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View from Private Equity

We caught up with select private equity contacts recently who specialize in midsize consumer investments. The prospect of investment opportunity in retail/apparel sector remains bleak. Despite better visibility on the bottom of the cycle and on cash flows, lack of cost-effective financing for PE buyers seems to be the main reason for the minimal activity. The interesting call out there is that when fundamentals become more clear, but outside forces preclude a key buy-side constituent from hitting the bid - that creates an opportunity. There is clearly a wait and see approach whereby potential buyers have the patience to see companies fall under the court's protection before stepping in. With the cost of capital likely going higher, we're likely to see more strategic deals and less PE transactions.

New deals aside, we also addressed the environment for the companies already owned by PE firms. There's been no change to the trend whereby banks and commercial lenders that backstop loans with cash flow as collateral are doing whatever they can to avoid taking control of troubled assets - even when covenants are tripped.  

As for June trends in the mall. Father's day was promising, however traffic subsided post the event with the final week mall traffic was "brutal". Overall, the month did show a deceleration relative to the April/May trends. Interestingly, Canadian mall traffic is mimicking US trends. Despite these trends, there is a sense that the Canadian consumer remains in better shape than their American counterparts.

As for rent renegotiations, we're still not at the point where 'tenant-forced' renegotiations are a slam dunk. Landlords are not looking to bail out struggling retailers whose only hope may be rent concessions. Pier One was also mentioned as an example of a company that is seeing meaningful results from their strategic real estate repositioning.

Finally, there appears to be a growing view among the PE community that if deals are going to get done they will be more focused on medium to large size companies. The rationale here is that scale is key to generating operating leverage and garnering profitable market share gains as the economy improves. Does the prospect of a larger deal synch with the fact that cost of capital is rising? No.  In fact, the only way this makes sense to us is if the PE firms are getting 'safer' with their bets and are offsetting a higher WACC with a lower discount rate on future cash flows.  All in, that spells opportunity to us for names in small/mid-cap land.


- Domestic textile demand increases in China - China's domestic textile demand increased by 5.21% between January and May despite exports fell, according to the China Textile Industry Council. Local clothing consumption climbed from 14% in April to 22.1% in May, even faster than the 21.6% growth registered by Chinese retail. Although the export delivery value was down 8.23% over the same five-month period, the output rise was rooted in domestic consumption strengthened by governmental stimulus policies. However, faster growth for the textile industry is unlikely to kick in the near future as migrant workers and college graduates are still struggling to find work and therefore their clothing expenditure is unlikely to increase soon. <fashionnetasia.com>

- Vietnamese textile and garment exports to Japan increase - Vietnam's textile and garment exports to Japan are expected to surge 20% to $900m-$1bn this year, boosted by preferential export tax rates introduced this month. Textile and garment exports to Japan using materials imported from Japan and other members of the Association of Southeast Asian Nations will enjoy a tax rate of 0%, rather than the previous 5-10% rate, under the Vietnam-Japan Economic Partnership Agreement. <fashionnetasia.com>

- Indian leather exports grew in April but behind for the year - Indian exports of leather and leather products from April 2008-February this year reached $3.3bn, a growth of 2.73% year-on-year, according to the Council for Leather Exports (CLE). In rupee terms, exports grew 16.16%.Based on this trend, the exports for the financial year will be about $3.6bn, well below the $4bn target, CLE stated. Footwear holds a major share of 42% in the total export of leather products followed by leather goods (24.2%), finished leather (19.1%), leather garments (12.35%) and saddlery and harness (2.59%). Major markets for the Indian leather products are Germany with a share of 14.28% followed by Italy (13.2%), UK (11.42%), US (9.56%), Hong Kong (6.23%), France (6.23%), Spain (5.99%), Netherlands (4.22%), Denmark (1.73%), Belgium (1.53%) and Australia (1.52%). <fashionnetasia.com>

- Sri Lanka bullish on future apparel exports - Sri Lanka's Joint Apparel Association Forum (JAAF) is targeting a turnover of over US$ 3.3 billion, through apparel exports this year. "We expect a turnover of US$ five billion by the end of 2011. At present, orders for summer and winter look steady this year, but the SME sectors are going through a bit of a tough time. However, the companies will be better off as soon as the global economy improves. Due to the global economic downturn most western countries will recover soon as Sri Lanka supplies apparel for them, he said. Competition among the apparel industry has grown rapidly - locally and internationally. The large-scale companies will catch up the markets while the SME sector is losing possibilities in the industry as they are unable to provide the orders for high quality products and deliver them on time.  Companies are calling upon the Government to reduce taxes in the export sectors, for exports to grow. <dailynews.lk>

- US trade relations - Apparel executives believe regional trade deals maintain their promise as a model for international trade relations, despite some data raising questions about the benefits. Sourcing executives and trade experts said regional accords such as the Central American Free Trade Agreement and the North American Free Trade Agreement should be a key part of U.S. strategy because they deliver more benefits than bilateral pacts and are more manageable than larger multilateral agreements like the stalled Doha Round of global trade talks. The regional agreements give "large American retail and wholesale operations...the opportunity to look not just at a small-to-medium-sized country" but to a far wider area, said Jeff Streader, senior vice president of global sourcing for Guess Inc.  <wwd.com/business-news>

- Protectionist measures are significantly affected textiles and apparel - Textiles and apparel, along with motor vehicles and parts, iron and steel, and chemical products, have been the manufactured goods most affected by new protectionist measures, such as tariff hikes and antidumping investigations, during the second quarter. A report compiled by World Trade Organization director-general Pascal Lamy said the number of trade-restricting or -distorting measures announced from March 1 through June 19 "exceeds" the number of trade-opening measures "by a factor of more than two." The leading trading powers, or G20, which includes the U.S., China, India, Argentina, Brazil, Germany, the U.K. and Japan, have failed to live up to commitments not to impose restrictive measures that distort global trade. The list of measures identified in the textiles and apparel sector included the initiation of antidumping investigations by Argentina on imports of denim from China, by Brazil on imports of synthetic fibers from China, by Turkey on imports of polyester staple fiber from China and on imports of woven fabrics of synthetic yarn from Malaysia. Other measures initiated in the last few months include the increase in value-added tax rebates on exports of textiles and apparel and new export subsidies by India to cotton farmers, the report said. India has also initiated an antidumping investigation on circular weaving machines from China. The WTO said the impact of the economic crisis on world cotton-mill use is expected to cause a 27% drop in cotton trade to 6.1 million tons and production to dip 10 percent to 23.7 million tons. <wwd.com/business-news>

- Obama and the apparel industry - Most trade experts expect Obama will approve some antidumping and countervailing duty cases, which could have implications for the apparel and textile industry. Some officials believe that the atmosphere in Congress is very hostile to trade. The President's overall trade policy framework remains a work in progress. U.S. Trade Representative Ron Kirk, the point man on global commerce, said last month that Obama plans to outline a new trade game plan in the "near future." The lack of specifics has been another factor in delaying measures on Capitol Hill. Obama took a tough stance on trade during the presidential campaign, singling out the unfair trade practices of China and urging the protection of U.S. workers and industries hit hard. But he has tempered his stance since taking office, balancing his emphasis on enforcement with warnings against protectionism while citing the benefits of more liberalized trade regulations. <wwd.com/business-news>

- Less inventory in retail industry - With a new level of discipline tied to the times, retailers are hoping to eke out more profit with a lot less inventory. Inventory levels at many chains are down 15%  or more from a year ago, but instead of simply going on the defensive against stock gluts and consequent markdowns, stores quickly are learning to make their existing inventories more productive, bringing merchandise into stores closer to when it's needed and being more selective in what they buy and replenish based on actual sales results. <wwd.com/retail-news>

- American Apparel under NYSE review - American Apparel, Inc. announced that it received a letter from the NYSE that the Exchange accepted the company's previously submitted plan of compliance and, pursuant to such plan, has granted the company an extension until August 19, 2009 to regain compliance with its continued listing standards. As previously disclosed, on May 19, 2009, the company received a letter from the Exchange stating that the company failed to timely file its 10-Q. <businesswire.com>

- Macy's has cut the amount of newspaper ad spending in half over the past four years - While classified ad dollars have largely shifted to online sites like Craigslist, Macy's migration away from newspapers has more to do with specific business decisions that make it difficult to imagine newspapers recapturing those lost retail dollars. <paidcontent.org>

- Reebok follows FitFlop and Others in muscle building shoe - Reebok has a sneaker out called Easytone. The sneakers actually tone key leg muscles every time you walk. Easytone uses something called balance pods, which essentially create what Reebok calls "natural instability". In layman's terms, when wearing the EasyTone sneaker, it's like walking in sand on the beach. That particular movement results in toning the gluteus maximus, hamstrings and calves due to increased use of those muscles. Now how cool is that? Miss the gym for a day or two, no problem. Just go about everyday business. Walk the dog, grocery shop, go to the mall, take the kids to the park and do whatever it is you do. As long as you are moving, EasyTone's will be working to keep you toned and fit. <examiner.com>

Retail First Look: 7/7/09 - Reebok Fit Shoe 

- Consultant Toni Yacobian claims potential transactions are far too often overlooked - Yacobian that the industry's great failings is untapped consumer traffic. In their efforts to cope with the recession, she contends, retailers have applied the scalpel to personnel, prices and costs, and scrutinized all assets, except perhaps their most important one - the customers who enter their stores.  The Yacobian Group LLC, a 20-year-old Maynard, Mass.-based consulting practice with a reputation in training to motivate retail staffs and devising operating models to improve the customer experience, has begun offering retailers a new system called CIMS, or Customer Interaction Management Operating System. "It's like an X-ray into the in-store experience to see where it is not being properly delivered, and then it provides a means to set clear goals, from individual sales people right up to the chief executive, to increase productivity from existing traffic," explained Yacobian, the ceo of Yacobian Group. <wwd.com/business-news>

- Christian Lacroix will undergo job cuts - Employees were informed Friday of a restructuring plan that could see the workforce cut to 12 from 124, effectively reducing the 22-year-old fashion house to a licensing operation. Workers were told layoffs could be avoided only if a buyer emerged for the troubled firm, which sought court protection from its creditors in May, caught between an expensive upscaling drive and a steep fall in orders amid the economic crisis. Nicolas Topiol, Lacroix's chief executive officer, said Monday letters of intent were expected this week and offers would be invited until the end of July. The restructuring plan, if activated by the current owner, Florida's Falic Group, would see only a handful of employees kept on board to manage Lacroix's licensing pacts, which include men's tailored clothing with Sadev, men's shirts and knitwear with Rousseau, wedding dresses with Rosa Clara and Mantero for scarves. <wwd.com/business-news>

- Links of London plans US expansion - With a new president for North America, a repositioned product line and the relaunch of its Web site, Links of London is embarking on U.S. expansion. The British brand plans to open flagships in select cities, and has forged a relationship with Bloomingdale's, where in-store Links shops are being unveiled. With a deep-pocketed parent - Athens-based Folli Follie Group - and lower-priced collections with items that can be worn in multiples, the company said it believes it can succeed during the recession. Meanwhile, Links' big sister, Folli Follie, has its own growth agenda. With 250 directly owned and operated stores in Asia, Folli Follie hopes to ultimately open the same number of units in the U.S., said Ketty Koutsolioutsos, co-founder and creative director of the Folli Follie Group. <wwd.com/retail-news>

- Japan's Aeon Posts Fourth Loss in Five Quarters on Declining Clothes Sales - Aeon Co., Japan's second-largest retailer, reported its fourth net loss in five quarters after clothing sales continued to slump amid the country's worst postwar recession. <bloomberg.com/news>

- Adidas Plans to Raise 500 Million Euros in Debut Bond Issue in Currency - Adidas AG is raising 500 million euros by selling five-year bonds, the sporting goods maker's first issue of notes in the currency. <bloomberg.com/news>

- Neiman Marcus appoints new Chief Marketing Officer - The Neiman Marcus Group, Inc. announced today that Wanda Gierhart has been appointed Senior Vice President, Chief Marketing Officer. Ms. Gierhart will report to Karen Katz, President, Chief Executive Officer of Neiman Marcus Stores and Executive Vice President of The Neiman Marcus Group and will be responsible for marketing, market research, advertising, sales promotion, and customer insight activities for Neiman Marcus Stores, Neiman Marcus Direct and Bergdorf Goodman. Her appointment will be effective August 10, 2009. <prnewswire.com>

- JNY is starting to hire again - Shop.org offers a job board for people looking for positions in e-commerce. Latest postings include a director of Web production at Jones Apparel Group; a vice president of merchandising at ideeli; and an e-commerce marketing manager at Oriental Trading Co. Shop.org member companies are invited to post jobs for free. <smartbrief.com/news>

- Seeking Alpha calls out WEYS - Today's research recommendation is Weyco Group (WEYS) because the stock price fell within 10% of the 52 week low during intraday trading. According to Standard and Poor's, Weyco Group distributes, wholesale & retail, men's branded footwear in the U.S., Canada, Europe; offers casual footwear, dress shoes and accessories under Florsheim, other brands. WEYS has increased its dividend for 28 years in a row which gives us ample information about the quality of the company's management. Essentially, WEYS has survived 4 recessions of varying degrees since 1980 (current recession excluded.) As recently as May 28, 2009, WEYS has increased the dividend by a little over 7% from $0.14 per quarter to $0.15. This indicates that management believes that although the current recession could get worse the company will survive. <seekingalpha.com>

- Lacoste ad with losing Roddick - It has become a standard tradition that when a sponsored athlete wins a big tournament, the company runs a full page ad in a newspaper to congratulate them. It was surprising to see an Andy Roddick ad on the back page of the New York Times sports section after his loss. <cnbc.com>

Retail First Look: 7/7/09 - Andy Roddick Lacoste


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

07/06/2009 10:40 AM


Breaking $33 and the hearts of the skinny jeans fans. Covering a -3% down move today. McGough/Levine will re-short it when it's up on another fashion call. KM

07/06/2009 09:41 AM


Booking the gain here. We'll re-short strength, at a price. Barron's being short the weather is obviously company that I don't need. KM


DKS: Goldman upgrading to Buy from Neutral, price target to $20.

JNY: Goldman upgrading to Buy from Neutral, price target to $12.

KSS: Goldman upgrading to Buy from Neutral, price target to $50.

BJ: Goldman downgrading to Sell from Neutral.


LQDT: Jaime Mateus-Tique, President & COO, sold 6,400shs ($65k) as part of 10b5-1 plan, a fraction of 2.6mm shares in total common holdings.

MW: Carole Souvenir, EVP & Chief Legal Officer, ER, sold 3,825shs ($77k) nearly 50% of total common holdings.


Retail First Look: 7/7/09 - SV 7 7 09