Company Notes Digest 5.16.14

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

It’s half way through May and we’re still talking about the weather

Every retailer pretty much stuck to the same script: business was weak in Q1 because of the weather

“Like other retailers in the United States, the unseasonably cold and disruptive winter weather negatively impacted our U.S. sales and drove operating expenses higher than expected for the company” ($WMT)

“we were expecting sales to be stronger than they were at both Bloomingdale’s and Macy’s, and as I just stated, the weather clearly played a major role in the weakness.” ($M)

“We had very tough business in February and March like everyone else; we were down something like $40 million to plan at one point just from weather.” ($JCP)

Even online shopping is apparently not immune from the grip of cold weather

“Obviously, E-Comm was also affected by some of the difficulty from a weather perspective in the quarter.” ($KSS)

Everyone agrees that things got better when the weather warmed up though

“once the weather warmed up, there was a significant change in the trend. So, again, a couple of weeks doesn’t a quarter or a year make. But it is encouraging to see that and particularly in the northern climate. So that’s part of why we’re feeling confident” ($M)

“I’m encouraged by the sales momentum in the back half of the quarter” ($WMT)

“I am encouraged by the consistent improvement that we saw as the quarter progressed.” ($KSS)

“we had a great recovery in April” ($JCP)

“Our business did get better as the quarter went on. First month was, February was the toughest month of the quarter for us and last month was the best.” ($JWN)

But here’s the rub: Q1 for retailers lasts Feb-April. Bad weather affected only two out of thirteen weeks

“As we indicated in February, we realized negative comp sales during the first two weeks of the fiscal year from severe winter storms. A solid start to the spring season and a strong Easter holiday drove positive comps over the remaining 11 weeks of the quarter” ($WMT)

And April got a strong boost because Easter shifted later in the year

“April was very, very strong because of the shift in the Easter holiday.” ($JCP)

When Macy’s was pushed, they admitted they couldn’t be sure it was all weather related

“While we aren’t sure that all of the weakness in the quarter was weather-related, we continue to believe that the underlying customer demand is strong enough to enable us to achieve our annual guidance” ($M)

And conceded that they planned for a so-so consumer and that’s what they’re seeing

“when we gave our guidance at the beginning of the year. We were not expecting the consumer to be all that strong. So that really hasn’t changed with anything we’ve seen in the first quarter. Obviously, could make it a little more challenging but we still think that the consumer is okay but not great.” ($M)

Walmart makes an emphatic statement on accelerating inflation

“Q1 was marked by a rapid acceleration in inflation, as cost inflation was approximately 160 basis points, compared to 30 basis points in Q4″ ($WMT)

If the weather is unfavorable, food inflation could get worse (uggh, more weather)

“even though supplies appear to be adequate, global grain and oil seed demands remain strong. Unfavorable growing conditions in any part of the world would hurt production, reduce the stock to use ratio and result in prices quickly moving higher.” ($DE)

Consumer

You have to invest heavily to stay on top of the pack in e-commerce

“I don’t know how a retailer could compete going forward without a really strong online presence and investing heavily to keep up with all that’s happening technologically in that world.” ($M)

“An important element is our technology investments, which represent $1.2 billion or 30% of our capital plan.” ($JWN)

Home was a weak category for Macy’s after a long run of strength

“it stood out for us too because as you know, home has been so strong for so long. So I’m hoping it’s just an outlier and by the second quarter that would no longer be the case. Early May is making us feel a lot better. But there’s really nothing we’re seeing on the competitive front that would lead us to be concerned about home longer term.” ($M)

JC Penney may have steadied the ship

“as I go to stores I don’t hear from associates that we’re in misalignment at this point. I think we’re back to running the business properly.” ($JCP)

“I think we put to bed a lot of the previous anxieties and frankly our results will only enhance that we are going forward.” ($JCP)

Millenials shop both online and in store

“There is sort of assumption that many people have that it’s all online, is actually not the case. Millennials love shopping in stores as well as online and browsing in one channel and shopping in another, so both have been doing well.” ($M)

Online shopping has made pricing much more competitive

“the competitive issue has been, it’s been made more dramatic by the fact that the online business has really made things much more transparent and really better for customers if all the choices are out there.” ($JWN)

Online and off-price outlets are a way to generate new customer relationships

‘we’re not interested in isolating the channels. The reason we’ve invested the way we have is because we want to have a complete offering online, in-store, regular price and off-pricing. We believe that that’s going to allow us to engage with more customers and we also believe particularly in the online and off-price segment that it’s a great vehicle for us to acquire new customers. And we find that a lot of those customers do migrate to a regular price offering as time goes on, and we also have regular price customers that periodically look to shop at the Rack. And as long as we can continue to offer that more robust offering, we believe we’re going to create more lifelong customers.” ($JWN)

Healthcare

The healthcare landscape is shifting, everyone more focused on better quality of care at lower cost

“Pharmacies are increasingly positioning themselves as convenient alternative sites for primary care and offering services to patients to assist them in managing their health. Payers and providers are collaborating in innovative ways to design effective value based reimbursement programs that will slowly shift our fee for service based approach to a care delivery to our payment for value approach tied to outcomes delivered by providers. And consumers are more engaged in understanding the cost and quality of healthcare than ever before.” ($MCK)

Materials, Industrials, Energy

Still too many dry bulk ships to balance the market

“we still say the same thing that the numbers of that available in the waters are too many. We have still vessels coming into the water…demolition has been slowing down since its peak in 2012″ ($DSX)

Diana is sorry for being right that everyone was overly optimistic

“We regret to say that we were once again correct in our way of thinking at the previous conference call where everyone was over optimistic about the market. And we said to you read the sign better and see that the market is not — the things are not so good as they were presented to you being.” ($DSX)

The Dry Bulk market will improve eventually, but unlikely to get better in the next 12-24 months

“even though we assure that the market will improve eventually and it will improve significantly from the level at that we’re now, we are not very optimistic about the next 12 to 24 months as regard to rate, which does not exclude spike in rate, especially spot rate, due to seasonal reasons or other disruptions in the supply stream of ships.” ($DSX)

Private equity money is distorting the market

“big chunks of money that are coming into the picture from private investors and together with the capital market but they have distorted the way of thinking and they create a kind of not normal optimism about the market but influences everybody.” ($DSX)

Low interest rates are also delaying the equilibrium

“there is also the very low cost of the money. If you have interest rates very low, then the equilibrium between the values does not come quickly stronger” ($DSX)

Farm income expected to decline slightly in 2014

“While remaining near long term averages, grain prices and farm income are expected to decrease in 2014. As a result, farm machinery demand is expected to be lower for the year” ($DE)

Miscellaneous Nuggets of Wisdom

Forecasting is a part of business. You do the best you can with the information you have.

“Like any other estimate that we have to make, whether it’s brand inflation or generic inflation or generic launches, et cetera, what we attempt to do is use the best resources we have internal to the company and whatever resources are available externally to create those views…It certainly could be wrong, and the manufacturers don’t typically tell us what they’re going to do.” ($MCK)

Enter new markets with an underdog mentality

“We go in with a lot of humility, it’s not easy to go to another country and we have to win with the customer. So we’re going in with an underdog mentality” ($JWN)

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.