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Health

Eating 400 calories a day from these foods could raise dementia risk by over 20%

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Talk about food for thought.

A growing body of research suggests that ultra-processed foods like frozen pizzas and breakfast cereals high in sugars, fats and empty calories are bad for your health. Now, a new large-scale study presented at the 2022 Alzheimer’s Association International Conference in San Diego this week offers more evidence that people who get a high percentage of their daily calories from ultra-processed foods are also at a higher risk of cognitive decline.

A team of researchers from the University of São Paulo Medical School in Brazil followed a diverse sample of more than 10,000 Brazilians for up to 10 years. The subjects filled out food frequency questionnaires to note how often they were eating foods including: unprocessed or minimally processed ingredients (aka whole foods like fresh, dry or frozen fruits, vegetables, whole grains, meat, fish and milk that underwent minimal processing, like pasteurization); processed foods (canned fruits, artisanal bread and cheese, and salted, smoked or cured meat or fish); and ultra-processed foods (industrial formulations of processed food substances like oils, fats, sugars, starch, artificial flavors and colorings, but containing little or no whole foods). 

The subjects also took cognitive tests up to three times a year, including memory tests and word recognition tests, to monitor their cognitive functioning; aka, mental abilities such as learning, thinking, reasoning, remembering, problem-solving, decision-making and attention. They also took regular verbal fluency tests to track their executive functioning; aka the mental skills that help an individual plan, monitor and successfully meet their goals. 

The findings? Those who ate 20% or more of their daily calories from ultra-processed foods had a 28% faster rate of cognitive decline, and a 25% faster rate of executive function decline, compared to the subjects in the study who ate the least amount of processed foods. In other words, someone following a 2,000-calorie-a-day diet who consumed 400 of their daily calories from ready-to-eat frozen meals, processed meats, breakfast cereals and sugar-sweetened beverages each day saw a faster rate of cognitive decline. 

Opinion: Your diet isn’t just making you obese, it could be speeding up cognitive decline

And many of us are fueling ourselves with these ultra-processed foods. The researchers noted that a whopping 58% of the calories consumed by U.S. citizens come from ultra-processed foods. We’re not alone; 56.8% of the calories consumed by British citizens, 48% of the calories consumed by Canadians, and up to 30% of the calories eaten by Brazilians also typically come from these ultra-processed foods, the researchers added. And despite the rise in plant-based alternatives (some of which are highly processed, themselves) and poultry consumption — and a dip in buying and eating unprocessed red meat — another recent report noted that Americans are still eating as much processed food as they did two decades ago, particularly deli meats, sausage, hot dogs, ham and bacon.

Related: Putting less sugar in packaged foods could prevent millions of Americans from getting sick — and save the U.S. over $160 billion

But there was an interesting catch in the cognitive decline study: If the overall quality of a subject’s diet was otherwise very high (meaning they ate a lot of unprocessed whole foods like fruits and vegetables, whole grains and lean proteins), then this association between ultra-processed foods and dementia disappeared. So the good news is, you can counter consuming these often cheap and easily-accessible ultra-processed foods by cooking more at home (which can also save you money) and preparing your food with whole foods like fresh or frozen produce, whole grains and lean meats and proteins. 

“Limiting ultra-processed food consumption, particularly in middle-aged adults, may be an efficient form to prevent cognitive decline,” the researchers wrote in their findings published in the journal JAMA Neurology this week. Indeed, this aligns with what health officials such as the American Heart Association have been saying: rather than calling out “good” or “bad” individual foods, folks should focus on eating an overall healthy diet that is high in fruits and vegetables, whole grains and lean/high-fiber proteins that are minimally processed. 

Read more: No more ‘good’ vs. ‘bad’ foods: 10 healthy eating ‘patterns’ to prevent heart disease and death

But brain health isn’t the only concern when it comes to ultra-processed foods. Here are four other ways that these ready-made meals and snacks can hurt your health. 

Processed foods raise your risk of heart disease

An analysis of almost 30,000 people published in the JAMA Internal Medicine journal in 2020 suggested that eating two servings of red meat and processed meat each week – such as two hot dogs or four pieces of bacon – was “significantly associated” with heart disease.

“It’s worth trying to reduce [consumption of] red meat and processed meat like pepperoni, bologna and deli meats,” wrote senior study author Norrina Allen, associate professor of preventive medicine at the Northwestern University Feinberg School of Medicine.

Researchers from the University of Paris collected data on the diets and health of more than 105,000 people aged 18 and up over the course of five years for a 2019 report. They found that those who ate the most “ultra-processed” foods had a greater risk of heart attack, stroke and other cardiovascular issues.

The American Heart Association also released a new scientific statement last year focusing on overall healthy eating habits to protect your ticker, which included choosing minimally-processed foods (such as a bag of salad or roasted, unsalted nuts) rather than ultra-processed foods (such as sugary cereal, potato chips or smoked sausage) as much as possible. The dietary guidelines also recommended limiting the consumption of food and beverages with added sugars. And it suggested choosing or preparing foods with little or no salt.

Processed foods increase cancer risk

People who had a 10% higher intake of ultra-processed foods saw more than a 10% increase in risk for cancers including breast cancer, according to a 2018 study published in the peer-reviewed British Medical Journal.

So when the American Cancer Society updated its diet recommendations to prevent cancer in 2020, cutting out processed foods was high on the list – along with curbing the consumption of sugar-sweetened drinks, red meat and alcoholic beverages. The American Cancer Society recommended piling your plate with a variety of whole, unprocessed foods and vegetables, instead; particularly dark green, red and orange veggies, as well as fiber-rich legumes like beans and peas. The guide also promoted whole grains, whole fruits in a variety of colors, and overall foods that are “high in nutrients in amounts that help achieve and maintain a healthy body weight.”

Processed foods lower life expectancy 

So considering the reports suggesting processed foods are associated with a host of chronic health conditions like cancer, heart disease and dementia – not to mention obesity, as those who follow an ultra-processed diet could consume up to 500 more calories per day compared with those who consume whole foods – it shouldn’t come as too much of a surprise that research has also found a link between eating these foods and early death.

Researchers at the University of Navarra in Pamplona, Spain documented the dietary habits of more than 20,000 Spanish college graduates between 1999 and 2014. They found that people who frequently consumed heavily processed foods (as in, more than four servings of each per day) had a 62% increased risk for early death compared to those who indulged in these foods less often.

And the 2020 study that noted eating two servings of red meat and processed meat each week was linked with heart disease also found that consuming these tasty but risky foods was also “significantly associated” with death. In fact, people who ate two servings of red meat or processed meat a week — but not poultry or fish — were linked with a 3% higher risk of all causes of death.

Processed foods hurt the planet – and come back around to bite you  

Favoring the growth and production of processed foods – which often rely on the same handful of staple ingredients such as sugar cane, corn, rice and wheat – has resulted in killing off more diverse plant offerings. This impacts agrobiodiversity—or the variety and variability of animals, plants and microorganisms used directly or indirectly for food and agriculture, which affects soil health and farming’s long-run profitable resilience, according to research published in BMJ Global Health earlier this year. What’s more, producing ultra-processed food uses large quantities of land, water, energy, herbicides and fertilizers, which hurts the environment by emitting greenhouse gas and creating tons of packaging waste.

Read more: Processed foods like ramen packets and frozen pizza can hurt your heart — and the globe, study says

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Business

20 dividend stocks with high yields that have become more attractive right now

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Income-seeking investors are looking at an opportunity to scoop up shares of real estate investment trusts. Stocks in that asset class have become more attractive as prices have fallen and cash flow is improving.

Below is a broad screen of REITs that have high dividend yields and are also expected to generate enough excess cash in 2023 to enable increases in dividend payouts.

REIT prices may turn a corner in 2023

REITs distribute most of their income to shareholders to maintain their tax-advantaged status. But the group is cyclical, with pressure on share prices when interest rates rise, as they have this year at an unprecedented scale. A slowing growth rate for the group may have also placed a drag on the stocks.

And now, with talk that the Federal Reserve may begin to temper its cycle of interest-rate increases, we may be nearing the time when REIT prices rise in anticipation of an eventual decline in interest rates. The market always looks ahead, which means long-term investors who have been waiting on the sidelines to buy higher-yielding income-oriented investments may have to make a move soon.

During an interview on Nov 28, James Bullard, president of the Federal Reserve Bank of St. Louis and a member of the Federal Open Market Committee, discussed the central bank’s cycle of interest-rate increases meant to reduce inflation.

When asked about the potential timing of the Fed’s “terminal rate” (the peak federal funds rate for this cycle), Bullard said: “Generally speaking, I have advocated that sooner is better, that you do want to get to the right level of the policy rate for the current data and the current situation.”

Fed’s Bullard says in MarketWatch interview that markets are underpricing the chance of still-higher rates

In August we published this guide to investing in REITs for income. Since the data for that article was pulled on Aug. 24, the S&P 500
SPX,
-0.50%
has declined 4% (despite a 10% rally from its 2022 closing low on Oct. 12), but the benchmark index’s real estate sector has declined 13%.

REITs can be placed broadly into two categories. Mortgage REITs lend money to commercial or residential borrowers and/or invest in mortgage-backed securities, while equity REITs own property and lease it out.

The pressure on share prices can be greater for mortgage REITs, because the mortgage-lending business slows as interest rates rise. In this article we are focusing on equity REITs.

Industry numbers

The National Association of Real Estate Investment Trusts (Nareit) reported that third-quarter funds from operations (FFO) for U.S.-listed equity REITs were up 14% from a year earlier. To put that number in context, the year-over-year growth rate of quarterly FFO has been slowing — it was 35% a year ago. And the third-quarter FFO increase compares to a 23% increase in earnings per share for the S&P 500 from a year earlier, according to FactSet.

The NAREIT report breaks out numbers for 12 categories of equity REITs, and there is great variance in the growth numbers, as you can see here.

FFO is a non-GAAP measure that is commonly used to gauge REITs’ capacity for paying dividends. It adds amortization and depreciation (noncash items) back to earnings, while excluding gains on the sale of property. Adjusted funds from operations (AFFO) goes further, netting out expected capital expenditures to maintain the quality of property investments.

The slowing FFO growth numbers point to the importance of looking at REITs individually, to see if expected cash flow is sufficient to cover dividend payments.

Screen of high-yielding equity REITs

For 2022 through Nov. 28, the S&P 500 has declined 17%, while the real estate sector has fallen 27%, excluding dividends.

Over the very long term, through interest-rate cycles and the liquidity-driven bull market that ended this year, equity REITs have fared well, with an average annual return of 9.3% for 20 years, compared to an average return of 9.6% for the S&P 500, both with dividends reinvested, according to FactSet.

This performance might surprise some investors, when considering the REITs’ income focus and the S&P 500’s heavy weighting for rapidly growing technology companies.

For a broad screen of equity REITs, we began with the Russell 3000 Index
RUA,
-0.18%,
which represents 98% of U.S. companies by market capitalization.

We then narrowed the list to 119 equity REITs that are followed by at least five analysts covered by FactSet for which AFFO estimates are available.

If we divide the expected 2023 AFFO by the current share price, we have an estimated AFFO yield, which can be compared with the current dividend yield to see if there is expected “headroom” for dividend increases.

For example, if we look at Vornado Realty Trust
VNO,
+1.01%,
the current dividend yield is 8.56%. Based on the consensus 2023 AFFO estimate among analysts polled by FactSet, the expected AFFO yield is only 7.25%. This doesn’t mean that Vornado will cut its dividend and it doesn’t even mean the company won’t raise its payout next year. But it might make it less likely to do so.

Among the 119 equity REITs, 104 have expected 2023 AFFO headroom of at least 1.00%.

Here are the 20 equity REITs from our screen with the highest current dividend yields that have at least 1% expected AFFO headroom:

Company Ticker Dividend yield Estimated 2023 AFFO yield Estimated “headroom” Market cap. ($mil) Main concentration
Brandywine Realty Trust BDN,
+1.82% 		11.52% 12.82% 1.30% $1,132 Offices
Sabra Health Care REIT Inc. SBRA,
+2.02% 		9.70% 12.04% 2.34% $2,857 Health care
Medical Properties Trust Inc. MPW,
+1.90% 		9.18% 11.46% 2.29% $7,559 Health care
SL Green Realty Corp. SLG,
+2.18% 		9.16% 10.43% 1.28% $2,619 Offices
Hudson Pacific Properties Inc. HPP,
+1.55% 		9.12% 12.69% 3.57% $1,546 Offices
Omega Healthcare Investors Inc. OHI,
+1.30% 		9.05% 10.13% 1.08% $6,936 Health care
Global Medical REIT Inc. GMRE,
+2.03% 		8.75% 10.59% 1.84% $629 Health care
Uniti Group Inc. UNIT,
+0.28% 		8.30% 25.00% 16.70% $1,715 Communications infrastructure
EPR Properties EPR,
+0.62% 		8.19% 12.24% 4.05% $3,023 Leisure properties
CTO Realty Growth Inc. CTO,
+1.58% 		7.51% 9.34% 1.83% $381 Retail
Highwoods Properties Inc. HIW,
+0.76% 		6.95% 8.82% 1.86% $3,025 Offices
National Health Investors Inc. NHI,
+1.90% 		6.75% 8.32% 1.57% $2,313 Senior housing
Douglas Emmett Inc. DEI,
+0.33% 		6.74% 10.30% 3.55% $2,920 Offices
Outfront Media Inc. OUT,
+0.70% 		6.68% 11.74% 5.06% $2,950 Billboards
Spirit Realty Capital Inc. SRC,
+0.72% 		6.62% 9.07% 2.45% $5,595 Retail
Broadstone Net Lease Inc. BNL,
-0.93% 		6.61% 8.70% 2.08% $2,879 Industial
Armada Hoffler Properties Inc. AHH,
-0.08% 		6.38% 7.78% 1.41% $807 Offices
Innovative Industrial Properties Inc. IIPR,
+1.09% 		6.24% 7.53% 1.29% $3,226 Health care
Simon Property Group Inc. SPG,
+0.95% 		6.22% 9.55% 3.33% $37,847 Retail
LTC Properties Inc. LTC,
+1.09% 		5.99% 7.60% 1.60% $1,541 Senior housing
Source: FactSet

Click on the tickers for more about each company. You should read Tomi Kilgore’s detailed guide to the wealth of information for free on the MarketWatch quote page.

The list includes each REIT’s main property investment type. However, many REITs are highly diversified. The simplified categories on the table may not cover all of their investment properties.

Knowing what a REIT invests in is part of the research you should do on your own before buying any individual stock. For arbitrary examples, some investors may wish to steer clear of exposure to certain areas of retail or hotels, or they may favor health-care properties.

Largest REITs

Several of the REITs that passed the screen have relatively small market capitalizations. You might be curious to see how the most widely held REITs fared in the screen. So here’s another list of the 20 largest U.S. REITs among the 119 that passed the first cut, sorted by market cap as of Nov. 28:

Company Ticker Dividend yield Estimated 2023 AFFO yield Estimated “headroom” Market cap. ($mil) Main concentration
Prologis Inc. PLD,
+1.29% 		2.84% 4.36% 1.52% $102,886 Warehouses and logistics
American Tower Corp. AMT,
+0.68% 		2.66% 4.82% 2.16% $99,593 Communications infrastructure
Equinix Inc. EQIX,
+0.62% 		1.87% 4.79% 2.91% $61,317 Data centers
Crown Castle Inc. CCI,
+1.03% 		4.55% 5.42% 0.86% $59,553 Wireless Infrastructure
Public Storage PSA,
+0.11% 		2.77% 5.35% 2.57% $50,680 Self-storage
Realty Income Corp. O,
+0.26% 		4.82% 6.46% 1.64% $38,720 Retail
Simon Property Group Inc. SPG,
+0.95% 		6.22% 9.55% 3.33% $37,847 Retail
VICI Properties Inc. VICI,
+0.41% 		4.69% 6.21% 1.52% $32,013 Leisure properties
SBA Communications Corp. Class A SBAC,
+0.59% 		0.97% 4.33% 3.36% $31,662 Communications infrastructure
Welltower Inc. WELL,
+2.37% 		3.66% 4.76% 1.10% $31,489 Health care
Digital Realty Trust Inc. DLR,
+0.69% 		4.54% 6.18% 1.64% $30,903 Data centers
Alexandria Real Estate Equities Inc. ARE,
+1.38% 		3.17% 4.87% 1.70% $24,451 Offices
AvalonBay Communities Inc. AVB,
+0.89% 		3.78% 5.69% 1.90% $23,513 Multifamily residential
Equity Residential EQR,
+1.10% 		4.02% 5.36% 1.34% $23,503 Multifamily residential
Extra Space Storage Inc. EXR,
+0.29% 		3.93% 5.83% 1.90% $20,430 Self-storage
Invitation Homes Inc. INVH,
+1.58% 		2.84% 5.12% 2.28% $18,948 Single-family residental
Mid-America Apartment Communities Inc. MAA,
+1.46% 		3.16% 5.18% 2.02% $18,260 Multifamily residential
Ventas Inc. VTR,
+1.63% 		4.07% 5.95% 1.88% $17,660 Senior housing
Sun Communities Inc. SUI,
+2.09% 		2.51% 4.81% 2.30% $17,346 Multifamily residential
Source: FactSet

Simon Property Group Inc.
SPG,
+0.95%
is the only REIT to make both lists.

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Business

Carvana Faces Cash Crunch From High Debt, Rising Interest Rates

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Carvana Co.

CVNA -3.13%

, the used-car dealer that was a pandemic winner, is rushing to conserve cash as once-plentiful financing options dry up and business deteriorates.

On Friday, Carvana laid off about 1,500 people, its second round in six months. Its weakening finances mean raising funds would be difficult and costly, and it could run out of cash in a year, analysts say.

Few companies have been hit harder by rising interest rates than Carvana. The company’s interest expense nearly doubled early this year when it paid up to get financing for an acquisition. Its cost to finance car purchases is up by three-quarters this year, and some of its real estate has lost value. Car buyers, meanwhile, are holding off purchases in the hope that rates fall.

In a memo to Carvana’s employees announcing the layoffs, Chief Executive

Ernie Garcia III

blamed an uncertain economic environment that he said was particularly tough on fast-growing companies that sell products affected by higher interest rates. “We failed to accurately predict how this would all play out and the impact it would have on our business,” he said.

The company said it has millions of satisfied customers, and that disrupting the auto industry isn’t easy. “We have seen many e-commerce companies written off early in their journey only to become market leaders. We plan to follow suit,” a spokesman said. Earlier this month, Carvana executives said cash flows and profitability are the strategic focus now.

WSJ’s Ben Foldy explains the factors that helped drive Carvana’s growth and why investors are now questioning its future. Illustration: Preston Jessee

Carvana became wildly popular among car buyers, with heavy advertising and haggle-free cars delivered to their doors. Investors bought in, driving the shares up more than sixfold. The stock has fallen more than 97% from its peak last year. Carvana’s bonds are trading at distressed levels. 

“They built an infrastructure across the enterprise with the assumption that the growth would be there,” said Daniel Imbro, a managing director at Stephens Inc. 

The ratings firm S&P Global Ratings warned that Carvana’s liquidity likely would erode faster than expected, and changed the outlook on its CCC+ rating to negative earlier this month. It said the company’s standing to raise more cash from stock and bond investors has deteriorated.

Less than a year ago, Carvana was still trying to keep up with demand. In February, it agreed to buy a car-auction business that would help boost inventory. Car sales slowed, though. 

The day the deal was completed in May, Mr. Garcia said it had overshot on growth and laid off 2,500 workers. Days earlier, it had issued a $3.275 billion bond with a 10.25% coupon to fund the purchase. The high coupon almost doubled Carvana’s annual interest expense and reflected investors’ fears of a recession and rising inflation. 

Carvana CEO Ernie Garcia III and his father, Ernest Garcia II, when the company went public in 2017.



Photo:

Michael Nagle/Bloomberg News

Carvana thrived when interest rates were low because it could borrow cheaply to buy cars and make loans to customers. Its credit line from

Ally Financial

to buy cars had an average 2.6% interest rate last year, compared with 4.5% at the end of September. Ally required Carvana to set aside 12.5% of the amount borrowed as of late September, up from 7.5%, further tightening its cash situation. An Ally spokesman declined to comment.

Carvana earned big profits selling its car loans to investors who were hungry for yield. Gains from the loans help Carvana offset the losses it makes selling cars. When investors turned choosier on these securities in the spring, Carvana sold many of the loans to Ally instead, on less-favorable terms. The gains it books from loan sales fell by around one-third in the third quarter from the year-earlier period.

Mr. Garcia told analysts on a call Nov. 3 that the company would keep cutting costs and that it has access to around $4 billion in liquidity, in addition to its $316 million cash and some other assets. The amount includes what it can borrow on credit lines to buy cars and make loans. It also included around $2 billion of real estate, which isn’t typically considered a liquid asset.

The company’s chief financial officer said Carvana could borrow against the real estate, which includes sites it bought this year. It previously raised around $500 million from selling some sites where it inspects cars and then leasing them back for 20 or 25 years. 

That step might work, analysts said, but would also add expenses. They said any real-estate deals would likely occur piecemeal over time, or involve high rent payments because of Carvana’s credit troubles. 

Scott Merkle, a managing partner at SLB Capital Advisors, which specializes in sale-leaseback transactions, said the long-term leases in the space generally rely on financially sound tenants that can be expected to make their lease payments for years. He said that overall conditions for sellers have softened in that market because of higher interest rates, but that sale-leasebacks still provide a better cost of capital for companies than other financing. 

Carvana said it is testing ways to make more from its car sales, such as having customers pick up cars from its vending machines.



Photo:

USA TODAY NETWORK/Reuters

Some Carvana-leased properties have received a tepid response on the market. A 12-story “flagship” car-vending machine in Atlanta that Carvana sold and leased back in December was relisted this summer. It is still on the market, and the asking price has since been lowered.

Carvana said it is testing ways to make more from its car sales, such as taking payment before delivery and having customers pick up cars from its vending machines. 

“We’ve got a bunch of committed liquidity. We’ve got a bunch of real estate, and I think that we feel like that puts us in a good position to ride out this storm,” Mr. Garcia told analysts on the Nov. 3 call.

—Ben Foldy, Will Feuer and Ben Eisen contributed to this article.

Write to Margot Patrick at margot.patrick@wsj.com and Kristin Broughton at Kristin.Broughton@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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Business

Target Shares Plunge on Earnings Miss and Weak Holiday Sales Forecast

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Target Corp.

TGT -13.14%

said consumers pulled back on their spending in recent weeks, sapping sales and profits in the latest quarter and putting a cloud over its holiday season.

Quarterly profits came in below Target’s forecasts and the company’s sales growth lagged behind larger rival

Walmart Inc.

WMT 0.72%

in the period. Target executives lowered their financial goals for the holiday quarter and said they are prepared to offer deep discounts in the coming months to clear out unwanted inventory and attract shoppers.

Target shares dropped 13% in Wednesday trading on the earnings, which came in well below Wall Street’s estimates. It is the second time this year the retailer has misjudged consumer demand—in the spring executives said they were surprised by shifts away from furniture and appliances.

Government data released Wednesday showed that retail spending, including purchases at restaurants, car dealers and gas stations, rose 1.3% in October from September. The data aren’t adjusted for inflation and the government earlier reported that consumer prices rose 7.7% in October from a year earlier.

Target executives said that sales worsened sharply in October and November with guests’ shopping behaviors increasingly affected by inflation, rising interest rates and economic uncertainty.

“Clearly it’s an environment where consumers have been stressed,” said Target Chief Executive

Brian Cornell

on a call with reporters. “We know they are spending more dollars on food and beverage and household essentials, and as they are shopping for discretionary categories they are looking for promotions.”

Target executives said consumers are waiting to purchase items until they spot a deal, buying smaller pack sizes and giving priority to family needs. Sales of food, beverage, beauty products and seasonal items were strong, they said.

Retailers are facing an uncertain holiday season with high food and gas prices pinching some households. Target, like many of its peers, has been discounting to try to clear out a glut of goods this summer. Target’s inventory rose 14.4% in the October quarter from a year ago, while its revenue rose 3.4%. Quarterly net income tumbled by half.

“We are committed to being clean at the end of the holiday season,” regarding excess inventory, said Target Chief Financial Officer

Michael Fiddelke,

on a call with analysts Wednesday. If consumer trends of recent weeks persist, “it will come with more markdowns to make sure we accomplish exactly that goal.”

Rival TJX Cos. reported mixed quarterly results on Wednesday, with lower sales and higher profit margins. The off-price retailer said its U.S. comparable-store sales declined 2% in the quarter, as gains in its Marshalls and T.J. Maxx apparel chains were offset by a drop in its HomeGoods chain.

TJX said it was comfortable with its inventory levels heading into the holidays and said it now expected U.S. comparable-store sales to be flat or up 1% from a year ago.

Walmart gets over half of its U.S. revenue from groceries, while Target’s business is more skewed toward discretionary categories such as home goods, apparel, electronics and beauty products. As consumers absorb higher prices, many are pulling back spending where they can.

Consumer spending has held up relatively well so far despite inflation, but experts say we’re approaching an inflection point. WSJ’s Sharon Terlep explains the role “elasticity” plays in a company’s decision on whether to raise prices. Photo illustration: Adele Morgan

For the most recent quarter, Target said comparable sales, those from stores and digital channels operating at least 12 months, rose 2.7% in the quarter ended Oct. 29 compared with the same period last year.

On Tuesday Walmart said U.S. comparable sales rose 8.2% in the quarter. Walmart executives said the retailer is attracting more higher-income shoppers as many shift spending away from discretionary categories to food and look for value.

Target said it is gaining market share in its five main categories, even as consumers pull back spending in some cases. Existing shoppers are buying more and visiting more frequently, said Christina Hennington, Target’s chief growth officer. Traffic to stores increased 1.4% in the most recent quarter.

This year Target expects a hit to its gross margin of around $600 million due to shrink, the industry term for theft and other product loss, said Mr. Fiddelke. “We’ve seen that trend has grown over the course of the year,” he said.

SHARE YOUR THOUGHTS

What’s your outlook on Target and why? Join the conversation below.

Target, which surprised investors by slashing its forecasts twice in the spring, on Wednesday reduced its sales and profits expectations for its fiscal year, which ends in January.

“We expect the challenging environment to linger on beyond the holiday,” said Mr. Fiddelke.

The company now expects a low-single-digit percentage decline in comparable sales and an operating margin around 3% for the fourth quarter. In August Target said sales would grow in the low- to mid-single-digit percentage range for the full year and operating margin would be around 6% for the second half of the year.

Target executives said they would look to cut at least $2 billion in costs over three years. Executives said the company isn’t planning major layoffs or hiring freezes as part of the new cost-cutting program, but streamlining processes inside the company.

—Suzanne Kapner contributed to this article.

Write to Sarah Nassauer at sarah.nassauer@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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US

Walmart to Pay $3.1 Billion to Settle Opioid Lawsuits

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Walmart Inc.

WMT 7.24%

has agreed to pay $3.1 billion to settle opioid-crisis lawsuits brought by several U.S. states and municipalities, adding to a landmark settlement with rival pharmacy chains.

The agreement resolves a collection of lawsuits brought by states, cities and Native American tribes. Earlier this month,

CVS Health Corp.

CVS 1.08%

and

Walgreens

WBA 1.75%

Boots Alliance Inc. agreed to pay roughly $5 billion apiece to settle the lawsuits. The companies didn’t admit wrongdoing in their deals.

The Walmart agreement was announced the same morning that the retail giant reported its latest quarterly results. The company said it took $3.3 billion in charges in the last quarter related to opioid settlements.

Walmart reported stronger-than-expected sales in the October-ended quarter and raised sales and profit goals for the year, signs the big discount chain is drawing in shoppers despite high inflation. Walmart shares rose over 8% in midmorning trading.

Each state, local government and tribe will need to decide whether to participate in the settlement. Plaintiff’s attorneys that lead negotiations are encouraging them to do so, saying the payments hold the pharmacies accountable for their alleged roles in the opioid abuse.

Walmart said that it strongly disputes allegations made in the lawsuits and that the settlement isn’t an admission of liability. The company said its settlement payments will reach communities faster than other deals. CVS is paying out over 10 years, and Walgreens over 15 years.

Walmart has roughly half as many locations as either CVS or Walgreens, which combined have roughly 19,000 U.S. drugstores. Walmart has faced scrutiny from the federal government related to how it prescribed opioids.

The Justice Department filed a lawsuit in December 2020 over its alleged role in the opioid crisis, claiming Walmart sought to boost profits by understaffing its pharmacies and pressuring employees to fill prescriptions quickly. The settlement with the states doesn’t cover the federal case, which Walmart has sought to have dismissed.

The Justice Department sued Walmart a few months after the company had pre-emptively sued the federal government, saying the Justice Department and Drug Enforcement Administration were attempting to scapegoat the company for their failings. Walmart’s suit was dismissed in February 2021. Walmart appealed the dismissal, but lost that case late last year.

Opioid abuse has claimed more than half a million lives and triggered more than 3,000 lawsuits by governments, hospitals and others against players in the pharmaceutical industry, including manufacturers, distributors and drugstores.

The fact that Walmart will pay out funds almost immediately rather than over a decade or more “is particularly noteworthy considering that Walmart dispensed fewer opioids, and at lower dosages, than the other pharmacy defendants,” said lawyer

Paul Geller,

of Robbins Geller, a who is representing local communities.

Write to Sharon Terlep at sharon.terlep@wsj.com and Sarah Nassauer at Sarah.Nassauer@wsj.com

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Business

Walgreens Unit Close to Roughly $9 Billion Deal With Summit Health

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A unit of

Walgreens Boots Alliance Inc.

WBA 3.78%

is nearing a deal to combine with a big owner of medical practices and urgent-care centers in a transaction worth roughly $9 billion including debt, according to people familiar with the matter, the latest in a string of acquisitions by big consumer-focused companies aiming to delve deeper into medical care.

The drugstore giant’s primary-care-center subsidiary, Village Practice Management, would combine with Summit Health, the parent company of CityMD urgent-care centers, in an agreement that could be reached as early as Monday, the people said.

Health insurer

Cigna Corp.

CI 0.73%

is expected to invest in the combined company, the people said.

There is no guarantee the parties will reach a deal, the people cautioned, noting that they are still hammering out details of an agreement.

Summit Health, which is backed by private-equity firm Warburg Pincus LLC, has more than 370 locations in New York, New Jersey, Connecticut, Pennsylvania and Central Oregon, according to the company’s website. Current and former physicians also own a large interest in the business.

Village Practice Management, which does business as VillageMD, provides care for patients at free-standing practices as well as at Walgreens locations, virtually and in the home. In 2021, Walgreens announced it had made a $5.2 billion investment in VillageMD, boosting its stake to 63%. At the time, Walgreens said the investment would help accelerate the opening of at least 600 Village Medical at Walgreens primary-care practices across the country by 2025 and 1,000 by 2027.

The expected deal follows a string of mergers involving companies like VillageMD and CityMD as big healthcare providers seek more direct connections with patients.

Amazon.com Inc.

in July agreed to purchase primary-care operator

1Life Healthcare Inc.,

which operates under the name One Medical, for about $4 billion. In September,

CVS Health Corp.

struck a deal to acquire home-healthcare company Signify Healthcare Inc. for $8 billion.

Cano Health Inc.,

which operates primary-care centers, has attracted interest from both CVS and insurer

Humana Inc.

in recent months, The Wall Street Journal has reported.

Bloomberg a week ago reported VillageMD’s interest in Summit Health.

Walgreens appears to have pre-empted a sale process for Summit Health that was set to kick off next year, according to the people, who said the company was about to interview banks before it received interest from VillageMD.

Summit Health has been backed by Warburg Pincus since 2017, when it took a stake in CityMD, a large chain of New York City urgent-care centers.

Since that time, Warburg has helped the company complete multiple transformative acquisitions, including the 2019 merger of CityMD and multi-speciality medical-practice group, Summit Medical Group.

New York-based Warburg, which has more than $85 billion in assets under management, is no stranger to healthcare. The firm counts healthcare-IT business Modernizing Medicine Inc. and Ensemble Health Partners, a revenue-cycle management business for hospitals, among its portfolio companies.

—Anna Wilde Mathews contributed to this article.

Write to Laura Cooper at laura.cooper@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Appeared in the November 7, 2022, print edition as ‘Walgreens Nears Deal For Urgent Care Firm.’

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Business

China Weighs Zero-Covid Exit but Proceeds With Caution and Without Timeline

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SINGAPORE—Chinese leaders are considering steps toward reopening after nearly three years of tough pandemic restrictions but are proceeding slowly and have set no timeline, according to people familiar with the discussions.

Chinese officials have grown concerned about the costs of their zero-tolerance approach to smothering Covid outbreaks, which has resulted in lockdowns of cities and whole provinces, crushing business activity and confining hundreds of millions of people at home for weeks and sometimes months on end. But they are weighing those against the potential costs of reopening on public health and support for the Communist Party.

As a result, they are proceeding cautiously despite the deepening impact of the Covid policies, the people said, pointing to a long path to anything approaching pre-pandemic levels of activity, with the timeline stretching to sometime near the end of next year.

The uncertainty around China’s Covid-19 strategy has led to a guessing game in the financial markets, with some looking for any sign that China would begin easing its Covid policies. China’s Communist Party congress last month, when Chinese leader

Xi Jinping

claimed a third term, had once been viewed as a potential turning point in its battle against Covid, but little has changed in the country’s approach to containing Covid.

China’s leaders are worried that a surge in Covid infections, hospital admissions and deaths could undermine confidence in the ruling Communist Party’s legitimacy.



Photo:

TINGSHU WANG/REUTERS

On Saturday, officials from China’s National Health Commission again reaffirmed their commitment to a firm “zero-Covid” strategy, which they described as essential to “protect people’s lives.”

Some progress is being made on relaxing border controls for inbound travelers from abroad. Beijing is likely to further cut the number of hotel quarantine days required of incoming travelers by early next year, to a total of seven days, say people involved in discussions, from a current policy of seven days in a quarantine facility followed by three days of home monitoring.

Domestically, officials have informed retail businesses that the frequency of PCR testing—a staple of China’s Covid regime—could be reduced as soon as this month, in part because of the high cost of mass testing, according to people familiar with the matter. The people said the government is planning to reduce the thousands of PCR testing stations that have been set up across the country as part of the campaign to institutionalize testing, citing the cost.

ECONOMIC IMPACT OF COVID IN CHINA AND CHINA’S ZERO-TOLERANCE APPROACH

Still, the leadership has found it difficult to enact broader relaxation measures this year, the people said. Many of the measures will remain. The country will still move aggressively to stamp out even small outbreaks, through mass testing and lockdowns. People will still need to use health codes on their phones to access public spaces, and travelers entering the country will face quarantines and rounds of Covid tests.

A combination of new viral variants, an underequipped public healthcare system and the impending approach of winter has left Beijing worried that a potential surge in Covid infections, hospital admissions and deaths could undermine confidence in the ruling Communist Party’s legitimacy.

Chinese health officials have been closely monitoring the fatality rates and public reactions in Hong Kong, Japan and South Korea, which share cultural roots with China and where governments had until recently imposed similar measures, the people said.

“The reopening in China will be carried out in an orderly manner. It will start gradually depending on the geographic areas and sectors, and it will be different from what we’ve seen in the West,” said one of the people involved in discussions. For example, the government could decide to implement less stringent measures in cities that are major business hubs.

Workers at the world’s biggest assembly site for Apple’s iPhones walked out as Foxconn has struggled to contain a Covid-19 outbreak. The chaos highlights the tension between Beijing’s rigid pandemic controls and the urge to keep production on track. Photo: Hangpai Xinyang/Associated Press

While some have questioned the accuracy of China’s official figures, health experts say the country’s Covid fatality rate has been much lower than in much of the West due to its strict measures. Officially, China has recorded roughly 5,000 Covid-19 deaths, a fraction of the U.S.’s more than 1 million deaths. China’s Communist Party has celebrated its lower official death count as evidence of the superiority of its governance model.

In recent months, Chinese officials have maintained close contact with the World Health Organization, focusing on the alert level that the Geneva-based body has assigned for the Covid-19 pandemic, according to people familiar with the matter.

The WHO’s emergency committee meets once every three months to assess whether the pandemic still constitutes a “public health emergency of international concern.”

A WHO shift in declaration would give China more wiggle room for policy changes. Beijing could start to push for more aggressive easing measures and adjust the domestic narrative on Covid, effectively declaring victory in containing the virus, according to people familiar with the matter.

The WHO first declared a public health emergency of international concern in January 2020, and decided during its latest meeting, held in October, that it is still too early to lift the status. The next meeting is slated for January.

A WHO official said the agency doesn’t comment on private discussions with member states.

One plan under consideration in Beijing, the people said, would be to begin treating Covid-19 as a “Class B” infectious disease following any change in the WHO’s designation. China has been treating it as a Class A disease, which calls for stricter public-health measures.

Even with such a move, it could take China a much longer time—perhaps a year, the people said—to return to pre-pandemic levels of activity. The government wants to continue to monitor new variants closely to ensure that they don’t become more dangerous, they said.

Any further loosening of measures would be contingent on a boost in the elderly vaccination rate. Beijing is planning to launch a vaccination campaign later this year for vulnerable groups, aiming for 95% of people aged 60 or above to receive two doses, some of the people said. The latest government data, from early November, shows 86% of the elderly population had received two vaccine doses, compared with 90% for the broader population.

Another condition for a full reopening of its economy is to boost access to oral antivirals to treat Covid, the people said. Earlier this year, China’s drug regulator granted approval for Azvudine, an HIV drug developed by Chinese drugmaker Henan Genuine Biotech Co., to be used for treating Covid. Drug regulators have also approved

Pfizer Inc.’s

Paxlovid drug.

Any further loosening of measures would be contingent on a boost in the elderly vaccination rate.



Photo:

CHINA DAILY/VIA REUTERS

The National Health Commission responded to a request for comment by referring to remarks made during its Saturday press conference.

There have been some signs of a shift in China’s posture on Covid in recent months. In September, Mr. Xi visited Central Asia, making his first trip outside the country since Covid began spreading in the central Chinese city of Wuhan in early 2020. The Chinese leader has also begun receiving foreign heads of state in Beijing and is expected to attend a summit of leaders from the Group of 20 nations in Indonesia next week.

Still, Beijing has been careful to rein in expectations of a rapid shift, including in the Saturday press conference. In a string of pointed commentaries last month, Communist Party mouthpiece the People’s Daily called for confidence and patience with Beijing’s zero-Covid strategy. Health officials have urged local governments to build quarantine hospitals to prepare for rebounding infections. Shanghai, for example, is building a quarantine facility that can house more than 3,000 people at a cost of just under $200 million, state media reported.

“All the signs are pointing to the beginning of preparation for an eventual reopening, especially given the rising cost of the ‘dynamic zero-Covid’ policy for the economy,”

Goldman Sachs

economists said in a Monday note. “The actual reopening is still months away as elderly vaccination rates remain low and case fatality rates appear high among those unvaccinated based on Hong Kong official data.”

 —Drew Hinshaw contributed to this article.

Write to Keith Zhai at keith.zhai@wsj.com

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Business

Opinion: The cloud boom has hit its stormiest moment yet, and it is costing investors billions

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The cloud boom has finally reached a resting altitude, but Wall Street is doing anything but resting.

Amazon.com Inc.
AMZN,
-4.06%,
the original pioneer in cloud computing, confirmed Thursday what rivals Microsoft Corp.
MSFT,
-1.98%
and Alphabet Inc.
GOOGL,
-2.85%

GOOG,
-2.34%
suggested with their earnings reports earlier in the week: Cloud-computing growth has finally reached a plateau, as companies around the world cut costs to address the slowing economy. Amazon Web Services, the backbone of Amazon’s profit, saw revenue hit its slowest growth on record, and executives said that it will slow down even more.

“The back end of the quarter, we were more in the mid-20% growth range, so carry that forecast to the fourth quarter — we are not sure how it’s going to play out, but that’s generally our assumption,” Amazon Chief Financial Officer Brian Olsavsky told analysts after reporting quarterly growth of 27.5%.

It was a jarring slowdown for AWS, which recorded 33% growth in the second quarter, 37% growth in the first, 37% in the fourth quarter of 2021 and 39% growth a year ago. It shouldn’t have been too much of a surprise, though: Smaller rivals reported similar slowdowns earlier in the week.

Microsoft’s Azure cloud business grew 35% in its fiscal first quarter, down from 40% in the previous quarter and 50% the year before, and executives predicted another five-percentage-point fall this quarter. Alphabet’s Google Cloud is also slowing, even though it was the bright spot of double-digit growth in the disappointing quarter for the internet ad and search giant. Google’s Cloud Services grew 37.6% in the third quarter, up from 35.6% growth in the second quarter, but down from 43.8% in the first quarter, and 44.6% in the fourth quarter.

Regular readers of this column should also not be surprised, as we predicted three months ago (perhaps just a tad early) that a slowdown was coming. It probably should have happened in 2020, but the COVID-19 pandemic caused a rush of companies to boost their cloud services, as remote work suddenly made a move to the cloud essential for many businesses.

More recently, though, the largest businesses with the most complex workloads are shutting down or putting off major projects, and cutting their spending on the cloud-computing power they would have needed to support hem.

“There are three parts to the cloud slowdown,” said Maribel Lopez, principal analyst at Lopez Research, who joined MarketWatch in predicting a cloud-spending slowdown earlier this year. “One is related to reigning in and rationalizing the Wild West of spending that companies did during COVID to keep the lights on,” which is leading to the cutbacks we see now. Second, recent waves of cloud workloads by the industries that are still slow-rolling their move to the cloud — such as government, healthcare and education — “are the most complex, time consuming and challenging to move to the cloud quickly.” Lastly, is a general fear related to the macroeconomic environment, leading to cuts anywhere executives can find them.

Read also: The cloud boom is coming back to earth.

Wall Street has reacted swiftly and strongly, ripping more than $300 billion in market cap away from just Microsoft and Amazon this week, if Amazon’s steep decline in Thursday’s after-hours session persists. But this is where it helps to think about a longer-term view: Just because cloud growth is declining does not mean that the technology is still not core to the future.

Microsoft and Amazon will continue to develop and sell their cloud-computing offerings, and they will see healthy margins on them. Google is continuing to invest in its cloud business, adding 2,000 new employees via its acquisition of Mandiant last quarter, and executives said this week that businesses and governments are still in the early days of public cloud adoption.

“We’re pleased with the momentum in Cloud and do continue to be excited about the long-term opportunity,” Alphabet Chief Financial Officer Ruth Porat told analysts this week.

Many analysts agree. Dan Ives, an analyst with Wedbush Securities, said this week in a note about Microsoft that “the shift to cloud is still less than 50% penetrated.” Growth is slowing as inflation continues and the strong dollar outside the U.S. hits the revenue lines of many tech giants, causing many companies to pause in their spending, but that is a short-term problem.

Moving to a cloud provider is not for the faint of heart, and it is a transition that in some cases takes longer than expected. The same will hold true for investing in the cloud for the long term, even as there is some pain now. It’s still a massive and important part of the tech sector, an essential business that enabled companies to keep operating around the world during the pandemic. Whatever the future growth rate, the cloud appears here to stay.

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Business

Amazon Stock Slides After it Gives Weak Outlook Amid Recession Fears

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Amazon.com Inc.

AMZN -4.06%

projected sales in the current quarter would be far below expectations, sending its stock plunging and offering the latest stark sign of how shifting economic forces are battering tech giants that thrived during the pandemic.

The company on Thursday said sales in the recently completed third quarter rose 15% from a year earlier, while net income was $2.9 billion—its first quarterly profit in 2022, though still a 9% decline from the same period last year.

The e-commerce giant jolted investors with its projection for revenue of $140 billion to $148 billion in the current period—analysts had expected more than $155 billion, according to FactSet. Amazon, which said the estimate includes a sizable hit from foreign-exchange factors, also said it anticipated operating income of anywhere between zero and $4 billion, reflecting the uncertainty looming over what is traditionally its biggest quarter of the year because of holiday shopping.

The company’s shares fell more than 12% in after-hours trading following the results to trade near $97. At that level, Amazon’s valuation is below $1 trillion, which it first hit in 2018.

The disappointing outlook capped an extraordinary several days that also saw shares of other tech giants plummet after their results showed worsening conditions in a range of areas.

Shares of

Facebook

parent Meta Platforms Inc., already battered over the past year, dropped nearly 25% on Thursday after it reported its second quarterly revenue decline in a row a day earlier.

Microsoft Corp.’s

stock also fell after it delivered on Tuesday its worst net income decline in more than two years and the weakest revenue growth in over five years. Google-parent

Alphabet Inc.

similarly disappointed investors with slowing sales.

These tech companies flourished during the pandemic, as life and work suddenly shifted more to the internet, pushing up sales and spurring the already fast-growing companies to accelerate hiring and investment.

Now, one after another, engines that drove that growth are sputtering. Sales of personal computers and other gadgets are falling. Consumers, walloped by inflation, are broadly trimming their spending, while companies are tightening their outlays for everything from digital ads to IT services.

“There is obviously a lot happening in the macroeconomic environment, and we’ll balance our investments to be more streamlined without compromising our key long-term, strategic bets,” Amazon Chief Executive

Andy Jassy

said Thursday. 

In the third quarter, Amazon’s online store sales rose 7% to $53.48 billion after falling in recent quarters. The segment includes product sales primarily on its flagship site and digital media content. Its online sales got a boost from its annual Prime Day sale, which this year fell in the third quarter where last year it was in the second quarter.

While still the nation’s largest online store, Amazon’s e-commerce division has struggled to grow this year. The company in the second quarter reported a 4% year-over-year drop in its online stores segment. That marked the largest drop since the metric was first reported in 2016.

This year, Amazon’s e-commerce machine—which has grown at breakneck speed for decade—has been showing signs that it could be entering a phase of slower growth. After a multibillion-dollar infrastructure build-out and hiring spree, it now has to contend with high inflation and concerns about a recession weighing on consumer spending.

Chief Financial Officer

Brian Olsavsky

said the company has entered a period of caution.

“We are preparing for what could be a slower growth period like most companies. We are going to be very careful on our hiring,” Mr. Olsavsky said during a call with reporters Thursday. “We certainly are looking at our cost structure and looking for areas where we can save money.”

He said Amazon is “seeing signs all around that people’s budgets are tight, inflation is still high.”

Analysts say the new challenges Amazon faces in e-commerce could linger.

Amazon has the largest share of online commerce, about 38%, but its market share has plateaued in recent years, according to market research firm Insider Intelligence. Analysts say the company’s size has made it unlikely the e-commerce unit’s growth would hit the same pace it once did. Amazon also is dealing with increased competition from

Walmart Inc.,

Target Corp.

and others.

Mr. Jassy has shifted toward cost-cutting. The company cut back on subleasing millions of square feet of excess warehouse space and put off opening new facilities while earlier thinning out its hourly workforce through attrition.

It enacted a hiring freeze through the end of the year at its corporate retail division, the segment that drives core sales and is responsible for a large part of this year’s slowdown. The company has paused hiring among some teams at its Amazon Web Services cloud-computing division.

While Amazon’s earnings continue to be aided by AWS and its expanding advertising business, growth slowed in the cloud business. AWS had sales of $20.5 billion during the third quarter, a 27% rise but one of the lowest rates of growth posted by the unit in recent quarters. Mr. Olsavsky said the company saw AWS customers “working to cut their bills.”

Amazon’s advertising revenues rose 25% to $9.5 billion.

Amazon is headed toward the end of the year with added challenges. After needing fewer blue-collar employees earlier in the year, it has looked to add more than 100,000 workers at its warehouses to meet the expected holiday demand. Still, that strategy has come with a cost. Amazon recently said it would spend $1 billion to raise average starting salaries to $19 an hour nationwide and is earmarking millions to raise wages and benefits for its delivery employees.

Consumers will be more likely to return to bricks-and-mortar stores for their holiday shopping this year, and economic concerns will likely weigh on spending, according to analysts. Amazon’s own

Jeff Bezos

seemed cautious about the future. He recently said it is time to “batten down the hatches,” referring to warning signs that the U.S. is headed for a recession.

Write to Sebastian Herrera at sebastian.herrera@wsj.com

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