Thursday 09/01/20

1. In MACRO & COMMODITIES NEWS, Trump tries to calm the US/Iran situation, India slashes its own growth forecasts, von der Leyen manages Brexit expectations, Spain’s Sanchez digs in and a lithium producer cuts guidance
2. In RETAIL/CONSUMER GOODS NEWS, Macy’s outlines store closures, UK retailers have a shocker, Sainsbury’s gets an Argos drag, Boots and Ted Baker consider their futures, Greggs offers staff a £7m bonus, Beyond Meat sees a McOpportunity and Constellation downplays cannabis
3. In INDIVIDUAL COMPANY NEWS, Uber tries fudging the rules and TikTok tightens them
4. In OTHER NEWS, I bring you some camouflaged animals

So the US/Iran situation calms (for now), India cuts growth forecasts, von der Layen manages Brexit expectations, Spain’s Sanchez tries to dig in and a lithium producer cuts guidance…

I must say that I could do a whole other Watson’s Daily just on macro news these days, but I’ll try and keep it quick!

Donald Trump backs away from military action against Iran (Financial Times, Katrina Manson and James Politi) shows Trump’s efforts to de-escalate tension between the two countries as he said that the US would not respond via military action to the most recent attack on US forces by the Iranians. He added that there had been no Iraqi or American casualties after the missile attack on Tuesday night. This represents a climbdown from his recent rhetoric where he said that he would inflict “disproportionate” military action if Iran retaliated. This was met by relief all around, but you never know with Trump (or Iran, for that matter!), so it’s not worth getting too comfortable…

Then India cuts growth forecast to slowest pace in 11 years (Financial Times, Stephanie Findlay) heralds the latest official growth forecasts from India’s ministry of statistics which say that India’s GDP will grow at 5% in the current financial year – its slowest pace for over a decade. This is down to weakening private consumption, industrial activity and investment and although the government is trying to counter this with corporate tax cuts and more infrastructure projects, this will take some time to feed through. * SO WHAT? * This is disappointing news and comes at a time where the country faces concerns (from some of its own people) over the credibility of its official data. Given Narendra Modi’s enhanced powers and keenness to push through his Hindu nationalist agenda,

maybe the administration is just buying itself a bit of time by making the downgrades.

In Ursula von der Leyen: three takeaways from her Brexit speech (Financial Times, Jim Brunsden) we see the FT’s take on what the new EC president had to say about Brexit when she was in town yesterday. The FT looks at three takeaways, but I would summarise them further by her saying that negotiations will be difficult, take longer than BoJo thinks and that relations will forever change. No surprises there then.

Pedro Sánchez prepares to dig in as Spain’s prime minister (Financial Times, Daniel Dombey) gives us the latest on Spain’s “new” PM and what he needs to do if he is going to achieve anything at all. He was sworn in yesterday and will probably kick off proceedings by making it difficult to remove him now that he has got his grubby paws on the top job. He has got all sorts of legislation up his sleeve, but whether he will be able to get anything done because of his paper-thin majority is another question. Negotiations over Catalonia and a new budget are bound to be particularly tricky. Good luck Pedro…will we be heading for a fifth general election in five years?? 😜

In the world of commodities, Lithium producer Livent falls 12% after guidance cut (Financial Times, Henry Sanderson) shows a worrying trend for some as the company slashed its earnings guidance and warned that the market for the raw material used in batteries is “challenging”. It is also revisiting its plans to increase capacity given the continued weakness in lithium prices. * SO WHAT? * This is a real downer for many as there had been expectations of an uptick in lithium prices as they had fallen by over 50% in the last year due to more supply coming online from new mines in Australia as well as from big producers SQM and Albemarle. Having said that, this is good for battery MAKERS as one of their input costs will be cheap.

Macy’s announces store cuts, UK retailers continue to suffer, Sainsbury’s cheer is dulled by Argos, both Boots and Ted Baker consider their futures, Greggs is on a roll, Beyond Meat sees a McOpportunity and Constellation downplays its cannabis connection…

In the US, Macy’s plans store closures, posts encouraging holiday sales (Wall Street Journal, Suzanne Kapner) shows that the troubled department store chain is looking to shut down 28 Macy’s stores and one Bloomingdale’s, but on the other hand says it saw “a strong trend improvement from the third quarter” as the sales decline in the fourth quarter wasn’t as bad as everyone had been expecting. The company has around 680 department stores and 190 specialty stores and said that the closures were just a normal part of an annual review of its store portfolio. * SO WHAT? * Macy’s is just another department store struggling to keep up with changing consumer behaviour. Under chief exec Jeff Gennette, it has executed a number of initiatives such as sprucing up the best performing stores and trying out new concepts such as Backstage (which sells deeply discounted items) and Story (which sells themed merchandise). Unfortunately, these efforts have not had a huge impact thus far, but I guess at least the company is trying! It remains too early to tell whether they will bear fruit or whether Gennette is just rearranging the deckchairs on the Titanic…

Back in the UK, Exodus from high street hits retailers in worst year on record (The Guardian, Sarah Butler) cites the latest figures from the British Retail Consortium (BRC) and KPMG which show that sales fell for the first time in 24 years, making it the worst year on record for British retail as a whole. Sales were tipped over the edge as the crucial final two months of the year proved to be weak. On the other hand, Black Friday lifts sales on high street out of the red (The Times, Gurpreet Narwan) interprets the same figures in a more upbeat way, saying that sales grew by 1.9% in the five weeks to December 28th versus the same time last year BUT if you make adjustments for Black Friday, total sales actually fell by 0.9% in the period. The BRC observed that the week going into Black Friday had usurped Christmas this year as the biggest shopping week of the year for non-food. * SO WHAT? * Although many retailers are clearly having a rough time of it at the moment, it seems that consumers haven’t closed their wallets completely. December data from Barclaycard shows a continuation of the trend for consumers to spend less on “stuff” and more on “experiences” as spending increased on cinema tickets (+19%), pubs (+11.7%) and takeaway orders (+12.5%) versus a drop in spending on clothing, toys and computer games. I think that the quieter December for retailers must surely have been adversely affected by having a general election that got nerves jangling and people spent their money instead on experiences to lift their spirits. As I have said before, wage growth has been strong and we still have a very tight labour market, so I think that things could be a lot worse. Retailers need to upgrade their in-store experience for customers – and if they do this effectively, they will see the benefits as consumers have the money.

Low toy demand at Argos weighs on Sainsbury’s Christmas trade (Daily Telegraph, Simon Foy) shows that, on the one hand, the supermarket’s food business did pretty well in a competitive market, but then Argos found the going tougher over the festive period. Chief exec Mike “We’re-in-the-money” Coupe put a positive spin on things by saying that “The colder weather helped to deliver strong clothing sales in the quarter and our Christmas, party and gifting ranges were all popular with customers”. Although not stellar, things could have been worse!

Then in Boots owner stays mum over taking ailing chemist private (Daily Telegraph, Laura Onita) we see that Walgreens Boots Alliance (WBA), Boots’ American parent company, is staying tight-lipped over speculation that it may take the retailer private with help from investor KKR. UK sales have continued to weaken. * SO WHAT? * There has been speculation about a $70bn take-private deal since November and as the retailer’s poor performance persists, so do the rumours. Boots is to shut 200 shops and has also axed 350 jobs at its Nottingham HQ as part of efforts to jolt the business back to life, but I would argue that a turnaround needs to go much deeper. Sometimes it can be much easier to perform root-and-branch surgery on a company without having to deal with the constant glare of shareholders, so I am sure this buyout option is at least being considered.

Another company is also considering its options in Ted Baker’s bankers call in experts to weigh prospects (The Guardian, Sarah Butler) as advisory firm FTI Consulting has been brought in to do a business review and come up with possible ways forward for the troubled fashion retailer. The consultation is expected to take a few weeks. * SO WHAT? * Given the company’s absolutely shocking performance (it recently announced its fourth profit warning in a year) you can see why they got in some help. Ted Baker is currently reaching its £180m debt limit and is looking at all sorts of ways to bring in much-needed cash (including selling its HQ and leasing it back, that will apparently raise £60m). The slowdown in trading has been compounded by the recent discovery of an accounting error by the recently appointed CFO and speculation abounds that founder Ray Kelvin could return and take the company private (although apparently he’s not that keen – but who knows?!? Surely even if he was keen he wouldn’t say it because the selling price would then go up!). Whatever happens, Kelvin will certainly have a part to play as the shares are very tightly held – he has 35% and over a quarter of the remaining shares are held by investment firm Toscafund (which recently built up a sizeable stake), Schroders and Threadneedle.

In consumer goods news, Supplying McDonald’s is just not possible (The Times, James Dean) heralds a potentially massive opportunity for Beyond Meat as its rival Impossible Foods has pulled out of the bidding to supply meat-free burgers to McDonald’s because it can’t produce enough. McDonald’s is the world’s #1 fast-food restaurant chain and is yet to launch a meatless burger worldwide despite competitors such as Burger King doing so (Impossible Foods supplies it with the patties for the Impossible Whopper). Impossible Foods’ chief exec Pat Brown said that “Having more big customers right now doesn’t do us any good until we scale up production. I wish we had vastly more capacity than we do right now because the demand is high”. * SO WHAT? * This must be gutting for Impossible Foods, but I suspect that the way things are right now there’s room for everyone in the alternative meat arena. Beyond Meat will have to step up big time as others will be waiting in the wings for them to fail. If they do step up, this could be the making of the company IMO.

Following on from one of my themes in this years Watson’s Yearly, High hopes suffer new blow at Constellation (The Times, James Dean) shows that beer giant Constellation Brands announced that it was writing down its 38% stake in Canopy Growth, Canada’s #1 marijuana grower, by $534m. The stake originally cost Constellation $4bn and is in addition to the previous writedown of $839m it made after its second quarter results in October. The writedown made a sizeable dent in its third quarter profits but it still beat market forecasts due to strong beer sales. * SO WHAT? * I would have thought that the Canopy investment would have been hanging over investors for a while given that the Canadian company’s share price has cratered by almost two thirds from its high at the end of April last year, so at least this writedown addresses that. I still think that there’s time for the cannabis boom, but we will clearly have to wait a while yet!

Uber fiddles about and TikTok outlines etiquette…

Uber retools California fares in response to gig economy law (Wall Street Journal, Preetika Rana) highlights some more Uber shenanigans as the company tries to see if it can get around the California Assembly Bill 5 (aka “AB5”) by altering the way it calculates some fares. Basically, AB5 went into force on January 1st and reclassifies drivers as “employees” rather than “contractors”. This is a big deal because being an employee means that Uber has to provide benefits such as holidays, minimum wage and sick pay – thus hiking up their costs considerably. Yesterday, Uber put a new cap on its commission and let drivers know how much they could make on certain trips. * SO WHAT? * There wasn’t too much detail on this in the article but I am guessing that the reason Uber is doing this is because it can argue that this new feature will allow drivers to PICK the jobs they go on, hence giving them more autonomy and therefore allowing them to act more like independent contractors (which is what they want). This sounds like

lawyers manufacturing a loophole as this interpretation would be very literal, but I think that the spirit of the law would still define drivers as employees. We’ll just have to see how this unfolds because the implications could be massive if they are taken as a precedent for the rest of the world.

TikTok tightens rules on video content and users (Wall Street Journal, Sarah E.Needleman) shows that TikTok is trying to address criticisms of the rather freewheeling nature of its highly popular content as it released new rules covering ten categories yesterday. Most of its users are under 30 and its new rules of etiquette forbid things like the promotion of behaviour leading to eating disorders, threats against users based on immigration status, gender and caste. * SO WHAT? * TikTok said that it introduced these guidelines because it felt it need to provide users with more clarity, but I think this is BS. I think it’s all about TikTok’s desire to clean up its image and address some of the criticisms that could hold back future growth. The company faced a lot of criticism over its content in India (a key market for the company) and continues to face potential regulatory problems in the US where there are worries that it breaches national security given that it is owned by Chinese conglomerate ByteDance.

And finally, in other news…

In today’s “…and finally,” sections I thought I’d bring this to your attention: Can you spot the camouflaged animals in these photos? (Insider, Talia Lakritz https://tinyurl.com/v7lj3wt). There are some absolutely incredible animals on show here!