October 30, 2017 Consensus

The Weekly Consensus – October 30, 2017 (Volume 9, Number 41)

The Big Story
Halloween: When Things Get Less Scary for Retail
Maeghan Thompson


Halloween is a time when many of us like to use spooky decorations, costumes, and horror movies to give ourselves and loved ones a thrilling scare. When it comes to traditional brick and mortar retail, things are scary enough already. Shopping malls and department stores are struggling with declining traffic, many companies are closing underperforming stores, and 19 major retailers have filed for bankruptcy protection this year. However, this year’s Halloween season may offer the retail world a brief respite from the otherwise gloomy environment for a couple of reasons. Ironically, for retail, Halloween may be the least scary time of the year.

The core reason why Halloween should be a positive for retailers this year is that participation in the holiday is expected to rise – and with participation increasing, holiday-related spending should increase as well. According to the National Retail Federation (NRF), Halloween-related sales this year are expected to be a record breaking $9.1 billion, up 8.3% from last year’s $8.4 billion. Nearly 180 million Americans are expected to participate in Halloween this year, whether it be by dressing up or handing out candy.

The projected increase in participation is related to at least two dynamics in the consumer economy. First, the struggles of traditional retailers belie underlying strength in the macroeconomic environment, which has been bolstered in recent years by improving employment and rising consumer confidence. Better economic conditions should be positive for discretionary spending in general, including spending on holidays. Second, Halloween dovetails nicely with consumers’ increasing preference for experiences (especially those that can be shared on social media) over material goods. Luckily for retailers, the experience of Halloween is usually facilitated by the purchase of material goods. Most notably, the NRF predicts that consumers this year will spend $3.4 billion on costumes, and nearly $3.0 billion each on candy and decorations. This offers an opportunity for retailers who can sell these categories and other holiday related items, a broad group that includes big box retailers, specialty apparel brands, pharmacies, and grocery stores.

Halloween is also giving out treats to the retail landlord community this year. While not a permanent solution to increasing vacancy rates, a rising number of Halloween-related pop-up stores offers landlords a chance to capture some additional rental income, even if only for a few months. One such pop-up retailer is Spirit Halloween, a seasonal retailer that offers Halloween decorations, costumes and accessories. This year, Spirit Halloween announced they will have 1,300 temporary locations across North America, and hire about 30,000 temporary workers. Spirit Halloween has expanded its physical footprint for the last 15 years, adding about 50 to 100 shops throughout the US and Canada per year.

Halloween is still just a drop in the bucket compared to the Christmas/Winter Holidays retail season, and ecommerce companies are certain to capture some of this year’s additional Halloween-related spending. Still, Halloween’s strong projected growth presents an opportunity. Figuratively, the holiday is standing at its front door with a big bowl, and is ready to dole out nearly $1 billion of incremental, up-for-grabs revenue. Retailers should get in line and say it out loud: “trick or treat.”



Headlines of the Week

Here’s why CVS wants to buy Aetna for $66 million

CVS Health is reportedly in talks to buy the nation’s third largest health insurer, Aetna, in a deal that would allow the pharmacy giant to expand into an entirely new arena of health care. A successful deal could push millions of Aetna’s members toward CVS’s retail pharmacies, walk-in Minute Clinics, and services such as home visits for infusion drugs at a time when retail pharmacy companies are facing stiff competition. It would also give Aetna the ability to move deeper into the lives of the 44.7 million people it serves and manage their health more efficiently. The Wall Street Journal reported Thursday that CVS Health had made a proposal to buy the health insurer for as much as $66 billion, which could make the deal the biggest merger of 2017.

Amazon Delves Further Into Smart-Home Market With ‘Key’ Service

Amazon.com Inc. is going to start delivering packages not just to doorsteps, but inside homes as well. The new service, called Amazon Key, incorporates a smart lock fitted to a customer’s door, as well as a new Amazon security camera to record the movements of the delivery person, the company said. Amazon will also sell its Cloud Cam as a standalone piece of hardware, moving the e-commerce giant into the home security market and setting it up to compete with traditional players including Netgear Inc. as well as newer entrants like Alphabet Inc. ’s Nest Labs. The service is a perk available exclusively to Amazon’s premium Prime subscription users, and starts at $250.



Apparel & Footwear

Deckers halts sale hunt against investors’ wishes

Footwear manufacturer Deckers Brands will launch a $400 million share buyback program as it wrapped up a strategic business review and simultaneously reported a 26 percent increase in its second quarter net income. In an earnings conference call on Oct. 26, the company said that it would no longer actively pursue a sale or merger, as investors have demanded. Deckers brought on financial and legal advisers to conduct the strategic review and said it had conversations with 90 potential acquirers, but determined it would not be the best return for shareholders. The company is still facing challenges from investors, who are seeking new leadership on the board of directors to compel a sale. Deckers remains open to considering sale options in the future if they arise but is shifting its focus toward its $100 million profit improvement program through fiscal year 2020.

American Eagle’s NYC concept lets students do laundry while shopping

American Eagle Outfitters unveiled a new concept store at Union Square in New York City, featuring “AE Studio,” which will open ahead of the holidays on Nov. 10. The focal point of the shop’s first floor is a “Jeans Gallery,” which in collaboration with Atelier & Repairs, designs custom denim repurposed from previous American Eagle collections. The store also holds dressing rooms outfitted with concierge iPads as well as a “collaboration space” for capsule collections created with emerging designers and artists. The store includes enticing amenities like free laundry facilities for students and a bar and lounge with a view of Union Square.

JPMorgan Chase Agents $50MM Upsize for Tailored Brands

Tailored Brands, Inc., a retail holding company for various men’s apparel stores, including the Men’s Wearhouse and Joseph A. Bank brands, announced that it has amended its asset-based revolving credit facility, expanding availability to $550 million from $500 million and extending its maturity to October 2022 from June 2019. Tailored Brands Chief Financial Officer Jack Calandra said, “Our amended credit agreement provides Tailored Brands an additional $50 million of financial flexibility at a lower cost and better maturity profile.” The ABL includes a $100 million expansion feature and has an improved fee structure.



Athletic & Sporting Goods

In massive retail shift, Nike to focus efforts on just 40 retail partners

Nike Inc. CEO Mark Parker on Wednesday announced a massive shakeup in the footwear giant’s retail business, saying the company will focus its efforts on just 40 key retail partners.  The company’s current retail network encompasses 30,000 retailers with 110,000 points of distribution. Nike officials said the company won’t necessarily remove Nike products from those other retailers, but over the next several years will focus its resources, marketing efforts and exclusive product offerings on 40 key partners, including Foot Locker Inc. and Nordstrom Inc. The company did not release the full roster of the 40 select retail partners.


Discount store sales could hurt Under Armour’s brand, analyst warns

Under Armour should do an about-face and pull its sports apparel and shoes out of Kohl’s, Designer Shoe Warehouse and Famous Footwear, all retailers where the brand has expanded this year, one Wall Street analyst is recommending.  Otherwise, the sports apparel maker risks diluting the strength of its brand and hurting profit margins, said Sam Poser, an analyst with Susquehanna Financial Group, in a pre-earnings report. The expansion will hurt sales most at retailers that Poser described as “brand-appropriate,” outlets such as Dick’s Sporting Goods, HIbbett Sports and Modell’s Sporting Goods, he said. Meanwhile, he said, the brand lacks a compelling message and faces stiff competition from rival Nike, which has been heavily promoting products and can better withstand intense price competition.


Cosmetics & Pharmacy

Walgreens to Shutter 600 Stores by Next Spring as Part of Rite Aid Purchase

Walgreens Boots Alliance expects to shutter about 600 stores in the wake of its purchase of 1,932 stores from rival Rite Aid.  The closings will start next year and take place over 18 months, Walgreens CFO George Fairweather said on the chain’s quarterly earnings call. The stores marked for closing will mostly be Rite Aid locations. The retailer expects to close stores within a mile of another Walgreens or Rite Aid location. Walgreens won regulatory approval in September to buy 1,932 stores and three distribution centers from Rite Aid for $4.38 billion.

Discounters & Department Stores

What’s Behind HBC’s WeWork Deal? Millennials

Hudson’s Bay Co. announced it is selling Lord & Taylor’s flagship New York building to WeWork, as well as leasing other select stores’ space to the gig economy workspace provider.  However, the deal is not just about real estate or HBC getting cash to cut its debt. Many department stores and other brick-and-mortar retailers have been stymied in their attempts to drive in-store traffic, especially from younger shoppers. The partnership with WeWork is intended to remedy that problem.

Sycamore Is Said to Weigh Deal for Troubled Bon-Ton’s Assets

Sycamore Partners, a private equity firm with a reputation for scooping up troubled retail operations, has held talks with distressed department-store chain Bon-Ton Stores Inc. about acquiring some of its assets, people familiar with the matter said. Sycamore has spoken with debt-laden Bon-Ton about a potential transaction in recent weeks, said the people, who asked not to be identified because the discussions are private. A purchase of Bon-Ton assets would extend a remarkable run of retail deals for Sycamore.

Nordstrom Doubles Down on Discount Format Amid Retail Woes

With its buyout plans on hold, Nordstrom Inc. is under intense pressure to find answers to the department-store slump. Key to that effort is reviving what was once a long-time bright spot for the chain: Nordstrom Rack. The discount stores had been helping the company cope with a slowdown at its full-price formats, but now they are in need of their own jump-start. Same-store sales and traffic have stalled at Nordstrom Rack this year.

Nordstrom Announces Clothing Donation Initiative with Give Back Box

Every year, billions of pounds of clothing ends up in landfills. To combat this growing problem, Nordstrom, Inc. is offering a new initiative that helps customers give new life to used clothing and accessories while supporting local nonprofits. Through a partnership with Give Back Box®, customers can donate items by mail at no cost. All donations will be directed to local nonprofits where they will be sold to fund community programs such as job training and education initiatives.


Grocery & Restaurants

Chipotle 3Q same-store sales rise 1% as earnings disappoint

Chipotle Mexican Grill Inc. said that same-store sales rose 1 percent in the third quarter ended Sept. 30, but earnings disappointed Wall Street expectations. Quarterly revenue increased 8.8 percent to $1.13 billion, and net income more than doubled to $19.6 million, or 69 cents per share, from a year earlier. But both numbers were below analysts’ expectations, according to information from the website Earnings Whispers, and the stock fell sharply in after-hours trading.

&pizza scores investment from firm with NFL ties

RSE Ventures, a sports and entertainment venture firm co-founded by the owner of the Miami Dolphins, has invested at least $25 million in the 23-unit fast casual pizza chain &pizza, the company announced on Wednesday. It’s the third funding round since 2015 for the Washington, D.C.-based chain, which has now received at least $60 million from investment firms over that period. The latest funds will help the chain continue its East Coast expansion. The company has locations in D.C., New York, Pennsylvania, Maryland and Virginia. The funds will help the chain expand to Miami, Boston and open four to six new shops in New York City next year.

Home & Road

Bed Bath & Beyond Launches $29 Annual Membership Beyond+

Bed Bath & Beyond has taken its membership experiment out of the pilot phase and into beta mode, according to its website. Shoppers are now invited to join “Beyond+” for $29 per year, which gives them 20% off their entire purchase and free shipping for online orders, with exclusions on oversized items.  “Hundreds of thousands of items” are available through the Beyond+ membership, which does not apply to many of the company’s other banners. Bed Bath & Beyond first floated the idea of a membership as a way to ease margins hit by its popular — and ubiquitous — blue and white direct mail 20%-off coupons and Sunday circular $5-off coupons.

Sherwin-Williams Chalks up Record 3rd-quarter Sales

The June acquisition of Valspar helped spur paint and coatings giant Sherwin-Williams Co. to record sales in its third quarter and first nine months of 2017. Sherwin-Williams reported consolidated sales of $4.5 billion for the period ended Sept. 30, a 37.4% increase; and $11 billion for the year’s first nine months, 16.1% ahead of 2016’s first three quarters. Natural disasters reduced sales by around $50 million in the third quarter. Net income per common share was off 18.4% in the third quarter to $3.33, including a $1.42 per share charge for acquisition-related costs.

American Silk Mills Acquired by Sutlej Textiles

Boutique textiles designer and distributor American Silk Mills announced it is being purchased by Sutlej Textiles and Industries Ltd. of Mumbai, India. American Silk Mills said following the acquisition, the company will continue in all of its current business lines but will have expanded operating and financial resources. Founded in 1896, American Silk Mills designs, weaves and distributes textiles for the residential, contract, transportation and specialty markets. Sutlej Textiles and Industries Ltd. is one of the largest integrated textile manufacturing companies in the world. The company said the acquisition will accelerate its entry into the American market.

Jewelry & Luxury

Signet Completes Sale of Its Prime Credit Accounts

Signet Jewelers announced it has completed the first phase of the outsourcing of its in-house credit program. The industry’s biggest retailer still hasn’t found a buyer for its subprime accounts, which represent approximately 45 percent of its credit book, and were what raised the credit concerns in the first place. For now, those accounts will be serviced by Genesis Financial Solutions, but remain on Signet’s books. Signet will also continue to originate new subprime accounts.

Gens Y and Z Are Buying Lots of Luxury Stuff After All

Generations Y and Z are rewriting the rules of the luxury market, according to a report released on Wednesday by the consulting firm Bain & Co. The global luxury market, encompassing goods and luxury experiences, is forecast to grow by 5 percent this year to an estimated 1.2 trillion euros, or $1.4 trillion, according to the study, compiled using market data and interviews with people in the industry. But while older shoppers traditionally have driven the growth of sales in the luxury sector, this time it was shoppers born after 1980 who made the difference.

Analysis: The State of the Colored Stone Market

It’s a topic that seems to be on everyone’s lips right now, communicated through the use of various buzz words: responsible sourcing, due diligence, transparency. They’re all different parts of the same conversation that has been popping up not only in jewelry but across consumers goods industries in recent years. The jewelry industry already has been working to make progress but, now, also needs to find ways to make those efforts known.


Office & Leisure

Travel service launches door-to-door luggage forwarding service

Dufl is expanding its travel luggage service, a shipping service for golf clubs, skis, bicycles, snowboards and other luggage, to door-to-door baggage delivery. The Dufl app is known for saving travelers three to five hours per round trip. Users now just schedule a pickup, have their luggage ready at their doorstep, and it will be sent direct to the destination. Dufl was named a “Best Travel App” by USA Today in 2015. In July, Dufl launched a new golf service in Japan.

Mattel shares plunge after reporting loss, plan to cut costs

Shares of Mattel Inc. dropped nearly 20 percent in after-hours trading Thursday after the company reported a third-quarter loss of $603.3 million and said sales were hurt by the bankruptcy filing of the toy chain Toys R Us. The company also announced plans to cut $650 million in costs over the next two years and suspend its quarterly dividend beginning in the fourth quarter. “Clearly disappointing” was how CEO Margo Georgiadis characterized the third quarter. The company said results were also hurt because retailers were managing inventory more tightly and some brands had not performed as expected.

Technology & Internet

Amazon launches Handmade Gift Shop, offering more artisan items in latest blow to Etsy

Just in time for the holidays, Amazon launched a new gift shop for its Handmade shopping portal, offering a selection of handcrafted items in a variety of categories. It’s the latest blow to Etsy, the creative platform struggling to hold off the e-commerce giant.

Finance & Economy

U.S. Growth at Above-Forecast 3% on Consumer, Business Spending

The U.S. economy expanded at a faster pace than forecast in the third quarter, indicating resilient demand from consumers and businesses even with the hit from hurricanes Harvey and Irma, Commerce Department data showed.  While GDP grew more than anticipated, analysts look to another key measure to assess the true health of the economy. Final sales to domestic purchasers, which strip out trade and inventories — the two most volatile components of the GDP calculation — climbed 1.8 percent, the slowest since early 2016, after rising 2.7 percent in prior quarter.

U.S. Consumer Sentiment Rises to Highest Level Since Early 2004

Consumer sentiment climbed in October to the highest level since the start of 2004 as households grew upbeat about the outlook for the U.S. economy, a University of Michigan survey showed.  Gains in incomes, higher property values and stocks at a record kept sentiment about personal finances near an all-time high. More than half of all respondents in the survey said they anticipated the good times would persist in the coming year and expected the economic expansion would endure over the next five.

New home sales surge 18.9 percent in September, highest level in 10 years

Sales of new U.S. single-family homes unexpectedly rose in September, hitting their highest level in nearly 10 years, offering hope that the housing market was regaining speed after appearing to stall in recent months.  The Commerce Department said new home sales surged 18.9 percent to a seasonally adjusted annual rate of 667,000 units last month amid an increase in all four regions. That was the highest level since October 2007 and followed August’s upwardly revised sales pace of 561,000 units.  The percent gain was the largest since January 1992.