January 7, 2019 Consensus

The Weekly Consensus – January 7, 2019 (Volume 11, Number 1)

The Big Story
Digital-First Brands’ Next Conquest: Malls

It was reported last week that U.S. retail vacancies inched higher in the fourth quarter, rising to 10.2% from 10.0% a year earlier. The small increase underscores how the retail sector has withstood many store closures across the nation, despite substantial headwinds. Many had feared the worst, given actual or imminent closings by Sears, Kmart, JC Penney, Gap, Toys R Us, and Victoria’s Secret.

To combat the expected closings and the challenges of traditional retail, many mall owners have turned to new tenants and new leading models. Many malls are increasingly shifting real estate to apartments, hotels, fitness companies, grocery stores, and restaurants. Many are also growing increasingly dependent on short-term leases, for both online brands and traditional retail brands seeking a new physical experience.

Macerich, the third-largest owner and operator of shopping centers in the U.S., recently launched BrandBox, a leasing program that allows online brands to try brick-and-mortar with a temporary pop-up store. The leases are typically six to twelve months, with minimal buildout or construction, which allows Macerich to switch up its layout frequently and accommodate different numbers of shops. Kimco Realty and Jones Lang LaSalle also launched new initiatives focused on flexible terms and formats. Across the board, store closures have made property owners more open to working with companies that are reluctant to commit to traditional leases.

Said Kevin McKenzie, Macerich’s chief digital officer, “Instead of selling real estate, we’re selling a solution. That’s an entirely new process, culturally, for our company.”

“You had to sign a multiyear lease to be in a mall, but that’s changed,” said Jennifer Granozio, senior vice president at Allied Experiential, a firm that organizes pop-ups for companies across the country. “Now they’re letting you rent an empty space for a few months. They never used to let you do that.”

The rise of short-term leases has coincided with an increase in customer acquisition costs among digitally native brands. With the cost of acquiring new customers online becoming more expensive, many businesses are turning to physical retail.

Said Gabriella Santaniello, president and founder of A-Line Partners, a retail research firm, “Vacancies have opened things up for digitally native brands to get a really good deal on a pop-up or short-term lease, and they’re taking advantage of it.”

It makes for a bright spot in the retail sector. At the same time that digitally native brands have seen a significant increase in the cost of acquiring new customers online, higher mall vacancies have made opening a store more affordable and flexible. According to Green Street Advisors, a real estate research firm, there are now 600 physical stores from digitally native brands. Those same brands plan to open 850 stores over the next five years, according to Jones Lang LaSalle.

Much of that growth is anticipated to be driven by higher-profile digitally native brands. Casper plans to grow from twenty stores today to 200 over the next three years. Bonobos plans to grow from a current 60 stores to 100 in the next two years. Warby Parker expects to reach 100 stores in the next year.

Despite the positive indications, online brands are not expected to completely offset the loss of more traditional retail businesses. Digital-first brands are highly selective in choosing locations for their stores, and many cluster around the same affluent neighborhoods and upscale shopping destinations. As a result, not every mall is benefiting from the influx of digital brands, and certainly not every mall is benefiting equally. Said co-founder and co-CEO of Warby Parker, Dave Gilboa, “We’re not considering anything outside of the premiere malls.”

Online brands today account for a small fraction of overall mall tenants, but their influence – and the revenue they create – is only expected to increase. However, while the growth of digital brands in physical retail is promising, it may not be enough to restore most malls to their former glory.

 

Headlines of the Week

Sears Prepares for Possible Liquidation as ESL Bid Fails

Sears Holdings Corp. is preparing to potentially wind down the iconic retailer after Chairman Eddie Lampert’s bid to buy several hundred stores out of bankruptcy fell short of bankers’ qualifications, according to people with knowledge of the matter. The retailer started laying the groundwork for a liquidation after a series of meetings Friday in which its advisers weighed the merits of a $4.4 billion bid by Lampert’s hedge fund to buy Sears as a going concern, said the people, who asked not to be identified because the discussions are private.

Apple says it could miss $9 billion in iPhone sales due to weak demand

Apple CEO Tim Cook published a letter to investors warning of weaker than expected first-quarter earnings, citing “fewer iPhone upgrades than we had anticipated.” The weakened demand came primarily from China, although Cook notes that “in some developed markets, iPhone upgrades also were not as strong as we thought they would be.” In an interview with CNBC, Cook elaborates on the shortfall, pointing out that “the trade tensions between the United States and China put additional pressure on their economy,” which resulted in fewer customers.

 

 

Apparel & Footwear

Michael Kors Holdings Finalizes Versace Acquisition, Changes Name to Capri Holdings

Following the September 2018 announcement of luxury group Michal Kors Holdings acquiring the Versace fashion house for a sum exceeding $2.1 billion, the American conglomerate announced it has completed the takeover. The addition of Versace to its portfolio coincides with the luxury group’s decision to change its name to Capri Holdings, starting January 2. The company that is publicly listed on the New York Stock Exchange under the ticker Kors – soon CPRI – is betting on Versace to help grow group revenues to $8 billion in the long term. In addition, Capri Holdings aims to increase Versace’s global retail footprint from 200 to 300 stores, accelerate e-commerce and omni-channel development, plus expand accessories and footwear from 35% to 60% of revenues.

 

Vans Sues Target for Selling Similar Sneaker Design

Things have begun to heat up between Vans and Target as the lifestyle brand filed a lawsuit against the retail giant over a sneaker design.  According to legal documents obtained by TMZ, Vans is alleging Target’s Camella Lace-Up shoe mimics the design of their classic Old Skool Shoe.  According to Vans website, in 1977, “Vans #36, the Old Skool, debuts with the now famous Vans Sidestripe. The Old Skool is Vans’ first skate shoe that incorporated leather panels for increased durability.

Oaktree, Goldman Said to Gain Control in Fullbeauty Bankruptcy

Fullbeauty Brands, the women’s plus-size clothing retailer owned by Apax Partners and Charlesbank Capital, has lined up support from creditors for a pre-arranged bankruptcy that would hand control to senior lenders including Oaktree Capital Group LLC and Goldman Sachs Group Inc. The Chapter 11 bankruptcy would cut about $900 million of debt, Fullbeauty said in a statement. The filing allows the company to keep operating while it works out a plan to turn around the business and satisfy its debts. Fullbeauty expects to make the U.S. bankruptcy filing around Feb. 4 in Manhattan, with the solicitation process expected to end around Jan. 24 and the completion of the process in early 2019.

 

Athletic & Sporting Goods

Dick’s Sporting Goods Not Renewing USOC Deal After Four Years

Dick’s Sporting Goods will not renew its USOC sponsorship, which expired at the end of the year. The company cited a “new investment focus” in deciding to end its nearly four-year run as official sporting goods retailer of Team USA.  Dick’s is the only USOC sponsor whose deal expired at the end of 2018. The remaining 20 sponsor deals expire in 2020.  Dick’s USOC relationship centered on its “Contenders” program, which gave Olympians and Olympic hopefuls part-time jobs with flexible hours to accommodate training schedules.

 

Zwift Raises $120M to Expand Its Virtual Cycling Technology to Esports

Technology’s impact on both fitness and gaming has been steadily increasing, but it has rarely attempted to combine the two in any impactful way. That may have changed, though, as a startup out of London looks to fuel the increasing demand for both of these interests with a large new funding round. Zwift is an interactive platform that enables cyclists to both interact and compete with each other virtually. The company announced that it had raised $120 million which, according to co-founder and CEO Eric Min will be used to expand into additional sports. Zwift has been focused strictly on the gamification of cycling but now looks to add running competition as well and to branch out into eSports tournaments.

The Pac-12 wants a $500M investment from private equity

Private equity has long made its living turning around distressed companies.  Could the industry revive a struggling college sports league?  The Pac-12 Conference is seeking a $500 million investment from a private equity partner for a 10% stake in the league’s TV network and other commercial assets, according to The Oregonian. A possible deal could reportedly value the new business at between $5 billion and $8.5 billion, per the conference’s plans. It would also include broadcast and sponsorship rights, merchandising, and distribution agreements.

Cosmetics & Pharmacy

New York City Pharmacies Banned from Selling Cigarettes

New York City pharmacies are prohibited from selling cigarettes and other tobacco products, thanks to a bill which went into effect on Jan. 1. The bill, which was signed by Mayor Bill de Blasio in 2017, also prohibits pharmacies from selling e-cigarettes and was part of a package of anti-smoking bills that also raised the minimum price of cigarettes to $13 a pack. “People trust pharmacies to help them stay well — they should be helping smokers quit, not the opposite,” Deputy Mayor for Health and Human Services Herminia Palacio said in a statement. Many pharmacies have voluntarily stopped selling tobacco products, including CVS Health, which discontinued selling cigarettes in 2014. About 500 pharmacies still sell tobacco products, according to the city.

 

Rite Aid warned of risk of delisting from NYSE as shares fall below $1

Rite Aid is at risk of being delisted from the New York Stock Exchange and considering a reverse stock split to prop its share price above $1 to comply with the exchange’s trading rules, the company said Friday. Shares of the drugstore chain have fallen 64 percent over the past year, down to 75 cents a share as of Thursday’s close from $2.11 on Jan. 3, 2018. Rite Aid’s stock has hovered under $1 per share over the past month, breaking the NYSE’s rule. The exchange notified Rite Aid on Thursday that its average share price was too low and placed its stock at risk of delisting. Rite Aid has six months from the Jan. 3 notice to boost its average share price above $1 for a month. The company listed a reverse stock split, where companies combine shares to increase the price, as an option “to cure the share price non-compliance.” The delisting warning comes after a string of headaches for the company.

 

Discounters & Department Stores

Nordstrom co-President Blake Nordstrom, who treated employees like family, is dead at 58

Blake W. Nordstrom, part of the fourth generation to lead his family’s namesake retail company through one of the industry’s most tumultuous periods, died in Seattle on Wednesday morning. He was 58. The company confirmed his death. On Dec. 10, Mr. Nordstrom announced that he had been diagnosed a week earlier with lymphoma, sharing optimism at his prognosis of a “treatable” form of the cancer, which affects the immune system. He told employees, customers and shareholders he planned to undergo chemotherapy and reduce his travel schedule but “otherwise continue to work throughout this process as normal.”

Lord & Taylor flagship store locks its doors forever

After 104 years, Lord & Taylor’s flagship store on Fifth Avenue locked its doors forever.

The venerable department store famed for its animated holiday windows closed down Wednesday afternoon, ending a blowout sale that left whole floors empty. By the end, clothes that once sold for as much as $100 were going for $5.99, and $600 designer shoes for $99. The 11-story building has been sold to the WeWork space-leasing company for more than $850 million.  Forty-five other, smaller Lord & Taylor stores remain open, mostly on the East Coast. In addition, Lord & Taylor-branded merchandise is being sold online through the Walmart website.

What do positive comp sales say for department stores? Not much

Department stores have once again decked the halls this holiday season to lure shoppers into their stores. But as the twinkling lights dim, what’s left behind are the same old disappointing results. But it shouldn’t come as a surprise that department stores lag. The reason is simple: department stores continue to lose market share. The original full-line department stores (think of Sears or Montgomery Ward) carried everything a household needed — clothes, appliances, linens, etc.

 

 

Emerging Consumer Companies

The Wing raises $75 million

The Wing, the coworking, social, and event space for women, raised $75 million in Series C funding. The investment was led by Sequoia Capital, with participation from existing investors NEA and WeWork, and new investors Upfront Ventures and Airbnb. The Wing currently has locations in New York, Washington, DC, and San Francisco. The funding will be used to help fund 2019 expansion to new locations in Los Angeles, Chicago, Boston, London, Toronto, and Paris.

Candid expands retail footprint

Candid, the startup promising to make straight teeth more accessible and affordable, will open new physical locations in San Francisco, Austin, Santa Monica, and Columbus, Ohio. The company hopes to have 75 locations by the end of the year. Candid currently has locations New York, Boston, and Los Angeles.

Mahabis enters administration

Mahabis, the London-based slipper brand, began the process of administration. The company for now has ceased selling product. Founded in 2014, Mahabis sold nearly one million pairs of slippers in its history.

 

Grocery & Restaurants

Amazon to expand Whole Foods stores

Amazon.com is planning to expand its Whole Foods Market portfolio by adding more stores to put more customers within its two-hour delivery service range, The Wall Street Journal reported. Whole Foods employees have visited regions of Western North America for potential retail spaces in parts of Idaho, southern Utah and Wyoming where it currently has no stores. The world’s largest online retailer plans to expand its two-hour delivery service, Prime Now, to nearly all of its roughly 475 Whole Foods stores in the United States.

Luby’s counters Bandera board push

Luby’s Inc., addressing an activist investor board seat fight, is telling shareholders it is working to improve the company’s financial results and operating performance as the competing sides head toward a Jan. 25 annual meeting and proxy vote. Bandera Partners LLC, a New York hedge fund that now owns about 9.8 percent of Luby’s shares, in late November said it was putting forward its own slate of four candidates for the company’s nine-member board, citing “bloated corporate expenses” and the company’s sale of real estate. Luby’s said it did not endorse any of Bandera’s nominees.

Stop & Shop to acquire King Kullen

Ahold Delhaize USA’s Stop & Shop plans to buy Long Island, N.Y., supermarket chain King Kullen Grocery Co. Inc. Financial terms of the transaction weren’t disclosed. Stop & Shop said Friday that the deal includes 32 King Kullen stores, five Wild by Nature natural/organic supermarkets and the King Kullen corporate office in Bethpage, N.Y. Quincy, Mass.-based Stop & Shop said it expects to close the deal during the first quarter of 2019, pending customary closing conditions.

Home & Road

Whirlpool Corp. Identifies the Features Homeowners Crave in a Smart Home

With smart home technology expanding its offerings and capabilities, a survey from Whirlpool Corporation defined what homeowners want out of smart products: smart features that are easy to understand and are a practical and efficient addition to their everyday household tasks. More than 2,000 homeowners and renters from four different regions of the world— the U.S., India, Brazil and France—took part in the survey, which questioned respondents on their daily routines and preferences when it comes to home appliances. The majority of consumers (72 percent) are looking for simpler, faster ways to help manage their lives, and over half admit to feeling that cooking (52 percent) and doing laundry (58 percent) take up more than the preferred amount of time.

Lowe’s looks to hire 65,000 new employees in tightest labor market in decades

Lowe’s said Friday it plans to hire more than 65,000 people this year — some permanently and others on a seasonal basis — to help fill roles ranging from customer service to merchandising. It also is planning to ditch some existing roles, which the company says will help it “simply operations” in stores. The home improvement retailer said 10,000 of the new jobs will be permanent and on its merchandising team. It said 6,000 will be full-time store managers and department supervisors in stores. And 2,000 will be technology roles to help build out Lowe’s website, while the remaining more than 50,000 positions will be temporary and filled ahead of the busy spring season.

Jewelry & Luxury

Graph Diamonds: The Year in 5 Telling Charts

Data can be exhilarating. Last week, Avi Krawitz, Rapaport’s News Editor and Senior Analyst, called me over to look at his screen, as there was something exciting on it. The attraction was a line chart of the RapNet Diamond Index (RAPI™) for 1-carat diamonds throughout 2018, showing that the peak price on July 6 coincided exactly with the day the US implemented its first China-specific tariffs. The index dropped through the end of the year. He later beckoned a few more colleagues over, and there was soon a modest clamor of interest around his workstation. By the end of the day, even the office administrator was asking, “Did you see that graph?” Charts can, it appears, tell a story in ways that would require many words. So, we’ve decided to relive 2018 through five pieces of visual data about the diamond and jewelry trade.

Pre-Owned Jewelry Website Seeks to Raise $10M

TrueFacet, an e-commerce site that sells both new and pre-owned jewelry and watches, has its sights set on another round of funding.  In a Dec. 26 filing with the Securities and Exchange Commission, the New York based-company indicated it recently raised $7.1 million from investors and is seeking to secure $2.8 million more, for a total of $9.9 million.

The e-commerce site has raised millions in the past several years, including $6 million in its startup round of funding led by Maveron LLC in September 2016, and has continued growing.

Four Trends from a Tough Year for Stocks

Diamond-related shares mainly fell in 2018, in line with a global stock-market downturn. Investors fretted about trade tensions, uncertain consumer demand and the impact of the US Federal Reserve raising interest rates in December. The S&P 500 index ended the year more than 6% down, while Hong Kong’s Hang Seng slid 14%. It wasn’t all bad: Some diamond miners did well, while retail offered a few exceptions to the rule. Here were the main takeaways from the year in stocks: 1. US retailers slumped; 2. The trade war hit nearly everyone; 3. Big diamonds meant big money.

 

Office & Leisure

Toys R Us workers set to get paid — months after bankruptcy

Roughly 10 months after Toys R Us started closing its 735 U.S. stores, nearly 20,000 workers laid off without severance by the bankrupt retailer are finally getting some money. Checks were cut this week for those who submitted claims in late December, and the process will continue for several more months, according to a labor advocacy group that helped former employees mount a public relations campaign seeking severance.

Workers have until March to file the paperwork to seek payment. The payments range from $200 to more than $12,000. The money comes from a $20 million financial assistance fund established in November by private equity firms Bain Capital and KKR, two of three companies that took over Toys R Us in a $6.6 billion leveraged buyout in 2005.

GameStop shares surge 12% on report it could be announcing a buyer next month

GameStop shares surged 12 percent Friday on a report from the Wall Street Journal that a deal for the struggling retailer could come as soon as mid-February. Private equity firms interested in buying GameStop include Sycamore Partners and Apollo Global Management. The video game and electronics company has struggled as competition from Amazon and digital gaming have eaten into its sales. Revenues have dropped for four of the last five years, and investors aren’t happy. Its stock, which has a $1.5 billion market value, declined 30 percent last year. The company has been trying to restructure its business and branch out beyond selling new and used video games. In November, it sold its Spring Mobile business for $700 million to Prime Communications to generate cash.

Fast-growing online wedding company opens store—complete with ministers

Zola has made the leap to brick-and-mortar with an experiential destination where it promises customers can plan their entire wedding and registry in under one hour. The online wedding planning and registry company has opened a temporary store, in Manhattan’s Flatiron District, that offers one-stop shopping for wedding planning. Designed for engaged Millennials who want to have a fast, fun and easy experience, the outpost includes sections where customers can create free wedding websites, design “save the date” and wedding invitations, and register for gifts. And for couples who don’t feel like waiting, they can elope on site — all of the store associates are Universal Life ministers available to perform weddings. There is also a CBD lounge to help make wedding planning even less stressful. (CBD is the legal, non-psychoactive chemical compound in cannabis. It is easily blended into beverages and food.)

Technology & Internet

Amazon’s cashierless Go stores could be a $4 billion business by 2021, new research suggests

Amazon Go is not only trying to out-convenience convenience stores, it could out-earn them, too. And that could mean a new, giant multi-billion dollar business for Amazon within just a few years. Amazon’s new cashless, cashierless stores — which allow customers to just grab items off shelves and automatically get charged upon exiting, thanks to a bevy of sensors and cameras — bring in about 50 percent more revenue on average than typical convenience stores, according to new estimates from RBC Capital Markets analysts. Using their own purchases at Go stores as data points, RBC analysts estimated that the typical order size at the new futuristic shops is around $10. The analysts also counted the number of visitors to an Amazon Go — an average of 550 a day — which would mean the average Go store generates an estimated $1.5 million in revenue a year excluding days when current Amazon Go stores are closed.

 

Pokemon Go maker Niantic raises $190 million ahead of new Harry Potter game release

Niantic, the video game maker behind Pokemon Go, has raised $190 million as it gears up for the release of a new game that revolves around the Harry Potter universe. The San Francisco-based firm revealed in a filing with the U.S. Securities and Exchange Commission that it had raised the funding on Dec. 20, shortly after a Wall Street Journal report said it was in the process of raising a fresh round of capital. The Journal also reported that the round would put Niantic’s valuation at $3.9 billion.

 

Finance & Economy

Companies added way more jobs than expected in December

Contrary to growing concerns about a potentially slowing U.S. economy, job creation surged in December as measured by the latest ADP/Moody’s Analytics survey.  Professional and business services led the way with 66,000 new positions, education and health services contributed 61,000 and leisure and hospitality added 39,000. In all, service-related industries were responsible for 224,000 of the new hires, while goods producers rose by 47,000.

Mortgage applications plummet nearly 10% to end 2018, despite lower rates

Mortgage interest rates fell to the lowest level in four months, but that did nothing to spark activity in the mortgage market.  The numbers are surprising, given that homebuyers and homeowners looking to refinance could have taken advantage of lower interest rates. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($453,100 or less) decreased to 4.84 percent from 4.86 percent a week earlier, with points decreasing to 0.42 from 0.47 (including the origination fee) for loans with a 20 percent down payment.

Economy’s strengths in 2019: Strong job market, consumer spending and low inflation

The stock market’s recent sell-off has stirred fears of a 2019 recession.  But a post-Christmas rally that lifted stocks briefly is likely rooted in this reality: Some key engines, such as a healthy labor market, will continue to drive the economy forward in 2019.  While growth is expected to ease from a projected 3 percent or so in 2018 — which would be a 13-year high – to about 2.5 percent in 2019, that would still be a solid performance and top the 2.2 percent average during the nine-year-old economic expansion.