08/25/09 09:38AM EDT


25 AUGUST 2009

We’re still 4-6 months off of what we think will be a meaningful step-up in retail M&A. But this week’s mini-round of asset sales are definitely notable – especially for those ‘investors’ that barked at the Charlotte Ruse Board for not accepting a single digit bid 82% ago.


It’s hardly a secret that M&A has picked up across the board in almost every sector. But have you noticed that on a relative basis Retail has not participated? It started off strong earlier this year, and M&A over the past few months has pretty much died down to a crawl. My view on this has been, and continues to be, that retail, in aggregate, does not NEED to sell assets right now due to the cash flow stability and visibility presented by a) stabilizing top line, b) tight inventories, and subsequent gross margin predictability, c) sg&a cuts and d) capex cuts. My extremely strong view is that the M&A ante will pick up in 1Q10 when we see who will prove to have invested properly today in proactively driving their models, instead of milking the margin structures for all it’s worth (i.e. printing too much profit today and risking growth and cash flow stability next year).

With all that said, I was definitely surprised by yesterday’s announcement that Advent International is purchasing Charlotte Russe for $17.50/share or a total of $380 million. Recall that in November of last year, the company’s largest shareholder at that time attempted to take over the company for $9.50 per share- a bid that the board rejected, and many major shareholders openly dismissed. Now we’re looking at a price 82% higher for a sub-par business. Here’s a great example of a severe duration mismatch between those that rented the stock last year versus the Board of Directors.

Other M&A Callouts

  • Speaking of M&A, fashion blog “Fashionista” is suggesting that DKNY is up for sale by LVMH. The blog goes on to suggest that the brand is no longer a good fit with the company’s super premium/luxury strategy. While this is certainly noteworthy and something to watch, it’s probably more interesting that the story was broken in a fashion blog. It’s only a matter of time before trolling Facebook and Twitter will yield tangible investment ideas.
  • Nike is looking to sell its 100% stake in the United Soccer Leagues (U.S.L), a legacy position it acquired along with the company’s purchase of Umbro in 2007. The relatively unknown league has teams in the US, Canada, and Puerto Rico. Finding a buyer for the non-core asset however, may be more of a challenge. The most obvious buyer would be Major League Soccer (M.L.S), U.S.L’s biggest and more popular competitor. However, the M.L.S has chosen not to submit a bid for the league, which is likely due to potential anti-trust issues as well as the fact that the official sponsor of M.L.S is rival Adidas.


-Price is even more of a factor than last year for buying sporting goods and athletic footwear and apparel - Following on a study conducted last summer by The SportsOneSource Group that indicated that price had become the number one motivating factor in determining where to shop for sporting goods or athletic footwear and apparel, it comes as no surprise that the factor has become even more important this year.  The interesting point is how high product quality was ranked by consumers and the increased importance of convenient locations. An even higher percentage of adult consumers viewed Price as the most important factor when deciding where to shop versus the 2008 report.  Product Quality was the attribute ranked second highest and Product in Stock was the third ranked attribute. <>

-Lower production costs in inland China drive plants to move away from the coasts of Guangdong  - In view of the lower production costs in the inland region, Chinese leather and footwear processing are moving out in large number from the coastal belt provinces of Zhejiang and Guangdong. This is due to the ever-soaring labour costs and increasing investments in complying with the country's new environmental policies, while inland provinces such as Chongqing and Fuxin, received assistance from the local government, have been building industrial zones where offer factories comparatively lower land prices, labour, raw materials, water and electricity and modern sewage treatment systems. Exports and imports from the leather sector have dropped by 10.8% and 17.7%, respectively in June 2009. <>

-Margin Boost: brands and retailers are getting the cheapest shipping rates anyone has seen in a while - Brands and retailers are enjoying some of the lowest ocean freight rates they’ve seen in years and are likely to see only slight increases going forward. It could take several years for the world’s major ocean carriers to dig themselves out of an oversupply issue that they spent the last decade or more creating. Prior to 2007, rising global economies and booming Chinese manufacturing capabilities spurred a binge of ship and container building. The number of 20-foot equivalent units, or TEU, handled by the Port of Los Angeles alone went from 1.7 million in 1998 to 8.5 million in 2006.  <>

-Congress attempting to pass a bill that will raise manufacturing costs in order to create a more green environment - Greenpeace has been trying to push a bill at the US Congress that requires chemical plants to adopt environmentally friendly and safer manufacturing process. In the meantime, the organization has recently protested in front of a textile chemical plant against its use of chlorine gas in its manufacturing process which might cause danger to the nearby community. If the legislation is passed, safer technologies can be enforced throughout the country. A spokesperson for the National Association of Manufacturers termed the bill "regulatory overkill". <>

-Textile and apparel manufacturers in Hong Kong and China which export to the EU could face obstacles in the coming years - Further requirements of a tough law on chemicals and their safe use will have to be considered in relation to their products from 1 June 2011. While these stringent requirements set out in Regulation 1907/2006 (REACH Regulation) are not limited to the textile and apparel sector, given the significant amount of textiles and clothing exported from Hong Kong and the mainland to the EU, an early warning is particularly important. <>

-Under Armour will be sponsoring five New York high school basketball teams - UA will sponsor 5 NYC basketball teams as part of 27 high school basketball teams it will sponsor during the 2009-10 season, according to a report in the Daily News. That list includes Lincoln High, which has won seven of the last eight PSAL championships.  <>

-Warnaco names David Cunningham as president - Apparel maker Warnaco Group Inc. said Monday it named David Cunningham as president of its Calvin Klein Jeans division, replacing Janice Sullivan, who is leaving the company. Cunningham joined Warnaco in 2006 as president of the Chaps business. Before that, he was group president for Kenneth Cole at Paul Davril Inc.  <>

-Timberland Co. appointed Jim Davey as vice president of global marketing - Prior to joining Timberland, Davey spent eight years with Nickelodeon and Viacom Consumer Products, most recently as senior vice president, global marketing, planning and retail development. <>

-Lowe's Bets on Australia Property Market in Woolworths Hardware Venture - Lowe’s Cos., the second-largest U.S. home-improvement chain, will team with Woolworths Ltd. to enter Australia’s A$24 billion ($20 billion) hardware market, betting on an economy where home-building approvals rose by the most in four years. <>

-Whole Foods attempts to quell boycott cries - Protesters and unhappy customers have taken to the streets and to social networking sites to express their displeasure regarding Whole Foods chief executive John Mackey's recent Wall Street Journal op-ed column. Some are threatening to boycott the store altogether. The column, which appeared on August 12, was critical of President Obama's healthcare plan. It urged the country to embrace a more free-market healthcare system. Yesterday, members of the Washington D.C.-based United Food and Commercial Workers Union demonstrated outside of Whole Foods' stores in two locations in Ohio and plan to continue disseminating educational flyers to shoppers over the next few weeks. The group has emphasized the incongruity between Mackey's assertions and the brand image that Whole Foods has built. Online, the playwright Mark Rosenthal's "Boycott Whole Foods" Facebook group now has over 26,000 members. Though Whole Foods' own Facebook page has comments from numerous supporters stating their solidarity with Mackey and commitment to their local stores. <>

-Strong online sales growth in July - Online sales were helped by strong fashion sales and wet weather in July with customers spending £4.2bn, an increase of 16.8% on last year. <>

Thieves stole a semi-trailer full of footwear from a Wolverine Worldwide's distribution center in Howard City - Police say the thieves used their own semi-truck to steal the 40 foot long semi-trailer Monday morning. The trailer is said to have been full of footwear at the time it was stolen. Officials say the semi-trailer is is grey in color with "MAERSK" written along the side. <>

-LVMH wins trademark battle - A federal judge last week awarded more than $400,000 in damages to LVMH Moët Hennessy Louis Vuitton in a five-year-old trademark case over its Epi Leather trademark. The luxury house filed the suit in January 2004 alleging Carducci Leather Fashions Inc., a New York retailer, had sold counterfeit handbags bearing Louis Vuitton trademarks. As the case proceeded, however, the company discovered another firm, Bonini Italian Handbags Inc., supplied the items and added it as a defendant. Louis Vuitton and Carducci settled in 2006. According to court documents, Bonini never answered the allegations and the court eventually entered a default judgment against the company. <>

-Tiffany & Co. won a dispute over the sale of its Little Switzerland  business - A federal judge last week affirmed a $3.6 million award that Tiffany & Co. had won at arbitration in a dispute over the sale of its Little Switzerland Inc. business. Tiffany and NXP Corp., which bought the Caribbean jewelry chain through its Oakland, Mich.-based assignee Dhirim Inc. in 2007, had fought over the final sale price because of balance sheet adjustments. The two companies entered arbitration, as called for in the purchase agreement. In April, an arbitrator at financial services firm KPMG decided in Tiffany’s favor and awarded it $3.6 million. Dhirim refused to pay and, several weeks later, brought a lawsuit in U.S. District Court in Detroit seeking to have the award vacated.  <>

-Black Halo, a contemporary women's clothing line, has launched its first marketing campaign - includes photo ads in the September issues of Elle, Nylon and Interview magazines. The campaign, via Sew Branded in New York, was developed in late July and the beginning of August after the company held a photo shoot in order to update its Web site. This led Black Halo to venture into e-commerce, which in turn led to the decision to advertise. "It just made sense," said Sean Pattison, vp at the clothing company. What began as a simple project "took on a life of its own," he said. By advertising in fashion magazines, the company is looking to create "greater brand awareness for the general public," Pattison said. Black Halo ads will also run in the October and December editions of Nylon as well as the October issue of Interview. <>

-Spring Preview with The North Face - The North Face is freshening things up for spring ’10. The San Leandro, Calif.-based brand has updated its running and trail running styles (including a faster, more athletic look and a revamped logo) and is debuting two new eco collections with the men’s Kyoto and the women’s Suzy Qzy, as well as an expanded focus on casual styles. But the brand, which ranges from $80 to $130 for most styles, isn’t abandoning its technical focus, with trail running and multisport styles making a strong showing. Styles from The North Face are available at outdoor and athletic shops, as well as select sporting goods and department stores. <>



TIF: Charles Marquis, Director, exercised the right to buy 11,856shs ($29k) adding roughly 10% to total common holdings.


  • James Johnson, Director, sold 2,528shs ($114k) or roughly 20% of total common holdings.
  • Troy Risch, Executive Officer, sold 1,478shs ($67k) upon the vesting of options approximately 5% of total common holdings.

BGFV: Jeffrey Fraley, Senior VP – Human Resources, sold 10,000shs ($141k) nearly 40% of total common holdings.

© 2020 Hedgeye Risk Management, LLC. The information contained herein is the property of Hedgeye, which reserves all rights thereto. Redistribution of any part of this information is prohibited without the express written consent of Hedgeye. Hedgeye is not responsible for any errors in or omissions to this information, or for any consequences that may result from the use of this information.