Under Pressure
Inflation and rising interest rates putting pressure on the economy
Succinct Summary: Inflation and rising interest rates have put a lot of pressure on the economy but overall consumers have remained remarkably resilient. Still, we are finding areas of concern building in many sectors. Consumer electronics and used cars are two areas where demand is ebbing. Middle-income consumers may be starting to trade down.
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Macro
Inflation has been at ridiculous levels
"We have seen some ridiculous inflation in the last 4 or 5 months. I mean if you don't think I'm serious, just drive to McDonald's and buy your kid a quarter pounder with cheese and fries and see what you pay for that" - Jack Henry & Associates (JKHY 0.00%↑) CFO Kevin Williams
Consumers are feeling the pressure
"But besides that, I mean, all the unpacking we've done with the customer is they're feeling tremendous pressure on their budgets as inflation has taken hold in more essential categories like food and gas, and they're spending less in apparel" - Kohls (KSS 0.00%↑) CEO Michelle Gass
"We are still seeing some of the things that we talked about in the first quarter where lower -- numbers in the lower end of the economic spectrum, we're seeing a little bit of a pullback there, really not in their traffic so much, but in their overall shopping given they have less government aid dollars than they had in the past. They are still coming to see us in good amounts. Their traffic is fine." - BJ's Wholesale Club (BJ 0.00%↑) Robert Eddy
"Our sales were well ahead of plan, with inflation lifting our average transaction size, but we know that the amount and persistence of inflation is negatively affecting many families. From the U.S. to Mexico to Canada to Chile, they are prioritizing how they spend their money." - Walmart (WMT 0.00%↑) CEO Doug McMillon
"We are facing a very difficult and uncertain macroeconomic environment that we expect will continue to strain our customers' discretionary spending." - Ross Stores (ROST 0.00%↑) CEO Barbara Rentler
Some consumers feel like they’re in a recession
“Recession is a word. Whether we are in a recession or not is really not the important thing. It’s what it feels like for the people going through this" - Bank of America (BAC 0.00%↑) CEO Brian Moynihan
But overall the consumer has proven resilient
"We are operating in a unique environment with many crosscurrents, inflation and interest rates, and supply chain disruptions and the like. But given all that, our customer in our markets has been incredibly resilient. As Jeff said, project demand is incredibly strong." - Home Depot (HD 0.00%↑) CEO Edward Decker
"We see no deterioration in consumer behavior from the beginning of the year until now" - Bank of America (BAC 0.00%↑) CEO Brian Moynihan
"Even though there’s some anecdotal feedback about whether inflation is impacting the rate at which people are tipping, we don’t see that in our data" - Toast (TOST 0.00%↑) COO Aman Narang
Businesses are feeling good
"What we're seeing overall in the business, the questions about housing and the economy, all very real questions, again, things we're following closely. But I mean we just couldn't feel better about our business." - Home Depot (HD 0.00%↑) CEO Edward Decker
There are signs that the cost and supply chain pressures have peaked
"...while conditions remain far from what we would have considered normal in the years before the pandemic, there are early signs that both costs and volatility may have peaked. More specifically, lead times in global shipping have begun to decline. Spot rates to move shipping containers have fallen somewhat. And in light of the reduction in petroleum prices we've all seen recently, fuel surcharges have been easing somewhat compared with the peak rates we saw earlier in the second quarter. That said, conditions remain highly unfavorable when compared to the years before the pandemic, and we're mindful of the continued risks in the months ahead" - Target (TGT 0.00%↑) John Mulligan
"In the first half year, overall, we have witnessed a broad-based inflationary development. Globally, and across markets and industry, there is an exceptionally high level of volatility and uncertainty, particularly with regard to the further development on the supply side. While input prices recorded a drastic increase compared to the first half year of 2021, dynamics started slowing down month-over-month recently" - Henkel AG & Co KGaA ($HEN3) CEO Carsten Knobel
Margin pressures should ease as the year goes on
"While we anticipated some moderation from the unprecedented product order growth of last year, demand signals remain solid. We do expect to continue to experience higher costs in the short term, driven primarily by higher component, freight, and logistics costs, which is reflected in our Q1 guide. However, as you'll see in our annual guidance, we expect this margin pressure to begin to ease as the year progresses." - Cisco Systems (CSCO 0.00%↑) CEO Chuck Robbins
International
UK inflation hit double digits for the first time in 40 years
"The Consumer Prices Index rose by 10.1% in the 12 months to July 2022, up from 9.4% in June. On a monthly basis, CPI also rose by 0.6% in July 2022, compared with no change in July 2021. Rising food prices made the largest upward contribution to the change in both the CPIH and CPI annual inflation rates between June and July 2022." - UK Office for National Statistics
There are still some intermittent shutdowns in China
"We are still seeing some intermittent shutdowns, not whole city shutdowns in China at the moment. So that is still disrupting brick-and-mortar retail -- As it relates to Hainan, as we mentioned also in our prepared remarks, and I’m sure you all have seen, Hainan is experiencing a lockdown right now. So, all of the doors are closed. Courier services as well have been suspended for online orders. And we’re obviously monitoring that day by day, but that is something that began in the month – at the beginning of the month of August" - The Estée Lauder Companies (EL 0.00%↑) CFO Tracey Travis
The regulatory tone in China is trending more positively for internet platforms
"Well, in terms of your first question on the regulatory front, I think we have given some of the highlights in our strategy section. But I think as you have observed, right, the recent regulatory direction is actually trending towards a more positive tone for platform economy and the key message is one to promote well-regulated, healthy, and sustainable development, two, to complete the ratification, and three, to carry out regular supervision. And that's reiterated in both the state council meetings as well as the politburo meetings in late July." - Tencent ($TCEHY) CEO Huateng Pony Ma
Financials
Robinhood trading volumes in July were down 3%
"Total Trading Volumes in July were down slightly from June 2022. Equities were $49 Billion (down 3%), Option contracts were 67 Million (down 2%), and Cryptocurrencies were $6 Billion (down 1%)." - Robinhood (HOOD 0.00%↑) Markets Report
Consumer
Some retailers are seeing changes in consumer behavior
"As the year has progressed, we've seen more pronounced consumer shifts and trade-down activity. As an example, instead of deli meats at higher price points, customers are increasing purchases of hot dogs as well as canned tuna or chicken. Private brand penetration has also inflected higher. And in the food category, specifically the private brand, growth rate doubled compared to Q1 levels." - Walmart (WMT 0.00%↑) CFO John Rainey
"...many of our retail customers communicated to us that they were experiencing rapidly changing consumer behavior, particularly in home appliances, as well as reduced foot traffic in the home center channels. They also indicated that their inventory positions were as much as 30% to 40% higher than year-ago levels and that they were going to curtail replenishment orders, and in some cases, cancel orders altogether." - Spectrum Brands (SPB 0.00%↑) CEO David Maura
Others aren’t
"There was no -- let me be clear on your question about pushback on the pricing. We have zero -- not only do we do qualitative studies on it, we are actually able to measure, well, down to the SKU level, turns, how we’re selling an item where the retail has been adjusted, but even entire categories, departments, and the store. In fact, we’re measuring our turns and all of these things relative to pre-COVID, fiscal ‘20, calendar ‘19. And in most cases, we are actually turning our inventories faster than then" - The TJX Companies (TJX 0.00%↑) CEO Ernie Herrman
"At this point, we are not seeing indications of material trade down. If anything, we're seeing the opposite with continued strong demand for our new and innovative products at higher price points. Bill will provide more context on our customer spending trends later in the call." - Lowe's Companies (LOW 0.00%↑) CEO Marvin Ellison
Consumer activity may depend on income levels
"It's a conflicting period, in terms of the data. If you look at what's happening across categories and across income levels, inflation is having an impact, particularly for those who do not have as much money so we see them behaving in different ways, but we're also attracting a lot of new customer to say come to our stores, our app, our website higher-income families are shopping at Walmart, because they're price sensitive now, we shared earlier this morning, families making over $100,000 in household income, have driven a lot of our growth during this last quarter also the end of the month, performance was stronger than what we had seen in the first two months there's things happening that are encouraging," - Walmart (WMT 0.00%↑) CEO Doug McMillon
"Interestingly, in our higher-income customers, we're actually seeing more customers, and they're spending more. So it correlates, again, to where the economy is creating like I said, pressure. We're really seeing in that middle-income customer." - Kohls (KSS 0.00%↑) CEO Michelle Gass
"On the consumer, we're not seeing any change, certainly since if I take the first to the second quarter with our comps have been relatively consistent. The composition of comps have been relatively consistent. If I compare it to when we started to lap the stimulus from last year, and our customer surveys and our own performance would suggest that where we're really seeing pressure is the lower-end consumer. But on the trade-down customer, there's no indication that in our data that would suggest that that's happening." - Ross Stores (ROST 0.00%↑) COO Michael Hartshorn
Spending may have slowed in late spring but then rebounded in July
"After a strong start in May, we saw trends slow in June, which continued through mid-July. As trends soften, the promotional environment has become more intense, especially in apparel, but also in footwear. In the back half of July, trends started to pick up meaningfully, especially in our earliest back-to-school markets -- That more pronounced softening in our lower-income customer base was a trend we saw in our core business as well as our customer segments at WSS. That trend continued into the first half of July. But the back half of July began to improve, particularly in the early back-to-school markets. While the back-to-school trends are very encouraging, given the uncertainty in the macroeconomic environment, we are still tempering our expectations for the balance of the year." - Foot Locker (FL 0.00%↑) CFO Andrew Page
"June was our toughest month. So we started with seeing some encouraging spring seasonal selling. Things really fell off in that kind of late May and into June. As we looked at the correlation to the inflationary pressures that was having a massive impact on our business, we took a number of actions in July in terms of driving value. That's clearly what the customer wants, and the customer was responding. So that was encouraging. And we recognize that the environment is going to be promotional. It's going to be very value-driven. And so that is reflected in our guide." - Kohls (KSS 0.00%↑) Michelle Gass
Retailers are working through excess inventories
"In-stock levels have improved about 250 basis points since Q1 in our grocery business alone, despite the heavy sales volumes we are experiencing. We also made progress selling through excess inventory, especially in hardline categories. At the end of Q2, Walmart U.S. inventory growth was 26% versus last year, reflecting over 750 basis points of improvement from Q1 levels -- We have cleared most summer seasonal inventory, but we are still focused on reducing exposure to other areas such as electronics, home, and sporting goods. We have also canceled billions of dollars in orders to help align inventory levels with expected demand. We estimate that only about 15% of our total inventory growth in Q2 is still above optimal levels and our actions in Q3 will allow us to make significant progress toward rationalizing absolute levels and mix, which will enable our stores to be well positioned ahead of the holiday season." - Walmart (WMT 0.00%↑) CFO John Rainey
"...we've meaningfully reduced our ownership and commitments in categories where we've seen softening demand. This has allowed us to strengthen our inventory position and in-stock position in the categories that are driving our growth, most notably in Food & Beverage, Beauty, and Essentials. Regarding the financial impact of those decisions, Michael will provide more details in a few minutes. But the high-level story is, the vast majority of the financial impact of these inventory actions is now behind us." - Target (TGT 0.00%↑) CEO Brian Cornell
Inflation is inflating inventory values
"So if you think about -- just take the U.S. inventory increase in the second quarter of $11 billion. If you decompose that, about 40% of that is due to inflation. So don't think units, think just dollars. And then you look, as Doug noted, at things like the fact that we're growing as a company that we've got less in stock next year and you normalize for all of that, you really whittle that down to about $1.5 billion of inventory that if we can just wave a magic wand, we'd make go away today. And the fact is we'll sell that. But if we were to start from scratch, that's what we'd get rid of. In terms of the types, as John noted, the inventory issues were most acute in apparel in the second quarter. As we look into the third quarter, I'd say it's home, electronics and apparel are probably the areas that stand out the most." - Walmart (WMT 0.00%↑) CFO John Rainey
Streaming companies are pushing into live sports
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Technology
Softness in consumer markets continues
"ICAPS customers, who serve IoT, communications, auto, power, and sensor markets, are reporting areas of strength and weakness. These customers serve broad and diverse applications. They are seeing softness in consumer-centric markets, which are being impacted by macroeconomic factors. Auto and industrial demand continue to be solid, because those investments are driven by large inflections, such as electric vehicles and industrial automation. In these areas, chip makers are securing long-term capacity agreements that underpin their capital spending plans." - Applied Materials (AMAT 0.00%↑) CEO Gary Dickerson
No material demand signal changes at Cisco
"We haven't seen a material demand signal change as we've entered into Q1. So that's where we are. I think on the last call, I believe, I talked a lot about how I believe that post-pandemic, the view of technology by our customers is much different than it would have been seven, eight, nine years ago there. I think if you ask our customers if they would pause spending during a crisis, they would probably respond, when is there not going to be a crisis, given what we've dealt with the last three years." - Cisco Systems (CSCO 0.00%↑) CEO Chuck Robbins
Memory spending is expected to the lower in FY 222
"Memory spending is expected to be lower than in 2022, as macro uncertainty and weakness in consumer electronics and PCs causes these customers to defer some capacity additions." - Applied Materials (AMAT 0.00%↑) CEO Gary Dickerson
Demand exceeds supply in Semiconductor equipment
"What we see for 2023 and the next three-plus quarters, as we said in our initial comments, is that demand is still significantly above our ability to supply, but we have got the confidence that we just reconfirmed all of that -- We expect Applied to remain supply constrained for the next several quarters. We are working through our very substantial backlog of orders, which provides a buffer to in-year demand fluctuations, and in addition, customers are providing us with longer-term visibility and commitments in response to their own customer’s actions to lock in the strategic capacity they need." - Applied Materials (AMAT 0.00%↑) CEO Gary Dickerson
We’re in a period of sustained structural inflation in semiconductors
"I believe that we are in the post-Moore's Law era and in a period of sustained structural inflation in this business for many, many years ahead. I think it's true to say that supply -- we've been increasing, of course. We've invested strongly in our own manufacturing capabilities to be able to secure supply and increase supply actually across the 4 wafer fabs inside ADI. So yes, supply is improving there. And thematically as well as supply has been improving actually right through the pandemic, right over the last couple of years from our subcontractors as well. So I think there is a lightening of supply across the board." - Analog Devices (ADI 0.00%↑) CEO Vincent Roche
Industrials and Transport
Macro issues are impacting car sales
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Used car prices are declining
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GM is at an inflection point in EV production
"We've obviously done a lot of exciting things on our plate at GM. We're about to come into a real inflection point on EV production, as we're just kind of weeks away from opening our first cell plant and initiating production there. And as you've seen from a lot of the materials that we put out, we have a new cell plant opening each of the next 4 years. We've talked about locations for the first 3. We'll soon have a location for the fourth, but we're set to be an industry leader in cell production here domestically as well, which I think is an important piece of the puzzle" - General Motors (GM 0.00%↑) CFO Paul Jacobson
Materials & Energy
Oil supply may not keep pace with demand
“Global oil demand is now similar to pre-pandemic levels. And while there are growing concerns about potential demand impacts from a recessionary environment, supply factors may overwhelm those demand impacts. In previous cycles, high oil prices have led to significantly oversupplied markets. In the current situation, however, major sources of supply are below pre-pandemic levels and trending lower -- The inventory of drilled but uncompleted wells, something we call DUCs, in the United States has decreased for 24 consecutive months to its lowest level in more than 9 years. The pace of decline has significantly slowed over the past few months, suggesting that the DUC inventory may be plateauing at a minimum level” - Pason Systems ($PSYTF) CEO & Non-Independent Director Jon Faber President,,
Real Estate
Homes prices are going lower
"What we're seeing is a little bit more home price -- faster home price reduction and homebuilders, obviously, are looking to hit their quarterly targets as well. So they're a little bit faster to reprice than the average person who might be reselling their home. So when you talk about what we're seeing from a cap rate expansion perspective, it's been a little bit faster to expand on the new home side. And we actually expect that will continue." - Tricon Residential (TCN 0.00%↑) CIO Jonathan Ellenzweig
Existing-home sales declined for the sixth straight month in July
"The ongoing sales decline reflects the impact of the mortgage rate peak of 6% in early June. Home sales may soon stabilize since mortgage rates have fallen to near 5%, thereby giving an additional boost of purchasing power to home buyers. We're witnessing a housing recession in terms of declining home sales and home building. However, it's not a recession in home prices. Inventory remains tight and prices continue to rise nationally with nearly 40% of homes still commanding the full list price." - National Association of Realtors Chief Economist Lawrence Yun
The good thing though is that the slowdown in housing is starting to level off
"The housing-market slowdown is starting to slow down. Fewer homeowners are listing their homes due to ebbing homebuyer demand. That’s hampering the recent growth in housing supply that has been forcing sellers to slash their prices. The number of homes for sale during the four weeks ending August 14 fell slightly from the prior four-week period, the first decline since the start of the year, as new listings plummeted 14% from a year earlier—the largest annual drop since June 2020. With fewer homes hitting the market, the sellers who remain aren’t facing as much competition from other sellers. Consequently, the share of home listings with price reductions—a key gauge of a cooling market—is no longer surging and has leveled off at its record high." - Redfin (RDFN 0.00%↑)
Nuggets of Wisdom
The suitcase exercise to help with making business decisions when resources are few
"When you travel and start to think about what to bring, most people start with a ton of items. But if you can only bring a carry-on? Then you suddenly need to look at each item more carefully. Is this item truly critical? Can one item fit two purposes? It’s a tricky balance to invest in the future while also reducing non-essential costs.” - Papaya Global CEO Eynat Guez
Step away from 24/7 stimulus
"Young people are bombarded by daily pings from work or posts on social media. Removing yourself from that 24/7 stimulus can help in thinking much more critically, understanding the bigger picture of where they want to go, what they want to do," - RIND Snacks Founder Matt Weiss