Retail First Look: 6/19/09

MORNING CALL OUT: LIZ

Liz came out yesterday morning and 'updated guidance' (ie guided down) the morning after announcing a convertible offering. Combine that with short interest as a % of float going from 20% to 4% year-to date, and arbs looking to short the stock and play this deal. What do you get? A 25% hit on the day. Ouch! Welcome to the reality of sub-$5 stocks.

 My thoughts? Let's think about sentiment for a minute. Sales have been awful out there for the past 3-weeks. This is across concepts and price points. Is LIZ doing poorly? You betcha. But no worse on a relative basis than they had been.

 Given that Liz' credibility is already in the gutter, there's no way the company could risk doing a deal and then coming out a few weeks later and missing by a dime. They HAD to preannounce.

 What are people ignoring? Over the course of the past several months LIZ has taken several steps to repair its balance sheet, push out maturities and mitigate bankruptcy risk. It has done just that. I firmly believe (via basic math) that this company will not breach nevermind file. On top of that, costs are coming down further, capex will be cut again, and there's the call option on selling additional assets.

In the spirit of this being a binary outcome, either the top line stabilizes, margins pop, people eye $0.80 in EPS and actually start to view this as a company with a shot at being a viable ongoing concern. If it fails, then LIZ fires McComb, and breaks up the pieces. The core Liz brand used to be $1.4bn. Now its just under $1bn. Lets say the real number is $600mm. What do you think Wal*Mart could do with this as a house brand? 1x sales on that brand plus the value of Lucky, Juicy, Kate Spade, and monetization of other assets gets a high single digit stock after netting out debt.

Does the stock look like death here? Yes. Technically it is broken. But I still really like the risk/reward.

LEVINE'S LOW DOWN

  • Pockets of improving trends within home related categories continue to surface. On Pier One's 1Q conference call, the CEO highlighted outdoor furniture as one of the company's best performing categories. He also noted that strength has continued into the Summer and outdoor accessories are also performing well. Whether this is a benefit of "cocooning" or just an overall improving trend off of a low base, we take this as a positive sign for the sector.
  • Not surprisingly there has been a large amount of talk about the poor weather during the month of June. Rainfall amounts are breaking records across much of the country and the month still has just under two weeks to go. Given the overall weakness in the economic backdrop, it has been some time since the good old weather excuse has been used. We don't like to hear such excuses, but this time it's probably warranted.
  • The NRF urged Congress Thursday to resist political pressures from the textile industry to tighten tariff enforcement for apparel imports amidst an influx of counterfeit goods. Last we checked, the number of US textile mills has fallen by over 80% over the past 10 years. The NRF is holding the cards here, and will win the political card game.
  • In addition to announcing the acquisition of Universal Safety Response, Smith & Wesson silenced recent calls that demand for handguns and rifles has weakened by issuing updated Q4 results - revenues +20% were double consensus expectations. More details will be provided when SWHC reports earnings Monday.

MORNING NEWS
Zach's overview of items you're unlikely to find in the general press. 

  • The disparity between VAT rates North and South of the border will result in substantial job losses in the retail sector, electronics group, Currys warned today. Currys, which has outlets in both parts of Ireland, called on the Government here to cut VAT, allowing businesses to compete more effectively. https://www.firstrain.net/
  • MPs voted yesterday evening to increase VAT rate from the current 18 percent to 20 percent, writes Äripäev. The third reading that is expected also to approve the raise in the excise duties of fuel and alcohol and cut sickness benefits will take place today. https://www.firstrain.net/
  • The U.S. International Trade Commission voted on Thursday to move forward with the first general Chinese safeguard case decided under the Obama administration, which could have implications for other industries like textiles. The question is, will Obama send a message about the administration's willingness to be tough on China and decide to impose quotas ? Pasted from <http://www.wwd.com/business-news/japan-department-stores-may-sales-fall--2177785?navSection=business-news>
  • U.S. textile executives who at one time supported the controversial Central American Free Trade Agreement told a House panel Thursday that four years of massive amounts of fraud and inadequate Customs enforcement in the region are crippling their businesses. Textile executives are calling on Congress and the Obama administration to overhaul the textile enforcement division of U.S. Customs & Border Protection and crack down on what they claim are soaring levels of fraud in Central America and other trade preference areas. Pasted from <http://www.wwd.com/business-news/japan-department-stores-may-sales-fall--2177785?navSection=business-news>
  • Diadora SpA said Wednesday it had reached an agreement for Geox SpA's founder and Chairman Mario Moretti Polegato to buy all Diadora's assets through his investment arm, Lir. Pasted from <http://www.sportsonesource.com/>
  • Nike Inc. appointed John Lechleiter, Ph.D. to its board of directors. Lechleiter, 55, is chairman, president, and CEO of Eli Lilly and Company.
  • In Eddie Bauer's Chapter 11 filings the company asked the court for permission to sell the company to private equity firm CCMP Capital Advisors and continue retail and catalog operations, including honoring its gift cards. CCMP Capital has agreed to: Keep the majority of the stores open and retain the majority of the employees; support company motions to maintain critical vendor relationships and payments; and support company motions to honor gift cards and the company's loyalty reward program. Pasted from <http://www.brandweek.com/bw/content_display/news-and-features/green-marketing/e3i1cb4423097de6eb10c010c88e70c5806>
  • E-commerce and the Internet give Under Armour Inc. the best and most effective means to reach its core audience-gifted teenage athletes, vice president of e-commerce Mark Kuhns told attendees Wednesday during his featured speaker address at the Internet Retailer Conference & Exhibition in Boston. Under Armour is connecting to its core customer through the online world of ESPN.com, You Tube and other social networks. Pasted from <http://www.internetretailer.com/dailyNews.asp?id=30856>
  • China's textile machinery market overview: China's textile machinery manufacturing industrial output value increase 4.9% in 2008, profit margin remains low for the Chinese textile machinery manufacturing industry (a profit margin of only 5.6 % was far below the average profit margin of China's manufacturing sector in average), knitting equipment made up the largest market share with 34% of China's textile machinery market. Pasted from <http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=APPSEAR.story&STORY=/www/story/06-18-2009/0005046436&EDATE=THU+Jun+18+2009,+10:00+AM>
  • UK retail rents are expected to drop 11% by the end of next year, as retailers are demanding better deals from landlords who are desperate to stop shops becoming empty in the economic downturn. This will be the first drop in prime rents since the recession in the early 1990s. Pasted from <http://www.drapersonline.com/retail-rents-to-drop-20-by-end-of-next-year/5003704.article>
  • U.K. Retail Sales Unexpectedly Dropped in May for First Time in 3 Months U.K. retail sales unexpectedly dropped in May for the first time in three months and Bank of England Governor Mervyn King said the economic recovery may be sluggish as banks ration credit. Pasted from <http://www.bloomberg.com/news/industries/consumer.html>
  • Japanese Department stores' May sales slid 12.3% for its 15th straight month of decline with apparel sales down 15.1% (men's wear down 16.9%, women's wear declined 15%), citing the ongoing recession, rising unemployment, and swine flu fears as drivers for the loss. To combat the current climate, some Japanese department store operators are offering summer discounts earlier than usual.Pasted from <http://www.wwd.com/business-news/japan-department-stores-may-sales-fall--2177785?navSection=business-news>

INSIDER TRADING ACTIVITY:

DECK: Constance Rishwain, President Simple & Ugg, sold 1,000 shs.

MACRO SECTOR VIEW AND TRADING CALL OUTS

Retail First Look: 6/19/09 - FL trading outliers