In The Headlines

A Not so Happy Holiday Selling Season for Most Retailers?

Despite several early reads that the season came in better than expected, most of the department stores and specialty chains that have announced their results said sales at their established stores continued to slide in November and December. The latest victim of the trend was J.C. Penney, which reported a drop in comparable store sales of 0.8% percent during the final two months of 2016. While that dip was less severe than the declines at competitors Kohl’s and Macy’s, it was well shy of Wall Street’s expectation for 3% growth. The widespread deterioration from last year’s dismal results underscored the challenges facing legacy retailers, who are closing stores and cutting jobs in a bid to boost their productivity. That includes Macy’s, which is cutting more than 10,000 workers as it shutters 68 locations.

Department stores have been hard hit by changing customer habits. Increasingly, data shows that people are electing to shop online at stores such as Amazon rather than at brick-and-mortar stores. Shoppers are also spending more on experiences such as dining out and traveling, and on big-ticket items such as homes, rather than on apparel, which has traditionally been a key sales driver for department stores.

“The magnitude of how bad things actually were was the big negative surprise,” Wells Fargo analyst Ike Boruchow wrote in a note to investors, dubbing the season ‘The Nightmare Before Christmas.’ Of the 11 companies that had so far reported holiday sales, eight posted negative results, Boruchow said. Only PVH, The Children’s Place, and Gap were outliers (though Gap’s results came off a very weak base).
The soft results stand at odds with several spending and consumer reports that have trickled out over the past few days. Mastercard SpendingPulse said holiday sales topped expectations and grew 4%. Meanwhile, a group of more than 1,000 consumers told the International Council of Shopping Centers that they spent 16% more this holiday than last season and 4% more than they originally planned.

Yet the discrepancy is not entirely unexpected. Even as analysts said department stores had an opportunity to improve their margins over last year, they acknowledged that those retailers who were forced to rely on promotions would be the season’s laggards. Despite pared back inventory levels and chillier weather, Kohl’s said the “competitive promotional environment” ate into its gross margin more than originally anticipated.

“The retailers that are stuck in the middle really did not do well, and the majority of their growth was fueled by promotions,” Steve Barr, PwC’s US Retail and Consumer Sector leader, said about the broader industry last week. On the flip side, analysts remain optimistic on those retailers that have done a better job addressing consumer tastes. They include Ulta beauty stores; off-price chains like T.J.Maxx and Ross; and active wear brands including Lululemon and Adidas.

Another expected winner is Amazon.com, which grabbed more than one-third of online spending this holiday season, according to Slice Intelligence. Amazon.com said it had its “best ever” holiday season, shipping more than 1 billion items worldwide. Separate data from ComScore shows that desktop spending rose 12% this season. Once mobile is factored in, the analytics firm expects that overall e-commerce sales will show a 16% to 19% jump. The Commerce Department will release December 2016 sales late next week. The National Retail Federation will release its final results shortly after. The trade group is calling for sales to increase 3.6%. But for many retailers, there may not be much to celebrate.

Citations

1. http://cnb.cx/2iLnkCP – CNBC
2. http://reut.rs/2i2RwFf – Reuters

Japanese Workers Say a Nervous Hello to Cognitive Computing

The year of artificial intelligence (AI) has well and truly begun, it seems. An insurance company in Japan, Fukoku Mutual Life, announced that it will lay off more than 30 employees and replace them with an artificial intelligence system.

The system is based on IBM’s Watson Explorer, which, according to the tech firm, possesses “cognitive technology that can think like a human,” enabling it to “analyze and interpret all of your data, including unstructured text, images, audio and video.” The technology will be able to read tens of thousands of medical certificates and factor in the length of hospital stays, medical histories, and any surgical procedures before calculating payouts, according to the Mainichi Shimbun.

The company said it hopes the AI will be 30% more productive and aims to see investment costs recouped within two years. Fukoku Mutual Life said it expects the $1.73 million smart system—which costs around $129,000 each year to maintain—to save the company about $1.21 million each year. The 34 staff members will officially be replaced in March.

While the use of AI will drastically reduce the time needed to calculate Fukoku Mutual’s payouts–which reportedly totaled 132,000 during the current financial year–the payments will not be made until they have been approved by a member of staff, the newspaper said.
Japan’s aging population, coupled with its prowess in robot technology, makes it a prime testing ground for AI. According to a 2015 report by the Nomura Research Institute, nearly half of all jobs in Japan could be performed by robots by 2035. Dai-Ichi Life Insurance has already introduced a Watson-based system to assess payments and Japan Post Insurance is interested in introducing a similar setup, the Mainichi said.

AI could also soon be playing a role in the country’s politics. Next month, the Economy, Trade, and Industry Ministry will introduce AI on a trial basis to help civil servants draft answers for ministers during cabinet meetings and parliamentary sessions. The ministry hopes AI will help reduce the punishingly long hours bureaucrats spend preparing written answers for ministers. For example, if a question is asked about energy-saving policies, the AI system will provide civil servants with the relevant data and a list of pertinent debating points based on past answers to similar questions. If the experiment is a success, it could be adopted by other government agencies, according the Jiji news agency.

As AI technology continues to evolve, jobs involving simple mental tasks are increasingly likely to be taken over by computers, leading AI researcher Andrew Ng recently said. A future in which white collar workers are increasingly replaced by cognitive computing technology may soon become a reality.

Citations

1. http://bit.ly/2iH8smN – The Guardian
2. http://for.tn/2iOiTHp – Fortune

The Good News Is . . .

• The ISM manufacturing composite index hit 54.7 in December, up a sharp 1.5 points from November for its best reading in 2 years. New orders were the highlight component of the report, at 60.2, for another 2-year high and up 7.2 points which is the sharpest monthly jump during that period. Production was up 4.3 points to 60.3, employment up 0.8 to 53.1, and export orders rose to 56.0 which was a 2 ½ year high.

• Constellation Brands Inc., a leading international producer and marketer of beer, wine, and spirits, reported earnings of $1.96 per share, an increase of 14.0% over year-earlier earnings of $1.72 per share. The firm’s earnings topped the consensus estimate of analysts by $0.24. The company reported revenues of $1.81 billion, an increase of 10.0%. Management attributed the results to increased market share in its beer business.

• Euronext said that it has offered to buy the French arm of the London Stock Exchange Group’s majority-owned clearing business, LCH S.A., as the British company looks to win regulatory approval for a merger with Deutsche Börse. The London Stock Exchange and Deutsche Börse agreed in March to a merger, which would create Europe’s largest stock market operator by far, combining exchanges in Britain, Germany and Italy. Euronext said that it had made an irrevocable all-cash offer of $535 million for all of LCH S.A.

Citations

1. http://bloom.bg/2eVhfSb – Bloomberg
2. http://cnb.cx/1gct3xa – CNBC
3. http://bit.ly/2j3cIwI – Constellation Brands Inc.
4. http://nyti.ms/2i4NKi8 – NY Times Dealbook

Planning Tips

Guide to Understanding Dividends

Investing in dividend-paying stocks can be a good way to build long-term wealth and also to provide retirement income. Below is a brief guide to dividends how they work, and some of their advantages and disadvantages. Be sure to consult with your financial advisor to determine if dividends are appropriate for your investment strategy and goals.

How dividends work – Before determining whether dividends are the best option for retirement savings, it is important to understand how dividends work. When an investor purchases a stock, he or she becomes a proportional owner of the company based on how many shares of stock are purchased. Dividends are typically paid in cash on a quarterly basis and must be owned by the ex-dividend date in order to receive the declared dividend. Shareholders who own preferred stocks receive fixed-rate dividends, while common stock shareholders receive variable-rate payouts.

Advantages of dividends – Most investors are concerned with poor investment performance, loss of principal and the constant threat of high inflation. Dividends can provide a hedge against these risks while saving for retirement. According to Bloomberg, more than 40% of large capitalization stock returns since 1931 have consisted of dividends, creating a positive argument for the use of dividend-paying stocks within an investor’s long-term portfolio.

• • Hedge against volatility – Although equity investments are attractive to investors for the potential of higher returns, volatility within the  market can be a cause for concern for investors saving for retirement. Focusing solely on capital appreciation through equity investment       may not provide the consistency investors need in order to achieve retirement savings goals. Adding dividend-paying stocks in an allocation   can help mitigate loss in equity positions.
  • Hedge against inflation – Investors can use dividends to hedge against rising inflation for the long term. Although rates have been relatively low recently, inflation still has a corrosive effect on investment returns. Investors who hold positions in dividend-paying stocks may be better able to navigate higher inflation rates while saving for retirement.

Disadvantages of dividends – Although there are reasons why investors may want to supplement capital appreciation in equity positions with seemingly steady dividend payments, there are caveats to consider.

• • No guarantees – Dividends are not guaranteed; reliance on consistent payouts could skew savings projections in the wrong direction. Should companies decide to not declare dividends, investors could fall short of their savings goals.
  • Dividends are taxable – Dividends are taxed at a qualified dividends tax rate which depends on the income bracket that the investor falls into, while the gains associated with the sale of appreciated stock are taxed at the lower capital gains rate. Paying higher taxes can have a detrimental effect when the time comes to take income in retirement.

Dividend rate and dividend yield – The dividend, or dividend rate, is the total income an investor receives from a stock or other dividend-yielding asset during the fiscal year. Dividend rates are expressed as an actual dollar amount; for example, Company Y paid out an annual dividend rate of $5. When this dollar amount is quoted in terms of dollar amount per share, it may also be referred to as dividend per share. Stock dividends are often quoted instead, using another figure: dividend yield. The yield is calculated by taking the total annual dividends and dividing that figure by the current share price. Dividend yield is expressed as a percentage rather than a dollar amount. You are more likely to see dividend yield quoted than dividend rate. The initial reason for this makes sense when a company that pays out dividends at a higher percentage of its share price is offering a greater return for its shareholders’ investments. However, dividend yields can vary wildly, so the calculated yield may actually have little bearing on what the future rate of return will be. Additionally, dividend yields are inversely related with share price; a rise in yield may be a bad thing if it only occurs because the company’s stock price is plummeting.
Cash dividends and stock dividends – A cash dividend is a payment made by a company out of its earnings to investors in the form of cash (check or electronic transfer). This transfers economic value from the company to the shareholders instead of the company using the money for operations. However, this does typically cause the company’s share price to drop by roughly the same amount as the dividend. A stock dividend, on the other hand, is an increase in the amount of shares of a company with the new shares being given to shareholders. The benefit of a stock dividend is choice. The shareholder can choose to keep the shares and hope that the company will be able to use the money that is not paid out in a cash dividend to earn a better rate of return, or the shareholder can sell some of the new shares to create his or her own cash dividend. The biggest benefit of a stock dividend is that shareholders do not generally have to pay taxes on the value. Taxes do need to be paid, however, if a stock dividend has a cash-dividend option.
Citations
1. http://bit.ly/2i2LBjL – Dividend.com
2. http://bit.ly/2iUuogD – The Balance.com
3. http://bit.ly/2j374ea – Investopedia
4. http://bit.ly/2iOpUI8 – Motley Fool
5. http://bit.ly/2joe8Fi – InvestingAnswers.com