Company Notes Digest 8.21.15

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:

The Fed is counting down to liftoff

“Most judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point.” —Federal Reserve (Central Bank)

It’s watching China

“While the recent Chinese stock market decline seemed to have had limited implications to date for the growth outlook in China, several participants noted that a material slowdown in Chinese economic activity could pose risks to the U.S. economic outlook.” —Federal Reserve (Central Bank)

But it also has a growing list of financial market stability concerns on its radar screen

“Participants discussed a range of topics associated with financial market developments and financial stability. They commented on issues related to the deterioration in bond market liquidity reported by market participants, the potential migration of leveraged loan underwriting to the nonbank sector in light of current supervisory guidance, and the assessment of valuation risks when term premiums were narrow while most other risk premiums were not.” —Federal Reserve (Central Bank)

The Fed will be data dependent, but at least some people on the FOMC think that monetary policy shouldn’t be set on a month to month basis

“Some participants advised that progress toward the Committee’s objectives should be viewed in light of the cumulative gains made to date without overemphasizing month-to-month changes in incoming data.” —Federal Reserve (Central Bank)

One positive piece of longer term data is that household formation has picked back up

“1.6 million households were formed in the second quarter. This is something that we have been hoping for.” —Home Depot (Home Improvement)

Another positive data point is that consumers are seeing more value in their homes again

“We also continue to be encouraged by the results of our second quarter consumer sentiment survey. Roughly half of respondents indicated that they believe they’re home values are increasing; double the number from 2012. And this positive sentiment around home values is rooting through to spending patterns, with plans to begin a home improvement project in the next six months, continuing its recent upward trend.” —Lowe’s (Home Improvement)

It’s also encouraging that back to school sales are starting off strong

“we have been pleased with comp performance so far this month, including back to school sales…we’re seeing a very positive start to back-to-school and back-to-college.” —Target (Big Box Retail)


The Chinese steel industry is in pretty bad shape

“The second quarter of 2015 has proven to be even tougher than the first quarter for the steel mills in China. China steel industry has entered into a new phase of retrenchment due to slowing infrastructure investment and a sluggish housing market. This is partially because the central government has shifted away from investment led growth to a consumption driven economy.” —General Steel Holdings (Chinese Steel Company)

Chinese public sector spending has slowed down.  The private sector is comparatively strong.

“the areas of strength particularly the Pharma area is a lot of private sector money. So traditionally this market has been heavily dominated by the direct investment by the government. We’re seeing a move. I think it’s still the majority but we are seeing a lot more business coming from private funded enterprises” —Agilent (Industrial Equipment)

Government spending was slowed by anti-corruption measures and now that’s led to longer sales cycles

“I think it’s a new normal…we’re no longer pointing to longer deal cycles in China as a result of anti-corruption. But I think the longer deal cycles are here to stay and now are now in this kind of this rhythm of really cautious approvals by the government authorities” —Agilent (Industrial Equipment)


It’s possible that the most important section of the Fed minutes was buried at the end.  It was a discussion of “alternative implementation frameworks” for monetary policy

“At the conclusion of the meeting, the Chair noted that the staff would soon begin an extended effort to evaluate potential long-run monetary policy implementation frameworks.” —Federal Reserve (Central Bank)

Given the expected pace of normalization, the committee judged that it would not have to make any decisions for several years

“In view of the likely time frames for normalization of the stance of monetary policy and the System’s balance sheet, the Committee probably would not need to reach any final decisions regarding such a framework for several years.” —Federal Reserve (Central Bank)

The committee also noted that special consideration should be given to scenarios that could require a return to the zero lower bound

“in light of experience over recent years, policymakers agreed that a number of related issues warranted attention, including topics such as the effectiveness of alternative implementation frameworks in scenarios that could require a return to the zero lower bound” —Federal Reserve (Central Bank)


Retailers are engaged in a battle to win the future

“Winning in the future requires change. Change in this case requires investment and investment pressures short-term earnings.” —Wal-mart (Big Box Retail)

Winning is critically important

“First on our list is to become a leader in digital, this is critically important because guest research shows that digital relevance drives traffic and engagement across all selling channels.” —Target (Big Box Retail)

Simple brick and mortar can’t compete in this omnichannel world

“we are committed to become a world class Omnichannel retailer. We understand the change in dynamics of retailer, we also understand that attempting to recreate a free 2011 J. C. Penny would not work in this new Omnichannel world, therefore are adjusting our business model and our leadership team to compete on this new Omnichannel retail landscape” —JC Penney (Department Store)

The challenge is that things are changing very quickly

“I think one of the challenges we all face right now, we’re still in relatively early stages, particularly in this e-commerce space in terms of understanding how that model is evolving and the elements of that model that we need to find to be more productive.” —Nordstrom (Department Store)

Nordstrom says retailers must create good experiences wherever the customers are

“We don’t think the customer is loyal to channels. We don’t hear customers talk about channels very much. Customers value experiences, and so the more successful we’re at in creating a great shopping experience, no matter how they’re choosing to shop, I think the better our business will be.” —Nordstrom (Department Store)

But being able to create those experiences in E-commerce requires building whole new companies within existing ones

“we have a built talent dense Internet technology company inside of Walt-Mart. We are now able to create new experiences for customers across digital and physical.” —Wal-mart (Big Box Retail)

“we have built a very strong team that’s very new to the brand but showing really good drive and the whole idea of a larger format and “web-as-alpha” strategy is almost building new companies within there” —Urban Outfitters (Retail)

And it’s tough to wear two hats at once. Invest in one area and another one suffers

“And frankly, as a result some retail fundamentals have started to suffer. Specifically in stocks in our stores have been unacceptable so far this year. And our guests deserve better.” —Target (Big Box Retail)

Companies are struggling to figure out how to create online moats. Private brands are one way.  It’s extremely competitive to sell national brands.

“I can’t minimize the importance of private brands as we strive to be a world class omnichannel retailer, again any retailer that is increasing their penetration on national brands while increasing their percent of online business will have to deal with some very capable, very capital intensive competitors of who are great at price analytics but as we continue to focus on making our sourcing and private brands more efficient, we believe we can become on omnichannel retailer and protect yourself of a profit and from a value standpoint unlike most retailers in our space.” —JC Penney (Department Store)

The winner will probably be whoever can operate at the lowest cost

“I come from a world where low cost retailer will always win” —JC Penney (Department Store)

Even the supply chain needs to be fundamentally restructured for e-commerce

“Retail is changing rapidly today than any time in my career and we need to ensure that core operations keep pace with the new ways we’re serving the guests. Overtime Target has developed an incredibly complex supply chain, built to serve an outdated linear model in which product flows from vendors through distribution centers to stores. To serve guests today we are becoming much more flexible in a way we fulfill demand for products and services. And this is stretching our supply chain well beyond its core capabilities.” —Target (Big Box Retail)

Retailers are touting their existing store base as flexible fulfillment centers

“In addition to the three direct fulfillment centers, we have 2,000 stores that are conveniently located, and we’re working on delivery capability from the stores. So we look at the stores to really be the expedited capability to put product in the hands of customers.” —Home Depot (Home Improvement)

And pushing BOPUS and BOSS

“We had another quarter of strong growth in our digital assets with dotcom sales growing approximately 25%, led by online orders picked up in the store through Buy Online, Pick Up In Store, BOPUS; and Buy Online, Ship to Store, BOSS.” —Home Depot (Home Improvement)

It’s a brave new world in retail, but on the other hand there’s nothing new under the sun

“From a CapEx stand point we have a tremendous advantage, many retailers that are ramping up into an omnichannel world, they have to make significant capital investments in constructing distribution centers. Because we are former catalogue retailer we already have the supply chain infrastructure in place to leverage.” —JC Penney (Department Store)


The tablet market is under even more pressure than the PC market

“In tech; what I’d say about that particular quarter is that there was a more pronounced shift down in the tablet and reader business, that’s shifting away at this point…Tablets actually are on a pretty tough spiral bind. The trend that we are seeing is that PCs are making a little bit of a comeback and Windows 10 hopefully is helping that. But also the mobility with people going to bigger devices, that’s also replacing some of the tablet businesses…So looking ahead, we don’t expect any help in tablets but we do expect PCs to improve.” —Staples (Office Supplies)

Applied Materials saw weak order trends because customers are reusing their equipment and running at higher utilization rates

“Looking at the market as a whole, we now see 2015 wafer fab equipment spending being approximately flat relative to 2014, with potential downside risk. The most substantial revision to our outlook is foundry spending, where we have lowered our estimates for the remainder of the calendar year. This is primarily due to customers managing excess inventory, improving their yields, and reusing equipment.” —Applied Materials (Semiconductor Manufacturing Equipment)

Materials, Industrials, Energy:

Hormel Foods lost 20% of its Turkeys to avian flu

“Jennie-O Turkey Store segment profit decreased 45% and sales decreased 12%. Results were impacted by high pathogen avian influenza, as flocks lost earlier this year created large volume shortfalls in operations and sales…The bird loss, if you will, ended the system near 20%.” —Hormel Foods (Meat Packer)

Hormel has re-populated its barns, but there’s a risk that the flu comes back in the fall

“We are filling up the barns but there clearly is at least a little bit of risk associated with that. We’ve heard a similar theory as to perhaps birds go south faster than they come north and they may not linger as long in the areas, and so that might be a positive factor. But I mean, at this point, it’s just such a wild card. I mean, this was an unprecedented incident already. We’re trying to learn from it, the government’s trying to learn from it. It could hit other parts of the country, it could hit another time of the year, it could go away, it could come back in a smaller manner. And so, we’re trying to be ready for any contingency. And the best I can tell you right now is we haven’t had a system outbreak since early June” —Hormel Foods (Meat Packer)

In order to get product to market more quickly companies need to manufacture closer to home

“I think we have an opportunity to bring product to market much faster than we do today…we are trying to accelerate the production by near sourcing, more production capabilities in the Americas” —Urban Outfitters (Retail)

Miscellaneous Nuggets of Wisdom:

Part of building trust with your customers is pricing products fairly

“If a product that we sell is available for less out there, then that’s the price that the market is at, and we need to be there…we think it’s just good customer service and part of earning our customers’ trust that we have market prices. ” —Nordstrom (Department Store)

Operating leverage works both ways

“When you’re that short in volume in your plants, that creates all sorts of overhead issues. When you literally don’t have products to sell, I mean, you’re losing that margin and that volume.” —Hormel Foods (Meat Packer)

Listen to your customers

“we spend a lot of time since we brought on our new Chief Marketing Officer Mary Beth West asking customers what they think rather than the leaders of the company sitting around in a conference room deciding what we think the company should be.” —JC Penney (Department Store)

Study an opportunity carefully for a long time before committing capital

“We are one of the few major U.S. retailers to have expanded successfully internationally…we go into countries and we build brands and we are constantly increasing our number of vendors in every single country. I think what we have learned prior to going into Germany is to really investigate country for a long period of time before we go in. So, you tread lightly, you are camping, you really understand the mix of the customer, and every single country is very, very different. So, you have to take a long time to study each country before you go in. So, we have lots of learnings. And now we have obviously expanded into many new countries a little bit quicker, but we did a lot of homework before.” —TJX (Off-price retail)

Full transcripts can be found at