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What is Walmart's Hidden Gem & ESPN Builds on New Streaming Service
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Walmart's profitable ad business and ESPN builds on a new streaming service
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Hey guys, it's Christian McCaffrey, pro running back. I'm partnering with Abercrombie this season to tell you about their viral denim. All you need to know is denim should fit like this. Abercrombie's athletic fit is a game changer. They're designed for guys with an athlete's build like mine, just enough room and the perfect stretch. When a jean fits that well, I'm wearing it on repeat. Shop Abercrombie denim in the app, online and in store. Fox vs. ESPN New battles in the war of the streamers droning on Chipotle's latest move and Wal Mart, we unearth its hidden gem for Thursday, August 21, it's Brew Markets Daily. And I'm Ann Berry. More market details to come. But first, Wal Mart quarterly earnings out today and the headlines have been all over the news. A bump in full year revenue guidance, continued share gains with high income shoppers, but a missing earnings and signs of tariff pressure. The stock dropped 5% in response. Now, it was a dense earnings report, but the jewel that caught my eye was ads. So let's dig in to Walmart Connect. It helps brands to place ads in front of the 150 million customers per week in Walmart's US stores and e commerce sites, something called a retail media strategy. And Walmart has been way ahead of the game in making the most of it compared to other retailers. I started following this digital ad business inside Walmart about five years ago, before it was even named Connect. Well, last year Walmart connect added over $3 billion to the company's total revenue and is aiming for 6 billion in the near term. The business just hit 31% growth for the quarter. So that goal is in line of sight. And here's the best bit. It's super profitable, which comes in handy when right now Walmart is focused on how to keep its edge as a low price retail leader. So much so that CEO Doug McMillan flagged it explicitly in today's earnings call. Let's hear what he had to say.
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From a business model point of view, the fact that we have businesses like advertising and membership growing obviously help with flexibility as it relates to when we decide to absorb part of a tariff cost increase.
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Money for Walmart Connect is literally buffer against tariff impact. So let's do some very rough math. If we assume that the ad platform runs at about an 80% margin, then at $6 billion of revenue, Walmart Connect would account for about 10% of the whole company's EBITDA. That's a measure of profit. Not bad for a service that was barely a footnote in all the investor materials five short years ago. Which is why we dig through all those reports for you. Well, Walmart share price drop did weigh down the entire S&P 500 throughout today, and Wall street analysts are still working through some noisy impacts on their earnings reports such as insurance and legal charges, which may be one time passing through the detail overnight. Coming up later in the show, the eternal power of sports and why we're nerding out on software investing. But first, if you want to dig in on stocks, check out public.com Brew Markets Daily is sponsored by Public. Before the show today, our producer John mentioned a feature he found on Public.
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That's right. Of course, you can build your own investment plan on Public, which consists of up to 20 assets, but you can also choose from themes in their marketplace. I saw healthcare, cybersecurity and Energy transformation really helpful ways to discover new investment ideas. With either an investment plan you create yourself or one of their pre made ones, you can automatically contribute to these assets on a recurring basis.
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And if you have questions about your investments, no problem, because Public has Alpha, an AI powered research assistant that can help you find the answers you're looking for. Alpha will not only tell you that a stock is moving, but why it's moving. Public combines a wide range of asset classes with the tools you need to build and manage your wealth. Whether it's with stocks, options, bronze or crypto, Public is the investing platform for those who take it seriously. To get started at public.com brewmarkets that's.
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Public.Com BrewMarkets paid for by Public Investing, Full Disclosures and Podcast Description now let's.
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Move to the pricey and spicy intersection of sports and media, because ESPN today launched its flagship streaming service and for the first time, every major piece of ESPN content, from live games to studio shows, will be available without a cable subscription. You just have to pay $30 a month. Now this is a major shift in business model because for decades ESPN was the engine of the cable Bund bundle, raking in enormous carriage FEES up to $10 per subscriber for its parent company, Walt Disney. Sports fans recently would sign up for ESPN LED bundles, even if nothing else on cable interested them. Well, in the age of cord cutting, those days are over. And even though ESPN has managed to bring in billions of dollars in revenue each year, its operating income has been in the red with the skyrocketing cost of sports media rights.
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Right, ESPN just signed a 1.6 billion dollar deal to stream the WWE. That's wrestling. And that's nearly increase over wrestling's previous sports deal. TKO Group with the ticker TKO Technical Knockout, which owns WWE and UFC has seen their stock up nearly 30% year to date.
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But media companies are willing to shell out the money because sports remains the most popular programing on television.
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Of the top 100 telecasts of 2024, 85 were sporting events and related programming.
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Literally, it is the last bastion of traffic driving people to go watch a particular TV network, a particular program, live stream sports. So no surprise then that the other sports broadcasting giant Fox isn't just idly standing by watching espn. It has countered with its own digital digital move. And it also did it today. Fox is debuting its own standalone streaming service, Fox One.
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Yeah, for $20 a month you get access to the Fox broadcast network, Fox News, all the Fox sports, including its NFL Sunday games, the World Series and tons of college football.
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But while sports remains the engine here, there's one distinction in the Fox package that caught our eye. Because UNL broadcasting companies, Fox is actually still doing pretty well in linear television, mainly because ratings at Fox News are up. The median viewer age there is 69 years old. So Fox wants to keep that viewer and reach a new younger demographic with the streaming service using sports as the hook to reel them in.
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That's right. And Fox chairman Lachlan Murdoch says as much. He said, quote, we do not want to lose traditional cable subscribers to Fox.
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One, keeping those viewer demographics different. So John, football season is coming up. Are you going to be signing up for one or both of these new services?
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I will admit I'm one of those many people that these media companies are hoping will be onboarded because of sports. I signed up to the Peacock to watch the Olympics and I signed up to Paramount plus to watch March Madness. But those subscriptions are just a few bucks a month and you can cancel them. So this fall I'm going to stick to my antenna and watch my local football teams lose.
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Now, just in case there's any doubt as to the importance of sports in the markets right now, I just want to point to a story that broke as we were walking into the studio, which is that Comcast NBC Universal is an advanced talks with Major League Baseball to carry the baseball games on NBC and the Peacock streaming service. And guess what?
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They're paying for it, John, 20 or $30 a month.
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$600 million for a three year deal. So major money continuing to move into the sports space. John, we have a question from the audience that's right.
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We heard from Andy in Dallas and he wrote greetings and I saw today that a private equity firm is buying software company day force for 12 billion dol. Billion. I've never heard of Day Force. Why is anyone paying for a no name company?
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Well, I love this question, even if it is about a no name company. Because software deals have been booming and this deal trend is a good way to talk about what's going on in the software space more broadly and a trend that isn't going to go away, which is private equity money in and around it. So let's break down Day Force, which used to be called Ceridian. It's a big business with over $500 million of annual profit.
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And I looked this up on their website. It's a global platform that helps companies recruit and onboard employees, meet payroll and provide training. And the customer list is decent, from Accenture to Harley Davidson.
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So Dayforce is definitely not the only game in town. You've probably heard of competitors like ADP, which is over 10 times bigger when you look at market cap and Workday, which is over six times bigger and actually a great stock to compare Dayforce with really to get to the heart of the question. So here's why private equity loves buying software companies in general and by the way, why software stocks tend to do quite well. These businesses have subscription models. These are our favorite. We love regular, predictable recurring revenue streams. And they've also got high margins, which all means good cash flow. And cash we often say is queen, which means debt can be used to buy this company, which is important to private equity buyers.
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And Day four shares have been trading at lower valuation than workday at under six times sales compared with seven for peers. Day Force's stock is down over the past five years while Workday is up 17%.
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And that difference is exactly where private equity sees opportunity. The firm buying Dayforce said it out loud, announcing that it can, quote, accelerate growth and quote, deepen customer impact. Which is their way of saying that by taking the company off the New York Stock Exchange and taking it out of the market's glare for results reports every quarter, the private version of Dayforce can make expensive, difficult investments in long term growth. They can focus on boosting margins. Dayforces are only about 2/3 the level of those of its comps. It can do better, but it might be hard now. Now key to this is AI and here's what caught my eye. As of December, dayforce has nearly 7,000 customers on its platform and data data on those clients 7.6 million employees dating back decades and in the age of AI data is gold mining it. Cleaning it up and then molding it into something useful takes time and it takes money and it takes focus.
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And you keep saying that public markets often don't have that patience when these improvements can take a while.
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They don't. So Andy, your question why pay up for this one? Well, here's my take to do all of the hard work of investing, data mining, AI infusing and growing that the public markets don't often reward short term. And I will bet you that Dayforce comes out the other side of being private to be sold to either Workday or ADP or a similar public company. They're definitely big enough to buy a glammed up version of Dayforce one day.
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Or maybe it'll IPO again as a bigger, leaner, techier company a few years from now.
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Very, very possibly it does happen. These companies often go private just to bounce back out being public again. Well, we're going to take a quick break and when we come back, will drones deliver sales back to restaurants? Eczema isn't always obvious, but it's real. And so is the relief from EBGLIS. After an initial dosing phase, about 4 in 10 people taking EBGLIS achieved itch relief and clear or almost clear skin at 16 weeks. And most of those people maintain skin that's still more clear at one year with monthly dosing.
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EBGLIS Librekizumab LBKZ a 250 milligram per 2 milliliter injection, is a prescription prescription medicine used to treat adults and children 12 years of age and older who weigh at least 88 pounds or 40 kilograms with moderate to severe eczema, also called atopic dermatitis, that is not well controlled with prescription therapies used on the skin or topicals or who cannot use topical therapies. EBGLIS can be used with or without topical corticosteroids. Don't use if you're allergic to ebglis. Allergic reactions can occur that can be severe. Eye problems can occur. Tell your doctor if you have new or worsening eye problems. You should not receive a live vaccine when treated with Epglis. Before starting Epglis, tell your doctor if you have a parasitic infection searching for real relief?
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Ask your doctor about EPGLIS and Visit or call 1-800-LILYRX or 1-800-545-5979. This episode is brought to you by State Farm. Checking off the boxes on your to do list is a great feeling. And when it comes to checking off coverage, a State Farm agent can help you choose an option that's right for you. Whether you prefer talking in person, on the phone, or using the award winning app, it's nice knowing you have help finding coverage that best fits your needs. Like a good neighborhood, State Farm is there. Welcome back to Brew Markets Daily. We've been paying close attention to the steep decline that's been happening across fast casual restaurants lately, specifically in what we will call the lunch bowl space. Kava, Sweetgreen and Chipotle are all experiencing slowdowns and investors are taking note. Carver stock hit a 52 week low last week. Chipotle is down over 28% year to date. And Sweetgreen recently saw its shares fall nearly 25% after reporting disappointing sales. Now, on a macro level, one explanation for the drop might be what the official category called food away from home has been suffering from, which is prices rising faster than groceries. So that many see restaurant lunches as an unnecessary discretionary splurge and are cutting back. They're making the lunches at home. Now, these restaurant trains are trying all sorts of tactics to re engage customers. Sweetgreen, for example, launched discounted $13 bowls, still not cheap. And a new loyalty program. But that actually backfired.
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Right, And I also saw that they're focusing on their core menu, which means they're ditching the popular ripple fries.
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That's too bad. I actually really liked the ripple fries. Well, Carver is rolling out automated make lines to add speed and accuracy to the customer experience. They're all focused on service.
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Yeah, that's right. They're focusing on service. And Ann, I noticed that few of these chains talk about making the actual food better. To me, this seems like gimmicks and promotions to stop the bleeding. I wonder if there's desperation setting in.
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Well, let's talk about one little move that we saw in the news today and we can discuss. Is it a gimmick or is it something to actually try to start a movement? Starting today, select customers in the Dallas area can have their Chipotle order delivered to their house by drone.
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Okay, that sounds great.
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I mean, okay, not gimmick or no gimmick. Well, look, Chipotle has teamed up with drone company Zipline to introduce Zipot delivery through the app. So you can order your burrito bowl and an autonomous aircraft delivers it to your house. Chipotle thinks this will resonate with a younger consumer base.
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And you always say that same Store sales growth measures the health of these companies. Chipotle recently reported that its Same store sales fell 4%. Is this drone play a way to just juice those numbers? You can't really evaluate store sales to store sales. If young people are getting the burritos.
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Airlifted to them, it certainly makes it harder. And the other question I have around this, why the younger demographic who typically don't have as much money to spend? So a lot about this strategy that we're going to keep watching now, our team found articles that Chili's detest runs of drone delivery back in 2022, but that restaurant decided to pull away from the idea. Zipline says, however, that it will be partnering with sweetgreen to set up potential drone delivery for that chain as well. Well, the restaurant folks are not the only players in the consumer space trying to use drone delivery to get consumer attention. Walmart has been doing the same. It does have a partnership with Zipline as well as with Wing, which is owned by Alphabet. And it looks as though Dallas has been a test market for Walmart as well. Something going on in Texas that's attracting all of this drone action. Chipotle stock finished down today. It's 4pm on the east Coast. The markets have closed and we don't have a ticker tape. So let's throw it over to our human ticker John to tell us how the markets closed out today.
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Well, The S&P 500 closed lower for the fifth day in a row, closing down 4.10of a percent. And the NASDAQ and the Dow were both down about a third of a percent. The US And EU issued a joint statement outlining the next phase of their trade deal, including a 15% baseline tariff on most import, including pharmaceuticals. That's progress, but still a way to go before the EU gets approval from all 27 of its nation members. Another restaurant in trouble. Stock in Cracker Barrel was down as much as 15% today after the company unveiled an unpopular redesign of its logo. And finally, newly formed media conglomerate Paramount Skydance soared today for no apparent reason, though I see speculation on message boards that it is becoming a meme stock.
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Well, it'll be a late night as we dig through earnings dropping right now from the software sector, including Workday, Zoom and Intuit. And we're also going to be eagerly awaiting news out of Jackson Hole tomorrow where Federal Reserve Chair Jay Powell will be giving his comments on the state of the economy. Now, the market is going to be watching extremely closely, closely for any signs of change that might indicate that the expectation of a rate cut next month are misplaced. So topics I expect him to cover include, number one, the importance of Fed independence number two, the fact that the Fed should remain data driven in its decision making, a nod to the fact that there have been conflicting signs in recent times as to whether inflation is really under control. We've seen slightly different reports coming from the PPI and from the Consumer Price Index. I suspect he's also going to give a running list of his successes because he's been under a lot of pressure lately, a lot of speculation as to whether he's going to be allowed to ride out the rest of his term. There have been calls for his resignation and I suspect he's going to want to secure his legacy. And this will be his last speech from the Jackson Hole Symposium during his tenure. So big macro day coming to end the week. We'll be watching. That's all for Today's that's all for Today's Brew Markets Daily Brew Markets Daily.
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Is hosted by Anne Barry and produced by John Crateau, Tarek Abdelatif and Emily Milian. Our technical director is Lonnie Fiskas and the president of Morning Brew, Inc. Is Devin Emery. If you'd like to get in touch, send an email or Voice memo to BrewMarketShoworning Bukom.
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Wake up tomorrow with the Morning Brew newsletter and tune in to Neil and Toby on Morning Brew Daily. See you back here tomorrow. Same time place.