April 2, 2018 Consensus

The Weekly Consensus – April 2, 2018 (Volume 10, Number 14)

The Big Story
Advantage, Walmart
Betsy White

Last week, while the current resident of the White House was tweeting negative comments about the retail behemoth Amazon, the Wall Street Journal reported that Walmart, the Amazon of the 80s and 90s, is in discussions to buy health insurer Humana.  A transaction involving Humana, with a market cap of $38 billion, would be the largest in Walmart’s history, but still smaller than other recently announced transactions in the space, including the proposed acquisitions of Aetna by CVS for $69 billion and of Express Scripts by Cigna for $67 billion.

As big as Walmart is with $500 billion in total sales, according to a 2016 report, it is only the fourth largest retail pharmacy, with CVS, Walgreens and Express Scripts each generating more than twice the pharmacy revenue as Walmart.  Combining forces with health insurer Humana, which has over 14 million policyholders, could help drive traffic and additional pharmacy (and other) business to the 4,700 Walmart stores with pharmacies and to Walmart’s online business.  Further, aligning with a health insurer would have the added benefit of helping to control healthcare costs and benefits for Walmart’s 1.5 million U.S. employees.

For Walmart, the benefits of a Humana acquisition are nearly endless – expansion of its business through healthcare goods and services, one of the fastest growing segments of the economy, additional clout in the ever-concentrating world of health insurance, access to big data, and the ability to drive additional traffic through its stores are just a few.  It’s all about growth, and in its latest quarterly release, Walmart’s all-important metric of ecommerce growth is slowing.

Looming over Walmart’s consideration of Humana is a familiar boogeyman: Amazon. Amazon has also recently announced some moves into healthcare, including a partnership with Berkshire Hathaway and JP Morgan that will look for technology solutions to provide healthcare at reasonable costs. In addition, according to research firm Leerink, Amazon currently has a team of over 30 people looking at building a pharmacy business.

While any transaction between Walmart and Humana has yet to play out, based on all of the M&A activity in the retail/healthcare space, it’s difficult to determine whether Walmart is playing offense or defense.  But by any number of measures, it does appear that that a combination here is a winning proposition.

 

Headlines of the Week

Trump attacks Amazon again over sales tax and the postal service

President Donald Trump on Thursday fired off more criticism at Amazon.com Inc., saying his problems with the internet retailer predate his election a day after a report that he’s “obsessed” with regulating the company.

Walmart And Target Are Set To Be The Big Winners From Toys ‘R’ Us Closures

Whether Amazon killed Toys “R” Us may be of interest to analysts and commentators, but more pressing for toy retailers is the question of who will capture the billions of dollars that would otherwise have flowed to Toys “R” Us. Our exclusive consumer research conducted in the past week suggests that Walmart and Target are set to win big from the closure of Toys “R” Us stores in the U.S. Coresight Research surveyed U.S. consumers in recent days about where they browse for, and buy, toys and games. Our research enables us to look at those who shopped at Toys “R” Us in the past year and determine what other retailers they also browsed and bought from — which gives us an indication of which retailers are most likely to win the toy dollars that Toys “R” Us will no longer be taking.

 

 

Apparel & Footwear

Adore Me plans hundreds of stores

Online intimates brand Adore Me is moving into brick-and-mortar and plans to open 200 to 300 stores in the next five years, Retail Dive reports. The first seven to 10 stores will open this year in New York and another 20 will open next year, per Retail Dive. Shoppers will be able to try on items for home delivery and staff will be able to check out customers using mobile devices. With its expansion into physical retail, Adore Me aims to take market share from Victoria’s Secret, which has about 1,200 stores in the U.S. and Canada, The Wall Street Journal reports.

Billabong Shareholders Agree to Boardriders Merger

Shareholders of Billabong International Limited approved a merger with rival Boardriders Inc., putting an end to protests by Billabong’s dissident shareholders. Some of the Australian surfwear giant’s shareholders balked at Boardriders’ offer to pay $1 per share.

Boardriders, based in Huntington Beach, Calif., sweetened the deal by raising the price to $1.05 per share. A Billabong statement said that more than 95 percent of its shareholders voted for the merger and more than 85 percent of the company’s shareholders voted. The deal, reached on March 28, still needs to be approved by an Australian court, where an appeal can be filed. If the court approves the deal, it is scheduled to become effective by April 9.

Royal Robbins clothing line has a new owner

Royal Robbins, the U.S. outdoor and travel apparel company founded by the iconic climber with the same name, has been acquired.  Fenix Outdoor International AG announced that it has signed an agreement and acquired 100 percent of Royal Robbins, with consolidation to be complete in the second quarter of 2018, according to a news release.  Fenix Outdoor is an internationally active group focused on products for nature and outdoor life, including clothing and equipment. Brands include Fjällräven, Tierra, Primus, Hanwag, Brunton, and now Royal Robbins, in addition to outdoor retailers Naturkompaniet, Partioaitta, Globetrotter, and Friluftsland. Today the company has presence in over 30 countries worldwide.

 

 

Athletic & Sporting Goods

NFL and Nike sign 8-year contract for uniforms

The NFL and Nike just made their relationship official — again.  The two brands announced that they would be extending their partnership for another eight years. The new deal will take place when the current one expires in 2020 and will run through 2028.  As part of the deal, Nike will set up all 32 teams with game-day uniforms and sideline apparel that bears the swoosh logo.  Nike will also provide gear to the NFL players it has individual contracts with, including two of its newest signs: Top rookie prospects Saquon Barkley and Baker Mayfield.

Accell North America acquires Beeline Bikes

Accell North America (“ANA”) has acquired Beeline Bikes, the mobile service franchiser. ANA has been an investor in the company for several years.  ANA is the North American parent company of the Diamondback, Haibike, iZip, Raleigh and Redline bicycle brands.  Under the new ownership, Beeline franchisees will have direct access to the brands and resources of ANA, the company said.

Cosmetics & Pharmacy

Youth to the People Secures Minority Investment

Indie skin-care brand Youth to the People has landed a minority investment from Strand Equity.  Youth to the People focuses on skin-care products that contain superfood ingredients, cold-pressed extracts and natural botanicals. Right now, the business makes a cleanser, cream, serum, mask and eye cream that are sold on the brand’s web site, as well as through Dermstore, Sephora, Nordstrom and Free People. The products are not animal tested, vegan, formulated without parabens and housed in recyclable packaging. Industry sources estimate the brand is on track to triple sales to around $20 million for 2018.

Rite Aid, Albertsons Merger Gains Momentum with HSR Expiration

Rite Aid announced that the HSR waiting period (under the Hart-Scott-Rodino Antitrust Improvements Act of 1976) in connection with its previously announced merger with Albertsons, expired. The expiration of the waiting period under the HSR Act satisfies one of the conditions to the closing of the merger, which remains subject to other customary closing conditions, including the approval of Rite Aid’s stockholders. With the Albertsons-Rite Aid merger, originally announced in February, the combined operation is poised to become the No. 4 retail pharmacy operator in terms of pharmacy sales.

 

Discounters & Department Stores

Democrats Take Positive View of Walmart in Reversal for Retailer

Walmart Inc., which has taken more progressive stands on everything from worker pay to gay rights in recent years, has won over the majority of Democrats — a reversal for a retailer that has long been a Republican favorite. Almost 52 percent of people who identify as Democrats would consider shopping at the company, according to a report from the YouGov BrandIndex. That’s up about 8 percentage points from five years ago. The support of Republicans has stayed solidly above 65 percent.

 

Grocery & Restaurants

Grocery Wars Turn Small Chains Into Battlefield Casualties

Amazon’s $13 billion purchase of Whole Foods in June added a sense of urgency to the competition to feed American families, raising the prospect that the e-commerce giant would upend groceries just as it has every other aspect of retail. This month, Walmart responded with its own plan to start offering an online grocery delivery service in 100 cities. At stake is not only the price of toothpaste and bananas, but the fate of thousands of cashiers, cake decorators and meat cutters, many of whom belong to labor unions and are owed pensions when they retire. Like businesses in other industries — including Toys “R” Us, which announced liquidation plans this month — many failing supermarkets are owned by private equity firms that have loaded the companies up with debt.

SBE/Hakkasan Group merger officially off

A year after announcing plans to merge and create a billion-dollar nightlife and restaurant group, the proposed deal between SBE and Hakkasan Group is officially dead. Rumors have circulated for months that the proposed merger was off, but Hakkasan Group declined to confirm until last week, when officials said through a spokesperson that the deal will not proceed.

Bodega Latina expands to Texas with Fiesta Mart buy

Bodega Latina Corp., operator of the El Super chain, has agreed to acquire Fiesta Mart, the Houston-based banner with 63 supermarkets in Texas. The acquisition is valued at about $300 million, according to a report in the Wall Street Journal. The purchase gives Bodega Latina, which is a division of Mexico’s Grupo Comercial Chedraui, 122 stores and revenues of about $3 billion, according to Bodega Latina. It will operate supermarkets in California, Arizona, New Mexico, Nevada and Texas.

Home & Road

RH Stock Soars After Earnings Beat, Return To Expansion Strategy

RH shares jumped after the luxury furniture firm reported better-than-expected earnings and plans to return to an expansion stance. The company, formerly known as Restoration Hardware, reported EPS of $1.69, an increase of 148.5% and above forecasts for $1.56. Revenue of $670 million was just below Wall Street estimates of $671 million, though it was a year-over-year increase of 13%. It also generated nearly $130 million of free cash flow in the quarter.

Home Renovations Drive Retail Job Growth

An increase in home renovation projects is driving the growth of American retail jobs, especially at stores like Home Depot and Lowe’s.  Retailers added 50,300 jobs last month as the U.S. unemployment rate remained unchanged at 4.1 percent. Building-materials stores hired more than 10,000 people, making up more than one-fifth of the total retail jobs added, The Washington Post reports. Homeowner spending on improvements and repairs is expected to reach $340 billion in 2018, up 7.5 percent from 2017, according to the Joint Center for Housing Studies of Harvard University.

Jewelry & Luxury

Tiffany Fails Where Rolex Wins: Insights Into Tiffany’s Latest Financial Report

Tiffany & Company just delivered some happy news to its stakeholders. Following a strong two-month holiday season, when net sales increased 8%, the company posted a full year sales increase of 4% to reach $4,2170m worldwide. Each of Tiffany’s global reporting markets grew, with the exception of Japan (-1%), though in both Asia-Pacific and Europe comparable store sales declined ( -2% in each), but other factors helped to overcome these shortfalls. As a corporation, Tiffany is heavily dependent upon its global markets, which account for 55% of total sales. Because of that, its relative weakness overseas in 2017 should be cause for concern, though not alarm as of yet.

Australia’s biggest diamond mine is running out of diamonds

Sometime in the next few years Argyle Diamonds, Australia’s biggest diamond mine and the source of rare and prized fancy pink gems, will come to the end of its life.  The shutdown, and the loss of Argyle’s output of 14 million carats of diamonds a year, will cut world production by around 10% and is expected to create upward pressure on prices.

Argyle has been in operation since 1983, first as an open pit and then from 2013 as an underground operation, producing more than 95% of Australia’s diamonds.  At the end of 2017, the estimated ore reserve was 16 million tonnes, down from 29 million tonnes, a drop of 45% from a year earlier.

Louis Vuitton expands French manufacturing to meet handbag demand

Louis Vuitton, the biggest earnings driver at French luxury goods group LVMH (LVMH.PA), is expanding its leather goods and handbag production with at least two new workshops planned for this year and next, the brand said on Tuesday. The label, originally known for its travel trunks, will hire 500 people for two sites in western France, bringing its staff of leather goods specialists to around 4,000 as it looks to meet growing demand. One site will open by July this year, and another by early 2019. A third new opening should follow later next year, Vuitton’s industrial director Emmanuel Mathieu said.

There’s Life in Baselworld Yet

Baselworld 2018, which ended Tuesday, saw a year-on-year decline from 1,300 exhibitors to approximately 650, and was shortened from eight days to six. Considering that the world’s largest watch and jewelry fair hosted 1,500 participants in 2016, this year’s drop seems even more dramatic. More defections are expected next year as contracts with exhibitors expire. In a terse statement in November, Baselworld officials reiterated the defiant stance they took during the 2017 show: that they had decided to make it a leaner event by focusing on quality rather than quantity.

 

Office & Leisure

As Toys R’ Us Closes, Only One Major Toy Store Is Thriving in the Retail Apocalypse

When Toys R’ Us announced plans to close all 735 of its U.S. stores this month, it wasn’t exactly a surprise. Amazon’s toy sales grew about 12% last year, according to market research firm One Click Retail, while declining foot traffic has threatened to topple every time-honored kids company from American Girl to the once-invincible Lego. In an era of smartphone shopping and same-day delivery, one decades-old toy chain has managed to weather the storm. And it’s a peculiar one. In February, Build-A-Bear announced its fourth straight year of profitability. As retail giants like Claire’s, The Limited, and Payless shutter stores by the hundreds, the company has expanded its physical footprint by 12% over the last five years. And while Toys R’ Us closed its doors with $5 billion in debt, Build-A-Bear is debt-free.

Office Depot shelves went without Sharpies after vendor spat

Newell Brands — the maker of Sharpie, Paper Mate pens and Elmer’s Glue, among other products — recently interrupted its shipments to Office Depot over a dispute about how the office supplies retailer was marketing its goods. The move led to a 10% sales decline in the division that makes those items, The altercation comes amid upheaval in the office supplies space, which has Office Depot and rival Staples pivoting to focus more on business customers and Amazon seizing more office supplies sales to consumers and businesses alike. Big box retailers often flex muscles at their vendors in an effort to rein in costs. But once in a while suppliers flip the script. Vendors and retailers forge what should be win-win agreements regarding marketing and promotions, but Newell says that Office Depot didn’t live up to theirs.

Technology & Internet

Toys R Us halts online sales as the retailer goes out of business

Toys R Us Inc. shoppers will have to head to stores to pick up their favorite toys now. The toy retailer has ceased selling online. “We have shut down the website for any purchases but our brick and mortar stores are open and holding going out of business sales,” an overlaid message on the site reads.

Finance & Economy

Consumer sentiment in March hits highest level since 2004

U.S. consumer sentiment slipped slightly at the end of March, after shooting up in the mid-month report, but still recorded its highest level since 2004.  The index dipped slightly lower at the end of March due to uncertainty about the impact of the proposed trade tariffs, according to the report. Concerns with trade policies offset positive reactions to recent tax reform legislation.  Consumers also anticipate interest rates increasing in the foreseeable future, slowing future economic growth.

 

Consumer spending up modestly as incomes rise

Americans increased their spending just 0.2 percent in February, while their incomes were boosted by increased wages and business owners’ income.  A closely watched signpost, consumer spending accounts for about 70 percent of U.S. economic activity.  After-tax income jumped 0.4 percent. With consumers holding back on spending, the savings rate rose to 3.4 percent — the highest since last August. The rate was 3.2 percent in January. Savings had fallen to a 12-year low in December.  The healthy income gains could spur more spending in the coming months.