Amazon is Coming for Your Ad Revenue

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Companies are struggling and a debate is raging over whether ad-revenue dependent media companies can grow and thrive in the age of advertising behemoths like Google ($GOOGL) and Facebook ($FB). Amazon ($AMZN), meanwhile, grew its advertising revenue by 60% with analysts pegging its advertising revenue at $4.5b in 2018 - larger than combined revenues of Twitter ($TWTR) and Snapchat's ($SNAP) ad business. David Carey of Hearst Magazines has some thoughts about the future (audio).

Retail Happenings of the Week

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Millennials don't like brands. No news there. But this piece about the rise of no-name attire has some projections that furthers the "Amazon Effect" narrative ((and helps explain the seemingly ludicrous Kroger Inc. ($K) clothing line)). "This year Amazon will leapfrog T.J. Maxx owner TJX Cos. and Macy’s Inc. to become the second-biggest seller of apparel and footwear in the U.S., Wells Fargo estimates." And "In some categories—like the active wear that Americans increasingly wear all day, whether or not they hit the gym—private labels combined account for 20 percent of the market, according to researcher NPD." Short Lululemon ($LULU)? Addition reason (see above) to short TJ Maxx ($TJX)?

If this stresses you out, at least you can double down on discounted protein and work off the anxiety, given the look of GNC Holdings Inc. ($GNC). What does this all mean for the malls? Not a whole lot of good. Hence, mud. Though some beg to differ to the tune of $25b.

Some predictions for 2018. The most obvious of which is that there'll be more retail bankruptcies to come in 2018. Just (maybe?) not Charlotte Russe, which has seemingly pulled off a miracle and kept itself out of bankruptcy court with a consensual deal with its lenders in hand. Last note: while "treasure hunt" retailers may not be impervious to Amazon, Costco Wholesale Corporation ($COST) very well may be: it reported a 17% increase in earnings, a 42.1% increase in e-commerce sales and steady membership rates. The stock popped nicely going into week's end.

Steinhoff is a Hot Mess

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Steinhoff International Holdings NV is engulfed in a massive accounting scandal going back to 2016 and now the CEO has resigned, asset sales are in the works, and professionals have been retained. The company owns Mattress Firm, the ubiquitous bed company with mustachioed creepers for salesmen who pounce on you the second you open the door. As if the countless direct-to-consumer mattress brands weren't threat enough to the business, some bad accounting sure adds insult to injury. Meanwhile, Eight Sleep, a 3.5 year old NY-based smart mattress maker, just raised $10.5mm in fundingfrom Khosla Ventures, bringing its total funding up to $32.5mm. The company lets you control your bed temperature, among other things, via remote or through Amazon Alexa. Because letting Alexa listen to your bedroom activity isn't creepy at all. 

Short the Impulse Buy?

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People Are Worried About Coca-Cola & Pepsi

In our interview with an Amazon ($AMZN) exec back in December, we questioned the effect that Amazon Go would have on certain sales - including, notably, impulse buys at checkout. Now, it seems, others are catching on. And they're worried about the extent e-commerce growth of food delivery will impact The Coca-Cola Co. ($KO) and PepsiCo, Inc. ($PEP). We're pretty sure Boxed.com sells Coke. In big cities, we'd argue that e-commerce may actually make it MORE likely that people buy soda as they'd no longer have to schlep it home from Trader Joe's.

Fast Forward: Breitburn, Faraday Future, Patriot National Inc., Etc.

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Breitburn Energy Partners LP inches closer to the end of its bankruptcy. More noise around Faraday Future. Choice quote: "A convertible note of more than $400 million, with a 12 percent interest charge, becomes payable immediately if Faraday & Future Inc. can't raise the Series A round by December...." Well, it's December. Meanwhile, high level employees can't jump ship fast enough. Patriot National Inc. ($PN), a technology services provider for insurance companies, announced that it has a restructuring support agreement in place with major lenders Cerberus Business Finance LLC and TCW Asset Management Company LLC and the company will be filing for bankruptcy in the District of Delaware. Peace out Charming Charlie LLC. The J.G. Wentworth Company ($JGWE) will be filing its prepackaged bankruptcy on or around January 18. GNC Holdings Inc. continues to try and refinance its debt and is finding the capital markets aren't as forgiving as they once were on the heels of Vitamin World's liquidation and given Amazon's penchant for selling everything and anything, including meathead stuff. 

Mostly Non-Black-Friday Retail Report (Macy's, J.Crew, Signet Jewelers)

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A Week of Nonstop Retail

Don't worry: Macy's ($M) has a plan (must read) and it includes finally trying to address what competitors - not just Amazon ($AMZN) - have been doing for, literally, decades. Of course, maybe, just maybe, the first part of their plan should be to make sure they're able to collect payment from their customers. But, we're not #BlackFriday experts. Anyway, thanks, millennials, you're killing the mall-based low-cost jewelry sellers. This week, Signet Jewelers ($SIG) reported dogsh*t numbers with same-store sales down 5% and downward-adjusted guidance for 2018. J.Crew Group Inc. = 💩💩💩. The company reported revenue down 5%, and aggregate comp sales down 9% (JCrew down 12%, but Madewell up 13%); it reported an all-in $17.6mm net loss (driven, in part, by its restructuring efforts...FEES!). The company also announced plans to close more stores for a total '17 tally of 50 closures. Elsewhere, people are concerned about derivative effects of big box retail: here, what happens to Salvation Army? Finally, happy 10 year anniversary Circuit City.

Retail (Rise of the Retail Suppliers & Their Financiers)

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Factorers Flex Their Muscles

We're getting amped up for Star Wars and so we figured we'd use a SW-like subtitle here. Anyway, Toys R Us'trouble sparked a vendor awakening (see what we did there?) and attendant media speculation, which, combined (with an obnoxious level of PE-placed debt), sparked the behemoth-retailer's surprise bankruptcy filing. Its logical to draw a direct line from that to the circumstances unfolding now in Bon Ton Stores ($BONT) and Charming Charlie, where both retailers reportedly had to get extended access to capital under their credit facilities to make it through the holiday season (after which they'll both probably file for bankruptcy anyway, but whatevs). Likewise, Sears Holdings Corp. ($SHLD) has had to recently tap all available resources to ward off retailers. Notably, it indicated that "[m]erchandise payables were $0.8 billion and $1.6 billion at October 28, 2017 and October 29, 2016, respectively, as we have significantly reduced our dependency on vendor financing." Sure, broheims. Is "significantly reduced our dependency on vendor financing" a euphemism for "nobody will extend us credit anymore"? Anyway, earlier this week, Calypso St. Barth couldn't make it that far as vendors filed an involuntary bankruptcy petition against it in New Jersey. Apparently, vendors don't like it when a company stonewalls them and refuses to pay. Go figure. But, wait:there's more. Unbeknownst to casual observers of the #retailapocalypse, many suppliers rely on specialty lenders called "factorers." Factorers purchase accounts receivable from suppliers so that suppliers have some near-term liquidity - rather than waiting 30-120 days for, say, Toys R Us to pay them (or waiting forever, as the case may be, e.g., Vitamin World, now liquidating). In turn, there are specialty insurers who provide the factorers cover in the event that the receivables are never paid. Which, given the volume of retail bankruptcies today, seems like a pretty likely risk. Apropos, (i) insurers are charging factorers more for insurance, (ii) factorers are seeking more favorable terms from suppliers and (iii) suppliers are therefore seeking tighter payment terms from retailers. Without the ability to satisfy those terms, well, you get it: Toys R Us. It's like a nice big game of dominoes played among one big unhappy family. With Uncle Amazon watching from above with an evil-a$$ grin on his face. 

Amazon vs. Walmart (Regular Entry)

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Screw it. We've been desperately trying to avoid mention of Amazon but it's simply impossible. This week Amazon ($AMZN) launched its Kohl's ($KSS) takeover...uh, partnership...pursuant to which consumers can buy Amazon products at Kohl's locations and return Amazon shipments for processing. In other words, Kohl's has become a return center for Amazon. Nothing to see here. Meanwhile, Amazon took over a few floors above the Macy's ($M) location in Seattle. Nothing symbolic about that whatsoever. Amazon has also partnered with large apartment landlords to install lockers inside large buildings. That's one way to dominate the "last mile." And people were in an uproar about that (dumbass) startup Bodega? Imagine this: "Hey Alexa, order me some toilet paper please." Within ten minutes your apartment building doorman calls you and says you have a package. How can that be? Well, just so happens the Amazon Locker in your apartment building has a stockpile of toilet paper laying in wait. Mark it: we're headed in that direction. And nobody seems to realize it. Bezos is laughing at the Bodega founders right now as he surreptitiously dominates local small business. If he has time to laugh while simultaneously wrecking fashion, that is. 

Walmart Gives Retail a Brief Reprieve

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A number of retailers have cited wage increases as one of the reasons for filing for bankruptcy. John Morberg, the CEO of Garden Fresh Restaurant Intermediate Holdings, made sure to highlight this issue upon that company's bankruptcy filing. On the flip side, Toys R Us includes wage increases in its go-forward business plan. Target recently announced wage increases too. But Walmart, which had previously announced wage increases didn't match Target in its earnings announcement on Tuesday, providing relief to a lot of retailers already squeezed by various macro trends. Speaking of Target and Walmart, they are innovating to compete with Amazon for the "last mile." This could get ugly.

Grocery.Effed

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Already-distressed grocers like Bi-Lo Holdings and Fresh Market were already dealing with the threat of increased competition from Amazon when Hurricane Irma swept through and hammered them. Apollo Global Management reportedly has extended a 6% unsecured $50mm bridge loan to Fresh Market to help keep it afloat. Meanwhile Bi-Lo is advisored to the hilt and seems headed towards some kind of restructuring. Tops Friendly Markets also has secured debt trading at distressed levels. While Kroger announced somewhat flat guidance going forward, it acknowledged an expected fall in earnings as price wars heat up with Amazon and foreign encroachers like Aldi and Lidl; it also announced that it hired Goldman Sachs to explore a sale of its convenience store business. While the stock traded up on the news, it is still down nearly 37% since the WholeFoods news. There will be winners and losers in this space and it seems increasingly likely to shake out quickly. 

Vultures Are Swarming Around Houston Distressed Real Estate

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Vulture investors are swarming all around distressed Houston real estate. Because of course they are. Elsewhere, folks are beginning to worry about the effect of Amazon's ($AMZN) increased push into fashion: will it rock retail real estate even more than it has? With seven private labels now, Amazon is rumored to expand into sportswear, going directly after Nike ($NKE) and Under Armour ($UA). Query what level of data Amazon can leverage from usage of its AWS to crush its (new) competitors.

Mall Operators are Getting Desperate

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Lets Debate Vernacular, Shall We? 

Retail.AI (Short Vernacular). So, let's not call malls "malls" anymore. Let's call them "community hubs" or "community centers." We don't want to, uh, "'get lost in the vernacular.'" C'mon. This is a fulsome piece about the future of malls, featuring all kinds of fancy comments from mall operators about the future of brick-and-mortar retail. A QIB Global Real Estate professional notes, “Offering more than a simple consumer transaction, we are creating places that encourage people to dwell, drawing in the community and ensuring people will visit again and again. By curating a more integrated, experience-led offer that responds to a broad range of customer needs, we’re supporting an uplift in sales across all categories including fashion and apparel.” Anyone still awake? Can someone check to see if the Guinness Book of World Records' record for buzzword usage was broken? And, like that, poof! People go to malls again. Woohoo! A few things seem apparent to us from this piece: (i) the Westfield at the World Trade Center, as we've previously reported, is underperforming; (ii) the same-store-sales measurement is out-dated if mall operators envision nothing but food, gardens, and sale returns (until Amazon institutes a Shyp-like service where, so long as you are Prime member, you can have couriers pick up and package shipments for you); and (iii) everyone is losing faith in department stores. Of course, it's a bit easier to be optimistic as a REIT operator if/when you're able to leverage public financing to aid your modernization efforts. Serious question: how is that not a bailout of sorts?

Amazon > Costco

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Costco Has Some Work to Do

Amazon (Getting its Own Category). As this point, Amazon merely needs to hint that it may enter a vertical and market caps will get sliced by 30%. It doesn't matter whether that's logistics (see UPS and Fedex) or pharma. The idea that Amazon Prime will affect wholesale retailers like Costco? Well, Costco's CEO said, "As it relates to the publicity and the news and the noise around Amazon and Whole Foods, all we can do is perform." That's not a confidence-inspiring answer by any stretch of the imagination. And the market reacted by sending shares down nearly 10%. Why? Membership renewals and margins were down. Revenue? Up. Net income? Up. That's what makes this market move so intriguing. The report actually wasn't terrible. But Amazon!

Notable (Molycorp, PwC, Sears, Toys R Us, Westinghouse)

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Molycorp. Oaktree Capital Group LLC may attempt to IPO Neo Performance Materials Inc., a remnant of the Molycorp bankruptcy.

PwC Law Firm. Yes, you read that right. PwC is launching a law firm in Washington DC to focus on international corporate restructuring. 

Sears. Is it the blueprint for everything Amazon is doing?

Toys "R" Us. This nine-year old kid has a future in marketing. If Toys doesn't figure out some way to market this, they deserve to liquidate. Meanwhile, Walmart smells blood in the water: with Toys' Babys "R" Us also in bankruptcy and NYC Mom-favorite Giggles closing, Walmart is expanding its private baby line. 

Westinghouse. Private equity firms are at the gates.