June 25, 2018 Consensus

The Weekly Consensus – June 25, 2018 (Volume 10, Number 25)

The Big Story
Death, Taxes, and Tariffs?
Billy Busko

Nearly 150 years ago, Civil War journalist and poet Ambrose Gwinnett Bierce neatly offered this definition of a tariff, “A scale of taxes on imports designed to protect the domestic producer against the greed of his consumer.”

On July 6th, the US will impose tariffs on $34 billion of Chinese products. On the heels of July 6th, the US will impose tariffs on another $16 billion of Chinese products. China announced reciprocal action:  applying tariffs on $50 billion of US goods. In this high stakes game of trade, the US more than doubled down last week. In fact, the US quadrupled down by stating that another $200 billion of Chinese goods would be subject to a 10% tariff.

What does this potentially mean to the US consumer?

In the first round of tariffs, the US intentionally and virtually excluded consumer goods. Capital goods such as industrial machinery accounted for 52% of affected products, and intermediate goods such as semi-conductors accounted for another 43% of affected products. Only 1% of these tariffs applied to consumer goods. It should also be noted that tariffs already imposed against numerous countries in March pertained only to steel and aluminum.  Thus, consumer goods had been unscathed directly (albeit the trickle down effect is unavoidable and has led to the cost of washing machines increasing 17% this year).

Taking Chinese goods subjected to tariffs from $50 billion to $250 billion would surely include products commonly purchased directly by US consumers.  That 1% of consumer goods in the first round was originally planned at 12% until retailers such as Best Buy successfully lobbied to have consumer electronics excluded, such as flat screen televisions.  At $250 billion, the impact will be far greater. Last year, the US imported a total of $505 billion of goods from China. Thus, the US may soon be placing tariffs on half of all goods coming from China (the specific products are yet to be named).  The top fifteen products by value accounted for 70% of all Chinese imports, of which ten were consumer products. The leading import is the cellphone. Approximately 70% of all cellphones are made in China (including nearly all Apple iPhones), and Americans bought $70 billion of them.  Other leading products include computers ($45 billion), apparel ($36 billion), toys and sporting goods ($27 billion) and furniture ($21 billion).

The most direct impact of such tariffs will be higher prices – all other things being constant, by about 10%.  There’s also concern that these higher prices will fuel inflation and result in the Federal Reserve raising interest rates faster and further than it otherwise would in an effort to control such inflation. The financial markets have been volatile and trending downward as tariffs have recently been part of the daily news cycle. Further, as a targeted country retaliates, US exporters and employees could suffer as their goods become more expensive in those served markets and sales consequently decline. Lastly, companies operating in China could be harmed as the Chinese government may exert its influence in undue ways. Perhaps relatedly, there’s speculation that Starbucks may reconsider its plans to double its 3,300 locations in China.

While by far the largest, China isn’t the only concern. The European Union announced last week that they’ll impose tariffs on $3.2 billion of American goods. This is in response to the US steel and aluminum tariffs. And these named goods are some quintessential American goods: peanut butter, orange juice, bourbon, and Harley-Davidson motorcycles.

In response to these announcements, the National Retail Federation expressed, “A tit-for-tat trade war has erupted and American families are caught in the middle. Higher prices for everyday essentials and lost jobs threaten to sap the energy out of the strong US economy.”  The Retail Industry Leaders Association added, “Trade wars don’t punish China, they raise the cost for consumers.”

The economist and Nobel Prize winner Milton Friedman voiced this opinion 50 years ago, “The benefits of tariffs are visible as certain workers can see that they are protected. The harm of a tariff is invisible. There are people that don’t have jobs because of tariffs, but they don’t know it.”

Death and taxes may not be avoided, but let’s hope that tariffs – from all sides – can be.

 

Headlines of the Week

Supreme Court rules states can require online retailers to collect sales tax

Online shopping will soon become more expensive after the U.S. Supreme court ruled Thursday that states can require internet retailers to collect sales taxes. The 5-4 decision broke with 50 years’ worth of legal rulings that barred states from imposing sales taxes on most purchases their residents make from out-of-state retailers.

Google to invest $550 million in China e-commerce giant JD.com

Google will invest $550 million in Chinese e-commerce powerhouse JD.com, part of the U.S. internet company’s efforts to expand its presence in fast-growing Asian markets and battle rivals including Amazon.com. The two companies described the investment announced last week as one piece of a broader partnership that will include the promotion of JD.com products on Google’s shopping service. This could help JD.com expand beyond its base in China and Southeast Asia and establish a meaningful presence in U.S. and European markets.

 

Perry Ellis Taken Private by Founder in Deal With Fortress

Clothing designer-retailer Perry Ellis International Inc. agreed to be taken private by its founder, George Feldenkreis, in a $437 million deal after Feldenkreis spent months pushing for the company to be sold. Investors will get $27.50 a share in cash, the Miami-based company said in a statement. That’s the same as Feldenkreis’s initial offer, and below the closing price on Friday. “This transaction delivers an immediate cash premium and is in the best interest of all Perry Ellis shareholders,” J. David Scheiner, the non-executive chairman of Perry Ellis, said in the statement. Fortress Credit Advisors LLC is providing $282 million in financing, with the rest coming from the Feldenkreis family and Wells Fargo Bank, according to the statement. Feldenkreis had said the board wasn’t doing a good job and that going private would let the company take a long-term view to confront challenges facing the clothing industry.

 

 

Apparel & Footwear

Tapestry Sues Executive Who Accused Former Stuart Weitzman Creative Director of Sexual Harassment

Tapestry filed a suit in New York State Supreme Court last week against Thomas Gibb, less than a month after the executive sued the company and former Stuart Weitzman creative director Giovanni Morelli, accusing the latter of sexual harassment. Morelli exited the company a week before Gibb filed his suit. Gibb was fired on Monday. Gibb was the vice president of footwear operations at Coach, according to the suit, and was moved to the same role at Stuart Weitzman on March 1. In Tapestry’s complaint, the company states that it learned Gibb was extensively involved with another shoe brand, the flip-flop line Tidal, through a New York Times feature published on May 28. The company alleges Gibb had previously revealed that he was only a passive investor in Tidal.

Asos to ban silk, cashmere and mohair from its website

Asos is banning products which contain feathers, silk, cashmere and mohair from its website. The fashion retailer says it has updated its animal welfare policy and will stop stocking products using these materials by the end of January 2019. Animal rights group Peta said it “applauds ASOS for leading the charge for compassion in fashion”. Asos has already banned fur, angora and other rabbit hair and products which use materials from vulnerable animals. Peta claims that the mohair, cashmere, down and silk industries “exploit countless goats, geese, ducks, and silkworms, causing these sentient beings unnecessary pain and suffering”. The move has mainly gone down well with people on social media.

 

Athletic & Sporting Goods

Varsity Brands to be acquired by Bain Capital in $2.5 billion deal

Varsity Brands Inc. is being sold to a global private investment firm that manages approximately $95 billion in total assets. Terms of the deal were not disclosed. However, CNBC has reported Bain Capital will buy the company for $2.5 billion. Varsity brought in an estimated $1.7 billion in revenue last year — up from $1.55 billion in 2016 — according to MBJ research.  Founded in 1974, Varsity consists of three divisions:  BSN Sports, a U.S. distributor of team sports equipment and apparel; Varsity Spirit, a cheerleading uniform company, which is also in the business of educational camps, clinics and competitions; and Herff Jones, a provider of graduation and educational products and services.

Puma Relaunches Basketball Division With Multiple Signings, JAY-Z Joins as Creative Consultant

Recent speculation was confirmed: Puma is back in basketball. The global shoe and sportswear company has announced the signings of top draft prospects DeAndre Ayton (Arizona), Marvin Bagley III (Duke), and Zhaire Smith (Texas Tech). On top of that, JAY-Z has joined as the company’s president of basketball operations.

Cosmetics & Pharmacy

CVS Pharmacy Launches Nationwide Rx Delivery

The home-delivery revolution has reached the drug store industry. In a move that puts it ahead of Amazon, at least for the time being, CVS Pharmacy said that prescription delivery is now available from its retail locations nationwide. The company said it is the first national drug store retailer to offer pharmacy and front store delivery chain-wide.

Under the CVS program, customers who want their medications delivered directly to their mailbox—as quickly as the next day in certain markets—can request prescription delivery via the CVS Pharmacy app or by calling their neighborhood store and asking to have their prescriptions delivered. The delivery service charge is $4.99. Along with eligible prescriptions, a selection of the most popular health and household items carried by CVS Pharmacy, ranging from cold and flu remedies and vitamins to personal and feminine care products are also available to add to delivery orders. CVS introduced same-day prescription delivery in New York City at the end of last year. It has now expanded the service to Boston, Miami, Philadelphia, San Francisco and Washington, DC.

 

Discounters & Department Stores

How long can the off-price retail party go on?

Off-price retail is nearly as old as the department store that spawned it — it was Edward Filene, son of the Boston department store magnate, who thought of selling excess inventory at bargain prices in the basement of the downtown store. A little later, Frieda Loehmann collected garment overruns from top labels and sold them at deep discounts from her Brooklyn apartment, establishing the earliest version of the beloved American retail format. Eventually, most department stores had their “bargain basements,” and factories held their own special sales of defective, over-produced or canceled orders. But other enterprising retailers joined Loehmann over the years in selling such items in addition to seconds, close-outs, returns and last season’s leftovers from other apparel and footwear companies.

Will Macy’s Ignite A New Era Of Legacy Retailer Innovation?

The moderate department store sector has been struggling for some two decades; first losing share to category killers and discount mass merchants, then to off-price retailers and now, increasingly, to Amazon. Since 2008, department stores’ share of total retail has sunk from 2.8% to about 1.7%. Over 1,000 stores have been shuttered during the past few years with more sure to follow. J.C. Penney and Sears have seen their market values collapse, while Kohl’s, Dillard’s and Macy’s have significantly underperformed the market.

Recently, however, a certain ebullience has returned to the sector as financial performance has improved. Some observers now see a rebirth, while others are a bit more skeptical. It may well turn out that the past few months’ gains are more a dead cat bounce than renaissance.

Sears Is the Latest Retailer to Test Mini Shop-in-Shops

Sears Holdings is hoping that two is better than one when it comes to reviving its stores. Over the weekend, it opened a miniature Kmart inside a larger Sears location in Brooklyn, New York, and also plans to test the reverse, with Sears appliance shops coming to full-size Kmarts. The shop-in-shop concept is one of its newest strategies aimed at luring in customers as its fends off dimming brick-and-mortar sales. In the past year, it has shuttered nearly 400 unprofitable stores, and announced another 72 closures during its last earnings presentation, most of which are already underway.

Can pop-up shops save department stores?

Neighborhood Goods wants to be the new department store — well sort of. The one year-old startup, which just raised $5.75 million in seed funding, is opening up its first 13,000 square foot store in Plano, Texas this fall. While the size is significantly smaller than most department stores, it’s design aims to fuel constant discovery and community — and pop-up shops are the key. The new space will house about 15 brands at a time on a rotating cycle, including several multinational brands alongside local indie labels. The focus is all about courting digitally native brands that want a physical presence but aren’t drawn to traditional department stores.

 

Grocery & Restaurants

Native Foods Café acquired by Millstone Capital Advisors

The plant-based Native Foods Café chain has a new owner with plans to grow. With 13 restaurants in four states, the Chicago-based fast-casual concept was acquired by private-equity-firm Millstone Capital Advisors, based in St. Louis, the company announced Thursday.

Kroger sees earnings, digital sales spike in first quarter

Citing a strong beginning for its Restock Kroger strategic plan, The Kroger Co. surged past Wall Street’s earnings expectations for its fiscal 2018 first quarter. Kroger on Thursday also reported revenue and same-store sales gains for the quarter — including a jump in digital sales — and raised the low end of its full-year earnings guidance.

Home & Road

Rent-A-Center to Be Acquired for $1.37 Billion

The rent-to-own retailer has entered into an agreement to be acquired by an affiliate of buyout firm Vintage Capital Management in a deal valued at $1.37 billion, including debt. Vintage will buy the company for $15 per Rent-A-Center share, which is $1 per share above its previous offer price and represents a premium of 25% to the stock’s closing price on Friday. Vintage Capital is the controlling shareholder of Buddy’s Home Furnishings, a Florida-based rival of Rent-A-Center, which operates 330 stores, mostly in the South. The company has been pursuing Rent-A-Center since last fall, when it offered to buy the company for $13 a share. Last week, Vintage upped its offer to $14 a share

Lovesac Aims to Raise $46 million with IPO

Top 100 Furniture retailer and upholstery manufacturer Lovesac is looking to raise $46 million with an initial public offering of stock according to documents filed with the Securities & Exchange Commission. Lovesac, which ranked number 67 of Furniture Today’s 2018 list of Top 100 U.S. Furniture Stores with estimated 2017 sales of $101.8 million, grew sales 19.5% last year. The company has 66 U.S. stores across 29 states, as well as locations in Sydney, Australia, and Jeddah, Saudi Arabia. It also has a strong e-commerce presence. Plans call for a total of 76 stores by the end of this year. Lovesac, founded in 1995, sells its patented, high-end upholstery including the original foam-filled “Sac,” as well as a modular sectional system called “Sactionals.”

Jewelry & Luxury

Brooks Brothers’ Deconic Shakes Up Its Sales Strategy

Deconic, the premium fashion jewelry company owned by Brooks Brothers Group, is rejiggering its sales strategy. The Brooklyn, N.Y.–based company, which owns Alexis Bittar and Carolee and licenses jewelry brands ABS by Allen Schwartz, Trina Turk, and Lois Hill, is in the midst of building out a stable of independent sales representatives with the goal of expanding its footprint in premium independent jewelry stores in the United States. Elda Fistani, chief revenue officer for Deconic, told JCK that the company is in the midst of hiring 20 in-field sales reps to target “the very top tier of independent stores.”

The RealReal’s Rati Levesque: ‘We drive traffic back into luxury stores’

In 2011, while running a boutique in San Francisco, Rati Levesque noticed her customers were becoming more interested in the items in store that were on consignment than the new products she carried, despite their higher price point. That’s when Julie Wainwright approached her with the idea of The RealReal, an online marketplace for authentic luxury consignment. Levesque was convinced to join on as chief merchant, and two weeks later, she shut down her store to work on the startup full-time, out of Wainwright’s house. Shortly after she and Wainwright moved their workspace to a warehouse in Marin County, they received a call signaling they were onto something: “Someone called us to ask us the resale value of a Chanel bag,” said Levesque.

Antwerp Says Device Will “Revolutionize” Diamond Cutting

Antwerp World Diamond Centre (AWDC), which represents the diamond trade in Belgium, has developed new technology that it says will “revolutionize” the diamond cutting process—which, it notes, has remained fundamentally the same since the 15th century. The result, dubbed Fenix, fully automates the diamond cutting process, which until now has been done largely by hand and has always been considered labor-intensive and time-consuming. Using the new technology, which took 10 years to develop, a diamond can be polished 10–20 times faster than by hand, AWDC says. That means that a stone that would typically take an entire day to manufacture can now be polished in one and a half hours.

Jennifer Fisher Collaborates With Diamond Foundry on Lab-Grown Collection

Influential jewelry brand Jennifer Fisher is officially dabbling in lab-grown diamonds.

Yesterday, the New York–based company debuted a collaborative collection of stud earrings created in partnership with lab-grown diamond firm Diamond Foundry. The eight mismatched diamond studs are currently available exclusively on the brand’s website.

The collection’s diamonds—which are cut into trendy trillion, emerald, and keystone shapes—are anchored by handmade 18k yellow gold settings.

 

Office & Leisure

GameStop Up For Sale As Internet Takes Over Video Game Marketplace

As market trends shift away from physical video game sales in favor of direct downloads, the biggest remaining dedicated gaming retailer is up for sale. GameStop announced Tuesday that the Texas-based company is in “exploratory discussions” with possible buyers. GameStop announced the news in a press release on its website. The Fort Worth, Texas-based company also emphasized that it could potentially walk away without a sale in place. One potential suitor is Sycamore Partners, according to Bloomberg. Originally founded in 1984 as Babbage’s, GameStop took advantage of the game industry’s meteoric rise from the mid-1980’s and beyond to become a massive, ubiquitous retailer. In 2005, GameStop bought EB Games and became the de facto place to buy games in the U.S.

Technology & Internet

Amazon’s Prime Wardrobe now available to all US Prime members

Amazon’s new “try before you buy” clothing service is now available to all its US Prime members. A year ago, the company launched the service, called Prime Wardrobe, by invitation only. After testing it out and having Prime members order thousands of different styles, Amazon said Wednesday that it’s time to bring the program to many more customers. The service comes at no additional cost to US Prime members, including shipping and returns.

 

Finance & Economy

Housing affordability in America is its worst in nearly a decade

Housing in the US has not been this unaffordable since property values were in free fall 10 years ago. In the first quarter, affordability as measured by the average share of income needed to buy a median-priced house was at its worst since the third quarter of 2008, according to Attom Data Solutions. This was not just because home prices were too high. In fact, the rate of appreciation slowed in the first quarter, according to Attom. What really tipped the scale was the rise in mortgage rates.

 

Student Loan Debt Statistics In 2018: A $1.5 Trillion Crisis

Student loan debt is now the second highest consumer debt category – behind only mortgage debt – and higher than both credit cards and auto loans. According to Make Lemonade, there are more than 44 million borrowers who collectively owe $1.5 trillion in student loan debt in the U.S. alone. The average student in the Class of 2016 has $37,172 in student loan debt.