Analyst: Best Buy’s multichannel model proving to be a core strength

Although up against a soft comparative from the prior year, it is fair to say that Best Buy has produced a very robust set of second quarter numbers. The 4.9% increase in domestic sales underlines that the company is more than holding its own in the electricals market and should put pay to the oft repeated fiction that retailers of its ilk will struggle to survive in the era of Amazon.

As much as some of the elevated sales are the result of the exit of players like Hhgregg and the continued store closures of Sears and others, we believe this windfall is only part of the reason for an uptick in fortune. There are underlying reasons for Best Buy's success, many of which have been self-engineered by the company.

One of the most pleasing aspects of the results comes from online where sales advanced by a shade over 31%. This is an acceleration of Best Buy's usually strong growth in the channel, and by our figures means it is taking market share within the digital space. There are plenty of reasons for this success, but foremost among them is a joined-up proposition that allows customers to quickly and easily order products online and collect them in stores.

From our customer data, it is also clear that there are large groups of customers who feel more confident buying online from Best Buy than other e-commerce only merchants, mainly because Best Buy has stores where they can seek advice, resolve problems, and return items if needed. In this sense, Best Buy's multichannel model is proving to be a core strength.

It is certainly true that the continued growth of online changes physical space requirements – not in the sense of whether stores are needed, but in the type, configuration, and format of those stores. On this front, we are encouraged to see that Best Buy is making continual adjustments to its estate where it is appropriate to do so. While stores remain a firm profit center, this pruning of the fleet is a prudent activity that will prevent any longer-term headaches.

The fact that stores are needed is evident in customer data that shows how much shoppers value the advice of Best Buy associates. Naturally, some tech-savvy consumers have no need of this, but there many other segments that do and Best Buy's efforts to improve customer service is paying dividends.

Equally important is a desire to see and experience products before buying them – this applies in particular to larger purchases like televisions and appliances. Here, Best Buy's stores are a valuable asset and this should allow it to withstand the recent decision of Sears to sell some appliance brands via Amazon.

We also applaud Best Buy for engaging with newer technologies like smart home. From our data, we see that there is an appetite among consumers to know more about this sort of technology, and we believe Best Buy is in an ideal position to inform and engage.

Overall we remain confident about Best Buy. The company is well managed and is successfully navigating many of the challenges of retail. The exit of rivals has provided some helpful breathing space, and we do not doubt that there will be further exits over the years ahead. Best Buy is in an ideal position to capitalize on this.


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What will your company do with the tax-reform windfall?

Athletic footwear retailer adopts poison pill; lowers guidance

BY Marianne Wilson

The Finish Line's board on Monday adopted a shareholders rights plan as the retailer warned of a grim second quarter and a steep decline in sales and profits for the year.

"The board believes that it is in the best interests of Finish Line and our shareholders to adopt a shareholder rights plan given the current market conditions and recent share accumulations,” said Glenn S. Lyon, chairman of Finish Line. “The plan is designed to ensure that the company’s board of directors is able to appropriately consider whether proposals, if any, are in the best interests of all our shareholders. The company remains positioned to fully capture the opportunities we foresee to optimize value for all our shareholders.”

Sports Direct International, a U.K.-based sporting goods retailer, recently increased its interest in Finish Line from 7.9% — as reported in a filing in April — to 17.4%, according to Footwear News. Sports Direct operates 700 stores in the U.K. and continental Europe, and 80 premium lifestyle stores in the U.K., along with a portfolio of brands that include Everlast and Kangol. In June, it acquired Bob's Stores and Eastern Mountain Sports out of bankruptcy.

The rights plan adopted by Finish Line has an expiration date of August 28, 2020, or earlier if shareholder approval of the plan has not been obtained at or before the company’s 2018 Annual Meeting of Shareholders

The move comes on the same day that the retailer announced disappointing preliminary results for its second quarter, ended August 26, 2017, and cut its outlook for the fiscal year ending March 3, 2018. For the second quarter, consolidated net sales fell 3.3% to $469.4 million, driven by a 4.6% decrease in Finish Line same-store sales.

Based on the decline in sales and pressure on gross margin from increased markdowns, the company expects to report second quarter earnings per share in the range of $0.08 to $0.12. The company now expects Finish Line comparable sales to decrease 3% to 5% for the year versus its previous guidance for an increase in the low-single digit range.

Adjusted earnings per share are now expected to be in the range of $0.50 to $0.60 for the 53-week fiscal year ending March 3, 2018, versus the previous guidance range of $1.12 to $1.23, and compared with adjusted earnings per share of $1.06 for the fiscal year ended February 25, 2017, which was a 52-week year.

“We believe it is prudent to adjust our outlook as we expect the environment to remain highly competitive and promotional throughout the remainder of the year," said Sam Sato, CEO, Finish Line, which runs approximately 950 branded locations in U.S. malls and shops inside Macy’s department stores. "In light of our disappointing second quarter results and revised projections for fiscal 2018, we will remain very disciplined in managing our expenses and inventories throughout the remainder of the year."

Sato said the company is making good progress "rightsizing" its business to better compete in the current environment.

"In the past 12-months, we’ve made a number of changes that have created a more nimble organization and generated approximately $6 million in annualized savings, and over the past two years we’ve closed approximately 80 underperforming stores," he said. "We remain steadfastly focused on executing our strategic plan to drive increased shareholder value over the longer term.”

The Finish Line's disappointing results echo those of its rival Footlocker. On Aug. 18, the retailer reported a 4.4% drop in net sales, to $1.7 billion, and a 6.6% drop in same-store sales for its second quarter.


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What will your company do with the tax-reform windfall?

Regulatory Wrap-Up: Governor of Illinois vetoes minimum wage hike



Illinois: As expected, Governor Rauner vetoed legislation seeking to raise the state’s minimum wage to $15/hr. by 2022. While not likely, the legislature could override the veto with ten additional votes in the house and six in the senate. While the statewide minimum remains at $8.25/hr., the city of Chicago is currently at $11/hr. with a rise to $13 by 2019. Cook County, the largest county in the state, has an increase scheduled to reach $13/hr. in 2020, however over 80% of municipalities have opted out of the increase.

Missouri: Minimum wage protests are occurring in both Kansas City and St. Louis. Protesters are calling on businesses to voluntarily maintain higher wages despite a recently passed statewide law that prevents cities from setting rates higher than the state’s $7.70/hr. rate. Protests are likely to continue through the weekend.

Flagstaff, AZ: A lawsuit that sought to remove a wage-related initiative from the ballot was dismissed by a judge this week. The current law calls for the city minimum wage to increase to $15.50 by 2020. The dismissal allows the initiative language supported by the Greater Flagstaff Chamber of Commerce to appear on the 2018 ballot. It would peg the city's wage rate $0.50/hr. higher than the state rate and link the city’s annual increases to the state’s timetable ($12/hr. by 2020).

Montgomery County, MD: County Executive Leggett reaffirmed his concerns regarding a countywide increase to a $15/hr. minimum wage. Leggett vetoed $15/hr. legislation earlier this year; however, several of the council members who are running for higher office have reintroduced the legislation. Leggett’s comments come as the county awaits a revised economic impact study that he commissioned. The original version contained methodology errors.

Paid Leave

Pennsylvania: A state senator reintroduced legislation for the third time that seeks to mandate employers provide 12 weeks of paid leave for new parents.

Labor Policy

NLRB: Peter Robb, a management attorney from Vermont, will be selected to fill the position of NLRB General Counsel, pending a background check. This position is one of most important within the agency and plays a critical role in determining what cases the board reviews. An NLRB General Counsel that leans towards management is a helpful development for employers. The outgoing general counsel’s term ends Oct. 31.

Missouri: Missouri allows residents to call a referendum on new legislation by collecting signatures from at least 5 percent of voters (over 100,000) from six of the state’s eight congressional districts. Unions appear to have completed that task by submitting 300,000 signatures to the secretary of state in an effort to overturn a right to work measure that passed during the 2017 legislative session. The secretary of state has suspended the law the while his office confirms the validity of the signatures. If more than 100,000 signatures are deemed valid, a referendum to overturn the state’s right to work law will appear on the 2018 ballot.

Labor Activism

Labor Day: Both the AFL-CIO and the SEIU are focusing their Labor Day PR efforts in midwestern states that went for Donald Trump. The AFL-CIO-backed Good Jobs Nation is organizing statewide rallies in hopes of highlighting the need for worker protections in the president’s ongoing trade negotiations and other policy initiatives, including an Indiana event aimed at highlighting Carrier plant job losses. President Trump previously pledged to keep Carrier jobs in the United States. The SEIU announced that it will spend $100 million organizing in rust belt states beginning this weekend and ramping up into 2018. On Sept. 4, operators should expect SEIU strikes and protests in major metros across the country.

Menu Labeling

New York City, NY: As a result of a case brought in federal court by the National Association of Convenience Stores and the National Restaurant Association among others, the city announced an agreement to postpone implementation of the city menu labeling law and defer to the enactment dates established in the federal regulations. The federal law goes into effect on May 7, 2018 and applies to restaurant chains with twenty or more outlets.

Health Care

Wellness Programs: The U.S. District Court ruled that the Equal Employment Opportunity Commission’s regulations regarding wellness programs were arbitrary and need to be revisited. The issue at hand is a regulation that allows employers to raise premiums up to 30% for employees that elect not to participate in employer-sponsored wellness programs. While the court found that the EEOC rules did not adequately defend the rationale for the 30% threshold, the current rules still remain in place. The federal judge determined that rescinding the rule at this time would cause ‘disruption and confusion’ in the market and directed the EEOC to revisit the rule. There is no announced timeline for future EEOC action.


Massachusetts: The Department of Revenue heard testimony this week on the recently issued regulation that establishes apps and/or files on a customer’s computer or smartphone constitutes physical presence in the state for sales tax collection purposes. Public comments on the regulation remain open until Aug. 30.

New Jersey: The division of taxation announced a voluntary disclosure program for online retailers that is similar but distinct from the Multistate Tax Commission’s previously announced program. The program runs from Aug. 21 to Nov. 21 and applies to any non-compliant businesses that fall under the ‘affiliate nexus’ law passed in 2014. That law applies to sellers with contractual ties to any state-based entity from which the seller receives some form of compensation for referral sales.

South Dakota: The State Supreme Court is set to hear oral arguments on Aug. 29 in the landmark “economic nexus” case that could ultimately rise to the U.S. Supreme Court. The first-in-the-nation law was signed by Gov. Dennis Daugaard in March 2016 and went into effect on May 1, 2016. The law mandates sales tax collection from out of state merchants with over $100,000 in sales (or 200 transactions) per year into the state. Should the Court find for the plaintiffs, the case may be reviewed by the U.S. Supreme Court during the 2018 session.

Key Takeaways

A DC restaurant, Oceanaire which is part of the Landry’s chain, added a 3% surcharge to checks noting it was “due to the rising costs of doing business in this location, including costs associated with higher minimum wage rates.” The story was picked up in the press and on social media and the high volume of customer complaints caused the restaurant to reverse course and rescind the surcharge. The public response was predictable and the company unnecessarily created a media event. Other companies would be wise to learn from this episode.

Union executives and labor leaders are calling into question the SEIU’s announcement this week to “double-down” on electoral politics in 2018. The union’s leadership slashed the Fight for $15 organizing budget in late 2016 and appears to be redirecting at least some of that money toward 2018 political races. Resource allocation weighted toward electoral politics versus traditional organizing efforts is indicative of the union’s current priorities – demonstrating that the need to have friendly politicians in office is viewed of greater importance than organizing more workers into the union.

As the relationship between the President and Republicans in Congress continues to deteriorate, Trump has recently stated that he wants to tie funding for a border wall to the government spending bill which will be negotiated in September. A continued impasse could trigger a government shutdown. While a shutdown may have minimal impact on daily operations, further chaos at the federal level could cause consumer unease and continues to block progress on the business agenda.

Legislature Status for Week of 8/28/17

The United States Senate is in recess with pro forma sessions every 3 days until Sept 5

The United States House is in recess with pro forma sessions every 3 days until Sept 5

Ten state legislatures are currently in regular session

o CA, IL, MA, MI, NJ, NC, NY. OH, PA, WI


We've recently launched a podcast that focuses on politics and policy for the restaurant industry. You can listen to the "Working Lunch" podcast by clicking here or subscribe on iTunes here.

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The Regulatory Wrap-Up is presented by Align Public Strategies. Click here to learn how Align can provide your brand with the counsel and insight you need to navigate the policy and political issues impacting retail.


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What will your company do with the tax-reform windfall?