October 22, 2018 Consensus

The Weekly Consensus – October 22, 2018 (Volume 10, Number 40)

The Big Story
Furniture, Flagships, and the Future
Paul Alexander, CFA


The Restoration Hardware catalog arrived at my house last week, and as usual, it contained hundreds of pages of high-end furniture and décor items. However, the page that I found most interesting didn’t have any product on it at all. This season’s book leads off with a short letter from Gary Friedman, the Chairman and CEO of RH (the acronym that Restoration Hardware has been using in recent years as part of a subtle re-brand). Entitled “The Death of Retail Is Overrated,” Friedman’s letter outlines his vision for RH’s stores and makes an optimistic case for the future of physical retail. The letter announces a new 90,000 square foot RH flagship in New York City, complete with multiple galleries, an art installation, and a restaurant, and suggests that compelling stores such as this one are the future of retail. Friedman likely doesn’t mean for all retailers to interpret his letter as strategic real estate and merchandising advice. But since he doesn’t explicitly warn against that, let me do it for him: flagships and expensive experiential retailing are not for everyone.

While the title of Friedman’s letter and some of the arguments within contain generalizations about retail as a whole, the letter is truly written from the viewpoint of RH. Which is why not everyone should adopt RH’s strategies – because not everyone in retail is RH.

First, not everyone has a strong brand. Near the end of Friedman’s letter, he calls the new RH flagship a retail experience. I believe that sells the store short. It is a brand experience. Everything in the store not only influences shoppers to buy in the moment, but its grandiosity and sophisticated aesthetic also serve to elevate RH in the mind of the shopper. It helps to reinforce the brand’s perceived quality and taste level. This can drive purchases of RH product and reduce price sensitivity both in the moment, and for years to come. This is wonderful for a company that relies on its brand to drive purchases, but for retailers who compete on value or convenience, such a brand-building approach to retailing is unnecessary and expensive. Don’t expect to ever find a 90,000 square foot 7-11 or a Costco flagship.

Second, flagships deliver the biggest impact for vertically integrated brands with their own distribution, but not all brands follow that model. For RH, if a flagship store successfully influences a shopper to become a lifelong customer, that person can only buy RH products in the future through RH’s stores and website. For a retailer that carries collections of broadly distributed brands, if a flagship creates a connection for a shopper and one of those brands, future purchases may happen elsewhere, diluting the store’s return.

There is a lot to agree with in Friedman’s letter: there is something immutable about people’s desire to congregate as social animals, and there is something tangible about physical retailing that can be more engaging than the web. These are strong arguments that support RH’s reasoning for opening such an impressive store. But flagship stores make a lot more sense for RH than they do for many retailers and brands. While RH may feel like they’ve cracked the code to the future of retail, many other companies need to keep searching for their own formula.


Headlines of the Week

Perry Ellis shareholders vote in favor of founder, to go private

Perry Ellis International shareholders on Thursday voted in favor of founder George Feldenkreis’ $437 million bid to take the Doral-based company private. Feldenkreis’ son, Oscar Feldenkreis, currently serves as the company’s president and CEO. The board of directors unanimously agreed to Feldenkreis’ offer – $27.50 a share – in June, and agreed to go private under his management. His deal, subject to regulatory approval, is expected to close this year. After fleeing Cuba, Feldenkreis launched Perry Ellis as Supreme International Corp. in Miami 50 years ago. In 1999, the company acquired the Perry Ellis brand and changed its name to Perry Ellis International.


Amazon US Prime membership growth slows

Is Amazon Prime maxing out? The e-commerce giant’s rewards club, which offers paying members two-day free shipping on millions of items and streaming video programs, grew just 8% over the past 12 months to 97 million U.S. subscribers, according to CIRP, the slowest pace since the research firm started tracking membership in 2012.



Apparel & Footwear

David’s Bridal flirts with possible bankruptcy after skipping debt payment

The nation’s leading wedding retailer is flirting with the possibility of bankruptcy protection, which often involves some store closures, after skipping a key debt payment.

David’s Bridal, whose tight grip on the wedding business has loosened in recent years amid digital competition and declining marriage rates, failed to make a key loan payment last Monday. That move served as a warning to creditors that the company is barreling toward a restructuring effort of some kind. Failing to make a debt payment is often a precursor to filing for Chapter 11 bankruptcy protection. There’s a “very high likelihood” of bankruptcy or a consensual debt restructuring for David’s Bridal, said Mathew Christy, an S&P Global Ratings analyst who tracks the retailer.


Athletic & Sporting Goods

A Resurgent Nike Is Good for Foot Locker. Until It Isn’t

Foot Locker has been one of the biggest beneficiaries of a resurgent Nike. But is the shoe retailer poised to stub a toe?  Only last month, Nike executives said their work with Foot Locker—among other partners, including Amazon.com — was vital to its growth. That’s a good thing.  But Nike, like many brands, wants to sell more goods directly to the consumer. That could mean trouble for Foot Locker if Nike and other top brands don’t see it as an indispensable way to connect with shoppers.


NBA Apparel: Puma re-enters the basketball world

Puma has been MIA in the basketball world for more than 18 years, but recently they’ve gotten back into the game. Last spring, the company made its first move in signing several incoming players around NBA Draft night, and earlier this week, Puma pulled the trigger and signed their first All Star in DeMarcus Cousins.  In addition to signing NBA players to represent the brand, Puma also released their first basketball sneaker since 1999.


Cosmetics & Pharmacy

Walgreens, McLaren Health Care Partner on Rx, Health Service

Walgreens and Michigan-based health network McLaren Health Care announced that they will work together on a strategic collaboration with a focus on health services and pharmacy offerings. Through the partnership, McLaren said it planned to open various health service offerings inside Walgreens locations throughout Michigan, including retail clinics, urgent care centers and primary care sites. In addition, McLaren’s health service offerings, as part of the agreement, and Walgreens will operate some select onsite pharmacies, purchasing the prescription files and inventory of McLaren pharmacies in Michigan. As part of the purchase, McLaren Health Plan members will be able to access Walgreens prescription services at any of the Walgreens-owned pharmacies or any Walgreens store.

Unilever Third-Quarter Sales Growth Picks Up With Prices

Unilever, which dropped plans to move to the Netherlands this month after British investors rebelled, reported a pick-up in third-quarter sales, as it was able to pass on higher commodity costs to consumers. The Anglo-Dutch maker of Dove soap and Ben & Jerry’s ice cream did not give an update on its thinking about simplifying its dual-headed structure beyond saying it would take time to fully digest shareholder feedback after the backlash against the Netherlands move. Unilever said underlying sales rose 3.8 percent in the third quarter.

Discounters & Department Stores

Walmart saves $200 million by changing its light bulbs and $20 million with a new floor wax

The multiplying power of size makes it easy to save big money on little changes.

Imagine saving millions of dollars just by changing light bulbs and floor wax. It’s exactly what Walmart is doing. “We are in the process of a multiyear rollout of replacing all fluorescent fixtures with LEDs in our stores, clubs and parking lots,” Chief Financial Officer Brett Biggs told analysts Tuesday at the retailer’s investor day at its headquarters, in Bentonville, Arkansas. “Not only is it good for the environment, these changes could reduce our annual energy costs by $200 million over time.”

Macy’s Expands VR Furniture Shopping To 70 Stores

While virtual reality has struggled over the years to reach a mass consumer marketplace, it may be finding a warmer welcome in retail. Macy’s is launching what it says is the largest virtual reality rollout in retail history, with 70 of its stores now with VR implementations, with another 20 to follow in January. The HTC Vive VR headsets are being used for Macy’s furniture, with shoppers able to visualize their spaces with the side benefit of allowing Macy’s to offer a larger range of furniture in a dramatically smaller space.


Thriving Off-Price Retail: Ross Continues National Expansion, Opens 40 New Stores

Off-price retailer Ross Stores is bucking the trend of shuttered stores plaguing the department store segment by pursuing a massive national expansion. The Dublin, California-based chain opened 40 new stores in September and October, completing its 2018 target to open 99 new locations. The new stores consist of 30 Ross Dress for Less locations and 10 dd’s Discounts stores across 19 states. In August the company increased its long-term store count goal from 2,500 stores to 3,000 stores. At present its portfolio includes 1,500 Ross stores and more than 230 dd’s Discounts locations, Retail Dive reports.

Why Sears bankruptcy will be bad for J.C. Penney

Struggling J.C. Penney best brace for an avalanche that has been set in motion by the death of longtime foe Sears. Sears, which filed for bankruptcy protection last Monday, will soon begin liquidation sales at 142 locations as a means to raise cash to pay back creditors. The liquidation sales – ranging from sweaters at Sears to toys at Kmart – will likely cause shoppers to check out the stores for hot deals. That traffic spike at Sears and Kmart could lead to fewer customers this holiday season wandering the aisles of J.C. Penney. To combat Sears’ rock-bottom liquidation prices, J.C. Penney could be forced to respond with its own cut-rate prices.



Grocery & Restaurants

Instacart lands $600 million in financing

Instacart is looking to a new round of funding to fuel its momentum in the on-demand grocery delivery arena. San Francisco-based Instacart said Tuesday it has landed $600 million as part of a financing round led by hedge fund D1 Capital Partners. The e-commerce company has raised more than $1.6 billion in funding since its launch in 2012, and the latest financing lifted its valuation to $7.6 billion. The new capital will be funneled toward additional expansion in North America — with new plans to build a Canadian technology hub — along with marketing investments to boost awareness of its service at grocery stores and recruit engineering and product development talent.

McDonald’s operators move to form franchisee association

Following a first-of-its kind gathering of more than 400 U.S.-based McDonald’s franchisees last week, a group of operators moved one step closer to forming a self-funded alliance to represent their interests with the Chicago-based company. The group, called the National Owners Association, is an “owners advocacy group” that aims to “work with McDonald’s to positively impact the system,” according to its website.

Home & Road

Advance Auto Parts Will Drive Onto Walmart.com

Walmart has unveiled a partnership with Advance Auto Parts to create a specialty auto parts store on Walmart.com. The online store will sell common auto parts and accessories, including tires, lube and battery services, both online and in the 2,500 Walmart Auto Care Centers nationwide. The retail giant already has built flagship online stores for Lord & Taylor and Moosejaw. The Advance Auto Parts partnership comes on the heels of two major acquisitions for Walmart: plus-size fashion retailer Eloquii and intimates retailer Bare Necessities. But unlike these acquisitions, the Advance partnership includes brick-and-mortar elements.

Helen of Troy Sees Double-Digit Growth in Housewares, Health and Home in Q2

Helen of Troy reported a 14 percent increase in Q2 sales to $393.5 million. The company increased its outlook for housewares growth, including OXO and Hydro Flask this year after sales increased 19.4 percent in the second quarter ended Aug. 31, to $137.5 million, attributing its growth to higher sales of housewares and health and home in the club channel, an increase in online sales, new product introductions, an increase in certain customer inventory levels compared to the prior year and a higher mix of Hydro Flask sales. These factors were partially offset by lower international sales. Housewares net sales growth is expected to hit 11 percent, compared to an earlier predicted 9 percent.

Jewelry & Luxury

Maybe the Jewelry Industry Isn’t Shrinking, It’s Changing

We have all seen the numbers that say that the U.S. jewelry industry is shrinking.

In the third quarter of 2018, the Jewelers Board of Trade (JBT) found that 226 U.S. jewelry businesses closed and only 51 opened. Those numbers are roughly even with last year’s and show that the industry continues to consolidate. And yet, there might be more going on than meets the eye. When I spoke at the Portland Jewelry Symposium a few weeks back, my presentation featured similar stats. Afterward, Eric Braunwart, owner of Columbia Gem House, made an intriguing point: Lately, he’s been contacted by a lot of young jewelry designers and retailers, who generally seek him out since his company deals with responsibly sourced and Fair Trade gems. He’s found that most of them aren’t listed on standard industry references like the JBT.

De Beers warns that weak rupee may take sparkle out of diamond sales

The latest rough diamond sales from De Beers, the world’s largest source of rough diamonds by value, put it on track to match or beat the full-year sales for 2017, but weakness in the rupee could derail sales. De Beers, which is 85%-owned by Anglo American, said it had achieved sales of $475m for the eighth of 10 annual sales during the month to October 12. De Beers holds large four-day sales events in the Botswana capital of Gaborone called sights, but it does sell diamonds between those events.

In the seventh sales cycle of 2018, De Beers recorded revenue of $503m.

LVMH expands storytelling initiative to the US, through Benefit and Sephora

In the digital age, intimacy and authenticity are often resounding ideals of a brand’s social media strategy — but it’s still rare for the general public to meet a brand’s creative team or go inside a company workshop in real life. On October 12, 13 and 14, Benefit Cosmetics and Sephora were among the first U.S. brands to participate in “Les Journées Particulières,” an initiative from French luxury goods conglomerate LVMH meant to allow people inside the company’s many “maisons” to more intimately understand and appreciate brands such as Christian Dior, Givenchy and Louis Vuitton.

U.S. Government, Lazare Kaplan to Fund Botswana Diamond Cutting

Another $125 million loan guaranty has been pledged to boost diamond cutting and polishing in Botswana. The loan is backed by New York City diamond manufacturer Lazare Kaplan (LKI), the U.S. government’s Overseas Private Investment Corp. (OPIC), and Stanbic Bank Botswana. It is meant to drive local development and to help Botswana diversify its largely diamond-based economy. Lazare Kaplan, OPIC, and a different bank—Barclays—previously supported a different $125 million loan guaranty in 2016. OPIC hopes to provide the country’s cutting and polishing sector with $333 million over a 13-year horizon.


Office & Leisure

Radio Systems Corp. Acquires Kurgo

Radio Systems Corp., makers of the PetSafe, Invisible Fence and SportDOG brands, has acquired Motivation Design LLC, makers of Kurgo pet products. Based in Salisbury, Mass., Kurgo has a portfolio of highly functional and easy-to-use pet travel products that allow families and pets to experience outdoor travel and adventure together. “The acquisition of Kurgo will enable Radio Systems to expand our reach to customers seeking adventure outside their home,” said Willie Wallace, CEO of Radio Systems Corp. in Knoxville, Tenn.

“Our customers tend to focus on spending more quality time with their pets, which includes bringing their dog on outdoor adventures with them. Kurgo’s passion for adventure pet products is in sync with the PetSafe brand’s mission to help pets and their owners live happy lives together.” “We are excited about this new chapter for Kurgo products,” said Gordie Spater, Kurgo’s co-founder.


Welcome to the first holiday season without Toys R Us

One week before Thanksgiving, FAO Schwarz’s signature toy soldiers will stand at the ready to ring in the holiday season. Three years after closing its Manhattan flagship store, the iconic toy seller is back in New York City — complete with more than 20,000 square feet of toys, games and dolls. Of course, FAO’s new location in Rockefeller Center isn’t the only place you can pick up its piano dance mat or a model bumper car set. At Macy’s in downtown Washington, FAO-branded toys were piled high in a holiday display that was up weeks before Halloween. Some toy makers are debuting new stores this fall and building partnerships with other chains, while at the same time, retailers and discount stores are expanding their wares. In the wake of Toys R Us’ demise, for example, Ollie’s Bargain Outlet bought nearly $200 million of toys from suppliers left with excess inventory, and plans to sell them at “up to 75 percent off the fancy stores’ price.”

Technology & Internet

eBay accuses Amazon of illegally poaching its sellers

eBay has officially filed a lawsuit against Amazon, accusing the e-commerce giant of hatching a scheme to poach its biggest sellers. The platform first threw down the gauntlet in early October, sending its rival a cease-and-desist letter. According to eBay, at least 50 Amazon reps from all over the world, including the US, UK, France, Spain, Italy, Australia and Singapore, used the company’s direct messaging system to contact hundreds of its high-profile sellers in an effort to convince them to switch platforms. eBay’s lawsuit also said that Amazon coordinated those efforts from its headquarters, seeing as a lot of the accounts were created from an Amazon IP address.


H&M Backs AI-Powered Men’s E-tailer Thread

The corporate venture arm of Swedish fast fashion behemoth H&M Group, dubbed H&M CO:LAB, has just funneled $13 million into London-based e-tailer Thread as part of a $22 million Series B investment in the start-up, which uses artificial intelligence to power an online personal styling service selling premium-priced men’s fashion. For H&M CO:LAB, transactions typically range from $1 million to $20 million and have included investments in sustainable fashion upstarts like Renewcell and Worn Again; digital retailers like Thread and Sellpy, a used clothing marketplace; and technical solutions like Klarna, a digital payments start-up.


Qurate combines HSN and QVC into the newly named QXH

Qurate, No. 11 in the Internet Retailer 2018 Top 500, acquired TV and web retailer HSN and its brands in mid-2017 for $2.1 billion. Now, it is combining HSN and QVC U.S. into a new business unit called QXH. HSN and QVC U.S. together generated $8.5 billion in revenue in 2017, garnered more than 1 billion visits to its websites and shipped more than 170 million items, Qurate says. The following retail brands now operate under Qurate: TV and web retailer QVC Inc. and flash-sale site Zulily.com, as well as HSN and Cornerstone Brands, which include Ballard Designs, Frontgate, Garnet Hill, Grandin Road and Improvements.


Finance & Economy

U.S. retail sales increase modestly; consumer spending strong

U.S. retail sales barely rose in September as a rebound in motor vehicle purchases was offset by the biggest drop in spending at restaurants and bars in nearly two years.  But other details of the report from the Commerce Department were upbeat and suggested that consumer spending ended the third quarter with strong momentum, which should provide a boost to economic growth despite anticipated drags from weak exports and a struggling housing market.


Housing market slows as prices and rates rise

Denver epitomizes the slowdown taking hold this year in the nation’s housing market as mortgage rates climb, home prices rise and the new tax law limits the benefits of ownership. While housing is still largely a seller’s market, it’s becoming less so and the playing field should be roughly balanced between buyers and sellers by mid-next year, says Ralph McLaughlin, chief economist of research firm Veritas Urbis Economics.