Transcript: Nightly Business Report – May 13, 2016

NBR-ThumANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue Herera.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Surprisingly strong. Retail sales grew at the fastest pace in more than a year, so why are so many traditional stores stuck in the mud?

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Billion-dollar bet. Why Apple (NASDAQ:AAPL) decided to make a sizable investment in one of Uber’s biggest rivals.

MATHISEN: How I made my millions. No, not me. Our newest series introduces you to a serial entrepreneur who made a special sponge and is now soaking up success.

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Friday, May 13th.

HERERA: Good evening, everybody. Welcome.

A triple-digit decline on this Friday the 13th. But the week filled with retail angst didn’t end as it began. Today, we learned that retail sales were robust last month. According to the latest government data, consumers spent more in April than expected and that’s important because consumer spending is responsible for about two-thirds of economic output.

But it flies in the face of everything that we’ve heard this week from some of the nation’s biggest retailers who are struggling to attract shoppers and grow revenue. JCPenney was the latest to report an unexpected sales drop and cut its gross margin guidance for the year.

Steve Liesman looks at the possible reasons behind the disconnect.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: A strong national retail says report for April gave a major boost to the idea that the U.S. economy’s in the early stages of a rebound from that weak first quarter. Retail sales grew 1.3 percent, beating estimates in auto sales and furniture. Economists now looking for 2.5 percent overall economic growth in the second quarter.

But the number raised a troubling question. Why have retail earnings been so lousy? Nordstrom’s had comparable sales fall 17 percent, Kohl’s (NYSE:KSS) saw them to 4 percent for the quarter. Macy’s (NYSE:M) registered a decline of nearly 6 percent.

Theories abound. At the top of the list, Internet retailers eating the lunch of department stores. Year over year, online sales are up double digits compared to no growth at department stores.

BARRY STERNLICHT, STARWOOD CAPITAL CEO: The retail’s got to pick up its game, got to make — the mall owner’s got to create activities in a mall, like a hotel, to pull people into the property. And do stuff that you can’t do online.

LIESMAN: But the online growth trend has been around for years, odd that anybody should be surprised by it. Others suggest the election undermining consumer confidence.

NEELY TAMMINGA, PIPER JAFFRAY: We think it’s election related. There’s a lot of people not happy on either side with the presumptive nominees. And the consumer’s voting.

LIESMAN: Working against that idea, consumer sentiment surged in May unexpectedly. How much confidence can consumers lack if they’re back to the lots of buying cars? We know this, job growth has been pretty solid and wages are even rising now, up about 2.5 percent year over year.

Gas prices, they’re up a bit, but still low. Stock prices, they’ve rebounded. Home values continue to rise modestly. Consumers have the means to spend if they want to.

MICHAEL GOULD, FORMER BLOOMINGDALE CEO: People are spending but what are they spending it on? They’re spending it on about an experience. They’re spending it on something with a sense of entertainment, social activity.

LIESMAN: For now, the retail mystery remains unsolved. Consumers, they’re spending, but investors, they’re trying to figure out in whose cash register the money is ending up.

For NIGHTLY BUSINESS REPORT, I’m Steve Liesman.

(END VIDEOTAPE)

HERERA: So where and what are consumers buying with their money?

Jan Kniffen, CEO of the retail consultant firm J. Rogers (NYSE:ROG) Kniffen Worldwide, joins us now.

Jan, welcome. Good to have you with us.

My sense is that in that package, we get an idea of where that money is going. They’re spending on cars. They’re spending on stuff at Home Depot (NYSE:HD), and they’re spending on experiences. But they’re not going to JCPenney or Macy’s (NYSE:M) or Nordstrom’s.

JAN KNIFFEN, J. ROGERS KNIFEN WORLDWIDE CEO: That’s for sure. We’re not seeing them turn out in the full price mainline stores. We’re seeing continued growth in fast fashion. We’re seeing continued growth in the off-price sector.

We’re seeing continued growth in online. Let’s read that as Amazon (NASDAQ:AMZN). We are not seeing growth in the traditional brick and mortar full-price mall-based retail space.

HERERA: You say you’ve seen this movie before how do you think the sequel, if we’re living it right now, is going to turn out?

KNIFFEN: Well, these guys aren’t going away, right? I mean, Macy’s (NYSE:M) is a big, healthy company. They’re going to monetize their real estate. They’ll get better at what they do. They’ll shrink the store base. They’ll do more omni retailing.

My concern is not, are they going to be here? Even Penny’s is going to be here even given the tough time they went through. It’s a really question of what to these stores look like going forward? What does the ROI on their investments look like?

The problem I see is every time Macy’s (NYSE:M) takes a sale out of the store and puts it online, ROI goes down. Every time a vendor takes a sale out of the Macy’s (NYSE:M) or another department store and sells it themselves, direct to consumer, they sell it at retail and their ROI goes up.

So, we’re seeing the vendors doing more and more direct to the consumer.

MATHISEN: So —

KNIFFEN: And we’re seeing more and more vendors selling to off-price. We’re seeing a lot of price compression.

MATHISEN: I infer from that then, Jan, that maybe if I want to make a buck here on retail, I might be better investing in some of the retail manufacturers who are selling direct or have their brands, whether it’s a Polo Ralph Lauren (NYSE:RL), a Coach (NYSE:COH) maybe, a Michael Kors. Am I right on that?

KNIFFEN: You’re in my bailiwick here. I really like Ralph Lauren. I like PVH. I like VF. I like Columbia, I like Haines brands, because those are vendors — I think are going to be better in the back half of the year than the retailers. I think they’re going to do some decenter mediation and sell more themselves. So I like that space.

You also mentioned something else I like. I like strong brands that have a real serious presence in the mind of the consumer. Kate Spade is a good example. Their mind share is a lot bigger than their business.

You said Michael Kors. I’m not a fan of Kors. I think they’re on the downside now. But I like Coach’s resurgence require like them.

I also like things that I would call Amazon (NASDAQ:AMZN)-proof. That’s not going to be forever. But things like Bali beauty, things like Alta, are pretty much Amazon (NASDAQ:AMZN)-proof. I like things like that as well.

MATHISEN: Lots of ideas, Jan. Thank you so much. Have a great weekend.

KNIFFEN: Thank you.

MATHISEN: Jan Kniffen, J. Rogers (NYSE:ROG) Kniffen Worldwide Enterprises.

And later in the program, our market monitor has some retail names she says are worth owning for the next three to five years.

Meantime, a down day on Wall Street. Stocks dropped sharply pressured by consumer companies and energy shares which followed oil lower. The Dow Jones Industrial Average dropped 185 points to 17,535. The NASDAQ was off 19. The S&P 500 was down 17. All the major indexes were lower for the week. The Dow and the S&P 500 registered their third straight week of losses, the NASDAQ its fourth.

MATHISEN: A closely followed gauge of inflation rose slightly last month. Producer prices, the prices businesses receive for their goods and services, increased 0.2 percent in April. That was a little less than expected but it was the first increase since January. Excluding food and energy, the index was up a little less than 1 percent. The latest data suggests overall inflation remains tame.

HERERA: Dow component Apple (NASDAQ:AAPL) is making a billion-dollar bet in a country where it’s some facing obstacles. The Dow component is investing in China’s most popular ride-sharing company, a major competitor to Uber.

Akiko Fujita reports tonight from Shanghai.

(BEGIN VIDEOTAPE)

AKIKO FUJITA, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is certainly a huge coup for China’s largest ride-sharing company, Didi Chuxing. That investment today, $1 billion, the largest investment for this company.

And with the funding in place, Apple (NASDAQ:AAPL) joins the likes of Tencent and Alibaba who have been strategic investors in Didi Chuxing.

Now, Tim Cook has framed this as an opportunity to get a better sense and to learn more about certain markets in China. This comes as Apple (NASDAQ:AAPL) looks to reinvigorate sales here in China, the world’s second-largest market. Sales in Greater China slipped 26 percent the last quarter.

Apple (NASDAQ:AAPL) has also been under tremendous pressure from Chinese regulators. The iBooks and iTunes and movie store both shut down here in China last month.

Now, speaking of Didi Chuxing, this is a company that’s now valued at $25 billion. They’ve been lost in a very heated competition with Uber but they are the dominant player here with 87 percent market share, 11 million riders a day. And they’ve expanded their service as recently, not just to include private riding hailing, but also buses and chauffeurs that drive cars of these users.

Now, certainly, investors have been speculating for some time that Apple (NASDAQ:AAPL) could be entering the car business. Today’s announcement that perhaps another hint of Apple’s larger strategy moving forward, Tim Cook has said he’s more interested in the software aspect of it. Finding ways to connect that smartphone with infotainment, in-car experience. But there’s also speculation whether Apple (NASDAQ:AAPL) is, in fact, building up their own driverless car.

And the timing of this is very interesting, considering that Tim Cook will be visiting China later this month.

Akiko Fujita, Shanghai.

(END VIDEOTAPE)

MATHISEN: Still ahead, hackers strike at the heart of the global financial system. We’ll tell you what they did and what it means.

(MUSIC)

HERERA: An anti-counterfeiting group has suspended Alibaba’s membership. The International Anti-Counterfeiting Coalition told members that it had failed to inform the board about conflicts of interest involving an executive of the group. Member companies had recently pushed back against Alibaba’s inclusion which some view as a marketplace for fakes.

Gucci America, Michael Kors and Tiffany (NYSE:TIF) all recently left the coalition because of Alibaba’s involvement.

MATHISEN: Facebook (NASDAQ:FB) CEO Mark Zuckerberg defending against accusations of political bias which we told you about earlier this week. In an online post, he wrote that Facebook (NASDAQ:FB) does not censor conservative topics and that the social media network does not permit the prioritization of one viewpoint over another. Zuckerberg also said he is conducting a full investigation and will reach out to conservative leaders to discuss the issue.

HERERA: Global bank hackers strike again. They found their way into the financial messaging system believed to be the most secure in the world. The system is used by thousands of banks to move money all over the globe. And it comes as investigators are still trying to solve the heist from the Central Bank of Bangladesh back in February.

Eamon Javers is following the story for us.

Eamon, it’s getting more and more frightening. What are the implications for the global banking system?

EAMON JAVERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, this is scary for banks around the world, Sue, because that international consortium that you’re talking about is called SWIFT. They’re based in Brussels, and they operate the electric messaging system that thousands of banks around the world and more than 200 countries use to send messages authorizing wire transfers of large amounts of money, billions and millions of dollars at a time in some of these messages.

So the fact that hackers could get into software that interacts with SWIFT and authorize transfers right out of a bank account is really scary. SWIFT saying in a statement last night that they found a second instance where this apparently has happened. They would not name the bank or say how big it was or even what continent this bank was on, but it has deep implications for the financial system.

MATHISEN: Any other shoes to drop in this story?

JAVERS: Well, one of the big questions in all of this is whodunit, right? We don’t know who did this attack against the unnamed bank revealed last night, and we still don’t know who was behind that $81 million heist at the New York Fed’s account that they held for the Bank of Bangladesh.

One report out today suggested there may be a similarity between the hack at the Bank of Bangladesh and the attack on Sony (NYSE:SNE) that we saw that was later blamed on the North Koreans.

We’re going to need a lot more reporting on this to find out who is exactly behind it, but there’s some tantalizing threads now out there in the public discussion.

HERERA: Is there another alternative for the banks to use other than SWIFT? That’s one of the questions that was floated out there. Why are we using SWIFT if they can hack into it? But almost everybody uses it. Is there an alternative?

JAVERS: Well, there isn’t, Sue. You’re right to spotlight that.

Carolyn Maloney, congresswoman on Capitol Hill, wrote to the New York Fed asking them why they put so much stock in this particular system and the Fed replied in answers that were revealed today, in essence, everybody around the world uses this system, so we have to use it too. The global financial system is really dependant on a few electronic systems. SWIFT is just one of them.

HERERA: Eamon, thank you very much. Eamon Javers in Washington.

MATHISEN: It’s an important time of the year for the media industry, broadcasters and digital media want Madison Avenue to commit to buying ads for the upcoming season. And while digital has been taking ad dollars from television the trends this year are surprising.

Julia Boorstin explains.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Rumors of television’s demise may have been exaggerated. This year’s outfront when broadcasters pitch their lineups will be the first time in five years they secure more outfront ad dollars than the prior year. Media Dynamics projecting a 5 percent increase in dollars, a 10 percent increase in prices.

ANDREW FRANK, GARTNER VP OF RESEARCH: Few media can match the kind of impact, the kind of sight, sound, and motion that TV delivers for an advertiser, particularly advertisers that are — that care about their brands and care about their image. You know, it’s very hard to match that kind of impact with a digital banner or search app.

BOORSTIN: Broadcasters of benefitting from political ad and the Olympics but higher prices are also coming from less inventory. A number of cable networks including Viacom (NYSE:VIA) and Turner are cutting back on commercial time. And even “Saturday Night Live” is reducing its ad load.

And now, TV ads are getting more high-tech. Media giants are leveraging big data to more narrowly target ads. And as traditional media companies use digital targeting, Internet giants are becoming more like traditional media. At this year’s digital new front, some 40 companies presenting to Madison Avenue putting premium digital video in the spotlight.

Best positioned, Facebook (NASDAQ:FB) with its live video, Hulu’s mix of original TV shows, Google’s YouTube offering premium ads through Google (NASDAQ:GOOG) Preferred, which sold out last year. Drawing magnet global to shift over $250 million into Google (NASDAQ:GOOG) Preferred over the next three years.

DAVID COHEN, MAGNA NORTH AMERICA PRES.: The business news is we are funding it from television budgets, which is obviously where the majority of our spending resides. So, if you look at consumer usage, we’re just acknowledging that audiences are shifting out of linear television to other platforms.

BOORSTIN: As digital individual draws more viewers, it’s also growing its ad dollars. Digital advertising projected to hit $68 billion this year, topping TV ad spending for the first time. So, while TV returns to growth, it’s facing more competition than ever.

For NIGHTLY BUSINESS REPORT, I’m Julia Boorstin in Los Angeles.

(END VIDEOTAPE)

HERERA: Trian Fund Management exits its stake in Pepsi and that’s where we begin tonight’s “Market Focus.”

According to a regulatory filing, the activist hedge fund sold its more than 18 million-share stake in the snack and beverage company in March. Trian said Pepsi addressed many of the operational issued addressed by the hedge fund. The news sent shares of Pepsi down more than 1.5 percent to $104.18.

The chief financial officer at Tiffany (NYSE:TIF) and Company steps down. Ralph Nicoletti will resign from the luxury jewelry retailer by the end of the month to become CFO at Newell Brands, which owns Sharpie, Markers and Yankee Candle. Shares fell nearly 3 percent to 64.43.

MATHISEN: Automaker Honda posted an $860 million loss as currency headwinds and hefty costs related to its Takata airbag recall dragged down results. Subsequently, the company plans to recall 21 million more vehicles in addition to the 30 million vehicles it previously recalled. Shares down more than 4 percent on the day to $26.28.

And Acacia Communications made its stock market debut today. The telecom equipment company raised $103.5 million in its IPO, 4.5 million shares were sold at $20 apiece. The stock did rise more than 34 percent on the day to $30.95.

And Pfizer (NYSE:PFE) will no longer allow its drugs to be used in lethal injections, saying its products are meant to save lives. It is the latest U.S. drugmaker to impose such controls, which means the drugs used in executions are no longer legally available to authorities. Shares of Pfizer (NYSE:PFE) were unchanged for the day at $33.19.

HERERA: Our market monitor tonight is a value investor. She likes companies she says are misunderstood by the market and names that belong in your portfolio for the long-term.

Joining us for the first time is our monitor guest. She is Kim Forrest, senior equity analyst at Fort Pitt Capital.

Good to see you, Kim. Welcome.

KIM FORREST, FORT PITT CAPITAL SR. EQUITY ANALYST: Thanks for having me.

HERERA: Let’s start with your stock picks if we could and it’s retail which really got slammed this week. Urban Outfitters (NASDAQ:URBN), why do you like ‘em?

FORREST: Well, they’re misunderstood like all the stocks that we’re going to talk about today. They are cast as a teen retailer and mall-based, and they’re not really either one of those things. About 50 percent of their revenues are from the teen market, but it’s the older teen and college age. And then the rest is for women’s clothing. And that tends to be the higher-end woman shopper.

But the really exciting thing is the company goes after millennials where they want to shop which is in urban areas and next to colleges. So, the company is just well-positioned and we think it’s very misunderstood.

MATHISEN: My wife loves anthropology, by the way. VF Corps — I don’t know one child in the Northeast who does not have a North Face jacket.

FORREST: Well, I’m sure there are because this year, the sales of their jackets were a little light. And that is why they’re on the list. They’re underperforming because everybody who made jackets underperformed this year.

MATHISEN: It’s a warm winter.

FORREST: Yes, exactly. But they — again, they have this stable of brands including Vans, Timberland (NYSE:TBL), and the North Face, among others. And they are just excellent merchandisers and retailers. And they know what people want, make it, and do it in a very cost effective way.

HERERA: And now to technology. Intel (NASDAQ:INTC) made your list?

FORREST: Exactly. And we think they’re misunderstood because they are “Intel (NASDAQ:INTC) Inside”, in your PC. But we think they’re going to move into mobile devices more and more, and cars and everything’s getting smarter. We think Intel (NASDAQ:INTC) has the technology that will drive our smart devices.

HERERA: All right, Kim, on that note, we thank you very much. We’ll have you back soon.

FORREST: Thank you.

HERERA: Kim Forrest with Fort Pitt Capital.

FORREST: And coming up, how a box marked “junk” became one man’s secret to success. The story of how he made his millions coming up next.

(MUSIC)

HERERA: And here’s a look at what to watch for next week. On Tuesday, more retail earnings when Home Depot (NYSE:HD) reports its quarterly results. On Wednesday, the Federal Reserve releases the minutes of its last meeting. The world’s largest retailer Walmart reports earnings on Thursday. And that’s what to watch for next week.

MATHISEN: General Motors (NYSE:GM) is halting sales, halting sales of nearly 60,000 SUVs. The vehicles have incorrect EPA window stickers that overstate fuel economy. The vehicles include the 2016 Chevy Traverse, GMC Acadia, and the Buick Enclave large cross-overs.

HERERA: A warning tonight from Subaru to its drivers. Don’t drive some of our cars. The automaker is recalling more than 48,000 2015 to 2017 Outback and 2016 to 2017 Legacy models. The reason, the steering may fail. Subaru says these vehicles should not be driven until they are inspected or repaired. Outback is Subaru’s second bestselling vehicle.

MATHISEN: You’ve seen our stories we hope every jobs Friday promising startup companies, but when do bright ideas turn into even bigger businesses? I got my hands dirty finding out how one man turned a revolutionary sponge — yes, a sponge — into a multi-million dollar enterprise based in Folcroft, Pennsylvania, near Philadelphia.

It’s part of our new series we call, “How I Made My Millions.”

(BEGIN VIDEOTAPE)

MATHISEN: Keeping up with Aaron Krause isn’t easy.

A lot of inventers are serial inventors. And that description fits you, right?

AARON KRAUSE, SCRUB DADDY FOUNDER: Absolutely, I’ve been inventing products and ideas since I was probably 10 years old.

MATHISEN: His most successful brain child, the perpetually happy, scrappy, Scrub Daddy sponge.

AARON KRAUSE: This is not an overnight success by any means.

MATHISEN: The original business was a car washing and car detailing business?

AARON KRAUSE: I like to tell everyone, I learned everything about business in the detailing business.

MATHISEN: It was a business he started right after college back in 1993. Not exactly the career path his parents, both of them doctors, had envisioned.

AARON KRAUSE: I started this process of inventing all these new improvements and new types of buffing and polishing pads.

MATHISEN: And in 2008 about 14 years after specializing in automotive foam products, 3M (NYSE:MMM), having noticed the upstart competitor, offered him a deal he couldn’t refuse.

AARON KRAUSE: We were bought out by a $28 billion a year company.

MATHISEN: The terms of the acquisition weren’t disclosed but one of the patented products 3M (NYSE:MMM) definitely didn’t want was this tough as nails sponge Krause initially designed to clean mechanics’ hands.

AARON KRAUSE: We took the product, we made about 100 of them, put them in a box, I labeled it “junk,” scrap, put it in the back of the factory, and that’s where it’s at. From 2008 until 2011.

MATHISEN: And what got it off the shelf?

AARON KRAUSE: I got to credit my wife.

STEPHANIE KRAUSE, SCRUB DADDY DIR. OF PR AND SOCIAL MEDIA: I asked Aaron to come out here and clean the lawn furniture.

AARON KRAUSE: I was looking at it, what am I going to use that’s not going to scratch the paint off of this? Got those old sponges, I’ll have a use for them, I’ll use them, I’ll throw them out.

MATHISEN: So, he grabbed one of the rock-hard plastic scrubbers and plunged it into a bucket of warm, soapy water.

AARON KRAUSE: And it went —

MATHISEN: Softened?

AARON KRAUSE: Totally soft. I said, what’s that? The thing’s ruined. It’s not going to scrub at all. I took it out, it worked a little bit.

But as I was scrubbing, the temperature outside was changing, getting harder and harder.

MATHISEN: It was at that moment he realized the foam actually changed texture — soft in warm water, hard in cold, which made it perfect for cleaning just about anything

AARON KRAUSE: I looked at it and I said, oh my God, we missed the entire boat.

MATHISEN: An epiphany for a sponge that Krause is still excited to show off.

Oh, man.

AARON KRAUSE: Isn’t it amazing?

STEPHANIE KRAUSE: He started giving it out to friends and family to test.

AARON KRAUSE: Now, it’s going to be great for scrubbing all your pots.

STEPHANIE KRAUSE: Everybody came back with great results.

MATHISEN: Get out of my way, I want to do this.

Not everyone was this enthusiastic at first but a shot on QVC and a trip to the “Shark Tank” in 2012 stirred up interest.

AARON KRAUSE: The retailers started calling us. Bed, Bath, and Beyond. Walmart. Home Depot (NYSE:HD). They all started us.

MATHISEN: Until then, Krause says he’d only sold $100,000 worth of sponges. Now, he estimates total retail sales have hit $100 million.

What do mom and dad say now?

AARON KRAUSE: At this point, I’m the only one in my family that has patents and I think that they’re finally pretty proud.

(END VIDEOTAPE)

MATHISEN: And Krause says it would not have been possible without support from his parents. His dad let him run the car detailing business out of his garage and loaned him the money to get started, a true five-year loan at one point above the bank’s rate. Why? Because at that time, Krause was a credit risk.

He paid it all back. The sponges are — if you don’t have them, the sponges are really, really good.

HERERA: I’m going to get one.

MATHISEN: They’re tough, tough as nails.

HERERA: Why doesn’t that ever happen to us?

Before we go, here’s another look at the day and the week on Wall Street. The Dow dropped 185 points, the NASDAQ was off 19, the S&P 500 was down 17. The major indexes were all lower for the week.

And that does it for NIGHTLY BUSINESS REPORT tonight. I’m Sue Herera. Thanks for joining us.

MATHISEN: Grab your sponge Scrub Daddies. I’m Tyler Mathisen. Have a great weekend. We’ll see you on Monday.

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) 2016 CNBC, Inc.

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