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Capital Calls

12 March 2021 By Breakingviews columnists

Concise insights on global finance in the Covid-19 era.


– T-Mobile US

– Ulta Beauty

Super charged. Nearly a year since T-Mobile US and Sprint closed their merger, the $157 billion company led by Mike Sievert is delivering on its promises of synergies and then some. It could be unwelcome news for rivals Verizon Communications and AT&T.

T-Mobile said on Thursday that it unearthed additional cost savings by cutting marketing expenses, consolidating IT and the like. It now expects to achieve $7.5 billion in synergies in 2 years, up some 25% from the original $6 billion it pegged when the deal was announced in 2018. In turn, T-Mobile is forecasting to return some $60 billion to investors in share buybacks in 2023-2025.

T-Mobile also pledged that the merger would result in a more competitive market for 5G connections. Bernstein estimates that T-Mobile can more than double its customers from about 20 million in 2020 to nearly 45 million in 2025 targeting home broadband and enterprises – typically Verizon and AT&T territory. The telecom wars show no sign of a truce. (By Jennifer Saba)

New look. Ulta Beauty is tweaking its routine. The U.S. cosmetics retailer said on Thursday President Dave Kimbell will succeed Chief Executive Mary Dillon in June. It will be tough to fill Dillon’s shoes. Under her, Ulta shares have increased more than 250%, more than the 144% price return for the S&P, according to Refinitiv.

Kimbell is also inheriting lingering pandemic side-effects. On the same day, the company said sales dropped 17% year-over-year to $6.2 billion in the 12 months to Jan. 30. Makeup sales are still falling, Dillon said in an earnings call, and that’s its largest category, accounting for 44% of sales last year. That outweighs bright spots such as skincare.

Shares dropped 10% in early trading in New York. Ulta said sales won’t fully recover this year, and operating profit margin isn’t bouncing back either partly because makeup sales recovery is still uncertain. At 32 times next year’s earnings according to Refinitiv data, Ulta’s shares trade higher than retailers like Target, which stock similar skincare products. Ulta’s best hope is selling more premium products like $50 eye-shadow palettes. Last year was rough, but Kimbell’s tenure will start off just as challenging. (By Amanda Gomez)

Sewing grace. Christian Sewing has had a good pandemic. The Deutsche Bank chief executive’s 2020 compensation rose 46% year-on-year to 7.4 million euros. Compare that with peers like Jes Staley at Barclays, who took a 32% pay cut, or UBS’s recently departed boss Sergio Ermotti, whose remuneration rose a measly 7%. Sewing’s haul is smaller than Ermotti’s 12 million euros, but bigger than Staley’s and HSBC CEO Noel Quinn’s. Both banks have bigger market capitalisations than Deutsche.

Such simple comparisons are a little off, however. Sewing’s year-on-year bump looks high partly because he relinquished a big chunk of his bonus in 2019, when Deutsche was in dire straits. And his 2020 performance arguably merits a premium: the lender’s shares rose 22%, compared with a 26% fall for the STOXX Europe 600 Banks Index. That won’t assuage employees who fell victim to Sewing’s cost cuts. But at least it gives his bonanza some basis in logic. (By Liam Proud)

Bad timing. Setting a new record isn’t always a good thing. UK exports and imports fell by around a fifth in January from the previous month, data showed on Friday. The main impetus for the groundbreaking declines was plunging trade with the European Union in the first month of new Brexit arrangements. Exports to the EU fell by 41% while imports from the bloc dropped by 29%.

True, the numbers come with health warnings. For example, some stockpiling may have occurred before the EU exit transition period ended. And trade started picking up towards the end of January. Still, an Institute of Directors poll on Thursday showed nearly 20% of business leaders who trade with the EU had stopped doing so in January, with a narrow split between those who said the pause was temporary and those who said it was permanent. Brexit reverberations will complicate the UK economy’s post-pandemic recovery. (By Swaha Pattanaik)

Approach Trench. Asia is helping Burberry bulk up its M&A defences. Despite mandatory lockdowns in Europe, the luxury trench-coat maker on Friday said comparable store sales in the three months to March 27 were expected to grow between 28% and 32% year-on-year. Analysts like Jefferies had previously expected 22%. Burberry shares jumped 9% to their highest since January 2020, before Covid-19 spread globally. The gains trim the chances of a takeover.

The euphoria may not spread to the rest of the sector. European luxury goods outfits like Hermès International and Kering were flat on Friday. Either they have already enjoyed an Asia bounce, or their valuations were already pushing at the seams. Hermès is trading at 49 times 2022 earnings, compared to 28 times for Burberry. The good news for Chief Executive Marco Gobbetti is that this gap is narrowing. His turnaround, which includes a first menswear-focused collection by designer Riccardo Tisci, may be working. (By Dasha Afanasieva)

Discounted. Hong Kong conglomerate Swire Pacific can learn from its rival. The company just reported its first-ever annual loss of $512 million for 2020 and warned that the worst was not yet over. Covid-19 and the city’s political turmoil have battered units including airline Cathay Pacific and retail-geared Swire Properties. On Friday, Cathay, burdened by Hong Kong’s extreme three-week quarantine requirement, said passenger traffic dropped 98% year-on-year in February.

Not all of Swire’s rivals are suffering similarly. Fellow trading house Jardine Matheson, albeit with a different business mix, just reported a $1 billion net profit for 2020. More gallingly, Jardine’s historic restructuring unveiled on Monday has helped narrow its valuation discount: its shares now trade at one-tenth below their post-revamp net asset value, compared to 26% before the announcement. Swire offers a 50% discount to net asset value. Business is tough, but a restructuring might help. (By Jennifer Hughes)


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