Company Notes Digest 3.31.17

Each week we read dozens of transcripts from earnings calls and presentations as part of our 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.

It was another very light week for corporate comments. The consumer is probably holding steady, but there were a couple of data-points to suggest that Q1 growth might have been a little bit soft.  Earnings season will pick up in a few weeks and then the pace should increase by quite a bit. I’ll be careful what I wish for.

The Macro Outlook:

The consumer is pretty steady

“When I think about the consumer, I think the consumer has been pretty steady. We know the consumer is looking for everyday value. The consumer is not reacting to promotional value constructs, the way they did a few years ago and I think that when you give the consumer what it is that they want, they’re visiting restaurants.” —Darden CEO Gene Lee (Restaurants)

Some first quarter numbers may be soft, but mostly for transitory reasons

“U.S. consumer purchases for center-of-store food were soft in the first quarter, especially in February. This is based on retail consumption reports for the period which showed a measurable year-on-year deceleration across many categories…We believe that this short-term slowdown can be attributed to a confluence of factors, including unseasonable weather, a late Easter and the timing of income tax refund payments, which are likely temporary. In fact, a few weeks into our second quarter we have seen an uptick in our sales of U.S. consumer products…we don’t see anything in our data going into March to suggest the slowness that we saw in January and February as continuing.” —McCormick & Co CEO Lawrence Kurzius (Spices)

“The slowing sales trend early Q1 has most acutely impacted eCommerce. We have clearly identified the issues, an assortment lacking depth and color for spring compounded with visual merchandising that did not powerfully translate our design vision.” —Lululemon CEO Laurent Potdevin (Apparel)

Wage inflation could moderate a bit, but is still a pressure point

“we expect wage rates to moderate a little bit, we were near 5% this year for the full year, California, New York, are the two states that we expect to have less pressure in, because we’re not seeing the same kind of minimum wage increase. New York had a 50% increase last year and California right about half as much as last year. So we’re getting a little bit of moderation on the wage rate in our view. But we still think it’s going to be a pressure point above what we’ve seen in the history of this company” —Dave and Buster’s CFO Brian Jenkins (Restaurant)

Electronic component costs are rising

“there is a rising component cost environment right now. On the Client side we see it in memory, we see it in glass and LCD panels. On the server side and storage side, we are seeing it in SSD drives and memory.” —Dell Technologies CFO Tom Sweet (Enterprise Tech)

International:

Cuba is opening up slowly but surely

“at this point in time obviously there are number of ships going for the first time…So we are sending larger ships, Paradise probably the largest ship from the U.S. to Cuba going. And so you know, it will happen over time, they’ve got pace and take their time but again there is a lot of change already occurring there…things are increasing and we’ll just have to continue to work with them and go at the pace they want to go.” —Carnival Cruise CEO Arnold Donald (Cruises)

Financials:

The trend towards indexation is more pronounced in the Americas

“I would say that what we are observing is that trend is more pronounced in the Americas than we are seeing in the EMEA and Asia-Pac region” —Factset CEO Phil Snow (Fintech)

Miscellaneous Nuggets of Wisdom:

Strive for simplicity

“if you try to take a complexity and you then try to solve it with a complex system, you have created a double complexity and that usually doesn’t work very well. All the companies I have ever been involved with and studied, most of the time when they are launching a big system or they are opening a new facility, if something drastically goes wrong and that’s because they haven’t first simplified it.” —Restoration Hardware CEO Gary Friedman (Retail)

Full transcripts can be found at www.seekingalpha.com

Dell Technologies FY 4Q17 Earnings Call Notes

Tom Sweet

It’s a rising component cost environment

It’s Tom. So look, it’s obviously I think the people that you’ve talked to and what they are saying publicly is relatively consistent in the context of there is a rising component cost environment right now. On the Client side we see it in memory, we see it in glass and LCD panels. On the server side and storage side, we are seeing it in SSD drives and memory. So it’s all about balance, right.

David Goulden

Cloud isn’t a place it’s an operating model

So everything gets cloud washed, Steve, these days and I think I am aware of the particular report which you are talking about. So first of all, cloud is not a place, it’s an operating model and the operating model can be applied on-prem or off-prem. It’s really providing IT as a service. And I think that everybody is going to implement some form of hybrid cloud. So it’s also a combination of both. When you look at the kind of IT infrastructure marketplace, as we do that have service storage network, combined marketplace about $110 billion this year, we see strong double-digit growth in that infrastructure being sold into private cloud and into public clouds, but the biggest piece is still a non-cloud environment often virtualized.

Customers still making tactical decisions

“what we’re seeing is in the marketplace customers are still making tactical decisions. There’s a lot of work going on to look at IT transformation and future architectures. So the customers who haven’t made those decisions yet in terms of what their IT transformation strategy is are still doing it very much by what they need and the more approach, different from how they were buying a couple of years ago. The customers who are moving forward with transformation are making longer term decisions, but that’s still a smaller piece of the marketplace.”

All flash is not deflationary

“So you’ve got a number of factors. I would comment that the move to all-flash is actually not deflationary for the storage marketplace because what happens is that all-flash is actually more expensive but then with data services, [indiscernible], compression, et cetera, you get the same dollar to gigabyte effectively as you do with the hybrid system. So that’s one of the things that people talk about that we don’t see being a factor.”

Lululemon 4Q16 Earnings Call Notes

Laurent Potdevin – Chief Executive Officer

Slowing sales due to merch issues

“The slowing sales trend early Q1 has most acutely impacted eCommerce. We have clearly identified the issues, an assortment lacking depth and color for spring compounded with visual merchandising that did not powerfully translate our design vision. With focused urgency our teams have been cross correcting the issues, with early indications reflecting an immediate and positive impact on performance. We will see more color in selected style as early as next week.”

Celeste Burgoyne

Co-located and locals

“So as we’ve spoken about with our real estate strategy, co-located and locals, both continue to be something that we see as really exciting opportunities from 2016 and into 2017 in areas we’re focusing really hard on and they both allow us to really capture traffic in the most relevant ways for those communities. Co-located, expanding our square footage, for example, Mall of America and Somerset, two key U.S. co-located stores in 2016, we’ve driven more traffic in those locations and have grown the Men’s business in particular from 50% to 70% through more dedicated square footage. And then locals has also allowed us to go into smaller communities in a really locally relevant way and the results have been something we’re really proud of. Bend, Oregon and Fort Collins also, for example, have been two of the four that we’re really excited about and we’ll continue to really put into that strategy into 2017.”

Darden FY 3Q17 Earnings Call Notes

Gene Lee – President and CEO

Unit economics of a new acquisition

“Next, the restaurant level economics are very attractive. Cheddar’s has average restaurant volumes of 4.4 million, average restaurant guest counts of approximately 6,300 guests per week and an average check of approximately $13.50, all of which helps provide a strong return on investment and with only 165 restaurants today, the significant runway for growth.”

Darden platform should give a boost

“And so, having Cheddar’s being able to plug into the resources that — and capabilities that we’ve developed with data and insights should be a big advantage for them. It’s going to take us some time to be able to get them into our systems, but that we think about the Darden platform and plugging brands into it, we think that gives — that enables these brands to have a significant advantage in the marketplace.”\

Consumer pretty steady

“I would say if you look at our industry benchmarks, for the first couple weeks of March, the delay in the tax refunds was an impact in February and we’ve seen a few, a little bit better trends in the beginning of March. We’re also in March dealing with a much later Easter this year than we had last year. So just a lot of noise.

When I think about the consumer, I think the consumer has been pretty steady. We know the consumer is looking for everyday value. The consumer is not reacting to promotional value constructs, the way they did a few years ago and I think that when you give the consumer what it is that they want, they’re visiting restaurants.”

Keys to successful acquisition

“We think we give them a great scale advantage. We think the data and insights work that we’re doing, we think we help them with their strategic planning and we’ve got an umbrella that enables them to have unique operating cultures inside the brands and yet have these industry-leading retention numbers.

And so as long as we’re organized appropriately and we stay decentralized and have great presidents run their businesses, managing the portfolio is really just a management challenge and we got to keep the center small and so that we don’t burden the brands but we help the brands compete more effectively in the marketplace and I believe every one of our brands goes to market today with a significant advantage.”

Harder and harder to find locations to open olive garden

“the opportunity to open Olive Garden is not as plentiful as the opportunity to open Cheddar’s and we’ve got — we’re not fully penetrated with Olive Garden, but we’re getting closer and closer and it’s getting harder and harder to find locations where it would be — we could get that return because of cannibalization and other factors.”

Rick Cardenas

Inflation

“Restaurant labor was favorable, driven by lower manager incentive pay, given last year’s strong performance in the third quarter. This was partially offset by continued hourly wage rate inflation pressure. Restaurant expenses were unfavorable due to higher than anticipated utilities inflation, particularly natural gas, increased preopening related to more second ever openings this year than last, increased credit card fees and Worker’s Compensation and public liability claims.”

Do see some commodities inflation

“Hey John, it’s Rick. Yes, we did say commodities are expected to be up, buy up ever so slightly in the fourth quarter. Eventually this is going to turn. So, we’re not going to talk about ’18 yet, but we do see commodities slight inflation this quarter and what we talk about in our presentation, we’re about 80% covered. So, we’re, pretty covered for the rest of the year and including 80% in beef. So, we feel pretty good about where our numbers for the rest of this year and we’ll talk about ’18 in ’18.”

McCormick & Co 4Q16 Earnings Call Notes

Lawrence Kurzius – President and CEO

Saw a slowdown then an uptick

“As has been widely recognized by food analysts and investors, U.S. consumer purchases for center-of-store food were soft in the first quarter, especially in February. This is based on retail consumption reports for the period which showed a measurable year-on-year deceleration across many categories.

While retail sales growth of spices and seasonings exceeded the performance of most center-of-store categories, continuing to display its relative strength, our category was impacted by the industry slowdown as well. We believe that this short-term slowdown can be attributed to a confluence of factors, including unseasonable weather, a late Easter and the timing of income tax refund payments, which are likely temporary.

In fact, a few weeks into our second quarter we have seen an uptick in our sales of U.S. consumer products. Our outlook for U.S. sales of spices and seasonings for the balance of the year remains strong and unchanged from our prior projections.”

Believe that transitory issues affected us

“What we didn’t anticipate was the slower industry sales in the U.S., which as we’ve discussed on the call we think are really due to transitory factors. We don’t see anything in our data going into March. I know we’re getting into second quarter here, but we don’t see anything in our data going into March to suggest the slowness that we saw in January and February as continuing. And for the reasons that we gave on the call, we think that it is transitory and the timing of tax payments. I think Lent had a big impact on us. Our business has a very high index to Hispanic consumers who are more catholic. The later Easter made all of Lent fall outside of the quarter and we’re certainly seeing the reversal of that in March. And then the weather that was out of sync with the season where it was just very warm and that discourages consumption of the cold weather items that normally we sell a lot of during that time of year, chili, gravy and all of the things that go along with that.”

Loss of shelf space at one retailer is big impact

“That is really the story in the UK, Evan, is that one retailer – it’s a very concentrated market, so the customers are larger and they all matter and has a big impact not just on our UK business but it’s big enough that it impacts our EMEA business as a whole. The change in shelf space and items in distribution with that retailer really occurred during the fourth quarter of last year. And so that’s an unfavorable comparison that we’re going to carry for that region for the whole year. I will also say that that’s really baked into our thinking that 5% to 7% constant currency. We’ve got a great story in other markets and other markets in that market. We continue to invest in marketing in the UK even with this change because it’s important to show both that customer and the other customers in the market and frankly the consumer the relevance and importance of our brands”

Change in timing of refunds has a real impact

“I don’t want to underestimate the impact that the change in U.S. income tax refund policy has had pushing those refunds later, especially for consumers at the lower end of the economic spectrum who tend to spend those refunds. Often that’s their earned income coming back to them, those go into regular household consumption and I think it has the same kind of impact as a change in SNAP payments.”

Factset 4Q16 Earnings Call Notes

Phil Snow

Intersection of finance and tech

“At FactSet, we are at the perfect intersections of technology and finance which fuels on our thinking on product innovation. The world’s more open than it’s ever been and both volume and access to information are now at unprecedented levels. We see clients willing to outsource and move more workflows to cloud base solution. With a significant investment and upgrades to our technology stack combined with our content and analytics, we are now able to offer new ways for clients to leverage the power of FactSet.”

Move to passive greater in the Americas than elsewhere

“That’s a great question Bill, thank you. So it is an ongoing trend, I would say that what we are observing is that trend is more pronounced in the Americas than we are seeing in the EMEA and Asia-Pac region and you see that reflected in our growth rates. So we anticipate that it will continue to had in this directions for little while, what I would say is that we have a broader suite of solutions that we had historically to help mitigates some of that.”

Carnival Corporations 4Q16 Earnings Call Notes

Arnold Donald – President & CEO

A lot of change happening in Cuba already, but slowly

“No, not that I’m aware but at this point in time obviously there are number of ships going for the first time, including Paradise which we’re excited about as I mentioned in my opening comments. So we are sending larger ships, Paradise probably the largest ship from the U.S. to Cuba going. And so you know, it will happen overtime, they’ve got pace and take their time but again there is a lot of change already occurring there, additional cruise companies are not going to Cuba after RE initial foray with the [indiscernible] Fathom brand and so things are increasing and we’ll just have to continue to work with them and go at the pace they want to go.”

New ships give higher ROIC

“Yes, sure. First of all, the new ships inherently give you a higher return on invested capital in general because of the mix, the scale, the density, the efficiency, just a combination of everything. So you know you’re going to build new ships because they are inherently more efficient and position for stronger return on invested capital in all kinds of environments. So new ships are coming.”

Dave and Buster’s 4Q16 Earnings Call Notes

Brian Jenkins

Getting a little bit of moderation in wage rate

“We do anticipate labor to move to the negative side next year. So it’s a pressure point to our P&L moving into 2017, largely on the heels of wage rate. That said, we expect wage rates to moderate a little bit, we were near 5% this year for the full year, California, New York, are the two states that we expect to have less pressure in, because we’re not seeing the same kind of minimum wage increase. New York had a 50% increase last year and California right about half as much as last year. So we’re getting a little bit of moderation on the wage rate in our view. But we still think it’s going to be a pressure point above what we’ve seen in the history of this company, so it’s going to be a pressure point.”

Any regional differences mainly from weather

“First of all, there are regional differences. Most of the regional differences tend to get driven for us at this point by. Weather, although I think we called out on our last call that the ones that were not particularly subject to weather like California and Florida were doing well for us. More specifically than that, we haven’t had a lot — Texas was very close to the average in the third quarter, it fell off quite a bit actually in the fourth quarter and was a negative for the quarter.”

Restoration Hardware 4Q16 Earnings Call Notes

Gary Friedman – Chairman and Chief Executive Officer

We’re making long term decisions

“we believe we are going to be a long-term growth company. We are an investment platform. And we think we keep getting smarter and we are going to be better allocators of capital as we go forward. And so we believe the returns we are going to get – continue to get better, but there may be some times where there is lumpiness because we decide to invest more aggressively into something that we think is going to have a greater long-term impact or opportunity. But I think as I articulated in the past, we are going to invest like we own 100% of the company. We are here for the long run. We are not going to play a quarter-to-quarter game. We are going to play for multiple years and a long-term view, and no different than the decision and the investment we made moving from a promotional to a membership model. These are long-term decisions.”

We’re building a new operating platform

“We believe we are going to build an operating platform that’s unlike anything in the industry. And we are going to do it from the inside out. We are going to design it ourselves. And nobody will be able to copy it, so more to come. We are excited about it. And I am personally leading the effort just so you know, that’s what I am really excited to do.”

You can’t solve complexity with complexity

“what I have learned in my career is when you – if you don’t take the complexity out of the business and simplify the business, if you try to take a complexity and you then try to solve it with a complex system, you have created a double complexity and that usually doesn’t work very well. All the companies I have ever been involved with and studied, most of the time when they are launching a big system or they are opening a new facility, if something drastically goes wrong and that’s because they haven’t first simplified it and our effort here is going to, first and foremost, simplify our business and then support and amplify that simple solution with simple systems.”

Company Notes Digest 3.24.17

Each week we read dozens of transcripts from earnings calls and presentations as part of our 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.

It will be another few weeks before earnings season begins to pick back up. Until then we’re picking up scraps of information where we can.

Lennar’s CEO features prominently in this week’s digest. The underlying fundamentals for the housing industry are arguably stronger than any other industry in the economy. We’ve massively under-built since the bubble and there is a huge demographic wave of millennials who want to buy homes. Still, pricing has been so distorted by low interest rates that it’s tough to say how these forces will balance out.

Unfortunately, my expectation is that millennials will likely end up buying houses at inflated prices and have a similar experience that we got from our college degrees. Societal pressures will cause us to lever up to purchase an asset with an extremely low return on investment.

The Macro Outlook:

Housing market conditions are stronger and strengthening

“market conditions certainly feel like they are strong and strengthening. The slow and steady, though sometimes erratic, market improvement that we’ve seen for the entirety of this recovery seems to be giving way to a more definitive reversion to normal.” —Lennar CEO Stuart Miller (Homebuilder)

There’s clearly a sense of general optimism in the market

“As our traffic has increased, we’re getting some very direct feedback from our customers as they tell us what they are looking for, their timing and, sometimes, their motivation. There’s clearly a sense of general optimism in the market. There’s a perception that jobs are being created and that wages are actually starting to move upward. There’s a solidifying sense that the government has adopted a business-friendly posture and that will result in real changes to tax rates and to the regulatory environment. The banking world is making more overtures to small businesses and to mortgage borrowers and there’s a sense that borrowers can make their way through the process.” —Lennar CEO Stuart Miller (Homebuilder)

People want to buy before rates go up

“Additionally, the upward direction of interest rates has encouraged some to get off the fence and consider purchasing a home rather than renting. Rents have risen and the prospect of higher purchase prices and higher interest rates makes a compelling case that today’s opportunity might be the best opportunity to leave those annual increases in monthly payments behind.” —Lennar CEO Stuart Miller (Homebuilder)

60% of 18-35 year olds are living with parents, relatives or roommates

“Interestingly, the front page of U.S.A Today reports today that 60% of millennials ages 18 to 35 are living with parents, relatives and roommates and that is a 115-year high.” —Lennar CEO Stuart Miller (Homebuilder)

Pricing power is on the horizon

“Limited supply and production deficits are now intersecting with land and labor shortage and this suggests, though not yet seen, but suggests, that pricing power is on the horizon as we move through the year.” —Lennar CEO Stuart Miller (Homebuilder)

You can only be positive when you see such momentum

“to put it very simply we feel very good for the second half of the year…We have very good bookings, we have good pipeline. We have great momentum in most part of our business…So you could only be positive when you see such momentum.” —Accenture CEO Pierre Nanterme (Consulting)

International:

The UK and Europe are benefitting from weak currencies

“I think the currency situation particularly in the UK is very favorable and they are benefiting from a significant amount of European tourism into the UK as well as Asia and U.S. tourism into the UK. And I can say the same thing about Continental Europe where we are seeing from the credit card data that we look at every month that particularly Chinese stores given the euro’s lack of strength is also a place that there is a lot of tourism going on and a lot of shopping going on, so really benefiting from that.” —PVH CEO Manny Chirico (Apparel)

Financials:

Tax reform will create winners & losers

“I will say that I’ve had a recent opportunity to listen to Steve Mnuchin, the Treasury Secretary…And the two things that I take away from listening to him is that he’s very smart, very thoughtful in his approach…The other thing that I walked away with is a sense that he and this administration are listening carefully knowing that there will be winners and losers, there will be ups and downs, in any configuration of the tax revamp and so there is, virtually, no ability to draw certainty today from what pieces and in what proportion they are going to be woven into a new tax program.” —Lennar CEO Stuart Miller (Homebuilder)

Food inflation remains modest

“we see a bit more modest inflation outlook versus what we saw a year ago in the fourth quarter” —General Mills CFO Don Mulligan (Packaged Foods)

Consumer:

The Retail environment is not in a steady state

“The retail landscape is particularly in the U.S. is not – is in a steady state…I think the important thing to point out is that these changes are really being driven by the consumer, and consumer demand at the same time remains quite strong. But we know that consumer expectations are quite high in terms of product, the type of product they want, the innovation, the style. They want the product fast, they want it easy, they want personal service.” —Nike CEO Mark Parker (Apparel)

Third and fourth tier locations will struggle to stay open

“the trend is now that A&B super centers are going to be open and the C&Ds are not. If you happen to be in a center that’s not A&B, you have a very large percentage of probability that you will not be making money and if you’re in A&B, the more developers are trying to balance their loss of income by increasing their rents on the A&B. That’s why so many specialty store business are going out of business” —Perry Ellis Chairman George Feldenkreis (Apparel)

The US has overbuilt retail

“I think you know brick and mortar in general is under pressure, but I think one of the benefits that exist in Europe and in Asia even to a greater extent is the level of retail square footage on a per capita basis is just significantly lower, 50% lower than it is in the United States. So I think some of the challenges with — the challenges that we’re facing in brick and mortar in the United States has to do with there is too many stores. I don’t believe that issue to the level that it exist in the United States exist in Europe and in Asia.” —PVH CEO Manny Chirico (Apparel)

Retailers are aggressively cutting inventory

“I think the retailers have done a very good job in department store sector in particular about keeping inventories clear. We came out of the fourth quarter, I think they reacted strongly to some of the softer sales trends…Whatever they’re planning be it flat sales or slightly negative comps sales, the buy plan is even lower than that.” —PVH CEO Manny Chirico (Apparel)

Customers are asking FedEx for more pickup locations. Maybe there is a role for omnichannel after all…

“FedEx On-Site is a nationwide network of alternate delivery locations, which is a direct response to our customers telling us they want access to more choices for package delivery and drop off. FedEx On-Site locations include some Albertsons and some Kroger grocery stores as well as select Office Depot, OfficeMax and FedEx authorized ship centers.” —FedEx EVP Rajesh Subramaniam (Delivery)

Technology:

Office layouts have changed

“Day-to-day business continues to be considerably softer likely because of the ongoing decline in demand for traditional private offices and open plan cubicles…[customers] want offices that practically support creativity and innovation by helping their people do their best work.” —Steelcase CEO James Keane (Office Furniture)

Steelcase listed healthcare and technology as weak sectors

“we experienced growth in six of the 10 vertical markets we track including five with double digit percentage growth rates. This growth was dampened by declines in the technical professional, education, healthcare and information technology sectors” —Steelcase CFO David Sylvester (Office Furniture)

Industrials:

There’s more to the economy than mobile phones

“Amazon is a wonderful company and they certainly have revolutioned the e-commerce world and we’re not sure what Amazon is going to do one way or another. But the FedEx system that consists of thousands of facilities and the ability to pick up transport and deliver it in one to two business days between any two addresses in the United States has been decades in the making and we think that we have a not great risk of being disrupted…people focus on e-commerce because everybody looks at this from their mobile phone forward where the real story is everything behind the mobile phone and that’s what FedEx has in enormous quantities; airplanes, trucks, facility, team members.” —FedEx Chairman Fred Smith (Delivery)

Full transcripts can be found at www.seekingalpha.com