May 14, 2018 Consensus

The Weekly Consensus – May 14, 2018 (Volume 10, Number 20)

The Big Story
Walmart is Small
Douglas Stebbins

It was just over nine years ago, in this very space, that I did a deep dive into inner workings of Walmart and, based on empirical evidence, made the bold declaration that “Walmart is Big.”  As an update to that ground-breaking piece of journalism, I went back to see how things stand currently.  Walmart, in 2017 had revenue that, for the first time ever, topped half a trillion dollars in annual sales.  Walmart’s revenue in 2017 was about equal to the next five largest US retailers (Costco, Walgreens, Kroger, Home Depot and Target), combined.

At year end January 30, 2018 Walmart had 11,700 retail units across the globe.  Having opened their first store in Rogers, AR in 1962, Walmart, on average, has opened nearly 210 stores a year every year since; almost one store opening for every work day of the year for 56 years.  Who knew that ribbon cutting could be a full-time job?

The data seemed to confirm my hypothesis that yes indeed, Walmart is, and continues to be, big.  But where do they go from here?  The more I looked at the numbers, the more it became clear that there is still plenty of opportunity for growth, especially internationally.

Of Walmart’s store portfolio, 5,350 of the units were located in the US and 6,350 units were international.  But Walmart’s perception as a global dominator is a bit overstated.  With a significant presence in both Mexico and Canada, over 70% of Walmart’s units are in North America.  So, while there is one Walmart for every 60,000 North American residents, for the 7.1 billion people that do not live in North America there is one Walmart for every two million people (so get there early to avoid the crowds).

For its global expansion, Walmart is adopting a different strategy than what they used to dominate North America.  With its recent purchases of ecommerce platforms Jet.com, Bonobos and Modcloth, Walmart realizes that the road to continued growth is not paved with brick and mortar but with clicks and bytes.

To address the relatively unaddressed international market, Walmart announced last week that it had out-bid Amazon and will pay $16 billion for a 77% stake in Indian e-commerce leader Flipkart.  Keep in mind that India, with 1.3 billion residents is more than four times more populous than the US, but currently has fewer than two dozen Walmart-owned locations.  Walmart’s “Best Price Modern Wholesale” banner is a chain of 20 locations that sells discounted merchandise to the small independent retailers that dominate Indian retail.

There are a few reasons for Walmart’s lack of significant presence in India.  The most meaningful is commercial regulation in India that makes it difficult for foreign owners to operate brick and mortar retail locations in India.  The acquisition of Flipkart, which was founded in 2007 by two former Amazon employees, allows Walmart to quickly gain market share in India without the time, expense and regulatory hurdles of trying to build out a network of stores.

As Walmart becomes more comfortable operating in the ecommerce marketplace, it will undoubtedly look for more web-based retailers to help fuel its global growth.  So, while you should expect to see Walmart’s global footprint continue to expand, just don’t expect to see a lot of ribbon cutting ceremonies.

 

Headlines of the Week

Walmart makes big bet in India, pays $16B for Flipkart stake

Walmart will soon reach shoppers in India’s massive consumer market directly, as it takes control of the online retailer Flipkart that’s known for its ubiquitous delivery drivers on their motorcycles with oversized backpacks. The $16 billion controlling stake, announced Wednesday, is the largest acquisition yet by the world’s largest retailer. Retail sales are being fueled by a hot economy in India, and both Walmart and Amazon have pushed hard to catch up to Flipkart and become the first major U.S. retailer to establish a substantial foothold in the country.

Toys “R” Us liquidation gives boost to toy sales

The toy industry is enjoying a growth spurt. In the first 10 weeks of 2018, when the toy industry was in a “business as usual” state, U.S. dollar sales grew by 2% — on par with the results for the year-ago period, according to global information company The NPD Group. The proceeding four weeks brought two unique circumstances which converged to lift the industry: the beginning of the Toys “R” Us liquidation (March 15) and an early Easter (April 1). In those weeks, from March 11 through April 7, toy sales grew by 36% over the same period in 2017 — driving year-to-date growth for the 14 weeks combined to 13%.

 

 

Apparel & Footwear

Duluth Trading aiming for 100 stores in 5 years

Outdoorsy apparel retailer Duluth Trading Co. has embarked on an ambitious brick-and-mortar expansion plan — after opening 15 stores last year, the company is opening another 15 this year, and another 15 annually until it reaches 100, the Minneapolis Star-Tribune reports.  Stores bring not just more customers across all channels but also higher-spending ones, CEO Stephanie Pugliese told analysts in March.

Canadian Tire goes international with strategic $985M purchase of Helly Hansen

Canadian Tire Corporation Ltd.’s $985 million purchase of Helly Hansen gives the retailer access to a lucrative global marketplace without the overhead risk of a large new bricks and mortar store network, executives said.  The most significant acquisition for Canadian Tire since it bought sporting goods retailer Forzani Group in 2011 and casual apparel chain Marks in 2001, the purchase of the premium sportswear brand comes at a time of investor trepidation about the future of store-based retail amid the rise of online shopping.  Founded in 1877 and based in Oslo, Norway, Helly Hansen has annual revenue of $500 million and is sold in over 40 countries around the world including the U.S. at stores such as Nordstrom and REI, as well as the U.K., Sweden, Germany, Spain, Russia and Australia.

Retailer Express makes its ‘extended’ sizes available in-store

Columbus-based specialty fashion retailer Express is introducing extended sizing across its women’s and men’s product assortments within its stores.  Express has offered extended sizing online for some time. This month, Express is rolling out the new size options starting with new arrivals ranging from sizes 00 to 18 (tops in XS to XL) in women’s and XS-2XL in men’s. The newly expanded offering is featured in 130 stores across 44 cities in the United States, including select stores in Columbus, Cincinnati and Cleveland.

 

Athletic & Sporting Goods

Why the Revelation of Nike’s Supposed ‘Boys Club’ Culture Won’t Kill the Brand

Back to back departures of top executives and an exposé in a national news publication — detailing multiple incidences of misconduct against women — isn’t likely to take down Nike Inc., according to experts. The firm has shouldered internal upheaval in recent weeks — starting with the highly publicized exit of brand president Trevor Edwards, who, by many accounts, was next in line to succeed chairman and CEO Mark Parker. That news preceded several unexpected and high-profile exits as well as multiple reports describing allegations of harassment, a toxic workplace environment (for women) and a quiet, female-led revolt.

Bass Pro Shops & Cabela’s To Add Sunglass Hut Shop-In-Shops Across U.S.

Bass Pro Shops and Cabela’s together with Luxottica Group announced plans to roll out Sunglass Hut retail shop-in-shop concepts in approximately 160 locations across the U.S.  Sunglass Hut will be the exclusive seller of sunglasses at all Bass Pro Shops and Cabela’s locations.  The brands first partnered together in May 2015 with the opening of Bass Pro Shops at the Pyramid in Memphis, TN. Located inside a massive transformed sports arena along the banks of the Mississippi River, the immersive experience, operated by Bass Pro Shops, includes a Sunglass Hut shop-in-shop within the iconic 535,000-square foot national destination.

Cosmetics & Pharmacy

CVS to Acquire Fred’s Specialty Pharmacy Business

Fred’s Inc. has reported that CVS Health is purchasing its specialty pharmacy business EntrustRx for $40 million. The general merchandise and pharmacy store announced that it had reached a definitive agreement to sell certain assets of its specialty pharmacy unit — EntrustRx — to CVS Health for $40 million “plus an amount equal to the value of inventory of EntrustRx.” For CVS, the acquisition is an upgrade to an already expanding specialty pharmacy business.

IFF to Buy Israel’s Frutarom for $7.1 Billion, Nearing Top Spot

International Flavors & Fragrances Inc agreed to buy Israeli flavors and ingredients maker Frutarom for $7.1 billion in cash and stock, vying for the industry’s top spot with market leader Givaudan. The flavors and fragrances sector was expected to consolidate after Geneva-based Givaudan said in March it planned to launch an offer for French natural ingredients firm Naturex and Israeli media reported last month that Frutarom had attracted takeover interest. The deal marks another bet on the explosion of consumer preferences for smaller upstart brands that feature more natural products focused on health and wellness.

Diplomat Nears CEO Decision Amid Solid Q1 Results

Specialty pharmacy services company Diplomat has shared its first-quarter 2018 financial results. The company’s revenue hit a record high of $1.34 billion, thanks in part to the addition of its newly minted pharmacy benefit management segment, recently renamed CastiaRx, Diplomat said. Following the earnings announcement, interim CEO Jeff Park voluntarily stepped down from his post, effective May 11, as Diplomat said it was entering the final stages of its search for CEO. With the company expected to name a CEO by the end of the week, CFO Atul Kavthekar will assume additional responsibilities until the new CEO’s appointment is effective.

e.l.f. Beauty Announces First Quarter 2018 Results

e.l.f. Beauty today announced results for the three-month period ended March 31, 2018.

Net sales increased 9%, or $5.3 million from the first quarter of 2017, to $65.9 million, primarily driven by growth in leading national retailers largely attributable to the benefit of shelf space acquired in 2017 and the addition of store locations at Ulta Beauty.

 

Discounters & Department Stores

Sears CEO Eddie Lampert: We are still ‘fighting like hell’

Sears Holdings CEO Eddie Lampert on Wednesday said the company is ahead of Walmart and Target in that the company has “tried to incubate our own capabilities” instead of making major acquisitions. “Let me be the first one to acknowledge we are on the right path but we haven’t gotten over the hump. We need to convert our vision into reality, [which has been] made much more difficult because the operating performance isn’t where it needs to be,” he said.

 

Grocery & Restaurants

Why Mondelez Is Buying Tate’s Bake Shop for $500 Million

Mondelez, the conglomerate behind brands Oreo, Chips Ahoy, and Ritz Crackers, will acquire cookie maker Tate’s Bake Shop for $500 million in cash. Tate’s, a Southampton, N.Y.-based premium cookie and baked good brand, has been growing rapidly. Tate’s sales have quadrupled in the past five years.

Del Frisco’s Restaurant Group to acquire Barteca for $325M

Irving, Texas-based Del Frisco’s Restaurant Group Inc. announced an agreement on Monday to acquire Barteca Restaurant Group for $325 million. Norwalk, Conn.-based Barteca is parent to the Barcelona Wine Bar and Bartaco chains.

Home & Road

Newell Brands Expands Transformation Plan With Additional Divestitures

Newell Brands is continuing to restructure under an expanded accelerated transformation plan, which includes divesting of two more brands and applying all after-tax proceeds from its divestitures to debt repayment and share repurchase. Newell has added Jostens and Pure Fishing to its divestiture list, joining non-core businesses Rubbermaid Commercial Products, Rubbermaid Outdoor/Closet/Refuge and Garage, Process Solutions, Rawlings, Goody, U.S. Playing Cards and Mapa/Spontex/Quickie.

The company’s core consumer divisions that will remain include appliance and cookware, food and outdoor and recreation, which encompass familiar housewares brands Oster, Sunbeam, Calphalon, Crock-Pot, Mr. Coffee, Sistema, Ball, Rubbermaid, Food Saver, Coleman and Contigo. Other remaining divisions cover home fragrance, writing, baby and safety and security.

 

RugsUSA Receives Investment from Comvest Partners

Comvest Partners has bought into RugsUSA, an e-commerce retailer and supplier of rugs and other home décor products, to help support the company’s growth. The amount of the investment was unavailable at press time. The investment was made on RugsUSA’s 20th anniversary, said founder Koorosh Yaraghi, who will continue in his role as CEO and an owner of the company. With leading design and global sourcing capabilities, RugsUSA provides an expansive selection of products directly through its website, as well as through other e-commerce marketplaces and retailers.

Jewelry & Luxury

Burberry Sues Target Over Its Iconic Check Pattern

Target has become Burberry’s latest, well, target, in the luxury brand’s tireless fight to protect its iconic check trademark. The British company filed a lawsuit on May 2 in New York against both Target Corporation and Target Brands, Inc., accusing them of selling a number of products that infringe on Burberry’s check trademark. Items include eyewear, luggage, stainless-steel bottles and scarves. As the complaint explains, this was not a one-time occurrence: Burberry claims it sent Target a cease and desist in early 2017.

How product customization is driving a new business strategy at Tapestry

Tapestry, the company that owns Coach, Kate Spade and Stuart Weitzman, is placing a bet on customization as it expands two platforms that let customers personalize products.

As customization becomes more relevant to fashion brands, few other retail companies have invested in customization platforms like Tapestry. As part of the business’s ongoing restructuring strategy, customization plays a role in pivotal goals like reducing promotions, improving pricing structure, and mining customer data around trends and buying behavior, in order to speed up the supply chain.

Why Are Jewelry Retailers Saying ‘I Don’t’ To Lab-Grown Diamonds If Millennials Want Them?

The $80 billion mined-diamond industry is at a tipping point as man-made diamonds are offering consumers a new option. When consumers are given a choice between buying a 1 carat mined diamond for $5,000 or a bigger 1.25 carat lab-grown diamond for the same price, more people are opting for the bigger lab-grown stone. It is virtually identical in quality and composition to the mined diamond, but without the human toll or negative environmental impact of mining operations. This is most especially important to the millennial generation. That is, if they are given the choice at the jewelry counter.

Today the lab-grown diamond industry is estimated by Morgan Stanley to represent less than 1% of the global market for rough diamonds, with sales between $75 to $200 million.

Dennis Ulrich to Retire from Richline This Year

Dennis Ulrich is retiring as CEO of the Richline Group after almost 11 years in the position and 45 in the jewelry industry, the company announced. Richline’s current president, Dave Meleski, will take over as CEO, with Ulrich staying on for “some time” to assist Meleski in the transition. Ulrich started in the jewelry business in 1974 when he began working at the “original Richline” with his father, Mitchel, and his mother, Ruth.

 

Office & Leisure

Office Depot ‘encouraged’ by Q1; raises outlook

Office Depot Inc. reported first quarter sales and profits that exceeded expectations as it continues to transform itself from a traditional office supplies retailer to a services-led shopping experience with a broader business services platform. The retailer’s profit dropped 65% to $41 million, or 7 cents a share, for the period ended March 31, compared with $116 million, or 22 cents, for the year-ago period. Office Depot attributed the decline in profit to narrowed gross margins from store and supply chain cost deleverage, and higher selling, general and administrative expenses.

GameStop CEO Mauler leaves after 3 months

Michael Mauler who was promoted to chief executive officer at GameStop in February is out. Mauler resigned for “personal reasons,” the company said Friday.  The resignation, effective today, “is not due to any disagreement with the company regarding its financial reporting, policies or practices or any potential fraud.” But Mauler isn’t entitled to any severance, the company said. Mauler, 56, was a 16-year veteran at the Grapevine-based video game retailer and most recently was executive vice president and president of the retailer’s 2,000-store international division.

Technology & Internet

Synchrony To Acquire Loop Commerce

Synchrony Financial announced May 10th that it will acquire Loop Commerce, the digital gifting platform used by retailers to make every product giftable. Using Loop’s GiftNow feature, consumers shopping for someone else at a participating retailer can send any product to any recipient using only their email address and then schedule a time for that item to be delivered, including in real time. Sizes and colors, and even the item itself, can be exchanged and then sent to an address provided by the recipient.

 

Finance & Economy

US consumer prices rebound modestly in April

U.S. consumer prices rebounded less than expected in April as rising costs for gasoline and rental accommodation were tempered by a moderation in health-care prices, pointing to a steady buildup of inflation.  Excluding the volatile food and energy components, the CPI edged up 0.1 percent after two straight monthly increases of 0.2 percent. The so-called core CPI rose 2.1 percent year-on-year in April, matching March’s increase.

 

American Consumer Debt To Hit $4 Trillion By EOY

New data shows that Americans are on pace to accumulate a collective $4 trillion in consumer debt by the end of 2018.  LendingTree, the nation’s leading online loan marketplace, released its first Consumer Debt Outlook for May 2018 — it found that collectively, Americans owe more than 26 percent of their income on consumer debt, up from 22 percent in 2010.  Consumer debt includes non-mortgage debts such as credit cards, personal loans, auto loans, and student loans.