November 20, 2017 Consensus

The Weekly Consensus – November 20, 2017 (Volume 9, Number 44)

The Big Story
Amazon Should Be Jealous
Marshall Schleifman

Most people are familiar with the concept of “Hallmark holidays” – celebrations that are perceived to exist primarily for commercial purposes.  Headlined by Valentine’s Day, Mother’s Day, and Father’s Day, and filled out with commemorations of Grandparents, Secretaries, Bosses and others, “Hallmark holidays” drive consumer purchases of cards and gifts to feed the corporate profit beast (in its defense, Hallmark officially disclaims credit for creating any holidays).  In fact, according to National Day Calendar, various interest groups, industry associations, and businesses now sponsor over 1,500 “national days” to attract attention and share-of-wallet.

Some events make no attempt to obscure their commercial intentions.  Well known to most Americans by now, Amazon invented Prime Day in July 2015 to commemorate the 20th anniversary of the company’s founding.  A celebration exclusively for members of Amazon’s Prime club, the company offers discounts on various products, especially Amazon’s own consumer electronics.  In 2017, Amazon’s third annual Prime Day generated estimated sales of approximately $1 billion over 30 hours.  Impressive by nearly every standard.

However, China’s Alibaba has taken its celebration of consumption, Singles’ Day, to a different level altogether.  Conceived to embody the opposite of Valentine’s Day, Singles’ Day is held annually on November 11th (11/11, get it?) and encourages people to show their pride in being single.  Alibaba has coopted this silly “holiday” and transformed it into an increasingly global event for festivals, parties and, most importantly, SHOPPING.

Singles’ Day 2017, held a little over a week ago, can only be described as a bonanza:  between midnight and 12:02 a.m. (yes, two minutes), Alibaba completed $1 billion in gross merchandise sales – the same amount Amazon is estimated to have generated over 30 hours.  By 1:00am, Alibaba’s sales stood at $8.6 billion.  Over the course of the day, sales totaled $25.3 billion!

To put that further in perspective:

  • Total sales for Black Friday and Cyber Monday combined for all U.S. retailers were $6.8 billion in 2016.
  • The National Retail Federation’s STORES Top Retailers 2017 report lists only 18 chains that surpassed $25.3 billion for total annual sales in 2016.

Overall, Singles Day generated $38.2 billion across all retailers, up more than 40% over last year, according to Chinese e-commerce research firm Syntun.  While Alibaba accounted for 70% of the total trove, Amazon China represented 2%.  With more than 500 million middle class consumers in China, winning in that country means winning the world.  So Amazon, the envy of every retailer and perhaps every corporation in the U.S., likely looks at China, Singles’ Day, and Alibaba and thinks, “I wish we could do that…”

 

Headlines of the Week

Stitch Fix prices IPO of 8 million shares at $15, below expectations

Online personal shopping company Stitch Fix priced its initial public offering (IPO) below expectations in a downsized offering on Thursday, raising $120 million. The underwhelming IPO highlights the challenges e-commerce companies face going public in the wake of poor performances from Snap and Blue Apron. It was also a disappointing debut for the newest breed of online shopping companies, which includes Warby Parker and Rent the Runway. Stitch Fix priced 8 million shares at $15, below its indicated range of $18 and $20. The company had originally planned to sell 10 million shares in the offering. The main concern for investors was its continued ability to stay profitable, according to a source familiar with the situation.

P&G Acquires Native Natural Deodorant Brand

Procter & Gamble has acquired Native deodorants, a fast-growing direct-to-consumer natural deodorant brand. The consideration for the venture-backed deodorant startup reportedly is $100 million cash.  The acquisition is expected to help P&G broaden its portfolio to reach consumers who are looking for products free of certain ingredients or full of natural ones, amid concerns that traditional deodorants may cause cancer. The company already owns popular deodorant brand Secret.  According to the consumer products giant, Native would appeal to consumers buying natural personal care items online and not in stores. San Francisco-based Native, an online distributor of deodorant, reportedly has more than a million customers since launching 2.5 years ago. The company recently received $500 thousand from Azure Capital Partners.

Mattel snubs Hasbro’s latest acquisition approach – sources

Mattel Inc has rebuffed Hasbro Inc’s latest takeover approach, people familiar with the matter said on Wednesday, casting uncertainty over the potential combination of the world’s two largest toy companies. Mattel’s rebuttal indicates that Margaret Georgiadis, who took over as the company’s chief executive in February, is seeking to drive a hard bargain in negotiations with Hasbro, even though Mattel’s stock has significantly underperformed that of Hasbro in the last year. Mattel has informed Hasbro its proposal undervalues the company and does not take sufficiently into account the potential for regulators to reject the deal based on antitrust concerns, the sources said. The terms Hasbro has proposed could not be learned, and it is not clear whether negotiations between the two companies will continue. The companies have engaged in multiple rounds of deal talks over the last two decades.

 

 

Apparel & Footwear

As Athleisure Cools, Denim Heats Up

The denim market has been enjoying a long-awaited rebound. Sales in the $13.5 billion US women’s and men’s jeans market grew 4 percent in 2016, according to market research company the NPD Group — the category’s best performance in years. Globally, following three years of declines, the jeans market, valued at $92.9 billion, is also expected to grow this year, with men’s and women’s categories forecast to rise this by 4.2 percent and 3.7 percent respectively, according to Euromonitor. And as the athleisure trend begins to cool — presenting challenges for gym-to-street brands like Lululemon, Sweaty Betty and others — it would seem denim is clawing sales away from the sportswear category.

Payless mum on layoffs as employees leave following town hall meeting

Payless ShoeSource didn’t respond Thursday to requests for information about the number of people the company let go during the day, but employees estimated it was up to 40 percent of the company’s corporate staff. Employees attended a town hall meeting at 8:30 a.m., where they learned about significant layoffs. Payless filed for bankruptcy in April and emerged four months later, nearly halving its $838 million debt load and reorganizing with the intent of stabilizing the company. The job losses at Payless this year will have a significant impact on the Topeka economy. Although this week’s layoffs are estimated to cost 200 employees their jobs, Payless has reportedly been leaving positions open and outsourcing other positions. The company had about 800 employees in March, according to Spreer. Reportedly, Payless has decreased its workforce by as many as 500 jobs this year.

Plus-size women’s clothing retailer sheds stores, files for bankruptcy

Less than a month after announcing it would close up to 10 stores, a plus-sized women’s clothing retailer has filed for bankruptcy. Fashion to Figure filed for Chapter 11 Monday in federal court in Newark, according to court papers. It has 23 stores in seven states. Fashion to Figure’s CEO Michael Kaplan told NYPost.com in October that the company made a mistake in expanding into malls too quickly at a time when the retail business was changing. Kaplan is the great-grandson of Lena Bryant, who rolled out the first plus-sized clothing with the founding of Lane Bryant.

 

 

Athletic & Sporting Goods

Adidas CEO Kasper Rorsted targets US market and remains committed to Reebok

In an interview with Manager Magazin, Adidas CEO Kasper Rorsted explained how Adidas is going to attack Nike in the US market.  “We need to be significantly larger and more profitable in North America. The region accounts for around 20 percent of our sales. However, North America’s share of the global sports market is 37 percent. So there’s still a lot of potential”, said Rorsted about Adidas’ biggest weakness at the moment.

 

Lacrosse retailer LAX World shutters stores

Lacrosse retailer LAX World has closed all 16 of its stores, including the original Towson location, and shut down its corporate headquarters in Cockeysville.  The chain, started in 1988 as the nation’s first store dedicated to the growing sport, had been expanding since being sold four years ago by founder Jim Darcangelo to a LAX World executive and two former Jos. A. Bank Clothiers Inc. executives.  At the time, the owners said they hoped to capitalize on lacrosse’s mushrooming popularity to launch a national expansion, with plans to open 40 to 50 stores in existing and new markets over five to six years. They also planned to expand online and in wholesale channels. The wholesale business several years ago accounted for 45 percent of sales and targeted lacrosse programs and teams.

Cosmetics & Pharmacy

Foundation Consumer Healthcare Closes Plan B One-Step Buy, Names new CEO

Foundation Consumer Healthcare has announced a new addition to its product offerings. The company has completed its $675 million acquisition of Plan B One-Step and two value emergency contraceptive brands from Teva. Alongside its new products, the company has added Greg Bradley, a 34-year CPG industry veteran, as its president and CEO. Among the products marketed by Foundation Consumer Healthcare is St. Joseph Aspirin, Theravent, Neo-Synephrine, Bronkaid and Campho Phenique.

Discounters & Department Stores

Target’s holiday forecast disappoints, sending shares lower

Target reported a bigger-than-expected increase in quarterly same-store sales, a positive sign for the big-box retailer’s turnaround plan. Target also raised its earnings outlook for the full year, though its fourth-quarter forecast, which includes key holiday sales, is lower than analysts’ expectations. That sent Target shares tumbling more than 8 percent shortly after market open on Wednesday. “While we expect the fourth-quarter environment to be highly competitive, we are very confident in our holiday season plans,” Chief Executive Brian Cornell said in a statement.

 

Wal-Mart Surges After Sales Growth Hits Post-Recession High

Wal-Mart Stores Inc. soared to an all-time high after delivering its strongest U.S. sales gain in more than eight years, helping the retailer keep pace with rival Amazon.com Inc. as the crucial holiday season begins. Comparable sales at domestic Wal-Mart stores grew 2.7 percent in the third quarter, the company said on Thursday, beating the increase projected by analysts. It also boosted its earnings forecast for the full year, sending the shares on their biggest rally in more than nine years. The results added fresh evidence that Wal-Mart’s resurgence is here to stay. The e-commerce business saw gross merchandise volume — a measure of all the goods it sells online — soar 54 percent in the quarter, a sign it may be chipping away at Amazon’s dominance. The online growth figure now includes sales from Jet.com, which it acquired in the third quarter of last year.

 

Grocery & Restaurants

Roark Capital offers to buy Buffalo Wild Wings: Wall Street Journal

Restaurant chain Buffalo Wild Wings Inc. has received a takeover bid valued at more than $2.3 billion from private equity firm Roark Capital Group, the Wall Street Journal reported, citing people familiar with the matter.

TPG Growth acquires majority stake in Mendocino Farms

The Mendocino Farms sandwich chain has been acquired by private-equity firm TPG Growth, a middle-market fund with plans to expand the concept outside California, the company said. In addition, former Darden Restaurants executive and Yard House co-founder Harald Herrmann has been named CEO of Mendocino Farms, which is based in Los Angeles. TPG Growth has acquired the majority stake previously held by private-equity firm L Catterton, which invested in Mendocino Farms in 2012. Whole Foods Market Inc., which also invested in the sandwich chain two years ago, has kept its minority stake as part of the deal with TPG Growth.

Albertsons buys piece of Texas’ El Rancho Supermercado

Albertsons Cos. has invested an undisclosed amount in Texas-based, Latino-focused El Rancho Supermercado, the grocer announced on Thursday. The deal gives Albertsons a longer arm into the Hispanic community and will allow the smaller El Rancho to “accelerate growth and expand into new markets throughout Texas.”

Beekman buys majority stake in Another Broken Egg

Beekman Investment Partners III LP has made a majority investment in Another Broken Egg of America LLC, the companies said Monday. The New York-based private equity firm said Chris Artinian, Beekman managing director, would assume of the role of president. Miramar Beach, Fla.-based Another Broken Egg Cafe has 65 full-service restaurants that feature breakfast classics, cocktails and other specialties from 7 a.m. to 2 p.m. daily.

Home & Road

Williams-Sonoma is buying a 3-D imaging and augmented reality startup for $112 million

Williams-Sonoma, the home furnishings company that also owns the West Elm and Pottery Barn retailers, has agreed to acquire the San Jose-based startup Outward for $112 million in cash, the companies just announced. Five-year-old Outward specializes in replicating physical products in high-quality 3-D imagery that can be used for visual merchandising on retail websites and apps. Outward has also worked with companies, including Williams-Sonoma’s Pottery Barn, to use its product renderings in augmented-reality apps that help customers visualize how a piece of furniture or decor would look in their home. The deal is expected to close by the end of next month.

 

Home Depot Lifts Full-year Forecasts as Hurricanes Spur Demand

Home Depot Inc, the largest U.S. home improvement chain, raised its full-year profit and sales forecast after Hurricanes Harvey and Irma spurred demand for generators, flashlights and rebuilding materials. The Dow component, which is riding a multi-year recovery in the housing market, got a huge boost in the quarter as the hurricanes drove customers to its stores in the southern United States for emergency supplies. Despite the spike in sales in the latest quarter, investors remain concerned about when the U.S. housing recovery might lose momentum.

Leon’s Reports Increases for Q3

Cost control was the primary driver of increases in Leon’s Furniture Limited’s third quarter increases in revenue, gross profit margin, net income and earnings per share.  For the three-month period ended Sept. 30, Canada’s largest retailer of furniture, appliances and electronics reported revenue of C$594.6 million, up 3.3% compared with the same period last year. Adjusted net income rose 9.9% to C$34.4 million and adjusted diluted earnings per share rose 7.7% to C42 cents.

October Furniture Store Sales Increase 4.4%

Sales at furniture and home furnishings stores rebounded in October with a 4.4% increase over the same month last year and trailed the 4.7% gain for the broad retail sector, the U.S. Department of Commerce reported.  Estimated furniture and home furnishings store sales reached $9.7 billion in October, up from a revised $9.3 billion in October 2016, the government said. Sales for the sector increased 0.7% from the month before, after the government revised up the September number to $9.64 billion from the previous $9.57 billion estimate.

Jewelry & Luxury

Coach is bringing its previously ubiquitous logo back to collections and ad campaigns

The Coach logo is making a comeback, but investors of the brand have questions.

Tapestry (Coach’s newly branded holding company) CEO Victor Luis spent a lot of time on the logo during his call with investors for the company’s first quarter of financial 2018 earnings. He made the argument that the luxury logo has been a driving force in reinvigorating sales in the premium handbag and accessories market, citing the double-digit growth of the $40 billion industry as proof that “brands absolutely still matter.” He said that Coach sales in North America were negatively impacted by a shortage of the logo and laid out plans to bring it back in a relevant way.

Gucci’s Cracked The Luxury Code With Millennials

Kering, the global luxury group with brands including Bottega Veneta, Saint Laurent, Balenciaga, Brioni, Stella McCartney and others, is going gangbusters this year, with first three quarter 2017 revenues up 26.4% on reported basis over last year. Even in North America, which has been slow to advance for most luxury brands, posted a 20.7% uptick in the first half of the year.  Leading Kering’s charge in year-over-year growth is Gucci, its Italian luxury fashion and leather goods brand. Gucci’s was up 44.5% in the nine months ending September 30, 2017. Gucci alone makes up 39% of corporate revenues, and 57% of its Luxury Activities segment. Stunning results in a luxury market that Bain & Company expects to grow 5% in 2017. Even more impressive, Kering’s chairman and CEO Francois-Henri Pinault told CNBC that about 50% of Gucci’s sales are coming from millennials, the cohort of 35-year olds and younger, a generation that has been particularly troubling for luxury brands.

 

Average Engagement Ring Spend Creeps Toward $6,500

The Knot’s biennial survey on marriage proposals shows that the average engagement ring spend has increased 25 percent since 2011. According to the wedding planning website’s 2017 Jewelry & Engagement Study, which surveyed 14,000 engaged or recently married U.S. brides and grooms, the average amount spent on an engagement ring is now $6,351. That is up 25 percent from $5,095 in 2011, and is a 6 percent increase from $5,978 in 2015, the last time The Knot conducted this particular survey.

Lab-Grown Diamonds Become a Bandwagon

Yes, many in the industry remain wary of lab-grown diamonds, and events like this week’s report of a fake GIA inscription certainly don’t help matters. But at the same time, we are swamped with announcements of new companies entering the business. Lab-grown certainly seems to have become a bandwagon that many in the industry are merrily climbing on board. There’s even an attempt to form a virtual lab-grown diamond bourse, called the Lab Grown Diamond Network.

 

Office & Leisure

Barnes & Noble shares surge as activist urges deal to take it private

Barnes & Noble shares jumped as much as 16 percent Thursday afternoon after The Wall Street Journal reported an activist investor has proposed a deal to take the bookseller private. Sandell Asset Management came to the retailer with a transaction that would value Barnes & Noble at around $650 million, or $9 a share. Barnes & Noble shares closed Wednesday at $6.60 apiece. Barnes & Noble issued a rebuttal, saying: “The Company does not take Sandell’s proposal as bona fide in that Sandell is the beneficial owner of 1 million common Barnes & Noble shares worth approximately $7 million.” Sandell controls roughly 2 million Barnes & Noble shares, for a stake in the company of about 2.75 percent, a securities filing shows. One person standing in Sandell’s way is Barnes & Noble Chairman Leonard Riggio. “Riggio has no intention of rolling his shares into such a transaction, and the Company believes a debt financing of $500 million is highly unlikely,” Barnes & Noble said.

Technology & Internet

Apple Is Ramping Up Work on AR Headset to Succeed iPhone

Apple Inc., seeking a breakthrough product to succeed the iPhone, aims to have technology ready for an augmented-reality headset in 2019 and could ship a product as early as 2020. Unlike the current generation of virtual reality headsets that use a smartphone as the engine and screen, Apple’s device will have its own display and run on a new chip and operating system, according to people familiar with the situation. The development timeline is very aggressive and could still change. Apple Chief Executive Officer Tim Cook considers AR less isolating than VR and as potentially revolutionary as the smartphone.

 

Strong growth: US e‑commerce sales jump 15.5% in Q3

The health of the U.S. e-commerce market remains strong, as new government data shows that consumers purchased $107.00 billion worth of retail products on the web in the third quarter. That’s an increase of 15.5% compared with $92.64 billion in the third quarter of last year, according to the U.S. Commerce Department.

Finance & Economy

US retail sales unexpectedly rise on automobile purchases

U.S. retail sales unexpectedly rose in October as an increase in purchases of motor vehicles and a range of other goods offset a decline in demand for building materials, suggesting consumer spending remained fairly strong early in the fourth quarter.  The Commerce Department said retail sales increased 0.2 percent last month. Data for September was revised to show sales jumping 1.9 percent rather than the previously reported 1.6 percent advance.  Retail sales increased 4.6 percent on an annual basis.  Economists polled by Reuters had forecast that retail sales would be unchanged in October. The slowdown from September’s robust pace largely reflected an unwinding of the boost to building materials and gasoline prices after recent hurricanes.

 

Americans waiting on a raise, run up debt

Most Americans have not seen a raise in the past year, according to one study, but they are running up a lot of personal debt, according to another.  That’s a bad combination.  A little more than half of American workers did not see a raise last year, according to wage data collected by BankRate.com. Workers over the age of 53 were hardest hit, with 63 percent not seeing any change in pay or job.  A little more than half of younger workers got a raise or a new job, with most of them below 36 years of age.  Overall, employers gave 38 percent of Americans a raise, while 18 percent of workers found a better job.