October 9, 2017 Consensus

The Weekly Consensus – October 9, 2017 (Volume 9, Number 38)

The Big Story
2017 Holiday Sales: More Diamonds than Coal?
Billy Busko

 

75 days.  Yes, it’s hard to believe, but there are only 75 shopping days until Christmas.  And it’s that time of the year when prognosticators reveal their holiday sales forecasts based partly on recent back-to-school sales and a myriad of other factors.  For perspective, holiday sales account for roughly 20% of total annual retail sales.

As the second largest shopping season, forecasters have taken note of this year’s back-to-school sales increase of approximately 10% over 2016, totaling a record $84 billion ($30 billion for K through 12 spending and $54 billion for college spending).  The other factors that analysts weigh are typically economic inputs, but, of course, weather can also have an impact.  Weather Trends, a service that predicts weather for retailers, forecasts that Thanksgiving Day will be six degrees cooler in the Northeast and nearly twenty degrees cooler in the Midwest, which retailers will welcome, as an early chill tends to bolster sales.

In short, the prognosticators are pretty jolly about 2017 holiday sales, but let’s first look at Christmas Past.  The National Retail Federation (NRF), the world’s largest retail trade association, stated that 2016 holiday sales totaled $656 billion, a record level of sales and an increase of 3.6% over 2015.  (As NRF defines it, holiday sales include revenues in the months of November and December, excluding autos, gas and restaurant sales.) Bain & Company reports that the sectors that outperformed included Health & Personal Care and Home Goods & Furniture. Looking back over longer periods, holiday sales have posted an average annual gain of 3.4% and 2.5% over the past five and ten years, respectively.  Last year, online sales grew 14.3% and accounted for approximately 11% of total holiday sales. For perspective, ecommerce sales represent roughly 9% of total retail sales today.  (Yes, in spite of lots of gloomy news, brick and mortar stores still account for 91% of total annual retail sales.)

Deloitte is among the jolliest of forecasters as they predict that holiday sales will advance 4.0% to 4.5% this year. “The projected uptick in holiday sales ties to four primary factors starting with anticipated strong personal income growth,” said Deloitte’s senior U.S. economist. “Last year, disposable personal income grew 2.0% over the year to the holiday period, and we may see that rise to a range of 3.8% to 4.2% this season. Consumer confidence remains elevated, the labor market is strong and the personal savings rate should remain stable at its current low level.”

The NRF predicts that holiday sales will increase between 3.6% and 4.0% to a record high of $678 billion to $682 billion.  “Our forecast reflects the very realistic steady momentum of the economy and overall strength of the industry,” NRF CEO Matthew Shay stated. “Although this year hasn’t been perfect, especially with the recent devastating hurricanes, we believe that a longer shopping season and strong consumer confidence will deliver retailers a strong holiday season,” he added.  Mr. Shay’s reference to the longer season refers to Christmas arriving 32 days after Thanksgiving, which is one day longer than last year, and it includes an extra weekend day.  Take note, procrastinators. (The biggest shopping day last year was December 23rd.)

Other forecasters include RetailNext, which is predicting holiday sales gains of 3.8%, while AlixPartners forecasts an increase of 3.5% to 4.4%. eMarketer has stated the most conservative forecast of 3.1%.

According to the NRF, holiday sales represent approximately 30% of total annual online sales (compared to the aforementioned 20% for in-store sales). The NRF forecasts that online sales will increase 15% this year, while Deloitte is more bullish with a forecast of an 18% to 21% increase. RetailNext and eMarketer expect an increase of 14.9% and 16.6%, respectively.  Of all ecommerce holiday sales, the retail marketing firm NetElixir predicts that Amazon will have a whopping 34% share, an increase from its 30% share last year.  This firm also predicts that 35% of online holiday purchases will take place on smart phones.

Whether purchased in a store or on a website, it appears that there may be a few more bows under the tree this year. However, what may be harder to gauge is what will be inside the boxes. After all, both brick and mortar and online retailers want the same present – cash flow.  Retail analytics firm EDITED pointed out that during the four-day Black Friday period last year the number of discounted items rose by 20% and the average sales discount was 44% versus 36% the prior year.  RetailNext observed that the discount and off-price channels were the strongest performers last holiday season.  Regarding the upcoming holidays, the NRF commented that, “Consumers are different in a post-recession era, and that puts pressure on retailers.”  Deloitte has added that the market is likely to see a highly competitive and promotional holiday season.”

In summary, many factors are poised to support a healthy Holiday season, but consumers are likely to continue their recent pattern of searching for bargains. In just over 75 days, we shall see whether retailers are singing “Blue Christmas” or “Joy to the World.”

 

Headlines of the Week

Walmart has acquired the logistics startup Parcel to help launch same-day delivery in New York City

Walmart.com will soon begin offering same-day delivery to some customers in New York City, and it has purchased a local startup to help it with the behind-the-scenes logistics. The giant retailer has acquired Parcel, a Brooklyn, N.Y.-based company that handles scheduled and same-day delivery services in New York for online retailers like Bonobos and meal-kit companies like Chef’d and Martha Stewart’s Martha & Marley Spoon. Parcel will continue to serve those clients, but Walmart will also utilize the startup’s technology and network of delivery employees to ramp up its own same-day delivery offerings for both Jet.com and Walmart.com in New York City.

The Jean Coutu Group Acquired by Metro

Metro announced a deal to acquire the Jean Coutu Group for $3.6 billion, creating for a combined food and pharmacy retailer with annual sales of $12.8 billion. As part of the deal, Metro will acquire more than 400 Canadian drug stores and a distribution center.

Metro’s existing pharmacy distribution and franchising activities will be combined with those of the Jean Coutu Group, which will operate as a stand-alone division of Metro with its own management team led by Francois Coutu. The combined business will have an overall network of more than 1,300 stores in Canada, with 677 drug stores.

 

Apparel & Footwear

Supreme Said Close to Investment Deal with Carlyle Group

Just hours after Supreme opened a new 3,000-square-foot store in the gentrified Williamsburg neighborhood of Brooklyn with a big party, speculation mounted that the skate-inflected label could be nearing a deal to sell a stake in the company to private equity firm The Carlyle Group, according to a report in Women’s Wear Daily. If true, the deal would mark a new chapter for the streetwear label, which was founded in 1994 by James Jebbia and recently launched a blockbuster collaboration with luxury mega-brand Louis Vuitton. Following the collaboration, speculation swirled that Vuitton’s parent company LVMH had acquired Supreme for $500 million, but the reports were shot down by sources close to both companies. Since Jebbia opened the label’s first outpost in a storefront on Lafayette Street, Supreme has become a global cult brand, buoyed by scrappy start-up hustle and an almost puritanical sense of local pride.

The Cult Of Crocs: Can The Brand Make A Comeback By Fighting Its Haters?

It’s the shoe that people love to hate. But in a brand reboot, Crocs is calling out its haters in a politically charged message about tolerance. There are only two types of people in the world: Crocs lovers and Crocs haters. “We are the brand that people love to hate,” admits Michelle Poole, Croc’s head of global merchandising. “Actually, we value the tension because it keeps us relevant.” She points out that the collaboration with Christoper Kane generated 3 billion global media impressions–and much of this was negative press.

Gymboree emerges from bankruptcy

Gymboree has emerged from bankruptcy with a reduced footprint — and with new owners. The children’s apparel retailer announced Friday that it has successfully completed its financial restructuring and emerged from Chapter 11 as a new corporation under the name Gymboree Group. The company exited bankruptcy with a reorganization plan that includes a comprehensive recapitalization that will eliminate more than $900 million in debt and a reduced store footprint. Gymboree filed for Chapter 11 bankruptcy in June 2017. The company has received an $85 million new term loan from Goldman Sachs and access to a $200 million revolving credit facility from Bank of America Merrill Lynch and Citizens.  Gymboree Group’s pre-petition term loan lenders – including Searchlight, Apollo Global Management, Oppenheimerfunds, Brigade Capital Management, LP, Marblegate, Nomura Securities International and Tricadia Capital Management, LLC – are the company’s new owners.

Dr. Martens Ousts CEO in Middle of Private-Equity Revamp

Dr. Martens has never had sales to match the cultural relevance that comes with being worn by the likes of Pete Townsend, Kurt Cobain and many rock stars in between. That widespread recognition made the company a tantalizing target in 2013, when the private equity firm Permira bought the rubber-sole boot maker for nearly $500 million—and now those growth plans have hit a snag. Dr. Martens announced on Friday that Chief Executive Officer Steve Murray was leaving in an attempt to speed up the company’s transformation. The current chairman, Paul Mason, will take over during a search for a new chief executive. As Permira has pushed for growth, Dr. Martens expanded beyond its sturdy boots and shoes. Sales hit nearly 290 million pounds ($390 million) for the year ended March 2017, an increase of 25 percent over the previous year and a sign of a turnaround taking hold, but remain a fraction of the $3.6 billion of Sketchers USA Inc.

 

Athletic & Sporting Goods

For Adidas and rivals, sponsorships are good business

Multi-million dollar sponsorship deals of the kind between Adidas and the University of Louisville — in focus after a scandal over alleged bribes paid to high school athletes — are not just an effort to burnish the image of sports gear makers.  They can be a cost-efficient way to boost sales against tough competition, marketing experts say.  Whether in U.S. college sports or European soccer, Adidas and its major rivals Nike and Under Armour reach potential customers more effectively by getting their brands used in the biggest events, say marketing experts.  Criminal charges brought last week against an Adidas marketing executive and 9 others drew renewed public attention to the perfectly legal practice of paying university sports programs to wear branded goods.

 

PlayCore expects continued growth under new owner, CEO says

Chattanooga-based PlayCore, the nation’s largest maker of playground equipment, has a new owner.  A New York City-based private equity firm, Court Square Capital Partners, purchased PlayCore from another private equity firm, Sentinel Capital Partners, for an undisclosed amount.  Sentinel Capital Partners has owned PlayCore since 2014. Since then, PlayCore has grown and acquired 14 other companies and today owns 27 brands with more than 8,000 customers, the venture capital company stated.   Prior to Sentinel’s ownership, PlayCore was owned by at least two other private equity firms: Irving Place Capital and Chartwell Investments.

Beauty & Health

Honest Company may be raising a down round

The Honest Company, the five-year-old natural body and home care products company cofounded by the actress Jessica Alba, looks to be raising $75 million in new venture capital funding at $19.60 per share, according to a Delaware filing first spied by CBInsights and reported by Axios.  The amount is a far cry from the $45.75 per share price point of the company’s $100 million Series D round, closed in 2015 at what was reportedly a post-money valuation of $1.7 billion.

Regis Corp. to Focus on Value Segment

The nation’s leading salon operator has entered into a major transaction that will reshape its portfolio.  Regis Corporation announced it has sold substantially all of its mall-based salon businesses in North America and entered into an agreement to sell substantially all of its International segment to The Beautiful Group, an affiliate of Regent, who will operate them as the company’s largest franchisee. This transaction includes 858 of the company’s North America Regis Salons and MasterCuts locations, which are full-service, mall-based salons, as well as the intellectual property related to MasterCuts and certain other trade names. The announced transaction also includes the company’s 250 Regis Salons and Supercuts salons in the U.K.

Diplomat Acquires 8th Day Software

Diplomat Pharmacy, Inc. has acquired 8th Day Software and Consulting, LLC, and named its founder as Diplomat’s chief information officer. 8th Day Software, based in Tennessee, will operate under Diplomat subsidiary Envoy Health Management LLC. 8th Day expands EnvoyHealth’s service offerings for health care partners to include IT outsourcing, consulting, and product development.  “In an interoperable world, technology delivers comprehensive insight and sustainable value for patients and health care partners,” said Jennifer Cretu, senior vice president of pharma services and marketing at Diplomat. Dave Loschinskey, founder of 8th Day, becomes Diplomat’s CIO. He served as CEO of 8th Day since it launched in 2013.

 

Discounters & Department Stores

Sears Canada bid buys it another few weeks

Sears Canada executive chairman Brandon Stranzl has put together a bid to save a portion of Sears Canada that includes financial backing, but if it fails, the entire chain could begin liquidation as early as Oct. 19. Stranzl’s bid, which has yet to be approved, does not include Sears stores at Fairview Mall, Scarborough Town Centre, Oakville Place and Lime Ridge Mall in Hamilton, which are part of a parcel of properties returning leases to landlords and being liquidated.  Another 59 stores have already been liquidated. An estimated 7,000 jobs could be saved if the bid is accepted, said Dan Murdoch, the Stikeman Elliott lawyer representing the group working on the bid led by Stranzl.

 

Grocery & Restaurants

Jet.com to launch its own ‘everyday essentials’ grocery brand, Uniquely J

Walmart’s Jet.com is going after millennial shoppers with the launch of its own grocery brand called Uniquely J, which is expected to arrive in a couple of months. The goal with the brand — beyond an obvious desire for increased margins — is to attract a younger shopper. Jet believes that Uniquely J will do so not only by nature of a product selection that includes everyday essentials, but also because of product quality and design.

 

Ahead of proxy vote, P&G pushes hard to keep Peltz off board

Procter & Gamble Co’s Chief Executive David Taylor urged investors to back its turnaround plan and vote against activist investor Nelson Peltz’s addition to the board, just days ahead of the largest proxy vote in corporate history. “We strongly recommend you give us this opportunity to finish this transformation,” Taylor said during a question and answer session with investors.

Home & Road

Hurricane Irma Cuts into Havertys 3Q Sales
Havertys reported a 1.9% decrease in third quarter sales and a 2.9% drop in same-store sales for the period as Hurricane Irma led to temporary closings at 55 Florida and Atlanta-area stores.  Sales for the quarter ended Sept. 30, decreased to $207.6 million from $211.7 million for the third quarter of 2016. Total written sales for the third quarter were down 3.5%, and written same- store sales decreased 4.2% over the same period last year. Havertys closed stores, readied for severe weather and halted home deliveries in advance of Irma. Smith said 55 of the company’s 124 stores were closed for at least one day, including stores in metro Atlanta.

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.

Jewelry & Luxury

Three years in: Coach’s restructuring plans provide a template for competitors

Three years into its turnaround plan, Coach is proving that — with the right ingredients — a struggling heritage brand can gets its groove back. Coach was helped by getting an earlier start than competitor brands including Ralph Lauren and Michael Kors, which have launched restructuring plans in the last year. Coach kicked things off in 2014 with a plan drawn up by the company’s then new CEO, Victor Luis, to reverse sales declines and transform the brand’s reputation from one of affordable luxury to that of a more exclusive tier.

Diamond Stocks Are Crashing This Year, But Gem Prices Aren’t

It’s been a surprisingly ugly year for most diamond companies. Shares of small producers, mainly focused on mines in southern Africa and Canada, have tumbled more than 30 percent during the past year and each company seems to be embroiled in its own mess. The issues range from mine setbacks, political fights and low prices for certain types of stones. The volatility is normal for such a speculative corner of the industry, but the losses are surprising since rough-diamond prices have held up relatively well.

Automatic Grading Could Herald A Second Diamond Industry Revolution

The diamond cutting and polishing industry remained pretty much unchanged for centuries, then went through a revolution in the 1990s. That was when technology took much of the human skill out of the process. It began as a simply upgrading of the way things had been done thus far. Starting with automatic polishing, laser kerfing and sawing as well as automatic bruting. Technology suddenly opened up huge new possibilities. Now, almost anyone with some basic skill and training could cut and polish a diamond.

Diamond Foundry Sets Up New Growing Facility

Diamond Foundry is opening up a new production facility in San Francisco, where it says it will produce 100,000 cts. of man-made gems a year. The new factory represents “America’s largest above-ground diamond production,” it says. The company also plans to open up a new MegaCarat foundry in 2018 in Wenatchee, Washington. The site has been leased from Stemilt, one of America’s leading producers of apples and pears.

 

Office & Leisure

Office Depot to Buy CompuCom for $1 Billion

Office Depot Inc. investors are skeptical that a technology makeover can help the chain rebound from a punishing retail slump. Shares of the retailer suffered their worst decline in two months after Office Depot delivered a grim forecast and announced plans to buy CompuCom Systems Inc. for about $1 billion, giving it a platform to sell tech services to business customers. The company described the acquisition as the first step toward a becoming a seller of business services and technology — rather than a traditional retailer of paper, pens and staplers. But the plan wasn’t enough to reassure shareholders, who see a glum retail landscape continuing to cloud Office Depot’s future. Office Depot is acquiring CompuCom from private equity investor Thomas H. Lee Partners LP in a deal that includes repaying the takeover target’s debt and issuing new shares. When the transaction is completed, Thomas H. Lee will hold an 8 percent stake in Office Depot.

 

Chernin Group Acquires Sports Fantasy, Gambling Businesses

Peter Chernin is sinking his teeth into sports gambling and fantasy sports. His Santa Monica holding company, Chernin Group, announced the acquisition of three companies that have been merged to form what it is calling the Action Network.  The acquisitions, terms of which were not disclosed, include FantasyLabs, a provider of data and tools to test daily fantasy sports theories to help build team lineups; Sports Insights, a betting enterprise that tracks real-time scores and gives betting line analysis; and SportsAction, an app featuring live scores, betting odds and gambling advice.  Chernin is billing Action Network as a data analytics company that will sell “premium sports analysis that will cater to the $170 billion-plus underserved sports wagering and fantasy markets,” the company said in a press release.

Pop-up shop pioneer Spirit Halloween is hitting the mall as more retailers vacate

Halloween isn’t only a favorite time of year for kids. Many retail landlords with vacant stores also have something to look forward to. Spirit Halloween, which first popped up in 1983, is considered one of America’s first “pop-up shops.” The retailer, which operates a year-round e-commerce business, has a physical retail presence for only about two months a year. And for the past 15 years, Spirit Halloween has been expanding its physical footprint, adding roughly 50 to 100 shops throughout the U.S. and Canada per year. In 2017, Spirit will have a whopping 1,300 temporary locations across North America.

Technology & Internet

Amazon Is Testing Its Own Delivery Service to Rival FedEx and UPS

Amazon.com is experimenting with a new delivery service intended to make more products available for free two-day delivery and relieve overcrowding in its warehouses, according to two people familiar with the plan, which will push the online retailer deeper into functions handled by longtime partners United Parcel Service Inc. and FedEx Corp. The service began two years ago in India, and Amazon has been slowly marketing it to U.S. merchants in preparation for a national expansion, said the people, who asked not to be identified because the U.S. pilot project is confidential. Amazon is calling the project Seller Flex. The service began on a trial basis this year in West Coast states with a broader rollout planned in 2018.

Finance & Economy

Private credit booms as new hedge funds pile in

Private equity and hedge fund firms are lending to companies at the highest rate ever, driving up competition in the sector and forcing funds to look outside the US for more opportunities.  Private credit, which has sprouted while post-crisis regulation curtailed the amount that banks were willing to lend, is growing at a rate not seen since the hedge fund industry boom in the 1990s.  Private credit funds managed about $600bn at the end of last year, according to data from research firm Preqin.  That figure could grow to $1tn by 2020, according to two industry lobby groups, the Alternative Credit Council and the Alternative Investment Management Association, and the law firm Dechert, in a report.

 

U.S. Consumer Comfort Declines by Most in a Year on Finances

Americans’ confidence suffered its biggest weekly setback in more than a year as optimism about personal finances slumped, Bloomberg Consumer Comfort Index figures showed.  The data marked the fourth decline in the last five weeks following a 16-year high at the end of August. The index, now the lowest since July, is down 3.4 points from that peak. The weakness was driven by a sudden drop in optimism about personal finances, which had reached a three-month high a week earlier. The result may partly reflect what Americans are paying at the gas pump, as prices remain elevated after climbing sharply in response to Hurricane Harvey.