September 24, 2018 Consensus

The Weekly Consensus – September 24, 2018 (Volume 10, Number 36)

The Big Story
2018 Holiday Sales: More Diamonds Than Coal?
Billy Busko

Three months from today is Christmas Eve.  Gifts will be wrapped, but what will be opened?

It’s that time of the year when early prognosticators reveal their holiday sales forecasts based partly on recent back-to-school sales and various other factors.  For perspective, holiday sales account for roughly 20% of total annual retail sales overall, but can represent significantly more for many businesses.

The back-to-school shopping season is the second-largest seasonal shopping period of the year in terms of consumer spending.  Totaling $84 billion, sales last year (2017) saw a dramatic increase of 10% over 2016 and were record-setting.  Although final numbers for 2018 are still being tabulated, it looks like this year was be able to hold onto almost all of those gains, but narrowly fell to $83 billion, according to the National Retail Federation (NRF).  2018 college spending is expected to have reached a record $55 billion, while elementary through high school spending is expected to have totaled $28 billion.  The slight drop overall is credited toward electronics (laptops, tablets, smartphones) being more frequently purchased throughout the year as part of everyday life rather than being associated with school.

Before looking ahead, here’s a review of Christmas Past and how sharp the predictions were.  (Definitionally, holiday sales include revenues in the months of November and December, but exclude autos, gas and restaurant sales.)  The NRF, Deloitte, RetailNext, AlixPartners and eMarketer estimated that 2017 growth would be within a range of 3.1% to 4.5%.  Actual 2017 holiday sales growth came in at a very jolly 5.5%, which was the biggest percentage gain since the 2008 recession.  Sales totaled $692 billion, which eclipsed the previous record of $656 billion set in 2016.  According to Adobe, on-line sales increased 15% and represented 16% of total holiday sales.  According to First Data, brick-and-mortar stores saw growth of 4%.  Retail sectors that exceeded the overall growth rate of 5.5% included electronics/appliances, furniture/home furnishings and building materials.

Regarding Christmas Present, Deloitte announced last week that it expects the jolly themes of 2017 to continue in 2018 as they’re forecasting an increase of 5.0% to 5.6%. Deloitte predicts that on-line sales will increase between 17% and 22%.  The company commented, “The anticipated growth in holiday sales is likely because of solid disposable personal income growth.  A strong labor market should also aid retail spending, along with elevated consumer confidence and a stable personal savings rate of around 7%.  Consumer sentiment and spending indicators provide a healthy outlook for retailers across channels with strong expectations for store-based and on-line retailers.”

AlixPartners is calling for holiday sales growth of 3.1% to 4.1%.  The firm expressed that they were being cautiously optimistic as “the health of retail is still very strong, but 2017 will be a tough year to follow.” According to eMarketer, sales will be strong, but not quite as strong as last year as they expect on-line sales to increase 15.3%.

Other prognosticators include Coresight Research, which predicts a 4% increase, and Internet Retailer Research, which forecasts that on-line sales will continue to take markets share and account for 16.7% of total sales.

Whether purchased in a store or on a website, it appears that there may be a few more bows under the tree this year.  Who will be the winners and the runners-up? Deloitte added, “The leading retailers this holiday season could be the ones who are able to strike the right balance between innovation, experience and value that best engages the consumer and stands out in a busy season.”

 

Headlines of the Week

Today Is Your Final Chance to Register for the Consensus Great Brands Show

Consensus will host the eighth annual Consensus Great Brands Show (CGBS) on Wednesday, September 26th at TheTimesCenter in New York City. We are pleased to welcome and showcase another collection of exciting and compelling consumer and retail brands. For additional information, visit Consensus Great Brands Show, or to register, click here.

 

 

Apparel & Footwear

Gap Inc. Introduces New Menswear Line: Hill City

In mid-October, Gap Inc. is scheduled to release a new clothing brand called Hill City, a men’s performance-wear label geared toward the active guy who exercises, bikes, runs or just likes to hang out in athletic wear. Hill City will offer technical clothing for exercising and meeting with friends, said Noah Palmer, the brand’s general manager. The new label by the San Francisco company will be sold exclusively on the e-commerce channel (www.hillcity.com). Some of the line’s pieces will be displayed at 50 locations for Athleta, which is Gap’s retail chain carrying its women’s sports and active-apparel brand. In addition, the new brand will be designated as a B Corporation, or a benefit corporation, which is a for-profit business that includes a positive impact on society or the environment among its legally defined goals.

Trump tariffs are good news for China’s sellers of knockoff designer bags

When President Trump threatens China with more tariffs, Lulu thinks of her commission checks and smiles. It’s a good time to work in the fake-handbag business. The shadow industry — already a big moneymaker — stands to reap another windfall from the U.S.-China trade war. Knockoffs of famous brands — Coach, Kate Spade and others — are mostly made in China and arrive on U.S. shores through clandestine channels built to dodge authorities. The authentic purses and their components, also made in China, are shipped through official routes and face Trump’s proposed new duties of 10%, which take effect Monday. This all stacks up in favor of the counterfeit labels at every step of their illicit journey: from factory floors in China to street vendors in cities worldwide.

 

Athletic & Sporting Goods

JD Sports to invest $260 million in U.S. to maintain momentum

Britain’s JD Sports promised to back up its purchase of U.S. chain Finish Line by investing 200 million pounds ($260.7 million) over the next five years after overseas growth helped fuel a 19 percent rise in first-half earnings.  The company, now Britain’s biggest sportswear retailer with about 1,500 outlets in 16 countries, could bring forward plans for a continental European warehouse due to Brexit, Chief Financial Officer Brian Small said.  Revenue rose 35 percent in the half year to Aug. 4 at the chain, which has benefited from the global trend toward “athleisure” – or wearing sportswear while not playing sport.

 

Under Armour to cut 3 percent of workforce

Under Armour said its restructuring program will now cost more than it previously expected: It plans to cut about 400 jobs, or about 3 percent of its global workforce, by March.  Under Armour shares jumped more than 5 percent on the news.  The athletic apparel company known for its compression T-shirts and performance clothing has been struggling as competition heated up, and rivals like Nike and Adidas have stolen market share. Some retail watchers have also criticized the company as it expanded to new retail channels, saying these steps hurt the exclusivity of its brand.

Cosmetics & Pharmacy

Elle Macpherson’s WelleCo Aims to Be a $200 Million Brand

Just six months after entering a small number of brick-and-mortar doors in the U.S., Elle Macpherson is opening a New York flagship for her Australia-based supplement company WelleCo — and doesn’t plan to stop there. The brand’s SoHo space is set to open. This will be the first freestanding WelleCo door outside of Australia — Macpherson and her business partner, Welleco chief executive officer Andrea Horwood, also operate a stand-alone shop in Perth. Harwood and Macpherson declined to comment on current sales, but did say the brand’s goal is to reach $200 million in sales in the next three to four years.

Avon Products Expects To Achieve Low-single Digit Revenue Growth By 2021

At its 2018 Investor Day, Avon Products, Inc. provided certain financial initiatives and investment targets by 2021, driven by the execution of its new strategy to Open Up Avon and return to growth. It targets $400 million in cost savings by 2021. The company expects to achieve low-single digit revenue growth and low double-digit margins by 2021. Following the cost savings initiatives, the Company’s cash generation should exceed its investment plans. Accordingly, Avon does not anticipate increasing its debt position and will remain focused on reducing debt.

 

Discounters & Department Stores

Walmart wants to bring its ‘everyday low prices’ to health care

When most people think about health care, rarely do “discounts” and “low prices” come to mind. But Walmart is looking to change that. The retail behemoth, which markets itself as the leader in “Everyday Low Prices,” is beefing up its presence in the health care sector. It inked a deal last month with Anthem, one of the nation’s largest insurers, to entice more Medicare enrollees to buy over-the-counter medications and health supplies at its stores. It recently tapped former Humana executive Sean Slovenski to lead its health and wellness division. And it was reportedly looking to buy PillPack before Amazon purchased the online pharmacy in June.

Why an obscure tech firm plans to resurrect Bon-Ton

In 1898, Max and Samuel Grumbacher opened their first store, in York, Penn., forming the basis of what would become Bon-Ton Stores. If a brand is the story of a company and everything it’s done, and how customers feel about that story, then it took 120 years to build the Bon-Ton brand from scratch. In a lot of cases, including Bon-Ton’s, it’s quicker and cheaper just to buy a brand outright, one that someone else has built. Billions of dollars were spent making Bon-Ton into a national department store chain. CSC Generation, the largely unknown company that picked up Bon-Ton’s brand property, along with other intellectual property assets, at a bankruptcy auction did so for $900,000. That’s some markdown, and yet it’s real money — a bet that CSC can make good on a brand behind a retailer that went bust.

 

 

Grocery & Restaurants

Landmark tip-credit lawsuit revived in Ninth Circuit

The United States Court of Appeals for the Ninth Circuit on Tuesday revived a lawsuit filed by a group of servers and bartenders that could have sweeping consequences for the industry, addressing whether a subminimum wage can be used for non-tipped work. The case, Alec Marsh v. J. Alexander’s LLC, is named for a server who sued the casual-dining chain alleging he was unfairly paid a tip-credit wage for tasks unrelated to serving.

Del Frisco’s to sell Sullivan’s Steakhouse to Romano’s Macaroni Grill

Del Frisco’s Restaurant Group Inc., is moving to pay down its debt with the sale of its 14-unit Sullivan’s Steakhouse chain to Romano’s Macaroni Grill for around $32 million, the Irving, Texas-based company said Tuesday.

Supervalu selling 19 Shop ‘n Save supermarkets to Schnucks

Supervalu has entered into a definitive agreement to sell 19 of its 36 Shop ‘n Save supermarkets to Schnucks Markets. The stores are located primarily in the St. Louis, Mo., area. As part of the acquisition, Supervalu and Schnucks will also enter into an agreement for Supervalu to serve as the primary supplier for nine of Schnucks’ existing stores located across northern Illinois, Iowa and Wisconsin. In April, Supervalu announced plans to sell its Shop ‘Save banner as part of its ongoing shift to move its emphasis from retail to its wholesale business.

Home & Road

Capital Brands Acquired By Centre Lane Partners

Kitchen electrics supplier Capital Brands has been acquired by private equity firm Centre Lane Partners, HomeWorldBusiness.com has learned. Richard Krause has been named Capital Brands CEO. He most recently was with South Carolina-based Confluence Outdoor, a domestic manufacturer of kayaks, canoes and related accessories. He has also held leadership positions with then-Newell Rubbermaid, ConAgra Brands, Sun Capital Partners and Fiskars Group, among others. In an interview with HomeWorld, Krause said the company for the foreseeable future will maintain its headquarters in Los Angeles. While noting that it’s too early in the process to discuss long-term plans, he did say the company is currently working to fill key top management positions.

Another Retailer Is Getting in the Restaurant Business

Crate & Barrel has long sold items to help shoppers prepare and serve meals at home, from dinnerware and drinkware to cutlery and kitchen tools. But for those who’d rather take a night off from home cooking, next spring its Oakbrook Center store will get a full-service restaurant. The restaurant is a partnership between the Northbrook-based home goods retailer and Chicago’s Cornerstone Restaurant Group, with Chicago chef Bill Kim overseeing menu development.  “As a longtime destination for dining and housewares, we know that our customers love to entertain, and incorporating food and beverage offerings is a natural extension of the Crate & Barrel brand,” CEO Neela Montgomery said in an email.

Jewelry & Luxury

Is De Beers’ Lab-Grown Line a Fit for Signet?

Signet Jewelers CEO Gina Drosos made an intriguing statement toward the end of the company’s second quarter earnings call last month in response to a question from Needham & Co. analyst Rick Patel. Patel noted that Signet is carrying an increasing number of pieces of jewelry set with lab-grown sapphires and rubies, and he asked if the retailer had plans to expand into man-made diamonds. On the August earnings call, however, the retail CEO suggested that Signet might be open to man-made diamonds as long as they are not set in engagement rings.

Claire’s lenders come to truce in bankruptcy fight

Claire’s Stores on Monday said it struck a deal with its loudest creditor —  Oaktree Capital Management — that would allow the retailer to move forward with a plan to reorganize that it negotiated ahead of its Chapter 11 filing in March. An attorney for Claire’s said at a court hearing that the agreement would allow for recovery of up to 25% of second-lien debt holders (which would include Oaktree), according to an audio recording of the hearing. The deal would also resolve many of the back-and-forth legal fights among Claire’s, Oaktree and the retailer’s other lenders. Oaktree is set to vote in favor of Claire’s existing reorganization plan, after months of opposing it and trying to raise the cash to buy Claire’s itself.

Alex and Ani Plans to Sell to Fewer Independent Jewelers

As part of a distribution overhaul beginning in 2019, Alex and Ani will sell more of its product through proprietary channels and less through independent jewelers and mass merchants. While the Rhode Island–based brand doesn’t plan any changes in the current year, it will likely cull the number of jewelers it sells to in 2019 and beyond, says Dani Marks, senior director of brand marketing. “We are stepping away from the traditional footprint and distribution model,” she says.

Pandora Plans For A Sparkling Future In The U.S., While Troubles Remain In Its Danish HQ

Pandora, the $3.6 billion Danish jewelry company known for its interchangeable charm bracelets, is experiencing similar interchange in its management ranks. Right after announcing second quarter 2018 results, the company ousted its CEO Anders Colding Friis, replacing him with Jeremy Schwartz, former The Body Shop CEO, and company chief financial officer Anders Boyer to jointly run the operation in the interim until a new CEO is appointed. This follows the resignation earlier in the year of then CFO Peter Vekslund. Taking the blame is the board’s disappointment with sales, which remained flat through first half 2018 compared with same period last year, DKK 9,934 billion compared to 9,984 billion 1H17, though sales rose 5% in local currencies.

 

Office & Leisure

Toys R Us nostalgia may not be enough to fuel toy sales this holiday season

Nostalgia over the loss of Toys R Us may have boosted toy sales in the beginning of the year, but it might not be enough to fuel holiday sales. While there was renewed optimism about the state of the toy industry after a 7 percent jump in sales from January to June, UBS analyst Arpine Kocharyan is skeptical the trend will endure. Kocharyan said that toy sales in July and August were down in the high-single digits, with September continuing that downward trend. The slump so far in September could be a bad sign because parents often begin to stash away toys for the holidays, especially if they think an item could be a hot seller or if they are on a tight budget.

Lemonis doubles down on Camping World, says No. 1 asset is loyalty club

Camping World Holdings Chairman and CEO Marcus Lemonis issued a vote of confidence in his RV and camping accessory retailer when he bought a chunk of its stock on Friday. “I set up the bid and I ended up only with 25,000 shares. I was kind of disappointed,” Lemonis, said on Monday. While shares of Camping World have been relatively stagnant since June, the CEO appeared confident that his company would achieve its longer-term goals. In particular, Lemonis said that Camping World’s 2017 acquisition of outdoor products retailer Gander Mountain would help bolster the Good Sam program, which he said in the past makes his company “the category-killer” in its space. “Our No. 1 asset are our customers that sit in our Good Sam file,” he said of Camping World’s loyalty program.

 

Technology & Internet

Amazon Will Consider Opening Up to 3,000 Cashierless Stores by 2021

Amazon.com Inc. is considering a plan to open as many as 3,000 new AmazonGo cashierless stores in the next few years, according to people familiar with matter, an aggressive and costly expansion that would threaten convenience chains like 7-Eleven Inc., quick-service sandwich shops like Subway and Panera Bread, and mom-and-pop pizzerias and taco trucks. Chief Executive Officer Jeff Bezos sees eliminating meal-time logjams in busy cities as the best way for Amazon to reinvent the brick-and-mortar shopping experience, where most spending still occurs. But he’s still experimenting with the best format.

Visa and Mastercard reach $6.2 billion settlement on swipe fees

Visa Inc. and Mastercard Inc. agreed to pay as much as $6.2 billion to end a long-running price-fixing case brought by merchants over card fees, the largest-ever class action settlement of an antitrust case. The lawsuit is one of many flashpoints in the battle between retailers and financial firms over the $90 billion that U.S. merchants spend every year on swipe fees. The dispute began in 2005, when Visa and Mastercard were still owned by banks. Merchants had accused them of violating antitrust laws by illegally inflating swipe fees, or interchange, that merchants pay on every purchase transaction and which banks use to fund consumers’ credit-card rewards.

 

 

Finance & Economy

Household net worth climbs by $2.19 trillion, driven by stock market, house prices

Household and nonprofit net worth rose by $2.19 trillion in the second quarter, the Federal Reserve announced.  That represents a seasonally adjusted annual rise of 2.1% to $106.93 trillion, driven in part by gains in the stock market as well as in the value of real estate.  As the economic cycle grows older — and as the real estate sector bemoans a lack of available homes that has driven up house prices — household net worth continues to gain.  The continued economic boom is bolstering the assets of America, particularly at the upper end of the distribution scale.

Halloween Spending to Reach $9 Billion

Once again, Americans are looking forward to splurging on their favorite candy, costumes and decorations during the Halloween season. According to the National Retail Federation’s annual survey conducted by Prosper Insights & Analytics, total spending for Halloween is expected to reach $9 billion, the second highest in the survey’s 14-year history. The figure is relatively the same as last year’s previous record of $9.1 billion.  Celebrants are planning to spend an average of $86.79, up from last year’s $86.13, with more than 175 million Americans planning to partake in Halloween festivities this year.