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 November 18, 2009


We’ve been expecting a big quarter out of PSS (one of our favorite names all year), and the preannouncements out of DSW and now BWS (after the close yesterday) support our call. We still think estimates are too low, by a long shot.

After the close yesterday we had our latest positive preannouncement with BWS reporting earnings 30% above consensus. Recall that DSW kicked off the 3Q with a preannouncement back in mid-October. This leaves us with only two companies that have not preannounced in the small peer group that we track for PSS – Shoe Carnival and…PSS itself. The read through has obvious implications with trends improving on the margin at the same time that PSS is hitting an inflection point in earnings. Consistent with our call, the Street is still too low by at least 20%, 25% and 30% for the quarter, year, and 2010.

With more retailers starting to report positive same store sales in the absolute sense driven in part by improved traffic, we are seeing a significant acceleration of comp trajectory across footwear on both a 1Yr and 2Yr basis. Taking all the factors into consideration, including comps tracking +/- 1% on a 2-year basis for both DSW and BWS in the 3Q,  I am increasingly confident that PSS will print a positive absolute comp this quarter. With sourcing costs easing heading into the 2H and the DC transition complete, the leverage on higher sales is meaningful.

The bottom line is that we are coming out at $0.58 for the 3Q, meaningfully above Street expectations of $0.47, and closer to $2.00 for next year. With the stock trading at 10x our fiscal 2010 estimate, the earnings power is not reflected in shares at this level. For further detail on PSS and our multi-year thesis, please contact us for a copy of our PSS Black Book.

RETAIL FIRST LOOK: IT'S A FOOT RACE - FootwearCatTable 11 09





  • Despite some initial confusion surrounding commentary about the promotional environment, Target’s management was quick to point out that they always anticipate a “highly promotional fourth quarter” and this year should not be any different. They further elaborated that planned promotional activity is not likely to be more aggressive than in the past (including Black Friday) and clearance promotions should in fact be less this year given the tight inventory control across the entire retail landscape heading into the holidays.
  • On its very bullish conference call, TJX management suggested that the company’s success in 2009 has not really benefitted much from other retail bankruptcies, inventory liquidations, and the recession. While the company’s results have been exceptional, it’s hard to believe these external factors haven’t had a meaningful impact. Otherwise, it’s hard to explain why almost all other off-pricers ranging from Ross Stores to Gilt Groupe are also experiencing similar positive trends.
  • While most apparel retailers are now complaining about the warm weather and the abrupt shift in momentum from October in the sale of seasonal apparel, Home Depot is seeing the opposite. Management noted that same stores sales in November are tracking ahead of October’s -5.2% trend, due in part to seasonally warm weather. Outdoor categories, such as roofing, are seeing positive benefits from the warm trends.
  • In an effort to reach younger customers and broaden its customer base, Burberry is embracing the world of digital media. The company is planning to spend 40% of its European Fall/Winter campaign budget online. The spend is notable as the overall industry statistics suggest that in five years, only 20% of global ad spend will be digital (clearly it is much less today). Burberry’s digital leadership position is highlighted with its recent online broadcast of the company’s London Runway show and its launch of artofthetrench.com.


Consumer Prices Suggest Core Inflation Low - Builders in October probably broke ground on U.S. houses at the fastest pace in 11 months, and consumer prices held below the Federal Reserve’s long-range goal, economists said reports today may show. A report from the Labor Department may show the cost of living climbed 0.2 percent for a second month. The Commerce Department’s housing report is due at 8:30 a.m. in Washington. Estimates in the survey ranged from 570,000 to 630,000, after 590,000 in September. Also at 8:30 a.m., the Labor Department will release the consumer price gauge. Compared with the same time last year, prices were probably down for the eighth consecutive month. Excluding food and energy costs, the so-called core index rose 0.1 percent after climbing 0.2 percent in September, according to the Bloomberg survey median. The gauge was probably up 1.6 percent in the 12 months to October, according to the survey median. Fed policy makers’ long-term forecast for their preferred measure of inflation, the Commerce Department index tied to consumer spending and excluding food and fuel, calls for gains in a range of 1.7 percent to 2 percent. It was up 1.3 percent in the 12 months to September.  <bloomberg.com>

Obama, Hu Vow Cooperation Amid Divisions Over Trade - President Barack Obama and Chinese President Hu Jintao concluded their formal meetings in Beijing yesterday with promises of increased cooperation amid lingering friction over currency, trade and human rights. Obama said the world’s most populous nation played a vital role in helping end a global recession and will be a key partner in dealing with challenges from curbing the nuclear ambitions of Iran and North Korea to combating climate change. “The relationship between the United States and China has never been more important to our collective future,” Obama said in an appearance with Hu at the Great Hall of the People.  <bloomberg.com>

Goldman Sachs, Buffett Said to Plan Aid for Small Businesses - Goldman Sachs Group Inc., under fire in Washington for setting aside billions of dollars for bonuses a year after getting a taxpayer bailout, is preparing to team up with Warren Buffett to provide assistance to small businesses, said people familiar with the matter. The charitable effort, which may be announced as soon as today, coincides with one of the Obama administration’s top economic priorities: spurring hiring at small companies. The initiative would aim to provide assistance -- ranging from counseling to obtaining funding -- to 10,000 U.S. businesses, according to the people, who declined to be identified before the program is announced. Buffett’s Berkshire Hathaway Inc. is the largest shareholder in New York-based Goldman Sachs. <bloomberg.com>

EU VAT: No longer a threat - The European Union plans to impose value added tax on non-European companies that provide services in the European Union. But Indian IT companies are not worried, reports CNBC-TV18's Kritika Saxena. It was a proposal that, when first announced, had Indian IT companies sweating at the brow. The EU plans to impose value added tax on non-European companies operating inside the EU starting the first of January. Indian firms were worried that this would scale up costs by 25%, making their pricing uncompetitive. But now, this panic has subsided. <moneycontrol.com>

Ahold Aims to Cut Costs by 350 Million Euros, Step Up Expansion - Royal Ahold NV, the owner of the U.S. Stop & Shop grocery chain, pledged to cut costs by 350 million euros ($521 million) and pursue expansion amid speculation that the company may become a takeover target. Ahold plans the expense reduction by the end of 2012, Chief Executive Officer John Rishton said today, adding there is “not an area in the business we’re not looking at.” The Amsterdam- based retailer today reported a 22 percent gain in third-quarter net income to 238 million euros, beating the 179 million-euro average estimate of eight analysts in a Bloomberg survey. Ahold, the owner of Dutch market leader Albert Heijn, should use excess cash of about 2 billion euros to make acquisitions or buy back stock to avoid becoming a bid target, analysts including Petercam’s Fernand de Boer have said.  <bloomberg.com>

TSA Will Sell Wii Game Consoles - The Sports Authority will begin selling Nintendo products, including videogaming consoles and the Wii Fit and Wii Fit Plus games. TSA has been in talks with Nintendo for the past six months and decide dto carry the game console, "to shift the paradigm and shake up the treadmill and sporting-goods business.” Select TSA stores will begin publicizing the tagline “We know fit. We know fun” and will sell Wii products and feature the games in dedicated areas. Fitness trainers will be on hand to help customers try them out. <sportsonesource.com>

India IPO funding seen hit by unsecured lending curb - A popular tactic used by Indian brokerages to raise money for rich clients is likely to be banned by the central bank's move to curb unregulated lending, potentially crimping funding for a long pipeline of planned IPOs. India's central bank this month proposed to stop borrowers from issuing non-convertible debt with a maturity of less than 90 days, part of a broader effort to remove excess liquidity as overseas funds pour into its markets. Brokerages have made such borrowings mostly from mutual funds, typically at twice the commercial paper market rate, and then turned around and loaned the funds to rich clients. The wealthy investors, in turn, used the cash to invest in a recent slew of IPOs, fuelling aggressive valuations. <reuters.com>

UPS expects a slight increase in holiday season shipments this year - From Thanksgiving to Christmas, United Parcel Service of America Inc. expects to deliver about 400 million packages worldwide, with most of them in North America, representing a slight increase over last year’s holiday shopping season, a spokeswoman says. UPS expects its busiest day of the year will be the Monday before Christmas, Dec. 21, when it expects to deliver 22 million packages, an increase of about 40% over normal daily delivery volumes. To handle the peak volumes, UPS will hire about 50,000 seasonal workers, many of them delivery drivers’ helpers.  <internetretailer.com>

The Sharper Image returns - The Sharper Image, the former multichannel retailer which closed its nearly 200 stores last year shortly after filing for bankruptcy, is back with a new e-commerce site at www.sharperimage.com. The site, which Camelot Venture Group designed, developed and launched, features the retailers’ trademark gadgets, such as sound-soothing alarm clocks and adjustable-temperature wine chillers.  <internetretailer.com>

Lanvin Finds Minority Investor - WWD has learned the French fashion house has sold a minority stake to an investor in exchange for a capital injection estimated in the tens of millions of euros. The identity of the investor could not immediately be learned, but it is understood to be a European family holding company with a long-term horizon and no exit strategy. It acquired a 12.5 percent stake in Arpège SAS, the holding company for Lanvin. He declined to name the investor, while characterizing it as in sync with Lanvin’s “human scale” organization and familial management style. The proceeds will be used to help Lanvin expand its retail network and deepen its commercial footprint, leveraging the design prowess and buzz of its acclaimed creative director Alber Elbaz, Andretta said. <wwd.com>

Web sales up 12.6%, but where are those sales coming from  - When it comes to online sales, it looks like things may be bouncing back a bit. In October, e-commerce sales increased 12.6% over October 2008, according to a new monthly study of 150 e-retailer clients of MyBuys Inc. that the firm conducted exclusively for Internet Retailer. So in October, even though total sales were up by 12.6% year over year, the industry’s health was little changed from a year ago because total sales owed so much to discounted items, sales of which were up 112%, and because the depth of discounts increased from an average of 24.6% in October 2008 to 28% this October. Online retailers saw sales drop 2.6% on non-discounted goods from the same period last year <internetretailer.com>

New Domestic Focus for China, Hong Kong - China’s economy and manufacturing sector are picking up steam again, posting impressive new growth numbers that point to a strong recovery from the global financial crisis. Not far behind, textile and apparel trade fairs in Hong Kong and Mainland China are approaching the next six months with renewed vigor and hope for a revitalization in customers and purchases. “In general, Asian economies are recovering from the global crisis more quickly than elsewhere,” said Michael Duck, director of Hong Kong’s Asia Pacific Leather Fair. “This region has the world’s largest populations and its citizens are fast improving their standard of living and level of disposable income. These economies, once regarded as the low-cost production platforms for an affluent West, are now turning attention to their domestic markets.” <wwd.com>

Japan Looks for a Jumpstart - As Japan inches its way out of a recession, trade show organizers are seeking strategies to entice retailers and give the market here a boost. “Neither buyers nor exhibitors can figure out what suits the market,” said Takashi Yoshioka, who represents the casual apparel show Frontier. “[Buyers’] budgets are smaller than before, and they don’t know what to sell and buy.” Naoya Jita of JFW International Fashion Fair, Japan’s biggest fashion trade event, also recognized the challenges in the current market.  “Buyers are interested in the goods that sell well now, but more than that, they are looking for something that creates [future] excitement on the retail scene,” Jita said. <wwd.com>

New Balance isn't just sensible shoes anymore - New Balance for Nine West is unveiling its seasonal lineup of fashionable sneakers and shoes for women. Earlier this year, New Balance Athletic Shoe Inc., the Boston-based company known for athletic footwear, teamed up with shoe retailer Nine West to launch their first joint collection of footwear; the footwear aimed to combine New Balance performance technology with Nine West's sense of fashion and style. <boston.com>

Powdr Corp. Agrees to Buy Copper Mountain - Intrawest and Powdr Corp announced they have entered into a definitive purchase agreement to sell Intrawest’s interests in Copper Mountain to Powdr Corp. The transaction is anticipated to close in December 2009 and the agreement is subject to regulatory approvals including the issuance of a U.S. Forest Service special-use permit to Powdr Corp. This winter season it is business as usual at Copper Mountain. Once the transaction is finalized Intrawest and Powdr Corp have committed to work together to ensure that all of the multi-mountain season pass products, vacation reservations and joint marketing initiatives will be honored for the 2009-2010 winter season.  <sportsonesource.com>

Deckers Wins Ugg Counterfeit Lawsuit - Deckers Outdoor Corp. has won a copyright infringement lawsuit against a Melbourne, Australia firm over the sale of counterfeit Ugg boots. According to Smart Company in Australia, a court has ordered the company, Hepbourne, to pay Australian $7.5m (U.S. $6.9 mm) to Deckers. Deckers has pursued Melbourne company Hepbourne for over five years over the sale of counterfeit boots and has obtained court orders on a number of occasions preventing Hepbourne from selling the boots. But according to court documents, Hepbourne continued to sell the boots at markets and on eBay, even after legal action was launched and the homes of some of its selling agents were searched. A Federal Court judge in Australia awarded Deckers A$3 million (U.S. $2.8 mm) in damages for lost profits and a further A$3.5 million (U.S. $3.3 mm) for the flagrancy of the copyright breach. The defendants were also ordered to pay A$1 million (U.S. $0.9 mm) in costs. <sportsonesource.com>

Orenstein Launches Consulting Business - Joel Clark Orenstein, who has held executive posts at companies such as Halston, Oscar de la Renta outerwear, J. G. Hook, Fashion Ribbon, Federated Department Stores and Lord & Taylor, has started his own consulting firm. Orenstein Fashion Business Planning & Merchandising Service will offer services such as business planning, financial analysis, merchandising, sales management, evaluation of channels of distribution, sourcing and marketing. Based in Southport, Conn., Orenstein is working with a team of merchants and business analysts on a freelance basis. <wwd.com>

Barclays Head of Global Retail Warns Upstart Supermarket Banks - The new boss of global retail banking at Barclays has hit out at supermarkets and other companies setting up their own banking offers. Antony Jenkins, who recently moved to the role, believes supermarkets may be underestimating the difficulties of running a banking operation and questioned whether they had the right skills to run it, according to the Financial Times. Tesco and Sainsbury’s have both been taking advantage of the loss of confidence in traditional banks by ramping up thier financial services offers. “The series of disruptions in the global financial system has created opportunities for other players to enter the market and it’s going to make it an interesting landscape,” he said. <retail-week.com>