December 11, 2017 Consensus

The Weekly Consensus – December 11, 2017 (Volume 9, Number 47)

The Big Story
For Retailers, Is Being Political Ever Correct?
Mark Lenz

Patagonia last week updated its homepage with this message, written in stark white on black: “The President Stole Your Land.” The change announced Patagonia’s opposition to (and legal efforts to prevent) President Trump’s recent order to significantly reduce the size of two large national monuments in Utah.  REI, another large outdoor retailer, also responded to the president’s decision by making a more subdued statement that they “are unwavering in our nonpartisan commitment to public lands.”

The federal government owns nearly two thirds of the land in the state of Utah, an amount of land much higher than in all other states in the U.S. except for two.  The announcement by President Obama creating Bears Ears National Monument last year, which makes up 1.3 million acres, while pleasing environmentalists and the local Native American tribes, did not please the local politicians and states’ rights supporters.

In this time of political polarization, most companies walk a tight line and say little on political topics as to not offend and alienate up to 50% of their potential customers. Some have dipped their toes in the water on a certain position, only to find themselves at the center of heated controversies.  For instance, Target last year faced protests after instituting a transgender-inclusive restroom policy.  Others have become embroiled in political quarrels just for selling products made or endorsed by public figures with controversial political affiliations. This recently happened to a number of retailers, including Nordstrom, when certain groups protested the sale of Ivanka Trump-branded products.

So, what is a retailer to do?  In Patagonia’s case, the company is betting that its statements will play well with most of its customer base, and/or it is willing to potentially sacrifice customers because of how passionate it is about this issue. Many of Patagonia’s core customers likely support environmental causes and have political leanings similar to those of Patagonia’s founder, Yvon Chouinard.  Earlier this year, Mr. Chouinard announced that Patagonia would no longer attend the Outdoor Retailer show in Utah and was also trying to influence the move of that major show from Salt Lake City to another state due the position of Utah politicians on the topic of protected lands.  REI’s customers may be equally passionate about the issue as those of Patagonia, but REI appears to be taking more care to avoid a clearly political statement that could risk alienating potential customers.

In these two cases, it is probable that the great majority of customers agree with the brands’ stance on land conservation.  For retailers that do not have a customer base that leans heavily one way or the other politically, taking a position like this can lead down a complex path. In the case of Chick-fil-A, when the owner made his position regarding same sex marriage clear in 2012, there were immediate protests and boycotts. Over time, the owner stopped making comments, and Chick-fil-A weathered the storm and today remains a successful business.  In that case, outrage was initially intense, but it appeared that the majority of the customer base was happy to resume eating chicken sandwiches as soon as the political controversy died down.

At the end of the day, every consumer facing company needs to consider whether taking a public and possibly political position will be harmful or beneficial to the business before making any such statements.  Those that don’t may be left to face the wrath, or worse yet, the disappearance of their customer.


Headlines of the Week

CVS Health, Aetna to Merge

CVS Health and Aetna announced their plan to merge. Woonsocket, R.I.-based CVS Health will be acquiring Aetna, whose headquarters are in Hartford, Conn., for roughly $69 billion, or $207 per share. The two companies said that the merger offers the potential to change how patients access care at lower cost. CVS Health said the combined company — which would offer CVS Health access to the 44.6 million people Aetna serves — would offer new opportunities to reach patients, turning CVS Pharmacy locations in spaces for wellness, clinical and pharmacy services, as well as vision, hearing, nutrition, beauty and medical equipment in addition to its current offerings. It also will offer health services at many locations that will turn CVS Pharmacy stores into a hub for answering patient questions about their conditions, prescriptions and coverage.


Wal-Mart Plans to Change Its Name

What’s in a name? For Wal-Mart Stores Inc., it’s what’s not in the name that counts.

The world’s biggest retailer announced plans to change its legal name to Walmart Inc. on Feb. 1, the start of its next fiscal year. The tweak reflects how customers commonly refer to the company, and supports its aim to serve customers both in physical stores and online. “Why the change? Because of our growing presence as a retailer who serves customers no matter how they choose to shop,” Chief Executive Officer Doug McMillon said in a blog post on the company’s website. “Most of us, and I’d guess all our customers, refer to our company as Walmart.”


Apparel & Footwear

Moda Operandi, Women-Led Luxury Seller, Raises $165 Million To Speed Up Growth

Luxury online fashion retailer Moda Operandi has raised $165 million in growth capital as it increases its footprint in sought-after Middle Eastern and Asian markets and develops new technology to woo wealthy, mobile-savvy young women to its site. The round was co-led by Adrian Cheng, scion of the third-richest family in Hong Kong, and Apax Digital, a new billion-dollar fund investing in high-growth internet companies advised by private equity giants Apax Partners. This brings Moda’s fundraising total to just over $300 million in seven years. Existing investors include New Enterprise Associates, LVMH and Fidelity, among others. Company CEO Deborah Nicodemus described this new injection of capital as strategic. Cheng, especially, will be able to open doors for Moda as it makes inroads in markets like China, Hong Kong and Korea.

Roots doubles down on physical stores with plans for up to 10 new locations in Canada, 14 in the U.S.

Roots Corp. sees ample room to grow its store base. The apparel, footwear and accessories company reported sales increases of 10.1 per cent at stores open for more than a year and better than expected earnings in the third quarter, its first public report since completing an initial public offering of shares in October. Roots chief executive Jim Gabel told analysts Tuesday that stores, particularly those renovated to a new format, are an important part of the company’s strategy as it grows its presence online. Canada remains far from a mature market for Roots,” Gabel said Tuesday, noting the retailer is looking at 30 “high potential” new locations in this market, where it plans to open 8 to 10 new stores by the end of 2019 and renovate up to 33 additional locations. Roots, which began selling leatherwear and a popular “negative heel” shoe out of a Toronto boutique in the 1973, now has 120 locations across Canada, four in the United States, and 138 stores in Taiwan and China with local partners.


Argent Is Filling the Gap in Affordable Women’s Workwear

Argent is among more startups providing affordable, contemporary clothing for women of all ages and sizes. “There’s been much more of a push of casual leisure than career clothing by retailers, so there’s a shortage of options for professional women,” says Simeon Siegel, executive director at Nomura/Instinet Equity Research, who follows the retail industry. “And while behemoths like Amazon are growing,” he says, there’s room for small businesses as midsize companies such as Talbots Inc. and Ann Taylor parent Ascena Retail Group are closing stores. Argent is all about combining style and function.  Its founders—Sali Christeson, 31, a former cloud services manager at Cisco Systems Inc., and Eleanor Turner, also 31 and a former designer for Tory Burch and J.Crew—started the brand in 2016 after concluding most women’s workwear was dowdy and outdated.



Athletic & Sporting Goods

Cabela’s eyes options, may sell all or part of business

Cabela’s may be seeking a buyer for all or some of the sports chain. The retailer has been under pressure since late October when the investment firm Elliott Management bought a 6 percent stake and pushed for strategic changes from the company, like the potential sale of its credit card unit.  Shares of Cabela’s Inc. are down 11 percent this year, but they’ve risen more than 18 percent in the last month on speculation of a buyout.  CEO Tommy Millner said Cabela’s continues to honor its commitments and that the company remains focused on its business.


Decathlon opens first Australian store

Spare a thought for Super Retail Group chief executive Peter Birtles. On the same day that Amazon launched its new Australian site, thousands of shoppers flocked to Tempe in Sydney, where global sporting goods retailer Decathlon opened its first bricks and mortar store, 16 months after setting up an Australian online store.  Decathlon’s first Australian store is 3800 square metres – two to three times the size of most Rebel stores – and carries more than 7000 products across more than 70 sporting goods and outdoor categories.


Cosmetics & Pharmacy

GNC to Weigh Options — Again

For the second time in less than two years, GNC Holdings is reviewing its alternatives. The struggling retailer said it was not moving ahead with its previously announced plans to refinance debt that comes due in 2022, and also said it has retained Goldman Sachs and Co. as a strategic advisor to help the board “evaluate alternatives to optimize GNC’s capital structure and other alternatives to enhance shareholder value.” The company did not specify its options.

Fred’s Mulls Putting Specialty Business on Auction Block amid Q3, YTD Losses

In its third quarter, Fred’s reported a $51.8 million loss — an increase over the $38.4 million loss it reported in Q3 2016. As it works to pay off its debt, the company canceled its quarterly dividend and said it is exploring strategic alternatives for non-core businesses, including its specialty pharmacy business and real estate. It’s also updating its share repurchase program.


Discounters & Department Stores

Dollar stores are dominating retail by betting on the decline of the American middle class

Dollar General and other dollar stores are thriving while department stores struggle to survive — and their success is built on the death of the American middle class. The Wall Street Journal reported that Dollar General has become one of the most profitable retailers in the US by opening more locations in places across the country that have continued to struggle economically. “The economy is continuing to create more of our core customer,” Dollar General CEO Todd Vasos told the WSJ.

Walmart makes last-minute holiday push for procrastinators

In the final weeks before Christmas, Walmart is making its biggest push yet for the company’s order online, pick up in store service. This holiday season, the big-box retailer will qualify more items on for same-day pickup in stores than ever before, Walmart announced Friday. The company continues to tap into the 90 percent of Americans who live within 10 miles of a Walmart store.



Grocery & Restaurants

How Blue Apron wooed and then disappointed Wall Street investors

Earlier this year, Blue Apron Holdings Inc. executives traveled the U.S. selling potential investors on the meal kit company’s coming initial public offering. Behind the scenes, however, all was not well.

Home & Road

Home Depot to Improve Stores; Sets $120 Billion Sales Goal

The nation’s largest home improvement retailer authorized a $15 billion share repurchase program and said it would accelerate investments in key areas of its business, including its stores. Home Depot plans to invest in such areas as its stores, associates, supply chain and delivery capabilities. CNBC put the investment at $4.5 billion over the next three years, and said the chain would also build a new website for professionals. “The retail landscape is changing at unprecedented rates and we plan to invest for the future to address the evolving needs of our customers,” said Craig Menear, chairman, CEO and president.

Restoration Hardware Earnings Increase in Q3, Updates Outlook

Despite a tough hurricane season, Restoration Hardware (RH) reported a strong third quarter — and is entering its fourth quarter on a high note. For the third quarter, revenues increased 8%. This is an additional 3% increase from last year despite an approximate 1% negative impact from Hurricanes Harvey and Irma. Meanwhile, brand revenues increased 6% compared to a 6% decrease last year.  The company reported Q3 EPS of $1.04, which was in-line with the analyst estimate of $1.04. This is despite a negative impact of approximately $0.05 from Hurricanes Harvey and Irma, and includes a positive impact of approximately $0.11 related to a lower effective tax rate. This compares to adjusted diluted earnings per share of $0.20 last year, according to Street Insider.

Jewelry & Luxury

Signet’s Credit Practices Spur Investigations

In its latest form 10-Q filed with the Securities and Exchange Commission, Signet revealed that two government agencies are conducting investigations into the company’s credit practices. On Sept. 6, the Consumer Financial Protection Bureau (CFPB) told Signet it is considering legal action against the company, regarding alleged violations of the Consumer Financial Protection Act of 2010 and the Truth in Lending Act.

The alleged violations are related to in-store credit practices, promotions, and payment protection protocols, the company said, without getting more specific.

Firestone Raising Cash After Diamond Price Drop

Firestone Diamonds is looking to raise $25 million (GBP 18.5 million) to fund operations at its Liqhobong mine in Lesotho after weak rough prices drove the company to a loss and forced it to rethink its plan for the asset. Disappointing demand resulted in the miner achieving an average price of only $77 per carat in its fourth fiscal quarter, the company explained in a statement last week. This brought the total average for the financial year that ended June 30 to $90 per carat, compared with an original estimate of $107 per carat, it said. When the mine’s value dropped as a result of the lower-than-expected prices, Firestone incurred an “impairment charge” of $122.6 million, meaning the devaluation counted against the company’s profits.

How Gucci Cracked the Millennial Code of Luxury

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 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.


Office & Leisure

Toys ‘R’ Us to Close 26 U.K. Stores in Court-Led Restructuring

Toys “R” Us Inc. plans to shut at least 26 U.K. stores as the retailer goes through bankruptcy proceedings in the U.S. The closures, starting in spring 2018, will pare rents on warehouse-size stores and let the company focus on better-performing small shops and online operations, according to an emailed statement on Monday. The U.K. arm will pursue a Company Voluntary Arrangement, a type of court-led insolvency proceeding. Warehouse stores “are too big and expensive to run in the current retail environment,” U.K. Managing Director Steve Knights said in the statement. “The business has been loss-making in recent years and so we need to take strong and decisive action to accelerate the transformation.” The U.K. arm’s CVA restructuring plan must be approved by creditors in a vote scheduled for Dec. 21.

Lego wins critical copyright case in China

It was good news for Lego this week as a court in China ruled in favour of the Danish toy producer in a case involving two Chinese companies copying Lego products. The Shantou Intermediate People’s Court decided that certain products made by Chinese company BELA infringed upon the copyrights of Lego and that the products acted as elements of unfair competition. It’s the first time that Lego has filed, and subsequently won, an anti-unfair competition case against imitators in China – a country that holds great market potential for the toy manufacturer. Chinese companies have been producing knock-offs of Lego products for some time now, and this year thousands of consumers in European countries such as Italy, France, the UK, Poland, Denmark, Russia, the US, Brazil and Australia have bought copy products. Some producers, such as Lepin, haven’t even bothered to change the logo and have seemingly tried to make knock-offs and packaging almost exactly the same as Lego products.

Technology & Internet

Everlane Just Disrupted Itself

The Internet-born style disruptor just did what no one expected: built a store, right in the middle of Manhattan. But why?


Amazon Alexa users buy more stuff, study shows

Amazon’s Alexa voice technology is helping consumer brands sell more, according to a recent study, underscoring its potential as a major marketing platform. The study, run by Linc Global, shows that Echo owners increased their purchases of consumer products, like diapers, by 13.5% in the third quarter of 2017, up from the 7.5% jump seen in the second quarter of this year. Those companies also saw an unusually high 60% upsell rate, meaning the consumers bought more products from the same brand after their Echo purchase.

Finance & Economy

This year’s plans for job cuts at lowest level since 1997, Challenger report says

Companies announced plans to cut 35,038 jobs in November, an increase of 30 percent from last year, a private survey reported Thursday.  From January to November, employers announced just over 386,347 layoffs, the lowest total for that period since 1997, outplacement consultancy firm Challenger, Gray and Christmas said. November’s total represents a 17 percent rise in layoff announcements from October.


Monetary policy must address ‘frothy’ financial markets, warns central bank body

Investors should be more concerned about an overheating financial market at a time when consumer debts are rising to unsustainable levels, according to the global body for central banks.  In its quarterly financial review, the Bank for International Settlements (BIS) said investors were choosing to bask in the “light and warmth” of improving global growth, muted inflation and soaring stock markets. However, record high debt levels and the scale of this year’s rally in asset prices are both reminiscent of the pre-2008 financial crisis era, according to the BIS.