February 11, 2019 Consensus

The Weekly Consensus – February 11, 2019 (Volume 11, Number 6)

The Big Story
A High Growth Industry? Or A Budding Mania?
Douglas Stebbins

Holland was famously gripped by “tulip mania” in the 1630’s when, in what is considered by many to be the first speculative financial market, prices for certain tulip bulbs escalated to such a level that a single rare bulb could cost a year’s wages.  Not surprisingly, the craze was not sustainable, and by early 1637 bulb prices collapsed.  Who would have thought that a simple plant could drive such speculative investment?  On second thought, maybe it is not too hard to imagine.  We may be living through our own mini-mania, as the past couple of years have seen a torrid pace of deals and sky-high valuations involving a different plant. Not tulips, but cannabis.

According to CapitalIQ, there have been over 500 transactions involving U.S. based cannabis-related companies in just the past 12 months.  That amounts to a pace of almost 10 mergers, acquisitions or capital raises per week, as operators and investors try to capitalize on the burgeoning U.S. pot market.  While still illegal under U.S. federal law, a number of individual states have passed legislation permitting the use of marijuana for medical and industrial uses, and, more recently, for recreational use.  The recently passed Farm Bill also legalized commercial hemp for certain uses, but punted oversite of cannabidiol (CBD), the non-psychoactive ingredient in cannabis, to the FDA, which promptly stated that it would not allow CBD to be added to food or drink without prior approval.  New York City also announced that it would be cracking down on edibles and drinks that include CBD.


But, even with all of these moves toward cannabis acceptance, the U.S. is still a few years behind our progressive neighbors to the north. Since late 2018, recreational use of marijuana has been legal throughout Canada.  So Canadian cannabis companies, enjoying the country’s legal clarity, have greater access to both public and private sources of capital than their U.S. counterparts.  There are almost 150 publicly traded cannabis-related companies in Canada, most of which are trading on secondary equity markets.  There are nine cannabis companies traded on Canada’s premier stock market, the Toronto Stock Exchange.  Canadian marijuana firms have also attracted investment from large multinational strategic investors like tobacco giant Altria and alcohol conglomerate Constellation Brands.

But with cannabis still illegal under U.S. federal law, sources of capital for American marijuana companies are much more limited.  With the legal marijuana market in the U.S. projected to be almost $150 billion by 2025, the question remains, who is going fund this growth?

It probably won’t be banks.  As long as cannabis remains an illegal substance under U.S. federal law, cannabis companies have no entitlement to federal bankruptcy protection (even though its operations may be legal under applicable state law).  Until the federal law changes, traditional U.S. lenders will likely choose to stay clear of cannabis.

To date, most of the funding in the U.S. has come from individual investors, family offices and small investment funds set up specifically to invest in cannabis.  Large, established venture capital and private equity funds have generally been reluctant to aggressively pursue cannabis investments.  Some funds are explicitly prohibited in their bylaws from investing in portfolio companies that derive revenue from activities such as gambling, pornography, munitions, tobacco, alcohol and, by extension, cannabis.  Other funds, while not prohibited, are concerned about alienating their limited partners, such as pension funds and endowments, by investing in vice-related companies.

But, for many, the economic draw of the fast-growing cannabis market will be too much to resist.  So, when funds meet with their LPs or go out to raise their next fund, many will want to clarify that cannabis-related investment opportunities will be part of their mandate.  In the ongoing, and often elusive, search for above-market returns, the lure of the growing cannabis market may be too much for certain fund managers to ignore.  The bigger challenge might be for funds to convince wary investors that the cannabis market is not another tulip bubble, and that the risk–return relationship is palatable.


Headlines of the Week

Foot Locker makes $100M bet on popular online sneaker marketplace GOAT

Foot Locker has announced that it has made a $100 million investment in GOAT Group, an online marketplace which operates GOAT, and specializes in the selling and authentication of sneakers and runs Flight Club, consignment stores for rare and popular sneakers that operate in New York City, Los Angeles, and Miami.  Foot Locker and GOAT will begin to merge their collective forces across both their digital and brick-and-mortar operations. Footlocker’s investment in GOAT group is expected to advance GOAT’s technology apparatus and e-commerce operations. The move will also boost the group’s global presence in the athletic shoe marketplace. Foot Locker operates approximately 3,220 stores in 27 countries.


Bankruptcy judge gives Sears another chance, OKs $5.2B plan

A bankruptcy judge on Thursday blessed a $5.2 billion plan by Sears’s chairman and biggest shareholder to keep the iconic business going. The approval means roughly 425 stores and 45,000 jobs will be preserved. Eddie Lampert’s bid through an affiliate of his ESL hedge fund overcame opposition from a group of unsecured creditors, including mall owners and suppliers, that tried to block the sale and pushed hard for the company’s liquidation. In delivering his decision, U.S. Bankruptcy Judge Robert Drain for the Southern District of New York rejected the group’s claims that the sale process was unfair and flawed, that it shut out any others who could have been interested in buying the business and that Sears had more value to its creditors if it died than if it lived.



Apparel & Footwear

Tapestry stumbles on path to luxury power

Tapestry on Wednesday reported second quarter net sales grew 1% to $1.80 billion from $1.79 billion in the prior year. Inventory at the end of quarter rose to $732 million from $666 million in the year-ago period, mostly driven by regional distributor buyback activity over the past twelve months. Tapestry stumbled during the all-important holiday period, and even its profit success was thanks more to financial advantages like low interest rates and taxes than to its own merchandise sales. Coach suffered a reversal of fortune over the holidays, although it was a problem at home more than abroad, where the brand “is seen as … newer and fresher.” Stuart Weitzman was the standout, after several quarters of difficulty. If Tapestry is to regain its footing on its path to becoming a luxury highflier, however, a lot rests on Kate Spade, which the company acquired in 2017 for $2.4 billion and which had been delivering good results.

Charlotte Russe files for bankruptcy and will close nearly 100 stores

Charlotte Russe has filed for Chapter 11 bankruptcy and plans to close 94 stores, the company announced. The young women’s clothing chain becomes the latest mall-based retailer to file for bankruptcy protection, and joins a list that includes Gymboree, Claire’s, and Mattress Firm. In a court filing, Charlotte Russe, which operates 500 stores in malls around the country, said it “suffered from a dramatic decrease in sales and in-store traffic” and struggled with “the burden of maintaining a large brick-and-mortar presence.” The company hopes to emerge from bankruptcy with a new owner and a lighter balance sheet. It secured $50 million from lenders to continue running about 400 Charlotte Russe and Peek Children’s stores, as well as its website, during the bankruptcy.

Fullbeauty Breaks Record for Fastest U.S. Bankruptcy

Fullbeauty Brands Inc., the women’s plus-size retailer, set a record for the fastest U.S. corporate bankruptcy after taking less than 24 hours to win court approval for its plan to restructure the company. The company had support from all its stakeholders when it filed for Chapter 11 status on Sunday in the U.S. Bankruptcy Court in White Plains, New York. Fullbeauty, which had more than $1 billion of borrowings, is cutting around $900 million of debt through the bankruptcy process, allowing it to funnel less cash toward interest payments while it turns itself around. Judge Robert Drain said there were good reasons to approve the company’s plan promptly, including that every creditor had voted for the plan, and that the company has foreign suppliers that may not be comfortable selling to a company in bankruptcy. He gave verbal approval for the plan on Monday in court, less than a day after the original filing, and signed the official order approving the plan on Tuesday.


Athletic & Sporting Goods

BikeCo, LLC Purchases ASE Assets as Going Concern

BikeCo, LLC, a joint venture consisting of Tiger Capital Group and Advanced Holdings Co. Ltd., has acquired the assets of Advanced Sports Enterprises (ASE).  The winning bid, approved by the bankruptcy court on February 1, exceeded $23 million.  BikeCo, LLC will operate the wholesale business as Advanced Sports, Inc. LLC. (ASI) and include ASI’s bike trademarks Fuji, Kestrel, SE, Breezer and Tuesday, and component brand Oval Concepts.  Davis and Hsu added that the new owners plan to keep the ASI brands and retain the vast majority of the staff in the company’s Philadelphia headquarters.


Levine Leichtman Capital Partners and Management Acquire Club Champion

Levine Leichtman Capital Partners, a Los Angeles-based private equity firm, announced that it has partnered with management to acquire Club Champion, LLC from Summit Partners. Club Champion is a leading provider of custom fitting services and golf equipment in the US. The Company currently operates 47 stores across 25 states with plans to continue its rapid expansion. Club Champion is headquartered in Willowbrook, IL.

LNK Partners exits Fitness Connection to Roark after five years in portfolio

Atlanta-based buyout house Roark Capital has picked up a majority stake in value exercise club operator Fitness Connection from LNK Partners.  The deal marks the end of a more than five-year investment in the business for LNK, during which the firm said it expanded the company significantly into new and existing geographic markets.  Fitness Connection currently operates more than 40 locations across Texas, North Carolina and Nevada, and aims to offer the full range of amenities and services of a large, full-service premium club for as low as $10 per month.


Cosmetics & Pharmacy

Procter & Gamble acquires This is L

This is L, a feminine care brand launched around organic tampons and pads, was acquired by Procter & Gamble in a deal valued at roughly $100 million. Founded in 2011, the company promises that for every product purchased, it distributes another in developing countries to prevent diseases and unplanned pregnancies.

Estée Lauder Hits $4 Billion in Sales for Latest Quarter

Gains in skin care, travel retail, the Asia-Pacific region and online sales drove The Estée Lauder Cos. Inc. to a new quarterly revenue high — $4.01 billion. In the fiscal second quarter, net sales were up 7 percent year-over-year. Net earnings were $573 million, up dramatically from $123 million in the prior-year period. Diluted net earnings per share were $1.55, compared to 33 cents the prior year. The company’s Asia-Pacific region was up 17 percent year-over-year.

Chinese Demand Boosts L’Oreal Cosmetics Sales

Strong Chinese demand for luxury skin creams helped Lancome owner L’Oreal beat sales forecasts in the fourth quarter, as did a pick-up in its lagging mass market division. Like rivals including U.S.-based Estee Lauder, the French maker of Maybelline and Urban Decay make-up has thrived on strong demand from Chinese shoppers in recent years, especially for its higher-end products. Sales of L’Oreal’s top-flight brands exceeded analyst expectations in the last three months of the year thanks to this market, despite cooling economic growth in China, and fears over a Washington-Beijing trade war.


Discounters & Department Stores

Target is taking its new loyalty program to more cities

Target has a new loyalty program with personalized perks up its sleeve. The discount retailer has plans to take a revamped loyalty program that’s been in somewhat of a stealth mode in Dallas since March to five new markets on Feb. 19: Charlotte, North Carolina; Denver, Indianapolis, Kansas City and Phoenix. The program is free to members and doesn’t require a Target credit card to sign up.

Walmart Will Keep Scaling Back Fine Jewelry Sales

Walmart plans to cut back further on its fine jewelry sales counters this year, continuing a process that began in 2018, spokesperson Tara Raddohl-House confirms to JCK. “Overall, year-on-year fine jewelry offerings have decreased in Walmart stores,” she says. “Our plan for this year is similar, meaning we will look store by store to assess if fine jewelry is in demand, and if not, we will reallocate that space.


How Big-Box Stores Bilk Local Governments

A multibillion-dollar philosophy question is rippling through small-town America. If you build something that is fundamentally useless to anyone but you, should you have to pay property taxes on it? Dozens of big-box stores are arguing the answer is, essentially, no. As the country confronts an epidemic of retail closures, spurred by e-commerce, obsolescence, changing economic geography, and corporate mismanagement, mega-stores are using their shuttered rivals as “comps” in fights with local appraisers in order to reduce their tax bills.



Emerging Consumer Companies

Ritual, vitamin subscription company focused on women, raises $25 million

Ritual, the Los Angeles-based vitamin subscription company offering a line of prenatal and essential vitamins for women, closed on a $25 million Series B round. Norwest venture Partners led the round, with participation from previous investors Forerunner and Founders Fund. According to the company, it has sold over one million bottles to date, and its products are backed by over 12,000 scientific studies.

Cuyana, early leader around the fewer, better philosophy, raises $30 million

Cuyana, the San Francisco apparel and accessories brand, raised $30 million to expand its retail footprint, improve its supply chain and develop new products. H.I.G. Capital led the round in partnership with Digital Luxury Ventures. Cuyana plans to open new stores in locations in which Cuyana has launched pop-ups, including Chicago, Seattle, Washington, DC, and Texas, to augment its five permanent retail stores in New York, San Francisco, Palo Alto and Los Angeles.

Hydrow Receives $20 Million+ Growth Investment Led by L Catterton’s Growth Fund

Hydrow by CREW, the first live outdoor reality rower, today announced that it has received a significant growth equity investment led by L Catterton.  The investment, made from L Catterton’s Growth Fund, will enable Hydrow to bring its connected fitness rower to consumers across the country.  Founded in 2017 by U.S. National Team Rowing Coach and entrepreneur Bruce Smith, Hydrow offers a live on-river outdoor rowing experience at home that engages two times more of the body’s muscles than biking or running and results in up to 400 calories burned in a 20-minute workout.



Grocery & Restaurants

Papa John’s accepts $200 million Starboard investment

Papa John’s International Inc. has accepted a $200 million investment from hedge fund Starboard Value LP with an option of an additional $50 million through March 29, the companies announced. The struggling Louisville, Ky.-based pizza chain also announced that the company would appoint three new directors to its board, including Starboard CEO Jeffrey C. Smith.  In accepting Starboard investment, Papa John’s rejected a counter offer from former CEO John Schnatter, who said that on Feb. 2 he offered a deal “on terms that were substantially similar to, but superior to, the Starboard transaction.”

Smart & Final mulling possible sale?

Smart & Final Stores Inc. reportedly could be on the selling block. Citing unnamed sources, Reuters reported that Smart & Final is exploring strategic options, including a potential sale of the company. Los Angeles-based Ares acquired its majority stake in Smart & Final from Apollo Global Management in late 2012 for $975 million. About two years later, the retailer completed an initial public offering at $12 per share. As of afternoon trading on Tuesday, Smart & Final shares were at $6.34 after opening calendar 2019 at $4.70.

Del Frisco’s reaches détente with activist investor

Del Frisco’s Restaurant Group Inc. reached détente Monday with Engaged Capital LLC in an agreement that expands the casual-dining company’s board and added a director endorsed by the activist investor. The Irving, Texas-based parent to the Del Frisco’s Double Eagle Steakhouse, Del Frisco’s Grill, Barcelona Wine Bar and Bartaco concepts said it was also terminating a shareholder rights plan it adopted in December after noticing unusual activity in its share trading. Del Frisco’s said the board agreement with Newport Beach, Calif.-based Engaged Capital, which owns about 9.9 percent of the company’s shares, includes the appointment of activist-endorsed board member Joe Reece, founder and CEO of Helena Capital.

Home & Road

Things Remembered Files for Bankruptcy to Facilitate Acquisition

Things Remembered has filed for Chapter 11 bankruptcy protection as part of its plan to be acquired by a leading giftware company. The retailer, which sells engraved and personalized gifts and keepsake items, said it has entered into an agreement to sell most of its business to Enesco, a giftware, home décor and accessories company. To facilitate the sale, Things Remembered filed for bankruptcy and is seeking court approval for a severance and outplacement program to support impacted employees and incentives for store employees. Enesco intends to operate Things Remembered online, direct mail, and B2B retail businesses. It also will keep a “portfolio” of stores open under the Things Remembered brand. (Things Remembered currently operates about 400 stores.)

JC Penney will stop selling appliances at the end of this month

J.C. Penney is getting out of the appliance business, marking the first major change by new CEO Jill Soltau since she joined the struggling department store chain late last year.

The company’s former CEO, Marvin Ellison, who’s now chief executive of Lowe’s, brought back appliances in 2016 after the retailer had spent more than three decades focusing primarily on soft goods like apparel. He saw an opportunity to get into the business as Sears, which has now filed for bankruptcy, was steadily losing market share.

Jewelry & Luxury

Lab Diamonds Will Be Jewelers’ Hot Rock This Valentine’s Day and Beyond

Valentine’s Day is a prime gifting holiday, with the NRF projecting some $20.7 billion will be spent this year on lover’s gifts. While percentage wise more gifters will celebrate with candy (52%) and flowers (35%), they will spend the most on jewelry, nearly $4 billion worth. Combine these two facts together and it looks like a lot of diamonds will exchange hands this February 14. And while the vast majority of those diamonds will be sourced from the earth, a rapidly growing share of engagement diamond rings will be ethically and sustainably grown under laboratory conditions.

Kay and Zales Get New Advertising Agencies

Signet-owned Zales and Kay have chosen new ad agencies, about six months after sister nameplate Jared did the same. After 34 years with Stern Advertising, Kay Jewelers’ creative has moved to Zimmerman Advertising, a Fort Lauderdale, Fla.–based agency that specializes in retail. The Zales account will now be handled by New York City–based Badger & Winters, an agency known for “female empowerment messaging.” Cofounder Jim Winters said in a statement that its work with Zales will “change how the jewelry category engages women.” Prior to this, Zales’ ad agency since 2010 was Austin, Texas–based GSD&M.

Jeweler Pandora’s plan to regain luster lifts shares

The Danish charm-bracelet maker, currently looking for a new chief executive, has been challenged by a fall in the number of shoppers visiting malls in its main markets, while new jewelry lines have failed to entice shoppers. It cut its 2018 sales outlook twice in consecutive quarters last year. Pandora said it would target annual cost savings of 1.2 billion Danish crowns ($184 million) and push marketing efforts to try reigniting interest from women in particular. It expects up to 2.5 billion crowns in restructuring costs during this year and 2020.


Office & Leisure

Mattel and National Geographic Team Up for New Line of Barbie Dolls

Mattel announced in a statement on Thursday that it would be partnering with National Geographic to create a line of Barbie dolls focused on occupations that women are underrepresented in—like science, exploration, and research. The occupations will include Barbie as a wildlife conservationist, astrophysicist, polar marine biologist, wildlife photojournalist and entomologist. The dolls and play sets come with accessories certified by an “advisory council comprised of female National Geographic Explorers” that includes National Geographic magazine editor-in-chief Susan Goldberg. The company will be releasing the line nationwide in Fall 2019 and it will range in price from $14.99 to $29.99. Mattel said dolls purchased online will receive a special promotion “to encourage learning and discovery.”

Joann names new CEO

Joann Stores on Tuesday announced that it’s sticking with Wade Miquelon, who last year was named interim chief executive upon the departure of Jill Soltau, now J.C. Penney’s CEO. Miquelon has been named president, CEO and a board member, according to a company press release emailed to Retail Dive. Miquelon joined the sewing-and-crafts retailer as executive vice president and chief financial officer three years ago and was key to the “revitalized branding, refreshed merchandising, expanded digital capabilities, and customer-focused storefront innovation” executed under Soltau, the company said.

Before that he was CFO at The Walgreen Company and held executive roles at Tyson Foods and Procter & Gamble.

Technology & Internet

Amazon reconsiders its New York City HQ2 after backlash

Amazon.com Inc. is reconsidering its plan to build a corporate campus in New York after facing a wave of opposition, according to a news report that cited unnamed people familiar with the matter. Amazon executives have had internal discussions recently to reassess the situation in New York and explore alternatives, citing people familiar with the matter. The company hasn’t leased or purchased office space for the project yet, making it easy to withdraw the commitment.

Tim Armstrong is launching a new company to bring products and experiences directly to consumers, no retailer required

After a career at Google, AOL and Verizon watching digital disrupt media and advertising, Tim Armstrong is now focusing on digital’s transformation of retail. He is now announcing his new company, the dtx company, which stands for “direct to consumer.” Its mission, Armstrong says, is to “empower consumers and companies to build direct relationships.” His company will invest in start-ups in this space and work with these brands to help them scale. Additionally, dtx will launch pop-up experiences to introduce a broader range of direct-to-consumer companies to people around the country.

Smart home camera maker Wyze Labs raises $20M after startup finds success with low-cost WyzeCam

Wyze Labs, the Kirkland, Wash.-based makers of a low-cost, smart home security camera, has raised $20 million in new funding, according to a filing with the Securities and Exchange Commission. Wyze was founded by Amazon veterans Yun Zhang, Dave Crosby, Elana Fishman and Dongsheng Song in 2017. The startup launched its WyzeCam camera in October of that year, with 1080p HD video and 14 days of free cloud storage. At $19.99, the price severely undercut the group’s former employer, as Amazon released its own Cloud Cam for $119.99 around the same time.


Finance & Economy

Retail sales growth might not be as robust this year, with trade, government shutdown concerns

Retail sales growth in the U.S. could be cooling off in 2019, as a trade war with China and spillover effects from the recent partial government shutdown hang like a dark cloud over the industry.  The National Retail Federation is calling for retail sales, excluding automobile dealers, gasoline stations and restaurants, to climb between 3.8 and 4.4 percent this year, amounting to as much as $3.84 trillion.  That would be less than growth of 4.6 percent in 2018, which NRF says is its preliminary estimate for retail sales last year, pending the release of December data from the Commerce Department that was stalled from being announced during the government shutdown. NRF in August of last year said it expected 2018 retail sales to be up at least 4.5 percent.

US fund managers brace for consumer slowdown

With expectations for slowing growth escalating, U.S. fund managers are selectively avoiding stocks in consumer companies as lofty valuations, concerns about declining earnings estimates, and consumer confidence keep them on guard.  Low U.S. unemployment and rising wages should point to a healthy consumer, but worries about global growth, domestic U.S. politics and a U.S.-China trade war have been wearing on consumer and investor moods.

U.S. consumer credit tops $4 trillion for the first time in December

For the first time ever, consumer credit has risen above $4 trillion, the Federal Reserve said.  In December, the growth in consumer borrowing decelerated, but only slightly, to $16.6 billion, the Fed said. That’s an annual growth rate of 5%, which is down from a 6.8% rate in November.  With low unemployment and steady income growth, consumers have been tapping into credit lines, economists said. The Fed reported earlier this week that banks are starting to tighten standards on credit cards.