Succinct Summary: The earnings season unofficially kicks off this week with the big US banks reporting. People are enjoying summer and the post-pandemic world. The economy is booming and supply chains are struggling to keep up with demand. Inflationary pressures are the result. The back-to-school season will be important to determine what trends have staying power.
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Macro:
People are enjoying summer
“It’s a lot of, ‘I’m going to see family, I haven’t seen my parents in a year” - Okta (OKTA) CEO Todd McKinnon
“It's definitely morning here and a little bit sunnier than even normal here on the West Coast. So we're enjoying the onset of summer and the resurgence in the consumer, everybody's thing” - Skechers (SKX) CFO John Vandemore
Back-to-school will be important to see what trends are emerging
"We believe that the back-to-college period will be a really interesting pivot and to return to a new normal, and we see that brings multi-generational traffic” - Bed Bath & Beyond (BBBY) CEO Mark Tritton
The economic environment has improved significantly
"The economic environment improved significantly. Most of our manufacturing end-markets turned positive during the quarter, and this evidenced itself in IP readings that turned to double-digit growth in April and May and in sentiment readings such as the MBI index, which are at very high levels. All of this is supported by our customers' outlooks, which are robust.” - MSC Industrial Direct (MSM) CEO Erik Gershwind
But labor is still very tight
"I think our biggest challenge right now is labor from a manufacturing standpoint, and that's occurring. And this is mainly a US-based issue, though not exclusively in the US, but it's principally a US contract. So, as it stands right now, there are some extended lead times that we're seeing in pockets.” - Herman Miller (MLHR) CFO Jeffrey Stutz
"So we have seen tremendous pressure to hire. I want to note this is important. It's really a U.S. phenomenon for us. we're not feeling the same pressures in Canada or Europe. So that gives me some hope that this is a part of economic stimulus and enhanced benefits that have created some of the situation. In the face of this, we're doing a lot to maintain staffing levels.” - Alimentation Couche-Tard (ATD.B) CEO Brian P. Hannasch
"Now all of a sudden, we're seeing pretty significant labor inflation...we're hearing that across North America. I mean, everywhere. By the way, it's not just our industry. And so now we're starting to see competition from Amazon, from UPS, from FedEx. So I think you're going to see a long-term dearth in terms of labor. And so we've got to figure out a path to make us more labor-efficient.” - Waste Management (WM) CEO Jim Fish
There are some signs things might be improving as applicant flows are rising in some states
"...We're seeing some early signs of increased applicant flow there's 25 states that have either announced or ended supplemental unemployment benefits in the U.S. And we're seeing, again, increased outland flow in those states. And with rising vaccine rates, we are optimistic that people will be more comfortable returning to workforce.” - Alimentation Couche-Tard (ATD.B) CEO Brian P. Hannasch
Part of the labor issues though may be long term
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Many companies are really feeling broad-based inflationary pressures
“As a result of these shortages and supply chain disruptions, transportation costs have increased significantly due to port delays and container shortages and we're seeing increases in shipping costs. We've also seen inflationary price pressures with significant increases in the commodities that are input to our vendors products, as well as wage increases in certain markets.” - PriceSmart (PSMT) CEO Sherry Bahrambeygui
"There is broad-based inflation that’s recognized by everybody. It’s not just us that’s going up in isolation that’s full industry is moving. And so we are pretty confident that we are going to be able to take the pricing that we need.” - McCormick & Company (MKC) CEO Lawrence Kurzius
"We're feeling the impact of inflationary pressures in the business. We expect commodity pressures sequentially from Q4 into Q1 will drive an estimated $4 million of increased costs that will pressure gross margins...We're also feeling it in the area of direct labor costs like so many companies are, and we expect that that's going to drive an estimated $1 million of sequential increased costs” - Herman Miller (MLHR) CFO Jeffrey Stutz
“…we're in a potential high inflation environment." - Stolt-Nielsen (SOIEF) CFO Jens Gruner-Hegge
"While I don't want to get too specific at the segment level, what I will tell you is all of our segments are experiencing higher inflation..inflation in the market is broad spread, it's across industry, it's global” - General Mills (GIS) CFO Kofi Bruce
"Some of the inflation is related to this emergence from COVID. But some of it is more structural.” - Waste Management (WM) CEO Jim Fish
“…we're absolutely seeing inflation indicators. We've seen it for a while actually, and it's been somewhat discordant here, the general conversation be around transitory issues when we've seen labor inflation, raw material inflation, transportation cost inflation seen everywhere” - Skechers (SKX) CFO John Vandemore
Early stages of an inflationary cycle?
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International:
Brazil is doing well so far
"We’re starting to see new market opportunities in that way. And so you couple that with pretty good economic situation, notwithstanding the COVID implications to Brazil, but the economic indicators in Brazil largely favorable. GDP is good, inflation is generally in hand, unemployment, pretty — pretty standard in a range that normally operates. So for — the currency is pretty strong. So Brazil economic indicators are good and so servers and IT spending in Brazil are positive." - SMART Global (SGH) CEO Mark Adams
Exceptionally high demand in southern Europe as they reopen
"Subsequent to the ending of this quarter and what we're seeing right now is a strong recovery in demand, and we expect that to continue. One, of course, they're opening up quite fast now in Southern Europe. So we are seeing an exceptionally strong demand this year.” - Stolt-Nielsen (SOIEF) CEO Niels Stolt-Nielsen
Consumer
June US retail sales up 11% Year-Over-Year
"Just as summer months bring warmer weather, U.S. retail sales continue to heat up, with June marking the ninth consecutive month of total retail sales growth*. According to Mastercard SpendingPulseTM, U.S. retail sales excluding automotive and gasoline increased +11.0% year-over-year in June and increased +10.4% compared to June 2019. E-commerce growth continued to hold steady +8.3% YOY/ +95.0% YO2Y, reflecting the ongoing shift to digital, driven by the pandemic” - Mastercard (MA) Mastercard SpendingPulse
Hybrid work to be the 'biggest shift' in a generation
"Hybrid work represents the biggest shift to how we work in a generation. And it will require a new operating model. Teams now has over 145 million daily active users, almost double the number a year ago. In markets where employees have returned to the workplace, including Australia, China, New Zealand, South Korea, and Taiwan, we have seen usage continue to grow" - Microsoft (MSFT) CEO Satya Nadella
DoorDash is delivering Best buy items
"Through our partnership with DoorDash, same-day delivery is now available in additional 3,000 Zip codes in the U.S., and 47 cites across nine Canadian provinces.” - Bed Bath & Beyond (BBBY) CEO Mark Tritton
███ of consumers have changed waist sizes during the pandemic"
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Food, home, and pet products demand stays strong
"...we still expect at-home food consumption to be above pre-pandemic levels, even if it's below -- slightly below a year ago....For sure, I think as consumers who are at home have more time to prepare breakfast. We saw things like eggs and pancakes grow more quickly than cereal. We do believe cereal will continue growing in the future. And again, as we look over that 2-year period, the category did grow.” - General Mills (GIS) CEO Jeff Harmening
"…our proprietary consumer survey data supported by external research tells us that consumers are enjoying the cooking experience. It provides a creative outlet, makes them feel adventurous, reduces stress and connects the family, and they feel home cooked meals are healthier. In a recent consumer survey from May 68% of U.S. consumer survey state they are cooking more today than pre-pandemic, and 78% claim, they would maintain or increase their level of cooking at home as things return to normal next week with no meaningful difference between those vaccinated and those not.” - McCormick & Company (MKC) CEO Lawrence Kurzius
"The other thing I would say is, for pet is a little bit more straightforward, and frankly, there are more pets than they were before. And that is certainly true here in the U.S., it's true in other parts of the world as well. But particularly in the U.S., 85% of those new pets are in homes that already contained one pet. And so these are people who are used to having pets. And so the amount of pet food that's going to be consumed over the next few years, we think, is going to be elevated in addition to the fact that the fastest-growing part of pet continues to be the natural segment, which is where our Blue Buffalo competes.” - General Mills (GIS) CEO Jeff Harmening
Technology:
Microsoft's security business is growing as security threats rise
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Demand for chips still very robust
“The markets today are more diversified than ever. Automotive, electric vehicles requiring more memory and storage — actually becoming data centers on wheels in the future — and certainly smartphones, data centers, gaming, industrial applications...We really see a healthier and more robust demand environment than ever.” - Micron (MU) CEO Sanjay Mehrotra
Increase in ransomware attacks correlates with rise of crypto
"There’s a direct correlation. When you look at the rise of ransomware, it absolutely aligns with the rise of anonymous digital currencies.. It’s no question it’s an enabler that you can break in anonymously and be paid anonymously, and now you can commit crime from 10,000 miles away in a safe harbor," - FireEye (FEYE) CEO Kevin Mandia
Health:
Urban footfall continues to recover at Walgreens
"So footfall in the U.S. is very consumer-driven, people back -- people are traveling again and cities are filling up again. So we saw a major skew, every one of our four formats. So if you look at rural transactions were up, suburban was up less than urban was up, but the actual biggest transaction gain was in the urban area. And the same play true on sales where urban is still down year-on-year slightly, but we think we will see an ongoing recovery there...Yes, particularly as you looked at March, April, May, it was that transactions in March were down 21% in urban. By the time they got into April, they were up 42%. So there's a market difference between March, April, May, and we see that continuation into June as well. So we're very happy with the recovery that we're seeing, particularly in the U.S” - Walgreens Boots Alliance (WBA) EVP James Kehoe
Industrials and Transport:
Prices for ferrous scrap remain at multiyear highs as demand stays elevated
"…prices for ferrous scrap during Q3 rose to multiyear highs, continuing a trend that we saw in Q2. Notably during the quarter, both pricing peaks and troughs were at respectively higher levels than we've seen in the past decade, and even though prices have dipped slightly since the end of the quarter, they remain at multiyear highs. These stronger pricing levels are supported by cyclical and structural trends, including the post-pandemic economic recovery and the global focus on decarbonization...On the domestic front, ferrous scrap demand and prices remained high through the quarter as steel capacity utilization approached pre-pandemic levels of 83%....Demand for material continues to be broad based, and we expect it to strengthen as auto production accelerates. Finished steel prices and demand also reached multiyear highs during the third quarter.” - Schnitzer Steel (SCHN) CEO Tamara Lundgren
A low carbon economy is more metal intensive
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How travel is progressing
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Ocean freight rates to be high into 2022 even as transit times for containers lengthen
"The global seaborne container trade is expected to grow by 6.6% in 2021, so this is very much driven by the container lines, while the container ship fleet growth is expected to grow by 4.5%. So you see that growth is higher than the new supply of tonnage coming in. The high demand for capacity allocation and the disruption and congestion in ports since the second half of 2020 are causing an increase of the ocean freight rates across the markets, which is expected to continue into 2022….Customers are increasing production to meet their demand. And as a result, of course, that means our demand is also picking up. The container ship capacity constraints continue, while demand keeps growing. Supply chain transits are lengthening. So it is because of the port congestions that transit times are taking longer” - Stolt-Nielsen (SOIEF) CEO Niels Stolt-Nielsen
Demand putting pressure on the ability to restock as supply chains struggle
"…in terms of restocking the shelf, honestly, I wish we have done a little bit more in the second quarter. I said we are at 90%. We would have really hoped to have it all done, and there is still more work to do because the demand has just continued to remain high through this period. If you just do the math, there is a lot of noise in the year ago numbers. So if you take it back to ’20, and then a year ago, consumption was up tremendously, but we couldn’t ship to that. Our shipments lagged a lot. So if we compare back to 2019, our consumption is up in second quarter, 18% versus 2019.” - McCormick & Company (MKC) CEO Lawrence Kurzius
"At the same time, the industrial economy is experiencing very real supply chain shortages and disruptions. These disruptions are evidencing themselves in product scarcity, freight delays, and extreme labor shortages that are resulting in significant availability and inflationary pressures, and we are certainly not immune to these challenges; and in fact, we're seeing them play out.” - MSC Industrial Direct (MSM) CEO Erik Gershwind
A shift in conversations
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Materials & Energy:
Energy demand fell massively last year
"It's interesting to ask how surprising the falls in energy demand and carbon emissions were last year. Yes, they were the biggest falls seen for 75 years, but they occurred against the backdrop of a global pandemic and the largest economic recession in post-war history. So how surprising were they given everything else that was going on? ... the actual fall in energy demand was far bigger than what we predicted Even after controlling for the collapse in economic activity, the actual decline in energy demand was close to twice the size of the predicted fall, 4.5% compared to a predictive fall of around 2.5%. The main call of this surprise can be better understood by looking at the size of the falls in the different components of energy demand. Oil consumption is estimated to have fallen by an unprecedented 9.3% or over 9 million barrels a day in 2020. And as you can see from this chart, this is far bigger than anything seen in history. It's also far bigger than the falls in any of the other demand components...Indeed, the fall in oil demand accounts around 3/4 of the decline in total energy consumption. It's also the key factor accounting for the near-record fall in the carbon intensity of the energy mix” - BP (BP) EVP of Strategy & Sustainability Giulia Chierchia
“In 2020, we had the first year of negative growth since the period of the Great Recession in 2008/2009. Year-end demand was approximately down 8.6 million barrels per day, below the levels of the 2019 year-end demand figures or approximately 8% down” - Tsakos Energy Navigation (TNP) COO George V. Saroglou
Gas and electricity had modest changes last year
"Gas demand is estimated to have fallen by a little over 2% in 2020, broadly similar to the decline seen in 2009 in the aftermath of the financial crisis. Consumption fell in most regions with a notable exception of China, where gas demand grew by almost 7% last year. The relative immunity of natural gas was helped by sharp falls in gas prices, which allowed gas generation to gain share in the U.S. power market and hold its own in the EU. Electricity consumption is estimated to experience the smallest fall across the main components of final energy demand, declining by less than 1% in 2020” - BP (BP) EVP of Strategy & Sustainability Giulia Chierchia
Oil demand may be back to pre-covid levels by 2022
“Oil demand is recovering from the monumental losses of last year. And after a strong demand growth year in 2021, experts now see a return to the pre-COVID demand levels by next year. OPEC+ managed the collapse in demand diligently and with discipline and has now restored more than 40% of the initial 10 million-plus production cuts and plans to gradually add more barrels, which means more cargoes to a market that is thirsty for oil as global oil stocks are now below the key 5-year average levels in all main demand areas, OECD and the developing world.” - Tsakos Energy Navigation (TNP) COO George V. Saroglou
Real Estate:
Large users are talking about the need for less space
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Nuggets of Wisdom:
Avoid making deals with bad people
"That we learned a long time ago is that you can't make a good deal with a bad person. Just forget it. Now, if you think you can draw up a contract that, that is going to work against a bad person, they're gonna win. But one thing, they, they probably enjoy litigation but ah, Berkshire Hathaway as an entity, or me personally, or anything, we don't wanna spend our life, you know, doing that sort of thing. And, and besides, the bad guys win. They know more games. They may lose eventually in the but, but it's no way to spend your life" - Berkshire Hathaway (BRK.B) CEO Warren Buffett
Some of the companies we are tracking this week. Don’t forget to subscribe to get the full flavor of the earnings season.
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