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The Weekly Consensus

Ideas, observations, and news on the consumer products and retail industries
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The Weekly Consensus – July 16, 2018 (Volume 10, Number 27)

The Big Story
‘Twas the Hours Before Prime Day
Maeghan Thompson

As you’ve not doubt heard, this year’s Amazon Prime Day starts today, Monday, July 16th, only a few hours from now (12pm PT/3 pm ET). Prime Day 2018 will run through tomorrow, Tuesday, July 17th for thirty-six hours, which is six hours longer than last year’s event.  If Prime Day continues to grow as it has in recent years, which seems reasonable, millions of people right now are likely stretching their clicking and tapping fingers, and readying their “Buy now with 1-Click” buttons.

Prime Day was launched in 2015 to celebrate the 20th anniversary of Amazon’s founding.  Each year since, it has taken place in the middle of July to reward Amazon Prime members all over the world with special deals, making it the unofficial Black Friday of summer.  Internet Retailer estimates that total 2017 Prime Day sales (through Amazon and other retailers) reached $2.4 billion, and Amazon reported the day achieved 60 percent year/year sales growth. In addition, Amazon signed on more new Prime memberships on Prime Day last year than on any other day in company history. For 2018, Internet Retailer estimates total sales will grow 67% to just over $4.0 billion.

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The Weekly Consensus – July 9, 2018 (Volume 10, Number 26)

The Big Story
Full of Vacancy

Last week, it was reported that mall vacancies have hit their highest level since 2012 and are closing in on all-time records. According to a report by REIS, the commercial real estate data company, the amount of occupied retail real estate in 77 major U.S. metropolitan areas dropped by 3.8 million square feet in the second quarter, the largest decline since 2009.

The news coincided with the last of more than 700 Toys R Us stores closing last week, after the company filed bankruptcy earlier in the year. In all, more than 4,100 major retail stores closed so far in 2018, according to Coresight Research. Six hundred Walgreens have closed this year, while Bon-Ton, Sears and Kmart, Best Buy, Signet Jewelers, Mattress Firm, and GNC have all closed two hundred stores or more this year. Claire’s, Foot Locker, and The Children’s Place have closed one hundred or more locations.

Shopping centers saw 8.6% of their retail space unoccupied in the second quarter, up from 8.4% at the start of the year, according to the REIS report. The vacancy rate peaked at 9.4% in 2011. Back then, the economy was still in a recession, and too many malls had been built in the preceding decades, resulting in a glut of retail space. “We were over-retailed,” said Barbara Denham, a senior economist at REIS. “The recession knocked a lot of stores out of business. While the industry made corrections, it may still be the case that the U.S. is over-retailed. The Wall Street Journal recently noted that for every person living in the U.S., there is 24 square feet of retail space. In Australia, it amounts to 11 square feet, and in the U.K., it is just five square feet.

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The Weekly Consensus – June 25, 2018 (Volume 10, Number 25)

The Big Story
Death, Taxes, and Tariffs?
Billy Busko

Nearly 150 years ago, Civil War journalist and poet Ambrose Gwinnett Bierce neatly offered this definition of a tariff, “A scale of taxes on imports designed to protect the domestic producer against the greed of his consumer.”

On July 6th, the US will impose tariffs on $34 billion of Chinese products. On the heels of July 6th, the US will impose tariffs on another $16 billion of Chinese products. China announced reciprocal action:  applying tariffs on $50 billion of US goods. In this high stakes game of trade, the US more than doubled down last week. In fact, the US quadrupled down by stating that another $200 billion of Chinese goods would be subject to a 10% tariff.

What does this potentially mean to the US consumer?

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The Weekly Consensus – June 18, 2018 (Volume 10, Number 24)

The Big Story
Retail’s Retreat and Refresh
Betsy White

You almost never hear the words retail and change used in a positive sense these days, but last week brought a mixed bag of stories regarding brick and mortar retail that included two developments that offer some optimism for the industry.

First, three stories last week illustrated the increasingly common phenomenon of old retail space being repurposed:

  • Hudson’s Bay announced it would not continue to operate its Lord & Taylor mid-town Manhattan store next year once the sale of the location to WeWork, a co-working space operator, is completed after holiday 2018. The original plan was to shrink the store, but now the company plans to close it and focus more resources on ecommerce.
  • Cirque du Soleil announced it will be opening a 24,000 square foot “Creactive” family entertainment center in a Toronto area mall in 2019. Ostensibly, the space for the new center will come from a recently closed anchor retailer.
  • The New York Times reported that part of a former Macy’s store in Alexandria, VA has been converted into a homeless shelter, at least temporarily.

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The Weekly Consensus – June 11, 2018 (Volume 10, Number 23)

The Big Story
Buffett and Dimon Are Right About Quarterly Guidance
Paul S. Alexander, CFA

In a commentary published in the Wall Street Journal last week, JPMorgan Chase & Co CEO Jamie Dimon and Berkshire Hathaway chairman Warren Buffet encouraged companies to cease issuing quarterly earnings guidance. The rationale was that short-term guidance “often leads to an unhealthy focus on short-term profits at the expense of long-term strategy, growth and sustainability.” The article further argued that markets’ fixation on the near-term can also deter companies from going public, which can limit those companies’ financial options, as well as the investing options of the general public.

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The Weekly Consensus – June 4, 2018 (Volume 10, Number 22)

The Big Story
RetailWire Discussion: Best Buy Finds More Inventory on Hand Drives Sales
George Anderson, RetailWire

Best Buy has been on a roll with a same-store sales gain of 7.1 percent in the first quarter following a nine-point comp gain during the fourth quarter. Among the keys to the consumer electronics chain’s success has been its inventory management.

Speaking on Best Buy’s earnings call with analysts in late May, CFO Corie Barry applauded the company’s inventory and demand planning group for “the quality of our inventory,” which she said was reflected in the chain’s net promoter score. “Customers are consistently telling us one of the big drivers of that improved customer experience year-over-year is inventory availability both online and in stores,” said Ms. Barry. “And so, I feel very good about the targeted quality of the inventory and then also the levels in support of the business we’ve been seeing.”

Best Buy’s inventory is up about nine percent on a square foot basis year-over-year. The chain is in the midst of a multiyear effort to transform is supply chain, according to a Wall Street Journal report. While the chain’s management believes the investments being made are critical to Best Buy’s sales success, analysts are watching to see if it delivers the returns investors expect.

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The Weekly Consensus – May 21, 2018 (Volume 10, Number 21)

The Big Story
Department Stores: No Turnaround Yet, But Reasons for Optimism
Mark Lenz

Last week was a roller coaster ride for the department store segment.  After Macy’s released positive first quarter results early in the week, there was upbeat analysis everywhere.  Was this the beginning of a long-hoped-for turnaround in the segment?  Then the rest of the public companies in the space released their numbers later in the week and the enthusiasm was diminished.  While Dillard’s beat sales and bottom line expectations easily, JC Penney and Nordstrom disappointed with anemic sales growth.  And then there was Sears, which reported a precipitous drop in sales and spoke about selling one of their strongest remaining brands, Kenmore.

What are the takeaways and highlights from this mixed bag of reports?

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The Weekly Consensus – May 14, 2018 (Volume 10, Number 20)

The Big Story
Walmart is Small
Douglas Stebbins

It was just over nine years ago, in this very space, that I did a deep dive into inner workings of Walmart and, based on empirical evidence, made the bold declaration that “Walmart is Big.”  As an update to that ground-breaking piece of journalism, I went back to see how things stand currently.  Walmart, in 2017 had revenue that, for the first time ever, topped half a trillion dollars in annual sales.  Walmart’s revenue in 2017 was about equal to the next five largest US retailers (Costco, Walgreens, Kroger, Home Depot and Target), combined.

At year end January 30, 2018 Walmart had 11,700 retail units across the globe.  Having opened their first store in Rogers, AR in 1962, Walmart, on average, has opened nearly 210 stores a year every year since; almost one store opening for every work day of the year for 56 years.  Who knew that ribbon cutting could be a full-time job?

The data seemed to confirm my hypothesis that yes indeed, Walmart is, and continues to be, big.  But where do they go from here?  The more I looked at the numbers, the more it became clear that there is still plenty of opportunity for growth, especially internationally.

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The Weekly Consensus – May 7, 2018 (Volume 10, Number 19)

The Big Story
Moral Hazard (Again) at an American Icon
Marshall Schleifman

Mount Rushmore National Memorial depicts the familiar faces of four presidents chosen by sculptor Gutzon Borglum because of their importance to the history of the United States.  When the monument was completed in 1941, the undisputed “Mount Rushmore” of retailers would have featured Sears Roebuck & Company.  A dominant retailer across several generations, Sears was the largest U.S. retailer as recently as the early 1990s, when it was then displaced by Walmart.  In 2004, Sears was acquired by Kmart Holding Corporation, controlled by hedge fund ESL Investments run by Eddie Lampert, which marked the beginning of a long chapter of struggles and decline.

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The Weekly Consensus – April 30, 2018 (Volume 10, Number 18)

The Big Story
Why Consensus Joined the Terra Alliance
Michael A. O’Hara

On April 16, 2018, after a 6-month trial period, Consensus was invited to become the 16th member of a global network of investment banking firms called The Terra Alliance (http://terra-alliance.com/).  The alliance includes members in Europe, Asia, Australia, the Middle East, Africa and North America.  The alliance intends to add health care- and technology-focused firms in the U.S. to complement our firm’s consumer orientation and Chicago-based InterOcean Advisors’ strength in industrial markets.

The alliance was founded in September 2002 by the corporate finance departments of several independent private banks in Europe to enhance their ability to serve their clients on cross-border opportunities.  The group has now evolved well beyond Europe, and its member firms advised on more than 200 M&A transactions with a total value in excess of $8.5 billion in recent periods.

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