TODAY'S CALL OUT
Several analysts are out this morning pumping Aeropostale after seeing the fall assortment. If you want to hinge your investment thesis on the company having the right 'skinny jeans, plaid blazers, and bling' then be my guest. If that's your style then you're probably not reading our stuff anyway.
But what I'll ask is this... Have you ever heard a CEO or a head of merchandise stand before ANY external constituent and say "boy, our brand new product line really stinks..." In all the years I've covered retail I have not.
In the meantime, this is a company operating at both peak margins and sales/inventory spread. It's inventory turns defy gravity relative to industry standards (i.e. 3x ANF) and its cash conversion cycle has come down to about 20 days - which is a level that makes it appear as close to a bank as a retailer can conceivably appear to be. I don't want to penalize success, but I scratch my head in wondering how it can get more efficient.
If you believe in more earnings beats, then you could argue that the current 7.5x consensus EBITDA multiple is actually closer to 5-6x. Still not enough to get me excited, but I won't argue that this is an 'expensive' multiple. But while short interest is not exactly low at 16% of the float, it is down from 37% earlier this year.
A point I think is most telling is in the sell-side sentiment chart below. Even as the stock lost 65% of its value and then bounced 170% off its bottom, price targets remained within a $5 band of the price at that point in time. There are 30 analysts covering the stock, and not a single 'Sell' rating.
The bottom line here is that I won't be so close-minded as to say that fashion does not matter. But we need sheer growth in comp and square footage in order to feed this horse. Let's hope that the bling works for Fall. But neither hope nor bling are part of our investment process. What is part of our process is finding a company where it has something in its DNA that gives it a competitive edge in leading consumer demand as opposed to following it. ARO's inventory turns and speed to market are a plus, but its edge in controlling its destiny is dull.
LEVINE'S LOW DOWN
Some Notable Call Outs
- Online-only retailers including Amazon and Overstock have been rapidly dropping their affiliate programs. According to many state laws, the affiliate programs establish a physical presence in the state in which business is originated and therefore requires the collection of sales tax. It is widely known that the pure-play ecommerce companies have enjoyed a measurable competitive advantage by not having to collect sales tax. With budget shortfalls across the nation, it is not surprising that state governments are willing to wage legal battles in an attempt to drive additional revenues. Net, net this shift in power ultimately hurts the pure play .com companies and levels the playing field for those engaging in a "bricks an clicks" strategy. The pendulum is gradually shifting back to the traditional retailers and away from value seeking consumers ...
- In a late breaking change of events, CA governor Schwarzenegger vetoed an Advertising Tax bill . This in turn has led Overstock to announce it is not ending its affiliate program in that state. While this is a victory for online retailers, it is also an example of the delicate balance being waged between politics, business, and the best interests of consumers. In this case, the outcome favors not only Overstock, but the small, local affiliates that generate income for themselves and the state.
- Heading into the holiday it's worth taking a look one final time at gas prices as we approach another weekend of heavy driving. After rising for a record 54 days in a row, prices at the pump have subsided each of the past 10 days. The average price of a retail gallon is now $2.63, down from the peak on Father's Day of $2.69. Gasoline was $4.09 on this day last year.
- Add soap and fragrance retailer Crabtree and Evelyn to the list of retailers filing for Chapter 11 bankruptcy protection. The company operates 124 stores in the US and has revenues of $100 million. While we expect M&A to take a breather in the retail space, bankruptcies are expected to continue as cost of capital is on the rise and retailers with thin margin structures have little left to cut on the expense line.
Zach's overview of items you're unlikely to find in the general press.
- Overstock ends affiliate agreements in four states over sales tax rules - Following similar moves by two other major e-retailers, Overstock.com is cutting ties with affiliates in California, Hawaii, North Carolina and Rhode Island because of legislation that would require the online retailer to collect sales tax.<internetretailer.com>
- Ralph Lauren makes more plans with the US Olympic Committee - Polo Ralph Lauren has reached a deal with the U.S. Olympic Committee to dress the American team at the Games in Vancouver this winter and in London in 2012. The agreement, which was signed last month, extends one Polo made with the USOC in April 2008 to supply clothes for the Beijing Games. Polo will pay the USOC a royalty of about 10% from the sale of any items featuring the Olympic seal, according to two people familiar with the matter. For the Vancouver Games, Polo has designed zip-up snowflake sweaters, knit caps and parkas, about half of which will bear its polo-player logo. The athletes will wear the clothes during the opening and closing ceremonies. <online.wsj.com>
- Schuylkill Valley Sports clearing Crocs inventory through donations - Sporting goods retailer Schuylkill Valley Sports, with 18 locations in eastern Pa., recently donated hundreds of pairs of Crocs footwear to four local nonprofit organizations, including Liberty Ministries, the Salvation Army of Boyertown, the Pottstown Cluster of Religious Communities and Cornerstone Church's Give & Take operation. "Crocs worked closely with SVS to enable us to donate close to a thousand pairs of Crocs footwear to local groups," said Phil Baumgardner, marketing director and buyer for Schuylkill Valley Sports. "We are always excited to give back to the local community when we can." <pottsmerc.com>
- Juicy Couture brand has big growth plan - It's been only a year since Edgar Huber joined the Liz Claiborne Inc.-owned Juicy Couture brand as its first president, and he's already made strides in his overall growth plan. Huber has opened several new stores worldwide and has big plans to open more. The ultimate goal, he said, is to develop the Juicy Couture brand, which did $600 million in sales last year, into a multibillion-dollar business. Huber said he's now working with Asian license to open faster - he would like to see somewhere between 45 and 50 stores in China alone. Two Juicy stores in Greece are planned to open in November, five will roll out in Dubai (there are three there already), and he is currently in talks to open stores throughout the rest of the Middle East. In addition, Huber is working on South America, where there is currently no Juicy presence. His plan is to first open in Mexico and then move south into Brazil. In the U.S., Juicy stores are planned for openings this month at the Stanford Shopping Center in Palo Alto, Calif., the Galleria at Roseville in Roseville, Calif., and The Summit in Birmingham in Alabama. In total, Huber plans to open about 25 company-run freestanding stores and 18 outlet stores before the end of the year. <wwd.com/retail-news>
- Wal-Mart shakes up retail with health insurance mandate endorsement - Wal-Mart Stores Inc.'s endorsement of an employer mandate for health insurance shook main street retailers on Wednesday. The move gave momentum to proponents of making the business community help pay for the sweeping, landmark health care reform legislation before Congress, and gave a boost to a centerpiece of President Obama's domestic agenda. The ramifications of Wal-Mart's splash into the political debate over health car: a battle with other retailers and businesses that have formed a coalition opposing employer mandates and a government-funded insurance option. The National Retail Federation came out swinging against Wal-Mart's endorsement. <wwd.com/business-news>
- China, Brazil, South America, Leather Industry, and plans to eradicate the US Dollar from trade - The financial crisis which hit world trade in 2008 has prompted China and Brazil to search for other ways of consolidating and firming up their bilateral trade. This involves cutting the US dollar out of their two-way trade and accepting reals and yuan for transactions. After Brazil's President Lula da Silva's visit to China in May 2004, bilateral trade between these two countries began to grow significantly. Lula's visit was followed by President Néstor Kirchner of Argentina in June of that year and then President Chávez of Venezuela followed suit in October. South America was making a conscious effort to penetrate China's huge market and also open the door for reciprocal Chinese investments. There are signs of recovery in demand for all Brazilian exports to China. This recovery includes leather exports and the CICB presence in Shanghai. The question is, can this work? Brazil can accept yuan but if it needs to pay the exporters, it is highly likely that the yuan will be converted into US dollars, after the transaction is completed. This means that the demand for US dollars is still present in the market place. Only if other countries join in this trade which excludes the dollar canthis system prosper. Another drawback is how do you calculate the exchange rate between Brazilian reals, Chinese yuan and Venezuelan bolivares? It's all done by referencing each individual currency to the US dollar. (Dollar cross-rates in technical jargon).Thus the dollar's influence is still present even in transactions which exclude it. To exclude the dollar completely, a great number of nations would have to agree to participate using the yuan, the euro or IMFSDR's. <fashionnetasia.com/industryupdate>
- Update on China's textile and apparel manufacturers - China's textile and apparel manufacturers are battling tough market conditions, but they are still committed to corporate social responsibility, according to a new report from the China National Textile & Apparel Council. Large-scale textile companies suffered negative growth rates in employment and workers at small and medium-sized companies are particularly vulnerable. In Kaiping, a city in southern China's Guangdong Province, more than 40 textile and garment companies - about 10% of all textile and apparel companies in the city - had ceased operations as of October, according to a municipal survey. The report also noted that Chinese companies faced increased pressure from the appreciation of the yuan against the dollar, the rising costs of labor and compliance with state regulations. China's Labor Contract Law, implemented in January 2008, boosted protection for employees and increased their pay and benefits. But it also contributed to rising labor costs. Over half of the 80 enterprises surveyed in the report gave a "cautious welcome" to the law. Many respondents said the new legislation has helped companies develop a more self-conscious appreciation for employee rights, but pessimistic ones predicted the law would lead to a substantial increase in labor disputes and litigation. To help offset costs, the government has issued several tax rebates over the last year and mandated state loans for the textile industry. Survey responses indicate that such state regulation, which effectively relieves financial pressures, enables companies to remain committed to CSR initiatives. <wwd.com/business-news>
- Vietnam and France's footwear trade relationship - According to the Vietnam Leather and Footwear Association (Lefaso), in the first six months of this year, Vietnam's footwear exports to France increased 1.6%. At present, footwear is one of the country's five main exports to the French market and leads other industries in export turnover. Footwear is one of the few commodities Vietnam exports to France that can take advantage of foreign exchange rates, as it pays for the import of raw materials in USD, but brings home profits from sales in Euros, Lefaso said, adding that this has contributed to this major growth in export. The association also said that Vietnam has many opportunities to increase bilateral trade in the near future, especially after a recent visit by a delegation of French leather businesses to Ho Chi Minh City to study the market and opportunities for joint venture with Vietnamese partners. Two-way trade between Vietnam and France has grown to an annual growth rate of 25% since they set up diplomatic ties 20 years ago and Vietnam has maintained a trade surplus with this market since 1997. <english.vovnews>
- India falls back in business report - India ranked 121 among 181 economies around the world in terms of starting a business in India, according to a recent report published jointly by World Band and International Finance Corporation named 'Doing Business 2009'. However, compared to its corresponding report published in 2008, India slightly declined from its earlier position, which was at 114 in 'Doing Business 2008'. The study was conducted across 181 economies that include 46 economies in Sub-Saharan Africa, 32 in Latin America and The Caribbean, 25 in Eastern Europe and Central Asia, 24 in East Asia and Pacific, 19 in the Middle East and North Africa and 8 in South Asia, as well as 27 Organisation for Economic Co-operation and Development (OECD) high-income economies as benchmarks. Pasted from <indiaretailing.com>
- Global Retail Development report ranks the top emerging countries growth potentials - A.T. Kearney's latest Global Retail Development Index report claims that retailers that operate solely in developed markets are faring far worse than those with a foothold in the developing markets. The 2009 report identifies opportunities for retail in emerging nations where competition is weak, real estate is inexpensive, logistics networks are improving and consumers are beginning to spend on branded products. The retail apparel index, a part of the GRDI, analyzes total clothing sales and imports, population and the presence of international apparel retailers. Here are the results: (1) Brazil, which is a $94 billion apparel market, was top-ranked for the second consecutive year driven by its high apparel spending per capita. (2) Romania: Romania recorded the largest jump in the apparel index this year (from 6th to 2nd) driven by growth in total clothing sales and having Eastern Europe's 2nd largest population. (3) China: $114 billion apparel market with an $85 average spend per capita (500 million people in the nation of more than 1.3 billion live in urban markets). (4) INDIA, (5) Argentina, (6) Ukraine, (7) Chile, (8) Russia, (9) Saudi Arabia, (10) Turkey. <wwd.com/retail-news>
- Japan's economic situation - There are indications the health of recession-plagued Japan is improving slightly - but market watchers warn a full-fledged recovery for the world's second-largest economy is far from imminent. On Wednesday, The Bank of Japan released its closely monitored business sentiment survey, the tankan, which showed an improvement from a record dip in March but still came in lower than expected and languished in negative territory. The quarterly index gauging large manufacturers' pessimism about the economy rose to minus 48 from minus 58 in March. Separately, household spending rose for the first time in 15 months, gaining 0.3% in May, although some attributed much of the improvement to an isolated event: the government's 12,000 yen ($125) in cash handouts to each resident. <wwd.com/business-news>
- Japan's Uniqlo comps increase but trends are decelerating rapidly - Uniqlo's same-store sales climbed 6.4%, but declines sequentially from 18.3% growth in May and 19.2% in April. In June, Japanese consumers snapped up summer goods like t-shirts and tank tops with built-in bras. A Fast Retailing spokesman noted that a series of national holidays in April and May helped lift business during those months. Fast Retailing said the number of consumers visiting its stores in June rose 9.5%, although average spending per consumer dropped by 2.8%. This fall/winter, German designer Jil Sander will debut her first collection for the Japanese chain. Uniqlo's monthly sales figures exclude revenue from the brand's stores outside Japan. <wwd.com/business-news>
- Bath and body soap marketer Crabtree & Evelyn Ltd. filed for Chapter 11 bankruptcy - It will "pursue a plan of reorganization to capitalize on opportunities for future growth and profitability, including evaluation of its real estate portfolio, strengthening brand strategies and restructuring of its financial obligations."Cited operational issues such as changes in management that resulted in strategy shifts and inability to renegotiate lease terms for many of its retail sites as some of the reasons for the filing. As of June 29, Crabtree, which has about 950 employees in the U.S., owed $4.1 million to trade vendors and $790,124 to landlords on leases for its retail stores. <wwd.com/business-news>
- Shareholders lawsuit against Gildan dismissed in court - A federal judge on Wednesday dismissed a lawsuit accusing Gildan Activewear Inc. of misrepresenting earnings' potential and two company executives of insider trading. U.S. District Court Judge Harold Baer Jr. in Manhattan said the suit did not adequately show the defendants' intent to deceive, manipulate or defraud investors. The class-action suit combined complaints from groups of stockholders that filed against the Montreal-based vendor after it reduced fiscal 2008 guidance in April of that year, citing problems at a new factory in the Dominican Republic. Investors alleged the manufacturer spent the months before the revision touting the same facility's promise for increased earnings. The investors also accused chief executive officer Glenn Chamandy and chief financial officer Laurence Sellyn of insider trading for realizing combined gross proceeds of $96 million on stock sales. <wwd.com/business-news>
- UK company Thom Browne and its new plan with new CEO - Thom Browne has tapped Josh Sparks as president and chief executive officer, succeeding Tom Becker, who exited the company in April. The designer men's wear firm has also completed the first stage of a recapitalization plan, selling a minority share to Japan-based Cross Company, a manufacturer and specialty retailer.To broaden the brand's appeal at retail, Sparks is planning to introduce price points 20 to 30 percent lower than what's now available in Thom Brown collections, where suits start at about $2,800. "We want to be competitive with the European designer brands, which tend to have more elasticity in their pricing, whereas we have been more niche," explained Sparks, who emphasized even the lower-priced suits would be full-canvas and retain the brand's luxury appeal. Sparks would like to expand distribution from its current 45 stores to about 150 to 200 stores over the next three years. Thom Browne is also close to inking a deal for its first license, which Sparks said could be announced by next week. "Thom Browne has built an incredibly respected and aspirational brand and there are many opportunities to leverage that in licensing. But we want to carefully manage those opportunities and not rush into anything," he noted. <wwd.com/business-news>
- Kmart aides unemployed people of Michigan - Kmart has launched a money-off program for the jobless in its original home state of Michigan. The retailer's Smart Assist Savings Scheme entitles the unemployed to discounts of 20% on own-label staples such as baby products, basic groceries and toilet roll. Kmart is issuing discount cards, valid for six months, to customers who are registered as unemployed. It expects to carry on issuing the cards until January, The Financial Times reported. Michigan has an unemployment rate of 14.1% - the highest in the US, where the national average is 9.4%. Other retailers have implemented similar schemes. Spartan Stores, a 99-store grocery chain based in Michigan, issued discount cards to former General Motors employees and Green Hills, a New York family-owned grocer, runs a Recession Assistance scheme, giving the registered unemployed a 10%. <retail-week.com>
- Sears makes it easier to sign in to its new online communities - Consumers can use their credentials from Google, Facebook and other popular web services to sign on to the MySears and MyKmart forums. Sears says it is the first major retailer to employ the OpenID standard for using credentials across web sites. <internetretailer.com>
- J.C. Penny appoints new general merchandiser - J. C. Penney Company, Inc. announced the appointment of Pam Mortensen as senior vice president and general merchandise manager of Fine Jewelry, effective July 27, 2009. Ms. Mortensen comes to JCPenney from Wal-Mart Stores, Inc., where she previously served as vice president and divisional merchandise manager of their Fine Jewelry and Watch division. She will report to Jeff Allison, executive vice president and general merchandise manager of home and custom decorating. <capitaliq.com>
- NexCen's financial results will finally be released after restatements - Due to financial accounting irregularities NexCen has not provided any financial information since the fourth quarter of 2007. Its 2007 results will be restated. Nexcen's franchise brands that includes two retail franchises: TAF (The Athlete's Foot) and Shoebox New York, as well as five quick service restaurant (QSR) franchises: Great American Cookies, MaggieMoo's, Marble Slab Creamery, Pretzelmaker and Pretzel Time. For the first quarter, NexCen expects to report revenues from its franchise business of $12 million against $10 million a year ago, a 15% gain. First quarter 2009 results fully reflect the acquisition of Great American Cookies and the joint venture interest in Shoebox New York, which were completed in January 2008. On a pro-forma basis, assuming these two transactions had been completed on January 1, 2008, revenues from continuing operations were approximately $12 million for the first quarter of 2008. <sportsonesource.com>
- Beyoncé and Tina Knowles launch footwear, apparel, eyewear, and accessories line - Beyoncé and Tina Knowles announced the upcoming launch of the Sasha Fierce for Deréon collection of apparel, footwear, eyewear and accessories, debuting just in time for the back-to-school season. The capsule collection of apparel and accessories for fall will develop into a deeper assortment for spring '10 with sportswear and sneakers as categories for growth. The shoes for b-t-s, which will range from $60 to $80 for shoes and up to $120 for boots, will also feature more fashion-forward elements, including different styles of studding and unique heel treatments. <wwd.com/footwear-news>
- Nike launches Transformers basketball shoe - In honor of the worldwide premiere of the ultra-successful "Transformers" movie sequel, three limited-edition performance kicks pay homage to the Hasbro franchise. Nike is releasing a Nike Zoom Fight Club, Nike Zoom FP and Nike Sharkalaid in colorways that honor Megatron, Bumblebee and Soundwave, respectively. (The Zoom FP and Sharkalaid styles are $100; the Zoom Flight Club will be $120.) All three styles come packaged to resemble boxes from the toys' 1980s heyday, including J-hooks and original Hasbro graphics. The shoes, which can be purchased individually, became available yesterday at select doors in China, Hong Kong, the Philippines and Taiwan. U.S. fans will be able to pick up the styles at House of Hoops, the basketball-focused Nike-Foot Locker retail collaboration. <wwd.com/footwear-news>
MACRO SECTOR VIEW AND TRADING CALL OUTS