Year-End Bloodbath Coming for Target, Amazon and Walmart, Mushkin Says

really positive one was out of Target earlier today. The shares UH surged more than four percent initially, but have retraced some of those gains and are up a little bit more than three percent now. To give a better sense of what was driving the positive better than expected returns for Target and what this might mean for Walmart, is Scott Mushkin. He's managing director and senior staples retail

analyst for Wolf Research in New York City. Scott first with Target, I mean, was there anything negative here or was this just, you know, unrelentingly a positive scene And how did they turn around their outlooks so much? Yeah? I mean I think if you look at the quarter, it was just straight out positive. Um, you know, as we look across our sector staples retail, and we also do some of the hardline names like home depot Um.

People are just outperforming right now. The economy strong, we got low, very low unemployment rate, Wage growth has been percolating. The stock market everyone knows has been on fire. Housing markets good and so what we've been saying to people, if you're not doing well, now, when will you do well? But I would, you know, throw a little cold water on that. For Target, I mean, their numbers are still going to be down year over year, uh, their ebit,

their earnings will be down. So you know, while it's definitely much better than they thought they were going to do at the start of the year, you know, Target does still face some significant headwinds in this business. And just to put perspective in stock gains today, the shares are still down about year to date. So this has been you know, you say, everybody has been doing well at least in the stock world. Targets certainly hasn't. Other

retailers have also. Retailers have also gotten beaten up. Also coach I should mention as well as Dick Sporting Goods this week have gotten just crushed after worse than expected earnings, so it hasn't been a uniformly positive situation. I want to ask specifically about Targets online presence because this has been a huge challenge in its fight with Amazon, and can you give us an update on kind of how much it's adapted to an online format and what the

growth has been like there. Yeah, I mean the growth has been really strong. I think they were up in the quarter um and you know they're you know, they're on a collision course. Targeting in Amazon a very significant one. One of the things Targets doing is Target Restock, which is consumable items. If you order it by two pm, you get it the next day, uh, for kind of reordable consumables. It's really right aimed at what Amazon is doing with Amazon Now out on Amazon next Day with

their Prime membership and of course subscribe and save. And this is our caution with the space and and I think you said, you know, not everyone's doing well, and that's correct, but sales for a lot of people have gotten a little bit better. But the problem with that is it's costing a lot to generate those sales. And that's going to be the same thing with Target when they when they expand into e commerce. They go all

these programs, same day delivery, stores doing delivery. The question is will Target make more money three years from now than it does today? And given the battle and suing with Amazon, battle and suing with Walmart, it's really hard to see that it's just going to cost more to do business. This is this is a really fascinating point. In other words, people say, well, they need to adopt the online reality of today, and yet to do so

costs a lot of money. So you know, whether they can increase their sales enough to overcome and then some those costs is a big question. Mark can just get a little bit more granular about what the costs are. I mean, it wouldn't they rely on you know, a FedEx or UPS or US postal service, And I mean

where where's the big costs going to come from? Yeah, I mean, I mean you nailed it with what you said, and so I mean the cost is basically, um, you're having to when customers used to drive to your store pick the stuff off them shulves the shelves themselves. Now what you have to do is either set up a whole distribution network to deal with them online or pick the stuff off the shelves yourself and either have them

pick it up or send it out to them. I mean, the margin hit can be anywhere from you know, five basis points to you're not making any money. Uh, And this is really the challenge facing all retail. On top of it, everyone has too many stores. The stores are too big. I mean, you can go through the litany of challenges um and demographics is another challenge where we

just don't have as many people having kids. So you know, Targets got a lot in front of it, a lot of tight But you got to hand it to the team. They're working really hard to address these things. It's just from an equity investor's perspective, or you're gonna have more money in your pocket in three years or less, it looks like it's going to be less. And that's why

we remain pretty negative on the stock. So just looking ahead, So Walmart's going to be reporting earnings tomorrow and it shares her down just to touch less than two tents of a percent, And I just have to wonder whether Walmart's shared dip, if you can even call it, that is a direct response to targets positive earnings because there seems to be a sort of fixed pool that the two are fighting over and when one does better, the other is going to do worse. Is that a proper interpretation?

I mean, I think that's a huge concern. Right, Like we've you know, we've seen Amazon report their sales are better than expected, targets sales are better than expected. Walmart I think is doing you know, decently. Well, I'm not sure that their sales have accelerated thus far this year. Um, you know, Walmart is really an interesting company where you know,

invest is gravitated towards it so much this year. But if you look at the numbers, some fascinating numbers here EBITDA at Walmart, is actually looks like this year will be the same as it was in two thousand and eleven and net earnings the same as they were in two thousand and eight. Yet the stock is like thirty

dollars higher. So what I've been saying to people is that company better ripped the kill not to cover off the ball tomorrow, or you probably have some downside because it's really seen significant equity appreciation and anticipation of a of a turnaround, and you know, we were made really cautious into the back half of the year on the

entire space. As Amazon continues to add fulfillment centers, it's just going to be a blood bath as we get to your end, a blood bath within Walmart as well target the Walmart target and where you've even gotten a little bit more nervous around Amazon. We took our rating from out perform down to appear perform. It's just everybody's gearing up. We call it the clash of the Titans

between Amazon and Walmart. But if you've been following anything, you know some of these small regional grocers they're adding online capabilities. I mean, this is just going to be a trench war and it's going to be long, and

it's gonna be hard. And just to sort of extrapolate out, when you talk about a blood bath, are you talking about steep discounts that will end up eating into the bottom line, expenditures for distribution networks that are going to eat into the bottom line, as well as a losing market share which will also eat into the bottom line.

Is that sort of the trifecta you're viewing again, you nailed it, Yeah, I mean that's the trifecta, like that's our big concern as we get to the back half and I actually add one more labor costs rising rapidly UM and so this is an issue for the companies too. So you know the theme, it's just costing more to do business. Returns are coming down, it's harder to generate those sales makes and and you know, everyone knows what

happened last year last holiday period. Everyone's gearing up. These businesses can't afford to lose the traffic, to lose the share. And if you listen to the Target conference called they were they had hints of caution around their fourth quarter because they know they've got to keep the traffic. They know they've got to keep the share, and one of the best ways to do that is to get more promotional,

get more aggressive, throw more labor at the stores. UM. So we're not looking for a very you know, a very good fourth quarter out of retail um. You know, the one saving grace. Maybe the economy. Economy is definitely picked up. Maybe that will will help, but will it be enough. Scott Mushkin with some rather sobering words about the entire retailer industry. Scott Mushkin is managing director and

senior Staples Retail and US at Wolf Research in New York. Well, they might be expressing concerns about aluminium, but they are certainly not expressing concerns about bitcoin. Bitcoin has surged eighty nine percent since mid July, shocking rally that has some scratching their heads and wondering how long this can last. Josh Deppman joins US now he's president of Fintech Investment Group UH and Josh, I want to get your sense of what exactly has been behind the acceleration in the

rally and bitcoin that we've seen over the past few weeks. Well, personally, I believe that bitcoin is an excellent store of value, and people are starting to realize that with the stock market at all time highs, no interest rate in any bearing securities, that bitcoin actually can serve as an impetus to go even higher and maybe even two five thousand by the end of this month, And currently it is at about four thousand, So it's you're expecting it to

climb another good chunk by the end of this month. You know, I hear what you're saying, and this is something that a lot of people have said, which is as central banks seek to devalue their currencies are at least buy assets and in parking these stimulus efforts, that why not go into a cryptocurrency that's backed by uh, this sort of blockchain technology in this sense of sort of communal creation of what it means to have a currency.

At the same time, nothing really has happened in the past few weeks to sort of, uh indicate that it's more of a good time to go into this than than in the past. Right. Well, I mean, you know, the key is that it is a store of value, that there is a limited supply. And one of the things that's great about bitcoin, uh is that you know, it is a kind of a ubiquitous coin even though that it you know, it does have a limited amount

that can be there. People have heard of it, People know of it, and there's more and more adoption in retail and businesses that are willing to take bitcoin. You pay, you pay your employees in bitcoin, right, yeah, we do. They have that option, yes, and the ones that have received their paying bitcoin are much more happy than the ones who have taken the fiat currency lately. Do you

do you personally spend bitcoin at retailers? Uh? We do um, you know, in where I live in the land or that there aren't a lot of places that accept bitcoin. But when we're on the road, you know, if if there's an ability to pay for it in bitcoin, we do, so I have to wonder, you know, A big question mark about bitcoin is, yes, there might be a limited store of the cryptocurrency, but nothing's backing it and it's

not adopted by any nation. And normally a currency is thought to be something that is backed by the good faith and the economic engine of a country. That's not the case here. Well, no, it isn't. And quite frankly, the cryptocurrency is kind of a misnomer. Uh. These are these are commodities, these are digital assets. There's no ownership, you don't have voting rights. There's a lot of things that you don't have with bitcoin that you would say in a security like you know, shares of Microsoft or

what have you. However, because there is a limited avout of value and there is no central government that could come in and uh mess around with changing rates, adding liquidity, taking away liquidity. Uh, there is a certain stability with that model that lends itself for some trust and some beliefs and Uh. I think that's why people are migrating to it, because they see what a disaster the central

banks have become. And you know, anything that's regulated by the government has a tendency to uh just become more and more regulated. You know. I take issue with the idea that the central banks have become disasters because some would say that they stepped in and they prevented another, uh financial crisis that was at least another great recession, great depression, as as what we saw in the thirties.

So you know, I mean some people could say that they did what they needed to do and we haven't seen rampant inflation and the economy has continued to grind higher, So you know, there is this feeling. Yes, central banks have certainly stepped into the markets and it propped them up in a big way. But I do have to, uh take issue with that. And I also have to question one other thing that you're you're saying, which is

ubiquitousness of bitcoin. I have yet to see a retailer that has a sign up that says we accept bitcoin. Where is this cryptocurrency ubiquitous and sort of where is it accepted? That sort of gives you the sense that it's a long lasting I mean, you can buy stuff on on overstock, dot com, Virgin Atlantic, Dell Computers, Starbucks

has uh venues where you can pay in bitcoin. Um, there will be more uh And and if if the segment that's happening is coming out, it's going to allow the transaction time to be greatly increased, and then therefore it'll be a lot easier to pay in bitcoin. Uh. And that's something that's coming up here in the next month or so. And if if that happens, which we believe it will, we believe they'll be even more increased

acceptance of bitcoin. In other words, if people can transact with bitcoin, not only can they do it more quickly, but also I assume the settlement and the back office costs will also be reduced. Correct, That is correct. So that's a big piece of it as well. Right, absolutely, So, are more of your eployees asking to be paid in bitcoin these days? Yes? They are? What proportion of your employees are paid in bitcoin? Uh? Probably, um, you know, and we we allow them, um, you know, to access

coins that that we mind ourselves. Uh. And basically we think that uh, you know, at least for the time being we think that the more more are going to be paid in bitcoin. Josh Detman, thank you so much for joining me. Uh, such an interesting area. I'm looking at the chart right now. It is a kind of mind blowing to see the rally. It looks like a rocket taking off of bitcoin's value. Josh Dettman as president

of Fintech Investment Group in Florida. And we will keep talking about bitcoin, but not only bitcoin, but also uh the blockchain technology behind it that is being adopted by more big investment firms. So yesterday we were talking about the retail sales and how the U as a consumer appears to be in really good shape. And then we get this from our own Adam Tempkin, a story about how deep subprime auto loans are experiencing delinquencies at the

fastest pace since the crisis. That sounds bad. Adam Tempkin joins us now to explain what's behind this and how concerning this really is. Adam Tompkin is a credit markets reporter here at Bloomberg News. So Adam, let's just get a big picture sense of what the delinquency rate is and just the backdrop for deep subprime auto loans, which to my recollection are at the highest proportion of overall

subprime auto loans that they've ever been. That's right, even though subprime as a whole is decreased a little bit, deep subprime, which is a what what equifox calls advantage score which is similar to FI GO of less than five thirty, has actually increased, and the delinquency rate for those least credit worthy borrowers it's as high as was for loans originated in OH seven and O eight um.

And those credit scores are about the same, you know, that range bound five thirty or less, But yet the performance of the loans is getting worse for those people. So what does this mean? Does this mean that the originators of these loans were irresponsible or a little bit lax with their lending standards. Does this mean that perhaps the American consumer isn't as in good shape as people had expected, or is this a comment on the underlying

value of the car? I mean, what's your takeaway from this? Well, equifox feels that this is really about shifting market share in the auto loan market. So basically, you had three kind of newish players post crisis that got into subprime lending dealer finance companies, mono lines and independent finance companies mino lines. To be clear, our bond in chures right, No, no, no,

this is a different type of mono line. These are if that's recollection from the crisis ere These are sort of non bank lenders, but they don't have a parent company. They're just doing their own thing, so that distinguishes them

from what they call captive of finance companies. The captive finance are like the Ford or GM when they have and these other the model line, as you say, are independent companies that finance themselves with what we basically securities or yes, all these deep subprime lenders that have entered the market and through competition have loosened underwriting since the crisis. They tend to fund themselves through asset back securities. But mind you, it's still a very small proportion of the

overall auto lending market. So what you have is you have on one hand, banks, credit unions and um, you know, finance companies with parent companies doing very concervative underwriting since the crisis, and that's or more of overall auto lending. And then you have mono lines, independent finance companies and dealer finance. They're doing a lot of subprime, and they're getting their going down the credit spect from and they're

doing a lot of this subprime and deep subprime lending. So, you know, here's a dilemma that I've been thinking about a lot because we have been hearing about problems within the auto lending sector for a while that perhaps things got out of control. Uh. The amount of auto related dead outstanding in the US has reached an all time high. You have people who are like pulling back and tightening standards,

like Wells Fargo. Um. But I'm wondering how much this is idiosyncratic to the auto industry and the auto lending sector versus the overall consumer, because we are also seeing an uptick intolinquencies among credit cards, uh, credit card dead um. And you are seeing, although to a smaller extent, you're seeing a little bit of a weakening within higher rated borrowers, more credit worthy borrowers as well with their auto loans. So you know, when you talk to analysts, are they

concerned about a broader base weakening of the consumer? Well, I spoke to you Equifox's chief economist Amy cottson she didn't think so she thinks that this is idiosyncratic to the auto market and shifting. Um, you know, basically the auto ending market has shifted towards these newer entrants that are willing to take on the risk. These like the monolnes, the deal you know, can you give us some names

of them the companies, Yeah, like Westlake, Exeter, Scopos. And by the way, these are all asset backed securities issuers, and you know those deals, those bonds are protected. But when you think about the actual borrower, you know, it's not a great situation. Uh. The way that this happens is when cars are repossessed. Um, you know, the lenders try to get money back when people are not paying their their loans. However, use car prices are going down,

so interest rates are going up. So I have to wonder, you know, who's feeling this pain right because somebody's not getting their money paid back. If you're seeing more delinquencies and more losses. Are people who hold the bonds that are backed by these auto loans? Are they starting to

see losses? Are the actual companies, the monol lines, as you say, are the independent independent financing units, Are they feeling pressure or threatening bankruptcy or is this just all kind of going out in the wash because the yields are so high anyway on these things. Well as far as the asset backed bonds, which again a lot of this deep subprime stuff goes into these asset backed bonds, those happen to be very well protected with you know,

credit enhancement and you know other overcollateralization, other protections. So bond investors have not really been feeling it, despite the fact that delinquencies have been rising. But you know, you have your poorer borrowers, first of all, on the hook for loans that that can't pay back, and often the

car has already been been repossessed. And I will say, and this is an undertold story, but some of these borrowers of these uh consumers are paying rates of what like or more on these loans, which is crazy, very very high, and they're underwater because their car no longer is worthwhile. So probably they're going to be uh, probably suffering the most in all of this. Adam Tompkin, thank you so much for joining us. Really uh, really informative.

Adam Tompkin is a structured finance reporter for Bloomberg. We're talking about deep subprime auto loans. This is a small portion of the overall auto lending sector, about forty billion dollars, but still very important as sort of a gauge of the temperature in consumer credit worthiness. When we're looking on our computers or at work, a lot of people don't think about all of the back office support that goes into storing, maintaining the data, enabling conferences that are virtual

with other people. But it is actually a massive business. And here to tell us more about that is Stephen Smith, chief executive officer and president of Equinix. We're also joined by Josh Yatskoitz. He's a media and cable analyst for Bloomberg in intelligence and Stephen, I wanted to start with you.

So Equinis was formed, which seems rather prescient frankly, because it seems like, uh, it has only become more necessary to store data and get somebody to maintain it all for you, because it is a very difficult Can you give us a sense of how big this market is and how big you see it growing too? Well, it's

a great question. Um. The company is eighteen years old, as you point out, and and it is a four billion dollar revenue business been public for for a couple of decades now, and the basic premise of the business is we design, build and run big, massive data centers on behalf of thousands of big customers, bid two of them, right, No, we have a hundred two yes data centers, but we have almost ten thousand customers and these are big global,

two thousand fortune businesses and small and medium businesses, all sizes. But generally speaking, companies either do their own technology or they today more increasingly in the last four or five years, are going directly to the cloud, or third option for them is to come to data centers like equin x, where if they don't want to be in the data center business themselves, portions of their I T can go to co location where we give them private access to

the cloud providers, the networks, etcetera. So the company was built on the premise of ninety eight, when the Internet was scaling. The big network, the big telcos came to the market and said we can't hand off traffic very

elegantly in the US. A start in the US and Equinox was chosen as the company to facilitate networks handing off traffic to scale the Internet that's how the company started, and then since then we've just scaled it to help scale all of this traffic, mobile, cloud data, all this stuff today that we talk about requires massive amounts of servers and storage, arraysing networking gear, and we glue it

all together inside these centers. Josh, can you give us a sense of what the competitive landscape is, because I'm curious. I just want to bring you in to sort of give a picture of how much this area has grown as far as companies they're trying to break in. Yeah, UM Equinox is the biggest by far in the space. There's other players on both It's called de retail space, which specializes in the interconnections, and the whole space wholesale space, which is one of these large UM large data centers

for large deployments. You have competitors on both sides. Uh, the retail space is a little more fragmented. Equinox dominates all over the world UM as as Steve can allude to, but you have a lot of small players coming in. There's just so much demand out there from cloud providers, from enterprises from all over the space UM for interconnections and just wholesale space in general that there is room for everybody to grow, and everybody does seem to be

growing really well both. An interesting aspect that Josh knows as well is that um even the big cloud providers that are dominating the technology conversations today, the Microsoft, the AWSS, the Google's and then and then Facebook and Apple, who aren't really cloud providers but big hyper scaling companies, they build these massive data centers in the middle of nowhere, big server farms, you know, in the middle of Tennessee, Oklahoma, Finland,

where there's cheaper power, cheaper labor, low taxes. And then when they when they when they distribute their network all over the world, they use companies like Equinics, So they put their capital in their big servant they build the huge server farms, and then when they go to Frankfort, into London, into Singapore and Shanghai and Dubai, they use

the data center capacity with companies like Equinics. We're just the biggest in the world globally, and there's thousands of these data center companies around the world that facilitate not only cloud but enterprise data centers, etcetera. Can I'm feeling a little behind the times as you talk, but I'm trying to imagine what that means when they use equinics to connect the rest of the world. Is it uh fibers, Is it through satellites? Is it through I mean, how

how does it gets to you? It's both. So all of our data centers are connected with each other in each of the metropolitan areas and so and then we're connected on top of the networks between metros, so between Chicago and you ORC or anywhere in the world that carriers connect the world, but in a metropolitan area they do that inside of Econoxis data center. So we we are that we are the central place. And this is

what started the company. It was six or seven of the biggest telecos came into New York, d C, Chicago, Dallas, Silicon Valley in l A, two places on the East coast, two places on the West coast, and two places in the middle of the country to facilitate scaling the Internet. Can I ask, because we hear so much about telecommunication companies and the need to upgrade their networks to five G is there a sort of parallel problem that that that you're facing as far as sort of upgrading the

overall technology underpinning this interconnectivity. It's part and parcel to it. Five G is one technology that will make things go faster and and go to the next level. We go to four G T five G, everything gets faster, so the latency is down to milliseconds and sometimes micro seconds.

So that's that's one technology that's going to facility. There's also um up to fifty new undersea cables being laid today between continents just to get ready for the data explosion that cloud and mobile and all of this information that we all used to run our businesses, including yours. So so when you see that starting to happen in the billions of dollars being invested to connect continents, connect cities, connect buildings, connect things. This is this whole Internet of

things concept. It all gets done in data centers, cloud sits and data centers. Cloud is a is a technology paradigm shift to pay for it by the drink. You used to you used to have to buy all your servers, and today you say, I just want to use this much compute, this much stores, and this most network, and

I want to pay a monthly fee. Steven Smith say thank you so much for joining us, Chief executive officer and president of Aquinix, which is based in San Francisco, and our thanks to Josh Yasco, it's telecom, cable and media analyst for Bloomberg Intelligence. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox.

I'm on Twitter at Lisa abramowits one before the podcast. You can always catch us worldwide on Blueberg Radio