R3: COLM, GGP, VRA, JCP & KCP

R3: REQUIRED RETAIL READING

October 22, 2010

 

Following a successful IPO of Vera Bradley (as measured by day one), continue to expect high premiums on growth given its scarcity.  We challenge anyone to name 5 retail concepts with square footage growth over 10%.

 

RESEARCH ANECDOTES

 

- According to a Gallup poll tracking average daily spending for low and in middle income consumers, new YTD lows were reached in September.  The self-reported survey for September reported average daily spend of $48, down sequentially from $54 in August and $64 in July.  On a year over year basis, spending also declined significantly from last year’s average spend of $60.

 

- While traffic has doubled on COLM’s e-com site a year after shifting from simply a marketing to a commerce site, management noted that conversion rates are in-line with the rest of the industry – nearly 90% of consumers that visit research the product then buy it elsewhere.

 

- After winning numerous awards with the Kinvara, Saucony’s first lightweight running shoe, expect the brand to be a primary player in this emerging category in 2011. A discussion with the head of the brand suggests that initial plans are to offer at least four more lightweight models next year. Following the mantra of ‘less is more,’ the weight of next year’s line is going to make the Kinvara heavy by comparison.

 

 

OUR TAKE ON OVERNIGHT NEWS 

 

General Growth Property's Reorganization Plan Confirmed - A Manhattan bankruptcy court judge has confirmed General Growth Property’s plan of reorganization, paving the way for GGP to exit bankruptcy court proceedings on Nov. 8. As part of the restructuring, GGP will split into two publicly traded companies. The new GGP will continue to be the second-largest shopping mall operator, with more than 185 regional malls in 43 states. The spin-off, called The Howard Hughes Corp., will own the master-planned communities and work on development opportunities. GGP filed for Chapter 11 bankruptcy court protection in April 2009. It has since restructured $15 billion in mortgage debt. The reorganization plan provides a full recovery to creditors and shareholders. William Ackman’s Pershing Square Capital Management is among the firms supplying $6.8 million in equity commitments to GGP, and Ackman will serve as chairman of the spin-off. <wwd.com/business-news>

Hedgeye Retail’s Take:  With a very efficient bankruptcy process, it appears that retailers will be heading towards more visibility with the second largest mall landlord in the near future.  In reality, the bankruptcy process was nothing more than a headline distraction for the tenants.  Over the past year, there were no reports of service level disruptions or operational issues as a result of the company’s financial collapse.

 

Vera Bradley IPO Has Successful First Day - After pricing at the high end of its expected range, Vera Bradley Inc. ended its first day of he-counter trading by spiking up 55.3% in its initial public offering debut. The 28-year-old handbag and accessories firm priced its IPO of 11 mm shares of common stock at $16 a share, raising $176 million. The shares, which trade under the symbol “VRA,” opened at $23 and closed at $24.85. Based in Fort Wayne, Ind., the company sells through a network of 3,300 independent specialty retailers, company-owned stores and on its Web site. The firm operates 31 full-price stores and two outlet locations. According to the prospectus, it plans to open nine full-price stores and three outlets in 2011, with at least another 14 stores each year thereafter for the next five years. The company-owned stores average 1,800 square feet. The company is focused on expanding distribution in underpenetrated markets in the U.S. <wwd.com/business-news>

Hedgeye Retail’s Take:  With growth a premium in retail, it will be interesting to see how more mature retail companies fare in the IPO market (TOY, TSA).  Clearly a brand with just 31 stores has room to expand, hence the excitement.  We challenge anyone to come up with 5 retail brands growing at over 10%.

 

JCP Ends Big Book Catalogues - J.C. Penney Co. Inc.’s transition from “Big Book” catalogues to “look book” mailers is now complete. J.C. Penney will still be in the print media business, but the new books will become “specialty in-store” mailers showcasing select fashion looks or must-haves to encourage consumers to shop in-store or online. The traditional catalogue format featured everything in a particular category. Penney’s catalogue dates back to 1963 and grew to $1 bn in 1979. Shoppers who relied on the catalogues for their purchases can either go to jcp.com or contact a Penney customer care center, which will input the order through the Web site. <wwd.com/business-news>

Hedgeye Retail’s Take: The end of an era and the end of having to talk about “Big Book” compares.  Time to focus solely on e-commerce.

 

KCP and Macy's Work Together - Kenneth Cole Reaction launched at Macy's stores Wednesday, solidifying an exclusive collaboration built on a new partnership model that will in turn drive sales higher. This has proved to be the case with partners as diverse as Tommy Hilfiger and Rachel Roy, and Macy's expects similar results from Reaction. Since Macy’s started working with the Kenneth Cole team on the sportswear, the product has already evolved. The sportswear is intended to appeal to the young, contemporary guy. The retailer initially carried Reaction outerwear, footwear, tailored clothing, dress shirts and ties, pants and accessories, and the brand had had a track record of success. Since hitting the floor last week, bestsellers have included dress pants, sport coats, slim suits and patterned suit separates. Long-sleeve wovens, novelty knits, cardigan sweaters and graphic T-shirts have also been strong, said a Kenneth Cole spokeswoman. Beginning in February and continuing through the year, the retailer will work with designers to create capsule collections of women’s apparel that will rotate on the floor every two months. <wwd.com/retail-news>

Hedgeye Retail’s Take:  While exclusivity has worked in the past with M, we’re still not convinced that KCP has turned the corner on its apparel efforts.  There is still much work to do here, although the M collaboration and the acquisition of its sportswear license from Chaus are a start.

 

Espirit Targets Growth Through Outlet Expansion - Targeting cost-conscious shoppers, Esprit Holdings Ltd. is accelerating its U.S. retail growth with outlet stores, initially focusing on the West Coast and Southwest. The U.S. expansion strategy will be dominated by 3,500- to 5,000-square-foot outlets. Esprit plans to add 15 to 20 outlet stores over the next year — five this month in the California cities of Los Angeles, Gilroy, Vacaville, Desert Hills and Milpitas — and no full-price stores. Esprit manufactures merchandise specifically for its outlets and that constitutes 95% of what is on the floor. The average price is 30% less than Esprit’s full retail prices. <wwd.com/retail-news>

Hedgeye Retail’s Take:  Late to the outlet party but probably not a bad time to pick up some quality locations as even outlet malls have recently suffered a bit on both productivity and traffic levels.

 

Hilfiger Launches Younger Targeted Retail Store - On Thursday, Tommy Hilfiger unveiled the first Tommy boutique in the U.S., a 1,000-square-foot store at 375 Bleecker Street in Manhattan, in a former Hilfiger collection location. Two other U.S. Hilfiger stores will be converted to Tommy boutiques and two more Tommy stores were recently opened in Toronto. Tommy differs from the Tommy Hilfiger flagship sportswear stores, which are more uptown prep, more refined and more grown up. This is focused on the younger customer. The line will also be available at tommy.com beginning in the spring. Aimed at 20- to 30-year-old customers, the Tommy merchandise is accessibly priced. For example, Tommy knits will retail from $24 to $59, denim will run from $69 to $129, and outerwear will start at $129 for men and $139 for women. The collection is sourced through Li & Fung Ltd. and manufactured in the U.S., Asia, India and Mexico. <wwd.com/retail-news>

Hedgeye Retail’s Take:  While probably not a huge growth vehicle given the high cost real estate strategy (at least to start), this sounds very similar to Rugby.  Something to keep an eye on over the intermediate term.

 

Supply Constraints Dent Lacrosse Footwear - Supply constraints in China continued to impact LaCrosse Footwear Inc.’s business in Q3. The Portland, Ore.-based company saw stronger demand in the quarter for both its core work and outdoor products but revenue for both categories suffered from the capacity limitations of the firm’s third-party manufacturing partners in China.As a result, LaCrosse had a significant volume of work and outdoor boot orders that it was unable to fulfill, but it expects to ship them early in the fourth quarter. <wwd.com/footwear-news>

Hedgeye Retail’s Take:  Add Lacrosse to the list of companies including COLM and FINL expressing challenges in the supply chain over the past 3-4 months.

 

Sport Chalet Secures Credit Agreement - Sport Chalet, Inc. has secured a four-year, $65 million credit agreement with Bank of America, capping what it said was the first phase of a strategic plan to align its business with post-Recession reality.  Sport Chalet has embarked on a multi-pronged strategy to better align its business with the challenging economic environment. Initially, these directives included renegotiating rent on existing stores, deferring store openings, improving inventory management and reducing selling, general, and administrative expenses. To achieve sales growth, the company enhanced its online presence, aggressively growing its vendor brand shops, along with product and service offerings, while further expanding its Team Sales division. Additionally, the company continues to source the best technical performance and lifestyle merchandise in order to further differentiate the Sport Chalet shopping experience. Sport Chalet has implemented new micro-merchandising strategies to more accurately reflect each store's customer demographics, including specialty concepts such as new running and triathlon shops.  <sportsonesource.com>

Hedgeye Retail’s Take: The company’s updated strategic plans may buy SPCHA time, but with competition heating up for west coast locations from the east, it may only be prolonging the inevitable.

 

Russell Athletic Partners with the Harlem Globetrotters - Russell Athletic has signed a three-year deal to become the official uniform, practice gear and travel gear provider for the Harlem Globetrotters. Under the agreement, sister companies Brooks will be the Globetrotters' official supplier of casual footwear, and Bike is the team's official provider of athletic training supplies.  <sportsonesource.com>

Hedgeye Retail’s Take: Assuming the deal came at minimal cost relative to other opportunities, the ‘Trotters will give the brand a great opportunity for some highly recognizable marketing & advertising.

 

Vancl.com Says 2010 Sales May Triple on China Growth, Plans Nasdaq Listing - Vancl.com, China’s biggest online clothing retailer, expects sales to triple this year as more people in the world’s largest Internet market use the Web to buy apparel, the company’s chief executive officer said. <bloomberg.com>

Hedgeye Retail’s Take: The shift towards increased domestic demand has been underway for much of the year, but 3x is material step function up in anyone’s book. With e-commerce a robust growth channel, there is sure to be interest in the ADR should it get listed on the NASDAQ.

 

Ikea Plans Growth in China - Ikea, whose biggest Asian store is in China, plans to more than double its outlets in the country by 2015 as rising incomes turn more dozing visitors and diners at in-store restaurants into furniture buyers. The home-furnishings market is projected by Euromonitor International to surge 17% this year in China, the world’s fastest-growing major economy. Ikea said this month it will add $300 mm to the $1.2 bn being spent by a mall developer part-owned by the furnishings company, as the chain increases its stores in China to 18 from 8. The retailer also has three outlets in Hong Kong among more than 300 worldwide. China’s economic transformation lifted 300 mm citizens out of poverty during the past three decades, according to the United Nations. The growing prosperity will help the nation’s home-furnishings market expand to 186.9 bn yuan ($28 bn) this year. <bloomberg.com>

Hedgeye Retail’s Take: As the country’s economy grows – so does the nations wealth. Natural focus for the affordable home furnisher.

 

 


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