Weekend Update #88

Written By Emily Philpott
 
Welcome to Blue Room's Weekend Update. Each week, we're sharing what companies we're researching and the what, the who and the how that we think makes the companies interesting and unique. This roundup is brought to you weekly by a group of interns, creative minds, artists and investors who believe that through best in class investing along with the democratization of financial education we can do great things together. Enjoy, Explore and Share.
 
 
 
 
 
 

For the first time since July 15th, the S&P 500 posted a weekly loss — signaling the market rally is hitting resistance as investors weigh the risks of a hawkish Fed. The S&P 500 closed the week at 4,228.37 (-1.21%), the Dow Jones Industrial Average closed at 33,706.34 (-0.16%), and the Nasdaq Composite closed at (-2.62%).

The 4-week rally had been characterized by short covering and the return of meme stocks, and it appears the tide may be turning there as well. Bed Bath & Beyond share prices peaked this week, ending a 400% rally from July 26th to August 17th. During the rise, a 20-year-old student’s BBBY trade profited $110 million, but share prices have fallen 60% since Tuesday following the exit of activist investor Ryan Cohen. 

Outside of the U.S., China’s central bank cut interest rates by 10 basis points in a surprise move on Monday as data showed a worsening economic slowdown in the country. On Wednesday, the Consumer Prices Index in the U.K. surged to 10.1%, hitting a 40-year high. 

In U.S. economic news for the week, the minutes from the July 26-27 FOMC meeting were released on Wednesday, unveiling a broader and more complex reaction function to economic data regarding interest rate increases. Although the market had begun to price in the possibility of faster rate cuts due to overtightening, the minutes suggest the Federal Reserve is also open to more aggressive interest rate paths if data suggests that may be required to quell inflation. 

Thank you Blue Room Analyst JARED FENLEY

 
 
 
 

Key Updates

  • Secured a non-dilutive debt facility from Hercules Capital for up to $175.0 million

    • $15 million drawn at closing; $25 million available to be drawn by Dec. 15, 2023; remaining $115 million becomes available in tranches through March 31, 2025

    • Bears interest at a calculated prime-based variable rate currently at 10.05% and matures 48 months from closing, which may be extended to 54 months upon achievement of certain performance milestones

  • Implementing cost-savings initiatives; prioritizing R&D programs anticipated to be potentially the most valuable and meaningful opportunities in its pipeline and decelerating and discontinuing programs that are in their earlier sta 

  • The debt facility and cost optimization extends runway by a year, into 2025

 
 
 

General Key takeaways:

  • Second half finished stronger than anticipated. 

    • Sales ahead of expectations driven by inflation lifting the avg. transaction size. 

  • Food inflation will continue to increase in the next quarter, and will continue to see heavier mix in food and consumables (puts pressure on margins).

    • Food comps were flat exiting the quarter

  • Continues to “make good progress to reduce inventory levels via markdowns”

    • Relieves pressure on stores and supply chain

  • Reduced the # of shipping containers in the system by more than half from Q1

  • Holding prices down/rolling back in: opening price-point, private brand, food and consumables

  • Customers increasingly choosing Walmart to save money and deal with inflation

    • More pronounced shift as the year progresses in consumer shifts and trade down activity

      • Instead of deli meats at higher price points, customers choose hot dogs, canned tuna or canned chicken

      • Private label branded growth doubled versus 1Q levels

      • About three-quarters of Walmart’s market share gains in food came from customers with annual household incomes of $100,000 or more. 

 

Key Updates

  • Secured a non-dilutive debt facility from Hercules Capital for up to $175.0 million

    • $15 million drawn at closing; $25 million available to be drawn by Dec. 15, 2023; remaining $115 million becomes available in tranches through March 31, 2025

    • Bears interest at a calculated prime-based variable rate currently at 10.05% and matures 48 months from closing, which may be extended to 54 months upon achievement of certain performance milestones

  • Implementing cost-savings initiatives; prioritizing R&D programs anticipated to be potentially the most valuable and meaningful opportunities in its pipeline and decelerating and discontinuing programs that are in their earlier sta 

  • The debt facility and cost optimization extends runway by a year, into 2025

 
 

U.S. natural gas prices eclipsed their June highs this week – rising more than 70% from the lows experienced in July – as concerns are mounting that robust domestic and overseas demand will deplete reserves that otherwise would be stowed for the coming winter. 

In the United states, supplies are more than 10% below their normal levels as Americans continue to blast their air conditioning units to combat intense August heat. 

What's more, Freeport LNG – the second-largest U.S. LNG exporter that supplies around 20% of U.S. LNG exports – is set to resume some operations in October following an explosion and fire on June 8. This explosion ended the bull market in U.S. natural gas prices as it provided a massive shock to domestic supply. 

However, as the prospect of increasing our export capacity increases with as we approach the expected reopening of the Freeport LNG facility, the comfort of extra supply is no longer present. Indeed, with European buyers willing to pay almost seven times the U.S. price, competition for spare supplies remains fierce, and will likely only get fiercer.

 
 
 
 
 
 
 

Hello Blue Room,
If anyone has a funny opening story to begin the meeting,
please let me know.
AGENDA
I. Business & Performance Update
II. New Research Processes Update (e.g. spreadsheet for EPS)
III. Impact UpdatesToday we will be focusing on each other in the Brainstorm.
Eli's question was: "If you were on a desert island, but you could have a beverage come out from each of your fingers, what would they be?"Icebreaker:Eli's question, or:
+ What book(s) have you been reading?
+ What show(s) are you watching on TV, Netflix, ROKU?
__________ __________

Watch the BRVN Team in Action This Week:August 14, 2022: Building collaborative spreadsheet which tracks EPS estimates across the firm.August 15, 2022: Building financial models for Match Group and Bumble.August 17, 2022: Building financial models for Match Group and Bumble, continued,

 
 
 

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These materials do not purport to be all-inclusive or to contain all the information that a prospective investor may desire in considering an investment. These materials are intended merely for preliminary discussion only and may not be relied upon for making any investment decision. Any discussion or information contained in this presentation does not serve as a receipt of, or as a substitute for, personalized investment advice from Blueroom or your advisor. 

This publication does not constitute an offer to sell or a solicitation to buy any securities in any fund, market sector, strategy or any other product. Investing is speculative and involves substantial risks (including, the risk of loss of the investor’s entire investment). Past performance is not indicative of future results, and there can be no assurance that the future performance of any specific investment, investment strategy, or product will be profitable.

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Emily Philpott
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