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We think that investors, in aggregate, walked away from this conference with the least amount of insight than at any time in all the years we attended. Why? Pardon the condescending tone here, but the companies simply do not have a clue, and therefore cannot lead the consensus.  Everyone wanted clarity on costs – but they did not get it. Hardly anyone we spoke with acknowledged the impact on earnings when heavily discounted product (due to weak demand) crosses the input cost barrier.  Management teams were generally dismissive when we discussed it with them.

Overall, we came away with a stronger view that estimates need to come down in most parts of retail (JCP, GPS, CRI and M). We’re incrementally constructive on the athletic space, where estimates should still head higher (FL, NKE, HIBB, KSWS).  On the margin, we’re less bearish on PVH due to management’s approach to managing risk. In addition, we’re also incrementally positive on WRC. We entered the conference incrementally positive on SKX. But we left squarely negative.  Please see other call outs below, and give us (or ) a shout if you’d like to discuss.

 

 

INDUSTRY COMMENTS

  • Overall most people we spoke with did not appear to get the “nuggets” they were on the hunt for.  “Is this companies cracking down on ’off the record’ comments or just that they have nothing to say”.
  • Increasing uncertainty re the impact of cost inflation and pricing power is resulting in duration elongation as many companies issued 5-year guidance outlooks/targets relative to year’s past.
  • Also, keep in mind the BIG issue here… Cost inflation is manageable and has a good enough window of planning and execution. But the problem will rear its’ ugly head at the end of the season, when the industry realizes that it has too much product (after 2 years of taking down inventories), and then excess discounting begins.
  • Most honest and thoughtful answer to the questions about cost pressure on sourcing came from URBN’s CEO:  “The way I see it, if you create good product that the consumer wants or must have, the cost pressure takes care of itself.  We’re in the business of creating products that our customers want.”  In other words, the consumer will pay for something if they really want it and the Street and many other companies are overly focused on defense, not offense.
  • Another positive came from PVH – who wasn’t even at the conference.  They are planning for costs to be up 10-15%. As such, they’re planning for units to be down 10-12%. It’s been a while since we heard a management team in this biz talk about buying in units. THAT’s the way to do it. Buying in dollars with little strategy around costs/ASP/units is a dangerous game. Unfortunately we need a LOT more companies to act this way – and that won’t happen. But this made me incrementally less bearish on PVH.
  • In a somewhat similar vein, PERY management suggested that consumers will be faced with the choice to either pay higher prices, or risk not having product from which to choose due to industry-wide inventory shortages. While the company is currently ordering ~10% fewer units in order to offset higher cost increases, our sense is the perception of tight supply is unlikely to drive consumer spending in 2011. Economic reality will trump perception all day.
  • Most talked about new (growth) story: SODA (Sodastream).  Expect Target distribution in ’11 as well as expanded products at BBBY.  Challenge is filling demand with high service levels.  Met the challenge with BBBY for holiday. 
  • URBN quotes:  “Our customer that shops all three channels spends 5x as much as the average customer with us”.  Perhaps this is why they are so excited to finally have a fully integrated multi-channel platform.
    • “The sourcing environment is the toughest we’ve seen in 17 years”.
    • “You will be happy with our inventory levels at year end”.
    • “We were never in low cost factories to begin with.  So on a relative basis, we’re just not seeing the increases in labor that others may be seeing”.
    • “Most of our costs are not in raw cotton textiles, but rather in trims, buttons, and embellishments.”
  • E-commerce and mobile initiatives were consistently one of the top topics of discussion. While many companies with sales below 5% of their total spoke to the continued opportunity for growth, Wolverine Worldwide with ~7% of sales coming from e-commerce stood out by highlighting their goal of achieving 15% of sales overtime.
  • Outlier Callouts:
    • While most footwear brands are quickly shifting production out of China, Skechers plans to continue to source over 90% of its production from China for the near-to-intermediate term.
    • While most companies are planning to leverage SG&A costs in order to offset margin pressures over the next 12-months, Deckers is planning to increase UGG marketing costs by 1.5% of sales in 2011.
    • At this point, most if not all retailers know exactly what cost increases they will face in the 2H of the year – whether it be high single-digit or low double-digit inflation, consumers and retailers are clearly waiting to see who blinks first.   
    • Most crowded breakouts: LULU, URBN, SKX, ARO, VFC, GES, PSS