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Saturday August 30, 2014



Struggles Continue for Barnes & Noble

Barnes & Noble, Inc. (BKS) reported its fiscal 2014 first quarter results on Tuesday, August 20. The book retailer's earnings continue to decline as its Nook segment falls further behind rival e-book offerings.

First quarter revenue was $1.3 billion, an 8.5% decrease from last year's $1.45 billion. The Nook segment played a big part in the revenue decrease with revenue that fell 20.2% compared to the same quarter last year.

To make matters worse for Barnes & Noble, the company recorded a net loss of $87 million. This net loss was even greater than the comparable period last year when the company reported a net loss of $39.8 million.

Michael P. Huseby, President and CEO of Barnes & Noble and NOOK Media, tried to reassure investors that efforts are being taken to return the company to profitability. "Our top priority in our operating strategy is to increase all categories of our content revenue. We are working on innovative ways to sell content to our existing customers and are exploring new markets we can serve successfully," said Mr. Huseby.

Barnes & Noble has faced numerous challenges in the past few years as e-books have grown more popular. The company released the NOOK e-reader in an effort to tap into the growing e-book market, but the NOOK's popularity continues to lag behind that of Amazon's Kindle and Apple's iPad. Some investors saw a silver lining in February when Chairman Leonard Riggio announced plans to acquire Barnes & Noble's retail business. On Tuesday, Mr. Riggio formally announced that he was suspending those efforts, which helped contribute to the stock's fall during Tuesday trading.

Barnes and Noble, Inc. (BKS) shares ended the week at $13.99.

Target's Earnings Miss the Spot

Target Corporation (TGT) reported its second quarter earnings on Thursday, August 22. The company reported weak earnings, the result of increased costs from the company's expansion into Canada.

Second quarter revenue was $17.2 billion, a 4% increase from the comparable period last year when revenue was $16.8 billion. The revenue increase was the result of a slight 1.2% increase in comparable store sales and additional revenue from new stores.

Net income for the quarter was $611 million, a 13.2% decrease from the $704 million reported during the same period last year. Target incurred greater expenses during the quarter as it sought to continue its plan to open as many as 124 stores in Canada by the end of the year.

Gregg Steinhafel, Chairman, President and CEO, had this to say about the results, "Target's second quarter financial results benefited from disciplined execution of our strategy and strong expense control, offsetting softer-than-expected sales. For the balance of this year, our U.S. outlook envisions continued cautious spending by consumers in the face of ongoing household budget pressures. In Canada, where we are only five months into our market launch, we continue to learn, adjust and refine operations in our existing stores as we prepare to open another 56 stores by year-end."

The company is incurring significant costs this year to aggressively expand into Canada, the company's first foray outside the United States. Because of the costs required to open new stores, Target announced that it expects its earnings per share for the year to be near the low end of its previous guidance to investors. This news combined with the subpar earnings report led Target's stock price to fall nearly 4% on Wednesday, August 21.

Target Corporation (TGT) shares ended the week at $64.35.

Pandora's Earnings Warn of Trouble Ahead

Pandora (P), an Internet radio service, reported its fiscal 2014 second quarter results on Thursday, August 22. Despite beating expectations during the quarter, the company provided some pessimistic guidance for the rest of the year.

Pandora reported revenue of $162 million during the quarter, a 58% increase from the same period last year. Advertising revenue saw especially strong gains, increasing 44% to $128.5 million.

The company reported earnings per share of $0.04. This number beat expectations that earnings per share would be only $0.02.

Joe Kennedy, Pandora's Chairman and CEO, seemed pleased with the quarter's results. "Our second fiscal quarter was an important inflection point in Pandora's history," Mr. Kennedy said. "Strong momentum in our mobile business, with non-GAAP total mobile revenue growing 92% year-over-year to $116 million, clearly demonstrates the leverage in Pandora's business model. To drive future growth, we are accelerating investment in new technologies, channels and capabilities that maximize the value Pandora delivers."

While Mr. Kennedy may be publicly optimistic about the company's future, investors and analysts are not. First, Pandora's guidance for the rest of the year is that earnings per share will be between zero and $0.05, below the straight $0.05 analysts expected. In addition, Apple is set to launch its iTunes Radio service this fall, which will create significant competition for the company, especially considering that many of Pandora's listeners use Apple mobile devices. As a result, many investors and analysts believe Pandora's listener base is set to take a huge hit later this year, ultimately impacting the company's earnings.

Pandora (P) shares ended the week at $18.91.

The Dow started the week at 15,081 and closed at 15,011. The S&P 500 started the week at 1,656 and closed at 1,664. The NASDAQ started the week at 3,603 and closed at 3,658.

Treasuries Rise on Weak Home Sales News

Treasury prices rose on Friday after data showed that the sale of new homes was weaker in July than expected. This week the Federal Reserve released the minutes from its July meeting showing that it plans to begin reducing its bond purchases later this year.

Sales of newly-built homes declined 13.4% in July to 394,000, which was much lower than the expected figure of around 487,000 homes. The decline was the biggest since May 2010 and was most likely the result of a continued weak economy and rising mortgage rates.

Prior to the home sales data the 10-year note yield rose to 2.93%. After the data release the 10-year note yield fell to 2.84% during early Friday trading. The 30-year bond yield fell to 3.83%.

The release of the Fed's July meeting minutes indicated that the Fed will look to begin tapering its bond purchases later this year, perhaps as early as September. Although the bond market has been reacting wildly to speculation surrounding tapering all summer, the meeting minutes had a muted impact on the markets, an indication that the markets have already priced in the expected tapering.

Global central bankers, including some members of the Federal Reserve, are gathering this weekend for an annual economics conference in Jackson Hole, Wyoming. However with the absence of Chairman Ben Bernanke, most pundits don't expect any fresh announcements regarding the specific timing of the tapering. It seems for now that the markets must hold their breath in anticipation of the Fed's decision.

The 10-year Treasury note yield finished the week at 2.82% while the 30-year Treasury note yield finished the week at 3.80%.

Interest Rates Rise on Tapering News

Freddie Mac released the results of its weekly Primary Mortgage Market Survey (PMMS) on Thursday, August 22. Average fixed mortgage rates rose on news that the Federal Reserve plans to start reducing its bond purchasing program, known as quantitative easing, later this year.

The 15-year fixed rate mortgage averaged 3.60% this week, which was up from last week's average of 3.44%. Last year at this time, the 15-year fixed rate mortgage averaged 2.89%.

The 30-year fixed rate mortgage averaged 4.58% this week. This represents an increase from last week when it averaged 4.40%. One year ago at this time, the 30-year fixed rate mortgage averaged 3.66%.

Frank Nothaft, Vice President and Chief Economist at Freddie Mac, commented on this week's rates, "Fixed mortgage rates continued to follow bond yields higher leading up to the August 21st release of the Federal Reserve monetary policy committee's minutes for July. In its July 30th and 31st meetings, the committee members were broadly comfortable with a plan to start reducing its bond purchases later this year, although a few emphasized the importance of being patient."

"Meeting participants acknowledged mortgage rate increases might restrain housing market activity, but several members expressed confidence the housing recovery would be resilient in the face of higher rates. In fact, existing home sales increased in July to the strongest pace since November 2009 and homebuilder confidence in August rose to its highest reading since November 2005. Both increases occurred after mortgage rates had risen from their spring-time lows."

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

Published August 23, 2013

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