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Saturday August 30, 2014



Wal-Mart's Sales and EPS Disappoint

Wal-Mart Stores, Inc. (WMT), the world's largest retailer, reported its quarterly earnings on August 15. The company reported net sales and earnings per share below expectations, causing investors to question the strength of consumer spending and the economic recovery.

Wal-Mart reported net sales of $116.2 billion for the quarter. Analysts had expected quarterly sales of $118.47 billion.

The company reported quarterly net income of $4.07 billion. This represents an increase of 1.3% from the same period last year. However, Wal-Mart reported earnings per share of $1.24, one cent below analysts' estimates of $1.25 per share.

"We delivered a solid increase in earnings per share for the second quarter," said Mike Duke, Wal-Mart's President and CEO. "I'm encouraged by our position to execute in the second half of the year, particularly with the steps we're taking to improve performance. There are areas of our business where we can do a better job, and we will." Despite Mr. Duke's positive words, Wal-Mart reduced its EPS guidance for 2013 from $5.20-5.40 to $5.10-$5.30.

In addition, Wal-Mart announced on August 15 that they have been sued by the Texas Hearing Aid Association for allegedly selling hearing aids in Texas without the required state license. The Association alleges that Wal-Mart was aware of the licensing requirement and intentionally ignored the requirement to reap the full benefit of hearing aid sales. The Association is looking to stop Wal-Mart from selling hearing aids until it obtains a proper license and is asking that Wal-Mart return all profits from unlicensed sales.

Wal-Mart Stores, Inc. (WMT) shares ended the week at $74.11, down 3.2% on the week.

Macy's Earnings Miss Expectations

Macy's, Inc. (M), an established U.S. retailer, reported its quarterly earnings on August 14. The company's earnings per share and sales numbers failed to meet the expectations of Wall Street analysts.

Macy's reported total sales of $6.07 billion for the quarter. This represents a decrease from the comparable period last year when the company reported net sales of $6.12 billion.

The company reported quarterly net income of $281 million. This is $2 million more than Macy's reported for the same period last year. However, Macy's reported earnings per share of $0.72, which was $0.06 below the expectations of some Wall Street analysts.

"Going into the third quarter, we are encouraged by our early read on the back-to-school season," said Terry Lundgren, Macy's Chairman, President and CEO. "We believe we have the right strategies in place at Macy's and Bloomingdale's, particularly in the omnichannel and online initiatives that are driving our business to a new level of shopping accessibility for our customer. We have dissected the fall calendar and related merchandise strategies for the second half, and we remain confident about our prospects for growth in the remainder of the year."

As part of its Believe campaign Macy's will be providing schools with the script and music score to its original production "Yes, Virginia The Musical." In addition, Macy's will give $1,000 to 100 schools to help make the productions possible. The play was inspired by the true story of Virginia O'Hanlon, who in 1897 at the age of eight wrote a letter to the editor of the New York Sun newspaper asking whether Santa Claus existed. The editor wrote an enthusiastic response encouraging Virginia to believe. As part of the campaign, Macy's is collecting letters to Santa. For each letter, Macy's will give $1 to Make-a-Wish Foundation (up to $1 million).

Macy's, Inc. (M) shares ended the week at $44.99, down 6.76% for the week.

Dell's Profit Falls amid Buyout Talks

Dell, Inc. (DELL), a seller of personal computers, reported its quarterly earnings on August 15. The company's results showed a drastic drop in net income from a year ago.

Dell reported revenue of $14.51 billion. This figure is about the same as last year at this time when the company reported revenue of $14.48 billion.

Despite similar revenue, profit dropped sharply. The company reported net income of $204 million. This is a decrease of 72% from the same period last year when the company reported net income of $732 million.

Brian Gladden, Dell's CFO, commented on the quarterly results. "In a challenging environment, we remain committed to our strategy and our customers, and we're encouraged by increasing customer interest in our end-to-end solutions offering and continued growth in our Enterprise Solutions, Services and Software business."

On February 5, Michael Dell and private equity firm Silver Lake Partners entered into an agreement to acquire Dell. Carl Ichan and Southeastern Asset Management challenged this buyout agreement in court. They argued that Dell and Silver Lake undervalued the company with their offer and launched an opposing bid to buy out 72% of the company. The judge turned away Ichan's petition. If the transaction is completed, Dell will no longer be a publicly traded company but will be privately owned by Michael Dell and Silver Lake Partners.

Dell, Inc. (DELL) shares ended the week at $13.82, up 0.73% for the week.

The Dow started the week at 15,415 and closed at 15,081. The S&P 500 started the week at 1,688 and closed at 1,656. The NASDAQ started the week at 3,646 and closed at 3,603.

Treasuries Fall as September Looms

Treasury prices fell and yields rose to their highest level in two years on Thursday, August 15. This rise in yields reflects investors' concerns that the Federal Reserve (Fed) will begin tapering its $85 billion per month bond-purchasing program next month.

The 10-year Treasury note yield reached 2.82% during Thursday trading, the highest since August 2011. The 10-year yield rose 19 basis points for the week, the most since the week ending July 5.

Fears that the Fed will begin reducing its purchases of government bonds next month grew when the U.S. Labor Department reported encouraging jobs numbers on August 15. The report showed that the number of applications for unemployment benefits declined 15,000 to 320,000 for the week ending August 10. This represents the fewest number of initial claims since the week ending October 6, 2007.

"Expectations are that the Fed will be withdrawing its stimulus and that's definitely a negative for rates," said Thomas Simons, a Government-Debt Economist at Jeffries LLC. "Jobless claims were taken with the most weight. Clearly it's a good sign for the labor market when you have an indicator of layoffs at its pre-recession level."

In spite of the strong employment data, some investors are worried that the economy is not as healthy as this data would seem to indicate. Consumer prices increased 2% for the 12 months ending July 2013. Additionally, Wal-Mart, Macy's and Kohls all reported quarterly earnings below expectations this week showing that consumers may be cutting back on spending.

However, others argue that reducing the stimulus is the best thing for the economy in the years to come. "A lot of people expect the Fed to taper in September; its probably the right thing for the Fed to do," said Drew Matus, U.S. Chief Economist at UBS Securities. "In the long run, the Fed acknowledging the economy is strong enough to survive without continued rounds of easing should be considered net positive as we move ahead."

The 10-year Treasury note yield finished the week at 2.83% while the 30-year Treasury note yield finished the week at 3.86%.

Interest Rates Remain Stable

Freddie Mac released the results of its weekly Primary Mortgage Market Survey (PMMS) on Thursday, August 15. The results show average mortgage rates remained largely unchanged this week.

The 15-year fixed mortgage rate averaged 3.44% this week. This represents an increase of one basis point from last week when the average fixed mortgage rate was 3.43%. One year ago at this time, the 15-year fixed mortgage rate averaged 2.88%.

This week, the 30-year fixed mortgage rate averaged 4.4%. This figure is unchanged from last week. Last year at this time, the 30-year fixed mortgage rate averaged 3.62%.

"Fixed mortgage rates have been bouncing around over the past few weeks on market speculation that the Fed will taper some of its monetary stimulus," said Frank Nothaft, Vice President and Chief Economist at Freddie Mac. "In fact, 65% of economists surveyed by Bloomberg expect the Fed to reduce the amount of bond purchases at its September 17th and 18th monetary policy committee meetings. Currently, mortgage rates on 30-year fixed mortgages are 1.1 percentage points above their all-time low set on November 21, 2012, which translates into $125 more per month in mortgage payments on a $200,000 loan."

The money market fund finished this week at 0.4%. The 1-year CD finished at 0.6%.

Published August 16, 2013

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