March 25, 2019 Consensus

The Weekly Consensus – March 25, 2019 (Volume 11, Number 12)

The Big Story
Hudson Yards: Nice Mall, Or Transforming Retail?

Hudson Yards, billed as the most expensive real estate project in U.S. history at $25 billion, opened this month. Its 28 acres encompass apartments, condominiums, retail stores, restaurants, a cultural center, and a 150-foot art-installation dubbed The Vessel. At seven stories and one-million-square-feet, the shopping center has been promised to transform both Manhattan shopping and the retail experience.

Of the more than 100 shops and 25 cafés and restaurants, most are familiar names: Louis Vuitton, Kate Spade, Cartier, Uniqlo, Banana Republic, H&M, Neiman Marcus, and Shake Shack dot the list. Along with those household brands, Hudson Yards has touted the first brick-and-mortar stores for a number of digitally-native brands. In fact, the presence of those brands has given way to an entire floor within the shopping center and a special name to boot: The Floor of Discovery. According to the Hudson Yards website, “The Floor of Discovery will house a unique collection of first locations from digitally native brands and experiential shopping offerings from modern brands.”

Esty Ottensoser, a retail specialist with the project’s developer, Related, explains “The addition of sought-after emerging brands and one-of-a-kind experiences round out our already exceptional collection of leading brands in every category, from luxury to fast-fashion.” “A spirit of creativity unites the Floor of Discovery — from shopping to dining to Snark Park’s imaginative exhibitions. It reflects our passion for creating a destination that fosters retail innovation, offering our customers and retail partners opportunities to explore new products, services and technologies.”

All of this is not to suggest that these digitally-native brands have not had any physical presence before, or won’t have any retail stores elsewhere. Rhone has had a series of pop-ups. M.Gemi has a number of permanent stores and pop-ups. b8ta has fifteen other stores. Stance has eight other stores and three outlets. Lovepop has fifteen kiosks along the East Coast.

While it may not be the first or only location for these brands, there’s enough excitement around Hudson Yards for brands to want to be a part of it. Favorable lease rates help, too. Webber Hudson of Related commented that established brands have generally committed for longer leases, while younger brands have signed shorter deals, citing industry vacancies and retail challenges as a reason to consider flexible lease options. Taken together, the massive scale, anticipated foot traffic, excitement around the new development, attractive lease options, and cohabiting with similarly-situated brands made it an easy decision for some.

Said Barbara Nealey of Rhone. “While we have been testing out pop-up and short-term retail for the last two years, we’re excited to partner with Hudson Yards to launch the first-ever permanent brick and mortar Rhone retail concept.”

Cheryl Kaplan of M.Gemi echoed  the same. “After experimenting with various pop-up formats in NYC, we are thrilled to be setting down permanent roots at Hudson Yards. This space will allow us to create M.Gemi’s most immersive retail experience yet, bringing our ethos of ‘Italian luxury, made the old way, sold the new way’ to life.

Underneath all the superlatives and lofty descriptions, is shopping at Hudson Yards unique? Will it dramatically alter or improve retail, and serve as a model for future developments, albeit at a likely smaller scale?

John Wilson, of Stance, summarized: “We see Hudson Yards as the retail embodiment of our brand – a convergence of community, culture and commerce that represents an innovative approach to an experience that has traditionally been pretty one dimensional.”

Innovative, yes. Transformative? Not yet.

 

Headlines of the Week

Levi Strauss IPO raises $623.3M

Levi Strauss on Thursday began trading on the New York Stock Exchange under the name LEVI, pricing 36,666,667 shares of its Class A common stock at $17 apiece, just higher than its target between $14 and $16. That will raise $623.3 million for the denim brand, giving it a valuation of $6.55 billion. 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.

 

The two newest unicorn companies are women-focused and women-led

For female-led startups, it was a pretty good week. On Tuesday, beauty brand Glossier announced that it had raised $100 million in its most recent round of funding, increasing its valuation to $1.2 billion. And Thursday, clothing subscription service Rent the Runway made a similar announcement—a $125 million funding round, which propelled its valuation to the billion-dollar mark. The two companies have a lot in common. They were founded within a year of each other (Rent the Runway in 2009, Glossier in 2010); they used analytics and customer feedback to fine-tune their offerings; they didn’t do much marketing but instead relied on social media and word of mouth. Oh, and they’re both led by women who were able to tailor their products for female customers. Unicorns are no longer rare in Silicon Valley, but that doesn’t mean they’re not important indicators.

 

 

Apparel & Footwear

A Rebranded Nine West Emerges from Chapter 11

Nine West Holdings, Inc. announced that it, together with certain of its affiliates, has successfully completed its financial and operational restructuring and emerged from Chapter 11 under the majority equity ownership of CVC Credit Partners and Brigade Capital. The Company has been renamed Premier Brands Group Holdings LLC (Premier Brands Group). Premier Brands Group will move forward with a right-sized capital structure, streamlined operational footprint, profitable and growing wholesale and licensing businesses, and proven management teams in place. It will have over $100 million of go-forward liquidity to support its operations and future growth initiatives, as a result of successfully syndicated exit financing facilities led by Wells Fargo and Goldman Sachs.

DSW to change name, develop in-house brands as part of strategic update

Footwear and accessories retailer DSW is going through a major rebranding. The company on Tuesday announced it is changing its corporate name to Designer Brands Inc., effective immediately. It also is changing its ticker symbol on the New York Stock Exchange to DBI from DSW, with an effective date of April 2, 2019. (The nameplate on DSW stores will remain as is.) Designer Brands also announced plans to create exclusive private brands and products to sell via its DSW and The Shoe Company divisions. The brands will be developed through the design and sourcing capabilities of the Camuto Group, which the company acquired in November. Other priorities include growing the kids business at DSW and expanding in-store DSW services, such as its partnership with the W Nail Bar, custom insoles, shoe repair and shoe concierge.

Rudsak, the Canadian Outerwear Label Adored by Gigi Hadid and Mindy Kaling, Makes Its New York Debut

Twenty-five years ago Evik Asatoorian created a black leather jacket—an item of clothing that has been synonymous with non-conformity and rebellion. That moment was the beginning of Rudsak, a Montreal-based outerwear and premium leather goods company that combines fashion with function. Rudsak soon went beyond, expanding into categories like handbags, footwear, and ready to wear. Last week, Rudsak made its debut in the United States in New York, at the unveiling of Hudson Yards, a new area on the west side of Manhattan that combines, shopping, culture, food and drink, and living. With its elevated design and celebrity fans like Gigi Hadid, Awkwafina, Machine Gun Kelly, Debra Messing, Mindy Kaling, and Jane Fonda, Rudsak is poised to make inroads in the American market.

 

Athletic & Sporting Goods

Nike shares fall after North American sales growth disappoints

Nike shares tumbled following the sneaker maker reporting weaker-than-expected sales in North America during its fiscal third quarter, hurt, in part, by fewer people buying Converse-branded merchandise.  Nike said its digital business surged 36 percent, as it continues to invest in online initiatives like its mobile app and customization options for customers. The company said shoppers using its Nike retail app to shop average 40 percent higher sales than those people who don’t. Although its earnings topped analysts’ expectations, and total revenue was in-line with estimates, Nike shares sunk more than 4 percent after the bell on the news. The stock had closed the day at a record high of $88.01.

 

JD Sports to Buy Remaining Shares of Footasylum in $119M Deal

A month after upping its stake in the beleaguered chain, JD Sports Fashion PLC has announced that it will buy the remaining shares of Footasylum PLC in a cash deal worth 90.1 million pounds, or $119.25 million. The acquisition, which is expected to be completed in the next month or so, puts JD’s offer at 82.5 pence per share — only half the value of Footasylum’s initial public offering of 164 pence in November 2017. It also comes a month after the British sportswear giant — parent to many retail banners including The Finish Line, Scotts, Getthelabel.com and Chausport — increased its holding on the company to 18.7 percent.  U.K.-based Footasylum was founded in 2005 by David Makin, one of the co-founders of JD Sports. He was joined three years later by John Wardle, JD’s other co-founder, who served as CEO until 2015 and then as executive chairman.

 

Amer agrees to sell Mavic to Regent

Amer Sports has agreed to sell its Mavic cycling business to Regent, a U.S. private equity firm.  Amer, which owns a variety of brands including Salomon, Arc’teryx, Peak Performance, Atomic, Suunto, Louisville Slugger, Wilson and Precor, had announced last year that it was exploring options to divest itself of Mavic. Amer is currently in the process of being acquired by an investment group led by Chinese athletic footwear brand Anta. Amer recorded its cycling business as a discontinued operation for its full year 2018 financials.  Enve, part of Amer’s cycling business, was not sold to Regent.

Cosmetics & Pharmacy

Revlon Brand’s Value Drops Below $1 billion

Revlon Inc. reported net sales for its flagship brand dropped below $1 billion and that a “material weakness” in its internal financial reporting controls would delay the company from filing its annual financial performance summary with the Securities and Exchange Commission. The company posted overall net sales of $2.56 billion for 2018, down 4.8 percent from the prior year for a net loss of $294.2 million, Women’s Wear Daily reported. Sales for the Revlon brand were $998.3 million, down from $1.09 billion. The Form 10-K filing delay was caused by an issue with enterprise resource planning software, the company said, and will be completed no later than March 29, but financial results are not expected to change. The company estimated the cost to fix the software problem at about $54 million, Bloomberg reported.

A piece of the pie: Independents build new business models

Independent community pharmacies face unprecedented pressures in the form of national chain competitors and a drug-pricing system that’s stacked against them. More than a third of the pharmacies in the country — about 35% — are independent pharmacies, according to data released last fall from the National Community Pharmacists Association. NCPA estimated that the number of independent pharmacies totaled 21,909 in 2017, down slightly from 22,041 in 2016. Those independent operators that remain have found ways to survive and even thrive, however, often with revenue models that stretch beyond the dwindling margins they can expect to recoup for dispensing prescriptions. They are leveraging their strong community ties and high service levels, expanding their product assortments, and seeking to gain compensation for the value they add to overall patient care.

Discounters & Department Stores

Shopko to liquidate

Shopko is going out of business. The discounter announced that, despite its best efforts, it has been unable to find a buyer for its business. Shopko, which filed for bankruptcy in January, said Gordon Brothers will oversee a liquidation of its stores, beginning this week. The process is expected to conclude in about 10 to 12 weeks. The company said it is still evaluating strategic options for its optical business.

Walmart ending ‘savings catcher,’ says its prices are lowest ‘vast majority of the time’

Walmart will end its “savings catcher” program, saying the price-matching tool mostly finds its prices are lower anyway. Customers have until May 14 to submit their Walmart Pay e-receipts for processing. People on social media are upset and displayed significant balances they’ve earned over the life of the program, some well into the hundreds of dollars. While it will no longer be automatic, a Walmart spokeswoman said the retailer isn’t abandoning price matching.

In a World Dominated by Amazon, Costco Continues to Thrive. Here’s How They Do It

A lot has changed in the world of retail over the past few decades. While legacy stores like Sears and Toys “R” Us have gone bankrupt and are left for dead, Walmart is desperately fighting to hold off Amazon and the e-commerce tsunami. In the midst of the retail apocalypse, however, Costco is thriving. The company just released its latest results, which include over 7 percent growth and a surge in net income (27 percent, to $889 million).

 

 

Emerging Consumer Companies

Glossier raises $100 million Series D

Glossier, the New York-based beauty and skincare business, raised a $100 million Series D. The round was led by Sequoia, with participation from new investors Tiger Global and Spark Capital, and existing investors Forerunner Ventures, Thrive Capital, IVP, and Index Ventures. The round values the company at $1.2 billion, tripling the valuation it had with a $52 million Series C in 2018. To date, Glossier has raised nearly $200 million.

WeWork launches program for food startups

The We Company’s WeWork Labs is launching WeWork Food Labs, a program designed specifically for food startups. The program provides workspace, community, and content to entrepreneurs in the food space. The flagship location is slated to open in late 2019 at the High Line in West Chelsea, New York, and will provide members with a custom R&D space, pantry, private dining room, merchandising area, and indoor-outdoor event space.

 

 

Grocery & Restaurants

Starbucks invests $100M in new retail startups

Starbucks announced that it will be investing $100 million into Valor Siren Ventures, a new venture fund led by private equity firm Valor Equity Partners, which will serve as an incubator for the next generation of food and retail technology startups. The new fund will seek to raise an additional $300 million over the coming months from other investors and key partners. Along with the monetary investment, Starbucks will also be exploring commercial partnerships with the retail startup companies.

Peak Rock Capital to acquire Turkey Hill from Kroger

Private equity firm Peak Rock Capital has entered a definitive agreement to acquire the Turkey Hill business from the Kroger Co. Financial terms of the transaction were not disclosed. Turkey Hill produces iced teas, fruit drinks, milk, frozen dairy treats and ice cream products at a manufacturing and distribution facility in Conestoga, Pa. Cincinnati-based Kroger has owned Turkey Hill since 1985 and announced this past August plans to explore strategic options for the business, including a potential sale.

Home & Road

Bedgear brings Performance Sleep Shops to Macy’s

Bedgear has introduced its Performance sleep products in Macy’s, where the mattresses and pillows will be available in 130 stores and online at macys.com, officials said.  The in-store experience, designed for Macy’s is the latest installation of Bedgear’s interactive kiosks, which are focused on both convenience and comfort, officials said.

Ikea Sets Opening Date for First Small Studio Location in NYC

Ikea U.S. will open its first small-scale city center location in the country in New York City April 15. Ikea Planning Studio, at 999 Third Avenue, “will focus on providing inspiration and smart solutions for city living and small spaces,” the retailer said in a release. The retailer first announced plans for the shop late last year. “We conducted extensive research about city living, and we believe New Yorkers will see their needs reflected this new concept,” said Leontyne Green Sykes, chief operating officer, Ikea Retail U.S.  The home furnishings giant, which has scaled back its big-box growth plans in the United States, recently announced the development of 30 new “touchpoints’ in city centers globally over the next three years.

Jewelry & Luxury

Baselworld Planning More Price Cuts in 2020

Baselworld lowered prices for some exhibitors this year and plans to retool its entire pricing structure for 2020, Managing Director Michel Loris-Melikoff said at the event’s opening press conference Wednesday evening in Switzerland. It is one of several adjustments he’s made since taking the reins of the floundering watch and jewelry trade show just nine months ago, making it a priority to change the show’s “communication and management style” amid uncertainty about its future.

Tiffany Provides Glimpse into Future Store Design

With Tiffany & Co. refurbishing its flagship store on New York’s Fifth Avenue, there is a buzz of speculation on how the retailer plans to make the shop more interactive and appealing to millennials, as it has vowed to do. What people may not know, however, is that Tiffany has already made a similar move in London, opening a new, modern store that strikes a different tone than the one many consumers associate with the brand.

It may also provide a glimpse of how the famous Manhattan branch will ultimately shape up, since we’ll have to wait until the end of 2021 to see that one in its completed form.

The World Jewellery Confederation (CIBJO) Calls for Synthetics Treatment Disclosure

The World Jewellery Confederation (CIBJO) has specified the need to disclose treatments when it comes to both natural and lab-grown diamonds. Sellers must make the disclosure clearly, both at the time of sale and before, the organization noted in guidelines it released last week. The same instructions apply to natural and synthetic colored gemstones, CIBJO said. The guidelines apply to any stone that has been treated to change its color, durability, stability or clarity, CIBJO explained. Those treatments include irradiation, coating, heating and annealing, and High Pressure-High Temperature (HPHT).

 

Office & Leisure

Michaels losing market share in crafts

The Michaels Companies on Tuesday reported that fourth quarter net sales fell to $1.8 billion from $1.9 billion, mostly because of an extra week in the previous year’s quarter, the previous closure of all 94 full-size Aaron Brothers stores and a comp store decline. Store comps dropped 0.4% (flat on a constant currency basis); accounting for the loss of a trading week, however, store comps rose 1.4%, the arts and crafts retailer also said.

Michaels is grappling with factors — like the loss of a holiday sales week and costs associated with shuttering and rebranding its Aaron Brothers and Pat Catan’s stores — that make its quarterly results seem worse than they are. But the arts and crafts retailer can do better, according to Neil Saunders, who noted that the economy and the demise of Toys R Us should have provided bigger boosts. The retailer continues to overstate challenges in its segment, Saunders warned, noting that research reveals that spending on crafting rose 2.7% over the quarter.

SeaWorld’s former interim CEO John Reilly is out

For a year, SeaWorld interim CEO John Reilly led the Orlando-based company as attendance and finances improved. When he got passed over for the permanent job last month, the chairman of the SeaWorld board of directors said Reilly would work with the new chief Gus Antorcha to keep the company’s momentum growing. But it turns out, that won’t be the case. Reilly, now the chief operating officer, is departing effective March 31, the company said Tuesday in a news release. Reilly made the decision to leave on his own, said SeaWorld spokeswoman Suzanne Pelisson-Beasley late Tuesday.

Marriott reveals plan to open more than 1,700 hotels worldwide

Marriott International is planning to open more than 1,700 new hotels around the world over the next three years, translating to between 275,000 and 295,000 new rooms.

This is part of a three-year growth plan for Marriott. Its merger with Starwood propelled these goals, according to a company statement. Marriott’s President and CEO Arne Sorenson told CNBC Monday that over the next three years, “we’ll open half of our hotels outside the U.S,” meaning international travelers will now see Marriott hotels popping up in more locations around the world. The announcement comes after a rough end of 2018 for Marriott.

Technology & Internet

Consumers can now buy directly within Instagram

In recent months, Facebook Inc.-owned Instagram has been exploring various ways to transform the photo-sharing app into an ecommerce platform. And on Tuesday it took its biggest step to date in announcing that it is testing a shopping feature, called Checkout, with a handful of retailers. Checkout aims to remove the biggest point of friction that shoppers have encountered on Instagram: The need to checkout on the retailer’s website. Checkout lets a shopper complete her transaction without leaving the social network.

 

EU sets its sights on fining Amazon and Apple

U.S. tech giants might have a respite after two decades of European Union antitrust investigations. But not for long. While Google just got a third, and possibly final, EU fine on Wednesday, regulators still have their eyes on Amazon.com Inc., Apple Inc. and Facebook Inc. EU antitrust chief, Margrethe Vestager, told reporters earlier this month that an early-stage probe into Amazon’s potential use of data to overtake smaller shops on its Marketplace platform is “quite advanced” and she’d “like to take more decisive steps” before she leaves office later this year. She’s also promised to examine a complaint Spotify Technology SA made targeting Apple’s app store and has said she ”takes an interest” in potential anti-competitive behavior by Facebook.

 

Pinterest hires Walmart’s chief technology officer

Pinterest Inc. has hired Jeremy King, Walmart Inc.’s executive vice president and chief technology officer of Walmart U.S. and U.S. ecommerce. His last day at the retail giant will be March 29, according to an internal company memo sent to all Walmart associates on Wednesday. King will report to Pinterest CEO Ben Silbermann and lead Pinterest’s team that’s responsible for powering the visual discovery engine.

 

Finance & Economy

Economy expands for first time in five months, leading indicators show

A survey of economic conditions in the U.S. rose in February for the first time in five months, perhaps a sign that growth is poised to pick up a bit after a very slow start early in the year. The leading economic index increased 0.2% in February, the privately-run Conference Board said Thursday. It’s the first uptick since September. The improved reading in February was spurred by higher stock prices, lower interest rates and improved access to credit. Gains in those areas offset weaker job creation and a somewhat higher — though still-low — level of layoffs.

 

U.S. jobless claims fall 9,000 to 221,000 as layoffs show no sign of rising

The number of laid-off workers who applied for unemployment benefits declined in mid-March to a one-month low, suggesting little deterioration in a robust labor market that’s powered the economy over the past several years. Initial jobless claims, a rough measure of layoffs, fell by 9,000 to 221,000 in the seven days ended March 16, the government said Thursday. Economists surveyed by MarketWatch had forecast claims to total 225,000. The more stable monthly average of claims rose by 1,000 to 225,000. The number of people already collecting unemployment benefits, known as continuing claims, fell by 27,000 to 1.7 million.

 

Existing-home sales roar back in February, hitting an 11-month high

Existing-home sales ran at a 5.51 million seasonally-adjusted annual rate in February, the National Association of Realtors said. That was an increase of 11.8% for the month.  Sales of previously-owned homes shook off the winter blahs as mortgage rates remained subdued, incomes kept growing, and more inventory helped the housing market regain some balance. The month-over-month increase was the biggest since December 2015, when sales rebounded after a regulation-induced slump.