Earnings Recap: Retail Divergence and Tech's Evolving Challenges

As we head into the final stretch of the year, the market's resilience is on full display. The S&P 500 has rebounded sharply, recovering 10% from the lows seen in early August following a brief yen carry trade-induced unwind. Now, it's hovering just below all-time highs. The Nasdaq has bounced too, but it's lagging behind as sentiment around mega caps and semiconductors cools.

Small caps, as measured by the IWM, continue to underperform large caps. Despite a technical squeeze in early July that brought them to year-to-date parity with SPX and NDX, they've struggled over the last month. Even with the Fed's nearly guaranteed rate cuts in September, small caps remain weak—a reflection of their fundamental challenges. They’re more vulnerable to economic slowdowns and carry levered balance sheets, which warrants their discount relative to large caps.

On the economic front, things appear stable on the surface. Consumer confidence remains strong, but the lower 20% of income earners are starting to feel the pinch due to stagnant wage growth. The middle class is holding up, but cracks are beginning to show, particularly with job cuts in traditionally stable industries like finance, real estate, and tech. While the headline job numbers look solid, the quality of jobs is deteriorating, with fewer six-figure opportunities that support the middle class.

Consensus has SPX earnings per share at 279 in 2025, up 15% from 242 in 2024. This puts the SPX at just over 20x 2025 earnings and more than 23x 2024 earnings. Revenue growth is expected to be modest at 6%, so a significant portion of this earnings growth is projected to come from margin expansion—an ambitious assumption given current margin levels.

I'm taking a cautious stance as we approach September, expecting flat to down markets for the remainder of the year. The VIX has pulled back near 15, making hedging relatively cheap, so I've been adding put butterflies and put spreads as a protective measure. While a severe recession doesn't seem imminent, even a moderate slowdown in consumer spending or corporate investment could lead to downward earnings revisions. The market has priced in a lot of good news and corporate earnings growth, making it difficult to see attractive returns from current levels.

With that said, let's shift from the macro view to a closer look at this week's earnings reports.

This week brought a mixed bag of earnings, particularly among retailers, highlighting the divergent paths companies are taking in the current economic climate.

Lululemon LULU 0.00%↑ : As the largest retailer reporting this week, Lululemon's results were a blend of positives and challenges. The market’s low sentiment and the stock’s valuation support meant that despite the mixed report, the stock remained largely unchanged. On the downside, U.S. women’s sales were disappointing, with domestic revenue flat and Canada up 11% in constant currency. The company admitted to product missteps in its U.S. women’s apparel, which might reflect some complacency from past success. However, LULU is addressing these issues, and I’m inclined to give them the benefit of the doubt for now. The bull case hinges on North America achieving mid to high single-digit topline growth in 2025. On the brighter side, gross margins expanded by nearly 100 basis points, hitting record levels, and operating margins also rose by 110 basis points, driving EPS up 18% on a 7% revenue increase. International growth remains a strong point, with China up 37% in constant currency and the rest of the world growing at 27%, though at a decelerated pace, as expected given the high base from last year. The capital allocation strategy was solid, with $600 million in stock buybacks, reducing shares outstanding by 2%. As a shareholder, I’d prefer the stock price stays lower to allow for more buybacks while LULU addresses its North American operational issues. Overall, the results weren’t surprising, and I still like the stock at this level, given its valuation support and potential for renewed growth in North America, which could lead to a multiple re-rating.

Dollar General DG 0.00%↑ : On the other end of the spectrum, Dollar General had an abysmal report, resulting in a 30% drop in its stock price. Same-store sales were barely positive at 0.5%, with 1% growth from traffic, while transaction amounts declined by 0.5%. The company saw a shift to consumables and increased promotional activity, pressuring gross margins. Operating margins are also under strain due to wage inflation, which is running higher than anticipated, along with rising store maintenance costs. Dollar General mentioned that its lower-income customers, who make up 60% of sales, are feeling the pressure, while middle-income consumers haven’t yet traded down. It seems to me that DG is losing market share to e-commerce and larger retailers offering newer, broader, and more convenient options at similar prices. Despite the stock’s cheap valuation, I’m not interested in owning a retailer with a levered balance sheet, struggling through a turnaround, and facing reduced buyback capacity as it aims to align leverage with targets. The thesis that DG is a beneficiary in a tough economic environment feels outdated.

Five Below FIVE 0.00%↑: FIVE also had a tough quarter, with management admitting they lost focus while expanding too quickly. They’re now refocusing on their core demographic of preteens and teens, slowing new store openings, and aiming to improve execution. While there are execution issues, the bigger challenge seems to be how FIVE is positioned in a shifting consumer landscape. The retailer primarily sells low-cost, impulse-buy items to lower- and middle-income consumers. This kind of spending is highly discretionary, and parents are likely reconsidering trips to FIVE to buy items that are easily lost or broken. This was evident in the 5.7% decline in same-store sales, driven by lower volumes. The fading Squishmallow trend underscores how fickle these trends can be, leading to inventory issues. Gross margins fell 220 basis points due to deleveraging and higher shrink, even after removing self-checkout in many stores. While FIVE may appear cheap, it faces a long road to recovery, with increased competition and ever-changing consumer preferences making the turnaround challenging. FIVE’s valuation might appear cheap at first glance, but given the significant operational hurdles and the potential shift in consumer behavior, there’s a risk that it’s a value trap. The need to refocus on execution and the highly discretionary nature of its product offering make it vulnerable in an uncertain economic environment. The competitive landscape and changing consumer preferences could further erode its value, making the current valuation less compelling.

Abercrombie & Fitch ANF 0.00%↑: In contrast, ANF delivered stellar results, with revenue up 21%, and beats on EPS, gross margins, and operating margins. They raised their full-year revenue and margin guidance and sounded optimistic on the earnings call. ANF has successfully rebranded, bringing back the 18-40-year-old demographic, and their balance sheet is in excellent shape after redeeming a senior note. They plan to use all excess free cash flow for share buybacks, which could reduce shares outstanding by over 10% in the next two years. Despite these strong results and a reasonable valuation with an 8% free cash flow yield, the stock dropped 13% this week. The bear thesis here is that earnings revisions will slow dramatically going forward, and that ANF might be over-earning, with margins likely to decline in the future. Additionally, the cyclical risks in specialty retail could keep multiples subdued. While I don’t see ANF having a bad quarter in the near term, the upside seems limited until they can instill confidence in their margin trajectory and sales momentum.

Ulta Beauty ULTA 0.00%↑: ULTA is another retailer struggling as the beauty category normalizes after the torrid growth seen post-COVID. Competition has intensified, with over 1,000 new distribution points opening in the last three years, offering little differentiation. In response to softer topline growth, ULTA ramped up promotional activity in June and July, but this didn’t drive additional in-store sales. Similar to other retailers mentioned, the only thing ULTA has going for it right now is its valuation. It’s going to be a tough slog in a highly competitive space, with online sales continuing to capture a larger share of incremental growth.

This week’s retail earnings highlight the bifurcated nature in the consumer discretionary sector. While some companies like ANF are executing well and finding ways to grow, others like DG and FIVE are struggling with operational missteps, changing consumer behavior, and increased competition. The varying results underscore the importance of being selective in this environment, focusing on companies with strong fundamentals, clear growth strategies, and the ability to navigate a shifting economic landscape.

In tech, NVDA 0.00%↑ was the clear star this week, though the anticipation may have slightly overshadowed the actual results. Despite the hype, the earnings report was relatively uneventful, largely meeting the high expectations that had been set. Data center revenue came in at $26.3 billion, beating estimates by $2 billion, with a sequential growth guide of $2.5 billion, aligning with buy-side expectations. The continued arms race among cloud service providers to build out their infrastructure drove these results, while enterprise and sovereign buildouts are still in the early stages.

One potential point of concern could have been the decline in gross margin, but this was expected due to prior comments on Blackwell pricing. Ultimately, there’s little to critique in NVDA’s results, and the market hasn’t gained any significant new data points. With the stock trading at 22x 2026 EV/EBIT, the valuation isn't outrageous considering NVIDIA's dominant position in one of the largest infrastructure build-outs since the internet's advent. The critical question remains around the sustainability of top-line growth and margins as the company shifts more towards inference (already over 40% of revenue) and away from training. Long-term, the key will be the development of use cases and revenue generation from both consumer products and B2B sales to justify ongoing infrastructure investments, but these answers won’t be clear until we get closer to 2026.

Elastic ESTC 0.00%↑: On the other end of the spectrum, ESTC 0.00%↑ was the clear loser of the week, with a reputation for unexpected guidance cuts (referred to as getting "Janeshed" by those familiar with the stock). They managed to rug pull investors once again. The company’s Q1 results were in line with expectations, with operating margin and free cash flow coming in well above. However, guidance was lowered by $34 million from last quarter, and lower commitments led to reduced RPO. Management blamed the miss on go-to-market issues stemming from a sales segmentation change, raising serious questions about their competence—particularly given that this issue wasn’t flagged when the FY guidance was issued last quarter.

So, is there a bull case post-earnings sell-off? Bulls might argue that the setback is temporary and management will learn from it. They could point to traction around AI, with 1,300 customers using generative AI use cases and 200 customers with over $100K in annual contract value, up 55 from last quarter. Vector search, a key area for Elastic, is still in its early days, and as companies experiment with retrieval-augmented generation AI implementations, Elastic could benefit from wider enterprise deployment and new use cases, potentially reaccelerating top-line growth.

On the bear side, skeptics will argue that vector search could become commoditized, with larger players like MongoDB offering more comprehensive, general-purpose databases that appeal to developers across various workloads, including transactional, operational, and analytical use cases. MongoDB’s broader developer appeal often makes it the go-to choice for new application development, driving higher adoption rates. Elastic, while strong in its niche, lacks the same level of developer-driven growth potential. Bears will also note that Elastic has never consistently generated profits, with top-line growth consensus now dropping into the single digits and no meaningful FCF when accounting for stock-based compensation related dilution. At 5x 2024 consensus revenue, the stock is now in a territory where private equity firms might start to take interest, given its beaten-down valuation.

While the valuation is intriguing at these levels, my conviction about the underlying business conditions remains weak. The GTM strategy will likely take a few quarters to fix, suggesting that the stock could be rangebound in the near term. For those interested in gaining long exposure, selling the January 2025 $70 put could be an interesting way to play the stock, offering a potential entry point at a lower level with some premium income as a buffer.

MongoDB MDB 0.00%↑: Shifting focus to MDB 0.00%↑, the company reported a solid quarter that exceeded expectations, resulting in a significant stock price jump of 17% for the week. Revenue grew by 13%, surpassing guidance by 3%, with Atlas—their cloud-based database service—growing 27%, driven by better-than-expected consumption trends towards the end of the quarter. Notably, the company raised its full-year revenue forecast by $35 million, which exceeded the second-quarter beat of $16 million. This raise wasn’t due to anticipated increases in Atlas usage but was instead attributed to a stronger pipeline in Enterprise Advance, their enterprise-grade offering that provides advanced features and security support.

Operating margins on a non-GAAP basis came in at 11%, approximately 300 basis points ahead of consensus estimates, thanks largely to revenue outperformance and deferred expenses. This set a positive tone for the remainder of the fiscal year. However, customer growth metrics were less impressive, with the addition of about 1,500 net new customers in Q2, marking a 21% year-over-year decline and continuing a trend of slower customer acquisition that began in the second half of 2024. The quarter ended with 50.7K customers. Additionally, the company is facing free cash flow headwinds due to upfront payments related to cloud commitments and an IPv4 charge, but management expects these to turn into a positive cash flow impact in the coming years.

While the quarterly results provided some relief for bulls, I’m skeptical of the post-earnings pop. So, what’s the bullish/bearish view on MongoDB?

Bullish Perspective:

Despite concerns around the increased adoption of open-source relational databases like PostgreSQL, which has become a favorite among developers, MongoDB has maintained its market share in key segments like operational databases, cloud operational databases, and NoSQL. MongoDB operates in a large and growing market, with total addressable markets of $76 billion for operational databases, $54 billion for cloud operational databases, and $54 billion for the NoSQL market—each expected to grow at compound annual growth rates (CAGRs) of 9%, 17%, and 19%, respectively, through 2028. With MongoDB holding a relatively small market share—ranging from low to mid-single digits across its core markets—there is significant room for expansion, especially given MongoDB’s consistent track record as a share gainer.

MongoDB also benefits from a large and active developer community, likely in the millions, making it the most popular non-relational database globally. This widespread adoption provides a strong foundation for long-term growth. Although management has indicated that they are not yet seeing AI as a significant tailwind for the business in FY25, the company believes it is well-positioned to play a crucial role as AI becomes more deeply embedded in enterprise applications. MongoDB’s flexible document model, low latency, and robust infrastructure are seen as key enablers for AI-driven applications in the future. The company envisions playing a role in the new stack of applications that will emerge as AI matures, though it’s too early to determine the exact nature of this role.

Bearish Perspective:

On the flip side, bears argue that MongoDB’s revenue growth has noticeably decelerated, with recent quarters reflecting slower-than-expected Atlas consumption. As the database market becomes increasingly crowded, MongoDB is struggling to maintain its previous growth rates, raising concerns about the company’s ability to sustain momentum, particularly as competition intensifies. The softening of new customer acquisition coupled with declining net revenue retention suggests that MongoDB might be reaching saturation in its target markets, or that competitors are successfully capturing potential MongoDB customers.

Despite approaching a $2 billion run rate, MongoDB continues to report negative GAAP operating margins and no meaningful FCF when accounting for the dilutive impact of stock-based compensation. The inability to turn a profit while growth slows to low double digits raises questions about the sustainability of a business model that cannot deliver profitability at scale. The shift in MongoDB’s sales incentive structure in FY24, which prioritized new workloads over larger, upfront deals, has resulted in underperforming workloads that could dampen growth in FY25. This misalignment between sales incentives and long-term growth potential raises concerns about management’s strategic decision-making.

Valuation Concerns:

From a valuation standpoint, MongoDB is trading at 10.5x 2024 consensus revenue, which is projected to grow 15%. Analysts expect revenue growth to reaccelerate in 2025 and 2026, with projections of 17% and 22% growth, respectively. If we assume analysts’ estimates are low and actual growth comes in 5 percentage points above current estimates (27% growth in 2026, which seems unlikely), the company could reach $4.6 billion in revenue by 2028, potentially generating FCF of almost $1.2 billion (at a 25% margin). For the stock to produce a 10% compound annual growth rate (CAGR), it would need to trade at a market cap of nearly $35 billion, or a FCF multiple of 32x—achievable if top-line growth exits at low 20s with 25% FCF margin.

However, a lot needs to go right for this scenario to play out, and I wouldn’t make it my base case. Given the current valuation, I don’t see much upside from today’s levels unless top-line growth really reaccelerates. Therefore, I would stay on the sidelines for now, monitoring how the company navigates its competitive landscape and whether it can achieve the necessary growth to justify its current valuation.

Salesforce CRM 0.00%↑: Salesforce reported earnings this week, reaffirming the resilience of its enterprise platform despite concerns about macroeconomic headwinds, increasing competition, and the risks and opportunities presented by Generative AI. The company’s revenue was up 10% year-over-year, reflecting solid performance but also a deceleration from its previous growth rates. New revenue also showed signs of slowing, both year-over-year and sequentially, highlighting challenges in maintaining the momentum that has fueled Salesforce's growth in recent years.

Operating margins, however, were a bright spot, improving by 170 basis points to reach 33.7% in Q2. This margin expansion led Salesforce to raise its full-year margin guidance to 33.8%, demonstrating the company’s focus on expense discipline and operational efficiency. This is a significant development for a company that has often faced scrutiny over its cost structure. On the cash flow front, Salesforce raised its full-year operating cash flow guidance to 25% year-over-year, signaling strong cash generation. The company returned $4.3 billion to shareholders through buybacks and dividends in Q2, which underscores its confidence in financial stability and commitment to returning value to shareholders. Additionally, cRPO grew by 10% year-over-year, surpassing both guidance and street estimates. Geographically, revenue growth in the Americas decelerated to high-single digits, reflecting a more challenging buying environment, particularly among small and medium-sized businesses (SMBs) and in sectors like tech and professional services. This slowdown could be a result of both macroeconomic pressures and increased competition in these segments.

On the AI front, Salesforce signed over 1,500 AI deals during the quarter, with AI bookings doubling quarter-over-quarter. This rapid growth suggests that while AI may not yet be a major revenue driver, it is quickly becoming an integral part of Salesforce’s value proposition. Salesforce also introduced Agentforce, a new product designed to automate administrative tasks using AI. The early feedback on Agentforce has been positive, and the product is set to go generally available in October, with more details expected at the upcoming Dreamforce conference. This product could become a significant driver of productivity gains for Salesforce’s customers, further embedding the company into their operational workflows. Multi-cloud adoption remains a robust growth driver for Salesforce, with 16,000 customers adding new clouds during the quarter. The Data Cloud segment also showed impressive growth, with paid customers increasing by 130% year-over-year, indicating strong demand for Salesforce’s broader ecosystem of solutions.

As a mature company, Salesforce is now experiencing decelerating top-line growth but continues to generate healthy earnings and free cash flow. It remains the leader in front-office productivity and a strategic partner to both SMBs and large enterprises. Despite this, the stock is not expensive, currently trading at a 5% FCF yield, and doesn’t seem to be pricing in any potential benefits from AI-related growth. Assuming Salesforce continues trading at 20x FCF, investors can expect to generate high single-digit to low double-digit returns, which should align with FCFPS growth. To generate a 10% annualized return by 2028, an investor would need to believe that Salesforce can achieve a high single-digit top-line compound annual growth rate, reaching approximately $53 billion in revenue with FCF margins of 35%, generating $18.5 billion in FCF, and the market assigning a 22x FCF multiple. There is potential upside if Salesforce successfully leverages AI to drive incremental top-line growth, which could lead to multiple expansions and enhance forward returns.

Disclosure: Author is long LULU and may initiate a position in ESTC via short puts. Author reserves the right to buy/sell without prior notification.