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Takeaway: The Americanization of the European consumer is the key trend in Europe today. No promotions = no revenue.

We hosted a call today with Stacey Widlitz from SW Advisors to review the state of retail in the UK heading into earnings. Stacey specializes in monitoring promotional cadence and relative brand positioning for US brands that sell in Europe.  Here’s a brief review of our notes from the call. Please note that while we agree with most of her comments, these thoughts represent her unaltered views. We're simply downloading to you in an easily-digestible format.

For more details, or to connect with Stacey directly, please contact your Hedgeye salesperson.

Macro 

Same store sales growth in the UK still running below inflation. Inventories are finally clean (with few exceptions – like GPS) but are squarely driven by increased promotional activity. The ‘Americanization’ of UK retail, where consumers are trained to wait for discounts, seems to be a trend that is more relevant than ever.

In 4Q, November was a disappointment and retailers got promotional very early relative to last year. ‘Hitting the panic button too early in the quarter’.

Retailers that did not have 20-50% signs up (or ‘free fragrance’ or other promo) by the 1st week of December saw a meaningful slowdown in traffic and/or conversion. Mid-December was ‘eerily quiet’.

Majority of retailers noting that consumers are waiting til after the holidays bc they have figured out the markdown game.

Here are callouts by company/brand:

ANF

After stabilizing in 3Q (something that Stacey had called out when we did this call a quarter ago), ANF got incrementally worse on the margin.

The company did not promote until after holiday, which made it stand out like a sore thumb. Consumers walked into the flagship looking for deals and could not find any overtly stated promos.

The new Hollister store is around the corner from Abercrombie. There is a 35% price discount between the two, but the consumer does not respect it.

The company simply did not pull the pricing lever like it needed to.

GPS

Gap and Banana were early with promotions. Perhaps too early.

30% off 1st weekend 

75% off by end of month

Even now stores look heavily clearance. Other retailers are bringing in new product, but GPS seems mired in the excess inventory of holiday.

Gap is competing against Top Shop where conversion rates are double. GPS price points are too high and there’s not enough units. GPS has Fast Fashion at one end, and Primark at the other end (single digit opening price points). Biggest risk to Gap is that Top Shop accelerates expansion.

KORS

Went on sale mid Dec this year, which is earlier than last year.

Harrods and dept store discounts were deeper in percentage terms

This weekend the stores are being cleared and freshened up.

KORS' aspirational aspect is much more significant in the UK vs US.

Priced 40-50% higher in UK than US. Kors has the highest price spread out of any brand vs the US.

DECK

Retail stores decided to promote, which helped them – as did a blast of snow in Jan.

GES

Surprised how long it took to bring out the 50% signs.

After Christmas the 50% off inventory was 2x what it was mid month.

GES seems to be unable to nail down who their consumer really is and what drives shopping behavior.

VICTORIA’S SECRET FLAGSHIP

One of SW's favorites.

Very high conversion rate in store.

Lingerie market is very department store focused in the UK.

There is a specialty-store void that is filled by VS.

URBN

Opened a 2nd flagship on oxford street. Absolutely amazing environment.

Conversion rates are also some of the highest in the market at first flagship. Very solid brand opportunity.

COH

2 flagships in London. There’s quite a bit of promos going on, which is unusual for flagships. Seeing the 30-50% off in bags, trenches, footwear. This is a new phenomena for COH

RL

RL had not been getting the boost from Chinese tourism over the past few years like the rest of the luxury market has been.

Part of this is because the tourists have wanted logo product like LV and Coach.

Now those preferences are waning as Chinese consumer wants non-logo product, which opens up a new consumer opportunity for RL.

In answer to recent concerns out there about RL, Stacey sees all brands following the promotional cadence set by the department stores, and that RL is not necessarily losing share in that context.

Hilfiger is 25% cheaper than RL. Some shirts are 15%. Definitely not enough of a gap to threaten RL.

That said, TH is running some of the most successful promotions, with only discounted odd-sizes left over for sale.

LULU

Brand appetite is high. Sweaty Betty is the only athletic game in town outside of the traditional brands (adidas, nike, puma) and they cannot particularly compete with LULU – even at a 30-40% discount. $275 for two tops and a pair of leggings is steep by our standards, but for a UK consumer it works.

H&M

H&M was the only fast-fashion retailer to be early in pulling the promotional trigger. The others did not need to. Forever21, Top Shop had extremely strong traffic trends.

Pricing Spreads (who are the highest and lowest spreads)

KORS is 40-50% higher priced in the US.

ANF – priced in dollars – paying 50% more. Especially high given that Hollister is a block away at 35% less.

VS is the outlier on the other end. Only 15% premium to the US. Not a surprised that it is performing so well.

TJX

The ‘Americanization of the UK’ plays right into TJX’s efforts to grow international presence. They are the only game in town. This is seemingly a great secular opportunity given where the market is headed.