Performance Food Said to Get Takeover Interest From US Foods

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1:23With our unified Team Michigan approach, businesses scale faster and compete at the highest level. Michigan, pure opportunity. Seize your opportunity at michiganbusiness.org. Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. You know, if you drive in early enough to work, you get to see their trucks on the roadway making deliveries to restaurants, a performance food group and U.S.

2:07foods. Oh, you see? No, I see them all the time. I don't come as early as you. I should probably. Anyway, there's 3 a.m. There is like a talk about a possible deal. Take over one by the other. Crystal C is our U.S. deals reporter. Who's taking over who? Do we know or is this this rumor at this point? So we are reporting that U.S. Foods has made and has shown interest in a tie-up. So the companies are actually pretty similar in size in terms of enterprise value. They have a lot of debt, both of them. So at this point, it's early. We don't know who's taking over who just yet. But what we know is if this deal does go through or if this deal does go ahead, it will face a lot of regulatory scrutiny.

2:54And eventually the goal is to combine the company into a company that has$100 billion worth of revenue. Do we think it's more about scale, margins, distribution overlap, or just really fending off Cisco? So Cisco is actually currently the number one. The top three, four players. We should point out that's Cisco with an S. Cisco with an S. That's right. And that actually, I see those trucks more than I see the others, at least in the city. So Cisco, U.S. Foods, Performance Food, they all have their moment. Like in the past decade or so, actually, they have each like taken top spot and it's moved around.

3:29So there are moments where, you know, they have had activists attack at various different points. So it's interesting that this is the moment where you see that U.S. food is performing better than Performance Food, despite the name. So it's going to be a very challenging deal. In 2015, when Cisco and U.S. tried for a tie-up, that deal got struck by antitrust. So it definitely is a market where scale matters, margin matters. You can combine regions, you can combine your fleets. So all of those things make it a very good synergetic combination. The margins right now are like, you said the razor thin, right?

4:08So it depends on the market that you surface, Yes, depending on whether you're going after restaurants, is it cafes, or is it like hospitals, schools? What do these companies do? They prepare food, or they bring, explain that. So there are various different things that they do. It comes from, they do produce, they do prepared food, and they supply to places like restaurants, hospitals, schools, hotels. So depending on your end customers and what your products are, the margin's slightly different. also it means your production would be different and it impacts costs so i'm sure there is in in these ceos head a dream combination of you know what the composition of each product or each geographic should be and well if so this in this case u.s would clearly think that a tie up with performance would get them closer to that ideal uh business portfolio and regarding the why now Do you think it has something to do with softer regulatory regulations with the Trump administration as compared to the Biden's?

5:15Yeah, that's definitely one big concern. It is a very consolidated industry. So my gut feeling is either way, under whatever administration, it will be looked at by the antitrust. That said, the M &A dealmaker had been expecting 2025 since the inauguration day that this would be a much friendlier M &A market under President Trump. And Liberation Day hit and that put a lot of things on pause. In the past month or so, we have seen people warming up to the idea of exploring deals or like, you know, pulling triggers. So there is an element of a friendlier regulatory environment. All right, Crystal.

6:01Appreciate it. Crystal Seed, the U.S. deals reporter from Bloomberg News, talking about Performance Group attracting a takeover interest from U.S. food. Again, this is a potential deal could create a distribution company with combined sales of something on the order of like$100 billion. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts. Or watch us live on YouTube. Did you know they use remnants from the manufacture of denim in the U.S.

6:38currency? No, really? Well, if you hold up a bill, you'll see like little shreds. It looks like, you know, from your jeans. Is that only in the U.S. or does that happen all over? I don't know. I know that's definitely the case with U.S. currency. And that brings us to a discussion about Levi Strauss with her earnings. Mary Ross Gilbert is a senior equity analyst covering retail for Bloomberg. Did you know that? I did not. I mean, I know what you're talking about, those little threads in the bills. No, that's from the byproduct of manufacturing denim. They use it at the Treasury. um mary was uh mary ross gilbert yesterday was she was wearing uh what were we wearing yesterday uh ralph lauren and today the brooks brothers no gap okay very nice but it's a it's a it's a malvon gap collab so sold out it looked like the little brooks brothers thing but anyway um so levi what did we learn from levi strauss and their earnings So I think what we learned in the earnings report, first of all, you know, very optimistic view.

7:48But if you really dissect it, for example, the guidance that they raised on the revenue line, they now expect full year revenue to be up one to two versus down one to two. Most of it looked like a change, a shift in their view on the currency headwind. And then the other piece was because they had a strong second quarter. So the way we look at it is there's probably upside above their guidance and consensus view, which is in that range. So, you know, we think that the way the business has been reset, look, Dockers is out of the picture now. They got rid of some underperforming lines. They really honed in their SKU count, their stock keeping unit count, and really honed on profitable merchandise.

8:35And they've really taken their tops business. They've infused more fashion and style. And it's a growing category for them, as is non-denim bottoms. And, of course, their core denim business, jeans business, which they are at the leading edge of the latest trends. And, you know, even slim and straight are still a thing. But the biggest growth is really coming from loose and baggy. And that actually translated with shorts, too, for summer. And that kind of explains why they also had a strong second quarter. And they saw it globally. So, you know, very, very good. And across wholesale, too. So that was nice to see that.

9:19But DTC, direct to consumer, really led. And that was up double digits. Have you heard John's skinny jeans are out and baggy is in? If you look at all the young folks like Gen Z, they do wear baggy. I've got these stretch fabrics. That's the point at which I find myself. Okay, that's good. Levi's welcomes all styles. Okay, so more than half of Levi's merchandise needs for the rest of the year, according to the company, they've already been imported. But what will happen when that runs out? Have they released any plans when that happens? And would tariffs set in place by then, assuming? Yeah, Isabel, so you brought up a key point, and that is, what is the impact of tariffs?

10:03So just to give you a little perspective, Levi's is very well diversified. They only source about 1 % from China, so very little exposure there. Vietnam is probably 5 % to 9%. Of course, we have news that that tariff rate Trump has set, but it's not carved in stone, and there's no effective date yet. And we got news today that Vietnam is saying, hey, we don't want a 20 % tariff. if we want it to be 10 to 15. Nonetheless, with Vietnam being 5 to 9%, and then Mexico's 5%, and probably that is under their Canada agreement. So chances are they're not affected. And then everywhere else, they're assuming 10%.

10:44So the unmitigated impact is only about 50 basis points for the year, but with mitigation measures already taken effect, that's going to reduce it down to just 20 basis points. So they are one of the companies, if I look at my universe, of apparel-branded retailers that are sort of the least impacted by tariffs. Unless things change. But we still think that the impact will still not be as significant as it might be for others. I mean, is a company like this willing to take a hit to margins before raising prices for consumers? It's like 30 seconds. Yeah, John, you know, they're actually strategically raising prices on some of their new innovation.

11:32And that's where they're able to sort of build it in with that new product. And I think that's working effectively. All right, Mary. Always a pleasure. I can't wait to see what you're wearing next week. Mary Ross Gilbert, a senior equity analyst covering retail for us here at Bloomberg Intelligence. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. You know what time of the year it is? It's time for the mid-year assessments for the global communications and network equipment.

12:14Specifically, who better to do that than Woo Jin Ho? He's the senior technology analyst from Bloomberg Intelligence. and joining us on this Friday morning from our campus in Princeton, New Jersey. All right, mid-year update. So what's the update, Wu-Jin? Well, I will tell you, look, the fundamentals are actually fairly positive. You have AI drivers driving certain names like Arisa Networks and Celestica, and also the enterprise campus switching and the data center searching have upgrade drivers as well that's going to benefit someone like a Cisco and an HPE. Now, the issue is, and your prior guest was talking about tariffs and export restrictions, tariffs actually really spooked me out.

13:01And does that throw a monkey wrench in enterprise IT spending into the second half of the year and temper the growth and earnings expectations? So how much could tariffs and economic uncertainty really trip up the global networking sector sales in the latter half of the year? Do we have a number in mind? Yeah, don't have a number in mind. There's a couple of things. The networking sector has actually done a very, very good job in managing and navigating tariffs. From a sales perspective, we really haven't seen estimate cuts as a result of it. From a gross margin perspective, we're thinking about 100 and 200 basis points.

13:37And that's already reflected into consensus expectations. What I don't know, but there are a lot of enterprise IT spending surveys that are out there saying that they are going to start siphoning potentially siphoning off some of their spending plans one of the things that I will say is that enterprise networking tends to be a more mature and commoditized market so if there's going to be a couple of areas of spending that could be curtailed PCs obviously but also networking would be second in line hey Wujin we've been making a big deal about well it is a big deal that Nvidia across the what four trillion dollar market cap yep can that be sustained given what you you just said let's let's talk about the the multiple expansions sure so I'm not the Nvidia analyst I can't talk from a high level in terms of what's going on in video as well as some of the drivers to earnings growth if we look at some of the the AI initiatives that are going on whether it's all by the hyperscale cloud guys or some of the sovereigns and these neo clouds like core waves though they're building out these hundred thousand GPU type of installments this is lasting based on my work and then my colleagues works this is lasting over the next couple of years the only gaming time town for a high-end GPUs to train AI models is Nvidia.

15:10So is there sales momentum as well as earnings momentum to support it? Yes, there is for Nvidia as well as the rest of the supply chain. In the note you mentioned, or it was mentioned that we aren't seeing any trade overhang risk when it comes to demand in the latter half of the year and they aren't really reflected in consensus and in valuations. Why do you think that's the case? Yeah, I don't know, right? I think what happened was in the after following the first quarter results, you know, the companies have not yet really fully reflected the tariff impacts into their expectations, and consensus has carried that through the rest of the year.

15:53There has been very little indication after following first quarter results with regards to a pullback in demand, or more importantly, a pull forward in demand that's going to affect the second half. So, you know, my guess is that I'm waiting for what the second quarter results are going to tell us in terms of the second half. Wuj, thanks a lot. I appreciate it. Wuj, and Ho, the senior technology analyst from Bloomberg Intelligence joining us there from our Princeton, New Jersey campus. This is the Bloomberg Tech Minute brought to you by ChatGPT. Now with ChatGPT Work. I'm Carol Masser. Social media posts on sleep outnumber those on exercise by 3 to 1 and those on diet by 5 to 1, according to consumer researcher Ryla Global Consulting.

16:42And so it may come as no surprise that there are seemingly no limits to what we will do to get a good night's sleep. People are spending on everything from pricey sleep trackers, AI-powered scent therapy machines, to$3 ,000 body temperature-regulating Manosphere-endorsed mattress covers, and couples outfitting totally separate bedrooms. As Bloomberg's Dina Shanker reports, it all adds up to a sleep support industry that's a$300 million business, with growth coming from functional beverages and sleep powders, even as some experts warn that these products may not be effective and can even be harmful.

17:17Despite the spend, 6 out of 10 American adults still don't get the 7 to 9 hours of sleep the credible science says we need. As for experts, they recommend making lifestyle changes, such as getting sunlight and limiting screen time to improve sleep. That's the Bloomberg Tech Minute brought to you by ChatGPT. Put ChatGPT to work on your most ambitious ideas and projects. Get started at ChatGPT.com today by selecting Work Mode, available on Plus and Pro plans. If you listen to financial news, you know a lot of time is spent thinking about what's next. The next opportunity. The next investment. The next move.

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19:474certain. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. Do you have a pet? I'm used to growing up, but now I live alone. I used to growing up, but now it's hard in New York City. you have to take them out in the morning, at noon, after work, and for some even before bed. Do you have a pet? I used to. Used to. You know, I was so upset when we lost her that I just, I can't bring myself to replace her. Well, that's a bummer.

20:29Diana Rosario Pena is our Consumer Staples analyst, and she's here to tell us about just how much we spend on pets. It's like a staggering figure, isn't it? Yes, yes. and it's gonna keep growing up over the next five years we expect globally that the market might reach oh about 500 billion dollars by 20 only 500 billion that's it what in god's name are people's i mean yeah it's obvious dog food and stuff like that but is there anything like else i need to know about like dressing their pets up in little crazy costumes and stuff like that and little boots yes so um there's been a couple of things uh food remains the biggest expense for pet ownership it's about 30 40 percent of of the expenditure but um there are other things that come with owning a pet now people are more willing to get into discretionary like you know vests and shoes for their dogs and crates and the things like that.

21:35Also, health care is a big thing. People are more willing to spend more on the health care of their pet than they used to. Why is that? Is it because more dogs are getting sick or is it more because of the insurance company? Like, why does Trenton? Well, it's a couple of things. First of all, the humanization of pets. now people consider them as family. So they're willing to spend a little bit more to keep their family member around. So there's a greater acceptance of that kind of attitude. Who benefits the most from all this? What particular companies? I think, what did we use to feed our dog?

22:16Human food, actually, when I was younger. No, you don't feed them human food. Yeah, maybe that's why my dog wasn't the healthiest. Well, human-grade food, I will guess. So it really depends. If you're looking at food, the big food companies, Nestle, Colgate, Mars, General Mills, they have food offerings in different price points. But on the more premium side, you have things like Fresh Pet, that they have the Fresh Frozen, which is really like human-grade food that you just take it out of the fridge and you give it to your dog. All right. We know that - Like Isabel. Sadly, I shouldn't have said that.

22:56So we know that Americans love their pets and everyone knows that. To your point, people are delaying having children because they have pets or in part because they have pets and because the economy is tough. Where does the U.S. stack globally? Yes. So we're still about 40 % of the market. you know, we're probably going to grow about 35 percent compared to like the 38 percent that we expect over the next five years. So we're still going to be the biggest, the most mature part of the industry. There's others that might grow faster than that. There's other regions outside of Europe and the United States.

23:34However, that size of the pie is smaller, obviously. You know, it's not just dogs. There was a fascinating Bloomberg profile of a guy, I think it must have been Florida, who sells designer geckos. And some of them fetch a fortune, like five grand for a little gecko. What's the most popular pet? Is it the dog? It's still dogs and cats. And that is mainly where we focused on. Of course, there's others like hamsters and cobras and things like that. But that doesn't. By the way, just parenthetically, don't put the hamster near the cobra. Oh, my. Fish is also. I don't want to imagine. That should seem obvious.

24:18Fish is also fun. I think it's good training for young kids. You know, they just feed it once a day. The cleaning of the aquarium is always tough, though. Don't smell that. It shows them responsibility for sure. OK, so we know that e-commerce sales, you wrote in your note that in the U.S. it might reach 27 percent of the total from 20 percent in 2020. So we have that. We have the pharma market. We have the food market really just growing. What could be? What could be the hindrance here? What headwinds are you seeing in this space? Well, we actually see certain pockets of the market being a little bit more conflicted, particularly in the past year, discretionary spending.

24:56You know, we did make fun of the vests and even, you know, of popular fashion brands are expanding their names into pets. But that part of the spending has been a little bit subdued, I want to say. And part of it is because the population, the pet population, has been not growing as much as they used to, like back at the beginning of the pandemic. But another thing is obviously the economic situation. People are curbing their spending. So that is like one of the first few things. In terms of premium, we still think it's going to premium food. We still continue to think that it's probably going to get to 57, 60 percent of the food in the U.S., like the overall food.

25:47But the cadence is probably going to be more like 27 on rather than shorter term. We think people are going to probably get with kibbles rather than, you know, the fresh frozen part. Diana, thank you. Diana Rosaria Pena, the Consumer Staples Analyst. How the world is going to spend$500 billion on their pets. This is the Bloomberg Intelligence Podcast. Available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, 10 a.m. to noon Eastern on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.

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