Latest / Bloomberg Intelligence / Salesforce, Kohl's Shares Plunge, Musk Empire

Transcript

Salesforce, Kohl's Shares Plunge, Musk Empire · Bloomberg Intelligence

0:02
Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
0:09
Speaker 2: You're listening to the Bloomberg Intelligence Podcast. Catch us live
0:13
Speaker 2: weekdays at ten am Eastern on Apple Car, playing Android
0:17
Speaker 2: Otto with the Bloomberg Business App. Listen on demand wherever
0:20
Speaker 2: you get your podcasts, or watch us live on YouTube.
0:25
Speaker 3: One of the movers today is Salesforce dot Com. I
0:30
Speaker 3: thought it was just one of those stocks that can
0:31
Speaker 3: do no wrong. But the stock's down twenty percent last
0:36
Speaker 3: this morning kind of reported some numbers so disappointing to
0:39
Speaker 3: the street, so I wanted to break it down and
0:41
Speaker 3: al so we can do that with the on Rock
0:43
Speaker 3: from Chicago on rog Rana. He's a senior tech analyst
0:46
Speaker 3: for Bloomberg Intelligence. Honorrock Mark Bennioff here, I thought everything
0:50
Speaker 3: he touches turns of gold. What happened to Salesforce and
0:52
Speaker 3: the results last night?
0:54
Speaker 4: Yeah, the macro spending is not good right now, and
0:57
Speaker 4: we saw that good work day a week ago. People
0:59
Speaker 4: are push out contracts so large deals. They're not signing
1:02
Speaker 4: at the same pace they did before. So a little
1:05
Speaker 4: bit of you know, tale of two tech stories. One
1:08
Speaker 4: is companies are spending more on AI, but then they're
1:11
Speaker 4: taking spending away from other areas such as, you know.
1:14
Speaker 5: Buying new software or consulting and things like that.
1:17
Speaker 6: Does Salesforce not have an AI product yet? And why.
1:23
Speaker 5: No?
1:23
Speaker 4: They have one particular productl data cloud and that twenty
1:26
Speaker 4: five percent.
1:27
Speaker 5: But frankly speaking, remember, if you have a revenue based
1:30
Speaker 5: this size, you know, thirty five forty billion dollars.
1:34
Speaker 4: You know that a few million is not going to
1:36
Speaker 4: move the needle if all the other spending starts to
1:39
Speaker 4: slow down.
1:40
Speaker 7: All right, here's Alex, here's the group.
1:42
Speaker 3: An example, just a great Wall Street inefficiency, one of
1:45
Speaker 3: the reasons that many firms on Wall Street just can't
1:48
Speaker 3: generate decent returns. There are fifty six analysts covering Salesforce
1:52
Speaker 3: dot com. I'm going to say a lot. I'm thinking
1:55
Speaker 3: five get paid, five make aprofit off of bride and
1:59
Speaker 3: read research on that name.
2:01
Speaker 7: You know, just absolutely crazy.
2:03
Speaker 3: Forty buys, fifteen holds one cell, forty buys yep. So
2:07
Speaker 3: what's the the forty buys out there?
2:10
Speaker 7: Anna Rod?
2:11
Speaker 3: Did they fundamentally change their view of Salesforce dot Com
2:14
Speaker 3: after these results?
2:17
Speaker 4: No, no, no, there's no reason to do that, because
2:19
Speaker 4: this is just elongation of the sales cycle. It's not
2:22
Speaker 4: that people aren't buying cloud products. It's just a matter
2:25
Speaker 4: of there not signing large deals. People are basically saying,
2:28
Speaker 4: you know, I can live with what I have right now,
2:31
Speaker 4: and I'll wait for next year to go back and
2:33
Speaker 4: buy this stuff. It's not that it's not things are
2:35
Speaker 4: not that horrible. I mean, they're still growing at ten
2:38
Speaker 4: percent or so. It's not the end of the world.
2:41
Speaker 4: But what really happened is three quarters ago their new
2:45
Speaker 4: bookings rate was slowing down and started to take a
2:48
Speaker 4: u turn, so they went from eleven percent to thirteen percent,
2:51
Speaker 4: and they were at thirteen percent for two quarters in
2:53
Speaker 4: a row.
2:54
Speaker 5: This quarter, we were.
2:55
Speaker 4: Expecting it to be around twelve percent or so, twelve
2:58
Speaker 4: to thirteen percent, and they came at ten. So these
3:01
Speaker 4: deals being pushed out, it's it's just a matter of time,
3:04
Speaker 4: whether it's.
3:04
Speaker 5: Two quarters away, whether it's three, but they will close.
3:07
Speaker 4: People are looking to move more things to the cloud
3:10
Speaker 4: on the application side also, so it's just I would
3:13
Speaker 4: say a little bit of delay, but that delay is
3:16
Speaker 4: now takes you into twenty twenty five rather than being
3:19
Speaker 4: a middle of the you know, this year's story. So
3:21
Speaker 4: that's partially the reason of people are saying, you know, well,
3:23
Speaker 4: we'll come back to the story six months from now.
3:26
Speaker 6: Are you surprised at the severity of this dock drop though,
3:29
Speaker 6: based on this because this is also just a law
3:31
Speaker 6: of large numbers, right, You're growing at double digits and
3:34
Speaker 6: then eventually that double digits slows. That's like life, right.
3:38
Speaker 5: Yeah, Alex, absolutely right.
3:40
Speaker 4: I mean, if you look at salesforce on the on
3:42
Speaker 4: the rosy side, their free cash flow this year is
3:44
Speaker 4: going to grow twenty percent, with the likelihood of another
3:47
Speaker 4: fifteen to twenty percent growing next year. This company has
3:50
Speaker 4: now changed the narrative from high sales growth or growth
3:54
Speaker 4: at any cost, to growing with a lot of margin expansion.
3:58
Speaker 5: This company has a long.
3:59
Speaker 4: Way to go before the margins reach I would call maturity.
4:03
Speaker 4: They still tend turn to a twelve percent away from
4:06
Speaker 4: that stage. So there is a lot of free cash
4:08
Speaker 4: flow that needs to come out of this company. So,
4:11
Speaker 4: you know, I think I am surprised about the severity
4:14
Speaker 4: of their reaction.
4:16
Speaker 3: You know, an, I guess this kind of goes to
4:18
Speaker 3: a question I've been asking since this whole AI scam,
4:21
Speaker 3: I mean discussion began eighteen months ago. How much of
4:25
Speaker 3: this is really incremental new spending for this new thing
4:29
Speaker 3: called AI versus just taking some tech spending from other
4:33
Speaker 3: parts of the stack, whether it's software or hardware applications.
4:36
Speaker 7: And does I talked to us about that.
4:39
Speaker 5: Yeah, I completely agree with you.
4:41
Speaker 4: This has been our case because one of the things
4:43
Speaker 4: we saw was one of the most important companies in
4:46
Speaker 4: the space for leading indicators is Accenture, and their consulting
4:49
Speaker 4: revenue has been declining for the last three quarters because
4:52
Speaker 4: of exactly what you said.
4:53
Speaker 5: People are not.
4:55
Speaker 4: You know, if you have a consulting project, you put
4:57
Speaker 4: that on hold and you use that money to buy
4:59
Speaker 4: you know, few chips new servers trying to figure out
5:02
Speaker 4: if your infrastructure is.
5:03
Speaker 5: Ready for the next phase of AI development.
5:06
Speaker 4: You're actually experimenting with new products and trying to figure
5:09
Speaker 4: out and the big question for a lot of them
5:11
Speaker 4: is do I really need to buy a brand new
5:13
Speaker 4: software product where my next generation CRM product could look
5:17
Speaker 4: a little bit different or some other product could look
5:20
Speaker 4: at a little bit different.
5:21
Speaker 5: What we are.
5:21
Speaker 4: Seeing right now is text spending flat from last year,
5:25
Speaker 4: no new increment, but we're hopeful that you know, the
5:29
Speaker 4: typical waterfall is you have hardware semiconductor spending first, then
5:34
Speaker 4: it trickles down to software, then it trickled downs to services.
5:37
Speaker 5: So we are optimistic that.
5:39
Speaker 4: Next year we should see some improvement in software spending,
5:42
Speaker 4: and perhaps the second half of next year into the
5:45
Speaker 4: year after something on the consulting and then the services side.
5:49
Speaker 6: Do we learn anything from Dell in terms of AI
5:52
Speaker 6: and spend from Salesforce?
5:55
Speaker 4: Yeah, but that's the same exact thing that they are
5:57
Speaker 4: buying more AI servers, but at the expense of some
6:00
Speaker 4: thing perhaps like a salesforce or for that matter, workday.
6:03
Speaker 6: Okay, so a woe for salesforce is good for Dell.
6:07
Speaker 4: Yeah, it's good for all the semiconductor names and the
6:10
Speaker 4: GPO players. People are basically saying, Okay, if I have
6:13
Speaker 4: to go experiment on AI, I gotta find that money somewhere.
6:17
Speaker 4: Net Net, I'm still spending the same amount on technology
6:19
Speaker 4: that I did last year. It's a question of reallocation
6:22
Speaker 4: of those resources. Another place where seeing an improvement in
6:25
Speaker 4: spending is companies outsourcing a lot more work because that
6:29
Speaker 4: they're saying is I got to find cost savings in
6:31
Speaker 4: order to deploy it into these AI products.
6:34
Speaker 3: So just stepping back even further for tech spending. What
6:38
Speaker 3: are the likes of IDC saying about tech spending over
6:42
Speaker 3: the next couple three years on RUG?
6:46
Speaker 4: So the next three is I think almost everybody unanimously
6:49
Speaker 4: believes that it is going to be a good number
6:51
Speaker 4: because frankly speaking, and I've said this a number of times,
6:53
Speaker 4: when you look at it is as a percentage of GDP,
6:56
Speaker 4: tech spending is still a small portion.
6:58
Speaker 5: When I look at just the US alone, and we.
7:00
Speaker 4: Have somewhere around enterprise technology spending, you know, excluding smartphones,
7:04
Speaker 4: somewhere around one and a half trillion or so. When
7:07
Speaker 4: you look at healthcare spending, it's not a four trillion.
7:10
Speaker 5: So we we.
7:11
Speaker 4: Talk a lot about tech, but as a percentage of
7:13
Speaker 4: total GDP in the US, it's still a small number.
7:16
Speaker 4: And software is even a smaller portion of that. So
7:19
Speaker 4: you know, we are I'm pretty optimistic to bullish that
7:22
Speaker 4: in the long run, I'm happy with, you know, with
7:25
Speaker 4: the tech space in you know, in terms of growth rate,
7:28
Speaker 4: in terms of profitability, in terms of sustainability compared to
7:32
Speaker 4: other sectors.
7:33
Speaker 6: What else? What else is on your radar right now
7:35
Speaker 6: on our AGAs we're almost done with all the big
7:37
Speaker 6: tech guys.
7:39
Speaker 5: Yeah.
7:39
Speaker 4: So now when you look at it, Workday and Salesforce
7:42
Speaker 4: are the first companies to report in the next cycle
7:44
Speaker 4: of earning. So when you look at, you know, results
7:47
Speaker 4: that coming out in July, we're going to head a
7:50
Speaker 4: lot of the same what we have heard from these
7:52
Speaker 4: two companies. Now, the two exceptions from that in our
7:55
Speaker 4: view would could be Microsoft and perhaps even SAP. But
7:58
Speaker 4: other than that, every other you know, software company we anticipate,
8:02
Speaker 4: and even services companies we anticipate, we'll talk about the
8:05
Speaker 4: same thing. Deal delays elongation of that, and this is
8:08
Speaker 4: partially the reason. You know, if you look at somebody
8:10
Speaker 4: like a service now he's getting really hammered today, or
8:13
Speaker 4: article getting hammered, and then that makes sense because this
8:16
Speaker 4: is a leading indicator that things are not going to
8:18
Speaker 4: be good when results come out come out in July.
8:22
Speaker 6: Great stuff, I likes the best of course, right, thanks
8:25
Speaker 6: a lot on a rock run a Bloomberg Intelligence a
8:27
Speaker 6: senior technology analyst. Salesforce is getting totally creamed. I mean
8:31
Speaker 6: it's down like twenty percent. It's a raise in like
8:33
Speaker 6: three hundred and seventy points from the now like this
8:36
Speaker 6: serious decliner here today.
8:38
Speaker 3: And Mark Pennioff. You know he's the before today. The
8:42
Speaker 3: net worth of according to Rich Gover, about ten billion
8:44
Speaker 3: dollars to take a little.
8:45
Speaker 6: Bit of it, a little bit of a head there.
8:47
Speaker 2: Today you're listening to the Bloomberg Intelligence Podcast. Catch us
8:52
Speaker 2: live weekdays at ten am Eastern on Apple car Play
8:55
Speaker 2: and Android Auto with the Bloomberg Business. You can also
8:59
Speaker 2: listen live on Amazon Alexa from our flagship New York station,
9:02
Speaker 2: Just Say Alexa playing Bloomberg eleven thirty.
9:07
Speaker 3: Cole's Way, The stock is down the most on record,
9:10
Speaker 3: huge miss on earnings, cut the guidance, and the street
9:15
Speaker 3: sending this stock down twenty seven percent, the most on
9:18
Speaker 3: records is extraordinary. Let's check in with the Bloomberg Intelligence
9:21
Speaker 3: analyst that covers this stock in this sector. Mary Ross Gilbert,
9:24
Speaker 3: Senior Equity analyst for Retail for Bloomberg Intelligence, joining us
9:29
Speaker 3: from La via zoom So, Mary, thanks so much for
9:32
Speaker 3: joining us here. Twenty seven percent reduction in this stock price. Here,
9:37
Speaker 3: what does a market not like from the earnings?
9:41
Speaker 8: Yeah, so we sort of knew going into earnings that
9:45
Speaker 8: they have a wonderful data measure that we use called
9:50
Speaker 8: Bloomberg's Second Measure. And it basically tracks consumer transactions ATM
9:56
Speaker 8: and credit card transactions, and so based on that data,
10:00
Speaker 8: we had a feeling that they might miss by two
10:03
Speaker 8: hundred to three hundred basis points, which they did. Comp
10:06
Speaker 8: sales fell four point four percent. That was below analysts
10:10
Speaker 8: one point seven percent estimate. And really what was happening
10:14
Speaker 8: there for the company is that they were going against
10:18
Speaker 8: a significant clearance activity in the first quarter of twenty three.
10:23
Speaker 8: Now they knew that going into the quarter, and that's
10:26
Speaker 8: why they expected sales to be flat. But they expected
10:29
Speaker 8: their new category initiatives. This means like Home de Corps
10:34
Speaker 8: of course so Fa, which continues to do really well.
10:37
Speaker 8: The key was so FORA bringing in all the customers
10:40
Speaker 8: and generating real sales and very profitable sales is the
10:45
Speaker 8: fact that those customers are not buying enough of the
10:48
Speaker 8: adjacent categories. So that's where they sort of came up short.
10:52
Speaker 8: So they did show that their initiatives are working, but
10:56
Speaker 8: just not enough and it's not across the whole store,
11:00
Speaker 8: and that's what they need to do, and so this
11:02
Speaker 8: is going to take some time for them to really
11:05
Speaker 8: get category mixed throughout the store and really be executing
11:11
Speaker 8: so it just delays this potential turnaround for the company.
11:15
Speaker 6: Okay, so let me just break that down. So, one,
11:17
Speaker 6: you got tough comps because it was really promotional last year,
11:20
Speaker 6: so that was stressful. But all the stuff that they're
11:23
Speaker 6: doing to entice people to buy stuff also isn't working
11:26
Speaker 6: in the way that they thought. Is that a consumer
11:29
Speaker 6: problem or is that a Coohle's execution problem.
11:33
Speaker 8: Yeah, so actually I'm going to reword what you just
11:36
Speaker 8: said there because it is working those new categories. So
11:40
Speaker 8: for example, their home seasonal and eight Everyday Decore, those
11:45
Speaker 8: sales were up thirty percent, Impulse items were up sixty percent,
11:50
Speaker 8: women's full price sales were up three percent, gifting of
11:55
Speaker 8: thirty percent. So we're seeing that they're working, but it's
11:59
Speaker 8: just not enough up to offset, you know, the weakness
12:03
Speaker 8: that they're experiencing. For example, in active wear, even though
12:06
Speaker 8: they're private brand, private brands within active are doing well.
12:12
Speaker 8: They need to have a better mix of some of
12:15
Speaker 8: some national brands in there to really rejuvenate the sales
12:19
Speaker 8: in that category. Also, when they brought in so far
12:22
Speaker 8: As shops, they got rid of jewelry and so they
12:25
Speaker 8: sort of missed out on gifting in the jewelry area,
12:28
Speaker 8: so they're planning to bring that back. They're also hoping
12:31
Speaker 8: to boost conversion of those so for a shoppers by
12:35
Speaker 8: bringing in more relevant junior brands, and that's going to
12:38
Speaker 8: come later this year, and that includes Aero Coal, Stall, Roxy,
12:41
Speaker 8: Madden World, Quicksilver for example. And then of course they're
12:45
Speaker 8: going to be adding babies shops, which could also help
12:48
Speaker 8: them later in the year. So we do expect to
12:51
Speaker 8: see some improvement and these categories are working, it's just
12:55
Speaker 8: going to take a lot longer to get the overall
12:58
Speaker 8: mix right, That's what we think is happening.
13:02
Speaker 3: Mary Again, a twenty seven percent decline in the stock
13:04
Speaker 3: press on a piece of news like this, to me,
13:07
Speaker 3: it calls into question how investors are viewing this management team.
13:11
Speaker 3: I look on the MGMT function on the Bloomberg terminal
13:14
Speaker 3: and I see most of the senior managers are only
13:16
Speaker 3: there less than a couple of years.
13:17
Speaker 7: So this is a relatively new management team.
13:20
Speaker 3: Is this Wall Street saying we don't have much confidence
13:22
Speaker 3: in you guys?
13:24
Speaker 8: It could be temporary, That's the way I look at it,
13:26
Speaker 8: because frankly, Tom Kingsbury, who's the CEO here, he is
13:31
Speaker 8: the one responsible for turning Burlington Stores into the successful,
13:36
Speaker 8: fast growing off price retailer that it is. It's very
13:40
Speaker 8: focused on the low end consumer. So he, I think
13:43
Speaker 8: is the right person and all of the initiatives that
13:47
Speaker 8: he's been doing. We've noticed the changes dramatically since he
13:50
Speaker 8: came on board in the stores. In fact, even the
13:53
Speaker 8: culture of the environment you go in there and you
13:57
Speaker 8: talk to the salespeople. Year over year, once he came
14:00
Speaker 8: on board, we observed a huge change, a huge lift
14:04
Speaker 8: in the culture where everyone is more excited about the business. So,
14:08
Speaker 8: you know, it's the first quarter. They had tough comparisons,
14:12
Speaker 8: and we'll have to see as more and more of
14:14
Speaker 8: these initiatives come into play. We think it's really just
14:17
Speaker 8: going to be a delay in the turnaround rather than hey,
14:20
Speaker 8: this is a failure for management, because these things, when
14:23
Speaker 8: you're doing a complete redo of a business, it really
14:28
Speaker 8: takes time to gain traction, especially in an intense segment
14:33
Speaker 8: which they play in.
14:35
Speaker 6: We also get Nordstrom's gap costco out after the closing
14:38
Speaker 6: bell that that's a pretty random mix. It's going to
14:41
Speaker 6: be interesting to see the macro read for that. What
14:44
Speaker 6: are you going to be paying most attention.
14:45
Speaker 8: To well, a lot of exciting things happening with Gap,
14:52
Speaker 8: and we're expecting to, you know, hear some pot of
14:56
Speaker 8: positive results coming out of Gap. Nordstrom. I think they're
15:00
Speaker 8: seeing an improvement overall in the business, but most of
15:03
Speaker 8: it is being driven on the rack side, so again
15:05
Speaker 8: that's their off price model and that's really sort of
15:08
Speaker 8: the big story for Nordstrom. But we think the full
15:11
Speaker 8: line store is seeing some improvement as well. And if
15:15
Speaker 8: you look at other retailers that are really executing well
15:18
Speaker 8: like Abercrombie, which their numbers are out yesterday and just
15:23
Speaker 8: bluep same with urban outfitters with their free people and
15:27
Speaker 8: anthropology brands once again just blew past estimates. So it's
15:32
Speaker 8: really a case where if you're really executing, then you're
15:38
Speaker 8: coming out and head of plan and then of course
15:41
Speaker 8: the shares react accordingly.
15:43
Speaker 3: So, Mary, what are you hearing from your companies, your contexts.
15:48
Speaker 3: How about the health of the consumer these days?
15:52
Speaker 7: What are we seeing?
15:54
Speaker 8: You know, it's a good question. I would say overall,
15:57
Speaker 8: the consumer is very resilient, so of course, you know,
16:01
Speaker 8: within off price or value, the low end consumer is
16:04
Speaker 8: still being challenged with inflation. But the good news is
16:09
Speaker 8: they're employed, and so being employed I think is one
16:13
Speaker 8: of the biggest factors out there. And of course we
16:15
Speaker 8: just saw so that all bodes well for retail generally,
16:21
Speaker 8: but again it's really going to be segmented, with those
16:26
Speaker 8: earning a higher income being able to spend more and
16:29
Speaker 8: those with lower income being even more discerning.
16:33
Speaker 6: When I find so interesting and you bought up Abercrombie,
16:36
Speaker 6: is it and we're talking to the Red Robin CEO. Also,
16:39
Speaker 6: if you know your customer and I want to say niche,
16:42
Speaker 6: because like Gap is a niche, but like you know
16:44
Speaker 6: who you're designing for and that's the business that you're doing,
16:47
Speaker 6: and you're not going to try and chase all the
16:49
Speaker 6: things you can actually outperform in this market across the board,
16:54
Speaker 6: whether you're super high end to take a look at LVMH,
16:57
Speaker 6: whether you're looking at Swiss Watches, or whether you're looking
16:59
Speaker 6: at Gap, or whether you're looking say ad best Buy,
17:03
Speaker 6: and I find that to be a really striking difference
17:06
Speaker 6: maybe than what we've seen before.
17:10
Speaker 8: I would agree with you. So if Abercrombie, you raised
17:12
Speaker 8: a good point, they're sort of poor millennial customer with
17:16
Speaker 8: the Abercrombi brand will continuing to introduce new categories. So
17:21
Speaker 8: for example, they brought out, you know, the wedding shop
17:26
Speaker 8: and that was sort of an add on to the
17:28
Speaker 8: best Dressed Guests, and it was just so well received
17:32
Speaker 8: because they were listening to their customer and they're giving
17:35
Speaker 8: them more and more of what that customer wants. And
17:38
Speaker 8: it's also extending the age range sort of beyond the
17:41
Speaker 8: millennial poor consumer that they go after, and so that's
17:45
Speaker 8: also helping to bring in new customers. And then they're
17:49
Speaker 8: starting to look at the adjacent categories and buying there.
17:53
Speaker 8: So they're really showing how they can continue to execute
17:57
Speaker 8: against very difficult comparisons where they're already showing double digit
18:01
Speaker 8: lifts in comp sales. So that's a sign of great
18:06
Speaker 8: execution right there.
18:08
Speaker 7: All right, Mary, thanks so much for joining us.
18:09
Speaker 3: Mary Ross Gilbert, she's a senior Ecadannaals covering the retail
18:12
Speaker 3: space for Bloomberg Intelligence, joining us from Los Angeles via
18:15
Speaker 3: zoom Here looking at Coles again, that's stock down twenty
18:18
Speaker 3: five percent plus on some week numbers.
18:22
Speaker 2: You're listening to the Bloomberg Intelligence podcast. Catch us live
18:26
Speaker 2: weekdays at ten am Eastern on Apple Card Playing Android
18:29
Speaker 2: Auto with the Bloomberg Business App. Listen on demand wherever
18:32
Speaker 2: you get your podcasts, or watch us live on YouTube.
18:37
Speaker 6: I'm Alex the alongside Paul Sweeny. This is Bloomberg Intelligence Radio.
18:40
Speaker 6: We bring you all the top news and economics and
18:42
Speaker 6: finance through our lens of Bloomberg Intelligence analysts. They cover
18:45
Speaker 6: two thousand companies and one hundred and thirty industries all
18:48
Speaker 6: around the world. We're also taking a look here at
18:51
Speaker 6: some stocks really on the move after earnings, and one
18:54
Speaker 6: is Red Robin Gourmet Bergers. That stock is up a
18:57
Speaker 6: whopping twenty percent. If you look inside the numbers, you're
19:00
Speaker 6: looking to adjusted loss per share at eighty cents, revenue down
19:05
Speaker 6: seven point one percent year on year, comm sales down
19:08
Speaker 6: six point five percent, average check is a little higher
19:10
Speaker 6: by about three percent, and mark operating margin was eleven percent.
19:13
Speaker 6: But the street loves it. Let's get a read on why. GJ.
19:18
Speaker 6: Hart is president's CEO and director of Red Robin Gormet
19:21
Speaker 6: Berger's and he joins us now DJ great to get
19:24
Speaker 6: your perspective. What do you think the street is loving
19:27
Speaker 6: so much about these earnings when the numbers and the
19:29
Speaker 6: comps feel a little weak on the numbers.
19:33
Speaker 9: Well, I think what they like is our strategic plan
19:36
Speaker 9: to move this company forward. We call it the North
19:39
Speaker 9: Star Plan. And we reported that in the first five
19:43
Speaker 9: weeks of the second quarter that our comps that turned positive,
19:47
Speaker 9: and I think that that surprised them a bit because
19:49
Speaker 9: I think they all had us slightly negative. And I
19:52
Speaker 9: think we're making great progress. Our teams have done amazing
19:55
Speaker 9: work and we're really proud of where we are today.
19:58
Speaker 9: And we sequentially really proved in the first quarter in
20:01
Speaker 9: spite of a very tough start. So we feel great
20:03
Speaker 9: about where we're going. And I think they see that,
20:06
Speaker 9: and it's great to see.
20:08
Speaker 3: GJ talk to us about your consumer, your customer, Who
20:12
Speaker 3: is your customer and kind What are you seeing from
20:14
Speaker 3: your customer's behavior these days?
20:17
Speaker 9: Sure, well, our customer is basically Middle America and families
20:22
Speaker 9: and all over the United States. And what we're seeing,
20:26
Speaker 9: interestingly enough, is in our premium burgers, in our premium
20:31
Speaker 9: gourmet burgers that we promote, we're seeing a real high
20:34
Speaker 9: take rate.
20:36
Speaker 10: We're also seeing that on the value in the.
20:39
Speaker 9: Tavern burgers are actually having a high take grade as well.
20:43
Speaker 9: And so what we are seeing is some trade down
20:46
Speaker 9: from some of our guests, but then it's still surprising
20:50
Speaker 9: to see that our gourmet lines are still doing as
20:53
Speaker 9: well as they are. The other indicator is that things
20:55
Speaker 9: like add ons, appetizers, desserts, those take grates are about
20:59
Speaker 9: the same. So net we're feeling relatively about the consumer
21:04
Speaker 9: when you.
21:04
Speaker 6: Take a look at who is coming through your doors.
21:08
Speaker 6: Has that changed at all as the economic environment has
21:12
Speaker 6: become more challenging.
21:16
Speaker 9: Well, you know, put aside to the economy for a minute.
21:20
Speaker 9: Our comeback plan in the North Star plan is all
21:22
Speaker 9: about engagement with our guests, bringing back fun value and
21:26
Speaker 9: really taking this ic, iconic brand back to where it was.
21:30
Speaker 9: And so we're seeing a lot of laps guests come
21:33
Speaker 9: back in. We're seeing a lot of new guests. Our
21:36
Speaker 9: loyalty platform that we just relaunched, we're seeing numbers like
21:41
Speaker 9: we've never seen before in terms of sign up. So
21:43
Speaker 9: we're getting a good base of people and we're doing
21:45
Speaker 9: exactly what we wanted to do is just send a message, Hey,
21:49
Speaker 9: come back into Red Robin, give us a try, and
21:52
Speaker 9: I think you'll be pleased. And we're seeing that so
21:54
Speaker 9: that feels great.
21:56
Speaker 3: Inflation, how does that impact your business to what extent
21:59
Speaker 3: can you pass along to your customer base.
22:01
Speaker 7: How are you guys dealing with that?
22:04
Speaker 9: So, as we've said, inflation for us is sort of
22:06
Speaker 9: in that three to five percent for the for the year,
22:09
Speaker 9: and we're staying true to that. So certainly it's still
22:12
Speaker 9: there in terms of pricing power. You know, we've lagged
22:16
Speaker 9: others in the industry over the last couple of years,
22:18
Speaker 9: but we still feel like, you know, pricing is going
22:22
Speaker 9: to be tough, and we have a great value compared
22:25
Speaker 9: to pretty much everybody out there with a seventeen dollars
22:28
Speaker 9: check average in a full service experience. So you know,
22:33
Speaker 9: again we're positioned well. We are trying to screen value
22:36
Speaker 9: with our thirty bottomless sides and our tavern Berger lineup,
22:40
Speaker 9: and I think that's starting to resonate with the guests
22:42
Speaker 9: that were everyday value and hey, you can come in
22:45
Speaker 9: and have a lot.
22:45
Speaker 10: Of fun at Red Route.
22:46
Speaker 6: What about labor.
22:49
Speaker 9: Labor is always a challenge right around the around the
22:52
Speaker 9: United States.
22:53
Speaker 10: It's we're seeing increases all over the place.
22:56
Speaker 9: But you know, the good news is there's more labor available,
22:59
Speaker 9: So our our team member base is strong at this point,
23:03
Speaker 9: and certainly it's a challenge. We have to be as
23:05
Speaker 9: efficient as possible. We've invested a lot back into the
23:08
Speaker 9: overall experience by putting labor back into the restaurants. Management
23:12
Speaker 9: teams are appropriate now and so yes, it's going to
23:15
Speaker 9: be an ongoing challenge, but we're not alone in that
23:18
Speaker 9: and we're going to continue to stay the course because
23:20
Speaker 9: we believe long term it's the right thing to do
23:23
Speaker 9: for the brand, to bring it back to the iconic
23:25
Speaker 9: brand and it's been for almost fifty years.
23:28
Speaker 3: So GJ kind of on that front, give us a
23:31
Speaker 3: sense of the history of Red Robin, you know, kind
23:35
Speaker 3: of where, how did it get started, what's the where
23:37
Speaker 3: do you guys kind of find yourself in the competitive landscape.
23:41
Speaker 7: And where do you need to get to.
23:43
Speaker 9: Sure well, Red Robin started up in the state of
23:47
Speaker 9: Washington outside of Seattle, and it really started as a
23:50
Speaker 9: tavern and it's and it's humble beginnings have gone to
23:54
Speaker 9: over five hundred restaurants all over the United States. We
23:58
Speaker 9: have fit fit a really nice niche within casual dining.
24:02
Speaker 9: We are family friendly, we are a bunch of fun
24:05
Speaker 9: in the restaurant.
24:07
Speaker 10: We have great value, great.
24:09
Speaker 9: Hospitality, and great food and that niche sort of has
24:13
Speaker 9: been one that when Red Robin really started to go
24:16
Speaker 9: a little bit astray, that no one's really filled that gap.
24:19
Speaker 9: So we're really believed that debt positioning still holds true today.
24:23
Speaker 9: We just need to bring things relevant. So whether it's
24:26
Speaker 9: the food offerings or the hospitality or the fun environment,
24:29
Speaker 9: we need to bring it relevant, which is what we're doing,
24:31
Speaker 9: which is why we're investing so much into this plan.
24:34
Speaker 9: But if we do that well, we think there's plenty
24:36
Speaker 9: of room for us to continue to grow and we're
24:40
Speaker 9: going to continue to work hard to make that happen.
24:42
Speaker 6: And your resume is quite long, right, you're the former
24:45
Speaker 6: CEO of California Pizza Kitchen Texas Roadhouse. I love KPC
24:49
Speaker 6: no CPKA.
24:50
Speaker 3: Well, if you're in Monterey, California, there ain't no pizza
24:54
Speaker 3: and so CPK is it. So it's not bad, the
24:55
Speaker 3: kids are happy, it's all good.
24:56
Speaker 6: No, it's good. And the barbecue chicken part of it
24:58
Speaker 6: it was really good too. I mean, yeah, I do.
25:01
Speaker 3: I'm sorry.
25:02
Speaker 6: You've done a lot and you've seen a lot, and
25:04
Speaker 6: you've operated these kind of restaurants through many different environments.
25:07
Speaker 6: Can you just give me your sort of career perspective
25:10
Speaker 6: on what you see now and trends developing and how
25:13
Speaker 6: things have changed.
25:16
Speaker 10: Well, sure, I'll be happy to look.
25:18
Speaker 9: I think at the end of the day, in this
25:21
Speaker 9: restaurant business, you have to stay the course and really
25:24
Speaker 9: know who you are and who you are trying to be.
25:27
Speaker 9: And as long as you do that day in and
25:29
Speaker 9: debt execute at a very high level.
25:31
Speaker 10: You're going to be successful. It's going to ebb and flow.
25:33
Speaker 9: The ups and downs are going to be there, and
25:35
Speaker 9: you need to stay true to who you want to be.
25:39
Speaker 9: And I think that's that's the big opportunity for us here.
25:43
Speaker 9: You know, in spite of a tougher economic backdrop, if
25:46
Speaker 9: you will, we're starting to see good success and great
25:48
Speaker 9: momentum for a plan that we put in place. So
25:51
Speaker 9: what I've seen over the years, you know, Texas Roadhouse,
25:54
Speaker 9: we grew, it was a real high growth company.
25:56
Speaker 10: Still loved the company.
25:57
Speaker 9: CPK was a turnaround and we had a lot of
25:59
Speaker 9: great success there as well. But again, you know, it's
26:03
Speaker 9: really staying true to who you are and making sure
26:06
Speaker 9: you align every single team member in the organization around
26:09
Speaker 9: your mission, vision and values.
26:11
Speaker 10: Where it is you want to get to.
26:12
Speaker 9: And so as long as you do that, stay the course,
26:15
Speaker 9: and you provide the leadership that's steadfast in that commitment,
26:18
Speaker 9: you'll be okay. And that's what my experience of almost
26:21
Speaker 9: forty years now gosh, getting old, you know, that's what
26:25
Speaker 9: it tells me.
26:26
Speaker 3: So, GJA, talk to us about the footprint for Red Robin.
26:31
Speaker 3: How many units do you have now? How many restaurants
26:33
Speaker 3: have now? And maybe where do you want to go?
26:35
Speaker 9: Sure, well, we have five hundred and ten restaurants and
26:40
Speaker 9: you know, look at this point, we like to say,
26:43
Speaker 9: first things first, we need to get this North Star
26:45
Speaker 9: plan in place and start to have growth within our
26:48
Speaker 9: existing restaurant base. It's a little too early to talk
26:51
Speaker 9: about growth.
26:52
Speaker 10: Again. There is plenty of white space in America.
26:54
Speaker 9: For more Red Robins, but we need to do first
26:56
Speaker 9: things first, and that's what we're doing. And you know,
26:58
Speaker 9: it's a couple of years away in terms of thinking
27:00
Speaker 9: about growth.
27:02
Speaker 6: Really interesting stuff. When you're gonna get him in New York.
27:05
Speaker 6: I've never been to one. Are you thinking about it?
27:10
Speaker 9: Well, you probably in Manhattan right so, no, we're not
27:13
Speaker 9: thinking about Manhattan right now, but we certainly would love
27:16
Speaker 9: to host you in.
27:17
Speaker 10: Any one of our restaurants.
27:18
Speaker 7: I know there's one.
27:20
Speaker 6: I know something you said, there's one field trip there
27:24
Speaker 6: than John Tucker's Beach Club. Of course, make the rounds
27:27
Speaker 6: and this all makes GJ. Thanks a lot. We really
27:30
Speaker 6: appreciate it, really good perspective. Congrats on the good outlook
27:33
Speaker 6: and the stock pop today. J. J. Hart, President and
27:36
Speaker 6: CEO and director of Red Robin Gourmet Burgers. I mean,
27:40
Speaker 6: you know, we've been eating out a lot more and
27:41
Speaker 6: as the weather got nicer and a man, you see
27:43
Speaker 6: that on your credit card bill, so I can definitely
27:46
Speaker 6: see how sort of a different kind of place would
27:49
Speaker 6: be really helpful to go to and still be able
27:51
Speaker 6: to have fun and eat good food and also not
27:54
Speaker 6: pay three hundred dollars for three people.
27:57
Speaker 7: But you had a glass of prosecco.
27:58
Speaker 6: Yeah, but just one androun like Panda and back like before.
28:02
Speaker 6: It's very different.
28:03
Speaker 10: Where did you do that was three hundred dollars for
28:05
Speaker 10: three people?
28:05
Speaker 6: Brooklyn?
28:06
Speaker 4: Really?
28:07
Speaker 3: Yes?
28:08
Speaker 6: And one of those three people is nine and a half,
28:12
Speaker 6: so anyway a half people, yeah, exactly two and a
28:14
Speaker 6: half people.
28:16
Speaker 2: You're listening to the Bloomberg Intelligence podcast. Catch us live
28:20
Speaker 2: weekdays at ten am Eastern on Applecar Play and Android
28:24
Speaker 2: Auto with a Bloomberg Business app. You can also listen
28:27
Speaker 2: live on Amazon Alexa from our flagship New York station,
28:30
Speaker 2: Just say Alexa, Play Bloomberg eleven thirty.
28:34
Speaker 6: Him Alex see you alongside Paul Sweeney. Not only do
28:37
Speaker 6: we cover all the news and finance with our great
28:40
Speaker 6: analysts of Bloomberg Intelligence, we also tap our huge amount
28:44
Speaker 6: of reporters over at Bloomberg News and every day they
28:47
Speaker 6: have a Big Take, and it really delves into the
28:50
Speaker 6: topics that we're talking about every day and is an
28:52
Speaker 6: amazing deep dive to get a true sense of what's
28:56
Speaker 6: going on out there. And today's big takes about none
28:59
Speaker 6: other an Elon Musk, and it talks about Elon's orbit,
29:03
Speaker 6: that Musk's galaxy of companies is basically under threat as
29:07
Speaker 6: Tesla continues to spiral, and it takes a look at
29:09
Speaker 6: the people in his orbit that try and keep things running,
29:12
Speaker 6: even though many accuse him of being distracted by all
29:14
Speaker 6: of his ventures. One of the writers is Kurt Wagner,
29:17
Speaker 6: Bloomberg Tech reporter, and he joins us. Now, Kurt, does
29:20
Speaker 6: walk us through what you learned in this piece.
29:24
Speaker 11: I mean a big part of what you know, working
29:27
Speaker 11: for Elon is all about, is sort of working for
29:29
Speaker 11: Elon everywhere he needs you, right, So you might be
29:31
Speaker 11: employed technically by Tesla, but you might show up on
29:35
Speaker 11: you know, a SpaceX project or an X project. And
29:38
Speaker 11: I think, you know, not only are the people that
29:41
Speaker 11: he works with sort of hovering around and all these
29:43
Speaker 11: various roles, but I think his companies are becoming closer
29:46
Speaker 11: and closer together. And that's why it's so important that
29:49
Speaker 11: you know, when Tesla is struggling, it has this trickle
29:51
Speaker 11: effect because that's where he gets his wealth to fund XAI,
29:55
Speaker 11: to to you know, deal with X, to deal with SpaceX.
29:58
Speaker 11: And so, you know, what we wanted to sort of
30:00
Speaker 11: do is show people that all of these different companies
30:03
Speaker 11: and all the people who work them are interconnected. And
30:05
Speaker 11: we try to do that with a pretty cool visual
30:08
Speaker 11: graphic that folks can see on the on the website today.
30:11
Speaker 7: Kurt, what is the musconomy to find that?
30:16
Speaker 11: Yeah, it's a term that represents or reflects these six
30:20
Speaker 11: different businesses that he's running at any given time, and
30:24
Speaker 11: again sort of this idea that they all work together.
30:27
Speaker 11: They you know, in X's case, the data from X,
30:31
Speaker 11: which used to be called Twitter, is now sort of
30:34
Speaker 11: powering XAI his startup.
30:36
Speaker 10: Right.
30:36
Speaker 11: The money from Tesla has historically been used to help
30:39
Speaker 11: fund SpaceX and his purchase of X. And again you
30:43
Speaker 11: see the musconomy as this collection of businesses that Elon
30:47
Speaker 11: runs and how they are all intertwined with one another.
30:51
Speaker 6: Do the people in his orbit do they like this?
30:54
Speaker 6: Like that to me sounds terrible, Like I like predictability,
30:56
Speaker 6: which I know as funny as I work in news.
30:58
Speaker 6: I like predictability. I like to know what I'm doing.
31:00
Speaker 6: I do not want to be pulled in seventeen thousand directions.
31:02
Speaker 6: Do people in his orbit like that?
31:06
Speaker 5: Well?
31:06
Speaker 11: I think the people at the very you know, center
31:09
Speaker 11: of this universe, the people who are closest to Elon.
31:11
Speaker 11: Whether they like it or not, it's sort of a necessity, right,
31:14
Speaker 11: because that's what it takes to be close to that
31:16
Speaker 11: center of power. And so we've seen, for example, his
31:19
Speaker 11: business manager Jared Birchall shows up pretty much across all
31:23
Speaker 11: these different companies. His lawyer, Alex Spiro shows up across
31:26
Speaker 11: all of these companies. So if you want to be
31:28
Speaker 11: at the center of this universe, you have to be
31:31
Speaker 11: willing to go where Elon goes. And as we know,
31:33
Speaker 11: he not only has these six companies, but he's doing
31:35
Speaker 11: a million other things as well. And so whether they
31:38
Speaker 11: like it or not, I'm not sure if it really matters,
31:40
Speaker 11: because that's just what it takes to work for Elon.
31:42
Speaker 7: Musk and Kurt the center at all.
31:44
Speaker 3: As you mentioned, from an economic financial perspective, is Tesla
31:47
Speaker 3: stocks off twenty eight percent year to date? Is that
31:50
Speaker 3: exerting any pressure on musconomy.
31:54
Speaker 11: Well, it is because we've started to hear rumblings that
31:57
Speaker 11: Tesla's board is, you know, on happy with Elon being
32:01
Speaker 11: distracted with these other companies, right, And so I think
32:04
Speaker 11: when things are going well, when the stock is up,
32:06
Speaker 11: when business is booming, you know, the idea of him
32:10
Speaker 11: spending you know, several hours a day over at Twitter
32:14
Speaker 11: or now X is not as big of a deal, right,
32:17
Speaker 11: But when suddenly the stock is down, when business is struggling,
32:20
Speaker 11: those hours feel like a huge distraction and it feels
32:23
Speaker 11: like he's not plugged into the money making part of
32:26
Speaker 11: this machine, which is Tesla. And so I think the
32:29
Speaker 11: business there is a huge indicator of what he's able
32:33
Speaker 11: to do with his time. Elsewhere, and that's what we're
32:36
Speaker 11: seeing right now. I think that tension is as Tesla's
32:38
Speaker 11: business is struggling, is creating pressure on him to focus
32:41
Speaker 11: more of his time at the carmaker.
32:43
Speaker 6: How do they all? How do all the businesses though intersect?
32:47
Speaker 6: Because from a broad look they don't. But then if
32:51
Speaker 6: you dive a little deeper, like they do, like X
32:53
Speaker 6: you can use all that stuff for large language models
32:56
Speaker 6: for his AI stuff, and the AI stuff goes into
32:58
Speaker 6: the car stuff, and the car stuff, I guess goes
33:00
Speaker 6: into the rocket ship stuff.
33:03
Speaker 10: Yeah, I mean you kind of hit on it.
33:04
Speaker 11: Like the connective tissue between these companies can be somewhat small.
33:09
Speaker 11: In X's case, as you pointed out, the data there
33:12
Speaker 11: is being used to train a chatbot called Grock within XAI.
33:17
Speaker 11: We know that, for example, the corporate plane, like small things,
33:20
Speaker 11: the corporate plane that Elon uses that Tesla is the
33:23
Speaker 11: same one that's used at SpaceX. We know that they
33:25
Speaker 11: share certain employees, so you know, I mentioned Jared Burchell,
33:29
Speaker 11: his business manager, Alex Biro, his lawyer, Like these are
33:32
Speaker 11: the types of connective things that bring these companies together.
33:35
Speaker 11: Is the people and and sort of you know, the
33:38
Speaker 11: smaller parts of their business that are intertwined. And I
33:41
Speaker 11: feel like, again I already talked about it, but Tesla
33:45
Speaker 11: is sort of the engine behind this whole thing. If
33:47
Speaker 11: Tesla is humming and doing well, it kind of enables
33:49
Speaker 11: everything else to grow too.
33:51
Speaker 7: How about Twitter?
33:52
Speaker 3: You bought that for forty four billion dollars. Kurt and
33:55
Speaker 3: a lot of analysts says the value of Twitter's declined
33:57
Speaker 3: dramatically as advertisers have Is there any pushback from anybody
34:02
Speaker 3: or folks just saying, hey, it was his money, you
34:04
Speaker 3: can do.
34:04
Speaker 7: With it what he wants.
34:07
Speaker 11: Yeah. I mean, I do think it poses a challenge
34:10
Speaker 11: because of this distraction I was talking about with Elon's time, right,
34:13
Speaker 11: I think, especially if you're a Tesla investor, you have
34:17
Speaker 11: to be scratching your head and saying, what are you doing?
34:19
Speaker 11: You know, why are you spending money on this, on
34:22
Speaker 11: this or excuse me, spending time on this money losing
34:25
Speaker 11: business when you could be sort of you know, making
34:28
Speaker 11: money for shareholders over here. And I think it's, you know,
34:32
Speaker 11: becoming a bit of a problem. I think what will
34:34
Speaker 11: be interesting is to see whether x sort of gets
34:37
Speaker 11: folded into x AI at some point, I could see
34:41
Speaker 11: those two companies sort of emerging so that you know,
34:43
Speaker 11: again X provides the data for these large language models,
34:47
Speaker 11: but it sort of gives him some cover to spend
34:49
Speaker 11: time in X because now it's part of the AI business,
34:52
Speaker 11: which is much more exciting, I think, for people than
34:54
Speaker 11: the free speech business, which hasn't been very lucrative for him.
34:57
Speaker 6: The free speech business. Wo's in the free speech business? Like,
35:00
Speaker 6: what is that mental wires?
35:01
Speaker 10: That is Elon?
35:02
Speaker 11: Elon is the is in the free speech business.
35:05
Speaker 10: I guess.
35:05
Speaker 6: So what do you think the biggest question then is
35:08
Speaker 6: going in your reporting? What emerges the biggest problem or
35:12
Speaker 6: the biggest question?
35:14
Speaker 11: Yeah, I think really it comes down to kind of this.
35:18
Speaker 11: We haven't really talked much about this yet, but Elon's
35:21
Speaker 11: pay package at Tesla is sort of up for debate.
35:25
Speaker 10: Right.
35:25
Speaker 11: You may remember he was supposed to be paid I
35:27
Speaker 11: believe it was fifty six billion dollars and that pay
35:31
Speaker 11: package was I believe set up in twenty eighteen. It's
35:33
Speaker 11: been challenged in court and a judge basically said this
35:37
Speaker 11: isn't a fair compensation, and Elon is fighting this in court.
35:41
Speaker 11: But it's a huge deal, not only because it's you know,
35:44
Speaker 11: his own net worth, but because that money is then
35:47
Speaker 11: used to fund so many of these other projects. So
35:50
Speaker 11: if he's not able to secure this this pay package
35:53
Speaker 11: that he thought he had, it impacts the loans that
35:56
Speaker 11: he takes out and impacts his liquidity to be able
35:59
Speaker 11: to use on these other companies. And I do wonder
36:01
Speaker 11: if he starts to lose a lot of his net worth,
36:04
Speaker 11: his value, if that's going to have an impact on Xai, Twitter,
36:08
Speaker 11: SpaceX and others.
36:10
Speaker 6: All Right, thanks so much, Kret. We really appreciate it's
36:11
Speaker 6: a great read. You guys. You should definitely check it out.
36:14
Speaker 6: Kurt Wagner, Bloomberg type reporter standing by there for us.
36:20
Speaker 2: You're listening to the Bloomberg Intelligence Podcast. Catch us live
36:24
Speaker 2: weekdays at ten am Eastern on applecard Play and Android
36:27
Speaker 2: Auto with the Bloomberg Business app. You can also listen
36:30
Speaker 2: live on Amazon Alexa from our flagship New York station.
36:34
Speaker 2: Just say Alexa, play Bloomberg eleven thirty.
36:38
Speaker 3: Let's check in on these markets. I get a little
36:40
Speaker 3: bit of a sell off here today. Anna Rothbund joins us.
36:43
Speaker 3: She is the chief investment Officer SEBIZ Investment Advisory Services,
36:49
Speaker 3: joining us from Cleveland Ohio via zoom here on a
36:53
Speaker 3: You know, it seems like we've kind of cycled through
36:55
Speaker 3: these earnings. Although we've got some retailers this week, the
36:58
Speaker 3: earnings framework seems pretty solid out there for the market.
37:02
Speaker 3: I think we've got a FED that's going to be
37:04
Speaker 3: on the margin cutting rates going forward. Does that set
37:08
Speaker 3: us up for pretty constructive outlook here?
37:10
Speaker 7: For risk assets? How do you guys think about it?
37:14
Speaker 1: Well, good morning. The valuations are still high.
37:17
Speaker 12: I mean from an entry point, it isn't that attractive.
37:21
Speaker 12: I mean, it's been exciting, and if you've been holding stocks,
37:23
Speaker 12: it has been exciting. But if you're trying to put
37:26
Speaker 12: cash to work, it is kind of a nervous environment.
37:29
Speaker 12: So earnings great, is about six percent year over year?
37:33
Speaker 12: Guidance not so great, And underlying that guidance really is
37:37
Speaker 12: the economic activity. The GDP number came in this morning.
37:41
Speaker 12: Forget the first quarter, because if we want to compare
37:44
Speaker 12: it to earnings, which is year over year, you have
37:46
Speaker 12: to compare the GDP year over year, and that number
37:48
Speaker 12: is two point nine percent better than one point three
37:51
Speaker 12: but two point nine percent GDP growth to six percent
37:55
Speaker 12: earnings growth year over year, that basically tells you the
37:58
Speaker 12: stock market isn't the economy, but that is the economic backdrop,
38:04
Speaker 12: and those are the fundamentals that the companies have to
38:06
Speaker 12: work with support guidance. Weaker growth prospects, these don't really
38:12
Speaker 12: excite us at this point, especially when the valuations are high.
38:15
Speaker 6: You had Bill Dudley writing a column for Bloomberg today
38:18
Speaker 6: that you know, it was fun. I was talking about
38:20
Speaker 6: the neutral rate. Maybe the neutral rate is a lot higher.
38:22
Speaker 6: So it's not sort of higher for longer, it's higher
38:25
Speaker 6: like forever. Now we're going to be in a totally
38:27
Speaker 6: different kind of normalized environment. What do you think about that?
38:32
Speaker 12: Well, so I do think that neutral rate is probably higher.
38:37
Speaker 12: It doesn't mean that the rate right now isn't restrictive enough.
38:42
Speaker 12: Right so, right now, I do think that it is
38:44
Speaker 12: restrictive because the rate sensitive areas of the economy and
38:49
Speaker 12: the markets they have responded.
38:51
Speaker 1: It's the not so rate sensitive areas that have been
38:53
Speaker 1: really booming.
38:54
Speaker 12: If you think about the sixty six percent of Americans
38:58
Speaker 12: that have that own home, most of which grand majority
39:02
Speaker 12: of which have locked in low rates. That's not rate sensitive,
39:06
Speaker 12: right So in thirty four percent of Americans who are
39:10
Speaker 12: renting their rents are super high because there are that
39:13
Speaker 12: many homes out there for them to buy, so the
39:15
Speaker 12: rent keeps going up.
39:16
Speaker 1: So from that.
39:17
Speaker 12: Perspective, the majority of Americans actually are not rate sensitive, right,
39:22
Speaker 12: So to me, raising rates from this point on, or
39:26
Speaker 12: keeping rates super high for indefinitely isn't really going to
39:31
Speaker 12: help us with the inflation, bringing inflation down to what
39:34
Speaker 12: I think.
39:34
Speaker 1: Is an arbitrary two percent, because it's.
39:37
Speaker 12: Not going to affect those people who have low rates, right.
39:40
Speaker 12: So I think thinking about neutral where the neutral rate
39:44
Speaker 12: might might be, which, by the way, nobody really knows,
39:47
Speaker 12: and thinking that the air on the side of higher
39:50
Speaker 12: forever or higher indefinitely, I think is a little bit
39:54
Speaker 12: too restrictive.
39:55
Speaker 1: I do think that we need to be on the
39:56
Speaker 1: path for normalization.
39:59
Speaker 3: So on a given it sounds a little bit more
40:01
Speaker 3: of a conservative bent for you kind of how do
40:04
Speaker 3: you guys think about asset allocation these days?
40:07
Speaker 7: A little bit more defensive?
40:10
Speaker 12: Yeah, I mean, so we're long term investors and we're
40:13
Speaker 12: diversified investors, and for.
40:14
Speaker 1: A lot of us, it's it hasn't been easy for
40:17
Speaker 1: a while now. For about two years.
40:19
Speaker 12: Stocks and bonds have not been correlated. I mean, they
40:24
Speaker 12: have been highly correlated. Maybe not today because of tech,
40:28
Speaker 12: but the correlation has been really high. And that environment
40:31
Speaker 12: diversified portfolios are really difficult to manage. So a lot
40:35
Speaker 12: of our investors have gone into alternative investments. So here
40:39
Speaker 12: we're talking about absolute return type of strategies like hedge funds.
40:44
Speaker 1: Hedge funds run the gamut, so you really have to
40:46
Speaker 1: be not careful, but very selective and.
40:49
Speaker 12: What you choose, and certainly managers matter, and a lot
40:52
Speaker 12: of people have gone into private credit and private equity.
40:54
Speaker 1: But I will remind people.
40:56
Speaker 12: That despite the fact that you don't experience that day
41:00
Speaker 12: to day intra day volatility in those instruments because they
41:04
Speaker 12: are not marked to market more frequently as frequently as
41:07
Speaker 12: the public markets, the underlying exposure to the economy is
41:11
Speaker 12: exactly the same. So you're either going to feel it
41:14
Speaker 12: now or you're going to feel it later.
41:16
Speaker 1: So you really have to be choosy.
41:17
Speaker 12: But certainly diversifying away from stocks and bonds, we've seen
41:22
Speaker 12: a lot of that happening.
41:23
Speaker 6: What should your allocation be to bonds? The narrative of
41:26
Speaker 6: the last couple of days is higher rates herting stocks,
41:28
Speaker 6: and then today it's like, Okay, maybe we've seen the
41:30
Speaker 6: run up and yields, go ahead and buy some bonds,
41:32
Speaker 6: but stocks are still training heavy. What do you make
41:35
Speaker 6: all that?
41:36
Speaker 1: Yeah, so if you're investing in bonds, certainly bonds.
41:40
Speaker 12: If you lose bonds and stocks, stocks are going to
41:42
Speaker 12: lose more, right, I mean, it's just a more volatile
41:46
Speaker 12: asset class and it's lower.
41:47
Speaker 1: On the capstack. Right.
41:49
Speaker 12: If you own bonds, yes, we're in a very difficult environment.
41:52
Speaker 1: But you have to own it for income. If you
41:54
Speaker 1: own it for total.
41:55
Speaker 12: Return, or if you own it your price sensitive, it's
41:58
Speaker 12: not going to be a fun ride for you.
42:00
Speaker 1: So if you're.
42:00
Speaker 12: Owning it for income, and if let's say credit for example, investment,
42:04
Speaker 12: great credit spreads are super tight, but underneath that the
42:08
Speaker 12: total income is very high because underneath that the risk
42:11
Speaker 12: free rate is very high.
42:12
Speaker 1: That's the treasury rate.
42:14
Speaker 12: So if you own it for income, then I think
42:17
Speaker 12: it's it's it could be lucrative for you if you're
42:20
Speaker 12: owning it for income. Now with stocks, earlier, I said
42:24
Speaker 12: valuations are high, stocks are irrational. You're just going to
42:27
Speaker 12: end You're going to encounter irrationality in the markets. The
42:30
Speaker 12: best practice here really is to rebalance regularly, so you're
42:33
Speaker 12: taking advantage of the irrationality of the stock market when
42:37
Speaker 12: it goes up, take the gains and rebalance your portfolio,
42:40
Speaker 12: and if you have that discipline, over the long run,
42:43
Speaker 12: you can have much better risk adjusted returns.
42:47
Speaker 3: So, you know, a lot of folks are kind of
42:50
Speaker 3: feeling like if they're long tech, they're in a good
42:54
Speaker 3: place because tech is going to lead this market. Do
42:56
Speaker 3: you share that view or do you feel like you
42:58
Speaker 3: need to be more diversifiedquities.
43:00
Speaker 12: We're very diversified, but we do have.
43:05
Speaker 1: We do have exposure to tech. I think that tech
43:08
Speaker 1: is exciting.
43:09
Speaker 12: I mean there's a little bit of push toward AI
43:12
Speaker 12: and AI exuberance and a little bit of it being
43:15
Speaker 12: punished today.
43:17
Speaker 1: But I think AI is a real deal. Right now
43:19
Speaker 1: we have proof of concept.
43:20
Speaker 12: We have to see how it actually manifests itself in
43:23
Speaker 12: different areas of the economy. We're not there yet, but
43:25
Speaker 12: it is going to be a real deal. And a
43:27
Speaker 12: lot of these companies, especially in the S and P
43:30
Speaker 12: five hundred and large companies, they're not betting.
43:32
Speaker 1: The farm on AI.
43:34
Speaker 12: They have an actual business with a lot of cash
43:36
Speaker 12: flow and frankly, very little debt. So when they're actually
43:40
Speaker 12: incubating AI and see how they can be incorporated into
43:44
Speaker 12: the rest of the business. I think that is actually
43:46
Speaker 12: a worthy venture and if you're a long term investors,
43:49
Speaker 12: it actually will pay off to hold onto tech.
43:52
Speaker 6: All right, thank you so much. We really appreciate Anna.
43:54
Speaker 6: Thank you Anna Rathburn see iow of it cebiz Investment
43:57
Speaker 6: Advisory Services giving us her perspective on the market. I
44:01
Speaker 6: do not envy being a money manager at this time.
44:04
Speaker 2: This is the Bloomberg Intelligence podcast, available on apples, Spotify,
44:08
Speaker 2: and anywhere else you get your podcasts. Listen live each
44:12
Speaker 2: weekday ten am to noon Eastern on Bloomberg dot com,
44:15
Speaker 2: the iHeartRadio app, tune In, and the Bloomberg Business app.
44:19
Speaker 2: You can also watch us live every weekday on YouTube
44:22
Speaker 2: and always on the Bloomberg terminal.