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SBUX - Starbucks France

The Starbucks brand has tremendous opportunity overseas, but it will not come easy. Starbucks's JV partner is proof that there are a few bumps in the road. For the third time in four tears, Starbucks appointed a new managing director to run the operations. Starbucks, which opened its first outlet in France in 2004, only has 41 stores in the country. One of the issues the company faces is the French culture is not a to-go culture.

Reading the Starbucks blogs in France I found a post that sums it all up:

Let's compare a shot of espresso in France to one in a Starbucks:

In France: a piping-hot demitasse served in a small ceramic cup with a couple cubes of sugar, the rich aroma suffusing the atmosphere.
In Starbucks: 1.5 ounces of weak, rapidly cooling beverage in the bottom of a 12-ounce "Dixie cup", that both smells and tastes like cardboard.

KSWS: Beware the Shrinking Salesforce

Not a secret that the top line at K-Swiss has been under massive pressure. The 2 and 3-year trend line is just about as bad as I can find in retail. That said, the sales decline has been flattening out, and SG&A growth recently rolled over, which is a pretty attractive inflection point in the operating profit trajectory from my perspective.

My interest in this one was all but squashed today when my sources realized that KSWS has taken the knife to its salesforce, with some senior layoffs over the past 2 weeks. Could we see the SG&A trend continue to improve at face value? Perhaps. But it always gives me the creeps when cost saves come at the expense of a salesforce.

Note: Chart below shows the change in market share for K Swiss in its 2 largest categories; Tennis and Lifestyle. Not a pretty trend. Data compliments of NPD Fashionworld.

UA: Zero to 30 in 2 Weeks

By the end of this past weekend, my sense is that sell-throughs on the new Under Armour Cross Trainers ticked up by 200-300bp from the 6-10% sell through rates we initially saw earlier in the week. While these are not 'knock-out' numbers (remember that UA's cleat launch was 20-30% sell through), they remain very respectable.

But if looked at on a very narrow 2-week market share view, UA has grown the cross training market by 19%, and has taken 30% of that segment out of the gate. Nike's share went from 56% to 36% and Reebok went from over 5% to about 1%. While not sustainable given that product supplies are likely to dwindle throughout the summer, this is no doubt, a number being flashed around Baltimore these days.

The "Proto Evade" at a $79.99 price point is the lead dog of the cross trainer line. The low cut styles are doing very well, followed by the mid-cuts. The higher cut styles (and highest price point at $100) are nowhere near as successful.

One consideration is that week one numbers for any major product launch tend to be buoyed by both pre-sells and in-house employee promotions. All of the majors - Sports Authority, Hibbett's, Dick's, and Finish Line did a solid job here.

Overall, the attitude at retail across the US is upbeat regarding the launch. Interestingly, more than one person we spoke with used the following terminology regarding the launch; "The launch was not Jordan-esque, but it more than satisfied expectations". Sounds like this has been spoon fed as the standard line...

Keep an eye on the UA investor day next Thursday in Baltimore. I can't imagine anything but solid news/spin will come of it. As it relates to footwear, my bet is that the Tech Running initiative for Spring '09 gets some solid bandwidth. Keep in mind that this is a category that is perhaps the most competitive in all of footwear, and also one that is farthest from UA's core competency. We're even seeing brands like K-Swiss, the perennial tennis brand, get into running next Spring, as well as a more meaningful push by Asics. It'll be interesting to hear how UA will keep market spending under control as this initiative launches.

Chart below shows 2 week yy change in Cross Training market share. Courtesy of NPD Fashionworld.

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Credit Crisis 1. Green Retail 0.

Interesting, yet unfortunate, turn of events for Nau last week. I think this is (was) one of the cooler brands out there. I'm hardly the fashionista type, but these guys at Nau had a great idea to establish Nau as 'The' green apparel brand on the market.

But after 14 months, the company shut its doors. I was particularly fascinated by the key rationale.

"In the current highly risk-averse capital market, we simply could not raise the necessary funds to continue to move forward. We believe this is not so much a reflection of the viability of our business, but the result of an unfortunate confluence of events. Just as we could not have predicted the sudden groundswell of environmental consciousness that blossomed at the time we launched our business, we did not foresee the current crisis in the capital markets. At this time, investors are loath to invest in anything; especially, it appears, a company like Nau that has the audacity to challenge conventional paradigms of what a business should be."

Should the company have thought a bit more about funding needs before agreeing to give away 5% of gross receipts to charity? I'm sorry to say this, but the answer is probably 'Yes.'

It just stinks when anyone out there looking to think outside the box and break-down long-standing paradigms gets a black eye.

Last I checked, black eyes don't last forever.

Apparel Capital Deployment Famine

Capital deployment is like feast or famine in the apparel industry, and the supply chain starved.

If there's one thing I am convinced of it's that for a company to thrive in what will be a dramatically different operating environment for the next 3-5 years, the brand/retailer needs to invest in its content - big time. Whether it manifests itself in capex or SG&A depends on the specific business model (retailers need more capex while 'brands' need more SG&A).

Another key backdrop for me is that a company in this space could literally earn whatever it wants to for a few quarters. Maybe even a few years. Not tough to defer lease liabilities, and take down opex to boost margins today and borrow from 2-3 years out. EPS does not equal economic reality.

Consider the following...
  • The first exhibit shows the year/year change in gross margin for the apparel supply chain versus its SG&A ratio. In other words, it shows how much the industry is reinvesting back into sales, marketing, product, and the retail experience in different gross margin cycles. Noticing anything?
  • First off, it's pretty tough to miss that gross margins were up pretty massively over 7 years. That's right in line with my industry call (i.e. this tailwind will reverse).
  • Second, is it just me or has the yy change in the SG&A ratio consistently coming down? I don't know about you, but when I look for a good business, I like to find one that takes gross margin improvement and reinvests a fair share into SG&A to drive future growth. This industry has done the polar opposite.

Key Commodity Trends

  • - From the Cattlenetwork - Cattlemen's attitudes were bullishly positive! Drought, hay shortages, and row cropping has forced breeding stock off their range over the last year and a half and the results of this herd reduction are just now starting to show. Weekly feeder cattle receipts in last year's drought ravaged Southeast are already running 9 percent lighter than 2007 and this shortage should become even more prevalent as the summer progresses. Research Edge translation - beef prices are going higher for the balance of 2008!
  • CornThe CEO of Pilgrim's Pride (PPC), Clint Rivers, spoke in NYC this week and said - "I think today the industry is thinking in terms of placing (chickens) for $6 corn when I think we should realize the potential for $8 corn is certainly there and I think we should be in a position to deal with that. PPC recently announced it was cutting production about 5 percent, largely due to higher feed costs. Research Edge conclusion - The restaurant industry to see higher chicken price for the foreseeable future.
  • WheatWheat

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