Company Notes Digest 8.18.17

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.

Earnings season is wrapping up and retailers are the last to report. The environment was described as a “perfect storm” and “hyper-competitive” with no signs of slowing down. Retailers are trying to move into omni-channel and putting on a good face, but “the definition of loyalty in the retail business for the consumer is the absence of the better alternative.” Consumers will shop wherever they can find the lowest prices at the greatest convenience. At the moment Amazon is the elephant in the room.

Next week begins the summer doldrums for earnings, so we’ll likely take the next two weeks off. Be back again in September.

The Macro Outlook:

We are beginning to see some inflation in food

“after several quarters of lower commodity costs, we are beginning to see some inflation. We anticipate this will curtail some of the hypercompetitive discounting we have seen in recent quarters.” —Jack in the Box CEO Lenny Comma (Restaurants)

The transition has been a little more rapid than normal

“the transition from deflation to inflation has been a little more rapid than normal, and there are certainly some categories where we are seeing more than 2% to 3% inflation…I wouldn’t say we are seeing anything out there today that would be overly difficult for our customers to pass along.” —Sysco CEO Bill Delaney (Food Distributor)

Millenials are becoming key decision makers in businesses

“Most of our chefs and operators in our customer’s kitchen are millennials. They want different type of equipment.” —Middleby CEO Selim Bassoul (Kitchen Equipment)

Financials:

Home Depot feels good about housing markets

“You know we continually look at months of supply, there is 4.3 months of supply in the market of housing availability against a historical norm of six, that clearly is helping to drive improvement in home value appreciation…So, we see this housing favorability continuing as we look forward. And I think the watch out for us is, you wouldn’t want to see affordability become an issue, but that at this point doesn’t seem to be a concern for us at all.” —Home Depot CEO Craig Menear (Home Improvement)

Mall rents are falling

“we think real estate prices a couple years from now are going to be less expensive than they are today. We’re starting to we’re seeing that as we renegotiate leases or relocate stores. The rents are coming down in all but the true A malls. So, if you take a look at the true A malls we actually think rents in those malls might actually go up…because they’re going to be in such high demand” —Dicks CEO Ed Stack (Sporting Goods)

Consumer:

The retail industry is in a perfect storm

“The retail market is currently in flux. The environment is highly competitive and dynamic…It’s a perfect storm right now” —Dicks CEO Ed Stack (Sporting Goods)

CEOs are trying to stay optimistic

“I also know that we operate in an environment of intense and disruptive competition, and that our customer has more shopping options than ever, and we need to provide her with a compelling and a unique proposition. So winning in this environment requires us to act with a great sense of urgency to make changes in how we operate and to move faster. And as we do this, I am confident that Macy’s will win again.” —Macy’s CEO Jeffrey Gennette (Dept Store)

They argue that omni-channel is essential

“The customer is clearly telling us that brick-and-mortar retail continues to be an essential part of the shopping experience and certainly when it is executed right with the right values. All of this gives us confidence in our long-term global store growth potential.” —TJX CEO Ernie Herrman (Off-Price)

Out of sight out of mind

“there is an impact on a market when you have fewer stores in it and share of mind is therefore decreased, and as a result, those areas where we’ve closed stores, the rate of growth in our omnichannel business has been a little less…Everything that we’ve learned from that store closure pilot has been that reinforcing the importance of a great physical footprint. And we’ve said over and over again, and we have seen nothing that doesn’t support this. In fact, I think the thesis is growing stronger.” —Kohls CEO Kevin Mansell (Dept Store)

But everyone is trying to match Amazon

“I think we are in the time of hyper competition. People are out there trying to get market share. They are doing things that one typically wouldn’t do in a business. I guess, the elephant in the room there, you know who it is, is doing an awful lot of things without regards of the bottom line and is getting rewarded for it. And so there are an awful lot of other people trying to do the same thing. So yes, I think there is margin opportunity. I think we could get there, but I also am very, very aware of the hypercompetitive space that we are in.” —Urban Outfitters CEO Richard Hayne (Apparel)

The price competition is impossible to avoid

“We tried to not be promotional. We didn’t want to be the price leaders in the industry. And as things got competitive and somewhat unpredictable, the consumer told us that they felt that we weren’t priced competitively in the marketplace.” —Dicks CEO Ed Stack (Sporting Goods)

Retailers are doubling down on promotions

“when you look at the marketing strategy…number one, we’re going to remain very promotional. And what we’ve spent a lot of time on is reducing the overlap of promotions, reducing the amount of overlap of discounts on top of each other. But we’re doing that all the way through the back half and that really is a big focus of ours.” —Macy’s CEO Jeffrey Gennette (Dept Store)

Consumers are only as loyal as your prices

“We didn’t start the promotion, but we can’t sit around and pretend it doesn’t happen. We need to engage in that. And our customers have told us, you need to engage here in today’s marketplace…I’m a firm believer that the definition of loyalty in the retail business for the consumer is the absence of the better alternative.” —Dicks CEO Ed Stack (Sporting Goods)

The competition shows no signs of slowing down

“The pace of change in the consumer and competitive environment doesn’t show any signs of slowing down.” —Target CEO Brian Cornell (Big Box Retail)

If anyone can challenge Amazon, it should be Walmart

“We continue to gain traction in e-commerce with Walmart U.S. GMV up 67%…we continue our transformation to become more of a digital enterprise that moves with speed and agility…We’ve seen strong results from the rollout of online grocery…Marc Lore and the team delivered another quarter of robust topline growth” —Walmart CEO Douglas McMillon (Big Box Retail)

Technology:

Home Depot spends half its advertising budget on digital

“Our overall advertising spend is up, lower single digits, but as we’ve essentially made more significant pivot to digital marketing it’s over half our marketing right now. That’s a medium that you can get good insight on the return on your spend and as Craig said, the team just done a great job continuing to increase the return on that spend, so leveraging that low single digit to a much more productive return on overall ad spend” —Home Depot EVP Ted Decker (Home Improvement)

Apple products sold well at Target

“on the Apple comments, they weren’t just driven by tablet, they are driven across the board in categories. And we had really strong showing in Q2 on the iWatch which we worked with Apple on clearly. And we have a lot in our plans for Q3 and Q4 with potential new launches as I have outlined.” —Target CEO Brian Cornell (Big Box Retail)

Online video has tailwinds to revenue, but headwinds to profitability

“more and more people are watching online video at longer and longer time, on a daily basis…and at the same time, advertising revenue has been increasing, and there is also an increasing willingness from consumers to pay. So, the subscription number as well as revenue has been increasing quite rapidly. On the other hand, the flip side of this is the cost of content has been increasing, even faster. So, what we see is that over time, we believe the content will continue to increase, but the rates would probably be lower. And the subscription, as we continue to increase, would deliver higher revenue per active user. So, we will get closer to a more equilibrium between cost and revenue at some point in time. But I think unfortunately at this point in time, the net loss of the business is still increasing.” —Tencent President Martin Lau (Chinese Internet)

Neural Nets are improving at a double exponential rate

“A neural net in terms of complexity is approximately – not quite, but approximately doubling every year. And this is one of the exciting things about artificial intelligence. In no time in my history of looking at computers in the last 35 years have we ever seen a double exponential where the GPU computing model, our GPUs are essentially increasing in performance by approximately three times each year…And…on top of it, the neural network architecture and the algorithms that are being developed are improving in accuracy by about twice each year…And so you’ve got these two exponentials that are happening, and it’s pretty exciting. That’s one of the reasons why AI is moving so fast.” —Nvidia CEO Jen-Hsun Huang (GPUs)

The next revolution of AI is at the edge

“The next revolution of AI will be at the edge, and the most visible impactful evidence will be the autonomous vehicle. Our strategy is to build a ground-up deep learning platform for self-driving cars, and that has put us in pole position to lead the charge” —Nvidia CEO Jen-Hsun Huang (GPUs)

Industrials:

All in all there was good industrial activity in the quarter

“positives around oil and gas…infrastructure, aggregates, cement positives; seeing positives in machinery OEMs, transportation equipment and paper and food…all-in-all, we saw good activity in the quarter” —Applied Industrial Technology CEO Neil Schrimsher (Distributor)

Materials, Energy:

Dry Bulk shippers are starting to feel more positive

“We’re generally positive about the market from the second half 2017 onwards and we believe that every subsequent year will fare better than the year before…environmental regulations will thereafter not only contribute to a transition towards a cleaner environment, but it will also assist shipping in reducing vessel supply and will therefore lead us to better markets as of 2020 onwards.” —Star Bulk Carriers CEO Petros Pappas (Dry Bulk)

Miscellaneous Nuggets of Wisdom:

Take care of your customer on their terms

“What we’ve learned is a customer comes with a return, that’s their errand they have to do, and the more efficient, the faster we are in doing that, the more free time we’re giving back to the customer. And oftentimes, they take that free time and start shopping. So we’re really looking to take care of the customer on their terms, and if they have a great experience in our store with a return, we certainly believe that ends up in good news for us.” —Nordstrom President Erik Nordstrom (Dept Store)

Full transcripts can be found at www.seekingalpha.com

Cisco Systems’ (CSCO) Q4 2017 Earnings

Charles Robbins – CEO

Cyber attacks have increased

“the 90% increase in cyber-attacks against IoT devices over the last year”

Currency headwinds in the UK

“On the UK, if you go back to Q3, we talked about it being significantly down and one of the primary drivers was the headwind created by currency. In Q4, what I’ll tell you is that headwind from currency remained, it did not ease up….I’ll say one final thing on the UK: while enterprise and commercial we saw a good uptick, service provider remained about the same.”

Orders improving

“In general, I think if you just look at our order rates that we released today, we went from Q3 negative four to flat in Q4. So clear that we saw improvement there.”

Kelly Kramer – EVP & CFO

Inventory is up

“A large majority of the inventory increase is driven by memory advanced purchases. So that protects us in for a large portion but we also have been as I mentioned in the lack — we’ve also been securing and committing to our purchase commitments for even more access to supply that also will ensure that we have the supply albeit perhaps at higher prices if they continue to rise.”

 

 

Tencent Holdings’ (TCEHY) Q2 2017

Martin Lau

It will take a while for online video to breakeven

“there is a lot of usage, more and more people are watching online video at longer and longer time, on a daily basis. But at the same time — and at the same time, advertising revenue has been increasing, and there is also an increasing willingness from consumers to pay. So, the subscription number as well as revenue has been increasing quite rapidly. On the other hand, the flip side of this is the cost of content has been increasing, even faster. So, what we see is that over time, we believe the content will continue to increase, but the rates would probably be lower. And the subscription, as we continue to increase, would deliver higher revenue per active user. So, we will get closer to a more equilibrium between cost and revenue at some point in time. But I think unfortunately at this point in time, the net loss of the business is still increasing.”

James Mitchell

High demand for AI-as-a-service 

“In terms of providing AI-as-a-service, I think this is definitely a one direction that we are going into in our cloud business already and we are seeing a lot of demand on that. And we have been able to sign up a lot of customers because of our ability to offer them AI capability. And that’s just the beginning. Over time, I think we will do much more on that.”

People are discoevring games on more communal venues

“In terms of games and targeting, if you look at games playing globally, particularly on the personal computer, it’s moved from being media driven to being increasingly community driven. 20 years ago, people discovered new games on the PC in the U.S. and Europe through computer magazines; now, they’re discovering them through reddit, through Twitch, through those kinds of more communal venues. And some of the same trends are underway in China. And what we’re trying to do is working with the game developers to make sure that we target their games to the users who are likely to be most receptive.”

Walmart FY 2Q18 Earnings Call Notes

Douglas McMillon

Growth

Walmart U.S. grew comp sales 1.8% and comp traffic 1.3%. We continue to gain traction in e-commerce with Walmart U.S. GMV up 67%.

Moving to be more of a digital enterprise

“Our strategy is to make every day easier for busy families. To accomplish this, we continue our transformation to become more of a digital enterprise that moves with speed and agility. I’m encouraged by innovation in the business. We’re testing associate delivery of walmart.com orders in a few stores and by the end of the year, we’ll have approximately 100 automated pickup towers in stores across the U.S., where customers can pick up their orders within a matter of minutes.”

Seen strong results from online grocery rollout

“We’ve seen strong results from the rollout of online grocery, which is now in more than 900 U.S. locations, and we’re expanding this service in many of our markets around the world. Retail is constantly evolving and it’s critical that we move even faster as the customer and competitive landscape continue to change.”

Marc Lore and team delivered robust growth

“In Walmart U.S. e-commerce, Marc Lore and the team delivered another quarter of robust topline growth with GMV up 67%, including acquisitions. The majority of this growth was organic through walmart.com as customers are finding a broader assortment and more options to receive what they want at their convenience.”

Target 2Q17 Earnings Call Notes

Brian Cornell – Chairman and Chief Executive Officer

Pace of change doesn’t appear to be slowing

“During this period of rapid transformation in retail in which many others are shrinking, we will continue to look for ways to partner and deliver incremental growth for high quality brands while delivering differentiation and value for our guests. As we look ahead, we are committed to continued progress against our long-term goals. And we expect the environment will continue to be challenging. The pace of change in the consumer and competitive environment doesn’t show any signs of slowing down. And we are well positioned to emerge as one of the winners in retail”

Mark Tritton

Strong growth in hardlines

“In hardlines, comparable sales grew between 3% and 4% in the second quarter, the strongest performance we have seen in 10 years. Growth in this area was broad-based including double-digit growth in both videogames driven by Nintendo switch and Apple within electronics. Toys grew more than 3% with board games continuing to be a strong highlight. ”

Apple strength across the board

“I think firstly just on the Apple comments, they weren’t just driven by tablet, they are driven across the board in categories. And we had really strong showing in Q2 on the iWatch which we worked with Apple on clearly. And we have a lot in our plans for Q3 and Q4 with potential new launches as I have outlined. So we think there is still room for growth and continuing the trend. In terms of Nintendo Switch, we worked really closely with those guys as well to develop not only a product but a marketing campaign that the guests really responded to. ”

Cathy Smith

Better than expected performance

“In the second quarter our traffic sales and financial performance were all better than expected. Notably, the upside to our expectations was broad based across the country, across channels and in all three months of the quarter. Second quarter comparable sales increased 1.3% driven by a traffic increase of 2.1%. “

Star Bulk Carriers 2Q17 Earnings Call Notes

Petros Pappas

Generally positive about the market

” We’re generally positive about the market from the second half 2017 onwards and we believe that every subsequent year will fare better than the year before. This however is a fragile balance, which may tilt against us if ship owners embark in massive newbuilding ordering. We therefore highlight once again that the most important factor for market balance is owners newbuilding ordering discipline, in order to ensure a sustainable recovery as environmental regulations gradually come in to force. This environmental regulations will thereafter not only contribute to a transition towards a cleaner environment, but it will also assist shipping in reducing vessel supply and will therefore lead us to better markets as of 2020 onwards.”

Not concerned about Iron Ore stockpiles in China

“I think that the present stock is about the 142 million tons. Now, if you think that China consumes 1.6 billion, perhaps even more than that – billion tons of iron ore every year that is about a 140 million tons per month. Therefore 140 million tons of stock is one months’ worth. Now, I don’t think they would go below 70, so even if they decided to draw on their stocks that would be 15 days’ worth. I’m not saying this wouldn’t affect the market. This would probably temporarily affect the market, but it is not really such a great amount to be extremely worried about. I do not rule out that at some point that potentially iron ore prices go very high, they might temporarily draw on those stocks and that would have a transient effect on the market, but I do not consider this as a huge amount of stocks that would do permanent damage to the market.”

Jack in the Box 2Q17 Earnings Call Notes

Lenny Comma – Chairman and Chief Executive Officer

We are beginning to see some inflation

“after several quarters of lower commodity costs, we are beginning to see some inflation. We anticipate this will curtail some of the hypercompetitive discounting we have seen in recent quarters.”

Incremental lift from DoorDash partnership

“We have seen incremental lift in sales and markets served by DoorDash, which is delivering Jack in the Box food from approximately 37% of our system. We are also negotiating with other providers to expand delivery and have already begun tests with some of these vendors.”

Seeing worse performance at lower price points

“Yes. So if you look at the traffic below the $5 price point is negative. And when you look at the traffic above the $5 price point it’s essentially flat. So yes, we are seeing a much healthier business above the $5 price point and it becomes very obvious to that all the pressure is on the bottom side of the menu. In addition to that we also see the brands with positive same-store sales are starting to see margin pressures.”

The consumer is redefining convenience and we are in the convenience business

“The consumer is really redefining convenience and we are in the convenience business. So we are going to need to do some things to respond to that which we have already either done or at least begun to test. The consumer is also demanding lower price points in the current – in the current environment. So we need to do some things to respond to that. And then long-term, we just think that our brand is going to lose its relevance, if we don’t remodel our sites and improve our service that leads to this place where it’s sort of frictionless, which is again becoming sort of one of the redefinitions of service going forward. So I think, we need to actually invest in all of those things, not just value.”

NVIDIA 2Q17 Earnings Call Notes

Jen-Hsun Huang – NVIDIA Corp.

GPU acceleration of servers delivers extraordinary value proposition

“Data center is a very large market, as you know, and the reason for that is because the vast majority of the world’s future computing will be largely done in data centers. And there’s a very well accepted notion now that GPU acceleration of servers delivers extraordinary value proposition. If you have a data-intensive application, and the vast majority of the future applications in data centers will be data intensive, a GPU could reduce the number of servers you require or increase the amount of throughput pretty substantially. Just adding one GPU to a server could reduce several hundred thousand dollars of reduction in number of servers. And so the value proposition and the cost savings of using GPUs is quite extraordinary.”

Cryptocurrency is here to stay

“Cryptocurrency and blockchain is here to stay. The market need for it is going to grow, and over time it will become quite large. It is very clear that new currencies will come to market, and it’s very clear that the GPU is just fantastic at cryptography. And as these new algorithms are being developed, the GPU is really quite ideal for it. And so this is a market that is not likely to go away anytime soon, and the only thing that we can probably expect is that there will be more currencies to come.”

Costs close to $1000 to manufacture top of the line GPU

“And so the price of Volta is driven by the fact that, of course, the manufacturing cost is quite extraordinary. These are expensive things to go and design. The manufacturing cost itself, you guys can estimate it, is probably in the several hundred dollars to close to $1,000. However, the software intensity of developing Volta, the architectural intensity of developing Volta, all of the software intensity associated with all the algorithms and optimizing all the algorithms of Volta is really where the value-add ultimately ends up. And so I guess the pricing – your question relates is pricing. We expect pricing to be quite favorable for Volta.”

Going to see lvl 4 self driving cars in 2021

“And then the fully autonomous drivered cars, driven cars, branded cars will start hitting the road around 2020 and 2021. So the way to think about it is this year and next is really about development. Starting next year and the following year is robot taxis. And then 2021 to forward you’re going to see a lot of Level 4s.”

Volta is a giant leap

” Volta was a giant leap. It’s got 120 teraflops. Another way to think about that is eight of them in one node is essentially one petaflops, which puts it among the top 20 fastest supercomputers on the planet. And the entire world’s top 500 supercomputers are only 700 petaflops. And with eight Voltas in one box, we’re doing artificial intelligence that represents one of them. So Volta is just a gigantic leap for deep learning and it’s such a gigantic leap for processing that – and we announced it at GTC, if you recall, which is practically right at the beginning of the quarter.”

Neural net hardware and software is improving at an exponential rate

“A neural net in terms of complexity is approximately – not quite, but approximately doubling every year. And this is one of the exciting things about artificial intelligence. In no time in my history of looking at computers in the last 35 years have we ever seen a double exponential where the GPU computing model, our GPUs are essentially increasing in performance by approximately three times each year. In order to be 100 times in just four years, we have to increase overall system performance by a factor of three, by over a factor of three every year.

And yet on the other hand, on top of it, the neural network architecture and the algorithms that are being developed are improving in accuracy by about twice each year. And so object recognition accuracy is improving by twice each year, or the error rate is decreasing by half each year. And speech recognition is improving by a factor of two each year. And so you’ve got these two exponentials that are happening, and it’s pretty exciting. That’s one of the reasons why AI is moving so fast.”

The whole car is going to become an AI

“The second major component is our self-driving car platforms, and a lot of it still is infotainment systems. Our infotainment system is going to evolve into an AI cockpit product line. We initially started with autonomous driving. But you probably heard me say at GTC that our future infotainment systems will basically turn your cockpit or turn your car into an AI. So your whole car will become an AI. It will talk to you. It will know where you are. It knows who’s in the cabin. And if there are potential things to be concerned about around the car, it might even just tell you in natural language. And so the entire car will become an AI.”

The next revolution of AI will be at the edge and the most visible impact will be in the autonomous vehicle

“The next revolution of AI will be at the edge, and the most visible impactful evidence will be the autonomous vehicle. Our strategy is to build a ground-up deep learning platform for self-driving cars, and that has put us in pole position to lead the charge”

Nordstrom 2Q17 Earnings Call Notes

Erik B. Nordstrom – Nordstrom, Inc.

60% of online returns come back into the store

Sure, Adrienne. This is Erik. Our online return rate, we don’t break out specifically. It’s come down a bit in the last – it’s been over a year now that we’ve made some progress there. But it’s high. Our online business’ a high return rate. We get over – for full-price, over 60% of our online purchase returns do come to stores. For off-price, it’s over 80%, which is a real positive for us. It’s an example we use a lot internally, especially on full-price, because it is free for customers to mail back their returns, yet over 60% of our customers choose to do their returns in a store. And it’s because that’s what they want to do. It’s good for the customer, and by the way, it’s good for us. It’s more economical for us to take a return that way, and also, as you can imagine, having a customer in the store is beneficial.

And we really don’t focus on trying to turn around that return and make it fail immediately with it. What we’ve learned is a customer comes with a return, that’s their errand they have to do, and the more efficient, the faster we are in doing that, the more free time we’re giving back to the customer. And oftentimes, they take that free time and start shopping. So we’re really looking to take care of the customer on their terms, and if they have a great experience in our store with a return, we certainly believe that ends up in good news for us.

Applied Industrial Technologies 4Q17 Earnings Call Notes

Neil A. Schrimsher – Applied Industrial Technologies, Inc.

Sales trends by month

“Sure. So, Ryan, our sales per day trends for the overall fourth quarter improved 1.1% from the third quarter. May was slightly below April. We finished up in June. July was positive year-over-year probably mid-upper single digits. So, as expected, down sequentially from June with seasonality, and month-to-date August, we started well over these initial seven to eight days.

Overall good activity in the quarter

“All right. So, similar, 18 were up in the past quarter, positives around oil and gas that we’ve talked about year-over-year and sequentially in the U.S. Other related industries, infrastructure, aggregates, cement positives; seeing positives in machinery OEMs, transportation equipment and paper and food, those are probably the ones in the 18 and I think the others start to narrow a little bit more too. So, I think all-in-all, we saw good activity in the quarter and it’s a good base as we move into fiscal 2018.”