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RETAIL FIRST LOOK: VFC - I DON'T GET IT

16 JULY 2009

TODAY'S CALL OUT

VFC is quickly rising to the top of my 'how the heck can they make the quarter' list.  Levi's all-around weak results on Tuesday were rather telling (Levi has a bigger denim biz than VFC). Denim is not exactly knocking the cover off the ball right now. VFC's high margin The North Face business is slowing, company-wide retail is having a tough go at it this quarter, and Nautica is - well, Nautica. Make no mistake - this is a deal story. VFC needs an acquisition big time, and I don't like stories that hinge on buying assets. With ZQK shoring up its balance sheet it no longer needs to sell DC shoes (which VFC would like to own) so it comes as no surprise that VFC is throwing  its hat in the ring for Eddie Bauer. Not sure if I get that one. One might ask if an Eddie Bauer deal is meaningful enough to save 2H numbers. I think not.  Eddie Bauer has just shy of $1bn in revs, and barely $10mm in EBIT. This is a 'fix me' story. Even if VFC got it for free, it would hardly be accretive. If it only got the more profitable pieces, then it takes up the complexity of the transaction. The bottom line is that I am at $4.40 for this year, and am struggling to get there. We could conceivable see a $0.40 miss from the Street's $4.84. 

LIZ better aligning comp with shareholders? Ok, was I the only one was bowled over to see that Bill McComb's employment agreement was re-upped for 3-years just 6 months after being renewed in December? There's always a reason for such actions, and I can assure you that this one was not because 'the stock price has done so dang well that we gotta stay married.' I have a meeting with LIZ in a week's time - so this will be an important issue to delve into. But in reviewing both agreements with my colleague Michelle Leder, it appears that the only meaningful change (aside from duration) is higher severance in the event of a change in control trigger.  These things can always be interpreted many different ways, but the bottom line from my perspective is that he is getting paid more to the extent that this puppy gets flat-out sold.  I like that.

LEVINE'S LOW DOWN

Some Notable Call Outs

- WMT Goes Samurai?  Interesting speculation that Wal-Mart might reopen the Samurai Bond market for US investors. Really mixed signals there from our perspective. On one hand, it's good for the companies that can do it... i.e. those that have the trust of those that could buy the debt, and can presumably leave the cash outside of the US to fund growth instead of repatriating cash and getting dinged with tax penalty. But not a good signal when a major US stalwart like Wal*Mart finds Japanese soil a better source of funds than the Ozarks. Keith summed it up in fewer words... "Bad for patriots.  Good for capitalists. The US capital markets are no longer endowments."

- Looking below the surface of Wolverine's (WWW) inline 2Q results reveals some interesting and noteworthy trends. First, the company reported there was an acceleration in same store sales in the middle of the quarter in its owned retail stores and ecommerce business. This is consistent with weekly NPD data we watch carefully, but also a noteworthy improvement as we inch closer to the key back to school selling season. Second, the company offered some very detailed insight into trends in at-once and futures orders. The takeaway here is that the uncertainty in the US retail environment remains high. The shift from futures to at-once is substantial, with lead times shrinking by 5 weeks y/y for customers requesting delivery at-once and by 7 weeks for futures orders. Two-thirds of the orders in the quarter were categorized as "at-once" vs. 50% in 2Q08. The net trade off here is higher gross margins at the expense of generally higher inventory levels.

- At a conference yesterday, Gymboree management was asked a question about sourcing opportunities and the impact on product cost reductions. Management responded by saying there are still many opportunities out there and that they are testing Africa as a new sourcing alternative. This is the first mention I've seen of Africa for apparel product procurement, ever.

- While still a relatively small player in the denim market, Joe's Jeans had some interesting commentary on pricing in the premium denim category. The company recently introduced an opening price point product at $138, which was below the $145 to $179 range in the existing line. Management expected the lower price point to do well, especially in this environment. However, results have been below expectations leaving the belief that the fashion denim category purchase is driven more by emotion than by price. While we can't disagree with reality of this data, we can say that the market for premium denim is certainly smaller than it once was. There will always be a niche for premium goods, but the current environment will keep a cap on the market opportunities that were once thought to be endless.

MORNING NEWS 

- US Commerce Secretary Gary Locke working with China to open up trade relationship - China must do more to open its domestic markets to U.S. goods, services and investment as the countries seek to combat the global economic crisis, U.S. Commerce Secretary Gary Locke said on Wednesday.  Locke, on his first official visit to China, said U.S.-China relations were the most important trade relationship in the world, and he outlined crucial issues to be jointly addressed. Chief among them are climate change; working to lower China's trade surplus and increase its domestic consumption; speeding up currency reform, and avoiding protectionist policies amid the financial crisis. In Washington, the International Trade Commission said Wednesday, it has initiated the first trade remedy investigation of textile products from China since quotas were lifted at the end of last year. The ITC said in a Federal Register notice it received a complaint on July 9 that "narrow woven ribbon with woven selvedge" from China and Taiwan was being dumped into the U.S. market or is being subsidized in ways that injure U.S. companies. The petition, filed by Berwick Offray LLC and subsidiary Lion Ribbon Co., referenced the lifting of the textile and apparel quotas as a key factor. A public hearing on the matter is scheduled for July 30, after which the ITC will issue its decision on whether there is sufficient injury to the U.S. industry for the case to proceed. A determination should be made by the end of next month, according to an ITC spokeswoman. <wwd.com/footwear-news>

- India's cotton exports expected to shrink from lighter Chinese demand - India's cotton exports are expected to shrink for this year due to decreasing Chinese demand and lower production combined with higher state purchase prices, according to the Cotton Association of India. Exports are likely to drop 59% to 3.5 million bales in 2008/09, with total output expected to fall 7.4% to 29.18 million bales. China, which is experiencing a slowdown in its textile industry affected by the global economic crisis, is the largest destination for Indian cotton, accounting for over 70% exports. <fashionnetasia.com>

- No sign of Vietnamese footwear recovery - There is no sign of recovery in Vietnam's footwear sector for the year despite recent uptake of textile and apparel exports in the last couple of months.  According to Vietnam Leather and Footwear Association,  footwear exports in the first five months of 2009 can reach US $2 billion compared to the target of $5 billion. The European Union accounted for a majority share of footwear exports from the country and the sector has also been able to increase exports to the US by 9%, when compared with the same period of 2008, the association said. <fashionnetasia.com>

- California lawmakers appeared close to a deal late Wednesday to resolve the state's budget crisis - Economists said the budget circus has created widespread uncertainty, which is a drag on the state economy, as the engines of economic growth - large employers and consumers - stall until they can be reasonably confident the government has its house in order.  Like other apparel designers struggling through the recession, Karyn Craven, founder of Burning Torch, a decade-old Los Angeles-based contemporary apparel brand, has narrowed her focus to survive. She downsized her staff and trimmed the company's offerings by about 30 percent, focusing on unique pieces using vintage or recycled materials. The state has been paying creditors with IOUs for only the second time since the Great Depression because Gov. Arnold Schwarzenegger and the legislature have been unable to agree on how to close a $26.3 billion budget deficit. <wwd.com/footwear-news>

- CIT Group's government funding looks bleak - CIT Group Inc. said late Wednesday it has been told there is "no appreciable likelihood" of government funding in the near term. <sportsonesource.com>

- Eddie Bauer may be headed to a liquidation sale - Reports state that Monarch Alternative Capital and Anchorage Advisors, the two lenders that control Eddie Bauer's $200 million in debt, may bring in Hilco Consumer Capital and Gordon Brothers to create a bid that would liquidate Eddie Bauer's stores. <sportsonesource.com>

- Toning footwear that promise to firm muscles are expected to become a $100 million category in 2009 - Yet, it's still a category in its infancy. Brands such as MBT, Ryn and FitFlop have earned a cult following, broadening their distribution significantly in the last year or two, and now mainstream brands such as Reebok and Skechers are getting in on the action. More major brands are sure to follow, said Matt Powell, a footwear analyst with SportsOneSource. "It's still emerging at this point, but it's starting to feel like its going to be a really big deal," he said. "People are starting to talk about it the way they talked about aerobics back in the mid-'80s." Mr. Powell estimates the category will reach $100 million in retail sales this year. And though that's a fraction of the roughly $1 billion walking category and $5 billion running category, he says toning footwear is the kind of thing that could "catch on like wildfire." "Pretty much everybody is aware of it, but some have chosen not to play yet," he added. "This could revive the walking category, which has been dormant for 10 years." <adage.com>

- CNBC highlights Under Armour's Recharge suit - The Recharge is a compression suit that the company has designed for athletes to wear for 24 hours after their big workouts. Under Armour says it helps reduce swelling and soreness time and re-energizes the body for the next workout. "Right now we're seeing this on athletes across all major sports leagues -- NHL, NFL and MLB -- so it's starting at the top level," said David Ayers, Under Armour's director of product creation. "But this is a science that can benefit all athletes, from guys and girls just getting off the couch for the first time and are just going out for a run and feeling aches and pains the next day. It's as much for them as it is for the world class athlete." Under Armour worked with the University of Connecticut to test athletes and to support the claims for this product. For optimal results, the company recommends athletes put it on within two hours of finishing a workout and wear it for 24 hours. Both the top ($99.99) and the leggings ($89.99) are being sold separately and could be seen as steeply priced in this economy. Ayers says the cost is all relative. <cnbc.com>

- Footwear CPI prices increased 1.6%year over year in June - Footwear prices increased 0.2% in June and advanced 1.6% from a year earlier, the Labor Department said Wednesday in its Consumer Price Index. Women's footwear prices declined 0.3% in June, and dropped 0.9% in 12-month comparisons. The cost of men's footwear declined 0.5% in June, while rising 2.1% year-over-year. Boys' and girls' footwear prices rose 1% in June, and spiked 6.4% compared with a year earlier. Retail apparel prices, which include footwear, rose a seasonally adjusted 0.7% in June while advancing 1.5% compared with a year earlier. Apparel prices declined 0.2% in March, April and May. Prices for all goods and services advanced 0.7% in June, but declined 1.4% year-to-year. The monthly increase was driven by a significant jump in gas prices. <wwd.com/footwear-news>

- LLBean and Sears top the list of online website availability and quality connection in June - Web shoppers could access a top 50 retailer web site with a high broadband connection an average of 98.90% of the time in June. That availability compares with an average of 91.88% for a low broadband connection and 74.49% for dial-up, says Gomez Inc. The web retailer with the best high broadband availability rate in June was LLBean.com at 99.76%, followed by Sears.com at 99.64%, Newegg.com at 99.62% and ColdwaterCreek.com at 99.59%. Sears.com also had the most consistent low broadband and dial-up availability in June at 98.61% and 98.04%, respectively. <internetretailer.com>

- Bill Gates ups his stake in JJB sporting goods company - Billionaire Bill Gates has taken a stake in embattled sports retailer JJB. The Microsoft tycoon made the acquisition through the Bill & Melinda Gates Foundation, the philanthropic organisation created to "help all people lead healthy, productive lives". On Tuesday the foundation, which is also supported by legendary investor Warren Buffett, increased its holding from 7,072,405 shares to 7,872,405 taking the stake to 3.14%. <retail-week.com>

- Wal-Mart to close deal on acquisition of Russian retail real estate company - According to unofficial reports of retail market insiders, Wal-Mart Stores Inc. has initiated negotiations to acquire 100% stake in the Russian retail real estate company OOO Torgovy Dom Kopeyka which owns 49 properties in Russia. One of the top managers of Finansovaya korporatsiya URALSIB OAO said that Wal-Mart made a preliminary written offer in June. According to this manager, Kopeika has not accepted the offer formally yet, but it is planning to do it in August 2009. Nikolay Tsvetkov may keep a minority stake in the company. It is estimated that Kopeyka may be worth between $280 million and $630 million. Esmerk reported that Corporate Relations Director of Wal-Mart in Russia and Eastern Europe, Konstantin Dubinin, has not commented on this information.

- Wal-Mart going green and leading the way - Wal-Mart is expected to introduce an index that would determine the social and environmental impact of all the products it sells today during a Web cast of its Sustainability Milestone Meeting. The index could help buyers decide what items to put in stores; consumers referring to the index could see how brands compare in the sustainability department. The move has lots of implications, including potentially higher costs for manufacturers. There could also be more competition among brands for shelf space as manufacturers vie for higher rankings. The initial setup for new methods of manufacturing might be a cost added for Wal-Mart's producers, but long-term, it certainly will be a benefit. <wwd.com/retail-news>

- UK lingerie supplier files for bankrupcty - Lingerie supply giant Intimas has collapsed into administration after it was hit by the weak sterling and tough trading. <drapersonline.com>

- Ossie Clark label closing - The iconic Ossie Clark label, which relaunched last year, is shutting down. "Due to market conditions, developing the business has been challenging and the decision has been made to cease trading,'' a company spokesman said Wednesday. Brothers Marc and Julian Worth, clothing business veterans, hoped to turn Ossie Clark into a global designer brand. They had an exclusive licensing deal with Alfred Radley, a manufacturer who purchased Clark's business in 1968. Marc Worth never disclosed how much he paid for the license, although he told WWD in 2007 he planned to invest "a seven-figure sum'' in the overall project. <wwd.com/business-news>

- Yolanda Cellucci's 41 yr old bridal shop shuts down - After dressing tens of thousands of brides in the last 41 years, Yolanda Cellucci will close her one-stop bridal and ready-to-wear boutique, salon, spa and cafe in Waltham, Mass., next month. <wwd.com/retail-news>

- New board of advisors for men's footwear company Vael - Bourgeoning men's footwear and accessories company Vael unveiled a new creative board of advisors Thursday to assist the growing brand. The Santa Barbara, Calif.-based brand, which launched its collection of shoes and bags for fall '08 and has been tapped to create a special-edition shoe for the Project trade show in September, has recruited a group of advisors with longtime connections to the streetwear market, including the founders of Stussy and Mossimo. "We have put together an advisory board of iconoclasts who represent the best and most creative minds in the fashion industry," said Vael founder and Creative Director M. Coleman Horn, in a statement. "These are pioneers in the fashion industry ... and Vael is fortunate to have their support and expertise as a driving force behind our success as a new brand." <wwd.com/footwear-news>

- U.S. Army secures footwear licensing deal - A line of U.S. Army-trademarked footwear and bags from the Philip Simon Group will be shown in August at MAGIC. The deal was brokered by The Beanstalk Group, which represents the U.S. Army. The multiyear deal will see the development of fashion and athletic footwear and bags featuring vintage Army aesthetics and street-chic styles. "We want to create a footwear line that expresses and conveys the ideals of the U.S. Army, but in a fashionable way," says Philip Chemla, president of PSFG. "This line will embody the idealistic aspects that define the U.S. Army and translate them into functional and fashionable shoes and bags. The patriotic homage combined with bright accent colors and cool styles will appeal to consumers across the board." <licensemag.com>

INSIDER TRADING ACTIVITY:

LIZ: Andrew Warren, CFO, sold 2,837shs ($7k) less than 10% of common holdings.

LIZ: Nicholas Rubino, SVP & Chief Legal Officer, sold 434shs ($1,100) less than 5% of common holdings.

ARO: John Howard, Director, sold 2,093shs ($75k) less than 5% of common holdings as a charitable contribution.

MACRO SECTOR VIEW AND TRADING CALL OUTS

Retail First Look: VFC – I Don’t Get It - SV 7 16 09