Company Notes Digest 8.22.14

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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

Home Depot was upbeat about the consumer

“customers clearly feel better about investing in their homes.” ($HD)

The company sees housing as a modest tailwind

“We believe the housing market remains a modest tailwind for our business. We had growth in transactions and ticket for both the quarter and the half. Both our Consumer and Pro businesses grew” ($HD)

It’s particularly encouraging that big ticket did well

“we saw an acceleration of big ticket transactions. These results support the view of a continuing recovery in the U.S. home improvement market.’ ($HD)

Gap thinks consumers are doing slightly better too

“I think the consumers feeling slightly better, which now we think it’s good for the overall industry.” ($GPS)

Many retailers are still complaining about the promotional environment though

“reflecting a retail environment in which a broad set of competitors are leaning heavily on promotions and a consumer environment in which shoppers are still cautious and focused on deals.’ ($TGT)

“I think the environment, I would say, like in the second quarter it felt a little more promotional, I think, than last year. And I think the business environment is a little mixed out there” ($TJX)

Some retailers are trying to take a stand against being promotional

“The final initiative was the back away from what had become incessant promotional activity and stand for brand integrity and authenticity.” ($URBN)

Target implies that the promotions may be easing with back to school

“while it’s still early, we have been pleased with the results so far in the back-to-school and back-to-college season in which we have seen improved sales trends from guests focused on the occasion rather than promotions.’ ($TGT)

The low to moderate income consumer is still struggling

“On the consumer piece, no, we haven’t really seen any major shifts from Q1 to Q2, but I think, it’s pretty apparent that the low to moderate income customer is struggling. I think, you’re seeing that in the – in some of the results that are being posted by the [ph] moderate apparel (25:17) retailers. So, I don’t think we have anything to add to that other than I think that that customer is challenged economically and finding this environment difficult.’ ($ROST)

“As you’ve likely heard from many retailers, the consumer continues to be under pressure…It’s really this long and stubborn pressure on the middle-income customers and especially the lowest income customers, and it’s been several years now and there is somewhat – it’s going to get better. I’m optimistic, but there’s not much light at the end of the tunnel and customers continue to look at for values.” ($DLTR)

Yellen still sees a lot of slack in the labor markets

“the Committee judged that underutilization of labor resources still remains significant.” ($FED)

But Dollar Tree sees a shortage of truck drivers

“we anticipate our freight cost will continue to be a meaningful headwind to gross margin, primarily as a result of driver shortages and related wage increases” ($DLTR)

You can’t like these comments from Bank of China about the state of Chinese credit markets:

Small business is having trouble getting financing

“our nation is very concerned about, the Bank is also very concerned about this. Right now we face some downward pressure and we are at a turning point in making our adjustments. We understand that financing is difficult and costly for SMEs” ($BankofChina)

Bank of China argues that part of the reason that credit is tight is that banks’ cost of capital has increased and they are getting disintermediated by wealth management and non bank lenders

“capital cost for banks has gone up, so everything has become more exclusive, because what is flowing in has become more expensive. People are talking about wealth management and not so much focusing on primary deposits…So the asset flowing into the banks has become more expensive, and therefore that naturally affects things that are going out. Secondly, the whole loan cycle has been extended. There are many more channels available in the market such as trust channels.” ($BankofChina)

Nonperforming loans have increased, reflecting the slowing of the Chinese economy

“Towards the end of June, NPL volume reached RMB85.9 billion, which is an increase of RMB12.6 billion, NPL ratio 1.02% which represents an increase of 0.06 percentage points…We believe such changes are reflecting the situation of slowing down of the Chinese as well as overseas economies and also because of the restructuring of the banking system.” ($BankofChina)

Financials

Medtronic argues that tax inversion will level the playing field with foreign competitors and that they’ll still pay plenty of US taxes

“Medtronic will continue to pay significant U.S. taxes and increase our investments in the U.S. On taxes, we will continue to pay federal, state, and local income taxes on all U.S. earnings as well as Social Security taxes, property taxes, and the medical device tax. Cumulatively, these taxes represent more than 45% of U.S. income and we expect to pay a similar rate post-close. In addition, this transaction will put us on an even playing field with foreign companies regarding use of internationally-generated profits’ ($MDT)

Retail money flowed out of loan funds last quarter. Eaton Vance thinks the flows are an over-reaction

“our retail bank loan flows turned negative in the third quarter, consistent with overall industry trends…we struggle to understand the accelerated redemptions being seen today in the loan category. Loan prices are stable. Credit conditions are benign and yields remain quite attractive in relation to other floating rate instruments.” ($EV)

Institutional investors are moving to fixed income funds with a more flexible mandate

“income investors have migrated from Core Fixed Income to Core Plus to increasingly we’re seeing interest in Multi-Sector, which is moving out a little further on the risk spectrum, which is broadly where Kathleen Gaffney’s Multi-Sector Income Strategy operates ($EV)

Consumer

Companies’ ecommerce customers tend to be their most loyal customers

“The guest that shops Target online is absolutely our best guest. They shop both online and in stores. It’s really all about what’s convenient for them, and sometimes it’s just easier to knock an item off your list by buying it on your mobile device” ($TGT)

TJX doesn’t think a lot of people are making much money in ecommerce

“there aren’t a lot of e-commerce businesses out there that are making a ton of money and I think we’re very happy with Sierra. We are learning. We do want to make money with our e-com business. But more importantly, I keep coming back to we want to balance, pushing the customer to brick-and-mortar and back.’ ($TJX)

Everyone is talking about their “omni-channel” strategy

“Final thing and probably the one that I’m most excited about and our team is most excited about, and most importantly our customers are most excited about is the omni plan. Customers are changing the way that they shop retail stores and online. They want the benefits of both. We know that customers who shop both are far more valuable customers and happier customers that if they were to shop at either of the two channels.” ($SPLS)

“We need to build capabilities focused on satisfying the wants and the needs of our guests and ensuring that our digital and store operations operate seamlessly to provide a single superior experience.” ($TGT)

Staples agrees that the office supplies industry is clearly over stored

“It’s obvious to me that the office superstore industry is over stored in the United States and that is driven by the shift to online as well as the decline of paper-based office supplies. That’s why we’re closing 225 stores and that’s why we’re downsizing a lot more than that and that’s also why Office Depot and OfficeMax merged and why they’re closing 400 plus stores as well.’ ($SPLS)

Staples doesn’t think brick and mortar goes away though

“Having said all that, I don’t believe that retail goes away. I think retail is important to customers. I think customers like retail for convenience, they like it for immediacy, products services, face-to-face customer service.’ ($SPLS)

There are plenty of goods out there waiting to be sold

“I can say it 100 times and I will say it again. We could be $40 billion, we could be $50 billion, and there is more goods than we could ever take. Every day, we’re having that conversation. The availability is vast and the quality of it is terrific, and we don’t see that changing in the back half at all.” ($TJX)

“in terms of the supply, we’re seeing plentiful supply, amount of merchandise in the market.” ($ROST)

So TJX is running its inventories lean

“we are very clean in the stores. In fact, our inventory, well, it’s been lean off season and, given the second quarter with sales picking up, our clearance levels are very under control. No real liabilities there.” ($TJX)

Retailers make their plans months in advance

“the plans for the back half of the year have been put in place months ago. We always would tweak and make adjustments, but the heart of what we’ve got planned was committed many moons ago…I mean our holiday buy was made last year.” ($HD)

There’s a lot more money floating around on the first day of a month

“First of the month, there are a lot of payroll checks out there. A lot of people get paid at the first of the month, a lot of the government checks go out in the first of the month. There are a lot of things, there’s a lot more spendable income around the first of the month. And many of our customers, especially the lower income customers, wait until the first of the month because they just really don’t have the ability other times” ($DLTR)

Someone is still increasing their ad spend on television

“we are increasing our total marketing spend in TV impressions and our commercials will be on TV even more weeks than last year” ($TJX)

Technology

The PC sales boost from Windows XP expiration is probably over

“The windows XP expiration has contributed to our growth, although we believe we’re now through much of that benefit.’ ($HPQ)

HP thinks the PC business is still flat to declining

“The PC business is flat to declining slightly and we think that that will continue.’ ($HPQ)

PC sales were strong all over the world though in both commercial and consumer markets

“Commercial sales grew 14% year-over-year, with consumer sales up 8%…with regard to PC strength regionally this was broad based across all regions, Americas and EMEA in particular had good quarters” ($HPQ)

There may be a similar catalyst to the XP upgrade in the server market

“We think the windows Server 2003 upgrade is an opportunity for us. There’s a significant number of Servers in the install base and they are going to have to upgrade. So there is some similarity between the XP upgrade and the server upgrade” ($HPQ)

Staples confirms that we’ll see “multiple” product releases from Apple in the fall?

“Apple in our stores is a very important component. It’s been in our stores less than a year. We started selling iPhones recently. We haven’t yet had a new Apple product release and we’re excited about multiple product releases this fall.” ($SPLS)

Miscellaneous Nuggets of Wisdom

When your competition gets aggressive keep yourself tight and keep yourself liquid

“As it pertains to promotions in the market, Q2 was a highly promotional quarter, particularly in the mid-tier, and we really don’t see any reason for that to change in the back half of the year. In terms of how we got our margins, really what we did was plan very conservatively, left ourselves liquid, had plenty of open to buy, and we chased most of our business. We also had very tight inventory controls in this promotional environment, which is key so that you’re always liquid and fluid and you have constant open to buy.” ($ROST)

Transcripts via Factset and www.seekingalpha.com