Weekly Business Roundup
Publication 14- Disney's New Pricing Strategy, Jerome Powell Says Fed's Inflation Battle is Far From Over, and Biden's Debt Forgiveness Plan Sparks Political and Economic Backlash
Published Sunday, August 28th 2022
This week, Bed, Bath & Beyond secured new funding despite lingering challenges, the affadavit related to the FBI’s raid of Donald Trump’s Mar-a-Lago home was released, despite being heavily redacted, and the U.S. and China came to an agreement in regards to the PCAOB’s auditing of U.S-listed Chinese firms.
Business
Disney’s New Pricing Strategy- More Profit From Fewer Park Visitors
Walt Disney used to call Disneyland his “magic kingdom.” These days, Walt Disney Co. has a new magic trick: wringing every last dollar out of each visitor to its profitable theme parks.
Over the past two years, as Florida’s Walt Disney World Resort and Southern California’s Disneyland Resort have emerged from the shadow of the coronavirus pandemic, the company has made a host of changes that have sent the cost of a visit to a Disney resort skyward.
Disneyland
The outcome is a bonanza for Disney: Even as the company limits the number of visitors and keeps attendance at its U.S. theme parks below prepandemic levels, they are generating record sales and profits.
The results reflect a major strategic shift on Disney’s part, where the company is focused less on maximizing the quantity of visitors and more on increasing how much money each visitor spends, an approach the company refers to as yield management. Improving the visitor experience, the thinking goes, will prompt guests to spend more hours—and therefore more money—at the parks because they are having such a good time.
The biggest change in the past two years—and the most lucrative for Disney—is the introduction of a smartphone-app feature called Genie+ that costs $15 per person a day, on top of the price of admission, and allows parkgoers to skip the unreserved lines for some attractions, which the company refers to as “standby.” But Genie+ doesn’t cover everything. To skip the standby lines at the most sought-after attractions, including some Star Wars and Guardians of the Galaxy-themed rides, reservations now cost an additional $10 to $17. Standby waits for popular attractions can last hours.
At the same time, many benefits that used to be free—from parking for certain annual passholders to airport shuttles to MagicBand wristbands that serve as combination hotel-room keys and park passes—have been eliminated or now come with a price. Disney has raised prices on hotel rooms, food and merchandise over the past year as inflation has climbed to record levels in the U.S.
Disney’s theme-park pricing is determined by “pure supply and demand,” said a company spokeswoman. “No different than airplanes, hotels or cruise ships.”
In the quarter that ended Jan. 1, Disney’s domestic parks set records in both quarterly revenue and operating income, then broke both of them six months later. For the quarter that ended July 2, the business unit that includes the theme parks also posted record revenue of $5.42 billion and record operating income of $1.65 billion.
Josh D’Amaro, the chairman of Disney’s parks, experiences and products division, said that the changes have given visitors more choice about how to spend their time and money at the parks, while at the same time making the parks “extremely commercially successful.”
Chairman of Disney’s Parks, Josh D’amaro
In fiscal 2021, the first year that both of Disney’s two main U.S. resorts had reopened following the worst of the coronavirus pandemic, attendance at Disney’s U.S. parks fell by 17% compared with the previous year, the company reported, but per-capita spending by guests grew by 17%, or nearly three times the average annual growth rate during the previous decade. Disney doesn’t disclose attendance for its theme parks.
At the same time, the changes driving the increases in revenue and profit have drawn the ire of what Disney calls “legacy fans,” or longtime parks loyalists, including annual passholders who feel they are being pushed to the side in favor of big-spending families taking once-a-year, or even a once-in-a-lifetime, vacations.
“Disney has this love-hate relationship with annual passholders,” said Len Testa, a computer scientist who runs Touring Plans, a travel company that offers apps to help visitors find deals and navigate their trips to Walt Disney World and publishes a popular guide to Disney theme parks.
On one hand, they provide a reliable source of revenue—the investment bank UBS estimated early last year that annual passholders at Disneyland account for about one half of annual visits—but on the other, annual passholders tend to spend less than other visitors per visit, Mr. Testa said.
A typical annual pass holder might ride only one ride during a visit, eat an ice cream cone and walk around for a few hours, taking up capacity that might otherwise be used by out-of-state visitors, Mr. Testa said.
“Those people would have stayed all day,” he said. “They would have eaten multiple times in the restaurants, they may have stayed in the hotel. They would definitely be buying more merchandise.”
“[Disney’s prices] are driven by pure supply and demand. No different than airplanes, hotels or cruise ships”
Twitter, Elon Musk Lawyers Battle Over User Data in Court After Whistleblower Complaint
Lawyers for Twitter Inc. and Elon Musk argued Wednesday over Mr. Musk’s requests for some data around the social-media platform’s calculation of monetizable daily active users, or MDAUs, with Twitter saying it has cooperated as required and Mr. Musk saying he needs more information.
Tesla Chief Executive, Elon Musk
In a hearing in Wilmington, Del., Alex Spiro, a lawyer for Mr. Musk, argued that Twitter cherry-picked documents and misled the public about the data it presented investors on spam and fake accounts, and he asked the court to require the company to hand over more data and communications.
Mr. Spiro also pointed to a whistleblower’s complaint made public this week to bolster his argument accusing Twitter of misleading shareholders with information Mr. Musk relied on when agreeing to the terms of the merger.
A Lawyer for Mr. Musk, Alex Spiro
“Twitter has misled investors, stonewalled us about data and information, and has economic incentives to mislead,” Mr. Spiro said.
He pointed to the MDAU metric as the key way that Twitter tells investors about how many users see advertisements, as well as how its executives dole out bonuses. He argued data, metrics, and communications are needed to capture what the company knows about spam or fake accounts.
Bradley Wilson, an attorney for Twitter, told the court that the requests from Mr. Musk’s attorney wouldn’t be material to the legal question surrounding the termination agreement and that the legal team already had access to much of the information needed for the case. He also argued there were privacy concerns about some of the proprietary information that Mr. Musk’s attorneys were requesting.
“They provide no explanation of why that data is legally relevant in the case. It’s an inherently subjective process to determine if something is or isn’t spam,” Mr. Wilson said. “If two people reach a different conclusion it doesn’t mean Twitter was wrong, or misleading for relying on that opinion.”
The judge didn’t make a decision Wednesday on the request for more data.
Last week, Chancellor Kathaleen St. Jude McCormick granted Mr. Musk’s request for a hearing over its request to compel Twitter to produce documents as part of its discovery requests. Chancellor McCormick said then that oral arguments could help resolve the dispute “given the technical nature of aspects of the dispute” as presented by Mr. Musk.
Twitter sued Mr. Musk on July 12 in the Delaware Court of Chancery to try to force him to proceed with his takeover bid after he said in a July 8 securities filing that he planned to walk away from the deal.
Bed Bath & Beyond’s Challenges Linger After Loan Deal
Bed Bath & Beyond Inc. selected asset manager Sixth Street Partners to supply new financing, according to people familiar with the matter, as doubts remain among vendors and some investors about the company’s turnaround prospects.
Sixth Street is in exclusive talks with Bed Bath & Beyond and is nearing final terms for a loan of close to $400 million to shore up the troubled retailer’s liquidity, according to people familiar with the matter. Negotiations to finalize the loan documents are ongoing, one of the people said.
The company told prospective lenders it had selected a proposal for an asset-based loan, people familiar with the matter said. Bed Bath & Beyond stock climbed as much as 30% on Wednesday, closing up 18% at $10.36.
A loan deal would help refill the company’s coffers and give confidence to vendors that Bed Bath & Beyond can pay its bills. The business has sought to stretch payments to some vendors, which have been pulling credit to the company in recent weeks amid mounting doubts that it could pay them back and a shortage of credit insurance, according to people familiar with the matter.
At least one firm that finances suppliers has stopped providing credit on shipments to Bed Bath & Beyond, according to reports.
The loan is structured as a first-in-last-out facility, meaning it is backed by collateral but will only be paid out after other secured debt in the event of bankruptcy, the people said.
Sixth Street Partners manages $60 billion in assets, and has a retail lending practice that has made loans to retailers such as J.C. Penney Co. and DSW Inc.
The loan is part of a broader plan by the company to shore up its finances. Bed Bath & Beyond indicated earlier this month that it is in talks with lenders and its professional advisers to strengthen its balance sheet and would provide a comprehensive update later in August.
But given its high cash burn in the second quarter, the company will likely need to secure more support from investors to give it runway to execute its restructuring plan.
“The loan would provide a couple more quarters of time to show improvement operationally and appease vendors,” said Seth Basham, analyst at Wedbush Securities. “While we’re skeptical of their ability to generate cash in the short term, if they can show that they can improve their margins and free cash flow through the holidays, that could be a path to regain investor confidence.”
Traditional debt markets may not be a viable route for the retailer to raise new capital. Bed Bath & Beyond’s bonds are trading at deeply distressed levels, indicating that any new debt issued by the company may be prohibitively costly with effective yields above 25%.
The Union, N.J., retailer does have a path to issue millions of new shares, potentially helping the company secure an additional lifeline. Bed Bath & Beyond hasn’t indicated yet whether it expects to issue new shares.
“We’re surprised that the company didn’t try to issue shares,” said Bradley Thomas, analyst at KeyBanc Capital Markets. “It would have been silly not to at least consider it given where the stock was trading.”
The company has been closing stores, reducing corporate overhead and renegotiating contracts with vendors as it looks to cut costs, but its cash burn has deepened in recent months as sales have fallen. Unsecured bonds backed by the company trade between 15 and 30 cents on the dollar, a sign that investors doubt they’ll be paid back in full.
“While we’re skeptical of their ability to generate cash in the short term, if they can show that they can improve their margins and free cash flow through the holidays, that could be a path to regain investor confidence”
Economics
Jerome Powell Says Fed Must Keep Inflation Fight Going
The Federal Reserve must continue raising interest rates and hold them at a higher level until it is confident inflation is under control even if unemployment rises, Chairman Jerome Powell said at a central bank retreat.
Mr. Powell’s widely anticipated speech Friday at the Jackson Hole symposium of central bankers and academics pushed back against recent expectations by some investors that the Fed might quickly retreat from restraining growth next year. “We will keep at it until we are confident the job is done,” he said.
Fed Chairman, Jerome Powell
While rate increases would bring down inflation, Mr. Powell said, “they will also bring some pain to households and businesses.” He added, “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”
U.S. stocks dropped sharply and bond prices inched lower after Mr. Powell’s remarks, which were unusually brief for such a gathering. “The chairman broadly aimed his remarks to put to bed the idea that the Fed will soon be done with its tightening cycle,” said Oscar Munoz, a strategist at TD Securities.
Fed officials raised their benchmark federal-funds rate by 0.75 percentage point at each of their last two meetings, most recently in July, to a range between 2.25% and 2.5%. The current pace represents the most rapid increase in short-term interest rates since the central bank began using the fed-funds rate as its target in the early 1990s.
Officials agreed at their meeting last month that they would need to continue lifting rates but they signaled greater caution about overdoing rate rises. That had fueled optimism in financial markets that the Fed might pivot next year toward cutting rates.
It was “an ‘anti-pivot’ speech,” said Krishna Guha, vice chairman of Evercore ISI.
Separately, the Commerce Department reported Friday that consumer spending slowed in July, rising only 0.1% from June’s 1% increase, in the face of high inflation and rising interest rates. Inflation decelerated in July, with overall prices falling 0.1% from June, according to the Fed’s preferred gauge, the personal-consumption expenditures price index.
In his speech Friday, Mr. Powell said the economy “continues to show strong underlying momentum” despite some mixed signals on growth. On inflation, he said one month’s improvement “falls far short” of what the Fed “will need to see before we are confident that inflation is moving down.”
“The labor market is particularly strong, but it is clearly out of balance, with demand for workers substantially exceeding the supply of available workers,” Mr. Powell said. The labor market has seen robust job gains as it recovered from the pandemic, with a July unemployment rate at a 50-year low.
Fed officials are likely to weigh whether to raise rates by a half point or 0.75 point at their next meeting, Sept. 20-21, after reaching consensus this summer that rates would need to reach high-enough levels to slow the economy’s growth by reducing investment, spending and hiring.
“We will keep at it until we are confident the job is done”
Economies Across the Globe Show Hints of Imminent Sharp Slowdown
Business activity in the U.S., Europe and Japan fell in August, according to new surveys, pointing to a sharp slowdown in global economic growth as higher prices weaken consumer demand and the war in Ukraine scrambles supply chains.
U.S. companies reported a sharp drop in business activity in August in a broad-based decline led by services companies, though manufacturing slowed as well. High inflation, material shortages, delivery delays and interest-rate rises all weighed on business activity, the S&P Global survey said.
The composite purchasing managers index for the U.S. economy—which measures activity in both the manufacturing and services sectors—was 45.0 in August, down from 47.7 in July. That marked the second consecutive month with a decline and was the lowest reading since May 2020, early in the pandemic. A reading below 50 indicates a contraction; a reading above that level indicates growth.
“Gathering clouds spread across the private sector as services new orders returned to contractionary territory, mirroring the subdued demand conditions seen at their manufacturing counterparts,” said Siân Jones, senior economist at S&P Global Market Intelligence.
The U.S. economy has contracted for two consecutive quarters, though job growth remains robust with unemployment matching a half-century low. Inflation remains near records despite a slight cooling of inflation in July with the Federal Reserve pursuing an aggressive rate-raising strategy to cool demand and slow price gains.
Europe business activity also declined for a second month in a row amid a renewed rise in energy prices over uncertainty about Russia’s willingness to maintain its already reduced supply of natural gas ahead of the heating season.
Russian state gas supplier Gazprom on Friday said it would shut down the Nord Stream natural-gas pipeline to Germany for three days of maintenance later in August. That sent gas prices up, spurred by worries over Europe’s ability to amass sufficient fuel supplies before winter.
World
Biden’s Student Loan Forgiveness Plan to Cancel Up to $20,000 in Debt for Millions
President Biden will forgive up to $20,000 in federal student loan debt for tens of millions of Americans, a move that will provide unprecedented relief for borrowers but is certain to draw legal challenges and political pushback.
U.S President, Joe Biden
Following more than a year of internal debate, the president said Wednesday that he will cancel $10,000 in federal student loan debt for borrowers making under $125,000 a year or couples making less than $250,000 a year. In addition, those who receive federal Pell Grants and make less than $125,000 a year would be eligible for total forgiveness of $20,000, Mr. Biden said.
“An entire generation is now saddled with unsustainable debt,” Mr. Biden said at the White House, adding that he wouldn’t apologize for what he characterized as a program to help the middle class.
“I understand that not everything I’m announcing today is going to make everybody happy,” he said. “But I believe my plan is responsible and fair.”
Independent estimates suggest the plan will cost more than $300 billion over 10 years. The action will add to the federal deficit over time since borrowers will repay less, or none, of their loans to the federal government, but it doesn’t involve the immediate outlay of federal funds.
The forgiveness applies to students with federal loans from undergraduate and graduate programs, as well as Parent Plus loans, White House officials said. While debt forgiveness is often treated as income for tax purposes, the canceled student debt will be exempt, like some other federal student debt forgiveness programs. The White House said borrowers who took out federal loans by June 30 of this year are eligible for forgiveness. Loans taken out after that date won’t be eligible.
Mr. Biden also announced an extension of the pandemic pause on student loan payments through the end of this year. Loan payments were set to resume for millions of borrowers after Aug. 31. The Education Department will release more details on how borrowers can claim relief in the coming weeks and will make an application available before the repayment pause expires at the end of the year. Around eight million borrowers could be eligible for automatic relief, the department said, because it already has their income data.
The plan was welcomed by advocacy groups and Democrats who have long pushed for loan forgiveness, though some previously called for a much broader program to erase more debt.
Republican lawmakers quickly criticized the idea, and are likely to incorporate the topic into their midterm-election messaging. “Who will have to pay for Biden’s debt transfer scam? Hard-working Americans who already paid off their debts or never took on student loan debt in the first place,” House Minority Leader Kevin McCarthy (R., Calif.) wrote on Twitter. The Republican National Committee called the plan “Biden’s bailout for the wealthy.”
House Minority Leader, Kevin McCarthy (R., Calif.)
Jaime Harrison, the Democratic National Committee chair, said on Twitter that he was amazed Republicans would criticize the plan when they “practically trip over themselves to provide tax cuts & incentives to the richest corporations & Americans.”
“Who will have to pay for Biden’s debt transfer scam? Hard-working Americans who already paid off their debts or never took on student loan debt in the first place”
Trump Home Search Prompted by Prior Discovery of Top-Secret Documents, Affidavit Says
Boxes retrieved from former President Donald Trump’s Mar-a-Lago home early this year contained more than 184 classified documents, including some deemed top- secret or derived from clandestine human-intelligence sources, according to a heavily redacted affidavit released Friday laying out the Federal Bureau of Investigation’s justification for its extraordinary search of the Florida estate in early August.
Former U.S President, Donald Trump
The document, spanning 38 pages, 24 of them fully or partially blacked out, said there was “probable cause to believe that additional documents” containing classified national defense information and presidential records remained on the premises after the handover early this year and “also probable cause to believe that evidence of obstruction” would be found there. A separate document said investigators relied on accounts from “a significant number of civilian witnesses” before searching the home.
The affidavit was released on court order almost three weeks after FBI agents searched Mar-a-Lago and carted away more than two dozen boxes including 11 sets of classified documents, some of which were meant to be accessible only in special high-security facilities, according to a search warrant made public by the Florida court that approved it. The search followed months of correspondence by the National Archives and Records Administration to secure Trump administration records.
The document unsealed Friday represents the fullest official account of the Justice Department’s ongoing investigation into Mr. Trump’s handling of classified material after he left the White House in early 2021, and it highlights the seriousness of the government’s concerns that it could be misused.
A federal judge Thursday approved the government’s redactions of key details, including identities of witnesses and law-enforcement agents, as well as the investigation’s “strategy, direction, scope, sources and methods,” noting that federal agents have received threats of violence since the search.
The redacted affidavit provides few new clues, however, about where the probe is headed.
The warrant, released earlier, says investigators were seeking all records that could be evidence of violations of laws governing the gathering, transmitting or losing of classified information; the removal of official government records; and the destruction of records in a federal investigation. It couldn’t be determined whether anyone will be charged with a crime, a move that would only come after intense deliberation by the highest echelons of the Justice Department and would further subject the agency to allegations of political interference, which Attorney General Merrick Garland has sought to avoid.
U.S Attorney General, Merrick Garland
The search set off a furious political response that the release of the affidavit hasn’t quelled. Mr. Trump and his allies said the redactions showed a lack of transparency, playing to their favor in shaping public opinion about the case. The former president has seen his standing in the GOP strengthen since the Aug. 8 search as he considers a 2024 challenge to President Biden, who has said he is running again.
Mr. Trump reacted on his social-media platform: “Affidavit heavily redacted!!! Nothing mentioned on “Nuclear,” a total public relations subterfuge by the FBI & DOJ, or our close working relationship regarding document turnover – WE GAVE THEM MUCH.”
The government had argued that revealing too much of the affidavit could expose witnesses and jeopardize the continuing investigation into the former president’s handling of classified information.
China
U.S. and China Reach Agreement on U.S.-Listed Chinese Company Audits
Washington and Beijing reached an agreement for U.S. accounting regulators to inspect China-based audits, laying the groundwork for a monthslong process that could prevent numerous Chinese companies from being booted off American stock exchanges.
New York Stock Exchange Trading Floor
The deal, which was negotiated over many months, comes after a decadelong standoff between regulators in the two countries over the audit working papers of New York-listed Chinese companies. It appears to mark a rare concession from Beijing at a time when the U.S. and China are locked in disagreements over issues such as trade and human rights.
The agreement allows Public Company Accounting Oversight Board inspectors to travel to Hong Kong or mainland China for inspections. U.S. regulators said they expect American inspectors to be on the ground by mid-September. They will have to work swiftly to complete an assessment of whether China is compliant with U.S. law by the end of the year, officials cautioned.
China had previously denied U.S. regulators routine access to companies’ audit working papers on the grounds of national security. In a departure from what officials have said previously, the Chinese stock regulator said on Friday that audit working papers generally do not contain state secrets, individual privacy, companies’ vast user data or other sensitive information.
While both sides used optimistic language to describe the agreement, the two nations appeared to differ on what the agreement said about the detailed process for U.S. regulators to inspect Chinese audits. Officials from the U.S. Public Company Accounting Oversight Board and the U.S. Securities and Exchange Commission said they agreed with their Chinese counterparts to not make the language of the deal public.
SEC Headquarters, Washington D.C
One point that remained unclear was whether U.S. regulators would be able to conduct their investigations without Chinese officials present.
Calling the agreement a “first step” forward, the PCAOB said China granted the regulators “complete access to the audit work papers, audit personnel, and other information we need to inspect and investigate any firm we choose, with no loopholes and no exceptions.”
“The real test will be whether the words agreed to on paper translate into complete access in practice,” according to the statement from PCAOB’s chairwoman Erica Williams.
The PCAOB said complete access would mean U.S. regulators will be able to interview and take testimony from “all personnel associated with the audits the PCAOB inspects or investigates.”
The Chinese side, calling the agreement an important step “in addressing the shared concern of auditing cooperation,” emphasized that the U.S. regulators would only conduct inspections with the assistance of the Chinese. The U.S. regulators will also have to communicate with the Chinese counterparts about their plans before the investigations, the statement from China said.
That appeared to clash with PCAOB’s statement, which said: “The PCAOB has sole discretion to select the firms, audit engagements and potential violations it inspects and investigates—without consultation with, nor input from, Chinese authorities.”
The Chinese statement said the assistance from the Chinese regulators would also involve Hong Kong-based accounting firms that have audit data storage in mainland China, suggesting that U.S.-listed Chinese companies and their accounting firms might have to transfer their audit working papers and other data from mainland China to Hong Kong.
According to PCAOB and SEC officials, the reason the agreement involves transferring working papers from mainland China to Hong Kong is because Hong Kong’s Covid-19 protocols make it easier for PCAOB inspectors to get in. Quarantine times to enter some Chinese cities would make it difficult to complete inspections in time.
“The PCAOB has sole discretion to select the firms, audit engagements and potential violations it inspects and investigates—without consultation with, nor input from, Chinese authorities”
Good to see PCAOB in china.
Makes investing there seem a lot safer.
Inflation still on the rise yet markets are performing relatively ok. Makes good sense!