Transcript: Tuesday, August 12, 2014

NBR ThumANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Susie Gharib.

SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Retail read. Wal-Mart (NYSE:WMT), Macy`s, JCPenney and Kohl`s — what to expect when their earnings are released this week?

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: A few dings. Why a Wall Street darling may have a little tarnish on the gold seal of approval.

GHARIB: And healthy diagnosis. Is the health care system ready for ageing baby boomers? The second part of our “Aging in America” series tonight on NIGHTLY BUSINESS REPORT for Tuesday, August 12th.

MATHISEN: Good evening, everyone. And welcome.

We begin tonight with more signs that America`s economy, while not humming for everybody in all regions and income levels, is nonetheless on better footing than it`s been in years.

Just today, we learned July`s federal budget deficit was down to $95 billion and 10 months into the current fiscal year, Uncle Sam`s yearly budget shortfall hasn`t been this low since 2008.

On the job`s front, the Labor Department says more people are quitting their jobs. That`s actually a positive since it means they either have or are confident they can get a new one.

The Federal Reserve says the home mortgage market improved last quarter, with banks easing up on lending standards for borrowers with good credit.

And to top it all off, the National Federation of Independent Business reports that small business owner optimism ticked higher in July, a good sign as we push through the third quarter.

GHARIB: This week, we`ll see if American consumers can keep the optimism on the upswing, as some of the nation`s biggest retail chains post second quarter earnings. Analysts are hoping for a big turnaround from a disastrous start with wicked winter weather keeping shoppers at home.

So, will this quarter be better, and which retailers will stand out?

(BEGIN VIDEOTAPE)

GHARIB (voice-over): The retail earnings story is a tale of two retails: high end and low end. Macy`s, which also owns the Bloomingdale`s stores, is one of those higher end success stories. When it reports quarterly numbers tomorrow, analysts are looking for sales growth of 2.5 percent.

Oliver Chen at Citi likes the stock, even though it lagged the S&P500 retail index this year, because he thinks demand for Macy`s products is relatively consistent.

OLIVER CHEN, CITI: I would say that I like cash flow. Cash flow is always fashionable. We`re recommending limited brand Macy`s. That`s a name to think about with less fashion risks.

GHARIB: Another higher-end fashion retailer, Nordstrom (NYSE:JWN), is due to report on Thursday. Nordstrom (NYSE:JWN)`s seven-and-a-half percent first quarter growth was an upside surprise, though management has been careful with its full year guidance.

Caution is the common theme for lower end retailers like Kohl`s, JCPenney and Wal-Mart (NYSE:WMT), all reporting on Thursday.

Wal-Mart (NYSE:WMT)`s U.S. same store sales dropped last quarter for the first time in almost three years. This time around, analysts aren`t looking for much in the way of growth, less than 1 percent for U.S. stores and just above 1 percent overall.

Earlier this year, Kohl`s looked set to get a bump from the struggles at JCPenney, but it showed no such gain in the first quarter.

Stock watchers will also be looking for any hints on how back-to-school season is going for retailers.

Thom Blischok who keeps an eye on consumers says mall traffic has been up and shopping baskets a little bit fuller than they have been in the recent past.

THOM BLISCHOK, RETAIL ANALYST: The consumers are a bit hardened as to what they select, what they buy, where they buy, how they buy, and the tradeoffs today are much more significant from the tradeoffs we saw five, six, eight years ago.

GHARIB: Blischok also says the rest of the year is going to be extremely competitive for retailers, which means more discounts and promotions for consumers, but less profits for retailers.

(END VIDEOTAPE)

MATHISEN: So, should some of the retail stocks we just mentioned be in your portfolio?

Let`s ask Liz Dunn. She`s a senior retail analyst with Macquarie Securities.

Liz, welcome. Good to have you with us.

Susie mentioned some of the companies that are out with earnings on Thursday. Macy`s, Penny`s, Nordstrom (NYSE:JWN), Kohl`s, and Wal-Mart (NYSE:WMT). Do you agree with the thesis that among those stocks, the ones that`s skewed to the higher end are ones that you would favor with your investment dollars?

LIZ DUNN, MACQUARIE SECURITIES: Absolutely. I think that the low and middle income consumer is really struggling. There hasn`t been job growth or wage growth that we`ve wanted to see and certainly, it`s been worse for that group of consumer.

I think the high-end consumer is actually doing OK. And there is a tremendous interest of branded goods that you`d find at a Macy`s or at a Nordstrom (NYSE:JWN).

GHARIB: So, Liz, if an investor has, let`s say, $10,000 and they want to put new money into some retail stocks, what would be the one stock that you would say is a definite plus and that it`s going to go up near term?

DUNN: Well, I`m an analyst, so I`m hesitant to say anything definite. But if I had $10,000 to invest, I`d invest in Macy`s. I think it`s — they are a gaining share, they got the right merchandise, they`ve got very solid promotions, the consumer wants promotions right now, strong e-commerce and omni-channel strategy. They have tremendous expense discipline, strong free cash flow. They are buying back stock, paying a competitive dividend. I think it`s a great company and an attractive valuation.

MATHISEN: You`re neutral on Penny and under-perform on Kohl`s. Explain.

DUNN: Yes, Penny`s is in the midst of a turnaround. You know, they are expecting, I`m expecting to see solid comp store sales growth from Penny`s. That`s really on the back of last year`s disaster.

So, if you like at it on a multi-year basis, we`re still looking at sharp declines. But we should see some improvement, improvement in sales and improvement in growth margin. And so, I certainly don`t want to fight the trend on terms of my rating.

Kohl`s, on the other hand — well, first of all, they are seeing Penny`s take back market share but they`re also seeing market share losses to other channels of retail — the online channel, the mass channel, the off price channel. Kohl`s is kind of stuck in the middle and I think that their value proposition isn`t as strong as it has historically been.

GHARIB: The big elephant in the room is Wal-Mart (NYSE:WMT). I saw a headline today that said Wal-Mart (NYSE:WMT) is going to belly flop on its earnings when they come out on Thursday. I mean, what`s going wrong with Wal-Mart (NYSE:WMT)?

DUNN: Well, I don`t officially cover the company, so I can`t comment specifically on earnings. But I can say, they`ve been cautious — they sounded cautious on their consumers and the that low-end consumer that is Wal-Mart (NYSE:WMT)`s consumer is really having the hardest time in this recovery.

They are not seeing job growth. They are not seeing wage growth, and that`s a challenge. And then they are seeing cuts to entitlement programs that, you know, that Wal-Mart (NYSE:WMT) benefits from like programs like SNAP. And so, I think that consumer is challenged.

I also think Wal-Mart (NYSE:WMT) competes really head-to-head with some of the online retailers on price and there is a lot of price competition right now, and so Wal-Mart (NYSE:WMT) is challenged by, you know, players like Amazon (NASDAQ:AMZN) to really sharpen its pencil when it comes to pricing.

MATHISEN: All right. Liz, thank you very much. Liz Dunn with Macquarie Securities.

GHARIB: A real reversal of fortune for one retail stocks. Shares of high end designer Kate Spade spiked higher this morning after posting better-than-expected quarterly earnings, thanks to a strong sales of handbags and accessories. It even raised its full-year guidance.

But as you can see here, shares plummeted, closing down 25 percent after warning that gross margins for the year would fall as it faces increased competition.

MATHISEN: No steep drops in the major averages today. Just little ones, jitters about Russia`s next move in the Ukraine crisis basically had Wall Street investors on edge today a little bit. Dow ended the session nine points lower, NASDAQ was off 12 and S&P shed three.

Crude oil prices fell today, closing just above $97 a barrel, West Texas. That snapped a three-session winning streak and with good reason. The International Energy Agency cut its forecast for global oil demand while the U.S. Energy (NASDAQ:USEG) Information Administration said the U.S. produced the most energy in July in 30 years. Those factors turned and pressured energy stocks big time, especially oil and gas production names like Southwestern Energy (NYSE:SWN), Chesapeake, Anadarko, which were among the market`s worst performers today.

GHARIB: A mixed report card on the health of the U.S. economy from the S&P ratings agency. Its keeping its overall assessment of economic risks unchanged, but says some key risk factors for the economy have subsided. The S&P now projects that total U.S. credit losses could decline by as much as $45 billion this year and that home prices will continue to increase this year, as well.

MATHISEN: House price gains are slowing, the National Association of Realtors says prices grew 4.4 percent in the second quarter. That`s the slowest annual pace since 2012, while 122 out of 173 metro areas posted gains, only 19 markets saw double digit rises, that`s half as many as in the first quarter.

The total number of sales slackened, too. Slower price gains, of course, good news for buyers trying to break into the market. The most expensive market in the country, by the way, San Jose. Median price: $899,500.

GHARIB: Wow. You can buy a couple Teslas with that.

Still ahead, shares of Tesla closed at a record, but will a not-so glowing review of its Model S dent its reputation? That`s next.

(MUSIC)

GHARIB: Some good news for farmers. The U.S. Agriculture Department is now forecasting record-breaking harvest this autumn for corn and soybean crops. That put a lot of pressure on grain and soybean prices today. Soybean wheat futures fell more than 1 percent. Corn`s future rose a bit because even though a record yield is forecasted, the outlook is slightly below expectations.

MATHISEN: It was pressure on shares of Tesla today, but the electric car maker still managed to close in a fresh all-time high. That`s despite the fact that “Consumer Reports” magazine which gave Tesla`s S Model glowing reviews last year, now says it has found some minor problems with the car.

(BEGIN VIDEO CLIP)

JAKE FISHER, CONSUMER REPORTS: Whether or not the small problem or big problem, it`s an inconvenience, and you want to buy a car these days, you almost expect the car to be problem-free. And there are many cars you can buy that are like that. So, it`s going to be interesting with Tesla, as time goes on.

(END VIDEO CLIP)

MATHISEN: So how bad are the problems and should drivers and investors be concerned?

Phil LeBeau joins us now from Chicago with more on the knock on Tesla, including what the auto maker has to say.

Phil, that gentleman earlier today said he had one of these cars for about 15,000 miles. So, he`s had time to break it in or for it to break.

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, it`s not just him, Tyler. “Consumer Reports” bought a Model S with the specific idea of being, let`s drive it for a year, as anybody else would drive it, and let`s see what people think. And it was a number of members of “Consumer Reports” driving the Model S.

And the minor problems they encountered were things like the door handle, which is flushed with the frame of the vehicle. It`s supposed to come out when you approach the vehicle so you can open the car. Well, it wouldn`t come out a couple times. So, they had to call Tesla. Tesla then would do an over the air software updates, which then allowed them to open the vehicle. One time, the center console went blank, so they had no controls for the vehicle. They had to do a hard reset for the Model S.

Are these issues that stopped the people at “Consumer Reports” from driving the vehicle completely for days on end? No. And every time Tesla responded by fixing what was under warranty and getting the vehicle to operate as it should.

However, these are nagging issues that were brought to the forefront by “Consumer Reports” and it raises the question of, if I`m paying $90,000, Tyler, I want that vehicle to perform flawlessly and not have nagging issues.

So, that`s what the issue is going to be over the next couple months, as we see these reviews come in.

GHARIB: You know, Phil, exactly, you don`t want your car on the side of the road when you`re spending that kind of money. But are these real sign — I mean, are they just growing pains —

LEBEAU: I think so.

GHARIB: –or is it really something much more serious than that?

LEBEAU: No, I think it`s growing pains. You`re talking about a company that has increased production from basically, what, 22,000 last year. It will be over 35,000 this year. It will be, by the end of next year, over 100,000.

And as you ramp up production, you are going to have occasionally these problems that will pop up especially with a new vehicle. So, this is what we`re seeing, growing pains.

GHARIB: All right. Thanks a lot, Phil — Phil LeBeau reporting from Chicago.

Well, you can call this the IPO that wasn`t. After its stock had been trading for six sessions on the NASDAQ, an Israeli based biotech company called Vascular Biogenics it wasn`t issuing shares after all. That means all the investors who bought or sold stock in the company since it began trading, now have nothing to show for it. The company blames a key investor`s failure to follow through on a commitment to buy shares for the cancellation of the initial public stock offering.

MATHISEN: Schlumberger (NYSE:SLB), I just love saying that company`s name, says it is starting to feel the pain of U.S. and European Union sanctions on Russia, and that is where we begin tonight`s “Market Focus”.

The world`s largest oilfield services provider said third-quarter earnings could be lower by as much as 3 cents a share. That`s because penalties are restricting the engagement of people and equipment in its Russian operations, so says the company. That sent shares of Schlumberger (NYSE:SLB) down 1 percent to $107.87.

Boeing (NYSE:BA) has been selected with United Technologies (NYSE:UTX) Sikorsky unit to build prototypes of helicopters for the U.S. Army. The first flight of the chopper is expected in 2017. The value of the contract not disclosed. Boeing (NYSE:BA) shares down slightly, despite the news, to $120.47. Shares of UT also fell a fraction to $104.91.

The mortgage servicer, Ocwen Financial (NYSE:OCN), warned that it might have uncovered material weakness in its accounting methods. In a regulatory filing, the company said it would restate financial statements for the last year and the first quarter because of the issues. The stock tumbled about 5 percent to $25.16.

Dendreon (NASDAQ:DNDN) tumbled to its lowest level ever after it warned that there is a significant risk that it will not be able to repay debt that`s maturing in 2016. The drug developer said it`s considering alternatives to repaying the debt, including options that leave shareholders with little or no equity in the company. Shares of the small-cap stock plunged about 34 percent today to $1.40.

GHARIB: Insys Therapeutics saw its shares climb on better-than-expected second-quarter earnings. The drug company said its cancer pain treatment helped bolster the results. The stock was up nearly 5 percent to $31.85.

Exact Sciences got the OK from the Food and Drug Administration to sell its home colon cancer test, the first of its kind to be cleared by regulators. Colon cancer is one of the most common forms of cancer in the U.S. And this test gives patients another option for screening. The stock popped 2 percent to $17.46.

King Digital, the maker of popular Candy Crush Saga game, got crushed in after-hours trading. The social and mobile game maker reported earnings that met forecasts, but sales were below estimates and the company lowered its full-year outlook. It blamed weakness in Candy Crush sales. After the bell, shares initially plunged by more than 20 percent. You can see it right there. During regular trading, shares were up slightly to $18.20.

MATHISEN: An update now on the troubles for the struggling gambling Mecca Atlantic City in New Jersey, and the fate of its newest, glitziest casino. No qualified bidders came forward in the bankruptcy auction for the 2-year-old Revel Casino. It costs $2.5 billion to build and since it opened, it never has managed to turn even a quarterly profit. The Revel will shut its doors September 10th and will be at least the third casino to fold in A.C. this year.

GHARIB: It might sound like something right out of “The Jetsons” but it`s real and here. One of the world`s top hotel chains has begun using robots to deliver items like towels or toothbrushes, right to your room. So, does this mean robots will be taking away jobs from hotel workers? And how does it change the hospitality industry?

Josh Lipton reports.

(BEGIN VIDEOTAPE)

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): From factory floors to driverless cars, the idea of robots taking over human tasks isn`t new. In fact, one study from the University of Oxford says nearly 50 percent of U.S. jobs are at risk of being replaced by computerization.

(on camera): But here in Aloft Hotels, the company`s parent Starwood Hotels, say it isn`t looking to eliminate staff but rather assist them with the help of this guy.

(voice-over): This is the very first butler. Its name is Alo. The idea of the butler is to take time-consuming jobs off the hands of front desk staff like sending items up to guest rooms so the staff can instead spend a lot more time being attentive to guest needs and requests in person.

JEFF ZOGG, ALOFT: From efficiency standpoint, it gives us much more efficiency and it really allows our talent members to do what they are here for, which is to serve our guests.

LIPTON: The robot itself is designed by startup Savioke, which has received funding from the likes of Google (NASDAQ:GOOG) Ventures. But even the company`s CEO thinks robots can actually only do so much.

STEVE COUSINS, CEO, SAVIOKE: Robots can do simple things pretty well and they can do it reliably over and over but they`re not going to do like all the things a person can do. Robots aren`t like going to replace people, but they can basically be a productivity tool.

LIPTON: This is just a pilot program, but Starwood Hotels hopes to roll these robots to nearly 100 locations around the world, and as costs and sensors inside the robot comes down, the idea becomes more affordable.

COUSINS: It`s going to come in as, you know, $2,000 will be in that kind of range. It`s not going to be hundreds of thousands. It`s not going to be multiple tens of thousands of dollars.

LIPTON: As robots become more prevalent in day to day life, the question remains, do you have to tip them?

For NIGHTLY BUSINESS REPORT in Cupertino, California, I`m Josh Lipton.

(END VIDEOTAPE)

GHARIB: I would tip them. They look kind of cute. To read more about Josh`s story and how Starwood Hotels is using robots, go to our Web site, NBR.com.

MATHISEN: And coming up, the impact baby boomers will have on the health care system as they age and what some of the biggest players in the industry are doing to meet their names. The second part of our series, “Aging in America” is next.

(MUSIC)

GHARIB: It looks like its finally sinking in. More Americans understand they have to save now to pay for their retirement later. A new survey by Fidelity Investment shows that nearly half of current U.S. workers say if offered, they would prefer to have lower pay now in return for higher employer contribution to their 401k retirement savings account.

MATHISEN: A lot of people enrolled in insurance plans may need some of that extra money. Premiums on state health care exchange plans will rise by a forecast average of 7.5 percent next year. This according to a study by a division of PricewaterhouseCoopers. The highest proposed rate increase came in Nevada where Time Insurance Company enrollees may see premiums rise 36 percent.

GHARIB: Well, the health insurance industry adjusts the cost to consumers in the second year of the Affordable Care Act. We continue our four-part series called “Aging in America”. In part two tonight, we look at the impact of what a rapidly ageing population would have on the U.S. health care system.

Meg Tirrell has our story.

(BEGIN VIDEOTAPE)

MEG TIRRELL, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): For the next 15 years, the baby boomer generation will turn 65 at a rate of about 10,000 every day and with older age come more health issues, conditions like high blood pressure, heart disease, arthritis and diabetes.

WILLIAM CHIN: It is estimated that over 90 percent of seniors have at least one chronic disease. In fact, 77 percent have two or more.

TIRRELL: And the pharmaceutical industry is responding. There are more than 430 medicines in development for the top 15 chronic diseases affecting seniors, according to the industry group PhRMA. More than double the number 10 years ago.

DAVID RICKS, ELI LILLY: There is no question that diseases that affect the elderly around the world, actually, are the fastest growing and some of the most difficult problems in the health care system and, of course, we believe medicines and pharmaceuticals make a difference for those patients.

TIRRELL: Dave Ricks leads the biomedicine unit at drug maker Eli Lilly (NYSE:LLY). He said much of the company`s research is focus on the medicines for the aging, a shift from in the past.

RICKS: I think the science and study of diseases of the elderly has, in fact, increased and therefore our ability to look for new medicines in that space have coincided with this underlying market demand in the elderly aging population.

TIRRELL: One area, though, remains particularly challenging, Alzheimer`s disease. The medicines currently on the market address just the symptoms rather than underlying cause and the industry seen several high-profile failures, including from Eli Lilly (NYSE:LLY).

Still, Lilly and others continue to work in the space. The number of medicines in development has tripled from a decade ago. That`s as more than 36 million people worldwide have dementia, a number only expected to grow without intervention.

(on camera): And the swelling number of seniors will put pressure on health care costs. The number of beneficiaries is expected to rise from about 52 million now to more than 80 million in 2014, and costs are expected to rise accordingly from about 3 1/2 percent of GDP now, to 5.6 percent in 2040.

For NIGHTLY BUSINESS REPORT, I`m Meg Tirrell.

(END VIDEOTAPE)

GHARIB: Tomorrow as we continue our series, “Aging in America”, we look at some of the companies that stand to benefit as the population grows older.

MATHISEN: Finally tonight, something that`s gone viral. It`s called the ice bucket challenge for ALS, known as Lou Gehrig`s disease. And here`s how it works: people videotape themselves getting a bucket of ice water dumped on their heads and post it on social media and challenge someone else to do the same, or they have to donate money to an ALS charity.

Watch.

(BEGIN VIDEO CLIP)

CROWD: Three, two, one!

(CHEERS)

(END VIDEO CLIP)

MATHISEN: And Meg Tirrell got it, too. Today, top executives and researchers at Biogen Idec (NASDAQ:BIIB), a Boston area firm of finding a cure for the disease took the challenge and the national office of the ALS Association says — and this is really good news — it`s received $2.3 million since the end of July, 10 times what it took in over the same period last year.

GHARIB: Poor Meg, but that`s — you`re a pharmaceutical reporter. You`ve got to have the ice bucket, part two.

MATHISEN: Got to do for that.

GHARIB: That`s NIGHTLY BUSINESS REPORT, I`m Susie Gharib.

And we want to remind you that this is the time of year your public television station seeks your support.

MATHISEN: We sure do.

I`m Tyler Mathisen. On behalf of your public TV station, thanks for your support and we`ll see you back here tomorrow.

END

Nightly Business Report transcripts and video are available on-line post broadcast at http://nbr.com. The program is transcribed by CQRC Transcriptions, LLC. Updates may be posted at a later date. The views of our guests and commentators are their own and do not necessarily represent the views of Nightly Business Report, or CNBC, Inc. Information presented on Nightly Business Report is not and should not be considered as investment advice. (c) 2014 CNBC, Inc.

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