August 13, 2018 Consensus

The Weekly Consensus – August 13, 2018 (Volume 10, Number 31)

The Big Story
Rite Aid’s Roller Coaster
Marshall Schleifman

Last Wednesday evening, pharmacy chain Rite Aid and supermarket Albertsons mutually agreed to terminate their pending merger.  Despite general support for the strategic merits of the combination, some large institutional Rite Aid shareholders opposed the deal and both major shareholder advisory firms urged against it believing that the economics of the proposal disproportionately accrued to Albertsons’ side.  Rite Aid abruptly cancelled its shareholder vote scheduled for Thursday morning, providing no reason for doing so.  This curious breach in standard procedure simply may have been intended to avoid the embarrassment of a failed vote or it may have been the follow-through on a high-stakes Rite Aid negotiation threat when Albertsons would not make a concession to appease the holdout shareholders.  While Rite Aid’s press release stated that it had “heard the views expressed by [its] stockholders”, Albertsons’s press release explained that it was “unwilling to change the terms of the merger.”

An afterthought in the Walgreens versus CVS two-horse pharmacy race, Rite Aid has been seeking an elegant solution to its predicament for some time.  In fact, this was the second time Rite Aid terminated a merger in little over a year (an astonishing “achievement” in itself).  In June 2017, Rite Aid and Walgreens cancelled their merger transaction in the face of antitrust concerns raised by the Federal Trade Commission.  Instead of a full acquisition, the parties recut an asset deal in which Rite Aid sold 2,000 of its 4,500 stores to Walgreens.  The $4 billion in proceeds Rite Aid received was needed to address its highly leveraged balance sheet.

One idea that was bandied about before and even during the Albertsons courtship was that Amazon could be Rite Aid’s white knight.  This line of thought may have been born from the timing of Rite Aid and Walgreens terminating their merger and Amazon and Whole Foods announcing theirs within two weeks of each other in June 2017.  With Amazon demonstrating that physical retail is part of its strategy and rumors that it planned to enter the pharmacy business, some speculated that Rite Aid’s combination of stores, industry relationships and comprehensive drug distribution licenses could lead to an acquisition.  No one can purport to know Amazon’s next moves, but Whole Foods and Rite Aid seem quite dissimilar on every metric.  Furthermore, Amazon’s June 2018 announcement that it is acquiring online pharmacy Pillpack for $1 billion has revealed a direct-to-consumer pharmacy strategy.

Where does Rite Aid go from here?  Earlier last week, even before cancelling its shareholder vote, Rite Aid updated the outlook for its operations, independent from any Albertsons merger.  Management reduced EBITDA guidance by $80 million, or 12%, from the range provided less than four months earlier.  The day after the merger was terminated, Moody’s placed Rite Aid’s ratings on review for downgrade.  It will be interesting to see if Rite Aid can navigate a successful future despite the setbacks it has endured.  The ups and sharp downs of the past couple years have been dizzying.


Headlines of the Week

Albertsons, Rite Aid Terminate Merger

Albertsons and Rite Aid announced that they had mutually decided to terminate the proposed merger of the Boise, Idaho-based grocery retailer and the Camp Hill, Pa.-based retail pharmacy chain. The termination came a day before Rite Aid was set to hold a special shareholders meeting at which the company has been urging its shareholders to vote in favor of the merger. “Albertsons believes that the strategic rationale of the Rite Aid combination was compelling, including the $375 million of cost synergies and $3.6 billion of identified revenue opportunities,” Albertsons said. “We disagree with the conclusion of certain Rite Aid stockholders and third-party advisory firms that although they acknowledged the strategic logic of the combination, did not believe that Albertsons was offering sufficient merger consideration to Rite Aid stockholders.”

Mattress Firm Explores U.S. Bankruptcy to Close Stores

Mattress Firm Inc, the largest U.S. mattress retailer, is considering a potential bankruptcy filing as it seeks ways to get out of costly store leases and shut some of its 3,000 locations that are losing money, people familiar with the matter said. Mattress Firm’s deliberations offer the latest example of a U.S. brick-and-mortar retailer struggling financially amid competition from e-commerce firms such as Inc. Shares of Mattress Firm competitor Tempur Sealy International Inc. jumped on the news and ended trading up 5.2 percent at $52.64. Mattress Firm’s South African parent, Steinhoff International Holdings NV, has been working on a deal to restructure the debt of some subsidiaries with its creditors, following an accounting scandal. Creditors agreed last month to hold off on their debt claims for three years. Steinhoff acquired Mattress Firm for $3.8 billion in 2016. The sources, who requested not to be identified because the plans are private, cautioned that Mattress Firm has not made any final decisions and its plans could change.



Apparel & Footwear

Crocs closing manufacturing facilities but will keep making shoes

Crocs said that it’s closing all of its manufacturing facilities and announced that its chief financial officer will resign. Crocs, based out of Niwot, Colo., noted in a press release Tuesday that a facility in Mexico will shutter and there are plans to close one in Italy. It’s unclear what the future of production will be. The company said Carrie Teffner, executive vice president and chief financial officer, will leave Crocs effective April 1, 2019. Her successor will be Anne Mehlman, who comes from Amazon-owned online shoe retailer Zappos. Mehlman will begin her duties August 24, 2018.

Canada Goose shares jump on smaller-than-expected loss

Luxury parka maker Canada Goose reported a smaller-than-expected first-quarter loss on Thursday, amid growing revenue from its direct-to-consumer business. The Toronto-based company reported a net loss of $18.7-million, or 17 cents, in the quarter ended June 30, narrower than analyst expectations for a loss of $22.3-million, or 21 cents.

The maker of $900-parkas has been focused on expanding margins by taking more control of its manufacturing and retail sales. Largely cushioned from the retail industry’s struggles by its luxury pedigree, it is opening more of its own stores, pushing into China and Hong Kong, and has expanded into new product lines including knitwear.

Michael Kors, other luxury brands get a boost ahead of the holidays

Michael Kors is just the latest beneficiary of an apparent lift in spending on luxury goods, thanks to a strong economy in the U.S. that has boosted consumer confidence and kept the unemployment rate at record lows. The handbag retailer, which also owns Jimmy Choo, on Wednesday raised its earnings outlook for the full year, as it also reported first-quarter profit and revenue that exceeded Wall Street expectations. Management said on a call with analysts and investors that traffic is even up at department stores, as “the declines that we had seen previously are beginning to become mitigated.” Michael Kors is now expecting to earn between $4.90 to $5 per share for the full year, an increase of 25 cents from its prior range.

Athletic & Sporting Goods

LionTree Announces Minority Investment in Ripken Baseball

LionTree LLC announced that it has made a significant minority investment through its investing arm, LionTree Partners LLC, in Ripken Holdings LLC, a youth sports education & entertainment company founded by Hall of Fame baseball player Cal Ripken, Jr., and his brother, former MLB player, Bill Ripken.  LionTree’s investment is driven by its positive view of marquee brands as multi-channel platforms and excitement around the future of youth sports education and live experiences.

Adidas reports rise in second-quarter net profit, confirms full-year outlook

German sportswear firm Adidas reported stronger-than-anticipated second-quarter net profit on Thursday, with the company saying it remains firmly on track to hit its full-year targets despite taking an impairment charge on its struggling Reebok brand. Net profit over the second quarter rose 20 percent to 418 million euros ($485 million), beating analyst expectations of 387 million euros. Kasper Rorsted, who took over as CEO in 2016 after a series of profit warnings, has sought to place a greater emphasis on profitability at Adidas — although the company still lags behind U.S.-based rival Nike.

Under Armour’s collaboration with Dwayne Johnson tops list of the best-matched celebrity endorsements

Wrestler-turned-actor Dwayne Johnson’s endorsement deal with Under Armour has been ranked as the best-matched celebrity-brand partnership in the fashion and retail sectors.

A list produced by research company Spotted and published Friday rates celebrity endorsements out of 100, taking into account factors such as public perception, whether the star’s audience overlaps with the brand’s in terms of age, gender, income and location, and how risky a celebrity’s behavior might be. Tommy Hilfger’s work with the model Winnie Harlow comes second in the ranking, scoring 97.2, followed by the homeware store Crate and Barrel, whose partnership with actress Reese Witherspoon scores 96.1. Johnson, known as “The Rock,” started his partnership with Under Armour in January 2016 and a Project Rock 1 sneaker released in May 2018 sold out in less than 24 hours, according to a post on Johnson’s Instagram account.

Cosmetics & Pharmacy

CVS Health Posts Adjusted Q2 EPS Growth on Strong Script Volume Growth

CVS Health has posted its second-quarter results for the three months ended June 30, bringing in revenues of $46.7 billion — an increase of 2.2% over the previous year. Despite being buoyed by same-store prescription growth of 9.5% in the retail/long-term care segment and 5.9% in its pharmacy services segment, the company still swung to a net loss of $2.6 billion, compared with $1.1 billion in net income in the prior-year period. The company‘s earnings per share for the quarter, based on generally accepted accounting principles hit a $2.52 loss, compared with $1.07 earnings in the prior-year period, but adjusted EPS this period was $1.69 — up from $1.33 in the prior-year period.

CVS Health said the net loss was largely the result of financing related to the Aetna acquisition. CVS Health noted that it also was due to a $3.9 billion consolidated operating loss that included an LTC impairment charge and $39 million in costs related to its proposed acquisition of Aetna. Same-store sales increased 5.9% and pharmacy same-store sales increased 8.3% in Q2.

Despite New PBM Revenues, Diplomat Posts Slight Q2 Loss

Diplomat Pharmacy is beginning to see revenue growth from its recently launched PBM segment, but the Flint, Mich.-based company still swung to a slight loss in the second quarter, according to the company’s earnings. Revenue increased 26% to $1.4 billion and gross profit grew to $98.4 million from $66.7 million in the prior-year period, but the company posted a net loss of $4 million for the quarter ended June 30. Adjusted EBITDA was $42.7 million, up from $25.2 million a year ago, and earnings per share were -$0.05.


Discounters & Department Stores

Walmart is reportedly launching an Everlane-like clothing brand

Walmart has been making an aggressive push into the clothing business. Last year it bought brands including Bonobos and ModCloth, and earlier this year it launched four of its own private label brands. Its next step, Business of Fashion reports, may be launching a basics brand similar to Everlane, but aimed at Gen Z shoppers and with lower prices. Citing two people “with firsthand knowledge of the matter,” BoF says the line is a product of Walmart’s brand incubator. Andy Dunn, the founder and CEO of Bonobos, who Walmart appointed to “oversee the company’s collection of digitally-native vertical brands” when it bought Bonobos, is leading the project.

A Guide to Walmart’s Ragtag Alliance Against Amazon

Battling Amazon isn’t easy—even for the world’s largest retail chain.  Fear of Jeff Bezos helps explain why Walmart has in recent years forged alliances with Google, Microsoft, China’s and other tech players. The members of the unofficial coalition all share a common goal: preventing Amazon from ruling the digital galaxy. It’s like a movie in which a ragtag alliance faces down an all-powerful foe, only in this case the plucky rebels also happen to be some of the world’s most powerful companies. Walmart Inc. has created a formidable e-commerce business by investing billions to hire engineers and data scientists, building automated distribution centers tailored for web orders and rolling out curbside pickup for online grocery orders at more than 2,000 stores.

How Target is growing its men’s beauty and grooming businesses

Target sees big potential for men’s beauty in stores, so it’s changing its approach to the category. Over the past few months, the Minnesota-based retailer began revamping its grooming destinations in stores by cross-category merchandising men’s beauty products with Goodfellow & Co., the brand’s private label men’s line, which debuted in August 2017. For instance, in the men’s beauty aisle, Goodfellow & Co. accessories like hats, wallets and dopp kits can be found, as well as signage featuring the clothes. Goodfellow & Co. was one of a series of new in-house brands Target began launching last year, including its women’s collection A New Day and home line Project 62. At the time, Target said it expected to drop 12 new brands over the course of two years.

J.C. Penney adding infant and toddler gear near the closed Toys R Us and Babies R Us stores

J.C. Penney sees an opportunity to fill voids left in cities across the nation with the closing of Toys R Us, Babies R Us and Sears stores. The retailer is adding cribs, high chairs, strollers, car seats and everyday baby essentials such as bottles, pacifiers, diaper bags, snack cups and crib sheets in about 500 stores. Those stores were identified on a market-by-market basis, said James Starke, Penney’s senior vice president and head of merchandising.



Grocery & Restaurants

Kroger mulls options for Turkey Hill

Kroger could be putting its Turkey Hill CPG food business up for sale. The Cincinnati-based company said Tuesday that it was exploring strategic alternatives for the division within Kroger Manufacturing, including a potential sale, retaining Goldman Sachs to review and evaluate options. Turkey Hill is a producer of a line of popular fruit drinks, iced teas, milk, ice cream and frozen dairy treats based in Conestoga, Pa.

Oath Pizza announces strategic partnership with Aramark

Global foodservice contractor Aramark on Tuesday announced an investment in 10-unit Oath Pizza with the goal of accelerating growth on college campuses, in hospitals, sports venues and corporate cafes. The move is unusual for Aramark, which typically enters into licensing agreements with national brands. In this case, Aramark entered into an exclusive, strategic partnership with Oath Pizza as a new, niche brand that could be scaled across its portfolio. The foodservice giant led a Series C equity fundraising round for Oath Pizza in April.

Pokéworks gets financial lift from Tokyo-based restaurant giant

A Tokyo-based restaurant company with a massive global presence has partnered with fast-growing poke concept, Pokéworks. The Irvine, Calif.-based poke chain, one of a handful of brand leaders in the country, said it is partnering with Toridoll Holdings Corporation of Japan to grow the chain. Terms of the agreement were not disclosed, but the investment is significant. The company, founded in 2015 in New York City, has more than 120 locations under development across North America.

Real Mex again files for bankruptcy protection

Real Mex Restaurants, whose core brands are Chevys, Acapulco and El Torito, has filed for Chapter 11 bankruptcy protection, the company announced Monday. The filing comes six years after the Cypress, Calif.-based company emerged from an earlier bankruptcy. In a statement, Real Mex said the most recent bankruptcy filing will allow current co-owner Z Capital Group to take total ownership of the brand through an asset sale.

Home & Road

Casper to Go Big in Brick-and-Mortar with 200 Stores

The online brand credited with starting the disruption of mattress retailing is planting its flag in the physical space. Casper plans to open 200 stores during the next three years, according to CNBC, which cited a report by the Wall Street Journal. The news comes amid reports that the nation’s largest mattress retailer, Mattress Firm, which operates some 3,400 stores, is mulling filing for Chapter 11 bankruptcy protection, and as other online upstarts have jumped into the market. Casper, which upended the industry with its mattress-in-a-box product and generous return policy, opened some 15 long-term pop-ups across the United States last year. In February, the brand opened its first permanent location, in downtown Manhattan, followed by a second location, in May, at Toronto’s CF Sherway Gardens mall. Casper plans to open additional locations throughout Canada.

Wayfair to Open Store

Yet another e-tailer has decided to try out the physical space. Wayfair plans to open a retail outlet in the Cincinnati suburb of Florence, Kentucky, according to a tweet by the city of Florence. The 20,000-sq.-ft. location will open early next year, reported Furniture Today, and will sell returns and closeouts. In separate news, Wayfair reported that its second quarter sales increased $538.5 million to $1.6 billion, up 48.8% year over year. The number of active customers increased 34%, to 12.8 million. The retailer posted a net loss of $0.77 per share, more than expected. In the second quarter of last year, Wayfair said it had a net loss of $0.26 per share and $1.12 billion in revenue.

Jewelry & Luxury

Pandora CEO Out After Company Cuts Forecast

Pandora CEO Anders Colding Friis is out after less than four years at the helm of the Danish bead and jewelry maker. The announcement of his resignation came as the company reported weaker-than-expected results for the second quarter and just a few days after it cut its forecast for the year and announced plans to lay off a small percentage of its workforce, mainly in Thailand. Friis joined the company in 2015 and was the one who outlined its four-year plan at Capital Markets Day in January, a plan that focuses on cutting production time to bring more new product to market quicker.

New Site Lets Jewelers Sell Watch Brands Online

Troverie, an e-commerce platform that conducts authorized sales of top watch brands, debuted on Tuesday with the support of both watch companies and leading independent retailers. The site, based in Newark, N.J., is offering more than 800 models from 16 brands: Bell & Ross, Blancpain, Breguet, Breitling, Bulgari, Girard-Perregaux, Glashütte, Hamilton, Longines, Movado, NOMOS Glashütte, Omega, Raymond Weil, TAG Heuer, Ulysse Nardin, and Zenith. It currently carries only new watches, though it may offer “certified pre-owned” product in the future.  Sales are fulfilled by a network of 26 high-end jewelers, comprising 80 stores in 23 markets.

Prepare The Parachute For When Good Times Come To A Close

Recent events in the jewelry and watch industry show how little time, patience and sentimentality large companies in these – or any other industries – have when business turns south. A few weeks ago, the mighty Baselworld show took a hit when giant watch manufacturer Swatch decided it would no longer exhibit at the fair. Swatch’s portfolio includes Breguet, Omega, Longines and plastic Swatch timepieces, along with more than a dozen other brands.  Swatch chief executive Nick Hayek commented that such traditional annual fairs had lost their relevance in a more transparent and fast-paced world.


Office & Leisure

Petco partners with Canadian Tire

Petco said it’s expanding into Canada through an exclusive partnership with Canadian Tire, which will carry Petco’s pet food, treats, supplies and accessories online and in stores. This month, Canadian Tire will begin selling Petco’s private-label WholeHearted premium pet food and more products will be added in September, according to a press release from the companies. Founded in 1922 and offering an assortment of toys, home improvement, apparel and automotive items, Canadian Tire runs 1,700 retail and gasoline locations, according to a press release. This partnership brings Petco’s assortment to Canada, continuing the pet retailer’s assertive growth strategy in a highly competitive market.

Party City rebuffs offer from China’s Meisheng Cultural: sources

U.S. retailer Party City Holdco Inc rejected an acquisition proposal earlier this year from Meisheng Cultural & Creative Corp, a Chinese manufacturer of toys and apparel, people familiar with the matter said on Friday. Meisheng Cultural’s unsuccessful acquisition attempt illustrates how some Chinese companies see opportunities in marrying their low-cost manufacturing base with U.S. retailers looking for an edge in their fierce competition over prices with e-commerce sites such as Inc. Party City is not exploring a sale and is no longer in talks with Meisheng Cultural after deeming its unsolicited proposal to be inadequate, the sources said, requesting anonymity to discuss the confidential matter. Meisheng Cultural, based in Hangzhou in southern China, was established in 2002 and designs and develops animation, games and movies, and has more than 3,000 employees, according to its website.

Sad over losing Toys R Us, parents drive a surge in toy sales in the first half of the year

Things are looking up for the toy industry as parents and grandparents, sad over the bankruptcy of Toys R Us, fueled massive sales in the first half of the year. The toy industry’s sales grew 7 percent to $7.9 billion through June, according to market research company NPD Group. “It is likely that the Toys R Us news has kept toys top-of-mind for parents and grandparents when shopping for kids in general, benefiting both consumers and the industry,” Julie Lennett, senior vice president and industry advisor, said in a statement Monday. She said she was convinced that the jump in sales was at least partially due to empathy over losing Toys R Us.

Retailers raise game on back-to-school supplies

The microwave ate my homework? Reusable notebooks where writing disappears with heat are among the basic school supplies raising their game against gadgets like iPads.

Also hot in the paper aisle this year: Decorative tape, creative journals and scented pencils in smells like bacon and pickle. “There’s an explosion of innovation and fun” in school supplies, said Scott Bayles, vice president of stationery at Walmart. He noted that people are looking for ways to relieve stress through creative expression, and that’s trickling down to kids. Companies that make school supplies have figured out how to get parents to spend more by offering innovations on the basics, said Marshal Cohen, chief industry adviser at The NPD Group. At Staples, for example, a pack of 72 basic No. 2 pencils costs about $15.49, or 21 cents each, while a pack of five scented pencils runs $7.99, or $1.60 each.

Technology & Internet

Walmart and invest $500 million in a Chinese logistics service

Dada-JD Daojia has raised $500 million from existing backers Inc. and Walmart Inc. to quicken the growth of its delivery network across China. The logistics company said it intends to use the funds to invest in supply chain technology and serve merchants on its platform, which connects scooter-riding drivers in about 400 cities with about 1.2 million online merchants and delivers everything from packages to groceries.


Finance & Economy

Stores, Factories Lead This Year’s Unexpected Hiring Boom

Economists expected hiring to slow in 2018 because a tight labor market—consistent with a sub-4% unemployment rate—would make it difficult for businesses to find workers. The opposite has occurred, largely due to a resurgence in two categories that had been contracting, retail and manufacturing. Through July, U.S. employers added an average of 215,000 jobs a month to payrolls. That is a marked acceleration from the 184,000 jobs added on average during the first seven months last year. And, well above the 165,000 average monthly employment growth economists surveyed by The Wall Street Journal predicted for 2018 when asked in January. One big reason is after shedding an average of 6,000 jobs a month during the first seven months of 2017, retailers added an average of 12,000 each month this year. An increase in consumer spending, driven by rising incomes and strong confidence, is causing some retailers to expand.

Why a few economists think US job growth might not last without one key ingredient

Although payroll growth slowed in July, the unemployment rate decreased and overall job conditions appeared strong, the U.S. Labor Department reported. But according to Satyam Panday, a S&P global deputy U.S. economist, that continued job growth may not last. Panday told CNBC’s “Closing Bell” that at this point in the economic growth cycle, the labor market tends to decrease. “When you look at the prime age workers, the employment-to-population ratio does have some room for improvement,” he said. “So we could see potentially about a million or so folks coming back in the labor market.

However, Panday added that “there is a huge uncertainty in this and we do think perhaps by 2019 we will start to have a bit of a slowdown starting.”