1 00:00:02,720 --> 00:00:10,600 Speaker 1: Bloomberg Audio Studios, podcasts, radio news. You're listening to the 2 00:00:10,600 --> 00:00:14,560 Speaker 1: Bloomberg Intelligence Podcast. Catch us live weekdays at ten am 3 00:00:14,640 --> 00:00:17,880 Speaker 1: Eastern on Apple, Cocklay and Android Auto with the Bloomberg 4 00:00:17,920 --> 00:00:21,000 Speaker 1: Business App. Listen on demand wherever you get your podcasts, 5 00:00:21,360 --> 00:00:23,280 Speaker 1: or watch us live on YouTube. 6 00:00:23,760 --> 00:00:25,320 Speaker 2: I feel like we have to talk about what's going 7 00:00:25,360 --> 00:00:27,280 Speaker 2: on in biotech. It's the m and a Monday, Paul, 8 00:00:27,360 --> 00:00:29,600 Speaker 2: and there's been this trend of course of the big 9 00:00:29,600 --> 00:00:32,360 Speaker 2: pharma company is desperate to refill their pipeline. 10 00:00:32,400 --> 00:00:35,480 Speaker 3: It's getting competitive now and they're going competing on price. 11 00:00:35,520 --> 00:00:37,240 Speaker 3: That's what I'm kind of noticing here went from b 12 00:00:37,400 --> 00:00:40,320 Speaker 3: like a rare to find it now it's everywhere. Yeah, 13 00:00:40,320 --> 00:00:41,960 Speaker 3: and now they're competing on price. 14 00:00:42,080 --> 00:00:43,800 Speaker 2: So it's a good thing if you are looking to 15 00:00:44,040 --> 00:00:46,720 Speaker 2: get in on the antiobest drugs and you're looking for 16 00:00:47,240 --> 00:00:50,120 Speaker 2: a more affordable price, because the companies are doing what 17 00:00:50,159 --> 00:00:53,280 Speaker 2: they can to appeal to consumers. Michael shat Is, Bloomberg 18 00:00:53,320 --> 00:00:57,840 Speaker 2: Intelligence Senior Farmer, Senior pharm of Biotech analyst, joining us 19 00:00:57,880 --> 00:01:01,760 Speaker 2: now and Michael Novo Nordoice is now undercutting Eli Lilly's 20 00:01:01,800 --> 00:01:04,600 Speaker 2: obesity drug price. Tell us exactly what they're doing here 21 00:01:04,640 --> 00:01:07,800 Speaker 2: because my understanding is that both these companies recently worked 22 00:01:07,800 --> 00:01:09,959 Speaker 2: out a deal with the White House to reduce prices overall. 23 00:01:11,720 --> 00:01:14,400 Speaker 4: Yeah, thanks, so absolutely, this is I mean, this is 24 00:01:14,400 --> 00:01:16,679 Speaker 4: obviously ahead of the White House deal. So you're seeing 25 00:01:16,880 --> 00:01:19,680 Speaker 4: starting doses being reduced two hundred dollars per month, and 26 00:01:19,720 --> 00:01:23,039 Speaker 4: then doses thereafter being charged at an average of three 27 00:01:23,120 --> 00:01:25,920 Speaker 4: hundred and fifty dollars per month compared to five hundred 28 00:01:25,959 --> 00:01:29,479 Speaker 4: dollars previously. So I mean, you know, those prices kind 29 00:01:29,480 --> 00:01:31,520 Speaker 4: of aligned to you know, the pricing in the in 30 00:01:31,520 --> 00:01:35,880 Speaker 4: the White House statement coming from trump RX, but compared 31 00:01:35,920 --> 00:01:38,840 Speaker 4: to Lily, I mean, they're undercutting them by about you know, 32 00:01:38,880 --> 00:01:42,360 Speaker 4: one hundred dollars at each dose. And this is basically 33 00:01:42,640 --> 00:01:45,920 Speaker 4: a ployed to basically compete for new patients starts. As 34 00:01:45,920 --> 00:01:48,760 Speaker 4: we know, Lee's got the more effective product in terms 35 00:01:48,800 --> 00:01:52,800 Speaker 4: of weight loss profile, and they're also you know, executing 36 00:01:52,840 --> 00:01:55,000 Speaker 4: better on the launchers. And I think that's clear from 37 00:01:55,040 --> 00:01:58,320 Speaker 4: three key results where we saw contrasting fortunes between those 38 00:01:58,360 --> 00:01:59,600 Speaker 4: two particular drug makers. 39 00:02:00,600 --> 00:02:02,800 Speaker 3: Mikey, give us a sense of this marketplace here, what 40 00:02:02,920 --> 00:02:07,200 Speaker 3: percentage of the addressable market is actually taking these obesity 41 00:02:08,120 --> 00:02:10,919 Speaker 3: drugs versus because it seems like as the price comes down, 42 00:02:11,000 --> 00:02:13,600 Speaker 3: more and more people will be able to get access 43 00:02:13,639 --> 00:02:14,760 Speaker 3: to them. 44 00:02:15,040 --> 00:02:17,880 Speaker 4: Yeah. Absolutely, I mean it's a highly priced sensitive market. 45 00:02:18,240 --> 00:02:20,600 Speaker 4: When we look at penetration rates in the US, you know, 46 00:02:20,680 --> 00:02:24,480 Speaker 4: low single digits, that's obviously going to accelerate as these 47 00:02:24,639 --> 00:02:29,360 Speaker 4: as these drugs become cheaper. Looking outside the US, penetration 48 00:02:30,080 --> 00:02:33,040 Speaker 4: rates are even lower. So there's you know, still significant 49 00:02:33,160 --> 00:02:37,440 Speaker 4: kind of you know, patient runway out there in terms 50 00:02:37,480 --> 00:02:40,560 Speaker 4: of US penetration. I mean, you know, the deal, the 51 00:02:40,800 --> 00:02:43,840 Speaker 4: White House pricing deal on GLP one drugs, you know, 52 00:02:44,880 --> 00:02:47,720 Speaker 4: supports kind of use of these these GLP one drugs 53 00:02:47,880 --> 00:02:50,480 Speaker 4: in Medicare, you know there we think that it can 54 00:02:50,600 --> 00:02:54,320 Speaker 4: unlock you know, seven to eight million patients. According to 55 00:02:54,360 --> 00:02:56,280 Speaker 4: a White House statement, I think they said ten percent 56 00:02:56,320 --> 00:03:00,560 Speaker 4: of Medicare beneficiaries would become eligible for GLP one drugs 57 00:03:00,840 --> 00:03:03,400 Speaker 4: based on the pilot program, and that's going to be 58 00:03:03,440 --> 00:03:05,800 Speaker 4: introduced in twenty six, and I think it's going to 59 00:03:05,800 --> 00:03:09,360 Speaker 4: become mandatory in twenty seven. And then they've also you know, 60 00:03:09,480 --> 00:03:13,200 Speaker 4: loaded the price in Medicaid too. I think the uplift 61 00:03:13,240 --> 00:03:15,240 Speaker 4: in terms of patients there is a bit harder to 62 00:03:15,240 --> 00:03:18,400 Speaker 4: deduce or or to kind of model, given that you know, 63 00:03:18,480 --> 00:03:20,880 Speaker 4: coverage is going to be on a state by state basis, 64 00:03:20,960 --> 00:03:24,760 Speaker 4: and there's also kind of different qualifying criteria, which again 65 00:03:25,160 --> 00:03:26,040 Speaker 4: is state dependent. 66 00:03:27,320 --> 00:03:30,280 Speaker 2: What does this mean, Michael? For the companies like Hymns 67 00:03:30,320 --> 00:03:33,880 Speaker 2: and Hers, the companies that make compounded copycat versions of 68 00:03:33,919 --> 00:03:37,280 Speaker 2: these antiobesity drugs, they've done very well. And I know 69 00:03:37,320 --> 00:03:39,320 Speaker 2: those stock for Hymns and Hers has been kind of 70 00:03:39,400 --> 00:03:41,840 Speaker 2: all over the place, but it is modestly higher from 71 00:03:41,840 --> 00:03:43,000 Speaker 2: where it was at the start of the year. 72 00:03:44,520 --> 00:03:46,600 Speaker 4: Yeah, I mean I think that whole you know, the 73 00:03:46,680 --> 00:03:49,360 Speaker 4: compounding situation. I believe that you know, one point two 74 00:03:49,400 --> 00:03:52,360 Speaker 4: million patients are on compounding GLP one at the moment. 75 00:03:53,120 --> 00:03:55,440 Speaker 4: That's based on kind of comments and Novo made during 76 00:03:55,480 --> 00:03:59,080 Speaker 4: their three key results. Obviously, loaning down the price would 77 00:03:59,160 --> 00:04:05,840 Speaker 4: kind of of the branded treatments would basically well, I 78 00:04:05,840 --> 00:04:08,280 Speaker 4: mean it would it would you know, lessen the delta 79 00:04:08,320 --> 00:04:12,160 Speaker 4: between you know, coffeecats and branded treatment. So I guess 80 00:04:12,200 --> 00:04:15,520 Speaker 4: it's a negative for for for these you know, compounded 81 00:04:15,560 --> 00:04:16,839 Speaker 4: jylpy one drug makers. 82 00:04:17,200 --> 00:04:19,359 Speaker 3: Mikey. When I look at the big cap farm of names, 83 00:04:19,480 --> 00:04:22,480 Speaker 3: is it as simple as I want to own the 84 00:04:22,480 --> 00:04:25,880 Speaker 3: ones with exposure to obesity market and not own the 85 00:04:25,880 --> 00:04:28,320 Speaker 3: ones that don't. Because I'm looking at your your slate 86 00:04:28,360 --> 00:04:31,400 Speaker 3: of stocks and you're either up thirty percent or you're down. 87 00:04:33,440 --> 00:04:36,120 Speaker 4: Yeah, I mean, I think you know there's a there's 88 00:04:36,160 --> 00:04:39,200 Speaker 4: a few large farmer names which which has entered the space. 89 00:04:39,839 --> 00:04:42,520 Speaker 4: You know, in the in the recent years, you've seen 90 00:04:42,560 --> 00:04:46,799 Speaker 4: kind of deals with russ and Zealand for an Amlin drug. 91 00:04:46,839 --> 00:04:51,920 Speaker 4: Most recently you've obviously got the fires and Metsarah m 92 00:04:52,000 --> 00:04:56,400 Speaker 4: and A deal. I mean, I think OBESTI is obviously 93 00:04:56,440 --> 00:04:59,120 Speaker 4: appealing given you know the size of the target population, 94 00:05:00,200 --> 00:05:03,279 Speaker 4: how underpenetrated it currently is, and you know, if you're 95 00:05:03,320 --> 00:05:07,760 Speaker 4: looking to you know, offset patent expirations later in the decade, 96 00:05:08,720 --> 00:05:11,560 Speaker 4: you know there's an abundance of kind of jill point 97 00:05:11,600 --> 00:05:14,480 Speaker 4: on products out there, as well as other assets too. 98 00:05:14,839 --> 00:05:16,640 Speaker 4: So I think that's the appeal of the space. It's 99 00:05:16,640 --> 00:05:20,200 Speaker 4: a large market, it's underpenetrated, and there's high demand for 100 00:05:20,200 --> 00:05:21,000 Speaker 4: these treatments too. 101 00:05:21,920 --> 00:05:23,440 Speaker 2: I mentioned em and A, and of course we know 102 00:05:23,520 --> 00:05:27,800 Speaker 2: that JANJ is making a purchase to increase its pipeline 103 00:05:27,800 --> 00:05:30,640 Speaker 2: to get away from relying on these older drugs that 104 00:05:30,640 --> 00:05:34,480 Speaker 2: have lost patent protection. Is every farmer company doing the 105 00:05:34,520 --> 00:05:37,599 Speaker 2: same things that you know they're not only strategy, but 106 00:05:38,120 --> 00:05:40,040 Speaker 2: is that the way they move forward? Is there anyone 107 00:05:40,040 --> 00:05:42,239 Speaker 2: who's kind of like in a good position and doesn't 108 00:05:42,279 --> 00:05:43,320 Speaker 2: need to make a deal. 109 00:05:44,880 --> 00:05:46,600 Speaker 4: I mean, I think that's always been part of the 110 00:05:46,680 --> 00:05:50,200 Speaker 4: large farmer model. They supplement kind of in house innovation 111 00:05:50,360 --> 00:05:52,840 Speaker 4: with extern of innovation, particularly if they want to get 112 00:05:52,839 --> 00:05:59,240 Speaker 4: into areas perhaps outside of their core competency. But I mean, 113 00:05:59,279 --> 00:06:01,880 Speaker 4: I think that's just the model in general. Biotechs always 114 00:06:01,960 --> 00:06:06,440 Speaker 4: been the pipeline for large farmer companies or release help 115 00:06:06,480 --> 00:06:07,960 Speaker 4: bell caut that pipeline. 116 00:06:09,320 --> 00:06:12,400 Speaker 3: Stay with us. More from Bloomberg Intelligence coming up after this. 117 00:06:16,040 --> 00:06:19,720 Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live 118 00:06:19,800 --> 00:06:22,919 Speaker 1: weekdays at ten am Eastern on Apple Coarclay and Android 119 00:06:22,920 --> 00:06:26,239 Speaker 1: Auto with the Bloomberg Business App. Listen on demand wherever 120 00:06:26,279 --> 00:06:29,799 Speaker 1: you get your podcasts, or watch us live on YouTube. 121 00:06:30,520 --> 00:06:33,680 Speaker 3: It is Merger Monday, and today we've got a financial 122 00:06:33,720 --> 00:06:37,680 Speaker 3: buyer making some headlines here. Clayton du Billier and Rice 123 00:06:37,960 --> 00:06:41,440 Speaker 3: now known as CDR. They agreed to buy Sealed Air 124 00:06:41,480 --> 00:06:44,800 Speaker 3: Corporation in a deal value in the packaging company that 125 00:06:44,880 --> 00:06:47,640 Speaker 3: invented the bubble brap six point two billion dollars. To 126 00:06:47,760 --> 00:06:50,760 Speaker 3: break this deal down, Leanna Baker, managing editor of the 127 00:06:50,800 --> 00:06:52,480 Speaker 3: deal's team, joins us live here in our Bloomberg and 128 00:06:52,480 --> 00:06:56,360 Speaker 3: Directive Broker studio so CDR Sealed Air six point two 129 00:06:56,480 --> 00:06:59,960 Speaker 3: billion dollars. Pretty interesting deal? Was this expected in the marketplace? 130 00:07:00,120 --> 00:07:03,359 Speaker 5: Sure? So CD and R we had picked up last 131 00:07:03,400 --> 00:07:05,680 Speaker 5: week had been in talks to buy Sealed Air and 132 00:07:05,720 --> 00:07:09,039 Speaker 5: the biggest packaging deal in a long time. And today 133 00:07:09,040 --> 00:07:10,480 Speaker 5: we see it get to the finish line on this 134 00:07:10,560 --> 00:07:13,320 Speaker 5: merger Monday. And what's interesting here is that while the 135 00:07:13,440 --> 00:07:16,080 Speaker 5: enterprise value is over ten billion, which is pretty big, 136 00:07:16,800 --> 00:07:19,600 Speaker 5: the share price is sort of below where it's trading 137 00:07:19,800 --> 00:07:22,360 Speaker 5: on the margin. So not a huge premium here, In fact, 138 00:07:22,520 --> 00:07:24,320 Speaker 5: no premium. It's sort of a take under. And if 139 00:07:24,320 --> 00:07:28,520 Speaker 5: you see where shares are trading, you know, investors aren't 140 00:07:28,560 --> 00:07:33,600 Speaker 5: super thrilled, but it is you know, still a good 141 00:07:33,640 --> 00:07:35,400 Speaker 5: sign for this to get to the finish line. We 142 00:07:35,480 --> 00:07:37,520 Speaker 5: are seeing a lot of take privates in this m 143 00:07:37,560 --> 00:07:40,720 Speaker 5: and a boom private equities putting their dry powder to work. 144 00:07:41,200 --> 00:07:42,960 Speaker 5: This is the latest example. 145 00:07:43,040 --> 00:07:45,080 Speaker 2: Was this an obvious candidate for takeout. 146 00:07:45,600 --> 00:07:50,360 Speaker 5: It's funny that you asked, because packaging has been sort 147 00:07:50,360 --> 00:07:53,000 Speaker 5: of a predictable area of revenue, and we were sort 148 00:07:53,000 --> 00:07:55,560 Speaker 5: of expecting a time of economic uncertainty that we would 149 00:07:55,560 --> 00:07:58,760 Speaker 5: see more packaging deals. But if you look at the data, 150 00:07:59,120 --> 00:08:02,080 Speaker 5: packaging deals have been down compared to last year, where 151 00:08:02,120 --> 00:08:05,840 Speaker 5: other sectors, even in industrials, had been busy. So it 152 00:08:05,960 --> 00:08:07,960 Speaker 5: was a little surprising to see a big deal in 153 00:08:07,960 --> 00:08:11,679 Speaker 5: this space. But you know there could be more because 154 00:08:11,720 --> 00:08:15,480 Speaker 5: it's sort of a predictable area, you know, to to 155 00:08:15,640 --> 00:08:16,120 Speaker 5: invest in. 156 00:08:16,440 --> 00:08:18,680 Speaker 3: Having been adjacent to the private equity world most of 157 00:08:18,720 --> 00:08:20,920 Speaker 3: my career, I think I learned a few things, which 158 00:08:20,960 --> 00:08:23,440 Speaker 3: is easy to raise money, It's easy to put money 159 00:08:23,440 --> 00:08:26,760 Speaker 3: to work. It's really hard to monetize those investments. Where 160 00:08:26,800 --> 00:08:28,880 Speaker 3: are we in that monetization because it's been kind of 161 00:08:28,880 --> 00:08:31,200 Speaker 3: a fallow market for the last four or five six years. 162 00:08:31,200 --> 00:08:33,400 Speaker 5: So I'm surprised you said it's easy to raise money 163 00:08:33,440 --> 00:08:36,040 Speaker 5: because I've seen my colleagues who focus on private equity 164 00:08:36,080 --> 00:08:39,560 Speaker 5: have been writing about some issues in the fundraising market 165 00:08:39,559 --> 00:08:41,280 Speaker 5: that it's not as easy as it used to be. 166 00:08:41,800 --> 00:08:45,559 Speaker 5: But definitely there's fewer and fewer public public traded companies 167 00:08:45,640 --> 00:08:47,680 Speaker 5: for you guys to report on because there's just so 168 00:08:47,840 --> 00:08:51,120 Speaker 5: many of these take privates and the IPO market, which 169 00:08:51,160 --> 00:08:55,200 Speaker 5: is one way that these PE firm sponsors could get 170 00:08:55,200 --> 00:08:57,720 Speaker 5: some monetization, that's been like shut the past few years. 171 00:08:57,720 --> 00:08:59,920 Speaker 5: I know things are coming back a little bit by 172 00:09:00,160 --> 00:09:04,000 Speaker 5: these sponsors love to trade assets to each other, and 173 00:09:04,040 --> 00:09:07,080 Speaker 5: there were some other private equity deals today. Bain bought 174 00:09:07,160 --> 00:09:10,240 Speaker 5: a golf company from clear Lake for like a billion 175 00:09:10,320 --> 00:09:12,320 Speaker 5: or so dollars. So we do see like the steady 176 00:09:12,400 --> 00:09:16,280 Speaker 5: drum beat of private equities firms just trading assets to 177 00:09:16,280 --> 00:09:18,880 Speaker 5: each other, and then the occasional big tape private like 178 00:09:18,920 --> 00:09:19,400 Speaker 5: this morning. 179 00:09:19,559 --> 00:09:22,160 Speaker 2: So you mentioned that it's a little harder to fundraise 180 00:09:22,200 --> 00:09:24,439 Speaker 2: now than it was a few years ago. Presumably that's 181 00:09:24,440 --> 00:09:28,040 Speaker 2: because of where interest rates are. If interest rates do 182 00:09:28,120 --> 00:09:30,160 Speaker 2: decline in twenty twenty six, what does that mean for 183 00:09:30,320 --> 00:09:31,640 Speaker 2: fundraising efforts by PE. 184 00:09:32,400 --> 00:09:34,520 Speaker 5: So I would say that it's going to be easier 185 00:09:34,520 --> 00:09:38,560 Speaker 5: for firms to borrow for leverage buyouts, so we could 186 00:09:38,640 --> 00:09:42,960 Speaker 5: see more deal making and that could lead to monetization, 187 00:09:43,080 --> 00:09:45,480 Speaker 5: which could then lead to saying to investors, hey, we 188 00:09:45,520 --> 00:09:48,199 Speaker 5: have these great returns from these sales, maybe now is 189 00:09:48,440 --> 00:09:50,400 Speaker 5: the time to raise money. I do think that there's 190 00:09:50,440 --> 00:09:54,839 Speaker 5: also so many newer private equity firms emerging, and then 191 00:09:55,240 --> 00:09:58,280 Speaker 5: with private credit, like there's just a lot of things 192 00:09:58,640 --> 00:10:03,360 Speaker 5: competing for investors mention. But yeah, this is this is 193 00:10:03,840 --> 00:10:08,160 Speaker 5: one for cdn R, you know, probably their largest deal 194 00:10:08,200 --> 00:10:11,760 Speaker 5: in a while, but there's probably more take privates in 195 00:10:11,800 --> 00:10:13,400 Speaker 5: the market for some of their competitors. 196 00:10:14,360 --> 00:10:16,319 Speaker 3: M A go on this deal. You see where the 197 00:10:16,360 --> 00:10:18,280 Speaker 3: advisors are, who's getting paid, which one of my buddies 198 00:10:18,280 --> 00:10:18,880 Speaker 3: are getting paid. 199 00:10:18,920 --> 00:10:21,280 Speaker 5: So it's funny. I don't have enough time to mention 200 00:10:21,480 --> 00:10:26,000 Speaker 5: how many banks are on the financing, so everyone is 201 00:10:26,040 --> 00:10:29,520 Speaker 5: on the financing, and it's funny. We reported late last 202 00:10:29,559 --> 00:10:31,600 Speaker 5: night that this deal was going to happen, and we 203 00:10:31,600 --> 00:10:33,720 Speaker 5: were trying to get the share price, and we were 204 00:10:33,800 --> 00:10:36,040 Speaker 5: kind of kicking ourselves because we didn't get that in time. 205 00:10:36,600 --> 00:10:39,320 Speaker 5: When everyone clear there was a poorly cut secret. A 206 00:10:39,320 --> 00:10:42,200 Speaker 5: lot of people knew we just they were you know, 207 00:10:42,360 --> 00:10:43,960 Speaker 5: mom's the word on the price. 208 00:10:44,040 --> 00:10:47,120 Speaker 3: Well, there are ten investment banks getting paid, not part 209 00:10:47,160 --> 00:10:49,040 Speaker 3: of it for the private because I mean these investment 210 00:10:49,040 --> 00:10:52,080 Speaker 3: banks they have departments that their only job is to 211 00:10:52,120 --> 00:10:54,520 Speaker 3: call on private equity. That's it. They don't call on 212 00:10:54,600 --> 00:10:56,920 Speaker 3: they don't care about industries. They just so you got 213 00:10:56,920 --> 00:10:58,640 Speaker 3: to pay these people because they've been calling on you 214 00:10:58,679 --> 00:11:00,280 Speaker 3: all year, and when you finally do with you, you 215 00:11:00,360 --> 00:11:02,599 Speaker 3: got to pay all of them. Whereas the advisor, the 216 00:11:03,080 --> 00:11:05,520 Speaker 3: seller was represented by evercore One. 217 00:11:05,920 --> 00:11:08,000 Speaker 5: Which used to be sort of a bootique name, but 218 00:11:08,120 --> 00:11:11,199 Speaker 5: now you know, they're pretty big and public and they're 219 00:11:11,320 --> 00:11:14,360 Speaker 5: you know, trying to eat the bulge brackets Launch for example. 220 00:11:14,440 --> 00:11:16,640 Speaker 5: So yeah, not many people left off that deal. 221 00:11:17,240 --> 00:11:20,320 Speaker 3: Stay with us. More from Bloomberg Intelligence coming up after this. 222 00:11:24,280 --> 00:11:27,960 Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live 223 00:11:28,080 --> 00:11:31,160 Speaker 1: weekdays at ten am Eastern on Apple, Cocklay and Android 224 00:11:31,160 --> 00:11:34,480 Speaker 1: Auto with the Bloomberg Business app. Listen on demand wherever 225 00:11:34,520 --> 00:11:37,640 Speaker 1: you get your podcasts, or watch us live on YouTube. 226 00:11:38,360 --> 00:11:42,440 Speaker 3: It is holiday shopping season. I think it's really hard 227 00:11:42,440 --> 00:11:44,080 Speaker 3: to be a retail analyst. And you've got to be 228 00:11:44,160 --> 00:11:46,160 Speaker 3: right on the stock and valuation and earnings and all 229 00:11:46,200 --> 00:11:48,319 Speaker 3: that kind of stuff like every other animals. But then 230 00:11:48,320 --> 00:11:50,240 Speaker 3: you also have to kind of be right on fashion. 231 00:11:51,040 --> 00:11:51,640 Speaker 1: How do you do that? 232 00:11:51,679 --> 00:11:52,280 Speaker 2: How do you do that? 233 00:11:52,320 --> 00:11:54,640 Speaker 3: I have no idea. Married Ross Gilbert, that's her job 234 00:11:54,679 --> 00:11:59,199 Speaker 3: Bloomberg Intelligence Senior Echo Annals covering the retailers. Mary, talk 235 00:11:59,200 --> 00:12:01,280 Speaker 3: to us about a pair of and where are we 236 00:12:01,559 --> 00:12:03,720 Speaker 3: in the world of apparel these days? What's selling, what's 237 00:12:03,800 --> 00:12:07,280 Speaker 3: not selling? Are some companies getting it right? Because we're 238 00:12:07,320 --> 00:12:09,200 Speaker 3: right smack in the middle of the holiday shopping season. 239 00:12:10,800 --> 00:12:13,520 Speaker 6: Yes, so, Paul, you're absolutely right here we are in 240 00:12:13,520 --> 00:12:16,480 Speaker 6: the holiday season, and yes, there are some companies that 241 00:12:16,520 --> 00:12:19,560 Speaker 6: are getting it right. One of those companies includes Gap, 242 00:12:19,600 --> 00:12:22,960 Speaker 6: which they'll be reporting their earnings on Thursday, and we 243 00:12:23,000 --> 00:12:25,920 Speaker 6: see a lot of strength with their two largest brands 244 00:12:25,960 --> 00:12:29,880 Speaker 6: being Old Navy, so we're seeing tremendous strength and style, 245 00:12:30,320 --> 00:12:33,560 Speaker 6: their viral campaigns that they have there, and also with 246 00:12:33,600 --> 00:12:36,959 Speaker 6: their namesake brand, Gap, which is their second largest brand 247 00:12:37,000 --> 00:12:39,320 Speaker 6: for that company. So that's like seventy percent of sales 248 00:12:39,400 --> 00:12:42,640 Speaker 6: right there for those two brands, and we're seeing a 249 00:12:42,679 --> 00:12:45,120 Speaker 6: lot of strength and momentum and we think that continues 250 00:12:45,160 --> 00:12:50,600 Speaker 6: into twenty twenty six. For Gap Aritzia, which is expanding 251 00:12:50,640 --> 00:12:55,280 Speaker 6: in the US and is entering new markets, opening news 252 00:12:55,280 --> 00:12:58,960 Speaker 6: stores and then they're gaining on a comp sales basis, 253 00:12:59,040 --> 00:13:01,240 Speaker 6: So we're seeing a lot of strength with that brand 254 00:13:01,800 --> 00:13:04,840 Speaker 6: really taking off in the US, so it's still very 255 00:13:04,880 --> 00:13:08,040 Speaker 6: small here. You know, they have under seventy stores in 256 00:13:08,080 --> 00:13:10,640 Speaker 6: the US and most apparel brands have over two hundred, 257 00:13:11,120 --> 00:13:14,120 Speaker 6: So that's one that's faring well. And then of course 258 00:13:14,160 --> 00:13:17,280 Speaker 6: in the value segment and obviously Old Navy touches that. 259 00:13:17,440 --> 00:13:21,160 Speaker 6: But off price, we see strength and off price because 260 00:13:21,200 --> 00:13:25,240 Speaker 6: here you have the brands that consumers want, and it's 261 00:13:25,320 --> 00:13:30,679 Speaker 6: pretty prevalent across all the companies TJX, Ross Stores and 262 00:13:31,160 --> 00:13:34,800 Speaker 6: Burlington stores. Now on the department store side, we just 263 00:13:34,880 --> 00:13:38,400 Speaker 6: had Dillard's numbers out for the third quarter last week 264 00:13:38,480 --> 00:13:42,800 Speaker 6: and they're third quarter comp sales rows three percent. That's 265 00:13:42,840 --> 00:13:47,120 Speaker 6: a really nice figure there, and their margins came in 266 00:13:47,200 --> 00:13:50,959 Speaker 6: better than expected, and that's because they execute a full 267 00:13:51,080 --> 00:13:55,360 Speaker 6: price model. They're not promotional like Macy's or Kohl's at all. 268 00:13:55,400 --> 00:13:59,080 Speaker 6: They do have clearance sales and they're typically two times 269 00:13:59,080 --> 00:14:03,000 Speaker 6: a year, but they're showing their models working. But we 270 00:14:03,080 --> 00:14:06,800 Speaker 6: think that Macy's is showing some signs of improvement right 271 00:14:07,040 --> 00:14:09,840 Speaker 6: that we could see their comp sales also come in 272 00:14:10,320 --> 00:14:12,800 Speaker 6: higher when they go to report in early December. But 273 00:14:12,960 --> 00:14:17,360 Speaker 6: Coles they're still struggling. They you know, they still need 274 00:14:17,400 --> 00:14:21,000 Speaker 6: to get assortments right. We did notice their online traffic 275 00:14:21,120 --> 00:14:23,600 Speaker 6: was better than in store, and then of course when 276 00:14:23,600 --> 00:14:27,440 Speaker 6: they reported their second quarter, they were still seeing lower 277 00:14:27,520 --> 00:14:30,040 Speaker 6: sales for their credit card customers, and those are supposed 278 00:14:30,040 --> 00:14:32,240 Speaker 6: to be their most loyal absolute customers. 279 00:14:32,680 --> 00:14:36,160 Speaker 2: So Mary, I got to ask you about abercrom Fitch 280 00:14:36,160 --> 00:14:38,920 Speaker 2: because you did not mention that stock that company at all, 281 00:14:38,960 --> 00:14:42,480 Speaker 2: and that was like the star retail performer in twenty 282 00:14:42,520 --> 00:14:45,680 Speaker 2: twenty three when it's stock jumped almost three hundred percent. 283 00:14:45,880 --> 00:14:48,360 Speaker 2: In twenty twenty four, it gained about seventy percent. So 284 00:14:48,440 --> 00:14:52,040 Speaker 2: far this year it's down about fifty four percent. What 285 00:14:52,080 --> 00:14:54,280 Speaker 2: does abercrom mean not getting right or did it just 286 00:14:54,760 --> 00:14:57,800 Speaker 2: peak already? And you know now everyone else is, you know, 287 00:14:57,800 --> 00:14:58,440 Speaker 2: playing catch up. 288 00:14:59,560 --> 00:15:02,440 Speaker 6: We're just we're not seeing the strength and the namesake brand, 289 00:15:02,480 --> 00:15:05,640 Speaker 6: but in their Hollister brand, we are seeing strength. So 290 00:15:05,920 --> 00:15:11,280 Speaker 6: really their gen Z focus with Hollister, we're seeing strength, 291 00:15:11,320 --> 00:15:14,040 Speaker 6: and we're thinking they're going to report some strong numbers 292 00:15:14,120 --> 00:15:18,560 Speaker 6: for the third quarter. But the namesake brand, maybe it's 293 00:15:18,680 --> 00:15:21,920 Speaker 6: become a lot more competitive. You know, that customer that 294 00:15:21,960 --> 00:15:25,640 Speaker 6: shops at Abercrombie also shops at Aritzia, so they could 295 00:15:25,640 --> 00:15:28,280 Speaker 6: be getting more competition, and with some of the department 296 00:15:28,400 --> 00:15:32,240 Speaker 6: stores like a Macy's bringing in more relevant brands that 297 00:15:32,400 --> 00:15:35,760 Speaker 6: might also be taking share. So we are we're just 298 00:15:35,840 --> 00:15:40,680 Speaker 6: not seeing the strength that we had been seeing on 299 00:15:40,720 --> 00:15:43,600 Speaker 6: a comp sales basis. And then also we'll have to 300 00:15:43,640 --> 00:15:46,200 Speaker 6: see how they're faring with margins because they did have 301 00:15:46,560 --> 00:15:49,320 Speaker 6: a fair amount of exposure with India, and India is 302 00:15:49,360 --> 00:15:52,000 Speaker 6: now at fifty percent, but we think they'll be able 303 00:15:52,040 --> 00:15:56,440 Speaker 6: to shift yeah sourcing, you know, into those lower cost 304 00:15:56,520 --> 00:15:59,000 Speaker 6: Asian countries. Most of Asia is kind of near that 305 00:15:59,040 --> 00:16:04,200 Speaker 6: twenty percent range now, including China. So we think most 306 00:16:04,240 --> 00:16:07,880 Speaker 6: of these brands are doing a good job shifting sourcing, 307 00:16:07,920 --> 00:16:10,840 Speaker 6: and we think that tariffs can be overcome and we 308 00:16:10,880 --> 00:16:14,280 Speaker 6: think in the second half you will see margins improve 309 00:16:14,320 --> 00:16:17,240 Speaker 6: across the board. But there are certain retailers that are 310 00:16:17,280 --> 00:16:21,400 Speaker 6: not really experiencing the erosions such as Ralph Lauren. They're 311 00:16:21,440 --> 00:16:25,000 Speaker 6: really doing a great job generating strong sales at higher 312 00:16:25,000 --> 00:16:28,440 Speaker 6: price points and so they're getting the benefit of the 313 00:16:28,480 --> 00:16:32,720 Speaker 6: sales leverage and then also the full price selling and 314 00:16:32,760 --> 00:16:35,480 Speaker 6: at higher price points, and those are offsetting tariffs. So 315 00:16:35,480 --> 00:16:38,520 Speaker 6: you're just not seeing a negative effect. It's just so 316 00:16:38,560 --> 00:16:42,160 Speaker 6: you're not seeing the margin expansion you would typically see 317 00:16:42,240 --> 00:16:43,600 Speaker 6: with Ralph Law. 318 00:16:44,280 --> 00:16:44,880 Speaker 1: Stay with us. 319 00:16:45,040 --> 00:16:47,400 Speaker 3: More from Bloomberg Intelligence coming up after this. 320 00:16:51,320 --> 00:16:55,000 Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live 321 00:16:55,080 --> 00:16:58,560 Speaker 1: weekdays at ten am Eastern on Applecarcklay and Android Auto 322 00:16:58,560 --> 00:17:01,640 Speaker 1: with the Bloomberg Business Out. Listen on demand wherever you 323 00:17:01,680 --> 00:17:05,080 Speaker 1: get your podcasts, or watch us live on YouTube. 324 00:17:05,640 --> 00:17:08,000 Speaker 3: Taking some folks out the fear renews My favorite Italian 325 00:17:08,040 --> 00:17:10,879 Speaker 3: restaurant place is going to be packed. I mean, it 326 00:17:10,960 --> 00:17:13,960 Speaker 3: just seems like the restaurant business remains pretty darn strong. 327 00:17:13,960 --> 00:17:14,560 Speaker 2: But what do I know? 328 00:17:15,040 --> 00:17:19,040 Speaker 3: Michael Halen, Senior restaurant and food service analyst from Bloomberg Intelligence, 329 00:17:19,080 --> 00:17:21,200 Speaker 3: he joins us here. Hey, Mike, give us a CeNSE here. 330 00:17:21,240 --> 00:17:23,960 Speaker 3: I know you kind of you track this stuff really closely. 331 00:17:24,200 --> 00:17:26,919 Speaker 3: How are the restaurants doing out there? Does it depend 332 00:17:26,960 --> 00:17:29,680 Speaker 3: upon what segment of the market they're targeting? 333 00:17:31,160 --> 00:17:34,840 Speaker 7: Yeah, that's definitely part of it. We saw that in 334 00:17:34,960 --> 00:17:38,720 Speaker 7: last month's data find dining had a really nice rebound, 335 00:17:40,080 --> 00:17:42,560 Speaker 7: and I think part of it is because they're catering 336 00:17:42,600 --> 00:17:46,800 Speaker 7: to hire income consumers who own assets and are feeling 337 00:17:46,840 --> 00:17:51,240 Speaker 7: pretty good about things moving forward. You know right now, 338 00:17:52,760 --> 00:17:54,640 Speaker 7: you know, November is going to be a tough month. 339 00:17:54,720 --> 00:17:58,479 Speaker 7: There's no doubt about it. The government shut down has 340 00:17:58,520 --> 00:18:01,600 Speaker 7: definitely impacted sales and traffic for the chains we cover, 341 00:18:02,400 --> 00:18:06,560 Speaker 7: especially in the DMV area as well as in the 342 00:18:06,640 --> 00:18:10,320 Speaker 7: South where there's a lot of government workers. Also, last 343 00:18:10,400 --> 00:18:15,240 Speaker 7: November restaurant sales had a nice boost from the election, 344 00:18:15,800 --> 00:18:18,080 Speaker 7: and so we're going to be lapping tough, tough comps. 345 00:18:18,080 --> 00:18:23,320 Speaker 7: So November is not looking great, but the things should 346 00:18:24,160 --> 00:18:27,240 Speaker 7: bounce back a little bit here in December. And we're 347 00:18:27,560 --> 00:18:31,000 Speaker 7: not crazy bullish, but we're more bullish about the first 348 00:18:31,000 --> 00:18:31,920 Speaker 7: half of next year. 349 00:18:32,800 --> 00:18:35,919 Speaker 3: So how about quick Let's start with quick Quick Service 350 00:18:35,960 --> 00:18:38,520 Speaker 3: a dining talk to us about that marketplace. I think 351 00:18:38,560 --> 00:18:41,359 Speaker 3: back to McDonald's of the world and so on. How's 352 00:18:41,400 --> 00:18:41,879 Speaker 3: that varing? 353 00:18:43,240 --> 00:18:46,280 Speaker 7: Yeah, so Quick Service had a really difficult first half. 354 00:18:46,040 --> 00:18:46,480 Speaker 3: Of the year. 355 00:18:46,520 --> 00:18:48,920 Speaker 7: They were lapping strong comps and they and they kind 356 00:18:48,920 --> 00:18:52,280 Speaker 7: of lost their way when it came to value, right. 357 00:18:52,320 --> 00:18:55,920 Speaker 7: They just had implemented too big of price increases over 358 00:18:55,960 --> 00:18:59,000 Speaker 7: the last few years and customers started to push back, 359 00:18:59,280 --> 00:19:02,320 Speaker 7: especially low income consumers who have been you know, who 360 00:19:02,359 --> 00:19:05,880 Speaker 7: are really impacted by inflation. To a much greater degree 361 00:19:05,920 --> 00:19:09,520 Speaker 7: than middle and higher income consumers. So the first half 362 00:19:09,640 --> 00:19:12,320 Speaker 7: was difficult, but here in the second half of the year, 363 00:19:12,359 --> 00:19:16,160 Speaker 7: things have gotten better, largely because they've re established their 364 00:19:16,320 --> 00:19:21,280 Speaker 7: value propositions. You know, McDonald's has revamped its dollar menu 365 00:19:21,320 --> 00:19:24,280 Speaker 7: this year. They also reintroduced snap wraps at a three 366 00:19:24,320 --> 00:19:28,520 Speaker 7: dollars price point, which have boosted checks by you know, 367 00:19:28,680 --> 00:19:32,280 Speaker 7: people adding them on to their orders, as well as 368 00:19:32,400 --> 00:19:35,439 Speaker 7: bringing in some low income consumer traffic. But you know, 369 00:19:35,600 --> 00:19:39,160 Speaker 7: low income consumers are pulling back at a pretty big rate. 370 00:19:39,400 --> 00:19:42,159 Speaker 7: You know, we think part of that is the snap 371 00:19:42,359 --> 00:19:48,040 Speaker 7: benefit pullback right and so quick. But they've been able 372 00:19:48,080 --> 00:19:51,399 Speaker 7: to bring in some higher income consumers and middle income consumers. 373 00:19:51,400 --> 00:19:55,360 Speaker 7: So things are starting to look better, all right, McDonald's, 374 00:19:56,280 --> 00:19:58,800 Speaker 7: McDonald's especially, I mean McDonald's is going to be lapping 375 00:19:58,800 --> 00:20:00,960 Speaker 7: the E coli or right now is lapping the E 376 00:20:01,080 --> 00:20:04,719 Speaker 7: Coli outgate about them from last year, and so you know, 377 00:20:04,800 --> 00:20:07,240 Speaker 7: they're the eight hundred pound gorilla, and I think good 378 00:20:07,280 --> 00:20:09,760 Speaker 7: results out of McDonald's over the next few quarters should 379 00:20:09,760 --> 00:20:12,160 Speaker 7: boost the entire category. 380 00:20:12,400 --> 00:20:14,560 Speaker 3: How about the cost of beef, which you know, consumers 381 00:20:14,560 --> 00:20:17,320 Speaker 3: complain about across the board. I know companies are dealing 382 00:20:17,359 --> 00:20:19,199 Speaker 3: with it, and what I understand is we're not going 383 00:20:19,240 --> 00:20:21,840 Speaker 3: to see a material improvement in the cattle herd till 384 00:20:21,840 --> 00:20:24,640 Speaker 3: maybe twenty twenty eight. So how does that factor into 385 00:20:24,640 --> 00:20:27,160 Speaker 3: the profit margins of all these restaurants. 386 00:20:27,960 --> 00:20:31,840 Speaker 7: Yeah, and so the restaurants that are impacted the most 387 00:20:32,040 --> 00:20:37,879 Speaker 7: are you know, burger chains like Shake Shack or steakhouses 388 00:20:37,920 --> 00:20:41,280 Speaker 7: like Texas Roadhouse that own and operate all of their stores. 389 00:20:41,520 --> 00:20:44,600 Speaker 7: You know, to your point, beef inflation for these chains 390 00:20:44,640 --> 00:20:46,199 Speaker 7: is going to be in the mid teens in the 391 00:20:46,240 --> 00:20:50,119 Speaker 7: fourth quarter. So yeah, yeah, very high. So definitely a 392 00:20:50,160 --> 00:20:55,520 Speaker 7: lot of margin pressure for those chains. If you know. Luckily, 393 00:20:55,560 --> 00:20:59,560 Speaker 7: those two chains you know, have have driven traffic as 394 00:20:59,640 --> 00:21:02,920 Speaker 7: of late into the stores which you know, and driven 395 00:21:03,000 --> 00:21:06,000 Speaker 7: higher sales and been able to pass along price increases 396 00:21:06,040 --> 00:21:08,600 Speaker 7: and that has kind of helped their operating leverage, which 397 00:21:08,600 --> 00:21:12,480 Speaker 7: has helped offset the higher costs for the burger chains. 398 00:21:12,520 --> 00:21:14,760 Speaker 7: They there's less impact for the chains that we cover 399 00:21:14,800 --> 00:21:18,720 Speaker 7: for McDonald's, Wendy's, Jack in the Box because they're largely franchised, 400 00:21:18,720 --> 00:21:21,320 Speaker 7: so that the franchisees are the ones putting the bill 401 00:21:21,400 --> 00:21:22,520 Speaker 7: for the higher beef costs. 402 00:21:22,600 --> 00:21:26,679 Speaker 3: Why, like, why do not all change. Do like the 403 00:21:26,720 --> 00:21:30,520 Speaker 3: McDonald's franchise e model. What's the benefits of franchising or 404 00:21:30,560 --> 00:21:32,520 Speaker 3: what's the benefit of owning versus a franchise. I think 405 00:21:32,520 --> 00:21:34,440 Speaker 3: I thought I would. I saw the movie. I think 406 00:21:34,440 --> 00:21:37,440 Speaker 3: I understand the economics of franchising. It seems pretty good. 407 00:21:38,400 --> 00:21:41,560 Speaker 7: Listen the franchise business. That's a great business, you know, 408 00:21:41,600 --> 00:21:44,320 Speaker 7: and from where I sit as an analyst, you know, 409 00:21:44,359 --> 00:21:46,439 Speaker 7: we love it. It's easier to predict the earnings and 410 00:21:46,480 --> 00:21:50,040 Speaker 7: the free cash flow. It's it's a much more steady 411 00:21:50,080 --> 00:21:53,959 Speaker 7: business model. Franchising eliminates a lot of the operating leverage 412 00:21:53,960 --> 00:21:58,520 Speaker 7: and thus the risk to your margins out of the business. Right. 413 00:21:59,400 --> 00:22:02,960 Speaker 7: But if you are running a full service restaurant chain 414 00:22:03,200 --> 00:22:07,480 Speaker 7: where operations is very core to your business, think Darden, 415 00:22:07,600 --> 00:22:12,199 Speaker 7: think Texas Roadhouse, you want to own and operate your 416 00:22:12,200 --> 00:22:14,639 Speaker 7: source because you want to have control over those operations. 417 00:22:14,640 --> 00:22:17,840 Speaker 7: You want to make sure people are getting a good experience, 418 00:22:17,880 --> 00:22:21,520 Speaker 7: and they're just much harder to run than a McDonald's 419 00:22:21,640 --> 00:22:23,720 Speaker 7: or a Wendy's. And then I'd say, on the last 420 00:22:23,760 --> 00:22:27,159 Speaker 7: case would be somebody like shake Shack or wink Stop 421 00:22:27,520 --> 00:22:31,399 Speaker 7: or Kava. You know, when your cash on cash returns 422 00:22:31,480 --> 00:22:36,080 Speaker 7: are forty fifty sixty percent. We don't think it's a 423 00:22:36,119 --> 00:22:38,159 Speaker 7: bad thing to be greedy and you want to open 424 00:22:38,240 --> 00:22:39,800 Speaker 7: up as many stores as possible. 425 00:22:40,280 --> 00:22:45,000 Speaker 1: This is the Bloomberg Intelligence Podcast, available on Apple, Spotify, 426 00:22:45,160 --> 00:22:48,640 Speaker 1: and anywhere else you get your podcasts. Listen live each 427 00:22:48,680 --> 00:22:52,400 Speaker 1: weekday ten am to noon Eastern on Bloomberg dot com, 428 00:22:52,560 --> 00:22:56,080 Speaker 1: the iHeartRadio app, tune In, and the Bloomberg Business app. 429 00:22:56,520 --> 00:22:59,440 Speaker 1: You can also watch us live every weekday on YouTube 430 00:22:59,800 --> 00:23:02,080 Speaker 1: and always on the Bloomberg terminal.