RETAIL FIRST LOOK: A CROSS-SECTION OF EARNINGS

RETAIL FIRST LOOK: A CROSS-SECTION OF EARNINGS

November 12, 2009

TODAY’S CALL OUT

On the whole, this morning’s earnings were positive coming in above expectations (and beyond recently pre-announced levels in the case of KSS). What’s interesting to note is the breadth of the read-through given the broad demographic cross section captured by WMT (discount), KSS (mid-tier), and URBN (fashion). Here’s our initial take:

WMT:

WMT came in a couple pennies above guidance ($0.84 vs. $0.78-$0.82); however, the focus will be on the deceleration of comps on a 2Yr basis reflecting domestic weakness. The company continues to drive its price leadership message, which in turn is driving traffic (up 1.5%), but is putting some pressure on the topline in the near-term. Results in 3Q and guidance for 4Q reflect a deceleration in same store sales on a 2-yr basis. Aside from self-driven pricing pressure, management also noted that food deflation continues to pressure sales and the impact was greater than expected in the quarter. Given the sheer amount of times “price leadership” was mentioned by management, we suspect Wal-Mart will remain aggressive over 4Q, implying that a meaningful pick up in traffic (i.e market share) will be necessary to see meaningful upside.

KSS:

While it might seem obvious given the majority of retailers are heading into the holiday season with clean inventory positions, KSS’ pattern of raising and beating expectations is likely to continue. Margin and sales comparisons are easing while at the same time the company reported its best sales/inventory ratio in a year. Recall, that the company is managing inventories well, even against a backdrop where they are opening new square footage at a rate greater than each of its competitors. Guidance implies another deceleration in two-year comps, but it just looks extremely conservative on the surface. Yes, the holiday is still uncertain but the set-up here looks to be one erring on the side of upside, both relative to the company’s forecast and the Street estimates.

URBN:

Incredibly tight inventories and significantly easing compares provide a meaningful tailwind over the next few quarters. Given the trajectory of URBN’s comps it appears the brand continues to gain traction, driven mostly by its cleaned up merchandising presentation (i.e less clearance/clutter/confusion) and fashion leadership at both Urban and Anthro. Offsetting this setup is of course high expectations given the steady improvement we have seen over the past few quarters.

RETAIL FIRST LOOK: A CROSS-SECTION OF EARNINGS - WMT SIGMA

RETAIL FIRST LOOK: A CROSS-SECTION OF EARNINGS - KSS SIGMA

RETAIL FIRST LOOK: A CROSS-SECTION OF EARNINGS - URBN SIGMA

LEVINE’S LOW DOWN

Some Notable Call Outs

  • Macy’s noted that its improvement in sales over the third quarter was prevalent across all regions. However, the Midwest region was the standout. Bloomingdales also outperformed its sales plans and was noted as having a “particularly strong” quarter. Management also commented that all three of the company’s Manhattan locations are showing improvement (after being hit particularly hard with tourism declines).
  • Add Blu-Ray discs to the list of items that are being heavily discounted at Wal-Mart, Best Buy, and Amazon. The aggressive pricing on new releases follows the footsteps of recently reduced prices on best selling books and standard definition DVD’s. The pricing on the Blu-Ray discs is expected to be $17, a substantial drop from the $25 average price for new releases.
  • Tuesday’s launch of video game, “Modern Warfare 2” is on track to be the biggest video game launch ever, eclipsing last year’s launch of Grand Theft Auto 4. It is believed that Modern Warfare sold 7 million copies in the first 24 hours, and is on track to sell 10 million by the end of its first week. At the suggested retail price of $60, that would mean “gamers” spent $600 million in one week on the new release!

MORNING NEWS 

KKR Puts Higher Valuation on Dollar General Than Walmart in IPO - KKR & Co., the private-equity firm that bought Dollar General Corp. just before the leverage buyout boom collapsed, is taking the discount retailer public at a higher price than investors pay for Wal-Mart Stores Inc. KKR, Goldman Sachs Group Inc. and other owners plan to sell 34.1 million shares of Dollar General today, according to data compiled by Bloomberg, less than 2 1/2 years after purchasing the Goodlettsville, Tennessee-based company for $7.3 billion. The $784 million sale, which would be the largest initial public offering by a U.S. retailer in at least 17 years, values the discount merchant at as much as 29.5 times earnings, Bloomberg data show. That’s almost twice as expensive as the 15.4 multiple for Walmart, the world’s biggest retailer. <bloomberg.com>

Geithner Sees ‘Early Signs’ of Economic Rebalancing - U.S. Treasury Secretary Timothy Geithner said there are “early signs” that the world is addressing imbalances in spending and saving that contributed to the global crisis. Asia is “leading the world” back to recovery, Geithner told reporters in a joint press briefing with counterparts from the Asia-Pacific Economic Cooperation group following a meeting in Singapore today. American exports are also growing at a healthier rate, he said. APEC finance ministers today echoed calls by policy makers around the world for reduced reliance on Asian savings and American spending, a pattern that analysts say held down U.S. borrowing costs and fueled a credit bubble. In a joint statement, they also reiterated a pledge to maintain stimulus efforts “until a durable recovery in private demand is secured.” Geithner said that while it’s too soon to withdraw stimulus measures, the Obama administration is committed to reducing the record U.S. fiscal deficit, a legacy of reliance on overseas funds and unprecedented stimulus spending to counter the crisis. <bloomberg.com>

K-Swiss Announces $70 Million Stock Buyback Program - K-Swiss Inc. announced its Board of Directors authorized a new stock repurchase program for the company to repurchase up to $70 million of the company's Class A Common Stock. This program replaces the Company's existing 2004 stock repurchase authorization for up to 5,000,000 shares that expires on December 31, 2009. Under the new stock repurchase program, the company may purchase through December 31, 2014, as market conditions warrant and from time to time on the open market or otherwise, up to $70 million of its Class A Common Stock. The company believes the repurchase of its shares of Class A Common Stock can be a good use of excess cash depending on the Company's array of alternatives. Since August 1996, the company has expended an aggregate of $166.8 million through its several stock repurchase programs by which it has purchased 25.5 million shares of its Class A Common Stock. <sportsonesource.com>

Fed Officials Say Recovery Will Be Hampered by Unemployment - The U.S. economy will be slow to recover from the deepest recession since the 1930s as rising unemployment curbs consumer spending, Federal Reserve officials said. San Francisco Fed Bank President Janet Yellen raised the prospect of a “jobless recovery” in a speech in Phoenix, while Dennis Lockhart, who heads the Atlanta Fed, predicted a “relatively subdued pace of growth” this quarter and beyond. The comments yesterday are among the first on the economic outlook since the Fed signaled last week that a return to growth alone won’t be enough to change its policy of keeping interest rates near zero for “an extended period.” Instead, the central bank said any change would depend on increases in employment and inflation. <bloomberg.com>

Walmart Adjusts Asda Ownership - In Asda's most recent annual reports, the retailer discloses that Walmart has "sold" Asda to Corinth, another Walmart company, for a £5.7 billion ($9.4 billion) cash payment and £1.24 billion ($2.05 billion) in shares. Asda directors have been appointed to Corinth's board. Where Corinth was a subsidiary of Asda, it is now the parent company. Asda reports the deal had been done for good financial management reasons. Asda's annual accounts also revealed the supermarket chain paid £111 million ($184 million) in tax, down from the year before and that its profits before tax were £520.4 million ($862.1 million), also slightly down on 2007, on sales of £18.57 billion ($30.76 billion). The chain is third largest in the U.K. behind Tesco and Sainsbury. <licensemag.com>

Nike's Jordan Brand announces new AIR JORDAN 2010 shoe - A division of footwear, apparel, equipment and accessory products manufacturer NIKE Inc (NYSE:NKE), Jordan Brand announced the launch of its AIR JORDAN 2010 shoe on Wednesday, to celebrate its quarter-century of design and genre-inspiring style. AIR JORDAN 2010 will pay respect to the legacy of Michael Jordan in basketball and to the talented Team Jordan athletes in sports, with Dwyane Wade being the first to debut the shoe created by Jordan Brand. Air Jordan's footwear, apparel and accessories are inspired by the legacy, vision and direct involvement of Michael Jordan.

<tradingmarkets.com> <slamonline.com>

 RETAIL FIRST LOOK: A CROSS-SECTION OF EARNINGS - 4

 Study: Retail Shrink Rising - Worldwide retail losses from shoplifting, employee theft, organized crime and administrative errors jumped 5.9 percent to $114.8 billion for the year ended June 30, according to a new survey. The losses, known as shrink, represented 1.43 percent of sales of the 1,069 retailers that were surveyed in 41 countries. Total shrink in the U.S. rose to $45.99 billion, or 1.6 percent of sales, up from 1.48 percent a year earlier. Apparel retailers experienced the highest rate of theft — 1.84 percent of sales — of the categories tracked in the Centre for Retail Research’s third annual Global Retail Theft Barometer. The survey was sponsored by Checkpoint Systems Inc., a shrink management firm. <wwd.com>

Study Sees Higher Holiday Apparel Spending - A holiday miracle could be in the offing for apparel marketers, according to a new forecast by Brand Keys. Despite predictions of lackluster holiday business, 16,000 consumers responding late last month to the branding consultant’s annual survey expect to spend an average of 10 percent more for apparel than they did a year ago — a surprising leap, considering a projected 1 percent drop in outlays overall. After two years on the sidelines, these shoppers appear ready to add some new clothing to their wardrobes, including pieces to replace things that have worn out or no longer fit, said Robert Passikoff, president of Brand Keys. The holidays also may unleash seasonal demand for apparel, traditionally the number-one holiday gift, albeit one overshadowed in recent years by demand for gift cards and electronics. <wwd.com>

Macy’s Upbeat on Holiday Season - Macy’s, the nation’s biggest department store chain and an industry bellwether, cut its losses in the third quarter and now has a brighter outlook on the holiday season. Executives, in a surprisingly upbeat mood despite the nation’s rising unemployment and economic uncertainties, said the new view stems from a recent uptick in mall traffic; strong sales of private labels, exclusive merchandise and online; better business at Bloomingdale’s; lower inventories overall, and the My Macy’s localization program. However, the retailer’s shares fell Wednesday after its fourth-quarter profit projection was below Wall Street’s expectations. <wwd.com>

Target takes aim at mobile holiday shoppers - Target Corp. is adding new mobile features for the upcoming holiday season. Due to launch next week, Target will offer shoppers access from their mobile phones to checklists, holiday planners, gift and video finders, and holiday-planning text alerts. On its mobile site, Target.com, Target allows shoppers to view, manage and update their TargetLists, which are lists that include items picked out by gift recipients. Later this month, shoppers will be able to access this feature on the Target App for iPhone. <internetretailer.com>

Westfield Reports Strongest U.K. Sales in 7 Years - Westfield Group, the world’s biggest owner of shopping malls by market value, said retail sales in October at centers in the U.K. have risen at the fastest pace in seven years. The rate of store closings has also fallen since the March quarter, Managing Director Steven Lowy said in a conference call today while providing an update on the Sydney-based company’s performance in the three months to Sept. 30. Westfield’s London shopping complex, which opened at the height of the global financial crisis last year, has attracted some 20 million visitors and has signed more than 15 new tenants, the mall owner said in a statement on its Web site in October. Retail sales in the U.K. rose 3.7 percent in the three months on a comparable basis, Westfield said. <bloomberg.com>

Safilo Tender Offer in Doubt - Italian eyewear firm Safilo Group SpA on Wednesday reported a $71.6 million third-quarter loss and cast doubt on its life-saving recapitalization deal with Hal Holding NV because of a weak response to the Dutch shareholder’s cash tender offer. Losses for the three months through Sept. 30, which included a 28 million euro, or $40.2 million, writedown of assets, widened to 50.1 million euros, or $71.6 million, from 6.7 million euros, or $10.1 million, in the year-ago period. As reported last month, sales declined 7 percent to 212.6 million euros, or $306.1 million. Dollar figures were converted at average exchange rates for the period. Safilo approved a recapitalization plan on Oct. 19, in which Amsterdam-listed Hal would inject new equity and pay off some of the eyewear maker’s debts in return for a stake of between 37.23 and 49.99 percent. <wwd.com>

Travel Retail Expands at LAX - Travel retail is set for expansion at Los Angeles International Airport as part of an at least $1.2 billion overhaul. Looking to the future despite a recession driven decline in tourism, officials last month approved a plan to double retail and restaurant space in the next four years to about 100,000 square feet at the Tom Bradley International Terminal. Visitors to the airport, which has nine terminals with a total of almost 185,300 square feet of retail concessions, will encounter changes well before the Bradley project is scheduled be finished in 2013. Four other terminals with 22 retail units and 27 food units occupying 71,145 square feet will be updated by 2011. Four more terminals are also scheduled for improvements before completion of the Bradley facilities. <wwd.com>

Overstock.com Succeeds in Goal of Raising $30,000 for Veterans - Overstock.com, Inc. (Nasdaq: OSTK) today gratefully thanked its customers for their overwhelming response to Overstock.com’s announced goal to raise $30,000 for Wounded Warrior Project by Veterans Day. "These are great Americans and great people, who served their country honorably," said Overstock.com Chairman and CEO Patrick Byrne. "Whether or not you agree with the conflicts in which our nation is engaged, this is an opportunity to give valuable assistance to true American heroes." <money.cnn.com>

Banana Republic Opens SoHo Prototype - On Wednesday, the upscale division of Gap Inc. unveiled the New York City version of its new store prototype at 552 Broadway between Prince and Spring Streets. The two-level, 18,000-square-foot store offers a series of “boutiques” off a main boulevard, each designed “like idealized walk-in closets,” the company said. F <wwd.com>

INSIDER TRANSACTION ACTIVITY:

WAG: Marilou Ferstel, Director, sold 4,100 shares for a gain of $162k.