R3: FL: #1 on Strategic Wish List...Check

R3: REQUIRED RETAIL READING

January 11, 2009

With the first of our strategic wish list initiatives for Foot Locker announced Friday, don't be surprised to see some combination of the remaining strategies announced when the company reports 4Q results. We continue to warming to the name as a big idea in 2010.

TODAY’S CALL OUT

Back on December 17th we posted our “Wish List” of strategic moves that we'd like to see Foot Locker execute to positively fix the business under the new leadership of Ken Hicks. The first bullet highlighted right-sizing the store base and optimizing the portfolio by brand. After Friday's announcement that it expects to close 120 net stores in Q4 and will begin consolidating elements of the Lady Foot Looker and Kids Foot Locker concepts we can check off #1 on the strategic wish list.

With a 30+ point margin spread between the least profitable and most profitable stores, this is a key point to enhancing long-term profitability. Additionally, with 1.7 Lady Foot Lookers for every Kids Foot Looker the opportunity to right-size the Lady portfolio appears compelling (see our "FL: Close 'Em or Suffer" on 1/6 for more detail).  

So what’s next? Hicks is expected to unveil his plan in the Spring, with the reporting of 4Q results. We won’t be surprised when some combination of the remaining "Wish List" strategies will be employed to begin the turnaround. Neither should you. The question here is not what ideas will be communicated but rather if and how well they can be executed. We continue warming to the name and suggest now is the time to dust off the old file for what could be one of our key names in 2010. 

LEVINE’S LOW DOWN 

  •  In an effort to recapture women’s interest, Sperry Top-Sider has officially succeeded with an Authentic Original 2-Eye boat shoe designed and sold through exclusively through J. Crew…in platinum gold. The shoe has completely sold out and is now on backorder until March at the earliest (just try ordering online!). While the financial benefit is likely to be muted with shoes already out of stock, the value from a branding perspective should not be understated with Sperry now one of the hottest trends at one of the most relevant fashion retailers.
  •  With the Retail Big Show kicking off this morning in NYC, a rather startling fact is the number of retailers registering for the show this year up 27% over last year. I think we can safely state this increase is not demand driven, but I suspect it's symptomatic of the recent wave of new designers entering the market following the extinction of many storied and tired brands/designers over the past year.
  • After saying relatively under the radar, the court case between VFC and The South Butt has become higher profile after the defending company called for dismissal last week. Brand protection has to be respected, however, there is a point at which it's just silly...this is one such example. The exposure from this case is arguably more detrimental to the TNF brand than had they just gone about their business. That said, the company's been looking for an acquisition for a while now, why not buy out the 2-year old bootstrap operation and call it a day.

MORNING NEWS 

Iconix Sues Merrill Lynch - Iconix Brand Group Inc. filed a lawsuit against Merrill Lynch, Pierce, Fenner & Smith Inc. on Thursday accusing the financial adviser of fraud over the sale of $13 million in devalued auction rate securities. Iconix engaged Merrill as a financial adviser in 2006 as the fashion group began to acquire its portfolio of home and apparel brands. In its complaint, filed in a Manhattan federal court, the company said its adviser encouraged it to invest in auction rate securities as part of its capital management plan. Lawyers for Iconix wrote that Merrill represented the securities to be safe and highly liquid. Auction rate securities, or ARS, are long-term interest-bearing instruments of varying credit risk traded at auctions where their interest rates are reset. Prior to the subprime mortgage crisis, they were attractive to some investors who could ideally liquidate them at such auctions, which usually occurred weekly, biweekly or monthly.  <wwd.com>

La Go Go’s Growth Shows China Consumer Spending Power - Beijing office worker Wang Hong holds up a $44 black blouse at Chinese clothing store La Go Go and smiles. “It’s like getting a foreign brand at local prices,” said the 33-year-old Wang, standing in front of racks of clothes at the Jiamao mall. By offering prices as much as 25 percent less than international retailers Esprit and Mango, La Go Go parent Ever- Glory International Group Inc. is transforming itself from a supplier to Levi Strauss & Co. into a Chinese fashion chain. The retail unit’s sales climbed 153 percent in the third quarter from a year earlier. Ever-Glory chairman Edward Kang started La Go Go stores in 2008 to capitalize on rising local affluence and counter a drop in exports. The Nanjing-based company now has 154 La Go Go outlets and plans to open as many as 1,000 by 2015.  <bloomberg.com>

Prada Said Tapping François Kress as U.S. Chief - The company is about to name François Kress president and chief executive officer of New York-based Prada USA, according to a source familiar with the situation. Kress, the former managing director of Bulgari’s jewelry, watch and accessories division, will replace Graziano de Boni, who left Prada in late October to head up the newly formed Reed Krakoff division at Coach Inc. Kress left Bulgari in September. Until Kress’ appointment, which is said to be effective today, Prada SpA chief operating officer Sebastian Suhl had taken on the additional responsibilities for the U.S. Prada could not be reached for comment. <wwd.com>

Kellwood Acquires ISIS - Kellwood Co. on Friday closed on its acquisition of ISIS, a women’s outdoor performance and casual apparel firm. Terms of the deal were not disclosed, except that the acquisition was completed through Kellwood’s American Recreation Products subsidiary. Sources familiar with the transaction said Kellwood’s owner, private investment firm Sun Capital Partners Inc., provided monetary assistance for the purchase of ISIS. “We’re pleased to have ISIS as part of the Kellwood group of brands, and we look forward to announcing more acquisitions throughout 2010,” said Michael W. Kramer, president and chief executive officer of Kellwood. Kramer said last month the firm was on the hunt for more acquisitions, and has been in deep discussions with several firms about possible purchases.  <wwd.com>

Jhane Barnes Sells Stake to AW Chang - After months of searching for new business partners, Jhane Barnes has struck a deal with AW Chang Corp., which has acquired a 50 percent stake in the business. Terms were not disclosed. Under the partnership, AW Chang will manufacture and market Jhane Barnes collection sportswear, neckwear, dress shirts and hosiery through its men’s apparel division, Excalibur, a vertically integrated company that produces neckwear and dress shirts under license; Barnes will continue to head design. The business will now be known as Jhane Barnes Collection. The deal ends a period of uncertainty for the company, which had been looking to restructure since early last year. Over the summer, Barnes said she was looking for stakeholders, and was considering bids from two different parties. At that time, Excalibur was named as the licensee for Jhane Barnes neckwear and ties. “But we soon learned that our company had the financial, sourcing and manufacturing capabilities to give Jhane what she needed,” said Warren Katz, president of both the new Jhane Barnes Collection and Excalibur.  <wwd.com>

A new e-reader will give Borders.com’s new e-book store top billing - Spring Design’s Alex e-reader, which will launch Feb. 22, will prominently feature Borders Group Inc.’s new e-book store when the site launches in the second quarter, the companies announced. Although shoppers will be able to buy and read books from the entire Internet, Borders.com will receive top billing on the e-reader as it will appear on its initial screen, says a Borders spokeswoman. The Alex e-reader device enables users to download any book or document that conforms to the ePub format using Adobe Inc.’s anticopying DRM software—a combination gaining support among many e-book sellers apart from Amazon.com Inc., which uses its own format developed for its Kindle e-book reader. The Alex reader can also display content in .txt or HTML formats. <internetretailer.com>

Apparel Retailers Cut Jobs - Apparel retailers across the country cut 5,900 jobs in December, reversing gains reported in November as stores hired extra help for the holidays. In the height of the holiday season, department stores cut 5,600 positions to employ 1.51 million people, while specialty stores eliminated 300 jobs to employ 1.42 million, the Labor Department said Friday. Declining employment levels at stores in December “tells us retailers were very cautious about the holiday season,” said John Lonski, chief economist for Moody’s Investor Services. “The continued weakness of the labor market warns against expecting more upside surprises for consumer spending.” As long as the labor market stays slack, the better-than-expected holiday comparable-store sales results reported Thursday are no guarantee consumer spending will make a robust recovery in early 2010, Lonski said. The job situation is more likely to show signs of improving in the spring, he said. <wwd.com>

China Exports Rise 17.7 Percent - Reversing a 13-month pattern of decline, China’s exports rebounded and rose 17.7 percent in December, lending weight to conventional wisdom that its economy has recovered from the global downturn. Yet economists cautioned that much of China’s recovery has come on the back of a massive government spending plan that sought to pour $586 billion into economic development, primarily through creating new infrastructure like roads and railways. “We are seeing good signs in the new data, especially for December,” said He Weiwen, a Beijing-based trade analyst with the World Trade Union. Figures released Sunday by China’s General Administration of Customs showed imports in December surged by 55.9 percent over the previous December. In all, China’s exports for 2009 declined by 16 percent to $1.2 billion, while imports fell by $1 billion, or 11 percent. China’s contentious trade surplus shrank significantly last year, contracting by 34 percent to a total of $196 billion.  <wwd.com>

E-commerce deal-making picked up in the fourth quarter - Merger and acquisition activity rose significantly in the fourth quarter among digital media companies, led by increased action in e-commerce companies, says the latest Deal Notes report from investment banker Petsky Prunier. The digital media segment also includes comparison shopping, social media, local search and classified sites as well as shopping portals. Investors in that segment completed 54 deals in Q4 2008 with a value of about $2.0 billion compared to 50 deals worth $1.15 billion in the same period a year earlier. The dollar value of deals jumped 74% compared to Q4 a year ago while the total number of deals was up 8%. E-commerce was the most active digital media subsegment, with 17 transactions valued at $784 million.

The second-most active segment was interactive advertising, which includes interactive agencies, ad networks, digital video, mobile advertising, e-mail services, and search engine marketing and optimization companies, as well as affiliate networks, with 47 transactions worth $1.2 billion.  <internetretailer.com>