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    RETAIL FIRST LOOK: QUANTIFYING THE RETAIL FREIGHT TRAIN

    AUGUST 31, 2009

    TODAY’S CALL OUT

    Another month is set to pass, and another month where retail will have continued its charge forward. The key driver, of course, has been earnings revisions. As we’ve been banking on since March, earnings revisions have driven this horse down the stretch over the summer. Three months ago, we were looking at 12-month forward consensus earnings growth expectations of -15%, and that’s since climbed by 39 points to +24%. Yes, a 39% up-shift in earnings power. Yeah, we all know that the market discounted the sell-side’s estimate mismatch from reality long before it showed up in reactive research reports, but interestingly enough, the group’s multiple is HIGHER today than it was when earnings estimates were still in the tank. We’re looking at 16x earnings – near peak levels – on 24% earnings growth estimates. This is the same period, mind you, where retail’s short interest remained consistently at the high end of all industry groups at 14% of float. The bottom line is that retail outperformed the S&P by 2.4% this month-to-date, 9.5% over the past three months, and 26.0% since August of ’08. Yes, that’s an annualized rate of 28.8%, 38.0% and 26.0%, respectively. Yes, that spells O-u-c-h to those that are not allowed to be bullish. But that’s history…

    What’s the setup now? Simply put, to put fresh money in this group, you need to argue multiple expansion beyond 16x. I cannot imagine I can find a single sane person that would argue that (heck, maybe that’s bullish in itself). In fact, we’ve already started to see the delta on earnings revisions flatten out (not good). But more likely, we’d need to argue that 24% earnings growth is too conservative. That was easy 3-6 months ago. But not quite today. Now we start getting to the point where we need to argue a good ‘ol fashioned demand recovery instead of simply gross margin stabilization, SG&A cuts and lower capex. Could we see a snapback in spending in spring ’10 as we anniversary a weather impacted 2009 at the same time we see a slight economic recovery? Yes. But I consider that a false start, and one that I’m not going to pay up for today. I still like the names where I see either meaningful earnings deviation, or those that are M&A targets (which should pick up in early ’10). Favorites continue to be smaller-focused, such as UA, PSS, LIZ, KSWS. I don’t like VFC, TJX, ROST, GIL, and TBL.

    RETAIL FIRST LOOK: QUANTIFYING THE RETAIL FREIGHT TRAIN - 1

    RETAIL FIRST LOOK: QUANTIFYING THE RETAIL FREIGHT TRAIN - 2 

    LEVINE’S LOW DOWN

    Some Notable Call Outs

  • While Tiffany’s U.S same store sales still remain under pressure, the spread in performance between the New York metro region and the rest of the chain is narrowing. In the recently reported second quarter, U.S same store sales declined by 27%, with the nine New York stores down 29%. The trend in the NYC area showed a measurable improvement vs. Q1, when the group of nine stores posted a 40% decline. The 5th Avenue flagship store continues to suffer from large declines in European tourist traffic year over year.
  • In an effort to improve its marketing aimed at growing the women’s line, Under Armour has been conducting agency reviews to choose a firm that will lead this campaign. Historically, UA has not used full-service outside agencies for ad campaigns but has instead used consultants and design houses in collaboration with its internal marketing department. We look forward to hearing more about these efforts and any potential marketing changes focused on women. Given the huge opportunity to differentiate the brand between its core male and female demographics, we see great potential form any changes that lead to a more feminine message geared towards women athletes. The company has often been criticized for portraying a very male-oriented macho image even in its effort to grow its women’s apparel business.
  • A visit to a mall in the NY area over the weekend revealed extremely light inventory at an Abercrombie and Fitch. Signs of tight inventory control were extremely visible to the consumer, as racks were spaced with 2-3 inches between hanging garments and stacked items were maxed out at 4-5 high. Interestingly, the clearance rooms in the back of the store and the full priced middle rooms were so thin on inventory there were actually multiple empty shelves on the wall. If I didn’t know any better, I may have thought this location was preparing to close. Staff levels were also extremely thin, with not even one employee per room visible. It is not wise to make a characterization based on one store visit, but with the key BTS season ramping up, this was eye-opening to see first-hand. 
  • Having been an owner of Anchor Blue (a casual-apparel chain) since 2003, Sun Capital has reacquired a majority stake in the company through the bankruptcy process. Given the increased ownership stake coupled with the likelihood of some losses along the way (on the company’s way into bankruptcy in May) it appears Sun has “traded” this asset on and off over the past 6 years. Sun Capital has now seen about 12 portfolio companies go bankrupt since the beginning of 2008.

    MORNING NEWS 

    -Footwear M&A show signs of pick up in coming quarters - After several seasons of silence on the mergers-and-acquisitions front, the footwear industry is beginning to see signs that deals might pick up over the next several quarters. Several companies are flush with cash and have been vocal in their hunt for strategic opportunities in the contracting vendor environment. Still, most analysts believe it is unlikely the market will see any large-scale deals until at least the end of 2010, calling last month’s $979 million marriage between Amazon.com and Zappos.com an anomaly. Acquisitions are a major focus at Iconix Brand Group Inc., which has said it is looking to get a deal done by the end of 2009. Cash rich Steven Madden's  management has said there are three acquisition targets on the firm’s radar, and analysts speculate that a men’s or women’s fashion brand with a similar demographic could be synergistic. Even Skechers USA Inc., which has completed few buyout deals since its inception, recently said that the abundance of small, niche companies available in the marketplace could be a path for expansion, especially since the company has $257 million in cash to spend. <wwd.com/footwear-news>

    -Contemporary apparel commit to fashion forward and realistic pricing - Makers of contemporary and young contemporary apparel are renewing their commitment to a more fashion-forward sensibility, lowering wholesale pricing and in some cases, launching divisions to address a wider customer base and reel in new business. Although faced with tepid retail sales, embattled lenders and buyers plagued by dwindling budgets and wary customers, contemporary and young contemporary companies are aiming to cut costs, not aesthetics. <wwd.com/business-news>

    -Recession showing signs of retreat - Luxury firms like Hermès and Tiffany continue to feel the squeeze; the world’s largest beauty company, L’Oréal, is coming under increasing pricing pressure from consumers reluctant to buy more expensive shampoo, and the second-largest discount retailer, Carrefour, is still working on a massive restructuring to prepare for an eventual upturn. But while executives remain extraordinarily cautious, there is a growing sense at those firms, as well as companies ranging from J. Crew to Guess, that things may have bottomed out across the board. Ceo’s have begun to talk expansion and growth rather than cutbacks and retrenchment, plotting new store openings and trying to grab even more market share. <wwd.com/business-news>

    -Japan's Retail Sales Fall for 11th Month on Employment Woes, Poor Weather - Japan’s retail sales fell for an 11th month in July, extending the longest losing streak since 2003, as poor weather and a worsening job market kept shoppers at home. <bloomberg.com/news>

    -Garment manufacturers in Nepal receiving more international orders - Garment manufacturers in Nepal are expecting market revival as the industry has been recently receiving more international inquires and orders from the US and India, according to president of Garment Association of Nepal Prashant Pokhrel. In the first seven months of the ongoing year, there was a slump of 56% in garment export to the US. During this period Nepal exported US $4.1 million worth of RMGs against its shipment of $9.4 million during the same period last year. However, the industry experienced an 8% increase in exports in July after a fall for eight consecutive months, according to GAN. In the meantime, the tabling of a bill at the US Senate to allow preferential entry for Nepali garments has also contributed to the increased orders. Although the country has been receiving more inquiries for garments, the actual orders received are not enough to keep the factories running for the whole year, said the official. Just seven or eight garment factories are working now and if bulk orders are received from international markets, 36 more garment factories can be reopened at short notice. <fashionnetasia.com>

    -UK optimism over the rest of the year - Although UK's high street sales fell for the fourth consecutive months to August, retailers have shown optimism about the outlook in the rest of the year. According to its monthly Distributive Trades Survey, 34% of retailers expressed that their sales volume in the year to August had risen, while 51% said they fell. The resulting balance in August of -16% was similar to sales declines in the previous three months but was better than expected. A similar fall in sales is predicted for September (-14%). Towards the end of the year, a balance of just -2% of retailers are expected, the least negative outlook for nearly two years. <fashionnetasia.com>

    -In Style: Laid Back - Laid-back styling is going to be a strong note for summer, with vintage-inspired details such as shell beading for women and printed canvas for men creating effortless, down-to-earth looks. Fringe trims and easy slides are working in concert to create a casual vibe. <wwd.com/footwear-news>

    -Under Armour is hoping for a slam dunk with a new viral video starring NBA point guard Brandon Jennings - The two-minute documentary-style spot, called “Back :02 Practice,” was shot on location in the Milwaukee Bucks’ old neighborhood in South Central Los Angeles and shows the young athlete hard at work on the court and outfitted, naturally, in a pair of customized Under Armour sneakers. A second video, with freestyle skier Jen Hudak, highlights the brand’s running footwear. Both spots were directed by Douglas Sloan of New York-based IContent and are airing on UnderArmour.com, YouTube, MTV.com and other sites. Though the Baltimore-based company’s basketball shoes have not yet rolled out to retail stores, the firm has been wear testing them with college teams since last spring, and Jennings has been in them for almost a year, according to a company spokesperson. In addition, last week, Under Armour announced it would sponsor 23 boys’ and girls’ high school basketball teams for the 2009-10 season as part of its Undeniable program. <wwd.com/footwear-news>

    RETAIL FIRST LOOK: QUANTIFYING THE RETAIL FREIGHT TRAIN - 3

    -Ralph Lauren to Open Up to 15 China Stores Yearly as U.S. Sales `Flatten' - Polo Ralph Lauren Corp., designer of Chaps and Club Monaco clothing, plans to open as many as 15 stores annually in Hong Kong and China as U.S. sales slow. <bloomberg.com/news>

    -Oakley CEO steps down - David Scott Olivet has stepped down as CEO of Oakley, according to the Orange County Business Journal. Colin Baden, president of Oakley since 1999, has taken over as CEO. <sportsonesource.com>

    -A line of premium footwear by Timberland will land in select nationwide Saks Fifth Avenue stores in September - A pop-up shop will also launch at the flagship location in New York City. The collection features hand-sewn boat shoes (a Saks' exclusive), as well as styles from the brand's boot company and Abington lines. The NYC Saks pop-up shop will be open from Sept. 9 to Sept. 20. "We are proud to partner with Saks Fifth Avenue, a retailer that shares our history of style and commitment to modern craftsmanship," says Tom Lucas, vice president of sales for Timberland North America. "As part of this debut, Timberland will be featuring our highest-echelon premium footwear collections and we are excited to see the response from Saks customers, who are known for their discerning taste and appreciation for premium quality and authentic style." <licensemag.com>

    -K-Swiss parties in New York with tennis stars to celebrate spring 2010 line - K-Swiss brought its California sports aesthetic to New York for a tennis-themed party celebrating the spring ’10 line and some of its featured athletes (including Vera Zvonareva, who’ll be testing her skill on court in Queens, and longtime spokeswoman Anna Kournikova). K-Swiss put its people to work on the runway, along with recently named skate line creative director and pro skater Greg Lutzka (at left). Lutzka told Insider the company was close to signing more skaters to its team, which should be finalized by the end of the year. He also spilled the specs for the signature skate shoe he will release next year: suede with a three-piece toe, vulcanized sole and high- and low-top versions. <wwd.com/footwear-news>

    -Fabolous at Foot Locker - Brooklyn-based rapper Fabolous stepped out in a Manhattan Foot Locker last week to support his partnership with Reebok and its new Classic Remix collection. While fans flocked to meet the “Throw It in the Bag” artist, Fab dished to Insider on his personal sneaker style. “Right now, I am digging high-tops, but it all depends on what I’m wearing,” he said, noting that comfort and fashion are key to a successful stage look. And when on tour, he never misses a chance to eye new swag. “I like to stop in all the hot spots across the country and see what’s new in the stores.” The Classic Remix Tour will next take Fab to New Orleans, Miami, Houston and Atlanta. <wwd.com/footwear-news>

    -Foot Locker teams with Gen2Media Corp to launch an exclusive, ad-supported internet television channel - Gen2Media Corporation, a fully integrated digital media, technology and marketing company, today announced that it has teamed with Foot Locker, Inc. (NYSE:FL), the New York-based specialty athletic retailer, to launch an exclusive, interactive, ad-supported Internet television channel that will be available for viewing on Foot Locker's web site later this fall. Powered by Gen2's proprietary, patent-pending video publishing platform and Smart Content Management System(tm), FootLockerOnlineTV will showcase custom video programming and digital advertising specially created to appeal to millions of visitors that collectively frequent Foot Locker's web properties each month. Bob Stephan, Director, Partner Marketing at Footlocker.com, stated, "With Gen2's Partnership, we look forward to providing our web visitors with an even more vibrant and engaging online experience through on-demand delivery of high impact, professionally-produced video programming that is both informative and entertaining. We also expect that the diverse and flexible ad serving opportunities that Gen2's video publishing platform enables will also be an exciting opportunity for potential advertisers who may be interested in messaging our large and loyal following of athletic footwear and apparel enthusiasts."  <reuters.com>

    -Mass merchants lead retail categories with a 15% rise in July traffic - With the sharpest increase in traffic at Kmart.com, mass merchants and wholesale clubs posted a 14.8% year-over-year increase in the number of unique web site visitors in July to lead five other retail categories measured by Compete. <internetretailer.com>

    -Talbots dresses up its web site with a new look and more personalization - An updated rich media application on the retooled Talbots.com lets visitors shop by outfit and see recommended shoes and accessories. The revamped site runs on an ATG e-commerce platform Talbot`s installed last year. <internetretailer.com>

    -American Apparel introduces another strange idea with Bag-O-Scraps - You've got to hand it to American Apparel, they're always finding new ways to make tired cotton and spandex duds into something exciting and marketable. In perhaps it's more extreme permutation, American Apparel will now be bypassing design and production altogether and opting to sell the Bag-O-Scraps, which the AA website describes as: "collected cuttings from some of your favorite fun fabrics from around the American Apparel factory to make one-of-a-kind bags of scrap fabrics. Use them for all sorts of arts and crafts. Make clever jewelry, accessories, a card for your grandma or a colorful hanging sculpture for your apartment. Each bag comes with a zine (printed on scrap paper, of course) with five fun and easy scrap projects, complete with how-to instructions." It'll be interesting to see the kinds of designs AA wearers who buy the Bag-O-Scraps will be able to come up with, and whether they will be more or less scantily clad than their current models. <huffingtonpost.com>

    RETAIL FIRST LOOK: QUANTIFYING THE RETAIL FREIGHT TRAIN - 4

    -Analysts take on Genesco - Analysts said troubles in the economy and uncertainty in the skate market could hinder Genesco Inc.’s earnings prospects until late in the year, even after the company beat expectations during its second quarter. There is worry about the skate shoe category, which is a big part of Journeys’ mix.  Some analysts are hesitant about Q3 and point towards Q4 as the recovery point.  The CEO said the chain had adopted a more promotional position heading into fall, citing the wider distribution plans of some vendors, which is increasing competition. Nevertheless, he said he felt positive about the retailer’s product assortment. <wwd.com/footwear-news>

    -Analysts applauded the leadership of DSW Inc.’s recently appointed president and CEO, Michael MacDonald - Some analysts liked DSW's ability to cut down on costs, which had not been focused on as much in the past by DSW.  Analysts seem to like the direction the new CEO is steering the company. During the quarter seasonal sandals, early demand for fall boots, pumps, and comfort shoes drove sales, but men’s shoes remained weak. The new CEO said that the company remains committed to the strategy of providing a trend-right product assortment, value and convenience, and pointed to an action plan to better execute on those core areas of the business. He declined to outline the specifics, but said consumers would begin seeing elements of the new initiative this fall. <wwd.com/footwear-news>

    -Analysts cautioned that sluggish sales trends and an increased reliance on promotions could hurt Brown Shoe’s bottom line. Although Brown had tried to rely less on the buy-one-get-one strategy at its Famous Footwear stores, it was forced to reintroduce BOGO in June and plans to continue the promotion throughout the back-to-school season. “We changed our promotional cadence early in the [second] quarter in favor of single-pair promotions,” Brown President and COO Diane Sullivan said on a conference call. <wwd.com/footwear-news>

    -Saucony is getting women into the gym with its new women's cross training shoe the Grid Virtue - Saucony may have made its name in running, but the Lexington, Mass.-based brand (a division of Topeka, Kan.-based Collective Brands Inc.) is getting women into the gym with its new women’s-specific cross-training shoe, the Grid Virtue (at left). The $75 style adds more lateral support than Saucony’s traditional running silhouettes for the side-to-side motions of training. The lightweight 9.7-oz. model has a forefoot groove to accommodate spin-class bike pedals, and also features a bunion screen on the toebox to relieve pressure in an area where women traditionally need flexibility. The Grid Virtue will be available at sporting goods and family accounts. <wwd.com/footwear-news>

    RETAIL FIRST LOOK: QUANTIFYING THE RETAIL FREIGHT TRAIN - 5

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

    08/28/2009 10:29 AM

    SELLING PSS $15.69

    McGough doesn't like the stock into the EPS print. He likes it coming out of the print. Selling high in order to manage risk around the event. KM

    08/28/2009 12:51 PM

    COVERING AZO $147.26

    Covering on red. I think people are figuring out what the Cash for Clangers program means... KM