Onions + Walmart and Krispy Kreme earnings
A quick fix of the latest financial happenings.
Good morning, investors!
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Without further ado…
One Weird Exception to the Definition of Commodity: Onions
The term “commodity” is pretty broad. It encompasses everything from wheat and cotton to oil and precious metals. Pretty much everything that you’d consider an agricultural product or natural resource. There’s even a blanket clause in the Commodity Futures Trading Commission’s definition of commodity that captures “all other goods and articles” in addition to the aforementioned.
Well, there’s one exception — onions.
Commodity: (1) A commodity, as defined in the Commodity Exchange Act, includes the agricultural commodities enumerated in Section 1a(4) of the Commodity Exchange Act, 7 USC 1a(4), and all other goods and articles, except onions as provided in Public Law 85-839 (7 USC 13-1), a 1958 law that banned futures trading in onions, and all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in; (2) .A physical commodity such as an agricultural product or a natural resource as opposed to a financial instrument such as a currency or interest rate. (Emboldened for emphasis on onions)
That 1958 law is known as the Onions Futures Act, and it was introduced by Michigan Congressman Gerald Ford after two men successfully cornered the market in 1955.
Those men were Vincent Kosuga and Sam Seigel.
Cornering a market isn’t easy, especially for an agricultural product. Still, Kosuga was determined to try anyway. In 1955, Kosuga — a farmer from upstate New York — built a massive corrugated aluminum shed and proceeded to fill it with onions. Millions of onions.
At one point, the pair controlled 98% of the country’s onions — including the ones that hadn’t been harvested yet.
“There's a way to do this. It's called the futures market. When you buy a futures contract, you're essentially making a deal with farmers to buy the onions they haven't even harvested yet. It just so happened that Vince was also a commodities trader. In the trading pits of Chicago, Vince and his business partner, Sam Siegel, they bought up all the available futures contracts for onions.
By the winter of 1955, they had done the impossible.” —Keith Romer, on a Morning Edition episode of NPR
In turn, Kosuga could charge whatever price he wanted for his layered meal tickets. And he did, charging exorbitant rates for onions and profiting handsomely.
But that wasn’t enough. Kosuga and Seigel took it a step further — they shorted onions, flooded the market with supply, and made millions by tanking onion prices.
“The mesh bag that you put 50 pounds a bag of those onions in, the bag alone empty costs 20 cents. A 50-pound bag of onions, they went to 10 cents a bag.” —Harvey Paffenroth, nephew of Vincent Kosuga, on NPR
Farmers went bankrupt. They could hardly give away onions, let alone sell them. They donated them to orphanages and hospitals. Some even offloaded onions to gas stations to give away as a promotion for buying gas.
Eventually, Congress stepped in and outlawed futures trading on onions.
Source: The Futures: The Rise of the Speculator and the Origins of the World's Biggest Markets
Two Earnings Calls, Two Different Results: WMT and DNUT
In late July, Walmart lowered its profit outlook for Q2 and the entire fiscal year. Management cited inflation challenges and trouble moving its clothing inventory.
“The increasing levels of food and fuel inflation are affecting how customers spend, and while we’ve made good progress clearing hardline categories, apparel in Walmart U.S. is requiring more markdown dollars. We’re now anticipating more pressure on general merchandise in the back half; however, we’re encouraged by the start we’re seeing on school supplies in Walmart U.S.” —Doug McMillon, Walmart Inc. president and chief executive officer, in the release.
Naturally, investors weren’t thrilled, and shares sank about 7.5% on the news.
However, shares have not only since recovered but also risen an additional 5.3% after Walmart reported better-than-expected revenue and EPS.
Plus, the company announced a big addition to its membership program (pun 100% intended):
Pickup and delivery are strong. Growth is improving on Walmart.com, including the marketplace. And more people are choosing to be a Walmart Plus member, or step up to in-home. Walmart Plus is an important component of our plan, and we announced the addition of a streaming benefit. Walmart Plus members will receive a Paramount Plus subscription at no additional cost as part of their Walmart Plus membership in September. (Emboldened for emphasis)
…
Innovation isn’t a term reserved for the tech industry. Even sweet treats can partake.
During Krispy Kreme’s latest earnings call, management announced the company’s latest innovations:
We're also launching a fantastic new fritter that will be available only on Fridays this year and are even testing ice cream and shakes as we think about unique ways to drive additional frequency.
But investors weren’t enticed. Alas, not even new fritters and the possibility of Krispy Kreme ice cream could shroud management’s revised revenue and adjusted EBITDA guidance for 2022.
Previous Guidance
Net Revenue of $1.53 billion to $1.56 billion
Adjusted EBITDA of $210 million to $218 million
Revised Guidance
Net Revenue of $1.49 billion to $1.52 billion
Adjusted EBITDA of $189 million to $195 million
We are updating our 2022 outlook, mostly to reflect FX headwinds, but also the softer U.K. trading environment and the relative underperformance by U.S. hubs without spokes.
Even with the lowered guidance, Krispy Kreme still projects to surpass FY21 revenue and Adjusted EBITDA of $1.38 billion and $187.9 million — albeit, not by as much as they initially expected.
Three Eye-Opening Tweets
And finally, we close with three eye-opening tweets.
BBBY: An enigma.
Tesla: Head and shoulders above the competition.
Economics 101
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