What CEOs Said Last Week: Dog Days of Summer

by Scott Krisiloff, Avondale Asset Management

Each week we read dozens of transcripts from earnings calls and presentations as part of our 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 Week’s Post: Dog Days of Summer

The last two weeks of August are typically two of the slowest weeks of the year for the business community. Not many companies were speaking this week, but the comments seemed to reflect the seasonal mood. Although the economic weakness from the beginning of the year has bottomed out, the upswing doesn’t seem too exciting. It’s worth noting that upswings never do feel exciting until the wall of worry has been climbed. Still, it’s difficult to see how we get an acceleration in growth rates without inflation. The most optimistic actors seem to be focused on just trying to control what can be controlled.

The Macro Outlook:

Companies continue to find ways to be pleased with relatively anemic growth

“In our domestic segment, revenue increased a greater than expected 0.1%…driven by comparable sales of 0.8%…As it relates to…our expectations, maybe our expectations were too low. But the other thing is that frankly our team is executing extremely well.” —Best Buy (Consumer Electronics)

CEOs are trying to stay optimistic that good execution can carry the day in a tough environment

“The consumer is going through a period around the world of uncertainty…but ultimately at the end of the day if we can deliver a better experience day in and day out in our restaurants, we’re confident we can win that market share fight.” —McDonald’s CEO Steve Easterbrook (Fast Food)

“the retail environment has softened since we last talked, and our sales are being impacted by a more cautious consumer…As always, our focus is on what we can control, which includes our supply chain and inventory initiatives…” —Williams Sonoma CEO Laura Alber (Home Goods)

“I think we’re going to be in a more moderate growth world for a long time and a low — lower interest rate environment for a long time, but I still think that you’ll be able to — good investors will still be able to make a lot of money.” —Brookfield Asset Management CEO Bruce Flatt (Asset Management)

Sentiment can swing rapidly when your baseline growth is close to zero

“the early part of the [fiscal] third quarter where sentiment was a bit more positive as those commodity prices were up…that can change in a hurry, and it certainly with the commodity prices coming down, I think it’s fair to say the overall mood would be less positive than it was a couple months ago even.” —John Deere (Farm Equipment)

There continues to be a glut of inventory in a number of capital goods industries

“there continues to be a glut of trucks entering the market. And so it’s been transportation, construction, and we’re still seeing a decline of pricing on oil and gas related equipment. And also anything tied to mining as well” —Ritchie Bros Auctioneers SVP Doug Olive (Used Industrial Equipment)

Retailers are carrying less inventory but they may still be carrying too much

“I still believe that even with less inventory, there’s so many uncertain factors out there, the macroeconomic environment, political environment, even though stores are positioned perhaps with less inventory than they have last year, that doesn’t necessarily mean that, that sales will materialize” —Ross Stores CEO Barbara Rentler (Off Price Retail)

There are shortages developing in some parts of the technology supply chain though

“we are seeing on the horizon some shortages, particularly around LCDs, DRAM and Flash memory. And it’s not so much coming from the PC industry. It’s more coming from adjacent categories going to – glass going into televisions, memory going into phones that are likely to double density, which is putting pressure on the overall industry.” —HP Inc. CEO Dion Weisler (Printers)

Wages also continue to rise

“I think we’ve done a good job so far as Michael Hartshorn said in absorbing those wage rate increases in the last couple of years. But that’s probably a limit to how much we can absorb. ” —Ross Stores President Michael O’Sullivan (Off Price Retail)

Shortages and wage increases can lead to higher inflation. The Fed is signalling that it is closer to making a move

” Employment has increased impressively over the past six years since its low point in early 2010…core PCE inflation, at 1.6 percent, is within hailing distance of 2 percent–and the core consumer price index inflation rate is currently above 2 percent. So we are close to our targets.” —Federal Reserve Vice Chair Stanley Fischer (Central Bank)

International:

The British economy appears to have emerged from the Brexit vote unscathed

“we haven’t seen a Brexit effect at this point in time. It doesn’t mean something couldn’t come down the road, but we haven’t seen that at this point.” —Nordson CEO Michael Hilton (Industrial Components)

Europe seems very healthy to PVH

“Europe seems much healthier as a market to us. I know all the headlines about Europe and what you see. But as far as the consumers being – spending discretionary money, it’s very healthy there.” —PVH CEO Manny Chirico (Apparel)

There may have even been a bit of a boost

“interestingly we saw an uptrend in the UK sales almost immediately following the vote. We believe that the weakening of the pound has made London a more attractive tourist shopping destination.” —Tiffany IR Mark Aaron (Jewelry)

It’s really too early to tell though

“we saw very, very limited impact from Brexit….so, Q3 was really a non-event. On a go-forward basis, it’s unclear exactly what the impact is going to be. We are definitely seeing and, in some cases, following with our own pricing increases. What’s less clear is…what is going to be the impact on demand…And it’s just too early to tell.” —HP Inc. CFO Cathie Lesjak (Printers)

Canadian regulators are taking a closer look at home price appreciation

“Regulatory bodies are also responding to the combination of rising house prices and record levels of consumer leverage. We support the Canadian federal government’s recent action to form a working group to study the housing market and develop appropriate recommendations.” —Royal Bank of Canada CEO David McKay (Bank)

The impact of currency fluctuations on financial results are starting to balance out

“There was no translation effect on total sales as the stronger yen offset the negative translation effects from the stronger US dollar against other currencies.” —Tiffany IR Mark Aaron (Jewelry)

Financials:

The financial industry is being very cautious with capital spending

“discretionary spending in the banking sector remained soft, weighed down by macroeconomic concerns and a prolonged low interest rate environment…We see the banking sector being more cautious in spending over the near-term.” —Cognizant Technology Solutions (IT Consulting)

Consumer:

There may be some weakness in the high end consumer

“There’s obviously some strength out there in different parts of retail. In apparel specifically, the environment remains challenging, and quite frankly, it remains most challenging in the higher end of the market.” —Gap CEO Arthur Peck (Apparel)

“We can only speculate on why domestic US consumer spending at the high end has been generally soft, but we believe that macro market and political uncertainties are likely playing a role in restrained consumer behavior.” —Tiffany IR Mark Aaron (Breakfast)

If there is weakness at the high end, Toll Brothers isn’t seeing it though

” While there has been a lot of discussion about weakness in the luxury new home market, we just aren’t seeing it based on this quarters contract growth across all of our regions” —Toll Brothers CEO Douglas Yearley (Homebuilder)

The retail landscape continues to be very promotional

“when the industry’s on sale 365 days a year, when there’s free delivery, when there’s 70% off merchandise, I don’t think the promotional activity can get much stronger.” —La-Z-Boy CEO Kurt Darrow (Home Goods)

More athletic apparel is sold for fashion than function

“the facts are that most of the basketball shoes that we sell never see a basketball court, most of the running shoes that we sell never see the roads or the trails of the track to run in, they just look really good and they are part of the sneaker culture that we really support” —Foot Locker CEO Richard Johnson (Apparel)

PVH believes that it is close to profitable scale in e-commerce

“And I think from a pure profitability point of view, the only issue we’re dealing with on our own e-commerce sites is scale. As that business continues to grow…we’re 12 months away from going from a loss position on those businesses to a profit position on those businesses…we truly are becoming agnostic about where the customer shops.” —PVH CEO Manny Chirico (Apparel)

Priceline likes Facebook

“I think we would like to spend more money on Facebook going forward. We have a good relationship with them, and we’ve found that a number of things that we’ve done on Facebook works well, particularly retargeting, which really is more of a performance-based analysis the way we look at it. So, I would look for us to be doing more. As you could see by Facebook’s announcement, the scale of their advertising business is growing, and while it traditionally has been more of a brand advertising platform, we like to work closely with Facebook to find ways to make more performance-oriented placements work for us. ” —Priceline CEO Jeff Boyd (Travel Agency)

Technology:

Small businesses have been slow to move their accounting software to the cloud

“we have done work with our customer base in the desktop to figure out why they aren’t interested in the cloud. And reasons one through five are all basically, I am not ready to move to the cloud. I don’t want to put my data in the cloud. I don’t want to move to a subscription service. My current product is working just fine. My accountant is working with me and they have got a desktop version.” —Intuit CEO Brad Smith (Accounting Software)

Materials, Energy:

Banks feel confident that any issues caused by $35-$40 oil are now well known and behind them

“we are well past the stress test days and we actually know every part of our portfolio and see how it performs in a low oil price environment…I think a lot of the issues that the $35-$40 oil would have indicated are behind us. But it also depends on how long the prices remain depressed.” —Bank of Montreal CRO Surjit Rajpal (Bank)

There are no new coal mines being built around the world

“the big thing we got to look at in coal is no new supply in the world which is a very important issue. You don’t see anyone building new mines or increasing production of mines…So a significant decrease coming down from Indonesia, no new supply from Australia, from Colombia, South Africa, et cetera, that’s all relatively stable and no new big mines being built anywhere in the world.” —Glencore CEO Ivan Glasenberg (Metals and Mining)

Full transcripts can be found at www.seekingalpha.com