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R3: REQUIRED RETAIL READING

January 5, 2009

We’re on the cusp of getting the most important “rear-view” data point of the year for retailers and it’s likely to be pretty good. Positive earnings aside, now is the time to start thinking about the sustainability of both margin improvements resulting from inventory management and sales growth driven by consumer demand (or lack thereof).

TODAY’S CALL OUT

There’s nothing like starting the New Year with a look back.  While most of us are still figuring out our resolutions and goals for 2010, retailers are about to report their most important sales data of the year.  The month likely ended positively, with a surge in mall traffic coming in the critical final weeks of the holiday.  Calendar favorability is also expected to contribute 1-1.5% to results, which will add to both profits and positive headlines.  After a sluggish start to the holiday season (weather related), clean inventories, planned but not excessive promotional activity, and status quo demand all lined up for a solid profit picture as we wrap up 4Q and look towards Spring. As we eagerly await same-store sales results to be reported on Thursday, the bigger picture is probably the better place to focus in on. 

The real question coming out of the holiday season is if there were any notable signs or changes in consumer behavior.  The answer is probably not, as consumer credit, employment, housing, and even prices at the pump have remained relatively stable over the past few months.  On the margin, some of these factors are improving (albeit with the help of good ‘ol “easy compares”), but not a rate needed to support continued earnings upside at the pace we saw in 2009.   

The real issue here, in the wake of expense and inventory cuts is now one of demand.  As we look ahead to January, we don’t believe this month will be a good barometer as inventories are currently depleted, post-holiday clearance activity is its lowest point in years, and the cold freeze is unlikely to spark early sales of Spring apparel.  This expected lull sets up some “breathing room” to really figure out if the consumer is about to step-up and make that extra visit to the mall.  From our vantage point, we maintain that this is going to be a stock picking year.  Demand is likely to remain lackluster and cost cutting has peaked.  We may have another month to piece together a better picture of the consumer, but at the same time it’s probably best to retire the thesis of “easy compares”.

Eric Levine

Director

LEVINE’S LOW DOWN 

  • With CES taking place this week in Las Vegas, expect to hear lots of buzz surrounding the latest and greatest gadgets and technology breakthroughs. In the absence of any expected “breakthrough” technology, there is likely to be lots of chatter surrounding 3D TV (thank Avatar for the added focus here), e-readers, netbooks, mobility, and Apple’s imminent tablet launch. As always, retailers will be looking for any products that can help boost AUR’s and margins.
  • According to Forrester Research, retailers spent $4.67 billion in 2009 on interactive marketing. The figure is expected to grow to $8.6 billion by 2014, with mobile growing to almost $200 million from just $59 million this year. While the growth rates are impressive, the absolute dollars spent on interactive marketing are still small relative to traditional marketing spend. Wal-Mart and Target combined spend near $2 billion annually on marketing and advertising!
  • Over a week ago I pointed out that the UGG retail store in Soho consistently had a line out the door during the holiday season. Well, now it’s time for an update. Both the UGG store and a metro-area outlet store still have long lines of customers waiting to get in. To my knowledge, UGG is one of a very few retailers that employ a “bouncer” to control entry and exit into their stores.
  • “Green” and “sustainability” are buzzwords that are expected to continue to increase in importance to the U.S. consumer. The longevity of such trends is still questionable, but most signs suggest that retailers and brands will continue to push the environmentally friendly envelope. A 2009 survey found that 54% of consumers would purchase more sustainable, green products if pricing was at parity with non-green products. Additionally, consumers are very aware of lip-service vs. reality. Another survey suggests that 70% of consumers don’t believe companies when they tout their efforts to help the environment and sustainability. As such, 64% of consumers would like corporations to use third-party verification to ensure that intentions are honest and transparent.

MORNING NEWS 

Target Launches Warehouse Club Event - One of the first discounters to advocate design for the masses, Target is now dabbling in the no-frills warehouse club concept. The Great Save, a shopping event now through Feb. 21, features low prices on bulk-packaged items and designer brands in a warehouse-club-like setting, but without club membership fees or ID cards. The event is being held in the seasonal departments of all 1,740 Target stores. The strategy could be aimed at countering the consumer perception that Target is more expensive that its rival Wal-Mart, whose parent company operates its own warehouse club division, Sam’s Club. Wal-Mart Stores Inc. has consistently outperformed Target Corp. over the last year in comparable-store sales gains. A Target spokesman declined to speculate as to whether The Great Save is a harbinger of the retailer rolling out its own warehouse club format. <wwd.com>

Tesco Clubcard company Dunnhumby buys KSS Retail - Dunnhumby, the market research company that is majority-owned by Tesco, the UK supermarket, has bought KSS Retail, a US price-modelling company, for an undisclosed sum. KSS Retail analyses and predicts shoppers' behaviour by tracking the effects of price changes on shop shelves and on online stores. It then generates pricing "models" for the retailers to implement based on consumer demand. Its technology and services are used by retailers such as Kroger, Portugal's Sonae, and Associated Food Stores.  Dunnhumby, which runs Tesco's hugely successful Clubcard loyalty scheme and analyses shopper activity in over 200m households worldwide, said that the acquisition will enable it to combine its know-how and expertise with that of KSS Retail. <telegraph.co.uk>

Asda steps up UK grocery battle with price cuts - Asda, Britain's No. 2 grocer, is cutting prices on 3,600 products by an average of 13 percent, intensifying the battle between the big supermarket groups at a time when lower food price inflation is hitting sales growth. Asda, owned by the world's biggest retailer, U.S. group Wal-Mart Stores Inc (WMT.N), said on Tuesday the cuts covered one in five products in its stores, including potatoes, carrots, bananas, milk, nappies, rice, bread and cheese, and represented its biggest and broadest reductions in over a decade. The cuts would more than offset an increase in VAT sales tax applicable to some non-food products on Jan. 1 and the vast majority would last for a minimum of six to 12 weeks, it said. The move appears to ratchet up a price war between supermarket groups, although it is reminiscent of similar campaigns in previous years which have been funded mainly by cost cutting and have not undermined industry profit margins. <reuters.com>

PacSun Names Cameron New Marketing Chief - In a move designed to help the company recapture its roots, Pacific Sunwear of California Inc. will today name former Levi Strauss & Co. executive Robert Cameron senior vice president of marketing. At PacSun, Cameron, formerly vice president of Levi’s Brand Marketing, will be responsible for creating a differentiated experience at the company’s 897 stores around the U.S. as well as on its Web site. He will also work with the company’s major brands to re-create the California lifestyle at its stores. This is a new position. “Robert has a tremendous track record of building brands and creating world-class customer experiences, particularly in the youth segment,” said PacSun president and chief executive officer Gary Schoenfeld. “We’ll leverage his background to reclaim our position as the favorite place for 15- to 24-year-olds to shop.”  <wwd.com>

Military Retail Giant Seeks Growth - A $10 billion retail giant that operates in 49 states and more than 30 countries is on the prowl for market share. The Army and Air Force Exchange Service, which sells 877,000 items from socks to electronics to 11.6 million active and retired military personnel, plus their spouses and dependents, is stepping up fashion, modernizing systems and investing to improve service. It’s also building malls and lifestyle centers at major bases in the U.S. and abroad. The exchange service sees the potential to grow despite the impact of the recession. “It’s the largest $10 billion business that nobody knows about,” said Maj. Gen. Keith Thurgood, commanding general and chief executive officer. “I was asked how gloomy 2009 would be, and I said one word — ‘opportunity.’ This is the time for us to invest in technology, spend money and focus on the customer in terms of pricing and promotion. If we get our strategy right, we can put ourselves on a glide path to grow in ’10, ’12 and the future.”  <wwd.com>

Next Sees Momentum Slowing After Holiday Sales Gain - Next Plc, the U.K.’s second-largest clothing retailer, said a recovery in consumer spending may not be sustainable after a rebound in holiday sales caused the company to raise its annual profit target. Chief Executive Officer Simon Wolfson expects a “similar” level of profit in the coming year as shoppers feel the effects of tax increases or job cuts, the company said today. Next is buying inventory at the “lower end” of its sales budget. Next fell as much as 3.5 percent in London trading as the company’s comments on the outlook offset the increased earnings forecast and higher holiday sales. The retailer today raised its pretax profit goal for fiscal 2010 for a fifth time to as much as 500 million pounds ($807 million) after Britons bought more of its women’s fashion ranges in the build-up to Christmas.  <bloomberg.com>

Herrera Greets 2010 With New Game Plan - While many companies are hunkering down given the sputtering global economy, Carolina Herrera is forging ahead with new stores, sharper pricing and an aggressive rollout of CH Carolina Herrera. “Fashion is about movement. It is a dream you can make a reality when people wear your clothes,” the designer said during a Monday morning interview with Marc Puig, chairman and chief executive officer of the Puig Beauty & Fashion Group, which owns the Herrera fashion house. While some might argue last year was one bad dream given the recession, the duo is determined not to get mired down by the malaise that seems to have engulfed many shoppers around the globe. <wwd.com>

END Footwear Co-Founder Launches LUME - Andrew Estey, former END Footwear co-founder and award-winning footwear designer, announced the launch of LUME, a premier active-lifestyle brand focused in the fusion of health and wellness. Influenced by the active baby boomer and grounded in a design philosophy of “inside out,” LUME’s main focus is to drive innovation through fit with a focus on how the foot connects to its environment. As footwear will be the catalyst, LUME’s plan is to move quickly over the next few seasons to complete a unique wellness system comprised of Footwear, Inserts and Socks, all designed to benefit and enhance the foot's comfort. With its core group in place, the brand is moving full steam ahead with a planned launch into footwear as their first introduction in FA’10.  <sportsonesource.com>

Lanvin Investor Revealed -  Lanvin’s parent Arpège SAS, which last November sold a 12.5 percent stake, realized a capital increase totaling 27.5 million euros, or about $39.3 million at current exchange rates. The amount is disclosed in documents filed with the commercial court here and obtained by WWD. They describe a two-prong capital increase, with 10 million euros, or about $14.3 million, representing a debt-to-equity conversion, and 17.5 million euros, or $25 million, deposited at the private bank Neuflize OBC. It is understood the minority investment was made through a family trust associated with the Bartel family. The documents name Ralph Bartel, born in Germany and resident of Switzerland, as a new director of Jeanne Lanvin SA.  <wwd.com>

Congress Inaction Puts Tariffs on Textile Imports - U.S. apparel, textiles and footwear manufacturers could be hit with tens of millions of dollars in duties on imported components after Congress failed to pass legislation extending hundreds of expiring duty breaks before adjourning for the year. The so-called temporary duty suspensions, which must be renewed periodically by Congress, are intended to help domestic manufacturers compete by giving them tariff breaks on components such as certain yarns, fibers and footwear parts that are no longer made in the U.S. and must be imported. Lawmakers granted three-year duty suspensions on an estimated 500 imported categories in 2006, but those breaks expired on Dec. 31, leaving U.S. companies to pay for the duties on the imports that enter the country, beginning Jan. 1. The tariff suspensions are contained in legislation dubbed the “Miscellaneous Tariff Bill” that has a strict set of criteria, including stipulations that each import category receiving the breaks is “noncontroversial,” which means the items are no longer made in the U.S., and cannot cost more than $500,000 in lost revenue per category annually to the U.S. Treasury. <wwd.com>

E-commerce stocks roar into 2010 up 91% from January 2009 - Despite an off week as the year came to a close, 2009 represented a big rebound for e-commerce stocks. The Internet Retailer Online Retail Index of 25 e-commerce stocks advanced 91.44% over the course of 2009, easily exceeding the gains in the broader stock market. By comparison, the Dow Jones Industrial Average gained 18.82% and the Standard & Poor’s 500 Index was up 23.45% for 2009. The e-commerce index’s gains were more in line with that of the NASDAQ exchange, which includes many high-tech companies, and which advanced 43.89% in the past 12 months. E-commerce and other tech companies were bouncing back from a miserable 2008. While Internet Retailer only began tracking its Online Retail Index in February 2009, those 25 stocks collectively were down 39% in 2008. The NASDAQ fared even worse in 2008, sinking 41%, while the Dow was off 34% and the S&P 500 37%.  <internetretailer.com>

37% of smartphone owners purchased merchandise via their phones in 2009 - Mobile commerce is poised to explode this year, says online marketing and research firm Compete, which has found in new research that 37% of smartphone owners purchased merchandise via their phones in 2009. However, smartphone owners are not all alike, the firm says. “We’re seeing notable behavior differences across devices. So, for example, users of the Android operating system share different characteristics than Blackberry and iPhone enthusiasts,” says Danielle Nohe, director of consumer technologies at Compete. “As marketers better understand how each group actually uses their devices, there’s a huge potential in 2010 for mobile commerce to explode.”  <internetretailer.com>

Supreme Court to Consider NFL's Exclusive Licensing Deal Case - The National Football League next week will ask the U.S. Supreme Court for a broader shield from antitrust lawsuits, one that would let teams act as a group in marketing their logos and trademarks. The court will hear arguments over the league’s exclusive agreement with Adidas’s Reebok subsidiary to sell hats, jerseys and all clothing with team logos. The Supreme Court will decide whether the National Football League should be considered as a single entity or as separate businesses when defending against antitrust claims, according to the Los Angeles Times. Lawyers for pro football owners will ask the justices to rule that the NFL should be shielded from antitrust laws because its teams, while competitive on the field, function in business as one entity. If exempted from the antitrust laws, sports leagues could be insulated from antitrust claims over video-game licenses, television rights, franchise relocation and even player salaries, Bloomberg News reported. Only Major League Baseball is exempt from antitrust laws now. <sportsonesource.com>

Vietnamese Footwear exports fall sharply - Vietnam’s earnings from footwear export in 2009 dropped by 15.8 percent to US$4 billion despite the sector’s efforts to weather the global economic crisis. According to the General Statistics Office, the country’s footwear exports to all its main markets fell sharply. This was attributed to Vietnam’s shrinking export markets. Following the EU’s decision to continue imposing anti-dumping taxes on Vietnamese leather-capped shoes, many footwear companies, including foreign-invested companies in the country had to cut down production levels by between 10-30 percent in comparison with 2008.  <vovnews.vn>