The Daily Dose: Watch for a Surprise

 | Aug 25, 2014 | 9:00 AM EDT
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Thoughts and prayers go out to everyone impacted by the California earthquake over the weekend. I am somewhat of a science fan, and definitely remain concerned by the risks to publicly traded companies doing business in California should the "big one" hit. Granted, when reviewing the financials of a company like Starbucks (SBUX), one of the last considerations should be environmental risks if 100s of stores get destroyed from California falling into the Pacific Ocean. Don't laugh, folks, I have not made it this far in my career without pondering every possible (or almost every -- even I am wrong sometimes) scenario for a company's future and how that will shape earnings and valuation, and that includes weather. I have in the past factored in boosts to same-store sales for Home Depot (HD) and Lowe's (LOW) amid hurricane season.

Having said that, investors enter the week with an okay message from Yellen and her global central banking counterparts at Jackson Hole. Nothing too hawkish, nothing too dovish, suggesting that equities could rally into another surprisingly solid employment report early next month. One comment, however, from Yellen did leave an impression on me: her reiteration of a "significant underuse" of the workforce.

Damn right there is, and a glimpse into this underuse is easily done via Wal-Mart (WMT). The world's largest retailer -- and others such as McDonald's (MCD) and Target (TGT) -- continue to utilize technology to tailor employee schedules to match peak demand. In essence, companies have developed the "on-call economy", where people are unable to allocate hours to learn new skills for career advancement because their lives are in constant flux from minimum-wage-paying employers.

Or here is another example of underuse that I sensed from a fun interview with the CEO of DineEquity (DIN) last week. Tablets are now being installed at all Applebee's so that customers could order appetizers, drinks, and entrees, cutting out the requirement for as many waiters and waitresses as in years gone by.  Further, IHOP has unveiled a new mobile ordering app, setting the table for efficiency gains as some humans are removed from the workflow of the restaurant.

As you can see, underuse has different meanings.

Stock Spotlight: Nike & Best Buy

Footwear is on fire this back-to-school season. Hearing this consistently from contacts, and indeed watching it at Macy's (M) Finish Line shops, Foot Locker (FL) (strong second quarter), and Finish Line (FINL). Although Under Armour (UA) has beefed up its presentations of sneakers at specialty footwear retailers, I believe consumers remain infatuated with Nike (NKE) offerings across styles. But it's what I have decoded from studying the company's new shoes that should interest investors from a future profit perspective: massive cost savings through product reengineering.

For instance...

  • Many new Nike sneakers no longer have thick "tongues", replaced with thin fabric donning the Nike logo.
  • Ankles on premium running offerings are being supported by sock-like fabric, not thick foam.
  • Shoes are significantly lighter.
  • More affordable Nike sneakers have painted on Nike logos and coloring instead of visual stitching.

On another note, take a look at Skechers (SKX). I am seeing expanded floor presentations at retailers for the company's latest offerings, which are meaningfully lighter and, believe it or not, rather trendy. 

As for Best Buy (BBY), I think the company will once again beat earnings estimates. In studying earnings reports from rivals, the electronics category doesn't appear to have performed too poorly in the second quarter despite everyone waiting for the iPhone, which aligns well with management's cautious guidance offered on May 22. 

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