November 12, 2018 Consensus

The Weekly Consensus – November 12, 2018 (Volume 10, Number 43)

The Big Story
Midterm Grades: A Mixed Bag for Retailers
Douglas Stebbins

 

Last week’s midterm elections were unlike any we had seen in recent years.  They had all the drama and buildup (and money) of a presidential year.  After months of campaigning the ballots were finally submitted.  And when all was said and done, it seems like nothing was said and done.  Was it a Blue Wave?  Was it a Red Wall? It all depends upon which news channel you happen to turn on.  But I guess it should come as no surprise that days after the polls closed, Florida would still be counting its ballots.

But in the lead up to the election there was a lot of talk about the strength of the economy and the appreciation in the stock market.  Since the day before Trump was elected president, November 7, 2016 the stock market has enjoyed a nice run, with the S&P 500 up 31% since that date.  During the recent midterm campaigns, nearly every candidate for any office, from both parties, tried to take credit for the stock market’s growth.  Was the nice performance of the market just a continuation of Obama’s momentum, or was it due to Trump’s bold new policies?  While the cause may be unclear, there is little question that the stock market has generally performed well during Trump’s first two years.  But as advertisers like to note, “individual results may vary.”

In an effort to determine how retailers have performed, we looked at the stocks of 117 different publicly traded retailers over the last two years.  Public retailers were up over that timeframe, but they did not perform as well as the market as a whole.  The median public retailer is up just over 9% over the past two years, about one-third of the gain of the broader market as represented by the S&P 500.  The average (mean) retailer was quite a bit higher than the median, helped by some outliers that helped push the figure higher.  RH (formerly Restoration Hardware) and Etsy were each up over 300%, while Ollie’s, Conns and Five Below were each up over 200% over the past two years.

Only two of eight retail segments analyzed outperformed the overall market.  The four publicly traded electronics retailers as a group were up 61%, led by Conns and helped by Best Buy, which was up 86% over the period.  The other group that outperformed the market was furniture retailers which was up 32%, led by RH’s stellar performance and also At Home which increased over 172%.  With a softening housing market tied to increasing interest rates, it will be interesting to see if furniture retailers will be able to keep up their pace.  The Home Improvement stocks have already seen some softening.  As a group, Home Improvement retailer stocks are down 19% over the past two years.

Perhaps most surprisingly, one of the categories that has performed relatively well has been department stores.  The median department store gained 28% over the past two years led by Kohl’s (+84%).  In contrast, ecommerce companies underperformed the market with median stock appreciation of 18% since Trump’ election.  Perhaps the market is acknowledging that it overestimated the extent to which consumers have replaced the mall with their keyboard.

Ultimately, while the stock market has indeed enjoyed a nice run over the past couple years, many retailers are not quite keeping pace.  Maybe the newest elected political leaders can keep the economy and stocks, including retail stocks, moving in the right direction.  Now, if only we can determine who actually won the elections.

 

Headlines of the Week

Report: Amazon plans to split new headquarters between New York, Northern Virginia

Amazon plans to split its second headquarters evenly between two locations, New York City and northern Virginia, rather than picking one city for HQ2, the Wall Street Journal reported, citing a person familiar with the matter. The driving force behind the decision to build two equal offices is recruiting enough tech talent, the person said, adding that the move will also ease potential issues with housing and transit. Under the new plan, Amazon would split the workforce with 25,000 employees in each city selected.

 

Newell Brands Sells Pure Fishing to Sycamore Partners for $1.3 Billion

Newell Brands, as part of its massive overhaul of its company, sold Pure Fishing for $1.3 billion to New York-based Sycamore Partners private equity group. Sycamore Partners does not hold any other businesses in the outdoors recreation space. Pure Fishing had net sales from its top lines (Penn, Abu Garcia, Berkley) of $556 million in 2017, according to the report.

 

 

Apparel & Footwear

Versace could pose ‘distraction’ for slowing Michael Kors

Michael Kors on Wednesday reported second quarter revenue rose 9.3% year over year to $1.25 billion. The company will rebrand to Capri Holdings Limited when it closes its acquisition of Italian fashion brand Versace in the fourth quarter. Michael Kors’ healthy earnings in the second quarter had more to do with tax cuts than its brands’ performance. That bodes poorly for Michael Kors’ ability to take on Versace, considering how much rehabilitation the Italian fashion house requires. Some analysts expressed skepticism about Capri’s potential. “We believe management is losing control of the Michael Kors model as it seeks to distract attention through additional acquisitions where it has little room for error given high prices paid,” an analyst said.

 

Nike Sock Supplier Plans Biggest Pakistan Private Sector IPO

Interloop Ltd., which makes socks for Nike and Adidas, is planning Pakistan’s biggest ever initial public offering by a private firm. The company plans to raise as much as 6.8 billion rupees ($51 million) to expand its sock manufacturing capacity by around 20 percent and enter the denim business, said Chairman and Co-Founder Musadaq Zulqarnain. It will offer 12.5 percent of the business in the sale, likely to take place in January, and is aiming to lift revenue by 77 percent over five years, he said. “Our capacity is already full,” Zulqarnain said in an interview at the company’s head office in Faisalabad.  Interloop can see more growth, so will “take that risk” to expand, he said.

FullBeauty misses debt payment, buys time with lenders

FullBeauty Brands this week missed a payment on a $345 million loan. Following the decision not to pay, the plus-size brand company and e-tailer entered into a forbearance agreement with its lenders, according to S&P, which downgraded FullBeauty’s debt rating to indicate a default. S&P analysts said that they expect FullBeauty would “engage in an out-of-court restructuring across the capital structure before the end of the year.”  Burdened with debt levels Moody’s has called “untenable,” FullBeauty could face competitive threats as new and established players breathe life into the plus-size category. Private equity firm Apax Partners acquired FullBeauty in 2015 in a leveraged buyout worth more than half a billion dollars.

This fledgling lingerie company is growing by 300%, and crushing the mighty Victoria’s Secret

As Michelle Cordeiro Grant grew up, she thought she had to be a doctor or a lawyer.

As a daughter of Indian immigrants, it seemed like the right path to success. But a job at Victoria’s Secret changed not only her career path, but also her idea of what it means to be a woman.  Now, she’s the founder and CEO of a fast-rising lingerie brand that’s taking on her former employer. Lively was founded by Grant in April 2016, and has been growing ever since — with its latest move its partnership with Nordstrom this year. The brand homes in on female positivity, using comfortable bras and activewear to get there— combining lingerie and leisure to pen the term “leisurée.”

 

Athletic & Sporting Goods

PE-owned Maurice Sporting Goods buys O2COOL

Middleton Partners, parent company of Maurice Sporting Goods, announced today that is has acquired O2COOL, an innovative leader in the hydration and portable cooling market with more than $50 million in annual revenue. With this acquisition, Middleton plans to leverage the synergies of O2COOL and Maurice Sporting Goods, to establish Maurice Outdoors, a collection of powerful industry brands with best-in-class distribution.  The Company specializes in patent-protected cooling, hydration, and patio, pool and beach solutions that appeal to active consumers.

Cosmetics & Pharmacy

Frédéric Fekkai Buys Back Business

Frédéric Fekkai is back in the driver’s seat of his namesake brand. The hair stylist and entrepreneur has partnered with Cornell Capital to acquire Fekkai Brands, the joint venture created by Designer Parfums and Luxe Brands that bought the business in 2015.

Terms of the deal were not disclosed and both Fekkai and Cornell declined to comment on the numbers. Fekkai Brands, which consists of the Fekkai brand sold in mass market retailers and The One by Frédéric Fekkai sold at Ulta Beauty, as well as six salons in North America, is estimated by market sources to have a wholesale volume of about $35 million. Analysts estimate that the purchase price would have been around or slightly less than the estimated $50 million that Designer Parfums and Luxe Brands paid for it.  Cornell Capital LLC, a $2.5 billion private investment firm founded by Henry Cornell, former vice chair of Goldman Sachs’ merchant banking division, is said to have the majority stake in the venture; Fekkai’s fund, called Mistral Capital Partners, is believed to have the minority.

CVS Health beats Street in Q3

CVS Health’s third-quarter results beat Wall Street expectations, with the Woonsocket, R.I.-based company posting $47.3 billion in revenue and $1.73 in earnings per share ahead of the expected close of its acquisition of Aetna. The revenue represents year-over-year growth of 2.4%, as its same-store prescriptions grew 9.2% and its pharmacy services segment claims increased 5.7% for the quarter ended Sept. 30. Year-to-date, the company said it has generated $6.4 billion in cash flow from operations and free cash flow of roughly $4.9 billion.

Ulta Beauty Makes First-ever Acquisitions; To Slow Store Expansion

Ulta Beauty’s digital strategy is moving into high gear as the retailer starts to slowly pull back on its aggressive brick-and-mortar expansion and build a “digital innovation ecosystem.” The beauty giant in a release said it has invested in digital workflow partner Iterate, and an online booking tool called Spruce. Ulta also has acquired two technology start-ups in artificial intelligence and augmented reality — QM Scientific and GlamSt — which the retailer said will allow it to better build out its AR and AI capabilities, especially as they relate to personalization. On the brick-and-mortar front, Ulta reduced its U.S. store target by 200 stores, scaling back from 1,700 stores to 1,500. (As of Nov. 3, the retailer operated 1,163 locations across 50 states.). It plans to open 80 stores in 2019, 75 in 2020 and 70 in 2021, in sync with “a stronger focus on optimizing the store portfolio.”

Diplomat’s Q3 Sees Slight Loss Despite Adding PBM Revenue

Diplomat Pharmacy posted $1.4 billion in revenue for the third-quarter, but the Flint, Mich.-based company’s net income decreased to $0.2 million for the quarter compared to $1 million in the prior-year period. Revenue increased 22% to $1.4 billion, from $1.1 billion and gross profit grew to $93.4 million from $65.1 million in the prior-year period.

 

Discounters & Department Stores

Service.com offers $60 million for Sears’ Home Improvement business

Sears Holdings Corp. has nailed down its first bidder for one of its assets — the Home Improvement business. Service.com, a website that helps consumers find local professionals for home-improvement services, has made a $60 million offer for Sears’s Home Improvement business, a unit of the Sears Home Services division. The proposed “stalking horse bid” would set the floor price at the first bankruptcy auction for one of Sears’s assets, according to court papers filed Saturday.  An auction date of Dec. 13 has been proposed, and Sears would seek court approval of the sale on Dec. 18.

Do Not Resuscitate: The Saga of Sears, Hedge Fund Hubris And Media Ignorance

As a long-term bear on Sears, I was not surprised to see the iconic retailer file for bankruptcy. I first recommended shorting the stock years ago and told investors to declare victory about a year ago when it hit single digits after trading as high as $190/share in 2007 (when its Chairman Eddie Lampert was lauded as a financial genius). At the time, the company was repurchasing billions of dollars of stock (it ended up buying back $6 billion of it) in what I argued would go down in history as one of the worst investments of all time, and those buybacks now rank with such gems as buying (or not selling) Valeant Pharmaceuticals at $270/share or believing that Elon Musk was actually going to take Tesla private at $420/share.

 

 

Grocery & Restaurants

Spread Bagelry to expand beyond Philadelphia with private-equity investment

Philadelphia wood-fired bagel concept Spread Bagelry is expanding with an investment from MVP Capital Partners. The Radnor, Pa.-based private-equity firm has made an undisclosed investment in eight-year-old Spread Bagelry, known for its Montreal-style bagels baked in a 20-ton wood-fired brick oven. The capital will support the company as it beefs up leadership and expands beyond its two Philadelphia locations.

Papa Gino’s, D’Angelo Grilled Sandwiches close 95 restaurants amid Chapter 11 filing

The parent company of Papa Gino’s Pizzeria and D’Angelo Grilled Sandwiches filed for Chapter 11 bankruptcy protection following the closure of 95 underperforming restaurants. As part of the bankruptcy proceedings, Dedham, Mass.-based PGHC Holdings Inc. has entered into a stalking horse agreement with Wynnchurch Capital to purchase 141 company restaurants in Massachusetts, New Hampshire, Rhode Island and Connecticut.

Papa Murphy’s considers sale of company

Papa Murphy’s Holdings Inc. said Wednesday it is evaluating strategic alternatives, including a possible sale of the take-and-bake pizza chain. The decision to look at strategic alternatives comes in conjunction with a comprehensive review of the pizza chain’s business strategy, the company said. Papa Murphy’s currently has about 1,460 units.

Taco Bueno files for Chapter 11 bankruptcy protection

Taco Bueno Restaurants L.P. has filed for a pre-packaged Chapter 11 bankruptcy, and the quick-service Mexican brand said debt-holder Sun Holdings Inc. would lead the reorganization plan. The Farmers Branch, Texas-based company said it had entered into an agreement with Taco Supremo LLC, an affiliate of Dallas-based Sun Holdings, which had acquired all of the company’s bank debt before the filing and committed to as much as $10 million in debtor-in-possession financing for operations.

Bojangles’ sold to Durational Capital Management

On Tuesday, Bojangles’ Famous Chicken ‘n Biscuits announced that it would be taken private and had entered an agreement to be acquired by Durational Capital Management LP and The Jordan Company, L.P. for $16.10 per share in a cash transaction. The deal is expected to close in the first quarter of 2019 and comes eight months after the fried chicken and biscuits’ chain’s CEO Clifton Rutledge resigned.

Home & Road

Lowe’s Continues Strategic Reassessment with New CIO, Store Closures

Lowe’s Companies, Inc.  continues to strengthen its leadership with the appointment of Seemantini Godbole as chief information officer, effective Nov. 12, while also tightening its store portfolio with the closure of underperforming stores. Godbole most recently was Target’s senior vice president of digital and marketing technology, responsible for the re-architecture of the company’s digital platforms and the introduction of technology for new customer experiences such as mobile applications, buy-online-pick-up-in-store and ship from store programs, digital wallet, localized pricing, and other customer loyalty and engagement offerings. Prior to Target, Godbole also spent 15 years at American Airlines/Sabre and Travelocity where she held a variety of senior technology leadership roles globally.

Jewelry & Luxury

Pandora’s Charms Fall Out of Fashion

Another quarter, another profit warning from Pandora AS. The Danish maker of affordable bling jewelry cut its forecast of full-year revenue growth on Tuesday and abandoned its long-term sales target. Far from golden. Investors have, unfortunately, become used to the steady stream of bad news from the company. And Tuesday’s warning was accompanied by an overhaul of the business. That indicates that the strong sales expansion Pandora enjoyed a few years ago won’t return any time soon.

Everything Changes, Some Things Stay the Same

The diamond and jewelry trade tends to be reactive rather than proactive. That was clear during the recent conference season, with the World Federation of Diamond Bourses (WFDB), the International Diamond Manufacturers Association (IDMA), the World Jewellery Confederation (CIBJO) and the World Diamond Council (WDC) all holding their annual meetings in October. Much of the discussion, according to reports from the meetings, was centered on how the trade should relate to synthetic diamonds. It’s a difficult question following the recent decision by the Federal Trade Commission (FTC) to expand the definition of “diamond” to include those grown in a laboratory.

American Watchmaking’s Red-Hot Season

When I first wrote about hints of a renaissance in American watchmaking, in a March 2012 article for the New York Times, Shinola wasn’t a thing—at least not yet. The Detroit-based watchmaker made its formal debut at Baselworld in the spring of 2013.

In the six years since, the landscape of the American watchmaking sector has drastically shifted. While it’s still nothing like the glory days of the pre–World War II era, when domestic manufacturers such as Elgin, Hamilton, and Waltham set the gold standard for industrialized watch production, a handful of contemporary makers are actively designing, marketing, and sometimes even making wristwatches in America.

Refiner Republic Metals Files for Bankruptcy

One of the country’s largest precious metal refiners filed for bankruptcy following the discovery of “inventory discrepancies” in its books and records this past summer.

Republic Metals Corp., which has its main office in New York and processes metals at a facility in Miami, filed Chapter 11 in U.S. Bankruptcy Court for the Southern District of New York. The company is looking for a buyer, and on Oct. 29, Swiss refiner Valcambi issued a press release stating that it had “reached an understanding” to acquire Republic Metals Corp. and the companies were “working through the logistics of the planned integration.”

Office & Leisure

Raimondo, Mattiello focus on keeping Hasbro in R.I.

Gov. Gina Raimondo and House Speaker Nicholas Mattiello said Friday that they’re working to persuade the Hasbro toy company to remain in Rhode Island. Both, however, stopped short of saying that they’ll focus on keeping Hasbro’s headquarters in Pawtucket. On Wednesday, Pawtucket Mayor Donald Grebien, Central Falls Mayor James Diossa and the local leaders called for an “urgent” cooperative effort by state officials to prevent Hasbro from leaving, a departure that would deliver another economic blow to a community dealing with the closure of Memorial Hospital and the pending relocation of the PawSox. Hasbro, one of the world’s largest toy companies, was founded in Providence in 1923 and eventually relocated its headquarters to Pawtucket. It employs roughly 1,000 people locally, out of a workforce of 5,000 globally. A Hasbro spokeswoman confirmed on Wednesday that the company was contemplating moving its corporate headquarters.

UK Bookstore WH Smith tried to buy Barnes and Noble

Barnes and Noble had a serious suiter to buy the entire company.  WH Smith is one of the largest bookstore chains in the United Kingdom and they spent over 2 million dollars in a bid to snatch it up.  The deal fell through and this has resulted in the firing of the CEO Demos Parneros, who B&N said in a defamation lawsuit that he sabotaged the sale.  Parneros has since denied that he tried to stop the deal from going through, telling the Wall Street Journal in a statement, “I was fully supportive of the sales process from the start.”  WH Smith pulled out of the deal after doing their due diligence on the company, but that did not stop them from another acquisition.  Last week, W.H. Smith agreed to acquire InMotion, a U.S. company that operates 114 stores across 43 airports.

Technology & Internet

Etsy’s sales grew 20.4% in Q3

Sales through Etsy Inc., an online marketplace for handcrafted goods, increased 20.4% for the third quarter ended Sept. 30. Etsy reported gross merchandise sales, or the total value of goods transacted on the marketplace, of $922.5 million in Q3, up from $766.4 million in Q3 2017. Revenue—which Etsy generates from listing fees, seller services and commissions on sales—grew 41.4% to $150.4 million for the third quarter from $106.4 million in the previous third quarter. Active buyers were up 17.0% to 37.1 million compared with 31.7 million during the same period last year.

 

Finance & Economy

Mortgage applications drop to 4-year low as interest rates hit 8-year high

Rising interest rates are now clearly taking their toll on potential homebuyers. Total mortgage application volume fell 4 percent last week from a week earlier and plunged 16 percent from a year ago, according to the Mortgage Bankers Association’s seasonally adjusted index.  Mortgage applications to purchase a home led the volume lower, falling 5 percent for the week to the lowest level in two years. Purchase applications were 0.2 percent lower than a year ago.

US consumer borrowing up solid $10.9 billion in September

Americans increased their borrowing by a solid amount in September. But the gain was less than half the big August surge as borrowing in the category that includes credit cards fell.  The August gain had been the strongest increase in nine months.  The category that covers auto loans and student loans rose a solid $11.2 billion. The category for credit cards fell by $311.6 million after having risen $4.6 billion in August.  Consumer borrowing is closely tracked for signs of consumers’ willingness to take on more debt to finance their purchases.