July 10, 2018 Consensus

The Weekly Consensus – July 9, 2018 (Volume 10, Number 26)

The Big Story
Full of Vacancy

Last week, it was reported that mall vacancies have hit their highest level since 2012 and are closing in on all-time records. According to a report by REIS, the commercial real estate data company, the amount of occupied retail real estate in 77 major U.S. metropolitan areas dropped by 3.8 million square feet in the second quarter, the largest decline since 2009.

The news coincided with the last of more than 700 Toys R Us stores closing last week, after the company filed bankruptcy earlier in the year. In all, more than 4,100 major retail stores closed so far in 2018, according to Coresight Research. Six hundred Walgreens have closed this year, while Bon-Ton, Sears and Kmart, Best Buy, Signet Jewelers, Mattress Firm, and GNC have all closed two hundred stores or more this year. Claire’s, Foot Locker, and The Children’s Place have closed one hundred or more locations.

Shopping centers saw 8.6% of their retail space unoccupied in the second quarter, up from 8.4% at the start of the year, according to the REIS report. The vacancy rate peaked at 9.4% in 2011. Back then, the economy was still in a recession, and too many malls had been built in the preceding decades, resulting in a glut of retail space. “We were over-retailed,” said Barbara Denham, a senior economist at REIS. “The recession knocked a lot of stores out of business. While the industry made corrections, it may still be the case that the U.S. is over-retailed. The Wall Street Journal recently noted that for every person living in the U.S., there is 24 square feet of retail space. In Australia, it amounts to 11 square feet, and in the U.K., it is just five square feet.

The shopping slowdown is being felt in all types of brick-and-mortar retail outlets throughout the country. Vacancies in open-air shopping centers, for example, increased during the last quarter in 55 of the 77 metropolitan areas studied by REIS. The Wall Street Journal reports that the impact is especially severe among strip malls and other neighborhood and community shopping centers, which suffered their worst quarter in nine years. About 3.8 million square feet of space was emptied from April to June, pushing the vacancy rate for this type of mall up to 10.2%, REIS said.

Many point to online shopping growth as one of the major factors leading to the vacancies. While online sales only account for less than a tenth of total retail sales, online sales are growing much faster than traditional retail sales – at a rate of 15% per quarter.

Malls have scrambled to fill the spaces left empty. In the case of Toys R Us, spaces of less than 25,000 square feet are sought by Hobby Lobby, Burlington Stores, TJX Companies, Big Lots, Scandinavian Designs, Ashley Homestore, and Ollie’s Bargain Outlet. Larger spaces are being sought by fitness centers and specialty grocers. Entertainment companies, such as trampoline parks, escape rooms, and other interactive concepts are one bright spot, filling the void and driving traffic. Some property owners are converting retail space to office space, going so far as to outfit traditional retail space for call centers or churches.

Many industry observers have argued that the so-called Retail Apocalypse has been exaggerated in recent years, but reports such as these show that there are kernels of truth behind the click-bait.

 

Headlines of the Week

ABG Completes Acquisition Of Nine West And Bandolino

Authentic Brands Group LLC (ABG) completed the acquisition of Nine West and Bandolino from Nine West Holdings Inc. Through this purchase, ABG increases the company’s footwear and accessories business to over $2 billion in global retail sales, further establishing the company’s position as a leader in the fashion footwear space and bringing the company’s brand portfolio to nearly $8 billion in global retail sales. As reported, ABG acquired Nine West Holdings in a bankruptcy auction. ABG’s winning bid is valued at over $340 million of cash and other considerations. This winning bid is over $140 million more than ABG’s stalking horse bid. With respect to the brands’ footwear and handbag categories, ABG has appointed Marc Fisher Footwear to operate the footwear businesses and Signal Products, Inc. to operate the handbag and SLG businesses.

 

Behind Conagra’s $10.9B Deal For Pinnacle Foods: Why Frozen Food Is Suddenly So Hot

With consumers’ growing taste for fresh and healthy food, major packaged food giants have seen their growth slow and their businesses disrupted by upstarts that consumers consider as more authentic. But some of those big giants are fighting back — in a good way. In the latest example, Conagra Brands, which owns brands including Healthy Choice and Marie Callender’s frozen meals, agreed recently to buy Pinnacle Foods, the parent of labels including Birds Eye frozen vegetables, in a deal valued at nearly $11 billion. It represents the largest global food M&A deal so far this year, and the 15th-largest ever.

 

 

Apparel & Footwear

Perry Ellis backs founder’s takeover bid despite Randa’s higher offer

Perry Ellis International Inc recommended shareholders to vote for the buyout offer from the company’s founder instead of a higher bid made by men’s accessories maker Randa. Randa Accessories on Monday offered to buy Perry Ellis for $28 per share, 50 cents higher than founder George Feldenkreis’ offer that the company agreed to in June. Randa’s $444 million proposal does not include some requirements that are part of Perry Ellis’s agreement with Feldenkreis, such as granting of due diligence access or having negotiations about a competing takeover proposal, the company said. A committee formed to evaluate the offers also said it was uncertain of Randa’s debt financing commitments, as well as the lack of evidence of sufficient cash equity on hand.

Stalking Horse Charlesbank Named Top Bidder for Bankrupt Footwear Firm Rockport

The Rockport Group announced that, after completing a Court approved marketing process, it intends to complete the previously announced Asset Purchase Agreement with CB Marathon Opco, LLC, an affiliate of Charlesbank Capital Partners, LLC, pending approval by the United States Bankruptcy Court for the District of Delaware. The sale to Charlesbank will enable Rockport to ensure the continuation of its deep heritage and great brands and enhance its focus on its global wholesale, independent and e-commerce businesses. Following the sale to Charlesbank, post-closing Rockport will have significantly less debt than it did before the sale, which will strengthen its ability to meet the needs of customers and consumers and help further position the Company for growth and long-term success. On May 14, 2018, Charlesbank was named the stalking horse bidder in Rockport’s Court-supervised sale process under Section 363 of the Bankruptcy Code. Rockport engaged in discussions with a number of potential buyers and did not receive any competing bids. Rockport will now move forward with its sale to Charlesbank following the Court’s approval.

Clothing Sellers Defy Retail’s Death Rattle

Specialty apparel and department store stocks have been battered in recent years as a steady stream of store closings and unenticing merchandise put their future in doubt. But the apparel and accessories business is suddenly looking more fashionable. Last week, Goldman Sachs analyst Alexandra Walvis initiated coverage of Tapestry Inc., Tiffany & Co. and VF Corp. with a buy rating. Several days before that, UBS initiated coverage on a basket of nearly two dozen apparel and accessories stocks, including buy ratings on the likes of Nordstrom Inc. and American Eagle Outfitters Inc. The accompanying research note said “the market has exaggerated the ‘stores are dead’ idea.” And earlier in June, Omar Saad of Evercore ISI went so far as to write that “the retailpocalypse is over” as he closed short positions in Kohl’s Corp. and Dick’s Sporting Goods Inc. and offered a rosy view on the prospects of Macy’s Inc.

 

Athletic & Sporting Goods

Nike’s American sales grow for the first time in a year

Nike is back on track at home. North American sales rose 3% in the spring after three straight quarters of falling revenue. North America makes up 40% of the Nike’s roughly $36 billion in annual sales, and the company has been overhauling its business model to adapt to a shift in the retail environment. Nike has relied on selling its shoes, clothes, and equipment to sporting goods chains and specialty retailers. That model is under pressure: Partners like Sports Authority have gone out of business in recent years, while traffic has slowed at stores.

 

Nike favored to beat soccer juggernaut Adidas at World Cup

In a World Cup brimming with upsets, Nike Inc. looks on track to defeat soccer juggernaut and archrival Adidas AG in the closely watched jersey sponsorship battle. The Nike swoosh decorates the outfits of Brazil, France and England, the sides in the quarter-finals most favored by betting websites to win the World Cup, plus Croatia.  Top German sports brand Adidas has Belgium, Russia and Sweden in the quarter-finals, with the group of eight rounded out by Uruguay, sponsored by Puma SE.  The combined accomplishments of Nike-sponsored teams in Russia mark a major success for the U.S. sports apparel maker as it pushes to increase global soccer-related sales that reached more than $2 billion in fiscal 2018.

Cosmetics & Pharmacy

Walgreens Boots Alliance Completes GuoDa Investment

Walgreens Boots Alliance is now officially a 40% stakeholder in Chinese pharmacy chain GuoDa. The investment in Sinopharm Holding GuoDa Drugstores was announced in December 2017, but cleared regulatory hurdles on Thursday. The investment came shortly before the Deerfield, Ill.-based company reducing its stake in Chinese wholesaler Guangzhou Pharmaceuticals from 50% to 20%. The minority stake in GuoDa, which is China’s leading retail pharmacy chain, was acquired through a capital increase worth roughly $416 million, and Walgreens Boots Alliance said it would account for the stake as an equity method investment.

Macy’s Plans 55 New Bluemercury Stores

Macy’s Inc., pleased so far with the performance of Bluemercury, is pushing for more. The cosmetics brand, acquired by Macy’s for $210 million in 2015, will open about 55 new stores through 2019 — maintaining the chain’s pace of expansion. Macy’s “plans to open approximately 25 Bluemercury freestanding stores in 2018. The company expects to open approximately 30 freestanding stores and locations within Macy’s stores in 2019,” spokeswoman Blair Rosenberg said in an email.  The plans underscore how Bluemercury has become a key part of the department store’s strategy to defend its turf from online competitors and the rise of chains such as Ulta Beauty Inc. and Sephora. The growth will bring Bluemercury’s store count to about 215.

 

Discounters & Department Stores

Nordstrom And Retail’s Growing Urgency To Rethink Performance Metrics

Cowen and Co. retail analyst Oliver Chen recently downgraded Nordstrom shares, and the stock promptly tumbled. Among the concerns he cited were declining comparable store sales at both Nordstrom’s full-line department stores and the Rack off-price division. There’s a real risk to misunderstanding what is really going on. One of the things we are going to need to get used to, not only with Nordstrom but with many other brick-and-mortar-dominant retailers, is a new way of thinking about performance — and much of this has to do with letting go of comparable stores sales as a key indicator while fundamentally thinking differently about the role of physical stores.

Walmart hires New Chief Customer Officer and New CMO from Outside

Walmart has named a new U.S. chief customer officer and a new chief marketing officer, both women recruited from the outside, in a major departure for the giant retailer, which has never previously had a female chief marketer or one recruited directly into the position from outside. Janey Whiteside will join Walmart on Aug. 1 in the newly created role of chief customer officer, to be based in Hoboken, N.J., site of Walmart’s Jet.com unit, according to a memo to employees from U.S. CEO Greg Foran and U.S. E-Commerce CEO Marc Lore. Barbara Messing will join Whiteside’s team as CMO in mid-August. Messing is now CMO at TripAdvisor, where she was part of a team that led its transition from a media-only site into a trip-booking e-commerce player.

 

 

Grocery & Restaurants

Califia Farms secures $50 million investment

Plant-based beverage maker Califia Farms has closed a round of funding totaling more than $50 million. The investment round was led by Ambrosia Investments, along with existing investors Sun Pacific and Strips Group.

 

AccorHotels to buy half of SBE in $319M deal

SBE Entertainment Group, parent company of the Umami Burger chain and operator of several of José Andrés’ restaurants, among many others, has found a new investor to fuel its expansion. AccorHotels and SBE have signed a letter of intent for Accor to acquire 50 percent of SBE. The hotel group said it would invest $319 million in SBE to buy the common equity and preferred units owned in part by Cain International, giving it a 50 percent stake. SBE founder and CEO Sam Nazarian will continue to own the remaining half of the company.

 

Centerbridge explores sale of P.F. Chang’s

Private-equity firm Centerbridge Partners L.P. is exploring a sale of the P.F. Chang’s China Bistro casual-dining chain after owning it for six years and splitting off its sibling brand, the fast-casual Pei Wei Asian Kitchen. Centerbridge and the board of Scottsdale, Ariz.-based Wok Parent LLC announced Friday they had retained Bank of America’s Merrill Lynch and Barclays to oversee a possible sale of P.F. Chang’s, which it took private in a $1 billion deal in July 2012.

Home & Road

Back-To-School Season is in Session – Amazon launches Off to College Store

With the scent of the new school season in the air, Amazon launched its Off to College online store, along with its redesigned Back to School online store, while Walmart implemented two new ways to shop home furnishings, with a key focus on small space living and back-to-school. The Off to College store seeks to give consumers access to all the products needed for life on campus, from laptops and textbooks to bedding and small kitchen appliances—and late-night snacks. Shoppers can browse products in such categories as College Essentials, Textbooks, Clothing, Shoes & Accessories, Electronics, Study Supplies, Home and Deals.

Bed Bath Focused on ‘Next Generation’ Store Development

On the heels of an executive management shake-up and lackluster first quarter sales and profits, the Bed Bath & Beyond team is squarely focused on its “next generation” stores, which are testing several new merchandising and assortment strategies. The retailer hosted its typically succinct annual meeting of shareholders, after which CEO Steve Temares answered media questions about the company’s new store concepts, its mission toward personalization, experimenting with a variety of company brand co-locations and what he calls “scarcity products,” which include seasonal, decorative furnishings, treasure hunt and deep-value merchandise as well as food and beverages, and health and beauty care. There are currently four next generation stores open, two of which are in the Northeast–one in Mount Vernon, N.Y., and the other near Philadelphia. Plans call for opening 15 more by this fall and 20 more by next spring, Temares said.

Jewelry & Luxury

De Beers Gives In And Begins Selling Lab Made Diamonds

The allure, scarcity, and high cost of diamonds has largely been controlled by De Beers. Now, the company is doing something they once said they would never do, sell man-made diamond jewelry. This comes at the risk of diluting demand for the globally controlled diamond market. However, the world’s largest diamond miner believes it has the tools and expertise to drive prices sufficiently low enough in the man-made diamond industry to both differentiate them from real diamonds and make a profit at the same time.

The Price of Platinum Briefly Sinks to a 14-Year Low

At press time, platinum was trading at $843 an ounce—after its price briefly hit $810, the metal’s lowest price in 14 years. Even so, platinum is still trading at historic lows compared to some of the other jewelry metals. Currently, platinum is trading for almost $400 less than the price of gold, which was valued at $1,240 an ounce at press time. For most of recent history, the price of platinum has topped that of gold. However, according to BullionVault, the price of platinum has now trailed that of gold for more than two years, the longest such run since the 18th century.

Signet Is Done Outsourcing Its Credit Programs

Signet Jewelers Ltd. has completed the outsourcing of its credit programs, a process the retailer started a little over a year ago. Signet announced Monday that it sold 70 percent of its non-prime receivables to funds managed by CarVal Investors and the remaining 30 percent to funds managed by Castlelake L.P. In addition, CarVal and Castlelake will purchase new non-prime receivables going forward at a discount and with the same percentage breakdown, 70 percent to CarVal and 30 percent to Castlelake.

 

Office & Leisure

Barnes & Noble CEO fired for violating company policies

The nation’s largest bookstore chain said it has fired its CEO, Demos Parneros, for “violations of the company’s policies.” In a statement, Barnes & Noble did not offer any other details except to note Parneros’ termination was not due to any disagreement regarding its financial reporting, policies or practices or any potential fraud. It also said he will not receive any severance pay. Parneros was tapped as CEO of the struggling chain in April 2017, the chain’s fourth CEO in four years. Prior to joining Barnes & Noble as COO in 2016, he was president of North American stores & online for Staples. While the company searches for a new chief executive, it will be run by a leadership group that includes CFO Allen Lindstrom, chief merchandising officer Tim Mantel and VP of stores Carl Hauch. Leonard Riggio remains executive chairman and will also be involved in its management.

Retail Revival: How Joann, Office Depot And Even Nordstrom Are Staying Relevant

Joann is trying to prove that 75 is the new millennial. The sewing and fabric chain, once a fixture at strip centers, has made a sharp turn on the path to what many might have thought was obsolescence and is remaking itself. New technology, new creators’ studio, new target market. The old girl apparently has some fight in her, and she’s putting it to use. Several old-school merchants, in categories ranging from shoes to office supplies, are remaking themselves in a bid for shopper relevancy. Following 18 months of intensive research, the chain has unveiled its concept store in Columbus, Ohio, combining elements of community building and technology.

Technology & Internet

Amazon to acquire PillPack

Amazon has made another pharmacy play. The company will be acquiring online pharmacy PillPack, bringing on board its pre-sorted medication dose packaging and home delivery offerings.

 

YouTube Hires Derek Blasberg to Lead New Fashion and Beauty Partnerships Division

YouTube is forming a new division dedicated to fashion and beauty content partnerships, led by Derek Blasberg. He is tasked with cultivating relationships with brands and high-profile people in the industry so that they will use the platform more often, more effectively and build audiences there. The appointment comes less than a week after Instagram launched its long-form video app, IGTV, in a clear bid to compete with the Google-owned platform.

 

Finance & Economy

The U.S. labor shortage is reaching a critical point

America’s labor shortage is approaching epidemic proportions, and it could be employers who end up paying. A report from ADP and Moody’s Analytics cast an even brighter light on what is becoming one of the most important economic stories of 2018: the difficulty employers are having in finding qualified employees to fill a record 6.7 million job openings. Truck drivers are in perilously low supply, Silicon Valley continues to struggle to fill vacancies, and employers across the grid are coping with a skills mismatch as the economy edges ever closer to full employment.

 

Fed on lookout for recession but still sees strong economy: minutes

U.S. central bankers discussed whether recession lurked around the corner and expressed concerns global trade tensions could hit an economy that by most measures looked strong, minutes of the Federal Reserve’s last policy meeting on June 12-13 showed.  The minutes, which described a meeting in which the Fed raised interest rates for the second time this year, also suggested policymakers might soon signal that the Fed’s rate-hiking cycle was advanced enough that policy was no longer boosting or constraining the economy.