Tales from the C-Suite: The Sky Isn't Falling

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 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: The Sky Isn’t 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 haven’t 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 week’s 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 hasn’t been any dramatic change in the consumer in May

“what we are seeing…it’s very much more of the same…We don’t see that weakening environment, but in the same respect we also don’t see a strengthening of commerce and obviously that’s something that we’d 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.” —Visa CEO Charles Scharf (Payments)

“I don’t 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. perspective…We don’t see that the consumer had a step-down in spend.” —Mastercard CFO Martina Hund-Mejean (Payments)

Costco is encouraged that discretionary categories performed relatively well

“Okay. Well, in terms of the customer, so far so good. We don’t see any dramatic change…Interestingly, when you look at nondiscretionary items…versus discretionary items…including big-ticket items like furniture, electronics and the like, we’ve 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, I’d have to say our customers are still pretty healthy” —Costco CFO Richard Galanti (General Merchandise)

Toll Brothers still loves the luxury housing market

“We don’t agree that there’s weakness at the high end. I think our results and our commentary confirms and supports that…I would not accept the thesis that the high end has a bid ask issue. We don’t 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.” —Toll Brothers CEO Douglas Yearley (Homebuilder)

There continue to be companies that see some weakness though

Demand for farm equipment is pressured

“Low commodity prices, stagnant farm incomes, and elevated used equipment levels in U.S. and Canada are continuing to pressure demand for farm equipment” —Deere Investor Relations Joshua Jepsen (Ag Equipment)

Jewelry sales are soft

“We 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.” —Tiffany (Jewelry)

And IT spend is muted

“And by geography and by segment and by technology, our view is, all of that feels muted right now…muted is not necessarily a bad thing, it’s just the reality that we don’t see the strong growth that has existed in the IT spending environment” —Tech Data CEO Bob Dutkowsky (Technology Distributor)

But overall the sky isn’t falling (except for Brazil)

“I 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.” —Linkedin Head of Sales Mike Gamson (Social Network)

Financials:

Some financial engineering tricks may be reaching their limits

Companies can’t borrow and buyback forever

“We are very committed to shareholders returns, cash returns in fact in the last year we have returned 250% of free cash flow so we can’t stay at that level.” —Applied Materials CEO Gary Dickerson (Semiconductor Equipment)

And GAAP profits are important

“Yes, listen, we’re 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 we’ve got a very clear commitment with our compensation committee about the goals that we’re moving towards and I think so far so good on tracking towards them.” —Linkedin Head of Global Sales Mike Gamson (Social Network)

If the financial engineering doesn’t end, regulators could flex their muscles

“The power has shifted towards regulators in this country. And I think that’s a risk for the economy. I don’t think that’s a coincidence that we’re seeing sub-par economic growth, I think it’s a burden. Doesn’t matter if you talk to healthcare executives or bankers.” —Chevron CEO John Watson (Oil and Gas)

Blockchain is something financial companies are spending a lot of time thinking about

“blockchain 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 we’re developing prototypes…I think if you just ask me what the impact will be I think the short-term on payments not tremendously significant” —Visa CEO Charles Scharf (Payments)

An increasing number of people are filing tax returns via mobile phone

“the number of completed returns through the mobile app and through mobile browsers doubled.” —Intuit CEO Brad Smith (Personal Finance Software)

Consumer:

Flat is the new up for many old-line retailers

“In our domestic business, we delivered better-than expected, essentially flat comparable sales, versus our guidance of 1% to 2% decline.” —Best Buy CEO Hubert Joly (Consumer Electronics)

Retailers are having to defend expansion plans

“So 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 experiences” —DSW 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 —Steve Madden Director of Finance Derek Browe (Shoes)

But the returns can kill you in online apparel 

In the online channel, it’s 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 —Destination XL CEO David Levin (Big and Tall Apparel)

It’s a great time to be a content creator

“there are so many different buyers out there for content. It’s a great time to be a content creator.” —Comcast EVP Mike Cavanagh (Media)

Millenials want to own homes

“As millennials mature, studies indicate that their appetite for home ownership is consistent with past generations, which is of course encouraging for our industry.” —Toll Brothers Chairman Bob Toll (Homebuilder)

Technology:

Jeff Bezos said that we’re entering a golden age of machine learning

“It has been a dream for so long, a kind of science fiction scenario, the things we’re solving with machine learning today are extraordinary. We really are at a tipping point where the progress is accelerating. I think we’re entering a golden age of machine learning. We’re 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.” —Amazon CEO Jeff Bezos (E-Commerce)

This isn’t the first time that things like AI or IoT have been talked about though

I was around for the first AI wave…AI was a dirty word for a long time…grad students avoided the subject because you’d have your funding pulled right away —Digimarc CTO Tony Rodriguez (Digital Watermarks)

“So look we’ve 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 we’re on the cusp of that, but on the meantime the industry is exploded.” —Verizon CEO Lowell McAdam (Telecom)

IBM sees cognitive technologies as complementary to human workers

“we don’t 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 decisions” —IBM CFO Martin Schroeter (Enterprise Technology)

The cloud allows companies to update applications with more agility

“there’s certainly an economic element to this. But it’s really about agility…with our clients and the hybrid environment, we’re delivering new functions every day. And that’s why clients find that cloud that model so appealing.” —IBM 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 “scott@earthlink.com” who love their address and don’t want to give it up. —Earthlink Treasurer Trey Huffman (Internet Service Provider)

Healthcare:

More physicians are becoming employees of hospitals as hospitals consolidate

“over the last couple years a significant amount of consolidation in hospitals, and that will probably continue. We’ve also seen that the physician, more and more physicians are becoming employees of the hospital than they have been in the past.” —Johnson and Johnson EVP Sandra Peterson (Diversified Healthcare)

Materials, Energy:

Energy companies are running out of liquidity and will likely default despite higher oil prices

“further deterioration in the oil and gas producer portfolio occurred during the quarter…This trend was expected as leverage borrowers exhaust available sources of liquidity…The recent increase in oil prices, while encouraging, is not likely to have an immediate positive impact.” —Toronto Dominion CRO Mark Chauvin (Bank)

Miscellaneous Nuggets of Wisdom:

Bring your team together

“I’m always making sure it’s a special event and that people understand the importance of getting together. My point is that it’s 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.” —Liberty Global CEO Mike Fries (Cable)

Be adaptive to change

The world is changing and you have to understand what’s around you, what you can and can’t control. If not you’re not long for this business or any business really —Perry Ellis CEO Oscar Feldenkreis (Apparel)

Know your purpose

“Life 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, I’ll starve; because I just can’t draw. But if you ask me to argue a point out, I’ll get by. Those are the cards I was handed out, and I make use of them. Don’t try and do something you are not favored by nature to do.” —Lee Kuan Yew, Former Prime Minister of Singapore

Full transcripts can be found at www.seekingalpha.com

Copyright © Avondale Asset Management