Breakingviews - Corona Capital: Brexit curveball, Sonos

LONDON/NEW YORK/HONG KONG (Reuters Breakingviews) - Corona Capital is a column updated throughout the day by Breakingviews columnists around the world with short, sharp pandemic-related insights.

European Union and British flags flutter in front of a chancellery ahead of a visit of British Prime Minister Theresa May in Berlin, Germany, April 9, 2019. REUTERS/Hannibal Hanschke


- Brexit talks

- Sonos earnings

CURVEBALL FOR BREXIT. As if there weren’t enough complexities in down-to-the-wire Brexit talks, Covid-19 struck the team of lead European dealmaker Michel Barnier on Thursday, putting a temporary stop to negotiations. With some European politicians already predicting “real trouble” if a deal isn’t inked within the next week, it looks like time to consider yet another extension.

The idea of Britain and the EU moving smoothly to a new regime on Jan. 1 was already a stretch. Remaining sticking points, like who can fish in British waters, might be surmountable. But even then, the transition promises to be chaotic. A Northern Irish trade association warned on Wednesday that manufacturers would not be ready for some of the checks and controls that would apply even if there were an accord.

Yet European Commission deputy chief Valdis Dombrovskis said this week that the January cutoff date cannot be moved. The same day, the European Central Bank said institutions forced to move staff and capital to the mainland should expect “no additional flexibility” because of the pandemic. Some EU policymakers think their deadlines are unmovable; the virus may have other ideas. (By John Foley)

GREEN DAY. Sonos has used the pandemic to crank up profit. The wireless-speaker company’s shares surged 25% on Thursday after posting net income of more than $18 million in its fiscal fourth quarter. Chief Executive Patrick Spence said the California company is “delivering the profitability that we’ve been talking about since our IPO, well in advance of when we thought we would actually achieve it.”

The company cited a report from Futuresource noting 63% of audio hardware owners are now comfortable buying products online, up from 25% before the pandemic. Revenue in Sonos’s direct-to-consumer channel increased 84% year-over-year.

Some of the interest is out of necessity. Days are long and lonely. Music is a source of comfort. Gatherings are more often at home, too. But even when Covid-19 subsides, Sonos has found a way to make its business model work. That will continue to be music to investors’ ears. (By Lauren Silva Laughlin)

OLD WHITE MEN. The coronavirus has turned back the C-suite diversity clock. Of Britain’s top 100 listed companies, only five now have female chief executives, down from eight in 2018, according to Heidrick & Struggles. The executive search group puts this down to boards falling back on experience and familiarity during unprecedented turbulence. Glencore is a case in point. The commodity trader’s boss of the last 18 years, Ivan Glasenberg, 63, had been due to move on this year. Now he might not.

Ireland scored a double win, with the highest proportion of female CEOs, at 15%, and the lowest average age, at 53. On that latter score, the United States fared worst, with the average corporate leader being 60 years old. Experience may help companies survive a crisis, but life after the pandemic may be very different, given changing social trends and a slow recovery. A lack of diversity could soon become even more of a problem. (By Ed Cropley)

NEVER THE SAME PLACE TWICE. Bargain shopping loses its thrill when buyers can’t peruse the aisles for treasures. That has allowed discount dealer TJX Companies to avoid coming up with an e-commerce strategy for its houseware line. Covid-19 means it may finally have to get one.

The retailer said on Wednesday that it would launch a website for its HomeGoods chain to “satisfy our current customer base,” according to Chief Executive Ernie Herrman. Sales at the company’s open locations fell 5% in the quarter ended Oct. 31.

Before Covid-19 hit, TJX’s stock had been a strong performer. As competitors struggled to compete for online shoppers, HomeGoods thrived by shunning e-commerce altogether. Its parent company’s shares rose almost 80% between late 2017 and February. Meanwhile, chains from Barneys to Payless ShoeSource shuttered.

An e-commerce strategy could help Herrman get over the pandemic hump. But scrounging for sales online probably won’t generate the same high for shoppers, or shareholders. (By Lauren Silva Laughlin)

PAUSE BUTTON. The pandemic has forced money managers to put their good intentions on hold. Nearly four-fifths of institutional investors said their firms were temporarily deprioritising environmental, social impact and corporate governance issues as investment criteria, an Edelman survey showed. Nearly as many said the companies in which they invest were doing the same, according to the poll of 600 investors whose firms collectively manage assets worth more than $20 trillion.

This is not a permanent setback. The survey found that 96% of investors expect to increase their focus on so-called ESG practices as economies recover from Covid-19, and 88% believe that ESG-friendly companies are a better bet for long-term returns than ones that don’t put a high priority on such initiatives. An increase in the proportion of money managers interested in taking an activist approach means laggards will face more pressure to change their ways in the coming years. (By Swaha Pattanaik)

BUBBLING OVER. Chinese hotpot specialist Haidilao is turning up the heat. The $38 billion restaurant chain plans to add 400 new locations, mostly in the People’s Republic, this year, a third more than its previous estimates. Even as restaurant sales in China plunge, the group’s chief strategy officer says fewer competitors and falling rents are opportunities for expansion.

For a company specialising in meals where diners share a communal broth, Haidilao has proved surprisingly resilient amid the pandemic. After reporting a net loss in the first half, the company is expected to be back in the black in the six months to December, Refinitiv data shows. Even so, its Hong Kong-traded shares are up a blistering 83% since the start of the year, and now fetch a frothy 60 times forward earnings, twice the multiple at KFC operator Yum China,. Investors betting on a quick recovery risk getting burned. (By Yawen Chen)

ROYAL MISS. The benefits from a surge of lockdown-induced parcel deliveries have been lost in Britain’s post. Royal Mail on Thursday raised its full-year revenue target thanks to a rise in online shopping but also warned that it is struggling to control costs. Manual sorting of higher volumes of parcels and Covid-19-related expenses like safety equipment and agency staff dragged the formerly state-owned group’s UK business to a 129 million pound adjusted operating loss in the six months ending Sept. 27.

Things could improve. Royal Mail has earmarked 100 million pounds of extra spending to make sure it can maintain quality in the busy Christmas period. There’s also a chance ongoing talks with labour unions will produce an agreement that will allow Royal Mail to cut costs and reap the benefits of a surge in demand for its services. The 7% rise in the 3 billion pound company’s shares on Thursday morning suggests investors are hopeful interim Chief Executive Stuart Simpson may one day be able to deliver. (By Aimee Donnellan)


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