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R3: VFC, PPR, COLM, LVMH

R3: REQUIRED RETAIL READING

December 13, 2010

 

 

 

 

RESEARCH ANECDOTES 

  • With a UK VAT increase taking effect on January 4th, retailers and manufacturers are expected to bear costs beyond the expected supply/demand changes resulting from the 2.5% tax increase.  In fact, it is estimated that it will cost UK retailers £35 million just to re-label and re-price items in inventory once the tax increase takes effect.  Even worse is the timing of such efforts which will take place during the traditional  post Christmas clearance period.
  • According to an Aon Hewitt survey, 8 in 10 Gen Y (ages 18-35) workers will not meet all of their financial needs in retirement unless there is a significant change in savings and investing behaviors.  Part of the problem arises from Gen Y savings habits, which leave only 50% of Gen Y workers participating in eligible defined contribution plans.  Of those who do participate, the average pre-tax contribution rate is just 5.3% of pay.
  • At the opening of a new store in Vancouver over the weekend, Louis Vuitton management noted that they set price based on costs – period. Throughout the downturn, Vuitton was the only brand not discounted at department stores. As such, with many retailers eying substantial cost inflation in 2011 the luxury retailer should prove to be a solid barometer in the coming year.

OUR TAKE ON OVERNIGHT NEWS

 

Retailers Eye Openings Again - Are brick-and-mortar stores inching back into expansion mode? Traditional retailers have taken something of a beating over the last few years, battered by everything from the recession and the newly frugal masses to the growing popularity of e-commerce and mobile commerce. Lord & Taylor’s plan to open its first new full-price store in 30 years, in Yonkers, N.Y., bodes well for the industry. Other positive indicators include the dearth of available space for pop-up shops — a recession-era phenomenon that gave retailers the flexibility to rent month-to-month — due to more permanent leases being signed. But for every upbeat trend there are caveats — accommodations to the postrecession economy and reminders that the free-spending days are still a thing of the past. For example, on the prime stretch of Madison Avenue last year there were 15 available stores. All were leased this year, albeit at lower rents. Retailers may be opening stores, but many of them are smaller than in the past, or existing stores are being carved up and downsized. Saks Inc. has shuttered underperforming units, while Charming Shoppes Inc. this year plans to close 100 to 120 Lane Bryant, Fashion Bug and Catherines units; The Jones Group said it would shut 165 stores, and Foot Locker Inc. closed 106 underproductive units after shuttering 179 in 2009.Nonetheless, the mood at last week’s International Council of Shopping Centers Meeting and Deal Making here was upbeat — a far cry from the grim confab two years ago at the height of the recession. <WWD>

Hedgeye Retail’s Take:  What’s more surprising is not that retailers are once again building confidence to grow again (plenty of cash and not much else to do with it), but rather that more stores haven’t closed over the past few years.  Yet another reason why inventory management is clearly the key to retail success.

 

PPR Squelches Speculation of Interest in Burberry - French retail-to-luxury group PPR said it is not interested in purchasing British luxury brand Burberry, quashing speculation that had goosed Burberry shares this week. “Burberry is a very beautiful brand, but it does not match the selection criteria for our luxury portfolio,” PPR spokeswoman Charlotte Judet said. PPR this week moved one step closer to its stated goal of selling its retail assets in order to fund expansion in the lifestyle segment, which should eventually dwarf its luxury division Gucci Group. The group announced on Thursday it had entered into exclusive negotiations with South Africa’s Steinhoff International Holding Ltd. for the sale of its furniture chain Conforama for 1.2 billion euros, or $1.58 billion at current exchange rates, in cash and the payment of its debt. Talk of the impending sales has fueled speculation PPR was interested in using some of the proceeds to snap up a new brand. Burberry and Californian outdoor sports lifestyle brand Quiksilver have been cited as key targets. <WWD>

Hedgeye Retail’s Take:  Active week for PPR speculation.  When a company says they plan on growing via acquisition it certainly makes the rumors easy to come up with. 

 

VF, Kellwood Said Eyeing Rock & Republic - VF Corp. and Kellwood Co. are both in the hunt for bankrupt Rock & Republic. According to financial and market sources, the discussions have intensified over the last several weeks. Executives at both VF and Kellwood declined comment. Both firms have taken a look at the distressed avant-garde premium denim brand before, but walked away because they wanted the assets, not founder Michael Ball. He is said to have wanted both an equity stake and a creative role in the reorganized firm, according to those familiar with the talks. So what changed?  Sources said Ball lost his leverage when a $60 million deal with Bluestar Alliance, a private equity firm that has since morphed into a brand management firm, fell apart last month. That deal would have allowed Ball to remain in a continuing role with a restructured Rock & Republic. Executives at Bluestar could not be reached for comment. <WWD>

Hedgeye Retail’s Take: Kellwood has been both actively and vocally looking to acquire a premium denim brand for more than 2-years now and is the more likely candidate of the two in our view.  For starters, VF is looking for a medium-sized brand with $300-$500mm in sales (R&R is closer to $100mm) and the reality is that there would be a fair amount of overlap with Sevens. Aside from the brand’s asset value, it appears that Ball’s involvement is proving to be a significant hurdle for prospective buyers – a reality the founder may soon have to come to grips with if a deal is to be done.

 

Q&A With COLM’s Tim Boyle - After a multiyear investment in personnel and product, President and CEO Tim Boyle and his team are dramatically growing their footwear business and redefining what Columbia means to outdoor retailers and consumers. Boyle said the company is ready to take its place in the top specialty outdoor independents and chains through a new focus on technically advanced product. That follows a major effort to move its brands out of the value-oriented and price-driven retailers it had become known for. This summer, the firm acquired OutDry Technologies S.r.l., a Milan-based group that created a patented waterproofing method. And last month, the Columbia brand rolled out Omni-Heat, a three-prong set of cold-weather technologies that it supported with its largest advertising campaign to date, a global effort that encompasses print, online and in-store elements. The growth agenda should pay off in footwear, which accounts for $238.5 million in sales — roughly 17 percent of the total business — on a trailing 12-month basis as of Sept. 30. "We've always talked about the enormous opportunity for our company for footwear," Boyle said in an exclusive interview with Footwear News. "We've been selling it since 1993, so we've had a few different people in the company managing it. And even though the business has grown, we've just never had the team in place that could literally explode it. And now we have that team in place. It should be our biggest product [category] ever." <WWD>

Hedgeye Retail’s Take: The company has made a big bet here not only on the product itself, but also the efforts to support it both at the staff level as well as externally with targeted marketing spend. Footwear remains the most significant growth opportunity over the intermediate-term with growth in the sporting goods channel both in apparel and footwear a close second.

 

Rising Costs Challenge Execs - Can footwear manufacturers manage rising sourcing costs without sizeable price increases?Projections vary, though virtually all industry experts agree that production costs including raw materials, labor, duties and freight, as well as costs associated with the re- valuation of the Chinese renminbi, are set to rise steeply in the New Year."People are calling it the perfect storm," said Deckers Outdoor Corp. COO Zohar Ziv. "It's unusual [for it all to be happening at the same time]. When we're coming out of a global recession, you would think there would be more labor availability, but the contrary has happened. "Matt Priest, president of the Footwear Distributors & Retailers of America, said his members are bracing for an increase ranging from 8 percent to 20 percent. The looming question is what this will mean for wholesale costs. So far — in the midst of a still uncertain economy — few have proposed across-the-board wholesale price increases. Instead, many have said they will mitigate any increase with operating efficiencies."Managing [sourcing cost increases] and not having some [wholesale] cost increase will be difficult but it is manageable," Priest said. Ziv said Deckers was exploring alternative sourcing areas such as northern China, and next year will begin some production in Vietnam. <WWD>

Hedgeye Retail’s Take: Operating efficiencies were commonly highlighted as a possible offset in the 1H of 2010, but with retailers now staring at HSD-LDD cost increases, it’s been a while since we’ve heard that as the leading rebuttal from retailers compared to price increases. The reality is that consumers will see these pressures at the store in the form of higher prices to some extent, with the balance absorbed by the supply chain. Just how much is absorbed by whom remains a key theme and critical question across retail as we head into 2011.

 

No Fear Sued Over Unpaid Rent - Several shopping centers in Southern California have sued No Fear, the action sports brand based in Carlsbad, CA, for falling months behind in rent for its retail outlets, according to a report in the Los Angeles Times. An attorney for No Fear Retail Stores Inc. blamed the late payments on the difficult economy and said the company was working with shopping centers to renegotiate leases. The lawyer said the rents are well above market levels and were signed during better times. According to the report, the Irvine Spectrum and Block at Orange both filed lawsuits in Orange County Superior Court; and shopping centers in Arcadia, West Covina and Valencia filed suits in Los Angeles County Superior Court. No Fear opened seven stores in late 2008 and early 2009. giving it 53 retail stores in seven states, most of them in California. No Fear also in 2009 agreed to acquire Canadian eyewear and apparel company Gatorz Inc. and emerge as a publicly traded company in Canada. The deal still needs regulatory approval in Canada. <SportsOneSource>

Hedgeye Retail’s Take: Last we checked, renegotiations are typically more productive when the rent check is still coming in.  Perhaps early indications of more supply to come in CA?

 

EU delays schemes to Offer Pakistan trade concessions - Asian countries and the European Union are seeking a compromise on a controversial EU plan to offer flood-devastated Pakistan trade concessions particularly on textiles as relief in January 2011. Bangladesh, India, Peru and Vietnam have refused to endorse an EU request for a WTO waiver at the 153-nation Geneva-based World Trade Organisation which is required for the temporary measures to take effect. EU leaders, who backed the idea in September, were hoping that the measures would come into effect on 1 January. “The EC (European Commission) officials are in touch with their Indian counterparts on this and we will satisfactorily resolve this matter,” India prime minister Manmohan Singh said. “We support all international efforts to provide succour to the flood victims of Pakistan through direct aid and grant assistance. On the other part we too had offered and remain willing to support the victims of natural calamities through relief assistance,” he added. <FashionNetAsia>

Hedgeye Retail’s Take: Offering aid is one thing, but offering concessions that could likely impact other countries is altogether different. Accounting for only 2% of EU’s imported home textiles last year compared to Pakistan’s 17% contribution, it’s easy to see why India is so concerned over any competitive advantage given awarded to Pakistan.

 


Silvio’s Black Eye

Position: Long Germany (EWG); Short Euro (FXE), Short Italy (EWI), Short Spain (EWP)

 

Italians are calling tomorrow B-Day, where ‘B’ is for Berlusconi, when Prime Minister Silvio Berlusconi faces a no-confidence vote that could swing on just one or two votes. In remarks today Berlusconi seemed to issue an ultimatum: either vote for him or else the country will be sent spiraling into the Eurozone debt crisis.

 

The 74-year old Berlusconi, whose center-right People of Freedom party is expected to win a vote of confidence in the upper house, but is more vulnerable in the lower house, has stood in a perilous state since July when followers of his former deputy, Gianfranco Fini, left the governing majority to set up a parliamentary group of their own.

 

We’ve had the opportunity to write about Berlusconi this year due to his numerous “scandals” and the risky state of Italian finances with the Eurozone’s largest public debt, at ~120% of GDP. We’ve presented Italy’s Crisis in Confidence as one not unique to Italy alone, but many EU states such as Greece, Ireland, Portugal, Spain, and Hungary that have mismanaged and overextended their public balance sheets.

 

However, here we must stress that Italy is a much larger “fish” than its European peers who have already been forced to receive bailouts from the EU/IMF, both in terms of size of the economy and debt outstanding (see chart).  We’ll be managing risk around a scenario in 2011 in which Italy may too need funding assistance to prevent a default. Both a rising yield premium (see chart below) to own Italy’s debt and underperformance of its equity market this year have been signaling a heightening risk trade.

 

Silvio’s Black Eye - b1

 

Silvio’s Black Eye - b2

 

Investment risk in Italy revolves around the confluence of these macro factors:

 

1.) Public Debt  – the country is rolling up against €500 Billion of government debt maturities (principal +interest) over the next three years--a level equivalent to Germany’s obligations, yet from an economy 1.6x larger than Italy’s. As the chart below shows, a major headwind comes in 2011, ~ €350 Billion.

 

Silvio’s Black Eye - b3

 

Silvio’s Black Eye - b4

 

2.) Political Uncertainty  –  government instability begets investor uncertainty and unleashes the snowball of investor fear that runs government yields higher. We’ve already seen this film in Greece and Ireland this year.

 

3.) Austerity’s Blues – We continue to see strong foot power (strikes) against the government’s proposed €30 Billion in austerity cuts.

 

4.) Aging Population  – Italy will have the oldest population by 2015 and 2020 in the Eurozone, with a population >65 at 21.9% and 23.2%, respectively (see chart).

 

Silvio’s Black Eye - b5

 

In remarks today Berlusconi noted that he is seeking to form a new government supported by “all moderates” if he wins the confidence vote.  Unfortunately, should Berlusconi win, his majority may still be so small that he simply prolongs Italy’s Crisis in Confidence.

 

Suffice it to say, we’re forecasting rocky waters for Italy in 2011. Look to meetings this Thursday and Friday at the European Summit in which discussions will include new  mechanisms to deal with Europe’s sovereign debt problems.

 

Matthew Hedrick

Analyst


MACAU TRENDING UP 60%

Strong revenue growth continues thru Dec 12th
 

 

Through the first 12 days of December, Macau table revenues were HK$6.629 billion.  After taking into account the number of weekend and weekdays and a full month of slots, our previous HK$17.5 billion estimate for December gaming revenues remains intact.  If our projection holds, December would represent another very strong month in Macau, up approximately 60% from last year.

 

Market shares month-to-date are shown below although they are probably of little value this early in the month.  Hold related volatility is obviously a bigger factor over shorter time periods.  However, we remain impressed with Wynn’s market share rebound over the last few months.  The addition of two new VIP rooms should continue that trend.  MGM also remains above the recent trend and we expect that to continue, even beyond the Q1 IPO.

 

MACAU TRENDING UP 60%  - macau1


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THE M3: LEVEN COMMENTS; PACKAGE TOURS; WAGES

The Macau Metro Monitor, December 13th, 2010

 

SANDS SEEKS 'EQUITABLE SOLUTION' WITH GOV'T: LEVEN  Macau Daily Times

Acting Sands China CEO, Michael Leven, has said that the company wants to work with the Macau Government to find an “equitable solution” regarding plots 7 and 8 on Cotai.  Leven said the Government gave “no official reason” for rejecting the company’s request.  "We want to better understand what happened. Why, how and now what can be done to reach a fair solution for all parties,” he said.

 

Regarding meeting Macau CEO Chui, Leven said neither he nor Adelson had met with him but confirmed that the company has requested a meeting.  Also, according to Leven, a new Sands China CEO will not be confirmed by the year-end deadline.

 

Regarding sites 5 & 6, Leven said, “We still aim at opening the first phase in December next year, but probably just in a couple of months I can tell what we’ll open. The rest will be opened during 2012." For the Four Seasons apartments sale, it is still in the hands of the government.  Leven reiterated that the request is not aimed at getting approval for the sale, but the authorisation to transfer it to a new limited company, in which holders can then sell shares.

 

Despite more Cotai competition, Sands China “will still be one of the major growth vehicles [in the territory], with plots 3, 5 and 6, especially after the completion of Galaxy Macau,” he added.

 

PACKAGE TOURS AND HOTEL OCCUPANCY RATE FOR OCTOBER 2010 DSEC

Visitor arrivals in package tours increased by 4.2% year-on-year to 396,310 in October 2010.  Visitors from Mainland China continue to lead the pack with 274,805 or 69% of the total.  628,773 guests checked into hotels and guest-houses in October 2010, up 8.2% YoY.

 

VENETIAN, CLEANERS REACH AGREEMENT Macau Daily Times

According to the Labour Affairs Bureau (DSAL), Venetian has reached an agreement with 70 local cleaners regarding unequal wages.  The Venetian told workers that the company will follow the initial plan which will see the operator increase perks and wages in the first half of next year for all personnel and review the internal management mechanism, such as the promotion system and distribution of tasks.
 



THE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - December 13, 2010

 

As we look at today’s set up for the S&P 500, the range is 33 points or -1.64% downside to 1220 and 1.02% upside to 1253.  Equity futures are trading above fair value following a strong start to the week across Asian and Europe where China's decision to not to raise its benchmark interest rate has prompted further risk appetite.  On the data front this week, the passage of the newly-proposed fiscal stimulus package through both Houses of Congress will be the main focus today. For the rest of the week, data highlights include tomorrow's FOMC rate decision plus November Retail Sales, November CPI and Empire Manufacturing on Wednesday.  In addition, weekly Jobless claims plus the Philly Fed Index on Thursday.

  • Airgas (ARG) told court its directors disagreed over minimum price they would accept for co. from Air Products & Chemicals in takeover; earlier stated they were unanimous
  • American Superconductor (AMSC) may be overvalued as wind- turbine inventories at customer Sinovel increase, Barron’s says
  • Colonial Properties Trust (CLP) said it may sell shares equivalent to as much as $100m
  • EXCO Resources (XCO): Wilbur Ross has bought 7.5% in XCO and wants to discuss “extraordinary corporate transactions,” such as a merger or asset sales, according to SEC filing
  • GFI Group (GFIG) said it will pay a special 25c-shr dividend
  • Horace Mann Educators (HMN) boosted quarterly dividend to 11c-shr, vs Bloomberg forecast 10c
  • Mattel (MAT) may rise 20% or more in next year on demand for American Girl dolls, Monster High dolls, Barron’s says
  • Plains All American Pipeline (PAA) and Western Gas Partners (WES) may rise as their fee-based business expands, Barron’s said, citing UBS analyst Jeremy Tonet
  • W&T Offshore (WTI) said it will pay special dividend of 66 cents per share

PERFORMANCE

  • One day: Dow +0.35%, S&P +0.60%, Nasdaq +0.80%, Russell +1.20%
  • Last Week:  Dow +0.25%, S&P +01.28%, Nasdaq +1.78%, Russell +2.70%
  • Month-to-date: Dow +3.67%, S&P +5.07%, Nasdaq +5.58%, Russell +6.85%
  • Quarter-to-date: Dow +5.77%, S&P +8.69%, Nasdaq +11.35%, Russell +14.89%
  • Year-to-date: Dow +9.42%, S&P +11.24%, Nasdaq +16.23%, Russell +24.22%
  • Sector Performance (last week): Financials +3.78%, Tech +1.53%, Consumer Staples +1.15%, Industrials +1.04%, Materials +0.65%,  Healthcare +0.64%, Consumer Discretionary +0.37%, Energy +0.12% and Utilities (-0.50%)

 EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 827 (+473)  
  • VOLUME: NYSE 974.51 (-2.96%)
  • VIX:  17.61 +2.09% YTD PERFORMANCE: -18.77%
  • SPX PUT/CALL RATIO: 1.48 from 1.33 +11.66%

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 17.68 -0.811 (-4.388%)
  • 3-MONTH T-BILL YIELD: 0.13% -0.01%  
  • YIELD CURVE: 2.68 from 2.59

COMMODITY/GROWTH EXPECTATION:

  • CRB: 314.91 -0.37% (-0.49% last week)
  • Oil: 87.79 -0.66% (-1.57% last week)
  • COPPER: 411.20 +0.61% (+2.83% last week)
  • GOLD: 1,384.95 -0.31%% (-1.53% last week)

CURRENCIES:

  • EURO: 1.3226 +0.03% (-1.40% last week)
  • DOLLAR: 80.070 flat (+0.87% last week)

OVERSEAS MARKETS:

 

EUROPEAN MARKETS:

  • European markets opened up and extended gains with mining shares the leading advancers up +2.1% after Chinese industrial output data beat expectations buoying confidence about the economic outlook.
  • Investors took comfort that China did not raise its interest rates over the weekend, though they did raise bank reserve requirements on Friday, and shrugged off China's inflation rate rising to its highest level in over 2 years.
  • Continuing M&A activity also helped sentiment.
  • In a broad advance all but one sector, healthcare (0.1%) trade higher. Peripheral European debt spreads and the euro were pressured ahead of the EU Leaders Summit on 16-17 Dec. Major indices trade slightly off session highs.
  • UK PPI input +9.0% y/y vs consensus +8.5% and prior downwardly revised +8.2%
  • UK Rightmove Dec house prices (3.0%) m/m, up +0.4% y/y; predicts 2011 house prices flat to down (5%)

 

ASIAN MARKTES:

  • Most Asian markets went up today as the region reacted well to China's raising banks' reserve requirements rather than interest rates.
  • Railway stocks continued up in China on government plans to develop a high-speed rail network.  Energy stocks outperformed on economic data suggesting the global economy is recovering.
  • Japan finished higher, with a weaker yen supporting the market. The market opened flat, but took heart on China’s rise.
  • Energy stocks gained on higher oil prices, and property stocks advanced on reports that secondary home sales have picked up, moving Hong Kong higher in light trade.
  • Australia rose, with miners gaining on the belief that China’s raising its reserve requirements for banks was not as harsh a tightening measure as the country might have chosen. The country’s big banks went up on relief that banking system reform measures announced yesterday were not as radical as feared.

Howard Penney

Managing Director

 

THE DAILY OUTLOOK - S P 1213


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