The Summary of Commentary on Economic Conditions, commonly known as the “Beige Book,” is published by the Federal Reserve eight times per year. In it, the 12 regional Reserve branches offer anecdotal evidence on the current economic environment in their respective regions based on interviews with key business contacts, economists, market experts, and other sources. In Goldman Sachs Group, Inc.(NYSE:GS)’s quarterly Beige Book publication, they review the earnings transcripts of companies in the S&P 500 to monitor the anecdotal evidence of fundamental and thematic trends. This quarter’s report contains excerpts from 80 companies that account for 36% of total S&P 500 (INDEXSP:.INX) revenues and comprise 41% of the S&P 500 (INDEXSP:.INX) equity capitalization. All management comments on the following pages were taken verbatim from company transcripts as recorded by Call Street and accessed via FactSet. All company data are as of February 12, 2013. Goldman Sachs Group, Inc. (NYSE:GS) highlight four major themes from 4Q 2012 earnings commentary.

Goldman sachs

Theme 1: Strategies to protect high margins
Companies are focused on protecting margins at the expense of revenue growth. Firms plan to control costs, improve product mix, and grow high margin segments.

Theme 2: Variety in the uses of cash
Managements have been using free cash flow and high cash balances in a variety of ways. Most noticeably, firms have funded pension plans; increased advertising and technology infrastructure spending; and distributed cash to shareholders.

Theme 3: Mixed views on the economy
Some companies noted signs of a recovering economy while others commented on persisting challenges and weak confidence. While the economy heals uncertainty lingers, leaving many firms to “wait-and-see” before making decisions.

Theme 4: Impact of political uncertainty, particularly with taxes
Politics remain a significant hurdle for companies. Elections and government transitions, in the US and abroad, combined with the fiscal cliff, payroll tax rise, and potential corporate tax reform caused uncertainty for a wide variety of companies.

Theme 1: Strategies to protect high margins
Companies are focused on ways to protect profitability as margins have fallen modestly from historically high levels. Some companies are prioritizing margins over revenue growth while others are increasing growth in high margin segments and paying special attention to controlling costs as well as product mix.

Selected examples: Aetna Inc. (NYSE:AET), Air Products & Chemicals, Inc. (NYSE:APD), Apple Inc. (NASDAQ:AAPL), Bed Bath & Beyond Inc. (NASDAQ:BBBY), ConAgra Foods, Inc. (NYSE:CAG), General Electric Company (NYSE:GE), The Hershey Company (NYSE:HSY), The Coca-Cola Company (NYSE:KO), Morgan Stanley (NYSE:MS), NIKE, Inc. (NYSE:NKE), Oracle Corporation (NASDAQ:ORCL), Schlumberger Limited. (NYSE:SLB), Constellation Brands, Inc. (NYSE:STZ), SYSCO Corporation (NYSE:SYY), AT&T Inc. (NYSE:T), Walgreen Company (NYSE:WAG), and Yum! Brands, Inc. (NYSE:YUM).

Theme 2: Varied uses of cash

Companies discussed the variety of ways they are deploying strong balance sheets and large cash balances. Managements are increasing spending in capex, keeping cash overseas, building infrastructure, being opportunistic about M&A, borrowing at low yields, and funding pension plans. There was little evidence of increased hiring.

Selected examples: Apple Inc. (NASDAQ:AAPL), Baxter International Inc. (NYSE:BAX), BlackRock, Inc. (NYSE:BLK), Boston Properties, Inc. (NYSE:BXP), Colgate-Palmolive Company (NYSE:CL), Costco Wholesale Corporation (NASDAQ:COST), Google Inc (NASDAQ:GOOG), Honeywell International Inc. (NYSE:HON), Starwood Hotels & Resorts Worldwide, Inc (NYSE:HOT), The Hershey Company (NYSE:HSY), International Business Machines Corp. (NYSE:IBM), JPMorgan Chase & Co. (NYSE:JPM), Lockheed Martin Corporation (NYSE:LMT), LyondellBasell Industries NV (NYSE:LYB), 3M Co (NYSE:MMM), The Southern Company (NYSE:SO), Constellation Brands, Inc. (NYSE:STZ), AT&T Inc. (NYSE:T), Tyson Foods, Inc. (NYSE:TSN), and Exxon Mobil Corporation (NYSE:XOM).

Theme 3: Mixed views on the economy

Uncertainty persists, and companies continue to tread lightly in a slowly recovering economy. By and large, corporate management remains cautious due to slow GDP growth, low consumer confidence, and a mixed holiday season. However, these challenges are well understood by now and recent stability alongside a steady recovery in housing is generating some optimism.

Selected examples: Air Products & Chemicals, Inc. (NYSE:APD), American Express Company (NYSE:AXP), BlackRock, Inc. (NYSE:BLK), Citigroup Inc. (NYSE:C), Cintas Corporation (NASDAQ:CTAS), E I Du Pont De Nemours And Co (NYSE:DD), Family Dollar Stores, Inc. (NYSE:FDO), General Electric Company (NYSE:GE), JPMorgan Chase & Co. (NYSE:JPM), Southwest Airlines Co. (NYSE:LUV), 3M Co (NYSE:MMM), Robert Half International Inc. (NYSE:RHI), Schlumberger Limited. (NYSE:SLB), The Southern Company (NYSE:SO), SYSCO Corporation (NYSE:SYY), Thermo Fisher Scientific Inc. (NYSE:TMO), Verizon Communications Inc. (NYSE:VZ), and Wells Fargo & Company (NYSE:WFC).

Theme 4: Impact of political uncertainty, particularly with taxes

Politics both in the U.S. and internationally increased uncertainty. In the U.S., the election, a temporary resolution to the fiscal cliff, and increased payroll taxes left managements frustrated. In addition, concerns about the debt ceiling, sequestration, corporate tax reform and health care legislation are still hotly debated. Companies are cautiously optimistic about the leadership transition underway in China.

Selected examples: Alcoa Inc. (NYSE:AA), BlackRock, Inc. (NYSE:BLK), Citigroup Inc. (NYSE:C), FedEx Corporation (NYSE:FDX), Honeywell International Inc. (NYSE:HON), Starwood Hotels & Resorts Worldwide, Inc (NYSE:HOT), The Coca-Cola Company (NYSE:KO), The Southern Company (NYSE:SO), Constellation Brands, Inc. (NYSE:STZ), AT&T Inc. (NYSE:T), Thermo Fisher Scientific Inc. (NYSE:TMO), Tyson Foods, Inc. (NYSE:TSN), and Verizon Communications Inc. (NYSE:VZ).

Theme 1: Strategizing for improved margins

Companies are focused on ways to protect profitability as margins have fallen modestly from historically high levels. Some companies are prioritizing margins over revenue growth while others are increasing growth in high margin segments and paying special attention to controlling costs as well as product mix.

Aetna Inc. (NYSE:AET)

…We believe we can continue to generate revenue and profit growth in 2013 in this business as we price to medical cost trend and manage to our target margin. We remain committed to our disciplined pricing model, and when faced with a choice, we will continue to favor achieving target margins over membership growth.

ConAgra Foods, Inc. (NYSE:CAG)

We have been very disciplined with our pricing architecture, and in some cases, we’ve deliberately chosen to improve profit margin instead of growing volume.

General Electric Company (NYSE:GE)

We have every one of our teams working on lowering their structure, so having a more consolidated higher level P&Ls. We have everybody participating and putting their back offices into centers of excellence and more shared services across the company. And we have a common IT initiative across the company to reduce our general ledger and enterprise resource planning systems that is pretty much across the portfolio. So everybody is participating, everybody has cost targets and it’s pretty broadly based.

SYSCO Corporation (NYSE:SYY)

The relative improvement you’re seeing on the margin trends is a combination of two things…trying to strike the right balance in terms of growth and being responsive to our customers and secondly is because the inflation has subsided…. So we’re continuing to try to grow the business aggressively but be smart about it, and we need to continue to improve on the margin side.

Air Products & Chemicals, Inc. (NYSE:APD)

I’ll also say that we’re focused on additional cost reductions beyond simply people reductions [in Europe]. We’ve got a lot of initiatives going on from a supply chain perspective as well as trying to push price.

Apple Inc. (NASDAQ:AAPL)

We believe that there are two primary factors that will benefit gross margins sequentially. First and the largest of the two, our teams have made meaningful progress in reductions in product and transitory costs from the actions that they have been working on to get down the cost curve. … And second, we expect a more typical level of deferred revenue from
device sales.

Morgan Stanley (NYSE:MS)

We’ve been operating so much under the basis that there won’t be increased revenues. Obviously, the world is going to evolve so at some point that’s not true. But, our approach has been what can we control, how do we drive up margins in a flat revenue environment, and obviously through the expense line is how we’re doing that.

AT&T Inc. (NYSE:T)

As you know, the investments we’ve made to drive record smartphones sales impacted margins. While we continue to make progress in improving our margins, we also are more than willing to invest in smartphones because of the benefits they bring. We’re doing a lot of work in terms of just margin expansion… expect to expand our margins again this year, and so our objective is to get our margins comparable to our competitors and also equalize share.

Constellation Brands, Inc. (NYSE:STZ)

And I would just point out that the pricing that we took was sort of significantly below just the general level of pricing that’s been taken in the beer industry. So our pricing was below 2% overall, whereas the industry as a general proposition has taken more pricing than that. So that could be the reason why we’re really not seeing any slowdown or impact of our pricing thus far, because it was a pretty modest increase.

The Hershey Company (NYSE:HSY)

…We’ve seen moderation in some of our key commodities is also expected to really benefit it next year. So that does play an important part.


Although there continues to be a great deal of volatility in the components of gross margin, we are seeing some encouraging trends. The pricing actions we’ve taken over the last five seasons, combined with easing raw material costs, are now more than offsetting the impact of ongoing labor cost inflation.

Oracle Corporation (NASDAQ:ORCL)

Selling systems loaded with Oracle intellectual property along with deemphasizing the selling of low-margin, undifferentiated products like commodity x86 servers and LSI disk storage systems, products that contain no Oracle intellectual property, those two things have reshaped and downsized our hardware business while making that business much more profitable.

Walgreen Company (NYSE:WAG)

We achieved stable margins in a very promotional environment. We’ll continue to work to strike the right optimal balance between sales and profitable growth. …The key to retail is trying to balance price and promotion in the right way…

Bed Bath & Beyond Inc. (NASDAQ:BBBY)

These decreases in the gross profit margin as a percentage of net sales were primarily attributed to an increase in coupons, due to increases in both the redemptions, and the average coupon amount as well as a shift in the mix of merchandise sold to lower margin categories.

Yum! Brands, Inc. (NYSE:YUM)

The biggest driver of margin pressure is the same-store transaction decline. That weighed heavily on us in the fourth quarter and we see that continuing into 2013.

Schlumberger Limited. (NYSE:SLB)

All the customers in North America that I’m talking to are still looking for us to help them drive more cost out of the system, whether that is efficiency or technology…

The Coca-Cola Company (NYSE:KO)

…We anticipate a more moderate year of commodity inflation with incremental costs related to our big four commodities.

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