Jollibee’s Domestic Growth Sales Fell to the Lowest in Recent History! PSYEi 30 Firms Borrowed Php 9.23 For Every Peso of Net Income in 1Q 2019!

It’s not that they don’t know the truth (they might, if they stopped to think about it.) It’s not that they want to know the truth, either. Information is available if they looked for it. No, they fear the truth. And being part of a mob is a good way to hide from that fear—Seth Godin

In this issue:

Jollibee’s Domestic Growth Sales Fell to the Lowest in Recent History! PSYEi 30 Firms Borrowed Php 9.23 For Every Peso of Net Income in 1Q 2019!

-Falling CPI Equals Booming Economy? 1Q Net Income Grew 7.86%, Revenues Up 12.86%

-PSYEi 30 Firms Borrowed Php 9.23 For Every Peso of Net Income in 1Q 2019!

-Jollibee’s Domestic Growth Sales Fell to the Lowest in the Firm’s Recent History!

-JFC’s Faltering Top Line Margins

-More Backlash from JFC’s Pac-Man Debt Strategy: Interest Expenses Surge, International Risk Rise as Share of Domestic Assets Falls

Jollibee’s Domestic Growth Sales Fell to the Lowest in Recent History! PSYEi 30 Firms Borrowed Php 9.23 For Every Peso of Net Income in 1Q 2019!

Falling CPI Equals Booming Economy? 1Q Net Income Grew 7.86%, Revenues Up 12.86%

At the start of the year, falling inflation, it was proclaimed, would be a boon to the economy, and to earnings, said the experts in unison, consequently, justifying the intensive pumping of the headline stock market index, the PhiSYx.

So the major equity bellwether generated a hefty 6.09% return.

The top and bottom line results of the PhiSYx members in the 1Q of 2019:

Figure 1

The sharp rally in fixed income securities buoyed the banking system’s net income to juice up total net income growth by 7.86% to Php 178.8 billion for a Php 13.020 billion increase. (figure 1, upper table)

The banking system’s 24.08% jump in net income to Php 25.85 billion or an increase of Php 5.02 billion accounted for a hefty 38.53% share of the total.

Nine of the 30 PhiSYx components registered declines, one suffered a loss, while four posted gains below 5%. With 14 of 30 issues underperforming, it isn’t a puzzle why 1Q returns had been mediocre.

Revenue performance also manifested an almost similar dynamic where the banking system’s revenue surge of 35.11% contributed to a sizeable 21.96% share to the overall 12.66% revenue growth. (figure 1, middle table)

Excluding the banks, net income grew by only 5.52% while revenue expanded by 10.73%.

And mergers in retail enterprises like those of Jollibee and Robinsons Retail Holdings bloated revenue gains.

Applying the BSP’s 1Q 2019 CPI of 3.8%, the inflation-adjusted net income growth was 4.06% while revenue growth was 8.86%. For the non-banks, inflation-adjusted growth was 1.72% for net income and 6.93% revenues.

And don’t forget 1Q 2019 GDP (5.6%) fell to 2015 lows. (figure 1, lowest window)

So what happened to the popular cliché of low inflation equals economic and earnings boom under a regime of inflation targeting?!

PSYEi 30 Firms Borrowed Php 9.23 For Every Peso of Net Income in 1Q 2019!

Of course, while the mainstream fixates on the top line and bottom line, the financing of such supposed growth will be barely touched.

The general idea is that revenues and net income are products of free lunches.

Figure 2

The BSP reported plunging debt for the real economy in the 1Q of 2019. (figure 2, upper window)

Well, it may have seemed that way since 1Q 2019 debt growth for non-bank PSE issues was only 9.35% against their annual debt growth of 17.08%.

In contrast, non-bank income grew 5.52% in the 1Q 2019 and 7% in the year 2018. That said, debt growth remains FASTER than net income growth in the 1Q (69.4%) as was in 2018 (144%).

San Miguel (25.7%), Ayala Corp (15.4%), Bloomberry (11.19%), MetroPacific (9.49%), Aboitiz Equity (6.66%), JG Summit (5.93%) and SMPH (5.77%) had the largest % shares, representing 80.1% of the total. (figure 2, lower window)

But headline numbers can be deceiving because of the base effect.

From the debt-to-income or credit intensity perspective, the non-bank Phisix firms in the 1Q borrowed Php 7.06 to generate a peso of net earnings or in marginal context Php 9.23 of gearing for every peso of income.

In so many words, mounting debt will not only erode on the listed firm’s capacity to generate income but also encumber cash flows generation or liquidity.

And the leveling off of liquidity in the banking and financial system must be symptomatic of these escalating debt to income dynamic.

Even more, debt has been amassing on a few firms to highlight increasing systemic risks through concentration risks.

Jollibee’s Domestic Growth Sales Fell to the Lowest in the Firm’s Recent History!

One of the most striking developments of the 1Q had been the deterioration in Jollibee Food’s financials.

While media focused on the 14.7% drop of net income which was blamed mainly on losses from its recently acquired US food chain Smashburger, that’s only part of the story.

By the way, Jollibee shares have been one of the six issues that hit fresh record highs in 2019.

Elucidated below are JFC's unpublished escalating financial woes.

Figure 3

In its 1Q press release, JFC said that domestic sales grew by 9.5%, a level last seen in 1Q 2013.

However, in the Segment Information of section 5 of its notes to unaudited consolidated financial statements on its 17Q, reported 1Q domestic sales of Php 29.437 billion was only 7.08% higher from Php 27.491 billion in the same period of 2018. (figure 3, upper window)

7.08% sales growth represents the smallest sales growth in JFC’s history ever since it published its FS in 2009!

International sales rocketed by 38.06%, from the incorporation of Smashburger, to offset the plunge in domestic sales growth!

The combined 1Q sales increase of 14.11% was higher than the average 9-year period (2010-2018) of 13.54% growth.

So Smashburger, puffed up the JFC’s revenues in 1Q 2019!

Because JFC’s domestic stores expanded 8.5% to 3,141 in the 1Q 2019 from 2,895 in the 1Q 2018, new stores delivered almost all of the sales growth with hardly any contribution from existing outlet sales.  Domestic sales per store even plunged to -1.31% in the 1Q 2019 from +9.16% in the same period last year.  (figure 3, middle window)

International stores soared 48.7% to 1,402 in the 1Q 2019 from 943 last year. International sales per store shrunk 7.14 but did better than last year’s 12.95% contraction.

Partly because of Smashburger, JFC worldwide inventory of stores swelled 18.37% to 4,543 from 3,838 over the same period to bring about a decline in total sales per stores to -3.6% in 1Q 2019 from +3.94% a year ago.

JFC’s Faltering Top Line Margins

And because of falling sales growth relative to higher rates of costs of goods, JFC’s gross profit margin dwindled to 15.68% sharply lower than 17.38% a year ago.

Operating margin likewise tumbled to 4.4% from 5.57% a year ago from higher administrative expenses. And please do note that even before Smashburger’s inclusion, JFC’s gross and operating margins have plateaued from 2013 to 2016 and from here begun its descent. (figure 3, lower window)

Sorry, but domestic sales, which accounted for 73% of JFC’s top line, did most of the damage to its 1Q performance. Smashburger only exacerbated it.

But it comes as a surprise that mostly cash-based Jollibee’s sales had been affected more by the March collapse in consumer credit rather than retail enterprises dependent on credit cards.

The deterioration of JFC’s top line has massive implications on the consumer’s spending capacity. The impact from the ongoing liquidity crunch has begun to impact more on the middle and lower class.

But it doesn’t stop here.  

Recall that in March, I propounded of the transition of JFC’s erstwhile sound business model to an aggressive debt-financed PAC-Man strategy.

Part of the 1Q 2019 fallout in sales must have been from these. [See Jollibee’s Fantastic Paradigm Shift: From Consumer Value to Aggressive Debt-Financed Pacman Strategy March 3, 2019]

In the recent past, JFC has expanded aggressively through horizontal integration. That is, JFC bought out and tacked into its fold, its domestic competitors.  That’s JFC’s Pacman Strategy.

Now the thrust has been to expand also horizontally but externally.

JFC’s external recourse may be about the weak peso. As a means or a strategy to hedge against this, the company engaged in foreign FDI. However, JFC may be venturing into the unknown or to unfamiliar markets, where its competitive advantage may be deficient. It may not possess the same quality of knowledge and expertise in dealing with foreign consumers.

JFC’s 1Q deterioration comes in the face of its aggressive expansions as the ongoing liquidity crunch pulls the economy down.

More Backlash from JFC’s Pac-Man Debt Strategy: Interest Expenses Surge, International Risk Rise as Share of Domestic Assets Falls

It isn't a bad thing to experiment by moving away from one’s competitive moat. It becomes a gamble only when aggressive leveraging has been used to boldly finance such undertakings.

Figure 4

JFC should be an example.

Compounding JFC’s top line woes have been the rocketing of debt and its attendant spiraling of interest rate payments. (see figure 4)

JFC’s 1Q 2019 debt surged 27.32% to Php 25.803 billion from Php 20.266 billion from the same period a year ago. With rising debt burden comes higher interest payments. JFC’s 1Q interest expense vaulted 123.9% to Php 319.84 billion from Php 142.9 billion over the same period. Rising financing costs erode on JFC’s margins.

Figure 5

Like its bigger peers, JFC has been borrowing more than it earns.

For instance, it borrowed Php 5.54 billion more this year compared with a decrease in net income of Php 234.4 million. JFC’s borrowing binge accelerated only in 2015. (figure 5, lower window)

Lastly, while domestic sales accounted for 73% share of total sales in 1Q 2019, it has been falling. International sales have been gaining ground in its stead.

On the other hand, JFC’s share of domestic assets has shrunk to 54.14% of total assets from 56.92% share last year and from 71.13% its peak in 2011.

Such point to JFC’s rapidly growing international exposure even when its competitive moat is here.

If JFC’s gambit of an aggressive credit financed external expansion should turn out to be unsuccessful, then it is likely to have a severe impact on the company’s balance sheets.

The stock market has paid exuberantly for JFC’s credit financed gambles in the expectation that the company will conquer the world's retail food chain markets. Good luck to them.

However, the glorious performance of the past doesn’t guarantee rosy future outcomes.

Not with excessive risk-taking on ventures outside the ambit of one’s competitive advantage that had been financed aggressively by credit.

Jollibee should show us the way.

Oh by the way, I’m still a fan of Jollibee’s products.

Bullseye! NG-BSP Admits that the War on Mining Has Failed, the BSP’s Gold Bill is Now a Law!

Those entrapped by the herd instinct are drowned in the deluges of history. But there are always the few who observe, reason, and take precautions, and thus escape the flood. For these few, gold has been the asset of last resort.—Anthony C. Sutton

Bullseye! NG-BSP Admits that the War on Mining Has Failed, the BSP’s Gold Bill is Now a Law!

Back in 2016, I cited the Bangko Sentral ng Pilipinas (BSP) as one of the principal reasons why the war on mining will fail. [Why the War on Mining Will Fail! June 26, 2016]

“Of course, another reason why mining won’t likely be totally banned is because the Bangko Sentral ng Pilipinas not only buys gold from the miners (even illegal miners), they get revenues from sales to them!

“So I expect the BSP to oppose a total ban.

Last week, the political leadership enacted the BSP’s Gold Bill!

From the BSP: (bold added)

The BSP today announced that Republic Act (RA) No. 11256, An Act to Strengthen the Country’s Gross International Reserves (GIR), was approved by Congress and signed by President Rodrigo R. Duterte last 29 March 2019.

The new law exempts from excise and income tax the sale to the BSP of gold sourced from small-scale mining activities. The measure also covers the sale of gold by small-scale miners to accredited traders for the eventual disposal to the central bank.

R.A. No. 11256 seeks to remedy the 99% drop in BSP’s domestic gold purchases from more than 900 thousand fine troy ounces (FTO) in 2010 to around 10 thousand FTO in 2019 as a result of the taxation of the sale of gold to the BSP beginning July 2011. 

The tax regime under R.A. No. 11256 would allow the BSP to increase its purchases of domestic gold to further build up the level of the Philippines’ GIR, which serves as the country’s primary buffer against external economic shocks. An increase in BSP’s gold purchases using pesos leads to a net increase in the GIR, thereby improving the country’s economic standing and lowering the cost of both funding for the Republic as well as doing business for the private sector. It also prevents the smuggling of Philippine gold through the black market to other countries and allows small-scale miners and traders to sell gold at international market prices.

So the BSP (and the leadership) admitted to the following:

First, the domestic mining industry IS the primary source of gold for the BSP, which it uses to manage its balance sheet.

Second, the massive backlash of excise taxes on the industry, and thus its UTTER failure!

This excerpt signifies an awesome confessional: “R.A. No. 11256 seeks to remedy the 99% drop in BSP’s domestic gold purchases…a result of the taxation of the sale of gold to the BSP beginning July 2011.” 

Back in August 2012, I wrote… [Philippine Informal Gold Mining Industry Booms, August 24, 2012]

The amount of gold sold by small-scale miners and traders to the Philippine central bank in the second quarter plunged 98 percent from a year earlier, according to the latest government data. By law, all gold produced by miners such as Mulato in the Philippines should be sold to the central bank at around world market prices.

It has been an accelerating trend over the past year. The data shows central bank gold purchases dropped an annual 4 percent, 76 percent and 88 percent in the second, third, and fourth quarters of 2011, respectively. It fell 92 percent in the first quarter.

Small-scale gold mining output, is the main source of the central bank's gold reserves, which hit a record high of $10.4 billion early this year.

For authorities, it would be better to “police” than to waive taxes. This assumes that smuggling or the informal sector will be curtailed by mere regulatory enforcement, yet the above already demonstrates their helplessness: note the phrase “become so overwhelming it can do little about the smuggling”

Doing the same things over and over but expecting different results has been the entrenched characteristic of politics. The essence of politics is symbolism. The impression to “do something” are actually meant to generate votes.

In reality, the purported political path to “police” gives political authorities a share in the the profits. Possibly to finance coming elections?

(bold italics added)

It took the BSP eight long years to realize the might or power of the law of demand on the economy, “if you tax something, you get less of it”!

Such is an example of the complete failure of “statistics is economics”!

Lastly, the political institutions (war on mining) have failed to control or suppress the black market, which has been the primary channel for small-scale mining activities, and subsequently, the conduit for smuggling!

Again in 2012, I wrote: [Philippine Mining Index: Will The Divergences Last?  August 13, 2012] (bold italics added)

In reality, environmental preservation and optimizing revenues from the mining industry are strongly associated with theresource curse dilemma, that which is the politicization of the resource industry.

Informal economy, corruption, rent seeking and a general deterioration in the quality of governance are symptoms or are products of asphyxiating regulations, bureaucracy, high burdens from taxes and the cost of compliance, insecure property rights and involuntary exchanges or the intense politicization of the industry.

So the BSP and the political leadership has VALIDATED my predictions!

Well, for the BSP, it may not be all about GIRs or “improving the country’s economic standing and lowering the cost of funding”.

Figure 1, World Gold Council

Global Central Banks buying of gold hit a record high in 1Q 2019.

From the Financial Times (May 2): [bold added]

The central banks of Russia and China helped drive a 7 per cent increase in global gold demand in the first quarter from a year earlier, according to the World Gold Council, as they continued efforts to trim their exposure to US dollars.

Central banks purchased a total of 145.5 tonnes of gold worth about $6bn, an increase of 68 per cent compared with last year and the strongest first quarter since 2013, the industry-led body said.

Russia was the biggest buyer during the period, adding 55.3 tonnes of the yellow metal to tilt the composition of its reserves away from the US dollar, amid rising tensions with Washington and the prospect of further sanctions. China added 33 tonnes to its holdings and Ecuador bought gold for the first time since 2014, said the WGC.

There’s been lots of purchases by emerging market central banks looking to diversify their US dollar exposure, or in the case of Russia there are potential implications for FX reserve management if they become subject to sanction risk,” said Alistair Hewitt, a director at the WGC.

Last year central banks bought more gold than at any time since the end of the gold standard in 1971, led by Russia and Kazakhstan.

Still, the WGC data show that purchases have started to slow from last year. In the third quarter of 2018 central banks bought a total of 253 tonnes of gold, and 165.6 tonnes in the fourth quarter.

Overall gold demand also fell 17 per cent from the fourth quarter of 2018, said the WGC.

The BSP may have been influenced by emerging market central bank trend of partly diversifying its reserves assets.

It could also be about hedging reserves against the risks of a financial calamity.

Figure 2, World Gold Council

It may also be in response to the snowballing geopolitics of de-globalization as evidenced by the increased usage of economic sanctions and trade wars where gold may serve as safe-haven assets for central banks.

It may even be about emerging markets veering away from the US dollar standard to elude the hegemonic grip of US financial institutions and geopolitical intrusions.

It could even be related to financial asset collaterals used in the offshore US dollar (Eurodollar) markets.

Figure 3

In reality, based on the WGC’s data, the BSP’s gold reserves have been stagnant since 2011.

So the BSP’s Gold Bill must be about preparations to accumulate gold reserves and or designed to CENTRALIZE domestic gold trade for either tax purposes (formal gold enterprises) or to manage gold flows.

Figure 4 (Gold Price)

Because of the market mayhem late last year, gold prices surged to record highs against 72 currencies in January 2019.

Gold prices continue to soar against the Indonesian rupiah and Indian rupee, as examples.

Well, gold prices in Philippine pesos, reveals a similar dynamic as it approaches its 2011 apex.

So has the BSP been anticipating the record gold prices in pesos too for it to push the Gold Bill?

With the BSP’s Gold Bill highlighting the culmination of the absurd war on mining, expect that the next political move on the industry to be about liberalization.

Tax issues will impel the National Government to liberalize the industry.

The alcohol prohibition was repealed by US President Franklin Delano Roosevelt in 1933, hardly because of its social side effects but because the government wanted to generate financing in the face of the great depression.

As Professor Donald J. Boudreaux wrote,

And a House leader of Congress' successful attempt to propose the Prohibition-ending 21st Amendment said in 1934 that "if (anti-prohibitionists) had not had the opportunity of using that argument, that repeal meant needed revenue for our government, we would not have had repeal for at least 10 years."

There's no doubt that widespread understanding of Prohibition's futility and of its ugly, unintended side-effects made it easier for Congress to repeal the 18th Amendment. But these public sentiments were insufficient, by themselves, to end the war on alcohol.

Ending it required a gargantuan revenue shock -- to the U.S. Treasury.

From this premise, I shall make a prediction.

When the real economy falters, the government will liberalize the mining sector!

(bold original)

The Era of Easy Money is OVER! President Duterte Confirmed This With “The Economy Is In Doldrums”  June 24, 2018

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