Company Notes Digest 5.20.16

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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: Over-Stored

Retailers continued to report soft earnings last week. Most seem to agree that the softness is primarily focused on the apparel industry and that this is not a broader consumer issue. However, as retail spending moves increasingly online, it’s clear that the US has too many retail outlets and that the industry will need to shrink over time. That could pose problems for those with investments in the sector.

The Macro Outlook:

As everyone knows by now, retail has been soft

“a very strong start to the quarter in February was overcome by softer-than-expected pre-Easter business and then a further deterioration in April versus our plans” —Kohls CEO Kevin Mansell (Department Store)

“post Easter sales and traffic trends softened noticeably consistent with what you’ve heard from many of our competitors.” —Target CEO Brian Cornell (General Merchandise)

“From a macro perspective, we did experience a deceleration in trends through the quarter” —L Brands CFO Stuart Burgdoerfer (Victoria’s Secret)

Walmart was pleased with a 1% comp

“We’re encouraged by the Walmart U.S. comp and believe it is attributable to real improvement in our store experience. Our customers are giving us positive feedback and I’m seeing it myself on store visits and you can see it in the traffic numbers. We delivered comp sales of 1% in Walmart U.S. due to continuing traffic increases which improved 1.5% this quarter.” —Walmart CEO Doug McMillon (General Merchandise)

It’s not obvious to everyone what’s causing the weakness

“to be honest with you, Paul, is that right now I think we’re having a hard time determining how much of our underperformance was more related to macro factors” —Kohls CEO Kevin Mansell (Department Store)

Consumers are paying more at the pump

“We know as the guest and our consumer has moved through the course of 2016, prices of the pump, fuel prices have resin and that certainly an impact.” —Target CEO Brian Cornell (General Merchandise)

But most seem to agree that this is not a broader consumer problem

“Obviously, the retail industry is going through a rather painful period of rationalization. Rarely have I read so many negative articles about our industry. Unlike much of what has been written, I don’t believe the consumer is the problem. I think our customer is in relatively good shape.” —Urban Outfitters CEO Richard Hayne (Apparel Retail)

Weather may be one contributing factor

“So far in May, our retail segment comp is lagging behind the first quarter trend, and I’m going to attribute that, as far as I can tell, to weather…in the first week of May, we had six out of seven days of rain here in the Mid-Atlantic and temperatures were somewhere between 10 and 20 degrees below normal.” —Anthropologie CEO David McCreight (Apparel Retail)

“A cold snap late in the quarter interrupted favorable spring weather conditions and caused a slowdown of residential sales.” —Toro CEO Michael Hoffman (Lawn Mowers)

Consumers may also just be spending on experiences rather than goods

“when we look at our categories, and we look at what customers are spending, you’ve heard the data all week, it’s entertainment, it’s experiences, it’s home beautification, and apparel was down because of the share of wallet with other places.” —JC Penney CEO Marvin Ellison (Department Store)

Home Improvement is a particularly strong segment

“our view of the macro environment remains consistent. We believe that housing data indicates continued tailwinds for our business.” —Home Depot CEO Craig Menear (Home Improvement Retail)

“the outlook for the home improvement industry remains positive…housing remains a bright spot ” —Loews CEO Robert Niblock (Home Improvement Retail)

But are consumers “spending” on their homes or are they “investing” in them?

“we continue to capitalize on a favorable macro backdrop and consumers increasing desire to invest in their homes.” —Loews CEO Robert Niblock (Home Improvement Retail)

“within overall categories today’s consumer, our guest is reinvesting in their homes. They’re spending money on home improvement.” —Target CEO Brian Cornell (General Merchandise)

Whatever the cause, retailers are having to take big markdowns on inventory

“the clearance and promotional environment is really noisy. There’s a lot of excess product out in the marketplace…There’s some heavy, heavy discounting going on.” —Nordstrom President Blake Nordstrom (Department Store)

And the weakest players are struggling to survive an “over-stored” environment

“Simply put, America is over-stored and overstocked. We have approximately 10 times more retail space per capita than our European counterparts and more direct-to-consumer choices too.” —Urban Outfitters CEO Richard Hayne (Apparel Retail)

“Time to recognize the over storing of America is coming to an end and that the sooner we reduce the store count the better, it will make retailer stronger, more focused and more profitable.” —Perry Ellis Chairman George Feldenkreis (Apparel)

“I think the industry has definitely been over-stored. We’re making some big strides with this right now with over 20 million square feet coming out of the marketplace.” —Dicks Sporting Goods CEO Ed Stack (Sporting Goods)

International:

A move to a consumer led economy could potentially increase China’s import demand

“It is also increasingly becoming a consumer economy with a very large emerging middle class with wealth and a taste for imports. We believe that presents an opportunity for us as China becomes more than just an export market.” —Expeditors International CEO (Freight Forwarding)

Brookfield Asset Management’s CEO says that Chinese capital investing in the US is not a sign of capital flight

“we are seeing is very significant amounts of capital being invested from China to other more developed markets…most people interpret that that as people taking money out of China and wanting to have it out of China. And that’s possible some of the money is that. But a lot of it is that the institutions in the country have been encouraged to invest outside of the country.” —Brookfield Asset Management CEO Bruce Flatt (Asset Management)

Rockwell Automation is seeing improvement in Europe

“So I would say that we are seeing improvement [in Europe] and it’s been driven from both emerging Europe and then specific countries in mature Western Europe, particularly now that the south has come back a little better, strengthen in Italy, particularly in some of the home and personal care OEM segment. France has turned positive as well as Spain.” —Rockwell Automation CEO Keith Nosbusch (Industrial Automation)

Financials:

The Fed made it pretty clear that markets are underestimating the potential for a June hike

“Some participants were concerned that market participants may not have properly assessed the likelihood of an increase in the target range at the June meeting, and they emphasized the importance of communicating clearly over the intermeeting period how the Committee intends to respond to economic and financial developments.” —FOMC April 2016 Meeting Minutes (Central Bank)

If data is strong, most FOMC members agreed that it would be appropriate to increase interest rates next month

“Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee’s 2 percent objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June” —FOMC April 2016 Meeting Minutes (Central Bank)

ICE says that its IPO pipeline is rebuilding

” I’m pleased to say that we’ve already seen a handful of IPOs early in 2Q and our pipeline continues to build.” —Intercontinental Exchange CFO Scott Hill (Securities Exchange)

Consumer:

E-commerce is not as profitable as brick and mortar

“I’ve been an early I guess realist on e-comm versus brick-and-mortar. It’s not as profitable and I think everybody is coming around to that.” —Kohls CFO Wesley McDonald (Apparel Retail)

“we’re looking at ways to improve how we consolidate the distribution side. But, it is a challenge, eCommerce definitely is a lot more expensive versus brick and mortar.” —Perry Ellis CEO Oscar Feldenkreis (Apparel)

Off price retailers benefit from full price retailers’ pain

“we are in one of those modes right now where one of our most difficult challenge is controlling how much we buy right now, because the markets are plentiful and they are plentiful with spring summer goods coming up. Based on the environment going on that’s probably no surprise.” —TJX CEO Ernie Herrman (Off Price Retail)

“the department store sector…their business is way off…so history would show that, there would be plentiful supply as we go forward.” —Ross Stores CEO Barbara Rentler (Off Price Retail)

Once you train your customers to expect promotions it’s difficult to stop them

“when you start tightening up in promotion, you are playing a game of chicken with your customers, and they try to wait you out.” —Gap CEO Arthur Peck (Apparel Retail)

Fast Fashion is probably partially to blame for Department Store woes

“Certainly the women business has been more of a challenge especially with the advent of the international competitor like Zara, H&M, et cetera, which unquestionably have taken market share away in the women’s and junior business from change on department.” —Perry Ellis Chairman George Feldenkreis (Apparel)

The apparel industry has been dealing with deflation for 25 years

“I think that I was talking about the industry, where there has been price deflation. And I think the price deflation is going on for probably 20 to 25 years now.” —Urban Outfitters CEO Richard Hayne (Apparel Retail)

Jack in the Box said that the impact of McDonald’s all day breakfast is starting to moderate

“it was certainly compounded though by the aggressive marketing of the breakfast all day promotion from one of our major competitors. But as we move here into Q2 and Q3, we do see that the impact on the 10:30 to noon timeframe…has waned. And we also see that the impact outside of that timeframe has been negated.” —Jack in the Box CEO Leonard Comma (QSR)

It takes a long time to fix a bad Real Estate decision

“we will not take real-estate at economics that don’t fit our model because you live with that for 10 years, you can’t fix bad real estate. You can make a bad buy from a merchandizing standpoint and you can mark it down and you can do whatever you need to do with it to get it out of the system. Bad real estate, you got it for 10 years.” —Dicks Sporting Goods CEO Ed Stack (Sporting Goods)

Technology:

Marc Benioff said that AI is the next big thing for technology

“when I look forward, what I see is an AI first world and for every customer is going to be able to get whole another generation of productivity out of artificial intelligence, machine learning, and deep learning.” —Salesforce CEO Mark Benioff (CRM)

Walmart said it saw some improving trends in electronics

“While entertainment continues to be a sales headwind, we did see some improving trends in electronics” —Walmart CFO Brett Biggs (General Merchandise)

Industrials:

Industrial comps will start to get easier as we go through the year

“traffic comparisons will start to get easier as we go through the year but that doesn’t change the fact that the markets are very tough right now for our customers” —Westinghouse Air Brake Technologies CEO Ray Betler (Railroad Brakes)

Agricultural equipment markets may be stabilizing

“Although the underlying strength of the ag market remain subdued, conditions appear to be stabilizing.” —Raven Industries CEO Daniel Rykhus (Industrial Technology)

Materials, Energy:

Fertilizer prices may have bottomed

“We think that things have bottomed, if that’s the right term in terms of sentiment, in terms of potash prices.” —Potash CEO Jochen Tilk (Fertilizer)

Cement prices are rising too

“the price environment is strengthening. We have driven a clear directional shift in pricing in Q1 2016.” —LafargeHolcim CEO Eric Olsen (Cement)

Dry Bulk shipping companies fear for their survival, which means the industry may be at the bottom

“One thing is for certain that we have reached the level where everyone and by everyone I mean every shipping company feels like is not very well prepared for what is coming. And this is for me the absolute bottom of the market. It’s a good thing that almost everyone is pessimistic about the market because the cleansing is going to happen.” —Diana Shipping COO Ioannis Zafirakis (Dry Bulk Shipping)

Miscellaneous Nuggets of Wisdom:

Irrational competitors with deep pockets create a challenge for rational players

“The nightmare scenario for any businessman is that you have a rich, dumb competitor” —Liberty Companies’ Chairman John Malone (Billionaire)

Know your downside

“Always analyze the downside and structure everything so that you live to fight another day.” —Liberty Companies’ Chairman John Malone (Billionaire)

Prioritize your family

“I let business take too large a part of my life for a period in my life and probably neglected the kids more than I should have.” —Liberty Companies’ Chairman John Malone (Billionaire)

Full transcripts can be found at www.seekingalpha.com