The Newsletter
The Transcript 03.08.20
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Succinct Summary: As vaccines continue to be administered the end of the pandemic appears to be at hand. People are resuming normal lives and pent up demand is being unleashed. Consumers are looking forward to a summer filled with travel and congregation with family and friends. Even the Fed is noticing the brighter outlook. The world is opening back up but it probably won’t ever be the same as it was before the Pandemic.
Macro Outlook:
Johnson and Johnson will add another billion vaccines around the world by the end of this year
“To think that only 12 months ago, these were literally numbers that came across in an email, discussing the genomic sequencing of COVID-19, and here we are a year later, on the cusp of literally having 100 million doses delivered in the United States by the end of June, close to a billion around the world by the end of this year is a, is just a remarkable achievement.” – Johnson & Johnson (JNJ) Chairman & CEO Alex Gorsky
The emergency is over
“If you just look at the pure numbers, what they’ve contracted for, they could vaccinate everyone in the US about 1.6 times right. And so that to me would indicate a pretty clear sign that the pandemic period, emergency pandemic period is over.” – Johnson & Johnson (JNJ) CFO Joe Wolk
People are resuming normal lives
“I also think, underlying, that people and humans are social creatures. They want to do this. They want to meet, and they want to travel. They want and go establish those relationships” – easyJet (EJTTF) CEO Johan Lundgren
“…people are anxious to see family, they’re anxious to see their friends, they’re anxious to take a real vacation again. And we think that as the vaccination rates increase, as infection rates moderate, as borders and travel restrictions are eased, that we’ll see a pretty healthy resurgence in personal travel.” – Mastercard (MA) Chief Product Officer Craig Vosburg
“We know that consumers in the U.S. have a considerable amount of pent-up demand. We know many of them have also been able to accumulate some additional savings over this past year as they’ve suspended many of their activities. I expect they’re going to be ready to get their lives back this summer.” – Delta (DAL) CEO Ed Bastian
Even the Fed is noticing a brighter outlook
“As I mentioned, with rising vaccination and other things happening – fiscal policy support – there’s good reason to think that the outlook is becoming more positive at the margin and in coming months we could see spending and job creation picking up.” – US Federal Reserve Chairman Jerome Powell
“The real-estate market continues to be strong. Spending on goods continues to be strong, which is good for the manufacturing sector. Business investment continues to be healthy as well. Now we’re in a world where the virus has come down really at remarkable rates over the last month. The vaccine does look like it’s rolling out. And you know, my personal metric is I’m now talking to people who have gotten the vaccine, which is a shift from where we were even two weeks ago” – Richmond Federal Reserve President Thomas Barkin
But probably won’t change course any time soon
“I’ll just say that for several decades the U.S. and the world, really, economy have been in a low-inflation world, and low inflation is what people expect both here and around the world. For those expectations to change, businesses and people would need to believe that larger increases in prices would be repeated year after year, and we think it’s unlikely that these deeply ingrained low inflation expectations would suddenly change.” – US Federal Reserve Chair Jerome Powell
There’s no looking back. We’re headed into a new world.
“I don’t see any customers going backwards. No one’s asking us to take this stuff away. No one’s asking us to go back to the pre-2020 state. It really is a world where customers see these trends accelerated. They need to invest. They need to catch up. They’re going to speed up their investments, we believe, over the decade.” – Dell (DELL) COO Jeff Clarke
“The consumer is probably more impatient than they’ve ever been before, particularly since now they’ve had the luxury of an entire year of getting titles at home pretty much when they want them. I’m not sure there’s going back.” – Disney (DIS) CEO Bob Chapek
Consumer:
Retailers are posting strong comps
“January was a really surprising month for me. I think if I do this for another 20 years, we’re unlikely to see January comps grow at a rate of over 30%” – Target (TGT) CEO Brian Cornell
“…we’ve had nine months now that the past three quarters that more or less 25 odd percent comp, grew the business over $21 billion.” – The Home Depot (HD) COO Ted Decker
“Net sales for the quarter increased 14.7% to $43.89 billion from $38.26 billion a year ago in the second quarter.” – Costco (COST) CFO Richard Galanti
“Comparable store sales in the fourth quarter were flat versus last year. We were down 10% in November, flat in December and up positive 17% in January” – Burlington Stores (BURL) CEO Michael O’Sullivan
There is a high demand for pop culture items on Etsy
“Every single day, something happens in pop culture, and it is immediately reflected on Etsy. A fun example is at the inauguration, when Bernie Sanders showed up with the mittens, sitting grumpy in the chair, Etsy sellers sold $1.9 million worth of Bernie Sanders-inspired merchandise within days.” – Etsy (ETSY) CEO Josh Silverman
Costco raised minimum wages
“I want to note this isn’t altruism. At Costco we know that paying employees good wages …makes sense for our business and constitutes a significant competitive advantage for us. It helps us in the long run by minimizing turnover and maximizing employee productivity.” – Costco (COST) CEO Craig Jelinek
Technology:
90% of Dell’s employees don’t want to come back to an office
“We’re in week 51 since we sent everybody home on March 16. We’ve polled our — 90% of our team, we polled. They don’t want to come back. And I think we’re seeing the same thing from our customers. It is clear the workforce prefers the flexibility they get in this do-anything-from-anywhere environment. And we believe the future is a hybrid world where we likely will go back to the office, but we will only go back to the office, say, one out of the five days a week. You won’t go back to a specific dedicated place. It will be more collaborative space. It will be space where great interactions will occur, but they will be very different than today, and the workplace will fundamentally change.” – Dell (DELL) COO Jeff Clarke
Work is not a place it’s an outcome
“Work is not a place anymore. No specific timeframe. Work is really an outcome.” – Dell (DELL) COO Jeff Clarke
The role of x86 is changing
“…the role of the x86 is changing. We’re living in a world now with more specialty processors and accelerators. We’re seeing more specialization towards workloads. I think there are a lot of reasons that shifting, whether it’s scale, the lower barriers of entry, some of the performance scaling concerns and breaking down what used to be a single processor to do everything into specialty units going forward. So that backdrop sits on the PC as well. I think it’s more pressing on the server side and the storage side than the enterprise side. But certainly, it’s something that we look at on the PC side. We’ve offered both Intel and AMD for years. We’ll continue to do so. But I’ll tell you, ARM gets interesting, particularly more so as it moves from its traditional low-power value proposition to one of greater performance. The higher performance it becomes, the more interesting it becomes.” – Dell (DELL) COO Jeff Clarke
There’s more chips in a truck than there were 10 years ago
“Because anymore, it’s not a manual transmission, it’s an automated transmission, which means that an engine needs an ECM, infotainment needs chips, you name it the truck now needs five or six chips that are required for running the entire vehicle, which used to be 10 years ago, probably one or two that used to be there. This is also causing additional problems.” – Cummins (CMI) Engineering Head Srikanth Padmanabhan
Healthcare:
Covid testing will be needed even in 2022
“2022 could be an even more elevated levels way too early to know. But we’ll have more capacity online, both in cell culture media, single-use technologies and sterile fill finish, to be able to respond to that as well…our expectation is that COVID testing is going to be relevant for a long time” – Thermo Fisher Scientific (TMO) CEO Marc Casper
Many surgical procedures are moving to Ambulatory Surgical Centers
“We’ve seen the shifts of care really moving from hospital settings to ASCs. And really, when I talk to customers, what we’re seeing is just the severity of cases that they’re managing. So a 2-hour colorectal case is now taking 5 hours. And so that productivity in the OR has somewhat been stymied given the most sick patients are really now being triaged, which is good for patients, but it’s just going to take a while for hospital systems really to get up their flow.” – Johnson & Johnson (JNJ) Executive VP Ashley McEvoy
Industrials and Transport:
Unprecedented supply chain issues continue
“So the supply chain issues across the retail industry, I would say, over the last several months have been extraordinary. The magnitude of the bottlenecks, the congestion and the delays in getting merchandise into the country, and then moving it around the country, I would characterize all of this as unprecedented…A few months ago, I would have said, but the situation would solidly correct itself once we got through holiday, that did not happen. There are still very, very significant industry delays coming through the ports, the transportation hubs and our vendor warehouses.” – Burlington (BURL) CEO Michael O’Sullivan
“Supply chain is something that we’ve been managing very closely over the last year in the COVID environment and that challenge continues. It’s in the context now of pretty significant demand, demand is very strong at this point. So this is a industry wide issue. It’s a global challenge. In fact, beyond just our industry really has, demand has come back fairly rapidly. And many of the suppliers are still in a COVID restricted environment and probably hadn’t fully anticipated the recovery happening at that rate.” – The Toro (TTC) CEO Rick Olson
There’s too much demand and not enough supply
“We have too much demand that we can’t meet and there is not enough supply that we have to flushen up, which means my view is that this demand cycle could actually be extended a little longer, because people are already booked out for the end of the year. All of our own clients are saying that they have completely sold out for the year. And tomorrow we’ll get the February orders. My sense is it’s going to be pretty high as well. And if that is the case, you’re now talking in Q1 of next year for orders that are being placed right now to be resolved, right, which is good. But the good problem to have, but it’s going to be a little longer than the cycle.” – Cummins (CMI) Engineering Head Srikanth Padmanabhan
“Regarding the pressures from high consumer demand, examples of areas where we have some supply issues on the nonfood side: certain electronics due to chip and component shortages like TVs, computers, and smart home-related items; exercise equipment, bikes, and outdoor activity items; lawn and garden items; and appliances. On the food side, canned beverages have some shortages due mostly to the aluminum can issue of shortages. Bacon is up 45% in pounds. And so for whatever reason, there’s a lot of demand there, so there’s a little bit of challenge there.” – Costco (COST) CFO Richard Galanti
Ports are congested
“From a supply chain perspective, overseas freight has continued to be an issue in regards to container shortage and port delays. This has caused timing delays on certain categories, including furniture, sporting goods, lawn and garden, and even some food and sundries items like seafood, imported cheeses, and oils. We expect these pressures to ease in the coming months, but it’s impacting everyone, of course.” – Costco (COST) CFO Richard Galanti
“The domestic freight markets are extremely dislocated and the global air-freight and ocean markets have tremendous amounts of constraints around them…There’s no fast way to recover there…There are no extra ships sitting around waiting to be deployed…Customers that normally could book a container days before shipping now have to act weeks in advance. Some companies in desperation are turning to more-expensive air freight.” – C.H Robinson (CHRW) CEO Bob Biesterfeld
“There are still very, very significant industry delays coming through the ports, the transportation hubs and our vendor warehouses…Even though we’ve been able to manage through these issues, there’s clearly a financial impact in terms of higher freight rates and supply chain expenses.” – Burlington (BURL) CEO Michael O’Sullivan
“…it’s less about the ports right now and more about the containers…we’re seeing anywhere from 2 to 7 days of delays in the ports, the bigger challenge is actually on just inbound vessels, having enough containers over in Asia to bring product in” – Urban Outfitters (URBN) COO Francis Conforti
Industry got caught flat-footed
“I’d say the last downturn…and the economic downturn and subsequent upturn happened 18 months from 2009 November whereas now it’s happening in seven to nine months. Which means essentially, we just caught flat footed, we’re not able to meet and our suppliers are not able to meet the demand. And added to this is the semiconductor issue that we are having with this cost is enormous pain both on the auto side.” – Cummins (CMI) Engineering Head Srikanth Padmanabhan
Supply chain headwinds could last well into 2021
“…we would expect that at some point, supply and demand for freight is going to return to some kind of an equilibrium, but we really don’t know when that’s going to happen. So our expectation is that we’ll be facing similar headwinds to what we saw in the fourth quarter and what we’ve seen so far this year well into 2021.” – Burlington (BURL) CFO John Crimmins
“In terms of how long those will last, again, it’s hard to say. From where we sit today, it feels like the freight costs will continue through the year” – Ross Stores (ROST) CFO Travis Marquette
Energy:
The era of the internal combustion engine is nearing an end
“There is no long-term future for cars with an internal combustion engine…We are firmly committed to becoming an electric-only car maker and the transition should happen by 2030. It will allow us to meet the expectations of our customers and be a part of the solution when it comes to fighting climate change.” – Volvo (VOLVY) CTO Henrik Green
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