March 20, 2017 Consensus

The Weekly Consensus – March 20, 2017 (Volume 9, Number 12)

The Big Story
Trump Bump/Slump
By: Douglas Stebbins

There is nothing the stock market despises more than uncertainty.  It seems that the market would rather accept a less than optimal certainty rather than try to evaluate the range of outcomes of some looming unknown.  Who can forget, when on election night, the Dow futures at one point dropped more than 900 points – not because of Trump’s specific policies, but rather the market’s reaction to the unexpected Trump victory.  The drop was short-lived, and the day after the election the stock market ended up over 1% as Wall Street had begun to contemplate what a Trump presidency might mean to the stock prices.

Since Election Day, the markets have embraced Trump’s pro-business message and pro-business cabinet assignments.  Whether it is discussions (or tweets) of stimulus or taxes or regulation, it is generally understood that Trump will lean pro-business.  The result has been a nice stock market bump in the four months since the election, with the S&P 500 up over 11% and the Dow Jones average up over 14%.

Not all stocks have enjoyed that run, however, with stocks of retailers being a mixed bag.  I looked at 113 public retailers and found that the median return since the election was just about zero (actually -0.2% to be exact).  However, by drilling deeper it was evident that not all retailer stocks have performed equally under the Trump regime.  Of the eight retailer categories researched in S&P Capital IQ (apparel, department stores, electronics, general merchandise, home furnishings, home improvement, internet/direct and specialty) only two out-performed the market in general.  The biggest gainers were home improvement retailers and home furnishing retailers, while the biggest losers were apparel/specialty and department stores.  There certainly are some macroeconomic reasons for these results.  The continued performance of the general economy has encouraged an uptick in the housing market and has helped housing related stocks.  Contrarily, ecommerce expansion and decreasing mall traffic has hurt the prospects of mall-based retailers.

Some of the retailer stock market performance is a reaction to an uncertainty surrounding Trump’s policies and how they might impact retailers. Specifically, Trump’s conceptual border adjustment tax is being resisted by many retailers that rely on imported goods.  Especially vulnerable would be apparel retailers who have become increasingly reliant on low-cost foreign manufacturing to provide goods at competitive prices.  The home improvement and furnishing retailers are less reliant on imports, and less impacted by the tax, partly because their products are generally larger and more difficult/expensive to ship from foreign manufacturers.

There are a lot of things that are unknown (or unknowable) about the proposed tax including:  what will the tax be? how will exchange rates react? will other countries retaliate? will it be enacted? Trying to figure out the future of retail is hard and layering in new, uncertain, trade regulations, further complicates the picture, preventing retailer stocks from fully enjoying the Trump bump.  As Donald himself said regarding another initiative, “nobody knew healthcare could be so complicated.” That, of course, drew the universal response that anyone who worked in healthcare knew exactly how complicated it is.  The same could be said for retail.  As Consensus founder Mike O’Hara likes to say, “Retail is not rocket science, it’s harder.”

Apparel & Footwear

Shares in coat maker Canada Goose soar in debut on Toronto and New York markets

Shares in Canada Goose, whose winter jackets have been made famous by the likes of celebrities Daniel Craig and Kate Upton, soared today in its debut on stock markets in Toronto and New York.

The Toronto-based company, ubiquitous for its $900 parkas with fur-lined hoods, debuted with an initial public offering of 20 million shares under the symbol GOOS.  Canada Goose shares launched at $23.86 on the Toronto Stock Exchange. It would finish the trading day at $21.53.

In New York, shares opened at $18 US. They closed at $16.08 US.

The outerwear manufacturer says of the 20 million subordinate voting shares offered, 12.85 million shares will come from existing shareholders.

Owner of Kate Hudson sportswear line Fabletics explores sale -sources

TechStyle Fashion Group, owner of the Fabletics sportswear line that features celebrity actress Kate Hudson, is exploring a sale that could value it at more than $1.5 billion, including debt, people familiar with the matter said on Monday.

The sale process will test the worth of Hudson’s name recognition, as well as the value of so-called athleisure – workout apparel to be worn for both sport and everyday life.

TechStyle has hired investment bank to run an auction for the company, the people said, cautioning that it was possible that no deal would be reached.

El Segundo, California-based TechStyle’s venture capital investors include Rho Capital Partners, KEC Ventures and Trinity Capital Investment.

Pentland Acquires Majority Stake in Vintage US Sneaker Brand SeaVees

The third-generation UK family business has bought a majority stake in Californian casual lifestyle sneaker brand SeaVees for an undisclosed sum through its subsidiary Pentland Brands.

Pentland Group has a lucrative history of investing in US footwear brands. In 1981 it bought a 55% stake in a then-small athletic footwear brand, Reebok USA, for $77,500, followed by a 55% stake in Reebok International in 1984.

It sold its share in Reebok for $770 million in 1991.

A significant part of the Pentland Group, its brands business owns a stable of sports, outdoor, and fashion brands including Speedo, Berghaus, and Canterbury.

Athletic & Sporting Goods

Here’s How Puma Overtook Under Armour in the Sportswear War

Thanks to partnerships with Rihanna, The Weeknd, and Young Thug, Puma recently surged past Under Armour in the sportswear hierarchy (at least in the stock market). But the comeback doesn’t end here. Globally, Puma has always been a bigger brand, but in recent years it was Under Armour that was the darling of the industry and the stock market. But these days, Puma’s stock price is skyrocketing—going from 194 to 289 Euros over the past 12 months—while UA’s has gone from the mid-80s in USD to just $19.14. A lot of this Under Armour brought upon itself through overzealousness and PR nightmares, but it also signals the shifting tastes of customers. Point is, people want cool-looking sneakers, and Puma is a brand offering up a whole lot of them as of late.

Adidas steps away from TV advertising as it targets $4 billion growth

Adidas is leaving behind TV advertising as it seeks to quadruple its e-commerce revenues by 2020, Chief Executive Kasper Rorsted told CNBC.  Rorsted said the firm would focus primarily on digital channels to capture younger consumers, a crucial demographic for the sports clothing line.  Rorsted took to the helm of Adidas last year and has placed increased digital retail sales at the centre of his overhaul strategy, aiming to grow revenues from 1 billion euros ($1.06 billion) in 2016 to 4 billion euros ($4.25 billion) by 2020.  Rorsted is lauded with having significantly boosted e-commerce sales while at the helm of German chemical and consumer goods company Henkel.

Cosmetics & Pharmacy

Ulta Delivers Strong Fourth Quarter and Full Year

Ulta Beauty (ULTA) announced financial results for the thirteen week period (“Fourth Quarter”) and fifty-two week period (“Fiscal Year”) ended January 28, 2017, which compares to the same periods ended January 30, 2016.

“The Ulta Beauty team delivered outstanding fourth quarter results, capping an exceptional year of sales and earnings growth while investing to drive market share gains and create sustainable long term shareholder value,” said Mary Dillon, Chief Executive Officer. “We are confident in our outlook for continued success in 2017 as we execute our strategy to be a destination for All Things Beauty, All in One Place™. Our new brand pipeline is very healthy and we are particularly excited to announce the addition of the Estée Lauder Companies’ MAC brand, which will launch on Ulta.com and begin to roll out to stores this spring.”

CVS Health PBM Clients Achieve Lowest Drug Trend in Four Years

CVS Health’s pharmacy benefits management clients achieved the lowest drug trend in the past four years, despite rising drug prices. CVS Caremark clients saw their prescription drug trend drop to an average of 3.2% compared to 5.0% in 2015, according to the company. In addition, 38% of CVS Caremark commercial clients achieved a negative trend, which means they actually spent less on their prescription benefit in 2016 than they did in 2015, despite rising drug prices. Out-of-pocket costs for members also dropped 3.0% compared to the previous year.

Discounters & Department Stores

Neiman Marcus Mulls Sale, With Hudson’s Bay Seen as Suitor

Neiman Marcus Group Ltd., the struggling department-store chain that scrapped plans in January for an initial public offering, is considering a sale of the company instead.  Neiman Marcus is in talks with Hudson’s Bay Co., the owner of Saks Fifth Avenue, about a buyout of the upscale retailer, according to the Wall Street Journal. The deal would exclude Neiman Marcus’s nearly $5 billion in debt, the newspaper reported.  The takeover speculation follows Neiman Marcus’s announcement Tuesday that it’s working with financial advisers on a review of its strategic options, which may include selling part or all of its business. The company also wrote down its brand and other assets by $153.8 million last quarter and rejiggered its corporate structure to give it more financial flexibility.

Macy’s next CEO wants to make these 5 big changes at the store

Your local Macy’s store may soon look a lot different.  Roughly one week before President Jeff Gennette takes the reins from longtime CEO Terry Lundgren, the incoming chief executive gave Wall Street a taste of what the company’s future might look like.  Speaking at the Bank of America Merrill Lynch Consumer & Retail Technology Conference in New York City Tuesday, Gennette walked investors through five tests Macy’s is conducting that could eventually be rolled out across its fleet.

Gordmans Stores Files for Bankruptcy With Plan to Liquidate

Gordmans Stores Inc., the century-old discount department store chain, filed for bankruptcy with plans to liquidate its inventory and assets.  The company, which posted losses in five of the past six quarters, listed total debt of $131 million in Chapter 11 papers filed Monday in Nebraska federal court. Gordmans said in a statement that it has an agreement with Tiger Capital Group and Great American Group “for the sale in liquidation of the inventory and other assets of Gordmans’ retail stores and distribution centers,” subject to court approval or a better offer.  For now, the chain will operate “as usual without interruption,” Chief Executive Officer Andy Hall said in the statement.

Wal-Mart continues its e-commerce shopping spree, snapping up ModCloth

It’s official.

Wal-Mart on Friday confirmed that it has acquired ModCloth, a specialty online apparel retailer that caters to curvy women.

The announcement comes two days after a report by fashion blog Jezebel said a deal between the two was imminent. It also marks Wal-Mart’s fourth digital acquisition since September, when it closed its $3.3 billion purchase of Jet.com.

The company did not disclose the price it paid for ModCloth. However, a spokesman said it was “along the same lines” of the previous two companies Wal-Mart snatched up. Wal-Mart purchased Shoebuy for $70 million in December. And last month, it bought outdoor apparel retailer Moosejaw for $51 million.

Grocery & Restaurants

Ruby Tuesday considers sale

Ruby Tuesday Inc. said on Monday that it is exploring strategic alternatives — including a potential sale of the company — as it looks for ways to recover from more than a decade of sales and stock price declines. The Maryville, Tenn.-based bar-and-grill chain has retained UBS as its financial advisor to assist in the process. The company said it would explore all options, including options other than a sale.

NPC to buy 62 more Wendy’s units in $53M deal

NPC International Inc. plans to expand its Wendy’s holdings with the agreement to buy 62 burger restaurants from Valenti Mid-Atlantic Management LLC, the company said Thursday. Overland Park, Kan.-based NPC, which also is Pizza Hut’s largest franchise group, said it would pay $52.6 million plus additional working capital. NPC also agreed to acquire the property at six locations from Valenti Mid-Atlantic Realty for $3.6 million. The Wendy’s units are in south-central Pennsylvania in the Harrisburg and Allentown markets.

Noodles & Co. sells $31.5M in shares to investment firm

Noodles & Co., looking to raise cash amid store closures and sales challenges, said Tuesday that it has sold $31.5 million in stock to the investment firm Mill Road Capital. The stock sale is the second in the past month for the Denver-based noodle chain, which in February sold $18.5 million in preferred stock to the private equity group L Catterton.

Home & Road

Williams-Sonoma Q4 Profit Tops Street

Williams Sonoma Inc. reported adjusted fourth-quarter earnings above expectations and said its board of directors authorized a dividend increase.  In a separate announcement, the company said Sandra Stangl, president of its Pottery Barn brands, will resign from the company March 31.

The retailer earned $145 million, or $1.63 a share, in the quarter ended January 29, compared with $141 million, or $1.55 a share, in the year-ago period. Adjusted for one-time items, Williams Sonoma earned $1.55 a share, beating analysts’ estimates of $1.50 per share.  Sales fell to $1.582 billion from $1.586 billion a year ago. Online revenues increased 2.2% to $809 million from $792 million in the year ago-period. E-commerce generated 51.1% of total company net revenues the fourth quarter and 49.9% of total company net revenues in the full year.  For the full fiscal year, net revenues grew 2.2% to $5.08 billion, versus $4.97 billion last year.

Will being more like Home Depot work for J.C. Penney?

J.C. Penney is looking more like a home improvement store with every passing day. That’s not such as stretch given that Marvin Ellison, CEO of J.C. Penney, is drawing on his experience as an executive at Home Depot in his effort to turn around the department store chain.

Penney recently announced plans to expand the sale of major appliances to 100 more stores while adding home improvement categories, including ceiling fans, home safes, power tools and wallpaper, to its merchandising mix. Management also announced a pilot program to test a bathroom remodeling service in addition to an existing deal it has with Trane to install heating and air conditioning equipment.

Jewelry & Luxury

Ivanka Trump Fine Jewelry Is Officially Over

In February, JCK news director Rob Bates wrote about the uncertainty surrounding the Ivanka Trump Fine Jewelry collection. At the time, retailers were saying the company was only shipping existing styles, and communication from the brand was uncharacteristically patchy.  Would it stay or would it go?

The suspense ended Monday, when the company released a statement confirming that the fine jewelry collection Ivanka Trump launched in 2007 is being discontinued.

Tiffany & Co. Plans to Speed Things Up

Tiffany & Co. hasn’t traditionally allowed analyst questions on its conference calls, but investors must have had a lot built up. When executives opted to take questions today, they fielded a solid hour of inquiries, until vice president of investor relations Mark Aaron finally cut things off.

The storied retailer posted better-than-expected, if still uneven, results, which chairman and interim CEO Michael J. Kowalski termed “disappointing.” Comps came in flat for the fourth quarter (ended Jan. 31) and down 5 percent for the year. But profits, though down 3.3 percent for the quarter, beat Wall Street expectations, and analysts were generally heartened by the results. In particular, they seemed pleased that Tiffany had stabilized formerly falling sales under the $500 price point.

Swatch Group Sees Sales, Profit Sink in 2016

Swatch Group reported a drop in net sales and income in 2016 amid a “very challenging economic environment” in which watch sales continued to decline.

In its full-year financial report released Thursday, the company said net sales were $7.58 billion, an 11 percent decrease year-over-year at both current and constant exchange rates. Net income was $594.9 million, a 47 percent drop, while operating income was $806.8 million, which is a decrease of 45 percent over 2015. The company said that 2016 was “marked by worldwide turbulence in a very challenging economic environment.”

Office & Leisure

Party City strikes a deal in the Carolinas

Party City (NYSE:PRTY) announces that it signed a $31M deal to acquire a master franchise group representing 18 franchise stores in North Carolina and South Carolina that generated sales of $44M last year.The company notes the purchase price represents a 4.6X multiple of EBITDA and that the fully synergized multiple is expected to be about 4X. “This latest franchise acquisition expands our footprint in the Carolinas and provides us with an opportunity to strengthen the brand integrity of these locations and to explore opening additional company-owned stores in this market over time,” notes CEO James Harrison.”We will continue to evaluate accretive franchise acquisitions going forward in order to expand our company-owned footprint, improve the operational efficiencies of these stores and enhance the customer experience,” he adds.

Platinum Equity Closes $6.5 Billion Fund, Purchases Staples’ Australia and New Zealand Business Units

Platinum Equity announced Monday the closing of a $6.5 billion fund and the new investment vehicle’s first acquisition, a buyout of Staples Inc.’s Australian and New Zealand business for an undisclosed sum.

The Staples transaction is indicative of the kinds of wide-ranging deals the Beverly Hills-based private equity shop will pursue through the newly-raised capital fund, according to a statement from Platinum Equity founder and Chief Executive Tom Gores.  “We have the capacity, the capability and the capital necessary to handle transactions of any size and complexity anywhere in the world,” Gores said.  Platinum Equity will leverage its management expertise to streamline the operations of the South Pacific Staples carve out.

Technology & Internet

hhgregg Bankruptcy Buyout Falls Through

In another setback for the beleaguered hhgregg, the unnamed bidder that had agreed in principal to buy the retailer out of bankruptcy has backed out of the deal. The “stalking horse” bidder — tentatively identified by the Indianapolis Business Journal as an affiliate of hhgregg ad agency Zimmerman Advertising — had signed a non-binding term-sheet agreement to acquire the chain in the wake of its Chapter 11 filing last week. But the 132-store CE, majap and furniture merchant announced late yesterday that the two parties failed to reach a definitive purchase agreement, and the deal has since been terminated.

Intel Buys Mobileye in $15.3 Billion Bid to Lead Self-Driving Car Market

In the world of driverless cars, household names like Google and Uber have raced ahead of rivals, building test vehicles and starting trials on city streets. But when it comes to what is under the hood, an array of lesser-known companies will most likely supply the technology required to bring driverless cars to the masses. And in a $15.3 billion deal announced on Monday, Intel moved to corner the market on how much of that technology is developed. The chip maker’s acquisition of Mobileye, an Israeli company that makes sensors and cameras for driverless vehicles, is one of the largest in the fast-growing sector and sets the stage for increasing competition between Silicon Valley giants as well as traditional automakers over who will dominate the world of autonomous cars.

Finance & Economy

Inflation is back, but economy remains weak

If the Federal Reserve had any doubts about raising interest rates, the government’s latest inflation data should help put them to rest.  As Fed policymakers wrapped up their latest two-day meeting, the central bank was widely expected to boost interest rates as the labor market continues to tighten and inflation moves well into their longstanding target range.  Despite the acceleration in price gains, though, the overall strength of the economy remains relatively weak.  In the past, the Fed has typically sought to use higher rates to cool off inflation and offset future price increases. But Fed Chair Janet Yellen told senators on Capitol Hill last month that uncertainty about the incoming Trump administration’s policies has made the central bankers’ job more complicated.

Job Surge Fuels Bidding Wars for Record-Low Supply of U.S. Homes

Buyers are clamoring as an improved job market and growing confidence in the economy collide with rising mortgage rates — yet there’s little new inventory for them to purchase. Housing starts remain well below levels before the last recession, and builders have focused on higher-end properties out of reach for many people.  The three months through January had the fewest homes on the market on record, according to an analysis by Trulia. Prices jumped 6.9 percent in January from a year earlier, the biggest increase for any month since May 2014, data from CoreLogic Inc. show.

Americans spent slightly more at retail stores last month

Americans spent only slightly more last month at retail stores compared with January, a sign of consumer caution despite rising optimism about the economy.  The Commerce Department said retail sales ticked up a seasonally adjusted 0.1 percent in February, after a much bigger gain of 0.6 percent the previous month. January’s gain was revised higher.  The figures suggest that strong job gains this year, near record-high stock prices and decent pay gains haven’t yet lifted spending. Economists note that spending was likely held back by delays in tax refund payments.