October 23, 2017 Consensus

The Weekly Consensus – October 23, 2017 (Volume 9, Number 40)

The Big Story
Will Stitch Fix’s IPO Be as Trendy as Its Clothes?


Last week, Stitch Fix, an online personal stylist and subscription apparel business founded in 2011, filed paperwork for its initial public offering. For many, this represents the latest “new consumer” brand to go public – and all that comes with it. While it marks the continued growth and evolution of emerging brands and the new consumer economy, it also opens the space (and the brands within it) to scrutiny.

The business of Stitch Fix seems relatively simple. Consumers fill out a user profile, a personal stylist selects items for that consumer, and then five apparel items are delivered to the consumer’s door. The user is charged $20 for the personalized styling service, and that charge is applied as a credit towards the purchase of the items. Consumers keep only what they want and mail back the rest. They can sign up for regular deliveries, or order occasionally.

The model has served Stitch Fix well, and has catapulted the brand to some vaunted company. Like other new consumer stalwarts Warby Parker, Rent the Runway, Harry’s, and Casper, Stitch Fix has been rumored to be eying the public markets for some time. Now that the time has arrived, the question is whether this a harbinger of things to come for similarly perceived brands, or is Stitch Fix an exception because of some distinctive quality or characteristic, whether it be industry, business model, financial performance, or some technological advantage?

For many reasons, Stitch Fix is an outlier. The company has only raised $42 million in capital, far less than many of its counterparts, yet it generated nearly a billion dollars in revenue in the its fiscal year ending in July. This was up from $730.3 million in 2016, $342.8 million in 2015, and $73 million in 2014. The $977.1 million recorded in 2017 revenue outpaces nearly all of Stitch Fix’s peers.

And if capital raised and revenue weren’t enough for Stitch Fix to stand out, the company is generally profitable. It recorded net income of $33.2 million in 2016 and $20.9 million in 2015. For 2017, it reported a nominal loss of $594,000.

Like many of its brethren, Stitch Fix takes pains to not be labeled as a retail company. It works hard to spin itself as a technology company first, and then a fashion or consumer brand. As has been noted by journalists and observers alike, Stitch Fix uses the words “data science” 64 times in its IPO filing. Also like many of its contemporaries, Stitch Fix has seen slower growth with scale. Whereas revenue grew 113% from 2015 to 2016, it slowed to 34% from 2016 to 2017. Similarly, growth of its customer base slowed from 93% to 31%.

It has been reported that the Stitch Fix will seek a valuation of $3 billion to $4 billion, or 3x-4x 2017 revenue. It remains to be seen whether it will fare better than the last new consumer company to go public, Blue Apron, whose stock now sits at half of its IPO price. It’s also unclear how Stitch Fix will weather the competition from other emerging brands or Amazon, which recently launched a subscription clothing service.

Many observers will watch Stitch Fix’s IPO with interest. The most intriguing question is whether it can avoid the fate of Blue Apron, while charting a different, public course versus its still-private or recently acquired peers. If things go well, it might find itself not only a pioneer in retailing, but a trend-setter in how startups view the public markets.


Headlines of the Week

Walmart Looks Set to Start Its Own Online Mall With Lord & Taylor

Walmart.com is close to landing a deal to give department store Lord & Taylor dedicated space on its web site according to the Wall Street Journal, a move that could presage the retailer offering itself to other brands as an alternative to Amazon.com. for showcasing their wares. According to the Journal report, which cited a person familiar with the matter, the deal would be a first step in creating an online mall with Walmart.com as its front door. Other brands in the mall could include men’s clothing store Bonobos and online retailer Jet.com, both of which were part of a shopping spree of e-commerce companies by Walmart in the last 15 months.

Stitch Fix files for IPO, testing investor appetite for online retailers

Online personal shopping company Stitch Fix has filed for an initial public offering. The IPO will be the first test of investor reception to the newest breed of online shopping companies. The company did not state how much it expects to raise, but anticipates it will be valued at roughly $3 billion to $4 billion, sources familiar with the situations said. Stitch Fix is a variant on the popular e-commerce “subscription box” model, in which customers pay to have regular — often monthly — shipments of goods.  In fiscal 2017, the company reported $61 million in earnings before interest tax depreciation and amortization, down from $73 million in 2016. That was off $977.1 million in sales in 2017, up from $730.3 million the year prior.



Apparel & Footwear

Aldo Group calls off Camuto Group buyout

Footwear retailer Aldo Group has called off its acquisition of US brand house Camuto Group, less than three months after it made the announcement about its intention to buy it. In August, Aldo Group said it planned to buy Camuto Group’s footwear and accessories businesses for an undisclosed sum. Aldo has released a statement saying “both parties mutually decided” not to pursue the sale. David Bensadoun, Aldo chief executive, said “The Aldo Group continues to be focused on growth. Despite not moving forward with the acquisition, Camuto Group will become a key strategic partner for us. Our two organizations have complementary strengths, capabilities and reach.”


This Retailer Went From Zero To $2 Billion In Four Years

The Company is called LuLaRoe, and it sells ladies’ clothes along with some men’s and children’s in colorful styles. LuLaRoe does not have stores and does not sell direct-to-consumers on its website or any other way. It sells through a network of individual representatives it calls Independent Fashion Retailers (I’ll call them IFRs). IFRs buy from LuLaRoe at 50% of the suggested retail price and sell to their friends and contacts, pocketing the difference. LuLaRoe has over 80 thousand IFRs. None of them receive the exact same assortment of products in any shipments.


Athletic & Sporting Goods

Under Armour launches merchandise subscription service

Under Armour is jumping on the fashion subscription box bandwagon with its latest offering, ArmourBox.  Under Armour’s box works like this. An “official outfitter” will pick four to six pieces of Under Armour gear that fits a customer’s profile, based on needs, style and goals, then send it out, either monthly or every 60 to 90 days.  Unlike some services, though, there’s no monthly fee, and no shipping or return fees, Under Armour says. Customers can take a week to try it all on, then pay for what they want to keep and ship the rest back. A 20 percent discount will apply if a subscriber buys everything in the box.

German footwear brand Puma powered to higher profit forecast by Rihanna, Bolt

German sporting goods maker Puma on Wednesday lifted its full-year profit forecast for the third time in 2017, after a big-earning third quarter when celebrity partners like Rihanna and Usain Bolt dominated headlines.  The Bavaria-based firm, a subsidiary of sporting and luxury group Kering, now expects to make between €235 and €245 million euros in operating, or underlying profit – almost double last year’s figure – it said in a statement.

Cosmetics & Pharmacy

Reckitt CEO Focuses on Health, Looking Beyond Worst Year

Reckitt Benckiser Group Plc separated its home-care and health businesses, sharpening its focus on brands such as Durex condoms and Enfamil baby formula after a second cut in the sales forecast this year. The Slough, England-based company’s move to create two autonomous units could lay the groundwork for a broader strategic shift, or even a sale of the household business. It followed a quarterly revenue decline as the company tallies the fallout from a cyberattack, lackluster demand for new products and other woes.

Anthem Joins With CVS to Start Its Own Pharmacy Business

Anthem, one of the nation’s major health insurance companies, said that it planned to start its own business to manage prescription drug plans by partnering with CVS Health, the large pharmacy benefit manager and drugstore chain. The insurer is in the midst of a bitter legal battle with Express Scripts, its current pharmacy benefits manager, over claims that Anthem has been overcharged. The insurer said it will start the new business in 2020 after its contract with Express Scripts expires, estimating the savings from the new arrangement to be about $4 billion a year, the bulk of which it said would flow to customers in the form of lower drug costs.

Discounters & Department Stores

Department stores want to cash in on the indie beauty boom

Independent beauty brands are having a moment. Their trendily packaged products combined with smart marketing strategies have drawn cult customer followings and attention from legacy companies like Estée Lauder and L’Oréal. Now, in need of a traffic boost, department stores want a piece of the action. Neiman Marcus is the latest to dust off its beauty counters with a new partnership with Indie Beauty Expo, a platform that helps bring new beauty brands to market. Starting today, 15 brands under the Indie Beauty Expo umbrella will be on sale at Neiman Marcus, with a portion of the products exclusive to the department store. It’s a limited-run partnership, lasting until inventory sells out, but Neiman Marcus beauty VP and merchandise manager Kelly St. John said that it’s a testing ground for bringing indie beauty brands in store on a permanent basis.


Target this week opening a dozen stores

Target thinks it knows what the young professionals who live in Uptown Minneapolis want from its newest store: activewear, Starbucks and lots of groceries, especially organic varieties. The small-format store opening Wednesday in the heart of the bustling neighborhood — a stone’s throw from a CorePower Yoga, CycleBar and LA Fitness — includes plenty of yoga pants and jazzy sports bras from the retailer’s new JoyLab brand as well as its popular C9 line. The 21,400-square-foot store, about one-sixth the size of a typical Target store, is part of a wave of about a dozen new store openings this week for Minneapolis-based Target Corp. Also on the roster is one in high-profile Herald Square in midtown Manhattan across from Macy’s flagship store, as well as locations in and around Chicago, Los Angeles and Philadelphia. All but one of the new stores opening this week, a full-size store in Honolulu, are Target’s smaller-format stores.

Macy’s has deal to sell top half of Chicago flagship

Macy’s has struck a preliminary deal to sell the top half of its State Street flagship building in Chicago to a Canadian real estate investor that plans to convert the space into offices. Toronto-based Brookfield Asset Management, one of the world’s largest real estate owners, has agreed to buy floors 8 through 14 from Macy’s, according to sources. The deal for approximately 700,000 square feet has not been finalized.



Grocery & Restaurants

NRD Capital buys struggling Ruby Tuesday

NRD Capital, an Atlanta-based private-equity firm, has agreed to buy long-struggling casual-dining chain Ruby Tuesday Inc. in a deal valued at $335 million, the companies said on Monday. NRD is paying $2.40 a share for the 599-unit bar & grill concept, or about 21 percent above Friday’s closing price of $1.99. Ruby Tuesday had been exploring strategic alternatives in recent months following years of weak same-store sales and declining traffic.


Roark Capital buys stake in Culver’s

Culver Franchising System Inc. has sold a minority interest to the Atlanta-based private equity group Roark Capital Group. Terms of the deal were not disclosed. The Culver family will remain majority owners of the Prairie Du Sac, Wis.-based quick-service chain, but opted this year to sell a piece of the company after toying with the idea periodically over the past decade. The Culver’s brand has more than 600 locations in 24 states. Culver’s generated $1.3 billion in U.S. system sales last year, according to NRN Top 100 data.


Macaroni Grill files for bankruptcy protection

Romano’s Macaroni Grill filed for Chapter 11 bankruptcy protection on Wednesday, as the casual-dining chain works to close locations and restructure operations. The Denver-based chain recently closed 37 locations, prompting lawsuits by some of the company’s landlords. According to a filing with the U.S. Bankruptcy Court for the District of Delaware, many of the company’s landlords are “seeking to recover damages far in excess of anything they would be entitled to under bankruptcy.” Macaroni Grill has 93 company-owned locations and franchises another 23 units.


Supervalu expands wholesale reach through Associated Grocers of Florida acquisition

Supervalu on Wednesday announced its acquisition of Associated Grocers of Florida in a transaction valued at approximately $180 million. This transaction provides Supervalu with the ability to expand its operations into a new part of Florida as well as provides new opportunities to bring Supervalu’s products and services to Associated Grocers’ diverse customer base in South Florida, the Caribbean and other international markets. Additionally, as part of the pending transaction, Supervalu has reached a long-term supply agreement with Associated Grocers’ largest customer that will go into effect upon the closing of the transaction.  During Associated Grocers’ last fiscal year, which ended on July 29, 2017, Associated Grocers’ revenues were approximately $650 million.


Pieology receives investment from Kevin Durant

NBA stars Kevin Durant and LeBron James aren’t just battling one another for rebounds and three-pointers. Now they’re facing off in the battle for the future of two-minute pizzas. Last week, Durant invested an undisclosed amount in Pieology Pizza through his Durant Co. Durant will own a stake in the Rancho Santa Margarita, Calif.-based company, as well as some of its franchises. Durant will develop franchises for the brand and will acquire units, Pieology founder Carl Chang said in an email. Pieology had 130 locations as of Dec. 26, 2016, a number that has grown rapidly in recent years. The investment pits Durant against James, who was an early investor in the fast-casual Blaze Pizza chain.

Home & Road

PTS America Acquires Sango

Tabletop company PTS America has acquired dinnerware manufacturer Sango for an undisclosed sum. PTS will manufacture, market and sell Sango worldwide, with the exception of Japan, transfer its inventory to the PTS warehouse in Cerritos, Calif., and continue to work with the Chinese factory where Sango is produced, according to PTS Vice President David Lee. Sango currently sells about five dinnerware patterns to Bed Bath & Beyond and is otherwise anchored by its online business, he said. “We don’t anticipate any large gaps in servicing Sango customers,” he said. The acquisition of Sango, which is known for its ceramic dinnerware sets, “gives PTS an entrée to the casual entertaining sector that we had not been in previously,” Lee said. It also allows PTS to capitalize on some of Sango’s more advanced manufacturing techniques, such as its expertise in reactive glazes, he added.

Furniture Stores Trail Broad Retail Sector with 1.7% September Sales Increase

Sales at furniture and home furnishings stores increased 1.7% from September a year ago, well below the broad retail sector’s 4.7% gain, according to the latest U.S. Department of Commerce report.  Estimated furniture and home furnishings store sales totaled $9.57 billion in September, up from a revised $9.41 billion in September 2016, the government reported today. Sales were down 0.4% from the month before — based on an August sales estimate revised down slightly to $9.61 billion. From July through September, furniture and home furnishings store sales were up 3.8% from the same three months last year and increased 0.2% from April-through-June period, the report said.

Jewelry & Luxury

Neiman Marcus’ gift list for billionaires reveals the guilt that plagues America’s richest people

Neiman Marcus’ annual Christmas list for billionaires reveals the growing sense of guilt among the richest of the rich in America. The Fantasy Gift section has been one of the highlights of the retailer’s “Christmas Book” for more than 50 years. Since the 2008 financial crisis and Great Recession, however, there’s been a growing layer of guilt impinging on the fantasy of buying gifts that cost thousands — or even millions — of dollars. In recent years, certain gifts on the list have been coupled with charity donations. This coupling of charity with absurdly pricey luxuries reveals the discomfort felt by extremely wealthy Americans in an economically divided nation.


Louis Vuitton scours the nation for its first U.S. factory site, discovers Keene, Texas

Back in the summer, the chairman of French luxury goods maker Louis Vuitton let it slip at a high-brow fashion show in Paris that the company was looking to open its first manufacturing site in the U.S. Then earlier this month, the 163-year-old company bought 256 acres of land in Keene, Texas, from Dallas surgeon Wayne Z. Burkhead Jr. and Rockin’ Z Ranch LLC, according to the Cleburne Times-Review. Last week, Johnson County commissioners approved a tax break package that will bring the leading fashion house’s 100,000-square-foot factory to the city of 6,000 residents. The tax breaks total about $91,000 a year for 10 years.

Signet Bought Diamond Retailer JamesAllen.com For $328M Back In August. What’s Next?

Dean Lederman has been a retail disrupter since before “disrupter” was a world people regularly used. I meet with him at JamesAllen.com’s midtown Manhattan office, almost six weeks after the $328 million deal with Signet Jewelers – the Ohio-headquartered company that owns Kay Jewelers, Zales and Jared the Galleria of Jewelry, among others – was announced. Lederman, who founded JamesAllen.com back in 2006 with three other partners, including CEO Oded Edelman, is still getting used to working for a giant, publicly traded company. “If you and I were sitting across from each other having coffee, I would talk about this for hours,” he said a number of times, in response to questions he wanted to deflect.

De Beers’ $370M Sight Reflects Slow Rough Market

De Beers’ October sight closed with a value of $370 million as rough-diamond buying slowed due to holidays and sightholders reported a sluggish dealer market. Proceeds from the miner’s eighth sales cycle fell 27% from $507 million in the previous sight in August, and dropped 25% compared with the equivalent period a year ago, according to Rapaport records. Rough prices were largely unchanged from the previous sight, sightholders noted, with many dealers on the secondary market struggling to make a profit on the goods or even cover costs.

Office & Leisure

Toys ‘R’ Us Is Exploring Options for Its $2 Billion Asia Business

Toys “R” Us Inc., the retailer that filed for bankruptcy in North America, has been exploring options for its growing Asian business, including a potential initial public offering.

The U.S. chain and its local joint venture partner, the billionaire Fung brothers, have been speaking with investment banks to study the feasibility of listing the Asian business on the Hong Kong bourse. A deal could value the unit at as much as $2 billion. Toys “R” Us and some of its North American subsidiaries filed for bankruptcy last month, though its Asian unit wasn’t included in the proceedings. Deliberations are at an early stage, and Toys “R” Us hasn’t decided which path to pursue. Toys “R” Us owns about 85 percent of the Asian venture, while Fung Group — the private holding company of Hong Kong businessmen Victor and William Fung — has the remainder.


Office Depot announces resignation of top executive

Office Depot Inc.’s Chief Administrative Officer Michael Allison resigned from the company late last week and will be taking home a severance package totaling about $2.5 million. The Boca Raton-based office supply company announced the departure of Allison in a filing with the Securities and Exchange Commission on Tuesday, but did not mention the reason he is stepping down. The resignation of Allison comes just two weeks after Office Depot announced that it would be acquiring CompuCom Systems, Inc. for $1 billion as it looks to diversify away from office supplies and into technology services.

Technology & Internet

Amazon is poised to run straight into the sportswear market with its own brands

Amazon.com Inc. is tapping some of the biggest athletic-apparel suppliers to make a foray into private-label sportswear, according to people familiar with the matter, setting the stage for further upheaval in an already-tumultuous industry. Makalot Industrial Co., a Taiwanese vendor that produces clothing for Gap Inc., Uniqlo and Kohl’s Corp., is making apparel for the Amazon line. Eclat Textile Co., another Taiwanese supplier, is contributing to the effort as well. The manufacturers are producing small amounts of products for Amazon as part of a trial. Amazon has previously ventured into private-label fashion, offering office clothing, jackets and dresses under names like Goodthreads and Paris Sunday. But pushing into activewear would bring fresh competition to some of the world’s biggest athletic brands.

Blue Apron is laying off hundreds of employees

As Blue Apron approaches its next earnings report in a couple of weeks, the company said Wednesday that it is laying off 6 percent of its staff as part of “a company-wide realignment of personnel to support its strategic priorities.” These layoffs hit both the company’s corporate offices and fulfillment centers and will add up to hundreds of jobs. Blue Apron was one of the big — and most anticipated — consumer IPOs of the year, but it’s also now one of the companies that represent the major challenges consumer IPOs have faced throughout the year. Since going public, Wall Street has cut Blue Apron’s stock price in half and it’s barely been able to retain unicorn status. The company is an example of a complex business that can face significant challenges acquiring and retaining customers, as well as one that faces an existential threat from Amazon.


Walmart looks into retail’s future with Store No. 8 innovation gala

Virtual reality was the star of Walmart’s Store No. 8 inaugural innovation gala — an event that exhibited how the technology will shape retail shopping. Store No. 8, Walmart’s technology incubator focused on ideas that will transform the future of commerce, held its first innovation gala on Wednesday. Store No. 8 works with startups that specialize in areas that include robotics, virtual and augmented reality, machine learning and artificial intelligence. This event however, gave put the spotlight on the value of VR.

Finance & Economy

US economy hums along, still few signs of pickup in inflation

The U.S. economy expanded at a modest to moderate pace in September through early October despite the impact of hurricanes on some regions, the Federal Reserve said in its latest snapshot of the U.S. economy, but there were still few signs of an acceleration in inflation.  Hurricanes Harvey and Irma hit during the survey period and will have a negative effect on third quarter economic growth, the Fed has said, although it expects the impact to be temporary.


U.S. unemployment claims fall to 222,000, lowest in 44 years

The number of Americans collecting unemployment benefits fell last week to the lowest level since Richard Nixon was president.  The Labor Department said that claims for jobless aid dropped by 22,000 to 222,000, fewest since March 1973. The less volatile four-week average slid by 9,500 to 248,250, lowest since late August.  Unemployment claims are a proxy for layoffs. The low level suggests that employers are confident enough in the economy to hold onto workers.