October 29, 2018 Consensus

The Weekly Consensus – October 29, 2018 (Volume 10, Number 41)

The Big Story
A Big Month for the Fledgling Legal Cannabis Industry
Michael A. O’Hara

A momentous month for legal cannabis began a few weeks ago, with an edition of Entrepreneur magazine that featured a 28-page special section on tips for operating in the industry. Included among the content covering cannabis-specific software platforms, packaging options, biogenetics, delivery services and branding advice, the section contained ads for a new investment fund for “blue chip cannabis companies” from Sol Investments, a cannabis-focused law firm, and a line of Cannabidiol (CBD) products bearing the name of licensing magnate Kathy Ireland.  All are signs of the emerging acceptance of the legitimacy of the estimated $6 billion market for legal cannabis products.

Halfway through the month (October 17), Canada became the second nation in the world to legalize recreational marijuana.  But this doesn’t mean our neighbors to the north are planning on radically changing their consumption habits.  As cited in the Huffington Post, “Statistics Canada found that, out of 5,000 people polled, 82 percent said they would be ‘unlikely to try cannabis or to increase their consumption with legalization.’” Further, while this act removes much of the criminalization previously associated with the substance, as with American states that have legalized it, Canada’s national government left much of the rule making to its provinces, who can restrict how it is sold and consumed.  As a result, the product will not be flooding the market immediately but instead will gradually find its way into the mainstream.

While most first movers in the category thus far have been small businesses, some big corporations are considering major moves into the space, particularly in CBD products – products that incorporate some of the anti-inflammatory and pain relief features of cannabis without producing a high for the user.  Bloomberg reported this month that Coca Cola is considering a CBD infused beverage, and Walmart, which already sells hemp oil products online, is reportedly considering selling CBD products in its Canadian stores now that the product is legal.

Finally, last week, alcohol industry giant Constellation brands sent shockwaves through the industry by announcing that it would sell a portfolio of its leading wine brands in a deal that could fetch in the neighborhood of $3 billion so that the company can invest in other areas, including cannabis.  Indeed, Constellation recently invested $3.8 billion to grow its stake in the Canadian publicly-traded marijuana business Canopy Growth to nearly 40 percent.  This makes good business sense for the owner of Corona beer: “an A.T. Kearney survey this month found that more than one-quarter of North American beer drinkers would swap booze for marijuana,” as reported by S&P Global Market Intelligence.

The growth of the industry in the U.S., however, remains constrained by cannabis’s treatment under federal law.  As a so-called “Schedule 1 drug” under the Controlled Substances Act of 1970, cannabis is deemed by the federal government to be a dangerous drug without meaningful benefits.  As such, and notwithstanding its de-criminalization under the laws of many states, businesses are not immune from federal prosecution for selling most products containing cannabis.  These rules may change in the near- or medium-term, however, as several congressmen have introduced legislation to regulate cannabis similarly to the way alcohol is regulated.  The consumer interest in the product, the entrepreneurial fervor around the category and recent investments by big business will likely apply pressure to federal lawmakers over time.  A deal at the federal level on regulating cannabis coupled with the increasing preparedness of state governments and businesses should allow for a controlled and professionalized growth opportunity within this space.

 

Headlines of the Week

Target’s battle plan for the holidays: Free two-day shipping, more staff and toys

Target for the first time ever will offer free, two-day shipping with no minimum purchase required this holiday season, in a bid to win shoppers over rivals like Walmart and Amazon. The retailer said Tuesday that starting Nov. 1 and running through Dec. 22, “hundreds of thousands of items” will be eligible for free, two-day shipping on Target.com. In March, it began offering the perk to its credit card holders or for those orders over $35.  Also this holiday season, Target said its “Drive Up” service — where shoppers can place their orders online and have them brought directly to their cars — will be at nearly 1,000 stores, ahead of a planned rollout schedule.

Amazon plunges 10% on revenue and guidance miss

Amazon’s third-quarter earnings beat Street estimates, but its revenue and fourth-quarter outlook fell short of expectations. Amazon shares plunged 10 percent in premarket trading Friday to $1,600 a share. At this rate, it will be the stock’s biggest decline since January 2014.

 

Apparel & Footwear

French Connection in talks with several parties over sale of company

French Connection said it has begun discussions with four interested parties regarding a sale of the British clothing retailer. The company, which announced last week that it was reviewing all strategic options, said it has also had conversations with several other interested parties regarding its plans. French Connection, which was founded by Chief Executive Officer and Chairman Stephen Marks in 1972, has a market capitalization of over 51 million pounds ($67 million). Once known for its provocative FCUK brand of clothes and accessories, the company has been in the red for six years. In March, it said it was close to turning profitable, adding that it would consider resuming dividend payments when it did. French Connection said in a statement that it expects the strategic review, including the formal sale process, to conclude during the first half of 2019.

Indochino offers installment plans, faster delivery

Menswear brand Indochino has tapped fintech startup Klarna to help launch flexible-term installment plans so customers can pay for purchases over the course of six to 36 months. The platform offers real-time approval after a four-step application process that keeps customers on the retailer’s website, rather than re-directing them elsewhere. Indochino also announced a new two-week delivery promise on purchases, cutting its previous delivery guarantee by one week, with the aim of enhancing the customer experience.

Shares in shoemaker soar on death of matriarch Wanda Ferragamo

The death of Salvatore Ferragamo’s widow has sent shares soaring in his eponymous company amid speculation her successors may sell their stake in the business. The company’s value peaked in 2015, and has been on a downwards trajectory since May last year. Wanda Ferragamo, the Florentine shoemaker’s matriarch, died aged 96 on Friday. She was widowed 58 years ago, taking over her husband’s shoemaking business and growing it into an international brand. The company was listed on the Milan exchange in 2011, but Wanda Ferragamo kept 19.5 per cent of the voting rights, while a further 15 per cent needs to be re-allocated after her daughter Fulvia died earlier this year. Salvatore Ferragamo was founded in 1920s Florence, making and selling ladies footwear.

 

Athletic & Sporting Goods

Puma Lifts Outlook as Basketball Launch Goes Well

German sportswear firm Puma raised its outlook for full-year sales and operating profit as it reported strong sales growth in the Americas and Asia and said its first basketball shoe in 20 years had been well received.  Puma saw sales rise almost 16 percent in the Americas in the quarter and 23 percent in Asia, showing little of cooling in the region even as concerns grow that a trade war between Beijing and Washington will curb spending by Chinese shoppers.  Puma has revived its fortunes in recent years by putting a big focus on soccer and running, while partnerships with celebrities like singers Rihanna and Selena Gomez have boosted its popularity among women.

A New Option for N.B.A. Prospects: The Million-Dollar Intern

Darius Bazley, a top basketball prospect, is skipping college and charting a new path for draft prep: earning $1 million as an intern for New Balance.  The internship, to be precise, is folded into a handsome shoe contract Bazley, 18, has landed with New Balance on the lure of his pro potential. Bazley’s multiyear deal will pay him $1 million “no matter what happens” with his N.B.A. career — and can pay up to $14 million if he reaches all performance incentives.

 

Sporting Life and Golf Town to merge, but continue operating separate stores

Fairfax Financial Holdings Ltd. says it is merging its Sporting Life Inc. and Golf Town Ltd. brands.  The Toronto-based company says the two sporting goods retailers will operate separately with their own branding and management teams, but will make joint investments in technology, staffing and their supply chains.  Fairfax and Signature Global Asset Management, a division of CI Investments Inc., acquired Golf Town and its 47 stores in 2016.  A handful of Golf Town locations have shut down in recent years, but Sporting Life has grown to operate 11 stores in Ontario, Quebec and Alberta and says it is eyeing additional locations in British Columbia and Manitoba.

Head Impact-Monitoring Mouthguard Maker Prevent Biometrics Buys X2 Biosystems Technology

Prevent Biometrics, the Edina startup making data-gathering mouthguards for contact sports, has purchased technology assets of X2 Biosystems, a fellow impact monitoring technology company out of Seattle.  With the technology assets it’s acquiring of X2, Prevent Biometrics will hold nine U.S. patents and a dozen international patents related to measuring and displaying head impacts for coaches, doctors and parents. Both companies have been developing an interface for its users to measure head impacts on the field through products worn by athletes.

 

Cosmetics & Pharmacy

RB, Walmart and Doctor on Demand Partner on Promotion

Walmart, Reckitt Benckiser and telehealth service Doctor on Demand have teamed up on an effort aimed at making healthcare more accessible. This fall, Walmart shoppers who buy such RB brands as Mucinex, Delsym, Airborne or Digestive Advantage online or in-store will receive a limited-time offer for a no-cost Doctor on Demand consultation.

“This initiative is a big first step in delivering on RB and Walmart’s shared purpose of unlocking every American’s right to healthier lives,” said Gregory Chabidon, chief medical officer USA of RB’s health unit.

 

Discounters & Department Stores

Sears’s Losses Could Become Its Most Valuable Assets

The losses that drove Sears Holdings Corp. into bankruptcy could end up being a valuable multibillion-dollar asset because of tax breaks — especially for its most notable creditor and Chairman, Eddie Lampert. As of the retailer’s bankruptcy on Oct. 15, Sears estimated it had net operating losses it could use to offset $5 billion of future taxable income, and separate tax credits of around $900 million. These are the most valuable assets Sears has, and under U.S. tax law, they could disappear in bankruptcy if another company or investor takes the company over.

Walmart Doubles Down on Its Transformation into A Technology Company

At this past June’s Walmart Associate and Shareholders Meeting, CEO Doug McMillon continually referred to Walmart as a “technology company.” That had many people scratching their heads saying, in effect, Walmart is not Microsoft, Google or Amazon, for heaven’s sake. MIT Technology Review asked, “Walmart wants us to believe it’s turning into a tech company?” Doubters need to step down. Walmart has partnered with two of those tech leaders – Microsoft for cloud computing and Google for voice-activated shopping – and made a number of acquisitions and investments to elevate its ecommerce platform, along with investments in in-store automation that will eventually enhance operations efficiency within its nearly 5,000 stores.

 

 

Grocery & Restaurants

Starbucks cafes in Europe to be operated by Alsea

Starbucks has struck a deal with its longtime Latin American business partner Alsea, S.A.B. de C.V., to take over 260 company and franchise stores in Europe. The deal calls for Alsea to take over operations of 83 company-owned stores in the Netherlands and France. Alsea will also assume operations of 177 franchise stores in Belgium, Luxembourg, France and Netherlands. The unloading of the company-owned European cafes, which reduces overhead costs for the chain, comes as Starbucks is facing pressure from shareholders amid sluggish sales.

Schnatter asks Papa John’s to amend ‘poison pill’

Amid speculation that buyers are seeking to take over Papa John’s International Inc., founder John Schnatter has asked that the chain’s current management revise the “poison pill” provision in a plan issued on July 23 that prevents him from working with potential buyers. The measure would drastically increase the price of a hostile takeover. In a letter dated Oct. 18, Schnatter requested that what he called the “Acting in Concert” provision be removed, indicating that it violated the laws of Delaware, where Papa John’s is registered.

Brandless wants to create the next great consumer packaged goods brand — but it hasn’t built customer loyalty yet

When Brandless launched in the summer of 2017, it aimed to disrupt the $760 billion U.S. consumer packaged goods industry by offering low-cost, high-quality home products and non-perishable foods. So far, that disruption hasn’t been felt by major CPG retailers. The startup now sells more than 350 “better-for-you” products, ranging from non-GMO gummy candy to stainless-steel can openers, most priced at $3. Thus far, Brandless doesn’t have a notable market share in any of its product categories. Perhaps more importantly, people who do buy from Brandless don’t seem to be purchasing from them again at the same rate as some of its competitors.

Home & Road

Wayfair Launches Membership Program

Wayfair Inc. has joined the club—the membership club, that is—with the launch of MyWay, a new membership program that costs of $29.99 annually and offers access to insider sales, discounts on installation and assembly services, and free shipping and next-day delivery. MyWay is available to Wayfair customers in the U.S. and its benefits can be applied when shopping Joss & Main, AllModern and Birch Lane. MyWay is also available at Wayfair.ca with benefits specifically tailored to Canadian customers. The free shipping has no order minimums. There is also free next-day shipping on “thousands” of items, the company said. MyWay members also receive 25 percent off in-home Services such as assembly, installation, and upgraded delivery options including “Room of Choice” and “Full Service Delivery.”

 

Trends Evolve at Tabletop Show

Tabletop color and design trends deepened and evolved but did not break new ground during the New York Tabletop Show last week. The color palette has morphed slightly but not shifted dramatically. Pastels continue to roll out (in an array of eye-catching midcentury shapes by Gibson, and in matte melamine from PTS), while blush and pale pink persist (with introductions by Gibson, Porcel, iittala and Godinger, among others.)

Design motifs in dinnerware and glassware were heavily geometric and optic, with several spirals thrown in for good measure. Another strong theme is eclectic global, best evidenced in Lenox’s expansive new Global Tapestry collection which is artisanal and eclectic and offers a melting pot aesthetic.

Jewelry & Luxury

Rosy Blue, Vijay Gold Worry Sears Will Sell Consigned Goods

Sears Holding vendors Rosy Blue and Vijay Gold have filed limited objections to the bankrupt company’s motion to liquidate 142 stores, arguing the plan is unfair to vendors that have provided merchandise on consignment. Sears’ proposal to liquidate all the inventory at those stores, whether it owns the inventory or not, does not respect the right of companies with consigned merchandise at those retailers, argue the objections from Rosy Blue and Vijay Gold, the business name for Shanti Corp.

Analysis of the Majors: Losing Middle Ground

By all indications, 2017 was a strong year for the watch and jewelry industry in North America, but not all retailers shared in the wealth. In this analysis of National Jeweler’s exclusive “$100 Million Supersellers” and “Top 50 Specialty Jewelers” lists, we examine what separates the retailers that saw sales climb and expanded operations from those headed in the opposite direction. According to the U.S. Commerce Department’s Bureau of Economic Analysis, Americans spent some $76.85 billion on watches and jewelry last year, up 5 percent from the $73.2 billion spent in 2016.

 

Squirrel Spotting: Who Needs Jewelry?

Buying jewelry makes absolutely no sense on a rational level. Even if customers had better transparency about why things cost what they cost, the idea that they pay thousands of dollars for jewelry just boggles the mind. Or does it? Why do people buy jewelry? For that matter, why do they buy timepieces or quality writing instruments? Is it to signal that they are “in a relationship?” To “tell time?” To “write their grocery list?” Of course not. We buy jewelry because the act of shopping itself ignites a neurological reward system in our brains that makes us feel good. Really good. Chocolate good.

 

Office & Leisure

Mattel Gets a Boost from Barbie

Mattel reported strong sales in the third quarter for its biggest brand — Barbie. Sales grew 14% worldwide from a year ago. But total sales fell 8%, dragged down by a decline in demand for its toys in China and Europe, the company said Thursday. Sales fell 18% outside of North America but grew at home at their fastest rate since 2015. Mattel and other big toy makers have been struggling in recent years as kids shift their interest to games on smartphones and tablets as well as other high-tech toys. Ynon Kreiz, chairman and CEO, said Mattel has made “meaningful progress” to becoming more profitable. He said the company is on track in an industry being driven by technology. Mattel’s strategy is focused on getting the most out of its “iconic brands” and its intellectual property.

Barnes & Noble Appoints Financial and Legal Advisors as It Explores Sale

A few weeks after announcing its intention to explore a sale, Barnes & Noble has started making moves. On October 3, the company announced its board of directors had formed a special committee tasked with “evaluat[ing] strategic alternatives for the Company” after receiving “expressions of interest from multiple parties” interested in buying the troubled bookseller. The announcement indicated that the appointment of legal and financial advisors by the committee would follow. The B&N special committee has now announced these appointments (Baker Botts L.L.P. for the former and Evercore for the latter). Notably, the announcement of the special committee’s formation included the information that the company’s chairman–and founder–Leonard Riggio is apparently interested in making an offer himself, though he “has committed to support and vote his shares in favor of any transaction recommended by the Special Committee.” The announcement also indicated that there’s someone out there gunning for a hostile takeover; as a result, the board adopted a poison pill.

Technology & Internet

11.11 Turns 10: Alibaba Kicks Off 2018 Global Shopping Festival

Alibaba Group on Friday launched the monthlong celebration of its 11.11 Global Shopping Festival in Beijing, saying this year’s 10th anniversary event will be the largest-ever in scale and reach. This year, 180,000 brands from China and around the world will participate in 11.11.

 

Finance & Economy

US economy grows at fastest back-to-back pace in 4 years, boosted by solid consumer spending

The US economy grew at a faster rate than expected in the July-September quarter, according to the Commerce Department’s advance report.  The third quarter marked the strongest back-to-back quarters of growth for the US in four years.  A healthy jobs market with the lowest unemployment rate in 49 years, coupled with strong consumer confidence, supported consumer spending, the biggest driver of the US economy. Personal consumption increased at a 4% rate, the strongest since 2014.  Businesses also made a strong contribution to the economy as they stockpiled on inventories; this category tends to be volatile from quarter to quarter.

 

CEOs’ biggest fear is interest rates, says chief executive behind confidence survey

The primary concern among American CEOs is rising interest rates, said Steve Odland, president and CEO of The Conference Board.  A recent survey by the organization, a global, independent business membership and research association, showed that CEO confidence declined in the third quarter and is at its lowest level in two years.  Odland, a CNBC contributor who once served as CEO of both Office Depot and AutoZone, said there is a “double whammy” coming from the Federal Reserve as it raises interest rates and winds down its balance sheet.