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Takeaway: Hedgeye gets a rare look into the UK retail market and its implications for US companies.

On today’s Retail expert call, we were joined by retail expert Stacey Widlitz, head of SW Retail Advisors.  Stacey is a recognized expert on retail trends with a unique perspective on both the US and the UK markets.  Operating from her base in London, Stacey provided our clients valuable insights on some key retail names last quarter.  In today’s conference call she shared her insights on the Christmas season and the changing face of UK retail.

Stacey saw the Christmas season and the fourth quarter generally flat year-over-year in terms of sales.  November was a disappointment in the UK and retailers started discounting both early, and aggressively.  A key takeaway is that the UK consumer has generally been used to much higher price points than we see in the US, and there has not been a broad culture of discounting in the UK.  Stacey believes that is changing and this Christmas season looked a lot like the US season in terms of promotions.  One point that worked in favor of the UK retailers was that they came into the final quarter with tightly controlled inventories.  Nonetheless, what Widlitz calls the “Americanization of the UK consumer” forced many stores to run US-style holiday promotions.

Widlitz noted heavy promotions at many leading department stores, with fragrance and cosmetics giveaways, and 20%-50% discounts common across the sector – she says Gap ran their discounts as high as 75%.  Retailers were taken by surprise as customers stayed away from early season discounts, coming back Yankee-style to scoop up bargains, many of them waiting until the day after Christmas – in the UK it’s called “Boxing Day” and is a separate occasion for gift giving.  Widlitz says the UK consumer has figured out the waiting game, and retailers have to play along with the new rules.

Another key theme is the pricing disparity of international brands which often are priced the same in pounds sterling as in US dollars.  Widlitz says Kors handbags are significantly more expensive in the UK – a bag that costs US$ 400 in New York costs 400 pounds sterling in London – equivalent to US$ 630.  UK customers have figured this out and some now buy expensive fashion items on-line in dollars and have them shipped to friends in the US.  London retailers have to figure out how to compete in this environment, and Kors, for example, discounted earlier, and more heavily than in the past.

Widlitz says Hilfiger was among the more successful stores, running “some of the leanest promotions around,” discounting only large sizes and left-over odd pieces.  The higher price point and the cachet appear to still hold appeal for local fashinistas.

Widlitz was most positive on Victoria’s Secret, whose London flagship store appears to be one of the most successful major retail apparel outlets.  Traffic continues strong and with a high conversion rate – folks who come to look, then stay to buy.  Widlitz believes VS is hitting a real void in the retail market, as the only competition for lingerie is either low-market department store lines, or very high-end boutiques.

A major theme that will determine the future of retail is the strength of the Asian tourist trade.  High-end accessory retailers look to Chinese consumers to provide demand.  They will need it.  One of the stark differences this year was the lines waiting to get into boutiques such as Prada and Louis Vuitton: there weren’t any.  Last year there were lines out the door at these upscale shops.   Retailers are counting on Asian tourist trade to bolster sales at their highest-end outlets, amidst concerns the domestic accessories market may be close to saturation.  Luxury brands view London as the bridge to bringing Asian tourist demand to the US, so these sales figures will be closely watched.

Widlitz believes the biggest new opportunity may be in off-price retailing.  The UK does not have malls, and with the “high street” retail mentality, most operators appear not to be aware of the attraction of this segment.  Widlitz singled out TJX as doing “phenomenally well” with an off-price strategy.  The outlet village concept is catching on, she says, and could be huge.  

We are pleased to have access to Stacey Widlitz’ unique coverage and analysis.  The Hedgeye Retail team will continue to monitor overseas developments for their impact on the domestic market, and for their implications for stock prices in their segment.