Company Notes Digest 5.30.14

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

The Macro Outlook

Considering it’s June and we’re still talking about weather, I’m thinking DSW may have a point:

“we won’t wait for…maybe the weather never turns.” ($DSW)

Toll brothers hasn’t seen much of a shift in housing activity in May

“Demand over the past year has been solid although relatively flat compared to the strong growth we experienced beginning in 2011 coming off the bottom of this housing cycle. So far in May the story has been more of the same. Traffic and deposits are up a little and agreements are down a little. Business continues to be good but relatively flat.” ($TOL)

Toll argues that this lull is similar to what we saw in the 90s recovery though

“We note that the last cycle’s recovery in the early 1990’s began with a period of rapid acceleration followed by leveling before further upward momentum. We believe that we are in a similar leveling period in the early stages of the housing recovery with significant pent up demand building.” ($TOL)

Toll thinks there are a lot of people circling, but not purchasing

“you have got a lot of people circling. And since they are not buying at the level we thought they would be, they are spending more and more time contemplating and studying the decision.” ($TOL)

Toll argues tight inventory and pent up demand will lead to higher prices

“you don’t have any inventory. You don’t have any inventory but you got demand and you have price increases. You get price increases people are going to rush to try and beat the boat. So I think the best is yet to come’ ($TOL)

More retailers are starting to talk about a promotional environment instead of weather

“I think the promotional activity I would describe it as disruptive, chaotic and really is across the entire industry and I think what you are seeing is business has been tough and I think that most retailers do to address that are just price reducing in a degree that I’ve never ever seen before.” ($DSW)

Autozone voices some concerns on the consumer

“Although we have some concerns about the health of the consumer due to ongoing financial strains and increasing gas prices, we are pleased with our execution and excited about our ongoing strategies.” ($AZO)

The high end consumer is rolling though. Home prices in exclusive neighborhoods are back with a vengeance

“I think if you look at what’s happening in the very extremely sought after markets, they are not only back, but they are back with a vengeance. And I think that just leads, because those people have the money and the ability to do what they want, when they want. I think that just leads the overall luxury market. And I think there is every reason to think that it’s going to kick in very soon.” ($TOL)

Even McDonalds is bifurcating its menu for the growing income gap

“There is a bifurcation in the U.S. and if you look at the lower income levels. Some of the lower income levels have not prospered as much clearly in recent years and primarily since the recession started. It is important that McDonald’s remain affordable for consumers. And so the value component is important. Having said that, we also see that there is this category of premium burgers, and the category has been out there a while. But the premium is also defined differently by consumers. Real and fresh are two really large aspects of premium.” ($MCD)

Rising gas prices have a particularly big effect on the lower income consumer

“We continue to believe gas prices have a real impact on our customers’ abilities to maintain their vehicles and we will continue to monitor prices closely in the future.” ($AZO)

It’s been a long time since the financial crisis. Things have changed:

Families who bought homes back then are probably ready to move

“if they bought their home in ’02, ’03, ’04 most people stay in a home I think it’s seven years on average. They are back to even or in some markets they are back above water and they are looking to move their family on.” ($TOL)

Cars bought back then are already 5-7 years old

“there’s a little bit of a dip in that five- to seven-year-olds, but the more important point is that the number of registered vehicles hasn’t really changed significantly, so we still have the same number of vehicles out on the road and so you do have a little bit of a dip, if you will, if you look at the timeline.” ($AZO)

Oil demand has grown by 10m barrels per day since then

“in 2008, we were using 83 million barrels a day…we are using 93 million barrels today or thereabouts” ($APA)

Meanwhile in capital markets, hedge funds are already feeling the pressure to chase performance

“We find ourselves heading into June and people still have years to make. So I think we’re going to continue to see a push when those opportunities arise.” ($C)

And the head of Bank of America’s investment banking division noted that high M&A volume may be because companies are in a race to the finish before liquidity dries up

“I think also on the M&A side, again some extent there is a bit of a way rush to the finish in a sense that people think okay, maybe in 2015, where it might be where they are, or liquidity might not be — better there might be specifically if its heavily dependent on leverage to — I would better do my deal sooner rather than later.” ($BAC)

Many companies are still looking internationally for growth

“The story here really is one of investing in our international client base and so a lot of the growth that you see on the page has been an investment in building our [global corporate and investment banking] franchise outside the U.S.” ($BAC)

“what we’ve been focused on as a leadership team is to continue to grow our international business. It’s always been an element of our strategy, but in this environment we’ve stepped up our focused on that from a leadership standpoint and resources, because there is a strong demand for our products and capabilities internationally and because it is an area of growth for us.” ($LMT)

Increasing US healthcare cost is one variable that makes international expansion more attractive

“the bigger thing is the increasing penetration outside the United States, where healthcare cost as a percent of sales, respect to sales in that countries is lot less.” ($COST)

Financials

The key to being a bank in the Eurozone is to not fool yourself into thinking that German Euros and Spanish Euros are the same thing

“in spite of a single currency, we never allowed ourselves to be fooled that German Euros and Spanish Euros were the same thing. They weren’t. And I think having that deposit funding on a local basis was important.” ($C)

Regulations could lead to higher volatility because brokers have less ability to provide support to the markets

“I think I can make a fairly strong argument that I think over time we’re actually going to see heightened volatility. If you look at the consequences of the regulation of smaller bank and broker dealer balance sheets, you look at the continued AUM growth in terms of all types of money managers in the world; that the bank and broker balance sheets aren’t going to be there to be that shock absorber in the markets. In fact they are going to have be that shock absorber. So I can actually argue that there is probably more volatility.” ($C)

Regulators have also helped to build a moat for large banks because they’re not letting second tier big banks get bigger

“the challenge in the businesses today is if you are not off scale it’s very difficult to get scale, meaning that regulators aren’t going to allow you to buy your way to get the scale because they’re not letting big banks or brokerages get bigger.” ($C)

Citi has 1,000 people working on the Fed’s stress tests. (FWIW: I’d argue that one seasoned bank analyst should be able to do a decent stress test on any bank in about 30 minutes)

“So by the time we finish its well into the 1,000s of people that get involved in terms of our CCAR process and submission.” ($C)

Consumer

Some people still like to go out and do stuff

“not everybody wants to just sit home and type in stuff to have it delivered in the morning, people like to go out and do stuff.” ($COST)

Omnichannel retail makes it difficult for small businesses to compete

“over the last couple of years the top 10 retailers and footwear have grown their market share by several hundred basis points…all the other retailers have had market share losses and I think that what that reflects is the difficulty that smaller less well capitalized, less technologically proficient, regional footwear players that they are going to have very difficult time being competitive in the new way of doing retail and that way is that the customer wants to shop seamlessly from store to the dot com site to the mobile site and she wants to access all the product with — regardless to where it is and she wants help making that decision on what she should buy and once she decides what she is going to buy, she wants it delivered to her wherever she wants it and whenever.” ($DSW)

McDonalds welcomes competition to breakfast. Competitors bring more attention to the day-part and never get traction

“in all the years I’ve been in McDonald’s. There is always been someone entering breakfast every year. Several of the players have done it multiple times and that will continue. We actually view that as a good thing. The more energy that there is in the immediate relative to breakfast, we feel like we’ll win” ($MCD)

Organic foods are supply constrained

“We’ve seen surprisingly good success on organic and produce and fresh meat, fresh ground beef. And the challenge is the supply, frankly. There is not enough supply” ($COST)

Healthcare

Some of the Obamacare provisions have added 1-1.5% to health insurance costs

“some of the things that have been added like up to 26 year old instead of 18 to 22 based on if your kid is in college or not, your dependants, on mental and medical health priority no limits.There is — all these things have added, 1 and 1.5 percentage points to already large number.” ($COST)

Materials, Industrials, Energy

Apache is very bullish on oil

“Oil is a world market. I mean, I am very bullish on oil.” ($APA)

LNG probably wont change the natural gas picture

“this morning with $4.47, I can’t see that really changing. Lot of people think that if we get all this LNG offshore, I think – they think it will change. We can plan awful lot of LNG and still supply gas to North America, $4.50 or thereabout.” ($APA)

EOG thinks the Permian is nice, but not as good as the Bakken or Eagleford

“Permian is a great place to drill wells, it’s a lateral – tremendous amount of reverse potential. But it’s not the play quality, the rock quality and the technical aspects of the play are not nearly as strong as Eagle Ford or the Bakken. And it will not be able to maintain this dramatic growth rate that we have had historically in the country. And it will not be able to replace an Eagle Ford or a Bakken.” ($EOG)

There’s probably not another Bakken or Eagleford out there

“hink our thoughts are and we know all – we know the U.S. very, very intently. We did not see another Bakken or an Eagle Ford out there. That would be both the size of the field and the quality of the field together. That’s probably not one of those out there.” ($EOG)

There is plenty of opportunity in the US though

“I think anything internationally whether the Mexico or some other place that EOG is really not actively pursuing any plays internationally and it’s because that we see an abundance of opportunity in particularly the U.S. And we are very focused on the U.S. and we think there is ample room there for us to continue to grow the company.” ($EOG)

Miscellaneous Nuggets of Wisdom

Make a good first impression

“You know, when you first engage with a customer, you don’t start at number one, at least not on very many occasions. A lot of times, you’ll start as fourth or fifth call. Well, if nobody else in town has it, now you’ve got an opportunity to impress that customer, so they call you with something they didn’t think you would have and you have it, and then you give them prompt, great service, and guess what? Now you’ve got a chance to start moving up that list.” ($AZO)

Some words from Ray Kroc, a legendary businessman

“Ray Kroc had a statement. He made the statement years ago. He said he didn’t know what we’d be selling in the year 2000, but we’d be selling more than anyone else” ($MCD)

If you don’t cannibalize yourself, someone else will

“I get back to the question is if somebody is going to take that business, we would rather take it” ($COST)

It pays to grow organically

“We decided to do that years’ ago instead of growing the company, the typical way by acquisitions and mergers, we have historically chosen to go through exploration. And we have grown the company organically. We internally generated all of our own prospects and go out and just capture the acreage at very little dollars, very nominal dollars on the front end side and we captured not only acreage of low cost but we actually are able to capture the sweet spot of these plays by being there first.” ($EOG)

It’s tough to make the economics of an acquisition work

“I think it’s very difficult to make money in an acquisition market. You have to place so much on the upfront. And it just makes the overall project very, very low return. And the company is fortunate I think that we will be able to continue to organically generate.” ($EOG)

There are reasons to take your time and be patient

“Each one of these plays has a certain speed that is optimum speed in the time, the life of each of the fields…If you speed that up, you have – you could easily lose efficiencies and instead of reducing the well cost, you increase the well cost. And also, while you are completing all these wells, you are learning a whole lot, you are learning the rock, you are learning about the play, you are learning about the proper completion that you want to put on each one of these wells and that’s an ongoing process all the time and we are making significant advance until the time…from the people side of it, you want to make sure you have top quality people and you have a very dedicated group of people and a very focused group of people to manage and to have discipline to do all this correctly.” ($EOG)

To make good purchases you have to know things that someone else doesn’t

“we have been able to continue to capture acreage at very low cost compared to what they end up being later down the road. And so you have to be upfront, you have to know something that somebody else doesn’t know. You have to just kind of do it in a stealthy manner.” ($EOG)

Lockheed Martin at Sanford Bernstein Conference

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Focusing on international with US slow

“what we’ve been focused on as a leadership team is to continue to grow our international business. It’s always been an element of our strategy, but in this environment we’ve stepped up our focused on that from a leadership standpoint and resources, because there is a strong demand for our products and capabilities internationally and because it is an area of growth for us.”

f-35 is 16% of sales

” From Lockheed Martin standpoint, I would tell you that having the F-35 well supported in both the House and Senate and by our customer I think is very important. It’s 16% of our sales. ”

Something needs to be done about sequestration again in 2015 2016

“What will happen beyond FY ’14 and ’15 once we get through this budget cycle on ’15 and to ’16 is we have an uncertain situation, Doug, because that is when sequestration would come back into place unless Congress does something about that. Everyone I speak to says they want to do something about that. So my optimism says, hopefully they’ll get together and they will do something about that. We may still see some cuts in FY ’16 and beyond, but not at the sequestration level.”

International tensions get international governments attention on defense

“the tensions in Ukraine and the aggressiveness with Russia there, as you mentioned the South China Sea and the tensions over there, the North Korean’s and their unstable behavior, just different reach and it continues in the Middle East to be a dangerous neighborhood and a lot of tensions that arrived there.

All of those things say to us as a nation and to our allies around the world that while we have budget pressures that a number one thing that any nation has to do is to be focused on their national security. And so as you deal with budget pressures, each one of these nations I speak to say, but we still have to address the national security strategy that we have to protect our citizens and to provide them with the essential services that they need. And we’ve got to figure out how to manage that budget.”

Long cycle between contract and delivery

“So that backlog is if you look at our business, the predominance of our business are long-cycle businesses. We build aircraft, satellites, things that from the time we get the order, the contracts sign to the time that we actually deliver is three years, some times three years plus.”

Have sold 4600 F-16s

“But on the F-35, itself, what we envision is that it’s going to go the way of other tactical aircraft programs, such as the F-16. Today the program of record is around 3,000 aircraft. The F-16 we’ve sold 4,600. We’re still selling more.”

International focused on missile defense, f-16 and cyber security

“There is a strong demand for missile defense around the world.”

“the venerable F-16 is still selling around the world. We have backlog to 2017 and we expect to continue to sell it beyond that.”

“There is growth in cyber security. It’s a largest threat for many countries right now, it’s the cyber threat and they need help. And we have the capabilities to help them.”

Going rate for missile defense system is $3-$5 B

“And then Poland has a $5 billion opportunity, the Polish Shield they call it, but this is the Shield of Poland opportunity for their missile defense system and we are in the down select on that opportunity. ”

Cyber security at $1B right now, expanding commercially too

“And in that business, we are growing at about right now it’s around $1 billion worth of sales in that business. We are even moving into supporting commercial customers there, because a lot of large companies, whether they are utilities or they are banks, in the financial side or in other critical infrastructure, they need help in protecting their systems, just like we’ve been able to protect our systems.”

Commercial is not necessarily the same market as government

“you’re right to say there are differences. And we never go into a new market unless we know what we’re doing. We know the product line. We know exactly what we are offering. If we have to go to market differently, we hire talent to support that. We do the right things, so that we go to market appropriately.”

Costco 1Q14 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Comps not bad, but negatively impacted by gas prices and currencies

“comparable sales figure was up 4%. For the quarter sales were negatively impacted by gas price deflation which is about 25 basis point impact and by weaker foreign currencies relative to the U.S. dollar year-over-year which in the aggregate impacted sales by about 140 basis points to the negative.”

Opened 4 new locations in fiscal Q3Some people still like to go out and do stuff

“So, I think there is still a lot of reasons — not everybody wants to just sit home and type in stuff to have it delivered in the morning, people like to go out and do stuff. We are pretty good at getting you in the warehousing.”

Not enough supply of organic stuff

“We’ve seen surprisingly good success on organic and produce and fresh meat, fresh ground beef. And the challenge is the supply, frankly. There is not enough supply”

On cannibalization: If someone is going to take the business we want it to be us

“I get back to the question is if somebody is going to take that business, we would rather take it”

Interesting discussion on healthcare costs

“one thing that helps it, I mean, we read about hospital cost or becoming less inflationary in the U.S. We — and I talked to few other different types of companies at a recent meeting outside the Costco and we’re not seeing below as low numbers. I think maybe on a per charge at a given hospital or a given doctor, something’s might me lower if its only through the Medicare system as example. But some of the things that have been added like up to 26 year old instead of 18 to 22 based on if your kid is in college or not, your dependants, on mental and medical health priority no limits.

There is — all these things have added, 1 and 1.5 percentage points to already large number. The thing that’s frankly can help us more than that whether inflation is 5% or 10% or 3% and certainly if it comes down in the mid-to-lower single-digits that’s a positive for us. But the bigger thing is the increasing penetration outside the United States, where healthcare cost as a percent of sales, respect to sales in that countries is lot less.”

EOG at Sanford Bernstein Conference

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

First movers in shale by 3-4 years

“I think what has really driven the company in the last four to five years is that we were first movers in shifting from gas to oil. And we were the first movers by literally three or four years ahead of the industry.”

Focused on growing by exploration, not acquisition

“We decided to do that years’ ago instead of growing the company, the typical way by acquisitions and mergers, we have historically chosen to go through exploration. And we have grown the company organically. We internally generated all of our own prospects and go out and just capture the acreage at very little dollars, very nominal dollars on the front end side and we captured not only acreage of low cost but we actually are able to capture the sweet spot of these plays by being there first.”

Also pioneer their own completion technology

“The other thing the company is known for is being first movers or leaders in horizontal completion technology. And the company has very unique model in that. It’s not directly tied to the service industry. We supply our own materials for our fracs. We do all of our own internal frac designs technically. And that has given us an enormous lead on cost and well improvements”

Lots of reserves in the Eagle Ford, only drilled 17% of defined locations

“We did in our February call, we increased our Eagle Ford reserve potential by 45% and so its now gone from 2.2 billion barrels equivalent recoverable to 3.2 billion barrels that’s the third increase we have had in that field. And we now have 7200 defined locations. We drilled 1200 of those. And so we have 6000 remaining locations in those locations had a cut-off of 60% A tax rate of return or better. ”

Permian is nice, but not enough to maintain dramatic growth in oil production

“Permian is a great place to drill wells, it’s a lateral – tremendous amount of reverse potential. But it’s not the play quality, the rock quality and the technical aspects of the play are not nearly as strong as Eagle Ford or the Bakken. And it will not be able to maintain this dramatic growth rate that we have had historically in the country. And it will not be able to replace an Eagle Ford or a Bakken.”

A decentralized approach

“We have a very decentralized company. So we have nine operating divisions in North America and each one of those divisions has a very strong exploration group. So we are literally working every basin and every rock in North America at the same time.”

Have to be careful to move at the right speed

“Each one of these plays has a certain speed that is optimum speed in the time, the life of each of the fields…If you speed that up, you have – you could easily lose efficiencies and instead of reducing the well cost, you increase the well cost. And also, while you are completing all these wells, you are learning a whole lot, you are learning the rock, you are learning about the play, you are learning about the proper completion that you want to put on each one of these wells and that’s an ongoing process all the time and we are making significant advance until the time.”

“from the people side of it, you want to make sure you have top quality people and you have a very dedicated group of people and a very focused group of people to manage and to have discipline to do all this correctly.”

Probably not another Bakken or Eagleford out there

” think our thoughts are and we know all – we know the U.S. very, very intently. We did not see another Bakken or an Eagle Ford out there. That would be both the size of the field and the quality of the field together. That’s probably not one of those out there. And but we would love to find one, but we do have a very nice list of ongoing prospects and projects in different phases across the company that we are working on and we are optimistic that there are additional things that we will be able to bring forward”

Refinery system is adding capacity to refine US oil

“the refinery system, like this little bit lower cost, U.S. production and they are absorbing it very readily. They are adding additional capacity to refine this oil. And they continue to displace not only the light crudes but they are beginning to displace many of the medium grade crudes that are imported.”

You have to know something someone else doesn’t know to get a good price on acreage

“we have been able to continue to capture acreage at very low cost compared to what they end up being later down the road. And so you have to be upfront, you have to know something that somebody else doesn’t know. You have to just kind of do it in a stealthy manner.”

Drilling costs have come down so much that it doesn’t make sense to go back to old wells with new technology

“the way the industry has gone, the drilling cost on the well – to just get the well initially drilled has become a very small part of the total cost of the well. And its because the efficiency of the drilling has advanced so far that in total cost of the well, the drilling side is so small that really instead of trying to recomplete the well, its really I think more prudent to go in and just drill a new well and complete it correctly. And then you are assured of getting it technically done right and it’s kind of taking a fresh start, and just trying to fix something that weren’t done correctly.”

Really hard to make good returns in acquisitions, better to grow organically

“I think it’s very difficult to make money in an acquisition market. You have to place so much on the upfront. And it just makes the overall project very, very low return. And the company is fortunate I think that we will be able to continue to organically generate.”

Meaningful reduction in drilling below $90

“I think you would start seeing a meaningful reduction in oil drilling anything below $90 a barrel.”

Not focused on international because plenty of opportunity to grow in the US

“I think anything internationally whether the Mexico or some other place that EOG is really not actively pursuing any plays internationally and it’s because that we see an abundance of opportunity in particularly the U.S. And we are very focused on the U.S. and we think there is ample room there for us to continue to grow the company.”

Oversupply natural gas until 2017-2018 at least

“there is going to be more demand for gas down the road, it’s just a matter of timing on that hopefully by 2017, 2018 we will see some substantial demand increases.”

Citigroup at Bernstein Conference

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Reading between the lines, seems like they failed CCAR because they didn’t take CCAR seriously enough

“it was the qualitative piece that Fed objected to and I would say that while our regulatory interaction is confidential, what I would say is that the Fed’s early response publicly around what they saw as our challenges I think have been very consistent and that is that across the work streams, while none of those work streams in itself was failing or was of poor (ph) quality, when they took the work streams and put them together and viewed the institution as systemically important as we are, they thought our qualitative submissions should have been higher. And to be clear these are work streams around the CCAR process, not your business or how you run the business.”

thousands of people working on CCAR

“So by the time we finish its well into the 1,000s of people that get involved in terms of our CCAR process and submission.”

You could make an argument that regulations will lead to higher volatility

“I think I can make a fairly strong argument that I think over time we’re actually going to see heightened volatility. If you look at the consequences of the regulation of smaller bank and broker dealer balance sheets, you look at the continued AUM growth in terms of all types of money managers in the world; that the bank and broker balance sheets aren’t going to be there to be that shock absorber in the markets. In fact they are going to have be that shock absorber. So I can actually argue that there is probably more volatility.”

Funds still have to make their year, could lead to volatility

“We find ourselves heading into June and people still have years to make. So I think we’re going to continue to see a push when those opportunities arise. I think those volumes have the ability there. And the volatility has the ability to come back in a reasonable way.”

If you’re not already at scale it’s hard to get there

“the challenge in the businesses today is if you are not off scale it’s very difficult to get scale, meaning that regulators aren’t going to allow you to buy your way to get the scale because they’re not letting big banks or brokerages get bigger.”

Got to be positive on Mexico

“if you are at all constructive in terms of the U.S., I think over the intermediate and longer term you’ve got to be very constructive in terms of Mexico because when we think of Mexico and the significant role that Mexico has played towards the U.S. it’s obviously been on the labor side of things”

Still some legacy legal issues, they can’t always dictate the timing of when things get done

“we’ve — probably got another issue to in holdings that we’ve got to get behind us. And again, as we’ve said before the challenge of that is, we don’t get to pick the timing, we’ve got to wait until the agencies and the enforcement peers and so for, are wanting to engage with us and then we obviously want to engage and get those to replace”

Don’t fool yourself that Spanish and German Euros are the same thing

“in spite of a single currency, we never allowed ourselves to be fooled that German Euros and Spanish Euros were the same thing. They weren’t. And I think having that deposit funding on a local basis was important.”

We are an urban bank

“we are not a rural consumer bank. We are an urban based, high credit quality consumer bank that offers a wide array of products ranging from credit card mortgages, wealth management, et cetera. And that’s what we’ve been doing, is really concentrating and focusing our work around the urban centers”

McDonalds at Sanford Bernstein Conference

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Five products account for 40% of McDonald’s sales

“our core menu which includes items like our Big Mac and Egg McMuffin, World-Famous Fries those products account for roughly 40% of our sales is about five total products for 40% of our sales.”

80% franchised, opportunity for refranchising is in APMEA

“Today more of an 80% of our global restaurants are owned and operated by local business men and women. They are fantastic. Our U.S. business is 89% franchised and in Europe and APMEA about 70% of our restaurants are franchised. As such the primary focus of our refranchising will be in APMEA and Europe, where we can shift to a more heavily franchised structure in certain high growth markets as well as in established markets where we have room to expand our base of franchised restaurants.”

Digital is a growth opportunity

“I think just adding to that there are significant growth opportunities that we see ahead of us, digital being one of them and to move at the speed we like to move and the scale, that’s not an insignificant investment.”

Digital ordering is one avenue

“we talk about two different aspects of digital, both the experience and the engagement side. E-commerce is almost a green tree. So the ordering, the fulfillment, the pay that aspect of it clearly has to be a part. ”

Teasing some other digital avenues “non McDonalds related”?

“So it will be a broader strategy and it will probably be some things that are also value-added, that are non-product related, some things that maybe non McDonald’s related at all, but may add value to our customers. So those are the areas that we are looking into.”

Other players have always tried to get into breakfast, we think it’s good because they bring energy to the category

“Breakfast is a dynamic area, everyone wants to get into breakfast. It is the last year or so there has been much more energy around breakfast. But I would tell you in all the years I’ve been in McDonald’s. There is always been someone entering breakfast every year. Several of the players have done it multiple times and that will continue. We actually view that as a good thing. The more energy that there is in the immediate relative to breakfast, we feel like we’ll win because breakfast is a growing day part for us.”

Mcdonalds bifurcating the menu for high income, low income

“There is a bifurcation in the U.S. and if you look at the lower income levels. Some of the lower income levels have not prospered as much clearly in recent years and primarily since the recession started. It is important that McDonald’s remain affordable for consumers. And so the value component is important. Having said that, we also see that there is this category of premium burgers, and the category has been out there a while. But the premium is also defined differently by consumers. Real and fresh are two really large aspects of premium.”

Ray Kroc wisdom

“Ray Kroc had a statement. He made the statement years ago. He said he didn’t know what we’d be selling in the year 2000, but we’d be selling more than anyone else”

60% of workforce under age 24

“I think that it is interesting that in the McDonald’s world 36% of our employees are age of 16 to 19. 70% of our workforce is part time, 60% of our workforce are 24 years of age or younger.’

Loyalty programs are a big opportunity

“A huge opportunity McDonald’s is a late entrant in the U.S. We are further ahead in a couple of other markets. We have some pilot markets i.e., the France, the Sweden of the world, that Japan slightly from a CRM perspective but only, I’d say, at a very entry level offer. But if you look across the various markets, the relationship management is a big, big opportunity we believe”

QE Exceeded Household Savings Over Last 5 Years

With the market rising, it’s looking increasingly likely that QE will end in October of this year as scheduled.  There’s lots of debate about what effect the end of QE will have on the markets.  Considering the magnitude of the programs though, it’s hard to imagine how the end can’t be significant.

To put QE in context, below is a chart of the amount of assets that the Fed has purchased over the last five years compared to the total amount of dollars that US households saved in the same period.

In a traditional world, household saving represents the vast majority of new demand for financial assets.  For the last five years though, the Fed has doubled the demand for financial assets by buying even more than households did.  When QE goes away, the marketplace will be missing a major buyer.

If you were a merchant and you lost half of your customers, it would take some painful adjustments to right size your business.  In addition to being over-staffed and over-facilitied, you would likely be carrying bloated levels of inventory, which would need to be cleared at discount prices.

We talk a lot about how psychology drives price movements, and to a large extent that’s true, but there are mechanical elements to securities markets too.  Securities markets are an elaborate collection of merchants and we are about to lose one of our largest customers.

QE vs. Household Savings

Toll Brothers 1Q14 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Business has been a little better but mostly flat, May more of the same

“Demand over the past year has been solid although relatively flat compared to the strong growth we experienced beginning in 2011 coming off the bottom of this housing cycle. So far in May the story has been more of the same. Traffic and deposits are up a little and agreements are down a little. Business continues to be good but relatively flat.”

Comps get easier in July

“Comparisons do get easier in July which last year was when we saw the impact of rising interest rates.”

There was a similar pattern in the 90s real estate recovery

“We note that the last cycle’s recovery in the early 1990’s began with a period of rapid acceleration followed by leveling before further upward momentum. We believe that we are in a similar leveling period in the early stages of the housing recovery with significant pent up demand building.”

TOL argues that supply is tight

“ew home inventory stands at just 5.3 months’ supply, based on current sales paces. If demand and pace increase, the 5.3 months’ supply could quickly be drawn down. Current demographics seem to suggest that new home sales should pick up. If the tight supply bumps into increasing demand, prices could rapidly rise.”

Think you’re going to see increased price levels

“I can’t think of the existing homes, but I think of the new home market, you are going to see continued and even increased sales price levels.”

Home buyers from the early 00’s are not underwater and may be getting ready to move

“if they bought their home in ’02, ’03, ’04 most people stay in a home I think it’s seven years on average. They are back to even or in some markets they are back above water and they are looking to move their family on.”

Online shopping for homes leads to high conversion rate on visitors

“our conversion ratios of visitor to deposit and visitor to agreement, continue to run at all-time highs. So, the business has certainly changed in that. A lot of the work is done from the family room couch on the iPad and less is done in the sales office.”

A lot of people circling, bent up demand, but not buying at the rate we thought they would

“common sense tells me with this pent up demand that the level was at, you have got a lot of people circling. And since they are not buying at the level we thought they would be, they are spending more and more time contemplating and studying the decision.”

The conversation is much improved from ’08 ’09

“we can think back to ‘08 and ‘09 when virtually every visitor was in our sales center loving our decorating and our homes, but worried about their job security and the ability to sell their house and that conversation doesn’t occur anymore to any great extent. ”

Extremely high end is back with a vengeance

“I think if you look at what’s happening in the very extremely sought after markets, they are not only back, but they are back with a vengeance. And I think that just leads, because those people have the money and the ability to do what they want, when they want. I think that just leads the overall luxury market. And I think there is every reason to think that it’s going to kick in very soon.”

Inventory can get tight pretty quick, lead to price increases

“if you have got inventory at 5.3 months, that’s based on current sales, which are for new home sales something like 450,000 a year. If you get back to 700 which would not be any kind of real move because normally we did 1 million to 1.5 million…you don’t have any inventory. You don’t have any inventory but you got demand and you have price increases. You get price increases people are going to rush to try and beat the boat. So I think the best is yet to come”

A tight market for subcontractors, costs going up

“It’s an issue, it’s market by market. I think Texas for us is the worst. Our prices are up about $2,000 in this quarter. We are working through and it’s better now than it was earlier in the recovery because more workers have come back to the industry. But in hot markets where backlogs are big and we have lots of action and Texas is a good example. It’s a struggle. We are working through it. ”

Apache at Sanford Bernstein Conference

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Analyst concern: Permian is a black box for APA

[Analyst question]

“Talk a little about the Permian, some people see it as a bit of a black box, whereas other operators might be focused on a key zone or a key county, you are kind of everywhere. How do we get an understanding of what you like best in the Permian, what’s working, how do you allocate capital out there?”

Apache answer, allocate to highest ROR

“we have got a tremendous acreage position and the way we allocate capital is based on the highest rate of return on projects we can find in each one of those basins.”

Costs of drilling are contained, partially because of company initiatives

“our cost pressure we are seeing, honestly we are seeing a little cost pressure on the rig side. On terms of the completion side which is at least 65% of the cost, actually we continued to bring costs down. Now that’s not necessarily costs haven’t gone up, it is the way that you go about recompleting wells. We self source of all our sand, we self source all our chemicals. So the only thing that you are really bringing out is hosepipe. And the faster you can do that we measure time in minutes, not in days. So the faster you can do that it’s lower that cost a bit.”

Feel like they have two really good assets in the North Sea

“Our runtime in North Sea on our platforms was 92%. The industry average was 60%. That says something about our people, but it also says something about the assets that we have. We have two of the best assets from the North Sea and Forties in barrels.”

Look at the business in terms of EUR vs. cost

“It’s EUR versus cost…it’s not just which ones are the best on the EURs that’s ones from the rate of return standpoint. And that’s basically how we look at our business.”

Can’t see natural gas getting above 4.50, even with LNG

“this morning with $4.47, I can’t see that really changing. Lot of people think that if we get all this LNG offshore, I think – they think it will change. We can plan awful lot of LNG and still supply gas to North America, $4.50 or thereabout.”

Very bullish on oil

“Oil is a world market. I mean, I am very bullish on oil. And I say the same thing today as I said three or four years ago. If you look at the world, I think in 2008, we were using 83 million barrels a day and everybody goes that’s we are using 93 million barrels today or thereabouts. And if you look at the cost that were putting all these barrels on a bookstore, I can’t never say never, because we could see so many thought overall for three or four months, but we are going to see long-term pressure, higher pressure on oil prices in my opinion.”

DSW 1Q14 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Comps decline

“Comparable sales declined by 3.7%. In the DSW segment, which includes DSW stores and DSW.com, comparable sales declined 4%.”

Things got slightly better throughout the quarter, but negative comps throughout

“Within the quarter, there were sequential improvements in our comparable sales performance, but we’ve posted negative comp performance in each of the three months in the quarter.’

It was cold last year, it was colder this year

“We were disappointed with our sales results this quarter. We had expected to post a sales increase given the cold start to spring that we experienced in the prior year.

Unfortunately, weather was even less favorable this year. These conditions created a very competitive pricing environment in the quarter, which is reflected in our margin results.”

Things didn’t recover as rapidly as anticipated

” think what our guidance and our margin performance reflects is the fact that the business didn’t recover as rapidly as we had anticipated.”

Pretty intense pricing pressure

“I think the other thing that we have seen is pretty intense pricing competition, which we’ve obviously reacted to in order to give the same great relative value to the customer, but also to control our inventory.”

Sandals season starting 3-4 months later

“right now is it looks like the sandal business is actually starting three months later than what you would normally position the sandal inventory. So for example you typically think that sandal starts in February as they did last year and as they are doing this year, they are taking a later start like three to four months.”

Super promotional environment

“So I think the promotional activity I would describe it as disruptive, chaotic and really is across the entire industry and I think what you are seeing is business has been tough and I think that most retailers do to address that are just price reducing in a degree that I’ve never ever seen before.”

Can’t chase price down and grow a business

“So we all know that we can’t chase price down and drive a growth business and so what we talked about in the earnings call is that we are going to be very proactive as we are right now.”

Going to have to sit down with vendor partners to make sure we are competitive

“We always have been, but will be even more so sitting with our vendor partners to make sure that we are competitive with everything going on in the industry so that we continue to drive value to the customer, but it’s happening across the industry in every segment.”

We thought we had purchased well, weather working against us, but we lost some bets too

“We believed that this past quarter because it had a very slow start because of the weather, we actually believed that we had bought the right things. We bought core items. We bought trend items. The trend items, the early trend items that we placed our bet on that seem to be the big deals in the industry didn’t play out for us. Example that would be Gladiator, they just didn’t play out.

So we took some bets and we lost those bets. The place that we took bets on our four items fashionable, not fashion directional, those are actually doing very well. So I think this is typical of any quarter where some of the fashion you place your money on, it does work, the weather worked against us, but we do have some bright spots in sandals, but we still haven’t started to see it comp positive yet.”

Appear to be hitting promotional environment head on

“I think what we said is we are going to be increasing to be able to pass additional value to the consumer”

“we are aggressively out in the marketplace to procure additional opportunity buys. We will be pricing those very sharply and I want to stress very sharply.”

We are in chase mode

“So the one thing that we do know is when we are in a chase mode and we operate lean and mean. We deliver results and we don’t take excess markdowns. We will be running our inventory level very wisely and tightly in the back half, so we make sure that we demonstrate that.”

Maybe the weather never turns

“We are in a good chase mode. We have opened to buy liquidity and we don’t wait for maybe the weather never turns.”

Reduced outlook for second half too

“we reduced our expected results both from the second quarter and the second half.”

Omni-channel makes it very difficult for small retailers to compete

“over the last couple of years the top 10 retailers and footwear have grown their market share by several hundred basis points…all the other retailers have had market share losses and I think that what that reflects is the difficulty that smaller less well capitalized, less technologically proficient, regional footwear players that they are going to have very difficult time being competitive in the new way of doing retail and that way is that the customer wants to shop seamlessly from store to the dot com site to the mobile site and she wants to access all the product with — regardless to where it is and she wants help making that decision on what she should buy and once she decides what she is going to buy, she wants it delivered to her wherever she wants it and whenever.”