In the first six weeks of the new year, overall economic momentum has stock values rising, with the S&P 500 up approximately 5%. Over this period, the S&P United States REIT Index is up 6%, while ongoing headwinds challenging retailers have pushed the S&P Retail Select Industry Index down nearly 3%. Subject to these macro, real estate and retail influences, Simon Property Group, the largest mall owner-operator, lags with a stock price down over 5% year-to-date. Unwilling to let external forces define its future, in the past few weeks Simon has authored two M&A transactions to chart its course.
Last week, a U.S. Bankruptcy judge approved a bid by Simon, fellow mall REIT Brookfield Property Partners and brand management company Authentic Brands Group to acquire fast-fashion retailer Forever 21. The strategy for Simon (same for Brookfield) is two-fold: first, defensively, owning the retailer ensures Forever 21 stores, which are typically large for a specialty retailer, stay open in Simon malls. For Simon, Forever 21 becomes less about directly generating rent than maintaining occupancy rates and co-tenancies that affect rent levels and lease renewals for neighboring occupants.
Second, offensively, partner Authentic Brands Group is perceived as a brand magician capable of repositioning Forever 21 into a thriving standalone enterprise. If successful, optimizing Forever 21’s once-$4.4 billion revenue business offers a lot of upside. Even if only modestly successful, slowing Forever 21’s descent will allow its store locations to be repurposed strategically over time instead of going dark all at once, which could happen under a third-party owner or liquidation. Any eventual outcome is a favorable risk-adjusted return for Simon’s share of the $81 million paid by the consortium. Importantly, Simon knows this playbook perfectly – in 2016, the same three partners acquired Aéropostale, a similarly situated retailer in comparable circumstances.
In another transaction, last week Simon announced an agreement to acquire 80% of Taubman Realty Group for $3.6 billion in cash (the Taubman family will retain 20% and continue to manage the Taubman Realty Group portfolio). This transaction comes nearly 20 years after Simon first attempted to acquire Taubman (hostilely) in a saga that spanned 2002 and 2003. The consolidation of industry leaders comes as mall landlords face an elevated number of bankruptcies and store closures by both anchor tenants (for example, Macy’s recent announcement to close 125 stores in the next three years) and specialty retailers (see Forever 21 above, for example). Taubman received a 50% stock price premium to sell its 26-mall portfolio, including several premier shopping centers.
Simon intends to incrementally invest in adapting Taubman’s malls into innovative shopping and entertainment environments where retailers offer consumers immersive shopping experiences. To justify such a robust premium, there must be lots and lots of synergies too.
No need to recount here the challenges facing mall-based retail real estate in 2020. For the sake of bricks and mortar retail, hopefully the industry is listening to what Simon is saying and doing.
Headlines of the Week
Apax Partners-owned shoemaker Cole Haan, formerly a part of Nike, on Friday made its U.S. listing application public, after confidentially filing it with the regulators in October. The company said it would not receive any proceeds from the offering as all the shares will come from selling stockholders. Nike sold its Cole Haan handbag and shoe brand to private equity firm Apax Partners in 2012 for $570 million, nearly 24 years after acquiring it. The IPO is part of a broader wave of U.S. retail listings in 2020 by companies including Casper Sleep, Madewell, and MyTheresa. Cole Haan intends to list its shares on the Nasdaq under the symbol “CLHN.” The company posted revenue of $686.6 million for the year ended June 1, 2019, up 14.1% from a year earlier, and reported a 43.4% rise in profit to $33.1 million.
Pier I Imports, after years of trying to fix itself, has filed for Chapter 11 bankruptcy and said it already has the approval of its lenders to pursue a sale of the company. The retailer is in the process of closing up to 450 stores including all its stores in Canada. About 400 stores have already closed or are holding going-out-of-business sales. The retailer has received about $256 million in debtor-in-possession financing from Bank of America, Wells Fargo and Pathlight Capital LP. Pier 1 CEO and chief financial officer Robert Riesbeck said in a statement that the decision to file for bankruptcy protection will give the company more “time and financial flexibility” to get Pier 1 through to a sale. Pier 1 is asking the court to set March 23 as a deadline for bids to be accepted.
Apparel & Footwear
Online luxury fashion retailer MyTheresa plans to list on the New York Stock Exchange, taking advantage of robust equity markets, people close to the matter said. Its owner, Neiman Marcus, is working with Morgan Stanley on the planned listing, which could take place as early as April, they added. The firm, which sells clothes from 250 of the world’s most coveted fashion brands including Prada, Gucci, Burberry and Dolce&Gabbana, may be valued at around $500 million in a potential deal, one of the sources said. MyTheresa peers such as Zalando, Global Fashion and Asos are listed in Europe, but the firm is opting for a listing in New York, the sources said, following fellow online fashion retailers Farfetch and The RealReal. The pair had successful market debuts but have since struggled, with both companies’ stock trading below their initial public offering prices. The IPO would also be the latest example of a private equity firm spinning out a better-performing retail asset from its struggling parent company.
Fresh off her Super Bowl performance, Jennifer Lopez is starting her own line of footwear with Designer Brands Inc., the owner of DSW stores, which is betting on her star power to help boost stagnant sales. Lopez and Designer Brands are forming a joint venture, which represents a step beyond the licensing deals that celebrities are typically involved in. It will give Lopez the chance to earn shares in the company based off of her products’ performance. The deal is structured in a way that puts no cap on how many shares Lopez can own — so if the project pays off, the entertainer could end up becoming an important stakeholder. Designer Brands could use a boost. Its stock tumbled 36% last year, and has continued to lose value this year. That’s because tariffs on footwear and rampant promotions in the U.S. have squeezed margins. The company also cut its earnings forecast to below analysts’ estimates in December.
Andrew Clarke, a veteran retail executive and former president of women’s apparel brand Loft, has been tapped as the next chief executive of Francesca’s. The women’s apparel and accessories chain on Thursday said Clarke will replace interim Chief Executive Michael Prendergast effective March 9. Prendergast, an Alvarez & Marsal consultant who took the temporary leadership role a year ago, will remain with the Houston-based retailer for some time to aid with the transition. Clarke brings 25 years of retail experience to Francesca’s. Most recently, he was president of Loft, a brand owned by Ascena Retail Group. Prior to that, he was chief merchandising officer at Justice, also owned by Ascena. Clarke previously held various merchandising leader roles at Kmart, France-based Pimkie and Europe-based New Look Retailers.
Patagonia is back in the lawsuit headlines after suing the makers of a “Petrogonia” apparel line. OC Media has been selling a full line of apparel, including T-shirts, hoodies, hats and more, with a logo pretty obviously based on the Patagonia Fitz Roy logo, only replaced with oil field imagery. “In blatant disregard of Patagonia’s rights in the ‘Patagonia’ trademarks, and without authorization from Patagonia, OC started manufacturing, promoting, offering for sale, and selling apparel products and accessories bearing the ‘Petrogonia’ name and brand, together with a design that is nearly identical to the P-6 logo (the Petrogonia Design),” said the filing, according to World Intellectual Property Review. OC Media even went as far as trying to trademark “Petrogonia” on Jan. 15 this year. With the ongoing lawsuit and clear copy of Patagonia’s branding, it would be a longshot for OC Media to land that trademark. Given Patagonia’s connection to enjoying the outdoors and appreciating nature, a company celebrating oil drilling with its logo is definitely not something it will tolerate.
Athletic & Sporting Goods
For the past few months, Under Armour Inc. executives have promised that 2020 would be the coming-out party of a brand-new company, a shift from defense to offense after a multiyear restructuring and a change in leadership. Then, they went back on the defensive. After revealing fourth-quarter results and 2020 projections that trailed analysts’ expectations, the company issued a sobering set of expectations for investors. Revenue in 2020 will trail the consensus estimate of $5.51 billion by a wide margin. The coronavirus could hurt sales by $60 million in the next few months, with more harm down the line.
BSN SPORTS, the nation’s largest direct marketer and distributor of sporting goods to the school and league markets and a division of Varsity Brands, announced that it has acquired certain assets from Riddell’s Kollege Town division, including approximately 50 sales representatives, sales management and customer service professionals, and Kollege Town’s fanaKTive graphic capabilities.
Advent International, one of the largest and most experienced global private equity investors, announced that it has acquired Zingfit, a U.S.-based software company powering boutique fitness brands globally, and Triib, a U.S.-based software company powering fitness professionals and gyms across the globe. Zingfit was founded in 2012 when its founders spotted an opportunity to empower boutique fitness brands by creating a better digital experience.
Cosmetics & Pharmacy
The antitrust challenge by the FTC suit blocking the sale of Harry’s has derailed the $1.37 billion deal to merge Schick razor parent company Edgewell Personal Care with the direct-to-consumer razor start-up. Edgewell announced its first-quarter fiscal 2020 results with flat organic net sales growth, representing further sequential top-line improvement, as well as 49% adjusted earnings per share growth. It also announced that following the U.S. Federal Trade Commission’s (“FTC”) lawsuit seeking to block the proposed transaction, Edgewell terminated its merger agreement with Harry’s, Inc. Edgewell said it will continue to develop its own direct-to-consumer efforts, which will take longer than acquiring Harry’s, and will continue to look for smaller brands to acquire. Harry’s has informed the company that it intends to pursue litigation. Edgewell believes that such litigation has no merit. In a joint statement, Harry’s co-founders and co-CEOs Jeff Raider and Andy Katz-Mayfield said they are “perplexed by the FTC’s process and disregard of the facts” and that they believe they would have won the FTC case.
CVS Health’s fourth-quarter 2019 results brought increased revenue and earnings per share. The Woonsocket, R.I.-based company saw fourth-quarter revenues of $66.9 billion and $1.73 in earnings per share. The full-year revenue represents year-over-year growth of 32%. Net income increased $2.2 billion for the quarter and $7.2 billion for the year, both of which ended Dec. 31, 2019. CVS Health’s retail/long-term-care segment saw revenues increase by 2.5% in the quarter. Much of this growth was attributed to increased prescription volume — which was up 5.6% on a 30-day equivalent basis — and brand inflation, partially offset by continued reimbursement pressure and an increased generic dispensing rate. The segment’s front-store revenues increased 22.7% for the quarter, which CVS Health attributed to increases in health and beauty product sales. The segment’s quarterly operating income was $1.9 billion — a $2.1 billion increase from the prior-year Q4 loss of $270 million.
Discounters & Department Stores
Stage Stores’ stock plunged 59 percent to a low of 51 cents per share Wednesday amid reports that the Houston retailer is considering a financial restructuring that might include a bankruptcy filing. Speculation about the department store chain’s future swirled amid dismal holiday sales and anonymously-sourced stories from Debtwire and The Wall Street Journal, which sent the company’ stock on a nosedive from a recent high of $9.29 in early January to 79 cents per share by the close of Wednesday trading.
Walmart is discontinuing service for its Jet Black members in New York City on Feb. 21, a company spokesperson told Retail Dive in a statement. That is part of a broader effort to move Jet Black from “incubation” to Walmart’s broader customer organization, the spokesperson said. Once the service to members is discontinued, “we’ll focus on how to leverage Walmart’s infrastructure to make conversational commerce scalable,” the spokesperson said. According to The Wall Street Journal, which first reported that Jet Black would transition away from a service model, Walmart had been in talks around a possible spin-off of the unit, but it ended without a deal.
Macy’s Inc. faces a difficult road as it dives into New York City real estate development. The struggling retailer, trying to generate cash off prime real estate in midtown Manhattan, recently unveiled plans for a 1.5 million-square-foot building atop its iconic store in Manhattan’s Herald Square. But the proposed office tower requires zoning changes that have to be approved by the city, a potentially thorny political process that can delay, or even quash, the project.
Emerging Consumer Companies
After months of turbulence, San Francisco-based DTC Brandless has shut its doors. This comes less than three years after launching and a $240 million investment from SoftBank in July of 2018 that valued Brandless at a little over $500 million. Brandless was launched in July 2017 by Tina Sharkey and Ido Leffler as a brand built for profit and purpose. Brandless made hundreds of better-for-you, everyday essentials, including organic, non-GMO food, clean beauty and personal care products, nontoxic cleaners, and home goods offered at simple fair prices. Brandless also created and curated original digital content ranging from recipes to life hacks and spotlights on people doing good in the world. The company will reportedly lay off 70 employees, with 10 staying aboard to resolve outstanding orders and presumably figure out how to sell its remaining assets.
Hollar, the Los Angeles-based marketplace selling branded consumer goods at low prices – similar to a dollar store – is shutting down. Some assets and a few employees are expected to go to Five Below. The company was founded in 2015 and raised roughly $80 million from investors that included Kleiner Perkins, Index Ventures, Pritzker Group Venture Capital, Lightspeed Venture Partners, Greycroft, Comcast Ventures, and Forerunner Ventures.
Grocery & Restaurants
The Good Bean, maker of roasted chickpea snacks, has acquired Beanitos, maker of better-for-you bean-based chips and puffs. The acquisition was directed through investments from L Catterton, 2x Consumer Products Growth Partners and BFY Capital. The combined companies now offer a portfolio of 10 The Good Bean s.k.u.s and 16 Beanitos s.k.u.s, making it the “largest legume-based snacking portfolio in the U.S.,” The Good Bean said. Additionally, both brands are committed to sustainably sourcing from U.S. farms, and their current combined annual procurement of sustainably grown and harvested legumes now exceeds five million lbs.
Natural and organic grocer Earth Fare plans to close its doors. The Asheville, N.C.-based chain said that inventory liquidation sales, including store fixtures, will begin at all of its stores as the company seeks to sell its assets “in whole or in parts.” Currently, Earth Fare operates 50 stores in 10 states, including Alabama (two), Florida (14), Georgia (three), Indiana (one), Michigan (one), North Carolina (13), Ohio (three), South Carolina (six), Tennessee (five) and Virginia (two). A spokeswoman for Earth Fare said the stores are expected to be shut by the end of February. Oak Hill Capital Partners, a New York-based private equity firm, currently holds a majority stake in Earth Fare.
BBQ Holdings, the parent of Famous Dave’s, continues to diversify its portfolio with the acquisition of 25-unit casual dining chain Granite City Food and Brewery. The asset sale comes two months after the Minneapolis-based operator Granite City Food & Brewery Ltd. filed for Chapter 11 bankruptcy protection. The company intends to operate Granite City as is with no plans to rebrand. Granite City Food & Brewery, intended to grow as a chain of restaurant-microbreweries, was founded in 1999 by industry veterans who worked for the Champp’s Americana.
Home & Road
Tempur Sealy International said fourth quarter net sales increased 29%, and direct-to-consumer channel net sales increased 62%. For the full year, net income increased 89%, the company said. “The investments we have made over the past four years strengthening the long-term foundation of our company investments have enhanced our competitive position,” said Chairman and CEO Scott Thompson. “We exited 2019 with all-time record fourth quarter sales, adjusted EBITDA and free cash flow. The combination of our powerful omnichannel distribution platform coupled with our market leading brands and products continues to drive market share gains and solid financial performance. We are carrying our momentum from 2019 forward, and we expect record full-year revenues and over 20% growth in adjusted EBITDA in 2020.”
Home furnishings and décor e-tailer Wayfair is laying off 550 employees worldwide, according to a report in the Boston Globe. The company currently employs 17,000 people worldwide. The report said the company will lay off 350 people in its Boston headquarters, and a total of 3% of its remaining global workforce. “On reflection, this last period of investment went on too long, and we find ourselves at a place where we are, from an execution standpoint, investing in too many disparate areas, with an uneven quality and speed of execution,” said Niraj Shah, Wayfair CEO, in an email to employees obtained by the Boston Globe. “Through two years of aggressive expansion, we no doubt built some excess, inefficiency and even waste at times, in almost every area.” Wayfair will hold its fourth-quarter earnings report on Feb. 28.
Jewelry & Luxury
De Grisogono USA, the American branch of the Swiss luxury brand that filed for bankruptcy on Jan. 29, has filed for Chapter 7 in Southern District of New York federal court. The U.S. branch ran a two-story, 1,600-square-foot boutique on Madison Avenue in New York City, which opened in 2017. The brand previously occupied a different location on Madison Avenue.
Chinese tourists normally flock to Bond Street, home to some of the most expensive retail space in the world. They gather behind the velvet ropes outside the Gucci store or emerge from the flagship boutiques of Chanel and Louis Vuitton with stuffed shopping bags. This week, however, there were next to none. The scene was replicated on the shopping boulevards of Paris, in the malls of Dubai and on the streets of Hong Kong. The coronavirus has caused the quarantine of more than 50 million people in China, and travel and visa restrictions to more than 70 countries. Alongside widespread shutdowns of stores and malls in China, it has taken a heavy toll on the global luxury goods sector, long dependent on the spending of Chinese shoppers at home and abroad.
Despite Amazon’s domination across categories, there is one that has always eluded it: luxury fashion. A report from Women’s Wear Daily at the beginning of the month said that Amazon was prepping its long-rumored luxury fashion platform, its largest endeavor toward luxury fashion yet. But those rumors, and Amazon’s desire to court luxury brands, have been around for years with little progress. Amazon has posed challenges for luxury fashion brands, including selling counterfeit products. Even if it cleans up its act, it’s unclear whether that would be enough for it to win over luxury brands.
Office & Leisure
Mattel turned in mixed fourth-quarter results after holiday revenue was weighed down by continuing sales declines in its American Girl and Fisher-Price brands. Sales during the holiday quarter slumped 3%, once again feeling the strain from poor sales of American Girl dolls and Fisher-Price toys. Sales in the American Girl segment dropped 20% in the fourth quarter, pulling down the entire doll category 6% despite the growth of the Barbie brand. Declines in Fisher-Price Friends, Fisher-Price and Thomas & Friends brought the infant, toddler and preschool segment down 9%. Mattel isn’t the only company that had trouble during the holidays. Funko, Target and Spin Master all reported disappointing holiday sales. Meanwhile, Hasbro saw its sales rise 3% during the holiday quarter, buoyed by toys from Frozen and Star Wars that are tied to its Disney partnership.
For the past eight years, Harvard professor Ryan Raffaelli immersed himself in the world of independent bookstores. Concluding his study, he just released a working paper, entitled “Reinventing Retail: The Novel Resurgence of Independent Bookstores.” Prior to 1995 when Amazon arrived on the scene, the number of independent booksellers reached historic highs, according to the American Booksellers Association (ABA). And Amazon didn’t just take down the independents. Barnes & Noble dropped from 681 stores in 2005 to 627 at the end of 2019, after it was acquired by hedge fund Elliott Advisors. Elliott also owns U.K.-based bookstore chain Waterstones, with 238 stores. Waterstones and other successful indie bookstores follow the 3Cs model outlined in Raffaelli’s working paper: community, curation, and convening. Bookstores use these 3Cs as leverage to beat Amazon at its bookselling game. But this 3Cs model is applicable to every retailer, no matter the category or whether its only one store or hundreds.
Mattel Inc will close a factory in Canada after shutting down two plants in Asia, as the toymaker reduces its manufacturing footprint to cut costs. The maker of Barbie dolls closed its manufacturing sites in China and Indonesia last year and will shut a facility in Canada sometime this year. The closure of the Mega Bloks factory in Montreal, Canada would affect about 580 workers. The manufacturing overhaul is said to be a part of Chief Executive Officer Ynon Kreiz’s plan to turn around and stabilize Mattel, which has struggled in recent years from weak sales. Mattel did not immediately respond to Reuters’ request for comment.
Technology & Internet
Google’s plan to buy Fitbit Inc. is running into a wall of antitrust and privacy worries in the U.S., Europe and Australia, where competition officials are increasingly wary of how internet giants can exert control over data to cement their dominance. Google’s $2.1 billion acquisition of the maker of smartwatches and fitness trackers, announced in November, would add wearable devices to the internet giant’s hardware business. It also advances the ambitions of Google parent Alphabet Inc. to expand in the healthcare sector by adding data from Fitbit’s more than 28 million users. In the past, the Fitbit deal probably wouldn’t have raised much concern for competition enforcers because the company doesn’t compete directly with Google. And even with Fitbit, Google would have a minuscule share of the hardware and fitness-tracker market. Today, there’s heightened concern, particularly in the European Union, about how tech companies can leverage their control over data to become ever more powerful.
Shopify Inc. reported fourth-quarter revenue that topped analysts’ estimates and gave an optimistic forecast for this year, boosted by holiday shopping and add-on services such as payment and marketing tools. Sales grew by 47% to $505.2 million in the quarter, Ottawa-based Shopify said in a statement Wednesday. For 2020, Shopify said it sees revenue of $2.13 billion to $2.16 billion. The key metric of gross merchandise volume, which represents the value of all goods sold on the platform, increased 47% from a year earlier. Shopify helps businesses open their own digital stores across multiple channels, including social media, through its platform. The company also provides point-of-sale services in brick-and-mortar stores.
Finance & Economy
The U.S. government’s sale of 30-year bonds drew a record low yield of 2.061% after the Treasury rally spurred by the spread of the Wuhan coronavirus in China and around the world helped drive rates across the curve to multi-month lows. The previous all-time low for a 30-year sale was 2.17% in October.
The number of rich people around the world shot up in 2019. That’s according to a report released from market research firm Wealth-X focusing on the “very high net worth” population, defined as those with a net worth of between $5 million and $30 million. The number of people with a net worth of between $5 million and $30 million rose to 2.67 million in 2019, a growth rate of 10% from 2.39 million people in 2018, Wealth-X says. By comparison, the number of people with a net worth of between $5 million and $30 million rose to 2.39 million individuals in 2018, a growth rate of just 1% from 2.35 million individuals in 2017, a Wealth-X spokesperson tells CNBC Make It.