Speaker 1: Hello, and welcome to another episode of the All Thoughts Podcast.
Speaker 1: I'm Tracy Alloway and I'm Joe. Joe. It always feels
Speaker 1: to me like it's earning season, Isn't that right? I
Speaker 1: feel like every month it's earning season. It just goes
Speaker 1: on forever. I know, it's always earning season. It's always
Speaker 1: like about to be Mardi Gras in New Orleans. Like
Speaker 1: there are certain things that I was like, Oh, that's
Speaker 1: that's this time of year again, Like certain things it's
Speaker 1: always like Carnival in Brazil, and it's like, oh, that's
Speaker 1: happening again. And yes, earning season is always right around
Speaker 1: the corner. These things that just seem I think that
Speaker 1: they feel like they're supposed to be rarer than they
Speaker 1: seem to be. Yeah, they happen four times a year,
Speaker 1: but it seems like it's constant. Maybe this is one
Speaker 1: reason why we historically haven't done a lot of earnings episodes.
Speaker 1: But I think now is a good moment to actually
Speaker 1: stop and reflect on what we've been seeing from companies
Speaker 1: because of course all of this feeds into the big
Speaker 1: macro inflation discussion. Well, two things about this is, like,
Speaker 1: one is economists should listen to what companies say more totally,
Speaker 1: I feel like we've so there's so many economists and
Speaker 1: I love them, but there are so many economists out
Speaker 1: there who, you know, like though some trying about the
Speaker 1: money supply or the FED or some like the dot
Speaker 1: plots and all this stuff, and all that's great and
Speaker 1: I love it and everything, but often, like companies are
Speaker 1: just telling you what's going on. And a lot of
Speaker 1: my favorite sort of like economics analysis comes from someone
Speaker 1: who's just like, let's listen to the conference call and
Speaker 1: hear what management has to say. Right. There is a
Speaker 1: tendency for economists to talk about inflation expectations in the
Speaker 1: sort of abstract sense. But you could just read and
Speaker 1: earnings transcript and look at a big food company, for instance,
Speaker 1: and see that they're saying, oh, yeah, we're going to
Speaker 1: push through some more price increases, and that would be
Speaker 1: a pretty big clue and why. And this also gets
Speaker 1: to and the nice thing about conference calls too is
Speaker 1: you know, the analysts represent the interests of investors, right,
Speaker 1: and so they're asking the questions that investors want to
Speaker 1: know about. And one of the things that we've explored
Speaker 1: for years on this show is the degree to which
Speaker 1: companies care about investors, and we talked about it a
Speaker 1: lot with oils, specifically oil companies for years maximizing drilling
Speaker 1: output verse price, then switching post pandemic and so forth.
Speaker 1: So these conference calls give a clue on both sides,
Speaker 1: and that help drive corporate behavior totally. So on this
Speaker 1: episode we are going to be trying to I guess,
Speaker 1: draw that line between the micro and the macro talk
Speaker 1: about earnings and what it means for the wider economy.
Speaker 1: And I am very happy to say that we do
Speaker 1: have the perfect guest. We are going to be speaking
Speaker 1: with Samuel Rines. He is a managing director over at Corbu.
Speaker 1: You might recognize his name if you've been subscribed to
Speaker 1: the Odd Thoughts newsletter. I've written a little bit about
Speaker 1: his work recently, but he's been writing some very good
Speaker 1: analysis of earnings and specifically the pricing strategy that companies
Speaker 1: are undertaking in the current environment. So Sam, thank you
Speaker 1: so much for coming on Off Off, He thank you
Speaker 1: for having me. So you know I first started reading
Speaker 1: your work I guess it was last year, and you've
Speaker 1: developed this idea that you call POV. Price over volume
Speaker 1: can you walk us through exactly what that is. Sure,
Speaker 1: So basically, going back to call it early twenty twenty two,
Speaker 1: it was kind of this realization that something was going
Speaker 1: on underneath the surface with corporations that was pretty interesting,
Speaker 1: and that was they were making the decision that they
Speaker 1: didn't really care about losing a little bit of volume
Speaker 1: and they really cared about kind of finding how much
Speaker 1: price they could push and how much the consumer would
Speaker 1: react to it. And the first really interesting example of
Speaker 1: that that we pulled out was Pepsi and Pepsi we
Speaker 1: called it the new PPP. It was what was going
Speaker 1: to bail investors out after the Russia invasion, and it
Speaker 1: was the Pepsi pricing power. Pepsi found that even though
Speaker 1: they had about four percent of their revenue exposure to Russia,
Speaker 1: they could push price everywhere else and make up for
Speaker 1: that volume without any problem. So it's this really interesting
Speaker 1: kind of first tidbit, right corbu we tend to really
Speaker 1: focus on what's going on with the geopolitics and try
Speaker 1: to drive down into that and figure out how to
Speaker 1: kind of play around it. And it was really a revelation,
Speaker 1: at least to me, when Pepsi was pushing double digit pricing.
Speaker 1: This is so fascinating. I'm already like blown away because
Speaker 1: to me, this opens up a whole new way of
Speaker 1: like thinking about some of the questions and tying things together.
Speaker 1: But let's stick with pepsi for a second, because when
Speaker 1: the invasion of Ukraine happened, were certainly a lot of
Speaker 1: people who understood some pretty straightforward ways that that could
Speaker 1: be inflationary, right, energy, grain costs, etc. Well, you're saying,
Speaker 1: is there's this other mechanism that happened that you only
Speaker 1: would understand. But I started looking at the micro where
Speaker 1: a company felt pressure to raise prices elsewhere to compensate
Speaker 1: for the loss of sales in one market so that
Speaker 1: they can continue to deliver steady results for the investors. Yes,
Speaker 1: and it certainly wasn't just Ukraine. Sure, it wasn't just
Speaker 1: that they also had you know, they have freedom. Yeah,
Speaker 1: there was, sure, there was some that was a factor
Speaker 1: in everyone around the world to some extent who was
Speaker 1: a consumer of PepsiCo products was to some extent paying
Speaker 1: more to compensate for the lack of revenue and earnings
Speaker 1: that they were getting from the Russian market. Oh exactly.
Speaker 1: And it was It was pretty immediate. It was not
Speaker 1: something that it was just a subtle pause. It was
Speaker 1: something that was very very well. Question just real quickly
Speaker 1: on this. Where did they say, like this, we raised
Speaker 1: prices in these markets. How do you know that that's
Speaker 1: the reason? Oh it wasn't They never explicitly stated, okay, right,
Speaker 1: it was they had an excuse to begin raising prices
Speaker 1: they had. This is exactly what I wanted to bring
Speaker 1: up because like, it does feel like in the environment
Speaker 1: of the past three years, you've had a lot of
Speaker 1: supply chain disruptions. It feels like there has been a
Speaker 1: peg for companies to go out and say like, well,
Speaker 1: because of this, we need to raise prices. And this
Speaker 1: is something Joe that actually came up on our episode
Speaker 1: with the Baker. Right, he said explicitly that if something
Speaker 1: is going on with, for instance, the price of eggs,
Speaker 1: if there's an avian flu outbreak and it's national news,
Speaker 1: it's an opportunity to increase prices without getting a whole
Speaker 1: bunch of pushback. And that is exactly it, right, A
Speaker 1: lot of companies had these call it one off or
Speaker 1: very very rare excuses and to raise prices and begin
Speaker 1: to find how much the consumer would take. And one
Speaker 1: of my favorite examples of this is Wingstop. Right, it
Speaker 1: was national news that chicken wings were pricing was going
Speaker 1: through the roof, right, and something like one hundred twenty
Speaker 1: five percent over a year at one point, and Wingstop
Speaker 1: began to push price, push price, push price, and they
Speaker 1: had zero pushback from the consumer. Right. The consumer just
Speaker 1: continued to buy chicken wings. And it's not as though
Speaker 1: there are a limited number of places to go buy
Speaker 1: a spicy chicken wing. They pushed it and pushed it
Speaker 1: and pushed it. And now chicken wing prices have fallen
Speaker 1: somewhere around fifty percent from their peak, and Wingstop is
Speaker 1: not exactly stopping pushing their price. In fact, they're saying
Speaker 1: and guiding towards a typical two to three percent type
Speaker 1: price increase. So it's a really interesting once you get
Speaker 1: that price push, once you figure out that the consumer
Speaker 1: is willing to pay it, that is margin expansive over
Speaker 1: time as you begin to have a normalization in your
Speaker 1: input costs. So are there any examples like what other
Speaker 1: publicly traded companies also have sell a lot of wings? Oh?
Speaker 1: I'm trying to think, but I guess now they went private.
Speaker 1: They did, But I guess what I'm The reason I
Speaker 1: ask is because you know, intuitively, one would think that
Speaker 1: if Wingstop is raising prices, some other company could use
Speaker 1: that as an opportunity to gain share. And so in
Speaker 1: your reading of these transcripts, why don't we see that
Speaker 1: effect to play it? I get it. Wingstop they're a company.
Speaker 1: Why wouldn't they want to push price to see where
Speaker 1: that breaking point is maximize returns? Why do you not
Speaker 1: see other companies then say, okay, well we're going to
Speaker 1: try to make it. We'll take a lower margin for
Speaker 1: higher volume because they can raise price right alongside of them,
Speaker 1: and those have those larger margins. I mean, it's one
Speaker 1: of those things with Pepsi, right, Pepsi Coca Cola. You
Speaker 1: shouldn't have Pepsi being able to push price in theory, right,
Speaker 1: it should be Pepsi and Coca Cola battle it out
Speaker 1: and you have very minimal price increases and they don't
Speaker 1: have the ability to really play catch up with inflation.
Speaker 1: And that's simply not the case right now. They're just
Speaker 1: willing to take it. So what did Coca Cola do
Speaker 1: when too is raising prices? Raise prices right alongside of
Speaker 1: that interesting and took a little volume it. So this
Speaker 1: actually leads nicely to something else I wanted to ask,
Speaker 1: which is how much of this is a sort of
Speaker 1: food consumer good story versus other types of manufactured goods,
Speaker 1: because certainly reading your research, you know there's a lot
Speaker 1: of talk about pepsi, wingstops, Smuckers, Texas Roadhouse, which is
Speaker 1: one of my favorite today. I'm sorry, I'm sorry. Um,
Speaker 1: actually neither have I for once. Um, okay, So how
Speaker 1: much of this is about food versus other sectors? Oh,
Speaker 1: it's it's really interesting. So I kind of divide it
Speaker 1: into three categories, good services and leisure and just to
Speaker 1: kind of break it up into a kind of a
Speaker 1: framework to work around it. And so if you look
Speaker 1: at services like Texas Roadhouse, again that's that's kind of food.
Speaker 1: But you know, they're raising menu prices, they are also
Speaker 1: guiding to higher wages. Same with cracker barrel, kind of
Speaker 1: the Middle America businesses are raising their menu prices and
Speaker 1: they're guiding to five to six percent wage games. And
Speaker 1: I mean they're pretty explicit about it. So it's an
Speaker 1: it's you know, it's kind of price over volume. With
Speaker 1: the side of wages in the interest of journalistic integrity,
Speaker 1: Tracy just I bead me during this conversation, reminded me
Speaker 1: I did have some turkey jobs. Joe is literally sitting
Speaker 1: there surrounded by empty jerky. I said that I haven't
Speaker 1: like even like a proper meal today. I am not
Speaker 1: on a completely youngcayed stomach. I do not want to
Speaker 1: deceive the listeners, and so I wanted to issue a
Speaker 1: correction right there. Correction where were we? Yeah, well, on
Speaker 1: the good side, just really quickly, because it's interesting. So
Speaker 1: there's this smaller company, Donaldson, that does filtration systems. They
Speaker 1: guided to a two to six percent revenue game in
Speaker 1: the coming year, and then in the fine print said
Speaker 1: with six percent effective pricing. Wow, so you know you
Speaker 1: can kind of do the math there and figure out
Speaker 1: that that's zero percent volume at the top end of
Speaker 1: the guy. I love the flow of this conversation because again,
Speaker 1: it leads very naturally into my next question. But why
Speaker 1: aren't consumers pushing back well to Donaldson, I mean for Donald's.
Speaker 1: And it's not just consumers, right, it's the corporations that
Speaker 1: buy the filtration customers that buy their feel short stuff.
Speaker 1: Why aren't they pushing back. It's a combination of wage
Speaker 1: gains and that you're feeling a little bit wealthier right
Speaker 1: this This is a world where inflation doesn't feel necessarily
Speaker 1: as forced on the consumer. And the consumer, you know,
Speaker 1: there's not a whole lot of options when you're trying
Speaker 1: to figure out whether you're buying PEPs or your coke
Speaker 1: or Freedo's or lays. Mean, it's it's it's a strange thing.
Speaker 1: But you look at you look at the wage gains
Speaker 1: coming through the system right now, and the wage gains
Speaker 1: make people feel a lot wealthier, particularly you know, social
Speaker 1: Security benefits rocketed in January. You know, people are feeling
Speaker 1: much wealthier, particularly in the lower deathsiles of income. I mean,
Speaker 1: I fully admit to being in a like total a
Speaker 1: certain economic bubble here living in New York City. But
Speaker 1: it is a very frequent conversation where people like complain,
Speaker 1: I was like a restaurant prices are crazy these days, etc.
Speaker 1: Yet also people are still going out to eat, and
Speaker 1: could people complain about how hard it is to get
Speaker 1: it get a meal or get a table or reservation
Speaker 1: or restaurant or order delivery. It's like, oh I gotta
Speaker 1: I gotta stop ordering like you know, uber eats or
Speaker 1: grub hub or whatever. It's just insane and I'm paying
Speaker 1: fifty five dollars all in fees for two dozen chicken
Speaker 1: wings and then people keep doing it. This makes me
Speaker 1: think also, like how much of this this is a
Speaker 1: speculative question that's hard to answer, but how much of
Speaker 1: it is just people are traumatized by a year of lockdowns.
Speaker 1: We all want to get out and live our lives.
Speaker 1: Maybe maybe we don't save a lot for the next
Speaker 1: couple of years, but we finally get to go out.
Speaker 1: We get to book travel, go on cruises, eat nice
Speaker 1: meals at restaurants. Tracy, can I tell you some bad news? Okay,
Speaker 1: we're like coming around three years of this. Yeah, okay,
Speaker 1: but I was in yeah, yeah, No, I know the
Speaker 1: lockdowns are over, but it should have been a very
Speaker 1: long year. All right, fine, But I do think there
Speaker 1: is a sort of psychological explanation here as well. Yeah,
Speaker 1: I mean this is speculation, but what COVID did for
Speaker 1: a lot of people, including myself, was it shortened the
Speaker 1: time horizon have spent. Right, you know, the life cycle
Speaker 1: model began to put some volatility into that and you
Speaker 1: began to put some volatility into whether or not you
Speaker 1: were going to be able to do the things you loved. Right,
Speaker 1: and kind of going back to this you know, services question.
Speaker 1: When you look at rev par for the major hotels,
Speaker 1: occupancy really isn't back to twenty nineteen levels yet, but
Speaker 1: the average amount of money that they're making off the
Speaker 1: room has skyrocketed back well above twenty nineteen levels. So again,
Speaker 1: price over volume, there's a there's a certain level that
Speaker 1: there's you know, a price push on the consumer and
Speaker 1: the consumer you know, yes, occupancy levels are going higher,
Speaker 1: but the average room rate is going much higher. Same
Speaker 1: with cruises, right, Cruise cruise capacities aren't back to twenty
Speaker 1: nineteen levels, but pricing is well above. Norwegian came out
Speaker 1: with a really interesting earnings report recently where they said, hey,
Speaker 1: you know, bookings are really really good and they're well
Speaker 1: above twenty nineteen pricing levels. It's it's just across the
Speaker 1: board on the pricing front. So from a cost perspective,
Speaker 1: a typical major national hotel chain are a Norwegian at
Speaker 1: this point? Are they seeing much cost inflation? Hotels? Someone
Speaker 1: On the labor front, that's really where they're seeing their
Speaker 1: costs begin to move higher on the cruise front, bunker fuel.
Speaker 1: But overall, these are they're expanding margins when they when
Speaker 1: they push through these prices despite the fact that like
Speaker 1: they haven't even gotten back to volume levels. These are
Speaker 1: these are beyond what their costs are, right correct, Yeah, Okay,
Speaker 1: that's very easy to see. That's just that's just and
Speaker 1: over time it's going to be very very good for them. Sam,
Speaker 1: you mentioned something about customers having limited choices, for instance,
Speaker 1: coke versus pepsi, which is not exactly true, but you know,
Speaker 1: point taken, and this is an issue that has come
Speaker 1: up a lot, this idea of corporate concentration and that
Speaker 1: as the marketplace is dominated by bigger companies, bigger and
Speaker 1: fewer companies, they have more pricing power. Is that something
Speaker 1: else that's playing a role. It's certainly playing a role
Speaker 1: to a degree. It's because you know, if you see
Speaker 1: pepsi racing price, you have call it permission to go
Speaker 1: raise price. And it wasn't just Coca Cola that raised price,
Speaker 1: it was Doctor Pepper Snapple. They took price over volume.
Speaker 1: And you know, you know, and now Kurig is in
Speaker 1: there as well, but you know Kurig took price and
Speaker 1: Smuckers on Folders took price. You know, those are the
Speaker 1: kind of you know, you can kind of think of
Speaker 1: that as coffee at home. Can you talk a little
Speaker 1: bit about the questions that are being asked on these calls,
Speaker 1: because presumably, right an analyst wants to be able to
Speaker 1: go back and you know, sort of like you know,
Speaker 1: the information is ultimately the information they're trying to extracts
Speaker 1: the information that the holders of stock and these companies want.
Speaker 1: What are what are analysts asking and or sort of
Speaker 1: implicitly telling management about what investors demand these days? Sure,
Speaker 1: so there was an interesting question. This was a couple
Speaker 1: of quarters ago on the Wings on a wingstop call
Speaker 1: where one of the analysts asked, if wing prices fall,
Speaker 1: what are you going to do? Are you going to
Speaker 1: go after ball? Are you going to go back after volume?
Speaker 1: Market share? And the I believe it was the CEO
Speaker 1: responded with, no, this is a you can think of
Speaker 1: this as a level set on pricing, and we believe
Speaker 1: that our brand can dictate that type of pricing going forward.
Speaker 1: That to me was very indicative of what was going
Speaker 1: to happen and they followed through with it, wing prices
Speaker 1: fell and they said, now we're still going to create
Speaker 1: prices a little bit higher here margins are going to
Speaker 1: go higher. Another interesting comment, and this kind of goes
Speaker 1: to where I think a lot of things are going
Speaker 1: to flow on the price over volume front and the
Speaker 1: coming quarters. There was a very interesting call with a
Speaker 1: shipping company that for some reason I'm spacing on at
Speaker 1: the moment, but management had said, listen Q one, Q two,
Speaker 1: it's going to be a pretty difficult time for us.
Speaker 1: But looking at the end of Q two and into
Speaker 1: Q three, we see an inventory cycle beginning to emerge again.
Speaker 1: And so when you're raising prices if you're PEPSI that said,
Speaker 1: we're going to raise a little bit of price. If
Speaker 1: you're Coca Cola, if you're any of these companies that
Speaker 1: have seen Kimberly Clark that have seen those inventory levels
Speaker 1: at the end retailer creep lower, you're looking at the
Speaker 1: potential for it not only higher pricing going into the
Speaker 1: back half of the year, but also a restock on
Speaker 1: the volume front. So it's a really interesting one. So
Speaker 1: the big inventory glut that a lot of people were predicting,
Speaker 1: you don't see evidence of that in the current earnings results.
Speaker 1: So there's some inventory glut, particularly with companies like Target. Target,
Speaker 1: it's a POV world. I don't know where they're living
Speaker 1: right now. I mean when Walmart is pushing price over
Speaker 1: ticket on their tickets and having lower foot traffic, that
Speaker 1: to me is indicative of something being very wrong with Target.
Speaker 1: And then you go to something you know you kind
Speaker 1: of want to check to be clear, because Target is
Speaker 1: not raising prices right, Targets not raising prices, and they're
Speaker 1: not getting the mixshift that Walmart might be might be
Speaker 1: seeing in a meaningful way. They don't have traffic and
Speaker 1: they don't have pricing way. But this is interesting because
Speaker 1: then you get Contour, which owns Lee and Wrangler, Right, Okay,
Speaker 1: if you think it's something to do with clothing, if
Speaker 1: you think it's something to do with merchandising, I mean
Speaker 1: Wrangler and Lee put up a seven percent revenue game
Speaker 1: for the quarter. It's it's a really interesting kind of
Speaker 1: And then there's Dollar Tree. I mean, dollar Tree had
Speaker 1: lower number of transactions at a higher price. I'm wearing
Speaker 1: Wranglers right now, by the way, M sorry, I want
Speaker 1: I need to actually two things. I feel like this
Speaker 1: is the point to interject and point out that an
Speaker 1: odd lots regular guest as Abella Vapor is out with
Speaker 1: like a new paper on inflation, and she talks a
Speaker 1: lot about some of these exact same things. Everyone should
Speaker 1: go read it, including Also there was a PepsiCo call
Speaker 1: that she cites the same thing where the Andless were like,
Speaker 1: but you're not going to go back to like cutting
Speaker 1: cutting prices, right Like at the end of all this,
Speaker 1: are they our price is gonna like mellow out or
Speaker 1: you're gonna go low in the management you know, the
Speaker 1: way they phrased it, according to her is like, because
Speaker 1: we are a very innovative company, we do not feel
Speaker 1: like we're going to have to compete on price. Yeah,
Speaker 1: on Walmart target specifically, can you talk about like, you know,
Speaker 1: Walmart is probably pretty great proxy for aspect. What is
Speaker 1: Walmart doing specifically? What is their strategy and how much
Speaker 1: does it deviate from the everyday low prices which I
Speaker 1: sort of thought of as Walmart's calling card for the
Speaker 1: last thirty years or whatever. Yeah, what is Walmart's strategy?
Speaker 1: Walmart strategy, it's being at a lower price point, then
Speaker 1: call it target and the interesting part there is that
Speaker 1: there's they have a significant grocery business, which is also meaningful,
Speaker 1: and they've done a very good job on that front,
Speaker 1: and that's where a significant amount of their price gains
Speaker 1: are happening. Right. They don't have a significant amount of
Speaker 1: traffic going up, but they do have a significant amount
Speaker 1: of pricing coming through the system, and a lot of
Speaker 1: that is food inflation. And Target does have grocery at
Speaker 1: least some of them do, but they simply haven't seen
Speaker 1: the consumer going there to shop for groceries. And you know,
Speaker 1: Kroger came out and you know they're they're doing well
Speaker 1: on the grocery front, and so it's it's very much
Speaker 1: a grocery and higher turnover type world which Walmart dominates
Speaker 1: over Target. So broadly, POV is intact consumers are not
Speaker 1: yet really pushing back against it, but maybe on the
Speaker 1: margins we've seen some adaptation, so I know, I think
Speaker 1: in like the recent minutes, they were talking a little
Speaker 1: bit about consumers maybe changing their preferences. And then we
Speaker 1: also have this explosion of private label goods, so companies
Speaker 1: like Walmart selling their own brand of groceries at lower
Speaker 1: price points than say I don't know Smuckers or Craft
Speaker 1: or whatever. To what degree could that start to impact
Speaker 1: the POV strategy. Private label is to a significant degree
Speaker 1: part of POV right. It gives the consumer the second option.
Speaker 1: And when you begin to see Kroger I think their
Speaker 1: their own brand, the hour brands was plus ten percent
Speaker 1: in the latest quarter, you are beginning to see private
Speaker 1: label take some share, but it's not taking enough share
Speaker 1: to matter against the pricing power kind of to your
Speaker 1: to your point on Smuckers, I mean, they guided to
Speaker 1: six percent net sales, eight percent organic, and then in
Speaker 1: the fine print said, listen, we understand that there's going
Speaker 1: to be some volume down, so we're it's going that's
Speaker 1: going to be all price. And that was for twenty
Speaker 1: twenty three. Wait, sorry, explained that last part again. What
Speaker 1: was so this was Smuckers, Okay, right, So it's like
Speaker 1: Jeff peanut Butter, that type of deal, you know. And
Speaker 1: what's interesting about them is they said six percent net
Speaker 1: sales growth, eight percent organic, all of that's going to
Speaker 1: be pricing, and we understand that there will be an
Speaker 1: elasticity on the volume front. So if you get what
Speaker 1: they're willing to take that because they if they could,
Speaker 1: If they could push eight percent price increase and only
Speaker 1: a two percent volume did increase, that's a good trade.
Speaker 1: It's a great trade. How does that How does that
Speaker 1: feed into wages? Because I imagine if POV is a
Speaker 1: dominant strategy and you're maybe producing less but selling it
Speaker 1: for more than maybe you cut you start to cut
Speaker 1: back on labor expenses, or maybe you know you have
Speaker 1: a slightly smaller workforce and you're paying them slightly more.
Speaker 1: I don't know. Yeah, it seems like there's a lot
Speaker 1: of moving parts there. There's a lot of moving parts.
Speaker 1: I would point to Walmart going to fourteen dollars, right,
Speaker 1: that's that's basically the minimum wage of the US being
Speaker 1: raised to fourteen dollars. I mean, it's it's the starting
Speaker 1: wages now fourteen and there'll be some ketch up there
Speaker 1: and Lows had to invest in their frontline workers heavily.
Speaker 1: Home Depot did as well. Places like there's Tractors Supply,
Speaker 1: which which is one of the most interesting retailers on
Speaker 1: the plane. Tell us why you know what I've actually
Speaker 1: in my mind and the backlog, I've like we should
Speaker 1: do a tractor Supply episode because that's one of those
Speaker 1: names that probably a lot of people don't know that company,
Speaker 1: but I think like the long term stock chart on
Speaker 1: that is like insane, right, it's like one of the
Speaker 1: big sac winners of the last decade, or it's it's
Speaker 1: been a phenomenal secular winner. Can we take a minute
Speaker 1: to just have like a little one minute discuss what
Speaker 1: is traction? So you know they sell live chickens there,
Speaker 1: or at least the one close to meet us. So
Speaker 1: in nineteen ninety seven this was a one dollar stock
Speaker 1: and now it's a two hundred and twenty six stocks
Speaker 1: So nice, nice couple of nice three decades. But what
Speaker 1: is the story there? So the story there is well,
Speaker 1: I mean from nineteen eighty seven, it's been store growth.
Speaker 1: It's a phenomenal management team. Listening to the listening to
Speaker 1: those calls, reading the transcripts, it's it's simply a phenomenal
Speaker 1: management team. And what they you know, what they sell
Speaker 1: are everything from grain and things that you grain to
Speaker 1: feed animals, different farm tool equipment. Hey, baby checks, we
Speaker 1: gotta do a tractor. You know. Who we should have on, Tracy?
Speaker 1: I thought that would be good who we've had on
Speaker 1: to talk about tobacco in the tempt Oh yeah, he'd
Speaker 1: be great. He knows all the real American company like anyway, Sorry,
Speaker 1: keep going, keep going. But Tractor Supply one pace of
Speaker 1: fair wage and has invested all along with their employees,
Speaker 1: and two has had spectacular same store sales growth through
Speaker 1: the inflation. Right, they can pass inflation on. Right. It's
Speaker 1: known to farmers that there's inflation, and people communities that
Speaker 1: there's inflation, and farmers are doing in rural communities are
Speaker 1: doing rather well in this environment. I mean. One of
Speaker 1: the one of the ways I will know price over
Speaker 1: volume is breaking is when Bucky's stops advertising that the
Speaker 1: its an assistant general manager in at a very large
Speaker 1: gasoline station can make two hundred and twenty five thousand
Speaker 1: dollars a year plus benefits. Is that true? It's a
Speaker 1: sign that sits out in front of every Buckey store
Speaker 1: I've been too over the last two That's not I
Speaker 1: But I'll just say both of my kids, one of
Speaker 1: their first ever like diaper changes was in a Buckey's bathroom,
Speaker 1: and they're famously clean, and so I have a very
Speaker 1: big affinity Torque. These are odd lots tips change your
Speaker 1: kids diapers at a bucket for lower prices. They do
Speaker 1: have the cleanest bathrooms in the world, and they're that's
Speaker 1: like their calling card, Like everyone knows you get a
Speaker 1: really clean bathroom in bucket. Sam, you actually mentioned something
Speaker 1: that I wanted to ask you, which is what would
Speaker 1: make you start to think or suspect that the POV
Speaker 1: strategy is starting to fall apart. Sure, so, kind of
Speaker 1: going back to the way that I break it down
Speaker 1: into good services and leisure, I would like to see
Speaker 1: leisure break first, right, that's really when when people stop
Speaker 1: spending the incremental money on a very expensive Norwegian cruise
Speaker 1: or more expensive airline tickets. When that begins to break down,
Speaker 1: I think you begin to have at least a signal
Speaker 1: that the consumer is no longer able to take those
Speaker 1: price increases, and leisure comes first. Services, second, goods last. Right,
Speaker 1: you have to buy peanut butter, at least I do,
Speaker 1: or my daughter will have a problem. But you have
Speaker 1: to buy those staples. So that's the called the cadence
Speaker 1: of POV that I'm looking for another rural stock. I'm
Speaker 1: a big fan of looking at Middle America as a
Speaker 1: signal for how the economy's doing. Is Player's Industries. You know,
Speaker 1: they make snowmobiles, snowmobiles in side by sides, And one
Speaker 1: of the things that they have said is where you know,
Speaker 1: we're seeing two things. One, we're seeing volumes not necessarily
Speaker 1: be that great, but we are seeing pricing go up, right,
Speaker 1: So they're pushing price, and that's that's working on rural
Speaker 1: America pretty steadily. So I want to see things like
Speaker 1: that begin to no longer happen. And when that begins
Speaker 1: to break down, that's kind of the first signal that
Speaker 1: the consumers no longer able to take the pricing on,
Speaker 1: you know, going out to Cracker Barrel or going to
Speaker 1: Texas Roadhouse Olive Garden and they're expensive lettuce. That was
Speaker 1: actually one of the best comments I heard first of all.
Speaker 1: That lettuce was a I think it was a two
Speaker 1: point five million dollar headwind wow on the cost because
Speaker 1: they have unlimited soup and salad and lettuce is really expensive. Wait,
Speaker 1: Olive Garden does Yeah, do you remember the famous starboard
Speaker 1: and they're like they're like put some salt in the
Speaker 1: water and pulled up with the unlimited red sticks. Didn't
Speaker 1: you write a bag like a ripos to that that
Speaker 1: was a great that was just like some amazing content. Wait,
Speaker 1: so so you were talking Sam, you were talking about
Speaker 1: the cadence of people pushing back against um price. And
Speaker 1: so I'm assuming if people start to push back first
Speaker 1: against leisure activities and then maybe you know, non essential
Speaker 1: goods like a snowmobile, would that be like a signal
Speaker 1: or a clue that maybe we're heading towards a soft landing. Well,
Speaker 1: that depends how the FED reacts, right, because it's going
Speaker 1: to be very difficult in my mind for the FOMC
Speaker 1: to get off of we call it twenty five's for
Speaker 1: life until they begin to actually see corporations decelerate pricing.
Speaker 1: And when Smucker says for twenty twenty three it's eight percent,
Speaker 1: that is not good for the f o MC. When
Speaker 1: Cracker barrels saying wage increases are five to six percent,
Speaker 1: that's not good for the FOMC. You know, one is
Speaker 1: a consumer good and one is Middle America getting a
Speaker 1: pay raise. When Walmart's raising their minimum wage, again, that's
Speaker 1: a pretty big deal when it comes to consumption on
Speaker 1: the lower end. So do I think it pushes us
Speaker 1: to closer to a soft discre landing. I would argue
Speaker 1: it is going to be rather easy to acts denly
Speaker 1: read too much into CPI decelerating simply because you're going
Speaker 1: to have used autos, which I don't know, you don't consume.
Speaker 1: You used auto all the time, you do consume groceries
Speaker 1: all the time. It's going to be easy to read
Speaker 1: in a little too much to CPI and PC readings
Speaker 1: over the next few months and be really excited that
Speaker 1: maybe the FED doesn't have to go to five fifty five,
Speaker 1: and then all of a sudden get caught a little
Speaker 1: off guard when corporations continue to push pricing trying to
Speaker 1: find the elasticity on their merchant. I have just like
Speaker 1: two more questions, but you know, I just I wonder.
Speaker 1: You know, we don't get conference call transcripts obviously for
Speaker 1: privately held companies, but you know, it does seem as
Speaker 1: though there are differences in how companies that have to
Speaker 1: be accountable to shareholders every quarter and answer all street
Speaker 1: analyst questions every quarter behave We did an episode recently
Speaker 1: with an investor in Arizona Land, and he was saying
Speaker 1: that the privately held homebuilders feel more comfortable holding unused
Speaker 1: land on their balance sheets than the publicly held ones
Speaker 1: that have to like again answer it's like, why you're
Speaker 1: holding so much land? Don't you remember the Great Financial Crisis.
Speaker 1: I think there have been stories in the oil patch
Speaker 1: as well where some of the privately held drillers are
Speaker 1: a little bit more comfortable expanding in part because you know, again,
Speaker 1: and this is like a Jeff Curry Goldman thing, the
Speaker 1: exact profitability over volume, the end of volumetric expansion is
Speaker 1: in something investors want to see. Do you have any
Speaker 1: reason to believe that some of these dynamics that you
Speaker 1: describe may be different and that maybe some privately held
Speaker 1: companies see an opportunity for view to take advantage of
Speaker 1: when they're publicly traded counterparts are doing pov oh trying
Speaker 1: to think of a good example of that, and you know,
Speaker 1: call it the oil patch being in Houston and saying
Speaker 1: I talked to a significant number of these smaller operators.
Speaker 1: It's kind of two things are playing into it. One,
Speaker 1: they're feeling cost pressures that are far higher than they're
Speaker 1: publicly traded peers, So their ability to do volume over
Speaker 1: price is very very limited at the moment, because you know,
Speaker 1: they're publicly traded piers have far more powered power and scale.
Speaker 1: It's it's somewhat different for the private frackers. They're they're
Speaker 1: doing a little bit more volume on call it the margin,
Speaker 1: but not much and so it's it's a much different
Speaker 1: i would say mentality in the oil patch even with
Speaker 1: the private but the private guys it's much more of
Speaker 1: a cost issue than it is a an attempt to
Speaker 1: do the volume. I'm sure they would. I mean, it's
Speaker 1: this is this is Texas right. Drill drill, drill. It's
Speaker 1: pretty straightforward. When it comes to consumer goods, it's it's
Speaker 1: difficult to find any that call it have reliable size. Yeah,
Speaker 1: you know, you can kind of look at some of
Speaker 1: the some of the companies that are growing pretty quickly
Speaker 1: in the private markets, but it's difficult to parse out
Speaker 1: exactly whether they're going for volume or if it's just
Speaker 1: the trend is their friend? And I just have one
Speaker 1: last question, but it sort of dawned on me. You know,
Speaker 1: did we did Odd Lodge help contribute to just thinking
Speaker 1: about that? With all our supply chain acts give you
Speaker 1: for like, the real story is that companies use news
Speaker 1: about disruptions, about avium, flu about ports, about semiconductor shortages
Speaker 1: about wings chicken prices as excuses to raise prices rather
Speaker 1: than like real like they're just like, okay, we spent
Speaker 1: three years talking about all these things, and then the
Speaker 1: company is like, thank you lots, please keep doing stories
Speaker 1: about disruptions so that we can do the project power,
Speaker 1: Like is it our Is it all our fault? I
Speaker 1: wouldn't say it's all I mean there's there's blame to
Speaker 1: go around. But there is an interesting part of that
Speaker 1: to that egg story. You know, going into Christmas, the
Speaker 1: USDA does this weird It does a whole bunch of
Speaker 1: weird stuff. But one of the best reports out there
Speaker 1: was a post Christmas one where it was the largest
Speaker 1: they call it disappearing of eggs on record that they
Speaker 1: had done per person or per household. I think it
Speaker 1: was eight eggs per household during Christmas. So even with
Speaker 1: the higher pricing, volumes were up. So it's that's just
Speaker 1: an interesting side note, and I think a lot of
Speaker 1: it kind of going back to one Tracy's points earlier
Speaker 1: was we hadn't really been able to get reliably together
Speaker 1: for Christmas. Yeah, you know, Kron was you know, a
Speaker 1: year ago, so we hadn't been reliably able to get
Speaker 1: together for Christmas, so we went big on baking this
Speaker 1: time around. We were excited to be together again. Tracy baked,
Speaker 1: I did. I baked cookies, sugar cookies. Oh my god,
Speaker 1: they took me forever. I'm sorry. I have one more question,
Speaker 1: in an attempt to deflect some of the blame away
Speaker 1: from our thoughts. What are companies actually doing with the
Speaker 1: additional money? Is it actually going to pay off higher
Speaker 1: input costs and maybe some wage raises like we've been discussing,
Speaker 1: or is it being returned to shareholders or investment like
Speaker 1: what are you seeing all of the above? It is.
Speaker 1: It's a combination of needing to offset the input cost
Speaker 1: increases they're non trivial obviously, some labor and better return
Speaker 1: for shareholders dividends, etc. There's a great chart from John
Speaker 1: Deere on basically the revenue gain off of the price
Speaker 1: which is most of it volume which is very very little,
Speaker 1: if any, and then the material costs, labor costs, and
Speaker 1: the return to shareholders and the offset to the input
Speaker 1: cost increases is one hundred and thirty five. So it's
Speaker 1: a very interesting Again, that's basically a duopoly in the US,
Speaker 1: but it's a very interesting study and there's enough to
Speaker 1: go around to cover all of it. All right, Sam,
Speaker 1: thank you so much for coming on all thoughts. That
Speaker 1: was fantastic, even though it did lead to the realization
Speaker 1: that we are part of the problem. I feel like
Speaker 1: the light bulb must have gone up like a big action.
Speaker 1: I'm so sorry we did all news episode. Yeah, thanks
Speaker 1: so thank you. Joe. I think we should call this
Speaker 1: excuse inflation. I like excuse inflation, and you're right, the
Speaker 1: baker said it. He yeah, that's all he said. He's
Speaker 1: like even in the past, because this was even his
Speaker 1: point when he said it was like even like prior
Speaker 1: to the pandemic, etc. When he, as a baker was
Speaker 1: thinking about when to raise prices, which he wanted to
Speaker 1: do every year. The opportunities best arised when something related
Speaker 1: like oh a flowered you know, disruption inflame or disruption
Speaker 1: and eggs were in the news. It's like, Okay, this
Speaker 1: is the moment that you can raise prices without consumers
Speaker 1: pushing back too much. And then the last three years
Speaker 1: have been nothing but laf destructions. Yeah, lallapaloozo excuses. That's right,
Speaker 1: But obviously it does raise the question of what can
Speaker 1: break the cycle, and it does seem you know, listening
Speaker 1: to Sam lay out some of the comments that we've
Speaker 1: seen on earnings calls, it does seem incredibly sticky. And
Speaker 1: once you have that pricing power and you've managed to
Speaker 1: push through the price, it feels like there's just very
Speaker 1: little incentive to reverse, Like why would you if your PEPSI,
Speaker 1: why would you start lowering prices? And you know, the
Speaker 1: thing is and obviously the irony to me, which I think,
Speaker 1: you know, people talk about greed and greed flation right
Speaker 1: and it's like they don't need to be raising prices,
Speaker 1: they're just expanding their margins. The irony to me is
Speaker 1: that as long as companies are in this greed flation equilibrium,
Speaker 1: like a sort of corner of the payoff game theory matrix,
Speaker 1: the stock prices are not going to do well because
Speaker 1: this will keep the FED on the twenty five forever standpoint.
Speaker 1: There's sort of like keeping financial conditions from getting too loose.
Speaker 1: So the irony is the companies would probably wish they
Speaker 1: could get out of this part of the matrix because
Speaker 1: management is mostly going to have their wealth tied to
Speaker 1: the stock rev than anything else, So It's like a
Speaker 1: pretty undesirable state for I think everyone right now, what
Speaker 1: if higher interest rates which increase interest rate expenses also
Speaker 1: end up fueling the POV strategy because you have to
Speaker 1: make that up in one way or another. We gotta have,
Speaker 1: we gotta Warren Mosler to talk about, we actually do it.
Speaker 1: This is definitely an episode that I think has me
Speaker 1: thinking about, like eight other episodes. Let's get Larry Hampton
Speaker 1: on to talk about tractor supply though, yeah, okay, all right, um,
Speaker 1: and chicken wings obviously, okay, shall we leave it there
Speaker 1: for now? Leave it there? This has been another episode
Speaker 1: of the Odd Lots podcast. I'm Tracy Alloway. You can
Speaker 1: follow me on Twitter at Tracy Alloway, and I'm Joe Wishal.
Speaker 1: You can follow me on Twitter at the Stalwart. Follow
Speaker 1: our guests Samuel Rimes. He's at Samuel Rimes. Follow our
Speaker 1: producers Kermen Rodriguez at Kerman Arman and Dashel Bennett at dashbot,
Speaker 1: and check out all of our podcasts at Bloomberg under
Speaker 1: the handle at podcasts, and for more odd Lots content,
Speaker 1: go to Bloomberg dot com slash odd Lots, where we
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Speaker 1: comes out every Friday. Go there and we sign up.
Speaker 1: Thanks for listening.