March 5, 2018 Consensus

The Weekly Consensus – March 5, 2018 (Volume 10, Number 10)

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

A couple of months ago, I wrote The Big Story about how Patagonia and REI responded to President Trump’s decision to downsize several National Monuments, and the risks and rewards of the positions they took.  Recent events have created another unavoidably public moment for retailers, as they grapple with politically-charged gun policies in the aftermath of the school shooting in Florida.

There are many retailers that sell firearms in the United States.  Some offer guns only as part of a broad assortment of other goods, such as Walmart and Dick’s Sporting Goods.  Both retailers announced last week that they would change their gun policies in reaction to the school shooting, raising the age for buying any firearms from 18 to 21.  Both Walmart and Dick’s namesake stores had already discontinued sales of semi-automatic rifles several years ago, but Dick’s also announced last week that it would discontinue sales of high-capacity magazines in all of its stores and semi-automatic rifles in its Field and Stream-branded outdoors stores.  The company’s announcement stated “We have to help solve the problem that’s in front of us. Gun violence is an epidemic that’s taking the lives of too many people, including the brightest hope for the future of America — our kids.”  However, certain observers have pointed out (perhaps cynically, but not erroneously) that these changes for Dick’s and Walmart likely won’t impact the companies’ bottom lines too severely. Semi-automatic rifle and other gun sales to customers between the ages of 18 and 21 likely don’t account for a large portion of either retailer’s sales, making these moves relatively painless public relations gestures.

On the opposite end of the firearm seller spectrum, are local gun shops in communities large and small.  These shops garner virtually all of their revenue from the sale of guns and are likely to cater to some of the most loyal gun owners.  Given the nature of their business and the likely political leaning of their clientele, it seems that the question of whether to change policies is an easy one for this group, at least as a business decision.

For a third group of retailers that carry firearms, things are much stickier, and getting less comfortable by the day. Companies that focus on hunters and anglers, but carry some other sporting goods as well, such as Academy, Bass Pro Shops and Cabela’s, are in a difficult position. These retailers’ customers are more likely to be gun owners, but the companies also have many customers who are not.  Academy has already announced that it will not be changing their gun sales policies, but the company did call for the strengthening of background checks.  Bass Pro purchased Cabela’s last year and has not made any announcement regarding either brand’s position on the subject.  Although it may want to stay out of the limelight, Bass Pro/Cabela’s may eventually be forced to make its views known as pressure mounts on brands to take a side.  Vista Outdoor, for example, has found it painful to remain silent; REI announced last week that it would discontinue buying certain of Vista’s “non-gun” brands like Giro, Bell, and CamelBak because Vista remains silent on gun control and its firearms brand, Savage Arms.

As I said at the end of my last Big Story, ultimately, every consumer facing company needs to determine whether taking a public and possibly political position will be harmful or beneficial to its business before making any such statements.  I believe that management of each of the businesses above made or will make their decision based on what they think will please their customers.  Each company is assessing whether they will be left to face the wrath, or worse yet, the disappearance of their customer.


Headlines of the Week

Dick’s Sporting Goods will stop selling assault-style rifles

Dick’s Sporting Goods, the nation’s largest sporting goods retailer, will stop selling assault-style weapons like the one used in the Parkland, Florida, high school shooting.  The company said it will also raise the minimum age for all gun sales to 21. Dick’s will not sell high-capacity magazines that allow shooters to fire far more rounds than traditional weapons without reloading, as well as other accessories used with weapons similar to the AR-15.  The company stopped selling military-style semiautomatic weapons in its Dick’s-branded stores after the Sandy Hook elementary school shooting in 2012, but it continued to sell such weapons at its 35 Field and Stream stores.  Now it will pull those weapons from all of its stores.


Amazon Delves Deeper into Smart Home Technology with Acquisition of Ring

Amazon is ramping up its presence in the smart home security market.  The company has reached an agreement to acquire Ring, which makes WiFI-enabled doorbells and other smart home technologies. Reuters put the deal at more than $1 billion. “Ring is committed to our mission to reduce crime in neighborhoods by providing effective yet affordable home security tools to our neighbors that make a positive impact on our homes, our communities, and the world,” Ring said in a statement. “We’ll be able to achieve even more by partnering with an inventive, customer-centric company like Amazon. We look forward to being a part of the Amazon team as we work toward our vision for safer neighborhoods.”



Apparel & Footwear

Activist hedge fund to pressure Genesco for more asset sales: sources

Activist hedge fund Legion Partners LLC will pressure U.S. footwear retailer Genesco Inc to sell assets beyond its Lids Sports Group business, and could challenge its board if it does not do so. Legion Partners, which together with investment firm 4010 Partners LP owns 5.3 percent of Genesco, wrote to the company’s board of directors on Monday asking it to carry out a full review of strategic alternatives. Genesco announced earlier this month that it would explore a sale of Lids, its team sports merchandise and headwear business that has struggled under fierce price competition. However, it stopped short of exploring a sale of the rest of its businesses. Legion Partners told Genesco that if the company refused to explore all its options and did not commit to returning cash to shareholders, it might nominate a slate in April to its board of directors. Legion Partners believes that by divesting Johnston & Murphy and Schuh, Genesco could be worth $68 per share.

China’s Fosun to take control of Austrian lingerie maker Wolford

China’s Fosun will pay 55 million euros to buy a controlling stake in loss-making luxury lingerie and legwear specialist Wolford from its founding family and will make an offer to remaining shareholders. Fosun, which wants full control of Wolford, became majority shareholder in struggling French fashion house Lanvin earlier this month and also has stakes in Italian high-end menswear label Caruso and U.S. knitwear firm St. John Knits. Besides struggling with falling demand for its luxury tights, bras and shirts, Wolford has been suffering logistics problems and dealing with management upheaval in recent months and has been loss-making for more than two years. Around 50 investors mainly from North America and Asia had shown interest in taking over the founding family’s stake after it announced its intention to sell in June, Wolford said. Fosun has agreed to pay 33 million euros ($40 million) for the 50.9 percent stake and will provide up to 22 million euros as part of a capital increase. It said it intends to offer other shareholders 13.67 euros per share to gain full control, boosting the Austrian group’s stock.

Private investment firm buys La Perla from Pacific Global

La Perla Global Management, the parent company of global lingerie brand La Perla, has been bought by private investment firm Sapinda for an undisclosed amount. Founded in 1954 by Ada Masotti, La Perla is headquarted in London and employs more than 1,500 people in over 150 global locations. The news comes after talks with previous owner, Pacific Global Management, to sell the brand to Chinese investment firm, Foson International, failed to complete. Based in Amsterdam, Sapinda is a privately-owned principal investment holding company, focused on special situation investment opportunities across continental Europe, Africa, Middle East and Asia.



Athletic & Sporting Goods

Smith & Wesson Gun Sales Are in Free Fall

Age limits and bans on assault-style rifles are in vogue now, but the biggest threat to gun sales may still be President Donald Trump.  Consumer demand is falling to “new, lower levels,” according to the 166-year-old maker of Smith & Wesson firearms. The company, American Outdoor Brands Corp., is bracing for the downturn by cutting jobs and repaying debt. Rivals, including one in bankruptcy, are contending with the same slowdown.  Call it the Trump slump. The gun industry thrived under President Barack Obama, as firearms enthusiasts expected crackdowns and rushed to stockpile weapons.

Cosmetics & Pharmacy

Diplomat Finishes off Fiscal Year Strong

Diplomat closed 2017 in a strong position as it moves to position itself as a broader-based healthcare company, according to its full-year and fourth-quarter results. The Flint, Mich.-based independent provider of specialty pharmacy services brought in $1.15 billion in revenue for the quarter ended December 31, 2017, and $4.49 billion in revenue for the full year ended the same date. The earnings report caps a full year for Diplomat, during which its rejiggered business strategy also was by the retirement of longtime CEO and co-founder Phil Hagerman. Diplomat’s quarterly revenue represents a 1% increase over the previous-year quarter, which it said was driven by completed acquisitions.

Will Glossier File an IPO?

Glossier just keeps getting bigger. The millennial beauty brand selling Über-popular cleansers, balms, and brow fillers just finished its third round of funding, in which it raised $54 million. However, WWD reports that Glossier seems to be on the IPO track, as the founder and president are set on making it as big a company as possible. “We are building a massive, stand-alone business with customer experience at the core,” founder Emily Weiss told WWD. “If an IPO is the best way for us to get there, then we’ll do that.” She also said that they had no specific plans for an IPO at this time. Industry officials say Glossier is currently valued at around $390 million, is not yet profitable, and has around $40 million in sales. After their Series B fundraising (which garnered $24 million) they expanded their product line beyond the beloved balms and cleansers to an acne solution, body lotion and oil, sunscreen, and a perfume.


Discounters & Department Stores

Walmart Unveils New Apparel Brands to Check Amazon’s Growth

Walmart is introducing low-cost clothing brands for women, kids and plus-size customers, aiming to lure shoppers as Amazon gobbles up more apparel sales. The store brands include Time and Tru in ladieswear—which will replace the jettisoned DanskinNow label—along with Terra & Sky in plus-size apparel and Wonder Nation for kids, according to a company presentation to suppliers obtained by Bloomberg News. The George apparel brand, which Walmart brought over from its British unit Asda, will be refocused for men only. The new brands will replace older ones such as Faded Glory, White Stag and Just My Size.

Macy’s Snaps Losing Streak with First Sales Increase in 3 Years

At long last, Macy’s is on the upswing again. The department store chain said on Tuesday that comparable sales rose 1.3% in the holiday quarter that ended on Feb. 1, their first quarterly increase by that metric since the end of 2014 and well above analysts’ forecasts. What’s more, both sales and profit exceeded what Wall Street analysts had been expecting of Macy’s. And the company, after 11 quarters of declines, saw enough encouraging signs during the holidays that its turnaround efforts are working to forecast comparable sales will increase for the full fiscal year in 2018. “On the path to growth in 2018, we will continue to improve our execution, strengthen our product offerings and make the necessary investments to be competitive with today’s demanding consumer,” CEO Jeff Gennette said in prepared remarks.

How the owner of Winners and HomeSense continues to defy Amazon

TJX Companies Inc., owner of Winners and HomeSense, is one retailer that continues to defy the Amazon odds — it doesn’t sell its goods online or reveal its current lineup of goods on a website, but its performance is consistently strong. The off-price retailer’s shares leapt 7 per cent Wednesday after it posted another strong year of sales growth in Canada, up 5 per cent in the period ended Feb. 3. That followed a robust 2016 where sales climbed 8 per cent.


Grocery & Restaurants

Pizza Hut Replacing Papa John’s as NFL Sponsor

Pizza Hut is replacing Papa John’s as one of the National Football League’s corporate sponsors, just one day after Papa John’s and the league announced they were ending their relationship, reports SportsBusiness Daily. Papa John’s was the league’s official pizza sponsor since 2010, but the company says it would shift focus to deals with 22 of the NFL’s 32 teams. Papa John’s deal was set to expire in 2020. The Pizza Hut deal is through the 2021 season.


Modern Market acquired by private-equity firm Butterfly

Modern Market has been acquired by Butterfly, a Los Angeles-based private-equity firm, according to a press release Tuesday. Terms of the deal were not disclosed. Denver-based Modern Market operates 28 fast-casual restaurants in Colorado; Texas; Arizona; Washington, D.C.; and Maryland. The menu centers around healthful, sustainably sourced food. Butterfly was formed by executives from the private-equity firms KKR & Co. LP and Vista Equity Partners to focus on the food sector, including agriculture, aquaculture, food and beverage products, food distribution, and foodservice.

Home & Road

Walmart Plants Flag in the Ever-Expanding Mattress Field

Walmart is the newest entrant in the online mattress battle with Allswell, a line of mattresses and bedding. Jack Hanlon, vice president-analytics for, wrote on his LinkedIn profile Monday that he was “super excited to announce our newest brand: Allswell! Allswell will provide amazing mattresses and bedding with great prices to customers in the U.S.,” he wrote. “Building on the success of our existing DNVBs (digitally native vertical brands) Bonobos and ModCloth, we’re creating more amazing products for our customers.”

Jewelry & Luxury

The bright side of the diamond supply gap

For investors scratching their heads about the future of volatile world markets this year, David Whittle offers an alternative: Say it with diamonds. “We’re the largest new diamond mine in the Northwest Territories,” says Mr. Whittle, interim president and CEO of Mountain Province Diamonds Inc. (MPVD). His Toronto-based company is a 49-per-cent joint venture partner with mining giant De Beers Canada Inc. in the mine called Gahcho Kué, a remote fly-in/fly out operation 280 kilometres northwest of Yellowknife. “De Beers is the operator. They run it hands-on, and we’re fully involved with the oversight and management. We take a fulsome role in the decision-making,” Mr. Whittle says.


Office & Leisure

Toys ‘R’ Us Has Maybe One Shot Left At Staying Alive

When Toys “R” Us filed for Chapter 11 bankruptcy protection last September, the company made the point that “the vast majority” of its locations were profitable and that it expected to keep most of its 1,600 stores (800 in the U.S.) open. Five months later, the chain has announced plans to close another 200 stores, effectively cutting in half the number of stores it operates in the U.S. Further, the British arm of the company released news this week that Toys “R” Us in the U.K. has gone into administration and is in the process of “an orderly wind-down” of its business. TRU is the biggest toy chain in the U.K. with 105 stores currently in operation. According to The Wall Street Journal, internal company documents also show that Toys “R” Us appears to be backing off from a promise to provide severance to U.S. workers affected by store closures. Store managers were told last month to let all workers know that the company would pay severance, while the documents reviewed by the Journal said, “There are no severance benefits being provided for the store-closing process.”

Barnes & Noble Narrows Q3 Loss

In an age of ecommerce, Amazon and free shipping, Barnes & Noble is putting on a brave face despite fiscal appearances of a “dead retail chain walking.” The chain reported a third-quarter (ended Jan. 27) loss of $63.5 million, which was an improvement from a loss of $70.2 million during the previous-year period. The decline underscored a same-store decrease of 5.8% primarily due to lower foot traffic.  “While we were disappointed with our holiday sales, comparable store sales trends did improve in January,” CEO Demos Parneros said in a statement. In February, the chain implemented a companywide expense reduction plan, including a new store labor model that provides greater flexibility by eliminating tasks and allowing employees to focus more on customers. It estimates these actions will result in annual cost savings of about $40 million.

Technology & Internet

Amazon will start collecting sales tax for shipments to Pennsylvania

Amazon has told third-party sellers that it will soon start collecting sales tax on shipments to Pennsylvania. Starting April 1, “Amazon will calculate, collect, and remit sales tax for orders shipped to customers” in Pennsylvania, the company said in its seller central portal, which is only available to marketplace merchants. An Amazon spokesperson confirmed the policy. Pennsylvania is just the second state, following Amazon’s home state of Washington, that’s part of a new service called “Marketplace Tax Collection,” which CNBC reported on in November. Lawmakers in Pennsylvania passed a bill last year requiring internet retailers to charge and collect sales tax, leveling the playing field for physical stores.

Finance & Economy

U.S. Housing Prices Return to Peak Levels

After plummeting 33% during the recession a decade ago, U.S. house prices have returned to peak levels, bouncing back 51% nationally, according to a report from global property analysts CoreLogic.  A combination of favorable interest rates and relaxed standards for mortgage loans resulted in peak residential home prices across the country in 2006, the report said. But by 2007, prices had collapsed and continued to log steady declines through 2011.  The average home price is now 1% higher than it was in 2006, the report said, and the average year-over-year home equity gain was $14,888 in the third quarter of 2017, indicating that the housing market has widely recovered since “the trough,” an expression used in the report to describe the bottoming out of the market.


US consumer inflation picks up in January as spending slows 

U.S. consumer prices increased in January, with a gauge of underlying inflation posting its largest gain in 12 months, bolstering views that price pressures will accelerate this year.  Inflation is expected to breach its target this year as a tightening labor market boosts wage growth. Faster economic growth, spurred by a $1.5 trillion tax cut package and increased government spending, is also seen stoking inflation.