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April 14, 2011





Drought A Big Worry as Cotton Planting Begins - How many acres of cotton will be planted in 2011 when all is said and done? Analysts say economics and weather will play a big role. Tight supplies in old crop cotton are a bullish for new crop cotton. Fundamentals can change in a hurry. Producers should consider putting a floor under cotton prices at between $1.30 and $1.40 a pound. Cotton acreage estimates may push the markets up and down as planting season nears, but lingering dry weather across the Cotton Belt could have a much bigger impact on the market in the longer term, according to Texas A&M Extension economist John Robinson, speaking at the Ag Market Network’s April 12 teleconference.  USDA’s March 31 Prospective Plantings report was a surprise to many, projecting cotton plantings at 12.56 million acres of upland and Pima. The market reacted fairly strongly with new crop cotton prices moving to just under $1.40 per pound. Robinson thinks cotton acreage may end up a couple of percentage points higher than March projections. <DeltafarmPress>

Hedgeye Retail’s Take: Prepare for speculation about what ‘next year’s crop will be.’ Investors are absolutely fed up with the inflation debate. Actually, they view it as a fact – not a debate. But quantifying the benefit to margins if we have a bumper crop is clearly more interesting, and potentially profitable.  KEEP IN MIND, however, that changes to the crop discussed today will not impact retail margins until 2013.


Ferragamo Aiming for July IPO - Good things come in threes. After Prada and Moncler, speculation is mounting here that Salvatore Ferragamo is the latest Italian brand to be looking at an initial public offering by July. Prada plans to list in Hong Kong in the first half, while Moncler is expected to hold its IPO slightly earlier in Milan. A source said Ferragamo’s IPO could value the company at around 1.5 billion euros, or $2.1 billion at current exchange, compared with the larger Prada’s estimated valuation in Hong Kong of up to $9 billion. Italy’s merchant bank Mediobanca has been tapped, together with J.P. Morgan, as coordinator of Ferragamo’s global offer, joint book runner and joint lead manager, a well-placed source told WWD. These are the same two banks chosen in 2008 by the Florence-based firm, which had plans to go public that year.  <WWD>

Hedgeye Retail’s Take: Given the resilience of the luxury market in the face of such ugly Macro cross-currents over the past few years, luxury IPOs have several relatively strong legs to stand on. Sell while the going’s good…


A Brit in London - Burberry has brought its Burberry Brit concept onto home turf. On Friday, it will unveil a sprawling, 10,000-square-foot Burberry Brit store located in London’s bustling Covent Garden area. The store is Burberry’s seventh Brit store globally and its first in the U.K., following recent Brit openings on Bleecker Street in New York and Corso Venezia in Milan.  Christopher Bailey, chief creative officer at Burberry, described Burberry Brit as “the casual expression of the Burberry guy and girl.” To wit, although the store, which Bailey designed, is done out with Burberry’s signature dark wood floors and sleek, polished black chrome fittings, it’s filled with colorful, casual merchandise. The brand’s April Showers collection, which includes pieces such as red Perspex trenchcoats and yellow mini capes, stands near the store’s entrance, placed amid Perspex blocks in primary colors. The two-story store also has areas devoted to accessories and denim, while a room on the basement floor is given over to the label’s trenchcoats and outerwear. <WWD>

Hedgeye Retail’s Take: These mega stores have traditionally been marginally profitable at best. But for the luxury brands, they’ve actually been profit centers (note comment re Ferragamo and luxury market). We’re seeing – for the most part – rational growth in these stores, as well as rational closures when warranted (i.e. NikeTown Denver closing).


J Crew to Launch UK Online BusinessJ Crew, the “preppy” US retailer bought out in a $3bn private equity deal last year, is planning to launch an online business in the UK’s high-end fashion market this summer, its chief executive has said. Mickey Drexler, J Crew’s head and one of the most renowned personalities in US fashion retail, said the group would use its online business to spearhead its overseas expansion ahead of opening more bricks-and-mortar stores. Mr Drexler successfully repositioned J Crew as an up-market brand, but until now he has maintained a narrow focus on the US market. He will join a growing band of fashion retailers using the internet to lead expansion outside their home markets. “We just have huge demand overseas,” Mr Drexler told Bloomberg TV. “We’re walking, we’re studying right now. But we launch in the UK . . . in August or September. That’s kind of our official online international.” <FinancialTimes>

Hedgeye Retail’s Take:  The interesting angle is that J Crew is rolling into a new market without having legacy infrastructure as baggage. Do not underestimate the importance of this! Growth into new markets without the hassle of an antiquated operating asset base is extremely high return.  We think this will come at a premium going forward.


Retail Restructuring Seen Ahead - Retail will be a primary source of restructuring activity for the next 18 months, if not longer.  That’s the conclusion of Durc Savini, managing director and head of the restructuring and recapitalization group at investment bank Peter J. Solomon Co., which held a company presentation Wednesday on “2011 Retail Restructurings: Watch Hemlines, Hardlines and Waistlines” at New York’s Princeton Club. Other presenters included Kenneth Berliner, president and head of the mergers and acquisitions group, and managing directors Jeffrey Derman and Jeffrey Hornstein. Savini told attendees that the largest segment of firms with risky credit ratings — 18 percent — are apparel and retail companies. Those limited by lack of financial strength or low pricing power are the ones that will be facing tough headwinds, he said.  <WWD>

Hedgeye Retail’s Take: Hmmm… The head of a retail restructuring Firm talking up that restructurings will pick up meaningfully over the next 18-months. Do you think that just MAYBE he’s a little biased? Nonetheless, given the 400+bp margin compression we expect to see this year – and specifically in 2H – he’s probably right.


Mango Planning Large-Scale Global Expansion - Coming off a 10.9 percent sales increase in 2010, Mango is planning to add another 550 stores to its global portfolio this year, including entries in six new markets that will give it a presence in 109 countries.  Through its own network and those of franchisees, the Barcelona-based retail and wholesale firm added 380 stores last year, lifting its total to more than 2,000. Included in the total store count are 113 units under its H.E. by Mango men’s wear banner, 39 of which are in Spain. Among the 550 stores to be added this year are 20 men’s stores. The company said that it eventually expects to have 500 H.E. by Mango stores.  In 2010, Mango’s revenues grew to 1.27 billion euros, or $1.68 billion, from 1.15 billion euros, or $1.6 billion, in 2009. These figures, converted from the euro at average exchange for their respective periods, represent both wholesale revenues and sales of company-owned stores, excluding value-added taxes.  <WWD>

Hedgeye Retail’s Take: Check these guys out. When people are hitting the conference circuit and doing their super-duper-double-secret one-on-ones, they’re focused on the typical US (used to be) growth companies.  

R3: Drought, JCG, Mango, and Ferragamo - R3 4 14 11