Company Notes Digest 2.14.14

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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

Starwood feeling pretty up-beat about the North American hotel market:

“The lodging recovery in North America continued unabated, driven by strong corporate transient demand, empowering through the government sequester and shutdown.” ($HOT)

Campbell soup isn’t seeing a great consumer environment though:

“We are in the midst of a turbulent period. Retailers are wrestling with challenged consumers who remain under pressure and consumer behavior is becoming less predictable.” ($CPB)

The $10,000 question is: how much of the weakness can be blamed on weather?

“We have assessed that weather is neutral to us in this quarter. We definitely acknowledge a benefit of cold temperatures, but we think it was offset by unfavorable weather disruptions. We had plant closures for a while, retail store closures and some lost business in the Foodservice sector…We have had some weather related costs. The weather has been so severe, we actually had soup freeze in some of our transportation and have to be destroyed and that sort of thing.” ($CPB)

Some weakness in emerging markets, but still mostly stable:

“Across the rapidly urbanizing economies, we see the same wide range of performance as last year. India and Brazil, for example, are entering an election year with economies that are sagging. The recent QE tapering headlines have added to the woes of some other individual countries. Still, all indications are that the long-term trend lines of rising wealth, development and growing infrastructure are set to continue.” ($HOT)

China may actually be just fine. Chinese corporate spending has momentum:

“we see good sales momentum among our Chinese corporate accounts. We’ve tailored our sales efforts to their unique needs, being highly decentralized and tending to book the last minute. The result has been double-digit increases in our corporate business and a full pipeline of new prospects” ($HOT)

2nd and 3rd tier cities still being developed:

“the pace of development in second- and third-tier cities continues. In the coming years, these cities will represent more than 200 metro markets, with more than 1 million people. We’re on track to open more hotels this year than last year, and our signing pace for new deals last year finished at a record pace. Many of those deals are in these newly emerging cities.” ($HOT)

Just like the good old days (2008) Chinese import demand pushing commodity prices higher. Dramatic price inflation in dairy markets:

“Recently the domestic cheese market has experienced dramatic price inflation…At current levels CME’s spot cheese prices have been fluctuating near or above all time high…A significant constriction in Chinese milk production coupled with rising demand for dairy based protein throughout Asia ultimately caused the dramatic increase in Asian demand for imported dairy commodity dairy products.” ($DF)

The real mess is in Latin America. Argentina at an acute stage:

“In Latin America, the Argentinian crisis is reaching the acute stage and will need to be monitored. Our business has already taken a big hit over the past few years. We’ll have to see what the impact of the recent devaluation will be.” ($HOT)

A case study of what happens to a CPG company in hyperinflation:

“Turning to Latin America, organic revenue grew 12.3% for the year, almost entirely due to pricing in the hyperinflationary economies in Venezuela and Argentina…the effects of high inflation have led some consumers to trade down to cheaper brands…we fully expect to offset commodity inflation over time including the impacts of currency but we’re unable to price quickly enough to protect gross margins in the back half of the year…As local currencies weakened the cost to purchasing raw materials traded in dollars, euros or sterling spiked.” ($MDLZ)

It takes consumers a little while to get used to new price points, but Latin America is so used to inflation, one quarter should be enough:

“The reaction we talked about and the sensitivity in emerging markets is likely to be more from consumers and it just takes a while to get the price back on a potential way to make sure that in every channel, there is a right path and the right size and right price point for every consumer and get that all the way through the system, it takes consumers a little bit to get used to that. And typically it’s a quarter in emerging markets.” ($MDLZ)

Financials

It’s a great time to be selling hotels. Lots of buyers back in the market:

“there are more buyers now seeking to deploy larger amounts of money. Our sense, as we told you earlier, was it used to be the public REITs in the U.S. who came in for one hotel at a time, issued stock, et cetera. We now think that there are people who are willing to do portfolio sales. We think private equity is back, had not been in the market before. Certainly the sovereigns are back. So we’re optimistic that — as I think I said in my comments, that this is prime time for asset sales, and we intend to fully take advantage of it.” ($HOT)

Cap rates ranging from sub 5% to 6% or 7%:

“Cap rates-wise, it’s purely a function of what hotel you’re selling. I mean, we’ve seen sub-5% cap rates on some of our better hotels, and 6% to 7% on some of the more suburban and airport hotels.” ($HOT)

Consumer

E-commerce rapidly evolving. Fossil once thought of internet as a direct to consumer channel, now a wholesale channel:

“the market is changing very quickly. Now I think we used to look at our own website as looking at how much sales and traffic we’ve got. And I think we changed our thought process. And really it should be looked at in terms of how can we facilitate online an omni-channel growth with all our partners because as a fact of the matter as you mentioned, all of our wholesales partners have had huge growth in all of our categories over the last several years and that’s continuing.” ($FOSL)

Jewelry increasingly becoming globally branded:

“the jewelry business is much larger than the watch business. And there has been a lot of reports in the last year that show that jewelry is becoming increasingly globally branded which fits right now in wheelhouse” ($FOSL)

Whole Foods having difficulty fighting margin pressure as it lowers prices:

“guidance reflects a year-over-year decrease in gross margin…we were doing such a good job on our shrink, and we were doing a good job on the buy side, we were able to completely offset the price adjustments we were making, we were actually in a happy situation of making price investments and saw our gross margins go up. We think we have most of the shrink, the low hanging fruit we could get on the shrink we picked up and we will continue to make the price investments.” ($WFM)

It takes 2-3 quarters to realize the benefits of lowering prices:

“Good news about price investments is that in the short-term it hurts comps because if you had the same customers coming in and they are paying a little bit less per item that’s going to bring comps down. But we found that after two to three quarters the positive impact of lowering of those prices begin to be felt in the comp base as we began to see our basket size increase and when you have on the margin more customer shopping with us.” ($WFM)

Technology

The “internet of everything” may be hitting a tipping point:

“Internet of Everything has moved from an interesting concept to a business imperative driving opportunities across every major vertical. It was the central conversations at the Consumer Electronics Show and the World Economic Forum, the last couple months with CEOs, industry and country leaders globally. Anyone walking away from these events should characterize this year as the tipping point.” ($CSCO)

The “internet of everything” means connecting all things to the internet. An example of a mining application:

“like in mining where you connect the sensors to all of the equipment in a major mining operation” ($CSCO)

When Google bought Nest all of a sudden the concept clicked with people:

“It’s that light switch went off in a very, very positive way with the CES the World Economic Forum and when Google bought Nest, it was a light switch that all of a sudden every consumer, player, manufacturer realized” ($CSCO)

John Chambers is claiming that now people get it and are excited about it:

“a year ago, if I had to buy somebody a drink for me to talk very long about the topic. Now, they are offering to buy us dinner and they bring the board of directors here…the excitement we see in the conversations we’re having today and with customers about the next wave of the Internet, reminds me of the mid-1990s” ($CSCO)

Healthcare

CVS quit smoking because it has new customers to think about:

“You think about the retail customer, you think about know whether it’s the client, be it the employer, health plan, but there’s also a new customer emerging, okay? Provider groups and hospitals” ($CVS)

Hospitals and Doctors are moving toward being compensated based on outcomes, want to partner with businesses that help them achieve better outcomes:

“I will give you two examples of where we think that the decision will make a difference. If you look at ACOs and physician practice groups today, they are increasingly focused on outcomes, because more and more of it is being linked to their reimbursement rates and a key areas that ACOs are focused on, is the role that tobacco place in exacerbating a lot of chronic conditions that are driving cost up in the healthcare systems, so many of these ACOs have developed number of metrics to track this.” ($CVS)

Materials, Industrials, Energy

Despite increased activity in the Permian region, oil service pricing remains pretty flat:

“I think in general we see cost trending now and they are flat right now in terms of service. A lot of that at this point is going to be driven by efficiencies.” ($APA)

Regulatory changes in Gulf of Mexico since Macondo changes the economics of drilling in the area:

“[in] Gulf of Mexico we were facing about $250 million a year of abandonment liability because of the change in the laws, because of Macondo, so it was time to divest that asset.” ($APA)

Miscellaneous Nuggets of Wisdom

Consistent growth has to be achieved through careful management. Naturally, businesses ebb and flow:

“Our challenge is to manage this growth as consistently as possible, taking into consideration the natural ebbs and flows of brands and business cycles…As a company, we want to be responsive to both the near term and long term objectives of our various stakeholders. Managing with flexibility and our structure supports our objective of delivering more predictable and consistent earnings and cash flow.” ($FOSL)

International operations demand strong regional offices:

“we have been benchmarking much larger global multi-brand consumer product companies on how they go to market really looking at scalability for our own company. And as part of that effort what we’ve done is restructured the company and we’re instead of having the corporate office here in Dallas control everything globally as we have three regions with the strong regional offices in Switzerland, Hong Kong and in the U.S. So in our Dallas office we have a global office and also a regional office. So what we’ve done is the global guidance where we’ve empowered these regions to operate on their own within guidelines, but their own approvals to move faster and be more adaptive to the market. And this was from our research of looking at much larger global companies” ($FOSL)

You never know how high you can reach:

“When the first Whole Foods Market store opened in 1980 we had no idea we’d be becoming 8th largest public food and drug retailer in the US ranking number 232 on the Fortune 500…When we went public in 1992 we thought that maybe we could have hundred stores and I remember back 10, 15 years ago we had endeavor in the company called Structure 250 where we were talking about how to organize ourselves and we had 250 stores. And here we are with 373 today on our way to 500 in 2017.” ($WFM)