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Hurricane damage, freight costs weigh on Dollar General's earnings, execs say

Studios, Exhibitors Set To Spar Over Streaming

Power Forecast Briefing Discusses Improved Spark Spreads and Profitability Projections for ERCOT and PJM

Energy

Power Forecast Briefing: Fleet Transformation, Under-Powered Markets, and Green Energy in 2018

Nexstar Buys WGN For A Song; Divestiture Of WGN, Stakes In Food Channels Likely


Hurricane damage, freight costs weigh on Dollar General's earnings, execs say

Lingering impacts from hurricanes Florence and Michael will drag on Dollar General's fiscal fourth-quarter earnings, while the retailer expects longer-term headwinds from increased shipping and transportation costs, executives said Dec. 4.

"You look at our footprint, we're particularly dense in coastal Carolinas and coastal Florida as well as in rural areas where a lot of the heaviest damage was," Dollar General CEO and director Todd Vasos said during a conference call discussing the discount retailer's third-quarter earnings.

The costs associated with the damage hit Dollar General's fiscal third-quarter diluted EPS and caused the company to trim its fiscal 2018 earnings guidance, which sent the company's stock tumbling by 8.3% in midday trading Dec. 4 to $102.42 per share.

Florence made landfall on the North Carolina coast Sept. 14, tearing a path of death and destruction across both North Carolina and South Carolina. Michael hit nearly a month later on Oct. 10 and hit much of the Southeastern U.S.

"As you look at the nature of the cost, it was storm damage and repairs [and] inventory damage [that] were the key drivers there," Vasos said during the call.

Combined with other floods and fires, Dollar General booked $19.9 million in expenses for the quarter from the hurricanes. Those charges and other costs will deliver a 4-cent hit to diluted EPS in the fourth fiscal quarter, Executive Vice President and CFO John Garratt said.

Longer term, Dollar General is expecting transportation costs, particularly higher carrier rates, to pressure gross margins in the company's fiscal fourth quarter and fiscal 2019, executives said.

A shortage of truck drivers in the U.S. is forcing companies to pay more for freight or to look for alternatives to offset the increased costs. Gross profit for Dollar General dropped 39 basis points year over year in the third fiscal quarter to 29.5% of sales, Garratt said.

The company is growing its private fleet of trucks to 200 by the end of fiscal 2018, up from 80 at the end of fiscal 2017, and expanding its distribution center network to better offset increased shipping costs, executives said.

"It's hard to say how long the carrier rates pressure will continue, but we feel [we] are very well-positioned with the mitigating actions that we're taking as that stabilizes," Garratt said during the call.

Regarding trade, Garratt said the company has had "a relatively low exposure" to tariffs imposed by the Trump administration thus far. However, in preparation for a possible increase in tariffs, the company is contemplating options such as reducing its dependency on China by diversifying product manufacturing and supply. Presidents Donald Trump and Xi Jinping agreed to a 90-day truce to negotiate trade policies, after a meeting at the G-20 Summit in Buenos Aires, Argentina, on Dec. 1. The Trump administration imposed 10% tariffs on $200 billion worth of Chinese imports effective Sept. 24, which was expected to increase to 25% on Jan. 1, 2019. However, the new agreement will put the previously expected increase on hold, while both countries negotiate new policies.

Dollar General also announced plans to continue its investments in real estate expansion in 2019. The new projects include opening 975 new store openings, remodeling 1,000 stores and relocating 100 stores. While Dollar General has historically focused on rural areas, Vasos said the company is positioning itself to open more store in urban areas in the future.

"It won't be a radical change, it will be a slow methodical change to a little bit more of a heavier metro mix as we continue to build the portfolio out," Vasos said.

On the digital front, the company’s DG GO app, which launched earlier this year, is now live in 250 stores, Vasos said. The app allows customers to apply coupons to products and skip the checkout line by paying on their phones and had more than 20,000 actively monthly users in the third quarter.

Although Vasos did not give specifics on possibly integrating the app into more stores, he said the app has received positive feedback from customers.

"We know that our customers who more frequently engage with our digital tools tend to shop with us more often and check out with larger average baskets," Vasos said.


Technology, Media & Telecom
Studios, Exhibitors Set To Spar Over Streaming

Dec. 14 2018 — According to an article published in Variety in November, Warner Bros. and Universal Pictures are expected to reopen conversations with exhibitors about earlier VOD releases for their films. The studios argue that an earlier on-demand release helps minimize piracy and allows them to better leverage the multimillion-dollar ad campaigns launched for their films' theatrical debuts.

Exhibitors, on the other hand, worry that a shorter theatrical window will reduce ticket sales as potential patrons opt to wait and watch films at home. Fewer ticket sales also lead to lower concession revenues -- the most profitable aspect of the exhibition business.

The article also notes that studios have an extra incentive to negotiate earlier release windows, as WarnerMedia is launching its own streaming service in 2019 while Comcast, home of Universal, is looking to expand its streaming offerings. Having their major films released on their respective services shortly after theatrical release could help drive subscriber growth.

Pushing for a film's possible VOD release just weeks after its big-screen debut could be seen as an aggressive move, but studios have been slowly shrinking their theatrical release windows over the past 20 years. In 1999, the average theatrical window was 169 days; this was just as the DVD market was beginning to explode and the VHS cassette was still a market factor. Soon, DVD became a massive source of revenue for studios and they began to release their films on home video at a quicker pace. In 2017, the average theatrical window dropped to 105 days before dipping to 99 days in 2018.

The major studios all trimmed their theatrical windows by a fair amount between 2000 and 2018, from an average of 172 days down to 94 days, a difference of more than two and a half months. Twentieth Century Fox and Universal Studios had the shortest average theatrical window at 89 days, while Walt Disney had the longest theatrical window at 107 days.

We tracked eight blockbuster films in 2018 that were released on home video less than 90 days after premiering in theaters. The shortest window belonged to "Venom" ($212.3 million domestic gross), which was released in theaters on Oct. 5 and will debut on DVD and Blu-ray just 74 days later on Dec. 18.

The motion-picture business has always been able to capitalize on new technology, from the TV to the VCR to the DVD player, to drive growth. Streaming video has become the primary source for home entertainment — just ask Netflix and its 137.1 million subscribers worldwide. If studios are launching their own services, they naturally want their own premiere content on those services. Studios may not get the rapid release window they are hoping for, but they will likely keep bringing it down slowly, as they have for the past two decades.

If you are a client then learn more about Economics of TV & Film below:

Movies make their way to your home in less than 100 days in 2018

State of Home Entertainment 2018

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Watch: Power Forecast Briefing Discusses Improved Spark Spreads and Profitability Projections for ERCOT and PJM

Dec. 13 2018 — In our latest Power Forecast Briefing, Steve Piper discusses recent power market activity and a forecast that points to profitability for merchant generation regions of ERCOT and PJM. Both saw improved spark spreads in 2018, but ERCOT's upside appears more limited than PJM going forward. More data and market tracking tools can be found on the Market Intelligence platform’s Power Forecast subscription.

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Watch: Power Forecast Briefing: Fleet Transformation, Under-Powered Markets, and Green Energy in 2018

Steve Piper shares Power Forecast insights and a recap of recent events in the US power markets in Q4 of 2017. Watch our video for power generation trends and forecasts for utilities in 2018.

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Technology, Media & Telecom
Nexstar Buys WGN For A Song; Divestiture Of WGN, Stakes In Food Channels Likely

Dec. 10 2018 — Walt Disney Co.'s pending acquisition of much of 21st Century Fox Inc. certainly raised the bar for cable network valuations — at 15.4x cash flow — and the divestiture of the regional sports networks may see another double-digit-multiple transaction with Amazon.com Inc. in the mix of buyers. Another deal, Nexstar Media Group Inc.'s pending acquisition of Tribune Media Co., sees stakes in three cable nets going to the buyer for single-digit multiples (6.9x).

The deal follows the collapse of Sinclair Broadcast Group Inc.'s deal to buy the company, which is now being litigated. We think that Nexstar is getting quite a deal on the cable network assets and will likely flip them for a quick profit.

When Discovery Inc. agreed to buy Scripps Networks Interactive Inc. in July 2017, the domestic cable networks were valued at $10.14 billion, or 10.5x cash flow, with Food Network (US) valued at $4.5 billion (Scripps owned 68.7%) and Cooking Channel (US) (also at 68.7%) valued at $525 million.

In the current transaction, the valuations come to $3.47 billion and $323 million, respectively. Thus, if Nexstar can get Discovery Communications to pay at least what it paid in the Scripps transaction, Nexstar may make a quick profit. Granted, minority interests typically trade at a discount. Scripps Networks Interactive, however, has tried for years to cut a deal to buy out the minority stake and it may be willing to strike a deal at a higher price to put this issue behind it.

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