The Macro Outlook
The Container Store brings in da noise, brings in da funk
“We thought our sluggish sales were all because of weather and calendar shifts in the fourth quarter…now we’ve come to realize it’s more than just weather and calendar consistent with so many of our fellow retailers we’re experiencing a retail funk.” (Container Store (NYSE:TCS))
It may be tempting to write TCS’ results off as just one (questionable quality?) retailer, but they may have pretty good data
“We know from our involvement in the national retail federation…this funk, this retail funk…we don’t see any geographical differences between it, it seems to be all over the place. We have a pretty robust database…so many retailers that we talked to are experiencing that” (TCS)
Surprisingly, in TCS’ view, the funk is hitting the high end, not just the low end
“This retail funk seems to be not just limited to sort of lower end retail, it’s also hitting the higher end retailers…for a long time it was the lower end retailers were suffering in the higher end were doing better and we were doing better. Now it seems to be more democratic, it seems to be kind of across the board.” (TCS)
Family Dollar confirms that the low end is still struggling, and thinks may have even slipped back
“The low end consumer has not benefited in this recovery at all in fact I think have slipped further back.” (Family Dollar Stores Inc (NYSE:FDO))
The funk is not necessarily being created by e-commerce either
“Internet sales aren’t that great across the retail sector either” (TCS)
Still, the retail funk may just be limited to retail
“Consumers seem to be buying homes and automobiles and even high ticket furniture which has kind of been in the doldrums since the great recession. But most segments of retail are a little like us, seeing more challenging sales certainly than we had hoped for early in 2014″ (TCS)
Wells Fargo is seeing broad based loan growth
“The loan growth is broad based. If you look at it’s consumer, it’s private banking area, commercial and cross so it’s really broad based” (Wells Fargo & Company (NYSE:WFC))
And more optimism too
“There is more optimism. I think consumer confidence is at six year high. It is not breakout but it’s — we are having more discussion with more customers about buying homes, buying autos, investing in infrastructure if you are a business, buying something” (WFC)
Meanwhile in the industrial economy, two industrial parts distributors had positive things to say
MSC Industrial Direct said that their customers confirm what the macro data is saying
“After leaving behind the weather related disruptions and holiday season that we faced in our fiscal second quarter, overall market conditions improved during our March through May 3rd quarter…feedback [from our customers] includes a firmer demand environment, more robust order flows, and some talk of order backlogs” (MSC Industrial Direct Company Inc (NYSE:MSM))
Fastenal sees strong sales momentum
“We have great momentum going into the second half of the year…we are seeing a tremendous amount of growth in our business right now, from non-fasteners, we are seeing improvements in fasteners, we see great trends in fasteners” (Fastenal Company (NASDAQ:FAST))
However, MSC noted that growth is still moderate and visibility remains low
“despite these encouraging signs and significant improvement over prior year, we would still characterize the current environment as one of moderate growth. Customers remain slightly more confident but they also remain appropriately cautious with their spending and capital investments. On a related note, while customers’ order backlogs are generally solid for the next few months, we’re not hearing much about visibility longer term which would be more typical of a high growth environment.” (MSC Industrial Direct Company Inc (NYSE:MSM))
And Fastenal was disappointed by its margins
“On the EPS side, we were somewhat disappointed, we thought we would do a better job or produced higher earnings per share and it’s really a margin story.” (FAST)
Importantly, one of the reasons that Fastenal was disappointed by its margins is that it has been investing in growth. Management is betting that investment will eventually drive sales, but for now it’s a bet that is impacting margins
“we’re investing in people at the store, we’re investing in selling energy at the store that’s going to provide us the energy to ramp up our growth and that’s what you are seeing in the year-over-year numbers…[but] There are some sacrifices that come along the way and right now one of those sacrifices is a weaker gross margin than we would prefer.” (FAST)
It takes time to train new people, and that impacts the efficiency of a business
“I know that’s an intangible but I’ll tell you we were adding 16% to 17% more hours in the store. They are inexperienced people. As they gain experience and they gain confidence, things will change but that goes right back to the habits of pricing our customer or a sale appropriately.” (FAST)
If expenses go up because revenue goes up, that’s a good thing though
“If our expenses grow because revenues growing up, that’s a good thing. And we will make the investment that we believe will make– need to make for the long-term success of the company.” (WFC)
MSC also notes that pricing power is soft, inflation moderate
“the pricing environment remains soft…the fact that commodities really haven’t moved, that is the trigger in our industry for manufacturers moving prices and manufacturers lift price changes is what triggers the distributor pricing moves. That cycle just hasn’t kicked in. We did mention a couple of pockets where we potentially saw signs of life in lift and commodities prices, it just hasn’t been sustained enough to the point where manufacturers are bringing increases to market.” (MSM)
Alcoa is seeing Chinese demand for aluminum stabilizing
“China, we see, we believe it’s 0% to 4% but slightly up from what we said before, minus 1% to 2%, 3%, and the reason for it is the market is stabilizing.” (Alcoa Inc (NYSE:AA))
Financials
It is a competitive banking environment out there
“it is a more competitive environment. There are lots of people out there. Lots of banks out there with a lot of liquidity competing for loans. And we do see more competitive — more borrower friendly structures that we have to react to from one asset category to another.” (WFC)
But no expectations for deterioration in credit quality
“I think it’s going to be hard for [net charge offs] to move rapidly to any much higher number. And we know what kind of assets we have been putting on the book for the last few years which I think we all believe are very high credit quality particularly on a historical basis. So normalization will happen over some period of time but at least from our perspective we wouldn’t expect it to be an abrupt move. Credit is still quite strong.” (WFC)
Wells Fargo is confident that its people are managing risk well
“Our front line and relationship managers and others are confronted with having to make decisions about where we want to be in, where we don’t want to be. We think we are very good at spotting that. And managing credit risk has been strength at Wells Fargo as you know for a very long time.” (WFC)
And regulators are focused on putting out credit fires before they begin
“they’ve got a big focus on what’s going on with leverage lending inside of banks” (WFC)
Reserve releases will likely start to slow down though
“We continue to expect future reserve releases, absent a significant deterioration in the economy but expect a lower level of future releases as the rate of credit improvement slows and the loan portfolio continues to grow.” (WFC)
Unlike JPM, WFC does not see large deposit outflows occurring as the Fed raises rates
“I am of the opinion that you are going to see at least for the first couple hundred basis points move up in rate, probably very little movement in disintermediation…[deposits] might not grow as fast but I am very confident about how all our deposit franchise will perform in a rising rate environment.” (WFC)
Wells Fargo says its auto loan portfolio looks just fine
“we had a specific slide on disclosure on the growth in the auto portfolio in particular that showed among other things over a long period of time what’s been going on in our portfolio with FICO scores, average loan to value and payment to income ratio of our auto customers. And each of those has improved, not only over the last five years but improved meaningfully from pre crisis levels. So the portfolio actually looks really good.” (WFC)
Consumer
Two thirds of a retailer’s SG&A is occupancy and labor
“Two-thirds of our SG&A expense is essentially fixed and it relates to store occupancy and store labor. And so those are the expenses that are basically fixed and they are tied very much to square footage growth.” (FDO)
Technology
3D printing is not far away from becoming reality. The main use today is in prototyping
“No, no, no, no, we are not a long way off of 3D printing becoming a reality…The main use for it today is prototype, rapid prototyping and this is where it allows us to cut down the prototyping times from what used to be 18 months because you had some time in there for having to make tooling down to weeks.” (AA)
Miscellaneous Nuggets of Wisdom
If you push margin too hard you can end up making bad business decisions
“What we have discovered as if we push margin too hard that we make bad business decisions and we’re walking away from very — what might be very profitable business” (FAST)
Search your soul
“We’ve done a lot of soul searching on the margin and we found as if we push it too hard it throws breaks on sales.” (FAST)
Business is all about returns on capital
“One thing, Bob Kierlin taught us years ago that we can never forget, at the end of the day, it’s about returns. At the end of the day, it’s about your operating margin. Are you generating cash to support your growth in terms of the business? And if you do that everyday and you service your customer well, you’ll grow your business. And you’ll build a better business tomorrow than you have today.” (FAST)
Disclosure: 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.