With These 4 Guidance Cuts, Expect More Companies to Lower 2H 2022 Expectations

We closed out our opening comments this morning by writing that today's market "will also need to contend with another round of earnings misses and guidance cuts due to lingering supply chain issues, elevated raw material costs and bloated retail inventories."

Those comments referred to the guidance cut by AAP holding McCormick & Co. (MKC) as well as the ones from Newell Brands (NWL) and UiPath (PATH) , but also a horrible earnings report from retailer American Eagle (AEO) .

The most direct impact for us will be with MKC shares, which are under pressure Thursday, but the combination of those items underscores our view that before we exit September, we are likely to see more companies reduce expectations for 2H 2022 given the number of headwinds that are blowing. As a reminder, there is no shortage of investor conferences this week and next week.

Let's dig into McCormick's news and then layer in the other announcements, which will give us a more well-rounded picture.

McCormick

Spice and seasoning company McCormick & Co. issued downside guidance for its August quarter with EPS of $0.65 vs. the $0.83 consensus with revenue near $1.60 billion vs. the $1.63 billion consensus. Impacting comparisons, the company divested its Kitchen Basics business during the quarter but the moderation in consumer consumption was greater than anticipated. Gross margin pressures in the form of continued supply chain issues and related raw material costs remained, which explains the larger bottom-line impact vs. the top line shortfall for the August quarter.

When McCormick reports its quarterly results on October 6, we'll have a clearer picture as to how much of the August shortfall was due to the divestiture and how much to the other factors. We'll also be quite interested in the progress on the company's previously announced pricing initiatives that were instilled during August. Increases like those tend to be weaved in with the full benefit being had in the ensuing months.

Insight into that effort and how sticky those increases are will help us determine any potential downside risk to McCormick's new 2022 EPS target of $2.63-2.68 vs. the $3.03 consensus that is based on 2022 revenue of $6.32-$6.44 billion vs. the $6.55 billion consensus. McCormick's previous guidance called for 2022 EPS of $3.03-$3.08 and revenue of $6.5-$6.6 billion.

Parsing the revised guidance, it implies second half revenue will still rise 6%-10% with the bulk of that coming in the company's November quarter. Historically, that has been the company's strongest quarter given sell-in for holiday related demand and this year it should see benefits from those August price increases.

Soon after that quarter is put to bed, McCormick has also announced its dividend for the coming year, and we'd remind members the company has been increasing that payout consistently over the last 36 years. We see no reason why it won't announce even a modest dividend increase for 2023, keeping it on path to move from being a Dividend Aristocrat to a Dividend King. That combination has typically led to a powerful year-end move in MKC shares.

From a portfolio perspective, today's move lower adds to the losses generated by the position, something we are keenly aware of. The question we are wrestling with is whether the shares can rally back to their highs earlier this year, which would lead to the portfolio recovering its losses against the position's $97 cost basis. The answer to that will more than likely be had on October 6 and hinge on what the company has to say about its pricing efforts vs. input cost inflation.

Between now and then we will be closely watching the technicals for MKC, where we see support on the weekly chart just a bit lower than current levels (circa $78). Today's drop has good volume with it (selling), as the indicators are pointing down at this moment. We are looking for the October 2021 low to hold here as buyers stepped in just under a year ago and pushed the stock higher. No question today's move is a problem, and if we see a break below the $75 level, we are more inclined to reduce the name.

American Eagle

Despite reporting July quarter consolidated revenue of $1.2 billion that matched the consensus forecast, American Eagle  widely missed EPS expectations for the quarter. The company shared it was impacted by a challenging consumer backdrop and is expanding the scope of expense and capital expenditure reductions with a focus on store payroll, corporate expense, professional services, and advertising.

Alongside these efforts, American Eagle is pausing its quarterly cash dividend to provide additional financial flexibility. Quarter-to-date, demand trends remain difficult, with brand revenue down in the high-single digits. Per the company, if the current trends continue, this quarter will see higher markdowns in anticipation of a more promotional retail environment and its seasonal clearance cadence which is more weighted to its January quarter.

We see this as more confirmation that retail inventories are not only bloated but painful and the retailer discounting effort will be needed to clear it out. We will continue to avoid such names even as we continue to favor the portfolio's shares of Costco (COST) .

Newell Brands

Consumer goods company, Newell Brands cut its outlook for both the current quarter and the balance of 2022 citing greater than expected pullback in retailer orders. Per the company, "We are taking decisive actions to mitigate the impact of these challenges by further tightening our belt on cash and cost management and adjusting our supply plan."

Again, a sign that retail inventories remain at elevated levels with consumers being far more choosey with what they are spending their disposable income dollars on.

UiPath

Earlier this week, enterprise automation software company UiPath cut its revenue expectations for its third quarter due to "foreign exchange and macroeconomic volatility." The company now sees its third quarter revenue in the range of $243-$245 million vs. the $269.5 million consensus.

That is but the latest comment on currency headwinds, while its comment on "macroeconomic volatility" refers to the slowdown in corporate spending that we are increasingly hearing about. With that in mind, we are also reading reports that Alphabet GOOGL has told a number of senior managers to restrict travel to "business critical" trips, another indication that it is managing for a more pronounced slowdown in the economy.

Action Alerts PLUS is Long MKC, COST, GOOGL.