August 21, 2017 Consensus

The Weekly Consensus – August 21, 2017 (Volume 9, Number 32)

The Big Story
GGP Makes a Play to Bring Real Life to Digital Brands
Michael A. O’Hara

Politely pushing through the crowds of private equity investors, venture capitalists and commercial lenders that clogged the Nasdaq Marketsite’s auditorium, Erin McCarthy made a beeline for the founders of an emerging consumer experience brand who had just descended the stage at Consensus’s Next Great Consumer Brands event.  Unlike the 300 or so other attendees of the May 2017 event, Ms. McCarthy had a different kind of capital to offer to presenters: retail real estate.

One might find it peculiar for a real estate executive to attend a conference dominated by ecommerce companies.  But for Ms. McCarthy, who is VP of Retail Development at GGP (formerly General Growth Properties), these companies are just what she is looking for.  In her role, she is charged with the task of bringing innovative potential users of retail real estate to the high-quality regional shopping centers owned and operated by America’s second largest mall operator.

Ironically, McCarthy partially owes her current job to the threat that ecommerce companies pose to mall operators.  Growth in ecommerce in recent years has increasingly pulled shoppers away from physical stores, resulting in significant dislocation.  Certain media outlets have declared brick and mortar retail dead; a victim of the so-called “retail apocalypse”.  However, the notion that ecommerce is preordained to simply replace physical retail is an oversimplification.  Many ecommerce companies have encountered problems such as high customer acquisition costs, low customer loyalty, and the fact that not everyone shops online.  Certain companies, including Warby Parker, Bonobos, Blue Nile and even Amazon have responded to these issues by opening physical stores to engage with customers and reinforce their brands in new ways. Meanwhile, brick and mortar retailers and landlords are trying to adapt and retain shoppers.

Enter Ms. McCarthy. She and her colleagues at GGP are working to help ecommerce companies that want to spur growth with physical stores – an endeavor that may help them to identify GGP’s tenants of the future. They have begun to scour the web and conferences like ours to find brands that have a distinct voice and a real audience online, and help these businesses develop a concept that works in the physical world.  This week, in conjunction with pop-up store experts The Lion’esque Group, GGP will launch its “irl” initiative.  Irl, which stands for “in real life,” is billed as a “living lab for retailers that delivers an immersive experience and rebuilds the human connection between brands and consumers in today’s digital age within an omni-channel storefront.”  GGP and Lion’esque will provide 14 emerging and digitally native brands with prime real estate in the iconic Water Tower Place on Chicago’s Miracle Mile, staffed by personnel trained in both traditional retail techniques and in each brands’ product offering.  GGP and Lion’esque will also provide the brands the type of traffic and customer experience data these firms are used to mining online.  If irl is successful, it could help incubate and nurture a new generation of omni-channel brands, an outcome that would be mutually beneficial for both the young companies and GGP.

The retail sands are indeed shifting, but more and more it is becoming clear that great brands need to be everywhere their customers are.  Through irl, GGP is giving a group of promising digitally native brands a low-risk opportunity to test the theory that thriving online doesn’t mean you can’t also succeed “in real life.”

 

Headlines of the Week

Foot Locker sales miss weighs on sector’s stocks

Foot Locker Inc. followed its athletic-wear store peers in reporting far worse-than-expected same-store sales in its latest quarter, a sign that the “athleisure” market may be running out of steam.  The key industry metric, which measures sales in stores open at least a year, slid 6% compared with the 1.7% growth forecast by Consensus Metrix. The figure is Foot Locker’s first negative comparison since 2009, according to Citi Research.  Declining or slowing sales at sports retailers could be evidence that the once-hot athleisure trend, or the trend of wearing workout clothing in nonathletic settings, is cooling down. The popularity of yoga pants and performance wear has boosted athletic-wear makers for years but a lack of product variation have caused sales to slow.

Staples spinning off retail business

It’s official: Staples’ new private equity owner, Sycamore Partners, plans to split up the office supplies seller by spinning off its retail operations from its corporate sales unit. Staples said it expects to separate its U.S. retail business and Canadian retail businesses into two separate Sycamore-affiliated entities. The carveout transactions would be independently financed and yield $1.35 billion for Staples Inc. Post-spinoff they would be run and managed independently, according to the filing. The remaining Staples business would then be the current North American Delivery unit, which includes Staples Advantage and Quill.com. To finance the transaction with Sycamore, Staples expects to take out a total of $4.25 billion in debt.

Apparel & Footwear

Victoria’s Secret Owner Drops to Six-Year Low on Weak Forecast

L Brands Inc. tumbled to its lowest level in almost six years after disappointing investors with its profit forecast, a sign that the company’s comeback is still a ways off. The outlook underscores the troubles Victoria’s Secret has had connecting with younger customers. Shoppers have been shifting toward cheaper, less-supportive lingerie like bralettes — a category where the company faces competition from American Eagle Outfitters Inc.’s Aerie brand and e-commerce players. On top of that, consumers are skipping trips to the mall, and many are spending more money on travel and technology than apparel. Same-store sales at Victoria’s Secret plunged 14 percent last quarter, a deeper drop than the 12 percent decline predicted by analysts.

Gap Shares Rise as Old Navy Again Boosts Results, Forecast

Clothing retailer Gap Inc reported better-than-expected second-quarter results and raised its full-year profit forecast, helped by strong demand for Old Navy products, fewer discounts and better managing inventory. Gap’s same-store sales increased 1 percent in the three months ended July 29, rising for the third straight quarter. Analysts were expecting sales to be flat year-over-year. Since becoming Gap’s chief executive in 2015, Art Peck has reinvigorated the Old Navy brand, its biggest revenue contributor, through celebrity tie-ups, social media campaigns and better styles – dresses, pants, mid-tops and shorts did well in the latest quarter. Peck has also focused on Gap’s supply chain, taking a leaf out of the book of fast-fashion retailers such as Zara and H&M, by reducing the time taken to bring latest fashion from the ramp to stores.

Coach Comeback Continues, But It’s Fragile

Coach’s years-long efforts to rehabilitate its upscale aura continued to pay off as the handbag maker reported its a fifth straight quarter of rising comparable sales in North America for its namesake brand. However, the company’s stock fell over 7% in pre-market trading, as the company’s forecasts for the current fiscal year fell short of expectations. The New York-based company has taken steps such as cutting back drastically on promotions, getting out of dozens of wilting department stores, closing many of itself stores, and establishing itself as a ‘fashion-forward’ company in the three years since Victor Luis launched his turnaround.

Athletic & Sporting Goods

Rawlings Sues Easton Over Confusing Baseball Bat Branding

Two baseball equipment companies are going to battle in the Eastern District of Missouri over the use of what could be considered a confusingly similar design applied to baseball bats. Rawlings Sporting Goods Company has sued Easton Diamond Sports, claiming that Easton, through its S150 bats, has ripped off Rawlings well-known and distinctive 5150 products.  Rawlings is trying to rush a preliminary injunction through the court on this case, as it believes that Easton is preparing to release the purportedly infringing bats on September 1.

Cosmetics & Health

WBA and Rite Aid withdraw Deal for 2,000-plus Stores, to Refile

Walgreens Boots Alliance and Rite Aid filed notice with the Securities and Exchange Commission that the companies would be withdrawing its initial deal to acquire 2,186 Rite Aid stores, and will refile that agreement by Friday, August 18. That will reset the clock on the waiting period under the HSR Act with to Sept. 18, 2017, unless otherwise extended or terminated. Following the termination of the deal to acquire Rite Aid outright, Walgreens Boots Alliance and Rite Aid on June 29 had agreed to a new deal under which Walgreens Boots Alliance would purchase almost 2,200 stores and three distribution centers from Rite Aid for $5.2 billion in cash.

CVS to Purchase 20 Fagan Pharmacies, Close 12 Locations

CVS Pharmacy and Fagen Pharmacy announced that CVS will acquire 20 Fagen Pharmacy locations in northwest Indiana and northeast Illinois. CVS Pharmacy will continue to operate eight of the locations as CVS pharmacies after they are converted and renamed by late September. The remaining 12 Fagen Pharmacy locations will close and all pharmacy files will be transferred to nearby CVS Pharmacy locations. CVS Pharmacy also expects to hire many of the Fagen Pharmacy employees currently working at these locations.

 

Yellow Wood Partners Announces Acquisition of Freeman Beauty

Yellow Wood Partners, a Boston-based private equity firm focused on investing in consumer brands and companies, announced the acquisition of Freeman Beauty, a leading specialty beauty company with a portfolio of brands across the skin care, hair care, foot care and specialty bath and body categories, from Champlain Capital, a private equity firm with offices in San Francisco and Boston.  Yellow Wood is investing in Freeman in partnership with CEO Jon Achenbaum and the company’s senior management team. Freeman’s iconic brands serve categories with explosive growth and include Feeling Beautiful, the #1 facial mask brand in the mass market.

Discounters & Department Stores

Walmart’s online sales soar as it seeks to catch Amazon

Walmart’s recent spending spree to try to catch up to Amazon seems to be paying off.

The world’s largest retailer said Thursday that online sales soared 60 percent in the past three months as people shopped more at Walmart.com, Jet.com and its other websites.

Walmart had paid more than $3 billion for Jet last year, and since then picked up smaller players including ModCloth and Moosejaw. It is also expanding online grocery ordering to more stores, and is adding giant automated kiosks to 100 locations so customers can pick up online orders without waiting for employees to fetch them.

 

TJX Flexes Its Brick-and-Mortar Muscles

It’s back to business as usual at TJX Cos. Inc. And by that, I mean the company is once again serving a slice of humble pie to the long list of retailers that are bemoaning declining store traffic and slowing sales. TJX, the parent of off-price powerhouses T.J. Maxx, Marshalls and HomeGoods, reported on Tuesday that comparable-store sales in the latest quarter were up 3 percent over the same period a year earlier. It also raised its earnings guidance for the full year. TJX appears to have returned to form, with healthy growth in comparable sales after a slowdown the previous quarter.

‘Green shoots’ emerge as Target pulls out of yearlong sales slump

Target Corp.’s wide-ranging efforts to lower prices, offer more stylish fashions and improve its website and groceries seem to be paying off. Those initiatives helped pull the Minneapolis-based retailer out of a yearlong sales slump as it struggled to keep up with Walmart and Amazon. On Wednesday, Target reported better-than-expected second-quarter results with comparable sales rising 1.3 percent, mostly driven by a 32 percent jump in online sales. Wall Street approved, sending Target’s shares up 4 percent. But analysts remained a bit tempered in their excitement because Target said it would increase its capital spending to remodel more stores next year and continue lowering prices and also indicated the shift to online sales would continue to weigh down profits.

 

Grocery & Restaurants

East Hampton Sandwich Co. gets a growth investment

East Hampton Sandwich Co. has received a growth investment from the Dallas-based private equity firm CIC Partners.  Terms of the deal were not disclosed.  East Hampton is a five-year-old, fast-casual sandwich chain based in Dallas with eight locations and two more to be opened in Houston.  The company hopes that the investment from CIC will help provide it with the funds and expertise to help it grow in Texas and beyond.

CapitalSpring takes majority stake in Beef ‘O’ Brady’s parent

CapitalSpring has acquired a majority stake in FSC Franchising Co. LLC, the franchisor of Beef ‘O’ Brady’s and The Brass Tap.  The investment company also owns a majority stake in family-dining chains Shari’s Café & Pies and Norms Restaurants.  The previous majority owners were Los Angeles-based private-equity firm Levine Leichtman Capital Partners.

 

Home & Road

Home Depot Posts 6% Sales Growth amid Strong Housing Market

The Home Depot reported second quarter sales rose 6.2% to $28.1 billion. Overall same-store sales in the quarter rose 6.3%, handily beating the Consensus Metrix analyst expectation for 4.9% cited by Reuters. Net earnings for the quarter rose 14.2% to $2.7 billion, or $2.25 per diluted share, compared with net earnings of $2.4 billion, or $1.97 per diluted share, in the year-ago quarter. E-commerce sales grew 23%. The home improvement retailer raised its fiscal 2017 projections and now expects sales to grow approximately 5.3%, same-store sales to grow approximately 5.5% percent and diluted earnings to grow approximately 13% percent from fiscal 2016 to $7.29 per share. Unlike retailers in other markets, the robust housing market is providing a healthy sales environment for home improvement retailers in general and Home Depot in particular.

Amazon’s Home and Kitchen Categories Growing 25 Percent Annually

Amazon’s home and kitchen sales hit $7.6 billion in 2016, with the housewares category accounting for 15 percent of growth, according to a recent One Click Retail report. And housewares continue to perform well: from Jan. 1 through Prime Week this year, the retailer sold $3.8 billion of housewares in the United States alone. The report, called the Amazon Home & Kitchen Q1 & Q2 2017 Update, analyzes both the retail giant’s category growth for 2016, as well as for the first two quarters of 2017 in the United States, United Kingdom and Germany. The virtual Amazon Home store— which offers home and kitchen products, furniture and appliances—continued its upward climb as consumers switch to online buying from brick-and-mortar stores, One Click Retail said.

Jewelry & Luxury

Costco Ordered to Pay Tiffany $19M-Plus in Trademark Lawsuit

A federal judge has ordered Costco to pay Tiffany & Co. $11.1 million in damages plus, interest, in addition to the $8.25 million a jury awarded Tiffany last year in its trademark infringement lawsuit against the warehouse club. Tiffany sued Costco Wholesale Corp. in early 2013 for selling rings in their stores next to signage labeled “Tiffany” as a standalone term, without the use of a modifier such as “setting,” “set,” or “style.” While Costco argued in a countersuit that “Tiffany” had become a generic term that could be used by any company to describe a particular style of ring setting (multiple slender prongs holding a single stone), U.S. District Judge Laura Taylor Swain disagreed, throwing out Costco’s countersuit and granting the jeweler’s motion for summary judgment in 2015.

US Jewelry and Watch Sales Hit a Record High Last Year

The U.S. Commerce Department’s Bureau of Economic Analysis has released its revised figures for personal consumption expenditures by product type for 2016, an index that includes spending on jewelry and watches. According to the report, Americans spent $85.4 billion on jewelry and watches last year, a record sales number. This is an increase from the preliminary 2016 figure the bureau released in February this year, which listed the amount at $80.9 billion.

Why the UK’s Leading Jeweler Bought Mayor’s

Aurum Holdings, the leading jeweler in the United Kingdom, says its purchase of Mayor’s Jewelers is part of a larger plan to enter the U.S. market.  Aurum is paying $104.6 million to the Birks Group for the 17-store chain, which includes 16 Mayors stores and one Rolex boutique. The Mayor’s acquisition is “the biggest deal we have ever done,” says Aurum CEO Brian Duffy. “It’s a huge huge deal for us. “We have admired Mayor’s for some time,” he adds. “It has a similar culture as our own. There are things we can learn from Mayor’s. There are things we can bring to Mayor’s. We hope to accelerate investment, by investing in stores, investing in marketing, looking to see what opportunities are available.”

 

Office & Leisure

‘Angry Birds’ Maker Rovio Could Launch IPO Next Month

Rovio, the Finnish firm that makes the popular Angry Birds games, is reportedly planning to go public soon. According to a Monday Bloomberg report, a local IPO could net Rovio $400 million and value the company at around $2 billion. The IPO could take place as early as September. Last year was a good one for Rovio, bringing the company back into profitability after a precarious couple years that saw the firm dabble in a variety of non-gaming areas, not always successfully. Rovio attributed its 2016 fillip to both a record performance in its games division and the success of the first Angry Birds movie (a sequel will come out in 2019).

 

Technology & Internet

Amazon’s private label business is booming thanks to devices, expanded fashion lines

Amazon has been doubling down on its private label business in recent months, though many of its own brands aren’t easily identifiable to consumers as they don’t indicate they’re Amazon-made products. But these private labels have been gaining steam, according to a new report out this week from 1010data. Several Amazon brands have been seeing tremendous growth, it found, including AmazonBasics, kids’ clothing brand Scout + Ro, Amazon Elements, and other Amazon-made devices like Echo, Kindle, and Fire TV.

 

SharkNinja, CDH Reach Strategic Investment Agreement to Accelerate Global Growth

CDH Investments entered into a definitive agreement to purchase a significant equity interest in SharkNinja, a pioneer and market leader in producing highly-innovative household cleaning and kitchen small appliances. The partnership is designed to propel the growth of the SharkNinja brands and its portfolio of products internationally. The transaction will bring together the complementary strengths of the strategic partners to further reinforce SharkNinja’s global competitive edge. The company’s existing international expansion strategy will be enhanced by increased attention and resources to introduce innovative products to the homes throughout the world, with special emphasis on Asia.

 

Does Amazon Pay Taxes? Contrary to Trump Tweet, Yes

“Amazon is doing great damage to tax paying retailers. Towns, cities and states throughout the U.S. are being hurt — many jobs being lost!” President Trump tweeted Wednesday morning, echoing his earlier characterizations of the company as a “no-tax monopoly” that does not pay “internet taxes.” Mr. Trump’s suggestion that Amazon does not pay taxes is false. If Mr. Trump’s point was that Amazon did not collect sales taxes — which are owed by the purchaser and collected by the retailer — it is true that the company once avoided doing so. But that criticism is outdated. As of this April, Amazon has collected sales taxes in all states that have one.

Finance & Economy

Americans’ debt level notches a new record high

Americans’ debt level notched another record high in the second quarter, after having earlier in the year surpassed its pre-crisis peak, on the back of modest rises in mortgage, auto and credit card debt, where delinquencies jumped.  Total U.S. household debt was $12.84 trillion in the three months to June, up $552 billion from a year ago, according to a Federal Reserve Bank of New York report.  The proportion of overall debt that was delinquent, at 4.8 percent, was on par with the previous quarter. However, a red flag was raised over the transitions of credit card balances into delinquency, which the New York Fed said “ticked up notably.”

Consumer sentiment rises to highest level since January

Consumer confidence was better than expected in August, beating projections from economists surveyed by Reuters.  The consumer sentiment index, a survey of consumers by The University of Michigan, rose to 97.6 in August. Economists estimated the index would climb to 94 from the 93.4 reading in July.  “Consumer confidence rose in the first half of August to its highest level since January due to a more positive outlook for the overall economy as well as more favorable personal financial prospects,” Richard Curtin, chief economist for the Surveys of Consumers, said in a statement.