As the pace and gravity of COVID-19 headlines markedly increased last week, it became clear that a number of spheres of public life in this country will be impacted in the next several weeks, and potentially longer. Daily life has begun to change in healthcare, travel, education, commerce, hospitality, entertainment, and more. Here at Consensus, first and foremost, our thoughts are with anyone who has become sick or been forced to quarantine, healthcare workers, and those with underlying health issues. But as Consumer industry specialists, we can’t help but to also think about how things will change for businesses in the sector. Some segments are clearly experiencing a surge in demand, such as grocery and personal healthcare products, while others are seeing customers evaporate, such as restaurants and airlines. A number of headlines last week left us incrementally more concerned about one segment of Consumer Discretionary in particular: sporting goods.
Much of what sporting goods brands and retailers offer falls into two buckets, both of which are likely to be negatively impacted in the coming weeks and months. The first is sports equipment. As schools and youth leagues across the country suspend or cancel athletic activities, the sports equipment category is likely to suffer. Any cancellations will clearly reduce the need for equipment. If not cancelled, seasons that are shortened will likely also reduce demand (at least marginally due to less wear and tear), and compress the selling season for impacted sports, which could force retailers into margin-killing promotions and clearance.
The second bucket of products likely to be impacted is fan gear. With collegiate and professional sports leagues suspending play across the NBA, NCAA, NHL, MLB, PGA, MLS, ATP, NASCAR, and XFL, and a potential cancelation of the Olympics looming, sports fans will have fewer prompts and less need to purchase merchandise repping their favorite team. Some of this disrupted demand will likely be recouped when the leagues resume activity, but some will be lost permanently.
These headwinds to demand will be felt across the sporting goods industry (so will supply chain concerns, as significant amounts of sporting goods are sourced from China). But demand issues will likely be most acute in brick and mortar retail. While quarantines and voluntary social distancing may prompt some people to pass the time at home by shopping online, physical retail is likely to suffer from drastically reduced foot traffic.
Wall Street seems to agree with this gloomy scenario. On Tuesday, March 10th, Dick’s Sporting Goods reported fourth quarter results that solidly beat analysts’ estimates. Further, management stated on the earnings conference call that first quarter sales were off to a good start, and that the company was seeing no impact to sales from COVID-19, even in the Pacific Northwest. Shares of Dick’s (DKS) surged 12.2% in premarket trading. However, momentum waned over the day, as headlines and speculation about sports cancelations and suspensions mounted. By Wednesday’s market close, the stock was down 20.0% from its Tuesday open. With the cascade of announcements that began on Wednesday with the suspension of the NBA and culminated with the cancelation of the NCAA men’s basketball tournament on Thursday afternoon, the stock dropped another 11.6% on Thursday. It fell slightly more on Friday, despite a broader market rally. In total, from Tuesday morning to Friday afternoon, Dick’s share price fell 29.5%. This compares to a 3.6% drop for the S&P 500 over the same time span.
To end on an optimistic note, however, sporting goods could see an explosion in demand once sports return. If there comes a day when it is deemed that the coast is clear and all sports can come back, especially if that happens all or almost all at once in a simultaneous multisport (Re)Opening Day, the feeling could be jubilant and triumphant. That day may be a long and painful way off right now, but when it comes, many sports-fan consumers may decide to declare victory by spending money. Here’s hoping we hear the words “Play ball” sooner than later.
Headlines of the Week
The Federal Reserve, saying “the coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States,” cut interest rates to essentially zero on Sunday and launched a massive $700 billion quantitative easing program to shelter the economy from the effects of the virus. The new fed funds rate, used as a benchmark both for short-term lending for financial institutions and as a peg to many consumer rates, will now be targeted at 0% to 0.25% down from a previous target range of 1% to 1.25%. Facing highly disrupted financial markets, the Fed also slashed the rate of emergency lending at the discount window for banks by 125 basis points to 0.25%, and lengthened the term of loans to 90 days.
Apparel & Footwear
French Connection has reported a £2.9 million loss for the year ending January 31, and has remained uncertain about the current market condition due to the onslaught of the coronavirus outbreak. Group revenues dropped 11.4 per cent to £119.9 million, with the retailer noting that store closures had accelerated this. It also closed its China and Hong Kong joint venture for the loss of £500,000. Meanwhile, wholesale revenue in the UK dropped 4.8 per cent, though its US wholesale division saw sales rise by 15.7 per cent.
In October 2018, French Connection announced it was considering selling the company, but earlier this year, the retailer said it was no longer searching for a buyer – effectively taking it off the market.
The chief executive of HanesBrands is retiring. The basic apparel and intimates giant announced that Gerald W. Evans Jr. plans to retire at the end of its current fiscal year, which ends Jan. 2, 2021. The company, whose brands include Champion, Hanes, Maidenform, Bali, Playtex and more, has begun a search process for his successor with the assistance of executive search firm Russell Reynolds Associates. Evans, 60, joined Hanes in 1983 and was appointed CEO in 2016. Under his leadership, the company’s annual revenue has grown to nearly $7 billion. In other news, HanesBrands announced an agreement with Amazon to make its value-priced C9 by Champion line an Amazon exclusive. It is the first time that C9 will be available globally.
Tapestry said Monday Jide Zeitlin, its chairman and CEO, has agreed to stay with the luxury goods retailer over the next three years to work on its plans to restore growth. Joshua Schulman, the CEO and brand president of Coach, will leave the company after a transition period. Zeitlin, a former executive at Goldman Sachs, took over Tapestry last year. He will oversee the Coach brand until a replacement for Schulman is named. Zeitlin said he sees an opportunity to boost growth at Coach, Kate Spade and Stuart Weitzman by leveraging each brand’s “differentiated positioning and strong consumer connections.”
L Brands, the owner of Victoria’s Secret, has picked a woman to lead its board as the company seeks to move past allegations of misconduct and a misogynistic culture. Sarah Nash, currently the CEO and chairwoman of Cleveland-based Novagard Solutions, will take over for founder Leslie H. Wexner, the retailer said Thursday. Wexner announced he was giving up the seat last month after New York private equity firm Sycamore Partners bought a 55% stake in the lingerie company from L Brands for $525 million. Nash joined the Columbus-based retailer’s board in 2019, the same year the company was hit by scandals and a deepening sales slump that has taken a bite out of its shares. She will take over for Wexner when the sale closes, which should be this spring.
Athletic & Sporting Goods
Sporting goods retailer Modell’s Sporting Goods filed for Chapter 11 protection in the U.S. bankruptcy court in New Jersey, citing a challenging retail environment. The company, which has liquidated 19 stores in partnership with financial services firm Tiger Capital Group, said it will start closure sales at its remaining stores. The privately owned Modell’s, which calls itself the oldest U.S. family owned and operated sporting goods retailer, said it will also continue to explore recapitalization through a potential sale of some or all its assets.
Baton Rouge baseball bat manufacturer Marucci Sports is being acquired for $200 million by a Connecticut-based investment fund with a goal of penetrating new markets and increasing the brand’s presence internationally. Marucci has 230 employees and its headquarters are expected to remain in the Baton Rouge. Marucci Sports, founded in 2004, has grown to about $15 million in annual adjusted earnings in December 2019, before interest, taxes, depreciation and amortization, a common business metric.
Dick’s Sporting Goods will stop selling guns at 440 additional stores this year, escalating the company’s methodical elimination of firearms from its stores. The move follows a series of decisions at Dick’s to scale back gun sales. A few days after the Parkland, Florida, school shooting in February 2018, the company announced it would stop selling semi-automatic weapons like the one used in the event. A few months later, Dick’s pulled firearms and hunting accessories from 10 stores as a test. That went well: Overall sales increased at those stores. The company then pulled guns and ammunition from 125 additional stores in March 2019. Now Dick’s plans to nearly quadruple the number of stores without guns, the company announced during its fourth-quarter earnings report Tuesday.
Cosmetics & Pharmacy
Henkel AG, the German shampoo maker, and buyout firm KKR & Co. are among a small group of suitors proceeding to the second round of bidding for Coty Inc.’s professional hair and nail products business, people familiar with the matter said. Advent International and a separate consortium of Cinven and the Abu Dhabi Investment Authority weren’t chosen to advance to the next round after they submitted initial offers last week, the people said. Private equity firms Bain Capital and Clayton Dubilier & Rice dropped out of the race, according to the people, who asked not to be identified as the information is private. Some suitors have made bids for just the Good Hair Day business or Coty’s Brazilian operations, the people said. The entire unit, which owns brands including Wella and Clairol, could fetch $7 billion to $8 billion, Bloomberg News has reported.
Ulta Beauty reported fourth-quarter earnings that easily beat analysts’ expectations. The beauty giant will open approximately 75 net stores this year. It also plans to complete approximately 42 store refreshes. Ulta’s net income increased 3.7% to $222.7 million in the period ended Feb.1, compared to $214.7 in the year-ago period. Earnings per share increased 7.8% to $3.89, which included a $0.06 per share benefit due to an increase in federal income tax credits. Analysts were expecting earnings per share of $3.72. Net sales increased 8.5% to $2.30 billion, missing analysts’ estimates of $2.32 billion. Same-store sales increased 4.0%, driven by 1.8% transaction growth and 2.2% growth in average ticket.
Revlon Inc. has gotten a lifeline — but it’s coming with a cost. The business has found a way to restructure short-term debt, and in 2020, is implementing a restructuring plan that includes layoffs. Revlon said 60 percent of the $200 million to $230 million that it hopes to save by the end of 2022 will be coming through headcount reductions in 2020. The overall plan is meant to “build a stronger global business operation,” improve cost efficiencies, improve operating margins and grow income and profitability, the company said in a statement. On the company’s earnings call Tuesday, chief executive officer Debbie Perelman called the plan “two important steps forward.” Revlon’s new chief operating officer Sergio Pedreiro called it “right sizing the organization.” Revlon’s 2019 restructuring program allowed the company to save $95 million. In 2020, the company expects between $105 million and $155 million in cost reductions, and between $55 million and $65 million in restructuring charges, including severance payments.
Schnucks is getting out of the pharmacy business via a new deal with CVS Health. CVS Pharmacy will be acquiring 110 pharmacies from Schnucks, rebranding and operating 99 of them as CVS Pharmacy within Schnucks stores. The remaining 11 pharmacies will see their prescription files transferred to nearby CVS Pharmacy locations. CVS Pharmacy is no stranger to operating its pharmacies within another retailer’s box. Notably, the Woonsocket, R.I.-based pharmacy arm of CVS Health owns and operates all of the pharmacies within Target’s stores. CVS Pharmacy and Schnucks positioned the deal as a strategic move to bring together the established Midwestern grocer and CVS Pharmacy’s pharmacy services and clinical expertise. CVS Health noted that the deal also offers the company a capital-efficient expansion into key markets.
Discounters & Department Stores
Here in the U.S., as coronavirus continues its spread, people have been panic buying supplies like toilet paper and hand sanitizer, and stores like Target know that as a frightened public rushes to get supplies, the danger of community spread grows more real. Target CEO Brian Cornell just issued a press release detailing how Target stores are helping slow the virus’s spread, and the measures they’re taking are extensive.
Walmart has created a “COVID-19 emergency leave policy” in response to the novel coronavirus, according to a March 10 email the company sent to its U.S. associates and shared with sister publication HR Dive. Effective immediately, Walmart associates can take this leave under certain circumstances. If workers think they are “unable to work or are uncomfortable at work,” they may stay home. Walmart will waive its attendance policy through the end of April. To be paid for this time, workers will need to use paid time off options. If a Walmart facility or associate undergoes quarantine, the store will pay out two weeks of pay and waive the absences during that time.
Neiman Marcus on Wednesday announced a new strategy focused on “growing its luxury customer base and driving full-price selling,” that includes closing most of its Last Call off-price stores by the first quarter of its fiscal year 2021. Some Last Call stores will remain open in order to sell residual Neiman Marcus inventory, per a company press release.
Kohl’s on Friday issued an update on its latest demand trends as the coronavirus pandemic changes people’s shopping behavior. In a filing with the U.S. Securities and Exchange Commission, the department store chain noted weaker sales in a few key markets, but said it is seeing no impact to date on its e-commerce channel. As part of an announcement that it was postponing its investor conference, originally scheduled for March 16, Kohl’s management revealed details about its sales pace over the last week or so. Demand is softening in the areas most affected by the virus, executives said, but the COVID-19 pandemic has thus far had no impact on digital demand.
Emerging Consumer Companies
On March 13th, Neighborhood Goods was set to open a 10,600-square-foot department store on Austin’s popular South Congress Avenue, the company’s third location. Its neighbors will include sweetgreen, Everlane, Reformation, Equinox, and Texas’ first ever Soho House. It intends to open a restaurant on-site, Prim and Proper, which will open at a later date.
Arfa, a new consumer goods company founded by the former president and chief operating officer of Glossier, is set to launch its first brand this month after operating in stealth mode for the past year. The company develops personal care brands based on close relationships with the people who use them. It intends to give 5% of profits to people who support and promote Arfa’s products to an entity called The Collective. The hope is that The Collective generates awareness and helps to keep customer acquisition costs down.
SoulCycle released details about its at-home bike, with on-demand cycling classes that users can stream through a monthly content subscription via a digital platform called Variis. The bike will come with a 21.5-inch full HD screen, has a footprint slightly larger than the Peloton bike, and weighs about seven pounds more. The SoulCycle bike costs $2,500 and includes a five-class pack to use in studio.
Grocery & Restaurants
Boise, Idaho-based Albertsons, the nation’s second-largest supermarket chain with more than 2,200 stores, has filed for an initial public offering. The company has been owned for the past 14 years by private equity firm Cerberus Capital Management. After Albertsons’ 2015 merger with Safeway, investors tried to take the company public, looking to raise as much as $1.6 billion in an IPO, but then pulled the offering amid lackluster market conditions for retail stocks in late 2015. In 2018, the company attempted to go public with a $24 billion merger deal with Rite Aid Corp., which fell apart due to investor pushback in August 2018.
PepsiCo, Inc. plans to acquire Rockstar Energy Beverages for $3.85 billion. The addition of the Rockstar brand will add to PepsiCo’s line of energy beverages, which include the Mountain Dew Kickstart, GameFuel and Amp brands. PepsiCo has had a distribution agreement with Rockstar since 2009. The energy beverage company’s products are available in more than 30 flavors and sold in 30 countries. The transaction is subject to customary closing conditions and expected to close in the first half of 2020.
Foods United, a subsidiary of Swiss investment company Blue Horizon, is changing its name to The Livekindly Co. (TLKC) following its acquisition of plant-based consumer platform Livekindly Media. The media platform joins a portfolio of plant-based startup brands, including LikeMeat and The Fry Family Food Co. TLKC also announced a $200 million founder-led funding round. Funds will go toward further acquisitions with the goal of establishing a collective of both heritage and startups brands, the company said. It also will focus on scaling its current plant-based portfolio.
Home & Road
Following its announcement that it will liquidate all Art Van, Art Van PureSleep and Scott Shuptrine stores, Art Van Furniture LLC filed its anticipated Chapter 11 bankruptcy. The filing in United States Bankruptcy Court for the District of Delaware estimates the retailer has between $100 million and $500 million in assets and a commensurate level of debt. The filing also estimates there are more than 50,000 creditors. It was immediately unclear how many of the creditors include customers that have paid deposits for furniture. Late last week, Furniture Today reported that customers were told they couldn’t get merchandise they had ordered or an immediate refund on deposits.
Purple Innovation, a comfort technology company in the bedding industry, posted a fiscal net revenue gain of $124.3 million for the fourth quarter ending on Dec. 31, 2019, which is a 58.3% increase over the $78.5 million revenue gain in the prior-year fourth quarter. The company reported a net loss of $12.7 million compared with a net loss of $5.4 million in the fourth quarter of 2018. The fourth quarter included a $13.4 million non-cash loss associated with the change in fair value of warrant liabilities. Purple’s operating income was $2.8 million for the current quarter compared with an operating loss of $5.2 million for the prior-year fourth quarter. Adjusted operating income was $3.9 million compared with an adjusted operating loss of negative $4.3 million in the fourth quarter of 2018.
Jewelry & Luxury
Federico Marchetti, the chairman and CEO of luxury e-tailer Yoox Net-a-Porter, said he plans to step away from the CEO role next year and the company will look for a successor. “As planned, we are in the early stages of implementing a succession plan for the next CEO of Yoox Net-a-Porter, with me staying on as chairman to ensure a smooth transition and set the new CEO up for success,” he said in a statement.
In 2015, TAG Heuer debuted what was considered the first-ever luxury smartwatch, the TAG Heuer Connected. Just months after its release, in January 2016, I sat down with Guy Semon, now chief of the research institute for the watch division of LVMH, who told me the brand’s foray into smartwatches was a must: “In the next few years, [wearables] will be one of the best pillars in our industry,” he predicted. “We have to go there.”
The 2010s saw China move assertively to the center of the world stage, while Chinese consumers overtook Japan as the largest market for luxury goods in 2012. As we enter a new decade, China either leads or is close to leading sectors from outbound travel to beauty, to fashion to luxury cars. Yet this new dawn of national pride, optimism and the Chinese economic juggernaut has been sharply jolted by the social impact of the coronavirus. The business battleground for brands was already a minefield – the rewards are huge for winning in China, but the pathway there needs a deft understanding of a unique culture, social media landscape and sociopolitical viewpoints.
Last year, Burberry dressed more than 250 unemployed women — some homeless, others fresh out of prison, others simply having difficulty finding work — for job interviews that could change their fortune. But this isn’t simply a charity case. The British brand donated these wares to Smart Works, an organization that supplies free clothes for interviews, not only because it was a nice addition to its corporate responsibility agenda, but because it has to find new ways to offload unsold stock, once destined for the incinerator.
Office & Leisure
The parent company of Fingerhut, and several other brands, has filed for bankruptcy protection. Bluestem Brands, Inc., as well as all of its subsidiaries and affiliates, filed for Chapter 11 with a reported $733 million in liabilities. The retailer has secured a stalking horse bidder to acquire the company as well as $125 million in debtor-in-possession financing from a series of lenders to allow the company to continue operations under the restructuring process. Bluestem said it intends to use the reorganization process to implement “a value-maximizing transaction.” The company is looking to deleverage its balance sheet as it looks for long-term success. The company said it expects to continue servicing its customers through its e-commerce sites and catalogs and does not anticipate any interruption at its call centers and distribution centers as it continues normal business operations.
Party City is shuffling its c-suite, with CEO Jim Harrison transitioning to vice chairman, effective April 1. Brad Weston, currently the CEO of Party City’s retail unit and president of the Party City Holdings umbrella company, is set to take over the Party City CEO spot from Harrison. The executive transition follows a fourth quarter in which revenue decreased 9.2% year over year to $731.6 million and retail sales decreased 12.4% due to store closures, the sale of its Canadian retail business and poor Halloween sales. Sales for the full the fiscal year were down 3.2%. During 2019, Party City closed 35 stores, and has closed another 20 stores since the end of the fiscal year, according to the company.
Four longtime board members at GameStop, including co-founder and executive chairman Dan DeMatteo, are leaving the video game retailer’s board. GameStop also said Monday that three people with extensive retailing experience are joining the board, including longtime former president of Nintendo of America Reginald Fils-Aimé. Two of the new board members have experience with private equity, an interesting choice after the board decided that GameStop was no longer for sale. It considered such a move a year ago. The new board members are: Bill Simon, a former CEO at Walmart U.S., who has been with private equity firm KKR & Co. as a senior adviser since 2014; James Symancyk, who has been CEO at PetSmart since 2018 and before that was CEO at Academy Sports & Outdoors. Both of those companies are owned by private equity firms; and Fils-Aimé.
Samsonite entered 2020 with a lot of baggage. The world’s largest maker of branded luggage had loaded up on debt, partly to afford its $1.8 billion acquisition of Tumi in 2016. But reduced global growth this year may lead to lower earnings and more difficulty in servicing that debt. S&P Global earlier in March lowered its outlook on the company into so-called junk territory. The ratings service put the Massachusetts-based, Hong Kong-listed group on “CreditWatch with negative implications.” Samsonite’s debt was roughly three times its revenue, as of its September 30, 2019, financial report. That debt load provided the company “with a limited cushion to absorb any potential performance declines stemming from the virus’ spread,” S&P Global said.
Technology & Internet
The virus causing the coronavirus disease 2019—called COVID-19—continues to spread across the globe, and online retailers are wondering, “How will the coronavirus affect my online business?” Many retailers are having online sales spikes in flu-related products, such as cleaning supplies and health products. However, the long-term impact for the coronavirus is not yet known, and many retailers are lowering their sales forecasts for the year. Retailers that manufacture or supply their goods from China are unsure of how this will impact their supply chain, or how this will impact demand for their products. Digital Commerce 360 has conducted a survey in March 2020 of 304 retailers.
Amazon is telling all of its employees globally to stay home through the month of March, as the COVID-19 coronavirus spreads. “We continue to work closely with public and private medical experts to ensure we are taking the right precautions as the situation continues to evolve,” an Amazon spokesperson told CNBC in a statement. “As a result, we are now recommending that all of our employees globally who are able to work from home do so through the end of March.”
A coalition of unions representing 5.3 million workers is pushing the Federal Trade Commission (FTC) to investigate Amazon for anti-competitive business practices. The 28-page petition, filed Thursday, asks the FTC to look into Amazon’s “immense and growing influence” in the economy. The unions laid out a number of issues they think the FTC should examine, including whether Amazon “depresses wages” in markets where it’s a major employer, whether the company favors products on its site that pay for Amazon services and whether Amazon abuses its dominance in cloud computing, by serving as both a “retailer of software and as platform.”
Finance & Economy
U.S. producer prices fell by the most in five years in February, pulled down by declines in the costs of goods such as gasoline and services. The report came on the heels of data showing a surprise rise in consumer prices in February and steady increase in underlying inflation. But the signs of some inflation in the economy are likely short-lived as the coronavirus pandemic suppresses demand for services like transportation, hotel accommodation, entertainment and recreation.