New Macy’s CEO Tony Spring looks to revive a 166-year-old retailer fighting for relevance

Tony Spring speaks at an event unveiling the Macy’s new women’s apparel brand, On 34th, in July. Spring is former CEO of Bloomingdale’s and begins as Macy’s CEO in February 2024, succeeding longtime Macy’s CEO Jeff Gennette, right.

Melissa Repko | CNBC

Inside its headquarters in New York City’s Herald Square, Macy’s got ready to unveil its newest women’s clothing brand. Its incoming CEO Tony Spring prepared for his own reveal.

Spring took the stage in mid-July in front of fashion influencers, reporters and Macy’s employees, standing beside his soon-to-be predecessor, Jeff Gennette. He was at the pinnacle of his career, making his first public in-person appearance since being named CEO-elect of the 166-year-old department store operator.

Yet where many top executives would have lapped up the limelight, the 58-year-old retail veteran and leader of Macy’s higher-end department store chain Bloomingdale’s kept his remarks brief. He spoke for less than two minutes, then quickly stepped aside for On 34th, the company’s new brand of women’s clothing and accessories, to get the spotlight.

Spring will step onto a bigger stage and inherit the iconic department store’s issues when he takes over the role of Macy’s CEO on Sunday. His push to revive the retailer will depend in no small part on his ability to curate strong brands and store designs — and let the products win over shoppers.

Among the company’s challenges, Spring will contend with inflation-weary shoppers who continue to watch their discretionary spending, confront lower employee morale after more than 2,000 recent layoffs and stare down a contentious battle with activist investors. Macy’s has lost cachet with younger shoppers and brands who see its sprawling stores and endless aisles of merchandise as a relic of the past.

Investors have taken notice. Macy’s stock closed at $18.63 per share Friday, giving it a market cap of $5.11 billion. Shares have fallen about 24% in the last year.

Spring will face existential questions about how Macy’s can stay relevant and grow rather than shrink, as competitors such as Amazon, T.J. Maxx and even Target and Walmart steal away sales. He will also lead Macy’s promising efforts to chase suburban shoppers with smaller stores in strip malls, expand its offerings of trendier exclusive brands and luxury names, and build on the strong performance of newer businesses such as its beauty chain, Bluemercury, and its off-price business, Backstage.

In CNBC interviews, current and former Macy’s employees, industry leaders and investors said Spring will bring a deep retail background, a merchant’s sharp eye and credibility with coveted national and global brands from his decades at Bloomingdale’s.

Yet they acknowledged the new CEO will have his hands full. Some expressed concern that as a longtime executive at the company, Spring won’t bring the same scrutiny an outsider would.

“When you have an internal appointment, you don’t tend to see that much shake-up in the wider team, and sometimes that’s needed,” said Neil Saunders, managing director of research firm GlobalData. “The biggest risk is just really that. Someone new comes in the post, but we just see a continuation of the same old strategies without much new thinking.”

Macy’s declined interview requests for this story, but Gennette praised Spring as the right person for the job when the company announced his retirement and his successor’s appointment in March. Gennette pointed to Bloomingdale’s strong results — the higher-end department store has outperformed the namesake Macy’s brand in recent years — and described Spring as “an ally and trusted partner in advancing Macy’s, Inc.’s strategies.”

“Tony consistently innovates for the customer, is an exceptional brand builder and an excellent talent developer who has strengthened our culture through his leadership,” he said in the news release.

‘A merchant at heart’

Spring’s ascension to the top role at Macy’s is the culmination of nearly four decades with the retailer. Fresh from graduation from Cornell University, he was hired by Bloomingdale’s in 1987 as an executive trainee in the White Plains, New York, store.

He moved up the ranks, ultimately becoming CEO of the higher-end department store in 2014.

Even as he rose, Spring described himself as committed to one of retail’s key building blocks: making sure stores draw customers in, invite them to linger and surprise them with beautiful displays and items they didn’t know they needed. It’s a touch shoppers and Wall Street believe Macy’s could use as it fights for relevance.

“I’m a former merchant,” he told the audience at the launch event for Macy’s “On 34th” brand in July. “I still consider myself a merchant at heart.”

Bloomingdale’s is known for having a knack for understanding customers and which brands to carry. The chain, which has 55 locations across the country, has been a crown jewel of its parent company despite its smaller size. It carries pricey and prominent luxury brands, including Theory, Sandro and Alice + Olivia, but also has popular and more affordable in-house brands, such as Aqua.

It has also drawn shoppers with limited-edition pop-ups and collections of merchandise that tap into the cultural zeitgeist or cater to the Instagram and TikTok generations, such as an exclusive Barbie-themed clothing line.

Macy’s namesake brand accounts for most of its stores and revenue, yet Bloomingdale’s and Bluemercury have seen better sales trends.

On CNBC’s “Mad Money” in October, Spring said his time at Bloomingdale’s reinforced “it’s all about curation of product and the delivery of a better experience for the customer.”

“Retail is theater,” he said in the interview.

He described Bloomingdale’s as “a growth vehicle” but said the company’s namesake brand can be one, too.

“We’re talking to different customers and we can obviously learn from one another without becoming one another,” he said.

GlobalData’s Saunders has criticized Macy’s for sloppy displays, bland merchandise and poor customer service at its namesake stores. He said after leading “the better-run part of the business” in Bloomingdale’s, Spring needs to bring those “softer skills” to Macy’s.

“Get some pride back into the business,” he said. “That might mean making some investments. It might mean putting back in visual merchandising teams. It might mean investing more in staff and labor hours, but I think it’s a decision worth taking. And it’s a relatively easy win.”

Spring will have tougher tasks, though, Saunders said. In a competitive industry, Macy’s needs a sharper identity to compete with specialty retailers, big-box stores and off-price players that often beat the department store on convenience, value and fashion, he said.

And, he added, Spring must take a hard look at the company’s real estate footprint to decide where it should shut stores, shrink locations or expand outside the mall.

Wooing investors and brands

In his new role, Spring will have to charm investors, shoppers and hot brands. It’s a delicate balance, as its efforts to boost sales, make the store experience more appealing to customers and win over investors hungry for profits could at times clash.

As its stock value has eroded, Macy’s has gotten smaller by most other key metrics, too. Over the past decade, the company has closed about a third of its namesake stores. Its annual net sales have fallen during that same period, from about $28 billion in 2013 to $24.4 billion in the last full fiscal year it has reported, which ended in late January 2023.

Macy’s struggles have turned the retailer into a target for the activist investors Spring will face down as he becomes CEO. Its board last month rejected a $5.8 billion proposal by Arkhouse Management and partner Brigade Capital Management to acquire the shares of the retailer that they don’t already own and take the department store operator private.

In an interview on CNBC after that rejection, Arkhouse managing partner Gavriel Kahane signaled that he hasn’t given up yet. He called on Macy’s to open up its books to the investors, or the firm will take the matter to shareholders, he said.

Certainly not done with pursuit of Macy's acquisition, says Arkhouse's Kahane

Investors will get their best glimpse into the health of the company Spring is inheriting in late February, when Macy’s is expected to report its holiday-quarter results and its outlook for the year ahead. In the previous quarter, the retailer said it expected same-store sales to decline by up to 7% in the fiscal year that ended in late January.

Though the company’s sales are sagging, Spring will take over promising pockets of the business, as well. Its smaller stores, which Macy’s is opening in a growing number of strip malls, have outperformed sales at its traditional, mall-based locations. After launching the women’s clothing brand On 34th, Macy’s plans to debut and refresh other lines that shoppers can find only at its stores and on its website. That private brand strategy has succeeded for other retailers, such as Target.

Spring’s career as an insider has raised concerns among some industry analysts. A Macy’s spokesperson said that while Spring came up through Macy’s, he has pushed for adding fresh perspectives to the retailer’s leadership team. Many of the company’s recent top hires have come from the outside.

Those include his successor at Bloomingdale’s, Olivier Bron, who was most recently CEO of department stores in Thailand; and Sharon Otterman, Macy’s new chief marketing officer, who came from Caesars Entertainment.

Having the right national brands will also shape Macy’s future success. It’s another area where Spring’s experience as a merchant could benefit the company.

Compared with rival Nordstrom, Macy’s has been slow to add younger and newer brands that can draw fashion-forward customers.

As Macy’s expands its third-party marketplace, some new brands have joined its website. One of those is Untuckit, a men’s apparel brand typically sold directly through its own stores and website.

Just ahead of the holiday season, the company’s clothing debuted on Macy’s website. It was Untuckit’s first meaningful push into wholesale, said the brand’s CEO and co-founder Aaron Sanandres.

Sanandres said he saw Macy’s as a way to reach shoppers who haven’t yet discovered Untuckit. Now, he said, it’s considering its next moves in wholesale — including the possibility of selling apparel at Macy’s stores.

Yet he said he has grappled with the same questions that other popular brands may have. Will merchandise get confined to a corner of Macy’s huge stores? Will its reputation take a hit from being carried by a retailer associated with old-school malls or 40%-off signs? Can it keep tight control over its own brand’s level of promotions?

“There are a lot of conversations around that, and it’s partly why we’re baby-stepping into the relationship to make sure we don’t see any negative pushback from our customer,” he said.

One of the most crucial parts of Spring’s job will be attracting millennial and Gen Z shoppers who don’t share the same loyalty as their parents and grandparents to Macy’s namesake stores and website, said Oliver Chen, an equity research analyst for TD Cowen.

Winning those shoppers over will come down to having better merchandise and a sense of style, he said.

“You need to be inspired by Macy’s,” he said. “The customer doesn’t necessarily want the cheapest thing from Macy’s. They want a nice, fashion-forward thing.”

Some of those shoppers are like Annie Rush. On a recent weekday, she zipped in and out of Paramus Park mall in New Jersey to make a purchase for one of her teenage sons.

Rush said she prefers to shop online, where she can search for what she wants with the help of filters. At a Macy’s store, the sea of options can be overwhelming, she said.

“Sometimes they offer too many things,” Rush said. “It’s like decision paralysis. You can’t find what you want or have to dig.”

With an Old Navy bag in hand, she cut through Macy’s only to get to the mall’s parking lot.

— CNBC’s Gabriel Cortes contributed to this report.

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Retailers urge Congress to crack down on theft, as industry ramps up lobbying effort

Representatives from more than 30 retailers joined a major industry lobbying group on Capitol Hill on Thursday, as they ramped up pressure to pass a law that backers say will curb retail theft.

The National Retail Federation escalated its campaign to rally support for the bill, known as the Combating Organized Retail Crime Act, which would make it easier to prosecute theft as a federal felony and set up a system for governments to share resources on crime. The retail lobby group dubbed its event “Fight Retail Crime Day.”

Before holding individual meetings with retail officials, the bill’s co-sponsors joined NRF CEO Matthew Shay in a press conference outside the Capitol — where they framed the legislation as critical to retailers’ bottom lines and their employees’ safety.

“You also have to recognize, this is not just the theft, but the danger to the employees, the cost to the consumers, and then the impact upon the individual retailer,” one of the bill’s co-sponsors Sen. Chuck Grassley, R-Iowa, said at a press conference. “[Organized retail crime] has to be dealt with in a comprehensive way. And that’s what our legislation is all about.”

Sen. Chuck Grassley, speaking at a press conference for the lobby group’s “Fight Retail Crime Day.”

Courtney Reagan | CNBC

Organized retail crime is different from shoplifting. The NRF defines it as “the large-scale theft of retail merchandise with the intent to resell the items for financial gain.” It usually involves multiple people who steal large amounts of goods from a range of stores, which a so-called fencing operation then sells, according to the group.

The NRF and individual retailers have spoken more than ever in recent months about how retail crime affects their profits, their employees and their customers. Target even cited the trend as it announced it would close nine stores.

Despite those comments, a survey released by the NRF last month found retailers’ losses from theft are largely in line with historical trends, but most respondents reported violence associated with the acts is getting worse. Much of companies’ lost inventory can also come from internal theft or management issues, as William Blair analysts wrote in a research note Thursday.

Even so, the industry has pushed for federal and state laws that aim to crack down on crime. Retailers continued their campaign for policy changes in Washington on Thursday.

The Combating Organized Retail Crime Act was reintroduced earlier this year. It seeks to create a new multi-agency group under the Department of Homeland Security that would pool information and intelligence from many states and local law enforcement sources. Officials want to better detect, track and prosecute members of organized crime rings with new federal standards. 

American Eagle Outfitters chief global asset protection officer Scott McBride, who is meeting with lawmakers to rally support for the law, pointed to the collaboration as a major benefit of the proposal.

“That’s one of the main purposes that allows us to have a charter within a federal agency to actually help us create a clearinghouse to aggregate properly to investigate more efficiently and more in depth,” he said.

While retailers say organized retail crime could lead to higher prices for shoppers and store closures, many of the co-sponsors are focused on what retailers have said is escalating violence associated with the theft.

The NRF’s national retail security survey showed two-thirds of retail respondents reported seeing increased levels of violence and aggression from ORC offenders in 2022 compared with 2021. In the 2021 survey, 81% of respondents reported more violence than in the year prior.

McBride noted that some areas of the country have had a harder time hiring and retaining store employees because of the increase in violence. Most retail store employees are instructed not to intervene when theft is taking place because of the risk of violence.

Rep. Dina Titus, D-Nev., told about a recent incident she witnessed in a Walgreens.

“The person came up with a backpack and just started scraping eyelashes into the backpack and walked out,” she said at the press conference. “I said to the sales lady, ‘Did you see what that guy just did?’ She said, ‘Yeah, he comes in here two or three times a week and we can’t do anything about it because management is afraid somebody might get hurt.'” 

The industry has also focused on the amount of stolen goods needed to prosecute as a felony depending on the location. Trade groups have said many crime rings know the law, and steal just enough to stay below it in each incident.

National Retail Federation CEO Matthew Shay speaking at a press conference for the lobby group’s “Fight Retail Crime Day.”

Courtney Reagan | CNBC

The bill would establish a new federal felony threshold that is also aggregated over any 12-month period rather than a threshold per incident.

“What this legislation will do, is allow prosecutors in the states, if they choose to, to pursue a federal remedy, instead of, or in addition to, a state remedy, when certain thresholds get met,” Shay told CNBC. “So if the total dollar value of the stolen guards exceeds $5,000 in a single year, local prosecutors can pursue a federal charge.”

Some criminal justice experts have questioned whether lowering the threshold will reduce crime, and said enacting stiffer penalties could potentially hurt marginalized groups.

While the members of Congress at the press conference, along with retail representatives and the NRF, acknowledge there is wide support for the measure, time is ticking on the legislative year to move it forward to committee and beyond.

McBride acknowledges passage of the bill would not be a panacea, but “it just adds another layer … to help the retailer and disincentivize the bad guys from using [organized retail crime] as a means for financing their criminal activities.”

The Combating Organized Retail Crime Act would follow another law known as the INFORM Act that went into effect at the end of June, which requires online marketplaces to verify the identity of their sellers with the goal of deterring the sale of stolen or counterfeit goods. Retailers that don’t comply will face fines.

When asked Thursday, Shay said it’s still too early to tell what the effects of the new legislation will be.

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The big AI and robotics concept that has attracted both Walmart and Softbank

Symbotic technology in use at a Walmart facility.

Courtesy: Walmart

Venture-capital giant Softbank notched a $15 billion-plus gain on its 2016 deal to buy Arm Holdings when the artificial intelligence-enabling semiconductor firm went public last month. But not as many investors know about Softbank’s “other” big AI investment, Wilmington, Mass.-based software and robotics maker Symbotic, which Walmart has taken a big stake in itself.

That may soon change.

Symbotic, a company that has already generated market heat selling AI-powered robotic warehouse management systems to clients including Walmart, Target and Albertson’s, is partnering with Softbank to play in a potentially giant and transformative market. The two are teaming up in a joint venture called GreenBox Systems which promises to deliver AI-powered logistics and warehousing to much smaller companies, delivering it as a service in facilities different companies share. They say it’s a $500 billion market, and an example of the kind of change AI can bring to the economy at large.

If it works, GreenBox will reach companies that could never afford the multi-million dollar required investment, in the same way cloud computing puts high-end information tech within reach, said Dwight Klappich, an analyst at technology research firm Gartner.

“I’ve seen a lot of robotics tech and I’ve never seen anything like it in my life,” TD Cowen analyst Joseph Giordano said. “Compared to what it replaces, it’s like day and night.” 

Erasing memories of a big WeWork real estate blunder

It might even mute the memory of Softbank’s most disastrous commercial real estate management investment ever, the notorious office-sharing company WeWork. 

Like WeWork, GreenBox is a promise to fuse technology and real estate. Indeed, its  sales pitch of “warehouse as a service” recalls the “space as a service” slogan in WeWork’s 2019 IPO prospectus almost exactly. The big difference: with WeWork, outside analysts struggled to identify what technological advantage WeWork ever offered clients over working at home or in traditional offices, let alone one that justified its peak valuation of $47 billion. WeWork today is worth under $150 million and is now under bankruptcy watch as it warned in August of its potential inability to remain “a going concern,” and more recently stopped making interest payments on debt, asking lenders to negotiate.

At GreenBox, the technology is the whole point, Giordano said. And unlike WeWork, which wanted people to change the way they used offices, Symbotic and GreenBox are out to let companies that already run warehouses boost efficiency and profits, he said. 

“Contract warehousing exists today – but those operations are mostly manual,” said Robert W. Baird analyst Rob Mason.

Softbank, perhaps not surprisingly, doesn’t like the WeWork analogy even being mentioned, with spokesperson Kristin Schwarz declining an interview request for Vikas Parekh, Softbank’s representative on Symbotic’s board (Parekh is also on WeWork’s board), after the firm learned CNBC would ask about it.

“If we are to put Vikas on the record for this, the interview would need to stay focused on GreenBox, and not on any other SoftBank topics,” Schwarz wrote in an e-mail. 

Softbank owns more than 8% of Symbotic, according to data from Robert W. Baird, and took it public through a special purpose acquisition company last year. Softbank also owns 65% of the GreenBox venture, which launched with $100 million in investment by the two companies. Walmart owns another 11% of Symbotic, according to a proxy statement from the robotics company, and is by far its biggest customer until the GreenBox venture ramps up, accounting for almost 90% of revenue.

“We share the same vision of going big and going fast,” Symbotic CEO Rick Cohen said. “We believe this market is massive.”

Symbotic has generated stock-market excitement even before the GreenBox deal. Its shares are up 190% this year. Sales in its most recent quarter climbed 77%, and orders for its existing warehouse-management systems jumped to $12 billion – a backlog it would take the company years to fulfill  Add in the $11 billion of Symbotic software and follow-on services GreenBox committed to buy over six years in July, and that backlog soars to $23 billion for a company that expects its first billion-dollar revenue year in fiscal 2023, and to break even on an EBITDA basis for the first time as a public company in the fourth quarter.

The best indication of the future may be from Walmart, which bought its Symbotic stake as part of the companies’ deal to automate the retailer’s 42 U.S. regional distribution centers for packaged consumer goods.

The product is the reason why, analysts say. 

At prices of $25 million to hundreds of millions, according to a conference call Symbotic held with analysts in July, a Symbotic system blends as many as dozens of autonomous robots that scoot around warehouses at speeds up to 25 mph, moving and unloading boxes from pallets and picking orders with AI software that optimizes where in a warehouse to put individual cases of goods, and lets boxes be packed to the warehouse’s ceiling, Giordano said, wasting much less space in the building. 

The system works something like a disk drive that uses intelligence to store data efficiently and retrieve the right data on demand – but with boxes of stuff. And a large warehouse can use several different systems, piling up the required investment to get moving.

Because Symbotic’s system can track inventory down to the case easily, where stuff is put can be matched much more easily to incoming orders, making it possible to more fully automate order picking. It can also match the design of outgoing pallets to the layout of the store the pallet is headed to, speeding up unloading and shelf stocking, Klappich said. 

But the biggest innovation the tech allows is in business models, rather than in technology itself. That hasn’t spread outside of giant companies yet, but Giordano and Mason say they think it will.

The AI’s precision will let multiple companies share the same warehouse, and even commingle their goods for efficient shipping without confusion, much as cloud computing lets multiple clients share the same computer servers, Mason said. 

“Through sharing infrastructure, you can get out of the infrastructure business and focus on what’s important to you,” Klappich said. “Larger-scale automation without the capital expense has been a challenge.”

Born out of stealth work with Walmart, minting a multi-billionaire

The idea grew out of a vision Cohen had when running his family’s grocery distribution company, C&S Wholesale Grocery, which he has grown to $33 billion in annual revenue from $14 million since 1974.  Symbotic was founded in 2006, and worked in stealth mode for years while refining its prototypes with Walmart. 

“I’ve spent my whole life in the outsourcing and [logistics] business with C&S, so, this — the ability to run warehouses for people — has always been on the plate, Cohen said in the July analyst call. “We said we’re going to take care of Walmart first. …We are now starting to say, I think we can do more.”

Symbotic and C&S have made the 71-year old Cohen one of America’s richest men, with a net worth hovering around $15.9 billion, according to Forbes. 

Symbotic teamed up with Softbank to build GreenBox in order to preserve its own capital, Cohen told analysts. The joint venture was initially capitalized 65% by Softbank and 35% by Symbotic, for a total of $100 million. Analysts say the venture will require much more capital, possibly raised by having GreenBox itself borrow money in the bond market. Symbotic said it will use its share of the profits from sales to GreenBox to keep its equity stake in the joint venture around 35%.

“The question has been, who has the capital to set it all up?” Klappich said. “Softbank could be the key because they have deep pockets.”

The joint venture will buy software from Symbotic, then turn around and sell the warehouse space, equipment and related services as a package to tenants. 

Many questions remain, and potential threats from Amazon, private equity

Much else about the new company remains unknown, beginning with the identity of its not-yet-announced chief executive, Mason said. The venture could either develop warehouses or rent them, though Symbotic said it will probably mostly rent them. Pricing for the warehouse-as-a-service is undisclosed. 

But the rise of Greenbox more than doubles Symbotic’s potential market, and nearly doubles its backlog. Symbotic has said that its total market is about $432 billion, a figure chief strategy officer Bill Boyd repeated on the conference call when the GreenBox alliance was announced.  Early adopters will be in businesses like grocery and packaged goods, with Symbotic expanding into pharmaceuticals and electronics over time, according to Symbotic’s annual federal regulatory filing this year.

The GreenBox market for smaller companies shapes up as another $500 billion of possible demand, Gartner’s Klappich said. The estimates are based on the number of warehouses in those industries, the likely percentage of warehouses in each whose owners can afford the technology, either independently or through GreenBox, and the average price of Symbotic-like systems. 

The third quarter of the company’s fiscal year, which ends in October, illustrates how the company’s profits might scale. Revenue jumped 77% to $312 million, and its loss before interest, taxes and non-cash depreciation and amortization expenses shrank to $3 million. Mason says the company will turn profitable on an EBITDA basis in the fiscal year that begins this fall, before orders from GreenBox begin, and EBITDA will be “in the mid-teens” as a percent of sales by the following year.

Clients stand to save money all the way through the warehouse, Klappich said.

Giordano estimated the savings at eight hours of labor per outgoing truck. The technology can also cut space rental costs by allowing goods to be packed closer together and stacked higher. 

Using the facility as a service will let seasonal companies cut back on the space and robot time they use during slow periods, rather than carry them all year. The warehouse should run with many fewer workers, Giordano said. And GreenBox will pay for upgrades to robots and software every few years, rather than making tenants invest more, he said.

Walmart led investors on a tour of its Brooksville, Fla. warehouse in April, and said technology investments like the Symbotic alliance will let profits grow faster than sales. More than half of distribution volume will move through automated centers within three years, improving unit costs by about 20% as two-thirds of stores are served by automated systems. The company has said little about the impact on jobs, but CEO Doug McMillon said overall employment should stay about the same size but shift toward delivery from warehouse roles. 

Competition will be arriving soon enough, analysts say. Building something like Symbotic, and especially moving it down into the realm where companies other than global giants can afford it, takes a combination of technology, money and vision, Klappich said. 

Amazon could expand into the space, using its warehousing expertise in a service that resembles its Web hosting business model, or private-equity firms awash in investable cash might acquire combinations of companies to produce competing products and business models, Klappich said.

For Softbank, the payoff if GreenBox works is potentially huge. Analysts on average project Symbotic shares to rise another 53% in the next year after pulling back amid recent recession fears, according to ratings aggregator TipRanks. With post-IPO estimates arguing that Arm shares will stagnate, and taking into account that Softbank paid a reported $36 billion for Arm in 2016, it’s possible Symbotic will be the bigger win in the end, at least on a percentage basis, as the 65% share of GreenBox rises in value.

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Jim Cramer’s top 10 things to watch in the stock market Monday

My top 10 things to watch Monday, August 14

1. It’s a big week of retail earnings. Is Target (TGT) undervalued? Is Walmart (WMT) overvalued? Is Club name TJX Companies (TJX) going to start with its usual up two points and then cascade down two? That’s what you need to be ready for. TJX and Target report second-quarter results on Wednesday, while Walmart reports on Thursday.

2. Morgan Stanly on Monday names Club holding Nvidia (NVDA) a top pick, while predicting a beat and raise when the company reports second-quarter results on Aug. 23. But I really want to warn people that I don’t think it’s ready to be bought.

3. Mizuho on Monday raises its price target on Amgen (AMGN), a very low-risk pharmaceuticals company, to $223 a share from $214, while maintaining a neutral rating on the stock. Elsewhere, Jefferies raises its price target on Amgen to $310 a share, up from $275, and reiterates a buy rating.

4. U.S. Steel (X) rejects an unsolicited takeover bid from rival Cleveland-Cliffs (CLF) that would have valued the former at roughly $7 billion. Cliffs is willing to buy anything. But why would the Federal Trade Commission ever allow this? U.S. Steel said Sunday it’s reviewing its strategic options.

5. Citigroup on Monday downgrades Urban Outfitters (URBN) to neutral from buy ahead of the clothing retailer’s second-quarter earnings on Aug. 22, while raising its price target to $40 a share, up from $36. The firm expects URBN to deliver an earnings beat, but thinks market expectations are too high going into the print. I like this company and find this downgrade disturbing.

6. Following a red-hot initial public offering last month, Morgan Stanley on Monday initiates coverage on beauty-and-wellness company Oddity Tech (ODD) with the equivalent of a hold rating and $57-a-share price target. The bank cites “strong long-term revenue growth prospects” for Oddity, but thinks the positives are already priced into the stock’s valuation.

7. Bernstein on Monday downgrades hotel chain Marriott International (MAR) to market perform, or neutral, from outperform, arguing the stock’s short-term upside is limited by its increased valuation this year and a slowdown in the U.S. luxury space. But the firm increases its price target on Marriott to $218 a share, up from $204.

8. Mizuho on Monday raises its price target on restaurant-management-software firm Toast (TOST) to $30 a share, up from $27, while maintaining a buy rating on the stock, following its “very strong” second-quarter results. Baird, conversely, designated Toast a “bearish fresh pick” following its big run of late. The firm has a neutral rating on the stock, with a price target of $25 a share.

9. China’s Country Garden, the country’s largest private real-estate developer, suspends trading of its onshore bonds on Monday, in a sign it could soon move to restructure its debt. Shares are down roughly 17%, weighing heavily on Hong Kong’s Hang Seng Index. The news is the latest sign Beijing will likely need to step in to shore up China’s beleaguered real-estate sector.

10. Piper Sandler on Monday raises its price target on Club name Coterra Energy (CTRA) to overweight, or buy, from neutral, on expectations for “strong execution across the portfolio.” The bank increases its price target on the oil-and-gas firm to $35 a share, up from $30.

And remember to tune into the Club’s Monthly Meeting on Thursday at 12:00 p.m. ET.

(See here for a full list of the stocks at Jim Cramer’s Charitable Trust.)

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Walmart is bringing ads to an aisle near you as retailers chase new moneymakers

Walmart is turning more parts of its stores into advertising opportunities. For example, brands can buy a spot on its self-checkout screens.

Walmart

One of Walmart‘s latest offerings at its SuperCenters isn’t a hot new toy, snack flavor or sundress. It’s advertising.

Shoppers will soon see more third-party ads on screens in Walmart self-checkout lanes and TV aisles; hear spots over the store’s radio; and be able to sample items at demo stations.

Walmart’s push into advertising resembles similar moves by retailers like Kroger, which struck a deal to bring digital smart screens to cooler aisles in hundreds of its stores, and Target, which began testing in-store demos and giveaways, including a recent “Barbie” branded event with Mattel that took place at about 200 stores.

For Walmart, selling ad space to its wealth of existing partners is another way to capitalize on the company’s huge reach and to expand into higher-margin businesses. The discounter has nearly 4,700 stores across the U.S., with roughly 90% of Americans living within 10 miles of a Walmart store.

In the U.S., about 139 million customers visit Walmart stores and its website or app each week.

“When you think about our store, our store footprint and the percentage of Americans that we reach through our stores, we can deliver Super Bowl-sized audiences every week,” said Ryan Mayward, senior vice president of retail media sales for Walmart Connect, the retailer’s advertising business.

The company plans to ramp up in-store ads using its approximately 170,000 digital screens across its locations as well as 30-second radio spots that will be available to suppliers later this year and can target a specific store or region.

And it’s hoping at least one of the new advertising initiatives will be easy to digest: free samples in stores on the weekends.

Walmart plans to sell the demo stations to advertisers and bundle them with other ad formats that can run at the same time to make for a fuller campaign. QR codes at the demo tables will pull up online shopping options, meal ideas or seasonal information.

It tried out the new in-house approach of selling sampling stations in Dallas-Fort Worth and plans to offer the option in more than 1,000 stores across the country by the end of January.

Advertising still drives a small sliver of Walmart’s overall revenue. Its global advertising business hit $2.7 billion in the most recent fiscal year, which ended in late January. That’s less than 1% of Walmart’s total annual revenue.

Yet it is becoming a more meaningful growth engine for Walmart. CEO Doug McMillon said earlier this year that he expects company profits to grow faster than sales over the next five years, driven in part by higher-margin businesses, including advertising.

In the most recent fiscal year, Walmart’s global ads business grew nearly 30% and its U.S. ads business, Walmart Connect, rose about 40%. That’s a sharper gain than the approximately 7% increase in Walmart’s total revenue and Walmart U.S. net sales during the period.

The next frontier

As Walmart and other retailers grow their ad businesses, the store stands as the next frontier. Target, Kroger and others have pushed aggressively into retail media, a buzzy term used to describe marketing to shoppers based on customer data.

That side hustle has become a more substantial revenue stream for retailers, especially as brands look for new ways to reach big audiences. Retail media is on track to be a $45 billion industry this year, up 20% from the prior year, according to Insider Intelligence. The market researcher expects that growth to accelerate in the coming years and reach about $106 billion in 2027.

Yet up until recently, retailers, including Walmart, have largely focused on selling online ads and steered clear of adding digital signs or flashier ads to the places that draw higher traffic and drive the vast majority of sales: their own stores.

Walmart’s Mayward said the retailer has added advertising to stores “in a very deliberate and cautious way” after learning how shoppers respond to online ads.

When done right, he said ads can enhance the experience for shoppers and lift sales. For example, he said, a customer may spring for a sound bar after learning about the product on the TV wall when walking through the electronics department. They may decide to buy a jar of salsa after seeing a video of it near the aisle of their favorite bag of chips.

“It’s a complimentary advertising moment,” he said. “It’s helping you make connections between two different products and decide that you maybe need that second thing.”

Walmart is turning the approximately 170,000 digital screens across its U.S. stores into advertising opportunities. For example, a company that makes a snack or a beauty product can advertise in the TV aisle of the electronics department.

Walmart

According to Mark Boidman, head of media at New York City-based investment bank Solomon Partners, that proximity offers a unique opportunity that online advertising can’t replicate.

“It’s better to reach people with video when you’re aisles apart as opposed to miles apart,” Boidman said.

He noted it’s gotten harder for brands to get in front of large audiences as customers increasingly fracture into smaller groups that watch different TV shows, subscribe to different streaming services or tune in to different broadcast channels.

Plus, he added, they want to more closely track if marketing dollars lead to sales. Grocers and big-box retailers have valuable first-party data that can better measure that, since they can advertise a product and then use a loyalty program or sales patterns to see if it became more popular.

But that additional data can be a double-edged sword. He said companies must respect shoppers’ privacy concerns, too. If an advertisement is too targeted to an individual, they may feel creeped out.

The right balance

With the debut of more in-store ads, retailers risk those privacy concerns as well as backlash from shoppers who may see the ads as unsightly or irritating.

That’s already played out at Walgreens: The drugstore added digital smart screens that flashed ads on fridge doors in many of its U.S. stores. Some shoppers complained on TikTok and Twitter that the doors made it hard to find ice cream, pizza or other frozen and chilled items they wanted.

Walgreens CEO Roz Brewer, who stepped into her role after the deal got signed, didn’t like them either, according to a lawsuit filed last month by Cooler Screens, the company behind the tech. It alleges Walgreens was in breach of contract after breaking off an installation agreement.

The drugstore chain had agreed to install the screens in at least 2,500 stores across the U.S., according to the lawsuit, but Brewer squashed the rollout after visiting the stores and comparing the screens “to ‘Vegas’ in a derogatory way.”

Walgreens disputed Cooler Screens’ claims and said it terminated its contract with the firm based on its “failure to perform.”

Cooler Screens has converted stores’ frozen and refrigerated aisles into places where companies can advertise.

Cooler Screens

In an interview with CNBC, Cooler Screens co-founder and CEO Arsen Avakian acknowledged that bringing ads into physical stores is tricky. But he said stores need a more modern look that allows shoppers to search, sort and discover merchandise like they do online and in apps.

Kroger plans to install Cooler Screens in 100 stores by the end of year and reach 500 by next year. Walmart piloted Cooler Screens technology, but ultimately decided not to expand it.

Andrew Lipsman, a retail and e-commerce analyst at Insider Intelligence, said retailers have to tread lightly to avoid creating the real-world equivalent of pop-up ads.

“There’s a concern of it looking too much like Times Square,” said Lipsman, who previously worked for Cooler Screens and has closely followed retail media.

As retailers expand ads into stores, they can start with lower-risk spots like pharmacy or deli counters where customers may welcome a distraction as they wait, he said, adding that stores have plenty of subtle ads already. Brands pay for prominent spots at the end of aisles or for signs that spread the word about a seasonal snack, discount or new product.

And people have gotten used to seeing digital ads in other parts of the physical world, such as around the perimeter of major sports arenas.

“There’s digital signage everywhere,” Lipsman said. “It’s become pervasive across many contexts. It’s natural it’s going to enter the store.”

Disclosure: CNBC’s parent company, NBCUniversal, is a media partner of Walmart Connect.

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As Macy’s stock struggles, the retailer bets on private brands with more modern looks

Macy’s launch event for its new private brand, On 34th, also marked one of the first public appearances by Tony Spring (left) since he was named incoming CEO. Spring is CEO of the company’s higher-end department store chain, Bloomingdale’s. He will succeed Jeff Gennette (right) in February.

Melissa Repko | CNBC

NEW YORK — Macy’s, the 165-year-old department store chain, is looking for ways to keep up with the newer kids on the block.

The retailer faces slumping sales, and its stock has struggled in a good year for the market. Now, it’s banking on a wave of new and refreshed private brands to attract shoppers, especially as some flee to popular direct-to-consumer brands, online giants like Shein and Amazon, and big-box players like Target.

On Wednesday, it showed off its newest private brand, On 34th, at its Macy’s Herald Square flagship. The brand, named after the legacy store’s Manhattan location, is made of up of women’s clothing and accessories. The brand is designed for women ranging from 30 to 50 who want modern, versatile and easy-to-wear looks.

The new brand is hitting store shelves and Macy’s website at a challenging time for the company and much of the retail industry. Consumers have cut back on discretionary spending at stores as they’re pinched by steeper grocery bills and rent, while they spend on experiences like concerts and summer vacations. The department store operator cut its full-year outlook last month, after seeing consumers pull back on purchases of clothing and other items.

On 34th is the first of four new private brands that Macy’s plans to launch by the end of 2025. It also plans to refresh some existing labels and phase out others.

Macy’s Chief Merchandising Officer Nata Dvir said On 34th’s debut comes after more than two years of customer research.

“They cared about fit, quality and value and had a tremendous amount of passion around what they were putting on every single day,” she said. “And they deserved better.”

The kickoff event previewed another piece of Macy’s future, too: It marked one of the first public appearances of Tony Spring, since he was named its next CEO. Spring, who currently leads the parent company’s higher-end department store Bloomingdale’s, will succeed Jeff Gennette in February.

Gennette said Wednesday that consumers’ financial stress continues to show up in the company’s sales trends.

Macy’s significantly cut its financial expectations in June. The department store operator, which includes Bloomingdale’s and beauty chain Bluemercury, said it expects comparable owned-plus-licensed sales to drop by 6% to 7.5% for the year. It expects earnings per share of $2.70 to $3.20 for the year.

Shares of Macy’s have reflected investors’ concerns. Macy’s stock was down more than 20% so far this year as of Wednesday. The S&P 500, by comparison, is up 19% this year.

Some of Wall Street’s worries are company-specific, as investors question whether the legacy department store can keep up with shoppers’ changing tastes.

Macy’s has sought to steady the ship in recent years while battered by other fast-changing dynamics. Led by Gennette, the department store kicked off a three-year turnaround plan in February 2020, about a month before the start of the Covid pandemic. It called for shuttering lagging stores, investing in its higher performing locations and stepping up online growth.

Macy’s is leaning into private brands to drive growth. Its newest brand, On 34th, is designed to be both fashion-forward and easy to wear. It ranges in price from $19.50 for a tank top to $299.50 for a leather jacket.

Melissa Repko | CNBC

Private brands are a common way that retailers offer lower-priced and exclusive merchandise to customers. The labels tend to be more profitable, since the companies have direct control, fewer middlemen and scale when making the items. Plus, since the items can’t be found anywhere else, the retailer isn’t going head to head on price with a competitor.

Macy’s sells a mix of private brands and national brands, including Ralph Lauren, Calvin Klein and Levi Strauss. It has about 25 private brands that cut across categories like apparel and home goods, including On 34th.

In the most recent fiscal year, private brands drove approximately 16% of sales. Yet Macy’s would like to get that closer to about 20%, a level that it hit in the past.

But the strategy comes with risks. Target is the poster child of private label success, after hatching and expanding many billion-dollar brands including children’s apparel brand, Cat & Jack, and activewear brand, All in Motion. On the other hand, some investors have pinned the downfall of now-bankrupt Bed Bath & Beyond in part to its expensive and aggressive rollout of private brands that customers didn’t want.

Gennette said Macy’s has been thoughtful about the push. It’s gathering customer input while developing the apparel and even made tweaks in recent weeks while testing the brand with customers at two New Jersey stores. Plus, he added, Macy’s has had years of experience selling private brands with a following, such as women’s apparel brand I.N.C. and home goods brand Hotel Collection.

The company has poached talent from retailers known for strong brands, too, including Emily Erusha-Hilleque, a 23-year veteran of Target, as its senior vice president of private brands. It also hired Bryan Riviere, previously of Gap-owned Banana Republic, Levi Strauss, Lululemon and Nike, as its senior vice president of private brand sourcing, product development and production.

Along with providing fresh looks, Macy’s wanted to step up the quality and fit of its clothing. Over the past three years, it has cut the number of factories and mills that it works with by about half, Riviere said. By working with fewer partners, it has the scale to negotiate better prices, savings to invest in better fabrics and knits and more buy-in from the factories that it works with.

It also worked with a technology company to standardize sizing across all Macy’s private brands. Universal sizing makes shopping less of a guessing game for customers and returns less likely, Erusha-Hilleque said.

On 34th will officially debut in mid-August with about 750 items that range from a basic tank top at $19.50 to a leather jacket for $299.50. Its shoe collection will launch in spring 2024.

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Target shoppers can now make a return without leaving the car

Target is dangling a new perk to get shoppers to swing by its stores: customers can make returns without leaving their car.

The curbside-returns service, which began last week at roughly a quarter of Target’s nearly 2,000 stores nationwide, will be available across the chain by the end of summer. 

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Target is sweetening its curbside-pickup service, Drive Up, to attract and retain customers as the retailer braces for a potential sales slowdown and tries to hang on to pandemic-fueled gains. Total annual revenue grew by about $31 billion – or nearly 40% – from fiscal 2019 to 2022.

Now, as shoppers become more budget conscious and buy fewer discretionary items, Target said it expects comparable sales to range from a low single-digit decline to a low single-digit increase this fiscal year. At an investor day in February, it projected full-year earnings per share of between $7.75 and $8.75, below Wall Street’s expectations of $9.23 per share, according to StreetAccount estimates.

The company hopes convenient perks like curbside returns will boost customer loyalty and jolt sales.

“Any time we remove friction from our guest experience it benefits the guests and benefits Target because they deepen their relationship with us,” Chief Stores Officer Mark Schindele said. “We’ve shown that with Drive Up overall. Guests try that service, they love it and then they shop our stores more often.”

Curbside pickup became a bigger sales driver for retailers’ e-commerce businesses, especially as shoppers tried to avoid crowds during the Covid pandemic. For some shoppers, the habit has stuck as work and home schedules are fuller and commutes are back — and retailers including Target and rival Walmart now aim to capitalize on that.

Click-and-collect, a term used to describe buying online and picking up purchases curbside or in store, grew from 6% of overall e-commerce sales in the U.S. in 2019 to 11% in 2022, according to data from Euromonitor, a market research firm.

Delivery still accounts for the majority of online sales, but click-and-collect drove about $114 billion of sales in 2022 — a jump from $36 billion in 2019, according to Euromonitor.

In the U.S., the vast majority of click-and-collect comes from curbside pickups, said Bob Hoyler, industry manager for retail research at Euromonitor. 

The market research firm anticipates click-and-collect sales in dollars will grow by 8% this year, compared with 2% for delivery. The growth will be fueled by consumers who opt for curbside pickup to avoid delivery fees or shipping minimums at a time of heightened price sensitivity, Hoyler said.

Target debuted Drive Up in 2017 as a test in Minneapolis, where the company is based. It expanded the service to stores across all 50 states in 2019. It added fresh and frozen groceries in 2020, and tacked on wine and beer the following year. 

Last year, the retailer expanded the service to allow shoppers to order a Starbucks drink to retrieve when they pick up their curbside order. The service is available at about 240 stores.

Sales fulfilled through Drive Up grew more than 70% in the fiscal year that ended in late January 2022, on top of a more than 600% boom during the prior fiscal year, the company said. Drive Up sales grew more than 10% in the most recent fiscal year.

Target’s same-day services, which include Drive Up, accounted for more than half of digital sales as of late January as consumers embrace convenience. Same-day services also include Target-owned delivery service Shipt and Order Pickup, which allows shoppers to retrieve an online purchase inside of a store.

The retailer’s average fulfillment cost per unit has fallen by 40% over the past four years as those services grow, Chief Operating Officer John Mulligan said at an investor day in February. More than 95% of Target’s total sales, including digital, are fulfilled in stores.

Other retailers have added to curbside pickup. Walmart rolled out curbside returns at all of its stores ahead of the 2022 holiday season. Dick’s Sporting Goods added curbside returns to its services in 2020 and offers it across all of its stores.

Neither company would quantify the use of curbside pickup or returns, but Walmart said it has seen nearly double the volume of customers using curbside returns from its launch across the chain last fall compared with this month.

At an investor event earlier this month, Walmart CEO Doug McMillon said the retailer is competing on convenience, too. He credited pickup and delivery for driving growth in recent years, and said the company’s recent survey results show customers are choosing the big-box retail giant to save time along with money.

Yet other retailers such as Kohl’s have eliminated curbside pickup. It ended the service last summer, swapping it out for a self-pickup service inside of stores.

The company’s shift to self pickup is part of efforts to cut costs, including by reducing its payroll, Chief Financial Officer Jill Timm said in September at a Goldman Sachs conference. She said Kohl’s is also testing self checkout and self returns.

For some retailers, the time and labor of curbside pickup can be hard to justify — especially since it encourages shoppers to stay in their cars rather than step into stores where they may fill up their carts with more purchases, Euromonitor’s Hoyler said.

Those concerns fueled skepticism of curbside returns within Target, too.

Most Target returns are made at the store, according to the company. Inside of a store, a shopper may swap out a returned product for another or grab an impulse item.

At Target’s investor day in late February, Citibank analyst Paul Lejuez asked if the retailer would ultimately miss out on purchases by adding curbside returns.

Schindele, the chief stores officer, said Target is focused on the lifetime value of a customer, not just the economics of a single transaction. He said allowing curbside returns also helps the retailer get unwanted items back on the sales floor faster and lowers the cost of mail-in returns.

He added that curbside pickup still inspires browsing and other purchases. On average, about 20% of customers who pick up Drive Up orders also make an in-store purchase on the same day, he said.

“What we find is when a guest uses Drive Up — and it could be Drive Up returns, it could be Drive Up purchase — we find that they spend more money in store over the course of the year.”

During tests of curbside returns, some shoppers have stopped by just to return an item, Schindele said. Others have picked up purchases while making a return. Still others have retrieved items they bought, made a return and gotten a Starbucks drink.

For Target, curbside returns could serve as a differentiator and a complement to the merchandise mix it sells, Hoyler said. Target’s sales focus is on general merchandise, such as apparel and beauty products, with only roughly 20% of its annual sales coming from grocery items. That’s much less than Walmart, which draws nearly 60% of its annual U.S. sales from grocery.

That general merchandise tends to be returned much more often than items like milk and bananas, he said.

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Shrinking food stamp benefits for families mean yet another challenge for retailers

A worker carries bananas inside the Walmart SuperCenter in North Bergen, New Jersey.

Eduardo Munoz Alvarez | AP

For some shoppers who already struggle to cover grocery bills, the budget is getting tighter.

This month, pandemic-related emergency funding from the Supplemental Nutrition Assistance Program, formerly known as food stamps, is ending in most states, leaving many low-income families with less to spend on food.

More than 41 million Americans receive funding for food through the federal program. For those households, it will amount to at least $95 less per month to spend on groceries. Yet for many families, the drop will be even steeper since the government assistance scales up to adjust for household size and income.

For grocers like Kroger, big-box players like Walmart and discounters like Dollar General, the drop in SNAP dollars adds to an already long list of worries about the year ahead. It’s likely to pressure a weakening part of retailers’ business: sales of discretionary merchandise, which are crucial categories for retailers, as they tend to drive higher profits.

Major companies, including Best Buy, Macy’s and Target, have shared cautious outlooks for the year, saying shoppers across incomes have become more careful about spending on items such as clothing or consumer electronics as they pay more for necessities such as housing and food.

Food, in particular, has emerged as one of the hardest-hit inflation categories, up 10.2% year-over-year as of February, according to the U.S. Bureau of Labor Statistics.

“You still have to feed the same number of mouths, but you have to make choices,” said Karen Short, a retail analyst for Credit Suisse.

“So what you’re doing is you’re definitely having to cut back on discretionary,” she said.

The stretch has made it impossible for some to afford even basic items. It’s still too early to see the full impact of the reduced SNAP benefits, said North Texas Food Bank CEO Trisha Cunningham, but food pantries in the Dallas-Fort Worth area have started to see more first-time guests. The nonprofit helps stock shelves at pantries that serve 13 counties.

Demand for meals has ballooned, even from pandemic levels, she said. The nonprofit used to provide about 7 million meals per month before the pandemic and now provides between 11 million and 12 millions meals per month.

“We knew these [extra SNAP funds] were going away and they were going to be sunsetted,” she said. “But what we didn’t know is that we were going to have the impact of inflation to deal with on top of this.”

Shifting market share

So far, retail sales in the first two months of the year have proven resilient, even as consumers contend with inflation and follow a stimulus-fueled boom in spending in the early years of the pandemic. On a year-over-year basis, retail spending was up 17.6% in February, according to the Commerce Department.

Some of those higher sales have come from higher prices. The annual inflation rate is at 6% as of February, according to the Labor Department’s tracking of the consumer price index, which measures a broad mix of goods and services. That index has also gotten a lift from restaurant and bar spending, which has bounced back from earlier in the pandemic and begun to compete more with money spent on goods.

Yet retailers themselves have pointed out cracks in consumer health, noting rising credit card balances, more sales of lower-priced private label brands and shoppers’ heightened response to discounts and promotions.

Some retailers mentioned the SNAP funding decrease on earnings calls, too.

Kroger CEO Rodney McMullen called it “a meaningful headwind for the balance of the year.”

“We’re hopeful that everybody will work together to continue or find additional money,” he said on the company’s earnings call with investors earlier this month. “But as you know, because of inflation, there’s a lot of people whose budget is under strain.”

Credit Suisse’s Short said for lower-income families, the food cost squeeze comes on top of climbing expenses for nearly everything else, whether that’s paying the electric bill or filling up the gas tank.

“I don’t think I could tell you what a tailwind is for the consumer,” she said. “There just isn’t a single tailwind in my view.”

Emergency allotments of SNAP benefits previously ended in 18 states, which could preview the effect of the decreased funding nationwide. In a research note for Credit Suisse, Short found an average decline in SNAP spending of 28% across several retailers from the date the additional funding ended.

Some grocers and big-box retailers could feel the impact more than others. According to an analysis by Credit Suisse, Grocery Outlet has the highest exposure to SNAP with an estimated 13% of its 2021 sales coming from the program. That’s followed by BJ’s Wholesale with about 9%, Dollar General at about 9%, Dollar Tree at about 7%, Walmart’s U.S. business with 5.5% and Kroger with about 5%, according to the bank’s estimates, which were based on company filings and government data.

Retailers that draw a higher-income customer base, such as Target and Costco, should feel comparatively less effect, Short said. If nothing else, the dwindling SNAP dollars could shift shoppers from one retailer to another, she said, as major players seek to grab up market share and undercut on prices.

Fewer dollars to go around

Another factor could make for a bumpier start to retailers’ fiscal year, which typically kicks off in late January or early February: Tax refunds are trending smaller this year.

The average refund amount was $2,972, down 11% from an average payment of $3,352 as of the same point in last year’s filing season, according to IRS data as of the week of March 10. That average payout could still change over time, though, as the IRS continues to process millions of Americans’ returns ahead of the mid-April deadline.

Dollar General Chief Financial Officer John Garratt said on an earnings call this month that the discounter is monitoring how its shoppers respond to the winding down of emergency SNAP benefits and lower tax refunds.

He said stores did not see a change in sales patterns when emergency SNAP funds previously ended in some states, but he added that “the customer is in a different place now.”

Tax refunds can act as a cash infusion for retailers, as some people spring for big-ticket items like a pair of brand-name sneakers or a sleek new TV, said Marshal Cohen, chief industry advisor for The NPD Group, a market research company.

This year, though, even if people get their regular refund, they may use it to pay bills or whittle down debt, he said.

One bright spot for retailers could be an 8.7% cost-of-living increase in Social Security payments. Starting in January, recipients received on average $140 more per month.

However, Cohen said, the cash influx might not be enough to offset pressure on younger consumers, particularly those between ages 18 and 24, who have just started jobs and face milestone expenses like signing a lease or buying a car.

“Everything’s costing them so much more for the early, big spends of their consumer career,” he said.

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Venture capital for Black entrepreneurs plummeted 45% in 2022, data shows

Bea Dixon, the CEO and co-founder of The Honey Pot Company

Courtesy: Honey Pot Company

In 2016, Beatrice Dixon had finally secured a deal with Target to carry her line of feminine care products. But she had one problem: She was still making them in the kitchen of her Atlanta home, and she needed to scale up — fast. 

The CEO and co-founder of The Honey Pot Company, a vaginal-wellness brand, was faced with the “impossible” task of launching in 1,100 stores and needed funding to bring on manufacturers so she could deliver on the retailer’s orders. 

She managed to secure that crucial round of financing from the New Voices Foundation, a fund led by Richelieu Dennis that’s devoted to supporting women entrepreneurs of color. Using that financing, and some funding from family and friends, Dixon was able to quit her job, move operations out of her kitchen and launch in Target stores nationwide by 2017. 

Some six years later, Dixon’s products are a staple in retailers across the country. 

“It was really hard, man, we weren’t having any luck,” Dixon told CNBC in a recent interview about the struggles she faced securing investors. “I don’t know what would have happened if we didn’t get that money.”

Dixon is one of many Black entrepreneurs who struggled to secure funding for their businesses and relied on venture capital financing earmarked for diverse founders. While Dixon and many others have ultimately succeeded, Black-led businesses and Black founders have historically faced disparities in securing VC funding. 

Overall, Black entrepreneurs typically receive less than 2% of all VC dollars each year while companies led by Black women receive less than 1%, according to data from Crunchbase. 

In the wake of the police murder of George Floyd and the racial justice reckoning that followed, Black founders and Black-led startups saw historic gains in securing VC funding in 2021. However, as momentum around the movement fizzled and market conditions worsened, a lot of those gains were lost by the end of 2022. 

While overall VC funding dropped by 36% in 2022 as inflation and interest rates surged, financing for Black businesses saw a steeper drop of 45%, according to the Crunchbase data. That drop is the largest year-over-year decrease Black entrepreneurs have seen over the past decade. 

“There were a lot of political and cultural strife problems in 2020 and early 2021 that created a higher focus on Black and diverse founders,” said Kyle Stanford, a senior analyst at Pitchbook. “No one wants that to be the reason why they focus on investing in any group, but that did put a lot of focus on the problems that VC has had investing in anyone outside of a straight white male.”

Marlon Nichols, the co-founder and managing general partner of MaC Venture Capital, said diverse businesses tend to take the brunt of VC slowdowns because firms typically resort to the status quo in times of economic uncertainty. 

“We’ve always invested in white men and that’s what we’re going to do right now. That’s where we’re comfortable. That’s where we know and believe that we’re going to get the return,” is how Nichols, who is Black, described the decisions made by some firms. “This diversity thing is cool, we’ll pick it back up maybe, you know, once we’ve weathered this storm.”

So-called ‘risky bets’

In 2014, Dixon was working at Whole Foods and suffering from an ongoing case of bacterial vaginosis that she wasn’t able to shake. Then, she said, her late grandmother came to her with a solution — in a dream.  

“She just told me that she had been walking with me and seeing me struggle and she knew how to fix it, and she basically hands me a piece of paper that has a list of ingredients on it and she tells me to memorize what’s on the paper,” Dixon said, recalling the dream of her grandmother. “I made it within a couple of days, and, basically, this formula actually healed me.”

The mixture, which included ingredients such as lavender, apple cider vinegar, grapefruit seed extract and rose, worked for family and friends, too, Dixon said. Using a $21,000 loan from her brother, she began selling the product and displaying it at trade shows and expositions.

Honey Pot Company products

Courtesy: Honey Pot Company

Using her connections at Whole Foods, she got the product on the shelves of the store but wasn’t able to seriously scale up and attract outside investors until she secured the deal with Target. 

“It was hard. Us being Black-owned business founders, was it harder? Sure, it probably was,” said Dixon. “I think every time we raised money, we had trouble doing it, you know, but I think that the important context to put there is that anybody that raises money, it’s not going to be easy.” 

While he doesn’t invest exclusively in diverse businesses, Nichols said he’s more likely than some venture capitalists because MaC Venture Capital is led by a diverse team unlike other firms that are typically run by white men.

“The investors are primarily white and male and usually come from affluent communities, which means that they have very specific experiences and have been exposed to very specific things and are comfortable with very specific things,” said Nichols, whose latest firm opened in 2019. 

To many firms, investing in founders from diverse backgrounds is considered a riskier bet because the entrepreneurs differ from the norm they’ve become accustomed to, said Ladi Greenstreet, the CEO of Diversity VC, which works to tackle systemic bias within venture capital.

In the aftermath of Floyd’s murder in May 2020, many major banks, corporations and investment firms pledged to change that — and make diversity a top priority moving forward. 

However, the steep funding drop-off Black founders saw in 2022 indicates some of those promises may have been short-lived charity plays rather than investments that firms actually believed would bring in strong returns.

“When you take venture capital financing, the expectation is that, you know, you have a partner now, if you perform, your partner is going to continue to back you, they’re going to help you to raise that next round of funding, right?” said Nichols. 

For white-led teams, there’s no expectation that recipients have to be “extraordinary” in their first two years of operations in order to get follow-on funding, but the bar is far higher for Black entrepreneurs, said Nichols, whose firm manages about $450 million in assets.

“For most of these Black founders, that’s exactly like the expectation, you’ve got to be extraordinarily exceptional in order to get additional capital,” he said. “And if you’re truly treating this like all investments that you make then that shouldn’t be the case.” 

‘Huge blue ocean’

Pocket Sun is the co-founder and managing partner of SoGal Ventures, a VC firm devoted to supporting women and diverse entrepreneurs. Since the firm opened in 2016, it has seeded multiple unicorns, or startups that grew to have valuations over $1 billion. The businesses include Function of Beauty and Everly Health.

“From a financial investment perspective, this remains a huge blue ocean for people to dive in,” said Sun. 

“Venture capital is a very privileged and exclusive industry, and has always been that way. And it has such disproportionate decision-making power on the future of technology, the future of innovation, the future of quality of life in many ways,” said Sun.

While investing in diverse teams can often be seen as a moral imperative and something that’s done because it’s the right thing to do, studies have shown it can lead to higher returns for investors, said John Roussel, the executive director of Colorwave. 

Honey Pot Company products

Courtesy: Honey Pot Company

“And somehow, we’re still stuck in this situation where we’re trying to convince people of that,” said Roussel, whose organization connects early stage founders to mentors and capital. “It really takes, you know, strong players taking a lead and showing people that there is opportunity here and there is generally the same success rates regardless of someone’s skin color.” 

Dixon, the founder of The Honey Pot, pointed to her own success as an example. “Clearly, it’s safe to bet on Black businesses,” she said.

Products from the company are now in 4.6 million homes, nearly double the number from two years ago. They are also sold nationally in retailers such as Walmart, CVS, Walgreens and more. The Honey Pot didn’t share its current valuation or how much it makes in annual sales. 

Dixon called on investors to put their biases aside and see companies for their basics: balance sheets, innovation strategies and business goals, not the skin color of its teams.

“My skin color shouldn’t be a part of the conversation, period,” she said. “And yet, it still is, right?”

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Dollar General’s new Popshelf stores chase inflation-weary shoppers in the suburbs

HENDERSONVILLE, Tennessee — Dollar General‘s next big strategy for growth is tucked in a strip mall in suburban Nashville, and it is coming to other cities soon.

It’s a new store called Popshelf. Over the past two years, the Tennessee-based discounter has tested the store concept, which caters to suburban shoppers with higher incomes, but sells most items for $5 or less.

A wide range of merchandise fills the shelves, including holiday-themed platters, party and crafting supplies, novelty foods such as gourmet chocolates and Portobello mushroom jerky, and gifts like dangly earrings, lip gloss and toys. It’s designed to be a treasure hunt that keeps shoppers coming back.

Now, with inflation still high, Dollar General is ramping up its plans for Popshelf. It aims to double the banner’s locations to approximately 300 stores next year. Over the next three years, it plans to grow to about 1,000 locations across the country. Eventually, it sees an opportunity to reach about 3,000 total locations. It is also testing mini Popshelf shops inside of some of its Dollar General stores. So far, it has about 40 of those shops.

But Popshelf will have to prove it can hold up in a tougher economy. Walmart, Best Buy, Costco and others have warned of weaker sales of discretionary items as consumers spend more on necessities. Target recently cut its holiday quarter forecast, and Kohl’s pulled its outlook, citing middle-income consumers who feel stretched.

On Dollar General’s recent earnings call, CEO Jeff Owen said even customers who make $100,000 a year have been shopping at its stores.

Chief Merchandising Officer Emily Taylor said Popshelf can draw spending-conscious shoppers by offering items that don’t cause guilt.

“The fact that we have such great value across a lot of these categories gives our customers at Popshelf an opportunity to really treat themselves at a time where they may have a difficult time doing that in other locations,” she said.

Higher incomes, higher profits

Popshelf is designed to drive higher sales and higher profits than the Dollar General store banner. It has more general merchandise, which typically has higher margins than food. Each Popshelf store is projected to hit between $1.7 million and $2 million in sales annually with an average gross margin rate that exceeds 40%.

In the third quarter, Dollar General’s gross profit as a percentage of net sales was 30.5%. That includes all of its stores, but the vast majority are under the namesake banner. It does not disclose annual or quarterly sales on a store level.

By the numbers

POPSHELF

  • About 100 stores in nine states
  • Carries mix of home goods, seasonal decor, party supplies, crafts and toys
  • Most items for $5 or less
  • Suburban locations
  • Draws shoppers with a household annual income from $50,000 to $125,000

DOLLAR GENERAL

  • About 18,800 stores in 47 states
  • Carries many everyday items, such as food, cleaning supplies and paper products
  • A mix of price points, with about 20% of items for $1 or less
  • About 75% of stores are in small towns or rural areas with 20,000 people or less
  • Core customers have an annual household income of $40,000 or less

Source: Dollar General

The new store concept also courts a wealthier customer who lives in the suburbs — like a busy mom who is juggling a couple of kids, said Tracey Herrmann, senior vice president of channel innovation. That customer may need to buy toothpaste and cleaning supplies, but she wants to go a place where she can browse and toss fun items into her basket as well, Herrmann said.

Inside of Popshelf stores, the brands and items on shelves reflect that customer. For example, stores sell food and household brands often carried by higher-end grocers, such as Mrs. Meyer’s hand soap, Amy’s frozen meals and Tillamook cheese. It has a selection of global snacks, such as Pocky and Hello Panda. And it has specialty kitchen and baking items, such as inexpensive spices and unique condiments.

It also has exclusive brands, such as its own line of low-priced candles, room sprays and diffusers — including a signature scent, Citron Berry, which fills up its store. It carries some private brands sold by Dollar General, such as Believe Beauty, a makeup brand that’s been touted by influencers, including Bethenny Frankel of Bravo’s “The Real Housewives of New York City.”

It has rotating seasonal items, depending on the time of year, such as Christmas decor, pumpkin-themed items, bright colors for Easter and beach towels in the summer.

Herrmann said the store’s name was inspired by that mix of merchandise, which constantly gets refreshed.

“We believe the product pops off the shelf and really brings itself to life without us really even having to do much with it,” she said.

Discounters’ time to shine

Over the past several years, John Mercer, Coresight’s head of global research, said those value-conscious retailers have benefited from millennials buying homes and starting families as they juggle expenses such as college debt. Plus, he said, members of the second-largest generation — baby boomers — are looking for value as they retire and live on a fixed income.

Inflation has become an additional tailwind for the off-price and discounter sector this year and into 2023, he said.

Dollar General has historically performed well in economic downturns. It posted same-store sales gains during every quarter of the Great Recession in the late 2000s. On the other hand, Target, Macy’s, Nordstrom and Kohl’s were among the retailers with seven or eight quarters of negative same-store sales in that period.

Investors have been bullish about Dollar General. Shares of Dollar General have risen about 4% so far this year, as the S&P 500 Index has fallen by about 16% in the same period.

Corey Tarlowe, a retail analyst for Jefferies, said Popshelf may face some pressure in the near term as consumers think more carefully about purchases. Yet he said the tight labor market means most shoppers are still employed. Plus, he added, Popshelf’s middle- or upper-income consumer likely has a larger budget and bigger bank account.

Tarlowe said the store’s wide mix means it can steal away share from many different retailers, including crafting stores like Joann, Michaels and Hobby Lobby, pet stores like Petco, drugstores like CVS and Walgreens and dollar stores like Five Below and Dollar Tree.

“At the end of the day, it’s all about the value messaging,” he said. “That’s the core of it. It’s Dollar General pricing wrapped in a pretty bow.”

–CNBC’s Nick Wells contributed to this report.

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