Markets continue to hold near-record levels as investors turn their heads toward company conference calls as earnings season heats up. The Dow Jones Industrial Average dropped 0.27% for the week, while the S&P 500 and NASDAQ posted gains of 0.54% and 2.36%, respectively. But what a week for massive headlines — let’s dig into three big moves and developments from this week.
A no-good, terrible, week
Poor investors of Chipotle Mexican Grill, Inc. (NYSE:CMG) can’t catch a break when it comes to food safety concerns. Shares of the once phenomenal growth stock — and still a huge winner for long-term investors — are still trying to recover from the food safety debacle that happened in 2015.
If you recall, Chipotle consumers in Washington state contracted E. coli, followed by far more consumers getting sick with norovirus, and then by consumers getting salmonella in Minnesota. More instances popped up around the country and it caused Chipotle to put the full press on damage control and rethink its food safety procedures.
Then this week brought diners at a Dallas location sharing a video of mice falling through the roof in one of the company’s restaurants and reports of a norovirus outbreak at a location in Sterling, Va. And while the rat incident has been said to be “an extremely isolated incident” the outbreak in Sterling was reported to number more than 100, per iwaspoisoned.com. The news has sent shares of Chipotle down nearly 13% this week to its lowest level in four years.
This is more of a brutal blow to investors than the 13% decline suggests because signs of the company turning things around appeared promising with comparable-store sales guidance in the high single digits this year, compared to a staggering 20% decline in 2016. It’s simple: these food safety problems are a direct hit to the core principal that Chipotle serves a premium product with higher quality food. For now hold off on knee-jerk reactions but investors need to hear what management says during its second-quarter results on July 25th to better understand the immediate impact.
Shares of Netflix (NASDAQ:NFLX) are having a polar opposite week to those of the aforementioned Chipotle and traded roughly 13% higher this week after a strong second-quarter result. It exceeded management guidance in nearly every aspect, starting with domestic streaming subscribers checking in at 51.9 million compared to guidance of 51.5 million. Its international streaming subscribers checked in at 52 million, ahead of guidance calling for 50.5 million.
Looking at its top and bottom line performance for the second-quarter, revenue checked in at $2.79 billion compared to guidance of $2.78 with operating margin checking in 20 basis points higher than guidance of 4.4%. Net income and diluted earnings per share were in-line with guidance calling for $66 million and $0.15, respectively.
But perhaps the story moving forward is Netflix’s free cash flows, which were negative to the tune of $608 million during the second-quarter due to the cash expenses involved in producing original content. Some of that new content includes what could become Netflix’s first “blockbuster” movie starring Will Smith called “Bright”. The trailer for that $90 million movie hit San Diego’s Comic-Con this week and is one of Netflix’s most ambitious projects. It also paid over $100 million for Martin Scorsese’s movie “The Irishman” which begins shooting shortly.
This is an incredibly intriguing stock to follow as it tries to flip the Hollywood way of opening on the big screens first before filtering to streaming devices, among other mediums. But this week’s 13% increase sends a signal: investors are willing to let cash burn as Netflix tries to flip the script on the traditional film industry ways.
An unexpected partnership
After years of struggling shares, Sears Holding Corp. (NASDAQ:SHLD) had a small reason to be excited this week after two notable developments. First, shares moved higher Monday after the company received a $200 million cash infusion from CEO Eddie Lampert’s hedge fund ESL Investments. But that cash came at a serious cost: the line of credit has a 151 day maturity and a hefty 9.75% interest rate.
Then things got a little more interesting when Sears announced that it had struck a deal with Amazon.com (NASDAQ:AMZN) to sell Alexa-enabled appliances including the Kenmore brand on Amazon. That initially sent the stock surging roughly 15%, and even caused shares of Lowe’s and Home Depot to decline in the mid-single digits initially.
To call the partnership unexpected might not do it justice: these two companies are practically the polar opposite in terms of success and relevance. This easily marks Sears’ broadest distribution of its Kenmore brand outside of its own stores, but in a way is also admission of defeat that Sears’ can no longer survive without the help of an outside e-commerce network.
Whether this is merely a small story before Sears’ trudges into bankruptcy, or some weird first step in a long-term strategy for Amazon’s path to global dominance, is yet to be seen — but it’s definitely an interesting story to watch.
Daniel Miller has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Chipotle Mexican Grill, and Netflix. The Motley Fool recommends Home Depot and Lowe’s. The Motley Fool has a disclosure policy.