RETAIL FIRST LOOK: THE VOLUME/PRICE TRADE OFF

RETAIL FIRST LOOK: THE VOLUME/PRICE TRADE OFF

November, 9 2009

TODAY’S CALL OUT

Risk/reward is looking ugly for the market. There is a bifurcation in retail. Food/Staples, Multi-line Retail, and Apparel looking particularly bad. Sporting Goods, Home Improvement, and to a lesser extent Auto Retail is looking safer.

Earnings season for the market in aggregate, is over, and ‘Macro Time’ begins.  This is when it gets fun. Unfortunately, the near-term setup does not look good. Check out Keith’s Early Look this morning – 3.5% near-term downside and only 1% upside – not a good risk reward. One of the key call outs is recent strength in the market on eroding volume statistics. Since volume = conviction, this too, is not good. Let’s translate this to retail, as there are clearly massive overlays.

We break out every publicly-traded retail stock into separate sub-industries – think of it like a broader view of the MVRX.  What we see is that the weighted price change for retail is strengthening while volume is rolling over.  A couple notables by sub-industry…

 

1. Negative Call Outs

  •  
    • Food and Staples Retailing: Volume eroding on relative strength.
    • Multi-line Retail (incl Dept Stores): Sequentially eroding volume over 1-day, 1-week and 3-week with strengthening price.
    • Apparel/Accessories and Lux: Similar to Multi-line, though not quite as severe.

2. Positive Call Outs

  •  
    • Sporting Goods/Athletic Specialty: Sequentially improving volume across durations on price strength.
    • Home Improvement: Same.

Pick your spots wisely as the year draws to an end.

LEVINE’S LOW DOWN

Some Notable Call Outs

  • Late Friday it was announced that RadioShack/The Shack will begin selling the IPhone in select locations in the Dallas and new York City regions beginning later this month. In 2010, it is expected that the IPhone will be sold chainwide. While this has long been rumored, it is somewhat curious that the news was relayed late on a Friday with little fanfare. Ultimately this is likely to be a positive for The Shack, but it probably does mean market share losses for others already peddling the coveted device. With 4,470 stores, there likely few if any markets that don’t already have access to the IPhone.
  • In the most expensive retail real estate transaction in New York City since November 2008, an investment group purchased the retail square footage of the St. Regis hotel on 5th Avenue for $117 million. The purchase price equates to $4,737/square foot for the 25,000 square foot space. Whether the overall commercial real estate market remains to be seen, but the mid-town location is said be amongst the highest cost per foot retail spaces in the country and perhaps across the entire globe.
  • Just hours after Adidas dropped its sponsorship of UCF because Michael Jordan’s son wore Air Jordans in a game, a Facebook boycott has emerged. The Facebook Group, “Boycott of Adidas after they dump UCF over ONE pair of Nikes”, now has 386 members. It seems like this negative publicity is on track to cause Adidas far more damage than the $3 million the company is saving by cancelling its UCF partnership. Yet another reason why companies and brands must stay on top of the latest social networking trends.

MORNING NEWS 

2 IPOs planned for the week of Nov 9 - Dollar General, a KKR-backed small-box discount retailer with 8,700 stores in 35 states, plans to raise $750 million by offering 34,100,000 at a price range of $21.00 to $23.00. At the mid-point of the proposed range, Dollar General will command a market value of $7,672.40 million. Dollar General, which was founded in 1939, booked $11,127 million in sales over the last 12 months. The Goodlettsville, TN-based company plans to list on the NYSE under the symbol DG. Citi, Goldman Sachs, and KKR are the lead underwriters on the deal. Rue21, a value-focused teen fashion retailer with over 500 stores in 43 states, plans to raise $115 million by offering 6,765,437 at a price range of $16.00 to $18.00. The Warrendale, PA-based company plans to list on the NYSE under the symbol RUE. BofA Merrill Lynch , Goldman Sachs, and J.P. Morgan are the lead underwriters on the deal. <renaissancecapital.com>

Global Cotton Subsidies Grow in Year - Global support to the cotton industry, including direct subsidies, border measures, crop insurance subsidies and minimum support price regimes, more than doubled in 2008-’09 to $5.9 billion compared with $2.7 billion in 2007-’08, with more than 50 percent provided by the U.S. Bernard Hoekman, World Bank director of international trade, told a forum of World Trade Organization diplomats and experts last week that total U.S. support to cotton production increased to $3.1 billion in 2008-09, up from $888 million in 2007-08, or an equivalent of 50 cents per pound of production. <wwd.com>

Wal-Mart kicks off DVD price war; looks to open 40 new stores in India - Just as shoppers are getting closer to their peak holiday shopping days, Wal-Mart Stores Inc. this week escalated the online price war it set off last month with books, offering pre-ordered DVDs priced at $9.98—down from list prices close to $30—and free shipping at Walmart.com. Amazon.com Inc. and Target Corp. countered with their own, slightly less generous, offers on their e-commerce sites. Wal-Mart Stores Inc, the world’s largest retailer, plans to open 40 more cash and carry stores in the country, the Commerce and Industry Minister, Mr Anand Sharma, said here today. In India, Wal-Mart has a wholesale joint venture with the Bharti Group. The first wholesale store was opened in Amritsar on May 30 this year. <internetretailer.com> <indiaretailing.com>

Designer Dresses Available Through Netflix Model - For many women, a $1,000 dress is something they admire in the pages of a glossy magazine or see draped on the frame of a celebrity — not an item hanging in their closet. But a nascent Web site called Rent the Runway is hoping to make high-end fashions much more accessible and almost as easy as renting a movie from Netflix. The mail-order service, which finishes the testing phase on Monday, allows women to rent dresses from notable fashion designers like Diane Von Furstenberg, Hervé Léger and Proenza Schouler for roughly one-tenth of what they would cost to buy in a retail store. The rentals run $50 to $200 for a four-night loan and are shipped directly to the customer’s doorstep. <nytimes.com>

Judge Approves Fred Leighton Purchase - A bankruptcy judge has signed off on the sale of Fred Leighton to a group of investors that includes former Barneys New York principal Bob Pressman and jewelry firm Kwiat Enterprises. The approval paves the way for the $25.8 million deal to close this week. Kwiat, Och-Ziff Capital Management Group and Pressman’s Triton Equity Partners submitted their bid for the jeweler last month with the backing of Merrill Lynch, Leighton’s largest creditor. Fred Leighton Holding has been in Chapter 11 proceedings since April 2008, when then-owner Ralph Esmerian filed for protection to halt an inventory auction sought by Merrill Lynch. <wwd.com>

China's Non-wovens and technical textile industry bounces back - Despite a decline in exports due to the financial crisis, industry adjustments, government action and product innovation has kept China's textile industry solvent in the first half of 2009. Entering 2009, China's macroeconomy showed some improvement, including an expansion in the scale of loans and an increase in the purchasing managers index (PMI). The Chinese government increased the ratio of tax refunds on exported textiles and apparel by three times and introduced a series of structural adjustments and revitalization plans for textile industries. These policies have stimulated China's textile economy, which at midyear appeared to be bouncing back. Compared with other parts of the textile industry, nonwovens and technical textiles are recovering more quickly. <fashionnetasia.com>

Luxury products no longer being manufactured in Europe - Just as the US leather goods manufacturer Coach manufactures in China and India, Calvin Klein subcontracts in Asia: Tommy Hilfiger and Ralph Lauren polo shirts are sewn in Indonesia. Amongst the Italians, Prada has some of its leather goods made in Turkey and Armani outsources in Eastern Europe and China. The British Burberry company makes its raincoats in the UK but its T-shirts in China. Businesses in the US and the Italians do not have any problems recognizing that they manufacture in other countries. Foreign manufacturing is tending to accelerate especially in prêt-a-porter and accessories. However, for the French this topic is very taboo. <fashionnetasia.com>

U.S. Opportunity for Foreign Luxe Firms - The U.S. market still has untapped potential that European luxury goods companies could unlock in their quest for growth markets. So says a research report published Thursday by investment house Bernstein, arguing the U.S., thanks to its sheer size and favorable demographics, provides an “attractive, if not straightforward” opportunity for European luxury companies in the short and medium term. The U.S. luxury market is worth around 44 billion euros, or $65 billion at current exchange, and remains a large fixture on the global luxury landscape, although it presents challenges such as a dispersed resident population, reliance on wholesale distribution and consumers’ appetite for discounts. <wwd.com>

Global Retail Rollout for Justin Timberlake’s William Rast Label The brand has launched an aggressive global retail expansion. The premium denim and contemporary sportswear brand, cofounded by Timberlake and his friend Trace Ayala, unveiled its fusion of a Hollywood lifestyle with Tennessee roots in three California stores that opened Nov. 1, heralding the launch of 40 to 50 units by 2012. <wwd.com>

La Perla to close nine brands - Italian lingerie firm La Perla is to rationalise its brand portfolio and lower prices in a move it claims will boost its market share. La Perla is to close lingerie and swimwear brands Malizia, Glamour, Anna Club, Aquasuit, Joelle, The Black Label, Limited Edition and Bridal from autumn 10. The La Perla brand portfolio will comprise three brands; La Perla, La Perla Studio and the newly launched Villa Toscana. Villa Toscana forms part of La Perla’s strategy to focus on cosetry with modern twists including laser-cut lace. The Villa Toscana range draws its inspiration from La Perla’s archives and includes pastel colour palettes and flower patterns on innerwear, beachwear and loungewear. <drapersonline.com>

Victoria's Secret Opens Sprawling Flagship on Broadway - Victoria’s Secret has amplified its presence on Broadway in SoHo with a new 24,000-square-foot flagship, nearly five times the size of the store it’s replacing one block south. That space will be entirely devoted to Pink. The flagship had a soft opening on Friday. The space for the VS flagship at 591-593 Broadway was assembled by putting two retail properties together: 593 Broadway, formerly a 16,000-square-foot Lounge boutique, and an 8,000-square-foot Eastern Mountain Sports unit at 591 Broadway, in a deal said to be worth more than $100 million. <wwd.com>

Burberry Launches Social Networking Site - Burberry will today unveil its own social networking Web site, Artofthetrench.com, an homage to the brand’s trenchcoat. According to creative director Christopher Bailey, the Burberry site is not commercial, but is aimed at engaging the brand’s fans and tapping into their passion for trenchcoats, old and new. <wwd.com>

INSIDER TRANSACTION ACTIVITY:

VLCM: Rene Woolcott, Director, sold 20,000 shares for a gain of $332k.

NFLX: Michael Schuh, Director, sold 600 shares after exercising options to buy 600 shares for a net gain of $33k.

GPS: Marka Hansen, President-Gap Brand, sold 18,800 shares after exercising options to buy 18,800 shares for a net gain of $164k.