October 15, 2018 Consensus

The Weekly Consensus – October 15, 2018 (Volume 10, Number 39)

The Big Story
Economic, Social Trends May Keep Halloween Spending Creeping Up
Maeghan Thompson

Halloween is a celebration of all things dark and spooky, but predictions of retail selling this year are hardly scary.  Like prior Halloween seasons, consumers are snapping up pumpkin-flavored everything, fun-size chocolate, fake cobwebs, jack-o’-lanterns and costumes, and industry observers expect that by All Saints’ Day on November 1, Halloween-related spending will roughly mirror last year’s record-breaking figures.

This year’s total spending forecast for Halloween, according to the National Retail Federation’s (NRF) annual survey, is expected to reach $9 billion, which is slightly lower than last year’s record-breaking forecast of $9.1 billion (the survey’s margin of error of 1.2%).  Fewer Americans are expected to participate in Halloween this year, 175 million versus 180 million last year, however, the average spend per person is predicted to be up modestly, from $86.13 to $86.79.  Most consumers will be focusing on costumes this year, as 68% of Halloween shoppers plan to purchase costumes, driving $3.2 billion of sales, according to the NRF survey.

Both economic and social factors are adding to Halloween’s momentum. First, the economy continues to head in the right direction, with unemployment at a 49-year low of 3.7%, and the final September reading of consumer sentiment exceeding 100.0 for only the third time since 2004. Second, Halloween continues to benefit from social trends. Halloween’s pageantry fits nicely with consumers’ increasing attraction to experiences (especially those that can be shared on social media). Millennials are also helping to fuel Halloween spending as they increasingly shower their pets with attention and seasonal gifts. According to the NRF survey, 20% of Halloween celebrants plan to purchase costumes for their pets this year, a proportionately large jump from last year’s 16%.

Recent trends in retail real estate are also supportive of Halloween spending. Increasingly, landlords are turning to pop-up stores to capture additional rental income, even if only for a few months. One of the largest of such pop-up retailers is Spirit Halloween, a seasonal retailer that offers Halloween decorations, costumes and accessories. This year, Spirit Halloween will have roughly 1,325 temporary locations across North America, an increase from last year. Spirit Halloween has expanded its physical footprint for the last 15 years, adding about 50 to 100 shops throughout the US and Canada per year.

Perhaps most importantly, while Halloween spending is still only just more than a rounding error compared to the greater Christmas/Winter holiday season, it can be viewed as a leading indicator for Christmas. Given the strength of the economy and supportive social trends, Halloween seems likely to deliver a treat this year, which could foreshadow jolly holidays to come.

 

 

Headlines of the Week

Sears files for bankruptcy; Eddie Lampert steps down as CEO

Sears Holdings filed for bankruptcy protection early Monday after years of staying afloat through financial maneuvering and relying on billions of CEO Eddie Lampert’s own money. Lampert, who has served as CEO for the past five years, will step down from that post, effective immediately, but remain chairman. The 125-year-old retailer, once the nation’s largest, said Monday it was appointing Mohsin Meghji, managing partner of M-III Partners, as its chief restructuring officer. As part of the bankruptcy, Sears will shutter 142 stores toward the end of the year. It expects to begin liquidation sales shortly. The locations of these stores wasn’t immediately known. The bankruptcy filing comes more than a decade after Lampert merged Sears and Kmart, hoping that forging together the two struggling discounters would create a more formidable competitor.

DSW, Authentic Brands team up to acquire Camuto for $375M

Authentic Brands Group and DSW on Wednesday purchased a majority stake in the intellectual property of the Camuto Group’s proprietary brands. Total consideration paid to the Camuto Group will be approximately $375 million, according to a DSW press release. DSW will contribute about $56 million to acquire a 40% stake in the intellectual property of Camuto Group’s proprietary brands (including Vince Camuto, Louise et Cie, Sole Society, CC Corso Como, Enzo Angiolini and others), and Authentic Brands Group will take the majority of 60%, the companies said. DSW will also contribute some $200 million to acquire all of Camuto Group’s global production, sourcing and design infrastructure, including operations in Brazil and China, a new distribution center in New Jersey, plus working capital of about $100 million. DSW said it will acquire licensing rights for the Jessica Simpson footwear business, the footwear and handbag licenses for Lucky Brand and Max Studio, and joint venture participation in Camuto’s ED Ellen DeGeneres and Mercedes Castillo brands.

 

 

Apparel & Footwear

Wilson family sells Kit and Ace to team led by CEO George Tsogas

The family of Lululemon founder and billionaire Chip Wilson has sold its Vancouver-based fashion chain Kit and Ace to the company’s CEO, George Tsogas, and four other executives for an undisclosed amount. The sale, which closed August 31, marks the end of a fanciful journey for the Wilsons, who founded the company with one store in July 2014 and went on an expansion spree that saw the company have 700 employees and 61 stores around the world less than two years later. Growing pains forced layoffs, and the company’s store count fell to 41 stores in March 2017. The next month the company announced that it would close all 32 stores located outside Canada and would retrench to nine stores within Canada. Tsogas is transitioning the brand away from technical cashmere and dressier garments, and primarily toward pants and other garments for cyclists and urban commuters.

Sneaker Startup Allbirds Takes Flight With $50 Million In Funding

Two years ago, Allbirds started with one type of shoe: a pair of superfine merino wool sneakers designed to be the most comfortable shoe on Earth.  In a world where the line between formal and casual has become increasingly blurred, Allbirds’ grey sneaker struck a note and sales took off—with over a million pairs sold in its first two years. Investors bought in too, and on Thursday the company announced it had raised an additional $50 million in funding from T. Rowe Price, Fidelity and Tiger Global, bringing the total raised to $77.5 million. The new funding round values the company at over $1 billion, according to a source familiar with the deal. The company’s signature product is made out of wool, but it has expanded into new styles and materials in the last year, beginning with a line of runners made from eucalyptus fibers that’s better for summer months when people might not want wool-covered feet.

 

Athletic & Sporting Goods

Lululemon once considered acquiring Under Armour

Lululemon founder Chip Wilson pulls no punches in a new tell-all book called “Little Black Stretchy Pants.”  In it, he claims that he met with Under Armour founder and CEO Kevin Plank to discuss an acquisition of the company by Lululemon in 2008.  Wilson writes that he ultimately decided against pursuing anything with Under Armour due to an experience he had at the meeting with Plank: “However, after a meeting with Under Armour CEO Kevin Plank in 2008, I couldn’t see Kevin’s macho philosophy working with that of the Super Girls,” he wrote in his book.

 

All those buzzy luxury sneakers are “irrelevant” to the market, says Adidas’s CEO

The influx of luxury brands into the sneaker business in the last few years has helped to solidify sneakers as status symbols, and on occasion, objects of obsession. New York Times writer Jon Caramanica described his eight-month search to nab a pair of Balenciaga’s colossal Triple S sneakers, which despite their $900 price tag, were constantly sold out everywhere he looked. Other sought-after shoes by labels like Louis Vuitton and Gucci are regular sights at fashion shows and anywhere street-style photographers flock for material.  But even as more luxury labels put out buzzy sneakers, they remain small-time players.

Cosmetics & Pharmacy

DOJ gives conditional approval to CVS merger with Aetna

The Department of Justice gave preliminary approval Wednesday for CVS Health’s acquisition of insurer Aetna, cementing a deal that could transform how U.S. consumers access health care. The two companies cleared their path to merge when Aetna announced Sept. 27 that it reached an agreement to sell its Medicare Part D drug plan business to WellCare Health Plans for an undisclosed amount. Regulators were concerned about the overlap between CVS’ and Aetna’s Medicare Part D plans. The Justice Department said that the divestiture was a condition to winning final approval.

WBA’s full-year results bring double-digit earnings growth

Walgreens Boots Alliance on Thursday shared its full-year sales results for its fiscal 2018. The company reported a sales increase of 11.3% for fiscal year 2018, bringing its revenue to $131.5 billion, with adjusted earnings per share growing 18% to $6.02. For the fourth quarter, the company’s sales were $33.4 billion, with adjusted earnings per share of $1.48. The company’s adjusted net earnings for the full-year rose 23.2% to $5 billion.

 

Discounters & Department Stores

Walmart acquires online intimates retailer Bare Necessities

Walmart has added a leading women’s lingerie brand to its growing brand portfolio. The discounter announced it is acquiring Bare Necessities, which offers more than 100,000 SKUs from more than 160 brands, including an extensive assortment of bras, swimwear, shapewear and sleepwear. The purchase price was not disclosed. “Intimates, a category that has been aggressively growing online, has complex sizing and highly specialized products,” said Denise Incandela, head of fashion, Walmart U.S. eCommerce. “Bare Necessities will bring deep category expertise, a content offering designed to educate intimates shoppers, as well as strong brand relationships and operational capabilities.”

 

Target Introduces Private Label Line of Inexpensive Essentials

Target will launch a private label collection of everyday essentials called Smartly, with most items costing less than $2. The assortment will arrive in stores on Oct. 14 and includes items such as hand soap, paper plates, household cleaners and razors. The retailer is creating new brands as one of three avenues for dealing with competition from Amazon and Walmart, according to Target CEO Brian Cornell. The other two are opening and remodeling new stores, and leveraging Drive Up delivery and Shipt same-day delivery services.

 

Grocery & Restaurants

Jack in the Box franchisee group calls for removal of CEO

A group representing a majority of Jack in the Box restaurants have called for the removal of CEO Leonard Comma and a restructuring of the chain’s leadership team. Jack in the Box National Franchisee Association said its no-confidence vote on Comma, who has been CEO and board chairman since January 2014, comes amid “unsustainable loss in sales and transactions.” The group represents 95 Jack in the Box franchise owners who operate about 2,000 of the brand’s more than 2,200 restaurants.

JAB vs. Starbucks coffee war continues with illycaffè deal

JAB Holding Co. is taking a bite out of Starbucks’ recent $7 billion licensing deal with Nestle. The German-based company, which owns Keurig Green Mountain and a slew of other coffee-centric brands, has entered into a licensing agreement with Italian coffee giant illycaffè to make a line of illy-branded aluminum capsules. JAB’s JDE division in the U.S. will produce and distribute the new capsules, designed for Nespresso machines. Nespresso is owned by Nestlé. In a deal cut with Starbucks earlier this year, Nestlé gained the rights to market, sell, and distribute the chain’s coffee and tea around the world.

Papa John’s stock rises amid new takeover rumors

Shares of Papa John’s International Inc. rose Tuesday morning on reports that Trian Fund Management LP was considering taking over the troubled pizza delivery chain. The Wall Street Journal, quoting “people familiar with the matter” reported that Trian, headed by activist investor Nelson Peltz, had requested information from Papa John’s so it could consider a takeover.

Shake Shack founder Danny Meyer leads investment in e-commerce site Goldbelly

When an unsolicited six pack of Ted Drewes Frozen Custard arrived at Shake Shack founder Danny Meyer’s door four years ago, he became nostalgic about his hometown. The package had been sent by Goldbelly, an online marketplace for regional and artisanal foods. This affection for Goldbelly persuaded Meyer to lead a $20 million round of Series B funding for the company through Enlightened Hospitality.

 

Kitchen United wins $10M investment led by Google Ventures

Kitchen United announced the closing of a $10 million series A funding round led by Google Ventures, a move that will accelerate planned growth for the self-described “virtual restaurant concept.” Launched in 2017, Kitchen United is a state-of-the-art commercial kitchen facility designed primarily to meet the needs of restaurant operators looking to build off-premise business. The shared facilities, for example, offer both kitchen space and infrastructure for restaurants to launch delivery-only concepts or to test their brand in new markets without making an investment in real estate.

 

Home & Road

FCA said to near sale of Magneti Marelli to KKR’s Calsonic

Fiat Chrysler Automobiles is nearing a deal to sell its car-parts unit, Magneti Marelli, to Calsonic Kansei after the Japanese company raised its bid, according to people with knowledge of the talks. Calsonic, an automotive supplier owned by private equity firm KKR & Co., and FCA have reached a tentative agreement on price and may announce an accord as soon as this month, said the people, who asked not to be identified as the discussions are confidential. Fiat and KKR are negotiating a valuation of more than 5.5 billion euros ($6.3 billion) including debt, they said.

Highlander Partners Announces Acquisition of SFERRA

Highlander Partners, L.P., a leading middle market private investment firm based in Dallas, Texas, announced the acquisition of SFERRA Fine Linens, LLC.  Founded in Italy in 1891, and headquartered today in Edison, New Jersey, SFERRA is a luxury linens and home lifestyle company, with a leading consumer brand known for design, textile innovation, trusted quality, and craftsmanship. SFERRA’s product portfolio today includes more than ten different categories, including bed, bath, table, and decorative accessories.  The SFERRA brand is known for its fine Italian craftmanship and for sourcing premium natural fibers from the foremost global resources to spin and weave its luxury goods.  The Company’s multi-channel distribution platform consists of over 800 home specialty boutiques, major luxury department stores, SFERRA.com, and select hospitality properties.

Tech retailer b8ta partners with Google

Consumers will soon be able to test Google’s smart home products before they buy them. Google is partnering with b8ta to open interactive, home-like vignettes in b8ta flagship stores in Houston; San Francisco; Austin, Texas; Corte Madera, Calif.; Tysons Corner, Va. The vignettes will also be rolled out in two upcoming b8ta locations due to open later this year, at The Mall at Short Hills, Short Hills, N.J., and Scottsdale, Arizona.

The stores will feature special demos of Google’s Home products placed in vignettes modeled after various rooms found in any home – from a living room to a kitchen – to allow shoppers to test different Google Assistant commands and see how the products work in a relatable environment.

Jewelry & Luxury

Ted Baker signs deal with Timex for new watch collection

Ted Baker has entered into a licensing agreement with watchmaker Timex Group, which will see it produce branded watches for the retailer. The new partnership is aimed at expanding the retail brand’s watch offering, and its new range will be sold across both Ted Baker’s global retail estate and Timex Group’s global distribution network next summer. Timex already manufactures watches for numerous retailers including Guess, Versace and Italian fashion brand Salvatore Ferragamo.

Pandora Debuts First New Charm Bracelet in 5 Years

For the first time in five years, Pandora has launched a new charm bracelet concept.  Bracelets in the Reflexions collection are crafted in a flexible, mesh-like style with charms that clip on via built-in silicone grips. As with all of Pandora’s charm bracelet offerings, the charms are interchangeable, allowing for customization. Reflexions bracelets are available in three different metal styles: sterling silver; what Pandora calls “Pandora Rose,” or 18-karat rose gold plating; and “Pandora Shine,” or 18-karat gold plated silver.

De Beers Jewellers Sees Sales Drop

De Beers Jewellers has pinpointed Asia as its area for expansion after global revenue fell last year, according to accounts the company filed at the end of September. Revenue dropped 6% to $98.6 million in 2017 amid a “more demanding customer environment,” the retailer said. Its net loss widened to $37.6 million from $12.1 million the year before due to an impairment charge — a permanent reduction in the value of an asset — and the impact of currency fluctuation. De Beers’ retail unit sells in various local currencies around the world, but reports in dollars.

Kay Jewelers Case Shows Power Of Social Media To Right Wrongs

If ever there was a case in the diamond jewelry industry that proved the power of social media to force retailers to move sharply to fix consumers’ complaints, then we saw it at the start of this week.  Requitta Darshae East who lives in Chicago used Facebook to criticize Kay Jewelers, part of the huge Signet Jewelers chain. The post gained enormous traction, especially after it was picked up and reported by media in the United States and elsewhere around the world.

 

Office & Leisure

How Canadian bookstore chain Indigo plans to compete against Amazon in the U.S.

In the age of Amazon, Borders is bankrupt, and Barnes & Noble is closing stores as sales decline, reportedly 6 percent in the first quarter of this year. But one Canadian bookstore chain is expanding to the U.S. anyway. Indigo’s first U.S. store opened this week in Short Hills, New Jersey, along with an in-store Café Indigo coffee shop. The company thinks it can make headway in the U.S. because of its lineup of exclusive products and its “store within a store” model to showcase different product categories. It’s also a fresh brand that avoids the legacy baggage of incumbent retailers and taps into the experiential, destination-style retail model that Amazon hasn’t quite cracked yet.

FAO Schwarz makes global push and plans return to NYC ahead of Christmas 

Toy retailer FAO Schwarz is making a massive global push ahead of this holiday season, just months after Toys R Us filed for bankruptcy and liquidated hundreds of stores across the U.S. It plans to set up a permanent presence in Canada and China and open pop-up shops in Spain, Australia and London. In the U.S., FAO Schwarz will return to New York, by opening a permanent flagship store at 30 Rockefeller Plaza on Nov. 16, marking its comeback in the city after shuttering its famed location on Fifth Avenue in 2015. In Canada, the toy retailer will open permanent but pint-sized shops of up to 1,000 square feet inside nearly 90 Hudson’s Bay’s department stores. In China, FAO Schwarz is working with Kidsland China — the country’s major toy retailer — to open two massive stores, in Beijing and Shanghai, next year. In London, FAO Schwarz has teamed up with Selfridges to open pop-up shops for the holiday season in two of the department store chain’s locations, with more in the works for 2019, the company said.

 

Technology & Internet

Google unveils Pixel 3 and Home Hub smart screen

Google is releasing an updated version of its high-end Pixel phone packed with new camera tricks, a Chrome OS tablet and its first smart-screen device with Google Assistant. Put another way: Google is taking on the iPhone, the Surface Pro and the Echo Show. The company announced on Tuesday the new Pixel 3, Pixel Slate and Google Home Hub.

US Postal Service seeks to raise package delivery rates 9.3% to 12.3%

The United States Postal Service (USPS) yesterday revealed a list of proposed rate hikes for fiscal year 2019 that would raise prices on the kinds of shipping services used by Amazon.com Inc. and other e-retailers. According to the proposal, rates for traditional parcel delivery—which applies to packages weighing more than a pound—would go up 9.3%, while the rates for lightweight packages would rise 12.3%. The changes come after months of pressure from President Donald Trump, who has been calling on USPS to dramatically increase the rates it charges Amazon for package delivery.

SAP takes aim at ‘pop-up’ e‑commerce

SAP SE is coming out with new e-commerce service the company is aiming at small- to medium-sized consumer goods manufacturers and merchants that want to quickly launch a “pop-up” online store. The service will be based on SAP Upscale Commerce, a software-as-a-service that SAP will initially make available in North America. SAP said it “was designed for the specific needs of mid-market accounts with limited budgets for software and implementation.”

 

Finance & Economy

Retail Stocks in Retreat Despite Strong Consumer Spending

Retail stocks sold off to multi-month lows, defying strong consumer spending driven by a surging U.S. economy and the lowest unemployment rate in decades. The twin headwinds of rising wages and falling margins are to blame, dropping this recently resurgent group into an intermediate correction. Unfortunately for shareholders, adverse forces are likely to grow well into 2019, affecting sector leaders and laggards alike.

Stock sell-off isn’t the start of a bear market, analysts say

The sell-off isn’t the start of a major or prolonged bear market, but rather, simply a correction, experts said.  Markets over several days plunged last week, with U.S. stocks posting their worst two-day stretch in eight months. The three major indexes — the Dow, the S&P 500 and the Nasdaq Composite — all fell more than 5 percent between Wednesday and Thursday.  “The sharp sell-off we are seeing in the market has left a lot of folks wondering if this is the beginning of the end. Investors shouldn’t panic,” said Christopher Smart, head of macroeconomic and geopolitical research at Barings.  “So far, it has the feel of a temporary correction that will take some of the excess air out of tech stocks,” he said.