Company Notes Digest 6.29.17

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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 was a light week for earnings reports since it’s the last week of the quarter and next week is a holiday. Homebuilders sound very positive on housing markets, but office furniture supplier Steelcase saw hesitation from its large customers. In retail, it’s Amazon’s world and everyone else is just living in it.

The Macro Outlook:

We’re seeing a “definitive reversion to normal” in the housing market

“Overall, the attitude of our customers continues to confirm the sense that we have as business operators that the economic environment in general is strong and stable and improving. The slow and steady though sometimes erratic market improvement that we have seen for the entirety of this recovery continues to seem to be giving way to a more definitive reversion to normal.” —Lennar CEO Stuart Miller (Homebuilder)

Animal spirits and confidence have returned

“a lot of what’s driving people to the market is a sense of confidence, it’s animal spirits…the confidence that people bring with them to the table about whether their job is stable and whether there’s going to be a wage increase or there is opportunity for them to move and be mobile to the next job opportunity.” —Lennar CEO Stuart Miller (Homebuilder)

Millenials are forming homes after all

“I think for the longest time it was in great debate. What will this generation do in terms of homeownership. You could certainly see a trend at the time where rental, the household formation…it wasn’t happening. Where was this generation, this millennial going to set their roots. And what we’ve seen is that the cycle essentially was delayed about 6 to 7 years. And right now it’s really starting to come to fruition. And that fruition is as they are now moving into the jobs that they have secured as they are now forming families, as they are now getting their feet underneath them, we’re seeing that formation happen. And we are seeing them move into the homebuying market just as every other generation has.” —Home Depot VP Paul Deveno (Home Improvement)

There’s relatively low inventory

“What remains especially striking is the extremely low levels of resale inventory available. At 4.2 months nationally, and well below that in many of our submarkets, resale inventory is insufficient to meet demand. It is one of the key factors underlying pricing power in most of our markets, and we plan to continue maintaining pace…while increasing price when appropriate.” —KB Home CEO Jeff Mezger (Homebuilder)

And so homebuilders have pricing power

“We continue to feel that limited supply and production deficits from the past years are now intersecting with land and labor shortage and we started to see some pricing power as we have moved through the selling season, somewhat offset however by construction costs increases. Additionally the economic realities of a constrained and supply of housing options and the economic realities of higher rental rates are beginning to have a rational impact on decision making for the first time home buyer as millennials are continuing to come to the housing market.” —Lennar CEO Stuart Miller (Homebuilder)

Business investment may not be as robust as anticipated though

“Our analysis of our orders reveals a significant decline in large projects and large customers…Yet we don’t see any evidence of a broader slowdown in the economy…So, then as we think about it, we say well, what’s going on in our industry, what’s going on with our customers. It could be that some are just pausing, hesitating and we have some anecdotal stories around that. The customers are waiting to see what happens with healthcare reform for example…If you are interested in growing and you need to hire workers in the U.S. you might be interested in immigration reform..So, we have heard anecdotal stories like that.” —Steelcase CEO Jim Keane (Office Furniture)

If Washington doesn’t pass any legislation it could impact confidence

“Not yet, but if this continues to go like this where no major legislation is passed. It will impact confidence, there is no question about that.” —Korn Ferry CEO Gary Burnison (Executive Search)

Wage inflation pressures are mounting

“Labor, we continue to see some pretty good inflationary pressure…there’s 3% to 4% wage inflation in our labor number, right now; we’re able to offset some of that with productivity enhancements. But labor continues to be something that we’re focused on” —Darden CEO Gene Lee (Restaurants)

Is the Fed starting to get concerned about high asset prices?

“…elevated valuation pressures, especially when combined with high leverage, can lead to excessive credit growth. When asset prices are appreciating rapidly and expected to continue to do so, borrowers and lenders are more willing to accept higher degrees of risk and leverage” —Federal Reserve Vice Chair Stanley Fischer (Central Bank)

International:

Europe is doing ok, but there’s uncertainty in the UK

“I met with many-many business leaders in Europe last week actually, I think there’s a great hope in France…and in the UK specifically I think there’s uncertainty…so I would say it’s kind of hopeful in France, steady-as-she-goes in Germany and uncertainty in the UK.” —Korn Ferry CEO Gary Burnison (Executive Search)

Mark Carney is talking about removing stimulus

“Some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional.” —BOE Governor Mark Carney (Central Bank)

Financials:

Open floor plan offices need quiet spaces

“as people move towards open plan there is also a counterforce which is that people are seeking privacy and they are seeking spaces they can create that are flexible as well as reconfigurable that can create rooms for people to – in which they meet or places where people can kind of get away and concentrate for a bit.” —Steelcase CEO Jim Keane (Office Furniture)

Consumer:

Retailers are investing heavily just to tread water

“So it’s unfortunately from a bottom line perspective is that as the world evolves these investments aren’t producing growing earnings but they are sustaining our relative position in the landscape… but these investments need to be made. If we didn’t make these things, we won’t exist today.” —Bed Bath and Beyond CEO Steven Temares (Retail)

Consumers want more heavy packages shipped to them

“We also continue to experience growth in demand for large, heavy package delivery as a growing array of items are now being sold online. Furniture, mattresses, sports and exercise equipment are increasingly moving to the FedEx Ground network for residential delivery. This trend has accelerated over the past 12 months, and we have made adjustments to facilities and investments in sortation technology that enable outstanding service for these larger packages. We’re continuing to analyze pricing and surcharges for oversized packages to ensure that we have appropriate pricing for the service provided.” —FedEx EVP Rajesh Subramaniam (Shipping)

There (probably) wont be just one winner in e-commerce

“there is not just going to be one customer, even though that lot of talk about the Amazon and Whole Foods deal, I mean, all of our major customers have e-commerce components. As we have experienced around the world, there are variety of customers who participate in e-commerce and so it’s not going to be just one winner.” —General Mills CEO Jeff Harmening (Packaged Food)

There (probably) are still some segments of retail that Amazon won’t play in

“the only way Amazon’s in our world right now is through Amazon Prime delivery…Our research tells us that guests still want to come to restaurants. Believe it or not, millennials still want to come to restaurants.” —Darden CEO Gene Lee (Restaurants)

Technology:

Mobile video consumption is growing by 75% per year

“last year we saw video growth grow by 75% as measured by gigabytes on the network. So as an industry, we always hear that 75% to 80% of video, of the data on the network in the next five years is going to be video and we’re seeing it play out.” —AT&T SVP Scott Mair (Telecom)

Miscellaneous Nuggets of Wisdom:

Strive for simplicity

“Don’t underestimate how simplifying our business has helped us improve execution…the key to our guest count growth is better execution through simplicity.” —Darden CEO Gene Lee (Restaurants)

Full transcripts can be found at www.seekingalpha.com