January 21, 2019 Consensus

The Weekly Consensus – January 21, 2019 (Volume 11, Number 3)

The Big Story
For Consumer Brands, Is Being Political Ever Correct? – Part IV
Paul Alexander, CFA


Consumer brands and retailers continue to take public political stances at an increasing rate in recent years, a move that, traditionally, has been avoided and occasionally ridiculed.  We’ve chronicled this growing trend in three prior Big Stories, going back to late 2017, when our colleague Mark Lenz wrote about Patagonia’s outspoken opposition to the Trump administration’s moves to reduce the size of certain national monuments.  In each of our prior three stories on this theme, we noted the risks associated with taking a stand. However, we have yet to point to an example where this strategy backfired (Dick’s firearm-minimum-age change resulted in missed sales, but fell short of a backfire, in our opinion).  Today, we look at an example where a company’s public political stance flopped.  Or, at least, it initially looked like a flop.

Last week, Gillette released a roughly one-and-a-half minute commercial on YouTube called “We Believe; The Best Men Can Be,” in which the company challenges men to reject toxically masculine behavior, such as sexual harrassment, bullying, and physical violence.  The company references the #MeToo movement in the ad, and uses language that plays on the company’s long-time slogan, “Gillette: The Best a Man Can Get.”

The ad was greeted with significant backlash, as many viewers felt it stereotypes all men as mysogynists and bullies perpetuating boys-will-be-boys attitudes.  Some consumers called for boycotts and demanded apologies from Gillette parent Procter & Gamble.  One Twitter user calling for such a boycott and an apology received over 6,000 Likes and nearly 700 Retweets on his original comment.

However, interestingly, as last week progressed, it became harder and harder to say that the ad was a failure.  On the most superficial level, it helped Gillette gain more headlines and publicity than it has in years – the initial response to the ad was picked up by every news outlet from Fox News and the Wall Street Journal to the BBC and Australia’s News.com. And by the end of last week, a backlash to the backlash emerged.  Numerous groups came to the ad’s defense, including advocacy groups championing anti-violence and men’s ethics, as well as editorials in many news outlets. Among many, the Milwaukee Journal Sentinel, WIRED, and the Boston Globe all ran pro-Gillette entries; the Boston Globe’s was titled “The Backlash to the Gillette Ad Is Exactly Why It’s Needed.”

Individuals also came to the ad’s defense. In the first 48 hours after the video was posted on YouTube, when the backlash was at its greatest, Dislikes on the YouTube clip outpaced Likes by a ratio of roughly 10 to one. By Friday afternoon, that ratio had narrowed to two to one, and the 700-Retweet tweet mentioned above had also attracted over 700 mostly chiding replies.  Finally, a Morning Consult survey conducted among 2,201 American adults was released at the end of the week suggesting that most people liked the ad. According to the survey, watching the ad made the number of people who feel that Gillette “shared their values” increase from 42% of respondents to 71%.

It’s unclear whether Procter & Gamble anticipated the initial backlash to the Gillette ad, but it is likely that P&G was keenly aware of the risks when they launched it.  Tom O’Guinn, professor of marketing and department chair at University of Wisconsin-Madison, said as much in the Milwaukee Sentinel Journal: “Procter doesn’t do anything without data. They don’t go to lunch without data.  So they had something that told them that [the ad] was OK.”  For other brands without the resources of P&G, extensive data may not be available before a decision is made to run a politically charged commercial.  But increasingly, taking a stand seems to work.  Even when, at first, it doesn’t.


Headlines of the Week

Lampert to Get Another Chance at Keeping Sears Afloat

Eddie Lampert, the dogged billionaire who’s hitched his career and reputation to a fading American retail icon, will get another chance at reviving Sears Holdings Corp.

In an agreement reached in the wee hours of Wednesday in New York, Lampert won a bankruptcy auction with a plan that will keep the bankrupt company in business and save thousands of jobs, according to people with knowledge of the discussions. The agreement still needs to be approved by the U.S. judge overseeing the bankruptcy.

Lampert’s offer prevailed over competing proposals from liquidators that would have forced the 126-year-old department-store chain to shut down and sell its assets.


GameStop completes sale of 1,284 AT&T Wireless stores for $700 million

GameStop said Wednesday that its board and financial advisers will continue a “comprehensive review of a full range of strategic alternatives” as it closed on the $700 million sale of its AT&T Wireless stores. The Grapevine-based company announced the sale of 1,284 stores to Sugar Land-based Prime Communications the day before Thanksgiving. “We are pleased to successfully complete this transaction and begin 2019 with an increased focus on the video game industry and the rapidly growing collectibles space,” GameStop’s executive chairman Dan DeMatteo said in a statement. What’s it going to do with that money? The company said in its statement that it could pay down some of its $800 million in debt, buy back shares, reinvest in its two core businesses of games and collectibles, or a combination of these options. GameStop hasn’t announced its holiday sales yet, but said it plans to later this week.



Apparel & Footwear

Adore Me seeks to disrupt brick-and-mortar with robotic DC

A fast-growing online lingerie startup is creating an innovative foundation for its expansion into physical retail. Adore Me has opened a 126,286-sq.-ft. distribution center in Secaucus, N.J. The startup automates order management in its center by combining two robotic technologies: AutoStore cube storage technology and Opex SureSort automated delivery sorting. By leveraging these solutions, Adore Me says its new warehouse is fulfilling over 20 thousand orders per day, which represents four times the volume of a conventional distribution center. In addition to speed, orders are completed at lower cost and with increased accuracy. “I’m delighted to announce that the distribution center is fully up and running,” said Morgan Hermand-Waiche, founder and CEO, Adore Me.

Shoe retailer Payless to explore options, including sale

U.S. discount retailer Payless ShoeSource has hired an advisor to help evaluate strategic alternatives, including a sale or restructuring, less than 18 months after it emerged from bankruptcy. Payless exited bankruptcy in 2017 with about $400 million in loans, after slashing its debt pile from over $800 million. The action underscores the efforts Payless is making to avoid a second bankruptcy, as the popularity of online shopping on websites such as Amazon.com continues to challenge the viability of many brick-and-mortar retailers. The chain, a fixture in malls and strip malls known for its shoes costing less than $30, is also considering shuttering at least one-third of its approximately 3,000 stores. Payless bucked a trend because it managed to successfully emerge from its 2017 bankruptcy, while many others had to liquidate. As part of the bankruptcy, a group of creditors, including hedge fund Alden Global Capital, took over ownership, according to bankruptcy court records.

Clothing retailer Gymboree files for bankruptcy again

Children’s clothing retailer Gymboree Group Inc filed for Chapter 11 bankruptcy protection, the second time in almost two years, and said on Wednesday it will close more than 800 Gymboree and Crazy 8 stores. The San Francisco-based company said it will also sell its high-end line, Janie and Jack, as well as its intellectual property and online platform. The company’s Canadian arm, Gymboree Inc, also intends to seek bankruptcy protection, it said.


Athletic & Sporting Goods

TRX Completes Strategic Growth Recapitalization

TRX announced that it has successfully recapitalized the business with a strategic growth capital investment from Equity38, LLC. Structured as a management buyout of previous investors by Equity38, the partnership was ideal for TRX in that it maintains the company’s existing infrastructure, led by Founder/CEO and former Navy SEAL, Randy Hetrick; while also arming TRX with the capital and significant additional category expertise and resources from Equity38, to further develop the TRX brand and business to an even higher level.  Founded by Hetrick in 2004, TRX is the global leader in functional training solutions and the pioneers behind Suspension Training, the bodyweight-based exercise method.


Head Sport agrees to buy most ASE assets for $22M

At a bankruptcy auction, Head Sport — a European sports company best known for its skis and tennis rackets — agreed to purchase most of the assets of Advanced Sports Enterprises for about $22 million. The agreement is subject to court approval later this month.  Head is an Amsterdam-registered company that manufactures ski, tennis, swim and other sports products and licenses its name to suppliers in other industries. ASE’s Karen Bliss said Head agreed to purchase most of the assets, including some Performance Bicycle stores. “We don’t know their intentions for the assets,” Bliss, ASE’s Chief Marketing Officer, told BRAIN. “It’s a big deal.”


Roma Buy Back Shirt Rights from Nike

40 million euros. That’s the rough amount that Italian soccer club Roma needs to come up with in player sales to break even each summer, after inking deals with Qatar Airways and Hyundai in 2018. On that very front, Roma made the move to keep raising revenues elsewhere this week. The club is looking to re-do its deal with Nike, having bought out Nike’s Roma venture in the capital itself, and seizing back ownership of the club’s merchandising rights.  The 10-year sponsorship was unsatisfactory enough that Roma chairman James Pallotta publicly claimed the deal was a mistake on many levels.


Cosmetics & Pharmacy

L’Occitane Adds Elemis for $900 Million as Luxury Skincare Booms

Luxury cosmetics firm L’Occitane International SA agreed to buy beauty and skincare brand Elemis for about $900 million, as the maker of organic lotions looks to expand in the U.S. and U.K. with its biggest deal on record. Hong Kong-listed L’Occitane agreed to buy Elemis from Steiner Leisure Ltd., a portfolio company of private equity firm L Catterton that focuses on consumer investments. The deal is the latest in a spate of acquisitions of high-end skincare brands, with demand for natural beauty products on the rise in Asia — a trend that has also lifted cosmetics giant L’Oreal SA. L’Occitane said the acquisition will bolster the group’s growth globally, with plans to bring the Elemis label into new markets. The brand has been popular among millennial and Generation X consumers.


Shopko files for Chapter 11 protection, will auction Rx business

Big changes are coming for Green Bay, Wis.-based Shopko. The retailer has filed for Chapter 11 bankruptcy with the aim of financial restructuring due to “excess debt and ongoing competitive pressures,” it said Wednesday. Alongside the bankruptcy process, Shopko will be auctioning off its pharmacy business, among other repositioning efforts. Shopko said it would be conducting an auction process for the pharmacy business — a move that follows the sale of pharmacy files from 22 of its pharmacies to Hy-Vee and files from 42 pharmacies to Kroger in December. Besides optioning its pharmacy business, Shopko said it also would be closing 38 stores and relocating more than 20 of its in-store optical centers to freestanding locations.


Walmart to exit certain CVS Caremark retail pharmacy networks

Walmart is bowing out of two CVS Caremark retail pharmacy networks. CVS Health on Tuesday announced that the Bentonville, Ark.-based retailer would be leaving the CVS Caremark pharmacy benefit management commercial and managed Medicaid retail pharmacy networks. CVS Caremark has asked Walmart to fill these prescriptions as in-network through April 30. The change will not affect Walmart’s participation in CVS Caremark’s Medicare Part D pharmacy network, CVS Health said, adding that Sam’s Club will stay in the networks that Walmart is leaving. The point of contention, CVS Health said, was reimbursement rates.


Discounters & Department Stores

J.C. Penney’s new CEO Jill Soltau starts naming her team and lists openings

J.C. Penney’s new chief executive officer Jill Soltau has started putting her team together and last week announced a list of positions she wants to fill. The search for a chief financial officer “is well underway and has surfaced many compelling candidates,” Penney said in a statement. Other key leadership jobs Penney is trying to fill are chief merchant, chief customer service officer, senior vice president of planning and allocation and principal accounting officer. Mike Robbins, who arrived at Plano-based Penney in 2015 from Target, has been named chief officer of stores and supply chain.

Target is making a bigger bet on baby

Without Babies R Us, Target sees an opportunity to double down on its own baby business. The retailer is expanding its in-house brand Cloud Island, which currently sells items like crib sheets, stuffed animals and baby bath toys, to include essential items like diapers, wipes, toiletries, utensils and bowls. The launch of about 30 new items happens Monday. Target says most goods will be priced under $10 — 30 to 40 percent less expensive than comparable national premium brands. When Toys R Us liquidated its business last year and shuttered its Babies R Us stores, many retailers saw an opportunity to flood a suddenly underserved market.



Emerging Consumer Companies

Birdies raises $8 million

Birdies, maker of stylish women’s slippers, raised $8 million in its Series A funding. The round was led by Norwest Venture Partners, with participation from Slow Ventures and Forerunner Ventures. Launched in 2015, Birdies has now raised $10 million altogether.

Indochino accelerates brick-and-mortar expansion, plans new offerings

Indochino, the digitally native made-to-measure menswear brand, is expanding its store portfolio and product offerings. The Vancouver-based company intends to open up to 20 locations in North America in 2019. Six locations are already confirmed in the Northeast. Five are confirmed for the West Coast.  The brand also plans to expand beyond formalwear, beginning with casual shirts that will launch in time for summer.

Mahabis receives lifeline, assets acquired

Mahabis, the London-based footwear business that recently entered administration after running short on capital, had its assets purchased by investment firm YYX Capital. The firm, headed by James Cox, founder of Simba Sleep, will further invest in the business in an attempt to advance the efforts of Mahabis’ founder, Ankur Shah, who will no longer be involved with the company.



Grocery & Restaurants

Kroger’s CEO maps out the retailer’s growth plans

The retailer has spent the past few years investing in technology and forming partnerships as part of its Kroger Restock strategy, which aims to transform Kroger to a growth company from a grocery company. Such initiatives include offering 100 SKUs on Alibaba’s T-Mall Chinese marketplace, an investment and exclusive agreement with U.K.-based Ocado Group PLC, developing products for its organic line of products Simple Truth, grocery order pickup at Walgreens stores and scan-and-go shopping in Kroger stores.

Albertsons reports sales uptick for third quarter

Albertsons Cos. saw sales edge up in its fiscal 2018 third quarter and posted net income after a loss in the previous quarter. The Boise, Idaho-based supermarket retailer also said that, in connection with some refinancing measures, it has cut its debt load by about $1 billion over the past 12 months. For the quarter ended Dec. 1, Albertsons turned in revenue of $13.8 billion, up 1.8% from $13.6 billion a year earlier. The company said the gain reflects a 1.9% uptick in identical-store sales and higher fuel sales of $91.7 million, partially offset by lost sales from store closures. E-commerce sales surged 73% year over year.


Home & Road

Draper James x Crate & Barrel Sheets and Pillows Are Here

On Tuesday, the brand, founded by Reese Witherspoon, announced the launch of a bedding collaboration with Crate & Barrel that features duvet covers, pillow shams and sheets. The Willow Collection is the latest in an ongoing collaboration that has so far included dining and entertaining essentials. In true Witherspoon style, the line has plenty of Southern charm, with designs featuring a classic blue and white leaf pattern and trellis motifs. “Say hello to the prettiest bedding you’ll love to tuck into every night,” Witherspoon writes on CrateandBarrel.com. “Sweet dreams, y’all.”

Harley-Davidson Invites Wall Street Into Its Dealerships

The introduction of the LiveWire electric motorcycle indicates it’s no longer business as usual at Harley-Davidson a company built on gasoline, grease, and loud pipes. It’s not a new type of bike that signals big changes are coming to the motorcycle company, though, it’s the reversal on prohibiting private equity firms from owning its dealerships that means Harley is not the same business it was. It’s a long-standing Harley-Davidson policy that private equity firms can’t own a Harley motorcycle shop. The motorcycle industry has evolved, though. Interest in heavy, big-bore bikes is on the wane and sales are tough to come by. So Harley-Davidson has changed too. At a dealer webinar in December, Harley-Davidson revealed that not only can a dealer buy as many as 10 dealerships now, but private equity will also be able to invest in dealerships.

Home Depot Is Rehabbing the Shopper Experience. Can Other Retailers Do the Same?

If there’s one retailer that can install a window of opportunity for all merchants by improving its own shopper expectations, it might be Home Depot.

The chain is in the midst of an ambitious strategy to unify online and offline operations — a plan that may have been a key contributor to the 9% increase in overall home-improvement product sales during the holiday season. And Home Depot’s plan, if it is indeed fortifying industry sales gains, could alter shopper expectations across the board.


Jewelry & Luxury

Blue Nile CEO Jason Goldberger Resigns

Jason Goldberger, who served as Blue Nile’s CEO for the last year and a half, has resigned from the company, a report said.  The news was first reported by GeekWire.  Blue Nile did not respond to requests for comment. Reached via email, Goldberger confirmed his departure, but otherwise declined comment.  Eric Anderson, the current executive vice president of Bain Capital Private Equity, will serve as interim CEO until a successor is found, the report said.


Signet to Pay $11 Million Penalty in Credit Case

Signet Jewelers has agreed to pay an $11 million combined civil penalty to the Consumer Financial Protection Bureau (CFPB) and the New York State Attorney General (NYAG) to settle charges that it enrolled customers in credit card programs and for credit insurance without their knowledge or consent. A release from the New York State Attorney General’s office charges that Signet employees used a variety of tactics to, in its words, “deceive” consumers into enrolling in the company’s credit program. In some cases, employees induced consumers to provide personal information by signing them them up for a rewards and discount program, without letting them know they were also getting a credit card.

Signet’s Holiday Sales Fall Short

Signet rolled out new products, new commercials, ramped up digital marketing and improved its websites, but it was not enough to counter department store discounting and declining interest in lines that were once bestsellers. Total sales dropped 3 percent to $1.84 billion. “Our holiday season performance fell short of our expectations,” CEO Gina Drosos said in the company’s earnings release issued Thursday morning.


Office & Leisure

The Farmer’s Dog Raises $39 Million In the Largest Series B Round for a Pet Startup

The Farmer’s Dog, a subscription company that makes fresh and personalized meals for dogs, has raised the largest Series B round for any pet-related startup. Last year saw its share of blockbuster investments in the pet space. On-demand dog-walking app Wag received $300 million from SoftBank’s Vision Fund in January, while competitor Rover raised $155 million ($125 million in cash and $30 million in credit) soon after in May. But that doesn’t mean scrappy startups have been overlooked.

Janet Schijns Departs Office Depot

Janet Schijns departed Office Depot where she’s served as the chief merchant and services officer, overseeing the company’s development of business and managed technology services sold to and around the channel. A fixture in the IT and telecom channels, Schijns is rejoining the consulting firm she founded more than a decade ago, JS Group. In a phone interview, Schijns said she enjoyed her time and role at Office Depot, but it was time to return to the consulting ranks. Schjins joined Office Depot in July 2017 after seven years at Verizon, where she served in sales, marketing and channel leadership roles. At Office Depot, Schijns helped shape the company’s development of Workonomy, a suite of business and technology services sold through and around channel partners.


Technology & Internet

Microsoft and Walgreens join forces to take on Amazon in health care

Microsoft announced a partnership with Walgreens Boots Alliance Tuesday. As part of the deal, Microsoft will become Walgreen’s new cloud provider. The two said they will also work on solutions to lower health care costs. Walgreens will open up 12 “digital health corners” in stores that will sell health care-related gadgets. The two companies said the partnership will help Walgreens gain personalized data about their customers’ health, which will allow pharmacists to give better, customized nutrition and wellness solutions. The Microsoft-Walgreens joint venture appears to be a clear move by the two companies to try and counter Amazon’s growing clout in health care.

Walmart plans to add 2,000 technology experts to its staff

Walmart Inc. plans to hire 2,000 technology experts this year to support its efforts both in stores and online, boosting the group’s ranks by more than a fourth. The world’s biggest retailer is looking for data scientists, software engineers, designers and others to work in nine offices from Silicon Valley to Bangalore, Walmart chief technology officer Jeremy King said in a Bloomberg Television interview. The retail technology group that King leads currently has about 7,500 employees after hiring 1,700 last year, he said. The hiring binge will support Walmart’s efforts to expand its online business and embed in-store technology, such as robots that scrub floors and scan shelves. It’s part of a bid to wrest market share from rivals such as Amazon.com.

Fossil Group Will Sell Smartwatch Technology to Google for $40 Million

Fossil Group, the world’s largest manufacturer of smartwatches, announced that it is selling $40 million in intellectual property to Google—all related to a smartwatch technology currently in development. As part of the deal, Google’s also conscripting an undefined percentage of Fossil Group’s roughly 200-strong team of hardware, software, and product designers currently at work on the new technology. The employees will join Google when the deal closes.


Finance & Economy

U.S. Shutdown Pain Yet to Infect Outlooks for Economic Growth

For all the hand-wringing and headlines over the fallout of the U.S. government shutdown, most forecasters still don’t expect it to cause too much pain to the economy so long as it doesn’t endure.  Analysts project the government will reopen by mid-February, though if the closure lasts through March, the disruption will cause economic growth to dip below 2 percent this quarter, according to the median forecast in a Jan. 15-17 Bloomberg survey. At the same time, just under half say the government impasse increases the probability of a recession this year.


Recession is the number one fear for CEOs in 2019, survey says

As the World Economic Forum in Davos approaches, a new survey of over 800 CEOs has revealed that global business leaders see recession as their number one external concern for 2019.  Threats to global trade and political instability ranked second and third, respectively, according to the survey by the research group The Conference Board.  The recession risk was touted as the number one concern in Japan, China and Latin America but was only placed third by American executives. In the U.S. threats to cybersecurity was listed as the source of greatest unease with new competitors second.

University of Michigan consumer sentiment plunges in January

Consumer sentiment plunged in January to the lowest level since President Trump was elected, according to the University of Michigan index. The index fell to 90.7 in January from 98.3, with the expectations index dropping especially sharply. Economists polled by MarketWatch forecast a 97.5 reading. “The loss was due to a host of issues including the partial government shutdown, the impact of tariffs, instabilities in financial markets, the global slowdown, and the lack of clarity about monetary policies,” said Richard Curtin, chief economist for the survey.