March 13, 2017 Consensus

The Weekly Consensus – March 13, 2017 (Volume 9, Number 11)

The Big Story
Reports of the Death of Retail Store Shopping May Not Be Exaggerated
 

Since the internet bubble of 2000, we have been hearing about the end of brick-and-mortar shopping.  The recent flurry of distressed situation and bankruptcy filing news make it seem like the two decades of prognostications are finally starting to come true.  At the commencement of this 11th week of 2017, let’s take stock of this year’s major store closing announcements and retail Chapter 11 filings, which are piling up.

J.C. Penney, Sears and Macy’s have announced new closures of up to 140 stores, 104 stores and 68 stores, respectively.  Abercrombie & Fitch will close 60 stores, Crocs 160 locations and Staples 70 stores.  Cushman & Wakefield “anticipate[s] as many as 5,000 major chain closures in the coming year — a 25% increase over 2016.”

Year-to-date in 2017, there have been several high-profile retail bankruptcy filings, which have or will result in additional store closings, if not their entire brick-and-mortar footprints, including:  Gander Mountain (162 stores), Eastern Mountain Sports (53 stores), Bob’s Stores (35 stores), The Limited (250 stores), RadioShack (1,500 stores), Wet Seal (171 stores), Vanity Shop (137 stores) and HHGregg (220 stores).

Credit rating agency Moody’s recently reported that over 13% of the retailers (19 companies) it evaluates are on the lowest and distressed tier of its rating spectrum.  This represents the largest percentage since the 2008/2009 Great Recession peak of 16%.  These 19 companies owe approximately $5 billion in aggregate debt due through 2021.

It should come as no surprise that the primary challenge for struggling retailers is the explosive growth of digital commerce, which has resulted in declining customer foot traffic.  Retailers weighed down by unproductive store leases and burdened by underdeveloped online and mobile capabilities struggle to adapt and compete.  Even Walmart, the largest brick-and-mortar retailer in the world by a wide margin, has had to adapt its model in the wake of formidable online competitors.  In an effort to help close the nearly $200 billion gap between its market capitalization and that of Amazon, Walmart has been on an acquisition spree to develop the capabilities and scale to more effectively compete head-to-head.

When today’s consumers visit brick-and-mortar stores, their digital fluency impacts their experience.  Collectively, they are allocating a smaller portion of wallet for in-store purchases, while they expect sharp pricing, superior service and entertainment value from their in-store experience.  All of these behaviors narrow gross margins and add operating expenses.

There are a lot of watch lists speculating on the future of some large household names and myriad smaller retail businesses.  We may not know who or when, but the lesson is clear:  Creditors, beware.  Retailers, be prepared.  Consumers, beware and be prepared for the consequences.

 Apparel & Footwear

As Sales & Profits Struggle, Weyco Places Umi Brand on the Selling Block

Weyco Group Inc. today reported fourth-quarter sales and profit that missed expectations and also announced that it is exploring strategic alternatives for Umi, its children’s footwear brand.

Weyco said today that its fourth-quarter sales slipped 6 percent year-over-year, to $82.1 million, missing Wall Street’s forecast for sales of $84.5 million.

Adjusted net income, at $6.1 million, or 59 cents per diluted share, fell short of analysts’ bets for diluted earnings per share of 61 cents.

Within the North American wholesale segment, net sales of the Stacy Adams, Nunn Bush and Florsheim brands were down 11 percent, 9 percent and 6 percent, respectively, for the quarter. The company said the sales declines were the result of a challenging retail environment, particularly at brick-and-mortar locations, where foot traffic declined.

Online bra-fitting co Brayola raises $5m

Israeli startup Brayola has completed a $5 million financing round.  Founded in 2011 by CEO Orit Hashay, the company operates online brassiere stores. The Firstime fund led the round with a $4 million investment, with participation from Gett (formerly GetTaxi) and former fashion industry figure and Kidbox founder Haim Dabah..

Brayola’s market is estimated at $32 billion a year, including $14 billion in the US, where the company is currently focusing. The company’s algorithm enables women to find bras that fit them, and offers them a selection of virtual bras, from which they can select the ones they like according to brand and size.

What went wrong at BCBG Max Azria

In June 2016, Women’s Wear Daily described the BCBG Max Azria Resort 2017 runway collection as “fresh, colorful, distinctive and easy-to-wear.”

It was the last collection the Los Angeles-based women’s fashion brand would show.  Around the time that BCBG elected not to show at September’s Fashion Week, California Apparel News reported that the company was laying off 123 people; that employees were complaining about the direction of the business; and that staff was being asked to work fewer hours. Max Azria, the Tunisian fashion designer who in 1989 founded BCBG (so named for the Parisian slang “bon chic, bon genre,” or “good style, good attitude”), had been on paid leave since July 2016, and The Wall Street Journal reported that he hadn’t been seen in the office in weeks. That same month, his daughter Joyce, the creative director of lower-cost line BCBGGeneration, left to start her own brand.

The harsh reality for Anthropologie: It’s still selling the wrong clothes

For troubled women’s clothier Anthropologie, the first warning flags went up back in 2015. Sales were lackluster in the first quarter of the year, a slip that executives chalked up to a weak selection of dresses: Some of the silhouettes were wrong, and so were the fabric choices and price points.

Simply put: It made an unforced fashion error. And now, Anthropologie seems locked in a pattern of making the same mistake over and over again.

The retailer’s parent company, Urban Outfitters, reported on Tuesday that it saw a 2.9 percent decrease in comparable sales — a measure of sales online and at stores open more than year — at the corporate division that is anchored by Anthropologie. That’s the sixth consecutive quarter that sales have fallen or have been flat on this metric.

Athletic & Sporting Goods

Dick’s to Cut Unpopular Brands From Stores

Dick’s Sporting Goods (DKS) said Tuesday it plans to eliminate some brands that are less popular with shoppers, as the retailer continues its push to capitalize on the downfall of major rivals.  The nation’s largest sporting-goods chain plans to refocus its product lineup by dropping up to 20% of its vendors. CEO Edward Stack said changes are coming to “deliver a more refined offering for our customers” and enable Dick’s stores to “stay ahead of consumer trends.”  The company’s decision to eliminate certain vendors came as a result of a business review, which Dick’s initiated in response to the retail headwinds that took down rivals like Sports Authority.

Adidas making American comeback

A few years ago, Adidas was fading away in America like a tired 1970s rock band, its once-iconic three stripes producing more nostalgia than sales.  But the German sports brand found a more contemporary beat by partnering with rapper Kanye West and other pop culture icons and aggressively engaging its target audience of 14-to-24-year-olds where they live — on social media.  Suddenly, kids began buying the shoes their parents wore, now infused with retro chic. They bought them in such quantities that Adidas snuck up behind Under Armour and recaptured the No. 2 position in combined U.S. apparel and footwear sales from the Baltimore-based brand, according to an NDP Group analyst.

New Adidas CEO Plans Fast-Fashion Focus to Catch Up to Nike

Adidas AG’s new chief executive officer is doubling down on surging sales of casual sneaker lines like Stan Smith and Tubular to transform the German sportswear maker into a fast-fashion business and gain ground on larger rival Nike Inc.  Sales of so-called lifestyle products from the Originals, Neo and Y3 lines rose 45 percent in 2016, more than triple the pace of performance sports gear, the company said. CEO Kasper Rorsted said focusing on fast-fashion and stripping away non-core businesses like golf and hockey will increase profit more than expected, lifting the shares to a record.

Cosmetics & Pharmacy

Ulta Beauty to Continue Aggressive Store Expansion on Heels of Strong Quarter

Ulta Beauty reported a stellar fourth quarter that shows why many consider it one of the hottest retailers in the United States.  The beauty products retailer also said it would open approximately 100 net new stores in 2017, and remodel 13 locations. Ulta Beauty’s net income for the quarter, ended Jan. 30, surged 30% to a better-than-expected $140.2 million, from $107.8 million in the year-ago period.  Net sales jumped 24.6% to $1.6 billion, also better than expected.  Total same-store sales, which include online commerce, rose 16.6%, driven by 10.9% growth in transactions and 5.7% growth in average ticket.  E-commerce sales grew 63.4% to $154.9 million from $94.8 million last year, representing 380 basis points of the total company comparable sales increase of 16.6%.

Walgreens Looks to Speed Up Rite Aid Merger

Walgreens Boots Alliance is considering a move that would force the Federal Trade Commission to vote on its planned merger with Rite Aid within 30 days.  Walgreens is considering declaring that it has “certified compliance” in its application, which would mean that the drugstore chain believes it has given regulators substantially all the information they need to make a decision, The New York Post reported.  According to the report, the move would be risky, but could bear fruit for Walgreens with a Republican-led FTC not likely to block the $9.7 billion deal.  The Walgreens-Rite Aid proposed merger was first announced in October 2015. If the deal goes through, Fred’s Pharmacy would buy at least 865 divested Rite Aid stores.

Is ‘fat’ the New Normal? Fewer Overweight People Are Dieting

Although weight gain has continued among U.S. adults, fewer report trying to lose weight, according to a study appearing in the March 7 issue of JAMA.

Socially acceptable body weight is increasing. If more individuals who are overweight or obese are satisfied with their weight, fewer might be motivated to lose unhealthy weight. Jian Zhang, of Georgia Southern University, and colleagues used data from the National Health and Nutrition Examination Survey to assess the trend in the percentage of adults who were overweight or obese and trying to lose weight during three periods: from 1988-1994, 1999-2004 and 2009-2014.

Discounters & Department Stores

J.C. Penney adding more services and hard goods, even bathtubs

Check out the home section on jcpenney.com and you’ll see bathtubs for sale and lots of other items not in J.C. Penney department stores like a jig saw and other tools, ceiling fans, home safes and wallpaper. J.C. Penney CEO Marvin Ellison said the department store’s moves into more hard lines and services including a partnership with Trane to offer heating and air conditioning  make sense for a department store today as mall traffic declines and stores close.

Penney is also testing, what Ellison called, a simple one-to-two day moderate priced bathroom refresh remodeling service. Ellison is trying to make stores more productive as he closes weak ones.

Amazon actually isn’t the biggest problem, Macy’s CFO says

Amazon is an easy source of blame for the ongoing wave of store closures happening at bricks-and-mortar chains.  But according to Macy’s CFO Karen Hoguet, there’s a bigger competitive threat challenging her company’s business over time: off-price.  As chains like Macy’s and J.C. Penney remove 100 or more stores from their fleets, TJX, Burlington and Ross are on the expansion track. Their stores are resonating with shoppers because of their constantly changing inventory, as well as their consistently low prices, Hoguet said at the UBS Consumer & Retail Conference in Boston on Wednesday.  To fight back, Macy’s is taking a page out of those chains’ books.

Has Walmart Finally Created the Endless Shopping Aisle? If So, Amazon Should Be Worried

Walmart is getting savvier at creating ways to shop in its stores and online at the same time, and Amazon should be worried.  The world’s largest retailer is testing a touchscreen monitor in its toy aisle at certain stores in Texas that helps parents and children alike find exactly what they are looking for. And if they don’t find it in the store, they’re only a click away from ordering online, Walmart CFO Brett Briggs said at the Raymond James Investor Conference on Wednesday.

“We’re testing how to interact with the customer differently, understanding better how they want to shop,” Briggs said.  Briggs said the toy aisle touchscreen is big, “and some of these touchscreens, I really haven’t liked in the past. I think they’re a little clunky (but) this one is really good.”

Grocery & Restaurants

At McDonald’s, a focus on speed

At its Investor Day presentation this week, McDonald’s Corp. executives took investors and analysts and a few media members on a series of demonstrations that reveal what they see as the chain’s future. Those demonstrations revealed a faster McDonald’s. By the end of the year, McDonald’s customers will be able to order via an app and get their food at the curb. And many of them will be able to have their food delivered directly to their home. McDonald’s plan would give customers the ability to choose whether they want to dine in, take out, go through the drive thru or have food brought out to their car. The chain’s mobile app would, theoretically, ease some congestion inside the drive thru. Its Experience of the Future would improve efficiency inside the restaurants.

Bill Ackman prepares his Chipotle exit

That was fast. Bill Ackman, the activist investor, revealed a 9.9 percent interest in Chipotle Mexican Grill Inc. in September of last year. Chipotle named four new board members to the company the following December. And then on Friday, Ackman’s Pershing Square Capital Management filed what is known as a shelf registration, indicating the firm could sell the nearly 2.9 million shares it owns in the Denver-based burrito chain.

Home & Road

The Legacy Companies Acquires Three Brands

The Legacies Companies has expanded its brand portfolio with the acquisition of the West Bend Electrics Division and Vinturi from Focus Products Group International and the Yonanas Consumer Retail Division from Winston Products.  Neal Asbury, CEO of The Legacy Companies, said this is an exciting time for the company and that there is potential for more acquisitions this year. Vinturi has been making its patented red wine aerator since 2007 and has developed its wine accessories assortment to include a number of items, including a white wine aerator and various wine-related tools such as corkscrews and foil cutters.

Carquest Getting Harder to Find? Advance Auto Parts Planning More Changes, More Stores in 2017

Auto parts retailer Advance Auto Parts (NYSE: AAP) announced that it plans to accelerate store growth with 75 to 85 new locations in 2017. But the brand expansion may be even more pronounced as efforts are underway to also convert up to 200 Carquest stores.  It’s a slight shift in strategy following two years that were focused on consolidating nearby Carquest and Advance Auto stores, usually at the expense of the Carquest customers. We’ve taken a close look at the work to convert, consolidate or relocate Carquest stores,” says company spokeswoman Laurie Stacy. “Store consolidations have shown mixed results while conversions and relocations have shown better results.”

Jewelry & Luxury

Report: LVMH to Launch E-Commerce Site for All Brands

It looks like luxury conglomerate LVMH Moët Hennessy Louis Vuitton is getting ready to jump back into the e-commerce game.  According to a report from the Financial Times, the luxury goods company plans to launch a website in May branded as Le Bon Marché, which is the department store that the company acquired in 1984. The website will offer not only brands from LVMH’s own stable–the company owns Bulgari, TAG Heuer and Hublot, among others–but also non-LVMH brands, making it competition for other online luxury websites such as Net-a-Porter and Farfetch. It is unclear at this time if the site will operate on a wholesale or marketplace model with these other brands.

Signet Chairman Speaks Out on Controversies

Signet Jewelers Ltd.’s quarterly earnings call began with an unusual occurrence: a statement from board Chairman Todd Stitzer.  And he immediately addressed the elephant in the room: the waves of negative publicity that have pounded Signet since The Washington Post published a story in late February detailing past accounts of sexual harassment and mistreatment of female employees at the company.  The report was based on more than 1,300 pages of recently unsealed documents filed as part of the ongoing class-action arbitration in which women allege they were passed over for promotions and paid less than men.

On Thursday, Stitzer reiterated the point made by a company spokesman immediately after the Post story ran: that the ongoing class-action case contains no allegations of sexual harassment and that the allegations are not an accurate reflection of the company’s culture. They were made by a small group of women and relate to incidences that happened in the 1990s through 2005, he said.

Signet Sinks Again; 4Q Comps Fall 4.5 Percent

Signet Jewelers reported yet another downbeat quarter, with sales falling at every division except for Piercing Pagoda.  Overall same-stores sales fell 4.5 percent in the quarter, and 1.9 percent for fiscal year 2017.

Fourth quarter comps fell 5 percent at Kay, 3.2 percent at Jared, 16.4 percent at regional brands, 4.5 percent at Zales, 13.3 percent at Gordon’s, 3.8 percent at the U.K. division, and 7.2 percent at the Canadian division. Only Piercing Pagoda stuck out from the sea of down arrows, with sales rising 5.7 percent.

Office & Leisure

Staples to Close 70 Stores in North America

Staples Inc. suffered its worst stock decline in almost seven months after the company posted disappointing results and announced plans to shutter 70 stores in North America.

Same-store sales in the region declined 7 percent during the fourth quarter, the Framingham, Massachusetts-based company said on Thursday. Earnings came in at 25 cents a share in the period, excluding some items. That was a penny less than analysts estimated.

The store-closing move, which follows the elimination of 48 locations in 2016, will affect about 5 percent of stores in North America. Staples had 1,255 locations in the U.S. and 304 in Canada at the end of the last fiscal year.

National Dog Day Report: online spending on pet products is up 67 percent

In recognition of National Dog Day, Slice Intelligence is unleashing data about how pet owners pamper their four-legged friends through online shopping. Slice found that online spending on cat and dog supplies is up 67 percent from July 2015 to July 2016. These pet-friendly shoppers spent ruff-ly $40 per order on products for dogs and cats.

Spending on pet food is the main driver for the entire pet category. Revenue generated from pet food sales grew by 121 percent since the beginning of 2015. Data also shows that 57 percent of all online cat and dog spending is on their food.

Lego reports highest revenue in 85-year history

Lego has reported the highest revenues in its 85-year history even as profits returned to a more “sustainable” level after years of double-digit growth.

Sales in 2016 rose 6pc on the previous year to hit a new high of 37.9bn Danish kroner (£4.4bn), although in the previous year they had shot up 25pc. The brick toy company’s profit rose 1.7pc to 12.2bn kroner last year.

Bali Padda, the first non-Dane to be in charge of the company, said he was satisfied with the toy maker’s performance during 2016, despite slowing growth in the second half.  “We were encouraged by our performance in mature markets in Europe and continue to see strong potential in China, which represents an attractive growth opportunity,” he said.

Technology & Internet

RadioShack Files For Bankruptcy, Again

General Wireless Operations (GWO), the company that runs RadioShack’s remaining 1,500 stores, has filed for Chapter 11 protection, plunging the iconic CE retail chain into bankruptcy for the second time in two years. The reorganization plan calls for the shutting of 187 stores by Monday; the sale to Sprint or closure of another 365 stores by March 31; and an evaluation of the remaining 1,000 locations, with an option to liquidate. General Wireless, a unit of hedge fund Standard General, which bought the RadioShack brand and its best stores in a series of bankruptcy auctions in 2015, blames its co-leasing deal with Sprint for its current woes.

M-Commerce Will Dominate E-Comm This Year

Mobile commerce will dominate e-commerce for the first time this year, according to a study from eMarketer, with most e-comm purchases coming from a smartphone. eMarketer, a research firm based in New York, released its retail and e-commerce outlook for 2017, with data stemming from other research firms, government agencies, media firms and public companies. According to eMarketer, e-commerce is expected to grow 16 percent in 2017, reaching $462.17 billion and accounting for 9.2 percent of total retail sales. Total retail sales will grow 3.5 percent for the year, topping $5 trillion. While apparel and accessories took top billing for the category, expected to grab the largest share of online spending (18.7 percent), computers and consumer electronics took second, with 16.7 percent expected growth. Mobile commerce, meanwhile, will reach $157.14 billion, up a whopping 35.5 percent over last year.

More than half of retailers ready to go all-in on Internet of Things

As the retail industry continues its digital transformation, chains need a new formula to best service its shoppers. To achieve this goal, 70% of retail decision makers are ready to make changes to adopt the Internet of Things (IoT), according to the 2017 Retail Vision Study, from Zebra Technologies. The study analyzes the technology trends shaping the future of the global retail industry and enhancing the shopping experience. As online shopping becomes mission-critical in this age of transformation, retailers are challenged with providing unprecedented levels of convenience to help drive customer loyalty. While efforts only scratch the surface currently, within four years, these intentions will become priorities.

Finance & Economy

ADP Says Companies in U.S. Hired the Most in Almost Three Years

Companies added the most workers in almost three years to U.S. payrolls in February on a surge in construction and manufacturing employment, data from the ADP Research Institute in Roseland, New Jersey, showed.  The U.S. labor market is continuing its strong run as demand chugs along, potentially benefiting from increased optimism about the economic outlook under President Donald Trump.  Claims for unemployment benefits are the lowest in almost 44 years, signaling employers are keeping firings at a minimum.