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R3: Observations Part Deux

R3: REQUIRED RETAIL READING

January 15, 2009

 

With a slightly thinned out crowd on day 2 of the annual ICR Exchange, there were still many notable observations.

 

 

TODAY’S CALL OUT

 

With a slightly thinned out crowd on day 2 of the annual ICR Exchange, there were still many notable observations:

 

  •  True Religion kicked of the day to a full house, with a strong focus on retail growth. 2010 real estate will be centered on premium malls. At the standing room only breakout, it was revealed that company’s prior sales agent was receiving a 4% commission on major accounts and 8% on boutiques. Management does not expect to yield any cost savings from taking the sales function in house, as all costs will be reallocated to the new structure as well as supporting co-op marketing formerly covered by the sales agent.
  •  Steve Madden (the person, not the brand) offered some insight into the company’s M&A efforts. When asked about the recent success of fitness footwear, he replied “We tried to buy Fitflops and got shot down. I’m jealous of Skechers, they are doing a great job with their Shape-Ups”. He also went on to praise Zappos, saying they are “selling shoes like crazy”.
  •  VFC’s CEO alerted the crowd that the company was using a new slide presentation for the first time. While the graphics were updated, the presentation only yielded one incremental data point. The company’s ROI on consumer direct (retail) was 20% in 2009. As a result of the high returns, expect VFC to continue to invest in and grow its direct businesses.
  •  Warnaco’s CEO described the upcoming launch of the Calvin Klein underwear line, “X”, as “awesome”. The company will use 3D video to highlight the technical benefits of the new product offering. Management suggested that this could be the largest CK underwear launch in company history.
  •  Companies with the most buzz: CROX, TLB, JCG, DECK, RUE
  •  Standing room only breakouts: VFC, WRC, TRLG, URBN, TLB (last presenter of the day and still drew a large crowd)
  •  VFC’s breakout reveled that a $300-$500 million acquisition would be ideal. The company remains focused on targeting a company in the outdoor/action sports sector. However, both public and private sellers are focused on average industry multiples that are still too high in their view. According to the CFO, multiple contraction may be on the horizon leaving the company to wait patiently for the right price.
  •  Sourcing costs for 2010 are shaping up to be a tale of two halves. Most companies have locked in product cost savings in the first half, but cite flat-to-slight increases over the back half. Apparel manufacturers still believe there is ample manufacturing capacity to keep costs down, but the rate of year over year savings has likely peaked in the near term.
  •  Lots of talk about “toning” footwear. It was a close race between SCVL and BWS for the “most bullish on the toning category” award. Both companies indicated new products are forthcoming from Skechers (lower profile sole) and Reebok (more youthful designs).
  •  Crocs has no intention of entering the performance category. The company fully intends on keeping its eye on casual/comfort footwear instead. 2010 marketing spend is expected to stay flat-to-down slightly, with a key difference in allocation. What had gone toward sponsorships in the past (AVP Sponsorship ~$20mm) will now be completely redirected towards wholesale marketing – something the company has not done in the past.
  •  Offering a slightly different perspective on unit growth, Casual Male’s CEO said, “I’m not a store count guy…I just want to do more than $180/sq. ft.”

 

MORNING NEWS 

 

Collective Brands Hires International Performance/Lifestyle Chief - Collective Brands Performance + Lifestyle Group (PLG) hired Dan Brausch to head its International team, supporting PLG's global growth initiatives for all its brands including Sperry Top-Sider, Saucony, Keds and Stride Rite Children's Group targeting Europe, Asia and Latin America. Brausch will begin in his new role Jan. 20th and report to Gregg Ribatt, president and chief executive officer of the Collective Brands Performance + Lifestyle Group. He will head up the International division for PLG to help drive growth for each brand in Europe, Asia and Latin America. Brausch's specific responsibilities will include direct management for the company's European operations headquartered in the Netherlands, as well as responsibilities for PLG's additional international operations based in Lexington, which manages each brand's presence and business in Asia and Latin America. <sportsonesource.com>

 

Hanesbrands Contractors Damaged in Earthquake - Hanesbrands Inc., the parent of Champion, said some of its contractors suffered damage in the Haitian earthquake. The company said three of the four sewing operations it contracts with in Haiti that make its men's casualwear and underwear T-shirts were affected by the earthquake. Two of the contractors reported little to no damage, with the other reporting some structural damage. The contractors must also deal with damage to roads, bridges and power systems, at least on a temporary basis. The one contractor that did not suffer damage, located near the Dominican Republic border, will use Dominican Republic ports to transport its goods. Hanesbrands plans to increase production at its plants and contractors in the Dominican Republic, Central America and Asia to minimize the disruption and prevent a material impact. <sportsonesource.com>

 

A faltering financial performance prompts Zale to replace its CEO - Zale Corp. is selling more online, but less overall, and that faltering financial performance companywide led Zale to replace three top executives, including its CEO. Zale announced yesterday that CEO Neal Goldberg, chief stores officer William Acevedo and chief merchandising officer Mary Kwan have left the company, effective immediately. Zale also appointed company president Theo Killion as interim CEO and chief sourcing and supply chain officer Gil Hollander as the head merchandiser. Killion, who joined Zale in August 2008 after holding senior management positions at Tommy Hilfiger, Limited Brands, Macy's East and the Home Shopping Network, also will assume initial responsibility for all store operations. Hollander joined Zale in 2000 after Zale acquired Piercing Pagoda Inc., a gold jewelry specialty retailer. "Our board is determined to do all in its power to put in place effective leadership to help return the company to profitability,” says chairman John B. Lowe, Jr. <internetretailer.com>

 

AmeriBag Acquires Cerf Brothers - Gear bag maker AmeriBag, Inc. has acquired Cerf Brothers Bag Company, which manufactures and distributes HideAway, CampInn and Browning gear lines and renamed the company Cerf Products Inc. Cerf products are sold by Bass Pro, Dick’s Sporting Goods, Wholesale Sports, Sportsman’s Warehouse, Sports Chalet, among others. AmeriBag’s key domestic retail distribution includes Dillard’s, L.L. Bean and many specialty retailers in the comfort shoe and sporting goods industries. Cerf brands will be warehoused at the corporate headquarters of AmeriBag in Kingston, NY and distributed through direct sales, online retailers and sporting and outdoor retailers. The company plans to expand its resources and create new jobs at its New York headquarters throughout 2010 in order to further develop all AmeriBag and Cerf product lines.  <sportsonesource.com>

 

Top online retailers keep on sending out the e-mail - Despite other marketing initiatives such as social media and paid search, online retailers continue to rely heavily on e-mail as a tried and true way to reach customers, says a new study from Smith-Harmon Inc. Smith-Harmon, an arm of Responsys Inc., says that in 2009 the 100 largest online retailers sent out an average of 132 promotional messages to each subscriber, an increase of 12% over 2008 and 39% more than two years ago. During the first three quarters of 2009, big web retailers sent each of their subscribers an average of 10.2 e-mails and 13.2 messages during the holiday season, the report says.  <internetretailer.com>

 

Upper-Income Spending Surged in December - Americans making $90,000 or more a year opened their wallets in December. Their self-reported average daily spending in stores, restaurants, gas stations, and online surged 13% in December compared to November, to $132 per day -- nearly matching their spending of a year ago ($137).

R3: Observations Part Deux - r1

In sharp contrast, Americans making less than $90,000 a year spent 2% more last month than in November -- $62 per day; their December spending trailed December 2008 levels by 22%.

R3: Observations Part Deux - r2

December marked the second time in three months that upper-income spending broke out of what had been a relatively tight range ($107-$121) from January to October 2009 that likely represented the "new normal" spending patterns. It may be that the surge on Wall Street and the seeming stabilization of the housing market increased upper-income Americans' confidence in the U.S. economy. In turn, this may have encouraged upper-income Americans with discretionary income who had been temporarily cutting back on their spending because of the recession to spend more during the holidays. Women's Self-Reported Spending Up More Than Men's - Women reported average daily spending in December of $65 per day -- a 12% increase, and another reason for the holiday spending surge -- while spending among men increased 3% to $79 per day. At the same time, spending by both groups was down from a year ago -- by 21% and 19%, respectively.

R3: Observations Part Deux - r3

Self-Reported Spending Up in All Regions but the East - Consumer spending increased in three regions in December compared with November, with the increases larger in the Midwest (14%) and the South (12%) than in the West (5%). Spending in the East was unchanged after increases in the prior two months. However, year-over-year spending was down across all regions.

R3: Observations Part Deux - r4

Self-Reported Spending Up Across Age Groups - Month-to-month consumer spending increased across all age groups in December, with older Americans increasing their spending the most (up 11% among those aged 50 to 64 and 12% among those 65 or older) while middle-aged (30- to 49-year-old) and younger adults increased their spending less. Spending across all age groups was down from December 2008, with the largest declines among the youngest (35%) and oldest (26%) American adults.

R3: Observations Part Deux - r5

Spending New Normal - The Federal Reserve Beige Book report on Wednesday confirmed that Christmas spending was up slightly from 2008, but was far below 2007 levels -- consistent with Gallup's pre-holiday estimates. Gallup's self-reported spending data suggest that upper-income Americans played a major role in December's spending increase. This makes sense in the context that upper-income Americans not only tend to have greater disposable income available to them but also tend to be less influenced by job-market conditions than do other Americans. In this regard, the surge on Wall Street and the optimism it generated among upper-income consumers may have been the real reason Christmas spending held up this year. On the other hand, spending among lower- and middle-income Americans was essentially flat in December. This would not be good even if today's gas prices weren't up by about $1 per gallon compared to a year ago. Given that spending among these groups is heavily influenced by the job situation -- and that remains depressed, according to Gallup data -- their spending may continue to be flat for months to come. That is, the new normal in spending may continue to dominate middle- and lower-income Americans' discretionary spending and may continue to favor the low-cost retailers that serve them. <gallup.com>


THE M3: MGM MACAU IPO, MACAU HOTEL OCCUPANCY, FERRY SERVICE

The Macau Metro Monitor. January 15th, 2010

 


MGM’S MACAU JOINT VENTURE MOVES CLOSER TO IPO marketwatch.com

The Macau casino joint venture between MGM Mirage Inc. and Pansy Ho has initiated a vetting process of investment banks to work on a Hong Kong initial public offering that could raise up to $1 billion.  Two Wall Street investment banks have sent representatives to meet with officials from MGM Grand Paradise, operator of the MGM Grand Macau, to discuss the flotation, according to local media.  The group would be the last of Macau’s six main casino operators to list shares in Hong Kong.

 

 

MACAU’S HOTEL OCCUPANCY RATE DROPS TO 78.4% chinaknowledge.com

Macau has seen its hotel average occupancy rate decline by 0.8% year-over-year to 78.4% in November 2009, according to the Statistics and Census Service.  The figures show that four-star hotels, which had the highest occupancy rates, had an average occupancy of 88.2%.  In November, the total number of available guest rooms in local hotels rose to 19,216, a 12.9% rise compared to the same month in ’08.  Mainland Chinese tourists accounted for 51.9% of the total, and tourists from Hong Kong accounted for a further 20.4%.

 

 

FIVE COMPANIES LICENSED FOR FERRY SERVICE BETWEEN MACAU AND HONG KONG macaunews.com.mo

A total of five companies have been licensed to provide ferry services in Macau for ten years, according to a statement from the Maritime Administration.  TurboJET, Yuet Tung, Chu Kong, Macao Dragon and CotaiJet have all been approved for operation.  A total of fourteen for ferry services between Macau, Hong Kong, and Guangdong province had been approved by the government.  Macao Dragon is the only company to have never before provided ferry services in Macau.  Three of the five new routes will connect the Macau Maritime Ferry Terminal in the Outer Harbor with Shun Tak Centre, China Ferry Terminal in Tsim Sha Tsui, as well as the SkyPier at Hong Kong International Airport.  The other two new routes are between Pac On and Tsim Sha Tsui as well as the SkyPier.

 

 

 



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TWO YEAR REVPAR TRENDS

With very easy year-over-year comps, we thought it would be instructive to look at 2 year comps as a gauge of the underlying trends.

 

 

It is no secret that RevPAR has been getting less bad.  Certainly, lodging stocks seem to reflect that trend.  It remains to be seen, however, whether the underyling demand is actually getting stronger sequentially.  Year-over-year comps are very easy.

 

The following chart tracks RevPAR, occupancy, and average daily rate on a two year comp basis.  Here, the trends are not so conclusive.  On the one hand, occupancy looks like it is on an upward trajectory.  However, the ADR trend is negative and RevPAR may be as well.  Certainly, the recent 3 week moving averages are not comforting, not even occupancy.  In fact, on a two year basis, weekly RevPAR declines eclipsed 30% in two out of the last three weeks and three out of the last seven.  Even on a one year comp basis, the the slope of the moving averages has turned down.  The coming weeks should be enlightening. 

 

TWO YEAR REVPAR TRENDS - lodging metrics 2yr 1.14


WE'RE NOW 1.8 MONTHS FROM A BIG TAILWIND FOR CONSUMER LENDERS

 

Our Financials Sector Head Josh Steiner looks at the relationship between initial unemployment claims and the unemployment rate:

 

The 444k initial unemployment claims figure this morning was up 11k from 433k last week (revised down 1k from 434k).

 

As such, the 4-week rolling average claims improved this week to 441k from 450k last week - an improvement of 9k, well ahead of the slope of 5.4k/week since March (9 months of data).

 

WE'RE NOW 1.8 MONTHS FROM A BIG TAILWIND FOR CONSUMER LENDERS - js1

 

The following chart shows why this metric is important to track.Over the last 20 years, unemployment begins falling in earnest once rolling claims break into the 375-400k range. At the 9-month trajectory of -24k/month we are 1.8 months away from 400k and 2.7 months away from 375k. As such, by the March/April timeframe we should be at a level where unemployment begins to fall steadily, which will put a long-term tailwind behind consumer lenders.

 

WE'RE NOW 1.8 MONTHS FROM A BIG TAILWIND FOR CONSUMER LENDERS - js2

 

For those wondering how to interpret a possible inflection in rolling claims should we see one in late January/February, we would suggest using a positive slope of 7.2k/week as an outer risk band. This is the fastest weekly rate at which rolling claims increased over a two week period since the trend of improvement began in March. Alternatively, in the absolute, one can use 475-480k as a near-term rolling upper limit based on the downward channel that's been in place since March.

 

Joshua Steiner, CFA

Financials


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