The Macro Outlook:
Macys was disappointed, but not discouraged by its sales performance last quarter
“our sales performance fell short of what we had expected. And as a result, so did our earnings. In speaking to our leadership group last week, Terry, our CEO, started his comments by saying: I am disappointed but not discouraged.” –Macys (Retail)
Kohls noted that results were weak for a lot of retailers, but said that it doesn’t see anything wrong with the consumer
“On the consumer, I know some of the sales results in the first quarter around some of the retail companies have been probably less than expectations were…there isn’t anything that we’re seeing with the consumer that would change our view for the year. I think it’s still generally positive versus last year. So we think over the course of time, the consumer is in a better place and is going to have a positive impact on our sales.” –Kohls (Retail)
JC Penney may have been the most optimistic of the lot
“Geographically, all regions posted positive comps this quarter, with the West and Central regions posting the highest gains over a year ago. Easter was strong for us across the board, with the apparel businesses driving significant growth in Easter categories compared to a year ago.” –JC Penney (Retail)
Macys cited weak tourist spending as a major headwind. Even domestic companies are not immune to a strong dollar
“With the strong dollar, our sales from international tourists are down significantly. Because of our strong flagship stores in key tourist markets like Manhattan, Las Vegas, San Francisco, and Chicago, this has had a big impact on our overall sales.” –Macys (Retail)
Many companies have hedged FX exposure, but those hedges will roll off over time
“we have hedged our FX exposure. And so as those hedges roll off, we will have a year-on-year hedge FX hurt continuing into fiscal 2017 from the portion of the business that was hedged in fiscal 2016.” –Ralph Lauren (NYSE:RL) (Apparel)
However, hedges give companies time to make real adjustments
“we have taken decisive actions to mitigate the negative currency impacts. First we are raising prices in certain markets that have been impacted by currency devaluation…Second, our supply chain organization has negotiated lower cost across our manufacturing base as a result of lower raw material and oil prices as well as the strength of the U.S. dollar.” –Ralph Lauren (Apparel)
If FX keeps trending the way it has then this whole discussion may not matter anyways
“that $5 million loss if exchange rates kind of stay more stable which I would expect they wouldn’t be as volatile that would largely go away.” –Middleby (Restaurant Equipment)
Wages are rising
“overall in wages, Pat, our expectation is wages will continue to rise and we’ve put that into our thinking over the course of the year and my expectation is wages will probably continue to rise and we’ve always managed that.” –Kohls (Retail)
So companies are looking for ways to cut labor
“Number two is can you help me save labor. I will tell you three years ago, two years ago it was not a number, it was there, if you can help me save labor, but now it because number two. It went from being maybe a number six item to number two.” –Middleby (Restaurant Equipment)
Cisco can do things with 20 people that used to take thousands
“if you watch the innovation we’re talking about in many of these areas, what used to take thousands of people, Pankaj does with 20. We do the new mobility capability with data combining Wi-Fi with 3G and 4G in a way with 18 people in eight months. You make moves in security the same way. You bring Spark to life with business messaging with 200 people.” –Cisco (Networking Equipment)
International:
People were worried about Europe, but now they’re not
“I would say that I was worried about Europe a little bit more. Europe is doing quite better.” –Middleby (Restaurant Equipment)
Financials:
It takes 18-24 months to develop properties in Texas and California
“because there is a drive through and it’s a free standing ground up building, that process takes anywhere from call it, 18 months in Texas to two plus years in California. So activity today doesn’t create a new restaurant next month because it has a much longer timeline” –Jack in the Box (Restaurant)
An analyst asked Nordstrom (NYSE:JWN) why they bought back fewer shares this quarter. Answer: it’s a systematic approach and the price was above where they set it
“No, there’s no change in our approach. I mean, we set up a buyback plan matrix ahead of time. It’s governed through a 10b5-1 plan. It was purely a function of the repurchase amount that was set based on share price.” –Nordstrom (Retail)
Consumer:
It’s time to start thinking about Generation Z as its own group of consumers
“Generation Z is those 21 years of age or younger and I’m sure many of us on the call have children that fits in the Generation Z. They are quickly emerging as a formidable group of consumers. It makes up 47% of the population and they will be again moving into gradually trickling into the work force over the next ten years.” –Middleby (Restaurant Equipment)
Omnichannel customers are the best type of customers
“somebody shops omnichannel is three or four times as valuable as of the customer that somebody just comes to the mall or just shops online…ultimately it’s the omni-channel customer that’s going to be the best customer for us.” –JC Penney (Retail)
Retailers have spent a lot of money on technology in the last few years, but maybe the heavy investment period is ending
“if you look in the slides we provided, you will see we made an enormous investment in CapEx over the last seven or eight years, about $4 billion between the Oracle (NYSE:ORCL) tools, the investment in home remodel and the visual clarity that we added to the stores, as well as the number of IT investments in digital…we are refocusing our CapEx primarily on enabling the growth initiatives in Center Core” –JC Penney (Retail)
“we expect 2015 to be the peak investment year due to the concurrent timing of multiple growth initiatives. This includes Canada, Manhattan, several flagship remodels, and a third fulfillment center. We expect CapEx in subsequent years to normalize below our plan average of 5% of sales.” –Nordstrom (Retail)
Wal-Mart (NYSE:WMT) is making a push into health and wellness merchandise
“we’re seeing Wal-Mart has intensified the whole health and wellness business and especially on making a strong commitment to the whole ath-leisure active wear business.” –Perry Ellis (Apparel)
Linear pay TV has probably peaked, but the bundle still provides the best economic value
“my general sense is that the linear pay television business probably peaked a couple of years ago and that it’s in a very slight decline in terms of number of households that will pay for the big bundle but I don’t see it and it’s not declining as fast as I would have thought it would and so there is — and the bundle was here for the vast majority of people still the best economic value.” –Dish (Satellite TV)
Pay TV has gotten so expensive that the balance of power has shifted a bit towards distributors over content owners
“I’d say in general the tail has moved a little bit more in the distributors…there comes a tipping point for content providers when it’s a $100 a month that you lose more subscribers than you gain and so you start missing our guys say you start missing a whole generation and it’s hard to get it back” –Dish (Satellite TV)
Technology:
There is a learning curve for companies to understand and adopt technology
“the market continues to gain wisdom around cloud and so we are seeing more of the commentary around unmanaged cloud and managed cloud elements show up in these bids. So customers are starting to get smart about knowing what they’re asking for and comparing competitors differently, and that’s good news for us.” –Rackspace (Cloud Service Provider)
“A number of years ago we started talking about the next phase of the Internet, the Internet of Everything. That will be much bigger than the last, and it will require everything to become digital. At the time, almost no one understood what we saw. Today, it’s everyone’s idea.” –Cisco (Networking Equipment)
Has Microsoft (NASDAQ:MSFT) all of a sudden become the cool kid in cloud computing?
“Office 365 is taking share. As you think about what Office 365 does, it provides a SaaS-based managed solution for some of the most ubiquitous and mature types of apps in the world; email, collaboration, productivity. These all applications that CIOs are in increasing number saying, why should I run that? I add no value to it. So the size of the market is big and it’s moving faster out of the corporate data center. And Office 365 has a leading position in it. ” –Rackspace (Cloud Service Provider)
“During the quarter we announced Cisco and Microsoft will integrate Cisco cloud innovations with Microsoft Azure to help service providers more quickly and cost efficiently launch new applications. We will also extend the enterprise-class security and services and customer private clouds to Microsoft Azure with Cisco Cloud Services Router, the 1000V” –Cisco (Networking Equipment)
Zillow acknowledged that “unique users” is not a real metric
“At a 140 million unique users we’ve probably already past the point where it makes sense to think about that number as a real metric, in a sense that it’s such an abstract number, we all know people have multiple devices; we know that people use multiple brands. And so it’s quite abstract” –Zillow (Real Estate)
Considering that Zillow’s IR angrily called me after I blogged about how misleading “unique users” is, I’ll take partial credit for these internal debates
“In terms of metrics, I’m laughing because this is something that we’ve spent a lot of time internally trying to bid debate and trying to figure out how best to provide investors with transparency and an ability to model…I don’t think we’d really found the right — the sort of perfect metrics which give investors transparency” –Zillow (Real Estate)
Healthcare:
Policymakers are moving the healthcare system towards outcome-based reimbursement
“policymakers have set meaningful direction to support a transition to value-based care in the United States. Recently Congress overwhelmingly passed H.R. 2 which permanently replaces Medicare’s sustainable growth rate system. The bill, which was signed by the President, provides needed reimbursement stability and predictability for providers in the near term while they transition to a more incentive-based payment system by the year 2019.” –McKesson (NYSE:MCK) (Medical Distributor)
Materials, Industrials, Energy:
Many companies have budgeted for oil prices lower than they are today and are ready to ramp production if prices stay here
“We have budgeted conservatively at $50 WTI for the year. And while first quarter oil prices came in a little below that level, the second quarter is off to a good start. Should oil prices stabilize at these higher levels and cash flow increase accordingly, we are well-positioned to ramp up the drilling program in an efficient and cost-effective manner.” –Apache (NYSE:APA) (Oil Exploration and Production)
Miscellaneous Nuggets of Wisdom:
All that is old becomes new. JC Penney saved money on building distribution centers for e-commerce because it already had them for its catalog business
“JCPenney is a company that has a great catalog infrastructure and so as we think about CapEx for omnichannel we are spending most of that on digitizing the infrastructure. So we are not building DCs, we are just trying to create platforms to digitally connect those DCs to the customers for what we call seamless transactions for them to purchase in-store, online, et cetera” –JC Penney (Retail)
One of many good things about having an owner-operator CEO is that they don’t have to manage to Wall Street’s demands
“I think we’re probably a little less aggressive today than perhaps when Joe was here because I’m looking at to gain a customer long-term and I’m not trying to get a customer to make a bonus or get a customer to show to Wall Street because I’m very confident in where we are going. So I don’t need to play to do that” –Dish (Satellite TV)
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.