The Macro Outlook:
Businesses appear to be seeing a spring uptick
“In the U.S. which is our largest market, we actually see slight uptick in consumption…generally from a consumption standpoint, things to us in our categories look reasonably good in the U.S. and on a slight uptick. ” —Procter and Gamble (Consumer Packaged Goods)
“the short answer is this spring we’re sort of seeing an uptick in all of our business. So all parts of the country, so while we have seen stronger business in some of the areas where we don’t have a physical presence, we’ve also seen uplift in the areas where we do have a physical presence” —Oxford Industries (Apparel)
“we were disappointed when February showed a decline…the good news is unlike last quarter where we began with a negative month, this time we ended the quarter in April positively and we began with a very strong May.” —Hovnanian Enterprises (Homebuilder)
Commercial Construction markets are solid
“We believe the construction end market continues to recover. As we discussed previously, we believe non-residential activities strength is solid in most of our priority districts now and we saw gradual improvement over the past year with strength widening across the country.” —HD Supply (Industrial Distributor)
The upper class is doing just fine
“As we look ahead towards fiscal 2016, we remain incredibly optimistic with…an economic environment that remains particularly strong for upper income vacation travel.” —Vail Resorts (Ski Resorts)
Homebuilders are un-mothballing communities that were set aside in the housing bust
“Assuming current market conditions remain steady, we continue to anticipate un-mothballing approximately 900 lots in fiscal 2015 in two locations, one in Natomas, California, and the other along the Hudson River Waterfront in New Jersey. As the housing market improves, additional communities will be un-mothballed in future periods.” —Hovnanian Enterprises (Homebuilder)
The job market is clearly getting more competitive
“I think we just want to highlight something that I think everybody knows, which is that the market for jobs is obviously getting more competitive and our own success obviously means that within our resorts and in our company, it is more competitive to get talent.” —Vail Resorts (Ski Resorts)
Inventories have been managed very tightly
“We are seeing some pressure from a trade inventory standpoint as those inventories continue to be drawn down as tightly as they can. And so unfortunately, we’re seeing a higher level of out of stocks than what we have previously.” —Procter and Gamble (Consumer Packaged Goods)
Given these conditions it seems a little strange that we’re still not seeing inflation
“We have not seen a material change in the deflation environment versus our last call…We have not seen a material change in the pricing environment either. It remains challenging as it has for the past several years.” —HD Supply (Industrial Distributor)
Maybe we are?
“Food commodity inflation for the quarter was driven primarily by increases in beef and poultry while our food pricing was approximately 2.9% and partially offset these pressures. We still estimate that the full year commodity inflation will run between 4% and 5%” —Dave and Busters (Restaurants)
It’s pretty amazing that Texas’ economy still appears to be unscathed by low oil prices
“as it relates to Houston and Texas, specifically, we just pulled some analysis again last week and we’re just not seeing anything, whether it because of oil or rain or whatnot that’s negatively impacting Texas at this point.” —Dave and Busters (Restaurants)
The East Coast hasn’t recovered quite as quickly as other parts of the country
“The D.C. market, overall, has been sluggish compared to where we’d expect it to be at this time in the cycle. Clearly, sequestering is taking its toll and employment has not been as vigorous as it used to be. So that is not giving us the punch that we normally have. In the Northeast, that market has just not recovered as vigorously as other markets have.” —Hovnanian Enterprises (Homebuilder)
International:
European economies have been choppy
“Western Europe continues to be, I would describe it as choppy, but the chop is the level chop” —Procter and Gamble (Consumer Packaged Goods)
Financials:
Low interest rates make everything look attractive
“in today’s low interest rate environment, you could make any acquisition look attractive and that’s dangerous. You have got to use more of a cost of funds over a longer period of time to really look at what returns you might get from an acquisition” —Wells Fargo (NYSE:WFC) (Bank)
Consumer:
The gold standard of brand advertisers has spoken: digital advertising delivers higher ROI than TV or print
“There continues to be significant savings opportunity in marketing, particularly in non-media spending. By following the consumer, we’re proving marketing spending effectiveness and efficiencies to deliver more, longer reach, higher frequency, greater resonance with less. We’re shifting more advertising to digital media, search, social, video and mobile as consumers spend more time there. In general, digital media delivers the higher return on investments in TV or print.” —Procter and Gamble (Consumer Packaged Goods)
Advertising agencies could be a major loser in the shift to digital marketing
“One non-media cost area that offers significant opportunities is agency spending, which includes fees and production costs for agencies we use for advertising, media, public relations, package design and development of in-store materials. We plan to significantly simplify and reduce the number of agency relationships and the cost associated with the current complexity and inefficiency, while upgrading agency capability to improve creative quality and communication effectiveness.” —Procter and Gamble (Consumer Packaged Goods)
E-commerce has an advantage in inventory management
“we were able to accelerate or able to flow, I should say, inventory to the e-commerce business faster than we could the stores. There’s an additional step in the supply chain for getting the inventory from our distribution centers to our stores, which takes a little bit of time that in e-commerce you don’t have that step. So, we’re able to have a better inventory position in e-commerce which I think drove the upside.” —Lululemon (Yoga Pants)
We are seeing tectonic shifts in the food marketplace right now
“You are seeing major CPGs have lost $18 billion in market cap in the last three, four years. You all saw the article in Fortune that this is a — this are tectonic shifts in the food marketplace that are happening right now.” —Whole Foods (Grocery)
The competition in health foods has become intense. People are racing to the bottom on price.
“look, it’s clear that the market is moving. Market is looking for a new bottom with respect to pricing as a lot of folks are jumping in. There is a lot of add-on, particularly some of the same product where market is trying to move quickly to a lower pricing. They basically is moving faster than I think we can take Whole Foods or that we want to take Whole Foods with respect to some of those particular products.” —Whole Foods (Grocery)
Mike Ullman probably deserves some props for pulling JC Penney out of its tail-spin
“I think it goes without saying that Mike and many of the executives will never receive the credit they deserve for the work that they put in place in the last two years. To say that he was handed a very difficult situation would be and understatement. And I don’t think there are too many executive leaders that could have stepped into that situation at the time he did to literally save the company.” —JC Penney (Retail)
A couple of years ago a lot of people assumed that either Sears or Penney would have to go bankrupt and that Penney was the likely candidate. Now Sears looks more likely than Penney
“first quarter domestic comparable store sales declined 10.9%, comprised of decreases of 7% at Kmart and 14.5% at Sears Domestic.” —Sears Holdings (Retail)
Apparently I’m the only shmoe who is still getting married
“There are indicators that the overall wedding business is slowly shrinking due to shift in cultural attitudes towards traditional weddings. The U.S. marriage forecast published by Demographic Intelligence reports the number of weddings have been on a slow decline since 2008 and projected to continue to contract through 2016.” —Mens Warehouse (They’ll Guarantee it)
Healthcare:
This tax season was the first time that most people realized that ACA has an impact on their taxes
“I think that many people for the first time began to realize that their taxes and healthcare decisions are related” —H&R Block (NYSE:HRB) (Tax Preparation)
More people claimed they had health insurance than H&R Block expected, but that may be because the IRS did not force them to verify it this year
“what we found this past tax season is that more of our clients actually filed indicating non-marketplace coverage for them and their household members. We think this is related to the fact that the IRS had really limited mechanisms in place really to enforce compliance, and a lot of people used the checkbox process as a way of avoiding ACA-related penalties” —H&R Block (Tax Preparation)
It will be a few years before the full impact of ACA is felt
“it will be several years before the full impact of the ACA is felt. In fact, there are several important changes coming in just the next year…penalties for not obtaining healthcare will essentially double to $325 per adult or 2% of household income, whichever is greater. And finally, new documentation requirements will impact those taxpayers claiming to have employer-provided or private insurance.” —H&R Block (Tax Preparation)
Cynical thought of the week: treating disease is a lot more profitable than curing disease
“HIV is a chronic disease. Once you go on medications, you are on medications for life, so if you are diagnosed with HIV in your 20s or 30s, you may be taking our medications or other medications for up to four to five decades for the full period of your life.” —Gilead (Biotech)
Materials, Industrials, Energy:
The spring redetermination process to assess the collateral of Energy loans has been relatively painless
“The spring redetermination process is getting to the end. And so far, from our perspective, it’s gone relatively well. Having said that and we expected over time, when we redetermined borrowing basis in the fall for it to go well too” —Wells Fargo (Bank)
That said, variables could change between now and the end of the year that could lead to more non-performing loans
“Having said all that, I would caution anybody who is looking at the industry to be careful about taking the results of this spring redetermination and then applying it to future redeterminations, because you have got to remember that there was a tremendous amount of hydrocarbons that were created in 2014. It was probably the most active year for the industry. Many of that those hydrocarbons moved into approved producing category, which is what you lend against. To the extent that our investment in the industry declines a little bit, it’s likely that the rate of that growth will decline. So that’s one important thing to remember. And then also, it’s a function of price. Now when you calculate your borrowing basis, you are not using the market price. I think most in the industry used a significant discount to the market price. For example, we saw last fall. Having said that, as time goes by, there is always an assumption that the underlying market prices are going to increase and if oil prices stay where they are today, you are going to then be comparing lower prices to potentially higher prices in prior borrowing basis.” —Wells Fargo (Bank)
Miscellaneous Nuggets of Wisdom:
There are advantages to being a second mover too
“We are behind in our omnichannel strategy, but we don’t look at that as a disadvantage because I think the second-mover advantage is so powerfully strong. Having worked for Home Depot (NYSE:HD) where we literally started from scratch in developing an omnichannel and I’d argue now that Home Depot has one of the best omnichannel experiences of any brick-and-mortar retailer.I learned a lot of lessons on the things that worked and did not work in a retail environment.” —JC Penney (Retail)
Irreplaceable assets really only come up for sale once every few years
“there are truly hundreds and hundreds of ski resorts, thousands around the world…We’re very focused on what I’d call a handful…that we think are the best. And our goal is to wait for even if it takes years truly to wait for that, because in the ski industry the good news is you can’t build any other resorts…we’re big believers in not rushing.” —Vail Resorts (Ski Resorts)
Brands are platforms for innovation
“our experiences have been that those large brands are platforms for innovation which fundamentally drives market and share growth, and the historical data is very consistent on that point.” —Procter and Gamble (Consumer Packaged Goods)
It’s really hard for an upscale brand to move down market
“I understand that there is — the road is littered. It’s littered with folks that haven’t worked out. It’s also — there is also people on that road who have been successfully, I think Nordstrom (NYSE:JWN), Nordstrom Rack.” —Whole Foods (Grocery)
Be a predator, not prey
“For the last couple of years, we have been hunted. This turns us back into the hunter and it feels a lot better to our company that is entrepreneurial by nature to move and attack in this second way along with our flagship brand.” —Whole Foods (Grocery).
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.