AI could drive a natural gas boom as power companies face surging electricity demand

A chimney from the Linden Cogeneration Plant is seen in Linden New Jersey April 22, 2022. 

Kena Betancur | View Press | Corbis News | Getty Images

Natural gas producers are planning for a significant spike in demand over the next decade, as artificial intelligence drives a surge in electricity consumption that renewables may struggle to meet alone.

After a decade of flat power growth in the U.S., electricity demand is forecast to grow as much as 20% by 2030, according to a Wells Fargo analysis published in April. Power companies are moving to quickly secure energy as the rise of AI coincides with the expansion of domestic semiconductor and battery manufacturing as well as the electrification of the nation’s vehicle fleet.

AI data centers alone are expected to add about 323 terawatt hours of electricity demand in the U.S. by 2030, according to Wells Fargo. The forecast power demand from AI alone is seven times greater than New York City’s current annual electricity consumption of 48 terawatt hours. Goldman Sachs projects that data centers will represent 8% of total U.S. electricity consumption by the end of the decade.

The surge in power demand poses a challenge for Amazon, Google, Microsoft and Meta. The tech companies have committed to powering their data centers with renewables to slash carbon emissions. But solar and wind alone may be inadequate to meet the electricity load because they are dependent on variable weather, according to an April note from consulting firm Rystad Energy.

“Economic growth, electrification, accelerating data center expansion are driving the most significant demand growth in our company’s history and they show no signs of abating,”

Robert Blue

Dominion Energy, Chief Executive Officer

Surging electricity loads will require an energy source that can jump into the breach and meet spiking demand during conditions when renewables are not generating enough power, according to Rystad. The natural gas industry is betting gas will serve as the preferred choice.

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Natural gas prices year to date

“This type of need demonstrates that the emphasis on renewables as the only source of power is fatally flawed in terms of meeting the real demands of the market,” Richard Kinder, executive chairman of pipeline operator Kinder Morgan, told analysts during the company’s first-quarter earnings in April.

“The primary use of these data centers is big tech and I believe they’re beginning to recognize the role that natural gas and nuclear must play,” Kinder said during the call. Kinder Morgan is the largest natural gas pipeline operator in the U.S. with 40% market share.

Natural gas is expected to supply 60% of the power demand growth from AI and data centers, while renewables will provide the remaining 40%, according to Goldman Sachs’ report published in April.

Gas demand could increase by 10 billion cubic feet per day by 2030, according to Wells Fargo. This would represent a 28% increase over the 35 bcf/d that is currently consumed for electricity generation in the U.S, and a 10% increase over the nation’s total gas consumption of 100 bcf/d.

“That’s why people are getting more bullish on gas,” said Roger Read, an equity analyst and one of the authors of the Wells Fargo analysis, in an interview. “Those are some pretty high growth rates for a commodity.”

The demand forecasts, however, vary as analysts are just starting to piece together what data centers might mean for natural gas. Goldman expects a 3.3 bcf/d increase in gas demand, while Houston-based investment bank Tudor, Pickering, Holt & Co. sees a base case of 2.7 bcf/d and a high case of 8.5 bcf/d.

Powering the Southeast boom

Power companies will need energy that is reliable, affordable and can be deployed quickly to meet rising electricity demand, said Toby Rice, CEO of EQT Corp., the largest natural gas producer in the U.S.

“Speed to market matters,” Rice told CNBC’s “Money Movers” in late April. “This is going to be another differentiator for EQT and natural gas to take a very large amount of this market share.”

Natural gas market looks oversupplied right now, says EQT CEO Toby Rice

EQT is positioned to become a “key facilitator of the data center build-out” in the Southeast, Rice told analysts on the company’s earnings call in April.

The Southeast is the hottest data center market in the world with Northern Virginia in the thick of the boom, hosting more data centers than the next five largest markets in the U.S. combined. Some 70% of the world’s internet traffic passes through the region daily.

The power company Dominion Energy forecasts that demand from data centers in Northern Virginia will more than double from 3.3 gigawatts in 2023 to 7 gigawatts in 2030.

Further south, Georgia Power sees retail electricity sales growing 9% through 2028 with 80% of the demand coming from data centers, said Christopher Womack, CEO of Georgia Power’s parent Southern Company, during the utility’s fourt-quarter earnings call in February.

“Economic growth, electrification, accelerating data center expansion are driving the most significant demand growth in our company’s history and they show no signs of abating,” Dominion CEO Robert Blue said during the company’s March investor meeting.

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EQT shares over the past year.

The surging power demand in the Southeast lies at the doorstep of EQT’s asset base in the Appalachian Basin, Rice said during the earnings call. Coal plant retirements and data centers could result in 6 bcf/d of new natural gas demand in EQT’s backyard by 2030, the CEO said.

EQT recently purchased the owner of the Mountain Valley Pipeline, which connects prolific natural gas reserves that EQT is operating and developing in the Appalachian Basin to southern Virginia. EQT is the only producer that can access the growing data center market through the pipeline, said Jeremy Knop, the company’s chief financial officer.

“I think we are very uniquely positioned in that sense,” Knop said during the call. Rice said the Southeast will become an even more attractive gas market than the Gulf Coast later in the decade. EQT is planning to expand capacity on the Mountain Valley Pipeline from 2 bcf/d to 2.5 bcf/d. The pipeline is expected to become operational in June.

The level of electricity demand could help lift natural gas prices out of the doldrums.

Prices plunged as much more than 30% in the first quarter of 2024 on strong production, lower demand due to a mild winter and historic inventory levels in the U.S. By 2030, prices could average $3.50 per thousand cubic feet, a 46% increase over the 2024 average price of $2.39, according to Wells Fargo.

Grid reliability worries

Dominion laid out scenarios in its 2023 resource plan that would add anywhere from 0.9 to 9.3 gigawatts of new natural gas capacity over the next 25 years. The power company said gas turbines will be critical to fill gaps when production drops from renewable resources such as solar. The turbines would be dual use and able to take clean hydrogen at some point.

“We’re building a lot of renewables, which all of our customers are looking for, but we need to make sure that we can operate the system reliably,” Blue told analysts during Dominion’s earnings call Thursday.

Renewables will play a major role in meeting the demand but they face challenges that make gas look attractive through at least 2030, Read, the Wells Fargo analyst, told CNBC.

An all of the above strategy is the only thing that we see as the way to maintain the reliability and the affordability that our customers count on.”

Lynn Good

Duke Energy, Chief Executive Officer

Many of the renewables will be installed in areas that are not immediately adjacent to data centers, he said. It will take time to build power lines to transport resources to areas of high demand, the analyst said.

Another constraint on renewables right now is the currently available battery technology is not efficient enough to power data centers 24 hours a day, said Zack Van Everen, director of research at investment Tudor, Pickering, Holt & Co.

Nuclear is a potential alternative to gas and has the advantage of providing carbon free energy, but new advanced technology that shortens typically long project timelines is likely a decade away from having a meaningful impact, according to Wells Fargo.

Richard Kinder, executive chairman of pipeline operator Kinder Morgan, said significant amounts new nuclear capacity will not come online for the foreseeable future, and building power lines to connect distant renewables to the grid will take years. This means natural gas has to play an important role for years to come, Kinder said during the company’s earnings call in April.

“I think acceptance of this hypothesis will become even clearer as power demand increases over the coming months and years and it will be one more significant driver of growth in the demand for natural gas that will benefit all of us in the midstream sector,” Kinder said.

Environmental impact

Any expansion of natural gas in meeting U.S energy demand is likely to be met with opposition from environmental groups who want fossil fuels to be phased out as soon as possible.

Goldman Sachs forecast carbon emissions from data centers could more than double by 2030 to about 220 million tons, or 0.6% of global energy emissions, assuming natural gas provides the bulk of the power.

Virginia has mandated that all carbon-emitting plants be phased out by 2045. Dominion warned in its resource plan that the phase out date potentially raises system reliability and energy independence issues, with the company relying on purchasing capacity across state lines to meet demand.

Duke Energy CEO Lynn Good said natural gas “can be a difficult topic,” but the fossil fuel is responsible for 45% of the power company’s emissions reductions since 2005 as dirtier coal plants have been replaced. Good said electricity demand in North Carolina is growing at a pace not seen since the 1980s or 1990s.

“As we look at the next many years trying to find a way to expand a system to approach this growth, I think natural gas has a role to play,” Good said at the Columbia Global Energy Summit in New York City in April. The CEO said natural gas is needed as a “bridge fuel” until more advanced technology comes online.

“An all of the above strategy is the only thing that we see as the way to maintain the reliability and the affordability that our customers count on,” Good said.

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Ulta CEO says e-commerce sites can do more to stop the sale of stolen goods

Read CNBC’s full investigation into the alleged organized theft groups that police say are stealing and reselling items from retailers including Ulta Beauty, T.J. Maxx and Walgreens.

Faced with sophisticated organized retail crime rings that investigators say have targeted his company, Ulta Beauty CEO Dave Kimbell is laying some blame on e-commerce sites.

In the first in-depth interview given by a retail CEO about organized theft, Kimbell responded to a monthslong CNBC investigation that showed how police broke up what they say is a professional network of thieves who used Amazon to resell millions in cosmetics stolen from Ulta stores and other retailers across the U.S.

While Kimbell wouldn’t comment directly about Amazon, he said online marketplaces are “part of the problem.”

“[Online marketplaces] give more scale and more opportunity for people to liquidate this product,” Kimbell told CNBC in an on-camera interview. “You used to have to sell stolen goods at flea markets or out of the trunk of your car, or maybe just locally. Now, you have more sophisticated tools to have a broader reach across the country or even internationally.”

As part of an investigation into retail crime rings and the actions companies and law enforcement are taking to crack down on the problem, CNBC followed a case that involved Michelle Mack, a San Diego woman whom prosecutors accuse of using her Amazon digital storefront to resell goods stolen from stores.

The 53-year-old mother of three and her husband, Kenneth Mack, were charged with conspiracy to commit organized retail theft, grand theft and receipt of stolen property in connection with the alleged crime ring. During a raid at her California mansion in December, California Highway Patrol and Homeland Security agents say they found $387,000 in suspected stolen goods, most of which had come from Ulta. Investigators say her crime ring brought in millions of dollars over more than a decade. Both Michelle Mack and Kenneth Mack have pleaded not guilty. 

For Kimbell, the scale of such an operation wasn’t surprising.

“Unfortunately, I’m not that shocked because we’ve seen it in other parts of the country,” said Kimbell. “The magnitude of this one is significant. But this is what’s happening, and this is the environment in which we’re operating.”

Ulta Beauty CEO Dave Kimbell said online marketplaces need to do more to prevent the sale of stolen goods.

CNBC

Kimbell said he doesn’t think the onus is on consumers to evaluate whether a product they are buying from an online marketplace is stolen. Many shoppers may not even consider that the products could be stolen from one retailer and sold by another, he said, adding it’s a largely online phenomenon.

“That doesn’t happen in brick-and-mortar [stores]. You wouldn’t come into a retailer and see somebody [at] a table in front [selling] stolen goods,” Kimbell said. “We shouldn’t have an environment where it’s possible to steal from one retailer and [have it] end up on any other platform, any other large-scale, mainstream platform.”

Anyone who sells products online “should be committed to ensuring that nothing that they sell is stolen goods,” Kimbell said.

“I can tell you with 100% certainty, nothing that we sell at Ulta.com or any online platform is product that’s been stolen from another retailer,” he said. “There are tools, there’s data, there’s analytics, there’s capabilities that we collectively have that we could try to take even more action.”

Amazon declined CNBC’s request for an interview but said in a statement the e-commerce giant has “zero tolerance for the sale of stolen goods.” An Amazon spokesperson said the company invests $1 billion annually and employs “thousands of people” to combat fraud, including detection and prevention tools.

The spokesperson said Amazon works with law enforcement and other retailers to “stop bad actors and hold them accountable.”

In the Mack case, Amazon said it did not receive signals that would have indicated the seller was offloading stolen goods. Mack’s page was taken down after her arrest.

How bad is organized retail crime?

It’s unclear exactly how big of a problem organized retail crime is. The National Retail Federation and the Retail Industry Leaders Association say not every instance is reported, tracked or tallied.

According to the most recent NRF survey on shrink — the industry term for lost inventory from damage, theft or other sources — the total value of goods stolen in external theft instances totaled $40.5 billion in 2022, representing 36.15% of total shrink, compared with 37% in 2021.

Ulta Beauty is one of a number of retailers that have started to discuss retail crime as a problem but haven’t quantified how it is affecting their businesses. Ulta Beauty Chief Financial Officer Scott Settersten and Chief Operating Officer Kecia Steelman have discussed theft or organized retail crime specifically on earnings calls or at investor conferences. 

Ulta Beauty said it aims to have all of its fragrances locked up in stores in the first few months of this year. Fragrance has been one of the hardest-hit categories for the retailer because of its high value and the relative ease of reselling it, Kimbell said.

The CEO didn’t quantify the rise of organized retail crime his company has seen, but he said “it has definitely gotten worse.”

“Retail crime has been part of the retail industry forever … but what we’ve seen over the last few years, really the last couple of years, is a significant elevation,” he said.

Retail executives are increasingly worried about a rise in violence associated with theft, according to the NRF survey, with 81% reporting an increase in violence and 28% reporting that their company has closed a specific location because of crime. Ulta said it has not yet closed a store because of crime.

Kimbell said he is particularly concerned about how the rise in crime affects Ulta’s 50,000 employees across 1,400 stores around the country.

“These situations … they’re not fun … they’re threatening; they’re intimidating,” Kimbell said. “They can be traumatic.”

– Additional reporting by Ali McCadden.

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Inside the organized crime rings plaguing retailers including Ulta, T.J. Maxx and Walgreens

In a tony suburban enclave in the San Diego foothills, police say, an organized retail crime “queenpin” had built an empire.

Tucked behind the stone walls of her 4,500-square-foot Spanish-style mansion, Michelle Mack had stockpiled a small fortune in cosmetics that had been stolen from Ulta and Sephora stores across the country, authorities said. 

Police don’t suspect that Mack, 53, took the items herself. Instead, they say, she pulled the strings from the shadows, employing a network of around a dozen women who stole the items for her so she could resell them on Amazon.

Michelle Mack’s home in Bonsall, California, Dec. 6, 2023.

CNBC

With their airfare, car rentals and other travel expenses paid by Mack, the suspects committed hundreds of thefts up and down the California coast and into Washington, Utah, Oregon, Colorado, Arizona, Illinois, Texas, Florida, Pennsylvania, Massachusetts and Ohio, investigators said. Mack selected which stores to target and what merchandise to take and the women were sent to clear out entire shelves of merchandise before making off with the stolen goods stuffed into Louis Vuitton bags, investigators said.

Investigators began referring to the theft group as the “California Girls” and considered Mack the crew’s ringleader. She made millions reselling the stolen items on Amazon to unwitting customers at a fraction of their typical retail price, investigators said, before she was arrested in early December.

Michelle Mack is taken into custody, Dec. 6, 2023.

CNBC

Law enforcement officials say Mack’s alleged theft ring is just one of the many that are plaguing U.S. retailers and costing them billions in losses annually. Their rise has led many companies to lock up merchandise, hire security guards and lobby lawmakers for stricter regulations.

These organized theft groups don’t typically carry out the splashy “smash and grab” robberies seen in viral videos. Instead, they pilfer goods quickly, quietly and efficiently. They often function within elaborate, organized structures that in some ways mimic the corporations they’re stealing from, police said.

CNBC has spent about eight months embedding with various law enforcement agencies and investigating theft groups to understand what organized retail crime looks like from the ground. In some cases, CNBC witnessed low-level shoplifting incidents involving people who appeared to be homeless or mentally ill. In other instances, CNBC saw takedowns of alleged organized theft groups that police said were reselling stolen merchandise at flea markets. Mack’s group, from her alleged network of professional thieves to her lucrative Amazon marketplace, was by far the most sophisticated one CNBC tracked alongside police.

California Highway Patrol officers arrest a retail crime suspect.

CNBC

But federal agents with Homeland Security Investigations, the Department of Homeland Security’s law enforcement branch, said some crime groups are even more elaborate — and theft is just one facet of their enterprises.

“We’re talking about operations that have fleets of trucks, 18-wheelers that have palletized loads of stolen goods, that have cleaning crews that actually clean the goods to make them look brand new,” said Adam Parks, an assistant special agent in charge at HSI, which is the main federal agency investigating retail crime.

“Just like any business, they’ve invested their capital into business assets like shrink wrap machines, forklifts,” Parks, who works out of HSI’s Baton Rouge, Louisiana, office, told CNBC in an interview. “That is what organized theft looks like, and it actually is indistinguishable from other e-commerce distribution centers.”

These theft groups in their myriad forms have become a thorn in the side of retailers big and small, prompting retailers to cite crime as the reason for lower profits, the inability to hire and retain staff, and the degradation of the in-store experience. They have also united politically divided Americans in their disdain for seeing everyday products locked up behind glass cases and witnessing brazen theft gone unchecked in stores.

Suspected stolen cosmetics found inside Michelle Mack’s home.

CNBC

Whether organized retail crime is actually rising is up for debate. Retailers including Target, Foot Locker, Walgreens and Ulta have said theft is a growing problem in recent years. But few have said how often it’s happening or how much money they’re losing from it, fueling accusations from some experts and analysts that they’re blaming crime in order to mask operational missteps.

The National Retail Federation estimates that retailers lost $40.5 billion to external theft, including organized retail crime, in 2022. That represented about 36% of total inventory losses — slightly lower than the 37% in 2021.

Even if theft has not meaningfully reduced some retailers’ profits, many have warned that crime can threaten the safety of workers and shoppers.

“The financial impact is real, but way more important is the human impact, the impact it has to our associates, the impact it has to our guests,” Ulta CEO Dave Kimbell told CNBC in a rare sit-down interview.

“It also impacts the communities in which we live,” he said. “If people don’t feel safe going in to shop in certain areas of a community, it really has an impact and can change neighborhoods and change communities over time.”

The government response to the issue has grown in turn. Both local and federal agencies have stepped up enforcement of laws targeting organized retail crime, and lawmakers are proposing and passing more measures that stiffen penalties for theft offenses.

HSI initiated 59 cases against organized theft groups in fiscal 2021, resulting in 55 indictments and 61 arrests, the agency said.

By the end of fiscal 2023, cases had more than tripled, to 199. Indictments spiked more than fivefold to 284, while arrests soared to 386, more than six times the number in 2021.

California Highway Patrol, which runs one of the most active retail crime task forces in the country, reports it made 170% more arrests for organized theft offenses in 2023 than it did in 2022.

It’s not clear whether organized theft offenses increased in that time or officials ramped up enforcement as the issue got more public attention and the retail industry’s lobbying engine pressed them to make it a priority.

CNBC embedded with teams from HSI and California Highway Patrol to witness four organized retail crime operations for this investigation. The probe is also based on more than a dozen interviews with law enforcement officers, retail leaders and customers, along with records, including court filings, company reports and property records.

New Orleans

On a sweltering Monday morning in July, about a dozen agents from HSI New Orleans gathered behind the U.S. Custom House, preparing for Operation French Quarter.

The officers were instructed to pose as shoppers inside three Walgreens stores and one CVS store in the area seeing high rates of theft, sometimes as many as 20 to 30 incidents per day, agents said.

As federal law enforcement agents who typically investigate terrorism, sex trafficking and gang leaders such as Joaquin “El Chapo” Guzman, the officers weren’t there to arrest people for petty theft. They had a clear directive: Find out who’s stealing and follow them out of the store to determine who else they may be working with.

“Obviously, the name of the game, guys and girls, is trying to get the bigger and better fish,” Assistant Special Agent in Charge Scott Robles, who led the operation, told the assembled officers. “We’re trying to identify the people who are in charge of this organized crime.”

Assistant Special Agent in Charge Scott Robles of Homeland Security Investigations addresses a team of undercover agents in New Orleans, July 17, 2023.

CNBC

At the bottom of organized retail crime rings are boosters — the people who go into stores and take the items. Robles was hoping the serial thieves targeting the drugstores could lead them to a larger operation.

“It can be anybody. It could be the mom with five kids just looking for extra money. It can be somebody that’s part of a team. … They may be getting paid with food, they may be getting paid with beer or drugs,” Robles said. “Some people get paid cash or they’re trying to work off a debt.”

Throughout the hourslong operation, agents identified at least one case that they say plainly showed organized theft.

Surveillance footage of the incident shows a man enter one of the Walgreens stores, head to the cosmetics aisle, remove a plastic shopping bag from his pants and calmly load it up with 17 jars of nail polish, valued at around $200. He then walked about a half mile away to the New Orleans Public Library’s main branch, where he sold the nail polish to a security guard, police said.

Federal agents briefly questioned the security guard, and the incident remains under investigation.

Beyond that instance, the vast majority of the thefts agents witnessed during the operation were low-level and petty, involving people who appeared to be homeless, mentally ill or transient. One man stole paper towels and then walked into a homeless shelter. A group took a case of beer and later went to a park to drink it. A woman stole a case of water, set up a stand to resell it and then defecated on the sidewalk.

Operation French Quarter showed how the lowest level of a retail crime operation can function, and how even small thefts can involve coordination among bad actors. Still, the incidents underscore the challenges investigators face when trying to build cases; they also demonstrate just how petty many thefts are, especially in urban areas with high rates of homelessness and addiction.

A Walgreens spokesperson told CNBC that the chain is “focused on the safety of our patients, customers and team members” and is taking steps to “safely deter theft” and “deliver the best patient and customer experience.”

“We are working closely with law enforcement, elected officials and community leaders to draw greater attention to and improve our response to retail crime,” the spokesperson said.

San Jose

Crates filled with unopened jugs of Gain, Tide and Downy detergent. Boxes stuffed with Gillette razors, Olay moisturizer and Allegra allergy pills. A pile of sparkly silver boots in sizes 8, 9 and 10 with the T.J. Maxx tags still on.

This is just some of the merchandise that California Highway Patrol found inside a home and storage container belonging to suspected members of an organized retail crime ring during a raid in November.

A bin filled with sparkly silver boots that police suspect an alleged San Jose, California, crime ring stole from T.J. Maxx.

Gabrielle Fonrouge

In all, investigators uncovered nearly 20,000 items valued at more than $550,000 across five locations connected with the group, according to CHP. Police suspect the majority of the items were stolen from T.J. Maxx stores and a variety of drugstores and grocery stores in and around the Bay Area.

CHP’s probe began in September, when investigators from TJX Companies, the owner of T.J. Maxx, reached out to the agency’s organized retail crime task force with information about a crime ring that it said was buying and reselling stolen goods — a “fencing” operation.

When boosters need to cash in on the items they take, they turn to fencers, who buy the products for pennies on the dollar and resell them at a margin Wall Street could only dream of, retail crime investigators have said.

Experts said retailers can have a hard time persuading law enforcement to investigate theft at stores because it is often considered a property crime, which police tend to see as less urgent than homicides, shootings and narcotics crimes.

To show law enforcement the scope of the problem, TJX investigators began conducting surveillance on the alleged crime ring. CHP agreed to take the case. Sgt. Manny Nevarez, who oversees all organized retail crime investigations in the Bay Area for CHP, told CNBC the group had hit stores in multiple counties in an effort to evade detection.

“They are not catching on that some of the retailers have their own loss prevention personnel and typically, if you target one store in San Jose, then the word gets out and then the next store is notified,” said Nevarez. 

Sgt. Manny Nevarez oversees organized retail crime investigations in the Bay Area for California Highway Patrol.

CNBC

Police learned that alleged members of the group were reselling the suspected stolen merchandise out of their homes and at the local Capitol Flea Market — a sprawling swap meet on the outskirts of San Jose. Officers also witnessed members of the crew receiving suspected stolen merchandise, transferring those goods to others in their network and exchanging money.

At the end of November, dozens of CHP investigators working with TJX descended on the five locations connected with the alleged fencing ring and carried out search warrants in a raid cops dubbed “Operation Kingsfall.” The locations included numerous homes along with a storage unit. 

“Nosotros somos policia,” the officers shouted in Spanish outside one of the homes. “Police, search warrant. Open the door with your hands up,” they continued, switching between English and Spanish before using a battering ram to knock down the door.

Officers from California Highway Patrol approach a home suspected to be connected with an organized retail crime ring in San Jose, California, Nov. 28, 2023.

CNBC

The location, an innocuous single-family home with Christmas decorations out front, looked like any other on the block. But on the sidewalk and grass near the property line sat dozens of discarded clothing tags, anti-theft devices, hangers and other retail store detritus.

Inside the home, CHP officers and TJX personnel found mountains of goods they suspect were stolen to resell, including bags of apparel with the tags still affixed, boxes of Huggies diapers, liquor and power tools.

By the time authorities completed the raids, they had enough suspected stolen merchandise to fill three 20-foot-long U-Haul trucks. A spokesperson for the Santa Clara County District Attorney said it is charging nine defendants in connection with the alleged crime ring.

Investigators examine suspected stolen merchandise connected with an alleged organized retail crime ring in San Jose, California.

CNBC

The law enforcement operation witnessed by CNBC showed the breadth of some of the fencing rings in the U.S. and how flea markets can play a role in the sale of stolen goods. Capitol Flea Market didn’t respond to a request for comment. 

“There’s certain crimes that come up where the public reaches a point where they’re like, ‘We have had enough of this,’ right?” Lt. Michael Ball, who helped oversee the operation, told CNBC. “And this is one of those that’s reached that level where people are saying widely and shouting it all the way up to our governor’s office that they have had enough of this.”

In a statement, a TJX spokesperson said the company is “thankful” for CHP’s efforts and is taking organized retail crime “very seriously.” The spokesperson said TJX is “laser-focused on ways to mitigate theft in our stores.”

The company told CNBC it will not resell the recovered merchandise. If TJX considers the items to be in suitable condition, it will donate them to charities in the area where they were found, the company said. If it deems the products unsuitable, it will work to dispose of them “responsibly,” it said.

San Diego

When Donna Washburn started shopping for a Christmas gift for her daughter in December, she wanted to “splurge” and buy her a bottle of Nars foundation. But she couldn’t find it in stock at a store close to home.

So, like many consumers, she Googled the product. She saw it was available on Amazon and cost around $38 before tax, nearly 30% cheaper than its typical retail price of $52.

“I said, you know, ‘It’s Amazon, it’ll come fast.’ It was the beginning of December. So I really didn’t want to wait too much longer for Christmas,” Washburn told CNBC in an interview, adding she was told it would arrive by Dec. 11.

Donna Washburn bought a beauty product from Michelle Mack’s Amazon store that police suspect had been stolen.

CNBC

Unknown to Washburn, police say, that bottle of foundation had likely been stolen by the crew of boosters allegedly employed by Mack — the suspected retail crime mastermind accused of running an illicit business from her San Diego mansion.

The Christmas gift ultimately never arrived, because Mack was arrested before she could ship the package, which was one of many found in Mack’s residence by investigators.

“I pay attention, but not that much, you know?” said Washburn, a 63-year-old clinical education associate in St. Augustine, Florida. “I’m shopping from Amazon. Hopefully you can trust it. So now that we know better … we’ll think twice.”

Washburn had bought the foundation from an Amazon storefront dubbed Online Makeup Store, which Mack had opened in 2012. CNBC viewed it before it was taken down in late 2023.

Suspected stolen cosmetics found inside Michelle Mack’s home.

CNBC

On its face, Mack’s storefront looked no different from the millions of others on Amazon’s marketplace. It had 4.5 stars on more than 100 reviews, and featured cosmetics from popular brands such as Mac, Tarte and Charlotte Tilbury that shoppers can find in neighborhood beauty stores.

There was just one red flag: the prices. Many of the products for sale at Mack’s store were listed at a fraction of the typical retail price, including a $25 bottle of Estee Lauder foundation that typically retails for $52 and Too Faced mascara that typically goes for $29 and was being sold for $17.

The store brought in millions. Since 2012, Mack sold nearly $8 million in cosmetics through the storefront before it was shut down, and she brought in $1.89 million in 2022 alone, Amazon sales records provided to investigators show.

Mack could offer such low prices, police suspect, because her crew of boosters had stolen the products in hundreds of incidents over more than a decade. Some of the thefts brought in around $2,000 in merchandise while others netted as much as $50,000 worth of merchandise, prosecutors said.

Mack’s business was humming along ahead of the holiday shopping season until the carefully crafted empire police say she built crumbled. On a cool December morning just before dawn, a convoy of CHP and HSI agents, armed with a search warrant, raided her sprawling mansion.

Mack, dressed in a baby pink pajama set and a pair of fuzzy mule slippers, was handcuffed and put into a police car as her teenage daughters stood in the driveway, watching.

Inside her garage, investigators found what they described as a “mini-store” — shelves and shelves of beauty products, sunglasses and designer bags organized in neat bins and categorized by product. They also found hundreds of postmarked yellow envelopes destined for unwitting customers, including Washburn, with “Online Makeup Store” marked as the return address.

Police recovered nearly 10,000 items worth a total of more than $387,000, CHP said.

A California Highway Patrol evidence photo of suspected stolen goods taken from the garage of Michelle Mack, who is accused of masterminding an organized retail crime network from her home in San Diego.

Source: California Highway Patrol

A California Highway Patrol evidence photo of suspected stolen goods taken from the garage of Michelle Mack, who is accused of masterminding an organized retail crime network from her home in San Diego.

Source: California Highway Patrol

A California Highway Patrol evidence photo of suspected stolen goods taken from the garage of Michelle Mack, who is accused of masterminding an organized retail crime network from her home in San Diego.

Source: California Highway Patrol

In February, California Attorney General Rob Bonta filed a total of 140 felony charges against Mack; her husband, Kenneth Mack; and seven other alleged members of the crew. The charges included conspiracy to commit organized retail theft, grand theft and receipt of stolen property. The defendants have all pleaded not guilty. CNBC contacted each defendant multiple times for comment, but none of them responded.

“This is a multimillion-dollar criminal scheme. It was complex. It was orchestrated,” Bonta said when announcing the charges. “We are not talking about garden-variety shoplifting.”

Court records filed in connection with the case provide a rare glimpse into the inner workings of an alleged organized retail crime ring. They show text messages between the suspects and details about the operation.

“I’m not stealing regular I’m going to start filling up my bag quick. So I want to know stuff I can grab in bulks too,” Kimora Lee Gooding texted Michelle Mack on Jan. 7, 2023.

Between Jan. 30 and Feb. 16, 2023, Gooding committed at least 10 separate thefts at Ulta stores across California, prosecutors allege in court records. In each case, Gooding took more than $950 worth of goods, the records say.

On Feb. 21, a few days after Gooding’s string of thefts, Mack sent her a screenshot of “Online Makeup Store” with an address she could ship the stolen products to. It was the same business address that was listed on Mack’s Amazon page before it was shut down, and traced back to a post office box a few miles from her home.

“Even without lancome we still did well,” Michelle Mack texted her husband two days later, allegedly referencing a prestige cosmetics brand owned by L’Oreal.

Soon, orders were pouring into Michelle Mack’s Amazon store.

California Highway Patrol Officer Andrew Barclay outside Michelle Mack’s home during her arrest.

Scott Zamost

“Lots of orders let’s get shipping,” Kenneth Mack texted Michelle Mack alongside an image that showed a bin full of paper.

By July 8, it appeared that the haul Gooding and others had allegedly brought in had dried up. Michelle Mack needed more things to sell.

“Did you get some new girls?” Michelle Mack texted Alina Franco, another person charged in connection with the theft crew. “I really need product so if you have anything please let me know.”

A day later, two more thefts connected to the ring were committed and many more followed, prosecutors said.

In addition to Ulta and Sephora, the theft organization targeted a range of other retailers, including Macy’s-owned Bloomingdale’s, Prada, Bath & Body Works, Victoria’s Secret, and Luxottica’s Sunglass Hut and LensCrafters, prosecutors said.

Sephora and Bath & Body Works declined to discuss the case with CNBC. Victoria’s Secret, Macy’s, Prada, Sunglass Hut and LensCrafters didn’t respond to requests for comment.

Despite the recent surge of headlines and commentary on the topic, organized theft groups have long operated around the world. But retail industry leaders and some law enforcement officials argue the rise of online marketplaces and e-commerce has caused such incidents to increase or have made it easier for theft groups to operate.

“There’s an ease of distribution that has become even more prevalent for stolen goods through online marketplaces. … You used to have to sell stolen goods at flea markets or out of the trunk of your car or maybe just locally,” said Ulta’s Kimbell. “Now, you have more sophisticated tools to have a broader reach across the country or even internationally.”

Ulta Beauty CEO Dave Kimbell said online marketplaces need to do more to prevent the sale of stolen goods.

CNBC

While Kimbell didn’t name Amazon specifically, he said online marketplaces are “part of the problem” and should be using the data, analytics and other technology available to them to be more “proactive” in shutting down bad-actor sellers.

“We shouldn’t have an environment where it’s possible to steal from one retailer and [have it] end up on any other platform, any other large-scale, mainstream platform” that people consider legitimate, said Kimbell.

Bonta called on Amazon and other marketplaces to “do more.” He said they could inform law enforcement, or at least talk to a seller, when red flags such as unusually cheap goods pop up.

“If you freeze out the demand and remove the market by closing out the marketplace where the stolen goods are so easily sold, you make organized retail crime as an organized crime less attractive. And we need to create barriers, instead of ease, for the ability to commit these crimes,” Bonta said in an interview.

California Attorney General Rob Bonta discusses Michelle Mack’s case in an interview on Feb. 16, 2024.

CNBC

In response, an Amazon spokesperson said that the company has “zero tolerance for the sale of stolen goods” and that the company invests more than $1 billion annually in preventing fraud and abuse.

“We leverage sophisticated detection and prevention solutions across our stores and fulfillment operations, allowing us to quickly spot a range of organized retail crime (ORC) schemes,” the spokesperson said in a statement.

The spokesperson said Amazon supports efforts to trace items throughout the supply chain and investigates allegations of stolen merchandise to find out how products were obtained.

“When we identify an issue, we work closely with law enforcement, retailers, and brands to stop bad actors and hold them accountable, including withholding funds, terminating accounts, and making law enforcement referrals,” which have led to arrests, product seizures and the disruption of retail crime rings, the spokesperson wrote.

The company said it assisted with the investigation into Michelle Mack’s alleged theft crew and provided evidence to investigators. It said it’s “pleased” the suspects were arrested because it “sends a strong message that the sale of stolen goods has severe consequences.”

Consumers, many of whom are hungry for deals as they contend with lingering inflation and high interest rates, may feel that buying stolen goods is a victimless crime, experts say.

Michael Krol, HSI’s special agent in charge, disagrees with that idea. He said not only does theft lead to higher prices for consumers but also the items they’re buying could be unsafe because of how they were stored or otherwise manipulated.

“Those items might not have the quality assurance and compliance that we expect in the United States. Baby formula, your medicines … [Consumers] could be buying baby formula that’s expired by three months,” said Krol.

The Inform Consumers Act, which took effect in June, was designed to curb the sale of stolen, counterfeit or otherwise harmful products on online platforms by requiring marketplaces to verify and share identifying information on certain third-party sellers.

The law was designed to prevent the exact type of illicit business Michelle Mack is accused of conducting on Amazon. If sellers are required to provide their contact information to marketplaces and on their listings, bad actors may be deterred from selling illicit goods.

However, Michelle Mack’s business name and an address belonging to it had been verified and was publicly available on her seller’s page. She’d already been on the platform for more than a decade by the time the Inform Act rolled around.

The verification process that Amazon conducted for Michelle Mack’s store after the Inform Act passed wasn’t enough to raise the company’s suspicions, either.

“In this instance, we did not receive signals to identify the seller was engaged in selling stolen goods,” Amazon said.

As part of the law, marketplaces are also required to provide a way for people to report suspicious product listings. But the law doesn’t require the marketplaces to do anything with that information.

“Amazon works hard to ensure our store is a safe and trusted place for shoppers,” Amazon says on a page where people can report suspicious listings. “If you believe any product, seller or other activity in our store is suspicious, please report this using one of the below methods.”

“While we are not able to respond directly to each report,” it says, “we appreciate your feedback.” 

— Additional reporting by Ali McCadden  

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#organized #crime #rings #plaguing #retailers #including #Ulta #Maxx #Walgreens

New Macy’s CEO Tony Spring looks to revive a 166-year-old retailer fighting for relevance

Tony Spring speaks at an event unveiling the Macy’s new women’s apparel brand, On 34th, in July. Spring is former CEO of Bloomingdale’s and begins as Macy’s CEO in February 2024, succeeding longtime Macy’s CEO Jeff Gennette, right.

Melissa Repko | CNBC

Inside its headquarters in New York City’s Herald Square, Macy’s got ready to unveil its newest women’s clothing brand. Its incoming CEO Tony Spring prepared for his own reveal.

Spring took the stage in mid-July in front of fashion influencers, reporters and Macy’s employees, standing beside his soon-to-be predecessor, Jeff Gennette. He was at the pinnacle of his career, making his first public in-person appearance since being named CEO-elect of the 166-year-old department store operator.

Yet where many top executives would have lapped up the limelight, the 58-year-old retail veteran and leader of Macy’s higher-end department store chain Bloomingdale’s kept his remarks brief. He spoke for less than two minutes, then quickly stepped aside for On 34th, the company’s new brand of women’s clothing and accessories, to get the spotlight.

Spring will step onto a bigger stage and inherit the iconic department store’s issues when he takes over the role of Macy’s CEO on Sunday. His push to revive the retailer will depend in no small part on his ability to curate strong brands and store designs — and let the products win over shoppers.

Among the company’s challenges, Spring will contend with inflation-weary shoppers who continue to watch their discretionary spending, confront lower employee morale after more than 2,000 recent layoffs and stare down a contentious battle with activist investors. Macy’s has lost cachet with younger shoppers and brands who see its sprawling stores and endless aisles of merchandise as a relic of the past.

Investors have taken notice. Macy’s stock closed at $18.63 per share Friday, giving it a market cap of $5.11 billion. Shares have fallen about 24% in the last year.

Spring will face existential questions about how Macy’s can stay relevant and grow rather than shrink, as competitors such as Amazon, T.J. Maxx and even Target and Walmart steal away sales. He will also lead Macy’s promising efforts to chase suburban shoppers with smaller stores in strip malls, expand its offerings of trendier exclusive brands and luxury names, and build on the strong performance of newer businesses such as its beauty chain, Bluemercury, and its off-price business, Backstage.

In CNBC interviews, current and former Macy’s employees, industry leaders and investors said Spring will bring a deep retail background, a merchant’s sharp eye and credibility with coveted national and global brands from his decades at Bloomingdale’s.

Yet they acknowledged the new CEO will have his hands full. Some expressed concern that as a longtime executive at the company, Spring won’t bring the same scrutiny an outsider would.

“When you have an internal appointment, you don’t tend to see that much shake-up in the wider team, and sometimes that’s needed,” said Neil Saunders, managing director of research firm GlobalData. “The biggest risk is just really that. Someone new comes in the post, but we just see a continuation of the same old strategies without much new thinking.”

Macy’s declined interview requests for this story, but Gennette praised Spring as the right person for the job when the company announced his retirement and his successor’s appointment in March. Gennette pointed to Bloomingdale’s strong results — the higher-end department store has outperformed the namesake Macy’s brand in recent years — and described Spring as “an ally and trusted partner in advancing Macy’s, Inc.’s strategies.”

“Tony consistently innovates for the customer, is an exceptional brand builder and an excellent talent developer who has strengthened our culture through his leadership,” he said in the news release.

‘A merchant at heart’

Spring’s ascension to the top role at Macy’s is the culmination of nearly four decades with the retailer. Fresh from graduation from Cornell University, he was hired by Bloomingdale’s in 1987 as an executive trainee in the White Plains, New York, store.

He moved up the ranks, ultimately becoming CEO of the higher-end department store in 2014.

Even as he rose, Spring described himself as committed to one of retail’s key building blocks: making sure stores draw customers in, invite them to linger and surprise them with beautiful displays and items they didn’t know they needed. It’s a touch shoppers and Wall Street believe Macy’s could use as it fights for relevance.

“I’m a former merchant,” he told the audience at the launch event for Macy’s “On 34th” brand in July. “I still consider myself a merchant at heart.”

Bloomingdale’s is known for having a knack for understanding customers and which brands to carry. The chain, which has 55 locations across the country, has been a crown jewel of its parent company despite its smaller size. It carries pricey and prominent luxury brands, including Theory, Sandro and Alice + Olivia, but also has popular and more affordable in-house brands, such as Aqua.

It has also drawn shoppers with limited-edition pop-ups and collections of merchandise that tap into the cultural zeitgeist or cater to the Instagram and TikTok generations, such as an exclusive Barbie-themed clothing line.

Macy’s namesake brand accounts for most of its stores and revenue, yet Bloomingdale’s and Bluemercury have seen better sales trends.

On CNBC’s “Mad Money” in October, Spring said his time at Bloomingdale’s reinforced “it’s all about curation of product and the delivery of a better experience for the customer.”

“Retail is theater,” he said in the interview.

He described Bloomingdale’s as “a growth vehicle” but said the company’s namesake brand can be one, too.

“We’re talking to different customers and we can obviously learn from one another without becoming one another,” he said.

GlobalData’s Saunders has criticized Macy’s for sloppy displays, bland merchandise and poor customer service at its namesake stores. He said after leading “the better-run part of the business” in Bloomingdale’s, Spring needs to bring those “softer skills” to Macy’s.

“Get some pride back into the business,” he said. “That might mean making some investments. It might mean putting back in visual merchandising teams. It might mean investing more in staff and labor hours, but I think it’s a decision worth taking. And it’s a relatively easy win.”

Spring will have tougher tasks, though, Saunders said. In a competitive industry, Macy’s needs a sharper identity to compete with specialty retailers, big-box stores and off-price players that often beat the department store on convenience, value and fashion, he said.

And, he added, Spring must take a hard look at the company’s real estate footprint to decide where it should shut stores, shrink locations or expand outside the mall.

Wooing investors and brands

In his new role, Spring will have to charm investors, shoppers and hot brands. It’s a delicate balance, as its efforts to boost sales, make the store experience more appealing to customers and win over investors hungry for profits could at times clash.

As its stock value has eroded, Macy’s has gotten smaller by most other key metrics, too. Over the past decade, the company has closed about a third of its namesake stores. Its annual net sales have fallen during that same period, from about $28 billion in 2013 to $24.4 billion in the last full fiscal year it has reported, which ended in late January 2023.

Macy’s struggles have turned the retailer into a target for the activist investors Spring will face down as he becomes CEO. Its board last month rejected a $5.8 billion proposal by Arkhouse Management and partner Brigade Capital Management to acquire the shares of the retailer that they don’t already own and take the department store operator private.

In an interview on CNBC after that rejection, Arkhouse managing partner Gavriel Kahane signaled that he hasn’t given up yet. He called on Macy’s to open up its books to the investors, or the firm will take the matter to shareholders, he said.

Certainly not done with pursuit of Macy's acquisition, says Arkhouse's Kahane

Investors will get their best glimpse into the health of the company Spring is inheriting in late February, when Macy’s is expected to report its holiday-quarter results and its outlook for the year ahead. In the previous quarter, the retailer said it expected same-store sales to decline by up to 7% in the fiscal year that ended in late January.

Though the company’s sales are sagging, Spring will take over promising pockets of the business, as well. Its smaller stores, which Macy’s is opening in a growing number of strip malls, have outperformed sales at its traditional, mall-based locations. After launching the women’s clothing brand On 34th, Macy’s plans to debut and refresh other lines that shoppers can find only at its stores and on its website. That private brand strategy has succeeded for other retailers, such as Target.

Spring’s career as an insider has raised concerns among some industry analysts. A Macy’s spokesperson said that while Spring came up through Macy’s, he has pushed for adding fresh perspectives to the retailer’s leadership team. Many of the company’s recent top hires have come from the outside.

Those include his successor at Bloomingdale’s, Olivier Bron, who was most recently CEO of department stores in Thailand; and Sharon Otterman, Macy’s new chief marketing officer, who came from Caesars Entertainment.

Having the right national brands will also shape Macy’s future success. It’s another area where Spring’s experience as a merchant could benefit the company.

Compared with rival Nordstrom, Macy’s has been slow to add younger and newer brands that can draw fashion-forward customers.

As Macy’s expands its third-party marketplace, some new brands have joined its website. One of those is Untuckit, a men’s apparel brand typically sold directly through its own stores and website.

Just ahead of the holiday season, the company’s clothing debuted on Macy’s website. It was Untuckit’s first meaningful push into wholesale, said the brand’s CEO and co-founder Aaron Sanandres.

Sanandres said he saw Macy’s as a way to reach shoppers who haven’t yet discovered Untuckit. Now, he said, it’s considering its next moves in wholesale — including the possibility of selling apparel at Macy’s stores.

Yet he said he has grappled with the same questions that other popular brands may have. Will merchandise get confined to a corner of Macy’s huge stores? Will its reputation take a hit from being carried by a retailer associated with old-school malls or 40%-off signs? Can it keep tight control over its own brand’s level of promotions?

“There are a lot of conversations around that, and it’s partly why we’re baby-stepping into the relationship to make sure we don’t see any negative pushback from our customer,” he said.

One of the most crucial parts of Spring’s job will be attracting millennial and Gen Z shoppers who don’t share the same loyalty as their parents and grandparents to Macy’s namesake stores and website, said Oliver Chen, an equity research analyst for TD Cowen.

Winning those shoppers over will come down to having better merchandise and a sense of style, he said.

“You need to be inspired by Macy’s,” he said. “The customer doesn’t necessarily want the cheapest thing from Macy’s. They want a nice, fashion-forward thing.”

Some of those shoppers are like Annie Rush. On a recent weekday, she zipped in and out of Paramus Park mall in New Jersey to make a purchase for one of her teenage sons.

Rush said she prefers to shop online, where she can search for what she wants with the help of filters. At a Macy’s store, the sea of options can be overwhelming, she said.

“Sometimes they offer too many things,” Rush said. “It’s like decision paralysis. You can’t find what you want or have to dig.”

With an Old Navy bag in hand, she cut through Macy’s only to get to the mall’s parking lot.

— CNBC’s Gabriel Cortes contributed to this report.

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#Macys #CEO #Tony #Spring #revive #166yearold #retailer #fighting #relevance

Friday’s S&P 500 and Nasdaq-100 rebalance may reflect concerns over concentration risk

It’s arguably the biggest stock story of 2023: a small number of giant technology companies now make up a very large part of big indexes like the S&P 500 and the Nasdaq-100. 

Five companies (Apple, Microsoft, Amazon, Nvidia and Alphabet) make up about 25% of the S&P 500. Six companies (Apple, Microsoft, Amazon, Nvidia, Alphabet and Broadcom) make up about 40% of the Nasdaq-100. 

The S&P 500 and the Nasdaq are rebalancing their respective indexes this Friday. While this is a routine event, some of the changes may reflect the concerns over concentration risk. 

A ton of money is pegged to a few indexes 

Now that the CPI and the Fed meeting are out of the way, these rebalances are the last major “liquidity events” of the year, corresponding with another notable trading event: triple witching, or the quarterly expiration of stock options, index options and index futures. 

This is an opportunity for the trading community to move large blocks of stock for the last gasps of tax loss harvesting or to position for the new year. Trading volume will typically drop 30%-40% in the final two weeks of the year after triple witching, with only the final trading day showing significant volume.

All of this might appear of only academic interest, but the big move to passive index investing in the past 20 years has made these events more important to investors. 

When these indexes are adjusted, either because of additions or deletions, or because share counts change, or because the weightings are changed to reduce the influence of the largest companies, it means a lot of money moves in and out of mutual funds and ETFs that are directly or indirectly tied to the indexes. 

Standard & Poor’s estimates that nearly $13 trillion is directly or indirectly indexed to the S&P 500. The three largest ETFs (SPDR S&P 500 ETF Trust, iShares Core S&P 500 ETF, and Vanguard S&P 500 ETF) are all directly indexed to the S&P 500 and collectively have nearly $1.2 trillion in assets under management. 

Linked to the Nasdaq-100 — the 100 largest nonfinancial companies listed on Nasdaq — the Invesco QQQ Trust (QQQ) is the fifth-largest ETF, with roughly $220 billion in assets under management. 

S&P 500: Apple and others will be for sale. Uber going in 

For the S&P 500, Standard & Poor’s will adjust the weighting of each stock to account for changes in share count. Share counts typically change because many companies have large buyback programs that reduce share count. 

This quarter, Apple, Alphabet, Comcast, Exxon Mobil, Visa and Marathon Petroleum will all see their share counts reduced, so funds indexed to the S&P will have to reduce their weighting. 

S&P 500: Companies with share count reduction

(% of share count reduction)

  • Apple        0.5%
  • Alphabet   1.3%
  • Comcast    2.4%
  • Exxon Mobil  1.0%
  • Visa                0.8%
  • Marathon Petroleum  2.6%

Source: S&P Global

Other companies (Nasdaq, EQT, and Amazon among them) will see their share counts increased, so funds indexed to the S&P 500 will have to increase their weighting. 

In addition, three companies are being added to the S&P 500: Uber, Jabil, and Builders FirstSource.  I wrote about the effect that being added to the S&P was having on Uber‘s stock price last week.  

Three other companies are being deleted and will go from the S&P 500 to the S&P SmallCap 600 index: Sealed Air, Alaska Air and SolarEdge Technologies

Nasdaq-100 changes: DoorDash, MongoDB, Splunk are in 

The Nasdaq-100 is rebalanced four times a year; however, the annual reconstitution, where stocks are added or deleted, happens only in December. 

Last Friday, Nasdaq announced that six companies would be added to the Nasdaq-100: CDW Corporation (CDW), Coca-Cola Europacific Partners (CCEP), DoorDash (DASH), MongoDB (MDB), Roper Technologies (ROP), and Splunk (SPLK). 

Six others will be deleted: Align Technology (ALGN), eBay (EBAY), Enphase Energy (ENPH), JD.com (JD), Lucid Group (LCID), and Zoom Video Communications (ZM).

Concentration risk: The rules

Under federal law, a diversified investment fund (mutual funds, exchange-traded funds), even if it just mimics an index like the S&P 500, has to satisfy certain diversification requirements. This includes requirements that: 1) no single issuer can account for more than 25% of the total assets of the portfolio, and 2) securities that represent more than 5% of the total assets cannot exceed 50% of the total portfolio. 

Most of the major indexes have similar requirements in their rules. 

For example, there are 11 S&P sector indexes that are the underlying indexes for widely traded ETFs such as the Technology Select SPDR ETF (XLK). The rules for these sector indexes are similar to the rules on diversification requirements for investment funds discussed above. For example, the S&P sector indexes say that a single stock cannot exceed 24% of the float-adjusted market capitalization of that sector index and that the sum of the companies with weights greater than 4.8% cannot exceed 50% of the total index weight. 

At the end of last week, three companies had weights greater than 4.8% in the Technology Select Sector (Microsoft at 23.5%, Apple at 22.8%, and Broadcom at 4.9%) and their combined market weight was 51.2%, so if those same prices hold at the close on Friday, there should be a small reduction in Apple and Microsoft in that index. 

S&P will announce if there are changes in the sector indexes after the close on Friday. 

The Nasdaq-100 also uses a “modified” market-capitalization weighting scheme, which can constrain the size of the weighting for any given stock to address overconcentration risk. This rebalancing may reduce the weighting in some of the largest stocks, including Apple, Microsoft, Amazon, Nvidia and Alphabet. 

The move up in these large tech stocks was so rapid in the first half of the year that Nasdaq took the unusual step of initiating a special rebalance in the Nasdaq-100 in July to address the overconcentration of the biggest names. As a result, Microsoft, Apple, Nvidia, Amazon and Tesla all saw their weightings reduced. 

Market concentration is nothing new

Whether the rules around market concentration should be tightened is open for debate, but the issue has been around for decades.

For example, Phil Mackintosh and Robert Jankiewicz from Nasdaq recently noted that the weight of the five largest companies in the S&P 500 was also around 25% back in the 1970s.

Disclosure: Comcast is the corporate parent of NBCUniversal and CNBC.

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#Fridays #Nasdaq100 #rebalance #reflect #concerns #concentration #risk

Jim Cramer’s top 10 things to watch in the stock market Thursday

My top 10 things to watch Thursday, Dec. 14

1. U.S. stocks are higher in premarket trading Thursday, with S&P 500 futures up 0.46%. Equities rallied Wednesday after the Federal Reserve held interest rates steady, while indicating it would cut rates three times in 2024 — a decision more dovish than I expected. Meanwhile, bond prices are also strengthening, with the yield on the 10-year Treasury falling below 4%.

2. Toll Brothers announces a new $20 million share-buyback program — and there are only 100 million shares. But CEO Doug Yearley thinks it’s ridiculous that his stock sells at eight-times earnings when it’s more of a secular grower, despite changes in the housing industry.

3. UBS upgrades Club holding Coterra Energy to buy from neutral, citing its strong balance sheet strength and oil diversification. But the firm lowered its price target to $31 a share, down from $33.

4. Piper Sandler raises its price target on Club name Amazon to $185 a share, up from $170, while maintaining an overweight rating on the stock. The firm cites improving retail margins and an expected acceleration at cloud unit Amazon Web Services. Amazon is Piper’s top large cap pick.

5. Stifel raises its price target on Lululemon Athletica to $596 a share, up from $529, while reiterating a buy rating on the stock. The firm argues that “still sound” U.S. consumer balance sheets and wage growth should support margin expansion for companies like Lululemon with “brand specific drivers.”

6. Nike is back. Baird raises its price target on the sneaker company to $140 a share, up from $125, while keeping an outperform rating on the stock. Nike’s “quality growth profile plus margin recovery potential support a continued favorable outlook,” the firm contends.

7. Mid-stage trial data shows that Merck and Moderna‘s experimental cancer vaccine, used in conjunction with Merck’s Keytruda therapy, reduces the risk of death or relapse in patients with melanoma skin cancer after three years.

8. JPMorgan raises its price target on L3Harris Technologies to $240 a share, up from $213, while maintaining a neutral rating on the stock. The firm has “high confidence” in the aerospace-and-defense-technology company’s targets for sales and cash flow.

9. Piper Sandler upgrades Club holding Foot Locker to overweight from neutral, while raising its price target to $33 a share, up from $24. The firm cites Foot Locker’s margin expansion opportunity in 2024, arguing the company is best positioned among the athletic-and-footwear group over the next year.

10. Bernstein raises its price target on FedEx to $340 a share, up from $305, while reiterating an outperform rating on the stock. FedEx, which Bernstein expects to benefit from cost cuts and improved international market conditions, is set to report quarterly results on Dec. 19.

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Falling oil prices is hurting energy names. But plenty of others stocks stand to gain

An oil rig in front of a sunset

Andrey Rudakov | Bloomberg | Getty Images

U.S. crude prices continued to fall Wednesday, settling below $70 per barrel for the first time since early July and at their lowest levels since June. That’s good news for the Federal Reserve in its battle against inflation. While the impact on oil and natural gas stocks has not been as cheery, companies across many other industries stand to gain.

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#Falling #oil #prices #hurting #energy #names #plenty #stocks #stand #gain

These 10 portfolio names outperformed the stock market amid the October decline

Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., October 26, 2023. 

Brendan Mcdermid | Reuters

Despite a downbeat month for stocks and mounting macroeconomic uncertainty, several Club names outperformed the market in October — and landed in the green.  

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#portfolio #names #outperformed #stock #market #October #decline

As the market enters correction territory, don’t blame the American consumer

An Amazon.com Inc worker prepares an order in which the buyer asked for an item to be gift wrapped at a fulfillment center in Shakopee, Minnesota, U.S., November 12, 2020.

Amazon.com Inc | Reuters

The initial third-quarter report on gross domestic product showed consumer spending zooming higher by 4% percent a year, after inflation, the best in almost two years. September’s retail sales report showed spending climbing almost twice as fast as the average for the last year. And yet, bears like hedge-fund trader Bill Ackman argue that a recession is coming as soon as this quarter and the market has entered correction territory.

For an economy that rises or falls on the state of the consumer, third-quarter earnings data supports a view of spending that remains mostly good. S&P 500 consumer-discretionary companies that have reported through Oct. 25 saw an average profit gain of 15%, according to CFRA — the biggest revenue gain of the stock market’s 11 sectors.

“People are kind of scratching their heads and saying, ‘The consumer is holding up better than expected,'” said CFRA Research strategist Sam Stovall said. “Consumers are employed. They continue to buy goods as well as pursue experiences. And they don’t seem worried about debt levels.” 

How is this possible with interest rates on everything from credit cards to cars and homes soaring?

It’s the anecdotes from bellwether companies across key industries that tell the real story: Delta Air Lines and United Airlines sharing how their most expensive seats are selling fastest. Homeowners using high-interest-rate-fighting mortgage buydowns. Amazon saying it’s hiring 250,000 seasonal workers. A Thursday report from Deckers Outdoor blew some minds — in what has been a tepid clothing sales environment — by disclosing that embedded in a 79% profit gain that sent shares up 19% was sales of Uggs, a mature line anchored by fuzzy boots, rising 28%.

The picture they paint largely matches the economic data — generally positive, but with some warts. Here is some of the key evidence from from the biggest company earnings reports across the market that help explain how companies and the American consumer are making the best of a tough rate environment.

How homebuilders are solving for mortgages rates

No industry is more central to the market’s notion that the consumer is falling from the sky than housing, because the number of existing home sales have dropped almost 40% from Covid-era peaks. But while Coldwell Banker owner Anywhere Real Estate saw profit fall by half, news from builders of new homes has been pretty good.

Most consumers have mortgages below 5%, but for new homebuyers, one reason that rates are not biting quite as sharply as they should is that builders have figured out ways around the 8% interest rates that are bedeviling existing home sellers. That helps explains why new home sales are up this year. Homebuilders are dipping into money that previously paid for other incentives to pay for offering mortgages at 5.75% rather than the 8% level other mortgages have hit. At PulteGroup, the nation’s third-biggest builder, that helped drive an 8% third-quarter profit jump and 43% climb in new home orders for delivery later, much better than the government-reported 4.5% gain in new home sales year-to-date.

“What we’ve done is simply redistribute incentives we’ve historically offered toward cabinets and countertops, and redirected those to interest rate incentives,” PulteGroup CEO Ryan Marshall said. “And that has been the most powerful thing.”

The mechanics are complex, but work out to this: Pulte sets aside about $35,000 for incentives to get each home to sell, or about 6% of its price, the company said on its earnings conference call. Part of that is paying for a mortgage buydown. About 80% to 85% of buyers are taking advantage of the buydown offer. But many are splitting the funds, mixing a smaller rate buydown and keeping some goodies for the house, the company said.

Wells Fargo economist Jackie Benson said in a report that builders may struggle to keep this strategy going if mortgage rates stay near 8%, but new-home prices have dropped 12% in the last year. In her view, incentives plus bigger price cuts than most existing homes’ owners will offer is giving builders an edge. 

At auto companies, price cuts are in, and more are coming

Car sales picked up notably in September, rising 24% year-over-year, more than twice the year-to-date gain in unit sales. But they were below expectations at electric-vehicle leader Tesla, which blamed high interest rates, and at Ford

“I just can’t emphasize this enough, that for the vast majority of people buying a car it’s about the monthly payment,” Tesla CEO Elon Musk said on its earnings call. “And as interest rates rise, the proportion of that monthly payment that is interest increases.” 

Maybe, but that’s not what’s happening at General Motors, even if investor reaction to good numbers at GM was muted because of the strike by the United Auto Workers union. 

GM tops Q3 expectations but pulls full-year guidance due to mounting UAW strike costs

GM beat earnings expectations by 40 cents a share, but shares fell 3% because of investor worries about the strike, which forced GM to withdraw its fourth-quarter earnings forecast on Oct. 24. Ford, which settled with the UAW on Oct. 25, said the next day it had a “mixed” quarter, as profit missed Wall Street targets due to the strike. Consumers came through, as unit sales rose 7.7% for the quarter, with truck and EV sales both up 15%. GM CEO Mary Barra said on GM’s analyst call that the company gained market share, posting a 21% gain in unit sales despite offering incentives below the industry average.

“While we hear reports out there in the macro that consumer sentiment might be weakening, etc., we haven’t seen that in demand for our vehicles,” GM CFO Paul Jacobson told analysts. But Ford CFO John Lawler said car prices need to decline by about $1,800 to be as affordable as they were before Covid. “We think it’s going to happen over 12 to 18 months,” he said. 

Tesla’s turnaround plan turns on continuing to lower its cost of producing cars, which came down by about $2,000 per vehicle in last year, the company said. Along with federal tax credits for electric vehicles, a Model Y crossover can be had for about $36,490, or as little as $31,500 in states with local tax incentives for EVs. That’s way below the average for all cars, which Cox Automotive puts at more than $50,000. But Musk says some consumers still aren’t convincible. .

“When you look at the price reductions we’ve made in, say, the Model Y, and you compare that to how much people’s monthly payment has risen due to interest rates, the price of the Model Y is almost unchanged,” Musk said. “They can’t afford it.”

Most banks say the consumer still has cash, but not Discover

To know how consumers are doing, ask the banks, which disclose consumer balances quarterly. To know if they’re confident, ask the credit card companies (often the same companies) how much they are spending. 

In most cases, financial services firms say consumers are doing well.

At Bank of America, consumer balances are still about one-third higher than before Covid, CEO Brian Moynihan said on the company’s conference call. At JPMorgan Chase, balances have eroded 3% in the last year, but consumer loan delinquencies declined during the quarter, the company said.

“Where am I seeing softness in [consumer] credit?” said chief financial officer Jeremy Barnum, repeating an analyst’s question on the earnings call. “I think the answer to that is actually nowhere.”

Among credit card companies, the “resilient” is still the main story. MasterCard, in fact, used that word or “resilience” eight times to describe U.S. consumers in its Oct. 26 call.

“I mean, the reality is, unemployment levels are [near] all-time record lows,” MasterCard chief financial officer Sachin Mehra said.

At American Express, which saw U.S. consumer spending rise 9%, the mild surprise was the company’s disclosure that young consumers are adding Amex cards faster than any other group. Millennials and Gen Zers saw their U.S. spending via Amex rise 18%, the company said.

“Guess they’re not bothered by the resumption of student loan payments,” Stovall said.

Consumer data is more positive than sentiment, says Bankrate's Ted Rossman

The major fly in the ointment came from Discover Financial Services, one of the few banks to make big additions to its loan loss reserves for consumer debt, driving a 33% drop in profit as Discover’s loan chargeoffs doubled.  

Despite the fact that U.S. household debt burdens are almost exactly the same as in late 2019, and declined during the quarter, according to government data, Discover chief financial officer John Greene said on its call, “Our macro assumptions reflect a relatively strong labor market but also consumer headwinds from a declining savings rate and increasing debt burdens.”

At airlines, still no sign of a travel recession

It’s good to be Delta Air Lines right now, sitting on a 59% third-quarter profit gain driven by the most expensive products on their virtual shelves: First-class seats and international vacations. Also good to be United, where higher-margin international travel rose almost 25% and the company is planning to add seven first-class seats per departure by 2027. Not so good to be discounter Spirit, which saw shares fall after reporting a $157 million loss.

“With the market continuing to seemingly will a travel recession into existence despite evidence to the contrary from daily [government] data and our consumer surveys, Delta’s third-quarter beat and solid fourth-quarter guide and commentary should finally put the group at ease about a consumer “cliff,” allow them to unfasten their seatbelts and walk about the cabin,” Morgan Stanley analyst Ravi Shanker said in a note to clients.

One tangible impact: United is adding 20 planes this quarter, though it is pushing 12 more deliveries into 2024, while Spirit said it’s delaying plane deliveries, and focusing on its proposed merger with JetBlue and cost-cutting to regain competitiveness as soft demand for its product persists into the holiday season.

As has been the case throughout much of 2023, richer consumers — who contribute the greater share of spending — are doing better than moderate-income families, Sundaram said.

The goods recession is for real

Whirlpool, Ethan Allen and mattress maker Sleep Number all saw their stocks tumble after reporting bad earnings, all of them experiencing sales struggles consistent with the macro data.

This follows a trend now well-entrenched in the economy: people stocked up on hard goods, especially for the house, during the pandemic, when they were stuck at home more. All three companies saw shares surge during Covid, and growth has slacked off since as they found their markets at least partly saturated and consumers moved spending to travel and other services.

“All of the stimulus money went to the furniture industry,” Sundaram said, exaggerating for effect. “Now they’ve been falling apart for the last year.”

Ethan Allen sales dropped 24%, as the company said a flood in a Vermont factory and softer demand were among the causes. At Whirlpool, which said in second-quarter earnings that it was moving to make up slowing sales to consumers by selling more appliances to home builders, “discretionary purchases have been even softer than anticipated, as a result of increased mortgage rates and low consumer confidence,” CEO Marc Bitzer said during Thursday’s earnings call. Its shares fell more than 20%. 

Amazon’s $1.3 billion holiday hiring spree

Amazon is making its biggest-ever commitment to holiday hiring, spending $1.3 billion to add the workers, mostly in fulfillment centers. 

That’s possible because Amazon has reorganized its warehouse network to speed up deliveries and lower costs, sparking 11% sales gains the last two quarters as consumers turn to the online giant for more everyday repeat purchases. Amazon also tends to serve a more affluent consumer who is proving more resilient in the face of interest rate hikes and inflation than audiences for Target or dollar stores, according to CFRA retailing analyst Arun Sundaram said.

“Their retail sales are performing really well,” Sundaram said. “There’s still headwinds affecting discretionary sales, but everyday essentials are doing really well.

All of this sets the stage for a high-stakes holiday season.

PNC still thinks there will be a recession in early 2024, thanks partly to the Federal Reserve’ rate hikes, and thinks investors will focus on sales of goods looking for more signs of weakness. “There’s a lot of strength for the late innings” of an expansion, said PNC Asset Management chief investment officer Amanda Agati.

Sundaram, whose firm has predicted that interest rates will soon drop as inflation wanes, thinks retailers are in better shape, with stronger supply chains that will allow strategic discounting more than last year to pump sales. The Uggs sales outperformance was attributed to improved supply chains and shorter shipping times as the lingering effects of the pandemic recede.

“Though there are headwinds for the consumer, there’s a chance for a decent holiday season,” he said, albeit one hampered still by the inflation of the last two years. “The 2022 holiday season may have been the low point.” 

Deloitte predicts soft holiday sales

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Top Wall Street analysts remain optimistic about these five stocks

The Netflix logo is seen on a TV remote controller in this illustration taken Jan. 20, 2022.

Dado Ruvic | Reuters

As the earnings season rolls on, investors are getting a glimpse into how companies are handling an array of macro pressures.

Analysts can pick apart these quarterly reports and help investors identify companies that can withstand near-term challenges and deliver attractive returns in the long term.

To that end, here are five stocks favored by Wall Street’s top analysts, according to TipRanks, a platform that ranks analysts based on their past performance.

Netflix

Streaming giant Netflix (NFLX) recently delivered a beat on third-quarter earnings per share, with its crackdown on password sharing helping to add more subscribers to its platform.

Evercore analyst Mark Mahaney said that there were several key positives in the company’s third-quarter print, including 8.76 million subscriber additions, stronger-than-anticipated Q4 2023 subscriber addition guidance, and share buybacks of $2.5 billion. He also noted an increase in the 2023 free cash flow outlook to about $6.5 billion, from the previous guidance of at least $5 billion and a price hike for the basic and premium plans.

“We continue to believe that NFLX’s ad-supported offering and password-sharing initiatives constitute major Growth Curve Initiatives [GCI] – catalysts that will drive a material reacceleration in revenue and EPS growth,” said Mahaney.    

The analyst thinks that the company is pursuing these GCI catalysts from a position of strength, given that it is a global streaming leader based on several metrics, including revenue, subscriber base and viewing hours.

Mahaney reiterated a buy rating on NFLX stock with a price target of $500. Interestingly, Mahaney ranks No. 48 among more than 8,500 analysts tracked by TipRanks. His ratings have been profitable 55% of the time, with each delivering a return of 25.4%, on average. (See Netflix Technical Analysis on TipRanks)

Nvidia

Next up is semiconductor giant Nvidia (NVDA). The stock has witnessed a stellar run this year, thanks to demand for NVDA’s chips in building generative artificial intelligence (AI) models and applications.

In a recently updated investor presentation, the company revealed roadmaps for its data center graphics processing units, central processing units and networking chipsets.

JPMorgan analyst Harlan Sur, who holds the 88th position out of more than 8,500 analysts on TipRanks, noted that NVDA’s product roadmaps indicate two major shifts. First, Nvidia has accelerated its product launch timing from a 2-year cycle to a 1-year cycle, which is expected to help the company keep pace with the growing complexity of large language compute workloads.

Regarding the second major shift, Sur said that the roadmaps indicated “more market segmentation (cloud/hyperscale/enterprise) by expanding the number of product SKUs [stock keeping units] that are optimized for a broad spectrum of AI workloads (training/inference).”

The analyst thinks that with these notable developments, the company is taking a multi-pronged approach to strengthen its data center market and technology. He reaffirmed a buy rating on the stock with a price target of $600, noting the growing demand for NVDA’s accelerated compute and networking silicon platforms and software solutions in the development of generative AI and large language models.

Sur’s ratings have been successful 64% of the time, with each rating delivering an average return of 18.2%. (See Nvidia Insider Trading Activity on TipRanks).

Instacart

Grocery delivery platform Instacart (CART) made its much-awaited stock market debut in September. Baird analyst Colin Sebastian recently initiated a buy rating on CART stock with a price target of $31.

Explaining his bullish stance, Sebastian said, “Despite a range of well-financed online and legacy retail competitors, Instacart enjoys an enviable combination of scale, retail integrations, vertical expertise, and proprietary technology.”

The analyst highlighted that the essence of Instacart’s business model is an asset-light partnership strategy. He also thinks that Instacart’s data and technology sophistication are its key competitive advantages. He believes that most food retailers might not be able to build similar internal e-commerce capabilities.

Most importantly, Sebastian views Instacart’s advertising business as one of the most successful launches of retail media, second only to e-commerce behemoth Amazon (AMZN). He pointed out that consumer packaged goods advertisers are promoting their products by leveraging Instacart’s performance ad formats that help in reaching target customers with relevant product ideas.   

Sebastian holds the 340th position among more than 8,500 analysts on TipRanks. His ratings have been successful 52% of the time, with each rating delivering an average return of 10.7%. (See Instacart Options Activity on TipRanks).

SLB

Oilfield services company SLB (SLB), formerly Schlumberger, recently reported better-than-expected third-quarter adjusted earnings. SLB stated that the oil and gas industry continues to gain from a multi-year growth cycle that has shifted to international and offshore markets, where the company claims to enjoy a dominant position.       

Goldman Sachs analyst Neil Mehta contends that while there are no clear near-term catalysts for SLB stock, the long-term growth story remains intact due to resilient customer spending. The analyst highlighted that Saudi Aramco is expected to spend about $245 billion through 2030, reflecting about 5% to 6% annual growth. Further, additional spending (at a modest growth rate) is anticipated from the United Arab Emirates’ ADNOC, Qatar and other players in the region.

Given that 80% of SLB’s revenue is from international and offshore markets, Mehta is confident that the company is well-positioned to leverage the long-term momentum in the Middle East. 

“SLB remains the preferred way to gain exposure to the international and offshore theme, with additional growth drivers in the expansion of its digital footprint with customers, which is margin accretive at ~40-45%, in our view,” said Mehta. 

Calling SLB a structural winner, particularly during pullbacks, Mehta reiterated a buy rating on the stock with a price target of $65. He ranks No. 155 among more than 8,500 analysts tracked by TipRanks. His ratings have been profitable 65% of the time, with each delivering an average return of 12.5%. (See SLB’s Stock Charts on TipRanks) 

Tesla

Our final name this week is electric vehicle maker Tesla (TSLA). The company missed earnings and revenue guidance for the third quarter, with macro pressures, a highly competitive EV market and aggressive price cuts affecting its performance.

Mizuho analyst Vijay Rakesh noted that despite the sequential decline in the company’s Q3 gross and operating margin due to lower pricing and Cybertruck R&D expenses, they remain at the high end of the margins of legacy automakers and way above rival EV makers’ margins.

The analyst lowered his price target for TSLA stock to $310 from $330 to reflect near-term headwinds like margin pressure, macro weakness and Cybertruck ramp challenges. Nevertheless, he reiterated a buy rating, noting that the stock still trades at a discount to disruptors such as Nvidia, while also generating profitability at scale.

“We believe TSLA is prioritizing market share, technology, and cost leadership and is better positioned than peers to weather any turbulence to the broader Auto market,” said Rakesh.

Rakesh ranks No. 82 among more than 8,500 analysts tracked by TipRanks. His ratings have been profitable 57% of the time, with each delivering a return of 18.6%, on average. (See Tesla Financial Statements on TipRanks)

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