March 26, 2018 Consensus

The Weekly Consensus – March 26, 2018 (Volume 10, Number 13)

The Big Story
Apocryphal Apocalypse
Billy Busko

“How the words are dark and dire: It is later than you think.” – Robert Service

 

“The reports of my death are greatly exaggerated.” – Mark Twain

Headlines:

Claire’s Stores Files for Bankruptcy

Duluth Trading to Increase Store Base 50% This Year

Toys ‘R’ Us Going-Out-Of-Business Sale Begins Friday

Land’s End to Open Dozens of Stores in 2018

Starbucks Opening 750 Locations this Year

These are headlines just from this past week.

In the past year, reports under the heading “Retail Apocalypse” have been made by many media outlets, including the BBC, Bloomberg, the Financial Times, Forbes, Fox, the Los Angeles Times, MSN, the New York Times, the New Republic, Newsweek, USA Today, Vogue, the Wall Street Journal and the Washington Post.  But as our sample size of one week shows, is there really more going on than just doom and gloom for retail stores?

This is often the reported storyline.  The rise of e-commerce, shifting consumer spending habits and excess retail space has led to thousands of store closures and a record number of bankruptcies.

Amazon and Walmart are credited with taking swaths of market share based on their vast scale and superior logistics that provide low-cost advantages and the ability to enter adjacent markets (e.g. food/groceries).  However, it’s important to keep in mind that on-line shopping accounts for only 9% of total retail revenues today.

Regarding retail real estate, there are 1,200 malls in the U.S., which is the result of mall openings outpacing U.S. population growth by 2:1 from 1970 to 2015.  As points of comparison, the U.S. has 40% more shopping space per capita than Canada, five times more than the U.K. and ten times more than Germany.  However, the International Council of Shopping Centers recently claimed that the occupancy rates at the nation’s malls are in aggregate a healthy 93%.

The third commonly cited issue is the shift in spending habits that favors experiences over things, a trend being led by millennials.  This is supported by the influence of social media and the desire to tell a story or share pictures or video of an experience.  Hotel occupancy rates are high, and airlines flew a record number of passengers last year.  In 2016 and for the first time, more money was spent in restaurants/bars than at grocery stores, and this trend continued last year.  However, a recent Deloitte report concluded that a large majority of millennials are actually equally likely to shop in stores as older generations, so the spending shift may not be the coming tsunami that many pundits have predicted.

Although lacking a catchy name, countering the “Retail Apocalypse” is the number of store that have recently opened.  Several sources, such as Forbes, IHL and Statista, reported that approximately 14,000 stores opened in 2017 compared to 10,000 closings.  (To be clear, 10,000 store closings is a startling record, eclipsing the recession-related previous record of approximately 7,000 stores in 2008.)  If the aforementioned fast-growing restaurant sector is excluded, “core retail” still reportedly saw a net gain of 1,000 stores.  To provide further perspective, Bloomberg reported that according to the U.S. Census there were 1,070,000 retail stores in 2015 (the most recently reported year).  Thus, a net change of 1,000 stores is about one-tenth of one percent of total stores.

Further challenging the “Apocalypse”, the U.S. Department of Commerce reported that retail store revenues grew 4.0% in the 4th quarter of 2017 compared to 2016, inclusive of the all-important Holiday season.  On-line sales grew significantly faster at 10.0%, but off of a vastly smaller base.  In general, some sectors thrived (Home and Electronics) and others lost share of wallet (Apparel and Sporting Goods).

In the end, Mr. Service and Mr. Twain are both right.  As a whole, retail stores are not likely facing an apocalypse – at least not today.  Instead, stores are facing a Darwinian evolution where there’s a natural selection of winners and losers. There will be major retail bankruptcies in 2018 as Bon-Ton, Claire’s and Toys ‘R’ Us have already shown.  There are retailers who have already announced significant downsizings, including Ann Taylor, Best Buy, Crocs, Foot Locker, The Gap, J. Crew, Kmart/Sears, Michael Kors, Teavana and Vitamin World.  However, for those retailers who engage the customer and take advantage of today’s tools, change is good and they will live for another day.

 

 

Headlines of the Week

As Grocery Wars Rage, Target And Kroger Mull A Merger

Target and Kroger are discussing a possible merger, several people with knowledge of the matter tell Fast Company. The talks come as the grocery industry grapples with Amazon’s increasing hold on the market. The two companies first started conversations last summer about a partnership that could improve Target’s grocery business and give Kroger customers more access to merchandise and e-commerce. Target and Kroger spoke again in the fall and talks are ongoing this year. The companies appear to be struggling to decide whether a merger is the best path forward.

 

Nordstrom Shouldn’t Feel Too Bad About Not Going Private

The Nordstrom family’s months-long bid to take the department-store chain it founded private has reached its end. Nordstrom Inc.’s independent board announced Tuesday evening it had ceased talks with the family — including the company’s co-presidents, Blake W. Nordstrom, Peter E. Nordstrom, and Erik B. Nordstrom — about a go-private transaction, saying they couldn’t agree on a price. As Gillian Tan and I wrote earlier this month, after the board rejected the family’s $50-a-share bid, it may have been prudent to accept that offer or one just slightly higher.

 

 

Apparel & Footwear

This New Site Could Be the Shopbop of Plus-Size

It may not be getting the attention it fully deserves just yet, but plus-size fashion is no longer the ignored market it once was. Over the last few years, brands like Eloquii, Universal Standard, Gwynnie Bee, and Dia & Co have seen explosive growthcelebrity funding and collaborationsbrick and mortar investments, and overall critical acclaim. Why the industry doesn’t have a Shopbop of its own — that is, an online shop that curates brands on one comprehensive destination — is a question four former Gilt executives had in mind when creating their latest project, CoEdition, a new plus-size fashion website. CoEdition will sell clothes, swimwear, shoes, and intimates from brands like Tahari, Rachel Roy, Stuart Weitzman, Cosabella and Cynthia Rowley. While the site, interestingly, isn’t stocking hot e-commerce brands like Eloquii or Universal Standard, chief merchant Brooke Cundiff says it will be selling about 150 different brands by the end of the year.

Lands’ End plots physical expansion as sales jump 11%

Lands’ End posted its best quarterly performance in three years last week. Net revenue in the fourth quarter rose 11.3% year over year to $510.6 million, including $25.9 million from an extra week of trading. It was the third consecutive quarter of growth, following 11 straight quarters of sales declines, according to CEO Jerome Griffith. Same-store sales rose 5%, according to a company press release. Further, Lands’ End discussed plans to expand its brick-and-mortar footprint. Lands’ End expects to open its first Chicago store in the second quarter and plans to open four to six stores this year. Over the next five years, the plan is to open 40 to 60 locations, based on traffic, convenience, analytics and where the retailer enjoys strong brand recognition, according to Griffith.

 

Athletic & Sporting Goods

Nike Product Revamp Helps North America to Rebound

Investors in Nike Inc., which was hit by a misconduct scandal that burst into public view last week, are taking comfort from a turnaround at its ailing North American business.  Though sales in the region declined for a third straight quarter, Chief Executive Officer Mark Parker said the picture brightened by the end of the latest period. New products and an improved customer experience have led to a “significant reversal of trend,” he said in a statement.

 

Dick’s Touts Growth Opportunities In Footwear And Apparel

Dick’s Sporting Goods’ officials elaborated on its exit from the fitness tracker category and challenges in firearms. But much of its presentation was spent discussing growth opportunities on the footwear and apparel side with brands including Nike, Adidas, Brooks and Patagonia as well as its numerous private labels.  The meeting came a day after Dick’s released fourth-quarter results. Earnings declined in the quarter but arrived at the upper end of guidance. More importantly, Dick’s officials provided earnings guidance for the current year that was well ahead of Wall Street’s targets as innovation from several brands is expected to result in less margin pressure in 2018 than previously anticipated.

Cosmetics & Pharmacy

L’Oreal Buys an Augmented Reality Beauty App Maker

Makeup empire L’Oreal wants to promote its huge collection of brands the high-tech way, so it’s buying Modiface to make that happen. It’s now in the process of acquiring the beauty tech company, which has been teaming up with big cosmetics brands for over a decade to create augmented reality apps for mobile and desktop. Modiface’s AR tech powers quite a lengthy list of beauty apps, including a website where you can digitally try on Estee Lauder’s lipsticks. It also provides the magic behind Benefit’s perfect brow-finder, Sephora’s Virtual Artist App, which gives you way to see what the retailer’s products look like on your face, and even Bixby Vision’s make-up tool for the S9 and the S9+. In addition to apps, Modiface also develops AR mirrors that can superimpose makeup on your face in real time.

Ulta Beauty Q4 earnings Miss; To Open 100 stores

Ulta Beauty is not backing down in 2018 from its aggressive expansion. The beauty powerhouse said it will open approximately 100 new stores and execute 17 remodel or relocation projects in fiscal 2018. Ulta ended fiscal 2017 with 1,074 stores. Ulta also released its quarterly and annual results. For its fourth quarter, ended Feb. 3, Ulta’s adjusted earnings per share were $2.75, which excludes a $0.65 net benefit due to tax reform related items. Analysts had expected $2.77 per share. Same-store sales (including e-commerce sales) increased 8.8%, driven by 6.2% transaction growth and 2.6% growth in average ticket. Retail comparable sales increased 4.2%, including salon comparable sales growth of 3.2%. E-commerce sales increased 60.4% to $248.3 million, including the benefit of the 53rd week, compared to $154.9 million last year. E-commerce comparable sales increased 50.4%.

J&J Explores Sale of LifeScan

Johnson & Johnson announced the potential sale of its LifeScan division, a leader in blood glucose monitoring products, to Platinum Equity. The private investment firm made a binding offer of approximately $2.1 billion for the diabetes company. LifeScan posted 2017 net revenue of approximately $1.5 billion. The acceptance period for the offer will end on June 15, 2018, unless extended, and during that time consultations with relevant works councils are planned. If the offer is accepted, the transaction would be expected to close by the end of 2018.

 

Discounters & Department Stores

In Push For Convenience, Walmart Wants To Help Shoppers Assemble Furniture, Mount TVs

There’s a big movement among major retail companies to become more than just places that sell you things. In the latest example, Walmart is partnering with a home-services app called Handy to give shoppers a deal on professional help assembling furniture or installing a TV. Walmart has been testing a partnership with Handy in Atlanta and now plans to expand it to more than 2,000 locations. The idea is to appeal to shoppers with more convenience — a major battlefield for retailers.

 

Grocery & Restaurants

Jack in the Box completes $305M sale of Qdoba

Jack in the Box has completed the sale of Qdoba to Apollo Global Management in a $305 million cash deal, ending the burger chain’s 15-year ownership of the fast-casual Mexican brand. Affiliates of New York-based Apollo, which also owns the parent companies of the Chuck E. Cheese’s and Peter Piper Pizza dining-and-entertainment brands, inherit more than 700 owned and franchised Qdoba restaurants in the U.S. and Canada. In fiscal 2017, the chain generated systemwide sales of more than $820 million.

Southeastern Grocers initiates financial restructuring

Southeastern Grocers announced today that it has entered into a Restructuring Support Agreement with a group of creditors and its private equity sponsor regarding the terms of a comprehensive financial restructuring that will position the company for long-term financial health. The company said that 582 stores will continue to operate as usual, while 94 stores will close, many of which will have their related leases rejected and lease rejection claims rendered unimpaired.

HelloFresh Acquires Green Chef

Meal-kit service HelloFresh SE has acquired Green Chef, a Boulder, Colo.-based rival known for its USDA-certified organic meal kits, for an undisclosed sum. Headquartered in New York, HelloFresh provides subscribers with curated recipes and fresh ingredients for making well-balanced meals. It now claims it will offer the largest selection of meal plans for consumers, adding Green Chef’s organic vegan and gluten-free menus, which include plans compliant with Paleo and Keto diets.

Home & Road

Williams-Sonoma Inc.; Pottery Barn Shined in 2017

Product refreshes, a handful of store remodels and a new brand targeting apartment living helped make Pottery Barn a stand out for Williams-Sonoma Inc. last year. All of its brands saw positive comparable brand revenue growth; Pottery Barn had 4.1 percent growth.

Auto Retailers Push Back on Flashy Redos

Sonic Automotive Inc. says it will resist automakers’ demands for grandiose upgrades of its new-car dealerships.  The pushback comes as Sonic and other public auto retailers shift their focus to used-car operations, which offer better returns. “We’re just not going to get caught up in the game of building these facilities like we’ve been asked to build in the past,” said Jeff Dyke, Sonic’s executive vice president of operations. “We’re not going to be bullied into that situation, either.”  Sonic, of Charlotte, N.C., can build a new EchoPark store, its stand-alone used- only outlet, for about a third of the cost of building a new franchised dealership, Dyke told Automotive News.

Jewelry & Luxury

Claire’s Stores Files for Chapter 11 in Prepackaged Bankruptcy

Saddled with a heavy debt load from a leveraged private equity buyout, on March 19, teen jewelry fave Claire’s Stores filed for Chapter 11 in Delaware bankruptcy court.

The company comprises 7,500 stores, concession locations, and franchise stores under the Claire’s and Icing brands. It employs approximately 10,000 people. The company said in a statement that it is “confident” it will survive the bankruptcy process, which it hopes to emerge from by September.

Signet CEO Sees a Lot of Things Wrong at Her Company

Listening to Signet CEO Gina Drosos’ recent conference call, it’s clear that a) she plans big changes for the company, and b) she isn’t happy with how things are going. Here are the issues Drosos says she uncovered while making a “deep dive” into the company’s operations, according to a SeekingAlpha transcript.

In Switzerland, a Much Smaller Baselworld Set to Open

The 2018 edition of Baselworld will be shorter and smaller than in years past. As announced back in November, the number of exhibitors at the show is down by half, from 1,300 to about 650, with many brands put off by the high cost of exhibiting at the show. Baselworld is also two days shorter this year—six days instead of eight. At the opening press conference held Wednesday morning in Basel, show Managing Director Sylvie Ritter said the watch industry is in a period of change and “unprecedented concentration,” in which the strongest players are getting stronger and weaker brands are being challenged.

 

Office & Leisure

KB Toys plots comeback in wake of Toys ‘R’ Us demise

Nearly 10 years after it went out of business, a former rival of Toys “R” Us may return to the scene in the wake of the toy giant’s plan to liquidate its U.S. operations. Strategic Marks, a company that specializes in reviving defunct brands, is looking to revive the KB Toys name. The firm, which bought the KB name about a year ago, plans to open some 1,000 KB Toys pop-up stores for Black Friday and the holiday shopping season, CNN Money reported, and has been in talks with pop-up operators such as Spencer Spirit Holdings.

Ellia Kassoff, president of Strategic Marks, announced his plans on March 16 in a LinkedIn post with the headline “WE’RE GOING TO SAVE THE TOY INDUSTRY!”

Billionaire CEO on a mission to save Toys ‘R’ Us

Isaac Larian says he and two other unidentified investors are pledging $200 million to try to save about 400 of the remaining 735 US stores that are slated to close. He’s started a GoFundMe page to try to raise more, through small contributions from people who love the stores, as well as to generate publicity about his efforts. So far it has raised about $5,000. “This is an American icon that has to be saved,” Larian, the founder and CEO of MGA Entertainment said. “I used to take my kids there instead of Disneyland. This needs to be saved for the next generation.”

Michaels to close most Aaron Brothers stores in brand repositioning

The retailer on Thursday announced that, following a strategic review of Aaron Brothers, it plans to close all 94 of its 97 full-size Aaron Brothers stores and reposition the brand as a “store-within-a-store” concept providing custom framing services in all Michaels store locations. Michaels will also rebrand Framerspointe.com, a company-owned online custom framing website, as AaronBrothers.com. In fiscal 2017, Aaron Brothers’ net sales totaled approximately $110 million and had no material impact on the company’s operating income, according to Michaels. The company expects the after-tax cost of implementing these changes will be in the range of $37 million to $42 million, with the vast majority of the cost recognized in the first quarter of fiscal 2018. “It makes no real sense for Michaels to invest time and effort into a brand that has little potential as a stand-alone entity,” Neil Saunders, managing director of GlobalData Retail, said.

Technology & Internet

Walmart looks to future acquisitions to fight Amazon

Walmart Inc. remains in buying mode as it looks to differentiate its online inventory to compete with Amazon.com Inc., said Marc Lore, the online chief of the world’s largest retailer. Future acquisitions will likely be in the $50 million to $300 million range and could go higher, Lore said Tuesday at the Shoptalk conference in Las Vegas. Lore made his first public comments since the retailer reported decelerating online sales growth from the crucial holiday shopping season.

 

Amazon considers buying Toys R Us retail spaces

Amazon.com Inc. has looked at the possibility of expanding its retail footprint by acquiring some locations from bankrupt Toys R Us Inc., according to people with knowledge of the situation. The online giant isn’t interested in maintaining the Toys R Us brand, but has considered using the soon-to-be-vacant spaces for its own purposes, said the people, who asked not to be identified because the talks are private. Such a move would let Amazon quickly expand its bricks-and-mortar presence.

Finance & Economy

Leading indicators post fifth straight advance

The Conference Board said its leading economic index rose 0.6% in February, following a 0.8% gain in January and a 0.7% rise in December.  The index rose for the fifth straight month, and eight of the 10 indicators that make up the leading index advanced. The biggest help came from average weekly manufacturing hours. Building permits and stock prices were the only drags.  The gains suggest an economy with real momentum. Job market data continue to be strong, and consumer and business confidence are, for the most part, robust.

 

Jobless numbers show strong job growth in March that should support consumer spending

The number of Americans filing for unemployment benefits unexpectedly rose last week, but the increase was marginal, suggesting strong job growth in March that should underpin consumer spending.  Claims have now been below the 300,000 threshold, which is associated with a strong labor market, for 159 straight weeks. That is the longest such stretch since 1970, when the labor market was much smaller.  The labor market is considered to be near or at full employment. The jobless rate is at a 17-year low of 4.1 percent, not too far from the Federal Reserve’s forecast of 3.8 percent by the end of this year.