Takeaways From Earnings Calls: The Consumer Is Doing Better

This is the season for conferences, and we are here to give you the major points we picked from the conferences we have attended so far. The major takeaway seems to be that Q2 was the bottom with an expected slow but sure recovery as we head into Q3 and Q4. Consumer sentiment has improved marginally as consumers get comfortable with the new normal. There is a general sense that things are improving. As per a Bank of America survey, for the first time since February, more investors believe that we are in an early recovery (49%) phase than in a recession (37%):


The consumer is recovering slowly

The general positive sentiment could be because the consumer is feeling more comfortable in the new normal. Panic and panic buying have receded, and there is a sense of calm. We can’t really tell if this is the calm before a storm, but we can see that things are improving albeit slowly. Analyst expectations for YoY revenue and EPS growth for Q3 and Q4 are rising perhaps due to investors being too pessimistic in projections back in Q2. The consumer is spending more as a result. Bank of America (NYSE:BAC) gave us some insights into the trends so far in Q3. They indicated that, on a YOY basis, total consumer spending has improved to being flat in August from being down 26% at its lowest point in Q2. In short, the mood has generally improved:

…we went through a period of time where people just got very focused six months ago on…we need to get things up and going quickly. We need to work in a remote environment…we can’t run our business, we can’t figure them out…while I think there is still some of that for sure that has definitely calmed down – DocuSign (DOCU) CEO Dan Springer

…we think we’re at a better baseline as the conditions start to normalize from here. – Slack Technologies (WORK) CEO Stewart Butterfield

…now, I would say, we have relatively good visibility if things don’t change drastically from here. – RH (RH) CEO Gary Friedman

Surprisingly, the consumer increased savings during this pandemic. Savings rates normally decline in a crisis period, but this one is quite different as customers have increased their savings rate from around 8% in March to around 19% in July. What we are seeing is some banks like Bank of America had higher customer deposits yoy. Consumers are using some of the money to also pay down debt, meaning delinquencies and deferrals are declining. We are likely to see stable delinquencies and charge-offs for banks in Q3 as a result. Some lenders are extending mortgage forbearance further, meaning that the short run may be positive for the financial institutions.

Source: Bank of America

Consumers are bored at home and are turning to gaming for entertainment. They are also making fewer trips to the store in larger basket sizes while shopping more online. Expect retailers and gaming companies to do well in Q3 as a result.

I think we are seeing some gradual sort of return to patterns that customers get comfortable with in a COVID environment as – continue to see large basket sizes and fewer trips – The Kroger (KR) CFO Gary Millerchip

As a result of the pandemic, we continue to see a slow return to normal from the shutdown period resulting in fewer customer visits, but increased basket size – The Kroger CEO Rodney McMullen

Source: Fred

There is a need for caution though as things are not all rosy. We are in the midst of a pandemic, and there is a high chance that additional stimulus may not be forthcoming once this one runs out at the end of this month. This is especially true, given the general admission by management teams that the retail spending has been greatly boosted by the enhanced unemployment benefits.

Continued focus on the home and on fitness

With consumers being increasingly comfortable, there is also a continued focus on making the homes comfortable also. The Home Depot (HD) CEO Craig Menear put it well when he said,

“Our customers tell us from surveys that home is never more important than it is today.”

In the process, they are looking to get rid of old stuff with companies like eBay (NASDAQ:EBAY) helping out on this. We learned that Americans have a lot of junk that could be sold online. Apparently, the average consumer in the US has $4,000 of goods in their home that they could sell with only less than 20% of all this being online as of now, as per eBay CEO Jamie Iannone. People are looking to make the home comfier, so anything around the home is bound to continue doing well. They are spending money on building, used cars, gaming, home furniture, swimming pools, and home appliances:

..You get, the interesting thing about humans, right, we kind of compare and contrast ourselves all the time, what we wear, what we drive, where we live. Our home, the size of our home, all these little things…And your home has got to be all furnished and it’s got to look a hell of a lot better. And because, you just going to have more people over and you are going to be spending more time there – RH CEO Friedman

Source: A16Z

Consumers are also focused on health and wellness. People are working out a lot and are keen to eat home-cooked meals. Propelled by this tailwind, companies like Peloton (NASDAQ:PTON) had a spectacular quarter. In the last quarter alone, workouts at Peloton were up 333% YoY, doubling the number of workouts per subscription per month as a result. This area is experiencing an expansion of TAM that is attracting the likes of Apple (NASDAQ:AAPL) which this week launched Fitness+ as it looks to tap into this renewed focus on health and wellness.

Our data insights show customers are rediscovering their passion for cooking at home and have an aspiration to eat more healthy foods as a result of COVID. When we talk to our customers they tell us they plan to continue to prepare and eat more meals at home – The Kroger CEO McMullen

What we see this year is just an acceleration…with consumers being really focused on their own health, making sure they take their health in their own hands” – Johnson & Johnson (JNJ) Executive Vice President Thibaut Mongon

Source: Peloton Shareholder Letter

Lessons in a pandemic: Debt is not good

On a side note, one thing caught our attention this week. It was Delta CFO Paul Jacobson speaking at a conference candidly on the importance of managing debt. Airlines are in the midst of a tough period as the pandemic hits their top and bottom lines. Paul has learned the lesson that debt is not good in such rough times. Were he to do things all over again, he would prefer less debt. Here he is:

We all set aspirational goals for ourselves and if you had told me a year or two ago, that I could be CFO over a $75-billion balance sheet, I would have been delighted, because maybe we would have had a comparable market cap. But, unfortunately, I think I’ve learned enough to know that you’d rather have that in equity than debt

This resonates well with Warren Buffett’s wisdom in this area which he shared in the 2019 newsletter:

We use debt sparingly. Many managers, it should be noted, will disagree with this policy, arguing that significant debt juices the returns for equity owners. And these more venturesome CEOs will be right most of the time. At rare and unpredictable intervals, however, credit vanishes and debt becomes financially fatal. A Russian-roulette equation – usually win, occasionally die – may make financial sense for someone who gets a piece of a company’s upside but does not share in its downside. But that strategy would be madness for Berkshire. Rational people don’t risk what they have and need for what they don’t have and don’t need.

In short, be careful with debt-ridden companies as you invest.

In conclusion

We like the fact that things are becoming more stable and the consumer is being more comfortable. This is a platform on which to build a better 2021 and 2022. We hope things continue to get better.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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