What CEOs Said Last Week: "Waiting for Godot"

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: Waiting for Godot

The biggest news of the week was that the Federal Reserve made it clear that it wont be raising interest rates this month. The economy continues to appear too sluggish still to support an increase. At what point do we start to question whether the low rates are themselves what is causing the weakness? Barclays’ CEO is clear that low rates are not helpful. The Fed doesn’t seem to see it that way, but deflation isn’t going to last forever.  We will start cycling price declines by the end of the year, at which point inflation measures are likely to start showing higher levels.

The Macro Outlook:

Kroger’s customers are telling them they are less confident in the economy

“A lot of what we are seeing suggests a gradual tightening of budgets. Our customers tell us they are less confident about the economy now than they were three months ago, and they expect the economy to get worse in the next three months.” —Kroger CEO Rodney McMullen (Grocery)

Customers are still spending though

“If you look at the areas that we would consider discretionary like high-value wine, Boar’s Head, Starbucks, Murray’s Cheese, all of those areas, they continue to have nice growth. The comments I made are more based on the surveys that we — where we survey customers almost every day and the changes in terms of what the customers tell us they anticipate will happen.” —Kroger CEO Rodney McMullen (Grocery)

Deflation continues to be a headwind

“The math works against us, when we don’t have 3% inflation, right? So, 3% inflation we passed it through, and the math works in our favor because we’re using percentages. So, we’re delivering the same case, we can have a little bit more margin, where we have no inflation, it’s a little harder. We still have to ship the same case and it still costs us the same, we’re just generating less margin.” —United Natural Foods CEO Steven Spinner (Food Wholesaler)

But deflation wont last forever

“as we know from past experience, the environment won’t be deflationary forever…historically, I always like to say high prices solve high prices and low prices solve low prices, because capacity will start changing. And if you look at farmers, they’re very smart, and they’ll start producing less of the things where they don’t make money. So historically, that’s what’s caused inflations to swing…as you get toward the latter part of the year and early next year, you’re starting to cycle the deflation. So I would — certainly, we would guess that it would start to moderate just because you’re starting to cycle some of the deflation” —Kroger CEO Rodney McMullen (Grocery)

It’s time to end zero and negative interest rate policy

“But negative interest rates are not helpful. And I think one of the questions we all need to ask ourselves is has accommodative monetary policy going towards zero and negative interest rates – has that run its course? Is it having the benefit that one would expect by dropping interest rates? And i think it’s a fair question that all central bankers and bankers need to be asking themselves today.” —Barclays CEO Jes Staley (Bank)

Not going to happen any time soon

“In today’s new normal, the costs to the economy of greater-than-expected strength in demand are likely to be lower than the costs of significant unexpected weakness. This asymmetry in risk management in today’s new normal counsels prudence in the removal of policy accommodation.” —Fed Governor Lael Brainard (Central Bank)

International:

Brexit hasn’t led to any contraction in credit, so consumer confidence may recover quickly

“You know, Brexit was a political shock, which had a very quick impact on consumer confidence. In some case industrial confidence. But generally an economic contraction of size happens because there’s a curtailment in the supply of credit. Credit markets are wide open…So, you know, we think consumer confidence may in fact recover fairly quickly in the United Kingdom.” —Barclays CEO Jes Staley (Bank)

But the EU still faces fundamental issues

“Our European Union is, at least in part, in an existential crisis…I have witnessed several decades of EU integration. There were many strong moments. Of course, there were many difficult times too, and times of crisis. But never before have I seen such little common ground between our Member States. So few areas where they agree to work together.” —European Commission President Jean-Claude Juncker

Citigroup is very constructive on Mexico

“Clearly, we are very constructive about Mexico…We still think that that has got tremendous untapped potential our franchise in Mexico…When you look at all the advantages that Mexico has being with approximate to the U.S., the chance to really participate with the U.S. economy. The workforce in Mexico, there is just a lot of growth that can yet coming from Mexico.” —Citigroup CFO John Gerspach (Bank)

Financials:

Banks have been turning their focus to growth

“as people have been rolling off the platform, we have been able to hire new coverage bankers, new sales people and effectively been able to shift the mix of our population of our people from a little bit more inward-facing to a little bit more outward-facing.” —Bank of America Head of Investment Banking Christian Meissner (Bank)

Chase has added 1m new credit card holders this year

“We recently launched Freedom Unlimited…from the first quarter through the end of August, we acquired more than a 1 million new customers with the new product.” —Chase CEO Gordon Smith (Bank)

They are confident that all of those new holders are good quality customers

“So, why aren’t we scared, we take those numbers apart in intense detail…all of that data suggests that we’re bringing in really good quality customers. So if any of that was to change, I’d be here telling you that we were not growing as quickly as we are, but we feel confident with the quality of the business that we’re building.” —Chase CEO Gordon Smith (Bank)

Some banks have already gotten a little too aggressive in pursuit of growth

“The Wells Fargo culture is committed to the best interest of our customers and providing them with only the products and services they want in value. We’ve made fundamental changes as the result of our findings, including taking disciplinary actions such as terminations of managers and team members who acted counter to our values. These terminations were results of our own internal investigations as part of our internal controls and did not happen all at once but took place over the last five years.” —Wells Fargo CFO John Shrewsberry (Bank)

Consumer:

There’s way too much retail space in the US

“we’ve been very clear in thinking that commodity retail in the United States is in a secular decline. So there are too many stores all selling the same product and there is just too much competition, by not a little, by a lot. The published statistics of the International Council of Shopping Centers is that there is a 25 square feet of retail per capita in the United States. The next highest nation is about 8. But I think that the 25 square feet per capita number is incorrect. I think it’s more like 35 or 40 if you really actually do your own numbers. So in any event there’s just a ton of stores all selling the same stuff.” —Vornado CEO Steven Roth (REIT)

High end home furnishing is a tough business

“Designers get 25% to 40% off the business. That’s why we can’t be like a luxury brand like HERMES that has no promotions, right, because at the highest end of luxury apparel, there is no promotions. At the highest end of luxury furniture, it’s 100% on promotion…I have always said…being in the furniture business, it’s an ugly baby, but it’s ours” —Restoration Hardware CEO Gary Friedman (Home Furnishing)

There’s still strong demand for organic food but there are many many more outlets

“There’s still considerable demand for the products across center store…it’s just being dispersed over a much wider approach. So, there’s many, many, many, many more outlets to buy the same product.” —United Natural Foods CEO Steven Spinner (Food Wholesaler)

The cable bundle is still the best value for consumers

“Well, and this is my personal view…is that OTT sounds like a better business than in reality it is. I mean, that fact is if you want a decent sized bouquet or bundle of cable channels your programming costs are going to be $40, $50, $60, and if your programming cost are $40, $50, $60 you’re going to have a consumer proposition that’s going to be $40, $50, $60 or more. And if you are a consumer that has cable and you get 200 channels, I’m not sure why huge numbers of people are going to run out and get excited about paying $45 for 25 channels” —Comcast CEO Stephen Burke (Media Conglomerate)

1 million people watched the Super Bowl on their mobile phone

“But people said, hey, people won’t watch the Super Bowl on their mobile device. the reality is over 1 million people did watch the Super Bowl on their mobile device” —AOL CEO Tim Armstrong (Internet)

Technology:

iPhone 7 sales are off to a strong start

“it’s has been four days, so we got a take it into account that, but the reality of it as one of the biggest providers of the iPhone services, our sales are up, we have seen a real improvement and exceeding our expectations” —AT&T CFO John Stephens (Telecom)

Being a cloud vendor requires a large investment that creates barriers to entry

“I think to be a hyper skilled cloud vendor…you need to be able to spend vast amounts of money in terms of CapEx, so billions and billions of dollars a year, building out data centers, buying private fiber, building servers…Secondly, you have is thousands of engineers that can write — distribute systems code; you can’t just buy into this market because none of the servers that we use now are off the shelf servers…And then the third thing you need to have is frankly time…the combination of those three things creates a pretty big moat, and when I look at other vendors in the market, I think that’s going to be very difficult for folks to break in” —Microsoft EVP Scott Guthrie (Technology)

Healthcare:

Some in the healthcare industry are concerned that Clinton could take us to a one-payer system

“So I prefer not a one-payer system, but a graded system where you individually have enough transparency and understand your healthcare policy…I think overall, I think the Clinton approach to healthcare drives you to a one-payer system, it drives you to rationing, drives you to a place where most consumers don’t want to be.” —Pfizer CEO Ian Read (Healthcare)

Johnson & Johnson’s CEO expects pricing power to continue in Healthcare because of favorable demographics

“I think absolutely we should be expecting ongoing pricing pressures in the industry. It’s just the fact that if you look at the macroeconomic issues around the world, given aging populations, the fact that each of us are getting there faster by the minute. But about 12% of the population is over the age of 65, that number is probably going to go to 25% certainly here in the United States. If you’re in Japan, you’re already at 25%, but if you’re in Germany and places like that, you’re rapidly approaching that same number. When you consider the fact that once you turn 65 you tend to consume about 5 to 7 times the amount of healthcare you consumed before you were 65.” —Johnson & Johnson CEO Alex Gorsky (Healthcare)

Industrials:

Airlines continue to buy fuel efficient planes despite lower oil prices

“there is one theory that as oil prices come down, the value of our new airplanes and new technology is going to go down I think. The operating cost advantages is of less value. But actually what we’ve seen is that oil prices have come down it’s added to airline’s profitability which has increased their ability to buy and refresh their fleets and that is the more dominating behavior.” —Boeing CEO Dennis Muilenburg (Aerospace)

Materials, Energy:

It may still be too early to say that the energy industry has bottomed out

“There are some that say that that market has stabilized. Quite frankly, we’re not seeing it…it could be another down year in oil and gas for us next year.” —CLARCOR CFO David Fallon (Industrial Components)

“Well, I think it’s early days when you start to say have we bottomed out and you’ve got to look at it from both North America perspective and then a global perspective, and in North America you’re starting to see some indicators, you’ve seen them externally like I do where rig count has started to improve. Internationally, you’re still seeing a decline. So I think it’s early days, this industry is volatile, it’s cyclical and we’ve got to be ready for that volatility.” GE Oil and Gas President Lorenzo Simonelli (Conglomerate)

Miscellaneous Nuggets of Wisdom:

Brands are defined as much by what they don’t sell as what they do

“So to build great brands, you have got to decide who you are and who you are not, right. Brands are defined as much by what they don’t sell, as what they do sell.” —Restoration Hardware CEO Gary Friedman (Home Furnishing)

Full transcripts can be found at www.seekingalpha.com