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RETAIL FIRST LOOK: CALLOUTS FROM A BUSY DAY

    RETAIL FIRST LOOK: CALLOUTS FROM A BUSY DAY

    21 AUGUST 2009

     

    TODAY’S CALL OUT

     

  • DKS has shifted gears a bit and now appears to be moving towards an offensive stance after spending a bit of time on defense. With better than planned sales and earnings, management’s confidence is showing through to strategic investment in the business. Store growth is accelerating with the purchase of several former Joe’s stores in the Northwest (probably a few more to come as well), a resumption in IT spend on a marketing/merchandising system that was originally scrapped for this year, taking e-commerce in house, and opening a new consolidated headquarters in early ’10 are all signs that the company is positioning itself for a pickup in growth over the next couple of years. Additionally, gross margin compares ease substantially over the next couple of quarters exactly at the same time clearance of stale Golf Galaxy product begins to wind down.
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  • It is no surprise that Ross Stores’ second concept, DD’s Discount, is doing well as a result of the lower-income consumer seeking value. Recall that this brand was put on a hold a couple of years ago while the company revisited it’s approach to building the DD’s chain. Fast forward to a weak economy and a growing glut of real estate and management is now talking about a 500 store potential for the concept.
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  • GPS is either increasingly confident in its merchandising changes or spending a little more to try and reverse its negative same store sales trends. Plans for 3Q now include a $25 million incremental commitment to advertising, which is expected to be split evenly between Gap and Old Navy. The bulk of the spending will be directed towards print but the company will also add radio (which is new for the current campaigns). When asked if Gap brand will resume TV advertising in 4Q, the response was muted. Management expects to make a decision about TV in the next couple of weeks. On the margin, this is more positive response than last quarter, when management responded by saying there would be no TV until the merchandise was showing more sustained signs of improvement.
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  • Historically PVH’s CEO is conservative with his outlook, especially of late when the company has outpaced earnings estimates substantially. Guidance following 2Q results is no different, but the tone on back to school suggests a more robust reality. On the company’s 2Q call, CEO Manny Chirico said, “The only thing that gives me pause is what I read in the papers, and people worried about back to school. Our back to school business has gotten off to a very strong start. And I feel good about where we are transacting for the last six weeks.”
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  • Looking below the surface of The Buckle’s 13.6% sales increase (+8.6% comps) reveals a stark contrast between the men’s and women’s trends. For the quarter, men’s sales decreased by 2%, offset by a 27.5% increase in women’s. Accessories were also strong, increasing by 20%. The near-30% growth in women’s far outpaces the growth in the category when compared to any other retailer, in the mall or in a strip. Management attributes its success to “newness”.
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  • Real estate assets and brand names continue to shift around. On Stage Stores quarterly call the company articulated its strategy with the recently purchased Goody’s trademark as well as opening locations under the Goody’s banner. Originally, management intended to buy the brand and retire it as a defensive measure. However, management now realizes that in certain markets Goody’s still has brand recognition. As a result, SSI now plans on opening a total of 40 stores under the Goody’s brand. More proof here that retailers just never seem to die.
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  • BKS is seeing very favorable rent negotiations as 87 leases out of 774 are at or near the end of their term. An additional 124 leases are coming due next year and are also being renegotiated. The company made it clear that new lease terms are below current lease rates. This is not the first we are hearing of retailers regaining leverage as tenants, but with 30% of the store base potentially seeing lower rents for the next 5-10 years, the impact could be measurable.
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  • Children’s Place is seeing a mid single digit decrease in product costs for goods that are currently in place for back to school. Cost reductions are even greater for holiday product and Spring ’10. We continue to be bullish on opportunities for margin gains at companies with high exposure to China (and to a lesser extent Asia) sourcing.
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  • With competition always trying to eat away at GameStop’s industry leading used-game market share, you can always count on a question or two about it on the company’s conference calls. As of 2Q, the company is not seeing any competitive impact from tests underway at Amazon, Best Buy, or Wal-Mart. The company remains focused on monitoring the competition, but for now is probably more concerned with title slippage and uncertainty with the economy- both reasons for which the company slashed guidance for the remainder of the year.
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  • While Abercrombie is decreasing its offering of logoed merchandise, Aeropostale appears to be heading in the opposite direction. This trend is best summarized by management’s quote, “…frankly our customer cannot get enough of our name and responds to it whether we put it on a t-shirt, polo, or cami.” At one time, Abercrombie customers couldn’t get enough of the logos either…
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    MORNING NEWS 

     

    -Tarrant Apparel Group is in the process of a merger that will take the company private and return it to the control of its founders - Shareholders of Tarrant Apparel Group on Thursday approved a merger that will take the company private and return it to the control of its founders, the company said. Investors representing more than 74 percent of the company’s outstanding shares voted in favor of the move at a special meeting, the Los Angeles-based private label manufacturer said. In February, Tarrant agreed to sell its outstanding shares to an acquiring firm headed by founders Gerard Guez and Todd Kay at the price of 85 cents a share, or about $15.2 million. Shares of the company closed trading Thursday at 84 cents. Guez is Tarrant’s chairman and interim chief executive officer and Kay is the company’s vice chairman. Under the initially disclosed terms, the deal will merge the manufacturer with Sunrise Merger Co., which will then sell the shares not already owned by Guez and Kay to Sunrise Acquisition Co. The two are members and managers of Sunrise Acquisition. <wwd.com/business-news>

     

    -Escada AG’s chief executive officer Bruno Sälzer and chief operating officer Werner Lackas have sold their stakes in the German fashion house -  According to the company, Sälzer and his wife sold all their shares. When Sälzer assumed the top post at Escada in July 2008, he and his wife reportedly paid about 3 million euros, or $4.7 million at that time, for the shares, which equal a stake of about 1%. The executives sold their shares to avoid any conflict of interest as shareholders in future talks with potential investors. “If a solution is reached in the next couple of weeks, someone could say I pushed, as a shareholder, in a particular direction,” Sälzer told WWD. “And if a possible investor wants my business model, it’s best not to be a shareholder.” In addition, from the bondholder side, “it was always a problem that they thought I was very close to the Herz brothers [Wolfgang and Michael, who are major shareholders]. Now I have one hat on, and I’m interested to keep it on,” the ceo said. <wwd.com/business-news>

     

    -Billabong Shares Slumps After Earnings Miss Estimates - Billabong International Ltd., Australia’s biggest surfwear maker, fell the most in three months after posting earnings that missed some analyst estimates. Slumping demand in the U.S. and discounting at home is cutting profitability in Billabong’s largest markets as the company also battles a rising Australian dollar, which is lowering the value of overseas sales. Billabong’s result was weak with pressure across both the Americas and Australasia. The Australian dollar’s 8.6% rise against its U.S. counterpart since May 18 cut almost A$3 million from earnings, Billabong said.  Annual sales in the Americas rose 35% on the company’s purchase of surf accessories maker DaKine Hawaii Inc. Excluding acquisitions, sales from the Americas fell 13%. Billabong’s margin in the Americas, which measures earnings as a proportion of sales, fell to 11.9% in the past year from 18.1% in 2008. Earnings at the company’s Australasian division, which includes Australia, New Zealand and Asia, fell 22%. <bloomberg.com>

     

    -Juicy Couture promoted Laura Mays to senior vice president and managing director, North America - Mays had been divisional vice president of merchandising at the Liz Claiborne Inc.-owned brand. In her newly created role, she is responsible for retail, wholesale and online distribution for the brand, focusing on merchandising, company-owned stores, wholesale and marketing for the Juicy Couture and the new Bird brands. Mays has been with Liz Claiborne for more than six years in a variety of jobs, first with the Liz Claiborne brand and then at Juicy Couture, where she has been senior vice president of sales, vice president and general manager of accessories and, more recently, divisional vice president of merchandising. Mays has overseen the development and growth of the Juicy Couture accessories business and the positioning of apparel as well as the other categories — including children’s wear, footwear and pet attire — which make up the Juicy Couture lifestyle brand at wholesale. <wwd.com/business-news>

     

    -Facebook finds a friend in e-retailers, and added revenue - Facebook yesterday began testing selling products from outside merchants through its site. The king of social networks has opened its Facebook Gift Shop to a handful of retailers that are marketing both virtual and physical goods. <internetretailer.com>

     

    -Sears and Kmart help stimulate Santa’s wallet with savings card - ‘Tis the season for saving, but in a few months it will be the season for spending as consumers pull out their wallets over the holidays. To make sure shoppers have enough cash to go around, Sears and Kmart this week launched a card to help them save.  <internetretailer.com>

     

    -Sam's Club is giving its members the chance to say goodbye to coupon clipping - The warehouse club today announced the introduction of eValues, a personalized digital savings program providing paperless coupons. Members will automatically receive customized discounts, based on the items they purchase, at checkout. Offers cover a wide-range of products including food, office supplies, tires, appliances, electronics and mattresses. eValues accounts can be managed online at samsclub.com. Accounts can also be checked via kiosks that have been installed at more than 600 store locations. Offers can be sent to member's iPhones, BlackBerrys and smart phone devices for shopping ease. The eValues program is available at Sam's Club locations for those enrolled in the Sam's Club Plus Advantage and Business memberships. A recent Scarborough Research study found e-coupons have been gaining in popularity. Eight percent of U.S. households currently receive coupons via e-mail or text message.  "This program enables us to simplify our members' lives by eliminating the wasteful practice of couponing that requires consumers to do all the work," said Cindy Davis, executive vice president of membership, marketing and e-commerce at Sam's Club, in a statement. "With eValues, we can ensure we are providing superior, more relevant offers based on member preferences."  <brandweek.com>

     

    -Liberty, the iconic London department store, is reported to be in talks with US value chain Target about a collaboration on clothing next year - According to reports, talks between Liberty and Target are at an advanced stage. The collection would potentially launch for spring 10 and would likely feature a range of clothing and accessories pieces worked in iconic Liberty print fabrics. Liberty prints have already been used by several high street fashion chains in the UK, including Topshop and Gap. The department store has also linked up with designers and celebrities such as Luella Bartley and Ronnie Wood to help boost brand recognition.  <drapersonline.com>

     

    -The Consumer Product Safety Commission has exempted textiles from lead testing requirements - The panel, which posted the decision on its Web site Thursday, said it determined textile products typically do not contain levels of lead that are harmful to children and, therefore, don’t need to be subject to the law’s testing requirements. The federal Consumer Product Safety Improvement Act, which went into effect last year, significantly lowered the lead limits for all products designated for children aged 12 years or younger. The requirements will be phased in over a period of several years, eventually decreasing to a maximum of 100 parts per million by August 2011 from the current 300 parts per million. Natural fibers including cotton, linen, jute, silk and wool, as well as manufactured fibers such as rayon, acetate, polyester and nylon, are all exempt from testing requirements, according to the commission. Exceptions to the decision include fabrics that have decals or prints added to them after the dyeing and finishing process. Children’s leather items with pigment-based coatings must also be tested. <wwd.com/business-news>

     

    -Genfoot America enters distribution, sales, and marketing deal with Montabelluna - Genfoot America announced earlier this week that the outdoor footwear company has entered into a deal with Montabelluna, Italy-based Aku Italia to oversee the distribution, sales and marketing for Aku outdoor and trekking footwear in North America. A separate division devoted to the Aku brand initiatives is currently being put in place. “We will quickly integrate all of Aku’s sales and operational requirements into Genfoot’s existing framework. Our short-term goal is to reintroduce [the] Aku brand and quickly establish the Aku product through specialty outdoor retailers in the North American market,” Genfoot President Richard Cook said in the statement. A soft launch is planned for spring ’10, followed by a larger push to key retail accounts for spring ’11. <wwd.com/footwear-news>

     

    -A line of juniors' sportswear based on the colorful characters of Paul Frank has hit racks at Macy's stores nationwide - The apparel line by Jerry Leigh of California includes knits, woven's, T-shirts, fleece hoodies and related separates. "We are thrilled to collaborate with one of the most distinctive and creative brands in the fashion world," says Andrew Leigh, president of Jerry Leigh of California. "This innovative and colorful apparel line has appeal for our core consumer and is uniquely positioned to dominate in this category at retail." Besides Macy's department stores the sportswear is also available at Paul Frank stores, fashion boutiques and other select U.S. retailers. Further distribution is planned for 2010. "Our partnership with Jerry Leigh has provided us with the bandwidth to create an inspired sportswear line that teen girls everywhere will love," says Ryan Heuser, co-founder and president of Paul Frank Industries. "We've produced a one-of-a-kind look that will appeal to new and long-time Paul Frank fans alike." <licensemag.com>

     

    -Macy's has unveiled its newest exclusive apparel line by fashion designer Rachel Roy in stores - The collection, Rachel Rachel Roy, features contemporary sportswear, footwear and accessories, including chunky sweaters, T-shirts with graffiti graphics, print leggings, leather bombers, handbags and party dresses. The line retails from $59 to $299."Rachel Roy has an incredible fashion sensibility and design integrity, and her new Rachel Rachel Roy collection at Macy's is feminine, individualistic and versatile," says Nicole Fischelis, ready-to-wear fashion director for Macy's. "This is exactly the type of newness that gets the customer excited about fashion again. I think she will really love this collection." <licensemag.com>

     

    -Five J.C. Penney stores in three states have been robbed in the last 3 months - Five J.C. Penney stores in three states have been robbed of jewelry and other merchandise worth millions since June by brazen burglars who broke in through the roofs. The most recent heists this week were filmed by surveillance cameras that showed a pair of masked, glove-wearing thieves. Police said they descended into two stores in Covington and Lafayette, La., via ropes, evoking images of a Hollywood thriller. Robbers hit a Penney’s store in Indianapolis in June and units in the Houston suburbs of Pasadena and Rosenberg in July. The losses at the off-mall stores — primarily gold and diamond jewelry, denim and other items — are “into the millions,” Penney’s spokesman Tim Lyons said Thursday. <wwd.com/business-news>

     

    -New York’s garment center is in danger of extinction - New York’s garment center, once the heart of an industry that employed hundreds of thousands of workers and produced most of the clothing in the United States, is in danger of extinction. For decades, cheaper foreign competitors and rising rents forced many of the sewing and cutting rooms and the button and zipper shops that once thrived on the side streets south of Times Square to close, shrink or move as mass production shifted to China, India and Latin America. Now, even the remaining factories and shops that make the couture coats, dresses and other apparel for glamorous fashion designers like Nicole Miller, Yeohlee Teng, Anna Sui and Nanette Lepore are in jeopardy. Owners say they are caught in a vise between declining retail sales and landlords eager to find better-paying tenants. Some city officials and industry leaders worry that if manufacturing is wiped out, many of the designers who bring so much luster to New York will leave, along with the city’s claim to be a fashion capital rivaling Paris and Milan. The damage would be undeniable, given that the industry’s two big annual events — Fashion Week in September and February — attract enormous numbers of visitors and generate hundreds of millions of dollars in economic activity. The Bloomberg administration is now considering designating one or more large buildings in the garment center solely for manufacturing and related businesses. For 22 years, the city has protected the garment district through special zoning that restricts building owners — from 34th to 40th Street, between Broadway and Ninth Avenue — from converting factory space to offices, which command higher rents.  <nytimes.com>

      

     



UK Retail Sales Up, Unexpectedly…

The UK Office for National Statistics posted positive retail sales for July today, up 0.4% sequentially or +3.3% annually, after rising 1.3% in June M/M.  While we didn’t expect this jump, we also can’t ignore the facts: though we see inflation getting ahead of growth for the island nation, the positive momentum in retail sales, though rear-view, suggests that the consumer’s willingness to spend is reflective of a positive outlook on the broader economy.

 

On the longer term, however, the big question is if this momentum can be sustained. As the chart below illustrates, the last six months show a very incomplete picture.  While we remain bearish on the country’s overall fundamentals (see our previous posts on the UK for analysis), including a ballooning budget deficit that pushed up to 8 Billion Pounds (~$13 Billion) in July, this retail sales data point is an important callout, and one we will be monitoring closely to discern any trend shifts.

 

With the UK economy slowly coming off the bottom and the FTSE vying with the S&P500 for YTD performance at 7.2%, we’re still not bulls on the country’s growth prospects over the intermediate term, yet are cognizant that within the European space market performance has not been tied solely to fundamental drivers this year.

 

Matthew Hedrick

Analyst

 

UK Retail Sales Up, Unexpectedly…  - mh uk retail

 


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SBUX - BREAKING NEWS?

The Wall Street Journal is reporting that SBUX is going to start charging up to a quarter more for some drinks.  My first reaction was that for a company that is currently trying to fight the perception that its drinks are too expensive, it might be a little premature for the company to raise prices. 

 

Starbucks’ same-store sales growth improved in fiscal 3Q09, but management attributed these sequentially better results to its value combo offerings and limited time promotion of iced coffee for under $2.  Value is working right now to drive traffic for the company (only less negative) and by raising prices, SBUX runs the risk of damaging this value perception.

 

The reality is that the WSJ only has part of the story.  The price increase is consistent with the company’s comments from its Q2 earnings call as it relates to SBUX’s “new pricing architecture,” which began rolling out May 5 in several key markets and will continue over the coming months.  The goal is to provide value to customers while managing margins.   

 

The end result of the “new pricing architecture”, SBUX is fine-tuning its pricing in select markets to better reflect geographic and cost considerations.  There will be minor changes that will both lower and raise prices.  It’s important to note that this is the first time in the company’s history that it has lowered prices.

 


Retail Chart of The Day: ROST

I’m the first to admit that our SIGMA charts are next to impossible to interpret for anyone that has not spent 15 minutes on the phone with someone on my team.  But if you can’t interpret the chart below and either a) you can short stocks or b) own ROST, then you should give us a call.

 

The crux of it is that the delta on sales/inventory spread is turning down after 6+ quarters on cloud 9 at the same time we have visibility on comping against increasingly tougher Gross Margins and favorable SG&A.  ROST drives its business in large part on packaways, meaning that it buys all it can when the going is good, and pulls out of inventory to sell when appropriate. Right now, the 2H buys that were subsequently packed away are keeping this company alive and kicking. Yeah, it has another quarter of great top and bottom-line visibility. But then the simple fact that it is at peak margins and full valuation with slowing momentum will start to matter.

 

Retail Chart of The Day: ROST - ROST SIGMA CHART


Germany: A Huge Deflationary Print?

Research Edge Position: Long Germany (EWG)

 

The Federal Statistics Office reported that German Producer Prices fell 7.8% in July from a year earlier. As we’ve been highlighting in our posts on Germany  over the last weeks, we see this deflationary environment in the short term as positive (it remains our conviction that in the last quarter inflationary pressure will return to the major economies) as the economy melts up, having moved into positive territory with a +0.3% in Q2 GDP reading quarter-on-quarter.

 

On an annual compare this “deflationary” PPI number (the lowest in 60 years) can be heavily attributed to the manic energy prices of last year, while on a sequential basis, PPI fell 1.5% or -0.2% when excluding energy costs. According to the report, energy prices fell 16.5% annually, with gasoline decreasing 5.1% on the previous month.  After June’s PPI reading of -4.6% Y/Y, July’s number does not sway our opinion that producers will benefit on price declines which, if sustained, should continue to trickle down to consumers. German CPI last registered  at -0.7% annually (the Eurozone average), and we see this purchasing power as bullish for consumer sentiment and spending.

 

While a strong Euro has also benefitted domestic purchasing power, we’re still cautious on the export picture with the Euro above the $1.42 level. However with exports and factory orders increasing sequentially, ZEW’s economic expectations number jumping upward, and continued strong and transparent leadership from Chancellor Merkel and Co., our bullish stance on Germany is intact.

 

Matthew Hedrick
Analyst

 

Germany: A Huge Deflationary Print?  - MH ppi

 


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