Bloomberg Audio Studios, Podcasts, radio news.
This is Bloomberg Intelligence with Alex Steinel and Paul'sweenye.
The real app performance has been the US corporate high yield.
Are the companies lean enough? Have they trimmed all the fats?
The semiconductor business is a really cyclical business.
Breaking market headlines and corporate news from across the globe.
Do investors like the M and A that we've seen?
These are two.
Big time blue chip companies.
The window between the peak and cut changing super fast.
Bloomberg Intelligence with Alex steel and Paul'sweenye on Bloomberg Radio.
On Today's Bloomberg Intelligence Show, we dig inside the big business stories impacting Wall Street and the global markets.
Each and every week we provide in depth research and data on some of the two thousand companies and one hundred and thirty industries our analysts cover worldwide.
Today we'll discuss a leadership shakeup at the coffee chain Starbucks.
Plus we'll look at why the US Justice Department and maybe considering a breakup of Alphabet's Google.
But first we dive into a big deal in the M and A space.
This year, Mars agreed to buy Calenova for nearly thirty six billion dollars and this brings together two major food companies and the biggest deal this year.
And this comes as a package food industry has been grappling with declimbing volumes, slow in growth, and a weakening global consumer.
For more, we are adorned by Jennifer Bartasha's Bloomberg Intelligence senior analyst Retail, staples and packaged Food. We first asked Jennifer why this Mars Kelenova deal is actually happening.
There's a couple of things. The first is, you know, from a Mars portfolio perspective, when it comes to the snacking category, they are heavily exposed to chocolate and coco has been a structural issue in terms of cost for a while and we think that's going to continue indefinitely. And so this helps them diversify out that snacking side of their portfolio, and it also helps them do a little bit more in emerging markets, which is an area where Kelenova has some strength.
So, okay, so is it offense or defense from that perspective, because it feels like it could be a combination both like diverse by away from just pure cocoa but also expand.
Yeah, I think it's a combination of the two. It's on the cocoa side, it's a little bit of risk mitigation, you know, and helping to ease some of the costs they're feeling there. And you know, traditionally chocolate has held up actually really well through the pandemic and after the pandemic, but we're finally starting to see a little bit of weakness and consumer demand for chocolate just because of food inflation,
and so diversification will will certainly help with that. And then you know, on a global basis, Mars has leading you know, they're in the top three market share in almost every region in confectionery, and so having more of the salty snack side and getting more into that can only consolidate their market share position in a lot of leading global, you know, regions.
Jen, what makes us deal really interesting for me is the Mars company. Because it's a private company. What do we know about Mars? Maybe I don't know the size capitalization, did they ever talk to investors.
Very rarely, you know, but what they have disclosed, you know, their annual revenue is a little over fifty billion dollars, So definitely a sizable company. And what I think is very interesting is when you break that revenue down, nearly sixty percent of their revenue is coming from pet food. So although everybody associates Mars with chocolate, the larger portion of their business is pet and so they own the Pedigree brand, they own the Whiskers brand, and that is
a big powerhouse for them. That's part of the reason we think there actually won't be a lot of FTC pushback on this because it's a smaller port of their portfolio and the products are there's really no overlap between what Kelenova does and what Mars does.
Amazingly, I did not know that.
I did not know that at all.
Why we love John Bartras. I mean, that would kill them, but sure right, dogs can't have chocolate from that thing. And so Jen, does this mean we're going to see a lot of other m and A in the space? And if so, sort of who and where would we see that.
We've seen a lot of a sentiment towards tuck In acquisition over the last couple of years. But there are some pressures that are affecting the industry. So when you listen to what all of these package food companies are saying their priority for twenty twenty four and headed into twenty twenty five is regaining volume. But the problem is that consumers not yet in a position where they're buying bigger volumes of food, and so M and A is a potential route to be able to better navigate the market.
So you know, in this instance, with this deal, we're expecting over a billion dollars in synergies between Mars and Kelenova,
coming from procurement, coming from manufacturing, things like that. So I think that this deal may spark at least some consideration for larger deals again in the package food space, as they're trying to find ways to contain costs, expand their geographic and product footprint at a time when it's hard to spend to spur consumers into buying greater volumes, So it may be an alternative for them.
In food inflation, you cover the package good companies, you cover the grocery stores as well. Those prices, while the rate of inflation has slowed, those prices ain't coming down, are they.
They're coming down, but very very slowly. And so if you look on it on a basis, you know, comparison back to twenty nineteen, food prices are still almost twenty percent higher than they were in twenty nineteen. In certain categories where there's been relief, especially from the cost of commodities.
So as corn has come down and soy has come down, and wheat has come down, sugar has come down, we've seen, you know a little bit of price relief, but it's going to take some time for that to really translate into something that consumers feel in their pocketbook instead of just individual products being you know, either not getting increases or coming down slightly in price.
So which company in your space do you feel like is doing pretty well on the margin and the top line side, because if margins are going to get squeezed, you need the top line to grow. But the top line is still really struggling with consumers right now. So who's managing that the best?
Well, you know, up until the probably the the you know, the last quarter or two, Mandalies has actually navigated that pretty well, you know, because the demand for suites and indulgences has had held up pretty well. You know, companies that do have that exposure to snacking, generally speaking, are doing better overall than companies that are more center store, and I would point to Kraft Hines as an example of center store or Campbell's Soup as a center store type.
Is center store, I mean, I haven't heard that before.
So center store is when you're in a grocery store. Everything that's not on the outside, so it usually is like shelf stable products. So think about your canned soups, your pasta, your pasta sauces, things like that. Those are the pantry staples that most people you know purchase. And then the perimeter is of course all of your fresh food.
Thanks to Jennifer Bartasha's Bloomberg Intelligence senior retail analyst, we move.
Next to the home improvement retailer home Depot. This week, home Deepot reported quarterly earnings and sales that top analyst expectations, but the.
Company cautioned that sales will be weaker than expected in the back half of the year. Home Depot cited high interest rates and economic uncertainty.
For more and all of this. We were joined by Red Brown, Bloomberg News earnings reporter, and we first asked Red to break down what home Depot's numbers actually mean.
I think overall kind of the message that I'm sort of taking away from the results is this seems like they might have kind of found bottom. If we look the last six quarters, they've seen earnings top and bottom line shrinking, and then for the first time since twenty twenty three, things are flattening out a little bit. So, yes, they cut the top line outlook maybe a bit of a reset there, But I think there's a lot to be optimistic about these results.
Well, I think I guess one of the questions that I had, just being a grizzled veteran having listened to a million conference calls, is you know, suggesting that maybe this is a little bit temporary, that maybe these are purchases that are being deferred in anticipation of lower rates. How does that kind of stand with you? I mean, I think it does.
I think I maybe I believe it a little bit more than that. It sounds like you two might just because the one thing that analysts are putting to a lot is contractors backlogs. So those are you know, contracted that they are expected to eventually fulfill. It's just a matter of when the customers are ready to actually you know, follow through with that and say yep, let's do it.
You know, those are long term projects to take several months, so it's not something that people are kind of likely to back out of their big something you probably need to get financing for as well. So it's it's you know, it's a significant commitment for the consumer. And yeah, I mean this deferral mindset I think is an interesting way to spin the situation for for Home Deeper right now.
Yeah, that's interesting. So you have contractor backlog because customers want to get their project in the queue, but they're not putting down the money for it yet. So it's always like, hmmmm, is that kind of wind the economy really turns? What winds up happening? So I guess if we just say, okay, we're at the trough, I wonder if we have any visibility yet into what the recovery then looks like for a home depot.
Yeah, so I think, you know, if we look into what they said the commentary around the guidance cuts, they said, if it's going to be the same store sales, the top end is down three percent this year. They're saying that that will happen if things stay stable from the first half of the year, and right now they say all signs point to consumer demand like staying at that same level, and they're not guiding towards the bottom end
of that range right now. So right now, that seems to be where the company is at with some positive outlook here as well.
You know, I'm just looking at the chart here and just thinking back to the pandemic that stuck you know, was up about one hundred and seventy percent from you know, the beginning of the pandemic through the end of twenty twenty one. It's come off since then. So that was just such a moonshot for the company. What does the company say about the consumer their business kind of now versus pre pandemic. Did they ever put it in that kind of context.
Well, the reason for that ride up, if you remember, was because of so much DIY activity. Everyone was stuck home. I mean, I'm tired of looking at this shelf, Let me fix it, or I hate this paint color.
Whatever it was.
Now there's a little bit less of that, just because we're spending less time at home, you know, we have less time on our hands, and Home Depot is kind of accepted that that they're not going to see those levels as much anymore, and what they are focusing and similar thing happening at Low's as well, is focusing on that contractor business. It's a higher margin business, it's a
little bit more consistent. And we saw what their their latest acquisition, eighteen billion dollar acquisition for SRS Distribution, and that is part of this pivot towards can we capture more of the market share for those contractors.
Oh yeah, love me some contractors working with some right now in the Berkshires. The allowance for my kitchen island was huge.
Are there good contractors up like in that part of the world.
Yeah, yeah, really good? Yeah, Okay, I mean we went to one we didn't do like comparison shopping because this company had, like we done our roof, had did our did our kitchens, like we'd already worked with them for the last you know, ten fifteen years. Read when you take a look at earnings in general, so you're your earnings reporter, like this is as your jam. What are some of the takeaways that we can learn from earnings in general? Right now?
I think with home depot it's just a kind of repetition of this same pattern in retail, which is consumers are trading down you know, last year there was so much were when is it happening? When is it happening? And it's kind of been slowly trickling in quarter over quarter more people are trading down or what that looks like on the ground is I'm delaying some of those bigger purchases, those bigger, high margin for the company's purchases.
I'm focusing on what I need. And I think Walmart will be the kind of exemplar example of that of people. You know, I'm just looking at you know what I need. I need food, I need groceries, I need toiletries, things like that, and then maybe I'll delay until I get a little bit more clarity on when I'm going to buy that TV.
So for our home depot, I think I just think of walking into home depot and boyd there's a lot of stuff. They're huge, huge stores and there's a lot of stuff there. Talk to us about inventory. Inventory management, I know for some of these big box retailers is huge. What are they saying these days?
So one thing to look for the inventory is actually the transportation costs have been coming down, So I think overall that just speaks to an easy supply chain for home depot, so they are able to manage a little bit better. In general, they're managing their costs quite well. That's part of the reason that they were able to
kind of flatten out the earnings trough there. And yeah, I think overall the inventory has been shifting well and they are, you know, they have so much stuff there, able to manage it well and they're able to get the products that people want in the stores.
Our thanks to Red Brown, Bloomberg News Earnings Reporter.
Coming up, Starbucks has a new CEO. We're going to break down the leadership change. Next.
You're listening to Bloomberg Intelligence on Bloomberg Radio, providing in depth research and data on two thousand companies and one hundred and thirty industries. You can access Bloomberg Intelligence via b I go on the terminal.
I'm Paul Sweeney and m Alex Steel, and this is Bloomberg.
You're listening to the Bloomberg Intelligence podcast. Catch us live weekdays at ten am Eastern on Affo car Playing and broud Oto with the Bloomberg Business app. Listen on demand wherever you get your podcasts, or watch us live on YouTube.
We look next to a shake up at the copy chain Starbucks. This week, Starbucks out did its CEO and picture otlet Mexican Real CEO Brian Nickel as its next leader. For more and all of this, we are joined by Jody Lori Bloomberg Intelligence credit Analysts, and we first asked Jody for her reaction to this week's news.
I think, as the credit analysts were always sort of hesitant when there's these full scale changes that happen overnight, and when you've had a CEO that's only been there since March of last year, so we have just only gotten comfortable with the concept they were giving back twenty billion dollars and now you have two activists investors very heavily involved, one getting a board seat and pushing out
the CEO with a new CEO. That could be a positive for the company long term in terms of performance. But I do also think that shareholders might make it better than bondholders at this point.
Why do you say that you think they're just going to maybe start returning cash shareholders.
I think they'll get a little bit more aggressive with that, Paul.
I mean, I think you know, it could end up being the type of thing that they look at the company and that you sort of think about ways to sort of boost the value, whether it be spin off some entity or what have you. I'm not sure what entity they could spin off to Starbucks because so much of the non core business has already been peeled away.
That said, I mean, I think that when when you're dealing with activists, you're always sort of hesitant because you say, Okay, how much are they going to risk the balance sheet? How much are they going to lever to get the company into a different spot. Now that might be a short term pain for long term gain, but for bond holders, when you think about that short term pain, that's not always necessarily the best thing. Which you know, we have a long history of yam for for example, you know,
which which the new CEO is part of. When they spun off their entity Young China, you know, they ended up giving back so much of their money to shareholders.
Which then to the point breaks a question like how is Starbucks actually doing from a bond holder perspective.
From a bond holder perspective, you know, over the past year, they've been a little bit more volatile. Something that that's very clear that we've been tracking is the aldi the Bloomberg second measure data.
Yeah, okay, so.
Wait, first all, what is this? Because I got to be honest, for I've never heard of this before, and you mentioned it and you're going to talk about it, and now I'm a little obsessed with it.
It is pretty amazing, Alex, particularly when it comes to Starbucks, because the R squared or you know, the sort of predictive value of it is pretty great when it comes to Starbucks in particular.
So what it is. It's credit card and debitcard.
Swipes only in the United States, and Bloomberg aggregates the data. You can see it. You can see it both on a year over year basis. You can see it on an actual value basis. If you look at the year over year where it's trending, it's actually very much down when it comes to sales and transactions, which is not surprising because they've had a couple of sort of disappointing points, one of them being geopolitics, so the Astro turf effort
related to the Middle East. The other portion is obviously China and the fact that they really went all in on China and it's been a little bit of a disappointment. And then you've also just had consumers pulling back in terms of their spending on things like Starbucks, McDonald's, what have you. And so companies have been trying to just
get people in the door. Now if you look at it for you know, transaction value, or if you look at you know, the PLACER data which we also have embedded on the terminal, and the placer data is down, so that's estimated visits. So people physically going into stores has been down recently. And so how does the new CEO get these people back? How does he get them comfortable with the Starbucks that we used to know and love.
I'm not sure talk.
To us about China, because I know you've flagged that before. It talks about China and what it means for Starbucks.
I think China means a lot of things for a lot of the companies in our space. I think it's been a very common word, more so than normal when it comes to across the consumer and leisure space.
You know.
So if you listen to earning calls this quarter, anyone from Hilton to Hyatt to you know, even the cruise lines have been mentioning China either as an avenue for growth or as a disappointment for an avenue for growth. I mean, we haven't seen the value of China. We've seen sort of.
The sluggish, slow growth of late.
And for someone like Starbucks that last year they mapped out their plan and they said, we're going to be building out more stores in China and that's our international growth plan, and that's how we're getting the company back on track. All of a sudden, you don't necessarily have that. I mean that's kind of a big problem.
Yeah, and when they talk about like strategic options for that are partnerships, what does that wind up looking like? They're not gonna spin it off, right, So it's not gonna be a Yum and Yum brand's China kind of situation. So how do you digest that?
I mean, it could be a Yum and China situation. Who knows what's on the table at this point. I mean, we could fathom any sort of measures. I mean, most of Starbucks stores are owned, but then when it comes to international it's a little less so.
And even places like you know, I mentioned the cruise lines.
You know, we were on a Royal Caribbean ship a couple months ago and they had a like in our.
Bas always like, remember at the time, I was on that cruise and it was really awesome. Sorry continue.
They did actually have a collector mug for Icond of the Seas that I did buy, which was a Starbucks mug, but it was Starbucks with a bunch of Icon of the Sea stuff.
I had to get it. I mean, it was two companies I cover.
I was like, I can't one shot. Well, on the flip side of this this transaction Chipotle, what's the outlook there, what's the feeling there in the street.
So Chippote is an interesting one because they don't really have that much dead outstanding. So it's one that you know, Mike Hallen really deeply covers. We a little less, so we cover it from the standpoint that obviously it's a very important player in the space. It's that fast casual we love talking about Yalm and obviously Chipotte sort of lines in perfectly with Yalm and it's sort of that intersection between Yum and Darden, which we like talking about.
And so I mean, I think, you know, Chippote obviously had a lot of negative headlines. We're talking five years ago, you know, in terms of safety for their food, which is obviously never never a good thing. Since then, they've turned around the company quite substantially. Now, I don't know what this means when you have a Darling CEO jump ship and go to another company. I'm not quite sure what we'd expect there. I do sort of wonder what shareholders are.
Thinking our thanks to Jody Lourie, Bloomberg Intelligence credit Anios.
We move next to my favorite space energy. We have something here at Bloomberg called Bloomberg New Energy Finance. The idea behind it is to provide data on commodities, power, transport, industries, buildings and agriculture and new technology.
This week we looked at battery storage, because you can't make a transition if you can't store the energy for more. We're dravened by Yea yu Sakhani, head of Energy storage research at Bloomberg, and.
We first ask Yayo just how much energy storage we realistically need going forward and how hard is it to get there?
To give you some context, when we talk about storage, we're talking about multiple types of technologies. You mentioned batteries specifically, we're really talking about many tarotwood hours of battery storage capacity that's a little bit hard to make it tangible.
But just to give you some context on where the market is today, we are at about one point two tarotwood hours of total batteries Tara what hours, Yeah, exactly, Yeah, so that's yeah, when you get to Terra's that's that's pretty big, it's bigger.
Thank okay, thank you exactly.
So essentially where we're at is like we've had record years in terms of total deployment of batteries in the world, and the this is in the form of both evs, so batteries that go in electric vehicles, that's in the Tesla's, the byds that you see being sold, as well as
in stationary storage markets. So that's like big grid batteries that are installed to shift solar and wind generation to evening hours as well as you know, some people are installing them in their homes because they would like to have some backup power or they have their own solar system and they would like to shift some of that energy to their evening consumption. So that's that's quite a lot and definitely records still continuing to be broken.
There is the efficiency of batteries. Is that getting better? And how does it get better?
Yeah?
I mean, good question. There, so they are they have been getting better. So a lot of the trajectory around batteries and improvement on technologies is very much focused around with immine batteries. We've seen over the last decade improvement in many aspects of the technology, so becoming more energy dense so you can carry more energy storage capacity.
I mean, like it's not one or two hours, maybe it could be days.
It could be it could be days. Although today the majority of the systems that we're seeing deployed are pretty much two four hours. There is some extension of that so that that means like we can shift more energy to maybe not another like the next day, but maybe then a day in the next week. But primarily today the majority of the use cases are are generally two four hours within a day.
Why is it so hard to increase storage life? Like, why is it so hard to go from a couple hours to longer?
So it's not technically hard to do, it's more about the cost. So once you start looking at multiple hours and multiple days, that means you have to add more
energy storage duration, more capex to that project. And if there isn't really a mechanism for you to be paid for that additional investment that you're adding the more batteries for for duration, You're not really going to want to do that as somebody who's building these batteries, and so it's it's a lot of it is related to what is the market paying for today and what the market
needs to day in the future. Our expectation and based on VNIF analysis, is that we're going to see longer duration needs and that's primarily because we're going to be we're going to need to be shifting more solar and more WIN generation to other hours and for longer periods. If we're decommissioning those gas plants that are currently providing that service.
What are the next in terms of batteries and stores, what's the next thing that lay people like Alex and I and John we should be looking for thinking.
About so some exciting things aside from the market level stuff, which is like as I mentioned, record levels of battery capacity being deployed. Probably it's more about like the evs becoming more more affordable. So if you want to go into the store and buy instead of buying conventional car, you want to buy an electric vehicle, actually having that at a price point that's more accessible for your focket. That's essentially a factor of multiple things, one of which
is the battery costs. So for the battery costs to come down, which a big portion of an electric vehicle cost, that actually makes those.
Big coming down.
They are coming down, and that's actually a major story for this year. It's the fact that we've seen batteries at record low prices, especially in China, but that's starting to have a knock on effect in other markets in the world as well, and so there's a lot of
factors around the markets related to that. There's huge over capacity in the battery manufacturing sector in China today, and then there's the back of that intense competition of the battery manufacturers in the Chinese market, and that's essentially really putting a lot of pricing pressures downwards in that market.
Before I let you go to subsidies help from governments to make all this happen.
Yeah, absolutely so. I think in the context of the US specifically, we've seen a lot of gigafactories being announced in the US at the back of the Inflation Reduction Act. They provide multiple types of subsidies. A major one is for the production of batteries, battery cells and battery modules, which are the building blocks of batteries that you see in electric cars, stationary storage. And that's a significant amounts thirty five to forty five dollars per kilo what hour
for the production of these batteries. And so we've seen a lot of gigod factories announced, although as of late there's been some delays to some of those announcements because of the slowdown around av demand growth.
Our thanks to Yeyu Sakhani, head of Energy storage research at Bloomberg and.
EF coming up on the program laingre retailer Victoria's Secrets, appointing a new CEO to lead its turnaround more in details.
Next, you're listening to Bloomberg Intelligence on Bloomberg Radio, providing in research and data on two thousand companies in one hundred and thirty industries. You can access Bloomberg Intelligence vmb I go in the terminal.
I'm Paul Sweeney and am Alex Deal and this is Bloomberg.
You're listening to the Bloomberg Intelligence podcast. Catch us live weekdays at ten am Eastern on applecar Play and Android Auto with the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station. Just say to play Bloomberg eleven thirty.
We move now to big tech and Google. This week we heard the US Justice Department is considering breaking up Alphabet's Google.
This comes after a landmark court ruling found that the company monopolized the online search market.
For more.
We are joined by Jen Reeed, Bloomberg Intelligence Senior litigation Analyst.
Your first ask Jen, what exactly the DOJ is thinking about doing when it comes to Google.
You know, now push comes to shove with this case because it hasn't the DOJ hasn't really talked too much about remedies. It's been working on liability in it won, and it won pretty resoundingly. So now it has to think about what it wants to ask the judge to do to remedy what the judge found to be anti
competitive about what Google's been doing. And I have to say that the idea of a structural request or a breakoup's been around since twenty twenty because the Department of Justice inserted it into the first complaint it filed back in October of twenty twenty. It said, we may be asking the judge for structural relief as necessary, and it's something the DOJ's thinking about, and I don't think it's
a surprise. Why not go for it? You know, there's kind of a big as bad mentality right now, and if that's the case, then you want to break apart these dominant firms and they have this win, why not try to go for the gold on this?
So that's the case, though, I mean, is it one of those things where they're going to go for it but really it's going to be okay and they're not going to do it, and they're going to do something else, and then what's that something else instead?
Look, I think they will. It's going to be up to the judge. And my gut here is that the judge probably would not order that kind of drastic relief. I just think that the judge was really specific here about finding that it's the default agreements that Google had entered into that were anti competitive, and what was harmful about them was that it did not allow the rivals to gain the data they needed through searches to have scale to be a good enough search engine. And those
are two big issues. So if those are the two things that are anti competitive. My suspicion is the judge will say, hey, no more default, no more payment to be the default search engine at these key search access points. And by the way, maybe you need to share some of this data you've collected over the years through all these searches with these to give them a chance to get better. Those are two options. And leahon Island's reporting was great about also this AI issue and concerned about
using its dominance to get a lead in AI. And maybe the DoD will do something there.
Too, because the AI thing is the one that I think has a lot of people concerned, not investors, but just people think about AI and what it means for privacy and all these other issues. What does it mean for jobs and security and all these things which the market nobody has an idea and certainly not the courts or regulators here. But what are Google's defenses here here, given that they did lose that anti trust case.
I think one of the things Google will do will point to language by the judge, And actually there was quite a bit of it in the complaint about the fact that it really has been a great innovator, that it's been ingenius, that the fact of the matter is it developed the best quality search engine in the world by putting in money, by putting in innovation, by hiring
great engineers and ingenuity. The judge did say that, and also the judge, by the way, said even though Google had obtained a monopoly position, it continued to innovate, even though it didn't really have to once it gained that spot. So Google will say, look, you know, you have no guarantee that that same kind of innovative spirit will be behind the parent of this new company. If you cleave offf Android or cleaveoff Chrome and it's run by some other entity, you know that might not be in that
entity's DNA. You have acknowledged that we're innovators and that will continue to innovate, and it makes the most sense for these assets to stay in our hands. That's what I think Google.
Will say, all right, our thanks to Jen Ree, she's Bloomberg Intelligence senior litigation analyst.
We'll turn out to news in the banking industry, Bank of Nova Scotia has agreed to buy a minority stake in the US regional bank Key Corp. For about two point eight billion dollars.
This comes a Scotia Bank makes good on its plans to invest more capital in the US.
For more on this, we were joined by Herman Chen Bloomberg Intelligence, senior analysts for US regional banks.
I first asked Herman to walk us through what Key Corp actually was before Scotia Bank got involved this week.
Key Corp regional bank based in Ohio, Cleveland, strong presence in commercial ending and has a really robust investment bank and capital markets capability for its size. On the flip side, the bank has been really pressured by the higher interest rate environment. It got caught off sides a little bit by both its hedging strategy and its investments in low yielding securities when interest rates were near zero. So it's margin and profitability has lagged the peer group over the
past couple of years. That being said, things were improving and didn't require any additional capital infusion. There was on a path to self help. Margin had already reached the bottom, but now with the two point eight billion capital infusion from Scotia Bank, they can accelerate that earnings profitability improvement story.
How long does it take to get something like this done? Like has this been in the works for a while or what.
Yeah, it seems like based on both the calls that that Key Corp and SCOO been conducted, the CEOs had ongoing conversations about a potential investment. From what I understand, Scotia Bank wanted to expand in the US and had done a lot of due diligence in looking at opportunities,
and Key Corp was their top choice. So it adds a great earning stream and exposure to the US for Scotia Bank and for Key Corp. It really improves its capital and liquidity and really puts them on offense rather than playing defense for the past couple of years.
How are the banks like Key Corp doing as interest rates may fall somewhat soon.
Yeah, I guess I would contrast it with a tumult of March and April of last year. The banks had largely been very defensive pretty much up to the end of last year, reducing its lending capacity, trying to improve its capital and liquidity ahead of both fears about deposits leaving and also higher regulatory burden. Right now, it seems
like they're in a much stronger position. Capital has been built up, they're back to lending the only issue is there's not a lot of demand, and the banks are positioned for potentially lower interest rates that can improve some lending going forward. They've had a lot of the potential rate decline, so they're in a fairly good position to really prosecute the opportunity.
What about deposits? Has deposit flight stopped, particularly if rates wind up coming down. I'm just waiting for my market's account all of a sudden started to tick lower and yield where are we here with that?
My high savings account is already ticked down in anticipation for Rencooks, So American Express, I'm not a big fan of that. I would say that the posits have really stabilized. There's no real rush to build deposits now because as I said before, there's not a lot of demand for the lending site, so you don't need a lot of deposits to really fuel that muted demand appetite out there
for loans. That being said, the positle cards aren't rising either, and they're pretty stable because the FEDS stabilized the Fed funds rate for a bit now, and we'd expect, you know, some stable margin. Depending on the bank, some could be down over the next year just based on their balance sheets.
Are there other potential targets for investments from other banks in this kind of scenario.
Yeah, from what I understand that there's a unique way of accounting for the Canadians. A small portion of investments in financial institutions has as a positive capital calculation, so it might be more focused on the Canadians in general. But that being said that, we have seen some pickup in traditional m and A activity in the United States.
Discover Capital one is the biggest one that we're still waiting for regulatory approval on, and then there's some smaller banks that have done some deals as well, So it seems like that the activity is going to rebound even more once we get rate cuts.
Our thanks to Herman Chan and Bloomberg Intelligence senior analysts for US regional banks.
We move next to the lingerie retailer at Victoria's Secret. This week we got news at Victoria's Secret is poaching the top executive from Rihanna's Lingerie brand to lead the retailers turnaround.
Hillary super will replace Martin Waters, who was terminated as CEO and resigned from the board.
For more on this, we are joined by Mary Ross, Gilbert Bloomberg Intelligence senior equity analyst covering retail.
We first asked Mary if this week's news is a big deal for Victoria's Secret.
I think this is a big deal. Being a woman focused brand, we think that Hillary Super And as you mentioned, she was just the CEO at Rihanna's brand Fenti x Savage, and that's a lingerie company. It's a teeny, teeny tiny company. But Hillary has three decades of experience, was the chief of the Anthropology brands more recently and prior to that, she's worked at a number of other brands, including American Eagle.
And speaking of competition to Victoria's Secret and why they've lost share, American Eagle has a brand called Airy and that's about, you know, one point six billion dollar business. So Victoria's Secret has lost market share, but they have been in a turnaround mode for the past three to
four years and we're starting to see some traction. But we really think that with Super's understanding of the consumer, working with multiple brands and really getting the brand heat, we think that she could really make a difference here at the HELM. So we think this is good news, and of course it comes as they say that they just beat two Q earnings. You know, they gave preliminary estimates for their second quarter.
When did things really fall apart for Victoria's Secret, what was the trigger?
Yeah, the trigger was really this sort of me too move movement, and given that it was a brand that was sort of focused on the perspective of what made women sexy from a male perspective rather than from the female consumer perspective, and that has has shifted. It used to be part of limited brands. It was then spun off. They've become a more inclusive brand. I mean, how many companies out there can say that they have one hundred percent equal pay across the business. I don't know of
any others, but they have achieved that. You know, it's third party documented or certified, I should say. So, they've made tremendous progress. They've really improved the lineup.
But I think kind of getting it to.
The next level and really getting that turnaround to a point where they can get back to growth. I think this is the right time at the moment to pivot and bring in somebody like Hillary super So. I think it's very, very exciting for the company at this time.
Well, Mary if the industry has changed, that the lingerie part of the business has changed. Where are success coming from in that new world?
Yeah, well, so there's a couple of things that happened. I mean, the category had been growing for many years and had been expected to grow, but they did experience a slow down last year. But we're already starting to see improvements in the category, at least in the US. Internationally, by the way, Victoria's Secret is growing in the double digits. I think in the last quarter international was up eleven percent. So the category did weaken, but it looks like it's
starting to turn back up again. And really what happened is with this sort of me too moment, it became more inclusive, and so Victoria's Secret has adopted their brands to be more inclusive, and you know, once again to come from the perspective of a woman and what the woman needs, you know, and it's a whole assortment. And if you go into the stores, you will see a dramatic improvement in the assortment that they have. In the employee culture. I would say it's very positive, very exciting
environment when you go into the stores. But they do need to remodel most of the stores. They've only been able to touch a small percentage of the store base so far, so there's still more to go. And then the Pink brand is really at an earlier stage of a turnaround, but we're already seeing fallen assortments really improve. And they brought on Natalia Bryant as a brand ambassador, so that's pretty exciting. We're heading in the right direction.
Thanks to Mary ros Gilbert, Bloomberg Intelligence and your equity analyst covering retail.
This is the Bloomberg Intelligence podcast, available on Apples, Spotify, and anywhere else you get your podcasts. Listen live each weekday ten am to noon Eastern on Bloomberg dot com, the iHeartRadio app, tune In, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg terminal count