October 2, 2017 Consensus

The Weekly Consensus – October 2, 2017 (Volume 9, Number 37)

The Big Story
The Cost of Competing Just Went Up
Mark Lenz

Last week, Target jumped into the retail industry’s starting wage wars by announcing that the company will increase its minimum wage to $11 per hour starting this fall and to $15 per hour by 2020.  This move certainly ups the ante relative to both Walmart (which announced starting wage increases to $9 per hour in 2015 and then $10 per hour in 2016) and other retailers that have announced starting wage increases in recent years. However, is Target getting ahead? Or is it making up ground?

Target’s rationale makes sense, and it is aware of the challenges that come with this change.  The company believes this investment in people will help improve earnings by fashioning a more engaged and motivated sales staff that will provide better service to its customers, thereby driving sales.  However, employee productivity will have to increase to compensate for higher wages in order to preserve the bottom line.  Additionally, there is the ripple effect throughout the rest of Target’s store payroll, as everyone’s pay will need to be calibrated up to keep a proper pay scale that rewards more seasoned employees and incentivizes everyone to work toward earning raises.  Target says that the higher wage rates are included in their public projections, so they are not changing their profit estimates.  Due to lower unemployment levels, being able to recruit the top new hires would have likely required larger than usual wage increases even without new, higher starting pay at various retailers.

However, Target isn’t just competing against the Walmarts and Gaps of the world, who have recently upped their pay.  The Wall Street Journal reported last week that since 2000, non-managerial wages across the economy have increased by over 10% adjusted for inflation, but wages in retail declined during the recession and have just recently made it back to the same level as they were in the year 2000.  Certain companies, such as Costco, have made investments in employees for many years, but the data show that many retailers have benefitted financially by not having to raise real store wages for over 15 years.  During that time, overall customer service levels at many brick and mortar retailers have suffered and are seen as broadly deficient compared to most ecommerce retailers and higher-end brick and mortar retailers.

Target’s salvo across the bow last week will make many retailers, large and small, think about how compensation needs to be adjusted to be able to hire and retain the best employees possible.  However, given that retailers have fallen so far behind other industries and other channels when it comes to customer service and pleasing shoppers, forward-thinking retailers should realize that they aren’t just competing with Target or Walmart as they set their wage policies. This pocket of retail may be in a wages-related arms race, but they are all behind.


Headlines of the Week

Toys ‘R’ Us secures $3.1 billion financing

In an important vote of confidence in its brand from key lenders, Toys “R” Us closed on crucial financing just in time for the holiday crunch.  The retailer announced that it has closed on $3.1 billion of financing facilities that will support its operations during its restructuring process. The financing was from a group of lenders led by JP Morgan.  Toys “R” Us said the financing will also provide additional funds that will allow it to invest in various initiatives, including the renovation and modernization of its stores through improved layouts, updated lighting and other areas. The retailer also plans to use the finds to update its e-commerce sites and infrastructure “to better reflect its brand, promote the hottest toys and provide improved delivery capabilities so Toys “R” Us can effectively compete in the online shopping space.”


Unilever Steps up Beauty Push with $2.7 Billion Carver Korea Deal

Unilever has agreed to pay 2.27 billion euros ($2.71 billion) to buy fast-growing cosmetics company Carver Korea in its latest move to build a global beauty business.  The purchase from Goldman Sachs, Bain Capital and Carver’s founder follows a string of smaller skincare and cosmetics deals as the Anglo-Dutch pivots away from slower-growth food. Unilever is working hard to boost its performance after an unexpected takeover bid by Kraft Heinz in February. It has since raised its margin target, announced a share buyback and a plan to sell its shrinking margarine and spreads business.  The company had already been trying to become more reliant on bath, body and beauty products, which tend to have higher growth and margins than food.  To that end, it has bought a string of higher-end cosmetics and skincare companies including Murad, Dermalogica, REN and Kate Somerville.



Apparel & Footwear

Hunter sales and profits drop

Hunter has seen sales and profits slump after a year of “significant investment” and difficult US market conditions.  Adjusted EBITDA fell by 35% to £9.2m in the year to 31 December 2016, down from £14.1m the previous year.  Revenue dropped by 9.5% to £102.9m, from £113.7m. The company said its performance this year was in line with expectations.  Hunter said it continues to see “significant” growth in new product categories and “strong momentum” in its online and retail stores.  However, its wholesale business in the US was dented by the “broader challenges” facing US department stores.


How Everlane Hacked Your Wardrobe

Catalogue companies and the people on infomercials have been doing direct-to-consumer marketing for years, but these ads hail from a new generation of startups, companies often backed by venture-capital money, that want to use the methods and practices of Silicon Valley to “disrupt” regular old consumer goods.  One of the startups to pioneer this formula was Everlane, a mostly online clothing company that sells “modern basics,” the kind of no-nonsense staples one associates with J. Crew and Gap. Everlane has expanded into everything from sweaters to accessories and has reportedly sought to raise investment at a valuation of more than two hundred and fifty million dollars.

Alfred Angelo auction brings $245,000 for creditors of failed bridal dress retailer

The Alfred Angelo Bridal auction earlier this month raised about $245,000 for the company’s creditors.  The auction didn’t make a dent in Alfred Angelo’s massive debt, after the company collapsed and filed for bankruptcy in July. But some bidders — namely dress retailers and other small business operators — got some real bargains.  Alfred Angelo Bridal company and its stores closed in July and the company filed for Chapter 7 liquidation. No one big bidder for Alfred Angelo’s storied wedding dresses emerged from the auction, held on Sept 2, as auctioneer Stan Crooks had hoped.  Instead, top auction sales were: $5,300 for a 2008 Ford E250 Cargo Van with 53,000 miles on it; 30 “original design” wedding dresses that went for $3,600, or $120 apiece; and 363 designer wedding veils that were sold for $5,082 — a steal at $14 apiece.


Athletic & Sporting Goods

Nike’s China sales are booming, as demand wanes in North America

Nike delivered a mixed bag of results, posting strong sales growth in its international geographies, particularly China. But wholesale revenues continued to decline in North America into the fiscal first quarter.  In a competitive retail environment, Nike has been seen as racking up expenses, favoring discounts and heavy spending to grow its direct-to-consumer business.  Revenue for the Nike brand was $8.6 billion, up 2 percent on a currency-neutral basis, while sales for Converse were $483 million, down 16 percent and driven lower by declines in North America, the company said.

It started with the shoes. How sportswear firms factor into college sports scandals

In late August, Louisville’s Tom Jurich held a press conference at the school’s Thorntons Academic Center of Excellence to announce a 10-year, $160 million contract extension with adidas.  Colleges have long been tied to the athletic apparel companies, whether it was Nike, Reebok or adidas, and the more recent big player in the sportswear game, Under Armour. It’s a lucrative, symbiotic relationship, providing a college’s sports teams with apparel as well as marketing opportunities and merchandise royalties.  It’s also lucrative for some of college sports’ most high-profile coaches. Pitino, for example, has received $1.5 million a year from adidas, according to USA Today.  Louisville’s new deal with adidas, which has a $16 million per-year value and runs from 2019-28, is the richest in the ACC but is not the best in college athletics. UCLA makes $18.7 million a year from Under Armour and Ohio State makes $16.7 million a year from Nike.

Finish Line in talks to sell itself to a British retailer

Struggling sneaker chain Finish Line is in talks to sell itself to a Europe-based retailer, The Post has learned.  British-based Sports Direct — which owns brands including Everlast and Kangol — is in direct negotiations to buy Finish Line, and an acquisition could be announced in the coming weeks, a source close to the situation said.  Sports direct already owns an 8-percent stake, according to filings, and the poison pill caps its potential ownership at 12.5 percent.  Sports Direct — whose billionaire owner Mike Ashley also owns the Newcastle United soccer team — operates a similar-size footwear chain in Europe.

Cosmetics & Pharmacy

Jean Coutu in Advanced Talks to Be Acquired by Metro

Industry consolidation continued in the Great White North as the Jean Coutu Group could soon be part of Canada’s third-largest grocery chain. The company announced that it was in advanced talks with Metro, which operates in Quebec and Ontario, regarding a potential combination agreement.  Under the terms of a non-binding letter of intent dated Aug. 22, the company would be acquired for $24.50 per share, paid 75% in cash and 25% in Metro shares.  The Jean Coutu Group operates a network of 419 franchised stores under the PJC Jean Coutu, PJC Santé and PJC Santé Beauté banners. It also owns Quebec-based subsidiary generic drug maker Pro Doc. In 2017, the company’s retail sales were $4.47 billion.

Discounters & Department Stores

Department Stores Cling to Power Over Landlords on Mall Upgrades

The owners of the Sunrise Mall in Northern California have a vision for updating the 45-year-old center. Tenants there are making it difficult to get it done.  Proposed changes have been held up by the property’s department stores, which include Macy’s, J.C. Penney and Sears. Shoppers in the area, meanwhile, are turning to other, more modern centers as the redevelopment stalls.  Department stores may be struggling to draw customers, but they haven’t relinquished their hold on America’s malls. The aging retail juggernauts are exploiting contracts with landlords that give them the power to dictate how a property can be developed, covering everything from parking to signage to what types of operators are allowed into a center.

Kohl’s Turns to Starbucks Veteran to Succeed Mansell as CEO

Kohl’s Corp. will elevate Michelle Gass to the top job next year when longtime CEO Kevin Mansell retires, turning to a former Starbucks Corp. executive to help steer the department-store chain through a period of unprecedented disruption.  Gass, who currently serves as chief merchandising officer, will take the helm in May after the company’s next shareholder meeting. Mansell, 65, has been chief executive officer since 2008.  Kohl’s is looking to Gass to help modernize a chain that’s facing an industrywide slump. Sluggish mall traffic and the incursion of e-commerce have dealt a blow to department stores, including Kohl’s, Macy’s Inc. and J.C. Penney Co. The company’s same-store sales — a closely watched measure — dropped 0.4 percent last quarter.



Grocery & Restaurants

Shareholder takes issue with J. Alexander’s acquisition

In a letter to the board last Tuesday, Marathon Partners Equity Management, LLC said J. Alexander’s proposed acquisition of 99 Restaurants from title insurance company Fidelity National Financial Inc. “is overly accommodating” to the interests of Fidelity and its affiliates. Marathon also questions the J. Alexander’s board’s ties to Fidelity, suggesting those ties “are hindering the pursuit of alternative options that could potentially result in better outcomes for shareholders.”


Home & Road

Bassett Q3 Revenue, Net Income Up

Bassett Furniture reported its revenue and net income were up by more than 9% for the third quarter ended Aug. 26.  Consolidated sales were $114.3 million for the period compared with $104.7 million for the same quarter last year, an increase of 9.1%.  Net income for the quarter was $4.6 million or 43 cents per diluted share as compared with $4.2 million or 38 cents per diluted share for the prior year quarter.  Operating income, however, declined to $7.3 million as compared with $7.5 million for the prior year quarter. Adjusted operating income, excluding the $1.4 million for the settlement of the Polyurethane Foam Antitrust Litigation, was $6.5 million compared with $6.1 million for the 2016 period.

Pier 1 2Q Loss Grows to $7.8 Million

Pier 1 Imports posted a slim fiscal second quarter sales gain and a $7.8 million loss as it lowered its earnings guidance for the full year as it seeks ways to improve its sourcing, supply chain and promotional success.  Net sale for the quarter ended Aug. 26, increased 0.4% to $407.6 million from $405.8 million for the same period a year ago. Same-store sales increased 1.8%.  Pier 1’s online business for the quarter represented about 27% of sales, up from about 20% a year ago.  Pier 1 closed four stores in the quarter (seven through the first half) and expects to close a total of about 20 to 25 stores for the year.

Home furnishings giant enters ‘gig economy’ with acquisition

Ikea Group has entered the booming market for on-demand services.  The home furnishings giant is acquiring TaskRabbit, an on-demand services platform company that connects customers with workers, called “taskers,” that handle everyday needs such as furniture assembly, moving and packing, general handyman repairs, and home improvements. The price of the transaction was not revealed. The deal, which is expected to close in October, stems from a pilot Ikea and TaskRabbit launched in November 2016. Through the partnership, Ikea offered furniture-assembly services by TaskRabbit’s workers to its customers.

Jewelry & Luxury

Here’s How Much It Costs to Buy a Diamond the Size of a Tennis Ball

After a year of negotiations, the British jeweler Graff Diamonds has bought the world’s second-largest diamond, the tennis-ball-sized Lesedi La Rona.  The Canadian mining outfit Lucara Diamond had been struggling to sell the 1,109-carat uncut stone, with a Sotheby’s auction last year failing to achieve the $70 million reserve price. Experts suggested the diamond was simply too big to allow accurate analysis of the gems it might yield.  The highest bid in that abortive auction was $61 million. So, what did Graff pay in the end? $53 million.

Miners Could Start Hunting for Young Diamonds

Some diamonds could be younger than mining companies thought, according to research that may prompt rough producers to expand the areas in which they can search for precious stones.

Researchers used a method called “radioisotope analysis” to establish the age of small inclusions in diamonds from the Venetia mine in South Africa. By assessing these flaws, they were able to determine how old the crystals were.   It turned out that nine out of the 26 diamonds — donated by De Beers — were about 3 billion years old, perhaps resulting from the break-up of an old continent. However, 10 gems were just over a billion years old, correlating with a giant volcanic event in Zimbabwe a mere 1.1 billion years ago, according to a summary of the paper by Science Daily.

David Yurman Is Now Selling on Mr. Porter

David Yurman is partnering with Mr. Porter, the men’s fashion offspring of Net-A-Porter, to sell pieces from its men’s silver collection—primarily bracelets.  WWD reported that Mr. Porter is the first purely e-commerce partner for David Yurman, which is a top-selling brand for countless independent jewelers and department stores including Saks Fifth Avenue and Nordstrom.  “We have been exploring other opportunities to service the rapidly growing appetite of the online customer,” Carol Pennelli, the company’s chief commercial officer, told WWD. “And what’s so remarkable about Mr. Porter is its global reach, as they ship to more than 100 countries worldwide.

Office & Leisure

Barnes & Noble Looking To Open More Stores Despite Sales Decline

Barnes & Noble has had a tumultuous month. Just a few days after wild rumors of a buyout sent stock prices skyrocketing (and a subsequent denial of the allegations), the company announced a 6.6% first quarter sales decline over the same period in fiscal 2017. Sales of products under the Nook umbrella fell 28%, from $41 million to $29.5 million, though the company reports that the division was still profitable. While the digital side of B&N is relatively healthy, comparable retail sales fell 4.9%. The company says, however, that it plans to add more stores to its roster, in addition to relocating others as their leases expire.

Technology & Internet

Amazon pushes out new devices as Google and Apple ramp up their offerings

Amazon.com Inc., girding for a stronger fight from Apple Inc. and Google, unveiled a slew of consumer devices including an improved Alexa-powered smart-home hub, a smaller Echo speaker and a version of its compact Echo with a screen called Spot. Though hardware products aren’t key to Amazon’s bottom line, they serve as important conduits for popularizing and expanding the Alexa voice-based digital assistant, which is integrated into the latest devices.

VR, AR Headset Market Poised For Growth

IDC is forecasting significant growth for the virtual reality and augmented reality headset market. The firm expects the market to reach 13.7 million units in 2017, growing to 81.2 million units by 2021, with a compound annual growth rate of 56.1 percent.

Finance & Economy

US second-quarter GDP growth revised up to 3.1 percent

The U.S. economy grew a bit faster than previously estimated in the second quarter, recording its quickest pace in more than two years, but the momentum probably slowed in the third quarter as Hurricanes Harvey and Irma temporarily curbed activity.  Growth last quarter was the quickest since the first quarter of 2015 and followed a 1.2 percent pace in the January-March period. Economists had expected that the second-quarter GDP growth rate would be unrevised at 3.0 percent.  Harvey, which struck Texas, has been blamed for much of the decline in retail sales, industrial production, homebuilding and home sales in August. Further weakness is anticipated in September after Irma slammed into Florida early this month.