Tag: C&E Industry News Filter

Trump is backed further into a financial corner after losing control of his company

With Donald Trump’s legal liabilities growing and a presidential campaign to run, losing control of his company couldn’t have come at a worse time.

After a New York judge ordered the Trump Organization to pay $364 million in penalties and barred the former president from any role in running a business in New York state for three years, Trump now finds himself backed further into a financial corner with fewer options for how to maneuver.

“It will have such an enormous impact on the operation of his business,” said Randy Zelin, a professor of law at Cornell University and a veteran criminal defense attorney with experience in complex financial matters. “But it will also provide a strong basis for an appeal.”

New York Attorney General Letitia James had asked New York State Supreme Court Justice Arthur Engoron to levy a $370 million financial penalty against the Trump Organization and also to ban Trump and his children Ivanka, Donald Jr. and Eric Trump from running any company in the state of New York, where his real-estate empire has long been based.

Engoron’s ruling barred Donald Trump Jr. and Eric Trump from being involved in running any business in the state for two years. The judge also ordered that former U.S. District Court Judge Barbara Jones, who has been serving as an independent monitor of the Trump Organization since 2022, continue in that role with expanded powers for the next three years. The ruling also ordered that an independent compliance officer be appointed within 30 days.

“The Trump Organization shall be required to obtain prior approval — not, as things are now, subsequent review — from Judge Jones before submitting any financial disclosure to a third party, so that such disclosure may be reviewed beforehand for material misrepresentations,” the ruling read.

The outcome of the civil trial sat solely in Engoron’s hands, and in September, he issued a summary judgment essentially ruling in favor of James’s arguments that the Trump Organization had engaged in fraud for years by repeatedly misstating the value of assets to lenders and insurance companies.

The judgment is the latest in a string of legal and financial blows that the former president has faced and that have already had an impact on his presidential campaign.

Trump has incurred $76 million in legal costs over the past two years stemming from the wide array of criminal and civil prosecutions he faces. More than $27 million of the money raised in the last six months of 2023 to support his presidential campaign has instead been used to cover his legal costs, according to campaign-finance filings.

A report by Bloomberg earlier this week suggested that Trump may face a cash crunch caused by his ballooning legal costs as early as this summer, just as the presidential race will be heating up.

Last month, a federal jury ordered Trump to pay $83.3 million in damages for defaming the writer E. Jean Carroll, whom he had attacked online after she had accused him of raping her in a department-store dressing room in the 1990s. He had earlier been hit with a $5 million verdict in a state case on similar charges.

Trump has vowed to appeal the verdicts and denied raping Carroll, but in order to appeal, he will be required to put up bonds for the full award amounts. That means he would need to either get a bank to back him or to pledge collateral — like a real estate asset — to secure the bond.

But without full control of his real-estate empire, Trump will likely find it harder to line up financing or use his assets as freely as before.

Under the terms of Engoron’s ruling, Trump will no longer be able to make any moves involving assets held by the Trump Organization without the approval of the court-appointed monitor.

Even pledging his assets as collateral for the bond that he would be required to post in order to file an appeal would be complicated by the imposition of a monitor.

“When you lose control of your company, you lose control of who is going to be paid and how much they will be paid. All the money will, first and foremost, be used to operate the business, and how much goes to Trump and his children becomes a secondary concern,” Zelin said.

Add to that the mounting legal costs for multiple criminal cases being brought against him — on charges related to Jan. 6 as well as charges of mishandling classified documents, election fraud, racketeering and illegally paying hush money to women who claimed they’d had affairs with him — and Trump finds himself in a worsening financial bind.

So far, the former president has managed to cover many of his legal costs through donations from his political supporters, but that means that money won’t be available to fund his campaign for president. At the end of the year, President Joe Biden’s re-election campaign had about $46 million cash on hand, while Trump’s campaign had $33 million, Federal Election Commission filings show. Some $50 million held by Trump’s political action committees has already been used to cover his legal bills.

Regarding the properties held by the Trump Organization, while Trump has been able to refinance many of the loans underlying his bigger real-estate holdings, pushing their maturity dates back several years, he still has a stake in some high-profile buildings that have debt coming due in the next few years.

With the court-appointed monitor part of the equation, it might now be more difficult for Trump to secure new debt in order to refinance those buildings, and that could even technically trigger defaults, depending on how the loan covenants were written.

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February 16, 2024
Etsy drifts further away from its roots with first Super Bowl ad

Etsy Inc., once known as a quirky marketplace for handmade, artisanal and vintage items, seems to be moving further away from its origins amid a much tougher e-commerce landscape and the impact of AI.

Etsy
ETSY,
+4.83%
will be marketing to a whole new audience on Sunday, when its first Super Bowl commercial will run. The 30-second ad is quirky; it depicts a generic 19th-century American leader who’s flummoxed over how to reciprocate France’s gift of the Statue of Liberty. With the help of an anachronistic smartphone, he and his team search on Etsy using its new Gift Mode option, and find its “Cheese Lover” category after determining that the French love cheese. Voilà — they decide to send the French some cheese.

The commercial is part of Etsy’s push of a new user interface featuring Gift Mode, which lets shoppers search for gifts for a specific type of person or occasion — combining generative AI and human curation to give gift buyers some unusual options.

But are these moves desperate and costly efforts to try to reach potential new buyers, coming on the heels of Etsy’s plans to lay off 11% of its staff?Or could running a TV ad at the most expensive time of the year actually lead to more sales on the once-fast growing marketplace?

Etsy believes these moves will help the company grow again, and its research shows the average American spends $1,600 a year on gifts. “There is no single market leader and Etsy sees a real opportunity to become the destination for gifting,” Etsy’s Chief Executive Josh Silverman said in a recent blog post.

Etsy is clearly under pressure after seeing its gross merchandise sales more than double in 2020 during the pandemic, when it became a go-to place to buy handmade masks and all kinds of items for the home, from vintage pieces to antiques to castoffs. From personal experience as an Etsy seller, I saw sales at my own small vintage-clothing shop more than double in 2020 and then fall back in 2021, while still remaining higher than in 2019. In the last two years, sales have slowed, and some other sellers have witnessed similar patterns, based on their comments in seller forums.

The number of sellers and buyers on the platform has increased on the same level as gross merchandise sales. But e-commerce competition has also gotten more fierce.

“Our main concern with Etsy is growing competition in the space from new players like Temu,” said Bernstein Research analyst Nikhil Devnani, in an email. Temu and fellow Chinese online retailer Shein have raised a lot of investor jitters, as Etsy’s gross merchandise sales have slipped over the last year and are forecast to fall again in its upcoming fourth-quarter earnings report later this month.

Devnani said a Super Bowl ad could potentially help the marketplace gain visibility, something it has always lacked.

“One dynamic they’ve talked about a lot is that brand awareness/recollection is still low, and this keeps frequency low,” he said, noting that Etsy buyers shop on the site about three times per year, on average. “They want to be more top-of-mind … Super Bowl ads are notoriously expensive of course, but can be impactful/get noticed.”

The company’s big focus on Gift Mode, however, could be a risky strategy. How many times a year do consumers look for gifts? And in a note Devnani wrote in October, before the company’s Gift Mode launch, he said that one of the concerns investors have is that Etsy is too niche. “’How often does someone need something special?’ is the rhetoric we hear most often,” he said. Etsy, then, is counting on buyers returning for other items for themselves.

Etsy CEO Silverman believes buyers will come back again and again to purchase gifts. Naved Khan, a B. Riley Securities analyst, said in a recent note to clients that he believes Gift Mode plays to Etsy’s core strengths, offering “unique goods at reasonable prices” versus the mass-produced products sold on Shein, Temu, Amazon.com Inc.
AMZN,
+2.71%,
and other sites.

Consumer spending has changed, though. At an investor conference in December, Silverman said that consumers are spending on dining out and traveling, instead of buying things.

But while investors still view Etsy as a niche e-commerce site, some buyers and sellers see it overrun with repetitive, non-relevant ads. Complaints about a decline in search capabilities, reliance on email and chat for support, and constant tech changes are common on seller forums and Facebook groups. AI-generated art offered by newer sellers as a side hustle has also become a thought-provoking, debated issue. And there are complaints about mass-produced items making their way on the site.

Etsy said that in addition to its human and automated efforts, it also relies on community flags to help take down infringing products that are not allowed on its marketplace, and that community members should contact the company when if they see mass-produced items for sale on the site.

It also continues to work on search. On its last earnings call, Silverman said the company was moving beyond relevance to the next frontier of search, one “focused on better identifying the quality of each Etsy listing utilizing humans and [machine-learning] technology, so that from a highly relevant result set we bring the very best of Etsy to the top — personalized to what we understand of your tastes and preferences.”

The pressure could build on the company if its latest moves don’t generate growth. Etsy recently gave a seat on its board to a partner at activist investor Elliott Management, which bought a “sizable” stake in the company in the last few months. Marc Steinberg, who is responsible for public and private investments at Elliott, has also has been on the board at Pinterest
PINS,
-9.45%
since December 2022.

Elliott Management did not respond to questions. But in a statement last week, Steinberg said he was joining the board because he “believe[s] there is an opportunity for significant value creation.” Some sellers fear that the pressure from investors and Wall Street will lead to Etsy allowing mass-produced products onto the site. In its fall update, Etsy said the number of listings it removed for violating its handmade policy jumped 112% and that it was further accelerating such actions.

Etsy’s stock before the news of Elliott’s stake was down about 18% this year. Its shares are now off about 3.65% this year, after recently having their best day in seven years on the news that Steinberg joined the board.

Etsy is a unique marketplace that for many years had a much better reputation than some of its rivals, like eBay
EBAY,
+0.98%.
But since going public and answering to Wall Street, the need to provide growth and profits for investors has become much more of a driver. The Super Bowl ad and Gift Mode may bring a broader awareness to Etsy, but will it be the right kind of awareness? Sellers like me hope these new efforts will stave off the continuing fight with the likes of Temu and other vendors of mass-produced products, and help Etsy retain the remaining unique aspects of its marketplace.

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February 9, 2024
Barclays to buy retail banking arm of supermarket chain Tesco for £600 million

Tesco on Friday said it was selling the retailing banking business of Tesco Bank to Barclays for £600 million initially, and then another £100 million after the settlement of certain regulatory capital amounts and after transaction costs.

The U.K. supermarket chain said it will use majority of a combined £1 billion, which also includes a special dividend previously announced from Tesco Bank, for a share buyback.

It will retain insurance, ATMs, travel money and gift cards, that on a proforma basis account for roughly £80 million to £100 million in operating profit, and said the deal is mildly accretive to earnings per share.

Barclays said it’s acquiring credit cards, unsecured personal loans, deposits and the operating infrastructure that includes £8.3 billion of unsecured lending balances with a credit quality consistent with its existing U.K. portfolios. The business it’s buying had an adjusted operating profit of approximately £85 million in the 12 months ended February 2023.

Barclays also will enter into an exclusive strategic partnership with Tesco for an initial period of 10 years to market and distribute credit cards, unsecured personal loans and deposits using the Tesco brand, paying £50 million per year.

Tesco
TSCO,
+0.89%
shares have dropped 3% this year while Barclays
BARC,
-1.02%
shares have declined by 7%.

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February 8, 2024

British American Tobacco Swings to Pretax Loss on U.S. Cigarette Write-Down — Update

By Joe Hoppe

British American Tobacco said it swung to a pretax loss, driven by a previously reported write-down of its U.S. cigarette brands, but backed forecasts for growth in 2024.

The FTSE 100 cigarette maker–which houses the Kent, Dunhill and Lucky Strike brands–said pretax loss for 2023 was 17.06 billion pounds ($21.54 billion) compared with a profit of GBP9.32 billion a year prior. It said the swing was largely driven by an impairment of GBP27.6 billion. Of the impairment, GBP27.3 billion relates to pressure on some of its traditional cigarette brands in the U.S., as it shifts focus to smokeless products, it said.

BAT said in early December that its performance in the U.S. had been hindered by smokers switching to cheaper, nonpremium brands and a rise in illegal disposable vapes. The brands being written down included Newport, Pall Mall, Camel and Natural American Spirit, a company spokesperson said at the time.

Adjusted profit from operations edged up to GBP12.465 billion from GBP12.41 billion in 2022. Despite the growth, it skirted under a company-provided consensus forecast of an adjusted operating profit of GBP12.595 billion.

New categories revenue rose to GBP3.35 billion from GBP2.89 billion, missing a forecast of GBP3.46 billion, according to company-provided consensus.

Revenue was GBP27.28 billion compared with GBP27.66 billion, dragged by the sale of its businesses in Russia and Belarus, foreign-exchange pressures and lower cigarette volumes, and partially offset by the increased new categories revenue. Revenue was forecast at GBP27.60 billion, according to consensus provided by the company.

BAT said global tobacco industry volume is expected to decline around 3% in 2024, and it backed prior guidance for low single digit organic revenue and adjusted operating profit growth for the year.

The company said it will invest this year to strengthen its U.S. business, accelerate innovation and enhance its capabilities, which it said would weight its performance toward the second half.

“Thereafter, we will progressively build to deliver 3-5% organic revenue, and mid-single digit adjusted organic profit from operations growth by 2026 on a constant currency basis. We are committed to continuing to reward shareholders with strong cash returns throughout this period,” Chief Executive Tadeu Marroco said.

The board declared a dividend of 235.52 pence a share, up from 230.9 pence.

Write to Joe Hoppe at joseph.hoppe@wsj.com

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February 7, 2024

Mattel announces cost cuts after fourth-quarter results miss expectations

Toy maker Mattel Inc. on Wednesday reported fourth-quarter results that missed expectations, with the company saying it plans to cut costs this year while continuing to buy back stock.

The cost cuts would follow layoffs by rival Hasbro Inc.
HAS,
+1.34%
amid a slowdown in demand for toys. They also come as other companies over the past several weeks have announced layoffs and plans to tighten up expenses, as investors seek out bigger profit margins.

Shares of Mattel
MAT,
+1.57%
were up 1.5% after hours.

“Looking ahead, we are launching a new cost-savings program focused on profitable growth and expect to improve profitability and continue share repurchases in 2024,” Mattel Chief Financial Officer Anthony DiSilvestro said in the company’s earnings release.

Mattel — known for its Barbie and Hot Wheels toys and, increasingly, its efforts to turn them into content — reported fourth-quarter net income of $147.3 million, or 42 cents a share. That compares with net income of $16.1 million, or 4 cents a share, in the same quarter in 2022.

Adjusted for things like severance, product recalls and changes to deferred tax assets, Mattel earned 29 cents a share. Sales rose 16% to $1.62 billion.

Analysts polled by FactSet expected Mattel to report adjusted earnings per share of 31 cents, on revenue of $1.65 billion.

“Execution on our toy strategy was strong and we made meaningful progress in entertainment across film, television, digital and publishing,” Chief Executive Ynon Kreiz said in the company’s earnings release.

“We ended 2023 with the strongest balance sheet we have had in years, putting us in an excellent position to execute our strategy to grow Mattel’s IP-driven toy business and expand our entertainment offering,” he continued.

Mattel reported earnings after the key holiday-shopping season, and as analysts try to gauge the sales impact from the success of the “Barbie” movie released last summer. Mattel executives have said they want to make more films based on some of its other popular toys, and turn “Barbie” into a film franchise.

However, toy demand has been cooler recently, thanks to two years of inflation-fueled higher prices for goods and necessities. Retailers have taken a cautious approach toward stocking their shelves, after getting caught two years ago with too many toys and electronics that people didn’t want.

The Wall Street Journal reported this month that activist investor Barington Capital had taken a stake in Mattel, adding that Barington believed the company should consider “pursuing strategic alternatives” for its Fisher-Price and American Girl businesses.

Bank of America analysts on Tuesday said Mattel and Hasbro were among the companies that were “most at risk of direct impact” from shipping disruptions in the Red Sea. Yemen-based Houthi fighters opposed to Israel’s war in Gaza have attacked ships in the area, forcing lengthy detours and driving up shipping costs. Mattel, the analysts noted, got around 24% of its total sales from the Europe, Middle East and Africa regions in 2022.

During a conference in December, Kreiz said he believed in the long-term growth of the toy industry. But he said that after a jump in growth between 2019 and the pandemic, 2023 would likely be tamer.

“We believe 2023 will be back to normal in terms of shopping patterns and consumer behavior,” he said. “And also even inventory at the retail level and at our level is now reverting back to historical norms.”

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February 7, 2024
Disney, Fox and Warner Bros. team up to launch new sports streaming service

Walt Disney Co.’s ESPN, Fox Corp. and Warner Bros. Discovery Inc. are teaming to create a joint sports streaming service.

The as-yet unnamed service, which could be available as early as the fall and offer a sort of Hulu model for sports, comes amid an explosion in sports-streaming rights and audiences.

The service would essentially be a skinny bundle of the companies’ linear channels, including ESPN, ESPN2, ESPNU, SECN, ACCN, ESPNEWS, ABC, Fox, FS1, FS2, BTN, TNT, TBS, truTV, as well as the ESPN+ streaming service.

“The launch of this new streaming sports service is a significant moment for Disney
DIS,
+2.73%
and ESPN, a major win for sports fans, and an important step forward for the media business,” Disney Chief Executive Bob Iger said in a statement late Tuesday. “This means the full suite of ESPN channels will be available to consumers alongside the sports programming of other industry leaders as part of a differentiated sports-centric service.”

Added Warner Bros.
WBD,

CEO David Zaslav: “This new sports service exemplifies our ability as an industry to drive innovation and provide consumers with more choice, enjoyment and value and we’re thrilled to deliver it to sports fans.”

Each company will own one-third of the platform, according to Disney, in a deal reminiscent of the original Hulu, which started off as a joint venture between ABC, Fox and NBCUniversal.

The service will have a new brand with an independent management team, and will be available to bundle with Disney+, Hulu and Max subscriptions.

“We’re pumped,” Fox
FOX,
+0.55%
CEO Lachlan Murdoch said. “We believe the service will provide passionate fans outside of the traditional bundle an array of amazing sports content all in one place.”

More details, including pricing, will be announced later.

Prominently missing from the deal are Comcast Corp.
CMCSA,
-1.00%,
which owns NBCUniversal and its sports lineup that includes NFL football and the Olympics, and Paramount Global
PARA,
-0.21%,
which owns CBS — which carries the NFL and college football, among other sports.

The new service will showcase thousands of high-profile sporting events and include all four major sports leagues — the NFL, NBA, MLB and NHL — as well as college football and basketball, golf, tennis, cycling, soccer and UFC.

Shares of Disney were down 1% in extended trading Tuesday, while Fox shares jumped 6% and WBD gained 3%.

Mike Murphy contributed to this report.

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February 6, 2024
Small businesses are paying 100%+ of profits to Uncle Sam after tax-law change

Small businesses in sectors like software and manufacturing are panicking over the expiration of a critical tax deduction that they say could lead to mass layoffs and business closures, unless Congress acts quickly to amend the law.

“This is a life-and-death scenario for small software companies,” Michelle Hansen, co-founder of the geocoding company Geocodio, told MarketWatch.

The tax change that Hansen and other software executives are taking issue with was signed into law by President Trump in 2017, as part of a larger tax overhaul that slashed the top corporate tax rate from 35% to 21%.

But in order to satisfy Senate budget rules and pass the law with only Republican votes, the bill could not increase the budget deficit over a 10-year window.

So lawmakers included a provision that, beginning in 2022, drastically reduced how much research-and-development spending a business could deduct from their annual revenue to determine taxable income.

The change penalizes certain industries like software and information technology — where engineer salaries are often classified as R&D expenses — as well as manufacturing and pharmaceuticals
IHE.

IntervalZero CEO Jeff Hibbard, whose Massachusetts-based company designs and sells software for installation on precision machines like semiconductor manufacturers, told MarketWatch that he has had to tap into company savings for the past several years in order to avoid laying off engineers.

He said that his firm brings in about $9 million in revenue annually with expenses of $8 million — but 60% of those expenses come in the form of engineer salaries, which can only be deducted from taxable income over a five-year period because the IRS treats it as R&D.

He said that after taxes consumed all his profits in 2022, he had to pay an additional $800,000 to Uncle Sam, and an additional $600,000 for the 2023 tax year.

“We’ve had to do a hiring freeze and postpone projects” in a cutthroat industry where technology progresses rapidly, Hibbard said. “We’ve been in existence for 15 years. For the first 14, we always hired additional people. Now we have a hiring and salary freeze.”

The House of Representatives voted last week 357-70 to restore full expensing for R&D as part of a $79 billion tax package that boosted the child tax credit and extended other business tax breaks.

The bill now heads to the Senate, which already has its hands full debating immigration and national-security issues, and analysts say election-year politics could thwart its passage in 2024.

Henrietta Treyz, director of economic-policy research at Veda Partners, gave just a 10% chance of the bill passing the Senate in a recent note to clients.

“This year’s effort to pass a tax package has been more robust than the effort we saw in 2022 and 2023,” she wrote. Treyz added, however, that “the competing need to pass border reform and Ukraine/Israel aid, and general dysfunction in Washington keep us pessimistic that we’ll see a bipartisan economic-stimulus package come out of Congress this year.”

On top of Republicans not wanting to give President Joe Biden a victory that would provide tax relief for businesses and families, Senate Republicans could decide to drag their feet on the bill in the hope that they’ll retake the chamber next year and can play a bigger role in the process, according to Owen Tedford, policy analyst at Beacon Policy Advisors.

“The critical member to watch is Senator Mike Crapo [of Idaho], the top Republican on the Senate Finance Committee,” Tedford wrote. “Crapo has not outright opposed the bill but has raised policy concerns and has expressed a desire to have a chance to amend it.”

Political considerations may be dictating the bill’s fate in Washington — but some business owners fear they don’t have the wherewithal to wait until next year for the problem to be fixed.

Benjamin Bengfort, co-founder and CEO of Iowa-based software firm Rotational Labs, told MarketWatch that he had to lay off workers last year after his 2022 tax bill rose by 438%.

He noted that even demand for his products has taken a hit because of the change in the law, because his services can count as an R&D expense for his customers, too.

“So it is [between] a rock and a hard place for us, no matter how you look at it,” Bengfort said. “This is an existential threat for software engineering companies.”

Andrew Keshner contributed.

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February 5, 2024
McDonald’s misses revenue target as it cites impact from Middle East war

McDonald’s Corp.’s stock fell 1.3% in premarket trading on Monday after the fast-food giant missed Wall Street analysts’ estimates for revenue and same-store sales, while citing an impact from war in the Middle East.

The global fast-food giant said it expects “macro challenges” to persist in 2024.

McDonald’s
MCD,
-0.35%
said its fourth-quarter net income rose by 7% to $2.04 billion, or $2.80 a share, from $1.9 billion, or $2.59 a share, in the year-ago quarter.

McDonald’s said the latest quarter’s results included 15 cents a share in one-time charges.

Breaking those charges out, McDonald’s would have earned $1.95 a share. Analysts expected McDonalds to earn $1.83 a share, according to FactSet data.

Revenue rose 8% to $6.41 billion, short of the FactSet consensus estimate of $6.45 billion.

Fourth-quarter global comparable-store sales increased by 3.4%, including a 4.3% rise in the U.S.. Analysts expected same-store sales growth of 4.7%.

McDonald’s said its comparable sales fell in the Middle East as a reflection of war in the region since Oct. 7.

All other same-stores sales rose in international developmental licensed markets.

Total international developmental licensed markets same-store sales rose by 0.7%, well below the result in the previous quarter, which saw a 10.5% increase.

Looking back at the balance of 2023, McDonald’s said its net income rose by 37% to $8.47 billion.

Revenue jumped by 10% in 2023 to $25.49 billion.

Free cash flow for 2023 increased to $7.25 billion from $5.49 billion.

Before Monday’s moves, McDonald’s stock was up by 10.9% in the past year.

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February 5, 2024
How to navigate market risk from interest rates, the economy and politics in 2024

As the U.S. Federal Reserve’s three-year reign in the headlines potentially comes to an end, an analysis of this year’s market themes can offer valuable insights for predicting trends and ensuring attractive returns in 2024.

Beyond the central bank’s actions, pivotal factors shaping the investment landscape this year include fiscal policies, election outcomes, interest rates and earnings prospects.

Throughout 2023, a prominent theme emerged: that equities are influenced by factors beyond monetary policy. That trend is likely to persist.

A decline in interest rates could significantly increase the relative valuations of equities while simultaneously reducing interest expenses, potentially transforming market dynamics. Contrary to consensus estimates, 2023 brought a more robust earnings rebound, leaving analysts optimistic about 2024.

The 2024 U.S. presidential election, meanwhile, introduces a new element of uncertainty with the potential to cast a shadow over the market during much of the coming year.

Choppy trading, modest earnings growth

Anticipating a choppy first half of the year due to sluggish economic growth, we see a better opportunity for cyclicals and small-cap stocks to rebound in the latter part of the year. As uncertainty around the election and recession fears dissipate, a broad rally that includes previously ignored cyclicals and small-caps should help propel the S&P 500
SPX
higher.

Broader macroeconomic conditions support mid-single-digit growth in earnings per share throughout 2024. Factors such as moderate economic expansion, controlled inflation and stable interest rates are expected to provide a conducive environment for companies, enabling them to sustain and potentially improve their earnings performance. We estimate EPS growth of 6.5%. This projected growth aligns with the broader market sentiment indicating a steady upward trajectory in earnings for the upcoming year, fostering investor confidence and supporting valuation expectations across various sectors.

“ If the economy has not been in recession at the time of the first rate cut but enters one within a year, the Dow enters a bear market.”

When it comes to U.S. stock-market performance around rate cuts, the phase of the economic cycle matters. When there has been no recession, lower rates have juiced the markets, with the Dow Jones Industrial Average
DJIA
rallying by an average of 23.8% one year later.

If the economy has not been in recession at the time of the first cut but enters one within a year, the Dow has entered a bear market every time, declining by an average of 4.9% one year later. Our base case is a soft landing, but history shows how critical avoiding recession is for the bull market as the Fed prepares to ease policy.

Big on small-caps

This past year has posed a hurdle for small-cap stocks due to the absence of a driving force. These stocks typically perform better as the economy emerges from a recession. While they are currently undervalued, their earnings growth has been notably lacking. If concerns about a recession diminish, a normal yield curve could serve as a potential catalyst for small-cap stocks.

Growth vs. value

The ongoing outperformance of megacap growth stocks that we saw in 2023 might hinge on their ability to sustain superior earnings growth, validating their current valuations. Defensive sectors in the value category, meanwhile, are notably oversold and might exhibit strong performance, particularly toward the latter part of the first quarter. Should concerns about a recession dissipate, cyclical sectors within the value category could outperform, particularly if broader market conditions turn favorable in the latter half of the year.

Handling uncertainty

The Fed’s enduring influence regarding the prospect of a soft landing in 2024 remains a pivotal point in the market’s focus. Considering the themes of the past year and the multifaceted influences on equities beyond monetary policy, investors are advised to navigate through uncertainties stemming from unintended fiscal shifts, upcoming elections and the impact of fluctuating interest rates. While a potentially choppy start to the year is anticipated, it could create opportunities for cyclical and small-cap stocks later in the year.

Ed Clissold is chief of U.S. strategies at Ned Davis Research.

Also read: Mortgage rates dip after Fed meeting. Freddie Mac expects rates to decline more.

More: After the Fed’s comments, grab these CD rates while you still can

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February 3, 2024
Mark Zuckerberg could pay millions to the IRS on Meta dividends. He still might be getting ‘a major break’.

Mark Zuckerberg delighted Meta shareholders and Wall Street this week with news of the social media giant’s first-ever dividend.

The IRS may also be happy, now that it’s staring at millions in taxes on the Meta stock dividends bound for Zuckerberg’s portfolio.

Zuckerberg, the CEO of Meta Platforms Inc.
META,
+20.32%,
is poised to make $700 million in dividends yearly. He owns nearly 350 million shares, according to FactSet, and the company will start paying a quarterly dividend of 50 cents a share.

That would yield nearly $167 million in federal taxes yearly, after a qualified-dividend tax of 20% and another 3.8% tax on the investment returns of rich households, two accounting experts said.

California income taxes of 13.3% on the dividends could cost Zuckerberg another $93.1 million, said Andrew Belnap, an accounting professor at the University of Texas at Austin’s McCombs School of Business.

All in, that’s a combined $259.7 million in federal and state taxes annually on the Meta dividends, Belnap estimated.

For context, U.S. taxpayers reported over $285 billion in qualified-dividend income to the IRS though mid-November 2023, according to agency statistics. Nearly 30 million tax returns reported qualified dividends through that time.

Meta said it plans a quarterly cash dividend going forward, with the first such payment in March.

Meta shares soared 20.5% on Friday, ending with a record-high close of $474.99. The Dow Jones Industrial Average
DJIA,
S&P 500
SPX
and Nasdaq Composite
COMP
all closed higher Friday.

‘Zuck is getting a major break’

Meta announced the dividend payment in its earnings results Thursday, on the same week that Americans began filing their income taxes.

A look at Zuckerberg’s dividends and their tax implications offer a peek at the debate about the varying ways wages and wealth are taxed.

“Zuck is getting a major break,” said Andrew Schmidt, an accounting professor at North Carolina State University’s Poole School of Management who also crunched the numbers for MarketWatch.

Approximately $167 million “seems like a high tax bill,” he said. But if Zuckerberg received the $700 million as a straight salary, Schmidt estimated he’d be looking at a roughly $259 million tax bill on the wages after they were taxed at the top marginal rate of 37%.

Federal income tax brackets run from 10% to 37%.

Meanwhile, the IRS taxes qualified dividends and capital gains at 0%, 15% and 20%, depending on income and household status. The net investment income tax adds another 3.8% for individuals making at least $200,000 or married couples worth $250,000.

For federal and state taxes on the Meta dividends, Zuckerberg would face a combined rate of 37.1%, Belnap noted. “His tax rate on this is actually fairly high,” he said.

The gap in tax rates on income derived from wages and investments “has been a big criticism with U.S. tax policy,” Schmidt said, especially as lawmakers look for ways to come up with more tax revenue.

Regular retail investors enjoy the same preferential rates on capital gains and dividends as the top 1% of taxpayers, Schmidt added. The issue is that those dividends and stock profits are a smaller part of their income while salaries, taxed at higher rates, are a bigger proportion.

Belnap noted that California’s state tax rules don’t provide special treatment to dividends.

Read also: Where Trump, Biden and Haley stand on capital gains, the child tax credit and other key tax questions

Zuckerberg received a $1 base salary in 2022, a figure that hasn’t changed in several years. He is now worth $142 billion, according to the Bloomberg Billionaires Index, making him the fifth-richest person in the world.

Meta did not immediately respond to a request for comment.

Taxes on the Meta dividends will not be something Zuckerberg, or any Meta shareholders big or small, need to deal with until next year’s tax season, Belnap and Schmidt observed.

But as taxpayers amass their 1099-DIV forms on dividend income, IRS figures show that it’s mostly upper-echelon taxpayers reaping the rewards on the preferential rates for qualified dividends.

Households worth at least $1 million accounted for 40% of the approximate $285.3 billion in qualified dividends reported through mid-November, according to agency figures.

For less affluent investors, “it’s usually a nice supplement, but I’d say very few people are living off dividends,” Belnap said.

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February 2, 2024
Meta’s stock is the most overbought in 11 years, but that could be a good thing

There’s a common belief that “overbought” is a technical condition for a stock, but in practice it seems to be more of an ability.

Meta Platforms Inc.’s stock
META,
+20.32%
soared so much Friday after a blowout earnings report, that some technical readings have reached levels not seen in 11 years.

The stock rocketed 20.9% to close at a record $474.99, to book the third-biggest gain since going public in May 2012. The only bigger rallies were 23.3% on Feb. 2, 2023 and 29.6% on July 25, 2013, which were also after earnings reports.

The stock’s Relative Strength Index, which is a momentum indicator that measures the magnitudes of recent gains and losses, climbed to 86.48. That’s the highest level seen since it closed at a record 89.39 on July 30, 2013.

But that shouldn’t scare off Meta bulls.

Many chart watchers believe RSI readings above 70 are signs of “overbought” conditions, which suggests bulls need a breather after running faster and farther than they are used to.

There are also many who believe the ability to become overbought is a sign of underlying strength, since a stock tends to be trending higher when RSI hurdles 70. (Read Constance Brown’s “Technical Analysis for the Trading Professional.”)

For example, the record RSI reading came three days after the record stock-price rally of 29.6% on July 25, 2013. Even though RSI closed at what was then a record of 88.27 after a record price gain on the 25th, the stock continued to rally and become even more overbought.

It was that spike that snapped the stock out of the year-long doldrum that followed the initial public offering, and flipped the long-term narrative on the stock to bullish. (Read “Facebook’s ‘breakaway gap’ is a bullish game changer,” from The Wall Street Journal.)

FactSet, MarketWatch

And while the record RSI readings in July 2013 did lead to a minor short-term pullback, it didn’t stop the stock from embarking on a long-term uptrend, in which RSI made multiple forays above 70.

FactSet, MarketWatch

And the last time RSI closed above 85 was Feb. 2, 2023, when it closed at 86.07, also after a blowout earnings report.

And similar to 10 years earlier, that historically high overbought reading helped launch another long-term rally.

FactSet, MarketWatch

So yes, Meta’s stock is now facing historically high overbought conditions. But as many chart watchers like to say, overbought doesn’t mean over.

One thing to consider, however, is that the two prior times RSI spiked above 85 were while the long-term fates of the stock were still in question — the stocks were working on short-term bounces following long-term downtrends.

FactSet, MarketWatch

But Friday’s blast off happened just days after the stock closed at a record high. There was no resistance to hurdle, so rather than a bullish “breakaway gap,” Friday’s jump could be considered more a bullish leap of faith.

Also read:

Meta’s killer stock rally could add $200 billion in market cap — a historic haul.

Nvidia’s stock could rise above $600 — despite signs it’s already overbought.

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February 2, 2024
Trump says Powell is being ‘political’ with interest rates

Former President Donald Trump on Friday criticized Federal Reserve Chair Jerome Powell and said he’s playing politics with interest-rate policy.

“It looks to me like he’s trying to lower interest rates for the sake of maybe getting people elected,” Trump said, in an interview on the Fox Business Network.

“I think he’s political,” added Trump, the likely 2024 Republican nominee for president.

Asked if he would reappoint Powell to a third four-year term, Trump replied “no.”

Trump said he has a couple of choices in mind to replace Powell, but wouldn’t say who.

Trump said he thinks lowering interest rates would lead to massive inflation. The conflict in the Middle East is likely to lead to “big inflation” from a spike in oil prices, he added.

“Trump said he thinks lowering interest rates would lead to massive inflation. The conflict in the Middle East is likely to lead to “big inflation” from a spike in oil prices, he added.”

Powell “is not going to be able to do anything,” Trump said.

On Wednesday, Powell said he wasn’t giving a potential third term any thought. Powell’s current term expires in early 2026.

Speculation on a third term “is not something I’m focused on,” Powell said.

“We’re focused on doing our jobs. This year is going to be a highly consequential year for the Fed and monetary policy. We’re, all of us, very buckled down, focused on doing our jobs,” Powell said.

Analysts say that the Fed will be criticized by both parties in the election year.

On Sunday, Powell will appear on the CBS News program “60 Minutes” and will likely face more questions about the election.

Earlier this week, top Democrats on the Senate Banking Committee urged the Fed to cut rates quickly, saying they were too high and hurting the housing market.

“Keeping interest rates high will be detrimental to American workers and their families and do little to bring down prices or promote moderate economic growth,” said Sen. Sherrod Brown, a Democrat from Ohio, and the chairman of the Banking Committee, in a letter to Powell prior to Wednesday’s Fed meeting.

At the meeting on Wednesday, the Fed kept its benchmark interest rate unchanged in a range of 5.25%-5.5%.

Asked about the letter from the Democrats on Wednesday, Powell said Congress has given the Fed the job of stable prices. High inflation hurts people at the lower end of the income spectrum, he added.

“It’s what society has asked us to do is to get inflation down. The tools we use to do it are interest rates,” he said.

The Fed has penciled in three rate cuts for 2024. Powell said that a cut at the Fed’s next meeting in March was unlikely. He said the Fed wants to see more good inflation reports so it can have greater confidence that inflation is coming down to the 2% target.

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February 2, 2024
Tesla settles California hazardous-waste lawsuit for $1.5 million

Tesla Inc. will pay $1.5 million to settle a lawsuit filed earlier this week by 25 California counties accusing the electric-vehicle maker of mishandling hazardous waste.

San Francisco District Attorney Brooke Jenkins announced the settlement late Thursday.

“While electric vehicles may benefit the environment, the manufacturing and servicing of these vehicles still generates many harmful waste streams,” Jenkins said in a statement. “Today’s settlement against Tesla, Inc. serves to provide a cleaner environment for citizens throughout the state by preventing the contamination of our precious natural resources when hazardous waste is mismanaged and unlawfully disposed.”

The lawsuit, filed Tuesday, accused Tesla
TSLA,
+0.84%
of improperly handling, transporting and disposing hazardous materials including oil, lead acid batteries, antifreeze and diesel fuel at as many as 101 sites across the state.

As part of the settlement, Tesla was ordered to pay $1.3 million in civil penalties, and $200,000 to reimburse the cost of the investigation, which began in 2018. Tesla also must comply with an injunction for five years to properly dispose of its hazardous materials.

Last month, Tesla reported earnings of $7.9 billion in the fourth quarter.

Tesla, which dissolved its media relations team in 2020, did not respond to a request for comment.

Tesla shares are down about 24% year to date, compared to a 3% gain by the S&P 500
SPX.

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February 1, 2024
Etsy’s stock is having its best day in seven months after Elliott takes ‘sizable’ stake

Investors bought up shares of Etsy Inc. on Thursday after the online crafts marketplace added to its board of directors a partner of hedge fund Elliott Investment Management L.P., which recently acquired a “sizable” stake in the company.

Etsy
ETSY,
+9.31%
said Marc Steinberg, who is responsible for public- and private-equity investments at Elliott, has been appointed to the board, effective Feb. 5, and will also join the board’s audit committee.

“Etsy has a highly differentiated position in the e-commerce landscape and a uniquely attractive business model, supported by a distinctive and engaged community,” Steinberg said. “We became a sizable investor in Etsy and I am joining its board because I believe there is an opportunity for significant value creation.”

Etsy’s stock shot up 8% in afternoon trading, to pare earlier gains of as much as 14.2%. The stock was headed for its best one-day gain since it climbed 9.2% on July 11.

Elliott’s stake was acquired in recent months, as the fund’s disclosure of equity holdings through the third quarter did not list Etsy shares.

“Marc’s appointment reflects our ongoing commitment to enhance the perspectives and expertise on the Etsy Board,” said Etsy Chairman Fred Wilson. “We look forward to benefiting from his voice in the boardroom as a seasoned and experienced investor as we continue our journey of creating a leading global e-commerce platform.”

Etsy now has 10 board members.

Etsy’s stock has run up 18.6% over the past three months, but has tumbled 48.5% over the past 12 months. That’s compared with the S&P 500 index’s
SPX
18.7% rally over the past year.

Read (December 2023): Etsy to cut 11% of staff as CEO says company is on ‘unsustainable trajectory’

At an investor conference in December, Chief Executive Josh Silverman said business has slowed since the post-pandemic boom, as people have “had enough of buying things” and are now spending primarily on eating out and travel. Inflation and the loss of government subsidies was also weighing on spending.

Still, Silverman said, Etsy is now about two and a half times bigger than it was before the pandemic, and the company has more active buyers than it did at the peak of the pandemic.

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February 1, 2024

Shell Earnings Beat Forecasts on Strong Gas Trading; Launches $3.5 Bln Buyback — Update

By Christian Moess Laursen

Shell’s annual profits fell last year, although by less than the market had expected, as the European energy sector grapples with lower oil and gas prices and weaker refining margins.

Still, the London-based energy giant said Thursday that it would buy back $3.5 billion in shares this quarter and hiked its fourth-quarter dividend by 20% to 34.40 cents a share, in line with its promise of lofty shareholder returns despite slipping commodity prices.

The oil-and-gas major posted $20.28 billion in full-year profit measured on a net current-cost-of-supplies basis–a metric similar to the net income that U.S. oil companies report. This compares with $41.56 billion in 2022 when oil and gas prices soared after Russian invaded Ukraine.

For the fourth quarter, Shell’s profit on a net current-cost-of-supplies basis dropped to $1.38 billion from $6.15 billion in the preceding three-month period, reflecting lower refining margins, margins from crude and oil products trading, and higher operating expenses.

However, adjusted fourth-quarter earnings–which strip out certain commodity-price adjustments and one-time charges–rose to $7.31 billion from $6.22 billion in the third quarter, beating a consensus forecast of $6.04 billion, based on a poll of 24 analysts compiled by Vara Research. The increase was driven by higher trading gains from liquefied natural gas, favorable tax movements, and higher production, Shell said.

Market watchers had expected a dip in quarterly earnings, forecasting results across the integrated energy sector to have been hit by lower oil prices and refining margins.

But despite the weaker market environment, Shell’s key integrated-gas unit, which includes its leading LNG business, posted adjusted fourth-quarter earnings of $3.96 billion, up from $2.53 billion in the preceding three months.

“As we enter 2024 we are continuing to simplify our organization with a focus on delivering more value with less emissions,” Chief Executive Wael Sawan said.

The company, the second-biggest by market cap on the FTSE 100 index, also booked a $3.9 billion impairment charge, dragging quarterly net profits, which fell to $474 million from $7.04 billion. This was flagged by the company in January.

Cash flow from operations–a measure of the cash a company generates from normal business operations–rose to $12.575 billion in the quarter, topping a consensus forecast of $11.59 billion, from $12.33 billion in the third quarter.

During the fourth quarter, Shell–Europe’s biggest integrated oil company–produced 901,000 oil-equivalent barrels a day, in line with its targeted range, and 7.1 million metric tons of LNG, likewise in line with its guidance.

Upstream production–the extraction of crude oil and natural gas–also met the targeted range at 1.87 million BOE a day.

For the current quarter, Shell expects an output between 930,000 and 990,000 BOE a day of integrated gas, 7.0 million-7.6 million tons of LNG and an upstream production of 1.73 million-1.93 million BOE a day.

Write to Christian Moess Laursen at christian.moess@wsj.com

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January 31, 2024

Judge dismisses Disney’s free-speech lawsuit against DeSantis

Walt Disney Co.’s lawsuit against Florida’s Republican Gov. Ron DeSantis and others, alleging they retaliated against the company for publicly criticizing a controversial parents-rights education law backed by DeSantis, was dismissed by a federal judge on Wednesday.

Shares of Disney
DIS,
-0.92%
fell about 1% Monday.

Judge Allen Winsor ruled Disney lacked legal standing to sue DeSantis. He added that Disney’s charges “fail on the merits” against members of the Florida board of a special improvement district in which the company operates its parks and resort.

In his ruling, Winsor said Disney “has not alleged any specific actions the new board took (or will take) because of the governor’s alleged control.” He added the company “has not alleged any specific injury from any board action.”

“Its alleged injury … is its operating under a board it cannot control. That injury would exist whether or not the governor controlled the board,” he wrote.

Disney strongly suggested it will appeal Winsor’s ruling.

“This is an important case with serious implications for the rule of law, and it will not end here,” the company said in a statement. “If left unchallenged, this would set a dangerous precedent and give license to states to weaponize their official powers to punish the expression of political viewpoints they disagree with. We are determined to press forward with our case.”

The controversial legislation, dubbed “Don’t Say Gay” by critics, was passed in 2022.

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January 31, 2024
Alphabet’s stock dips because advertising was good, but not good enough

Google parent Alphabet Inc.’s stock was tumbling late Tuesday, as a rebound in digital advertising fell short of analysts’ lofty expectations.

The search-engine powerhouse reported a jump in fourth-quarter sales, chiefly through advertising, but Alphabet’s shares
GOOGL,
-1.34%

GOOG,
-1.16%
fell 4% in after-hours trading.

Total revenue was $86.3 billion, up 13% from $76 billion a year ago. Sales minus total acquisition costs (TAC) came in at $72.3 billion, compared with $63.1 billion a year ago.

Alphabet reported fourth-quarter net income of $20.7 billion, or $1.64 a share, compared with net income of $13.6 billion, or $1.05 a share, in the year-ago quarter.

“We are pleased with the ongoing strength in Search and the growing contribution from YouTube and Cloud. Each of these is already benefiting from our AI investments and innovation. As we enter the Gemini era, the best is yet to come,” Alphabet Chief Executive Sundar Pichai said in a statement announcing the results.

Analysts surveyed by FactSet had expected on average net earnings of $1.59 a share on revenue of $85.3 billion and ex-TAC revenue of $71.2 billion.

Google’s total advertising sales climbed to $65.5 billion from $59 billion a year ago, edging analysts’ average expectations of $65.8 billion. YouTube ad sales rose to $9.2 billion from $7.96 billion a year. Google Cloud rang up $9.2 billion in sales, up from $7.3 billion.

Alphabet is also ramping up AI initiatives to improve operational efficiency and productivity for 2023 and beyond. The company is using AI in its finance organization and analytics, but Alphabet did not break out AI revenue in Tuesday’s earnings report.

Alphabet Chief Financial Officer Ruth Porat told CNBC that gen-AI will be a focus of the call with analysts now taking place.

Shares of Google have climbed 53% over the past 12 months. The S&P 500 index
SPX
has risen 21% the past year.

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January 30, 2024
As FanDuel parent Flutter starts trading on NYSE, CEO expects Super Bowl bets to ‘break records’

Flutter Entertainment, the parent company of FanDuel, started trading on the New York Stock Exchange for the first time Monday, as the company tries to narrow the valuation gap between it and rivals including DraftKings.

Flutter said Monday that it’s planning to make the New York Stock Exchange its primary listing and will put that to a vote of its shareholders in May. Making the NYSE its home, rather than London, will help it get included in important U.S. indexes, the company said.

Launching Monday with the ticker FLUT, it’s targeting New York as its primary listing late in the second quarter and early in the third quarter.

Having a New York listing will also boost its profile in the U.S., help with recruitment and retention, and access “much deeper” capital markets.

Flutter CEO Peter Jackson spoke with Yahoo Finance about the company after it started trading on Monday. The total addressable U.S. sports betting market is expected to reach $40 billion by 2023 — but Jackson thinks that’s lowballing it. “I expect [$40 billion] will turn out to be conservative, because everything in America turns out bigger than you expect,” he said.

And when asked about betting on the Super Bowl matchup between the Kansas City Chiefs and the San Francisco 49ers, he said, “We’ll break records in a couple of weeks time.”

London-listed shares
FLTR,
-0.92%
drifted 0.3% lower on Monday, though the stock has gained 17% this year.

According to FactSet, DraftKings
DKNG,
+1.88%
trades on 8.2 times estimated fourth-quarter sales, compared to 2.6 times for Flutter Entertainment.

Flutter said it plans to retain its London listing, having already delisted from Euronext Dublin.

Flutter earlier this month said that FanDuel was the “clear number one sportsbook” in the U.S. during the fourth quarter.

Other Flutter brands include Betfair, PokerStars and Paddy Power.

Weston Blasi contributed.

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January 29, 2024

Ryanair 3Q Rev EUR2.70B

By Anthony O. Goriainoff

Ryanair Holdings said third-quarter adjusted profit after tax fell as higher fuel costs offset revenue gains, and narrowed its guidance for the year.

The Irish budget airline said Monday that for the quarter ended Dec. 31 adjusted post-tax profit–its preferred metric–was 15 million euros ($16.3 million) compared with EUR211 million the year before.

Revenue for the quarter was EUR2.70 billion, compared with EUR2.31 billion a year ago.

The company said revenue per passenger rose 9%, with ancillary revenue up 2% to around EUR23 and average fares up 13% to over EUR42.

The airline carried 41.4 million passengers in the quarter compared with 38.4 million a year ago. Load factor–a measure of how full a plane is–for the period fell one percentage point to 92%.

The company narrowed its profit after tax guidance for the year to between EUR1.85 billion and EUR1.95 billion, from prior guidance of between EUR1.85 billion and EUR2.05 billion.

The company said that although it will benefit from the first half of Easter traffic falling in late March, this was unlikely to fully offset weaker-than-previously-expected load factors and yields in late third quarter and early fourth quarter.

Write to Anthony O. Goriainoff at anthony.orunagoriainoff@dowjones.com

By Anthony O. Goriainoff

Ryanair Holdings said third-quarter adjusted profit after tax fell as higher fuel costs offset revenue gains, and narrowed its guidance for the year.

Revenue for the quarter was EUR2.70 billion, compared with EUR2.31 billion a year ago.

The company said revenue per passenger rose 9%, with ancillary revenue up 2% to around EUR23 and average fares up 13% to over EUR42.

The airline carried 41.4 million passengers in the quarter compared with 38.4 million a year ago. Load factor–a measure of how full a plane is–for the period fell one percentage point to 92%.

The company narrowed its profit after tax guidance for the year to between EUR1.85 billion and EUR1.95 billion, from prior guidance of between EUR1.85 billion and EUR2.05 billion.

Write to Anthony O. Goriainoff at anthony.orunagoriainoff@dowjones.com

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January 28, 2024

Denim pioneer Levi’s is rolling out ‘tech pants’ and other new offerings this year. But will retailers stock them?

With a rough 2023 in the rearview mirror, Levi Strauss & Co. this year is trying to tackle its problems with new pants.

That includes pants with lighter-weight denim; pants for women that can be worn as high-rise or low-rise; and even nondenim pants that management, during Levi’s
LEVI,
+1.27%
earnings call on Thursday, referred to as a “tech pant” for men with “moisture control and 360 mobility.” The company also plans to expand its offerings of Performance Cool pants intended to keep the wearer cool and dry on hotter days.

But as those products roll out, the retailers that account for most of Levi’s sales are still cautious about packing their shelves with new apparel — even though Levi’s executives pointed to slightly better demand from clothing stores during the fourth quarter and holiday period. And as the denim pioneer cuts costs, brings in new leadership and tries to be a bigger e-commerce player, Wall Street will now be digging around for signs of a payoff.

“Ultimately, the market will be looking for evidence new strategies can drive accelerated growth,” Stifel analyst Jim Duffy said in a research note on Thursday.

“We continue to believe in brand vitality and opportunities for extension. With product reflective of new direction arriving in the marketplace across 2024, the proof will be in consumer response,” he continued.

In an interview with MarketWatch on Friday, Duffy said he was optimistic about Levi’s standing as an established brand and stronger demand for its dresses, skirts and other women’s clothing items. But the more products a company rolls out, he suggested, the more it has to invest to make them work — and the more it needs to manage if sales falter.

“The risk, as I see it, is that more categories means more SKUs and more product that is fashion rather than core basic styles, and more investment and inventory that, if it doesn’t translate to the marketplace, could result in higher markdowns,” he said, referring to the stock-keeping units by which retailers track inventory.

Levi’s on Thursday said it would lay off between 10% and 15% of its global corporate staff in the first half of this year, a move intended to save $100 million in costs over that period. The layoffs are part of a two-year plan, called Project FUEL, intended to save money and strengthen the part of Levi’s business that sells directly to consumers via its own e-commerce network and its physical stores, as opposed to third-party retail operations.

The layoff announcement arrived days ahead of Chief Executive Chip Berg’s departure from that role, with Michelle Gass taking over on Jan. 29. As the company tries to be bigger than men’s jeans, Gass, in Levi’s earnings release on Thursday, said she saw an opportunity to grow internationally, make Levi’s own online and bricks-and-mortar sales a greater priority, and turn the brand into a larger “denim apparel lifestyle business.”

Levi’s shares fell after hours Thursday, after the company’s full-year profit forecast came in below expectations. The stock rebounded 1.3% on Friday but is still down 10.3% over the past 12 months.

Still, Levi’s direct-to-consumer sales jumped 11% during the fourth quarter, and accounted for 42% of sales overall. Duffy said that the company has pushed deeper into its direct-sales business because it gives executives greater insight into what consumers want, as well as more control over how it markets and sells its clothing. Cutting out other retailers also widens margins on sales, he noted.

Levi’s operating margins were higher in the fourth quarter. It also declared a dividend of 12 cents per share, payable in cash on Feb. 23.

But sales in Levi’s wholesale segment — the sales it gets from retailers who buy Levi’s product, then sell it to consumers — fell 2%. Better results in the U.S. and Asia were offset by a drop in Europe, the company said.

Retailers have spent the past two years trying to clear unwanted clothes from their stockrooms, and cutting prices in the process, after spiking inflation restricted many shoppers’ appetites to basics.

As Gass prepares to take the reins, she sought to put a positive spin on retail-chain sentiment. “So net-net, overall, as a company, we’re exiting the year on a strong note,” Gass said on the earnings call. “And U.S. wholesale, we’re encouraged. But as it relates to that channel, we’re not declaring victory yet. There’s been a lot of volatility this past year, some in our control, some outside. And so we are taking a cautious approach as we look forward.”

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January 26, 2024

Tag: C&amp;E Industry News Filter

Choppy trading, modest earnings growth

Big on small-caps

Growth vs. value

Handling uncertainty

‘Zuck is getting a major break’

Tag: C&E Industry News Filter