NIGHTLY BUSINESS REPORT for August 9, 2016, PBS - Part 1

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ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue Herera.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Box office success. Disney (NYSE:DIS) string of movie hits powers its quarter, but it next big bet won`t be the big screen. It will be on the small one.

SUE HERERA MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Return to sender. The Postal Service delivered a loss. The reason? It delivered packages.

MATHISEN: Sweat equity. If you build it, bounce off it or hang from it, will they come? What the fitness industry is doing now to get a leg up on the competition.

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, August 9th.

HERERA: Good evening, everybody. Welcome.

The NASDAQ closes at a record. But tonight, we begin with Disney (NYSE:DIS). The blue chip company rode a wave of box office hits like "The Jungle Book", "Finding Dory" and "Captain America" to a very profitable quarter.

That increase in studio revenue helped offset sales of its cable unit, which fell short of Wall Street expectations. And the biggest surprise was a major investment in a video streaming company formed by Major League Baseball. It`s called BAM Tech.

Overall, Disney (NYSE:DIS) earned $1.62 per share, one cent better than estimates. Revenue of $14 billion also topped expectations and was about 9 percent more than a year ago. But investors apparently wanted more and shares fell in initial afterhours trading.

Julia Boorstin who spoke with CEO Bob Iger has more on Disney`s quarterly results.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: The big headline from Disney`s better-than-expected earnings results, its commitment to digital. The media giant announcing it`s buying a third of streaming video company BAM Tech for a billion dollars, with plans to buy a new sports app that`s a collaboration of ESPN and BAM Tech. It also plans to use the new technology to create streaming video apps and products for the company`s other properties.

BOB IGER, DISNEY CHAIRMAN & CEO: We think it`s a good investment. We love the business model. We think that in today`s world, having the ability to stream on a scaled basis, live sports and live programming, is a competitive advantage.

BOORSTIN: Disney`s CEO Bob Iger says this investment leaves the door open for the company to eventually bring its core ESPN service direct to consumers outside the bundle if and when it makes sense. And in the meantime, Iger says Disney`s adopting as consumer shift to smaller TV bundles, announcing that its seven biggest TV channels will be included in the DirecTV Now bundle in the works.

Back over to you.

(END VIDEOTAPE)

MATHISEN: Julia Boorstin reporting.

Bill Smead owns Disney (NYSE:DIS) shares and has for a long time. He`s CEO of Smead Capital Management.

Bill, welcome. Good to have you with us.

BILL SMEAD, SMEAD CAPITAL MANAGEMENT CEO & CIO: Thanks for having us.

MATHISEN: What do you think of the strategic directions that Mr. Iger seems to be taking Disney (NYSE:DIS), the smaller bundle, a different way to reach viewers on television?

SMEAD: Well, the first thing is their genius is these multiple brands in multiple areas, and nurturing those brands. And what we`ve always believed is if you`ve got great content, you don`t really have to fear the distribution system, right? There`s been a lot of concerns about the changes in the distribution system, negatively impacting their addicted customers.

But what I think we heard from him today for example in this BAM investment is when you`re a Major League Baseball fan and you`ve got season tickets to a team and you follow them on the road, you can`t get enough contact with them, right? You can`t get enough information. They`re going to be at the cutting edge with their content everywhere it`s needed.

HERERA: So, are you saying that the ESPN worries, which, you know, knocked the stuffing out of the stock a couple of quarters ago, that those are in the past now?

SMEAD: They are a normal part of the ups and downs of a widely diverse portfolio in the entertainment business. I thought of it today, you know, there are certain companies in Warren Buffett`s table of companies that he owns or the stocks that he owns in the Berkshire Hathaway (NYSE:BRK.A) portfolio, and there`s always somebody having hard time in that, you know, stable of companies.

And it`s the same thing with Disney (NYSE:DIS). Right now, "Captain America" is hotter than a pistol and ESPN has come down a bit maybe because it`s harder to get commercials into soccer games than it is in football and basketball and basketball.

MATHISEN: Let`s talk about the stock. It has been a little bit bruised in recent quarters. What have you been doing with your holdings?

SMEAD: Well, we added to it recently. Here`s one o the reasons, Tyler. The -- we looked at many of the most appealing and successful major branded companies with addictive customer basis -- the Nikes, the Coca- Colas, the Procter and Gambles, et cetera -- and what we found out is, this is far and away the cheapest of those companies on both price to earnings forward basis and also on a free cash flow generation.

By the way, the thing that matters most to us in this report -- free cash flow was up 51 percent year over year. So, if you own the entire Disney (NYSE:DIS) Corporation, you had 51 percent more money, way over a billion dollars more that you can do whatever wanted with this quarter that`s compared to the year before. And that`s --

MATHISEN: Very quick answer here. What happens after Mr. Iger leaves? Are you worried about that? Quick, yes or no?

SMEAD: Well, the answer is you want somebody really good to take his place, and since he has been such an effective cultivator of other talents, I think he`ll find a really good person to take over stewardship.

MATHISEN: Bill, thank you very much. Bill Smead with Smead Capital Management.

SMEAD: Thank you.

HERERA: On Wall Street, the NASDAQ closed at a record. The S&P 500 and Dow inched upwards. The gains, however, small, came despite a decrease in productivity and some weak retail earnings. We`ll have more on that momentarily.

By the close, the Dow Jones Industrial Average rose 3 points to 18,533. NASDAQ added 12 to a record 5,255, and S&P 500 rose fractionally.

MATHISEN: Worker productivity fell for the third straight quarter and that is the longest stretch of productivity decline since the late 1970s. Productivity, which is the output of goods and services produced per hour of work, decreased a half percent. Economists expected an increase. The pace of productivity growth is a key factor in determining quickly worker pay and economic output can grow without triggering higher inflation. Sluggish productivity gains like we`ve been seeing can restrain wage in economic growth and weigh on American living standards.

HERERA: And Americans are borrowing more to finance vehicles. They`re also making more purchases on their credit cards. According to a quarterly survey by the New York Fed, total household debt in the U.S. hit more than $12 trillion in the second quarter and that`s an increase of about $35 billion from a year earlier. Mortgage debt, though, hasn`t moved much in the past two years and total student debt decline over that same time frame.

MATHISEN: A major Republican donor is now backing Hillary Clinton. Former MGM CEO, Harry Sloan, who served on the national finance committees for both John McCain and Mitt Romney, says Donald Trump is unprepared and temperamentally unfit to be president.

John Harwood follows the story for us tonight from Washington.

Harry Sloan, John, is not the only Republicans who oppose Trump. GOP Senator Susan Collins of Maine, a key state. A number of national security officials have added their names to the list.

My question really is, how significant is it in light particularly of the fact that much of Mr. Trump`s support is not based on affiliation with the GOP establishment?

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, significant for two reasons, Tyler, not each one individually, it`s the accumulation of them all happening at the same time. That is sending signals to wavering Republicans, wavering independents who lean toward Republican, that maybe this guy isn`t OK and we should go with the other candidate in the race.

Donald Trump has a base of support and as you mentioned, it`s not attuned to the elites. But it`s not a big enough base of support to win. He needs to add votes and the places he needs to get those votes are from some of those Republicans who are defecting.

HERERA: Which may be why it may be a controversial comment on the Second Amendment today. Take a listen.

(BEGIN VIDEO CLIP)

DONALD TRUMP (R), PRESIDENTIAL NIOMINEE: Hillary wants to abolish -- essentially abolish the Second Amendment. By the way, if she gets to pick -- if she gets to pick her judges, nothing you can do, folks. Although the Second Amendment people, maybe there is, I don`t know --

(END VIDEO CLIP)

HERERA: How`s that going to play?

HARWOOD: Not well.

Look, Donald Trump seemed to be making a joke. It`s a joke that some people including the Clinton campaign and some in the audience actually sitting behind him, took as a kind of breathtaking allusion to violence.

Now, the Trump campaign says no, we were talking about mobilizing Second Amendment people hind Donald Trump in the election and certainly, they are going to mobilize Second Amendment people behind Donald Trump. But at a moment when the argument is fitness for office, even joking about a topic like this seems to be something that adds to the troubles of Donald Trump has had as he`s trying to shift towards issues like his economic plan.

MATHISEN: You know, Mrs. Clinton is having some trouble of her own. Two parents of Americans killed in the terror assault on a U.S. consulate in Benghazi are suing her for wrongful death. What does something like this mean for her campaign?

HARWOOD: Well, it continues the line of argument that`s been made since Benghazi, that Hillary Clinton was negligent in some fashion. She`s, of course, been cleared by formal inquiries of any direct reasonability, but this is the line that Republicans use to discredit her term as secretary of state.

Interestingly, there was a controversy yesterday when at a Clinton rally, the father of the Orlando nightclub shooter was in camera view behind her. This is something that in addition to that lawsuit that you just mentioned, is going to fan controversy about Hillary Clinton and draw criticism. I would expect her to distance herself from the decision to allow that father into the rally.

MATHISEN: All right. John, thank you very much. John Harwood tonight in Washington.

HERERA: Small business optimism rose just a touch in July. But don`t get too excited about that slight increase because the level remains well below the long-term average and part of the reason for that cautious outlook has to do with upcoming election.

Kate Rogers (NYSE:ROG) delves into some of the details.

So, what`s the feeling overall on Main Street right now, Kate?

KATE ROGERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, see, you hit right off the bat. So, optimism is fairly stagnant on Main Street. We`re at 94.6 for the reading in July. It`s been climbing up and down, you know, about a tenth of a point over the past several months. I will mention, it`s a one year high, but as someone who covers this, it`s nothing to get too excited about.

You`re still hearing more business owner saying conditions are going to be worse off in the next three to six months than those who think it`s going to be better. They`re citing high inventories and regulations, big two issues there. And also, trouble finding skilled workers continues to come up as a really big issue for small --

MATHISEN: So, 94.6 is not a good reading. It suggests they`re not optimistic?

ROGERS: No, the historical average is 98 and so, it`s been well below that for sometime. Ninety-eight was the historical average prerecession, and so, you want to see it between 100 and 105 usually is considered better. Better, yes, that would be blowout. It would be great.

HERERA: Is the political climate playing into this lack of optimism?

ROGERS: Yes. So, you`re seeing an increasing number of small business owners citing the political climate as a major reason that they`re choosing not to expand right now and a major reason they think right now is not a good time to grow their business. Thirty-six percent of small business owners said that in July. That`s also a one-year high, which is interesting, and last January 2015, that was at 19 percent.

MATHISEN: Is it the uncertainty leading up to the -- does it have to do with one particular candidate of the two or is it just we need to get this behind us?

ROGERS: I think it`s general uncertainty. As we`ve discussed on this show before, I mean there`s not solid small business plans from either candidate. Even Donald Trump yesterday in Detroit mentioned we`re going to cut regulation at every level. Well, what regulations are you talking about? What does that mean?

So, uncertainty is a keyword when it comes to both candidates. Hillary put some bullet points on her website. But, you know, bullet points don`t lead to a solid foundation for small business growth unfortunately.

So, these small business owners, they want details, they want answers. And I will note the NIFB is conservative leaning, that group, they don`t endorse a candidate and they aren`t saying Trump is necessarily the key answer here to small business success.

HERERA: We will see. Thanks.

ROGERS: We will. Thank you.

HERERA: Kate Rogers (NYSE:ROG).

MATHISEN: Thanks, Kate.

All right. Still ahead, why the Postal Service did not deliver financially despite delivering more packages?

(MUSIC)

HERERA: Delta passengers face more delays and canceled flights today, this as that carrier tries to get back on track after the airline`s computer system was shut down worldwide for about six hours yesterday. Delta is attempting to thin out its schedule to help normalize flight operations.

MATHISEN: Losses are mounting for the U.S. Postal Service. The independent government agency has been losing more money than it`s been making for the better part of a decade. This as it struggles to increase share in a market that is now dominated by e-mail and ecommerce and not sending first class letters.

But there was a sliver of positive news. Morgan Brennan has more on the postal service`s financial health.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Another quarter, another loss. U.S. Postal Service lost more $1.5 billion last quarter. But things aren`t quite that bad, if you take out fees that are mandated by Congress not related to operations, the operating loss is $552 million.

Still, today`s results showed it`s all about ecommerce. Of course, the USPS has been aggressively betting on for its turnaround. Package revenue grew 18 percent, helping to offset further declines in first class mail, where volume kept shrinking and stamp prices were lowered in April for the first time in a century.

But its post offices handle more packages, more money must be spent to ensure their delivery.

SATISH JINDEL, SHIPMATRIX PRESIDENT: They are delivering on Saturdays and Sundays, and as the volume increases for the service, they do end up at the higher cost because on Sundays, they don`t have mails to deliver, so they cover the cost of the package service.

BRENNAN: Last quarter, that translated into a nearly $500 million jump in cost, as more workers and more vehicles were needed to get more goods to doorsteps. Experts say much of that is the Amazon (NASDAQ:AMZN) effect, since the postal service is Amazon`s biggest carrier.

With a billion packages shipped by Amazon (NASDAQ:AMZN) last year alone, carriers have scrambled to keep pace. Earlier this year, the USPS raised some parcel rates to help compensate for those rising cost, and today, the agency said further hikes will be considered.

The Postal Service is hoping that they push for package delivery will eventually pay off. But on the heels of today`s results, the question is, how long will it actually take?

For NIGHTLY BUSINESS REPORT, I`m Morgan Brennan.

(END VIDEOTAPE)

HERERA: Not as many people want to take cruises to Europe, and that`s where we begin tonight`s "Market Focus".

Norwegian cruise line is cutting its earnings guidance for this year and next due to falling demand from North American customers and a weaker British pound. In the latest quarter, the company managed to beat on earnings, but revenue came in a little light. As a result of that, shares fell nearly 12 percent to $37.91.

Valeant Pharmaceuticals reported a loss and a drop in revenue in the most recent quarter, but investors welcome the CEO`s plan to reorganize the business. In addition, Valeant reaffirmed its full year outlook and said it will trim more than $5 billion from its debt over the next year and a half. Shares were up 25 percent $28.16.

Tribune Media said its loss widened as steep income tax charges tied to the sale of the company`s "Newsday" newspaper hurt its results. But even so, earnings were good enough to top estimates. The company did however miss revenue targets despite an increase in political advertising. Shares fell 8 cents to $37.22.

MATHISEN: Job recruiting website Monster Worldwide (NYSE:MWW) is going to be bought by the staffing company Randstad holding for $429 million. Under the deal, Monster will delist from the New York Stock Exchange, but will remain an independent entity. In addition, Monster reported a loss and a decline in revenue in its latest quarter. Shares of Monster up today though, 26 percent to $3.50.

Wayfair said an increase in expenses caused the home furnisher to post a wider than expected loss. The company did though report a rise in revenue, and that surpassed estimates in part because of a 65 percent increase in its number of active customers.

CEO Niraj Shah spoke about the company`s progress in scaling the business.

(BEGIN VIDEO CLIP)

NIRAJ SHAH, WAYFAIR CO-FOUNDER & CEO: We`ve been at this 14 years. So, our systems, the technology we have, the 5,000 people we have, we`ve gotten past those initial growing pains where, you know, the question is, do you keep going, do you build those hardened systems, do you scale them up? And we continue to do that. Then, we see more and more opportunity as the years go by.

(END VIDEO CLIP)

MATHISEN: Shares fell more than 19.5 percent on the day to $38.80.

Gap (NYSE:GPS) meantime isn`t out of the woods just yet. The apparel retailer reported a 4 percent drop in same store sales for the month of July. Its Banana Republic brand slipped on a peel. However, Gap (NYSE:GPS) earnings guidance for the second quarter was significantly ahead of analysts` expectations. Shares, though, slipped as well, down 6 percent to $24.01.

Domestic sales grew glue for the first time in more than three years at Coach (NYSE:COH) but that upbeat news wasn`t enough to help the hand bag and leather goods retailer clear revenue targets. It did however top profit estimates and announce plans to discontinue selling its products in department stores.

CEO Victor Luis said despite global economic concerns, he still believes in the brand.

(BEGIN VIDEO CLIP)

VICTOR LUIS, COACH CEO: There`s obviously a tremendous amount of macro economic pressures that are taking place right now, whether it`d be impacting the impact of currency, geopolitical issues such as Brexit and, of course, some of the tragic terrorist attacks that impact sentiment, especially around luxury goods. But long-term, this is an amazing category and I believe the most attractive category in the fashion space to be in.

(END VIDEO CLIP)

MATHISEN: Shares fell 2 percent to $40.51.

HERERA: In addition to getting the earnings results from Coach (NYSE:COH) and Gap (NYSE:GPS) this week, we`re also going to hear from some of the department stores. Macy`s (NYSE:M) and Kohl`s (NYSE:KSS) on Thursday. While Nordstrom (NYSE:JWN) and JCPenney are both on top for Friday.

So, let`s turn now to Dana Telsey, CEO and chief resource officer at Telsey Advisory Group, for more on what she`s expecting from retailers reporting this week.

Good to see you, Dana.

DANA TELSEY, TELSEY ADVISORY GROUP: Thank you. Thank you so much for having me. Nice to see you too.

HERERA: Let`s start, first of all, with Macy`s (NYSE:M) because, you know, it`s had some very tough sleddings. What are you going to be looking for in Macy`s report?

TELSEY: I`m looking for what the same store sales are. I think, overall, obviously, they had a poor first quarter in same store sales down just over 6 percent. I think the second quarter, we want to see if it`s continuing, or if there`s any slight improvement.

I think we`re also going to be watching inventory levels carefully and also margins. There isn`t any department store company that isn`t looking to reduce inventory levels and manage their margins. We heard about a lot of promotions during the quarter. So, that`s one of the things we`ll be keying in on.

MATHISEN: Let me turn you back to Coach (NYSE:COH) and Gap (NYSE:GPS), two companies that have struggled in recent times. Are they getting better?

TELSEY: I think Coach (NYSE:COH) is getting better. Remember, it`s been a two-year turn around plan in June 2014, that they laid out their turnaround. They said they`d have positive comps two years later in June of 2016, and that`s what happened. I think the downdraft in the stock today came from the fact that they are reducing some department store exposure. It`s hitting them for 100 basis points on the sales lines, the guidance for 2017.

I think it positions them stronger on margins. Gap (NYSE:GPS) is a different story. The improvement in earnings in the second quarter came from careful attention to margins and expenses while sales decelerated at the end of the quarter.

HERERA: Let me turn you to the luxury part of the market, and Nordstrom (NYSE:JWN) is upscale, not specifically luxury, but it`s certainly is upscale. What are you expecting from their results and what about the state of luxury overall?

TELSEY: I think overall, what I`m expecting from Nordstrom (NYSE:JWN), I want to see how the components of the same store sales are. They break out the full line department stores, they break out rack. I think you`re still going to have the full line department stores down in excess of 5 percent on a comp basis. We`ll see if this negative at the rack have improved at all.

Their anniversary sale is split between the July quarter and August quarter. So I think we`re going to have to get an update on how that is. And, overall on luxury, like Victor Luis said at Coach (NYSE:COH), it`s challenging for luxury now with fewer tourists and the feel good factor isn`t what used to be.

HERERA: Right. We`ll leave it there, Dana. Thanks for joining us.

TELSEY: Thank you.

HERERA: Dana Telsey with Telsey Advisory Group.

MATHISEN: Today, chief executive of Walmart and CEO of jet.com spoke about their recently announced $3 billion acquisition, Walmart`s largest purchase ever of an ecommerce company. The CEO of jet.com called the deal, quote, "a perfect marriage".

(BEGIN VIDEO CLIP)

DOUG MCMILLON, WAL-MART CEO: We`re serious about e commerce and want to serve customers in the way they want to shop. As we`ve been watching jet.com grow, we`ve been paying close attention to the traction that they`ve had and their ability to scale so quickly.

MARC LORE, JET.COM CEO: I think this allows us to accelerate a growth trajectory and pull in profitability. The cost of goods and all the assets that they can bring to Jet is going to make our overall experience better and the financials better.

(END VIDEO CLIP)

MATHISEN: Stick with that guy. Lore sold his previous company, Quidsi, parent of diapers.com, to rival Amazon (NASDAQ:AMZN) back in 2010.

HERERA: Coming up, why gyms and fitness studios are going to extremes to give their profits a lift.

(MUSIC)

MATHISEN: Three well-known universities Yale, NYU and MIT were sued over their retirement plans. The lawsuit alleges that their defined contribution plans charged employees excessive fees. The complaints allege that the universities failed to monitor the fees paid to administer the plans and did not replace more expensive, poor performing options with more economical ones.

HERERA: The competition in fitness is fierce and that means studios are pushing the envelope to pull people in the door, with crazy workouts to get you fit, Diana Olick shows you the rope, literally, in our latest edition of "Sweat Equity".

(BEGIN VIDEOTAPE)

UNIDENTIFIED FEMALE: That feels really good.

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Whether you`re hanging from the ceiling, you`re definitely not bored. And that`s the strategy behind new fitness offerings in a space that`s getting increasingly crowded.

How important is it to really mix it up?

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