Weekly Business Roundup
Publication 16- Queen Elizabeth Dies as Britain's Longest-Serving Monarch, Bed, Bath, and Beyond Search for New Executive Following CFO Suicide, and ECB Raise Rates by 0.75 Percentage Point
Published Sunday, September 11th 2022
This week, Apple Inc. unveiled their new iPhone 14 lineup, Juul set to pay over $400 million to settle underage vaping probe, and China’s lending strategy raised questions about it’s economy’s strength.
Queen Elizabeth II Dies at 96 After 70 Years on the Throne
Queen Elizabeth II, who defined the monarchy for generations of Britons, died on Thursday, plunging the U.K. into mourning and giving the country its first new head of state in 70 years, her son, King Charles III.
Queen Elizabeth II
Buckingham Palace said the 96-year-old queen—who ascended the throne when Winston Churchill was prime minister and the country was recovering from World War II—died at her residence in Balmoral, Scotland.
King Charles was in Scotland with his family and was expected to return to London after spending the night in Balmoral. “The Queen died peacefully at Balmoral this afternoon,” Buckingham Palace said in a statement.
The queen’s death marks a watershed moment for the U.K. Britons under the age of 70 have grown up knowing only one monarch. She was the most visible link to the country’s imperial past and the embodiment of national identity. “We mourn profoundly the passing of a cherished Sovereign and a much-loved Mother,” said King Charles III in a statement. “I know her loss will be deeply felt throughout the country, the Realms and the Commonwealth, and by countless people around the world.”
King Charles III
For the U.K., the queen’s death adds to a growing feeling of gloom at a time of high inflation, a looming recession, falling real wages and skyrocketing energy prices from the war in Ukraine.
Within minutes of the news, crowds gathered outside Buckingham Palace. Many hoisted cameras and phones in the air. In one corner of the crowd, some people sang “God Save the Queen.” Palace staff dressed in black posted the official notice of her death at the palace gates.
“We are all devastated,” British Prime Minister Liz Truss said. Queen Elizabeth was “the rock on which modern Britain was built,” she added.
“I know her loss will be deeply felt throughout the country, the Realms and the Commonwealth, and by countless people around the world”
Business
Bed Bath & Beyond Names Laura Crossen as Interim CFO After Death Of Gustavo Arnal
Struggling home-goods retailer Bed Bath & Beyond Inc. on Tuesday named an interim executive to lead its finances, a move aimed at reassuring investors after the death of Chief Financial Officer Gustavo Arnal.
Union, N.J.-based Bed Bath & Beyond said Laura Crossen would take over on an acting basis, effective Sept. 5, following the death by suicide of Mr. Arnal on Friday. Ms. Crossen, who joined the company in 2001, was promoted in late June to the role of chief accounting officer after her predecessor John Barresi resigned. She previously held the position of senior vice president of treasury and tax and will continue as principal accounting officer of the company.
The company’s stock has dropped about 50% since the beginning of the year and closed down 18% at $7.04 on Tuesday.
Mr. Arnal, who became Bed Bath & Beyond’s CFO in the spring of 2020, jumped from a New York building on Friday, two days after he had briefed investors on the retailer’s plans to secure new financing, cut jobs and close about a fifth of its stores.
Gustavo Arnal
His death adds to the company’s leadership gap following the ouster of former Chief Executive Mark Tritton in late June and the departure of other senior executives. Mr. Arnal had been a key figure in the management team hired by Mr. Tritton, who was replaced after the company posted disappointing results for two quarters in a row. Bed Bath & Beyond is currently led by Sue Gove, an independent director on the company’s board, while a search for a permanent CEO is under way.
Ms. Crossen will have to work to stabilize the company’s finances, which have been deteriorating sharply in recent months, analysts said. Bed Bath & Beyond has been burning through its capital reserves, ending May with $107.5 million in cash, down from $1.1 billion a year earlier. It booked a net loss of around $358 million for the quarter ended May 28, compared with a net loss of about $51 million a year earlier.
Last week, Bed Bath & Beyond said it had secured $500 million in financing, including a new $375 million loan through JPMorgan Chase & Co. from Sixth Street Partners. The fresh cash would stabilize the business as the company enters the holiday season, Mr. Arnal and other executives said. Suppliers need assurance that it is safe to provide the company with inventory ahead of the holidays, analysts said. Bed Bath & Beyond last week said some vendors were asking for better payment terms amid concerns about its liquidity.
On a call with investors last week, Mr. Arnal had discussed Bed Bath & Beyond’s restructuring plans and provided interim financial forecasts. He also told analysts that the company was still in the process of finalizing its accounting for the quarter ended Aug. 27. Bed Bath & Beyond will have to file its quarterly 10-Q to regulators within 45 days or seek an extension.
Ms. Crossen’s more than 20 years with the company likely means she can keep “reporting and the day-to-day going,” said Cristina Fernández, a senior equity research analyst at brokerage firm Telsey Advisory Group LLC. “I think they should be able to do it on time,” Ms. Fernández said, referring to closing the books for the latest quarter.
Ms. Crossen will have to restore investor confidence in the company and its turnaround strategy, which took another hit after Bed Bath & Beyond said it would revamp its plans, close about 150 underperforming stores and bring back national brands after focusing on private-label products under former CEO Mr. Tritton.
Apple Unveils New iPhone 14 Lineup, Keeps Prices Steady
Apple Inc. on Wednesday began a third year of nudging customers to iPhones with 5G-capable technology, betting iterative enhancements will still appeal to buyers who haven’t upgraded to the latest offerings.
The iPhone 14 lineup took center stage for customers and investors at the company’s annual September event at its Cupertino, Calif., headquarters and on its website. The new models are an evolutionary offering after the late 2020’s iPhone 12 brought 5G cellular capability for the first time. 5G has been touted as offering faster download speeds, appealing for streaming video and videogames.
The tech giant focused on safety features for the iPhone 14 lineup and newest smartwatches, adding sensors that can detect car crashes and alert authorities. The new smartphones will get satellite connectivity for sending emergency messages to use in areas not touched by cellular towers.
iPhone 14 Lineup
Many analysts had expected to see Apple increase prices for some iPhones, but the company kept starting prices the same compared with a year ago for both base and high-end models. It dropped the cheapest iPhone Mini version.
Demand for the iPhone 12 and iPhone 13 lineups helped Apple post record profits and sales in the past two years. IPhone revenue rose 39% in fiscal 2021 and is expected to rise another 6.7% to a record $205 billion this fiscal year, which ends later this month.
“The iPhone’s sales performance year to date has been impressive, and is the biggest reason why the company has largely bucked the economic downturn,” said Gene Munster, managing partner at Loup Ventures. “Keeping that segment’s momentum going this holiday in the face of a stressed consumer will be top of mind for investors when the new models are unveiled.”
Apple has defied an industrywide decline in smartphone shipments, which slipped almost 9% in the past quarter compared with a year earlier, according to researcher International Data Corp. During the first half, the bright spot in the market was smartphones priced above $900, according to Counterpoint Research.
The biggest changes on Wednesday were in the higher-end iPhone Pro models that cost more and have helped drive more revenue for the company. Apple revealed 6.1- and 6.7-inch display versions of the Pro models and added a 6.7-inch offering—called iPhone 14 Plus—to the iPhone 14 base version along with the 6.1-inch display.
The Pro versions got a new faster A16 chip and screen that is brighter and allows for always-on display. The high-end phones come with a new design that houses the front camera in a pill-shaped hole in the screen replacing the iPhone 13’s notch. It surfaces alerts in what Apple is calling the dynamic island that expands across the top of the screen. The high-end devices have a bigger camera system with more-advanced zooming among other capabilities.
The base iPhone 14 with the 6.1-inch display will start at the same price as last year’s iPhone 13. The new larger-size 6.7-inch iPhone 14 Plus starts at $899 while the same-sized Pro version with a better camera system and other upgrades starts at $999. The bigger iPhone Pro Max starts at $1,099.
“It is impressive that Apple has maintained year-on-year pricing parity on the new iPhone 14 devices in the U.S.,” Ben Wood, chief analyst at CCS Insight, said in an email. “We had anticipated that inflation, increased production and component costs, and other expenses such as more expensive shipping would have led Apple to increase its retail pricing.”
The company also announced a new high-end version dubbed Apple Watch Ultra, starting at $799 and including a larger screen, more battery life and improved GPS precision. The Ultra, aimed at adventure users from backcountry hikers to scuba divers, has a new look with rounded edges along with an added button for custom actions and a crown that is designed to be used wearing gloves.
“It is impressive that Apple has maintained year-on-year pricing parity on the new iPhone 14 devices in the U.S. We had anticipated that inflation, increased production and component costs, and other expenses such as more expensive shipping would have led Apple to increase its retail pricing”
Juul to Pay $438.5 Million to Settle Probe Over Underage Vaping
Juul Labs Inc. agreed to pay at least $438.5 million in a settlement with more than 30 states, the latest step by the beleaguered e-cigarette maker to resolve allegations that it marketed its products to underage users.
Juul Vape Product
Under the deal, which includes 33 states and Puerto Rico, Juul is barred from depicting people under 35 in its marketing, product placements in film and television, advertising on billboards and social media, selling Juul-branded merchandise and funding education programs in schools, Connecticut Attorney General William Tong said in a news conference Tuesday.
“They relentlessly marketed vaping products to underage youth,” said Mr. Tong, a Democrat. He cited the toll that underage vaping has taken on families.
Connecticut Attorney General, William Tong
Juul denied wrongdoing and said it voluntarily had stopped the marketing and sales practices that the agreement bars it from using. The agreement follows an investigation begun in 2020 by 39 states.
Since last year, Juul has agreed to pay a total of $87 million in settlements with four other states that brought lawsuits against the company, including Louisiana, Arizona, North Carolina and Washington state. Thousands of other lawsuits against Juul are pending, including cases brought by nine other attorneys general.
The e-cigarette maker’s future also hinges on an appeal it has filed with the Food and Drug Administration, which in June ordered Juul to pull its products from the U.S. market. The FDA has suspended the ban while Juul appeals the decision.
Juul in 2018 soared to the top of the e-cigarette market and drew criticism from regulators and school administrators, who blamed the company’s sleek vaporizers, fruity flavors and hip marketing for fueling a surge in underage vaping. The company since then has been trying to regain the trust of regulators and the public. It limited its marketing and in 2019 stopped selling sweet and fruity flavors.
Youth use of e-cigarettes has fallen since the U.S. raised the minimum purchase age for tobacco products to 21 and barred the sale of sweet and fruity e-cigarette refill cartridges. Last year, disposable e-cigarette brand Puff Bar overtook Juul as the most popular e-cigarette among middle- and high-school students.
Juul on Tuesday said the settlement was part of its effort to resolve issues from the past. The company said it is focused on the future and is endeavoring to provide alternatives for adult cigarette smokers while combating underage use.
“They relentlessly marketed vaping products to underage youth”
Economics
ECB Raises Interest Rates by Historic 0.75 Point as Europe Stares at Recession
The European Central Bank raised interest rates by the largest amount since the early days of Europe’s currency union, moving aggressively to combat record inflation even as an energy crisis puts Europe on the brink of recession.
The bank said in a statement that it would increase its key rate to 0.75% from zero—its second hike this year following a 50-basis-point rise in July—and signaled that further rises were likely over the coming months.
At a news conference, ECB President Christine Lagarde warned that inflation was spreading beyond energy to a range of products. She said the ECB was ready to increase rates aggressively over the next several meetings.
“We want all economic actors to understand that the ECB is serious” about countering high inflation, Ms. Lagarde said.
ECB President, Christine Lagarde
The euro slid to about 99.7 cents against the dollar after the ECB’s decision, and investors dumped European government bonds while Ms. Lagarde was speaking as they moved to price in more interest-rate increases in the months ahead.
Thursday’s unusually large increase mirrors recent moves by other major central banks, including the Federal Reserve, which is expected to unveil a third successive 0.75-point rate rise later this month. Canada’s central bank raised its policy rate on Wednesday by 0.75 percentage point to 3.25%, a 14-year high.
The ECB is in a tougher position than its North American counterparts because Europe’s economy is being hit harder by the war in Ukraine. Inflation in the 19-nation eurozone has surpassed U.S. levels in recent weeks as Russia’s throttling of energy supplies to Europe has driven up prices.
Rising borrowing costs will likely increase the risk of a slide into recession for Europe, whose households and businesses are wrestling with surging costs and sagging confidence. With governments piling on debt to shield consumers and businesses from the economic fallout, a national election in Italy later this month could exacerbate strains in the region’s bond markets.
“I thought the language they used around inflation was really quite hawkish,” said Simon Bell, a portfolio manager at Legal & General Investment Management.
Still, Mr. Bell doesn’t expect 75-basis-point rate increases to become the norm for the ECB as policy makers likely remain concerned about the stability of financially fragile eurozone members like Italy.
The difference between 10-year bond yields for Germany and Italy—a key barometer of eurozone financial-market stress—stood at 2.3 percentage points on Thursday. That is just below levels reached in June that spurred emergency action from the central bank to shore up support for Italian debt.
Eurozone inflation increased to 9.1% in August and is expected to rise toward 10% over the coming months, as some government energy and public-transport subsidies expire, especially in Germany.
“We want all economic actors to understand that the ECB is serious”
U.S. Trade Deficit Shrank in July
The U.S. reported a sharp narrowing in the July trade deficit due to weaker demand for imports, a positive sign for short-term economic growth but a potential warning sign for the global economy.
The trade gap in goods and services shrank by 12.6% in July from the prior month to a seasonally adjusted $70.65 billion, the Commerce Department said Wednesday.
From an accounting perspective, Wednesday’s numbers bode well for U.S. economic growth in the third quarter, as trade deficits subtract from gross domestic product.
“Trade is going to help growth in the third quarter,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. However he added that declining imports due to cooling U.S. demand are “not a good sign for global economic activity, and that looks to be on the cards as we go into the latter part of the year.”
U.S. imports have dropped for two straight months as shoppers faced high inflation, which has dented consumer sentiment, surveys show. July’s import decline also came as U.S. retailers grappled with bloated inventories following prolonged supply-chain disruptions triggered by the Covid-19 pandemic.
Exports grew 0.2% to $259.29 billion in July from the prior month, helped largely by higher shipments of capital goods like computers and industrial machinery. Spending by foreign visitors, which is counted as a services export, also picked up as Covid travel restrictions eased and more vacationers came to the U.S.
The drop in imports and rise in exports in July came despite a strong dollar, which makes imports cheaper for U.S. consumers while lifting the cost of U.S. goods abroad, which can hurt exporters.
Still, economists expect a slowing global economy will hinder trade flows in the near future. Recent surveys have pointed to a sharp slowdown in global economic growth as higher prices weaken consumer demand and the war in Ukraine scrambles supply chains.
The export boom that has powered China’s economy through the pandemic decelerated in August, reflecting the impact from rising inflation and slowing growth elsewhere in the world.
“Trade is going to help growth in the third quarter”
China
China’s Lending Strategy in Emerging Markets Risks Prolonging Borrowers’ Pain
Burdened with a growing pile of souring loans to the developing world the past few years, Chinese lenders have been rescheduling payments and offering more credit to borrowers in financial straits.
Those strategies—reminiscent of “extend and pretend” practices of banks unwilling to recognize bad debts—failed in Sri Lanka, whose government collapsed recently under the weight of unpayable loans.
Now, China’s tactics face further tests, as other developing countries flirt with financial instability amid higher inflation and rising interest rates.
By propping up flailing borrowers without requiring them to significantly reform their economies, China’s lenders risk prolonging countries’ debt agony rather than fixing it, researchers say. History shows—whether in Latin America, Africa or Europe—that debt crises are usually resolved when creditors write down the value of debt they are owed and borrowers undertake policy overhauls to put their finances on a stable footing.
Chinese lenders also often refuse to publicly reveal terms of the forbearance they are offering. That is making it harder to know whether China’s restructurings are likely to work, researchers say.
With China, “you get the bailout without any of the policy reforms that would be necessary to get the economy back on a sustainable track,” said Brad Parks, executive director of AidData, a research lab at William & Mary, a university in Williamsburg, Va., that tracks development finance.
China’s Ministry of Foreign Affairs declined to comment. The Ministry of Commerce didn’t respond to a request for comment.
Supporters of China’s playbook of repeatedly renegotiating or extending debt, including some recipients of the loans, say it contrasts favorably with bondholders and other private creditors whose unyielding approach toward developing-world problems has sometimes made it harder to solve debt crises.
China’s approach may have helped forestall balance of payments crises or outright defaults that could have destabilized the world economy, as countries have been pummeled by the pandemic, high inflation and war in Ukraine.
There are also some signs that China is beginning to embrace a more collegial approach to countries in financial distress, after years of going it alone. Beijing has signed up to a Group of 20 advanced and developing economies’ initiative known as the common framework, aimed at easing poor countries’ debt burdens. In Chad, Zambia and Ethiopia, it has agreed to work with other creditors on debt relief.
“[With China,] you get the bailout without any of the policy reforms that would be necessary to get the economy back on a sustainable track”