The Update Issue: Surprises at Gap and Peloton, a SPAC Succumbs, and Amazon Seduces with Deals

Just a couple of weeks after I wrote about the troubles at retailer Old Navy, the CEO and president of its parent Gap (GPS) shockingly stepped down... Sonia Syngal had been in the top job for just over two years at the time of her unexpected resignation. Bob Martin, the executive chairman of Gap's board […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] The Update Issue: Surprises at Gap and Peloton, a SPAC Succumbs, and Amazon Seduces with Deals By Berna Barshay --------------------------------------------------------------- [Steve Jobs' Other Legacy]( The iPhone is Steve Jobs' legacy to the world. But what most people do not know is that Steve Jobs played a pioneering role in a much bigger project. A project that will have a bigger impact than the iPhone, iPod and the entire Apple ecosystem. MIT refers to this role as Jobs' legacy. Steve himself calls it the "biggest innovation of the 21st century". One American company (not Apple) is positioning itself perfectly to monopolize this innovation and put its own stamp on it. The best part is this company is being backed by none other than Job's biggest rival, Bill Gates. [Get the full details here](. --------------------------------------------------------------- Just a couple of weeks after I wrote about [the troubles at retailer Old Navy]( the CEO and president of its parent Gap (GPS) shockingly stepped down... Sonia Syngal had been in the top job for just over two years at the time of her unexpected resignation. Bob Martin, the executive chairman of Gap's board and a seasoned retail executive with experience as the CEO of Walmart's (WMT) international operations, stepped into the CEO role on an interim basis while the company searches for a new leader. Syngal was a Gap veteran, having worked at the company since 2004. She previously served as the CEO of the Old Navy chain before being elevated to lead all of Gap in March 2020. Along with announcing Syngal's departure, Gap announced it had recruited Horacio Barbeito, the former CEO of Walmart Canada, to take over the top job at Old Navy after the prior head, Nancy Green, departed in the wake of an inventory management disaster. The inventory problems coincided with the poor execution of rolling out extended, inclusive sizing at the chain. Gap also updated its guidance for the second fiscal quarter which ends this month... and the results were not encouraging. The company still expects sales to decline in the high-single-digit range but mentioned that promotional activity would take a bite out of gross margins. As a result, it expects to just break even on the operating income line, or perhaps dip a bit into the red. There was an air of hope around Gap when Syngal took over in 2020, since she had previously led Old Navy, which had been the primary growth engine for Gap in recent years. Investors hoped that she could bring some of the Old Navy magic to the floundering namesake Gap chain and the troubled upscale chain Banana Republic. Syngal took over from previous CEO Art Peck, who had departed in the wake of a scrapped proposed spin-off of Old Navy and a failure to turn around Gap and Banana Republic. Syngal's out not only because she failed to turn around the two troubled chains, but also because Old Navy effectively broke while on her watch. Over at flagship Gap, [a deal with recording artist, producer, and designer Kanye West]( provided a lot of hype... but not much quantifiable improvement. GPS shares fell 5% Tuesday in the wake of the news and are now down about 53% this year. It's unusual to see a CEO step down this abruptly... and after a short tenure and without a succession plan in place to boot. It's a definite sign that there are no quick fixes here. The bond market agrees with me, as Gap's 3.625% bonds that mature in 2029 dropped to an all-time low of just under 70 cents on the dollar yesterday – signaling that the possibility of financial distress at the company has increased. I continue to recommend avoiding GPS shares. Elsewhere in troubled terrain, home exercise company Peloton (PTON) continues to make big moves in a quest to lower its cost structure... CEO Barry McCarthy joined the company early this year with a mandate to make major cuts to the bloated Peloton cost structure – and quickly, as a weak demand environment paired with out-of-control spending put the company at existential risk as the pandemic waned and consumers headed back to the gym. In a move to get costs down, this week Peloton announced it would shut down all in-house manufacturing of bikes and treadmills and expand its relationship with Taiwanese manufacturer Rexon International, which will become the primary maker of Peloton bikes and treads. It's a radical operational about-face for a company that not long ago was doubling down on its manufacturing capabilities. Last April, Peloton closed on its $420 million deal to purchase gym equipment maker Precor, which has 625,000 square feet of domestic manufacturing space in North Carolina and Washington. At the time, Peloton was still operating with supply constraints and saw captive, domestic manufacturing as a way to speed up its supply chain and meet demand. What a difference a year makes... At the end of the March 2022 quarter, Peloton was grappling with inventory that was up 130% year over year at the same time that revenue from equipment sales had plunged 42%. Even before that disastrous report, [rumors were swirling that Peloton was halting production of equipment – a charge management initially denied but was later proven true](. Peloton declined to quantify how much this move would save the company, but directionally it should be a money saver in the long term. But in the short term, there could be layoffs at Precor and there will be 570 staff reductions in Taiwan at the company's Tonic Fitness Technology subsidiary. Staff reductions will bring with them the need for severance and other possible one-time costs. McCarthy is clearly making the right moves here, and his reputation from his time at streamers Netflix (NFLX) and Spotify (SPOT) is excellent. But he has a lot of work ahead undoing the strategic errors of founder and former CEO John Foley. PTON shares are down 76% this year and 95% since [I turned negative on them in January 2021](... With an enterprise value of just $3.8 billion, down around 90% from the peak, the company is starting to get interesting again... The run rate gross profit on just the subscription business is around $1 billion... PTON shares are trading for less than 4 times that gross profit number and at just 1 times trailing sales. Of course, the equipment business is still very weak, and that subscription business gross profit needs to cover a lot of sales and marketing, research and development (R&D), and overhead expenses. But that subscription revenue is also pretty sticky... The stock would be tempting if Peloton's balance sheet was better. Unfortunately, the company only has about $900 million in cash left as of March 31. And in that quarter, it burned about $700 million. McCarthy is slashing expenses fast, and working capital should be a source of cash as the company works down that inventory. But sometimes it costs cash in the short term to save money in the long term... The lack of financial disclosure and guidance around the new outsourced manufacturing arrangement gives me pause. Accordingly, I still recommend you avoid PTON shares – although they're certainly getting much closer to the level where they might be an attractive speculation. I'm on the sidelines for now because I think Peloton will need to raise dilutive equity capital to get through this turnaround. --------------------------------------------------------------- Recommended Link: [On Aug. 29, meet your 'Digital Twin']( Suppose your doctor says you're going to have a heart attack next Friday. Sound impossible? On August 29, a historic unveiling in Houston, Texas could create the biggest leap in technology many of us will ever see. [Learn more (incls. free stock ticker.)]( --------------------------------------------------------------- In a better-late-than-never development, I've been proven right on another one of [my 21 Predictions for 2021]( that I made in December 2020... Late 2020 was in retrospect the peak in frenzy for special purpose acquisition companies ("SPACs"). Also known as "blank-check companies," SPACs raise money and go looking for an operating business to acquire. However, there were too many of them launching at the same time. As a result, I made the following prediction... Prediction 6: At least one SPAC will have to give back the money it raised because it can't find a deal in time. A lot of companies (SPACs, private equity, venture capital, corporations) are competing for the same deals. One of the 2020 SPACs won't get over the finish line in time. It took a little longer than I expected... but this prediction came true in the most high-profile way possible when the largest SPAC ever raised announced on Monday that it was returning the money after failing to get over the finish line with a deal. Pershing Square Tontine Holdings (PSTH) launched in July 2020 with much fanfare. Not only was it the largest SPAC ever, raising $4 billion, but it had hedge fund billionaire Bill Ackman at the helm. Pershing Square Tontine attempted to buy a 10% stake in Universal Music Group (UMG.AS) last year from then-parent Vivendi (VIV.PA) prior to its eventual spin-off later that year. Unfortunately, regulators shot down that deal, noting that buying a stake in a business was not the same as buying a whole business, which is the traditional mandate of a SPAC. The health of the initial public offering ("IPO") market complicated the task at hand for Pershing Square Tontine, as companies large enough to be a target for the mega-SPAC had ample opportunity to just go public in such a receptive market for new issues. Ironically, now that the clock has run down for Ackman and his SPAC, valuations are infinitely more reasonable, and the IPO market is effectively shut. It's therefore not surprising that in this more hospitable market for making deals if you are a value investor, Ackman is still seeking avenues to do the kind of deal that his SPAC had hoped to do. According to Bloomberg... Ackman said in Monday's statement that he's still "working diligently to launch" a new type of privately funded acquisition vehicle, Pershing Square SPARC Holdings, that will issue publicly traded warrants allowing holders to acquire stock in a newly merged company. In investing as in life, timing is everything. If you are anything like me, you enjoyed celebrating Prime Day the past couple of days... Originally a sale to celebrate the anniversary of Internet juggernaut Amazon's (AMZN) founding – and to boost the number of subscribers to its Prime service – Prime Day has evolved to be something akin to a Black Friday in July. The deals are usually deep and plentiful, luring Prime members to stock up on basics as well as indulge in unnecessary splurges... Amazon watchers expected the deals to only be so-so this year, given the rising costs brands are facing to both manufacture and distribute product. While it's hard to quantify without an army of data scientists, my impression of Prime Day was that the discounts were deep enough to be interesting in many areas, but there were also some brands that were sitting it out. With inventory shortages quickly turning into inventory gluts at some brands, it's not surprising that we saw some deep and tempting discounts... while some brands that are hotter – or just have their inventory in check – declined to play in a big way. My other takeaway is that Amazon has invested a lot in making the site and app more shoppable... Whether it's a friendlier user interface, better integration with home and fashion influencers, or video shopping options... it was easier to shop and locate items of interest on the site or app than in past years. Whether or not that is enough to accelerate growth with consumers that are under pressure from rising gas prices and general inflation remains to be seen. Once a meaningful driver of Prime membership growth, it's a tall order for the fake holiday to reignite growth in Prime memberships, which have stalled out due to a recent $20 price increase as well as the law of large numbers. You can see the stall in this chart from the Wall Street Journal... Source: Wall Street Journal Prime Day sales are typically twice Amazon's normal run rate... But when the event was newer, it used to triple the normal sales. Prime Day has decelerated, much like Amazon's overall retail business, which is expected to have grown just 6% in the second quarter. Tough pandemic comps and a consumer under pressure are to blame. We'll get some indication of how Prime Day went when Amazon issues third-quarter revenue guidance with its second-quarter earnings at the end of the month. With shares down 34% this year, I think AMZN shares are a good long-term buy, but my bullishness is driven more by its Amazon Web Services division ("AWS") than by the prospects of its retail division, which was never terribly profitable even in the best of times... and is now plagued by the law of large numbers and tougher competition from traditional retailers like Walmart, Target (TGT), and Best Buy (BBY). From fake holidays to real ones... Happy Bastille Day! This French national holiday is the closest thing that country has to the Fourth of July here in the U.S. Instead of the declaration of independence from another country, the day recognizes the symbolic start to the French Revolution, which allowed the French people to free themselves from a despotic monarchy. In Paris on July 14, 1789, the French people stormed and took the Bastille, a military armory and prison – setting the stage for the eventual collapse of the monarchy... Source: Someecards This year's military parades and celebrations paid tribute to European solidarity in the face of Russia's invasion of Ukraine and also looked forward to France hosting the 2024 Summer Olympic games with its "Share the Flame" theme. There was lots of news to catch up on after a week away, so I'll return with the mailbag next week... Can anyone offer a contrarian bull case for GPS or PTON shares at these levels? Did you think the Prime Day deals were better, worse, or the same as in prior years... or did you opt out of the whole thing? [Click here](mailto:feedback@empirefinancialresearch.com?subject=Feedback%20for%20Berna) to send an e-mail with your thoughts. Regards, Berna Barshay July 14, 2022 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2022 Empire Financial Research. All rights reserved. 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