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RETAIL FIRST LOOK: EARNINGS REVISION DAY

06 AUGUST 2009

TODAY’S CALL OUT

 

Today is officially same store sales day, but we should probably rename it “Earnings Revision Day”.  Of the 30 or so companies that reported, a full one-third took earnings higher.  It’s getting a bit repetitive but disciplined inventory control, low levels of clearance, a benign promotional environment, and strong cost controls continue to drive upside.  

By the time you read this, there will probably be all kinds of volatility on the open as traders position themselves to “play” the comps.  In reality, July was a continuation of trend we have seen for the past few months or so.  Absolute demand as measured by sales still remains negative for most companies.  Aside from the noise on a calendar shift, underlying demand as measured by traffic commentary was almost identical to last month.  As we expected, there were a number of positive pre-announcements this morning with many driven by gross margin upside.  In fact, TJX, ROST, KSS, BKE, CHS, and ARO were the only retailers that reported positive same store sales.   As it pertains to earnings, JCP, KSS, M, ROST, TJX, ARO, CHS, CTR, and GPS all raised guidance above prior expectations and current Street estimates. 

The key theme dominating the month was the calendar shift as it relates to the timing of back to school.  It appears that this shift universally impacted the teen retailers, all of which cited this as having a negative impact.  Yes, we all knew this was coming but it seems to have had a bigger than expected impact.   In the case of Aeropostale and The Buckle, results were below Street expectations.  In markets where back to school has formally kicked in, anecdotes suggest that demand is actually pretty good.  However, it’s still early and the next few weeks will be the most important to watch. 

A key callout on the non-apparel side of things was continued price deflation in food and consumables.  Severe price deflation is negatively impacting top line trends across the discount store and warehouse club sector.  Offsetting these trends are pronounced market share gains that continued in month of July.  It remains clear that the traditional supermarket channel is still losing ground in a meaningful way.

RETAIL FIRST LOOK: EARNINGS REVISION DAY - 1 Year SSS Total

RETAIL FIRST LOOK: EARNINGS REVISION DAY - 2 year SSS Total Chart

LEVINE’S LOW DOWN

Some Notable Call Outs

  • One of the more interesting callouts from the RL conference call was the divergence in same store sales between the U.S. and Europe. Comps in the domestic full price stores were down 25%, while Europe were up slightly on a constant currency basis. The brand continues to resonate well, especially in the UK where tourism is benefitting from the weak Pound. With a higher margin structure in Europe than in the U.S., this trend bodes well for future growth and potential upside.
  • In a conversation with a private equity contact I was able to confirm that costs out of China continue to decline. As the owner of a tailored clothing business, this firm is seeing landed costs decrease by as much as 25% on recent manufacturing orders. The conversation then shifted to some insights on what the retailer will ultimately do with these savings. In this example, the company will sharpen price points to offer better values, while at the same time keeping a fair amount of the benefit in the form of margins.
  • In a press release, GameStop announced the appointment of a Head of Digital Media. As digital content grows, one of the most often asked questions about GameStop centers around the eventual transition away from physical game distribution. While there are still many years before video games are distributed predominantly online, the creation of this new senior position clearly shows that the reality of change is beginning to set in.

MORNING NEWS 

-BTS season might be too conservative with basics - With merchandise ready to hit the floors and marketing campaigns in place, retailers are hoping back-to-school can lift them out of the doldrums. After a disappointing b-t-s season last year and arguably the most difficult 12 months they’ve ever experienced, retailers are eager to reel teens into their stores and entice them with fresh trends, cutting-edge marketing strategies and in-store events. However, observers say many retailers are choosing to play it too safe this season by offering too many basics. Candace Corlett, president of WSL Strategic Retail, thinks smart retailers are closely watching teen and parent shopping patterns and applying it to their b-t-s expectations. “We are seeing that some are buying a little each week and spreading it out over several paychecks,” she said of shoppers. “But there’s also an equal percentage of people who don’t do their back-to-school shopping until right before school starts.” Based on results from the “How America Shops” survey, Corlett said shoppers’ mind-sets have certainly changed this year — likely due to the financial stresses many people are feeling from the recession. Corlett said she found it surprising that only about 12% of the adults surveyed said they actually enjoy shopping for their kids for b-t-s.  <wwd.com/retail-news>

-Outdoor June Retail Sales Recap - Retail sales for all core outdoor stores combined (chain, internet, specialty) dropped 2% compared to last June. Equipment and key footwear categories saw sales grow for the period. Across all three store channels, products related to camping, backpacking and hiking saw healthy sales in June. June was also an unusually cold and wet month across most of the US, possibly contributing to higher than average outerwear sales across all three store channels. Specialty stores lost 6% in total dollar sales compared to June 2008.  In chain stores, total sales were down 1% for the month of June. Sales continue to grow online, as the entire channel grew 5% in dollar sales this month and 6% YTD.  <sportsonesource.com>

-The once reluctant and skeptical denim industry is beginning to give its e-commerce operations a fuller embrace - Denim players such as Replay, Guess, My Lovely Jean and Le Temps des Cerises are expanding their online operations in a bid to capture a significant consumer segment that has fled the real-world retail environment for the virtual one.  While overall economic conditions remain challenging, a recent report from Forrester Research shows e-tailers are benefiting from a steady migration to online shopping. Online apparel sales in Western Europe are forecast to grow from 13.14 billion euros, or $18.92 billion at current exchange, this year to 19.88 billion euros, or $28.63 billion, in 2014. That hasn’t gone unnoticed by denim labels.  <wwd.com/retail-news>

-Junior girl’s footwear firm Penny Loves Kenny filed for bankruptcy in New York late last week - In court papers, the seven-year-old company, also known as Penny & Kenny Shoes LLC, reported assets of almost $900,000, with total liabilities equaling almost $4.9 million. According to the documents, filed on July 31, Penny Loves Kenny’s financial difficulties can be attributed to “general market conditions and the delivery of inferior product” from certain suppliers, as well as litigation against the company. As for the future of the company, court papers said it “intends to restructure its organizational abilities to decrease overhead and increase sales. Alternatively, [the company may] sell all or part of its business operations.”  <wwd.com/footwear-news>

-Sports Direct has conceded that it is not in line with corporate governance best practice and said that it is not taking any action to change that - In its annual report published yesterday, Sports Direct admitted that it did not comply with a number of the codes mainly concerning the number of independent non-executives on its board. It said that while it intends to appoint a further independent non-executive director to the board to make it compliant “no steps are currently been taken to achieve that”. It added that its was keeping its position under review. Sports Direct has been heavily criticised for its corporate governance stance since it floated in 2007. Ahead of its full year results last month, Investec challenged the retailer on key corporate governance and the disclosure of business information. <drapersonline.com>

-Quiksilver signs a deal with hotel to sell product - Co-branded board shorts and bikinis from Quiksilver will soon be available at The Standard Hotel chain through PC-enable automated dispensing solutions from Corona, Calif.-based AVT. The Standard Hotel has locations in Los Angeles, Hollywood, Miami and New York. <licensemag.com>

-Ross Stores agreed to pay civil penalty - Ross Stores Inc. has agreed to pay a $500,000 civil penalty to settle allegations that it neglected to tell the Consumer Product Safety Commission that it sold children’s hooded sweatshirts with drawstrings, which pose a threat of strangulation, the agency said Wednesday. The commission alleged the Pleasanton, Calif.-based retailer knowingly sold the products and failed to report it. Retailers, manufacturers and distributors are required under federal law to report to the commission within 24 hours after identifying that a product could be harmful. A company spokeswoman said the store did not knowingly sell products that violated consumer safety regulations and issued an immediate recall when it realized there was an issue. <wwd.com/business-news>

-For Barneys New York, it’s been an eventful year so far - Double-digit sales declines and a customer base hit hard by the recession sparked layoffs, expense cuts, jitters in the market and sharp downgrades by rating agencies. Not to mention the specialty store has been without a chief executive officer for 13 months. But amid the turmoil, the Barneys ship is still afloat and the waters — for now, at least — appear to have calmed. Parent company Istithmar World Capital has pumped $25 million into Barneys to release vendor shipments and ease liquidity concerns; there have been merchandise initiatives with designers to lower prices and provide greater value, and while there’s no talk of new leases being signed, the domestic expansion appears on track, with a flagship opening in Chicago last April, another set for Scottsdale, Ariz., in October, and Barneys’ first warehouse sale in San Francisco currently under way.  <wwd.com/business-news>

-Seven For All Mankind and Gap Inc. open pop-up shops - Seven For All Mankind and Gap Inc. are taking advantage of the wealth of empty storefronts around the country to open denim pop-up shops. Gap will open a pop-up store on Robertson Boulevard in Los Angeles on Friday featuring its 1969 selvage denim collection, while Seven For All Mankind unveils its Wash House temporary-shop concept on Boston’s Newbury Street on Aug. 14.  <wwd.com/retail-news>

-Benetton reports better deliver time of the fall-winter but profits decline - Benetton Group SpA remains upbeat for the second half of 2009 despite reporting a 63.1% decline in first-half profits due to the rescheduling of shipments and unfavorable currency fluctuations in emerging markets. “The combination of the good level of orders taken for the new fall-winter collection and actions currently in progress on the cost front thus allow reasonable optimism for the end of 2009 in respect of sales, profit and net indebtedness,” chief executive officer Gerolamo Caccia Dominioni stated Wednesday. Benetton said it moved the delivery time of the fall-winter 2009 collection to the third quarter to better match seasonality, provide improved service to clients and improve management of transport and logistics. <wwd.com/retail-news>

-After a fourth quarter in which profits fell 18% , Procter & Gamble Co. plans to add muscle to its marketing - P&G is teaming up with the National Football League in a major sponsorship deal that will kick off during the upcoming season. The arrangement, announced Wednesday but not a subject of the firm’s earnings call, encompasses more than a dozen P&G brands across male grooming, hair care, oral care and fabric care, and several of those brands will carry the “Official Locker Room Products of the NFL” logo. The move comes as P&G revs up plans to build its men’s care business (or in P&G speak, its “win with men” strategy). In June alone, the company acquired two high-end grooming brands, Zirh and The Art of Shaving. <wwd.com/business-news>

-American Sporting Goods announced that Tom O'Riordan, ceo and president, has resigned from the company - Chairman Jerry Turner will take the reins and continue to guide the company as it enters its 25th year in business.  ASG management, design, sales and distribution teams will remain unchanged.  "As we look to celebrate our 26th anniversary this year, I am confident that this new chapter will be a positive one for all brands in the ASG fold," noted Turner. "Our foundation remains strong despite the tough economic environment and we will continue to implement a multiple brand strategy that stays true to our goal of delivering the best product at the best value for our retail partners." Brands under the ASG umbrella include AVIA, And 1, ryka, Nevados, Yukon, NSS, APEX, Turntec and Triple Five Soul. <sportsonesource.com>

-Eastern Mountain Sports said that in order to facilitate future growth, it closed on new financing totaling $50 million - In addition to raising new equity from existing investors, EMS closed on a new, larger senior credit facility led by Wells Fargo Retail Finance.  <sportsonesource.com>

-Sport Chalet, Inc. sales decline 8.9% and comps slide 14.7% - Sales decrease 8.9% to $79.4 million for the first quarter of fiscal 2010 from $87.1 million a year ago. Comps tumbled 14.7%. The net loss was narrowed to $3.0 million, or 21 cents per share, compared to a loss of $4.5 million, or 32 cents, a year ago. <sportsonesource.com>

-Project571 announced the launch of the first line of college apparel - Project571 is proud to announce the launch of the first line of college apparel made with all eco-friendly materials and compensating providers according to fair trade practices. Colleges and universities all over the country are being graded on their own carbon footprints, their use of sustainable resources and adherence to Fair Trade practices. Project571 (five oceans, seven continents, one planet), a new Midwestern company, is working to fill a void by offering college-supporting organic clothing that is trendy, fashionable, fair and earth-friendly. All of Project571's products are made from organic cotton, recycled polyester, naturally occurring rayon or a combination, printed with environmentally friendly inks, and manufactured by Fair Trade certified wholesalers whose workers are treated and compensated fairly for their work. The result is college apparel that's superior in every way - soft, stylish and safe. <prweb.com>

-American Apparel's secret rummage sale to happen at LoftSEVEN - Rooftop pool party meets summer fashions at LoftSEVEN's designer sample sales. Held on the second Sunday of every month, LoftSEVEN's sample sale will be armed with an arsenal of designer duds, complimentary cocktails, and a chilled 25-person rooftop Jacuzzi. The August 9th sale will also be host to American Apparel's secret rummage sale, set high above historic downtown in The Haas Building. Guests will be able to shop summer looks from both established and independent L.A. designers, while enjoying live music and quenching their thirst with free beverages served by a staff of identical twins. Guests will also be allowed to cool off in the rooftop Jacuzzi should they choose to, whether they've bought or brought their own swimsuits.  With the summer heat wave in full swing, LoftSEVEN, has opted to provide some diversion to historic downtown L.A. residents who are in need of something to do. Since opening in May, LoftSEVEN has been host to several community events such as Rooftop Movie Night, Stand Up Comedy Night, and Art Walk. <prweb.com>

INSIDER TRADING ACTIVITY:

DBRN: Elise Jaffee, Senior Vice President, purchased 84,000shs ($295k) granted under the company’s stock option plan increasing total common holdings by less than 2%.

MACRO SECTOR VIEW AND TRADING CALL OUTS

RETAIL FIRST LOOK: EARNINGS REVISION DAY - SV 8 6 09