Phil LeBeau, Mary Thompson, Diana Olick>
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ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue Herera.
TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Growing pain. Sales growth slows at Wal-Mart (NYSE:WMT) and it`s not going to get better any time soon. So, when can investors expect the company`s turnaround efforts to pay off?
SHARON EPPERSON, NIGHTLY BUSINESS REPORT ANCHOR: Hospital hacked. Medical records held hostage. And they`re worth a lot to people who operate in the underground economy.
MATHISEN: A home all their own. We`ll visit a company that`s turning its employees into homeowners.
The third part of our series "Bridging the Divide" tonight on NIGHTLY BUSINESS REPORT for Thursday, February 18th.
EPPERSON: Good evening, everyone. I`m Sharon Epperson, in tonight for Sue Herera.
MATHISEN: And I`m Tyler Mathisen. Welcome, everyone.
Well, Wal-Mart (NYSE:WMT) continues to struggle. The world`s largest retailer reported slowing sales growth and said that won`t change much this year. Profit at the Dow component continued to come under pressure as a result of multi-billion dollar investments in worker wages and e-commerce. Investors were hoping to see those investments start to pay off in better results.
Apparently, it hasn`t happened yet. And that weighed on the stock which fell 3 percent, making Wal-Mart (NYSE:WMT) the worst-performing member of the Dow blue chip index today.
Morgan Brennan has more on Wal-Mart`s gloomy outlook.
MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: As Wal-Mart (NYSE:WMT) continues to bank on a turnaround, the effects of strengthening dollar and heavy investments played out in holiday season earnings. Investors were disappointed by America`s after key sales metrics fell short of estimates.
U.S. comparable store sales grew modestly, marking the sixth straight quarterly increase, but nonetheless were weaker than expected.
OLIVER CHEN, COWEN & CO. MANAGING DIR. & SR. RETAIL ANALYST: Comp sales came out at 0.6. Street was looking for 1 percent, that was a disappointment. Also, traffic growth slowed down a little bit. Traffic growth was about 0.7. This is a deceleration.
So, the real fixation here is on comp store sales and kind of that top line number. They also guided this a little bit light. That`s what investor fears are all around in terms of the stock weakness.
BRENNAN: Wal-Mart (NYSE:WMT) also forecast sales for this year would be relatively flat due to store closings and the stronger dollar`s continued impact. In October, it had said net sales would increase annually at 3 percent to 4 percent over the next three years.
Another worrisome trend, e-commerce sales growth slowed during the holiday season, rising just 8 percent versus previous years of double-digit gains. Food price deflation most notably from meat and dairy also weighed on results, more than offsetting any positives associated with low gas prices.
But it`s no secret that this will be a year of growing pains. The company`s in the midst of an attempted turnaround that involves heavy investment, including $1.5 billion for labor, as it raises starting wages and updates its paid time off policy.
JOSEPH FELDMAN, TELSEY ADVISORY GROUP SR. MANAGING DIRECTOR: They`re doing a lot of the right moves now to do the investment spending. And, you know, cleaning up the stores, more labor and hours in the stores, paying people a little bit better, improving the website -- doing all the things you need to do to have the better infrastructure.
BRENNAN: The company raised its annual dividend by 2 percent, mark the 43rd year of consecutive increases.
Before today`s slide, shares of Wal-Mart (NYSE:WMT) had rallied 8 percent for the year, versus a 6 percent drop for the S&P 500. Investors had flocked to the stock as a defensive play as recession fears began to emerge. But as the company invests heavily to stoke profits amid a number of headwinds, analysts caution the safest way to approach this big box behemoth may be with an eye to 2017.
For NIGHTLY BUSINESS REPORT, I`m Morgan Brennan.
EPPERSON: So, what does this mean for Wal-Mart (NYSE:WMT) stock and should you own it?
Ken Perkins is retail analyst at Morningstar (NASDAQ:MORN). Ken, thanks for joining us.
So, a lot of folks may already own Wal-Mart (NYSE:WMT) and, of course, a lot of folks shop at Wal-Mart (NYSE:WMT). Can Wal-Mart (NYSE:WMT) make a comeback here -- particularly with the picture and the outlook for net sales being flat for this year?
KEN PERKINS, MORNINGSTAR RETAIL ANALYST: We think so. But we think that if you`re going to own Wal-Mart (NYSE:WMT), you have to have a patient attitude and long-term time horizon.
The investments that the company is making are the right moves, but when you`ve put $3 billion into wages and several billion dollars into e- commerce initiatives, those things don`t change overnight. So, looking quarter to quarter for Wal-Mart`s sales to tick up I think is just inappropriate probably for a business this size.
MATHISEN: What`s working for Wal-Mart (NYSE:WMT) and what`s not?
PERKINS: Well, I think that`s the interesting question is because you look at all the negative things that people are looking at with this quarter, the international markets being struggling, the banner struggling, Amazon (NASDAQ:AMZN) growing.
And yet, you look at the company, that`s a very defensive company, and total sales excluding foreign currencies still increased about 2 percent for the year. Traffic is increased for five quarters now.
So, the brand, as much as people are concerned about it, is not in disarray. Things are slowing but if you`re looking at a very volatile market environment, you`re getting a pretty defensive company at a fairly reasonable valuation. I think that`s where over the next couple of years, if Wal-Mart (NYSE:WMT) really turns its business around, investors could realize some upside with some pretty good downside protection.
EPPERSON: So, Ken, does that mean investors who don`t already own Wal-Mart (NYSE:WMT) should jump in now? You say it`s a long-term play, is there another time that you should wait in here or do you get it right now?
PERKINS: We do think that the shares are still undervalued. It think what will really take it to the level of about $75 mark, which is our fair value, would be if the e-commerce and comp store sales trends really pick up. You know, we were admittedly much more bullish and optimistic on the shares trading in the low 50s after they initially announced wage increases.
But, overall, we still do see some upside. When you look around the investment universe, there are few companies that are trading at this sort of valuation that also have the defensive nature that Wal-Mart (NYSE:WMT) has. I think that`s why we like it over near term but more so over the long-term.
EPPERSON: All right. Thanks so much. Ken Perkins with Morningstar (NASDAQ:MORN) there.
PERKINS: Thanks for having me.
MATHISEN: Of course, even if you don`t own individual shares of Wal-Mart (NYSE:WMT), you may own it in your mutual funds, according to Morningstar (NASDAQ:MORN). The top fund-holders of the stock are as you might expect some of the big index funds. The Vanguard Total Stock Market Index fund, the Vanguard 500 Index Fund, which represents the S&P 500, and one that`s not an indexer, Dodge and Cox Stock Fund.
EPPERSON: Tyler, declines in Wal-Mart (NYSE:WMT) were offset by big gains in shares of IBM. The stock rising 5 percent on an analyst upgrade and a multi-billion dollar acquisition. Morgan Stanley (NYSE:MS) raised its rating on the stock to overweight from equal weight, saying that the company`s transition to a cloud-based business was underappreciated. And as part of that transition, IBM is acquiring Truven Health Analytics for over $2.5 billion, its fourth major health data-related deal this past year.
MATHISEN: Well, those gains, Sharon, in IBM were not enough to lift the major indexes today. They flip-flopped around the unchanged mark all day. By close, that three-day win streak was a thing of the past. Energy, financials, led to declines today. The Dow Jones Industrial Average off 40, 16,413 was the close there. NASDAQ lost 46 points, 4,487 was the finish. That`s more than 1 percent. S&P fell 9 points.
As for oil, the commodity gave up most of its gains on a rise in inventories here in the U.S. and after an official from Saudi Arabia was reported as saying his country was not prepared to cut production. Domestic crude settled higher by 11 cents.
EPPERSON: Now to a big story out of California, where medical records were held hostage. A Los Angeles hospital was hacked, crippling the center systems and blocking access to digital records. This happened as physicians continued to treat patients.
Bertha Coombs has more on the attack and how this was resolved.
BERTHA COOMBS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Hollywood Presbyterian hospital says it had no choice but to pay ransom demands after its computer system was taken hostage, paralyzed by hackers since February 5th. While officials say there`s no evidence patient information was compromised, the hospital had to resort to using paper files and at times sending people elsewhere.
KEITH JARVIS, DELL SECUREWORKS SR. SECURITY RESEARCHER: One of the things that makes health care environments so vulnerable to ransom ware attacks, you may have a radiology department talking to the laboratory, talking back to the doctors down in ER, and all these different groups have to interact. And to do that, you often have to create risk scenarios in the network that allow hackers, once they`ve gotten through the initial firewall of the hospital or health care organization that they can move around unimpeded.
COOMBS: Hollywood Presbyterian has been working with FBI but says it paid off the unknown hacker 40 bitcoins, estimated value $17,000, because it was the quickest way to get its system back.
KEVIN HALEY, SYMANTEC DIR. SECURITY RESPONSE: The encryption is unbreakable. So, in order to prevent this from getting onto machines, you have to have good security in place. That`s layered security. Good security on all your end points.
And training your end users, they may not -- they may be fooled now and then, but if you can stop them from getting fooled every time, you`re going to have a lot less trouble.
COOMBS: In 2015, there were over 260 health care breaches, just over half involving hacking or theft of files. There`s no hard data on ransom ware attacks.
Cyber security experts say most attackers target smaller organizations and individuals whose security is more vulnerable with demands for payments of less than $1,000. But with the hospital headline-grabbing ransom payment, the stakes may be rising.
JARVIS: There`s the hard liners you say, you never negotiate with criminals. There`s certainly a lot of truth to that. But unfortunately, the people who are attacked by ransom ware are often left without any leverage. They don`t have any choice but to pay this ransom to get their data back.
COOMBS: The only defense, they say, is prevention with strong security.
Bertha Coombs, NIGHTLY BUSINESS REPORT.
MATHISEN: So, how much are your medical records worth on the black market? Among other questions.
Joining us to discuss this is Mahmood Sher-Jan. He`s CEO of Radar, a privacy and security incident response management company.
Mahmood, welcome, good to have you with us.
I hardly know where to begin here. But in the case of the Presbyterian hospital out in Los Angeles, patient records were not compromised. What were they after? Were they simply after a ransom payment?
MAHMOOD SHER-JAN, RADAR CEO: Well, first of all, thank you for having me.
MATHISEN: Delighted to have you.
SHER-JAN: We understand that every day, health care organizations are under attack. Incidents are happening all the time. And the motive of these attackers can vary. And this case, obviously, was hopefully purely financial.
But their motives can go further. And they could get access to a treasure trove of information in a health care institution, where you have personal information, you have financial information, you have health care and insurance information, all of them really combine to provide tremendous value in the black market.
So, the motivations are very big to attack these health care institutions where they`re very vulnerable.
EPPERSON: We`ve seen a rise in the incidence of medical identity theft. And, of course, there are protections consumers need to take. But what about the health care organizations? What protections and processes are in place to protect patients` information?
SHER-JAN: Well, health care organizations in general have been a little bit further behind some of the other industries like financial and retail because they have been attacked for much longer and they have erected better security measures. Fraud and criminals always go after where defense is lower.
But many organizations in the health care industry have begun to really shore up their defenses. The areas of compromise are really both within the systems and all the electronic data that`s moved around. But also within just the employees and vendors and what is called business associates within these organizations.
So, there are many areas of vulnerability. These organizations have to have a good risk assessment, the ability to respond to incidents as they occur. So it`s really -- they have to have a good program in place.
MATHISEN: I`m curious. I mean, what are the identity thieves really after here? It`s hard for me to believe that they care very much about my cholesterol or my blood pressure or what procedure`s been done to me per se.
Is it more that these medical places are such rich targets because everything is there under one roof, from your Social Security number, to your insurance carrier, to your home address, what?
SHER-JAN: Absolutely. You hit it on the nail. It`s one place. It`s almost like coming to a mall where you can collect any type of information that could have or offer value in the wrong hands.
So, you mentioned all of those factors that make health care institutions very vulnerable to these attacks. And what you have to keep in mind is also the patients. I mean, all of us should be concerned about this, because at some point in our lives we become patients and customers of these institutions.
MATHISEN: Indeed we do.
SHER-JAN: And one of the risks that often gets overlooked is the risk to - - if that information is used in a way that pollutes our medical records, then we actually can have life and death situations where the wrong medication may be administered or the wrong patient may be given the wrong type of information and data.
So, this is a serious issue that we all should be very concerned about.
MATHISEN: Thank you very much for your insights. Mahmood Sher-Jan with Radar.
SHER-JAN: Thank you for having me.
EPPERSON: Still ahead, a new report shows something we don`t hear that often and that`s that the skies were a little friendlier last year than usual.
MATHISEN: You know that set top box on top of your TV? Take a look at it, it may change soon. The government has apparently taken the first step to opening up the set top box to more competition. Right now, you generally rent them from your cable provider, which according to a report costs more consumers more than $200 annually.
Today, the Federal Communications Commission voted 3-2 to begin the process of crafting rules that would let consumers own their boxes. Something Pay TV companies oppose.
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TOM WHEELER, FEDERAL COMMUNICATIONS COMMISSION CHAIRMAN: The law mandates it. Technology allows it. The industry at one time proposed something similar to it. And consumers deserve a break and a choice.
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MATHISEN: Comcast (NASDAQ:CMCSA) (NYSE:CCS) and AT&T (NYSE:T) called the new rules unneeded because of advances in Internet and app-based technology. Comcast (NASDAQ:CMCSA) (NYSE:CCS) is the parent company of CNBC, which produces this program.
EPPERSON: Now, if you fly a lot, this will come as welcome news. A new report from the Department of Transportation shows air travel in the U.S. actually improved last year. In fact, airlines had their highest percentage of on-time arrivals since 2012.
But as Phil LeBeau reports, it was a good year for all but one carrier in particular.
PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: With a record number of people flying in the U.S. last year, the vast majority of them arrived at their destination on time. Overall, almost four out of every five flights in 2015 were on schedule, the highest on-time arrival rate since 2012.
It`s a testament to airlines and airports doing a better job handling storms and last-minute disruptions to schedules. The report also shows airlines have improved how they deal with customers.
For example, there was a lower percentage of luggage lost or mishandled, perhaps because people are checking fewer bags and carrying more on board. And despite airlines flying more planes with every seat sold, there was a drop in the number of passengers bumped from oversold flights.
Last year, Hawaiian (NASDAQ:HA) Airlines had the best on-time arrival rate, followed by Alaska and Delta. Spirit had the worst on-time arrival rate, behind Frontier and Envoy.
For Spirit, a low-cost carrier that charges passengers a variety of fees, including for checked bags, last year was a rough one. Spirit`s complaint rate was substantially higher than the rest of the industry.
Spirit`s performance shows the growing pains that come from aggressively adding more flights and more destinations, which is what the airline did last year. That growth is expected to be more measured in the future.
Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.
MATHISEN: Coca-Cola (NYSE:KO) raises its quarterly dividend and that is where we begin tonight`s "Market Focus".
The sodamaker announced it would increase its dividend 6 percent to 35 cents which would be paid out to shareholders on April 1. April Fools Day. It`s no joke. This marks the 54th consecutive year the company has hiked its dividends. Shares of Coke up fractionally to $43.61.
Caterpillar (NYSE:CAT), the construction and mining equipment manufacturer, said its three-month machine sales fell sharply. The company`s energy and transport retail sales down 39 percent, while overall world retail sales fell 15 percent for the three months ending in January. An analyst from Axiom Capital predicts the company will cut earnings estimates several times this year. Cat shares lost more than 1.5 percent to $66.12.
The sporting goods Cabela`s (NYSE:CAB) posted better than expected earnings in its latest quarter. Thanks in part to a strong focus on core merchandise categories and an increase in online retail inventory visibility. Revenue also beat, despite what the company calls a negative weather impact on fall and winter apparel. Cabela`s (NYSE:CAB) also said there`s no decision on whether to sell all or part of the company. Shares fell about 4 percent to $42.30.
EPPERSON: Chip equipment maker Applied Materials (NASDAQ:AMAT) saw a drop in first-quarter profit but they were still strong enough to beat Wall Street targets. Revenues fell 4 percent but that was good enough as well. The company also issued a strong outlook for the second quarter. Shares rose in extended hours after the close to tick higher for the day to close at $17.17.
Fashion retailer Nordstrom (NYSE:JWN) missed forecasts on both its top and bottom line due to heavy discounts because of the unseasonably warm winter. The luxury department store also issued a down beat outlook for 2016. Shares initially fell sharply on the news in after-hours trading, but closed the regular session up nearly 1 percent, to $52.72.
MATHISEN: The Zika virus, which the World Health Organization calls a public health emergency, could cost the Latin American region $3.5 billion this year. According to the World Bank, countries that depend on tourism could be especially hard hit. The organization said it is making $150 million available immediately to help fight the virus.
EPPERSON: And there is a U.S. company that is also playing a part in the fight. SC Johnson, best known for household products like Pledge and Scrubbing Bubbles, is becoming a critical player in the global effort to combat the virus.
Mary Thompson has more from the company`s Waxdale plant in Mt. Pleasant, Wisconsin.
MARY THOMPSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Thousands of miles from the epicenter of the Zika virus, near the icy shores of Lake Michigan, Wisconsin-based SC Johnson is producing a key tool to battle the mosquito- borne illness.
MAUDE MEIER, SC JOHNSON SENIOR RESEARCH SCIENTIST: The most important thing is to really prevent the bite.
THOMPSON: The prevention provided to many by SC Johnson`s Off! and other repellents. To meet a Zika-fueled spike in demand, the family-owned firm began boosting production at some of its South American plants two months ago.
FISK JOHNSON, SC JOHNSON CEO: What I can tell you is that in Brazil and Argentina, we`re running about 900 percent of normal. So, a huge increase there.
THOMPSON: Declared a public health emergency by the WHO, the Zika virus is suspected of causing a sharp increase in Brazilian babies born with microcephaly, abnormally small heads.
The fifth generation of Johnsons to run the company, CEO Fisk Johnson convenes daily meetings to track the progress of the virus and demand for Off!, which is picking up here at home.
JOHNSON: We`re seeing an increase for demand here in the United States, an increase of about 40 percent from what would be normal at this time of year.
THOMPSON: While there are no reports of Zika being contracted through mosquito bites here in the U.S., entomologist Maude Meier says consumers will need to protect themselves as the weather warms up.
MEIER: I think people should be prepared. Don`t wait until it`s summertime and the mosquitoes are biting in full force.
THOMPSON: That`s why this plant in Wisconsin is now producing pallets of Off! like these 24/7 to stay ahead of demand.
But this also requires a consistent flow of key ingredients for its repellents like DEET.
JOHNSON: We have five or six suppliers around the world. And each and every one of them is beginning to ramp up their capacity now to help us.
THOMPSON: A global effort to fight what health officials fear could become a worldwide problem.
From Mt. Pleasant, Wisconsin, I`m Mary Thompson for NIGHTLY BUSINESS REPORT.
MATHISEN: Coming up, we will visit a unique company where your paycheck can include home ownership, as our "Bridging the Divide" series continues.
EPPERSON: The home ownership rate in America now sits at the lowest level in half a century, just around 64 percent. For African-Americans, it`s even lower, less than 42 percent. This as rents rise in small and large cities alike.
And tonight, we continue our series on efforts to bridge the economic divide with a look at one company in Cleveland that`s taking action.
Diana Olick shows us how it`s building its workforce and its community through an innovative program that turns employees into homeowners.
TIM COLEMAN, HOMEOWNER: It was a dream to own your own home.
DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: A dream and a prayer that went unanswered for grandparents Tim and Charlotte Coleman for half a century, until now.
COLEMAN: I was out of work for about a year. And I was looking for a job.
OLICK: Tim found one at a unique Cleveland cooperative.
Founded in 2009, Evergreen is a worker-owned and operated business that runs a commercial laundry and a greenhouse. The business also helps the employee owners become homeowners.
JOHN MCMICKEN, EVERGREEN COOPERATIVES CEO: That came along a few years after we started. You know, part of our challenge then and today, to some extent, is as we are hiring from these Cleveland neighborhoods, oftentimes, you know, one of the barriers to employment is just stable housing.
OLICK: So with some help from the county on taxes and the local housing authority, which had homes available through an existing program, Evergreen offered employees a five-year plan to home ownership.
MCMICKEN: After some financial training and some qualifications, our eligible employees are able to purchase a home that they then pay for via payroll deduction.
OLICK: From Charlotte`s paycheck at Evergreen`s greenhouse and Tim`s at the laundry.
COLEMAN: It`s become a neighborhood. That`s in your neighborhood where you came from.
OLICK: Together, they`re paying for and living in this house right in the neighborhood where they work.
COLEMAN: One thing I like about it, it comes out of your check before you even see it. So, that builds your credit up too.
OLICK: Affordable housing has reached a crisis level. More than 11 million Americans spend more than half their incomes on rents.
CHRIS HERBERT, HARVARD JOINT CENTER FOR HOUSING: It is kind of astounding given the importance of housing. You know, we go back to the housing act of 1948. A decent home and a suitable living environment for all Americans was a national goal. We have not achieved that. And yet we`re not talking about it.
OLICK: Cleveland is ranked the most affordable urban housing market in America. Homes here are very cheap and there are still thousands of abandoned properties left over from the foreclosure crisis. That`s why this program works so well here. The question is, would it work as well in a pricier city?
MCMICKEN: If you were to attempt to do this somewhere else, you would either, A, need more funding up front to catalyze it like we did, or more time. More time. So, maybe you pay for it in eight years instead of five.
OLICK: McMicken would like to see the program work in other cities and he`s had plenty of interest. But for now --
COLEMAN: My son, my daughter --
OLICK: -- at least it`s working for the Coleman, who have always loved their community and now finally have a real stake in it -- a home all their own.
For NIGHTLY BUSINESS REPORT, I`m Diana Olick in Cleveland.
EPPERSON: Evergreen says Detroit, New Orleans, and Baltimore have all expressed interest in bringing the program to their cities. And tomorrow, the final part of our series will look at the efforts to close the wealth gap between blacks and whites, with a look at how some financial adviser groups are working to bring more blacks into the profession and share more insights about saving and investing with African-American communities.