Power Lunch - Bruised Apple, Circling the Supply Chain 3/21/24

Episode Date: March 21, 2024

The DOJ is taking aim at Apple, as the tech titan faces a massive antitrust lawsuit. The stock is on pace for its worst day since August. We’ll bring you the latest details, including what’s at stake.Plus, the FTC just released the findings from it’s long-awaited supply chain study. And it has some bold claims relating to retail giants like Walmart, Amazon and Kroger. We’ll tell you all you need to know. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Good afternoon, everybody, and welcome to Power Launch alongside Contessa Brewer. I'm Tyler Matheson. Glad you could join us. Coming up, the DOJ taking aim at Apple. The tech giant facing a massive antitrust suit. The stock worst day since August. More on this, Contessa, in a minute. Well, plus we have the FTC presenting results of its long-awaited supply chain study that affects names like Walmart, Amazon, Kroger, and others will have that for you. But first, let's give you a quick check on the markets, and they have been moving higher today following yesterday's Fed decision. record highs now across the board. The Dow up 312 points at 39,824, almost at 40,000. The S&P 500 up 24, about a half percentage point there in the NASDAQ higher by also about a half percentage point at 16440. As for the S&P right now, let's get a quick power check on the positive side. You have micron surging on a big beat on the negative side.

Darden restaurants missing on revenue. Look at that Darden is off by six and a third of a problem. percent and Micron up by 16 and a half percent. We have more on both of those names still ahead today. All right. We begin, however, with Reddit. Exciting day for that company, marking the first social media IPO since all the way back in 2019, five years ago. Shares opening at $47 a piece. But beyond social media, there's a lot of discussion around its role in the AI area. Listen to what the CEO had to say about that. The value of our data is growing. In a world where more and more content in the internet is created by artificial intelligence,

the premium on actual intelligence, which is what Reddit is, continues to grow. Here to discuss is our own Deirdre Bosa, along with Deepwater Asset Management's Doug, Doug Clinton, Deirdre, and Doug, welcome. Good to have you with this. Deidre, I'm going to turn it over to you to ask the first questions here. Okay, well, I guess then, Doug, I will ask you a question. What do you make of this Reddit pop? Of course, it's still early. It has to settle. But I mean, 50% that's pretty good. It's not as good as yesterday's IPO, that Estera Lab 70% pop. Do you think that Reddit is more AI adjacent or kind of like an AI company as it's been trying to present itself throughout the road show and in the S1?

DeJy, I think it tells us, number one, that the IPO window right now for tech, especially if you have a little bit of an AI story is wide open. In terms of Reddit itself, I don't think that their AI story is this. clear as Astara Labs story. And the reason I say that is still the majority of Reddit's business and the majority I think of the future in terms of how the stock reacts will be dependent upon their ability to convince advertisers to spend more on the platform. In terms of AI, they have a great deal with Google. It's about a $60 million a year contract with Google for Google to use Reddit data to train its LLMs over three years. And I think that shows. that there is certainly value of the data. The challenge that we have is there's not that many

big buyers who are creating these foundation large language models who can come in and spend $60 million a year. And we just saw with inflection sort of having some changes amongst their founders going to Microsoft, there may not be that many companies that actually survive that can afford to buy this expensive data. It's a great point. And, you know, right now, Reddit gets most nearly all of its revenue from that advertising model. And it's And it competes with much, much bigger platform. So that's why I think that licensing data, the fee that it got from Google, which was $66 million, that represent about six or seven percent of its expected revenue this year.

I just wonder, Doug, how sustainable? Is this like a real business model for them? You have even Sam Altman himself trying to play down the use of that, saying that they draw from many different sources when he's talking about the New York Times lawsuit and them saying that OpenAI is drawing on their data without their permission. So how sustainable do you think it really is? I do think it's sustainable in at least the near term. So as we have this AI arms race, we have these huge competitors, OpenAI, Google, Anthropic building models that really compete directly against each other to get toward artificial general intelligence. I think the Reddit data

is important for that because they are in some ways, you know, these communities, 100,000 and active communities, sort of like expert networks on some very niche and useful topics. But I think over the longer run, as these models do get more toward artificial general intelligence, there's probably a cap to the value of that data from Reddit. So let me ask you, Doug, how important is profitability and how soon for Reddit? In other words, this is a company that has nice revenues, but no profits so far. profits are tough in social media for all of the companies that really don't have scale like meta, social and advertising in general online is really a scale game.

If you have the scale of a meta and Instagram, you can drive incredible profitability. You look at a company like Snap, who is kind of in that second tier, I would argue, with a Reddit, with a Pinterest. And you see that the profitability dynamics are a little bit different. I think that's going to be one of the key stories in terms of Reddit over the next couple years, Tyler, is can they get to profitability? They spent more than 50% of revenue on R&D last year. That is partly because they're still sort of subscale relative to some of these other platforms. They can find some good leverage in their model and continue to get those ad dollars to come onto their platform.

I think that could help the story a lot for me. Meanwhile, Deirdre, we learned that in a prospectus for this IPO that Reddit said, that the FTC is investigating its data licensing practices. How much of a hurdle is that? We don't know very many details about that, but it just does raise this tricky issue of how do you actually value that data in this age of AI.

How much is it worth? The Washington Post did this really interesting analysis. They got a hold of a Google data set where it showed the weightings of different websites. And you look at a New York Times and it had something called 100 million tokens versus 8 million for Reddit. So when you look through these different sources for these large language models,

there's also going to be discrepancy between them. And then you layer on regulators' concerns. Do the companies have the right to even sell this data? It just kind of tells us that we're early, and it's not exactly clear how it's going to be valued and how they're even going to be able to get money out of it. But does that mean that the Redditors are not using the diversity of language that the New York Times writers are?

The quality. It's a good point. We haven't even talked about the quality of that data. You know, we heard from Steve Huffman earlier today, and I was laughing when David Faber was talking about NSFW, not safe for work as a term that he had only just heard of. But that is what a lot of Reddit revolves on. And you have to wonder, is that the data that people are going to want to or data scientists are going to want to pay for versus sort of the prestige journalism of the New York Times? I don't know. I'm not, I'm not making a sense. statement either way. David needs to get out more. All right, thanks very much. Deirdre Bosa, thank you very much. And Doug Clinton, we thank you as well. The other big headlines that we're following today in the tech world, the DOJ, along with 16 states filing an antitrust case against Apple's iPhone, monopoly, the alleged monopoly. The stock down nearly 4%, actually a little more than 4% in real time. Let's listen to what Attorney General Merrick Garland alleges. Today, Apple's share of the U.S. performance.

smartphone market exceeds 70 percent, and its share of the entire U.S. smartphone market exceeds 65 percent. Apple charges as much as nearly $1,600 for an iPhone. But as our complaint alleges, Apple has maintained monopoly power in the smartphone market, not simply by staying ahead of the competition on the merits, but by violating federal antitrust law. Joining us now, Steve Kobach, who's covering the story. Also, Carl Zabbo, internet law professor at George Mason, and Maurice Stuckey, former FTC advisor under President Biden. Gentlemen, it's great to have you all with us. Steve, let me begin with you today. What's the response from Apple about the lawsuits? Lengthy. Let me put it that way. First of all, they're going to fight this. They're going to fight it in court, and they say this lawsuit is fight against their innovation. It's going to hamper their ability to make great products, people like. They also point out, they talk about their global market share a little bit, which is interesting because this is a U.S. case. But basically trying to make the case, we're small. We're just 20% of the whole smartphone market. Android is, you know, this global behemoth beyond us. But again, U.S. case, like Merrick Garland just said. And they're also just talking about how so many of these allegations throughout the lawsuit basically says, look, you know, everything they are accused of, they have a reason for.

And it all comes back to privacy, security, best experience. That is basically the argument they're making. Although, and I'm not a lawyer, and I really don't even play one on TV. But I will say that when you look at the defense that gets made in antitrust cases, having an excuse for it has not worked in the past. It's not enough to just have a reason for it. Maurice, you worked for the FTC under President Biden. You know that this is an administration that has been laser-focused on breaking up the potential for monopolies and antitrust practices here.

What do you make of the case that we heard from Merrick Garland? It looks like a very strong case because what they're alleging is not like with the epic lawsuit against Apple. not anti-competitive effects that are confined to one area, but really a concerted effort by Apple to prevent disruptive innovation from threatening its monopoly. And the way it did so is by degrading quality, reducing interoperability. So you can offer a justification for something that might be arguably pro-competitive, but it's going to be a lot harder for the courts to swallow doing something that degrades the quality and performance for Apple iPhone users. Professor Zabba, respond to Maurice there.

I take it you view this allegation, these lawsuit allegations, as deficient on the law and the fact, specifically with respect to protecting consumers from harm. Yeah, absolutely. Look, this is March Madness. This is a baseless claim predicated. on the simple fact that consumers are not being harmed. Now, my colleague over there was saying how the devices have not continued to improve. That just doesn't match reality.

It seems like every other day I'm getting some new function or feature pushed to my phone by Apple as part of an iOS update. They are constantly innovating. Let's look at competition in the marketplace. There's Apple and there's Android. So you have the Department of Justice that is actually suing Google, the maker of Android, for being a, quote, monopoly, and now suing Apple for being, quote a monopoly, yet they're direct competitors. So you've got to pick one, which is it?

And finally, we have to look at what is the purpose behind this? The complaint is, well, iPhones are really expensive. Yeah, they are. That's accurate. But the thing is, if people don't want to pay a premium price for a premium product, they can always go out and buy an Android phone or another different device. And that's competition in the marketplace. It's like complaining that Sonos speakers are too expensive. Yeah, they're expensive. They're a premium product. But at the end of the day, the claims in this lawsuit just don't make sense. And it's absurd that our Department of Justice is out there fighting to decide whether we see green bubbles or blue bubbles on our phones or complaining that the Apple Watch only works with Apple devices. Come on, this is not a legitimate

complaint. Everything's being done for security, safety, and improving the ecosystem and experience on the phones. Steve, why don't you address Carl's point there? And to his point, You sure don't hear a lot of customers complaining about Apple's ecosystem. Now, we just keep buying more Apple. You just keep doing it. You just go, this works. I'm happy. But that's also Merrick Garland's point.

It works. You're happy. You love it because they've made it. Because you don't know. You don't know what you're missing, Tyler. This is Merrick Garlands and the Department of Justice argument. You don't have the capability of maybe using your Garmin watch in a fully functional way on the iPhone the same way you can use an Apple. You might disagree.

This is just, I'm just... No, I get it. No, I get it. But for people who are in this Apple ecosystem, one, you can see how people who are in the Android system would look at this and go, right. They should break that up because it would give me more options and make the stuff that I have work better. But if you're in the Apple ecosystem, I thought it was really interesting. And he's talking about the wallet and the way that Apple is now insisting on taking a share of personal data that belongs to my bank because I want to use tap and pay. through my Apple wallet. It's something that it had not occurred to me. But I think where privacy

is concerned, Maurice, jump in here. There are some relevant points to be made here about are you doing the best thing for the consumers or are you keeping everyone in this ecosystem and creating modes that don't have to. And by the way, raising prices on phones every couple years, that was another part of it where the consumer harm comes in, they say. Yeah. So privacy is going to be a key pro-competitive business justification. But the complaint alleges, and it's actually true, is that if Apple were really concerned about privacy, it would actually take steps to improve it. I mean, the reason that it's getting billions of dollars from Apple, rather from Google, for Google to be the preferred search engine on all of the Apple devices, is not because it promotes privacy, far from it.

In fact, the incentives are contrary. But the more fundamental point here is that Apple protects privacy when it suits its purpose. And when it doesn't, it will undermine privacy with respect to like texting, for example. That's one of the examples given in the complaint. And I mean, to say that, oh, Apple users aren't complaining, well, it's hard to have the counterfactuals. like, well, what if Apple users could have, for example, more app stores available? What if, you know, an Epic pointed this out, what if instead of every app developer

having to pay 30% for in-app revenues could pay, let's say, 10% and pass that along to consumers? Consumers would be better off as well. So, I mean, I can understand why industry participants would be rapidly, you know, criticizing the complaint. But, you know, having represented Microsoft back in the day in the original case, the courts will scrutinize the justifications given by Apple. And when it comes to degrading performance for other services, the courts generally are not very sympathetic to those business justifications. And so Apple will have a rough road ahead.

We're running a little short on time. Professor Zalba, why don't you tie it off here, make your final point, and then we have to tie it up. Yeah, absolutely. Quite simply, Americans love these devices because they just work. The fact that I can't install apps that I don't know who made them or where they came from onto my phone, onto my Apple phone, makes my device more safe, more secure, less spyware than what we see on our computers.

So everything that we've seen has been pro-consumer. And at the end of the day, this doesn't pass the smell test because the market is highly competitive as people continue to buy not only Apple devices, but Android devices. So right there, you have competition in the marketplace. And yeah, prices are going up. But that is a lot more to do with inflation, supply chains and government red tape than it does some sort of broken marketplace. Interesting argument there. I'm sure we're going to come back and revisit this one. Thank you very much for making your points so clearly.

Carl Zabo, Maurice Stuckey, and Steve, thank you. Go back. Coming up, two heavy hitters in the athletic retail space reporting results after the bell. One would be Nike. The other would be Lulu Lemon. But which is the better bet for investors? We'll have a bullfight, a bullfight further ahead. Plus, stock soaring today following the Fed decision.

We will discuss the market, the economy, and more with Black Rock's Rick Reeder. Next. All right, welcome back. We've got a news alert now on Boeing. Some troubling signs there for the company's CEO, perhaps. Phil LeBoe has the details. Phil. Tyler, take a look at shares of Boeing, and they've been trading lower today, trending lower,

and we're slightly negative just a few minutes ago amid reports that the Boeing board, if specifically Chairman Larry Kellner and some board members are planning on doing a listening tour next week, going and visiting some of Boeing's largest customers here in the United States, talking with executives at those airlines without CEO Dave Calhoun and without Stan Deal, who is the president of Boeing commercial airplanes. So what you're looking at here is we have confirmed that these meetings will be taking place. It will be chairman Larry Kellner from the Boeing board, along with at least one board member, visiting a number of their top customers here in the United States. Potentially they might be visiting some of their largest international customers after that.

And this is essentially a chance for Kellner and board members to hear straight from the customers what's not working at Boeing and how frustrated those customers are. We do know from talking with people familiar with these discussions that the airlines initially reached out to Boeing and said, look, can we meet with you? Can the airline CEOs, the largest customers, come and meet with you? Boeing then came back and said, well, why don't we have Larry Kellner and one of the board members, or at least one board member,

come and visit each of the airlines as opposed to all the airline CEOs coming together at once? We should point out that we have reached out to Boeing for a comment on this. They have nothing official at this point aside from saying that Dave Calhoun and Stan Deal are supportive of any meetings between Larry Kellner and board members and customers where they can discuss how Boeing can do a better job. So that's the story in terms of what we can expect happening next week as part of a listening tour with Larry Kellner, the chairman of Boeing's board and some board members and some of Boeing's top customers. I'll take it back to you. Phil, thank you very much. I'll take it from here. But interesting, and the share price for today is still hanging on in the green. Meantime, the major averages are rallying for the fourth straight day following the Fed's plans to stick with its forecast of three rate cuts by the end of this year.

Here with some reaction, Rick Reeder, CIO of Global Fixed Income at BlackRock. Rick, it's good to see you today. Thanks for joining us. So when do you think? When can we expect the Fed to make the first cut? I mean, I think the market consensus going into the Fed was June. I don't think we learned much different around that. You know, there were a couple of comments yesterday that when, you know, when the chair talked about, we're trying to hit the inflation target, I actually say we're going to hit the inflation target over time. You know, we're still running above trend in inflation. In fact, yesterday I thought it was interesting. the Fed upgraded its growth forecast, upgraded its inflationary forecast, and then still gave the indication we can start middle of the year, and quite finally still get the three cuts in.

So anyway, I thought that was, you know, I think a market's reaction to it. It was better than could have been the case. And, you know, I thought it was an interesting. I thought the share did a very good job yesterday, I think, and through, listen, we think the data is going to give them a better chance over the next couple of months. And I think, you know, but we've got to see it. That is for sure. You and I were both attending a conference at Emory University this week where you were addressing some of the inflation data points that you're monitoring, and they were as diverse as, and it was a big hit with the business students, as diverse as the prices paid for Taylor Swift tickets to insurance.

Can you sort of set the thesis about where we are with goods and services inflation and how the Fed needs to change its monitoring of those? Yeah. So, I mean, as you think about it. I mean, I've never seen this in my career, but doing this a long time. You actually have a dynamic. The dichotomy between goods inflation and services inflation is extraordinary.

So, by the way, if you take a look at three-month, there's a three-month moving average goods inflation over one year or six-month moving average. You're actually having deflation or disinflation in goods where services, the three-month moving average of core services, is still 6%. Why is this happening? There are parts of the economy.

I talked about it. I did talk about it at the event, but people are paying not just for Taylor Swift tickets for F1 events, what they're paying for the Super Bowl, et cetera. But it's, it is a microcosma, the fact that experiences in the world, people are paying, there's a cultural dynamic around paying for experiences and what people are paying for services. And some of that is because the cost of the price of goods has come down. You have more disposable income to spend on services. It's a pretty wild dynamic that's at play today. And I, and I think it will continue.

There are parts of the Fed's interest rate tool does not affect some of the heavy levels of inflation. You think about health care costs, education cost, insurance. So there's a dynamic and part of why I think the Fed is right to say the last mile is hard, bringing down service inflation is very hard. But gosh, you look at the more cyclical component, i.e. goods inflation. It's actually negative. So it's time to start moving that rate down. Yeah, I went to see Seinfeld two weeks ago at the Beacon Theater. There's inflation in those ticket prices. Let me tell you. He was funny, though. He made me laugh about how much I paid. Let's talk a little bit about that. I'm curious here. You've made the case in my note that services inflation is the

kind of inflation that is the least resistant to the blunt force tool that the Fed has, which is interest rates. Explain why that is and therefore why it may be a little harder to get down to that 2 percent target that the Fed has when they're using a tool that may not work as well in that category of inflation as it does with goods. So that's a long story. I mean, if you go back, and this is why I think the analog of, look at what happened when you moved the interest rate in the 80s and 90s. You had a goods-oriented economy. You had an economy that was driven by, you think about energy costs, it was driven by hard assets.

Hard assets are financed. Insurance is not financed. Healthcare, most of it is not financed. Education is not financed. So you have a tool that's incredibly imprecise, but what does it impact? And this is why I think the Fed needs to start moving it down. There are some real pernicious effects on parts of the economy. Lower income. You're seeing this play out in terms of credit card charged off.

Some of the earnings reports you've been chronicling, lower incomes having a harder time. Commercial real estate, local banks are having a hard time. You talk about that a lot on the show. So what's happening is you've got a tool that targets parts of the economy that are interest rate sensitive and doesn't really hit the others, meaning you can get the tool back. I mean, the Fed, do you think about if we're running two and a half percent inflation, The Fed funds rate is five and three-eighth. That's pretty darn restrictive.

Even if we get 100 basis points off, it's still restrictive. And so I think that's the right mode. And I think the chair was very, very, very thoughtful about how you address that. Given your worldview here, let's talk about where you think people should put their money. I was very interested that you are talking about private credit, emerging markets, infrastructure. And then, of course, I mean, you're the head of fixed income. So you think high-quality fixed income is a great option. Listen, I mean, you know, this is a pretty unique point in time.

So if you think about, you know, we talk about service level inflation. Why is the Fed keeping the funds rate at 5 and 3A, service level inflation is too high? What it means, though, to buy yield or to get yield, and we launched an ETF called Bink, where we're clipping six and a half, 6.6% yield. How do you do that? When you've got the risk-free rate at such an elevated level, you actually don't have to stretch to take that much risk, and you can get paid 6, 6, 6.5%. Buying things like investment grade credit, buying things like European investment grade credit.

But this is a pretty extraordinary point in time where not only can you buy growth in the equity market, you can build a lot of income in a portfolio. You don't have to take a lot of risk. I would argue today that companies, if you take their credit quality, they should be borrowing 200 basis points lower. The only reason they're not is because the risk-free rate is high as people's service-level inflation is high. It's a pretty good environment to book, you know, just get yield into your portfolio. And we're seeing that play out. We're seeing investors go in that direction.

I think it's pretty powerful today. Rick, it's great to see you again. Thank you. Thanks for having me. Appreciate it. All righty. Coming up, Olive Garden parent, Darden, Lower, after posting its first sales decline since the COVID pandemic. We'll have more on that ahead in the program when Power Lunch returns in two minutes. All right, welcome back, everybody. Treasury's on the move today following yesterday's Fed meeting. Rick Santelli tracking the action for us. Hey, Rick. Hi, Tyler. You know, our last guest just talked about how restrictive Fed policy is where current interest rates are set by our central bank. But boy, today's data

really augurs for a different story. Let's look at today's data. Current account balance was the smallest deficit since March of 22. Philly Fed, business outlook, back-to-back positives. First time that's happened, Tyler, since April and May of 22. Initial continuing claims, especially initial, continue to be ultra-well behaved. S&P Global, PMIs, we had a Your guests talk about, of course, how service inflation is much stickier and much more adverse to any of the policies of the Federal Reserve to get at. But today's data from the PMIs showed that manufacturing PMI surged to a level we haven't seen since June of 22.

The services PMI was actually a bit disappointing. And leading economic indicators breaks a streak of 23 consecutive negative month-over-month changes to the best positive level now since February of 22. Existing home sales up 9.5%. Look at the interest rate response. There's an intraday of 10-year-note yields. They've basically been moving higher, and it was based on the data. Something else happened today.

Swiss National Bank, first one into the easing pool. Yes, they cut 25 basis points. This is the dollar versus the Swiss. Dollar, of course, surging on that surprise rate cut, moving to the best levels in nearly four months. And the Fed, the ECB and Bank of England, all on track based on markets to be first rate cuts in June. Contessa, back to you.

All right, Rick Santelli, thank you, sir. Let's get to Courtney Reagan now for a CNBC news update. Hi, Courtney. Hi, Contessa. U.S. officials say a landing jetty that would facilitate the delivery of aid into Gaza could be ready by May 1st. The pressure is on to boost aid to the enclave after our United Nations report earlier this week, suggested famine is imminent.

The progress on the U.S. jetty comes as officials from 36 countries and several U.N. agencies met in Cyprus today to discuss how to get more food and supplies into Gaza via a sea route launched last week. Well, Donald Trump's lawyers asked an appeals court today to excuse him from covering his $454 million fraud bond requirement. They argue it would cause the former president irreparable harm, before his appeal is decided. New York Attorney General, Lettisha James, can start taking steps to collect the money starting next Monday.

And another best-selling video game franchise is about to get its turn at the box office. According to Variety, a film adaptation of The Sims is in the works. Margot Robbie's lucky chap, which saw Blockbuster success with Barbie last summer, is reportedly producing the film with Virigo Entertainment.

Contessa, back over you. They're all blending together. Then it'll be a Broadway show as well. Oh, yeah, exactly. There you go. Courtney, thanks. All right, Nike and Lulu Lemon, both reporting earnings after the bell, which gives investors the better bet for the long-term debate

in an old-fashioned bullfight on Power Lunch returns. All right, everybody. Welcome back to Power Lunch, a bullfight brewing between two major retailers. In one corner, we got Nike down about 17% over the past three months. Then we have Lulu Lemon down about 6%. since reporting three months ago as well. Both names have been in a bit of a slump, more pronounced for Nike, but which is heading potentially for a turnaround.

Joining us now to make the case for Nike, Ike Boracow, senior equity analyst with Wells Fargo securities, has got an overweight rating and a $125 price target on that stock. And Cowan's John Kernan has an outperform rating on Lulu Lemon with a $553 price target there. Why don't we just go ahead, Ike, let you make the case for Nike, which has indeed had trouble since its December report, down 20% or thereabouts. Yeah, sure. Thanks, Tyler.

Look, I mean, just to be frank, we don't particularly love either name into earnings right now. We're below the street estimates for both. We think numbers are kind of come down for both when we hear from these guys. But we do think Nike is a better investment. And honestly, Tyler, to keep it simple, I think it's because Nike is a story that is all about recovery, which is a characteristic of this space and at this point of the cycle that we look for, recovery on margins, innovation, and valuation.

Whereas on the other side, Lulu is much more about sustaining robust results, both revenue and margins, which we believe is likely going to prove difficult as they move into 2024, and slowing growth and high multiple is always a tough bet. Where did Nike slip, Mike? Well, honestly, if you take a step back a couple of years, I would say that the strategy,

strategy management laid out in 2021 to put much more focus on the direct-to-consumer channel and kind of shun the wholesale channel has backfired. And it's caused issues not just with the P&L and profitability and revenue, but in terms of innovation in general. I think that's why you have issues with Jordan. I think that's why you have issues with the pipeline in general. I think that the good news, Tyler, is that we've kind of had, you know, the first thing you have to do is admit you have a problem.

In December, they admitted they had a problem. They announced they're restructuring, they announced that they're taking a closer look at this. But that's really where things started to fall apart. John, let's turn to you and make the case for why you think Lulu might be the better investment right now than Nike. Yeah, sure. We're market perform on Nike with below consensus estimates. We are outperform on Lulu with well above consensus estimates for this year. I think if you take a holistic view of both the store level and Omni Channel productivity of Lulu,

it's hitting all-time highs, like I said. We think it can continue in 2024. We think management is going to hit their 2026 targets in 2025. Tyler, like you said, our price targets $553. That's 32 times fiscal 25 expected EPS. I think there's a real balance between domestic and international growth here. We have international up 28% this year. We have domestic up 15%.

That's in fiscal 24. Domestic is going to, the whole business is going to get a nice lift from a 53rd week, which we think the street is mismodeling. And China is a new source of high margin growth. We model China up 35% in fiscal 24 to $1.5 billion. China could represent 15% of revenue by the end of this year. It remains a big tailwind on the gross market side. Where is Lulu on serving men?

Yeah, men has fallen behind the growth of women's a bit recently, but it's 25% of the business. I still think it's a growth market for them. There has been some new entrance into the sector, barriers to entry have fallen across this whole softline space. I think that's a big issue with Nike. right now where we favor some of the disruptors like Decker's and On and Lulu. And Lulu's also feeling some of the pressure, I think, in men's from some newer entrance

in the space. Interesting. Just curious, though, I mean, Lulu's been out there for so long and has been sort of the athleisure of record. And now everybody else has gotten in the game. The high-end guys are manufacturing athlete, and then Sheehan and Timu are offering it for a much more young and more affordable crowd. Like, how do they compete with?

all the newcomers to that game? Sure. I think the Lulu leads to space in innovation, certainly with bio-based materials, new recycled materials, emerging AI applications. There's use cases for personalization. Their inventory management has been very strong. Their gross margin is at all-time highs right now. The category expansion has worked very well for them, and there's a lot of newness. So they've used scale to their benefit. Their gross margins at all-time highs, they are the premium player in the athlete's space. So, Ike, I found it amusing.

maybe ironic that Nike has been criticized for see-through baseball uniforms, something that Lulu Lemon had been charged with some years ago, not baseball uniforms, more yoga pants. Comment on that if you don't mind. Yeah, I mean, I think that's a

small piece of the pie, Tyler. What I'll do is go back to what John is saying. I agree with everything that John's saying, I think he's spot on. I think where maybe we're differing is I think the rate of change on the Lulu story from here is going to slow. And I think that, you know, you guys alluded to it. I think competition,

I've covered the stock since the IPO. It's the first time I've ever actually considered competition from some of the emerging concepts as really having an impact. I think some of the drivers of North America, I think John's spot on with China. We worry about North America in the U.S. And I think that's where we see some of the growth in potential. I don't see Lulu doing it. I don't see Lulu doing it, Ike. But would Nike buy Vori? Yeah, can't comment on that. I think that I think Biori, aloe, those types of concepts are definitely disrupting the space to some extent. I think that's part of the problem.

Got to leave it there. Ike Borchow, John Kernan, thanks. Coming up, a new FTC report claims big retailers like Walmart and Amazon helped fuel sky-high grocery costs. We'll get key details with Power Lunch returns. Welcome back. A new report from the Federal Trade Commission blames large retailers like Walmart, Kroger, and Amazon for higher grocery costs. Megan Kisela is in Washington.

Has more. Hi, Megan. What have you learned? Hey, Contessa, so the FTC is just out with findings from a new report telling us that supply chain disruptions initially caused higher grocery prices, but it was actually the larger grocery retailers that made the situation worse.

The FTC's conclusion here was that big grocery chains used rising costs as a chance to raise their prices and boost profits, which they say remain elevated today. During a meeting on this today, Chair Lina Khan said the issue could warrant further inquiries. have been concerned about allegations of discriminatory conduct, differential pricing that we may be seeing, such that small and independent firms may be losing out to bigger firms. If we end up finding that these types of practices violate any of the antitrust laws, including the Robinson and Patman Act,

I know I'll be very interested in making sure we take swift action. Now, the FTC spent more than two years digging into information from Walmart and Amazon, but also from major suppliers like 10, Tyson Foods and Procter and Gamble. And the report calls out the major retailers and names Walmart specifically for pressuring suppliers to fulfill deliveries. They threatened fines, for example, for being late and allowed larger chains. This allowed larger chains to dominate over the smaller stores, which had more trouble keeping their shelves stocked. Now, guys, the FTC doesn't go so far here as to label any of this illegal activity, but both the commission

and lawmakers say they'll be looking further into this. Yeah, and if Lena Kahn says that she thinks it may warrant further inquiry. What does it exactly mean? We don't know exactly that yet, but two things here, the FTC is clearly saying to lawmakers and to policymakers with more authority to really look at this, look at what we found. Maybe you guys want to dig more into this too. They say they'll be sending it to Capitol Hill. But we've also heard the FTC talk a lot about enforcing laws that are already on the books. I think it's fair to say that they seem to think some of this happened because we weren't already well enough enforcing some laws that are meant to help small and medium grocery stores compete with wholesalers more. So we could see them sort of step up some of that

enforcement action there as well. All right. Megan, thank you very much. Megan Cassella. Coming up, we will get the trades on Micron, Darden, and FedEx after earnings in a fresh three-stock lunch. We'll be right back. Welcome back to Power Lunch, everybody. Time for today's three-stock lunch. And we're going to dive into two names that just reported quarterly results in another one with its earnings on deck. Here with our trades is Adil Zaman, a partner at Wall Street. Alliance Group. Let's start off Adil, if you don't mind, with Darden restaurants. The stock dropping after the company posted its first same store sales declined since the pandemic. Your take on Darden, Adil. Yeah, so we would stay away from Darden because, you know,

it seems like one of the things that's been weighing on their earnings is their food inflation. And for us, it seems like other competitors like Chipportley and like Shikshack have been far more successful in passing on the food. inflation to the customers. And part of that reason, Tyler, could be that there's been a shift in consumer taste. You know, you'd rather, for example, go to a Chipportlaa as opposed to an olive garden. So for that reason, we would stay away from Darden. Next up we have Micron Technology. The shares are jumping much higher today after the semiconductor maker beat estimates on the top and the bottom lines up almost 15%. It provided a strong forecast for

the third quarter. Adela, are you buying here? Yes, we do like Micron. You know, this is definitely, I would say, Contessa, that this is not for the faint of heart. So, you know, be careful with this, but, you know, especially with the drawdowns in 2020 and 2014. But we feel that finally the time has come for Micron, right? So when this era of artificial intelligence revolution,

we feel that a lot of companies are going to benefit from it, and Micron is one of them. artificial intelligence systems do require a lot of memory chips. And Micron is the one that provides that. It's one of the leading providers of that. And, you know, the good thing is that it's not a competitor to Nvidia. It's complementing Nvidia's business. So for that reason, we are constructor on Micron.

Let's move on to FedEx, which you see as a dividend growth play. Yeah, FedEx is a great dividend story. You know, they've done a great job in cutting down their clients. costs and I think when rates get cut, demand is going to also improve for them, which they've faced a little bit of challenge there. But the dividend story is great here because with rates coming down, we feel that money is going to come out of money market funds and investors are going to gravitate towards good quality dividend paying businesses that have a track record of dividend growth.

And FedEx is one such company. Their dividend growth on average for the past 10 years has been about 24.5% a year. So we are very constructive on FedEx. Any particular thoughts on how the earnings will come in quickly? Tyler, we think that the earnings should be positive. I think the demand story is going to improve, and they've done a good job in cutting down their costs. And we also like the fact that they're not too heavily reliant on Amazon as compared to their

competitor UPS. All right. Adil Zaman. Thank you very much. We appreciate your time. More power lunch next. But as we head to a quick break, a check on Reddit below its opening price of $47 per share, but still above where they had priced the IPO. We'll be right back. A brewing scandal hanging over baseball star, Shoea Atani's debut with the Los Angeles Dodgers. The team has fired his close friend and interpreter amid allegations of illegal gambling and theft against the interpreter. The allegations are not against O'Tani himself. But a question is $4.5 million in wire transfers, some of which apparently came from O'Tonnie's bank account to an illegal bookmaking operation.

There was an interview with ESPN where O'Tonnie was said to have paid off his friend's debts and then denied it. Gambling debt, not gambling on baseball, so says the interpreter, I should say. All right, thanks for watching Power Launch, everybody. Closing bell starts now.