October 1, 2018 Consensus

The Weekly Consensus – October 1, 2018 (Volume 10, Number 37)

The Big Story
CGBS for the People and the Planet
Betsy White

It was great to see many of you at our Consensus Great Brands Show (CGBS) at The TimesCenter last week, and we hope that you enjoyed hearing from our presenters and exhibitors as much as all of us at Consensus did.  We always strive to showcase a roster of strong, growing, and innovative brands, but looking back on the day, we noted two additional themes that came through – commerce that’s good for the planet, and products that promote healthier living.

Companies selling products with a benefit to the environment and our fellow humans included:

  • Barnana – delicious snacks made from commercially unsaleable bananas, reducing food waste;
  • Clean Cult – natural cleaning products sold in landfill-free packaging;
  • Naadam – clothing made of cashmere sourced directly from nomadic farmers, who are paid 50% more than the payments from traditional traders;
  • Nambé – distinctively designed home goods made using materials from sustainable sources;
  • S’well – beautifully designed, reusable water bottles made with a goal of eliminating the use of 100 million plastic water bottles by 2020. S’well also supports charities including UNICEF and organizations fighting breast cancer and AIDS;
  • Universal Standard – size agnostic clothing for all women that promotes body positivity; and
  • Yumi EcoSolutions – cups, plates, utensils and storage products made from bamboo and other plant materials that replace plastic products made from fossil fuels.

The group of companies selling products with a primary, more personal benefit of healthier-for-us alternatives to traditional products included:

  • 88 Acres – sustainably sourced snacks that are free from the top nine food allergens including peanuts and wheat;
  • ALOHA – organic, plant-based protein products that prove you don’t have to sacrifice taste for nutrition;
  • Felix Gray – eyewear designed to reduce digital eye strain and other side effects caused by screen time;
  • FitVine – wines with lower sugars and carbohydrates while eliminating other additives, all without sacrificing full flavor and alcohol content;
  • Kitu Life – coffees and creamers free from sugar and artificial ingredients and fortified with lactose-free protein and healthy fats;
  • Peeled Snacks – organic, non-GMO, gluten free snacks; and
  • TruEnergy – a natural-ingredient alternative to energy shots.

While all 29 presenting and exhibiting companies are first and foremost brand, product and profit focused, it’s great to see that for many, engaging in commerce does not conflict with intentions of creating a better and healthier future.

In closing, please let any of us at Consensus know if you’d like to get in touch with one of the CGBS presenters or exhibitors (full list at http://greatbrandsshow.com/ ).

 

Headlines of the Week

Michael Kors ups the glamour, buys Versace for $2 billion

Michael Kors is buying the Italian fashion house Versace in a deal worth more than $2 billion (1.83 billion euros), continuing its hard charge into the world of high-end fashion.

The deal comes just 14 months after the New York handbag maker spent $1.35 billion adding to its portfolio Jimmy Choo, the shoemaker that rocketed to fame on the high heels of “Sex and the City.” Like others in the fashion industry, Michael Kors Holdings Ltd. is trying to fire up sales by cranking up the glamour. Tapestry, once known as Coach, acquired Kate Spade last year. Like Coach, Michael Kors is changing its name as it seeks to reframe how people in perceive it. Michael Kors remains the chief creative director at Kors, but the expanding company will be renamed Capri Holdings Ltd., with $8 billion in projected annual sales.

Inspire Brands to buy Sonic Corp. for $2.3B

Inspire Brands, parent company of Arby’s, Buffalo Wild Wings and Rusty Taco, has agreed to buy Sonic Corp. for $2.3 billion, including Sonic’s debt. Following the completion of the deal, Sonic, parent company of quick-service burger chain Sonic Drive-In, will be a privately held subsidiary of Inspire, which is majority owned by private equity firm Atlanta-based Roark Capital Group. The deal will make Inspire Brands one of the largest foodservice companies in the country with annual sales of more than $12 billion and more than 8,000 company-owned and franchised locations.

 

 

Apparel & Footwear

Inside the J. Crew-Universal Standard collaboration

  1. Crew built an iconic American brand on the fabric of preppy basics like blue button-ups, herringbone blazers and classic chinos. But as mainstay as these styles were for thin working women, they simply weren’t an option before this summer for the nearly two-thirds of American women who fall outside the traditional apparel size range. This summer, Alexandra Waldman, co-founder and creative director of startup Universal Standard, and her team collaborated with J. Crew on several collections. It also heralded the moment the iconic retailer expanded to size 24 across all merchandise.

 

Dov Charney ordered to pay $19.5M over American Apparel suit

The Delaware Supreme Court on Monday affirmed a Dec. 17, 2017, ruling that American Apparel founder Dov Charney must pay hedge fund Standard General $19.5 million. That figure is the principal amount of a loan from 2014 when the hedge fund was working to help Charney retake control of the retailer, excluding accrued interest. In December the Delaware Chancery Court ruled that verbal agreements that Charney claimed he had made with Standard General — in which he would hand over additional American Apparel shares he acquired with the loan in exchange for reclaiming his CEO position — didn’t supersede written agreements he signed regarding the note. In an interview on Tuesday, Charney said that, when it comes to litigation, he is focused on a fraud claim being litigated in California. In that case, he alleges that American Apparel and the hedge fund ran the company into the ground after his 2014 ouster.

 

Athletic & Sporting Goods

Under Armour and Nike Can Continue Their Strong Run

Shares of Under Armour and Nike have outpaced Adidas’ American depositary shares year to date, a trend that’s reflected in footwear sales trends, according to Jefferies.  Under Armour is up more than 46% since the start of the year, while Nike has run more than 35%, compared to Adidas’s 23.4% gain.  Recent sneaker trends bode well for Under Armour and Adidas, says Jefferies, although the firm only thinks one is a buy.  In the latest round of the sneaker wars, Jefferies sees Nike and Under Armour shares leaving Adidas ADSs even farther behind.

ASB Sports Acquisition, Inc. Announces Three Add-on Acquisitions

Trivest Partners announced that its affiliate, Athletic Supply/Barcelona Sporting Goods has partnered with Williams’ Sporting Goods, Cardinal’s Sports Center, and Team Sports, Inc. These acquisitions will serve to broaden the Company’s product lines, build density in existing markets, deepen relationships with key vendors, grow the Company’s sales coverage network, and expand into the attractive Midwest geographic region. The key executives of each partner company are joining Athletic Supply’s management team and will retain meaningful ownership in the combined business.

Cosmetics & Pharmacy

Beautycon Expanding to More Cities With New Business Model

Beautycon is branching into pop-ups. The business, which throws beauty festivals attended by tens of thousands of beauty enthusiasts and hundreds of brands, is launching a new format — Beautycon Pop — intended to bring the Beautycon experience into new cities and countries. The new format includes eight themed rooms that beauty fans can Instagram their way through, plus a store that will sell primarily lip products from between 20 to 30 beauty brands. Beautycon Pop opens Nov. 16, at 333 South La Cienega Boulevard in Los Angeles, and will stay open for 30 days.

WellCare Agrees to Buy Aetna’s Part D PDP Business Ahead of CVS Health Merger

WellCare Health Plans will be acquiring the entirety of Aetna’s standalone Medicare Part D prescription drug plan business, effective 11:59 p.m. on Dec. 31, according to a Securities and Exchange Commission filing from CVS Health. The acquisition is pursuant to the approval of the CVS Health-Aetna merger, which reportedly is forthcoming from the Justice Department of Justice and which CVS Health said it expects by the early part of the fourth quarter. The company said that the Part D drug plan business had roughly 2.2 million members as of June 30. The filing notes that the divestment doesn’t affect Aetna’s Medicare Advantage, Medicare Advantage Part D or Medicare Supplement plans for individuals or groups.

Rite Aid Q2 Results Accompanied by Governance Changes

Rite Aid on Thursday reported its operating results for its second quarter, and separately announced governance changes. As the company reported $5.4 billion in revenue — though still swung to a loss of $325.5 million — it also nominated three independent directors to its board and separated the roles of chairman and CEO, naming Bruce Bodaken chairman, effective Oct. 30. Rite Aid said the nominated directors — Robert Knowling, Jr., Louis Miramontes and Arun Nayar — would stand for nomination at the company’s annual shareholders meeting, set for Oct. 30. They will replace current directors David Jessick, Myrtle Potter and Frank Savage, who won’t stand for re-election, Rite Aid said.

 

Discounters & Department Stores

Sears CEO proposes plan to avoid bankruptcy, as options and cash run low

Sears CEO Eddie Lampert is making his biggest push yet to avoid bankruptcy, with the company running out of time as a large debt payment hangs over its head next month.

Lampert’s hedge fund, ESL Investments, is proposing a way to restructure the struggling department store chain’s liabilities, in addition to asking Sears’ board to sell off roughly $1.75 billion worth of assets. This would reduce the retailer’s total debt by nearly 80 percent to $1.24 billion, according to the documents filed Monday with the Securities and Exchange Commission. Sears would also sell about $1.5 billion worth of real estate, much of which has been used as collateral in the past to generate liquidity, as part of the proposal. Some of the stores in such a transaction would be leased back to Sears, the filing said. Sears operated 866 stores under both its namesake brand and Kmart as of Aug. 4.

 

Inside the launch of Something Navy, Nordstrom’s first influencer-created brand

Looking to build meaningful connections with new consumers, Nordstrom is ramping up its focus on influencer fashion lines. Nordstrom has launched private-label brand Something Navy, created with the influencer behind the blog of the same name, Arielle Charnas. She has 1.1 million followers on Instagram, while @somethingnavy has 118,000. Nordstrom currently has more than 35 private label lines, and each has a design director who oversees the brand. For Something Navy, Charnas provided the design director with inspiration, from calling out interesting shapes she wanted to see to creating mood boards. It’s the first time the retailer is teaming with an influencer to create a brand.

Kohl’s Places A Large Bet On A Shift In Beauty Ideals

Kohl’s is launching EVRI, a private-label plus brand. This acronym (somewhat awkwardly) stands for Easy, Versatile, Real (Value) and Inspiring. The new brand should be a no-brainer, given the significant pent-up demand among larger women for access to more merchandise options. After all, by some estimates about two-thirds of American women wear a size 14 or above. The NPD Group reports that American shoppers spent $21.4 billion on women’s plus-size clothing in 2016, and the U.S. Centers for Disease Control and Prevention pegs the obesity rate among American women ages 20 and over at approximately 38%.

JC Penney shares crater 10% after CFO’s exit leaves a gaping hole in retailer’s C-Suite

J.C. Penney shares plunged Friday, a day after the department store chain announced the departure of CFO Jeffrey Davis to pursue other opportunities, creating another gaping hole in the retailer’s C-Suite. The stock skidded 10 percent Friday morning. It has lost more than 50 percent of its value over the past 12 months and now trades around $1.56, giving the company a market cap of about $491 million. Davis’ departure, effective Monday, follows the exit of Marvin Ellison as CEO earlier this year to go to Lowe’s. Penney’s chief customer officer, Joe McFarland, quit the company this summer to follow Ellison to the North Carolina-based home improvement retailer.

 

 

Grocery & Restaurants

Urban Plates to nearly triple in size with $38M financing

Urban Plates has closed a financing deal that will allow the Southern California fast-casual brand to nearly triple in size to 40 units over the next few years. The Cardiff, Calif.-based chain, popular for scratch-made food served in a polished cafeteria-style setting, closed a $38 million credit facility with Goldman Sachs Specialty Lending Group, the company announced Tuesday. The brand, founded in 2011, said it plans to expand its footprint over the next 36 months in the West and Northeast. It currently operates 13 locations in California and two in the Washington D.C. area.

Elite Restaurant Group buying spree continues with Patxi’s purchase

Elite Restaurant Group, the owner of Slater’s 50/50 and Daphne’s, is adding deep-dish pizza to its fast-growing portfolio. Mike Nakhleh, president of the Los Angeles-based company, said he has purchased the 17-unit Patxi’s Pizza from private-equity firm KarpReilly LLC. Terms of the deal were not disclosed. The acquisition, expected to close in 60 to 90 days, is the second for Elite in less than six months. When the deal is complete, Elite’s portfolio will increase to 50 restaurants with total revenue of about $100 million, Nakhleh said.

La Boulangerie acquires Loving Cup

The owners of Garbanzo Mediterranean Fresh and La Boulangerie have added to their portfolio of niche brands with the acquisition Wednesday of Loving Cup, a popular six-unit dessert shop in San Francisco. Terms of the deal were not disclosed.

Giant Eagle to acquire 56-store Ricker’s chain

Supermarket chain Giant Eagle has agreed to buy Indiana-based Ricker Oil Co. Inc., the owner of 56 Ricker’s convenience stores and gas stations throughout central Indiana. Ricker’s Chairman Jay Ricker told IBJ on Thursday morning that a purchase agreement for his 39-year-old company is in place and the deal is expected to close by the end of the month. Financial terms of the sale were not disclosed.

Home & Road

Bed Bath & Beyond’s Q2 Results Offset by Declining Store Sales

Strong digital growth was once again offset by declining store sales during Bed Bath & Beyond’s second quarter. The home goods retailer reported net earnings of $48.6 million, or 36 cents a share, for the quarter. Analysts had expected earnings of 50 cents per share. Net earnings for the year-ago period were from $94.2 million, or 67 cents per share.

Net sales were approximately $2.9 billion. In addition to being flat compared to the prior year, they fell just below analysts’ expectations of $2.96 billion. Same-store sales fell 0.6%, despite strong sales growth from the company’s digital channels. Sales from stores declined in the mid-single-digit percentage range.

Jewelry & Luxury

De Beers’ Lab-Grown Diamond Jewelry Line Launched Thursday

Lightbox, the line of jewelry set with lab-grown diamonds from De Beers, is now available. A marketing email dispatched Tuesday morning read “Your 48 Hour Countdown” at the top and invited consumers to “window shop while you wait” by previewing the line’s launch collection. There was also a launch countdown clock on the Lightbox Jewelry website. The line is initially being sold online direct to the public. Lightbox General Manager Steve Coe has said De Beers will do a “modest” brick-and-mortar trial run later this year and expand it over time; there has been speculation in the industry as to whether Signet Jewelers will be among the retailers to sell Lightbox.

 

As Lab-Grown Diamonds Boom, What’s Happened to the Pioneers?

If lab-grown diamonds are enjoying more industry acceptance, that’s in part because of the two companies that pioneered the concept: Apollo Diamond and Gemesis.

Today, both companies operate under different names—Apollo is now Scio, and Gemesis is called Pure Grown Diamonds (PGD). Two of the driving forces between Apollo and Gemesis—Robert Linares and Carter Clarke, respectively—are no longer with those companies. Yet just as the companies’ long-sought goal of market acceptance of lab-grown diamonds appears to be coming true, they face very different issues.

Michael Hill International Has Named New CEO

Michael Hill International has appointed Daniel Bracken as its new CEO, effective Nov. 15. Current CEO Phil Taylor is stepping down because “he has been diagnosed with a health issue and has decided to resign to focus on his treatment and recovery,” a statement said. A 30-year company veteran and its former CFO, Taylor was named Michael Hill’s permanent CEO in last May after serving in the role on an interim basis since August 2016. He will continue to consult with the company for the next six months.

 

Office & Leisure

Michaels expands kids’ crafting section in bid to win sales left behind by Toys R Us

Hundreds of stores went dark earlier this year when Toys R Us liquidated, leaving a window for other retailers to step in and court the toy retailer’s former customers. Toys R Us had accounted for about 15 to 20 percent of all U.S. toy sales last year. Many companies, including Walmart, have already laid out strategies to capture those sales — even retailers that aren’t typically known for their toy sales. Michaels, which has seen its stock drop more than 30 percent this year to a multiyear low, is hoping to entice parents of young crafters, builders and burgeoning artists with a robust selection of nonelectronic products and crafting materials. The company is making some major changes to the kids’ sections of its stores, including stocking the aisles with more than 600 new items and partnering with brands to get exclusive access to some products. “We call it creative play,” CEO Chuck Rubin told CNBC. “It’s kind of a variation of the toy market.”

Technology & Internet

Farfetch’s IPO raises $885 million

Farfetch Ltd., which sells luxury clothing online, sold shares above its marketed range in a U.S. initial public offering that raised $885 million. Farfetch’s website helps global, deep-pocketed shoppers get their hands on high-end goods such as an $8,287 leopard-print coat or $980 sneakers. The company also offers services that help sellers create content for online boutiques, manage product returns and analyze consumer data to determine pricing and inventory.

 

Amazon plans to open a new ‘4‑Star’ concept store in New York City

Amazon.com Inc. will open a new store in New York City on Thursday featuring top-selling and highly rated products, the online retailer’s latest effort at physical stores, where most consumer spending still occurs. Dubbed “Amazon 4-Star,” the new location will feature devices, kitchen items, toys, books and games. All products are items sold on Amazon that customers have rated four stars and above, are top sellers or are new and trending.

 

Finance & Economy

September consumer sentiment tops triple digit mark for only the third time since January 2004

Consumer sentiment was just under expectations in the final reading of September but the index remained near all-time high levels.  “Consumer sentiment remained at very favorable levels in September, with the Index topping 100.0 for only the third time since January 2004,” Richard Curtin, chief economist for The University of Michigan’s survey, said in a statement.  “All households held very optimistic expectations for improved personal finances in the year ahead, the most favorable financial prospects since 2004,” Curtin added. The index has slumped since March when it reached its highest level since 2004 with a reading of 101.4.

 

Fed rate hikes beginning to pressure consumers

The Federal Reserve has announced another interest rate increase, hiking the federal funds rate by a quarter point.  The rate that banks pay to borrow money will now float between 2 percent and 2.25 percent, and they will surely pass on the increase. It will put increased pressure on consumers who borrow money, particularly those who carry a credit card balance.  It directly affects the rate on home equity loans and auto loans but probably has the biggest impact on consumers with credit card balances. Credit card interest rates tend to be high because they are unsecured loans. When the fed hikes interest rates, they go even higher.