Speaker 1: This is Bloomberg Business Wait Inside from the reporters and
Speaker 1: editors who bring you America's most trusted business magazine, plus
Speaker 1: global business finance and tech news. The Bloomberg Business Week
Speaker 1: Podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio.
Speaker 2: The retail sector, which continues to come out with earnings.
Speaker 2: Macy's lows and Dick's Sporting Goods all reporting shares of
Speaker 2: Macy's getting slammed. COMP sales beat, but a significant drop
Speaker 2: from a yoga shows that department store customers are pulling
Speaker 2: back on purchases. CEO of Macy's pointing to ongoing macroeconomic
Speaker 2: uncertainty and talking about promotions quote surgically implemented.
Speaker 3: Sons Lake Precision.
Speaker 2: This cannot be good to clear out seasonable seasonal items.
Speaker 2: Dix plummeting lows, though rallying after second quarter com sales
Speaker 2: and corely profit beat. Average annalistestaments a lot going on.
Speaker 4: Tim, Yeah, with us, we got a great group. Bloomberg
Speaker 4: Intelligence Senior retail analyst Mary Ross Gilbert joins us on
Speaker 4: zoom In La and Bloomberg News reporter Simon Foxman here
Speaker 4: in our Bloomberg Interactive Brokers Studio Simone. I want to
Speaker 4: start with Dix and talk a little bit about this
Speaker 4: issue that we heard from Target last week, not just
Speaker 4: about the consumer pulling back, but about shrinkage, the industry
Speaker 4: term that's used for theft, employees stealing or damaged goods.
Speaker 3: What's going on.
Speaker 5: I mean, it seems like a very large contributor to
Speaker 5: their earnings this quarter, and we had this with Target
Speaker 5: last quarter. Back in May. Target said it was cutting
Speaker 5: its overall estimate for profits by five hundred million dollars
Speaker 5: because of shrink and what Dix was saying here on
Speaker 5: the earnings call today was simply that they had not
Speaker 5: planned for this level of shrinkage. They normally get a
Speaker 5: bit more shrink and account for it around the back
Speaker 5: to school season, but this is more. They said, it's
Speaker 5: a really big problem and that they're doing everything they
Speaker 5: can to kind of combat it. But I think this
Speaker 5: echoes some of the other concerns that we've heard from retailers.
Speaker 5: I think one thing that maybe this is what we're
Speaker 5: seeing in some of the trading today. It was just
Speaker 5: such a large issue, and last time when we heard
Speaker 5: Target talk about the impact overall, it was just such
Speaker 5: a surprise to people. I think that it was way
Speaker 5: larger than considered, and maybe that's why we're looking at shears.
Speaker 2: Maybe they should put some security tags and things.
Speaker 4: No, but that's so that's actually a perfect segue for
Speaker 4: Mary Ross Gilbert. It's what I brought up on the
Speaker 4: simulcast a little earlier, Carol, And not to step on
Speaker 4: your feet, but I mean, the fact is is, if
Speaker 4: you make the changes within a store to prevent theft,
Speaker 4: there's a certain point where there creates so much friction
Speaker 4: between the consumer experience and consumer actually trying to buy
Speaker 4: something that it's not even worth going to the store anymore,
Speaker 4: like trying to get deodorant in shampoo and toothpaste from
Speaker 4: a CVS behind plastic. So Mary, weigh in on this.
Speaker 4: What do you think of this, Mary Ross Gilbert, with
Speaker 4: the idea that you know, I said, the big winner
Speaker 4: with shrinkage is is e commerce because there is so
Speaker 4: much friction now with actually going into a store.
Speaker 6: I would agree with you there, but on the digital side,
Speaker 6: Macy's was down, and actually Macy's called out shrink They
Speaker 6: just didn't call it shrink, they called it shortage. It
Speaker 6: kind of confused investors at first on the call, but
Speaker 6: they quickly caught on, Oh yeah, they're talking about theft,
Speaker 6: and that's exactly what it is. And look, we've been
Speaker 6: hearing about it in the news every week. We're hearing
Speaker 6: a group of grab and go theft going on, and
Speaker 6: it tends to be along the luxury line. So Bloomingdale's,
Speaker 6: in fact, are Bloomingdale's right next to our building here.
Speaker 6: The Gucci boutique there was robbed I think about three
Speaker 6: weeks ago, so there's definitely a lot of that activity
Speaker 6: going on, and Macy's called that out also on their call.
Speaker 6: It didn't affect their margins this quarter. They have sort
Speaker 6: of budgeted for the shrink issue, but it's definitely it's
Speaker 6: something that they guided to for their third quarter as
Speaker 6: one of the factors as well as you know, the
Speaker 6: weakness and the consumer and the fact that they saw
Speaker 6: higher debt expense and that's associated with higher delinquencies. They
Speaker 6: were planning for it, but it's it's much higher than
Speaker 6: they planned for.
Speaker 2: You know, it feels like we're all of a sudden
Speaker 2: talking about shrink ange a lot. But I went back
Speaker 2: and just kind of did a quick Google search, and
Speaker 2: back in twenty fifteen, Bloomberg did a whole big story
Speaker 2: about shrinkage at everything from Dollar General, AutoZone, Whole Foods,
Speaker 2: Bed Meth and beyond, and then you know Walmart. So
Speaker 2: it's been an issue that's out there. It sounds like
Speaker 2: you want to jump in.
Speaker 5: Yeah, it's hard to. I think one of the challenges
Speaker 5: we've had, and certainly the challenge the printing has had
Speaker 5: as well, is determining how large this impact actually is,
Speaker 5: because yes, people are blaming shrink for things, and certainly
Speaker 5: in California, the laws have changed that in a way
Speaker 5: where the law doesn't punish theft up to a certain level,
Speaker 5: and that seems to encourage some degree of shrink overall,
Speaker 5: theft overall, but no one can kind of tell. I
Speaker 5: mean one thing, you know, Timmy were talking about how
Speaker 5: creating this atmosphere where people are worried about safety in
Speaker 5: stores pushes people to online. It's interesting because at the
Speaker 5: same time we're seeing Macy's, we're seeing Dix really invest
Speaker 5: in trying to get people back into stores, whether it's
Speaker 5: with Dixon House of Sport or Macy's with its smaller,
Speaker 5: more boutique elements.
Speaker 4: We talk about that a little bit because Dix has
Speaker 4: actually just crushed it since the pandemic. I mean, the
Speaker 4: stock is up six hundred and fifty percent even with
Speaker 4: today's decline since March of twenty twenty, and a big
Speaker 4: part of that is because of the huge investments that
Speaker 4: the company has made in this experiential element. So what
Speaker 4: can people do in Dick's stores that you know they
Speaker 4: can't do online?
Speaker 5: I think they're like rock climbing walls. You get special
Speaker 5: customer service, you know, especially engaging with the customer in
Speaker 5: a way that is not possible online. Right, there's already
Speaker 5: an incentive to try and go to stores. If you
Speaker 5: need a specific size, you don't know what tui as
Speaker 5: you are, you really have to go to figure it out. Instead,
Speaker 5: you're going to order multiple shoes and then you got
Speaker 5: the pain of sending them back and stuff. It's trying
Speaker 5: to create an incentive for people to be in stores,
Speaker 5: and one of the things we've seen across retailers is
Speaker 5: this investment into these smaller scale stores as well to
Speaker 5: try and get people in.
Speaker 2: So I want to go back to those that reported.
Speaker 2: So let's go back to Macy's for a moment, Mary,
Speaker 2: because what I thought was interesting, is what the CEO said.
Speaker 7: And I know.
Speaker 2: Our team also talked with the CEO earlier on Bloomberg
Speaker 2: Television or at least for Bloomberg Television. But these surgical
Speaker 2: surgically implemented talking about promotions surgically implemented to clear out
Speaker 2: seasonal items. That says to me some like over inventory.
Speaker 2: So is that just bad purchasing and bad decisions? Like
Speaker 2: how is Macy's doing generally?
Speaker 6: Yeah, so I think just to clarify the point on surgical,
Speaker 6: that's actually a good thing. So what he was trying
Speaker 6: to say is because they have invested in data technology
Speaker 6: and analytics, they are able to target their promotions more pointedly,
Speaker 6: and as a result, they're able to move out merchandise
Speaker 6: more quickly and not take as much of a hit
Speaker 6: as they would normally have done without that capability. So,
Speaker 6: if anything, that's actually a good thing. And they were
Speaker 6: able to, you know, clear out that merchandise well in
Speaker 6: advance of you know, what they were planning to do,
Speaker 6: So that is the good news. Yeah, going into the
Speaker 6: first quarter, they were seeing strength. I think everyone was.
Speaker 6: We you know, we had a good January, and then
Speaker 6: all of a sudden, the world changed and we started
Speaker 6: to see the declines you know, since then, and they've continued,
Speaker 6: and I think, as Gannett pointed out, I mean the
Speaker 6: consumer is also spending on experiences and travel, and then
Speaker 6: with their fifty percent of their customers earning seventy five
Speaker 6: thousand in under, they're strapped when you think about living
Speaker 6: expenses being so high, and look golf prices picking up
Speaker 6: some share possibly as we've seen, you know, strength in
Speaker 6: their figures.
Speaker 2: I did think it was interesting that the MACCFO saying
Speaker 2: credit card delinquities accelerated in the second quarter, particularly in
Speaker 2: June and July, which negatively impacted results. We've just got
Speaker 2: about twenty five seconds left for Lows. What do we
Speaker 2: need to know?
Speaker 5: Housing a little bit stronger than everyone anticipated, and contractor
Speaker 5: division especially kind of strong.
Speaker 4: Is that because people don't want to move and they
Speaker 4: don't want to they want to spend.
Speaker 5: The question, right, It's a little unclear at this point.
Speaker 5: You know, contractor was stronger for home depot as well,
Speaker 5: which is.
Speaker 2: More important to the home depots business. Isn't exactly, Yeah.
Speaker 5: Home depot split is fifty five forty five, whereas Lows
Speaker 5: is seventy five. DIY to twenty five typically. But this
Speaker 5: is interesting, right, Maybe people are stuck, maybe they're spending more.
Speaker 5: It's hard to get a sense whether this is a
Speaker 5: long term trend yet because the dynamics are moving so quickly,
Speaker 5: but there is an under supply of homes.
Speaker 2: I will say Low's is up three point six percent,
Speaker 2: so definitely an app.
Speaker 5: For the one good one.
Speaker 2: Yeah, I know exactly. There's not a lot. Simon Foxman
Speaker 2: here in our interactive broker studio. Reporter at Bloomberg News,
Speaker 2: thank you, Thank you, Mary Ross Gilbert are thanks to
Speaker 2: you as well, Senior retail analyst at Bloomberg Intelligence. On
Speaker 2: zoom from Los Angeles, you're listening.
Speaker 1: To the Bloomberg Business Week podcast. Catch us live weekday
Speaker 1: afternoons from three to six Eastern Listen on Bloomberg dot com,
Speaker 1: the iHeartRadio app, and the Bloomberg Business app, or watch
Speaker 1: us live on YouTube.
Speaker 2: One of my favorite moments of our broadcast was Iri
Speaker 2: Jersey our interest rate strategies here at Bloomberg Intelligence talking
Speaker 2: about was it on the live blog right? And he,
Speaker 2: you know, I said, what's more important to you? You know,
Speaker 2: in video or Jackson Hall? And I'm assuming he's going
Speaker 2: to be like Oliver Jackson Hall and he talked about
Speaker 2: on the blog saying, how people though we're talking about
Speaker 2: the importance of Nvidia this week.
Speaker 3: Yeah, you know it's funny.
Speaker 4: Ben Emmons, Van Emmon's over at newl New Edge Wealth,
Speaker 4: who listens to us. He has, sends a newsletter, he
Speaker 4: watches us. He just sent me that story. How in
Speaker 4: vidious Jensen Wong maybe driving fed rate hike expectations.
Speaker 2: I just think it's interesting that you know that that
Speaker 2: focal point. So anyway, this is why we wanted to
Speaker 2: talk about it. We I don't always love to do previews,
Speaker 2: but I felt like this was really important, and especially
Speaker 2: when you've got somebody like our own Bloomberg News US
Speaker 2: Semiconductor networking reporter Ian King, who knows this space so well.
Speaker 2: And Ian is of course joining us on zoom from
Speaker 2: San Francisco. Ian, we did see Nvidia, which has been
Speaker 2: on a tear certainly this year. I just want to
Speaker 2: pull it up to see how it closed today. It
Speaker 2: was down about two point eight percent, but it did
Speaker 2: hit another intra day record today on expectations that things
Speaker 2: are going to be pretty good when it reports after
Speaker 2: the close tomorrow remind us why this is such an
Speaker 2: important focal point.
Speaker 8: Well, if you believe in AI, if you believe that
Speaker 8: this is the future of computing and that it's going
Speaker 8: to revolutionize so much of the economy, then obviously, well.
Speaker 9: Who's going to profit from that? First of all?
Speaker 8: And you know, the company arguably the only company that's
Speaker 8: really shown I've done instable impact from it already is
Speaker 8: in video because the chips that they provide are absolutely
Speaker 8: central to the training of all of that software that's
Speaker 8: going to do all of these magical things.
Speaker 9: So we're told, do you believe the hype.
Speaker 8: And I believe the numbers the company? The company this
Speaker 8: quarter is on course to report quarterly revenue that just
Speaker 8: twenty twenty was annual revenue, So clearly there's been a
Speaker 8: rapid acceleration there. It was a company that was a niche.
Speaker 8: Now this data center business is absolutely huge and the
Speaker 8: majority of its business, whether that's sustainable or not, we'll
Speaker 8: get a window into tomorrow obviously, but in terms of proving, hey,
Speaker 8: look here's some real numbers, we've done something. It's absolutely there.
Speaker 8: Ask me about AI in general, and I might have
Speaker 8: a different answer.
Speaker 4: Well, we may get there yet, later in the program,
Speaker 4: we did just show chart of in video stock up
Speaker 4: more than two hundred percent. So far, you're to dating
Speaker 4: in what is it that makes in video different? What's
Speaker 4: the company's moat and does it have any true competitors?
Speaker 8: They have competitors who are wildly chasing them to try
Speaker 8: and catch up. The company's moat is that they saw
Speaker 8: this coming. I mean, a few years ago, a company
Speaker 8: that was making gaming chips started talking about accelerated computing,
Speaker 8: started talking about this being a thing, and everybody was like, really,
Speaker 8: are you sure. The CEO was talking about how many
Speaker 8: people were at universities were training on his software every
Speaker 8: eing quarter. We're like, yeah, we've got this many universities
Speaker 8: now teaching people this Kuda program.
Speaker 9: And again, well she was like, what's going on here?
Speaker 9: Why do we care? Now? Fast forward to where we are.
Speaker 8: Right now, everybody's using their chips, everybody's using their software
Speaker 8: because that software allows a form of computing to happen
Speaker 8: that was previously very very difficult, very time consuming, and
Speaker 8: very expensive. Still expensive, but now it's possible.
Speaker 2: I mean, at this point, considering all the conversations and
Speaker 2: all the reporting that you know, you and just kind
Speaker 2: of our overall team have done about the excitement of
Speaker 2: AI in general, one would assume that their numbers have
Speaker 2: to be blockbuster, right, or is there something in the
Speaker 2: cycle that companies will buy some chips and then they'll
Speaker 2: be a little bit of a lag and then they'll
Speaker 2: buy some more. Help me out and help me understand
Speaker 2: so that I'm hopefully somewhat smart when they report tomorrow.
Speaker 9: No, you've You've nailed it.
Speaker 8: That's the perfect question to be asking ahead of tomorrow,
Speaker 8: because then if you read the analyst reports, they're all
Speaker 8: over the place.
Speaker 9: Why are they all over the place?
Speaker 8: Well, three months ago Wall Street got embarrassed, right, fifty
Speaker 8: two percent ahead of what the consensus number was, Right,
Speaker 8: was the projection that in Video gave wow?
Speaker 9: Right?
Speaker 8: So what's happening this quarter is all of the analysts
Speaker 8: that are struggling, well, is it going to be that strong?
Speaker 8: Is it going to be stronger? Is the is the
Speaker 8: projected range going to be even stronger than that? And
Speaker 8: the answer is they don't really know, because you could
Speaker 8: actually explain how strong.
Speaker 9: In Video's numbers are.
Speaker 8: And this is, according to Bittenstein, by just looking at
Speaker 8: the spending of just four of these big hyperscalers of
Speaker 8: the Microsoft's, of the Google's you factor in all of
Speaker 8: the others, it could be even bigger. The gating factor
Speaker 8: on the flip side is back to supply did in
Speaker 8: video order enough chips did in video were in video
Speaker 8: as ambitious as they could have been to capture this
Speaker 8: because you remember, you get chips about four months after
Speaker 8: you order them, and they outsourced production, so their estimates
Speaker 8: of what they could do are going to be the
Speaker 8: gating factor here.
Speaker 2: So when I think about like, I love our supply
Speaker 2: chain function or supply like right, who's who are the customers?
Speaker 3: Who are the Bloomberg?
Speaker 2: I love it? I love it, But the supply chain management,
Speaker 2: I mean, and video's got to be on top of it,
Speaker 2: right to make sure that they can actually meet all
Speaker 2: the demand that's out there.
Speaker 8: Yeah, I mean that The good news on that on
Speaker 8: that end is that the PC market still isn't great
Speaker 8: and the smartphone market still sucks, so TSMC isn't devoting
Speaker 8: as much silicon to those customers, so that in theory
Speaker 8: frees up this extra capacity for in videos what it
Speaker 8: calls accelerators, which everybody's buying right now. As I said,
Speaker 8: the gating factor is how well did in Video see
Speaker 8: this coming the orders that they put in three months
Speaker 8: ago that they're going to get chips for now, you know,
Speaker 8: just how much of the order is in enough?
Speaker 4: So what can Invidia tell us? What can company executives
Speaker 4: on the call tell us about demand?
Speaker 8: Yeah, I mean, you know, there's a lot of mixed
Speaker 8: signals right now, general data center demand. It's not great
Speaker 8: because everybody's spending on AI PC demand, which is another
Speaker 8: huge market for them.
Speaker 9: That's not great.
Speaker 8: We don't have that many strong expectations for that part
Speaker 8: of their business. What will be interesting, I think, and
Speaker 8: this is what in Video has been very careful and
Speaker 8: I think very sort of perceptive in what they've done,
Speaker 8: is to try to spread the use of AI beyond
Speaker 8: these so called hyperscalers, beyond the Microsoft, beyond the Googles,
Speaker 8: beyond the facebooks, and they're trying to basically embed the
Speaker 8: use of this technology into the.
Speaker 9: Economy at large.
Speaker 8: Still early days there, people will be looking for signs
Speaker 8: of that kind of spread, of this becoming a more
Speaker 8: sort of baked in part of the economy. And that's
Speaker 8: back to your earlier comments. I think if they can
Speaker 8: show progress there, then the excitement can continue and it
Speaker 8: won't just be a factor of what Google is spending
Speaker 8: every quarter.
Speaker 4: So what does that look like when we actually see
Speaker 4: AI spread throughout the economy beyond these hyperscalers.
Speaker 8: I mean, initially for in video, it looks like companies
Speaker 8: that you wouldn't expect to be direct users of invidious
Speaker 8: technology becoming exactly that. So you have maybe pharmaceutical companies
Speaker 8: using accelerated computing for drug discovery instead of using the
Speaker 8: traditional methods to get the approval that they would go
Speaker 8: through the experimentation progress, Maybe we do it all on
Speaker 8: a computer. If they start ordering in a big way,
Speaker 8: it's spread into that side. This is an affirmation of
Speaker 8: in video, this isn't just a one hit wonder. This,
Speaker 8: this isn't a one use thing. So we need that
Speaker 8: kind of use a case to emerge and to become
Speaker 8: embedded and for that to become a significant part of
Speaker 8: the spending.
Speaker 2: I mean that goes into the euphoria side of it, right,
Speaker 2: Like if this just premeates in terms of the AI,
Speaker 2: the generative AI impacting everything that we do, I mean,
Speaker 2: man often running right, I.
Speaker 8: Mean it's it's you've seen the stories we've written them ourselves,
Speaker 8: and you've had these conversations. Are we at the beginnings
Speaker 8: of the internet here where pets dot com and everybody
Speaker 8: else got a wild voluation that was based upon nothing,
Speaker 8: or are we at the beginning of something which is
Speaker 8: more profound and more going to be much deeper embedded
Speaker 8: in economic activity. Obviously in Video is arguing that that's
Speaker 8: the case. Some people who are concerned that the valuations
Speaker 8: are saying, maybe this is a fad.
Speaker 4: You and I asked you earlier about you know, who
Speaker 4: competes with in video? You said, competitors are chasing them
Speaker 4: and the difference within videos that in video start coming.
Speaker 4: But who are as close as competitors right now?
Speaker 3: I mean, is there anyone?
Speaker 8: Two companies AMD obviously another graphics maker. They have a
Speaker 8: directly comparable product to in video that's coming in the
Speaker 8: fourth quarter of this year. We'll see just how quick
Speaker 8: the uptake is on that. They've given strong projection, so
Speaker 8: we'll see. And the other one is obviously Intel. They
Speaker 8: already are in this market. But again software how easy
Speaker 8: it is to use what they're going to provide, because
Speaker 8: in Video has made what they provide very easy to use,
Speaker 8: very just plug and play.
Speaker 9: As far as the industry is concerned.
Speaker 2: You're incredible as always. Ian King, Bloomberg News US semiconductor
Speaker 2: and networking reporter, just knows everything.
Speaker 3: YEA, what are you doing tomorrow?
Speaker 2: Get some sleep, buddy.
Speaker 1: You're listening to the Bloomberg Business Week podcast. Catch us
Speaker 1: live weekday afternoons from three to six Eastern on Bloomberg Radio,
Speaker 1: the Bloomberg Business App, and YouTube. You can also listen
Speaker 1: live on Amazon Alexa from our flagship New York station,
Speaker 1: Just say Alexa Play Bloomberg eleven thirty.
Speaker 4: Perhaps you're like me and in your wallet you've got
Speaker 4: a couple of different health insurance cards. One is for
Speaker 4: your medical insurance. It's the one you give to your
Speaker 4: doctor's office. The other one is for your prescriptions, which
Speaker 4: you present to the pharmacy when you pick up a medication.
Speaker 3: That prescription.
Speaker 4: One could be for a pharmacy benefit manager, also known
Speaker 4: as a PBM.
Speaker 2: Yeah, PBMs, Come on, you know what they are?
Speaker 7: They do you? Well?
Speaker 2: This is why you and do you know what they are?
Speaker 2: We haven't talked about this so much off air. They
Speaker 2: negotiate cheaper prices for employers in health plans. They also
Speaker 2: pocket drug makers cash, which you maybe didn't know about.
Speaker 2: They're under fire from all directions right now. Blue Shield
Speaker 2: of California last week say replaced some drug procurement services
Speaker 2: from CBS Health's Care PBM with an amalgam of rival offerings.
Speaker 2: In that sent shares of CBS sliding. We all kind
Speaker 2: of like stood up a little straighter when that headline crossed.
Speaker 3: Yeah, that was a big one.
Speaker 4: And then officials is divers as FTC Commission Chair Lina
Speaker 4: Kahn and Florida Governor Ron de Santis, they want more
Speaker 4: transparency from them. There's a story about PBMs and how
Speaker 4: they grab extra cash for themselves from the very parties
Speaker 4: they're supposed to be playing hardball against. It's in the
Speaker 4: upcoming issue of Bloomberg Business Week. It's on newsstands later
Speaker 4: this week. It's already online though, at Bloomberg dot com,
Speaker 4: Slash BusinessWeek and on the Bloomberg terminal with more. We
Speaker 4: got the author of the story, John Tozzi. He's Bloomberg
Speaker 4: News healthcare reporter. Also here is the editor of Bloomberg BusinessWeek,
Speaker 4: Joel Weber. He's in our Bloomberg Interactive Broker's studio.
Speaker 9: Joel.
Speaker 4: When I saw there was a story in the in
Speaker 4: the issue of Bloomberg Business Week about PBMs. I immediately just
Speaker 4: thought it was related to last week's news about Blue
Speaker 4: about California Blue Shield of California, you know, saying hey,
Speaker 4: we're gonna go with Mark Cuban startup, We're gonna go
Speaker 4: with Amazon startup. But the story's much bigger than that.
Speaker 3: Yeah.
Speaker 10: Well, I just had no idea how lucrative is to
Speaker 10: get between you know, you and your prescriptions. And it
Speaker 10: turns out that we're not alone, and how that feels
Speaker 10: like a big deal, and that even places like the
Speaker 10: FTC Federal Trade Commission has also shown an interest. John
Speaker 10: has been on this for a while and has kept
Speaker 10: me abreast of his interest in it, and so I
Speaker 10: was really glad to see it. But how does this
Speaker 10: break down, John, Because the very people who are supposed
Speaker 10: to be keeping our drug prices affordable maybe aren't maybe
Speaker 10: don't have my best interests at heart.
Speaker 7: Yeah, So this has been an issue in.
Speaker 10: You were just you know, like with somebody that we
Speaker 10: could you know, take advantage of.
Speaker 11: I'm sorry, John, this has been an issue in the
Speaker 11: industry for a long time. People who have followed it
Speaker 11: know about rebates. So basically what happens is you go
Speaker 11: to the pharmacy, you fill a prescription, your health plan
Speaker 11: pays the full dollar amount of that prescription, and then
Speaker 11: after the fact, at some point, the drug manufacturer the
Speaker 11: pharma company, sends a rebate for part of the value
Speaker 11: of the drug to your pharmacy benefit manager, and the
Speaker 11: pharmacy benefit manager sends part or all of that rebate
Speaker 11: back to your health plan. And this is something that
Speaker 11: has been debated for years how much of the rebate
Speaker 11: gets passed through. Employers and other people who pay for
Speaker 11: healthcare have said we need to have one hundred percent
Speaker 11: of the rebates passed through. There's been this increasing pressure
Speaker 11: to kind of get all this money coming from the
Speaker 11: drug makers back to the people who are ultimately paying
Speaker 11: for the drugs.
Speaker 2: Why are there rebates?
Speaker 7: Good question.
Speaker 11: I don't know if we have time for it here,
Speaker 11: but you know, I mean like this is sort of
Speaker 11: a system of payments and complexity that is built up
Speaker 11: over years.
Speaker 7: One.
Speaker 11: You know, what the PA say is that they lower
Speaker 11: drug prices by getting these They lower net costs by
Speaker 11: getting these rebates and other discounts from the pharma companies.
Speaker 11: They aggregate buying power, they aggregate demand, and they can
Speaker 11: go to the table with pharma and say, you know,
Speaker 11: give us, give us money back on these drugs. The
Speaker 11: question is, you know, where does that go and who
Speaker 11: who really benefits from it?
Speaker 10: Okay, so Tim mentioned that there are some new players around.
Speaker 10: How's this going down within the industry? Like this does
Speaker 10: seem like you know that there's an opportunity here to
Speaker 10: you know, maybe take advantage of consumers.
Speaker 3: But there are other approaches that you know are out
Speaker 3: there as options.
Speaker 11: Right, So, I mean, one thing to know is that
Speaker 11: there's been a tremendous amount of consolidation in the market
Speaker 11: over the years. So there are now three main PBMs
Speaker 11: that control about eighty percent of the market.
Speaker 2: I hadn't realized have been around since the sixties. I
Speaker 2: don't know why. I thought it was a newer thing,
Speaker 2: but forgive me good Yeah.
Speaker 11: And and they're also like those businesses are integrated with
Speaker 11: much larger companies that also own health insurance companies. Uh,
Speaker 11: you know, you have CVS Health, which owns ATNA, United Health,
Speaker 11: whichnes optimar X PBM Signal, which oones Express Scripts PBM.
Speaker 11: So they have their arms and a lot of different
Speaker 11: businesses that are all related. There is growing competition in
Speaker 11: the PBM market. There are a lot of new entrants,
Speaker 11: a lot of new tech focused companies, companies that say
Speaker 11: they're uh, you know, making more transparent offerings, but they're
Speaker 11: very small, and you know what traction they're getting is
Speaker 11: still you know, still to be.
Speaker 7: Seen because those three big players still dominate the market.
Speaker 3: Do you need a PBM?
Speaker 11: You know, the industry says that employers are not forced
Speaker 11: to contract for PBM services and they choose to do
Speaker 11: so anyway, and you know that's that's their position. I
Speaker 11: think realistically, you know, there's there's not a your alternative
Speaker 11: right now. If you're providing prescription drug coverage, this is
Speaker 11: sort of the avenue to do it.
Speaker 7: But with the blue how did it work.
Speaker 2: Before they became so dominant in.
Speaker 3: The nineteen sixties or before, like I don't know, like they.
Speaker 2: Have PBMs always had a role here.
Speaker 11: Well, I mean one thing is, you know, the role
Speaker 11: that prescription drugs play in healthcare has grown incredibly in
Speaker 11: that period. Right there are more new drugs, more expensive
Speaker 11: drugs every year. You know, in the nineteen sixties, I
Speaker 11: don't have it.
Speaker 7: In front of me.
Speaker 11: But the prescription spend was you know, much less than
Speaker 11: it is now. So part of this is like an
Speaker 11: evolution to you know, new innovation on the pharmacide that's
Speaker 11: very expensive here in the United States, where you know,
Speaker 11: we have a free market for healthcare and the drug
Speaker 11: makers can set their prices as high as they want,
Speaker 11: and so this is sort of an industry that's evolved
Speaker 11: in response to that. But you know, there are there
Speaker 11: are increasing questions around, you know, how it actually worked
Speaker 11: and whether they are you know, whether they're clients, the
Speaker 11: employers are fully capturing the value of the discounts that
Speaker 11: they get. Okay.
Speaker 10: So FTC has weighted into this and subpoena affiliates of
Speaker 10: PBMs called group purchasing organizations. I don't usually think of
Speaker 10: the FTC and you know, drugs being in the same place.
Speaker 10: I think usually more like kind of big tech crackdowns.
Speaker 10: But what is the FTC's interest here.
Speaker 11: So the FTC has subpoenaed the PBMs themselves and then
Speaker 11: these affiliates, the group purchasing organizations as well. You know,
Speaker 11: I think as a competition regulator they have and particularly
Speaker 11: under Lena Khan, they have sort of taken a close
Speaker 11: look at this industry. They're doing what is essentially a
Speaker 11: study of competition. So it's not, you know, it's not
Speaker 11: an enforcement action. They're kind of gathering information and will
Speaker 11: presumably produce a report at some point, you know. But again,
Speaker 11: there has been a tremendous amount of consolidation in the industry,
Speaker 11: I think, you know, and these are companies that have
Speaker 11: a lot of influence over what drugs are available.
Speaker 2: Well, and I also feel like rebates is a loaded word.
Speaker 2: It just says like I'm getting a rebate, like something's
Speaker 2: got to be good about it.
Speaker 4: But when I hear a rebate, I think to myself, Okay,
Speaker 4: this is, you know, a way to get you to
Speaker 4: buy something with the hope of you not actually cashing
Speaker 4: in this rebate.
Speaker 11: Well, the thing about a rebate is by the time
Speaker 11: you get it, you've already paid for it, right that
Speaker 11: you're not. It's it's not an upfront discount, although there
Speaker 11: are those two, it's you know, so, and then what
Speaker 11: happens to those dollars when they do flow back to
Speaker 11: the plan. How much goes to the actual patient who
Speaker 11: paid maybe the full cost of the drug if they
Speaker 11: have a high deductible.
Speaker 2: That's what I wanted to ask you, executives from the
Speaker 2: three the three big PBMs, this is in your story,
Speaker 2: so that they pass almost all the rebates they receive
Speaker 2: from drug makers back to clients. But we don't really
Speaker 2: know that, do.
Speaker 11: We well or do they They say they do, and in
Speaker 11: some programs, like in medicare, there are regulations around requiring
Speaker 11: them to do that. But the other thing that we've
Speaker 11: sort of come to learn is that even as they
Speaker 11: say they're passing back almost all of the rebates or
Speaker 11: all the rebates in some cases, there's other money they
Speaker 11: are getting from drug makers that is not called a rebate.
Speaker 11: So it's called a manufacturer administrative fee, or an inflation
Speaker 11: protection fee, or a data fee, or you know five
Speaker 11: or six other different terms that show.
Speaker 2: My SELFE trail. Is this what this is?
Speaker 6: Like?
Speaker 2: Like all these crazy little fills anyway?
Speaker 7: It so it sounds like it.
Speaker 11: Well, right, And so, I mean, one of the questions
Speaker 11: employers have is, you know, how much money are these
Speaker 11: companies making from pharma companies?
Speaker 7: And it's money that is tied to.
Speaker 11: The prescriptions that you know, you and I are filling, right,
Speaker 11: and so where does that go, and that's sort of
Speaker 11: the big.
Speaker 7: Unanswered question and all all of this.
Speaker 1: Where does it go?
Speaker 7: Where does it go?
Speaker 10: Yeah, there is a bipartisan interest in perhaps regulating this space.
Speaker 10: Is this one of those areas that everyone in DC
Speaker 10: actually gets along about.
Speaker 7: I think there is a lot of agreement.
Speaker 11: You know, we've seen bipartisan bills both in the House
Speaker 11: and in the Senate from several committees. You know, one thing,
Speaker 11: just the political context here is you know, last year
Speaker 11: in the Inflation Reduction Act, that took kind of a
Speaker 11: big swing at pharma because Medicare will be able to
Speaker 11: negotiate drug prices for the first time, and PBMs are
Speaker 11: sort of kind of next up in a way that
Speaker 11: you know, Congress has been looking at this industry pretty closely,
Speaker 11: and we'll see if there's action on that in this session.
Speaker 2: I thought it was really interesting too that it was noted.
Speaker 2: I think it was a quote from somebody in the
Speaker 2: story about how these fees that these PBMs get, that
Speaker 2: they're tied to the price of a drug, even though
Speaker 2: the process doesn't matter if the drug costs twenty bucks
Speaker 2: or two thousand dollars.
Speaker 11: Yeah, that's one of the really interesting things about this
Speaker 11: whole business is like a lot of people, a lot
Speaker 11: of actors' fees are tied to a drugs a list price.
Speaker 11: So you know the argument is that if your fee
Speaker 11: is tied to the list price, then you make more
Speaker 11: money on higher price drugs, so you have incentives to
Speaker 11: you know, cover and sell and promote higher price prasim Pick.
Speaker 2: Anybody, right, well, you know, pick a list.
Speaker 4: Right we go, v Hey, John, I wanted to go
Speaker 4: back to what happened last week when Blue Shield of
Speaker 4: California said I was going to replace some of its
Speaker 4: PBM reliance. So it was using CBS health Care mark
Speaker 4: the PBM for pretty much everything, and now it's going
Speaker 4: to use those upstarts that Joel mentioned mark Cubans, cost
Speaker 4: plus Drugs, something from Amazon. How closely is the industry
Speaker 4: watching this, because we saw a lot of stocks move
Speaker 4: south as a result of this.
Speaker 11: Yeah, I mean what's interesting is that Blue Shield of
Speaker 11: California is using some newcomers. It's also still using CVS
Speaker 11: for this specialty specialty drugs, which is maybe half or
Speaker 11: more of its pharmacy bend. So and it's also using
Speaker 11: another PBM called Prime Therapeutics that has a relationship with
Speaker 11: sickness express Scripts. So there they are doing something different,
Speaker 11: they are not totally disentackling them from the existing system.
Speaker 4: So does that essentially tell us that, Okay, the future
Speaker 4: of PVMs could be in specialties.
Speaker 11: That is definitely a growing area both of you know,
Speaker 11: for drug makers and for PBMs.
Speaker 7: You know, kind of high cost.
Speaker 11: Drugs that are called specialty. Although the definition around what
Speaker 11: is especially drug and what isn't is a little fuzzy
Speaker 11: sometimes too, but yeah, that is that is a place
Speaker 11: when you listen to these companies, that is a place
Speaker 11: where they are growing and you know, they have clinical
Speaker 11: programs around specialty drugs, and you know they're making more
Speaker 11: and more of their profits there.
Speaker 10: Okay, John, you know this space incredibly well, You're always
Speaker 10: all over it. Tell me something that you learned while
Speaker 10: you were working on this one.
Speaker 7: You know, I had.
Speaker 11: Actually not seen some of the contract language that we
Speaker 11: uncovered for this story, and it is pretty it is
Speaker 11: pretty revealing to look at. You know, we looked at
Speaker 11: a contract of between express Scripts PBM and one of
Speaker 11: its clients where they say, you know, we contract with
Speaker 11: pharma companies for our own account, you know, and we
Speaker 11: may make positive margin on those relationships, you know, so
Speaker 11: they are disclosing that to their clients. So what they're
Speaker 11: not you know, what nobody really knows is like how
Speaker 11: how significant is that to their business?
Speaker 2: And it makes me wonder, you know, as the cost
Speaker 2: of drugs just keep going go up and up and up,
Speaker 2: like how this potentially plays into all of it. This
Speaker 2: is why we were obsessed with this story all there.
Speaker 2: We were talking about it. John Tazzi, incredible, Thank you
Speaker 2: so much your rebates in the mail. John is of
Speaker 2: course healthcare reporter at Bloomberg News, as Joel said, just
Speaker 2: knows this space inside and out. John of course in
Speaker 2: our Interactor Broker Studio along with the editor of Bloomberg BusinessWeek,
Speaker 2: Joel Weber. Catch this story in the upcoming new issue
Speaker 2: A BusinessWeek at on newstands on Thursday, already online at
Speaker 2: Bloomberg dot com, slash BusinessWeek and on the Bloomberg Termolk.
Speaker 1: Guys, Thank you, This is Bloomberg Business Wait inside from
Speaker 1: the reporters and editors who bring you America's most trusted
Speaker 1: business magazine, plus global business, finance and tech news. The
Speaker 1: Bloomberg Business Week Podcast with Carol Messer and Tim Stenebeck
Speaker 1: from Bloomberg Radio.
Speaker 2: Let's get to it, guys, let's talk about the market trade.
Speaker 2: Lauren San Palipo is director and senior investment strategy analyst
Speaker 2: for the Chief Investment Office at Bank of America. With
Speaker 2: us on phone in New York City, big title, tell me, like,
Speaker 2: what is it that kind of from day to day
Speaker 2: is always on your mind?
Speaker 12: Well, I mean, particularly for summertime. This has been interesting
Speaker 12: recently after a really strong seven months, right, We've been
Speaker 12: watching stocks certainly rip to the upside here. It's a
Speaker 12: little bit of a digestion here in August, so that's
Speaker 12: making for an interesting August, and rates have certainly.
Speaker 2: August is supposed to be, or has of late, right,
Speaker 2: the second worst month for stocks, September being the worst.
Speaker 2: So we have seen this trade before. We kind of
Speaker 2: take a breather in August.
Speaker 12: That's right, yep. And so I'm not looking forward to
Speaker 12: September either your point worst season or worst month of
Speaker 12: the season here.
Speaker 4: So seasonality, Lauren, do you think what's happening is fundamental
Speaker 4: or technical?
Speaker 12: I think it's a little bit of both. I mean,
Speaker 12: so that seasonality is certainly not helping maybe a little
Speaker 12: bit technical too. We've seen those valuations run up, and
Speaker 12: I think this digestion is a little bit called for.
Speaker 2: So if September is worse, how much worse?
Speaker 9: Now?
Speaker 2: How much are you looking for? Like a ten percent
Speaker 2: correction on all the major equity averages? Like give us
Speaker 2: an idea. If you look at some individual names, you
Speaker 2: certainly can see some interesting trends, But what is it
Speaker 2: that you're looking for specifically? And again, is it technical fundamental?
Speaker 2: Is it just what I think.
Speaker 12: You could see? You know, I think under ten percent,
Speaker 12: it's not abnormal for markets to be pulling back by
Speaker 12: that amount a few times a year. So the fact
Speaker 12: that we've just gone sort of straight up into the
Speaker 12: right here on the chart sort of makes for this
Speaker 12: pullback scenario in September. So I'm weary, But at the
Speaker 12: same time, we've actually capitalized on some of these pullbacks.
Speaker 12: We think about buying into the market, because you know,
Speaker 12: the market really hasn't afforded those opportunities here to date.
Speaker 1: Think or do.
Speaker 2: Think about buying into the market or do you actually
Speaker 2: buy into the market.
Speaker 12: Well, we're advising clients, yes, okay too.
Speaker 2: Yeah, And are they listening? Are they a little nervous too.
Speaker 12: I mean, well, you're seeing this year sort of this
Speaker 12: idea that there are alternatives out there, right, So we
Speaker 12: have seen some of these elevated cash positions. Money market
Speaker 12: funds certainly attractive here at five percent, so that's really yield.
Speaker 12: So there's certainly some yield chasing happening. But yeah, we're
Speaker 12: looking to just deploy those on these opportunities now through
Speaker 12: year end.
Speaker 4: Are you at all concerned about what we've heard from retailers,
Speaker 4: specifically target Walmart? But we heard this week with executives
Speaker 4: saying that the consumer is pulling back a little bit.
Speaker 12: I think the tone of retailers, to your point, has
Speaker 12: gotten a little bit more cautious. In first quarter, we
Speaker 12: heard some evidence of trading down, but today felt a
Speaker 12: lot different, right, I mean, we learned that more folks
Speaker 12: are sort of at different levels of income, they're shopping
Speaker 12: in big box discount stores, and then more alarming, there's
Speaker 12: even evidence of shrink or effects for those retailers. So
Speaker 12: I think that has to be telling you something.
Speaker 4: What do you think the theft tells us, the shrink
Speaker 4: tells us?
Speaker 12: Well, I mean, my guess people steal out of necessity.
Speaker 12: So that's not great. We're seeing credit card balance is
Speaker 12: also extremely elevated. You hear that from the FED, so
Speaker 12: the retailers, plus what the FEEDA has been telling us,
Speaker 12: it's sort of the same story here, right, although it's been.
Speaker 2: Happening for years.
Speaker 4: It's just at a different scale now, I think, Carol.
Speaker 4: But I think, like you said, Carol, it's the question
Speaker 4: of and Lauren, tell us, if you have this data,
Speaker 4: it's I won't say it's troubling, but what I would
Speaker 4: like to know from these companies. I don't want them
Speaker 4: to lump all these losses together, like you know, I
Speaker 4: want to know exactly how much they're losing just from
Speaker 4: not from damage and not from employees stealing, but from
Speaker 4: customers stealing. Do you do you get any of that data?
Speaker 12: I have not ever seen that data out there, but
Speaker 12: you'd be surprised how much. I mean, in Manhattan here
Speaker 12: in New York City, all of the plastic that's up
Speaker 12: in front of products, you would think shrink would be down,
Speaker 12: theft would be down. So I think this is sort
Speaker 12: of unfortunately a sign of the times, and it's really
Speaker 12: sort of a cautionary tale in my eyes.
Speaker 2: When you look at the Equity Universe. I am curious,
Speaker 2: are there certain areas of the market that you think
Speaker 2: are more interesting when it comes to investment potential and
Speaker 2: return potential?
Speaker 12: Yes, And I think sector wise, energy complex it's been
Speaker 12: Joane August has been good for energy. Valuations are certainly
Speaker 12: some of the cheapest in the SMP. That's not the
Speaker 12: best reason to buy, but I think a very good
Speaker 12: reason to own energy is to own them over the
Speaker 12: next cycle. And they also have some really healthy balance sheets.
Speaker 12: So I like energy here. And also healthcare actually is
Speaker 12: just the second sector it for its defensive qualities. I
Speaker 12: think healthcare looks interesting.
Speaker 3: It's why healthcare specifically.
Speaker 12: I think the AI story is additive to healthcare, and
Speaker 12: I think that's a little bit overlooked. I know we've
Speaker 12: been talking about the AI story for some time now,
Speaker 12: but that productivity enhancement that AI can really offer, that
Speaker 12: seems compelling.
Speaker 4: And where do you think the value Where do you
Speaker 4: think the value is added there? Where do you you
Speaker 4: know who ends up making money when it gets more productive?
Speaker 4: Because if there is an area that is right for disruption,
Speaker 4: it's certainly healthcare. Ask anyone who's waited, you know, months
Speaker 4: to see a doctor and then waits hours in the
Speaker 4: office to see the doctor.
Speaker 12: Right, it made worse by the pandemic. It wasn't so
Speaker 12: kind to healthcare, i'd say, and you know telehealth add
Speaker 12: it sort of moment in the sun when we couldn't
Speaker 12: go into offices. But you're right to think that sort
Speaker 12: of healthcare. I think the infrastructure could definitely use an upgrade.
Speaker 2: Where don't want you want to be in this investment
Speaker 2: cycle right now?
Speaker 12: Well, we've backed away from the ultra defensive areas of
Speaker 12: the market, and I think, you know, there are some
Speaker 12: valuations in tech that don't seem so compelling here, but
Speaker 12: we do. But we do like that balance between tech,
Speaker 12: Like I said, AI that opportunity, but those are some
Speaker 12: you know, high quality plays we think that are certainly
Speaker 12: good for portfolios here.
Speaker 4: I know you can't name names necessarily, but when you
Speaker 4: talk about AI and high quality, give us give us
Speaker 4: some themes here, because I think there are some concerns
Speaker 4: that the AI story is still Okay, Well, we believe
Speaker 4: it's going to be big, but you need to show
Speaker 4: us that it's actually.
Speaker 3: Going to be big.
Speaker 12: Yeah, without naming names, I mean, I think tomorrow is
Speaker 12: a big day. In an individual'snog. But you know, it's
Speaker 12: always interesting to see a single company has actually become
Speaker 12: a big time macro story. It's sort of the bone
Speaker 12: weather right of the AI theme, and that's been a
Speaker 12: very predominant narrative that's played out in inequities this year.
Speaker 12: But I also think it's a really great check on
Speaker 12: supply chains and you know, the shortages that we've been
Speaker 12: talking about since the pandemic.
Speaker 3: I like calling it. That's what Carol's been saying too.
Speaker 3: You're like, the well I want Nvidia macro story.
Speaker 12: You can say it, not me.
Speaker 2: No, I really appreciate it. Lauren, take care. Lauren San Philippo,
Speaker 2: director of Senior Investment Strategy analyst for the Chief Investment
Speaker 2: Office every BAA on the phone in New York City.
Speaker 2: I just know we're all so like Gaga over AI.
Speaker 2: If Nvidia continues to see demand kind of grow into
Speaker 2: that valuation, that's a big gross story going forward.
Speaker 3: What if it doesn't wa wah, mom, get.
Speaker 2: Ready for correction.
Speaker 9: This is Bloomberg.
Speaker 1: This is the Bloomberg Business Week podcast. Avail Little on Apple,
Speaker 1: Spotify and anywhere else you get your podcasts. Listen live
Speaker 1: weekday afternoons from three to six Easterning on Bloomberg dot com,
Speaker 1: the iHeartRadio app tune In, and the Bloomberg Business app.
Speaker 1: You can also watch us live every weekday on YouTube
Speaker 1: and always on the Bloomberg terminal