Tales from the C-Suite: The Sky Isn't Falling
by Scott Krisiloff, CIO, Avondale Asset Management
Each week we read dozens of transcripts from earnings calls and presentations as part of ourĀ investment process. Below is a weekly post which contains some of the most important quotes about the economy and industry trends from those transcripts. Click here to receive these posts weekly via email.
This Weekās Post: The Sky Isnāt Falling
Earnings season slowed down a lot this week, but conference presentations took the place of earnings. Presentations at conferences are a nice change of pace because they tend to focus more on strategy and long term plans. There was some macro commentary though, which was positive in that conditions havenāt changed much in May.
In addition to the transcripts we read online this week, we also attended the B Riley Conference in Los Angeles. At B Riley we got the opportunity to meet one on one with a number of management teams and ask our own questions. Notes (usually paraphrases) from our meetings are included in this weekās piece. Thanks to the team at B Riley and especially Ken Tang for hosting us.
The Macro Outlook:
Visa and Mastercard both agree that there hasnāt been any dramatic change in the consumer in May
āwhat we are seeingā¦itās very much more of the sameā¦We donāt see that weakening environment, but in the same respect we also donāt see a strengthening of commerce and obviously thatās something that weād like to see. But I would say in every developed market around the world volumes continue to perform at levels like we saw last quarter.ā āVisa CEO Charles Scharf (Payments)
āI donāt think we see anything different really than what we said back when we had our last earnings call in our first quarter earnings call in April, right, I guess. So from a U.S. perspectiveā¦We donāt see that the consumer had a step-down in spend.ā āMastercard CFO Martina Hund-Mejean (Payments)
Costco is encouraged that discretionary categories performed relatively well
āOkay. Well, in terms of the customer, so far so good. We donāt see any dramatic changeā¦Interestingly, when you look at nondiscretionary itemsā¦versus discretionary itemsā¦including big-ticket items like furniture, electronics and the like, weāve actually had, relatively speaking, a little more strength in some of those nonfood categories. So that I think allays some of any concerns that some people have had. But generally speaking, Iād have to say our customers are still pretty healthyā āCostco CFO Richard Galanti (General Merchandise)
Toll Brothers still loves the luxury housing market
āWe donāt agree that thereās weakness at the high end. I think our results and our commentary confirms and supports thatā¦I would not accept the thesis that the high end has a bid ask issue. We donāt have buyers coming in that are looking to negotiate. We are very comfortable with the business. There are plenty of buyers and we love the luxury end.ā āToll Brothers CEO Douglas Yearley (Homebuilder)
There continue to be companies that see some weakness though
Demand for farm equipment is pressured
āLow commodity prices, stagnant farm incomes, and elevated used equipment levels in U.S. and Canada are continuing to pressure demand for farm equipmentā āDeere Investor Relations Joshua Jepsen (Ag Equipment)
Jewelry sales are soft
āWe attribute the overall lower sales to softness in domestic customer spending in many U.S. markets as well as lower spending by foreign tourists of many nationalities in New York and other high tourism markets.ā āTiffany (Jewelry)
And IT spend is muted
āAnd by geography and by segment and by technology, our view is, all of that feels muted right nowā¦muted is not necessarily a bad thing, itās just the reality that we donāt see the strong growth that has existed in the IT spending environmentā āTech Data CEO Bob Dutkowsky (Technology Distributor)
But overall the sky isnāt falling (except for Brazil)
āI travel around the world a lot with our customers and I have seen nothing personally or heard of on my team that makes me think the sky is falling again anywhere but Brazil.ā āLinkedin Head of Sales Mike Gamson (Social Network)
Financials:
Some financial engineering tricks may be reaching their limits
Companies canāt borrow and buyback forever
āWe are very committed to shareholders returns, cash returns in fact in the last year we have returned 250% of free cash flow so we canāt stay at that level.ā āApplied Materials CEO Gary Dickerson (Semiconductor Equipment)
And GAAP profits are important
āYes, listen, weāre very focused on GAAP profits, and I think all companies in our space who use both stock and cash are focused on it. And I think weāve got a very clear commitment with our compensation committee about the goals that weāre moving towards and I think so far so good on tracking towards them.ā āLinkedin Head of Global Sales Mike Gamson (Social Network)
If the financial engineering doesnāt end, regulators could flex their muscles
āThe power has shifted towards regulators in this country. And I think thatās a risk for the economy. I donāt think thatās a coincidence that weāre seeing sub-par economic growth, I think itās a burden. Doesnāt matter if you talk to healthcare executives or bankers.ā āChevron CEO John Watson (Oil and Gas)
Blockchain is something financial companies are spending a lot of time thinking about
āblockchain is it something I think that from our standpoint we certainly spend a lot of time thinking about and we have our own investments in companies where weāre developing prototypesā¦I think if you just ask me what the impact will be I think the short-term on payments not tremendously significantā āVisa CEO Charles Scharf (Payments)
An increasing number of people are filing tax returns via mobile phone
āthe number of completed returns through the mobile app and through mobile browsers doubled.ā āIntuit CEO Brad Smith (Personal Finance Software)
Consumer:
Flat is the new up for many old-line retailers
āIn our domestic business, we delivered better-than expected, essentially flat comparable sales, versus our guidance of 1% to 2% decline.ā āBest Buy CEO Hubert Joly (Consumer Electronics)
Retailers are having to defend expansion plans
āSo we still believe in new stores, I mean I think they create an incredible place for our customer to touch and feel the product, they make our digital platform more competitive and ultimately they create brand awareness. I think we have opportunities to leverage them perhaps differently than we do today to create different and unique experiencesā āDSW CEO Roger Rawlins (Retail)
Meanwhile Amazon is making an even bigger push into fashion
Amazon definitely wants to be seen as a place where a customer can get fashion āSteve Madden Director of Finance Derek Browe (Shoes)
But the returns can kill youĀ in online apparelĀ
In the online channel, itās the return and refund costs that kill you because of the high cost of shipping versus the ultimate price of the order. About 20% of overall apparel orders on e-commerce are returned āDestination XL CEO David Levin (Big and Tall Apparel)
Itās a great time to be a content creator
āthere are so many different buyers out there for content. Itās a great time to be a content creator.ā āComcast EVP Mike Cavanagh (Media)
Millenials want to own homes
āAs millennials mature, studies indicate that their appetite for home ownership is consistent with past generations, which is of course encouraging for our industry.ā āToll Brothers Chairman Bob Toll (Homebuilder)
Technology:
Jeff Bezos said that weāre entering a golden age of machine learning
āIt has been a dream for so long, a kind of science fiction scenario, the things weāre solving with machine learning today are extraordinary. We really are at a tipping point where the progress is accelerating. I think weāre entering a golden age of machine learning. Weāre still along ways away from being able to do things the way humans doing things. Human like intelligence is still pretty mysterious even to the most advanced AI research. If you think about the way humans learn, we are incredibly data efficient.ā āAmazon CEO Jeff Bezos (E-Commerce)
This isnāt the first time that things like AI or IoT have been talked about though
I was around for the first AI waveā¦AI was a dirty word for a long timeā¦grad students avoided the subject because youād have your funding pulled right away āDigimarc CTO Tony Rodriguez (Digital Watermarks)
āSo look weāve been talking about IoT, I think we talked about this a little bit at dinner last night, back in the late 80s when I started to get involved in cellular we used to talk about IoT being a huge revenue driver. I finally think weāre on the cusp of that, but on the meantime the industry is exploded.ā āVerizon CEO Lowell McAdam (Telecom)
IBM sees cognitive technologies as complementary to human workers
āwe donāt see the application of cognitive technologies as replacing or automating anything away. What it really does is it provides a better basis by which people can make decisionsā āIBM CFO Martin Schroeter (Enterprise Technology)
The cloud allows companiesĀ to update applications with more agility
āthereās certainly an economic element to this. But itās really about agilityā¦with our clients and the hybrid environment, weāre delivering new functions every day. And thatās why clients find that cloud that model so appealing.ā āIBM CFO Martin Schroeter (Enterprise Technology)
Email can be a sticky product
There are still 700,000 subscribers to legacy Earthlink. There are a lot of people who in 1995 got an email like āscott@earthlink.comā who love their address and donāt want to give it up. āEarthlink Treasurer Trey Huffman (Internet Service Provider)
Healthcare:
More physicians are becoming employees of hospitals as hospitals consolidate
āover the last couple years a significant amount of consolidation in hospitals, and that will probably continue. Weāve also seen that the physician, more and more physicians are becoming employees of the hospital than they have been in the past.ā āJohnson and Johnson EVP Sandra Peterson (Diversified Healthcare)
Materials, Energy:
Energy companies are running out of liquidity and will likely default despite higher oil prices
āfurther deterioration in the oil and gas producer portfolio occurred during the quarterā¦This trend was expected as leverage borrowers exhaust available sources of liquidityā¦The recent increase in oil prices, while encouraging, is not likely to have an immediate positive impact.ā āToronto Dominion CRO Mark Chauvin (Bank)
Miscellaneous Nuggets of Wisdom:
Bring your team together
āIām always making sure itās a special event and that people understand the importance of getting together. My point is that itās important to me that people feel connected to something more than just their desk and computer. That they understand the purpose and have a sense of their role and how they contribute to things.ā āLiberty Global CEO Mike Fries (Cable)
Be adaptive to change
The world is changing and you have to understand whatās around you, what you can and canāt control. If not youāre not long for this business or any business really āPerry Ellis CEO Oscar Feldenkreis (Apparel)
Know your purpose
āLife is what you make of it. You are dealt a pot of cards. Your DNA is fixed by your mother and your father. Your job is to make the best of the cards that have been handed out to you. What can you do well? What can you not do well? What are you worse at? If you ask me to make my living as an artist, Iāll starve; because I just canāt draw. But if you ask me to argue a point out, Iāll get by. Those are the cards I was handed out, and I make use of them. Donāt try and do something you are not favored by nature to do.ā āLee Kuan Yew, Former Prime Minister of Singapore
Full transcripts can be found at www.seekingalpha.com
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