February 19, 2018 Consensus

The Weekly Consensus – February 19, 2018 (Volume 10, Number 8)

The Big Story
The Risk of Giving a Brand’s Heritage the Boot
Marshall Schleifman

Since its founding in 1912, L.L. Bean has attracted a loyal customer base built at least partially upon its 100% satisfaction guarantee policy. The gold standard in retail. In practice, this guarantee meant that L.L. Bean was willing to replace any item purchased at any time – no matter how many years ago – in any condition if the customer was no longer happy with it, no receipt required.

L.L. Bean used to take great pride in that guarantee, its website stating: “L.L. himself always said that he ‘didn’t consider a sale complete until goods are worn out and the customer still satisfied.’ Our guarantee is a handshake – a promise that we’ll be fair to each other. So if something’s not working or fitting or standing up to its task or lasting as long as you think it should, we’ll take it back. We want to make sure we keep our guarantee the way it’s always been for over a century.” For L.L. Bean, this guarantee was a key differentiator, setting it apart from its competitors.

All of that changed this month when L.L. Bean ended its legendary policy. In a letter to customers, L.L. Bean’s executive chairman and the great-grandson of the company’s founder, Shawn O. Gorman, announced that customers now have one year to make returns and proof of purchase is required. Mr. Gorman explained that “a small, but growing number of customers has been interpreting our guarantee well beyond its original intent. Some view it as a lifetime product replacement program, expecting refunds for heavily worn products used over many years. Others seek refunds for products that have been purchased through third parties, such as at yard sales.”

Put simply, customer abuse of the guarantee is to blame for the change in policy. L.L. Bean said that over the past five years the percentage of abusive returns had doubled to 15 percent, costing the company approximately $250 million. “The numbers are staggering,” CEO Steve Smith told The Associated Press. “It’s not sustainable from a business perspective. It’s not reasonable.”

L.L. Bean now follows in the footsteps of its competitor REI, which eliminated its own no questions asked, no deadline return policy in 2013 and replaced it with a one-year return period. REI — nicknamed “Rental Equipment Inc.” and “Return Every Item” because of its former lifetime return policy — also pointed to customer abuse of the policy as a key reason for the change: “We saw a big disproportionate spike in products more than a year old being returned,” explained Tim Spangler, REI’s senior vice president of retail, during an interview in 2013. “It’s not a big surprise to get returns more than a year old. But it was the fastest growing sector of returns for us.”

Even though L.L. Bean’s change in policy brings it in line with other retailers like REI (and is still far more generous than most companies), customer reaction nevertheless was vociferous. On Facebook and Twitter, many consumers made clear that with the change in policy, they would no longer favor L.L. Bean over its competitors. One Twitter user stated: “L.L. Bean is changing their lifetime guarantee. Guess I’ll be looking at North Face and Jansport for my kid’s backpacks.” Others pointed to the lifetime guarantee as the reason they pay L.L. Bean’s prices: “Confidence in that lifetime guarantee made it easier for me to justify spending their prices.”

L.L. Bean used to view the guarantee as an important company asset, not a liability that needed to be remedied. “We simply look at our guarantee as an extension of our customer service philosophy and our commitment to offer high-quality merchandise that stand up to the guarantee,” L.L. Bean spokesperson Mac McKeever said in 2016. “As a company, we have made a conscious decision to invest in our customers by standing behind our products through our guarantee.”

At the end of his letter to customers, Mr. Gorman stated: “L.L. Bean has stood for quality, service, trust, and getting people outdoors ever since my great-grandfather founded our company over 100 years ago – and that will never change.” We’ll see if L.L. Bean’s iconic status is sustained without the guarantee, or if the company has made a serious miscalculation that threatens to turn it into just another outdoor brand.


Headlines of the Week

Amazon laying off corporate employees in rare cutback

Amazon is laying off hundreds of corporate employees, a rare cutback for a company that has spent most of the last few years in a frantic growth spurt. The layoffs, underway now, will fall on several hundred employees at the online retailer’s Seattle headquarters, along with hundreds more elsewhere in Amazon’s global operations, one person familiar with the cuts said. The layoffs are primarily focused on Amazon’s consumer retail businesses, according to two people familiar with the matter.


Fashion unicorn Farfetch will soon interview bankers for its New York IPO

Online fashion retailer Farfetch plans to interview bankers in upcoming weeks to help lead its New York-based initial public offering, according to sources familiar with the matter. The IPO could come as soon as this year. The London-based company is aiming for a valuation as high as $5 billion, some of the sources said. Unlike typical retailers, Farfetch does not own the inventory it sells, but rather serves as a conduit for brands and boutiques. As such, it can avoid the complicated task of predicting what customers want and the expense of holding it in stock.


Apparel & Footwear

How Canada Goose Went From Outdoors Outfitter to Fashion Force

Dani Reiss never wanted to be the CEO of Canada Goose. It was way outside his comfort zone. In fact, no one thought he would be—it was never in the plan for him to take over the family business. “I wanted to be a writer, so this is the last thing I ever thought I would do,” Reiss explains, sitting in the brand’s Toronto Headquarters after 17 years as CEO of a company valued above $1.7 billion. He spent his early 20s traveling the world, but ran out of cash and needed to earn a couple bucks, so he decided to take some time at Canada Goose. It transformed into a career. Now, 17 years later, Canada Goose is 61 years old. It’s a massive achievement—not just because so few fashion companies make it this far, but also because where Canada Goose is today looks almost nothing like where it started.

Frank and Oak picks up $16 million Series C

Frank and Oak, the direct-to-consumer clothing brand based out of Montreal, announced the close of a $16 million USD Series C funding round led by Caisse de dépôt et placement du Québec, with participation from Goodwater Capital and Investissement Québec. Frank and Oak launched in 2012 offering personalized menswear, with a recommendations newsletter that let users shop without much thought and pay for only what they love. Since then, the company has expanded beyond the internet to 16 retail locations across Canada, in city centers like Toronto, Montreal, Ontario, Calgary, and Ottawa. Though the company won’t share specific numbers, it does admit to having ‘hundreds of thousands’ of active members. The funding will go toward continued expansion in Canada, and testing more innovative product development processes. Frank and Oak has raised a total of $39.8 million, including this latest round.



Athletic & Sporting Goods

Nike is dominating Adidas in the sneaker war

Nike appears to be edging out rival Adidas in the competition for sneaker dominance.  The footwear company is proving that it can still rule the running and basketball sneaker category, according to data compiled by a Jefferies analyst. Nike has increased its market share in the top 60 sellers list, and its sneakers have dominated the top 10 selling shoes this year.  Close to 80% of footwear retailers surveyed said the “brand first indicated as strongest in running” was Nike, up from 75% in the previous survey. Meanwhile, Adidas’ primary brands, the Ultraboost and NMD, had declined in mentions to 13% from 15%, according to Jefferies.  Nike was also the clear leader in the basketball sneaker category due to the popularity of its Lebron James, Kyrie Irving, and Paul George brands. Adidas was barely mentioned in this category, falling to 1% from 3%.


Remington to file for bankruptcy amid declining gun sales

Legendary gun manufacturer Remington said it would file for Chapter 11 bankruptcy.  The North Carolina-based company announced it had reached a deal with creditors to reduce its $950 million debt load, seeking to write off about $700 million. The company will continue to operate as usual as the case proceeds in Delaware federal court, Remington executives said.  “Difficult industry conditions make today’s agreement prudent,” said Jim Geisler, executive chairman of Cerberus Capital Management, which acquired Remington in 2007.  Reuters reported the company’s sales crashed in 2017, leaving it with a $28 million operating loss. Credit ratings agencies attributed the decline in part to “receding fears that guns will become more heavily regulated.”

Cosmetics & Pharmacy

Walgreens, AmerisourceBergen in Acquisition Talks: Reports

Walgreens Boots Alliance reportedly is interested in a potential acquisition of AmerisourceBergen. Representatives of WBA CEO Stefano Pessina reached out recently to AmerisourceBergen CEO Steve Collis’ representative about acquiring the roughly three-quarters of the distributor that WBA doesn’t already own, according to the Wall Street Journal, which cited people familiar with the matter. According to the WSJ report, the companies are in early talks to combine, though sources reportedly stressed the uncertainty as to whether there would be a deal.

GNC Enters China through Joint Venture with Hayao

GNC announced an agreement regarding a China joint venture agreement with Harbin Pharmaceutical Group (Hayao), a leading pharmaceutical company. Under the terms of the agreement Hayao will invest approximately $300 million in GNC, becoming the single largest shareholder in GNC. In addition, GNC and Hayao have agreed to form a joint venture for the manufacturing, marketing, sale and distribution of GNC-branded products to the Chinese marketplace. The Chinese market is the largest international market for supplements and GNC is one of the most recognized brands by consumers in the market.

Poor-performing Nestle Opens Door to Sale of L’Oreal

Swiss food giant Nestle appeared to open the door to selling its stake in French cosmetics group L’Oreal after it said that its own business performance in 2017 fell short of expectations. Nestle, which has come under pressure from an activist investor, US hedge fund Third Point, to sell its stake in L’Oreal, insisted in a statement that it was keeping all options open regarding the 23-percent holding. Nevertheless, Nestle had decided not to renew a shareholders agreement between Nestle and the L’Oreal’s family shareholders, the Bettencourt family, under which neither side is permitted to increase their holdings.


Discounters & Department Stores

J.C. Penney is closing a Wisconsin distribution center and 8 stores

J.C. Penney said it’s closing a large distribution center as the retailer’s footprint no longer justifies properties built decades ago. Also, its post-holiday season review of its store fleet has resulted in eight stores closing, none in Texas. The Plano-based retailer said it will close its Wauwatosa, Wisc., distribution center this summer, eliminating 670 jobs. Eligible employees will receive separation benefits including outplacement services. About 480 employees are affected by the eight store closings, and the company said it’s working to relocate staff to nearby stores if possible.

Can the Nordstrom Family Outrun Retail’s Woes?

Many retailers, beset by online competition and shifting consumer tastes, are slashing costs and closing hundreds of stores. Nordstrom Inc. is doing the opposite.  The family-run company has been investing heavily as it tries to outrun the forces battering the industry. It is revamping some of its 122 department stores and spending more than $500 million to gain a toehold in Manhattan. It has snapped up e-commerce companies including flash-sale website HauteLook and subscription service Trunk Club. And it has launched new concepts, including a store in Los Angeles called Nordstrom Local that doesn’t stock any clothes. So far, those efforts have failed to pay off in rising profits. As Nordstrom has been ramping up capital spending, revenue for the six years ended in January 2017 increased by more than half to $14.76 billion but profits over that period fell.

How Much Pain Will the Bon-Ton Bankruptcy Cause for the Mall Sector?

Department store chain Bon-Ton Stores is currently working through a plan to close about 42 of its stores, totaling $435.8 million in CMBS exposure. While those are already sobering numbers in this environment, industry analysts say that the picture could be much worse.

Companywide, Bon-Ton store properties are behind about $2 billion in CMBS debt, says Steve Jellinek, a vice president of CMBS research at Morningstar Credit Ratings. The company estimates that about $170.6 million in CMBS debt is tied to properties that will see a significant drop in occupancy and net cash flow as a result of the store closures. That number, however, might rise.


Grocery & Restaurants

Chipotle names Brian Niccol as CEO

Chipotle Mexican Grill Inc. named Brian Niccol as CEO as of March 5, the company said Tuesday. Niccol most recently served as CEO of Irvine, Calif.-based Taco Bell Corp., the division of Yum! Brands Inc. He succeeds Steve Ells, founder and CEO of the Denver-based Chipotle, who announced in November he would step down.

Jollibee takes majority stake in Smashburger with $100M deal

Jollibee Foods Corp. has agreed to acquire an additional 45 percent of Smashburger for $100 million, the companies said Tuesday. The deal will increase the Pasig, Philippines-based restaurant company’s ownership stake in the Denver-based “better burger” chain to 85 percent. Jollibee acquired 40-percent ownership of Smashburger in October 2015.

Le Duff selling Timothy’s World Coffee, Mmmuffins

Le Duff America Inc. is in the process of selling its Canada-based Timothy’s World Coffee and Mmmuffins concepts to a subsidiary of MTY Food Group Inc., owner of Kahala Brands, the company said Thursday. The sale will be completed in April. The deal covers Timothy’s seven corporate and 30 franchised locations in Canada and two licensed locations in the United States and Mmmuffins’ four Canadian franchised locations, Le Duff said.

Home & Road

Ace Hardware Reports Revenues Up

Ace Hardware Corp. reported fourth quarter 2017 revenues of $1.32 billion, an increase of $84 million, or 6.8 percent, from the fourth quarter of 2016. Net income was $14.2 million for the fourth quarter of 2017, a decrease of $7.3 million from the fourth quarter of 2016. This decrease included a charge of $4.1 million due to the new tax legislation enacted in 2017 as well as increased warehouse costs incurred as part of the warehouse network reconfiguration. “New store growth, a 3.1 percent increase in same-store retail sales, along with revenues from our acquisition of The Grommet at the end of the last quarter, were the predominant drivers behind our strong 6.8 percent overall sales increase and record setting fourth quarter revenue,” said President and CEO John Venhuizen.

Jewelry & Luxury

Jewelers Hit Back at Human Rights Watch

“We have reviewed the Human Rights Watch report and reject the suggestion that RJC has got ‘flawed’ standards, governance and certification systems,” Gerhard Humphreys-de Meyer, communications coordinator for the RJC, told Rapaport News. HRW has itself acknowledged the RJC’s progress in making jewelers more aware of the importance of responsible sourcing and getting them to adopt more responsible practices, he added.

HRW stressed in a report last week that the RJC needed to strengthen its standards and auditing practices. It also ranked 13 major jewelry retailers on responsible sourcing of gold and diamonds, stating that most of the companies [fell] “short of meeting international responsible sourcing standards.” Criteria included the absence of child labor and human rights abuses.

Affluents Are Hardly Gluttons for Luxury Goods

“Splurging on luxuries is not a frequent practice for most affluents,” said eMarketer analyst Mark Dolliver, the author of a new report on affluent attitudes and buying behaviors. “Even if they would like to be flashy in that way, affluents do not necessarily feel they can afford it.” A January 2017 Ipsos report offered a telling glimpse of this dynamic. It asked respondents at various levels of affluence how much more income they would need “to buy luxury on a regular basis.” Those in the $100,000-plus bracket felt they would need an additional $111,000 on average. Respondents in the $250,000-plus class would need an extra $179,000.

How Blockchain May Also Play a Role in the Future of Gemstones

In January, De Beers announced that it was working on an initiative to bring blockchain technology to the diamond industry. But it was scant on details. But it is not the only company that believes that blockchain could play a role in the industry’s future. London-based Everledger is one of the first companies that talked about adapting blockchain technology for the jewelry industry. Initially, it saw blockchain mostly as useful for preventing theft.


Office & Leisure

Barnes & Noble confirms job cuts, expects $40 million in annual cost savings

Barnes & Noble confirmed that a new labor model in its stores will result in job cuts, but this will help the company save roughly $40 million annually. The New York-based retailer expects to book a charge of about $11 million in its fiscal third quarter for severance costs and other related expenses. Barnes & Noble has not disclosed the number of employees impacted by the news, but it’s attributing the workforce reduction to poor holiday performance. As the business improves, we’ll adjust accordingly.” Barnes & Noble said that the severance payments will be distributed in full by fiscal 2019. Barnes & Noble’s holiday sales fell more than 6 percent to $953 million, and same-store sales declined 6.4 percent for the holiday period, while online sales dropped 4.5 percent.

Revival? FAO Schwarz sets its sights on China, mini shops in airports

FAO Schwarz, whose famous New York store was closed two years ago, is setting its sights on China as it continues its revival begun late last year. The toy retailer said it will open locations in Beijing and Shanghai this year through a collaboration with China’s largest toy distributor, Kidsland. Kidsland will also open 30 smaller FAO Schwarz stores and shops in 200 department stores across China over the next five years. FAO Schwarz also signed an agreement with Hudson Group, one of the largest travel retailers in North America, to open a chain of FAO Schwarz-branded airport shops in the U.S. and Canada. The first will open later this year. Late last year, it opened shops in more than 5,000 retailers in the U.S.

Technology & Internet

Walmart leaps into virtual reality, acquires start-up

Walmart has made a move to strengthen its commitment to virtual reality. The discounter’s innovation lab, Store No. 8, has acquired Spatialand, a small VR platform and content studio. The studio will be tasked with creating the foundation of Store No 8’s third portfolio company, according to a blog entry on Store No. 8’s website. The new division will be tasked with developing and exploring new products and uses of VR through immersive retail environments. The plan is to incorporate solutions into all facets of Walmart, online and offline, according to the blog.

Finance & Economy

U.S. Consumer Prices Top Forecasts

U.S. consumer prices rose by more than projected in January as apparel costs jumped the most in nearly three decades. The report sent Treasuries and stocks tumbling as it added to concerns about an inflation pickup that have roiled financial markets this month.  The consumer price index rose 0.5 percent from the previous month, above the median estimate of economists for a 0.3 percent increase, a Labor Department report showed. Excluding volatile food and energy costs, the so-called core gauge increased 0.3 percent, also above forecasts for 0.2 percent. It was up 1.8 percent from a year earlier, higher than the 1.7 percent estimate.  The yield on 10-year Treasuries rose to 2.88 percent, while U.S. stock futures fell, as the figures renewed investor concerns that the Federal Reserve will raise interest rates at a faster pace than anticipated.


January spending weakness is temporary because consumers are about to get a big boost

January’s shocking drop in retail sales looks like there was a body blow to the consumer, but economists say it is likely a temporary hit and the positive impact of the tax bill should more than make up for it. Retail sales, a measure of consumer spending, fell 0.3 percent, compared with an expected gain of 0.2 percent, and December’s report was also revised lower. It was the worst decline since February 2017.  Economists say even with the December revisions, it’s unlikely the report is signaling a longer-term weakness in the consumer, the engine for about two-thirds of the U.S. economy.