Author: Helen Thomas

November 4, 2014

Tailwinds from specialty pharmacy and increased generic utilization lifted CVS Health up on Tuesday, as the company posted net revenues of $35 billion, representing an increase of 9.7% for the three months ended September 30.

“I’m very pleased with our strong results in the third quarter, which reflect better than expected revenue growth across the enterprise and expanding retail gross margins,” said Larry Merlo, CVS Health president and CEO.  “The 2015 PBM selling season continued to be highly successful with a significant number of new business wins across all lines of business.  We also continued to deliver substantial free cash flow, enabling us to return more than $3.7 billion to our shareholders year to date.  We are well on track to return more than $5 billion to our shareholders through dividends and share repurchases for the full year 2014.

Revenues in the Retail Pharmacy Segment increased 3.1%, or $501 million, to $16.7 billion in the period.  Same-store sales increased 2% versus the third quarter of last year, with pharmacy same store sales up 4.8% and front-end same-store sales down 4.5%.  Front store same store sales would have been approximately 480 basis points higher if tobacco and the estimated associated basket sales were excluded from the period.  Front store same store sales were negatively impacted by approximately 190 basis points from recent generic drug introductions and by approximately 190 basis points from the implementation of Specialty Connect.  Specialty Connect transitioned all specialty prescriptions to the Pharmacy Services Segment, as they are being processed through the Company’s specialty mail order pharmacies.  The implementation of Specialty Connect had a greater effect on revenues than prescription volumes due to the higher dollar value of specialty products.

For the three months ended September 30, the generic dispensing rate increased approximately 180 basis points in both the Pharmacy Services segment and Retail Pharmacy segment, to 82.5% and 83.3%, respectively, compared to the prior year.

Revenues in the Pharmacy Services segment increased 15.7% – or $3.1 billion – to $22.5 billion.  The increase was driven by growth in specialty pharmacy including the acquisition of Coram and the impact of Specialty Connect, as well as increased volume in pharmacy network claims.  Pharmacy network claims processed during the period increased 4.3% to 209.6 million compared to 200.9 million in the prior year.  The increase in the pharmacy network claim volume was primarily due to net new business and growth in Managed Medicaid, partially offset by a decrease in Medicare Part D claims.  Mail choice claims processed during the period decreased 1.3% to 20.7 million, compared to 21 million in the prior year.  The decrease in mail choice claims was driven by a decline in traditional mail volumes, which was partially offset by growth in CVS Health’s Maintenance Choice program.

The company narrowed its earnings guidance range for the full year 2014.  CVS Health now expects to deliver Adjusted EPS of $4.47 to $4.50, from $4.43 to $4.51, excluding the $0.27 per share loss on early extinguishment of debt.  GAAP diluted EPS from continuing operations is expected to be $3.93 to $3.96, including the loss on the early extinguishment of debt.  The company raised its 2014 free cash flow guidance range to $5.7 billion to $6 billion, from $5.5 billion to $5.8 billion, and raised the 2014 cash flow from operations range to $7.4 billion to $7.7 billion, from $7.2 billion to $7.5 billion.  The company expects to deliver Adjusted EPS of $1.18 to $1.21 and GAAP diluted EPS from continuing operations of $1.12 to $1.15 in the fourth quarter.

During the three months ended September 30, CVS Health opened 45 new and acquired 33 retail drugstores, and closed four retail drugstores.  In addition, the company relocated 13 retail drugstores.  As of September 30, the company operated 7,935 locations in 47 states, the District of Columbia, Puerto Rico and Brazil.  These locations included 7,779 retail drugstores, 936 health care clinics, 17 onsite pharmacies, 26 retail specialty pharmacy stores, 11 specialty mail order pharmacies, four mail service dispensing pharmacies, and 84 branches and six centers of excellence for infusion and enteral services.

Source: Retaililng Today 

November 4, 2014

Sales continued to decline at Office Depot in the third quarter, but CEO Roland Smith said excellent execution allowed operating profits to more than double.

Total company sales on a pro-forma basis to reflect the merger of Office Depot and Office Max declined 3% to $4.1 billion during the period ended September 27.  The top line decline was steeper at the company’s 1,851 unit North American retail division where sales declined 7% to $1.7 billion due to store closures and a 3% same store sales decline driven by a reduced transaction volume.

Smith said challenging market trends and store closures would continue to negatively affect sales in the fourth quarter, but the executive noted merger related synergies are allowing the company to exceed profitability expectations.

“Our third quarter results reflect excellence in execution against our critical priorities and merger integration objectives, and we are very pleased to have more than doubled our adjusted operating income from last year’s combined pro forma results,” Smith said.  “We continue to make significant progress on merger integration and have exceeded our synergy targets for the quarter.  Accordingly, we are raising our 2014 outlook for adjusted operating income to a range of $255 million to $265 million, which is more than 150% higher than pro forma 2013.  Looking ahead, our preliminary estimate for 2015 adjusted operating income is approximately $475 million, which is an 80% increase from our 2014 outlook.”

Source: Retailing Today

November 4, 2014

U.S. households plan to spend an average of $538 on gifts this holiday season, up slightly from $528 last year, The Conference Board reports today.  About 8 percent of consumers say they plan to spend more this year on holiday gifts, while approximately 32 percent plan to spend less.  The remaining 60 percent plan to spend the same as last year.

“The recent improvements in consumer confidence – along with robust job growth and declines in gas prices – have consumers approaching the holiday season in better spirits than last year,” said Lynn Franco, Director of Economic Indicators at The Conference Board.  “However, despite the improved holiday cheer, consumers will once again seek out bargains and incentives when making their purchases.”

About one in three holiday shoppers say they expect over half of their purchases to be on sale or discounted.  An increasing number of consumers will be clicking and shipping.  Nearly seven out of ten expect to purchase at least some of their holiday gifts online, while about one out of four say more than half of their gifts will be purchased online.

Source: The Conference Board

October 31, 2014

A growing economy, rising household formations, low mortgage rates and pent-up demand will help single-family housing production to rev up in 2015, while a growth in renters will keep the multifamily market at cruising altitude or higher, according to economists who participated in yesterday’s National Association of Home Builders (NAHB) 2014 Fall Construction Forecast Webinar.

“Single-family builders are feeling good.  They are not overly confident, but confident enough to keep moving forward,” said NAHB Chief Economist David Crowe.

He added that the single-family sector will finish out the year much stronger than it began and set the stage for a robust 2015.

“This is mostly due to a significant pent-up demand and steady job and economic growth that will allow trade-up buyers who have delayed home purchases due to job insecurity to enter the marketplace,” said Crowe.

A Bright Outlook

NAHB is forecasting 991,000 total housing starts in 2014, up 6.6 percent from 930,000 units last year.

Single-family production is expected to rise 2.5 percent this year to 637,000 units, increase an additional 26 percent next year to 802,000 and reach 1.1 million in 2016.

Multifamily starts, which Crowe said are now at a normal level of production, are projected to increase 15 percent in 2014 to 356,000 units and hold steady next year.

Meanwhile, the NAHB Remodeling Market Index, which averages ratings of current remodeling activity with indicators of future activity, matched its all-time high of 57 in the third quarter of 2014 and has been above 50 for six consecutive quarters.  A reading above 50 indicates that more remodelers report market activity is higher (compared to the prior quarter) than report it is lower.

NAHB is forecasting that residential remodeling will post a 3.4 percent decline in 2014 over last year, due in large part to slow activity in the first quarter caused by an unusual harsh winter throughout much of the nation.  Residential remodeling activity is expected to rise 2.7 percent in 2015 and an additional 1.3 percent in 2016.

Housing Will Soon Be Undersupplied

Taking an even more bullish outlook, Mark Zandi, chief economist at Moody’s Analytics, said that prospects are good for continued gains in overall economic and housing activity.

“The reason is that job growth is quite strong,” said Zandi.  “Currently, we are creating about 225,000 jobs per month, or 2.75 million per year.  That is double the pace necessary to reduce unemployment and under employment, which augers very, very well for housing demand and the housing market more broadly.”

With the current supply of housing running just over 1 million units on an annualized basis, Zandi said that this figure is well below what is needed for the longer run.

In the aftermath of the Great Recession, new household formations were depressed as the number of Millennials living with their parents or doubling or tripling up in apartments soared to about 3 to 4 million above normal, according to Zandi.  As the economy continues to improve and these 18-to-34 year-olds begin to form their own households, this will boost overall demand for new housing construction.

“In a normal year, there should be demand for 1.7 million units,” he said, adding that each single-family home generates about 3.5 jobs over the course of a year and every multifamily unit produces 1.5 jobs over the same period.

Taking this one step further, Zandi said that increasing the housing stock by 700,000 units to meet this unmet demand would create 2.1 million jobs, which “would reduce unemployment by 1.5 percentage points.”

By the end of 2017, Zandi expects mortgage rates to rise from their current rate of about 4 percent back to their “equilibrium” of 6 percent, which he noted would be very consistent with a solid job market and solid housing market.

“The housing market will be fine because of better employment, higher wages and solid economic growth, which will trump the effect of higher mortgage rates,” he said.

He added that single-family starts could be closing in on 1 million units by the end of 2015 and multifamily production could go as high as 500,000 units.

Housing and Jobs Go Hand-in-Hand

Delving beneath the national numbers, Robert Denk, NAHB’s assistant vice president for forecasting and analysis, noted the housing recovery will vary by state and region.

“We are getting back to the point where economic conditions are dictating the strength of local housing markets,” said Denk.  “It is very clear that those states with higher levels of payroll employment or labor market recovery are associated with healthier housing markets.”

Energy-producing states – North Dakota, Texas, Louisiana, Montana and Wyoming – where job growth is strong are also at the forefront of the housing recovery while Iowa and other farm belt states supported by agricultural commodities are also running above the nationwide average.

Meanwhile, states such as Nevada, Arizona, New Mexico, Alabama, Rhode Island and New Jersey that are coping with weak labor markets are also struggling to get their housing activity back on track.

Housing nationwide bottomed out at an average of 27 percent of normal production in early 2009 and the gradual and steady housing recovery now underway across the land will bring nationwide single-family housing starts to 68 percent of normal by the fourth quarter of 2015 and 90 percent of normal by the end of 2016.

In another way of looking at the long road back to normal, by the end of 2016 the top 40 percent of states will be back to normal production levels, compared to the bottom 20 percent, which will still be below 75 percent.

Source:  National Association of Home Builders

October 31, 2014

Dollar General has extended the deadline for Family Dollar shareholders to approve a buyout while it continues to recommend a “no” vote on a competing proposal from Dollar Tree.

Dollar General said it extended its tender offer to acquire all outstanding shares of Family Dollar for $80.00 to December 31 from October 31.  Meanwhile, Family Dollar is scheduled to hold a special meeting on December 11 to vote on a merger with Dollar Tree that offers less generous compensation than Dollar General’s bid, but is viewed as offering shareholders a higher degree of certainty concerning regulatory approval.  Dollar General has disputed that assertion and both it and Family Dollar have presented their respective experts to offer opinions on the merits of a Dollar General versus Dollar Tree acquisition.

Dollar General wants Family Dollar shareholders to vote against the Dollar Tree merger to send a clear message to the Family Dollar board to engage in discussions with Dollar General.  The company said a vote against the merger agreement with Dollar Tree would not obligate Family Dollar shareholders to tender their shares in the Dollar General tender offer.

Dollar General said it remains committed to the proposed acquisition of Family Dollar and will continue to cooperate with the Federal Trade Commission to obtain antitrust regulatory clearance for the transaction.

Source: Retailing Today

October 24, 2014

Temperatures are forecast to trend warmer than last year and normal across the Northern Plains and Northeast.  The South will be warmer than last year, but not too far from normal.  The West will trend cooler than last year with much greater precipitation in the Pacific Northwest.  In fact, much of the nation will trend wetter than last year.  Milder weather across the North may require more aggressive markdowns than planned earlier in the month, but increased rainfall will help to keep it from feeling too mild.  Black Friday weekend looks milder in the East with rain in the Central states.  Although, for the most part, the North will trend warmer, increased mositure means an increased risk of snow, especially in the West.  The heaviest snow will be across the interior Northeast, Minnesota and the Rockies.  Wetter trends in the West will help to get consumers in a winter mindset.  The lack of real cold weather will be especially noticeable for hardline categories, like heaters and auto batteries.

Source: Retailing Today, Weather Trends International

October 30, 2014

Retailers are in for a “humbling holiday” with a 3.4% overall increase in sales and a deceleration in e-commerce growth, according to a new forecast from retail industry consulting and research firm Customer Growth Partners.

In the 14th annual holiday forecast, the 3.4% increase in sales is well below projections of others, most notably the National Retail Federation, which has holiday sales advancing 4.1%.  E-commerce/direct-to-consumer sales will continue to decelerate, after two decades of robust double-digit growth, to just under 7% for holiday 2014.  Craig Johnson, president, said his pessimism is due to a difference of opinion over the biggest drivers of sales.

“Contrary to much conventional wisdom the single best predictor of retail sales is neither gasoline prices, the unemployment rate or consumer confidence, but growth in disposable income,” Johnson said.  “And the fact is that real median incomes have flatlined, if not declined, for many years now.”

If the 3.4% growth rate proves accurate, Johnson said it will be the third straight year of dismal retail spending following a 5% pace of growth in 2010 and 2011.  Overall retail sales for the November through December holiday period will reach $590 billion.  While that is a new record, the anemic 3.4% growth rate only marginally exceeds 2013’s 2.9% pace, and reflects declining median incomes for all but the top 10% of households, according to Johnson.

In addition to the impact of lagging income growth on spending, Johnson believes the declining share of the population with full-time jobs will also have an impact.  Only 48% of the working age population now holds a full-time job, the lowest in decades, and down from 54% as recently as 2006, according to Johnson.

“The shift to a ‘part-time economy’ has caused spending to rotate from discretionary goods to non-discretionary goods.  Consumers with full-time jobs spend against both needs and wants, but those with part-time jobs spend only against needs.”

Another headwind this year relates to a sharp price increase for food which accounts for some 15% of spending for moderate and lower income households.  Food price increases far outweigh this fall’s savings on gasoline costs, which comprises barely 4% of household budgets, according to Johnson.

Lastly, recurring monthly obligations, from cellphone and cable bills to record-high student loans are commanding a growing portion of disposable income, curbing potential gift giving.

Among merchandise categories, health and personal care stores will outpace other sectors with strong 6.3% growth while apparel sales will lag the already sluggish overall growth pace, with growth of only 2.4%.  Department stores will struggle again this year, both with the weak apparel sales and softening demand for the once white-hot handbag category, and will see essentially zero growth while consumer electronics will rebound strongly, with growth exceeding 4%, according to Johnson’s forecast.

“Holiday shoppers in 2014 remain very cautious in their spending, and will be relentless in seeking out value,” Johnson said.  “But retailers dependent on healthy discretionary spending will find this another challenging holiday, particularly those who placed holiday orders last May, when sales were still healthy.  Holiday 2014 will be a marginal improvement from last year, but until real income growth resumes, Santa will be hard-pressed to fill the Christmas stockings for either consumers or retailers.”

Source: Retailing Today 

October 30, 2014

The iconic suburban, single-family American home isn’t going anywhere – and neither are their Baby Boomer owners.  Contrary to common perception, the post World War II generation will not be trading home ownership for renting, suburbs for cities, or yards and gardens for more maintenance-free living.  Rather, most Boomers will age-in-place, while Boomer movers will account for nearly one in every four dollars spent on housing in the next five years.

The report, Baby Boomers & Their Homes: On Their Own Terms – released today by The Demand Institute, a non-advocacy, non-profit think tank jointly operated by The Conference Board and Nielsen – doesn’t expect this generation to “stick to the script” when it comes to retirement and housing decisions.  The research, which surveyed more than 4,000 Boomer households (ages 50-69), reveals that few have intentions of downsizing or moving to warmer climates far from their families.

“During the financial crisis, Baby Boomers saw their wealth drop dramatically.  While many have been forced to adapt their retirement and housing plans to new financial realities, they haven’t abandoned those plans entirely,” said Louise Keely, President of The Demand Institute.  “For the most part, they are still retiring in their mid-sixties and staying in their homes.  They value strong family relationships; they want to be near their children and grandchildren.  Additionally, many Boomers maintain plans to upsize their homes.”

The next decade will see many Boomers taking on home remodeling projects, as they seek to update and increase the value of their homes.  Nearly 40 percent plan for major home improvements in the next three years.  Yet, according to the report, most continue to prioritize style over the amenities necessary for aging, such as lower maintenance and accessibility features.  Those who do move are not interested in exclusive elder communities, and if they are, they will stay close to their current homes.

“Thanks to a host of factors – not the least of which is the Great Recession – Boomers’ nest eggs have shrunk dramatically in recent years,” said Jeremy Burbank, Vice President at The Demand Institute.  “Financially, this generation is not necessarily ready for retirement, and half of their assets are tied up in their homes.  Despite all of this, many Boomers will look to finance their housing aspirations.  Their choices will have real impact on the housing sector in the next several years.”

According to the report, Baby Boomers are carrying much more mortgage debt than earlier generations at this life stage.  Even so, most Boomers who will purchase homes plan to use mortgage financing to do so, and in contrast to Millennials, the majority is confident in their ability to qualify for financing.

Source: The Conference Board

October 29, 2014

The all-important holiday shopping season is upon us.  NRF’s 2014 holiday forecast calls for a retail sales increase of 4.1 percent to a total of $616.9 billion.  “Holiday sales” are defined as those happening from November 1 through December 31.

Overall, we expect holiday spending to reflect recent economic momentum.  The economy is expanding and there doesn’t appear to be any distinct shift away from the moderate pace of growth.  Growth is expected to continue to be slow and steady following the unusually high degree of volatility we saw in the first half of the year.

Economic growth for the balance of 2014 is forecast to be in the range of 3 percent over the same time last year.  Employment, income and consumer confidence are all improving.

Employment

Labor market indicators point to continued growth.  There have been gains of 200,000 or more jobs every month, except two this year.  Since the end of 2013, more than 2 million jobs have been created.  The unemployment rate – a key psychological indicator for the public – stood at 5.9 percent in September, down more than a full percentage point since the same time in 2013, and at its lowest level since July 2008.  Jobless claims have been below 300,000 for more than a month, which is rare in historical terms.

Income

With more jobs on the books, there is more aggregate income for more spending.  For August and the two prior months, personal income grew 4.1 percent compared with 2013.  As the season nears, we will be keeping a close eye on disposable income to gauge economic activity.

Consumer Confidence

Consumer confidence has reached post-recession highs over the past year.  The University of Michigan Consumer Confidence Index, for example, increased 1.8 points in October to 86.4, its best reading in more than seven years.

Nonetheless, confidence continues to be erratic and difficult to interpret.  With gas prices and unemployment low and smaller debt burdens, consumers should feel a bit better about their circumstances but they remain cautious.  Their mood may still be impacted by the lingering effects of the Great Recession.

Yet there is a lot of psychology at work, including volatile financial markets, European weakness, a slowdown in China, rising Middle East tensions and now Ebola.  All could still send a chill into consumer confidence, much like last year’s ploar vortex.

Consumer Credit

Credit conditions are improving.  Consumers continue to choose and use credit very strategically.  Revolving credit, though uneven over the past year, has risen recently.  If employment and consumer confidence continue to improve as we expect, revolving credit may continue its healthy pace and help spur retail spending.

Consumers should benefit from easing price pressures.  Summer weather was quite mild this year and gasoline prices have recently dropped, leaving households to spend less on air conditioning and gas, freeing up more disposable income.

Additional Factors

As we observed last year, holiday retail sales can be severely impacted by any transitory factor from higher personal taxes and the debt ceiling debacle to a federal government shutdown and severe winter weather.

This year, it’s too soon to predict the weather but at least Congress has kept the government open and there is no immediate talk of tax increases (at least not federally).

And The Forecast Is…

We look at employment, income, consumer confidence and consumer credit, incorporate a few wild cards such as gas prices, the whims of Congress and the outbreak of epidemics, then come up with an educated and informed figure.  It’s part science, part art.

In the grand scheme of things, consumers appear to be in a much better position this year than last, with a bit more confidence and spending power.  These factors should translate into a solid holiday sales season for retailers and merchants alike.  Nevertheless, shoppers will remain cautious and stick to their budgets this year – just in case we’re wrong.

Source: National Retail Federation 

October 29, 2014

Weaker than expected third quarter sales prompted Kohl’s to lower its profit forecast while noting that e-commerce sales increased 30%.

The company held an investor conference on October 29 and said third quarter sales were expected to decline 1.4% due to softer than expected sales during October.  The top line weakness caused the company to confirm that profits would be at the lower end of a previously forecast range of $4.05 to $4.45 a share.

While the overall forecast for the third quarter is for a decline, the company expects the children’s category to report comparable sales increases for the quarter.  Accessories, footwear and men’s are expected to report lower sales, but to outperform the company average.  Meanwhile, home and women’s are expected to underperform the company average.

Kohl’s currently operates 1,163 stores in 49 states.

Source: Retailing Today