August 27, 2018 Consensus

The Weekly Consensus – August 27, 2018 (Volume 10, Number 33)

The Big Story
Lab-Grown Diamonds and Love
Mark Lenz

 

In recent months, announcements by DeBeers and the Federal Trade Commission (FTC) concerning lab-grown diamonds have set the diamond industry abuzz.  In May, DeBeers announced that it was going to begin a lab-grown diamond jewelry business called Lightbox.  Lightbox will sell fashion jewelry with diamonds in soft shades of pink, blue and white, up to one carat total weight, beginning this fall.  Next, in late July, the FTC expanded its definition of a diamond to include those grown in a laboratory.  The FTC’s previous definition of a diamond said that a diamond is a natural mineral consisting essentially of pure carbon crystallized in the isometric system. The word natural does not appear in the new FTC definition of diamonds.  However, a lab-created diamond must be “qualified by a clear and conspicuous disclosure” with words such as ­laboratory-grown, so that a purchaser will know it is not a mined diamond.

The diamond industry is still trying to understand the impact of both announcements and what they mean for mined diamonds in the fashion category initially, and the bridal category in the long-term.  It seems that, as is the case with most products, the degree to which lab-grown diamonds are embraced by consumers and disrupt the established diamond industry will be governed by considerations of supply and demand.

On the supply side, lab-grown diamond technology is still evolving and only a small number of high quality stones suitable for jewelry can be produced, especially in larger sizes.  Accordingly, lab-grown diamonds only make up about 1-2% of the market today. However, they are cheaper to make than it is to bring mined diamonds to the consumer, and producers can offer them as sustainably-created and conflict-free.  Further, confidence is high among industry observers that improving technology and growing investment will allow for the production of greater quantities of high-quality lab-grown diamonds in the future.

On the demand side, there are at least two countervailing dynamics.  In lab-grown diamonds’ favor, lower prices and better value resonate with most consumers, and the ethical considerations of lab-grown stones have particular appeal with today’s core bridal jewelry consumers – millennials.  One recent survey of potential jewelry consumers found that “70% of millennials will consider a lab-grown diamond engagement ring.”  On the other hand, some consumers may view man-made diamonds warily because of the potential stigma of “fake” stones, in spite of the FTC’s more favorable definition.  The established mined-diamond industry is already trying to exploit this angle, as can be seen in the “Real is Rare” campaign over the last couple of years, which supports the view that the laboratory removes the uniqueness and romance from diamonds.

DeBeers seems to be trying to have it both ways.  Its investment in Lightbox is an effort to profit from growing interest in lab-grown diamonds, but the language it uses puts lab-grown diamonds a notch below, and hence protects, natural mined-diamonds. Lightbox’s website says “Lab-grown diamonds share the same physical, chemical and optical characteristics as rare, natural diamonds.  But the process needed to create them is different from nature, so while they are neither as valuable or precious, they are just as sparkly.”  On the one hand, DeBeers wants everyone to know that Lightbox diamonds are physically the same as mined diamonds, but on the other hand, the company is making it clear that Lightbox stones are not as “valuable and precious.”

Based on DeBeers’s Lightbox move, the new FTC definition, growing interest from producers and consumers, and evolving technology, it is likely that lab-grown diamonds will make up a much more significant portion of the fashion diamond industry in the coming years.  A bigger question mark is bridal, where romance takes on much more importance.  DeBeers and the established mining industry are already making the argument to millennials that lab-grown diamonds are inferior on that front.  It will be interesting to see if millennials agree that man-made stones are inferior, or if they’ll use DeBeers’s own words against them and say, but “they are just as sparkly.”

 

Headlines of the Week

Serta Simmons to Merge with Tuft & Needle

Serta Simmons Bedding will merge with direct-to-consumer mattress company Tuft & Needle.  The deal will be one of the first to combine a legacy mattress company with the upstart online brands that have infiltrated the industry over the past few years. Serta Simmons will seek to take advantage of combining Tuft & Needle’s e-commerce infrastructure and capabilities with Serta Simmons’ retail reach. Selling in stores helps to alleviate the cost of customer acquisition, which has grown for digital brands over the past few years as competition for online eyeballs has exploded. It also provides an easier way for customers to test a product. Tuft & Needle, Casper and other online competitors offer 100-night trials for free. Terms of the deal were not disclosed.

PepsiCo Is Acquiring SodaStream for $3.2 Billion

PepsiCo has agreed to acquire countertop carbonated water machine maker SodaStream for $3.2 billion—the snacking and beverage giant’s latest move to add healthier products to its portfolio and push a more environmentally friendly agenda. The deal, for $144 per share in cash, is a 32% premium to the 30-day volume weighted average share price of SodaStream, which earlier this month reported what it said was its “most successful quarter” ever and its ninth consecutive quarter of double-digit revenue growth.

 

 

Apparel & Footwear

Victoria’s Secret’s Pink lingerie ‘is not wanted any longer’ as investors shun L Brand shares

Even as L Brands is looking to turnaround its Victoria’s Secret lingerie brand, it has a new headache on its hands: its teen counterpart, Pink. The owner of Victoria’s Secret, Pink and Bath & Body Works said Wednesday night it is reducing its full-year earnings guidance, due to weakness in its Pink brand. Growth in sales at comparable stores for the teen-focused label declined by single-to-mid digits in the second quarter, company executives told analysts Thursday morning. On Wednesday evening, the company announced the retirement of Pink CEO, Denise Landman. Amy Hauk, president for merchandising and product development of Bath & Body Works, will replace Landman on Oct 1.

 

According to The NPD Group, Athleisure Is Here To Stay—For Now

A recent report by The NPD Group shows that 24 percent of total apparel sales are made in the athleisure segment. According to the global-information company’s “Future of Apparel” study, activewear—including yoga pants, sweatpants and hoodies—has evolved into the athleisure trend, resulting in the acceptance of athletic apparel that is appropriate to be worn outside the traditional gym setting. “I’m often asked if the athleisure trend is going to fade away, and the answer is no,” said Marshal Cohen, chief industry adviser—retail at The NPD Group, based in Port Washington, N.Y. “When you have comfort and function combined with fashion, it’s difficult to go back to anything else on a regular basis.”

TomboyX pulls in $4.3 mln Series A

Seattle-based TomboyX, a gender-neutral underwear brand, has raised $4.3 million in Series A funding. TAU led the round with participation from Redbadge Pacific and SBI Investments Korea. In conjunction with the funding, Pauline Brown, a senior adviser to TAU and former chairman of North American for the LVMH Group, has joined TomboyX’s board of directors.

 

Athletic & Sporting Goods

Athletic footwear retailer gets more personal with store shoppers

Fleet Feet is making its in-store shopping experience more customized. The retailer is launching two new proprietary programs to further enhance and personalize the customer experience — “Fit Engine” and “User Profiles.” The programs work in conjunction with Fleet Feet’s 3D foot-scanning technology (“fit id”) which it launched nationwide in 2017. The technology outputs measurements that store associates use to better personalize solutions for customers based on their individual needs. Using the data collected from fit id, Fit Engine reflects the most commonly selected shoe size and width based on the purchase decisions of other customers with similar foot shapes and measurements.

 

Hayward Industries, Inc. Acquires Paramount Leisure Industries, Inc.

Hayward Industries, Inc., a leading global manufacturer and marketer of residential and commercial pool equipment and industrial flow control products, today announced it has signed a definitive Purchase Agreement to acquire Paramount Leisure Industries, Inc. The transaction is expected to close during the month of August. Known in the industry as Paramount Pool & Spa Systems, the company has a strong heritage and reputation for high quality, innovative and state-of-the-art pool products.

Malibu enters agreement to acquire Pursuit Boats

Malibu Boats, Inc. announced today that it has entered into a definitive agreement with S2 Yachts, Inc. (S2) to acquire the assets of Pursuit Boats for a total consideration of $100 million. The transaction is expected to close in the fourth calendar quarter of 2018, subject to customary closing conditions. Malibu will fund the transaction with cash on hand and a borrowing under an incremental revolving credit facility to be added to its existing credit facility. Pursuit, located in Fort Pierce, Fla., is a member of the saltwater outboard fishing boat market through its offering of 15 models of offshore, dual console and center console boats.

Cosmetics & Pharmacy

New Water Acquires Trillium Health Care Products

An affiliate of New Water Capital L.P., a Boca Raton-based private equity firm focused on lower-middle market companies, announced today its acquisition of Trillium Health Care Products, a premier contract manufacturer of category-leading OTC products for some of the world’s top pharmaceutical companies. Based in Brockville, Ontario, Trillium has built a reputation in the pharmaceutical industry for its focus on quality and technical expertise in short and medium production runs across three dosage forms: liquid, solid and semi-solid. The existing Trillium executive team will continue to manage the company, with General Manager Jay Webb taking on the role of President.

 

Discounters & Department Stores

Target sales up 6.5 percent, highest in more than a decade

Target shoppers are back in stores and clicking online in record numbers, providing the company with the largest boost in sales in 13 years. The Minneapolis-based retailer reported Wednesday that combined sales of in-store and digital transactions were up 6.5 percent during the second quarter compared with a year ago. With consumers finally starting to show some confidence amid the nation’s longest-ever bull market rally, Target Corp. raised its profit outlook for the year, a sign that it expects a strong back-to-school and holiday season ahead.

 

Costco just made an uncharacteristic move to win over millennial customers

Costco has rolled out Apple Pay to all of its US stores in an effort to win over millennial shoppers. “We’ve added additional mobile payment options to make your next visit more convenient,” Costco said in a statement emailed to Business Insider. “Costco members can now use Apple Pay, Google Wallet, and Samsung Pay at U.S. Costco locations.”

 

Grocery & Restaurants

Papa John’s taps Bank of America and Lazard as company struggles to recover from public relations crisis

Papa John’s has hired Bank of America and Lazard as financial advisors to counsel the beleaguered pizza chain as it tries to stem damage following last month’s very messy and public ouster of its founder, people familiar with the matter told CNBC. The company’s shares have fallen by almost 45 percent over the last year as it grappled with weak sales and a public relations crisis after racially charged comments made last fall by founder and former Chairman and CEO John Schnatter that drew public outrage. The company isn’t currently exploring a sale, said one of the people who was briefed on the board’s thinking.

 

Cava Group to acquire Zoe’s Kitchen

Cava Group Inc. has agreed to acquire Zoe’s Kitchen Inc. in a Mediterranean-segment deal valued at about $300 million, the companies announced. Washington, D.C.-based Cava, a privately held company with 66 restaurants, agreed to acquire the Plano, Texas-based Zoe’s, a public company with about 260 units, for $12.75 a share, a 33 percent premium over Zoe’s Thursday close of $9.56 in a share. The Zoe’s Kitchen deal will be financed with a significant equity investment in Cava led by Boston-based Act III Holdings, an investment company created by Ron Shaich, founder and former CEO of Panera Bread Co., as well was The Invus Group and participation from existing investors SWaN & Legend Venture Partners and Revolution Growth.

Home & Road

Lowe’s to Pull the Plug on Orchard Supply Hardware

In a surprising move, Lowe’s Cos. will shutter its Orchard Supply Hardware division — closing all 99 stores — in order to focus on its core home improvement warehouse model.

The move was announced along with the company’s second quarter earnings report. Lowe’s said a strategic reassessment of the San Jose, Calif.-based hardware chain led it to the decision. The Orchard Supply stores, which are located mainly in California, but also in Oregon and Florida, will close by Feb. 1. In addition, Lowe’s will also close the distribution facility that services those stores.

Lowe’s Crosses $20 Billion Sales Mark; Taps CVS Exec as Finance Head

Lowe’s reported second quarter earnings and sales that topped the Street as a delayed spring finally drove customers to stores. The home improvement giant also said it is appointing David M. Denton as executive VP, CFO. Denton, who currently holds the same title at CVS Health, will join Lowe’s after the closing of the CVS acquisition of Aetna, expected in the second half of 2018. Denton will succeed Lowe’s CFO Marshall A. Croom, whose retirement was previously announced.

 

Jewelry & Luxury

Claire’s lender readies $1.5B bid for the bankrupt retailer

One of Claire’s Stores’ lenders, and its loudest opponent in the teen retailer’s Chapter 11 case, is raising cash for a $1.5 billion bid to take over the business. Thomas Lauria, a partner with White & Case representing hedge fund Oaktree Capital Management, said at a court hearing last week that Oaktree plans to file the bid for Claire’s by a court deadline at the end of August, according to an audio recording of the hearing. Oaktree had successfully extended a process to solicit and consider bids for Claire’s after the retailer entered bankruptcy with a plan for reorganizing negotiated with some of its creditors. Ray Schrock, an attorney for Claire’s, said the retailer is still soliciting bids.

 

Circa Founder Del Gatto Debuts Diamond Financing Fund

A new fund, headed by Chris Del Gatto, the founder and former head of Circa, is offering diamond companies collateralized loans as well as a way to sell excess inventory. “Industry financing is in a crisis,” says Del Gatto. “Banks are not funding this industry. In Antwerp, diamond companies can’t even get bank accounts.” To receive a loan from the Del Gatto Diamond Fund, companies must provide the fund with an equal amount of inventory as collateral.

TrueFacet Partners with luxury watch brands to sell secondhand

The luxury market’s icy relationship with the secondary market has started to thaw, as high-end brands aspire to attract a younger, more digital customer — and to play a more intentional a role in the thriving resale market. Today, luxury jewelry and timepiece e-tailer TrueFacet becomes the first in its category to sell pre-owned pieces with an official endorsement from high-end brands — they include watch and jewelry companies Raymond Weil, Frederique Constant and Roberto Coin. TrueFacet will sell pieces provided by the brands that have been returned, pre-owned, discontinued or “case-worn,” said company president Andrew Block, who spent 20 years at Tourneau before moving to True Facet in 2017.

 

Office & Leisure

Parents are set to spend $510 per household during back-to-school shopping, and most will be in stores

Back-to-school means back to shopping. But this year more consumers are going “old school.” According to a recent survey, consumers are returning to malls and other brick-and-mortar stores for backpacks, crayons and more. Meanwhile, shoppers for school items will spend twice as much in-store as online, according to this year’s annual “Back-To-School” survey by the consulting firm, Deloitte. Average spending on apparel, school supplies, electronic gadgets and more is expected to hit $510 per household this year. And $292 of that, or 57 percent, Deloitte found, will be spent in-store. That’s more than double the $115 parents expect to spend on online shopping for back-to-school, or 23 percent of spending. Shoppers are undecided about where they will spend the remaining 20 percent.

PetSmart ups its grooming game

PetSmart detailed its progress on its plan to improve one of the key areas of its business: pet grooming services. In February, the chain announced it was implementing a comprehensive action plan to provide pets with “an even safer and more enjoyable experience in its grooming salons.” The initiative, which includes the appointment of an independent review board and the installation of digital video cameras in PetSmart salon locations, came after the chain was hit with allegations that several dogs were severely mistreated while being groomed. PetSmart on Monday said that the installation of the cameras is currently underway, and nearly 50% of PetSmart salons will be completed by November 2018.

Technology & Internet

Luxury apparel retailer Farfetch, which grew 55% last year, plans to go public

Farfetch U.K. Ltd. is taking its luxury apparel marketplace to Wall Street. The British company filed paperwork for its initial public offering last week as the online luxury apparel market continues to grow. Gross merchandise value, or the cumulative price of goods sold through the online marketplace, hit $909.8 million in 2017, a 55.3% rise over the $585.8 million GMV of 2016, according to the filing. Farfetch’s total revenue generated through online transactions rose 63.8% in 2017 to $296.4 million, but it has yet to generate a profit. Beyond sales, the marketplace notes that active customers—those that made a purchase on the marketplace in the last 12 months—grew 43.6% to more than 935,000 from 652,000. The filing says 980 luxury sellers offer goods through the marketplace, with more than 5.7 million items available across 3,200 brands.

Grocery Logistics is Hot as Boxed Nabs $110 Million Investment from Aeon Group

Boxed, an e-commerce company that sells bulk grocery items, announced a $110 million investment led by Aeon Group, one of the largest retailers in Japan. This minority stake brings the total amount raised by Boxed to $243.6 million and values the company at $600 million.

E‑commerce accounts for an estimated 13.3% of US retail sales in the second quarter

U.S. online retailers’ sales growth decelerated slightly in the second quarter compared with Q1 and 2017 as a whole. U.S. online retailers generated $120.45 billion on the web in the first quarter, a 15.4% increase compared with $104.41 billion in Q2 2017, the Department of Commerce reported. This is a slightly lower growth rate than e-commerce for 2017 as a whole, when U.S. online sales rose 16.0% to reach $453.46 billion, compared with $390.99 billion in 2016. It’s also a slightly lower growth rate than the first quarter, when online sales from U.S. merchants grew 16.4%.

 

Finance & Economy

The Retail Outlook Is Bright, But Is There A Cloud Of Risk Over 2019?

The National Retail Federation recently announced that retail sales are exceeding earlier projections.  Tax reform, paired with a number of positive economic inputs, has resulted in more jobs and more spending. With this encouraging outlook, retailers have a lot of reasons to be excited about and anticipate the holidays — especially considering some retailers reap as much as 30% of their annual sales during the season.

US jobless claims fall as labor market holds firm despite trade tensions

The number of Americans filing for unemployment benefits fell last week, a sign the labor market was holding firm despite tensions between the United States and its trading partners that have spawned restrictions on global commerce. Initial claims for state unemployment benefits slipped 2,000 to a seasonally adjusted 210,000 for the week ended Aug. 18, the Labor Department said on Thursday. It was the third straight week of declines for claims, which have dropped so low that economists have scrambled for explanations. In July, claims fell to their lowest level since 1969 even though the workforce is much larger than in prior decades.