Retail Sales Down & Corporate Earnings Up: How does this happen?

by Kyle David on July 14th at 9:33 am EST

Yesterday, chip manufacturer Intel reported a blockbuster profit and raised their forecast for profits in the rest of 2010.  To put it a different way, Intel not only grew over the past 3 months, but they expect to continue growing at a faster pace than anyone expected.  But wait, today, we learned that retail sales are down for the second month in a row, and unemployment continues to be close to an all-time high.  For a company like Intel that sells microchips that go in a slew of consumer electronics to grow when the consumer isn’t spending or can’t spend seems like the impossible.

Craig Berger an analyst for FBR Capital markets noted that Intel, "meaningfully beat Street estimates and were new company records for revenues, gross margins, operating margins, profits, and revenues per employee."  So how did they do it?  How is Intel in the land of Milk and Honey when other companies that depend on the consumer are doing so poorly?  No, they didn’t stop purchasing.  They didn’t proceed with any mass-layoff plan.  Nor did they mandate 18 hour work days.  The answer is simple; they got very efficient. 

It is easy to make the case that employment hasn’t come back with the force of corporate profits, because companies were so incredibly bloated and inefficient. (You can also make the case that a lot of them were incredibly irresponsible, but that’s a different post.)  Cost-saving measures and efficiency standards were enough to bridge the gap between volume and margin, when volume sank with the economy. 

Intel didn’t do anything novel, but they sure did what a lot of other companies are afraid to do; make changes in an unstable environment.  They looked for new points of growth and targeted them, removing inefficiencies.  With the time saved, they increased productivity.  This sounds like the story of a lot of our clients who have: overhauled their billing system, streamlined business processes, became more focused on high ROI online marketing.  I have not come across an executive to date that has been successful by not recognizing that the key to success in any market is changing with it.  Clearly Paul Otellini, CEO of Intel got it right.  As did Ford’s Alan Mulally and Genworth’s Michael Fraizer.