You shall not pass

MARKETS

  • U.S. markets: Consumer goods, tech, and real estate dragged stocks lower. The S&P fell the most in almost two weeks.
  • Earnings today: GE, SunTrust.

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TOBACCO

Philip Morris Needs a Long, Deep Breath

Juulin' aint cool kids, and neither is Philip Morris. After lower-than-expected revenue growth, the cigarette company watched shares fall 16%—its worst day since 2008.

So why'd investors take a smoke break? Some point to its weak performance as health-conscious consumers limit bad habits like cigarettes. Others blame government crackdowns and anti-smoking campaigns. And while those longer-term trends have hurt Philip Morris, here's the more immediate problem:

The company's plan to reinvent the tobacco industry has hit a speed bump

And it all ties back to a little electronic cigarette called the iQOS. E-cigs aren't new, in fact the first modern version was invented by a Chinese pharmacist in 2003. But Philip Morris is putting its own stamp on the product.

Like a Greek Steve Jobs, CEO Andre Calantzopoulos is attempting to rebrand the look and feel of an entire industry. Just walk into an iQOS store and it'll feel like you stepped into an Apple showroom, just with fewer Geniuses and more tobacco.

Here's the plan of action:

  • Offer safer alternatives to traditional cigarettes (iQOS heats the tobacco but does not burn it).
  • Minimize the negative public opinion of tobacco.
  • And ultimately, per Calantzopoulos: "I believe there will come a moment in time where I would say we have sufficient adoption of these alternative products...to start envisaging, together with governments, a phase-out period for cigarettes."

What's got investors worried?

Turns out...and this might come as a shock...cigarettes are addicting. So getting so-called "converts" isn't very easy. Philip Morris found success in the Japanese market, where younger smokers latched onto iQOS quickly. But the older demographic has put up a fight.

In the U.S., things haven't been easier. The FDA has been twiddling its thumbs, deciding whether or not iQOS should be approved for the U.S. market.

Which leaves Philip Morris at a crossroads: Do you continue to burn through cash, trying to reinvent the industry? Or, do you try to keep market share in the traditional cigarette market?

Better think fast—its business could be depending on it.

PHARMA

Frodo's Not the Only One Who Dreams of the Shire

Imagine receiving a $63 billion offer, mulling it over, and then deciding..."Nah."

Well, pharma company Shire (-1.11%) did exactly that, slamming the door on Takeda's third (but probably not final) takeover attempt.

What you need to know:

  • Shire is the stuff of dorm room legend as the maker of Adderall, but it's been pretty successful at wiggling into rare disease treatments. That's caught Takeda's eye.
  • Shire is larger than Takeda, which would need to borrow a lot of cash to finance the deal.
  • This would be a game-changer for Takeda...and its home country, Japan. It'd be the largest overseas acquisition by a Japanese company ever.

There was almost some competition for Shire

Pharma company Allergan (-4.23%) also hinted it might be interested in a deal, but a few hours later said it wasn't feeling the vibe. Still, the company that brings you Botox might want an injection of new drugs. Restasis, its lucrative dry-eye treatment, will soon be squeezed by generic competitors.

ANTITRUST

The CEOs of AT&T and Time Warner Battle the DOJ

This week, AT&T (-1.14%) and Time Warner (-0.57%) called in the big guns (aka their CEOs) to defend their $85 billion deal...which has been stuck in a D.C. courtroom for weeks.

Remember: The DOJ sued to block the deal over antitrust concerns, and this trial has massive implications for how content distributors (AT&T) and content creators (Time Warner) merge in the future.

Let's roll the tape

On Wednesday, Time Warner CEO Jeff Bewkes argued that a merger needs to happen to compete with data-rich Silicon Valley:

  • "They can offer more effective choices. They can recommended programming based on what you watch. They can sell you a better package...They have a lot of advantages."
  • "They can sell a Chevy ad just to people who are trying to buy a car."

And he must have bumped into AT&T CEO Randall Stephenson outside the courtroom, because Stephenson sounded a similar note on the importance of tech:

  • "If you miss one technology cycle, it may not kill you, but it will make you sick for a very long time."

Set a reminder: The trial should wrap up by the end of the month, and Judge Richard Leon will take a few more weeks to make a decision.

RETAIL

Mattel Stops Playing Around and Tries to Grow Up

Playtime is up for Mattel (-3.17%) CEO Margo Georgiadis.

The toymaker best known for introducing Barbie to Ken is saying farewell to its CEO only a year after her orientation. In her place, board member Ynon Kreiz will take the Hot Wheel.

It feels like we just met Margo—the former Google exec with major plans to overhaul the suffering toy company. She cut product lines, suspended dividends, and drastically lowered inventory levels. But in the end, 2017 revenues fell 12%, operating margins tightened, and Mattel is losing one of its biggest customers, with Toys 'R' Us' bankruptcy.

Now Kreiz, a former studio exec for children's TV programming, will see if he can breathe some life back into Mattel.

He'll be the fourth CEO in four years to try.

WHAT ELSE IS BREWING

  • Wells Fargo (+2.28%) is close to reaching a settlement with regulators, and could be hit with a $1 billion fine as early as today (WSJ).
  • Snapchat is getting an update: With "Shoppable AR," users will now be able to buy products through the app's AR feature.
  • The men arrested at Starbucks spoke out for the first time on GMA.
  • Lyft is spending millions of dollars to combat the pollution created by its drivers.
  • After a year spent glaring at the "Charging Bull" in lower Manhattan, the "Fearless Girl" statue is moving closer to the NYSE.

WATER COOLER

BIGGER PICTURE

They say a picture is worth 1,000 words...which is great, because we definitely don't have room.

If you've been Yelping for a certain Starbucks in Philly recently, you might've come across a pop-up that looks like this:
Picture
What the...? A Philadelphia Starbucks store has been in the news recently after two black men were arrested for sitting and waiting on a third acquaintance to show up. Protests over racial discrimination have erupted offline and online, with Yelpers blasting this location with one-star reviews.

But according to Yelp, many of these reviews violate its rules. So in situations when news coverage dominates the conversation, it takes out its mop and cleans up.

Ask yourself: Do you agree with Yelp's policy to remove reviews sparked by news events?

THE BREAKROOM

CAPTION CONTEST
Picture
Knock, knock. What did Alexa say to Google? Comment on our Facebook thread with your captions and we’ll post the best one on our Instagram tomorrow.

WHAT THE CREW IS READING
The Undoing Project by Michael Lewis—If Daniel Kahneman and Amos Tversky haven't become household names yet...they should (at least in your house). Master storyteller Michael Lewis describes how these two psychologists revolutionized the field with breakthrough study after breakthrough study. This is not only a book about how humans make decisions, but it's also about how collaboration and friendship can produce revolutionary ideas. It's a great read.

It pairs nicely with Daniel Kahneman's classic, Thinking, Fast and Slow.

GUESS THE COMPANY
Industry: Retail

Market Cap: $26.6 billion

Target customers: Rural households earning $40,000 or less

Plans for 2018: Open 900 new stores (on top of the 14,000+ locations it has already)

(Answer located at bottom of newsletter)

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Breakroom Answers


Guess The Company
Dollar General

 

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