March 18, 2019 Consensus

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

The Big Story
Unintended Consequences
Betsy White

Successful retail strategy number one has always been to give consumers what they want, when they want it. That message has only been reinforced with the ubiquity of ecommerce and the evolution of omni-channel strategies at the most successful retailers. The latest twist on this has been the proliferation of business models that have provided consumers with the ability to satisfy their wants, not through ownership, but via a short-term rental model.

Perhaps it’s the gig economy, where many jobs are now done by contractors (who, by definition, are temporary), that is driving more consumers to rent instead of own. It is entirely possible to live your life today without owning a whole bunch of things that consumers have traditionally purchased (or at least rented on a long-term basis), like your home (think Airbnb), your car (Lyft, Uber), your clothes (Rent The Runway, Le Tote), and even your furniture (Fernish). At least until now, it appears that those who have taken advantage of the near-term cash flow benefits of rental programs have also benefited from little upward price movement. But renting-focused consumers may not be able to rely on price stability going forward, as evidenced by the millions and even billions of dollars of losses that public companies like Uber and Lyft report each year.

It gets more interesting when traditional retailers enter the rental market. Last week, Rent The Runway and West Elm, the self-described approachable and affordable home goods retailer that is part of the Williams-Sonoma family, announced a new partnership.  Launching this summer, this program will allow Rent The Runway subscribers to include West Elm home décor packages in their monthly Rent The Runway subscription plans. On the surface, this partnership appears to benefit Rent The Runway more than West Elm. Rent The Runway is just expanding its existing rental offering from clothing and accessories into home décor, while West Elm’s whole business plan has been built on the premise that consumers like to buy and own stuff rather than share it with others. Possibly West Elm, like the clothing brands that sell to Rent the Runway, believes it is attracting new customers versus cannibalizing sales from existing customers, along with gaining other market intelligence.

Providing the opportunity to consumers to rent goods that were previously only available for purchase is a bold experiment, but both consumers and retail brands alike need to consider not only the short-term benefits, but the long-term consequences.

 

Headlines of the Week

Dollar General will open 975 stores this year

Dollar General keeps expanding even as discount rivals like Family Dollar shrink. The company said Thursday it will open 975 new stores in the United States this year. Dollar General will remodel 1,000 older stores with new queue lines to drive last-minute impulse buys. It will also spruce up its health and beauty sections to lift sales. Dollar General has been growing for years in rural America. Dollar General (DG) opened 900 stores in 2018 and 1,315 the year prior. It has more than 15,300 stores across the country and sales have increased for 29 straight years.

 

PayPal is investing $750 million in MercadoLibre

Latin American online marketplace MercadoLibre Inc. is out to raise a lot of money. The company said Wednesday it has raised $1.85 billion through a public share offering and direct investments from companies including PayPal Holdings Inc. MercadoLibre is boosting investment in logistics as its ecommerce business faces increasing pressure in Brazil, its largest market, with Amazon.com Inc. expanding its presence in the region. It will also use the funds to invest in fintech and payments solutions, at a time when a ramp up in growth beyond retailing to payments and financial technology had led analysts to wonder if that might eventually dwarf its retail operations.

 

 

Apparel & Footwear

Chico’s taps Nordstrom vet to turnaround struggling brand

Chico’s FAS is making a change at the top of its namesake brand and shuttering 60 to 80 stores in 2019 following a disappointing fourth quarter. The women’s apparel retailer is appointing Karen McKibbin as president of Chico’s brand, effective April 1, 2019. McKibbin most recently served as president of Nordstrom Rack. Prior to that role, she was president of Nordstrom Canada. Previously at Nordstrom, she served as VP and led four different regions for the company. In addition, as part of a previously announced plan to close approximately 250 stores across its Chico’s, White House | Black Market and Soma brands in the next three years, Chico’s plans to close 60-80 stores in 2019. Chico’s is making these changes in the wake of a difficult fourth quarter of fiscal 2018. The company reported a net loss of $16.6 million, compared to net income of $28 million the same quarter a year earlier.

Kimora Lee Simmons to Relaunch Baby Phat

Baby Phat is coming back. About 20 years after its inception, the women’s urbanwear brand is set to relaunch in the upcoming months. Baby Phat developer Kimora Lee Simmons Leissner announced the news Friday, revealing she had personally purchased the brand from an undisclosed company. “We had to hunt around for it,” she told WWD. “[…] It’s perfect timing for this. Over the past several years, we realized the brand resonates with people and lives deep in their souls.” Baby Phat was a sub-label of the Phat Fashions imprint owned by Leissner’s ex-husband Russell Simmons. The brand served as the womenswear counterpart of Phat Farm, and earned more than a billion dollars in sales during its heyday. Leissner told WWD that the Baby Phat relaunch is scheduled for spring, and that it will deliver “mainstream sportswear” pieces for millennials.

LK Bennett tangles with collapse

British luxury fashion chain LK Bennett is going into administration as it desperately seeks the funding it needs to stay afloat. According to reports, EY will oversee the insolvency if no new investment can be found. The luxury label, which counts the Duchess of Cambridge and former Home Secretary Amber Rudd among its customers, has 41 shops and 480 staff in the UK with more shops and concessions globally, including in Spain, the Netherlands and the UAE. Famed for its kitten-heel shoes, it was founded by Linda Bennett in 1990. Ms Bennett said her aim was to bring “a bit of Bond Street luxury to the High Street”. She sold her majority stake in the chain to private equity firm Phoenix Equity Partners in 2008, but in 2017 returned to advise the business after the retailer started to struggle, and a short time later bought the company back.

 

 

Athletic & Sporting Goods

CorePower Yoga Sold to TSG Consumer Partners

Private equity firm L Catterton is selling CorePower Yoga for an undisclosed sum.  Connecticut-based L Catterton first invested in CorePower in 2013, and the yoga brand has since expanded from 80 locations in 12 states to 200-plus locations in 23 states. In recent years, L Catterton has also invested in other fitness brands such as Equinox, Peloton, and Pure Barre.  TSG Consumer Partners, founded in 1987, currently claims $5 billion in managed assets. The firm partnered with Planet Fitness in January 2013, prior to the health club company’s stock market launch.

Dick’s Sporting Goods Will Remove Guns from 125 Stores Amid Declining Sales

Dick’s Sporting Goods announced Tuesday it will remove firearms from 125 of its stores, according to news reports. The move follows the company’s ban on assault-style weapons last year in the wake of the Parkland shooting. CEO Ed Stack said Tuesday that Dick’s will pull hunting gear from 125 stores starting in around August in response to its slumping sales in those stores, a move that may spread to more stores next year. Dick’s last year announced it would ban sales of assault-style weapons after the Parkland, Florida, school shooting and revelations that its shooter, Nikolas Cruz, had purchased a gun from a Dick’s store. The company also halted sales of high-capacity magazines and guns to anyone under 21 years old.

Adidas CEO Expects Supply Chain Issues to Constrain U.S. Growth

German sportswear maker Adidas has warned investors it will miss its 2019 growth target because of supply chain problems in the first half of the year that are making it difficult to meet demand. Adidas expects the problems will mean the loss of between €200m and €400m of sales, equating to 1 per cent to 2 per cent of revenue, this year. For the full year, the group is forecasting sales growth of 5-8 per cent, after the effect of currency fluctuations are stripped out. Kasper Rorsted, chief executive, said that the group had “a capacity problem in manufacturing plants” with demand for mid-priced products in North America growing quicker than expected.

Cosmetics & Pharmacy

Helen of Troy to Explore Divesting Personal Care Business

Helen of Troy Ltd. announced it is in the process of exploring the divestiture of its personal care business, a subset of the company’s beauty segment, to focus more attention on such brands as Hydro Flask. The personal care business includes liquid, powder and aerosol products under brands such as Pert, Brut, Sure and Infusium. This potential divestiture advances the company’s strategy to focus its resources on its leadership brands. Those leadership brands—Braun, Honeywell, PUR, Vicks, Hot Tools, OXO and Hydro Flask—are among the highest volume, highest margin and most asset-efficient businesses at Helen of Troy.

Shakeup at Rite Aid: CEO, COO and CFO Leaving; 400 Jobs Cut

There’s been a big shakeup at the top at Rite Aid. The drugstore chain announced that John Standley will step down as CEO, staying on until the appointment of his successor. In other changes that are effective immediately, Bryan Everett, COO of Rite Aid Stores, has been promoted to COO of the company, succeeding Kermit Crawford who is leaving. And Matt Schroeder, chief accounting officer and treasurer, has been promoted to CFO, succeeding Darren Karst who will leave the chain this spring after supporting a brief transition. In addition, Rite Aid said it is reducing management layers and consolidating roles across the organization, resulting in the elimination of approximately 400 full-time positions, or more than 20% of the corporate positions located at the company’s headquarters and across the field organization. Approximately two-thirds of the reductions will take place immediately, with the balance by the end of fiscal 2020.

Sephora to Grow U.S. Footprint; Partnering with Treatment Services Company

Sephora is on the move in the United States. The specialty beauty retailer announced that it will open 35 new U.S. locations across the United States in 2019, marking five years of significant brick & mortar growth. Sephora currently operates more than 460 stores in the Americas, and 660 in-store shops inside J.C. Penney locations. The 2019 expansion will start on March 14th when Sephora opens an outpost at the new Hudson Yards development on the West Side of Manhattan. Additional Sephora stores will follow in such locations as Sawgrass Mills, Sunrise, Fla.; West Village, Dallas; and Laurel Village, San Francisco.

 

Ulta Beauty on Fire in Q4; Opening 80 Stores in 2019

Ulta Beauty reported results for its fourth quarter that beat the Street amid a surge in store traffic and online sales. The beauty giant also confirmed previously announced plans to open about 80 new stores in fiscal 2019. In addition, it will undertake some 20 remodel or relocation projects and complete approximately 270 store refreshes. Ulta’s net sales increased 9.7% to $2.12 billion in the quarter ended Feb.2, compared to $1. 93 billion in the year-ago period, which had an extra week. The Street had expected sales of $2.11 billion. Same-store sales increased 9.4%, driven by 7.1% transaction growth and 2.3% growth in average ticket.

 

Discounters & Department Stores

Walmart touts new fashion hub

With nearly as much hoopla and enthusiasm as a Walmart Inc. shareholders meeting, the retailer celebrated the opening last week of its new fashion distribution center in Bentonville. Many of the nearly 600 employees who work at the mammoth facility, dubbed DC 7842, turned out for the festivities, along with some of Walmart’s top brass and Bentonville Mayor Stephanie Orman. At the beginning and end of Tuesday’s ribbon-cutting ceremony, they led attendees in a rousing Walmart cheer.

Sears and Eddie Lampert Aren’t Yet Out of The Woods

Horrors! Eddie Lampert, scion boss of Sears, is back in court. While Lampert was able to purchase 425 Sears and Kmart stores for $5.2 billion, it turns out that it was not a clean transaction. Various parties are now trying to settle their claims.  Let me enumerate some of those claims. Transform Holdco LLC is the newly formed company doing business as Sears and Kmart. They claim that Sears Holding (otherwise known as old Sears) delayed some payment to vendors. Transform Holdco LLC also claims that old Sears short-changed the new Sears on inventory. Old Sears claims it is owed $57.5 million on the purchase price. Reports claim that new Sears will not sit down with old Sears to discuss anything until this claim is settled.

 

 

Emerging Consumer Companies

Shoes of Prey shuts down

After ten years, Shoes of Prey, the digitally-native footwear brand built on personalization and customization, is shutting down. The company raised more than $25 million. At its peak, Shoes of Prey employed 200 people.

Real Good Foods closes investment from Strand Equity

Real Good Foods, a leader in high protein, low carbohydrate foods, closed a minority investment from Strand Equity. Founded in 2016, the company has introduced innovative items such as low carbohydrate cauliflower-crust pizzas, snacks, appetizers and entrees. Products are sold through the company’s website and in 12,000 stores nationwide.

 

 

Grocery & Restaurants

Kraft Heinz weighs sale of its Breakstone’s business

Kraft Heinz, as part of a broad overhaul, continues to put long-time brands on the block. One of the latest is its Breakstone’s business, which sells cottage cheese, butter and sour cream. The move is understood to be part of a broader review of the company’s dairy business, which also includes its natural cheese business. It comes as Kraft Heinz also weighs selling its Maxwell House coffee business, CNBC previously reported.

Activist pushes Cracker Barrel to divest Holler & Dash

Sardar Biglari, the large Cracker Barrel Old Country Store Inc. shareholder who five years ago lost a battle to force a sale or other transaction of the company, this week urged it to divest or eliminate its fast-casual Holler & Dash Biscuit House. Biglari also questioned Cracker Barrel’s reporting of financial performance at new Cracker Barrel units, asking that the company “publish the total investment in new stores along with all pertinent data so we can judge the returns for the period under your leadership as CEO.” He also said the company should maintain or increase its special dividend, which was paid last August at $3.75 a share.

The Palm licensing parent files for Chapter 11 bankruptcy

The Naples, Fla.-based company that licenses The Palm steakhouse filed Chapter 11 bankruptcy last week while it appeals a recent judgment in a long-running family dispute over royalties. The move comes about four months after a New York court awarded $120 million to cousins of the founders’ descendants, who challenged the way royalties were paid over four decades.

Home & Road

Pier 1 Hires Debt Restructuring Experts

Pier 1 Imports shares were off sharply on a report the struggling Top 100 company has brought in debt restructuring lawyers and specialists to evaluate its options. Reuters reported the 987-store retailer hired Kirkland & Ellis, adding “to a roster of advisers counseling the chain as it explores strategic alternatives,” citing unidentified sources familiar with the move. The retailer also is meeting with investment bankers with debt restructuring expertise “as it weighs options,” the report said. The report notes that engaging Kirkland & Ellis lawyers, “who typically work on significant bankruptcies and other financial workouts, marks a new chapter” for Pier 1 after previous turnaround efforts failed. The report added, however, “a bankruptcy filing is not yet on the horizon for Pier 1,” noting its $71 million in cash as of December and $400 million available in a revolving credit line.

Z Gallerie Files for Chapter 11 Bankruptcy Protection

Z Gallerie has filed for Chapter 11 bankruptcy for the second time in 10 years and plans to close 17 stores. The privately held Gardena, Calif.-based retailer called the filing an opportunity to “restructure” using the cash collateral available with its existing secured lender, KeyBank National Assn. Through the agreement, Z Gallerie expects to have access to a $28 million debtor-in-possession financing facility through KeyBank National Assn. The petition, filed March 11 in the U.S. Bankruptcy Court for the District of Delaware, lists both assets and liabilities between $100 million and $500 million.

Furniture Stores Start Year with a 2.7% Drop in January Sales

January sales at furniture and home furnishings stores declined 2.7% from the same month last year, as the sector posted a weaker start to 2019 than its December slump. Sales in the furniture store category totaled $9.77 billion, down from the revised $10.04 billion in January 2018, according to the latest U.S. Department of Commerce report. Sales were off 1.2% from $9.89 billion in December, which was revised down from the previously reported $10.01 billion.

 

Jewelry & Luxury

Swatch Indicates Baselworld Pullout Is Permanent

Swatch Group, which made waves when it withdrew from Baselworld last summer, is now indicating it has no plans to return to the watch industry’s biggest fair. “There’s no need for it anymore,” Swatch Group CEO Nick Hayek said in an interview, according to Bloomberg. “The world has changed.”  The company did not respond to a request for comment by press time. Swatch Group, the world’s biggest watch company, was also the biggest exhibitor at Baselworld, spending an estimated $50 million a year.

Signet Hires a New CFO, Creates Mall Leadership Team

Signet Jewelers Ltd. has appointed former David’s Bridal Chief Financial Officer Joan M. Hilson as its new CFO, the company announced Wednesday.  She will replace Michele Santana, who is stepping down in April. Early in her career, Hilson spent seven years at Signet division Sterling Jewelers Inc. as the controller to the vice president of finance.

Since then, she has had more than 30 years’ experience in retail and corporate finance, working as CFO of David’s Bridal, American Eagle Outfitters and in the Victoria’s Secret stores division.

Neiman Marcus CEO van Raemdonck answers ‘Why New York City?’ as store prepares to open

When Neiman Marcus opens its first store in Manhattan on Friday, chief executive officer Geoffroy van Raemdonck will be there greeting customers. “You can only fully appreciate and measure the opportunities to do better if you are on the floor,” van Raemdonck said. Neiman Marcus is the anchor tenant of the Shops at Hudson Yards, a seven-level vertical mall that opens Friday on the Lower West Side. The $25 billion project is the largest private real estate development in U.S. history and the most ambitious since the famed Rockefeller Center was built during the depression in the 1930s.

 

Office & Leisure

Build-A-Bear in Q4 loss; will close up to 30 stores, focus on off-mall expansion

Build-A-Bear Workshop swung to a loss in its fourth quarter amid challenges in its two biggest markets: North America and the U.K. In its quarterly call with investors, CEO Sharon Price John said the company expects to close up to 30 stores over the next two years, with about half of those outside of North America. She noted that while the chain has been proactively managing its mall portfolio, it has also been diversifying away from traditional mall to broaden consumer accessibility to its brands. In October, Build-A-Bear piloted six, full-service standalone Build-A-Bear shops inside select Walmart locations.

Based on the pilot stores, the retailer is working with Walmart to identify expansion plans for 2019. In addition, Build-A-Bear is expanding its tourist strategy, including its partnership with Great Wolf Lodge, America’s largest operator of indoor water park resorts.

 

Mattel faces lawsuit over Barbie, Hot Wheels sales

Toy maker Mattel is facing a class action lawsuit in the United States District Court for the Central District of California on behalf of shareholders alleging that the company “made materially false and/or misleading statements, as well as failed to disclose material adverse facts about the Company’s business, operations, and prospects,” according to a March 6 court filing. Specifically, the suit claims that the company failed to disclose to investors that demand for Barbie and Hot Wheels and other products was declining, that Mattel had an excess of inventory, and that, therefore, its “positive statements about the Company’s business, operations, and prospects, were materially misleading and/or lacked a reasonable basis,” according to the documents.

Technology & Internet

Facebook’s outage affects brand marketers

Facebook underwent one of its most widespread and persistent system outages last week, with users across the globe unable to access its social network and services from Instagram to Messenger for much of Wednesday and into Thursday. From about noon New York time Wednesday, users encountered only partially loaded pages or no content at all, accompanied by a message saying an error had occurred. Several brand marketers tweeted that Facebook’s ad-buying system was down as well. The company said it was still investigating the overall impact, “including the possibility of refunds for advertisers.”

 

Amazon pushes first-party suppliers toward Brand Registry and Seller Central

The future for many sellers on Amazon.com Inc.’s Vendor Central platform is in limbo. On March 4, a number of Amazon.com wholesale suppliers did not receive purchase orders they typically receive on Mondays. After days of uncertainty and a void in communication from Amazon, many of the suppliers, commonly called first-party or 1P sellers in Amazon lingo, did receive purchase orders over the weekend, while others still are waiting, merchants tell Internet Retailer. The exact number of suppliers affected is not known, but experts speculate it was in the thousands. But the days of uncertainty with various automated responses from Amazon have given many first-party sellers a wake-up call that their future as vendors to Amazon may be at risk.

 

African online marketplace Jumia files for an IPO

African online retailer Jumia Technologies AG started a plan to sell shares in New York as the fast-growing Nigerian firm seeks to take advantage of rising internet access and increasing smartphone use in Africa. The company is seeking a public listing to raise funds and boost awareness, according to a filing on Tuesday. The retailer provides an Amazon.com Inc.-like service in 14 African countries and has expanded rapidly, with active customer numbers growing to 4 million at the end of 2018 from 2.7 million the previous year.

 

Finance & Economy

U.S. retail sales rebound in January

U.S. retail sales rose modestly in January after a December drop that was even larger than originally estimated, but the recovery was not seen strong enough to alter the course of a U.S. economy that was losing momentum in early 2019. Retail sales rose 0.2 percent as increased purchases of building materials and more discretionary spending offset the biggest decline in motor vehicle sales in five years. Data for December was revised to show sales tumbling 1.6 percent instead of decreasing 1.2 percent as previously reported. The drop in December was the biggest since September 2009 when the economy was emerging from recession. Economists polled by Reuters had forecast retail sales to be unchanged in January. Sales in January increased 2.3 percent from a year ago.

U.S. Durable Goods Orders Rose in January

Both orders for long-lasting goods and an underlying gauge of business investment rose in January, signaling solid domestic demand is helping buffer the U.S. manufacturing sector against slowing global economic growth. Overall orders for durable goods, manufactured products intended to last at least three years, increased a seasonally adjusted 0.4% in January from the prior month, the Commerce Department said Wednesday. The gain, marking the third consecutive increase, was driven by a sharp rise in orders for civilian airplanes. When removing transportation, orders declined at a 0.1% pace.

For the first time during the recovery lower-wage workers get the most benefit from rising wages

The recent jump in paychecks has come with an unusual characteristic, as workers at the lower end of the pay scale are getting the greater benefit. Average hourly earnings rose 3.4 percent in February from the same period a year ago, according to a Bureau of Labor Statistics report last week. That’s the biggest gain since April 2009 and seventh month in a row that compensation has been 3 percent or better. What has set this rise apart is that it’s the first time during an economic recovery that began in mid-2009 that the bottom half of earners are benefiting more than the top half — in fact, about twice as much, according to calculations by Goldman Sachs.