Issue #13: Public Retail Companies Showcase Strong Results

Walmart, Home Depot, and Warby Parker all had earnings calls this week to discuss their Q2 earnings. These three companies are at the future of commerce in their respective fields. Each one had a different level of success each quarter and here is the breakdown of the earnings.

Walmart (NYSE: WMT) - Since the start of the week, Walmart’s stock has risen about 9%. Why? Out of all three companies, they had the best earnings. Revenue, operating income, and net sales were all up. On the eCommerce front, driven by strong, growing demand for pickup and delivery, sales grew over 20%. The eCommerce segment was almost profitable. Pretty crazy that eCommerce for Walmart is not profitable yet, but as they get more pick-up orders, that will improve. Finally, Walmart+ and Sam’s Club memberships were up. The online marketplace orders saw growth too. Overall, growth was the name of the game for Walmart and it clearly paid off, but it will be interesting to see how long they can get away with unprofitable eCommerce.

Warby Parker (NYSE: WRBY) - At the end of 2023, Warby Parker announced a plan to launch 40 new stores in 2024 and return its eCommerce business to a growth channel. Thus far, as shown in the earnings call this week, it has paid off. Revenue and gross margin increased, which helped narrow the operating loss. On the eCommerce front, Q2 marked its highest eCommerce growth since Q1 2021. Finally, both the number of active customers and average revenue per customer increased. Similarly, a strong topline quarter, but it will be interesting to see how long they can be unprofitable without being punished by investors.

Home Depot (NYSE: HD) - With a challenging home market, people build less, which hurts Home Depot. The latest earnings reflected those struggles. Home Depot sales were up, but that is a little misleading. Home Depot purchased SRS Distribution, a building products supplier, which added over $1B to its topline revenue. Comparable sales for the quarter fell 3.3% from last year, which shows the struggles Home Depot is going through. Long term, housing building is such a cyclical business - it ebbs and flows. Home Depot will be fine, it just needs to weather the storm. The major long-term threat would be Ace Hardware as their smaller square footage allows them to be more nimble and adapt to shifting customer preferences.

What other public retail companies are you excited about?

Saks Extending Brand to Luxury Hotels & Apartments

Saks Fifth Avenue has frequently been in the headlines recently. First, it acquired Neiman Marcus with support from Amazon, who is trying to break into the luxury market. Then, lots of brands came forward that Saks had not been paying their invoices to the brands on time, which hurt those brands cash flow. Overall, some up and down weeks. Now, Saks is back in the headlines with a semi-innovative new strategy idea. Saks is thinking about extending its brand to luxury hotels and apartments to drive foot traffic to stores. Currently, near its Sak’s women store in Los Angeles, it is applying for permits to build a hotel, spa, private club, luxury residences, and restaurants. This strategy is not necessarily revolutionary, many others have done it or are currently doing it, but I think it is a very smart way to ensure there is a captive audience for your stores and diversify your revenue streams. For instance, a former Lord & Taylor store in New Jersey is being transformed into public spaces, townhomes, and apartment buildings. These types of projects are becoming more common as areas struggle to revamp unused mall space. I am very bullish on these types of conversions and look forward to following them along.

Starbucks Hires New CEO From Chipotle

Orange? A new color what does that mean? The yellow didn’t look good, so I wanted a way to signify trends that I am in the middle of - it could go either way in terms of positivity and negativity.

Last week, we covered Starbucks’ struggles adapting to a new wave of consumers. On Tuesday, Starbucks wasted no time announcing that their CEO, Laxman Narasimhan is leaving after joining in March 2023. In his place, Chipotle’s CEO, Brian Niccol. Chipotle’s stock price increased nearly 800% during his tenure, but he definitely timed the exit right with Chipotle struggling recently due to portion size headlines. Laxman overall struggled to lead Starbucks, as the stock price dipped due to poor sales performance, but began deployment of the Siren System, which should greatly improve operational efficiency. This change also marks a shift in the profile of the Starbucks CEO. Take a peak at both CEOs’ backgrounds below.

What stands out is Brian Niccol’s (right screenshot) experience in Quick Service Restaurant (aka Retail) and Laxman Narasimhan’s lack of it. Despite having a robust CPG presence, that is just an offshoot of Starbucks core business, and not a necessary skill set needed for the CEO. Starbucks needs to get back to its retail basics in order to win back market share.

The way I see it, Starbucks has three main competitors/categories. First, McDonald’s can beat Starbucks for value and a more extensive food menu, but not quality or variety of caffeinated beverages. Second, Dutch Bro’s, the more upstart drive-thru, small-format, coffee chain. Dutch Bros focuses on customer service and speed, which Starbucks can compete with. Finally, Swig, focuses on dirty sodas (a soda with added flavors and cream), a new type of beverage that could compete/draw people away from Starbucks core beverages. Still, despite these challenges, Starbucks has a path to win with quality beverages, a solid food menu, and a community space. I believe Starbucks can make a change and believe Niccol could be the right person with his QSR background, I am just not confident he will focus enough on quality and community.

One final thought. When Brian Niccol took over at Chipotle, he moved the HQ from Denver to Newport Beach California. Could you imagine if Starbucks was no longer headquartered in Seattle? (It seems like he will be staying in Newport with an Executive Assistant - not sure I love that either!)

Fighting Illicit Goods, Helping Trustworthy Importers, and Netting Gains (FIGHTING) for America Act

Politicians love naming a bill in a way that the abbreviation turns into a relevant word and last week was no different as the FIGHTING for America Act was introduced by a bipartisan group of senators. The goal of the act is to push back on a lot of the cheap goods entering the country. Currently, the United States has a policy of $800 USD for the “De Minimis Value”, which means the minimum threshold items are subject to duty. So, if you are importing an item under $800 you don’t have to pay taxes and if the item is over $800 you have to pay taxes. Companies like Temu and Shein are using this rule to deliver goods to customers at super-low prices. While customers are getting good value, there are product quality/experience concerns, and the price of American manufactured goods is being severely undercut. The bill addresses these issues in a couple of ways. First, apparel and other goods would now no longer be subject to the “De Minimis Value.” New data requirements and a $2 fee for De Minimis Value are being assessed. Finally, Customs and Border Patrol are required to collect additional data on the packages and have more streamlined procedures for searching packages. It is unclear whether this bill will pass but given the bi-partisan nature, it definitely has legs. If it passes, it will have a big impact on the retail world as the Shein and Temu prices will increase.

Ghost Kitchen Reef Pivots Again, Lays Off More Employees

Reef Technology took the ghost kitchen world by storm raising a lot of capital from Softbank Vision Fund and getting access to underutilized parking lots. The idea was parking lots are typically in high traffic areas, but are rarely full. By adding ghost kitchens to these parking lots, it would make better use of space, while providing restaurant operators a cheap location close to their delivery customers. In theory, a great idea. In practice, there were operational issues and health department violations which caused Reef to mostly exit the ghost kitchen market. After exiting food production, Reef got into micro-fulfillment services, notably helping FreshDirect deliver many of its orders in Manhattan and the Hamptons. However, now that has come to an end too, as Reef announced it is laying off its employees in Manhattan and Riverhead, Long Island. The pivot is that Reef will now subcontract the deliveries to owner-operators and be the landlords of the facilities. It is unclear what operations Reef will really do now across locations. Overall, I believe ghost kitchens can be useful, but it seems like Reef’s method of utilizing parking lots will not be the innovation Reef hoped it would.

• Summary: Aftercare AI is a post-purchase survey tool that uses AI to get insights from customers and upsell them via SMS and voice

• Founders: Aidan Lee, Justin May, and Anand Nadurri

• Investors: Y Combinator

• How this will shape the future of commerce: By being able to drag and drop smart, intuitive AI flows for voice and SMS, brands will be able to test & iterate faster, while gaining more revenue

• Why should you use this technology?: SMS and voice are increasingly areas where customers are more comfortable conducting commerce

• My take: Meet the customers where they want to be met, don’t need to overcomplicate commerce

Additional Links:

1. Jolie, the skincare brand that started the unveiling of Saks delayed payments to startup brands, donated the funds it received from Saks to another brand in need (read more here)

2. Whole Food’s CEO grocery shops at least 14 times per week (read more here)

   • My take: Makes sense why he is the CEO of a large grocery chain

3. Hellman’s Mayonaise partners with Titans QB Will Levis to launch a mayo-flavored cologne that you can buy (read more here)

4. Try Bite Sight, a video-based food delivery app, just announced a pre-seed raise (read more here)

5. Subway may or may not have had a meeting with its franchisees to discuss falling sales or profits, regardless they are in trouble (read more here)

   • My take: Subway increased prices, but maintained the quality and consumers noticed

6. FTC finalizes rule prohibiting business from buying reviews, suppression of reviews, AI written reviews, and employee written reviews (read more here)

   • My take: Are heavily induced or quid pro quo reviews acceptable?

7. Ace Hardware launches new 13,000-square-foot experiential center (read more here)

8. Book bars in New York City rising in popularity (read more here)

9. McDonald’s launches 2024 edition Happy Meal collectors cups and they are flying off the shelves (read more here)

10. Olipop announces it will be sold in the Intuit Dome, the LA Clipper’s new stadium, and the third stadium Ollipop is now in (read more here)

    • My take: Whoever figured out how to get around the Coke & Pepsi exclusivity agreements deserves a huge raise

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