Major Theme: 90% of the companies I met with sand the same song…”We’re slowing square footage growth, cutting capex, pulling back sg&a, and are closely managing inventories.” Thanks, but it’s a little reactive, don’t you think? Shouldn’t they have said this a year ago? I want to find a company that can confidently articulate a growth strategy and vision that includes something other than getting smaller. There were two companies that did so today. Lululemon and VF Corp. One I believe and the other I do not.
LULU: To say that I was impressed was an understatement. This company absolutely has a plan, and they are in control of their own destiny. Two things were abundantly clear to me; 1) They are moving ahead aggressively with their dot.com rollout – likely ahead of initial plan, and 2) LULU is sticking to its guns in lowering its average lease duration by shifting to 5-year leases from whatI calculate as a current weighted avg portfolio age in the mid teens. The thing I still need to flush out is how the company can lower terms while also cutting rent/ft so meaningfully (which it claims to be doing). That’s tough to achieve. I’m not doubting it, but need to vet it more before I completely buy in. Lastly, it sounds like the company is going heavy into women’s running apparel (shorts, especially) with an eye on Nike’s market share).
VF Corp: As we expected, VFC negatively preannounced into this event (see our ICR Preannouncement Considerations note from Sunday). But what knocked my socks off was management’s view that earnings in ’09 will exceed the long-term growth target of 10-11%. I don’t see how this is possible. First, they excluded higher pension expense and negative FX impact. Sorry folks….you simply can’t do that. Second, compares in 1H09 are super tough, and my sense is that they come out on the 4Q call and make earnings back-end loaded (ie take down 1Q and 2Q). Then They’ll hope that either a) an acquisition will come along to goose numbers, or b) the business environment will improve. Is this really worth paying a 30% premium to the group??? Apparently the market thinks so – the stock was down 6%.
More VFC Notables…
• Jeanswear mass channel was one of first impacted, will provide more detail in Feb
• Slower store growth in 2009 comp to 2008 below 5yr growth plan - fine with that (plan to most likely open less than 75, 5-yr plan is 75-100)
• Inflationary costs have come down, now flattish expectation for next year vs. orig expectation of 3% increase
• More marginal suppliers have gone out of business - not necessarily VF suppliers - not planning to use the balance sheet to help suppliers survive through 2009 - haven't changed terms (i.e. 30 days to 45) with suppliers, holding firm
• Markdown dollars - mostly at dept store level (3% of revs) - Nautica has been impacted, by markdowns, but not a major issue on the whole
• Had a very good qtr in TNF (will touch on in Feb)
• They are re-evaluating, making adjustments to internal compensation structure
• Under constant pressure to expand the distribution (footwear is <20% of TNF)
Quote of the Day – J Crew
“And I personally don't really pay much attention to history, but we try to figure out where the world is going.” – Mickey Drexler, CEO JCG
I’d juxtapose this vs one of our favorite quotes here at Research Edge from noted US/Spanish aphorist George Santayana. “Those who cannot learn from history are doomed to repeat it.”
No offense Mickey, but I side with Mr. Santayana on this one. If you followed his advice, you’d have seen that jamming the channel with more product when business starts to turn down simply is not a winning strategy. It did not work at Gap, and it does not work at JCP.
The irony is that I’m tempted by this story down here. But I need to up the management trust factor before I get more greedy in betting on the timing of the bottom.
Decker’s: Someone asked a very fair question… “What levers do you have to proactively manages through a potential protracted downturn or incremental hit to product momentum in 2009?” In the wise words of one of my Research Edge colleagues, “management sounded like they were throwing pancakes against a wall and hoping one would stick.”
• Still have significant excess inventory that will take at least 6-9 months to clear
• The decision on whether their long awaited distribution facility will be passed takes place this week.
The facility will be immediately accretive. They currently have 5 buildings that they operate from and they will be able to consolidate into 1. Will have short term duplicative facilities, but their buildings currently have very short leases all of which will expire by February. Big deal as they will be able to potentially reduce their headcount from ~1500 to ~500 with the benefit of significant automation. Fred claimed that if they could do that, they might be able to keep SG&A flat. They will be able to cut ~$7M along in transportation costs between the facilities.
• Have committed to 20-25 new stores in 2009, but not all are built and will not pursue additional locations if these aren't completed.
• Commented several times how inefficient their operations are currently
• 35% of sales through department stores – very weak channel
$100M that the company needs to have on hand (through June 2009) is all ARs
Have to get rid of more inventory, won't have good idea of what lies ahead until BTS 2009 after bankruptcies shakeout
Have lost ~500 doors from bankruptcies from 15-20k
• Wrote off $1M on Mervyns and Goodies, less than $100k for GOTT, but they have inventory that will have to be reallocated
• KSS family footwear was a bit stronger relatively
• Expect China to be in the black by end of F09/early 2010 to get to a point where they can leverage infrastructure and headcount
Big 5 Sports
• Look to take advantage of retail store environment in 2009 to grow locations and build inventories
• Only focused on states currently in, not new opportunities to expand
• Average store costs / sq ft is less than $30, are seeing retail prices like some others coming down by as much as 25-30%
• Mentioned that they can open stores very fast if the opportunity presents itself - in a matter of a few months vs. much longer for competitors
• "We believe we are advantaged in our growth and that we are very flexible in the type of real estate that works for us. Our stores average 11,000 square feet in size. This, we believe, allows us to fill the role of being a convenient neighborhood store. We provide a comfortable shopping experience for our customers. We don't need nor operate what's often referred to as cookie-cutter stores. We are successful in freestanding locations, small strip centers, major power centers. We have a small number of mall stores that perform very well."