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.

 

 


7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more