R3: JCG, GPS, DKS, OXM

R3: REQUIRED RETAIL READING

November 23, 2010

 

 

 

 

RESEARCH ANECDOTES

  • With Gap continuing on its quest for global expansion, the company opened its Milan store over the weekend.  However, the big news coming out of the launch does not surround the store itself but rather the merchandise inside.  It turns out that the opening included a collaboration with Valentino, only available in very few locations in Europe.  Unfortunately, the domestic chain is still awaiting a designer partnership that rivals those of H&M, Uniqlo, and Gap Europe. 
  • Bowing to the pressure created by an impending AFA boycott, Dick’s Sporting Goods renamed its “holiday shop” the “Christmas Shop” on its homepage.  Recall that yesterday we wrote about the AFA’s efforts to ensure that retailers were using the term “Christmas” rather than “holiday” in their marketing messages.  Will the AFA demand what DKS actually sells next?
  • According to a survey from Pew Research and Time Magazine, about half (52%) of all adults in this country were married in 2008; back in 1960, seven in 10 (72%) were.. In 1960, two-thirds (68%) of all 20-somethings were married. In 2008, just 26% were.

OUR TAKE ON OVERNIGHT NEWS

 

TPG & JCG Round 2 - J. Crew Group Inc. has inked a $3 billion deal to be acquired by TPG Capital and Leonard Green & Partners. The private equity firms will pay $43.50 cash for each share of retailer—a 15.5 percent premium over Monday’s closing price. Millard “Mickey” Drexler, chairman and chief executive officer, will remain with the firm and maintain a significant equity stake in the company. “We are in this for the long term and we do what we do day in and day out so we can deliver the best possible products to our customers,” Drexler said. Private equity firms have been circling retailers in recent months as a combination of relatively low stock prices and readily available financing have made the sector more attractive. This would be TPG’s second round as a J. Crew owner. It acquired 88 percent of the company in 1997, sold most of its stake when J. Crew went public in 2006 and only sold off the final pieces of its investment last year. <WWD>

Hedgeye Retail’s Take: TPG going back to the well here and just in the nick of time for JCG with the deal announced on the same day as scheduled earnings, which were incidentally weak as expected. After what will be one of the best year-end bonuses in retail, Drexler will stay on to run the privately held company.

 

Coty Purchases Philosophy from Carlyle - Coty Inc. has agreed to purchase skincare brand Philosophy from investment fund The Carlyle Group. Philosophy, which is expected to generate sales upwards of $200 million this year, will join the Coty Prestige portfolio. The deal, for an undisclosed sum, is expected to close next month. “The acquisition will allow Coty to strengthen its presence in the skincare category, which is one of our key strategic objectives,” Coty chief executive officer Bernd Beetz stated. “We believe the brand still has significant growth potential in the U.S. and tremendous opportunities in the international markets,” Coty Prestige president Michele Scannavini added. Founded in 2006 by Cristina Carlino in Phoenix, Arizona, Philosophy was bought by Carlyle Group in January 2007 for an estimated $450 million. The brand is sold in QVC, Sephora, Ulta and Nordstrom in the U.S., and still does the majority of its business in North America. <WWD>

Hedgeye Retail’s Take: The beauty sub-category remains one of the most active in all of retail. Recall that rumors began circulating earlier this month about Coty looking to purchase nail care company OPI. With the OPI deal was rumored to be close to a $1Bn deal, it’s unlikely the world’s largest fragrance company with revs north of $4Bn will look to acquire both, but in this environment it can’t be ruled out either.

 

Global Sourcing Shift - “Life as we know it has changed,” said Peter McGrath, executive vice president and director of product development and sourcing at J.C. Penney Co. Inc. McGrath told an audience at the annual Textile & Apparel Importers Trade & Transportation Conference last week to forget about the past 20 years, notable for product deflation. Addressing rising prices for cotton, which he called “white gold,” McGrath said Americans will be impacted by them as the “recession lingers. “Demand from the U.S. no longer sets the world’s prices,” he said. “The days of inexpensive apparel are over.” This will likely translate into a surge in the growth of private brands, which would change the assortment mix at mass merchants and department stores. He also predicted a “consolidation from retailers to spinners” that will make the supply chain much “leaner” than before. “Strategic alliances are paramount today…the laws of supply and demand are back at work,” he said. McGrath urged his colleagues at Bridgewaters South Street Seaport to petition their governments to “eliminate tariffs on apparel and shoes,” which is the goal of the dormant Doha Round of global trade talks. Sourcing executives at the conference, sponsored by the U.S. Association of Importers of Textiles and Apparel and the American Import Shippers Association, said apparel companies faced an array of sourcing challenges in the past year, from labor pressures in China to rising cotton prices and complicated trade rules. And they said firms that successfully navigated those obstacles will have to remain flexible and astute. <WWD>

Hedgeye Retail’s Take: With other southeast Asian countries facing their own issues, two countries that came up as additional considerations as a source for apparel exports were Egypt and South Korea with governments in each country taking steps to become more accommodative. Additionally, an opportunity for further capacity out of Indonesia was also suggested.

 

European Brands Brace for Cost Change - Europe’s fashion brands — from luxury to high street — are bracing for a perfect storm of currency headwinds, higher raw materials costs and, in the U.K., a rise in the value-added tax to 20 percent from 17.5 percent. They are struggling with the issue of whether to pass along price increases and risk less demand or absorb them and put margins at risk. With gold, cashmere and cotton costs reaching new highs, companies such as Compagnie Financière Richemont SA, the parent of Cartier and Van Cleef & Arpels, already have begun to increase prices — albeit quietly — while the U.K. retail chain New Look warned when it disclosed quarterly results this month that clothing prices could rise by as much as 8 percent next year. Other firms, such as Burberry and Sir Philip Green’s retail group, Taveta, plan to tweak supply chains and focus on delivering a merchandise mix that will counterbalance the rising costs. Versace, too, said it would not pass on those costs to the consumer. “We have no plans to increase retail prices in the short term,” said Gian Giacomo Ferraris, Versace’s chief executive officer. “We believe in this particular phase of the global economy that an increase in retail prices could affect sales in Europe and America. Asia, as of today, is probably less sensitive to this.” But keeping a lid on prices won’t be easy. “Many of the raw materials are from countries outside the Eurozone, which theoretically should allow a reduction in costs,” Ferraris said. “Based on our experience from previous years, we expect that producers will increase their prices in order to gain margins, and this will lead to significant pressure on our retail prices and margins.” <WWD>

Hedgeye Retail’s Take: Higher prices are a foregone conclusion, but the wrangling over who gets pinched will continue to play out well into next year.

 

Li & Fung Acuires Oxford Apparel Group - Trading giant Li & Fung Ltd. continues to rack up deals this year, acquiring the Oxford Apparel Group division of Oxford Industries Inc. for $121.7 million. Li & Fung USA, the New York-based subsidiary of Hong Kong-based Li & Fung, has signed a definitive agreement to purchase substantially all of the assets of Oxford Apparel. The division owns the Ely, Cattleman and Cumberland Outfitters brands, as well as a two-thirds interest in the Hathaway trademark. It also produces apparel under the licensed Dockers and United States Polo Association brands and operates private label programs for Macy’s, Target, Sears and Costco. Oxford Apparel is the second-largest division of Oxford Industries, and the sale will allow Oxford Industries to focus on building its key branded divisions, Tommy Bahama and Ben Sherman, as well as its tailored clothing division, Lanier Clothes. <WWD>

Hedgeye Retail’s Take: By selling off the apparel group (~30% of total sales), the capital infusion will enable OXM to focus on growing  featured brands Tommy Bahama and Ben Sherman, which together account for more than half of the company’s top-line.

 

Ben Sherman Footwear Deal - Ben Sherman announced on Monday it has inked a licensee agreement with GMI. Under the terms of the deal, GMI will design, manufacture, market, and distribute footwear under the Ben Sherman label in North America beginning with the fall 2011 season. For its inaugural season, GMI will product about 25 styles with casual items priced at $65-$110, and dressier styles for $100-$150. A higher end component of the footwear offering, called The Plectrum collection, will feature Italian-made, more fashionable product, including trainers, moccasins, and Chelsea and desert boots. The collection will retail at $280 to $420. “We’re truly excited to partner with GMI in North America,” Ben Sherman CEO Pan Philippou said in a press release. “Ben Sherman is a lifestyle brand and the footwear collection rounds out our offering for men, head-to-toe. We’re confident that GMI understands the Ben Sherman brand will deliver a fashion-forward, quality product.” <WWD>

Hedgeye Retail’s Take: Per the sale of Oxford's apparel group announced today, the company is wasting no time.

 

SmartSilver Fabric Now in India - NanoHorizons Inc. has extended the worldwide distribution of its SmartSilver antimicrobial products to India in a move that enhances  the country's ability to offer outdoor and sports brands fabrics used for performance and technical apparel. SmartSilver sales in India will be supported by a partnership with Indorama Polyester Industries Ltd. (IPI), which already uses  SmartSilver into its Ambs polyester fiber line. Headquartered in Thailand with annual sales of US$3.5 billion, IPI is a global leader in polyester production and the second largest producer of PET bottle polymers in the world. SmartSilver® is presently available in other Asian markets such as Thailand, South Korea, Taiwan, and Japan and is used extenisvely in performance apparel and footwear. The partnership comes as many in the textile industry are looking to diversify awar from China where rapid shifts in the labor market and rapid growth are pushing up costs. <SportsOneSource>

Hedgeye Retail’s Take: No surprise as India’s trajectory as a top apparel exporter continues to rise - having access to the industry's latest innovative technology is key to maintaining global leadership.

 

e-Commerce Shipping Ante - A week ago, Sony Corp.’s SonyStyle.com offered free shipping on orders of $75 or more. Today, the consumer electronics retailer’s home page is promoting free shipping on all orders as “Our gift to you.” Like other e-retailers in the week approaching Thanksgiving, Sony is using free shipping as a lure to win over holiday shoppers. According to a review over the past few days by Internet Retailer of the top 100 online merchants as ranked in the Internet Retailer Top 500 Guide, others that were offering free shipping on most if not all orders included Art.com, Blue Nile, CSN Stores, L.L. Bean, Neiman-Marcus, Nike, Saks Fifth Avenue, Shoebuy.com and Yoox Group. Overstock.com is offering $1 shipping on all orders. The number of top 100 retailers offering some form of free shipping, at 61, was down from a year ago, when 68 offered it during the week prior to Thanksgiving. Though as happened last year, more are likely to introduce free shipping as a promotional tool as the holiday shopping season officially kicks off during the Thanksgiving weekend. <internetretailer>

Hedgeye Retail’s Take: Free at what cost? While some retailers tout a $25 hurdle (e.g. Walgreens, Amazon, etc.) others require a $50 minimum (TRU); $75 (FL, REI, URBN); $150 (JCG); and Dell with the highest threshold at $699.

 

 


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