Company Notes Digest 8.12.16

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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: Department Store Rebound?

Macy’s and Kohl’s stocks both jumped after earnings this week, but results were still pretty lousy. They were just less lousy than they were in the first quarter. Kohl’s was characteristically ho-hum, and Macy’s was characteristically optimistic, but Macy’s big initiative is to close more stores than they were expecting. No matter how it’s spun, a company only does that because business is challenged.

As we learned last quarter though, department stores don’t provide the same read on the economy that they may have in the past. In the rest of the economy, activity is still depressed but there are signs that it may be turning up. The election has been a source of uncertainty, but polls may be starting to give an indication of who is likely to win without having to wait until election day.

The Macro Outlook:

Department stores were pleased with less-weak results

“Sales in the second quarter were $5.866 billion, down 4% from last year. On a comp owned-plus-licensed basis, sales were down 2%. This compares to the 5.6% drop we experienced in the first quarter.” —Macy’s CFO Karen Hoguet (Department Store)

“Comp sales decreased 1.8% for the quarter, below our expectations, but significantly improved over first quarter results. Transactions per store were down 4.8% for the quarter.” —Kohls CFO Wesley McDonald (Department Store)

It’s not clear that there’s been a big change in consumer behavior

“In terms of consumer behavior, I think there isn’t any new news there. We had modest improvement in our business and in traffic, but it’s still negative.” —Kohls CFO Wesley McDonald (Department Store)

Weather, for once, has been a positive boost

” weather has been hot this summer and has contributed to the strong apparel sales and perhaps more shopping in general as a way to avoid the heat.” —Macy’s CFO Karen Hoguet (Department Store)

However, things can’t be that great if your best news is that you have decided to close more stores

“We decided to be proactive and to close a larger number of stores this year…We believe we can benefit from right-sizing the company…while it will shrink the company somewhat, these closings will…help us to accelerate our growth.” —Macy’s CFO Karen Hoguet (Department Store)

There are some real green shoots around though

Back to school season has gotten off to a strong start

“We are encouraged by the start of the back-to-school season. We are seeing strength in all categories, but are most excited by the strong trend in denim.” —Macy’s CFO Karen Hoguet (Department Store)

Consumer electronics suppliers are hopeful that the second half will pick up

“We still expect the electronics demand picture to begin to turn in the second half of the year…we do think we’ve seen pretty much of bottoming in electronics business in Asia…The drivers are still the same as we have been talking about…from Apple for example, etc.” —Platform Specialty Products (Specialty Chemicals)

Mining companies may be restarting a little bit of capital spending

“Generally speaking, we expect continued slow recovery in the global economy…However, with that negative note, we are seeing capital spending return.” —Fluor CEO David Seaton (Engineering and Construction)

Settling of the Presidential election will be a positive catalyst for the economy

“Wherever I go around the world, I hear a lot of discussion about the United States presidential election. And I would say, seeing that one calm down, however, it is resolved, but seeing it calm down, I think will be an interesting and positive catalyst for our many businesses, and honestly probably for a lot of other markets as well, so that I would look for.” —Sothebys CEO Thomas Smith (Art Dealer)

Polls may be starting to help ease election uncertainty before November

“We have some very unusual personalities involved in this election. I think they are giving people some concern. I am not going to predict the outcome. But you know, we’re obviously watching the polling very closely. And I think that the election is important, but I think the polling would suggest that we will be in reasonable shape in this election.” —Third Point Reinsurance Chairman Dan Loeb (Hedge Fund/Insurance)

If the economy does pick up, will inflation return as well? Restaurant wages are rising at 3%

“We know wages are going up…And it’s not just the hourly team members which we’re doing. It’s managers at all levels, it’s our shift managers and our supervisors” —Shake Shack CEO Randy Garutti (Fast Food)

“We expect wage inflation of slightly below 3% in fiscal 2017, primarily reflecting wage increases for salary and hourly team members, with a third of this increase from higher minimum wages.” —Brinker CFO Thomas Edwards (Chili’s [baby back ribs])

International:

Brexit hasn’t even had an impact on Britain’s economy

“while we didn’t support Brexit on a corporate level or do we respect the voters’ decision…we’re not actually that worried at all about the future here. We’ve seen no slowdown in our sales levels in UK.” —Liberty Global CEO Mike Fries (European Cable)

European tourism has been hurt by terrorism though

“The main drag to our earnings expectation has been the rapid and steep deterioration of the operating environment in Europe and the negative impact that successive incidences and geopolitical events have had on cruise demand for the region, especially from our core North American consumers.” —Norwegian Cruise Lines CEO Frank Del Rio (Cruises)

Financials:

Lending Club restricted credit to less creditworthy borrowers

“As this recovery gets longer, credit has become more available. And these individuals, in particular have shown a propensity to be building debt…and then continuing to accumulate debt after the Lending Club loan as opposed to leveraging the loan to kind of pay-off their debt.” —Lending Club CEO Scott Sanborn (P2P Lending)

Macy’s has seen some increase in credit delinquencies, but isn’t concerned

“We are seeing some increase in delinquencies, as we had said. But…we’re also trying to grow the portfolio. So there’s nothing concerning happening in the portfolio today, and it is happening as we had anticipated.” —Macy’s CFO Karen Hoguet (Department Store)

Consumer:

Brands are starting to push back against department store promotions

“we will be removing ourselves from all of the department store friends and family sales as well. We think that this is critical for us to really do three things; number one, to protect our brand image. As you know, that channel has become very promotional and…we don’t think that’s the right thing to do for our brand going forward.” —Kors CEO John Idol (Apparel)

The restaurant industry is starting to see a more challenging environment

“We enter fiscal 2017 believing this will continue to be a tough macro environment. We’re not counting on relief from a presidential election or significant improvement in the economy anytime soon. Until household incomes start to see some absolute growth, we believe things will continue to be a challenge for consumers and for our industry.” —Brinker CFO Thomas Edwards (Chili’s [baby back ribs])

Cheaper food at grocery stores may play a role

“I do think this food at home versus food away from home gap does impact it…it’s gotten a lot more cheaper relatively speaking to go get fresh beef at your local butcher and go home and grill it. So that does have a bit of an impact.” —Wendy’s CEO Todd Penegor (Fast Food)

Competition in the packaged food industry is intense

“As an industry we are in an environment where retail competition is intensified in our biggest and most mature markets…our biggest challenge remains the fact that you continue to have a number of categories where consumption trends are working against us” —Kraft Heinz CEO Bernardo Hees (Packaged Food)

Bob Iger still loves the economics of the multichannel bundle

“The multichannel bundle delivers the most value to us and remains a great value proposition to consumers. Therefore, our top priority is to support it and to do what we can to maintain or enhance its value to customers. ” —Disney CEO Bob Iger (Magic Kingdom)

Video game franchises are now judged on their potential as esports

“We think we’ve created a strong character driven universe with big opportunities beyond just the game. We think Overwatch has strong potential as an esport.” —Blizzard (Activision) CEO Michael Morhaime (Video Games)

Streaming music is becoming a tough business

“I think the overwhelming drive in the digital music space is that you have several…big players who are…likely to further commoditize the market. Spotify did something, like, for the last year, $3.54 of ARPU per month and had 82% or 84% content costs. That sounds like a very hard business to me…[Amazon] Prime has an enormous amount of music if you are a subscriber that is embedded in that $99 annual fee. That is surely a commoditization of music…so, I think that subscription space is very hard.” —Liberty Media CEO Greg Maffei (Media)

Technology:

Fashion watch brands are preparing to make a big push into the wearables market in the second half

“The next three months are really going to amount to unprecedented launch in wearables. So we’ll have eight brands across three product categories, 100 SKUs, 40 countries, 20 languages, all launching in the next three months…what we’ll see there is hybrid smartwatches and trackers across eight brands, so Fossil, Michael Kors, kate spade new york, Armani, Diesel, Misfit and Chaps by Ralph Lauren” —Fossil CSO Greg McKelvey (Watches)

The web is mature

“the web is mature and so desktop is in slight decline and mobile web growth is a little soggy there, as everyone moves over to app.” —Yelp CEO Jeremy Stoppleman (Crowd Sourced Reviews)

Industrials:

The auto industry is concerned about the resale value of leased cars

“I have friends who are car dealers and probably you have friends who are car dealers. They are still very bullish, but, of course, that’s their part of the food chain. They are supposed to be optimist. So I remain optimistic, but I don’t know what’s going to happen with resale values.” —Amerco CEO Ed Shoen (U-Haul)

Materials, Energy:

Most oil companies say that $60 oil is necessary for growth

“We believe $40 oil will not provide enough cash flow or investment return to overcome the combined effect of production decline and demand growth worldwide…we continue to believe the U.S. horizontal oil industry as a whole needs a sustained $60 oil price…to deliver a moderate level of growth.” —EOG CEO Bill Thomas (Oil & Gas)

But EOG says that it can grow production at 10% per year at $50 oil

“Due to the sustainable gains in well productivity and cost, we can grow oil production at a 10% compound annual growth rate at $50 oil. At $60 oil, our compound annual growth rate jumps to 20%.” —EOG CEO Bill Thomas (Oil & Gas)

And Apache said that volumes could grow above $45 oil

“I think above $45 this year, you would have seen our volumes grow and been able to do that.” —Apache CEO John Christmann (Oil & Gas)

Miscellaneous Nuggets of Wisdom:

It’s easy to make friends when you sell $1 for $0.90

“A few former sales employees have told us that the customers liked Atmel. Well, if you allow me to sell a large amounts of $1 bills for $0.90, I can get a lot of love from the customers too. Microchip’s customer relations are built on charging a fair price for our proprietary value-added products. There’s nothing wrong with some healthy and constructive tension with customers on the pricing front.” —Microchip CEO Steve Sanghi (Semiconductors)

Full transcripts can be found at www.seekingalpha.com