December 18, 2017 Consensus

The Weekly Consensus – December 18, 2017 (Volume 9, Number 48)

The Big Story
What Will Be Target’s Next Me-Too Move?
Paul Alexander, CFA

The escalating arms race between Walmart and Amazon has been one of the most interesting storylines in the consumer economy over the last two years. But every few months or so, we get a reminder that retailing isn’t just a two-horse race. Last week provided one such instance, when Target announced its $550 million acquisition of Shipt, a food delivery startup that will give Target the ability to roll out same day delivery to millions of shoppers.

While the Shipt acquistion is a big move, Target is still playing catch-up with its two big rivals. Walmart has already experimented with same day delivery in certain markets, and it purchased the last-mile logistics company Parcel this summer. Amazon also already offers same day delivery on certain items and has a relationship with the grocery delivery service Instacart through Whole Foods. This isn’t the first time that Target has followed Amazon’s or Walmart’s lead. Target was a few months behind Walmart this year in becoming a partner retailer on Google Express’s voice shopping platform. And just last month, Target declared that it will offer free shipping on all orders throughout the holiday season, emulating part of of the value offered by Amazon Prime.

Target’s view appears to be that there’s nothing wrong with taking a page out of a competitor’s playbook, especially when it means that their rival has to do the dirty (and costly) work of pioneering or developing a new technology or strategy. Which begs the question: what might Target’s next move be to mimic Walmart and Amazon? Here are three ideas:

  • Grocery: Target already has grocery, but its offering is limited versus Walmart and Amazon’s Whole Foods, particularly in prepared and fresh foods such as bakery and produce. Moody’s estimated last year that Target’s grocery business is 15% the size of Walmart’s. Shipt certainly bolsters the convenience that Target can offer grocery shoppers, but expanding its grocery offering could be an even more impactful move.

  • Painless Checkout: Amazon’s “Amazon Go” store, which is in the final steps of testing and development, will use cameras, sensors and other technology to charge customers for the items they pick up in store without them ever needing to checkout with a cashier. Eliminating checkout could greatly improve the shopping experience, especially when stores are busy and would otherwise have long lines at the register. Both Walmart and Target have mobile apps that aim to improve the speed of checkout, but they require customers to manually scan each item with their phone or a handheld scanner as they put them in their cart. If Amazon Go is able to eliminate checkout, and the company then begins conditioning consumers to that experience through Whole Foods and other Amazon-owned brick and mortar stores, Target (and Walmart) would be smart to find a way to replicate that technology to keep pace.

  • Target Day: Target could host its own shopping day akin to Amazon Prime Day or China’s Singles’ Day. Hosting its own shopping day could be an interesting strategy to create buzz and attract shoppers. Target Day (or whatever they would call it) could be leveraged to get customers to sign up for the Target Red card or Shipt, or to otherwise deepen Target’s relationship with customers. One added bonus of hosting such an event would be that Target would be the center of attention that day. In contrast, on other big shopping days such as Black Friday and Cyber Monday, Target is only one of many retailers offering discounts. Establishing its own day would be one way to stand out – even if only for 24 hours.

Target may not end up making any of these moves, but it is safe to expect that it will work to keep Walmart and Amazon from gobbling up the entire retail world unfettered. As it tries to keep pace, it is likely to continue borrowing strategies and ideas from its big rivals. An old cliché tells us that imitation is the sincerest form of flattery, but it isn’t such a bad competitive strategy either.

 

Headlines of the Week

Target acquires food delivery startup Shipt

Target has made it clear with the $550 million purchase of food delivery startup Shipt that it isn’t going to let its grocery business fade into total irrelevance. The retailer’s grocery business, which is just 15% the size of Walmart’s, has been described by industry analysts as “bland” and “uninspired.” Some analysts have even suggested that the retailer cut its losses by quitting selling groceries altogether. The purchase of Shipt could change all of that.

 

Houston-based Charming Charlie files for bankruptcy protection

Houston-based Charming Charlie filed for Chapter 11 bankruptcy protection on Friday with a plan to revamp operations, reduce debt and shrink its chain of jewelry and accessories stores in a hotly competitive retail environment. The company said in a news release that it had entered a restructuring support agreement with most of its lenders and shareholders. Through the agreement, the company aims to overhaul its capital structure and close some of its roughly 375 stores.

 

 

Apparel & Footwear

Charlotte Russe Enters into Agreement with Lenders

Charlotte Russe has entered into a restructuring support agreement with holders of over 98% of its Term Loan debt that will reduce the Company’s Term Loan debt from approximately $214 million to $90 million. In exchange, the Supporting Term Lenders will receive 100% of the equity of Charlotte Russe, subject to dilution from a new proposed management equity incentive plan. The consummation of this restructuring transaction remains subject to several conditions, most notably that the Company obtain a threshold amount of annualized operational savings, including rent relief, and the commitment of all holders of the Term Loan debt to participate in the proposed out-of-court restructuring. The Company does not anticipate any impact or interruption to the business as a result of this transaction, which it expects to complete in early 2018.

Shoemaker Rockport explores options including sale: sources

The Rockport Group is exploring its options, including a possible sale, after one of the U.S. footwear maker’s major debtholders took ownership of the company, people familiar with the matter said Wednesday. Rockport’s plans to review its options, which the three sources said could also include an equity or debt infusion, come as many brick-and-mortar retailers struggle to cope with the popularity of online shopping and changing consumer tastes. Alternative asset manager Crescent Capital Group LP, a major creditor of Rockport, took ownership of the footwear seller in recent weeks from private equity firm Berkshire Partners LLC and injected new capital into the company with other co-investors, the sources said.

 

Tiger Group, Great American to Conduct GOB Sales for Luxury Retailer Calypso St. Barth
Resort wear, home goods, furniture and more are being offered at prices ranging from 25% to 50% off retail as luxury chain Calypso St. Barth liquidates all its stores. Tiger Group and Great American Group are supervising the going-out-of-business sales at 16 boutiques in New York, Georgia, Massachusetts, Colorado, California, Florida, Arizona, Maryland and South Carolina. Valued at a total of $15 million, the inventory is drawn from 25 Calypso St Barth’s boutiques, nine of which have already closed for good; the remaining 16 stores will be shuttered at the close of the liquidation process. Calypso St. Barth filed for Chapter 7 bankruptcy protection on Nov. 29, 2017, in the U.S. Bankruptcy Court, District of New Jersey.

 

 

Athletic & Sporting Goods

Decathlon Lands In San Francisco

Marking its return to U.S. retailing, Decathlon has opened a store in San Francisco on 735 Market Street in a former Golfsmith location.  Decathlon, known for its discounts, entered the U.S. market when it bought the assets of MVP Sports Stores in 1999. It exited the region when it closed its last four stores, all of which are in Massachusetts, in 2006.  In August 2017, the company announced it would open its first Canadian store in Brossard, Quebec during the spring of 2018.  Globally, the retailer has 1,176 locations, according to its website. Its biggest markets are France, with 301 stores; China, 214; Spain, 149; and Italy, 113. Decathlon, founded in 1976, has grown to more than €11 billion in 2017.

 

BSN Sports Acquires Partial Assets from Hibbett Team Sales

BSN Sports announces the acquisition of a portion of the assets of Hibbett Team Sales, a Birmingham, Alabama-based distributor of team apparel and equipment. Hibbett Team Sales is the team dealer subsidiary of Hibbett Sporting Goods.  The acquisition grows BSN’s already-expanding workforce. The company added more than 200 sales representatives in 2017. The Hibbett addition expands BSN’s network in Alabama, Georgia, and Florida.

Cosmetics & Pharmacy

Unilever Announces Plans to Acquire Schmidt’s Naturals

Unilever has announced an agreement to acquire Schmidt’s Naturals. The Portland, Ore.-based personal care line, founded in 2010 by Jamie Schmidt, began as a deodorant line, which has expanded its offerings to include bar soap and toothpaste. The company’s deodorants have won awards for its formulas, which are derived from plants and minerals. Its most popular scents include Charcoal + Magnesium, Rose + Vanilla and Lavender + Sage. Co-founders Jamie Schmidt and Michael Cammarata will continue to be involved with the brand.

TSG Takes Stake in Huda Beauty

Private equity firm TSG Consumer Partners has acquired a minority stake in Huda Beauty. Financial terms of the transaction were not disclosed. Huda Kattan founded her eponymous cosmetics brand, Huda Beauty, in Dubai in 2013 with her sisters, Mona and Alya Kattan, and her husband, Christopher Goncalo. The collection began with false eyelashes and has since expanded to include a full range of products with launches in retail outlets including ShopHudaBeauty.com, Sephora, Sephora in JC Penney, Harrods, Selfridges, and Cult Beauty.

 

Discounters & Department Stores

Loan extension amid holiday season gives Sears financial breathing room

Sears Holdings gained some breathing room amid the critical holiday shopping season with a pair of deals that will give it more financial flexibility. Sears paid down $325 million on a loan originally due midway through next year and entered into an agreement that gives it an extension to repay the remaining $400 million due, the company said. That loan now matures in January 2019 but could be extended another six months. The company also said it plans to get a new credit facility worth about $600 million, linked to a previously announced deal struck last month with the Pension Benefit Guaranty Corp., a federal agency that guarantees individuals’ pension plans.

Wal-Mart Will Allow Workers to Have Early Access to Pay

Wal-Mart Stores Inc., working with two financial-technology startups, will allow its 1.5 million-strong U.S. workforce to draw on their salary ahead of payday — or squirrel some of it away for a rainy day. The world’s biggest retailer has unveiled financial-planning tools designed by Even Responsible Finance Inc. and PayActiv Inc., a move that lets its employees access earned wages ahead of scheduled paychecks and avoid bounced checks or payday lenders. Staffers will receive eight free uses a year of the Instapay tool via Even’s personal-finance app, which is linked to the employee’s checking or prepaid account and Wal-Mart’s payroll system.

What a Sears lawsuit against a supplier means for retailers

A lawsuit filed earlier this year by a Sears Holdings subsidiary could have far-reaching implications for suppliers selling to a customer suspected of financial distress. The lawsuit is particularly significant to those in the retail sector, as brick-and-mortar operations across the country struggle amid growing online competition. Sears — which certainly isn’t immune to those struggles — was recently asked by one of its vendors, One World Technology, to provide proof that Sears was financially able to keep up its end of the two firms’ supply agreement. This is known as an “adequate assurance demand,” and it came with the threat that One World could stop supplying Sears with its products. Rather than acquiesce, Sears took the unusual step of filing a lawsuit in which it asked a court to declare the demand improper.

 

Grocery & Restaurants

MTY Food Group buys Imvescor in cash-and-stock deal

Canadian restaurant franchisor MTY Food Group Inc. announced Tuesday it will acquire Imvescor Restaurant Group Inc. in a cash-and-stock deal worth 248 million Canadian dollars. The Montreal-based restaurant franchisors will control more than 5,700 units across 75 brands, generating systemwide sales of about CA$2.9 billion. With the tie-up, MTY adds brands such as Scores, Pizza Delight, Commensal, Bâton Rouge Steakhouse & Bar, Ben & Florentine and Toujours Mikes to a portfolio that already includes TCBY Frozen Yogurt, Big Smoke Burger, Le Steak Frites and Wasabi Grill and Noodle.

Snacks company Snyder’s-Lance hires bank to weigh sale after Campbell approach

Snacks company Snyder’s-Lance has hired an investment bank to weigh a potential sale after an approach from Campbell Soup, sources familiar with the situation said on Thursday. Talks are continuing with Campbell and at least one other potential suitor.

Home & Road

Knoll Plans to Purchase Muuto for $300 Million

Knoll Denmark ApS, a wholly owned subsidiary of contract and residential furniture manufacturer Knoll Inc., has signed an agreement to purchase Copenhagen-based luxury furniture designer Muuto for $300 million. Expected to close in January, the company said that the deal will be funded through a combination of cash and borrowings under Knoll, Inc.’s existing credit facility. Knoll produces a line of contract furniture including desks seating and file cabinets, but also has a line of mostly contemporary leaning residential furniture that includes bedroom, dining room, living room and some youth bedroom. Muuto produces a line of modern Scandinavian-inspired furniture including chairs, sofas, dining and occasional tables and shelving and storage units. In addition, it has a line of lighting and accessories.

Pier 1 Imports Slumps 30 Percent; Holiday Optimism Disappears

Pier 1 Imports Inc’s  stock lost nearly a third of its value and its main competitors’ shares also fell after the furniture and home decorations retailer warned the holiday shopping season was not going well. Shares in the seller of wicker chairs and scented candles slumped 30 percent and was on track for its deepest one-day drop since 2009, while rival Williams-Sonoma Inc fell 3.25 percent, Bed Bath & Beyond Inc dipped 2.7 percent and At Home Group declined 1.3 percent.

Li & Fung Sets Furniture Business as Part of $1.1B Sale

Consumer products manufacturer Li & Fung is selling its furniture business along with its beauty products and sweaters businesses for $1.1 billion to Chinese private equity firm Hony Capital. The company’s furniture assets include Kenas, Whalen and True Innovations. Li & Fung said the deal represents an opportunity to simplify its overall business and allow its senior management team to focus its efforts on a three-year plan that the company believes will “deliver long-term shareholder value as it transforms into a digital company.” The deal, which is subject to shareholder approval, is expected to close in the first half of 2018.

Jewelry & Luxury

2017 Global Diamond Report Key Takeaways

The Antwerp World Diamond Centre (AWDC) and Bain & Company have released their seventh annual global diamond report, covering 2016 and the first half of 2017. The report examines all parts of the diamond pipeline: rough diamond sales and production; the cutting and polishing midstream sector and polished prices; retail sales; and the overall industry outlook for the next decade-plus, including the challenges it faces.  Here are seven key takeaways from the report.

IRS Stepping Up AML Audits of Jewelry Companies

The next knock on your door this holiday might not be UPS. The IRS is increasingly coming calling, too. The Internal Revenue Service seems to have stepped up its anti-money-laundering [AML] audits of small- and mid-sized jewelry firms in recent weeks, according to Tiffany Stevens, president and CEO of the Jewelers Vigilance Committee. “In the last month, the JVC has gotten more than five calls of IRS audits,” she says. “Obviously not everyone calls us; they have other resources. But that is a significant uptick in the number of calls.”

 

Office & Leisure

Struggling Mattel warns of slumping holiday sales as debt ratings are cut

Mattel Inc.’s struggles deepened Monday as the El Segundo toy maker warned of slumping holiday sales and its debt was downgraded by the major credit-rating firms. With only two weeks until Christmas, Mattel said in a securities filing that its fourth-quarter sales would be “negatively impacted” because of “certain underperforming brands” and because retailers were tightly controlling their inventories this holiday season.

As a result, Mattel — whose brands include Barbie, Fisher-Price and Hot Wheels — said its full-year sales would drop by “a percentage in at least the mid-to-high single digits” compared with 2016, when sales totaled $5.5 billion. Mattel said its profit also would suffer because the sales slump meant the company would have to write down the value of its inventory and offer discounts to retailers to clear out unsold products. Those problems are why S&P Global Ratings and Fitch Ratings further downgraded the company’s debt, which already was below investment grade. The downgrades came as Mattel plans to sell an additional $1 billion of high-yield debt.

How Alexandre Arnault Is Making a 120-Year-Old Luggage Brand Relevant Again

Alexandre Arnault, son of LVMH Chairman Bernard Arnault, the richest man in France, is probably tired of people characterizing him by his age and lineage, but the former is particularly impressive: At 25, he’s the CEO of 80-year-old luxury luggage company Rimowa, of which he led LVMH’s acquisition late last year. It would be easy to dismiss this appointment as nepotism, but as a member of one of the industry’s most important consumer groups — and with more knowledge of technology and startup culture than many of his peers — the younger Arnault is perhaps, in some ways, better equipped than someone with more business experience under his belt.

Technology & Internet

Small e-retailers could be hurt by the end of net neutrality

When the Federal Communications Commission voted Thursday to abolish net neutrality rules, the reaction from e-retailers and other web-based companies was swift, negative and sometimes threatening. Lawsuits and proposed legislation are expected to follow. Among e-commerce companies, observers expect the FCC decision to be especially hard on smaller players. But even e-commerce giant Amazon.com Inc. is worried about what the end of net neutrality rules—which require internet service providers (ISPs) to treat all data the same way—could mean.

Finance & Economy

U.S. retail sales jump in November on strong holiday sales

U.S. consumers went on a shopping binge last month as the holiday season began, leading to big gains among online retailers, electronics stores and furniture stores.  The Commerce Department said that sales at retailers and restaurants jumped 0.8 percent in November from the previous month, after a 0.5 percent gain in October. Consumers’ willingness to splurge should give the economy a boost in the final three months of the year.  A category that mostly includes online shopping rose 2.5 percent in a sign of the continuing dominance of e-commerce. Sales leapt 2.1 percent at electronics stores and 1.2 percent at furniture stores.  The figures were lifted by a large increase in spending at gas stations, which mostly reflected higher prices. But sales also rose at clothing stores, sporting goods retailers, and home and garden stores.

 

Fed raises rates a quarter point, hikes growth outlook for economy

The Federal Reserve came through on a widely expected interest rate hike following its two-day policy meeting and sharply raised its economic growth forecast for 2018.  In their decision, the central bank policymakers mostly followed the script, though they did indicate that one less hike is on the way for 2019. The move will push the target range to 1.25 percent to 1.5 percent. The rate is pegged to a wide variety of debt instruments, such as credit cards and adjustable-rate mortgages.  One of the more notable developments came from the expectations Federal Open Market Committee members set for gross domestic product next year. The committee collectively raised its GDP estimate from 2.1 percent in September to 2.5 percent.