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Ralph Lauren Has a $1.8 Billion Department Store Problem

Ralph Lauren greets the crowd after presenting his 

Discounting is killing its operating income

One of the biggest factors behind Ralph Lauren’s RL -0.40% sales problem has been department stores’ ongoing slump and inability to lure shoppers inside.

The fashion brand, which this week announced a $400 million comeback plan that will reportedly include closing 50 stores and cutting 1,000 jobs, gets 24% of its annual sales from department stores, with Macy’s M -1.07% by far its biggest account.

That means $1.8 billion of Ralph Lauren’s annual sales come from stores like Macy’s, Nordstrom JWN -1.74% , and Belk, which are all struggling with quarter after quarter of declining same-store sales, creating a domino effect on the fashion brand.

Macy’s last month reported comparable sales (including shops it licenses to outside brands) fell a worse-than-expected 5.6% in the first fiscal quarter, for their fifth straight decline as the department store blamed “the uncertain direction of consumer spending.” And Nordstrom did only slightly better.

So it’s easy to see why some many Ralph Lauren items end up at clear-out stores like TJX’s TAX -0.05% T.J. Maxx, where they sell for far less, which over time ruins a brand’s cachet on top of yielding lower top-line sales.

CEO Stefan Larsson said at Ralph Lauren’s first-ever analyst day this week that heavy discounting is leading the company to reduce shipments to wholesalers like department stores, with revenue in that wholesale channel set to fall by a double-digit percentage in 2017.

Larsson, who steered the comeback of Gap Inc’s GPS -2.02% Old Navy brand a few years ago, is putting department stores on notice that he won’t let their problems devalue his company.

The CEO told investors on Tuesday that shoppers will spend money on apparel but only if it is “exciting” and that “exciting isn’t selling a generic product with more and more discounting.” Kohl’s KSS -1.71% CFO, Wes McDonald, whose store sells Ralph Lauren merchandise, rang a similar note last month when he bemoaned an overall lack of “excitement” in fashion nowadays.”

But rather than sit back and watch the Ralph Lauren label wind up 80% off at a discount store, Larsson is planning to shorten production times to react more quickly to fashion trends and overhaul the supply chain to avoid overproduction, a problem exacerbated when department stores can’t sell his brand’s merchandise.

In the end, Ralph Lauren is not turning its back on Macy’s and its rivals. Without specifying how, Larsson said his company would work with those chains. Still, it’s easy to see why he would want to reduce his dependence on a retail channel that is shrinking with few signs of a turnaround.

Weekly Market Update: Caution Abounds Ahead of FOMC, Brexit Vote

Global markets were volatile this week as risk assets first recovered from the let-down of last week's May US jobs report and then succumbed to global jitters as funds rotated into fixed income. The ongoing oil market recovery propelled both WTI and Brent firmly back over $50 early in the week, helping boost the broader energy sector. Solidifying belief that the Fed will need to hold off on rate hikes at least little bit longer has helped gold and silver prices reach one month highs as well. In a widely anticipated speech on Monday, Fed Chair Yellen said nothing at to upset the apple cart, and there is a sense that a Fed rate increase in September is emerging as the new favorite view, although July is still touted as a 'live' meeting as well. The dollar arrested its decline without testing the lows seen in early May. Mid-week the DJIA and S&P500 approached but did not hit new all-time highs, as Brexit fears and interest rate jitters took over and pushed risk assets lower. For the week, the DJIA gained 0.3%, the S&P slipped 0.1%, and the Nasdaq fell 1%.

Treasury prices soared globally as panicky investors plowed into fixed income assets this week. The toxic combination of negative interest rates at the Bank of Japan, the ECB, and several other European central banks, fear of Brexit, and deep uncertainty about Fed rate hikes have fostered an extraordinary low yield environment. On Friday, the yield on the German 10-year bund sank to an all-time low of 0.025%, and some analysts suggested it could go to zero soon. Yields have fallen so far that more than $10 trillion of government debt worldwide is now trading with negative yields - Bill Gross took to Twitter to call the huge pile of negative-yielding sovereign a "supernova that will explode one day." The Japanese 10-year benchmark yield touched a record low of -0.15%. The 10-year UST yield fell as low as 1.649%, while the 30-year yield is at its lowest point since February 2015, at 2.45%, further flattening the yield curve to levels not seen since 2007. The 2-year/10-year UST spread has sunk below 90 bps, driving big losses this week in US financial stocks. Bond market analysts commented that the sustained level of demand for US Treasuries at this week's 10- and 30-year reopenings largely appeared to be driven by foreign buyers desperate for yield.

Some better US jobs data helped balance the narrative of a slowing labor market that emerged after last week's dire May payrolls report. The April JOLTS survey - Fed Chair Yellen's preferred gauge of US labor market health - saw an all-time high of 5.8 million job openings, up slightly from 5.76 million openings at the end of March. April hires fell to 5.1 million, slightly lower than the previous month's 5.3 million, while the key quits rate fell to 2.0% from 2.1% prior. Meanwhile, the jobless claims data showed the number of Americans filing for benefits unexpectedly fell in the week ended June 4th. Initial claims fell much more than expected, while continuing claims dropped 77,000 to 2.10 million, the lowest level since October 2000.

The annual US-China bilateral summit in Beijing saw tough rhetoric from both sides, with economic concerns taking a back seat to the tense situation in the South China Sea. Chinese officials blamed tensions in the South China Sea on the provocations of "certain countries for their own selfish interests." Secretary of State Kerry responded that China's plans to set up an air defense identification zone in area would be "a destabilizing act." Relations were smoother on the economic front, but there was still some tension. US Treasury Secretary Lew said good progress was made in currency talks and said China appeared committed to moving in an orderly way to a more market-oriented exchange rate. Lew pressed China to keep reforming bloated industrial sectors, especially steel, and told his Chinese counterpart that offloading excess capacity on the rest of the world was damaging global markets. Chinese officials stressed that Lew's critique only told half the story, as China's steel overcapacity resulted largely from the post-crisis stimulus plans, which themselves contributed to more than half of global growth in the 2009-11 period, helping lessen the impact of the Great Recession.

The China May trade report held good news and bad news for the world's second-largest economy. The bad: exports in dollar-denominated terms tanked 4.1% y/y, more than double April's 1.8% decline and slightly worse than estimates. The good: imports declined a mere 0.4% y/y, much improved from April's 10.9% slide and way ahead of expectations for a 6% decline. Softening global demand was clearly responsible for the worse exports component, while the ongoing recovery in commodities pricing and demand dovetailed nicely with the surprisingly robust imports component. In yuan terms, the trade report looked more positive, with exports up 1.2% y/y and imports 5.1% higher. The divergence with the dollar figures reflected the interruption of CNY's long-term appreciation trend against the dollar. Chinese Premier Li Keqiang once again reiterated this week that Beijing will be able to keep the yuan at a reasonable equilibrium level over the long term.

In Japan, the second and final reading of Q1 GDP confirmed the economy averted a technical recession, though concerns remain that the impact of Kumamoto earthquake could plunge the country back into contraction in the second quarter. Key components were better, with private consumption adjusted slightly higher to +0.6% from the preliminary +0.5%, and capex spending much improved to -0.7% from -1.4% in the preliminary. Skeptical analysts are quick to note that the data included an extra Leap Year day, and growth would have been slower if adjusted for that impact.

The referendum on the UK's further membership in the European Union is only two weeks away and a handful of polls this week have indicated the race is still too close to call. Three polls on Monday showed the 'stay' and 'leave' camps within a few points of each other, and the undecided camp remains in the double digits. Then on Friday an online poll from the Independent showed the 'leave' vote rising to 55%, further weakening the pound sterling. The pound continues to suffer from the heightened level of uncertainty, with GBP/USD dropping back toward 1.4200, for its lowest levels since late April. Last week there were reports that the ECB and the Bank of England were making provisional plans to provide liquidity guarantees for markets in the event of a vote in favor of Brexit, and this week BoE Chief Carney said that the Fed and BoJ are also looking to coordinate responses in case of excessive market volatility. In Parliament, a caucus of MPs in favor of remaining in the EU (totaling 454 MPs versus 147 in the 'leave' camp) is reportedly developing a plan to use their majority in the Commons to delay Brexit and keep UK within the single market because the 'leave' camp has refused to spell out what relationship it wants the UK to have with the EU in the future.

Three central banks around the Pacific Rim tinkered with their policy positions this week. The Bank of Korea surprised markets by cutting its seven-day repurchase rate by 25 basis points to 1.25%. The BOK statement expressed concern with rising household debt, slowing inflation, weakening consumption and declining exports. Analysts expect more BOK cuts are possible. The Reserve Bank of Australia signaled it was in no rush to cut interest rates again (it eased policy at the prior meeting) and kept the cash rate on hold at a record low 1.75%. The RBA acknowledged the recent recovery in trade, stating that exports and "areas of domestic demand" are expanding above trend. In New Zealand, the RBNZ kept on hold at 2.25%, while post-decision comments from Governor Wheeler indicated another rate cut was still built into projections. The statement emphasized inflation would strengthen, reflecting accommodative monetary policy, higher fuel and commodity prices, and a weaker NZD.

In M&A news, Westlake clinched a deal to acquire Axiall Corp, with the latter agreeing to be acquired for $33/share in cash. The deal values Axiall at $3.8 billion. The combined company will be the third-largest chlor-alkali producer and the second-largest PVC producer in North America, with expected combined pro forma revenues of $7.6 billion. Polycom received a competing acquisition offer to its deal with Mitel Networks. According to a Polycom filing, an unidentified private equity firm offered $12.25/share in cash, valuing the company at $1.66 billion. Back in April, Mitel agreed to acquire Polycom for $3.12/share in cash and 1.31 Mitel common shares for each share of Polycom. Weisman Group offered to acquire Ashford Hospitality Group for a $20.25/share, in a deal valued at $1.48 billion.

Investment opportunities in the autonomous vehicle space

Rob Toews is jointly pursuing degrees at Harvard Business School and Harvard Law School. He is the co-founder of SHFFT.

As companies race to bring autonomous vehicles (AVs) to market, investment activity in the space is heating up.

General Motors made headlines in March when it paid over $1 billion for Cruise Automation. A few weeks later leading venture capital firm Andreessen Horowitz entered the space, announcing investments in two early-stage autonomous startups, Comma.ai and Dispatch.

Most recently, secretive AV startup Zoox raised a massive $250 million funding round, making it Silicon Valley’s newest unicorn. These and other recent deals point to a growing investment frenzy as AVs get closer to mainstream commercialization.

The AV investment landscape is complex. It includes both hardware and software players and features competitors ranging from early-stage startups to large publicly traded corporations. This article will provide a primer for those interested in the rapidly evolving AV space.

Hardware

Vehicles

The first and most obvious layer of the AV ecosystem is the vehicle itself. The capital investment and manufacturing expertise required to produce vehicles at scale largely preclude early-stage entrants from being active here. Even large, deep-pocketed technology companies investing heavily in an autonomous future — e.g. Google and Uber — seem unwilling and unlikely to become car manufacturers themselves.

The most probable outcome therefore seems to be that traditional car manufacturers will continue to mass-produce vehicles in the autonomous age. It is unclear whether this manufacturing role will continue to be as profitable for these companies as it has in the past. As value creation in transportation shifts toward high-tech components and software, manufacturers of the cars themselves may become an increasingly commoditized, low-margin business.

Virtually every traditional car manufacturer has by now begun to invest in autonomous vehicle capabilities. Those with particularly interesting autonomous programs include GM, Volvo and Mercedes-Benz. (While Tesla manufactures cars, it is more appropriately considered a technology company.)

Lidar sensors

Lidar is one of several types of specialized sensors that allow AVs to interpret their environment. Lidar sensors give the vehicle a precise three-dimensional awareness of its surroundings by projecting lasers in all directions and measuring the time they take to rebound, a process analogous to radar (the word Lidar is a portmanteau of “light” and “radar”).

Given how critical these components are for overall AV functionality, the market for Lidar sensors will be enormous. A handful of startups have recently emerged that specialize in their production.

Two key dimensions of these sensors are their size and their cost; the company that can harness Moore’s Law to drive both of these down the fastest will have a huge advantage. The Lidar sensors that Google used for its initial AV prototypes reportedly cost $80,000, an impracticable price point for the mass market.

The current market leader in Lidar production, Velodyne, priced its most recent sensor at $500. Velodyne, a privately held company based in California, has yet to take any venture funding.

Another California-based Lidar startup that has attracted positive attention recently is Quanergy. Quanergy has announced that its sensors will cost only $250 and have no moving parts. The company has established relationships with a handful of large OEMs but has yet to bring a product to market.

Cameras

Like Lidar sensors, cameras help AVs understand their environment and maneuver accordingly. Though less precise than Lidar, cameras offer the significant advantage of being able to detect color—important when, for instance, identifying traffic lights and signs.

The dominant player in AV camera production is a publicly traded Israeli company named Mobileye. Mobileye has high-profile supplier contracts with a number of auto manufacturers including Tesla.

Computer chips

Perhaps the most important piece of AV hardware is the computer chip that serves as the vehicle’s “brains.” These chips take inputs from the vehicle’s various sensors and, based on complex software algorithms (discussed further below), enable the vehicle to operate autonomously. As with microprocessors in personal computers, these components sit at the very center of the overall system’s functionality.

Given the enormous computing power demanded, AVs will require state-of-the-art microprocessors. The established chipmakers that have long dominated the microprocessor market — Nvidia, Qualcomm and Intel — seem poised to leverage their existing expertise to succeed with AV chips. All three companies have signaled that autonomous technology will be a strategic priority moving forward.

Of the three, Nvidia is arguably taking this opportunity seriously and investing most heavily in it. Investors have taken notice, with the company’s stock trading near an all-time high.

Software

While the hardware described above is essential, AVs are able to act intelligently, or autonomously, because of their software. There are several different key types of AV software to be aware of.

It is worth noting that the divide between hardware and software companies, while helpful as a framework, is not entirely clean. Some hardware companies — e.g. Mobileye — also provide software to analyze their sensor data. Likewise, some companies classified below as software players also offer hardware as part of an end-to-end autonomous solution.

Mapping and localization

The first category of software critical to AVs is mapping and localization.

In order to effectively navigate, an AV must have a detailed and up-to-date map of its surroundings and must know where on that map it is located. Creating and continually updating such a map database is a massively challenging exercise.

The two biggest players specializing in digital worldwide map database creation are HERE and TomTom. Each of these companies has attracted significant investment attention — no surprise, given that maps will be a key strategic asset for the AV industry.

A coalition of German automakers including Audi, BMW and Daimler recently acquired HERE for around $3 billion (outbidding Uber, among others).

TomTom, a publicly traded company based in Amsterdam, has faced acquisition rumors for years by suitors including Apple; to date the company remains independent. Apple, Uber and Bosch all have partnerships to use TomTom’s data.

Meanwhile, other AV players — notably Google and Uber — are seeking to build mapping capabilities themselves, while a handful of smaller startups are also tackling this challenge.

Cybersecurity

As vehicles become increasingly connected to the Internet, other vehicles and surrounding infrastructure, cybersecurity will become an increasingly prominent concern. In an important warning of the potential dangers of connected vehicles, white-hat hackers last year remotely took control of a Jeep Cherokee and cut its transmission.

Entrepreneurs and investors are becoming active in AV cybersecurity. As examples, Tel Aviv-based Argus Cyber Security raised $26 million in Series B funding last year, auto electronics maker Harman paid $72.5 million for cybersecurity startup TowerSec in March, and newcomer Karamba Security raised $2.5 million in seed funding in April. More competitors will no doubt emerge soon.

Fleet operations and management

As the autonomous age dawns, many predict that private car ownership will become obsolete, replaced by shared AV fleets that individuals summon only when needed. The task of managing these fleets and optimizing their routes will be an immense challenge requiring complex software solutions.

Startups already beginning to tackle this challenge include RideCell, which in early April raised $11.7 million from BMW and Khosla Ventures. Given its strategic positioning and its commitment to autonomous technology, it seems safe to assume that Uber will invest and compete vigorously here.

AV artificial intelligence / machine learning

The central technological breakthrough at the core of the entire AV concept is the vehicle’s ability to conduct advanced and adaptive decision-making itself based on all the data at its disposal. Artificial intelligence software enabling vehicles to “think” in this way is the most important and technically demanding AV technology category of all. A handful of companies are seeking to build such solutions.

Some of these companies focus solely on software; to go to market, they will look to partner with, or be acquired by, hardware manufacturers. One prominent example is nuTonomy, which recently announced a partnership with the Singapore government to deploy driverless taxis there by 2018. nuTonomy, an MIT spinout, raised a $16 million in Series A funding in March.

Other companies are building machine-learning software integrated with hardware in order to offer a comprehensive autonomous system. Included in this group are auto manufacturers such as Tesla but also many promising startups. Cruise Automation, recently acquired by GM, is one well-known example.

Another noteworthy startup is George Hotz’s Comma.ai. Comma.ai is building aftermarket “kits” consisting of sensors, computers and software that allow customers to convert existing cars into AVs. The company aims to bring these kits to market for under $1,000 by the end of 2016.

Other startups tackling this ambitious challenge include Zoox, Peloton (focused specifically on long-haul trucking fleets) and Nauto, among many others currently in “stealth mode.”

Conclusion

The landscape of AV companies in these early days of the technology is fluid and fast-changing. Established auto manufacturers, large technology companies and scrappy start-ups are all fiercely competing to win in the AV ecosystem.

A wave of M&A activity, partnerships and consolidation seems likely as AVs move toward commercial availability. One thing is certain: There will be massive opportunity for profit as the autonomous vehicle market takes off in the coming years.

In the words of angel investor Tikhon Bernstam, one of Cruise’s earliest backers: “You’d be hard-pressed to lose money investing in this space right now because there is going to be tens or even hundreds of billions in M&A and IPOs going forward. Cruise at $1 billion may look very cheap one day