BI Weekend: US Earnings, Kenvue Deal, Ridesharing Latest

0:00Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real, lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a commitment to your clients. We're talking top-grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at Vanguard.com slash audio.

0:41That's Vanguard.com slash audio. All investing is subject to risk, Vanguard Marketing Corporation Distributor. Hello, I'm Stephen Carroll. I'm in Brussels where many of Europe's biggest decisions get made. And I'm Caroline Hepker in London. We're the hosts of the Bloomberg Daybreak Europe podcast. We're up early every weekday keeping an eye on what's happening across Europe and around the world. We do it early so the news is fresh, not recycled, and so you know what actually matters as the day gets going. From Brussels, I'm following the politics, policy and the people shaping the European Union right now.

1:15And from London, I'm looking at what all that means for markets, money and the wider economy. We've got reporters across Europe and around the globe feeding in as stories break. So whether it's geopolitics, energy, tech or markets, you're hearing it while it happens. It's smart, calm and to the point. And it fits into your morning. You can find new episodes of the Bloomberg Daybreak Europe podcast by 7am in Dublin or 8am in Brussels, Berlin and Paris. On Apple, Spotify, YouTube or wherever you get your podcasts.

1:50Bloomberg Audio Studios. Podcasts, radio, news. This is Bloomberg Intelligence with Scarlett Foo and Paul Sweeney. How do you think the Fed is looking at tariffs, the uncertainty of tariffs? Let's take a look at the sectors and how they perform. A lot of investors getting whipsawed every day by news events. Breaking market headlines. And corporate news from across the globe. Could we see a market disruption, a market event? Are people just too exuberant out there? You see some so-called low-quality stocks driving this short-term rally. Bloomberg Intelligence with Scarlett Fu and Paul Sweeney on Bloomberg Radio, YouTube, and Bloomberg Originals.

2:29On today's Bloomberg Intelligence show, we dig inside the big business stories impacting Wall Street and global markets. Each and every week, we provide in-depth research and data on some of the 2 ,000 companies and 130 industries our analysts cover worldwide. Today, as earnings season rolls on, we'll take a look at results from some of the biggest names in food, travel, and entertainment. Plus, the cash stockpile at Berkshire Hathaway grows to a record. But first, this week, Yum! Brands launched a strategic review for the pizza maker Pizza Hut. This comes after the company reported earnings that beat Wall Street estimates.

2:58For more, we were joined by Michael Halen, Bloomberg Intelligence Senior Restaurant and Food Service Analyst. We're first to ask Michael for his take on the possible sale of Pizza Hut. I think this was kind of a long time coming. It's really been a drag on the top and bottom line growth. Taco Bell is an absolute monster, is putting up strong unit growth as well as same-store sales growth quarter after quarter after quarter. KFC has had some well-documented same-store sales issues in the U.S., but that seems to be turning. They had a solid little quarter here with flat same-store sales versus six straight quarters of decline.

3:34So that business seems to be accelerating a little bit. And KFC unit growth overseas is phenomenal. Absolutely phenomenal. They crush it overseas. Yeah, so Pizza Hut has been this drag on this business for quite some time. I think the street is really excited about a potential divestiture here. Any potential buyers out there that you can identify? No, we don't have – we don't think any of the companies in the public market are going to be an acquirer of Pizza Hut. Yeah, this thing, like I said, has struggled mightily. I mean we can see private equity. I think private equity would be a good fit, right, because it's going to take – management said on the call, it might take some of their markets two, three years to get them back to their rightful position as market leader in those countries, which they see as their rightful position.

4:33I think Domino's would have something to say about that. But, you know, it's going to take a few years to turn around some of these markets and private equity, obviously, looking at a five to seven year time horizon would be a good fit. All right, Mike, let's step back. The restaurant space in general, getting through, you know, earning season here. What are you learning about kind of the consumer out there from the restaurant perspective? We heard from Wingstop and another fast casual chain that's struggling, also partly been a victim of its own success. It's absolutely crushed it over the last six years and is lapping very, very strong results from last year.

5:08But they talked some more about low-income consumers and Hispanic consumer weakness and it broadening here in the third quarter. There's some optimism here, I think, around the smart kitchens. What's a smart kitchen? So they're rolling out some kitchen technology that's boosting operations. It's speeding up service times. You know, they're putting out consistent 10-minute service times, which is 50 % better than they were doing prior. Accuracy is better. Food's getting to customers hotter and fresher, and people are going to have a better experience. And so stores that have had this technology, right now it's in about two-thirds of the U.S.

5:54stores. It's going to be in all 3 ,000 by the end of the year. But stores that have this equipment and have had it the longest are outperforming on same-store sales by 500 basis points. So we think that's why the stock is up so much. People are now a little bit more confident in a positive 2026 despite the decelerating trends here in the third quarter. What's going on on the labor front for restaurants? I'm thinking quick service restaurants, you know, with the southern border shut off, that was one of the industries that said we may have some labor problems associated with that. Have you heard from your companies about that?

6:34Yeah, you know, our companies just talk about the fact that they use E-Verify and they do everything by the book, which, you know, I think is predominantly the case. the impact that you're seeing, A, is with more of the independent restaurants, but then B, also kind of causes labor costs to go higher here for the public chains, right? And they're seeing another 4 % to 5 % wage rate inflation this year. That's been pretty common year in and year out since the pandemic. Our thanks to Michael Halen, Bloomberg Intelligence Senior Restaurant and food service analyst. We move now to earnings from the fast food giant McDonald's.

7:16The company reported faster than expected U.S. sales growth in the third quarter, and this comes as the restaurant looks to restore its reputation for affordable meals with new deals and promotions. We are joined by Red Brown, Bloomberg News earnings reporter. I think in the context of the other results that we've gotten from a couple other restaurants, I think it's really interesting during the call, the McDonald's CEO, CFO really talked about this bifurcation that they've been observing for the last few years between higher income diners and lower income people. And it seems like that trend is continuing, persisting, potentially accelerating.

7:51It seems like, and specifically what I'm talking about is the higher income consumers seem to be coming down into McDonald's and shopping a bit more, drawn in by the value that McDonald's has been pushing over the last couple of quarters. And we're seeing that across all of the fast food chains. That's Yum as well, and also Burger King, things like that. And then on the other side of that, companies like Chipotle and Cava, these kind of like middle tier that, you know,$20 bowls of food are struggling a little bit more as like people lose interest in that value proposition that they're offering.

8:22So I think McDonald's, obviously the biggest name in the space, really kind of hammers that point home for this earning season. And I think that's kind of the thing, like the main takeaway for me at the moment. And of course, McDonald's is leaning into this idea that it offers value at a difficult time for a lot of consumers. It's got a lot of deals and promotions to maintain that reputation. Does that cost it in any way or do the same sort of sales kind of back that up that this works? I think it's a little early before they've seen that benefit from it quite yet. They all have seen a little bit of pressure on the profitability because the company is so committed to this, restoring the value reputation is kind of the language that they use with their customers, that they're actually supporting the franchisees.

9:03They're giving them marketing. They're helping them make up some of that losses that they will make, they will have from offering these discounts on the menu. So McDonald's is committed to this. It sounds like they're committed to this in the long term because they do want to get people back in the stores. It doesn't, it's kind of remains to be seen whether or not the foot traffic is actually benefiting such that it is driving the bottom line as well. But they see it as so important to kind of refreshing or kind of reintroducing the brand proposition to people that they're willing to commit to this, take a little bit of that short-term pain for the long-term benefits.

9:37What are they saying about their cost structure here? I see beef prices much higher over the last year or two. What are they saying about there's some of the cost of goods sold here? Well, so the one thing to call on the cost of goods sold before we get into the beef issue is the marketing. So they are kind of bumping up the marketing. They saw around a 20 % jump in their SG &A expense because of that. But on the beef thing, McDonald's is the largest buyer of beef. So that scale kind of allows them to take it. They can take advantage of the scale and negotiate strong contracts when it comes to beef.

10:11Obviously, beef inflation has been hitting all of these companies, but not in a way that the companies are outsized negatively impact thus far. But definitely something to watch as the beef prices continue to go higher. And the improvement here, especially for its U.S. comparable sales, really comes at a timely point. Because for a while, the company had been laggard when it came to comparable sales, at least domestically. Yeah, definitely. And it does speak to the kind of strategic changes that they've made. Like they did act maybe a little bit late in the game. Burger King has been rolling out their value offerings for a little over a year.

10:47But McDonald's has acted and acted swiftly. Like, you know, it's a big deal, I think, to get the buy-in from the franchisees of McDonald's. Like, they had almost a consensus. It's very rare that you see almost like a high 90 % of franchisees willing to take the price hits because they're the ones that are dealing with this at the end of the day. But I think, you know, McDonald's acting fast, acting boldly to kind of get back into the green. I've noticed really, really in the last several years, so much more technology in the stores. Like, you can, a lot of them don't even have people practically taking your order.

11:19It's all done electronically. What are they saying about their investments in technology, maybe even AI? How is that impacting that business? Yeah, for McDonald's, there was quite a bit of talk about their digital offerings for this quarter. All of these companies, so between McDonald's, Yum!, which has KFC, Taco Bell, and a couple other brands under that umbrella, are all really pushing the digital for that exact reason, to get the cost down. McDonald's just rolled out their Monopoly program. When I was a kid, Monopoly was the peel-off on the cups. It was very exciting. Now it's completely digital.

11:55So that's another way of trying to drive people into the app to get people to shop through there. That's where a lot of promotions are. That'll help also drive foot traffic. So it's helping in two ways. It's helping people get in, shop more, and also helping on the cost front. Our thanks to Red Brown. He is a Bloomberg News earnings reporter. Moving next to the hospitality industry. This week, Cruise Company Norwegian Cruise Line reported earnings that missed expectations. For more on this, we were joined by Brian Egger, Bloomberg Intelligence Senior Gaming and Lodging Analyst. People are still cruising.

12:24The bookings are higher. I think that there is a bit of a change in their strategy related to the Norwegian Cruise Line brand, trying to get more families and kids and all that. We could talk about that, but that does have some slightly dampening impact on yield growth for the fourth quarter. So this is the idea that they're broadening their customer base, not just targeting the super high-income consumer, which by all accounts is doing just fine in this economy, whereas the lower-income consumer and the mass consumer perhaps is struggling with rates staying fairly elevated and a lot of question marks over their job prospects.

12:58What is Norwegian Cruise Line's strategy here, certainly compared to its peers like Carnival and Royal Caribbean? I think it's twofold. I think, number one, to try to attract more of a family audience, increase the core customer base of the Norwegian Cruise Line brand. And also by having more shorter duration cruises, maybe with home ports closer to where people live, that could result longer term and kind of more efficient operations and some more, you know, more savings on the net cruise cost per net unit cost side. But it remains to be seen. And I think that's why there's a little bit of caution because the near term effect will be a slightly dampening impact on the overall mix of yields.

13:39You know, cabins filled with children or families may have a slightly lower combined revenue yield than a different type of customer audience. Typically, the cruiser, they're pretty loyal people, Brian. How do they typically react or how do they spend during what could be maybe a little bit softer economic environment? So if you judge by the current environment, the overall booking space, I think, for the third quarter overall was up 20 percent. the outlook for next year is quite good with at least modest yield growth. So I think we're seeing still a pretty steady pace of consumer demand. Obviously, that could always change if we see a more severe economic downturn.

14:21But the overall pace in terms of bookings demand, notwithstanding this kind of tweak in marketing strategy, has been quite good. Our thanks to Brian Egger, Bloomberg Intelligence Senior Gaming and Lodging Analyst. Coming up, inside one of the biggest deals of the week, Kimberly Clark buying Kenview, the maker of Tylenol. You're listening to Bloomberg Intelligence on Bloomberg Radio, providing in-depth research and data on 2 ,000 companies and 130 industries. You can access Bloomberg Intelligence via B.I. Go on the terminal. I'm Scarlett Foo. And I'm Paul Sweeney. This is Bloomberg. Today's show is brought to you by Vanguard.

14:54To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a commitment to your clients. We're talking top-grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at Vanguard.com slash audio.

15:34That's Vanguard.com slash audio. All investing is subject to risk. Vanguard Marketing Corporation Distributor. I'm Barry Ritholtz, inviting you to join me for the Masters in Business podcast. Every week, we bring you fascinating conversations with the people who shape markets, investing, and business. CEOs, fund managers, billionaires, Nobel laureates, traders, analysts, economists, everybody that affects what's going on in the market, whether you own stocks, bonds, real estate, commodities, crypto, you really need to hear these conversations. Sometimes it's behaviorists like Dick Thaler or Bob Schiller.

16:16Sometimes it's fund managers like Peter Lynch, Bill Miller, Ray Dalio. Sometimes it's authors, Michael Lewis, author of The Big Short, and Moneyball. Regardless of the conversation, these are the folks that move markets each week. That's the Masters in Business podcast with me, Barry Ritholtz. Listen on Apple, Spotify, or wherever you get your podcasts.

16:43This is Bloomberg Intelligence with Scarlett Foo and Paul Sweeney on Bloomberg Radio. It was a merger Monday this week in the consumer goods space. Kimberly Clark announced plans to buy Kenview, the maker of Tylenol, in a$40 billion cash and stock deal. The combination would create a company with$32 billion in revenue and become the second biggest seller of health and wellness products. For more, we are joined by Diana Gomez, Bloomberg Intelligence Senior Equity Research Analyst. So it is surprising in many ways from the perspective of Kimberly Clark, I must confess. it shows that Canview really has a lot of work to do to turn around the business since it split from J &J about two years ago.

17:29And the third quarter MIS just added up to a pile of disappointing results. obviously there there's a ton of low-hanging fruit let's say in terms of efficiencies that can be gained in terms of plugging the great iconic well-known trusted brands from Canview into Canview's system that is running at a more efficient level at the moment but it will there is scepticism there because we are talking about revenue synergies as well as cost synergies and this will be quite a complex new company at the point when kimberly clark was just simplifying as they they were they are aiming to close the transaction on their international business that includes segments like tissue by mid-2026, and now this merger is expected to close around the same time.

18:31It just seems to complicate the picture a little bit. Oh, yeah, that does sound complicated. Besides the Tylenol, yes, and we know Al-Canvi has been dealing with some crises in the last month with Tylenol and then with talk lawsuits outside the U.S. as well. So I'm glad you went there. The Tylenol situation, the Trump administration has been attacking Tylenol overall. Do you think that's something that might complicate this deal? Could regulators step in and hold things up or raise questions that will just drag things out? Quite different questions, I would say, but great questions. So in terms of Tylenol, the legal risk is there.

19:16the Kenview was already fighting in the courts some lawsuits but we now have a Texas state lawsuit on top of it the Kimberley Clark's price when we look in terms of for instance an EBIT to enterprise value multiple and I'm taking 2025 26 2025 sorry that they will report so that will come at about 14 times, whereas historical transactions in the consumer health space were in the range of 16 to 20 times. So 14 times comes below that. So really reflecting not only the struggles of Canview where their organic growth is still declining, but also that liability risk with lawsuits that are ongoing and that's a new lawsuits that can be added as well.

20:14In terms of the, say, antitrust competition, regulatory approval, as I see it, they don't really overlap directly, but it really depends on a country region by region basis, because we know the U.S. stance can be very different from the European Commission one. Diana, should we expect more consolidation in the consumer product space, do you think? Yes, so that's a team that I've been watching very closely. Obviously, we had other large pharma groups with significant consumer health businesses. So we are talking not only over-the-counter medicines, but also the more personal care that deals with wellness.

21:01Sanofi decided to sell it to private equity. So at least for the next few years, that is that. Buyer is still considering, well, not considering, as management says, puts it, but buyer still has their consumer health business and they could be looking into either listing it or further consolidation within the current players. Our thanks to Diana Gomez, Bloomberg Intelligence Senior Equity Research Analyst. We also got earnings in the media space as well. Warner Brothers Discovery, the parent of HBO and CNN, reported third quarter sales that missed analyst estimates, providing a glimpse into the company's businesses as it puts itself up for sale.

21:43For details, we caught up with Geetha Ranganathan, Bloomberg Intelligence Analyst on U.S. Media. So Fundamentals, Scarlett, really don't matter all that much at this point, especially. Yes, the TV networks business, as we know now for many, many quarters, has been severely challenged. We saw a 20 % slump in TV advertising. We saw a 20 % decline in TV EBITDA. This was kind of well expected. And this really speaks to why they need to separate themselves, why they need to separate the low growth or rather the no growth TV assets from the part of the business that's actually growing, which is studio and streaming.

22:21That part of the business actually posted really good numbers. We saw the studio. Warner Brothers has actually been having a very, very successful run at the box office this year. They have about a 27 % share of domestic box office. And we've seen that kind of translate into really strong EBITDA numbers. And so we saw studio and streaming actually put up really, really good numbers. And that, again, speaks to why so many different parties, including a Netflix, including a Comcast, are interested in going after those studio and streaming assets. So right now, again, fundamentals don't matter that much.

22:54It's really all about the M &A. And I'm actually surprised, Geetha, that maybe we haven't had some more news on the M &A front because we've seen, you know, the M &A environment is very, very active. The market's very receptive to M &A here. We have a willing seller in terms of David Zaslav and the board of directors here. How do you think this is going to play out? Is something to make a bid for the entire company or just maybe the good pieces for it? We're having all possible permutations and combinations here, Paul. So we know that Paramount Skydance is actually interested in all of the company, including the TV networks.

23:29They've already made three bids. The highest one was for$23.50 per share for Warner Brothers Discovery, all of it. That was turned down. So they obviously have to come up with a much better offer. Now, the other bidders and the two that are most often mentioned are Netflix and Comcast. They are the ones that are only interested in the studio and streaming assets. No interest at all in the TV linear network business. We know that Netflix has started looking into the books of Warner Brothers Discovery. This doesn't necessarily mean that they have to come out with a bid. I mean, remember, Zaslav is, as you just mentioned, he's a very, very tough negotiator.

24:08He's a dealmaker. He is going to make sure that they really get paid well for the streaming and studio assets if they sell that. And we expect, you know, a price tag somewhere in the ballpark of about 75 to 80 billion. So, you know, whoever makes a big bid has to cough up a huge chunk of change for this asset. So we keep talking about how it's Netflix, Comcast and Paramount Skydance. Could there be another bidder that emerges from the shadows? Absolutely. I mean, you can never rule out big tech. You know, Amazon obviously has shown some interest in the past. They bought the MGM studio. we're not necessarily sure whether they've actually taken a look at the Warner Brothers assets.

24:46But again, Scarlett, as you kind of think about the whole media landscape and you kind of think about the various assets out there, this is kind of a once in a lifetime, kind of a generational opportunity for anybody who wants to get big in media to really go after Warner. I mean, they have some of the best IP out there. They have a streaming business that has performed really well. HBO Max is a name that resonates across the globe. So, you know, anybody and everybody should really be taking a look at this asset. So I wouldn't be surprised if we have some kind of a dark horse better here. Our thanks to Geetha Ranganathan, Bloomberg Intelligence, U.S.

25:21media analyst. We also got earnings reports this week from two of the world's biggest ride share companies, Uber and Lyft. Mandeep Singh joins us here, research head of Bloomberg Intelligence on Tech Stories. Talk to us about that segment of the economy, the ride sharing, the outsourcing, the third-party delivery. Are people still spending money on that stuff? They are. And all these companies, I mean, Uber reported over 20 % growth. DoorDash reported 25 % top-line growth. Even though the stock reaction was negative, that was primarily because they plan to spend more money next year on building their tech stack.