Builder Confidence Remains In Holding Pattern

May 15, 2014

Builder confidence in the market for newly built, single-family homes in May fell one point to 45 from a downwardly revised April reading of 46 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) released today.

"After four months in which the HMI has shown little signs of fluctuation, it is clear that builder sentiment is becoming more in line with the market reality of a continuing but modest recovery," said NAHB Chairman Kevin Kelly, a home builder and developer from Wilmington, Delaware.  "However, builders expressed some optimism that sales will pick up in the coming months."

"Builders are waiting for consumers to feel more secure about their financial situation," said NAHB Chief Economist David Crowe.  "Once job growth becomes more consistent, consumers will return to the market in larger numbers and that will boost builder confidence."

Derived from a monthly survey that NAHB has been conducting for 30 years, the NAHB/Wells Fargo Housing Market Index gauges builder perceptions of current single-family home sales and sales expectations for the next six months as "good," "fair" or "poor."  The survey also asks builders to rate traffic of prospective buyers as "high to very high," "average" or "low to very low."  Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.

The index's components were mixed in May.  The component gauging sales expectationsin the next six months rose one point to 57 and the component measuring buyer traffic increased two points to 33.  The component gauging current sales conditions fell two points to 48.

Looking at the three-month moving averages for regional HMI scores, the South rose one point to 48 while the Midwest fell a single point to 47 and the West posted a four-point drop to 47.  The Northeast held steady at 33.

Source: National Association of Home Builders 

Outlook Remains Positive Despite Flat April Sales

May 13, 2014

Retail sales rose ever so slightly in April, putting a damper on hopes of a sharp uptick in economic growth in the second quarter.  According to the U.S. Commerce Department, retail sales, which include categories such as automobiles, gasoline stations and restaurants, rose 0.1% in April, following a revised 1.5% increase in March that ranked as the biggest since March 2010.

According to the National Retail Federation (NRF), April sales, which exclude automobiles, gas stations and restaurants, were unchanged seasonally-adjusted month-to-month, yet increased 4.7% unadjusted year-over-year.

"Even though retail sales were weaker than anticipated, the fundamentals of the economy, including improving job growth and income gains, remain positive," said chief economist Jack Kleinhenz.  "While the shift in Easter played into the seasonal figures, NRF remains optimistic that retail sales will keep their positive trajectory, albeit in fits-and-starts, in the second quarter."

Additional findings from NRF's retail sales analysis include:

• Building material and garden equipment and supplies dealers stores' sales increased 0.4% seasonally-adjusted month-to-month and 2.7% unadjusted year-over-year.
• Clothing and clothing accessories stores' sales increased 1.2% seasonally-adjusted month-to-month and 5.2% unadjusted year-over-year.
• Electronics and appliance stores' sales decreased 2.3% seasonally-adjusted month-to-month and 1.8% unadjusted year-over-year.
• Furniture and home furnishing stores' sales decreased 0.6% seasonally-adjusted month-to-month yet increased 3.6% unadjusted year-over-year.
• General merchandise stores' sales increased 0.2% seasonally-adjusted month-to-month and 5.3% unadjusted year-over-year.
• Health and personal care stores' sales increased 0.6% seasonally-adjusted month-to-month and 6.6% unadjusted year-over-year.
• Nonstore retailers' sales decreased 0.9% seasonally-adjusted month-to-month yet increased 5.8% unadjusted year-over-year.
• Sporting goods, hobby, book and music stores' sales increased 0.7% seasonally-adjusted month-to-month yet decreased 0.6% unadjusted year-over-year.

"The shift in Easter to April did not provide enough bounce to retailers as retail sales struggled to keep their strong spring pace," NRF president and CEO Matthew Shay said.  "With consumer spending accounting for roughly 70% of total economic activity, NRF remains hopeful that the uninspiring April retail sales figures are just a temporary seasonal fluctuation."

Source: Retailing Today

Economic Highlights For The Week Ahead

May 12, 2014

Last week:  Some improvement in trade, domestically and globally, was the big news this week.  The forward indicators have been pointing to some improvement in global industrial conditions, which may be developing, as evidenced by the trade data.  The other big story is financial, in terms of the Federal Reserve continuing to unwind quantitative easing.  This is leading to renewed speculation about the timing of a return to a more normal yield curve in interest rates.  And the irony is that the domestic economy is beginning to pick up enough steam to contemplate raising interest rates, which would mean higher mortgage rates, which would possibly slow the improvement in home building and buying.  How much, and over what time frame, is a story that will unfold perhaps over the next year and a half.

Retail Sales, April (Bureau of the Census)

Vehicle sales (at a 16 million pace in March) reflect some catch up from widespread inclement weather at the start of the year.  Non-auto retail spending will reflect the same trend.  Going forward, the retail pace will be dictated by the pace of hiring and any pickup in wages.  Retailers, still stuck with piled-up inventory, are hoping continued good news on the labor front allows consumers to put into action some long delayed buying plans, which in turn will bring the inventory-to-sales ratio back down to something closer to normal.

Producer Price Indexes, April (Bureau of Labor Statistics)

Energy prices remain relatively stable.  Food prices are stable now but could start to move a little higher.  "Core" prices (which exclude food and energy) remain very low, rising by no more than 0.2 percent per month.  The big worry is that they might start rising even more slowly, as non-energy commodity prices stop rising at all.  In a soft economic environment, there is little reason to think these raw commodity prices will start rising faster this summer.

Consumer Price Indexes, April (Bureau of Labor Statistics)

Globally, inflation is slow.  Domestically, it is simply holding steady, but at a very slow pace.  "Core" prices (which exclude food and energy) have been rising by no more than 0.2 percent per month for more than a year.  Even with the economy starting to grow faster, faster price increases are probably not going to develop this spring or summer.  Energy prices are running below year-ago comparisons.  Food prices, however, are responding to low crop output, the result of a severe and prolonged California drought.  Medical-care inflation has slowed while the cost of housing remains steady.  Without much change in either of those two components, retail inflation will not change significantly.

Housing Starts and Building Permits, April (Bureau of the Census)

Home building has been running close to a million starts (annualized).  Demand has held up, even with mortgage rates moving a little higher.  And with foreclosure activity winding down, more demand has to be met by increased construction.  The home-owner end of this market could be impacted if mortgage rates rise faster.  Apartment building, however, is the stronger segment of this market, and even with higher mortgage rates, this won't change.  In fact, with 200,000 new jobs a month and higher mortgage rates, demand for apartments could intensify.

Fact of the Week

The national unemployment rate is now down to 6.3 percent.  But among those 24 years of age or younger, it is over 9 percent.  Moreover, a new report, In Ths Together: The Hidden Cost of Young Adult Unemployment, notes that governments (federal and states) lose almost $9 million in taxes not collected from pay not earned.  Add in the number not working and not in school (and since they are not looking for a job, they are not counted in the labor force) and the cost skyrockets to $25 billion.

What is the cost to individuals?  Starting their careers with bouts of unemployment, delaying their earnings experience and not developing their skill set could result in a collective loss of $20 billion in money not earned over thier working lives.

Nor is this strictly an American problem.  Youth unemployment is higher in several other countries, much higher in a few countries like Spain.  In fact, across the globe there is an army of unemployed and unengaged youth.  There are approximately 75 NEETS (Not in Employment, Education, or Training) across the globe.  What's more, the slower the global economy grows, the faster the number of NEETS will grow.  And by extension, the call on public resources and the limit on those resources increases, precisely because they are not engaged in economic activity.

Source: The Conference Board

Retail Sales Post Weaker-Than-Expected April Increase

May 13, 2014

U.S. retail sales barely rose in April and a gauge of consumer spending slipped, which could temper hopes of a sharp acceleration in economic growth in the second quarter.

The Commerce Department said on Tuesday retail sales edged up 0.1 percent last month, held back by declines in receipts at furniture, electronic and appliance stores, restaurants and bars and online retailers.

Retail sales, which account for a third of consumer spending, rose by a revised 1.5 percent in March.  That was the largest increase since March 2010.

Economists polled by Reuters had forecast sales advancing 0.4 percent last month after a previously reported 1.2 percent surge in March.

Data such as employment, as well as manufacturing and services industries surveys had suggested the economy regained strength early in the second quarter after being weighed down by bad weather and a slow pace of restocking by businesses in the first three months of the year.

But the retail sales report cast a shadow on that upbeat outlook.  So-called core sales, which strip out automobiles, gasoline, building materials and food services, and correspond most closely with the consumer spending component of gross domestic product, fell 0.1 percent in April.

That followed a revised 1.3 percent advance in March.

Core retail sales had previously been reported to have risen 0.8 percent in March.

Last month, retail sales were restrained by a 2.3 percent drop in receipts at electronics and appliance stores.  Sales at furniture stores fell 0.6 percent, while receipts at food services and drinking places dropped 0.9 percent.

Sales at non-store retailers, which include online sales, fell 0.9 percent.

However, receipts at building materials and garden equipment stores rose 0.4 percent.  Sales at auto dealerships increased 0.6 percent.  There were also increases in sales at gasoline stations, reflecting higher pump prices.

Excluding gasoline and autos, retail sales fell 0.1 percent.

Receipts at clothing stores rose 1.2 percent.  There were also gains in receipts at sporting goods shops.

Source: Fox Business

Old Navy Drives Gap's April Sales

May 9, 2014

Gap had a good April in terms of sales, and a large part of the reason is the company's Old Navy banner.

The company reported that April net sales increased 10% to $1.33 billion for the four-week period ended May 3, versus $1.21 billion last year.  Gap's comparable sales for April 2014 were up 9% versus a 7% increase last year.

For the first quarter so far, Gap's net sales have increased 1% to $3.77 billion versus $3.73 billion last year.  The company's comparable sales so far have decreased 1% versus a 2% increase last year.

"We are pleased with our execution overall in April, especially at Old Navy," said chairman and CEO Glenn Murphy.

For the month, comparable sales by global brand were as follows:

• Gap Global: up 3% versus an 8% increase last year
• Banana Republic Global: up 7% versus a 1% increase last year
• Old Navy Global: up 18% versus a 9% increase last year

The company expects diluted earnings per share for the first quarter to be in the range of $0.56 to $0.57.  It also expects gross margins for the quarter to decline less than the year-over-year decline in the fourth quarter of fiscal year 2013.  In addition, the company expects first quarter fiscal year 2014 operating expenses to be slightly above last year.

Gap will release its complete first quarter earnings results May 22, and will report May sales June 5.

Source: Retailing Today

Fred's Launches Aggressive Marketing Campaign

May 8, 2014

Fred's plans to implement a long-term marketing strategy stressing everyday low pricing and the convenience of a smaller box to help bolster sales against what the company describes as "intense competitive pressures."  The company's pharmacy operations continue to grow, however.

Fred's reported $150 million in sales for the four weeks ended May 3, representing a decline of 1.6% compared to year-ago sales.  For the first quarter ended May 3, sales totaled $498.5 million, down 0.6%.

Comparable store sales for the month of April decreased 2.3% compared with a 1.2% increase in the same period last year.  On a comparable store basis, year-to-date sales decreased 1.9% versus a 1.3% decrease for the year-earlier period.

"April's sales reflect the limited success of our legacy marketing strategies in matching up with prevailing intense competitive pressures," stated Bruce Efird, Fred's CEO.  "Beginning in late January, we started working with our outside marketing strategies to regain our sales momentum.  Working through extensive research and building a marketing strategy that can be sustained over the long term has taken several months to design, develop and validate", he said.  "One of the key findings of our research has pointed out that the aggressive use of our new strategy today is likely to be quickly embraced, based on the demographics of our customer base.  The team has put together a solid marketing plan to capitalize on Fred's position as a low-price leader and brand our convenience departments' advantages over small-box competitiors."

Fred's pharmacy department continued to demonstrate solid sales gains in April, with higher sales and comparable store script growth.  "However, these improvements were not sufficient to offset the sales shortfall in the other general merchandise departments, which experienced negative comparable sales and traffic declines in April," Efird noted.  "With this in mind, we now expect first quarter earnings per share to be in the range of $0.18 to $0.22.  As we now begin to implement our new marketing strategy, we expect to see its impact beginning in June, when we anticipate a return to positive comparable store sales in the range of 1% to 3%.

During April, Fred's opened three Xpress stores, closed two stores without pharmacies, and converted on Xpress into a full-service store.

Source: Retailing Today

Costco April Sales Beat Analysts' Expectations

May 8, 2014

The timing of Easter this year left Costco with 27 days of sales in April, rather than last year's 28.  But despite the Easter holiday shift, Costco still came out on top with a 7% increase in net sales that reportedly beat analysts' expectations.

The company reported net sales of $8.56 billion for the month, up from $7.98 billion during the similar four-week period last year.  Although Easter's timing this year did negatively impact this year's net and comparable sales by an estimated 1.5 to 2%, inflation in gasoline prices had a positive impact on comparable sales for the four-week period.

Total comparable sales increased 5%, U.S. comparable sales rose 5% and international comparable sales rose 2%.

Excludig gasoline prices and the negative impact of foreign currencies, total comparable sales rose 5%, U.S. comparable sales rose 5% and international comparable sales rose 7%.

Costco plans to report its third quarter results May 29.  It currently operates 652 warehouses, including 463 in the United States and Puerto Rico, 87 in Canada, 33 in Mexico, 25 in the United Kingdom, 19 in Japan, 10 in Taiwan, 10 in Korea and five in Australia.  Costco also operates electronic commerce web sites in the U.S., Canada, the United Kingdom and Mexico.

Source: Retailing Today

Supervalu To Acquire Rainbow Stores In The Twin Cities

May 7, 2014

Supervalu, the owner of Cub Foods, along with four Twin Cities-based independent grocery retailers, have each entered into definitive agreements to acquire select Rainbow Foods grocery stores.  In total, they agreed to acquire 18 Rainbow grocery stores, including 13 Rainbow pharmacies and three Rainbow liquor stores in Minnesota.

Jerry's Enterprises, Haug Enterprises, Lund Food Holdings and Rademacher Enterprises have joined Supervalu in executing these agreements.  Once completed, the acquired stores are intended to be operated by Supervalu, a Cub franchisee or an independent retailer as 10 new Cub Foods locations, two new Byerly's locations and six locations are expected to be operated under the Rainbow banner.

Of the 18 stores, Supervalu will have 100% ownership in three Cub stores, majority ownership in two Cub stores, minority ownership in three Cub stores and 100% ownership in two Rainbow stores as well as 100% ownership interest in eleven pharmacies.  Roundy's will be selling these 18 stores for approximately $65 million plus inventory.  Supervalu's aggregate purchase price across its multiple purchase agreements is approximately $35 million in cash plus the cost of inventory that will be purchased at the closing of the Rainbow store sale.  In addition, as part of the transactions, Supervalue will assume certain lease obligations and certain multi-employer pension liabilities related to the stores being acquired by Supervalu.

"Supervalu is thrilled to participate in this consortium of retailers that is acquiring Rainbow stores," said Sam Duncan, Supervalu's president and CEO.  "We're especially pleased that highly respected independent retailers here in the Twin Cities are also acquiring Rainbow stores.  These independent retailers are great customers to Supervalu who understand the importance of being a strong community grocer."

Cub Foods consists of a combination of corporate-ownded and franchised locations.  Following the close of the transactions, Cub Foods will total 66 stores in the Twin Cities and 77 stores banner-wide (including 76 stores in Minnesota and one in Illinois).  As part of acquiring these stores and with seasonal employment needs, Cub Foods expects to make more than 1,000 job offers in the coming months.

"For nearly five decades, Cub Foods has been a trusted grocer and innovator in the Twin Cities," said Mike Stigers, Cub Foods president.  "This community has always been important to us and it is our continued desire to deliver great products, excellent service and an incredible overall value in the grocery store.  With more stores under the Cub Foods brand and being serviced out of our distribution center in Hopkins, we will be better positioned to improve our efficiencies and explore ways to bring even stronger value and price competitiveness to our shoppers going forward."

The transactions are subject to customary closing conditions and are expected to be completed by the end of the summer.

Supervalu serves customers across the United States through a newtork of 3,339 stores made up of 1,819 independent stores serviced primarily by the company's food distribution business, 1,330 Save-A-Lot stores, of which 948 are operated by licensee owners, and 190 traditional retail grocery stores.

Source: Retailing Today 

Whole Foods' Record Revenue Increase Not Enough For Street

May 7, 2014

Despite the Easter holiday shift, Whole Foods reported second quarter revenue of $3.32 billion, a record increase of 10% from the prior-year quarter.  But the record was not enough for Wall Street, which expected $3.34 billion.

The company's earnings per share of 38 cents for the quarter also came in below expectations of 41 cents per share.

Comparable store sales, including the negative impact of approximately 50 basis points from Easter shifting from the second quarter last year to the third quarter this year, increased 4.5% on top of a 6.9% increase in the prior year.  The spread between comparable store and identical store sales growth for the quarter due to five relocations and one expansion was approximately 50 basis points.

"The rapidly growing demand for fresh, healthy foods affirms our mission for the last 36 years and highlights the increasing growth opportunity ahead of us," said co-founder and co-CEO John Mackey.  "Whole Foods Market is the premier brand in natural and organic foods, with unparalleled quality standards and the broadest selection.  As we continue to innovate and evolve at a fast pace, we are confident in our ability to gain market share and expect our sales to approach $25 billion during the next five years."

Since the end of the first quarter, the company has added eight stores in six new markets.  In the second quarter, the company opened three new stores.  So far in the third quarter, the company has opened one new store and completed its acquisition of four New Frontiers Natural Marketplace stores in Flagstaff, Prescott and Sedona, Arizona; and San Luis Obispo, California.  The company expects to open seven additional stores in the third quarter and another 11 to 14 stores in the fourth quarter.

Whole Foods currently operates 379 stores totaling approximately 14.4 million sq. ft. and expects to cross the 500 store mark in 2017.  Longer term, the company still sees demand for 1,200 Whole Foods Market stores in the United States.

The company has increased its development pipeline to a record 114 stores with the signing of nine new leases, including one relocation, totaling approximately 410,000 sq. ft.  These leases include three new markets and are located in Fayetteville, Arizona; Honolulu, Hawaii; Indianapolis, Indiana; Metuchen, New Jersey; Chappaqua, New York; Lower Gwynedd Township, Pennsylvania; Fort Worth, Texas; and Richmond, Virginia.

Looking ahead, the company is revising its fiscal year 2014 outlook and now expects sales growth of approximately 11%, comparable store sales growth of 5% to 5.5% and diluted earnings per share of $1.52 to $1.56.

The company expects the Easter shift to positively impact comparable store sales growth in the third quarter by approximately 50 basis points.

Source: Retailing Today

Single Family 55+ HMI Rises To Highest First Quarter Reading Since 2008

May 8, 2014

Builder confidence in the single-family 55+ housing market for the first quarter of 2014 is up year over year, according to the National Association of Home Builders' (NAHB) latest 55+ Housing Market Index (HMI) released today.  Compared to the first quarter of 2013, the single-family index increased 4 points to a level of 50, which is the highest first quarter reading since the inception of the index in 2008 and the 10th consecutive quarter of year over year improvements.

"There are many factors contributing to the positive signs in the 55+ housing market," said Steve Bomberger, chairman of NAHB's 50+ Housing Council and president of Benchmark Builders Inc. in Wilmington, Delaware.  "Rising house prices and low interest rates are helping baby boomers sell their existing homes at a favorable price and in turn, purchase a new home more suited to their current lifestyles."

There are separate 55+ HMIs for two segments of the 55+ housing market: single-family homes and multifamily condominiums.  Each 55+ HMI measures builder sentiment based on a survey that asks if current sales, prospective buyer traffic and anticipated six-month sales for that market are good, fair or poor (high, average or low for traffic).  An index number below 50 indicates that more builders view conditions as poor than good.

Two of the components of the 55+ single-family HMI posted increases from a year ago: present sales rose six points to 52 and expected sales for the next six months climbed nine points to 62.  Meanwhile, traffic of prospective buyers held steady at a reading of 41.

The 55+ multifamily condo HMI increased one point to 39, which is the highest first-quarter reading since the inception of the index.  Two of the 55+ multifamily condo HMI components showed increases compared to a year ago: present sales increased four points to 41 and expected sales for the next six months rose five points to 48.  Traffic of prospective buyers, however, decreased six points to 32.

Three of the four 55+ multifamily rental indices showed slight declines in the first quarter.  Present production dipped one point to 42, expected future production decreased three points to 45 and current demand for existing units dropped one point to 55.  Future demand did show an increase of one point to 59.

"The 55+ segment of the housing market is stronger now than it was a year ago," said NAHB Chief Economist David Crowe, "helped by factors like rising house prices, which has increased owners' equity and allowed them to buy in a 55+ community.  But there are still some headwinds hampering a stronger recovery, as builders in many markets are facing tight credit conditions and a lack of lots and labor."

Source: National Association of Home Builders

Healthy Housing Industry Spurs Job Growth

May 7, 2014

The health of housing is key for the overall state of the U.S. economy and housing stands poised to serve as an engine of job growth with the right policies in place, the National Association of Home Builders (NAHB) told Congress today.

Testifying before the Senate Banking Committee's Subcommittee on Economic Policy during a hearing examining the drivers of job creation, NAHB economist Robert Dietz said that home building and remodeling have generated 274,000 jobs over the past 2 1/2 years.

"This expansion has direct economic benefits," said Dietz.  "Housing provides the momentum behind an economic recovery because home building and associated businesses employ such a wide range of workers."

Employment from new home construction and remodeling has a wide ripple effect.  About half the jobs created by building new homes are in construction.  They include framers, electricians, plumbers and carpenters.  Other jobs are spread over other sectors of the economy, including manufacturing, retail, wholesale and business services.

NAHB analysis of the broad impact of new construction shows that building 1,000 average single-family homes generates:

• 2,970 full-time jobs
• $162 million in wages
• $118 million in business income
• $111 million in taxes and revenue for state, local and federal governments

Similarly, construction of 1,000 rental apartments, including units developed under the Low Income Housing Tax Credit, generates 1,130 jobs while $100 million in remodeling expenditures creates 890 jobs.

Currently, housing comprises about 15.5 percent of GDP but Dietz said the industry still has room to grow.

"Typically, housing represents 17 to 18 percent of the GDP," he said.  "With a growing population and an aging housing stock, NAHB forecasts that single-family construction will increase 22 percent in 2014 to 760,000 units and multifamily production will rise 6 percent to 326,000 units."

Noting that 2014 should be the first year since 2007 in which total housing starts exceed 1 million homes, Dietz said this expansion will produce jobs.  "In April alone, home builders and remodelers added 13,100 jobs," he said.

NAHB estimates that total housing construction over the next few years should return to just under 1.7 million combined single-family and multifamily starts on an annual basis.

Homeownership also represents the most important investment and source of savings for most middle class households.  The latest economic date show that the primary residence represents 62 percent of the median home owner's total assets and 42 percent of their wealth.  Moreover, almost two-thirds of all U.S. households own a home, while just 50 percent possess a retirement account and only 16 percent own stocks and bonds.

Though homeownership remains a cherished American ideal, access to safe and decent affordable rental housing is needed for those households for whom rentng is the best choice.  The Low Income Housing Tax Credit, the nation's only affordable housing production program, serves a critical role in this regard.  Since its inception, the tax credit has produced and financed more than 2 million affordable rental apartments.

Industry Faces Several Challenges

While home construction is poised to continue to expand and add jobs, builders continue to face persistent headwinds.  These include access to buildig lots, rising building material prices, access to builder loans and worker shortages in some markets.

Additional challenges are the lack of policy certainty in areas connected to housing.  To help the industry play its traditional role as a job creator, Dietz called on Congress to ensure that undue regulatory burdens do not hinder economic and job growth.  "Regulations imposed by the government at all levels account for 25 percent of the final price of a new single-family home built for sale," he said.

On the tax front, Dietz urged lawmakers to protect the mortgage interest deduction and Low Income Housing Tax Credit, which are critical to ensuring the growth of the middle class and access to affordable housing, and to enact a tax extenders bill that would retroactively extend expired tax rules such as the minimum 9 percent credit rate for the Low Income Housing Tax Credit and residential energy efficient tax credits for new construction and for retrofitting existing homes.

"Passing comprehensive housing finance reform that includes a federal backstop to ensure the availability of the 30-year mortgage, increase private capital in the marketplace and protect the American taxpayer would be a net positive for job creation," he added.

Source: National Association of Home Builders 

ODP Plans 400 Store Closures

May 6, 2014

Office Depot said it plans to close 400 of its 2,000 stores as it looks to realize efficiencies related to its merger with OfficeMax.

An estimated 150 of the stores will close this year, according to the company, which reported first quarter results and continued weakness in same store sales.  The company anticipates that the closures will generate annual run-rate synergies of at least $75 million by the end of 2016 and will begin to be accretive to earnings in 2015.

Total reported sales for the quarter were $4.4 billion compared to $2.7 billion in the first quarter of 2013, and were 3% lower than combined pro forma sales of $4.5 billion in the first quarter of the prior year.

The company reported an operating loss of $79 million and a net loss attributable to common stockholders of $109 million, or $0.21 per share.  The operating loss included special charges totaling $151 million, which were made up of $96 million in merger-related expenses, $41 million in non-cash IT-related impairment charges, $9 million in non-cash store impairment charges, and $5 million in international restructuring and other operating expenses.  The tax effect of these pretax charges was $4 million.  In the first quarter of 2013, the company reported operating income of $10 million and a net loss attributable to common stockholders of $17 million, or $0.06 per share.

"We are pleased with our first quarter performance.  After a weather-challenged start to the year, sales trends improved as the quarter progressed, and we exceeded our expectations for both cost reduction and operational execution," said chairman and CEO Roland Smith.  "With our new organizational structure established and leadership team largely in place, the execution on our critical priorities is improving, and we are delivering merger integration synergies more quickly than anticipated.  Accordingly, we have increased our full year 2014 outlook for adjusted operating income to be not less than $160 million from our prior outlook of not less than $140 million."

The company's North American Retail Division reported sales in the quarter of $1.8 billion compared to $1.1 billion in the first quarter of 2013, reflecting the inclusion of OfficeMax sales in the first quarter of 2014.  On a combined pro forma basis, first quarter 2014 sales declined 5%, and same-store sales declined 3% versus last year.  Same-store sales decreased primarily due to lower transaction counts partially offset by higher average order values.

Meanwhile, the Business Solutions Division reported sales of $1.5 billion in the quarter compared to $0.8 billion in the prior year period, reflecting the inclusion of OfficeMax sales in the first quarter of 2014.  On a combined pro forma basis, sales declined 2%.

International Division reported sales of $1 billion in the quarter compared to $0.8 billion in the proir year quarter, reflecting the inclusion of OfficeMax sales in the first quarter of 2014.  On a combined pro forma basis, sales declined 1% in constant currency.

For the remainder of 2014, Office Depot continues to expect that market trends will remain challenging across the company's product lines and distribution channels, and therefore continues to anticipate total company sales in 2014 will be lower than 2013 combined pro forma sales.  The expense deleverage from lower sales is expected to offset a portion of the merger synergies and operating improvements anticipated during the year.  Based upon earlier than expected realization of cost synergies and improved operational execution in the first quarter, the company now expects to generate adjusted operating income of not less than $160 million in 2014 compared with its prior outlook of not less than $140 million.

Including at least $75 million in annual run-rate synergies from the optimization of the U.S. retail store portfolio, the company also raised its estimated total annual run-rate of synergies to more than $675 million by the end of 2016, compared to its prior outlook of more than $600 million.  Of those synergies, the company now expects to realize approximately $180 million during 2014, and end the year with an annual run-rate of approximately $360 million, not including any benefit from the retail store network optimization.

The company also continues to estimate that $400 million of cash merger integration expenses will be required during the three-year period of 2014 through 2016 to substantially complete the integration, excluding costs related to optimizing the U.S. retail store portfolio, which have not yet been determined.  Approximately $300 million of these cash integration expenses will be incurred in 2014.  The company continues to anticipate integration capital spending of approximately $200 million to $250 million during the 2014 through 2016 period.  In 2014, the company expects capital spending to be approximately $150 million, excluding up to an additional approximately $50 million in integration expenditures.  Depreciation and amortization is expected to be approximately $300 million in 2014.

Source: Retailing Today 

Walgreens Sees Boost In April Sales

May 5, 2014

Walgreens posted April sales of $6.49 billion, an increase of 8.8% from $5.96 billion for the same month in fiscal 2013.

Total front-end sales increased 8.8% in April compared with the same month in fiscal 2013, while same-store front-end sales increased 8.2%.  Customer traffic in comparable stores increased 2.6% while basket size increased 5.6%.

For the combined March/April period that includes the Easter holiday season impact, comparable store front-end sales increased by 2.1%, while customer traffic in comparable stores decreased 0.9% and basket size increased 3%.

Prescriptions filled at comparable stores increased by 3.5% in April and increased 4.3% on a calendar day-shift adjusted basis.  April 2014 had one additional Wednesday and one fewer Monday compared with April 2013.  The retailer noted that the calendar shifts negatively impacted prescriptions filled at comparable stores by 0.8 percentage point.

April pharmacy sales increased by 9.2%.  Comparable store pharmacy sales increased 7.3% and increased by a calendar day-shift adjusted 8.1%.  Calendar day shifts negatively impacted pharmacy sales in comparable stores by 0.8 percentage point.  Calendar day-shift adjusted comparable store pharmacy sales were negatively impacted by 1.3 percentage points due to generic drug introductions in the last 12 months.  Pharmacy sales accounted for 64.5% of total sales for the month, the company stated.

Sales in comparable stores increased by 7.6% in April.  Calendar day shifts negatively impacted total comparable sales by 0.5 percentage point.  Generic drug introductions in the last 12 months negatively impacted total comparable sales by 0.8 percentage point.

Sales for the combined months of March and April 2014 increased 6.6% from the same two months in 2013.  Comparable store sales for the March/April period increased 5.5%.

Source: Retailing Today

CVS 'Solid' In First Quarter

May 2, 2014

Despite severe weather-related issues during the first quarter, CVS reported "solid results" across the enterprise and executives expressed optimism in achieving 2014 goals.

"It is unusual to hear us talk about the impact of weather on our business.  Historically, it has been our practice to not blame the weather when we explain our results, but this quarter the amount of severe weather was so abnormal that, quite frankly, it is hard not to talk about it," Larry Merlo, president and CEO told analysts during Friday morning's conference call to discuss results.  "...While disappointed that the severe weather put a damper on an otherwise excellent quarter, we remain very confident in our outlook for the full year."

Net income during the quarter rose 18.3% to $1.1 billion, compared with approximately $1 billion in the year-ago period.  Adjusted earnings per share for the three months ended March 31, 2014 and 2013, was $1.02 and $0.83, respectively, an increase of 22.5%.

Net revenues for the three months ended March 31, 2014, increased 6.3% to $32.7 billion versus the year-ago period.

Revenues in the pharmacy services segment increased 10.3% to $20.2 billion during the quarter, primarily driven by growth in its specialty pharmacy business, including the acquisition of Coram, as well as drug cost inflation, new clients and new products.

Speaking of the specialty pharmacy business, Merlo told analysts that it remains strong with revenues up about 34% year-over-year.  He noted that the integration of Coram is "going well," as the sales forces are being aligned and integrated products are being developed.

Merlo also said that the rollout of its new Specialty Connect offering is expected to be completed at the end of the quarter.  Specialty Connect is analogous to Maintenance Choice as it connects mail and retail capabilities to provide choice and convenience for members.

"We are positioned to continue to gain share in the fast-growing specialty marketplace as we developed innovative offerings that capitalize on our unique ability to optimize cost, quality and access," Merlo told analysts.

Revenues in the retail business increased 2.7% to $16.5 billion during the quarter.  Same-store sales increased 1.4% with pharmacy same-store sales up 3.8% and front store same store sales down 3.8%.  Both front same-store sales and pharmacy same-store sales were negatively impacted by a weaker flu season in the three months ended March 31, 2014 and severe weather across much of the United States, compared with the prior year, the company stated.

Despite the decline in front same-store sales, front store basket size improved modestly while front store margins improved notably during the quarter.  The increase in total same-store sales was primarily driven by the growth of prescription volumes and brand name drug cost inflation.  Pharmacy same store sales include a negative impact of approximately 120 basis points from recent generic drug introductions, the company noted.

Merlo stressed the importance of developing a sustainable front-end strategy and said that, as rivals increased promotional activity, CVS/pharmacy reduced its circular ad blocks year-over-year by about 6%.

"As a result of staying true to our targeted promotion strategy, I'm pleased to say that we saw growth in our average basket size, along with notable growth in our front store margin in the quarter.  Of course, we would like to see better front store comps but it is important that we have a sustainable front-end strategy."

For example, through insights from its ExtraCare loyalty program and its predictive modeling for personalized emails, it has experienced email open rates that are two times the industry average and response rates that are five times the industry norm.  Furthermore, the CVS/pharmacy ExtraCare Beauty Club is enjoying the impact of personalization as it has engaged 13 million of the company's best beauty customers, and the members are spending more than twice as much as the average beauty customer.

With regard to MinuteClinic, revenues were up 11.4% during the quarter.  There are currently 828 clinics in operation with plans to open at least 150 new clinics this year.  Of the new openings, about one-third will be in new markets.

Looking ahead, CVS Caremark confirmed its earnings guidance range for the full year 2014 and expects to deliver adjusted EPS of $4.36 to $4.50 and GAAP diluted earnings per share from continuing operations of $4.09 to $4.23 in 2014.  The retailer also continues to expect to deliver 2014 free cash flow of $5.5 billion to $5.8 billion, and 2014 cash flow from operations guidance of $7 billion to $7.3 billion.

"All the ongoing changes that we are seeing in the healthcare environment are certainly creating unique opportunities for CVS Caremark.  Our unmatched model in innovative solutions makes us well positioned to capitalize on these opportunities and we believe creates a sustainable competitive advantage," Merlo told analysts.

Source: Retailing Today

Economic Highlights For The Week Ahead

May 5, 2014

Last week: Perhaps the biggest news in this data-heavy week is the rebound in wage growth.  Factories and stores, idled by winter weather, were back in business in March.  The jobs report shows they continued to catch up in April.  But as The Conference Board's Leading Economic Index has been signaling for months, this is more than just a weather story.  The economy is getting stronger.  And the proof will come over the coming weeks as consumers gain more confidence and spend more (especially on long-delayed replacement items).  And perhaps there will be more business investment in the equipment needed to get the job done.

Employment Trends Index, March (The Conference Board)

This index does for the labor market what the Leading Economic Index does for the general economy.  The labor market is rebounding now.  Does this forward indicator show more underlying strength this summer, once the catch up is completed?

Fact Of The Week

As of late April 2014, according to the Drought Monitor, all of California is now in moderate to exceptional drought - for the first time in a decade and a half.  This is a big deal.  How big?  It could result in as many as 20,000 lost jobs and 800,000 acres of idle farmland.  Indeed, the worst drought conditions happen to be in the normally crop rich Central Valley.

The estimated costs could approach $7.5 billion.  But that's not all.  A limited supply of food is sure to send its cost higher.  In this era of deflationary pressure, that might be the biggest deal of all.  We could have the Federal Reserve setting out on an expansive monetary policy to counter deflationary pressure while food prices skyrocket, resulting not just in a hit on the average household budget but causing consumers (taxpayers) to do more than complain.  Finally, it is not just California.  Western and/or southwestern states are dealing with a multi-year drought that is not letting up this spring and probably won't let up during this crop-growing summer season.  Only Montana and Wyoming,  and of course northeastern Washington have escaped these conditions.

Source: The Conference Board

The Conference Board Employment Trends Index Increases In April

May 5, 2014

The Conference Board Employment Trends Index increased in April.  The index now stands at 118,000, up from 117.77 (an upward revision) in March.  This represents a 5.5 percent gain in the ETI compared to a year ago.

"April's increase in the Employment Trends Index, and continued improvement in recent months, is signaling solid growth through the summer," said Gad Levanon, Director of Macroeconomic Research at The Conference Board.  "Despite the disappointing GDP figure for the first quarter, job growth remains robust and when coupled with the massive retirement of baby boomers will result in a continued rapid decline in the unemployment rate."

April's increase in the ETI was driven by positive contributions from five of its eight components.  In order from the largest positive contributor to the smallest, these were: Percentage of Firms with Positions Not Able to Fill Right Now, Number of Temporary Employees, Industrial Production, Job Openings, and Initial Claims for Unemployment Insurance.

The Employment Trends Index aggregates eight labor-market indicators, each of which has proven accurate in its own area.  Aggregating individual indicators into a composite index filters out "noise" to show underlying trends more clearly.

The eight labor-market indicators aggregated into the Employment Trends Index include:

• Percentage of Respondents Who Say They Find "Jobs Hard to Get" (The Conference Board Consumer Confidence Survey)
• Initial Claims for Unemployment Insurance (U.S. Department of Labor)
• Percentage of Firms With Positions Not Able to Fill Right Now (National Federation of Independent Business Research Foundation)
• Number of Employees Hired by the Temporary-Help Industry (U.S. Bureau of Labor Statistics)
• Ratio of Involuntarily Part-time to All Part-time Workers (U.S. Bureau of Labor Statistics)
• Job Openings (U.S. Bureau of Labor Statistics)
• Industrial Production (Federal Reserve Board)
• Real Manufacturing and Trade Sales (U.S. Bureau of Economic Analysis)

Source: The Conference Board

Surprisingly Strong Job Growth

May 2, 2014

The labor market remains surprisingly and resiliently strong, as evidenced by the gain of 288,000 new jobs created in April.  The gain this month was aided by some catch up - hiring that perhaps would have happened earlier if not for the widespread inclement weather.  But that is only one part of the story.  Indeed, the more important part is that the economy has been gathering strength for some time.  The signals from the surveys of purchasing managers and The Conference Board Leading Economic Index have been pointing to some acceleration for months.  Weather, sequestration, a significant buildup of inventory and other factors have helped bottle up some of this strength.  Now, it would appear, the absence of these factors is finally allowing the economy's underlying strength to come to the surface.  The result is not just a relatively strong gain in jobs in April but probably more of the same in May and June and perhaps right through the summer.  And more jobs means more pay checks, lifting sentiment and spurring more spending.  The business response will be to lift investment in equipment.  With consumption and investment picking up some steam, more new jobs will keep opening up.  In fact, it could be enough to send the unemployment rate below 6 percent late in the second half of the year.  Another outcome: discouraged job seekers going back into the labor market.  And that is an even better marker for how much improvement is in economic conditions and prospects.

Source: The Conference Board

What's Ahead For Employment?

April 23, 2014

Many economic discussions - especially those following the Great Recession - have focused on the short-term or immediate economy, particularly in regard to the labor market.

However, longer term issues regarding investments, hiring and other business decisions cannot be lost in our thinking about the economy and its direction.  While most of us don't necessarily think or plan 10 years out, it remains vitally important to economists, retailers, policymakers and the consuming public to think about the future while creating budgets, plans or sales projections.

Fortunately, the U.S. Bureau of Labor Statistics provides information about the future with its Employment Outlook report that it issues every two years with a 10-year projection of employment and output.

Since the last BLS report, the economy has notably improved and is now poised for more sustained growth.  As the economy expands, long term patterns of growth and industry activity can be more readily observed and the BLS' estimates and projections become valuable to retailers and others who need to make decisions about the future economy, employment and consumer spending.

So where will eht jobs be 10 years from now?

In the coming decade, BLS projects that the "retail trade" sector is expected to increase by more than 1 million jobs to a total of about 16 million jobs by 2022.  In fact, retail is projected to be one of the top three domestic industries for future employment opportunities - behind only construction and health care.

 

The projected growth in the retail industry - pegged at 0.7 percent annually - reflects the healthier pace of consumer spending at 2.6 percent (higher than the 1.8 percent of the last decade) and a strengthening economic recovery.  BLS assumes that the economy will grow by 2.6 percent per year, unemployment will drop to 5.4 percent and productivity gains will increase 2 percent a year (idealistic for sure but feasible).

Demographic Changes Abound

While the retail industry's jobs increase isn't as dramatic as those in construction and health care (retail already has a large employment base), the three growth sectors are all inter-related.

As housing and residential construction increases to accommodate a growing population, construction will continue to gather steam.  Increases in new units built and the replacement of old housing should pay dividends to retailers who will help buyers fill those homes - think appliances, furniture and garden supplies.

America's rapidly aging demographic - baby boomers - are also spurring job growth in medical service fields.  An aging population and expanded medical insurance coverage (Obamacare) are factors the BLS incorporated into its projections.  Again, retailers - especially those selling health and personal care products - will play a critical role in that demand.

What is readily apparent from a review of the BLS report is the important role demographic changes are making in the economy.  While demographics have always played an important role in economic decisions, they are now becoming a centerpiece for discussion.

One of the most dominate changes is that the labor force participation rate among older workers is expected to continue its decline.  As the baby boomers (those born between 1946 and 1964) head into their retirement, fewer will be part of the American labor force, lowering the participation rate and slowing labor growth and economic activity.

This demographic change - while anticipated - is especially important for retailers.  As an individual ages, purchases change.  Retailers should take some time to prepare for these changes and remain ever-vigilant and responsive.

Source:National Retail Federation

The Long And Short Of America's Consumer Holidays

May 1, 2014

For 11 years now, the National Retail Federation has gauged consumers' spending intentions on America's favorite holidays like Valentine's Day, Mother's Day, Halloween and of course, Christmas.

During that time, Halloween has grown to become one of the most popular holidays of the year, average spending on back-to-school items has increased 31 percent since 2004 , and Thanksgiving Day has officially become a bonafide shopping day for millions of bargain-hungry Americans.  So, how do holidays "rank" when it comes to consumer spending?  Here's how each holiday ranks as of the release of the latest Mother's Day survey:

Winter holidays: As the largest gift-giving holiday of them all, the winter holidays account for nearly 20 percent of total annual retail sales for retailers.  In 2013, holiday celebrants spent an average of $730 on gifts, food, decorations and more.  After all was said and done, NRF found that holiday sales increased 3.8 percent to $602 billon.  More than 90 percent of Americans celebrated Christmas, Kwanza or Hanukah last winter, the most celebrated season of the year.

Back to school/College: Spending on pencils, backpacks, denim, college dorm furniture and collegiate wear, tablets, smartphones and notebooks costs mom and dad hundreds of dollars on average and a total of $72.5 billion last year.  But savvy parents know bargains are not hard to find.  Almost every sector of retail plays a role: drug stores, thrift stores, electronics stores, department stores, discount stores and even grocery stores for penny-pinching college students and their parents.

Mother's Day: Consumers say they will spend an average of $163 this year - $19.9 billion total - with the majority of their budget going to special outings, new apparel items and jewelry.  As to why Mother's Day is so much bigger than Father's Day: the types of gifts people typically buy mom tend to cost a little more, and dad even admits that he doesn't like all the fuss anyway.

Halloween: In 2013, two-thirds of Americans said they would partake in Halloween activities, spending $75 on average to celebrate, for a total of $6.9 billion.  The holiday has become more of an adult event than ever before, helping boost spending on costumes, candy, decorations and party materials more than 55 percent since 2005.  With the growth in popularity, other sectors have jumped into the mix.  Home improvement stores take advantage of their vast space to sell life-sized yard decorations, and drug and grocery stores are also now devoting select aisles to decorations, candy and costumes.

Source: National Retail Federation

Families Look To Shower Mom This Mother's Day

April 29, 2014

After splurging on tablets and smartphones, beauty supplies, apparel and jewelry for mom last year, consumers this year will celebrate Mother's Day keeping practicality in mind.  According to NRF's Mother's Day Spending Survey, Americans will spend an average of $162.94 on mom this year, down from a survey high of $168.94 last year.  Total spending is expected to reach $19.9 billion.

"As one of the most universally celebrated holidays, retailers will take this opportunity to attract Mother's Day shoppers with promotions on ladies apparel items, health and beauty products, jewelry and even restaurant options," said NRF President and CEO Matthew Shay.  "Now fully into spring, retailers are hoping consumer sentiment and spending intentions continue to grow as we round out one of the busiest retail seasons of the year and prepare for summer."

Moms work hard and they are entitled to a show of appreciation on their special day.  Most consumers will acknowledge that appreciation with a greeting card (81.3%), though it appears her loved ones will also look for special gifts.  Two-thirds (66.6%) of those celebrating will buy mom her favorite flowers, spending a total of $2.3 billion, and 33.5 percent will look for spring sweaters and blouses, spending a total of $1.7 billiion on apparel and accessory items.  Mom's loved ones will also buy books and CDs ($480 million), housewares or gardening tools ($812 million), personal experience gifts like a day at the spa ($1.5 billion), jewelry ($3.6 billion), and special outings like brunch or dinner ($3.8 billion).

Having spent the last few years treating mom to electronic gifts like tablets, smartphones, cameras and more, Americans this year may have less of a reason to invest in those items: 13.1 percent say they will buy mom a consumer electronic item and will spend a total of $1.7 billion, down from $2.3 billion last year.

"Americans haven't forgotten about the state of the economy and are treating their finances and gift-giving budgets in a way that keeps practicality top of mind," said Prosper's Consumer Insights Director Pam Goodfellow.  "But like we saw with Valentine's Day and Easter, people this year will look for special ways to treat mom to something nice without breaking the bank, knowing it's the thought that counts."

Most shoppers will head to specialty stores to find gifts (33.5%), but others will shop at department stores (32.4%), discount stores (24%), and online (29%).

The survey found 18-24 year olds are the most likely to shop at department stores among all other age groups; more than half (51.6%) will visit a department store in search of their perfect gift for mom.  But it's 25-34 year olds who will spend the most on mom, spending an average of $216.53.

Nearly two-thirds (63.9%) of those surveyed say they will shop for their mother or stepmother, while 22.5 percent will shop for their wife, 9.2 percent will shop for their daughter and 6.6 percent will shop for their grandmother.

Source: National Retail Federation