⛓What We're Reading: Week of October 13, 2019 (5 Reads)⛓

1. Automation (Long Andrew Yang?). A new report from the Federal Reserve Bank of San Francisco highlights the dangers of automation to the American worker:

The portion of national income that goes to workers, known as the labor share, has fallen substantially over the past 20 years. Even with strong employment growth in recent years, the labor share has remained at historically low levels. Automation has been an important driving factor. While it has increased labor productivity, the threat of automation has also weakened workers’ bargaining power in wage negotiations and led to stagnant wage growth. Analysis suggests that automation contributed substantially to the decline in the labor share.

2. Experiences (Long the “Data is the New Oil” Narrative). In response to “🎯Experiences Galore: Dave & Buster’s Complains of Cannibalization (Short Arcades)🎯,” one loyal PETITION reader sent us this piece, wherein Bloomberg describes how Steve Cohen’s Point72 analyzed geo-location data linked to (allegedly) anonymous credit card information to determine that there’s a direct negative correlation between Topgolf and Dave & Buster’s Entertainment Inc. ($PLAY). They noted “when customers went to entertainment venue Topgolf for the first time, their spending at a nearby Dave & Buster’s went down immediately….” The fund shorted PLAY as a result. Similarly, it used data to determine that alternative diets, i.e., Keto, were taking a bite out of Weight Watchers’ ($WW) business.

Topgolf, meanwhile, seems poised to IPO in 2020…maybe. We’ll see what the IPO markets are like in the wake of WeWork. Per Pitchbook, “[i]t’s unclear if the company is currently profitable.” 🤔

3. Malls (Long the “Over-Malled” Theme). This is a bit older, but here, Garrick Brown, Vice-President of Retail Intelligence at Cushman & Wakefield has some interesting numbers about malls:

I just finished crunching mall tenant sales per square foot data and the news may surprise some of you. Trophy malls (those with sales of $900 psf or more) currently average $1,257 psf. This has increased by 16.7% over the last three years. Class A malls ($600 - $900 psf) now average $714 psf and have increased 9.3% over the past three years. Class B malls ($300 - $600 psf) now average $402. This has fallen 1% since 2016. However if you exclude 18 centers that invested in significant upgrades the decline overall would have been -7.8%. Class C (-$300 psf) now average $213 and have seen a 13.7% decline over the past three years. Bifurcation is real. Strong getting stronger. Weak getting weaker. Quality wins.

Now, we would love to see how, even in the A malls, that average has changed over the last three years. We’d have to think that, even there, the trends are declining somewhat. Also, this was pre-Forever 21 filing for bankruptcy so the effects of that won’t flow through these numbers for some time.

4. Restaurants (Short Franchisees). Franchisee debt levels are starting to cause concern. Per Restaurant Business:

Franchise systems like McDonald’s, Wendy’s, Burger King, Jack in the Box and many others have been selling corporate stores to franchisees, relying on operators to provide the capital needed to fund remodels and build new units.

Lenders have been eager to make loans to these operators. And franchise systems have taken advantage of this availability of capital to fuel remodel programs.

As a result, debt levels have soared for franchisees. In a note this week, Bernstein Research analyst Sara Senatore noted that the leverage ratio for McDonald’s franchisees grew to 3.1 times earnings before interest, taxes, depreciation and amortization, or EBITDA, in 2018. In 2008, that ratio was just 1.3.

For Wendy’s, that ratio is even worse: 7 times EBITDA, from 5.7 in 2008.

🤔

5. Retail Ad Budgets (Long Ingenuity). Are all of those retailers who are planning on spending more on social media and marketing going to get bang for their buck? This suggests there’s reason for skepticism. Given the decrease in mall foot traffic, retailers are increasingly getting stuck between a rock (e-commerce saturation, limited ad supply, questionable tracking metrics and performance) and a hard place (brick-and-mortar leases, environmentalism).

Orexigen Therapeutics - Long Obesity & Patents, Short Massive Cash Burn

Only Oprah Winfrey Can Sell Weight Loss

Orexigen Therapeutics Inc. is a publicly-traded ($OREX) biopharmaceutical company with one FDA-approved product named "Contrave.” Contrave is an “adjunct” to a reduced-calorie diet and exercise for chronic weight management in certain eligible adults. In English, it’s a drug to help adults (allegedly) lose weight. And before we continue, please take a minute to appreciate the exquisite creativity these folks deployed with the name, "Contrave." We can only imagine the whiteboarding sessions that went down before someone said in MacGuyver-esque fashion, “Wait! Control + cravings = Contrave!” We hope the company didn't shell out too much cash money to the brand consultants for that one. But we digress.

Anyway, the drug could theoretically service the 36.5% of adults the Center for Disease Control & Prevention has identified as obese — a potential market of 91-93 million people in the United States alone. And that’s just today: that number is predicted to rise to 120 million people in the next several years. Yikes: that's 33% of the U.S. population. Apropos, the company claims that the drug is the number one prescribed weight-loss brand in the US with over 1.8 million prescriptions written to date, subsuming 700,000 patients. The drug is also approved in Europe, South Korea, Canada, Lebanon, and the UAE. 

All of that surface-level success notwithstanding, the company has lost approximately $730 million since its inception. This is primarily because it has been spending the last 16 years burning cash on R&D, clinical studies for FDA approval, recruitment, manufacturing, marketing, etc., both in and outside the U.S. PETITION Note: And people wonder why drugs are so expensive. The company believes it could be profitable by 2019 under its existing operating model and revenue forecasts; it enjoys a patent until 2030. Clearly, the patent is the critical piece to this company’s future.

Prior to filing for bankruptcy, the company’s bankers attempted to effectuate a sale of the company to no avail. The goal of the bankruptcy filing, therefore, is to pursue a sale with the benefit of "free and clear" status (⚡️Nerd alert ⚡️: this means the buyer doesn’t need to take on the substantial litigation risk to clear title in the asset). While no stalking horse bidder is lined up, The Baupost Group LLC, is leading a group of secured noteholders (including Ecori Capital, Highbridge Capital and UBS O'Connor) to provide a $35 million DIP credit facility and buy the company some time. Will they end up owning it? 

Two other things of note here:

1. The Baupost Group LLC is really toning its bankruptcy musculature lately. Between this deal and Westinghouse, the firm has been active.

2. Note to company management: Oprah Winfrey may have some more room in her weight loss asset portfolio now that she’s dumped a meaningful amount of her Weight Watchers International Inc. ($WW) stock holdings at a considerable gain.