The U.S. stock market posted declines in the third quarter driven by fears of a government shutdown, striking autoworkers, surging oil prices and the prospect of interest rates remaining higher for longer. Against this backdrop, government bond yields soared, equities came under pressure and the richly valued “magnificent seven1” lost their shine. As the Federal Reserve attempts to steer the economy, some worry the risks of a hard-landing are growing. Although uncertainty and volatility are likely to remain elevated, we view the recession guessing game as noise within the context of our long-term investment horizon. Ariel Fund declined -7.15% in the quarter, underperforming both the Russell 2500 Value Index and the Russell 2500 Index, which returned -3.66% and -4.78%, respectively.
Live entertainment, media and technology company, Sphere Entertainment Co. (SPHR, Financial) was the top contributor duringthe quarter. Shares jumped following news the Las Vegas venue was on track to open in late September and costs were in-line with expectations. Additionally, the company delivered a profitable fourth quarter relative to the loss posted a year ago. While the Sphere venue will take some time to reach its full potential, the company is planning to have events 365 days a year. In addition to hosting concert residencies, marquee sporting and corporate events, The Sphere Experience will debut in October, consisting of a series of exhibits chronicling technology's impact on the development of human potential. Management also believes there is a significant opportunity for advertising and sponsorship on the Exosphere (the Sphere's exterior) as well as licensing interior VIP hospitality suites. Meanwhile, U2 opened to great fanfare on September 29th – sending shares even higher into the month of October. In our view, the Sphere's new experiential immersive venue and the company's two regional sports and entertainment networks present a long-term opportunity, which remains meaningfully underappreciated at current trading levels.
Shares of global leader in for-profit education, Adtalem Global Education (ATGE, Financial), also advanced on a top- andbottom-line earnings beat and subsequent increase at the low-end of its FY2024 Adjusted EPS guidance. We remain encouraged by the continued recovery in nursing school programs, highlighted by Walden's new student enrollment up double -digits versus last year. Although, enrollment trends across the medical schools faced headwinds in the quarter, they appear temporary, with management having already implemented the necessary changes to convert strong underlying demand into students. Although investors remain skeptical of the near-term backdrop, we believe ATGE will benefit from the healthcare worker shortage in the U.S., evidenced by its market leadership as the number one grantor of nursing degrees in the U.S. and the largest producer of African-American MDs, PhDs and nurses in the country.
Toy manufacturer, Mattel, Inc. (MAT, Financial) also increased in the period. Although the retail environment remains challenging, MAT delivered a solid earnings beat and maintained full-year guidance. The successful release of the Barbie movie is expected to generate over $125 million of gross billings this year from film royalty payments while boosting the franchises' consumer products. These results continue to highlight MAT's progress towards expanding its entertainment offering and executing on its strategy to grow market share, improve profitability and generate higher levels of cash flow. In our view, MAT remains an undervalued asset with attractive growth prospects for its Barbie and Hot Wheels brands, as well as its Disney Princess and Frozen toy lines, Trolls and the global launch of Monster High.
Alternatively, several positions weighed on performance. Leading direct-to-consumer pool and spa care services company in the U.S., Leslie's Inc. (LESL, Financial), declined in the period following a preannounced earnings miss. Unfavorable weather across key markets and increased price sensitivity has resulted in weaker than expected store and website traffic trends. Investor concerns regarding the potential deflation on the price of chlorine further weighed on shares. In response to these results, management is reducing inventory, cutting costs and installed a new CFO. We believe our thesis remains intact. In our view, the company continues to differentiate itself through its loyal client base, vertically integrated supply chain, scale advantage and seamless customer experience.
Marketing communication company, Interpublic Group of Companies, Inc. (IPG, Financial), also traded lower in the quarter.Broad macro uncertainty and a pullback in spend from tech, telecom and smaller client accounts resulted in an earnings miss and subsequent reduction in full-year guidance. Looking ahead, management expects to grow from new business wins and strengthening performance across its media and healthcare businesses. We believe in IPG's resilient business model and its management team's ability to flex its variable cost structure to weather the cyclical headwinds that may come its way.
Finally, leading global manufacturer of power generation equipment, Generac Holdings, Inc. (GNRC, Financial), underperformed in the quarter. Management lowered full-year guidance as a soft consumer environment resulted in weaker-than-expected residential sales, margin contraction and an earnings miss. Subsequently, GNRC held an investor day and issued a new 3-year outlook above consensus driven by grid instability, climate change and accelerating power outages. In our view, GNRC's home standby generator business as well as its commercial and industrial opportunities will benefit from such heightened consumer sensitivities and result in a long runway of penetration across an expanding addressable market, margin expansion and free cash flow generation.
Also in the quarter, we added marketer and distributor of over-the-counter pharmaceutical drugs and products, Prestige Consumer Healthcare Inc. (PBH, Financial) . The company has ahistory of innovation and acquiring products to meet unmet consumer needs. Following an acquisition in 2017, the company levered the balance sheet and has been focused on using free cash flow to pay down debt. As its products, such as cough/cold and travel, rebound from COVID-19 pressures, we expect margins and earnings growth to lead to multiple expansion.
We did not exit any positions during the period.
As the pendulum of worry swings from one scenario to another, our focus on recent events and macroeconomic developments is to consider their effect on the long-term intrinsic worth of our holdings over the next five-to-ten years. Although the new “higher for longer” rate regime will likely present headwinds to corporate earnings growth, we remain confident in our portfolio positioning and stand ready to take advantage of market sell offs. We strongly believe the patient investor that stays the course and consistently owns differentiated business models with solid competitive positioning, low leverage and robust balance sheets will deliver stronger returns over the long run.
