A (4:56)

Well, quarterly earnings reports continue to roll on in and to send stocks moving. So today we're looking at two companies that are seeing shares fall today despite actually some interesting things going on inside their businesses. That's Kroger and Snowflake. So John, start, pick your poison. Which one do you want to go with?

B (5:14)

Let's start with Kroger.

A (5:14)

Let's start with Kroger.

B (5:15)

That's the grocery chain and I wanted to cover it. We talk about regional retailers, some chains or brands popular in the south or known best on the coasts. But Kroger Grocery has a presence across much of The United States. 2,800 stores in 35 states. You may not know it as Kroger because it's the parent company. Over two dozen banners, Dylan's Food for Less. Yes, Fry's Pick N Save, King Supers.

A (5:40)

I love that name. That is such a great name. So if you're Colorado or Wyoming, you've got a great name.

B (5:44)

There's 120 of them here and in California, 182 of the grocery store. That sounds like someone is sick.

A (5:50)

Ralph, why do you think that sounds like someone is sick?

B (5:53)

That's a term that if someone vomits.

A (5:55)

Oh really? How come I don't know that?

B (5:58)

Maybe it's a non English term.

A (5:59)

I know, but I've been here for long enough. I learn something new in America every single day.

B (6:04)

The ticker for Kroger is kr. It's on the New York Stock Exchange market cap of 41 billion. So there's a good chance that you don't live very far from a Kroger.

A (6:13)

From a Kroger, from a Kroger owned grocery store. So let's talk about what happened in this earnings report out today. The earnings per share narrowly beat estimates. The problem is that total sales of $34 billion did miss forecast. And when it comes to these kinds of businesses where they have got very thin margins, grocery notoriously has very limited profitability. When you miss on sales, it's really pretty bad news in terms of your operating leverage and what hits your bottom line. Grocery sales were up 2.6% year over year. Same store sales up nearly 3%. But the problem is again, didn't quite hit the bullseye when it came to what Wall street was expecting. Now one thing that is particularly interesting here about Kroger and I remember when they first announced this, Kroger to its credit has been trying to figure out a way to automate and automation when it comes to these traditional industries like bricks and mortar retail. They're thinking about trying to find savings in terms of the amount that they spent on their labor force. They're trying to figure out greater productivity and efficiency and most importantly, they're trying to figure out how to get their product, their groceries into the hands of consumers more and more quickly. In a world in which Instacart and Amazon has turned upside down our expectations around what speedy delivery looks like.

B (7:25)

Absolutely. And you just mentioned that in the first story that Amazon is going into that kind of delivery. And we saw news this week that they're doing a pilot program to get delivery in 30 minutes or less in Seattle and Philadelphia. So Kroger is trying to keep up with that.

A (7:38)

Absolutely. So there you've got Amazon really taking a shot of Walmart, but someone like a Kroger is going to feel the impact of that. Well, Kroger, an attempt, as you say, to keep up with it, had announced an initiative that tried to automate its fulfillment network. So automating, picking and packing, automating, getting all of these groceries out and into trucks to get delivered. The problem is it hasn't worked out so well. And as a result, Kroger did announce today a $1.5 billion loss. So an impairment charge reflecting the fact that they're having to wind down some of these automation projects when it comes to their fulfillment network.

B (8:10)

That's right. They had invested 2.6 billion billion into these automated grocery fulfillment networks. And this was, this wasn't just automation for the system. This was full delivery that people, a customer would put in their order and then the groceries would all be in this enormous warehouse, sort of like an Amazon fulfillment center. And Kroger even had their own trucks that they were delivering these items. I looked at an article from 2021 when some of these launched and it didn't look like a very, very sustainable operations for me. Well, they were talking about, if you can imagine an Amazon fulfillment center where there's folks that are taking packages and putting them in a box to send to a specific person. The same was for groceries, but it was 34 degrees inside these warehouses and these poor folks working there were wearing parkas I saw in the pictures and hats. And so it just seemed like a challenge to me from the beginning to get that done.

A (9:04)

Yeah, hard to make it a satisfying sort of working environment. But at the end of the day, Kroger decided they just weren't going to win on speed in any case and that customers wanted to, yes, receive their E commerce grocery orders quickly, but this was not the way to get there. So Kroger instead finding other ways to try to execute on this. Specifically in partnership with third party delivery companies like Instacart and Doordash. That was something the CEO talked about today.

B (9:30)

Right? Exactly. Because he figured they already have these distribution centers that are their local grocery stores and so they can use these third party services without significant capital investment.

A (9:41)

Something we've seen by the way, that is the playbook. So let's just go back to Amazon for a moment and talk about what Amazon is doing with Whole Foods. Yes, right. If you think if I go to my local Whole Foods, which I try not to do because it's so ridiculously expensive relative to what I'm getting. But I do go and you see there folks are fulfilling online grocery delivery requests by actually finding product from the whole food shelves. And also importantly, Amazon returns could be taken to Amazon to wholesale whole food stores. So the idea that the store is the distribution center is actually not a new idea. By the way, a concept that we talked about when we were looking at Urban Outfitters recently and we said newly, their rental clothing rental brand uses the stores as basically warehouses and inventory to try and fulfill for some of those subscription models. The idea that those four walls are not just simply a store. There's so many other things too. Really, really important. Let's talk a little bit more about the the guy in charge at the moment. Let's talk about Ron Sargent who is the interim CEO. And just to give some context here, in March of this year, the previous Kroger CEO Rodney McMullen resigned abruptly after an ethics probe into his personal conduct. We did dig around to try to figure out what exactly the issue was. We did not find anything. If you were listening, have some insight into what, what was going on there, do let us know because we couldn't find it in the public domain. He was CEO for 11 years and after he resigned, Ron Sargent, and who was the ex CEO of Staples and had been on the board of Kroger since 2006, was appointed interim CEO. And this to me was fascinating. I've been an interim CEO having joined from the board.

A (11:20)

He isn't the kind of interim CEO who says I'm going to keep the seat warm and just do no harm, not interfere, just keep the trains running on time to find the permanent CEO. Ron Sargent as interim has been getting his hands dirty.

B (11:34)

That's right.

A (11:35)

Last six, last nine months. Excuse me. He's been insanely busy.

B (11:39)

Right. He made that choice to get rid of the automation.

A (11:41)

Yeah.

B (11:42)

And he also closed down some Kroger restaurants called the the 1883 kitchen, which I'd never heard of. They Kroger ran some restaurants.

A (11:50)

Interesting.

B (11:51)

And he also closed some underperforming locations of grocery stores. So he came in and he's, he's making big decisions.

A (11:57)

Interesting too that despite that because I sometimes look at that and say, oh, this is somebody who's making their mark and they perhaps want to stay for the long haul. Sargent's been very clear, said the board looking for a permanent replacement from quote outside the company to bring in a fresh perspective, which I thought was just such a window into how this board is Thinking about what it is going to take to get Kroger to compete in a sustained fashion against the various competitive forces coming at it in this very difficult grocery environment. Also struck me that perhaps sometimes it's easier for an interim CEO who's not going to live with the consequences to do these very, very difficult things. So just an insight into how some of governance processes may work. Well, shares in Kroger were down today about four and a half percent up, net over 3% year to date. I got to tell you though, John, in this kind of market, slightly up 3%, almost the new flat. So Kroger sort of ticking along rather than doing anything superhuman at the moment, let's switch gears and talk about some software. We just had a bunch of software earnings. Salesforce earnings also came out today. But let's take a look at Snowflake.

B (13:06)

Yeah, because you know what I've enjoyed with our earnings conversations. We've covered all these different companies in the space of data and storage and cloud. And I think a lot of people just hear AI or they think of data centers and don't know the distinction between what these different companies do. I certainly didn't going into this earnings season. We recently covered Dell. They sell enterprise servers for on site storage. So that's not the cloud on site. Yesterday we talked about pure storage, which focuses on flash storage as opposed to traditional hard drives.

A (13:35)

And now we've got Snowflake. And just to really, really define it because it's so easy, once we hear about software, one sort of blends into the other. But what software, Sorry, what Snowflake specifically does is operate a platform that allows for data analysis and simultaneous access of data sets sitting in the cloud with minimal latency. And I just wanted to find latency because it's quite an important concept and I'm a nerd and I love this stuff. Latency in cloud computing is the delay in data transfer between devices. And that delay can be caused by factors like network congestion, the physical distance between data centers, or sometimes just the number of hops that the data must travel. So this concept of latency does impact the speed and therefore the quality of the experience you have when you're trying to access and process data. So that's what Snowflake is focusing on. Not equipment, but the applications that run on cloud infrastructure like Amazon Web Services and Microsoft Azure. It is a big company. Snowflake Ticker Snow Snow market cap $90 billion now. Revenue just to size it up again, $1.2 billion for the quarter increased nearly 30% year over year. Earnings per share beat expectations. Any other scenario, this would be really strong stuff, John, but stock is down over 11% today.

B (14:49)

Yeah. There's a feeling that it was overshadowed by slowing product revenue growth. And the bar was high last quarter the growth was 32% year over year. So this quarter it was only 29%. You know, trying to keep up that momentum. And this might account for a big drop. It was. The stock was down over 11% today. And maybe the market thought stock was already overvalued. Shares in Snowflake are up 72% gear to date. And so this might just have already been priced in.

A (15:15)

Now, just one thing I thought it was worth honing in on for a minute because we do like to talk about what are the key metrics that inform lots of investors? Decisions for different sectors. So when we talk about retail and restaurants, we always talk about the magic metric being same store sales growth when it comes to this particular business. And often for a lot of these contractual software companies. Software as a service Remaining performance obligation, rpo, just to get really technical for a moment, it is an important metric to look at and it represents the total value of contracted products or services. So they have basically been promised but are yet to be delivered to customers. And it provides visibility into what the actual revenue that's going to hit your books is going to look like. One thing that Snowflake did emphasize today was the fact that it's RPOs 7.9 billion, up 37% year over year. So saying, look, the pipeline to come is pretty Strong. And the CEO also emphasized the company added a record 615 new customers customers this quarter. Interesting. The other company that I've seen talking about the number of new customers like this is Palantir, saying, look, these are the new accounts that are actually going to roll in. A couple of other sort of nuggets we thought it'd be fun to share is just looking at the sheer size of Snowflake. This company IPO, John, in September of 2020 and became the largest software IPO in history.

B (16:33)

That's right. And its share price doubled on its IPO day.

A (16:36)

Yeah. First day of trading. Snowflake, interestingly, has the largest market cap of a company not in the S P500. We've talked about what it is to join the S P500 Club and how there are different criteria. Size is not enough. We think that for Snowflake, the reason it's not yet joined that elite club is the company isn't profitable under traditional gap accounting rules. There's a lot of stock based compensation which impacts their ability to hit that profitability threshold. So we're going to keep watching this one. Snowflake has become sort of emblematic of the question around how software will continue to evolve in the age of AI. And again with valuations being as high as they have been. Well, we're going to take a quick break and when we come back, PVH and Dollar General, two ends of the K shaped economy. What is going on with them? And what is going on with iRobot?

C (17:25)

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A (17:28)

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C (17:55)

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A (18:26)

It's 4pm on the east Coast. The market's closing. There's the bell telling us that trading is wrapping up for the day. So before we get to those names we're eager to break down now, let's take a look at what's been going on and throw it over to our human ticker, our producer John.

B (18:39)

That's right. The major indices wavered up and down all day as the markets evaluated new jobs data and speculated on how it might influence the Fed rate decision coming next week. The s and P 500 finished up a tenth of a percent, the NASDAQ up 210 of a percent, and the Dow finished down 1 tenth of a percent.

A (18:57)

Did you hear that? That's right. I heard you emphasize that's right. So. So our show went out yesterday and a listener said producer John always says right and that's right. So I heard you doubling down on. That's right. Just at the top there.

B (19:09)

That's right.

A (19:10)

Yes.

B (19:10)

I saw that comment as well.

A (19:12)

I knew you were going to say that. Let's talk about iRobot because this one is absolutely hilarious. What's going on here?

B (19:17)

We've been keeping an eye on the Roomba Maker iRobot. So, and that's the company that has been saying that if they're unable to find a buyer they might go bankrupt. But yesterday shares jumped over 70% on reporting that Commerce Secretary Howard Lutnick is going all in to support the robotics industry. I'm not sure that the modernized motorized broom was what Lutnick had in mind when he's talking about robots, but shares were back down 15%.

A (19:44)

I honestly think this was story was just an excuse for some clever reporter who wrote something I thought was quite funny. Top marks for the punny headline on this was quote reports the White House is considering sweeping initiatives to accelerate the domestic robotics industry. Yes, I do think that this was not, you know, I think Optimus over at Tesla was more in mind than this one. Let's switch gears and talk about two retailers that are really representative of completely different ends of the consumer spectrum, starting with Dollar General. I've been waiting for this one to get its time in the sun. And let me give you a little bit of context why? If you go back and look over history, there's been a lot of evidence that shows that when consumers are pressured, dollar stores tend to do quite well for two reasons. Lower income consumers try to find a place where they can get maximum value, of course. And so places like Dollar General, Dollar Tree tend to do very well with that dem. Also higher income consumers tend to also start switching to look at shopping in dollar stores to try and get more bang for their buck. We keep hearing about the choiceful consumer. I think it's an overused word. Places like Walmart have talked about the trading down by higher income shoppers. But today was really the day that Dollar General came into its own. Raised its full year profit outlook after quarterly sales and earnings beat expectations, sending its stock up 12% by midday. Comparable store sales RO 2 and a half percent. Even for the same amount, there was an identical increase in foot traffic. Still spending pretty strong. So this is one. Look, I bought this stock actually several years ago when it was clear that inflation was going up and up and up, hadn't done as well until this year. Finally getting its moment. And then finally let's take a look at pvh which is really again a different consumer demographic entirely.

B (21:33)

That's right. And I saw that PVH shares were down nearly 12% today on earnings and down 25% year to date date. And I asked myself, what is pv?

A (21:41)

Sounds like a plastic. Does it?

B (21:43)

Yes, it does. And I know you know what the company is it's been trading on the New York Stock Exchange for over a hundred years. I looked it up. PVH is Philips Vanhausen, named in part after the 1919 patented soft folding Van Housen collar. And over the years the company has acquired Izod Arrow, Calvin Klein and Tommy Hilfiger. And PVH is in a multi year endeavor to make Calvin Klein and Tommy Hilfiger into global lifestyle brands. But Wall street was disappointed with the guidance provided today, sending shares down.

A (22:12)

They are sort of in the thick of trying to come up with new identities for these because I think Tommy Hilfiger and Calvin Klein, if you go and look back over the course of decades, these brands that at one time were very, very sort of premium, truly luxury brands and then they went sort of mass market and after doing that they've sort of struggled to figure out exactly what they represent. So PVH really trying to figure out what it is in terms of strategy to get growth and again to get lifestyle versus just apparel to be the halo that wraps itself around these and get them going again. But so far, you know, take a look at the analysts are saying they just keep waiting for the growth to come and it hasn't come yet. Well, that's it folks for today's Brew Markets Daily.

B (22:51)

Markets Daily is hosted by Ambery and produced by John Crateau, Tarka Delatif and Emily Milian. Our technical director is Uchenawa Ogu and Jim Orso is our audio engineer. The president of Morning Brew Inc. Is Devin Emery. And and we'd love to hear from you if you have any feedback, a company you'd like us to cover or simply a comment on how I talk, send an email or voice Memo to brewmarketshoworning brew.com and wake up tomorrow with.

A (23:14)

The Morning Brew newsletter to tune in to Neil and Toby on Morning Brew Daily too. We'll see you back here tomorrow, same time, same place.