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R3: REQUIRED RETAIL READING

November 9, 2010

RESEARCH ANECDOTES

  • With costs locked in through the 1H of 2011, Warnaco’s management noted that it’s seeing a 6% increase in FOB costs of which 70% have been offset by pricing – the rest is expected to be offset by an increasing mix of international growth and retail sales. While many domestic retailers and brands lack similar growth opportunities, it’s becoming increasingly evident that gross margin expansion is simply not a given in much of retail in 2011.
  • The march towards a merchandising turnaround at Juicy Couture began yesterday with the unveiling of the brand’s new holiday collection designed by Erin Fetherston.  The collection is now available online and includes 11 looks, shoes, evening bags, hats, and jewelry.  Recall that Juicy brought Fetherston in this Spring to jumpstart the brand’s revival.
  • HD content still has a long way to go.  According to Nielsen, although 56% of US households now have at least one HDTV, only 13% of total day viewing on cable and 19% of viewing on broadcast television is “true HD” viewing.  In fact, 80% of broadcasts are still in standard definition. 

OUR TAKE ON OVERNIGHT NEWS

UA Nabs Brady - Under Armour has a new big-name endorser in the NFL, the company announced Monday. The Baltimore-based brand signed a multiyear deal with quarterback Tom Brady of the New England Patriots. Under the agreement, Brady will wear the brand’s apparel and footwear for training, as well as debut a customized Under Armour cleat in upcoming games. He will also receive an undisclosed amount of stock options. As a three-time Super Bowl champion, MVP and holder of several NFL records, Brady is the firm’s highest-profile spokesperson to date. “Tom Brady represents a lot of what Under Armour is all about,” founder and CEO Kevin Plank said in a written statement. “He’s humble and hungry and continues to be focused on winning and getting better every single day.” <WWD>

Hedgeye Retail’s Take: Big win for UA - kudos for successfully extracting Brady from Nike’s stable. Without knowing the terms of the deal, tough to say just how dilutive it will likely be in the near-term, but the move is consistent with what management said it would do as well as what the company should be doing at this stage of its growth. Expect marketing highlighting the company’s latest asset in media channels with 8-weeks left in the NFL season – particularly with the Patriots positioned for another post-season run. Keep in mind, however, that if Nike wanted to keep Brady, it would have. It had greater success in selling product around athletes that were lower-profile and not married to supermodels -- -but simply had more edgy off-field personas. This will be interesting to watch.

CK Opens First Pop-up in Tokyo - Calvin Klein has a new home in this city- at least for the next 13 days. The company opens today its first ever multi-brand pop up shop on Cat Street, a trendy shopping strip that intersects tony Omotesando Ave. The more than 1,600-square-foot-space, carries a mix of Calvin Klein Collection, Calvin Klein Jeans, Calvin Klein Underwear, Calvin Klein Home and a series of limited-edition ck Calvin Klein gold products. It will go dark Nov. 22. The entire Calvin Klein crew and soccer star Hidetoshi Nakata, who is also starring in the brand's underwear campaign, descended on the luminous white store to host an opening party Tuesday night. Tom Murry, president and chief executive officer of Calvin Klein, said the company is using the store to gauge the “interest level” for the top-tier Collection business. The company has been looking to reintroduce the designer brand to the Japanese market for a few years and Murry reiterated that he hopes to open a flagship store and shop-in-shops here in the near future. A Tokyo Collection store, operated by Onward Kashiyama, shuttered several years ago and the pop up boutique is currently the only place to buy the luxury collection in the country. Overall, Murry said the Japan business, which includes ckCalvin Klein and jeans, is faring relatively well. Although Japan accounts for only $200 million of the company’s $6.5 billion in turnover, the executive stressed the importance of the market, which is Calvin Klein's oldest outside the U.S. He said the men’s business never really slowed down- despite the recession- and women’s sales are showing signs of recovery. <WWD>

Hedgeye Retail’s Take: With a concentrated department store base more similar to the U.S., Japan makes a lot of sense for the brand. Moreover, given Warnaco’s comments earlier today, the rate of growth expected for the brand in China should help to drive greater awareness of the brand in across the far east.

Deckers Sues Bearpaw - Deckers Outdoor Corp. filed suit in United States District Court in the Central District of California against Tom Romeo and Romeo & Juliette, Inc. d/b/a Bearpaw, Inc. seeking a Court order to stop them from copying the trade dress design of several UGG boots. According to Angel Martinez, Deckers Chairman and CEO, in a statement, "UGG Australia's success has fueled an entire industry of knock-off products like Bearpaw. Bearpaw is misleading consumers and creating significant brand confusion by repeatedly copying our designs, but using inferior materials, constructions and craftsmanship." <WWD>

Hedgeye Retail’s Take: These knock-off lawsuits are rarely pursued given the associated cost and lack of timely resolution. However, a quick look on Zappos demonstrates the fact that Bearpaw’s boots sell for half the price of a comparable Ugg boot with little else differentiating the two. Even the size and positioning of labels make the cheap alternative a near ringer for the original. Recall that the “knock-off” bear case on DECK has been in existence Uggs made Oprah’s list of must haves.

Hermes Raises Full-Year Forecast - Hermes International SCA, the French luxury-goods maker in which LVMH Moet Hennessy Louis Vuitton SA holds a stake, raised its full-year revenue forecast after third-quarter sales jumped 31 percent. Revenue may climb around 15 percent in 2010, excluding currency swings, assuming that “solid” sales growth continues in the fourth quarter, Hermes said today in a statement, revising an Aug. 31 forecast of 12 percent growth. Sales increased to 590.1 million euros ($818.4 million) from 452.1 million euros a year earlier, the Paris-based company said. Hermes’s sales of leather goods rose 32 percent as more shoppers in Asia picked up handbags such as the company’s Birkin model. Sales of luxury goods may climb this year to the highest level since 2007 after the worst year on record, consulting firm Bain & Co. estimates. Revenue at PPR SA’s Gucci Group rose 27 percent in the third quarter and sales of fashion and leather goods at LVMH rose 26 percent. <Bloomberg>

Hedgeye Retail’s Take: Consistent with stories of out-of-stocks and supply shortages in the super-luxury segment, Hermes demonstrates the resiliency in the luxury sector.  Good time to take the trade for LVMH, but somehow we doubt this is merely a short-term investment.

Zegna Breaks Into e-Commerce - On Dec. 9, the men’s wear brand will launch an online store operated by Yoox that will offer both the firm’s signature line and Zegna Sport collections, targeted to a younger customer. The Z Zegna line is already available at Thecorner.com, a virtual mall also operated by Yoox. The new online shop “represents a natural evolution of the brand, in addition to being the very first step in our second century of history,” chief executive officer Ermenegildo Zegna told WWD. Zegna is marking its centenary this year. The opening of e-commerce is part of the company’s “new digital strategy, with the purpose to increasingly connect with customers through Web marketing, interactive technology and social media,” said Zegna. The executive noted the company will thus “be able to open up to a new kind of customer, conquering another market segment, in addition to providing an additional service to our existing customers. I believe digital marketing is a substantial pillar of our brand strategy, one we cannot disregard.” While Yoox operates the back end, the brands control all communication strategies, creativity, product, pricing, marketing, events and special content, and maintain a direct dialogue with customers, said Marchetti. <WWD>

Hedgeye Retail’s Take: When your brand waits over a decade to launch e-commerce, it become newsworthy.  Good news for Zegna fans. 

NBA Store to Close on Fifth Avenue Citing Higher Rents - The NBA Store plans to close in late February, a victim of rising rents. The building that houses the store, at 666 Fifth Avenue and 52nd Street, was sold in 2007 for $1.8 billion, the largest single-building sale in the city’s history. Of the 85,000 square feet of retail space in the building, the NBA Store occupies 35,000, with 16,000 used for selling. Other tenants — Brooks Brothers and Hickey Freeman — departed in 2009. Real estate experts said retail space at 666 Fifth Avenue and buildings in its vicinity command some of the highest retail rents in the city. According to Jeffrey D. Roseman, executive vice president and principal of Newmark Knight Frank Retail, ground floor rents on Fifth Avenue start around $2,000 per square foot. According to experts, rents along Fifth Avenue between 49th Street and 59th Street rose 15 percent since the spring. The space the NBA store inhabits is expected to be priced around $2,200 a square foot, sources said. Uniqlo is taking over Brooks Brothers’ 90,000-square-foot space. The Japanese retailer set a record when it agreed to pay $300 million in rent over 15 years. A Hollister Epic flagship is also slated to open in 20,000 square feet of the former Hickey Freeman space. The NBA Store opened in 1998. “It does not make economic sense for us to remain in the current location given the increased rent,” said Linda Choong, senior vice president of global retail development at NBA. “We are actively pursuing a new location in New York City. We are also considering a temporary store location during the build-out process.”

Hedgeye Retail’s Take: At a $2,200 per foot asking price, there’s no question the NBA can find better value somewhere else.  Perhaps we also see a stepped up effort between Champs/NBA/Adi to bridge the gap during the transition to a new location?  The Footaction store on 34th St. (near MSG)  is a prime spot for an upgrade to an NBA theme. 

Mobile Web Penetration Grows Among College Students - While most children and teens still rely on feature phones, college students have graduated to the world of mobile internet devices—including smartphones, tablets and mobile game consoles. According to the “ECAR Study of Undergraduate Students and Information Technology” by Shannon D. Smith and Judith Borreson Caruso for the EDUCAUSE Center for Applied Research, 62.7% of US undergraduates surveyed had an internet-capable handheld device. That number fell about halfway between the 83.8% who had a laptop and the 45.9% with a desktop PC. Ownership of internet-enabled handheld devices increased by more than 11 percentage points between 2009 and spring 2010, with the number of students planning to purchase such a device in the next year holding steady. The study was fielded before the release of the iPad, which many students expressed a specific interest in purchasing. <emarketer>

Hedgeye Retail’s Take: Hmmm.  College kids use smartphones?  No kidding.   They also text and Tweet (excessively).

R3: WRC, UA, LIZ, DECK - R3 11 9 10

The President Talks FDI with India - Obama, here on a visit to talk up economic cooperation and trade between the two countries, has joined the chorus of those pressuring the Indian government to loosen rules on foreign direct investment in retailing. Currently India restricts overseas firms to 51 percent ownership of single brand stores, meaning they need a local partner. Foreign companies can own 100 percent of cash-and-carry stores, but these can sell only to other retailers and businesses, not to the general public. Multibrand retailing is forbidden in India — which blocks the likes of Wal-Mart, Carrefour and Tesco from entering the market. The rules are seen as protecting India’s thousands and thousands of small independent shopkeepers. Addressing business leaders, the commerce minister of India, Anand Sharma, and planning commission deputy chairman Montek Singh Ahluwalia in Mumbai over the weekend, Obama said, “Here in India, many see the arrival of American companies and products as threats to small shopkeepers and to India’s ancient and proud culture. But these old stereotypes, these old concerns ignore today’s reality.” Given the potential of the market, global brands are eager to see the removal of any barriers to their entering India. The Indian retail market ranks as the fifth largest retail destination in the world, according to the India Retail Report, and is expected to quadruple in size by 2025. Estimated at $511 billion in 2008, the retail sector is forecast to grow to $833 billion by 2013 and $1.3 trillion by 2018. And yet only about 5 percent of the Indian retail market is in the organized segment. Just weeks before Obama’s visit, Wal-Mart chief executive officer Mike Duke spoke about FDI in New Delhi. “Our desire is to certainly see a 100 percent opening up of FDI in the retail sector,” he told reporters. “We’re in India because of the size of the population as well as the aspiring middle class that is willing to spend.” <WWD>

Hedgeye Retail’s Take: The key here is that just 5% of India’s retail distribution is organized.  Yes, that means that almost $500 billion in retail sales are transacted via independent, small shops and stalls.  Even with FDI passed, it will take a long time for modern, multi-branded retailers to make meaningful inroads. 

Sourcing Relationships Change With the Times - In the new dynamics of global sourcing, partnerships are in and skipping around the globe is out. But maintaining a real business relationship — one where brand and factory understand each other’s needs and problems and allow for give and take in timeworn practices — will require a bit of care and attention. “When is the last time you guys took a box of chocolates to your vendor? Never,” Munir Mashooqullah, principal and founder of Synergies Worldwide, said at the WWD Forum, “Global Opportunities: Sourcing & Supply Chain.” “It’s an exception.” Today, he said the business is a “price-point game” where cotton prices, currency fluctuations, tight credit, even natural disasters, can affect how much products cost, as well as how fast they arrive. “We talk about partnership, but we really have not been partners,” Mashooqullah said. “We’ve treated vendors like a slave constituent and that time has gone.” In order to build relationships, Mashooqullah said companies should research and understand their vendors’ businesses and avoid “low-balling” them. Given the continuing consolidation of global apparel production, brands are finding it’s not as easy to pack up shop and move to another factory or another country with lower costs, in part because there are fewer new producers opening up. Sukumaran said the partnership model is the only one that is sustainable in the long term because it is focused on meeting customers’ needs. “The past is no longer a guide to the future,” said Chris Koh Lian Chye, business director at SL Ponie Pte. Ltd. The buyer needs to stop moving to countries where labor is just cheap, and instead should also consider countries where the political, economic and cultural climate is stable, he said. <WWD>

Hedgeye Retail’s Take: There is a clear shift that’s developed between brand’s focus on quality of relationship instead of solely on price. With a multitude of macro factors becoming more commonplace in the today’s market in addition to increased competition over top suppliers, we expect the shift towards a more collaborative dynamic between brands and factories to be more lasting than fleeting in nature.

Consulate-General of Pakistan pays visits to Wenzhou - Pakistan’s Consulate-General Zafar Hasan has recently led a group of leather footwear manufacturers to meet up with Wenzhou city Mayor Meng Jianxin in Shanghai. The purpose of the meeting is to seek cooperation on leather and footwear industry between Wenzhou and Pakistan. According to Hasan, Pakistan is the country known for its leather and leather goods production, with 40% of leather shoes being sold in Pakistan are made in China. He invited Wenzhou footwear producers to take part in the Pakistan Trade Expo to be held the coming February. Wenzhou has many shoemakers and tanneries, and there is a large room for bilateral cooperation between the two countries’ leather industry, said Mayor Mang. <FashionNetAsia>

Hedgeye Retail’s Take: Collaboration among leading export countries suggests further evidence that price disparity will be less important relative to the strength of foreign brand relationships with leading factories in the far east as borders become less defined.

Sri Lanka Taking Clean/Green Approach - Sri Lanka’s apparel sector has broadly adopted cleaner production methods and currently has been marketing its products under the slogan "Garments without guilt", according to the country’s foreign secretary Palitha Kohonain. According to Kohona, sustainable development means to attain sustained economic growth, which is socially just and ecologically sound as well as based on harmony and stability. Pertaining to this, the National Council for Sustainable Development (NCSD) has been formed in collaboration with all line Ministries, under the “Haritha Lanka” (Green Lanka) Program which puts  emphasis on energy, climate change and other environmental aspects. <FashionNetAsia>

Hedgeye Retail’s Take: With many of the leading export countries facing increasing scrutiny over tannery operations and its recent shift towards a textile economy, Sri Lanka makes an admirable stab at gaining share by targeting the increasing clean/green movement.