Wine country goes back to basics — and online — as pandemic upends business


Selecting a bottle of wine to share over dinner was easy enough before the pandemic. Anyone might worry about paying too much or sounding silly when ording a fancy-sounding choice, but the ritual of picking a bottle to share, or glass to sip, had a way of making any meal out feel special.

That was until about five months ago. Now the idea of ordering wine, dining out or engaging in routine social gatherings, like birthday parties or anniversaries, involves weighing the potential risk of a run-in with the novel coronavirus, which the U.S. still struggles to tamp down.

The crisis has led U.S. households to rein in spending, hobbled entire industries and threatened the ruin of jobs. In other words, it’s the kind of public-health and economic shock that’s one for the history books. It might even be driving Americans to drink more.

The problem is they’re drinking more at home. And that’s had a sobering effect on much of the U.S. wine industry, which after a near quarter-century of growth, saw domestic wine sales drop 5% over the past 12 months to about $48 billion in June, according to data from industry research firm bw166.

Experts singled out March 20 as the day everything changed, when California, Illinois, New York and other states issued stay-at-home orders that came thundering down across the nation, forcing bars, restaurants and wine-tasting rooms and other nonessential businesses to shutter as authorities raced to control a wave of COVID-19 infections.

“When you add both the shutdowns of tasting rooms and closures of restaurants, 44% of sales fell out from underneath the wineries in one night,” Rob McMillan, an executive vice president and founder of Silicon Valley Bank’s wine division, told MarketWatch.

“It was a bad day to wake up.”

Like many other industries, wineries remain in the midst of an upheaval sparked by a global pandemic that’s been brutal on lower-income workers, but sparing Wall Street, where U.S. stock benchmarks, including the S&P 500 index,
SPX,
-0.20%
,
trade near record territory.

It’s not that consumers stopped drinking wine. Rather, diners who might in better times split a bottle at a restaurant, suddenly were rushing their carts through big-box stores and grocery aisles to fill up on necessities, including wine.

“Nationwide, retail sales blew up,” said Gary Obligacion, the general manager at the Post Ranch Inn, a luxury resort in Big Sur, Calif., that overlooks the Pacific Ocean, of the shift to at-home wine drinking at the onset of the pandemic. “People were in panic mode,” he said.

Post Ranch and its Sierra Mar restaurant recently reopened after a nearly three-month shutdown. For now, that still means only serving guests staying at the resort, who can order meals in their rooms or book at the Sierra Mar’s outdoor deck. But the restaurant’s thick, multipage wine book has been replaced by iPads that, like any wine bottles purchased for a table, are sanitized within view of diners.

“It’s all being done in a format for peace of mind around health and safety,” said Mark Buzan, Sierra Mar’s wine director, of the new protocols that make “any romantic notion about bringing a dusty, old bottle up from the cellar to present to a guest” a thing of the past.  

Two U.S. wine industries

The puzzle for smaller, premium winemakers to solve has been how to reach customers when retail sales have been booming, but mostly benefiting the nation’s wine Goliaths.

“There’s two wine industries,” McMillan said. “Roughly 75% comes through the largest 13 wineries,” he said, pointing to top sellers that include the E&J Gallo Winery, The Wine Group and Constellation Brands STZ. “They make wine, sell it to wholesalers, restaurants or grocery stores, and then it goes to the consumer,” he said. “The smaller wineries don’t get much wholesale attention.” 

What has been working, for some smaller producers, has been efforts to reach customers directly to spur sales, including online through their own websites, instead of relying on restaurants and others to create a buzz.

That’s meant repurpurposing staff and going back to the basics, including hitting the phones to drive sales. “It’s not like small wineries figured out overnight how to do outreach for online retail,” McMillan said. “For some, the only thing on their website was a shopping cart icon.”

This chart breaks down how sales have shifted at many U.S. wineries after shelter-in-place orders took hold, as producers ramped up business through wine clubs, online and over the phone.

Wine buying shift in 2020


SVB

Further into summer, as more restaurants reopened under new social-distancing rules, off-premise alcohol sales remained robust.

Spirits have led the charge higher, with sales jumping 29.3% for the week ended July 18, versus a year prior, while wine sales rose 19.7%, according to the latest data from Nielsen.

“A lot about wine is the story,” said Russ Colombo, a senior vice president at Baker Boyer, a lender in Walla Walla, Wash., focused on financing smaller wineries in the region. “The first bottle you sell or place at a restaurant is difficult enough,” he said, but after that “it’s all about momentum.”

For winemakers able to drum up their own support and sell directly to customers, a bonus is that they don’t have to pay a middleman, which can mean about twice as much profit for a producer when compared with wholesale transactions, Colombo said.

On the other hand, Colombo also called wineries “one of the toughest things to finance,” not only because of the fierce competition, but also because winemaking takes talent, a long view and probably luck.

“Winemakers are good at agriculture,” he said. “But for higher-end red wine, even before it hits the market, it could be two years. And in those two years, the world changes a lot.”

Wine Facts

One boon for smaller producers during the national tug of war over reopening, face masks and social-distancing restrictions has been visitors flocking to nearby wineries and vineyards for a bit of respite.

“Most high-end wineries that have tasting rooms are going to the reservations system,” Colombo said, adding that catering to fewer customers due to health-and-safety rules has been a positive for sales. “Winemakers, they find they can spend more time with their customers, tell their story and establish a personal relationship.”

And yet, there’s plenty of uncertainty. The earliest part of the 2020 harvest has kicked off in California’s wine country, while the state on Thursday reached the grim milestone of becoming the first state to report 600,000 COVID-19 cases since the pandemic was first detected in the U.S. earlier this year.

“What I can tell you is that it’s been an excellent growing season. The crop loads look average to high and you have to find homes for all of that fruit,” said Jennifer Putnam, chief executive at Napa Valley Grapegrowers. “But it’s a pretty intricate dance we do. You have to have a healthy workforce, good weather and people supporting Napa Valley agriculture and wines.”



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Foot Locker got a Q2 boost from government stimulus but Q3 could be a different story, analysts say


Foot Locker Inc. shares jumped 7.8% in Monday trading after the athletic retailer said it expected better-than-expected fiscal second-quarter earnings, but analysts are concerned that once the government stimulus funds dry up, so will demand.

For the second quarter ending August 1, Foot Locker
FL,
+1.78%

expects same-store sales to rise 18%. Earnings per share are expected to be 38 cents to 42 cents, and adjusted EPS is expected to be 66 cents to 70 cents.

The FactSet consensus was for a same-store sales decline of 23.6% and a loss of 40 cents per share.

“As we continued to reopen stores throughout the quarter, we saw a strong customer response to our assortments, which we believe was aided by pent-up demand and the effect of fiscal stimulus,” said Richard Johnson, chief executive of Foot Locker, in a statement.

Foot Locker is scheduled to report fiscal second-quarter earnings on August 21.

See:Versace parent Capri Holdings and Ralph Lauren slump as luxury sales takes a hit during pandemic

“While encouraged to see Foot Locker take advantage of a better near-term environment, the results directionally do not appear surprising given several tailwinds during May-to-June (pent-up demand, fiscal stimulus) which were well documented by others (Hibbett Sports/NPD Group) and seem likely to prove temporary,” wrote Baird analysts led by Jonathan Komp.

Hibbett Sports Inc.
HIBB,
+1.07%

gave a business update in July that shows second-quarter same-store sales on track for a 70% same-store sales increase.

Still, Baird analysts note a recent slowdown in sales at major retailers and brands, including Foot Locker, after a strong June and early July.

“We also are uncertain at this stage of how potential executive actions cutting the weekly federal unemployment payout to $400/week from $600/week previously and providing the option for a temporary payroll tax holiday through year-end (likely less impactful than Cares Act checks) may impact overall spending, with [Foot Locker] in our view highly sensitive to discretionary spending conditions,” Baird wrote.

Baird rates Foot Locker stock neutral with a $29 price target, up from $24.

A Stifel report also shows that athletic spending is likely tied to government stimulus over the coming months, with sports and lifestyle stocks remaining “largely rangebound” after reporting their most recent earnings.

“Underwhelming response from the market, we believe, reflects indications that the consumer recovery has hit a glass ceiling in July and August,” wrote analysts led by Jim Duffy. “Further stimulus is needed to support consumer discretionary fundamentals through an unconventional back-to-school period and holiday.”

See:The back-to-school season will be a ‘dud’ one analysts says, but the NRF is forecasting a record breaker

For the near-term, Stifel analysts favor names including Nike Inc.
NKE,
-0.38%

, Lululemon Athletica Inc.
LULU,
-2.68%

, Crocs Inc.
CROX,
+0.21%

and Yeti Holdings Inc.
YETI,
+0.04%

Raymond James analysts are more upbeat about Foot Locker’s preannouncement.

“Consumer demand is hot right now and not just in the United States due to brand strength in Nike’s basketball/running sneakers (Air Force One and Air Jordans), growing usage athleisure and comfort apparel, pent-up demand from deferred spending in March and April, stimulus checks, and other competitors remaining closed,” wrote Matthew McClintock.

“We believe Foot Locker should be the dominant beneficiary of Nike’s decision to focus on a few global key retail partners and the COVID-19 pandemic likely accelerated Nike and Foot Locker’s partnership.” 

Raymond James rates Foot Locker stock outperform with a $35 price target, up from $30.

Foot Locker stock is down 22% for the year to date while the Consumer Discretionary Select Sector SPDR ETF
XLY,
-0.36%

is up 13.5% and the S&P 500 index
SPX,
-0.98%

has gained 3.7% for the period.



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Yes, you may still be able to retire one day


COVID-19 pandemic has caused us to rethink many parts of daily existence, such as our health, jobs, where we live, our financial future, education, travel and the simple handshake. But according to data released Tuesday, many savers are still financially on the path to retirement.

The combination of a stronger market, pandemic-related stimulus opportunities and steady, disciplined investing in the second quarter, gave Fidelity Investments cause for optimism. The firm, which publishes its analyses on investors and employers’ retirement trends every quarter, found double-digit increases in 401(k) plans and individual retirement accounts.

Read: COVID-19’s next threat to your 401(k)

The firm also said 11% of employers reduced or eliminated their employer matches to retirement plans, and about a third of them said they will reinstate it within the next year (another half said they would do so as soon as financially possible). The average employer contribution in the second quarter of the year was $1,080 — something roughly three-quarters of workers received.

See: This is how much you need for retirement — and how COVID-19 will change that

Retirement savers haven’t stopped saving, Fidelity found. Nearly nine in 10 401(k) account holders (88%) were contributing to their accounts during the second quarter, which spanned April, May and June. Of those, 9% increased their contribution rates. Almost all (96%) of 403(b) account holders maintained or increased their contribution rates during the same months.

The average 401(k) balance in the second quarter was $104,400, up 14% from the first quarter but down 2% from the same time last year. The average 403(b) account balance was $91,100, a 17% increase from the last quarter and also 3% up from the year before. The average individual retirement account was $111,500, a 13% increase from the first quarter and just slightly more than the average $110,400 the same time last year.

Also see: Is Suze Orman right? Is a traditional IRA really the wrong way to invest for retirement?

Millennials continued to favor Roth IRA accounts, which are funded with after-tax dollars but can be withdrawn tax-free. This generation made up 23% more IRA accounts in the second quarter of 2020. Roth IRAs specifically had a 36% year-over-year growth (with a 50% increase in contributions).

Read: The Roth strategy we wish we’d built for early retirement

Not all retirement savers can be optimistic. The pandemic has put millions of Americans out of work, some of whom are close to retirement age and didn’t have enough to retire yet. The CARES Act, passed in March, allowed savers to withdraw more than usual from their retirement accounts, though financial advisers urge consumers to think carefully before doing so.



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Fed slows corporate debt purchases to trickle


The Federal Reserve building in Washington in 2017.


AFP/Getty Images

The Federal Reserve this summer vowed not to run “like an elephant” through the U.S. corporate bond market, roughly a month after making its historic leap into buying corporate debt for the first time ever.

The Fed’s latest holdings, pegged at $3.6 billion worth of corporate debt at the end of July, indicate that it has been been tiptoeing through the booming corner of finance instead, using only a smidge of its total $750 billion corporate debt-buying capacity and recently tapering its purchases down to a nub.

CreditSights analysts combed through the Fed’s latest portfolio data for trends and found the central bank’s daily puchases dwindled to about $21 million on average through July 30, down from about $180 million of daily buying when the program kicked off in May.

The below chart traces the Fed’s buying volume over the past three months, including how it started out buying only exchange-traded funds (ETFs) of corporate debt, but shifted exclusively to individual corporate bonds in recent weeks.

“As expected, Fed purchases of both corporate bond ETFs and direct purchases of bonds slowed in July as the market has generally functioned well,” wrote the CreditSights team led by Jeff Khasin.

“As of the end of July, daily ETF purchases were halted completely, with bond-buying comprising 100% of Fed purchases.”

For context, Google
GOOG,
+0.10%

parent Alphabet
GOOGL,
-0.10%

GOOG,
+0.10%

issued $10 billion of debt last week in the investment-grade bond market, at its lowest cost of financing on record, both Reuters and Bloomberg reported.

The Fed’s top corporate debt holdings, though July, include AT&T Inc.
T,
+0.60%
,
Comcast Corp.
CMCSA,
+0.49%
,
Toyota Motor Corp.
TM,
+0.46%
,
Ford Motor Co.
F,
+3.35%

and Apple Inc.
AAPL,
+1.45%
,
with the central bank holding $60 million to $50 million of debt by each company, according to CreditSights.

Of note, about 54% of the Fed’s corporate debt portfolio was rated on the cusp of “junk bond” territory in the bulging BBB-ratings bracket, a category that had been a source of alarm for regulators, at least until the Fed stepped in as a backstop during the pandemic to keep credit flowing.

Investment-grade companies issued a record $1.3 trillion of U.S.-denominated debt this year through last week, nearly an 80% increase from last year’s pace, according to BofA Global Research.

Much of the corporate borrowing has been viewed as a way for companies to build up a cash buffers during the COVID-19-induced U.S. economic crisis, which included gross domestic product plunging a record 32.9% in second quarter.

But with corporate earnings coming in surprisingly better for the second quarter, BofA’s credit team now thinks cash raised in the first half by investment-grade companies is enough to cover “perhaps four times baseline COVID-19 crisis related needs for 2H20.”

Researchers at the New York Fed on Monday said they remain concerned about the cash-flow shock of the pandemic at public U.S. companies in relation to their leverage levels, but looked at data only through April.

Related: New York Fed says rising number of U.S. companies less able to weather ‘liquidity shocks’ due to pandemic



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This $20 billion bond fund produced outsized returns by capitalizing on market turmoil, and is set to do it again


With bond prices high and yields low, an income-seeking investor might wonder if it is even worth owning a bond fund these days.

There are several reasons, underlined by the performance and characteristics of the Guggenheim Total Return Bond Fund, along with the possibility that interest rates may keep falling and stay low for many years.

This year has turned out to be a paradise for borrowers, with record-low interest rates in the U.S., but it has also become a difficult environment for fixed-income investors. You simply have to get used to much lower yields than you enjoyed in years past.

Then again, money managers can take advantage of market turmoil to scoop up discounted securities, setting up gains and relatively good yields for the long term.

Anne Walsh, chief investment officer for fixed income at Guggenheim Investments, explained how the $19.6 billion Guggenheim Total Return Bond Fund
GIBAX,
-0.10%

has outperformed its benchmark by a wide margin this year. She co-manages the fund with Scott Minerd, Guggenheim’s chairman and global chief investment officer, and Steven Brown, senior managing director of the firm.

First, here’s how the fund’s Class A
GIBAX,
-0.10%

and institutional shares
GIBIX,
-0.13%

have performed, with dividends reinvested, against its benchmark, the Bloomberg Barclays U.S. Aggregate Bond Index, and three exchange traded funds that aim to track the same benchmark:

Ticker

Total return – 2020 through July 31

Total return – first quarter, 2020

Total return – second quarter, 2020

Average return – 3 years

Average return – 5 years

Guggenheim Total Return Bond Fund – Class A

GIBAX,
-0.10%
11.53%

2.97%

5.63%

6.16%

5.52%

Guggenheim Total Return Bond Fund – Institutional

GIBIX,
-0.13%
1.68%

3.08%

5.70%

6.45%

5.86%

Bloomberg Barclays U.S. Aggregate Bond Index

7.72%

3.15%

2.90%

5.69%

4.47%

iShares Core U.S. Aggregate Bond ETF

AGG,
-0.11%
7.69%

3.10%

3.08%

5.62%

4.39%

Schwab US Aggregate Bond ETF

SCHZ,
-0.07%
7.87%

2.03%

4.29%

5.62%

4.38%

SPDR Portfolio Aggregate Bond ETF

SPAB,
-0.06%
7.64%

3.33%

2.77%

5.61%

4.38%

Source: FactSet

What really stands out this year is the fund’s second-quarter performance. The Federal Open Market Committee lowered its target for the federal funds rate to a range of zero to 0.25% on March 15, and also announced it would increase the size of its balance sheet by buying bonds. The Federal Reserve’s massive bond-buying activity has also pushed down long-term interest rates. Ten-year U.S. Treasury notes
TMUBMUSD10Y,
0.568%

were yielding 0.55% on July 31, down from 1.92% on Dec. 31.

Taking advantage of the turmoil in March and afterward

During an interview, Walsh explained how the fund has outperformed this year. At the end 2019, the fund was “very conservatively positioned,” with a high percentage of the portfolio in U.S. government bonds and only about a third in corporate bonds, she said. The portfolio had almost no securities that lacked investment-grade ratings. There were two reasons for such a position: Walsh and her team thought that with long-term interest rates already low, investors “weren’t compensated for risk,” and “there were signs of a coming recession.”

Walsh expected “a risk-off event,” a period during which investors would sell corporate bonds in a panic, setting up a buying opportunity. The previous major event of this type had been the credit crisis of 2008, with “some mini-cycles in 2011 and 2016,” she said.

Anne Walsh, chief investment officer for fixed income at Guggenheim Investments.


Guggenheim Investments

So after taking advantage of the market turmoil starting in March of this year, by selling highly liquid government securities and buying discounted corporate bonds, as well as asset-backed securities with attractive yields, Walsh said the portfolio is now about 60% corporate bonds, with 10% of that portion securities with ratings that are below investment grade. (The fund’s total portfolio is typically at least 80% investment-grade securities.)

Prices for residential mortgage-backed securities fell during March, as investors feared loan default risk. But this is another area where the market reality can outweigh investors’ worries. The U.S. housing market is now on fire, with homes in many markets not only selling immediately, but having their prices bid considerably higher than the asking prices. This action was described in a recent New York Post article.

The Guggenheim Total Return Bond Fund’s class A shares have a 30-day SEC yield of 1.91%, while the institutional shares have a yield of 2.27%. Those yields might seem low, but they are very good compared to 10-year U.S. Treasury notes (0.52% early on Aug. 4) and a yield-to-maturity of 1.07% for the Bloomberg Barclays U.S. Aggregate Bond Index, according to FactSet.

Walsh discussed the fund’s “carry advantage,” which means the higher rates are locked in for a relatively long time. The weighted average effective duration for the fund as of June 30 was 7.4 years, compared to 6.0 years for the index.

Looking ahead, she expects more buying opportunities as we head into the November elections, because of investors’ uncertainty.

Dire prediction

Lengthening the fund’s duration points to the Guggenheim team’s macroeconomic expectations. Walsh said the firm’s “base case” was that an economic recovery from the effects of the pandemic would take two to three years, with a “permanent change” for retail and other industries affected by the accelerating transition to online commerce.

And that long recovery means even lower interest rates. Walsh expects the yield on 10-year U.S. Treasury notes to fall further to around 40 basis points “in fairly short order.” The Guggenheim team’s longer-term prediction is for the 10-year yield to go negative by 2022.

Fund’s advantage

Walsh said Guggenheim is “unique in the industry” in its team approach to constructing and managing income portfolios, in contrast to “a lot of other asset managers that have a star system,” in which one portfolio manager who pretty much makes all the important decisions on strategy and portfolio makeup.

In a $40 trillion U.S. fixed-income market, Walsh believes “being expert in everything is beyond human ability.”

So Guggenheim has teams focusing on various sectors, asset classes, the economy, portfolio allocation and construction. This enables an “iterative process to build portfolios,” and for the team to “make much more thoughtful decisions on risk budgeting, allocation and portfolio assemblage,” Walsh said.



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