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RETAIL FIRST LOOK: SIZING UP THE DATA

SEPTEMBER 16, 2009

TODAY’S CALL OUT

There were some interesting callouts from yesterday’s retail sales release (noted below), but based on the tone of questions I get in my inbox on this topic, I think there’s a big lack of understanding about the size and importance of much of this data.

First off, let’s keep in mind that Personal Consumption is about $10 trillion. Retail sales is only $3.7 trillion. Chain store sales is about $500 billion, and yes that number continues to shrink as more retailers opt out of reporting monthly numbers to the National Retail Federation. 

Not only is the gap between these three components massive, but let’s look at how the spreads therein have changed over time. As it relates to retail sales vs. consumption, there are ebbs and flows, but both the long and intermediate-term trends are headed lower. The more interesting trend is the importance of chain store sales, which were only 16% of total retail last year, but are now down to 7.8% after Wal*Mart stopped reporting. This number is shrinking, and will continue to do so.

For those looking at the government’s numbers, here are some call outs…  

  • Consistent with monthly retail sales, U.S government data confirms a sequential improvement in year over year sales trends for most subsectors in retail.
  • Subsectors with the biggest sequential improvement included: Electronics and Appliances, Clothing and Accessories, Sporting Goods, Books, Music & Hobby, and Department Stores.
  • Consistent with comments out of KR and SWY, food retailing decelerated from July.
  • While the overall headline was better than the Street expected, the interesting callout here is the consistency of improvement across most categories.  While still negative on an absolute basis, the broadest measure of retail sales continues to show gradual and steady gains. 

On a more micro level, early anecdotes on September sales-to-date suggest the improvement in trend continues.  Importantly, we’re watching for signs of sustained traffic increases which would indicate a better sense of improving underlying demand rather than year on year results driven mostly by easing compares. 

RETAIL FIRST LOOK: SIZING UP THE DATA - 1

RETAIL FIRST LOOK: SIZING UP THE DATA - 2

RETAIL FIRST LOOK: SIZING UP THE DATA - 3 

LEVINE’S LOW DOWN

Some Notable Call Outs

  • Even though deflation and competition have consistently been issues negatively impacting the sales and margins of the traditional grocers for some time now, Kroger’s 2Q results suggest these headwinds have intensified. The company cited greater than expected deflation in dairy and perishables, the spread of deflation across more categories, price investments, a pick-up in lower margin national brand sales, and increased usage of food stamps as key drivers of the company’s disappointing 2Q results. Furthermore, sales are tracking below expectations through the first month of 2Q.
  • Despite the general fascination with all things iPhone, the ramifications of actually selling the device are a bit of a double edged sword. While units sold of the iPhone actually doubled in 2Q vs. 1Q at Best Buy with the launch of 3Gs, the company’s gross margin was negatively impacted by about 20bps in the quarter. One has to wonder how (and why) the hottest product in all of consumer electronics and perhaps pop culture is ultimately a drag to the profits of one the largest retailers in the space?
  • In an effort to survey customers and observe online shopping habits for supposed research purposes, Sears and Kmart asked participants to download “My SHC Community” software . In return, consumers received a $10 bonus. Little did consumers know, SHLD was collecting personal data including bank accounts, credit cards, addresses, phone numbers, and other personal information. Fortunately for the customer and unfortunately for SHLD, the FTC caught wind of this scheme and has since ordered the destruction of all data collected. This may be one of the biggest corporate blunders we have seen in a while.

MORNING NEWS 

-Affluent consumers have been hiding their luxury shopping bags and saving more money in big box stores - Big-box stores known for value are reeling in affluent consumers who have been hiding their luxury shopping bags and saving more money, according to a new study.  Eight in 10 households have been shopping at Target and The Home Depot; seven in 10 have been heading to Wal-Mart and Best Buy, and six in 10 have been visiting Lowe’s, the most widely shopped destinations in the past 12 months by people with annual household income of $100,000 or more, according to “The Ipsos Mendelsohn Affluent Survey 2009 Annual Report,” released Tuesday. But all is not lost in luxe land. Among upscale stores shopped by the affluent, the market research firm said Nordstrom has drawn the most action, visited by people in 28.3% of these households, followed by Apple, 22%; Bloomingdale’s, 9.9%; Neiman Marcus, 9.5%; Saks Fifth Avenue, 9.2%, and Brooks Brothers, 6.8 percent. Fewer of these consumers are now citing the economy as their chief “worry” — four in 10 versus six in 10 in January — and half are saying they’re “optimistic about the U.S. economy going forward,” said Bob Shullman, president of Ipsos Mendelsohn. <wwd.com/retail-news>

-Retailers and suppliers are preparing for a tough holiday season, according to a new report -The study, "U.S. Small and Middle Market Outlook 2009: Retailers and Suppliers Take Stock of Economic Downturn," found that 67% of retailers planned to stock less inventory than in 2008. The research draws on responses from two surveys, the first of 110 retail executives and the second of 104 executives at retail supply companies. Of the retailer respondents, 46% said they reduced their staff levels, 42% halted planned expansions and 29% delayed store renovations. The retailers did not have high expectations for a fast turnaround, either. While 47% of respondents believe the financial markets will improve next year, 45% believe it will take two or three years before consumer spending returns to levels seen in 2007. In preparation for the holiday season, 69% plan to expand online and direct selling, 56% plan to advertise more aggressively and 66% will offer greater discounts.  <brandweek.com>

-FTA urges EU Commission to end footwear antidumping law against China and Vietnam - The Foreign Trade Association has urged the European Commission to end anti-dumping measures against footwear imported from China and Vietnam. "Owing to the non-transparent and secretive nature of anti-dumping investigations, details of this compromise are unclear," said FTA legal advisor Stuart Newman. "However, it now looks more certain that the commission is intending to prolong the measures, rather than do the logical thing and terminate." The FTA said the majority of EU Member States opposed a continuation of the measures but was worried that more countries rather supports to extend the measures for an extra year or two instead of five years. "No prolongation, in whatever format the commission may come up with, is acceptable for European retailers and importers," said FTA secretary general Jan Eggert. "Our members have been adversely affected by these unnecessary measures and I trust that Member States will oppose any prolongation when they are called upon to vote." <fashionnetasia.com>

-Due to the flooding in a number of garment factories in Karachi, garment shipments from Pakistan to the US and EU were delayed - Advisor to the Prime Minister on Textile industry, Mirza Ikhtiar Baig, representing textile associations, has requested that the Governor State Bank of Pakistan (SBP), Salim Raza provide relief to the textile industry. In the meantime, the textile industry has been struggling to meet SBP export performance targets given that there has been global recession, gas and power cuts, and now rain and floods in the country. <fashionnetasia.com>

-Overstock launches O.biz bulk buying site - Overstock.com Inc. will launch a bulk buying site—O.biz—for businesses and consumers to buy bulk merchandise on Oct. 31. Single-character domain names are a new phenomenon and so far are rare. <internetretailer.com>

-Cherokee Q2 royalties lowered by less sales at Target Corp. and the liquidation of Mervyns - Revenues, all in the form of royalties, dropped 23.2%. Royalties in the U.S. dropped $1.1 million as a result of lower retail sales of the Cherokee brand due to the reduction of categories at Target and the absence of Sideout revenues due to the liquidation of Mervyns. Some of this decline was offset by growth of Norma Kamali volume at Wal-Mart Stores Inc., a licensing deal put together by Cherokee, and growth in smaller markets. Expecting to see benefit from the growing revenue streams of the Cherokee brand in Brazil, Chile, Peru and India, as well as the upcoming launch in Spain. <wwd.com/business-news>

-Deckers resolves lawsuits, issued a US patent for its Ugg Australia boot - Deckers Outdoor Corp. this week settled a lawsuit related to the Classic Cardy boot style within its Ugg Australia brand. The suit, filed on March 3 in the U.S. District Court for the Central District of California, alleged infringement on Ugg Australia’s Classic Cardy style by 10 separate defendants. The defendants included Aldo U.S. Inc., Tween Brands Inc., Steven Madden Ltd., Vida Shoes International Inc., Groove Footwear LLC, The Bon-Ton Stores Inc., Charlotte Russe, Kenneth Cole Productions Inc. and Skiekh Shoes. In the lawsuit, Deckers alleged, “The presence of defendants’ infringing boots in the marketplace diminishes, and is likely to diminish, the apparent exclusivity of genuine Ugg Cardy Boots, thereby dissuading potential customers who otherwise would have sought genuine Ugg Cardy Boots.” Deckers has been issued a U.S. design patent for its Classic Cardy boot. Separately, Deckers also announced that it has been issued a U.S. design patent for its Ugg Australia Bailey boot, which launched for fall ’09. <wwd.com/footwear-news>

-Kohl’s Corp. agreed to pay a $425,000 fine for selling children’s hooded sweatshirts with drawstrings - The CPSC alleged that Kohl’s violated consumer product safety laws by knowingly failing to report it sold the sweatshirts. The retailer agreed to pay the settlement but denied the allegations, according to the commission. Drawstring guidelines for apparel issued by the CPSC are designed to help prevent strangulation of children. Since 2006, the CPSC has regarded children’s jackets, sweaters and other outerwear with drawstrings as defective and posing a substantial risk to children. Under federal law, retailers are required to report to the commission within 24 hours if they receive information that a product is defective. Kohl’s paid a $35,000 civil penalty for failing to report children’s drawstrings in sweatshirts last year. <wwd.com/business-news>

-Barneys New York business as usual, or not - For Barneys New York, it appears to be business as usual — except the luxury chain remains cloaked in a heavy cloud of uncertainty regarding its future. It stems from being immersed in the recession-racked luxury arena, operating without a chief executive for 14 months, and the huge debt challenges facing Barneys’ parent company, the investment fund Istithmar. On Tuesday, David Jackson, chief executive officer of Istithmar, took a firm position, stating there are no changes at Barneys and no plans afoot for giving up on the fund’s retail holding. “We have stood by Barneys and will continue to stand by this company,” he told WWD. Jackson was responding to numerous press reports questioning the future of Barneys and its parent company. <wwd.com/retail-news>

-Adidas Gains as Morgan Stanley Says Buy Stock on Chinese Growth Prospects - Adidas AG, the world’s second- largest sporting-goods maker, rose the most in a month in Frankfurt trading after Morgan Stanley rated the shares “overweight,” citing the company’s prospects in China.  <bloomberg.com>

-Sears adds an online payment option - Web shoppers can now pay with eBillme, completing a purchase through online bill payment services. The option is available at Sears.com, Kmart.com and Kenmore.com. <internetretailer.com>

-Inditex Profit Beats Analyst Estimates on Openings From Beijing to Cairo - Inditex SA, which overtook Gap Inc. to become the world’s largest clothing retailer in the past year, reported first-half profit that beat analyst estimates, helped by store openings from Beijing to Cairo. Sales in the period rose 6.6% helped by store openings, as Inditex opened 166 stores in 35 different countries. Inditex said Zara would start offering online sales for the fall-winter 2010 season in Spain, France, Germany, U.K., Italy and Portugal, with a progressive rollout expected in all markets where the brand operates. <wwd.com/business-news>

-Prada's COO will assume responsibilities of CEO for an interim basis starting Nov. 1 - Sebastian Suhl, Prada SpA’s chief operating officer, will take over the responsibilities of president and chief executive officer of Prada USA on an interim basis, effective Nov. 1, the Italian fashion house said Tuesday. In that role, Suhl succeeds Graziano de Boni, who is leaving the company on Oct. 31 to join the newly formed Reed Krakoff division at Coach Inc. De Boni joined Prada last year, filling a job that had been vacant for two years following the departure of Constance Darrow. Suhl, who will assume the role until a successor is named, takes over Prada’s U.S. region at a time of continued economic instability and a drastically reduced demand for luxury goods. <wwd.com/business-news>

-Giorgio Armani SpA has expanded into Hungary, opening its first Emporio Armani store and Caffe in Budapest - “The Hungarian markets represents a very dynamic retail environment today where there is a growing appreciation for fashion and luxury,” Armani stated. <wwd.com/retail-news>

-Kim Clijsters picked up a significant bonus from her shoe and clothing sponsor Fila for winning the US Open - And while companies usually insure these bonuses, sources tell CNBC that Fila did not. That means the incentive money paid to Clijsters, said to be in the $300,000 range, will come out the company’s coffers. Fila spokesperson Lauren Mallon said that the Korean-owned company is private and does not disclose its contracts with its athletes. “We’re absolutely thrilled that she won and the exposure she gave the Fila brand was immeasurable,” Mallon said. It’s a standard practice in the industry for companies to insure their big incentive bonuses to minimize the risk. Given the fact that Clijsters had only played two tournaments after she retired from the tour two years ago to have a baby, the odds of her winning were as high as 40-to-1 at some sports books before the tournament started. That would have made the “win insurance” on Clijsters pennies on the dollar. At the same time, some sports marketers—given the longshot—might have been wary to insure anything. Because Clijsters had just come out of retirement, it makes sense that her contract would be heavily incentive-laden with small up-front guarantees. Fila’s biggest endorsement deals are with Clijsters and James Blake, who launched his Thomas Reynolds Collection at the US Open. <cnbc.com>

-Slingback booties are emerging as one of the hottest spring/summer trends. Whether opened up with a peep-toe at Alexander Wang and Alejandro Ingelmo or rounded off with front lacing at Cynthia Rowley and Derek Lam, the trend’s got major backing on the catwalks. Devi Kroell gave her platform slingback version a tropical vibe with candy-colored patent color blocking. Booties have continued to be a powerful force year-round, but are looking fresh again this season when they show a little skin. <wwd.com/footwear-news>

RETAIL FIRST LOOK: SIZING UP THE DATA - 4

INSIDER TRANSACTION ACTIVITY:

DKS: Ed Stack, Chairman & CEO, sold 442,365shs (~$9.9mm) approximately 2% of total common holdings.

RL: Ralph Lauren, Chairman & CEO, sold 127,600shs (~$8.8mm) less than 1% of total holdings including class B shares.

DECK: George Thomas, CFO, acquired 3,000shs (~$225k) via non vested stock units.

JCG: Tracy Gardner, President – Retail & Direct, sold 19,358shs (~$678k)  less that 15% of total common holdings pursuant to 10b5-1 plan.

SKS: Marc Metrick, Group SVP, sold 5,000shs (~$34k) less that 5% of total common holdings pursuant to 10b5-1 plan.