« June 25, 2006 - July 01, 2006 | Main | July 09, 2006 - July 15, 2006 »
Ask Wal-Mart, which saw anemic same-store sales growth of just 1.2 percent in June.
Some interesting nuggets: Tom Schoewe, executive vice president and chief financial officer, said traffic was down as customers seem to be making conscious efforts to make fewer trips to Wal-Mart, due to high gas prices. And Wal-Mart shoppers appear to have less disposable income for discretionary items. “The priority in spending by our customers is on food and consumables,” Schoewe said.
Oh, and at SAM'S CLUB, which appeals more to small business owners, the pictures wasn't much better. Excluding gas sales, same-store sales were up 1.3 percent.
Posted by dan at 11:04 AM
Steven Jones reports in the Wall Street Journal that railroads have given up on hedging energy costs and are simply passing through higher fuel costs to their customers.
In recent years, railroad companies aggressively hedged their fuel costs through the use of financial derivatives, saving millions of dollars.The strategy has left the station. Most railroads today are instead passing higher fuel costs on to their commercial customers in the form of surcharges. . .
"Hedging is not a long-term strategy" for containing fuel cost, says Robin Chapman, a spokesman for Norfolk Southern Corp., which put its last fuel hedges in place in May 2004. "When we thought we had reached a plateau in [oil and fuel] prices, we let the program phase out." . . .
Instead, oil hovers around $75 a barrel, and Norfolk Southern and other railroads have implemented fuel surcharges. For some railroads the charges amount to as much as 16% of their base freight rates, although Norfolk Southern's surcharge is now only about 2% of the freight rate.
One factor in the railroad operators' favor: Fuel surcharges are even higher on many air and truck shipping routes, and surcharges have cropped up in other industries, too.
United Parcel Service Inc. and FedEx Corp. recently boosted package fees to cover rising fuel costs. Cruise operators are raising prices and changing itineraries to reduce fuel consumption. Some airlines last month added surcharges on international flights. Even pizza parlors and florists are tacking on surcharges for home delivery. . .
Even railroads that used hedging successfully are turning away from it.
CSX Corp. of Jacksonville, Fla., entered 2005 with about 48% of its anticipated fuel demand, or about 360 million gallons of diesel, hedged at 81 cents a gallon, according to regulatory filings. At that time, diesel was going for about $1.95 a gallon.
But in the first quarter of 2006, hedges covered only 25% of CSX's fuel needs, falling to 11% in the second quarter and 1% in the third, according to filings.
In 2004, one year after implementing its hedge strategy, the company shifted its focus and "fuel surcharges became the primary vehicle through which CSX manages fuel price volatility," said a securities filing at the time.
Posted by dan at 08:56 AM
Leslie Wayne reports in the New York Times that Senators are upset that Boeing will be able to deduct a giant penalty it's going to pay to settle charges of wrongdoing from its taxable income.
Three prominent Republican senators have written to Attorney General Alberto R. Gonzales to express concern that Boeing may be allowed to take a tax deduction for a $615 million settlement reached last week with the government.The three senators — Charles E. Grassley of Iowa, chairman of the Senate Finance Committee; John McCain of Arizona, a longtime critic of Boeing; and John W. Warner, chairman of the Armed Services Committee — said in the letter that allowing Boeing to deduct payments to settle government ethics charges "would be unacceptable."
Boeing and the Justice Department reached an agreement on Friday in which the company agreed to pay $615 million to avoid criminal charges and settle claims arising from its improper hiring of a Pentagon official and its obtaining of proprietary documents from the Lockheed Martin Corporation relating to government rocket launchings.
Allowing the Boeing settlement to be tax deductible, the senators said in the letter, would result in "leaving the American taxpayer to effectively subsidize its misconduct."
"We are not interested in settlements that are designed to look good in newspapers, but fail to bring real accountability," the letter stated; a copy of the letter was obtained by The New York Times.
Mr. McCain first raised questions about Boeing's relationship with the Pentagon a couple of years ago. Hearings he called ultimately led to the cancellation of a $23 billion deal for aerial refueling tankers between Boeing and the Air Force as well as to the ethical investigations that resulted in the $615 million settlement, one of the largest ever imposed on a military contractor.
A Boeing spokesman, Tim Neale, said the settlement with the Justice Department did not address the tax status of the payment.
Mr. Neale said that $50 million of the settlement represented a penalty to resolve criminal charges and was not deductible. But, he said, the tax status of the remaining $565 million, which was to settle civil charges, was unclear.
Posted by dan at 08:51 AM
SEC Commissioner Paul Atkins gave a bizarre speech yesterday, in which he essentially praised backdating options as a good deal for shareholders. Bloomberg reports via the New York Times:
Companies that build in a profit for executives on stock options by making grants ahead of good news are not guilty of insider trading, said Paul S. Atkins, a commissioner at the Securities and Exchange Commission.Mr. Atkins said such maneuvers — which some federal officials say might be criminal fraud — were good for shareholders because directors could issue fewer options to reward executives knowing the price would rise, and then could pay lower salaries.
"It is cheaper to pay a person with well-timed options than with cash," Mr. Atkins said during a speech at a corporate governance forum in Washington yesterday. He said timing the grants gave companies "the biggest bang for the buck."
More than 60 companies have disclosed investigations, including 40 grand jury investigations, into whether options were timed to coincide with days when prices were low. Such timing might undermine the purpose of options, which are meant to encourage executives to act to make their stock rise. At least 17 people have been fired or have quit in connection with the inquiries.
Huh?
Posted by dan at 08:48 AM
Jennifer Levitz has the latest developments in the options backdating scandal in the Wall Street Journal. A question for her colleague at the editorial page, Holman Jenkins, who has pooh-poohed the practice: if backdating options is appropriate, why are companies restating earnings after they discover that they've engaged in options backdating?
Quest Software Inc. said it will restate more than five years of financial statements after an internal investigation found that "many" stock options to employees were wrongly dated.Quest, an Aliso Viejo, Calif., maker of software to help companies manage databases, said a special committee of independent directors found that "administrative approvals" required for many of the company's stock-option grants from fall 1999 into 2002 were "actually obtained subsequent to the measurement dates used for financial reporting purposes." That language suggests the options were backdated, since the measurement date for financial reporting is the date the option becomes effective.
When option grants are backdated to earlier days when the share price is lower, they effectively become "discount options" that require an expense under accounting rules. Quest said it didn't properly account for the options and will now restate its financials to do so. It said the amount of the additional expense "is expected to be material."
The company said the restatements will extend from 2000 through the first quarter of 2006. The restated periods continue well past the time when the company says it found problematic grants because accounting rules can call for option expenses to be spread over a period of years.
Quest said the special committee's review is ongoing and that the company hasn't yet identified all the stock-option grants that were wrongly dated. It added that it expects to incur "significant" costs arising from the investigation and related activities. Shares of Quest tumbled $1.40, or 9.9%, to $12.78 in 4 p.m. composite trading on the Nasdaq Stock Market.
Posted by dan at 09:59 AM
When it comes to inflation, the rubber is literally hitting the road. The Wall Street Journal reports.
Higher prices of rubber and oil are leaving their mark on tire makers.Sumitomo Rubber Industries Ltd. of Japan yesterday slashed its profit and sales outlook for the year, blaming higher natural-rubber prices. The warning was just the latest sign of stress from tire manufacturers, whose earnings have been squeezed by raw-materials costs as well as pressure from customers to limit price increases.
Earlier this week, French tire maker Michelin SA said it will raise prices of some tires in Europe, reflecting rising raw-material costs. Analysts and traders weren't surprised by Michelin's news, but they were skeptical of the company's ability to pass price increases on to transportation-industry customers, which are already affected by high energy costs. Price increases for Michelin's new and retread truck tires and earthmover tires will average 3% to 5%, effective this summer. Michelin is the world's largest tire maker by volume.
Last week, Bridgestone Corp., Sumitomo Rubber's bigger Japanese competitor, lowered its profit outlook because of higher costs for natural rubber and oil used to make tires and a loss from the closure of a U.S. tire plant.
Italian industrial conglomerate Pirelli & C. SpA Friday abandoned plans for an initial public offering of shares in its tire unit after hitting weak investor demand. Pirelli had hoped to raise as much as €810 million, or about $1 billion, from the sale of 35% of its Pirelli Tyre SpA business.
Posted by dan at 09:54 AM
Ron Nixon has a good piece in the New York Times today on how giant companies win government contracts earmarked for small business.
The Small Business Administration and other federal agencies are mandated by law to provide at least 23 percent of federal contracts to small businesses. But for years, government studies show, large corporations like GTSI, Boeing, General Dynamics and Northrop Grumman have been counted as small businesses either through legal loopholes, via acquisitions or simply by mistake. And despite some efforts by the federal government to correct the mistakes, problems persist.The stakes for small businesses are huge as they try to compete for contracts in an expanding federal marketplace. Since 2000, the amount of federal contracting has grown 55 percent, to $377 billion.
Last year, at least $4.9 billion worth of contracts, coded as small business, went to 13 of the largest government contractors, according to a review by The New York Times of contracting data provided by Eagle Eye, a research firm based in Virginia.
"The S.B.A.'s handling of small business contracting is a mess," said Harry C. Alford, president and chief executive of the National Black Chamber of Commerce. "They know about this problem and yet it continues to happen. The agency is either unwilling or unable to deal with it."
Representative Nydia M. Velázquez of New York, the senior Democrat on the House Small Business Committee and a frequent critic of the agency, agrees. "They've known about this for years and continued to put out these reports saying 'we've exceeded our goal of awarding contracts to small businesses,' " Ms. Velázquez said in an interview. "But every study points out that they are not truly achieving those goals. Small businesses don't want a handout, but they want a shot at competing on a level playing field."
The Small Business Administration, however, gives itself high marks. In a news release last week, the agency said that it had awarded more than a quarter of contracts to small businesses.
"This is excellent news for small businesses doing business with the federal government," said the departing S.B.A. administrator, Hector V. Barreto, in the release. "For the third year in a row, the federal government has met or exceeded its small-business contracting goal. The president and his administration are committed to helping small businesses get their fair share of government contracts."
GTSI was able to compete for the Air Force contract because of a provision in the law that allows companies to compete for small-business contracts even when they grow larger.
In 1996, GTSI was awarded a 10-year General Services Administration contract for a company with 500 employees or fewer, which the government considers a small business, said Paul Liberty, a spokesman for GTSI. "Since the company was classified as a small business at the time of the contract, it maintains that status until the contract ends," Mr. Liberty said.
The contract ends next year, and GTSI may no longer qualify as a small business, but until then the company can compete for contracts as a small business. "We don't make the rules, we just follow them," Mr. Liberty said.
Ms. Bozzetto, the owner of MySource, said this loophole in federal contracting laws provided much larger competitors like GTSI an unfair advantage over her sole proprietorship.
Posted by dan at 09:04 AM
My latest in Slate, on why businesspeople seem to like to use Chinese proverbs.
Posted by dan at 08:56 AM
Many people believe that mainstream media outlets like the New York Times suffer from an excess of irony in their reporting and analysis. I disagree. This story by Adam Nossiter, about un-free labor in Louisiana, begs for multiple trips to the all-you-can-eat irony bar.
LAKE PROVIDENCE, La. — At barbecues, ballgames and funerals, cotton gins, service stations, the First Baptist Church, the pepper-sauce factory and the local private school — the men in orange are everywhere.Many people here in East Carroll Parish, as Louisiana counties are known, say they could not get by without their inmates, who make up more than 10 percent of its population and most of its labor force. They are dirt-cheap, sometimes free, always compliant, ever-ready and disposable.
You just call up the sheriff, and presto, inmates are headed your way. "They bring me warm bodies, 10 warm bodies in the morning," said Grady Brown, owner of the Panola Pepper Corporation. "They do anything you ask them to do."
It is an ideal arrangement, many in this farming parish say.
"You call them up, they drop them off, and they pick them up in the afternoon," said Paul Chapple, owner of a service station.
National prison experts say that only Louisiana allows citizens to use inmate labor on such a widespread scale, under the supervision of local sheriffs. The state has the nation's highest incarceration rate, and East Carroll Parish, a forlorn jurisdiction of 8,700 people along the Mississippi River in the remote northeastern corner of Louisiana, has one of the highest rates in the state.
As a result, it is here that the nation's culture of incarceration achieves a kind of ultimate synthesis with the local economy. The prison system converts a substantial segment of the population into a commodity that is in desperately short supply — cheap labor — and local-jail inmates are integrated into every aspect of economic and social life.
The practice is both an odd vestige of the abusive convict-lease system that began in the South around Reconstruction, and an outgrowth of Louisiana's penchant for stuffing state inmates into parish jails — far more than in any other state. Nowhere else would sheriffs have so many inmates readily at hand, creating a potent political tool come election time, and one that keeps them popular in between.
Sometimes the men get paid — minimum wage, for instance, working for Mr. Brown. But by the time the sheriff takes his cut, which includes board, travel expenses and clothes, they wind up with considerably less than half of that, inmates say.
Methinks this is an odd vestige of something that goes back a little bit further in history than Reconstruction.
Posted by dan at 03:04 PM
Economic forecasting is a tough job, and, in many ways, a fool's errand. Take a look at the Wall Street Journal's most recent forecasting survey. (It's behind the firewall.) Every few months, the Journal canvasses 56 of the smartest Wlal Street and private sector economists around and asks for short-term and longer-term predictions. In January, the economists collectively said they thought 3-month Treasury bills would yield 4.63 percent on June 30; they were at 5.00 percent. In January, the economists preicted 10-year Treasury notes would be at 4.9 percent; they were at 5.15 percent; in January, they predicted that 1st quarter GDP would come in at 3.6 percent; it was 5.6 percent; in January, they projected that May's CPI would show a 3.1 percent gain from May 2005; it showed a 4.2 percent gain from May 2005. Again, this is no rap on the economists in the survey--a very smart bunch who have all sorts of interesting and insighftul things to say about the economy. Rather, it's a rap on the notion that we should give a great deal of weight to their short-term forecasts.
Posted by dan at 10:34 AM
All over the world, credit cards are a great business. Financial institutions borrow at the rates available to their corporate parents, and then lend at whatever rate the market will bear--generally a much higher rate. But as David Wighton reports in the Financial Times, China seems to be the exception to the rule.
Western banks piling in to the Chinese credit card market are likely to see little or no profits by 2010, according to an analysis by Lafferty Group, the banking research and advisory firm.It calculates that Chinese banks lost $84m before tax on credit cards last year and predicts that if present trends continue, losses could swell to more than $1bn in 2010. James Buckley, senior analyst at Lafferty's World Cards Intelligence, said there was a striking contrast between China and other fast-growing markets such as Mexico, where it estimates banks made profits from credit cards of about $1.5bn last year.
Western banks piling in to the Chinese credit card market are likely to see little or no profits by 2010, according to an analysis by Lafferty Group, the banking research and advisory firm.
It calculates that Chinese banks lost $84m before tax on credit cards last year and predicts that if present trends continue, losses could swell to more than $1bn in 2010. James Buckley, senior analyst at Lafferty's World Cards Intelligence, said there was a striking contrast between China and other fast-growing markets such as Mexico, where it estimates banks made profits from credit cards of about $1.5bn last year.
We find it amazing that western banks have invested something like $25bn in the Chinese banking sector, largely with the objective of generating consumer finance operations, when it is not obvious that there are profits to be made there, either now or in the near future," he said.
Lafferty believes it will be a generation before banks investing in China will show significant profits from credit cards, while those moving into Latin America and other growth markets will get a much healthier return much earlier.
The gloomy forecast is based on the "radically different economics" of the Chinese market, with a very high proportion of unprofitable customers, who pay off their entire monthly bill, together with very low and falling fees paid by merchants.
Posted by dan at 09:52 AM
Andy Webb-Vidal reports in the Financial Times on the continuing growth of Mercosur:
Venezuela was yesterday poised to become the fifth member of Mercosur, an addition that could accelerate the South American trade bloc's steady drift away from free trade principles.The presidents of the current members of Mercosur - Argentina, Brazil, Paraguay and Uruguay - were last night due to sign a treaty in Caracas with President Hugo Chávez.
The move combines South America's largest oil exporter with two of the world's largest grain and meat producers to create a grouping of some 250m people.
Pavel Rondón, Venezuela's deputy foreign minister for Latin America, said the move to become a full member the 15-year-old bloc would "open up a huge market . . . for the country's businesses".
Mr Chávez said Venezuela's entry into Mercosur marked "a new era in both Venezuelan and South American history", and added: "The union of South America is today more feasible than ever before."
But domestic critics - principally those same local businesses - claim they were never consulted over a decision they say is more motivated by Mr Chávez's political agenda than by economics.
Venezuela is only really competitive in the area of oil, an export commodity that does not require trade agreements. "The government has taken this decision guided by geopolitical criteria rather than by economic motives," said José Luis Betancourt, head of Fedecamaras, the national business federation.
Posted by dan at 09:47 AM
Can the "Broken teller windows" theory be far behind? Sana Siwolop reports in the New York Times on the revolt against bank branches in a tony New Jersey suburb.
For a look at just how quickly banks have been adding new branch offices in the last five years, it pays to visit this community's downtown.Four of the 10 businesses on North Park Place, which borders a picturesque town green, are banks, and even more banks are to be found on nearby South Street. According to town officials, downtown Morristown now has 17 banks in an area that extends only about a half-mile in each direction from the green. They say that there were fewer than half that number five years ago.
Gary W. Ford, a senior associate in the retail services group at CB Richard Ellis, a commercial real estate company, says banks are also expanding in nondowntown areas of the suburbs, generally without opposition. But, in some communities, there is concern that a proliferation of downtown branches is threatening to drain the vitality of business districts.
In Morristown, for instance, local officials are worried that banks have already snapped up much of the area's prime retail space and that because of their shorter business hours, they are also cutting into pedestrian traffic.
But an even larger concern is that the banks, because they are often willing to pay significantly higher rents, may be driving away other types of retailers. This is a particular concern here, where the business district spiraled downward during the 1990's and is still trying to regain a healthy mix of retailers.
Michael Fabrizio, the executive director of the Morristown Partnership, the local downtown business improvement group, estimated that retail rents in downtown Morristown are now averaging $30 a square foot annually, but that banks are offering landlords $65 to $70 a square foot.
"It's not the banks that bother us as much as it is the marketability of our downtown," he said. "What would happen if banks, after creating these artificial markets, were to eventually merge and not need downtown locations as much as they once did?"
Mr. Fabrizio and Richard Tighe, a local town councilman, are now trying to get Morristown to pass an ordinance that would ban banks from opening new branches in spaces that were previously occupied by other businesses. The ban would apply within the heart of Morristown, in an area around the town green that is about six blocks long and two blocks wide.
The ban would not affect two new banks that town officials say are already scheduled to open on South Street, as well as the bank that may eventually open in the large redevelopment project that is to be built on the site of the old Epstein's department store, just outside the area where the ban has been proposed.
Real estate executives say that similar bans have long been in place in Princeton and more recently in Red Bank, N.J., as well as in Bronxville and the village of Westhampton Beach in New York.
Posted by dan at 09:35 AM
Ford announced last week backed off its promise that it would produce 250,000 hybrids per year by 2010, the better to focus its efforts on flexible-fuel vehicles. It could turn out to be a smart move. Meanwhile, the car companies reported their June sales last week. Toyota reported that it sold 223,018 vehicles in the month, up 14.4 percent from the year before. Of that total, Toyota's five hybrid models accounted for 18,090, or 8 percent. Meanwhile, Ford reported that it sold 269,404 vehicles in June, down 7 percent. In other words, it sold about 20,000 fewer vehicles in June 2006 than it did in June 2005. Hybrid sales are starting to account for real numbers. And so far, only one car company is supplying the market.
Posted by dan at 09:07 AM
It's becoming increasingly clear that the resource-based problems we face are going to be solved not by government, but by the private sector. Whether motivated by profit, money-saving, or brand-image, more companies are doing more to conserve and make the best use of resources. For example, Dell is now offering free PC recycling.
Posted by dan at 08:51 AM