ARO: Setup Looking Sweet
October 13, 2009
TODAY’S CALL OUT
I love when Keith throws me 90 mph fastballs like what he sent me last night… “ARO breaking down on what couldn't have been better news, TRADE line = 42.84.” As most of our subscribers know, our process here is one where our analysts focus on owning the debate on key issues with companies, industries and sectors, while Keith is focused on managing risk and timing/sizing across multiple durations (TRADE, TREND, and TAIL). When we identify a critical uncertainty – as measured by price, sentiment, or financial performance, we collectively drill down on the answer. In that respect, ARO is an interesting budding idea. Consider the following…
Revenue growth has been solid – we can’t take that away. Kudos. But 900+ core stores, growth is reaching maturity. ARO’s new concept, P.S. from Aeropostale, is moving from a test concept with 7 stores to a full fledged growth vehicle. The P.S concept is aimed a 7 -12 year old consumer vs. Aero at 14- 17. The excitement around the success of this concept BETTER be justifiable. Also, remember that one of the key drivers to comp has been due to ARO making fashion a higher percent of the mix (ie skinny jeans and bling) and less of a fashion follower. This has pushed operating margins past peak levels. We’re all for upping the fashion component of a business. But the company needs to spend accordingly to sustain such growth, and mitigate the likelihood of a miss. We’re not convinced that’s the case here. Also, with the succession plan for a co-CEO structure (one person from Ops and the other from merchandising) it does not exactly scream ‘stability.’
Some other key factors we like to consider…
- Our SIGMA analysis for ARO is definitely not headed in the right direction. Yes, it is currently in the sweet spot where sales are growing faster than inventories and margins are up yy, but the sales/inventory spread is eroding, and margin compares get very tough in 1.5 quarters.
- Taking a longer term view, margins are beyond peak. Try finding another retailer where you can say that.
- Sentiment is generally positive. 55% buys, and only 7% sells. Price is deviating big time from $47 price targets (charts below). Analysts will pound the table or catch a falling sword. 15% of float is short – while that is higher than we like to see, it is less than half of where it topped out a year ago.
- Management does nothing but sell. Seriously…they were not even buyers a year ago at $13.
Maybe it’s too early to short this one. I’ll leave it to Keith to drill down timing/sizing (and will be back to our subs accordingly). But the setup certainly looks good.
LEVINE’S LOW DOWN
Some Notable Call Outs
- Unless you are an avid Columbia Sportswear watcher you may have missed the company’s last two hires to come across the wires. First, on October 6th the company announced the addition of Kathleen McNally as creative director apparel. Kathy joins the company with experience at Nike, Lucy Activewear, and J Crew. Second, the company announced the addition of Adrienne Moser as general manager of apparel merchandising for the Columbia brand. Moser joins with experience from Lacrosse, Nau, and Patagonia. While we don’t personally know these two hires, we suspect there is a subtle message here as Columbia invests in upgrading its apparel offerings.
- We have highlighted the success and intrigue with a number of U.S based members-only ecommerce sites selling fashion closeouts. One company we have not focused on is Vente-Privee, the French based predecessor to many of these stateside start-ups. Vente-Privee is said to be producing revenue of 650 million Euros annually and has now entered the rumor mill of potential acquisitions. While none of this can be confirmed, the valuation being thrown around suggests Vente-Privee is worth $1.5 to $2 billion! If true, it will not be long before a wave of IPO’s emerge across the membership-only space.
- As talk of Black Friday begins to heat up, add Blu-ray DVD players to the list of items that are sure to be used as key traffic drivers in the consumer electronics department. Although there are several models currently priced under $200, it is now widely expected that the product will be promoted at the $100 price point aggressively throughout the holiday period.
-China protests extension of EU footwear tariff - The European Union has to decide whether to extent a 15-month tariff against Chinese and Vietnamese footwear for unfair competition. Chinese manufacturers and European buyers complain this will push prices up at the expense of consumers.
Beijing – A European Union plan to extend tariffs on Chinese and Vietnamese footwear by 16.5 and 10 per cent respectively for at least 15 months has sparked an outcry from China’s shoemakers. Led by the EU’s main shoe-producing members (Italy, Spain, France and Poland), the European Union has accused the governments of the two Asian nations of unfairly subsidizing their low-cost shoemakers. The EU first imposed duties in 2006 for two years claiming unfair competition. This was renewed in October of last year but, pending a review by the European Commission, tariffs should end on 3 January.
-U.K. Retail like-for-likes rise 2.8% in September - Clothing and footwear sales grew in September, led by a strong performance from kidswear and back-to-school ranges. Autumn ranges were impacted by the mild weather at the start of the month, with winter footwear and clothing sales picking up towards the end of the month, according to the BRC-KPMG Retail Sales Monitor. UK retail sales values rose 2.8% on a like-for-like basis in September, compared with a 1.5% fall in September last year. However, the September 2008 reporting period was weak due to turmoil in the financial markets. The September 2009 period covered by the report also included the August Bank Holiday weekend. Total sales were up 4.9% on a year ago, versus a 1% gain in September 2008. <drapersonline.com>
-U.K. Inflation falls to five-year low - The level of inflation has dropped to its lowest rate in five years as falling energy prices continued to cut the cost of living, according to reports. The Office for National Statistics reported that the consumer prices index fell to 1.1% in September on a year-on-year basis, down from 1.6% in August. In the year to September, the retail prices index annual inflation fell by 1.4%, compared with a fall of 1.3% in August. The main cause of the fall was cheaper electricity and gas bills. Prices of clothing and footwear put upward pressure on inflation as prices rose by more than a year ago across a range of items. <drapersonline.com>
-IPO Climate Warming for Some Retailers - In the last 10 weeks, three retailers in North America have filed statements regarding their intent to go public — two in the U.S. and one in Canada. The two Form S-1 filings with the Securities and Exchange Commission in the U.S. were Dollar General Corp. on Aug. 10 and Rue21 on Sept. 18. Dollarama is the Canadian firm that filed Sept. 10. A fourth retailer, VS Holdings, which operates The Vitamin Shoppe stores, filed its Form S-1 on July 23, and is set to price this month. VS Holdings will be the first retail IPO in two years. And it isn’t only the U.S. IPO market starting to simmer. Last month, two retailers outside North America unveiled plans to go public. Italy’s online discount retailer, Yoox, said it plans to list on the Italian Bourse in the first half of next year. Australia’s largest department store group, Myer, said it will return to the Australian stock market before Christmas. <wwd.com>
-Wealthy Americans to Spend 5% Less This Holiday - Wealthy Americans will spend an average of 5 percent less on gifts this holiday season because of uncertainty about the economic recovery, a survey from the American Affluence Research Center found. Respondents with average incomes of $300,000 said they will spend $2,380 on average this year, compared with $2,505 last year, according to the survey. Nine percent said they won’t buy any gifts, 38 percent said they will spend less, 59 percent said their expenditures will remain the same and 3 percent said they will spend more. <bloomberg.com>
-Manufacturers Face Pressure on Sustainable Practices - Manufacturers will continue to face pressures to implement responsible business practices, as they balance cost controls and profitability with environmental and consumer awareness. Speakers at the first Sustainable Fashion Forum held here last week, which coincided with other events highlighting the issue, stressed its importance and complexity. Organized by APLF to coincide with the Fashion Access trade show, the event drew speakers and attendees from across the supply chain spectrum. <wwd.com>
-Puma Sports India looks to become a complete lifestyle brand - Shoes and sportswear maker Puma Sports India Pvt Ltd, a subsidiary of Puma AG Rudolf Dassler Sport, is moving from being just a sports and accessories brand to a complete lifestyle brand. The company has entered into an exclusive retail collaboration with Gini & Jony to enter the kidswear market. In India, Puma markets a range of lifestyle products, including shoes, apparels, accessories, watches and even sunglasses. While Puma will keep production and imports under its control, the distribution will be through Gini & Jony. <indiaretailing.com>
-New CEO at Converse - Nike Inc. announced Monday that Michael Spillane will move up to CEO at Converse, taking over from Jack Boys after his retirement at the end of the year. Boys had been CEO of Converse, a wholly owned subsidiary of Beaverton, Ore.-based Nike, since 2001. In 2007, Spillane joined Nike as Converse’s president of North American footwear shortly before becoming president of North America and global product. His prior experience includes CEO roles at Polartec and Malden Mills, in addition to senior positions at Tommy Hilfiger and Jockey. Under his new title, Spillane will report to Eunan McLaughlin, president of Nike Inc. Affiliates. <wwd.com>
-CEO Golden Leads Turnaround at Hampshire - The company named Heath Golden its new president and chief executive officer in August, following a turbulent period that saw a failed merger bid in April with NAF Holdings II LLC, an investment vehicle controlled by Efrem Gerszberg, brother of Ecko Unlimited co-founder Seth Gerszberg. Golden — an attorney by training, who was elevated from the chief operating officer position — has reorganized management and is overseeing the final stages of a restructuring plan, which began in 2008. The plan has reduced head count at the New York-based company by 50 percent and is on course to save Hampshire $12.4 million in annual selling, general and administrative costs. Hampshire, whose business is comprised of 60% sweaters and 40% sportswear, has seen top-line sales decline 25% since 2005, from $322.4 million to $240.9 million in 2008. <wwd.com>
-JJB Sports Plans to Raise 100 Million Pounds in Equity Sale - JJB Sports Plc plans to raise £100 million ($161 million) in a share sale. The U.K. sporting goods chain said it reviewed a range of options to provide additional capital and confirmed it is completing arrangements for an equity issue. <sportsonesource.com>
-M&M's Rock with Kiss at Walmart - Mars Direct, a division of Mars Snackfood U.S., has stocked My M&M's Kiss Blend on Walmart shelves. For a limited time, the iconic faces of the band are appearing on M&M's chocolate candies. The range includes four customized packages with band members Gene Simmons, Paul Stanley, Tommy Thayer and Eric Singer featured. The candy rollout coincides with the release of Kiss' latest album Sonic Boom, only available at Walmart. <licensemag.com>
-Amazon UK to offer free delivery on all products for Christmas - Amazon UK will offer free delivery on all of its products in the run up to Christmas. The retail giant has scrapped the £5 threshold customers used to have to cross to qualify for free deliveries. It will be available for all items shipped by Amazon until January 1 2010. Amazon UK managing director Brian McBride said: “Christmas is coming and so it’s the perfect time to offer customers free shipping on every item available from Amazon.co.uk.
RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough): AZO
10/12/2009 02:58 PM
COVERING AZO $144.77
The Auto-Repurchase-Zone continues to underperform, but its making a higher low here. I'll cover red and re-short it on an up day. McGough and Levine remain bearish. KM
INSIDER TRANSACTION ACTIVITY:
JCG: Tracy Gardner, President: Retail & Direct, sold 19,000 shares ($760k) after exercising the right to buy 19,000 shares, nearly 13% of total common holdings.