Retail First Look: 6/29/09

TODAY'S CALL OUT

  1. The first is that the infamous 'Nike making a run at Under Armour' rumor reared its ugly head again on Friday. UA traded +4% in a down tape. To reiterate what I said on Friday, ...this is beyond ridiculous. Aside from the fact that the 'would be' buyer and seller simply do not like one another, the biggest reason such a deal will not happen is that Nike thinks that it can beat Under Armour organically. Whether it can or not is absolutely, completely, 100% irrelevant. They won't buy another brand  to touch a consumer they think that they can win over with their own. Case in point... remember Callaway golf? Think back to around 2003. The Street was bugging Nike to buy ELY - then worth about $1.5bn. "After all, Nike, you have Tiger Woods...Imagine what you could do with Callaway?"  Nike's thought back then, as well as today sounds something like this... "Why do such a deal today for $1.5bn, when we can invest $200mm in our own brand, beat them organically, and have no integration risk?"  Guess what? It worked. Nike's share is ahead of ELY in most categories.  Importantly, Nike does not think that it needs UA to win. If such a deal happened, it would make me seriously question this change in Nike's strategy.  I'm not going to have to answer that question. As I noted on Friday - I'd place better odds of Abercrombie making a run at P&G.
  2. Now that June books are nearly closed, the apparel/footwear retail industry is calling it official. Weather was a disaster in June. I don't think anyone doubts that one bit. In fact, the last time I recall the weather card being this strong and as widely accepted even by people (like me) who hate when a management team uses the 'W' word was 3-years ago during the snow-less winter. That's when people granted Quiksilver (75% of Rosignol's biz in Europe, here 70% of ski runs did not even open for the year) , Amer Sports, and Columbia free passes (or, at least, heavily discounted passes) for lost sales. One thing that makes me antsy now, however,is that the MVR is up 2.7% month-to-date vs. a flat performance for the S&P. Translation = either a) the market is absolutely looking through weather, or b) it is stupid and does not realize the risk to sales numbers next week. Take your pick. Either way, the bottom line is that this synchs with our view that we need high quality earnings beats to take components of this group higher.

LEVINE'S LOW DOWN

Some Notable Call Outs

  • Despite a challenging economy and weak mall traffic, Finish Line's best selling item in the entire store is the Nike Air Max 2009, which retails for $160. While not enough to move the needle on tough compares, this is a reminder that unique product will continue to sell well despite the overall economic backdrop.
  • Finish Line was able to reduce overall occupancy costs by 5% in its recent quarter, reflecting the willingness of landlords to negotiate rather than lose tenants altogether. This is yet another example of retailers regaining the upper hand in negotiations as rent and lease terms remain the lynchpin for future profitability coming off of a 3 year period of unprecedented rent escalations.
  • In a sign that the Buckle anticipates substantial future growth, it signed a deal late Friday to build a new 240k/sq foot distribution center in its home state of Nebraska. The company's strong and stand out sale performance is clearly helping management's decision in laying out future growth plans.
  • A quick visit to the American Apparel sample sale on Orchard St. in Manhattan over the weekend suggested two things. First, consumers remain crazy about deals and are willing to wait in long, annoying lines for the opportunity to seek out values not otherwise found in "traditional" retail establishments. Secondly, companies with high inventory levels and creative merchandising will continue to seek out alternative forms of distribution, as evidenced by American Apparel's short-term lease of an empty store front. The challenging economic environment continues to afford those with creativity a unique opportunity to secure real estate at low prices in an effort to clear goods.

MORNING NEWS 

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

  • California Senator Dianne Feinstein (Democrat) introduced legislation on 21 May that would provide duty-free treatment through 31 December 2019 to apparel imports from least-developed countries that do not receive benefits under other U.S. preferential duty programmes, namely Afghanistan, Bangladesh, Bhutan, Cambodia, Kiribati, Laos, Maldives, Nepal, Samoa, Solomon Islands, Timor-Leste, Tuvalu, Vanuatu and Yemen. Sri Lanka would also be eligible to receive duty-free treatment under this legislation even though that country is not an LDC. To qualify for duty-free treatment, apparel would have to comply with certain requirements that are similar, and in some aspects identical, to those set forth under the African Growth and Opportunity Act, which is a programme that provides duty-free access to apparel from sub-Saharan African countries. In practical terms, the single most important benefit provided under this legislation is clearly the extension of duty-free treatment to imports of apparel wholly assembled in Bangladesh, Cambodia or Sri Lanka from foreign fabrics made from foreign yarns. This could present both an opportunity and a challenge to Hong Kong and mainland Chinese exporters. On the one hand, the enactment of this legislation would most likely stimulate demand in beneficiary countries for mainland Chinese textile inputs for apparel production, particularly fabrics. At the same time, these three countries, especially Bangladesh and Cambodia, would probably increase their apparel exports to the United States to the detriment of Hong Kong and mainland Chinese suppliers.  <http://www.hktdc.com/info/vp/a/gmt/en/1/4/1/1X05WMLL/Garments---Textiles/Duty-Free-Treatment-for-Least-Developed-Country-Imports-under-Consideration--China%E2%80%99s-Competitiveness-May-Be-Affected-in-Certain-Products.htm>
  • China is Russia's biggest trade partner. China's consumer goods such as textile and garments, with their cheep prices, are sustaining the daily needs of Russian people, who are less than prosperous. The announcement by Russia on June 18th of destroying imported Chinese goods on its 22 counters has put the long-standing problem of "gray custom clearance" on the table, again. "Gray custom clearance" refers to the practice by some government-connected "clearance" companies in Russia pushing imported goods into the Russian market at a tax rate far lower than the official level. These companies often undertake the whole process of the freight after they depart from Chinese ports, and deal with all procedures within the Russian territory. Last October, nearly $1 billion worth of goods were banned due to "gray custom clearance," and up to 400 Chinese enterprises were afflicted. This time, after the confiscation of goods in these 22 counters, another 7000 or so counters are also challenged, where $5 billion worth of Chinese commodities are facing the danger of being destroyed. <http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=APPSEAR.story&STORY=/www/story/06-27-2009/0005051340&EDATE=SAT+Jun+27+2009,+10:00+AM>
  • Japan's retail sales dropped for a ninth month in May as a worsening job market forced households to cut back. Sales slid 2.8% which was worse than the -2.6% consensus estimate. Falling wages and an unemployment rate at a five-year high are forcing households in the world's second-largest economy to reduce spending. The jobless rate rose to 5% in April, the highest since 2003, and about two work seekers are competing for a single spot, the most severe job shortage on record. Wages have slid for 11 months, the worst losing streak in six years. <http://www.bloomberg.com/apps/news?pid=20601205&sid=asXZTnfBpEZ4>
  • Angela Merkel, the German chancellor, has categorically ruled out an increase in value added tax in spite of rocketing public deficits, should she return to power for a second term after this year's general election. Speaking ahead of a conference of her Christian Democratic Union in Berlin on Monday that will endorse the party's manifesto, Ms Merkel sought to silence political allies and economists who last week called for tax increases to plug the hole blown in the public coffers by the economic crisis. "Every discussion about VAT damages economic activity," she told the mass-market weekly Bild am Sonntag. "With me, there will be no increase in value added tax under the next government." <http://www.ft.com/cms/s/0/1e742196-6408-11de-a4feabdc0.html?nclick_check=1>
  • Canada signed a free trade agreement Sunday with Jordan, its first with an Arab nation. The deal gives Jordan preferential trade conditions, including full exemption from customs duties for Jordanian goods. In return, the Mideast country will lower customs duties on Canadian products over a four-year transitional period. Agriculture, forestry, manufacturing and agri-food are expected to be the beneficiaries from immediate duty free access. The agreement is expected to be ratified by both parliaments later this year. Bilateral trade was estimated to be about $80 million in 2008, according to the Canadian Embassy in Amman, Jordan. <http://www.wwd.com/business-news/jeweler-david-webb-files-chapter-11-2196360?navSection=business-news>
  • David Webb Inc. has filed for Chapter 11 bankruptcy court protection in Manhattan, the second New York-based jeweler to do so in the same week. In business since 1948, the family-owned Webb operates a jewelry store at 789 Madison Avenue in Manhattan and has more than 30 employees. Webb listed assets of between $10 million and $50 million and liabilities of between $1 million and $10 million. Webb said in court papers filed last Tuesday that it has inventory valued at $7 million and accounts receivable of $165,000, among other assets. It owes FCC, which does business as First Capital, a secured creditor, $2.9 million. It is also a party to a lawsuit involving its landlord, Lawrence and Melvin Friedland, bankruptcy documents said. The company Web site lists Nina Silberstein as chairman, Stan Silberstein as president and Sharon Silberstein as vice president and creative director. <http://www.wwd.com/business-news/jeweler-david-webb-files-chapter-11-2196360?navSection=business-news>
  • Now that a Chicago bankruptcy court has signed a final order approving the sale of the assets of bankrupt Hartmarx Corp. to London-based Emerisque Brands and its investment partner SKNL North America, the question among retailers, bankers and even politicians - including its best-known customer, President Obama - remains whether the new owners can make Hartmarx and its brands viable in the long term and fulfill their promise to maintain jobs in the U.S. A. <http://www.wwd.com/business-news/jeweler-david-webb-files-chapter-11-2196360?navSection=business-news>
  • Sport Chalet, Inc. reported fourth quarter sales declined 12.7% as same-store sales tumbled 17.7% and the net loss in the period of $11.1 million, or 79 cents a share, compared to a loss of $2.8 million, or 20 cents, a year ago. Results came in just ahead of a forecast given in early May.  The Los Angeles-based sporting goods chain noted that same store sales were hurt by macro economic conditions and a warm January in the company's markets as compared to January of the prior fiscal year, which impacted the demand for winter related merchandise. <http://www.sportsonesource.com/news/article_home.asp?Prod=1&section=4&id=28506>
  • Escada said its 200 million euro, or $280 million, bond exchange program would begin today, and that almost all the preconditions for the realization of its financial restructuring plan have been met. The struggling German fashion house is offering bond holders a cash incentive if they accept the offer during the early-bird period, which ends July 14. The overall exchange period runs through Wednesday. The bond restructuring is a central pillar of Escada's rescue plan, which also calls for a capital increase of at least 29 million euros, or about $40.7 million at current exchange. <http://www.wwd.com/business-news/jeweler-david-webb-files-chapter-11-2196360?navSection=business-news>
  • Foot Locker Inc. is looking to pick up market share in the $8.4 billion skate market with the debut of CCS-branded brick-and-mortar stores. The company bowed CCS's first retail shop on the Third Street Promenade in Santa Monica, Calif., on April 30, and the second opened at the Garden State Plaza mall here on June 10. Foot Locker acquired CCS, an online skate retailer, for $102 million from Delia's Inc. last September. The CCS shops, which mimic the Website, feature skate shoes, apparel, accessories and hardgoods for the 12-to-18 year-old customer. CCS devotes plenty of shelf space to apparel, with labels such as Volcom, Fallen, Element and its own CCS brand. Although Foot Locker has experimented with skate-oriented displays in its Champs locations and about 600 Foot Locker stores, CCS marks the company's first push into full-line dedicated skate stores. But Foot Locker is hardly entering into unfamiliar territory: The company has retained all 32 of CCS' original merchants since its acquisition, including its managing director, Susan Van Arsdale. <http://www.wwd.com/footwear-news/bread-butter-fashion-2197002?navSection=footwear-news>
  • Insider caught up with the "Gossip Girl" star and face of K-Swiss' "Classic Remastered" ad campaign at the after-party celebrating the shoe launch at New York's Bloomingdale's. Is there a place for K-Swiss in the wardrobe of Chuck Bass, his ultra-dandified "Gossip Girl" alter ego? "Absolutely," he said, without hesitating. "I see him wearing them on the basketball court." Nearby, DJ Josh Madden (who also runs DCMA Collective with his brothers Joel and Benji of Good Charlotte) gave Insider some advice for keeping a party moving. "If you want to be a good DJ, all you have to do is worry about making the ladies dance," he said. Also feeling the beat was David Nichols, EVP of K-Swiss, who hinted that news would be forthcoming about the new California Youth action-sports label, which is a major facet of the Westlake, Calif.-based company's turnaround plan. <http://www.wwd.com/footwear-news/insider-ed-westwick-admires-k-swiss-ll-cool-j-dishes-on-collab-2197052>
  • Juicy Couture launched an intimate apparel store Friday in Las Vegas' Forum Shops at Caesars Palace, the first of what is expected to be a handful of single-category concepts for the Liz Claiborne Inc.-owned brand. The 2,200-square-foot boutique, called Love G&P, is on the former site of Juicy Couture's multicategory location that bowed in 2004. "Intimates is a natural extension to the brand and showcasing it in a close but separate environment felt like a strategic next step," said Beth Cohn, vice president of retail for Juicy Couture. "This will be the true destination for this category." The chain introduced intimate apparel a year ago with nighties, robes, pajama bottoms, sleep tops and underwear ranging from about $15 to $150, with graphics and prints that speak to the brand. Outside of Juicy Couture's stores, the line is carried in 200 specialty and department store doors, including Bloomingdale's, Nordstrom, Saks Fifth Avenue and Lord & Taylor. Bestsellers include a $60 stripe nightie called Crochet & Charms, Beach and Dog Boxers for $42, a long brushed jersey pant for $65, and a Love, Peace & Juicy pointelle nightie for $58. <http://www.wwd.com/markets-news/juicy-couture-gets-intimate-in-las-vegas-2196749?navSection=retail-news>
  • The legal headaches continue to pile up for Forever 21, with a new copyright and trade dress infringement suit filed against it by Express last week. In a complaint filed in U.S. District Court for the Central District of California, Express claims Forever 21 copied four of its copyrighted plaid patterns for men's shorts that were introduced in its stores in December 2007. Additionally, Express is claiming trade dress infringement for a zippered jacket the specialty retailer introduced last December. Forever 21 has been sued over 50 times in the past seven years for alleged intellectual property violations by competing retailers and designer labels. It has settled almost all of those cases out of court, but last month a case brought against it by California-based Trovata went to jury trial, ending in a hung jury. <http://www.wwd.com/business-news/jeweler-david-webb-files-chapter-11-2196360?navSection=business-news>
  • Children's Place Retail Stores Inc. has agreed to pay $12 million to settle a class action lawsuit that alleged its officers misrepresented facts about operations that caused the company's stock to artificially increase. The company said that it denied all the suit's allegations and decided to eliminate further litigation and related expenses. Children's Place said the settlement's cost would be covered by insurance. <http://www.wwd.com/business-news/jeweler-david-webb-files-chapter-11-2196360?navSection=business-news>
  • Amazon Cuts Ties With North Carolina Affiliates Over State Sales-Tax Plan Amazon.com Inc., the largest Internet retailer, cut ties with business affiliates in North Carolina after the state drafted legislation that would force the company to collect sales tax. <http://www.bloomberg.com/news/industries/consumer.html>
  • Urban Outfitters last week joined a very small club: Retailers who sell via smartphone, such as the iPhone. Urban's new site, m.urbanoutfitters.com, is designed to be easy to use on a mobile device. Now Urban customers can shop, see their wish lists, read the blog, check order status, find a store and sign up for text alerts from their mobile phones. The mobile store also links to Urban Outfitter's pages on Facebook, MySpace, Twitter, YouTube and Flickr. While any cell phone with Internet access can visit any Web store, unless the site has been optimized for the small screen, the experience is cumbersome and typically the checkout process doesn't work. As BlackBerrys, iPhones and Palms become ubiquitous, it makes sense to create stores for them, said retailers, to capture business from potential customers who are surfing the Web while waiting for appointments, commuting, on a lunch break or any place without full computer access. When Yoox quietly put up a test site in April, it received 710 orders in one month. Polo Ralph Lauren, Sears, SVC and Amazon also offer mobile shopping. <http://www.wwd.com/business-news/jeweler-david-webb-files-chapter-11-2196360?navSection=business-news>
  • Shoebuy.com steps up its traffic -eBay, however, isn't so lucky - Consumers love their stilettos and sneakers, at least if recent traffic data from Nielsen Online is any indication. Shoe e-retailer Shoebuy.com posted a whopping 43% rise in traffic in May compared to a year earlier. <http://www.internetretailer.com/>
  • Amid the flailing economy, footwear brands are finding opportunity in the bridal category. Several women's brands, from Payless ShoeSource to Mary Norton, have launched new bridal collections this year and are looking to make wedding shoes permanent additions to their lines. While Payless has long included dyeable dress shoes in its business, the retailer is now pushing bridal more heavily with Unforgettable Moments by Lela Rose, a capsule collection of kitten, slingback and T-strap heels priced between $25 and $45. It debuted in February at 2,600 Payless stores. Payless debuted an Unforgettable Moments Website in April to build the line independent from the other Payless collections. Cole Haan, meanwhile, launched a bridal collection this spring, following the debut of its DressAir line, which uses Nike Air technology to create comfortable dress shoes. <http://www.wwd.com/footwear-news/bread-butter-fashion-2197002?navSection=footwear-news>
  • Retailers across the country said that unusual weather patterns during June made a tough month even tougher. According to information from the weather-tracking firm Planalytics, the Northeast has had one of the wettest, coolest Junes in history, while areas of the South have experienced extreme heat. The Midwest has seen rain and flash flooding in some areas. Laura Bryan, who owns Wish, a women's high-end shoe store in St. Louis, said alternating bouts of rain and extreme heat have kept shoppers out of stores. But, some say indoor shopping malls may benefit from the weather. "People tend to want to get away from the rain and the heat, and they can't go to the beach if it's rainy, so they hang out in the mall," Garcia said. <http://www.wwd.com/footwear-news/bread-butter-fashion-2197002?navSection=footwear-news>
  • The mood at this week's Bread & Butter show is dark - at least as far as sneakers are concerned. Athletic companies showing at the event in Berlin put black front and center for both men and women, playing with texture, embellishment and colorful accents for contrast. <http://www.wwd.com/footwear-news/bread-butter-fashion-2197002?navSection=footwear-news>
  • With retailers working harder than ever to excite the customer, many are seeking new brands to create a point of difference. But where can they go to find fresh resources? In this economy, footwear retailers everywhere are scrambling to gain an edge on the competition. Many are turning to new designers and brands to bring excitement to their shelves. But it isn't always easy to find them. To track down new talent, store owners say they are looking beyond the trade show circuit and getting creative. Bloomingdale's began holding designer open calls in February. Some of these will be among the 17 new shoe brands the department store is adding to its roster for fall '09. The Internet also has become an increasingly important tool for hunting for up-and-coming designers and brands.  <http://www.wwd.com/footwear-news/bread-butter-fashion-2197002?navSection=footwear-news>

NOTABLE RESEARCH:

JCP: Morgan Stanley upgrades to Overweight from Equal-weight, price target is $35.

MACRO SECTOR VIEW AND TRADING CALL OUTS

Retail First Look: 6/29/09 - sector view