Lots More on What Earnings Are Telling Us About Prices Now

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1:20Bloomberg Audio Studios. Podcasts, radio, news. I will say Buc-ee's is maybe the most confusingly amazing place on the planet. Right. It is a mind-boggling experience. Sam is telling us a story about Buc-ee's. I heard. Wait, why was it? Hey, Sam, why was it insane? I got to know. Wait, are we recording? We're recording, right? Wait, you guys started without me. Well, we weren't starting. Okay, so this is off the record. I did a deadlift. One, two, three. Hegemony. Okay, good. Hegemony. Barges. This is an after-school special, except... I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the U.S.

2:11Where's the best squid ink pasta? These are the important questions. Is it robots taking over the world? No, I think that, like, in a couple of years, the AI will do a really good job of making the Onlots podcast. And people will say, I don't really need to listen to Joe and Tracy anymore. We do have... Cha-ching! The perfect guest. Welcome to Lots More, where we catch up with friends about what's going on right now. Because even when Odd Lots is over, there's always lots more. And we really do have the perfect guest. Oh, Joe, did you see Pepsi results from last week? You know what? Okay, I'm going to admit something.

2:50I haven't been paying that close attention to earnings this season. Just generally. I actually had that feeling that you weren't. But why is that? I don't know. Like, I think I'm like paying attention. I don't know. Like looking. I have no justification. Maybe I was thinking like too much about the Fed and trying to read monetary policy stuff. And you're right. I have no defense. You know, my. Wait, wait. How did you know I had a. How did you have this feeling that I've been slacking at the job? Because I was about to say something sarcastic. No, because I can tell. I think, you know, it's funny.

3:27After we've done the Odd Lots podcast for, I mean, it's actually coming up for 10 years in 2025. Yeah. It is actually disturbing that we tend to think of the same questions. Yeah. We tend to be on the same page. We tend to not actually have to, like, tell each other that many things. That's right. Like, we can just say one sentence and we both immediately know, like, what we want to do. Jeez. But yes, I could tell you weren't paying attention to earnings. I kind of feel like earnings are there. I've said this before, but I swear to God, they come up more often than four times a year. We're recording this, by the way, on February 14th, 2024, 4.06 p.m.

4:05And I'm looking at a TV right behind you, Tracy, and there is a headline, Cisco to cut 5 % of its global workforce. Yeah. So this is a big theme of earnings right now, which is layoffs. This I was aware of. Yes, in part because they're also hitting our own industry media, but predominantly they've been in tech so far. And it kind of raises the question about what levers companies actually have to pull to boost earnings and profit margins right now. Do you remember we spoke to Samuel Rines last year? So Sam nailed the earnings trade last year, and he kind of has like a new thesis now. Sam, it's good to talk to you on lots more.

4:45Oh, it's fantastic to be here. And at least Joe didn't make up an excuse to not be paying attention. I just admitted it. I just admitted it. Joe is very good at taking ownership for his faults. Is that the right word? Faults is fine. Yeah, faults. I mean, I was just riffing off excuseflation. Oh, yeah. Oh, thank you. I picked that up. I picked that up. Thank you. So this is one reason I wanted to talk to you, Sam. So last year we had this episode where we talked about how companies were basically pushing price. So raising their prices to offset lower volumes. And arguably, they've been doing that in the post-pandemic environment for a while now.

5:23And I think it kind of went viral after that. I don't know if that was your experience. It was certainly my experience. If I'd known that it was going to go quite that viral, I probably would have discontinued my Twitter account for a week or to. But yeah, no, that definitely went viral. Yeah, we should talk to Sam more often because I do know and I do I do read some of your notes. I don't read every one because life is short, but I like click on them. And during earnings season, you do track earnings and you derive the macro signals from what companies are saying on their conference calls. You do a close reading.

6:01So talk to us about layoffs because they're not really showing up in the macro data yet. Like by and large, the labor market data looks good, but we do have a lot of earnings headlines. So what is going on there? Yeah. So let's start with the layoffs. It's a strange world, right? Because the layoffs get a lot of attention. They get a lot of the headlines. But at the same time, if you look back at what was happening January, February, March of last year, it was far worse. It was far more of a massacre on the tech side. Yeah. If you look at the challenger layoffs, you can see like the spike last year was a lot more than it is currently, even though it feels like these announcements are in the headlines constantly.

6:44Yeah. And when you look at what you call a company like Meta, what they did last year in terms of headcount reduction, like Cisco, it was five times what Cisco did today. Right. So Cisco lays off 5 ,000 people. Meta did 25 in a single month last year. So to me, there's a lot of headlines about the layoffs, but it's not necessarily going to translate into the overall jobs picture simply because you have a pretty tight labor market. And it's not really as bad as the headlines which would suggest. So we did an episode recently with Jason Cummins at Brevin. He's negative on the economy. But one of the things that he says is that, OK, his basic thesis is that pricing power growth is not like it used to be.

7:38Companies can't push price like they could a year ago or two years ago. So in order to flatter margins, they're going to be cutting jobs because at least in the short term, you can get a profit margin boost by having fewer workers. How does that square with what you're actually seeing right now? I would say tech really did take their medicine last year. You can look at Alphabet, you can look at Meta, you can look at Amazon, right? The headcounts are all down pretty significantly on a year-over-year basis. The really interesting thing with the consumer products group companies, your Procter & Gamble's, your Unilever's, your Coca-Cola's, they really haven't had the hiring binge over the past two or three years that would allow for a lever on that front, particularly when they're running out of pricing power.

8:31So if you're running out of pricing power and your primary way of getting additional revenue in the door is volume, you're probably going to find it pretty difficult to lay a significant number of people off. You're looking for that incremental Frito-Lay being sold that takes a manufacturing facility, that takes somebody to make it. It's a much less interesting way of making margin. But it's really important from the perspective of, can they really lay a lot of people off? And I really don't know that they can, particularly if they don't want to get dragged in front of Congress and be accused of price gouging and then laying people off.

9:19That is a really bad political look. And so if I were Mark Zuckerberg or Jeff Bezos, I would really root for a significant layoff on the CPG side simply because you're going to have them dragged in front of Congress instead of Zuck and Bezos. I wanted to ask you about this, actually, because we're recording this, like Joe said, on Valentine's Day. And we just saw the Super Bowl. And one of the ads that ran during the Super Bowl was from the Biden administration about shrinkflation. And they have also made noises about price gouging and basically been saying that companies need to start bringing down their prices as overall inflation and supply chain pressures start to dissipate.

10:05And I always wonder how scary is that type of jawboning actually for companies and CEOs? Because it feels like, OK, you know, the president can say stuff about prices, but ultimately it's a free market economy. And unless you're engaging in monopolistic practices or doing something illegal, you're allowed to raise your prices again, as long as you're not colluding or something like that. it's really not that scary until the you know the FTC gets involved right it's something where you're like oh we have to tread lightly but you're not going to lower prices because you get yelled at from Washington right you're going you're only going to lower prices if it's advantageous for you in some way.

10:53And that is just the way it works. It's very, I would say it was politically advantageous from the Biden administration, but it's not all that nerve wracking. If you're a corporate CEO that has raised prices over the last few years, because frankly, you're really not raising prices that much going forward. And you've basically told everybody you're not going to. So just sorry, to be clear, staying on the layoffs real quickly, a tech company, I mean, one of the amazing things about software, modern tech companies, but why software is this amazing business model that people love is you build it and then it just, in theory, is a money-making machine forever and then the code lives on.

11:39And so at least in the short term, if you're not too worried about R &D or product development, you can cut workers, expand margin very clearly without necessarily taking a revenue hit in areas like tech and software. But basically, your contention is that in areas like consumer packaged goods, etc., there is just not much levers you can pull to cut workers without also affecting your ability to do business. Exactly. I really do think it's somewhat problematic when you look back over the past decade or so. A lot of these CPG companies really haven't added employees on net in any meaningful way.

12:25So it's not as though the employee leverage is really where they want to reach. What I would say is that, we called it price over volume when I was on about a year ago. What I would say now is you're beginning to see that price that companies put in begin to show up in margin in a very meaningful way, particularly gross margin. And those gross margin dollars are flowing into the quote-unquote brand building that they need to do in order to try to get volumes back. And you look at the metas and the alphabets of the world, they're kind of telling you that that's exactly what's happening. These companies are taking the incremental dollars that they're making on the gross margin line, and they're putting them into advertising and marketing in a meaningful and significant way to compete for those volumes.

13:24I was going to ask you exactly about this, like how companies actually push through volume increase in the current environment. And so you think that it's ad spending and basically, you know, increasing brand awareness. One of the reasons I really like talking to you, Sam, is because you do, unlike Joe, you do look at the earnings and like specifically what companies are saying on their calls with analysts, what CEOs are saying. What are some interesting things that you've picked out from the current quarter? And, you know, for instance, I mentioned Pepsi earlier, but like are they saying things specifically about either pricing power diminishing or volumes increasing?

14:08So one of the most interesting companies this past quarter was Unilever. And they do everything from skincare to ice cream. And when they put out their earnings in their presentation, they have this great chart. And it's 13.3 % pricing in Q4 of 2022. And a decline of, I believe it was 3.8 % in volume in Q4 2022. That evolved into 2.8 % pricing in Q4 of 2023 with slightly positive volume, about 1.8 % volume. That is a really interesting kind of mentality to take forward, that if you're a successful CPG company that raised prices and you've raised them at the right time and you began the process of slowly allowing that price to flow through the system, you didn't get too greedy.

15:11You simply allowed it to work through the system. You're beginning to have those volumes come back. and then you go, I think it's five or six slides later, and you look at what happened with their gross margin. Gross margins were up 200 basis points. Wait, 200 basis points or 20 basis points? That was a joke. I was not lift. 200 basis points. So gross margin was up 200 basis points. 130 basis points were spent on BMI, brand marketing investment. So what they're doing is they're pouring these gross margin dollars back into marketing in order to get the volumes that they want. And that is indicative of what's happening across the space.

15:59You can look at Kimberly Clark had a very similar type of, not necessarily numbers, but they had a very similar type of message in that we are going to spend on brand marketing. and we're going to do it in a very significant way because we want those volumes back, right? We push price to the extent that we think we can. Now it's all about getting those volumes back and those ad dollars are beginning to flow back into Meta and Alphabet. And you saw it in Meta's numbers. I would suggest this is not a short-term trend, right? It is very much something where they do not want to be in the headlines for laying people off after raising prices so much.

16:46What they want to do is they want to get volumes back while spending on ad dollars and ad dollars don't get you in the headlines. One really interesting point on that is when Molson Coors, I believe it was earlier this week, came out with earnings. They spent more money on advertising to kick their competition while they were down. It was an amazing, amazing conference call that everyone should listen to, that when your competition's down, you don't just sit back and take the volume that you're getting. You spend more. You really cement those gains that you're getting. And it was amazing. Kick them while they're down.

17:32I have to read that.

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19:04Discover how at MasterCard.com slash commercial acceptance. So the basic mechanism is for 2020 to tolerate some market share loss in exchange for significantly increased prices. Then over time, those increased prices, you don't have to keep increasing them. Over time, they become a little more competitive as the inflation process generally rolls on. And so now it's about getting that market share back and sort of a little more stability on price. When you said they're increasing ad spending, I was like, oh, good. This will be the savior of media. But then you said, no, it's all going to meta anyway.

19:42So I guess not. I mean, yes, that is the exact flow. And it's really intriguing when you think of it as price over volume shifted to what I call PAM, which is price and margin, but also price and marketing dollars. shifted to that, that really benefits the major platforms, right? It is meta and Amazon's boondoggle. However, if you think about what the boom really means for meta and Amazon, it means they basically get a free right or a free option on investing in AI because their revenues are ripping as everybody really wants to compete for those volumes. And so you're getting a tremendous uptick in ad dollars.

20:33You're getting everyone throwing money at the incremental dollar of coming in the door for revenue. And that is a really interesting kind of dynamic that POV basically built the AI world. I want to ask you more about AI, but just before that, what would be the proximate trigger for consumer packaged good companies specifically, I guess, to bring prices down? Would it be if the ad spending doesn't pay off and translate into higher volumes and they have to start discounting? It just seems like there's a general reluctance to go down that route at the moment. So yes, they're not raising prices as much, but most of them definitely aren't actually cutting them either.

21:22What would be the impetus for a price cut? I don't know that there is one. I would say that's kind of the conundrum of anyone who's looking at it and saying, I really want to see prices at the grocery store go back to 2020. That's simply going to not happen. That's a really tough one. You could maybe see some price competition, but at the same time, there's a pretty high industry concentration on the shelves. And if one person begins to hold price and do it successfully and have volumes begin to pick up slightly, it's unlikely that you get price cuts. The one way I think you could see significant price cuts would be if you have the GPL1s or something really actually reduce the overall consumption of food.

22:29That could have an overall effect on price, but we haven't seen that yet, and I'm highly skeptical of it. I've told Joe this. I've stopped eating lunch. Not because I'm on Ozempic, but because I just don't want to pay$20 for a sad salad anymore. It is funny listening to this conversation, how little competition comes up. And I think this is something we talked to you before about, Sam. And I think we definitely mentioned it in that Excusflation article we did. But just the idea that no one's incentivized really to do price wars because it's just a race to the bottom. And why even try to compete on price when you could just hold the line and boost margins that way?

23:15Sam, you mentioned AI. And I have this theory that, OK, like if NVIDIA is talking about AI, I believe it. If Meta is talking about AI, I believe it. If Google is talking about AI, I believe it. If some random other company is talking about AI, my assumption is, oh, this company is doing badly. and they're just trying to drop in some buzzwords on the conference call to get analysts and investors excited. I have no evidence for this theory, but what are the patterns of who's talking about AI and what? Actually, I do have a little evidence. UPS cut a bunch of workers recently, and then their CEO came out and said, oh, these are jobs that can be done by AI.

23:57I'm skeptical, but whatever. But it sort of feeds into this thing that AI is what people talk about when they're having trouble? Yeah. So on the UPS front, one, they're getting absolutely destroyed by Amazon, right? Instead of Amazon shipping through UPS and FedEx, what are they doing? They're shipping through themselves. So UPS is using AI and blah, blah, blah to mask the fact that they got their lunch eaten by Amazon and never saw it coming. I mean, Amazon went from basically having no market share a decade ago to being the size of UPS on the shipping front. It's an underreported, under-talked about story that they just destroyed everyone in their path.

24:47I mean, that's what Amazon does. When it comes to companies talking about AI, there are some ones that I think do it to cover up. it, but there's also some that do it because they actually have something and it's probably underrated. So one of the examples that I'd use is Kroger. So they talk about AI in their earnings and on their conference call. If you think about how much they have in terms of data on consumers, That is a pretty big database with which you toss an AI on top of it, and all of a sudden they actually have something. The large language models that everybody likes to talk about, there are companies who have been collecting data for a long time that didn't really know what to do with it, that all of a sudden are probably sitting on gold mines in terms of how to run their business, how to let me have a coupon at the right time, how to not have me have a coupon at the right time, incentivize me to go buy XYZ product off the shelf.

25:58Those are very, very interesting data sets. And I think it's anyone and their brother has AI. It's really the data to train the model that I think is going to become increasingly important over time. And companies that have been collecting that data are going to surprise a lot of people. This is my, well, if I was going to come up with investment theses, which it's a good thing, I'm not paid to actually do this. But I think insurers are really interesting right now, if you think about it from like a sort of data AI perspective. And I remember someone made this argument a long time ago, I think it was in a book.

26:41And for the life of me, I cannot remember what book it was. But someone made the argument that like, in an environment where the government is like reluctant to be assertive or active, then insurers become the de facto arbiters of acceptable behavior and business because not only do they have all the data about what people actually do, but they're also able to price it. And I think a lot about that in the current context of like not just AI, but also wildfires and floods and other things that we've talked about before, Joe. I buy it. I 100 % buy it that the insurers are new overlords. Wait, actually, Tracy and Sam, what is the deal with Coca-Cola margins?

27:27And I ask you this in part, because didn't you get into some sort of little debate with Jim Chan? I wasn't even trying to debate him. No, I know. So what is the story here? This was awesome. I didn't totally get it, actually. What was this conversation about? I don't understand. And so he was saying that like Coca-Cola is raising prices and they're going to keep raising prices. I don't have the tweet in front of me. And all I said was it was kind of a messy quarter in terms of pricing because Coca-Cola specifically calls out a few hyperinflationary markets in their earnings statement. The only one they named specifically is Argentina.

28:01They've never mentioned hyperinflationary markets before, I think, or at least not in Q4 last year. I went back and checked. And then they specifically say in the earnings call that they don't think pricing is going to be as strong this year. So that's all I said, like, oh, it was a slightly messy quarter in terms of pricing. So I'm not sure how much you can take away from it, that they're absolutely going to continue, you know, the POV strategy. And also they're guiding for lower pricing power in 2024. And Jim wasn't having it. And Sam, you back me up. So I appreciate that. Yeah. Yeah, I mean, it was pretty straightforward, right?

28:41They got two points, give or take, for the year out of hyperinflationary markets. They guided to 7 % to 8 % and they landed at 10%. So guess what? That gets you to 8%. And not to mention, they had guided the year for 7 % to 8 % dominated by price. And so, I mean, you look at what they did, they kind of nailed exactly what they said they were going to do. So Coca-Cola was pretty straightforward, as was Pepsi, as was Unilever, Procter & Gamble. You can go down through the list that 2024 is not going to be the year of price increases. It's going to be back to the algo. And that algorithm is, call it 2 % to 3 % on pricing and 2 % to 3 % on volumes.

29:31and they're all competing on that volume front and really trying to get that number up. So to me, I was looking at the Chanos tweet and like, huh? It sounds like it's normalized. It sounds like if you're the Fed, if you're anyone, like you're basically - It's not normalizing though. It's like 2 % price increases instead of like 5 % or 7%. Yeah, but that's normal. Okay, all right. From like a CP, oh. Yeah, like - Okay. Right? I mean, it sounds like if you're just the macro thing, it's like, yeah, we're back to sort of normal, huh? Yeah. And you got a step function up in terms of revenue. And then you get to drop those down to shareholders.