December 4, 2017 Consensus

The Weekly Consensus – December 4, 2017 (Volume 9, Number 46)

The Big Story
Gluttony Wednesday
Doug Stebbins, CFA

One should never underestimate the power of branding.  At some point, “the day after Thanksgiving” became known as “Black Friday”, a change that has magically caused normally rational people to wake up at 2am to line up outside of stores in the freezing cold.  While many believe that the term Black Friday was coined to identify when retailers’ red ink (losses) would turn into black ink (profits), it actually was a term created by the Philadelphia Police Department in the 1950’s to describe the chaos as shoppers descended upon the city for post-Thanksgiving holiday gift buying.  As the term took root in Philadelphia, there was an effort to rebrand the day “Big Friday” to make the city seem more welcoming to shoppers.  But it was too late, the Black Friday moniker was here to stay, and it is now known nationwide as the official beginning of holiday shopping season.

In an effort to spur consumer spending, there are a series of named days right around Thanksgiving.  In addition to Black Friday there is also “Cyber Monday”, “Small Business Saturday” and “Giving Tuesday.”  By giving these specific days around Thanksgiving a name, it helps reinforce the call-to-action for shoppers to get out their credit cards and start spending.

The Black Friday label is so powerful that it has been fully embraced by our Canadian neighbors.  Keep in mind that in Canada, Thanksgiving occurs in October.  So two Thursdays ago, while we were eating turkey and watching football, it was just another Thursday for our Canadian neighbors.  So, unlike the U.S., on the day after American Thanksgiving, Canadian schools and offices are open.  But the lack of time off has not deterred Canadian retailers from embracing the Black Friday marketing message.   Some retailers, such as Best Buy Canada, have a section on their website explaining to confused Canadian that “Black Friday is the first Friday that follows American Thanksgiving and is considered by many to be the beginning of the holiday shopping season.”  Canadian retailers are pushing hard to make Black Friday shopping a Canadian consumer tradition.

If U.S. retailers want to find more special shopping days, they may take inspiration from our northern neighbor.  Canadian retailers have made the day after Christmas, “Boxing Day”, into a huge consumer spending day.  Traditionally, since British servants had to work on Christmas to ensure that the holiday meals and celebrations were festive, the staff typically got the day after Christmas off and got a gift or “box” from their employer on that day.

In recent years, in the UK and other Commonwealth countries, such as Canada, Boxing Day has become synonymous with shopping deals, with stores opening early with special discounts.  Other countries have also adopted similar traditions; in Germany and Poland it is called Second Christmas Day, and in Ireland it is St. Stephen’s Day.  I predict that by holiday 2020, U.S. retailers will aggressively adopt one more “named shopping day” and American consumers will be inundated with Boxing Day marketing themes to try to lure shoppers back out to the stores the day after Christmas.  However, it will take some serious deals to get my family’s servant (me) off the couch and back to the mall.

 

 

Headlines of the Week

Arby’s to buy Buffalo Wild Wings in $2.9B deal

Arby’s Restaurant Group Inc. has agreed to buy Buffalo Wild Wings Inc. for $157 per share, the companies said on Tuesday. The merger values the Minneapolis-based chicken wing chain at $2.9 billion, including the company’s debt. Arby’s is owned by Roark Capital Group, which has been said for several days to be bidding on Buffalo Wild Wings.

Cyber Monday Breaks Online Sales Records With $6.6B Haul

The results are in, and they’re a humdinger. According to Adobe, Cyber Monday (Nov. 27) was the largest online shopping day in history, bringing in a record $6.6 billion and topping last year’s haul by nearly $1 billion, representing a 16.8 spike.

 

 

Apparel & Footwear

Ugg owner fails to appease shareholders

Deckers Outdoor, the parent of the popular Ugg shoe brand, made a flat-footed attempt on Monday to appease shareholders. Amid a contentious proxy fight with activist hedge fund Marcato Capital, the Goleta, Calif., company said that it would appoint at least two new independent directors to its board by its September 2018 meeting. But Marcato scoffed at Deckers’ move, accusing the company of “once again doing as little as possible, at the slowest pace possible, and at the last moment possible.” Marcato, which has an 8.4 percent stake in Deckers, nominated a full slate of directors to Deckers’ board in September. Shareholders will vote on the slate ­Dec. 14. The hedge fund has been pushing the company to sell itself. Deckers said last month — after contacting 90 potential bidders — that it is “no longer actively pursuing a sale.”

In an About Face, Everlane to Open First Brick and Mortar Clothing Store

Online retailer Everlane plans to open its first physical retail store on Saturday, marking a major departure from the company’s original vision. The store, in New York, will sell Everlane’s trademark T-shirts, cashmere sweaters, and shoes. There will also be space for dinners, workshops, and talks, according to the Washington Post. A second store is planned for San Francisco in February 2018. Everlane’s push into physical retail locations comes five years after CEO Michael Preysman told the New York Times’ T Magazine that the company would “shut down” before opening a brick and mortar store. The change in direction follows a pattern for many online retailers.

Denim Production in the United States Hit With Another Blow

One of the last mills in the United States to make denim fabric has decided to shutter its denim production and concentrate on technical fabrics. The DNA Textile Group announced on Nov. 28 that it would close down its Denim North America division by the end of January 2018 due to sagging demand and low selling prices. “The air came out of the balloon this last year,” said Monte Galbraith, president of DNA Textile, headquartered in Columbus, Ga. “For four or five years it was great, but I have never seen it decrease so rapidly as I saw it this year.” By the end of January, the company will be laying off more than 100 workers. The closure of these two mills is a blow to domestic denim production, which is now limited to just a few locations such as Mount Vernon Mills.

 

 

Athletic & Sporting Goods

Under Armour launches Lindsey Vonn ski apparel line

Lindsey Vonn, the world’s most decorated female ski racer, has launched a signature ski apparel line with Under Armour.  Vonn, a 2010 Olympic champion preparing for February’s Winter Games in South Korea, collaborated with Under Armour’s designers to create six pieces “built to take you from the ski lodge to the slopes with modern cuts and bold colors,” the Baltimore-based athletic brand said.

 

Nike shares get downgraded due to ‘lower growth’ in the US

Nike is no longer an attractive investment after its recent rally, according to one Wall Street firm.  HSBC lowered its rating to hold from buy for Nike shares, citing weakness in the U.S. market and the stock’s valuation.  The company’s shares are up 17 percent this year through Monday compared with the S&P 500’s 16 percent return. The stock is up more than 10 percent since Nike gave mid-teens annual earnings-per-share growth guidance for the next five years during its investor day last month.

Cosmetics & Pharmacy

Unilever Expands Personal Care Portfolio with Sundial Brands Acquisition

Unilever has announced plans to acquire New York-based personal care products company Sundial Brands. Sundial Brands’ portfolio includes the brands SheaMoisture, Nubian Heritage, Madam C.J. Walker and nyakio. As part of the deal, the company will operate as a standalone unit, with founder Richelieu Dennis continuing to lead as CEO and executive chairman. Unilever and Sundial Brands also will create the New Voices Fund with an initial investment of $50 million as part of the deal. This joint venture will look to empower women of color entrepreneurs and is intended to scale to $100 million by attracting other interested parties, the companies said.

Rite Aid Successfully Transfers First Stores to Walgreens Boots Alliance

Camp Hill, Pa.-based Rite Aid announced that it has completed the pilot closing and first subsequent closings under the amended and restated asset purchase agreement with Walgreens Boots Alliance. Rite Aid executed the transfer of 97 stores and related assets to Walgreens. Under the amended and restated agreement, WBA will purchase a total of 1,932 stores, three distribution centers and related inventory from Rite Aid for an all-cash purchase price of $4.375 billion on a cash-free, debt-free basis. Rite Aid and WBA expect to continue to transfer ownership of the stores in phases over the coming months, with the goal being to complete the store transfers in spring of 2018.

 

Discounters & Department Stores

Sears’ narrower loss sends stock soaring, but sales mark sixth year of declines

Sears Holdings, the parent company of Sears and Kmart stores, reported a narrower net loss for the fiscal third quarter than it did a year ago, as the company pushes to return to profitability against a backdrop of store closures and vendor disputes. Efforts to shrink the retailer’s real estate footprint look to be taking hold, as Sears aims to strike a balance with its existing assets. The department store chain is testing smaller store formats across the U.S., and in some cases moving to occupy a pint-sized portion of a bigger box, as mall operators redevelop their properties. While Sears’ stock was climbing more than 13 percent on the news, there’s still the sobering fact that sales have declined for six years and losses are deep.

 

Target Has Trouble Luring Guys to Its Stores

You couldn’t pay some guys to wear clothes from Target Corp. Andrew Aragon, a 26-year-old business-development associate in Washington, recently stumbled on a $40 Target gift card left at a city metro station. He went to his local Target and couldn’t find any duds worth buying, so he went home with teeth whitener. “I just don’t think of it as a place to go for clothing,” Aragon said. Guys have never really cottoned to Target. Women make up about 55 percent of the chain’s core customers, according to an industry study by market researcher Magid, a greater share than that at competitors Wal-Mart Stores Inc. or Costco Wholesale Corp. For years, cheap-chic women’s fashions from in-demand designers like Isaac Mizrahi and Jason Wu were enough to keep the cash registers ringing.

Costco ‘destroys’ November with massive sales surge

Costco on Thursday reported that November net sales rose 13.2% to $11.26 billion from $9.95 billion during the similar period last year. For the twelve-week first quarter of fiscal year 2018 ended Nov. 26, net sales rose 13.3% to $31.13 billion, from $27.47 billion in the same period last year, according to a company press release. Costco’s core average ticket (excluding fuel price inflation) rose 2.2%, more than October’s 1.6% increase.

Same-store sales in the month rose 10.8% overall, besting the Retail Metrics consensus estimate for 7% by 380 basis points. Same-store sales in the U.S. increased 10.2% (adjusting for fuel price inflation and currency, the core same-store U.S. sales rise remained impressive at 8.4% growth) and e-commerce same-store sales rose 39%. The performance is the warehouse retailer’s best monthly same-store sales gain in over six years, since its September 2011 12% gain, Retail Metrics noted.

 

Grocery & Restaurants

Jack in the Box nears sale of Qdoba for $300M

Jack in the Box Inc. is closing in on the sale of the Qdoba Mexican Eats brand to Apollo Global Management LLC for a price tag of more than $300 million, industry sources confirmed to NRN on Monday. The would-be buyer is the parent company of CEC Entertainment Inc., which owns the Chuck E. Cheese dining and arcade concept.

Kroger posts stronger than expected Q3

Kroger on Thursday said its investments in pricing, merchandising and cost-cutting helped propel unexpected sales and margin gains in the third quarter.

Home & Road

 At Home Delivers Another Strong Quarter

At Home reported its 15th consecutive quarter of same-store sales growth as its value-driven store-based home decor model shows no signs of losing momentum. The company also raised its full year outlook. At Home reported that its net sales grew 24.8% to $213.0 million in its third quarter, ended October 29, driven by the net addition of 22 stores since the year-ago period. Same-store sales increased 7.1%. Excluding the net impact of Hurricanes Harvey and Irma, the company estimate that comparable store sales would have increased 8.3%. As of November 29, 2017, At Home operates 149 stores in 34 states and is headquartered in Plano, Texas.

Art Van buys Levin and Wolf

Art Van Furniture has acquired Top 100 companies Levin Furniture and Wolf Furniture in deals that set up yet a new growth path for the furniture giant with combined sales expected to hit $1.3 billion in 2018. The Levin acquisition was reported last week after Furniture Today obtained a copy of CEO Robert Levin’s letter to employees about the deal. Neither Robert Levin or Wolf CEO Doug Wolf are expected to remain with the businesses long-term. Art Van said it will continue operating under the Wolf and Levin names. Terms of the deals were not disclosed.

Steelcase agrees to acquire AMQ Solutions

Steelcase Inc. has announced the pending acquisition of AMQ Solutions, a California-based provider of height adjustable desking, benching and seating for workstations in the open plan, collaborative environments and training rooms. The acquisition is expected to help Steelcase provide a broader range of price points to meet existing customer needs and serve additional customers globally.

Jewelry & Luxury

China Recovery Lifts Tiffany

Tiffany & Co received a boost from improved retail demand in Asia during its third fiscal quarter, as the company seeks to return to growth this holiday season. Group sales rose 3% year on year to $976.2 million in the three months that ended October 31, with a strong performance in the fashion-jewelry and solitaire categories, as well as in high and fine jewelry. Comparable-store sales slipped 1%, but profit increased 5% to $100.2 million. “These latest financial results marginally exceeded our expectations, but I believe that Tiffany has the medium- to long-term potential to achieve meaningful comparable-store sales growth, and drive higher operating margins and earnings growth,” said Alessandro Bogliolo, who joined the jeweler as CEO last month.

 

Exit Interview With Chaim Even-Zohar

This week, Chaim Even-Zohar, my longtime friend, colleague, and onetime mentor, announced he was retiring after nearly 40 years of diamond industry journalism. A true legend in the industry, Even-Zohar for decades published Mazal U’Bracha (now Idex), as well as Diamond Intelligence Briefs (now Diamond Intelligence Briefing). And while his editorials have always generated strong opinions—which isn’t surprising since he often expressed strong opinions—he is widely respected for his storehouse of knowledge, the impressive list of stories he has broken, and his dedication to, as well as the sheer joy he took in, his craft. For years, his Idex Thursday memo was required reading; the entire industry would stop and see what he had to say. The diamond trade will be a far duller, and possibly more dishonest, place without him. Even people he angered may be sad to see him go.

What We Know About Meghan Markle’s Ring

The UK’s Prince Harry has revealed how he proposed to Meghan Markle with a custom-designed ring featuring a center diamond from Botswana and two more stones from his mother, Diana. “The ring is yellow gold, because that’s [Markle’s] favorite, and the main stone itself is sourced from Botswana,” he said in a television interview Monday, after announcing his engagement to the American actress. “The little diamonds either side are from my late mother’s jewelry collection, to make sure she’s with us on this crazy journey together.”

Office & Leisure

Bankrupt Toys R Us’ plan to pay executives multimillion-dollar bonuses ‘defies logic and sense,’ US trustee says

Toys R Us’ bankruptcy proceedings are off to a rocky start. In a fiercely worded letter, Judy A. Robbins, the Department of Justice trustee assigned to Toys R Us’ bankruptcy case, argued that the retailer’s plan to pay multimillion-dollar bonuses to executives “defies logic and sense.” The letter was written in response to a motion, filed by Toys R Us in bankruptcy court on November 15, that requested permission to award bonuses to 17 executives. The bonuses would start at $16 million and later double should certain financial goals be met at the company. Robbins noted that five executives were given a package of bonuses totaling $8.2 million just before the bankruptcy filing. This included a $2.8 million incentive for CEO Dave Brandon “just to stay with the company,” Robbins wrote.

Why Barnes & Noble Wants Smaller Stores

Barnes & Noble is the latest retailer to discover that less is more sometimes. Coming off another awful quarter, the big-box retailers’s executives said on Thursday that the path to better financial performance could lie in operating smaller stores more focused on books with a more limited selection of items like games and toys. “Our goal is to get smaller,” Barnes & Noble Chief Executive Demos Parneros, who took the reins in April, told Wall Street analysts on a conference call. Barnes & Noble said that comparable sales fell 6.3% in the quarter ended Oct. 28., the seventh straight three-month period to see sales decline. The company said half of that decline stemmed from big sales last year of a Harry Potter book and the absence in this year of a similar blockbuster. But the problems also stemmed from non-book products that aren’t catching on with customers.

Technology & Internet

AWS launches Amazon Sumerian to build AR, VR and 3D apps quickly

We’d heard months ago that Amazon would be using its Re:Invent AWS event to roll out a new service related to building in mixed reality — augmented reality and virtual reality. And on the eve of the conference kicking off, it’s done just that. Today the company announced Amazon Sumerian, a new platform for developers to build and host VR, AR and 3D apps quickly and with minimal coding, for smartphones and tablets, head-based displays, digital signage and web browsers. As with many other AWS services, Sumerian is “free” to use: you pay only for the storage for what you create.

Finance & Economy

US consumer spending moderates in October, while inflation is picking up

U.S. consumer spending slowed in October as the hurricane-related boost to motor vehicle purchases faded, but a sustained increase in underlying price pressures suggested that a recent disinflationary trend had probably run its course.  Other data showed a second straight weekly drop in first-time applications for unemployment benefits, pointing to a further tightening in labor market conditions that could soon generate faster wage growth and drive inflation higher.

 

Economic growth in U.S. 3rd quarter highest since 2014

Led by a rise in business investment, the U.S. economy grew at an annual pace of 3.3 percent from July through September, its fastest rate in three years.  The Commerce Department estimated that third-quarter growth exceeded the 3 percent annual expansion for the period that it had initially reported last month.  The performance, achieved despite damage from two devastating hurricanes, marked the fastest expansion in gross domestic product — the broadest gauge of economic output — since a 5.2 percent annual spurt in the third quarter of 2014.