7-26-17 BUSINESS BY CARLSON

Business by Carlson

Business has been brisk this week, locally and outside our state. Let’s start with three Minnesota-based companies and their second-quarter (April-June 2017) earnings reports. There are lessons to be learned from each company’s experience.

First, Golden Valley-based Pentair, which is technically headquartered in Manchester, England, but only for tax reasons. They reported mixed results, which you can learn more about here:http://www.startribune.com/pentair-posts-mixed-second-quarter/436525543/. The company announced earnings yesterday (Tuesday) and then CEO Randy Hogan did a conference call with analysts to elaborate on that announcement. The stock fell 2%. Why? On the one hand, earnings after adjustments for extraordinary items rose in line with analyst expectations, but earnings from continuing operations –forget about those extraordinary items and look at what the company’s normally doing to make money– were down from 73 a year ago to only 37 cents. That may have bothered analysts and the market more generally. Pentair is in the midst of a major restructuring. It just sold off the Valve and Controls business, and are trying to hive off the remaining filtration and electrical products operations into two separate companies. Those corporate changes may make it harder for analysts and investors to “see” what’s going on in the company –whether it is cost-efficient, finding new and expanding markets. Maybe there’s a price to pay with this temporary lack of transparency.

Second is Eden Prairie-based Super Valu. Here’s where you can learn more about their second quarter performance: http://www.startribune.com/supervalu-s-profit-and-sales-leap-as-wholesale-business-again-outshines-groceries-like-cub/436514233/. They also announced second quarter results yesterday and then CEO Mark Gross talked to the analysts. Super Valu profit from ongoing operations grew 9 percent to $24 million, or 9 cents a share, in the three months ended June 17, the first quarter of its fiscal year. Revenue rose 6.4 percent to $4 billion. Both results were better than analysts expected and the company’s stock was up nearly 8 percent in early trading on the news. Super Valu just bought (not sold) a business when it spent $375 million to acquired Unified Grocers in Los Angeles. The key to Super Valu’s success in Q2 seems to be its whole sale business, which serves many different smaller food outlets in the region. The Cub stores retail business saw declining sales of 4.9%. Why keep a laggard in the corporation? Sometimes owning a business like the ones you also supply helps you be a better supplier. The strategy is called plural sourcing, and Super Valu is an apt practitioner of that strategy.

Third, we turn to the Maplewood-based 3M. Here is where you can learn more about Minnesota Mining and Manufacturing’s 2Q report: http://www.startribune.com/business/. 3M’s stock fell 5 percent to $199.39 after the announcement and then the analyst conference, this time featuring both CEO Inge Thulin and CFO Nick Gangestad . 3M’s stock had been trading near an all-time high for weeks. It reached a 52-week high of $214.57 last month. So why the negative response to the announcement? Well, second quarter sales rose 1.9 percent to $7.81 billion, slightly missing analyst expectations. Profits jumped to $1.58 billion, or $2.58 a share, compared with $1.29 billion, or $2.08 a share, in the same quarter a year ago. The earnings for the quarter ended June 30 included a 33 cents benefit from divested divisions. Excluding the divestiture gains, adjusted profits were $2.25 per share, which was below the average $2.54 per share analysts expected. Perhaps the lesson to be learned from the 3M experience is that analysts hate it when expectations aren’t met. One of the jobs of the top management team and their investor relations support team is to help set and then meet –better yet, exceed– those expectations. Maybe there’s even a little incentive to sandbag the analysts by setting expectations for next quarter’s revenues and earnings a little below what you think you can “really” meet. Maybe it pays to under-promise and over-deliver with corporate financial results as with many other things.

Wells Fargo is in the news again this week. This time it’s an announcement of intention to shut down hundreds of bank branch operations around the US to cut costs and help shift transactions to mobile digital devices. Here’s where you can learn more about the announcement and its logic: http://www.businessinsider.com/wells-fargo-is-closing-450-branches-2017-7. Wells Fargo is the leader in branches in the US with nearly 6,000. Number 2 is JP Morgan Chase at about 5200 branches. 2017-2018 will see from 200-250 branch closings so Wells Fargo will still be number one in the country with physical locations. The announcement is a signal that most investors should love. Closing branches means decreasing headcount. And Wall Street typically rewards the prospect of lower headcount with higher stock price in anticipation of lower labor costs. So now, let me be a contrarian. Profits in lending are often slim, but an exception is in small- and medium-sized business lending. Those relationships don’t usually arise from a click on a phone, but from a face-to-face visit to a local branch with a local branch manager. Small- and medium-sized business lending is relationship-based in a way that can’t be easily relegated to digital interaction. Let’s see how Wells Fargo manages to build and keep those all important relationships as it moves more from physical branches and people to cyber-branches and digital devices.

I’ve never counted myself as an arbiter of fashion taste, but I have to say I was a little surprised by the latest fashion campaign emanating from luxury goods designer, Gucci. Take a look at their latest fashion campaign theme here: https://www.businessoffashion.com/articles/news-bites/beam-me-up-gucci-campaign. It features extra-terrestrial creatures, robots and dinosaurs, alongside models, wearing the brand’s signature embroidered wool-cashmere overcoats, animal-printed knits and pearl embellished eyewear from its latest collection. In the campaign, the flock of outcasts are beamed up to a series of psychedelic “Guccified” outer space landscapes and trippy spaceship interiors, creating wild and fantastical compositions referencing cult classic films including “Star Trek” and “Creature of the Black Lagoon.” Marketing handbags as fashion accessories attractive to the Creature from the Black Lagoon? Scotty, beam me up.

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