Company Notes Digest 5.22.15

Each week I read dozens of transcripts from earnings calls and presentations as part of my investment process. Below is a weekly post which contains some of the most important quotes about the economy and industry trends from those transcripts. Click here to receive these posts weekly via email.

The Macro Outlook:

All things considered, the consumer is still more optimistic than not

“We are encouraged by the results of our first quarter consumer sentiment survey where we continue to see homeowners’ views around personal finances and home values improved. According to the survey, homeowners are shifting more of their spending to home improvement. As a result, their intentions to begin a home-improvement project in the next six months were the highest in six years and these planned projects are now almost evenly split between discretionary and non-discretionary.” —Lowe’s (Retail)

People were geared up for holidays, which is usually a good sign for consumer sentiment

“Seasonal energy was high throughout the quarter, beginning with Valentine’s Day. In addition to party essentials, our stores were well stocked with cards, gifts, gift bags, balloons and candy for that special purpose or that special person. Seasonal sell-through was good and stores quickly and efficiently transitioned the St. Patrick’s Day and Easter” —Dollar Tree (Retail)

Home Depot (NYSE:HD) saw strength in high ticket items

“I would say that we’re seeing really strength across many departments, water heaters, appliances, our tools, riding mowers, walks, all of our outdoor garden categories, grills, et cetera had just a terrific quarter and those wouldn’t be Pro-focused items.” —Home Depot (Retail)

Dentists are feeling confident enough to invest in remodeling their offices

“I would say we’re starting to see signs of life in terms of the new office construction. We’ve always been very consistent talking about, as the dentists gets busier and is more confident about their book of business and their practice, is when they’re more likely to start making more major investments in physical plans in terms of new office builds or remodels.” —Patterson (Dental Supplies)

The early reads are that May is off to a strong start

“I will tell you that it’s early on in the first quarter. So it’s hard to declare a victory right now, but we feel like we started off where we needed to start.” —Dollar Tree (Retail)

“May is off to a very strong start. That being said, we believe – it’s hard to tell whether that is going to be more a result of the shift in marketing or the acceptance of the product offer.” —Urban Outfitters (NASDAQ:URBN) (Retail)

Retail sales in March/April may have been affected by an Easter shift

“In particular, a calendar shift with Easter falling two weeks earlier this year, we estimate the impact of the holiday calendar shift was a negative $8 million to sales” —Dollar Tree (Retail)

Despite optimism, retailers’ results haven’t been all that great

“we think the macroeconomic and retail outlook remains pretty uncertain. You see that and you get a sense of that in the recent results that have been announced by other retailers.” —Ross Stores (NASDAQ:ROST) (Retail)

Red flag: off priced retailers noted that there is lots of unsold retail inventory. Some of that is because of the ports, some of it could be because the environment is weak

“the availability of goods in the market has been significant. Some of that could be a ramification of business around the environment not being as strong.” —TJ Maxx (Retail)

” Between the port dislocation and mixed sales results in Q1, there was a lot of availability. So, we feel very good about the packaway that we have, it’s branded products at really great values that our customers expect” —Ross Stores (Retail)

PC OEMs have been selling down excess inventory for months already. They may be closer to the end than the beginning

“The PC OEMs themselves have become very conservative starting back in January, February. They’ve been lowering inventory…That channel probably had four to six weeks of inventory, today that’s probably three to four…that reduction of inventory will stop. And that will feel like it’s been an immediate demand reversal…it’s sooner rather than later. I don’t get paid as much as you did to predict the exact date. So I’m going to let you kind of keep doing that but it is sooner than later.” —Micron (Tech components)

The good news is that the port issues are almost cleaned up

“The good news is that we are reasonably caught up in the DCs, the merchandised floor of our imports coming through the west coast is more normalized…Best news about the port slowdown is we’re pretty much past it.” —Dollar Tree (Retail)

Commodity markets are trying to deal with excesses of their own

The mining industry is still deteriorating

“When we take a look at mining and we take the inputs from our customer, it’s clear across our customer base that mining is taking another step down after multiple years of decline. We had previously had and guided our first-fit portion of that business to be down 10%. We’ve now taken that down to 15% to 20% within our model. So mining, globally, is really creating more headwind than we had originally predicted.” —Donaldson (Industrial Components)

Wal-mart battled the headwind of deflation in food

“One key headwind we faced in grocery during the first quarter was moderating inflation in meat, and deflation in both dairy and produce.” —Wal-mart (Retail)

Weakness in energy markets led to cautious buying by Precision Castparts (NYSE:PCP)’ customers

“We had sharp declines in volume, price and mix. All three in the same quarter, and this was related to our customers’ very cautious buying due to their uncertainties and their outlook and demand. As you would expect, in response to these dynamic we address not only today’s tough market conditions, but a cautious future outlook” —Precision Castparts (Metal Components Manufacturer)

There are examples of tight capacity too though

Freight costs are rising because trucking capacity was removed by the recession

“we do expect freight costs to be a headwind as we go through the year. And it’s not only the driver piece of it, but it’s also the fact that as we went through the economic down cycle, there are many less firms out there today, trucking firms and so the competition has gotten less in some respects.” —Dollar Tree (Retail)

Ross Stores is planning for wages to keep rising as labor markets have tightened

“As we’ve said before, though, we expect wage rates are going to move up over the next few years. I think you’re seeing that in the press almost every day. So it’s certainly something that we expect that we’re going to be talking more about as we get into our budget for 2016 and our longer term plans and certainly when we talk about our earnings guidance next February, my guess it will be part of that discussion too.” —Ross Stores (Retail)

International:

Currency movements had a real impact on demand for HP’s products

“the currency movements and the associated re-pricing impacted demand.” —Hewlett Packard (Enterprise Technology)

Trade agreements usually have unintended consequences. The Transpacific Partnership is unlikely to be an exception

“While global trade agreements have typically increased the interdependencies of global economies, they have also created their share of “unintended consequences.” So, those unintended impacts’ must also be factored into everyone’s perceptions of what the TPP will mean, again assuming it’s ever enacted and implemented.” —Expeditors International (Freight forwarding)

Financials:

Fannie and Freddie are working directly with smaller lenders now

“they have democratized the way they do business with small lenders, so another reason for us losing shares that there are some correspondence who would have come to us we would have accumulated loans and then gone to the agencies and those smaller originators go straight to the agencies themselves.” —Wells Fargo (NYSE:WFC) (Bank)

Many companies have had difficulty closing M&A transactions

“this is an extremely large and complex transaction, involving more than 13,000 retail store locations. It is the largest of any previous retail merger. Needless to say, this process has taken longer than any of us anticipated. We’re continuing to work very hard to close the transaction as soon as possible and our current expectation is that we can have this transaction completed in early July.” —Dollar Tree (Retail)

Consumer:

Retailers are seeing enough success in e-commerce that they are slowing the number of stores that they are opening

“we are accelerating our investments in virtual capabilities; we are slowing the number of new retail stores we open in the North American market.” —Urban Outfitters (Retail)

Customers are browsing in store and shopping online

“we really believe in building that one-on-one connection in our stores and using our stores for that really high touch service…often — they go to the store, they visit the store and then they go online and make a purchase” —Williams Sonoma (Retail)

The line is blurring between brand advertisers and direct response

“there has been this distinction and we’ve made this distinction as we talk about our business between direct response and brand. The reality is those lines are blurring. If you think about Coca Cola, Proctor and Gamble, Unilever (LONDON:ULVR), Nestle, any of the largest marketers that you would think of as brand, they of course care about their brand affinity and how consumers are going to have a preference for their product versus someone else’s, but they also very much care about driving growth and driving sales.” —Facebook (NASDAQ:FB) (Internet-Media)

We’ve been living in the golden age of television (SK Note: Did Mad Men mark the start and finish?)

“I think we’re like in the golden age of TV. There is more high-quality TV shows available now than at any other time in the history of the industry. I think last year alone, there were over 200 original scripted prime time series. I mean there’s almost more TV than any human could ever watch.” —Comcast (NASDAQ:CMCSA) (Media Conglomerate)

AT&T (NYSE:T) assumed that pay TV would decline when it purchased DirecTV

“as we were evaluating DIRECTV (NASDAQ:DTV), and obviously we modeled it nine ways to Sunday and as we evaluated we made the basic assumption that over the top would continue to develop. And that you would see not only cord cutters but cord nevers” —AT&T (Telecom)

AT&T is fairly confident that the FCC’s decision to regulate broadband as a utility will not stand

“As we have evaluated the FCC’s order on Title II, we actually are – we actually have a certain degree of conviction that these will not be the rules of the land in the long-term.” —AT&T (Telecom)

Technology:

The markets for tech hardware have been quite weak

“Business technology, computers and mobility drove the entire 5% same-store sales decline in North America …clearly tech was the big drag for the quarter, and primarily within tech, it was PCs and tablets.” —Staples (Office Supplies)

PC demand has been even worse than expected

“I think, we have gone through a little bit worse than expected PC demand period that has reset I believe everybody’s expectations as the industry for the year to where the unit growth in PCs” —Staples (Office supplies)

There is a school of thought that the computer scientists (software) have won out over electrical engineers (hardware)

“what we have discovered is there was a bit of an oscillation where people believed that the whole world would be driven by purely software and they – this was the computer scientists winning as opposed to the electrical engineers.” —EMC (NYSE:EMC) (Storage/hardware)

Hardware is still important though. Even commodities have value.

“But then people started to realize that in order to deliver performance, capacity, et cetera, hardware would still be important…there is commoditization of hardware but commoditization does not mean no value, it just means that it is now a commodity and a commodity is something that’s fungible.” —EMC (Storage/hardware)

The tech community has so much respect for Uber that “uberize” is now a verb meaning “to disrupt”

“we’ve seen is people start to challenge business models through the use of software and innovation…some people call it the uberization of pretty much every industry.” —EMC (Storage/hardware)

“I think people have this notion in their head that there is an uberizing application that they potentially can hunt out for their business that gives them distinct client value and therefore growth opportunities.” —IBM (NYSE:IBM) (Storage/hardware)

Materials, Industrials, Energy:

There are still no signs that energy weakness is affecting the Texas economy

“We have 178 stores in the State of Texas. We’ve seen no visible impact whatsoever in that State at this point.”–Home Depot (Retail)

“we didn’t see any correlation between what you just referred to, changes in the oil and gas industry, and an influence on our comps.” —Target (Retail)

The airfreight industry was a relatively un-noticed loser as technology shifted to smaller and more integrated devices

“The airfreight markets in particular and the freight markets in general became a very visible example of what ripple-on effects subsidiary industries can experience when the dominant industry they support fall victim to Harvard Business professor Clayton Christensen’s disruption theories. While the size of the computers started to shrink, other products, enabled by the intense R&D the tech market was driving, began to show up in alternative devices such as the smartphones and smaller and thinner tablets” —Expeditors International (Freight Forwarding)

Miscellaneous Nuggets of Wisdom:

There are more stakeholders in a business than just shareholders

“we will manage this business with a focus on what is best for our stakeholders, including our customers, our vendor partners, our associates and importantly, our long-term shareholders.” —Dollar Tree (Retail)

One of Silicon Valley’s great advantages is that they have shareholders who don’t seem to care about quarterly returns on capital

“revenue is one of the easiest things to find in the tech industry and profit is one of the hardest…if you are one of those companies that is given extraordinary market valuations without necessarily having to deliver profit…I am sure I would be sitting there smiling, going this is a great…Some of us have to deliver return on invested capital every quarter.” —IBM (Enterprise Technology)

People tend to believe that new technologies will completely supplant old ones, but technology infrastructure is no different than any city’s infrastructure. The old exists beside the new.

“I think that there is a certain infatuation with every wave that comes long. For those that have been around long enough, they can think of the dialog, the rhetoric and the discussions that occurred with every perceived technology wave that somehow rather the new would eliminate the old. And, yet, that hasn’t really been the case. Infrastructure is like a city, whether it’s Boston or New York or whatever your favorite city is. You see change and change to the skyline. You see improvement. But you also see a lot of things that are as they were. They haven’t changed. Maybe they have gotten a little new coat of paint and some renovation. Certainly the subway cars in New York City today are air-conditioned, I remember when they were not air-conditioned. And so those kinds of things happen. So the old doesn’t entirely disappear.” —IBM (Enterprise Technology)

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

Written By: Scott Krisiloff