April 8, 2019 Consensus

The Weekly Consensus – April 8, 2019 (Volume 11, Number 14)

The Big Story
Sears Home & Life: Good, but Enough?
Paul Alexander, CFA

Sears announced last week that it will open three new stores under the banner “Sears Home & Life” this May. After years of largely defensive strategies, such as downsizings, store closures, asset sales, and filing for bankruptcy protection in October, the decision to open new stores represents one of the only proactive, offensive measures that Sears has taken in recent memory. The question is, given the headwinds and failed strategies that have put the company in its difficult current position, what will these new stores look like, and do they have any hope of blazing a new, better future for the company?

Any company facing as many challenges as Sears needs to rethink its playbook if it is to attempt a comeback. The plan for the new Sears stores appears to appreciate that; Home & Life stores will be 10,000 to 15,000 square feet, mere postage stamp-sized boxes compared to the typical legacy Sears stores, which were about 150,000 square feet per unit. Within their smaller footprint, the new stores will focus on some of Sears’s strongest categories, namely tools, appliances, and other hard goods. Other strategic moves will be to focus on Sears’s best private brands, including the expansion of the DieHard automotive brand into lawn/garden and camping equipment, and offering more Kenmore products on Amazon’s Dash reorder platform.

At first glance, these moves make sense. Downsizing stores and focusing the assortment on categories that Sears is known for will likely make the units more profitable. Leaning into historically strong proprietary brands like DieHard and Kenmore should better leverage some of Sears’s most valuable assets.

But are these moves transformational enough? Sears faces some steep challenges. Competition in these categories is fierce, with both Home Depot and Lowe’s executing better than ever (stock prices for each company are near all-time highs), not to mention Amazon’s unrelenting advances into every nook and cranny of the consumer economy. Secondly, these stores are a big rethink versus legacy Sears stores, but, from what has been reported thus far in the media, they aren’t necessarily innovative or state-of-the-art relative to the latest trends in retail. They appear to lack anything that could be considered “experiential retail,” and, aside from being smaller and thus easier to navigate than a huge Sears, they don’t appear to boast any new convenience-related bells or whistles. They appear to be a step in the right direction for Sears, but they still appear to be, plainly, stores.

In the near term, the question of whether these strategies and new, smaller stores will be enough to turn the tide for Sears is premature. The company, technically called Transform Holdco, still has 220 remaining Sears stores, and 205 Kmart locations. These new Home & Life stores will represent under 1% of total company stores, and a tiny fraction of that in terms of total company square footage. Still, if they are successful, they may spark Transform Holdco on a truly transformational path toward a fleet of smaller, more profitable stores. Perhaps a bolder reimagining of Sears’ stores would stand a better chance of success, but the company is better off giving Home & Life a shot than not.

 

Headlines of the Week

Sears, after bankruptcy, is opening new stores for home goods

Sears is opening stores again. The embattled department store chain, which has shut hundreds of Sears and Kmart locations over the years and recently got another shot at life after filing for bankruptcy protection in October, still sees a chance to be a shopping destination for hard-line goods like appliances, tools and mattresses. Sears announced this week it will open three “Sears Home & Life” stores in May, in Anchorage, Alaska; Layette, Louisiana; and Overland Park, Kansas. These shops will be smaller in size — spanning only up to 15,000 square feet, while the average Sears store can be larger than 100,000 square feet.

 

Kellogg sells Keebler and Famous Amos to get out of cookies

Kellogg is getting out of the cookie business to focus on snacks and cereal. Ferrero will buy Kellogg’s Keebler cookies, Famous Amos, Mother’s, Murray’s, Girl Scout cookies and fruit snacks brands for $1.3 billion. Kellogg has been trying to sell off those brands since November. It said the brands weren’t a good fit with the rest of the company’s offerings, and the company had difficulty devoting the resources necessary to compete in the crowded cookie market. Last year, the businesses Kellogg is selling to Ferrero brought in about $900 million in sales but only $75 million in operating profit.

 

 

Apparel & Footwear

Charlotte Russe sells brands

Charlotte Russe Holdings is closing its stores, but its brand names will live on. The bankrupt company, which is in the final stages of liquidation, has sold its brands to two separate companies. Charlotte Russe announced that it sold its namesake brand and related intellectual property to YM Inc., a Toronto-based clothing manufacturer, and retailer that specializes in fast-fashions for young men, women, and kids. YM’s store banners include Urban Planet, Bluenotes, Urban Kids, West 49, Sirens, Suzy and more. In addition, Charlotte Russe has sold its Peek Kids brand and related intellectual property to Mamiye Brothers Inc., a designer, manufacturer, and marketer of apparel for women and children. Peek’s remaining nine stores will close in the coming weeks, but Mamiye will continue the brand’s e-commerce and wholesale offerings after a short break, starting again in July 2019.

Liam Gallagher’s Pretty Green fashion brand bought by JD Sports

Pretty Green, the fashion brand founded by Liam Gallagher, has been rescued from administration by JD Sports. JD Sports will keep the flagship store in Manchester open, but 11 other stores and 33 concessions in House of Fraser will close, putting 97 jobs at risk. “We are pleased to have completed the acquisition of the highly regarded Pretty Green brand. We look forward to working with the team on future positive developments,” said Peter Cowgill, executive chairman of JD Sports. Pretty Green was founded in 2009 by Oasis frontman Liam Gallagher and named after a song by The Jam. Simon Thomas, partner at administrators Moorfields said: “Pretty Green is a popular brand and received a considerable amount of interest. We are confident that JD Sports is the right fit for the business and will help to grow its online and wholesale channels.”

Madewell Appoints Its First-Ever CEO, Brand President Libby Wadle

Amid a period of turmoil at J. Crew, brand Madewell is the company’s shining star. And in a sign of its skyrocketing growth, Madewell has named its first-ever chief executive. Brand president Libby Wadle is taking on the CEO role as Madewell tracks toward becoming a billion-dollar brand, Madewell told Fortune. “The complexity of the business is changing,” Wadle says. “It’s a pivotal point for us in terms of growth.” Madewell reached over $500 million in total revenue in 2018. “We are more than halfway there,” Wadle says of the path to the billion-dollar mark. That milestone arrived as J. Crew saw executive turnover, near-constant 40%- and 50%-off sales (compared to Madewell’s full-price denim bar) and growing worries about its debt.

 

 

Athletic & Sporting Goods

Centre Partners Acquires Majority Stake in One World Fitness

Centre Partners, a leading middle market private equity firm with offices in New York and Los Angeles, announced that it has acquired a majority interest in New England Fitness and affiliates, now doing business as One World Fitness PFF, LLC, a leading owner and operator of fitness clubs under the Planet Fitness banner. New England Fitness was founded in 2006 to operate fitness clubs as a franchisee of Planet Fitness and has expanded its operations to include 18 fitness clubs primarily in the Philadelphia metropolitan and New Jersey markets.

Lululemon set to debut selfcare product line

A move into personal care products is another way Lululemon is broadening its efforts to become a lifestyle brand. The “selfcare” line currently includes deodorant, dry shampoo, basic balm and face moisturizer and will be available in the late spring, per the site. The retailer focused on product function, feel and format, and “gathered insights from athletes in our communities,” during the research and development process, according to the product site. Additionally, the Lululemon brand story continues to play itself out in the product offerings by emphasizing natural ingredients and partnering with athletes to understand customer needs.

Cosmetics & Pharmacy

WBA’s Q2 sees US pharmacy growth meet industry pressures

Despite posting solid sales gains — an increase of 4.6% that brought total sales to $34.5 billion — and strong retail pharmacy performance in the United States, Walgreens Boots Alliance came up against industry-wide headwinds in its fiscal second quarter. The company’s executive vice chairman and CEO Stefano Pessina attributed difficulties to reimbursement pressure and lower deflation, as well as ongoing U.S. and U.K. consumer market challenges, calling it “the most difficult quarter we have had since the formation of Walgreens Boots Alliance.” On a constant-currency basis, including the benefit from acquired Rite Aid Stores, WBA’s sales increased by 6.7%. The company’s net earnings decreased to $1.2 billion — down 14.3% from the prior-year period. Net earnings per share decreased 8.3% from the prior year, coming in at $1.24. Adjusted operating income decreased by 11.9% to $1.45 billion.

CVS Pharmacy launches same-day, on-demand Rx delivery nationwide

CVS Pharmacy is taking its prescription delivery service to the next level. The company on Thursday announced it is kicking off prescription delivery within hours, in addition to 1-to-2-day prescription service that already is available nationwide. The service, delivered by Shipt, is available at 6,000 CVS Pharmacy locations across the country. Through CVS Pharmacy’s newest delivery offering, the majority of CVS Pharmacy stores across the country are able to offer same-day delivery of eligible prescriptions. When a medication has been filled and is ready for pickup, patients can opt to have their medications delivered within hours. They simply have to select On-Demand prescription delivery service via the CVS Pharmacy app, through SMS text, or by calling their local CVS Pharmacy. The delivery service charge is $7.99 and the packages will be delivered by Shipt.

Walgreens tests stores sans tobacco, but sticks with the category

Though Walgreens currently operates stores that don’t sell tobacco products, Walgreens Boots Alliance vice-chairman and CEO Stefano Pessina has said the company will continue selling cigarettes while also emphasizing smoking cessation, according to a report in the Wall Street Journal. “The safety of our patients is very important, but we also have to do what our customers are requiring us to do,” Pessina recently told WSJ. “We see that when we don’t sell tobacco, we have a lot of [negative] reactions.” The report noted that currently, Walgreens doesn’t sell cigarettes in any of its New York City, Massachusetts and San Francisco stores because of local laws prohibiting drug stores from selling them.

Discounters & Department Stores

Walmart launches voice-activated grocery shopping

Walmart has partnered with Google to allow customers to voice order groceries from their Google Assistant enabled devices including Google Home, iPhones and Android devices, the retailer announced in a blog post. Shoppers can add products directly to their carts by saying “Hey Google, talk to Walmart.” Walmart will recognize customers’ past purchases to identify the correct brand and size of the product the consumer wants. Instead of telling the device to add a gallon of 1% Great Value milk, they can just tell the device to add milk. The more customers use the feature, Walmart U.S. senior vice president Tom Ward wrote in a blog post, the easier it will be to order groceries. The cross-platform technology will roll out to Google Assistant enabled devices throughout April.

3 Highlights From Kohl’s 2018 Annual Report

The No. 2 U.S. department-store chain made a lot of progress on its turnaround last year. In early March, Kohl’s reported another quarter of solid profit growth, capping off a strong 2018 fiscal year. For the full year, adjusted earnings per share soared 34% to $5.60. While much of the increase was driven by a lower tax rate, Kohl’s also made progress on initiatives to grow its sales and improve its profit margin last year. Kohl’s recently filed its annual report for fiscal 2018, which provides more detail on the company’s results for the past year and its plans for 2019. Here are three important details investors might have missed: strong gross margin growth, surge in free cash flow, and its balance sheet is in excellent shape.

 

 

Emerging Consumer Companies

Made In, premium kitchenware brand inspiring people to cook, raises $5 million seed round led by Brian Spaly

Made In, the digitally-native cookware company delivering quality, thoughtfully-constructed kitchen tools at an approachable price point, closed a $5 million seed funding round. The funding was led by Brian Spaly, founder of Bonobos and Trunk Club, with participation from Starting Line Ventures, The Alinea Group, chef Tom Douglas, Barry Sternlicht, founder of Starwood Capital, and The Labora Group. These investors join Karp Reilly, an early investor in Made In.

Tonal raises $45 million Series C led by L Catterton

Tonal, the San Francisco-based “Peloton for weightlifting” brand, raised a $45 million Series C. The round was led by L Catterton, with participation from Evolution Media, Shasta Ventures, Mayfield, and Sapphire Sport. The company has now raised $90 million in total. Tonal machines are wall mounted and replicate weight-lifting machines by using electromagnetism to simulate and control weight. With the purchase of the Tonal machine for $2,995 and the $49 per month subscription, Tonal members have access to personal training sessions, programs, and workouts.

Good Dog, marketplace for connecting dogs and owners, raises $6.7 million

Good Dog, the New York-based startup seeking to create an ethical marketplace for dogs, has raised $6.7 million in funding from a variety of investors, including BoxGroup, Felicis Ventures, Slow Ventures, Fuel Capital, BarkBox and SV Angel. Good Dog aims to connect dogs from breeders or shelters with prospective owners, and to that end offers a learning center to help future dog owners on everything from how to ethically and responsibly purchase a dog to which breed is right for any set of circumstances.

 

 

Grocery & Restaurants

Burger King franchisee GPS Hospitality buys 75 Pizza Huts

GPS Hospitality, the Atlanta-based multi-unit operator of nearly 400 Burger King locations, has bought 75 Pizza Hut restaurants in four states bringing its quick-service empire to nearly 500 restaurants. The deal widens the company’s Southeast footprint as the 75 Pizza Hut locations are spread throughout Georgia, Alabama, Kentucky and Tennessee. Kentucky and Tennessee are new to the firm’s portfolio, which includes 388 Burger Kings and 19 Popeyes Louisiana Kitchen.

Grocery Outlet files IPO registration

Grocery Outlet Bargain Market is poised to make an initial public offering. The extreme-value grocery chain has filed a Form S-1 draft registration statement with the Securities and Exchange Commission for a proposed IPO of common stock. Emeryville, Calif.-based Grocery Outlet has more than 300 stores in California, Idaho, Nevada, Oregon, Pennsylvania and Washington. In the fall of 2014, Grocery Outlet’s senior management partnered with affiliates of private equity firm Hellman & Friedman LLC to acquire the chain from principal owner Berkshire Partners LLC.

Whole Foods slashes prices on hundreds of items

Whole Foods slashed prices on hundreds of items Wednesday, extending its focus beyond enticing Prime shoppers. The specialty grocer’s last major price cut for all customers was in November 2017. In the interim, it has been rolling out more perks catered to members of Amazon Prime, such as offering them an extra 10 percent off discounted products.

Home & Road

At Home exploring possible sale

Reuters is reporting At Home Group is exploring options including a potential sale, noting its poor stock performance has turned it into takeover target. The report cited unnamed “people familiar with the matter.” While the retailer’s stock has suffered, its financial performance has not. The Plano, Texas-based chain recently posted net income of $29.6 million in its fiscal fourth quarter, up from $9.9 million a year ago.Net sales jumped 20.6% to $354.1 million, and gross profit increased 18% to $117.2. It was the 19th straight quarter of 20%-plus sales growth and the 20th straight quarter of same-store-sales increases. At Home Chairman and CEO Lee Bird pointed out the 180-store retailer topped $1 billion in fiscal year sales for the first time. But its earnings missed Wall Street expectations by a penny and sent the stock into a further slide. Since July of last year, the stock price has been roughly cut in half from a high of about $40.45.

Home furnishings retail sales decline for third month

Sales at furniture and home furnishings stores declined 2.3% in February from the same month a year ago, the third consecutive month of decreases for the industry. Sales in the category were an estimated $9.82 billion, down from a revised $10.05 billion for the same month last year, the U.S. Department of Commerce reported, as the industry lagged behind the broad retail sector. Furniture store sales were off 0.5% from $9.87 billion in January, which was preliminarily revised up from the previously reported $9.77 billion.

February sales for all U.S. retail and food services industries increased 2.2% from a year ago to $506 billion and were down 0.2% from January.

Ikea plans furniture rental in 30 markets by 2020

Furniture retail behemoth Ikea is planning to offer furniture for rental in all 30 of its main markets across the globe, including the U.S., by 2020 so products are reused as often as possible before being recycled. The news, reported by Reuters, said the move is designed to appeal to the company’s increasingly environmentally conscious and transient customers. The company first said it was looking into leasing its desks, beds and sofas in February. “The rental pilot was driven by the recognition that many consumers change homes more frequently but can’t afford new furniture every time they move,” said Jesper Brodin, chief executive of Ingka Group, which owns most Ikea stores, according to Reuters.

Jewelry & Luxury

Signet Sees Q4 Revenue, Same-Store Sales Dip

Signet Jewelers Ltd. had a lackluster fourth quarter as weak holiday sales took a toll and demand waned for its legacy merchandise. Quarterly revenue totaled $2.15 billion, dipping 6 percent compared with the $2.29 billion reported in the previous fourth quarter. Same-store sales, a figure that includes both online and in-store sales, slipped 2 percent, an improvement compared with the 5 percent decline in comparable sales a year ago, with online outperforming in-store sales.

How GIA Is Changing Its Reports for Lab-Grown Diamonds

The Gemological Institute of America is tweaking the grading reports it issues for man-made diamonds, dropping the word “synthetic” but still not using the same scale it does for natural diamonds. Beginning July 1, the GIA Synthetic Diamond Grading Report will become the GIA Laboratory-Grown Diamond Report. The word “synthetic” also will be removed from the “Identification” line, replaced with the words “laboratory-grown.”

The elimination of synthetic is in keeping with recent revisions the Federal Trade Commission made to its Jewelry Guides, removing the word from its list of recommended terms for lab-grown diamonds because of “the likelihood of consumer confusion.”

Hit by rent hike at New York flagship, Barneys New York gets lifeline with $50 million in credit

Luxury retailer Barneys New York just got a lifeline. The retailer has extended the term of its credit line by $50 million, giving it money for growth, as well as needed liquidity to weather industry challenges and a rent hike at its famed New York flagship, people familiar with the talks told CNBC. Rent at Barneys’ flagship on Madison Avenue jumped from roughly $16 million to approximately $30 million in January, nearly wiping out its earnings before interest, tax, depreciation and amortization, the people said.

 

Jewelers must say whether diamonds are mined or synthetic: U.S. FTC

The U.S. Federal Trade Commission, which investigates allegations of deceptive advertising, has sent warning letters to eight companies to insist they distinguish in advertisements between diamonds from mines and those made in laboratories, it said on Tuesday. The FTC said it had found instances where the eight companies advertised diamond jewelry “without clearly and conspicuously disclosing that the diamonds are laboratory-created,” according to the letter.

 

Office & Leisure

Airbnb invests in India’s biggest hotel company

Airbnb is investing in an Indian hotel chain that wants to become the world’s biggest within five years. The company took part in the latest funding round at OYO, one of India’s most valuable startups, it said Monday. Neither Airbnb nor OYO would comment on the size of the investment, but it could be as much as $200 million, according to media reports. OYO was valued at $5 billion in 2018. “Emerging markets like India and China are some of Airbnb’s fastest-growing, with our growth increasingly powered by tourism to and from these markets,” Greg Greeley, president of Homes at Airbnb, said in a statement. “In many of these markets, OYO is empowering local hospitality entrepreneurs to provide more options to more travelers,” he added.

GameStop lost $673M last year

GameStop on Tuesday reported that in its fourth quarter, which had one less selling week than the year-ago quarter, total global sales fell 7.6% to $3.1 billion, as consolidated comparable store sales rose 1.4% (with a 3.4% comp boost in the U.S. and a 2.9% comp decline internationally). For the full year, also with one less selling week, total global sales from continuing operations fell 3.1% to $8.3 billion, store comps fell 0.3% (rising 1.8% in the U.S. and falling 4.8% internationally), and net income swung to a loss of $673 million from its year-ago profit of $34.7 million. GameStop is set to embark on a turnaround strategy with a new CEO, George Sherman, who arrives in a couple of weeks, plus a couple of new board members coming out of an agreement with investment firms Hestia Capital Partners LP and Permit Capital Enterprise Fund LP, which had made some demands last month out of concern over the company’s stock value. But its retail segment is taking a beating as gaming increasingly moves to online streaming.

Staples in big brand revamp; rolling out more private labels

Office products giant Staples Inc. is getting down to business with a brand revamp that includes a big focus on its “worklife” positioning. As part of the revamp, the retailer replaced its signature slanted L logo with a streamlined mark whose main component is an actual staple. The new modernized icon is meant to reflect Staples “brand evolution and the enhanced experience it is delivering to its customers,” the company said. It also is a more literal representation of the Staples name. In addition, Staples unveiled five private label brands, each targeting a specific business need: Tru Red (business essentials such as pens, notebooks, and shredders), NXT Technologies (connective solutions for business teams), Coastwide Professional (professional-grade facility supplies), Union & Scale (furniture and décor), and Perk (breakroom products).

Technology & Internet

Red Points closes $38M Series C for its ‘antivirus’ SaaS for brands

Barcelona-based Red Points has closed a $38 million Series C which follows a $12M Series B last year. The company’s software as a service platform targets brands wanting to protect products and their reseller network from cheap online fakes and/or piracy, with both physical branded goods and copyrighted digital content covered by Red Points’ i brand protection tech. It automates the detection and sending of infringement notifications using marketplace scanning and machine learning powered image recognition that’s capable of spotting potential fakes at scale, combined with customizable rules that let brands prioritize and automate enforcement actions.

 

Amazon CEO Jeff Bezos will retain 75% of his Amazon stock

Amazon.com Inc. CEO Jeff Bezos will retain 75% of his stock in the company following his divorce from MacKenzie Bezos, the couple announced Thursday on Twitter, eliminating any concern that the split would influence his control over one of the world’s most valuable businesses. Bezos will continue to be the largest shareholder of the ecommerce giant valued at almost $900 billion as well as gain voting control of his former wife’s remaining shares.

 

Wayfair says ‘Yes Way’ to a second Way Day sale

Home furnishings giant Wayfair Inc. will have its second “Way Day” sale on April 10. The web-mostly giant is extending the sale this year to 36 hours from 24 hours during its inaugural event, April 25, 2018. Also new this year will be a livestream video on its site that will show product reviews of “dozens” of popular items that are on sale. Way Day includes discounts on more than 100,000 products (Wayfair has more than 14 million SKUs), thousands of flash sales and free shipping.

 

Finance & Economy

Weak February US retail sales underscore slowing economy

U.S. retail sales unexpectedly fell in February, the latest sign economic growth has shifted into low gear as stimulus from $1.5 trillion in tax cuts and increased government spending fades. The weak report from the Commerce Department on Monday joined a raft of other soft data, including housing starts and manufacturing production that have left economists anticipating a sharp slowdown in growth in the first quarter. The loss of economic momentum also reflects higher interest rates, slowing global growth, Washington’s trade war with China and uncertainty over Britain’s departure from the European Union. These factors contributed to the Federal Reserve’s decision last month to abruptly end its three-year campaign to tighten monetary policy.

US durable goods orders fall 1.6% in February

Orders to U.S. factories for big-ticket manufactured goods fell 1.6% in February, the biggest drop in four months, reflecting a plunge in the volatile commercial aircraft category. Demand in a key sector used to track business investment decisions also declined in February. The Commerce Department said Tuesday that the February decline came after a small 0.1% rise January and was the weakest showing since a 4.3% fall in October. Orders in a category that serves as a proxy for business investment plans edged down 0.1% in February after a 0.9% advance in January. The manufacturing sector has been strained for the past few months, reflecting a global economic slowdown and rising trade tensions which have hurt U.S. exports. But there have been more hopeful signs recently.

Weekly jobless claims are at their lowest level since 1969

The number of initial claims for unemployment benefit fell by 10,000 last week to 202,000 — the lowest since Dec. 6, 1969 — according to data released Thursday by the Labor Department. The weekly figure further underscores the robustness of a labor market where improved economic conditions and higher wages are bringing people off the sidelines and back to work, especially older Americans and women. Workers are displaying more confidence they can find a well-paid job, since employers must offer higher compensation to attract and retain the best applicants. With a shortage of qualified workers, some companies are even “locking in” the most highly skilled candidates, hiring them where no position is currently available.