Business

When warren buffett was asked to explain in April why Berkshire Hathaway, his investment firm, had built a 14% stake in Occidental Petroleum, or Oxy, over a frenetic fortnight of buying starting two months earlier, his answer was long. It included a digression into John Maynard Keynes’s “General Theory” of 1936, and a rollicking description of why Wall Street still resembles a gambling parlour, as it did back then. He barely mentioned the Houston-based oil company, now worth $69bn, besides saying that he had read Oxy’s annual report for 2021 and that Vicki Hollub, its boss, “made nothing but sense”. The pithiest explanation came from Charlie Munger, Mr Buffett’s long-standing sidekick: “We found some things we preferred owning to treasury bills.”Listen to this story. Enjoy more audio and podcasts on More

Getting a package delivered is easy. Sending it back is not. Repacking, printing labels and shipping it back up to the seller is an increasingly familiar experience for online shoppers. In America 21% of online orders, worth some $218bn, were returned in 2021, according to the National Retail Federation, up from 18% in 2020. For clothing and shoes it can reach around 40%. It is a headache for retailers. Listen to this story. Enjoy more audio and podcasts on More

Americans are “always in a hurry”, wrote Alexis de Tocqueville in “Democracy in America”, his opus published in 1835. Until the covid-19 pandemic, nowhere was this more evident in recent decades than in packed trains at peak times as people commuted to work. Listen to this story. Enjoy more audio and podcasts on More

A city rivalry is heating up between Shanghai and Chengdu. The highest temperatures and lowest rainfall since records began 60 years ago have led to severe power shortages across the south-western province of Sichuan, where Chengdu is located, and in its neighbouring municipality, Chongqing. As a result Sichuan has been forced to curb energy use at thousands of industrial firms. That in turn has threatened the supply of parts to carmakers, such as Tesla in Shanghai. Listen to this story. Enjoy more audio and podcasts on More

Peloton reported a wider loss in its fiscal fourth quarter as sales declined and costs mounted.
The company, under CEO Barry McCarthy, is carrying out an aggressive turnaround plan.
Peloton did not offer an outlook for its new fiscal year.

Brody Longo works out on his Peloton exercise bike on April 16, 2021 in Brick, New Jersey.
Michael Loccisano | Getty Images

Peloton on Thursday reported widening losses and slumping sales for its fiscal fourth quarter as the connected fitness equipment maker attempts to win back investors with cost cuts and strategic shifts.
The company’s shares declined more than 14% in premarket trading, a day after the stock surged more than 20% on news of its partnership with Amazon.

It marks Peloton’s sixth consecutive quarter of reported losses. The company said it aims to reach break-even cash flow on a quarterly basis in the second half of its fiscal year 2023.
Still, Peloton CEO Barry McCarthy said he expects the market for connected fitness will remain challenging for the foreseeable future, as consumer demand for at-home workout machines wanes from Covid pandemic highs.
Since McCarthy took over as chief executive from Peloton founder John Foley in February, the company has pursued sweeping changes that have yet to fully pay off. Peloton raised membership fees, hiked prices on some equipment, laid off thousands of workers, tested a rental option, exited last-mile delivery and transferred all production over to third parties. On Wednesday, Peloton also started selling a portion of its products on Amazon in the United States, its first such deal with another retailer.
“The naysayers will look at our [fourth-quarter] financial performance and see a melting pot of declining revenue, negative gross margin, and deeper operating losses,” McCarthy wrote in a letter to Peloton shareholders.
“But what I see is significant progress driving our comeback and Peloton’s long-term resilience,” he said. “We still have work to do.”

Peloton did not offer an outlook for its upcoming fiscal 2023. For the first quarter that ends on Sept. 30 it said it sees subscribers staying flat, and revenue ranging between $625 million and $650 million. Peloton said this takes into account near-term demand weakness and seasonal fluctuations to the business.
There was a silver lining for the company: This marked Peloton’s first reported quarter where higher-margin subscription revenue accounted for the majority of total sales.
Losses mount
Peloton’s net loss widened in the three-month period ended June 30 to $1.24 billion, or $3.68 per share, from a loss of $313.2 million, or $1.05 a share, a year earlier.
McCarthy said the losses stemmed from Peloton’s efforts to avoid an inventory glut, cut fixed costs and address other supply chain issues. The company earlier this year embarked on an $800 million restructuring plan. Peloton ended the fourth quarter with inventory of $1.1 billion, compared with $937.1 million a year earlier.
Revenue fell 28% to $678.7 million from $936.9 million a year earlier. That came in short of the $718.2 million that analysts had been looking for, according to Refinitiv estimates.
Within that figure, connected fitness revenue that includes the contribution from Peloton’s Precor business dropped 55% to $295.6 million.
Peloton’s connected fitness gross margin was another bleak point, at negative 98.1% compared with positive 11.7% a year earlier. Peloton said it experienced higher logistics expenses per delivery, increased port and storage costs, plus charges related to the recall of its Tread+ treadmill machine.
Peloton booked $383.1 million of subscription revenue, up 36% from the prior year and representing 56.4% of total company sales. Subscription gross margin ticked up to 67.9% from 63.3%.
McCarthy, who previously worked at Netflix and Spotify, has made it clear he is more interested in pursuing growth on the subscription side of Peloton’s business, rather than putting such an emphasis on hardware. He believes Peloton’s digital app will be core to the company’s future success.
Peloton burned through $412 million in cash in the fourth quarter, after it averaged negative cash flow of $650 million in each of the prior two quarters. It ended June with $1.25 billion in cash reserves and a $500 million revolving credit facility.
BMO Capital Markets analyst Simeon Siegel applauded McCarthy for making some “very constructive decisions” to stem a cash bleed in recent months. But, he said, Peloton may be facing a bigger issue of brand saturation.

Member count drops

Peloton ended its latest quarter with 2.97 million connected fitness subscriptions, about flat with prior-quarter levels and up 27% from a year ago. Connected fitness subscribers are people who own a Peloton product, such as its original Bike, and also pay a monthly fee for access to live and on-demand workout classes.
Its total member count, though, declined by about 143,000 people from the prior quarter to 6.9 million. McCarthy, following Foley’s initial vision, has said the company hopes to one day amass 100 million members.
Peloton’s average net monthly churn levels for connected fitness users ticked up to 1.41% from 0.73% a year ago.
The company said this was ahead of its internal expectations in part due to a consumer protection ruling in Canada that forced all customers in the country to approve the subscription price hikes that took effect in June, and about 85% of them have done so to date. Peloton said it had expected that some people would drop their memberships after prices rose.
But investors might be wary of the leap. A lower churn rate would be better news for Peloton, as it means people are sticking around and continuing to pay for their memberships.
McCarthy said in the letter to shareholders that the fourth quarter should prove to be the “high water mark” for write-offs and restructuring charges related to inventory and supply chain challenges. It should also mark the beginning of Peloton’s comeback story, he said.
Peloton shares have dropped around 60% year to date, as of Wednesday’s market close.

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The lowered guidance came after the company reported second-quarter earnings per share that topped Wall Street estimates by a penny.
Shares of rival Dollar General, which reported better-than-expected results, also slid after initially rising.

Dollar General and Dollar Tree stores
Getty Images

Shares of Dollar Tree fell Thursday after the company cut its financial outlook for the year, citing its investments in offering more competitive prices at its Family Dollar stores.
The move came after the company reported second-quarter earnings that topped Wall Street estimates by a penny, while revenue was essentially in line with expectations. Its shares were down 8% in pre-market trading.

Shares of rival Dollar General, which reported better-than-expected results, also slid after initially rising.
Dollar Tree CEO Mike Witynski said in a release that the company’s second-quarter results reinforces the relevance of the company’s products for households pressured by higher costs for food, fuel and rent. He also noted the company’s Family Dollar chain has closed the pricing gap with key competitors and that its “value proposition is the most competitive it has been in the past ten years.”
But he said the company’s investments in offering more competitive pricing is expected to pressure gross margins in the back half of the year, along with shoppers’ growing focus on necessary products.
“We are confident these pricing and other investments will generate very attractive returns over the long term,” he said.
For its fiscal 2022, Dollar Tree now expects earning to be in the range of $7.10 to $7.40 per share. It had previously forecast earnings of $7.80 to $8.20 per share. The company also tightened its net sales guidance for the year to a range of $27.85 billion and $28.10 billion. The previous range was $27.76 billion to $28.14 billion.

For the second quarter, Dollar Tree said it earned $1.60 per share, a penny more than Wall Street expected. Its revenue for the period was $6.77 billion, which was essentially in line with estimates for $6.79 billion. Same-store sales rose 7.5%.
Dollar General, meanwhile, reported earnings of $2.98 per share and revenue of $9.43 billion. That was better than the earnings of $2.93 per share and revenue of $9.4 billion analysts expected. Same-store sales for the period rose 4.6%.
Shares of Dollar General were down 2% in pre-market trading.

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The AR-15 is one of the most controversial weapons in America.
Lightweight and easily customizable AR-15 style weapons have skyrocketed in popularity in recent years, taking center stage at gun ranges and shooting competitions across the country. Advocates say the weapons are a symbol of freedom, and important for personal safety.

“I am smaller and less capable to handle violence, and a firearm is the great equalizer,” said Dianna Muller founder of the DC Project, which advocates for firearm education. “I go to bed comfortably and do not worry about it at all because I have an AR-15 beside my bed.”
As of 2018, there were an estimated 393 million civilian-owned firearms in the U.S., according to the Switzerland-based Small Arms Survey, a government-backed global organization. As of 2020, there were about 20 million AR-15-style weapons in the country, according to the National Shooting Sports Foundation, a trade association.
Firearm manufacturers have seen revenue surge, taking in about $1 billion from the sale of AR-15 style weapons in the past decade.
The weapons have been involved in a number of mass shootings, including at an elementary school in Uvalde, Texas, earlier this year that killed 19 children and 2 teachers. Critics argue the weapons are aggressively marketed by gun companies targeting at-risk young males.
In an effort to stem the flow of mass shootings, the U.S. House of Representatives last month passed legislation that would ban assault weapons. That measure is likely to face defeat in the Senate.

So what’s behind the popularity of the AR-15, and what responsibility do gun makers have when their products are used in mass shootings? Watch the video to learn more.
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Aircraft lessors are reaping the benefits of airplane shortages.
Some in-demand aircraft lease rates have surpassed 2019 levels.
Leasing firm executives said many of their customers are extending leases, with new planes hard to find.

An Airbus A321 is being assembled in the final assembly line hangar at the Airbus U.S. Manufacturing Facility in Mobile, Alabama.
Michael Spooneybarger | Reuters

Passengers aren’t the only ones paying more to fly this year.
A tight supply of aircraft is driving up the price airlines pay to rent planes, just as travel demand returns.

The rent on a new Boeing 737 Max rose more than 20% between April 2020 and this July to $316,000 a month, estimates aviation advisory firm IBA Group. The competing Airbus A320neo climbed to $324,000 a month, up more than 14% from April 2020, and the highest price since before the pandemic. The larger version, the A321neo, was going for $375,000 per month in a July.
The world’s largest aircraft leasing firms, like Air Lease, Avolon and AerCap, which acquired GE’s airplane leasing business last year, are reaping the benefits.

More than 51% of the world’s nearly 23,000 single-and-double-aisle jetliners are owned or managed by leasing firms, according to aviation consulting firm Cirium. While many airlines do own their aircraft, some carriers choose to rent planes instead, or combine the two.
Reasons for leasing vary and include weak credit ratings that drive up borrowing costs, and the desire, or need, to conserve cash, rather than shelling out to buy new planes, which can run more than $100 million apiece at list prices.
The higher costs come as airlines are already facing high inflation, resulting in expenses that usually get passed along in fares. Aircraft rents are approaching or in some cases surpassing 2019 prices, and they’re set to go even higher. This year’s surge in oil prices make newer, fuel-efficient planes more attractive than older ones, and higher interest rates could also drive up lease rates.

“You have the rising interest rates and higher cost of capital,” said Mike Yeomans, director of valuations and consulting at IBA. “That will push lease rates higher through the rest of the year.”
Leasing firm executives told CNBC that many of their customers are extending leases, with new planes hard to find.
Steven Udvar-Hazy, executive chairman of Los Angeles-based Air Lease, said the company’s lease extension rate is nearing a never-before-seen 90%, and that it usually runs about 65% to 75%.
“We’re seeing a lot of lease extensions on a planes that a year ago we projected that we would have to remarket,” said Udvar-Hazy. That means the company doesn’t have to worry about transition costs and it gives them a steady stream of income.
The trend is the result of a resurgence in airline bookings while Boeing and Airbus – still recovering from a demand and production lull during the earlier days of the pandemic along with supply chain issues – are unable to ramp up production as much as they would like to.
Global passenger traffic rose in 76% in June from a year earlier, but is still down about 29% compared with before the pandemic, according to the International Air Transport Association’s latest available data.
Hazy said interest rates would have to climb higher and remain elevated to significantly dent travel demand.
For now, airlines are “now looking at a world where they can actually deploy more aircraft,” said Andy Cronin, Dublin-based Avolon’s CEO designate. “We’re definitely seeing a shortage of aircraft and accelerating demand over and above what we would have expected at this stage.”
Cronin said lease rates for Boeing Maxes and Airbus A320neos have risen by 10-15% so far this year.
Supply chain problems and labor constraints have challenged manufacturers from increasing production. Part of the issue stems from sanctions on Russia that has crimped titanium supplies since that country’s invasion of Ukraine in February.
“Now we’re not talking about dozens and dozens of aircraft, but you’re talking five to 10 airplanes that these customers that are going to be without engines because we don’t have the titanium forgings that we had expected to get this year,” Raytheon CEO Greg Hayes said on an earnings call last month, referring to the conglomerate’s Pratt & Whitney engine unit.
“We’ll work through it, but it’s not going to be without a little bit of pain to our customers.”

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