RETAIL FIRST LOOK: MORE OF THE SAME
29 JULY 2009
TODAY’S CALL OUT
If I had to sum up the reporting over the past 24 hours its “same old same old”. Inventories remain tight (if not tighter in the case of COH) allowing gross margins to continue to expand. SG&A is still in check across the board (with the exception of COLM). Revenues were expected to be lackluster and for the most part they are right inline. In looking back at the first quarter results for each of these names, very little has changed. The comments we made on COLM about earnings heading higher despite topline pressures are playing out as evidenced by the beat. CRI appears to be truly on offense and the dynamics there remain clear. Real topline growth is driving EBIT expansion. The retail stores are working even as the mass channel struggles a bit (likely still a Wal-Mart issue although we’ll find out on the call).
In looking at COH, last quarter we spoke about driving a truck down the middle of it, separating the bull and bear case on the name. This also still holds true. On one hand the inventories are finally in check but to get there gross margins have eroded meaningfully and the company is altering its mix dramatically towards lower ticket product at $300 or below. I’m also concerned about the timing on stepping up China. Clearly there is a market opportunity there but the addition of 15 stores this year seems like an attempt to drive revenues as the U.S and Japan continue their slide. I still think there is more “adjusting” to be made from a stock perspective as a bottom needs to form on the company’s EBIT margin. The question here is can the company hold a low 20’s margin with a saturated store base, lower price points, higher penetration of outlet stores, and rapid expansion in China?
So where does all this leave us? Pretty much where we were at the end of last week before we saw these results. We’re still looking out to 2010 to see where the real opportunities lie beyond SG&A cuts and tightly managed inventories. Based on the last 24 hours, CRI is the name that stands out as fitting in the mold of market share gains balanced with investment, which is ultimately creating profitable growth. Clearly with positive same store sales momentum in both brands, there is evidence that the investment made in product and marketing is now paying off.
COH- Key difference here from last quarter is that they finally got inventories more in line with sales. Overall the topline was slightly weaker and gross margins continued to erode. SG&A was better controlled and share buybacks helped to make the eps. Announced stepped up growth in China which appears is an attempt to offset softness domestically and in Japan. Also shifting the mix to 50% of price points below $300, which is a big move off a base currently at 30% of the mix. This suggests to me while margin compares are easy and there is a chance to firm things up on here with full priced selling at lower price points, it will be harder to drive the topline in the absence of a meaningful uptick in traffic or units sold.
COLM- The key callout here was gross margins up, but SG&A also up dramatically. Results came in at a loss of $0.29, we were at ($0.26), and the Street was lower at ($0.41). Inventories also came out of the quarter high, with company citing earlier receipts of fall goods as vendors capacity has improved in Asia which allowed them to ship earlier.
CRI- Bottom line, huge beat and clean. Essentially the same dynamics as last quarter. Reported $0.23 vs Street at $0.05. We were at $0.13. Key source of upside was GM, up 357 bps we were looking for flat gm’s. SG&A up 84bps, we were looking for up 18bps. Bottom line here is that the brand momentum continues at both Carters and Osh Kosh with at least one more qtr of easy compares. This is one of the few names in our entire universe that is in the “Sweet Spot” of our Sigma analysis.
*If you need assistance interpreting our Sigma charts let us know…
LEVINE’S LOW DOWN
Some Notable Call Outs
- Cleary dictated by changes in consumer behavior, Coach is rebalancing its assortment to reflect more affordable price points. Handbags priced at $300 or below represented 30% of the assortment in FY09 and are expected to represent 50% of the mix in FY’10. With traffic under pressure and price points coming down as a result of the mix shift, it is unlikely that same store sales momentum will pick up meaningfully in the intermediate term.
- With intense focus on Under Armour’s footwear business, it’s important to remind everyone where the product line stands from a maturity standpoint. The company just anniversaried the launch of its non-cleated trainers in May and just reported its second quarter of sales for the running product. With basketball on the horizon, CEO Kevin Plank reminded investors on its 2Q conference call that the footwear category as a whole has an opportunity to improve by 1000+bps as benefits from scale, sourcing, and improved execution kick in.
- Based on comments on SuperValu’s earnings conference call coupled with recent commentary and results from SWY, it appears that food retailers are operating in one of the most volatile environments in recent history. SVU management commented that sequential change in inflation was one of the greatest ever, with the rate going from +5% to +2% in 3 months. Additionally, the company’s promotional mix is the highest in company history and trading-down continues to increase at an accelerated rate.
- German womenswear company files for Chapter 11 equivalent - German womenswear firm Delmod International, the parent company behind womenswear brands Delmod and Hirsh, has fallen into administration. It is unclear at present what effect the insolvency will have on the UK market. Delmod is the second German mainstream womenswear brand to come into difficulty in the last month. Escada, the German luxury womenswear group, sold off its Cavita, Apriori and and Laurel brands earlier this year to help it raise cash. <drapersonline.com>
- Global trade statistics for US imports of furniture indicate double digit declines - PIERS Global Intelligence Solutions has released trade statistics that gauge the recession's impact on the top U.S. import commodity by volume, furniture. In first-quarter 2009, inbound containerized shipments of furniture declined 19.2%. Based on first-quarter results, PIERS is forecasting a 16.52% decline in furniture imports for 2009 compared to 2008's shipments. This year's projected inbound furniture is expected to drop 27% from the peak in 2005. Overall, 2008 was a year in which furniture imports grew 73.55% -- but, against 2007's steep drop of 48.39% -- this is seen as regaining ground lost when the U.S. housing bubble went bust. Now global recession looks likely to reverse the recovery. An analysis of 2008 trade data on source countries shows that China, accounting for 62.4% of total known value of imports, was the top supplier of furniture to the U.S. However, China's rate of growth in furniture imports -- 66.73% -- was surpassed by Vietnam, with a 154.93% growth rate, albeit from a lower volume base. As a result, China's share of the U.S. market for imports dropped 2.83%, while Vietnam gained 2.74%. This is evidence of the continued shift in production away from China to lower-cost countries, a trend that is expected to accelerate post-recession. California led the states as an importer. North Carolina ranked as the number 2 importer, yet another indication of the furniture sector's globalization. Florida was the top furniture exporting state, followed by New Jersey. <prnewswire.com>
- Nielsen forecasts a modest gain in the Back to School Season - This year, as the U.S. continues to be in the grips of a recession, Nielsen is forecasting a dollar sales rise of 0.4% to 1.3%, a pace below the growth achieved in 2008. Unit sales will drop 5.5%. “Unlike the winter holidays, back to school shopping, to some extent, is not viewed as discretionary by consumers. Kids must have certain items at the start of the new school year. That said, we expect sales to increase at an extremely modest level in dollar terms in 2009. The nation is firmly in the midst of recession, so consumers will spend their money carefully, as they have for the better part of a year, and focus on purchasing the essentials,” said James Russo, Vice President, Global Consumer Insights at The Nielsen Company. One peripheral category which is forecast to gain is bottled waters. Often considered a discretionary item, bottled water is consumed as a staple, and is expected to out-pace juice sales with growth of 3.57%. “The winners this season will be retailers who offer strong discounts and appeal to the consumer’s desire for savings and value. Look for gains from supercenters, dollar stores, drug stores and to a lesser extent, club and grocery stores,” said Russo. <brandweek.com>
- Group of apparel and footwear companies ask US government to restore democracy in Honduras - A group of apparel and footwear companies have sent a letter to Secretary of State Hillary Rodham Clinton and other officials urging the Obama administration to help restore democracy in Honduras, while calling for an adherence to civil liberties in the wake of a military coup that deposed President Manuel Zelaya in June. Nike Inc., Adidas Group, Gap Inc. and Knights Apparel sent letters late Monday to Clinton, as well as to José Miguel Insulza, secretary general of the Organization of American States, and Thomas Shannon, assistant secretary of the Bureau of Western Hemisphere Affairs at the State Department, outlining their concerns over the political instability in a country where U.S. companies produce millions of dollars worth of apparel annually. The coup at the end of June has not disrupted apparel production in Honduras, according to sourcing executives, but they are concerned about long-term infrastructure breakdowns and potential problems if the new government does not adhere to internationally recognized standards on workers’ rights. <wwd.com/business-news>
- EU Commission will adjust rules benefitting online retail - The European Commission on Tuesday said it plans to adjust the rules governing the rights of retailers to sell their goods on the Internet in an attempt to make more goods available online. According to existing European Union rules, due to expire in May 2010, brand owners such as LVMH Moët Hennessy Louis Vuitton SA and Nike Inc. can dictate who sells their goods and in what environment. If a store sells a brand owner's goods, the brand owner can forbid the store from also selling those goods on its Web site. The commission said Tuesday that distributors should be able to sell and advertise goods online as they see fit. However, the commission said that a current restriction should be preserved: brand owners should be able to insist that a distributor that sells goods online should sell the goods in regular stores. That way, online entrepreneurs can't unfairly benefit from the brand recognition or luxury image created by regular shops and manufacturers. The commission's plans aren't final. The ruling is a setback for online-only retailers such as eBay Inc., which has argued that its users should be allowed to sell goods online without a brick-and-mortar store. <online.wsj.com>
- Brazil's footwear exports have tumbled during first half of 2009 - Shipments dropped 28.4% year-on-year, according to figures from the Brazilian Footwear Association Abicalçados. The country earned $728.7 million through footwear exports in H1, while imports increased 11% to $172.8 million. In terms of volume, footwear exports fell 26.5% to 65.8 million pairs in H1, while exports to its major market, the US, fell 31%. In the UK, Brazil's second most important market, purchases fell by 33.4%. <fashionnetasia.com>
- Indian government to ban child labor - Indian government has convened a meeting of exporters associations to eradicate the child labour problem in factories, according to Minister of State for Labour and Employment Harish Rawat. This came about after US casualwear retailer GAP has announced to stop all sourcing work to Indian garment manufacturers. Rawat said ecisions were taken regarding proactive steps such as external social audits, collaboration with local administration, NGOs and social activists, concerted action in child labour prone districts, examination of supply chain to ensure that exporters, suppliers and subcontractors conform to child labour laws. <fashionnetasia.com>
- Japan's Retail Sales Fall, Extending Longest Losing Streak in Six Years - Japan’s retail sales fell for a 10th month in June, extending the longest losing streak since 2003 as job losses and wage cuts forced households to trim spending. <bloomberg.com/news>
- Its official, California retailers and vendors avoid any tax hikes in new budget - California Gov. Arnold Schwarzenegger signed a budget package on Tuesday to close a $26.3 billion deficit after vetoing hundreds of millions of dollars in state spending. Retailers and vendors in California were spared increased taxes and fees, but the sweeping cuts range from state parks to AIDS prevention and treatment programs. The spending plan also relies on accounting maneuvers and borrowing as California struggles with rising unemployment and home foreclosures, as well as reduced consumer spending. <wwd.com/business-news>
- Timberland Co. hires new VP and GM of North America - The Timberland Co. named Mark Bryden to the newly created position of VP and GM of North America, effective immediately. He will be responsible for all North American operations at the Stratham, N.H.-based firm, including marketing, retail, wholesale and e-commerce, reporting to Jeffrey Swartz, president and CEO. Bryden was most recently president and GM of SmartWool Corp., acquired by Timberland in 2005. According to a Timberland release, during his tenure there, the company experienced record growth with the launch of sport and lifestyle apparel and expansion into international markets. Prior to joining SmartWool, Bryden spent 26 years at Levi Strauss & Co. in a variety of sales and marketing positions before moving into its international and supply chain management organization. In a separate move, SmartWool announced that Mark Satkiewicz, VP of sales, has been promoted to fill the position of president and GM. <wwd.com/footwear-news>
- Guess? Co-Founder Georges Marciano Must Pay Former Employees $370 Million - Guess? Inc. co-founder Georges Marciano must pay $370 million in damages to five former employees who were defamed and suffered emotional distress when he sued them for embezzlement, a plaintiffs’ lawyer said. <bloomberg.com>
- Wal-Mart Prices First U.S. Samurai Bonds Since Lehman Default in September - Wal-Mart Stores Inc., the world’s biggest retailer, sold the first samurai bonds from a U.S. borrower since Lehman Brothers Holdings Inc. defaulted on its yen debt in September. <bloomberg.com>
- Nordstrom is to introduce an Oracle Retail application to improve the size distribution of clothing in its stores - The size profile optimization system will ensure a better alignment of the right merchandise in the right sizes to meet customer demand and improve customer service. It will analyze sales data to create size profiles for its clothing merchandise that are unique to each store. These profiles will assist with decision-making around initial ordering of product, and then allocation and assortment planning decisions. The system can also be used to improve availability, and reduce end-of-season markdowns due to size limitations. <retail-week.com>
- Golfsmith re-launches e-commerce site - Golfsmith International Holdings, Inc. announced that it has redesigned and re-launched its e-commerce site at www.golfsmith.com with a variety of new features and social marketing tools. <sportsonesource.com>
- Geox plans to have flat sales growth in 2H after 4% growth in the first half of 2009 driven by flatish footwear and strong apparel growth - Despite taking a 28% hit on its bottom line, Geox SpA reiterated its plan for full-year sales to be in line with last year. The Italian footwear company's sales increased 4%. Footwear, which accounts for 91% of the company’s sales, increased by 1% while apparel grew 43%. <wwd.com/footwear-news>
- Asics strong running sales has driven its forecast for 2010 to high single digit growth - Asics America Corporation is forecasting high-single-digit growth for the 2010 fiscal year, thanks to continued growth in its running footwear business and strong sell-in for its apparel business. The company is estimating that revenues will increase between 6% and 7% for the first half of the year, and about 8% for the entire year. <sportsonesource.com>
- Luxottica's well-balanced brand portfolio and the performance of the Ray-Ban and Oakley brands helped drive sales up 3.5% in Q2 - Luxottica, which has eyewear licenses with Bulgari, Burberry, Chanel, Dolce & Gabbana, Donna Karan, Prada, Salvatore Ferragamo and Versace, among others, said the economic environment today “is less uncertain albeit certainly still challenging,” with North America “still suffering,” although June results were positive. The European market is picking up, Luxottica said, while business in Japan fell, as did emerging markets, “affected by the decline in the tourism industry.” <wwd.com/business-news>
- Lane Bryant's popular Right Fit(TM) collection continues to deliver what women want with the launch of the Right Fit straight leg jean - "Our Right Fit straight leg jean features classic five-pocket styling that pairs beautifully with boots, flats and even stilettos," says Brian Woolf, President, Lane Bryant and Cacique. "Our customers have been asking for a straight leg jean and we know they're going to love this new addition to the already popular Right Fit collection." While many other brands have recently folded their plus size collection or have relegated their lines to online-only sales, Lane Bryant continues to cater to the fastest growing fashion segment in America. "We listen to our customers. We know they want fashionable, flattering clothes and our Right Fit straight leg jean proves that women of all sizes can wear the latest fashions and look great," says Woolf. The new straight leg jean, retailing for $54.50, isn't the only exciting announcement from Lane Bryant. The retailer has paired up with the producers of the brand new dating show on Fox, "More to Love," for a dream date sweepstakes. <prnewswire.com>
- While the rest of the retail market struggles, sales of men's skinny jeans are going strong - Men's premium jeans, a small part of the overall market, have been a bright spot in the current recession. Men's jeans sales totaled $5.31 billion in the United States for the 12 months ended April 30, according to market researcher NPD Group, down 2% from a year earlier. But sales of fashion jeans priced $50 or more rose 8%. Denim brands, retailers and men's fashion magazines have relentlessly promoted skinny jeans. And pop stars such as Justin Timberlake and Kanye West, by wearing skinny jeans, have given something resembling permission for style-conscious young men to wear them. The style can be unforgiving, but many makers of men's jeans are trying to be more accommodating. Levi Strauss & Co. added room in the seat and thigh in its newest skinny jeans for men. True Religion added what it calls a "four-way stretch" Spandex material to its line of men's jeans selling for between $172 and $398. 7 for All Mankind, whose men's jeans sell for between $155 and $225, widened the thigh and elongated the distance from the crotch to the top of the waistband on the new skinny men's jeans it will start selling this month. After men complained the thighs on its jeans were too tight, the label, owned by VF Corp., had male employees at its Los Angeles headquarters walk, squat and bend in prototypes of the new look. It sold the style, called "Jared," at its Los Angeles stores as a test. Customers liked it, so it is going national. Gap's new men's slim jeans, which it calls "Authentic," contain three-quarters of an inch more fabric in the thigh and 11/2 inches more in the knee than its current skinny jeans do. <mlive.com>
- Jack Rogers is to become a lifestyle brand - Jack Rogers, essentially a one-note fashion story with its widely popular, oft-copied Navajo sandal, is about to be blown out into a lifestyle brand. Global Reach Capital last November quietly bought the brand from Miami-based JMR Management, manufacturer of Jack Rogers, and has formed a team of merchants, designers, production, marketing, financial and sales personnel to roll out new Jack Rogers products and categories. On the drawing board: sportswear, dresses, handbags, shoes, boots and a wider selection of sandals, and the first Jack Rogers retail stores, for the upcoming resort and spring seasons. Global Reach is partnering with the Peter Marcus Group on shoe manufacturing, with Modco, a branding company helping with the visual presentation, and with JMR, which continues to be a key supplier. “Three years ago we formed Global Reach Capital to invest in great brands. Jack Rogers has been on our radar since the beginning,” said William M. Smith, managing partner of Global Reach, chairman of Jack Rogers and former president of Financo. He wouldn’t disclose the purchase price for the brand, which has an estimated volume between $10 million and $12 million. “There are more dollars set aside to build the brand than we paid for it,” Smith said. “If in five years we don’t do 10 times the volume, we are going to be very disappointed.” Denise Johnston, the former Liz Claiborne group president and president of Gap men’s, women’s and adult accessories, has been named Jack Rogers chief executive officer. She said Jack Rogers shops in the 1,000-square-foot range are being planned, with the first expected to open around February 2010 in Manhattan, followed by units in the Hamptons, and Palm Beach or Bal Harbour, Fla. <wwd.com/markets-news>
- Comfort footwear brand Alegria Shoes has named Sheri Poe to the position of chief marketing executive officer - Poe, founder of Ryka athletic footwear, was most recently CEO of U.S. operations at MBT. Her duties at Alegria, owned by parent company Pepper Gate Footwear in Los Angeles and known for its rocker-bottom looks in a wide range of novelty materials and colors, will include overseeing branding and marketing. <wwd.com/footwear-news>
INSIDER TRADING ACTIVITY:
VFC: Bob Shearer, CFO, sold 110,000shs ($7.2mm) accounting for more than 50% of common holdings.
NKE: Ralph Denunzio, Director, sold 2,000shs ($104k) after converting 2,000 Class B shares less than 3% of common holdings pursuant to 10b5-1 plan.
LULU: Brad Martin, Director, sold 10,000shs ($160k) roughly 25% of common holdings.
MACRO SECTOR VIEW AND TRADING CALL OUTS