The Macro Outlook
Retailers had mixed things to say about the economy:
Macy’s says that at best the economic environment is improving very gradually
“our outlook for the fall season reflects our confident optimism tempered with the reality that many customers still are feeling the impact of an economic environment that at best is improving very gradually.” (Macy's Inc (NYSE:M))
Fossil said the US market remains its biggest challenge
“Our biggest challenge remains our U.S. business, where the retail environment is still challenging and where retailers continue to use promotions as a way to drive traffic.” (US)
Walmart sees the international consumer under pressure too
“The global economy remains challenged, which means the customer is also stretched. Price remains a critical factor in our customers’ buying decisions.” (Wal-Mart Stores Inc (NYSE:WMT)
Kate Spade complained that the environment is still very promotional
“We saw the landscape continue to remain promotional with increased activity over last year and key sale periods starting earlier than last year among retailers.” (Kate Spade & Co (NYSE:KATE)
Retail is always promotional though
“I can’t remember a time when it wasn’t promotional. So, I don’t see anything different in the second quarter or the fall season. This is a very promotional business. Our customer very much wants value and very much responds to promotions. So, I don’t see a change happening there….But it’s very promotional.” (M)
And Nordstrom doesn’t think there’s been any significant change in consumer behavior
“In terms of the health of the consumer, our trends have been pretty consistent. If you look at since the beginning of the year, we’ve been in that 3% to 4% range. And while there has been some macro news in terms of the health of the consumer, I think the way the consumers behaving certainly in our space continues to be relatively consistent” (Nordstrom Inc (NYSE:JWN)
Most importantly, back to school started off very strong (maybe the funk was just seasonal after all?)
“the end of the second quarter back-to-school was extremely strong at the start. We’ll see as it goes through the season, but we feel very good about it.” (M)
“I would just say that the start to back-to-school as indicated from our July performance was exceptionally strong.” (Kohl's Corporation (NYSE:KSS)
In Sysco’s eyes, restaurants don’t seem to be doing much better than retailers
“Our results reflect the impact of the slow and modest economic recovery in a food service industry that as a whole remains under pressure.” (Sysco Corporation (NYSE:SYY)
Food inflation has been significant
“During our May earnings call we indicated that inflation jumped substantially at the end of March. That trend continued and we saw a meaningful increase in inflation throughout the quarter” (SYY)
It’s been especially severe in dairy
“This is by far the most difficult operating environment in the history of the company…very high milk cost and resulting increases in retail prices created incremental volume softness in addition to increased pressure on our margins as pricing and retail was pressured by both price gap and price threshold considerations.” (Dean Foods Company (NYSE:DF)
Most people are expecting the inflation to moderate, but so far it hasn’t
“We haven’t seen it yet. I think what we’re saying is people that we all follow and just looking at some overview reports on commodities and that type of thing, and just the math of this thing as you get into the last third of next year we would expect it to subside some. But at this point it’s still very comparable to what we’ve seen in the last three or four months.” (SYY)
The fundamentals say that milk prices should come down, but so far they have not
“trying to prognosticate Class I at this point, all the data shows you that it should start to come down. All the fundamentals of the market say it should start to come down. But those fundamentals have been in place now for probably five to six months and we have not seen it come down.” (DF)
Restaurants will have to pass on food costs at some point. These are big increases
“Obviously they have to pass them along at some point. These are double-digit increases. So I think they are selectively passing it along where they feel that they can support it in their business; I’m sure they’re also working their menus…I think they’re managing the portions, I think they’re managing the mix of the menu and they’re passing it along where they can.” (SYY)
However, it’s hard to reconcile food cost inflation with the fact that Farmers are having an off year
“farm cash receipts which are forecast to be down somewhat from 2013. Assuming above-trend yields, grain and soybean production levels are expected to be up in 2014, which is resulting in lower prices for those crops.” (Deere & Company (NYSE:DE)
John Chambers sounds extremely negative on Cisco’s business in emerging markets
“We saw the impact of economic and geopolitical challenges in China, Brazil, Russia, Argentina, Turkey and Thailand, and a number of emerging markets that many of our other peers are seeing…Though the trends were looking better in Q2 and Q3 for emerging markets, the emerging countries lost momentum in Q4…Unfortunately, as we look out, we don’t see emerging markets’ growth returning for several quarters and believe it possibly could get worse.” (Cisco Systems Inc (NASDAQ:CSCO)
Perhaps the Chinese consumer is doing better than Chinese industry though: Fossil and Estee Lauder both saw strong growth in China
“In China, sales grew 20% with strong growth in the retail channel. Already today, the addressable watch market in China is over 6 billion and forecasted to exceed 10 billion in just 4 years. We continue to invest in this very important market and see real potential to increase our market share over time in the mid-tier price points.” (Fossil Group Inc (NASDAQ:FOSL)
“in China, our sales climbed double digits, and we remained the largest prestige beauty company” (Estee Lauder Companies Inc (NYSE:EL)
India is the one emerging market that Chambers is positive on
“There are some bright spots for the first time in a while. I think Modi in India is going to turn around that country. You can see the enthusiasm, both the citizens and the businesses there. If I were betting on a single emerging market I’d bet on India right now in a big way” (CSCO)
Consumer
Consumers are demanding a lot from restauranteurs–new experiences at lower prices
“Our customers are under a lot of pressure from the consumer to offer innovative experiences in food and presentations and to do it more and more cost-effectively.” (SYY)
Consumers seem to be liking the ability to buy online pick up in store…they even shop for more once they get there
“we have rolled out Buy Online Pickup in Store…We haven’t even marketed this capability yet, and we are already finding that many customers like this option. And once in the store, these customers are often buying other items as well.” (M)
Analysts are now starting to hypothesize that consumers are reverse-showrooming
Analyst comment: “I mean, some people are talking about customers targeting stuff online, and even if they don’t buy it, buying it in the store, but then not spending as much time shopping” (KSS)
Retailers are managing their inventories tightly
“What we discovered or what we experienced in the second quarter was that both with department stores and some of our boutiques, they were really focusing on managing their inventories tightly. And relative to our expectations, we saw some compression on sales because they were reducing their inventory level.” (FOSL)
It’s interesting how retailers deemphasize long term growth in off-price when the environment improves
“with respect to the off-price, over the last year, what you’ve heard us say is that our initial goal with off-price was to seriously reduce the volume that we were going to sell through off-price” (FOSL)
“we’re quite sensitive to the number of locations where the consumer can buy off price and that’s what’s driving that decision to guide the number of outlet doors down from our original targets.” (KATE)
Technology
The line between fashion and technology continues to blur
Fossil is partnering with Google for smart-watches
“On the wearables front, we continue to develop opportunities for our brands to participate in the wearable technology trend. Our partnership with Google combines the functionality associated with the Android Wear platform and our ability to bring premium lifestyle branded watches to market…our goal is to launch new product in 2015.” (FOSL)
Kate Spade is selling accessories at Apple stores
“It’s important to note that sales of our Kate Spade New York accessories at Apple remains strong with performance up significantly this quarter.” (KATE)
Smart Jewelry too?
“There could even be some communication devices that have to do with jewelry. So it’s not just a smart watch device, it’s all types of wearable technology.” (FOSL)
Instagram might be the most important digital marketing platform for fashion
Kate Spade and Estee Lauder both highlighted their performance on Instagram
“This quarter our Instagram following was again our fastest growing online community.” (KATE)
“M-A-C also expanded its digital audience through successful social media channels. It became the largest beauty brand on Instagram, and increased its Facebook fans by 25% in fiscal 2014.” (Estee Lauder Companies Inc (NYSE:EL)
Meanwhile, Walmart saw a negative comp in mobile phones because of a lack of innovation
“In wireless, we’ve experienced recent comp declines due to a lack of innovation in phone technology and our delay in system upgrades needed to process new carrier installment plans.” (WMT)
Rackspace argues that mainstream companies want service with their cloud
“more and more of these mainstream cloud adopters realize that they need compelling service level agreements that actually align their desired business outcomes with their cloud providers’ performance.” (Rackspace Hosting Inc (NYSE:RAX)
Amazon does not appear to want to compete by providing a high level of service
“I think it’s very counter to their culture. It’s very counter to their model. They continue to say that, that’s not the direction they are heading. It is very difficult to build a successful service culture. It’s a very different economic model.” (RAX)
Rackspace talked some s–t about IBM’s cloud capability (did we mention that we are for sale?)
“I will just add to that, which is, I think the opportunity for Rackspace is to become the IBM of the cloud. 30 years ago, IBM was without a doubt the most trusted computing company in the world. And with the acquisition of SoftLayer, they are really going more the commodity rate. If you look at the most recent Magic Quadrant from Gartner, IBM didn’t show up very well in the managed cloud segment. We really think that our high service model is really the new model for the cloud. And really, the IBM of the cloud is our opportunity and we don’t think IBM is going to be the company. We don’t think they are going to be the ones that are going to be taking that space and we think it’s ours to have.” (RAX)
Materials, Industrials, Energy
It’s too early to say whether this is just one bad year for farmers or if this is the start of a more prolonged downturn
“the answer to that question is what’s going to happen with the crop that will get planted next year in terms of do you have yet a third year in a row of good growing conditions on a global basis or do you have a year where those yields moderate a bit due to weather whether that’s in the U.S. or some other region….I think it’s just very premature to try to call whether this is a 12-month phenomenon or longer-term.” (DE)
Demand is still strong, so a production shock could still move prices higher
“Although supplies appear to be adequate, global grain and oilseed demand remains strong. Unfavorable growing conditions in any key growing region of the world’s coupled with the unknown impacts from geopolitical issues could lower production, reduce the stocks-to-use ratio and result in prices quickly moving higher” (DE)
Balance sheets are better than they were the last time there was a downturn
“I think one thing I would point out is you mentioned balance sheet and certainly compared to the 1980′s it would be better today, but even compared to the 1990′s, late 1990s, I think if you look at the data you’re in even better shape.” (DE)
Miscellaneous Nuggets of Wisdom
Monitor your purchase for a long time before you buy it
“Trunk Club is terrific business and one that we’ve been monitoring for some time…we’ve been super impressed with the five years that Trunk Club and their teams have been focused on the business on what they’ve been able to accomplish.” (JWN)
Don’t feel like you have to build every solution in house
“It’s something we felt we could do but they had made tremendous progress. And one of the key elements in our business is speed. And we felt, given it would probably take a year or two for us to take a sizable portion of capital and some of our leadership team to get this business up and running, that we were best served, acquiring Trunk Club to get off and running ASAP.” (JWN)
You may have to pay up a little to get a great asset, because if you don’t someone else will
“if we didn’t do, someone else would and would take it bigger. Trunk Club in and of itself is on a tremendous growth rate. It’s pretty clear where we can help them through things like inventory, supply chain, in-store alterations, things like that, right off the bat that we can add fuel to their growth” (JWN)
Disclaimer: 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.