Company Notes Digest 8.22.13

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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

Toll Brothers is still bullish on housing:

“It doesn’t appear as though rising interest rates have hurt our business.” ($TOL)

REALLY bullish–willing to bet that house prices will double again:

“Every single time we’ve come out of recession, we have almost doubled, and in some cases, tripled in the price of homes. Can that happen again? Well, it seems as though it’s unlikely. My bet is that it will.” ($TOL)

Unbelievably, the tightest labor market in the country could be in construction:

“Fortunately, in most of our markets, while labor has been tight, we are managing it. We have had to pay a little bit more, but we have long-term relationships with many trades.” ($TOL)

TOL has every reason to believe that this is early innings in a normal 5-7 year cycle:

“We think we’re in the early part of the cycle. There’s no reason to believe that this time it’s different. That it’s going to be a 2-year cycle or a 3-year cycle instead of an average cycle, which runs 5 to 7 years. And so we look forward to continued upside for at least a couple of years” ($TOL)

But every boom has a bust:

“Unfortunately, that also includes the other side of the mountain. So the sooner or later, we’ll be looking at the — looking down instead of looking up.” ($TOL)

Confirming TOL’s sentiment, Home Depot had a monster quarter:

“Comp sales were positive 10.7%…first double-digit positive comp in our business since 1999” ($HD)

It was so good it actually created operational challenges:

“I think it was a difficult quarter. It’s kind of the difficulty that want to have. You want to be challenged by sales but it required a lot of flexibility and responsiveness…some of us were here last time we did a double-digit positive comp and our execution wasn’t like it was today…our suppliers did an awesome job of working with us to make sure that product was flowing and be able to take care of the demand spikes. We couldn’t have done it without them.” ($HD)

For now, the Chinese seem to be breathing a sigh of relief that they escaped a hard landing:

“when I was there a few weeks ago, there was a quite confidence on the part of customers. So what we’re seeing there right now is an indication of relative health in the Chinese economy and much less concern around the potential for hard landing now than there would have been a few months ago” ($BHP)

And they are ready to get back to spending on infrastructure:

“in terms of steel and iron ore in China, the steel production has been running above where we thought it would be running at this time of year. We think we understand why, and it comes down to strong investment and strong construction” ($BHP)

If China is looking better than India, it could be because India has been particularly heavy handed with price controls:

“In India, the bigger issue…is that the government has imposed a very low ceiling on pricing for some of the stents” ($MDT)

Financials

Even though rates have risen, money is still basically free:

“Our buyer…They have plenty of room to [use more leverage]. They choose not to. That’s been the case even with a 3.5% mortgage, they’ve stayed at 70% [LTV]. We would have thought they would have levered up then and taken advantage of free money. 4 5/8% is still pretty close to free.” ($TOL)

And becoming increasingly more available:

Banks are trying to fill the hole of shrinking refi business with aggressive underwriting on purchase loans:

“since refis have slowed down, we’ve seen investors get more aggressive in trying to do business with us in terms of some loosening” ($TOL)

Especially in the non-conforming mortgage segment:

“We have a ton of jumbo visibility. We’re not constrained really at all in jumbo availability. People are being aggressive…the spread on a conforming loan is 4 5/8. On a jumbo today is 4 3/4. The spread is miniscule, and that really reflects, I think, that the banks are keeping a lot of the jumbo in portfolio.” ($TOL)

Consumer

Thanks to a tough second quarter that caught retailers off guard, Ross sees a more promotional environment in the back half of the year:

“I think coming out of the second quarter, where all the major department stores and discounters struggled in the second quarter. They have plenty of time to be preparing ramping up for a more promotional fourth quarter than they did — than they were able to for the second quarter, which kind of — I think quite a lot of people caught offguard.” ($ROST)

Be prepared to hear about the shortened holiday selling period:

“The fourth quarter, which has a compressed holiday selling period due to 6 fewer shopping days between Thanksgiving and Christmas this year.” ($ROST)

Parents have been procrastinating on back to school shopping:

“It seems like, the last 3 years, we’ve seen back-to-school start later and later and later in the season. And I think in a few years, July is not going to really be much of a month for back-to-school. I think it’s kind of pushing closer to school.” ($SPLS)

A lot of talk about omni-channel out of retailers:

Delivery expenses are growing, but net-net shipping costs still beat rent expense:

“delivery expense is greater than delivery income. And certainly, we go back 5 years, that wasn’t the case, and the trend is pretty clear. Fast and free, I think, is the expression that’s been used a lot…when you…consider the occupancy cost of bricks and mortar, you can afford to have quite a bit of shipping baked into every order and still come out ahead…” ($URBN)

Eventually, shipping is going to be free to the consumer, and retailers need to view the expense as a cost of doing business:

“So we intend to continue to press for at least fast, if not totally free. And we’re pretty convinced that in the next 3 to 5 years, it will be both fast and free. And we will absorb that cost as part of doing business, just like we’ve absorbed rent as part of doing business” ($URBN)

Retailers still see physical locations as a competitive advantage:

“we believe our more than 2,000 store locations throughout North America are valuable convenience for customers and can and should be a competitive advantage for us” ($HD)

Best Buy is ready to turn its locations into a network of distribution centers. Their employees are already trained:

“the store associate has already learned by buy online pick up in store how to have a pick ticket dropped to the floor and to be able to pick the order and put it in the basket. Now, the next phase of that is to put it in a box, create a shipping label for UPS, and have it distributed” ($BBY)

Small tweaks just need to be made to the infrastructure:

“our system – and this is very common in retailers – when inventory is actually sold, it takes up to 4 hours to be able to update the inventory…we had to get that timeframe down to 15 minutes before we were comfortable rolling [ship from store] out.” ($BBY)

Some purchases will never be made online though:

“our buyers, while they play online, they still come out to see us. This is not like buying an automobile online. It’s the biggest purchase of their life, and they will come out.” ($TOL)

JC Penney is confident it has enough money to survive:

“as we look through the end of the year, the $1.5 billion of liquidity that we have projected we’re not assuming that we need any additional financing.” ($JCP)

Technology

Flat comps for TVs is cause for celebration:

“comparable store sales for the television category were flat in the quarter, which is considerably better than the trend we’ve seen over the last few years…We believe that it’s been three years since the comps in TVs were flat” ($BBY)

PCs appear to be in a death spiral (he typed on his laptop…):

“In terms of the categories, it’s a combination of PCs, because of its size, and then the related businesses, computer peripherals, software, things like that, that are just — they have no chance to grow, they’re just deteriorating fast.” ($SPLS)

The server business isn’t exactly healthy either:

“The Server business has been under pressure for some time. The pricing in the marketplace is as intense as I have seen it since I have been at HP.” ($HPQ)

Technology has made Staples its whipping boy:

“they’re better controlling their spend than they ever have and also the mix of what you’re selling them. So everything from Board of Directors’ presentations that used to be sent out in hard copy in binders are now being done digitally on tablets. So it’s a change in technology. It’s impacting our core business. That’s why when we look at NAC in this quarter, the headwinds that we had to fight were negative office supplies, ink, toner and paper, all slightly negative, in spite of what I would argue as slight market share gains.” ($SPLS)

Healthcare

Hospitals are getting more organized about how they make purchases. More bureaucracy=slower decision making=a headwind for med device companies:

“the biggest issue was getting people on contracts. And that’s the change that’s occurred in the industry over the last several years where what used to be….the doctors [would] make [the buying] decision…now in hospitals, these committees are more engaged in that process and ensuring that the products have the technology. So as he indicated, that slows down the process slightly. It doesn’t mean you don’t get the price increases. It just means that you have to go through certain processes.” ($MDT)

Materials, Industrials, Energy

Commodity markets will eventually find balance:

“there has been a sharp decline of major mining equipment — sales of major mining equipment, which is one of the best indicators of future supply. In the medium term, this will inevitably lead to lower growth in supply and to more balanced markets. And the companies that will prosper are those able to invest prudently throughout the cycle” ($BHP)

Miscellaneous Nuggets of Wisdom

It doesn’t matter how much market share or history your company has. When you lose a customer’s trust it takes a long time to gain it back:

“in 2011 J. C. Penney did business at least once with over 50% of the families in America. We enjoy a 111 year old tradition of being a trusted destination…This is however a journey. There are no quick fixes to correct the errors of the past. It’s going to take time to get fully back on the right track across the Company” ($JCP)

Always focus on understanding your customer better:

“we continue to focus on who she is and ways that we can continue to outfit her and understand her better” ($URBN)

Give your customers a great experience, because word of mouth is the best form of marketing:

“we’ve always thought the best marketing for us is sort of unpaid marketing, word of mouth. And that really comes from making sure we have great value in the stores, the customer buys the goods, they go and tell their friends, et cetera.” ($ROST)