In our Conference Call Recaps, which are available to institutional subscribers, we summarize the conference calls and earnings releases of the most important earnings reports. Not only do we summarize the earnings results and the guidance, but we also relay each company’s macro and longer-term outlook to help subscribers keep up to date on the ever-changing landscape in topics spanning the US consumer, supply chains, inflation, labor, travel, technological developments, housing, foreign exchange, and capital markets. Click here to become a Bespoke member today!
Below we have provided some of the interesting insights we heard during the Q1 earnings season. We find that they are a helpful way to keep abreast of the major macro themes. Enjoy!
Summary
The Russia-Ukraine conflict only exacerbated an already strained supply chain environment and pushed commodity inflation even higher. Investors can reasonably assume that the constraints faced by the broader economy will persist throughout the fiscal year with some slight easing in the back half. The labor situation seems to have improved substantially, and certain companies even had a glut of labor supply. The consumer still appears quite strong, which means that price hikes will likely be taken in stride. View a complimentary sample of our Conference Call Recaps by clicking on the thumbnail below:
US Spending/Consumer
American Express (AXP) saw “increased engagement across our customer categories, led by strong spending by Millennial and Gen Z Card Members and small and medium-sized businesses, which were up 56 percent and 30 percent, respectively.”
“In terms of the North American business… we feel strong about the consumer demand.” – Whirlpool (WHR)
“Consumer spending… is quite robust [and] the labor market is almost fully recovered.” – Automatic Data Processing (ADP)
McDonald’s (MCD) is “keeping a close watch on lower-end consumers,” but “food at home has been increasing even more than food away from home.” The US consumer is in “good shape”.
United Rentals (URI) saw strong “customer sentiment and robust project activity.”
“We remain optimistic on the economy, at least for the short term – consumer and business balance sheets as well as consumer spending remain at healthy levels – but see significant geopolitical and economic challenges ahead due to high inflation, supply chain issues and the war in Ukraine.” – JP Morgan (JPM)
In the domestic parks segment, Disney’s (DIS) 2022 results will be “powered by strong demand coupled with customized and personalized guest experience enhancements that grew per capita spending by more than 40% versus 2019.”
Walmart’s (WMT) full-year guidance assumes “a generally stable consumer in the US, higher supply chain costs [and] continued pressure from inflation.”
Although inflation contributed to the rise in the average ticket price, customers “continue to trade up for premium innovative products.” – Home Depot (HD)
“As I sit here today, I’m not seeing any sign of a consumer slowdown.” – Target (TGT)
“When we talk to our guests, they often express their concerns about a host of rapidly changing conditions, ranging from geopolitics to high-end persistent inflation… particularly in food and energy.” – Target (TGT)
Supply Chain
“After a promising start the year, the operating environment soon changed with very significant geopolitical conflict, a resurgence of COVID in various places, record-high inflation and continued challenges on [the] supply chain front.” –Coca-Cola (KO)
“We are still seeing… inflated costs [and] quite a bit of disruption in our supply base.” – Whirlpool (WHR)
United Parcel Service (UPS) has been focused on digitization. Their new technology “enables [smaller customers] to begin shipping in under two minutes instead of… an average of 10 days.”
Microsoft (MSFT) is experiencing “constraints from the shutdowns in China.”
Apple (AAPL) noted that supply chain issues were “significantly lower” than they were in the December quarter before China began shutting down cities and factories again.
Management at Tesla (TSLA) maintained their volume growth target of 50% per annum over a multiyear horizon. However, over the last several quarters, “supply chain became the main limiting factor, which is likely to continue through the rest of 2022.”
“External challenges include limited availability and rising prices of certain commodities; as well as increased costs for labor, energy and transportation. These impacts are pervasive across the enterprise, but most notable in Consumer Health. We expect these pressures will continue to some degree throughout the remainder of 2022.” – Johnson & Johnson (JNJ)
JB Hunt (JBHT) gave clarity on the Chinese supply-chain situation, stating that the situation in Shanghai “looks just like a lot of ships and a little bit of water,” which will likely reach the US in the summer. Management expects ports to be relatively clogged in July.
As per Snap (SNAP), “supply chain shortages and labor disruptions, rising inflation, and geopolitical unrest” are impacting advertising budgets.
Constellation Brands (STZ) said that the company is facing numerous headwinds, such as “various supply chain challenges, adverse weather events, rising inflation [and] rapidly shifting consumer preferences.”
Lululemon (LULU) “continues to experience delays across [the] global network, particularly related to transporting products via ocean freight.”
KB Home (KBH) commented: “We underestimated the degree to which the Omicron variant would exacerbate an already constrained supply chain and workforce… While we take responsibility for our deliveries being below our prior expectations… we acknowledge that the variant was a significant contributing factor.”
Amazon (AMZN) is “no longer chasing physical or staffing capacity, our teams are squarely focused on improving productivity and cost efficiencies throughout our fulfillment network.”
“Simply said, [SBUX does] not have the adequate capacity to meet the growth demand.”
“We saw much higher than expected freight and transportation costs and a more dramatic change in our sales mix than we anticipated. This resulted in excess inventory, much of it in bulky categories which put additional strain on our already stretched supply chain.” – Target (TGT)
Inflation
“Pricing… has to be earning for the brands… When you go into high inflation, consumers come under pressure. There’s clearly reductions in real purchasing power going on for some segments of the population, if not everyone around the world.” – Coca Cola (KO)
“Restaurant-level margins continue to be impacted by unprecedented levels of inflation,” As per Chipotle (CMG)
Chipotle (CMG) saw “very little resistance to the pricing so far,” as menu prices were raised by over 4%.
“There are component costs that are falling and ones that are rising, and so not all of them are moving in the same direction.” – Apple (AAPL)
Pool Corp (POOL) added that the “tight labor market” is holding back installations, maintenance and repairs. On the bright side, the company has “seen some improvements in… supply chain issues.” POOL has “anticipated price increases” baked into their forecasts.
“Based on current prices, Alcoa (AA) expects both alumina and aluminum realized third-party prices to be higher than the first quarter, with that benefit partly offset by… higher energy and raw materials costs.”
Walgreens (WBA) stated: “inflation is on the rise… we expect to pass through most of that.”
Albemarle’s (ALB) guidance raise was largely due to higher “pricing in its Lithium and Bromine businesses… partially offset by inflationary cost pressures, particularly for natural gas in Europe.”
“Price leadership is especially important right now and one-stop shopping becomes more than just convenience when people are paying over $4 a gallon for fuel.” – Walmart (WMT)
Labor
“We are seeing hybrid approaches to learning and working are here to stay.” – Alphabet (GOOGL)
“The restaurants are staffed, we’re seeing performance in throughput.” – Chipotle (CMG)
“Strong overall economic activity continues to keep demand for labor high and we’ve been pleased to see labor force participation gradually recover over the course of the year.” – Automatic Data Processing (ADP)
Omicron led to “fairly meaningful labor challenges at the start of the quarter… as driver availability and productivity were impacted.” – JB Hunt Transport (JBHT)
“Labor continues to be an area with the greatest inflationary pressure in both professional driver and non-driver salary wages and benefits and we expect that trend to continue throughout the remainder of the year.” – JB Hunt Transport (JBHT)
“Associates that were out on COVID leave came back to work faster than we expected.” – Walmart (WMT)
Travel
“Travel and Entertainment spending was up 121 percent… and essentially reached pre-pandemic levels globally for the first time in March, driven by continued strength in consumer travel.” – American Express (AXP)
JPMorgan Chase (JPM) noted a “pick-up in credit card spending on travel and dining,” which is expected to continue into the next several quarters.
The travel industry is experiencing “robust consumer demand and an accelerating return of business and international travel.” – Delta (DAL)
According to Delta (DAL): “As demand continues to recover and we restore additional capacity in the second half of the year, we expect our non-fuel unit cost comparisons to 2019 will improve to up mid-single digits.”
Delta’s (DAL) press release stated: “Consumer demand accelerated through the quarter, highlighted by strong spring break performance. As Omicron faded, offices reopened and travel restrictions were lifted, resulting in an improvement in business travel demand and a stronger fare environment.”
In March, Hilton’s (HLT) system-wide rates “were up 3% compared to 2019 levels” due to “strong leisure trends”. Additionally, overall business transient now comprises 45% of total segment mix, just shy of pre-pandemic levels.”
In China, “re-imposed lockdowns suppressed demand [but] the rest of the Asia Pacific region saw a modest improvement in demand recovery as more countries loosen border and arrival controls in March.” – Hilton (HLT)
Technological Developments
This year, UPS will begin to implement “automated bagging, automated label application and robotic small sort… to drive increased productivity”.
“Waymo became the first company to run fully autonomous ride-hailing operations in multiple locations simultaneously.” – Alphabet (GOOGL)
Alphabet (GOOGL) also launched multi-search this quarter, which is “a new way people can find what they need using both images and words.”
Tech spend “As a percentage of GDP [is], by the end of the decade, going to double.” – Microsoft (MSFT)
Horizon, Meta’s (FB) metaverse platform, will launch through a web version “later this year.”
Meta (FB) is planning to launch a new headset (codenamed Project Cambria), “which will be more focused on work use cases and eventually [replace] your laptop or work setup.”
In order to mitigate semiconductor supply chain constraints, Apple (AAPL) developed “the world’s most powerful chip for a personal computer,” which is named M1 Ultra.
Due to extremely high commodity prices, the Tesla (TSLA) investor presentation stated that “diversification of battery chemistries is critical for long-term capacity growth” and nearly half of the vehicles produced in Q1 utilized lithium iron phosphate batteries, “containing no nickel or cobalt.”
According to Elon Musk, Tesla (TSLA) is working on a “dedicated robotaxi that’s highly optimized for autonomy, meaning it would not have a steering wheel or pedals.” TSLA is targeting 2024 for volume production of the robotaxi. TSLA also “remains on track to reach volume production of the Cybertruck next year.”
“Harnessing the power of technologies such as hybrid cloud and AI remains essential as our clients face a number of strategic challenges and opportunities, whether it’s competing for talent, supply chain issues, inflation, cybersecurity or geopolitical instability.” – International Business Machines (IBM)
JPMorgan Chase (JPM) is building out “real-time payments [and] certain blockchain type things” to build out wholesale capabilities.
CarMax (KMX) recently unveiled online technology that allows the company to make instant cash offers for used vehicles. CEO Bill Nash stated that “the rollout and rapid adoption of our online instant appraisal offer has solidified our position as the nation’s largest buyer of vehicles from consumers, nearly doubling our fiscal 2022 inventory self-sufficiency and propelling our wholesale business to new heights.”
Walgreens (WBA) recently acquired VillageMD and Shields in an effort to deliver “consumer-centric, technology-enabled healthcare” to local communities.
According to Micron (MU), new DRAM and NAND products are “achieving excellent yields, providing [MU] with solid front-end cost reductions and contributing meaningful revenue. [MU] qualified additional products on the advanced notes with a broad set of customers.”
Lululemon (LULU) is “partnering with and investing in Genomatica to create the first-ever plant-based alternative to nylon.”
“Everywhere we look, whether it is in entertainment, education or the enterprise, content is fueling the global economy. The democratization of creativity, the emergence of new ways to work and learn from anywhere, and the business mandate for personalized customer experiences underscore the immense opportunities we have as a company.” – Adobe (ADBE)
“New technologies will continue to shrink geographic distances, but countries and companies are reevaluating their interdependencies in a way that we have not seen since the end of the Cold War.” – Blackrock (BLK)
Amazon.com (AMZN) users can now “ask Alexa about symptoms for common health ailments… and virtually connect to health care professionals through a new collaboration with Teladoc.” In addition, AMZN’s virtual health services are now available 24/7 in the US.
“We made a lot of progress on both the wafer side and significant investments on the substrates… we continue to get…very good support from our suppliers.” – Advanced Micro Devices (AMD)
Starbucks (SBUX) is planning to launch “a unique platform for NFTs” on web 3.0 that will create “new revenue streams for SBUX.”
Construction/Housing
United Rentals (URI) is “starting to have conversations with customers about federal [infrastructure] projects that should kick off in 2023.”
“It’s hard to find a leading construction indicator that isn’t flashing green right now.” – United Rentals (URI)
According to POOL Corp (POOL): “outdoor living remains a priority with homeowners across North America.”
JPMorgan Chase (JPM) saw home lending originations decline by 37% y/y, “primarily due to the rising rate environment.”
In the guidance provided by KB Homes (KBH), the average selling price per home is expected to be $495,000 at the midpoint of FY 2022. This would translate to a y/y increase of 17.1%, so don’t expect a pullback in home values any time soon.
“The medium-to-longer term underpinnings of demand for home improvement have never been stronger.” – Home Depot (HD)
Foreign Exchange Rates
“With the stronger U.S. dollar and based on current rates, we now expect FX to decrease total company revenue growth by approximately two points.” – Microsoft (MSFT)
“We are reiterating our currency outlook of a two- to three-point currency headwind to [sales] a three- to four-point currency headwind to [EPS] for full year 2022.” – Coca-Cola (KO)
Capital Markets
BlackRock (BLK) commented, “we’re not seeing any real panic at all in the fixed income market, despite the worst performance in fixed income in 30-plus years in one quarter.”
Blackrock (BLK) added: “breadth and resilience enable us to play offense when others may be pulling back. Our agility in responding to opportunities and continued investments across market cycles have driven our industry-leading growth, our consistent growth, and generated value for our shareholders.”
JPMorgan Chase (JPM) “cannot foresee any scenario at all, where you’re not going to have a lot of volatility in markets going forward.” This prediction is due to the high inflationary environment, quantitative tightening, and elevated commodity prices.
“Gross investment banking revenue of $729 million was down 35% driven by both fewer large deals and less flow activity.” – JPMorgan Chase (JPM)
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