Lennar FY 2Q15 Earnings Call Notes

More than just a homebuilder

“Lennar has become not only the most profitable homebuilder in the business, but we continue to grow and mature our additional business segments that represent significant opportunity for the future. Simply put, Lennar has become much more than just a homebuilder.”

Spring selling season continues to confirm consistent improvement

“As we noted in many of our prior conference calls, and some of our other public statements, we continue to believe that we are still in the early stages of a multi-year, slow but steady housing recovery. This year’s spring selling season confirms that the market is continuing to improve at a very consistent pace.”

Limited supply growth against pent up demand

“the production deficit of both rental and for sale homes relative to the need for housing in the United States continues to create pent-up demand against a very limited supply.

Without a dramatic increase in the number of homes built in this country, we will continue to be short dwelling units per growing population, supply is limited and demand is building.”

Mortgage markets still tight

“the regulatory environments for mortgages remains challenging and limits the number of entrants for the for sale market. QM and QRM rules together with ATR, the ability to repay rules, continue to restrict qualified purchasers from accessing the mortgage market.”

First time purchasers back more slowly than expected

“first time purchasers have begun coming back to the housing market more slowly than expected and more slowly than they have historically. They’ve had the most difficult accessing the mortgage market, credit limitations have been most constraining to the first time buyers, and although that is beginning to open up as many have reported, they are not yet jumping in to the market place and they are also the most susceptible to price and interest rate increases.'”

Downside is supported by production deficit. Almost no likelihood of foreclosures

“We believe that the market is downside supported by the production deficit that has yielded a limited supply of both rental and for sale housing in the country. Any pullback in the housing market will be short lived as there is a need for shelter across the country and there’s very little inventory and almost no likelihood of mortgage foreclosures given the stringent underwriting standards of the pas years.

Targeting high end first time buyers and rental markets

“we have continued to focus our attention primarily on the higher end first time buyer and the move-up market, as our average sales prices reached an historical record high of $348,000 this quarter.

While approximately 25% of our home building business continues to be geared to first time home purchasers, our broader new household strategy has been aimed at the rental market”

5th largest non-bank lender in the country

“we’ve expanded our retail platform to become the 5th largest retail, non-bank lender in the nation, and we are able to capture an expanded share of the refi business as it exists.’

Seeing improvement across markets including first time buyer

“it’s really across the board that we are seeing improvement across markets. That includes the first time homebuyer. We are starting to see the first time homebuyer come back to the market place, but from basically a very flat level of virtually non-existent first time homebuyer to some beginnings of improvement.”

It feels a lot better, like they’re coming back, but still constrained

“It feels a lot better, it feels like the first time buyer is coming back but they are not jumping into the market, still constrained by the mortgage market. So we’ll have to kind of sit, watch and wait till the next quarters to see how that first time buyer market continues to evolve.”

First time buyer is very sensitive to price fluctuations

“As Rick Noted, you are seeing some pricing power and the first time buyer is probably the most sensitive group to price increases and interest rate fluctuation. So I think it’s going to be a push and pull program for some time to come, as pricing power continue to be pretty strong.’

Bringing down duration of land on our books

“We’ve been very focused on bringing down the duration of land that we are bringing on our books unless we find a really unique opportunity as with the Fremont property.”

We’re still in the early stages of the recovery

” we think we are in the early stages of this recovery. This has been a slow, steady recovery that’s been defined by pretty shallow levels of production. And those shallow levels of production are creating short supply for a growing demand and we think that as we look ahead, this recovery remains fairly shallow sloped, but consistent for a number of years to come.”

Floods in Houston

“the weather in Houston was interesting this quarter. It was a little rainy, some people heard on the news, and the rains absolutely shut down the market for a number of days during the quarter. There were days where our offices were actually shut down because there was not electricity and the floods were significant. ‘

Acquisitions of public companies don’t make sense to us because you’re just acquiring land and we think we can do it cheaper without the goodwill

“With regard to though and our views on consolidation, acquisition, it’s a tough go for us, because we are I think probably the best land acquisition machine out there.

And when you are buying companies today, you are buying land assets, and we had found that we are able to buy those assets through negotiations with sellers at a cheaper price than acquiring the company and paying the goodwill associated with the company.

We have continued to look at smaller acquisitions and you can and we’ll continue to do so. But with regards to the larger public companies don’t seem to pencil out for us today.”

New mortgage regulations take effect in October that have potential to create a minor disruption

“this is a rough and tumble mortgage market that is defined by a regulatory environment that has a lot of laws of unintended consequences coming through. And the new legislation, the new regulations that will come in to affect in October will have some ripple effect.

We are all over this and Bruce has been heavily focused on thinking through the nuance changes that will come in to the market in anticipation of some minor disruptions. We’ve been fortifying our mortgage company; I think you have seen it in the results from the numbers. But behind the scenes in the operations of our mortgage business, we recognize that there is potential for disruption and we are trying to stay ahead of the curve.”

It’s easier for larger players to adapt to regulation

“As I noted, there are a lot of unintended consequences embedded in some of this legislation or regulation I should say. I think in many of the instances the consequences are that larger players are benefitted and the larger player’s ability to adjust, to adapt and to spend the dollars to be ahead of some of the regulatory changes works to the benefit. We certainly think.’

We have advantages that small builders don’t

“I think the smaller homebuilders have had difficulty getting up running and engaged in a capital constrained market that has favored larger builders. They’ve had more difficulty accessing land. I think given the fact that we have a large mortgage subsidiary that’s able to do a large portion of our business versus a smaller builder that might have to depend on outside lenders. I think it does additionally slant the table in the larger builders favor.”

The mortgage process is very invasive and frustrating for the homebuyer today

“I will just add to Stuart’s comment that the mortgage process today is very invasive, very frustrating for the homebuyer, and the close working relationship that you are hearing and Stuart and Bruce described between homebuilding operations and mortgage company ready to sell takes a much better customer experience.”

There are continued cost pressures, especially on the labor side

“This is Jon. There’s continued pressure, we see it more on the labor side, perhaps than the material side in today’s world especially as start between single family and Multifamily pickup. And so some areas from framing and drywall, masonry, you see pressure there.”

Bed Bath and Beyond 1Q15 Earnings Call Notes

No doubt that digital is transforming retail

“There is no doubt that digital technology is transforming retail and the way customers shop. For example, customers may now start their shopping experience with us online or through a mobile device to research an item, read customer reviews or compare price. Then they may go on to visit a store and interact with one of our associates before placing an order online or purchasing the item in the store. The evolution of omnichannel retailing has created a more seamless and personalized shopping experience for customers.”

Working on more flexible fulfillment options

“To further support our mission to just take care of our customers, we are creating more flexible fulfillment options that will allow us to deliver orders more quickly and cost effectively. During the first quarter, we opened our newest Las Vegas facility and we are assessing additional sites throughout the country to gain even greater distribution efficiencies. As you know, we already have the capability to ship for most of our stores.”

Physical stores remain integral to our success

“As the digital world and physical stores converge, the physical stores remain integral to our success. Integrated properly, we have a unique opportunity to engage with our customers in new ways and develop deeper customer relationships. In addition to our merchandising efforts, we want to give our customers more reason to spend time in our stores. We want to encourage product discovery, create an experiential shopping environment and enhance the services we offer.”

Expecting flat to slightly higher earnings in 2015

“Based on these and other planning assumptions, we are modeling net earnings per diluted share to be in the range of $1.18 to $1.23 in the second quarter as compared to $1.17 in 2014. For the full year, we are continuing to model net earnings per diluted share to be between relatively flat and a mid-single digit percentage increase as compared to 2014.”

JS Conference Call Notes BBRY

Jeremy S., an investment analyst in Southern California, has started to contribute to Avondale’s company notes database. Below are quotes from some of the calls that Jeremy has read this week.

 

Blackberry (BBRY) is attempting to shift its strategy from a legacy phone manufacturer to a software firm under CEO John Chen.  For those unfamiliar with John Chen’s background, he is the former CEO of Sybase which he sold to SAP in 2010 for $5.8 billion, ultimately generating a 28 percent compounded annual growth rate during his 13 years as CEO at Sybase.  He also currently sits on the Board of Directors at Disney & Wells Fargo.  Chen believes a profitable turnaround and strategy shift at Blackberry is within reach next year and outlined his steps to simplify and streamline the business.  

“On the handset front, we are taking steps to get the business to profitability. A few key actions were taken in the quarter. Number one, we have reduced our spending in hardware through some level of reorganization. Number two, we moved some hardware resources to our software and our Internet of Things efforts.”

Blackberry CEO John Chen went on to emphasize the firm’s emphasis on security

“So I would like to say a few words about security, as it related to cyber security and our mobile security software. In the quarter we made a lot of progress investing in the security strategy, starting with the acquisition of WatchDox. To put this acquisition in context, BlackBerry focuses to expand our leadership in mobile security connectivity and communications. WatchDox expands our portfolio, allows us to protect documents on any device at rest or in transit, even after they left the network.”

Blackberry CEO John Chen said their QNX connected car platform continues to gain momentum

“Lastly, the number of smart cars now on the road using QNX solution is now over 60 million. And in the quarter we also released our features on over the air, the OTA, and I think this represents a very large opportunity for that product.”

Blackberry CEO John Chen said governments continue to embrace the Blackberry platform as security is of the highest importance in that particular sector

“A lot of our customers are in highly regulated industries that are not willing for us to use their name, especially in government agencies. And it’s safe to say, most of all the Canadian government agency users are BES.”

Carnival Cruise FY 2Q15 Earnings Call Notes

Building next generation ships

“we finalized the contract with Meyer to build four, state-of-the-art ships designed to provide an exceptional vacation experience tailored to our guest’s preferences.

This was part of our largest strategic partnership announced in March with Meyer in both Germany and Finland and with Fincantieri area in Italy to build nine ships over four year period from 2019 to 2022 and keeping with our measured capacity growth strategy.

These next generation ships will be the most efficient ever build with a total guest capacity of 6,600 through an innovative design pairing incredible cabins with even more innovative use of the ship public spaces.

Adding price per berth, in line with our existing order book, these ships will significantly enhance the return profile of our fleet. Moreover these next generation ships will pioneer a new era in the use of sustainable fuels through our green cruising designs, representing the first cruise ships to be powered FC by LNG”

A lot of macroeconomic difficulties in Europe

“As we had said before in the notes, there is a lot of macroeconomic difficulties in Europe. The economy seems to be bouncing along at the bottom”

Biggest competition is land based travel because we get 1/2 of all people who cruise

“First of all for us our business is pretty straightforward and so we consider our competition to be land based vacation. We have very differentiated product offerings versus the other cruise companies.”

“One of every two people cruise in the world, cruise with us and anything that generates interest in cruising automatically helps us and frankly it helps the other companies as well. So that is the focus of it and we think we’re seeing some success, there are some variables in any given year in any given market at any given time.”

First time cruisers up a lot especially from China

“first time cruisers are up dramatically, now there is a number of things that contribute to that beyond this year, I guess last year we were 3.4 million first time cruisers whereas the year prior we were like something like 2.7 or 2.8 or something. But there are number of things that drive that, number one we have got lot of first time cruisers elsewhere in China”

Industry capacity growing in 4-5% range

“Yes I think first of all overall the capacity growth for the industry is in the 4% to 5% range and our capacity growth along with vessels that we take out of service is going to be less than that. So we are totally focused on measured capacity growth.”

We’re still low penetrated in overall vacation market

“And we feel that with China in particular but even without China and the existing markets that that level of growth as long as we’re creating demand because we’re still relatively low penetrated as an industry as cruise industry in the overall vacation market that there is ample opportunity to create the relative scarcity to get yields off over time and to have them be up and still the greatest vacation value there is while providing the greatest vacation experience there.”

Darden Restaurants FY 4Q15 Earnings Call Notes

Focus on service, simplification, menu evolution

“Our Olive Garden strategy has been to focus on our core guests and the frequency of their visits by concentrating on the following areas: First, ongoing service and culinary simplifications that allow our restaurant teams to deliver great food and service. Second, continued menu evolution that focuses on our core brand equities; the improving appeal of Cucina Mia provides a great everyday value option for our guests, thereby allowing us to be more balanced with our promotional offerings.”

Separating a portion of our real estate

“let’s spend a few minutes discussing the real estate announcement we made this morning. The Board and I are excited about our announcement to separate a significant portion of our real estate and create a separate real estate business, which can grow in its own right. This decision was the result of a comprehensive analysis that we performed along with the support of our advisors. The plan is intended to optimize the value of our real estate by separating approximately 500 of our real estate properties utilizing three different steps”

Retiring $1B in debt

“after receipt of the proceeds, we intend to retire $1 billion of debt. This debt retirement will be sourced by the sale leaseback proceeds, a REIT distribution back to Darden at the separation funded by debt raised at the REIT, and cash on our balance sheet.”

Darden has a lot more concepts besides just Olive Garden

“The four segments are Olive Garden, LongHorn, Fine Dining, which includes The Capital Grille and Eddie V’s, and our other businesses which includes Yard House, Season 52, Bahama Breeze, Consumer Packaged Goods, and franchise revenues”

Normalized inflation environment

“We anticipate fiscal 2016 to be a more normalized inflation environment, resulting in overall inflation of 1.5% to 2%, with commodity inflation of 0.50% to 1%, and we expect the price at the low end of the overall inflation range.”

New CEO this year

“I want to share a couple of final thoughts. Fiscal 2015 was a year of meaningful transition at Darden with the election of a new Board of Directors, as well as my appointment to CEO.’

Flat traffic beats the market by a point to point and a half next year?

“right now we’re expecting traffic to be flattish for next year, which we think is going to end up beating the market by a point to point and a half. I’ve always said that the first barrier for us was to breakthrough and for Olive Garden to start to beat the market.”

Remodels doing 7 points better than the rest of the system

“we got a lot going on with remodels. I’ll start off by saying the initial 13 that we did which were pretty extensive remodels are trending in the mid-seven range above the system average. So in a six-way analysis they are performing, it’s a little over 7% in same-restaurant sales growth above the system”

We’ve significantly outperformed Knapp Track over the last 16 weeks

“We had one week in there, which was Easter week, the prior year that was for some reason we had a really bad week. That may have had more to do with promotional way to some other timing, but over the last 15, start of 16 weeks Olive Garden has significantly outperformed Knapp-Track. So I am pleased, I am not caught up any sequential trends where we continue to move our marketing spend to try to understand what’s working and what’s not. And when you make some commitments, sometimes it takes three to four weeks to adjust after you try something that might not be working as well as you like.”

Wage inflation may be in the high end of the 2-3% range

“we put that in the all others, in that 2% to 3%. I would say the wage rate is probably in the upper-half of that range, but there’s many other items that when you look at our P&L that would be bringing that overall inflation rate to the middle of that range at this point.”

Cutting costs by cleaning carpets less frequently

“I think our operating teams are doing a great job of going in and saying, for example, how many times do we really need to clean the carpets in a restaurant? There is a protocol, that you clean carpets once a month. If you do it more than that you end up actually destroying the carpet, and see really not a whole lot of benefit there. So we found a lot of restaurants that were cleaning carpets twice-a-month. So we’ve been able to find — that’s just one example of the costs the operating teams have been able to find over time.’

Consumers aren’t as deal driven as they have been

“I think we’re getting a little bit of help from the consumer. I do think the consumer is looking for less discounting activity today than they were a year ago, or two years ago. We’ve had a lot of discussion around the gas, what we call the gas dividend that’s going back to the consumer. I think there’s a lot of expectation that that was going to stimulate traffic. What I’ve been saying is, we haven’t seen it stimulate traffic, but we have seen it change the consumer behavior once they’re in our building, and they’re not seeking the deals the way they were years ago.”

People are picking up more add ons

“We’re seeing some more –- the consumers buy more add-ons. They’re buying wine, dessert, apps. So I think that that is the environment, is helping us somewhat move away from these constructs, and we’re just not finding them to be as successful as they once were, so we’re able to do that.”

It’s boosting our margins

“From a margin perspective, I would say that we’re picking up at probably well over a 100 basis point from reducing this heavy discount mentality or strategy, and you see that in every line in the P&L. So you have less discounts, the food cost improves, your labor cost improves.”

KarMax FY 1Q16 Earnings Call Notes

4.9% unit comps

“We had a great first quarter, driven by strong performance in all our key businesses areas and with the continuation of our store opening plan. I’ll give you some of the highlights for the quarter. Used unit comps increased by 4.9% and total used units grew by 9.3%.”

Clearly shifting more consumer behavior to online

“If you look at consumer behavior over the last several years, it’s clearly shifting towards wanting to do more and more of whatever shopping process they’re involved in online. And we see that continuing to shift, and then within that, continuing to shift towards mobile.”

Seeing stable performance from subprime lenders

“I think we talked about this a little bit last quarter. We’ve seen pretty stable performance from our Tier 3 lenders. If you look at what they’re approving and the quality of their offers, it’s been pretty consistent for the last several quarters.”

Credit quality of applications is up y/y

“if you look at credit quality of applications this quarter, it’s up about two points year over year. That moves the mix a little bit. And I think we’ve done a lot of work to build a good stable of Tier 2 lenders that each brings something different from the table from a credit perspective, and that adds incremental sales. So like I said, I think we’re happy with the performance of our Tier 3 lenders. I think that we see consistent aggressiveness out of them in the last several quarters.”

Selling prices were down

“the first part, I think we were down – well, I’m getting the number here – I think we were down a couple of hundred bucks. And I’m with you, Sharon, I don’t generally expect ASPs to go down, so I don’t have a great explanation for it. I think lower prices are better for our customers. I don’t think it really is an indication of much of anything because the move was so modest.”

I wouldn’t read to much into that though

“We were roughly flat last quarter. I think we’re up $100. So I haven’t really read too much into it. It’s such a small change in price.”

Shifted back to more 0-4 year old vehicle sales

“For the quarter, it was 76%. And you mentioned 75% was in the fourth quarter, and that’s on top of 73% the year prior. So I think pre-recession, that number was 85%, and then coming out of the recession it was 70%. So yes, we’ve seen some shifting back towards. We’ve been expecting this with the shifting in supply, with the change in the SAAR. But from quarter to quarter, it was relatively flat from the fourth quarter to this quarter.”

Not a lot of operating costs to working out delinquencies in a strong environment

“if you think about what’s entailed in the finance business, there’s a lot of activity contacting customers. If you’re in an environment where people are less delinquent and there’s fewer losses that – and fewer people not paying, which we are today, that means you’re making less calls. It probably needs less resource to do that.”

Higher lease percentage probably helps ability to source cars

“Lease percentage right now, I think, in the new car industry is somewhere around 30%. And when you see that supply coming back is really two years and three years later after you see a high lease percentage. So I’m not sure that we’ve seen much of it yet, but it’s never been a problem for us to source cars. And when cars are at a high lease percentage, when you look out two years and three years later, generally, they’re more organized at the auction, so it’s a little easier for us actually to buy those cars when we see them come back to the marketplace.”

We’re actually disintermediating peer to peer

a customer who normally would have put their car online and be – or have put up in their yard and put a for-sale sign on it, now they’re bringing a lot of those customers. They’re bringing their cars directly to us and sell it to us. So it may not be exactly the way you’re thinking of it, but I think we’re getting plenty of customers who would have gone through the peer-to-peer channel and are deciding to sell their car directly to CarMax.”

KB Home FY 2Q15 Earnings Call Notes

A tale of two halves

“we view this year as a tale of two halves. In the first half, among other things, we’ve expanded our community count and built a robust backlog that has strategically positioned our operations for revenue and earnings growth.

In the second half, we expect to realize the benefits of our expanded platform, as we convert our backlog into deliveries and revenues, improve our margins on a sequential basis and achieve greater economies of scale.”

Big headline increases in backlog numbers

“Our ending backlog in units grew 39% to 4,733 and our backlog value rose 57% to $1.6 billion. This was our highest second quarter ending backlog value since 2007. With this solid backlog position and our expectation for continued year-over-year community count growth over the balance of this year, we are now set up for accelerating revenue and profits and to enter next year with terrific momentum”

Housing market continues measured recovery

“the housing market also continues its measured recovery. Inventory levels remain well below normal, and while there is still price appreciation occurring in most markets, it is at a more moderate and sustainable pace. Even with the slight uptick in mortgage rates over the past week, affordability remains at compelling levels. The most encouraging statistical trend that bodes very well for future housing demand is the dramatic increase now occurring in household formation.”

Household formation has been accelerating

“Recent census reports put household formation at an annualized rate of almost 2 million, well above normalized historical levels and significantly higher than the 500,000 households we have averaged per year over the last eight years. This data point suggests that we may be at a turning point in this housing recovery, as household formation has been the missing link.”

No sign of slowdown from oil price decline

“While we remain cautious, we are still not seeing signs of a slowdown in demand in our communities as a result of the oil price decline.”

First time buyer coming back

“our first-time buyer percentage did move up a little bit in the quarter. We were up to 56% – couldn’t tell you if that’s a sustained trend or a coincidence of mix. But we saw an increase in three of the four regions during the quarter – a couple of points a region in first-time buyers. So it’s an encouraging sign and as I’ve shared, it’s what’s been missing to get a sustained housing recovery. We haven’t had the first-time buyer demand and this household formation that’s developing, that was very encouraging.”

The aging of the millennials

“over a 40-year period, the nation averaged 1.2 million household formations. From the period of 2008 to 2014, we averaged 500,000, well below normal. So people that don’t have a job, they’re staying with their parents longer – everything we’ve talked about over the past few years.

With the job growth that’s occurring and the aging of the millennials, they’re getting to a point in their life where they’re getting a job and moving on with their life. So if you go from annualizing the 500,000 to 2 million, it creates demand, whether it’s rental or for sale, there’s a lot more people that are out there needing a roof over their household.”

Strong volumes and pricing trends gave better than expected margins

“The predominant – I guess, when we were forecasting, the 50 basis points predominantly came from leverage; increased revenues on some of our fixed costs are included in margin. What we also saw during the quarter was some pretty strong pricing trends. ”

Seeing broad based strength across markets

“Specific to our business, there is no question that our demand has broadened out, where some regions that weren’t as larger contributor to our orders are stepping up quite a bit. So there is a broadening, but within the markets that we’re in, we’re seeing strength across the markets. There is not – all of them are doing better at their own pace of improvement, but there is none that I can think of where I’d say that’s a tough market today. It’s a pretty broad-based strengthening going on and I think a lot of it’s demographics. This household formation you can’t ignore the demand that gets created when those many people are moving from the roost.”

Company Notes Digest 6.19.15

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.

The Macro Outlook:

Conditions still aren’t right for a rate increase

“The Committee continues to judge that the first increase in the federal funds rate will be appropriate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. At our meeting that ended today, the Committee concluded that these conditions have not yet been achieved.” —FOMC Press Conference (Central Bank)

There are still residual effects of the financial crisis Seven years later

“it seems likely that some cyclical weakness in the labor market remains..the residual effects of the financial crisis, which are likely to continue to constrain spending and credit availability for some time.” —FOMC Press Conference (Central Bank)

Most FOMC members anticipate that rates will be raised this year

“clearly, most participants are anticipating that a rate increase this year will be appropriate. Now, that assumes, as you can see that they’re expecting a pickup in growth in the second half of this year and further improvement in labor market conditions.” —FOMC Press Conference (Central Bank)

That’s not an ironclad guarantee, but it should happen

“Obviously, we have to–you know, there can be surprises that might not happen. It’s not an ironclad guarantee, but we anticipate that that’s something that will be appropriate later this year.” —FOMC Press Conference (Central Bank)

We’re all watching the same data. Monetary policy is being set day to day

“We will be responding to incoming data, we’ve tried to make that clear. And I think it’s clear that the market is also responding to incoming data and you can see that in daily-market reactions to surprises in the economic data” —FOMC Press Conference (Central Bank)

No one really knows how the market will react when the Fed does raise rates

“I think our experience suggest that it’s hard to have great confidence in predicting what the market reaction will be to Fed decisions, and there have been surprises in the past.” —FOMC Press Conference (Central Bank)

We’re putting too much emphasis on the first increase though

“I want to emphasize sometimes too much attention is placed on the timing of the first increase in the federal funds rate. And what should matter to market participants is the entire trajectory, the entire expected trajectory of policy” —FOMC Press Conference (Central Bank)

The Fed will still be accommodative even after it raises rates

“Let me emphasize that the importance of the initial increase should not be overstated: The stance of monetary policy will likely remain highly accommodative for quite some time after the initial increase in the federal funds rate” —FOMC Press Conference (Central Bank)

Is the Fed being too patient though?

Labor markets sound pretty strong

“As investments spending around the world continues…we continue to see pretty robust activity in North American search.” —Korn Ferry (Executive Search)

Inflation is more mixed

“Some commodities are up, some are down. We are seeing deflation in milk, produce and seafood…just the volatility of inflation that’s out there, while we’ve seen some categories with deflation, we know that pharmacy inflation is actually as high as it’s been over the last several years in the first quarter.” —Kroger (Grocery)

But even Yellen agrees that the Fed may have raised rates too slowly in ’04-’06

“I think with the benefit of hindsight, it might have been better to raise rates more rapidly or more during the 2004 to 2006 cycle. You know, I’m not certain of that judgment but I think there’s a case to be made.” —FOMC Press Conference (Central Bank)

International:

Currency headwinds were greater than expected for Oracle

“The currency headwinds ended up being higher than consensus estimates would reflect, with 8% to software and cloud revenue as well as the total company revenue, 9% for hardware revenue and $0.09 for earnings per share. Currencies continue to move significantly and remain unpredictable.” —Oracle (Enterprise Technology)

Financials:

Financial services firms are hiring again on both the buy and sell sides

“You saw that we had a great quarter in terms of net workstation additions. I think that’s the strongest Q3 we’ve had in probably four years, and that was well distributed between the buy side and the sell side.” —Factset (Financial Data Terminals)

“The financial services growth I mean you are right, we saw definitely an uptick there and it would be really spread across asset management. Even capital market to some extent I mean not like it was but even banking. So we saw kind of steady improvement there.” —Korn Ferry (Executive Search)

Consumer:

This video from Restoration Hardware is one of the most fascinating things I saw this week

Click Here to Watch.  This guy is either crazy or a genius, but definitely would make a great Bond Villain —Restoration Hardware (Home Furnishing)

Physical locations are still very important. You can’t shrink to greatness.

“retail stores are really, really important…people want to see things and people want to interact in a three dimensional nature…it’s not about the Internet, the Internet is a channel. It’s going to change things. It’s going to shift things. But retailers that are penetrating to shrink to greatness, I think they are missing the whole point.” —Restoration Hardware (Home Furnishing)

Retailers who can create great physical experiences will win

“I think the physical experiences in the world are going to be even more important than the online experiences because we are social creatures. And I think the retailers that have the very best physical experiences in the world tied with the very best virtual and digital experiences in the world are the ones that didn’t win, not one or the others. It’s physical and digital. That’s the world.” —Restoration Hardware (Home Furnishing)

Pier One is attempting to shrink to greatness

“The careful reduction of our real estate footprints will allow us to drive growth to our omni-channel model, reduce store occupancy and payroll costs and improve efficiency. Additionally, other stores we are closing have contributions below the company average, overall profitability of the fleet will increase. We anticipate there will be additional opportunities beyond our initial 100-store assessment as we move through the process.” —Pier One (Home Goods)

Gap is just plain shrinking

“I hate closing stores, I hate the idea of closing stores, because I hate the idea of denying our customer the opportunity to shop in their favorite Gap store. I hate the idea of conceding market share. We will do everything we can do to claw back every dollar that we can. But let’s be realistic, some of that — some of those dollars and some of that wallet is going to go to the competition.” —Gap (Apparel)

E-Commerce is leading to the decline of the casual shopper

“the challenge for many of us in brick-and-mortar retailing today, is the decline of the casual shopper…when customers come to the store…they really have a pretty clear reason why they are there and so yes we’re missing those people who are just coming in for a browse and making an impulse purchase whilst they’re there. That’s the new world that we live in.” —Pier One (Retail)

Although E-Commerce is booming, people forget that the cost of shipping hasn’t really changed

“I think what a lot of people lose in this conversation is the fundamental input cost on pickup and delivery and that while technology today has certainly made user interface much more streamlined and easy as in the case of some of the applications we’re all accustomed to today, the fundamental input costs have not changed.” —FedEx (Shipping)

Specialty grocers are gaining share more slowly, but they aren’t losing share

“I’m not sure I 100% agree with your thesis when you look at some of the specialty retailers…I wouldn’t subscribe to the theory that there’s necessarily a sudden shift in market share away from them, it may be a slower growth in market share gain, but I wouldn’t say it’s a shift away from them…if I we’re sitting in their chairs, I wouldn’t necessarily be embarrassed by some of the recent results they’ve had.” —Kroger (Grocery)

Millenial parents want education that fosters well rounded kids

“We found that while education remains a core need, many parents are also searching for solutions that expand their child’s world, and help them develop in a more holistic and well-rounded way. Millennial parents are concerned about their child’s educational, emotional, and creative development. Based on our research, we believe demand is growing for fun experiences that engage, inspire, and enrich a child’s intellectual curiosity.” —Leap Frog (Education Technology)

The average age of the US vehicle fleet remains old

“Current expectations are that the average age of vehicles will continue to increase to approximately 12 years, just by 2016.” —Motorcar Parts of America (Auto replacement parts)

Healthcare:

The tailwind of Medicaid expansion is now turning into a headwind for Healthcare providers’ comps

“We are now cycling last year’s strong Medicaid expansion benefit. So our expectation is that script comp growth comparison will become more difficult for the next several months.” —Rite Aid (Pharmacy)

Materials, Industrials, Energy:

Energy companies may be ready to boost capital spending in 2H since oil prices have stabilized

“I think we’re encouraged with the stabilization of crude oil prices and in the ruble we’re going to see some acceleration of that backlog going forward. So I think as we look at it we kind of believe that we are through the worst of it and that will come out the other side of the trough especially in Q1 and Q2, look for a strong second half of the year. So, we don’t see any reason to modify the backlog and again we’ve not seen any recent cancellations.” —Capstone Turbines (Electric Turbines)

The Avian Flu is causing inflation in egg prices

“Along with the rest of industry we are closely monitoring the impact of the current avian flu outbreak on egg costs. While commodity inflation ex-eggs is expected to be moderate at less than 1.5%, we are currently projecting overall fiscal 2016 commodity inflation of approximately 5% to incorporate the impact of higher forecasted liquid and shell egg prices due to the recent avian flu outbreak.” —Bob Evans (Meat-packer)

Miscellaneous Nuggets of Wisdom:

Depreciation is real

“We need to buy the modernized fleet, 12, 15 airplanes a year and we continue to do that and you can count on us continuing to do that because they are aluminum, they oxidize, they wear out ” —FedEx (Shipping)

Focus all your energy on the most important things

“The hardest thing that we have to do is actually make sure that we’re trying not to improve on all things at once, but what are the things that are most important to the customer and put all our resources against that.” —Kroger (Grocery)

Full transcripts can be found at www.seekingalpha.com

Andrew Sohn Notes: WFM, LF, RH, MPA, CPST, RH, BOBE

Andrew Sohn, a junior at Columbia University, has started to contribute to Avondale’s company notes database. Below are quotes from some of the calls that Andrew has read this week.

 

Walter Robb CEO – WFM

Attention towards product quality in grocery retail is at a peak:

Clearly, in all my years of the grocery which is crossing 35 now. I’ve never seen a time where the market is tip so clearly in one direction with respect to the quality of food. You have all seen the flurry of announcements that have come out over the last number of months that everybody seems to be rushing out to say to declare their bona fides.

John Barbour CEO – LF
Modern day parents no longer prioritize traditional education in the development of their children; they prefer creating well-rounded children:

We found that while education remains a core need, many parents are also searching for solutions that expand their child’s world, and help them develop in a more holistic and well-rounded way. Millennial parents are concerned about their child’s educational, emotional, and creative development. Based on our research, we believe demand is growing for fun experiences that engage, inspire, and enrich a child’s intellectual curiosity.

John Barbour CEO – LF
LeapFrog suffered from subpar performance as a result of putting products on the shelf that really didn’t accord with customer tastes and preferences:

For the fourth quarter and full year, our net sales and net income declined year over year and fell well below expectations, due mainly to carryforward retail inventory from the holidays, lower demand for our tablets and associated content, and the later-than-planned shipment and promotion of LeapTV. The downturn in consumer sales of tablets over holiday season and into 2015 across our major markets was greater than expected. Since tablets along with associated content represent a large share of our overall sales, this decline had a significant impact on our performance. In addition, retail sales of LeapTV to date significantly missed our expectations. Following the later-than-planned shipment of the platform in the holiday season, we progressed into spring, which is seasonally sluggish and where consumer demand for video game consoles is traditionally very low.

John Barbour CEO – LF
LeapFrog maintains a pristine brand image, even after prolonged periods of subpar performance

LeapFrog is one of the most trusted brands in the industry. A recent Piper Jaffray survey from earlier this year of nearly 700 mothers find that the most positively perceived brands in the industry are Lego, Fisher-Price, and LeapFrog. When the surveyed moms’ brand perception across manufacturer product portfolios, LeapFrog held the highest positive perception at 77%, followed by Hasbro’s portfolio of brands at 61%, and Mattel at 56%. LeapFrog was also the number one positively perceived brand among moms of preschoolers aged three to five years old.

Gary Friedman President and CEO – RH

Restoration hardwares is attempting to create a new, “modern lifestyle” market to capitalize on consumer demands for more modern tastes

And when we look at the Modern market today or we look at the — we feel these trends that are — and the ones I talked about in the video that we believe are going to set up the opportunity to make a market. If you were shopping for modern home today and you had to go out into the marketplace and you just built a new home or you bought a home or you remodeled your home in a modern aesthetic you had to say, you woke up in the morning and say, I need Modern furniture and home furnishings, where do I go? My sense is that you really draw a blank, right. It’s an even more fragmented market than the one that the core RH interiors business has been competing against. Because there is no one that has dominant assortments in any of the categories and then has multiple categories and integrates those categories into a lifestyle point of view.

And then as you — if you think about the marketplace as it is, there really is no fully assorted, fully integrated modern concept that exists, I mean anywhere in the world quite frankly. You have people that, you got to whether it’s B&B Italia or other ones that they have upholstery and then they might have few lights, a couple of items here where you’ve got — you can design within reach. I’d say it’s very item-driven business. You walk into one of their stores and it’s very much not a lifestyle. It’s presented like an item business also. And you’ll see this business presented in a fully integrated lifestyle and a model that’s very similar to the core RH business and the interior business.

Gary Friedman President and CEO – RH

In addition to capitalizing on market preferences, producing a “lifestyle brand” will help cut costs for Restoration Hardwares

So I think you’re going to have a lot of people that are buying modern today that are having a hard time buying it and finding the price points very high and the value creation very low because the lack of synergy and scale that exists. And so that’s going to create — I think that’s going to create market share gains for us there. But just as importantly I believe, it’s going to create a new market. I think it’s going to motivate people who may be weren’t thinking about furnishing their home or buying new furniture furnishings.

Gary Friedman President and CEO – RH

While modern aesthetic tastes may take a minimalist designs, such preferences most likely won’t affect the level of consumption
I think there is a probably a little bit of a more minimal list view in modern home, right. And that each piece is the thing of beauty and less clutter and so forth. I think categorically you need places to sit. You need sofas, you need chairs, you need dining chairs, you need dining tables, you need beds, you need bedroom, you need case goods, you need lighting, you need ceiling lights, table lamps, floor lamps. You need Rugs. And I don’t think the assortment is going to be meaningfully skewed any differently, right.

You need bathrooms. It’s just like — whether you give a classic home with a classic aesthetic or you have a modern aesthetic, you got all the same number of living rooms, dining rooms, bedrooms, bathrooms, outdoor space so on and so forth. It’s just everything just got a different aesthetic and point of view might be presented in a more minimalistic way. That’s how I think about it.

Gary Friedman President and CEO – RH

Key revenue drivers is about being in tune with the periods in which consumers are willing to buy products and exploiting that position

The buying cycle — what really drives our business is the event buying tediously, life stage events. So if someone either buys a home, remodels a home or redecorates a home, that category, that life event is a big, big driver to our business. And then on top of that if you see when you look at our customer over a five-year period and you take their biggest purchase week, you see a big peak and that is you look it on each side of that for several years you see that fall-off right pretty big. And so, we are trying to position ourselves to maximize the market share when people have that meaningful event in their life. One that they buy home or they remodel a home and they redecorate their home.

Selwyn Joffe – President and CEO

MPA

MPA expects consumption in the automotive industry to stay strong in the near future as the number of cars in the population that need to be replaced is increasing

With favorable economic conditions, increased miles driven, along with the growth and the aging of the car population we expect strong demand for our products to continue.

As I have highlighted on previous calls, industry data shows the average age of vehicles is 11.4 years. In addition, as the number of cars in the 12-plus year old category continue to grow, the replacement rates for these vehicles increase is significant. Current expectations are that the average age of vehicles will continue to increase to approximately 12 years, just by 2016. This continues to bode well for us since we focus on non-discretionary parts that require increased levels of replacements as vehicles age.

Darren Jamison President and CEO – CPST

Current macroeconomic conditions are expected to influence traditionally low consuming areas into become better markets for Capstone

The prevailing theory for many year have been that the Midwest is not a good market for CHP or CCHP projects and poor project economics, in combination with conservative nature of the customers in the market, it’s just not a good opportunity. But lower natural gas prices coupled with rising electric rates have created an opening for a best-in-class CHP, CHP systems like Capstone.

We can also share some good news from our distributors in the shale regions. Despite the precipitous drop in oil prices, shale gas production continues to expand just at a slower and more deliberate rate than the past couple of years.

Even in the current market for oil and gas, there may be a light at the tunnel as some market indicators are looking good

At June 3rd we announced an order for 25 C65s to expand existing oil and gas customer fleets in key shale plays in the Western United States. This is surely after 1.4 megawatt order out of Marcellus and Utica Sale plays and support two new shale compressor stations. I think these order should be consider as a good market indicator, but despite the low energy prices shale gas producers are continuing to focus on the increasing efficiency while lowering through operational costs. Turning to Europe, although Europe remains economically constraint, we’re also encouraged by the strength in demand for CHP and CCHP application in a number of countries.

Darren Jamison President and CEO – CPST

Policy changes and macroeconomic influences are creating high growth opportunities in foreign markets

The Mexican Energy Reform has established reduced electrical cost and natural gas prices. This is creating an opportunity for Capstone. Our distributor, Industrias Energeticas secured two of the largest orders in Capstone history recently and the participation of the loss from Ramones pipeline project in eastern Mexico. With the freer market energy policy in place, natural gas development in Mexico is poised for substantial growth. And with these types of wins, Mexico certainly poised to be one of our top markets throughout fiscal 2016 and beyond. Elsewhere in Latin America we shift our first CCHP C1000 to Colombia for an application in large urban complex of government buildings. El Salvador receives an order for upgrade of a plastics manufacturing plant and this also marks our first project in El Salvador which hopes to plant a seed for future development and future projects there.

The Caribbean is also a very attractive market for Capstone, the high and volatile price for electricity and the most important issue in the Caribbean energy sector where electricity prices are among the highest in the world. This makes CHP and CCHP a very attractive alternative for power generation. Incremental growth in markets like Central, South America and the Caribbean is critical to Capstone’s future revenue growth and further diversifies and strengthen our global distribution channel.

Mark E. Hood President and CEO – BOBE

Recent avain flu outbreaks are likely to cause inflation in commodity prices in 2016

Along with the rest of industry we are closely monitoring the impact of the current avian flu outbreak on egg costs. While commodity inflation ex-eggs is expected to be moderate at less than 1.5%, we are currently projecting overall fiscal 2016 commodity inflation of approximately 5% to incorporate the impact of higher forecasted liquid and shell egg prices due to the recent avian flu outbreak.

Kroger 1Q15 Earnings Call Notes

Establishing in house technology/data capabilities

“I wanted to mention what I think is a great example of how we’re expanding our use of technology. Our recent decision to established 84.51° which replaced our previous joint venture, dunnhumbyUSA, 84.51° is helping us to continue to use data science for the benefit of our customers and to deliver a more personalized experience both in-store and online.'”

Some commodities up some down

“Some commodities are up, some are down. We are seeing deflation in milk, produce and seafood which is driving more tonnage volume. Milk is one of our most price-elastic categories that we have. When milk prices come down, people tend to buy a lot more. We’re at an advantage because we have a vertically integrated supply chain for milk. When our dairy plants run at higher volume, we become more efficient and productive. We continue to see inflation in generic pharmaceuticals and in certain commodities in the meat department.’

“Overall, inflation continued but at a lower rate during the first quarter which is in line with what we had expected.”

Invest in people even at entry levels

“Every day we hire people who come to Kroger for a job, then decide to stay for a career. In fact, two-thirds of our store managers today started as an hourly clerk stocking shelves or bagging groceries. We continue to increase our investment in training to build skills so our associates are ready for opportunities to advance and lead others.”

5.7% comps

“We were pleased with our first quarter identical supermarket sales growth of 5.7%. This strong performance was supported by identical supermarket sales growth in every department and every supermarket division. We continue to see outstanding double-digit identical sales growth in our natural foods department. Our meat, deli and pharmacy departments also posted strong identical supermarket sales growth.”

Inflation is pretty volatile right now

“just the volatility of inflation that’s out there, while we’ve seen some categories with deflation, we know that pharmacy inflation is actually as high as it’s been over the last several years in the first quarter. It’s right at double digits. And then a little bit of concern or thought process about the avian virus with the poultry flocks and how that might affect input costs later in the year and what’s going to happen with availability of those products.”

Still expecting 1-2% inflation

“We do expect to see some potential inflation out there in the poultry flocks as the avian flu issue hits. We don’t know what’s going to happen with all of the input ingredients that go into products from liquid eggs and how that might affect a lot of products that contain as an ingredient. So we think 1% to 2% is right. So far that’s what we’re seeing.”

Our to do list is longer than our done list

“hen you look at our culture overall, we’re always very proud of what we’ve accomplished. But at the same time, we feel like we have a tremendous opportunity to get better, and a lot of times we like to use the words that our to-do list is longer than our done list. And when you look at what’s out in front of us, we are incredibly excited about the opportunities that we see to continue to get better.’

Focus your efforts on the most important things

“The hardest thing that we have to do is actually make sure that we’re trying not to improve on all things at once, but what are the things that are most important to the customer and put all our resources against that.”

Analyst comment: some companies have noted a slowdown in dry grocery organic spending

“I know you said your Natural Organic department was up double digits. Did you see any changes at all? I think there are some other retailers that have said there was a bit of a slowdown, I think, primarily in the dry grocery side, but I don’t know. It doesn’t sound like you saw anything, but did you?”

I wouldn’t say there’s a shift away from speciality grocers, may just be a little slower share gain for them

“I’m not sure I 100% agree with your thesis when you look at some of the specialty retailers just because some of them have reported lower ID sales than what their trend has been, they continue to open stores, they have a little bit of cannibalization and a lot of them continue to post ID sales above what the market would be growing at. So I wouldn’t subscribe to the theory that they’re necessarily a sudden shift in market share away from them, it may be a slower growth in market share gain, but I wouldn’t say it’s a shift away from them.”

I wouldn’t be embarrassed if I were them

“if I we’re sitting in their chairs, I wouldn’t necessarily be embarrassed by some of the recent results they’ve had.”

We believe there will be continued consolidation in our industry

“we believe there will be continued consolidation in our industry, and we have every intention of being a consolidator in that consolidation of the industry. And as you know, we participated in several mergers over the last year and the last several years.”

We keep buying power available so that we can act when the right opportunity comes up

“we wouldn’t sit back and say Harris Teeter is behind us, we’ve delevered, let’s go spend another $2.5 billion, get it back up to 2.4 and work our way back down. It’s really quite the opposite. It’s one of the reasons we try to maintain the ratio where it is. If an opportunity does come up, can we take on the leverage of that correct unique opportunity, act on it, have the rating agencies continue to have the believability in us doing what we say, and that is we told them 18 months to 24 months we’d get our leverage back down?”