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A WWD study of revenue multiples shows who’s in the lead in a tough market.

Wall Street might not always appreciate the romance of fashion — but if investors are good at anything, it’s poring over the numbers as they figure out just where to put their money.

To gauge the full financial weight of a business, they often look at enterprise value — the combination of all the debt a company has raised and the current value of all of its stock, minus any cash on hand.

That boils a company’s value down to all of the money it’s managed to attract from debt and equity investors, extending that value to any stock that doesn’t float on the open market.

It’s how much you’d have to pay to buy a company at the current stock price and, read as a multiple of sales or earnings, it’s a good way to see who’s up and who’s down.

“The market places a valuation on these companies based on the subsector that they’re in and starts comparing them to each other to decide who’s more valuable and who’s not,” said Kelly Pedersen, partner and U.S. retail leader at PwC.

And just like in the mall, adjacency matters.

So a luxury company coming into the market will, at least at first, get a shot of getting a premium valuation. But it will have to earn its way up to, say, Hermès International, which gets credit for more than 16 euros of debt and equity investment from the market for every euro of sales.

A WWD study of S&P Capital IQ data on more than 100 fashion, luxury, beauty and retail companies showed an investor flight to relative safety, with big designer names and beauty getting top dollar alongside a few growing names still working toward profitability.

Among the leaders were Simon Property Group Inc., Shopify Inc., Brunello Cucinelli, E.l.f. Beauty Inc., Li Ning Co., On Holding, Inter Parfums Inc., The Estée Lauder Cos. Inc., L’Oréal and LVMH Moët Hennessy Louis Vuitton.

That the European luxury players are ranking as at the top of the industry in terms of valuation isn’t a surprise or change.

“The economy takes a dip, but yet luxury [sales] continue to increase,” Pedersen said. “Luxury specifically follows a path of its own, it’s on its own planet sometimes in terms of what those valuations look like.”

The big luxury players — including Hermès, LVMH Moët Hennessy Louis Vuitton, Kering and others — are high-profile, earn big profit margins and are generally very consistent, making more money than most in both good economic times and bad.

For instance, luxury leader LVMH last week reported a 15 percent increase in fourth-quarter revenues and its chief Bernard Arnault expressed confidence headed into 2023 and pointed to signs of recovery in China, which dropped its zero-COVID-19 policies.

“I’m quite confident that the Chinese leaders being very shrewd, they will surely take advantage of the period that is starting to revitalize Chinese growth,” Arnault said last week. “If this is the case — and we’ve seen signs of it in January — then we have every reason to be confident, even optimistic, about the Chinese market.”

LVMH gets 5.4 euros from investors for each euro of annual revenues, giving it a top valuation in fashion, by revenue multiple.

What has changed over the past 18 months is the market’s enthusiasm for newer brands and business models — where growth was enough to get Wall Street moving, costs and profits are now being scrutinized as well.

Pedersen said big investors are asking companies: “What are you doing with costs? How are you thinking about managing costs, not just as a onetime thing, but ongoing?”

In tougher times, investors have less patience.

“If quarter after quarter they don’t see a lot of progress and profitability, at some point you see investors say, ‘This model doesn’t actually work,’” Pedersen said.

The market is having a hard look at companies that were once seen as the next big thing, among them Stitch Fix Inc., which is getting just 20 cents of investment from Wall Street for every dollar of sales.

Instead, the funds investors were throwing at companies looking to be the next big thing are now going toward safer investments.

“Money that was in high-growth newer retail models has moved into multibranded holding companies, businesses that have historically been run very, very well,” said Matthew Katz, managing partner at SSA & Co. “They’re perceived as safer, having more consistent returns to investors as they look ahead to what could be a difficult time.”

Where companies have weaker revenue multiples, many are looking at how to get back into growth mode.

“These companies have been on many folks’ lists for: What’s the market position? What makes them different?” Katz said.

Also stuck in the valuation doldrums are compaines in the middle, between the luxury names still enjoying strong consumer spending and the ultra value names expert at catering to consumers when recession worries spike.

“How do retailers who are kind of stuck in the middle with large real estate footprints, how are they doing to drive growth in this market?” Katz said.

That is something that the established names, like Nordstrom Inc., Macy’s Inc., Fossil Group Inc. and Chico’s FAS inc., still have to prove to the market.

Each is getting just 50 cents or less from investors for every dollar of revenues despite their reach and connections with consumers.

Gen. Minihan shocks Washington by telling his troops to be ready to fight against China.

Honesty is not the default policy in Washington these days, so the political and media classes were jolted this weekend by the leak of a private warning by a U.S. general telling his troops to prepare for a possible war with China over Taiwan in two years. Imagine: A warrior telling his troops to be ready for war.

In an internal memo leaked to NBC News, Gen. Michael Minihan told his troops: “I hope I am wrong. My gut tells me we will fight in 2025.” The general runs the Air Mobility Command, the Air Force’s tank-refueling operation, and he says in his memo that he wants his force to be “ready to fight and win in the first island chain” off the eastern coast of continental Asia. He called for taking more calculated risks in training.

The general’s document won’t be remembered for subtlety. One of his suggestions is that airmen with weapons qualifications start doing target practice with “unrepentant lethality.” Another tells airmen to get their affairs in order. This candor seems to have alarmed higher-ups at the Pentagon, and NBC quoted an unidentified Defense official as saying the general’s “comments are not representative of the department’s view on China.”

But while Gen. Minihan’s words may be blunt, his concern is broadly shared, or ought to be. U.S. Navy Adm. Phil Davidson told Congress in 2021 that he worried China was “accelerating their ambitions to supplant the United States,” and could strike Taiwan before 2027. Gen. Minihan came to his post after a tour as deputy of Indo-Pacific Command. He like many others suggested that 2025 may be a ripe moment for Chinese President Xi Jinping to move. Taiwan and the U.S. both have presidential elections in 2024 that China may see as moments of weakness.

No less than Secretary of State Antony Blinken said last year that Beijing was “determined to pursue reunification” with Taiwan “on a much faster timeline” than it had previously contemplated. Are war-fighters supposed to ignore that message as they prepare for their risky missions?

Gen. Minihan is doing his troops a favor by speaking directly about a war they might have to fight. A recent war game conducted by the Center for Strategic and International Studies warned that, in a conflict over Taiwan, “the scale of casualties” would “stagger a U.S. military that has dominated battlefields for a generation.” Gen. Minihan’s boom operators are accustomed to working in skies the U.S. controls. Tankers would be essential in a fight for Taiwan given the vast distance over the Pacific—and would be vulnerable to heavy losses.

Former naval officer Seth Cropsey explained on these pages last week that America isn’t investing in the ships and weapons stockpiles that would be required to support a long war in the Western Pacific. Such yawning gaps in U.S. preparedness make a decision by Beijing to invade or blockade the democratic island more likely. Preventing a war for Taiwan requires showing Beijing that the U.S. has the means and the will to fight and repel an invasion.

Whatever his rhetorical flourishes, Gen. Minihan seems to understand this, and what Americans should really worry about is that some of his political and military superiors don’t.

BP cuts long-term forecast for oil and gas demand

Group’s latest annual outlook says energy security concerns will spur more investment in renewables

BP has trimmed its outlook for oil and gas demand in its latest annual forecast, arguing that the upheaval unleashed by Russia’s invasion of Ukraine will push countries to pursue greater energy security over the next decade by investing in renewables.

As a result, global carbon emissions could peak earlier in the 2020s than it had previously suggested, BP said in its annual energy outlook on Monday.

But even with increased political support for the shift away from fossil fuel, governments and industry are still far behind in the race to achieve net zero emissions by 2050, the analysis showed.

One of the sector’s most closely read studies, the outlook describes three scenarios for the evolution of the energy sector through to 2050. Under its “New Momentum” scenario, which is designed to “reflect the current broad trajectory” of the world’s energy system, oil demand would be about 93mn barrels a day in 2035, 5 per cent lower than it forecast last year, and natural gas demand would be 6 per cent weaker.

The lower forecasts reflect an increased role for domestic renewable energy as countries reduce dependence on imported hydrocarbons, but also expectations of weaker economic growth in the next decade because of the lasting impact of the energy crisis.

“The experience from the major energy supply shocks of the 1970s suggests that events that heightened energy security concerns can have significant and persistent impacts on energy markets,” Spencer Dale, BP’s chief economist, said in the report.

As a consequence, global carbon emissions under the New Momentum scenario would peak in the 2020s and reach 37.8 gigatonnes in 2030. That is about 4 per cent lower than it outlined last year when it said emissions would peak in the “late 2020s”. The International Energy Agency has forecast that greenhouse house gas emissions will peak in 2025.

US president Joe Biden’s multibillion-dollar support package for clean energy projects, the Inflation Reduction Act, had also helped to improve the outlook for carbon emissions. But “the scale of the decarbonisation” means greater support is required, including policies to facilitate quicker permitting and approval of low-carbon energy and infrastructure, the report said.

Despite the declines, in the New Momentum scenario global emissions would only fall 30 per cent from 2019 levels by 2050, according to the report, which added that a 95 per cent drop from 2019 levels was required for the world to achieve net zero emissions.

In that scenario, oil demand would remain around current levels, close to 100mn b/d, through “much of this decade” before declining gradually to about 75mn b/d by 2050. Under the “Net Zero” scenario, the study’s most ambitious outlook for a reduction in emissions, demand would drop to 70mn b/d in 2035, falling to 20mn b/d by 2050.

However, BP argues that natural declines in existing oilfields mean investment in oil and gas production will still be required for the next 30 years, even under the “Net Zero” outlook.

“The events [of the past year] also show how relatively small disruptions to energy supplies can lead to severe economic and social costs, highlighting the importance that the transition away from hydrocarbons is orderly,” Dale said. Demand for hydrocarbons must therefore fall “in line with available supplies”, he added.

Lenders say they will make the first payment due next month but are ready for legal action

Spain’s biggest banks will challenge the country’s controversial windfall tax after they have made the first payment next month, according to people familiar with their plans.

The levy was proposed last summer by Spanish Prime Minister Pedro Sánchez to raise €3bn to cushion people from surging energy prices. Several other European governments have targeted the profits banks have made from rising interest rates.

But Spanish lenders have decided to challenge the tax authorities after paying their first instalment by February 20.

“This will almost certainly end up in court,” said a senior executive at one of Spain’s biggest banks. “We have to do this in the interests of our shareholders.” Bank share prices were hit when the tax was announced.

Santander and BBVA plan to challenge the tax, according to people with knowledge of their thinking, while Bankinter and Abanca have publicly said they will. The boards of Sabadell and CaixaBank have yet to decide.

While the windfall tax is unpopular with Spain’s banks, it has also been criticised by the European Central Bank, which argued it could damage bank capital positions, disrupt monetary policy and be difficult to enforce.

Spain’s Socialist-led coalition government intends to impose a 4.8 per cent tax on banks’ income from interest and commissions for two years, arguing that rising interest rates have handed “extraordinary” profits to the sector. It has proposed a similar levy on energy companies.

The Spanish Banking Association has argued that if banks are forced to pay €3bn in taxes, it would reduce their lending capacity by €50bn because it would cut the amount of regulatory capital they can hold against those loans.

When the tax was announced, shares in CaixaBank, Bankinter and Sabadell fell by more than 10 per cent, while those of Santander and BBVA, the country’s two biggest banks by market capitalisation, but with significant business outside Spain, dropped by nearly 4 per cent.

Hungary and the Czech Republic have also announced extra taxes on banks to reduce the impact of energy prices.

Spanish banks have two options they could pursue, according to legal experts. The first is to appeal against the tax authorities in an effort to reclaim the money after they have made their first payment.

The second is to mount a challenge in the National High Court against the ministerial order setting out the tax, which is due to be published imminently.

Both options are likely to lead to years of legal battles that could ultimately end in Spain’s constitutional court or the European Court of Justice.

Bankinter chief executive Maria Dolores Dancausa has said the bank will decide the technical basis on which to appeal after paying the first instalment, while Abanca chair Juan Carlos Escotet said on Friday that the bank would challenge what he called a “clearly unconstitutional” tax.

Santander, BBVA and CaixaBank declined to comment. All three are reporting this week.

The finance ministry said: “We are convinced that the bank levy has been passed in compliance with the law.”

Collapsed payments firm’s trustee accidentally told the auditor that he did not hold any money on its behalf

EY came close to discovering fraud at the heart of Wirecard in 2016, when the collapsed payments firm’s trustee in Singapore accidentally told the auditor the truth, stating he did not hold any money on its behalf.

At the time, Wirecard’s accounts fraudulently stated that Citadelle Corporate Services in Singapore oversaw escrow accounts in Asia that held about €150mn in cash.

These escrow accounts were at the centre of the Wirecard fraud. Purportedly set up in 2015, the company said they held cash generated by its outsourced operations in Asia.

By June 2020 the amount in those accounts had supposedly risen to €1.9bn, when Wirecard disclosed it did not exist. The business subsequently collapsed in one of Europe’s largest accounting scandals.

But the truth about Wirecard’s Asia escrow accounts was almost revealed by Citadelle director Shan Rajaratnam in March 2016, because of a lack of co-ordination between individuals in Singapore, Dubai and Munich, according to documents reviewed by the Financial Times and testimony by the chief witness in the Wirecard trial.

Wirecard managers scrambled to come up with an explanation for the trustee’s statement, who subsequently confirmed to EY that in fact he did hold the cash, according to people familiar with the details.

EY declined to comment.

The firm audited Wirecard’s accounts for close to a decade without finding big problems and has been criticised for failing to request documents directly from Singapore bank OCBC, where the trustee accounts were said to be held.

EY has previously cited Singapore’s bank secrecy laws and said it was legally required to rely on information from the trustee instead.

Documents reviewed by the FT show that EY wrote to Citadelle in February and March 2016, asking the firm “to confirm the balances for the whole group” and to provide a “split up of the balances for each company respectively”.

In late March, Rajaratnam told the auditor in writing that “as of 31st of December 2015, there was no monies of Wirecard AG or any of its subsidiaries being held by us in our accounts”. 

In an email on March 29 2016, presented by criminal prosecutors at the Wirecard trial in Munich last week, EY asked Wirecard to “clarify the matter”. According to Oliver Bellenhaus, a senior executive who is standing trial for the fraud and has turned chief witness, Citadelle’s initial response “caused a lot of action” internally because it risked exposing the fraud.

Bellenhaus told a panel of five judges that Wirecard’s head of accounting Stephan von Erffa was asked to resolve the problem. In an email reviewed by the FT, von Erffa responded to EY’s email by stating that the trustee’s response only referred to “direct cash” rather than “trustee cash”, adding that the auditor would “surely” receive a second confirmation from Citadelle. “They always work on this in two departments,” von Erffa stated.

A senior Wirecard employee who worked in the finance department later told prosecutors that they did not know what von Erffa meant by “direct cash”. 

Citadelle on the same day sent a second email to Wirecard, this time confirming that it did hold the €150mn reported by the payment company in escrow accounts.

In later years, Bellenhaus created fake bank statements and balance confirmations on behalf of Citadelle, he told the Munich judges, adding that those documents were then passed to Citadelle, which sent them to EY.

Rajaratnam has been charged with 14 cases of falsifying documents and sharing them with Wirecard and EY, Singapore police said in a statement last May.

The forged documents “falsely represented that Citadelle held large sums of money in its escrow accounts at various points in time between 2015 and 2017, when Citadelle did not maintain such accounts or hold such balances in its accounts”, the Singapore police said. Rajaratnam’s case will be heard in a closed pre-trial conference next week.

A lawyer for von Erffa declined to comment. A lawyer for Rajaratnam did not respond to a request for comment.