RETAIL FIRST LOOK: MORE EARNINGS HIGHLIGHTS
AUGUST 27, 2009
Another day of upside with results largely better than expected.
TODAY’S CALL OUT
- It’s hard to believe the conservatism that WSM management is trying to convey when they produce $0.14 of upside in a quarter when the Street is forecasting a loss of $0.09. The bullish conference call included commentary that Q3 results are running ahead of plans and guidance, merchandising changes at Pottery Barn are beginning to take hold, and cost containment remains the key to upside leverage as sales accelerate. With all these positive data points, why is the outlook for 4Q unchanged? It seems that management is concerned about the holiday being promotional as a result of weaker competitors looking to either boost sales or actually liquidate. Even if this holds true, the benefits of competitive liquidation far outweigh any near-term sales impact. With WSM’s lean cost structure, each incremental sale (i.e. market share gain) will ultimately drop to the bottom line at a profitable rate. Now, if sales growth actually turns positive, there will be very few believable reasons to remain conservative on the company’s outlook.
- In one of the most eye opening examples of how the consumer prefers to shop on promotion, Brown Shoe provided some interesting commentary on its “BOGO” (buy one, get one) strategy at Famous Footwear. It appears that after eliminating its BOGO program in favor of single pair promotions early in 2Q, the consumer rejected the new strategy and sales tailed off. As a result of the negative trends, the company reinstated the BOGO, following exactly what the consumer wanted. Sales picked up immediately. Unfortunately, BOGO’s carry lower gross margins which ended up negatively impacting the quarter. Management’s comment that, “Unfortunately, right now BOGO is a way of life” suggests that promotional activity and margin pressure are likely to persist until overall underlying demand improves.
- Running shoes are the leading category within Famous Footwear’s athletic offering. This now the third major retailer to confirm that the running category is one of the few bright spots in what is otherwise a volatile environment for footwear.
- In an effort to drive traffic and build brand awareness, DSW is returning to TV with an advertising campaign this September. While it is unclear so far if TV has had any impact on sales (the last spot aired in May), management is still committed to incremental marketing spend over the back half of the year.
- While many retailers have articulated success in renegotiating lower rents or renewals, New York and Company highlighted a benefit of the current vacancy trend. During its second quarter, NWY signed short-term or temporary leases in an effort to test outlet locations. These leases provide the highest levels of flexibility given their minimal commitment and capital requirements. We have seen pop-up stores and vacant store fronts used for sample sales in major cities, but this may be a sign of things to come if vacancies continue to remain high. The market for temporary real estate is especially interesting as we near the holiday season- a time when both landlords and retailers aim to maximize both sales volumes and profits.
- With a strict adherence to the $1 price point, Dollar Tree is sometime faced with having to drop a product from its offering due to price increases or inflation. However, with improved sourcing costs and increased capacity in China (~40% of DLTR’s imports) the company is now able to bring products back that were dropped from the mix over the past couple of years. Additionally, cost savings allow the company to offer more “value” to the consumer, either in the form of higher quality or increased pack size. Given that there is a finite amount of pennies in a $1 price-point strategy, the trend in China could be particularly beneficial to companies like DLTR and NDN.
- As Charming Shoppes management continues to execute a major turnaround of all three of its brands, it has been upfront about plans to close unprofitable and cash-flow dragging locations. As an update to the original plan which called for 100 closures in 2009, the company is now expecting to close 145 units for the year. With 2,258 total stores, there is likely room for further cuts.
- On the Guess, Inc. 2Q call, management discussed their views on what is motivating their U.S. consumer to shop. If you guessed good prices and some type of promotion, then you probably don’t need to read any further. According to GES, customers are shopping for compelling values around events and spending less time in malls during non-event periods. In response to this very obvious discovery, GES has made adjustments to its promotional calendar to benefit from those “events” that drive traffic to the mall. This sounds like basic planning to me around key holiday and seasonal transition times, something that most retailers figure out a year in advance. Despite these efforts to boost sales trends stateside, the business remains strong across the globe.
- As most multi-channel retailers are substantially reducing catalog circulation in favor of more cost effective marketing and ecommerce distribution, Coldwater Creek is set to ramp up. With increased confidence in its merchandising changes, the company is planning a 40% increase in catalog circulation in 3Q. While the delta in mailings is large by any measure, it is worth noting that last year circulation was cut in the same period. Regardless, this may be one of the few retailers that is not seeing huge potential from a shift to online marketing and a move away from the costly catalog business.
-Hot categories of 2009 - Men’s underwear is need-based, typically on an 18-to-24-month cycle and the consumer is out there spending on necessity. Fleecewear was a standout, it was a category that did reasonably well for teen retailers (hoodies have been a key category for firms like New York-based Aéropostale). Intimate apparel is an industry bellwether to see how women are feeling, and it reflects how much desire they have to buy. Denim has been a top performer for retailers such as True Religion Inc., Chico’s FAS Inc. and Buckle. Gap Inc. is introducing an overhaul of its denim offering this month. <wwd.com/business-news>
-Consumer spending is down with a few exceptions - The NPD Group has released its latest report detailing spending in apparel product categories from January through June. Spending has been need based — but consumers are still spending. Bright spots included number-one-ranked male underwear, and fleecewear at number two. Both showed sales gains from the same period last year. Although the tops category ranked first in overall spending, it decreased 7.6%compared with the same period a year ago. The results for 1H 2009: Male Underwear + 4.9%, Fleecewear + 2.1%, Outerwear - 0.9%, Intimate Apparel - 3.3%, Sleepwear - 4.2%, Hosiery - 6.4%, Tops - 7.6%, Bottoms - 7.8%, Swimwear - 9%, Tailored Clothing - 11.4%. <wwd.com/business-news>
-The American waistline may be expanding, but plus-size shoppers are tightening their belts - People just aren't buying plus-size clothing at the rate they used to. Apparel in general — being a discretionary purchase — is suffering because of the economy, but plus-size has been particularly hard hit. According to the NPD Group, a market research company, the overall women's apparel business is down about 5% and plus-size is down almost 10% from the 12 months ending in May 2009 compared to the same time the year before. It's hard to account for the dip at a time when more than half of American women are estimated to wear plus-sizes, generally considered size 14 and up, but analysts have some theories. Some retailers don't want to lure overweight customers and send out the "wrong" image, experts said, and the customers themselves may feel put off by many stores. Some retailers, including Old Navy, Banana Republic and Ann Taylor, have taken their plus-size collections out of stores and are selling only online — which some experts say plus-size shoppers prefer. Others, including H&M, have dropped out of the plus-size market. And there's also the uncomfortable connection between obesity and lower incomes, which might help explain the dip. A study of nationally representative data on American workers by two professors at Stanford University found that obese workers at the same level of job experience, education and gender earned less than their thinner colleagues. <google.com/hostednews>
-A new luxury e-commerce site is launching here as online sales gain momentum in Japan - Glamour-sales.com, a new invitation-only Web site, goes live today with an inaugural sales event dedicated to Longchamp. Owned and managed by a group of French nationals, the Web site will sell lifestyle products ranging from Prada eyewear to packages at luxury hotels and cars from Peugeot. Initially the site will be limited to Japanese users, but the company plans to launch Glamour-sales in both China and South Korea next year. During each brand-specific 48-hour sale, the site will feature a brief film to showcase the products and encapsulate the brand’s essence. For example, Japanese model Hinano Yoshikawa is featured in the Longchamp film, a live-action fashion shoot of her posing sensually with the French company’s handbags. The site will also feature information about each brand’s history, an online catalogue and blogs, which members can use to interact with one another. <wwd.com/retail-news>
-Consumer spending was hardly affected by last year’s reduction in VAT, a survey has revealed - Consultants PricewaterhouseCoopers said 88% of the 2,000 consumers surveyed said the cut from 17.5% to 15% did not encourage them to spend more on either goods or services. Respondents said the Government’s £12 billion VAT cut from last November’s pre-budget report was insignificant compared to other economic factors, adding that economic uncertainty and salary cuts influenced their spending more. Only 8% of those surveyed said they spent more because of the cut, while 5% were unaware that there had even been one. The cut in VAT is expected to be reversed on 1 January. <retail-week.com>
-Williams-Sonoma’s online sales declined 21% in the second quarter - Home furnishings retailer Williams-Sonoma reported second quarter e-commerce sales of $210 million, a 21% decrease compared with $265 million in Q2 of 2008. The web accounted for 31% of sales in Q2 2009 vs. 32% in Q2 2008. <internetretailer.com>
-Apparel merchants logged the best response time in July - Apparel and accessories merchants continued their run, delivering the best response time to shoppers with a high broadband connection for the third month in a row, says Gomez. <internetretailer.com>
-Nike INC. brought out some of its brightest tennis stars on Wednesday to preview their U.S. Open attire and raise money for local youth charities - The company assembled a regulation-size tennis court right on Broadway, just below 23rd Street, and allowed hundreds of local youths to watch Serena Williams, Rafael Nadal, Roger Federer and John McEnroe in some light, on-court action. Four kids got a chance to receive coaching from the champions and play to win donations for their organizations. Williams, Nadal and Federer donned the daytime ensembles they plan to wear in the U.S. Open, which starts Aug. 31. <wwd.com/menswear-news>
-A new fashion trend for denim - After a period of immaculately clean superskinny fits dominating the jeanswear market, the big news for spring is the straight-leg distressed look — coupled with extreme ripped denim, soft whiskering and splattered paint-aged effects. <wwd.com/menswear-news>
-Sportswear emerges successful at a men's show in Dallas - A continued slide in tailored clothing sales prompted retailers at the Men’s Show Dallas Collective to focus on sportswear epitomized by colorfully striped shirts, bright polos, shorts and denim. Buyers said business overall remains challenging as they slashed budgets 20 to 50%, figuring they can always obtain goods if sales pick up. “It’s much more dressed down,” Bryson observed. Men rarely wear suits, coats or sport jackets, and the only time attorneys wear a suit is in court. "We are looking for new and exciting ways to keep it lively.” Bryson cited colorful striped shirts by Thomas Dean and Polo Ralph Lauren knit tops in solid colors, from basic blue and red to greens, orange and pink paired with shorts in neutral hues. The customer is “price-point driven,” said Luke Abney, co-owner of The Rogue Ltd. men’s shop and Forty Four Fifty women’s boutique in Jackson, Miss. <wwd.com/menswear-news>
-Levi Strauss & Co. has named Kodak veteran Jaime Cohen Szulc global chief marketing officer, a new position at the company - Szulc (pictured), who was most recently CMO of Eastman Kodak's consumer digital group, will report to Levi's CEO John Anderson. Szulc joined Kodak in 1998 as the marketing head for Latin America, later moving on to become general manager of the Americas region. Before that, he held marketing posts at Procter & Gamble Brazil and SC Johnson Latin America. Levi's current creative agency of record is Wieden + Kennedy, Portland, Ore. The company's current ad campaign features artistic, Americana-soaked visions of the young target audience with the theme, "Go forth." Independent Wieden launched that campaign shortly after its hire by Levi's last December. The brand typically spends $80 million in annual domestic measured media, per Nielsen. Omnicom Group's OMD was tapped in a separate review for media chores last October. <brandweek.com>
-Arcandor Fires Most Employees of Its Holding Company Amid Insolvency - Arcandor AG, the insolvent German retailer, has fired most of the employees at its main holding company, while the administrator restructures its department store and mail-order businesses. <bloomberg.com>
-Esprit Shares Plunge as Krogner Warns Clothes Profits May Continue to Drop - Esprit Holdings Ltd., the biggest Hong Kong-traded clothing retailer, may take until next year to return to profit growth after reporting its first earnings drop in more than a decade. Its shares fell the most in 10 months. <bloomberg.com>
-Italian Consumer Confidence Reaches 2 1/2-Year High on Easing Inflation - Consumer confidence in Italy rose to its highest in 2 1/2 years in August on signs that household spending is benefiting from falling prices, signaling the economy is recovering from its worst recession in six decades. <bloomberg.com>
-New regions are emerging as cost competitive in China for low- tech products - Fujian and Zhejiang are now key sourcing centers for apparel, with Zhejiang, for example, accounting for 20% of China's baby and children's wear exports -- an amount equal to Guangdong Province. As manufacturing for a range of products moves to other regions in China, Private Sourcing Events are an ideal platform for buyers to discover new suppliers who can meet their requirements. Sourcing & Audit Manager of Otto International Shanghai, Vincent Sung, said: "We are already familiar with many of the big name manufacturers in China. However, we cannot afford to overlook new suppliers, who are competitive in terms of pricing and quality and who are willing to work even harder to partner with us. "Private Sourcing Events connect us with new suppliers whom we know can meet our high standards before we even meet them." <prnewswire.com>
INSIDER TRANSACTION ACTIVITY:
GPS: Robert Fisher, Director, sold 414,00shs ($8.3mm) less than 5% of total common holdings pursuant to 10b5-1 plan.
FOSL: Tom Karsotis, Chairman, sold 147,718shs ($3.7mm) less than 5% of total common holdings.
DKS: Lawrence Schorr, Director, sold 35,000shs ($793k) nearly 50% of total common holdings.
FL: Ken Hicks, CEO, was awarded 500,000shs via stock options as part of corporate incentive plan.
- Michael Jeffries, Chairman & CEO, sold 4,090shs ($131k) upon exercising the option to buy 12,800shs a fraction of total common holdings.
- Charles Kessler, EVP-Merchandising, sold 3,834 ($123k) less than 5% of total common holdings.
- David Brandon, Director, sold 7,000shs ($256k) representing the remainder of his common stock holdings.
- John O’Brien, Director, sold 20,000shs ($732k) upon exercising the option to buy 20,000shs less than 50% of total common holdings.