May 21, 2018 Consensus

The Weekly Consensus – May 21, 2018 (Volume 10, Number 21)

The Big Story
Department Stores: No Turnaround Yet, But Reasons for Optimism
Mark Lenz

Last week was a roller coaster ride for the department store segment.  After Macy’s released positive first quarter results early in the week, there was upbeat analysis everywhere.  Was this the beginning of a long-hoped-for turnaround in the segment?  Then the rest of the public companies in the space released their numbers later in the week and the enthusiasm was diminished.  While Dillard’s beat sales and bottom line expectations easily, JC Penney and Nordstrom disappointed with anemic sales growth.  And then there was Sears, which reported a precipitous drop in sales and spoke about selling one of their strongest remaining brands, Kenmore.

What are the takeaways and highlights from this mixed bag of reports?

Macy’s results indicate that if department store retailers pull the right levers, they can participate in the sales growth that other retail segments are enjoying.  Continued investment in Backstage Stores, Blue Mercury and ecommerce capabilities have increased Macy’s exposure to the robust segments of off-price, beauty and web retailing, on top of improvements in the base businesses at Macy’s and Bloomingdales.  New ways to interact with customers are being implemented with the roll out of an updated loyalty program, mobile checkout and the acquisition of Story concept shop in recent weeks.  Macy’s has done a good job of pushing to evolve from the traditional department store model.

Nordstrom has also made strides in its efforts to innovate and adapt, with a new store model that carries no inventory and a new Men’s store in Manhattan.  A Woman’s store is to follow. The company also continues to strive to be the pinnacle of customer service, and to serve value customers with its Nordstrom Rack banner. Recent periods haven’t all been smooth sailing, however. The Nordstrom family has been trying to take the company private for the past year. Management insists that recent results haven’t been impacted by that, but it is reasonable to note that substantial time and effort has likely been spent on non-retail matters.

JCPenney blamed its lackluster results partially on the weather.  Unfortunately for the company, Macy’s strong results over the same time made the weather excuse less convincing.  While the Jewelry and Sephora shop-in-shop businesses performed well, there was weakness in most other areas.  JCPenney was actually the first department store to embrace major change with its Ron Johnson experiment.  It may have been ill timed and directionally challenged, but the company was right to see that change was needed.  However, because of that misstep, JCPenney has recently done less to change its trajectory, experiment and evolve than the retailers mentioned above.  Without further innovation, JCPenney is moving closer to becoming the next Sears than the next Macy’s.

This past week did not deliver the clear inflection point for department stores that some had optimistically begun to look for after the Macy’s report. However, the good news was that the companies that have done the most to reimagine and invest in new ways to serve and satisfy their customers seemed to see the most success.  While the changing currents of retail remain difficult to navigate, at least some of the biggest players now appear to have a winning game plan. As a department store shopper (there, I said it), I am rooting for these companies to get it right, so I can continue to shop for quality clothing and respectable brands under one roof.  If, like Macy’s and Nordstrom, department stores continue to evolve and make interaction easier, it will be easy for me and others to keep shopping there.

 

Headlines of the Week

Amazon, Whole Foods integrate Prime benefits in stores

The much-anticipated linkup between Amazon Prime and Whole Foods Market stores has arrived. Amazon and Whole Foods on Wednesday said that members of the e-tailer’s Prime benefits program can now get an extra 10% off sale items and weekly “deep discounts” on certain top-selling items at Whole Foods stores in Florida. Plans call for the benefits to roll out to all of the nearly 400 Whole Foods and Whole Foods Market 365 stores nationwide this summer.

 

US e-commerce accounts for 13.8% of total retail sales in the first quarter

U.S. online retailers generated $114.42 billion on the web in the first quarter, a 16.4% increase compared with $98.29 billion in Q1 2017, the Department of Commerce reported today. That would mean e-commerce represented 13.8% of total retail sales in Q1 compared with 12.4% of total retail sales in Q1 2017.

 

 

Apparel & Footwear

Rockport shoe company files for Chapter 11 bankruptcy protection, may close stores

Rockport Group became the latest shoe company to trip on retail’s rocky terrain as it filed for Chapter 11 bankruptcy protection last week. The company, whose shoe brands include Rockport, Aravon and Dunham, follows Payless ShoeSource and Nine West into bankruptcy court as shoe sellers grapple with declining traffic to physical stores. Rockport is aiming to keep its shoemaking business alive in a sale to a private equity firm. But the company warned that it may be forced to close all of its standalone retail stores, including 27 in the U.S. Rockport partially blamed a turbulent separation from its previous owner, Adidas unit Reebok, which sold Rockport in 2015 to an entity created by shoe company New Balance and Berkshire Partners.

More Fabric, More Money? British Retailer Is Accused of Charging ‘Fat Tax’

Size is a sensitive subject in the clothing business. So when one of Britain’s most popular and affordable clothing giants was found to charge more for plus-size clothing, it was accused of imposing a “fat tax” on women. The pricing by the store, New Look, revived a debate over whether the use of more fabric for the same outfit should logically cost more. The controversy erupted when a New Look customer said she discovered that a pair of green-striped trousers cost 15 percent more in all sizes above 16 (the equivalent of a Size 12 in the United States), which are considered plus sizes in Britain. “It’s like being discriminated against for being plus size when I’m only slightly bigger than average,” she told The Sun newspaper. “The average size for a British woman is now a Size 16.” She declared that the retailer was enforcing a “fat tax.”

 

Athletic & Sporting Goods

FanDuel could capitalize on gambling ruling with $700M merger

Irish bookmaking business Paddy Power Betfair has confirmed that it’s discussing a possible purchase of FanDuel, with Axios reporting a proposed price range of between $600 million and $700 million.  Along with DraftKings, FanDuel is one of the two most prominent daily fantasy sports companies in the US. The startups received a serious potential boost earlier this week, when a Supreme Court ruling opened the door for states in the US to legalize sports gambling. To date, DraftKings and FanDuel have focused on offerings that are legally regarded as games of skill rather than chance.  The acquisition’s potential price tag marks a significant decrease from FanDuel’s most recent private valuation, a $1.1 billion figure it reached as part of a $42 million financing in 2016. Overall, the company has raised in the ballpark of $400 million in total venture funding from the likes of Bullpen Capital, Comcast Ventures and KKR.

 

Nike and Adidas Are Moving Away from Manufacturing in China

The most popular sneaker brands in the world are trading in their Made in China labels for ones that read Made in Vietnam. Last week at a shareholder meeting, Adidas CEO Kasper Rørsted shared that 44 percent of the brand’s shoes were made in Vietnam last year, compared to only 31 percent five years ago. In that same time period, the share of Nike shoes made in China fell off a cliff, going from 32 percent in 2012 to 19 percent in 2017. And what China has lost in the sheer volume Adidas and Nike were bringing, it’s gained in prestige: The likes of Balenciaga have started manufacturing in the country. The fashion map is experiencing a significant shakeup.

Turnaround CEO tapped for Academy Sports + Outdoors

An executive experienced in retail turnarounds was appointed to lead Academy Sports + Outdoors as the company faces mounting pressure from online and brick-and-mortar competitors.  Ken C. Hicks was named chairman and CEO of the Katy-based company, one of the largest sporting goods retailers nationally. Hicks, a Houston native and the former head of Foot Locker, will replace J.K. Symancyk, who is leaving the company after more than two years to pursue another opportunity.

Cosmetics & Pharmacy

Target Upping Its In-store Game for Men’s Grooming

Target Corp. is putting a new push behind a growing segment of its beauty business: men’s grooming. The discounter is introducing a new store “experience” for the category across 11 Target stores, with plans to update the department in 80 more locations by the end of the year. More than 600 products will be featured in the new men’s selection, which is also being expanded to include such men’s accessories as hats, wallets and more from Target private apparel brand Goodfellow & Co. Target said its share in the men’s grooming market has continued to grow during the past few years. It expects the business to double by 2020.

Albertsons, Rite Aid Cooking up a Distinctive Food, Health Competitor

Following the completion of the merger between Rite Aid and Albertsons, the Camp Hill, Pa.-based drug store chain will maintain its brand identity within Albertsons’ locations. Many of the 1,777 in-store supermarket pharmacies operated by Albertsons soon will fly the red, white and blue retail pharmacy logo most closely associated with the “With Us It’s Personal” slogan, officials from both Albertsons and Rite Aid shared. Taken together, Albertsons/Rite Aid is a $81.4 billion company for the fiscal year ended Feb. 24, 2018, and is projecting to grow that base to $83 billion this fiscal year.

 

Discounters & Department Stores

Macy’s profit surpasses expectations, shares soar

With customers in a mood to spend, particularly on clothing, Macy’s surpassed all profit and revenue expectations for the first quarter of the year and raised its outlook. Its shares surged nearly 7 percent Wednesday, and the results helped the stocks of other department store chains, all trying to appeal to shoppers who are spending more online.

Macy’s, the first of the major department stores to release its quarterly results, has been expanding its store label brands, adding more off-price Backstage stores, and upgrading its checkout technology to make it faster and easier for shoppers.

Sears begins exploring sale of Kenmore, other divisions

Sears is considering selling its popular Kenmore appliance brand and other divisions after the hedge fund run by CEO Edward Lampert expressed interest in buying them and breaking up the company. Sears’ board is beginning a formal process to explore the sale of three pieces of the business Lampert’s ESL Investments expressed interest in acquiring: Kenmore, the home improvement business of the Sears Home Services Division, and the Parts Direct business of Sears Home Services, the retailer said Monday.

Target lowers fee for Restock next-day delivery program

On the heels of Amazon’s price hike for Amazon Prime, Target is shaving $2 off the delivery fee for Restock, its next-day delivery service for household essentials and nonperishable items such as laundry detergent, cereal and diapers. And Target is making the service, which previously cost $4.99 an order and has been reduced to $2.99, free for Redcard holders, who already receive free shipping on Target.com orders. “This definitely feels like Target is trying to make Redcard a little more digital-centric and more competitive against Prime,” said Ben Antenore, an analyst with consulting group Kantar.

Walmart Gives Up On Unpopular Self-Checkout Service

Walmart has ended its self-checkout service after it failed to become a hit with customers. According to Bloomberg, the retailer decided to offer its “Mobile Scan & Go” technology in about 150 Walmart stores after it was successful across its Sam’s Club warehouse chain. With the free Scan & Go mobile app, customers use a handheld device or their smartphones to scan the barcodes on products as they do their in-store shopping and add products to their carts.

 

Grocery & Restaurants

Landry’s owner’s blank-check company to buy Waitr for $308M

Landry’s owner Tilman Fertitta’s Landcadia Holdings Inc. has agreed to acquire online ordering and delivery platform Waitr Inc. for $308 million, the companies said late Wednesday. Houston-based Landcadia Holdings, an acquisition shell that Fertitta took public in 2016 and raised $250 million, agreed to pay at least $50 million in cash, as well as stock, for Lake Charles, La.-based Waitr, which offers online ordering and delivery services to independent restaurants and chains in underserved markets. Waitr, founded in 2013, has more than 5,000 restaurant partners in more than 200 cities in the Southeast.

Cava Group readies $35M investment round

Cava Group Inc. is working on another round of funding after passing the 50-unit mark for its fast-casual Cava concept, according to recent Securities and Exchange Commission filings. The Washington, D.C.-based company, which raised $34.9 million in March 2017 and $44.3 million in September 2015, has filed for a $35 million investment round, according to the filings. Fast-casual Cava has 52 units in eight states and the District of Columbia and is scheduled to enter the Austin, Texas, market this year.

REBBL Secures $20 Million In Funding Led By CAVU Venture Partners

REBBL, crafter of organic coconut-milk based super-herb drinks, has announced the closing of $20 million in funding led by CAVU Venture Partners, a VC and growth equity firm started by consumer products veterans known for backing and building iconic consumer brands such as BAI Brands, Health-Ade Kombucha, and Bulletproof Coffee.

Home & Road

Home Depot’s 1Q Profit Overshadowed by Same-store Sales

Home Depot reported strong first-quarter profits, though sales at comparable stores were dampened by inclement weather and revenue was weaker than expected. The Atlanta company earned $2.4 billion, or $2.08 per share, for the three months ended April 29. A year earlier the home improvement retailer earned $2.01 billion, or $1.67 per share.  The results were 2 cents better than Wall Street expected, according to a survey by Zacks Investment Research. Revenue climbed to $24.95 billion from $23.89 billion, just short of analyst projections for $25.2 billion in revenue.  Sales at all Home Depot stores open at least a year, a key gauge of a retailer’s health, rose 4.2 percent. Analysts polled by FactSet were looking for a 5.5 percent increase.  Sales at established stores climbed 3.9 percent in the U.S.  The quarterly same-store sales performance was the lowest rate of growth since the second quarter of 2015, due in part to bad weather.

Sears Begins Exploring Sale of Kenmore, Other Divisions

Sears is considering selling its popular Kenmore appliance brand and other divisions after the hedge fund run by CEO Edward Lampert expressed interest in buying them and breaking up the company. Sears’ board is beginning a formal process to explore the sale of three pieces of the business Lampert’s ESL Investments expressed interest in acquiring: Kenmore, the home improvement business of the Sears Home Services Division, and the Parts Direct business of Sears Home Services, the retailer said. Hoffman Estates-based Sears Holdings Corp. has been exploring alternatives for those businesses — as well as the Craftsman tools and DieHard battery brands — for nearly two years, saying it believes they have room to grow by expanding their reach beyond Sears.

Jewelry & Luxury

Pandora Sees Sales Drop 8% in US

First quarter sales dropped 8 percent year-over-year in the U.S. market for Pandora, with the Danish bead and jewelry brand blaming a lack of fresh product and slow sales in physical store. Revenue in the United States in Q1 totaled $162 million, with $5.6 million of that coming from the acquisition of franchise stores. (Pandora acquired a total of 17 franchise stores globally in the first quarter, the bulk of them in the United Kingdom.)

ABN AMRO to Shut New York, Dubai Diamond Lending Offices

ABN AMRO is closing its New York City and Dubai, United Arab Emirates, diamond and jewelry lending offices, the bank confirmed to JCK. ABN AMRO’s New York City diamond division has long been an industry institution and was, until now, one of the last remaining bank offices devoted to serving diamond and jewelry clients in the United States. “We are discontinu[ing] our local diamond and jewelry service in the United States, due to the very small portfolio,” says Brigitte Seegers, spokesperson for the Amsterdam-based company.

Richemont Slumps as Watch Inventory Buybacks Dent Earnings

Richemont shares fell the most in three years as the Swiss luxury-goods maker bought back more unsold watches from retailers, weighing on profit growth. The stock fell as much as 8.2 percent. Richemont spent 203 million euros ($240 million) on inventory repurchases aimed at preventing watches from falling into the hands of unauthorized sellers, the Geneva-based company said Friday. That held back full-year operating profit, which rose 5 percent, less than analysts expected. “Another really messy set of results following a larger-than-expected round of watch inventory buybacks,” Zuzanna Pusz, an analyst at Berenberg, wrote in a note.

 

Office & Leisure

Staples-owner Sycamore offers to buy workplace wholesaler Essendant

Staples-owner Sycamore Partners reported a roughly 9.9 percent stake in workplace wholesaler Essendant and its offer to buy the rest of the company for $11.50 per share in cash. Shares of Essendant, which closed at $11.03 a share, were up 2.45 percent in after-market trading, giving it a market capitalization of $415 million. Sycamore’s offer is the clearest indication to date of its plans to push Staples further into business-to-business services and away from its challenged retail business. Sycamore structured its $6.9 billion acquisition of Staples in a way that would allow it to eventually wind down Staples’ weaker retail operations. Essendant in April announced plans to combine with Genuine Parts Company‘s business wholesaler S.P. Richards business. For Sycamore, the play for Essendant comes with precedent. The private equity firm went hostile on women’s clothing chain Talbot’s and eventually acquired it for $391 million in 2012.

Bratz Boss Makes Play to Run Mattel, Is Told to Take His Toys and Go Home

Isaac Larian, the toy mogul behind Bratz dolls, has been at odds with Mattel Inc. for more than a decade. Now, he wants to be put in charge of his struggling rival. Mr. Larian recently offered to merge his MGA Entertainment Inc. with Mattel and put himself at the helm of the combined company. Mattel rejected the approach, which lacked details or financial terms. The proposal, made by Mr. Larian in a brief letter dated April 25, wasn’t previously known. Mattel responded that its board and advisers had decided the proposal wasn’t in the company’s best interests, according to a letter to Mr. Larian.

Technology & Internet

Overstock makes a private-label push

Overstock.com Inc. on Wednesday launched 17 private-label furniture brands that span a broad range of styles and products. The brands will add more than 16,000 SKUs to Overstock, as the retailer bolsters its offering by featuring The Gray Barn‘s farmhouse style, Carson Carrington Home’s mid-century designs and affordable traditional items from Laurel Creek.

 

Finance & Economy

Leading indicators up for sixth straight month

A composite index of leading economic indicators gained for the sixth straight month in April.  “In April, stock prices and housing permits were the only negative contributors, whereas the labor market components, which made negative contributions in March, improved,” said Director of Business Cycles and Growth Research at The Conference Board Ataman Ozyildirim.  The index is used to forecast global economic trends and take checks on the U.S. economy.

 

U.S. consumer spending picking up, gasoline prices a threat

U.S. retail sales increased marginally in April as rising gasoline prices cut into discretionary spending, but consumer spending appeared on track to accelerate after slowing sharply in the first quarter.  The economic outlook got a boost from other data showing factory activity regaining momentum in May on strong orders growth. While manufacturers reported paying more for raw materials, they were absorbing much of the higher costs, a sign inflation will probably continue to increase at a moderate pace.