Practical analysis for investment professionals
30 August 2016

The C-Suite Speaks: Dog Days of Summer

The C-Suite Speaks: Dog Days of Summer

The last two weeks of August are typically the slowest of the year for the business community, and industry comments last week reflected that seasonal mood.

Although the economic weakness from the beginning of the year has bottomed out, the desired level of growth has been slow to materialize. It’s worth noting that upswings are never exciting until the wall of worry is scaled. Still, it is difficult to imagine how we will see any acceleration in growth rates without inflation.

At best, the most optimistic industry executives are focusing on what they can control.

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 chairman and CEO Hubert Joly and CFO Corie Barry (Consumer Electronics)

The C-suite is trying to convince itself that good execution will 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 president and CEO Steve Easterbrook (Fast Food)

“Since we last talked, 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 president, director, and CEO Laura Alber (Home Goods)

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

There continues to be an abundance of used inventory in the 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, pricing, Doug Olive (Used Industrial Equipment)

Retailers are finding that inventory does not equate to sales.

“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 [had] last year, that doesn’t necessarily mean that . . . sales will materialize.” — Ross Stores director and CEO Barbara Rentler (Off Price Retail)

Shortages are developing in 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 . . . glass going into televisions, memory going into phones, that are likely to double density, which is putting pressure on the overall industry.” — HP president and CEO Dion Weisler (Printers)

Wages 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 there’s probably a limit to how much we can absorb.” — Ross Stores president and COO Michael O’Sullivan (Off-Price Retail)

Shortages and wage increases can lead to higher inflation. The US Federal Reserve is signalling that it may be 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%, is within hailing distance of 2% — and the core consumer price index inflation rate is currently above 2%. So we are close to our targets.” — Board of Governors of the Federal Reserve vice chairman Stanley Fischer (Central Bank)


The UK 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 president and CEO Michael Hilton (Industrial Components)

Business in Europe is still robust.

“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 . . . spending discretionary money, it’s very healthy there.” — PVH chairman and CEO Manny Chirico (Apparel)

There may have even been a bit of a boost in the United Kingdom.

“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 & Co. VP Investor Relations Mark Aaron (Jewelry)

However, time will tell what the full effect will be.

“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 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 president and CEO David McKay (Bank)

The influence 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 & Co. VP Investor Relations Mark Aaron (Jewelry)


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 president Gordon Coburn (IT Consulting)


There is still some weakness in the high-end consumer market.

“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, Inc. 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 & Co. VP, investor relations, Mark Aaron (Jewelry)

If there is weakness at the high end, the home market isn’t seeing it.

“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 quarter’s contract growth across all of our regions.” — Toll Brothers director and CEO Douglas Yearley, Jr. (Homebuilder)

The retail landscape continues to focus on promotions.

“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 chairman, president, and CEO Kurt Darrow (Home Goods)

More athletic apparel is sold for fashion rather than function.

“The facts are that most of the basketball shoes 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 chairman, president, and CEO Richard Johnson (Apparel)

Whether a consumer shops in stores or online is becoming a wash.

“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 chairman and 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. ” — The Priceline Group chairman, president, and CEO Jeff Boyd (Travel Agency)


Moving to the cloud takes time. 

“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 chairman and CEO Brad Smith (Accounting Software)

Materials, Energy

Banks are confident that any issues caused by $35–$40 oil are now 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.” — BMO Financial Group chief risk officer Surjit Rajpal (Bank)

No new coal mines are being built . . . anywhere.

“The big thing we have 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, etc. That’s all relatively stable and no new big mines being built anywhere in the world.” — Glencore CEO Ivan Glasenberg (Metals and Mining)

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.

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