December 17, 2018 Consensus

The Weekly Consensus – December 17, 2018 (Volume 10, Number 48)

The Big Story
New Services Creating Big Money from Small Business
Betsy White

You’ve hopefully wound down or finished your Christmas and holiday shopping for 2018 by the time you read this, and perhaps you were able to patronize one or more of the thousands of independently owned stores in the U.S. which, according to a survey from American Express, generated $17.8 billion in sales on Small Business Saturday® 2018.

Consumers are not the only fans of mom and pop retail. Last week, Faire, a disruptive technology company described as a wholesale marketplace for artisanal products, raised $100 million from some of the most successful venture capital firms in the U.S.   According to the company and press reports, Faire’s “run rate” annual sales are $100 million, and this latest financing round valued the company at $545 million.  Faire was founded in 2017 by three former executives of the payment processing company Square.

Faire can be described as a new-economy manufacturer’s representative or broker that services over 15,000 physical store locations by offering products from over 2,000 suppliers, which Faire calls “makers.”  The business operates as an intermediator, using technology to provide value added services to makers and retailers alike, making product availability more frictionless than in the past.  For retailers, Faire provides access to products online (eliminating the need to attend one or more costly trade shows), 60 day payment terms and limited product return rights, as well as proprietary AI software to help predict product success, which Faire claims improves sell-throughs.  The benefits on the maker side are similar – product exposure without the hassle and expense of trade shows, exposure to a large audience of customers, and no credit risk.  The maker side is where Faire generates revenue, charging a 15% commission on all sales, a 10% commission on new customer orders as a placement fee, and a 3% fee if makers want immediate payment.

Its focus on the wholesale channel and value-added services differentiates Faire from many new direct to consumer brands, but the proliferation of the latter provides a huge market opportunity for the company.  However, Faire is not the only firm with this business model, and a second company attracted a new nine-figure investment round which was announced on the same day as Faire’s last week.  Minted, which was founded in 2007 as a direct to consumer online marketplace of independent artists and designers, announced a $208 million raise from a different set of investors, to be used in large part to grow its wholesale business.

Is it riskier to invest hundreds of millions of dollars in a less-than-two-year-old company, or one that’s been around for 10+ years that is venturing into a different, although complementary, business model?  The clear winners here are the thousands of small retail businesses making and selling creative consumer products, and ultimately, we the consumers, who will have compelling reasons to patronize our neighborhood stores on more than just Small Business Saturday.

 

Headlines of the Week

Farfetch Acquires Stadium Goods, Valued at $250 Million

Farfetch announced Wednesday that it has acquired sneaker purveyor Stadium Goods, valued at $250 million, as the luxury e-commerce marketplace seeks to extend its reach in the growing streetwear market. The companies first partnered on a distribution deal in April of 2018. After the acquisition deal closes, Stadium Goods’s inventory of limited-edition sneakers and streetwear, offered on consignment, will be available everywhere Farfetch’s marketplace reaches. Farfetch, which went public on the New York Stock Exchange in September 2018, has aspirations to be the “Amazon for luxury,” adopting the e-commerce giant’s marketplace model.

 

Apple to invest $1 billion in new Texas campus

Apple will invest $1 billion in a new campus in Austin, Texas, the company announced on Thursday. The 133-acre campus will be located in North Austin and will accommodate an initial 5,000 employees, with capacity for 15,000 employees in total. The new campus will be located less than one mile from Apple’s existing Austin facilities and will house a range of jobs in engineering, R&D, operations, finance, sales and customer support. Apple said the expansion will make it the largest private employer in Austin.

 

 

Apparel & Footwear

Genesco sells Lids for just $100M to owner of retailer Fanzz

The parent company of Lids Sports Group announced Friday it has sold the struggling headwear retailer for $100 million—40 percent less than it paid to buy the firm in 2004. Genesco Inc. said Bethesda, Maryland-based Ames Watson Capital LLC—a company that also owns and operates licensed-sports apparel retailer Fanzz—will pay cash for Lids. The transaction is expected to close in early 2019. Lids is the second-largest of Nashville, Tennessee-based Genesco’s holdings, bringing in about a quarter of the company’s total revenue, but the retailer has been struggling. Genesco announced in February that it planned to sell Lids, but it took longer than the company expected to find a buyer for the firm, whose sales performance has been on the decline in recent quarters. Jacksonville, Florida-based Fanatics Inc., which owns several sports-related retail brands, will make a minority investment in FanzzLids in connection with entering into a commercial arrangement with that holding company.

 

Tory Burch names former LVMH executive Roussel as its next CEO

Fashion label Tory Burch is bringing on Pierre-Yves Roussel, a long-time executive at LVMH, as its new chief executive officer as the brand’s eponymous founder steps down from the role. Roussel ran the French luxury conglomerate’s fashion businesses, which include such brands as Celine, Givenchy and Loewe, until he left earlier this year. Burch and Roussel married a few weeks ago in a private ceremony. “I respect what he has built at LVMH and value the way he thinks about business, luxury and the fashion industry as a whole,” Burch said in a statement Tuesday. The newlyweds will run the show together. Burch, the current chairman and CEO of her label, will become executive chairman and chief creative officer as she continues to lead design. Roussel will focus on operations, filling a gap left by departing President John Mehas, who is taking the helm at Victoria’s Secret Lingerie.

L Brands Finds A Buyer For La Senza, But Turning Victoria’s Secret Around Is Still A Tall Order

L Brands, seeking to stem a decline in cash and focus on turning around the struggling Victoria’s Secret, its biggest unit, said Thursday it has found a buyer for its La Senza lingerie chain. Private equity firm Regent, which has stakes in brands like Sassoon and Lillian Vernon, will buy 100% of La Senza’s assets and agree to assume its liabilities, L Brands said, without disclosing the terms.  The Columbus, Ohio-based retailer, which also owns Bath & Body Works, may get additional money in the event that Regent sells La Senza or finds other “monetization of” the brand. L Brands estimated La Senza will close 2018 with sales and operating loss of about $250 million and $40 million respectively.

 

Athletic & Sporting Goods

Under Armour will shift production away from China

With U.S. trade tensions with China running high, Under Armour (UA) looks to be charting a path away from making sneakers and compression T-shirts in the country.  The sportswear maker plans to source 7% of its products from China by 2023, according to a slide presented at the company’s investor day Wednesday. Currently, Under Armour gets about 18% of its units made in China.  A good chunk of the production will be shifted to Indonesia, Jordan, Vietnam, Cambodia and the Philippines. Oddly enough, products sourced from the Americas is expected to drop to 17% by 2023 from 20% presently.

Oregon Ducks Clinch $23 Million Fanatics Deal

The University of Oregon, a school known as the “University of Nike” because of its close ties to the athletic brand, has a new apparel partner.  Fanatics Inc., the world’s largest seller of licensed sports gear, will become the college’s second big merchandise supplier — besides Nike. The company plans to produce hundreds of Oregon products and manage the school’s relationship with dozens of other licensees.  The agreement won’t push Nike to the margins. The brand retains exclusive rights to its Oregon-related intellectual property. Nothing Fanatics makes will use the popular O logo, nor the fighting duck design that often appears on the team’s jerseys.

808 Renewable Energy Corporation Completes Merger with Cool Events, LLC

808 Renewable Energy Corporation announced the completion of its merger with Cool Events, LLC.  The merger between 808 Renewable Energy and Cool Events redirects the Company’s business model to focus on the rapidly growing events industry.  Cool Events brings a seasoned management team with 35 years of combined experience in operating experiential events, including obstacle course races, running races, experiential family events and other competitive events. The team at Cool Events produced over 120 events in 2018 between its five wildly successful brands which include: Terrain Race, Bubble Run, Foam Glow, Blacklight Run and Blacklight Slide.

Cosmetics & Pharmacy

Ulta Beauty’s Q3 Results Report Sales Increase Amid Store Growth

Ulta Beauty’s winning streak continued in the third quarter as it continues to open stores at a rapid clip. The beauty powerhouse’s net income increased 25.3% to $131.2 million in the quarter ended Oct. 28. Earnings per share increased 28.2% to $2.18, just beating analysts’ estimates of $2.16 per share. Net sales increased 16.2% to $1.56 billion, in line with estimates. Total same-store sales increased 7.8%.

Fred’s Q3 Brings Focus on Raising Comps

With its third-quarter results, Fred’s saw its gross profits improve, even as comparable-store sales and net sales declined. The Memphis-based chain posted net sales of $306.4 million — down 5.5% from its previous-year third quarter — with comps down 5.3% from the prior-year period, when they were down 1%. Gross profit grew to $77 million in the third quarter, up from $70 million in the prior year. The company posted a net loss from continuing operations of $30.8 million, or $0.83 per share — an improvement over the $50.4 million net loss ($1.34 per share) the company saw in the third quarter of 2017.

Kroger to Buy Piece of Struggling Drug Store Chain’s Business

A new deal will expand Kroger Co.’s store portfolio and pharmacy customer base. Kroger said that is will take over 25 Shopko stores in Wisconsin and pharmacy files from 42 other locations in the state. Impacted Shopko pharmacy customers will have their prescriptions transferred to their local Kroger-owned grocery store, according to the Milwaukee Journal Sentinel. While the financial terms of the agreement were not disclosed, the purchase adds a “significant” number of potential new pharmacy customers to Kroger’s stores, a spokesman for the grocer said in the report. Earlier this month, Shopko announced it plans to close 39 locations, with all but one operating under the Shopko Hometown banner.

 

Discounters & Department Stores

A look inside Macy’s new retail strategy

A new in-store strategy at Macy’s is on prominent display at its Herald Square flagship in New York, where both The Market @ Macy’s and b8ta concepts are placed just inside one of the entrances, at the intersection of 34th and 7th streets. Both installations came into being this year, the same year that Macy’s acquired store concept Story, and invested in and partnered with b8ta. The department store’s most recent experiments sit alongside another shop-in-shop concept, a Samsung mini-store, and the three mark a departure from the usual in-store experience at Macy’s.

Dollar stores thrive in distressed pockets of America

As rural America gets left behind by the rise of coastal superstar cities and the chasm between the richest and the rest widens, one entity is heavily profiting from the blight: the dollar store. Why it matters: Economic signs point to a coming recession, and U.S. discount stores, which have boomed even in the strong recent economy, will only grow more — becoming the sole retail option for an increasing share of Americans. The big picture: The face of retail is changing. The rise of dollar stores goes hand in hand with the decline of American malls, says Yaromir Steiner, a mall pioneer in Columbus, Ohio.

Shoppers Flock Back to Luxury Department Stores

A few years ago, falling mall traffic and a slump in tourist visits to the U.S. led to sales declines at America’s leading luxury department stores: privately held Neiman Marcus and Hudson’s Bay’s Saks Fifth Avenue chain. However, tourists have started to return, the stock market surged in 2017, and economic growth has accelerated. As a result, well-heeled shoppers have opened up their wallets again. This has driven a return to consistent sales growth for Saks Fifth Avenue and Neiman Marcus. Unfortunately, that hasn’t translated into strong bottom-line results so far.

 

 

Emerging Consumer Companies

Jaanuu raises $15 million in growth capital

Last week, Jaanuu, a direct to consumer medical apparel company, announced that it raised $15 million. JMK Consumer led the round, with participation from the Nordstrom family. To date, Jaanuu has raised over $25 million.

Walker & Co. acquired by Procter & Gamble

Walker & Company, maker of Bevel men’s grooming products and Form beauty products, has been acquired by Procter & Gamble. Founded by Tristan Walker in 2013, the company sought to create products to better serve the needs of people of color. It launched with Bevel shaving products for men, then created Form, a collection of hair products for women. The company will operate as a wholly-owned subsidiary Procter & Gamble, with Walker continuing to serve as CEO.

 

 

Grocery & Restaurants

Activist investor fears Luby’s will ‘chisel away’ real estate assets

Bandera Partners LLC is looking to shake up the board of Luby’s Inc., nominating a slate of candidates to address what it called “bloated corporate expenses” and the company’s sale of real estate. New York-based Bandera Partners, which owns about 8.9 percent of Luby’s shares, sent a letter to the Houston-based company’s board this week, saying, “It is brutally painful to watch the company chisel away at its real estate portfolio to fund low-return investments into the business.” To stem losses, Luby’s announced an asset-sale program of $25 million in April and expanded it to $45 million in July.

The Madera Group secures nearly $21M in funding

Multi-concept restaurant operator The Madera Group has secured nearly $21 million in funding from Breakwater Management to accelerate growth of its chef-driven Mexican food brands. Madera’s brands include fast-casual Tocaya Organica and fine-dining concepts Toca Madera and Casa Madera. Breakwater’s $20.9 million investment will support Madera’s aggressive plan to more than double in size by adding 13 locations by the end of next year.

Jack in the Box plans to unload main HQ amid sale rumors

Amid growing unrest among most of its franchisees, San Diego-based Jack in the Box is exploring a sale, according to a Reuters report. Citing sources “familiar with the matter,” Reuters said the burger chain began talking to potential buyers this month including private-equity firms. At the same time, Jack in the Box has plans to downsize its San Diego headquarters with the sale of its main corporate building.

Home & Road.

PPG Acquires Coatings Company Whitford

PPG, the paint and materials company, has reached a definitive agreement to acquire coatings company Whitford for an undisclosed sum. While Whitford Worldwide Company makes coatings for industrial applications in automotive, aerospace and other industries, it is best known in the housewares industry as one of the go-to suppliers of nonstick coatings for cookware, bakeware and small electric appliances such as toaster ovens, griddles, fry pans and irons.

Financing Concerns Weigh on Auto Dealers in Q4

Alongside affordability challenges, high interest rates and difficulty obtaining credit for customers have clouded dealers’ typically rosy outlooks, according to Cox Automotive’s Dealer Sentiment Index survey. The fourth-quarter shift marks the first time that more dealers have expressed the current market was weak rather than strong since Cox began reporting survey results in the third quarter of 2017. The survey, which measured responses from 1,124 franchised and independent dealers from Oct. 24 to Nov. 6, tracks how dealers view their current market on a scale from weak to strong.

Jewelry & Luxury

Alex and Ani Brings Up Pandora in Suit with Sterling

In a Dec. 7 filing in Ohio federal court, Alex and Ani asked Judge Sara Lioi to let it seek evidence to determine whether rival charm brand Pandora interfered with its relationship with Sterling Jewelers. Pandora’s charms are currently sold at Jared, which is owned by Sterling. Jared briefly carried Alex and Ani, but the relationship ran aground, leading to the current lawsuit.

Inside James Allen: 3 Observations About Its First Store

On Friday, I took Amtrak down to Washington, D.C. to attend the grand opening of the first store for James Allen, the jewelry e-commerce site Signet Jewelers acquired in September 2017. James Allen certainly isn’t the first once-online-only retailer to decide it needs a physical space where consumers can interact with both the product and its people. Walk out the front door at James Allen and take a stroll down M Street and you’ll see companies like Warby Parker, the online eyewear seller, and Rent the Runway taking up space.

Don’t Be Fooled, Real Matters

A few years after the introduction of laboratory-grown diamonds in the US market, we can reflect on the strategies implemented by synthetic diamond manufacturers and marketers to assess the future of this ‘new’ category. From the outset lab-grown diamond marketers have attempted to position their product in the consumer’s mind as the equivalent of a natural diamond albeit at a 20 per cent price discount to the real thing.

The product was said to be ‘identical to a diamond’ because of its chemical properties, and in some cases synthetic diamonds have claimed to be ‘even more rare’ because they are produced in smaller quantities.

 

Office & Leisure

Michaels boosts top line as tariffs loom

Michaels last week reported a third quarter net sales rise of 2.7% to $1.27 billion from $1.24 billion a year ago, including “very strong e-commerce sales,” CEO Chuck Rubin said on a conference call. The rise was driven by a 3.8% store comp increase and operation of 19 net new stores. The company is now also contending with the specter of tariffs, and executives addressed that last week. If the 10% tariffs introduced in September stand, about $400 million of Michaels’ product costs would be subject to higher duties next year, creating a “$40 million headwind to merchandising margin before any mitigation efforts,” Chief Financial Officer Denise Paulonis told analysts.

Pet Supplies Plus Gets Acquired

Sentinel Capital Partners acquired Pet Supplies Plus (PSP). Founded in 1988 and headquartered in Livonia, Mich., PSP is a franchisor and operator of pet specialty stores that provide a customer-centric shopping experience in smaller stores that have a neighborhood feel. Serving 33 states, PSP’s system comprises 448 stores, split evenly between franchised and company-owned locations. “PSP is the No. 1 pet franchise system in the U.S., with an expanding footprint and a large white-space opportunity,” said Marc Buan, a Sentinel principal. “The pet industry is very attractive due to its stability, growth and passionate consumer base. PSP has a strong position in the pet retail segment and a very loyal customer base.” Sentinel has acquired 13 franchise investments over the course of its history.

U.K. toy retailer has eyes on U.S.

Another retailer expands to fill Toys “R” Us void. Hamleys, the 258-year-old British toy retailer, is close to finalizing a deal to open a store in Manhattan’s Herald Square area, near the Macy’s flagship, reported CNBC. After dropping anchor in New York, Hamleys would look to open stores in other major U.S. markets such as Los Angeles and Chicago and would consider moving into some of the more profitable malls, the report said. Hamleys is best known for its seven-level flagship in London, which is billed as the largest toy store in the world. The store is filled with attractions for kids, and is often described as a toy paradise. This is not the first time that reports have circulated that Hamleys was looking to enter the U.S. In 2015, the retailer retained JLL to facilitate a multiple store roll-out throughout the United States. But to date, the retailer has not opened any U.S. stores.

Technology & Internet

Amazon targets airports for checkout-free store expansion

Amazon.com is looking at bringing its futuristic checkout-free store format to airports in an effort to win business from hungry, time-pressed travelers, according to public records and a person familiar with the strategy. For months, the world’s largest online retailer has been expanding Amazon Go, where customers scan their smartphones at a turnstile to enter, and then cameras identify what they take from the shelves. When shoppers are finished, they simply leave the store and Amazon bills their credit cards on file. Amazon is evaluating top U.S. airports for new locations, according to public records requests to several airport operators.

GoPro Plans To Move US-Bound Camera Production Out Of China

GoPro Inc. on Monday announced that it plans to move most of its U.S.-bound camera production out of China by the summer of 2019 to mitigate the potential impact of inclusion on any new tariff lists. International-bound camera production will remain in China.

 

Finance & Economy

‘Historic’ tax refunds will extend retail boom into 2019

Polling shows that many Americans don’t like the landmark tax overhaul passed a year ago, but maybe that’s because they haven’t received a bulk of the benefits yet. The law cut tax rates for some individuals, but lots of Americans haven’t seen all those savings flow through to their paychecks, according to Wells Fargo & Co. That will be made up during a “historic” refund season early next year, with, for example, a household earning $45,000 a year realizing 70 percent of its tax benefit, the bank said Friday in a research note. Oftentimes, retailers struggle to draw shoppers in February and March. But bigger-than-expected refunds could help maintain the momentum this year from what is shaping up to be one of the best holiday-shopping seasons in recent memory.

 

Strong retail sales push growth forecasts to 3 percent for fourth quarter

Strong consumer spending is giving a boost to fourth-quarter GDP growth, pushing it up to 3 percent, according to a survey of economists.  Economists, participating in the CNBC/Moody’s Analytics GDP rapid update raised their forecast by 0.2 percentage points following the stronger-than-expected November retail sales report. Excluding automobiles, gasoline, building materials and food, retail sales gained 0.9 percent in November, on top of a revised 0.7 percent increase in October. Third quarter GDP growth was 3.5 percent, but economists have been looking for a slowdown in the fourth quarter continuing into next year.

 

U.S. Consumer Credit Rose Most in 11 Months in October

U.S. consumer debt rose in October by the most in almost a year and topped estimates, indicating Americans were stepping up borrowing to finance purchases.  Total credit rose $25.4 billion from the prior month, exceeding the median estimate of economists for a $15 billion increase, following an upwardly revised $11.6 billion gain in September, Federal Reserve figures showed. Credit-card and other revolving debt rose by the most in 11 months and non-revolving credit also increased.

Homeowners are seeing the smallest equity gains in two years

Homeowners in most places are still seeing their nest eggs get a little bigger, but the gains are shrinking quickly.  The average homeowner with a mortgage saw a gain of $12,400 in home equity between the third quarter of last year and this year, according to CoreLogic. That includes price appreciation and paying down the mortgage. That is down from $16,000 in annual gains in the second quarter, and the smallest gain in two years.