• Navigate This Market Turbulence: All Hedgeye Research → 3 Months 66% Off

    Preserve. Protect. Grow. Former hedge fund manager and CEO Keith McCullough has successfully navigated the Dot Com Bust, Great Financial Crisis and Crash of 2020. Get 66% off the smartest investing insights money can buy.


How can we not call out the Dress Barn/Tween Brands deal this morning. I could care less about that combined entity right now, but you gotta take note that the deals we're seeing in retail have gotten bigger and bigger and bigger. This is at the same time that companies are successfully shoring up balance sheets even if it takes up their WACC meaningfully (Quiksilver and Liz), the number of licensing deals is accelerating (Gap/Stella McCartney), well-known brands are broadening distribution (OXM w Tommy Bahama) and weak brands (Eddie Bauer) are filing Ch 11, or flat-out shutting down.  So what's next? 

I have no doubt that this will continue, but my gut is that the rate of acceleration takes a breather for a quarter or two. Why? As the entire planet now knows, 2H is a time period where sales comps get quite easy, GM stabilizes due to lean-ish inventories, SG&A cuts kick in, and capex continues to come down meaningfully. By my math, this leads to a 100 point swing in the industry's FCF growth rate (from -80% to +20%). My point is that there will be more desperate companies that can keep their heads above water and can resist the need for sweeping strategic change (even if every banker on the Street is clamoring to up the deal flow in an effort to get paid this year).  

But as much as this rate of change may take a breather in 2H, I expect the M&A cycle to step up dramatically starting in 1Q10. This is when we separate the men from the boys. There are so many companies out there that are making numbers today via SG&A cuts. As I've been pretty vocal about - this is a finite strategy. Yes, optically it will boost - or buouy - margins near term. But does it leave in place any growth investment/infrastructure from which to proactively drive business in '10? That's when we're going to see a massive diversion between quality and junk. And that's when investors really get paid for doing the deep dive on company-specific stories.


Some Notable Call Outs

  • On the real estate front, Rite Aid has contracted with a 3rd party to negotiate rent concessions for about 500 under performing locations. Several other retailers have engaged in similar arrangements, although none have reported back with updates on the success of such large scale real estate cost reduction efforts.
  • Just one day after Kroger reported solid and stable results, SuperValu pre-announced a weaker than expected quarter. While the release was brief, it pointed to cautious spending by its consumers as the culprit. The net result was both sales and margin pressure. The interesting callout here is that margins were worse than expected, especially given the general industry trend towards higher-margin private label products. I suspect that the bigger driver here was the competitive environment, although there was no mention of this in the press release.
  • A one-time designer denim promotion at Saks Fifth Avenue this week translates to weaker denim sales and ultimately tighter inventories.  This may indicate that denim sales were weak for the late spring season and/or Saks is attempting to bring inventories in line with sales following a Q1 sales drop of 27% (inventories only came down 7% in the same qtr).  The sales to inventory spread was the worst in the past ten years.  Discounts on the denim averaged 25% with price reductions reaching as high as 60%.  Three brands had more units on discount than the rest: VFC's 7 For All Mankind, Citizens of Humanity, and Joe's Jeans (JOEZ). 
  • A much needed improvement in footwear sales occurred last week.  Although sales were down 6%, the improvement from -26% the prior week is significant.  Footwear ASPs remained flat for the second week in a row, but remained down relative to the trend of high single digit increases that we have seen throughout most of 2009.
  • Under Armour, Converse and Nike are the positive call outs, while Reebok and Vans pick up the rear.
  • With orders down across the board by region, NKE confirmed that Western Europe will continue to be one of the most challenging markets both economically and from a consumer standpoint due excessive unemployment numbers.
  • Because of their favorable inventory position, NKE remarked that they will not be forced into heavy discounting.
  •  Last week US cotton production was down year over year and the condition of the cotton crop is tracking below last year's levels. These statistics are sequentially worse than the prior week.  Nationally, 20% of the cotton crop was budding by week's end, 5% behind last year and 13% behind the 5-year average. The crop's progress is behind the 5-year average in all states except Louisiana and North Carolina, where the weather has been slightly warmer than normal during most of the growing season. Overall, 44% of the cotton crop was rated in good to excellent condition, compared with 45% last week and 49% a year ago.  


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

  • China: 1st Quarter Import/Export Data encouraging for leather industry - As was to be expected both imports and exports of Chinese leather industry products declined by 8% in the wake of the slowdown in the global economy. Finished product imports all rose validating the point that consumer activity continues to be robust in the Chinese retail sector when compared to a lack of consumer confidence in Europe and the US. Experts are predicting an upturn in the Chinese leather sector by the third quarter of 2009. Overall consumer activity in China increased in April 2009 by 14.8% which is encouraging for western manufacturers and exporters of high end bags and footwear. Demand for travel ware, shoes, garments and gloves all increased. In contrast, the fall in raw material imports is not surprising after the collapse in hide and leather prices in the final quarter of 2008 when many contracts were not honored. Chinese factories received less outsourcing contracts as the recession in western countries started to bite, which caused many to shut down operations. <http://www.fashionnetasia.com/industryupdate/details.aspx?lang=0&sid=22&pid=2613>

Retail First Look: 6/25/09 - image1

  • H&M Profit Beats Estimates on Accelerated Store Openings, Stronger Euro - Hennes & Mauritz AB, Europe's second-largest clothing retailer, reported a 6% profit increase for the second quarter after store openings and the stronger euro offset slower consumer spending. Spring collections met with success, especially in countries where the world's third-largest fashion retailer has recently expanded.  But the Swedish fashion giant also reported flat sales in May, while comps declined 9% in the same month, in line with analysts' expectations.  For 1H 09 sales excluding value-added tax advanced 22.8%  and comps declined 2%. H&M said the recession has dampened consumer spending in all of its markets, especially Spain, the U.S. and Scandinavian countries.  However, sales in countries where H&M has recently expanded, such as Japan and Russia, have exceeded expectations. H&M reiterated future expansion plans, saying that it still expects to open 159 stores in the second half of the year, while closing 18. Most of the stores are planned to open in the U.S., U.K., Germany, France, Italy and Spain. Gross margin, a key indicator for retailers' profitability, declined to 190 bps due to  the strengthening U.S. dollar in the quarter, although the currency move was partly offset by lower raw material and transportation costs, H&M said. <http://www.wwd.com/business-news/hm-net-rises-64-percent-2188570?navSection=business-news>,  <http://www.bloomberg.com/news/industries/consumer.html>
  • The retail industry's two largest trade and lobbying groups have called off merger talks and will continue to operate as separate organizations with their own memberships and agendas. The Retail Industry Leaders Association and National Retail Federation said Wednesday they were ending merger discussions and declined to provide any further details. The initial talks in April were geared towards bringing together the memberships and financial clout of the industry's two powerful lobbying groups against a backdrop of a shrinking retail landscape struggling to survive the recession. The NRF's annual budget is $35 million and RILA's annual budget is an estimated $13 million. RILA represents 65 retailers and 200 members, including most major discounters and mass merchants such as Wal-Mart Stores Inc., Home Depot Inc., Best Buy Co. Inc., J.C. Penney Co. Inc. and Target Corp. Its membership also consists of product manufacturers. The NRF includes 2,500 members such as Macy's Inc., J.C. Penney, J. Crew Group, Levi Strauss & Co., Limited Brands Inc., Liz Claiborne Inc. and Neiman Marcus Inc. <http://www.wwd.com/business-news/hm-net-rises-64-percent-2188570?navSection=business-news>
  • U.S. textile groups concerned that the energy bill could lead to substantially higher operating costs, putting domestic producers at a disadvantage against global competitors. The bill is designed to obtain a clean energy transformation that will reduce our dependence on foreign oil and confront the carbon pollution that threatens our planet. But prominent textile trade groups, including the National Council of Textile Organizations, American Manufacturing Trade Action Coalition and National Textile Association, came out in opposition to the bill, in a letter to Congress on Wednesday. "As an industry that is heavily reliant on low-cost energy to produce more than $16 billion in exports, this bill would cause an undue financial strain through the increased costs of regulations with respect to the escalating demand (and therefore price) for natural gas, our main energy source, which has a carbon advantage over other main energy sources, as well as our coal-reliant energy utilities," the textile groups wrote. <http://www.wwd.com/business-news/hm-net-rises-64-percent-2188570?navSection=business-news>
  • Rents have dropped in several of the hottest retail corridors by an average of 11%, including the Meatpacking District and Madison Avenue, since spring 2008. The Real Estate Board of New York's spring 2009 report said a few areas, such as the West Village and the Financial District, have shown modest gains in the last year. However, since fall 2008, the average asking rent for available retail space has fallen 11 percent, to $115. "When the market tumbled in September, retailers wanted to hold out until the holidays to see what would happen," said Mike Slattery, senior vice president of REBNY. "Building owners had the same frame of mind during the winter. Owners have been more willing to negotiate free rents and provide allowances for tenants...a softer market provides an opportunity for people to get a foothold into a market." <http://www.wwd.com/business-news/hm-net-rises-64-percent-2188570?navSection=business-news>
  • A new breed of online retailer in Europe is seeking to fuel and meet demand by providing a service: part shop, part editorial. Among them are the U.K.'s Hanon.com, Oipolloi.com and Oki-ni.com; France's Studiohomme.com and Royalcheese.com; Italy's Thecorner.com, and  Sweden's Zoovillage.com, all of which combine news, interviews, events and exhibitions with retail to enrich the shopping experience. "Our job is to inform the public," says John Skelton, creative director for Oki-Ni. "Until now, retailers have second-guessed what the consumer wants and often given a skewed approach or story of what you are trying to sell. Our objective is to put across our take of what is going on, what we think is relative and hot and what we like in a humble way." Founded in 2001, Oki-Ni first began as a catalyst for collaboration projects and special edition lines, but relaunched in 2007 to sell coolerthan-thou styles and cult brands from across the globe. <http://www.wwd.com/business-news/hm-net-rises-64-percent-2188570?navSection=business-news>
  • Madewell offers affordable vintage pieces that complement Madewell jeans at the Brooklyn Flee Market - Madewell hopes The Flea's indie spirit will appeal to Madewell's consumers, and are spreading the word via e-mails, Madewell's Facebook page and word of mouth. "It operates as a real community," Guerra said of The Flea, which typically has 150 vendors in Fort Greene on Saturdays and 110 underneath the Brooklyn Bridge on Sundays. Straw hats, crocheted dresses, sunglasses, tops and bags will be among the vintage pieces sold in the Madewell stores. By and large, the flea market goods will retail for less than $100 and everything is meant to be mixed with the Madewell collection, especially its forthcoming more affordable 37s jeans. Due in stores next month, 37s - named for 1937, the year Madewell was founded as a family-owned workwear business - will retail for $59.50. In 2006, the J. Crew Group relaunched Madewell and opened the first Madewell store.  <http://www.wwd.com/retail-news/the-brooklyn-flea-finds-a-home-at-madewell-2187649?navSection=retail-news>
  • American Apparel has announced they plan to have their FIRST EVER flea market sale in NYC, with prices ranging from 2-25 dollars! Details: 185 Orchard St. (Between Houston and Stanton, next to the American Apparel store) Sat. Jun 27 12pm - 8pm; Sun. Jun 28 12pm - 8pm http://fashionindie.com/nyc-sales-first-ever-american-apparel-flea-market-sale-2-25/
  • Accessories buyers are shopping more judiciously, with a focus on immediates. Given today's economic downturn, buyers are shopping accessories trade shows more cautiously and judiciously, but according to show organizers, they are still shopping. Exhibitors have been "pleasantly surprised" with the first half of 2009. Buyer turnout has been strong and vendors have adjusted their turnaround times to meet the needs of buyers, many of whom are now shopping closer to season. The traffic density (the ratio of retailers to exhibit space) has increased by 20% this year. <http://www.wwd.com/retail-news/the-brooklyn-flea-finds-a-home-at-madewell-2187649?navSection=retail-news>
  • New York-based Brand Matter has entered into a licensing agreement with Anthony L&S LLC for men's and women's footwear under its Caribbean Joe brand. The license will also include footwear for Brand Matter's Jamaica Bay, Havana Jack's Café and the CJ Breeze brands. "We talked for a while about doing footwear in-house, but our strategy is to put the experts in the business in control," Rick Platt, president of Brand Matter told Footwear News. The footwear, which is debuting for resort '09, will include casual styles such as sandals and boat shoes and will feature prints consistent with the apparel collections. Department stores and specialty stores will be the target accounts. "Anthony L&S will focus on our largest Caribbean Joe apparel retailers, including Belk, Dillard's and Bon Ton," he added. Though price points have not yet been confirmed, Platt said the opening price point will fall somewhere above that of private-label product, but below the designer collections. <http://www.wwd.com/footwear-news/brand-matter-inks-deal-for-caribbean-joe-footwear-2187626?navSection=footwear-news>
  • Case Study: How Search Ads Helped Pier 1 Stay Afloat - The Challenege: The marketing team at Pier 1 Imports chose a challenging time to launch a new campaign and  panic-stricken consumers just weren't buying. The Plan: The "test" in question referred to a series of online search ads, developed in conjunction with Google, to drive store sales in select markets from Sept. 21 to Oct. 11. The Results: In markets where stores were operating on a "performing" basis, the retailer experienced a 2% sales lift and a 300% return on advertising spend. In areas where Pier 1's same store sales were declining, the retailer experienced a 5.3% lift. The Next Step: Incorporate both search and display at the same time by weighing the different channels to get an idea of their effectiveness in store. <http://www.brandweek.com/bw/content_display/news-and-features/retail-restaurants/e3i048f01beefa084a3837cbe15e128f4a5>
  • Abercrombie & Fitch is being sued by a woman who alleges the US retailer made her work in the stock room instead of on the shop floor because her prosthetic limb did not fit with the chain's image. <http://www.drapersonline.com/>
  • Web sales fall but not as far as other channels for Talbots in Q1 - E-commerce revenue declined by 11.7% in the first quarter as total sales and comparable-store sales decreased 26.2% and 26.9%, respectively. Direct sales, which include catalog and web, declined 28.6% <http://www.internetretailer.com/>
  • First quarter web sales drop at Coldwater Creek - For the first quarter ended May 2, web sales at Coldwater Creek decreased 27.2%. In comparison total sales and comparable-store sales dropped 15.8% and 18.6%, respectively. <http://www.internetretailer.com/>
  • Apparel and accessories merchants delivered the best response time in May to shoppers with a high broadband connection, says Gomez Inc. Shoppers with a high broadband connection could visit an apparel and accessories retailer's web site in an average time of 6.11 seconds compared with computers and electronics retailers (6.82 seconds), mass merchants (7.06), and specialty merchants (7.89).  <http://www.internetretailer.com/dailyNews.asp?id=30911>
  • Best Buy appoints Brian Dunn as its new CEO - Best Buy has named president and chief operating officer Brian Dunn the company's new CEO. Dunn takes over at a time when Best Buy is expanding its e-commerce business. <http://www.internetretailer.com/>
  • NBA draft pick shoe endorsement deals worth a lot less than last year - Shoe endorsement deals were worth more than $1 million a year ago and now is down to $750,000. All is quiet from Nike, who famously agreed to pay LeBron James and Carmelo Anthony a combined $108 million in 2003. Last year, Nike signed the kid who was once termed "The Next LeBron James," O.J. Mayo, for $400,000 a year. Adidas, which spent money on Derrick Rose and Michael Beasley last year, also has nothing to announce. Either does the new player in the game, Under Armour, which signed Brandon Jennings last year before he went off to Italy. <http://www.cnbc.com/id/31522493>
  • LIZ today announced it has completed its previously announced offering of $90 million principal amount of its 6% convertible senior notes due 2014 (the "notes"), which includes the exercise in full of the initial purchasers' option to purchase additional notes on the same terms and conditions. The Company received total net proceeds from the offering of approximately $86.6 million, after deducting fees and offering expenses payable by the Company. <http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=APPSEAR.story&STORY=/www/story/06-24-2009/0005049852&EDATE=WED+Jun+24+2009,+12:52+PM>
  • A group of 26 mostly Saudi women completed the first course of how to fit, stock and sell underwear from Victoria's Secret -- Training organizers hope to help boost a campaign to lift the ban on women selling underwear in the kingdom. The graduates held a small ceremony at a college in the western seaport of Jiddah on Tuesday, capping 40 hours of instruction during which they learned to overcome their embarrassment at doing bra fittings, deal with customer complaints and display the stock in an appealing manner. The 10-day course comes three months after a group of Saudi women launched a campaign to boycott lingerie stores until they employ women. Almost all the stores in the kingdom are staffed by men. The only exceptions are a few women-only boutiques, some of them inside popular shopping centers. The restrictions are ironic in a country that goes to great lengths to segregate the sexes. Men and women, for instance, who are not close relatives cannot stand in the same line at fast-food outlets or even be in the same car together. Conservative clerics have strong influence on government and society, and they ban anything they believe might lead to women's emancipation, such as driving or voting. http://finance.yahoo.com/news/Saudi-women-learning-how-to-apf-363130904.html?x=0&.v=1
  • Zudaas France, manufacturer and retailer of kids fashionwear and apparel, plans to have 250 outlets across India in this fiscal year and aims to become a Rs200-crore company by 2010-11. "This is the best time to expand our retail network as real estate prices are down and the estimated Rs12,000-crore Indian kidswear market is growing annually at 15%. We are scaling up our operation pan-India and plan to have 200 stores by March 2010 (in the kidswear segment)," Zudaas France MD Hitesh Mehta said. At present, the company has 57 stores in the country. It is diversifying into exclusive men's and women's wear and of their newly planned outlets 50 will be 'Zudaas Family´ stores, which would be launched soon. He said most of the outlets would be franchise-operated and the company is looking at both metros, and Tier I and II cities and the stores will be in the size of 250-800 sq ft. "Our first family store will open in July in Delhi and the target is to have 50 Zudaas Family stores by the end of this fiscal," Mehta added. http://www.livemint.com/2009/06/25123510/French-apparel-retailer-to-exp.html?h=B
  • Safilo Group SpA said it expects to breach its debt covenants and is negotiating with banks to postpone a loan payment due later this month, as talks continue with potential suitors. Safilo chief executive officer Roberto Vedovotto had hoped to secure a sale before the summer. "In this context, considering the possible misalignment of the results at 30th June 2009, compared to the financial covenants of the existing senior loan, the company has also begun negotiations with the financing banks in order to request a waiver with reference to such covenants, as well as the postponement of a payment due on 30th June 2009," Safilo stated late Tuesday. The Italian eyewear group's majority shareholder, Only 3T SpA, is in talks with at least two private equity bidders, believed to be Bain Capital and PAI, to ease Safilo's debts amid declining demand. As of March 31, Safilo had net debts of 617.7 million euros, or $861.2 million at current exchange. The Tabacchi family controls 39.9 percent of Safilo via Only 3T. <http://www.wwd.com/business-news/hm-net-rises-64-percent-2188570?navSection=business-news>
  • Textile group Devanlay SA, the manufacturer and distributor of sports brand Lacoste, has appointed José Luis Duran, former chief executive of French food retailer Carrefour, as president of its management committee. Duran's appointment will be effective July 1.  Duran, 44, will be appointed chief executive of the company in September and is expected to take the helm of Swiss-based Maus Frères, Devanlay's holding company, in 2010, succeeding Guy Latourrette. <http://www.wwd.com/business-news/hm-net-rises-64-percent-2188570?navSection=business-news>
  • Paramount Licensing plans to showcase several of its movie-based fashion T-shirts in August at MAGIC - The tee collection will feature: Top Gun by Changes for men and juniors (available now at Kohl's, Sears and JCPenney for $18), Up in Smoke by Fifth Sun for men (available now at Spencer's, specialty stores and online for $18.99), Footloose by Fifth Sun for juniors (available now at Wet Seal, Charlotte Russe and Delia's for $18.99), Flashdance by Fifth Sun for juniors (available now at Wet Seal, Charlotte Russe and Delia's for $18.99), Top Gun by Famous Forever for boys (available this summer in the U.K. at children's boutiques and specialty stores for £10.30, $16.99) <http://www.licensemag.com/licensemag/Fashion/Footloose-and-Other-Tees-Make-MAGIC/ArticleStandard/Article/detail/606193?contextCategoryId=47832>
  • Fashion programs for the upcoming release of The Twilight Saga: New Moon and recently premiered Transformers: Revenge of the Fallen have been secured with Jem Sportswear and its high-end women's division Awake. Summit Entertainment, producer of the Twilight movie franchise, is working with Awake to produce an exclusive New Moon-inspired women's apparel line for Nordstrom's BP. brand, as well as a window launch at Kitson on Oct. 15. The clothing line will include high-end tees, tanks, tunics, leggings, dresses, jackets and hoodies. DreamWorks' and Paramount's recent Transformers sequel, in association with Hasbro, teamed up with Jem Sportswear and Awake for a men's, women's, boys' and girls' apparel collection. Jem Sportswear and Awake also signed a licensing deal with Live Nation to design a "Summer of Love" promotion with Target.  <http://www.licensemag.com/licensemag/Fashion/Jem-Awake-Secure-Twilight-Transformers-Apparel-Dea/ArticleStandard/Article/detail/606191?contextCategoryId=47832>


PVH: Margaret Jenkins, Director, sold 1,240shs ($34,100) or ~28% of common holdings.


 Retail First Look: 6/25/09 - Calendar