Power Lunch - The “Hole” Story, and Is The Trend Your Friend? 8/25/23

Episode Date: August 25, 2023

Fed Chair Jerome Powell says inflation is still too high, and the Fed is ready to raise rates even more if needed. We’ll dig into the whole story. Plus, Oppenheimer is bullish on Nike, while Morgan Stanley is skeptical about Abercrombie & Fitch. We’ll get the read on retail from both firms. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome everybody to the Broadcasting Clinic we call Power Lunch. Alongside Kelly Evans, I'm Tyler Matheson. Coming up, Fed Chair Jay Powell says inflation is still too high and the Fed is ready to raise rates even more if needed. Stocks are now higher following an initial move lower. Bonds also on the move and we're going to dig into the whole story this hour. Plus Nike on track to end its 11 session losing streak is the worst over. We'll ask an analyst who is still bullish. Meanwhile, Abercrombie, Infer, Fitch has soared this year, but we'll hear from an analyst who is skeptical, Kelly. They don't want to pile on these trends today, Tyler.

Thanks. Let's get a check on the markets and the Dow's up almost 200 points leading the way with a half percent gain. Boeing is an outperformer. It's not even the strongest percent gainer, but a big point contributor there. The S&P up a third of a percent to 4392 and the NASDAQ trying to hang on to this 50-point gain. All this against the backdrop of yields chopping around today in the wake of comments from Chair Powell that were initially perceived as little hawkish, then maybe a little doveish. now, well, call it unch, 4.237, tie.

All right, we start with the main event out in Jackson Hole earlier today. Fed Chair Powell's speech. He said that he's ready to raise interest rates if necessary to tame inflation, but admits there's still a lot of uncertainty. As is often the case, we are navigating by the stars under cloudy skies. In such circumstances, risk management considerations are critical. At upcoming meetings, we will assess our progress. based on the totality of the data and the evolving outlook and risks.

Based on this assessment, we will proceed carefully as we decide whether to tighten further or instead to hold the policy rate constant and await further data. All right, here with some reaction is David Wessel, Senior Fellow in Economic Studies at the Brookings Institution, longtime follower of the Fed, Ron Insana, CNBC senior analysts, commentators, also Chief Market Strategist at Dynasty Financial Partners and Sarat Szil. SETI is our guest host for the hour. He's managing partner and portfolio manager at DCLA and a CNBC contributors. Got a lot of contributors here, folks.

Let me begin with you, David. As you look at the text of what Chair Powell said, was there anything that stood out to you, anything that was sort of unexpected? I don't think there was much unexpected. I think he made clear that they're not going to cut rates anytime soon. The choices between raising them a little more or holding them higher for longer.

He used the word carefully a couple times. I think that's code word for don't expect a rate hike in September. And I think he made clear that the labor market is really important here. He referred to the vacancy to unemployment ratio. He said that the unemployment rate has to go up a little bit. So I think what they're looking for is some softening in the labor market to give them confidence that they've already raised rates enough. He said in the quote you use, it's a risk management.

What that means is that a year ago, they said we have to raise rates to fight inflation. Now things are a much closer call, and we have to decide what's the bigger risk, too much inflation or an unnecessary recession. Ron, do you see him as more bullish or less or more bearish than you expected here? And was there anything in his remarks that led you to believe that they're close to done? Yeah, I mean, I think as David suggested, I mean, they're going to be careful. And so that sounds closer to done. Although he struck to me, anyway, a slightly more hawkish tone than I would have expected. Focusing, as David said, on the labor market, I tend not to agree that wages cause inflation.

They might be a symptom of it if prices rise faster than wages. That's not happening right now. So this kind of preoccupation with the strength in the labor market at a time when, you know, we are seeing some important increase. in the bottom 10% earning more than they might otherwise have or some unions getting better deals after 40 years of capital outperforming labor. To me, that's still a catch-up. And I don't think it's the type of problem that he or folks like Larry Summers continue to describe. I think they should be closer to Dunn. And I still think with everything that he said today, some of the variables that they look at within the inflation components themselves will likely trend low or not

higher. And Sarat, speaking of Larry Summers, one of the charts or columns that he had this week is making the rounds because he draws the comparison to CPI now versus in the 70s when we had this peak and then this crash. But then it went up again. Back then, oil prices tripled. And I don't know if it would take literally something of the same magnitude for us to literally follow that same trajectory upwards again. Yeah, and I think that's the important part. The Fed does not want to fall into that mistake of what happened in the 70s. It was oil back then, but it could be something else again, right? And it could come back to be oil again. And who knows what happens in Russia as well.

But when you've got the steady increase that we've had for the last couple of years in so many input prices, commodities, it's kind of, hey, we need to wait and see. We know there's a lag to Fed. So if we go too early, and even if the Fed hinted that said, hey, maybe we're going to cut rates, people are going to say, well, what are they seeing that we're not? It's not we're cutting rates because things are stabilized. It's going to be, oh, God, you're seeing demand fall off or there's some issue out there. So I think staying the course and watching because you don't want to make that mistake,

you already have the credibility issue before. So let's not fall into that trap again. Yeah. I might go ahead. Yeah. So that chart that you referenced about Larry Summers in the Washington Post op-ed piece, Jim Bianco did an adjustment of it. And while he agrees that we could still see inflation re-accelerate,

he adjusted for the way in which inflation was calculated in the 70s versus the way it's calculated today, took into account other variables. Jim Bianco shows an entirely different chart where the analogs don't match up nearly as precisely as Larry Summers would suggest. And so I'd throw that chart out. I think it's nonsense to make that comparison with the 70s. Because as you say, not only did oil prices triple in 73, they doubled again in 79. And we had massive shocks and other issues that were vastly different than the experience we're having today. David, jump in here.

You know, you use the phrase earlier that September may be off. the table that you don't expect an interest rate hike then. What was it that leads you, what is it that leads you to that conclusion? Well, partly it's the use of the word carefully that Powell used twice, which I think is code for we don't need to rush. And he pointed out that things are moving in the right direction. And as long as they keep moving in the right direction, we can be patient. Can I just associate myself with Ron's remarks on that, Larry, I thought it was beneath him. We don't need PhD economists doing chartist's stuff.

Olivier Blanchard is making fun of him on Twitter. I think it was just a way to get us to talk about Larry Summers, and that worked. Well, David, here's what I'll say in his defense. Is there an analogy on the fiscal side of things with now in the 70s? Because back that I was reading Bernanke's book, and he talked a lot about how kind of the fiscal side of things would spend a little bit more. They would try different ways to tamp down inflation, but it basically kept kind of fighting or undermining what the Fed was trying to do. And sometimes I look at all the spending now from the fiscal side and wonder if that's a risk.

Right. So I think it's a good question. Let's set aside the historical analogies because the 70s are very different. Inflation expectations were not anchored. But you're right to point out that fiscal policy has been a real contributor to the recent inflation. and there doesn't seem to be any sign that Congress or the President is willing to start to pull that back. Some of this stuff is long-term spending on investments that could increase the supply side of the economy. So I'm not worried about near-term increases in the deficit causing inflation, but it is a different situation than the one that Bernanke had to deal with after the global financial crisis when Congress was too stingy. Now we have a Congress that seems to be only able to move things one way, which is spend more and not raise taxes.

Right. Surat, I don't know. The last time you were here is probably a couple of months ago, I don't remember specifically. Has your view of the overall economy changed since then for the better or the worse? I think the view that we really have to factor in interest rates when you look at valuation is much more now. I think where rates are potentially higher, you really have to see what companies you own and kind of what the cash flows are going to come out. investors now have an alternative. And you can buy treasuries, you can buy corporate bonds, you could buy munis that for the next two to five years that are five to seven percent.

So I think the opportunity there, then you have to really look specifically as to what stocks you own. And I think that's going to be one of the big things going into the fall. So when you look at some of the stocks that are at what we might describe as stretched valuations, I don't mean to name names, but I'll name names and the invidias of the world. some of the others that come to the top of the mind. How does that make you think about that? Well, if you look at what the Fed is trying to do, which is slow down the economy,

how are you going to have companies that are going to grow at these fast rates again? If the idea is until the thing's slow, we're not going to stop raising rates. So you have to be really comfortable of what you own. And if it's an Nvidia, great, you're owning it for three to five years.

So you're not trying to say this thing goes down 20%. But, again, it shouldn't be the overall part of your portfolio. It should be part of the growth part of your portfolio. Then you can look at other companies and say, hey, do I want to own some of the health care stock? Do I want to own some pharmaceutical stocks? Because those will do well, and some of them have secular growth. So maybe I want to be in the J&J or Bristol Myers in there. Or, you know, do I want to be in a secular growth stock like an Uber?

That's got positive cash flow. So interest rates really don't matter that much to them anymore. But you're looking at the growth rate of that company. Or the parent company of, you know, here at CNBC, Comcast's cash flows are English. But where is that going to go down the road when we're talking about streaming? What are some of the costs that we're going to do? So I think individually cost of capital is going to be really important and also understanding what you own because growth rates are slowing down and you're seeing it from the leading

economy indicators. You're seeing it from auto sales. You know, those things are slowing down and select retail is also slowing down. Sarat, thank you very much. David Wessel, thanks to you as well. Ron and Sana, have a great weekend. We appreciate it. Sarat.

We'll be sticking around for the hour and we're glad to have him here. And we have a lot of stocks to talk about coming up. Nike's long losing streak looks like it should end today, but it's down 11 sessions coming in today and only up three quarters of a percent right now. Yesterday we heard from a collegiate swimmer who says Nike's still cool, but there's a lot of athletic leisure competition. Up next, we'll get a bullish analyst take on the stock. As we head to break, let's do a quick power check. And they have shares of Hasbro up 5% today after Stiefel raised or maintained its buy rating and raised the price target to 94. or Hasbro is currently trading just under 70. And meantime, it's a bad week for advanced auto parts, continuing to fall after earnings and a slew of price target cuts. The stock is down 6% today and has lost more than half its value just this year.

Welcome back. Take a look at shares of Nike, nicely on pace to break their record 11-session losing streak. As a slowdown in footwear and China could be weighing on the stock, it's also one of the worst performers on the Dow. this year, down 16% so far. Let's bring in Brian Nagel. He's seen your equity research analyst in retail hardlines and broad lines at Oppenheimer. Brian, it's good to see you again. You've got a buy rating still, a 150 price target on the stock. It's below 100 now.

When do you throw in the towel? Well, I'm not going to throw in the towel. Look, I think Nike's given each day it goes down and gives us a better buying opportunity. You know, for investors looking, I'd say over the intermediate to longer term. You know, in my view, and I've been talking with our clients about this a lot lately, I get it. There's a lot of concerns out there right now. Like you mentioned, you're opening, Kelly. There's concerns over consumer demand in China.

There's still concerns about consumer demand here in the United States, competition, inventory clearance. But look, I think we've seen this from Nike is actually performing very well through all of these concerns. Now, it's hard to say when the stock breaks out again. But look, I think the underlying fundamentals are Nike are in place. And I think it's just a matter of time before the stock once again begins to reflect those fundamentals. Surat? Thought here? Question? I understand what you're saying, look, and in my experience, buying a global brand when it's on discount is the time to do it. I mean, historically, that's how you've made money.

The question is, you know, given valuation now, where you see the tenure, it still trades at 30 times earnings going forward. What is the base case of the earnings reset? Because you're looking at bare case earnings right now. So obviously your P is much higher when the earnings are down so low. So when you look it out and you spread it, what do you think is a fair multiple for a like a Nike that's a global brand that when it comes back, it'll be hot and everybody wants to get it. And now none of the momentum guys actually even want to invest in it. No, look, I think it's a great question. It's something we wrestle with. So to answer your question, look, I think Nike steady state is a 30 to 35 multiple type stock. Okay, we've seen this trade

higher than that, particularly when rates were really low. And right now, at least the math I'm using, we're seeing Nike trade substantially below that range. But look, I think it's a 30 to 35 multiple stock. And the point you bring up is a good one. If we look at the earnings right now, those are still at least somewhat cyclically depressed. If we look over the next few years, that we get to more normalized earnings. So my view in the stock, and that's how I get to my $150 price target is that, you know, multiple back within that range. And frankly, I'm using a low end of that range. And then a more normalized earnings trajectory for the company. Let's talk a little bit about China. What do you see happening there and how important is it to Nike's

future? I assume the answer is pretty doggone important. And number two, competition to the extent that there is more of it and they may not own the market quite the same way that they did five years ago? Yeah, look, we've got to be honest. I don't know if anyone has a great read into what is happening in China. Okay. If you look at Nike's most recent commentary, okay, so Nike reported its fiscal fourth quarter results in later Jim, okay? And the CFO and CEO, they were very much talking up what seemed to be a nice rebound in the Chinese market. At the same time, they're talking about the continued strength and the Nike brand within China. Okay, and this was only two months ago. Okay, so look, Nike's a longstanding player in China.

We've heard the comments from Nike itself. I think Nike's doing well there. Now, I get it. You know, we have this almost every day on CBC. We're talking about, you know, some risk to the Chinese economy. And I see why that would spook investors. But I look, I think Nike is in that market performing well and, frankly, taking market share as well as continue to fend off competition for many local players that may be trying to emerge. So, Brian, you know, if this is a great buying opportunity, and of course it always would be, I just think a couple things, Disney, for instance, during COVID, you might have thought, oh my goodness, I can pick up this company for $85 a share.

You fast forward to today, it's back at $85. So, you know, you just wonder about, maybe demand for Nike's products is intact, longer term, but, you know, is it the same level that we might have expected, you know, in the past? Just is this really kind of the once-in-a-lifetime opportunity that it seems? No, I think it is. And look, I say this somewhat joking, but I'm actually really serious when I talk to our clients. I mean, we're all dressing much more casually now. You know, this was a trend that was in place before the pandemic.

I think it accelerated during the pandemic. And now I think as we're post-pandemic, I'm seeing the trend stick. You know, because I'm visiting clients. I mean, we're just not dressing up anymore. Look, that's a big benefit. You know, that trend is, and we're seeing this in the United States. I'm starting to see when I travel overseas as well. I mean, this casualization trend is a big positive for Nike's as a positive for Lulu Lemons,

positive for other players in the space. And I think that really speaks to this market share opportunity. So to answer your question, Kelly, look, I think the underlying demand right now for Nike, the demand potential is actually better than it's been in the last few or several years. Because I think we're buying more of this type of product for everyday wear. All right. All right. Brian, what are you talking about a little more casual? I'm like, you should see how good Tyler looks today.

What are you talking about here? No Nike products. He's a tie with the funky shoes, the whole thing. I'm with you, man. Brian. It looked like you got dressed out of the same closet this one. Yeah, we really did. Thanks, Brian.

Appreciate it. Quick programming note. Don't miss another CNBC taking stock special. Mike Santoli and Josh Brown will return to discuss all the issues facing the markets in a way that only they can. That is at 6 p.m. Eastern tonight. Right after Options Action, Power launch will be right back. Welcome back to Power Lunch. I'm Steve Kovac with their CNBC News Update. Lawmakers are looking to regulate foreign ownership of U.S. real estate due to fears that Chinese farmland near sensitive sites is creating a national security risk.

Lawmakers are looking to tighten controls and increase enforcement with proposed reviews on purchases and potential bans on certain countries from buying land. Also, a New York judge ruled that musician R. Kelly and Universal Music Group must pay over 500,000. thousand dollars in music royalties to victims of his sex abuse. Kelly is currently serving 30 years in prison after being convicted of racketeering and sex trafficking in 2021. And finally, the director of the British Museum is stepping down after items were stolen from the museum's collection. A member of the museum staff was dismissed last week after items including gold jewelry and gems from as early as the 15th century had been found missing, stolen, stolen, or damage. Tyler, I'll send things over to you. All right, Steve, thank you very much. Breaking news

to those session highs right now. We've got breaking news on that Instacart IPO, and Deerbosa has the details from San Francisco. Hi, Dee. Tyler, this is the S-1. We have been waiting for it flipping just moments ago. We're digging through all the financials, but this is Instacart. Just revealing its S-1 as it plans its public offering. The company will trade on the NASDAQ under the ticker code C-A-R-T-Cart. Pepsi, also, this. This is new. As a Cornerstone investor, it will purchase $175 million of preferred stock in a private placement, kind of underpinning this IPO. Instacart member is a grocery delivery app. It launched over a decade ago. So this is a long time coming, played a long time, will they or won't they? But here it is. The filing says that it has 85% of the U.S. grocery market, 7.7 million monthly active users.

In terms of financials, revenue of $2.55 billion in 2022. turned profitable last year, earning net income of $428 million. So this really differentiates it from Uber and Duradash, who went public with losses. Ad revenue, this is one we were looking at very closely because this is kind of what separates it. It's been in this business for a long time. Ad revenue in 2022 of $740 million. That represents year-over-year growth of 29%. Tyler and Kelly, we're going to continue to dig through this.

risk factors, the stakeholders, and we'll bring it to you as we get it. You know, to me, it's the all-important question, what the ticker's going to be. I love it, dear John. I love it. Cart. They were thinking there on that one. I was trying to guess it. It didn't occur to me, CART.

I thought maybe it would be INSTA. What was the other day, ARM, arm? That was the Tickers'emble was Arm. Now that's really genius, boy, I'll tell you. Deirdre Bosa. You need your creativity here. Great. The queen of the tickers.

Theater Bosa. Thank you. Still to come on Power Lunch content is still king. Loop Capital upgrading shares of Netflix to buy, raising their price target to $500, that's $85 of upside. And saying its large pipeline of unreleased content will help it weather the Hollywood strike much better than competitors. Just look at what they've done with suits, everybody.

We'll speak to the analyst behind that call next. Welcome back as Disney looks for partners for its ESPN. Amazon has emerged as a potential player in the future of the sports giant. and the shares are languishing we should mention at Disney, that is. Julia Borson joins us now with the latest details. What do you know, Julia? Welcome. Well, Kelly, Amazon has had early talks with Disney about working on the streaming version of ESPN

that that company has said in the works and potentially taking minority stake in the platform. This is according to a report in the information. Now, both Amazon and Disney have told us no comment on this report. But the idea here is that Amazon, which has the rights to NFL's Thursday night football package, could help ESPN grow its subscriber base for the direct-to-consumer version of ESPN that it has said it will inevitably and eventually launch. The information reporting that the streaming service could cost as much as between $20 and $35 a month. This comes after Disney's CEO Bob Eiger told CNBC back in July that the company was looking for a strategic partner for ESPN,

and we have reported that ESPN has talked to the leagues, the NBA, the NFL, the NLB, and NHL, about potentially being those partners. Now, ESPN chief Jimmy Petaro told me last month that they are interested in partners that can, quote, make the flagship product more compelling in terms of distribution, technology, marketing, and content. Amazon Prime Video has the advantage of an already massive viewership-based. Amazon Prime Video has an estimated 157 million viewers in the U.S.

behind Netflix with 172 million. That's according to insider intelligence. Now, while accelerating cord cutting has put pressure on ESPN to work on offering this streaming option, this will certainly make cord cutting even faster if you can get ESPN outside of that TV bundle. So that's another factor to watch here, how all of this comes into play. And then, of course, that price point is going to be essential. $20 to $35? That would be a lot per month for a stream.

Would this be for their ESPN Plus product, which I understand, is their current streaming offering? Is that what we're talking about here? No, we're talking about traditional ESPN, Tyler. So right now there is ESPN Plus, and that's primarily content that you do not find on television. Right now, if you want to get that core ESPN channel, you need to subscribe to some sort of TV bundle. What ESPN and Disney have been talking about is creating a version of ESPN that would go direct to consumer. They'll likely also keep something on linear TV with the same rights, but they need to renegotiate everything with the lead. to make sure that they have the right to bring that simultaneously direct to consumers.

So this is obviously a very complex thing. They have to worry about the relationships with the cable distributors, et cetera. But what ESPN and Disney and Bob Iger have acknowledged is that in light of cord cutting, they have to figure out how to efficiently and at the right price point, figure out how to bring that direct to consumers as well. And if they have a big partner, Amazon makes sense considering its reach and its viewership staff, but also remember it would make sense for them also perhaps to bring in the leagues as partners here. So this is far from a done deal. It makes sense that Disney's talking to everyone.

To your point on ESPN Plus, I was watching a Boston College, South Carolina women's soccer game last night on ESPN Plus because I know a player on one of the teams. But let me ask you this very quickly. In terms of partner scale, the deal that Disney ESPN did with that gambling company a month or so ago, that's not the kind of scaled partnership we're talking about. about here. That's a different situation here. What they're trying to figure out is what does it look like when you take this TV channel that's been so essential to the TV bundle and you offer it outside the TV bundle. How much do you have to charge? Who do you want to make sure you have on your side, maybe as an investor, to make sure that it can reach massive scale to compensate for the fact that you're probably going to be losing even more revenue from that linear TV business? Julia, thank you. Sarat. Any thoughts on Disney ESPN here?

I think this is really smart. If you think about what they're trying to do, and we don't know the details except, but you're trying to carve out the ESPN asset, which we know is not getting any valuation, really, because it's a depleting asset, but it is cash flow heading. Depleting because of cost cutting. Card, card cutting. Because you're losing subscribers, but you're losing the subscribers who aren't really watching. So why don't you take the content, which is live TV, which is live sports that everybody loves,

and find the right audience who's going to pay for it? This allows you to carve out ESPN from Disney, which is holding back the valuation of Disney, and getting a separate valuation potentially for ESPN, that if Amazon makes an investment, you could eventually spin it out or sell it to private equity or do something, because it is cash flow rich. You just need to get the right optimization of capital structure. Very interesting. And I can't wait for college football to start on Saturday.

All right. One media name is best position for the strike. And Loop Capital says this, hiking their price target to $500. Loup says the streaming giant has the best content pipeline to weather the TV drought. With us now is the analysts who made the call Loop Capitals Alan Gould. I don't believe we mentioned the company that we're talking about here. That would be Alan Netflix. Why do you like it so much?

First, thanks for having me on. You're welcome. Netflix is best position for what's occurring right now. Number one, all the competition is raising price and they're cutting back on the amount of content. so Netflix will be in a better competitive position. Two, their best position with the strike because they've got a bigger pipeline of unreleased content. They also have more global production capability than anyone. Three, streaming rationalization is inevitable.

You take the four large U.S. traditional TV studios, they will probably lose about $6.7 billion in streaming this year. Netflix will make over $7 billion. Next year, they're going to lose probably $3 billion. That can't go on forever. There's too many players. There will be rationalization. There will be a combination. One will go by the wayside.

That should improve Netflix's market share. The strike, we think the length of the strike is a little bit longer than people had anticipated. I think that's going to accelerate the decline in linear TV. That will help streaming. And with Netflix as a leader in streaming, that should help Netflix. the paid sharing or password sharing rollout was much smoother in the U.S. than we had anticipated, and advertising is still on the come. So we think they're very well positioned. I think the earnings estimates over time will go up. I think the usage will go up, given these advantages.

So we like to stop in here. That is a really muscular thesis that you have just laid out there, Alan. And what I hear among many things I'd like to pick up on is the idea that the other studios, whether it is universal or Paramount or Disney, that they are going to be, well, victims is my word, of the muscularity of Netflix. You know, right now, Comcast is losing $3 billion. It should be their peak losses for Comcast, but I don't see Brian Roberts standing by and continuing to lose large sums of money in the streaming business. Paramount Plus is losing. So what does Comcast do then?

Do they get out of that business? What? No. I can't afford to do that. You know, will there be some sort of a combination? I don't know. I mean, you've got, for example, it could be something as simple as Peacock and Paramount Plus have a joint venture in Europe where they have joined forces. So could it be a joint venture like that?

Or could it be something of a greater scale? A lot of people think at some point Comcast spins out NBCU and merges it into WBD, Warner Bros. Discovery, you know, and then you'd have a merger of Max and Peacock. But at some way, shape, or form, there will be fewer players in this business. We've certainly, I mean, obviously Comcast is our parent company, and we're not immune to hearing those same kinds of rumors. Surat, any thoughts here? Yeah, question for you.

I mean, one of the things during COVID was, let's just try and get as many eyeballs as we can. Where do you see Netflix in there now? Is the growth going to come from new viewers? Is it going to come from more raising prices? Are they going to, is the pie kind of grown to where it's maximum, or is there more potential there? From both areas, both from users and from revenue per user. As you know, they claim they had 100 million people using password sharing, about 40 million of those in the U.S. Canada market. So you've captured some. You certainly haven't captured all those players who were

sharing who are still willing to subscribe or maybe take the $699 advertising base tier, which is relatively inexpensive. And I think you'll see price increases. Netflix tends to raise prices about once a year. This year they did not raise prices as the password charging for password sharing was effectively a price increase. You look right now, I mean, Disney has gone from $799 to 1099 last December and raising it to 1399 for Disney Plus this November. That's a 75% increase in about a year. Hulu has a list price that will be 1799, higher than the 1549 price that Netflix charges for its standard tier. Now, I recognize most people probably take Hulu in a bundle with Disney Plus, maybe with the SPM Plus, so most aren't paying that price. HBO Max or Max, as it's now called, is 1599. Again, a premium to Netflix. So I think there's room for

Netflix to raise price. And I think there's some additional subs gains too. Fascinating conversation, Alan, a lot going to happen in the business in which we work. Thank you very much. Alan Gould, Loop Capital. Thank you. Thank you. Abercrombie and Fitch just blew away second quarter estimates, while the shares have more than doubled so far this year. And yet Morgan Stanley is still skeptical they can keep up. momentum for the long run? Is the bank just pulling at threads or is there real cause for concern? We'll discuss when Power Lunch returns. Welcome back to Power Lunch. Shares of Abercrombie and Fitch have been a huge winner this year,

more than doubling. This week, taking another leg higher after strong results in part, thanks to demand for that new trend in jeans. Wide leg, I think it is. Anyway, Morgan Stanley today is upgrading the stock, but only to equal weight and they're remaining skeptical in the long term joining us as the analyst behind this call, Morgan Stanley Equity Research Analyst, Alex, it's great to have you here. Is this because you're doubtful they can kind of stay on trend or what do you think about the company? Hi, Kelly. Thanks for having me today. Look, our view is intentionally thoughtful and pretty balanced in the range of outcomes that we see for Abercrombie. So look, in a bullpace,

I think ANF momentum can continue. The turnaround proves more durable. can inflect more fulsomely. And while that's the case, the business could certainly deliver high single-digit or even low double-digit even low-digit even low-digit-ebit margins. That could get you to a move further upward in the stock. Let's say, you know, 70 bucks or more. That's almost, you know, 30% upside from here. Right. But I think on the other side, we have to be fair. There's a real reality that ANF outperformance is well above its historical trend. Hollister isn't perfectly at an inflection point. And so over time, I have to be fair that the business could, you know, revert back to its historical mean,

which is a low single energy, EBIT margin. So our base case contemplates that, and that's where you get to 35, which is obviously some downside from here, too. Really quickly, before I bring in Ty and Surrott here, Alex, so are you saying, in other words, that Abercrombie has basically single digit, are they profitable? Forget EB, but, you know, just do they have positive profit margins today? Yes, they do. And part of this big pivot that they've had has been multifaceted.

I mean, the turnaround might be one of the only ones I can think of in retail history, which is quite impressive. And they've really done it after a decade of challenges where we've doubted where profitability has sat. You know, historically, the aggregate business has been low single digits. Now we're on track to do high single digit or low double digit. And really what that's been driven by and how Abercrombia has been able to pivot has been a few things. I mean, it's aged up its customer base.

It's expanded. It's assortment beyond casual and basics. That's enabled higher pricing, which is a key part of the margin turnaround. But also, it's rationalized its sore footprint, made it more inclusive and more welcoming. So there's a lot of it's done right to lift profitability. So I was going to ask you, what have they done right to affect this turnaround? And you just hit on a couple of things. They've aged up their customer base.

That means they've gotten older. And what specifically have they brought into? their merchandise mix to appeal to that older customer? Sure. So what they've done really is basically further differentiate the brand from its sister brand Hollister. So Abercrombie, it now targets like a 30 plus aged consumer. This isn't older than that.

It's still quite similar to Hollister, but that's, you know, more of a middle to high school age. So it created that gap there. And part of what it's done to the assortment is it's moved from like a jeans and teas business to something that's more similar to where you can find dresses, alternate types of pants. So that's really how the assortment has changed over time. And as they've done it, they've been able to take price. I want to emphasize, this is so impressive in the apparel market. It's a deflationary category. What that means is that price effectively declines

year after year after year. So their ability to affect this has been honestly nothing short of amazing. But it's also part of why we had been so skeptical is that there are few businesses, almost none, that are able to do this within specialty apparel. So when you look at them and you're going into the fall season and Christmas, do you see a sustainable model? Because that's one of the most difficult things about retail investing is great. You've got a good quarter. What's next? And you need new products and you need to go into the fall winter season to get your earnings up again. So where do you see that? Yeah, it's a great point you make. I mean, covering these fashion-driven specialty retail stock,

they're subject to very high cyclicality and thus really high margin and wide margin swings in EPS outcomes. It can be a very wild ride as you're covering them. And it's very hard to call that turn. And I think that's why kind of the thought around the couple of scenarios I outlined previously is where we're landing. It's more nuanced is that we see a range of outcomes where AvaCromy could continue to outperform. but we also have to acknowledge that it's not guaranteed. I will say, though, that these fashion trends tend to run, at least from our analysis, in three to four quarter cycles. So it feels like even should Abercromb be slow, we have Hollister just hitting an inflection that it could offset that. So it's nice that they have these two sister brands within the portfolio so that if one is struggling, the other can offset it.

Very interesting. And I'm going to ponder all weekend the phrase that you uttered, alternate pants. I really like that. Alex, thank you. Alternate pants forms. That's cool. All right. Thank you, my friend.

Coming up, payment power. Buy now, pay later, giant a firm surging on blowout fourth quarter earnings. Is it too late to buy the shares? After today's 30% gain, we will ask our trader in residence in three stock lunch. Welcome back to Power Lunch. I'm Steve Kovac with a market flash for you. Take a look at Hostess Brands. shares up about 25% here on a Reuters report that it's fielding takeover interests from the

likes of Mottalese, Pepsi, and Hershey. So we've reached out to the company for comment here, but this would be it's on pace now for its best day ever. So we're taking a look at this up 23% here. Tyler, I'll send things over to you. All right, Steve, thank you very much. Time for today's three-stock lunch, taking a look at some big movers of the day, served up with a Twinkie. First up, Alta Beauty lowered despite topping second quarter estimates. Here with our trades, Nancy Tangler, CEO, CIO, Laffer Tengler investments. Nancy, what do you think of Alta? So, Tyler, I think this is an opportunity to step in and add to holdings or initiate holdings if you don't own them.

I mean, the company delivered a good earnings report, raised guidance. The streets worried about gross margins that were impacted by supply chain increases and price increases. and, of course, shrinkage in the stores. And they've taken steps to solve the shrinkage problem. So they're locking up fragrances. That has made sure that customers have the inventory when they come in to buy those products. And I think that this is a company

that historically has been able to solve their problems over the long term and in the short term. They've got 42 million loyalty users, and they have multi-channel distribution, which they have found. really results in higher spending from customers. So we've been waiting for a chance to get in. We're going to be initiating position in Ulta. I think this is one you want to buy in here. I learned today that ALTA has more membership numbers than Starbucks. So wow, good for them.

All right, Nancy, this is a, we're just talking about this one, much more controversial. Affirm, skyrocketing 30% after a beat in their fourth quarter earnings last night. What would you do with the stock? I would, if I owned it, I would take this opportunity to exit. I mean, let's not forget the stock's down from 160 and 20, 21 during the pandemic mania. They're doing a couple of things right, but this is also a commodity business. And so I'd rather be exposed to the payment systems that are exposed to the high-end consumer. Uncertain economic environment, I don't think I'd want to own this, no earnings, and in a high-interest rate environment, this is not where you want to be focused. And finally, shares of the gap up over 7% today, but the company reported results

for the latest quarter, mixed ones. What's your take on gap? I think we were talking about a very new dynamic seeming CEO coming in there. Yeah, he's been there for three days, Tyler. So I do think at Lavertangler, we're very focused on management. This is your guy from a brand standpoint. He revived the Barbie franchise. We know what happened there. He has experience with Hot Wheels and Fisher Price. I think you let him do his work. Margin. are already improving, so a lot of the cost cutting and sort of recalibrating has taken place. I think this is a company that you wait for evidence for top line growth, and then you step in and buy it. Nancy, as always, great to see you. Have a great weekend. Nancy Tengler.

You too. Dear Jibosa has been digging through the Instacart or Cart IPO filing. She'll tell us what she's learning next on PowerLine. Let's get back to the breaking news we reported earlier today. That is Instacart filing for its IPO. will trade under this ticker symbol cart. Deirdre Bosa has been digging into the filing since this news first broke about 35 minutes ago.

Hi, Dee. Tyler, it's nearly 300 pages, so we will continue to dig through it. But here's what we learned so far. At first glance, what separates Instacart from other gig companies that have gone public over the last few years is its profitability. In 2022, it earned net income of $428 million, and each of the two years before then,

losses were less than $100 million. That's different than what we saw from, Uber, Lyft, and DoorDash. When they went public a few years ago, they were losing hundreds of millions, even billions of dollars a year in the case of Uber. So some questions still over how much of Instacart's profit is due to tax write-offs as it marked down its valuation. But we will continue to dig into that. The financial profile, though, is helped by, as we expected, it's advertising business that does have better margins. Revenue growth, another key metric. And that is decelerating. It's still above 30 percent. But in the risk factor section, the company,

warns that post-pandemic trends and macroeconomic factors have, quote, resulted in customers purchasing fewer items per order and reduced demand for premium or discretionary grocery purchases. Another thing that I was looking for was dual-class shares. They allow founders to keep control of their companies, even after an IPO. And that has been a trademark of tech IPOs over the last decade. Not here, though. There are no dual-class shares or outsized voting rights by insiders.

Another thing that jumped out is PepsiCo on the cover of the preempts. respect us. It will be an investor as soon as Instacart goes public. And this really speaks to Instacart's proposition as an ad company in addition to what we mostly know it best for, which is grocery delivery. PepsiCo has long been a partner with Instacart in terms of shoppable ads. So them putting money, significant amount of money, almost $200 million into the IPO, could help with investor interest. As the company now embarks on its roadshow, guys, that typically takes about two weeks. So we could see this thing hit the market. in, let's call it maybe the second week of September?

Sarat did or just gave us, in two minutes, more content that I can digest in a month. So a couple of key points here. Cash flow positive is going to be very important. Growth of earnings are very important. Use the comp of Uber. When Uber came public, they didn't make any money. But the inflection point for Uber stock, and it's $44 today, was when Uber announced that they were going to be cash flow positive and they were going to grow their earnings.

So I think they're doing it the right thing. no due class shares, come out, and you've got a great partner as Pepsi, because you now actually have somebody not just as a strategic, but a financial partner. But a real investor who's in there to stay. So the key is going to be sustainable earnings again, cash flow, and what is the growth rate of the cash flow? Would you be a buyer of the IPO? I would have to look at those metrics to really understand what the balance sheet looks like as well, because, you know, we don't know how much debt is on there. I'm sure it's in there. True. But what's your debt coverage? What are your covenants? And then essentially, what is your sustainable kind of recurring revenue growth?

Deirdre, thank you very much. Sarat, always great to be with you. And thank you all for watching Power Lund.