February 26, 2018 Consensus

The Weekly Consensus – February 26, 2018 (Volume 10, Number 9)

The Big Story
Amazon, and Everyone Else
Doug Stebbins, CFA

The rise of ecommerce and its fundamental reshaping of the retail world is well documented.  A Google search of virtually any consumer product will produce dozens of options that can be purchased online.  Ecommerce has exploded and the increase in the number and power of web-based retailers is undeniable.  Or is it?

eMarketer reports that Amazon at $197 billion in sales last year accounted for 4% of all retail sales in the US.  But of ecommerce sales, Amazon accounted for a whopping 44% of all web sales in the US.  So, while US ecommerce sales grew by $60 billion from 2016 to 2017, over $40 billion of that growth (or 70%) was attributable to Amazon.  And while the US ecommerce market grew 16% from 2016 to 2017, the growth rate for all eRetailers other than Amazon was a more pedestrian 8%.  In the ecommerce world there is Amazon and there is everyone else.

So, when it comes to keeping pace with ecommerce trends, what that really means is trying to keep up with Amazon.  Brick and mortar retailers are focused intently on developing web strategies to help them compete with Amazon.  Whether you are Kroger or Target or Dick’s Sporting Goods or The Gap, you wake up and go to sleep thinking about how to effectively compete with Amazon.

One of the highest profile challengers to Amazon is Walmart.  While Amazon accounted for 44% of US ecommerce sales, walmart.com and its related ecommerce businesses accounted for under 4% of US ecommerce, with $11.5 billion in revenue.  It is somewhat hard to fathom, but after spending decades being the biggest and baddest retailer on the block, in the battle against Amazon, Walmart is the scrappy underdog.  And, as may be expected, it is taking some lumps.

Walmart’s ecommerce sales grew 23% in the quarter ended January 31, which may sound impressive, especially since sales at Walmart overall grew 4.1%.  But Walmart’s 23% growth for the quarter was less than half of 50% growth it had recorded in the previous quarter and was the slowest growth rate in five quarters.  Wall Street was not impressed and, as a result, Walmart shares dropped 10%.  The growth rate decline should not have been a surprise to investors since previous quarters’ growth rates were propped up by acquisitions, and Q4 was the first quarter that included Jet.com sales in the year-ago period.  Surprise or not, the ecommerce sales growth decline was interpreted as a sign that Walmart was losing ground in its battle with Amazon.

Even with these disappointing results, Walmart management has reiterated that they are still projecting online sales growth of 40% for the upcoming year, but it is unclear whether the company will need to make more acquisitions to hit that target. Given the magnitude of the sell-off in Walmart’s shares after the recent deceleration, the stock market may be giving the company the green light to have its checkbook at the ready in the near future. Unfortunately for Walmart, as discussed earlier, there is Amazon, and there is everybody else. It may be difficult to catch Amazon by buying companies that are, by definition, somebody else.


Headlines of the Week

Albertsons Companies and Rite Aid Merge to Create Food, Health, and Wellness Leader

Albertsons Companies, one of the nation’s largest grocery retailers, and Rite Aid Corporation, one of the nation’s leading drugstore chains, announced a definitive merger agreement under which privately held Albertsons Companies will merge with publicly traded Rite Aid. The integrated company will operate approximately 4,900 locations, 4,350 pharmacy counters, and 320 clinics across 38 states and Washington, D.C., serving 40+ million customers per week.


General Mills Is Buying Blue Buffalo Pet Food for $8 Billion

General Mills agreed to buy Blue Buffalo Pet Products for about $8 billion, adding the maker of natural dog and cat food to a portfolio that includes Haagen-Dazs ice cream and Cheerios cereal. The Minneapolis-based company plans to pay $40 a share for Blue Buffalo, which sells “antioxidant-rich” dog nutrition and walnut-based kitty litter, the companies said in a statement Friday. The deal comes as global food giants are snapping up makers of natural and organic products, which are outpacing mainstream brands in growth. “In pet food, as in human food, consumers are seeking more natural and premium products,” General Mills Chief Executive Officer Jeff Harmening said. Over the past three years, Blue Buffalo has delivered compound annual net sales growth of 12%, the companies said, reaching $1.3 billion in the 2017 fiscal year. General Mills is one of several consumer-product giants focusing on pet care, a $30 billion market in the U.S. alone.



Apparel & Footwear

VF to sell one of its apparel brands

VF Corp. is in active talks to sell Nautica as it continues to focus on its best-performing brands. The sell-off follows the company’s sale of its Licensed Sports Group business to Fanatics in April 2017, and the divestiture of its Contemporary Brands businesses, which included 7 For All Mankind and Splendid, to Delta Galil Industries Ltd. in August 2016. The company announced the news in its fourth-quarter earnings statement. “While we do not yet have a definitive agreement, we are actively engaged with several parties, and we’ll update you as conditions warrant,” Steve Rendle, chairman and CEO, VF, told investors. VF’s revenues rose 20% to $3.62 billion for the fourth quarter, below forecasts of $3.7 billion.

The Gap CEO Out After Struggling to Grow Profits

Gap Inc is facing new challenges with the head of its namesake brand leaving The Gap after failing to improve operations and profit growth to the liking of the clothing retailer’s chief executive. The company, which also operates Banana Republic, Old Navy, and Athleta, said on Tuesday that Jeff Kirwan, president and CEO of The Gap, was leaving the company. He had been named to the job in late 2014 after several years at Gap Inc in other roles, and tasked with reinventing and improving the core business of a brand that generates 25% of Gap Inc’s total sales. But in those twelve quarters with Kirwan at the helm, The Gap brand managed only one quarter of comparable sales growth, which came in its most recently reported quarter, despite the culling of many weak stores over the years.

Fosun Triumphs in Bidding War for Lanvin, Troubled Fashion House

Lanvin, France’s oldest surviving couture house, which has been teetering on the brink of collapse for more than two years, has been acquired by a major Chinese private conglomerate after a fierce bidding war, the Chinese company announced. The conglomerate, Fosun International, said it had acquired a majority stake in the Paris-based Lanvin, which has been racked by the departures of designers, tumbling sales and entrenched internal discord. Fosun beat out Mayhoola for Investments, a fund backed by the Qatari royal family that owns brands like Balmain and Valentino. The deal is the latest by Chinese investors looking to build stakes in European luxury assets.



Athletic & Sporting Goods

Under Armour and Nike are stealing a page out of Adidas’ playbook

Call it the foam wars.  Nike and Under Armour are both releasing next-generation, foam-based running shoes this month — but Adidas has had a wicked head start.  The two companies have been forced to follow in Adidas’ footsteps as it has run away with one of the few sectors of the sportswear market that is growing rapidly: lifestyle running.  After Adidas’ impressive years in North America, Nike and Under Armour can no longer ignore the three stripes. In a transparent attempt to capture back lost market share, both Nike and Under Armour have released their own foam-platform shoes.


Mindbody just acquired an Atlanta digital fitness tracking company

Mindbody, a San Luis Obispo-based health and wellness software company, has acquired performance tracking company FitMetrix.  Mindbody did not disclose how much FitMetrix was purchased for.  The Atlanta-based company has partnered with Mindbody since 2015, giving boutique fitness studios, gyms and health clubs the capability to integrate digital performance tracking across several class and equipment types, according to the release. Studios can track, rank, display and instantly reward clients based on real-time results and create customized workouts using these metrics.  Its technology is also integrated with workout equipment like treadmills and indoor bicycles, as well as wearable devices.

Cosmetics & Pharmacy

Amazon Reportedly Launches Private-label OTC Brand

Amazon has quietly launched an exclusive line of over-the-counter health products in a possible challenge to pharmacy retail chains that could spark a price war and put pressure on store-brand profit margins. Technically, the company doesn’t own these products, which are produced by private-label manufacturer Perrigo, but it does put Amazon in a position to squeeze other retailers. The e-commerce giant launched the Basic Care line in August, including 60 products ranging from ibuprofen to hair regrowth treatment. Pharmacies make money when people walk in looking to grab medicine and end up buying cosmetics and other goods. They’re already losing traffic as people shop for those products online, including on Amazon. Giving them another possible reason to skip the store could hurt even more.

MainPointe Pharma Acquires Several Mission Pharmacal OTCs

Mission Pharmacal divested several consumer products to MainPointe Pharmaceuticals along with the marketing rights of additional consumer products that have been licensed by Mission to MainPointe. As part of these transactions, the companies have also entered into a renewable contract manufacturing agreement to continue manufacturing all of the included products that are currently made in Mission’s manufacturing facility.


Discounters & Department Stores

Costco or Amazon Prime? More shoppers are choosing both. How about you?

The number of people who both pay to shop at Costco and pay for free shipping from Amazon has grown rapidly in the last five years. Fifty-seven percent of Costco members also pay for Amazon Prime, up from 13 percent in 2013, according to a survey of 2,500 consumers conducted last month for boutique research firm MoffettNathanson. The membership overlap underscores the increasing cross-town competition between two of the world’s largest retailers.

Walmart’s online strategy isn’t clicking yet. Here’s how it plans to get its mojo back

Taking on Amazon isn’t so easy, even for one the world’s mightiest retailers. This is not to say superstore kingpin Walmart won’t eventually give the Seattle-based e-commerce giant a serious run for the online money, but it isn’t there yet. Walmart announced that its fourth quarter e-commerce sales grew 23 percent, down from a 50 percent hike in the previous quarter. In contrast, Amazon’s net sales were up 38 percent in the fourth quarter, compared with 34 percent the quarter before. That translates to $60.5 billion in quarterly sales and more than 5 billion items shipped.

Target CEO: Online shopping alone won’t cut it, retailers also need great stores

While e-commerce sales are growing, stores will always play an important role in a retailer’s overall strategy, Target CEO Brian Cornell told CNBC. “The winning retailers of the future are going to combine great physical assets with the ease that comes along with that digital interaction,” Cornell said on “Squawk Box.” “For the foreseeable future, the majority of U.S. retail sales will still take place at stores.”  Cornell said Target had a successful holiday season thanks to the many investments the company has been making in bricks and mortar.


Grocery & Restaurants

Rhône Capital to acquire Fogo de Chão for $560M

Rhône Capital will acquire Fogo de Chão Inc. in a cash deal valued at $560 million, the Brazilian steakhouse chain said. The Dallas-based casual-dining chain said stockholders will receive $15.75 per share, representing a 25.5-percent premium on its Friday closing price. The deal has been approved by the chain’s board members, executives and investment funds affiliated with Thomas H. Lee Partners LP, all of which own more than 60 percent of Fogo de Chão shares.

Tops files for bankruptcy

Tops Markets announced this morning that the company is filing for Chapter 11 bankruptcy. In a statement, the company said that it is pursuing a financial restructuring in order to eliminate a substantial portion of debt from its balance sheet and position Tops for long-term success. Tops stores throughout upstate New York, northern Pennsylvania and Vermont are continuing to serve customers with no impact to day-to-day operations, according to the company, which says it expects operations to continue as normal throughout this financial restructuring process.

H-E-B augments home delivery through Favor Delivery acquisition

H‑E‑B augmented its on-demand home delivery service through its acquisition of Favor Delivery, headquartered in Austin. Favor Delivery will become a wholly owned subsidiary of H-E-B. The terms of the transaction were not disclosed. Founded in 2013, Favor has quickly expanded its presence to 50 cities across the state of Texas, where it is currently the best-rated home delivery service. With Favor, H‑E‑B gains access to a best‑in‑class consumer‑facing technology and the on‑demand company’s advanced home delivery system. H‑E‑B will also leverage Favor’s data‑driven approach to capture valuable insights to deliver the best customer experience possible.

Home & Road

Home Depot Q4 earnings, Sales Tops Estimates

The world’s largest home improvement retailer continued to ring up big numbers for the fourth quarter amid digital initiatives and the strong U.S. housing market. The Home Depot posted net earnings of $1.8 billion for the quarter, up from $1.7 billion in the same quarter last year. Earnings were impacted by a combination of the Tax Cuts and Jobs Act of 2017 and a one-time bonus payment to hourly associates, the company said.

The retailer also raised its quarterly dividend, for the ninth-consecutive year, by 15.7 percent to $1.03 a share. Home Depot’s net sales rose 7.5% to $23.9 billion. Same-store sales rose 7.2%, as the company pointed to a commitment to the interconnected retail experience. Customer transactions rose 2% and the average ticket increased 5.5%.

Online sales grew 21% in the quarter, and 21.5% in fiscal 2017, and now make up 6.7% of the chain’s total sales.

Wayfair Sales Rise 48%, But Losses Widen

Wayfair posted healthy sales growth and improved earnings before interest, taxes, depreciation and amortization (or EBITDA). But while executives argued for the investments the company is making overseas and to its supply chain, profits continue to elude the 16-year-old online furniture and home goods retailer. Investors didn’t hide their impatience after the report as shares plummeted by 23%. The company is no doubt, as CEO Niraj Shah noted to analysts in a conference call, grabbing market share in the U.S. as more and more customers turn online to furnish and decorate their homes.

Jewelry & Luxury

Diamond industry turns to AR to attract wedding-wary millennials

As the way consumers shop for diamond rings continues to evolve, jewelers are looking to new forms of technology to keep up. Among them is Diamond Hedge, an e-commerce ring retailer that developed an AR mobile app to help couples digitally “try on” rings. Mehul Sompura, founder of Diamond Hedge, said the goal is to completely digitize the engagement ring shopping process. While the website already includes features similar to peer services like Say Yes! which allow users to upload a photo of their hand and experiment with styles, this is the first time a diamond company has used a live augmented reality feature. The app, which launched earlier this month, traces the line and movement of the ring finger as it moves on screen, reflecting how it would look like in real life.

US Consumers Spent Less on Their Weddings Last Year

Consumers’ priorities when it comes to weddings sound a lot like their preferences when it comes to retail. They want to have a great experience, and they want something uniquely their own. Last week, on Valentine’s Day, wedding planning website The Knot released the results of the 2017 Real Weddings Study, which surveyed nearly 13,000 couples in the United States who tied the knot last year. Overall, the study found that the average cost of U.S. weddings dipped in 2017, the first time that has happened in the 11 years The Knot has been doing the survey. The average cost of a wedding was $33,391, down 5 percent from the high of $35,326 reached in 2016.

Why Jewelry Consumers Prefer to Shop in Stores

By a significant majority, consumers prefer to shop for jewelry in stores rather than online, a new survey by TD Bank found. According to the poll of 1,021 respondents, 59 percent said they only shop for jewelry in store, while 34 percent said they generally shop for jewelry in store. By contrast, only 2 percent said they only shop for jewelry online (including apps), while 5 percent said they mostly shop for jewelry online. That’s significantly lower than the percentage of consumers who buy other kinds of products, like electronics, online, says Mike Rittler, head of TD Retail Card Services and interim head of U.S. Partnerships.


Office & Leisure

Toys R Us denies report that it may be forced to liquidate

Toys R Us downplayed a report that it is close to being forced into liquidation, a move that could result in the closure of the entire chain. The toy retailing giant has not breached any of the covenants governing its bankruptcy financing, a spokeswoman said. She called a CNBC report that the retailer could be at risk of liquidation “full of speculation.” CNBC reported Wednesday that sources familiar with the situation said Toys R Us is in danger of breaching a covenant on one of the loans that make up the $3.1 billion in debtor-in-possession financing. If Toys R Us were to violate terms of the loans, which require it to maintain certain cash balances, its lenders could take steps that would force the retailer into liquidation. “We have not breached any covenants,” said the spokeswoman Amy von Walter.

Gibson brings back ex-CFO

A former chief financial officer of Gibson Brands has returned to the music instrument maker as it nears key debt deadlines that could reshape the company’s ownership structure. Benson Woo is set to return to Nashville-based Gibson this week to take over its financial operations from Bill Lawrence, who recently left the company after less than a year. Gibson faces an early August maturity of $375 million of senior secured notes and will see another $145 million in bank debt come due in late July if the notes haven’t been refinanced by then. CEO Henry Juszkiewicz said he is working on a new credit facility and “fully expects the bonds to be refinanced in the ordinary course of business.”

Technology & Internet

Amazon Prime offers new perk for Whole Foods shoppers

Starting February 20th, Amazon Prime members will get 5% back at Whole Foods supermarkets when they use their Amazon Prime Rewards Visa Signature credit cards. The new incentive is the latest perk offered by Amazon to create more connections to Whole Foods, which the company acquired last year for $13.2 billion.

Walmart’s Amazon killer goes from superstar to man in the hot seat

He was hailed as Walmart Inc.’s online guru, the guy who would drag the lumbering giant into the digital-commerce era and put Amazon in its place. But 18 months after selling his startup to the world’s largest retailer, Marc Lore is finding those expectations awfully hard to meet. It’s not that investors and analysts are giving up on him as much as it’s a realization that the task at hand is daunting and growing harder by the day—and that Lore has little margin for error. Walmart’s online sales over the critical holiday period grew at less than half the rate of previous quarters, while investments Lore’s making to enhance the e-commerce business dented profitability.

Finance & Economy

Fed sees economy past full employment, but with only ‘moderate’ wage gains

Federal Reserve policymakers see an economy that may be past full employment, financial market prices that are high and overall growth that continues to gather steam.  Those conditions remain appropriate for further interest rate increases, though inflation pressures remain fairly muted for now, according to a key report to Congress the central bank released.  The monetary policy report provided a wide-ranging view of conditions for new Chairman Jerome Powell, who took the Fed’s reins earlier this month.

Prime-Age Men May Never Return to U.S. Workforce, Fed Paper Says

Men in their prime working years have left the labor force at an astonishing rate and they may never return if the state of the U.S. job market holds, according to a new report from the Federal Reserve Bank of Kansas City.  A decline in demand for middle-skilled work — a phenomenon dubbed “job polarization,” because more positions are concentrated at the higher and lower ends — has played a role in keeping prime-age men out of the job market, Didem Tuzemen, an economist at the Kansas City Fed, wrote in the paper released this week. Without job polarization, Tuzemen estimated that 1.9 million more prime-age men would have been employed in 2016.