February 20, 2017 Consensus

The Weekly Consensus – February 20, 2017 (Volume 9, Number 8)

The Big Story
Cold Cash

This week, Yeti, the premium cooler company that filed for an IPO in 2016 but has since put that on hold, will open its flagship store in its hometown on Austin, Texas. Located in a 1930s warehouse south of downtown Austin, the project is nearly two years in the making and covers more than 6,000 square feet.

Yeti has long appealed to hunters, fishermen, and outdoorspeople. It has excelled with content marketing, and that has helped it successfully create an aspirational brand in a segment that doesn’t see many aspirational brands. The approach has worked. The company generated $469 million in revenue in 2015, representing three-year growth of 748%. The flagship is its most ambitious content marketing yet.

Following in the footsteps of digitally-native businesses that open brick and mortar locations, the flagship is heavy on experience. It offers the chance to see and touch – and with an open-area bar and a stage for musicians even taste and hear – the brand.

The concept is intended to feel much more like a museum than a retail store. To achieve that, there are a number of displays and exhibits that evoke the qualities and emotions of the brand. One display features a boat in muddy waters surrounded by fish and crabs. Another features the backyard barbecue pit of a legendary Austin pit master. There’s also the 750-pound stuffed bear, half of a pickup truck, and a video exhibit of Yeti coolers being subjected to – and surviving – all kinds of use and abuse.

According to Corey Maynard, Yeti’s Vice President of Marketing, “It’s meant to be much more of an immersive Yeti experience – it’s our version of Disneyland – than it is to be a transactional space. Yes, we’re selling coolers, and you can get drinkware and shirts and hats and stuff, but it was much more important to us that people could have fun with the Yeti brand and see it brought to life in the three-dimensional world than just be a place that’s driven by transaction.”

“We wanted to create a space within our hometown that could bring the brand to life, bring the company to life, and be a place where people in Austin could get together, hang out, have a cold beer, and experience a little more of the Yeti story. I like to think of it as like a children’s museum for Yeti, where there’s a lot of fun things that you can read, play with, and interact with.”

Situated next to two hotels, it’s built to appeal to residents of Austin, as well as visitors. The goal is much more about creating “a permanent brand activation that allows people to interact with Yeti in ways that they’ll hopefully take with them in the future,” and much less about finding “a way to sell a lot of coolers to people who come inside.”

The strategy for the flagship is also intended to assuage any concerns of Yeti’s retail partners. While Yeti has a healthy online business, Yeti’s wholesale business to retailers represents much more of company revenue. To further the distinctions between the flagship and traditional retail, the flagship will offer limited edition merchandise that can only be purchased there. The flagship will also offer customization of products and repair service. As a result, the experience will be much more immersive, and far different than a typical retailer – and likely the most effective content marketing possible.

Apparel & Footwear

Sunrise Brands Bids For Bankrupt The Limited: Sources

Clothing firm Sunrise Brands LLC has bid for the e-commerce business and intellectual property of bankrupt U.S. retailer The Limited, challenging a $26.3 million offer from private equity firm Sycamore Partners, people familiar with the matter said.  Sunrise Brands’ bid underscores the value it sees in The Limited’s online presence and intellectual property, even as the specialty retailer was forced to close its roughly 250 bricks-and-mortar stores earlier this year. It filed for bankruptcy last month, with Sycamore Partners as a stalking-horse bidder.  The sources asked not to be identified because details of the bankruptcy auction are confidential. Sycamore declined to comment, while The Limited and Sunrise Brands did not respond to requests for comment.

Kate Spade Acknowledges That It’s Looking Into Its Options

Kate Spade could soon be sold to the highest bidder.  The retailer said that it was “exploring strategic alternatives” for its business. Shares jumped 11% on the news.  Kate Spade, which makes luxury handbags, will look into options that are in the “best interests of our company and shareholders,” said CEO Craig Leavitt in a statement. It will seek to do so in a “timely manner” but the company said there is no timetable for when it will complete the process.  It will not provide guidance or any updates on the process until it has come to a conclusion, it said.

Payless Reportedly Considering Plan To Close 1,000 Shoe Stores

Payless Inc. is in talks with its lenders over a restructuring plan that includes closing about 1,000 shoe stores as it wrestles with an unsustainable debt load, according to a Bloomberg News report.  The discount shoe retailer may consider filing for bankruptcy if it’s unable to reach a deal with the creditors, according to the sources, who asked not to be identified because the information isn’t public. A decision on whether to restructure in or out of court may be reached as soon as this month, they said.  Payless is the latest retailer to be under pressure because of declining mall traffic as more and more customers shift spending to experience from shoes and apparel. The retailer hired law firm Kirkland & Ellis LLP to look at options for its $600 million debt load, the sources said.

Aiming to Take the Hassle Out of Returning Online Orders

Happy Returns, a year-old service that makes it easier to return online orders, is building up its network of drop-off locations.  “We are finalizing our 2017 plan now,” said David Sobie, chief executive officer and cofounder of Happy Returns. “We will be in at least the top 10 metro areas including New York, Dallas, Atlanta and Boston, and we are expanding with new locations in cities we are already in. In Los Angeles, for example, we have two locations. We plan to have six there by the end of the year.”  Happy Returns currently has physical return locations in seven malls in L.A., Houston, San Francisco, Chicago and Washington, and operates in two formats: kiosks or “return bars” in the common areas of malls, and by integrating into the mall’s concierge guest services.  For the 2017 rollout, “We will primarily be opening in mall concierges,” Sobie said. “It’s obviously a more capital-efficient way to expand. It’s a lot easier to train folks already working at the concierge desk” than to design and build a return bar, and hire and train new staff.

30-Year-Old Comfort Shoe Brand Aerosoles Is Getting a Major Upgrade

When 30-year-old fashion-comfort brand Aerosoles began to show some mileage, it was time for a tuneup. So the Edison, N.J.-based company began to update its styling and comfort technology.  “[Our] strategy is not to walk away from the DNA of Aerosoles, but to modernize the product and make it more relevant for today’s consumers,” said Sandy Coviello, chief product officer.  That process — intended to appeal to both core and new, younger consumers — called for the introduction of more relevant toe shapes and heel heights, as well as more emphasis on the sport-fusion category, according to Coviello.  At the same time, it was important to retain the key Aerosoles characteristics of flexibility and lightness. “The athletic market doesn’t have to own how you feel in shoes and what you can do in them,” said CEO Shawn Neville. “The industry has gravitated toward three pockets: fashion, traditional and athletic-comfort. We want to lead in the fusion of performance and fashion.”

Athletic & Sporting Goods

Walmart Buys Michigan-Based Moosejaw To Boost Online Sales

Wal-Mart is buying Moosejaw — a Madison Heights-based company that specializes in outdoor recreation apparel and gear and is known for its quirky, cutting-edge marketing — in a bid to strengthen the global retail juggernaut’s online offerings for $51 million in cash, the companies announced.  Walmart said it will continue to operate the Moosejaw website and 10 stores as a standalone site and separate retail outlets. The employees will remain in Michigan.  Over the long term, Wal-Mart hopes to leverage the privately held Michigan retailer’s online sales knowledge and marketing of apparel and accessories and aims to open opportunities for Moosejaw suppliers to expand their reach on Walmart sites. But, the company does not plan to sell Moosejaw-branded merchandise in Wal-Mart stores.

Cabela’s Deal With Bass Pro Is Salvageable

It’s been a little over four months since outdoor-gear retailer Cabela’s Inc. agreed to a $5.5 billion takeover by closely-held rival Bass Pro Shops at a mammoth premium, valuing it at $65.50 apiece. Since then, it has slipped more than 26 percent from its post-offer peak to as low as $46.28 because the deal, once a sure thing, is now anything but.  Analysts and investors believe Cabela’s could sink even lower — to say, $35, if a deal isn’t consummated. But if a transaction is completed, even at a renegotiated price, the stock is arguably trading at steeper discount than it deserves.

MC Sports Files For Bankruptcy, Plans Liquidation Sales

Noting immediate issues for meeting financial obligations, Michigan-based sporting goods retailer MC Sports announced it’s filing for Chapter 11 bankruptcy protection. The chain, headquartered in Grand Rapids, recently has operated 68 retail locations. While noting plans for liquidation sales at all of the chain’s stores, a press release said the company also will investigate options that might allow its business to survive in some form. In its bankruptcy petition — filed in U.S. District Court in Grand Rapids — MC estimated its assets to be in the $50 million-$100 million range, with its estimated liabilities also in that monetary territory.

Cosmetics & Pharmacy

Hedge Fund Manager Buys Significant Stakes In Fred’s, Rite Aid

Well-known hedge fund manager David Einhorn, founder and CEO of Greenlight Capital, acquired significant stakes in both Fred’s Pharmacy and Rite Aid, according to Form 13F filings with the SEC.  During 2016’s fourth quarter, Einhorn initiated a new position in Fred’s, acquiring 1.5 million shares at an average price of $10.82 per share, reported Gurufocus.  The hedge fund manager also upped his stake in Rite Aid by 52% in the fourth quarter. Einhorn owned slightly less than 20.5 million shares as of Dec. 31, according to several media reports.

GNC’s Stock Plummets After It Nixes Dividend, Reports Awful Quarter

GNC’s stock was getting hammered after the nutritional supplements retailer reported quarterly earnings that missed the mark and said it was suspending its dividend.  Shares, which have lost 70% of their value in the last twelve months, dropped 13% to $7.21 in pre-market trading.  The Pittsburgh-based company has long been working on a turnaround and in December, after admitting it had “a badly broken business model,” overhauled its entire pricing system and rolled out new loyalty programs.  “GNC’s performance in the fourth quarter, while well below expectations, does not reflect the fundamental changes we have made to the business model,” said interim CEO Bob Moran.

Update On Walgreens-Rite Aid Deal

Walgreens Boots Alliance’s acquisition of Rite Aid is moving closer to getting a green light from the Federal Trade Commission.   The FTC is expected to approve the sale in the next two to four weeks, reported the New York Post, citing two sources close to the situation.  The major sticking point was reportedly the number of Rite Aid stores that need to be divested to Fred’s Pharmacy.  The FTC gave “pushback” regarding the initial plan to divest 865 stores to Fred’s, but now that Walgreens and Rite Aid have agreed to divest up to 1,200 stores, as well improved the quality of stores to be divested, the FTC is much more likely to approve the deal.  As for the two-to-four-week timeframe, the Post reported Debbie Feinstein, bureau of competition director for the FTC, wants to get the deal approved before she resigns, expected to be “within weeks.”

Declining Sales Force, Revenue Send Avon Shares Tumbling

Shares in Avon Products plunged 20 percent as sales at the cosmetics company continued a long slide and the number of people selling them declined.  There were 2 percent fewer people selling Avon products during the quarter.  Sales have declined every year since 2012, and fell 8 percent in 2016.  For the fourth quarter, Avon reported a loss of $10.7 million, or 4 cents per share.  Adjusted for expenses, the company made one penny per share, far worse than the per-share earnings of 9 cents that Wall Street had expected, according to a survey by Zacks Investment Research.  Its revenue of $1.57 billion was just short of the $1.6 billion industry analysts had projected.

Discounters & Department Stores

Neiman Marcus Tapping Into New Customers With Plus-Size Apparel Test

Neiman Marcus is hoping to bring in new customers to its brick and mortar stores by piloting plus-sized apparel in a select number of Last Call outlet shops.  Though the Dallas-based luxury retailer has sold plus sizes online for two years, this is its first foray into stocking the merchandise in physical stores. On Feb. 18 it will open plus-size women’s apparel sections at its Neiman Marcus Last Call stores at Grapevine Mills in Grapevine, as well as Sugarloaf Mills in Lawrenceville, Georgia; Great Lakes Crossing Outlets in Auburn Hills, Michigan; Miramar Outlets in Estero, Florida; and Arundel Mills in Hanover, Michigan.  “There’s not a lot of upscale options for this type of customer, so we thought it would work well in Last Call in these five stores,” said Frank Crisci, vice president of merchandising for Neiman Marcus Last Call.

Sears: Is The End Finally In Sight For The World’s Slowest Liquidation Sale?

When I left Sears in 2003, I was quite pessimistic about the company’s long-term prospects. Some initiatives we had put in place during a two-year strategic re-positioning effort were gaining traction, but most key metrics were alarming. The apparel business was well below a sustainable productivity level. The appliance and home improvement segments–which accounted for roughly 50% of our enterprise value–were losing market share to better positioned competitors, mostly notably Home Depot and Lowes. And the one strategy that might have saved us was no longer a feasible option. My fear was that Sears’ slow death was inevitable.  The following year Eddie Lampert put two failing retailers together and promptly made a bad situation even worse. While Sears and Kmart both suffered from challenges driving revenue, Lampert focused on cutting costs. As leading brands realized that retail was moving to an era of greater customer experience and shopping integration, Lampert set up merchandise categories as warring factions. Next came the idea of starving the stores further to focus on making Sears more digitally savvy. Then he became enamored with an emphasis on making Sears “member-driven” by launching “Shop Your Way,” a frequency shopping scheme that only served to lower margins without restoring necessary sales growth.

Lawsuit Claims Walmart’s Private Label Craft Beer Is “Wholesale Fiction”

It can be hard to tell if that craft beer on the grocery shelf comes from the vats of a small, independent brewer, or if it is the product of a commercial vat. That’s the crux of a new class-action seeking lawsuit that claims Walmart is deceiving consumers with its private label “craft” beer brands in an effort to inflate prices.  A beer drinker’s lawsuit claims that calling the beverages — made in collaboration with Trouble Brewing under the names Cat’s Away IPA, After Party Pale Ale, Round Midnight Belgian White, and Red Flag Amber — craft beer is a “wholesale fiction,” because they’re actually mass-produced.  According to the complaint, Trouble Brewing “doesn’t really exist,” echoing a recent Washington Post article that pointed out the applicant listed on filings with the Treasury Department’s Alcohol and Tobacco Tax and Trade Bureau is ‘Winery Exchange Inc.,’ which has since turned into WX Brands.

Grocery & Restaurants

Retailer BJ’s Wholesale Readying For IPO Or Sale

The private equity firms that own Westborough-based BJ’s Wholesale Club are considering selling the retailer or taking it public, the Wall Street Journal reported. The firms, CVC Capital Partners and Leonard Green & Partners, are now hiring investment bankers to explore the options, the Journal reported, citing anonymous sources. An IPO would come in the second half of 2017, one source reportedly said.

Kraft Won’t Back Down From Unilever Merger Pursuit Despite Rejection

Kraft Heinz announced a proposed $143 billion merger with Unilever in what would be one of the biggest deals ever.  But the Anglo-Dutch consumer goods giant has declined, saying in a statement the offer “fundamentally undervalues” the company.

Deal Rumors Give Popeyes Whiplash

Is Restaurant Brands International Inc. interested in Popeyes Louisiana Kitchen Inc.? Depends on who is doing the reporting, apparently.  First, Reuters reported that the owner of Burger King and Tim Hortons has approached the chicken chain in a potential bid for the company. The stock responded accordingly, skyrocketing 14 percent.  Not so fast, according to the New York Post, which reported that RBI was interested in buying Popeyes “a few months ago,” but has since backed off. The stock, perhaps unsurprisingly, fell 7 percent.

Home & Road

Best Buy Outlet Stores Sell Discounted Appliances

Electronics retailer Best Buy is testing outlet stores in four states as an alternative way to sell clearance and open-box merchandise.  The outlet stores will sell clearance and open-box merchandise at discounts up to 50 percent off, according to Best Buy spokesperson Paula Baldwin. Available merchandise includes televisions, home appliances, computers and other electronics that were either returned by a customer in a traditional store, served as in-store floor models or are otherwise discounted, the outlet store website says. Products come with a manufacturer’s warranty and all sales are final, Baldwin says.  Best Buy outlet stores are currently operating in California, Delaware, North Carolina and Texas and are only open Friday, Saturday and Sunday.  Other retailers are contributing to changes in the appliance market as well. J.C. Penney recently started selling appliances and HVAC equipment in its stores, and independent retailers have found success in selling appliances through partnerships with Sears Hometown and Outlet Stores.

Moe’s Home Expands Retail Ops To Midwest

Moe’s Home Collection is growing its retail division with a new location in South Dakota.  Scheduled to open this summer in Sioux Falls, the showroom will be located within a new Main Street-style shopping development at Lake Lorraine on Marion Road.  Vancouver-based Moe’s is were looking to expand the retail division across the U.S. and Canada by partnering with experienced individuals who like the brand, know the industry and are willing to take on the operational aspects.

Jewelry & Luxury

Tom Ford Is Entering The Swiss Watch Game

He’s both a lauded fashion designer and filmmaker, and now Tom Ford will try his hand at watches.  Ford’s design company Tom Ford International is partnering with Bedrock Manufacturing Company, the parent company of Shinola and outerwear and accessories brand Filson, on Tom Ford Timepieces.  Tom Ford Timepieces will be entirely Swiss-made and retail at a luxury price point.  Ford said, “Watches have long been an obsession of mine, and I have been waiting for the perfect moment in our brand development to introduce this category and have also waited for the perfect partner. We have found that in Tom Kartsotis and Bedrock Manufacturing Company. His passion and expertise in the industry are unparalleled, and I could not be more excited to embark on this venture with Tom and the team at Bedrock.”

‘Made In The USA’ Is A Tough Promise For Luxury Brands To Make

Standing in the lobby of New York City’s Trump Tower last month, LVMH CEO Bernard Arnault told reporters that the Louis Vuitton brand will expand its manufacturing in the U.S., potentially setting up a factory in the Carolinas or Texas.  Yet even as President Donald Trump pressures other businesses to ramp up their American-based production, experts agree that the “Made in the USA” movement is unlikely to take hold in the luxury sector anytime soon.  Designer labels face several major headwinds when it comes to producing goods here, including inadequate infrastructure and a shortage of raw materials.  “You’ve got so many things working against you,” Edward Hertzman, an apparel supply chain expert and CEO of Sourcing Journal, told CNBC.

This Harvard Grad Is Heir to the World’s Largest Jewelry Empire

One of Hong Kong’s four richest dynasties is preparing for a leadership transition that may test the adage that family fortunes don’t last beyond three generations.  Adrian Cheng, the Harvard-educated heir apparent of New World Development Co. and Chow Tai Fook Jewellery Group Ltd., is in focus after his 69-year-old father, Henry, recently went on leave because of an unspecified illness. The companies declined to comment on media reports that the senior Cheng had a stroke.  When the 36-year-old scion ultimately takes over from his father, he will be in charge of a conglomerate that controls one of the city’s biggest property developers, runs the Carlyle Hotel in New York City and operates a chain of jewelry stores that generates about 80 percent more revenue than Tiffany & Co. globally. Today, the family controls four listed companies with a total market value of more than $25 billion, as well as some that are closely held.

Office & Leisure

Mattel Launches American Girl’s First Boy Doll / Alibaba Partnership

After one week with a new chief executive, Mattel Inc. is already stepping into new territory — partnering with Chinese e-commerce giant Alibaba to design products for China and announcing its first male American Girl doll.  The toy maker said it will sell items through Tmall.com, Alibaba’s sprawling online marketplace. Mattel will also work with the Chinese tech giant’s artificial intelligence lab to develop “innovative products” to nurture childhood development.  It’s the first public move by Margo Georgiadis, a former Google executive who took over as CEO last Wednesday. In another splash, Mattel announced it will add a boy character for the first time to its American Girl line of dolls and accessories.

Something Else to Enjoy With Your Cat: Happy Hour

Why drink alone when you can drink with your pet?  The question comes from two competing start-ups in the unlikely product category of faux wine for cats (and, to a lesser extent, dogs) that comes in miniature bottles with cutesy names. No alcohol is involved (think liquid catnip). But already the company that brought its products to market first, Apollo Peak — which calls itself “the original cat winery” — is accusing its newer competitor, Pet Winery, of being a copycat.

Both ran discount promotions for Valentine’s Day. Both have come up with clever names for their products: For $11.95, people can buy Fluffy an 8-ounce bottle of Catbernet or Pinot Meow from Apollo Peak, which is based in Denver.  Or for $14.95, they can pour 12 ounces of Meow & Chandon from Pet Winery of Fort Myers, Fla.  Since alcohol can harm cats, these products are essentially catnip water, which can make a cat loopy and an owner happy.  But based on a wine tasting I conducted at a local cat cafe-slash-adoption center, the products are primarily catnip for the owners: The shelter cats did not like wines from either company — only two of them indulged — but the people visiting the tastings loved the concept.

Technology & Internet

hhgregg In Play

hhgregg may be heading toward a restructuring or sale.  According to an 8-K filing with the SEC, the struggling appliance and CE chain has retained an investment banking firm to help it “pursue a range of potential strategic and financial transactions.”  In a statement, hhgregg president/CEO Robert Riesbeck said, “We believe it is an appropriate time to explore potential strategic transactions,” but stressed that the company remains committed to its current strategy of cutting costs and deemphasizing CE in favor of appliances and furniture.

Amazon Hints At One Of Its Best-Kept Secrets

Amazon has historically kept its number of Prime subscribers close to the vest, but in its latest 10-K filing, the online retailer hinted at just how many members it might have. In its filing with the SEC, Amazon added a new line item to its annual report: retail subscription services. The company said it generated $6.4 billion in revenue related to that item last year.

What Is Wal-Mart’s E-Commerce Strategy?

Wal-Mart Stores Inc.’s acquisition of outdoor gear retailer Moosejaw is puzzling to a number of retail industry experts.  Consider the context: Wal-Mart is buying up relatively small—and in some cases unprofitable—retailers like Moosejaw, Shoebuy.com Inc. and Jet.com Inc., while Amazon.com Inc. is feverishly swallowing up the e-commerce market and posting growing profits.  Wal-Mart isn’t doing much to challenge Amazon’s gains, despite its one big advantage: its size. It operates 11,528 stores under 63 banners in 28 countries and e-commerce sites in 11 countries.  Even though Wal-Mart has sold online since 1999, e-commerce represents a fraction—just 2.8% in 2015—of its total sales.

Finance & Economy

Consumer Prices Post Largest Gain In Nearly Four Years

U.S. consumer prices recorded their biggest increase in nearly four years in January as households paid more for gasoline and other goods, suggesting inflation pressures could be picking up.  Inflation is trending higher as prices for energy goods and other commodities rebound as global demand picks up.  Gradually firming inflation and a tightening labor market could allow the Fed to raise interest rates at least twice this year.

U.S. Household Debt Near Record Levels, Federal Reserve Report Says

Total U.S. household debt climbed to a near-record $12.58 trillion by the end of 2016, a Federal Reserve Bank of New York report says.  February’s 33-page “Quarterly Report of Household Debt and Credit” shows that every category of debt measured — including mortgages, credit cards, student loans and auto loans — saw an increase. The total increase of $460 billion in 2016 was the largest in a decade. Mortgage balances, now at $8.48 trillion, made up 67 percent of the household debt.