Company Notes Digest 5.23.14

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

Home Depot spoke perhaps the four most consequential words of the week

“May sales are robust.” ($HD)

Mastercard also confirms that that the first few weeks of May are tracking well

“May looks like — the first couple of weeks of May looked like April more than the first quarter. So, the U.S. looks like it’s there in that form” ($MA)

Everyone agrees that weather was to blame for Q1

“much of the U.S. and Canada had an even colder spring and this had a significant impact on our sales.” ($HD)

Some retailers had more to blame than the weather though

“we didn’t call out weather. We — based on the fact that we’ve got some real issues in this industry has some very big issues in the golf business per se, and what was going on in the hunt business, we didn’t — we didn’t want it to look like we were hiding behind the weather” ($DKS)

“the retail environment is changing dramatically and consumer shopping patterns are changing fundamentally. This has been particularly severe in the teen retail sector. Mall traffic remains a significant headwind as the Gen Z customer no longer needs the mall to socialize and apparel preferences continue to focus on individuality and uniqueness.” ($ARO)

It’s also still a promotional environment

“We continue to see that the market is promotional which is why we’re working so hard as Julie said to take costs out of our supply chain and to develop inspiring and appealing products for our customer.” ($WSM)

Ross stores argues that retailers should never blame the weather

“I think the Midwest is a good case example of why retailers should never blame the weather. We mentioned the weather because obviously it was relevant in Q1. But when we look at the Midwest, there are lots of other things that can drive your top line certainly over the period of this quarter that can trump weather.” ($ROST)

High income consumer doing just fine

“The A malls for us are out trending the Bs and Cs. Actually from an income level, the higher income consumer group actually performed very nicely overall.” ($ARO)

The middle/low income consumer still having difficulties

“We’re not economists. But what we know is the customer – the customer who is the moderate base customer appears to have some difficulties right now and so, if you’re — the word is health, they seem to have a little bit of a health problem right now.” ($ROST)

It’s not a good sign for the average worker when companies are cutting jobs to improve productivity instead of out of financial necessity

“this actually has nothing to do with our confidence in the business. This has to do with really now understanding the opportunities that we have to make this company better…we need to run this company more efficiently, not only for the benefit of cost…but frankly in terms of ease of doing business, ease of working here and faster more nimble decision making. We’re going to have to be quicker and faster and more nimble to compete in this new world order. And by the way having a lower cost structure is an added benefit to that.” ($HPQ)

Financials

TD points out some “frightening” data points in the US mortgage market

“the overall mortgage market is clearly challenged in the U.S. as you’ve seen some signs that that’s frightening right now in terms of application volumes through the industry and so on.” ($TD)

But, anecdotally, starting to see some signs of an uptick

“on the mortgage portfolio I don’t want to give you information that’s not sort of solidly empirically rooted. I can tell you that anecdotally you are starting to hear about a bit of an uptick.” ($TD)

There may be some signs of life for consumer credit in HELOCs

“We saw some HELOC improvement in the late part of the quarter, maybe linked to this lock-in phenomenon that you hear about where people don’t want to move because they are locked into really low rates, but they are renovating and improving their current houses and so on.” ($TD)

Credit quality can’t stay strong forever, but good times may still have legs

“Credit has continued to be strong and more favorable than we expected across our retail and commercial portfolios and on both sides of the border. We said before, this trend cannot continue indefinitely, but it may have a while to go.” ($TD)

50% of transactions in the US are still in cash

“even in the U.S., 50% of the transactions are still with cash. So it’s not as in the U.S. has converted electronic payments ubiquitously, in fact, the only countries that have really done that well are the Nordics and Korea, for reasons of government support and pushing it. But everybody else, U.S. 50%, Brazil is 80%, Japan is 80% cash, Germany is 80% cash.” ($MA)

Consumer

JC Penney’s improved stature creates a headwind for other retailers

“Look, it’s certainly not a plus. It’s not — we try to quantify it when they weren’t doing as well and we had difficulty quantifying it, but we knew it was helping.” ($ROST)

Toronto Dominion says that Target’s fortunes are improving too

“we are already starting to see Target sales improving.” ($TD)

It’s hard to make money in e-commerce selling a low AUR product

“Secondly, e-commerce, so, we continue to look at e-commerce. We run a business that has a $10 average unit retail. And when we put together the economics currently, we think it’s very hard for people to make money. Not just shipping cost but return cost, processing cost, marketing cost etcetera.’ ($ROST)

There may have been some slowing in home related spending

“you’ve got changes in the sectors, furniture and furnishings and fixtures which were very strong a year and a half ago which was how I started calling out that housing was recovering in earnings calls, that seems to have slowed down which kind of fits exactly what’s going on in the housing market right now.” ($MA)

Kitchen remodeling was a hallmark of the housing boom

“if you go back to 2005 and 2006, one of the categories that was really the hallmark of turns and sales were special order kitchens; people would buy home, they would invest in the kitchen, they do upgrades and then they turn the home. That’s actually the category for us that got hit the hardest over the housing crash.” ($HD)

Today people aren’t taking on quite as ambitious projects

“you got to make sure the infrastructure of your home is right, you may paint, you may do some gardening. So I think it’s going to be different as we go through this housing recovery than what we saw at the height of the housing market” ($HD)

If you’re in the market for golf clubs now is probably a pretty good time to buy

“The more concerning and unpredictable issue is the golf business. We anticipated softness, but instead we saw significant decline…We don’t feel we found that bottom yet in the golf sales number…we plan to aggressively manage our higher than planned inventory level so that as we enter the back half of the year we are well positioned for the holiday season” ($DKS)

Technology

HP seeing signs of stabilization in PC market

“Overall, we’re seeing a slowing market contraction and signs of stabilization, particularly in commercial PCs.’ ($HPQ)

Consumer laptop sales grew slightly for the first time in nearly 4 years

“consumer notebook revenue grew slightly for the first time since the fiscal 2010 third quarter.” ($HPQ)

EMEA PC market stabilizing too

“by the way there is some strength in [EMEA] flat year-over-year for the first time in seven quarters. So the market is definitely stabilizing.” ($HPQ)

People are realizing that tablets can’t do everything

“companies are realizing there is a need for a productivity tool that’s different than just a tablet.” ($HPQ)

Materials, Industrials, Energy

There needs to be a big increase in ag productivity to meet growing global demand for corn

“We have around, globally around 300 million acres of productive corn acres globally and in order to meet this 500 to 600 million bushel a year increase in demand. We would have to increase productivity on those acres by 2% a year. So we’ve never done that before. That’s never happened” ($MON)

Can’t meet new demand by bringing on new acres of arable land

“we’re not to be able to bring significant amount of new acres into production. It’s going to have to come from productivity on the acres that we have or a shift in acres from other crops into corn.” ($MON)

It’s been a challenging planting season so far

“let me give you a read on where we are this season, this year and kind of a mid season checkpoint. Again this has been one of the most challenging Ag environments we’ve had, with significant headwinds around acres, around currency, commodity price, political unrest” ($MON)

Miscellaneous Nuggets of Wisdom

Build a flexible business model so that you can manage through uncertain environments

“it’s hard to predict, but what I want to talk about again is the power of our operating models that allows us to be flexible, which I think is key in this retail environment.” ($WSM)

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.