Day 1: Weblights

Yesterday we spent the day hopping from webcast to webcast focusing on unique callouts from a slew of company presentations.  Here are the notable takeaways:

 

  • A couple of interesting callouts from Kroger’s 2Q conference call:

The competitive environment remains largely a mixed bag, with some markets becoming more aggressive and others becoming less aggressive.  Net, net management described the environment as being slightly more rational, although inline with expectations.

 

Deflation and inflation co-exist within the store.  On the produce side, inflation has begun to creep into product costs although still at a slightly lower pace than originally expected at the beginning of the year.  On the flip side, the grocery area is seeing deflation which is largely the result of vendor driven promotions.  Management believes the CPG companies are now in the phase where they are focused on driving volume via promotional support.  Interestingly, this scenario is positive for KR gross margins while still a drag on topline performance.

 

For the first time in a while, management noted that sales strength was broad-based.  This includes positive idents in 17 of 18 regions.  All departments and customer segments showed increases.

 

Management noted that its seeing some gross margin benefits from positive mix, which has been skewing towards more discretionary products.  Starbucks, service counter deli, Boars Head, and natural foods were called out as showing improving sales trends.

  • Best Buy noted that it expects to see a slight acceleration in same store sales over the back half of the year, despite tougher comparisons.  This is largely due to new product introductions (3D and motion gaming, tablets, and e-books)  as well as an expectation that vendor supported promotions will pick up to spur TV demand. 
  • BBY is extremely bullish on its Best Buy Mobile business, as it was cited as the primary reason from gross margin upside in the quarter.  Interestingly, management sees a huge opportunity to gain additional share in the wireless business (only 5% now) as well as growth in other areas of connectivity.  Broadband, 3G, and  HD cable or satellite are all products for which BBY collects an incentive fee for new customer acquisition.
  • Office Depot noted that the company is not assuming any material improvement in the economy through 2011, and as such is planning conservatively.  Despite this view, the North American retail business did see a slightly positive comp through the August back to school period.  This marks a slight improvement from the prior quarter, which declined by 1%.
  • Kohl’s noted that the two most inflationary categories in the store, some home and footwear, are also the two best performing categories year to date.  Management went on to note that inflation is not necessarily a bad thing if managed properly, especially in the apparel category.
  • Kohl’s highlighted a recent social media (Facebook) campaign, which was centered on giving money to schools as part of a back to school marketing effort.  Prior the campaign, the company had 1 million fans.  In just over 2 months since the campaign began, Kohl’s now has over 2.6 million fans.
  • Aeropostale noted that is having to promote a little more aggressively than it has in the past, especially on key items.  Graphic tees have been the most heavily promoted category in the teen space (probably the most profitable as well). Management went on to note that a sustainable high teens operating margin would be largely dependent on an improving economy over time.
  • From a fashion standpoint, Aeropostale noted that they are seeing the beginnings of a resurgence in khakis and twills.  This coincides with some weakness in the denim category, which has been impacted by an over-distribution of skinny jeans, unseasonably warm weather, and lack of differentiation within the category.
  • JCP noted early enthusiasm for the company’s launch of Liz Claiborne, although it refrained from providing any details.  The company’s first circular highlighting the launch drops this weekend. 
  • Much like Kohl’s, JC Penney management noted that inflation would not be such a bad thing for the apparel category.  Management is only expecting modest 1-3% cost increases into the Spring as the company’s internal sourcing organization navigates rising costs out of Asia.
  • The future of the women’s business was a key topic of discussion for Under Armour. Highlighting the success of its partnership with Nordstrom, CEO Plank mentioned that it is in a testing phase at Bloomingdales and early indications are positive. Among the benefits of offering a more expansive assortment in women’s including more outerwear are the opportunities for distribution growth particularly at the higher-end, which is clearly underway.
  • Despite concerns over a dilutive competitive environment in Texas over the last 12-18-months, Dick’s Sporting Goods confirmed that dynamics have indeed improved with the market now comping at a faster rate than the company on a consolidated basis.
  • PSS confirmed that of the $28mm it can allocate to stock repurchase this quarter, it will indeed purchase every share possible with the stock at these levels.

Eric Levine

Director