A Blog by Jonathan Low

 

Dec 31, 2020

Why 2020 Was A Surprisingly Good Year For Many Big Businesses

For businesses with resources, a crisis frequently presents opportunity and the data suggest that the pandemic, despite its severity and scale, was no different.

Big companies cut costs, invested where they saw potential and grabbed market share. As the recovery progresses, they will emerge even stronger than they were already. JL

Liz Hoffman and Jennifer Maloney report in the Wall Street Journal:

The biggest companies were the ones that came out on top. They slashed workforces, cut costs and re-routed supply chains. Investors plugged financial holes, encouraged by central bankers who lowered borrowing rates and flooded the economy with cash. Consumers quickly got back to spending, shifting dollars online.The tactics that helped corporate titans thrive, laying off thousands of workers, going deep into debt, and grabbing market share from struggling competitors, will shape the recovery. The pandemic accelerated gains in the digital economy. E-commerce gained five percentage points, equal to the previous five years.

The coronavirus pandemic brought the global economy to a screeching halt this spring, sparking fears of a corporate bloodbath. As the year ends, it’s clear that the crisis has rewired the economy in surprising ways and served up unexpected opportunities for some big businesses to prosper.

Dog hiking vests and festive sweaters for pet lizards flew off the shelves at PetSmart Inc. Universal Pictures embraced the rise of streaming and reset Hollywood’s balance of power. Neiman Marcus came out of bankruptcy with a clean slate and new money from Wall Street. Salesforce.com Inc.’s CEO tired of Zoom calls, then agreed to pay $27.7 billion to own Slack, a tool to connect remote office workers, a big bet on a permanently changed workplace.

“We’ve had 10 years worth of change in 10 months,” said Rajeev Misra, CEO of the Softbank Vision Fund, the world’s biggest technology investor. He went into the crisis worried the market would leave his startups for dead, only to ride a record stock-listing boom to big gains.

The biggest companies, in many cases, were the ones that came out on top. They slashed their workforces. They cut costs and re-routed their supply chains. Investors plugged financial holes, encouraged by central bankers who lowered borrowing rates and flooded the global economy with cash. Consumers quickly got back to spending money, shifting their dollars online and replacing dinners out with at-home cocktails and overseas vacations with local getaways.

The tactics that helped many corporate titans thrive—laying off thousands of workers, going deep into debt, and grabbing market share from struggling competitors—will shape the recovery for months, if not years.


The pandemic and fallout continue, even as vaccines begin to be deployed. The death count keeps rising, and food banks continue to report heavy use. Small businesses have been battered and millions of Americans remain without jobs. Some pivots might yet turn out to be short-sighted, some predictions overly optimistic. November’s retail sales slowed as infections surged, a sluggish start for the holiday shopping season. In recent weeks, giants like Coca-Cola Co. and General Electric Co. have outlined plans to cut more jobs.

But corporate profits have snapped back. So have stock prices.

“I would have never guessed that I would be telling you this story today,” Toll Brothers Inc. CEO Doug Yearley said in an interview last week. “Back in March, we were all scared. We were scared personally, and we were scared for our business.”

During the last economic crisis, in 2008, the housing market crashed. This time buyers queued up in virtual open houses for new Toll Brothers developments in Boise, Idaho, and the Atlanta suburbs, spurred by falling mortgage rates and a desire for space.

Analyst projections for S&P 500 companies’3Q profit drop, change from 2019 to 2020Source: FactSet
%DATE PROJECTION WAS MADEActual: -6%April 2020MayJuneJulyAug.Sept.-30-20-100

At the end of June, stock analysts were projecting a 25% drop in the third-quarter profits of the companies in the S&P 500 index, according to FactSet. Their actual profits fell just 6%. Gains in health care, consumer goods and technology compensated for sharp declines among energy and industrial sectors.

When Neiman Marcus Group Inc. sold a 7-carat diamond ring in April to a customer who had never seen it in person, its chief executive glimpsed a new hope for the embattled luxury retailer. Neiman Marcus had temporarily closed its stores but top customers were still opening their wallets.

Fashion houses kept shipping to the high-end chain even after it closed its stores in March, furloughed many of its 14,000 workers in April and filed for bankruptcy in May. “Not only the customers but the brands supported us,” said CEO Geoffroy van Raemdonck. “Then it was a question of how quickly we could reopen the stores.”

Neiman Marcus emerged from bankruptcy protection in September with fresh financial backing from big investors. It has reopened all of its 40 remaining stores, including Bergdorf-Goodman in New York City.

Easy Money

Royal Caribbean Group stopped sailing in March and started packing financial sandbags. “You could never be too rich, too thin or too liquid,” CEO Richard Fain told his board of directors. The cruise operator borrowed from banks and sold new bonds to investors as it burned about $300 million a month, its ships in harbor and its reputation under fire. By October, it had laid off or furloughed 23% of its U.S. shoreside employees and repatriated more than 44,000 crew members to their home countries.

A bottomless well of investor cash kept companies like Royal Caribbean alive as revenue vanished. Ford Motor Co. in April set out to raise around $3 billion and ended up with $8 billion. Boeing Co. sought federal aid—a rescue that would likely have made the U.S. Treasury a major shareholder—then changed its mind and raised $25 billion from bondholders with far fewer strings attached.

Investors put a record $11 trillion to work this year, about half of it into corporate debt, according to financial-data firm Refinitiv.

John Zito, deputy chief investment officer of credit at Apollo Global Management, spent his 39th birthday, Saturday, March 21, in his home office. The investment firm had settled into a defensive crouch in February, moving a third of its assets into cash and other ultra-safe holdings. He wanted to go on offense. “You’ll never get another chance like this,” he told his team, dialed in on a conference call, “to buy great companies at tough prices.”

On Monday, the private-equity firm started buying. Over the next two weeks, it spent $800 million a day buying discounted corporate debt and newly issued bonds from Boeing, PetSmart, Airbnb and others.

Central bankers spurred investors on. Global governments have pumped $28 trillion into their economies this year through stimulus spending and financial-market backstops, according to Cornerstone Macro, an economic-research firm. That amounts to nearly one-third of global economic output, roughly what experts estimate was lost in the spring.

United Airlines Holdings Inc. got $5 billion to pay workers under the stimulus bill passed in March, but knew it wasn’t enough to compensate for its nearly empty planes. Wall Street filled the gap. The airline sold shares and took on more debt, including $6.8 billion borrowed against its customer-loyalty program, an arrangement quickly followed by rivals.

United and its union struck a deal that saved pilots’ jobs—CEO Scott Kirby wanted to avoid the years of retraining that would be required to rehire them after the pandemic had passed. But thousands of flight attendants, mechanics and others were furloughed in October after government aid ran out.

United has lost more than $5 billion this year and last week warned investors it was burning through more cash than expected. Mr. Kirby resisted calls this summer to add back flights to capture the demand many were sure would return.

“I bet I got 50 emails that said ‘build it and they will come,’” he said. “In the real world, if you build it, and they don’t come, you go bankrupt.”

Moving Faster

Medtronic PLC didn’t need money. It needed ventilators. It was Sunday, March 15, and incoming CEO Geoff Martha was riding his Peloton bike in the basement of his suburban Minneapolis home, fielding one call after another—the White House, the Federal Emergency Management Agency, state governors, the prime minister of Ireland.

“The numbers that they were asking for were orders of magnitude bigger than the entire [ventilator] market,” said Mr. Martha, who became CEO of the medical-device maker in April.

So Medtronic began sharing its ventilators designs with anyone willing to build them, and recruited manufacturers of auto parts and spaceships to start making components on their assembly lines.

In April, hospitals in Minneapolis and Chicago asked Medtronic if ventilator settings could be adjusted from outside a patient’s room to reduce the risk to hospital staff. Medtronic designed a solution, which was rolled out three weeks later.

“We’ve never done anything like that,” Mr. Martha said.

Medtronic’s sales, though hurt by the suspension of elective surgeries like implants of its pacemakers, have rebounded faster than expected. The company reported $7.65 billion in revenue in the quarter ended Oct. 30, just 0.8% shy of the same period last year.

Going Digital

The pandemic accelerated gains in the digital economy. Schools went online. Food delivery surged. More than 86 million households signed up for Walt Disney Co. ’s new streaming service in its first year. As a percentage of U.S. retail sales, e-commerce gained nearly five percentage points between March and July, equal to its gains in the previous five years, Federal Reserve data show.

E-commerce as a share of U.S. retail salesSource: U.S. Census Bureau via St. Louis FedNote: Seasonally adjusted.
%2010’11’12’13’14’15’16’17’18’19’20051015

That was welcome news for the SoftBank Vision Fund, which was on its heels early in 2020. It had poured billions of dollars into technology startups with little to show for it and some high-profile duds, like WeWork.

Mr. Misra, the fund’s CEO, spent the early days of the pandemic working with companies in his portfolio to slash costs, warning them that they likely wouldn’t be able to raise new money for a while. “The market might be shut for 18 months,” he told them.

Mr. Misra now says he was too bearish. Two dozen Vision Fund portfolio companies raised fresh cash from private investors this year. Six went public, including DoorDash Inc., the food-delivery company whose IPO documents credited soaring demand during the pandemic for some of its growth. After its shares rose 86% on their first day of trading earlier this month, SoftBank’s $680 million investment was worth nearly $12 billion.

“We knew we were in the right place,” Mr. Misra said. “Covid made it the right time.”

Need to Pivot

Jeff Shell saw his chance. The boss of Comcast Corp.’s NBCUniversal had spent years in a deadlock with movie-theater chains, which had exclusive rights to show new films for months, even as consumers had moved to streaming.

With theaters locked and dark this spring, Mr. Shell decided to release “Trolls World Tour”—an animated film his studio had spent $90 million to make —on streaming platforms like Apple and Amazon. “We could have put the film on the shelf until the world changed,” Mr. Shell said, “or we could find a different way to do it.” Within three weeks, the film had racked up $100 million in digital sales, and Mr. Shell told The Wall Street Journal that Universal planned to release future movies for streaming, too.

The biggest U.S. theater chain punched back quickly. AMC Entertainment Holdings Inc. said it wouldn’t screen any Universal movie until the studio reversed course. “You have to see the big picture,” Mr. Shell says his message was to theater owners. “There are people out there trying to kill both of us.” Netflix Inc. was gobbling up a bigger slice of the movie business. Actors and star directors had already made the jump.

Three months later, with most U.S. theaters still dark, a truce was struck that will reshape Hollywood beyond the pandemic. Universal’s movies will move to streaming platforms after 17 days. AMC will still get its opening weekend and share in revenue from at-home rentals.

The two companies had been close to a deal in 2016 and again in 2018 but talks had fallen apart, said AMC’s chief executive, Adam Aron. “We did in 12 weeks what we couldn’t get done in five years of trying,” Mr. Aron said. “Covid changed everything. Both sides were willing to take more of a risk.”

With the Pfizer Inc. vaccine now being administered and others in various stages of government approval, executives are waiting to see whether those changes are permanent. Mr. Aron is betting movie fans will still want the big screen for a slate of blockbusters pushed by the pandemic into 2021, including a James Bond flick he’s eager to see.

Surprising Demand

As restaurants and bars closed, Pernod Ricard SA saw one of its biggest sales channels shut off. But consumers still wanted to drink, and they started stocking up home liquor cabinets. The surge continued after Memorial Day, when Ann Mukherjee, who runs Pernod Ricard’s North American business, had expected it to drop off. Sales of Kahlúa rose. So did $150 bottles of cognac.

The company’s U.S. sales in the most recent quarter rose 6% from a year ago, even as many bars and restaurants remained closed or capacity-limited. Ms. Mukherjee has built a team dedicated to online sales. “Once a consumer figured out, ‘I don’t have to lug all these bottles home,’ who’s going to go backward?”

U.S. food and retail sales fell sharply in March but were climbing again by May and by June, were back above pre-pandemic levels, according to Fed data.

PetSmart CEO J.K. Symancyk saw it, too. Pet adoptions surged as people spent more time at home. Customers were buying hiking gear for their dogs, Halloween costumes for their guinea pigs, Advent calendars for their cats. Sales at the closely held company are up this year, he said.

“I didn’t know that Christmas costumes for a bearded dragon would be a business that we’re in,” Mr. Symancyk said.

Another surprisingly resilient sector: new homes. Many of Toll Brothers’s home-construction crews had put down their hammers in March after sales tanked. The company postponed land purchases and road construction and laid off 10% of its employees.

In mid-May, Mr. Yearley, the CEO, started hearing from his sales force: “We’re hot.” Traffic on the company’s website was up and customers were touring homes over Zoom. People wanted home offices and gyms. As the coronavirus spread through nursing homes and college campuses, they wanted in-law suites for aging parents and adult children.

As companies allowed their employees to relocate, Californians eyed Nevada and Idaho. New Yorkers flocked to Connecticut, a state that Toll Brothers had all but given up on due to sluggish sales.

By July, as mortgage rates hit all-time lows, Mr. Yearley said he was confident it wasn’t a blip. Toll Brothers is now aggressively buying land. And it is hiring again.

It was after 11 p.m. and Marc Benioff had been on back-to-back Zoom calls since 6 that morning. “I don’t think I can do that again,” he told his assistant the following day.

Months into the pandemic, working from home had gotten to Mr. Benioff, CEO of Salesforce Inc. But a few months later he would make a giant bet on the future of remote work, agreeing to buy Slack Technologies Inc. —a $27.7 billion transaction that was negotiated, in part, over Zoom.

The pandemic uprooted big tech companies from their California offices but it also spurred demand for many of their products. Apple Inc. gadgets and Google’s online tools became critical tools for remote work and school, and more companies tapped cloud services from Amazon.com Inc. and Microsoft Corp. Those four giants have added more than $2 trillion in market value so far this year.


Digital tools like these have kept Rite Aid Corp. running. Soon after taking over in 2019, chief executive Heyward Donigan began a shift to remote work as a way to draw talent from around the country to help manage a turnaround at the No. 3 pharmacy chain, which is based in Camp Hill, Pa. “Who would have known that getting set up with WebEx [video conferencing] back in August [2019] would be a game changer in March?” she said.

Ms. Donigan has insisted on some face-to-face contact with her executive team. In November, she held a meeting near Orlando, where she expected the group could meet comfortably outside—and ended up drenched as pelting rain from a tropical storm blew in.

“At least we got to see each other,” Ms. Donigan said.

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