The Newsletter

The Transcript 06.08.20

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A Personal Note: A lot has happened in the last two weeks we have been away. We start on a very positive note—warm congratulations to my co-author Scott Krisiloff and his wife on the birth of their beautiful twins this past week. On a different note, the challenge of racism has come to the forefront of global news. This week, we have a special section on quotes on the reactions from corporate management teams on the issue of racism. The bottom line is that we have a problem that needs fixing. I have also written a personal article about my experience of racism in Scandinavia. – Erick Mokaya

Corporate management teams have finally acknowledged that we have a problem

As the CEO of the world’s largest health-care company, I must state unequivocally that racism in any form is unacceptable, and that black lives matter.” – Johnson & Johnson (JNJ) CEO Alex Gorsky

“All these events have been tragic and it hurts on so many levels..we have to address some of these issues that are absolutely plaguing, you know, this great country ” – Chipotle (CMG) CEO Brian Nicco

“We’ve got a problem…We have a big problem and it needs to be dealt with” – AT&T (T) CEO Randall Stephenson

“There are structural barriers in place that keep these disparities in place” – American Airlines (AAL) CEO Doug Parker

And we need to listen to those affected and think and do something about the racism

“recent events have forced us to reflect on the severity of these issues, but these events are symptoms of a deep and longstanding problem in our society and must be addressed on both a personal and systemic level.” – BlackRock (BLK) CEO Larry Fink

“We can’t heal without truly understanding the depth of the disease” – JPMorgan Chase (JPM) Chase Consumer Bank CEO Thasunda Duckett

“As a white man, I also need to acknowledge the limits of my own life experience and listen to those who have faced systemic injustice since the day they were born.” – Johnson & Johnson (JNJ) CEO Alex Gorsky

“What we see is a moment here, a moment where we can make a bigger difference” – Walmart (WMT) CEO Doug McMillon

“We have to reexamine our own views and actions in light of a pain that is deeply felt but too often ignored” – Apple (AAPL) CEO Tim Cook

Some black executives shared their personal experiences on racism

“What the African American community sees in that videotape is that this African American man, who could be me or any other African American man, is being treated as less than human” – Uber (UBER) Board Member Ursula Burns

“Even though I’m the CFO of a global bank, the killings of George Floyd in Minnesota, Ahmaud Arbery in Georgia and Breonna Taylor in Kentucky are reminders of the dangers Black Americans like me face in living our daily lives. Despite the progress the United States has made, Black Americans are too often denied basic privileges that others take for granted. I am not talking about the privileges of wealth, education or job opportunities. I’m talking about fundamental human and civil rights and the dignity and respect that comes with them. I’m talking about something as mundane as going for a jog. Racism continues to be at the root of so much pain and ugliness in our society – from the streets of Minneapolis to the disparities inflicted by COVID-19.” – Citigroup (C) CFO Mark Mason

“I know for sure that what put my life on a different trajectory was that someone intervened to give me an opportunity, to close that opportunity gap. And that opportunity gap is still there.” – Merck (MRK) CEO Kenneth Frazier

These conversations and discussions need to be long term

“This conversation’s got to be longer-term and more lasting…When we have events like this, sometimes there’s a surge of energy and passion and emotion and people will give money, which again is good, but then we get distracted and we move on to something else and the lasting change doesn’t happen because we didn’t do the work to get through complexities” – Walmart (WMT) CEO Doug McMillon


Succinct Summary: There are some glimmers of hope across such industries like airlines, travel and retail as demand picks up from the April lows. We are, however, being cautioned about being too excited and urged to be cautious. All in all, there is significant pent-up demand. 

Macro Outlook:

Growth is picking up but don’t be too excited about it

“I am pleased to say, but I would not get overly excited about it, that we have seen nice growth coming into May. And essentially, what we have seen is both growing out green shoots in the areas you would expect, places where movement has become possible, where people can now start to think about their summer holidays, et cetera. We see that very quickly when that happens and cancellations have settled down. They are still at elevated levels, but they have stabilized.” – Expedia (EXPE) CEO Peter Kern

” We look daily at departures by region by platform, and we have seen some sequential improvements over the last three or four weeks. China particularly has gone from being down over or close to 70% to being down now 30%” – General Electric (GE) CEO Larry Culp

“reservations for short-haul travel bookings have almost fully recovered compared to last year as more and more regions lift travel restrictions. Long-haul business and leisure travel demands are gradually increasing as well.. on the positive note, we did start to see certain small but positive sign of recovery in markets where the virus is being well contained.” – (TCOM) Co-Founder James Liang

“Sales during the week ending April 4th were down 28%. On a positive note, this represented the low point of the pandemic impact for AAP to-date and our sales have been improving sequentially each week. Through the first four weeks of Q2, our comparable store sales are approximately in-line with the prior year” – Advance Auto Parts (AAP) CEO Tom Greco

“Another interesting data point, in the states that are beginning to reopen, we are seeing our stores outperform the total company comp in those locations, which to us is a data point but it’s a glimmer of hope” – Lowe’s Companies (LOW) CEO, Marvin Ellison

“we have seen a slight uptick in the sales-to-refunds ratio over what we were expecting in April. But again, that’s including some days that have even been positive. But I caution that we don’t jump to any conclusions.” – Delta (DAL) CFO Paul A. Jacobson

“Traffic was down initially around 80% and now it has come back to about 60%..once stores are open for a few days, we have sort of seen them reverting to that down 50%-ish type range.” – Urban Outfitters (URBN) Richard A. Hayne

“While bookings still remain suppressed, they are better now than they were in mid-April, driven by improved trends for the fourth quarter of 2020 and 2021 sales. For the remainder of 2020, we are booked well behind same time last year in load factor with prices down low single digits.” – Royal Caribbean Cruises (RCL) Jason Liberty

There is huge pent up demand across the board

“This huge pent-up demand in there already anyway, for particularly families who want to go on the kind of two week school holiday July, August”  – Ryanair (RYAAY) CEO Michael O’Leary

“..the TV audiences attracted to the German matches demonstrates the strong pent-up demand for live football after two-month absence” – Manchester United (MANU) CEO Ed Woodward

“People, after having been stuck in their homes for a few months, do want to get out of their houses; that’s really, really clear” – Airbnb CEO Brian Chesky

The recovery to pre-crisis levels will take a while

“We are facing a massively distorted market across Europe for the next four or five years.” – Ryanair (RYAAY) CEO Michael O’Leary

“We believe a return to near pre-virus levels will take many quarters and a medical vaccine or cure…there is nothing but uncertainty in the near future right now and every single day truly feels like a new beginning.” – Urban Outfitters (URBN) Richard A. Hayne

“It’s going to be a while before people start crossing borders, getting into planes or travelling for business” – Airbnb CEO Brian Chesky

And even within countries, it may take different shapes

“Within the U.S., I think as you talk about V shape, U shape, swoosh shape, whatever shape you want to think about. We’re going to see that in different parts of the U.S. even.” – Walmart (WMT) CFO Brett Biggs

The key to recovery is addressing the unemployment  and challenges of small business

” I think if the consumer generally feels like they’re gonna have a job and access since and to money and in some form security we’ll see them spend it if they don’t we won’t so the unemployment numbers got to be addressed the thing that’s on my mind right now with anything else is small business I think we all have to work together to ” – Walmart (WMT) CEO Doug McMillon

Walmart has noted some inflation

“We have seen some inflation… Everybody knows about the cost inflation that happened in those protein categories. I think there may be some and others as well” – Walmart (WMT) CEO Doug McMillon

“We have seen some inflation in categories like milk, eggs and dairy later in the quarter, and that seems to have subsided somewhat. And then protein inflation has picked up over the last few weeks, as plants have been inoperable in certain parts of the country” – Walmart (WMT) US President and CEO John Furner

Companies are investing in employee mental health issues

“And we found that the overall situation was taking its toll on many of our employees mental health as they sequestered into their own homes. As it has been for many people all over the world and so we invested in mental health and mindfulness programs to help them.” – Salesforce (CRM) CEO Marc Benioff

The big question is: What will be the new normal? 

“Now, the question beyond that is, what happens when everything opens up? I think it’s going to be, the new normal is still going to take some time. You see on the news that even in states where it’s been open, there’s not everybody running to sit down.” – Costco (COST) CFO Richard A. Galanti


Recovery going on in China

“Restaurants and shops are reopening across the country, the Chinese economy is rebounding, and Baidu’s marketing services is growing each week after hitting a trough in February” – Baidu (BIDU) CEO Yanhong Li

“In China, we’ve seen operations gradually stabilize. All stores are open, and customers are beginning to purchase more discretionary categories though not at pre-crisis levels.” – Walmart (WMT) CFO Brett Biggs


Softbank: Our unicorns are facing serious challenges

“Our unicorns are facing serious challenges against the background of coronavirus outbreak, but I believe that some of them will fly over the valley of the coronavirus and go beyond and fly high.” – SoftBank Group (SFTBY) CEO Masayoshi Son

There will be some solvency issues ahead

“There are large, highly levered companies and investment vehicles that the government and Fed rescue program is not likely to reach and take care of” – Oaktree Capital Management Co-Founder Howard Marks

The Fed will not keep supporting the market forever. 

“Those of us in the markets believe that stocks and bonds are selling at prices they wouldn’t sell at if the Fed were not the dominant force. So if the Fed were to recede, we would all take over as buyers, but I don’t think at these levels.” – Oaktree Capital Management Co-Founder Howard Marks


Walmart is discontinuing the Jet Brand (purchased for $3.3B in 2016!)

“One decision we’ve made is to discontinue While the brand name may still be used in the future, our resources, people and financials have been dominated by the Walmart brand because it has so much traction” – Walmart (WMT) CEO Doug McMillon

Supply chains are stretched 

“Our supply chain is amongst the most capable in the world. But in this environment, we’ve stretched it. Not only had products in categories like hand sanitizer, disinfecting wipes and sprays, toilet paper, beef and pork been hard to find, but items such as laptops, office chairs and fabric have been cleared out in some of our stores and online. We’re working to recover our in stock position as we begin the second quarter.” – Walmart (WMT) CEO Doug McMillon

“In terms of fresh, on the protein side, the merchandise is there but challenging from a production and processing side. Currently, for us, pork is the least affected but somewhat affected by what we have done for the last couple of three weeks, I believe.” – Costco (COST) CFO Richard Galanti

“While these are healthy signs of the needs that customers will continue to have coming out of the crisis, there continue to be significant supply constraints and delays in customer acceptance. This has impacted our ability to make deliveries to our customers.” – Hewlett Packard Enterprise (HPE) CEO Antonio Neri

Digital sales have accelerated especially in groceries

“Sales leveraging our digital platforms increased by approximately 80% in the quarter and more than 60% of the time our customers opted to pick up their orders at a store.” – The Home Depot (HD) CEO Craig Menear

“When I talk about this giant 10-plus fold increase in same-day grocery delivery, that’s certainly because people, there is a group of people that don’t want to go out.” – Costco (COST) CFO Richard Galanti

“If digital penetration more than doubled compared with last year, driving nearly 10 percentage points of our sales growth…we were already planning to reach this level of digital sales penetration over time, but this crisis has rapidly increased the pace of digital adoption among U.S. consumers” – Target Corporation (TGT) Michael Fiddelke

“Online traffic and conversion have exploded in the past six weeks with a 63% jump in new online customers. This has produced robust double-digit increases in sessions and demand.” – Urban Outfitters (URBN) CEO Richard A. Hayne

The future is omnichannel

“We continue to strongly believe that the future of U.S. retail will be based on an omnichannel model, in which quality retailers will serve their customers through both physical and digital capabilities” – Target Corporation (TGT) CEO Brian Cornell

There is a high demand for home improvement and DIY projects

“During the last 3 weeks of April and continuing into the first 2 weeks of the second quarter, we have seen a significant acceleration to double-digit comp sales growth, with strong performance across most of the store, as customers turn to repairs and home improvement projects” – The Home Depot (HD) CEO Craig Menear

“Our DIY omnichannel business is growing double-digits, significantly outperforming professional. While there are a number of factors here, from an industry perspective, the DIY business tends to perform well during an economic downturn, as unemployment increases, new car sales declined, the car park ages and more customers do their own maintenance and repairs…So a couple of important industry factors there people at home, more time on their hands, doing do-it-yourself projects. So those are some things for the industry at large.” – Advance Auto Parts (AAP) CEO Tom Greco

“The uptick in DIY demand was partly driven by the arrival of spring weather in many western and southern geographies, as well as a customer mindset that was heavily concentrated on the home. We saw broad-based project activity ranging from outdoor landscaping and other beautification projects to essential indoor repair and maintenance work and long-deferred home projects, the to-do list that customers hadn’t previously tackled given their busy schedules” – Lowe’s Companies (LOW) CEO Marvin Ellison

There is a significant number of people booking vacations to Italy, Spain, Portugal

“We are seeing a significant number of hits in searches over the weekend, particularly I think from families looking at going on the two weeks summer holiday from Northern Europe to places in Italy, Spain, Portugal, et cetera. And in all of those countries, we’ve seen the cases of COVID-19 are significantly lower in the beach and the resorts than they are in the heavily populated city” – Ryanair Holdings (RYAAY) CEO Michael O’Leary

Football is coming back in Europe

“We are encouraged by the return of German Bundesliga, which is the first major European Leagues to restart last weekend with the successful completion of nine matches, all played behind closed doors.” – Manchester United (MANU) CEO Ed Woodward


Cloud is just getting started and will be a $1T opportunity

“Cloud computing is the single largest IT industry transformation that we have ever seen… I think that accelerated cloud computing is a movement that is going to be a multiyear if not a decade-long transition. From where we are today, it’s only $100 billion industry segment of the IT industry. It’s going to be $1 trillion someday, and that movement is just starting.” – NVIDIA (NVDA) CEO Jensen Huang

“At the edge, the market for capabilities like remote cloud connectivity, and virtual desktop solutions was stronger than pre-crisis in certain segments.” – Hewlett Packard Enterprise (HPE) CEO Antonio Neri

Accelerated digital transformation in companies

“I’ve been on more sales calls with more CEOs in the last two months than at any time my career. And there’s universal agreement among them. Digital transformation, while this isn’t a one app, it’s a must have, company isn’t organizations and governments around the world have a digital transformation imperative like never before.” – Salesforce (CRM) CEO Marc Benioff

Trends in tech: Live broadcast in e-commerce

“It’s obvious that live broadcast in e-commerce is growing very quickly and becoming a trend. And it could become a major form of commerce, or more broadly speaking, I think live broadcasting will become another new form of media, comparable to video, images and text.”  – Baidu (BIDU) CEO Yanhong Li

“we believe with the more adoption of live broadcasting e-commerce and such as live concert, there will be increased demand from brands to participate in events like this.” – Weibo (WB) CEO Gaofei Wang

“With COVID-19, we realized that the boundaries between virtual and physical worlds have blurred to an unprecedented degree. We launched our live stream service in November last year, and we have found it to be an effective tool in lowering the barriers to helping consumers overcome their aversion to buying certain product categories on….We see live streaming not only as a channel to sell products but, more importantly, a venue for merchants to share their personal experiences and interact with users. Live streaming is a great way to showcase certain off-line experience that otherwise aren’t available to many of our users. ” – Pinduoduo (PDD) CEO Colin Huang

Tough to produce mobile devices in the US

“it’s going to be difficult for mobile devices to be produced in the U.S. because it requires a lot of labor.” – Hon hoision Industry (HNHAF) Chairman Young Liu

The new unit of computing is an entire data centre

“Previously, a CPU compute node was the unit of computing. Going forward, the new unit of computing is an entire data center. The basic computing elements are now storage servers, CPU servers and GPU servers, and are composed and orchestrated by hyperscale applications that are serving millions of users simultaneously” – NVIDIA (NVDA) CEO Jensen Huang

How will the work-place look like post Covid19? 

“I think more and more people are going to work permanently from home. There’s a strong movement of companies that are going to support a larger percentage of people working from home. And when people work from home, it’s going to clearly increase the single best home entertainment, which is video games.” – NVIDIA (NVDA) CEO Jensen Huang

“We expect in the coming weeks and months that more employees will continue to work from home than come into office” – Mastercard (MA) Chief People Officer Michael Fraccaro

“It’s imperative to recognize that the workplace will no longer be a single location, but an ecosystem of a variety of locations and experiences to support flexibility, functionality and employee wellbeing..That said, we expect current real estate footprint sizes to remain steady. Flexible working practices may result in fewer people in the office at any one time, but that space-saving is offset by the need to accommodate social distancing in the office.” – Cushman & Wakefield (CWK) CEO Brett White

“I think it will be a hybrid environment. You’re going to have some folks go back to work, you’re going to have split shifts.” – Crowdstrike (CWRD) CEO George Kurtz


A lesson from pre and post 9/11 on how travel might change

“It is demonstrably untrue that people stopped traveling as a result of 9/11. In fact, after a period of adjustment, travel took off. Sorry for the pun.On the other hand, it equally isn’t true that after the period of adjustment, travel reverted to the status quo ante. In fact, travel became very different from pre-9/11. What happened was that we adjusted, and all travel that took place in a post-9/11 world was really quite different from travel previously. It’s hard to remember that that dynamic took place. Travel didn’t simply revert to what it had been, rather travel adjusted to the new normal, and it grew on that basis. I believe personally that the same thing is going to happen in a post-COVID-19 world. Travel and tourism will grow, but not by reverting to what it was, but by adjusting to a world where all activities, everything we do in the world will have changed” – Royal Caribbean Cruises (RCL) CEO Richard Fain

About load factors:

” We will be lucky I think if we see a 50% loan factor through the second quarter. We are expecting maybe a 75% load factor in the winter, but we are guessing and are making this up as we go along.” –  Ryanair (RYAAY) CEO Michael O’Leary

“we tend to believe that there’s a little bit of a slower recovery going forward. I don’t think that when we turn the page into 2021, yet absent a vaccine or something, there’s going to be much of an appetite to get on a 85%, 90% load factor airplane” – Delta (DAL) CFO Paul A. Jacobson

Regional travel is coming back sooner

“what we are seeing clearly is what you have been hearing that local, regional, domestic is certainly coming back stronger sooner.” – Expedia (EXPE) CEO Peter Kern

“Despite the challenges, we’re glad to see in the recent weeks local travel has started to show signs of recovery in certain international markets.” – (TCOM)  Co-Founder James Jianzhang Liang

Housing is pretty healthy

“We entered the year with a healthy housing environment. We haven’t seen anything in that housing environment that’s changed materially. And typically when you look at recessions that are non-housing led for us, the performance decline is much more shallow, more of a flat type environment” – The Home Depot (HD) CEO Craig Menear

” What’s interesting about this environment is that this is not a housing recession. If you go back to 2008 – 2009, you’re in a housing recession and so the home improvement business was directly impacted. This is obviously different, and we’re seeing still sustained strength from our homeowners because they’re sheltering in place and they’re finding those projects around the house.” – Lowe’s Companies (LOW) CEO, Marvin Ellison

Auto is having a hard time

“Needless to say in addition to sluggish demand due to unstable global situation, the automotive industry is facing a period of major change and we are facing various challenges, such as responding to new technologies and complying with increasingly stringent environmental regulations globally.” – Mitsubishi Motors (MMTOF) CEO Takao Kato

Materials & Energy:

Exploration activity declining as companies cut CAPEX

“With operators, our customers cutting capex budgets, we are experiencing a reduction in exploration activity and delays in sanctioning of development programs. These deep cost-cutting measures will impact supply and demand dynamics, putting pressure on day rates and driving down utilization for all asset types in the coming quarters” – Seadrill Limited (SDRL) CEO Anton Dibowitz


COVID leading to fast adoption of Telemedicine

Necessity is creating innovation. Using Crossix data, we see that telemedicine increased rapidly in the US from less than 1% of doctor visits in February to more than 30% of visits in April” – Veeva Systems (VEEV) CEO Peter Gassner

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