Practical analysis for investment professionals
23 August 2016

The C-Suite Speaks: Industry Restocking

The C-Suite Speaks: Industry Restocking

Excess capacity and a surfeit of inventory have figured greatly in weak inflation. Recently we’ve been through a rough economic patch that has exacerbated the problem.

Last week, however, there were signs that inventories have been sufficiently depleted, and that industry is cautiously beginning to restock again. Greater production must be met with equally greater demand though. If inventories are restocked and demand doesn’t concurrently rebound, companies will shortly find themselves in a precarious position once again.

The Macro Outlook

August shows some improvement in industrial sales trends.

“Our sales per day trends included declines in April and May with improvement in June. July somewhat as expected with seasonality, softer than June. And through the early days of August, we’re seeing sequential improvements in that.” — Applied Industrial Technologies president and CEO Neil Schrimsher (Distributor)

Retailers feel that inventory levels are where they should be.

“Whether it’s the Rack or our stores, we’re in one of the best inventory positions we’ve been in, in many years.” — Nordstrom co-president Blake Nordstrom (Department Store)

“We are very comfortable with our inventory levels and the quality of our merchandise.” — Dick’s Sporting Goods chief accounting officer and SVP Joseph Oliver (Sporting Goods)

Companies may be getting back some pricing power. 

“Our average ticket was also positively impacted from slight commodity price inflation, mainly from building materials and lumber.” — Home Depot EVP – merchandising Ted Decker (Home Improvement)

“We increased prices across the portfolio in H1 by 5%.” — Carlsberg Group CEO Cees ‘t Hart (Beer)

“The pricing environment remains challenging. . . . We expect stronger pricing in H2 though. We started to take selective price increases in some categories and geographies.” — Nestle EVP and CFO François-Xavier Roger (Packaged Food)

Consumers are willing to spend on their homes as long as they see the value increasing.

“Consumers continue to view their personal finances and home values favorably, with half of homeowners believing the value of their home is increasing. We believe this positive sentiment around home value is driving home improvement spending. Consequently, we continue to see home improvement spending outpace overall consumer spending, as well as positive home improvement project intentions, including strong engagement in big ticket discretionary projects.” — Lowe’s chairman, president, and CEO Robert Niblock (Home Improvement)

But the consumer is spending selectively. Target sees cautious consumers.

“I think we have seen this environment persist now for well over a year. It’s a very cautious consumer. And if we look at the overall trends within retail, we have certainly seen, on a rolling 12-month basis, a slowdown in retail sales growth, but that’s not an excuse for us.” — Target chairman and CEO Brian Cornell (Big Box Retail)

Walmart is cheering 1.6% comps.

“We exceeded our Walmart US comp sales guidance this quarter, with Walmart US delivering comp sales of 1.6%, driven by a traffic increase of 1.2%. This was our eighth consecutive quarter of positive comp sales and our seventh consecutive quarter of positive traffic.” — Walmart Stores president and CEO C. Doug McMillon (Big Box Retail)

Certain parts of the United States are rebounding better than others. 

“The West was our best-performing area of the country. . . . The North was our weakest-performing division. There was almost 500 basis-point spread in comps between those two divisions.” — Lowe’s chairman, president, and CEO Robert Niblock (Home Improvement)

“We have seen particular strength in many of our West Coast markets. . . . We have seen pockets of softness on the East Coast.” — Target chairman and CEO Brian Cornell (Big Box)


Little to no impact from Brexit continues.

“On the UK question, frankly . . . our sales did not go down. We’ve the loss because of the conversion. Our sales in pound have been the same or what we projected. So there has not been a slowdown.” — Perry Ellis International executive chairman George Feldenkreis (Apparel)

“Urban’s European business also experienced strong comp gains with seemingly little impact on the business from the Brexit vote.” — Urban Outfitters CEO Richard Hayne (Apparel)

However, it would be foolish to jump to conclusions about Brexit after only six weeks.

“The thing that’s important to note, clouds were already gathering over the global economic outlook before the UK’s vote to leave the EU took place. It will take time for the full effect of the vote to be felt and understood. In my view, it would be rash to extrapolate from the economic and political noise of the last six weeks.” — Standard Life CEO Keith Skeoch (Insurance)

But commercial real estate investors do not seem concerned.

“In recent weeks, UK commercial real estate exposure has received a lot of attention from the investment community. In short, we don’t feel overly exposed. Given our history, we’ve had a cautious new business risk appetite in the sector, and we’ve dramatically shrunk our legacy exposure.” — RBS CFO Ewen Stevenson (Bank)

Strong steel demand can only continue for so long.

“From a demand side on the steel, we are quite optimistic. . . . The reason why we are a little bit cautious . . . is because we’re already running at a very, very high rate for many years. So, we do not see it negative. But, as we have already such a strong demand . . . we do believe that the upside beyond that, let’s say, strong demand probably is rather limited. ” — ThyssenKrupp CEO Heinrich Hiesinger (Steel)

Food and beverage market growth in China has stalled.

“In China, the food and beverage market overall saw its growth decelerating to basically zero growth.” — Nestle EVP and CFO François-Xavier Roger (Packaged Food)


The saga of the asset management industry continues.

“I outlined some of the major challenges facing the asset management industry. These include a shift in investor demand from active to passive strategies, pressures on fees in both active and passive, a growing industry regulatory burden, and rising costs of doing business. Unfortunately, nothing has changed over the last three months to lead me to believe that these challenges are going to abate anytime soon.” — Eaton Vance chairman, president, and CEO Tom Faust, Jr. (Asset Management)


A wave of new fashion is starting. 

“I saw more fashion excitement in spring than I’ve seen in quite a few years. . . . This is the fashion change that’s happening and my experience is, once it starts to happen, there is not much that stops it.” — Urban Outfitters CEO Richard Hayne (Apparel)

Flow and newness rather than promotional activity is key.

“I think it’s fair to say that the promotional activity has stabilized a bit here in the last quarter or so. . . . There’s vendors out there choosing to participate in different ways than they may have in the past with our competitors.” — Nordstrom co-president Peter Nordstrom (Department Store)

E-commerce forces a lower margin.

“Obviously we run lower margin in dot-com. The actual margin on the product is roughly equal to our brick-and-mortar. But when you put in shipping, it has a negative impact.” — JCPenney EVP and CFO Edward Record (Department Store)


Target calls out Apple for weak performance in electronics.

“We have to improve electronic performance. It was a significant drag — 70 basis points on our overall comp declines in the quarter. And Apple played a significant role there. So we over-indexed with Apple products.” — Target chairman and CEO Brian Cornell (Big Box)

Tim Cook is not too concerned about skeptics though.

“It doesn’t bother me. Because honestly, they were saying that about Apple in 2001. They were saying it in 2005. They were saying it in 2007 — ‘this stupid iPhone, whoever dreamed up this thing?’ Then they were saying that we peaked in 2010, then it was 2011. We got to $60 billion [in revenue], and they said you can’t grow anymore from this. Well, last year we were $230 billion.” — Apple director and CEO Tim Cook (Consumer Electronics)

Telecoms around the world are spending less on their networks.

“You look at some of the analyst reports on Service Provider CapEx, we actually saw exactly what the analysts have talked about. I saw one report that discussed double-digit declines outside of the United States and maybe flat to slightly up inside the US.” — Cisco EVP and CFO Kelly Kramer (Networking)

Deep learning is the “Thor’s hammer” of computing.

“Deep learning, you may have heard, is a new computing approach. It’s a new computing model, and requires a new computing architecture. . . . Deep learning was really ignited when pioneering researchers around the world discovered the use of GPUs to accelerate deep learning. . . . Deep learning is really machine learning supercharged, and deep learning is really about discovering insight in big data, in big unstructured data, in multi-dimensional data. . . . It’s Thor’s hammer that fell from the sky, and it’s amazing technology that these researchers discovered.” — NVIDIA co-founder, president, and CEO Jen-Hsun Huang (GPUs)

Miscellaneous Nuggets of Wisdom

I spent some time studying the Watergate era this week. I thought this quote was worth posting.

“We think that when someone dear to us dies, we think that when we lose an election, we think that when we suffer a defeat, that all is ended. We think, as T. R. [Theodore Roosevelt] said, that the light had left his life forever. Not true. It’s only a beginning always. . . . Because the greatness comes not when things go always good for you, but the greatness comes when you’re really tested, when you take some knocks and some disappointments, when sadness comes. Because only if you’ve been in the deepest valley can you ever know how magnificent it is to be on the highest mountain.” — Richard Nixon, 9 August 1974, the day of his resignation as president

Each week the team at Avondale Asset Management reads dozens of transcripts from earnings calls and presentations as part of its investment process. If you find these posts useful, click here to receive them every week via email.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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About the Author(s)
Scott Krisiloff, CFA

Scott Krisiloff, CFA, is the CEO of Avondale Asset Management, an independent investment advisory firm located in Los Angeles. Krisiloff is the author of the firm's blog, Company Notes.

1 thought on “The C-Suite Speaks: Industry Restocking”

  1. “Consumers are willing to spend on their homes as long as they see the value increasing.” Yes, but we are also cautious and practical spenders. We will only spend money as long as it’s good.

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