February 18, 2019 Consensus

The Weekly Consensus – February 18, 2019 (Volume 11, Number 7)

The Big Story
The Winners and Losers of Amazon’s Abandoned NYC HQ2
Mark Lenz

The Amazon River can be challenging to travelers, with risks lingering around every bend.  Amazon.com, Inc. found challenges around every bend while planning its HQ2 in New York City, and last week it decided the risks were too high, and announced it was backing off on its intent to build a second headquarters in Long Island City.

Incidentally, I wrote my last Big Story on Amazon HQ2 the week that the original announcement was made to split the new headquarters between Virginia and New York.   Two of the most powerful politicians in the state, the governor and the mayor of New York City were puffing out their chests upon the announcement.  However, at the same time, there was an undercurrent of dissent citing the cost in dollars and quality of life for current residents.  I asked then “who will be the real winners and who will be the real losers in this Amazon HQ story, and at what cost”?

After several months of discussion and negotiation since the original announcement, the dissent of local New York politicians and residents rose to a crescendo in recent weeks.  One of the loudest voices was newly minted U.S. Congresswoman Alexandria Ocasio-Cortez, who criticized the reported billions of dollars in tax breaks that Amazon was promised.

In a public announcement, Amazon said “A number of state and local politicians have made it clear that they oppose our presence and will not work with us to build the type of relationships that are required to go forward.”

The blame game for Amazon’s aborted NYC plan has been going back and forth at a furious pace. Mayor de Blasio said that Amazon “threw away the opportunity to be a good neighbor and do business in the greatest city in the world” while the governor blamed “a small group of politicians who put their own narrow political interests above their community.”  But certainly, these two powerful New York politicians (who were two of the most vigorous supporters of the Amazon HQ2 plan) lost to a group of local politicians with a different idea of what was good for their constituents.

In the end, New York City and the state of New York will save billions of tax dollars while Amazon takes its jobs and moves elsewhere.  Residents of Long Island City will not have to worry about being priced out of their homes due to pressure caused by an Amazon building frenzy.  And unions will not have to worry about whether Amazon will let them try to organize its workforce.

This decision and the factors that brought it about should make other cities and their politicians view these types of business/government partnerships in a different light.  Can tax incentive packages be structured in a way to bring consensus in advance?  Will tax incentives at these extraordinary levels still be perceived as a beneficial tradeoff for new jobs in other jurisdictions?  Was this setback just “a New York thing”?  Regardless, it is likely that other companies will think twice before committing to a relocation or expansion in New York City in the wake of the Amazon fracas.

Who will be the winners and losers of this episode, and what will be remembered when the dust settles?  Certainly, the politicians and activists that opposed HQ2NYC are claiming victory.  But, I believe, there are far more losers.  New Yorkers will miss out on thousands of first-rate jobs, and the state and city will suffer some reputational damage in the business community. Further, the governor and mayor have been embarrassed, and speculators who made wagers on real estate near the planned HQ immediately after Amazon’s announcement last year will likely take losses.  Beyond the losses, another lesson will be remembered: despite the obvious power of big business and high-ranking politicians, local politicians and activists still have power as well. And this time, the little guys prevailed.

 

Headlines of the Week

Amazon says it will not build a headquarters in New York

Amazon will not build a headquarters in New York City following mounting opposition, the company said in a statement Thursday. Amazon said it does not have plans to reopen the search for a replacement location. The company will continue to build its planned headquarters in Virginia and its other planned location in Nashville, Tennessee.

JAB Holdings Offers up to $1.75bn to Take Back Control of Coty

Investment group JAB Holdings has offered to pay up to $1.75bn to take back majority control of Coty, the problem-plagued cosmetics company in which it has been a longtime shareholder. The move by JAB, which has been on a $50bn deal spree in the consumer sector since 2012, is a sign of how determined it is to fix the mess at Coty that has dragged down the value of its portfolio. Coty’s share price plummeted 60 per cent last year as it struggled to digest a $12.5bn acquisition from Procter & Gamble that was engineered by JAB. Revenues have been declining sharply at its largest division, mass-market beauty, prompting JAB to replace management in November. Coty wrote down the value of the P&G assets, which include CoverGirl and Max Factor, by nearly $1bn.

Levi Strauss files for IPO

Levi Strauss & Co. on Wednesday announced it has filed for a proposed initial public offering. The company intends to list its Class A common stock on the New York Stock Exchange under the ticker symbol “LEVI,” according to a company press release. For much of its 145 years in operation, the storied denim brand had remained within the family line of Levi Strauss, who came to California from Bavaria during the Gold Rush in 1853 looking for a place to grow a dry goods business. The company went on to define American denim, although its roots haven’t had the same emotional pull for younger generations.

 

 

Apparel & Footwear

Xcel Brands Reports Acquisition of Halston and Halston Heritage Trademarks

Xcel Brands, Inc. announced the acquisition of the Halston and Halston Heritage trademarks. This transaction consolidates ownership of the Halston trademarks under Xcel; the company previously acquired the H by Halston and H Halston trademarks in December of 2014. Xcel has entered into a licensing agreement with Groupe JS International to produce and distribute sportswear and dresses under the Halston label and dresses under the Halston Heritage label, which is currently distributed in premium retailers including Neiman Marcus, Saks, and Bloomingdale’s. Xcel will continue to distribute H by Halston and H Halston through interactive TV and better retailers, respectively.

Canada Goose to open new factory in Montreal

Canada Goose Holdings Inc. says it will open a new factory in Quebec, its second in the province. The production facility will be located in Montreal and is expected to employ more than 100 people by the end of March, and grow to 650 new positions at full capacity by the end of 2020. The announcement came as the luxury parka maker reported a profit of $103.4 million or 93 cents per diluted share for the quarter ended Dec. 31, up from a profit of $63 million or 56 cents per diluted share in the same quarter a year earlier. Revenue in what was the company’s third quarter totalled $399.3 million, up from $265.9 million. Canada Goose also raised its guidance for revenue and profit for its 2019 financial year. It now expects revenue growth in the mid-to-high 30s on a percentage basis, compared with earlier expectations for at least 30 per cent.

The plus-size era is over before it began

In its place is a new standard: inclusive sizing, and retailers that haven’t woken up to those changes in apparel risk losing billions in sales. Imagine a woman, with a sense of style and money to spend, with friends, but she’s locked out, unable to buy anything that she feels is sexy or fun or lovely — whether it’s to wear to a club, the gym or a job interview — from any of the shops they pass. Two-thirds of U.S. women consider themselves to be a special size defined as plus, petite, junior or tall, according to NPD Group’s Consumer Tracking Service. One-third of female consumers identify as plus-size, the same study notes.

 

Athletic & Sporting Goods

Johnny Mac’s Sporting Goods will close retail stores after selling team sports division to BSN

Johnny Mac’s Sporting Goods, which has outfitted St. Louis athletes for decades, has sold its team division to BSN Sports of Dallas.  The division being sold to BSN — which deals equipment and uniforms to school sports teams — represented around 65 to 70 percent of its business, McArthur said.

Upstart Lacrosse League Scores Alibaba Billionaire Funding

The Paul Rabil-founded upstart Premier Lacrosse League has received backing from Alibaba billionaire and Brooklyn Nets investor Joe Tsai as part a Series A funding round.  The financing round was additionally led by Brett Jefferson of Hildene Capital Management and return investor The Raine Group. The capital will be used to fund future league operations, such as team and player-focused original programming and executive team expansion.  Through his investor firm, J Tsai Sports, Tsai brings a wealth of knowledge in sports, particularly with the NBA, via investments in the Nets and WNBA team New York Liberty.

NBA Star Porzingis, Jordi Cruyff Invest in Start Up Zone7

Israeli-American sports injury prevention start-up Zone7 has raised $2.5 million in seed funding, in an investment round led by Resolute Ventures with the participation of Kristaps Porzingis of the Dallas Mavericks and former Dutch soccer star Jordi Cruyff.  UpWest, Amicus Capital, Dave Pell and PLG Ventures also participated in the funding round for the Tel Aviv and Palo Alto, California-based company.  Co-founded by IDF elite intelligence unit 8200 alumni Tal Brown and Eyal Eliakim, Zone7 connects to medical and athlete performance data, and uses artificial intelligence-driven pattern recognition software to identify injury risk and simulate how changes in training and working impact performance and injuries.

Cosmetics & Pharmacy

Cannabis Brand to Open CBD Shops at Simon Malls Nationwide

A veteran retail executive will now bring products infused with the cannabis extract CBD to a wide swath of the public with the cooperation of the nation’s largest mall operator.

Peter Horvath, former president of DSW and COO of Victoria’s Secret, will open a chain of stores selling CBD-infused beauty and personal-care products at Simon Malls this year, with the first slated to open at Castleton Square Mall in Indianapolis in March. CBD is short for cannabidiol, the legal compound in cannabis that advocates say delivers the calming benefits of marijuana without the high that comes from THC. The deal was announced by Simon Property Group and cannabis and CBD product company Green Growth Brands Inc. (Horvath was named CEO of GGB last March. Prior to that, he served as chief global commercial and administrative officer at American Eagle Outfitters.)

Victoria Beckham Launches Own-Brand Beauty

She has been dropping hints for years, but finally Victoria Beckham has announced that she is launching Victoria Beckham Beauty as part of her eponymous brand later this year. “I want to take care of women inside and out, providing them with the must-have items in make-up, skincare, fragrance and wellness that I feel I need in my own life,” Beckham said in a statement. Victoria Beckham Beauty is launching as a digital-native brand, sold through Victoriabeckham.com and backed by NEO Investment Partners.

Lewis Drug Buys 6 Shopko Pharmacies

Lewis Drug is growing its reach in six communities across the three states it serves. The Sioux Falls, S.D.-based chain has purchased the pharmacy assets, including prescription files and records, from six Shopko stores. The Shopko pharmacies are in the South Dakota communities of Madison, Mitchell and Sisseton; Minnesota areas of Luverne and St. James; and Isa Grove, Ia. Once its new locations open, Lewis Drug will operate 58 pharmacies in South Dakota, Minnesota and Iowa.

 

Discounters & Department Stores

Neiman Marcus renews talks aimed at reducing the luxury retailer’s looming debt

Neiman Marcus Group and its creditors are renewing talks about reworking the company’s debt before its term loan comes due next year, with some agreeing to curb their trading during confidential negotiations, according to people with knowledge of the matter. The Dallas-based luxury department store chain is reaching out to creditors and their advisers to see whether they can get past issues that stymied previous efforts, said the people, asking not to be identified discussing a private matter. Certain unsecured bondholders have agreed to restrict their trades for a second time after the previous talks fell apart at the end of last year, the people said.

As Big Chains Die, These Small Department Stores Thrive

With hundreds of big-name stores closing across America, the department store as we know it is dying. But while mega-retailers like Sears and J.C. Penney gasp for life, and other chains like Bon-Ton go out of business, shoppers keep opening their wallets and whipping out their credit cards at a few smaller department stores that are still hanging in there. How do they stay in business as shoppers make more and more of their purchases online? Here are the secrets to these unique retail successes.

Barneys Is Adding a Cannabis Department

It wasn’t that long ago that acquiring marijuana felt like a perilous, intimidating task, even if it was legal. Dispensaries were often dingy, windowless spaces with product behind bulletproof glass and armed guards lending the unshakable feeling that things could escalate into a shoot-out at any moment. But now, there are beautiful Apple Store-esque storefronts like Med Men making weed procurement feel like a relatively normal and accessible part of everyday life — and Barneys is taking things to another level. Soon, you’ll be able to grab a bite at Fred’s, then pick up weed at the same time as your Prada bags and The Row sweaters. Well, sort of.

 

 

Emerging Consumer Companies

Joor raises $16 million to expand internationally

Joor, an online marketplace that connects fashion brands and retailers and works with nearly 200,000 retailers and 8,600 brands in 144 nations, has closed $16 million in Series C funding. The company intendeds to use the funds to add more tools to its platform and expand operations in Asia. The investment was led by Japanese conglomerate Itochu and included participation from existing investors Canaan Partners and Battery Ventures. Joor has raised $36 million since it was founded in 2010.

Macerich opens BrandBox, the retail-as-a-service offering that targets digitally-native brands

Macerich, one of the nation’s leading owners and operators of major retail properties, opened BrandBox in Tysons Corner, Virginia, just outside of Washington, DC. BrandBox is a new turnkey approach for digitally native brands to open and operate stores. The service can give to brands a fully functioning retail store unique to their brand’s aesthetic in weeks. The first BrandBox location features Winky Lux, Naadam, Interior Define, Nectar Sleep, DKNY, and UrbanStems. Additional locations are expected to open in 2019 at select Macerich properties.

Modcloth begins retail expansion

Modcloth opened its first-ever physical retail space in New York City in the start of its national retail expansion. By the end of December, Modcloth plans to have 19 new stores. Like Modcloth’s current stores in San Francisco, Austin and Washington D.C., the 2019 will be “FitShops” – stores that carry samples only, where consumers can try on products for size and place orders for delivery to home. The next FitShop locations are set for cities including Chicago, Salt Lake City, and Philadelphia.

 

 

Grocery & Restaurants

Beverage dispensing company Bevi receives $35m in funding

‘Smart’ beverage dispensing company Bevi has raised $35 million in a Series C funding round led by Bessemer Venture Partners. Boston-based Bevi produces a range of touch-screen operated beverage dispensers which allow users to select still or sparkling water in a variety of flavours. Bevi said that the funding will be used to accelerate product development across the company’s hardware, software and beverage portfolio, expand the company’s sales footprint within the US and Canada and build brand awareness with consumers.

 

Prices back on the rise at Whole Foods

Back in 2017 when Amazon first purchased Whole Foods Markets, one of the first moves made by the new owner was a slew of highly publicized price reductions designed to soften the grocer’s “Whole Paycheck” reputation — that its prices were too high for the average shopper. Now that may be changing. According to a report in The Wall Street Journal, pressure from consumer-product makers to cover rising costs for packaging, ingredients and transportation has led Whole Foods to raise prices on hundreds of products, based on internal communications viewed by the Journal.

Home & Road

YETI Reports Fourth Quarter and Fiscal Year 2018 Financial Results

Matt Reintjes, President and Chief Executive Officer of YETI Holdings, Inc., commented, “We finished 2018 with significant momentum in our business as we delivered full year results well above our original outlook and solidly at the high end of the revised outlook. We are extremely pleased with the strength in our business as our brand and products continue to resonate with consumers across all markets. We look forward to building on that momentum throughout 2019 as we continue to expand our customer base, drive product innovation, grow our direct-to-consumer business, and expand internationally.”

For the Three Months (Thirteen Weeks) Ended December 29, 2018 Net sales increased 19% to $241.2 million compared with $202.1 million during the same period last year.

Adjusted Operating Income increased 63% to $45.9 million, or 510 basis points to 19.0% of net sales, compared to $28.1 million, or 13.9% of net sales, during the same period last year.

Tempur Sealy in the Hunt for Innovative Mattress Solutions Assets

Tempur Sealy International disclosed that it submitted a stalking horse bid to purchase $26M worth of assets from Innovative Mattress Solutions. Innovative Mattress Solutions, which operated 140 stores under the Sleep Outfitters, Mattress Warehouse and Mattress King brand names, filed for bankruptcy in January.

Another Home Furnishings Brand to Offer Install Services

Crate and Barrel has joined the growing number of retailers targeting customers who don’t want to install or put together newly purchased home items. The home furnishings retailer is partnering with home services platform Handy to offer customers professional furniture assembly and home decor installation at over 90 locations across the United States. Associates at Crate and Barrel and CB2 can now work with shoppers to design a fully-furnished room, and then direct Handy professionals to assemble and install the entire look for one flat price.

Jewelry & Luxury

Pandora Appoints Consumer Brand Vet as CEO

Pandora has named Alexander Lacik, a veteran of various consumer brands, the jewelry company’s new president and CEO. He is the company’s sixth CEO since it went public in 2010. He replaces chief financial officer Anders Boyer and chief operating officer Jeremy Schwartz, who had been serving as co-CEOs following the resignation of CEO Anders Colding Friis last August. Both men are expected to continue in those positions.

Engagement-Ring Demand Fell in 2018 – Poll

Fewer US consumers bought jewelry for their weddings in 2018, while the number of couples opting for engagement rings also dropped, according to The Wedding Report.

The proportion of couples that bought an engagement ring when getting married fell 1.1% in 2018, with 87% purchasing one, according to a survey by the market-research company. Demand for women’s wedding bands also declined, with 86% buying them, down 2.3% year on year. The average amount couples spent on engagement rings decreased 0.4% to $3,388, while the average price of women’s wedding bands slipped 0.9% to $775.

 

The Lab-Grown Diamond Industry Is Still Out-Hustling the Natural

For the last six months, I have written a lot on lab-grown diamonds. Sometimes, I feel I’m writing too much. I have asked myself, “Why haven’t I been covering other issues or companies?” But now I realize that might not be the right question. In 2014, I wrote that the lab-grown diamond industry was out-promoting the natural. That is even more pronounced now. I don’t get many pitches from natural diamond companies. And some of the pitches I do get are kind of dull.

 

Office & Leisure

FAO Schwarz adding more stores, expanding beyond toys

The reborn FAO Schwarz is expanding its reach in multiple ways. The iconic toy brand announced several new licensing agreements in the candy, home, and accessory space as well as expansion of its physical retail footprint. Following the debut of FAO Schwarz’s flagship store at Rockefeller Plaza in New York City and the opening of its first airport location at LaGuardia Airport in November 2018, the company will open a second airport store, at Chicago Midway International Airport. In addition, through an exclusive agreement with Hudson Group, additional FAO Schwarz and FAO Schweetz shops will open throughout the year in airport terminals nationwide. FAO Schwarz has also partnered with Kidsland, China’s largest toy distributor and retailer with almost 300 stores. On the product front, FAO Schwarz has entered into licensing agreements with three companies to create a wide array of lifestyle products for children and families that will be available this fall.

Mattel shares plunge as 2019 forecast disappoints

Mattel Inc on Friday issued a disappointing 2019 forecast, barely a week after posting a surprise quarterly profit, triggering an 18 percent drop in its shares. The company said it expects EBITDA of $350 million to $400 million for 2019, below estimates of $480.18 million.

The toy maker also forecast flat gross sales on a constant currency basis for the year as it expects weakness in Thomas & Friends and American Girl to offset comparatively stronger sales of its Barbie and Hot Wheels brands. For the first quarter, Mattel said it expects lower gross sales, as it wrestles with the collapse of Toys “R” Us and currency fluctuations. U.S. toy makers have been scrambling to find newer avenues to sell toys after the sudden liquidation of the world’s largest toy retailer. However, a rise in Barbie sales had helped Mattel post strong fourth-quarter earnings on Feb. 7, with its shares surging 23 percent the following day.

Staples Makes another Acquisition

Staples continues to strengthen its service offerings.  The company has signed an agreement to acquire DEX Imaging, a leading independent document imaging technology dealer in the United States. The terms of the deal were not disclosed. Under the terms of the agreement, Dan Doyle, Jr., president and CEO of DEX Imaging, Dan Doyle, Sr., chairman of DEX and their existing executive team will continue to lead the business going forward.

Technology & Internet

Amazon is buying mesh router company Eero

Amazon has announced that it’s acquiring Eero, the maker of mesh home routers. Amazon says buying Eero will allow the company to “help customers better connect smart home devices.” It will certainly make Alexa-compatible gadgets easier to set up if Amazon also controls the router technology. Eero kicked off a wave of “smart” mesh router setups designed to overcome the coverage issues and dead zones of traditional routers. Instead of a single router device, multiple access points are used to blanket an entire home or apartment with a strong Wi-Fi signal.

 

Facebook Acquires Visual Shopping Startup to Bolster AI Work

Facebook Inc. said it acquired visual shopping and artificial intelligence startup GrokStyle Inc. in a move to bolster the social-media company’s own AI work. GrokStyle’s technology, which was integrated into Ikea’s mobile app, was simple in practice. A user takes a picture of a piece of furniture and the technology would match it to similar products that could be purchased online.

 

‘Amazon Live’ is the retailer’s latest effort to take on QVC with live-streamed video

Amazon is taking on QVC with the launch of Amazon Live, which features live-streamed video shows from Amazon talent as well as those from brands that broadcast their own live streams through a new app, Amazon Live Creator. On the live shows, hosts talk about and demonstrate products available for sale on Amazon, much like they do on QVC. Beneath that sits a carousel where shoppers can browse product details and make purchases. More than one video streams on Amazon Live at the same time, so shoppers can tune to the one that most interests them.

 

Finance & Economy

A record 7 million Americans are 3 months behind on their car payments, a red flag for the economy

A record 7 million Americans are 90 days or more behind on their auto loan payments, the Federal Reserve Bank of New York reported, even more than during the wake of the financial crisis.  Economists warn that this is a red flag. Despite the strong economy and low unemployment rate, many Americans are struggling to pay their bills.  A car loan is typically the first payment people make because a vehicle is critical to getting to work, and someone can live in a car if all else fails. When car loan delinquencies rise, it is usually a sign of significant duress among low-income and working-class Americans.

Retail sales were so bad, it’s either suspect data or a recession warning

The sudden and unexpected plunge in December’s retail sales data raised new concerns about a recession, but economists also say the biggest drop in nine years clashes with other data and may be suspect.  The Commerce Department said retail sales for December fell 1.2 percent, the largest decline since September, 2009 when the economy was exiting recession and shaking off the financial crisis. The report was delayed due to the government shutdown, and there is no release date for January sales data.

Consumer debt tops $4 trillion

For the first time ever, consumer debt is now topping $4 trillion, according to a new Federal Reserve report.  Economists say with low unemployment and steady income growth, consumers are actually tapping into credit lines, and in the last few years, the feds say Americans overall have bumped up their debt by $1 trillion.  That breaks down to nearly $1.2 trillion in auto loans, nearly $1.6 trillion in student loans and more than $1 trillion in consumer credit, mostly from credit cards.