August 28, 2017 Consensus

The Weekly Consensus – August 28, 2017 (Volume 9, Number 33)

The Big Story
Not So Strange Bedfellows
Marshall Schleifman

When Alphabet launched Google Express in 2013, it surely expected the service to become bigger and more important than it has.  After all, Alphabet does not undertake initiatives to be a laggard making a small impact.  With over 30 retail partners including stalwarts Costco, Walgreens, Bed Bath & Beyond, Kohl’s and Toys R Us, Google Express is Alphabet’s entry in ecommerce –  Amazon’s domain.  One could reasonably have forecast that world-class brands and products on a world-class Google technology platform would gain momentum and become a competitive force.  Thus far, however, Google Express has unintendedly stayed below everyone’s radar.  This week, that just might change.

At the same time that Amazon takes over Whole Foods to make its big splash into bricks and mortar, Google Express has taken an important step in its effort to earn more of the digital commerce pie.  Last week, Google announced a partnership with Walmart, representing Walmart’s latest strategy to narrow the digital commerce gap between the biggest bricks-and-mortar retailer and the largest digital one.  Starting next month, Walmart’s hundreds of thousands of products will be accessible through Google Express.  However, the value of Google Express to Walmart and vice versa is not about or even the mobile app, but the next big channel of digital retailing:  voice shopping.  “When it comes to voice shopping, we want to make it as easy as possible for our customers. That’s why it makes sense for us to team up with Google,” Marc Lore, the president and CEO of Walmart U.S. eCommerce, wrote in his blog post announcing the new relationship.

While it is fun and convenient to ask Amazon’s Alexa-enabled devices “what is the weather today in New York” or instruct them to “play jazz”, the enormous commercial opportunity is to capture commands such as “buy batteries” and then leverage purchase history to conveniently confirm selection of a Duracell AA 10-pack for fulfillment.  Walmart provides Google Express with a breadth of inventory to compete with Amazon’s product selection; the Google Assistant app and voice-activated Google Home device provide Walmart with language processing and artificial intelligence functionalities to compete in voice shopping with Amazon, whose Echo today controls over 70% of the voice-enabled speaker device market (Google Home is a distant #2 at 24%, per eMarketer).  While voice-enabled shopping is still in its early days, it is expected to become a rapidly growing portion of retail sales, especially for baskets of previously purchased everyday essentials for which preferred types, brands and sizes can be pre-populated for easy reorder.

Amazon is a retailer and technology company in one.  The new partnership between Alphabet and Walmart may be the counterbalance that together can keep up.


Headlines of the Week

Google and Walmart Partner With Eye on Amazon

Google and Walmart are testing the notion that an enemy’s enemy is a friend. The two companies said Google would start offering Walmart products to people who shop on Google Express, the company’s online shopping mall. It’s the first time the world’s biggest retailer has made its products available online in the United States outside of its own website. The partnership, announced last week, is a testament to the mutual threat facing both companies from Amazon’s dominance in online shopping is challenging brick-and-mortar retailers like Walmart, while more people are starting web searches for products they might buy on Amazon instead of Google.


Amazon will lower Whole Foods prices right away and Prime members will get special discounts

Amazon is wasting no time putting its stamp on Whole Foods. The e-commerce giant said on Thursday that it would start lowering prices on popular Whole Foods grocery items starting Monday — the day its $13.7 billion acquisition closes — and eventually introduce special discounts and benefits at the grocery chain specifically for Amazon Prime members. Amazon also said that it would start placing Amazon Lockers in select Whole Foods stores so customers could pick up and return Amazon orders at the grocer.


Apparel & Footwear

Teen apparel retailer tops Street

Victoria’s Secret’s loss is American Eagle Outfitters’ gain as the teen apparel retailer posted better-than-expected second quarter results, fueled by strong demand for its Aerie lingerie brand. Revenue rose 3%, to $845 million, topping analysts’ forecast for sales of $824 million. Total same-store sales rose 2%, beating analysts’ average estimate of a dip of 0.4%. Same-store sales were flat at American Eagle, but jumped 26% at American Eagle’s lingerie brand, Aerie. American Eagle CEO Jay Schottenstein said that sales trends improved in the second quarter, with continued growth in jeans, bottoms, women’s apparel and Aerie.

Surprise Gain for DSW in Weakened Footwear Market

Roger Rawlins, CEO of off-price shoe retailer DSW Inc. wants to recreate an “emotional connection” with its customers, a must-have to be “one of the few (retail) survivors” at a time when many apparel and shoe retailers are hurting from changing consumer spending priorities and where online retailers led by Amazon are increasingly stealing share. US shoe industry sales dropped 1% to $65 billion in the 12 months ended February, hurt by declines at physical locations, according to market research firm NPD Group. Declines in categories such as shoes, where consumers use to build their wardrobe, indicates a decline in fashion as a priority, NPD has said.

Iconic Canadian Retailer Roots Seeking to Go Public

Roots Canada Ltd., the iconic retailer known for its casual wear and leather goods emblazoned with beaver logos, has hired banks to prepare an initial public offering this year, according to people familiar with the matter. Roots could seek to raise about C$200 million ($159 million), they said. The IPO comes two years after the Toronto-based company agreed to sell a majority stake to New York-based private equity firm Searchlight Capital Partners. Founded in 1973 by Michael Budman and Don Green, Roots began with one small store in Toronto. It now has more than 200 retail stores in Canada, the U.S., China and Taiwan, selling products from athletic wear and leather bags to home furnishings, according to its website.



Athletic & Sporting Goods

Callaway Golf Buys Sportswear Maker TravisMathew in $125 Million Deal

Carlsbad-based Callaway Golf Co. announced that it has completed the acquisition of the golf and lifestyle apparel company TravisMathew LLC for $125.5 million in an all-cash transaction, subject to a working capital adjustment.  TravisMathew, which will continue to operate out of its Huntington Beach headquarters, has its roots in golf but has since added other lines of clothing and accessories.  Callaway said TravisMathew’s net sales for the full year of 2017 were estimated to be $55-60 million, with around $15 million in sales added to Callaway’s second half financial results.

Clarus Corp Acquires Sierra Bullets

Clarus Corp., formerly Black Diamond Inc., has completed the acquisition of Sierra Bullets, L.L.C. for $79 million, subject to a post-closing working capital adjustment. The transaction is expected to be immediately accretive to Clarus’ earnings per share.  Since 1947, Sierra’s products have cultivated a significant consumer following recognized by its iconic “green box” packaging and include globally recognized brands such as Sierra MatchKing, Sierra GameKing and Sierra BlitzKing.  For the unaudited 12 months ended June 30, 2017, Sierra’s total revenues were approximately $32 million with EBITDA of approximately $12.5 million, representing a purchase price multiple of approximately 6.3x EBITDA. Sierra has a strong cash flow profile, generating free cash flow conversion of approximately 95% with limited ongoing capex requirements.


Cosmetics & Pharmacy

Coty Falls after Revealing Quarterly Loss

Coty offered a mixed batch of quarterly results in the June quarter, revealing a quarterly loss but generating sales that topped Wall Street expectations. The company, whose brands include Cover Girl and Rimmel make-up, said its revenues came in at $2.24bn in the fiscal fourth quarter. That represented a 5 per cent year-on-year increase on a constant current basis when the sales from Procter & Gamble’s beauty division are added into the prior year’s results.  However, Coty logged a quarterly loss of $304.8m or 41 cents a share as the company ramped up marketing spending and was hit with higher costs related to the acquisition of the P&G business.

Boots UK Partners with IRI

Boots UK announced Wednesday that it has partnered with IRI to develop and operate a range of world-class customer insight tools for its product brands. “Joining forces with a global leader in big data and analytics will allow us to know more about our customers and, more importantly, improve their experience when shopping our product brands,” stated  Ken Murphy, EVP Walgreens Boots Alliance and chief commercial officer and president global brands. “At the same time, we will give our suppliers a powerful range of tools and platforms that will significantly improve their market knowledge and result in better and faster decision making. Together, we will have a more holistic view of our customers and be able to better anticipate and cover their current and future needs.”



Discounters & Department Stores

Can An eBay Executive, Big Data, And Exclusive Brands Save Macy’s?

Can an eBay executive help pull Macy’s business out of the doldrums? Next month, Hal Lawton, senior vice president of the online marketplace, will join the department store as president amid a business restructuring aimed at “balancing the art and science of retail” with big data, according to a press statement. The restructuring will result in 100 job cuts at the 800-unit chain, which has been battling ongoing sales declines. In the era of online shopping when consumers can buy around the clock from their digital devices, retailers are feverishly focusing on boosting business by gaining deeper, actionable insight into key metrics like inventory levels and consumer buying patterns via data analytics.

The owner of HomeGoods just opened its first Homesense store. Here’s how the two compare

Who says people don’t get excited about retail anymore? Big crowds gathered outside the first Homesense store to open in the U.S. this past week in Framingham, Massachusetts. TJX, the parent company of TJ Maxx, Marshalls and HomeGoods, is rolling out another home furnishing brand, promising this one will be different.  Taking a walk inside the Massachusetts store, one will find Homesense is organized mostly by color, pairing similarly patterned pieces throughout for shoppers in need of a little creative assistance. Homesense’s lighting, art and furniture sections — they’re huge. But unlike HomeGoods, one won’t see many items for kids nor pets sold by the new brand.

Reports Of JC Penney’s Death Are Greatly Exaggerated

The last several years have not been kind to JC Penney. Not only have they been swept up in the long-term decline of the moderate department store sector, but they also hemorrhaged huge amounts of market share during Ron Johnson’s failed re-boot. Under current leadership, the picture has not improved much. In fact, last week shares sank again after a disappointing earnings report. The stock is off nearly 90% in the past five years and some 40% year to date. Many observers have concluded that Penney’s is on a slow slide to oblivion. And while I agree that much more needs to be done to right the ship, I am cautiously optimistic.


Grocery & Restaurants

Bruegger’s Bagels to be sold to Caribou Coffee

Le Duff America is nearing a sale of Bruegger’s Bagels to Caribou Coffee as it seeks to concentrate on expanding its French concepts in the U.S., the company said Thursday. Terms of the deal were not disclosed. The sale would add yet another breakfast concept to the massive number of holdings of Caribou Coffee parent company JAB Holding Co., which owns the bagel concept Einstein Noah Restaurant Group and Panera Bread Co.


Home & Road

Disappointing Q2 for Lowe’s; To Boost Store Employee Hours

It was another disappointing quarter for Lowe’s Cos., which reported lower-than-expected adjusted earnings and revenue and gave notice of slower growth in profit margin for the second half.  The home improvement company reported that its revenue rose 6.8% to $19.5 billion for the quarter ended Aug. 4, which was short of estimates. Same-store sales rose 4.5%, exceeding Street forecasts.

Williams-Sonoma Q2 Earnings & Revenues Top, Shares Up

Williams-Sonoma Inc.’s earnings beat streak continued for the fourth time in second-quarter fiscal 2017. The company reported adjusted earnings of 61 cents per share, beating the Zacks Consensus Estimate of 59 cents by 3.4%.  Shares of the company rallied 6.6% in after-hour trading after the company bettered estimates in the quarter. The company’s quarterly adjusted earnings per share also increased 5.2% from the year-ago level. Net revenue of $1.202 billion came in line with the Zacks Consensus Estimate, improving 3.7% year over year.

Jewelry & Luxury

Signet to Acquire Owner for $328M

Signet Jewelers Ltd. has acquired R2Net, the owner of online retailer, for $328 million in cash, the retailer announced. The acquisition allows Signet to add what new CEO Gina Drosos described as a “very strong, fast-growing e-commerce brand” to its portfolio and gives the retailer control of R2Net’s technology arm, Segoma Imaging Technologies, which Drosos said will enable it to “deliver a new-generation digital shopping strategy for jewelry.” These technologies include a diamond imaging camera, which can create 360-degree HD images with a 40x super-zoom and can be used on any device; 3-D imaging technology that allows shoppers to pair loose diamonds with rings; a ring try-on app; and 24/7 customer service and chat capabilities.


How TrueFacet is helping luxury watch and jewelry brands transition to digital

TrueFacet sees its latest launch as a salve for the struggling luxury watch and jewelry market. The marketplace for certified pre-owned luxury watches and jewelry will debut its new “Brand Boutiques” Tuesday, a special arm of the site devoted to selling brand-new items from 16 hard-to-find brands like Fabergé and Fendi, whose e-commerce presence is minimal at best. For some, like Les Artisans de Genève — who said it’s been courted by various major online retailers — it will be the first time their products are available online.

It’s an interesting move to make for brands, opting for a platform less established than Yoox Net-a-Porter or Farfetch, who have made waves in the luxury space by merging a high-end user experience with services like speedy shipping and returns.

Women are buying their own jewelry and brands are taking notice

In the last three months the Lyst marketplace has sold thousands of the fashion-industry favorite Sophie Bille Brahe’s Lyra ring. While not noteworthy in itself, the ring’s pricetag of $4,522 makes it an unusual pattern. “That’s a pretty large purchase to make for yourself, and online,” noted Lyst’s public relations director, Sarah Tanner. After digging into it more, the company found that the bulk of those purchases — 85 percent to be exact — were made by women. It’s a trend that seems unsurprising at the outset — women buy jewelry! — but for those in the industry, it marks a shift. For years, expensive jewelry was bought by men, mostly around holidays like Valentine’s Day, which meant both brands and marketplaces focused marketing attention around male consumers, rather than female.

It’s All About The Cycle: Retain Your Perspective During Difficult Times

For most individuals who have been in the diamond and gem world for the last 40 years, as I have, the present moment of business should come as no surprise. During these four decades, I have watched the market swing from a marathon to a stroll in the park six times. Essentially, this is the nature of business. All things that go up, especially during good economic times, will eventually hit the ceiling and then will retreat to a position where they will revive. In these six cycles, it often felt like the industry was in such a negative environment that it was hard to imagine a recovery. If you blow too much air into a balloon it will reach a point where it explodes. If you let some of the air out it can be sustained.


Office & Leisure

Don’t Wait Too Long, Samsonite

Samsonite International SA CEO Ramesh Tainwala likened M&A to a teenager seeking a girlfriend, telling Gadfly on Thursday, “it comes when it comes.” Patience is a virtue. Tainwala has proven to be a savvy dealmaker, with purchases like Tumi, the high-end luggage maker, and the online category leader padding earnings in the first half. Knowing when to pounce is key, too, and the takeover prospects in bags and luggage brands couldn’t be better for a buyer like Samsonite. Consolidation is afoot among makers of bags, shoes and accessories, as retail sales slow and companies struggle with challenged outlet and department stores. In the last three months, we saw Michael Kors Holdings Inc. buy Jimmy Choo Plc and Coach Inc. acquire Kate Spade & Co. in what’s started to feel like musical chairs among luxury labels.


Ollie, a purveyor of ‘human grade’ pet food, just landed $12.6 million in fresh funding

Ollie, a two-year-old, New York-based subscription service that sells what it calls human-grade pet food, has raised $12.6 million in Series A funding. The round was led by Canaan Partners, with participation from WME Ventures, Rosecliff Ventures, RiverPark Funds, Correlation Ventures and earlier backers Primary Venture Partners and Lerer Hippeau Ventures. It brings the company’s total funding to roughly $17 million, including a $4.4 million seed round led by Primary and Lerer Hippeau last fall. The company certainly takes dog food seriously, promising to customize recipes based on each dog’s “unique needs” as well as recommending the perfect portion and delivering that precise amount of food to its customers’ doors. It uses a third-party USDA kitchen in Pennsylvania to produce its meals, which include chicken, beef, and lamb heart dishes with butternut squash, rutabaga, chickpeas, potato, cranberries, kale, strawberries, and cod liver oil, among other ingredients that you probably do not associate with dog food (yet!). Pricing is based on a dog’s calorie needs, with small dogs starting at $3 per day, and averaging around $6 per day per dog.

Technology & Internet

Everlane’s Quest To Make The World’s Most Sustainable Denim

Making a pair of jeans creates massive pollution. But Everlane found a factory where denim by-product is turned into bricks and polluted water is filtered. “Denim is a really dirty business,” says Michael Preysman, founder and CEO of Everlane, an online clothing retailer known for transparency in pricing and manufacturing processes. After visiting thousands of factories around the world–and stumbling on an enlightened factory owner–Everlane is launching its first-ever line of jeans on September 7. The fashion industry is among the most polluting in the world, but making denim–a $60 billion global market–is particularly terrible for the environment because it pollutes the water.


What is Amazon, really?

In the beginning, sold books. Today Amazon is a titan of e-commerce, logistics, payments, hardware, data storage, and media. It dabbles in plenty more industries. It’s the go-to site for online shoppers and merchants alike, a modern necessity that independent sellers love to hate. Prime, Amazon’s signature $99-a-year membership program, has an estimated 85 million subscribers in the US, equivalent to about two-thirds of American households. To even call it an e-commerce company feels completely inadequate. Behind every Amazon business decision is the “flywheel” philosophy.

Finance & Economy

US core capital goods orders rise, shipments surge

New orders for key U.S.-made capital goods rose slightly more than expected in July and shipments surged, pointing to an acceleration in business spending early in the third quarter.  Businesses are boosting spending despite uncertainty over the prospect of tax cuts. President Donald Trump and his fellow Republicans in Congress have said they want to lower both corporate and individual taxes as part of a comprehensive tax restructuring, but few details have emerged.

US existing home sales unexpectedly fall in July

U.S. home resales unexpectedly fell in July to their lowest monthly level of the year due to a lack of properties for sale, which also continued to push up prices.  The National Association of Realtors said existing home sales fell 1.3 percent to a seasonally adjusted annual rate of 5.44 million units last month. June’s sales pace was revised slightly lower to 5.51 million units.  Economists polled by Reuters had forecast sales rising 0.9 percent to a rate of 5.57 million units. Sales were up 2.1 percent from July 2016.  Supply was down 9.0 percent from a year ago. Housing inventory has declined for 26 consecutive months on a year-on-year basis.