Company Note: Manufacturing Rebounds, Retail Sector Struggles

The Macro Outlook

The manufacturing environment has improved a lot. Finally seeing growth

“The manufacturing environment, particularly the metal working sector, has improved considerably from where it had been during the last 1.5 years. We’ve moved past the contraction that we were seeing during our FY13 and are now in what we would characterize as a moderate growth environment.” (MSC Industrial Direct Company Inc (MSM)

It’s not huge growth, but customers are more confident

“Customers are reporting slightly more confidence and are seeing steadier order flows and backlogs. To be clear, with some exceptions, we would not characterize the current climate as high growth, as most customers remain appropriately cautious with their spending and their capital investments” (MSM)

Slow orders in 1Q were all due to weather

“Our order intake in the first quarter here in the U.S. where it slowed down, it slowed down, the order intake there slowed down. This has pretty much single handedly been driven by the extremely cold weather” (Alcoa Inc (NYSE:AA)

But the weather did improve and activity returned

“The weather eventually did improve and the environment returned to the levels that we saw in November and the first half of December.” (MSM)

Now people are catching up

“People are now trying to catch up and trying to make the days that they had projected for their project, so we continue to be optimistic in the recovery of that market.” (AA)

There’s still a lot of noise in the numbers though

“We’re quite encouraged by March. It was a relatively stable month. Is it possible that there was some movement and deferral of spending from January and February into March? Maybe. There’s a lot of noise right now.” (MSM)

Manufacturing rebounding, but retail environment doesn’t seem to be doing quite as well

Family Dollar lowering longer term growth forecast

“First, we are investing significantly to lower prices to provide more compelling values for our customers. Second, we are optimizing our workforce to improve execution and better align resources. Third, we intend to close approximately 370 underperforming stores. And lastly, we plan to slow square footage growth beginning in fiscal 2015.” (Family Dollar Stores Inc (NYSE:FDO)

Pier One pushing out long term targets too

“Under the plan we’ve previously expected to reach 225 of sales per retail square foot and operating margins of 12% by the end of this year, which is our fiscal 2015. We push those targets back by one-year and established new goal of 225 in sales productivity and 11% to 11.5% in operating margin by the end of fiscal 2016.” (Pier 1 Imports Inc (NYSE:PIR)

Financials

The credit environment is benign

“The credit environment continues to be benign and we believe our exposure to Russia is manageable. We are totally reserved based on what we know today and we are closely monitoring the situation.” (J P Morgan Chase & Co (NYSE:JPM)

But JPM growing C&I slower than the industry because other players are acting too aggressively

“In C&I, you’re right, the industry was up slightly, we were not. It’s a continuation of the things we talked about which is a combination of current selection of being very disciplined on credit, so not chasing growth at the cost of liberal credit structures and overly aggressive pricing…We are seeing the ongoing aggressive investing environment on both credit terms and pricing, and we will do every rational and sensible deal we can do but we are not going to chase growth at the expense of discipline.” (JPM)

Still tightness in mortgage markets for specific types of borrowers, not getting worse, but not going away

“if you are jumbo you get loan, if you are GSE you get loans, but almost all the other stuff in between, anything with any hereon it like you had a credit problem, if you are earning self-report income…It’s not getting worse. It’s just kind of sitting there and probably holding back a little bit the purchase market.” (JPM)

It’s noteworthy that JP Morgan reported a clean quarter without unusual items

“Of note, you will see that we didn’t disclose any significant items this quarter on the front page of the presentation.” (JPM)

Hopefully this is the end of unusual legal expenses

“And as I said earlier, no significant legal expense to report for the quarter. It obviously is good to have a quarter with such a small number and perhaps puts such large issues behind us. However, I want to remind you that we still expect legal expenses to be lumpy quarter-over-quarter for the next couple of years as we work through remaining issues.” (JPM)

The credit portfolio at Wachovia turned out much better than expected

“You are right to this extent. The Wachovia portfolio turned out to be better than we had thought and if you just look at how much we have moved from, on the PCI side into the accretable from the non-accretable, and we especially did a lot better on the Pick-a-Pay. We just had a terrific team that attacked that early on but credit turned out, I think partly because of things that we did. It turned out to be quite a lot better.” (Wells Fargo & Company (NYSE:WFC)

Consumer

Besides weather, retailers have also consistently cited the calendar shift as a culprit for weak results

“Total sales decreased 6.1% to 2.7 billion and comparable store sales decreased 3.8%. As a reminder, we estimate the extra week last year contributed approximately 189 million in sales. Excluding the impact of the extra week, total sales in the quarter would have increased 0.4% compared to the second quarter of fiscal 2013.″ (FDO)

“Fourth quarter comparable store sales declined 4.6% on the 13-week basis. After adjusting for the calendar shift comparable store sales for the 13-week ended March 1, 2014 increased 60 basis points versus the 13-week ended March 2, 2013.” (PIR)

Rite Aid’s real estate strategy: fill in existing areas then expand to additional markets

“I think we have an opportunity, in the early stages of our store growth strategy, to really get at those markets and fill them in a little bit. Then there’s probably some contiguous opportunities for us to get at, which we think have good economics associated with them. And while we’re probably working on those opportunities, we’ll be working on the underlying strategy to maybe crack into a couple of additional markets.” (Rite Aid Corporation (RAD)

Healthcare

A small number of patients make up a large percentage of prescription purchases

“There’s a core group of patients that really make up a big percentage of our script count.” (RAD)

Materials, Industrials, Energy

The most important thing in the commodities business

“In the commodity business, it’s all about where you are in the cost curve.” (AA)

Interesting comment on technology revolution in manufacturing, but didn’t really expand on it

“The bigger trend right now, is the impact that technology is having in manufacturing. That is right now at the heart of what we see as really a revolution going on in manufacturing.” (MSM)

Miscellaneous Nuggets of Wisdom

Anybody can give stuff away, it’s a little tougher to be a rational player

“Could we get more aggressive in the short term and spike our comps a little bit? We’re good at giving stuff away, we know how to do that. We can do that, but to your point, I think we are trying to be rational about it, do it in an effective way that builds relationships with customers.” (RAD)

A great analyst compliment: Wells Fargo is an earnings machine

Analyst comment: “You are clearly an earnings machine.” (WFC)

Disclaimer: The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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