Company Notes Digest 11.22.13

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

Retailers are preparing for war:

“more retailers are planning to open earlier than prior years on Thanksgiving Day, and there are 6 fewer shopping days in 2013 between Thanksgiving and Christmas. More importantly, a number of retailers have reported disappointing results over the past few quarters. We believe all of these factors combined will create the most intensely competitive and promotional holiday selling period in recent years.” ($ROST)

And there will be blood:

“it all depends how severe and bloody it gets…once the games begin, there’s not a lot any of us can really do” ($ROST)

The question is–will the consumer show? There are some signs that the consumer is running out of gas:

Glenn Murphy senses some fatigue:

“my view is there’s a little bit of fatigue out there when it comes to consumers. So the question is, are we disappointed in the consumer sentiment? Or are we, I’m just being honest, as an industry, have we really not been that innovative in order to give the consumers a value proposition that doesn’t look like wallpaper day in day out?” ($GPS)

And Ross says a slowdown is creating a good environment for buying closeout inventory:

“It’s a very good buying market. Okay. And yes, there’s a lot of opportunities…as business slows down…the supply lines obviously were not geared for that slowdown. So there was excess supply.” ($ROST)

But Housing is still a bright spot:

“Housing is a bright spot in our economy. As such, we are forecasting our fourth quarter sales and earnings to be stronger than our plan.” ($HD)

And the consumer is bifurcated. There are “haves” for every “have not”:

“We’re also seeing more bifurcation among consumers between those choosing higher-priced value-added products and those moving down the value stream to save money.” ($TSN)

Sometimes the only thing you have in business is faith:

“I’ve always had faith in the consumer. I’m just a glass half-full person. I just believe the consumer is more tailwinds than there are headwinds. And I think they’re going to come out and buy.” ($GPS)

Companies may start having trouble cost-cutting their way to earnings growth:

“There are really 3 things that have driven our operating margin over the last 2 years…I think that in each of those areas there might be some incremental upside. At this point, I think it’ll be fairly small, but there’ll be some incremental upside. So really most of the benefit from here on is from sales leverage.” ($ROST)

“I don’t think that the 15% growth number is going to be driven by cost-cutting. We’re just not going to save ourselves into the 15% growth” ($JEC)

When it comes to inflation, looks like I’m still waiting for Godot:

“is there deflation in the apparel business? Well, if you look at NPD, they’d say no. But is it a business that has heavy inflation? The answer is also no.” ($GPS)

State and Local Governments are starting to spend again on infrastructure:

“there’s a lot of states, a lot of municipalities that are…starting to spend to improve their facilities and do highways and do bridges and do transit systems that they haven’t been able to spend for quite some time” ($JEC)

Commodity price stabilization in 3Q may have been an illusion driven by Chinese stockpiling:

“I would suspect for a small part of what we saw in [dry bulk] rates [was that the Chinese] were taking advantage of the low price of iron ore or relatively low price of iron ore…to build up their stocks…So what we have here is a speculative purchase we feel of the commodity by people who can afford to speculate…and it was both in quantities that affected the market and would have affected any markets…because of the ferocity with which its appeared” ($DSX)

Financials

Somebody is getting aggressive financing auto loans (America’s Car Mart is a used car dealership catering to subprime-ish customers):

“Analyst Q: this influx of securitized lenders in the marketplace, could you compare and contrast it to the last time we saw this, which I believe and correct me if I am wrong was kind of like the ‘04, ‘05 and ’06 time periods. Is this substantially similar or do you see differences between this current environment and the last time we saw this type of competitive flex?

Management A: Yes, I would say it is definitely more significant than it was before. I think some of the deals and offerings we hear are more aggressive than that time period. And actually, it seems to be sustained longer this time than it was before…Yes, it’s definitely more aggressive than I think we saw the last time.” ($CRMT)

Consumer

Retailers are bracing for a heavily promotional environment. Those that have a clear sense of identity will fare better:

Ross is consistent in its low price message:

“our marketing strategy and our marketing message has been very consistent over the years. The message is really that we offer the best value in apparel and home fashions all the time. There’s no gimmicks, no spin, just a straightforward message. And we found that, that works pretty well with our customers. They understand the message. And when they come to the store, we kind of deliver on that message. So no real change in terms of the — just the every day value message that we’re providing for the customer.” ($ROST)

Urban Outfitters prefers to differentiate itself in other ways.  Promotions may even turn off Urban’s customers:

“We’re very much a believer in selling our product at regular price and creating an experience that differentiates and gives the customer a reason to come see us versus simply utilizing price to get them in the door. That remains our strategy…My experience is most of the customers that we try to serve, they’ll not particularly like promotional activities.” ($URBN)

Gap reminds us that relying on promotions isn’t going to cut it in the long run:

“If the definition of winning is having a similar promotion on a similar category week in, week out, I think people are going to do that. I think they’re going to struggle going forward to the point where the consumer is looking for an event, they’re looking for something exciting. At the end of the day, we’re in the fashion business…Maybe in my past life, just purely playing a discount or price card might have been effective, but not in this business” ($GPS)

Ross and JC Penney agree that when things get promotional, it’s time to get conservative:

“when we position ourselves relatively cautiously, when we keep our inventories tight, our expenses tight that actually if it’s a promotional environment we can do okay, and we can hit our guidance. And actually if it turns out we’re wrong, we’ve shown that we’re pretty good at chasing business. And we hope the sales trend is stronger…we run our inventories tighter. That’s what we do in off pricing…this is what we’ve done whenever we have felt the environment would be tricky, tricky being more promotional. We’ve tighten things up and got more conservative, and it’s just served us very well.” ($ROST)

You can always find a way to chase sales later:

“if you overplan the sales, you end up having too high an expense and too much inventory. If you’re a bit cautious with the plan, you can always find a way to leverage the expense and to find additional volume by selling more regular price and promotional price and less at clearance. Those are time true approaches to running a retail business.” ($JCP)

Ross and JCP also reflect on consumer buying patterns:

“the third quarter is tricky. As the quarter goes on, there are few reasons for the customer to shop until the weather turns cold” ($ROST)

“customers only come to department stores six to 12 times a year unlike a weekly shopping experience at a big box discounter, so it takes a while for the customer to realize we’re back in business, that we have the aesthetic they’re looking for, the lifestyle that they’re used to, the price promotion that they enjoy.” ($JCP)

Speaking of JCP, they took a step towards silencing critics in 3Q:

Margins were weak, but management argues mostly because of non-recurring items:

“there’s still several margin components that are weighing us down, the biggest of which is, of course, the discontinuation of some categories and negotiating with various partners to get out of things that didn’t resonate with the customer. These are nonrecurring, and frankly, once they’re out of the arithmetic of margin, we feel quite confident…There’s no other hidden component of gross margin, and that’s why we’re so confident about the fact that they will return to our traditional levels.” ($JCP)

And were emphatic on a couple of rumors:

They’re not giving merchandise away:

“I would like to point out, since there’s a lot of people saying that we are “giving the merchandise away”, there’s no remarkable difference between the margins we’re attaining on promotional markdowns through our major events than there was in 2011. So that’s just not a fact, and we’re quite comfortable with our promotional markdowns, promotional strategy.” ($JCP)

And they have the support of their vendors:

“our suppliers and vendors. Their support for us remains strong, and contrary to inaccurate reports, has not wavered over the past several months…Our suppliers are more than eager to help us when we ask for help.” ($JCP)

They sound pretty excited:

“The positive energy in our stores is inspiring…our teams are feeling it. Our supplier partners are feeling it, our associates at the store level are really excited about the fact that they see customers they haven’t seen for a while, and we’re consistently getting feedback that our stores look as good as they’ve ever looked” ($JCP)

Technology

Social media is particularly effective for companies that have always marketed by word of mouth:

“We have been experimenting and investing in social media over the last couple of years. We found historically that word of mouth is actually the best marketing that we have, and we found social media is a good vehicle to sort of promote word of mouth. So we’ve been doing a number of things in that space” ($ROST)

Materials, Industrials, Energy

For Dry Bulk Shippers the pain never ends:

“unfortunately the recent optimism in the market created a further problem which is going to prolong the agony and the problem of the market not picking up. So we are of the opinion that the market is not going to show any signs of recovery for the next three to six months and maybe we will see market deteriorating further” ($DSX)

Private Equity has injected fresh capital into the market complicating the situation:

“every cycle, you get somebody investing capital and usually delaying a recovery…in the 80’s the nationalized fleet in the containership trade in the 90s we saw the tax schemes from Germany, in the form of the KG structures. Now we’re seeing private equity funds.” ($DSX)

Diana thinks we’re close to a bottom now, but it’s going to be a weaker recovery:

“this happens near of the trough of the market. so the chances of these investments being profitable are far higher than other…[but] The recovery when it comes, its going to be later and weaker than it could otherwise be without this infusion of capital.” ($DSX)

Jacobs is seeing a greater number of small construction projects replace a small number of big projects:

“I would characterize today’s marketplace as compared to 4 or 5 years ago, what you’re referring to, the 1 big project, I think, you’re thinking of, those aren’t necessarily out there. But there’s a large volume of projects that are sort of just a little bit below that, maybe half that size in size. A large number as opposed to before where there were a few of those really big ones, but only a few.” ($JEC)

Counterintuitively, when it comes to oil sands non-traditional money is apparently a good sign:

“different clients than you might normally think about that are looking at investments as well in the oil sands business in addition to the traditional big energy companies, which, again, adds to my confidence that the overall viability of the oil sands business over the medium and long term is very strong…when you see nontypical investors, it’s usually a good indication of an ongoing, solid capital base. And when the nontypical investors start to run away, things tend to turn down” ($JEC)

Jacobs sees under investment by utilities, and wants to make an acquisition in the space:

“our view of the [utility] market is that it’s another area where there are long-term demands for investment that are being under-met at this point in time…So we think the power business is a business that Jacobs should be in…but we’re really going to have to make an acquisition to make it happen. We’re not going to be able to bootstrap that business.” ($JEC)

So it used its earnings call as a company wanted ad:

“so that’s why I made a point of mentioning the power business as an area of acquisition so you’d know where our thinking is, but also so people who are in that business listening on this call will know we’re interested.” ($JEC)

The world will probably plant less corn next year, leaving the door open for higher prices if there are unfavorable growing conditions:

“there is already talk about among U.S. farmers looking ahead to the 2014 planting season, about adjusting corn acreage down by about 4% in favor of soybeans…Looking at South America, Informa is forecasting a cut in planted corn area of about 10% in Brazil and of about 30% in Argentina…If 2014 brings unfavorable growing conditions in any part of the world, the U.S., Brazil, and Argentina in particular, corn stock fees [ph] would fall, suggesting the commodity prices would stabilize.” ($DE)

Miscellaneous Nuggets of Wisdom

Equity investments should produce 8-9% returns over time, even if you’re buying dry bulk ships:

“if you buy at the right time and you sell at the right time as well or if you keep your investment throughout tight, you are going to make something lie 8% to 9%. This is our position and having to run a company for the longest term” ($DSX)

Smart companies aren’t that interest rate sensitive when making long term plans:

“I would have to say that most of our clients are looking at their investment as long term, and short-term interest rates aren’t a big factor in their decision to invest. That might be true of smaller players. But when you look at big oil, big mining and minerals, big chemicals, big pharma, any of the major customers in this regard, I don’t think they are deceived by short-term interest rates as a key criteria for their investment decisions. So I don’t expect a nominal or reasonable rise in interest rates to have a materially negative impact on new investment.” ($JEC)

If you listen to your customer, she’ll tell you what you need to do:

“we listen pretty carefully to the customer. The customer will tell us exactly what they want in the store, and they’ll be able to help us on where it should be displayed.” ($JCP)

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

blog comments powered by Disqus