Retail First Look: 6/26/09


While the Street was predisposed yesterday with the hangover of the Fed announcement, and in digesting results from Nike and Bed, Bath & Beyond, some important datapoints around 1Q Chinese Leather imports/exports went unnoticed. Yeah...I know, I know... We're already looking at the close of 2Q, and China makes up its numbers anyway. So these are stale and fabricated...why should we focus on them?  Aside from the case I could make that the US makes up its numbers as well on trade categories (and other areas), this data from China is at least consistently fabricated. In other words, it tends to directionally track economic reality for users of leather.   Two callouts...

  1. The growth spread in leather shoe imports/exports troughed. Exports were down 24% in units, and 11% in dollars. The gap here is second only to 'footwear components' in the major categories, in which exports were down 42% in units and only -1.5% in dollars.  At the same time, leather shoe imports were UP 5.3% in dollars. While I'd argue that there will be a secular shift in imports of leather footwear into China by European producers as the Chinese consumer continues to emerge from the Iron Rice Bowl and takes down savings rates and spend on higher-end goods, this quarter's uptick is notable.
  2. Is it any mistake that this is the exact quarter where exports for China in aggregate were down 23%? Nope. Is it any surprise that just weeks after quarter-end China loosened taxes (VAT) on footwear to stimulate exports? Nope. Similarly, should it come as a surprise that three weeks later China did the same for leather goods? Nope.  Since then we've seen around 1,500 factories re-open in the Pearl River Delta in China (off a base of 6k).

Mark my words everyone... These numbers will prove to be a trough. The balance of power from a margin perspective is shifting back to the US brands that have been hurt over the past 2 years. People are underestimating the impact in 2010 for key companies.

Retail First Look: 6/26/09 - image1


Some Notable Call Outs

  • We're not ones to perpetuate rumors or to recycle published news stories, but this quote is notable from UK's The Independent. Tadashi Yanai, CEO of Japanese company Fast Retailing (parent of Uniqlo) said that he wants Fast Retailing to become the world's biggest clothing manufacturer and retailer, with annual sales of ¥5 trillion (over £30bn) within the next decade. He also said that, "to achieve our target, the Asian market is the most important and we have already begun to expand there. In Europe and the US it is not realistic to establish hundreds or thousands of new stores solely via our own efforts, so we want to buy a big chain business." He went on to confirm that Gap is "within the scope" of the domestic companies he has his eye on.
  • We're still questioning the logic of the DBRN/TWB merger announced yesterday. The conference call did little to articulate the real opportunities the combined entity will ultimately benefit from. We do not count elimination of "public company costs" or the assistance that DBRN will provide in alleviating Tween's limited access to capital as blockbuster reasons to justify the deal. Regardless of the strategic rationale, this deal is the largest we have seen so far in what is likely to remain a robust m&a cycle.
  • In a growing trend that may ultimately benefit retailers like CHRS and CTR, other specialty and department store retailers are cutting their exposure to the plus size business. The economy along with the higher cost, slower turning nature of plus sizes has led to the elimination of the category in stores. Most retailers are maintaining online offerings however. Historically, the plus size business has been seen as an untapped growth opportunity but it has not been successfully capitalized on in recent years.



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

  • Takashimaya Co., Japan's third largest department store chain, announced a steep drop both in sales and profits for the third straight quarter. Net profit dropped a whopping 93 percent to 316 million yen, or $3.2 million at exchange rates for the period. The retailer said Friday it has not seen any sort of recovery for apparel and high-priced luxury goods in recessionary Japan. To that end, sales slid 13.3%, operating profit dropped 72%. Japanese department stores are struggling to spur revenue as falling wages and a worsening job outlook deter consumer spending. Takashimaya began its summer sale this month, 10 days earlier than the usual July start.  <>, <>
  • Subhiksha Trading Services Ltd., the Indian retailer that closed stores after it ran out of cash, is confident its debt recast will be completed "well before" the end of next month after negotiations with stakeholders. The debt restructuring of the company, key to the survival of the retail chain, has to be completed by July 31, or six months since the beginning of the process. Subhiksha, which owes 13 banks about 8 billion rupees ($165 million), said 12 of the banks and the company's three largest stockholders are working to restructure the debt and infuse funds needed for the company to reopen its stores, Subramanian said.  Subhiksha on Jan. 30 said its business was at a "near standstill" and it needs 3 billion rupees to resume operations. The retailer, founded in 1997, ran out of cash in October after relying on a "high level" of debt, according to the company. <>
  • Online e-tailer eLuxury appears to be reincarnating as a social media site devoted to the world of luxury. Today, the e-tailer shuts its doors and on Monday, the new concept makes its debut.  Starting Monday, the site will pose one question a day, subjects will include fashion, art, food and wine, design, culture, travel, beauty, music and entertainment, the company said. "ELuxury will learn from its audience, getting smarter each day, and will use this intelligence to present increasingly targeted and relevant content," said a statement. <>
  • Textile group Devanlay SA, the manufacturer and distributor of sports brand Lacoste, has appointed José Luis Duran, former chief executive officer of French food retailer Carrefour, president of its management committee. Duran will be named ceo of the company in September and is expected to take the helm of Swiss-based Maus Frères SA, Devanlay's holding company, in 2010, succeeding Guy Latourrette.  <>
  • McKay Belk, president and chief merchandising officer of the Belk Inc. department store chain, is going on sabbatical for ministry-related work. Belk's sabbatical from the department store chain, which was founded by his grandfather William Henry Belk in 1888, begins Aug. 3. Belk said after his 12-month sabbatical he will become vice chairman, and will continue to provide the company advice on merchandising strategy and vendor relations. He will also continue as a member of the Belk board. But Belk also said he may not decide to come back. <>
  • John Jansen has been appointed to the new position of GM for Keen Europe. He will run the division from the company's new European headquarters in Rotterdam, the Netherlands. Jansen will focus on building the brand's business in Europe, but also will be part of Keen's global management team. He will work across the company to create a growth strategy for Keen in Europe. Jansen was previously VP of commerce for O'Neill in Europe and also has worked for Nike and Converse. <>
  • Dakine launched an interactive mobile-specific website, an abbreviated version of Dakine's website that is compatible with most media rich-enabled cell phones. When connected to a high-speed wireless or 3G network users can access streaming music and video clips. Additionally, worldwide surf reports provided by are available along with Snow reports provided by <>
  • French Consumer Confidence Increases to 15-Month High as Recession Eases - French consumer confidence rose in June for a fourth consecutive month to the highest since March last year in a further sign the recession may be easing. <>
  • U.K. retailer Woolworths was relaunched today as an online business,, by its new owner Shop Direct. The Web site focuses on the same Woolworths' offers as the store chain-toys and outdoor, children's clothing under the Ladybird brand, video games, DVDs, CDs and books and party goods, plus its famous "pick 'n' mix" sweets. Household goods have been dropped from the offer. <>
  • Recap of PVH's annual meeting - PVH is freezing development of Calvin Klein full-price retail stores as the company continues to downsize its outlet retail operation. Although Calvin Klein is a highly profitable growth engine, PVH's  outlet retail business has been a drag on financial performance. Calvin Klein retail stores have been hurt by the recession and won't expand until they begin to meet performance goals. PVH will continue to shut outlet stores, with 150 closures expected over the next three years in addition to the 100 Geoffrey Beene stores already shut. <>
  • Quiksilver Inc. and its subsidiary Quiksilver Americas Inc., entered into a commitment letter with Bank of America, N.A. ('Bank'), Banc of America Securities LLC, General Electric Capital Corporation ('GECC'), and GE Capital Markets Inc., pursuant to which the Bank and GECC committed, subject to certain conditions, to provide a senior secured asset-based revolving credit facility to Quiksilver Americas and certain of its domestic subsidiaries in the aggregate principal amount of $200 million. On June 24, 2009, the same parties entered into an amendment of the Revolving Credit Commitment Letter to extend the date by which all specified conditions must be satisfied, from June 26, 2009 to July 31, 2009. <>
  • Dickies aims to give its clothing a higher purpose in a new ad campaign. The manufacturer of work, school and outdoor apparel unveiled its new brand campaign today "Wear with Purpose", which focuses on the real stories of several American workers. The campaign was developed in-house at Williamson-Dickie, and begins this month, via print, online and national broadcast, as well as point-of-sale at retailers.  Williams-Dickie Manufacturing Company spent $5.3 million on media, per The Nielsen Company. Dickies' new tagline replaces "Legend in Work," but keeps with the brand's focus on the practical use of its clothing. According to Uchtman, this emphasis on hard work has broad appeal to a diverse base of consumers. <>
  • Brown Shoe Co. Inc., the operator of retail footwear sites and, relies on its own usability lab and outside site performance testing to see how its web pages are viewed by shoppers through multiple web browsers. Although Brown doesn't try to optimize its web sites for any single web browser, it monitors the breakdown of browser use by its site visitors and constantly tests how its pages are viewed through each of these browsers, says vice president of e-commerce Pete Hogan. <>
  • The Timberland Company has launched its latest green product innovation, the Earthkeepers 2.0 boot, which is touted as the first footwear the company has designed to be disassembled and recycled, rather than discarded, at the end of its life. The 2.0 collection is made of 80% recyclable or reusable materials that represent a 15% reduction in greenhouse gas emissions and a 15% increase in the use of recycled or renewable content, compared to the traditional Earthkeepers boot. Timberland said it will be the first footwear company to commercialize this process and plans to incorporate it into its fall 2009 collections. <>
  • Skechers USA announced Thursday that celebrity host and season-seven winner of "Dancing with the Stars" Brooke Burke will model in the next "Nothing Compares to Family" ad campaign. Burke will appear in the campaign with her fiancé, David Charvet, of "Baywatch" fame, and son Shaya, 1, and daughters Rain, 2, Sierra, 7, and Neriah, 9. The model first appeared in a Skechers ad in 1995. <>

Investment Rodeos

"It's the broncs and the blood, it's the steers and the mud, and they call the thing rodeo." -Garth Brooks

It's rodeo season in Western Canada, and I've flown back to my hometown of Bassano, Alberta to participate in the local amateur rodeo. No, I won't be riding bulls, or wrestling steers, but rather I'll be participating in the Wild Cow Milking competition. Wild Cow Milking is one of the more gentlemanly sports in rodeo. As such, it involves a team of three cowboys and a wild cow. The team that fills a bottle with the cow's milk the quickest, and runs the bottle across the finish line first, wins.

So, what exactly does either a rodeo, or wild cow milking have to do with global macro investment risk management landscape? There are two basic parallels. First, in a Wild Cow Milking competition the team with the most coordinated effort usually wins. By comparison, in the investment world, usually the team that is most effective at analyzing and tying together both the macro information and company specific data points, wins.

Second, just like the current investment landscape, rodeos are chaotic. In Alberta, when things get a little nuts, we say they are getting "western". To say that things are little western in the investment rodeo these days is an understatement. To emphasize this, let's look at some of the global asset class moves in the year-to-date via their representative ETFs: Russia +60% (via RSX), SP500 +2.0% (via SPY), Natural Gas -37.2% (via UNG), and high yield bonds up +6.9% (via JNK).

Our investment process, which combines both bottoms up and top down research, has uncovered a number of relevant and incremental data points this week that support our conservative, though slightly long-biased model portfolio positioning. Some of the key callouts from the Research Edge Team this week to our clients are as follows:

1. In healthcare, Tom Tobin and his team have been analyzing the negative impact on President Obama's approval rating as a function of aggressively taking up the gauntlet of healthcare reform. The reality is, as President Obama continues with the healthcare push, his approval rating will continue to weaken. Tobin likes hospital stocks on the short side to play this theme, along with his expectation that their bad debt will ramp with heightening unemployment.

2. Our restaurant analyst, Howard Penney, in his weekly conversations with his restaurant companies, has noted that none of his companies are providing a view that business is getting better, which obviously has implications for the broader consumer discretionary landscape. As a result, we are short the consumer discretionary etf, XLY, in our model portfolio.

3. In technology land, Rebecca Runkle provided an update on Oracle earnings this week, which suggests that software spending is and may continue to be better than expected. She has also been uncovering increased activity in the PC supply chain due to the pending Microsoft upgrade cycle, which may be an investable theme heading into the back half of the year.

4. From the Gaming, Lodging and Leisure team, they are expecting a slowdown in regional gaming markets this quarter. According to Todd Jordan (who is currently in Macau): "Every 1% y-o-y change in gas prices results in an inverse 0.15% change in same store gaming revenues, holding all other factors constant. In thinking about organic growth in regional revenues, it is necessary to focus on the trend in gas prices." Our Macro Team is bullish on oil, and Todd has his sector, and our portfolio, positioned accordingly.

5. Brian McGough, and his retail, footwear and apparel team, have zigged while the rest of the Street has zagged. While people are getting caught up in the noise around near-term earnings revisions and 2H numbers being a 'slam dunk' (this call mattered in March, not now after a 40% run), his team has shifted gears to focus on quantifying the impact of changes in international trade policies around apparel, as well as the cadence of cash flow in 2H and its impact of the M&A cycle. Ultimately, the team's call is that there will be a massive bifurcation between winners and losers starting in 1Q10 based on decisions today that are misunderstood by the market.

6. In our Macro group, our research this week was focused on the continued evidence of loose monetary policies globally, as indicated by ECB, Fed, and Chinese banking action this week. The implication of these historically loose global monetary policies is that the reflation trade should continue, with a risk of morphing into inflation in the back half of the year. To position for this, we are long energy companies (XLE), long energy producing nations (EWC, EWZ), and long inflation protected treasuries (TIPS).

The manifestation of these recent data points, and the work we have been doing all year, is our model portfolio structure. Our current positioning in our model portfolio supports the interpretation that things are still a little "western" out there. We currently have 20 longs and 9 shorts, for a long / short ratio of just over 2:1. In our asset allocation model, we still only have a medium allocation to equities and commodities, with cash as our largest weighting.

Ultimately, investing is a much more civilized sport than rodeo. The board room of the typical investment firm is typically classy in décor (although I hear Julian Robertson does have a stuffed tiger in his!), while a rodeo arena is littered with bruised cowboys, crushed beer cans, and empty Copenhagen tins. Also, most money managers don't routinely break bones while competing, even if they do have bruised egos at times.

But the parallels remain and the point is, if you want to win the global macro investment rodeo this year, you need to operate like cowboy. So put on those chaps, give yourself a slap, and ride the bull . . . and at the end of this year if you've stayed on for 8 seconds you'll probably "hear the roar of the Sunday crowd", and get paid for your performance.

Have a great weekend,

Daryl G. Jones
Managing Director


FL: Japan No Longer?

So it looks like FL finally confirmed the speculation that started in April about Matt Serra retiring as CEO.  I celebrated a birthday a week ago - let's just say it was a number between 35 and 40. FL is one of the few stocks in retail that you could have bought circa 1970 (in a 'diworsified form' as Woolworth/Venetor etc...). Had I been gifted a share way back then, my return would be a big fat goose egg. Yes, Foot Locker is the retail equivalent of Japan.


This company's management culture is one that strives for mediocrity - whether it knows it or not.  In its best form, it succeeded in being slightly below average, but all along remained squarely on the investment community's 'least respected management team' list.


Come on McGough...give the guy a fair shake. Serra has only been at the helm since '00/'01, and should not be saddled with the mistakes of years past. Also, he saw the company through the recession and economic recovery in '01-'03, and generated decent returns in the ensuing years.


Agreed. I'll definitely give credit where it's due. But how much of this recovery came from management's efforts vs. a general economic rebound? I guess we'll never know. But what we do know is that the stock is DOWN 20% since he took control, and over the past 5 years, ROE has gone from 16% to -4%, and Return on Capital is off by 2/3 to 4%. My kids generated a better return on capital last weekend at their lemonade stand - in the rain.


My point here is that this team's credibility is SO low, that ANY change is positive. Not to mention bringing in Ken Hicks from JC Penney - formerly JCP's President and Chief Merchandising Officer. I can't make the call yet as to how effective he'll be. But what I can say is that the gent's resume is far better than a company the size of Foot Locker probably deserves.


This thing is officially in the zone where it will get a free pass on any bad news related to operations for a couple quarters, and the Street will only get more jazzed and imaginative as it concocts kool-aid around what the new CEO could do to unlock value.


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It always nice to have some sort of fundamental perspective to explain the 33% move in the S&P 500 since March 9th! 

Since March 9th, the top five performing sectors have been Financials (XLF) up 88.5%, Industrials (XLI) up 29.3%, Materials (XLB) 39.3%, Consumer Discretionary (XLY) up 38.7% and Technology (XLK).  The reflation trade has pushed up the XLI and the XLB, while fundamental improvement has been a driver for the XLF, XLY and the XLK.

As of March 9th bottoms up consensus estimates for the XLY were estimating a 10.4% decline in operating EPS.  As of June 24th consensus estimates now have operating EPS only down 0.1%, an improvement of 10.3%.  The incremental news on the consumer continues to suggest that momentum is slowing in a number of key areas, which suggests that the big move in EPS to the upside has been made.  Over the past week, the Consumer Discretionary (XLY) is the fourth worst performing sector, declining 3.0% versus the S&P 500's 1.5% decline.  We remain short Consumer Discretionary (XLY).  

The numbers for the XLK are even more astounding.  Back in March, consensus bottom up operating EPS estimates for the XLK were down 20.6%; today it stands at -0.03%. 
While the benefit of the declining dollar has been reflected in the stock prices of the components of the XLI and the XLB, it's not reflected in the fundamentals.  In fact, things are looking worse for the XLI and the XLB since March 9th.  For the XLI and the XLB, current 2009 operating EPS are estimated to be down 27.3% and 37.6%, respectively.  This represents a decline of 12.8% and 19.6%, respectively, from March.
From a fundamental perspective, Energy looks interesting.  Since March 9th operating earnings estimates for the Energy sector have only improved 9.3%, despite a 33% move in the USO since March. 
Overall, despite the 33% move in the S&P 500 since March 9th, operating EPS estimates for the S&P 500 has declined to -10.5% from -8.3% in March.  As a fundamental analyst earnings matter most.  Stock are up earnings are down, and it's becoming consensus that the economy is going to recover in 2H09.  AT 917 in the S&P 500, the upcoming earning season takes on increased importance.      
Howard Penney
Managing Director




Research Edge Portfolio Position: Long EWZ

May unemployment data released by IBGE today showed the second modest sequential decline to 8.8%. As the Brazilian stimulus measures continue to be implemented, the stabilizing employment situation is a direct result of public sector job creation outpacing reduced headcounts in the manufacturing, mining and energy industries.  Unemployment levels still registered in double digits for several major urban areas, but are down across the board on a 3 year basis.

Average wages showed significant year-over-year increase with per capita household real income up 3.4% Y/Y; still trailing CPI by almost 1%, but providing the central bank with room to maneuver at their July meeting. Currently the benchmark Selic is still over 9%.

The positive data was a welcome relief to the equity market and the Bovespa finished the day up 3.7% while the EWZ ETF rose by 4%. With a cost basis of 53.83, we are still down by slightly over 1% in the long position we put on last week.

Although much needs to be done to eradicate pervasive poverty and to improve education levels we continue to be bullish on near term prospects for the Brazilian economy based on improving internal demand and global commodity dynamics.

Andrew Barber




In the past, CKR management has been very clear about its menu strategy:

"While many of our competitors responded to the ongoing macroeconomic challenges by offering low priced margin impairing products, we continued to differentiate our brands by focusing on premium priced innovative products."

"So, while other places are hopping on the value bandwagon and, thus, promoting their smallest and lowest-quality menu items, we'll keep doing what we do best by giving our customers what they really crave: big, delicious, premium-quality burgers."

"I don't think the competitors can maintain this level of discounting and actual food giveaways for very long. So we're going to maintain our discipline and our profitability and try and address those issues in the short term."

"The two ways we will not deal with the issues are by trying to drive business through discounting our products, serving inferior products, or massively couponing."

CKR has stressed that it offers good "value" by selling premium $6 burgers that are comparable to the more expensive burgers found at casual dining restaurants. It has also said in recent past that it must also offer affordable items for its customers that have less money to spend, but that it would never risk hurting margins by selling items at a price lower than cost. Yet, today when discussing its more affordable items, management said that CKR has the best tasting burgers and chicken sandwiches for $0.99. This sounds a little like a dollar menu to me! And based on comments made by CKR CEO Andrew Puzder last year, the company is selling these items below cost.

"As long as we serve a burger that's as good or better, and I think better, particularly this Prime Rib burger, than the casual dining places serve, and as long as we approach it as a -- you know, we market value different than other companies. You've probably seen the fake restaurant ads but we're not saying come in and get a piece of gut fill for $0.99, when everybody knows you couldn't go to the grocery store and make something for $0.99 that was edible, and you're not paying labor and rent. Instead of doing that, we say look, here, you know, people are willing to pay $14 for this burger in a restaurant. You can get it at Carl's or Hardee's for $4, $5, or $6."

Last quarter, management acknowledged that it would be adding more affordable items to its menu but that it would not use media support to promote them. Today, the company said it would promote some of these lower priced items outside of its four walls to increase awareness of its value items. Specifically, the company will advertise its Teriyaki burger that will sell for $2.89 and its 2 for $4 Western Burgers. The company also said that it has begun testing a new snack menu to address its affordability issues. Using advertising dollars to promote these lower priced items for the first time and testing a new snack or lower priced menu sounded like a "value initiative" to me. However, when I asked management about these "value initiatives," the CEO seemed a bit confused as to what I was referring.

This company has spent so much time defending its position on keeping its focus on a premium menu strategy and maintaining industry-leading restaurant-level margins that the CEO seemed to question my use of the word "value," which in this industry, often goes hand in hand with discounting. Although he allocated a good portion of today's earnings call to a discussion around creating awareness of the value inherent in the company's $6 burgers and the affordability of some of CKR's products, such as the burger and chicken sandwich for $0.99, the company will most likely not go far enough with its promotion of these products to really drive traffic because management will not want to be accused of discounting.

After today's conference call, I was left questioning what direction CKR is headed? Will CKE only pursue premium products in an attempt to preserve the high margins to which investors have become accustomed while sacrificing traffic? Or will they begin to go after the bottom feeder customers with more advertising of its lower priced items? Management seems a little unsure as well, saying that it will manage for the long-term and not for short-term sales pops in one breath and that it will do what it can to adapt to the new consumer environment in another. Either way, margins are at risk, but CKR risks losing substantial market share at Carl's Jr. if it does not act fast with a coherent market strategy to drive traffic.

Making matters worse for CKR is the fact that McDonald's will likely roll out its Angus burger in August with significant couponing. This premium burger offering at McDonald's will only create more competition for Carl's Jr. in the coming months.


CKR - MINCING WORDS - ckrmargiins


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