Restoration Hardware 4Q16 Earnings Call Notes

Gary Friedman – Chairman and Chief Executive Officer

We’re making long term decisions

“we believe we are going to be a long-term growth company. We are an investment platform. And we think we keep getting smarter and we are going to be better allocators of capital as we go forward. And so we believe the returns we are going to get – continue to get better, but there may be some times where there is lumpiness because we decide to invest more aggressively into something that we think is going to have a greater long-term impact or opportunity. But I think as I articulated in the past, we are going to invest like we own 100% of the company. We are here for the long run. We are not going to play a quarter-to-quarter game. We are going to play for multiple years and a long-term view, and no different than the decision and the investment we made moving from a promotional to a membership model. These are long-term decisions.”

We’re building a new operating platform

“We believe we are going to build an operating platform that’s unlike anything in the industry. And we are going to do it from the inside out. We are going to design it ourselves. And nobody will be able to copy it, so more to come. We are excited about it. And I am personally leading the effort just so you know, that’s what I am really excited to do.”

You can’t solve complexity with complexity

“what I have learned in my career is when you – if you don’t take the complexity out of the business and simplify the business, if you try to take a complexity and you then try to solve it with a complex system, you have created a double complexity and that usually doesn’t work very well. All the companies I have ever been involved with and studied, most of the time when they are launching a big system or they are opening a new facility, if something drastically goes wrong and that’s because they haven’t first simplified it and our effort here is going to, first and foremost, simplify our business and then support and amplify that simple solution with simple systems.”

Staples 4Q16 Earnings Call Notes

Shira Goodman – CEO

Narrowing geographic focus to NA

“Finally, we made great progress narrowing our geographic focus to North America. While we have successfully provided tremendous value to business customers across Europe over the years, we have not been as successful creating shareholder value in Europe. We believe it’s in the best interest of our shareholders to narrow our focus to North America where we have our strongest return on net assets, greatest scale advantage, and most compelling value proposition.”

Invest in the delivery business

“our investments in growing the delivery business are really of four types. First and foremost is growing our sales force. And keep in mind that’s inside outside specialists, we said when we launched 20/20 that it would be about 1,000 sale reps over three years, and we’re on track with that; obviously increasing the productivity of our sales team to leveraging data, digital marketing et cetera; staying competitive on pricing, our pricing in the contract segment is actually quite competitive, and we will continue to do so but that is not the single largest area of investment; and then just investing in the supply chain to keep pace with the growth of the delivery business.”

Omni is growing

“I was just going to say, I want to be clear that omni is growing, albeit it’s not the core component of our growth strategy. So, as an example, buy online and pick up in store which is a great win for the customer from a convenience perspective; it’s a win for us, and that we don’t pay for the last mile delivery is a growth area for us very much so. And the same can be said for ships from store which really helps us again with managing our dispersed inventory, especially end of life inventory more prudently and efficiently.”

Trying to understand a niche

“I was just going to say, I want to be clear that omni is growing, albeit it’s not the core component of our growth strategy. So, as an example, buy online and pick up in store which is a great win for the customer from a convenience perspective; it’s a win for us, and that we don’t pay for the last mile delivery is a growth area for us very much so. And the same can be said for ships from store which really helps us again with managing our dispersed inventory, especially end of life inventory more prudently and efficiently.”

Home Depot at Institutional Investors Conference Notes

Kevin Hofmann – President of Online and the Chief Marketing Officer

55% of our marketing spend is now digital

“In this case – here we go, we’ll start with marketing. We’ve made a pivot, a significant pivot over the last few years towards more digital marketing. You might be surprised to know that a better part of 55% to 60% of all of the marketing that we deployed now is in the new media or digital world. Now, that doesn’t mean the old media world of TV and you’re getting an early view here of our Spring TV spot that’s playing in a few markets right now.

On the far left there, we still do a ton of TV. We still do a ton of traditional radio. There still is a place in the world for print advertising. But we’ve seen the customers’ behaviors change where everybody is spending their screen time, where everybody is doing dual screen watching when they’re at home. It’s changed dramatically and especially with the explosion of mobile. So, we’ve changed dramatically our marketing habits where we deploy our marketing spend.

So, as you can expect, the traditional world on the left, the digital world with both paid channels, very active with Google search terms, we manage over 18 million different keyword combinations with Google and partners like Google. We have a very, very active social media practice. We do a lot of retargeting for customers and are constantly looking at ways to make our marketing and advertising more personal, more contractually relevant for the customer and also more location aware. So, talking to you based off the weather patterns that you’re experiencing in your local neighborhood, those are all things that we have and we’ve deployed in our marketing spend.”

Contractors are adopting digital like everyone else

“–there is a theory out there that the contractor is a late bloomer when it comes to e-commerce and we actually don’t see that so much. Especially the millennial contractor, very, very much lives on their mobile device and so, heavy usage of interconnected tools for the millennial contractor. And then what we find is that if we just can get them exposed to it, they love it. When I mention the buy online, pick up and store, it’s one of the most delightful things we can introduce to a contractor. So, we’ve seen really, really nice uptake from the Pros.”

Urban Outfitters 4Q16 Earnings Call Notes

Richard Hayne – CEO

Results disappointing and unusual

“Let me begin with a fourth quarter overview. I would characterize results during this year’s fourth quarter especially the holiday season as both disappointing and highly unusual. Total company comparable sales were flat for the quarter. But within the quarter two distinct periods appeared.”

Saw wide fluctuations in traffic

” Comps were up nicely in the month of November. All three brands enjoyed a fantastic start of the holiday season by driving double-digit comp sales gains on both Black Friday and Cyber Monday. Things were looking very good. Then came December, store traffic and overall demand in North America at all three brands evaporated for several weeks at the beginning of December. More normal demand returned only as Christmas and Hanukkah drew near. Demand remained normal immediately after the holidays but fell back again once the New Year began. I can’t recall having ever seen a quarter with such wild and wide fluctuations.”

Retailers face a lot of challenges

“Now let me say few words about the macro environment. Without that the retailers in general and URBN specifically face a number of challenges. The most obvious of which is disruption created by the digital revolution. Once again sales from the DTC channel grew much faster than the store channel. DTC session traffic is up strongly while store traffic is weak. The shift in consumer preference is both obvious and growing. Total company penetration of our direct channel across all brands increased by roughly 400 basis points during the holiday season. I predict within the next three years, total URBN retail segment sales by channel will be almost equal.”

Digital shopping is negatively impacting store margins

“This would be fine if the increase in DTC sales were wholly additive, but they’re not. Digital shopping is partially replacing store shopping and thus is negatively impacting store traffic and store generated sales. Flat to negative store ‘comps’ are causing occupancy deleverage and eroding four-wall margins.”

The bubble of this industry is deflating

“Add to that the fact that the U.S. market is oversaturated with retail space and far too much of that space is occupied by stores selling apparel. Retail square feet per capita in the United States is more than six times that of Europe or Japan. And this doesn’t count digital commerce. Our industry, not unlike the housing industry, saw too much square footage capacity added in the 90’s and early 2000’s. Thousands of new doors opened and rents soared; this created a bubble, and like housing, that bubble has now burst. We are seeing the results; doors shuttering and rents retreating. This trend will continue for the foreseeable future and may even accelerate. Another consequence of overcapacity is discounting and endless promotions as retailers try to drive demand through lower prices. This causes AUR deflation and erodes merchandise margins.”

We’re investing in the most promising opportunities

“how does URBN, with our current portfolio of strong, omni-channel, lifestyle brands, adapt, grow and remain solidly profitable? The answer: we plan to do what any good portfolio manager would. Invest resources in the most promising opportunities, diversify to lower risk, and increase liquidity. Fortunately for us, we are already reasonably diversified. Three years ago, we set out to strengthen and grow our non-apparel categories and have done so with considerable success. We now see many additional opportunities to grow by channel, category and geography.”

Highest priority is digital

“Our highest priority is where we’ve had the most recent success, digital. Last year, we made many improvements to our capabilities in this channel. We developed a single platform for all brands. This enables URBN to be more scalable and efficient in developing and rolling out front end enhancements across all brands, both on mobile, and all websites. We have improved our functionality around check out, payments, search, inventory visibility, in store pick-up, ship to store, mobile capabilities and speed on all web platforms.”

Not abandoning stores, but investment is trending downward

“I certainly don’t want to give the impression that we are abandoning the store channel because we’re not. I envision our brick and mortar store fleet as an equal partner with the virtual store in the new omni-channel retail world. We will continue to invest in this channel, but relative to historic levels, store investment is trending downward. This is largely because both larger brands have now reached what we believe, and have always said, is full penetration in North America, a fleet between 200 to 250 stores. Furthermore, it makes little sense to enter into many new, long-term leases at this time when all signs indicate that a similar lease will be less expensive in the near future.”

Dicks Sporting Goods 4Q16 Earnings Call Notes

Ed Stack – Chairman & CEO

Great time to be patient for real estate

“We look at this going forward that now is absolutely the right time to be patient from a real estate standpoint, with all the real estate that’s going to come up on the market. Penney’s announcing stores that they’re closing, Macy’s announcing stores. Some other people that are rumored to be closing stores or — consolidation in this industry is not over. And this is a time that we’re going to be very patient going forward.”

The e-commerce business is probably more profitable than you think

“Still the — so what we expect is as we continue to grow the business that the shipping costs are going to become a bigger piece of the expense structure as the business becomes a bigger piece of the entire business. We’re looking at ways at how we might be able to slow those shipping costs and we’re working through those. But to kind of call out the profitability of e-commerce versus the profitability of the store, we’re not ready to do that. But I will tell you that the e-commerce business is probably more profitable than you think.”

Target 4Q16 Earnings Call Notes

Brian Cornell

A seismic shift for our industry

“For the past several years, we’ve been watching several key consumer trends emerge. People are placing greater value on experiences. Often they would rather live it than own it, especially young people. When they buy, they want to buy into a greater purpose, not just a product. Taken together, these changes can only be described as a profound shift in the consumer mindset. Then combine that with the different behaviors around how and where consumers are choosing to shop. Today, there is total transparency. Ease and speed are paramount. The shift in channel preference is real and only gaining momentum. Our industry is the midst of a seismic shift, and, of course, you read the headlines.”

Not seen this number of distressed retailers since 2009

“In fact, many of you write the reports, we’re operating in an incredibly challenging environment. All across the retail industry, many of our competitors are aggressively rationalizing their assets. They are closing stores, exiting markets. They’re cutting costs just to keep their heads above water. We’ve not seen this number of distressed retailers since 2009 in the Great Recession. This contraction will create opportunities for Target to pick up market share over the long-term, but aggressive promotional activity will create pressure on our business in the near-term. At the same time, there are others who are thriving in this new environment. So the changes we’re making aims squarely at moving Target into the retail winner circle.”

The essential Target doesn’t translate to the digital world

“that essential base Target run doesn’t completely translate to the new digital world. Traffic drivers are fundamentally different and guests behave differently too. Put a guest in the store, they are looking for inspiration, they enjoy discovery, they enjoy shopping. But very often a visit to Target.com, it’s far more transactional. One item at a time, logon, check out, as fast as possible friction free.”

Challenge is to continue to understand consumer evolution

“So the challenge ahead is really about continuing to understand how consumer preference and expectations are evolving. Anticipating where they are going, what they’ll want before they have to tell us. Finding new ways to engage at every stage in every occasion. Offering and clearly communicating compelling value in every interaction at every touch points and building a new Target that’s uniquely positioned to compete and win, delivering on two pillars of market share growth, one digital, and one physical.”

Need to be proud of who we are. This isn’t the first shift in retail

“The third and final piece of our strategy is about standing proud and being confident about who we are, holding up the power and the potential of our brand as a beacon, and leaning into all the reasons guests fell for Target in the first place. So at the start this morning, I talked about how we’re looking at this seismic and accelerating shift in our industry and that’s true. But you know better than anyone that these inflection points come around every generation or so. And strong retailers endure, while others, well, they don’t. Pick your era defining change throughout history from downtown department stores to suburban malls, catalogs, e-commerce. Target not only weathered the storm, we emerged better positioned as a result, and that’s for many reasons.”

2017 is a year of investment

“I’ll go back to my what Cathy talked about a few minutes ago. We certainly view 2017 as a year of investment. In 2018, we’ll continue to transition as these different initiatives begin to mature. As we get into 2019 and beyond, we certainly expect stability and a return to growth. So that’s the model we’re looking at. We can’t laid out for you quarter-by-quarter. We want to make sure, we’re properly investing and accelerating these initiatives. And if there’s a message I want everyone to walk away with today, these aren’t new initiatives. We’ve been working on these for several years.”

We’ve got to invest to grow

” We’ve got to invest to grow. We’ve got to reimagine our stores. We’ve got to enter new neighborhoods as we’re doing with these small formats. We’ve got to transform our supply chain. We have to build out the digital capabilities required in this environment. We have to continue to elevate our proprietary brands. And I think most importantly, we just have to embrace the realities of this new era of retailing and make sure that we also embrace the way consumers are shopping today.”

Data science has become a strength

“Oliver, let’s try to unpack those questions. Let me start with the last one, as we think about the role of data science and analytics. And I made the comment that three years ago this was a nascent capability for us. It’s now quickly become one of the strength of the company. And we’re applying that across all of our various functions. It’s helping Mark and his merchant team make better choices. It’s certainly enabling some of the work that John is leading from a supply chain standpoint. It’s influencing how we lead and manage our stores. And Mike can talk about the important role it plays as we think about digital and the personalization of our communication. So data science is going to play an important role across all of our functions going forward to make the company focused on the right decisions, smarter decisions, more personalized decisions.”

John Mulligan

Stores are our key competitive advantage

“First, let’s talk stores, our key competitive advantage. They are at the center of everything we do for our guests regardless of how we deliver. The 40% digital growth we saw in December, they enabled it. In the two days that followed our record-setting cyber Monday, our stores shipped more than 1 million orders to fulfill that demand. The week before Christmas, our stores fulfilled nearly 70% of our target.com orders. And on Christmas Eve, they fulfilled more than 80%, shipping about half of those to our guests and packing the other half for in-store pickup.”

We’re slow and have too much inventory

“This past year, we hired a lot of talent with deep expertise and set wheels in motion for a major revolution of how we operate. We’ve honed in on two points we have to fix. To put it bluntly, we are slow and we have too much inventory. And I can’t tell you how painful it used to be to say that out loud. But now I’m actually eager to share it, because I’m so confident the work we’re doing will position us to compete on a whole new level. Fundamentally, we’re changing how we move product.”

Costco FY 2Q17 Earnings Call Notes

Richard Galanti

Still seeing deflation

“Regarding deflation, overall, primarily in the US, we have seen deflation in the 1%, 1.5% range in February. Departments such as foods, sundries, frozen foods, liquor meat, dairy showed the most deflation on the foods and sundries side. On the non-food side consumer electronics continue to be deflationary, primarily in the TV category. In terms of new openings, our opening activities, we planned, we opened a net of a 8 new locations during the first quarter, nine less were re-low.”

Working with instacart and Google Express

“Finally, a quick update on other home and office delivery sales channels. As you know, we partner with Google Express in five cities, operating out of 15 of our Costco US warehouses. In addition, we’re working with Google Express on a new service offering one to three day shipping of products throughout the Continental United States. We also continue to work with Instacart. Instacart currently operates in 26 US cities, in our case utilizing 132 of our US locations, and we are either testing or getting ready to test two other third-party delivery services within the next month or so.”

Gas prices up 29% y/y

“As Bob is reminding me, and getting back to the gasoline comment, a lot of it has to do with the contribution penetration of these areas. With gas inflation – I think gas prices are up 29% over the year, and gallon comps were up higher as well because of that.”

Private label philosophy

“Sure. I think yes, but we also, our success has been based first by selling branded goods at the best value out there. Two reasons, one such sharp savings relative to everybody else and two, our KS – if it’s as good as, if not better quality, which is our starting point and even a greater savings versus what we sell the brand for, that’s even better. And it keeps our members happy and it keeps us and our vendors honest. We’ll continue to drive it. Recognizing there aren’t a lot of $300 million and $500 million items out there, like the waters and the paper goods, and the K cups and whatever. But there’s lots of $20 million and $30 million and $50 million items – we get surprised every day. So yes, there will be a continued push for that, but there’s also a continued push to add brands that historically haven’t been prepared to sell us.”

We’re a bit of a tortoise

” One of the things we all know, we have the best prices on great quality items. And we’ve never been too good about worrying about how to get it to that end customer a day earlier. We’re doing – it’s the 80/20 with us. We’ve done just in the last six or eight months, a lot of improvement online in that customer experience, with the smallest amount of effort. The low hanging fruit. We’ve got good things working on, but we’re doing these things, honestly, from our offensive standpoint not a defensive standpoint. And I’m not trying to be cute. Clearly we want to do it for competitive reasons, too, but it’s not like we looked at this and we lost. We see our renewal rates, ex-some of that auto bill stuff that we believe. We see our traffic going up still, and we see online, we see our page views and the like going up as well. With some of the additional items and the types of items we put on and better communication to our members of what that is. I think again, sometimes we’re viewed as the tortoise, not the hare. Certainly, over time we’re viewed as being stubborn. I think in my view, we’re a lot less stubborn and – but we’re still a little bit of a tortoise sometimes and we got a lot of good things going on. We’ll see, but stay tuned.”

Inflationary in the months ahead

“The collective view is inflationary, or less deflationary, for the next few months and maybe a little inflationary, but it’s a crap shoot.”

Border adjusted tax is bad for consumers

“As it relates to the border adjustment tax, there’s clearly the people out there that want it and manufacturers that export a bunch of stuff and don’t import a lot of stuff and at the very other extreme retailers. Recognizing border adjustment tax is just one element of one version of the tax reform plan that’s been put forward out there. The probability of what’s going to happen and when it’s going to happen and how much of it’s going to happen, we don’t know. We don’t believe it’s good for consumers – it’s going to raise prices and ultimately, I read articles where some retailers, particularly apparel retailers, were 90%-plus of their merchandise is sourced overseas, well a 20% tax is a 20% tax. While retailers generally tend to historically be full corporate taxpayers, us in the mid-30s in the US probably a little higher than that, the total company effective rate. It’s going to hit it and so to go through, we personally don’t buy into the fact that it will be offset by a big rising dollar. We don’t know what’s going to happen with the retaliation out there by other countries, and we’ll see. But as a retailer, we definitely think that it’s bad, and we’re against it.”

Ross Stores 4Q16 Earnings Call Notes

Barbara Rentler

Uncertainty, remain cautious

“As we look ahead to 2017, there continues to be a great deal of uncertainty in the political, macroeconomic, and retail climates. In addition, we face tough prior year sales and earnings comparisons. As a result, while we hope to do better, we believe it is prudent to remain somewhat cautious in planning our business for the coming year. Nevertheless, we are confident that the off-price sector will remain a strong performing segment of retail especially given consumers’ continued focus on value.”

Michael B. O’Sullivan – Ross Stores, Inc.

Store closing negative at first, then positive

And, Paul, on your question about store closures, it’s difficult to respond to specifically, the Macy’s example that you gave, specifically how that affected our stores. There’s just too much noise to pick out the effect of those individual store closures. What I would say, though, is in general, with store closures, competitor store closures, there’s a short term effect which is as that competitor store is doing and going out of business now, that can impact our business negatively for the weeks of that happening. But then, obviously once that store is closed, there’s one less competitor in the market. So in general, it tends to be a good thing for us in the medium- to long-term.

Supply driven by other retailers’ poor inventory decisions

Yeah, that’s always a concern. We’re always concerned about supply. But one point Barbara had made a little while ago is that what really drives supply is other retailers and their inability to forecast their own sales. And if they’re not able to forecast their own sales, that tends to mean there’s greater supply availability, so.

Michael J. Hartshorn – Ross Stores, Inc.

Weather more important than Easter

Mike, I think historically weather has had a more meaningful impact on performance during the first quarter than the timing of Easter, which is what we’ve seen in the past

Autozone FY 2Q17 Earnings Call Notes

William C. Rhodes

Weather and tax refunds were headwinds

“After Christmas, the weather was much more mild with minimal snow and ice in the Midwest, Northeast and Mid-Atlantic. During this period, our sales growth moderated. Then, as noted above, in the last three weeks when we began lapping the beginning of last year’s tax refund season, our same-store sales declined fairly significantly. Late last year, the IRS announced that, in an effort to combat fraudulent tax refund filings, they would be delaying the issuance of refunds associated with returns claiming the earned income tax credit. Unfortunately, the timing of refunds typically begins in the last two or three weeks of our second quarter, and this year most of the refunds were delayed until after our quarter concluded.”

Rising operating costs

“Thank you, Bill. This quarter, our sales and profitability performance were not up to our standard. Much of the challenge was macro in terms of delayed IRS refunds, but we have also incurred rising operating costs, which include our initiatives. At the end of the day, we have had a remarkable track record of success and we will continue to focus on optimizing both short and long-term performance.”

No border adjustment

“First, following the election, the border-adjustable tax has become a hot topic. As I’m sure many of you know, I was part of a contingent of Retail Industry Leaders Association CEOs who went to Washington, D.C. and met with President Trump, members of his administration, and various members of Congress to share our perspective on the potential harmful effects of this proposal. While we are concerned about the impact on retail business models, we are more concerned about the ramifications for hard working American families due to likely significant inflation that would ensue. Our key message is that we certainly support a pro-growth agenda, including corporate and individual tax reform, but we stress the importance of a thoughtful approach to tax reform to avoid any unintended consequences.”

Bill Giles

Macro driving trends

“Switching over to macro trends, during the quarter, nationally unleaded gas prices started out at $2.16 a gallon and ended the quarter at $2.31 a gallon, a slight increase. Last year, gas prices decreased per gallon during the second quarter starting out at $2.09 and ending at $1.72. While prices at the pump are higher today than they were last year at this time, we continue to feel the absolute price of $2.31 a gallon is not high enough amount to change the driving behavior of Americans as we continue to see miles driven increasing. We also recognize that the impact of miles driven on cars over seven years old, the current average, is much different than on newer cars in terms of wear and tear. Miles driven increased 1.6% in October, 4.2% in November, and 0.5% in December. And for all of 2016, miles driven were up 2.8%. The other statistic we highlight is the number of seven-year-old and older vehicles on the road, which continues to trend at our industry’s favor”

JC Penney 4Q16 Earnings Call Notes

Marvin R. Ellison

Elements of the retail environment remain uncertain

” While we were very optimistic on our growth initiatives on 2017 plans, our 2017 guidance is conservative as we expect elements of the retail environment to remain uncertain. Clearly, if we see improvement in the environment relative to our current expectations, we’d expect to beat our sales guidance. But we want to plan the business conservatively based on what we saw in 2016.”

Able to talk about earnings again

” In the past, because we did not have positive earnings, EBITDA was really the only measurement we could track toward. But because we expect to deliver positive earnings for 2017, we’ll continue to talk about earnings as our key guidepost, but EBITDA remains important.”

We were slow to react to the casualization of America

“But I think we were slow to really adjust to some of the trend changes in the – I call it the casualization of America. And we were one of the last retailers to really get into the activewear trend in a big way. We feel great about the changes we’ve made specifically in activewear with Nike and adidas. And also our Xersion private brand activewear category is performing exceptionally well. So, it’s all about transitioning to a good balance between career and casual. It’s also about looking at the fact that we said we were over-assorted.”

No reasons why the consumer should be pulling back

” on more of a big picture perspective on kind of where we are in this industry, I’ll give you my thoughts. I think the state of the consumer from every measurement we look at, I mean, that there are no red flags out there why the consumers should be pulling back. Unemployment is stable. Wages are relatively up. And so, we don’t see anything from a macro standpoint that gives us any concern. There’s been some noise about delayed tax returns in February, but we know that those things will balance itself out throughout this quarter. So, it’s not something we’re spending a ton of time on.”