November 13, 2017 Consensus

The Weekly Consensus – November 13, 2017 (Volume 9, Number 43)

The Big Story
The “Apocalypse” Will Hurt Women More Than Men
Michael A. O’Hara

In a well-researched article, a team of four Bloomberg writers (aided by five others) made it abundantly clear last week that things will likely get a whole lot worse for brick and mortar retail in the coming years.  If 2017 is the retail “apocalypse,” (a foretelling of the battle of good versus evil at the end of the world), these authors made the case that 2018 or 2019 may be retail’s “Armageddon” (the biblical site of such battle). In America’s ‘Retail Apocalypse’ Is Really Just Beginning published on November 8, 2017, the Bloomberg authors lay out both the number of recent store closings and the amount of debt that major retailers are carrying and will likely find difficult to refinance. They also note that institutional lenders are increasingly less comfortable with retailer debt as an investment asset class than previously, and they explore the growing amount of reserves taken by consumer credit companies as people fail to repay debts owed to bankrupt companies even though they are legally required to do so.  But among the parade of horribles detailed in the article was a passing reference to a phenomenon that may have broad social ramifications not yet fully understood by most in the industry: the shifting sands from brick-and-mortar retail to ecommerce will have a meaningfully worse impact on the employment of women than men – particularly at the low end of the wage scale.

Referencing a prior Bloomberg article authored by Spencer Soper, the authors note that “women hold about 60 percent of jobs at general merchandise stores but only about a third of those at warehouses.”  The number of jobs lost at department stores since 2000 is roughly equivalent to the job gain in distribution centers (about 440,000) over that time.  But the latter jobs “tend to favor mid-career men without college degrees” over women, says recruiting firm Indeed.com’s chief economist Jed Kolko.  The result is sales floor, cashier and retail supervisor jobs previously held by women are turning into warehouse jobs held by men.

Also, the retail job loss and the distribution center job gain are not geographically aligned.  Not surprisingly, a large percentage – nearly 25% — of new distribution center jobs are with Amazon, and the job growth is clustered around Amazon’s distribution centers, whereas the retail store job loss is more evenly dispersed.  As a result, many women in retail may be unable seek work at a distribution center, and unemployment is worse in areas that do not have a regional Amazon DC.

The U.S. Census Bureau tells us that overall retail sales are up, not down, despite the loss of brick-and-mortar stores.  We know that the shift has been to ecommerce and, to a lesser degree, big box off-price retailers.  However, like most instances in which a part of the economy experiences a major change, this shift has and will continue to create certain groups of winners and losers. Unfortunately, it seems that for women in retail, especially those who do not live near a distribution center hub, the industry’s current turmoil may be particularly painful.

 

 

Headlines of the Week

$25 billion in 24 hours: World’s biggest shopping day sets new record

Chinese e-commerce giant Alibaba said Saturday that sales soared past $18 billion after just 13 hours of the retail blitz known as Singles Day, eclipsing the $17.8 billion it managed in the full 24 hours last year. Singles Day, a bonanza of online spending in China, has for years racked up more sales than Black Friday and Cyber Monday combined. Earlier in the day, Alibaba said eager shoppers had managed to spend $1 billion in just 2 minutes. As the clock struck midnight in Shanghai, the final sales tally rang in at $25,386,927,848, marking about a 40% increase over last year’s record-setting sales total.

Mattel Surges on Report That Hasbro Discussed Acquisition

Mattel Inc. gained as much as 24 percent on a report that Hasbro Inc. has discussed an acquisition, a deal that would unite the two largest U.S. toymakers. The Wall Street Journal reported on Friday that Hasbro made a recent takeover approach, but the terms of a potential deal weren’t clear. The merger talk followed a surprisingly sharp sales decline at Mattel last quarter. The toy company, which makes Barbie and Fisher-Price, suspended its dividend and escalated a cost-cutting push to cope with the slump.

Mattel also has been talking to its banking partners about alternative forms of financing, including an asset-backed loan. The company has $250 million in bonds maturing in March.

 

Apparel & Footwear

J.Crew approached Amazon about a sale, chairman Mickey Drexler says

Mickey Drexler thinks Amazon should have bought another giant brick-and-mortar retailer in addition to Whole Foods: The company he is chairman of, J.Crew. The retail industry legend and former J.Crew CEO said his company approached Amazon about a possible sale. “We went to visit some of his team members on that,” Drexler said of Amazon CEO Jeff Bezos in an interview with Andrew Ross Sorkin at the New York Times’ DealBook conference on Thursday. “And to me, it would have been an extraordinarily smart thing to do.” “I thought Walmart should have done it, too,” he said. “I thought Target should have done it. The thing that these big companies need is creativity.”

Tapestry, Formerly Coach, Looks to Wring Savings From Kate Spade

Tapestry Inc., the leather-goods company formerly known as Coach Inc., is looking to finally get a payoff from its Kate Spade deal. Chief Executive Officer Victor Luis expects cost savings from the merger to reach $100 million to $115 million in fiscal 2019, more than twice the company’s previous estimate. He also sees sales rebounding after a stumble last quarter. “We have returned to growth thus far in the second quarter and are well positioned for holiday,” Luis said in a statement. In its fiscal first quarter, which ended Sept. 30, same-store sales for the Kate Spade and Coach brands missed analysts’ estimates. The company also suffered a decline in its gross margin.

 

 

Athletic & Sporting Goods

Adidas reports more strong growth in North America, China

German sportswear firm Adidas reported another strong quarter of sales and profit growth, driven by expansion in China and North America, where it has been taking market share from arch rival Nike.  Sales of the Adidas and Reebok brands rose 28 percent in greater China and 23 percent in North America, but fell 17 percent in Russia, which Adidas blamed on the “ongoing challenging consumer sentiment” and store closures.  Adidas saw double-digit sales increases in its running and outdoor categories as well as at its Originals and Neo fashion labels, but said revenues fell from soccer and basketball, mainly due to the termination of two major sponsorship deals.

 

Lew’s, backed by Peak Rock, adds fishing equipment supplier Strike King

Lew’s Holding Corp., an outdoor consumer company owned by private equity firm Peak Rock Capital, is acquiring fishing equipment supplier Strike King Lure Co.  Strike King supplies hard and soft lures, wire baits, terminal tackle, sunglasses and other fishing accessories to the specialty outdoor market. The Collierville, Tennessee-based target’s products are distributed in retailers such as Wal-Mart Stores Inc., Cabela’s Inc., Bass Pro LLC, Gander Mountains and more.  Lew’s also distributes branded fishing reels, rods and accessories. The target’s portfolio of accessories includes floating key chains, speed lines, face shields, rod and reel combos, t-shirts, hats and other fishing apparel.

Cosmetics & Pharmacy

CVS Health Promises Nationwide Next-day Rx Delivery Alongside Earnings

CVS Pharmacy is making a big convenience push for its patients. Starting early next year, the retail division of CVS Health will be offering nationwide next-day prescription delivery, and it will be bringing same-day delivery to patients in select cities, with Manhattan’s same-day service kicking off on Dec. 4.  “Our goal is to meet the needs of our all of our customers wherever, however and whenever they want,” CVS Health executive vice president and CVS Pharmacy president Helena Foulkes said. “Providing same- and next-day options for delivery of medications is just another way we can help our patients get and stay healthy.”  The same-day delivery offering will include prescriptions and curated over-the-counter products that will be taken directly to patients, the company said. Following the Manhattan rollout, Miami, Boston, Philadelphia, San Francisco and Washington, D.C., will see the service unveiled in early 2018.

FedEx Pickup/Drop-off Services Now Available across 7,500 Walgreens Locations

FedEx and Walgreens announced that FedEx package pickup and drop-off services are now available at more than 7,500 Walgreens locations in all 50 U.S. states. The milestone comes 10 months after the companies announced a long-term alliance agreement to offer convenient access to FedEx pickup and drop off at thousands of Walgreens locations across the country. The Walgreens rollout is part of the nationwide expansion of FedEx OnSite, a network of retail locations offering FedEx pick up and drop off services, including the ability to hold packages for up to five business days. In addition to the more than 7,500 participating Walgreens locations, customers can also find FedEx OnSite in select Albertson’s and Kroger grocery stores.

Diplomat Accompanies Solid Q3 Results with Another Acquisition

Diplomat Pharmacy is demonstrating how it is continuing its growth — both organically and through acquisitions. Alongside its solid third-quarter results, the company announced its acquisition of Pharmaceutical Technologies, which does business as National Pharmaceutical Services. The Omaha-based pharmacy benefits manager has a proprietary claims-processing system and offers mail-order services through its Integrated HMO Pharmacy.

 

Discounters & Department Stores

Walmart Pay Could Surpass Apple in U.S. Mobile Payments

Wal-Mart Stores Inc.’s app is close to surpassing Apple Pay in usage for mobile payments in the U.S., giving the world’s largest retailer even more clout as a growing number of people shop with their smartphones. Available in 4,774 stores, Walmart Pay is enrolling tens of thousands of new users a day, up from thousands four or five months ago, said Daniel Eckert, who runs the business. Two-thirds of the customers who try it also use it a second time within 21 days, he said, giving him confidence Walmart Pay will surpass Apple Pay in the U.S. in terms of use by shoppers in stores where they’re accepted.

Longtime J.C. Penney merchant John Tighe has left the Plano-based retailer

J.C. Penney chief merchant John Tighe is leaving the Plano-based department store chain “to pursue other opportunities,” the company said. Tighe has been chief merchant and executive vice president since 2015 and joined Penney in 2002 from May Department Stores where he was a buyer. For many years, Tighe was being groomed for bigger jobs and he was promoted through the company. He had experience in almost every Penney department. But last year and this year, apparel has failed to get traction at Penney, particularly women’s, its largest department. The retailer’s stock price has hit historic lows as Penney failed to meet sales and profit forecasts.  Penney’s stock fell 18 cents, or 7 percent, to close at $2.37 a share on Friday.

Can Costco Convince the French to Buy Brie in Bulk?

About a half-hour south of Paris, a uniquely American import has opened for business.

The store’s aisles brim with beauty and bulk, side by side. One-kilogram (2.2 pound) wheels of Mont D’Or cheese sit near 4,699-euro ($5,509) Breitling watches. The Yanks demand that the locals fork over an annual fee of 36 euros ($42) just to walk in the door.

France, meet Costco Wholesale Corp. In June, the world’s largest warehouse-club chain opened in the suburb of Villebon-sur-Yvette, between Orly Airport and Ecole Polytechnique. Having succeeded in spreading its treasure-hunt shopping experience across North America, Asia and the U.K., Costco is infiltrating the global heart of refined taste.

 

Grocery & Restaurants

AmazonFresh exits several geographic areas

Amazon on Friday said it was discontinuing its AmazonFresh grocery delivery service “to select ZIP codes” around the country in a move that likely portends further realignment of the offering.

 

Panera Bread to buy Au Bon Pain

Panera Bread said that it has a deal with private-equity firm LNK Partners to acquire the Boston-based Au Bon Pain Holding Co. Inc. — which Panera sold 18 years ago. Terms of the deal were not disclosed, but Panera said it acquired the 304-unit Au Bon Pain to intensify its growth in nontraditional areas like hospitals, universities, transit centers and urban locations.

 

Home & Road

Rent-A-Center Rejects Exclusive Terms of Takeover Bid

Rent-A-Center has rejected the terms behind a $13-per-share takeover offer from private equity firm Vintage Capital Management, saying it’s too early in the review process to tie itself to an exclusive agreement.  In a letter to Vintage Capital Managing Member Brian Kahn, the rent-to-own giant said its board “remains committed to exploring a broad range of strategic and financial alternatives and ensuring a fair and impartial process to all parties that have expressed an interest in the company to date, or that may do so in the future.”  Rent-A-Center said it looks forward to “additional dialogue” with Vintage, but “given the early stage of the strategic review and the level of inbound interest from other parties, we do not believe it is in the best interests of our stockholders to enter into an exclusivity agreement with Vintage at this time.”

 

Producers in South Seeing Biggest Bedding Declines

Bedding producers in the South are faring worse this year than their colleagues in other sections of the country, an industry report says.  The Bedding Market Quarterly for the third quarter, just issued by the International Sleep Products Assn., breaks out the collective performance for producers in four regions: Northeast, North Central, South and West. And that report shows that the producers in the South are down more than their colleagues in other regions of the country.  Year to date, mattress units in the South are down 10.9%, by far the worst decline in any region. Mattress units in the Northeast are down 4.5%, while they are down 4.8% in the North Central region, and they are down 6.4% in the West.  Overall, mattress units are down in the first nine months of the year by 7.9%, the ISPA report said.

Jewelry & Luxury

Inside Burberry’s new strategic plan: Higher prices, more product

With the novelty of Burberry’s experiments in digital innovation wearing off, the brand is embarking on a new strategic plan that prioritizes a luxury product positioning over everything else. CEO Marco Gobbetti announced the new plan along with the company’s results for the first half of fiscal 2018, which saw underlying revenue and comparable sales both rising 4 percent over last year. Revenue grew to $1.7 billion for the half. While, according to Gobbetti, digital innovation remains a core part of Burberry’s brand identity, the most pressing matter on its path forward is moving prices of products across categories up, edging the brand entirely out of the dreaded middle-tier market of accessible luxury and into the higher-end sphere of fashion and heritage luxury brands.

LVMH Reshuffles Management, Shifting Sidney Toledano From Dior

In a sign that the turbulence that has significantly altered the luxury creative landscape in recent years has moved to the executive suites, LVMH Moët Hennessy Louis Vuitton, the world’s largest luxury group, has engaged in the fashion equivalent of a cabinet reshuffle. Sidney Toledano, the man who built Christian Dior into a multibillion-dollar global powerhouse and shepherded it successfully through one of fashion’s biggest scandals, will be stepping down from the helm of the brand after leading it for almost 20 years. He will become chairman and chief executive of the LVMH Fashion Group, the division that encompasses eight of the group’s smaller brands including Céline, Givenchy, Loewe, and Emilio Pucci. He will also join the LVMH executive committee. Pietro Beccari, the chief executive of Fendi, another brand in the LVMH stable, will become chief executive of Dior.

At Tiffany, the Fifth Avenue Face-Lift Starts at Home

Since joining Tiffany & Co. in January as chief artistic officer, Reed Krakoff has undertaken to freshen the image of the 180-year-old jewelry company. His first major footprint is on the fourth-floor home and accessories floor of Tiffany’s Fifth Avenue flagship, where the sacred and the profane are now commingling cheerfully. “The main thing we were trying to bring back was that aesthetic of the extraordinary as well as the everyday,” Mr. Krakoff said. Which is how the world came to know the Tiffany Tin Can (actually sterling silver and vermeil, $1,000), whose humble shape and unhumble price tag set the internet a-dither on Monday. (“When panhandling before the big riot, don’t be caught without this stunning $1,000 tin can from Tiffany’s.”)

Office & Leisure

Office Depot beats revenue estimates for third quarter

Boca Raton-based Office Depot beat analysts’ expectations on third-quarter revenue, despite posting lower sales than a year ago. Office Depot reported revenue of $2.62 billion, $10 million more than analysts expected. While that’s an 8 percent decrease from $2.8 billion over the same quarter in 2016, the office-supply retailer said the current quarter included impacts on both retail and business sales from hurricanes Harvey, Irma and Maria. Excluding store closures, sales were down 6 percent, the office-supply retailer said. The company also announced it has closed the $1 billion acquisition of CompuCom Systems of Texas, which will provide technology and other workplace services to business customers. Office Depot CEO Gerry Smith, who joined Office Depot in February from technology company Lenovo, said the acquisition marks a “milestone” for Office Depot in transforming the company “from a traditional provider of primarily office products into a broader product and business services platform.”

The growing popularity of pet resorts

The American Pet Products Association estimates Americans spent $6 billion alone on grooming and boarding last year. And we’re not talking kennels! Pet resorts and spas are popping up from coast to coast. Leah Fried-Sedwick owns the Olde Towne Pet Resort outside of Washington D.C. Like any other resort, the bill adds up quickly. A week-long stay costs about $1,000, but for pet lovers, it’s money well spent.

Technology & Internet

Overstock.com posts Q3 loss, ponders brick and click

Overstock.com posted a lower-than-expected loss of 3 cents per share and a 5% increase in gross profit for this year’s third quarter compared to the same period last year. The financial results and a myriad of possible directions for the company spitballed by its leadership during the earnings conference call, including the strategy of joining with a large brick-and-mortar chain, moved the company’s stock to an after-market closing price Wednesday of around $40 a share, a range it hasn’t traded in since August 2005.

Finance & Economy

Consumer Credit in U.S. Rises by Most Since November 2016

U.S. consumer credit outstanding rose in September by the most since November 2016 as credit-card debt exceeded $1 trillion, Federal Reserve data showed.  The pickup in September consumer credit capped a quarter in which debt outstanding grew at an annualized 5.5 percent, the fastest quarterly pace this year.  The September acceleration in non-revolving debt likely reflected a jump in motor vehicle purchases as consumers in hurricane-stricken areas replaced damaged autos.  While home values and stock prices have climbed, generating more wealth for some Americans, other households with fewer assets may find it difficult to boost their spending as their debt burdens mount.

 

Gradual rate hikes in the US are the best option, says Fed’s Mester

A gradual increase in interest rates is the best way to deal with inflation and support the U.S. economy, Loretta Mester, president and CEO of the Federal Reserve Bank of Cleveland, told CNBC.  “I think a gradual path is the best strategy we have for prolonging the expansion,” she said.  In October, the Federal Reserve said the U.S. economy had been expanding at a steady pace and suggested that another rate hike could take place in December.