Last week, three major U.S. department stores, J.C. Penney, Macy’s, and Kohl’s, topped analysts’ fourth quarter earnings and revenue estimates. Despite exceeding expectations (which were already tempered by a generally soft Holiday season), notable risks still loom for large brick and mortar retailers. The hazards are well documented: consumers have changed purchasing habits to favor more experiential retail, and brick and mortar department stores face growing competition from ecommerce companies like Amazon. Still, in the fourth quarter, these department stores were able to get some wins from various strategic efforts.
J.C. Penney: Led by Jill Soltau, who was named CEO of J.C. Penney in 2018, J.C. Penney continued to focus more apparel and jewelry, two higher margin categories, in the fourth quarter. The company’s ongoing turnaround efforts include discontinuing the sale major appliances such as refrigerators and washing machines, and closing underperforming stores. Ms. Soltau voiced optimism about the future in the company’s earnings press release: “In Fiscal 2019, we met or exceeded all five financial guidance metrics for the year, and we delivered our third consecutive quarter of meaningful gross-margin improvement in the fourth quarter. I am encouraged by our progress, especially in our women’s apparel businesses.”
Kohl’s: Beating analysts’ expectations in the fourth quarter drove Kohl’s stock price up by more than 4% in the days after the announcement. CEO Michelle Gass noted that the results were at least partially attributable to the launch of several new brands during the 2019 holiday season, including some identified through its Curated by Kohl’s program. On the other hand, Ms. Gass expressed frustration with Kohl’s women’s apparel business and noted that it has adopted a new merchandising structure and a new team to try to fix it.
Macy’s: Despite weaker than expected holiday sales, Macy’s beat fourth quarter earnings expectations. The retailer’s primary strategy for profit improvement in 2020 is expense control and restructuring. The restructuring plan announced by CEO Jeff Gennette looks to generate $100 million in annual cost savings. The plan includes reducing management roles, expanding its Growth 50 program, and expanding Macy’s Backstage.
Despite these positive earnings reports, risks continue to loom for major department stores. In addition to the well-known headwinds for physical retailers, the coronavirus was a topic of discussion on each analyst earnings call. While coronavirus did not factor into the fourth quarter, there is growing concern that it will threaten supply chains and weigh on foot traffic and consumer spending in future quarters. Still, given how uncertain the coronavirus’s spread and effects will be, none of the department stores explicitly factored any COVID-related impacts into their 2020 guidance.
J.C. Penney, Macy’s, and Kohl’s continue to navigate the difficult path forward for department stores, a path where the challenges of changing consumer behaviors and increasing competition have been joined by the new risk of a potential pandemic. Still, fourth quarter victories driven by new merchandising strategies and expense control serve as a reminder that shrewd management is still an asset capable of producing some gains.
Headlines of the Week
Footwear and lifestyle accessories brand Cole Haan’s plans to raise a reported $100 million in an IPO are on hold due to concerns surrounding the coronavirus, several media outlets reported. Reuters said Cole Haan declined comment on news that the IPO plans, announced in a Feb. 14 SEC filing, were on hold amid the recent stock market volatility, which also prompted Warner Music Group Corp. to delay its IPO plans as well. Calling itself an “emerging growth company,” Cole Haan said in the SEC filing it would list its common stock on the NASDAQ under the symbol CLHN. “Today, Cole Haan is a $1 billion global performance lifestyle brand at retail that connects with consumers primarily over digital platforms,” CEO Jack Boys said in the SEC filing.
Foodservice distributor US Foods Holding Corp. plans to buy Smart Foodservice Warehouse Stores, formerly the cash-and-carry format of Smart & Final Stores, in a $970 million cash deal. Under the deal, Portland, Ore.-based Smart Foodservice will be acquired from funds managed by affiliates of private-equity firm Apollo Global Management, which last April unveiled a $1.12 billion buyout deal to take Smart & Final private. At the time, published reports said Apollo planned to separate the Smart & Final retail grocery and Smart Foodservice cash-and-carry businesses. On Friday, Rosemont, Ill.-based US Foods said the acquisition excludes Smart & Final, which was separated from Smart Foodservice before the agreement with Apollo. Plans call for Smart Foodservice to retain its leadership team and operate as a separate business unit within US Foods.
Apparel & Footwear
Gap Inc. has tapped its Old Navy chief, Sonia Syngal, to be CEO, effective March 23, the company announced Thursday afternoon. “I’m committed to fully realizing the potential of our portfolio and the advantage of our scale, with a focus on strengthening the love that our millions of customers have for our brands,” Syngal said in a statement. “To do that, we must better prioritize initiatives and capabilities that will improve execution and drive value creation.” Syngal has been leading Old Navy’s business since 2016. She has been with Gap Inc. since 2004. She will also now be joining Gap’s board of directors later this month, the company said. The announcement comes after Gap earlier this year called off plans to split Old Navy into a separate public company.
As part of a larger strategy to keep up with the millennial consumer’s lifestyle, Abercrombie is adding special occasion apparel to its assortment, with an eye toward big life events many millennials are approaching, like weddings. The shift into special occasion apparel comes at a time when the brand is looking to keep its upward momentum. Abercrombie & Fitch has struggled to connect with its consumers in the last 10-plus years. In 2008, the company’s net income totaled $476 million, compared to just $7 million in 2017. However, the Abercrombie brand has taken some big steps in the last two years to appeal to the 20- to 30-something customer. Now, after talking to customers on social media to figure out where to go next, the brand landed on apparel that can be worn to weddings, bridal showers, office parties and engagement celebrations.
Rent the Runway hopes a new membership option will encourage even more women to buy fewer clothes, and turn to renting. The clothing and accessories rental service is launching a two-swap plan, it announced Tuesday. Up until now, Rent the Runway had offered two plans. There is an unlimited subscription, where users pay $159 per month to borrow four items at any time, swapping those out as frequently as they want during the month. It also offers a one-swap plan, where customers pay $89 monthly to have four items at once that can be swapped at the turn of each month. The new two-swap model gives users the ability to (you guessed it) swap out four items two times each month. It costs $135 per month.
Brand management company WHP Global is getting another big investment as it looks for brands to rescue. Oaktree Capital Management is adding $150 million to its equity stake in WHP Global, taking Oaktree’s total investment to $350 million. The latest capital raise, in addition to a debt facility already in place with BlackRock, gives WHP Global north of $1 billion in buying power. “Walk any mall, and you will see our acquisition targets,” WHP Global chairman and CEO Yehuda Shmidman told CNBC. “Our aim is to rescue powerful, legacy brands in difficult situations.” WHP Global is one of several growing brand management companies, like competitors Authentic Brands Group and Marquee Brands, which hunt for big name brands struggling under the weight of a broken operational or financial circumstance. The goal, Shmidman said, is to unlock the value of a brand that is restrained under its current environment.
Athletic & Sporting Goods
Prospect Hill Growth Partners, L.P., a private equity firm focused on operational value creation in middle-market growth companies, announced it has acquired a majority interest in Fitness Ventures, LLC. Founded in 2016 and headquartered in Orlando, FL, Fitness Ventures operates Crunch Fitness locations throughout eight states in the U.S. with several more in development. Founder Brian Hibbard will retain a substantial investment in the business and continue to lead the company as its Chief Executive Officer. Terms of the investment were not disclosed.
Performance technology company Hyperice announced it has acquired NormaTec, the creator of a popular recovery system used by professional athletes. Terms of the deal were not immediately made available, but Hyperice CEO Jim Huether told CNBC with the acquisition, he expects the company’s gross revenue to “more than double within 18 months.” Hyperice said it grossed in excess of $100 million in 2019. NormaTec’s compression system helps players with muscle tissue recovery, assist in preventing blood clots in legs, tightness and soreness. The system is listed on Amazon for which for more than $1,200. On NormaTec’s website, a newer version of the system sells for more than $2,000.
Cosmetics & Pharmacy
Unilever announced the initiation of a yearlong review of its health and beauty brands in an effort to maximize the growth of its beauty portfolio, according to The Sunday Times. The in-depth review will focus on poor-performing brands. The company reported sales of £18.2bn last year, with beauty and personal care brands contributing 42% of the group’s total revenue. M&A continued to be a growth lever with Unilever adding a number of brands to its portfolio in 2019; Lenor Japan, Bolivian personal and home care business Astrix, Tatcha, Olly Nutrition, French pharmacy brand Garancia, and the Laundress.
Federal Trade Commission (FTC) filing suit put an end to the $1.4 billion acquisition of Harry’s, one of the nation’s most innovative shaving brands, by Edgewell Personal Care, owner of some of the world’s largest, legacy shaving brands, including Schick, Wilkinson, Edge, and Skintimate. In true entrepreneurial spirit, Harry’s has done a reboot and is continuing its focus on brick-and-mortar expansion. Starting next month, Harry’s products and sister brand Flamingo’s products will be available in 8,000 Walgreens stores, marking the brand’s entry into the drugstore channel. The brand will also expand into 400 Walmart stores in Canada.
French pharmacy beauty brands Théophile LeClerc and Innoxa, formerly owned by the Laboratoires Visiomed, have been acquired by Frédéric Poux. Financial terms of the deal were not disclosed. Each beauty brand is more than 100 years old and has an established presence in a retail channel that straddles both beauty and medicine, an alluring combination to investors today as the wellness and natural trends mount.
Discounters & Department Stores
Underscoring grocery’s importance to its growth, Walmart is incorporating the Walmart Grocery app into the main Walmart mobile app. Janey Whiteside, executive vice president and chief customer officer at Walmart announced the move. Plans call for the updated Walmart app with grocery functionality to roll out in phases and for the Walmart Grocery app to be deactivated this summer, she said. Joining the two apps creates enhances the one-stop shopping experience at Walmart in the digital realm, according to Whiteside.
Kohl’s knows its women’s apparel business needs work. And it has a plan to try to fix it. “Our women’s business remained challenged throughout the year,” CEO Michelle Gass told analysts during a post earnings conference call on Tuesday. “We recognize that we need a much more significant reinvention in women’s to improve the trajectory moving forward.”
Target is adding fresh food staples and alcohol to same-day services at hundreds of its stores this year. That means along with paper towels and bags of chips, customers can pick up a gallon of milk, a bunch of bananas or a six-pack without getting out of the car. The Minneapolis-based retailer also plans to test convenience store-sized brick-and-mortar locations in some markets. Target announced the new offerings in a Tuesday earnings call. It will start testing fresh food pickup and drive up in the Twin Cities in late March and then add it to Texas and Florida stores. The company said it will expand the fresh food service to nearly half of its stores by the holiday season.
Emerging Consumer Companies
Brooklinen, the Brooklyn-based startup selling bedding and other home goods, announced that it has raised $50 million in new funding from Summit Partners. Founded in 2014, Brooklinen has been profitable for three of the last five years. It previously raised $10 million from FirstMark Capital in 2017. The company will use the funds to open new stores and expand internationally.
Rothy’s, the San Francisco-based company that made its mark with ballet flats, launched its first range of bags, which use fully recycled materials. The lineup includes five silhouettes, and range in cost from $65 for the mini Catchall to $350 for The Handbag. The bags are made with a mix of marine plastic — a new material for Rothy’s — and its signature upcycled plastic bottle knit. They are designed to be machine washable.
Super Heroic, the children’s apparel and footwear brand, has shut down. The Palo-Alto-based company was founded in 2016 and had raised $10 million, including $3 million from Foot Locker.
Grocery & Restaurants
Spindrift, maker of fizzy soda and sparkling water, has raised $29.8 million in a funding round, per an SEC filing. The Charlestown, Mass. company was founded by Bill Creelman and has raised $70 million in known venture capital funding to date, per Crunchbase data. Previous investors in the fizzy drink company include Almanac Insights, KarpReilly, Prolong Ventures, VMG Partners and more. Spindrift, founded in 2010, is up against big players, like the beloved and decades-old LaCroix, another sparkling water brand. Spindrift differentiates itself by emphasizing “real fruit” in its drinks.
Kroger beat fourth-quarter earnings and sales estimates amid rising demand for its growing assortment of private-label items. Sales increased to $28.9 billion from $28.3 billion last year and were in line with expectations. Digital sales were up 22%. Same-store store sales without fuel rose 2%. As part of its ongoing “Restock Kroger” program, the grocer has been increasing its selection of private-label products and enhancing its digital operations. Kroger’s “Our Brands” private label had its best year ever in 2019, exceeding $23.1 billion in sales. In remarks to analysts, Kroger chairman, and CEO Rodney McMullin said, from a financial standpoint, it is too early to tell the effect of the coronavirus on the chain’s business.
CraftWorks Holdings, the parent company of Logan’s Roadhouse, Rock Bottom Restaurant & Brewery and Gordon Biersch Brewery Restaurant, has filed for Chapter 11 bankruptcy protection and closed 37 underperforming restaurants. In a statement, the company said senior lenders Fortress Credit Co. will be a stalking horse bidder in an asset sale totaling at least $138 million plus the assumption of certain liabilities. A Fortress affiliate will also provide $23 million in financing to help ongoing operations during the Chapter 11 process. CraftWorks was formed in 2010 when affiliates of private-equity firm Centerbridge Capital Partners purchased Rock Bottom Restaurants Inc. and Gordon Biersch Brewery Restaurant Group Inc. In 2018, the company acquired casual-dining concept Logan’s Roadhouse. Craftworks and its franchisees operate 338 locations. Of those, 77 franchise locations will not be part of the asset sale.
Home & Road
The Inspired Home Show scheduled to take place in Chicago later this month has been canceled due to concerns over the coronavirus, the International Housewares Association announced. The show has been scheduled to take place March 14-17. The IHA said its board of directors and staff will work together over the next several weeks to measure the financial impact on the industry and the association. Once an analysis is complete, additional information regarding exhibitor refunds will be made available, it said.
Art Van Furniture will liquidate all Art Van, Art Van PureSleep and Scott Shuptrine stores and banners starting Friday, March 6, after a failed attempt to restructure and infuse new capital into the business. While eight Wolf Furniture stores in Maryland and Virginia also will be liquidated, former Levin President and owner Robert Levin has agreed to acquire the bulk of the Levin and Wolf Furniture operations in Pennsylvania and Ohio. A release from AVF Holdings said, “It made the difficult decision to wind down operations and begin liquidation sales at all of its company-owned stores in Michigan, Illinois, Indiana, Missouri and Ohio.” The release doesn’t mention a bankruptcy filing, although several sources noted one is coming, and the AHF release notes the Levin deal is “pending court approval.”
Jewelry & Luxury
As a result of Pandora’s new strategic reorganization, there will be some layoffs at its Baltimore headquarters, though some new jobs will be added, too, spokesperson Johan Melchior tells JCK. He declined to comment on how many jobs will be affected. On Tuesday, the Copenhagen, Denmark–based charm company announced a “strategic reorganization” that will divvy its 100 markets worldwide into 10 “clusters.” The reorganization will eliminate around 160 jobs.
Amazon isn’t a major player in fine jewelry, and we don’t see it stocking Irene Neuwirth and David Webb—or even more affordable sought-after brands such as Mejuri or AUrate—anytime soon. But its digital aisles are very much bulging with demi-fine and non-fine jewelry. Type the phrase “14k jewelry” into Amazon’s search bar, and a cornucopia of 14k gold pieces, mainly gold-plated styles, pop up from global manufacturers including Miabella, Pori Jewelers, and Lifetime Jewelry.
UNOde50 is in growth mode. The Madrid-based handcrafted silver jewelry brand tells JCK it plans to add four new branded stores to its portfolio of retail stores this year. The vertically integrated company will open stores in three major airports (Seattle-Tacoma; Charlotte, N.C.; and Salt Lake City) beginning in April. And in August it will bow its first Caribbean location—a stand-alone store in the Dominican Republic. UNOde50 currently operates 23 branded stores in the United States and Canada and saw 62% growth in gross operating results in 2019, says Jason McNary, CEO of the company’s
Office & Leisure
Some Papyrus stores will live to see another day. Paper Source announced that it has acquired 30 shuttered Papyrus locations, giving it a total of more than 165 stores nationwide. The greeting cards, stationery and gift retailer plans to rebrand the Papyrus stores, with the first wave of converted locations expected to open sometime in March. In January, Schurman Fine Papers, parent company of Papyrus, filed for Chapter 11 bankruptcy protection with plans to close all its 254 locations in the U.S. and Canada.
Since 2015, Paper Source has seen double-digit growth in card and gift categories, which the company credited largely due to its commitment to design and curation. Over 65% of the assortment is exclusive to Paper Source.
Lego has posted higher annual profits and announced plans to step up investment in shops and online with around 150 new outlets worldwide. The toy brand and retailer, which now has 570 stores globally, said it wanted to tap into a demand for more “immersive” experiences in stores. Having opened 150 shops in 2019, it is aiming to match this with another 150 in 2020, 80 of which will be across China as it focuses on expanding its footprint in the country to 220. Lego group chief executive Niels Christiansen said it was “too early” to say what the impact of coronavirus will be on the group. However, he stressed it “doesn’t change our strategy” or long-term investment plans. Results showed a three per cent rise in net profits to 8.3 billion Danish kroner (£970 million) on revenues six per cent higher at 38.5 billion Danish kroner (£4.5 billion).
The “force” is not with Baby Yoda toymaker Hasbro. The company has confirmed that supply shortages caused by the coronavirus outbreak will stymie production of its highly-anticipated Baby Yoda toys, some of which have already sold out in pre-order. Industry expert Jim Silver told CNN Business that Hasbro factories in China are still fully operational. But Silver, who spoke with sources inside these factories, warns consumers and shareholders that the worst is yet to come. “If things aren’t normal by the time June and July roll around, there will be shortages on a litany of toys,” said Silver, the CEO of toy review website TTPM.com. The threat of insufficient raw materials for the toys, namely resins and plastics available only in China, has become the most significant concern.
Last fall, during a visit to Barnes & Noble’s flagship store in New York City’s Union Square, the British bibliophile James Daunt strode about the ground floor in oxblood loafers deploring the bookshop’s hideous appearance. The carpets were dusty, and the escalators had broken down. Daunt has opened about 60 bookshops in his three-decade career, every one of them profitable, making him one of the Amazon era’s most successful booksellers. After founding Daunt Books, a popular, independent brand of stores in the U.K., he was credited with saving the country’s largest chain, Waterstones, from ruin by giving managers more agency over their inventory. Those credentials impressed Elliott Management Corp., a notorious $40 billion hedge fund better known for seizing an Argentine warship as collateral and berating corporate governance at Twitter Inc. and AT&T Inc. It acquired Barnes & Noble Inc. last year for $683 million including debt and appointed 56-year-old Daunt chief executive officer, the man in charge of its rescue.
Technology & Internet
Congress introduced a bill that would hold online marketplace operators, such as Amazon.com Inc., eBay Inc. and Walmart Inc., responsible for counterfeit products—particularly unsafe items—sold on their websites. A bipartisan group of four U.S. House of Representatives members co-sponsored the legislation— called the The Stopping Harmful Offers on Platforms by Screening Against Fakes in E-Commerce (or Shop Safe) Act—to stop online sales of counterfeit products. The group says counterfeit goods sold on online marketplaces is a growing problem because there is no law that adequately requires multi-merchant platforms to vet who is selling and what they’re selling on their sites. The bill outlines criteria the marketplace operators must follow when vetting third-party sellers on their sites.
A few years ago, Amazon.com Inc.’s quick delivery team debated doing something radical for the ecommerce giant: asking shoppers to consider the environment. The team building Amazon’s Prime Now same-day delivery service knew that the quickest delivery options tended to be the worst for the planet. A guaranteed one-hour delivery window sometimes meant sending couriers in mostly empty vehicles darting to far-flung neighborhoods, all the while emitting roughly the same greenhouse gas emissions as a fully loaded truck or van. Someone on the team proposed showing customers a “Green” shopping delivery option, a slightly slower delivery speed designed to give Amazon more time to cluster orders together and send out densely packed vehicles, saving on fuel, driver salaries and carbon emissions. The idea was one of at least two instances in recent years when Amazon teams debated telling customers more about the environmental impact of their shipping choices, according to two people familiar with the episodes. Neither was implemented, in part, because of the risk that shoppers would think twice before clicking “Buy Now,” the people say.
Etsy Inc. sold $4.97 billion worth of goods in 2019, up 26.5% from $3.93 billion in 2018. That total includes sales on Etsy.com, its online marketplace for handcrafted goods, and its marketplace Reverb.com, a platform for music gear and instruments. Not counting sales from Reverb, Etsy’s marketplace grew approximately 19.6% to $4.7 billion in 2019, according to the company’s year-end earnings release. Etsy purchased Reverb in July for $275 million. Etsy pointed to a strong holiday season and free shipping initiatives as key drivers for growth in 2019.
Finance & Economy
Nonfarm payrolls grew far more than expected in February as companies continued to hire leading into a growing coronavirus scare. The Labor Department reported that the U.S. economy added 273,000 new jobs during the month, while the unemployment rate was 3.5%, matching its lowest level in more than 50 years. An alternative measure of joblessness that counts those not looking for work and holding part-time jobs for economic reasons edged higher to 7%.
Manufacturing activity in the U.S. grew at a slower-than-expected pace last month as the coronavirus outbreak dampened sentiment in the sector, data from the Institute for Supply Management showed. The slow growth in U.S. manufacturing last month coincided with the coronavirus spreading throughout China and the rest of the world, denting expectations over global economic growth and corporate profits.