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Apple beats by $0.08, reports revs in-line; guides Q4 revs above consensus (208.78 -0.90)
- Reports Q3 (Jun) earnings of $2.18 per share, $0.08 better than the S&P Capital IQ Consensus of $2.10; revenues rose 1.0% year/year to $53.81 bln vs the $53.39 bln S&P Capital IQ Consensus.
- iPhone revenue -12% to $26 bln vs. $26 bln ests
- Service rev +13% to $11.46 bln; iPad +8% to $5.0 bln; wearables, home accessories +48% to $5.5 bln
- Americas rev +2% to $25.06 bln Europe rev -2% to $11.9 bln China rev -4% to $9.16 bln Japan rev +6% to $4.08 bln Asia Pac +13% to $3.59 bln
- Q3 gross margin of 37.6% vs ests of 38.1% vs 38.3% last year; services gross margins 64.1% vs ests for slight improvement from 63.8% last quarter
- Co issues upside guidance for Q4, sees Q4 revs of $61-64 bln vs. $60.92 bln S&P Capital IQ Consensus; sees gross margin 37.5-38.5% vs ests of 38.3% and 38.3% last year.
Beyond Meat says existing investors will be selling 3 million shares in a secondary offering even though the IPO was less than three months ago. https://cnb.cx/2K4p7Qr
The Hong Kong Protests: What Brands Need to Know
As the city's retail sector braces itself for a double digit decline, Richemont, Kering and DFS are already seeing an impact.
HONG KONG, China — Protests that began in reaction to a proposed extradition law, and have since broadened to a fight for Hong Kong’s autonomy more generally, reached Hong Kong International Airport on Friday July 26. Over 1,000 protestors in black occupied the arrivals hall the same day that Calvin Klein reportedly opened a new store at the airport.
The airport is yet another retail environment disrupted by protests which have already led to store closures on the city’s shopping streets and in malls. Riot police forced protestors out of the New Town Plaza shopping mall in Sha Tin on July 14, pushing them past Kenzo, Bally and Coach stores under a volley of umbrellas that protestors threw like spears. Tens of thousands of protestors also returned to popular shopping streets in Central and Causeway Bay on Sunday where they were met with tear gas and rubber bullets in what was the eighth consecutive weekend of protests.
Retailers in the city were already beginning to hurt before the protests began in June. The Hong Kong Census and Statistics Department says retail sales fell 1.8 percent for the first five months of 2019 compared with the same period in 2018. Now, with the unrest escalating, retailers and analysts have downgraded Hong Kong’s prospects for the rest of 2019.
July and August are normally peak season for the industry, according to the Hong Kong Retail Management Association (HKRMA), but “as the protests continue and further spread to different districts, our members forecast a drop by double digits in the next months,” they predicted in a press release.
The HKRMA has now revised its total retail sales projections for all of 2019 from single-digit growth to double-digit decline. That’s even bleaker than PwC’s forecast of a 5 percent decline amounting to HKD 460 billion ($58.9 billion) from 8.8 percent growth reaching HK$485.2 billion ($62.2 billion) last year. PwC’s estimate was made at the end of June, before the protests and responses to them escalated to current levels.
Several global luxury brands have already felt an impact. On Thursday July 25, Swiss luxury-goods maker Richemont joined Swatch Group AG in saying that the demonstrations had led to lower local sales due to store closures and lower tourist arrivals. Kering Chief Financial Officer Jean-Marc Duplaix attributed underperformance in Hong Kong and Macau in Q2 to “a combination of high comps, repatriation of Chinese demand and, more recently, some disruption in Hong Kong.”
On LVMH’s 2019 half year earnings call, CFO Jean-Jacques Guiony, said, “we haven't really felt any impact of what's happening in Hong Kong on our business. That's June. What happens in July is too early to say.” But he also said that travel retailer DFS, which is majority-owned by LVMH, had experienced a “slowdown” in Hong Kong and Macau in recent months.
When asked whether Chanel was reconsidering plans to show its 2019/20 cruise collection at the Kai Tak Cruise Terminal in Hong Kong on November 6 in light of the protests, a spokesperson for the brand said, “Like all brands present in Hong Kong, we are of course keeping a close watch on events, and have not yet made a decision. "
Stock prices of Hong Kong fashion and beauty companies Giordano International and Bonjour Holdings have dropped around 27 percent and 24 percent respectively since the beginning of the year, while the stock price of Aeon Stores Hong Kong, which operates retail stores and shopping centres, has fallen around 9 percent.
Among the most lucrative shopping hubs in the world, Hong Kong is the last place fashion retailers want to see their businesses disrupted. Real estate services firm Cushman and Wakefield said that at $2,671 per square foot per year, Causeway Bay beat out New York City’s upper Fifth Avenue ($2,250 per square foot per year) and London’s New Bond Street ($1,744 per square foot per year) to become the most expensive retail street in the world in 2018.
Reed Hatcher, head of Research, Hong Kong at Cushman & Wakefield, says street front rents in Causeway Bay actually rose 2.3 percent year on year in Q2 thanks to new transport links including the Hong Kong-Zhuhai-Macau Bridge and the Guangzhou-Shenzhen-Hong Kong Express Rail Link that increased the number of mainland Chinese tourists visiting Hong Kong. However, he said, “the area has come under pressure in the past couple of months from the ongoing social unrest and we currently forecast a mild drop in rents, by around 1 to 2 percent, over the next six months.”
Hatcher is also predicting a decline of 3 to 5 percent in the Central district of the city.
While the protests are a major factor in the HKRMA’s gloomy outlook, Michael Cheng, Asia Pacific and Hong Kong/China Consumer Markets Leader for PwC, also attributed their forecasted 5 percent decline in retail sales to other factors including the China-US trade dispute, turbulence in the equity market and the volatility of the Renminbi. PwC also expected a decline in the growth of tourist arrivals to hurt retail sales through the rest of 2019.
Brands now find themselves between a rock and a hard place and some have already got caught up in the conflict. In June, Nike cancelled the mainland China release of its collaboration with Undercover after the designer Jun Takahashi voiced his support for Hong Kong protestors on Instagram.
On July 24, an H&M employee in Hong Kong was spotted and photographed sporting a hardhat — a “symbol of silent protest” against the government — while manning the cashier, provoking backlash from mainland Chinese netizens. Soon after, in an apology published on H&M’s Weibo account, the brand voiced its support of Beijing’s “One Country, Two Systems” principle and Hong Kong’s “stability and prosperity,” adding that the employee would be spoken to immediately.
At present, around 500 of H&M’s 4,700 stores are located in China, where it generated around 11 billion Swedish crowns ($1.3 billion) of its total 200 billion in revenues last year.
While some have been quick to blame protestors for disrupting business, others argue Hong Kong’s autonomy is what makes it an appealing place to conduct business in the first place. According to the Fraser Institute’s Economic Freedom of the World index, Hong Kong is the most free economy in the world. The People’s Republic of China is ranked 100th.
German court hears case against ECB bond-buying
Fresh bid to block QE in long-running legal argument over €2.6tn stimulus programme
Germany’s constitutional court has embarked on a fresh hearing about the legality of the European Central Bank’s programme of asset purchases — just as the ECB gears up for an expansion of its economic stimulus measures.
After more than four years and with around €2.6tn-worth of bonds already bought, the quantitative easing programme remains controversial in northern eurozone states. Nowhere more so than in Germany, where the Karlsruhe court’s hearing is part of a long-running case that centres on whether the purchases constitute so-called “monetary financing”, which is prohibited under EU law.
The timing of the hearing is delicate. Last week ECB president Mario Draghi said that the bank’s officials would look at a range of stimulus options — including rate cuts, a commitment to keep policy exceptionally loose for years to come and another round of QE — to counter fears that the bank would persistently undershoot its inflation target of just under 2 per cent.
WHAT IS MONETARY FINANCING?
Eurozone treaties prevent the ECB from financing member states’ governments by buying their debt, a tactic known as monetary financing. This rule aims to protect the central bank from political pressure and avoid stoking inflation.
QE involves the central banks of eurozone member states buying government bonds in massive quantities, financed by the ECB.
The complainants in the case — a group of almost 2,000 people, led by German economists and law professors — argue that it is therefore illegal. They want the Bundesbank, which has been the biggest purchaser of bonds under QE, to stop participating in the ECB programme.
They first brought their case against the ECB after the eurozone’s central bank embarked on QE in 2015, attempting to get the German constitutional court to block it.
The ECB argues that QE does not constitute monetary financing because it is only buying the bonds in secondary markets from other investors, rather than purchasing the debt directly from governments. And the ECB’s QE rules prevent it from holding more than a third of any member state’s outstanding debt.
WHAT HAVE THE COURTS SAID?
The German courts have been busy for years with a series of court cases about the scope of the ECB’s mandate.
In 2016 the constitutional court ruled in the ECB’s favour in a separate case about its Outright Monetary Transactions programme, which was unveiled in 2012.
But when asked to look at QE in July 2017 the court said it was “doubtful whether [QE] was compatible with the prohibition of monetary financing” and that QE “may not be covered by the ECB’s mandate” but it reserved judgment and referred the case to the European Court of Justice in Luxembourg.
In December last year the ECJ found in favour of the ECB, saying that QE as currently designed is legal.
The case now goes back to the German court to interpret the ECJ finding in the context of German domestic law.
WHAT ARE THE RAMIFICATIONS?
The legal ramifications go far beyond this one case; they also concern whether the judgments of Germany’s highest court should take precedence over European law.
The complainants brought their case under the German constitution; until now it has been unclear whether the constitution’s power can be superseded by EU law.
And the dangers for the ECB’s QE programme are twofold.
First, if Karlsruhe rules in favour of the complainants the Bundesbank may decide it is preferable to obey German constitutional law rather than requests of the ECB.
Second, it could constrain the ECB in the design of any new QE package.
The ECB believes the ECJ judgment was flexible enough to enable the bank to raise the amount of outstanding bonds of any one member state it can buy — known as the issuer limit — from a third to as high as 50 per cent.
But the Bundesbank could contradict that.
The German central bank will send two witnesses to Karlsruhe this week, its head of legal and its head of economics.
Although they are set to argue against the complainants, saying that QE in its current form is legal, they could stress that the rules cannot be bent much more without reaching the boundary of what constitutes monetary financing — in other words the ECB has little further scope for bond buying.
This may make it tricky for the ECB to raise the issuer limit — and that is important. The ECB only has a limited amount of headroom for new QE, largely because only a small amount of outstanding German debt remains in the market that is eligible for the ECB to buy under the status quo.
The outcome of the case could take a while given the sensitivities involved; some observers do not expect a decision until the end of the year.
By that time, the ECB’s plan to launch a fresh round of stimulus could already be under way.
Gapping up
In reaction to strong earnings/guidance:
- RNG +13.4%, MEDP +10.8%, VRNS +10.3%, NBIX +9.5%, OMF +8.2%, TREX +7.9%, ZBRA +6.1%, CHGG +5.9%, QTS +5%, CNX +4.5%, STNE +4.2%, AER +4.2%, SLCA +3.8%, PG +3.8%, RH +3.6%, MRK +3.1%, MLM +2.9%, HUBB +2.9%, IRMD +2.3%, TXRH +2%, BRX +2%, LDOS +2%, GEO +2%, HLIT +1.8%, ETN +1.8%, ARE +1.6%, I +1.6%, JBT +1%, LLY +1%
Other news:
- MNTA +3.3% (granted FDA Fast Track designation for M281)
- MPLX +2.2% (rebounding from late move lower)
- EXAS +1.3% (following MadMoney CEO appearance)
Analyst comments:
- IVAC +8.6% (upgraded to Buy from Neutral at B. Riley FBR)
- MU +0.6% (upgraded to Equal-Weight from Underweight at Morgan Stanley)
Gapping up
In reaction to strong earnings/guidance:
- RNG +13.4%, MEDP +10.8%, VRNS +10.3%, NBIX +9.5%, OMF +8.2%, TREX +7.9%, ZBRA +6.1%, CHGG +5.9%, QTS +5%, CNX +4.5%, STNE +4.2%, AER +4.2%, SLCA +3.8%, PG +3.8%, RH +3.6%, MRK +3.1%, MLM +2.9%, HUBB +2.9%, IRMD +2.3%, TXRH +2%, BRX +2%, LDOS +2%, GEO +2%, HLIT +1.8%, ETN +1.8%, ARE +1.6%, I +1.6%, JBT +1%, LLY +1%
Other news:
- MNTA +3.3% (granted FDA Fast Track designation for M281)
- MPLX +2.2% (rebounding from late move lower)
- EXAS +1.3% (following MadMoney CEO appearance)
Analyst comments:
- IVAC +8.6% (upgraded to Buy from Neutral at B. Riley FBR)
- MU +0.6% (upgraded to Equal-Weight from Underweight at Morgan Stanley)
Coty Said Considering Divestitures as Part of Turnaround
Coty is looking to shed between $500 million and $1 billion in assets, one source said.
Coty Inc. may be gearing up to sell assets as part of its plan to turn the business around, according to industry sources.Two sources said the business is considering divestitures, and one well-placed source noted the company is looking to shed between $500 million and $1 billion in assets. It was unclear which assets specifically were on the chopping block.
A spokeswoman for Coty said the company does not comment on rumors or speculation.
There is also speculation that Alejandro Vicente, senior vice president and global head of M&A for Coty, may exit the group once the divestitures are complete.
One source noted that selling assets could help Coty deleverage, which is one of the key tenets of the new management team’s turnaround plan. Coty had about $7.4 billion in net debt as of March 31, the company said.
In July, Coty chief executive officer Pierre Laubies and chief financial officer Pierre-André Terisse said the company would now focus on deleveraging and profitability, and that investment efforts would center around 20 “mission critical” brands that are responsible for about 60 percent of total sales. Those brands include Rimmel, Burberry, Cover Girl, Wella, Hugo Boss, Max Factor, Gucci and OPI.
At that time, Terisse told Wall Street that divestitures were not part of the overall equation, including for the 40 percent of the business that isn’t considered priority. When J.P. Morgan analyst Andrea Teixeira asked about whether non-priority brands would be shuttered or divested, Terisse said: “There is no divesting of brand plan or no divesting of skus. It’s more reworking, the priority.”
Terisse told WWD at that time that Coty would consider acquisitions as long as it remains able to meet the company’s leverage goals, which include lowering the debt to earnings before interest, taxes, depreciation and amortization ratio to below four times. Asked about M&A, he said Coty “will have a look at the portfolio and take advantage of opportunities to make it better and improve it,” which could be done by “adding more [in] Asia, more skin care, more premium.”
More broadly, Coty’s turnaround plan includes sparking growth in core brands through better in-store execution, product assortments and media choices. In the longer term, it means building out the product innovation pipeline, too. The company is also planning to revamp marketing choices, rationalize sku’s and simplify decision-making.
Part of that includes organizational restructuring and the appointment of regional heads. Edgar Huber, previously president of the Luxury division, will be appointed president of Americas and Asia-Pacific, and Gianni Pieraccioni will become president of Europe, the Middle East and Africa. Simona Cattaneo is taking the helm of the Luxury division, and Fiona Hughes will be appointed president of Consumer Beauty.
Coty has struggled since it paid $12 billion to take more than 41 beauty brands from Procter & Gamble. Many of those brands arrived in worse shape than anticipated, and some of them — particularly those in the Consumer division, like Cover Girl and Clairol — have not yet regained solid footing. Coty has also added other brands since that megadeal, including a majority stake in direct-selling business Younique, and taking over GHD and Burberry’s beauty business.
For the most recent quarter, Coty posted nearly $2 billion in sales, down 10.4 percent from the prior-year period, with a net loss of $12.1 million.
Part of the company’s sales dips in recent quarters were due to supply-chain disruptions, but the management team in charge of orchestrating the P&G acquisition and running the integrated business — Bart Becht as chairman and Camillo Pane as the ceo — left the business in late 2018. Laubies was appointed ceo immediately upon Pane’s departure.
Becht later left Coty parent company JAB outright. Since then, JAB has upped its stake in Coty to 60 percent.
At the same time as Coty is said to be considering divestitures, the business — through Peter Harf, a partner at JAB — is said to be in talks to buy a majority stake in Kylie Cosmetics for $600 million. Coty has also declined to comment on that report.