Walmart Earnings, Using Data to Combat the Opioid Epidemic, Inside an Arctic Code Vault

on iTunes, SoundCloud, or Bloomberg dot Com. You can also listen to our radio show weekdays at two pm Eastern only on Bloomberg Radio. All right, well, as you just heard it, Doug describe Walmart certainly catching attention because well it's Walmart, and we pay attention to what they say about the health of the consumer, the health of the world, and some of those geo economic, geo political concerns as well. Let's get into it with Matthew Boyle, us retail reporter

for Bloomberg. Key's here with me in the Bloomberg Interactive Broker studio. And Jennifer Bartashes, she is senior US retail, staple and restaurant analysts for Bloomberg Intelligence. She's on the phone from BI headquarters down in Princeton. Matt, let me start with you. We got the numbers from Doug. But what jumped out at you as you were synthesizing this You know this company so well give us the nuance here. Well,

that's the thing. It's a synthesis that matters here. I mean, we first saw the top line numbers, the sales beat, they raised guidance for like, Okay, this is gonna be another good quarter for Walmart. But as the day war on, as you can see now, the shares are down, and it's a combination of some old concerns and some new ones.

The old ones, of course, are gross margins. All these wonderful things Walmart's doing online, next day delivery, sending groceries even into your house, you know, being delivered in your fridge while you're at work. These are all great, but they're very expensive, so profitability gross margins were down again this quarter. But then there's some new concerns. You've got a management reshuffle. You have no leader right now at their Sam's Club warehouse division, their cost Co copycat and

Sam's Club had a really poor quarter. Sales missed, profit was down, So you've got some new concerns as well. We're heading into the holiday season. You know, everybody needs to be at the top of their game, so people were looking to poke some holes, and it looks like they found some well, Jennifer, while investors might be poking some holes, your smart note says that Walmart continues to invest in the long run at the expensive near term earnings,

and this is the right approach in your view. Why yes, so, so you know, long term Walmart is is if they want to be competitive long term, especially against um rising competitors and the Amazon dot Coms of the world, then the investment in the structure, in the infrastructure and the business to build an e commerce business is a necessary evil. UM. And that is weighing down on short term earnings, and

everybody sort of expected that. Um. You know, Matt makes a great point that gross margin, you know, is still remains a concern, but it's not a new concern, um.

And instead, you know, I think one of the other things that is coming out of today's earnings is just the idea that the e commerce growth at Walmart is seeing is right now heavily skewed to food UM, and investors, you know, over time would like to see a greater dependence on merchandise, which is higher margin, to help make that business a little bit less of a drug on the rest of the entity. And so, Matt, as you look ahead, especially to the next few months, what does

Walmart need to do? What are the proof points that may get investors a little bit more on side. Well, it's not just what they need to do, it's what they need to stop doing. Um, they've stopped making these acquisitions of small, you know, digitally native sites, things like Bonobo's Modcloth, moose Jaw that was a key element of

sound made up some like dystopian science fiction retail. Well, the jobs that some of them are seem to be made up these days because they're selling They've already sold Modcloth jet Black, which was a very expensive experiment in uh sort of text based commerce. Um, we've told, we've heard is you know on the block. Um, so they're

going to be stopping making those acquisitions. What they need to start doing is selling more apparel, selling more home goods, things that target their rival is very very good at and it's done for years. Walmart is trying to get deeper into those two categories. But it's just but it's

a stretch. You know, when you think of sheep, you know, cheap chek, you think of Target, not Walmart, you know, Jennifer, I understand that investors don't like the lower margin E grocery business, except this appears to be the one area where Walmart is leading Amazon. Amazon has to play catch up in the grocery space. They're going out there trying to build a brick and mortar grocery store because that curbside pickup feels like it's starting to become more popular

than the grocery delivery that Amazon is known for. Why not double down, in Walmart's case, on that e grocery delivery because it feels like they're such a leader in that space. I will say, I don't think Walmart's really slowing down on grocery or e grocery, and they're continuing to expand the number of stores where you can do click and collect or the number of locations that will deliver to people's homes. But you're right, it is a competitive advantage that I think they want to be defensive

about um. And so it's it's great that it's it's it's booming so much for them, and when you look at Walmart versus Amazon in terms of like geographic distribution. The Amazon does does well enough when you're talking about urban areas where lots of people don't own cars and they wouldn't have things delivered to their house, including groceries. But the power of clicking collect is that it really uses the store base to really get to mainstream, non

urban America, and those consumers are responding as well. It's just that over time, you'd like to see the the overall e commerce balance um pick up a little bit more in the non food side as well. All Right, we're gonna leave it. There are lots more to look at with Walmart. Never an easy heart, straightforward story in many ways, owing to its size, scope and importance around

the world, certainly here in the United States. Jennifer Bartashes is senior US retail Staples and Restaurants analysts for b I. She joined us on the phone from Bloomberg Intelligence headquarters in Princeton, and Matthew Boyle. Matt Boyle, US retail reporter for Bloomberg here with me in New York City. All right, let's head down to Baltimore. Dr Josh Sharfstein joins us.

He is weis Stein for Public Health Practice and Community Engagement and the director of the Bloomberg American Health Initiative at Johns Hopkins University. And as you can probably tell by the name of the Bloomberg School of Public Health is supported by Michael R. Bloomberg, of course, the founder of BLOOMBERGALP and Bloomberg Philanthropies, Bloomberg ALP being the parent of Bloomberg News and Bloomberg Radio. Dr Scharstein, thank you

so much for joining us. Thanks for having me. All right, So we talk a lot about the opioid crisis from many different angles. It's an economic story, it's obviously a very important social and really human story. Give us a sense of where we are right now, and as you look back, maybe we start there. What could we have done to essentially prevent this? In some cases? What's the lesson that we learned here? Well, I think there there

are a few lessons. This is the greatest that is now largely responsible for the reduction in life expectancy over the last three years, which is the first time that's happened since World War One and the Great Influenza, and so it's having this enormous impact in communities of all kinds across the country. Um, there's probably a few different points in time where intervention would have made a difference.

Most recently, for this current version, the huge increase in prescribing of opioids for pain was a major factor, and the fact that it took a long time for the medical community to wake up to the fact that the culture of medicine in a way changed and doctors were prescribing four or five times what they've been prescribing before, and a lot of patients got trouble. So dr I'm out here in San Francisco and we talk about big data and data privacy, and it sounds great, but it

does bring up a lot of concerns. What is your solution to fold data into the conversation about how now to help the problem? Well, I think there have been a couple of great examples of states that are using data to identify the risk factors for overdose and more importantly, in my mind, the opportunities intervened and help people. So

I call out Massachusetts and Maryland. Massachusetts did a great big data project where they merged in their data from corrections with the data from the healthcare as well as um data from fatalities from the Corner Medical Examiner, and what they found, for example, was that people who have been incarcerated were at over a hundred times the risk of dying of an overdose when they got out compared

to the general population. But when those same people were given treatment with medications, there was a dramatic drop in their risk of death. The Maryland data has found that the highest risk individuals for overdose death are people who have actually been in the emergency room and the hospital, as well as had contact with the criminal justice system. And what I think makes both of those findings very interesting is that by and large, hospitals, the medical community,

and jails have failed to provide lifesaving treatment. They often don't operate to people who need it. And I think big data analyses are sort of a wake up call to the medical community and to criminal justice that every contact with someone who is an opportunity actually to to get people into effective care. Doctor Scharstein, It's interesting, you know,

as we think about the solutions here. I spent yesterday at the nine eleven Memorial and Museum on a security and a security summit, and you know, one of the continuous themes there was this cooperation between the public side and the private sector, and a lot of what it sounds like you're talking about does rely on a public sector solution in many ways, but also private industry coming in. How does that work? How does it happen in your estimation?

So the Massachusetts analysis I mentioned was actually done with in a consortium, a public private consortium. Dr Monica Brell's Commissioner of Health in Massachusetts and UM she brought in with the governor number of tech companies to help them really do the right analysis. I'll be honest with you, there are some clouds on the horizon in this big

data world. There's you know, sometimes I think companies will take data and they'll show up and say, you know, let's tell the doctor the percentage chance that the person right in front of them is going to overdose, and maybe they won't prescribe something. Those things I think might be a little bit fraught. I'd like to see the public private partnership where the public sector can actually pause and say, like, is this a good idea? You know,

will this make the care better or worse? And you have sort of the the technology and the skills from the private sector, but the judgment in the sense of the overall problem that's the public sector brings. What about hip of violations and data privacy rules, Well, um, most of these analyzes are done at an aggregate level, so

you're not using the individual's names. Um, there are There is the risk though, um, of course, that data systems can be compromised, and it's very important that when analyzes are being done that you know, there are a lot of data security standards. For me, the core question is is the analysis that's going to be done, you know, conceived of correctly, and is it going to be helpful

to people? You know? For example, I'm aware of some you know ideas where people say like, well, if somebody has had a problem, you know with being arrested years in the past, then we won't ever give them an opioid. Again, Well, that could backfire in a lot of different ways. The person may really be in pain and needs treatment or and if they don't get it, they may go out and how to use you know, drugs on the street

and be a much greater risk of death. So I really think the key is, um, you know, not just following the law, but having a really good idea. And I think it's a public private partnership there that that can make sure that we steer away from the bad idea. All right, well, it's a great overview, and we appreciate the context so much. Thank you. Dr Josh Sharfstein he is weis Stein for Public Health Practice and Community Engagement and the director of the Bloomberg American Health Initiative at

Johns Hopkins University. He joined us on the phone from Baltimore to set all right, well, let's talk a little bit about the market from a macro level, and then we're gonna go down a level with George Schulty. He is the founder of Shalty Asset Management. He's based up in Rye Brook, New York, just up the New Haven Line, I believe, from us here in New York City. He joins Taylor Riggs and myself. So, George, great to see you,

Great to be here again. Thank you. All right, So, this market, you know, I feel like we're trying to now make some sense of it as we get closer to the end of the year. As you sort of look back over nineteen, what's your takeaway so far? Well, it's been quite a quite a phenomenal amount of growth. I mean, this has been going on for eleven years now, and so you have, you know, kind of an uncertain situation, though I think Powell struggling with it. With extremely low

interest rates, stubbornly low inflation UM. But there's still quite the amount of monetary accommodation going on in the US. There's a lot of fiscal policy accommodation as well. UM. You have the unemployment rate close to a fifty year or low UM at about three point six percent. You have growth in the US at about one I guess, a little bit soft in the last quarter due to the GM strike and some weakness and business investment UM. But but again an inflation stubbornly low, still below two

percent at one point seven percent UM. And I think that's why Powell, you know, is continuing to put his foot down on the accelerator. You know, George, it's Tailor Riggs. I'm out here in San Francisco covering all things technology. So what I'm doing is I'm going around and asking everyone I know in New York the same pole question to try to get my head wrapped around the real story I've been covering tech. Let's pretend I've been ignoring

everything else. Tell me what is driving the markets right now? Is it Powell impeachment, earnings? What have I missed? So I think one of the big things that's driving tech is is just you know, money inflows into the massive e t f s that that are forced to buy

the largest growing companies. UM. I think there's also a you know, a wave of new cash still flooding into the fixed income market, and I think that is probably creating some risks because I think companies are probably borrowing a little bit more than they should be at this point in the cycle. I think it's a function of interest rates being so low and investors desperate for fixed income yield. And I think because of that, you're seeing some some interesting things in the tech space, Like with

we Work. I mean, that company probably shouldn't be borrowing money, but you know, it's able to, or was able to borrow money up until now, even though by all means it looks like it's probably an insolvent enterprise. UM. So there there's some very unique things happening in the market because interest rates are really so low there, as low as they've been in the history of the planet. UM. And this past summer, of course, we saw negative yielding

debt reach seventeen trillion dollars. That's never been that's never happened before in the history of the world. So I think what it's generating is the risk of asset bubbles, and hopefully as some of those unwind, you won't have systemic risk or systemic you know, fallout that could cause a real shock. So I know part of your background and you never fully leave this world is special situations. Distress. Uh, not a lot of distress, it feels like in the

world at the moment, but they're always special situations. And one of them that I believe you looked at is actually right there in Taylor's backyard, which is p g n A. Right, how do you look at a name

like that? So a lot of people say, by the way, with regard to distress, that there's not much going on, But I think that's a bit of a misnomer because if you look at the default rate, which a lot of the major investment banks that like to sell high yield bonds um it really just measures junk raded debt default rates, and that's that's it's below three. But here you have pg N E, which is one of the

ten largest bankruptcies of all time, and it's active right now. UM. I think, by the way, just parenthetically, you know, some of the other California utilities might be at risk too because of you know, the terrible wildfires we've had out there. But yeah, the way we look at that is, just like any other distress credit, we look at the company's

capital structure. In this case, because it has so much litigation liability, you can throw in about twenty five maybe even as highest thirty billion of additional claims into the capital structure and then try to value the business on an unlevered basis, and and try to figure out where air in the pecking order, uh, you know, the lenders or maybe even the equity owners would get a recovery in this case. We think that ultimately there have been

you know, a number of plans of reorganizations proposed. Um. There's been a lot of litigation back and forth about who has control over the case. Recently, the judge gave the bond holders approval to file a plan, and their plan looks like it dilutes the equity holders down to nearly nothing, which is actually typically what happens with bankrupt companies. So so we think short selling the PGNI stock just under seven dollars a share makes a lot of sense

for a potential return. That's probably the lowest risk way to play this um and and and separately, of course, you know the situation in California with forest fires and new fires, even after the bankruptcy, it's it's really terrible,

and you know, we hope they figured it out out there. George, reading through your recommendations, you talk about stock buy backs and special dividends and or M and A. I'm taking a look at a chart here, and it's the invest Go buy Back et F. So the investing companies that have bought back at least five percent of their shares in the last few years, and that's outperforming the dividend et F, which invest in companies that have consistently raised

their dividend over the last ten years. Why are companies that are doing share buy backs outperforming companies that are raising their dividends. That's a good question, and that's interesting observation about it outperforming. I think that that makes sense in my view because essentially, you know, companies are making the decision to buy back in their own stock when

they think it's cheap. And the result for remaining shareholders who do not sell into that buy back, whether it's sort of a program or a special one time buy back, is that you reduce the float outstanding and the and the smaller universe of shareholders can share the same cash flow that you had before, all other things equal. Um. So it also happens to you know, it tends to put a sort of a bottom on on a on

the stock that might be volatile. And so I think management teams and boards that are deciding to do that in many cases it's the right thing because of reducing float that uh you know that that really they don't need. It's a it's a higher form of or a higher cost of capital certainly than you can get in the fixed income market these days. And if you're under levered, meaning you know, you're not even investment like you have hardly any debt at all, this might be a great

way to use your capital. Right, all right, Always good to catch up with you, Thank you so much for coming in. George Chelty is founder of Shelty Asset Management, based up in Rye Brook, New York. Here with us in our Bloomberg Interactive Broker's studio. All right, So the cover story this week in Bloomberg Business Week. It's a must read and once you read it, I guarantee you're going to be talking about it. Ashley Vance wrote it. He is a writer, a host, and author so many

things here at Bloomberg. He joins us on the phone from Palo Alto Joel Weber, the editor of Bloomberg Business Week. He is here with me in our Bloomberg Interactive Broker's studio. And I have to say, Ashley, when I first read this story, I did, to quote my co host Carol Masser, A wait, what sort of moment? How did this even

come onto your radar screen? Well, you know, I've been covering open source for about twenty years, and uh, and I got a call from kid hub, which is is kind of the biggest platform to where open source code gets me these days, and they told me they have this crazy idea to go baring the world's source code in in small bud and and I managed to talk my way into seeing it. So, Ashley, what was it like? I think you told me yesterday was literally like a

storage shed? Is that right? Yeah? I did. They had put us some photos beforehand of artist mock ups and what this big would look like. Was there sci fi and and fantastic And when I got there now, I mean, you know, weird town and abandoned coal mine. They used to be owned by a Norwegian company. It was covered in preno frost and hid our way. So there are then there's this tool sheds that are there um with

these fancy reels of film and storage. So so actually, uh, they're not the only ones who have stashed something in in a cave nearby. There's also this followed by a global seed vault, where in the event of an apocalypse, hey, I'll go there and find some seeds. But the thinking here is that, you know, this is a place that should anything really really go wrong in the world, we

can stash things. And why open source? Why why would that be the we have seeds and open source, why would open source code be the second thing we need to stash. Yeah, I mean it's kind of funny, you know, like twenty years ago, open source was sort of a fringe idea of software, was dominated by companies like Microsoft and IBM M. But you know, in the interviewing twenty years it's it's the dominant way now that that code

gets developed. It's open sources behind pretty much everything you use in your day to day life, whether it's a smartphone and your computer, your television, your car. You know, every piece of our infrastructure UM is developed by partly paid codas that do work for big companies, but also all these volunteers. And so the idea here is look, um, say something just crazy happens in the modern infrastructure is brought to its needs, you would actually have kind of

the backup of how these things work well. And it is so interesting and Ashley, when you think about and I'm glad you mentioned the the idea of sort of covering open source for two decades, because two decades ago I was like, all right, cool, like, yeah, you guys are kind of out there on the fringes, but maybe you don't get the joke about how software is written and who controls it. But now this is I think accept it, not just accepted, but heavily endorsed and has

really changed the way the world works in many ways. Yeah. And the funny you think about it, just reflecting that wrote this story, was you know, like twenty years ago, Microsoft was the enemy. It was all about making an open source version of an operating system to compete against

Windows and computing against Office and things like that. Um, the sort of like strange thing happened, which is none of that worked, like the Linux stefftop never became mainstream, but all these open source coders who were fighting his fight made these incredible tools for sharing software on the Internet,

developing it. And you know, the knock on effect was that the open source became the backbone of the Internet of smartphones, and so they sort of won these two other wars um, which is really where the technology was heading rather than where it had been. And so you know today, if it's Google, if it's Netflix, if it's Uber, Amazon, whoever, you know their infrastructure runs on open source code. So here's the irony. Actually, you've been doing this for twenty years.

You show up at this vault with the CEO of get hub, now owned by Microsoft, one of the very companies that was like, never will we touch open source? How ironic is that? I mean, it's it's the crazy It's one of the crazy starts of the crazy story. You know, if you had asked me twenty years ago, this was ever gonna happen? I would have said it's impossible.

I remember Steve Baumber on stage Callegue open Source Software Cancer and and you know, giving away your code was just seeing it's sort of almost a criminal act by Microsoft. And you know last year they bought get hub for seven point five billion dollars and obviously through through their lot in with the open source crowd and um, you know,

it's just it's it's an incredible happening. I think a lot of it has to do with sat Nilla coming on the CEO and sort of thinking definitely about these things. What a different a couple of decades. Yeah, the last question actually, if I need to get there, how do I get there? Well, the easiest way you gotta take a couple of homes, but you can there are there's like one of two flights per day from Norway, and

I think it's about a two hour flights. Um, and there's there's like two thousand people that live in small But I hope you left bread crumbs for me. Yeah, there you go. All right. Actually it's a great story. It's the cover of this week's new issue of Bloomberg Business Week. Ashley Vance wrote it. He went there and wrote all about it. He joined us from Palo Alto. Joel Webber here with me in New York City a journal. But you let me drive? Oh no, no, no no, no, honey, please,

I'll do the right drivel. I want to drive, Just drive, baby, good questions, drying. This is the drive to the globe communings. We'll drive us to Dawn Bloomberg Radio. All right, it is time for the drive to the closed Run Carson back with this CEO of the Carson Group, looking after about eleven and a half billion dollars, who joins us on the phone from Omaha, Nebraska. Run. Great to have you with Taylor and myself. Hey, it's great to be here.

All right, all right, So I'm gonna ask you a variation of a very good question that Taylor asked earlier, which is, as you look across the landscape here, how do you sort of rank the things to either worry about or pay the most attention to? You know, you sort of think about geopolitics, you think about trade, you think about the FED, you think about earnings. Like, what's your sort of list of priorities here? Well, I think you nailed them all. I mean the thing that I's

going to drive them all. I was just with a I'm actually in Sarasota, Florida right now, is just with one of our clients, and he said, hey, what's gonna happen next year? As a no idea, And so he pushed me and said, well, what are the things you're gonna worry about? And said, well, you know, right now, I think the bigger the market is going to start to focus start handicapping the election. And you know, one extreme, you know, President Trump gets re elected, I think it's

gonna be pretty good for the market. Um, but I don't think he's gonna get re elected unless we get you know, a real a trade deal. On the other hand, Elizabeth Barren, we'll become our next president, is gonna be really bad for the markets. I think, really we look into the future here, the market is going to start to handicap those things. Of course, we've got Brexit, and we've got you know, the Fed out there, and we've got China trade which seems to be you know, moving

the markets every day. Um. But I would I would really really start thinking about who's gonna be in office, um, with the next election cycle. So we talked about handicapping the next election and yet equities are near their all time highs. What gives Well, I think the markets are telling you that they think, um, Trump's gonna be be reelected. And you know, as as a market has handicapped at

right now, this market has been really resilient, um. And I think the market loves the fact that, um, we've got you know, pal out there saying, hey, you know, we really don't have anything that we're too worried about right now. This is sustainable. On that note, I will share with you not the last FED meeting, but the

FED meeting before. I just so happened that the same evening after they voted, had dinner with one of the voting members, and UM, My concern was then that hey, are we do we really understand all the variables and all the things that that could trim us up. And he made a great uh point, and that you know, we really are on top of all of this. And you know, I saw it also on a different article today. The US is still the reserve currency of the world.

You know, we have twenty three trillion dollars. A lot of people got to own, um, the dollar, they got to participate here, and I think that also is going to provide a floor, you know, for the market for a while. So Ron very much top of mind for us today. We did a whole segment on it earlier in the show. Was Walmart. You know, we saw those

numbers come out. Obviously, Walmart a bell weather in some ways across retail, across uh you know, e commerce as well as as Taylor rightly pointed out earlier in the show, a sign of consumer demand, a sign of trade tensions being there or not there. How do you read it and how does that maybe affect your outlook, especially when it comes to the consumer and retail. Yeah, the consumer is strong and the consumer continues to be strong. You know,

we had the employment report was better. The next fact that I noticed claims for a little higher UM today than the market thought. But you know, companies like Walmart UM I think tells us just how how how strong the consumer is. And we love Walmart. Art I mean attractive offering in here continues to pressure you the tier two and tiers three retailers, and it is making significant strides into the e commerce business. And this is a

good exam pays a nice dividend. You you know, you're getting a one eight maybe a hair less than a one eighty yield, which in today's environment is pretty good. And so I think being a surgical is going to be really key here, you know, really understanding why you're owning what you're owning. And as Buffets says, from my very own old want to browska, you know, we're buying companies or businesses that an intrinsic value to their to

what to what we believe their value is. And I think just buying the whole market is probably not the approach. Most investors should take care but be more surgical. So if you are becoming more of a stock picker, being more surgical, really knowing what you're buying. Let's say you want to get a little bit defensive here. I was reading a report by U B. S. And they said, just on a pure valuation basis, at this point, when they're going within the defensive sectors, they're looking at healthcare

over utility. If you were to go defensive, where do you like companies within that space? Yeah? No, healthcare, I mean we like a lot and healthcare I mean, just look at the demographics, right and how old we're getting. Um Cell Gene was a great example of that. You know, we had a health celgene our port Foster or sometime um and of course we're gonna be taken out by Brusta Myers. But I think that your companies that are

doing um that. Another one that got hit really hard on was a Myriad Genetics m y g N. We think this is a really attractive entry point into into a company like that as well. But anything that's going to um uh provide, for example, with Myriad, you can get some testing done, get out ahead of you whatever your issues are, UM or providing like a cell gene um in their cancer therapy, something that's really going to enhance quality of life. So we we would be we

we like Healthcaren here all right. Ron Carson is the CEO of Carson Group, overseeing about eleven and a half billion dollars. He joined us on the phone from Omaha, Nebraska. Thanks for listening to Bloomberg Business Week. You can subscribe to the podcast on iTunes, SoundCloud, or Bloomberg dot com. You can also listen to our radio show every weekday at two pm Eastern only on Bloomberg Radio