January 14, 2019 Consensus

The Weekly Consensus – January 14, 2019 (Volume 11, Number 2)

The Big Story
Tech and Privacy Clash at CES
Maeghan Thompson

Last week, the Consumer Electronics Show, better known as CES, took over the Las Vegas Convention Center, showcasing more than 4,500 exhibitors in the consumer electronics industry.  CES has enabled consumers and technophiles for over 50 years to see the future of next-generation technologies and products.  In many years, the show has served as a coming-out party for groundbreaking new products, such as in 1970, when the first consumer VCR was unveiled, or, more recently, in 2015, when the event was overrun with web-connected products known as “Internet of Things.”  However, while the show often carries a certain “the-future-looks-bright” optimism, the message this year may have been “let’s-pump-the-brakes.”  The different tone this year emerged as technology’s inexorable advance seems more than ever to be jeopardizing a cherished right: privacy.

The sources of consumers’ elevated privacy concerns are many.  First, several household name companies suffered enormous data breaches in 2018, including Facebook (50 million users compromised) and Marriott (383 million customers compromised, including five million unencrypted passport numbers).  Second, while more and more Americans are inviting smart speakers, such as Amazon Echo, into their homes (eMarketer estimates 74 million Americans will have a smart speaker by the end of 2019), the products are often suspected of “listening” in on their owners.  In certain instances, speakers have malfunctioned and shared or exposed contact information or private, recorded conversations.  Lastly, new technologies such as facial recognition software and AI continue to evolve, and bring with them new privacy concerns.

Some of the new products at CES that underscored consumers’ privacy worries included safer routers, products that can keep smart speakers from picking up conversations that are not intended to be recorded, and a digital assistant that can be used without a connection to a cloud-based server (which makes it more hacking-resistant).

One of the new products at CES that raised an eyebrow for privacy-minded observers was FaceMe, a new highly accurate facial recognition engine.  With FaceMe’s technology, sensors can be installed in kiosks and/or digital marketing displays, allowing companies to track shoppers’ gender, age, race, etc., as well as their facial and emotional reaction to products or messages.  While few people would put this kind of customer analysis on the same level as hacking, some worry that personal data collected through facial recognition could be hoarded, stored, and potentially misused in the future. At the very least, some argue that it is an intrusion of privacy to be recorded or scanned by such software without a grant of permission.

Another reminder of privacy’s hot-button status at CES was actually outside of the show, not in it.  Apple installed a huge ad on the side of a 13-story building overlooking the convention center that played on the famous Las Vegas slogan, reading, “What happens on your iPhone, stays on your iPhone.”  The ad was hard to miss, according to reports, and was interpreted as a shot at other tech giants that are less careful with consumers’ privacy.

This year’s CES still showcased a number of new products typical of the show’s usual exhibition theme.  For instance, Samsung demonstrated a robotic assistant, “Bot Care,” which could help take care of sick or elderly, and Kohler introduced its Numi toilet, which incorporates Alexa to control its heated seat, lights and programmed noises.  Many consumers look forward to a day when CES can go back to simply showcasing products such as these. No one wants to live in a world where your smart toilet can be hacked.

 

 

Headlines of the Week

Sears chairman submits new $5 billion bid to save bankrupt retailer

Sears Holdings Corp Chairman Eddie Lampert submitted a revised takeover bid of more than $5 billion for the company, according to a regulatory filing made on Thursday, significantly increasing the likelihood the U.S. department store will be able to stay in business. Sears set a Wednesday deadline for Lampert to submit a new offer for the retailer and a $120 million deposit, after the billionaire hedge fund manager’s earlier $4.4 billion bid fell short. The chain, which includes Kmart discount stores, had decided to ask a U.S. bankruptcy judge to pursue liquidation Tuesday morning, before giving Lampert more time to improve his offer.

P.F. Chang’s agrees to sale

P.F. Chang’s China Bistro Inc. has agreed to a purchase by investment firms TriArtisan Capital Partners Inc. and Paulson & Co. Inc., according a notice sent to investors and reported late Thursday by Bloomberg News. The Scottsdale, Ariz.-based casual-dining chain has been owned by New York-based private-equity firm Centerbridge Partners L.P. since 2012, when it took P.F. Chang’s and its sibling fast-casual Pei Wei Asian Kitchen brand private in a deal estimated at $1.1 billion. Centerbridge will reportedly retain ownership of 200-unit Pei Wei, which split off from P.F. Chang’s in 2017. Bloomberg reported earlier in the week that the value of the deal was about $700 million.

 

 

Apparel & Footwear

LuLaRoe Founders Accused of Hiding Millions to Avoid Creditors

In 2017, LuLaRoe’s wildly colorful leggings and tops became so popular online that the four-year-old company earned about $2 billion in revenue—about as much as J. Crew.

But unlike J. Crew, LuLaRoe didn’t sell its clothes to customers. It sold them wholesale to its tens of thousands of “independent fashion consultants,” who in turn sold them retail.

Many of those people have struggled to find success with LuLaRoe, and the company has been sued by former consultants and customers alleging a wide range of misconduct, from improper sales tax collection to running an illegal pyramid scheme, all of which the company has denied. Now, a new suit takes aim at company founders Mark and DeAnne Stidham, alleging that they’ve hidden tens of millions of dollars in shell companies to avoid paying their creditors.

Bridal apparel retailer’s bankruptcy plan gets court approval

David’s Bridal is moving forward with its reorganization strategy. The bridal apparel retailer announced that the United States Bankruptcy Court in the District of Delaware has approved its restructuring plan. According to the arranged deal, David’s Bridal will slash its debt-load by approximately $450 million, and continue selling wedding and special occasion dresses in a wide range of styles, colors, sizes, and prices. A heavy debt load, along with increased competition from lower-priced competitors and changing bridal fashions, forced David’s Bridal to file for bankruptcy protection on Nov. 16.

WSJ: Charlotte Russe mulls sale, bankruptcy

Mall-based teen retailer Charlotte Russe is reportedly considering a sale or bankruptcy. The retailer hired Guggenheim Securities recently to explore strategic alternatives. A bankruptcy could be avoided if the retailer can strike a deal that allows it to scale, potentially through a sale or partnership of some kind, one of the sources said.

Despite some moves to reorganize its balance sheet and make headway with e-commerce efforts, Charlotte Russe’s financial situation has remained precarious for the last several years. The company has been struggling to unload mounting debt in an increasingly difficult climate for mall-based retailers. In February 2018, the company announced a restructuring deal with lenders that allowed it to slash its debt from $214 million to $90 million.

 

Athletic & Sporting Goods

Nike Launches Its First-Ever Yoga Apparel Collection

Nike has launched its first apparel collection designed specifically for yoga. A part of the Nike Training line, the assortment features pieces created for ease of movement, versatility and support.  Nike’s yoga collection includes garments for men and women, ranging from shorts and tights, to long hem tees, high neck tanks, mesh tops, hoodies and sports bras.

 

GSM Outdoors acquires Mainstream Holdings

GSM Outdoors, LLC, a multi-brand manufacturer and technology innovator of premium, specialized hunting and shooting products, has announced the acquisition of Mainstream Holdings, including Muddy Outdoors, Hawk, and Big Game Treestands, GMS said in a news release.  According to the company, Muddy Outdoors is a premier manufacturer of hang-on, climber, and ladder stands, along with portable tripod and quadpod elevated platform stands for hunting and rugged, elevated box blinds as well as pop-up and bale blinds for ground hunters, and a broad range of game cameras and tree stand and hunting accessories.

 

LNK exits Beachbody

LNK Partners has sold its minority stake in Beachbody, a provider of fitness and weight-loss solutions. The buyer was not identified. No financial terms were disclosed.  Beachbody is a leading creator and marketer of fitness and weight-loss solutions such as T25, P90X, INSANITY, 21 Day Fix, and Shakeology. During LNK’s investment period, the company significantly expanded its direct selling business and successfully launched its online streaming service, Beachbody On Demand, which now has over 1.5 million subscribers and continues to grow rapidly.

 

Cosmetics & Pharmacy

Ritzman Sells Rx Business to CVS Pharmacy

Ritzman Pharmacy announced that it is selling its 20 retail pharmacies to CVS Pharmacy.

Ritzman Pharmacy primarily services markets in Northeast Ohio. CVS Pharmacy plans to operate in the same locations with the same staff in the Akron and Berlin stores. The Ritzman Pharmacy locations in Rittman, Shreve, Sugarcreek, Wooster Milltown, Medina River Styx, Millersburg, Barberton, Wadsworth, Norton, Seville, Green, Wooster Downtown, Ashland, Orrville, Medina Forest Meadows, Dover, and Jackson will close and all pharmacy files will be transferred to nearby CVS Pharmacy stores.

Diplomat Adjusts Guidance amid Exec Shake-ups

Diplomat announced changes to its executive team and revised its guidance for its 2018 fiscal year. Diplomat president Joel Saban and Albert Thigpen, president and COO of the company’s CastiaRx division will be departing, effective immediately. Chairman and CEO Brian Griffin will directly oversee CastiaRx as the company looks for replacements, with plans for an operational review of the division once a successor is found. Also, ahead of their Q4 earnings, the company adjusted its outlook for the full-year 2018. It now expects 2018 revenue to be at the lower end of its previously predicted range of between $5.5 billion and $5.7 billion. Its adjusted EBITDA is expected to be between $167 million and $170 million, which it noted is an increase of at least 65% based on the low end of the 2018 range versus 2017. Its net debt is expected to be roughly $630 million.

 

Discounters & Department Stores

Target reports holiday same-store sales growth of 5.7%, maintains 2018 outlook

Target saw a surge of shoppers head to its stores and website during the 2018 holiday season, a sign that its investments in store remodels and delivery services are paying off, and an early sign that consumers across the U.S. spent more on gifts this year.

The retailer said Thursday that sales at its stores and website operating for at least 12 months climbed 5.7 percent this past holiday season. That compares with growth of 3.4 percent a year ago and surpasses some analysts’ expectations.

Weak holiday sales at department stores catch many off guard

Unemployment hasn’t been so low in years, wages are rising, consumer confidence is high and gasoline is cheap, all creating high expectations for department stores this holiday season.  That’s not what investors got in sales numbers released Thursday.

Department stores fell sharply before the opening bell, with bellwether Macy’s down nearly 19 percent after posting worse-than-expected sales in the period leading up to the holiday. The Cincinnati company also cut its full-year earnings and sales forecasts after saying that same-store sales rose about 1 percent during November-December. Chairman and CEO Jeff Gennette said in a prepared statement that things started out strong during Black Friday and Cyber Week, but sales fell off noticeably until the week of Christmas.

J.C. Penney CEO starts first round of store closings amid holiday sales decline

J.C. Penney Co. said it will close three stores this spring and may announce more next month as new chief executive officer Jill Soltau embarks on a broad evaluation of its footprint. The announcement briefly sent shares up in late trading. The Plano-based company declined to identify the store locations. J.C. Penney also reaffirmed its earlier guidance that it will generate free cash flow in fiscal 2018 and reduce its bloated inventory, an issue that has plagued the company in recent quarters.

 

 

Emerging Consumer Companies

Bevel launches skincare line

Following Walker & Co.’s acquisition by Procter & Gamble in December, the company’s shaving brand, Bevel, launched its skin care line last week. The initial collection includes four products: face wash, moisturizer, toner, and spot corrector.

Nordstrom partners with Away

For a limited time, Away products will be available at Nordstrom stores and on nordstrom.com. Nordstrom will feature Away as part of its pop-in program between January 11th and February 24th.

WeWork rebrands as The We Company

WeWork has rebranded in an effort to broaden its reach across people’s lives. The We Company will be structured around three main business units: 1) WeWork, its primary business centered on office space, 2) WeLive, its nascent residential division, and 3) and WeGrow, a business that to date includes an elementary school and a coding academy.

 

 

Grocery & Restaurants

Firebirds Wood Fired Grill acquired by J.H. Whitney Capital Partners

Firebirds Wood Fired Grill, a 48-unit “polished-casual” restaurant concept, has been acquired by J.H. Whitney Capital Partners LLC from Angelo, Gordon & Co. Terms of the deal were not disclosed. Firebirds’ CEO Mark Eason, who will continue on in his current role, said Tuesday that the deal positions the brand for growth. The Charlotte, N.C.-based grill restaurant chain — which specializes in steaks, seafood and burgers — had $161.3 million in systemwide sales in 2017.

The top U.S. grocery retailers are…

Dunnhumby’s “Retailer Preference Index” study examined the $700 billion U.S. Grocery market, and surveyed 7,000 U.S. households to determine which of the top 56 largest grocery retailers have the strongest combination of financial performance and consumer emotional sentiment. The overall RPI ranking evaluates retailer performance on seven pillars: price, quality, digital, operations, convenience, discounts/rewards and speed. The retailers who focus their business on superior value perception – defined by the strongest combination of price and quality – tend to have the most financial success and the strongest emotional bond with consumers, according to dunnhumby.

Lipari Foods acquired by private equity firm

Distributor Lipari Foods has been acquired by Miami-based private equity firm H.I.G. Capital. Financial terms of the deal, announced Tuesday, weren’t disclosed. Under the transaction, H.I.G. purchased Westport, Conn.-based Sterling Investment Partners’ interests in Lipari Foods. Specializing in perimeter-of-the-store, specialty and branded food products, Lipari serves more than 6,300 customers and 13,000 retail locations across 14 states, primarily in the Midwest. The Warren, Mich.-based company generates annual sales of about $1 billion

Home & Road

IHA Members Present Optimistic Outlook for 2019

Although possible tariffs on goods from China remain on the minds of housewares executives, the overall feeling is one of optimism as the industry embarks on a new year, according to the International Housewares Association. Asked about their outlook for this year, executives told IHA they foresee positive actions such as continuing product innovation and investment in supply chain management. According to figures supplied by IHA, global housewares spending in 2017 rose to $364.2 billion, up 2.5 percent. And while 2018 figures weren’t yet available, anecdotally, it seems 2018 will be another solid year for housewares sales, the trade organization noted.

CES Intros Touch Upon Waste and Wellness Themes

Technological innovations showcased at the consumer electronics show CES here this week include introductions for the kitchen and home that targeted food waste, identified food, provided weather reports and more. For the kitchen category, manufacturers addressed consumers’ rising concerns about food waste and continued desire for more convenience and access to information while cooking. At Bosch, for example, the interior cameras in its connected refrigerators now automatically recognize about 60 kinds of fruits and vegetables as well as suggest the ideal place to store them via an app.

Jewelry & Luxury

Huron Capital Invests in WD Lab Grown Diamonds

Private equity firm Huron Capital has made an undisclosed equity investment in WD Lab Grown Diamonds, a Laurel, Maryland–based producer of lab-grown diamonds. The company declined to comment on whether Huron now holds a majority or minority stake. However, the press release called the investment “significant,” and said that Huron was “the primary institutional investor” in the transaction. It also noted that CEO Clive Hill and chief technology officer Yarden Tsach will remain “significant” shareholders in the business and will continue to hold their respective roles.

Diamond Foundry Hikes Production, Prices

Diamond Foundry is increasing its production more than tenfold and raising wholesale prices 15%, as it predicts an uptick in demand for lab-grown diamonds. The company believes there is a shortage of synthetic-diamond supply while consumer interest in the product is rising. It plans to raise production to at least 1 million carats of rough per year, boosted by a new factory in Washington state, Diamond Foundry CEO Martin Roscheisen told Rapaport News Tuesday. “After careful monitoring of the market situation over the past months, we see demand increasingly outpacing supply,” the San Francisco-based company said in a note on its website December 21.

Tiffany to Disclose Origin of Diamonds

Tiffany & Co has begun disclosing the geographical origin of its diamonds to consumers, pledging to go beyond the standard responsible-sourcing methods prevalent in the industry. The company will provide information on stones’ regions or countries of origin in its engagement-ring display cases, starting Wednesday. For other diamonds, customers will be able to obtain provenance details by asking a sales or customer-service representative. The jeweler will stop sourcing diamonds with unknown provenance, even if they carry a guarantee of responsible sourcing.

 

Office & Leisure

Barnes and Noble finally experiences holiday growth

Barnes and Noble had a brutal holiday season last year and they promised that in 2018, things would be different. The bookseller has just reported that comparable store sales increased 4.0% between Black Friday and New Year’s Day and 1.3% for the nine-week holiday period ending December 29, 2018, marking the best comparable sales performance for B&N in several years. They cited their advertising campaign and improved website as contributors to the solid results, as well as a new buy online and pick up in store initiative. Barnes & Noble, Inc. will report third quarter earnings and provide an update on guidance on or about February 28, 2019.

Staples Canada Is Opening Their First Coworking Office In Toronto This Week and It’s Incredible

If you’re a student, freelancer, or work from home you can understand the struggle of feeling cooped up or in need of a change of scenery that doesn’t involve your bedroom desk. Finding a space to work that doesn’t involve a spotty Wi-Fi connection or loud and noisy customers can be difficult, and co-working offices seem to be a solution that we can all agree on. This week, Staples Canada is helping with this issue by opening a huge co-working office in the heart of Toronto, and it looks incredible. Staples Studio is a new project created by Staples Canada to transform their stores into places of creativity and work productivity. The co-office workspace isn’t the only thing exciting about this new Staples space. There will be an instore Mos Mos Café, available 24 hours to the workspace, and a Solution Shop, which will be able to offer support as well as in house-marketing, web design, and print services.

You have to pay to get into this Tokyo bookstore (but it’s worth it)

Would you go to a bookstore if you knew they probably didn’t stock the specific title you were looking for? What if you had to pay to get in? That’s the unusual step one Japanese bookstore has taken, but they’re offering a very different literary experience instead. Bunkitsu is making headlines as the first bookstore in Tokyo to charge an entrance fee. For 1500 yen (about US$14), you’ll get access to a huge and carefully curated range of 30,000 mainly obscure and rare titles across a range of subjects, including design, art, humanities and natural sciences. As well as the bookshelves, onsite there is a library and a reading room where you can bring the books to read them and a ‘laboratory’ where you can host book discussions.

Technology & Internet

Retailers are slashing iPhone prices across China as consumers say the phones aren’t worth the cost

Apple’s latest iPhone models are facing huge discounts in China as retailers try to sell the struggling devices. That comes as the top-of-the-line Apple smartphones have posted poor China sales on what experts say are too-high prices for the world’s largest smartphone market and a lack of innovative features compared to local competitors like Huawei.

 

Amazon and Walmart prepare to fight new Indian e‑commerce rules

Amazon.com Inc. and Walmart Inc. find themselves on the same side for once. The bitter rivals have come together in India to lobby the government on regulations that threaten to dampen their expansion ambitions. The newly tightened regulations threaten to pinch Amazon and Walmart’s Flipkart in one of the world’s fastest growing online commerce arenas, where both have invested billions of dollars.

 

Kroger, Microsoft partner on retail-as-a-service platform

Under a new partnership, Kroger and Microsoft said Monday that they will jointly develop and market a commercial retail-as-a-service (RaaS) product for the retail industry. Plans call for the solution to be piloted at a Kroger store in Monroe, Ohio, and a QFC store in Redmond, Wash., near both companies’ headquarters. Leveraging Microsoft’s Azure cloud platform, the RaaS offering will provide a range of front- and back-end functionality for retailers.

 

Finance & Economy

Probability of a recession rises to the highest in 7 years

The odds of a recession have grown to the highest level in seven years, according to a monthly poll by The Wall Street Journal.  Economists surveyed by the Journal are seeing on average a 25 percent chance of a recession within the next 12 months, the highest level since October 2011 and up from just 13 percent last year.  The heightened probability came from a slew of worries including the ongoing trade dispute with China, rising interest rates and the massive equity sell-off in December that led to stocks’ worst year since the financial crisis, the survey revealed.

 

US consumer borrowing growth up $22.1 billion in November

Americans slowed their pace of borrowing slightly in November, but it still grew by a robust $22.1 billion. Solid auto and student loans offset some of the decline in the category that covers credit cards.  Consumer borrowing is closely watched for signs that households are still willing to take on new debt to finance purchases. Consumer spending accounts for 70 percent of total economic activity.

 

Consumer financial stress on the rise report reveals

There was a rise in financial stress among US consumers in the fourth quarter of 2018 according to a suite of leading indicators.  In Q4 2018 the level of consumer stress hit its highest point of the year, although remained low by historic levels and the fundamentals of consumers’ finances remained strong.  “The previous Consumer Financial Stress Index pointed to a slight drop in consumer confidence that occurred in late 2018, but also predicted a robust holiday shopping season,” said Dave Coffey, Senior Vice President and Chief Digital Officer, LegalShield.