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Back to earnings under Armour shares. Let's take a look. They are down eighteen percent. They forecast worse than expected sales and profit for the current quarter. Here to break it all down for us, as Poohim Goyle, senior US e commerce and retail analysts at Bloomberg Intelligence poon em thanks for coming out this morning. So weren't they just I'm confused because it wasn't under Armour just starting to make this turnaround planned.
Yeah, you know what, We've seen under Armour make several attempts at a turnaround in the last decade. So this is another attempt. And they do have the right pillars in place, you know, focusing on brand equity, forocusing on full price sales. The issue is that the macro's not cooperating. We have one hundred million dollar impact on their costs from tariffs that they're expecting. We're seeing that they want to push full price in an environment where promotions are
picking up, so that's going to cost them sales net net. Basically, that means that sales are going to be down mid to high single digits in the next fiscal quarter, and North America, which is a clear key region for them, could be down low double digits. So the turnaround isn't shaping up like we expected, and I just think it needs a lot more time right now.
That is actually what caught my eye to the weak North America outlook. I think they're forecasting a fourteen percent to sixteen percent drop in North America sales, which is massive. So what then, is your view of under Armour's strategy, especially compared to its peers like Nike or Adidas or Adidas depending on who you're speaking with.
Yeah, so I think each of them are pursuing the strategy in a similar way in that they're focusing on the profitable channels to drive growth. So when you look at Adidas, you know they've been doing really well for the last few years, and it's in part by their effort to really push innovation and product to the consumer in the right channels, and really they've done a great job When it comes to Nike, they're clearly in turnaround mode.
They are moving forward with their turnaround. We are starting to see signs of you know, things getting better, especially on their new products. That said, Nike hasn't reported yet. And Nike too has exposure to Vietnam when it comes to their production, so they will to be under pressure. But we don't think that promotions go away completely.
Right.
Nike is liquidating a lot of inventory throats direct channel and the promotions are very high. So when you think about the customer, they're going to see Nike being discounted aggressively because they're trying to liquidate inventory, and then you see under Armour going at full price what our customer is going to buy, right, it just means that under Armour isn't going to be able to delay over the growth that they're expecting to because of the current promotional environment.
So with that said, I mean, the CEO was talking and said that they want to focus on strengthening the brand, positioning right premium products. They came out with this U a halo footwear you know line, is that the answer for them?
The answer is, in part, yes, you need to have you know what he talked about on the call, which I think every brand needs to do, is they need to have a good, better, best positioning within their product lineup. So yes, you can go ahead and introduce premium product, but remember under Armour isn't really viewed as a premium brand like Nike is, right, So you're trying to change customer perception here, and that doesn't happen overnight, so it'll
take time. I think the value chained that under Our plays and is still very very important to their brand and their ability to keep prices low there is going to be critical. It'll be nice to see what they do on the premium side, but I don't think they can hang their hat on that for a turnaround just yet.
All right, you said it all. Under Armour share still down nineteen percent. That's Punam Gooyle, senior US e Commerce and retail analysts Over at Bloomberg Intelligence.
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And welcome back to Bloomberg Intelligence. I'm Lisa Matteo sitting alongside Isabelle Lee. Paul Sweeney has the day off. All right, we're going to get back to earnings. Wendy's cut their full year sales guidance. They posted a bigger than expected quarterly decline. So what is going on at the burger chain. Well, let's bring in Michael Hallin. He's Bloomberg Intelligence senior restaurant and food service analysts joining us live from Princeton. Mike's
thanks for coming in. What can you tell us about Wendy's. What was the big sticking point for them?
Oh, listen, the previous management team through a lot of promotions at the wall and none of them are really stuck. So you know, the danger of you know, promoting a lot of different products is twofold.
You know.
Number one, it makes the operations suffer, right, So it's it's harder to execute in the kitchens, it's harder to execute at the front of the house. Speed of service ends up slipping, you know, quality of the food could suffer because it's it's not served hot, right, and then marketing so consumers get confused, right, Like what we saw at McDonald's was run two promotions over the quarter, right, Wendy's ran a handful. So when you're putting what do you put the marketing dollars behind?
Right?
But if you start promoting something for a couple of weeks and then switch your message, people don't really know why they're coming to your store, don't have a good reason to come to your stores. And so that's why we saw this massive underperformance in the second quarter, about four hundred basis points versus the rest of quick service restaurants.
And what is your take on when they's decision to cut it's twenty twenty five EPs outlook below the prior range and analyst expectation. Is it more structural weakness like consumer trends or is it really more one off pressures and how long do you think those issues might last?
So this is one off pressures. I mean you saw McDonald's outperform the market by two hundred basis points, right, and so this is primarily self inflicted. You know, restaurant consumers are spending money. They're more discerning, however, right, and so the chains that are providing a good, consistent experience, good value for the money, that's where people are spending
their money. They don't want to go out and spend a lot of money and have a bad night, a bad lunch, a bad dinner, whatever it is, right, And so that's why we're seeing this huge bifurcation and there's a widening gap between winners and losers. And so for Wendys, when you have bad operations, right, and when you have bad service, it takes time to regain that customer trust. So, you know, they got it to pretty terrible SAMSAR sales here in the US for the rest of the year.
They were down five to six percent in July, which is a horrific number, you know, way underperforming. The street, which is over was just about a one and a half percent increase. So this is going to take time to.
Fix now, Mike. One of the things you mentioned these promotions, right, but Wendy's has also done things like expanded their operating hours.
Right.
They're making this push for breakfast late night business. I'm guessing that's not working. I don't think breakfast when I think Wendy's.
I don't know, Well, this breakfast has been an issue for years now since they debuted it right there, and they debuted breakfast into it, you know, at a time when breakfast sales have been slipping, and they're slipping even more this year because it's just an easy meal to skip.
You can grab a bagel and a coffee and easily make it to lunch, right, And so they've been trying to gain steam in this daypart, and so they've been actually spending corporate dollars in addition to the franchise e dollars to try to expand that day part at a time when people are pulling back at breakfast and it's been a disaster for their lunch and their dinner business.
And Wendy has also reduced his dividends significantly, and it's CEO is also stepping down. So how do you think these capital allocation and leadership changes might affect the strategy moving forward?
Yeah, Kirk Tanner basically lit this thing on fire and ran for the exits. It's you know, he made a lot of management switches, moved a lot of people around the organization, fired people, brought new people in, you know, and then left right before things fell apart. Right, And now they have an interim CEO who said the right things on the call, right, But he comes from ups and he's only been in the restaurant industry since December, right,
so there's definitely a void at the top. We would love to see them find a good, strong restaurant operator slash marketer to run this business going forward.
So what's the winning formula for them? What do they have to do?
Is it?
Is it more promotions and more collaborations.
No, there's too many of those, So they're going to cut They're going to cut back on them and get the operations right right. And once you get the operations right, meaning people go and they have a good experience, speed of service is on point right, the food gets to
you hot right, you have a good, enjoyable experience. Once they get that stuff nailed, then they can start pushing on the marketing right, because you don't want people to come back to your restaurants and then have another bad experience. Then you're really going to be up the creek without a paddle, right, And so that that's what it's going to be about. It's going to be about nailing the operations.
Then once they're confident in that, then they can start pressing more, do some more collaborations, whatever, institute more menu items, and that's what management talked about on the call, they said they're going to push a lot of the initiatives they had original only planned for the second half into twenty twenty six. But you know, it was a crazy call.
I mean they were talking about how a lot of these initiatives they were just basically pushing out with very little testing, which is not how you run a restaurant business.
It's not I remember that Taki's collapse. They just didn't work out. Thank you Michael Hammon for joining us, the Bloomberg Intelligence senior Restaurant and food service analyst.
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There has been a ton of stories in tech and the news flow is continuing. I want to start with this first one, Meta picking up Pimko blue out for a twenty nine billion dollar data center deal. So here to talk more about it, Man Deep Sink, Bloomberg Intelligence senior Tech industry analysts, Mandy, thanks for joining us. So twenty nine billion dollar data center deal. I mean that's that's pretty big.
No, it's only if you don't look at their twenty twenty six CAPEX number, which could be north of one hundred billion. So look, the numbers are getting bigger and bigger in the world of AI infrastructure. And for a company like Meta, which was spending maybe thirty billion dollars in capex every year and has tripled its capex probably two one hundred plus next year, they need some external help when it comes to you know, procuring the land,
getting power twenty four to seven. I mean, at the end of the day, Meta is an application company that you know does ads, and they're trying to get in their own chips as well, but that's not their core competency. So it makes sense that you know, they're partnering with these large players on the infrastructure side because it will turn out to be a supercycle, and you know, the more partners they have in terms of these AI infrastructure buildouts, I think it will help them in the long term.
But is this kind of public private financial structure common for large tech infrastructures like Meta? Are they pushing into new ground and what are the benefits of using debt versus equity?
Well, I mean now with one hundred billion dollar CAPEX, it's more than their free cash flow every year. So up until now, you know, we were in that thirty to sixty billion dollar range. Metas annual free cash flow is around seventy billions. So from that perspective, they could afford to fund it on their own, I mean, because the scale keeps getting bigger and bigger every year. And look,
others may have the same problem. Microsoft has also talked about one hundred and twenty billion dollars run rate probably
in twenty twenty six as well. So external financing will come into play because, as I said, these companies have the lllms, they have the data, the algorithm, the applications, but they don't have the expertise in terms of procuring power twenty four to seven, and you need a lot more power when it comes to AI scale that everyone is imagining, you know, twelve months from now, twenty four
months from now. So from that perspective, also external expertise in terms of procuring land, setting up large clusters, how to power them, it does make sense that they have a private partnership there.
Now, I always hear you're talking about capex, that's so much je, But when are we going to rese that point where peop are going to start saying, you know what, where's my return on investment? Like, I see you're spending you know this much? But when are people going to start to turn the question a little bit?
So I mean, look at how far open ai and Nthropic have come. Right, So we know with open ai they are at a twelve billion dollar and we'll run rate now revenue run rate, and Thropic has five x. It went from one billion at the start of the year to five billion dollar rund rate. Look at Microsoft's cloud growth number. They went to thirty nine percent growth in Azure, seventeen percent left from AI. So look, you're not going to see a very clear distinction between what
is the AI contribution. In the case of Microsoft, it's very clear. But for Meta, they talked about their ads getting better, and when you look at the growth rates, Meta grew twenty two percent in the quarter. Compare that to Snapchat four percent Pinterest and these are companies that are fifty times smaller in scale than Meta. So the fact that Meta is growing that fast, they're sort of proving to everyone that, look, there is an advantage to
owning the infrastructure to investment in AI. And even though the model is not similar to a Microsoft where they are renting the cloud capacity and it's an old reredictable revenue stream meta, I think has a higher bar to prove in terms of your ROI question. But clearly, I think the fact that they did so well this earnings they already have an upper hand when it comes to digital ads.
What about when it comes to soft Bank and the Stargate AI push. What's significance of soft Bank buying the fox Con plant in Ohio and can you talk about their bigger ambitions for AI?
I mean soft Bank also has a big announcement from earlier in the year, you know, five hundred billion up to five hundred billion dollars in investment. So all these companies have to figure out how is it that they're going to deploy the money. So in the case of soft Bank, I mean, they either partner with TSMC or fox Con because they don't assemble their own chips. They don't do, you know, semiconductor manufacturing, So partnering makes a
ton of sense here in the United States. And that's where that five hundred billion dollar number you can show that this is how much I deployed this year, and it kind of shows your roadmap for the following years as well, because now that you're investing in one facility, chances are you'll probably add to that next year and so on.
All right, man deep Sing, Always a pleasure. Glad to have you here in the studio. Bloomberg Intelligence, senior tech industry analyst on the latest tech announcement.
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All eyes have been on the Central Bank and interest rates, right, but there's a new book out. It's taking a look into how decisions behind the fit, the ECB, etc. They're constrained by the natural rate of interest. So what exactly is this? What we're going to do is go to the expert. Is Tom Orlick, Bloomberg Economists chief ecomomist joins us from DC. Thanks for joining us, tom So. The book is called The Price of Money, A Guide to the past, present and future of the rate Natural rate
of Interest. I got to start by asking you, what exactly is this, this natural rate of interest?
So thanks for having me on, Lisa. So the natural rate of interest, it's kind of a won key concept, right, but if you're an investor in the treasury market, if you're an investor in the equity market, if you're an investor in the real estate market, it's pretty important. The natural rate of interest is the rate of interest which balances the supply of saving and the demand for investment
in the economy. And for a long time, from the nineteen eighties through the twenty tens, it was falling, right. That's why Larry Summers was talking about secular stagnation. That's why the US Treasury was borrowing at such low rates
for much of the last decade. The big argument that we make in our book, a book with essays by my colleagues at Bloomberg Economics, edited by Stephanie Flanders, Jamie Rush, and myself, The big argument we make is that the forces that were dragging interest rates down for much of the last four decades have now reversed, and we now have gone from a world where there's too much saving, not enough investment, and so low interest rates to a
world where there's not enough saving, too much investment, and so the US Treasury and everybody else is going to be paying much more to borrow.
So what are the big forces among demographics, technology, and geopolitics that you think will drive the natural rate higher in the coming decade.
So it's a great question, Isabelle. So let's think about what was dragging interest rates down. So first of all, you had too much saving. The baby boomers were working and saving money for their retirement. China, Saudi Arabia, other petro states were pumping their savings into the US treasury market. And then on the investment side, well, governments had their debt under control, government deficits were low, and growth was weak, which meant the private sector didn't have a huge incentive
to invest. So for a long time, from the nineteen eighties to the twenty tens, the pattern was too much saving, not enough investment, and falling interest rates. In the last decade, all of those trends have started to reverse. The baby boomers have retired, so they're not adding to their pensions, they're spending their pensions down. China, Saudi Arabia, they're not putting any money in the US treasury market anymore, and
US treasury borrowing has exploded. President Trump inherited a deficit of six point four percent of GDP in twenty four and with his One Big Beautiful Bill, threatens to send that deficit higher. So the pattern is shifted from too much saving, not enough investment, and falling interest rates to not enough saving, too much investment and rising interest rates. Donald Trump wants a new FED chair to cut the
short term policy rate. Even if he does that, we think these big structural forces are going to keep longer term borrowing costs elevated in the years ahead.
Yeah, and you mentioned that, So your book suggests that it's not going to be that simple to just, you know, get a new FED chair.
Correct, Yeah, that's right. So there's there's so much excitement around the question of who the next FED chair is going to be. Yesterday we had Stephen Myron, the head of the Counsel of Economic Advisors, nominated to the FED Board. There's talk that perhaps Kevin Hassett, the head of the NEEC, perhaps Kevin Walsh, former member of the FMC, could be the new FED chair. And the market is betting that whoever it is is going to move the dial and
start delivering a lower FED policy rate. But guess what, it's not the FED which has the determining force on the cost of borrowing across the US economy. It's actually those bigger dynamics, the balance between saving and investment. And the big argument we make in our book is that that balance has shifted, and so it doesn't matter who the FED chair is, borrowing costs are going to be structurally higher.
And you mentioned this earlier that if the cost of money keep rising, what then should governments, businesses, and individuals do differently to maybe adapt.
So let's think about what impact very low borrowing costs have had in past decades. So first for governments, when borrowing is cheap, then governments can keep on piling on debt and it's still sustainable. Think about equity market investors or property market investors. If you've put money to work in the US stock market or in US real estate pretty much anytime over the last four decades, you've made
quite a lot of money. And part of the reason for that is that interest rates have been low, So your cost of borrowing to make stock or property investments has been low. Now, with interest rates rising, all of those dynamics swing into reverse for the US, the US Treasury could be facing a world in the years ahead where the cost of interest payments on their debt is more than total US spending on the military, on defense,
on the Pentagon. For investors in the stock market or the equity market, that upward pressure on asset prices from low interest rates, well, at a minimum, I think we can say that's not going to be guaranteed going forwards, and we could well be moving into a world where structurally higher borrowing costs actually mean downward pressure on stocks, downward pressure on real estate.
So, Tom, what can you tell us about You know, where is the natural rate of injuries? Where is it headed?
So the focus of our book is on the natural rate of the ten year horizon. Now we think it's headed up from a low of below two percent in the mid twenty tens to around two and a half percent today, and it's going to continue edging higher in the months and years ahead. Now, what does that mean for the ten year treasury the rate, which is probably
the most important one in the whole global financial system. Well, we think something in the four to five percent range, something around four point five percent is going to be the new normal in the years ahead, doesn't mean there isn't going to be huge variation around that. If the Fed cuts policy rates, if that becomes the narrative for the next few months, it's going to impact long term
borrowing costs. But we think the new normal around which we're going to be fluctuating in the months and years ahead for the ten year treasury is around four point five.
Percent and we have less than one minute left. But you mentioned risks like AI war and climate. Give us a sense on how exactly those might drive up the natural rate.
So maybe we'll just talk about the AI piece of it. So, AI, if it delivers on its promise, is going to be a game changer for growth. And if the economy starts growing faster, well that's going to create all kinds of investment opportunities. Investment in the data centers to power AI, investment in re configuration of factories and offices to take
advantage of the new technology. And if investment demand goes up, well that changes the saving investment balance and that will be another force which adds pressure for interest rates to rise higher.
All right, tom Orlick, thank you so much. Good look at the book Boomberg Economics, Chief economist here at Bloomberg.
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