The Transcript 08.31.20

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Succinct Summary: The last week of summer before labor day is usually one of the slowest weeks of the year but this year it feels like things are moving at an incredibly fast pace.  Companies are looking to the future and beginning to permanently rationalize their cost structure.  Business travel budgets are likely to be cut for a long time.  Temporary layoffs are also becoming permanent.  In the near term economic activity is still very strong though.  We’re seeing a terrific end of the summer.  And the Fed is hoping it stays that way in the fall.

Macro Outlook:

Things feel like they’re moving really fast

“I’ll tell you, at this moment in time there has never been a time when we’ve had to go faster. We’ve had to deliver customer success faster and we’ve had to be there for our customers…each crisis tends to bring us to the future faster. And that appears to be what’s happening here” – Salesforce.com (CRM) CEO Marc Benioff

“COVID-19 is accelerating existing trends that we’ve seen and we’ve observed that we’ve seen a decade’s innovation in a few months” – WPP (WPP) CEO Mark Read

“Sometimes it takes a decade to make a week of progress, sometimes it takes a week and you make a decade of progress. That’s kind of the transition that we’ve seen” – VMWare (VMW) CEO Pat Gelsinger

Some things will never be the same

“In human history, we’ve never seen such an enormous migration of the workforce in such a short period of time. That’s why I say it’s a “black swan”. We’ll never educate the same, we’ll never provide healthcare the same and we’ll never work the same, as we make some fundamental permanent shifts in all aspects of society, how we work, learn, live and worship.” – VMWare (VMW) CEO Pat Gelsinger

Companies are beginning to make long term changes to cost structure

“…a bunch of package food companies that are now really just admittedly beginning to talk a little bit about taking some of the learnings from the pandemic and sort of making some longer-term structural changes as a result of it. Some have clearly stated that they’re not going back to a sort of pre-pandemic cost structure.” – Smucker (Analyst comment)

“Customers are also responding to the broader macro conditions, adapting their businesses, and scrutinizing or reducing their spending against the backdrop of sharp reduction in overall economic activity”- Elastic (ESTC) CEO Shay Banon

This includes permanent layoffs

“Privately, some [businesses] may hint that they probably won’t need as many workers as they once thought…They’ll have to reinvent their businesses in ways that they hadn’t done before.” – Carlyle Group (CG) CEO Rubenstein

“So particularly in areas where we’ve had savings on travel and hotel costs, some of our establishment cost-saving and some of our staff cost savings will be permanent in nature” – WPP (WPP) CEO Mark Read

But for now economic activity is still very strong

“Trends have remained strong in August, with sales up approximately 20% for the first three weeks of Q3” – Best Buy (BBY) CEO Corie Barry

“…we’re not seeing any slowdown in terms of customers either coming in with smaller purchases or interest than we thought they might and/or renewing.” – Okta (OKTA) CEO Todd McKinnon

“June contracts with a highest June in our history, our July contracts with a highest for any month in our history including the spring selling months of February, March, and April, when we historically sell the most homes. The strong demand has continued so far into August with deposits trending even better than July and also up significantly compared to the same three weeks last August.” – Toll Brothers (TOL) CEO Douglas Yearley

Credit is less stressed than many expected

“I would say the good news is, we are seeing the stress across the wholesale portfolio, very concentrated in those particular sub-sectors. And so the rest of the portfolio is actually performing quite well… would say barring any real major changes in the macro-environment, I would expect to see the performing provision decline quite substantially over the course of the next quarter or two” – Bank of Montreal (BMO) Chief Risk Officer Pat Cronin

Low interest rates are having a big impact

“30-year mortgage rates at or below 3% are fueling tremendous affordability. For example, with a 3% versus 4% mortgage rate, a person can afford a $900,000 home versus an $800,000 home with the same monthly payment.” – Toll Brothers (TOL) CEO Douglas Yearley

We’re seeing a terrific end to the summer

“The market is very strong. We are seeing a terrific end to the summer” – Toll Brothers (TOL) CEO Douglas Yearley

The Fed wants to make sure we have a great fall too

“Our new statement indicates that we will seek to achieve inflation that averages 2 percent over time. Therefore, following periods when inflation has been running below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time…our approach could be viewed as a flexible form of average inflation targeting..our revised statement emphasizes that maximum employment is a broad-based and inclusive goal…This change reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities” – Fed Chair Jerome Powell

A lot will depend on the path of the virus

“…it’s really hard for me to forecast, because it’s going to depend so much on the health path that we take over the fall” – Bank of Montreal (BMO) CEO Darryl White

International:

Economic activity around the world has been correlated to success in managing the virus

“In many Asian countries where the situation is much more under control. We see volumes close to where they were before the crisis. In the US and in some of the Americas country, where the impacts of the virus is still stronger. They are still behind significantly more behind that number. And Europe is on place in the middle in the countries where economic activities almost back to normal, we see usage levels not at their previous level, but very close to that. And what I’m talking is really the impact on the commercial side.” – HP (HPQ) CEO Enrique Lores

UK House market conditions very strong

“Housing market conditions remain unseasonably strong despite the UK moving into recession. Demand continues to outpace supply and support house price growth of 2.5% per annum. Meanwhile, houses are selling faster than flats as we see a shift in buyer priorities in the wake of the lockdown and movers prioritise more space. Home buyers shrug off recession fears as time to sell falls by almost two weeks” – Zoopla Research and Insight Director Richard Donnell

Financials:

We’re not in a good M&A environment

“I honestly feel like we’re very lucky that we were able to pick up MuleSoft and Tableau when we did, because they were both public companies today, you can do the math. We would not have been able to buy them. There’s no way, no how it wouldn’t have worked for us financially. So we’re not in a good M&A environment. I just don’t see it. Maybe things could change, of course, things always are changing. But I think, this isn’t part of our plan right now. We don’t see that.” – Salesforce.com (CRM) CEO Marc Benioff

The SEC expanded the definition of accredited investor

“For the first time, individuals will be permitted to participate in our private capital markets not only based on their income or net worth, but also based on established, clear measures of financial sophistication.” – SEC Chairman Jay Clayton

SPACS are not for everyone

“Hopefully the market settles down a little bit there…I think there are a lot of SPACs now. Some will do well and some won’t. For the right companies, SPACs are great vehicles, but it’s not a fit for everybody. It’s not a fit for every company.” – DraftKings (DKNG) CEO Jason Robins

Real Estate:

Retail is a falling knife

“We started this whole [pandemic] with more retail space per person than any other country in the world, by a multiple. The change in retail is really just a reorganization of oversupply. The pandemic has accelerated the amount of online retail, and I don’t think that’s ever gonna change. That’s gonna require future retail real estate to be very different than it has [been] up until now…There is no question in my mind that retail is a falling knife, and we are for sure not at the bottom” – Equity Group Investments Chairman Sam Zell

“We’re not a real big fan of malls…as you know, most malls are starting to die and they’re changing them out and they’re starting to make more in the strip centers by tearing out the [metal in the gut]” – Ollie’s Bargain Outlet (OLLI) CEO John Swygert

Online vs in-store EBIT margins end up being pretty similar

“Overall, on an annual basis, the EBIT levels of both of those channels are actually pretty similar. Now each quarter can be a little bit different. The makeup is a little different, too. Online has typically had a little less, a little lower gross profit rate, a little bit more SG&A leverage. Stores, while carries a little bit more gross profit rate. It carries a little bit more SG&A burden. So they kind of offset each other, and so similar EBIT levels — or they’re pretty similar EBIT level” – Best Buy (BBY) President Mark Mohan

Consumer:

Millennials are driving housing markets

“Millennials, many of whom are now in their thirties and forming families, are buying homes. They have wealth from a combined 20 to 30 years of work generated savings, which can enable them to afford a first home that is bigger and higher priced than the typical starter home” – Toll Brothers (TOL) CEO Douglas Yearley

“I think what’s noteworthy is the shift into a slightly younger demographic, with the millennial population getting into household formation.” – Williams-Sonoma (WSM) Chief Marketing Officer Felix Carbullido

Boise, Reno and Austin are some of the beneficiaries of outmigration from California

“There is no question that the benefits of Reno as an example and Boise which is doing extremely well for us, is to a large extent from the outmigration from California. And we’re seeing more and more higher percentage of our traffic into Reno, into Boise and then to some other markets Austin, Texas, as an example. It is from California” – Toll Brothers (TOL) CEO Douglas Yearley

Demand for boats is pretty high too

“…the retail demand we have experienced in the marine space in such a short time period is unprecedented. This has been a welcome surprise to everyone in the marine industry. The shift in our culture as a result of the COVID pandemic has fundamentally changed how people are spending their time. Boating provides a great opportunity for them to still get out and enjoy life while maintaining social distancing with their inner circles.” – Malibu Boats (MBUU) CEO Jack Springer

Consumers are shopping with purpose

“Consumer shopping patterns are evolving. Customers are shopping with a purpose, while looking to minimize risk and exposure. As a result, we are seeing material increases in average ticket, while seeing a decline in average visits” – Dollar Tree (DTLR) CEO Mike Witynski

Kids keep growing regardless of pandemic

“What happens with kids that is great that makes in a durable business is kids keep growing regardless of pandemic, regardless whether in a physical school or not” – Nordstrom (JWN) CEO Erik Nordstrom

“With the back half comes back-to-school, which was different for many families this school year. What hasn’t changed is the family ritual of shopping for supplies and cool clothes to allow kids to feel their best whether they are learning at home or socially distanced in a classroom” –  The Gap (GPS) CEO Sonia Syngal

You can’t really wear lipstick when you have a mask on

“What usually happens during a recession is there may be some switching of categories. One example is that the move has been to skin care right now and less about makeup. You can’t really wear lipstick when you have a mask on. People have switched into mascara and into eyeshadows and to brow styling. The questions we get now are ‘How do I make my eyes stand out for Zoom?’” – Bluemercury CEO Marla Beck.

Technology:

The pandemic has led to exponential growth in data

“…the amount of data and volume coming in now for a customer base is larger than anything they’ve ever experienced in the past, just because it’s coming from every which way. Just think about the…environment, the amount of data. The amount of data and interaction points that you and I are now interfacing with, either at home or on the road, because we’re not in the office is growing exponentially.” – Microsoft (MSFT) Investor Relations GM Mike Spencer

Note to Apple shareholders: Best Buy called out weakness in mobile phones

“We’re seeing favorable trends across literally all of our categories right now as we exit Q2 and start Q3 with the one exception that we noted around mobile phones” – Best Buy (BBY) CEO Corie Barry

It turns out that PCs aren’t dead

“We have never shipped so many PCs and it was really driven by the demand we see for people working from home and learning from home, PCs have become essential…PCs have become essential. In the past, we were talking about one PC per home. Now we see the need to have one PC per person. This is going to be driving demand [and] it’s going to be staying with us for a while.” – HP (HPQ) CEO Enrique Lores

Industrials:

Supply chains are under intense pressure

I can just say the supply chain over the last four months has just been hideously complex and nearly impossible to manage….There were many, many factory issues that we deal with many of them either closed or severely impaired during the quarter….And then once we could get the product made we had trouble because the air freight carriers and the vessel carriers were backed up and had raised the prices to a point that at least were there made it impossible for us to ship. So yes, we had a bunch of problems. Those problems have slowly dissipated. And I would say starting around mid-July, we’ve seen a much better flow of product” – Urban Outfitters (URBN) CEO Richard Hayne

“The challenge is that our customers have had with their global supply chains have not been driven by an inability to get goods transported across the world, but rather a lack of buffer inventory and single vendor reliability. Our single biggest challenge has been the difficulties with getting our seafarers relieved when their tours were up due to travel restrictions, closed borders and lack of flights. And we continue to battle this problem, but we have started to make some real progress”  – A.P. Møller – Mærsk A/S (AMKAF) CEO Søren Skou

Retailers are having a hard time keeping inventories stocked

“Throughout the quarter, we experienced inventory constraints in a number of categories, which did moderate our sales growth. While we expected product constraints as we entered the quarter, the stronger-than-anticipated demand as we open our stores for shopping resulted in more constrained product availability than we expected” – Best Buy (BBY) CEO Corie Barry

” Inventory levels in both our segments were impacted during the quarter, as it relates to higher turn consumable categories” – Dollar Tree (DLTR) CEO Michael A. Witynski

Wholesale used vehicle prices are up

“Industrial Wholesale used vehicle prices (on a mix-, mileage-, and seasonally adjusted basis) increased 3.4% in the first 15 days of August compared to the month of July. This brought the mid-month Manheim Used Vehicle Value Index to 163.4, a 15.6% increase from August 2019. If the mid-month value of the Manheim Index holds for the full month, the Index will set a record high for the third consecutive month” – Manheim Consulting


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