November 5, 2018 Consensus

The Weekly Consensus – November 5, 2018 (Volume 10, Number 42)

The Big Story
What Tomorrow’s Election Won’t Change
Marshall Schleifman

While everyone is focused on tomorrow’s election, with control of the U.S. Senate and House of Representatives, 72% of state governorships, and many state legislatures up for grabs, the most pressing news for U.S. consumers and consumer businesses may actually be the ongoing trade war with China.

Article 1, Section 8, of the U.S. Constitution states: “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises” and “To regulate Commerce with foreign Nations”.  However, laws passed over time have delegated the authority to unilaterally impose tariffs under certain circumstances to the President.  In imposing 10% tariffs in June on $50 billion of imports from China for allegedly stealing American technology and intellectual property, President Trump cited Section 301 of the Trade Act of 1974, which empowers a President to impose tariffs when “an act, policy, or practice of a foreign country…is unjustifiable and burdens or restricts United States commerce”.  Fortunately for consumers and consumer businesses, the list of affected products was limited to industrial sectors and excluded goods commonly purchased by consumers.  In retaliation for the U.S. tariffs, China promptly imposed tariffs on $50 billion of imports from the U.S.

Escalating the dispute, in July the President imposed tariffs on an additional $200 billion of imports from China.  The list of affected products now includes several types of consumer goods, such as certain handbags, electronics, furniture and appliances.  At their current scope, President Trump’s tariffs add $25 billion annually to the cost of goods.  No one is sure where these costs will be absorbed along the value chain – by Chinese manufacturers as lower margins, by U.S. wholesalers or retailers as lower margins, or by consumers themselves as higher prices?  Notably, the President also announced that the applicable tariff rate would increase from 10% to 25% on January 1, 2019, which would significantly increase the costs that need to be absorbed.  In response to these new tariffs, China again promptly retaliated by imposing additional tariffs on approximately $60 billion of imports from the U.S.

This past week brought several new ups and downs to the dispute and its prospects for timely resolution.  Last Monday, media reports circulated that the Trump Administration was preparing to announce new tariffs on the remaining $257 billion of imports from China as soon as December.  Such a timeline would put immense pressure on the scheduled one-on-one meetings between Presidents Trump and Xi later this month at the G20 summit in Argentina to avoid the pain on both economies from such wide and deep tariffs.  On Thursday, Presidents Trump and Xi spoke by phone in their first known direct communication in months, after which both publicly expressed optimism about resolving the dispute.  President Trump described the conversation as “long and very good” and characterized the discussions as “moving along nicely”.  Media reports suggested that President Trump had asked officials to begin preparing drafts of a U.S.-China trade deal.

However, the niceties and momentum may have been short-lived.  Since the Trump-Xi phone call, Trump Administration officials have been dampening expectations.  For example, White House chief economic advisor Larry Kudlow later stated that “we’re not on the cusp of a deal” and refuted the earlier reports that document drafting was underway.  Furthermore, earlier this morning, President Xi delivered a speech critical of President Trump, criticizing “one person” for trying to change “the irreversible trend toward globalization” with “law of the jungle” tactics and a “winner-takes-all” attitude.

How this trade war resolves is critically important to consumers and businesses.  At full throttle, a 25% tariff on over $500 million of goods imported from China creates a $125 billion drag on consumers and corporations, which will increasingly affect economic fundamentals, capital markets, business performance and consumer behavior.  The results of every Election Day have implications for all sorts of issues across American life, but the far-reaching impact of this ongoing trade dispute is narrowly in the hands of the Presidents of both countries.  For everyone’s sake, let’s hope it is resolved SOON.

 

Headlines of the Week

Differential Brands Group Now Has a New Name – Centric Brands Inc.

Differential Brands Group, the Los Angeles apparel company whose labels include Hudson, Robert Graham and SWIMS, is changing its name to Centric Brands Inc. after acquiring a significant part of Global Brands Group’s licensing business in North America.

Jason Rabin, the former president of Global Brands Group North America, will become Centric Brands’ chief executive officer, and William Sweedler, managing partner with Tengram Capital Partners, which played a role in the transaction, will continue to be the chairman of the board of directors. The $1.2 billion purchase price for the licensing business was paid in cash, according to Centric Brands, which will continue as a publicly traded company and be listed on the Nasdaq under the ticker symbol CTRC. The new company will be headquartered in New York with offices in Los Angeles, Montreal and Greensboro, N.C. The brands that make up Global Brands’ North American licenses include Calvin Klein, Under Armour, Tommy Hilfiger, BCBG, Joe’s Jeans, Buffalo David Bitton, Frye, Michael Kors, Kate Spade, All Saints, Cole Haan, Kenneth Cole and entertainment properties including Disney, Marvel and Nickelodeon.

 

Online holiday sales could top $124 billion, Adobe estimates

Online sales will grow 14.8% year over year for the 2018 holiday season and reach $124.1 billion, according to Adobe Analytics’ just-released holiday forecast. This 14.8% increase is just ahead of the 2017 holiday season’s growth, which Adobe estimates was 14.7% over the 2016 holiday season. Adobe defines the holiday season sales period as November and December. Similar to last year, the major online shopping days will be Cyber Monday, reaching $7.8 billion in online sales; Black Friday, reaching $5.8 billion; and Thanksgiving Day, reaching $3.3 billion, Adobe predicts.

 

 

Apparel & Footwear

L.L. Bean expands presence in Canada to help boost flat sales

U.S. retailer L.L. Bean is looking to sell more parkas, sweaters, flannel and mittens in Canada as part of its strategy for a return to sales growth. The 106-year-old retailer’s iconic boot and other products will be sold in 24 stores in Canada this holiday season, and in L.L. Bean-branded stores opening over the next decade. The company also has launched a dedicated Canadian website that smooths out duties and currency fluctuations. The deal, inked last week, makes sense because L.L. Bean has a strong customer base in Canada and its cold-weather gear and outdoor focus are a good fit, CEO Steve Smith said. Maine-based L.L. Bean is coming off three years of flat sales and a difficult era of belt-tightening that included a reduction in workforce, a tightening of its generous return policy, and a paring of product lines to refocus on the company’s outdoors roots.

Former American Apparel Boss Named True Religion Interim CEO

True Religion said chief executive officer John Ermatinger is to retire and has installed former American Apparel ceo Chelsea Grayson as interim ceo as the board looks for a permanent successor. Ermatinger was named to the top spot in 2015, bringing to the position experience after having been ceo of Tommy Hilfiger’s Asia-Pacific region, president of Gap Inc.’s Asia-Pacific division and Levi Strauss & Co. Americas president.

Grayson has been on the True Religion board of directors since last year and was chair of the audit committee. Her time at American Apparel capped a rough stretch in the company’s history with the departure of its founder, layoffs and two bankruptcies.

She had previously served as American Apparel’s general counsel and chief administrative officer before she was appointed to the ceo position in September 2016, succeeding Paula Schneider. Grayson, in a statement, said her focus would be to continue the momentum set off by collaborations with Bella Hadid and Manchester United.

Canada Goose buys Baffin Inc. for $32.5 million to expand into footwear

High-end jacket maker Canada Goose Holdings Inc. says it has snapped up fellow cold-weather gear producer Baffin Inc. as it looks to expand into footwear.  Toronto-based Canada Goose says it will pay $32.5 million for Baffin, which focuses mostly on outdoor and industrial boots but added a clothing line in 2011.  Baffin, founded in 1979, will continue to be based in the Hamilton community of Stoney Creek and run as a stand-alone operation.  Canada Goose has expanded rapidly in recent years including by taking the company public, opening retail stores abroad, and adding knitwear and rainwear to its product line.

 

Athletic & Sporting Goods

Hibbett Sports agrees to buy US fashion retailer City Gear

US-based athletics retailer Hibbett Sports has agreed to purchase City Gear for a cash consideration of $88m.  As part of a definitive agreement signed between the companies, Hibbett will offer an additional $25m over the next two years based on certain performance-based targets.  Based in the US, City Gear currently operates 135 stores in 15 states. Both companies offer a range of products from major brands such as Nike and Jordan among others.

 

Private Equity-Backed Xponential Fitness Buys Pure Barre

Private equity-backed Xponential Fitness LLC is acquiring a popular operator of barre studios, as boutique gyms continue to garner strong levels of interest from buyers. Xponential Fitness, run by industry veteran Anthony Geisler and backed by Snapdragon Capital Partners, has bought Pure Barre LLC. L Catterton took a majority investment in Denver-based Pure Barre in 2015. The consumer-focused private-equity firm is rolling its stake in Pure Barre and will become a minority investor in Xponential Fitness.

ABEO acquires Sportainment Manufacturer Fun Spot

ABEO, a leader in sports and leisure equipment, announces the acquisition of Fun Spot Manufacturing LLC, a company based in Georgia, USA, with a strong position in the Sportainment (activities combining sport and entertainment) sector.  Founded over 40 years ago, Fun Spot, vertically integrated, specialises in the design and manufacture and distribution of equipment for amusement parks and particularly trampoline parks: trampolines, Ninja courses, climbing walls and boulders. For the current financial year, Fun Spot expects to achieve revenue growth and post revenue of between USD 40-50 million with an EBITDA margin of over 20%.

Cosmetics & Pharmacy

Mustela Owner Acquires Babo Botanicals

French pharmaceutical business Laboratoires Expanscience has acquired New York-based Babo Botanicals LLC. Babo, founded by beauty industry veteran Kate Solomon in 2010, makes mineral- and plant-based skin-care, sun-care and hair-care products that target babies, children and adults. The brand’s products are Environmental Working Group-certified and center around botanical ingredients. Terms of the deal were not disclosed, but industry sources said Babo has about $20 million in retail sales. The business had a minority investment from private equity firm JMK Consumer.

L’Oreal Reports Strong Third Quarter Driven by Luxury Brand Sales to China

France’s L’Oreal SA, the world’s biggest beauty products maker, narrowly beat expectations for third quarter sales on strong demand for its luxury skincare brands particularly among younger clients and Chinese consumers. The Paris-based group posted third quarter sales of €6.1 billion, up 5.1% year-on-year on a like-for-like basis, but down 0.9% on a reported basis following the group’s disposal of the Body Shop. The result was ahead of analyst average expectations of a 4.7% growth in sales on a like-for-like basis, which strips out currency movements and asset acquisitions and disposals.

The Estée Lauder Companies Achieves Strong Fiscal 2019 First Quarter Results

The Estée Lauder Companies Inc. reported strong financial results for its first quarter ended September 30, 2018. The Company achieved net sales of $3.52 billion, an 8% increase compared with $3.27 billion in the prior-year quarter. The Company posted net sales growth in nearly all product categories, geographic regions and channels. Excluding the impact of currency translation and the adoption of the new revenue recognition accounting standard (“ASC 606”), net sales increased 11%. Net earnings rose 17% to $500 million, compared with $427 million last year. Diluted net earnings per common share increased 17% to $1.34, compared with $1.14 reported in the prior year. Adjusted diluted earnings per common share, which excludes items detailed below, before the $.06 impact of ASC 606 were $1.47, up 22% or 24% in constant currency.

Drybar’s Founders Launch a Hip New Massage Chain

The team behind Drybar want to give you quick midday massage. Their new concept is called Squeeze, and it will be closely modeled on Drybar, with the first location set to open in early 2019 in the Los Angeles neighborhood of Studio City. Squeeze’s mission is simple and encapsulated in its tagline, “A way better massage experience.”

This experience will begin with the shop itself that will be designed by the same architect as Drybar, and feature a fun, colorful decor. But price-wise, Squeeze will be in the middle of the market. Massages will cost between $39 and $129, depending on the length of the session, which will run between 20 and 80 minutes.

 

Discounters & Department Stores

How Kohl’s figured out the Amazon era

Kohl’s isn’t the flashiest retailer in America. But it’s a go-to store for millions of moms.

Kohl’s has connected with mid-aged, middle-income women through a mix of stylish clothing brands and a knack for quickly reacting to the latest fashion trends. Wall Street has taken notice. Kohl’s is one of the hottest retail stocks over the past year, outperforming peers like Macy’s, Nordstrom, JCPenney, and Gap. Much of Kohl’s recent success can be attributed to the department store’s improved tactics in its top business: Women’s clothes.  Kohl’s women’s apparel division accounts for about a third of the company’s roughly $19 billion in annual sales.

 

Sears Prepares for a Big Holiday Season, Bankruptcy and All

Sears Holdings Corp. may have filed for bankruptcy, but it’s still positioning itself as a holiday shopping destination. Even as the 125-year-old retailer continues to search for a loan to stave off liquidation, it’s stocking its shelves even fuller than in previous holidays seasons in a bid to entice customers who might not even realize it’s still operating.

“We are leaning into the holiday and we intend to win this season,” said Peter Boutros, the chief brand officer for Sears and Kmart.

 

 

Grocery & Restaurants

PepsiCo announces Health Warrior acquisition

Health Warrior, a nutrition company that focuses on creating such plant-based products as nutrition bars, will be joining the PepsiCo portfolio. The Purchase, N.Y.-based company announced that it was acquired in a transaction that will further expand its reach into the nutrition category. Founded in 2011, Health Warrior was created by Dan Gluck, Shane Emmett and Nick Morris, who wanted to help make nutrient-dense food more accessible to consumers.

 

Cheesecake Factory weighs decision on North Italia buy

The Cheesecake Factory Inc. is weighing financial alternatives as it nears the 2019 deadline on converting its minority investment in North Italia, executives said Tuesday. The Calabasas Hills, Calif-based company in late 2016 made minority equity investments in North Italia and Flower Child, two concepts founded by Phoenix-based Fox Restaurants Concepts LLC, and the North Italia deal’s timetable called for conversion to a majority investment in 2019.

CraftWorks acquires Logan’s Roadhouse

CraftWorks Restaurants & Breweries has acquired casual-dining Logan’s Roadhouse Inc. to create a 390-unit multibrand platform, the companies said Thursday. CraftWorks, which was created with the November 2010 purchase of the Rock Bottom Restaurants Inc. and Gordon Biersch Brewery Restaurant Group Inc. by affiliates of private-equity firm Centerbridge Partners L.P., and Logan’s will be combined into CraftWorks Holdings, the companies said.

Jack in the Box to add board seats in agreement with activist investor

In an agreement with JANA Partners LLC, Jack in the Box plans to expand its board of directors, with the activist shareholder making the recommendation on who will fill the two additional seats, according to a regulatory filing made this week. The move to expand the board from 9 seats to 11 seats comes a few weeks after The National Jack in the Box Franchisee Association called for the removal of CEO Lenny Comma, who is the board chairman.

Kroger, Ocado set terms for e-commerce partnership

The Kroger Co. and Ocado Group have signed a service and operational pact in connection with their partnership to build U.S. automated warehouse facilities for Kroger’s online grocery business. U.K.-based Ocado said Tuesday that, under the terms of the deal, Kroger plans to order three customer fulfillment centers (CFCs) by the end of 2018 and 20 CFCs during the first three years of the agreement. Kroger is expected to announce the locations of the first three CFCs in the next several weeks. Ocado has agreed to deploy and maintain modules of mechanical handling equipment to provide a certain level of throughput. The company said the goal is for Kroger’s CFCs to be up and running within about two years of each order being placed.

Home & Road

The Container Store’s Swings to Profit in Q2, But Earnings Miss Street

Despite launching a merchandising campaign that missed the mark among customers, The Container Store still increased revenues and sales during the second quarter. The home storage products retailer reported net income of $3.2 million for the period ended Sept. 29, compared to a net loss of $0.9 million a year ago. Earnings per share were 10 cents, which missed analyst estimates of 14 cents. EPS and adjusted EPS in the second quarter of fiscal 2018 includes 2 cents per share of incremental interest expense, and 3 cents per share in incremental marketing expense related to the brand campaign launch, when compared to the second quarter of fiscal 2017. Net sales increased 2.8% to $224.5 million, compared to $218 million a year ago. This also missed analyst estimates of $225.2 million.

New Lenox CEO Discusses Plans for Brand Rejuvenation

Incoming Lenox CEO Mads Ryder believes the rejuvenation of the 130-year-old tabletop brand lies in mixing old and new—both old and new products as well as strategies. Ryder, whose resume includes leadership roles at fellow tabletop company Royal Copenhagen as well as Lego and Weight Watchers, was named CEO of Lenox last week and spent his first day on the job visiting the company’s factory in Kinston, N.C. In an interview with HFN on Tuesday, he heralded the company’s history, legacy and the stories behind the brand that can be told.  The company’s weakness, he said when prompted, is that, “We do not tell it.”

F&I Profit per Unit Rises at 5 of 6 Public Dealership Groups

Five of the six public new-vehicle dealership groups improved average Finance & Insurance gross profit per vehicle in the third quarter, driven by growing F&I product penetration and F&I training efforts, the companies said. F&I profit per unit declined slightly for Asbury Automotive Group Inc., of Duluth, Ga., whose average gross profit per vehicle on a same-store basis dipped $16, or 1 percent, to $1,524. Meanwhile, total F&I gross profit was up 5 percent. Asbury CEO David Hult said on a call with investors last week that some of the profit decline had to do with a heavier mix of used vehicles in the group’s inventory.  AutoNation Inc., of Fort Lauderdale, Fla., ranked No. 1, boosted same-store F&I profit per vehicle 6.4 percent, or $107, to $1,781. CEO Mike Jackson attributed the consistent growth to AutoNation’s branded F&I product sales.

Jewelry & Luxury

Major US Retailers Embrace Synthetic Diamonds

Lab-grown diamonds will feature at some of the largest US retailers this holiday season, with JCPenney, Macy’s and Jewelry Television (JTV) anticipating strong growth in the category. Berkshire Hathaway subsidiary Richline Group will supply a new brand featuring lab-grown diamonds to JCPenney, the companies said in a joint statement Tuesday. The bridal collection, called Grown with Love, also appears on Macy’s e-commerce site. “By bringing Grown with Love into the JCPenney fine-jewelry department, we are filling a void in our assortment for lab-grown diamonds,” said Pam Mortensen, JCPenney’s senior vice president of merchandising.

The Diamond Trade’s Provenance Challenge

Source-verification programs are poised to become a standard feature of diamond sales, with early adopters set to gain market share. The question of whether a diamond could be traced throughout the distribution chain initially met with some skepticism. Back in 2011, as rough production from Zimbabwe’s controversial Marange fields was being cleared for export by the Kimberley Process, the goods were still banned in the United States (as they remain today). It was therefore necessary to separate the Marange goods during the production process if manufacturers were to continue supplying both the US market, and jewelers in other centers that were willing to buy the Zimbabwe rough.

4 Charged in Jewelry Store Heists Totaling $10M+

Four members of an international burglary crew who allegedly stole more than $10 million in jewels from stores in the United States and Europe over an 11-year period have been arrested. Damir Pejcinovic, 44, 36-year-old Gzimi Bojkovic (aka Jimmy), 35-year-old Adrian Fiseku and Elvis Cirikovic, 35, were taken into custody Oct. 24 and charged in an indictment unsealed the same day. The indictment alleges that the four men were part of a crew dubbed the “Pejcinovic Enterprise”—named after ringleader Damir (aka Damian or “CoCo”)—who stole from, or attempted to steal from, a total of 16 jewelry stores and banks in the United States and Europe between 2006 and 2017.

 

Office & Leisure

Bebe and Bluestar Acquire Gifts Retailer Brookstone

Bebe Stores Inc. announced it has partnered with Bluestar Alliance to acquire the brand name and related assets of beleaguered gifts-and-gadgets retailer Brookstone for an undisclosed price. In August, the Merrimack, N.H.–headquartered Brookstone filed for Chapter 11 bankruptcy protection. The retailer announced it would close its mall stores and focus on 35 airport stores and its e-commerce site, brookstone.com. Bebe, headquartered in Brisbane, Calif., also is rallying from tough times. In 2017, it shuttered all its physical stores and sold half the brand for $35 million to Bluestar Alliance, a New York brand-management company, in order to avoid declaring bankruptcy. Manny Mashouf, Bebe’s founder and chief executive officer, said Brookstone would support growth for his company. Joseph Gabbay, Bluestar’s chief executive officer, said the deal would revive Brookstone.

Barnes & Noble reveals details on why it fired CEO

In July, the nation’s largest bookstore chain fired Parneros for “violations of the company’s policies,” and said he would not receive any severance pay. The retailer offered no other details except to note that the termination was not related to the company’s financial reporting, policies or practices or any potential fraud. In August, Parneros fired back with a lawsuit seeking $4 million of severance plus other damages in which he accused Barnes & Noble founder and chairman Leonard Riggio for engineering his “firing without cause” and for “falsely and irrevocably’ damaging his reputation. The newest chapter to the saga is a countersuit filed by Barnes & Noble in which it detailed the reasons it terminated Parneros, including reports of sexual harassment and an allegation that he sabotaged an acquisition of the company.

Technology & Internet

Same-day delivery platform Deliv raises $40 million from investors

Same-day delivery service Deliv Inc. received a $40 million Series C funding round from investors, including Google, Clayton Venture Partners and the venture capital arm of Enterprise Holdings, bringing its total funding to $80.4 million. Existing investors, including United Parcel Services Inc., General Catalyst Partners, The Macerich Company, PivotNorth Capital, RPM Ventures and Upfront Ventures, also participated in the round. Deliv, founded in 2012, is an on-demand platform to provide same-day delivery in 35 major markets using independent drivers. The company will use the new money to further develop the platform’s technology and build its operational infrastructure, which includes hiring more people as the company expands. Currently, Deliv has about 100 employees and a network approaching 100,000 independent drivers. Deliv has more than 5,000 retailer clients.

 

Finance & Economy

Consumers spend more on cars and recreation in September. Inflation subdued

Americans bought more new cars and recreational goods in September, the sort of consumer spending that takes place when the economy is strong like it is now. Consumer spending climbed 0.4%, matching the MarketWatch forecast. It was the seventh month in a row in which spending increased by that amount or greater.  Consumers are spending at a rate sufficient to keep the economy going strong and inflation appears contained for now. The 2% rate of inflation is exactly where the Federal Reserve would like it.

U.S. consumer spending solid; income gain smallest in 15 months

U.S. consumer spending rose for a seventh straight month in September, but income recorded its smallest gain in more than a year on moderate wage growth, suggesting the current pace of spending was unlikely to be sustained.  The report from the Commerce Department also showed the increase in income at the disposal of households was the smallest in 15 months and savings dropped to their lowest level since December last year.  There are signs the stimulus from the Trump administration’s $1.5 trillion tax cut package has peaked. Higher interest rates and falling household wealth after a sharp stock market selloff are also casting a shadow on spending.