Not Going Away

The virus is not going away soon

Succinct Summary: The virus doesn’t seem to be going away soon with spikes in Asia causing a real headache to retailers who are preparing for the holiday season and are already grappling with a worsening supply chain situation. Elsewhere, the high cost inflation has captured the attention of Fed members.


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Macro:

The virus isn't going away soon

"I think Marc has talked a lot about how we're in this new pandemic world, that this isn't going away. We've opened half of our offices" - salesforce.com (CRM) COO Bret Taylor

"We are now at a turning point where we realise that a one-off boost is turning into normal business. COVID is becoming an infectious disease that stays with us. Therefore the tests will stay," - Qiagen (QGEN) CFO Chief Financial Officer Roland Sackers

Small businesses are still in recovery mode

"One thing that's unchanged is small businesses across the globe are still recovering. Some have recovered to -- back to pre-COVID levels. Some have actually accelerated their business because they changed the model. But at least what we see in our data, 20% ish of small businesses are still struggling. And struggling is defined by, they have -- their net deposits are down over 25%." - Intuit (INTU) CEO Sasan Goodarzi

Labor issues are impacting businesses still

"…what began as a decline in consumer demands due to unprecedented disruption of routines has now shifted into a shortage of labor supply at our salons. While retail and services are broadly feeling the effects of this labor shortage, it is amplified in our industry since salon staffing directly translates to revenue generation" - Regis (RGS) CEO Felipe Athayde

"…we will see price increases on many other products. Surgical is one example, Life Science and so forth. And part of the reason for that is transportation cost is through the roof. Labor cost inflation is very high." - Ansell Limited (ANN) CEO Magnus Nicolin

"Like most retailers, we experienced disruption within the global supply chain. Wage inflation in our distribution centers, and an overall shortage of workers to process a continued high level of demand. In addition, our suppliers experienced labor challenges and raw material shortages." - Advance Auto Parts (AAP) CEO Tom Greco

Companies are seeing more job applicants as unemployment benefits end

"Supply chain is a very challenging situation. We are seeing inflation there as we called out, more than we expected. The turnover, I think, has peaked and started to come down, is what I would tell you there, obviously as some of the benefits, the unemployment benefits, etc. start to come off, we are seeing more applicants and able to source the people that we need. I think the difficult environment is going to continue, but it's going to be less challenging, I think, than it was in the second quarter." - Advance Auto Parts (AAP) CEO Tom Greco

“We were encouraged last week by the announcement of the end of the additional federal unemployment benefits given the direct correlation between labor hours in revenue in our business." - Regis Corp. (RGS) CEO Felipe Athayde

High cost inflation hitting companies

"…as we came into the fiscal year, we were anticipating mid-single-digit cost inflation as a percent of our total cost of goods sold. Now we're seeing high single-digit cost inflation as a percentage of our total cost of goods sold." - J. M. Smucker (SJM) CEO Mark Smucker

"Cost inflation remains a prominent risk. We realized major cost increases last fiscal year in virtually all of our materials and finished goods as well as labor and domestic transportation. Continued imbalances between supply and demand for these resources may continue to exert upward pressure on cost" - Flexsteel Industries (FLXS) CEO Jerald Dittmer

Members of the Fed are noticing the higher inflation 

“I think the words were hot, hot, hot, we have a lot of inflation in the US more than we expected. If you look at something like core PC inflation, that’s excluding food and energy, you know, measured from a year ago, it’s running at about three and a half percent. That’s more than we expected.  I think we’re going to get at least two and a half percent inflation in 2022. Maybe higher than that. And there’s some risk to the upside on that. So for that reason, I think we want to get going on taper. Get the taper finished by the end of the first quarter, next year” - Federal Reserve Bank of St. Louis President  Jim Bullard

“What we’re seeing in these communities is inflation affects them disproportionately,. I think at the Fed we have to take that very seriously.” - Dallas Federal Reserve President Robert Kaplan

“Booming demand for goods and the strength and speed of the reopening have led to shortages and bottlenecks, leaving the COVID-constrained supply side unable to keep up. The result has been elevated inflation in durable goods—a sector that has experienced an annual inflation rate well below zero over the past quarter-century. Labor market conditions are improving but turbulent” - Fed Chair Jerome Powell

International:

Regulatory actions in China happen in cycles

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Switzerland and Europe more open for business

"…it's been a great experience being here in Geneva very much. The world is open for business here. And it's great to be meeting with our customers face-to-face and in-person and discussing our business with them and talking about their businesses and how their businesses are doing in this new normal. And we're learning quite a bit about how different the U.S. is from Europe right now. And also, how much has really changed, which is quite a bit." - Salesforce.com (CRM) CEO Marc Benioff

Frost in Brazil having an impact on global coffee production

"Generally speaking, the frost in Brazil, which is what Tucker was referring to over a longer period, over 12 months, it's going to have some impact on the amount of coffee that's available," - J. M. Smucker (SJM) CEO Mark Smucker

Financials:

Not many employees are back in the office

"A lot of things have changed for our customers in this new world, whether it’s Europe or the United States, and one of them is really return to work. The phenomenon that I see happening globally is not as many employees are coming back into their offices locally as any CEO expected...“You’re really starting see some very low attendance numbers in offices because employees are so productive at home” - Salesforce.com (CRM) CEO Marc Benioff

Consumer:

Strong retail comps for Q2

"During the quarter, our brick-and-mortar stores comped up nearly 40% versus last year and delivered a 36% sales increase when compared to 2019." - DICK'S Sporting Goods (DKS) CEO Lauren Hobart

"E-commerce grew at 12% and retail drove 98% comp with both channels growing at two-year comp of over 50%. And we delivered these sales more profitably with operating margins expanding another 360 basis points to 16.7% versus last year at 13.1%." - Williams-Sonoma (WSM) CEO Laura Alber

"For the quarter, comp sales increased 56.3%, driven by strong growth in our brick-and-mortar channel. As consumer confidence, optimism, and comfort to shop in physical stores continues to increase, we're seeing more of our members return to stores. Traffic trends in stores improved from the first quarter but remained lower than 2019 levels. However, comp sales in stores increased to this quarter compared to 2019, driven by strong average ticket growth." - Ulta Beauty (ULTA) CEO Dave Kimbell

Store traffic is still down but improving

"Traffic is another really interesting story, because in our retail stores, believe it or not, as much as traffic has improved, it's still down to 2019 and we're running these crazy good comps." - Williams-Sonoma (WSM) CEO Laura Alber

Back to school is off to a strong start

"We feel great by the momentum in our business, including a strong start to our back-to-school and back-to-dorm season...the momentum from Q2 has carried into August, with a great start to our back-to-school and back-to-dorm seasons." - Citi Trends (CTRN) CFO Pamela Edwards

"…the start to the back-to-school season, far outpaced earlier expectations and any prior back-to-school start....Q3 is on pace to set a record back-to-school." - Shoe Carnival (SCVL) President Mark Worden

Travel demand in August is trending below the previous forecast

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Technology:

Cyber attacks are increasing

“We are in a cyberwar. Nobody’s declared war, but attacks are happening everyday. I felt optimistic that the set of folks who came together have a commitment to work together, whether it’s with government or their competitors.” - Code.org CEO Hadi Partovi

"Moving on as you all are well aware, we've had a series of cyber security events over the last quarter against the backdrop of what we are seeing supply chain attacks, where bad actors tried to hack into core infrastructure pieces, which allows an access to enterprises or government systems. These vulnerabilities are being exploited by ransomware actors. The ransomware threat continues to rise. Our Unit 42 team research shows that the average ransom demand in the first half of this year, grew from 5.3 million, which is up 518% year-over-year." - Palo Alto Networks (PANW) CEO Nikesh Arora

“The reality is most of our critical infrastructure is owned and operated by the private sector, and the federal government can’t meet this challenge alone. You have the power, capacity and responsibility, I believe, to raise the bar on cybersecurity. Ultimately we’ve got a lot of work to do...We’ve seen time and again how the technologies we rely on from our cellphones to pipelines to the electric grid can become targets of hackers and criminals..I've invited you all here today because you have the power, the capacity and the responsibility, I believe, to raise the bar on cybersecurity Our skilled cybersecurity workforce is not growing fast enough to keep pace," - United States President Joe Biden

Industrials and Transport:

Supply chain issues are becoming worse as covid spikes in Asia

"We continue to be impacted by our stronger-than-expected demand across all brands as well as various supply chain disruptions, including industry-wide container shortages coming out of Asia, delays due to COVID surges in Vietnam and Indonesia and a recent port closure in China. And it's hard to predict with certainty when these supply chain challenges will be fully resolved. As a result, at this point, we expect back order levels to remain elevated with moderate improvements in our inventory levels through the balance of the year." - Williams-Sonoma (WSM) CFO Julie Whalen

"Extended shutdowns related to COVID-19 in Asia could bring a halt to the flow of source products for the industry. Similar events in the U.S. could be highly disruptive to our manufacturing and distribution operations." - Flexsteel Industries (FLXS) CEO Jerald Dittmer

There are no signs that supply chain disruptions are getting better

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In fact, the situation may be getting worse

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Vietnam is getting a lot of mentions in regards to supply chain issues

"Vietnam is a topflight sourcing country for us, it's an important country and I'd say that as we think about countries of origin, we are able to get manufacturing out of Vietnam and use accelerated transportation to make up any flow that's coming out of the factories as we deal with factory closures and temporary day’s loss, for example." - Gap (GPS) CFO Katrina O’Connell

"Our full year sales outlook bakes in approximately $60 million of adverse impact in Q3 and especially Q4 related to COVID-related manufacturing shutdowns in Vietnam." - Big Lots (BIG) CFO Jonathan Ramsden

“We are -- we have a situation in Vietnam. I am sure other people have the exact same situation where the country is completely closed. We have a lot of product there and we’re trying to get it in" - Urban Outfitters (URBN) CEO Richard Hayne

Despite this, companies are very confident about inventory levels for the upcoming holiday season

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Overall, supply chain issues will take time to rebalance

"The supply chain issues which we are confident are transitory in nature, will take some time until the global demand and supply for equipment are re-balanced." - Dollar Tree (DLTR) CEO Mike Witynski

Materials & Energy:

Global oil demand has been rising in H1 2021

"In the first half of 2021, as COVID-19 somehow moved to the side, while the economy is picking up, and the Chinese economy is steadily recovering for the better, global oil demand saw material uptick with climbing crude prices." - PetroChina (PTR) President Yongzhang Huang