Starbucks in decline?
Tired of waiting in line for a tattooed barista to write the wrong name on your two-shot venti chai latte? Well, so are many of Starbucks’ customers. The Seattle-based coffee chain reported its first quarter of declining sales and earnings since the pandemic, sending its shares down 16.5 percent through Thursday amid fears caffeine-starved Americans may be losing their appetite for overpriced breakfast drinks in gloomy, black-ceilinged shops.
Global revenue fell 1.8 percent, to $8.56 billion, while net earnings fell 15 percent, to $772.4 million in the first quarter. Same-store sales, a key indicator of retail success, fell 3 percent in the U.S. and 6 percent internationally, with same-store sales falling 11 percent in China, a market the company hoped would be a key to future growth. Lower-priced local competitors and the Chinese preference for tea have cut sharply into those hopes, as executives blamed China’s “choppy” economic recovery.
“This quarter’s results do not reflect the power of our brand,” CEO Laxman Narasimhan complained in a statement accompanying the report. But he said Starbucks has a bunch of tricks up its sleeve to boost sales next quarter. “Our Triple Shot Reinvention with Two Pumps strategy will deliver on the limitless potential of this brand,” he said.
Narasimhan had no quick solution, however, for a bigger problem: Too many customers are abandoning orders on the Starbucks app over long wait times and supply-chain screw-ups that have made some items out of stock. Starbucks isn’t alone among food firms facing a decline in sales and profits after the pandemic. McDonald’s is cutting prices on some items to keep customers coming back, and an S&P 500 restaurant subindex was up around 2 percent over the past year, as Starbucks shares fell nearly 25 percent.
McDonald’s CEO Chris Kempczinski, reporting similar flat same-store sales growth, said on an earnings call Tuesday, “Consumers continue to be even more discriminating with every dollar that they spend as they [face] elevated prices in their day-to-day spending.”
A big tax hike on the rich is coming, but only if Biden gets re-elected
Will your taxes go up when the Trump tax cuts expire in 2025? That probably depends on whether you are making $400,000 a year or not. President Biden promised in his campaign to kill Donald Trump’s $1.7 trillion 2017 tax cut package, which gave vast breaks to the wealthy and corporations but failed to trickle down into the pockets of the poor and middle class.
Last week, Biden doubled down.
“The tax cut is going to expire. If I’m re-elected, it’s going to stay expired,” he said. That was red meat to the Republicans, who appear determined to cut taxes for the wealthy and corporations, whatever the effect may be on wage earners.
On Tuesday, Treasury Secretary Janet Yellen braved the slings and arrows of an outraged Republican-led House Committee on Ways and Means to defend her boss, and explain how most Americans will benefit from Biden’s plan to sunset the cuts if he is re-elected for a second term. (They expire in 2025, and it would be too much of an uphill battle to try to quash them before then.)
Biden’s plan would cut the federal deficit by $3 trillion over 10 years by hiking $5 trillion in taxes on corporations and high-earning individuals over that decade. Those numbers may make your head swim, but the Joint Committee on Taxation says renewing all of Trump's cuts would cost $3 trillion over the next decade.
“Instead of allowing families hit by these high prices to keep more of their hard-earned money, President Biden wants the highest tax increase on families and small businesses in American history,” Ways and Means Committee chair Jason Smith, a Missouri Republican, blasted at Yellen.
Yellen fired back that the GOP claims were nonsense. “The president has been very clear that no family earning less than $400,000 will face a tax hike,” she said. “He has not proposed such a thing since he took office, and he’s not proposing to allow that to happen when parts of T.C.J.A. expire,” she added, referring to the 2017 Tax Cuts and Jobs Act.
Trump’s tax cut was skewed to the rich, according to the Tax Policy Center and the Center on Budget and Policy Priorities. Their analysis shows that households with incomes in the top 1 percent will receive an average tax cut of more than $60,000 in 2025, compared to an average tax cut of less than $500 for households in the bottom 60 percent.
The plan to cut taxes on the less-wealthy and raise them on the very wealthy comes as the Federal Reserve left interest rates — staying in the 5.25 percent to 5.5 percent range — unchanged for a sixth straight meeting of the secrecy-shrouded Open Markets Committee, which sets the benchmark borrowing rates for banks that take funds from the Fed.
That’s because with inflation at 2.7 percent, well below its 7.1 percent high in 2022, it’s still far above the 2 percent that the Fed would like to see to prevent inflation from becoming a permanent feature of the U.S. economy as it did in the 1970s.
“What we’ve said is that we need to be more confident” that inflation is falling for the long term before the Fed cuts rates, Powell said after the meeting. “It appears that it’s going to take longer for us to reach that point of confidence.” It looks like it’s going to take some time before Trump’s tax cuts expire, too.
Walmart lines up for the deeper-pocketed Whole Foods and Trader Joe’s customer
You may not have known this, but Walmart is actually the largest grocery chain in the U.S., attracting almost 1 in 4 U.S. consumer dollars spent on groceries. Now Walmart wants to get a piece of the upscale, healthier foods sales that drive shoppers to Whole Foods and Trader Joe’s.
The Arkansas-based retail giant has just launched a premium food brand called Better Goods, bringing some 300 items to its shelves, including rose raspberry jam and curried chicken empanadas, the Wall Street Journal reported. The range is broad, including frozen foods, dairy items, snacks, beverages, pastas, soups, coffee and chocolate, with prices from $2 to $15.
It will include desserts made with oat milk and non-dairy cheeses, gluten-free and sugar-free foods, and what the company is calling “culinary experiences."
Inflation — especially among foods — is driving Walmart’s expansion, as shoppers seek relief from high prices. Supermarket food prices (known in the industry as “food-at-home” prices, as compared to restaurant, takeout and fast serve meals) rose 5 percent last year, compared with a 20-year average of 2.5 percent. And that’s after an 11.4 percent increase in 2022.
Those shoppers are looking for better quality at lower prices, which often comes in store brands. In fact, the share of dollars spent on house-brands of so-called “core pantry items,” including breakfast meats, baking items, fresh bread and salty snacks accounted for 36.6 percent of market share in dollars in 2023, up from 36.2 percent in 2019.
A messy ending for Paramount, as Shari Redstone bails out
After years spent building a media powerhouse out of CBS, Paramount Pictures and the Viacom cable business, Paramount Global CEO Shari Redstone wants out at age 70. Yet the messy business of selling off her family’s controlling stake in the company has seen its share price collapse by half in the past year, from $23 to just $12.50. This week, as a board committee examines competing offers from private equity firm Apollo (joined by Sony), and another led by Skydance, a production company created by David Ellison, whose gazillionaire dad Larry founded Oracle, things just keep getting worse.
On Monday, Redstone, who wrested control of the company, then called Viacom, from her late father, Sumner, fired CEO Bob Bakish, who thought a Skydance sale was not in Paramount’s best interest. (Bakish walked out with an estimated $50 million in severance.)
Paramount’s troubles long predate Bakish’s year-old rift with Redstone. While old-line linear networks like CBS and MTV, and the cable system Viacom have been steady earners for Paramount Global, its movie studio has struggled, and it’s been unable to make a profit in the final frontier of entertainment — streaming. Its Paramount+ service added 3.7 million net new subscribers during the first quarter, well over the 2.2 million Wall Street analysts said they expected, but half of what industry leader Netflix added in the same period.
The company did get some good news this week with its first-quarter earnings report, with a nice boost from January’s Super Bowl. But the share price has barely budged and the board committee charged with selling Paramount Global, and several of the company’s largest shareholders — Redstone excepted — have doubts about the combination with Skydance, saying it would enrich Redstone at the expense of other investors. Skydance has now sweetened its proposal to $32 billion in cash and shares with the promise of $3 billion in cash to pay down debt and buy back shares.
With a last-minute offer Thursday of $26 billion in cash, Apollo and Sony have upped the bidding, just a day before Skydance’s exclusive bidding period ends. While that might make the Apollo-Sony deal the favorite, it could be thwarted by antitrust regulators; Sony and Paramount are the fourth and fifth largest movie distributors by box-office share. Last week, analyst Doug Creutz of TD Cowen wrote that his firm doesn’t expect any studio consolidation in 2024, “first and foremost due to regulatory issues.”
A headline in the Hollywood trade publication The Ankler summed up the Paramount debacle: “Nepo babies, a $50M shove and muddled visions for the once-great, now cursed studio,” and reporter Richard Rushfield put it into perspective, calling the once-great studio’s decline “slow-motion murder.”
Will Berkshire Hathaway Become a Unicorn's Unicorn?
It’s time for steaks again. The World’s Greatest Greatest Investor, Warren Buffett, is holding the annual meeting of his investment firm Berkshire Hathaway in his hometown of Omaha, Nebraska, America’s steak capital, and it’s poised to be a big event.
With its market cap at $866 billion, the diversified holding and investment firm may become the first non-tech firm to reach a trillion-dollar valuation. So far its Class B shares have jumped 12 percent this year, compared with the S&P 500’s 5.2 percent rise, out pacing Apple, Microsoft and Tesla. Berkshire Hathaway, which made its first fortune owning insurer Geico, and which now operates companies including Dairy Queen and the BNSF Railway, and has ownership stakes in dozens more, including a fourth of Kraft Heinz and a fifth of American Express.
The faithful come to hear Buffett dispense his investing advice for the coming year, one that’s expected to be financially tricky with U.S. interest rates staying high and holding down the stock market, doubts that the Dow can break the 40,000 point barrier, and geopolitical risk rising from Ukraine to the unknowns of a Trump electoral victory. Berkshire is holding nearly $170 billion in cash, giving it ample opportunity for new investments if some cash-strapped firms decide to sell,and its reputation as a safe pair of hands is attracting more investors in an unpredictable market. Berkshire shareholders will also want to know how the company will move forward without Buffet’s right-hand man, Charlie Munger.
Munger was famous for colorful quips that made East Coast bankers and Silicon Valley investors feel they were getting a bit of homespun Midwestern wisdom. Among them:
"A great business at a fair price is superior to a fair business at a great price."
"Avoid working directly under somebody you don't admire and don't want to be like."
"Mimicking the herd invites regression to the mean."
"All I want to know is where I'm going to die, so I'll never go there."
That last one didn’t work out so well for Munger, who died last year at 99, raising interest in Buffett’s succession.
The meeting is a big deal for locals, with hometown newspaper the Omaha World-Herald, which was owned by Buffett until 2020, offering tips on where to park for the meeting, and meeting attendees gathering at Buffett’s favorite restaurant, Gorat’s Steakhouse. And in a touch only finance nerds could love, the annual meeting has become quietly famous over the years as a place for what The Wall Street Journal recently called “passionate shareholder proposals" of marriage.
But Berkshire’s own romance may be dimming. The company is so big that Buffett warned in his February letter to shareholders that it may not have the same growth prospects it once did.
“There remain only a handful of companies in this country capable of truly moving the needle at Berkshire, and they have been endlessly picked over by us and by others,” Buffett said. “Some we can value; some we can’t. And, if we can, they have to be attractively priced.”
And there aren’t many opportunities out the U.S. either, Buffett wrote. “All in all, we have no possibility of eye-popping performance.” But take that with a grain of salt. Buffett made a similar warning in 1990: “A high growth rate eventually forges its own anchor.” The share price is up more than 15-fold since then.
