During earnings season, some companies will purposely release very bearish earnings reports, disclosing all the bad news at once. These are referred to as ‘kitchen sink’ quarters, where they "throw out everything but the kitchen sink." Companies will lay all their cards on the table without any sugar coating. They do this for transparency purposes and to control the narrative in an attempt to reset expectations by lowering the bar moving forward.
In most cases, the stock will initially collapse but may set a floor, giving shareholders a signal that the worst may be over. This can improve sentiment and, eventually, the stock price. Here are three companies that reported kitchen sink quarters to reset expectations and usher in a turnaround.
Nike: Setting the Bar Low for the Returning CEO
When Nike Inc. (NYSE: NKE) announced it was replacing its current CEO, John Donahoe, with the return of former CEO Elliott Hill on September 19, 2024, the stock surged 12% in the following days, rising from $80.98 to a peak of $90.62.
Elliott Hill commandeered Nike during its seismic growth spurt, starting as an intern in 1988 and returning to the top as its CEO in 2020. Sentiment turned very bullish in the hopes that the retail/wholesale sector giant would return to its former glory.
Nike's Kitchen Sink Fiscal First Quarter of 2025 Sets the Bar Low
However, shares gave back all their gains and continued to sink lower after Nike reported a kitchen sink fiscal Q1 2025 report two weeks ahead of Hill's return on October 14, 2024. While Nike was able to beat consensus EPS estimates by 18 cents, reporting 70 cents per share due to cost cutting, revenues continued to sink, dropping another 10% YoY to $11.59 billion, missing consensus estimates by $50 million. North America's revenue fell 11% YoY, which was the largest decline since the pandemic. Greater China's revenue fell 3% YoY. The company continues to lose market share to competitors like On Holding AG (NYSE: ONON) and Deckers Outdoors Co. (NYSE: DECK), which reported double-digit sales growth.
Fiscal Q2 2025 Forecasts Cut While Full Year 2024 Estimates Weren’t Updated
Nike also cut its sales forecast for revenues to fall 8% to 10% YoY in its fiscal second quarter of 2025 as gross margins will fall 150 bps. Its direct-to-consumer (DTC) business suffered a 13% YoY decline in addition to the 8% YoY Wholesale revenue decline. Former CEO Donohue’s strategy was to prop up the DTC channel while the Wholesale revenue fell, but those both flopped in the quarter. The 120 bps gross margin improvement YoY isn’t expected to last.
The company didn't update fiscal 2025 guidance, citing the CEO transition, so its previous lowered guidance of a mid-single-digit revenue drop remains. To illustrate the magnitude of its tumble, two years ago, Nike's EPS was expected to rise 21% YoY in fiscal 2025. Estimates now call for a 28% YoY EPS plunge. NKE shares continued to sink even after the new CEO took over on October 14, 2024, sinking from $81.64 to $78.62 two weeks later. Negative sentiment remains pervasive.
Boeing: Bad News Keeps Piling Up
For aerospace giant Boeing Co. (NYSE: BA), its new CEO, Robert “Kelly” Ortberg, hasn't been getting much traction as an International Association of Machinists and Aerospace Workers strike halted production lines on September 13, 2024, as 33,000 machinists walked off the job.
Negotiations with the union have continued to fall through as the Union wants 40% wage hikes and reinstatement of pensions, while management offers 35% hikes with improved retirement benefits.
Reporting a Kitchen Sink Bomb
On October 23, 2024, Boeing reported its third quarter of 2024 non-GAAP EPS loss of $10.44 or $6.17 billion, missing estimates by 9 cents. The company burned through $1.3 billion in cash. Revenue fell 1.5% YoY. Its Commercial Airplanes segment had a 5% YoY revenue drop to $7.44 billion with a negative 54% operating margin. However, that didn't include the full impact of the worker's strike.
Boeing warned that it was losing $1 billion in cash a month from the ongoing strikes. Additionally, it announced $5 billion in charges due to program cutbacks, and revenue guidance was cut to $17.8 billion versus $18.49 billion consensus estimates. The company is streamlining its operations and will be cutting 10% of its global workforce, or about 17,000 workers, not including the strikers. This befuddled analysts, considering Boeing still has half a trillion dollars of order backlog comprised of more than 5,400 airplanes. The real impact of the strikes won’t be felt until the fourth quarter and beyond.
Market Sees a Bargain as a Floor Is Put In
The company had $10.5 billion in cash at the end of the quarter, which makes investors concerned about potential dilution as the company needs to raise more cash if the strike continues longer. Despite the constant stream of negative news, Boeing stock has found a floor at $146.02, having rebounded to a peak of $163.44. Regardless of the kitchen sink quarter, the market sees the glass as half full due to the oligopoly halo effect. The immediate upside catalyst will be when the strike officially ends. The reality is that Boeing is not suffering from a demand problem with a total company backlog of $511 billion. The question is not a matter of if but when production resumes again.
Starbucks: CEO Caliber Makes a Difference
When Starbucks Co. (NASDAQ: SBUX) announced it was swapping out its CEO, Laxman Narasimhan, with fast-casual restaurant giant Chipotle Mexican Grill Inc. (NYSE: CMG) CEO Brian Niccol, its stock exploded 24.5% higher immediately.
Unlike Nike's stock, Starbucks's shares remain elevated even after reporting a kitchen sink preliminary Q4 2024 results and suspending forward guidance.
Preannouncing a Kitchen Sink Fourth Quarter With a Plan
Starbucks expects Q4 comparable sales (comps) to fall 6% YoY in the United States, 14% YoY in China, and 7% YoY globally. Sales in the United States suffered a 10% decline in comparable transactions. China suffered an 8% YoY drop in average tickets and a 6% drop in transactions. Its Q4 2024 EPS is expected to be around 80 cents versus $1.03 consensus estimates. Full-year 2024 EPS is expected at $3.31 versus $3.54 consensus estimates, with revenue of $36.30 billion versus $36.48 billion. Guidance for fiscal 2025 was suspended.
Keep in mind that Chipotle reported comps of 11.1% in Niccol’s last quarter as CEO. Now, as the acting CEO of Starbucks, Niccol seeks to stabilize the company and has stated that its problems are "very fixable." Niccol raised the dividend from 57 cents to 61 cents and plans to remove bottlenecks, improve staffing, simplify barista operations, notably during the morning rush, refine mobile ordering, and simplify the complex menu. The market knows this isn't CEO Niccol's first rodeo, as his leadership is what accelerated Chipotle's growth and brand to the top of the industry.
Niccol reassured investors, "We are reorienting all our work to ensure we deliver a high-quality hand-crafted beverage, prepared quickly and with care, and handed directly to the customer by our barista. This is the moment of truth. This commitment will drive every decision we make."
