Latest / Bloomberg Intelligence / Tesla Won't Be Able To Paper Over Losses in 3Q: Gordon Johnson

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Tesla Won't Be Able To Paper Over Losses in 3Q: Gordon Johnson · Bloomberg Intelligence

0:01
Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, along
0:04
Speaker 1: with my co host of Bonnie Quinn. Every business day
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Speaker 1: we bring you interviews from ceo, market pros, and Bloomberg experts,
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Speaker 1: along with essential market moving news. Find the Bloomberg Markets
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Speaker 1: Podcast on Apple podcast or wherever you listen to podcasts,
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Speaker 1: and on Bloomberg dot com. Tesla, that stock that everybody
0:22
Speaker 1: loves to talk about, up two thirds of represent in
0:24
Speaker 1: today's trading after earnings came out yesterday. Let's bring in
0:27
Speaker 1: somebody who says, maybe Tesla's, you know, just a little
0:31
Speaker 1: bit um not cooking the books. But well, we'll let him,
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Speaker 1: We'll let him say it. Gordon Johnson is founder and
0:38
Speaker 1: CEO of g LJ Research. So Gordon, did Tesla or
0:43
Speaker 1: did Tesla not make a good profit? Uh? Put it
0:47
Speaker 1: this way, Um, if you look at their core auto segment,
0:50
Speaker 1: Tesla losses significant amount of money. So what Tesla does
0:53
Speaker 1: is every quarter they recognize a certain level of regulatory
0:56
Speaker 1: credits and these net income revenue that don't have cash
1:01
Speaker 1: tied to them. Um uh. And this quarter that number
1:04
Speaker 1: was million. Their net income that they reported was one
1:08
Speaker 1: oh four. So those credits, um. They lost a significant
1:11
Speaker 1: amount of money, and the CEO even said this on
1:13
Speaker 1: the call. He said, our business is not based on
1:16
Speaker 1: the assumption of continued credit recognition because these are temporary numbers.
1:20
Speaker 1: But what's key here is if you look over the
1:22
Speaker 1: past twenty six quarters um and only four of those quarters,
1:26
Speaker 1: if you take Testla's net income less regulatory credit sold
1:30
Speaker 1: has they have They posted a profit, the most recent
1:32
Speaker 1: of which was three to nineteen. But what's also interesting
1:35
Speaker 1: is their regulatory credit revenue jumped from about a hundred
1:39
Speaker 1: million Q four to three hundred four and Q one
1:42
Speaker 1: and four hundred eight million and Q two. The reason
1:45
Speaker 1: that significant is because that allowed them to report four
1:48
Speaker 1: straight quarters of profit, which basically allows them or makes
1:52
Speaker 1: them as eligible to be including in the SMC five
1:54
Speaker 1: hundred real quick what What's what's important here is they're
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Speaker 1: effectively recognizing revenue on credit sells they have not yet
2:03
Speaker 1: made to uh FIAT Chrysler. The Chrysler said they're gonna
2:07
Speaker 1: buy credits essentially from Tesla at one point one billion
2:10
Speaker 1: over the next four years. In the first two quarters
2:13
Speaker 1: of this year alone, Tesla has recognized we believe eight
2:16
Speaker 1: hundred million of that one point one billion, So you
2:18
Speaker 1: can see they're significantly pulling forward revenues if they really
2:21
Speaker 1: haven't even sold yet to post the profits. We think
2:24
Speaker 1: it's not real. We think it's uh, you know, it's artificial,
2:27
Speaker 1: and we think they're gonna go back into severe losses
2:29
Speaker 1: in the back half of this year. So Gordon, why
2:32
Speaker 1: does the market not care about that? The stock is
2:35
Speaker 1: up two percent year to date, up over five on
2:39
Speaker 1: a trailing twelve month basis um, Why does a market
2:43
Speaker 1: not care? Well, Tesla is completely detached from reality. But
2:46
Speaker 1: if we have to put it on one thing, we
2:47
Speaker 1: put it on this Tesla stock in March essentially to
2:50
Speaker 1: get February. March fell from nine hundred and fifty dollars
2:53
Speaker 1: and three hundred and fifty dollars when the market collapsed, right,
2:56
Speaker 1: and then in late March the key that the federators
2:58
Speaker 1: serve announced Qui infinity. They essentially grew their balance sheet
3:02
Speaker 1: by three trillion dollars over a course of nine weeks,
3:04
Speaker 1: which is a four years worth of tax revenues in
3:06
Speaker 1: the US. The questions why are we even paying taxes? Right?
3:09
Speaker 1: That money is just going into stock market, and every
3:11
Speaker 1: speculative stock went to the moon. That's essentially the key
3:14
Speaker 1: reason why we'd say, um uh, people don't care, but
3:18
Speaker 1: we think they're gonna be forced to care. Because Tesla
3:20
Speaker 1: reiterated it's it's guidance for five hundred thousand cars sold.
3:24
Speaker 1: So in three two they're gonna have to sell roughly
3:25
Speaker 1: a hundred and sixty thousand cars. We think they're gonna
3:27
Speaker 1: fall far short of that. We think they're gonna report
3:29
Speaker 1: a big loss in Q three. They guided, Tesla has guided.
3:32
Speaker 1: Nobody's even talked about this on the South side, but
3:34
Speaker 1: Tesla guided on their call last night, they said, our
3:37
Speaker 1: credit cells this year are gonna be double last year.
3:39
Speaker 1: So if you take last year multiplied by two, subtract
3:42
Speaker 1: the first half of this year, they're guiding their credit
3:44
Speaker 1: cells down rough and the second half of this year
3:47
Speaker 1: that's a hundred percent gross margin revenue, it's gonna fall.
3:51
Speaker 1: So it's clear to us we believe right. Our opinion
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Speaker 1: is they effectively pulled in a bunch of credit revenue
3:57
Speaker 1: to show profit to be including the SMP by hundreds,
4:00
Speaker 1: and they're gonna go back to significant losses next quarter.
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Speaker 1: So given where the valuation is, not only do they
4:05
Speaker 1: need to show tremendous growth, which we don't think they're
4:06
Speaker 1: gonna do. Um. Their revenue is essentially peaked in the
4:09
Speaker 1: fourth quarter of eighteen UM and so did their deliveries. UM.
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Speaker 1: But we also think they're gonna go show severe head
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Speaker 1: income losses and cash burn. We think that's gonna push
4:18
Speaker 1: the stock down. But all of the analysts conceive that
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Speaker 1: test Us sold almost eight hundre million dollars in regulatory credits. Right,
4:23
Speaker 1: They're not hiding it or anything. So why are analysts
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Speaker 1: even not there is anymore? Well, I'll give you this, right,
4:29
Speaker 1: the consensus estimate going into last night's earnings was a
4:32
Speaker 1: loss of a dollar twenty Right. If Tesla would have
4:35
Speaker 1: lost money, that would have basically ended their ability to
4:37
Speaker 1: be included in the SMP five hundreds since must basically
4:41
Speaker 1: there was an email he sent out to his employees
4:43
Speaker 1: that was leaked to the um UH to the two
4:46
Speaker 1: news wires that they're close to propitibility. The stock has
4:48
Speaker 1: been on fire. If the street estimate, like, if analysts
4:52
Speaker 1: really thought they were gonna lose money yesterday, they should
4:54
Speaker 1: have downgraded the stock to cell because the stock would
4:56
Speaker 1: have imploded. I think they're select analysts that are complicit um,
5:00
Speaker 1: and and and and and essentially the pumps that are
5:04
Speaker 1: what Tesla consistently see. Um. What I mean by that
5:07
Speaker 1: is like the Street estimate for deliveries with seventy before
5:10
Speaker 1: the end of the before they even reported the deliveries,
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Speaker 1: Tesla came out themselves effectively be another league and so
5:15
Speaker 1: we're gonna do you know, we're gonna be close to
5:18
Speaker 1: close to ninety thousand. So I think the Street and argue,
5:21
Speaker 1: this is our opinion some analysts are intentionally keeping keeping
5:23
Speaker 1: their numbers low in order to keep the barlow so
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Speaker 1: Tesla can step over it. All. Right, let's step away
5:28
Speaker 1: just a second from Tesla and the quarterly earnings. What
5:32
Speaker 1: is your call as to how the other big auto
5:35
Speaker 1: manufacturers will step up? When they will step up in
5:39
Speaker 1: the EV market? Right, So, if you look at Tesla's
5:44
Speaker 1: revenue in Europe, um their market share rather, it's fell
5:48
Speaker 1: from to roughly from four Q two I'm sorry, from
5:53
Speaker 1: lun Q of last year to today. If you look
5:55
Speaker 1: at their market share in the most important global EV market,
5:58
Speaker 1: which is Norway. And why do we say that because
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Speaker 1: Norway is subsidized of the cost of your electric car.
6:03
Speaker 1: So everybody who makes electric electric car sells in Norway.
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Speaker 1: Tesla shares down from thirty seven percent in the fourth
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Speaker 1: quarter to roughly five percent as of today. The point
6:12
Speaker 1: is just this year e the EU put in a
6:16
Speaker 1: rule that you had to basically sell a certain amount
6:18
Speaker 1: of electric car that a carmaker or you penalized. That
6:21
Speaker 1: wasn't the case last year. So in the markets where
6:23
Speaker 1: Tesla is facing competition now they're getting uh, they're losing
6:28
Speaker 1: in a big way. The other thing I will not
6:30
Speaker 1: it is a lot of people say, well tech Tesla
6:31
Speaker 1: is the technology leader, right, they lead in batteries and
6:33
Speaker 1: they lead in autonomous driving. Let me let me put
6:35
Speaker 1: some reality today. Tesla does not make batteries, right, They
6:39
Speaker 1: do not make batteries. They buy them from Panasonic and
6:41
Speaker 1: c A t O. Anybody can buy a loop AMN
6:43
Speaker 1: on batteries from those vendors. And Tesla's R and D
6:46
Speaker 1: right if they're gonna take over the battery space. Their
6:48
Speaker 1: R and D spin was down almost six in Q
6:51
Speaker 1: two year over year, um, so they're not spending on
6:54
Speaker 1: R and D and they five batteries from other people.
6:56
Speaker 1: So we think there's misconceptions. And then lastly, in full
6:58
Speaker 1: self drive navigant rank the Dead Last dead lest Gordon Johnson,
7:02
Speaker 1: thanks so much for joining us. A compelling bear case
7:05
Speaker 1: for what has been a rocket ship of a stock.
7:08
Speaker 1: We'll see how it plays out, certainly. You know, no
7:13
Speaker 1: sector has been hit harder arguably than the US airline business.
7:16
Speaker 1: They sold. The traffic just plummet with the pandemic, and
7:19
Speaker 1: it really hasn't rebounded that much, putting a lot of
7:22
Speaker 1: pressure on their balance sheets. UH, and they are coming
7:26
Speaker 1: to market left, right and center, trying to raise capital,
7:29
Speaker 1: mortgaging everything they can effectively. American Airlines is in the
7:32
Speaker 1: market right now. Let's talk about that deal. Molly Smith,
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Speaker 1: corporate finance reporter for Bloomberg News. Molly, thanks so much
7:39
Speaker 1: for joining us here. Tell us about this one point
7:42
Speaker 1: two billion dollar financing that American is bringing the market. Yeah,
7:46
Speaker 1: so we're probably going to see at sometime at this quarter.
7:49
Speaker 1: American told us this morning when they reported earnings, and
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Speaker 1: the idea is basically to mortgage the brand in uh,
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Speaker 1: putting together a collateral package for this one point billion
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Speaker 1: dollars debt financing that Goldman is going to be working
8:03
Speaker 1: with American on so that some of that collateral includes
8:07
Speaker 1: the American Airlines trademark, also the a A dot com
8:10
Speaker 1: website domain, as well as key airline plots at LaGuardia
8:16
Speaker 1: and Reagan National Airports. So it's really interesting on the
8:20
Speaker 1: I P side, at least, we haven't seen airlines yet
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Speaker 1: putting up their trademark as collateral, so really shows you
8:26
Speaker 1: how they're really dolling out the kitchens things to get
8:29
Speaker 1: some of the secured financing. Yeah, how if you were
8:32
Speaker 1: a Goldman and you needed to would you sort of
8:35
Speaker 1: cash that in? So it's a it's a bit reminiscent
8:39
Speaker 1: for me, at least of when Ford had to do
8:42
Speaker 1: something similar to put pretty much all of its assets
8:45
Speaker 1: in hock to avoid filing for bankruptcy back in two
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Speaker 1: thousands five, and including for Fords the blue oval logo
8:52
Speaker 1: at the time. So it's, uh, it's something that's not
8:55
Speaker 1: you know, unique to companies in general, but definitely have
8:59
Speaker 1: not seen this from the airline so far in putting
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Speaker 1: together these collateral packages. Boy, here's a young corporate finance
9:05
Speaker 1: bankers the Chase Manhattan Bank. I could not even imagine
9:08
Speaker 1: going to my credit committee saying, you know, we lend
9:10
Speaker 1: one point two billion dollars against basically a logo. Um,
9:15
Speaker 1: but let's see if goldben can get it done. So, Molly,
9:17
Speaker 1: give us a sense of the cash burn for this industry.
9:21
Speaker 1: You know, I just reported a story in the last
9:22
Speaker 1: hour of Bloomberg News, reported a story about, you know,
9:25
Speaker 1: how the airlines are adding fewer than the expected flights
9:29
Speaker 1: here because the pandemic is kind of surging in in
9:31
Speaker 1: in key states. Here. What's the cash burn like for
9:35
Speaker 1: a lot of these companies right now? It's improving, but
9:39
Speaker 1: still negative. So I think they would take that as
9:41
Speaker 1: a general positive, and it seems that that's what investors
9:44
Speaker 1: are taking as a positive as well, that at least
9:47
Speaker 1: for American the cashman was nearly a hundred million dollars
9:51
Speaker 1: in April, pretty much a third of that in June.
9:54
Speaker 1: So again still negative, but improving. And we saw that
9:57
Speaker 1: also with Southwest and United. So they are attributing that,
10:01
Speaker 1: of course to you know, some increased revenue and that
10:04
Speaker 1: it does seem that passengers are more willing to fly.
10:07
Speaker 1: But of course, uh, there's still a long way to
10:09
Speaker 1: go in terms of coming back from this travel shutdown.
10:13
Speaker 1: It seems a little odd. So United putting up its
10:15
Speaker 1: loyalty points as collateral. You know American now putting up basically,
10:19
Speaker 1: I suppose that its logo, why go to the trouble
10:22
Speaker 1: of all of this, Why not just give them some
10:24
Speaker 1: cash to tie them over? If you're going to back them,
10:27
Speaker 1: why not back them? I think, you know, there needs
10:30
Speaker 1: to be some kind of security in these deals, and
10:33
Speaker 1: that of course, if any of these companies could borrow
10:36
Speaker 1: through the unsecured market at a reasonable cost, they would
10:39
Speaker 1: probably consider that. But if you're already looking at double
10:43
Speaker 1: digit yields on secured financing, then you can only imagine
10:46
Speaker 1: how much more painful or possibly not even it doesn't
10:50
Speaker 1: even seem possible to do it in the unsecured market.
10:53
Speaker 1: So and we've seen that investors are definitely assigning more
10:56
Speaker 1: weight to collateral too. I mean, remember United had try
11:00
Speaker 1: to previously secure a bond sale with some of its
11:03
Speaker 1: old aircraft, and investors were thinking that by the time
11:06
Speaker 1: these debts the debt matures, that a lot of those
11:08
Speaker 1: aircraft wouldn't even be in flight, so they then turned
11:11
Speaker 1: to the frequent flyer mile program. So it definitely is
11:14
Speaker 1: looking like the brands are getting more creative in terms
11:17
Speaker 1: of what they're putting up. So Molly, how's the market
11:21
Speaker 1: for some of these? I would call them quasi esoteric
11:24
Speaker 1: kind of credit facilities. Here are bond deals you have
11:28
Speaker 1: to pay a huge premium to get money based upon
11:31
Speaker 1: you know, with lateral clatteral being your logo. Yes, So
11:36
Speaker 1: we've seen a lot of other industries to like cruise
11:38
Speaker 1: lines um it's another big one that have also been
11:41
Speaker 1: very creative and some of these secured financings of believe
11:44
Speaker 1: it was Norwegian Cruise Line that cut up some of
11:46
Speaker 1: its islands believe it or not to borrow against and
11:50
Speaker 1: still paid um a ten percent plus fields in that deal. Uh.
11:55
Speaker 1: Carnival has also done some similar financings backed by its ships.
12:00
Speaker 1: So we definitely see that there is a price to play.
12:03
Speaker 1: But it seems like the idea on the investors side
12:06
Speaker 1: is that these companies are going to be around and
12:08
Speaker 1: come three five years whenever this debt matures, and that's
12:11
Speaker 1: why they're willing to lend. I mean, I can see
12:14
Speaker 1: the slots being worth something, but has it ever happened
12:16
Speaker 1: before that, For example, a new you know, an entity
12:19
Speaker 1: goes bust it it didn't make good on its in
12:22
Speaker 1: you know, and its promise to sort of pawn back.
12:25
Speaker 1: Basically it's logo, and then some other entity arrives twenty
12:28
Speaker 1: years later and takes the name or something. I mean,
12:30
Speaker 1: it could could have happened, Molly. I guess theoretically it's possible,
12:35
Speaker 1: suere though, I would think that whenever you are putting
12:39
Speaker 1: up these kinds of assets of collaterals, that there's a
12:41
Speaker 1: huge bedding process to make sure that the appraisal value
12:44
Speaker 1: is there and that it is something we should admit
12:47
Speaker 1: to borrow against. Yeah, it's so fascinating. It's a great story, Molly.
12:51
Speaker 1: I hope everybody listening to us reads it. Molly Smith's
12:54
Speaker 1: an American air borrows against Brandon one point two billion
12:57
Speaker 1: dollar Goldman deal. Let's take a look at the equity market,
13:03
Speaker 1: shall we. We had that, Let's just put it into context.
13:05
Speaker 1: We came into this pandemic, markets traded off about thirty
13:09
Speaker 1: four thirty five percent. We since retraced about that just
13:13
Speaker 1: extraordinary bounce back. The question is, as we head into
13:16
Speaker 1: and experience the second quarter earnings, where do we go
13:20
Speaker 1: from here? Tell us answer that we welcome Phil Orlando,
13:23
Speaker 1: chief equity market strategist ahead of client portfolio management at
13:27
Speaker 1: Federated Hermes. Uh, they are in uh sixty two sixty
13:32
Speaker 1: eight billion dollars in equities under management. Phil, thanks much
13:35
Speaker 1: for joining us once again. Here we're in I guess
13:38
Speaker 1: the second week of earnings here. Any takeaways you've had
13:41
Speaker 1: so far, the major takeaway is how much better the
13:47
Speaker 1: earnings have come out versus what we were expecting. So
13:51
Speaker 1: consensus going in was that earnings would be down about
13:55
Speaker 1: forty five year over year, UH, and that uh, you
14:00
Speaker 1: know or so of companies would would be withholding guidance.
14:05
Speaker 1: Now we're only about you know, fifteen or twenty of
14:08
Speaker 1: the way into the season, so it's still early. But
14:11
Speaker 1: the companies that have reported, three quarters of them uh
14:16
Speaker 1: beaten consensus earnings by about four which is the strongest
14:21
Speaker 1: beat we've seen in in ten years. So again, uh,
14:26
Speaker 1: there's still plenty of track left. But at least the
14:28
Speaker 1: companies that have reported early uh seem to be doing
14:32
Speaker 1: a lot better than than we had thought. How correct
14:36
Speaker 1: quote unquote our valuations right now? Pheel. There's a little
14:38
Speaker 1: talk in recent days about the you know, the top
14:41
Speaker 1: five companies in the SP five accounting for a fifth
14:44
Speaker 1: of the index. But if you actually look into it.
14:45
Speaker 1: Many of these companies you know have sold off. So
14:50
Speaker 1: there's no question that technology has been an important driver
14:55
Speaker 1: of UH this fifty percent rally we've seen from the
14:58
Speaker 1: bottom of the market on March twenty three. And there's
15:02
Speaker 1: no question that within technology, the fang stocks Facebook, Apple, Amazon, Netflix, Google,
15:11
Speaker 1: I'll throw Microsoft into that mix have have done heavy
15:15
Speaker 1: lifting in terms of technology UM and and this is
15:18
Speaker 1: a question that clients are asking a lot are in
15:21
Speaker 1: stocks expensive and on the basis of the reduction and
15:26
Speaker 1: earnings that we've put in place for this year UH
15:29
Speaker 1: SMP earrings last year or hiring sixty seven dollars. We
15:33
Speaker 1: initially had a hundred and eighty dollar estimate for this
15:37
Speaker 1: year at the beginning of the year, and then the
15:39
Speaker 1: pandemic hit. So we've taken our estimate down from a
15:43
Speaker 1: hundred and eighty dollars this year down a hundred and
15:46
Speaker 1: twenty five dollars. So on the basis of where stocks
15:49
Speaker 1: are now, on the basis of a HUD and earnings,
15:52
Speaker 1: you're trading at about twenty six times earnings, which which
15:55
Speaker 1: is very high by by any measure. But the point
15:58
Speaker 1: of issue that a lot of people don't understand is
16:01
Speaker 1: that because you're in the depth of the recession, and this,
16:04
Speaker 1: you know, the second quarter, this is the long the
16:06
Speaker 1: deepest recession we've seen in a really long time, it's
16:10
Speaker 1: inappropriate to value stocks off of the trough of the recession.
16:14
Speaker 1: You've got to look out to when you're gonna see
16:16
Speaker 1: some normalization in the economy, and in our mind that
16:20
Speaker 1: that's calendar twenty two. It will take us that long
16:24
Speaker 1: to get back to about a hundred and seventy five
16:26
Speaker 1: dollars in earnings. So if you're looking at today's stock
16:29
Speaker 1: prices on the basis of you know, normal earnings quote
16:33
Speaker 1: unquote in calendar twenty two, that you're looking at about
16:36
Speaker 1: an a team multiple, which is perfectly fine given the
16:40
Speaker 1: fact that treasury yields here at sixty basis points and
16:43
Speaker 1: the core PC inflation indicators at one. So it's really
16:47
Speaker 1: a function of your focus and your time horizon. Alright, Phil,
16:51
Speaker 1: So more near term here, I guess we're starting to
16:54
Speaker 1: hear a lot of conversation coming out of Washington, d C.
16:57
Speaker 1: We're getting to the short strokes here of potential fourth
17:00
Speaker 1: round of fiscal stimulus. How key is it that the
17:04
Speaker 1: stimulus package be, you know, as robust as maybe investors
17:07
Speaker 1: really hope for. Well. I think it's critically important that
17:11
Speaker 1: there is a package. I think it's important that it
17:16
Speaker 1: be done in a timely fashion, which is to suggest
17:19
Speaker 1: the window between this past Monday, when Congress returned from vacation,
17:25
Speaker 1: UH to August tenth, when Congress goes back on vacation.
17:29
Speaker 1: We've got to have a package in that window. We
17:32
Speaker 1: can't have Congress go on vacation and not get anything done. Now,
17:35
Speaker 1: the question is what's the size of the package, and
17:37
Speaker 1: what are the details going to be? And and Speaker
17:41
Speaker 1: Pelosi and the Democrats in the House have talked about
17:44
Speaker 1: something in the three trillion dollar neighborhood. I think the
17:47
Speaker 1: Republicans in the Senate have talked about something in the
17:51
Speaker 1: neighborhood and half that size. I'm less concerned about the
17:55
Speaker 1: size that I am. In terms of the components. I
17:59
Speaker 1: think we need to make sure that uh that there's
18:03
Speaker 1: more more money for hospitals and labs and testing. We've
18:07
Speaker 1: got to make sure that that cities and states are
18:09
Speaker 1: taken care of in terms of maintaining their their near
18:13
Speaker 1: term payrolls. We've got to make sure that businesses are
18:16
Speaker 1: taken care of. We've got to make sure that there's
18:19
Speaker 1: some liability protection for companies that have done the right
18:22
Speaker 1: thing in terms of keeping their customers and their employees safe.
18:27
Speaker 1: And we've got to get some money into the hands
18:29
Speaker 1: of of individuals. The sticking point up until now, and
18:34
Speaker 1: I don't know. I'm not in the room, so I
18:36
Speaker 1: don't know what the discussions are is how do we
18:39
Speaker 1: shift the incentivization from from staying home and and getting
18:45
Speaker 1: money as opposed to going back to work if your
18:49
Speaker 1: environment is safe and getting back on the payroll. And
18:53
Speaker 1: I think that that that six dollar extended unemployment bonus
18:57
Speaker 1: which is set to expire at the end of this month,
19:00
Speaker 1: that seems to be the key discussion point that's going on. Well,
19:04
Speaker 1: that's a long list of things that need to be
19:07
Speaker 1: in this package, and they have a week to do it,
19:09
Speaker 1: so I hope that some of them do actually materialize.
19:13
Speaker 1: Our thanks as always to fill Orlando for joining us
19:15
Speaker 1: from Federated Hermes Investors. It is time to check in
19:19
Speaker 1: with Bloomberg Opinion. Today we are looking at and Taylor's
19:23
Speaker 1: parent going bankrupt. Retailer's collapse has the potential to create
19:27
Speaker 1: more devastating ribble effects than were called by other COVID
19:31
Speaker 1: related watchouts that preceded it. According to Bloomberg Opinions, Sarah
19:35
Speaker 1: Holzac who joins US now Sarah, why is and Taylor
19:39
Speaker 1: and its parent more of a systemically important retailer or
19:43
Speaker 1: a group of retailers than, for example, a J. C.
19:45
Speaker 1: Penney or a Brooks Brothers or a J. Crew. Yeah,
19:49
Speaker 1: So as Tina is this quiet giant, and not in
19:52
Speaker 1: terms of sales, but in terms of how ubiquitous it
19:55
Speaker 1: is in US shopping center. So it has twenty hundred doors.
19:59
Speaker 1: Compare that to four hundred fifty stores for J. Crew
20:03
Speaker 1: or two hundred fifty stores for Brooks Brothers or eight
20:06
Speaker 1: hundred forty stores for J. C. Penney. It's just massive,
20:09
Speaker 1: And so all kinds of mall reefs have a lot
20:12
Speaker 1: of exposure to this company. Uh. It is the second
20:15
Speaker 1: largest tenant for Tanger Factory outlet centers, It's a top
20:19
Speaker 1: ten tenant for Brookfield and Acadia, and It's Simond property
20:23
Speaker 1: is a huge mall operator. Only Gap and L Brands
20:26
Speaker 1: are larger tenants than a Sena. So a Sena, I
20:30
Speaker 1: haven't eve heard about it until I read your column, Sarah,
20:32
Speaker 1: so full disclosure. So I learned a lot reading your
20:34
Speaker 1: column here. Uh. And how big they are in the
20:36
Speaker 1: world of retailing? How are they overall? How's their balance sheet?
20:40
Speaker 1: Has their capital structure? Is there a real risk here
20:44
Speaker 1: for these malls from this big group here? Yeah, so
20:49
Speaker 1: their balance sheet is not in great shape and that's
20:51
Speaker 1: been true since before COVID. Uh. This is a company
20:54
Speaker 1: that took on a significant amount of debt in when
20:58
Speaker 1: it bought an Taylor and Law and because of the
21:02
Speaker 1: business has been so unhealthy since then. It just hasn't
21:05
Speaker 1: been able to make much progress in bringing down that debt.
21:08
Speaker 1: So that was a key factor here and having to
21:11
Speaker 1: resort to bankruptcy. And it's just a company that's been
21:14
Speaker 1: really out of touch with consumer taste already. In the
21:17
Speaker 1: last couple of years, had to wind down its dress
21:20
Speaker 1: Barn chain, which was another huge chain with hundreds and
21:23
Speaker 1: hundreds of locations and it's sold it's more resist chain
21:27
Speaker 1: because again, it just couldn't find a way to generate
21:29
Speaker 1: consistently strong, comparable sales growth at these concepts because it
21:33
Speaker 1: was having so many fashion misses on Taylor and Taylor
21:36
Speaker 1: Loves Lane. Brian Lewin Gray, on and on and on.
21:39
Speaker 1: Will anybody miss these? Is there a moat at all
21:42
Speaker 1: that it was protecting or can somebody else just do
21:45
Speaker 1: the job of on Taylor at l Yeah, so it's
21:49
Speaker 1: certainly in this time where we're all working from home
21:51
Speaker 1: in our sweatpants, I think. And Taylor's customer that was,
21:55
Speaker 1: you know, mostly looking for office clothing. Um that that
21:58
Speaker 1: might be a business that you know, there's not a
22:00
Speaker 1: lot of demand for for quite some time. But it
22:03
Speaker 1: struggles with the Lane Bryant and Catherine's chains have been
22:06
Speaker 1: particularly baffling for me, and I do think there's opportunities
22:10
Speaker 1: for competitors to step in there. Both of those chains
22:13
Speaker 1: catered to plus sized women and that's a remarkably underserved
22:16
Speaker 1: portion of the US apparel market, and so I think
22:20
Speaker 1: if there's lots of closures there, that's a really good
22:23
Speaker 1: opportunity for department stores are specialty apparel target to step
22:27
Speaker 1: in and serve that audience. Sir, With all the trouble
22:31
Speaker 1: with the bricks and mortar retail, which you cover so well,
22:34
Speaker 1: what does it mean for the traditional American shopping mall.
22:41
Speaker 1: I think it means it's in a lot of trouble um,
22:43
Speaker 1: you know, the the store closures. When we look out
22:46
Speaker 1: over the next five years, I expect we'll see the
22:49
Speaker 1: most store closures in the clothing and accessories category. Some
22:53
Speaker 1: estimates have said we're going to see twenty four thousand
22:56
Speaker 1: store closures in that category. By compare that to only
23:00
Speaker 1: say twelve th store closures in consumer electronics or eleven
23:04
Speaker 1: thousand store closures and grocery. And as we all know,
23:07
Speaker 1: clothing is the heartbeat of the American mall, right, That's
23:10
Speaker 1: what most of the tenants are, that's what the store
23:12
Speaker 1: mixes then for quite some time. So as we continue
23:15
Speaker 1: to see struggles for clothing stores amid COVID, I think
23:19
Speaker 1: that really spells a lot of trouble to the American mall,
23:21
Speaker 1: which has been so much trouble already before this crisis.
23:24
Speaker 1: I mean, you don't have to pay rent on Instagram, right,
23:27
Speaker 1: The advertising is probably a lot lower on Instagram. And
23:31
Speaker 1: I'm not even being funny. I mean the amount of
23:33
Speaker 1: ads that I'm receiving for clothing and for discounts obviously
23:36
Speaker 1: now because clothing retailers are just not selling is do
23:40
Speaker 1: I mean, it would make you not want to open
23:41
Speaker 1: Instagram these days, Sarah, what happens to these malls? I mean,
23:46
Speaker 1: have you heard of of any sort of new idea
23:50
Speaker 1: that the that that that will make these malls work again?
23:54
Speaker 1: I mean, obviously there will be huge efforts to try
23:56
Speaker 1: and sanitize and and so on, but I mean, until
23:59
Speaker 1: after the the vaccine, does anybody want to be in
24:01
Speaker 1: a mall? I don't think so. And look, I think
24:05
Speaker 1: that the strategy that malls had been resorting to before
24:08
Speaker 1: COVID was to bring in alternative tenants like restaurants and gym's,
24:14
Speaker 1: because those are the things that were actually generating foot traffic.
24:16
Speaker 1: And I think those tendants are are going to struggle
24:19
Speaker 1: even more to draw foot traffic in COVID era, given
24:23
Speaker 1: you know, the health concerns related to heavy breathing and
24:26
Speaker 1: sweating in close proximity with other people at a gym,
24:29
Speaker 1: for example. So I think malls are in a really
24:32
Speaker 1: tough spot right now. I think, you know, the best
24:34
Speaker 1: they can hope for is to you know, really enforce
24:37
Speaker 1: social distancing guidelines, try to make it easy for stores
24:41
Speaker 1: to use their parking lots for curbside pickup. Um. I
24:44
Speaker 1: guess really emerging as a popular way to get product
24:47
Speaker 1: right now, and you know they're going to kind of
24:50
Speaker 1: have to muddle through that way. It's a really difficult situation. Yes, sorry,
24:54
Speaker 1: and and Vanni. Yesterday I drove into New York City
24:57
Speaker 1: for the first time since March, and I was just
25:00
Speaker 1: shocked by the number of empty stores, uh stores for
25:04
Speaker 1: rent um. It just seems like an every single block
25:07
Speaker 1: there are multiple empty storefronts. Just in the space of
25:12
Speaker 1: four months. It's just been devastating here in New York.
25:14
Speaker 1: I mean maybe even taken up our inventory and and
25:17
Speaker 1: and and still are the past one the other day
25:19
Speaker 1: where there was inventory and it last weekend, there was
25:21
Speaker 1: none this week. Yeah, it's it's just extraordinary. So, Sarah,
25:25
Speaker 1: my guess is this is just accelerating the demise of
25:28
Speaker 1: bricks and mortar and the rise of e commerce. Yes, exactly.
25:34
Speaker 1: A lot of these retailers are seeing unprecedented e commerce growth.
25:38
Speaker 1: You know, Target said on an average day in April
25:42
Speaker 1: it was getting as many e commerce orders as it
25:44
Speaker 1: gets on Cyber Monday. Right, this is just completely um
25:48
Speaker 1: change the contours of their business. And so I will think,
25:51
Speaker 1: I do think will continue to see stores trying to
25:54
Speaker 1: retailers trying to use those physical stores as fulfillment centers
25:57
Speaker 1: for online orders at least in the meantime time. But
26:00
Speaker 1: of course that's not a practical solution over the long term,
26:02
Speaker 1: right you don't need to be paying fifth avenue rent
26:05
Speaker 1: uh to mail clothing to your shoppers. And so there's
26:09
Speaker 1: just going to have to be a dramatic rethinking of
26:11
Speaker 1: the store portfolios as LEAs has come up UM and
26:14
Speaker 1: I think that's going to take time, but it's definitely
26:16
Speaker 1: going to happen. I did see that certain leases have
26:21
Speaker 1: been taken over, and one that jumped out was Aritzia,
26:24
Speaker 1: that Spanish retailer, and I just wondered what retailer is
26:28
Speaker 1: to I mean, how much money do you have? How
26:30
Speaker 1: much cash do you have to have on your books
26:32
Speaker 1: to decide to sort of a new release right now.
26:36
Speaker 1: I'm not sure there's one magic number, but I think
26:38
Speaker 1: you just have to feel confident that you are going
26:41
Speaker 1: to be able to whether this crisis, and I think
26:44
Speaker 1: you have to think about where you are in your
26:46
Speaker 1: store closure or opening journey. Right There are a lot
26:49
Speaker 1: of retailers who you know, younger changed, like a the
26:52
Speaker 1: No Boast for example, UM that their store portfolio isn't
26:56
Speaker 1: littered with all these uh, you know store locations they
26:59
Speaker 1: picked out in N five. They don't make sense anymore
27:02
Speaker 1: right um, So for them opening stores in its targeted
27:05
Speaker 1: way still makes sense right now, and they're likely to
27:07
Speaker 1: be able to get cheap rents and take advantage of that.
27:10
Speaker 1: If you're Maze, you've probably got a lot of old
27:12
Speaker 1: stores in your portfolio that don't make sense for this environment,
27:15
Speaker 1: and you're certainly not looking to lease anymore right now. Hey, Sarah,
27:18
Speaker 1: thanks so much for joining us. Once again. We always
27:20
Speaker 1: appreciate your thoughts on the retail space. Sarah Halzack retail
27:25
Speaker 1: columns for Bloomberg Opinion. You can read all her work
27:27
Speaker 1: in that of Bloomberg Opinion, Bloomberg dot Com, Slash Opinion,
27:31
Speaker 1: or Opie I n go on the terminal. Thanks for
27:34
Speaker 1: listening to Bloomberg Markets podcast. You can subscribe and listen
27:38
Speaker 1: to interviews at Apple Podcasts or whatever a podcast platform
27:41
Speaker 1: you prefer. I'm Bonnie Quinn. I'm on Twitter at Bonnie
27:45
Speaker 1: Quinn and on Paul Sweeney I'm on Twitter at pt Sweeney.
27:47
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27:50
Speaker 1: Bloomberg Radio