TheChek News Flow

Power projects in the west are too often delayed and over budget

Nuclear power is back in the spotlight for its potential contribution to curbing carbon emissions. A UK parliamentary committee recently urged the government to come up with a strategy, rather than vague targets, to more than triple nuclear generating capacity by 2050. In the US, the Vogtle 3 unit began delivering electricity to Georgia’s power grid — the first reactor the country has built from scratch in more than three decades. Yet the fact that Vogtle 3 and the coming unit 4 might also be among the last big US reactors to be built is a sign of the questions over such plants, despite their promise.

The basic climate case for nuclear power is solid. It can provide a “firm” generation bedrock to underpin more intermittent solar and wind. Since so much more generating capacity will be needed as vehicles and industry switch from fossil fuels, it would be a big stretch for renewables to fill all of the gap.

But nuclear is much more expensive than renewables, whose cost has come down sharply, even when everything runs smoothly, which it rarely does. The challenge of safely storing nuclear waste has not been entirely resolved. And recent experience in Europe and the US is almost entirely of projects being completed late and over budget. That has put off private investors, too.

France’s EDF now says Hinkley Point C, Britain’s first new nuclear power station for almost 30 years, is likely to cost more than envisaged. EDF’s Flamanville-3 reactor in France is over a decade behind schedule. In the US, the $14bn original cost of Vogtle 3 and 4 has blown past $30bn.

Japan and South Korea have a better record, but Japan is not building overseas. South Korea’s Kepco, though it successfully built Abu Dhabi’s first nuclear plant, is facing a copyright lawsuit from America’s Westinghouse over using the same design elsewhere. China and Russia have completed multiple reactors largely on time, but few western nations want to buy from them.

Small modular reactors — cheaper and quicker to build — may start to play a role, but are still in development. So if nuclear power is to play the part many western governments envisage, the industry needs to improve financing, construction and supply chains, and demonstrate it can build big reactors within the time and resources allotted.

The cost of capital and overall costs can potentially be held down through the regulatory asset base model, now adopted by the UK, where consumers pay towards a new plant through energy bills even during construction. This can avoid interest charges mounting up, but increases bills upfront.

In terms of project selection and planning, with several “third generation” reactor designs from the US, Europe and Japan now in operation, one rule of thumb should be to look for what has worked elsewhere and set out to replicate it. A 2018 report by industry and the UK government found that plant designs had to be nailed down before work began to reduce costs. If not, late changes and resulting construction delays were almost bound to cause expenses to balloon.

Industry insiders say building large reactors is not a technology challenge but an engineering and project management one. A vital need is for people with relevant skills and experience — knowhow that has atrophied in some western nations. The UK this month launched a nuclear skills task force to try to address the gap.

Many of the things engineers say are needed to keep nuclear costs down — better planning and communications, applying best practice — sound humdrum, but seem hard to achieve in real life. If “gigawatt-scale” reactors are to play their part in the west’s climate transition, the nuclear industry must be better at planning and execution.

Rocket company and satellite operator narrowed loss to $559 million in 2022; costs increased but revenues rose faster

SpaceX’s soaring revenue helped it eke out a small profit in the first three months of the year after two annual losses, according to documents that offer a rare view into the financials of Elon Musk’s rocket company.

The company generated $55 million in profit on $1.5 billion in revenue during the first quarter of 2023, according to results in documents viewed by The Wall Street Journal. The slim earnings came after two years of significant but narrowing losses at SpaceX, which is pouring money into a rocket that remains unproven and poses difficult technical challenges.

Founded by Elon Musk more than two decades ago, SpaceX has emerged as the dominant U.S. rocket launcher and has built a major satellite-internet business. NASA itself is dependent on the company—the agency doesn’t have a domestic alternative to SpaceX for flying astronauts to and from the International Space Station.

The Hawthorne, Calif.-based company has grown rapidly since its early days and was valued at roughly $150 billion during a recent employee stock sale, putting it on par with Intel or Disney.

Unlike those corporate giants, SpaceX is privately owned and keeps details about its finances under wraps, as do many other private companies. Some people with stakes in SpaceX have no idea how much money the company makes or loses. Many SpaceX investors view their holdings as a long-term bet and say they aren’t concerned about seeing results.

It is unusual to have a full look at some of the company’s recent results, as the Journal did, including costs and how SpaceX performed based on the traditional measure of profitability. The last public deep dive into its financials occurred more than six years ago in the Journal.

The documents viewed by the Journal described SpaceX’s first-quarter results as “preliminary.” The annual results indicate they are final.

Before SpaceX’s small quarterly profit at the start of this year, the company reported about $5.2 billion in total expenses for 2022, up from $3.3 billion the year earlier, the documents show. Revenue doubled to $4.6 billion, helping the company reduce its loss last year to $559 million from $968 million.

A SpaceX spokesman didn’t respond to a request for comment. Bret Johnsen, the company’s finance chief, couldn’t be reached.

SpaceX is part of a generation of venture-backed companies that have so far rejected public markets. That means it has been able to set its direction with less outside scrutiny. Ample capital from investors has helped the company stay private: It reported taking in around $2 billion in proceeds from issuing stock last year, up from $1.5 billion in 2021, according to the documents.

SpaceX’s approach resembles how other technology companies have invested huge sums of money into products and infrastructure to try to build advantages over rivals, at the expense of profits.

During 2021 and last year, the company spent a total of $5.4 billion on purchases on property and equipment and incurred significant research and development costs, the documents show. Some portion of that spending is tied to its program developing Starship, a powerful rocket that poses immense hurdles for SpaceX. Costs for Starship weren’t specified in the documents.

The company’s first Starship test flight in April ended when an onboard system destroyed the vehicle after about four minutes. SpaceX won’t be allowed to fly the rocket again until air-safety regulators sign off.

It also has been putting money into Starlink, a satellite-powered internet service, including for a new factory near Austin, Texas.

Last year, SpaceX spent $3.1 billion on a group of costs that included employee salaries, materials and spacecraft depreciation. That was up from $1.6 billion in 2021, the documents show. The company reported $1.3 billion on research and development expenses for 2022, an increase of 11% year over year.

SpaceX’s results have likely been helped by price increases for its Falcon rocket missions as well as delays that have prevented competitors from debuting new vehicles. It boosted Starlink prices for U.S. residential subscribers in 2022, but adjusted them more recently, raising prices for some customers and lowering them for others.

The company has put its financial resources to work in other ways. It spent $153 million to buy SpaceX shares earlier this year during one of its liquidity events, where current and former employees can potentially cash out their stock in the company, according to the documents. SpaceX also said it paid $524 million, mostly in stock, in a rare deal to acquire a satellite-communications company called Swarm Technologies in 2021.

The documents also show SpaceX wrote down the value of bitcoin it owns by a total of $373 million last year and in 2021 and has sold the cryptocurrency. Tesla, the electric-car manufacturer Musk leads, has taken a similar approach with its bitcoin holdings. Musk has posted about cryptocurrencies frequently over the years.

A giant investment from Softbank in 2021 turbocharged expansion plans at Vuori, which is now eyeing global expansion and a takeover of its customers’ closets. But Lululemon, Nike and a host of direct-to-consumer competitors stand in its way.

KEY INSIGHTS

The future of activewear is not leggings.

At least, that’s the central thesis behind Vuori, an activewear brand that has in recent years expanded beyond workout gear into categories like jackets and pants that are better suited to walking the dog or commuting to work than hitting the gym.

To be sure, the brand sells plenty of leggings too, including pairs made with a new fabric it calls BlissBlend, unveiled last week. But travel is among its fastest-growing categories, and stretchy trousers that look formal enough to wear to the office are a perennial bestseller.

“Brands like Vuori have permission to take more of your closet than ever before,” said Joe Kudla, who founded the brand as a men’s yoga outfitter in Encinitas, Calif. in 2014. “Whereas you used to have your workout clothes and clothes you’d socialise and go out in, today, we’re appealing to people across the spectrum of their lifestyle.”

There are, of course, many brands like Vuori. Lululemon, Gap Inc.’s Athleta and Nike all sell a mix of gym and lifestyle gear (Lululemon’s popular ABC jogger pants, for instance, are also positioned as ideal for the active commuter). There are countless start-ups trying versions of the same concept, including Rhone, Tracksmith and Outdoor Voices.

Vuori’s edge isn’t so much the idea of an activewear brand selling wardrobes for the office, but the scale on which it’s trying it. The brand took a $400 million investment from SoftBank at a $4 billion valuation in October 2021, at the height of the pandemic activewear boom. At the time, it had nine stores, mostly in California. Today, it’s up to about 40, with locations in London, Las Vegas and the Mall of America in Minneapolis. By 2026, the brand is hoping to have 100 stores, including a pop-up in Shanghai and a permanent outpost in Seoul planned for later this year.

The question is whether Vuori is on track to join Nike and Lululemon in activewear’s top tier, or if it’s destined to join other SoftBank investments — WeWork, Uber and Brandless among them — that expanded fast only to discover the market opportunity wasn’t as big or as lucrative as hoped.

Demand for sporty apparel has softened since SoftBank made its investment. Major sports and activewear retailers saw revenue dip 2 percent in the second quarter of 2023 compared with a year earlier, according to AlixPartners. Athleta’s sales dropped 11 percent in the quarter ending April 29; Gymshark, another workout apparel start-up that received a nine-figure investment from General Atlantic in 2020, laid off 65 employees and scaled back its US expansion plans earlier this year.

But though consumers may have over-indexed on workout clothes during the pandemic, the idea that stretchy, breathable clothes can be worn anywhere is proving stickier. Vuori has seen double- or triple-digit year-on-year monthly sales growth since at least 2019, according to data from Earnest Analytics. Quality apparel, marketed well, will still find an audience, experts say.

“For activewear, we’re seeing an expansion in use case but a contraction in demand,” said Tiffany Hogan, retail analyst at Kantar.

Brand Evangelists

In a saturated market, brand loyalty is more critical than ever.

Leggings, running shorts and stretchy chinos look more or less the same on a website or in a store display, regardless of who makes them. Brands are constantly releasing their clothes in different colours, tweaking minor details and rolling out new fabrics that promise a more flattering profile or to better wick away sweat.

“Being athletic-focused has given people permission to play, but it doesn’t give you guaranteed success,” said Simeon Siegel, managing director and senior analyst of retail and e-commerce at BMO Capital Markets. “You can’t just rest on your laurels and say you’ve come up with a hit product and you had customer resonance in the pandemic and therefore it will continue.”

Siegel said the most successful brands turn their customers into “evangelists,” who are not just loyal to their chosen logo, but feel passionate enough to spread the good word. Think yoga classes where Lululemon is the de facto uniform, or Alo Yoga devotees who are happy to wear the brand’s bra tops or bike shorts for a night out as they are to pilates.

Vuori’s evangelists flood social media and online fashion forums with testaments to the brand’s quality, as well as the “second skin” feel of its fabrics.

“I got Vuori clothing for Christmas 2 years ago and they still hold up strong and are super comfortable,” one Reddit user wrote last year in a forum about made-to-last products, placing the brand above Nike and Lululemon.

Brands like Vuori, Lululemon and Alo Yoga also benefit from their premium position in the market. Whereas lower-priced brands like Gymshark and Under Armour saw sales surge during the pandemic, those customers went away as inflation ate away at their buying power. Those who can afford to shop for new clothes these days are more likely to pay extra for higher-quality products, said Kantar’s Hogan.

“Vuori makes really good products, they fit well and they have unique and very comfortable fabrics that look high quality and stand the test of time,” she said. “That’s versus a mindset of, ‘I just need to update my wardrobe for $10.’ That’s not the mood shoppers are in right now.”

Vuori’s quality is signalled by its prices, including $98 leggings and $58 tops. It’s also using new fabrics like BlissBlend, which is made from 75 percent recycled synthetic materials and pitched as extra soft and quick-drying, to try to stand out from the competition.

The Lifestyle Factor

An important point of differentiation for Vuori is its focus on versatility rather than performance, according to Kudla.

“Vuori was born as a men’s premium active lifestyle brand,” he said. “So while performance is important to us, our primary goal is versatility.”

What he means is that while Vuori’s clothing is designed for athletic purposes and offers technical advantages in its moisture-wicking and lightweight fabrics, its marketing and the way pieces are styled signal that the brand stands for something more than just an affinity for working out: it nods to a certain way of life.

“There’s an overall shift in our collective consciousness toward a more active, healthy lifestyle, where people are taking their wellbeing more seriously,” Kudla added. “This trend is picking up steam.”

It’s a formula that’s also worked well for Alo Yoga, which in addition to the usual leggings sells items like a tie-dye tote bag that is ubiquitous in New York and beyond. The Los Angeles-based brand uses such merchandise to position itself as more than just another retailer.

“Our customers want to wear the bag to signify they’re part of this health and wellness lifestyle,” said Summer Nacewicz, VP of brand and creative marketing at Alo. “We’ve really resonated with the consumer [because] we stand for something bigger.”

For now, Vuori is intently focused on getting its name out there. Its business is profitable, Kudla said, and the future looks bright.

“[Going] public is one of many options,” he said. “I’m relatively young and I have a lot of passion for this business, and I feel like we’re in the early stages of a growth strategy.”