Wal-Mart released its second quarter earnings release earlier this morning.  The release highlighted some common themes as well as indications regarding recent management focus.

Top-line trends for the company continued, indicating a good quarter.  These top-line trends include significant growth in earnings per share of 12% year on year.  Sales for the quarter increased 5.5% sequentially, or 2.8% year on year.  Overall, a good quarter for the company, with results coming in at the top-end of the consensus range.

The downside related to Wal-Mart’s continued deterioration of its U.S. stores.  Sales declined for its U.S. stores for the 9^th consecutive quarter.  Falling close to 1% year on year, sales for Wal-Mart’s U.S. stores decreased at a higher rate than Wall Street estimates.  With Wall Street hoping to see signs of a revenue correction, the company’s U.S. stores remain in neutral (for more detail on challenges for Wal-Mart’s U.S. Stores, please see an earlier edition of the Barometer: Ground Hog Edition). Within its U.S. stores, sales of grocery items increased slightly, likely due to inflation and price increases the industry has experienced in the last few months.  Sales in other categories declined.

Non-U.S. growth continued to carry a disproportionate load for the company, with sales increasing 11%.  With 39% of revenues outside of the U.S., non-domestic growth has been the reason for the company’s good performance.  Yet, there are no indications the company has made any progress on turning around its U.S. business.  Management raised its earnings guidance for the remaining portion of the fiscal year.  This indicates management’s confidence in their ability to grow internationally and continue to take costs out domestically.  The company’s ability to grow earnings faster than revenue potentially indicates a heightened focus on costs in its domestic business as a stop-gap measure.  Management’s confidence in their ability to decrease costs must be high, given the economic head winds and uncertainty facing its domestic business.

Wal-Mart’s growth picture in the U.S. remains clouded.  The company seems to be experimenting on all fronts.  Smaller format stores are beginning to open.  The company recently launched a video streaming service to gain additional revenue.  After nine consecutive quarters, management has yet to show they are translating into any change in momentum and any reversal in the fortunes of its U.S. stores.

Shareholder pressure may start growing for more drastic actions.  In upstream industries, the trend is clear that getting smaller is perceived as the better strategic course.  That trend cemented itself with Kraft’s recent decision to split itself in two.  For Kraft, one business will now be the cash cow, focused on stable, incremental growth in mature, developed markets.  Kraft’s other business will focus on the fast growth of snacks and emerging markets.   This trend also represents a new models.  Large consumer package goods companies continue to take a portfolio approach, using cash from low growth, developed markets to fund its expansion elsewhere.  Wal-Mart has clearly been using a similar approach to fund its international expansion.  The Kraft decision represents a different, alternative path.

Will there be pressure to apply this new model downstream in retail?  With the clock ticking and more time expiring, management is likely focused on not finding out the answer to this question.

Editor’s Note – please see the Wal-Mart Barometer Page for past analysis of Wal-Mart’s financial releases and background on company performance.

June, 2011

Like I suspect many of you, economic news passes across my web screen by the second.  When the balance sheet of Greece hiccups, I hear it immediately sitting in Chicago.  One of the common threads in these stories is the engine of small business and entrepreneurship that will power the recovery.  More growth and innovation come from smaller companies. Small companies hire at a faster rate than big ones.  A strong fact base has shown repeatedly this to be true.  The growth equation appears to be that innovators create and grow new ideas that big companies buy in order to scale. The economic growth engine speeds up when this is repeated over and over again.

A wonderful example on the front end of this growth cycle has been Pure Digital.  In late 2007, the company launched a product called Flip Video, which quickly attained icon status.  An elegant example of designed-down innovation, Pure Digital stripped out the complexities of the modern day camcorder, added a slot for a 9 Volt battery and a big red button for recording.  Obvious now in hindsight, their innovation was not a new invention or anything added, but the genius of simplicity by taking things away.  The product took off.  Consumers tired of wires, too many buttons, and recharging lithium batteries snapped up the new cameras in mass.  With one product, a stagnant category was revitalized and a new market was born.  If you have one, you likely love it.  In May, 2009, after less than 2 years of incredible success, Cisco bought Pure Digital for $590 million.  Cisco’s biggest acquisition in a consumer market, the acquisition was heralded as a game changer for the company’s future.  With its purchase, Cisco inherited a mass market product with industry leading position.  Just over 2 years later, Cisco bagged the whole idea and announced this past April they were shutting the business down.

So what happened?  Well, Cisco has been in the news with unfavorable stories in the past year about its strategy.  The company’s skeptics began to question its voracious appetite for acquisitions, buying more than 100 companies since 2008.  This is a far cry from the stories written a few years prior when Cisco was often looked upon as the marquee company for successful acquisitions.  Yet, in 2011, as the company’s financial performance began the wane, something needed to give…and perhaps the tax write offs from recent acquisitions like Pure Digital were too much a temptation to resist.  That $590 million will now be amortized along with a new strategy containing words like “focus” and “core business.”

Perhaps shareholders were best served with this decision.  But still, the decision nags at me.  Didn’t this small business with a few people create an iconic brand and several hundred jobs along the way?  Of course, all the major camcorder manufacturers have launched their version of the Flip Video and you can argue that the company’s legacy, along with new fuel to the economy, can be found there.  But it still feels a bit like a squandered opportunity.

Successful acquisitions are always a challenge and a roll of the dice.  The mixture of start up moxie with big company conservatism can make these efforts even harder.  Subjugating the priorities of the acquired brand to larger corporate priorities means original ambitions can get lost.   The acquirer measures results differently as well.  In some cases, the technology is the acquisition target more than a company’s products.  Taking out an upstart competitor is another potential objective in the acquisition game.

Yet this example is so striking because of the value lost.  It is an example that shows the growth equation can be broken.  Those companies that buy into the equation, unfortunately, have no obligations to see it through.  As we collectively look for answers to drive economic recovery, we are under no obligation to solely rely on a growth equation that can so easily be broken.

Wal-Mart released its latest quarterly earnings this past week.  The release cements a perception of weakness now held by Wall Street about the ultimate main street stock.  “For every positive facet of the quarter, there seemed to be twice as many negatives,” one analyst reported to Barron’s.  Ouch.

Times sure have changed.  On the front side of the global recession, Wal-Mart’s earnings, quarter after quarter, demonstrated the company to be a juggernaut with flawless management execution.  Sales growth consistently beat estimates, margins always improved, and efficiencies continued step-level improvement.  As one example, the company’s earnings release at this time last year demonstrated a cash flow increase of $2.5 Billion (see earlier edition of Wal-Mart Barometer for details).

That was the old model.  The new model shows cracks, with the biggest one being the deteriorating growth of its U.S. stores.  Wal-Mart’s latest release marked the eighth straight quarter of sales declines in U.S. same store sales.  The same store sales decline of 1.1% came in below company expectations set by the company.  It has been decades since the company has been in this position, facing increasingly skeptical investors on its heels.  The core explanation for these results is the stretched economic state of their consumers.  With gas prices rises and economic uncertainty high, management cited these broader reasons for their predicament.  Yet other retailers, such as Target, are not suffering as much.  This is leading some analysts to conclude that they are losing market share in a time when low income consumers should be viewing Wal-Mart as a refuge.

The company’s success abroad helped it once again top overall expectations.  The growth outside the U.S. remains blockbuster.  The company’s market growth priority continues to be international markets.  But with much smaller margin contribution internationally, Wal-Mart’s share price will continue to suffer as a premium is put on restoring the U.S. picture to maintain historical margins.  The model outlined to Wall Street includes outsized international growth funded by U.S. profitability (for details, see an earlier edition of the Wal-Mart Barometer).  Without those domestic margin levels, the internal profits to fund international growth is depleted.  The company’s debt levels are at its highest levels in at least four years.  More debt will likely be needed as long as the current U.S. sales picture continues.

Over the past year, the company threw out the strategy of consolidating the number of items it carries, veering away from every day low price, and revamping stores to attract more upscale consumers.  That strategy was deemed a failure and is gone.  Many of the company’s partners and consumers rejected it.  What is not clear is a coherent strategy to take its place and repair the damage.  There is certainly a lot of experimentation going on.  The company is experimenting with its online business.  It is retrenching to recapture its core base of low income consumers by tailoring its packaging at lower price points.  It is looking to include tablets and other electronics into its assortment to spur demand.  What is not yet clear to the market is a more coherent strategy that combines these initiatives into a defined commitment to improve performance.  It does not appear that management is offering one.  They are likely the most challenged by the law of large numbers.  It could simply be that the Wal-Mart store has simply reached a saturation point, where any significant change will not contribute enough to return the company to U.S. growth.  Perhaps that is why management is considering more formats as the ultimate answer.

The challenge of returning U.S. store growth is daunting due to Wal-Mart’s size.  Recapturing growth will take a clearer strategy, a continued recovering economic picture, and more than a little luck.

May 13, 2011

I walked in on a Sunday evening to a conference room in a Chicago hotel. In normal times for me, such a setting would mean the liberal use of power point charts with an agenda covering a hot new product or the latest corporate initiative.  This night would prove different.

Seated amidst the many chairs were two men I instantly recognized, but had never met.  Their faces are permanently imprinted in my memory long ago after years of study.  It’s been fifty years since their emergence on the national spotlight, a moment in time during the civil rights era that commanded the nation’s attention.  Fifty years ago this past week these two men, James Lawson and C.T. Vivian – joined others on a heroic campaign toward desegregation, called the Freedom Rides.  Supported by previous Supreme Court decisions, hundreds participated by riding Greyhound buses across state lines and forcing integration at bus stations across the southern United States.  Starting out with little fanfare and little conflict, troubling signs soon developed.  During a celebration chaired by Dr. Martin Luther King in Atlanta, the Klan sent word they would be waiting across the border in Alabama.  Dr. King suggested prudence and patience.  The Attorney General at the time, Robert Kennedy, warned of the violence that awaiting them. But the volunteers – mostly students at the time – went on.   They had been trained well by Mr. Lawson, a minister who studied the ways of Ghandi on a mission trip to India years earlier.  Buoyed by idealism and cause, they went on.  They paid a price for doing so, including beatings in Selma and a bus fire-bombed in Anniston.  And then jail, intimidation, and depravation at the now legendary prison in Parchman Penitentary, Mississippi.  Indeed, a multitude of sacrifice that helped change the course of humanity.

And so here we were, these two gentlemen and I, now joined by others who were riders on those buses.  Diane Nash was there, a legend to those in the movement who went on to a regular and relatively obscure life in Chicago.  We sang, prayed to our gods and, most of all, listened to those that came to remember.   Their reflections evolved to a discussion on action and culture.  Their memories are joyful ones for taking the first step by acting, and then persevering by offering an alternative to a culture become accustomed to the perversity of racism.  I was struck by how well most of them have aged.  All of them now in the twilight of their lives, there was a gracefulness to each of them.  They were grateful to – in that brief moment – to provide an example of racial harmony in the most trying of circumstances.  They were grateful to have chosen to make a sacrifice that ultimately proved to help better those around them.  They knew their place in the world, speaking of the linkages between their experience in sacrificial protest to those later in civil rights movement, and then those striving for democracy in present-day Egypt and elsewhere.  In so many words, their message was the formula for changing a culture for the better starts with individual choice, progressing to daily example, multiplied over and over.

After the excitement, tumult, and drama of the Freedom Rides, these volunteers disbanded and moved on to pursue life’s journey in more normal times.  Ministers, teachers, and politicians became their callings.  With a smile, they looked back with satisfaction.  And I looked forward, thinking about what their example means for the rest of us, and myself.  I spoke with one freedom rider about my desire to bring my young son in the hopes of imparting my admiration of the Freedom Riders to him, but instead blaming the school night and homework for his absence.  Removing a button commemorating the event from his lapel, he put it in my hand with the suggestion to give it to my son.  Indeed, both of us will be watching PBS next week to see a new documentary that tells the story of these ordinary people that came together in a moment in time that changed the future.   With that, their example lives on.

April 18, 2011

Border’s Bookstore is one of the more recent and highest profile casualties of recession, going into bankruptcy and closing down most of its store fronts.   Accompanying the closure is a lot of hype – ironically unmatched by the company when they were a going concern – about fire sale pricing and store liquidations.  These declarations of once in a lifetime bargains are attracting the masses.

This event has been a long time coming.  Remember the phrase “Amazoned” in the late 1990’s? The catchphrase entered the corporate mainstream as an attempt to characterize the inevitable decline of brick and mortal business.  Meant for general consumption, it bore specific relevance to the 2 big brick and mortal bookstore juggernauts of the day; Border’s and its chief competitor Barnes & Noble.  Leading up to this period, both chains experienced explosive growth as they expanded across the U.S. consolidating an industry.  The conversation around the water cooler those days – sometimes with power points brought along for added credibility – was that these two chains were dead men walking.  It took longer than expected and now has come in full force.

So, salivating at the prospects, my family and I recently jumped in the car and headed for the nearest Border’s Bookstore set to close.  We all thought it would be like a hunting trip at the library, except this time we get to keep the spoils for pennies on the dollar.  Perhaps our visit would be just like the old times of browsing the shelves and finding that one gem of a book that lifts the spirit.   It didn’t exactly turn out that way.  Instead of a buying spree, our experience was more like a funeral for the past.  Our visit was similar to a wake for a distant relative whom we were once close to but had lost touch with over the past several years.  Oh sure, we recognized the store and there were the familiar memories once again in front of our eyes.  Our reaction to the best seller shelf was a bit awkward, not having access to what others thought of the read through a click of the mouse.  Huge signs gave testament to the large discounts.  These discounts melted away through a quick price comparison on the phone.

We continued to stumble over the old ways of doing things and, like some older relatives, instantly recognized the attempts to stay young that simply translated into a message of increased age.  Do we really need this movie on DVD?  The 50% off did not seem like a bargain for the choice movie on DVD, as our own DVD player starts to collect more and more dust.  Curious about the clearance rack, I asked myself, “What is this thing called the Kobo?,”  With further exploration, I came to the conclusion that it was Border’s version of the Kindle.  Or the iPad.  Or the Nook.   Additional merchandise as we walked through the aisles seemed out of place.  No doubt that crafts, scrapbooking, gift cards are all worthy categories marked by recent growth.  But these items aren’t destination items for Border’s consumer. There are other places, like Michaels stores, for those.  To cross-sell at point of purchase, some orientation and instruction is necessary.  Simply stacking such items without some orientation – are these the best items?  What is this stuff used for?  – means most folks continued walking as these items are not “destination” items for the fire sale.  Our old friend was dabbling in new hobbies, none of which seemed to take hold with passion and commitment.

So we kept walking and waited at the checkout.  Our family hunt netted a few items, mostly books on discount.  We journeyed home feeling a bit unsatisfied compared with the fervor that brought us there. It was visit with the promise of rekindling the past, only to realize that you can’t go back.

Bill Gates has a saying that came into mind as we drove away. “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.”  Indeed, Border’s demise took longer than the prognosticators predicted.  It did not happen overnight, but when it came, it happened swiftly and was total.  An indication of the complete transformation in bookselling is that no one wanted to buy the company.  Barnes & Noble has more than enough on its hands dealing with its own problematic and unprofitable real estate and did not see any advantage of inheriting more.

Longer than expected, we reintroduced ourselves to an old friend, realized how long it had been since we had been in touch, and saw that times had passed him by.

May 24, 2010

Wal-Mart continues to act as a barometer for the larger economy.  As the largest retailer in the world, its business results reflect an early view of future trends taking hold.  For leaders, these results can be a window in which successful strategies can be viewed.  As an investor, these results can act as both warnings and lights toward greater success.   Just as a the diversified conglomerate GE is often looked at as a barometer regarding infrastructure and business to business spending, Wal-Mart can be viewed in the same way with an eye towards the end consumer.

In February, on this blog, Wal-Mart’s fourth quarter earnings results were reviewed.  In that review, three trends were identified that are taking hold globally (read the post by clicking here).   These trends included changing consumer purchasing behavior, arguing that a segment of consumers felt renewed confidence to begin trading up once more.  These trends also included a heightened focus toward emerging markets as the growth platform in this recovery.  Wal-Mart’s 1Q earnings release occurred last week, so I took a look to see if the trends identified 3 months ago had strengthened as expected and to see what other trends could be emerging underneath the top-line earnings numbers.

Wal-Mart’s recent earnings strengthens the view that consumer behavior is indeed shifting.  Store traffic and same store sales for stores open at least a year in the United States continued to decline.  The decrease, at 1.2% year on year revenue, was double market expectations, illustrating that many consumers are increasingly taking their dollar elsewhere.  A Standard & Poor’s analyst captured the emerging consensus, “We expect U.S. comp-store sales growth to remain under pressure as consumers begin to trade up and take advantage of more convenient, but higher priced, competitors in a more stable economy.”

A heightened focus towards international markets also strengthened with first quarter results.  With US same store sales growth down more than 1%, Wal-Mart’s international division grew revenue by more than 20%.  Taking currency into account, this equated to a constant currency store growth of about 9%. Once again, China and Brazil were singled out as growth catalysts.  The growth rate in emerging markets for Wal-Mart continues to show a solid track record.  In that environment, capital investment and strategic focus will continue to be directed toward these markets, and away from what appears to be an uncertain environment in the United States.  For supply chains, this shift will be dramatic as emerging market supply chains will be reconfigured to serve domestic demand.

The third key trend identified in the fourth quarter, and validated last week, is Wal-Mart’s continued use of cost cutting as a competitive weapon.  On total sales growth of 5.9%, costs grew at 3.9%.  After each successive quarter, the economic recovery strategy being employed starts to emerge; continue to wring costs out, maintain position in the US, plow savings to grow the business in emerging markets.  The execution of this strategy continues.  A recent initiative recently became public that Wal-Mart is seeking to assume warehouse delivery responsibility in the US supply chain for many of its vendors.  Doing so, in essence taking over transportation responsibility up the supply chain, is directed toward lowering fuel costs and extracting more price cuts from its suppliers.

More confident consumers once again trading up, increased focus and capital moving into emerging markets, tightening cost controls in the US are the key strategies being used by Wal-Mart, visible in the earnings releases of the last two quarters.

There are more trends emerging.  In conjunction with its earnings release, Wal-Mart reduced its US sales forecast.  With the much higher than expected US sales declines, Wal-Mart’s view on US markets  is now uncertain.  Their response is to announce a new round of discounting to prop up demand in US stores.  Such discounting is now becoming widespread practice among leading grocery retailers seeking to hang on to their consumers.  With so many leading retailers engaging in this practice, inflationary fears in the broader US economy may quickly give way to industry fears of intensified price cutting.  This will have deep implications for the U.S. consumer goods market going forward.

May 19, 2010

Between dialogue and destabilization, Thailand opted for the latter.  In the last week, the Thai government’s tolerance ran out for the two month protests led by the group called the Red Shirts.  The costs of the protests were already high.  They had severely limited economic activity in the city, shutting down economic activity in the main commercial district of the city.  Negotiations started and then stalled between the two sides.  Then an army general, now one of the Red Shirt leaders and considered a turncoat by many, was shot during a press interview.  After that, the situation spiraled rapidly towards violence and government crackdown.  The city remains prone to violence, is under a curfew, and appears out of control in many places.  News reports of a grenade attack on a downtown luxury hotel serve as evidence that stability remains a future goal.  Amidst the crackdown, many protestors decided to burn what they could during retreat, including the building housing the Thai stock exchange.

The crisis is not yet over.  The prospects of both civil way and prolonged unrest remain.  Before order returns, continued violence may likely extend beyond Bangkok into the Northern, more rural part of the country.  As the crisis becomes contained, the true fallout will begin.

The economic fallout looks deep.  An export economy and regional center, Thailand’s continued stature as a distribution center and attractive place for investment is critical to its well-being.  That stature is now damaged.  Reforms after the 1997 financial crisis will prevent mass exodus of “hot money.”   There will be no melt down nor will there be a run on banks.  But risks with perhaps more lasting consequences are front and center.  Thailand’s leap into violence comes simultaneously with a global economic recovery.  Prior to the protests, Thailand was prepared to benefit through stronger exports and increased foreign investment as factories gear up to meet pent up demand.  That investment will likely go elsewhere.  Thailand’s Foreign Direct Investment (FDI) was already on the decrease.  According to the World Bank, FDI decreased from above $10 Billion in 2007 to just above $6 Billion this past year.  Thailand’s economic growth rate ranks below the regional average for the past 4 years (for more info, see a prior post on The Global Rail, Bangkok Blues).   Thailand may now watch the global economic recovery from the sidelines and its citizens will suffer as standard of living ebbs.  With it, threats that ongoing political strife will translate into alienation and violence will grow.

Thailand as a tourist destination will also no doubt take a hit.  Youtube videos will circulate, blogs will be read, and airline tickets will be canceled.

On its path towards restoration, Thailand’s existing institutions will not be able to call on the King.  In the past, it has been the King who played arbiter, moderating the warring factions of protestors, army, and civilian government. His stabilizing force has yet to emerge in this crisis.  In ill-health, the King may simply no longer have the capacity to do so.

Economic pressure will add to the growing pressure of the current government to act decisively and perhaps brutally.  Thailand’s elites, who often view the Red Shirts as criminals, will demand no less.  It will be a survival requirement of the current government.  Yet, the temptation to dismiss the last two months as a pointless uprising is a temptation to exchange short-term order for longer-term prosperity.  Closing the books on Red Shirt demands will catapult societal divisions into the underground.  If this occurs, Thailand’s road back to its place as a modern, cosmopolitan center will be much longer. The fabric of society has been torn, and efforts to repair it should be given equal emphasis as order is restored.

For links to the best ongoing coverage of the Thailand Crisis, click on this link.

May 12, 2010

Economic events in the past few weeks are spilling out into the streets.  It is happening across the globe, primarily in the matured economies of the developed world.  Faced with massive deficits growing higher, political leaders are attempting to regain control.  Simultaneously, the private sector economy continues to recovery and show signs of growth.  These two competing forces will predominate the economic landscape in the next generation.

This past week, there were numerous protests in Chicago about looming budget cuts in state government spending.  The results of these budget cuts will be felt directly by many, starting with public education.  Illinois’ current Governor, Pat Quinn, has proposed cutting the education budget by $1.3 Billion, which translates into about 1,300 less teachers in the education system statewide.  Last week, hundreds of students in the Chicago public school system walked out of classes in protest.  That same week, demonstrations also occurred protesting cuts to the state’s mental health budget, which would significantly curtail services in this area.  Illinois’ deficit is valued at over $12 Billion.

Meanwhile, half a world away, people died last week in Greece protesting a much more severe case of the same problem.  Look no further than the uprising in Greece to find evidence of the rage that can result when people face government retrenchment.  Crushed by debt, Greece’s financial problem runs the risk of spreading and, at its extreme, dissolution of the euro.  Paul Krugman covers the situation and its risks in a recent New York Times column.  Because of its debt situation, the citizens of Greece face higher taxes and a severe decrease to government services.  Suffice to say this situation is new to many.

Largely unnoticed, happening almost as a backdrop, were numerous signs that the economic recovery is gaining a much more solid footing.  Chief among this news was last week’s unemployment report showing an additional 290,000 added to payrolls in the last month, the most in four years.  Most of the jobs created were in the private sector.  There were other items of good news.  Last week, the Institute for Supply Management issued a report showing the manufacturing sector expanded for the ninth straight month and that the pace of economic growth was proceeding at a pace not seen since 2004.  Other reports issued in the week demonstrated continued high quality in company earnings and increased consumer spending.

And so it is that our future economy will include these two opposing forces co-existing with one another.  The consequence of crushing government debt and the resurgence of private spending.  Private asset and government liability.   Strength and weakness.  Love and hate. To focus solely on one is to be caught off-guard by the other.   This dynamic is the larger message behind the US financial markets decline, which also happened last week.  Debt caught the market both off-guard and frightened.  In doing so, attention swung from optimism (growth) to fear (debt).

It is certainly possible, even probable, that a strong economic recovery will overtake the current consensus on government debt.  Rising incomes and prosperity will fill government coffers and decrease the severity of the deficit problem.  Such a result, if it happens, will not displace the inevitability hard decisions that stem from a new era of government austerity.  Wise decisions in investments, resource allocation, and business strategy will be based upon the fact that both forces – private growth and government retrenchment – will be with us in the next ten years.

Successful leaders will look straight ahead at both forces.  Those that do otherwise will get whiplashed by the economy.

April  27, 2010

The first quarter earnings season is upon us.   Over 100 of the S&P 500 have reported their first quarter financial results and the results so far have been positive.  According to the Seeking Alpha, a leading blog on the financial markets, over 80% of companies releasing earnings have exceeded market expectations.  Bloomberg estimates that earnings for S&P 500 companies have increased an average of 9.1% for the month of April, the largest monthly increase since 2006.   Adding to the overall sentiment is a good mix of revenue growth contributing to the earnings showing.  Top-line results support the belief that the economic recovery is continuing and broadening.  Prior to the onset of the current earnings season, Wal-Mart’s fourth quarter results revealed several trends taking hold in the recovery (see The Wal-Mart Earnings Barometer).   A look at selected earnings reports this quarter confirm this economic recovery is taking on its own set of characteristics.  These trends continue to act as a barometer towards business strategies that will prove successful in the current recovery.

These shifts include -

A Shift in Consumer Spending, Led by Apple

Apple’s leadership in the market is redefining the staple good.  Despite consensus that consumers are saving more and cutting back on discretionary items, Apple’s year on year sales for all sorts of iGizmos increased by 50%.   Their growth is simply immense given  Apple’s quarterly revenue run rate is now over $13  Billion, which makes their annual sales percentage growth all the more impressive.  Despite economic hardship, Apple sold close to 9 million iPhones in one quarter alone.  All of Apple’s products are sold at a premium, from Macs to iPhones.  Yet, their products continue to move into the mainstream.

Apple’s blowout sales increase is not happening due to a resurgent consumer.  Overall consumer sentiment regarding the economy has remained largely unchanged in the past six months and is far below pre-recession levels.

Consumers may be cutting back, but many of them – by the millions – consider an Apple gadget to be a requirement.

Apple is but a starter example of more to come.  Consumer spending is starting to shift again.  As the economic crisis unfolded, consumers traded down and retreated hard.  This resulted in a shift.  Now, the shift is on again.

International as the Growth Path

Those companies that outperformed earnings expectations did so almost solely through international growth.

• Coke had a great quarter, but the company’s growth in North America was close to 0%.  India, Vietnam, Brazil, and Russia were among the markets where Coke posted double-digit revenue growth.
• Whirlpool trounced market expectations, delivering Q1 earnings more than 60% above Wall Street’s guidance.  While overall revenue grew at 7%, sales in Latin America and Asia grew more than 60%.
• Caterpillar delivered its first earnings increase in the last seven consecutive quarters.  Raising its sales outlook for the rest of the year, CEO Jim Owens credits their participation in emerging markets for the results.

What was once considered optional is now a requirement.  Emerging markets lie squarely in the path towards renewed growth.  (see The China Supply Chain for a view on what this shift means for supply chains during this coming decade).

Not Your Father’s Technology

Headlines in technology companies show the sector is rebounding.  Corporate spending has indeed contributed as pent-up demand comes forward.  There are also indications that technology spending is rebounding in a different form.  IBM’s financial release is an example.  Their primary source of recent reported growth lie in software and not in services.  This is not how IBM’s business model looks like according to a financial analyst.  Software growth is intended to be a multiplier for services growth.  This result indicates a shift to new software platforms.  Cloud computing, a greater reliance on open systems and web services are changing the nature of the old technology revenue model.  Long to be forecasted, it is now fast approaching.

Returning technology spending, but in new forms.  Growth strategy that begins in international markets.  Innovative products that tap consumer’s cravings to be connected.  These are the trends underlying the economic recovery.

April 20, 2010

Tires are being piled up, so they can be burned.  Barricades are being built.  Troops are being deployed. Six weeks on, the protests by Thailand’s red shirts is rapidly moving towards tragedy.  Again.   Following the botched military raid into the protestor’s camps a few weeks ago, the red shirts remain emboldened and fortified.  More important, no one is talking and it appears a settlement may give way to the gun.

Bangkok is a much different city, and Thailand a much different country, since the protests started six weeks ago.  At its start, many residents of the capital city dismissed the protests as a passing irritant.  Many, certainly most residents of Bangkok, viewed the arrival of rural Thais as a temporary storm that would quickly pass, with life and the economic recovery shortly returning to normal.  Tourism would continue and its export-driven economy would rise with the rest of the world.  Instead, economic gridlock is occurring.  Tourism is grinding to a halt.  Foreign businesses are growing cautious about new investment.  Thailand’s long-term currency credit outlook has been downgraded.  Bangkok’s commercial center has been largely shut down by protestors.  No doubt, those companies with production and economic interests in the country have had a conference call or two with contingency plans in mind.

As the news is saturated with stories of volcanic ash and stranded passengers, crisis has descended upon Thailand.  There are moves towards greater escalation.   The Red Shirts, populated by rural Thais seeking new elections, have remained defiant.  Their call for the dissolution of the current governance and immediate elections is now front and center.  They recently stormed a satellite station that was blocking transmission of their television station.  Now, the Yellow Shirts are seeking a comeback.  As a contrast to the Red Shirt protests in past years, the Yellow Shirts formed to defend the current governing coalition.  The Yellow Shirts are declaring their intention to take to the streets soon, creating the possibility for uncontrolled confrontation.   Many in the establishment have called the Red Shirt’s actions treasonous and are looking for a crackdown.

What does seem clear is that there are people, perhaps many, who are not vested in a non-violent outcome.  A Japanese cameraman killed a few weeks ago during the military’s first attempt to shut down the Red Shirt protests.  What is unclear is how he was shot, given that both protestors and the military indicated no live ammunition was used.  There have been reports of black clothed armed men, a third group, that played a role in these fatalities.  While the government has indicated their belief these people are “terrorists,” no one has yet to verify where these men came from and what organization they represent.

The military is not helping.  Their first attempt to stop the protests led to fatalities, embarrassment, and retreat.  This past week, they entered a hotel to arrest protest leaders.  Television cameras were rolling as these same protest leaders escaped out the back window of the hotel.   Despite their inability to control the situation, Prime Minister Abhisit placed the head of the military in charge of security.  The BBC is reporting this morning the military’s clear statement they will be using live ammunition going forward.

So, right now, the ground is laid for crackdown in lieu of compromise.  Meanwhile, the Prime Minister has remained largely silent and steadfast.  He is not engaging protestors in dialogue or seeking a settlement to their grievances.

All of these actions act as ingredients to repeat history.  Throughout this century, the Thai military has been the instrument of stability, primarily through the use of military coup.  Coup installs new government, re-write the constitution, government fails.  Repeat the cycle.    As current tensions reach a boil, it is being left to the military to maintain order.    Whatever the role, their position prohibits the military from being the force for a durable,  long-term solution.

Thailand’s governing and democratic institutions are fragile (see Bangkok Blues).  In that environment, Abhisit’s leadership is needed to reach a political settlement.  Doing so is an opportunity for his government to both regain legitimacy and build a foundation of civilian government that can last.  It will not be easy nor does it mean Abhisit will survive as Prime Minister.  But a successful negotiated settlement means participation in global economic renewal in a society where more feel an equitable stake.   Failure, though, means the frightening possibility of a return to governing through coup.  Its time to talk.