August 20, 2018 Consensus

The Weekly Consensus – August 20, 2018 (Volume 10, Number 32)

The Big Story
The Most Wonderful Time of the Year
Douglas Stebbins

 

There are three words that are forbidden around my house this time of year.  With three students and a teacher living under our roof, nobody who values their life would ever utter the term “Back to School”.  While students and teachers may dread the return of classes and homework, most retailers recognize that there is no bigger shopping incentive than an upcoming first day of school (other than Christmas).  That is why one cannot turn on the TV or surf the web this time of year without being bombarded with back-to-school advertising.  But not all retailers benefit from back-to-school equally.  To figure out which of the retailers benefit the most of back-to-school, we looked at the 2017 results for 129 publicly-traded retailers and calculated what percentage of their revenue occurred during calendar third quarter.

Given that Staples’s ubiquitous ads have made it clear that back-to-school is the “most wonderful time of the year”, I figured that their public-traded competitor Office Depot/OfficeMax would be near the top of the list, but with 26% of their sales happening in Q3 (slightly larger than their Q4), they were middle of the pack.  The publicly-traded retailer with the highest concentration of calendar Q3 sales was, not surprisingly, Barnes & Noble Education, which runs college bookstores, with over 40% of its annual revenue generated in Q3.

The retail category with the next largest Q3 concentration was online travel, which saw nearly 30% of its revenue in Q3.  With students heading back to school, families planning for Thanksgiving/Christmas travel, and business trips ramping back up after summer vacations, the travel sites see a spike of activity in late summer/early fall.

As far as retail apparel is concerned, the back-to-school season is busy but not as busy as Christmas.  Among apparel retailers, shoe stores see more Q3 concentration than stores focused on garments, which is probably due to shoes being a more challenging gift to buy than clothes.  Plus, no one wants to show up to a new school year with LeBron XIV’s when the LeBron XV’s have already been released.

In general, non-travel related internet retailers are more Q4 focused (30% of sales) than Q3 (23% of sales).  Christmas likely drives that seasonal spike, but perhaps the desire to avoid winter weather and crazy mall parking lots is part of what sends consumers to their keyboards that time of year.  Amazon, whose self-created self-serving shopping “holiday”, Prime Day, occurs during their Q3, still sees 34% of its sales in Q4 compared to only 25% of sales in Q3.

The retail segments with the lowest Q3 concentration also tend to have some of the highest Q4 concentration.  Department stores, jewelry stores and consumer electronics retailers have merchandise assortments targeted toward gift giving and they all record approximately 22% of their revenue in Q3 and over 30% of their annual revenue is recorded in Q4.

Of the 129 retailers analyzed, the two companies with the lowest Q3 sales concentration were 1-800-Flowers and FTD, which had 14% and 15% respectively in Q3.  I guess with all of the craziness involved in getting ramped up for the new school year, romance gets lost in the shuffle.  Rather than sending your kids in with an apple for the teacher on the first day of school, why not send them in with a bouquet of flowers, the flower shops will appreciate it.  And while you are at it, don’t forget to book that trip to see the family over Thanksgiving.

 

Headlines of the Week

Lee, Wrangler jeans: VF to spin off $2.5 billion division as yoga pants shake up industry

The company that owns Lee and Wrangler will spin off its jeans brands into a separate entity as yoga pants and other alternatives shake up the clothing industry. VF Corp. confirmed it will offload the denim business and its VF Outlet division into a separate, as-yet-unnamed company. The slimmed-down company will instead focus on growing its active-lifestyle brands, such as The North Face and Jansport. In a related move, VF will move its corporate headquarters from Greensboro, North Carolina, to metro Denver. The new jeans company will be based in Greensboro. It was not immediately clear how many jobs are moving. The move to ditch the identifiably American Wrangler and Lee brands comes as consumers have increasingly opted for alternatives to jeans, such as yoga pants.

 

China Sovereign Fund Backs Deal for $13 Billion Yum China

China Investment Corp. is backing a potential takeover of Yum China Holdings Inc., people with knowledge of the matter said, in a deal that would be the biggest-ever Chinese acquisition of a consumer company. The sovereign fund and DCP Capital, the investment firm run by former KKR & Co. senior executives, are part of a consortium with Hillhouse Capital that’s considering a buyout of the operator of KFC and Pizza Hut outlets in China, according to the people. Yum China, spun off from Yum! Brands Inc. in 2016 and listed in New York, has a market value of $13.6 billion.

 

 

Apparel & Footwear

Perry Ellis ends deal talks with Randa

Apparel maker Perry Ellis International has ended talks to be bought by fashion accessories maker Randa, backing an offer by its second-largest shareholder and founder George Feldenkreis. Perry Ellis said the decision was made after a major licensor refused to consent to Randa’s acquisition of the company, sending its shares down 5.2 percent to $27.58 in early trading. Randa had raised its offer by 90 cents to $28.90 per share earlier this month, valuing the company at nearly $460 million. It had, however, set a precondition that it would need to speak with the licensor before formalizing any deal.

 

 

Athletic & Sporting Goods

CREW By True Rowing Raises $5M Seed Capital from Olympic Rower

Following the Peloton revolution, the connected fitness world is again being upended by CREW by True Rowing with the announcement of $5 million in seed capital to bring a connected indoor rowing machine to market. Olympian and Indoor Rowing World Record Holder Richard M. Cashin and avid rowing enthusiast P. Andrews McLane, both private equity executives, are among those funding CREW by True Rowing to deliver the special benefits of on-the-water rowing to consumers worldwide. CREW by True Rowing daily creates inspiring live content broadcast straight from the cradle of American rowing, the Charles River in Boston, Mass. Instructors inspire home workouts with compelling music, real-time feedback, and daily stories from their journey to the National Team, all delivered on CREW’s proprietary, patent-pending broadcast-and-delivery system.

AstroTurf Corporation is announces the acquisition of Nagle Athletic Surfaces, Inc.

AstroTurf Corporation announces the acquisition of Nagle Athletic Surfaces, Inc., a prominent track and outdoor court installation specialist based in East Syracuse, NY. Nagle joins the SportGroup family of companies, which includes AstroTurf, Advanced Polymer Technologies, Polytan, SYNLawn, Melos, and more. The sale was finalized on July 31, 2018. The Nagle acquisition marks a significant investment in the Rekortan and Laykold brands a commitment to the track and outdoor court industry. Designed for the modern elite athlete, Rekortan is a diverse, world class series of polyurethane running tracks that is unmatched in quality and performance.

Sports Direct’s House of Fraser purchase fails to convince analysts

The purchase by Sports Direct of department store group House of Fraser drew a cautious response from analysts, with some saying the deal could backfire on Mike Ashley, the sportswear retailer’s founder and chief executive. Ashley, who also owns English Premier League soccer club Newcastle United, on Friday snapped up the 169-year-old House of Fraser’s 58 UK stores, its brand and its stock for 90 million pounds ($115 million) hours after it collapsed into administration. He has given away little about his plans for the company, beyond stating that he would keep as many stores open as possible and transform the chain “into the Harrods of the High Street” – a reference to the Qatari-owned luxury department store in London that was once owned by House of Fraser.

 

Cosmetics & Pharmacy

Perrigo to Separate Its Prescription Drug Unit

Perrigo is planning to separate the company’s prescription drug business so it can continue to focus on expanding its leading consumer business, which includes cold, cough, and allergy products, as well as infant formula for the store brand market.

“The board will consider all value-enhancing options, including a possible tax-efficient separation to shareholders, a sale or merger,” the company said in a press statement.

The Ireland-based company’s prescription business serves patients and health systems with ‘extended topicals’ medications. The portfolio includes topical generic medicines in multiple dosage forms, including creams, foams, mousses, gels, liquids and inhalable products.

Newell Brands to Sell Goody Products to ACON

Newell Brands has signed a definitive agreement to sell Goody Products, a manufacturer of hair styling tools and accessories, to a fund managed by ACON Investments, a private equity investment firm. Terms of the transaction were not disclosed. Goody’s 2017 net sales were approximately $115 million, according to Newell. “We are excited to be able to give Goody the focus and resources it deserves to prosper as one of the leading brands in its segments. We plan to leverage our experience to build iconic brands through product innovation and enhanced distribution to continue the company’s growth trajectory,” said Suma Kulkarni, partner at ACON. The transaction is expected to close within approximately 30 days, subject to customary closing conditions, including regulatory approval.

 

Discounters & Department Stores

Gump’s Files for Chapter 11, Faces Possible Closure

Gump’s, the iconic 157-year-old San Francisco department store that specializes in jewelry, home furnishing, and accessories, filed for Chapter 11 on Aug. 3 in Nevada bankruptcy court. The store, a longtime icon of the city’s Union Square shopping district, still hopes for a buyer to purchase it as a going concern or possibly scoop up its intellectual property or e-commerce platform, says William Noall, a member of business restructuring group of Garman Turner Gordon.

Where even Walmart won’t go: how Dollar General took over rural America

When Dollar General came to Haven, Kansas, it arrived making demands. The fastest-growing retailer in America wanted the taxpayers of the small, struggling Kansas town to pick up part of the tab for building one of its squat, barebones stores that more often resemble a warehouse than a neighbourhood shop. Dollar General thought Haven’s council should give the company a $72,000 break on its utility bills, equivalent to the cost of running the town’s library and swimming pool for a year, on the promise of jobs and tax revenues.

J.C. Penney shares dive 25 percent on forecast cut, weak results

Shares of U.S. retail chain J.C. Penney Co Inc sank below $2 for the first time on Thursday after it forecast a wider-than-expected full-year loss and posted disappointing results on the back of price cuts across product lines. The company’s shares fell more than 20 percent to $1.92 in trading before the bell, its lowest since listing on the New York Stock Exchange a week before the launch of the Great Depression in 1929. “We took necessary actions to mark down and clear excessive inventory positions across many of our categories, which encompasses more than just seasonal product or fashion misses,” Chief Financial Officer Jeffrey Davis said.

 

Grocery & Restaurants

Coca-Cola acquires minority stake in BodyArmor

Coca-Cola is looking to solidify itself with a large presence in the world of sports drinks. The Atlanta-based company announced that it had entered into a definitive agreement with BodyArmor, to acquire a minority stake. Terms of the agreement will give BodyArmor the opportunity to access Coca-Cola’s bottling system and accelerate its growth in order to meet consumer demands. This investment will be part of the Coca-Cola North America Venturing and Emerging Brands, or VEB, portfolio.

Kroger partners with China e-commerce giant Alibaba

Following months of speculation, The Kroger Co. plans to test sales of own-brand groceries through Alibaba Group, China’s largest e-commerce retailer. Kroger said Tuesday that it will pilot the sale of items from its Simple Truth natural and organic brand via an online store on the Alibaba Tmall Global platform.

Wendy’s sells stake in Inspire Brands

The Wendy’s Co. on Thursday sold its 12.3 percent ownership in Inspire Brands Inc., parent to the Arby’s and Buffalo Wild Wings concepts, for $450 million. Wendy’s had owned the remaining slice of what is now Inspire Brands since the July 2011 sale for $430 million of its majority interest in Arby’s Restaurant Group Inc. to Atlanta-based investment firm Roark Capital Group.

Home & Road

Sears CEO Makes a Bid for Kenmore Brand, Home Improvement Business

ESL Investments, the hedge fund run by Sears Holdings Corp. chairman and CEO Eddie Lampert, has made a formal offer for one of the retailer’s signature brands — a move to help the struggling department store chain stay afloat. The hedge fund has offered to buy Sears’ Kenmore appliances brand for $400 million. In addition, the firm also offered $80 million in cash for the Home Improvement (SHIP) business of the company’s Home Services division, according to a filing with the U.S. Securities and Exchange Commission. The deal was presented to the company’s board in a letter. According to the filing, ESL is proposing to acquire Kenmore in a cash deal. However, the transaction is contingent on receiving equity financing from a potential partner. No partner was named in the filing.

 

Home Depot Second-Quarter Sales Bounce Back, Results Top Estimates

Home Depot Inc’s profit and revenue topped estimates despite signs of a slowdown in the housing market, boosted by a rebound in demand for seasonal products and as shoppers spent more to remodel their homes.  The No. 1 U.S. home improvement chain also raised its earnings and revenue forecasts for the year. Consumers are investing in their homes, even as higher mortgage rates and rising real estate prices have hurt home sales this summer. Sales of new U.S. single-family homes fell to an eight-month low in June and data for the prior month was revised sharply lower, the latest indication the housing market was slowing down. Home Depot Chief Executive Officer Craig Menear sought to allay those concerns, saying the U.S. economy and the factors that drive home-improvement spending remained strong.

Jewelry & Luxury

Movado Buys Millennial-Targeted Brand [MVMT] for $100M

Movado Group Inc. is set to acquire MVMT Watches Inc., a millennial-targeted watch and accessories company launched five years ago by two 20-somethings who dropped out of college to start a business. Under the terms of the deal announced Wednesday, Movado will pay $100 million for the company initially, or approximately $85 million after taxes, and will make two future contingent payments that, combined, could total another $100 million. The exact amount of the second payment is contingent on MVMT’s financial performance under Movado’s ownership, with no minimum future payment required. Movado said it is funding the acquisition through cash and borrowings under its revolving credit facility.

Tiffany to Revamp New York Flagship Store

Tiffany & Co. will embark on a three-year renovation project at its famous Fifth Avenue store to make the customer experience more innovative and interactive. Refurbishment of the 10-story New York flagship will begin in February 2019, and will be complete by the end of 2021, the retailer said Tuesday. The branch will remain open throughout, with the jeweler temporarily expanding its retail space into an adjacent building during the transition. The store is responsible for a large proportion of the jeweler’s sales, and serves the multitude of tourists visiting the city.

Trade ‘Blind to Diamond-Swapping Threat’

Diamond dealers are failing to protect themselves against stone-swapping, and are instead waiting until an expensive loss occurs before taking action, equipment suppliers have warned. The switching of natural diamonds with synthetics or other lower-value goods is a common phenomenon to which many traders are oblivious, said Dror Yehuda, president of Israel-based Yehuda Diamond Company. That company makes the Sherlock Holmes scanner, which detects laboratory-grown diamonds created using both chemical vapor deposition (CVD) and the High Pressure-High Temperature (HPHT) technique.

 

 

Office & Leisure
Party City Becomes Latest Retailer to Turn to Amazon for Growth

The company said on Thursday it would begin selling Halloween costumes on Amazon’s mammoth marketplace, the first time it will sell Party City items outside of its fleet of 900 stores and its own website. And if that works out, Party City said in a statement, Amazon will later sell its Christmas and New Year’s merchandise. Party City also manufactures much of what it sells. Party City joins a growing list of retailers that have decided Amazon is a fact of life in doing business today and ultimately an important partner to build online sales. By some estimates, Amazon, via its marketplaces and what it sells directly, is behind 50% of U.S. e-commerce, meaning the threat of having Amazon steal sales from stores has to now be measured against the threat of missing out on its online growth

As Barnes & Noble Struggles to Find Footing, Founder Takes Heat

Leonard Riggio radically altered bookselling in America when he bought an ailing New York City bookstore and turned it into a national chain of megastores. Now, his company — Barnes & Noble — is floundering, the publishing industry that depends on it is worried, and Mr. Riggio has nobody to turn to but himself. That much became starkly evident last month when Barnes & Noble abruptly fired its chief executive, Demos Parneros, with little explanation. Mr. Parneros was the fourth noninterim chief executive in five years, a remarkable amount of turnover at a large company.

Tuft & Paw Is Basically the West Elm of Cat Furniture

We now live in a world where attractive $40 water bottles and elevated toothbrushes and dental floss exist. More and more frequently, startups are questioning why pragmatic items have to be hideous to look at, and are offering their own Instagrammable versions (at a price). And in a space where both cats and home design are celebrated, it’s not surprising that cat accoutrements are the next in line for a makeover. Tuft & Paw founder and cat owner Jackson Cunningham was confronted with the reality of atrocious-looking cat furniture after moving in with his girlfriend Vanessa, who is “obsessed with cats.” Arguably, nothing is more unattractive than jewel-toned plastic litter pans and beige carpet-covered scratching posts. “It kind of sucks that there isn’t nice cat furniture,” he says.

Technology & Internet

Best Buy bought the company behind senior-friendly JitterBug phone

Best Buy announced that it paid $800 million to acquire GreatCall, the company that makes the senior-friendly JitterBug phones. Perhaps more importantly, it has an emergency response service that more than 900,000 subscribers pay for. That fits the retail giant’s pivot to providing tech support and services as it moves away from focusing exclusively on devices and physical media.

Letgo raises $500 million to fuel growth

Letgo, an online marketplace for consumers to buy and sell used goods via its mobile app, announced a $500 million investment solely from venture capital technology investor Naspers Ltd. The online marketplace, which has grown the number of people listing products for sale has grown by 65% since the beginning of 2018, said the new financing will fuel, “growth, product evolution and expansion into new verticals and monetization efforts.”

 

 

Finance & Economy

Corporate America is raking in fat profits. Will it last?

Already fat profits at S&P 500 companies are on track to spike by nearly 25% during the second quarter. That would tie the first quarter for the fastest growth since 2010, according to FactSet. The across-the-board success includes everyone from Apple and Amazon to Chevron and JPMorgan Chase. Blockbuster earnings growth has offset rising concern on Wall Street about President Trump’s trade wars and crises in emerging markets, such as Turkey. “Earnings season was terrific — and I think we have at least three more terrific quarters ahead of us,” said Jeffrey Saut, chief investment strategist at Raymond James.

Workers see their paychecks get smaller as inflation continues to rise

While the rest of the economy pointed higher in July, American workers took a step backwards. Hourly and weekly earnings languished when factoring in the rise in cost of living, according to figures the Labor Department. Average weekly earnings actually decreased 0.2 percent over the one-month period and increased only fractionally from the same period a year ago. Average hourly earnings were unchanged over the month and actually two cents lower than July 2017. The readings came during a month that saw core inflation rise at its fastest pace since September 2008. The Consumer Price Index increased 0.2 percent month over month for an annual gain of 2.4 percent, up one-tenth of a percentage point from June and driven primarily by a jump in rental costs.