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Friday October 9, 2015



Costco Reports Higher Net Income

Costco Wholesale Corporation (COST) released its quarterly results on Tuesday, September 29. The company's revenues missed analyst expectations while earnings were higher than expected.

The company reported revenue of $35.8 billion, an increase of less than 1% from the same period last year. This was slightly lower than analyst estimates.

"Comp sales were down 1% on a reported basis, but were up 6% including the negative gas and FX impacts," said Costco CFO Richard Galanti. "Gas prices for the quarter were down 21% year over year, negatively impacted US comp figures by a little more than 3 percentage points, so a plus [6%] US comp excluding gas price deflation."

Net income was $767 million for the quarter, or $1.73 per share. This was higher than the analyst estimate of $1.66 per share.

Costco, America's second largest retailer, operates on a members-only system. Many of the company's locations operate filling stations and this week's report shows just how heavily the company relies on gas sales. With oil prices low for much of the quarter, the company was not able to pull in the revenue it expected. It remains to be seen how this will affect the company's share price going forward.

Costco Wholesale Corporation (COST) shares ended the week at $145.86, up 0.3% for the week.

Diamond Foods' Sales Fall

Diamond Foods, Inc. (DMND) released its fourth quarter earnings results on Tuesday, September 29. The company saw a decline in net sales but a welcome profit increase.

The snack food company reported net sales of $201.8 million. This represents a decrease of 7.9% from the same quarter last year.

"We are encouraged by our fourth quarter earnings performance, which was fueled by strong gross margin improvement. We are also pleased with the continued growth of Kettle in North America, Pop Secret market share gains, and the early signs of success in the Emerald transition to stand up bags," said Diamond Foods President and CEO Brian J. Driscoll. "Our strategic decision to exit low margin nut SKUs negatively impacted net sales, which were also adversely affected by foreign exchange. Looking ahead, we continue to believe we have a solid foundation for future growth across our portfolio,"

Net income for the quarter was $7.9 million or $0.25 per share. Last year the company reported a loss of $0.06 per share in the comparable quarter.

Diamond Foods, Inc. operates a Snacks segment and a Nuts segment. The company's Snacks segment, which includes its Kettle brand potato chips, saw net sales fall 0.2% to $129.8 million. The Nuts segment reported net sales of $72 million, down 19% from the same period last year. As a percentage of the company's net sales, the Snacks segment grew from 34.5% to 36.4% of net sales.

Diamond Foods, Inc. (DMND) shares ended the week at $31.45, down 8% for the week.

Barracuda Networks Reports Earnings

Barracuda Networks, Inc. (CUDA) released its second quarter earnings report on Tuesday, September 29. The company reported earnings that fell below expectations, leading shares to drop 34%.

The company reported revenue of $78.4 million, slightly lower than analyst estimates of $78.7 million. Barracuda's revenue during the same quarter last year was $68.7 million.

"We now have more than 261,000 active subscribers and this quarter's dollar-based renewal rates were 95.1%," said Barracuda President and CEO B.J. Jenkins. "In the second quarter, gross billings grew to $98.4 million, up 4% sequentially and up 14% year-over-year in constant currency. Our storage category billings grew in the mid-20% range year-over-year on a constant currency basis in Q2. However, we do see some evidence that growth in the overall storage market has slowed and that customer requirements are evolving, and we are adjusting our approach accordingly."

The company reported a loss of $2.2 million this quarter or $0.04 per share. The same quarter last year saw a profit of $738,000.

Barracuda Networks, a Silicon Valley-based information technology company, recently announced plans to purchase fellow technology company Intronis. The deal would provide Barracuda a greater market share of the cloud-based data storage and security industry. It remains to be seen whether this move will shore up or weaken the company's financial footing going forward.

Barracuda Networks, Inc. (CUDA) shares ended the week at $17.94, down 28% for the week.

The Dow started the week of 9/28 at 16,313 and closed at 16,472 on 10/2. The S&P 500 started the week at 1,929 and closed at 1,951. The NASDAQ started the week at 4,665 and closed at 4,707.

Yields Fall Following Jobs Report

Treasury yields fell on Friday, October 2 following the Labor Department's release of its latest jobs report. The U.S. economy showed slower than expected job growth for the month.

The U.S. added only 142,000 jobs in September. Analysts had expected an increase of around 200,000 jobs for the month. In response to the increased economic uncertainty, investors moved toward Treasury bonds rather than riskier investments, causing an increase in bond prices and a decrease in yields.

Following the release of the jobs report, the 10-year Treasury yield fell 4 basis points to 2.00% during early Friday trading. The 30-year yield had fallen to 2.84% from 2.85%.

While a September interest rate hike was expected during much of the lead-up to the Federal Reserve's September policy meeting, the slowdown in the global economy persuaded the Fed to hold off for at least a month. Now, with weaker-than-expected job growth added to the list of factors, a rate increase could be further down the road.

"The report is weak across the board," said Daniel Mulholland, Senior U.S. Treasury trader at Credit Agricole. "I don't think the Fed is going to raise rates in this environment. A rate hike is a 2016 story."

The 10-year Treasury note yield finished the week of 9/28 at 1.99% while the 30-year Treasury note yield finished the week at 2.83%.

Little Movement in Interest Rates

Freddie Mac released its latest Primary Mortgage Market Survey (PMMS) on Thursday, October 1. The report showed interest rates remained relatively unchanged from last week.

The 30-year fixed rate mortgage averaged 3.85% this week. This represents a slight decrease from 3.86% last week. This time last year, the fixed rate mortgage averaged 4.19%.

The 15-year fixed rate mortgage averaged 3.07% this week. This is down from last week when it averaged 3.08%. Last year at this time, the 15-year fixed rate mortgage averaged 3.36%.

"In contrast to the volatility in equity markets, the 10-year Treasury rate—a key driver of mortgage rates—varied just a little more than 10 basis points over the last week," said Sean Becketti, Chief Economist at Freddie Mac. "As a result, the 30-year mortgage rate remained virtually unchanged, dropping 1 basis point to 3.85%. This marks the tenth consecutive week of a sub-4% mortgage rate. Despite persistently low mortgage rates, the pending home sales index dropped 1.4% in August, suggesting possible tempering in existing home sales in September."

The money market fund finished the week of 9/28 at 0.3%. The 1-year CD finished at 0.6%.

Published October 2, 2015

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