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. 

Toys R Us Reported to Consider Closing 100 Stores

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Bloomberg Reports What We've Long Suspected: The Business is Hurting

Color us shocked. Despite millions of dollars worth of bonuses both pre and post-petition, Toys R Us' crack management team cannot figure out a way to stabilize the big box toy retailer. Bloomberg reported earlier today that the company is now considering closing "at least 100 U.S. stores in the face of weak holiday sales." Is this fake news? Anyone who believed management when they previously said they didn't intend a large percentage of stores was clearly smoking something. 100 out of approximately 879 US stores strikes as a meaningful percentage. Basic math. 

Bon-Ton Skips Interest Payment ($BONT)

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Bon-Ton Bankruptcy Coming to a Mall Near You Around January 15 2018

Bon-Ton Department Stores Inc. ($BONT) filed a notice with the SEC indicating that it is using its 30-day grace period to delay making a $14mm interest payment. It had gotten a small reprieve in December to bridge it through the holidays as vendors were clamoring for more friendly terms. Presumably, factorers were tightening terms as well. It seems like that the company will file for bankruptcy on or around January 15. 

Notable (Gaming, Guns, Fees and More)

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Activist Investing: A deep dive into what has made Elliott Management successful. 

Casinos & Gambling: The Supreme Court is considering arguments that will dictate the future of sports betting at casinos and racetracks around the country - a potential lifeline to an industry that has been plodding along. New Jersey is getting ready for some positive nows.

Guns (Long Irony): Donald Trump hasn't threatened the gun industry enough. Without the fear of increased regulation (which, of course, is mind-boggling after Las Vegas, but we digress), gunmakers are heavily discounting product and their stock is going in the sh*tter. American Outdoor Brands Corp. ($AOBC) and Sturm Ruger & Co. ($RGR) both saw stock declines this week on the news of slashed profit targets.

Healthcare: A running tally of all of the bankruptcies in 2017. The performance improvement consultants must also be at high capacity. Scripps Health, for instance, announced $30mm in cost cutting this week. And community health centers are apparently suffocating without federal funding from Congress.

Professional Fees: Caesars Entertainment Operating Co. is primed to pay $160mm in legal fees. Importantly, this number does not include the fee totals paid to financial advisors, investment bankers and the company's claims agent. Apples to grenades, we admit, but considering the fees seen in bankruptcy, Robert Mueller's $6.7mm nut over five months of investigation seems pretty lean and efficient to us. Just saying.

Retail (The Rise of Clicks to Bricks): Everlane is the latest digitally-native vertical brand that is embracing physical locations. Relating to the company's CEO, "He started the company understanding stores as albatrosses on the bottom line; now, he sees the value in them as temples to the brand." Meanwhile, FAO Schwarz is attempting yet another brick-and-mortar comeback in NYC.

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.

Toys R Us & Executive Compensation (Long Anger)

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Last week there was an uproar about Toys R Us' motion seeking approval of a proposed executive incentive plan. Then the Official Committee of Unsecured Creditors (UCC) came in, negotiated down the sweetheart arrangement, and filed a statement in support of the company's motion. We wrote about it all here. Since then, the bankruptcy court held a hearing and despite continued objection by the United States Trustee for the Department of Justice, the court approved the plan. Color us unsurprised. Also color us impressed by the company's sequencing.

There is 100% strategy embedded in the Company's plan, just weeks before Christmas, to get approval of its incentive plan. Note that we also highlighted that the company recently filed its store closure motion and that it only sets forth procedures for closures rather than specifically identifying closures. To date, only UK stores have been identified for closure. We suspect the US number may surprise people; we suspect a lot of employees will be losing their jobs; we suspect people will be pissed and that the incentive plan will reemerge as an issue in that context. On the bright side, at least Toys R Us was able to bring this Xmas's "hot toy" to the market. Oh, wait, that was Walmart($WMT). Womp womp.

All of which brings us, albeit circuitously, to General Electric ($GE). In 2015, former CEO and Chairman Jeff Immelt "earned" $37.25mm which included an 8% bonus increase (to $5.4mm) and a 9% salary hike ($3.8mm). In 2016, Immelt's comp stacked up to a smaller-but-still-impressive $21.3mm. When Immelt retired earlier this year, some figured that he walked away with $211mm. Ironically, by leaving earlier than he originally planned, he presumably got to take advantage of GE's (relatively) higher stock price prior to its utter and disastrous capitulation a few weeks later. 

Then this week, adding insult to injury, GE cut 12,000 jobs in its power equipment division, a 4% reduction of GE's total workforce. Why? Disruption, that's why. The division "has been hit hard by the rise of renewable energy." Notably, the energy business of Alstom - which services coal producers - is part of that division. Immelt, using his infinite "business judgment" (which is to say nothing of the Baker Hughes transaction), purchased Alstom in 2015 for a whopping $10b. Awesome. Timing. Bro. 

What are the ramifications for Immelt? Well, certainly none. He nearly got a new gig as the CEO of the highest valued private company in the world. And once the new tax plan goes into effect he can bequeath his ill-earned wealth to his family free of the shackles of the estate tax. We're sure that seems fair to those 12,000 people looking for jobs on the eve of Christmas. 

Tax Reform (Long Unhappiness & Therapy Bills)

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Who is Advising Giancarlo Stanton?

If the bankers aren't happy, it must be worthwhile. Totally kidding. Ken Moelis of Moelis & Co. ($MO) has joined the ranks of Bridgewater Associates LP CIO Ray Dalioopposing the elimination of the SALT deduction and questioning to what degree there'll be unintended consequences. Indeed, people in Los Angeles, Chicago and New York are freaking the eff out about what the reform legislation will mean as a practical matter. As it relates to the loss of the mortgage interest deduction, a choice quote, "An analysis of the Senate bill by Moody’s Analytics concluded that home prices in Manhattan could fall nearly 10 percent in the coming years because of the bill. Some New York and New Jersey suburbs could be even more vulnerable because property-tax rates are higher there and prices are still recovering from the bursting of the housing bubble." Boom. Nothing like an instant 10% decline in your real estate value. But don't worry, New Yorkers. Allegedly, naysayers argue that the threat of flight for tax arbitrage purposes is overblown. Or is it? The IRS recently reported a "record loss of people" out of Illinois. Where did they go? Florida and Texas, of course. Apparently Giancarlo Stanton didn't get the memo.

Query whether the rise of the 1099-economy and the "remote-first" movement will interact with the new tax bill in odd ways. People today seem less and less tethered to a physical location. Doesn't that, in many ways, explain the rise of WeWork? If people can leave, they will. We hear Austin, Denver, Nashville, and the Research Triangle are all looking ripe for growth.  

Grocery (Short Mom & Pops; Long Dollar Stores & Judges)

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This is a good example of what happens when a Walmart ($WMT) rolls into town, prices compresses like a boss, and puts local shops out of biz. People have to drive 40 minutes to go grocery shopping. That's bananas. Which explains Dollar General Corp's ($DG) strategy to, as the Wall Street Journal put it, "build thousands more stores, mostly in small communities that have otherwise shown few signs of the U.S. economic recovery."Which, in turn, illustrates, in part, the juxtaposition between what is happening in various communities across the country and the macro-economy generally. On one hand you have a record 86th straight month of nonfarm payroll expansion and unemployment at 4.1%. On the other hand, you have job and resource drain. Apropos, Todd Vasos, CEO of DG is quoted, "The economy is continuing to create more of our core customer." Speaking of jobs, we now have two precedents for judges ordering shuttered/shuttering retailers to, uh, not shutter. Last week we noted that Starbucks' ($SBUX) plan to shut Teavana locations down got blocked by a judge siding with Simon Property Group($SPG). Now Whole Foods has run into the same problem. Landlords 1, failed retail 0? Seriously...are there ANY winners, here, really?

Energy (Who Can Make Sense of it All?)

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This headline about sums up the effects of tax reform on energy policy: weakened incentives for solar and wind development and 1.5mm acres of the Arctic will be opened to new oil and gas development. Because there's, like, a ton of demand. But, even Bob Murray of Murray Energy Corporation isn't happy, alleging that tax reform will lead to more coal bankruptcies. Wait, we thought there was a coal bailout afoot? So confusing. Elsewhere, the Interior Department's Bureau of Land Management is delaying an Obama administration regulation that restricts harmful methane emissions from oil and gas production on federal lands. This should inure to the benefit of frackers who haven't exactly had an easy time the last few years. The debate over solar tariffs is getting faster and furious-er: NextEra Energy Inc.'s SVP, as just one example, thinks tariffs will decimate new utility-scale solar projects. Yet, curiously, congressional Republicans in Texans are conspicuously absent from the list of opponents to the tariffs, despite Texas being the 7th largest adopter of solar capacity in the US. Wait. They're voting against their constituent's interests? We could swear we've heard that recently in another context too.

Bitcoin (Bust Out the Big Guns. Literally.)

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What all of the big name investors have said about it. We really liked this befuddling bit from Marc Lasry of Avenue Capital, "I should have bought bitcoin when it was $300. I don’t understand it. It might make sense to try to participate in it, but I can’t give you any analysis as to why it makes sense or not. I think it’s real, as it coming into the mainstream." Ok, sure.

Meanwhile, once you start to understand the risks, this whole Bitcoin craze seems even...uh...crazier. Coinbase, for instance, may not be available to manage your transaction. A Board member is saying to proceed with caution (read: people are worried about lawsuits). Good luck with that volatility, then. And, security, apparently, is shockingly old school (must read - click "still too pricey" to view article). Maybe THIS really is the right way to protect your $BTC. W.T.F.

This seems like the most level-headed bit we've seen on BTC this week.

Chart of the Week: China's Mobile Internet Usage

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For context, there are more millennials in China than there are citizens in the United States. This screams "opportunity," which is why Apple Inc. ($AAPL) and so many others are looking to play ball there. Starbucks ($SBUX), for example, is fusing tech with retail to appeal to the Chinese consumer. The IMF, however, is concerned (must read). 

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Long Over-size Fashion

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We poked fun at Fashion to Figure because the timing of its bankruptcy filing couldn't have been worse - mere days before #BlackFriday and #CyberMonday. That said, there's a strong argument for over-sized women being an underserved demographic and New York & Co. ($NWY) seems to agree; it has purchased F2F's customer lists, trademarks, trade names and in-store assets (but not inventory) for $2.4mm. Or, ex-ing out the IP and fixtures, for $0.20 per customer name. 

Recruiting: More Genius Ideas to Differentiate Your Firm

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Go Long Perks

So, if pop-ups are too complicated, you could always go the perk route and, gawdammit, if biglaw and finance ought to derive inspiration from anyone it may as well be the geniuses on Sand Hill Road. Want your car gassed-up while your werk werk werking that conference call like a boss? Well, there's an app for that. Actually, several, and they all share an affinity for bad name-brands, e.g., Booster Fuels, InstaFuel, WeFuel, Filld and our personal favorite, Bankrupt. Ok, just kidding about that last one. But, we're very excited for the inevitable launch of G-uber, Gyft, and AirbnG. Seriously, bros, InstaFuel and WeFuel? Ugh. Choice quote, “'I live and work in Silicon Valley. If there’s an app to deliver something, we’re usually the first ones to jump on it....'" Is there a service that will deliver this dude a gun so he can be put out of his bro-y misery? Elsewhere in perk land, why not convince your Management Committee to beta test Walmart's ($WMT) latest and greatest technology which will deliver needed products directly to your office. Think about it: that time you spend going to the physical Walmart location or local Walgreens could now be put to MUCH better use. Like, you know, billing. To top it off, maybe your firm can offer you the Hello Alfred amenity so that you never have to bother with restocking your home fridge or picking up dry-cleaning. After all, that's time that could be spent doing much more worthwhile sh*t like...billing.