The Big Story

Fast Approaching: The Trade War’s Climax

Consensus

Last week, the Chinese Communist Party celebrated the 70th anniversary of Mao Zedong’s revolution forming the People’s Republic of China. In an accompanying “gesture of goodwill,” President Donald Trump last month delayed new tariffs scheduled to go into effect during the Chinese festivities by two weeks until October 15th.

The thirteenth set of talks during the ongoing trade war is slated for this week, with China’s delegation headed by Vice Premier and lead negotiator Liu He scheduled to meet with U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin in Washington, D.C. While everyone hopes that a resolution can be reached, neither side has shown signs of backing down from the positions that have yielded a dozen previous futile sessions. Accordingly, we must prepare for the trade war to continue and for the pending tariffs announced by Washington to become fully implemented.

The world’s two largest economies have been locked in this trade war for more than a year. Each side has applied tariffs on billions of dollars’ worth of imports from the other country. Until now, the impacts of these tariffs largely have been buried in the vast supply chains underlying industrial and agricultural production, without a direct connection to consumer pricing and families’ pocketbooks. Going forward, the next wave of tariffs proposed by the U.S. will hit consumer goods. The Trump administration strategically backloaded the pain for consumers, but such cherry-picking is no longer possible now that the U.S. plans to tax almost all imports from China. Every family is sensitive to prices for cell phones, laptop computers, video game consoles, toys, footwear and clothing.

It’s an economic fact that pressure from the trade war is being felt in the U.S. economy – the tens of billions of dollars collected by U.S. Customs and Border Protection are not being singularly borne by Chinese factories through equal price reduction offsets. There is a GDP drag, lower corporate profitability, inflation, lost jobs, suppressed wages and higher interest rates. The magnitude or significance of these impacts to the U.S., and whether the hit to the Chinese economy is less bearable to them, is debatable.

It’s also a political fact that pressure from the trade war will increase dramatically if the tariffs on consumer products kick in on December 15th. No longer obscured in raw materials, component parts or industrial goods, consumers will associate price increases they experience with the new 15% tariff. This is exactly why the December 15th date was selected. Originally proposed to go into effect on September 1st, the Trump administration delayed the effective date until after products for holiday shopping already would have passed through customs and be on store shelves.  President Trump explained, “We’re doing this for the Christmas season. Just in case some of the tariffs would have an impact on U.S. customers…so that they won’t be relevant to the Christmas shopping season.”

All this means that the end game on the trade war is quickly approaching. Despite Senator Lindsey Graham’s advice to “just…accept the pain” of the trade war, the economic and political costs will soon escalate beyond what the public will see as a necessary means to an end. We do not yet know what the settlement will look like, but expect “it” to be reached in the days just before or after December 15th – before the riskiest part of the trade war is reached or the most onerous tariffs given enough time to migrate from the Ports of Los Angeles and Long Beach to U.S. consumer pocketbooks. We should also expect that both sides will declare it a victory – they always do.

 

Headlines of the Week

ModCloth to be Acquired by Go GlobalRetail

Walmart is selling ModCloth to Go Global Retail. The terms of the deal, expected to close later this year, were not announced. The discount giant acquired ModCloth in March 2017 as part of a move to increase its brand portfolio and target younger, higher-income shoppers with brands not available on Amazon. But ModCloth, along with several other of the acquired brands, including Bonobos, have yet to turn a profit, according to Recode. Founded in 2002, ModCloth sells exclusive indie fashions and its own vintage-inspired line of apparel and accessories, with a target audience of women 18 to 35. Go Global Retail describes itself has a brand investment platform for strategic investors in the consumer sector. It has worked with other apparel companies including Guess and Billabong, according to its website.

 

Barneys finds $220 million bidder in bankruptcy court

A potential buyer is preparing a bid to take control of bankrupt luxury department store Barneys New York and help it stave off liquidation, the Wall Street Journal reported on October 3rd. A group of fashion executives, led by Sam Ben-Avraham, is preparing a bid of about $220 million, the Journal wrote, citing people familiar with the situation. At a bankruptcy hearing on October 3rd, Barneys’ lawyer said it was in negotiations with a buyer, and a judge extended the deadline for bids until Oct. 11 at a bankruptcy hearing, the Wall Street Journal reported. The bid would be subject to approval by the court.

 

 

Apparel & Footwear

Moody’s splashes cold water on Madewell IPO

Moody’s Investors Service analysts last week threw some cold water on J. Crew Group’s plans to separate its Madewell unit and take it public, saying, among other things, that the company may be overestimating Madewell’s value. While J. Crew pegs Madewell’s enterprise value at between $1.9 billion and $2.9 billion, Moody’s puts it at closer to $1.2 billion to $1.9 billion. The move also depends on the company and a group of its lenders agreeing on a debt restructuring plan, which Moody’s noted remains uncertain. Plus, “if the ultimate transaction is similar to the outlined offers, we would likely view it as a distressed exchange.” The analysts also expressed doubt about Madewell’s and J. Crew’s growth potential, which both would be crucial to the deal. While Madewell is in growth mode, it’s “lower than high growth peers like Lululemon and Canada Goose” and “its brand recognition is significantly lower than that of the selected high growth peers,” they said.

Karen Millen and Coast close their doors for the final time

A POPULAR clothes shop has closed for good after it was bought by an online retailer. Women’s clothing firm Karen Millen shut all of its stores for the final time on Monday, including its shop in Nile Street, Brighton. The firm was bought out by online clothes company Boohoo, which announced it would close all of the retailer’s stores as it transitioned to an online-only service. Fellow women’s retailer Coast has also closed all of its physical shops after being bought out by Boohoo. Both brands have now been relaunched as online-only retailers.

 

Athletic & Sporting Goods

Sportsman’s Warehouse to Acquire 8 Field & Stream Stores

Sportsman’s Warehouse Holdings, Inc. announced that it has entered into agreements with DICK’S Sporting Goods, Inc. to acquire 8 Field & Stream locations. The acquired stores will be operated as Sportsman’s Warehouse stores and are located in Pennsylvania (3), New York (2), North Carolina (2) and Michigan (1). The total purchase price of $28 million for inventory and assets will be funded through borrowings under Sportsman’s revolving credit facility. Sportsman’s will sublease the eight locations from DICK’S.  The transaction is expected to close on October 11, 2019 subject to customary closing conditions.

Kathmandu Acquires Surf Brand Rip Curl

New Zealand-based retailer Kathmandu Holdings Ltd. announced it will acquire Rip Curl for $236 million.  Rip Curl is an iconic global surf brand and action sports company. Surfer friends Brian Singer and Douglas Warbrick founded the company in 1969. Since then, it has grown into a massive lifestyle company.  It manufactures everything from wetsuits and surf shorts to watches and rompers. Rip Curl sells products across wholesale, retail, and online channels. The brand has a presence in Australia, New Zealand, North America, Europe, Southeast Asia, and Brazil.

TRX Acquires XD

TRX, the developer of functional training equipment and training content, has significantly expanded its product line and product development capabilities with the acquisition of XD, a leader in Kevlar-based fitness equipment manufacturing.  XD’s Kevlar-based line comes equipped with medicine balls, sandbags, sand discs, and battle ropes, among other products.  With a stable of nearly 300 individual functional training tools and fitness accessories, XD boasts the exclusive global license for DuPont Kevlar bringing the strength and durability of a military-grade material to TRX’s already robust line of functional training tools.

Cosmetics & Pharmacy

Shiseido, Estée Lauder Said Among Finalists in Drunk Elephant M&A Process

The Drunk Elephant sale process may be nearing an end, according to industry sources. According to multiple sources, final bids for the skin-care brand came in toward the end of September. Shiseido and the Estée Lauder Cos. Inc. are both said to still be involved in the process. The Drunk Elephant M&A process has been a favorite conversation topic on the beauty scene, with people throughout the industry speculating about who will pay up for the indie skin-care brand, which is expected to fetch close to $1 billion if it goes through with a sale. Drunk Elephant was said to have nearly $100 million in net sales for 2018. Drunk Elephant is one of the brands that propelled the concept of “clean skin care” into consumer lexicon

Modern Acupuncture Receives Minority Investment Led by Strand Equity

Modern Acupuncture, a Scottsdale, AZ-based company making acupuncture available, received a minority investment from Strand Equity. In addition to Strand Equity, Modern Acupuncture has assembled a group of value-added shareholders, including acclaimed acupuncturist Bob Doane, World Health Organization delegate Marilyn Allen, branding expert Scott Goodson, health and wellness entrepreneur Charles Anderson MD, entrepreneur Cole Zucker and actress Cameron Diaz. The amount of the deal was not disclosed. The company intends to use the funds to continue to expand its business reach. Founded in 2016 By Matt Hale, CEO, Modern Acupuncture offers affordable memberships that encourage patients to include acupuncture in their regular health, beauty and wellness routines.

The Beauty Chef Raises $10 Million, as Ingestible Beauty Takes Hold

The Beauty Chef has raised $10 million from Point King Capital, in a deal that underscores growing investor interest in the wellness space. The Beauty Chef makes products such as Glow Inner Beauty Powder, $65; Antioxidant Inner Beauty Boost, $42; Gut Primer Inner Beauty Support, $69, and Probiotic Skin Refiner, $69. The brand’s products are sold online, as well as through Sephora, Goop, Net-a-porter, Selfridges and Space NK.

 

Discounters & Department Stores

Walmart to test ideas aimed at reducing unnecessary health care spending

As part of an effort to curb health care spending, Walmart is testing new health-focused programs in select markets for its existing medical plan. The goal of the retailer’s new pilot programs is to enhance local care to avoid potentially unnecessary treatments and visits. Beginning in 2020, the nation’s biggest private employer will run pilots in select markets along with its existing medical plan, to see if they can scale across the entire company. Walmart hosts more than 1 million associates and family members on its medical plans. The idea is to test whether these new programs — called Featured Providers, Expanded Telehealth, Personal Healthcare Assistant, National Quality Provider Resource, and Nationwide Fitness Club Access — can help prevent users from running up unnecessary or avoidable costs, according to Walmart.

Costco quarterly sales miss estimates amid fierce competition

Costco Wholesale Corp reported quarterly revenue below Wall Street estimates on Thursday, as the U.S. hypermarket chain struggled to attract shoppers in the competitive grocery space. Costco is slashing prices while investing heavily in stores and online operations to defend their share of the market as Amazon.com Inc and Walmart expand aggressively. The membership-only retailer is expanding internationally, opening its first warehouse in China about two months ago, where overcrowding and traffic jams in the neighborhood forced the retailer to limit the number of shoppers in the store.

 

 

Emerging Consumer Companies

Ursa Major Raises Growth Equity Round Led by Fenwick Brands

Fenwick Brands, a private equity fund focused on providing capital and strategic guidance to emerging brands, has led a $5 million growth financing round for Ursa Major, a pioneer brand in the clean skincare market. Other investors in the financing include Finn Capital Partners and several family offices active in the personal care market. This is the Company’s first round of institutional capital. Founded by Emily Doyle and Oliver Sweatman in 2010, Vermont-based Ursa Major has attracted a loyal following of consumers across the gender spectrum with its clean, refreshing skincare products which are designed to be “low maintenance, but highly rewarding.” The Company, which has grown average annual revenue by more than 60% year-over-year for each of the past five years, has found success by focusing on “super natural” skincare essentials.

 

Vice Media acquires Refinery29

Vice Media, the notoriously provocative company that has courted controversy for its approach to the news, has acquired the women-focused digital media company Refinery29. According to the sources, the deal will value Refinery29 at less than $500 million, but the exact dollar amount is unknown. The deal not only expands Vice Media’s overall audience size but adds more female-focused content to its roster.

Rent the Runway to temporarily stop taking on new customers

Rent the Runway has stopped accepting new customers in the wake of an operations breakdown that resulted in canceled orders and a customer service breakdown. Then company cited “unforeseen issues associated with a significant software transformation that we are executing” in the company’s New Jersey warehouse. It has temporarily stopped accepting new subscribers and will not accept any new event-rental orders that need to be delivered before October 15th.

 

 

Grocery & Restaurants

Nestle invests in food allergy prevention business

Nestle Health Science, a business unit of Nestle S.A., has taken a minority stake in Before Brands, San Francisco, a manufacturer of products sold under the SpoonfulOne brand and designed to prevent food allergies. Terms of the investment were not disclosed. As part of the agreement, Nestle Health Science has acquired the licensing rights to Before Brands’ products outside the United States. Nestle also has an option to purchase all remaining equity in Before Brands in the future.

 

WKS buys 94 Denny’s restaurants from QK Holdings

Multi-concept franchisee WKS Restaurant Group has purchased 94 Denny’s locations and two support centers, making it the largest franchisee of the Spartanburg, S.C.-based family-dining chain, the franchisee announced Monday. WKS bought the properties from their previous owner, QK Holdings, LLC, which until the deal had been Denny’s largest franchisee. Terms of the purchase were not disclosed, but it gives WKS a total of 127 Denny’s restaurants across 10 states. WKS also franchises restaurants under the El Pollo Loco, Wendy’s, Krispy Kreme Doughnuts, Blaze Fist Fire’d Pizza and Corner Bakery Café brands.

 

MAD Greens and Snappy Salads merge

Fast-casual salad chains MAD Greens and Snappy Salads have merged, the two companies announced Tuesday. Terms of the deal were not disclosed, but the management of the new company, called Salad Collective, is led by MAD Greens executives Darden Coors and John Montgomery, who are CEO and president, respectively, of the new entity. Denver-based MAD Greens was founded in 2004 and operates 33 restaurants in Colo. and Ariz., as well as in the Austin, Texas, area. Snappy Salads, founded in 2006, has 14 units in the Dallas/Fort Worth Area. Both will retain their brand identities.

 

Dave’s Hot Chicken wins major investment to launch franchising

The original investor group behind Blaze Pizza has taken a partnership stake in the Dave’s Hot Chicken concept in Los Angeles with plans to franchise the brand across the country, the company said Thursday. Under the deal, the investor group has taken a 50% stake in the fast-casual brand, which was founded initially as a pop-up in a parking lot in 2017. The original founders retain 50% ownership and also will be franchisees. The investment group behind the deal includes Bill Phelps, co-founder of the Wetzel’s Pretzels chain, who is now CEO of Dave’s Hot Chicken. Joining Phelps as investors in Dave’s Hot Chicken are former California First Lady Maria Shriver, movie producer John Davis and Red Sox owner Tom Werner. All four were original investors in 2012 in the Blaze Pizza chain, which now has close to 350 locations.

 

200-unit Pizza Hut group buys 27 Arby’s

Quality Restaurant Group, a quick-service firm formed last year after buying more than 200 Pizza Hut locations, has acquired 27 Arby’s restaurants. The Raleigh, N.C.-based operator closed the Arby’s deal with Bentley-Miller Group this week for an undisclosed price. The Arby’s restaurants are in Colorado, Montana, Nebraska, Wyoming and South Dakota. GenRock Capital Management is the majority owner of QRG.

Home & Road

Samson acquires Southern Furniture

Samson Holding has acquired Southern Furniture, a 96-year-old custom upholstery manufacturer based in Conover, N.C., to support the expanding upholstery component of its Universal Furniture brand. It also gives Universal the ability to broaden its reach into special orders. The move is another investment on Samson’s part in U.S. manufacturing, where subsidiaries include Craftmaster Furniture and Baker Interiors Group. Terms of the purchase were not disclosed. The acquisition reflects Samson’s global investments in vertical manufacturing to support its supply chain and diversified customer base around the world. Southern Furniture will be operated by, and eventually assimilated into, the Universal brand.

Q2 sales dip 12.5% at Natuzzi

The spin-off of its Chinese retail operation and ongoing difficult business conditions contributed to a 12.5% drop in second-quarter net sales to €92.2 million for leather upholstery major Natuzzi. The company reported second-quarter loss of €10.5 million, compared with a loss of €8.6 million in 2018’s second quarter. Year-to-date order flow of the Natuzzi brand division is up 1.6% compared with the same period of last year as a result of high single-digit growth of written sales at directly operated stores and flat written orders from third-party-operated points of sale. The company says the trend is improving over the past three months, but year-to-date written orders from the Softaly unbranded division are down 25.7% against the same period last year.

Top 15 bedding e-tailers post 41% increase

The Top 15 bedding e-tailers, a group headlined by Amazon and Casper, collectively added almost $900 million in sales last year and remain on the ascent. The Top 15 generated sales last year of almost $3.1 billion, up from about $2.2 billion a year earlier, clearly showing that the online mattress arena remains a potent and vibrant marketplace. Collectively the Top 15, as ranked by Furniture Today in this annual listing, grew 41% last year, far stronger growth than leading brick-and-mortar mattress retailers. And the top five players had an even stronger year, growing 61% last year. Most of the revenues generated by the Top 15 are in online sales, but a growing number of those e-tailers are partnering with brick-and-mortar stores or selling their beds in their own stores.

Regency shutting down Mealey’s

Regency Furniture is closing all seven of its Mealy furniture stores three years after it acquired the Philadelphia-area retailer and plans to re-enter the market next year under the Regency brand. The retailer posted on Facebook and on its website that it’s “Going out of business forever” and “Everything must go.” The closing sale at its one New Jersey Mealy’s store started earlier this summer, while the Pennsylvania store liquidations began about a week ago, said Regency President Mark Stuart.

Jewelry & Luxury

A Lucky Escape for Europe’s Luxury Brands

Manufacturers of luxury handbags and champagne got lucky in the latest round of U.S. tariffs, but they still need to prepare for a less globalized world. On October 2nd, the Office of the U.S. Trade Representative released details of new levies on jets as well as a range of consumer products imported from the European Union. Earlier in the day, the World Trade Organization gave the U.S. the go-ahead to impose annual tariffs worth $7.5 billion as part of a long-running dispute between Washington and Brussels over airline subsidies. Scotch single-malt whisky is among the products hit with a 25% tariff. That will be painful for the industry, which counts the U.S. as its largest and most valuable single market, according to the Scotch Whisky Association. It will also be painful for Scotch drinkers in the U.S., who will likely bear most of the cost.

World’s luxury brands count costs of Hong Kong protests

Global luxury brands from Prada to Cartier are counting the cost to their businesses of four months of unrest in Hong Kong that has kept tourists away and forced shops to shut, with upcoming results set to reveal the damage.  Hong Kong, which ranks among the world’s top five luxury destinations, has long been a magnet for brands attracted by the flow of visitors from mainland China. The city accounts for between 5% and 10% of the estimated $285 billion annual global sales of luxury goods, according to Bernstein analysts. But data on October 2nd showed retail sales had fallen 23% in August from a year earlier – the biggest decline on record – while the value of sales of jewelry, watches and other valuable items decreased by 47.4%.

Helzberg Diamonds’ New Offer: “Elope Here”

We’re going to the strip mall, and we’re gonna get married! Helzberg Diamonds is letting customers tie the knot—for free—at any of its 200-plus stores. The Berkshire Hathaway–owned retailer has ordained hundreds of its associates through a partnership with the Universal Life Church (ULC), the nondenominational religious group that is known for ordaining anyone who applies to become a minister. “Since the program was announced, more than 900 associates have voluntarily gotten ordained,” says Wendy Gibbone, divisional vice president of store operations, via email. “We’ve also discovered that we were home to quite a few ordained associates already.”

 

Office & Leisure

The Race Is On to Be This Holiday’s Hottest Doll—and Billions Are at Stake

Holiday Barbie has some fierce competition this coming shopping season, and more than playtime is at stake. As the critical fourth quarter approaches, a toy war is brewing in the U.S., with billions of dollars up for grabs between the country’s three biggest dollmakers: Mattel Inc., Hasbro Inc. and MGA Entertainment Inc. Mattel’s Barbie is the reigning champ in the massive U.S. doll market, which NPD Group estimates was worth about $3.4 billion in 2018, up 45% over five years. But now Barbie faces its two biggest threats in recent years: the return of Olaf and Elsa dolls for Frozen 2, the sequel to Walt Disney Co.’s 2013 Oscar-winning blockbuster film, and a new release of MGA’s collectible L.O.L. Surprise! dolls that first blew onto the scene three years ago just as the “unboxing” craze began to explode. Rival dollmakers all have their sights set on segment leader Barbie, which last year returned to a $1 billion brand after four weaker years.

Six Flags pursuing purchase of Cedar Fair, including Cedar Point

In a deal that would unite two of the biggest players in the amusement park industry, Six Flags reportedly has made an offer to buy Sandusky-based Cedar Fair, sources told Reuters news service. Details of the proposal were not revealed, and it was unclear how Cedar Fair, the owner of Ohio’s Cedar Point and Kings Island, might react. Cedar Fair CEO Richard Zimmerman was expected to take part in an analyst-led “fireside chat” at the B. Riley FBR Annual Consumer & Media Conference Thursday in New York City, but that appearance was canceled, a move that some observers interpreted to mean that talks between the two industry giants are continuing. Industry analyst James Hardiman, with Wedbush Securities, said it’s unclear how Six Flags would pay for the purchase. “They already have a lot of debt,” he said. “It would make more sense to me if we had heard that Six Flags was interested in some of the Cedar Fair parks, as opposed to the whole thing.” Six Flags, based in Texas, owns 26 parks in North America. Cedar Fair owns 11 amusement parks and five waterparks in the U.S. and Canada.

Blackstone acquires controlling interest in Great Wolf Resorts

New York-based investment company Blackstone Real Estate Partners said it is acquiring a controlling interest in Chicago-based Great Wolf Resorts, Inc., the parent company of Great Wolf Lodge in Gurnee. Financial terms were not announced, but the transaction will give Blackstone a 65 percent stake in the entertainment water park chain, which owns 18 resorts around the U.S. Great Wolf’s current owner, Centerbridge Partners, L.P., and Blackstone will form a new $2.9 billion joint venture to own the company, the companies said in a release. In addition to the 18 water park resorts it currently operates Great Wolf is building a new resort in northern California that is scheduled to open in 2020, and plans on further expansions. The company employs more than 6,000 people.

Technology & Internet

Mall Developer Simon Takes 50% Stake in Rue Gilt And Launches Online Outlet Marketplace

Simon Property Group, a top U.S. developer of shopping centers, and digital commerce pioneer Rue Gilt Groupe, the owner of Rue La La and Gilt, are jointly building up an e-commerce marketplace that will cater to outlet mall shoppers, the companies said on Wednesday. In addition, Simon is taking a 50% stake in a new entity encompassing Rue Gilt and that website for $280 million. ShopPremiumOutlets.com had a soft launch in March as a way for Simon, whose outlet malls include the New York area’s Woodbury Common, to test the e-commerce waters and offer its tenants another avenue for selling their discounted wares. On top of being a vehicle for Simon to collect a bit of extra revenue in the form of commissions on every sale on the marketplace, the site is an acknowledgement that outlet shopping, long the province of malls full of factory stores far from densely populated areas, is going online just as full-price retail has before it.

‘An area of opportunity’: Amazon is going after grocery

An Amazon grocery store is on the horizon — and it’s not a new Whole Foods. Last week, the Wall Street Journal wrote about the company’s alleged plans to open a series of brick and mortar grocery stores. According to the report, Amazon has signed multiple leases for grocery retail space in the Los Angeles area — and some may open in the next few months. What’s more, the company is looking towards cities outside of California too. Few concrete details are known about the stores — other than they will be categorically different than the Amazon-owned Whole Foods, yet will be in the grocery space.

 

Finance & Economy

US manufacturing survey shows worst reading in a decade

A gauge of U.S. manufacturing showed the lowest reading in more than 10 years in September as exports dived amid the escalated trade war.  The U.S. manufacturing purchasing managers’ index from the Institute for Supply Management came in at 47.8% in September, the lowest since June 2009, marking the second consecutive month of contraction. Any figure below 50% signals a contraction.

Jobs report: Economy adds 136,000 payrolls in September, unemployment rate falls to 3.5%

U.S. employers added fewer jobs than expected in September and wage gains slowed, adding to evidence of decelerating growth in the domestic economy. But in a sign of a still-tight labor market, the unemployment rate unexpectedly declined to a fresh five-decade low of 3.5%.  Beneath the headline payroll additions, the vast majority of the net gains continued to come from the private service-providing sector, as opposed to its goods-producing counterpart.

Retail trade group sees holiday sales rising 3.8% to 4.2% this year, citing ‘uncertainty over trade’

Holiday retail sales in November and December — excluding automobiles, gasoline and restaurants — are expected to increase between 3.8% and 4.2% this year, reaching between $727.9 billion and $730.7 billion, the National Retail Federation said.  The retail trade group cited “uncertainty over trade” as being a potential drag on the season this year, as the U.S. and China are set to resume trade talks later this month. NRF’s sales range sits below some other forecasts from retail industry consultants, which are calling for growth of upwards of 5%.

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