Company Insights from ICR Conf

As a follow-up to yesterday's industry insights from ICR, here are our company specific notes from the event. Please give us (or ) a shout if you’d like to discuss.

 

COMPANY COMMENTS

 

PSS:

Cost Inflation:

  • Still too early to tell if they will be able to completely offet
  • See HSD increases as the peak
  • Key offset to cost inflation is markdown management - faster reaction increases turns = max gross profit $$
  • Keds most exposed brand (canvas) with 7-8mm  of ~195mm pair in total annually

Consumer:

  • Expressive consumer still larger portion of business than more cost conscience customer
  • Focused on hitting trends for expressive customer and driving price to offset lower end
  • At this point, a return of the lower end consumer would be gravy

Pricing:

  • ROST and TJX have offered lower price offering at times but not consistently
  • Have stopped trying to compete at the very low end - hurt them in early 2010

Gross Margins:

  • Engineer down to the material level to manage cost
  • Size Assortment Matrix (SAM) - key process used to decide whether to include tail sizes (beyond core sizing) for new styles + colorways to increase turns
    • At most Payless locations now shifting to implement at Stride Rite retail

Capital Spending:

  • Expect 2011 capital allocation to reduce debt to be ~1/3 of EBITDA consistent with recent years

Brands:

  • Sperry - women's segment now as big as men's
  • Have reduced door count by 1000 doors while growing retail driving gross margin expansion
  • Likely to add another 10 stores this year
  • Not sure where ceiling is for stores beyond 50

SKX:

Cost Inflation:

  • HSD, LDD price increases in 2011
  • Will continue to operate under the same margin requirements
  • Labor accounts for 25-30% of cost of shoe
  • Don't expect cost inflation to impact GMs in 2011 due to ability to pass through

Gross Margins:

  • Could see margins dip below 40% depending on how fast they can sell through overhang - but only for short periods of time

Sourcing:

  • Still source 90%+ in China and expect to maintain that level near-term rather than shift like rest of industry

Categories:

  • All core backlogs are positive, with mens and kids showing the most strength.
  • Women's SRR selling better than men's
  • Kids "on fire"
    • ~$300mm worldwide
    • Priced at the higher end
    • Accounts for ~20-25% of sales
    • Doing more business with FINL than in years past

Europe:

  • Toning sales 50-75% the size of U.S. at peak

Marketing Spend:

  • Q2 & Q3 largest qtrs in terms of spend

Boots:

  • <10% of sales
  • Did very well in Q3 & Q4

European Weather Impact:

  • Didn’t see material slowdown others have highlighted (boot sales offset declines in other categories)

Technical Athletic Launch in 2011:

  • July/Aug launch - first at SKX retail then at wholesale 4-6 weeks later
  • Lightweight running first test of $100+ product post toning – will also offer $70 entry point
    • Believes toning success gave brand confirmation/right to sell through premium priced product

DC Update:

  • Transition expected to take place in Q4 2011 - will store product in new facility starting in April/May
  • Expect to be shipping out of by the '11 holiday

GCO:

  • Seeing new store opportunities for LIDS up to 1100-1200 locations domestically – not anchored to malls (i.e. ski slopes)
  • LIDS Locker Room concept born from Sports Fanatics acquisition/added capability adds opportunity for ~500 locations
  • Has been comping nicely
    • In-store embroidering capability a key sales driver
    • Adds ~8% to sales
    • Roughly 50% of stores have capability
  • Building Lids Team Sports concepts closely with NKE
  • NKE is well penetrated with top 100, but very little exposure to smaller teams both College and HS at the local level - GCO offers that oppy.
    • Most players in this space private players, Nike ramping efforts aggressively will have product/blanks that can be customized
  • Also issued 5-year financial targets

DSW:

  • For the last several weeks men's footwear has outperformed women's
  • SKX did their homework in evolving the toning brand – like the evolution of product will continue to support
  • the Big Deal promotion has regularly been 12% of total sales for at least the past year.
  • Will have a mobile transaction system implemented by end of Q1
  • Capacity is freeing up as demand for toning shoes rolls over.

SHOO:

  • Int'l a key growth opportunity - only 5% of total sales
    • Currently $31mm in sales via distribution agreements - goal to get to $100mm+ by 2012
    • 7 new brands added since 2009 should grow to ~$150mm over next 3-years from $50mm currently
    • Fixing direct retail a key initiative with goal to get to 10% EBIT margins by 2012
    • e-commerce only accounted for $22mm in sales LTM (<4% of sales)

DECK:

  • Goal to reach $2Bn in sales by 2015
    • Int’l be 40% of rev. by 2015
    • Marketing currently only 2% of sales, will be increasing UGG marketing spend by 1.5% of sales in 2011
    • Men's business a key initiative: Pilot program in U.S. for 2011 launching in Q4 (Tom Brady endorsement)
    • Stores expansion - 260 by end of 2011 - vs. ~180 at end of 2010Business very strong
    • 5-10% growth in raw materials
    • Shift to men’s on the margin
    • Tom Brady….ugg! Now’s he’s wearing UA AND Ugg. That’s a first…
    • SIGMA not looking good. Actually, it looks bad.

CROX:

  • Core product now accounts for only 10% of revs
  • Excited about new technology in ’11, with emphasis on lightweight product.  5 crocs chuck taylor-like shoes equal weight of one original converse version.
    • Dual injection with both softer and harder material for increased durability
    • Expect the company to continue to operate under one brand.  Believes DECK is a great company to emulate.
    • Likely to see rollout of Jibbitz by Crocs at TGT.  $14.99 price point using molds from the Mamba line, originally slated for JCP 3 years ago.
  • Just launched "duet" product this week
  • Marketing Spend of $15-$18mm in 2010 towards integrated efforts nonrecurring 2011 efforts will shift toward direct to consumer

WWW:

  • Footwear wholesale - goal to grow 2x industry
  • Believe Merrill will be company's first $1Bn brand
  • Sold more than 400k pair of new Merrill barefoot shoes for Spring 2011 season - launched mid Feb
  • Has been very well received at specialty running shops to get M into those doors
  • Consumer Direct only ~7% of sales expect to take to 15% of sales over time
  • Cost inflation MSD in 1H, MSD to HSD in 2H

HIBB:

  • One of the most bullish at the conference – on both square footage and comp
  • 12-15 new stores in 2010 were Movie Gallery locations
  • Opportunity for 30-35 net store additions in 2011
    • 40-50% from Movie Gallery or Blockbuster locations
    • Plan to expand an additional ~20 stores in 2011 up to 7-8k sq. ft. formats
    • Only 20-25% of store base competes with a FL
    • Nike supporting marketing both in-store and external - HIBB's full-service positioning a competitive advantage
    • NKE accounts for ~50% of sales overall; 60-65% of footwear
    • Interestingly, they specifically called out KSWS from a product standpoint
    • That matters when a company’s (KSWS) sales is cut in half over 3 years.
    • KSWS Tubes for Spring '11 one of CMO's highlights
    • E3 replenishment system hasn't resulted in material bump in inventory as expected - even more efficient
    • “A NFL lockout would have a small impact on comps.  However, we’re more excited about the prospects for the NFL/Nike relationship and what it will mean for new products.  Did you see the Oregon Ducks uniforms?  Very exciting.”
    • Landlords still not giving in on rents, even though these stores have sat vacant.  Expect capitulation and the sites are pretty good.
    • Being in-stock, aided by replenishment systems, is still key to driving comps.

BGFV

  • Weather is simply impossible to read
  • Toning is a Fad
  • In 2H11 there WILL be a product margin squeeze.
  •  ‘We’ll all work together in ironing out the costs.’
  •  ‘But it won’t be an even distribution, and uncertainty is significant on timing and magnitude.

GES:

  • Paul Marciano, 1st presentation in 14 years.  Brand name inspired by billboard from McDonalds.  Wanted one syllable brand name.
  • 40% of rev’s licensing, 50% in Europe
  • 15% NA wholesale, 85% NA retail….global: 36% eur, 44% NA retail, 8% asia, 8% NA wholesale, lisc 4%
  • Opportunity in north Europe, currently in south.  Germany being evaluated
  • Italy is half of Europe

DLTA:

  • Pricing at wholesale Ts going up
  • Blank Ts demand is stronger
    • No unit degradation in last 6mo
    • 6mo lag between cotton costs and sale is puts significant strain on industry requiring much higher working capital
  • Spent another $15mm on inventory YY due to cost increases

VFC:

  • “We want to own your closet, the whole closet. And, maybe some drawers and shelves as well” 
  • More than double north face to $3 bil. -5 yrs
  • Mid march investor day will layout 5 year plans
  • International EBIT 200 bps higher than total corp op margin.  Lower tax rate abroad helps EPS.  Will be 40% of total in 5 years.
  • China $1 bln opportunity
  • No single brand fully developed on retail. Vans largest.  67 TNF, grows to 190 globally 5 years
  • GM’s will continue to expand in same manner as prior 5 years.
  • Spent incremental $100 mm on sg&A in 2010 centered on marketinf.  Half on tnf and vans.
  • 5.6% of total (mktg) was, 5% historically.  Will be lower in 2011, to offset margin pressure
  • Cash flow: exceed $900 mm, was $850. Acquisitions top priority.
  • Focus on outdoor, action sports
  • 5mm repurchase in 2010, vs. historical rate of 1-2mm shares per year.
  • May see north of 80 new stores in 2011, incremental comes from international
  • Will cut incremental marketing spend from ’10 to offset cost pressures
  • Not yet locked in on denim for Fall.  Many denim mills still not accepting orders and holding out for more clairty.
  • Bought some denim textiles in late ’10, will show up in YE inventories.  Small but will help to offset costs.
  • Rock and Republic (if successfully closed with courts) will be positioned away from competing with Seven.  Likely goes downstream from super premium.
  • All brands taking price, but not all due to cotton.
  • Feb 1st will see price increases in denim at retail, at WMT
  • Low-end denim price increase will not fully offset costs
  • Expect 10-15% more cotton to be planted, which may result in substantial price relief by year end.

Gordman’s CEO:  “Pricing is not the issue to understand the Gordman’s model”.

WRC

  • Is it me, or did this story actually sound decent???
  • The growth profile seems to be improving.