July 23, 2018 Consensus

The Weekly Consensus – July 23, 2018 (Volume 10, Number 28)

The Big Story
Toys “R” Us’ Hidden Technology Treasure Could Be Worth Millions
Paul Alexander, CFA

As the investment bankers charged with selling the intellectual property of the Toys “R” Us bankruptcy, we at Consensus have been working with potential investors to reimagine and relaunch the brand. While poring over the company’s wealth of trademarks, brands, domains, franchise agreements, and more, we experienced the investment banking equivalent of stumbling across a lost treasure chest in your grandmother’s attic: we found a trove of unused “IPv4 addresses” that may yield value to the bankruptcy estate in the millions of dollars.

Internet Protocol Version 4 (IPv4) addresses are a certain kind of IP address, which are the unique numerical labels that identify each device on the internet or a local network. Most devices and traffic on the internet are IPv4, as IPv4 was the favored internet protocol as the web grew over the 1990’s and early 2000’s. Given the way that IPv4 addresses are numbered, and the amount of digits in each one, there are only 4.3 billion possible IPv4 address combinations – a number that the world has already exhausted. There is a new internet protocol, IPv6, which was designed to offer a much larger number of possible addresses (340 undecillion to be exact, which is 340 followed by 36 zeros). However, there are communication problems between IPv4 and IPv6, and there are costs associated with switching from the old IP to the new one. Accordingly, most companies and institutions have yet to upgrade. But with all the IPv4 addresses in the world spoken for, what is a company to do if they want more IPv4 addresses?

A secondary market for IPv4 addresses has sprung up over the last several years to address this issue. Companies that need more addresses are willing to buy addresses from those that don’t. In 2011, Microsoft purchased 600,000 addresses from bankrupt Nortel Networks for $7.5 million. More recently, the Massachusetts Institute of Technology sold 8 million IPv4 addresses last year for an undisclosed sum, with Amazon purchasing at least a portion. Today, on one online IPv4 auction site, prices per address range roughly from $15.00 to $19.00 (although prices can be higher or lower depending on a number of factors).

IPv4 addresses were originally distributed for free by internet number governing authorities (the North American regional authority is the American Registry of Internet Numbers (ARIN)). Interestingly, initial allocations of addresses were often done in large blocks, in a sweeping manner that did not anticipate what hot commodities these addresses would become decades later. Hence MIT’s enormous number of addresses (the university only sold 8 million of its 14 million), and certain companies’ larger-than necessary allocations.

In the case of Toys “R” Us, the company was allocated over 130,000 IPv4 addresses in the early 1990’s in two Class B blocks (packages containing a little over 65,000 addresses). The company never externally used one whole block – a fact that makes it more valuable in the secondary market than it would be otherwise. We are engaged in dialog with several interested parties that need more IPv4 addresses for business purposes, and we expect to auction off the rights to these blocks in conjunction with the bankruptcy process. A strong auction could deliver substantial value for the estate – all through the sale of an asset that many at the company probably never knew existed.

Other companies that were allocated IPv4 addresses decades ago may also be unwittingly sitting on large unused blocks. With per-address prices approaching $20, large blocks can be worth millions of dollars. Executives who’ve never spoken to their IT departments about IPv4 addresses should look into this. Consider it the corporate-tech equivalent of checking beneath the couch cushions for spare change. But slightly more lucrative.

Any parties interested in learning more about the Toys “R” Us IPv4 address sale process should contact Paul Alexander at palexander@consensusadvisors.com for more information.


Headlines of the Week

Prime Day 2018 sales cross $4 billion

Prime Day 2018 is now Amazon.com Inc.’s biggest sales event ever, in spite of technical glitches during the opening hours of its fourth-annual summer sales event. While Amazon didn’t provide specifics on sales or growth, they did say they sold more than 100 million products on Prime Day (July 16-17). Internet Retailer’s early estimate pegs sales during the 36-hour event between $4.01 billion and $4.38 billion globally. That would mean sales grew at least 66% year over year, up from an estimated $2.41 billion during last year’s 30-hour sale.

P&G to Acquire First Aid Beauty for Reported $250 million

Procter & Gamble (P&G) is reportedly acquiring independent beauty brand First Aid Beauty (FAB), a transaction estimated to cost the Cincinatti, OH-based CPG company $250 million. P&G spokesperson Damon Jones told the Cincinnati Business Courier that the acquisition is “a great fit for P&G Beauty with its full line of prestige products that deliver skin health solutions specifically designed for sensitive skin and skin conditions.”  FAB is a top seller at Sephora, Ulta and on QVC, focusing on specialized skincare for eczema, redness and dryness, as well as sensitive skin.



Apparel & Footwear

The end of Victoria’s Secret: Why analysts and readers say the brand is on its last lace

Last week, Victoria’s Secret’s parent company, L Brands, saw a major drop in sales in June. This came as a surprise, since it coincided with the brand’s big summer discounts. It’s just the latest sign of trouble for Victoria’s Secret, which has seen declining sales for years now. Some analysts saw this as the final nail in Victoria’s Secret’s coffin.

Gymboree Relaunched Its Kids Clothes, and Lots of Parents Hate It

Many are furious the children’s clothing brand is making clothes that look like they are for “mini teenagers.” Last summer, the children’s clothing company Gymboree filed for bankruptcy and closed 360 stores across the country. Four months in, Gymboree exited Chapter 11 under new equity owners, and promised a reboot of the brand that would be bigger and better.  In an interview with Fortune, CEO Daniel Griesemer said the big difference would be better-quality clothing and pieces that could be mixed and matched, rather than Gymboree’s classic matching tops and bottoms. Except many modern parents don’t seem to want any part of the rebrand. Gymboree’s social media accounts have been flooded with angry comments eulogizing the “old Gymboree” and castigating the rebrand.


Goodwill’s Plan to Attract Young Shoppers Starts With a “Curated” Boutique

In a bid to win over younger shoppers, Goodwill is going the way of the carefully merchandised vintage stores dotting New York City. The company is opening a boutique on the Upper West Side of Manhattan, replete with more upscale lighting and fixtures than its standard stores. Known as a destination for dogged thrifters, Goodwill is doing the legwork for its customers and stocking the new store with trendy pieces culled from its other locations. “Curated by Goodwill NYNJ” is, indeed, a project run by the nonprofit’s New York and New Jersey branch, and it’s extending the concept to some of its existing stores, too. Borrowing from department stores’ “shop-in-shop” model of giving dedicated floor space to certain brands, Goodwill plans to carve out areas in eight of its locations to display fashion-forward items siphoned from each store’s inventory.


Athletic & Sporting Goods

Adidas ‘ascendancy’ in question as Nike steps up its game

Adidas could be seeing its rebound temper, as its sales in Europe — which have served as a bellwether for the brand — have declined and as it faces surging competition, especially in North America, according to a note by Wells Fargo analysts led by Tom Nikic emailed to Retail Dive.  Nike’s new innovations, including releases like the Vapormax and React, are resonating with consumers and putting pressure on Adidas on the high-performance athletic side, the analysts said. Meanwhile, VF-owned Vans is capturing share in streetwear, according to the note.

BSN Sports acquires TeamLine

Farmers Branch’s BSN Sports is expanding its foothold in the school and collegiate sporting goods market through an acquisition of TeamLine, LTD.  The acquisition of the Irving-based sports apparel maker follows several BSN Sports’ partnership deals with Nike and public schools across the country.  The new acquisition and partnerships will further enable BSN Sports to be “an incomparable one-stop shop” for the country’s collegiate and school sporting needs, according to a press release.  A part of Varsity Brand, BSN Sports has more than 2,000 employees, who market and distribute sporting goods apparel and equipment to more than 100,000 team sports customers.   TeamLine has been in operation since 1999.

Cosmetics & Pharmacy

Pfizer to Reorganize into 3 Business Divisions

Pfizer is organizing itself into three businesses: a science-based innovative medicines business which will include biosimilars and a new hospital business unit for anti-infectives and sterile injectables; an off-patent branded and generic established medicines business; and a consumer healthcare business, which will include all of Pfizer’s over-the-counter medicines.  Pfizer said the changes will go into effect at the beginning of the company’s 2019 fiscal year.

Discounters & Department Stores

Walmart CIO: We Picked Microsoft For Huge Cloud Deal To Accelerate Digital Transformation
How does a global corporation with 2 million employees, 10,000 brick-and-mortar stores, daily revenue of $1.37 billion and a booming e-commerce business become a lightning-fast innovation engine driven by staggering amounts of real-time data? For Walmart, the answer was to commit to a massive 5-year cloud deal with Microsoft that extends the two companies’ existing partnership and adds significant credence to my long-held belief that the world’s largest and most-influential cloud-computing vendor is indeed Microsoft rather than Amazon.

Macy’s and Kohl’s Debt Strengthened on Prime Day

If traditional mall stores are doomed by events like Amazon.com Inc.’s Prime Day, nobody told Macy’s Inc. and Kohl’s Corp. bondholders. The companies’ debt strengthened on Monday, as the stores offered their own sales to compete with the online giant’s discounting frenzy. Amazon’s server glitches may have also given a fillip to the traditional retailers’ bonds.



Grocery & Restaurants

As funding dries up, Chef’d shuts down

Los Angeles-based meal kit provider Chef’d reportedly has ceased operations and laid off its employees. The three-year-old company burned through funding in recent months, including financing from venture capitalists and food industry partners such as Campbell Soup Co. and Smithfield Foods Inc., and was forced to shut down.


JAB-backed Krispy Kreme takes majority stake in Insomnia Cookies

Krispy Kreme Doughnut is acquiring a majority stake in Insomnia Cookies in a move that helps the coffee and doughnut chain move beyond the glazed treats for which it is known. The deal is one more — albeit small — building block in the coffee and restaurant empire that European investment firm JAB Holding has been putting together. The terms of the transaction, which is set to close in the fourth quarter, were not disclosed.


Wendy’s, Papa John’s held merger talks before racial incident

The embattled founder of Papa John’s International reportedly was in talks with Wendy’s about merging the burger and pizza brands, according to sources cited Wednesday by the Wall Street Journal. The purported merger comes as Papa John’s is under siege following a public relations debacle tied to its ousted founder and chairman, John Schnatter. “The talks, which Papa John’s board was aware of, have cooled since the incident,” one of the sources said.

Home & Road

La-Z-Boy to Acquire Joybird

La-Z-Boy Inc. has entered into a definitive agreement to acquire e-commerce retailer and upholstered furniture manufacturer Joybird.  Joybird, which will become a wholly owned subsidiary of La-Z-Boy, is the trade name of Stitch Inds. Headquartered in Commerce, Calif., with manufacturing operations in Tijuana, Mexico, Joybird is privately owned and was established in 2014 by Alex Del Toro, Andres Hinostroza, Joshua Stellin and Christopher Stormer. The Joybird acquisition will be a core element of a multifaceted e-commerce strategy La-Z-Boy announced last year.  “Joybird is one of the premier players in the upholstered furniture e-commerce space, and we believe it will provide long-term value to La-Z-Boy and our shareholders,” La-Z-Boy Chairman, President and CEO Kurt Darrow said in an announcement of the deal.

Online Shoppers Picking Up More Housewares, Small Appliances

The percentage of online buyers who are purchasing housewares, small home appliances and home textiles is on the rise, according to The NPD Group.  While in-store sales still dominate, between 17 percent and 20 percent of the U.S. online buying population purchased housewares, home textiles and small appliances online in 2017. Additionally, about 2 percent bought major home appliances through e-commerce, NPD found through its Checkout E-Commerce Tracking, which collects data from more than 3 million consumers through its partner, Slice Intelligence.

Jewelry & Luxury

Walmart Seems to Be Cutting Back Jewelry Sales

Once the biggest jewelry seller in America, Walmart is gradually cutting the number of jewelry counters in its stores, sources say. In January, Talk Business, an Arkansas news site, reported that Walmart was planning to “eliminate its jewelry business,” as part of a larger series of cutbacks and layoffs. After that article appeared, I reached out to Walmart PR for comment and didn’t hear back, and the topic got lost in the shuffle.


Martin Rapaport vs. De Beers

Those who attended Martin Rapaport’s annual breakfast presentation at JCK Las Vegas, and followed the subsequent back-and-forth that ensued between the price list king and diamond giant De Beers, probably were left with a lot of questions. At the presentation, Rapaport shouted and gestured on stage with his usual fervor while raising a number of entirely valid concerns about the diamond industry. Among them: transfer pricing—the practice of undervaluing a resource, such as diamonds from Africa, in order to increase profitability and decrease tax liability—that allegedly takes place in Dubai, an issue that was at the center of the 2016 NGO boycott of the Kimberley Process.

Aurum Holdings records surge in sales to £685m for FY 2018

Aurum Holdings has reported a 21.2% surge in sales to £685.2 million for the financial year ended April 30, 2018. The group overtook Signet Jewelers to become the UK’s largest multi-store operator last year, and pushed into the North American market with the acquisition of Mayors in Florida and Atlanta in October, followed by the take-over of Rolex and multi-brand showrooms in Las Vegas. The American business has been key to the group’s staggering growth in the past 12 months, with pro forma net sales rising 9.9% across the pond, while UK sales rose by 5.2%.

One luxury brand on why retailers must do ‘less, but better’

With closures on the high street and the exponential growth of online shopping, the viability of physical retail in 2018 has never come under so much scrutiny. However, the shift from product-heavy showrooms to spaces, dedicated as much to experience and culture as they are to selling clothes, is nothing new in the luxury sector. The direction of luxury retail is all about a philosophy of ‘less, but better’ explains Ana Andjelic, chief brand officer at premium US fashion brand Rebecca Minkoff. “It’s about more flagship stores that tell the brand story and less random mall stores that are cookie cutter, so all stores have to fit into the locale seamlessly,” she explains.


Office & Leisure

Barnes & Noble extends credit agreement

Barnes & Noble has entered into an agreement to extend its existing $750 million credit facility through July 2023. The transaction was led by Bank of America, JPMorgan Chase, Wells Fargo Bank, National Association, and SunTrust Robinson Humphrey, Inc. Bank of America will administer the loan. The credit facility coincides with the company’s long-term turnaround plan, which also includes a focus on sales improvements and cost reductions. “We appreciate the strong level of support we received from our lending partners,” said Allen Lindstrom, CFO of Barnes & Noble. “Extending our credit facility provides us continued flexibility to support the seasonality of our business and execute on our strategic initiatives.” The extension comes on the heels of disappointing fourth quarter earnings. For the period ended April 28, the company reported a net loss of $21.1 million, compared to a loss of $13.4 million in the year-ago period.

Toys ‘R’ Us settles with ‘some’ creditors

Toys “R” Us has struck a deal with certain debtors and their key stakeholders to resolve disputes and maximize stakeholders’ recoveries. The new plan also avoids what could become a “lengthy, complex, and expensive litigation,” according to documents filed in bankruptcy court this week. According to the filing, an account will park funds for claims, including a baseline recovery of $180 million for participating creditors, as well as shared recovery after a group of secured lenders receive at least 50% of the $1 billion aggregated funds they were owed according to pre-bankruptcy filings. Creditors have the choice to opt out of the deal. Former Toys R Us workers could be next on the retailer’s list of payouts. Former employees are talking to two buyout firms about a possible hardship fund, according to CNBC. KKR and Bain, which took the company private in partnership with Vornado Realty Trust in 2005, are considering providing some financial help for workers who were hardest hit by the toy chain’s bankruptcy and liquidation.


Technology & Internet

EBay grows its customer accounts but struggles to compete with Amazon

EBay’s reduced revenue projection, on top of lackluster sales for the second quarter, revived concerns that eBay is having a hard time finding its place in the shadow of online retail behemoth Amazon.com.

Retailers take advantage of Prime Day with their own deals and free shipping offers

Retailers were ready to take on Prime Day by offering their own Prime Day-style or Cyber Monday-type sales. Retailers touted their no-membership fee policies as a dig at Amazon.


Finance & Economy

Strong consumer spending boosts retail sales in June

U.S. retail sales rose solidly in June, boosted by increases in purchases of motor vehicles and a range of other goods, cementing expectations for robust economic growth in the second quarter.  Given the upward revision to May data, the unchanged reading in core retail sales last month likely does not change views that consumer spending accelerated in the second quarter. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, braked sharply in the January-March period, growing at its slowest pace in nearly five years.


US weekly jobless claims drop to the lowest level since 1969

The number of Americans filing for unemployment benefits unexpectedly fell last week, hitting its lowest level in more than 48 1/2 years, as the labor market continues to strengthen.  Other data showed manufacturing activity in the mid-Atlantic region accelerated in July, driven by a surge in new orders received by factories. But manufacturers reported paying more for inputs.  They were less upbeat about business conditions and capital expenditures over the next six months, a sign that import tariffs were starting to hurt business sentiment.