The Newsletter
The Transcript 08.23.20
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Succinct Summary: Big retailers posted staggering comps in the second quarter as consumers shift spending towards purchases for items used at home. Part of the strength was driven by the stimulus but spending appears to have stayed strong in August even after the stimulus has waned. November’s elections are starting to shift into focus. And life may not get fully back to normal until 2022.
Macro Outlook:
Big retailers posted some huge comps in the second quarter
“The results we reported this morning are truly unprecedented. On the top-line, we delivered second-quarter comparable sales growth of 24.3%, the strongest we’ve ever reported” – Target Corporation (TGT) CEO Brian Cornell
“Sales for the second quarter were $38.1 billion, up 23.4% from last year. Comp sales were up 23.4% from last year with U.S. comps of positive 25%” – Home Depot (HD) CEO Craig Menear
“Walmart U.S. segment. Comp sales were strong again this quarter at 9.3% excluding fuel” – Walmart (WMT) CEO Doug McMillon
“Taking a look at our second-quarter results in more detail, total sales increased by 17.1%…Average selling prices were up mid-single-digits in the quarter, while units were up double-digits” – Foot Locker (FL) CFO Lauren Peters
The comps were partly driven by the stimulus, but also by real demand growth
“in terms of the overall benefit from the stimulus, hard to quantify, but we have to believe that there’s some – when customers have more money in their pocket, there’s some benefit to that. So we don’t kid ourselves to think that that didn’t have some kind of impact. But clearly, the customer is engaged around their home and looking to get things fixed, looking to take on projects as they have time to be able to do that” – Home Depot (HD) CEO Craig Menear
“There were several tailwinds affecting our Q2 performance including government stimulus, more people eating at home, a focus by customers on entertaining themselves at home, and investing in their homes and yards” – Walmart (WMT) CEO Doug McMillon
“I would say, the basket side, in addition to supply, of course stimulus checks does help with that. And so, like all retailers, we saw some growth associated at the same time that those checks were issued. So, any further issuance would definitely be a driver for basket growth” – Cresco Labs (CRLBF) CEO Charlie Bachtell
The comps settled as stimulus waned, but are still strong
“As the benefits from stimulus waned towards the end of the quarter, we saw our comp sales settle into a normal range” – Walmart (WMT) CEO Doug McMillon
“In August, we’ve continued to see the strong broad-based sales trend that we experienced in July, with strength across both DIY and pro customers. Month-to-date, August US comp sales trends are materially consistent with July’s performance levels” – Lowe’s Companies (LOW) CEO Marvin Ellison
“But, if you look at the volume of growth that is coming from, it’s coming from just more customers entering our stores coming into the industry, which has been a steady trend pre-stimulus issuance and then post” – Cresco Labs (CRLBF) CEO Charlie Bachtell
Customers are still fearful
“Our stores have stabilized right around 75% of their typical volumes, which when we think about it, given that we’re operating with reduced hours, that there’s still so much fear out there in the consumer.” – Kohl’s Corporation (KSS) CEO Michelle Gass
Business leaders are worried too
“Well, obviously, there’s a tremendous amount of uncertainty right now, whether it’s the shape of the recovery, the impact of COVID, we’ve got an election coming up” – Advance Auto Parts (AAP) CEO Tom Greco
“As we look ahead, there are many potential challenges on the horizon, including uncertainty surrounding COVID-19 economic headwinds from historically high unemployment, uncertainty surrounding government stimulus and a contentious November election” – Target Corporation (TGT) CEO Brian Cornell
Things may not get back to normal until 2022
“…But I think next year remains under some pressure, particularly in Q1 and Q2. The wildcard is, to me, it’s around vaccine and distribution of the vaccine. It feels like that’s really where the world is that we need to see that. That will take a little bit of time to kind of work its way through. I have some optimism that as we get to Q4 — Q3 and Q4, we start to see things moving better than what we’ll probably see in Q1. So I know that’s not so specific. But I think we’re into ’22 before we start seeing opportunities to get back to ’19 levels, and that might even be a trailing story as we get into kind of Q1 and Q2 of ’22” – Samsonite International SA (SMSOF) CEO Kyle Gendreau
International:
Hotel industry trends in China
“To share with you a few observations for Q2 and for recent months. First, hotel booking for intra-city bounced back the fastest and achieved over 25% year-over-year growth already, which contributed to the fast recovery of our hotel booking business compared to other players. Second, the recovery of hotel bookings for long-distance cross-city trips has not gone back to our expected level due to consumers’ hygiene concern. Third, lower-tier cities, which were less affected by the pandemic recovered faster than Tier 1 and Tier 2 cities. And room nights booked in lower-tier cities in Q2 already back to the same level of Q2 in 2019” – Meituan Dianping (MPNGF) CEO Xing Wang
Hiring for factory jobs in China is becoming increasingly difficult
“Before, if we wanted to hire one worker in China, there would be three people lining up. Now, if you are looking for three people, it’s nice if you have even one person lined up.” – Giant Bicycles (TPE:9921) Chair Bonnie Tu
Financials:
Bank balance sheets may be more impaired than the numbers show
“One of the reasons is, is that the banking system is not sending out warning signs as it did in previous cycles. and one of the reasons for that is in the CARES act, that GAAP accounting in effect was suspended for banks, for loans that have gone into what they now call deferral. So prior to that, if, if someone stopped paying you stopped paying the bank interest, it would go into non-performing and non-accrual. And now if the loan is deemed impaired by COVID banks can continue earning interest on those loans that aren’t paying them interest.. we looked at some FTC data recently and, most banks with the exception of the very largest…the giant banks do not have this risk, but a lot of midsize banks are at all-time record exposure to commercial real estate higher than in the, before the GFC and higher before the last commercial bus in the late eighties.” – Kynikos Associates Founder Jim Chanos
Consumer:
Consumers are spending on exercise equipment, home improvement and other DIY projects
“We’re sold out through the remainder of the year and are trying to catch up on capacity. The way these are manufactured, the tolerances are very tight. It’s not an easy process to get new hands working on and building these things. We’ve had to ramp up not just the manufacturing side but also the internal logistical side. Some of our numbers are higher than some Q4 numbers. It has really ramped up beyond all of our expectations”- Nautilus (NLS) Vice President Jay McGregor,
“During the quarter, we saw customers take on projects throughout their homes, from deck building to painting projects, landscape work and home repairs due to increased wear and tear. Clearly, our customers engaged with home improvement in a meaningful way” – Home Depot (HD) CEO Craig Menear
“People just have time on their hands, they’re washing their own cars, they’re detailing their own cars….So, it’s a great time for DIY, because people have time on their hands.” – Advance Auto Parts (AAP) CEO Tom Greco
Video games are hot too
“We are expecting a really strong second half for gaming…because how vibrant the gaming market is right now and how many people around the world is depending on gaming at home, I think it’s going to be the most amazing season ever. We are already seeing amazing numbers from our console partner, Nintendo… think it’s going to be quite a huge second half of the year” – NVIDIA (NVDA) CEO Jensen Huang
Schools are going to have to start lowering tuition or go out of business
“Seventy-eight percent of all students say they go to college for the sole purpose of getting a better job. If the schools don’t make it cheaper, don’t go online, and don’t expand their curriculum to be, in addition to what they have, skills related, and they don’t make it more convenient for the student base, they will go out of business…“Colleges are going to have to for the first time, lower their price, not just freeze it, but lower it. They’re going to get less funding from states than they’ve ever gotten before” – Chegg (CHGG) CEO Dan Rosensweig
The cost of fulfilling digital orders is a challenge
“I do expect the cost of shipping to continue to be a headwind as digital will continue to out-penetrate in the back-half of the year…We do have some headwinds with surcharges that we’re working through at this point” – Kohl’s Corporation (KSS) CFO Jill Timm
“…digital orders inherently involve more handling and more cost compared with conventional store transactions” – Target Corporation (TGT) CEO Brian Cornell
Technology:
Computing units are now entire data centers
“We believe that the future computer company is a data center-scale company. The computing unit is no longer a microprocessor or even a server or even a cluster. The computing unit is an entire data center now. And as I was explaining it to Vivek just now that a microservice that we are enjoying hundreds of billions of transactions a day, those are broken up into a whole bunch of microservices that are running across the entire data center. And so, the data center is running – the entire data center is running an application. I mean, that’s pretty remarkable thing. And that happened in the last several years.” – NVIDIA (NVDA) CEO Jensen Huang
Disney+ is here to stay, but everyone else?…
“Disney will remain relevant into the future. All of the rest of them are caddies on a golf course they’ll never play.” – IAC/InterActiveCorp (IAC) CEO Barry Diller
Uplink speeds are becoming more important
“The growth in upload usage outpaces that of the download by almost a factor of two….Almost all networks are optimized for the downlink—the ability to download files and stream video, for example, or to stream music—so typically you get much higher performance there. But I believe going forward you will care much more about the performance the other way, how fast you can upload. And you see that already today. Take a sporting event. When a team scores, the uplink actually gets used much more because everyone wants to upload the pictures and videos.” – Ericson (ERIC) CEO Börje Ekholm
Materials & Energy:
Bankruptcies are piling up in the oil industry
“The prices are just too low… the oil industry can’t make any money…We’ve had 23 bankruptcies so far in this sector this year defaulting at about $31B…We’ve got a creeping tsunami, right now, of bankruptcies. We’re going to continue to see more bankruptcies” – Canary CEO Dan Eberhart
Undoubtedly, the world is moving away from oil but given limited new sources, there is still value in oil
“Undoubtedly, the world is moving toward cleaner energy sources, and COVID-19 has introduced some demand downside, not only in the near term but possibly to a degree in the longer term. However, for oil in particular, steep production decline curves conservatively 3% per annum remain a feature of the industry and there are limited new sources of cheap supply. This makes it an industry where good value and returns can be generated for at least the next decade and likely beyond, none of which detracts from the energy transition that we are planning for over-time” – BHP Group (BHP) CEO Mike Henry
Long term demand trend for copper, nickel, and potash
“Decarbonization, electrification, diet, land use and population trends will all drive higher demand for copper, nickel and potash in the medium to longer term. We are therefore looking to grow in these future-facing commodities” – BHP Group (BHP) CEO Mike Henry
Lumber prices have surged with home demand and supply disruptions
“…the V-shaped recovery for housing has produced a staggering increase for lumber prices, which have more than doubled since mid-April. Such cost increases could dampen momentum in the housing market this fall, despite historically low-interest rates” – National Association of Home Builders Chair Chuck Fowke
“…lumber in the last several weeks of the quarter and into the first two weeks of this quarter has hit all-time record highs. Each framing and panel are over $700. They’re up essentially about 115%. But I would say a big piece of that was when COVID started, none of us knew where this was going to go, and the mills took a conservative approach and largely backed off harvesting trees and cutting logs. That product started up again about mid-quarter of Q2, and we’re starting to see much better flow in lumber” – Home Depot (HD) Executive Vice President of Merchandising Ted Decker
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