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.
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.
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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.
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.
RETAIL FIRST LOOK: 8/20/09
TODAY’S CALL OUT
- Deflation in food and consumables continues to weigh on topline results at BJ and is one of the reasons management tempered its outlook for same store sales over the back half of the year. The rate of price declines in key perishables categories including meat, produce, milk, eggs, and dairy increased during 2Q and are now expected to remain a headwind over the next two quarters. Same store sales in the perishables category decelerated from a 12% increase in 1Q to a 6% increase in 2Q. Unit volumes are still positive, but pricing trends are clearly taking their toll. Additionally, BJ’s continues to struggle with general merchandise sales, which comped negatively by 2%. Despite positive traffic of 4%, BJ’s membership remains cautious in its purchase of discretionary products while at the same time choosing to spend on food and consumables.
- PetSmart is one of the few retailers caught in the middle of a transition from inflation to deflation and the company is not getting any benefit along the way. On one hand, substantial inflation (up until now) in premium pet food and consumables was helping to drive same store sales and leverage expenses. With a limited amount of dollars to spend and the cost of pet food on the rise, the PetSmart customer then reduced their purchases of higher margin hard goods. The net result was a negative mix shift resulting in gross margin pressure. Shifting forward to the current trend, inflation is no longer holding up and y/y pricing gains are unraveling, leaving same store sales below plan. With deflation likely to kick in as many manufacturers have stopped raising prices on premium food (there is now talk of lowering prices), the forecast for the topline is now clouded. The optimal outcome for PetSmart would be a reversal in the mix shift now that the consumer may ultimately have more discretionary spend. However, it’s too early to make this call and the Catch-22 scenario of fewer sales and less margin appears to be the most likely outcome for at least a couple of quarters.
- As Tween Brands prepares to close its merger deal with Dress Barn, some interesting details were shared on the company’s conference call about its real estate portfolio. Between now and 2012, 361 store leases come due out of a total base of 900. In 2010, 200 stores will be up for renewal. We suspect this was well understood by Dress Barn during their due diligence, as it gives the new owners a huge amount of flexibility in profitably rightsizing the portfolio as well as mitigating some risk in the former Limited Too mall stores that are being transitioned to the value-focused Justice concept. While we don’t expect all of the leases to expire, the pendulum has certainly shifted towards the tenant in regaining flexibility and reducing costs in what has been a landlord driven environment for the last few years.
- Perry Ellis management had a handful of optimistic comments on its 2Q conference call as it pertains to the environment and specifically to their business. First, the company reminded listeners that 90% of its business is men’s which has not suffered as much as women’s. Second, the idea of depleted inventories at retail was introduced with the belief that planning over 3Q and 4Q may be too low even if the sales environment does not improve dramatically. Third, it was pointed out that apparel unit sales have remained robust and the recent decline in overall apparel spend has been predominantly driven by promotions and price erosion. Finally, the company reminded investors that many small apparel manufacturers have been going out of business, which ultimately leads to market share opportunities for the better capitalized survivors. We can’t say we disagree with many of the points made on the call, although we’re pretty certain it doesn’t pay to nudge expectations higher before the evidence of a positive shift takes place.
- It’s hard to believe back to school is underway and now a shift in focus toward Halloween is underway. While not a huge holiday for most retailers, Halloween has historically been used as a barometer of discretionary spending in the past. With that said, it’s important to note (thank you Hot Topic) that Halloween falls on a Saturday this year, which makes the calendar optimal for a full two days worth of costume parties and candy-induced bellyaches. As October 31st draws closer, expect consumables retailers to highlight the calendar benefit. In the meantime, we’ll focus on the timing of Labor Day, which detracts from August but helps September.
-Retailers are anxious to look ahead and now a survey of top executives found many don’t expect any real improvement until at least 2011 - That’s not to say it’s all doom and gloom among retail’s top brass, however. 70% of retail executives surveyed by KPMG expect business conditions to improve next year, with 68% predicting stronger revenues and 66% forecasting better profits. But 44% of executives also thought the economy wouldn’t substantially recover until 2011 or beyond. “These executives feel like they have done what they need to do to survive and be poised to take advantage [of conditions] when the economy recovers,” said Mark Larson, KPMG’s global retail sector chair, who was encouraged by the survey but acknowledged the improvement in 2010 will come off of plummeting profits and sales in 2009. Three-quarters of the retailers surveyed by KPMG said they had already trimmed their workforces and only 14 percent said they were still planning to issue pink slips. The weakness of the consumer and the impact of lower spending levels on retailers’ bottom lines came into even sharper relief as specialty stores reported second-quarter results Wednesday, adding to the slew of poor numbers that have been reported since last week. Cost-cutting and inventory reduction have been major themes so far this year, but some retailers appear to have made their cuts and are planning to bolster their businesses where they can. Overall, 54% of those surveyed by KPMG said their strategic focus was on investment, while the rest are still zeroed-in on cost cuts. Seventy-seven percent of executives are using technology to reduce operational costs. <wwd.com/business-news>
-Aeon Co., Japan’s second-largest retailer, may expand in India and Vietnam to boost growth as sales slump in its home market - “At a macro level, gross domestic product in the next 10 years is going to grow faster in Asia than the rest of the world,” Jerry Black, vice president in charge of Aeon’s Asia strategy, said in an interview today in Chiba, near Tokyo. While the company hasn’t made “any firm decisions,” India “is appealing to us” and he’s looked at locations in Vietnam. Aeon, operator of Jusco general-merchandise stores, is struggling to spur sales in Japan. The retailer also plans to “expand more aggressively” in Malaysia and Thailand, said Black, Aeon’s first non-Japanese executive. <bloomberg.com>
-China's textile and garment export fell 12.35% - China's textile and garment export fell 12.35% to $16.38 billion in July from the same period last year, according to the latest statistics on the official website of the General Administration of Customs. The figure in July, however, was 21% from $13.48 billion in June. The textile and garment export declined 11.15% to $89.17 billion in the first seven months from the same period last year due to sluggish demand in China's major export destinations, the US, EU and Japan. <fashionnetasia.com>
-Research reveals mixed impact of recession on Europe - Across the board people said that they were spending more time researching before making a purchase. In the UK, one in five will no longer make a purchase without extensive online research. In Germany, this figure rises to 27%. In France it is 13%, while in Spain and Italy one in ten people said that their research had increased. The results highlighted some surprising differences in local responses. One point, however, is consistent: people still love to shop but they're working harder to get the best from their money. Most affected overall by the credit crunch are the Brits and the Italians. 82% and 86% respectively said that they felt the economy had affected them personally. The most resilient nation is France, where an impressive 63% said that they had yet to really feel the downturn. <theretailbulletin.com>
-Germany-based Deichmann Shoes is making a play for U.S. market share - The private firm, which owns the Rack Room and Off Broadway retail chains, will introduce its own stores starting this fall. It is unclear if the stores will be under the Deichmann name, as they are in Europe. Five store locations have been confirmed, starting with units in Kennesaw, Ga., and Towson, Md., with three additional openings to follow in the Boston area. A continued Northeastern retail push is planned for 2010. <wwd.com/footwear-news>
-Wal-Mart launches Mad Style by True Jackson for BTS - Walmart is heading into the back-to-school season in style, nabbing an exclusive on "Mad Style by True Jackson," a line of apparel and accessories inspired by the Nickelodeon series. The line, designed by Jane Siskin, president and chief executive officer of L'Koral, is inspired by the live-action series True Jackson VP and includes long sleeved t-shirts; knit tees featuring graphics with positive messages like 'Be true to you'; fashion leggings with novelty buttons; jumper dresses with removable straps; tunic dresses with pre-scrunched sleeves; Mary Jane shoes; ballet flats; and sneakers. Every item in the collection is priced at $14 or less. "True Jackson VP inspires girls to dream big and embrace their individuality and creativity," said Hal Snik, svp, domestic licensing, Nickelodeon/Viacom Consumer Products. "The Mad Style line embodies the spirit of the show and the clothes are comfortable and affordable enough so that girls can follow the trends or create a look totally in their own style." Additionally, a microsite -- www.nick.com/madstylefashions/ -- has been developed exclusively for consumers and will be the digital headquarters for the new line. Kids can log on to view images of the line, get weekly style tips, play dress-up games and more. <brandweek.com>
-Dick's Sporting Goods decides not to sell Michael Vick jerseys - If you find an Eagles No. 7 jersey at one of Dick's Sporting Goods stores, it will be a Ron Jaworski throwback and not a brand new Michael Vick. That's because the company has decided not to sell jerseys bearing Vick's name. "We are simply evaluating the reaction of Eagles fans before we commit to buy it to sell in our stores," said Dick's chief marketing officer Jeff Hennion. "Right now, we're not sure how much demand there really is. If there's demand for it, we'll sell it." While there has been anecdotal evidence that suggest that Vick jerseys have been selling well, one retailer told us that they weren't moving as fast as they had hoped. Not only is Vick's past a factor, our source said, but also the fact that it's hard to sell the jersey of a quarterback who is not the starter in this environment. Two years ago, after Vick's dogfighting ring became public, Dick's was the first national retailer to pull all Vick products from its shelves. Dick's has nearly 400 stores in 40 states, but has the largest population of stores in Pennsylvania, where the company is based. <cnbc.com/id>
-Heelys Q&A - After exploding onto the footwear scene in 2000 with a “stealth skate shoe,” Heelys Inc. has struggled to maintain its momentum. In an unconventional move, the company named advertising veteran Tom Hansen as its new CEO in July. Several weeks after beginning his work at the Dallas-based firm, Hansen gave Footwear News some insight into Heelys’ future. Tom Hansen believes Heelys is an icon brand, which either recreates — or totally creates — its own category. It was probably one of the most disruptive forces in the [footwear] category when it came out. "Heelys, as a brand, never developed. It’s still a product. That represents a giant opportunity." "We’ve focused on the product of shoe with a wheel in the heel, but [we want to move ahead to] the benefit of Heelys." The new CEO believes that dance and music are big potential areas of growth for Heelys. "We want to be a brand that can participate in that part of pop culture. Beyond just skating, we see a lot of opportunity in the area of dance competitions, like the B-Boys." <wwd.com/footwear-news>
-Exports of Swiss watches continue to fall, declining 25.9% in July - Since January, watch exports have fallen 26.3%, reflecting wilting demand for expensive timepieces amid the economic crisis. Dollar figures are converted at average exchange rates for the periods to which they refer. The Swiss watch industry has been in decline since the end of 2008, after five years of strong growth, with exports currently below 2006 levels. Although all price segments declined in July, watches costing between 200 and 500 Swiss francs, or $186 to $466, held up best, with a fall of around 7%. More expensive ranges fell by more than 20%, while watches costing over 3,000 Swiss francs, or $2,797, recorded a steeper fall than the others, plummeting over 30%. Gold watches suffered the biggest fall in value terms, while the performance of steel and bi-metal timepieces was average, the federation said in a statement. <wwd.com/business-news>
-ColdwaterCreek.com takes the title as the most consistent site in July - ColdwaterCreek.com led a group of 23 major retailers that achieved an “excellent” web site consistency rating in July, according to Gomez. The top 48 retail web sites measured last month had an average site availability rate of 92.65%. <internetretailer.com>
-Abercrombie & Fitch sales fall in Q2, but web takes lightest hit - Abercrombie & Fitch’s second quarter sales declined across the board. Q2 e-commerce sales were $48.7 million, a 13% decline from $55.9 million in the second quarter of 2008. Total sales decreased 23% to $648.5 million from $845.8 million in Q2 of 2008. <internetretailer.com>
-American Apparel web sales were down 3.8% in the second quarter - Consumer brand manufacturer American Apparel reported web sales of $8.39 million for the second quarter of fiscal 2009, down 3.8% compared with $8.72 million in Q2 2008. Total sales edged up 2.3% for the quarter. <internetretailer.com>
-Riddell Sports signs NFL deal - Riddell Sports has signed a multi-year extension to its existing licensing agreement with the National Football League through 2014. <sportsonesource.com>
-Workwear and uniform brand Dickies has signed Bioworld as its newest headwear and cold weather accessories licensee - The apparel label has also extended its multi-year contract with Randa for licensed leather goods. Bioworld is currently developing a product line for spring 2010, which will include headwear and cold weather accessories, including scarves for men, women, boys and girls. The Bioworld announcement comes after Dickies ended its nine-year partnership with former headwear licensee Daystone International. "We've realized that Dickies customers use our apparel not only for work, but for after work and weekends, as well," says Michael Penn, vice president of licensing for Dickies. "Our brand has a long-standing heritage of providing quality, value and durability; whether you wear the clothes to rebuild a car or attend a music festival. Our network of licensing partners plays an integral role in getting our brand to consumers, and it's important that we do so in a consistent manner." The contract extension with Randa will see further development of Dickies-branded items such as belts, wallets, suspenders and travel kits for men and boys. Randa has worked with Dickies for more than 25 years. <licensemag.com>
-Men's Wearhouse has announced its second annual National Suit Drive- Determined to empower unemployed men by providing them with the necessary professional attire that will build their self-esteem and help "sell themselves" during job interviews, Men's Wearhouse has announced its second annual National Suit Drive, September 1-30. Concerned that thousands of men are unable to secure employment because they lack the initial, yet vital, step of looking presentable for a job interview, the nation's leading retailer of men's tailored clothing, is working with more than 200 local non-profit organizations throughout the country to collect thousands of articles of professional attire to be used by individuals looking to re-enter the workforce. In addition, Men's Wearhouse will donate one tie for every suit donated to help complete the outfit. All 1,065 Men's Wearhouse and Men's Wearhouse & Tux locations will serve as drop-off sites for gently used suits, dress shirts, sport coats, slacks, ties, belts and shoes that will be used to benefit men in need of these items to transition into the workforce. <prnewswire.com>
-Stage Stores Inc. names new senior VP of cosmetics - Stage Stores Inc. has named Christine Johnston, a former Macy’s beauty executive, as senior vice president of cosmetics, a new position. In the new post, Johnston reports to Andy Hall, the firm’s president and chief executive officer. She is responsible for all aspects of the company’s cosmetics business, the firm stated, which includes buying, planning, allocation and replenishment for the retailer’s Houston and South Hill, Va., divisions. <wwd.com/retail-news>
RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough): PETM
08/19/2009 10:52 AM
SELLING PETM $22.11
Levine and I had a higher level of conviction that the shorts would get squeezed ahead of the EPS report (tonight) than in the EPS report itself. Selling green here. KM
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