Under Armour Sinks as Tariffs, Sputtering Sales Hit Outlook

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1:14So healthcare is connected, not complicated. What's that look like? cheaper prescriptions that are easier to get, and care that looks at the whole person how you need it. Optum is helping make healthcare work as one for everyone. Learn more at business.optum.com. 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. Back to earnings Under Armour shares. Let's take a look.

1:56They are down 18%. They forecast worse than expected sales and profit for the current quarter. Here to break it all down for us is Poonam Goyal, Senior U.S. E-Commerce and Retail Analyst at Bloomberg Intelligence. Poonam, thanks for coming out this morning. So weren't they just, I'm confused, because wasn't Under Armour just starting to make this turnaround planned? Yeah, you know, 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, focusing on full price sales, the issue is that the macro is not cooperating.

2:34We have a$100 million impact on their cost 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 14 % to 16 % drop in North America sales, which is massive.

3:16So what then is your view of Under Armour 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.

3:51we 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 through its 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 an inventory. And then you see Under Armour going at full price. What are customers going to buy?

4:25Right. It just means that Under Armour isn't going to be able to deliver 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 UA 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.

4:56So 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 chain that Undermore 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's share still down 19%.

5:30That's Poonam Goyal, senior U.S. e-commerce and retail analyst over 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. Welcome back to Bloomberg Intelligence. I'm Lisa Mateo sitting alongside Isabel 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?

6:08Well, let's bring in Michael Halen. He's Bloomberg Intelligence Senior Restaurant and Food Service Analyst. Joining us live from Princeton. Mike, thanks for coming in. What can you tell us about Wendy's? What was the big sticking point for them? Listen, the previous management team threw a lot of promotions at the wall. And none of them 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 harder to execute in the kitchens. It's harder to execute at the front of the house. Speed of service ends up slipping.

6:51You know, quality of the food could suffer because it's not served hot. Right. And then marketing. So consumers get confused. Right. Like we saw at McDonald's was run two promotions over the quarter. Wendy's ran a handful. So what do you put the marketing dollars behind? 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 or 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 400 basis points versus the rest of quick service restaurants.

7:26And what is your take on Wendy's decision to cut its 2025 EPS outlook below the prior range and analysts 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 200 basis points, right? And so this is primarily self-inflicted. 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.

8:04They 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 Wendy's, 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 same-store sales here in the U.S. for the rest of the year. They were down 5 % to 6 % in July, which is a horrific number, you know, way underperforming the street, which was about a 1.5 % increase.

8:46So 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? And they debuted breakfast 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.

9:24And so they've been trying to gain steam in this day part. And so they've been actually spending corporate dollars in addition to the franchisee 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 its dividends significantly, and its 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.

10:10and then left right before things fell apart. And now they have an interim CEO who said the right things on the call, but he comes from UPS, and he's only been in the restaurant industry since December. 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 more promotions and more collaborations? No, there's too many of those. It's not working, yeah. 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?

10:54The 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'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.

11:27They said they're going to push a lot of the initiatives they had originally planned for the second half into 2026. 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 Takis collab. They just didn't work out. Thank you, Michael Hayland, for joining us. He's Bloomberg Intelligence Senior Restaurant and Food Service Analyst. 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.

12:03Listen on demand wherever you get your podcasts. or watch us live on YouTube. 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 PIMCO blew out for a$29 billion data center deal. So here to talk more about it, Mandeep Singh, Bloomberg Intelligence, senior tech industry analyst. Mandeep, thanks for joining us. So$29 billion data center deal. I mean, that's pretty big, no? Oh, it's big only if you don't look at their 2026 CapEx number, which could be north of 100 billion. So, look, the numbers are getting bigger and bigger in the world of AI infrastructure.

12:42And for a company like Meta, which was spending maybe$30 billion in CapEx every year and has tripled its CapEx, probably 200 plus next year. They need some external help when it comes to, you know, procuring the land, getting power 24-7. 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 are partnering with these large players on the infrastructure side because it will turn out to be a super cycle. 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.

13:34But is this kind of public-private financial structure common for large tech infrastructures like Meta, or are they pushing into new ground? And what are the benefits of using debt versus equity? Well, I mean, now with$100 billion CapEx, it's more than their free cash flow every year. So up until now, you know, we were in that$30 to$60 billion range. Meta's annual free cash flow is around$70 billion. 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$120 billion run rate probably in 2026 as well.

14:21So external financing will come into play because, as I said, these companies have the LLMs, they have the data, the algorithm, the applications, but they don't have the expertise in terms of procuring power 24-7. And you need a lot more power when it comes to AI scale that everyone is imagining, you know, 12 months from now, 24 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 talking about CapEx. That saves me so much out of you.

15:04But when are we going to reach that point where people 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 OpenAI and Anthropic have come, right? So we know with OpenAI, they are at a$12 billion annual run rate now, revenue run rate. Anthropic has 5x. It went from$1 billion at the start of the year to$5 billion run rate. Look at Microsoft's cloud growth number. They went to 39 % growth in Azure, 17 % lift from AI. So look, you're not going to see a very clear distinction between what is the AI contribution.

15:49In 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 22 % in the quarter. Compare that to Snapchat, 4%. Pinterest. And these are companies that are 50 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 a more predictable revenue stream meta i think has a higher bar to prove in terms of your roi question but clearly uh i i think the fact that they did so well this earnings that they already have an upper hand when it comes to digital ads what about when it comes to softbank and the stargate ai push what's the significance of softbank buying the foxconn plant in Ohio?

16:53And can you talk about their bigger ambitions for AI? I mean, SoftBank also has a big announcement from earlier in the year, you know, 500 billion, up to 500 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 SoftBank, I mean, they either partner with TSMC or Foxconn 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$500 billion number, you can show that this is how much I deployed this year.

17:33And 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, Mandeep Singh, always a pleasure. Glad to have you here in the studio, Bloomberg Intelligence, Senior Tech Industry Analyst, on the latest tech announcements. When your options are limited, so are your opportunities. At SIBO, the global exchange that pioneered options trading, we offer more ways to move with the market. From VIX and SPX options to global market data solutions, SIBO helps investors diversify, manage risk, and stay ahead of whatever the market does next.

18:11SIBO. Life is better with options. Your investments could be too. There are risks associated with SIBO Company products. Review the disclosures and disclaimers at SIBO.com slash US underscore disclaimers. This is the Bloomberg Tech Minute brought to you by ChatGPT. Now with ChatGPT Work, I'm Carol Masser. DoorDash, the largest food delivery company in the U.S., is building its own delivery drones and has gained the necessary FAA approvals to operate them commercially, the latest in its effort to delegate more orders to robots as a way of cutting delivery times. Bloomberg's Natalie Lung reports the company says it has been conducting pilot programs with various restaurants, some of which have seen their order volume grow during the test period.

18:56The effort marks an expansion of DoorDash's in-house robotics efforts to reduce reliance on human couriers for some orders, as their wages constitute a key expense to the business. Drones are also a way for DoorDash to cut delivery times on orders from more remote locations that some dashers may not want. 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. It's time to plan ahead and make sure your brand is showing up in ways that can have an impact.

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20:13Whether you're gearing up for fall events or simply planning ahead for the season, 4imprint can help your brand show up, stay useful, and make connections that last. Explore the possibilities at 4imprint.com. 4imprint. 4certain. 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. 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 Fed, the ECB, et cetera, they're constrained by the natural rate of interest.

20:53So what exactly is this? What we're going to do is go to the experts. This is Tom Orlick, Bloomberg economist, chief economist, joins us from D.C. Thanks for joining us, Tom. So the book is called The Price of Money, A Guide to the Past, Present and Future of the 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 wonky 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.

21:34The 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 1980s through the 2010s, it was falling. right? That's why Larry Summers was talking about secular stagnation. That's why the U.S. 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 u.s 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?

22:50So it's a great question, Isabel. 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 U.S. 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 1980s to the 2010s, the pattern was too much saving, not enough investment and falling interest rates.

23:37In 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 U.S. Treasury market anymore. And U.S. Treasury borrowing has exploded. President Trump inherited a deficit of 6.4 percent of GDP in 2024. and with his one big beautiful bill threatens to send that deficit higher. So the pattern has shifted from too much saving, not enough investment and falling interest rates to not enough saving, too much investment and rising interest rates.

24:24Donald 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 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 Council of Economic Advisers, nominated to the Fed board. There's talk that perhaps Kevin Hassett, the head of the NEC, perhaps Kevin Walsh, a former member of the FOMC, could be the new Fed chair.

25:10And 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 U.S. 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 costs of money keep rising, what then should governments, businesses and individuals do differently to maybe adapt?

25:53So 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 put money to work in the US stock market or in US real estate pretty much any time 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.

26:39For the U.S., the U.S. Treasury could be facing a world in the years ahead where the cost of interest payments on their debt is more than total U.S. 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 interest?

27:21Where is it headed? So the focus of our book is on the natural rate at the 10 year horizon. Now, we think it's headed up from a low of below 2 % in the mid-2010s to around 2.5 % today. And it's going to continue edging higher in the months and years ahead. Now, what does that mean for the 10-year Treasury, the rate which is probably the most important one in the whole global financial system? Well, we think something in the 4 % to 5 % range, something around 4.5 % 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.