February 4, 2019 Consensus

The Weekly Consensus – February 4, 2019 (Volume 11, Number 5)

The Big Story
Game On
Marshall Schlieifman

Effectively a national holiday, Super Bowl Sunday has no religious, historic, patriotic or familial foundation – it is simply about entertainment and indulgence.  Only a four-hour event, the Super Bowl is about friends, most of whom have no rooting interest in either competitor, getting together to watch the game and (over-)eat nachos, chicken wings, pizza, etc., etc., etc. on a new TV while wearing team apparel.  Not surprisingly, all those jerseys, TVs, food and drink really add up.  What is surprising is how much it all adds up to.

The National Retail Federation, the world’s largest retail industry association, has been surveying consumers to track Super Bowl spending since 2005.  According to the survey, Americans spent $14.8 billion this year, or $81.30 for every adult, to celebrate the Big Game.  This total is down from $15.3 billion last year, primarily because fewer people plan to watch the game – 182.5 million this year compared with 188.5 million last year.

The survey found that 72 percent of adults planned to watch the game.  Among those watching, 79 percent planned to buy food and beverages, 10 percent planned to buy team apparel and accessories, 7 percent expected to buy decorations and 7 percent planned to buy new televisions.  Twenty-four percent expected to attend a party, while 5 percent (that’s still an impressive 13 million people) thought they’d watch in a bar or restaurant.

To capture the wonder of Super Bowl spending, the following chart depicts total consumer spending on the event for the past decade:

While the spending on Super Bowl LIII is quite impressive, 66% growth over the past decade bodes well for 2020 and beyond.

For those of you who think this spending around the Super Bowl is frivolous, take heart in the fact that Americans spend more on their significant others over the next 10 days – on to Valentine’s Day next, and the NRF’s forecast of $20.7 billion in consumer spending.


Headlines of the Week

GameStop Ends Effort to Sell Itself, Sending Stock Plunging

GameStop Corp. said it has stopped an effort to sell itself, citing a lack of available financing at terms a buyer would find acceptable. The shares tanked 22 percent in early U.S. trading. The retailer started a strategic review in June and sold its Spring Mobile business as part of that process. GameStop said it is continuing its search for a permanent chief executive officer. It’s another disappointment for investors who hoped for a sale as a way out. GameStop, the world’s largest independent video-game retailer, has been struggling to insulate itself from shrinking brick-and-mortar sales of games like Call of Duty. The shares had already tumbled Monday on news that Apple Inc. plans to launch a subscription video-game service, indicating that competition is only intensifying for the beleaguered retailer.


Bystanders of Sears’ downfall will get their day in court Monday

For more than a decade, billionaire Eddie Lampert was arguably able to run Sears like his kingdom. The hedge fund titan who combined Sears and Kmart in 2005 led Sears Holdings as its chairman, CEO and largest investor. The company had public shareholders and a board of directors, but Lampert had unique discretion guiding its fate. That fate was tortured. Under his stewardship, Sears closed over 3,500 stores, slashed roughly 250,000 jobs and saw its share price fall from $193 a share in 2007 to less than a dollar. Now, bystanders in that destruction are finally having their day in court.



Apparel & Footwear

Deckers Brands Hikes Outlook on Robust Wholesale Growth

Deckers Brands Inc. sharply raised its earnings guidance for its fiscal year after reporting earnings in the third quarter easily topped guidance. The gains were led by a 12.5 percent climb in wholesale revenue, and Ugg’s sales grew 3.6 percent while Hoka One One’s revenues jumped 79.2 percent. “With third quarter results delivered and an updated outlook for the full fiscal year 2019, I am pleased to say that we are now well ahead of schedule to deliver on the long term strategic goals we laid out two years ago,” said Dave Powers, president and chief executive officer. “Our third quarter results were propelled by the Ugg brand as it successfully delivered a compelling product offering, with thoughtful and controlled distribution. In addition, we achieved impressive growth with our Hoka One One and Koolaburra brands.”


Guess names Lucky Brand chief as new CEO

Apparel brand Guess Inc. said Chief Executive Victor Herrero is leaving the company and will be replaced by Lucky Brand Chairman and CEO Carlos Alberini. Herrero, who has been Guess CEO since 2015, will step down Feb. 2 and also will resign as a board member. Alberini will assume the Guess CEO role after he leaves Lucky Brand, where he has been chairman and CEO since 2014. Guess Chairman Maurice Marciano will serve as interim CEO during the transition. Alberini is returning to Los Angeles-based Guess, where he was president and chief operating officer from 2000 to 2010. After leaving Guess, Alberini became co-CEO of Restoration Hardware until 2014, and a board member of Restoration Hardware from 2010 until the present.

Francesca’s explores strategic alternatives, possible sale

Francesca’s is exploring “strategic and financial alternatives” including a possible sale, financing or a refinancing, the company said Thursday in a press release. Executive shuffling is also in order. CEO Steve Lawrence resigned to pursue other opportunities and will be replaced by Michael Prendergast effective Feb. 1. Prendergast’s appointment is subject to finalization of an agreement with Alvarez & Marsal, where he is a senior director in the firm’s private equity performance improvement retail practice. Francesca’s, a largely mall-based boutique chain, is struggling to find its footing in an environment where its specialty peers are still pruning unprofitable stores and adjusting to new consumer behavior. In its latest quarter, which ended Nov. 3, the company reported a 10% decline in net sales, reaching $95.4 million. Comps plummeted 14%, on top of an 18% decline in the year-ago period.


Athletic & Sporting Goods

Victoria Beckham and Reebok team up, unveil new activewear line

It looks like Posh Spice has gone sporty.  More than a year after first announcing their partnership, Victoria Beckham and Reebok debuted a line of fashion-forward activewear. It’s Beckham’s first full collection with the Boston-based brand, following a limited ’90s-inspired release in July.  The Reebok x Victoria Beckham collection includes basics such as tank tops, joggers, and backpacks, as well as standout items, including a foil jacket and snap trousers. Products range from $30 to $500 in price, and many are unisex.


Vendor lawsuit against Dick’s Sporting Goods over ammunition contract moves forward

Dick’s Sporting Goods is being sued by a vendor claiming the Findlay-based retailer breached its contract in an ammunition agreement.  Nevada-based Battle Born Munitions is seeking to recoup about $5.5 million in damages related to claims of fraudulent inducement and negligent misrepresentation in addition to breach of contract that started in 2016, when Dick’s allegedly failed to take delivery and pay for several orders of ammunition branded with the company’s trademarked Field & Stream logo.

Cosmetics & Pharmacy

Walgreens Gets Lion’s Share of Shopko Pharmacies at Auction

Walgreens has emerged as the biggest buyer from the auction for the pharmacy assets of roughly 120 Shopko stores. According to recent court filings, the company was the successful bidder on assets from 63 Shopko pharmacy locations, which include inventory and pharmacy files. Also picking up some pharmacies at the auction were Albertsons, CVS Pharmacy, Hy-Vee, Lewis Drug, Rite Aid and Vogt Pharmacies, among others.

Shopko reportedly expects to generate some $52 million from the auctions.

Rite Aid Eyes Reverse Stock Split

Rite Aid’s board has approved a move aimed at being compliant with the New York Stock Exchange’s listing rules. The board approved a reverse stock split, which is subject to stockholder approval. It has slated a special stockholder meeting on March 21 for voting on the measure. If approved, Rite Aid will reverse split its stock at a ration of either 1-to-10, 1-to-15 or 1-to-20, such that 10, 15 or 20 shares of common stock will convert into a single share. The result is meant to be fewer, higher-priced shares held by each stockholder. The company said it would not have an impact on stockholder rights or on Rite Aid’s business operations or debt. Rite Aid will be in compliance with NYSE’s share price listing rule if it manages to maintain at least a $1 closing share price for one month during a six-month period that ends July 30, or if it manages a $1 average closing share price for the preceding 30 consecutive trading days. As of market close Jan. 25, the company has had a closing share price below $1 since Dec. 10.


Discounters & Department Stores

A Penney saved?

Over the holidays, a time of consumer spending strength that lifted most, a few unlucky retailers — including Tiffany & Co., Macy’s and Nordstrom —  suffered disappointing numbers. J.C. Penney was also in that sad group, as its holiday comps tumbled 3.5% (5.4% without a sales timing shift), but it’s facing an even more alarming truth — that its seasonal weakness may be less of a disappointment only because it wasn’t much of a surprise. It’s been a long haul for the 110-year-old discount department store, which just recently welcomed yet another new chief executive, former Joann chief Jill Soltau, after Marvin Ellison left last summer to take over at Lowe’s.

Kohl’s tries Weight Watchers with in-store studio, kitchen products

Kohl’s is joining WW — the company formerly known as Weight Watchers — in its latest experiment with giving shoppers new reasons to come to its department stores.

The retailer is opening a WW Studio in one Chicago-area store and will sell WW Healthy Kitchen products in certain stores and online, Kohl’s said Tuesday. The 1,800-square-foot studio will host workshops for local members and is expected to open this year. Kohl’s, which would not identify which location would get the studio, said it will begin selling the WW-brand kitchenware and cookware products in June.



Emerging Consumer Companies

Casper introduces the Glow

After starting with mattresses and expanding to pillows, sheets, duvets, and bed frames, Casper introduced the Glow, a small lamp intended for nightstands that retails for $89. The Glow projects a warm, soft glow that gradually dims as people fall asleep, and then brightens when it’s time to wake up. The timing of the device can be scheduled with an app. The Glow is expected to be the first of many hardware products for the brand.

Fernish announces $30 million investment

Fernish, the furniture-as-a-service company that enables subscribers to rent pieces for as long as they want for one monthly price, announced that it had raised $30 million to fund customer acquisition, build the team, and expand to new markets. The company launched in Los Angeles and recently expanded to Seattle. The investment was led by RET Ventures with participation from Amazon executive Jeff Wilke, Intuit founder Scott Cook, and TechStars.

FabFitFun raises $80 million to increase membership offerings

FabFitFun, the Los Angeles-based lifestyle brand that began as a media business before launching subscription boxes, raised $80 million in growth capital. The investment round was led by Kleiner Perkins, with participation from Upfront Ventures and NEA. The company’s flagship offering, the FabFitFun Box, delivers a curated collection of full-size products across beauty, fashion, wellness, fitness, home and technology each season. The investment will be used to increase membership offerings and strengthen the company’s position as a marketing partner and platform for brands.



Grocery & Restaurants

UNFI sues Goldman Sachs over Supervalu deal

United Natural Foods Inc. has filed a lawsuit against Goldman Sachs Group Inc. that alleges the investment bank engaged in improper conduct as adviser for the distributor’s $2.9 billion acquisition of Supervalu. In announcing the move, UNFI said New York-based Goldman Sachs “used its market power and influence” to control “all aspects of the transaction in order to extract millions in unjustifiable interest, fees and other damages.”


Papa John’s seeks investment after it abandons outright sale

Papa John’s International Inc, the world’s third largest pizza delivery company, is pursuing the sale of a stake in itself after acquisition offers from private equity firms did not meet its valuation expectations, people familiar with the matter said on Friday. Any such deal would come amid a battle for control of Papa John’s with the chain’s founder John Schnatter, who owns about 30 percent of the company. The transaction, which could be structured as a private investment in public equity, would boost Papa John’s finances, the sources said, as the company seeks to recover from low franchisee profitability and boost its sales through promotional discounts.

Luby’s slate wins proxy fight

Luby’s Inc. shareholders elected the company’s slate of nine board nominees despite, an activist investor’s proxy contest, the company said in announcing preliminary results. During the annual meeting of the Houston-based company — parent of the Fuddruckers and the Luby’s Cafeteria brands — shareholders rejected all four directors nominated by Bandera Partners LLC, a New York hedge fund that owns about 9.8 percent of Luby’s shares.

Home & Road

Unilever acquires The Laundress

Unilever is adding to its portfolio of home care products with a new acquisition. The company announced the acquisition of The Laundress, a New York City-based brand that makes eco-friendly detergent, fabric care and home cleaning products. The Laundress began in 2004 with a single product, the company’s Wool and Cashmere Shampoo, and has expanded since then to market 85 products. Unilever said the acquisition will grow its presence in the high-end home care market. The Laundress is set to remain operating in New York City, with co-founders Gwen Whiting and Lindsey Boyd leading it and their flagship retail store.

Oneida Sells Foodservice Business

The Oneida Group has sold the majority of its food service business, which markets flatware, dinnerware and barware, to Crown Brands, a distributor of commercial grade smallware, bakeware, cookware, beverageware, and other products to the food service industry. The transaction closed on January 28 and terms were not disclosed. Oneida said it will continue to sell Anchor Hocking glassware to the food service industry and will increase sales support in this channel. The company, which is in the process of moving distribution from Savannah, GA, back to Lancaster, OH, also plans to expand plant production capacity to better service and support growth.

Advance Auto Parts Announces Redemption of 5.750% Notes Due 2020

Advance Auto Parts, Inc., a leading automotive aftermarket parts provider in North America that serves both professional installer and do-it-yourself customers, announced it will redeem the $300 million aggregate principle of its 5.750% Notes due 2020 using available cash on hand. “I am pleased with our teams’ ability to deliver meaningful financial and operational improvements over the past several quarters,” said Executive Vice President and Chief Financial Officer Jeff Shepherd. “We remain incredibly disciplined in our approach to managing cash and delivering on our capital allocation priorities. In line with our financial priorities, the redemption of these notes reflects our focus to maintain an investment grade rating and underscores our confidence to generate significant cash flow from the business.”

Jewelry & Luxury

Lightbox Doing Its First Trunk Show, Los Angeles Pop-Up

Lightbox, De Beers’ much-talked-about lab-grown diamond brand, is continuing to make its presence felt in the non-digital world—with a trunk show this week on a cruise ship and a pop-up store next month in Los Angeles. The pop-up will run Feb. 8–14 at the Westfield Century City mall. It will feature the same 400-square-foot pastel cube that appeared last year at the Oculus mall at the Westfield World Trade Center in New York City. But this time, it will carry a bit of inventory to make actual sales.

LVMH’s Watch, Jewelry Sales Were Up 12% Last Year

LVMH, a titan in the world of luxury goods, reported strong full-year results with watch and jewelry sales climbing by a double-digit percentage. Sales of LVMH-owned watch and jewelry brands totaled €4.12 billion ($4.73 billion) in 2018 compared with €3.80 billion ($4.36 billion) in 2017. Organic (like-for-like) revenue growth was 12 percent. Bulgari had a show-stopper of a year with relative newcomers like the Octo Finissimo watch and Fiorever jewelry collection performing especially well.

De Beers Sales Slump Amid Market Weakness

De Beers’ rough-diamond sales slowed in January as a disappointing holiday season piled further pressure on the midstream. Proceeds fell to $505 million at the first sales cycle of the year, 25% lower than the $672 million it sold a year ago, the company reported Tuesday. January is typically one of the biggest sales periods of the year for rough, as retailers and dealers restock after the holidays. However, sluggish polished demand resulted in caution among De Beers’ buyers, a sight broker noted. Many of them rejected more goods than normal, including larger stones they don’t usually refuse, he added.


Office & Leisure

Michaels to shutter one of its retail store brands

The Michaels Companies is closing down a regional retailer it acquired three years ago. The arts-and-crafts giant on Wednesday announced that it will close all of its Pat Catan’s stores in the fourth quarter of fiscal 2018. The retailer plans to rebrand up to 12 of the 36 closed stores and reopen them under the Michaels banner. The company also updated its fourth quarter guidance to the low end of its forecast, citing “more volatility in consumer shopping behavior” so far in January than it initially expected. In 2016, Michaels acquired Lamrite West, a privately-held company based in Strongsville, Ohio, with a wholesale division, a small sourcing office in China and a small retail chain called Pat Catan’s Arts & Crafts Stores, which was operated as outlets for the wholesale business.

With no Toys ‘R’ Us, toys sales dip

The absence of Toys “R” Us from the retail landscape impacted toys sales — but not as much as had been feared. U.S. retail sales of toys generated $21.6 billion in 2018, down 2% from $22.0 billion in 2017, according to The NPD Group. The decline came after four straight years of growth in the toy industry. Juli Lennett, VP and industry advisor, toys, at NPD Group said, “Overall, a two percent decline is a solid performance after such a significant shift in the retail landscape. It’s also worth noting that annual 2018 sales are slightly higher than 2016, which experienced mid-single digit growth.” Toys “R” Us was estimated to account for 10% to 15% of all toy sales prior to its liquidation last summer. An array of retailers, from Walmart and Target to Party City and Five Below jumped in with expanded offerings to fill the void left by the chain’s demise.

Technology & Internet

Amazon stock falls after CFO says regulation in India and increased spending on the horizon

Amazon fell 4 percent Friday morning after the company announced on a call with investors it would likely increase investment in 2019 and raised concerns about new regulation in India. Amazon’s stock initially popped after hours on its fourth quarter 2018 earnings report Thursday. The stock took a steep turn during the company’s call with analysts when Amazon CFO Brian Olsavsky said Amazon plans to increase investments this year after scaling back capital expenditures and hiring the year prior. In notes following the report, analysts expressed concern about increased expenditures and a new law in India that will soon come into effect preventing foreign online retailers from selling products through affiliated companies.

Zwipe tops up with $14M to bring biometric payment cards to market this year

Biometric payment card startup Zwipe has swiped $14M to add to an earlier Series B round as it continues to work towards commercializing technology that embeds a fingerprint reader in payment plastic for an added layer of security. “We are not commercially rolled out yet, we expect that to happen in the second half of this year, starting first in Europe and potentially in the Middle East,” a spokesman told us, saying the financing will be used to scale up the company to prepare for a commercial rollout of a biometric payment card solution in the second half of 2019.

Returnly raises $8 million to streamline customer returns

Returnly, a San Francisco-based company that works with retailers and brands to handle post-purchase payments, said today it has raised $8 million and secured a credit facility that will enable it to finance over $300 million in repurchases. Returnly offers a range of solutions to retailers and brands to help them credit customers who wish to return products with an online wallet (Returnly Credit). The company, which counts Fanatics, Untuckit, Outdoor Voices, and GREATS among its hundreds of merchant partners, says it has found that retailers that make it easier for customers to return goods end up seeing them come back and make purchases with them again.


Finance & Economy

Payrolls surge by 304,000, smashing estimates despite government shutdown

Job growth in January shattered expectations, with nonfarm payrolls surging by 304,000 despite a partial government shutdown that was the longest in history, the Labor Department reported.  The unemployment rate ticked higher to 4 percent, a level where it had last been in June, a likely effect of the shutdown, according to the department. However, officials said federal workers generally were counted as employed during the period because they received pay during the survey week of Jan. 12. On balance, federal government employment actually rose by 1,000.


S&P 500 posts best January since 1987

The S&P 500 index advanced about 7.9% for the month, logging the best January since 1987, when the index posted a monthly advance of around 13%.  After the worst December for stocks in 87 years, “stocks have bounced back in a spectacular fashion,” said Ryan Detrick, senior market strategist for LPL Financial.  “With the S&P 500 about 10% away from new highs, we do think new highs are quite possible at some point this year,” he added. “Positive news from the Federal Reserve and China trade talks, as well as the realization by investors that the odds of a recession in 2019 are quite low could spark potential new highs.”

Housing market off to slow start in January

New data from Realtor.com indicates that the housing market is off to a slow start, as 15% of U.S. listings experienced a price cut in January.  Realtor.com Chief Economist Danielle Hale said the U.S. housing market is off to a slower start this year in many markets, compared to the rapid acceleration seen in January 2018.  According to the company’s data, the share of homes that experienced a price cut increased by 2% year over year. This increase is attributed to price reductions in the nation’s largest markets.