Weekly Business Roundup
Publication 5- U.S Inflation Hits New 40-Year High, Gary Gensler Proposes New U.S Stock-Trading Rules, and China Begins To Open Back Up
Published Sunday, June 12th 2022
This week, Elon Musk threatened to call off his potential purchase of Twitter Inc., Target Corp. cut it’s earnings expectation as the whole retail industry faces a mutual challenge, and new inflation data continues to worry economists.
Business
Elon Musk Threatens To Abandon Twitter Deal Due To Lack Of Information Regarding Spam Accounts
Tesla Chief Executive Elon Musk threatened to terminate his $54.20-per-share deal to buy Twitter Inc. earlier this week in a letter, citing company’s non-compliance with his request for data on the number of spam and fake accounts on the platform.
Musk accused the social-media giant of refusing to provide the necessary data for him to facilitate his own evaluation of the number of spam and fake accounts.
Tesla CEO, Elon Musk
A regulatory filing Monday disclosed a letter Mr. Musk’s lawyer, Mike Ringler, wrote to Twitter Chief Legal Officer Vijaya Gadde, stating Mr. Musk’s entitlement to the requested data; “This is a clear material breach of Twitter’s obligations under the merger agreement and Mr. Musk reserves all rights resulting therefrom, including his right not to consummate the transaction and his right to terminate the merger agreement.”
Mr. Musk’s latest letter is his clearest statement that he may try to abandon the deal, potentially spurring what could be a protracted legal battle between the two sides. As part of the deal, both sides agreed to pay each other a $1 billion breakup fee if they cause the deal not to happen for certain reasons. Twitter could also sue to force Mr. Musk to go through with the transaction. There are only specific scenarios under which Mr. Musk would be able to simply pay the termination fee to walk away from the transaction, including if regulators try to block the deal or the debt financing falls through.
For years, Twitter had publicly disclosed its own estimate of how many of its daily active users represent false or spam accounts, putting the percentage at fewer than 5% of its monetizable daily active users. Mr. Musk has pegged the figure at least four times as high at 20% of Twitter’s accounts.
Target Cuts Earnings Expectations as Entire Retail Industry Struggles With Excess Inventories
Target Corp. warned Tuesday that it expects near-term profits to fall less than three weeks after reporting a lower-than-expected quarterly earnings figure. The company attributed the expected decrease to it’s excess inventory, and it’s need to cancel orders with vendors and offer discounts to clear out unwanted goods.
The retailer’s inventory rose 43% in the April quarter as demand for outdoor furniture, small appliances and some electronics declined faster than expected and supply-chain snarls delayed the arrival of many goods past the ideal selling window, Target previously said. The company is moving faster to unload excess inventory in the current quarter.
Target’s CEO, Brian Cornell, in an interview stated “We’ve had some additional time after earnings to really evaluate the overall operating environment. We have to be decisive and get out in front of this to make sure this doesn’t linger through the back half of the year.”
The company’s stock was down 35.5% year-to-date, as of Friday, June 10th.
Target Chief Executive, Brian Cornell
The retail industry as a whole is facing similar inventory problems, as shoppers quickly shift their spending from items that were popular at the height of the pandemic, such as casual clothes, activewear, home textiles and tableware, to more formal clothing to wear to offices and social gatherings.
The change in what’s-in-demand usually would not present retailers with significant challenges, however, given the global supply-chain complications throwing off delivery of popular items, coupled with multi-decade high inflation prompting consumers to spend more on necessities like food and fuel while eating into discretionary income is proving to be a daunting task for sellers.
Macy’s Chief Executive Jeff Gennette said in an interview in late May that the shift was dramatic and happened faster than the company had anticipated. “It’s classic supply and demand,” Mr. Gennette said. “Too much supply, not enough demand.”
“Too much supply, not enough demand”
Amazon Executes It’s Stock Split
Amazon’s 20-for-1 stock split, announced in March, went into effect Monday. The split will in part make the tech company’s share price more accessible for people wanting to buy the stock.
The company’s board approved the 20-for-1 split in March and shareholders approved the move last month.
Stock splits don’t alter the value of a company or impact the worth of shareholders’ investments. In Amazon’s case, those who owned the stock as of May 27 will get 19 additional shares for every share they own.
Amazon last split its stock in 1999 during the dot-com boom.
Despite the fact that a stock split does not change the fundamental value of a company, an analysis by MKM Partners found that, over the past decade, companies that split their stocks outperformed the S&P 500 three and six months after their effective splits took place.
However, a split generally increases demand for a stock from retail investors due it being cheaper on a dollar basis.
A Cboe analysis found that trading volume of companies that split their stocks rose in the weeks and months following the splits. “The evidence suggests that stock-split events drive additional participation from retail investors, especially in securities with larger market capitalization,” Cboe said.
Starbucks Only Considering External Prospects For New Chief Executive Role
Starbucks Corp. said they are only considering external candidates for new chief executive role, as interim CEO Howard Shultz says the coffee-giant needs to hire new talent and younger leaders.
Starbucks Interim CEO, Howard Shultz
Mr. Shultz, who has made it clear he is not a candidate to hold the position permanentley, has stated that Starbucks has been in talks with several promising prospects for the role of chief executive and aims to identify a new one by fall. He also announced plans for him to have left the CEO position by the shareholder meeting next March.
“For the future of the company, we need a domain of experience and expertise in a number of disciplines that we don’t have now,” Mr. Schultz said during an interview. “It requires a different type of leader.”
Mr. Schultz returned to Starbucks’ C-suite in April to succeed Kevin Johnson on an interim basis, his third stint running the company that he built from a local Seattle coffee-shop chain into a global giant. Mr. Schultz said Mr. Johnson was a good CEO for the company but that he hasn’t reached out to him upon returning.
Former Starbucks CEO, Kevin Johnson
Mr. Schultz, who is now the company’s fourth-largest shareholder, flaunted his optimism in the company’s ability to transition into a new phase of growth and development
“I don’t look back. My eyes are looking forward,” Mr. Schultz said.
“[Starbucks] requires a different type of leader”
SEC’s Gary Gensler Proposes New U.S Stock-Trading Rules
Chairman of the Securities and Exchange Commision, Gary Gensler, outlined potential changes to U.S. stock-trading rules that aim to reduce costs for investors on Wednesday.
Securities and Exchange Comission Chairman, Gary Gensler
One of the main elements of the proposed rule changes was a requirement for brokerages to route individual investors’ orders into auctions- the objective being, as Mr. Gensler said, to “assure full competition among all market participants to provide the best prices for retail investors."
The suggested changes to U.S stock-trading rules saw fierce criticism from brokerages and trading firms, who said the current system is working well for individual investors. Many were skeptical about the neccessity of the proposed plans.
Robinhood’s Chief Legal Officer, Dan Gallagher, who was formerly an SEC commisioner, said “it is a really good climate for retail, so to go in and muck with it right now, to me, is a little worrisome.”
Kirsten Wegner, chief executive officer of Modern Markets Initiative, a lobbying and advocacy group for high-speed trading firms, said “switching to an auction system seems ill-timed, unneeded and a step in the wrong direction.”
Head of advocacy group Better Markets, Dennis Kelleher, called the critics of the SEC’s plans “whining billionaires.”
“Who are you going to believe?” Mr. Kelleher said. “The financial firms whose leaders became billionaires from extracting wealth from retail investors in nontransparent, anticompetitive markets or a regulator with nothing to gain?”
Head of Better Markets, Dennis Kelleher
Under current rules, brokers must perform “reasonable diligence” to determine the likely best market for executing a trade. Many brokers route orders to big electronic trading firms called wholesalers, including Citadel Securities or Virtu Financial Inc., rather than to exchanges such as the Nasdaq Stock Market, arguing that the wholesalers provide the best prices.
Some brokers, including Robinhood, accept compensation from wholesalers for routing trades to their venues. Mr. Gensler says this practice, known as payment for order flow, creates a conflict of interest and limits competition for individual orders.
“Who are you going to believe? The financial firms whose leaders became billionaires from extracting wealth from retail investors in nontransparent, anticompetitive markets or a regulator with nothing to gain?”
Economics
U.S Inflation Hits New Multi-Decade High
U.S inflation hit a new 40-year high in May as surging energy and food costs weighed heavily on consumers, worrying economists.
The Labour Department released it’s consumer-price index data for May on Friday, revealing the CPI, a measure of what consumers pay for goods and services, increased 8.6% year-over-year. May’s figure represents the highest inflation reading since December 1981.
May’s increase is attributable, in part, to rapidly rising energy and food costs, which are up 34.6% and 11.9% from a year earlier, respectively. But inflation pressures were distinctly broad-based in May, said Sarah House, senior economist at Wells Fargo Securities.
“Given everything from the implications of the Russian invasion of Ukraine, the Chinese lockdowns and just the sheer appetite for travel…what we’ve seen is the perfect storm of those factors hitting, along with some major refinery closures,” Ms. House said. “Inflationary pressures were seen nearly everywhere.”
Airline fares rose 12.6% from last month, the third straight double-digit rise, and the price for used automobiles rose 1.8% in May from April, reversing three months of declines.
“We suspect that the formidable momentum in inflation could push the headline rate for CPI close to 9% as early as next month,” said Ms. House, adding that it is likely to stay near those levels through the autumn.
James Knightley, chief international economist at ING, also acknowledged the spread of inflation across the whole economy.
“The breadth of inflation pressures in the economy should alarm the Fed,” he said. “To get demand into better balance with the supply the onus is on the Federal Reserve to do the heavy lifting.”
The CPI jumped 1% in May from April, after rising 0.3% in the prior month. The so-called core-CPI, which excludes the volatile categories of food and energy, increased 0.6% on the month, the same as in April, and 6% on the year, down from the previous month’s 6.2%, and March’s 6.5%, the highest rate since August 1982.
Further adding to inflationary challenges, the national average price of a gallon of regular unleaded gas hit $5 Friday night, a record high in the U.S. The rise in fuel costs is expected to persist throughout the busy summer driving season.
“Inflationary pressures were seen nearly everywhere”
U.S Trade Deficit Significantly Lower as Imports Fall
A Commerce Department report Tuesday revealed a signifcant drop in the U.S trade deficit in April. The gap in imports and exports fell 19.1% to $87.1 billion from March’s record figure of $107.7 billion, driven primarily from a sharp decline in imports.
April’s imports fell 3.4% to $339.7 billion, representing the first month-on-month decrease since July 2021, which extreme inflation and weaker domestic demand are both in part responsible for.
Exports grew 3.5% to $252.6 billion.
Despite April’s material drop, the trade deficit remains large compared with prepandemic levels. Before the pandemic, the trade deficit had fluctuated for years between $40 billion and $50 billion a month- roughly 45% - 60% of current levels.
Investing
Analyst’s Report- The Home Depot Inc. (NYSE : HD)
By Ben Slye
Business Explanation
The Home Depot, Inc. is the world’s largest home improvement retailer based on net sales for fiscal 2021. They offer their customers a wide assortment of building materials, home improvement products, lawn and garden products, décor products, and facilities maintenance, repair and operations products and provide a number of services, including home improvement installation services and tool and equipment rental. As of the end of fiscal 2021, they operated 2,317 stores located throughout the U.S. (including the Commonwealth of Puerto Rico and the territories of the U.S. Virgin Islands and Guam), Canada, and Mexico.
By The Figures
(as at close, Friday, June 10th 2022)
Price: $289.24
Market Cap: $297.27 billion
P/E Ratio: 19.03
Dividend Yield: 2.53%
52-Week Range: $279.59 - $420.61
ROE: 2,050.3%
ROIC: 36.8%
10-Year Revenue CAGR: 7.9%
10-Year FCF CAGR: 9.8%
10-Year Equity CAGR: N/A
Management
Edward Decker has served as CEO and President of Home Depot since March 2022.
Prior to assuming the role of CEO, he served as their President and Chief Operating Officer from October 2020 through February 2022, where he was responsible for global store operations, global sourcing operations, global supply chain, outside sales and service, and real estate, as well as merchandising, marketing and online strategy. From August 2014 to October 2020, he served as Executive Vice President of Merchandising, where he was responsible for merchandising strategy, marketing, vendor management, and in-store environment.
With over two decades of experience with the Company, Mr. Decker brings to their Board extensive retail experience and knowledge of their business.
Richard McPhail , has been Executive Vice President and Chief Financial Officer since September 2019.
From August 2017 through August 2019, he served as Senior Vice President, Finance Control and Administration, of the Company, and was responsible for enterprise financial reporting and operations, financial planning and analysis, treasury, payments, tax, and international financial operations. From August 2014 to September 2017, he served as Senior Vice President, Finance, with responsibility for U.S. Retail finance, strategic and financial planning, and business development activity.
Before Mr Decker, Craig Menear served as CEO from 2014-2022. Over that period he averaged a return on invested capital of 30.48%, and a return on equity of 1,227%. Mr. Menear’s competence and ability allowed him to grow the company’s revenue at 7.5% a year, their earnings-per-share at 17.07% a year and their free cash flow at 9.23% a year.
Mr. Decker has a lot of experience in The Home Depot but has not proved his competence as a CEO yet as he only assumed the position recently, however his many years spent with the company will likely prove advantageous to his performance as chief executive.
Competetion
The Home Depot’s main competitors include Amazon, Walmart, Lowe’s, Target Corp., Sherwin-Williams Co, and Home Product Center PCL. Although The Home Depot faces serious competition, it does have an adequate market share compared to its main competitors.
The total revenue of The Home Depot’s main competition for 2021 was $1.366 trillion, compared with the company’s 2021 sales of $151.157 billion, giving Home Depot a market share of roughly 11%.
Disclaimer: Not financial advice. All Things Business and it’s authors take no responsibility for what you do with your money.
China
China Opens Back Up, And The Wheels Of It’s Economy Begin To Turn Again
Shanghai Port, the busiest in the world, is benefiting from a gradual recovery in exports after a two-month citywide lockdown, as rising demand for ocean transport pushes up freight prices.
Though the world’s largest container port is not yet back to its pre-lockdown handling capacity, most major shipping lines have made plans to return to the dozens of harbours along Shanghai’s 200-kilometre coast, looking to secure more orders from exporters getting back on their feet.
“There has been fanfare surrounding port operations in Shanghai because container cargoes and carriers are returning to the city in droves,” said Xiong Hao, an assistant general manager at Shanghai Jump International Shipping. “Exporters are eager to send their shipments overseas, even with the higher freight costs.”
Many global shipping carriers had turned to Ningbo port in Zhejiang, which is a three-hour drive from Shanghai, in recent weeks to avoid the gridlock at Shanghai’s harbours.
Shanghai formally lifted its lockdown on June 1, allowing all manufacturers to resume production and try to make up the ground they lost to the Covid-19 pandemic.
“More importantly, the city will [be able to] defend its role as a global shipping hub,” said Lu Ming, an agent at the Shanghai Ocean Shipping Agency. “Many carriers and cargo owners turned to Ningbo in the past two months, and it is time to call them back.”
The municipal government said in late May that Shanghai’s ports were back up and running at 90 per cent capacity. But shipping industry officials said it was not until this week that a large volume of imported and exported goods finally flooded the terminals. The surge is likely to have boosted ocean freight rates.
Shanghai Port
In addition to the rebounding of Shanghai, Beijing took tentative steps toward reopening on Monday as much of China’s capital lifted restrictions on dining in restaurants and many workers returned to their offices.
For more than a month, Beijing health authorities imposed increasingly stringent measures on the city’s businesses and residents’ personal movements in a bid to stamp out the Chinese capital’s worst Covid-19 outbreak since the early days of the pandemic. City officials say those efforts are working as new daily infections have dipped to around a dozen cases or fewer in recent days, following weeks of mass testing of much of the city’s more than 20 million residents.
By allowing restaurants, gyms and other businesses to reopen, Beijing authorities are signaling that they believe they have managed to control the latest outbreak without having to resort to the sorts of harsh lockdown measures experienced recently in Shanghai and elsewhere.
Beijing
China’s economic rebound was further evidenced by the increase in trade. Exports grew 16.9% in May compared with a year earlier, China’s General Administration of Customs said Thursday, more than twice the 8% growth anticipated by economists polled by The Wall Street Journal and well above the 3.9% annual pace recorded in April.
Imports for for the first time in four months, growing 4.1% in May after staying flat in April. The strong surge in exports pushed China’s overall trade surplus to $78.8 billion in May, widening from a $51.1 billion surplus in April.
“Exporters are eager to send their shipments overseas, even with the higher freight costs”
Wow, i didnt think musk would actually go that far
the home depot is still growing it revenue and fcf and great growth rates for its age, a very strong company!