Author: Chad Symens

August 7, 2014

Markets in 56 of the approximately 350 metro areas nationwide returned to or exceeded their last normal levels of economic and housing activity, according to the National Association of Home Builders/First American Leading Markets Index (LMI), released today.  This represents a year-over-year net gain of seven markets.

The index’s nationwide score moved up slightly to .89, meaning that based on current permit, price and employment data, the nationwide average is running at 89 percent of normal economic and housing activity.  Meanwhile, 78 percent of markets have shown an improvement year-over-year.

“Things are gradually improving,” said NAHB Chairman Kevin Kelly, a home builder and developer from Wilmington, Delaware.  “As the job market grows, we expect to see a steady release of pent up demand of home buyers.”

Baton Rouge, Louisiana continues to top the list of major metros on the LMI, with a score of 1.39 – or 39 percent better than its last normal market level.  Other major metros leading the list include Honolulu; Oklahoma City; Houston and Austin, Texas.  Rounding out the top 10 are Los Angeles; San Jose, California; Salt Lake City; Des Moines; and New Orleans.

“With the national tally only reaching 43 percent of normal, single-family housing permits continue to be the lagging component of the index,” said NAHB Chief Economist David Crowe.  “The big bright spot is employment, where the number of metro areas having reached or exceeded their norms grew from 26 to 46 in a year.”

“In the 22 metros where permits are at or above normal, the overall index indicates that these markets have fully recovered,” said Kurt Pfotenhauer, vice chairman of First American Title Insurance Co., which co-sponsors the LMI report.  “This finding shows the impact that an uptick in permits can have on the overall health of markets.”

Looking at smaller metros, both Odessa and Midland, Texas, boast LMI scores of 2.0 or better, meaning their markets are now at double their strength prior to the recession.  Also leading the list of smaller metros are Bismarck, North Dakota; Grand Forks, North Dakota; and Casper, Wyoming, respectively.

The LMI shifts the focus from identifying markets that have recently begun to recover, which was the aim of a previous gauge known as the Improving Markets Index, to identifying those areas that are now approaching and exceeding their previous normal levels of economic and housing activity.  More than 350 metro areas are scored by taking their average permit, price and employment levels for the past 12 months and dividing each by their annual average over the last period of normal growth.  For single-family permits and home prices, 2000-2003 is used as the last normal period, and for employment, 2007 is the base comparison.  The three components are then averaged to provide an overall score for each market; a national score is calculated based on national measures of the three metrics.  An index value above one indicates that a market has advanced beyond its previous normal level of economic activity.

Source: National Association of Home Builders 

August 7, 2014

Steady Improvement Builds In U.S., Uncertainty Continues In Europe

Labor markets were mixed across the advanced economies, according to unemployment rates and employment growth data compiled and standardized by The Conference Board International Labor Comparisons (ILC) program for June 2014.

Unemployment rates in June fell in three of the nine countries compared and rose in five.  Italy saw the largest decline of 0.3 points – though, at 12.5 percent, Italian joblessness remains near an all-time high.  Unemployment fell 0.2 points in the United States (to 6.1 percent) and the Netherlands (to 6.8 percent).  By contrast, joblessness rose 0.2 points in both Japan and Sweden, to 3.3 percent and 7.9 percent, respectively.  Unemployment in Germany was unchanged at 5.1 percent, lowest by far among the European countries.

“Despite mixed unemployment trends seen across European economies in June, joblessness in the European Union as a whole has been on a downward trend over the last year,” said Elizabeth Crofoot, Senior Economist with the International Labor Comparisons program at The Conference Board.  “Italy’s apparent return to recession in the second quarter of 2014, however, comes after eleven consecutive quarters of rising unemployment, highlighting the country’s inability to gain a foothold in the recovery process.”

Employment in June rose in three countries, declined in three, and was unchanged in three.  Employment indexes in the U.S., Australia, and Italy each rose by 0.2 points.  Standing at 100.1, the U.S. employment index now exceeds the level of 2007 (=100) for the first time since the recession.  France saw the sharpest drop in employment – down 0.5 points to 101.3.

Source: The Conference Board

August 5, 2014

Office Depot softened the blow of weak second quarter sales by bumping up the pace of 400 store closings to drive greater than expected operating profit growth and expense savings related to the merger with OfficeMax.

Office Depot merged with Office Max last November and shortly thereafter announced plans to close 400 stores by the end of 2016.  The total number of closings remains intact, but the company now expects to close 165 of the stores this year compared to an earlier forecast of 150 closings in 2014.  The estimate of expense savings related to the closures was increased to $100 million from a $75 million estimate share at the end of the first quarter.

In total, Office Depot estimates the optimization of its North American store portfolio combined with other savings will result in annual run-rate synergies totaling $700 million.  That figure is well above the $400 to $600 million range shared when the deal was announced last year, and the $675 million estimate shared at the end of the first quarter.

Because the expense savings are being realized faster than initially forecast, the company is growing adjusted operating income faster than planned in the absence of any top line growth.

During the second quarter, our team executed exceptionally well, which enabled us to deliver merger synergies more quickly than anticipated,” said Roland Smith, chairman and CEO of Office Depot.  “We are very pleased with the integration of legacy Office Depot and OfficeMax as we create a culture focused on achieving our critical prioities in the near and long term.  As planned, we have completed our analysis of the North America retail store optimization strategy and have continued to make progress on the development of our unique selling proposition.  Based on accelerated synergies and improving execution, we have updated our full year 2014 outlook for adjusted operating income to be not less than $200 million, an increase from our prior outlook of not less than $160 million.”

Despite progress on the expense front, sales remain challenging for the company’s retail, commercial and international divisions.  On a consolidated basis, sales for the second quarter increased to $3.8 billion from $2.4 billion, reflecting the inclusion of OfficeMax results.  However, on a pro-forma basis, looking at results as if both companies existed on a stand-alone basis, sales declined from $3.9 million.

Sales at the company’s North American Business Solutions division declined 1% to $1.5 billion, on a pro forma basis while the operating profits ticked up to $59 million from $53 million.  International sales were essentially flat on a pro forma basis with the division’s loss declining to $2 million from $6 million.

Source: Retailing Today

Source: National Retail Federation

August 5, 2014

As today’s healthcare market continues to evolve, CVS Caremark’s portfolio of enterprise assets is enabling the company to provide innovative solutions and products that are delivering results, as evidenced by its “strong” second quarter results released Tuesday morning.

“As the health care environment evolves we are uniquely positioned to address the quality, affordability and accessibility issues in the healthcare system today,” president and CEO Larry Merlo told analysts during Tuesday morning’s conference call.  “So, we are highly focused on the unique opportunities we see for growth and we will continue to take an active and growing role in shaping the future of healthcare.”

Net income for the quarter increased 10.9% to $1.2 billion, compared with approximately $1.1 billion in the year-ago period.

Adjusted earnings per share for the three months ended June 30, 2014 and 2013, was $1.13 and 97 cents, respectively, an increase of 16.5%.  Adjusted EPS in the three months ended June 30, 2014 excludes $133 million and $124 million in 2014 and 2013, respectively, of intangible asset amortization related to acquisition activity, the company stated.

Net revenues for the quarter ended June 30 increased 10.7%, or approximately $3.4 billion, to $34.6 billion compared with the year-ago period.

Revenues in the Pharmacy Services Segment increased 16.2% to $21.8 billion during the quarter, driven by net new business growth in specialty pharmacy including the acquisition of Coram and the impact of its new Specialty Connect, drug inflatin and product mix, partially offset by an increase in generic dispensing.

Specialty Connect integrates the company’s mail and retail capabilities, providing members with the choice to bring their specialty prescriptions to any CVS/pharmacy, all prescriptions are filled through the company’s specialty mail order pharmacies, so all revenue from this specialty prescription services program is recorded within the Pharmacy Services Segment.  Members then can choose to pick up their medication at their local CVS/pharmacy or have it sent to their home through the mail.

The Specialty Connect offering has been well received by clients and patients, according to the company.  As of July, more than 60,000 specialty patients have transitioned to this model.

“The program is generating high satisfaction scores with patients.  It resonates with clients as a differentiated approach to simplifying the specialty process for members, and physicians appreciate the ease of use in getting patients started on therapy,” Merlo told analysts.

In providing a PBM 2015 selling update, the company stated that gross wins for 2015 is currently $5.4 billion.  Net new business is $2.6 billion.  As for renewals, the company has completed nearly $26 billion in business up for renewal with a retention rate of nearly 97%.

“I think our selling season success reflects our track record of generating savings for our clients through our unique suite of capabilities.  Top of mind for clients this selling season is achieving better control of their specialty spend,” said Merlo.

Revenues in the Retail Pharmacy Segment increased 4.5% to $16.9 billion.  Same-store sales increased 3.3%, with pharmacy same-store sales up 5% and front-end same-store sales down 0.4%.

Despite a positive impact of approximately 80 basis points from the shift of the Easter holiday, front-end same-store sales were negatively impacted by softer customer traffic, partially offset by an increase in basket size.  In addition, front-end same-store sales are beginning to be impacted by tobacco.  In February, the company announced that it will stop selling cigarettes and other tobacco products at its more than 7,600 CVS/pharmacy stores across the United States by October 1.

“As we plan for exiting the tobacco category this fall, we have begun to see a sales impact,” Merlo told analysts, noting that front-end same-store sales would have been approximately 110 basis points higher if tobacco and the estimated associated basket sales were excluded.  “Now, adjusting for this tobacco impact and the Easter shift, front-store comps were roughly flat in the quarter, sequentially improving from Q1.  Front store traffic decreased as customers continued to aggregate their trips and, at the same time, our average basket size continued to increase, reflecting the strength of our Loyalty program and the personalization it enables us to offer.”

Pharmacy same-store sales were negatively impacted by approximately 160 basis points from recent generic drug introductions and by approximately 130 basis points from the implementation of Specialty Connect.  The implementation of Specialty Connect had a greater effect on revenues than prescription volumes because of the higher dollar value of specialty products, the company stated.

Commenting on the acquisition of Hispanic-owned pharmacy retailer Navarro Discount Pharmacy, Merlo said the company expects to maintain the current product mix and will share its learnings of Hispanic marketing and merchandising with other CVS markets where it makes sense.

“The Navarro brand is one of the most recognizable in the Hispanic marketplace.  We plan to retain it.  As you recall, we adopted a similar strategy in maintaining the Longs Drug name for our acquired locations in Hawaii and that has been successful,” Merlo said.

The Navarro transaction is expected to be completed later this year.

In light of its “strong performance” during the quarter, the company raised and narrowed its earnings guidance range for the full year 2014.  It now expects to deliver adjusted EPS of $4.43 to $4.51, up from $4.36 to $4.50.  GAAP diluted EPS from continuing operations was raised to $4.16 to $4.24, up from $4.09 to $4.23.  It continues to expect to deliver 2014 free cash flow of $5.5 billion to $5.8 billion, while the 2014 cash flow from operations range was raised to $7.2 billion to $7.5 billion, up from $7.0 to $7.3 billion.  The company expects to deliver adjusted EPS of $1.11 to $1.14 and GAAP diluted EPS from continuing operations of $1.04 to $1.07 in the third quarter of 2014.

Source: Retailing Today 

July 30, 2014

Same-store sales continue to decelerate at Whole Foods as the nation’s leading natural and organic grocer continues to face traffic and ticket pressures caused by upstart rivals and established competitors.

Whole Foods sales in the second quarter ended July 6 increased 10% to nearly $3.4 billion from $3 billion the prior year while same store sales increased 3.9%, including a 60 basis points positive impact related to the timing of Easter.  Profits during the quarter increased 6.3% to $151 million, 41 cents a share, compared to prior year profits of $142 million, or 38 cents a share.

“Our business model is producing industry-leading sales per gross square foot, healthy returns on invested capital and strong operating cash flow,” said Walter Robb, co-CEO of Whole Foods Market.  “We are seeing signs of stability in our sales trends and believe our strategic initiatives will help generate further momentum and product increasing returns on invested capital over the long term.”

The company noted its stores generate average weekly sales of more than $736,000, or more than $1,000 per sq. ft.  Despite the high level of productivity, increased competition and reduced pricing at Whole Foods has put pressure on the company’s margins and top line growth.

Both factors were evident earlier this year when the company reported second quarter results on May 6 and lowered its full year expectations for sales and profit growth.  The diminished view caused shares, which had been trading above $50 for most of the year at that time, to decline sharply.  The release of third quarter results and affirmation of the company’s previously lowered outlook only served to send shares lower when the company reported results after the market closed on Wednesday.

Source: Retailing Today

August 5, 2014

Just a few days after naming a new CEO, Target issued a preliminary update on its second quarter expenses related, in part, to the December 2013 data breach.

The company’s financial results are expected to include gross expenses of $148 million, partially offset by a $38 million insurance receivable, related to the breach.  These expenses include an increase to the accrual for estimated probable losses for what the company believes to be the vast majority of actual and potential breach-related claims, including claims by payment card networks.

“Since the data breach last December, we have been focused on providing clarity on the company’s estimated financial exposure to breach-related claims,” said John Mulligan, interim president and CEO, CFO.  “With the benefit of additional information, we believe that today is an appropriate time to provide greater clarity on this topic.”

The environment in the U.S. and Canada continues to be challenging for Target.  Mulligan added that results aren’t yet where they need to be, but was optimistic about the company’s progress, particularly in its efforts to drive U.S. traffic and sales, improve its Canadian operations and advance its digital transformation.

“With last week’s announcement that the board has chosen Brian Cornell as Target’s next chairman and CEO, we are excited to welcome Brian to the team and committed to working together to accelerate Target’s transformation and become a leading omnichannel retailer,” Mulligan said.

The company now anticipates its second quarter 2014 adjusted earnings per share will be within a range around $0.78 compared with prior guidance of $0.85 to $1.00 per share, reflecting flat comparable sales in its U.S. segment, with lower-than-expected EBITDA margin driven by promotional markdowns, as guests continue to spend cautiously and focus on value in the current environment; as well as softer-than-expected sales in its Canadian segment, combined with the impact of continued investments to clear excess inventory.

The company will provide complete second quarter results August 20.

Source: Retailing Today

August 1, 2014

New Orders, Employment and Production Growing; Inventories Growing; Supplier Deliveries Slowing

Economic activity in the manufacturing sector expanded in July for the 14th consecutive month, and the overall economy grew for the 62nd consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report on Business.

The report was issued today by Bradley J. Holcomb, chair of the Institute for Supply Management (ISM) Manufacturing Business Survey Committee.  “The July PMI registered 57.1 percent, an increase of 1.8 percentage points from June’s reading of 55.3 percent, indicating expansion in manufacturing for the 14th consecutive month.  The New Orders Index registered 63.4 percent, an increase of 4.5 percentage points from the 58.9 percent reading in June, indicating growth in new orders for the 14th consecutive month.  The Production Index registered 61.2 percent, 1.2 percentage points above the June reading of 60 percent.  Employment grew for the 13th consecutive month, registering 58.2 percent, an increase of 5.4 percentage points over the June reading of 52.8 percent.  Inventories of raw materials registered 48.5 percent, a decrease of 4.5 percentage points from the June reading of 53 percent, contracting after five months of consecutive growth.  Comments from the panels are generally positive, while some indicate concern over global geopolitical situations.”

Manufacturing expanded in July as the PMI registered 57.1 percent, an increase of 1.8 percentage points when compared to June’s reading of 55.3 percent.  July’s PMI reading of 57.1 is the highest reading since April 2011 when the PMI registered 58.9 percent.  A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

A PMI in excess of 43.2 percent, over a period of time, generally indicates an expansion of the overall economy.  Therefore, the July PMI indicates growth for the 62nd consecutive month in the overall economy, and indicates expansion in the manufacturing sector for the 14th consecutive month.  Holcomb stated, “The past relationship between the PMI and the overall economy indicates that the average PMI for January through July (54.4 percent) corresponds to a 3.7 percent increase in real gross domestic product (GDP) on an annualized basis.  In addition, if the PMI for July (57.1 percent) is annualized, it corresponds to a 4.6 percent increase in real GDP annually.”

Of the 18 manufacturing industries, 17 are reporting growth in July.

Source:  Institute for Supply Management

July 30, 2014

• Following a strong June increase of 155,900, July showed a small loss
• States were mixed with about half showing small gains

Online advertised vacancies showed a small drop of 15,500 to 5,044,600 in July, according to The Conference Board Help Wanted OnLine Data Services.  The June Supply/Demand rate stands at 1.9 unemployed for each advertised vacancy with a total of 4.4 million more unemployed workers than the number of advertised vacancies.  The number of unemployed was 9.5 million in June.

“Labor demand continues to be at historically high levels with employer demand running at about 5 million ads each month,” said Dr. Gad Levanon, Director of Macroeconomics and Labor Markets at The Conference Board.  “While the average monthly increases have become more modest since early 2013, the overall trend has helped lower unemployment levels and reduced the U.S. Supply/Demand rate from a peak of 5.2 in June 2009 to 1.9 in June 2014.”

In July, professional occupations showed a small gain in Computer and Math (13,400) and Community and Social Services (3,500) but a drop in Healthcare (-8,300).  The Services/Production occupations showed losses with Office and Administration (-15,700) and Installation and Repair (-9,600).

Regional And State Highlights

• Fifteen of the 20 largest states posted losses in July
• Among the 50 states, 27 experienced gains while 23 declined

July Changes For States

In July, online labor demand was up in 27 states and down in 23 states.  The West and South experienced modest gains while the Northeast and Midwest posted declines.

The West experienced a modest gain of 1,800, with an increase of 1,900 in Arizona to 95,100.  Colorado grew 300, California dropped 1,800 to 546,900, and Washington fell 1,100 to 127,600.  Among the smaller states in the West, Utah gained 2,200, led by an increase in Sales and Related Occupations and Food Preparation and Serving-Related Occupations.  New Mexico rose 700, Hawaii increased by 200, Idaho dropped 1,800, and Oregon fell 600 to 68,200.

The South grew by 1,700 in July.  Out of the larger states in the region, North Carolina rose 1,300 to 128,600.  Florida and Georiga both fell by 2,500 while Texas dropped 1,400.  Maryland and Virginia both decreased by 1,000.  Among the smaller states, South Carolina was up 3,600 to 64,600.  This was the South’s largest gain, led by an increase in Education, Training, and Library Occupations and Management Occupations.  Kentucky rose 1,200.  Alabama and West Virginia increased by 1,000 and 900 respectively, while Mississippi fell by 600.

The Northeast fell 11,700, reflecting a loss of 7,100 in New Jersey.  Massachusetts dropped 3,700 to 149,400, and New York decreased by 3,400 to 303,400.  Pennsylvania rose 4,700 to 218,300.  This was the largest gain in any state and was led by an increase in Sales and Related Occupations and Installation, Maintenance, and Repair Occupations.  In the smaller states, Maine gained 800, Vermont rose 500, and New Hampshire increased by 300.  Connecticut and Rhode Island both decreased by 100.

The Midwest dropped 2,300 in July.  The largest drop occurred in Michigan (-6,500).  Illinois fell 2,100 to 201,400.  Ohio and Wisconsin fell by 1,000 and 900 respectively.  Minnesota rose 4,400 to 123,700.  This was the largest gain in the Midwest region.  Minnesota’s gain is partially due to the rise in Healthcare Practitioners and Technical Occupations and Office and Administrative Support Occupations.  Missouri fell 200.  Among the smaller states in the region, Kansas had an increase of 2,900 to 46,500, Iowa increased by 900, Indiana gained 600, and North Dakota and South Dakota inched up with gains of 400 and 100 respectively.

Metro Area Highlights

• In July, among the 20 largest metro areas, 4 (San Francisco, Minneapolis, San Jose, and Cleveland) gained and 16 declined
• Of the 52 metro areas for which Help Wanted OnLine provides monthly data, 28 lost advertisements, 21 gained, and 3 (Tucson, Louisville, and Kansas City) remained constant

Occupational Highlights

• In July, 7 of the 10 largest online job categories posted losses

Source: The Conference Board 

August 4, 2014

Each $1,000 increase in the cost of a new median-priced home price forces 206,000 prospective buyers out of the marketplace, according to a new study by the National Association of Home Builders (NAHB).

The number of households affected varies across states and metro areas and largely depends on their population, income distribution and new home prices.

Among the states, the number of households who would no longer be eligible to qualify for a mortgage based on a $1,000 increase to a median-priced home ranges from a low of 313 in Wyoming to a high of 18,250 in Texas.

“This study highlights the real effects that building regulations have on housing affordability,” said NAHB Chairman Kevin Kelly, a home builder and developer from Wilmington, Delaware.  “Local, state and federal government officials need to know that higher regulatory costs have real consequences for working American families.  Oftentimes, these government regulations end up pushing the price of housing beyond the means of many teachers, police officers, firefighters and other middle class workers.”

Based on national mortgage underwriting standards and incorporating the latest income distribution data from the American Community Survey and the U.S. Department of Housing and Urban Development, the report contains detailed results for more than 300 metro areas.

The analysis found that every $833 increase in fees paid during the construction process – such as the price of a construction permit or an impact fee – adds an additional $1,000 to the final price of the home.

Measured by local metro areas, the number of households who would be priced out of the market based on a $1,000 increase range from a low of 19 in Napa, California to a high of 5,742 in the New York-Northern New Jersey-Long Island, New York-New Jersey-Pennsylvania area.

Looking at affordable metro areas, where roughly 50 percent or more of households can afford new homes, the priced out effects are typically large and can often disqualify thousands of new home buyers, as in the case of Houston-Sugar Land-Baytown, Texas (4,234); Atlanta-Sandy Springs-Marietta, Georgia (4,135); and Las Vegas-Paradise, Nevada MSA (2,044).

Source: National Association of Home Builders