Consumer Prices

Consumer Prices

U.S. consumer prices recorded their largest increase in more than a year in May as costs for a range of goods and services rose, pointing to a steady firming of inflation pressures.

The Labor Department said Tuesday its Consumer Price Index increased 0.4 percent last month, with food prices posting their biggest rise since August 2011.

The uptick in price pressures should comfort some Federal Reserve officials who had worried inflation was running too low. Still, a separate inflation gauge watched most closely by the Fed continues to run below the U.S. central bank’s 2 percent target.

Fed officials start a two-day policy meeting Tuesday. The Fed is expected to further trim its monthly bond buying program, but isn’t seen raising interest rates until mid-2015.

A separate report from the Commerce Department showed housing starts and permits fell in May, a sign that the housing recovery could remain in slow mode. Fed Chair Janet Yellen has warned that a protracted housing slowdown could undermine the economy.

Groundbreaking for homes fell 6.5 percent to a seasonally adjusted annual pace of 1 million units in May. Permits declined 6.4 percent to a 991,000-unit pace, pulling back from the 1.06 million units touched in April.

U.S. stock index futures turned negative on the data, while prices for U.S. Treasury debt fell. The dollar hit session highs versus the yen and the euro.

“Medical care costs will help push inflation to 2 to 2.5 percent later this year. But the Fed could tolerate that,” said Craig Dismuke, chief economic strategist at Vining Sparks in Memphis, Tennessee.

Last month’s increase in consumer prices was the largest since February 2013 and above economists’ expectations for a 0.2 percent gain. It followed a 0.3 percent advance in April.

In the 12 months through May, consumer prices increased 2.1 percent, the biggest rise since October 2012. That came on top of a 2 percent rise in April and was above economists’ expectations for a year-on-year increase of 2 percent.

It was the first back-to-back 2 percent rise in the year-on-year CPI since early 2012.

Stripping out food and energy prices, the so-called core CPI rose 0.3 percent, the largest increase since August 2011. It had risen 0.2 percent in April.

In the 12 months through May, the core CPI increased 2 percent. That was the biggest gain since February of last year and followed a 1.8 percent rise in April.

Economists had forecast the core CPI rising 0.2 percent from April and 1.9 percent from a year-ago.

Food prices increased 0.5 percent in May, rising for a fifth consecutive month. Prices for meat, dairy, fruit and vegetables rose. Poultry and fish prices also increased as did the cost of eggs. Gasoline prices increased 0.7 percent. Prices for electricity also rose after declining in the prior month.

The core CPI was lifted by a 0.3 percent rise in rent. There were also increases in medical care costs, apparel, new cars prices and airline fares.

American Apparel

American Apparel

An internal investigation at American Apparel (APP) has found that its CEO Dov Charney violated company policies, ranging from misusing company funds to failing to stop the discrediting of at least one former employee who had accused him of sexual harassment, a person close to the matter said.

The company’s board ousted the 45-year-old Charney as chairman on Wednesday, citing unspecified allegations of misconduct. It suspended him as president and chief executive officer, and plans to fire him for cause, following a 30-day period stipulated in his contract.

The company’s independent directors hired law firm Jones Day in mid-March to lead the investigation, said the person and a separate source familiar with the matter. It is unclear what events prompted the board to initiate the investigation, which is ongoing.

The probe revealed that Charney, who founded the hipster clothing brand, was using company funds to book flights for his parents, the person said. He also sometimes provided corporate apartments to friends and stayed in them himself when he wasn’t on company business, according to this person.

The investigation’s findings also included that Charney had known about but failed to stop a blog created by an American Apparel employee that displayed naked photographs of a former saleswoman, Irene Morales, who had sued him, the person said.

A person familiar with Charney’s thinking said that any use of photographs of the former employee by American Apparel was only done to counter her damaging allegations and the strategy was approved by other company officials.

This person said that Charney believed any use of apartments was not material and was normal business practice. In terms of the travel charges, this person said Charney’s father is on American Apparel’s payroll and that his mother, although not an employee, is a retail and design contributor to the company.

Charney’s employment contract entitled him to “vacation benefits and reimbursement of reasonable and necessary business expenses,” according to a company filing in April. His father, Morris Charney, received $238,000 in architectural consulting and director fees from the company in 2013, the filing showed.

A spokesman for American Apparel declined to comment. A representative for Jones Day was not immediately available for comment.

The company, which only has a market value of $120 million, has been struggling with weak sales and heavy debt. While the industry lauded Charney for his creativity, the company has been under fire for lax financial controls and concerns about the strength of its management team.

In recent years, Charney has fought off a series of sexual harassment lawsuits. In one of the most high-profile cases, Morales claimed she was held as a teenage sex slave, forced to perform sexual acts during an eight-month period, including oral sex in Charney’s Manhattan apartment just after she turned 18.

A lawyer for American Apparel said in 2011 that it was Morales who had stalked Charney and was trying to “shake down” the company.

In 2012, a New York judge ordered her $250 million claim to be arbitrated. The status of the arbitration proceedings could not be immediately determined.

American Apparel is in talks to hire an investment bank, expected to be boutique Peter J. Solomon, one of the people close to the matter said. The bank, which could not be immediately reached for comment, will provide capital if the company’s lenders declare it in default on some of its debt, the person said.

 

Big retailers

Big retailers

Big retailers are taking a calculated hit to margins to invest in online grocery operations, in the hope they can persuade consumers to add more profitable items such as clothes and computers to their orders of fruit and vegetables.

Food has been one of the last things to move online because complex logistics for fresh, chilled and frozen products make it an expensive business. Retailers are also reluctant to lose the potential for the lucrative impulse buys that occur in-store.

However, retailers in Europe and North America are now ramping up their online food offer to compete with Amazon.com (AMZN), which is expected to expand its sale of fresh produce beyond a few trial areas with the aim of complementing its non-food sales — and eating other retailers’ lunch.

“They are trying to hook customers up to brands for their grocery shop and hope they will spend on non-food, which is lower headache and higher margin, which will drive profitability,” said Sophie Albizua of retail consultancy eNova Partnership.

“It is notoriously difficult to make money selling groceries online. The reason why people do it and need to do it have nothing to do with profit and nothing to do with groceries.”

Britain has led the way in selling groceries online, with e-commerce already accounting for some 5 percent of food sales. Other countries such as France are now catching up and the Boston Consulting Group predicts the global market will grow to $100 billion by 2018 from $36 billion in 2013.

‘Compelling Economics’

It has taken Tesco, Europe’s second biggest retailer, 17 years to bring its online grocery business close to the industry-leading margins it used to make in its store business.

Tesco made a trading profit of 127 million pounds ($216 million) on online grocery sales of 2.5 billion pounds in 2013, equal to an operating margin of around 5 percent. That beat the 3.7 percent Tesco reported for the group in 2013 — after it was hit by restructuring costs — but came in below group margin at or above 6 percent for the previous three years.

Some analysts suggest that Tesco should focus less on investment in costly e-commerce technology and logistics and more on cutting prices if it wants to stop losing market share in Britain to German discounters Aldi and Lidl.

But Tesco says it isn’t building its online business for the sake of it: The aim rather is to attract more big-spending food shoppers who also buy general goods, which traditionally sell at much higher margins than groceries.

Tesco customers who buy food online as well as in store spend twice as much as those who only shop in store. Those who also buy general merchandise spend three times as much — although only 4 percent of customers are currently in that last category.

Tesco, which still runs separate operations for online groceries and general merchandise, plans to combine its grocery and general goods deliveries — leveraging the sophisticated logistics network it has built up for food to cut costs for the company, and offer customers a faster service.

The one-hour delivery slots that Tesco offers seven days a week for grocery orders are unmatched by any other general merchandise retailer, including Amazon, points out Tesco multichannel director Robin Terrell.

Krispy Kreme

Krispy Kreme

When Crumbs, the New York City-based chain that built its business around cupcakes, shuttered several dozen of its remaining locations Monday, it seemed like an abrupt ending for a company that opened a decade ago to ride the wave of popularity of the sugary treat sparked by the TV series “Sex and The City.”

But Crumbs’ rise and fall isn’t surprising when considering the company’s dependence on a fad. In fact, it’s the latest cautionary tale for businesses that devote their entire menus to variations of a single product.

Krispy Kreme (KKR), for instance, expanded rapidly in large part on the cult-like following of its doughnuts. But sales started declining and the company ended up closing some locations. Last year, restaurant industry researcher Technomic said Krispy Kreme had 249 locations, down from 338 a decade ago. The chain has broadened its menu more recently. Executives at Krispy Kreme, which celebrates its 77th anniversary later this week, weren’t available for comment.

A similar fate befell Mrs. Fields, which is known for its cookies. The chain has suffered in part because of the ubiquity of places that sell cookies, and it was down to 230 stores last year, from 438 a decade ago.

TCBY had 355 stores last year, down from 1,413 a decade ago. Part of the chain’s problem is the competition, given the proliferation of frozen yogurt places. A representative for the parent company of Mrs. Fields and TCBY wasn’t immediately available.

Companies that only offer one item can fall victim to a number of risks. For one, trendy products tend to attract competition from big and small players that want to jump on the bandwagon. For instance, Starbucks and Cold Stone Creamery have been trying to capitalize on the cupcake trend with cake pops and ice cream cupcakes, respectively.

Being beholden to a single item also makes companies more susceptible to customers’ whims and changing tastes. There’s always a new fad. Frozen yogurt. Chopped salads. Freshly squeezed juices. Entrepreneurs may be eager to open stores selling these products, but there’s always the danger that fickle customers will move on to the next thing.

“A cupcake shop today can’t survive on just cupcakes,” said Darren Tristano, a Technomic analyst.

To combat the risks, many chains diversify their menus. And several have prospered by moving beyond their flagship products.

Dunkin’ Donuts (DNKN), for instance, has been pushing aggressively into specialty drinks and sandwiches, with a focus on boosting sales after its morning rush hour. And Starbucks (SBUX) has introduced a range of new foods and drinks in its cafes, including premium bottled juices and salad boxes. The coffee chain even plans to expand wine and beer offering in evenings to as many as 1,000 locations over the next several years.

Magnolia, another popular New York City cupcake shop, is credited for sparking the cupcake craze after it was featured in “Sex and the City.”

The chain, which opened in 1996, has endured while many of the cupcake shops that opened up in its wake — including Crumbs — focused on just cupcakes. That’s in part because Magnolia, which now has seven U.S. locations, offers a variety of desserts, including cakes, pies, cookies, brownies and banana pudding.

Sara Gramling, Magnolia’s spokeswoman, said the company is learning about the dangers of focusing too heavily on one product, as well as expanding too quickly.

“We’ll be mindful of those lessons,” she said.

Still, some chains manage to persevere by carving out a niche where there aren’t many competitors; Auntie Anne’s and Cinnabon have expanded locations over the years.

As for Crumbs, the company noted in a statement late Monday that it was evaluating its “limited remaining options.” That will include a Chapter 7 bankruptcy filing. Crumbs didn’t provide comment beyond its statement.

 

U.S. business economists

U.S. business economists

U.S. business economists have sharply cut their growth forecasts for the April-June quarter and 2014, though they remain optimistic that the economy will rebound from a dismal first quarter.

The average forecast for growth in the second quarter has fallen to 3 percent, according to a survey released Friday by the National Association for Business Economics. That’s down from 3.5 percent in a June survey. Growth in 2014 as a whole will be just 1.6 percent, they project, sharply below a previous forecast of 2.5 percent. If accurate, this year’s growth would be the weakest since the Great Recession.

The lower 2014 forecast largely reflects the impact of a sharp contraction in the first quarter. The economy shrank 2.9 percent at an annual rate, the biggest drop in five years. That decline will weigh heavily on the economy this year, even if growth resumes and stays at 3 percent or above, as most economists expect.

The economists reduced their second-quarter forecast largely because they expect consumers spent at a much more modest pace. They now expect spending will grow just 2.3 percent at an annual rate in the second quarter, down from a 2.9 percent estimate in June. Spending rose just 1 percent in the first quarter, the smallest increase in four years, a sign consumers are still reluctant to spend freely.

Many retail chains are feeling the pain. The Container Store (TCS) said Tuesday that sales at stores open for at least a year slipped 0.8 percent in the first quarter.

“We are experiencing a retail ‘funk,’‚ÄČ” Kip Tindell, chief executive of The Container Store, said Tuesday. “While consumers are buying homes and automobiles and even high ticket furniture, most segments of retail are, like us, seeing more challenging sales than we had hoped early in 2014.”

Family Dollar Stores (FDO) and clothing retailer the Gap (GPS) also reported lower sales this week.

Another factor weighed heavily on the first quarter: A big drop in exports widened the nation’s trade deficit and accounted for about half the contraction. Exports picked up in May and trade is unlikely to be as big a drag in the second quarter. But the NABE survey found that economists expect exports will now rise just 2.5 percent this year, down from June’s estimate of 3 percent. The weaker figures reflect sluggish economies in Europe and slower growth in China.

The NABE did a special survey after the government announced the dismal figures at the end of June. The group typically surveys economists quarterly.

Despite the downgrades, the survey underscores that economists are mostly optimistic about the rest of this year. Analysts largely blame the first quarter shrinkage on temporary factors, such as harsh winter weather and a sharp slowdown in inventory restocking. When companies restock their inventories at a weaker pace, it slows demand for factory goods and lowers production.

Jack Kleinhenz, president of the association and chief economist at the National Retail Federation, said that most other recent economic data, particularly regarding hiring, has been positive. Employers have added an average of 230,000 jobs a month this year, one of the best stretches since the recession.

In addition, consumers are more confident and government spending cuts and tax increases are exerting less of a drag. In 2013, a Social Security tax cut expired and government spending cuts were implemented. The combined effects slowed growth by 1.5 percentage points, economists estimate.

“Many of the fundamentals are there for growth,” Kleinhenz said.

As a result, the 50 economists who responded to the survey see the chances of a recession this year or next as pretty low. Sixty percent said the odds were 10 percent or lower, and more than 90 percent said they were 25 percent or lower.

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