On Friday January 7, mainland China suffered its deadliest day in the coronavirus outbreak with authorities reporting 86 fatalities, bringing the death toll to 722, according to CNN. Over 34,500 people are known to have been infected in mainland China, according to China’s National Health Commission, and another 320 cases have been reported across 27 other countries. The majority of cases have been recorded in Hubei province and its capital, Wuhan, the epicenter of the outbreak.
Reuters reported on February 6 that many factories have suspended operations until next week or longer as authorities try to contain the virus’s spread, and the Chinese government is studying monetary policy options amid expectations the outbreak will have a devastating impact on first-quarter growth, dropping GDP by as much as 2%. One of the main reasons for business leaders’ concern is that Hubei province and its largest city, Wuhan, are crucial centers for manufacturing and logistics.
According to the Wall Street Journal, “87% of member companies surveyed by the American Chamber of Commerce in Shanghai expect the outbreak to have a direct negative pull on their revenue, while only 13% considered the revenue consequences to be limited. About a quarter of member companies in the flash survey expect the outbreak to cut their China revenue by more than 15% in 2020.” A CNN headline reported “The coronavirus could cost China’s economy $60 billion this quarter.” The same article noted that Tesla has closed in Shanghai facility and Apple has lost significant production from suppliers in Wuhan.
Among the most vulnerable to the outbreak, and in some ways the most problematic for the virus’s continued spread, are China’s estimated 290 million migrant workers, who travel from rural areas to the cities to find jobs. The timing of the coronavirus outbreak has also exacerbated the risk of the contagion – it has coincided with the Lunar New Year holiday season, during which many migrant workers leave their factories and return to their villages and families.
The coronavirus crisis comes amid the backdrop of an extended trade war between China and the U.S. The U.S., citing unfair Chinese trade practices, began imposing tariffs in January 2018. In March of 2018, President Donald Trump tweeted that “trade wars are good and easy to win.” The President imposed and escalated tariffs on multiple categories of products throughout 2018 and 2019, with more tariffs threatened (particularly against a wide range of consumer products) towards the end of 2019. In January 2020, however, it seemed that the trade war was resolved in principle and new tariffs and planned escalations would be held in abeyance (and some tariffs were reduced or eliminated) pending the drafting of a comprehensive treaty.
Many consumer products businesses nervously applauded this détente, but some that we have spoken to pointed out that they had already moved production out of China to other countries to avoid tariffs. Footwear News similarly reported “the nearly two year trade war between the U.S. and China may have had an inadvertent upside for American footwear manufacturers: they are seemingly less susceptible to major shipping delays caused by global concerns about the rapidly spreading coronavirus.” China’s National Bureau of Statistics acknowledges that 3.8 million manufacturing jobs were lost last year, as many businesses shifted sourcing to venues like Indonesia, India, Pakistan and Vietnam.
Some of the American consumer brands warning of negative financial performance caused by the coronavirus are businesses with significant sales within China, such as Apple. Among those American consumer businesses who have historically relied on Chinese factories primarily to supply the domestic U.S. market, there appear to be two camps: those who stayed in China believing that the trade war would resolve itself, and those that moved production out given the uncertainty of the tariffs. The latter group may owe the President a thank you note for inadvertently helping them avoid late or lost shipments due to the coronavirus.
Final note: more important than any economic impact is the health of the people impacted. We hope a cure for the coronavirus is quickly developed, for those affected to return to health quickly, and for normalcy to return to China.
Headlines of the Week
Declaring 2020 a “transition year,” Macy’s on Tuesday released a plan “designed to stabilize profitability and position the company for growth” that includes shuttering 125 underperforming stores over the next three years (29 of which had already been announced for 2020). Some 2,000 employees will lose their jobs in the process, as the company reduces its “corporate and support function headcount” by 9%, according to a company press release. All told the moves should generate annual gross savings of about $1.5 billion, fully realized by year-end 2022. Costs of executing the changes will be about $450 million to $490 million, most recorded in 2019.
Federal antitrust regulators say a proposed merger that would combine old-school shaving brand Schick with upstart Harry’s would end up costing consumers some skin. The Federal Trade Commission last week sued to block Edgewell Personal Care Co.’s $1.37-billion acquisition of Harry’s, which was supposed to be finalized this year. The FTC argues that bringing two major shaving brands together would hurt competition. Edgewell’s Schick is the No. 2 razor maker in the U.S., behind Gillette. Both brands were forced to slash prices and overhaul their marketing strategies in recent years in response to the rise of Harry’s and rival Dollar Shave Club, which both started as direct-to-consumer digital brands. “The loss of Harry’s as an independent competitor would remove a critical disruptive rival that has driven down prices and spurred innovation in an industry that was previously dominated by two main suppliers, one of whom is the acquirer,” the FTC said.
Apparel & Footwear
Tapestry on Thursday reported that second quarter net sales rose 1% to $1.82 billion, as gross profit reached $1.21 billion, up from $1.2 billion a year ago. Sales growth was strong at the holidays, but the company has been forced to lower its full-year guidance due to the coronavirus outbreak in China, which CEO Jide Zeitlin said in a statement “is now significantly impacting our business in China, resulting in the closure of the majority of our stores on the Mainland.” The company estimates that the outbreak could cost some $200 million to $250 million in the second half of the year, but that “the dynamic nature of the situation” could alter that. Tapestry on Thursday also announced new leadership at its Kate Spade and Stuart Weitzman brands. Liz Fraser, who has been president of women’s fashion label Lafayette 148, will be CEO and brand president of Kate Spade effective March 1. The same day, Giorgio Sarné, now president of Tapestry Asia and president and CEO of Coach Asia, will be promoted to CEO and brand president of Stuart Weitzman, replacing Eraldo Poletto, “who has decided to leave.”
Laura Ashley has announced that Kwan Cheong Ng will step down from his position as chief executive and executive director of the fashion and lifestyle retailer. His last day will be April 30, after which he will remain on Laura Ashley’s board as a non-executive director. Laura Ashley’s current chief operating officer Katharine Poulter will succeed Ng as chief executive and executive director, effective from May 1. Poulter has 25 years of retail experience, with previous stints at Marks & Spencer, Kingfisher, Wilko, Tesco and Home Retail Group – the now-defunct parent company of Argos and Habitat. The news comes a few months after Laura Ashley’s finance director and joint chief operating officer Sean Anglim resigned after more than two decades with the business. In its latest results, Laura Ashley reported a statutory loss before tax of £14.3 million for the 52 weeks to June 30, 2019.
Mike Ashley’s Frasers Group has bought a 12.5% stake in luxury British handbag maker Mulberry, the company has revealed. Frasers – previously known as Sports Direct – provided no detail on how much was paid, but based on today’s share price the stake is worth almost £19 million. The Newcastle United FC owner has been keen to grow his high street operations and turn to more upmarket products through the rolling out of his Flannels stores, which sells luxury clothes. He had already been speaking to Mulberry – where a bag can cost £1,295 – for several months because the fashion house’s products are sold in House of Fraser stores. But sources close to Mulberry said the company was unaware of Mr Ashley’s investment plans. On Friday, Hong-Kong investment group Tybourne sold its entire 11% stake in the business, which Frasers is likely to have bought in the deal – although the company would not confirm it.
Athletic & Sporting Goods
Nike Inc said it would partner with some South American distributors, as a part of the footwear maker’s wider plan to sell new products directly to consumers faster. Retail brand management firm Grupo Axo will acquire Nike’s operations in Argentina, Chile and Uruguay, the company said, and Grupo SBF SA through its subsidiary will become the owner of the Nike’s Brazilian operations. Nike has been focusing on its direct-to-consumer business, a strategy that includes targeting online sales, product launches and supply chain improvements to bring new products to shelves faster.
CCM Hockey, a leading designer, manufacturer and marketer of hockey equipment and related apparel, is proud to announce the acquisition of Step Skating Blades Inc., the maker of STEP Steel high-quality skate blades. Headquartered in Quebec City and founded in 2000, STEP Steel has revolutionized hockey skate blades with their top-quality steel, unique manufacturing process and innovative profile designs.
Seattle electric bicycle maker Rad Power Bikes announced a $25 million investment round Wednesday, led by Vulcan Capital and Durable Capital Partners LP. It’s the second major fundraising round for the e-bike company, following a private investment from online retail titans last year. The investment is a milestone for the 13-year-old company and an unusual move for Vulcan, which typically funds more traditional technology startups. But Vulcan is just the latest tech investor to see something in Rad, which describes itself as the largest e-bike brand in North America by volume. Rad will use the new cash to open additional retail locations around the world and expand the company’s delivery service.
Cosmetics & Pharmacy
Palladium Equity Partners has acquired Accupac, a leading US provider of outsourced manufacturing and packaging solutions for the personal care and beauty markets, from J.H. Whitney Capital Partners. Pennsylvania-based Accupac offers complex formulation capabilities specializing in liquid topical and oral care products, including skin creams, toothpastes, and other personal care products. Accupac’s manufacturing facilities are strategically located in Mainland, PA, and Lakewood, NJ, are FDA registered, and cGMP compliant. Palladium is a middle-market private equity firm with approximately $3 billion in assets under management.
Under the leadership of Jean André Rougeot, who joined Sephora Americas as President and Chief Executive Officer in February 2019, Sephora is more than doubling its number of store openings from the previous year. The real estate selection is an indication that they are taking the battle for the beauty consumer straight to Ulta’s front door. The retailer announced plans to open 100 new stores across North America, moving with a strategy of meeting their consumers where they live and work. The new locations will include street and local centers as well as a mix of new and established shopping centers. Part of the strategy will include smaller-format stores.
Beiersdorf AG is stepping up its sustainable actions with the acquisition of the Stop the Water While Using Me! natural cosmetics brand. Financial terms of the deal were not disclosed. Stop the Water While Using Me!, launched in 2011, has been on a drive to “protect, save and donate water.” It boasts refillable systems and biodegradable skin-care products, including solid, waterless body and hair-care items, plus shower, hand, body and oral hygiene products. “The two Hamburg-based partners intend to jointly intensify the impact of sustainable skin care and to further their commitment to climate and resource protection,” Beiersdorf said in a statement released Wednesday. This marks Beiersdorf’s second investment since early December 2019, when the group announced it had taken a “significant stake” in Lycl Inc., a rapidly growing Korean beauty and tech start-up.
Discounters & Department Stores
Target plans to launch a new private label luggage brand next week, according to a corporate blog post. Dubbed “Open Story,” the line includes nearly 40 luggage products and accessories. Prices range from around $20 to $180, which the retailer says is 25% to 30% lower than “comparable” brands. Products include hard shell luggage, backpacks, garment bags and packing cubes. The brand launches in stores on Sunday and online Feb. 13.
J.C. Penney is revamping one of its biggest in-house women’s apparel brands to focus more on denim and casual looks. The relaunch, announced Thursday, is part of Penney’s strategy to pull itself out of a sales slump and remain relevant as more and more people turn to Amazon for clothing. Starting Thursday, its Ana brand will have new products in stores and online — in extended sizes from missy to plus to tall. The full assortment will be online and in stores by March, with items priced at about $39 to $49 each. Changes include jeans with softer fabrics and accessories in pastel hues.
Kohl’s Corp. has added the chief information officer of Pick ‘n Save owner Kroger Co. as its newest board member. The Menomonee Falls-based retailer announced the addition of Yael Cosset in a regulatory filing Feb. 3. His seat on the board of Kohl’s was newly created, bringing the retailer’s board size to 12 members. Cosset’s appointment began Feb. 2 and expires at the company’s annual shareholders meeting this year. He has worked at Kroger, the Cincinnati-based parent company of Pick ’n Save and Metro Market grocery stores, since 2015.
Emerging Consumer Companies
Casper Sleep opened for trading at $14.50 per share after pricing its initial public offering at $12 per share. According to its regulatory filings, Casper is hoping to raise just under $125 million with its IPO. The company’s last investment round valued it at more than $1 billion. Today, it is valued at half of that.
CUUP, the New York-based intimates brand founded in 2018, raised $11 million in Series A funding. The round was led by Insight Partners, with participation from earlier investors Forerunner Ventures, Global Founders Capital, Lerer Hippeau Ventures, and Bullish. The company has raised $15 million to date.
Foxtrot, the Chicago-based chain of convenience stores founded in 2013, announced that it has raised $17 million. The round was co-led by Imaginary and Wittington Ventures, with participation form earlier investors Fifth Wall, Lerer Hippeau, Revolution’s Rise of the Rest Seed Fund, M3 Ventures, The University of Chicago, Collaborative VC and Wasson Enterprise, and new investors Bluestein Associates and Barshop Ventures. Foxtrot offers on-demand delivery of its full product suite – its own products (coffee, sandwiches), emerging brands (Hims, MatchaBar) and staple products and brands (Bud Light and Oreo) through an app.
Grocery & Restaurants
Earth Fare filed for Chapter 11 bankruptcy protection in federal court, following an announcement that it plans to sell off its assets and go out of business. The Asheville, N.C.-based natural and organic grocer said in the filing that its board of directors met Nov. 5 to explore strategic options for the company — including a restructuring, reorganization or sale — and adopted the plan to file for Chapter 11 in a meeting on Feb. 3. Last week, Earth Fare unveiled plans to close its 50 stores and corporate office and sell its assets “in whole or in parts.” Inventory liquidation sales are now under way at stores. Earth Fare operates stores in 10 states, including Alabama, Florida, Georgia, Indiana, Michigan, North Carolina, Ohio, South Carolina, Tennessee and Virginia.
The Dubai- and New York-based ghost kitchen player Kitopi last week said it has closed on its Series B round of funding, raising $60 million to rapidly expand operations across the U.S. The funding round was led by Knollwood and Lumia Capital with further participation from new and existing investors BECO, CE-Ventures, GIC, Rise Capital, Reshape, Global Ventures and Wilshire Lane Partners, the company said. In the family of the growing number of ghost kitchen players positioned to grow delivery-only brands, Kitopi — which stands for Kitchen Operation Innovation — is different, describing itself as a managed cloud kitchen platform that partners with restaurant operators. Unlike more real-estate-focused ghost kitchens that offer rentable space for restaurant operators to expand their delivery reach, Kitopi offers a model that is similar to franchising, but for delivery only.
New York-based hotel and restaurant operator SBE Entertainment Group is partnering with shopping mall-owner Simon and hotel partner Accor to build a nationwide network of ghost kitchens and a food hall with a focus on delivery. The new company called C3, which stands for “Creating Culinary Communities,” aims to tap the culinary resources of SBE’s restaurants — including Umami Burger and other brands developed by chief culinary officer Martin Heierling — along with Simon’s real estate footprint and Accor’s 5,000 hotels and residences. The goal is to open 200 ghost kitchen locations by the end of 2021.
Home & Road
Tempur Sealy International said it has signed a definitive agreement to acquire a majority stake in Sherwood Bedding, a major private-label bedding producer. TSI said it expects to pay approximately $40 million for Steinhoff’s 80% stake in the company. Sherwood operates four manufacturing plants and is a Top 10 bedding producer. TSI said its acquisition of a majority stake in Sherwood would mark its entrance into the private-label bedding category, enabling the company to create a complete suite of product offerings ranging from Sherwood Bedding’s non-branded private-label lines to its well-known branded lines, Tempur-Pedic, Sealy and Stearns & Foster. The Ellman family will maintain a 20% ownership interest in Sherwood. Sherwood will be operated as a standalone, independent business unit within TSI and will continue to be led by its current management team. The transaction is expected to close within the first quarter of 2020, officials said.
Vertically integrated manufacturer and retailer Ethan Allen reported fiscal 2020 second-quarter sales of $174.6 million, a decrease of 11.5% compared with the same prior-year period, as its transition to a membership model contributed to a 21.8% decrease in wholesale orders. Net income of $7.1 million for the three months ended Dec. 31 was off 41.8% from fiscal 2019’s second quarter. Ethan Allen had second-quarter earnings per share of 27 cents compared with 45 cents a year ago. Along with the transition from a promotional to membership model, the company attributed the consolidated sales drop to a 4.2% decrease in international sales driven by lower sales in China and Canada and consumer caution with discretionary spending.
Jewelry & Luxury
Former Shinola president Jacques Panis has stepped down as chief executive officer of lab-grown seller New World Diamonds, which he has headed since last year. Erik Abraham, managing director of CITG Capital, said that “nothing has changed” with the Troy, Mich.–based e-tailer, despite Panis’ departure. The company has not announced his replacement. Panis, who was with Shinola for its first decade, left the watch manufacturer in 2018. He has headed New World since July 2018.
Pandora’s results have improved, though the jeweler is “not out of the woods yet,” executives admitted on a conference call following the release of its fourth-quarter earnings. The Danish charm maker’s comps fell 4% in the year’s final quarter—an improvement over the final quarter of 2018, when they fell 7%. Overall comps fell 8% in fiscal 2019. The improved results show that “our decline can be reversed,” said president and chief executive officer Alexander Lacik, crediting its Programme Now strategy.
The spread of the coronavirus in China and beyond has prompted shifts in the global trade show calendar and is negatively impacting retail sales in China. Retailers in China have been forced to close stores temporarily, and malls and public spaces have become ghost towns. But the virus’ impact on the jewelry industry may be just beginning. On Tuesday, the Hong Kong jewelry and gems shows moved its dates from March 2–8 to May 18–21, citing the safety and health of those involved. And the Swatch Group canceled its Time to Move event in Zurich, originally scheduled for late February, due to the spread of the virus.
Tiffany & Co shareholders made it official on Tuesday, voting in favor of a takeover of the luxury jewelry company by LVMH Moët Hennessy-Louis Vuitton. LVMH announced it was buying Tiffany & Co. for $16.2 billion, or $135 per share in cash on Nov. 24. Tiffany will join iconic brands including Louis Vuitton, Givenchy and Celine under the LVMH umbrella. LVMH is not required to hold a vote of its stockholders to approve the Merger Agreement. The company anticipates that the merger will be completed in the middle of 2020.
Office & Leisure
Going into the holiday season, Target grabbed headlines as it tried to solidify its position as one of the heirs to Toys R Us’ lost empire. The retailer forged a partnership first with Disney to open 25 in-store shops featuring toys from the iconic entertainment company that included one hundred products that could otherwise be found only inside Disney’s own stores. And then in October, the company announced a partnership with TRU Kids Brands, a still-modest venture created out of the ashes and brand assets of Toys R Us. Target would essentially be the online retail venue for anyone shopping toysrus.com who actually wanted to buy a toy they were browsing. In doing so, Target made a direct play for those still afflicted with nostalgia for the toy retailer that liquidated in 2018. But Target’s toy sales in the fourth quarter disappointed. During the second holiday season without Toys R Us around, Target had flat comp sales in the category. The category — of huge importance to the retailer’s Q4 sales — dragged on its entire performance along with electronics and home goods.
Staples is thinking outside the office with a reimagined store format that spotlights coworking, podcasting and community event spaces. The new concept, called Staples Connect, made its official debut on Feb. 5, in six redesigned stores in the Boston area (Boston, Cambridge, Needham, Brighton, Danvers, and Somerville). More than a place to make a transaction, the format offers customer-focused solutions and experiences, with hands-on learning opportunities for professionals, teachers, and students. Among the offerings are a 500-sq.-ft. community space where customers can connect and learn by hosting or attending events, such as speaker sessions, workshops, seminars, meetings and more. In partnership with iHeartRadio, the store also includes a dedicated podcast studio where customers can schedule a recording session. The space features a soundproof room with professional equipment for up to four people, with a dedicated in-house specialist available to assist.
Game company Cards Against Humanity has reportedly closed a deal to acquire parody website ClickHole.com from G/O Media. Financial terms of the all-cash deal weren’t revealed, but BuzzFeed News reported that Cards Against Humanity intends to make the site’s employees its majority owners. The site was founded by The Onion in 2014 to parody sites such as Upworthy and BuzzFeed before turning its sights to satirizing online politics. The site will operate independently and its employees won’t be involved in writing any of the game company’s famous cards, BuzzFeed reported. Cards Against Humanity is a wildly popular game in which player draws a fill-in-the-blank card, and the other players all pick a card from their hands with a weird, goofy or dirty word or phrase, and the first player picks the best fit.
Technology & Internet
Uber stock rose in extended trading on Thursday after the company announced a fourth-quarter loss that was narrower than analysts had expected and moved its EBITDA profitability forecast forward. The company’s shares spiked as much as 10% after hours when CEO Dara Khosrowshahi said on the company’s earnings call that the company was moving its EBITDA profitability target to Q4 2020, ahead of its original promise of profitability in 2021. Uber’s revenue growth accelerated on an annualized basis to 37% from 30% one quarter ago.
Best Buy’s CEO Corie Barry will keep her job after the board investigated misconduct allegations against her. Best Buy announced the review just over two weeks ago. It launched the investigation in December after receiving an anonymous letter containing the allegations. On Tuesday, the board committee said in the statement it “supports the continued leadership of the Company by Ms. Barry.”
Finance & Economy
Faced with shuttered stores and empty streets, big consumer brands and fashion houses are getting nervous about the impact of the coronavirus on their businesses. Nike, Adidas and Capri Holdings, which owns Versace, Jimmy Choo and Michael Kors, are among the companies this week that have warned investors that sales could take a hit as the virus spreads across China. Retailers are shutting their doors as efforts to contain the virus ramp up and would-be shoppers stay home.
An unseasonably mild January helped power the U.S. jobs market to more gains, with nonfarm payrolls rising 225,000 for the month, well above Wall Street estimates. The unemployment rate ticked higher to 3.6%, but for the right reason as the labor force participation rate increased 0.2 percentage points to 63.4%, matching its highest level since June 2013, according to data released Friday by the Labor Department. Economists surveyed by Dow Jones were looking for payroll growth of 158,000 and the jobless rate to stay at 3.5%, its lowest in more than 50 years.