June 18, 2018 Consensus

The Weekly Consensus – June 18, 2018 (Volume 10, Number 24)

The Big Story
Retail’s Retreat and Refresh
Betsy White

You almost never hear the words retail and change used in a positive sense these days, but last week brought a mixed bag of stories regarding brick and mortar retail that included two developments that offer some optimism for the industry.

First, three stories last week illustrated the increasingly common phenomenon of old retail space being repurposed:

  • Hudson’s Bay announced it would not continue to operate its Lord & Taylor mid-town Manhattan store next year once the sale of the location to WeWork, a co-working space operator, is completed after holiday 2018. The original plan was to shrink the store, but now the company plans to close it and focus more resources on ecommerce.
  • Cirque du Soleil announced it will be opening a 24,000 square foot “Creactive” family entertainment center in a Toronto area mall in 2019. Ostensibly, the space for the new center will come from a recently closed anchor retailer.
  • The New York Times reported that part of a former Macy’s store in Alexandria, VA has been converted into a homeless shelter, at least temporarily.

If we were publishing a click-bait story about the “retail apocalypse,” we might stop there, but two news items last week stood out as decidedly positive.

First, Macy’s announced a minority investment in and partnership with b8ta.  B8ta is a technology company that builds free-standing stores and shop-in-shop spaces for brands. Companies pay a fixed monthly fee to sell goods through b8ta shops and keep all of the sales revenue. This service provides brands with a way to experiment with brick and mortar without making long term commitments, all while learning about their customers and how to engage them.  The Macy’s-b8ta’s connection makes sense: who can offer b8ta more space, and who needs new ideas more than a 160-year-old, 850 unit department store?

Started by former Nest employees in 2015, b8ta to date has grown to 8 free-standing locations, a space in Macy’s Herald Square store, and locations set within 70 Lowe’s stores in 13 states. The concept initially offered electronics, but has plans to branch out into apparel, home, and beauty. b8ta’s model not only makes it easy for brands to experiment with physical stores, but also provides them with real time data on customer engagement, including capture rates and dwell times.

Macy’s b8ta investment, along with its February announcement that it will test pop up spaces in ten stores called The Market @ Macy’s, and its May acquisition of the concept shop Story, shows that Macy’s is trying to evolve. Through these investments and new concepts, the company is looking to engage both new and existing customers through innovation and change, which can be difficult for a $25 billion chain.

Second, RH (formerly Restoration Hardware) reported strong first quarter earnings and reaffirmed its contrarian view on brick and mortar expansion. The company discussed plans to open four new stores this year, including one in New York City. Three of the stores will also house restaurants, and the New York flagship will be a gargantuan 90,000 square feet. The company, while fully aware that its real estate strategy is the opposite of that of most retailers, also intends to accelerate store openings in future years.

These stories certainly offer an interesting mix of optimism and gloom. Five stories constitute only a small sample, but perhaps they are evidence again that physical retail is changing, but not dead yet.

 

Headlines of the Week

Macy’s Investment in Tech Startup b8ta Shows It’s Serious About a Turnaround

When it comes to reinventing its old department store model, Macy’s means business.

The retailer said on Tuesday it was taking a minority stake in b8ta, and working with the Silicon Valley startup to expand its new Market @ Macy’s concept, a pop-up shop within its stores where it showcases newer products of note. B8ta, a three-year-old company founded by Vibhu Norby, William Mintun, and Phillip Raub (formerly of smart home company Nest), lets shoppers try tech gadgets before buying them and has attracted attention for its innovative way of presenting products and collecting data about shopper habits.

More Toys R Us stores went up for sale. Here’s what’s moving in

The liquidation of Toys R Us is proving to be a long and complex process. The toy retailer, having filed for bankruptcy protection late last year and kicking off liquidation sales around this March, is slowly selling its real estate — what amounted to more than 800 stores across the U.S. According to court documents filed Wednesday in Virginia, another round of Toys R Us shops has been bid on, and the winners include retailers Aldi, Big Lots, Ollie’s Bargain Outlet, Ashley Furniture, and Raymour & Flanigan. This follows an auction earlier this year, where another handful of Toys R Us locations was bid on by Target, a few real estate investment trusts and other interested parties. In many instances, landlords are buying back the vacated Toys R Us boxes and will take it upon themselves to find new tenants. The purchase prices of the locations recently bid on haven’t been disclosed.

 

 

Apparel & Footwear

These brands are benefiting from fumbles at Victoria’s Secret

Missteps at L Brands‘ Victoria’s Secret are opening up the door for other lingerie retailers to tap into an underserved market. Today’s female consumers are increasingly turned away by Victoria’s Secret overtly sexy image. The brand was made famous for its brightly colored push-up bras, but shoppers are now in search of comfort and fit. Victoria’s Secret has long dismissed the idea of expanding its size range for bras to include more women. In turn, new players ThirdLove and Adore Me are looking to scale their businesses, which are built around selling extended sizes of bras in softer, neutral colors.

Paul Marciano to Resign as Guess Executive

Paul Marciano, the co-founder of Guess? Inc, and the subject of sexual-harassment allegations, announced he will be stepping down as chief creative officer and executive chairman of the Los Angeles company he helped found with his brothers in 1981. The decision was announced on June 11 after the special committee in charge of investigating allegations lodged by model Kate Upton concluded its investigations.

It was decided that Marciano will remain on the board until his employment contract expires early next year, but his brother Maurice Marciano will take over as chairman of the board.

ECCO Accuses Skechers of Stealing Soles, Files Patent Infringement Lawsuit in Delaware

Recently, Denmark-based footwear maker ECCO filed a suit alleging claims of patent infringement against Manhattan Beach, CA-based shoemaker Skechers. The suit, filed in the federal district for Delaware, asserts a series of patents owned by the Danish shoemaker which cover aspects of golf shoes which have been commercially successful for ECCO in recent years. According to ECCO’s complaint, Skechers’ infringement of the asserted patents began at least by February of this year. Skechers has been involved in intellectual property litigation on both the plaintiff side and the defendant side, but it has been defending patent infringement suits at a much higher rate in recent years. When looking at district court filings filed since January 1st, 2010, Skechers has been a defendant 22 times, a plaintiff 10 times and a third party once.

 

Athletic & Sporting Goods

Nike vs Adidas: The brand battle of the 2018 World Cup

The world’s biggest soccer event provides the ultimate platform for brands to compete for the attention of the sport’s 4 billion fans. Sportswear rivals Adidas and Nike, which both boast ties to the World Cup that stretch back decades, will be neck and neck as they compete to engage consumers over the next month.  Both companies have made the biggest investments in soccer and boast some of the best marketers and the biggest budgets in the game. Adidas, which has supplied the World Cup match ball since 1970, has a deal to serve as the official sponsor of the tournament until 2030.

Kelly’s Sports sells team division, will close retail stores

A Dallas-based sporting goods distributor has acquired the team division of Kelly’s Sports.  Kelly’s Sports, which is based in West Goshen Township, Chester County near West Chester was acquired last month by BSN Sports. Kelly’s Sports is a distributor of team apparel and equipment in the eastern Pennsylvania, New Jersey and Delaware markets, and has a retail store in the West Chester area and a store in the Harrisburg area.  BSN Sports has acquired more than 30 companies in the last six years according to its website.

Cosmetics & Pharmacy

Acquisition Brings Benzer to Empire State

Benzer Pharmacy’s latest acquisition is marking the company’s entry into New York state. The Tampa, Fla.-based company recently finalized the purchase of Amenia, N.Y. drug store Drug World Pharmacy. Benzer acquisition manager Carly Tan said that the New York market has been in Benzer’s crosshairs for years, with a beginning goal of establishing an introductory footprint in the Empire State.  “The Benzer Pharmacy acquisitions department believes the acquisition of Drug World Pharmacy in Amenia, New York is a symbol of what’s to come in the Northeast and across the country,” Tan said. “That mission will continue as we seek to increase the number and visibility of Benzer Pharmacy locations on a state-by-state and region-by-region basis in the months and years ahead.” Benzer now operates more than 65 corporate locations and has roughly 20 franchisee locations in 10 states.

Markwins Beauty Brands Acquires Lorac Cosmetics

Markwins is expanding its beauty portfolio by announcing its acquisition of prestige brand Lorac Cosmetics. “Markwins’ expanding success is simple at its core: we respect that different people have different needs. Whether culturally or economically, we understand that we need to satisfy the global consumer by continuing to acquire and develop disparate brands — one brand can’t conquer the world,” Eric Sung-Tsei Chen, CEO of Markwins, said. “With Lorac, we’re thrilled to add its distinct Hollywood heritage and celebrity status. I have always had a bias toward California, and Lorac is yet another embodiment of the California beauty spirit.” Founded two decades ago by professional makeup artist Carol Shaw, the Burbank, Calif.-based brand was created out of the need to develop products that wouldn’t irritate celebrity client’s sensitive skin.

HBC e-commerce company Pharmapacks raises $32.5M

E-commerce company Pharmapacks has brought in $32.5 million by selling a minority stake at an undisclosed valuation in a strategic round led by Reckitt Benckiser. Additional investments in the round came from McKesson Ventures, Sealed Air and the Emerson Group. Islandia, N.Y.-based Pharmapacks said that its proprietary platform allows brands to reach consumers with a complete solution that includes logistics, fulfillment, marketing and sales components. Pharmapacks selles direct-to-consumer through such sites as Amazon and Walmart.com, as well as on its own website.

 

Discounters & Department Stores

Walmart preps to take on Amazon Go

Walmart has a new Sam’s Club concept store in the works, and it could give Amazon’s cashierless convenience stores a run for their money. Keeping a focus on an “easier shopping experience,” the discount giant is developing a technology-driven store focused on fresh foods and digital technology. Running under the Sam’s Club banner, the Dallas-based store will be a 32,000-sq.-ft. location —smaller than a traditional Sam’s Club warehouses — and it will be exclusive to Sam’s Club members. “This will be smaller than a typical club – which is perfect for testing innovations in a live shopping environment,” Jamie Iannone, CEO, Sam’s Club, said on the company’s website.

New J.C. Penney CEO won’t have one big perk predecessors enjoyed

Sounds like J.C. Penney is getting serious about expenses. Last year, the perk for personal use of “corporate aircraft” was capped for the first time, and now the corporate jets are for sale.  There are three of them:  a 2001 Gulfstream IV-SP, a 2009 Gulfstream 450, and 2010 Gulfstream 450. Penney expects to fetch a total of $20 million in cash from the sales in the second quarter.  Not having the airplanes will save $5 million to $10 million in annual operating expenses, the company said in a filing on Thursday.  Penney will be taking a $50 million impairment charge in the second quarter to reflect the expected loss on the sale.

 

Grocery & Restaurants

Investment firm High Bluff buys Quiznos

Private investment firm High Bluff Capital Partners has closed on a purchase of QCE LLC, parent to the Quiznos toasted sandwich chain, the company said Monday. The Denver-based fast-casual brand said Susan Lintonsmith would continue as CEO and president under ownership by the San Diego, Calif.-based investment firm. Terms were not disclosed.

 

Tilted Kilt acquisition on months-long path

ARC Group Inc., parent to the Dick’s Wings & Grill casual-dining concept, is working toward a purchase of the struggling Tilted Kilt Pub and Eatery concept, the company said this week. Jacksonville, Fla.-based ARC wants to complete the purchase of the 47-unit Phoenix, Ariz.-based Tilted Kilt within the next three months, said Rick Akam, CEO of the company formerly known as American Restaurant Concepts and owner of the 23-unit Dick’s concept.

Home & Road

RH Continues to Expand with Showcase Destinations; Developing Smaller Model

RH (formerly known as Restoration Hardware) reported first-quarter earnings above Street expectations and upped its guidance as it continues to expand in high-end brick-and-mortar. RH will open four new stores (“Galleries”) this year, with locations in Portland, Oregon (opened in March); Nashville, Tennessee; Yountville, California; and New York City. The latter three will include a dining experience. The New York City site, in Manhattan’s Meatpacking District, will feature 90,000 sq. ft. of indoor and outdoor space, with a transparent elevator that goes up to a glass-encased rooftop restaurant with retractable doors that open out to a landscaped park. (Also in Manhattan, in summer 2019, RH will open its first-ever hotel, called RH Guesthouse.)

Rent-A-Center Gets Increased Acquisition Offer

An interested party has upped the ante for Rent-A-Center. Hours after the company announced it had ended its strategic and financial alternatives review and concluded a sale was not in its best interests, the retailer issued a statement in which it said it received an increased offer to acquire the company from one of the parties that has been involved in the process. “The [offer] letter was not accompanied by equity commitment letters that would be necessary for the company to evaluate whether to enter into an agreement with an acquisition entity possessing no assets,” Rent-A-Center stated. The rent-to-own retailer said its board would carefully consider any credible proposal with the assistance of its advisors.

Home Depot to Undertake Billion Dollar Supply Chain Revamp

Home Depot Inc. plans to spend $1.2 billion over the next five years to speed up delivery of goods to homes and job sites as the rise of online shopping resets consumer expectations. The home improvement retailer will add 170 distribution facilities across the U.S. so that it can reach 90% of the U.S. population in one day or less, said Mark Holifield, the company’s executive vice president of supply chain and product development. The new sites will include dozens of direct fulfillment centers for next-day or same-day delivery of commonly ordered products, as well as 100 local hubs where bulky items like patio furniture and appliances will be consolidated for direct shipment to customers. Mr. Holifield told a logistics industry conference last week that the retailer is realigning its supply chain to a changing retail landscape.

Jewelry & Luxury

Martin Rapaport Slaps De Beers—And De Beers Slaps Back

Martin Rapaport has made a number of fiery denunciations about lab-grown diamonds, so when I heard that he spent his annual JCK Las Vegas breakfast speech lambasting De Beers, I thought he had taken the company to task for Lightbox. But no, he only touched on that topic—and hailed De Beers’ approach as “brilliant”—and was angry about a different, if still important, issue: De Beers’ reluctance to let retailers and manufacturers identify the source of De Beers–mined goods as from the company.

Graff Profits Soar After Retail Expansion

Global store openings helped fuel a jump in revenue and profit at Graff Diamonds International last year, according to the luxury jeweler’s latest financials. Sales rose 22% to $692.8 million in 2017, while profit more than tripled to $52.1 million, last week’s filing showed. The London-based retailer saw UK sales slide 9% to $31.3 million, while revenue from the rest of its global network climbed 24% to $661.5 million. Results for Graff Diamonds International do not include all of the group’s activities, such as its controlling stake in diamond manufacturer Safdico, a De Beers sightholder.

Claire’s posts sales gains as lenders fight over its future

Claire’s reported that first quarter net sales rose 3.8% year over year to $311 million, a bump due to increases in concession and company store sales, according to a press release. Same-store sales in North America actually increased 5.4%, but European comps fell nearly 10%, making for a total decrease in comps of 0.4%. Adjusting for exchange rate changes, net sales would have fallen 1%, the company said. On Wednesday, a federal judge ordered Claire’s and its attorneys to extend a process to market and possibly sell the company to parties beyond those it already has an agreement with to buy the retailer out of bankruptcy, according to a recording of a bankruptcy court hearing. One of Claire’s lenders, Oaktree Capital Management, which has opposed Claire’s reorganization agreement with another group of lenders, has been pushing for the extended sale process.

Office & Leisure

Fabric and crafts retailer Joann looks for ways to get shoppers to stick around, not just shop there

Yet another company is refreshing its stores in a bid to keep shoppers engaged and coming back for the experience — not just the products sold there. Fabric and crafts retailer Joann, having been around for more than 70 years and now running more than 800 shops across the U.S., is rolling out a new store prototype this week in hopes of keeping consumers around even if they aren’t buying anything. The goal for many companies today is to create a memorable experience and a place where customers can do things — rather than just focusing on ringing up sales. A redesigned Joann store includes a studio to host events and craft classes, touchscreen kiosks that pull up craft projects from Pinterest, and a custom sewing service.

Patrick Acquires Marine Accessories Corp.

Elkhart-based Patrick Industries Inc. (Nasdaq: PATK) has acquired Tennessee-based Marine Accessories Corp. Financial terms of the deal were not immediately disclosed, however Patrick says MAC will continue to operate under its brand names in its existing facilities. MAC is a manufacturer, distributor and aftermarket supplier of custom tower and canvas products, as well as other related accessories to dealers, retailers, distributors and consumers in the marine market. The company has eight manufacturing and distribution facilities throughout the U.S. and Europe.  Patrick says MAC’s 12-month revenue through May 2017 was approximately $50 million. MAC is the seventh company acquired by Patrick in 2018.

Technology & Internet

Etsy raises its transaction fees and releases new seller tools

Etsy Inc. announced it is releasing two new tools for sellers on its marketplace, in addition to raising its transaction fees from 3.5% to 5%. The new rate will go into effect on July 16. The marketplace for handcrafted goods credits this rise in transaction fees to a new focus on marketing to attract buyers to the marketplace.

 

Finance & Economy

Consumer prices jump 2.8 percent for biggest increase in more than six years

U.S. consumer prices rose marginally in May amid a slowdown in increases in the cost of gasoline and the underlying trend continued to suggest moderate inflation in the economy.  The Labor Department’s inflation report was published ahead of the start of the Federal Reserve’s two-day policy meeting.

Consumer confidence rises boosted by strong labor market

Consumer confidence rose in May. According to analysts at Wells Fargo, the strong labor market supported those gains. They noted that both the present situation and expectations components of the index improved and that more consumers see jobs as plentiful.