• Navigate This Market Turbulence: All Hedgeye Research → 3 Months 66% Off

    Preserve. Protect. Grow. Former hedge fund manager and CEO Keith McCullough has successfully navigated the Dot Com Bust, Great Financial Crisis and Crash of 2020. Get 66% off the smartest investing insights money can buy.


31 JULY 2009


I highlighted yesterday that the key theme coming out of the WSA (show show) in Vegas today will be distribution – specifically AMZN/Zappos and the .com ramifications. The other theme will be sourcing, and who will benefit from import cost reduction. Even though I still think that the quantification of lower FOB (freight on board – the industry standard term for the total cost of an imported shoe) is misunderstood and underestimated, I think it’s safe to say that ‘lower costs out of China’ is the consensus call for the next couple quarters. The key question that everyone will be asking all the CEOs at WSA will be “who keeps the sourcing savings”?  Most of them will say “we will.”  But if the manufacturer in Asia thinks that they’ll keep it, the brand thinks it will keep it, the retailers thinks they’ll keep it, my sense is that the pie of expectations will add up to more than 100%.  That’s the problem.   

Let’s be clear about two things… 1) Industry executives DO NOT HAVE A CLUE as to how this will play out. If they claim to be keeping the margin, they are oblivious to any potential irrational action on the part of their supply chain partners and competitors.  Very few have a proactive Macro process to drill down this issue. One of the earliest ones to do so was Payless, which (after the 2Q print) remains one of my top ideas over the next 12-18 months.  They are doing what many others are not – in reverse engineering product in order to boost margin at a lower initial price point.  2)  The consumer will decide who pockets any excess cost saves. The best content will win, as always.  

But let’s consider a third point, which leads me to think that I almost don’t care who wins or loses. We’re seeing a 600bp swing in the spread between import costs and consumer prices. When you do the math, that gets me to about $0.40 per pair that get’s freed up in our system. Doesn’t sound like much? Multiply that by the 1.5bn pair of shoes sold in the US each year, and we’re looking at $600mm in incremental profit up for grabs. Yes, it will be a fight for that dollar amount, but keep in mind that since 2005 we’ve seen the net margin impact negative to the same magnitude.   

This is meaningful, and makes it tough to be bearish on margins for any footwear company over the next year.

RETAIL FIRST LOOK: MINE, MINE, MINE - footwear margin chart


Some Notable Call Outs

- For the second time this week we are hearing that trends on women’s fashion boots are strong, which bodes well for the fall and holiday selling seasons. Steve Madden and Nine West both cited strength in the boot category. With higher ASP’s, boots could ultimately be one of the standout products in back half of the year. Additionally, management cited they are actively looking at acquisitions to utilize their cash balance.

- On its conference call, Cabela’s management noted that sales of guns are beginning to slow. However, the slowing trend was anticipated and is within management’s expectation. Despite this, the firearms category drove most of the comp store sales growth in the quarter, accounting for 5.1% out of the total 6.1% comp.

- Benefitting from easy comparisons, lower year over year fuel prices, and industry capacity reductions (liquidations and closings), West Marine reported better than expected Q2 results. Additionally, categories aimed at the DIY boater are performing well. Management believes that with the initial shock of the recession now over, boaters are returning to the water but with a preference to maintain their boats themselves.

- In an effort to boost traffic for back to school, Payless is introducing product at an $8.99 price point for kids and $12.99 for women. On promotion, the women’s product will be out the door at $9.99. In order to maintain margins on this extremely low price point, the shoe was reverse engineered to meet a specific margin criteria. This may be one of the lowest price shoes we have ever seen marketed for back to school (inflation adjusted of course!).


-AnnTaylor reports more job cuts and pre-announces - AnnTaylor Stores Corp. is eliminating another 160 jobs, primarily at the corporate office in Times Square, and closing 30 more stores, in the retailer’s latest round of cuts unveiled Thursday. The specialty retailer, challenged by the poor economy, product misses and executive turnover, started restructuring in January 2008. However, chief executive officer Kay Krill vowed that Thursday’s cuts conclude the downsizing. Two thirds of the 160 cuts are at corporate headquarters, and are occurring across almost all functions, including planning and allocation, information technology, human resources, finance and real estate. The corporate office has about 1,600 employees, and the total head count as of last January was 18,000. About one-third of the cuts are happening at divisions. The new cost structure is set up for profitability in the back part of the year. For the second quarter, ending Aug. 1, the company now expects EPS to be slightly better than breakeven due to cost savings and weak but better-than-expected sales. Comp-store sales dropped 28% in the first quarter and in the second quarter were down 20% to $470 million. Loft performed better in the second quarter than Ann Taylor.  <wwd.com/business-news>

-Shoe designer Jeff Staple discusses new airwalk line at Payless - At a party Tuesday night to celebrate the Aug. 11 release of his nine-style collection with Airwalk, Staple told Insider that designing shoes for the brand to retail at Payless gave him the opportunity to think about design in a new way. “I’m very used to designing 100 shoes for one store in Manhattan. That’s easy,” Staple said. “[For the Airwalk collaboration], I had to think about what would work in Chicago, Denver, Los Angeles, for men and women — something that would resonate with all people.” Did the price constraints (no shoe in the collection goes above $50) add an extra challenge? Staple laughed. “Shoes in my market wholesale for more than $50,” he said. “I had to be educated on what materials would work.” Of course, that isn’t to say Staple has abandoned the niche genre entirely. In May, 110 specially designed Airwalk styles labeled with NCC-1701 (the Enterprise call number) were given to Reed Space and distributed to the cast and crew of J.J. Abram’s “Star Trek” film to celebrate the movie’s release. And this fall, to commemorate the DVD release, select Payless shops around the country will have the same silhouette — but this time, the mass version will use the three main colors (gold, blue and red) of the original uniforms instead of being done in burnished silver metallic (like the hull of the Enterprise). <wwd.com/footwear-news>

-Wal-Mart Everyday Low Price Laptops Lure Buyers to Profitable Hard-Drives - Staples Inc. and Wal-Mart Stores Inc. are slashing laptop prices and expanding their selections for the back-to-school shopping season, banking on the computer demand to sell more profitable accessories and services. <bloomberg.com/news>

-Fine handbag and accessories brand Coach is developing a new luxury apparel label, called Reed Krakoff, after its executive creative director - The women's collection is expected to roll out fall 2010 and will include ready-to-wear, handbags, accessories, footwear and jewelry. "We believe that this concept will serve to define the new American luxury and engage a different customer," says Lew Frankfort, chairman and chief executive officer of Coach. <licensemag.com>

-UK Like-for-like fashion sales were down 4.9% for the week ended July 26 according to BDO High Street Sales Tracker -  BDO Stoy Hayward said that it was the fifth consecutive week of falling fashion sales. It said that only a handful of specialist retailers had bucked the trend and that there were reports of low footfall at key shopping times during the week. Total like-for-like retail sales were down 2.2% over the week. <drapersonline.com>

-The UK High Street is having a difficult time as summer retail sales drop in three consecutive months - The only other sector to report growth was footwear & leather (a balance of +64%), which saw its strongest result since August 2007 (+70%), while falling sales were reported by retailers of hardware, china & DIY, and furniture & carpets. While sales continued to fall in the durable household goods sector, they dropped at a slower rate than the very heavy falls seen in the past year. However, the latest overall decline in retail sales was similar to the more moderate rates seen in May and June, and not as severe as the heavy falls seen between July 2008 and March 2009. Stocks remain adequate in relation to expected demand, but the volume of stocks lay below its long-run average for the third consecutive month. The volume of orders placed upon suppliers fell again, with a balance of 13% of retailers reporting a drop in July, and a balance of 17% foreseeing a decline in August. <fashionnetasia.com>

-Egyptian textile and clothing industry exports are falling - The Egyptian textile and clothing industry which has taken a vital role the country's economy is expected a decline this year due to the global economic downturn. Textile and clothing exports are seen falling by 5.3% in 2009 to US$2.169 billion, according to a new report from Business Monitor International (BMI). BMI expects the current global economic downturn will have an adverse effect on the industry, with sales and output set to decline this year and next. Overall Egyptian textile and clothing value added will drop by 9.3% in 2009, and again by 6.6% in 2010.  Moderate recovery is expected to set in from 2011, with growth of 4.5%.  <fashionnetasia.com>

-Colombia's textile and garment industry fears Venezuela will ban Colombian exports - Colombia's textile and garment industry has been worried about its neighbouring country Venezuela's probable implementation of import  ban of goods from Colombia, one of its biggest buyers. The Venezuelan government had stopped providing dollars to Venezuelan importers of textile goods from Colombia at the official exchange rate due to which they have to buy them from the open market at a high rate. This is the second time in recent years that Venezuela has imposed such bans from Colombia. Venezuela is the one of the biggest importer of textiles and apparels from Colombia. <fashionnetasia.com>

-CNBC's Darren Rovell discusses the recession, golf, and Callaway - "As I sit here at CNBC, I hear more and more people say that the recession is over and there are definitely signs. The Dow, for example, is on track to have its best July –- on a percentage basis -– since 1939. But I haven’t really seen any talk of recovery in the sports business world, until today that was. The golf club business has pretty much been a disaster over the last year. Since shafts don’t fall apart, it’s a totally discretionary purchase. Callaway, which were among the most aggressive in partnering with retailers on economical deals, reported that its profits dropped 82 percent in the last quarter. Yet many were ready to focus on the upside. Some potential upside has been seen in an uptick in sales in July and emerging market potential in China and India. Like every sector, there are still many signs that we’re not out of the woods.  Given the position the golf retail business was in (free club with this purchase! free club if this guy wins!) this is really the first great piece of news for the industry. Then again, maybe we should say then when we actually see sales going up instead of people projecting sales will be up." <cnbc.com>

-Hartmarx CEO steps down - It’s the end of an era for Hartmarx Corp., which is losing its chief executive officer and longtime employee Homi Patel just weeks after being purchased out of bankruptcy by Emerisque Brands. Patel, 60, who has worked for the men’s wear giant for more than 30 years, will step down as ceo today. “I have been extremely privileged to be the head of this wonderful company and its extremely talented and dedicated people,” Patel said of his tenure. “I am particularly proud that even in the most adverse of circumstances, our board and our employees conducted themselves with class and dignity, accomplishing our most important goals of maximizing the sale price while saving our brands and thousands of jobs.” Patel’s replacement was not immediately revealed, but it is widely expected to be Ajay Khaitan, the principal of Emerisque and a former ceo of denim brand Lee Cooper. <wwd.com/business-news>

-The ongoing economic crisis continues to bite into PPR’s business - The French luxury and retail group said sales slipped 3.6%. The group, which owns Gucci Group as well as French retail chains Conforama and Fnac, will continue to use “all available means” to adapt to an economic environment that remains uncertain. “We have launched initiatives aimed at reconfiguring our organizations and energizing our sales efforts over time,” chairman and chief executive François-Henri Pinault said in a statement. “These should begin to bear fruit in the second half of this year and continue into 2010.” <wwd.com/business-news>

-Despite a progressive improvement in the second quarter Bulgari SpA sees continued slow down in demand for watches and jewelry - Despite a progressive improvement in the second quarter and sales picking up at directly owned stores, Bulgari SpA was hit by poor sales in the U.S. and continued slow demand for watches and jewelry, reporting revenues down 21.7%. At constant exchange rates, sales would have dropped 28.9%. CEO Francesco Trapani said second-quarter results were an improvement over the first three months of the year and “particularly encouraging in terms of growing performance of the directly owned stores.” <wwd.com/business-news>

-Destination Maternity Corp. gets by with reductions - Reductions in inventories, expenses and markdowns helped Destination Maternity Corp. boost third-quarter profits by 64%. The company said it would exceed the high end of its earlier guidance for earnings per share of between 74 and 91 cents. Sales fell 6.4% and were down 5.5% on a same-store basis.  “We have taken aggressive actions to manage our business in this tough environment, and with our tight management of expenditures and inventory, we were able to continue to reduce expenses and were able to control markdown levels versus last year, resulting in better-than-planned gross margin performance and lower-than-planned expenses,” said chief executive officer Ed Krell.  <wwd.com/business-news>

RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough): PSS, WMT

07/30/2009 01:54 PM


The stock has had another nice run since we bought it and McGough's duration isn't owning this one for the quarter. KM

07/30/2009 10:12 AM


Free moneys will create y/y inflation in Q4. I'll continue to take down exposure to the US Consumer as we approach those dates. Sell high. KM