February 27, 2017 Consensus

The Weekly Consensus – February 27, 2017 (Volume 9, Number 9)

The Big Story
Steve Bowles

So here it is, another in a long line (nine years!) of stories about brick-and-mortar retailers suffering another in a long line of embarrassing setbacks. Now comes JCPenney announcing it has decided that there are too many JCPenney stores for the way that they currently do business.  Specifically, Penney plans to close 130-140 stores (along with a couple of links in the company’s distribution chain) during the next few months.  About 6,000 workers will be offered buyouts as Penney closes more than 13% of its stores.

Meanwhile, my own personal hobby horse is busy too, suffering its death throes in a particularly sad version of humiliating slow-motion.  That’s right, things at Sears/Kmart remain…less than promising.  Having recently announced that it plans to close 150 stores (108 of them being especially lackluster Kmarts).  About 4,000 more workers will be laid off as part of the process.

Even Macy’s recently announced plans to cut 100 of its 675 stores, with a further 10,000 layoffs.

For me, apart with the pain that goes along with reading about all the jobs lost, there is dismay at the seemingly imminent death of the great American shopping mall, which has been built up around “anchor” stores like these – a metaphor drawn around their perceived drawing power, and not for an anchor’s other noted ability: the power to drag things down…but I digress.  The point is, as a reformed mall rat, I am saddened by the general lack of traffic (of all ages) I’ve encountered in recent years.

Discussing the necessity of store closings, JC Penney Chairman/CEO Marvin Ellison said, “We believe closing stores will also allow us to adjust our business to effectively compete against the growing threat of online retailers,” before (contradictorily?) making note that 75% of JCPenney’s e-commerce orders are associated with brick-and-mortar somehow – ranging from ship from store to in-store pickup of online orders.

The problem is, that if stores are a burden and a major component in the e-alternative, it is hard to see how a brick-and-mortar expert might manage their way to great success.  Blame e-commerce if you must, for the headache, but that can’t be it.  Can it?

Then again, those people at Amazon really have figured out how to sell consumer goods to the modern shopper, haven’t they?

And there you have it, my grand suggestion: Amazon, you titan of e-commerce, you Walmart of the ether, open the treasury and build me a department store chain for the 21st century.  You have the caché to pull off a bold move without starting a panic, and you sell everything already, anyway.  Save the stores, save the malls, save the social outlet that such public spaces give us.  Give consumers another choice besides clicking away, in the dark.

Also, if you are looking for a name, I’ve made it pretty clear over the years that Roebuck’s is a fine name for a store, and it probably is available.

In the end, I leave it to you.

Apparel & Footwear

How Steve Madden Is Helping One Family-Owned Company Grow in a Major Way

On a Friday afternoon in February in the Schwartz & Benjamin Inc. showroom on 57th Street, industry veterans Steve Madden and Danny Schwartz weren’t talking seasonal boot sales.  It was just a few days after the proverbial stars aligned for Madden, who finally succeeded in snapping up Schwartz & Benjamin, the firm co-founded by Danny Schwartz’s grandfather 94 years ago.  For several years, Madden’s company has been aggressively pursuing the family-owned company that specializes in licensed brands and private-label footwear.

Sycamore Partners Wins The Limited Brand at Auction

Limited Stores Co. kicked off an auction for its brand name on Tuesday, with private-equity firm Sycamore Partners walking away as the winning bidder, according to people familiar with the matter.  On Tuesday, the only bidders chasing after the women’s apparel chain’s brand name were Sycamore and Sunrise Brands LLC, which showed earlier interest, the people said.  After a short morning of bidding, Sycamore prevailed with a $26.75 million offer, the people added. The deal is subject to the approval of a bankruptcy judge at a hearing Thursday.

Startup JackThreads Lays Off Most Staff and Puts Itself Up for Sale

A little more than a year after being spun out of Thrillist Media Group, Ben Lerer’s e-commerce startup JackThreads is preparing to cease operations as an independent company.  The online menswear retailer has cut its staff down to a skeleton crew with mass layoffs over the past two weeks, and is in discussions to sell the company, a spokesperson for JackThreads has confirmed. The layoffs include much of the customer service staff as well as certain high-ranking employees.  Thrillist Media, the digital publishing company, had acquired JackThreads in 2010 as part of an attempt to fuse e-commerce with the rest of its lifestyle coverage, but the two split into separate companies in 2015 after raising $54 million in new funding.

The Baby Gear Black Market

If baby stuff manufacturers stopped making everything right now, we’d all be fine for 10 years,” quipped my sister-in-law Nedra as she packed up a co-sleeper, three carriers, and a gigantic pile of onesies to hand down to us from her own kids. My partner and I were preparing to welcome our first baby. Her husband, my brother-in-law David, emailed us a list of brands and items that they’d found particularly useful, commenting, “You’ll figure out what works. Don’t bother to buy a lot — people will give it to you.”  So we didn’t. And they did.

At this point, we — like most families we know — have established multiple trade pipelines: cousins, friends, and the local parents’ listserv, where we can find stuff for free or a fraction of its cost.  Seven months into parenthood, most baby stuff comes to us used. We pass it along as fast as possible, given how fast the baby grows and how small our apartment is.

Athletic & Sporting Goods

Vail buys Stowe

Vail Resorts confirmed the rumors announcing it had entered an agreement to acquire Stowe Mountain Resort from Mt. Mansfield Company, Inc., a wholly owned subsidiary of American International Group, Inc., for a purchase price of $50 million, subject to certain adjustments.  Stowe Mountain Resort will be Vail Resorts’ first mountain resort on the East Coast and complements the company’s network of 10 world-class mountain resorts and three urban ski areas.

Can Nike Reinvigorate the Struggling Basketball Market?

Performance basketball sneaker sales are struggling, and industry insiders are sparse with insight on how the market’s leader, Nike, can reinvigorate the once dominant category.  Matt Powell, VP and sports industry analyst with The NPD Group, explained to Footwear News. “The kid is telling the brand what they’re going to buy and not going to buy, so it would be very difficult for a brand to turn their fortunes around overnight.”  Powell believes it’s the style of shoe, not the players wearing them, that’s not attractive to today’s consumer.

Cosmetics & Pharmacy

Shoppers Drug Mart’s Earnings Rise across the Board

Shoppers Drug Mart earned net income of $201 million Canadian for its fourth quarter ended Dec. 31. This compares to net income of $128C million during the same period in 2015. Adjusted net earnings were $393C million, compared to $363C million in the prior year.  Looking at other quarterly earnings, all presented in Canadian dollars throughout the remainder of the story, the retailer posted revenues of $10.845 billion in its most recent quarter, versus $10.6 billion in the year-ago period.  Drug retail same-store sales enjoyed a 3.4% increase in Shoppers Drug Mart’s fourth quarter, compared to an advancement of 5% in the prior year period. Broken down, pharmacy same-store sales growth increased 2.5%, while front-end same-store sales growth improved by 4.1%.  Food retail same-store sales growth rose by 1.1%, compared to a 2.4% advancement in 2015’s fourth quarter.

Revlon Puts Its Stamp On Amazon

Cosmetics and beauty company Revlon Inc. is looking to make a marketing statement in the eyes of eCommerce shoppers as part of a larger reinvention push.  To do so, it’s getting a little help from a company that knows a thing or two about eCommerce: Amazon. Revlon will be stamping its name on 10 million Amazon shipping boxes, said Internet Retailer, to make an impression on eCommerce shoppers (especially the coveted millennial cosmetics market) as part of a campaign called the Love Project.

“Digital is so important to us as a company,” said Eunice Byun, vice president of global digital marketing. “That’s where the consumer is. That’s where she is talking to her friends, learning about new trends.”

Discounters & Department Stores

Macy’s plans to stay afloat by making major changes to stores

Macy’s CEO Terry Lundgren wants to make something clear: 90 percent of Macy’s and Bloomingdale’s transactions happen in store. “A lot of people don’t believe that or understand that,” he said during the company’s fourth-quarter earnings call on Tuesday. “I want to point that out, because physical stores still play an important role, and while we feel good about our digital investments, more experimentation with in-store tech is priority for 2017.” As Macy’s follows through on plans to close 100 underperforming stores this year, the struggling retailer is seeing double-digit growth in online sales.

Can America’s Department Stores Survive?

At 11 p.m. last Thanksgiving, shortly before Thursday became Black Friday, the crowds were thick at Macy’s massive flagship store in Manhattan. Some 16,000 people had lined up around the block to kick off the biggest shopping weekend of the year. Five hours after the doors opened, they were still going strong. Rabid consumers from across New York, the U.S., and the world were snapping up Tommy Hilfiger underwear and Keurig coffee machines and Macy’s Hotel Collection bedding, leaving a trail of empty boxes, strewn sweaters, and toppled clothing racks in their wake. The mayhem didn’t let up until the wee hours, and it wasn’t unique to Manhattan—similar scenes played out at malls across the country. But instead of portending a strong Christmas period, the hordes served only as a reminder of department stores’ dwindling ability to generate excitement on an average day.

Kohl’s plans to trim its square footage, but not how you might think

After closing 19 stores in 2016, Kohl’s executives said on Thursday that the chain will continue whittling its square footage over time. But that doesn’t necessarily mean it will have fewer locations.  Instead, as competitor Macy’s moves forward with its plan to shutter 100 locations, Kohl’s CEO Kevin Mansell is looking for opportunities to move his company out of some of its cavernous stores and into smaller shops.  On a call with investors following the company’s fiscal fourth-quarter earnings report, Mansell said trading in some of Kohl’s larger stores will help the chain maintain its presence in different markets and operate more profitably.

J.C. Penney to close 130-140 stores and offers 6,000 early retirement

J.C. Penney announced its biggest number of stores closings in recent history on Friday and indicated store closings will take it out of some smaller markets.

Penney said it will close 130 to 140 stores over the next few months. That represents about 13 percent of its 1,014 stores, but Penney said, the stores generated less than 5 percent of total annual sales and were unprofitable.

A full list of planned store closings will be released in mid-March after stores have been notified. Most of the stores are expected to close in the second quarter, or by the end of July.

Grocery & Restaurants

Applebee’s sales decline pushes out Julia Stewart

The restaurant recession has cost the industry one of its most celebrated executives.  Julia Stewart, who resigned on Friday as chairman and CEO of DineEquity Inc., made a major mark on the restaurant industry during her remarkably long, 16-year tenure.  Stewart was one of the earliest, most vocal proponents of the franchise-heavy, “asset-light” operating model that dominates the restaurant industry today. She was twice named a Nation’s Restaurant News Golden Chain award recipient, and in 2015 she was named NRN’s Operator of the Year.  But Stewart was ultimately undone by persistent, worsening struggles at Applebee’s, the casual-dining chain she engineered to acquire in 2007, when she was CEO of IHOP.

Burger King owner brings growth model to Popeyes

After months of flirting, Restaurant Brands International Inc. and Popeyes Louisiana Kitchen Inc. finally agreed to tie the knot this week, with the Burger King owner agreeing to pay $1.8 billion for the fried-chicken chain.  RBI owns Burger King and doughnut-and-coffee chain Tim Hortons. Popeyes will add a third leg to the stool.  The deal cements RBI’s reputation as a burgeoning force in the restaurant industry, a company smaller only than McDonald’s Corp. and Yum! Brands Inc. in terms of system sales. The deal will also make RBI the fifth-largest restaurant company in terms of total global unit count, with 23,000 locations.

Unilever to Review Options After Takeover Bid Is Withdrawn

Unilever said on Wednesday that it was conducting a “comprehensive review” of its options after Kraft Heinz withdrew a $143 billion takeover bid for the consumer goods company on Sunday. The combination of the two companies would have created a giant in the packaged food and consumer goods industry, selling a wide range of items, including Heinz ketchup, Oscar Mayer meats, Ben & Jerry’s ice cream, Hellmann’s mayonnaise and Dove soap.

Kraft Heinz, itself the product of mega-merger, publicly announced on Friday that it had offered to buy Unilever. It would have paid Unilever shareholders $50 a share in a combination of cash and stock. But Kraft Heinz’s board — including Warren E. Buffett and the Brazilian-born billionaire Jorge Paulo Lemann — decided to withdraw the offer less than 48 hours later as it faced a potential lengthy fight for Unilever, an important company in British and Dutch business.

Home & Road

Home Deport Surges amid Higher-than-expected Sales, Profit

The Home Depot is closing in on the $100 billion mark in annual sales.  The Atlanta-based retailer posted a 6.4% increase in same-store sales in the United States, and 5.8% overall, for the quarter ended Jan. 29.  CEO Craig Menear credited merchandising mix and digital prowess for the chain’s better-than-expected fourth quarter performance, which saw sales increase to $22.2 billion in the fourth quarter, up 5.8% from 21.0 billion in the same quarter last year.  As the Home Depot closes in on the $100 billion mark for annual sales, the Atlanta-based retailer rang up a fourth quarter comparable-store sales stat of 6.3% in the United States, and 5.8% overall.

Online Home Decor Retailer Wayfair Soars in Q4, Beating Wall Street Expectations

Wayfair credits innovation, increasing brand awareness and repeat customers for its strong fourth quarter growth.  The home decor brand’s total net revenue for the fourth quarter ended December 31, 2016, rose 33.1% from last year to $984.6 million, topping analysts’ expectations for $975.32 million. The company’s gross profit was $238.6 million, or 24.2% of total net revenue.  Direct Retail net revenue, consisting of sales generated primarily through Wayfair’s five sites, increased $273.4 million to $959.0 million, up 39.9% year-over-year (YoY). The number of active customers in its Direct Retail business reached 8.3 million, an increase of 53.9% YoY, and repeat customers placed 2.7 million orders in the fourth quarter of 2016, an increase of 63.1% YoY.

T.J. Maxx parent steps up expansion, plans new home chain

The parent company of T.J. Maxx and Marshalls, which have taken a bigger share of clothing spending by selling popular brands at deep discounts, plans to expand even faster and test a new home store that’s different from its highly successful HomeGoods chain. TJX Cos. said Wednesday it will add 1,800 stores for a global total of 5,600 over the long term. And though it didn’t offer details about the new home store, company executives said the goal is to make it distinct enough from HomeGoods that people will shop at both. The first two are planned for later this year. The expansion plans were announced as TJX announced fourth-quarter results that topped Wall Street expectations, bolstered by strong sales during the holiday season.

Jewelry & Luxury

Why People Are Talking About Tiffany & Co.’s New Directors

Usually, the makeup of a company’s board doesn’t get much attention. But Tiffany’s addition of three new directors is definitely intriguing.  All three are veteran CEOs with impressive pedigrees. Francesco Trapani is the former CEO of Bulgari and once headed LVMH’s watches and jewelry division. Roger Farah is the co-CEO of Tory Burch and former president of Ralph Lauren, a man whom Fortune just dubbed a “retail rockstar.” James Lillie once headed consumer products giant Jarden.  The three joined the board as the result of a deal Tiffany made with activist investor Jana Partners, whose 5.1 percent stake in Tiffany (with Trapani) has just been made public. While it’s not clear whether Jana’s stake drove the departure of CEO Frederic Cumenal three weeks ago, it would put that abrupt switch in a new light, one that makes a lot more sense.

Brilliant Earth Set to Open Fifth Physical Location

Brilliant Earth is set to open its fifth brick-and-mortar location when it opens a new showroom in San Diego in late March. The location will contain approximately 2,000 square feet of retail space on the third floor of La Plaza La Jolla, an open-air shopping destination in the city that features a curated selection of boutiques, restaurants and personal services. And like other Brilliant Earth showrooms, the San Diego location will allow for walk-ins as well as provide shoppers with the opportunity for a one-hour personalized consultation with a jewelry specialist.

A report from De Beers’s new diamond mine

GAHCHO KUÉ is too far north for trees. In the few snowless months, its surroundings in Canada’s Northwest Territories resemble a sprawling archipelago, as much lake as land, dark ponds stretching flat to the horizon. Wolverines roam, as well as bears, foxes, hares and caribou, though the herds have dwindled. There are no roads, no pipes, no electricity cables. So it seems strange when, flying over the tundra, a giant truck appears, then another, then a steel factory, rows of trailers and a big grey pit, deepening by the day.  De Beers, the world’s biggest diamond company, marked the opening of its Gahcho Kué mine in September. Local indigenous leaders prayed for the mine, beating drums. Bruce Cleaver, the firm’s chief executive, and Mark Cutifani, the boss of its parent company, Anglo American, stood by a ceremonial fire, flames tilting in the wind.  Now the hard work is under way.

Total U.S. Jewelry Sales up 5.5% in December

Total December 2016 sales of fine jewelry and fine watches in the U.S. market rose by an estimated 5.5 percent, when compared to the same month a year ago, to $15.1 billion, according to preliminary data from the U.S. Commerce Department, as the graph below illustrates. This was the third consecutive monthly gain that has been well above modest gains earlier in the year.

Office & Leisure

Toys ‘R’ Us Has Laid Off Up To 15% Of HQ Employees

For decades, Toys “R” Us has stood as one of the most reliable and iconic sources of childhood glee. Now, that tradition is on shaky ground. This Friday, the company announced they had laid off between 10-15% of their home office employees out of Wayne, New Jersey — approximately 250 jobs were eliminated.   Toys “R” Us has been struggling financially for some time. In 2005, investors led by KKR & Co., Bain Capital and Vornado Realty Trust bought out the company for $6.6 billion. In 2016, the business refinanced its remaining $850 million debt load, allowing investors holding bonds maturing in 2017 and 2018 to swap their holdings for those maturing in 2021.

Carter’s Inc. buys Skip Hop, posts $258.1 million profit for 2016

Carter’s Inc. (NYSE: CRI) bought Skip Hop Holdings Inc. from Fireman Capital Partners for $140 million in cash.  Atlanta-based Carter’s said the deal also includes a potential future payment of up to $10 million depending on the company hitting certain fiscal targets in 2017.  New York-based Skip Hop’s product portfolio includes diaper bags, kids’ backpacks, travel accessories, home gear, and hardlines for playtime, mealtime, and bathtime.

Carter’s is the largest branded marketer in the United States and Canada of apparel and related products exclusively for babies and young children.

Technology & Internet

Amazon shoppers prioritize price and shipping when deciding whether to buy

Amazon.com Inc. shoppers care about price and shipping, and they will compare what other retailers offer before deciding whether to complete a purchase, according to a new report from digital marketing agency CPC Strategy.  CPC’s data shows 23.1% of shoppers cited price as the driving factor behind buying something on Amazon, while shipping came in a close second at 19.8%, according to the survey, which involved 1,500 U.S. shoppers age 18 or older in December.  More than half of all shoppers in the CPC Strategy report—53.5%—say they sometimes or always check prices elsewhere, while 18.2% say they only check Amazon’s prices before deciding to buy.

Nordstrom eclipses $3 billion in online sales in 2016

Online sales are growing for department store chain Nordstrom Inc., and more shoppers are picking up their online orders in its stores.  Nordstrom reported e-commerce sales in 2016 of $3.219 billion, up 13.7% from $2.832 billion in fiscal 2015. That total includes sales through its full-price flagship site Nordstrom.com as well as its off-price e-commerce sites NordstromRack.com and HauteLook. E-commerce accounted for 22.2% of overall sales in 2016, compared with 20.1% a year ago, Nordstrom said in its fiscal fourth quarter 2016 earnings release.

Finance & Economy

US existing home sales hit 10-year high in January

U.S. home resales surged to a 10-year high in January as buyers shrugged off higher prices and mortgage rates, a sign of growing confidence in the economy.  Sales were up 3.8 percent from January 2016. Demand for housing is being underpinned by a strengthening labor market, which is improving employment opportunities for young adults and, in turn, boosting household formation.

As Investors Search for More Alternatives to Boost Returns, Private Equity Tops the List

Institutional investors are ramping up their appetite for alternatives, including exotics such as unlisted infrastructure and private debt, but continue to be dissatisfied with hedge funds, according to Preqin’s H1 2017 Investor Outlook.  The study also found that institutional investors are looking to invest in a wider range of alternative asset classes. One-third of investors now commit to four or more asset classes, up from one-quarter a year ago, while almost one in 10 invest across all alternatives, the study found.  More specifically, Preqin said 9% of institutions invest in all six alternative asset classes, one-fifth have exposure to five or more, and over one-third (34%) invest in four or more.