Thursday 24/10/19

1. In TECH NEWS, Libra comes under scrutiny while Microsoft’s earnings rise on cloud services
2. In HIGH STREET NEWS, retail job losses continue rising, Tesco announces pre-Christmas pop-ups, Domino’s gets an activist shareholder, Sports Direct gets a new auditor and Metro Bank’s founder departs
3. In INDIVIDUAL COMPANY NEWS, WeWork undergoes big changes, Boeing’s profits more than halve and Tesla announces a surprise profit
4. In OTHER NEWS, I bring you some amazing photos and an uncanny resemblance…

So Zuck defends Libra and Microsoft benefits from the cloud…

In Zuckerberg warns blocking Libra will be boon to China tech (Financial Times, Kiran Stacey and Hannah Murphy) we see that Facebook’s chief Mark Zuckerberg faced searching questions yesterday in front of Congress about his proposed cryptocurrency, Libra, as well as things like false advertising and election interference, among other things. He acknowledged the misgivings of politicians and regulators but countered by saying that “China is moving quickly with the launch of a similar idea in the coming months. Libra is going to be backed mostly by dollars and I believe that it will extend America’s financial leadership around the world, as well as our democratic values and oversight”. Zuckerberg did not bend much on Libra, although he implied that he would be open to waiting to implement his plans to give Congress time to legislate on how to regulate cryptocurrencies and to making the dollar the principle currency rather than relying on a basket of them. * SO WHAT? * Although he reiterated that Facebook was not the sole leader, it is the only big financial backer so if it pulled out, the likelihood is that the whole thing would

fall apart. It seems to me that Libra’s future in its intended form is very shaky at the moment given the number of companies that recently abandoned the project (and the fact that it was mostly the payment companies like PayPal, Mastercard, Visa, e-Bay, Stripe that did so) and I really don’t expect politicians and regulators to take their foot off Facebook’s throat given that they potentially stand a lot to lose (some of which I mention here) if Libra works as it was originally intended. I think there is a very real possibility that Libra won’t see the light of day, or else it will have to take a substantially different form if it does. Maybe it will have to start small and build up gradually rather than launch with all the bells and whistles from day one.

Microsoft posts strong earnings growth (Wall Street Journal, Aaron Tilley) highlights a solid performance by the tech giant as it reported strong earnings for the first quarter due to continued success in its cloud computing business (which includes Azure and Office 365 among other services) and sales in its three main product areas performing above expectations. * SO WHAT? * Microsoft’s cloud division has been a major driver for the company as it became the third company to hit the $1tn valuation mark but there are increasing doubts that current momentum will be difficult to sustain due to concerns that companies may cut their IT spending in the wake of the current global economic slowdown.

Job losses increase, Tesco announces pop-ups, Domino’s gets an activist investor, Sports Direct appoint an auditor and Metro Bank’s founder exits…

Retailers cut 85,000 jobs in past year (The Guardian, Sarah Butler) cites the latest report from the British Retail Consortium (BRC) which shows that the UK’s biggest private employment sector – and one that has higher than average numbers of women – has been hit hard by ongoing store closures of chains like Bonmarche (administration last week with 3,000 jobs at risk), Karen Millen and Coast (hundreds of jobs lost), Mothercare, New Look, M&S, House of Fraser and Debenhams. Retailers blame rises in the minumum wage and apprenticeship levy, business rates, product costs (weaker pound due to Brexit making imports more expensive) and high rents for the need to cut costs. BRC chief exec Helen Dickinson appealed for more government help but also observed that “While MPs rail against job losses in manufacturing, their response to larger losses in retail has remained muted”. * SO WHAT? * This is clearly a bad state of affairs but consumer tastes continue to change, meaning that retailers are having to come up with new ways to survive and appeal to a more discerning customer. Retail is clearly a very important sector and what it is having to go through at the moment is very painful. That said, there are winners out there (e.g. Hennes & Mauritz, Zara’s parent company Inditex and our very own Joules etc.) – but they tend to be the ones with a decent offering and a good balance between online and offline capabilities. The identity of our high streets is changing at the moment and councils will have to come up with new ways of making them work otherwise there will be no town centres any more.

On a slightly lighter note, Tesco ‘Finest food and wine bars’ pop up for Christmas shoppers (Daily Telegraph, Laura Onita) says that we should be expecting high-end pop-up stores in big cities in the run-up to Christmas. The supermarket giant will sell some of its “Finest” range along with wine at several small sites for four-to-six weeks in November and December. * SO WHAT? * This sounds like a fun and relatively cheap way of promoting Tesco’s “Finest” range in the run up to Christmas. It may also swing the balance towards Tesco as a way of wheedling its way into shoppers’ consciousness while all the supermarkets fight over increasingly price-sensitive customers over this critical period. It is a gimmick, but a pretty good one IMO!

As you know, there has been a lot of bad newsflow for anyone involved in pizzas recently what with Pizza Express’ finances looking pretty tricky and the lack of leadership at Domino’s so in US activist grabs slice of Domino’s (Daily Telegraph, Oliver Gill) we see that things could be about to get interesting as LA-based activist investor Browning West has just become Domino’s fifth biggest shareholder with 5.33% in the company. * SO WHAT? * Domino’s is currently in disarray, having just pulled out of Switzerland, Iceland, Norway and Sweden in a bid to stem losses and faces increasing ire from its existing franchisees who want a bigger slice of the pie. It is also in a bit of a leadership vacuum at the moment as it is still on the look-out for a new CEO and chairman. Maybe this is a good time for an activist investor like Browning West to step in and shake things up. Although it normally tends to stay in the background of its investments, this could be an occasion where it needs to step up to the plate.

Elsewhere on the high street, Sports Direct finally names new auditor (The Times, Elizabeth Burden, Greig Cameron) signals an end to what has been an embarrassing six-week search for someone suitable to sort out its books after Grant Thornton resigned and no-one else appeared to want to take it on as a client! The “lucky” auditor now in the (very) hot seat is RSM and this appointment avoids the even more embarrassing scenario of the government having to select someone or, even worse, a suspension from the London Stock Exchange. * SO WHAT? * At least Sports Direct avoided further embarrassment with RSM’s appointment but it just goes to show how much it has had to scrape the barrel to choose an accountancy firm that has never had a FTSE350 client and normally specialises in auditing private and Aim-listed companies. 

Then Founder checks out as Metro falls £2.2million into the red (Daily Telegraph, Lucy Burton) shows that Metro Bank’s controversial founder, Vernon Hill, decided to resign earlier than expected just before the company announced a quarterly loss after market close that undershot consensus expectations. * SO WHAT? * Although Hill’s departure is what many have wanted for quite some time, the challenger bank is in a torrid state following an accounting scandal earlier this year, a botched debt issue and the expenses involved in maintaining a branch network. Metro Bank: doggone (Financial Times, Lex) points out that its shares are now worth one twentieth of their peak of £40.40 and a mere 10% of its £20 a share IPO price. Clearly, a lot needs to be done and I am guessing that store closures and the sale of at least some of the loan book will be among the first measures to be taken to turn this thing around.

WeWork sees big change, Boeing’s performance suffers big turbulence and Tesla surprises on the upside…

WeWork prepares to cut 4,000 jobs after SoftBank deal (Daily Telegraph, Olivia Rudgard) highlights drastic measures as up to 30% of the company’s global workforce could be affected. Meanwhile founder Adam Neumann stands to collect a $1.7bn payout as big investor SoftBank moves in to clear things up at a company that is now worth $8bn versus the $47bn it was valued at at the beginning of this year. WeWork rescue: the winners and losers (Financial Times, Andrew Edgecliffe-Johnson, Eric Platt, Kana Inagaki and Judith Evans) puts Neumann in the winners’ corner with his fat payout while the SoftBank Vision Fund, workers (including those who borrowed money to pay for options) and investors are among those to lose out. * SO WHAT? * The fact that SoftBank isn’t treating WeWork as a subsidiary although it will actually own 80% of the stock means that it won’t have to consolidate WeWork’s massive losses onto its balance sheet, minimising any potential damage. However, the new leadership – SoftBank’s Masayoshi Son and Marcelo Claure (WeWork’s new exec chairman, ex-COO of SoftBank) – still

faces the uphill task of convincing outsiders that they can make it profitable (it’s never turned a profit) without tons of cash coming in (because a lot of investors have had their fingers burned). As the market saying goes, WeWork sounds like “a dog – with fleas”.

Things remain tricky at Boeing as well as Boeing profits fall by more than half as 737 Max scandal swirls (The Guardian, Edward Helmore) shows the continued difficulties the aircraft manufacturer faces due to the grounding of its planes in the wake of a number of crashes involving its troublesome jet. It will continue to suffer as long as its planes stay on the tarmac and I don’t see things changing anytime soon as investigators will want to make an example of it and not make any further mistakes.

Tesla delivers a surprising profit (Wall Street Journal, Sebastian Herrera) highlights a rare bit of good news for the electric vehicle manufacturer as it announced a profit for the third quarter, giving it a welcome bit of breathing room. Tesla said it expected to continue to be profitable but added that new products could squeeze margins. Everyone was so surprised by this that the share price shot up by 20% in after-hours trading! Model 3 sales are going well and the company JUST managed to hit the low end of its delivery target range. * SO WHAT? * This is great news, but competition is getting better by the day. At least the company is starting to hit its delivery targets!

And finally, in other news…

Today, I thought I’d leave you with the amazing See the year’s best pictures of the hidden microscopic world (National Geographic, Michael Greshko https://tinyurl.com/yxdurj6m) and the rather interesting observation that Everyone thinks the medieval man looks like PM adviser Dominic Cummings (Metro, Harrison Jones https://tinyurl.com/yys6htx4) 😱😱😱