Company Notes Digest 11.24.15

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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.

This Week’s Post: Thanksgiving 2015

It’s a light week for earnings calls since it’s Thanksgiving, but we were still able to pull together a handful of interesting quotes.

This week’s post contains more color on the state of the consumer (most companies continue to say that spending is soft).  Tech Data also called out weak IT spending in North America and Donaldson said that global construction markets have weakened further.  

There are some things to be thankful for though…there’s pent up demand in housing markets and bloated inventories are getting right sized.  More importantly, Williams Sonoma’s CEO reminds us that human connection is what really matters.

The Macro Outlook:

The consumer is a bit of a mystery right now

“We certainly spend a lot of time here trying to understand the consumer and they really are right now, it’s a bit of a mystery.” —Cracker Barrel (Restaurants)

We know that the retail environment was challenged last quarter

“as everybody has witnessed over the last quarter, the Retail environment went through a very challenging time in the third quarter…I think given the continued volatility in environment, you are going to see a continued focus on inventory levels, not only in watches, across retailers overall.” —Movado (Watches)

Other consumer industries reported softness too

Cracker Barrel said that restaurant industry performance was weak

“Industry performance was below prior year levels and recent economic signals were mixed. We believe the consumer spending was challenged during the quarter, particularly in October” —Cracker Barrel (Restaurants)

Campbell Soup said consumers remain cautious

“consumers remain very cautious. We’re continuing to see Americans save more and spend less amid the uncertain economic climate.” —Campbell Soup (Packaged Foods)

Dollar Tree’s customer is still under a lot of pressure despite lower gas prices

“I think the customer especially our customer, our middle income, low middle income to lower income customers are still under pressure and they are concerned. They’ve seen lower gasoline prices and that’s helpful. But at the same time it’s not enough for that lower income customer. It’s just not enough to make a change in their shopping habits. At the same time they’ve seen lower gasoline prices. They’ve seen higher food prices. They’ve seen higher rent prices. They’ve seen higher healthcare costs. They’ve seen higher taxes. So they are still concerned, they are still under pressure” —Dollar Tree (Retail)

Other industries are seeing pressure too

IT spending is moderating in the Americas

“We don’t make the market; we don’t create the demand; we respond to the realities of it. And the realities are that IT spending is moderating in the Americas. It’s reflected not only in our results but in all of the results in the ecosystem.” —Tech Data (IT Wholesaler)

The global construction market has worsened

“Since our last update, our outlook for the construction equipment market has worsened…The softening that we see in construction is really we’re talking about from a global perspective. So we saw additional softening in some geographies like China. We clearly see it hard in Brazil right now.” —Donaldson (Industrial Components)

There are potential bright spots too though

There is still a lot of pent up demand for housing

“I am still extremely positive on what the future holds because…there is a tremendous amount of pent up demand…at some point there is going to be some form of a break out and there is going to be much more demand than we are seeing now. But the ultimate question is when, which I just can’t predict.” —Beacon Roof (Roof Supplies)

Small Businesses are investing in IT

“there are still good pockets of opportunity. In the quarter, we just reported, as Chuck described, SMB continued to be a strong area. We delivered double-digit growth in the Americas in SMB. So, there are pockets of strength.” —Tech Data (IT Wholesaler)

Inventories are bloated, but companies are making progress right sizing them

“We would continue to say there is more large row crop tractors in used row crop tractors in the market in the US and Canada than we would prefer. So it does continue to be a focus of ours, as we go through 2016. But we are making progress, so we are seeing that large Ag inventory coming down. In fact if you look at the high point in 2014, we’re down about 18% from that point. So again, making progress.” —John Deere (Farm Machinery)

Hopefully this is just a healthy pause

“It does feel like the economy might be slowing a little bit…It feels like a may be a healthy pause here, I don’t know. Things can certainly get worse. There is a lot of uncertainty in the world that could cause a slowdown in the economic activity. We’re not seeing it yet.” —Eaton Vance (Asset Management)

International:

Tiffany was encouraged by performance in China despite macroeconomic news

“With China in the news so much regarding their economy stock market and currency, we are pleased and encouraged that our total sales in China increased by a healthy amount in the third quarter despite volatility and sensitivity to headline macro events.” —Tiffany (Jewelry)

Financials:

Companies have relied on financial engineering to create growth this cycle

“Generating growth in this environment has been and remains difficult. As a result, the industry continues to respond with consolidation, spin-offs, aggressive cost cutting programs, and other measures to improve operational efficiency.” —Campbell Soup (Packaged Foods)

Consolidation is altering the landscape in many industries

“consolidation and intensified competition are disrupting and altering the landscape.” —Campbell Soup (Packaged Foods)

Bank loan funds have seen an exodus as investors lose confidence that interest rates will rise

“we had a lot of money move into the bank loan asset class in 2013 and anticipation at that point of rising interest rate. Maybe those investors weren’t really fully informed or fully committed about what this asset class was. I think there is a lot of that money is now been flushed out of the asset class.” —Eaton Vance (Asset Management)

Consumer:

Ross Stores expects the retail environment to be very promotional this holiday season

“There is ongoing uncertainty in the macroeconomic environment and, based on the current retail landscape, we expect the upcoming holiday season to be highly promotional. As a result, while we always hope to do better, we believe it is prudent to maintain a conservative posture.” —Ross Stores (Off-Price Retail)

A highly anticipated Star Wars video game has gotten off to a slow start

“I think Star Wars Battlefront got off to a slow start. Given the buzz around the movie, we anticipate that this game is going to be a very strong game…we do think that it is going to rally very strong, as we get to closer to the movie.” —Gamestop (Video Game Retailer)

Campbell Soup has shifted 40% of its advertising budget to digital

“we’re shifting our spend overall to about 40% of our spend in digital, and that is creating a different dynamic between working and non-working media.” —Campbell Soup (Packaged Food)

Technology:

The 4 big IT initiatives: cloud, security, big data and productivity

“these four transformation areas is exactly what virtually every customers looking for. How do I transform my IT environment to a hybrid environment? How do I secure my digital enterprise? How do I enable analytics, big data analytics environment? And how do I drive workplace productivity. And we are aligning software service and hardware or infrastructure to that” —Hewlett Packard (Enterprise Tech)

HP is shutting down its public cloud offering and using Microsoft as a preferred provider

“we announced in October that we will double down on our private and managed cloud capabilities and sunset our public cloud offering. This is the right move. It plays to our strength in private and managed cloud. We will continue to extend our cloud infrastructure leadership and integrate the public cloud element for our customers through a strategic partner-based model…Going forward, Microsoft Azure will become a preferred public cloud partner.” —Hewlett Packard (Enterprise Tech)

Industrials:

Heavy duty truck production is set to slow next year

“The anticipated slowdown in heavy-duty North American truck production next year is well documented…we know that in the U.S. first rate truck builds there is a decline in the future, and we’ve just tried to take a more cautious approach in the second half of our fiscal year and bake that in for the U.S. market.” —Donaldson (Industrial equipment)

Materials, Energy:

Total Energy Services’ CEO thinks that there needs to be consolidation in oil service in North America

“We strongly believe that the North American energy services industry must consolidate to provide the efficiencies in economies of scale necessary to compete in an increasingly global market. We believe this need for rationalization will become more apparent over the next few quarters.” —Total Energy Services (Oil Service)

Good acquisition opportunities may start to appear over the next few quarters

“Our view is things are going to settle out here over the next few quarters, there is going to be a lot of good acquisition and consolidation opportunities we’re going to use the strength of our balance sheet and our abilities to generate substantial cash at low utilizations.” —Total Energy Services (Oil Service)

Jacobs Engineering thinks its downstream energy customers may be close to a bottom

“We do believe that the clients in some of these end markets have either hit or are close to bottom… my comments on hitting the bottom and stabilizing is more from a Jacobs position…most of our activity is focused on refining and chemicals.” —Jacobs Engineering (Engineering & Construction)

Hormel Foods has been able to refill their barns after the Avian Flu, but wont fully recover for another couple of quarters

“We were able to completely refill our barns, but as we talked about before, the primary turkey for most of our value-added items is our tom turkeys. It’s a 22-week market cycle and so we will not been fully back to normalized volumes throughout the earliest of second quarter of fiscal 2016” —Hormel Foods (Meat Packer)

Households have been eating more pork thanks to lower prices

“In the retail channel, we are seeing increase featuring of Pork as pricing has come down. For the most recent year-over-year comparison, fresh Pork volume was up 6% on 2% lower pricing.” —Tyson Foods (Meat Packer)

Miscellaneous Nuggets of Wisdom:

Human connection still matters (especially around the holidays)

“Human connection still matters in the digital age” —Williams Sonoma (Home Goods)

Happy Thanksgiving!

Full transcripts can be found at www.seekingalpha.com