December 3, 2018 Consensus

The Weekly Consensus – December 3, 2018 (Volume 10, Number 46)

The Big Story
For Retailers, Is Being Political Ever Correct? – Part III
Paul Alexander, CFA

Retail brands appear to be taking public political stances at an increasing rate, a move that has traditionally seemed foolish to many in the industry.  This is a phenomenon we have written about in this space twice in recent months, as our colleague Mark Lenz chronicled in parts one and two of this series Patagonia’s public opposition to the Trump administation’s moves to reduce the size of national monuments, and Walmart and Dick’s Sporting Goods’s decisions to raise the minimum age at which the companies will sell firearms to a customer from 18 to 21.  Presumably, these decisions were carefully weighed, given their political, moral, and business-related implications.  They also seem to be a sign of the times, of the increasing difficulty that any person or brand has today of remaining politically neutral.  But a recent report suggest that it may be even more difficult to remain politically neutral than we ever realized.  In fact, from now on, it may be effectively impossible.

Speaking at a Business of Fashion event last week, former Cambridge Analytica executive Christopher Wylie revealed that his former company exploited Facebook users’ ‘likes’ of certain retail brands and labels to selectively target them with pro-Trump content. As The New York Times and The Observer reported in early 2018, Cambridge Analytica was a British political consulting firm that worked for the Donald Trump presedential election campaign.  The company was reported to have used the personal Facebook data of roughly 87 million people to target certain groups with messages and content meant to influence their votes.  Wylie said last week that Cambridge’s algorithms suggested that Facebook users who illustrated an affinity for American heritage brands such as Wrangler and L.L. Bean were potentially impressionable to pro-Trump messaging. Ostensibly, many such Facebook users were then targeted with Trump-leaning content.

In the wake of the public backlash that emerged after its activities became known, Cambirdge Alanytica has since closed operations.  However, the firm’s underlying premise that preferences in fashion and brands can predict political leanings seems to be one that other groups could find plausible and try to exploit again.  If that is the case, what is an L.L. Bean or a Wrangler supposed to do if it wants to remain politically neutral?

Another example of how brands today can lose control of how they are linked to politics occurred earlier in the month.  Comedian Hasan Minhaj, host of the Netflix political humor commentary show Patriot Act, released an episode about the streetwear hype-machine label Supreme.  In it, Minhaj skewered Supreme for taking in funding from the Carlyle Group because of Carlyle’s investment in an aerospace defense company that sells fighter jets to Saudi Arabia – jets that Saudi Arabia then uses in air raids in Yemen.  While some might look at Minhaj’s condemnations and equate it to playing six degrees of Kevin Bacon, he makes it sound like the bombs falling on Yemen are emblazoned with Supreme’s logo. He is even selling tee shirts on his website that feature graphics meant to look like Supreme, but instead say things such as “Defense Contractor,” and “Private Equity.”  It is unclear whether Patriot Act has broad enough viewership for this episode to materially affect Supreme’s business, but this episode presents another case of how brands today can become unwillingly political.

If current trends continue, it seems likely that we will see brands continue to be more politically proactive in the future in order to shape public opinion and the narrative of their corporate citizenship. This seems especially likely given that the alternative, avoiding politics, appears to be increasingly difficult to do. In his closing remarks last week, Christopher Wylie implored fashion companies to be more active, showing a deep belief in the power of brands to sway public opinion.  He said, “We depend on [brands] to not only make our culture but protect our culture. It is up to you if Trump and Brexit become the Crocs or the Chanel of our political age.”


Headlines of the Week

Cyber Monday sales break a record, with $7.9 billion spent online, Adobe Analytics says

Cyber Monday sales this year surged to new highs, with a record $7.9 billion spent online that day, an increase of 19.3 percent from a year ago, according to data from Adobe Analytics. That’s after Black Friday pulled in a record $6.22 billion in e-commerce sales, while sales online Thanksgiving Day totaled $3.7 billion. Transactions on mobile devices were up 55.6 percent Cyber Monday from last year to reach $2.2 billion in sales, said Adobe.


CVS Health Completes $70B Aetna Acquisition

The biggest healthcare merger of the year is complete. CVS Health on Wednesday announced that it had closed its $70 billion acquisition of health insurer Aetna, which it said positions the company as a premier health innovation company. The transaction will see each outstanding share of Aetna common stock exchanges for $145 in cash and 0.84 shares of CVS Health common stock. Rather than issue fractional shares, CVS Health is rounding the share of its common stock Aetna shareholders are entitled to down to the nearest whole number, with Aetna shareholders able to receive cash for any fractional share they are otherwise entitled to receive. The final transaction values Aetna at roughly $70 billion — or about $212 per share.



Apparel & Footwear

Kids clothing retailer Gymboree weighs closing half its stores

Gymboree, a U.S. retailer of infant and children’s clothing, is considering closing more than half of its approximately 900 stores, people familiar with the matter have reported. The move would be a setback for Gymboree after it emerged from bankruptcy last year. It was one of the few brick-and-mortar retailers that managed to escape liquidation in a wave of bankruptcies that swept the sector, amid the rise of online shopping. San Francisco-based Gymboree filed for bankruptcy in June 2017. Through that process, it cut its debt by $1 billion, and closed one-quarter of its shops. It emerged from bankruptcy in September 2017 with debt that included an $85 million term loan and $200 million revolving credit line.


Tory Burch Buys Back Stake

Tory Burch is buying back its stake from private family investment company Tresalia Capital, according to a person familiar with the matter. In 2009, the American fashion brand had sold a minority stake of approximately 20 percent to the Mexico-based firm, chaired by Corona beer heiress María Asunción Aramburuzabala of the Group Modelo family. Investors General Atlantic and BDT Capital Partners maintain a stake in the business, which they acquired in 2013, reportedly from Burch’s ex-husband, the serial entrepreneur Christopher Burch. Since launching in 2004, Tory Burch has grown into a billion-dollar business, with over 150 freestanding boutiques and a presence in more than 3,000 department and specialty stores. Tory Burch has been seen as a potential IPO candidate, but founder Burch has always dismissed the idea.


Crew axes Mercantile brand

In reversals of moves taken by its recently departed CEO, J. Crew is axing its low-price Mercantile brand and its just-launched Nevereven brand, the Wall Street Journal reports.

Crew executives didn’t mention such plans on their investor conference call Thursday night. The news came as the apparel company reported that third-quarter revenues rose 10% to $622.2 million, and comparable sales rose 8%, following a decrease of 9% in the same quarter last year.

Chico’s Meltdown Shows Perils of Dumping Older Customers for Younger Ones

Chico’s FAS has become the latest retailer to learn the hard lesson that you shouldn’t fire your loyal customers as you chase new ones, even if they’re young. The retailer’s shares on Wednesday fell 35%, their worst drop in 25 years according to Bloomberg News, after it reported that it was replacing the head of the Chico’s brand after a sharp sales decline brought on by a major merchandise miscalculation. Chico’s FAS CEO Shelley Broader told analysts that the namesake brand’s efforts to appeal to new customers with so-called “boho” styles, or clothes with bolder color and prints had gone too far and alienated its long-time core customer: older women. Comparable sales at Chico’s fell 10.2% in the third quarter, on top of a 5.8% decline in the same quarter in 2017.


Athletic & Sporting Goods

Dick’s Sporting Goods looking into removing all hunting gear from its stores

After removing all assault rifles and initiating new gun sale policies at all 732 of its stores, Dick’s Sporting Goods is contemplating removing all hunting gear from its stores, company CEO Edward Stack said in a Nov. 28 conference call. In a test run, the company removed all hunting products from 10 stores where hunting gear was underperforming and replaced it with assortments in categories such as baseball, licensed products and outerwear, according to the call.


Kawhi Leonard Agrees to Multi-Year Deal with New Balance

This might be the most Kawhi Leonard thing ever.  After being traded from the San Antonio Spurs to Canada, the Toronto Raptors star has the franchise rolling with a current record of 18-4, which is good for 1st in the entire Eastern Conference.  The Raptors star has now agreed to a multiyear endorsement deal with New Balance, league sources told Yahoo Sports. Leonard will now serve as the face of New Balance basketball as the company looks to reestablish itself in the market.

Cambridge Golf Completes Acquisition of Body Symphony

Cambridge Golf announced the acquisition of Body Symphony, LLC.  Cambridge Golf is poised to bring innovation to the golfing market with creative performance nutrition products, golf balls, equipment, clothing, accessories, and more.  Body Symphony with headquarters in Sarasota FL, focuses on bringing advanced Nutritional and Superfood Products to market.  The Company has pioneered the use of pumpkin seed protein into great tasting products optimized for clean and healthy nutrition needs with several unique products.

Cosmetics & Pharmacy

Beauty Giant Goes High-tech with Its First-ever Store

It took 60 years, but CoverGirl has made its brick-and-mortar debut. The iconic cosmetics brand opened its first permanent retail store, a sleek, two level flagship in the heart of Manhattan’s Times Square. Designed to serve as the physical embodiment of CoverGirl’s “I Am What I Make Up” philosophy, the 10,000-sq.-ft. space offers shoppers an immersive experience in what is billed as an “experiential beauty playground.”

Quip Raises Another $40 million for Dental Care Products and Services

Quip, the dental care startup that got its start selling electric toothbrushes directly to consumers, has raised $40 million. The money comes in the form of equity and debt financing, with about half of the funding coming in an equity deal lead by Sherpa Capital and the other half in debt financing from Triplepoint Capital. “I think the mix of debt and equity is a great thing for us,” Quip CEO Simon Enever told TechCrunch. “It’s more attractive than ever to get alternative types of financing.”

Discounters & Department Stores

Sears identified 505 stores it plans to sell as a group to keep the brand alive

Sears, which also owns Kmart and has been operating under bankruptcy protection since October, has identified 505 stores and leases that would be sold as a group early next year in an attempt to keep the Sears brand operating.

How Kohl’s Is Planning To Poach The Millennial Market

Kohl’s is not the first place to come to mind as the prime shopping destination for millennials. Kohl’s might come to mind as a mom store. But Michelle Gass, the new CEO, is here to challenge that. Seeing a twenty-something shopper at a Kohl’s store, Gass exclaimed, “This is the quintessential Kohl’s shopper we want to see in the future,” as reported in a recent Fortune profile. Gass might be uniquely suited to the challenge. Her track record indicates she has a knack for visioning products that will land well with customers. She started her career at P&G, where she successfully developed Crest for Kids, a product so popular it was soon emulated by competitors. She went on to Starbucks where she oversaw the development of the Frappuccino, a drink that almost emblemizes the company today.

Family Dollar’s rising costs and weakness ail Dollar Tree

Dollar Tree on Thursday reported that consolidated net sales rose 4.2% year over year to reach $5.54 billion. Enterprise same-store sales rose 1%, according to a company press release. By banner in the quarter, store comps at Dollar Tree rose 2.3% on a constant currency basis (2.2% adjusted for Canadian currency fluctuations) and the Family Dollar banner fell 0.4%. Family Dollar, which the dollar retailer acquired four years ago for $8.5 billion, is still giving the company fits despite changes to stores and the debut of private labels.


Emerging Consumer Companies

Prose raises $18 million Series B

Prose, the personalized haircare brand that uses online consultations and algorithms to create custom products for consumers, announced it had raised $18 million in Series B funding. Insight Venture Partners led the round, with participation from existing investors Forerunner Ventures, Lerer Hippeau, and Correlation Ventures. Founded in 2017, the company has raised $25 million to date.

Ladder, backed by celebrities and athletes, launches

Ladder, a Los Angeles-based, direct to consumer health and wellness brand launched last week. The company is backed by celebrities Cindy Crawford and Arnold Schwarzenegger, and athletes Lebron James and Lindsey Vonn. It uses an online quiz to provide customized fitness plans, and sells nutrition products, including protein and energy supplements.

Away opens new Chicago store

Away, the direct to consumer travel company, opened its second store in Chicago and its first downtown. The company’s other Chicago store is located at O’Hare airport. This is the seventh Away store. Founded in 2015, the company has raised $107 million to date.



Grocery & Restaurants

Kraft to Acquire Paleo Darling Primal Kitchen for $200 Million

Kraft Heinz Co. agreed to purchase Primal Kitchen, a maker of condiments and salad dressings, for about $200 million, as the food giant seeks to add healthier options in a bid to ignite sales. Primal Kitchen is seen generating about $50 million in sales this year with its health-focused products. Primal Kitchen bases its product selection on the so-called paleo diet, which is heavy on proteins and vegetables and stays away from carbohydrates.


Wagamama takeover approved despite shareholder outcry

Restaurant Group’s proposed takeover of Wagamama has been given the go-ahead. However, 40% of shareholders voted against the controversial deal, which values the noodle bar’s outlets at about £4m each. The £559m deal – including Wagamama’s debt – was approved by 60% of shareholders who voted at a general meeting held by the group, which includes the Frankie & Benny’s and Garfunkel’s chains. Restaurant Group’s management faced significant shareholder opposition to the takeover amid concerns the price was too high.


Papa John’s Slumps on Refusal of Potential Buyout by Trian

Shares of Papa John’s International, Inc. plummeted on Nov 27, closing the day down at 10.2%. Per a report by The Wall Street Journal, the dip occurred after Trian Fund Management LP — a private equity fund — discarded an offer to buy Papa John’s. Rumors also suggest that apart from Trian, Papa John’s had no other potential buyer, who would take up the entire pizza chain. The other buyout interests were in the form of acquiring bits and pieces of Papa John’s.

Crafthouse secures $250M in franchise expansion deal

Crafthouse, a three-unit Virginia chain known for its wide selection of craft beers, has signed a $250 million agreement with American Development Partners and launched a franchising program in a bid to take the brand nationwide. The partnership is aimed at adding 100 new franchise locations over the next five years, Crafthouse said. American Development Partners, or ADP, is a large-volume real estate development and private-equity company that helps provide funding and space for multi-unit operators.

Home & Road

New CFO , Stock Exchange Listing for Newell Brands

Financial changes are on the horizon for Newell Brands with the appointment of a new CFO and stock exchange listing. Christopher H. Peterson will join the leadership team as chief financial officer Dec. 3 and will report to president and CEO Michael Polk. He replaces Ralph Nicoletti, who previously announced his retirement at the end of the year. Peterson will be responsible for all aspects of the finance and information technology functions including business planning and analysis, operating division finance, accounting, SEC reporting, internal audit, tax, treasury, cyber security, information management and global business services. Over the past 25 years, Peterson has held key senior executive roles at Procter & Gamble, Ralph Lauren and most recently Revlon Inc. where he was COO, operations.

Advance Auto Parts moving HQ from Virginia to North Carolina

Advance Auto Parts Inc. is moving its headquarters from the Virginia city that was its home for nearly 90 years to North Carolina’s tech-heavy capital city, the company announced. The parts retailer plans to continue employing about 600 employees in Roanoke, Virginia, but the headquarters move and expansion in Raleigh were prompted by the relative ease in attracting computer-savvy talent as the company broadens its online presence, CEO Tom Greco said.

Jewelry & Luxury

Analysis: A Crisis in Melee

Among the standout trends that have taken shape in the diamond trade this year is the poor performance of small and cheaper stones. But the drop in the so-called melee market has not been sudden. Supply levels in the midstream were high during the 2008 financial crisis and have remained so since. Inventory climbed significantly in 2017 as three new mines came on stream, leaving the market with an excess of available goods, and prices of small diamonds have dropped by up to 20% in 2018. However, the oversupply is not the only issue causing the slump. The November Rapaport Research Report outlines another three factors that have influenced the weakness in the melee market.

Second Avenue Capital Partners Provides $20MM Credit Facility to New Fallas Stores

Second Avenue Capital Partners, LLC, announced the closing of a $20,000,000 asset based credit facility to help fund the purchase and on-going working capital needs of a new entity under the banner of Fallas Stores. This new facility was integral to closing a transaction for the purchase of 85 stores from the original National Stores during a bankruptcy mandated auction. Founded by Joseph Fallas in 1962, National Stores began as a single store operating in downtown Los Angeles under the banner “Fallas Paredes.” The new Fallas Stores will remain headquartered in Harbor Gateway, CA. This 85-store acquisition preserves more than 2,500 jobs in the many communities they serve across 7 states and Puerto Rico.

Tiffany’s Same-Store Sales in the Americas Rise 5%

Lower spending by Chinese tourists at Tiffany stores in the United States and Hong Kong put a dent in the jeweler’s third quarter results despite higher spending by locals.

Tiffany & Co. reported Wednesday that for the third quarter ended Oct. 31, same-store sales in the Americas rose 5 percent over last year and are up 7 percent year-to-date.

Net sales are up 5 percent (6 percent on a constant-exchange-rate basis) year-over-year to $442 million. Year-to-date, net sales in the region have risen 7 percent to $1.3 billion.


Inside Lightbox Jewelry’s First-Ever Pop-Up Store

De Beers’ lab-grown diamond brand has just popped out of its box. Last week, Lightbox Jewelry opened its first pop-up store at the Oculus at Westfield World Trade Center in New York City. The 400-square-foot walk-in cube, smothered in pastels and anchored by a giant ever-changing video screen, debuted at the 2-year-old mall on Nov. 26, Cyber Monday, and will run through Saturday, Dec. 2. While the pop-up displays the company’s product line, no items are available for sale, though store staff have iPads to direct shoppers to the Lightbox e-commerce site.


Office & Leisure

GameStop Enters into $700 million deal

GameStop is getting out of the mobile phone business as it moves to sharpen its focus on videogames and collectibles. GameStop Corp. has entered into an agreement to sell its Spring Mobile business to Prime Communications L.P. for $700 million. Spring Mobile owns and operates a network of 1,289 AT&T wireless stores. The transaction is expected to close in the fourth quarter. The move is in line GameStop’s previously announced review of its strategic and financial alternatives. GameStop said proceeds from the sale will be used to reduce the company’s outstanding debt, fund share repurchases, reinvest in core video game and collectibles businesses to drive growth, or some combination of these options.

Monopoly for Millennials – The new board game for hipster socialists living off capitalist parents.

Americans love to hate millennials, so maybe it was inevitable that someone would invent a board game to, er, celebrate their enthusiasms. The toy company Hasbro has released a new take on its classic board game, and Monopoly for Millennials is fun for the whole socialist family this holiday season. “Forget real estate. You can’t afford it anyway,” the game’s box proclaims. Players instead acquire experiences. When Monopoly for Millennials hit the shelves this month, it sold for less than $20. But as the game gained attention, it briefly sold out, and now it won’t leave the Walmart shelf for less than $75. So as millennials pass go, they may notice there is money to be made when supply meets demand.

Pets At Home rethinks vets business strategy as costs climb

Britain’s Pets At Home warned of a drop in full-year profit and the potential closure of dozens of veterinary practices in what amounts to a strategy rethink after first-half pretax profit slid more than 9 percent. The pet care group had touted its push into higher-margin veterinary services as key to growth in the face of declines in its traditional pet food operations. But on Tuesday said it had taken an almost 30 million pound charge against a restructuring of the veterinary business, with a further 20 million pounds-plus expected in 2019 and 2020.

Technology & Internet

No Middleman offers shoppers a place to find hundreds of direct-to-consumer brands in one spot

Stephan Aarstol, founder and CEO of Tower Paddle Boards, wanted a way for brands like his, which sells directly to consumers through its online storefront, to be easy for shoppers to find. He started No Middleman as a resource for consumers looking to buy directly from creators to save money, instead of trying to find products through Amazon or Google. His worry is that without some kind of directory, direct-to-consumer brands can get buried in search results even if they are selling on Amazon or buying Google Shopping Ads. The site is organized by product category, covering areas like food, fashion and footwear. Users can also search for specific kinds of products to hone in on one of No Middleman’s 1,500 subcategories. The brands are chosen and categorized editorially, with the directory doing up to three hours of research on a company before making a final decision on if they make the cut and get a full profile written up for the site.


24 states now have online sales tax laws in effect

When online sales tax laws in Colorado and Connecticut take effect on Saturday, 24 states will have sales tax collection statutes and regulations that require online retailers to collect sales tax on online orders even if they do not have a physical presence in that state. In June, the U.S. Supreme Court issued its ruling in the South Dakota v. Wayfair Inc. case that, for the first time, allowed states and local governments to require online retailers to collect sales tax even if they don’t have a physical presence, or nexus, in the state or local tax jurisdiction.


Amazon says it had its biggest shopping day ever on Cyber Monday

Amazon said Tuesday it had its biggest shopping day ever on Cyber Monday, basing the record on the number of items sold. It also said customers ordered over 180 million items over the five days starting with Thanksgiving through Cyber Monday. Investors are expected to closely watch the results of Amazon’s holiday sales after the company delivered fourth quarter guidance that missed Wall Street expectations.


Finance & Economy

Consumers’ Holiday Spending Estimate Is Down, but Still Solid

Americans are feeling a bit more cautious about holiday gift-buying today than they were a month ago, as evidenced by their estimated spending on Christmas gifts. That figure has fallen to $794, from $885 in October. Today’s figure is also down from $862 last year at this time, but consumer spending intentions remain high enough to suggest it will be a reasonably good holiday season for retailers, if not the banner year suggested by last month’s figure.

US weekly jobless claims rise to 6-month high

The number of Americans filing applications for jobless benefits increased to a six-month high last week, which could raise concerns that the labor market could be slowing.  Claims have now risen for three straight weeks.  Economists polled by Reuters had forecast claims falling to 220,000 in the latest week.  The claims data included Thanksgiving Day on Thursday. Claims tend to be volatile around holidays. The Labor Department said no states were estimated last week.

US consumer spending surges, while underlying inflation slows

U.S. consumer spending increased by the most in seven months in October, but underlying price pressures slowed, with an inflation measure tracked by the Federal Reserve recording its smallest annual increase since February.  Despite the strong consumer spending, there are indications that economic growth is slowing.