Introduction
I recently returned from a trip to the US which was a combination of business and pleasure. I was interested to hear what company management and investor relations teams had to say but was expecting the meetings to be hard work. I was pleasantly surprised. There was a marked contrast to the sullen atmosphere in the City of London and, although far from optimistic, they were certainly in a better state of mind than their UK peers.
The atmosphere could not have been more different from the general feeling of doom and gloom that resonated from all the boardrooms I tiptoed round during my last trip to San Francisco in October 2007. Things are still far from perfect - “we can only control our own bottom line, we just don’t know the answer to the question, how bad can things get?” - but a sense of change was in the air and companies and investors appeared to be tackling the problems, seen and unseen, with a positive attitude.
The US Consumer
Two core topics of conversation were the durability of the US consumer and the unknowns in the financial system. With regard to the consumer, the most immediate and notable feature of the slowdown was the extensive level of promotional television advertising ranging from Circuit City’s “stretch your tax rebate” through to a large number of “Memorial Day Sales” which lasted a full week. The television also ran numerous features with a variety of scare titles such as “The Oil Crisis….The Fuel Crisis….Running on Empty….The Investor Handbook to the Energy Crisis.” This seems to have prompted a series of initiatives announced by Suffolk County, Long Island, directed at those employed in the Public Sector suggesting they work four 10 hour days a week enabling them to cut back their commuting time and “reducing their fuel costs by 20 percent.” Other interesting sound bites I picked up relevant to the durability of the consumer were: “housing development plots have been scaled down. What was once 100 acres has become 50. …Wholesalers are hearing retailers don’t have any confidence … the quality of second hand items at garage sales continues to improve”.
The Unknowns in the Financial System
The unknowns in the financial system have clearly not yet been identified – will they ever be? - as the question “who has CDOs?” (one of the many three letter acronyms attributed to packages of credit and mortgage securities) was audible among investors. One remark: “there are between 50 and 70 banks in trouble today and in the 1930s there were 1600 banks in crisis” was met with the comment “what a period to benchmark against!” There is no point second guessing as to whether there will be further write offs as you are either branded neurotic or naively oblivious to the dangers at large. On a company specific level, a member of the investor relations team at Charles Schwab said “the number of people willing to short our shares remains volatile on a week by week basis. …everyone still thinks they can find the Achilles heel of financial stocks even if we can be as confident as we can be that one doesn’t exist.”
The whole environment, relating to the consumer and the financial system, was best summed up by an investment banker I spoke to: “this is the weirdest recession I have ever been in. It’s almost become a self-fulfilling prophecy….we all talked about a recession for so long that now it’s here we’re not quite sure what to do. There are a lot of second hand Mercedes Benz cars for sale but those restaurants that are still open are full on Saturday nights and the airplanes are certainly full.”
General Retailer Williams Sonoma
Williams Sonoma spoke openly about the difficulties in the retail sector but they are focused on “coping with tough times in our DNA” by improving their administrative, marketing, supply chain and Information Technology functions: “all the items at the back of house….talent in the back of the house is key to whenever growth is re-stimulated.”
It was interesting to hear how, having turned down real estate purchases during the last couple of years, they are now being offered similar or better locations at significantly lower prices. “We are not just buying more stores at lower levels than we could have thought possible, we are making our existing stores bigger by buying and remodelling adjacent sites which have become vacant.” The analysts are finding it difficult to comprehend their willingness to enter into negotiations in the current environment but in researching these opportunities, Williams Sonoma are showing a better understanding of the cycle and a longer term outlook. “Out of adversity comes opportunity is a refrain which has served this business well over the last 40 years….the easiest way to damage a brand is to cut back the customer experience when times get tough.” In addition, their continued investment in the business has led to a strengthening of their relationship with customers, hauliers and suppliers: “It’s made it a lot easier for us to guarantee capacity when the economy revives and will aid cost pressures and puts us in a position to see a lot of payback.”
Clothing Retailer Gap
Gap have worked hard, and continue to do so, to resuscitate their brands – Gap, Old Navy and Banana Republic. They were brutally honest about their failings saying “like for likes are not where we want them to be.” In addition, they are also focused on internal administrative improvements. “We are not buying inventory on an optimistic outlook….protecting the margin is the key issue….traffic would have to improve a lot for us to invest in stock.”
Although slightly less optimistic in their outlook, one point of interest was the similarities in attitude to the value of the brand between the two companies. Gap talked about heavy investment in the stores and “the Gap experience.” Having closed nearly 700 underperforming stores in recent years they now know that the key to success is “store execution” and heavy investment in those stores now deemed worthy of “immediate focus.” Although “the volatile consumer environment is certainly not helping….we can only focus on what we can control.”
US Bank Wells Fargo
Wells Fargo talked about the mistakes they made entering into alliances with mortgage providers in recent years but added that “we remain firmly open for business…had to undertake no dilutive capital raising….we’re busy looking at acquisition opportunities….we have a strong balance sheet…..we certainly aren’t paying up for additional deposits the way a lot of banks are.” Wells is probably best compared with Lloyds TSB in the UK in terms of its conservative nature. It is focusing on incremental internal improvements and continues to avoid the perilous area of investment banking reminding investors that “we are always managed with the economic cycle in mind…we weathered the 1980s and the 1990s.”
Financial Services Firm Charles Schwab
Another financial services business which, having weathered the storm, is striving to remind investors “we are open for business.” The company has three divisions: a retail bank, a financial services business and an administrative services business for the management of larger pension funds. The most interesting comment they made was that while a number of clients, investors and analysts continue to ask “just how bad will it get? No-one is yet asking what do I do when.…? ….people’s expectations have fallen apart.”
Conclusion
Although my conversations may not be representative of the general feeling in corporate America history tells us that economic cycles exist, stock markets will turn the corner and the strongest and best managed companies will survive. Our belief is that the US is two quarters ahead of the UK in terms of sentiment and in its economic cycle and we hope to see a pick up in the US towards the end of this year.
