July 30, 2018 Consensus

The Weekly Consensus – July 30, 2018 (Volume 10, Number 29)

The Big Story
Chick-fil-A’s Latest Eyebrow-Raising Move: Meal Kits
Daniel O’Brien

Fast food has held a unique position in American culture and the American diet for decades. It is impossible in many towns and cities to drive down Main Street and not be met with large neon signs, golden arches, and Colonel Sanders staring you in the face. One company, however, has long differentiated itself from the major burger chains. Best known for its delicious chicken sandwiches, cordial customer service, and controversial political views, Chick-fil-A has taken a different approach to fast food than most. It is now experimenting with a new product offering that could separate itself from the pack even further. The company will soon begin testing an offering of meal kits that customers can pick up in store and bring home to prepare on their own. This test, which will begin in mid-August in the Atlanta, Georgia area, could drive incremental sales if customers who are already in store decide to add meal kits for future consumption to their transaction. But getting into meal kits also entails a number of challenges and risks.

Perhaps the biggest question facing these meal kits is will Chick-fil-A customers want them? The first potential issue is that the meal kits are notably different from Chick-fil-A’s core menu. While the chain is known for its friend chicken, waffle fries, and buttery biscuits, the new meals appear to be noticeably healthier, with offerings such as pan roasted chicken with green beans. Second, meal kits are fundamentally different from fast food in that the consumer needs to do the cooking for themselves. Any customer that depends on the speed and convenience of fast food, or who doesn’t like cooking, might scoff at meal kits. Meal kits are not “fast” food.

Additionally, meal kits come with significant competitive pressures. The kit industry has been booming in recent years as consumers have experimented with working these new products into their established routines. But this growth has attracted many new entrants, creating pricing pressure, and making it harder to stand out. Consequently, the meal kit market has proven a difficult one in which to turn a profit. Neither HelloFresh nor Blue Apron, two industry leaders, has turned a profit since their foundings in 2011 and 2012, respectively, and Chef’d, a one-time top ten selling meal kit company, announced this month that it is shutting down operations. Chick-fil-A’s test is somewhat insulated from two of the biggest profitability hurdles for meal kit companies, namely high advertising and shipping costs, as its meal kits leverage the Chick-fil-A name and overall marketing budget, and as the kits are not shipped to consumers. Yet, these are also potential issues. The Chick-fil-A name has great brand awareness, but in the case of these meal kits, it may also create confusion for customers who associate it with fried, less-healthy food. Lastly, many meal kit customers who have grown accustomed to industry incumbents like Blue Apron may prefer to have their kits shipped to their homes.

Chick-fil-A has long been an iconoclast in the fast food industry. The chain has repeatedly challenged conventional wisdom, whether it be through higher food quality, greater investment in customer service, or not being open on Sundays. Superior unit economics versus the competition suggest that its moves have generally paid off: Chick-fil-A sales per store in 2016 were $4.4 million, while the same metric at KFC was only $1.1 million. Indeed, we see several potential questions regarding the company’s meal kit test, but if the new strategy proves to be a success, it wouldn’t be the first time that Chick-fil-A has proven doubters wrong.


Headlines of the Week

Facebook’s $100 billion-plus rout is the biggest loss in stock market history

Facebook on Thursday posted the largest one-day loss in market value by any company in U.S. stock market history after releasing a disastrous quarterly report. The social media giant’s market capitalization plummeted by $119 billion to $510 billion as its stock price plummeted by 19 percent. Facebook’s enormous loss in value came a day after the company reported weaker-than-expected revenue for the second quarter as well as disappointing global daily active users, a key metric for Facebook. The company also said it expects its revenue growth rate to slow in the second half of this year.

United Natural Foods to buy Supervalu for $2.9 billion

United Natural Foods Inc. plans to acquire Supervalu Inc. for about $2.9 billion in cash. The deal, announced Thursday, would create a large, diverse food distributor serving traditional grocery stores via Supervalu and natural/organic product retailers through United Natural Foods, whose primary customer is Whole Foods Market. United Natural Foods reported total sales of $9.3 billion for 2017, its most recently completed fiscal year, while Supervalu posted revenue of $14.2 billion in fiscal 2018.



Apparel & Footwear

Ivanka Trump Closing Her Namesake Fashion Brand

Ivanka Trump, President Donald Trump’s daughter, is closing her namesake fashion brand and planning a longer-term focus on policy in Washington. Ms. Trump, who formally separated herself from the business more than a year ago, holds an undefined policy portfolio as a senior adviser in the White House, most recently centered on workforce development. Her decision to concentrate on the White House comes after months of speculation about whether she and her husband, fellow White House adviser Jared Kushner, would remain in the administration for the rest of Mr. Trump’s term. Apparel sales at the brand, which Ms. Trump launched in its current form in 2014, soared in the year of the 2016 presidential election. But the company also became a lightning rod for critics of her father’s policies, with one anti-Trump group last year urging shoppers to boycott stores selling Trump-branded goods. Retailers including Nordstrom Inc. and Hudson’s Bay have stopped selling Ivanka Trump products in the past 18 months, citing poor sales.

Designers Hope ‘Drops’ Make You Shop

Following a streetwear trend, some mainstream labels plan more frequent deliveries of new merchandise—but in limited quantities—to spur shoppers’ fear of missing out

To get consumers into their stores more often, mainstream fashion brands including Alexander Wang, Burberry and Public School are putting out new items more frequently, with “drops” of merchandise as often as 12 times a year, instead of the usual two to four.

The tactic—a hot concept in fashion today—involves more than just releasing new clothing more often. Designers typically promote a “drop” with lots of marketing hype on social media and limit the offerings so that items sell out. The strategy follows a playbook perfected by influential streetwear brands like Supreme, Palace Skateboards and Nike. These brands, popular with millennials, have created buzz, long lines and a sense of urgency around releases of limited-edition products for short windows of time.


Sephora’s top U.S. exec to head up Lululemon

Lululemon Athletica Inc. has ended its search for a chief executive — a hunt it initiated in February after its existing chief abruptly resigned for falling short of the company’s “standards of conduct.” The yoga wear and lifestyle athletic apparel retailer announced it has appointed Calvin McDonald as CEO, effective Aug. 20. He will also become a member of the board. McDonald comes to Lululemon after spending five years as president and CEO of Americas for Sephora, the fast-growing beauty brand that is owned by luxury powerhouse LVMH. Under his leadership, Sephora delivered double-digit growth year after year, expanded its product offerings, created new digital platforms and store experiences, and expanded in global markets, including Brazil and Mexico.


Athletic & Sporting Goods

Fitness startup ClassPass raises $255M to fund expansion

ClassPass is now bench pressing $255 million. That’s how much the Big Apple fitness company has raised in venture capital including its latest round of $85 million. Led by L Catterton, which has also invested in Peloton and Equinox, and Singapore’s Temasek, the funding will help ClassPass expand into an additional 10 US cities and 20 countries by next year, the company said. It currently has members in 26 states and 50 countries. More than 1,000 of its 10,000 studios worldwide are located in New York City, a spokeswoman said.

Norwest Equity Partners invests in Wahoo Fitness

Norwest Equity Partners, a leading middle market investment firm founded in 1961, has made a significant investment in Wahoo Fitness, an innovative technology-focused fitness company that specializes in smart training products such as indoor bike trainers, GPS bike computers, apps and sensors for cyclists, runners, and fitness enthusiasts. The transaction closed on June 30, 2018; financial terms were not disclosed. Today, Wahoo’s portfolio of products includes the KICKR family of Indoor Cycling Trainers, the ELEMNT family of Cycling Computers, and the TICKR family of Heart Rate Monitors.

Cosmetics & Pharmacy

Albertsons, Rite Aid Ask Shareholders to Vote in Favor of Merger

Albertsons and Rite Aid think they have a leg up against rivals like Walmart and Amazon, and they want investors to know it. As the two companies head into an August vote over their planned merger, they have a message for investors — especially those who have pushed back against the combination: “size still matters,” according to CNBC. The analogy refers to the breadth of a deal, announced in February, which would combine Albertsons’ grocery operations with Rite Aid’s pharmacy business. The deal valued at $24 billion will also take the privately held grocer public. To sway investors, Rite Aid sent a letter to shareholders detailing the merits of the proposed merger, along with the company’s recommendation that shareholders should vote in favor of the transaction.


Lubrizol Looks to Incubate Beauty Brands

Are suppliers the next big beauty investors? Lubrizol, the Berkshire-Hathaway-owned chemical supplier and manufacturer, has invested a minority stake in One Ocean Beauty, a skin-care start-up founded by Burberry veteran Marcella Cacci. One Ocean Beauty is the first brand in the portfolio of Lubrizol Skin Essentials, the company’s venture arm that was formed to incubate skin-care brands in their early stages of development.


Discounters & Department Stores

Walmart unveils expanded baby offering

Walmart unveiled a new online baby department, with six curated collections of nursery decor, including Wanderlust, Boho Chic and Mid-Century Modern. The collections include designs for boy, girl or gender-neutral nurseries. All told, the revamp has added more than 30,000 new items for nursing, diaper changing, closet storage, car seats and other baby care necessities, according to a blog post from Lauren Uppington, vice president and general manager of the baby unit at Walmart’s e-commerce arm.

Sam’s Club to open a technology office separate from Walmart in downtown Dallas

Sam’s Club has hired about 100 technology employees in the Dallas area for a new office in downtown Dallas. Sam’s, the warehouse club division of Walmart, has leased 45,000 square feet in a renovated historic building at 603 Munger Ave., in the West End area of downtown Dallas. Sam’s is working on a new concept store that it plans to open this fall on Lower Greenville in a space where Walmart had operated a Neighborhood Market until early 2016. The company hasn’t said a lot about it, but plans for it to be a technology-driven shopping experience.

Done Chasing Millennials, J.C. Penney Tries to Win Back Moms

After spending the past few years chasing after millennials, J.C. Penney Co. executives say they are now focused on wooing another elusive group: middle-aged moms. The shift is the latest about-face for a retailer that has veered from one strategy to the next as it has cycled through three chief executives in nearly seven years. The company is on the hunt for another leader following the exit in May of Marvin Ellison, who left to become CEO of home-improvement chain Lowe’s Co s. Analysts and investors say time is running out to revive a retailer that was known for dressing Middle America.



Grocery & Restaurants

Papa John’s creates a poison pill to prevent founder John Schnatter from taking it over

The pizza chain Papa John’s has adopted a so-called poison pill designed to prevent the company’s founder, John Schnatter, from taking over the company. Schnatter resigned as the chairman of the board this month after he admitted to using a racial slur during a May conference call with a marketing agency. Days later he said he made a mistake resigning from the position. He still owns 29% of the company, according to Bloomberg data, and remains a director on its board. He stepped down as CEO at the beginning of the year. In a press release out Sunday, the company’s board of directors announced a plan aimed at preventing Schnatter from taking over the pizza chain.


Chef’d will be resurrected, but changed, under new owners

Chef’d, the meal-kit brand that last week ceased operations, is getting a second chance but will be reorganized to put greater emphasis on selling products in retail stores, says Robert T. Jones, president of True Food Innovations, which acquired the assets of Chef’d. Packaged-food consultancy True Food, which sells its own brand of meal kits via food retailers, acquired the assets of Chef’d, including plant, property, equipment, brand and intangible assets for an undisclosed amount. True Food plans to consolidate the assets into its existing businesses.


Garbanzo executives take stake in La Boulangerie

Executives from fast-casual Garbanzo Mediterranean Fresh have made a “significant” equity investment in the San Francisco-based La Boulangerie bakery-café concept, leaders of the two companies said. James Park, Garbanzo CEO, said he and real-estate investor Michael Staenberg, who holds an 84 percent ownership stake in the Denver-based chain, have partnered with Pascal Rigo, the founder and operator of La Boulangerie, to expand, franchise and license the brand. Garbanzo has 28 units, and La Boulangerie has eight.

Home & Road

Pier 1 Imports, Inc. Comments on Proposed Tariff

Pier 1 Imports, Inc. provided commentary regarding the proposed 10% tariff on additional classes of products imported to the U.S. from China announced by the Office of the U.S. Trade Representative on July 10, 2018. Pier 1 sources its products from multiple countries around the world, including China. Consistent with recent years, approximately 59% of the Company’s fiscal 2019 net sales are expected to be derived from merchandise produced in China. Of that amount, approximately half is expected to consist of product classes subject to the proposed tariff. The Company is evaluating strategies to mitigate the impact of the proposed tariff, including collaborative efforts with its vendor partners, and does not expect financial results in fiscal 2019 to be materially affected.


O’Reilly Automotive Reports Second Quarter 2018 Results

O’Reilly Automotive, Inc., a leading retailer in the automotive aftermarket industry, announced record revenues and earnings for its second quarter ended June 30, 2018.

Greg Johnson, O’Reilly’s CEO and Co-President, commented, “We are very pleased to report another profitable quarter, highlighted by a solid 4.6% increase in comparable store sales, which exceeded the top of our guidance range for the second quarter. Our top-line performance, driven by Team O’Reilly’s commitment to providing consistent, excellent customer service, and our relentless focus on profitable growth resulted in a 38% increase in diluted earnings per share to $4.28 for the second quarter. “

Jewelry & Luxury

Net-a-Porter is bringing the luxury bridal shopping experience online

Net-a Porter is betting on the fact that even brides-to-be don’t have time for a traditional luxury shopping experience. Though the retailer has been carrying bridal gowns since 2010, this year marked its biggest investment and bridal launch to date, scooping up the entire second collection of emerging brand Danielle Frankel in January. It has also added new bridal brands Galvan and Alexis Mabille, bringing its current selection to 105 looks.

Lab-Grown Line Won’t Hurt Low-End Goods, De Beers Says

De Beers doesn’t feel its new Lightbox lab-grown diamond line will hurt the market for the inexpensive diamonds commonly used in fashion jewelry, CEO Bruce Cleaver (pictured) tells JCK. “I have heard that talk, largely out of India,” Cleaver says. “My view is, a large percentage of small goods go into all sorts of products, like watches. I don’t really see a one carat blue or pink really competing with melee. I see it competing with moissanite and lower-value ruby and emerald. So I don’t think there is a cannibalization there.”

Of course, Lightbox, which will sell its first jewelry pieces online in September, will offer whites as well, but Cleaver believes consumers will gravitate to the blues and pinks.


8 Key Changes the FTC Made to the Jewelry Guides

The Federal Trade Commission dropped the final version of its revised Jewelry Guides Tuesday, relaxing the rules surrounding lab-grown diamonds and metal alloys while creating standards for describing “composite” gemstones like lead glass-filled rubies.

The Jewelry Guides are guidelines the FTC provides on the terms used in marketing and advertising gems and jewelry. While they are not official laws or regulations, JVC President Tiffany Stevens said those that do not follow the guidelines run the risk of being sued by a competitor, sued by a consumer and/or hit with civil penalties by the FTC.

SimplexDiam and Eaton Hudson Partner on Consulting Division

Leading jewelry liquidation companies SimplexDiam Inc. and Eaton Hudson have joined forces to create a consultancy that advises jewelry store owners looking to turn around their businesses, sell off unwanted inventory, or liquidate an entire store. Specifically, the jointly owned venture is offering retailers the following: inventory appraisals, sale promotions, the options of infusing fresh inventory (on consignment) into a stagnant mix, and adding supplemental sales staff and/or a sales supervisor to help coordinate a liquidation sale.


Office & Leisure

Investor Discloses Large Barnes & Noble Stake, Pushes for Change

An investment fund led by Richard Schottenfeld has acquired 5.7% of bookseller Barnes & Noble Inc. and has met with the bookseller’s senior management to discuss how to improve the company’s performance, according to a securities filing. In an interview, Mr. Schottenfeld said he began purchasing his stake in May. He believes Barnes & Noble can better manage its expenses while improving its in-store shopping experience.  He also said consumers are frustrated by the retailer’s online shopping efforts. “It’s our preference to work with the companies in which we invest,” said Mr. Schottenfeld. “A fresh investor can bring new ideas.” Mr. Schottenfeld’s holdings put him among the book retailer’s largest shareholders.

Retailer Brookstone Seeks Bankruptcy Financing

Brookstone Inc., the specialty retailer known for selling massage chairs, travel gadgets and other novelties at malls and airports, is shopping for bankruptcy financing to fund its business if it files for chapter 11 protection, according to people familiar with the matter.

The retail chain is seeking a roughly $50 million to $60 million loan to keep the business afloat, one of the people said. A chapter 11 filing could happen shortly after it nails down the financing, the people added. The situation remains fluid, however, and Brookstone is still exploring its options. A bankruptcy filing isn’t definite, one of the people said. Among its options is closing unprofitable stores, the people added. If the retailer does seek bankruptcy protection, it would be its second restructuring in recent years. In 2014 Brookstone filed for bankruptcy protection, and was sold to a Chinese consortium that pledged at the time to keep most of its 240 stores open.

Barbie Is on a Roll: The Good News From Mattel’s Dismal Quarter

Hidden within Mattel Inc.’s announcement of plunging sales and massive layoffs were two bright spots that may be the key to the toymaker’s turnaround — and they’ve been around for a combined 100-plus years. Barbie, the 59-year-old doll that’s Mattel’s biggest brand, had a 12 percent jump in sales in the second quarter, its third straight gain. Hot Wheels, which just celebrated its 50th birthday, had a 21 percent surge in revenue. What’s behind the revival in old-school brands? A strategy that’s summed up in company Power Point presentations as “giving them a new view of what they’ve been watching all along.’’ The “them” refers to today’s young parents, who may have grown up with Barbies and Hot Wheels only to snub them in favor of educational apps and fancy gadgets for their own kids. Mattel is trying to lure those customers back by recasting the toys’ image to play up not only the nostalgia but a newer notion: they’re beneficial to child development.

Technology & Internet

Amazon earnings skyrocket on cloud computing, advertising

Amazon.com posted a profit that was double Wall Street targets on Thursday and forecast a strong pre-holiday quarter thanks to the retailer’s newer high-earning businesses including cloud computing and advertising. Amazon’s report shows how the world’s largest online retailer has increasingly learned to compensate for the high costs of fast package delivery and video streaming, which it has marketed around the globe to huge success. This year, Amazon said the its July Prime Day event saw Prime members purchase more than 100 million products. Even more crucially, more people joined Prime on July 16 than on any previous day in the company’s history.


China’s Pinduoduo prices U.S. IPO at top of range, raises $1.6 billion

Chinese online group discounter Pinduoduo priced its U.S. initial public offering at $19 per American depositary share, raising $1.63 billion in the second-biggest U.S. float by a Chinese firm this year. The pricing values money-losing Pinduoduo – which counts Chinese internet giant Tencent Holdings as a main backer – at $23.8 billion, compared with a valuation of $15 billion following a funding round in April. The fast-growing company allows consumers to group together to get better discounts from merchants selling goods as varied as clothes, kitchenware and gadgets.


Finance & Economy

Second-quarter GDP jumps 4.1% for best pace in nearly four years

U.S. gross domestic product grew at a solid 4.1 percent pace in the second quarter, its best pace since 2014, boosting hopes that the economy is ready to break out of its decade-long slumber. The number matched expectations from economists surveyed by Reuters and was boosted by a surge in consumer spending and business investment. Stock market futures edged lower on the news while government bond yields moved lower. That’s the fastest rate of the growth since the 4.9 percent in the third quarter of 2014 and the third-best growth rate since the Great Recession. In addition to the strong second quarter, the Commerce Department revised its first-quarter reading up from 2 percent to 2.2 percent.


Retail stocks are proving that Amazon is not the industry-killer everyone feared

Amazon was supposed to break the retail industry. Instead, the sector is rallying. Some of the group’s biggest stocks have recently hit multiyear highs, and the XRT retail ETF is inching closer to record levels not seen since 2015. Stocks like Costco, Nordstrom, TJX, Ross Stores and Five Below reached 52-week highs as recently as last week. A big move through $50 would mark a break above old highs.

New Hampshire Fights Supreme Court Sales-Tax Ruling

Jeffrey Bart, the third-generation owner of Granite State Candy Shoppe in Concord, N.H., has never collected sales taxes. That is probably about to change. New Hampshire is one of five states without a broad-based statewide sales tax, a status that had insulated Mr. Bart and other retailers from a task familiar to businesses elsewhere. That cushion lasted until the U.S. Supreme Court’s June decision in South Dakota v. Wayfair, which lets states require retailers to collect sales taxes even if those businesses lack a physical presence in the state. That decision was a “huge mistake,” says New Hampshire Gov. Chris Sununu, who expects to sign legislation this week to make it harder for other states to impose collection requirements on New Hampshire retailers.