September 18, 2017 Consensus

The Weekly Consensus – September 18, 2017 (Volume 9, Number 35)

The Big Story
Running on Empty
Doug Stebbins

The economy continues to expand – jobless rates are at historical lows, consumer sentiment is strong, the housing market is hot, and the stock market is at all-time highs.  Then why are so many retailers struggling?  It is simple: the shopping habits of consumers have changed, and it has been hard for traditional retailers to adapt.  As ecommerce takes more and more market share, brick and mortar stores are fighting for a smaller group of shoppers.

To remain profitable off a smaller revenue base, traditional retailers are trying squeeze as much cash as possible out of each location.  Staffing, hours, and store footprint are all being tweaked to try to keep expenses under control and get more out of less.  Another key retail metric that is being actively managed to optimize cash flow is inventory levels.  A retailer’s ability to turn merchandise into cash in a timely manner is critical.

The inventory belt-tightening began after the financial crisis of 2008 through 2009, with retailers trying to remain profitable in the face of a sudden drop in consumer demand.   We looked at over 100 publicly traded retailers and found that prior to the recession, median inventory turns (COGS/average inventory) was 3.3x.  In the immediate wake of the recession, inventory turns jumped to around 3.7x as retailers cut back on merchandise purchases.  But increased pressure from online competitors have forced brick and mortar retailers to continue to keep inventory levels efficient.  Over the recent years, inventory turns have averaged around 3.5x.

Nordstrom has taken the inventory fight to a whole new level.  Last week, the company announced that it will open a concept store in West Hollywood, California that will carry virtually no inventory.  Rather than going to the store to peruse the racks, in this concept store, a shopper would meet with a stylist and, based on those conversations, clothes will be brought in for pick-up at a later date or delivered to the consumer’s home.  People who have grown up shopping regularly online do not feel the need to physically perform the treasure hunt to find what they want.  They are perfectly happy having a search engine or stylist do that grunt work for them.  Nordstrom’s strategy is not necessarily about improving operating efficiency, but instead adopting to new consumer habits.

Shopping centers have also evolved to conform to changing consumer habits.  Landlords have actively embraced services and experiential-type tenants to take storefronts formerly reserved solely for retailers.  You may have noticed medical clinics, veterinarians, fitness centers and entertainment venues like “Escape the Room” occupying high profile locations in retail centers.  The Nordstrom concept store it is more about offering the “experience” of shopping rather than the “function” of shopping.  That type of outside-the-box thinking might seem extreme, but the dislocation occurring throughout the retail landscape suggests that new ideas and bold new strategies are needed. Nordstrom’s latest experiment may not ultimately prove to be a home run, but these days, inaction or trying to compete without doing anything differently seems like a sure fire way to strike out.


Headlines of the Week

Nordstrom’s new idea: A neighborhood store that doesn’t stock clothes

Nordstrom will open its first “Nordstrom Local” store next month in Los Angeles, testing a new model for the fashion retailer: a small, neighborhood ‘hub’ that will have no clothing in stock and will focus instead on digital sales, customer service and tailoring. Nordstrom has managed through a rough decade for full-line department stores by responding to the trends that are disrupting the retail market — developing its e-commerce capabilities and expanding its off-price Nordstrom Rack stores. The Local effort, if successful, could add another element. It’s “the first downscaling of the department store concept,” said Neil Saunders, managing director at GlobalData Retail.

Nordstrom shares rise as family nears deal with Leonard Green to take retailer private

Nordstrom shares opened 5 percent higher Wednesday after CNBC reported a Nordstrom family group was closing in on a deal with a private equity firm to help take the department store private. Nordstrom family members were close to choosing Leonard Green & Partners to help fund a buyout of the eponymous department store, people familiar with the matter said Tuesday. Leonard Green would provide Nordstrom family members with roughly $1 billion in equity to help fund the deal, the sources said.



Apparel & Footwear

Roots Is Said to Seek C$700 Million Valuation in its IPO

Roots Corp., the Canadian retailer known for its casualwear and leather goods, filed for an initial public offering in Toronto. The retailer is seeking to raise about C$200 million in the share sale this month and could have a market value of about C$700 million ($574 million) after listing, according to people familiar with the matter who asked not to be identified because the matter isn’t public. The company plans to trade on the Toronto Stock Exchange under the symbol ROOT. Roots reported sales of C$281.9 million in fiscal 2016, up 10 percent from the previous year, the filing shows. Its net income fell to $8.1 million from $16.5 million over the same period. 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.

Aerosoles Files for Bankruptcy to Seek a Sale or Refinancing

The maker of Aerosoles flexible-sole footwear filed for bankruptcy as it looks to sell or refinance around its e-commerce unit. AeroGroup International, established in 1987 through a buyout of a Kenneth Cole division, estimated around $109 million in debt as of Friday’s Chapter 11 filing, and said it plans to continue evaluating store closings. It operates 78 stores across the U.S., after closing around 30 in 2016. The New Jersey-based footwear maker seeks a proposal to buy or finance a business around its wholesale and e-commerce units, joining a raft of retailers affected by changing consumer habits and the growth of online shopping. The company said it wants a proposal within 60 days to exit Chapter 11 by the end of the year.

LK Bennett founder buys out remaining stake in her label

LK Bennett founder Linda Bennett has increased her stake in the company by purchasing the remaining equity from private equity owner Phoenix Equity Partners. The deal was made for an undisclosed sum. Bennett, who opened the first LK Bennett store in 1990, first sold her business in 2008 to Phoenix Equity Partners and Sirius Equity for an estimated £100 million. While Bennett continued on as one of the retailer’s biggest shareholders, it was only earlier this year that she returned to the business as a consultant. LK Bennett today boasts over 130 shops in more than 30 countries, as well as hundreds of concessions.



Athletic & Sporting Goods

Under Armour unveils footwear design center near Nike headquarters

Under Armour has unveiled a footwear design and development center in Portland, Ore. It’s less than a dozen miles from the global headquarters of Nike, its archrival.  The Baltimore brand calls the center an “innovation hub.” It includes a biomechanics lab and training center for athletes to test products.  The building underscores Under Armour’s footwear emphasis. “Footwear is a key driver of our long-term growth and success,” said Peter Ruppe, senior vice president for footwear, in a written statement.  It also demonstrates the company’s willingness to compete in what was once Nike’s domain.

Monomoy Capital Partners Completes the Acquisition of West Marine, Inc.

Monomoy Capital Partners, a New York private equity fund focused on constructive investing and business improvement in the middle market, announced that it has successfully completed the acquisition of West Marine, Inc.  at a price of $12.97 per share or a total of approximately $337 million. The transaction was originally announced on June 29, 2017, and West Marine’s stockholders approved the acquisition on September 12, 2017.  West Marine is the largest specialty retailer of boating supplies and accessories in the United States, with 249 stores located in 37 states and Puerto Rico.

Cosmetics & Pharmacy

Walgreens Said to Tweak Rite Aid Deal to Gain U.S. Approval

Walgreens Boots Alliance Inc. is poised to revise its agreement to buy individual Rite Aid Corp. stores, a move that may be enough to resolve outstanding antitrust concerns and clinch U.S. approval for a deal the companies have been pursuing in different forms for two years, said people familiar with the matter. Walgreens is in the final stage of negotiations with the Federal Trade Commission about its plan to buy more than 2,000 Rite Aid stores and is set to propose a modified deal that could be announced as soon as Monday, according to three people, who declined to be identified because the talks are confidential. The deal would be a hard-won victory for Walgreens and its Chief Executive Officer Stefano Pessina, who has doggedly pushed for a transaction that could clear regulatory approval since the fall of 2015.


Discounters & Department Stores

Neiman Marcus Is Closing More Than 25% of Its Outlet Stores

Neiman Marcus is taking a step back from the discounting precipice. The luxury retailer, which has long been grappling with steep sales declines at its full-service department stores, said on Tuesday it was closing 10 of its 38 Last Call outlet discount stores, to better focus on its highest-end locations. The Dallas-based company had said in July that it would review the Last Call chain physical presence. Now, Neiman Marcus has determined it is better off putting more eggs in its full department store business, which includes Manhattan’s iconic Bergdorf Goodman store and its upcoming New York City store.


Grocery & Restaurants

Cafe Rio acquired by Freeman Spogli

Freeman Spogli & Co. has acquired a majority stake in Cafe Rio Mexican Grill. Terms of the deal were not disclosed. But existing management of the fast-casual Mexican chain, which has more than 100 units in 11 states, will remain and will keep “a meaningful equity stake” in the business.


Nestlé buys majority stake in Blue Bottle Coffee

Nestlé has acquired a majority stake in Oakland-based Blue Bottle Coffee, intensifying the growing battle over pricier, higher-end coffee. The deal values the fast-growing Blue Bottle chain at $700 million, according to a Financial Times report, and brings another, massive coffee giant into the burgeoning specialty coffee market. Nestlé reportedly bought a 68-percent share of the company. Blue Bottle has gained a reputation among consumers willing to pay high prices for high-quality coffee — and attracted tens of millions in investment along the way. Blue Bottle is expected to grow to 55 coffee shops in the U.S. and in Japan by the end of the year, from 29 at the end of last year. The company has also launched premium, ready-to-drink coffees, as well as ground coffee products in online and retail shops. Nestlé, meanwhile, is the biggest coffee producer in the world, with brands such as Nescafé and Nespresso.

Deloitte: Digital’s influence on grocery shoppers is growing

Digital’s influence on grocery overall has nearly doubled year over year, and is now impacting the in-store experience. More than half (51%) of grocery sales are digitally influenced, according to a new report from Deloitte, entitled “The Grocery Digital Divide: How Consumer Products Companies Can Deliver on the New Digital Imperative.” Digital now permeates the grocery path to purchase by influencing shoppers’ awareness, selection, purchase and loyalty, and in turn is driving new and evolving consumer habits.

Home & Road

Luxury Appliance Chain Pirch Shutting Half Its Showrooms

Pirch, the ultra-premium kitchen, bath and appliance chain, is retrenching after nearly a decade of aggressive growth. The business, widely lauded for its 10 high-touch luxury showrooms, has closed its latest, which opened last May in Austin, Texas, and plans to shut four more locales — Atlanta, Chicago, Dallas and Paramus, N.J. — by month’s end.

S.C. Johnson plans to acquire Method

S.C. Johnson & Son, known for brands such as Windex and Pledge, has signed an agreement to acquire cleaning product-makers Method and Ecover.  Method, which makes cleaning liquids in hip, curvacious bottles, opened a soap factory in Chicago’s Pullman community area in 2015. Belgium-based Ecover focuses on eco-friendly cleaning products, and both brands are owned by San Francisco-based People Against Dirty. S.C. Johnson, a private company based in Racine, Wis., didn’t disclose terms of the acquisition, which regulators in the U.S., U.K. and Germany must approve.

Jewelry & Luxury

Signet Completes R2Net Acquisition

Signet Jewelers announced Tuesday that it has completed its acquisition of R2Net, the owner of online retailer It paid $328 million in cash. The move will bring together Signet’s jewelry retail platforms with R2Net’s digital technology to help execute the former’s customer-first omnichannel strategy while also adding a millennial online retail brand to its portfolio, Signet said.’s sales have grown by 250 percent in the last two years, it noted, as consumers embrace its innovative technologies.

Luxury Brands Are In Danger Of Losing American Millennials: How To Get Them Back

Deloitte, the international consulting and financial advisory firm, recently published a report on millennials and their attitudes and purchase motivations in the luxury market. Entitled “Bling it on: What makes a millennial spend more,” it examines a survey with over 1,000 millennials, aged 20-30 years, in the U.S., U.K., Italy and China who expressed an interest in luxury spending. Many of the findings were not unexpected, such as their willingness to purchase luxury goods online and the influence of social media and brand websites as a source of information to propel their luxury purchases. But one finding popped for me: American millennials trailed far behind the other markets in their purchases of high-end fashion or luxury goods.

Richemont’s Luxury Valuation

What a difference a year makes. Richemont has swung from a massive profit warning, to firing on all cylinders. The company reported last week that sales excluding currency movements rose 12 percent in the five months to Aug. 31. That’s the fastest sales growth for the period since 2012, helped by consumers snapping up its Cartier watches and love bracelets.  It’s a far cry from last September, when Cie Financiere Richemont SA reported a slump in sales and warned that its first-half profit would fall by 45 percent. It wasn’t the only group to founder last year, and the period turned out to be the nadir for the purveyors of bling, with strong performances ever since from the luxury powerhouses.


Office & Leisure

Angry Birds maker Rovio sets price range for $1 billion IPO

Finnish mobile games maker Rovio Entertainment Ltd set a price range on Friday for its planned listing that would value the maker of “Angry Birds” at up to $1.1 billion, well below potential values cited in media reports. The company, whose business is recovering after a tough couple of years, announced its long-awaited initial public offering (IPO) this month, saying it was aiming to boost growth and to take part in gaming industry consolidation. Initial media reports had said the company could be valued at up to $2 billion in the flotation, though analysts had already questioned whether that could really be achieved. Rovio, whose games have been downloaded 3.7 billion times, grew rapidly after the original “Angry Birds” game was launched in 2009. But Rovio was slow to respond to a shift to freely available mobile games that make revenue from in-game purchases. Its business quickly declined as rival games such as Supercell’s “Clash of Clans” and King’s “Candy Crush Saga” took over.

ShelterLogic Acquires Outdoor Products Division of Transom Bravo Holdings

Transom Bravo Holdings Corp., a portfolio company of Transom Capital Group and global leader in the recreational and sporting goods markets, announced the divestiture of its Outdoor Products Division to ShelterLogic Corporation.  The Outdoor Division is a designer, innovator, manufacturer and marketer of shade canopies, outdoor chairs and related accessories.  Products from this division are sold under brands such as QuikShade, Solo, Shade Tech, Moto Shade and GO. These brands complement ShelterLogic’s existing product lines of shelters and framed canopies for residential and commercial use.

Technology & Internet

Everything You Need to Know About the Apple Watch and iPhone Release

Apple’s iPhone release event was as much about the highly-anticipated iPhone 8 and iPhone X as it was an homage to the company’s impressive feats with consumer technology over the last 10 years. Over the course of two hours on Tuesday, Apple delivered on many of the rumors of the last several months: three new iPhones (iPhone 8, iPhone 8 Pus, and the iPhone X) and a long-awaited update to Apple Watch that allows users to connect directly through cellular instead having to pair the Watch with an iPhone. And it wouldn’t be an Apple event without on-stage demos by Apple executives bragging about the new products and what they can do.

A South Dakota decision moves the online sales tax issue closer to the US Supreme Court

Since the birth of e-commerce, online retailers have been shielded from the requirement to collect sales tax from consumers who live in those states where the retailer does not have a physical presence, such as an office, store or warehouse. The U.S. Supreme Court likely will soon have the chance to change that. The question of whether out-of-state online retailers can be required to collect sales tax moved a big step closer to the nation’s highest court last week when the South Dakota Supreme Court upheld a lower court’s decision barring enforcement of a 2016 state law that requires larger e-retailers to collect sales tax from South Dakota residents and remit them to the state.

Finance & Economy

U.S. Household Incomes Rose to Record in 2016 as Poverty Fell

The U.S. median household income rose to a record last year and the poverty rate fell, as steady economic growth helped improve the lot of more Americans, according to annual data from the U.S. Census Bureau.  The results show improving incomes helped to make a further dent in poverty in 2016, which was President Barack Obama’s final year in office.  Strength in the labor market likely played a role. The economy added 2.2 million jobs last year and the unemployment rate had declined to 4.7 percent by year end. It’s fallen further in recent months to a 16-year low.


U.S. retail sales post biggest drop in six months

U.S. retail sales unexpectedly fell in August, likely hurt by the impact of Hurricane Harvey on motor vehicle purchases, suggesting a moderation in consumer spending in the third quarter.  The Commerce Department said retail sales dropped 0.2 percent last month, the biggest decline in six months. Data for July was revised to show sales increasing 0.3 percent instead of the previously reported 0.6 percent jump.  Motor vehicle sales tumbled 1.6 percent last month, the biggest drop since January, after being unchanged in July. Harvey, which slammed Texas in the last week of August and unleashed unprecedented flooding in Houston, probably dented sales of automobiles.