Are Uber and Lyft a Threat to the Future of Car Rental Companies?

At the dawn of America’s automobile age, a Nebraskan by the name of Joe Saunders came up with a wild idea: He would rent his Ford Model T to traveling salesmen. Today, 101 years later, his figurative heirs—Saunders later sold out to a Chicagoan named Hertz—confront an existential question: Can the U.S. car-rental business thrive in the era of Uber Technologies Inc., Lyft Inc. and, one day, autonomous vehicles?

The answer, so far, is not pretty. Losses at Hertz Global Holdings Inc. are piling up and Avis Budget Group Inc. just dialed back its profit forecast. Investors have paid a heavy price. Problems with rental fleets are one reason. In recent years, Hertz bought more cars than it needs, and it has been struggling to unload them at decent prices. Perhaps more troubling, however, is that car-rental companies face the kind of threat that felled Blockbuster, which was undone by new technology in the form of digital video and Netflix Inc. There will always be a market for rental cars, but for a growing number of business customers, and even some casual consumers, they seem like a throwback. Why wait in lines, pick up keys, fill up and drop off, when you can tap an app instead? The travails of the industry were driven home recently when Hertz reported its third straight quarter of red ink. The $0.63 per-share adjusted loss for the period that ended in June was worse than the lowest analyst projection. A day earlier, Avis cut its earnings projection for the full year. “The transportation business is evolving,” said Neil Abrams, president of Abrams Consulting Group, which does advisory work for the rental car industry. “The companies that stand still are left in the dust.”

To be sure, the industry’s tough times may have more to do with mismanagement than Uber, Lyft or new mobility companies delivering a glancing blow. Hertz in particular built up a bloated fleet of too many cars to rent. To keep those vehicles generating revenue, the company had to drop rental rates. The companies have had to slim down their fleets at the worst possible time. Millions of vehicles are coming back off leases from when the U.S. auto industry was on its years-long growth spurt.

That big supply is making it difficult to sell old rental cars in the used market. Hertz’s moves to shed cars quickly have accelerated depreciation rates for the rental industry. Chief Executive Officer Kathryn Marinello took over in January with the task of fixing the company a matter of weeks after billionaire investor Carl Icahn boosted his stake. “Hertz management has hurt the industry the most,” said Jim Tennant, principal of the Tennant Group, a consultant to the rental industry. Marinello said the company is now done slimming down its bloated fleet. “Of course, the hard work always comes before the pay off as reflected in our second quarter results,” Marinello said in a statement announcing the results.

As the companies struggle with managing the core business, Hertz and Avis also are going to have to navigate a hazy future. Whereas the harried business traveler has to lug bags to a bus, ride that to a rental counter, wait in line, get the car, inspect it, sign the papers and then drive off, ride sharing allows people to click an app and get picked up. At this point, Uber and Lyft have only taken about 3-4% of revenue from car-rental companies, mostly from business done at airport counters, estimates Hamzah Mazari, analyst with Macquarie. Bearish investors think they can steal 25%, Mazari said, though he expects more like a 5-7% percent cut. In rough numbers, he estimates Hertz and Avis could each lose $200 million in revenue. Each company now brings in about $8.6 billion a year. “As it gains momentum outside big cities, it could have bigger impact,” Mazari said of vehicle hailing and sharing. “It could get bigger especially if millennials are more comfortable with car sharing.”

In the near term, according to Avis CEO Larry De Shon, falling used-car prices that have made the resale of out-of-service rental cars costly are starting to stabilize and rates for rental cars are picking back up. In the long run, he has a plan to stave off increasing competition from the likes of Uber and the looming threat from self-driving robo-taxis. Avis’s Zipcar unit is leasing cars to Uber drivers through a pilot program in Boston. The company also has a partnership with Waymo, the autonomous driving division of Google’s parent company, Alphabet Inc., to manage its fleet of self-driving cars in Phoenix. Apple Inc., meanwhile, has cut a deal to lease Lexus RX450h sport-utility vehicles from Hertz’s Donlen fleet-management unit and test its autonomous driving system on the vehicles. The day Bloomberg News reported the deal, Hertz shares rose more than 13% as investors saw a way forward.

There is a role for rental companies to play in the future, said Michael Millman, founder of Millman Research Associates. They have large lots in major cities, airports and tourist attractions, and staff to maintain them. Their only real competition, he said, will be other rental companies like closely held Enterprise Holdings Inc. and General Motors Co.’s Maven unit. “I think they are going to benefit from this,” Millman said. “These pilots will grow into businesses and bring in new revenue.” That will require the rental companies to show they can transform a business that has been run the same way for decades—a major undertaking, Tennant said. “The car rental companies are not really good at change,” he said.

Citations

1. https://bloom.bg/2poOHqI Bloomberg
2. http://read.bi/2vpQ2Pk – Business Insider

Macy’s Plans a Makeover to Revive Its Shopper Traffic

Despite a shallower drop in second-quarter comparable sales, Macy’s took a massive beating recently on signs that the department store is still far from figuring its way out of the retail abyss it finds itself in. Shares have now fallen 54% from their 52-week high.

While analysts will point to a number of reasons for the share drop—Macy’s had nothing new to report on its efforts to sell prime real estate and the fact it cannot say when it might end its 10-quarter streak of sales declines—a big factor is how far Macy’s remains from fixing its crucial beauty business. Macy’s Chief Financial Officer Karen Hoguet told analysts on a conference call that cosmetics had been among the weakest categories for the retailer in the second quarter and that profit margins in the category had been pinched.

Cosmetics, fragrances and hair products are essential drivers of shopper traffic for any retailer, which in turn is key to getting consumers to spend more. In recent years, Macy’s, like other department stores from Nordstrom all the way up to Neiman Marcus, have lost substantial market share to the likes of LVMH’s Sephora and Ulta Beauty as customers have gravitated to a less didactic way of shopping for beauty products. Women, who make up as much as 80% of a department store’s clientele often see beauty shopping as “me-time,” and any damage to that side of the business is disproportionately painful.

Macy’s has been trying at least. It has been testing an “open sell-selling” to beauty or self-serve approach at some stores, realizing at last that many customers no longer like the old department store approach of having to sit in a chair and let a store worker control the experience. The company bought high-end specialty chain Bluemercury in 2015 for $210 million and is testing out how to incorporate Bluemercury and its products into more stores. About 20 of 650 Macy’s stores have a Bluemercury. (Macy’s said that the comparable sales at Bluemercury’s stand-alone stores have been strong.) “We’re figuring out how to make it work within our stores,” Macy’s CEO Jeff Gennette said in an interview.

But that gets to why investors are losing faith in Macy’s: it always seems to be testing things with little payoff to show for it so far. It is judicious for Macy’s to proceed with caution, but at the same time, every second means more market share drifts to rivals. In its most recent quarter, Ulta’s comparable sales rose 14.3% and you can bet a good chunk of that increase came at Macy’s expense. Even vendors are hedging their bets. Estée Lauder Cos recently started selling MAC products at Ulta, overcoming years of hesitation over Ulta’s strip mall concentration.

Still, Gennette, a 34-year Macy’s veteran who became CEO in May, says that the success Macy’s has had in “open-selling” in the women’s shoe department and in how it sells fine jewelry gives him reason to be confident about success in that way of selling beauty products. Macy’s is working with vendors on how to figure out open-selling and training store workers to sell and speak knowledgeably about a number of brands. “Beauty is much more complicated than those other two businesses but our commitment is as deep,” Gennette says in reference to women’s shoes and fine jewelry.

Yet successful deployment of more Bluemercury stores within Macy’s for instance could mean a boost for shopper traffic since Bluemercury offers spa services. (It is worth noting that J.C. Penney’s large salon and spa business is successful, but not enough for that chain to enjoy overall sales increases.) What is more, Macy’s is unveiling a new loyalty program in October that will aim, in part, to spur beauty sales. There too, Macy’s is going up against formidable competitors. Sephora and Ulta each have massively successive loyalty programs that will be hard to rival. At the same time, he knows how much upside there is if Macy’s pulls this off. “If we can have a solution where we can grow our beauty business, that will be a real jump-start to the overall business, to the balance of the building,” he said. And that might start to mollify anxious investors.

Citations

1. http://for.tn/2vMN2xo – Fortune
2. https://bloom.bg/2poOHqI – Bloomberg

The Good News Is . . .

• The consumer price index (CPI) edged up 0.1% in July as did the core inflation index which excludes food and energy. The performance of both indices demonstrates that inflation remains under control. Year-on-year inflation rates for both indexes also stood at 1.7% percent each. Moderation in housing costs remains a major disinflationary force, inching only 0.1% higher for a yearly 2.8% growth rate, which is down 0.2% from June. Inflation was held in check partly by falling vehicle sales and lower energy prices. Food, apparel and medical costs all edged higher for the month of July.
• Marriott International, Inc., the world’s largest hotel company, reported earnings of $1.13 per share, an increase of 34.5% over year-earlier earnings of $0.84 per share. The firm’s earnings topped the consensus estimate of analysts by $0.11. The company reported revenues of $5.8 billion, an increase of 48.5%. Management attributed the results to continued strength in occupancy rates in North America and surging demand in the Europe and .Asia Pacific markets.
• Aldo, the Canadian shoe company, has agreed to acquire the footwear and accessories operations of the Camuto Group. The takeover will give Aldo, which makes its own shoes and sells them in thousands of stores around the world, a bigger footprint at a time when fashion brands are seeking growth through mergers and acquisitions. Aldo sells shoes in more than 3,000 locations worldwide. The company employs more than 20,000 people and has $1.5 billion in sales annually. The Vince Camuto brand, based in Greenwich, CT, sells men’s and women’s shoes, bags, clothing and accessories. It also produces shoes and apparel for other brands including the Jessica Simpson Collection, Tory Burch and Lucky Brand Jeans.

Citations

1. https://bloom.bg/2eVhfSb – Bloomberg
2. http://cnb.cx/2lwnm3s – CNBC
3. http://bit.ly/2vWMfuf – Marriott International Inc.
4. http://nyti.ms/2vXP2T9 – NY Times Dealbook

Planning Tips

Tips for Understanding Social Security Survivor Benefits

Although best known for retirement benefits, Social Security actually pays four different types of benefits: retirement, disability, family, and survivor. Social Security survivor benefits provide income for the families of workers who die. Below is a brief guide to understand Social Security survivor benefits. Be sure to consult with your financial advisor to determine how these benefits may apply in your situation.

Calculating the Survivor Benefit – You have to have worked a certain number of years, and amassed the requisite number of “credits,” for your loved ones to be eligible. The exact number of credits you need to have family members be eligible for survivor benefits depends on your age when you die: The younger you are, the fewer credits you need, but nobody needs more than 40 credits (10 years of work). However, in the event of your death, a special provision allows benefits to be paid to your dependent children and the spouse who cares for them if you have acquired six credits or more within the three calendar years prior to death. As with the regular retirement benefits, the amount of survivor benefits that your family would receive is based on your average lifetime earnings. The more you have earned, the higher the benefit. If you are eligible to collect Social Security benefits upon retirement, your spouse or dependents may be eligible to collect them in your stead in the event of your death. Benefit amounts are based on the maximum amount the deceased would have collected if still living. In addition, the age at which your spouse or dependents begin collecting will dictate the amount of the benefit.

Who Qualifies for Social Security Survivor Benefits? – Monthly benefits are available to certain family members, including:

• A widow(er) age 60 or older (age 50 or older if he or she is disabled), who has not remarried
• A widow(er) at any age who is caring for the deceased’s child who is under age 16 or disabled
• An unmarried child of the deceased who is younger than age 18 (or up to age 19 if a full-time student in an elementary or secondary school), or 18 or older with a disability that began before age 22
• A stepchild, grandchild, step grandchild or adopted child under certain circumstances
• Parents, age 62 or older, who were dependent on the deceased for at least half of their support
• A surviving divorced spouse, under certain circumstances

How Big Are the Benefits? – Children under age 18, or 19 if still attending primary or secondary school, and disabled dependent children will receive 75% of the normal benefit amount. A surviving spouse who cares for your child under age 16 may begin collecting at any age and will receive 75% of your benefit amount. Dependent parents of the deceased are also eligible to collect benefits. For a single surviving dependent parent, benefits will be paid at 82.5% of your normal amount. If you are survived by both of your dependent parents, they will be eligible to collect 75% each.

Strategies for Surviving Spouses – As of 2017, surviving spouses are eligible to collect benefits as early as age 60, but benefits collected before the beneficiary reaches full retirement age are subject to reduction. Those who begin collecting before this age will receive between 71.5% and 99% of the normal benefit amount, depending on the exact age at which collection begins. Widows or widowers who begin collecting surviving spouse benefits after full retirement age, up to age 70, will receive 100% of this amount. However, your surviving spouse will still be able to collect benefits on his or her own account after age 62, should his or her own wage history result in a higher payout. So if your spouse has passed away, and you are approaching 60, you have a pretty important decision you need to make: Are you going to take that survivor benefit once your 60th birthday arrives–or are you going to wait until 62 to claim your own benefit? The answer should revolve around the size of each benefit payout. If they currently are about the same, you would take the survivor benefit at age 60 – again, it is going to be reduced, because you are taking it early; but the reduction factor applied to survivor benefits is the smallest of all the reduction factors. So you could collect that benefit from 60 all the way up to age 70, while your own benefit continued to grow; and then you can collect that much larger benefit starting at 70. Conversely, if your own benefit is rather small relative to the survivor benefit, you wait until 62, you take your own (reduced) benefit from 62 to 66, and then switch over to that survivor benefit at 66. Because it is not getting any bigger after that point, and because that is going to be your largest payout, you should take it then.

The Blackout Period – In some cases, families may inadvertently fall into a blackout period, in which they are ineligible to collect survivor benefits. It occurs because of inconsistencies in the rules governing the different sorts of survivor benefits for spouses, for offspring and for parents. A widow or widower does not qualify for benefits for her- or himself until age 60, remember. However, that spouse (regardless of age) can collect payouts as the caregiver for the deceased’s children–until the kids turn 16. The kids themselves qualify for benefits (paid to the parent), until they turn 18 (19 if still in school). But in between the offspring’s 18th birthday (when their survivor benefits cease) and the spouse’s 60th birthday (when his or hers resume), no one in the family is eligible to collect. There is an exception for disability. A widow or widower can begin collecting survivor benefits if he or she is disabled and the disability was incurred within seven years of the spouse’s death. A common remedy for the blackout period is life insurance– specifically, term life insurance, which provides coverage for a predetermined amount of time, usually 15, 20 or 30 years. With the purchase of 30-year term life insurance, the survivor gets a death benefit that can last him or her until the age of 61, one year after Social Security eligibility is reinstated.

Citations

1. http://bit.ly/2fzl8yy – Social Security Administration
2. http://bit.ly/2uw2a2t – Motley Fool
3. http://bit.ly/2hQHbS2 – Investopedia
4. http://bit.ly/2vumGOp – TheBalance.com
5. http://bit.ly/2hQVoyq – WealthManagement.com