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This situation in Honduras is escalating to the point where it can't be ignored as it relates to impact on retail.  In addition to the direct situation in Honduras, it's also noteworthy that Nicaragua and El Salvador are closing border routes as a pressure tactic to return Zelaya to office. 

In other words, despite reports from Gildan that the political limbo in Honduras has not affected operations, we're beginning to think otherwise. While most state owned operations are removed from direct conflict in San Pedro Sula on the northern coast, the closing of border routes in El Salvador and Nicaragua have significant ramifications. Companies such as VF Corp. and Hanesbrands with production in nearby countries typically ship to Honduras for export to the U.S. - this disruption is forcing companies to think of alternative and costly fixes (i.e. air freight). While production in Honduras may not be impacted directly, sky rocketing geo-political risk in the region will inevitably affect the cost of future business. With both Gildan and Fruit of the Loom production highly concentrated in Honduras, further escalation of the current situation may be net positive for Hanesbrands as reflected in the 7% positive divergence over the past 3-days.

Here are yesterday's developments...

  • The United Nations General Assembly has approved a resolution calling for the reinstatement of ousted Honduran President Manuel Zelaya.
  • The US has supported the UN resolution
  • Spain has called on other EU countries to withdraw their ambassadors
  • World Bank president has "put a pause" on its lending to Honduras and is "working closely with the OAS and looking to the OAS to deal with its handling of the crisis under its democratic charter".

The possibility of swift economic sanctions, including a temporary suspension of CAFTA trade policy, cannot be dismissed.  The US government appears to be willing to follow the UN's lead, and the UN in turn is taking its cues from the OAS, which is currently under the sway of Venezuela, Cuba and other allies of the Zelaya administration. We simply do not believe that the current administration has the will to fight UN/OAS consensus on this matter.


Some Notable Call Outs

- Not only are international brands and retailers trying to grab cheap rents in the US, but they are also building large fan bases on Facebook.  Using the social networking tool to track the most popular brands/companies as measured by the number of fans, we discovered that international brands are well represented in the top 10. The list includes: 1) Adidas Originals, 2) Victoria's Secret, 3) Nike, 4) Converse, 5) Victoria's Secret PINK, 6) Zara, 7) PUMA, 8) H&M, 9) Adidas, and 10) Burberry.  As Facebook continues to grow across the globe, we suspect that this list will evolve even further.  Interestingly, Adi's "Originals" sub-brand ranks higher in popularity than Nike. While still early in exploiting social networking to drive consumer awareness and ultimately market share, it appears from this small sample that US based companies are lagging their international competition.

- The death of Michael Jackson remains top of mind and this has retailers scrambling to meet demand for the pop icon's albums. Reports suggest that Amazon.com has sold more Michael Jackson albums since his death than it did in the prior 11 years combined! Given the weakness in the packaged media category and dramatic reduction in floor space allocated to cd's over the past 5 years, we suspect this phenomenon will provide a much-needed, albeit temporary boost to those that still sell music.


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

- Sport Supply Group on the acquisition front - Sport Supply Group, Inc. has acquired certain assets from Gus Doerner Sports, Inc. of Evansville, IN. SSG acquired the rights to Doerner's Team Sports Division which caters to high school, college and out of school sports programs in southern Indiana. Last week, Sports Supply Sport acquired substantially all the assets of Webster's Team Sports of Pompano Beach, FL. This transaction affords SSG the ability to expand its coverage of an important state while leveraging the pre-existing infrastructure and support systems already in place in that region. <sportsonesource.com/news>

- Dick's Opens in old Joe's Store - Dick's Sporting Goods Inc. will open a store in a former Joe's Sports & Outdoor in Hillsboro, OR. The store will be the second for Dick's SG in Oregon. The Hillsboro location marks the first Joe's store to be refurbished for another company. <sportsonesource.com>  [McGough: Hillsboro is the core of where some key Nike executives reside. Something tells me that the Swoosh will be disproportionately represented at this store]

- Eddie Bauer auction set - Eddie Bauer Holdings Inc. won bankruptcy court approval to sell its assets at an auction next month. At a joint court hearing held simultaneously in Wilmington, Delaware, and Toronto, where the company's Canadian division is in bankruptcy, two judges approved Eddie Bauer's request to hold an auction for its assets on July 16. <sportsonesource.com/> [McGough: Given all the interest in this name pre-filing, I'm interested to see who really steps up to the plate. That said, go and ask anyone under the age of 25 if they know who Eddie Bower is....]

- Billabong selects a global sourcing company - Billabong has selected NGC's e-PLM(r) for Product Lifecycle Management and e-SPS(r) for Global Sourcing and Visibility. NGC's software will be implemented worldwide as a strategic PLM and global sourcing solution for Billabong across all of the company's regions and brands. Billabong selected NGC after a detailed and rigorous evaluation of the industry's leading PLM vendors. "We chose NGC based on the functionality and ease of use of their solutions, as well as NGC's deep understanding of the fashion and apparel industries," said Mike Savage, General Manager of Product Development, Billabong International Limited. <globenewswire.com/news>  [McGough: As capacity frees up again at the plant level (a major theme of ours for 4 months), you're going to see more of these offensive moves in investment in software, systems and partnerships.]

- Nike launching cross-trainers inspired by the originals - Twenty years after Nike entered the cross-training category with the original Air Trainer - made famous by Bo Jackson's classic "Bo Knows" commercials - the company is prepping for the next evolution with the July 1 debut of the Trainer 1. Designers went back and reexamined the original shoe for inspiration and reengineered the design to incorporate the company's latest technological innovations. High-top and low-top versions of the $90 shoe are expected to drop at sporting goods and athletic stores later this year, along with limited-edition versions of the shoe in a variety of colorways and material makeups. <wwd.com/footwear-news[McGough: This is the benefit of having over 30 years worth of success from which to draw upon. When a shoe company reaches into the closet as a starting point for new product, the incremental ROI is materially higher than starting from scratch]

- Amazon and Blue Nile cut off affiliates in more states over taxes - Blue Nile today joined Amazon in ending referrals from Rhode Island web affiliates because of legislation that would require collecting sales tax. Both retailers recently made similar moves in North Carolina and Amazon today cut off affiliates in Hawaii. <internetretailer.com>  [McGough: This issue is escalating, and worth spending some time on - which we'll be doing.]

- License deals in China - Conflicting reports are circulating in Europe and in China about Pierre Cardin license deals in China. Earlier this week, it was reported that the French designer was set to sell all his product licenses and the brand to partners in China. This has since been denied, but it has been suggested that the designer is close to finalizing 32 footwear deals with its existing partners Jiansheng Trading and Cardanro in a €200 million ($280 million) deal. This deal is said to include the Maxim's brand.<licensemag.com> [McGough: People talk about more us direct investment in China, but I think more of the opposite. This licensing deal is a sign of what is yet to come, with China buying/licensing foreign content]

- Large Indian retail company terminates a JV - Pantaloon Retail India Limited (PRIL) has decided to terminate its joint venture (JV) with Planet Retail Holdings. The company has also terminated its JV with Blue Foods, which runs restaurant chains such as Bombay Blue, Noodle Bar and Copper Chimney. "Planet Retail has two businesses, which is apparel and sports. We are running the sports business and it has become a wholly-owned subsidiary. That's why the JV with Planet Retail is being terminated," Kishore Biyani, chief executive officer, Future Group, told Financial Chronicle. PRIL had 49 per cent stake in Planet Retail Holdings. <indiaretailing.com>

- The FitFlop Phenomenon - Topping the list of most-searched sandals on AOL is FitFlop. The footwear phenom surpassed a slew of globally-recognized brands proving that these muscle-toning, pain-relieving, posture-improving shoes are on everyone's mind. The FitFlop has received the seal of acceptance from the American Podiatric Medical Association. The latest FitFlop collection for Summer 2009 is an Italian-designed range of varying styles including a slide for those who don't like anything between the toes. FitFlops' patent-pending microwobbleboard(TM) technology midsole increases leg muscle activity by approximately 10-12% with each step. They help improve posture, tone calves, thighs and gluteal muscles. FitFlops have also been reported to provide relief from plantar fasciitis, heel spurs, chronic back pain, sciatica, osteoarthritis, scoliosis and countless other conditions. FitFlops range in price from $49.99 to $59.99. <sev.prnewswire.com/retail[McGough: Not good for Crocs. Though the dark horse beneficiary might be Skechers.]

- M&S group beats the street with 2.9% sales growth - In the quarter U.K. sales were up 1.7% and international sales soared 15.9%. Sales growth driven by the store's 125th anniversary campaign, and the timing of the long Easter weekend. Clothing, a division that has been struggling in recent months, rose 1.4%, with improved performance across all areas of the business. <wwd.com/business-news>

- American Apparel's manufacturing facility full of illegal workers - Up to one-third of American Apparel Inc.'s manufacturing employees in Los Angeles may be working illegally, according to the U.S. Immigration and Customs Enforcement agency. The ICE has notified the company that 1,800 of the 5,600 workers in American Apparel's Los Angeles production facilities do not have the proper paperwork to legally work in the U.S. Unless these employees resolve the discrepancies in their work records they will not be able to continue their employment with the company. While this would result in a significant reduction in the firm's production workforce, American Apparel said it did not believe the decrease would have a materially adverse impact on its financial results, due to its healthy inventory levels and manufacturing capacity. <wwd.com/business-news>  [McGough: Oh the irony that American Apparel has such a cult following with the 'anti-sweat shop' purists, and yet it overlooked such a basic component of making 'American Apparel in America.' That, of course, is having the goods made by people that are legally allowed to work here.]

- American Apparel expanding product range with bedding - American Apparel has been a mecca of hipster clothes since it debuted more than 10 years ago. But how much longer can people continue to wear deep V-neck shirts, gold lamé leggings, and hot pants? The company seems to know that the demand for these products could wane, so they've been adding new items to their stable lately. First it was butt-less tights, then scrunchies, and now the company is selling sheet sets.  <thefrisky.com>

Retail First Look: 7/1/09 - American Apparel Image

- Gap stepping up advertising with new agency - Just like it did this year with Old Navy, Gap Inc. appears ready to crank up the advertising on its Gap brand. Gap has been conducting an agency review and is likely to designate Crispin Porter + Bogusky for the Gap brand, according to sources. It's the same ad firm that does the campaign for the company's Old Navy division. There could be cost savings by utilizing the same agency for two divisions, though Gap is said to be pleased with Crispin Porter + Bogusky's quirky campaign for Old Navy, which features "SuperModelquins." Crispin Porter + Bogusky has a reputation for provocative campaigns. Meanwhile, management is gaining confidence in Gap brand products and wants to be more in front of consumers to reverse declining traffic and market share trends. In his first-quarter conference call, Gap Inc. chairman and chief executive officer Glenn Murphy acknowledged the need for increased marketing spend at Gap. The company plans a denim relaunch in August, to be followed by stronger marketing. <wwd.com/media-news> [McGough: I don't see how this can be a bad move. But Advertising only works if the product is there to back it up. The internal design talent is clearly lacking. But will new licensing deals (ie Stella McCartney and more to come) have the firepower to get this ball rolling?]

- Carrefour sets out a 3 year plan - Carrefour's chief executive, Lars Olofsson, on Tuesday disclosed a three-year plan to overhaul the world's second-largest retailer, achieve sizable savings and improve its image, which consumers have come to perceive as an expensive brand compared with competitors. By 2012, the company expects to achieve savings of $6.32 billion by improving the efficiency of its operations to generate higher margins, mainly in France, Italy, Spain and Belgium. The gains will consist of cutting operating costs and improving purchasing practices, and reducing inventory times by seven days. The transformation will require an investment of $702 million, and will entail one-off expenses. The company also underscored its resilience against the sharp economic downturn by disclosing first-half sales excluding gasoline should be slightly higher compared with the same period last year, and the increase in the second quarter of 2009 should be above that of the first quarter. Carrefour expects to focus on promoting its prices using advertising campaigns with clear price messages and price comparisons in a bid to attract more budget-conscious shoppers in the current downturn, according to the company. The retailer has already tested the strategy in Spain with success, logging market share gains and improving its image among consumers, Olofsson said. <wwd.com/media-news>

- H&M, Louis Vuitton and Wal-Mart at the top of survey - H&M, Louis Vuitton and Wal-Mart, respectively, are ranked as the world's most valuable apparel, luxury and retail brands this year, according to a study by consulting group Millward Brown Optimor. The group assessed global brands with the highest valuations in 17 sectors, from cars and coffee to technology and personal care. The study forecast the "intrinsic value" of 100 global brands by estimating their ability to "generate demand." Google was assessed as the number-one brand worldwide, worth $100.04 billion, followed by Microsoft, $76.25 billion; Coca-Cola, $67.63 billion; IBM, $66.62 billion, and McDonald's, $66.58 billion. H&M blew by Nike under Millward Brown's assessment to become the most valuable apparel brand, worth an estimated $12.06 billion, in a sector hit hard by the recession. The 62-year-old Swedish fast-fashion retailer was fueled by its offer of fashion, value and exclusive designer collections at affordable prices, such as a recent collection by Matthew Williamson and a collaboration with Jimmy Choo, which will launch a collection for women and men in about 200 H&M stores in November, said Pierre Dupreelle, a director at the brand consultant. Wal-Mart was the retail brand with the highest valuation, at $41.08 billion, a gain of 19 percent.  <wwd.com/business-news>

- New media/marketing company targets strictly college students - The estimated 13.6 million U.S. college students, ages 18 to 30, represent about $53 billion in discretionary spending, according to the 2008 Alloy Media + Marketing College Explorer study. Edhance, in beta test mode on this city's college populace, processes discounts back to students through affiliate programs with puma.com, target.com, Drugstore.com, skechers.com, avon.com, shopecko.com and Ice.com, a fine jewelry Web site. Discounts average about 10%. According to Edhance president Bjorn Larsen, the company has inked an agreement with a financial services company to automatically enroll more than 700,000 student credit card holders at back-to-school. Edhance has been quietly marketing itself through Twitter posts, but expects to go live in August. Every six months, users will be vetted to ensure they're still students. Bringing greater efficiency and transparency to student discounts make sense, said Larsen. "Here, you have a closed audience of tomorrow's shoppers," he said. "That's why retailers like Apple, J. Crew, The Limited and Club Monaco have given the deepest discounts to students for years." <wwd.com/media-news>

- Is the summer season a washout? - As consumers get ready to celebrate July Fourth, many merchants already have dismissed summer as a washout. Macy's flagship store has racks of summer tops, swimwear and dresses marked down as much as 50%, while luxury retailer Bergdorf Goodman is slashing prices on designer goods by as much as 70%. Meanwhile, piles of clothing as well as barbecue grills, tents and gardening tools are bypassing stores and heading straight to liquidators as merchants try to conserve their cash. Such deep discounting so early in the season is great news for bargain hunters, but it's a worrisome sign that shows a further weakening in retail sales since the end of May. Consumers' confidence in the economy, which had surged in April and May, is projected to be virtually unchanged for June when The Conference Board releases figures Tuesday. And major retailers will release June sales results next week. While unusually rainy weather across a broad swath of the country has dampened business, some analysts wonder whether shoppers are waking up to the harsh reality that the economy won't be getting any better soon - even as consumer spending makes up 70% of economic activity. That doesn't bode well for merchants, which need to get rid of summer inventory quickly to make room for fall goods that start to arrive next month. BMO Capital Markets analyst John Morris estimated that the volume and size of discounts for mall-based apparel retailers he tracks is 10% higher than last June even though inventory is down 20%. <google.com/hostednews>

RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough): ARO

06/30/2009 12:48 PM


Levine's love for retail does not find itself in this name. Peak margins for a company with peak momentum is always worth a shot (particularly when we can make sales here alongside the insiders). Short high. KM


SWHC: Michael Golden, President & CEO, sold 13,758shs ($70k), less than 5% of common holdings. Nicholas Leland, VP of Sales, sold 6,772shs ($35k) less than 5% of common holdings. Ann Makkiya, Corporate Counsel & Sec., sold 7,833shs ($40k) approximately 30% of common holdings. Ken Chandler, VP Operations, sold 3,598shs ($18k) less than 10% of common holdings.

DSW: Doug Probst, SVP, CFO & Treasurer, sold 4,154shs ($40k) after converting 13,000shs of restricted stock units to common shares. Deborah Ferree, Vice Chairman & Chief Merch. Officer, sold 9,010shs ($86k) after converting 28,200shs of restricted stock units to common shares. Kevin Lonergan, EVP & COO, sold 3,195shs ($31k) after converting 10,000shs of restricted stock units to common shares.

DECK: Peter Worley, President of Teva, sold 1,500shs ($106k) or roughly 5% of common holdings as part of 10b5-1 plan.


 Retail First Look: 7/1/09 - sector view