R3: COH: An Inflection in the New Reality

R3: REQUIRED RETAIL READING

January 20, 2009

The “good ol' days” of multiple handbag purchases and annual price increases are long behind us.  The new reality is that COH is now managing its margin structure to more realistic levels, while operating margins are still amongst the highest in all of apparel, retail, and luxury.  The real challenge here is one of expectations, which just don’t yet seem to be aligned with the new reality.

TODAY’S CALL OUT

There is no question that COH’s limited US growth prospects, large US outlet business, and strategy to emphasize growth in lower-priced categories are all concerns.  But the reality is, the “good ol' days” of multiple handbag purchases and annual price increases are long behind us.  The new reality is that COH is now managing its margin structure to more realistic levels, while operating margins are still amongst the highest in all of apparel, retail, and luxury.  The real challenge here is one of expectations, which just don’t yet seem to be aligned with the new reality.

This morning Coach reported 3Q EPS of $0.75, exceeding Street estimates by $0.03.   Embedded in the results was the company’s first positive increase in gross margins in three years! (+30bps).  Offsetting the gross margin gain was a lack of SG&A leverage to the tune of 80bps, as the company lapped some major cost savings last year.  While there is plenty to be positive about given what appears to be a bottoming in gross margins, the bears are likely to chew on the modest miss to domestic same store sales expectations.  With North American comps of +3.2% marking a return to positive sales for the first time in 4 quarters, expectations were calling for a 5% increase.

3Q results will be scrutinized given only modest upside (on a relative basis, COH is not yet showing substantial earnings leverage off of last year’s easy compares), but the net result here is that the top and bottom lines continue to improve.  Inventories ended the quarter in great shape, down 30% y/y against a total sales increase of 11%.  We actually wonder if inventory is too lean at this point.   The reductions are in part due to the mix shift towards lower price points, but still impressive and likely to set up well for future gross margin improvement (against easing compares).    Understanding where same-store sales can actually go in the absence of pricing power is the biggest challenge and one where expectations still seem a bit too high.

R3: COH: An Inflection in the New Reality - 1

LEVINE’S LOW DOWN 

  • Burberry management indicated strong sales of outerwear and non-apparel were key product categories helping to drive the company’s better than expected top and bottom line results. Interestingly, management also attributed the strength in part to the recent launch of the company’s social media effort dubbed The Art of the Trench. The online effort is considered one of the more creative interactive marketing efforts by a fashion brand in 2009.
  • After a multi-year run, fashion bloggers are calling for the bubble to burst on the Americana trend. American heritage brands such as Red Wing, L.L Bean, and Filson, which have seen a resurgence in popularity, may be poised for a relative slowdown now that year three of the trend is upon us. With the fashion trend potentially slowing, we wouldn’t be surprised to see the log cabin/apothecary themed store designs fade away as well.
  • In effort to generate buzz ahead of its Florence museum opening, Gucci is launching a collaboration with Christies. The luxury brand and auction house will be offering an online appraisal and authentication service for collectors of vintage Gucci wares. The sight will also allow Gucci archivists to prospect for potential acquisitions of historical importance ahead of the 2011 museum opening.

MORNING NEWS 

Liz Sells Claiborne Outlets in Canada - In a move to limit its exposure north of the U.S. border, Liz Claiborne Inc. has sold its 38 Liz Claiborne outlet stores in Canada to Laura Canada, a privately held specialty retailer based in Montreal. Terms weren’t disclosed, but Claiborne said financial details and closing information would be made available in subsequent filings with the Securities and Exchange Commission. The remaining six Liz Claiborne outlets in Canada are expected to be closed, either prior to or at the expiration of their leases, or converted into other formats. The company emphasized that the move will have no impact on its Canadian wholesale business, which it expects to expand, or its U.S. Liz Claiborne outlets. The 99 Mexx stores and 12 Lucky stores Liz operates in Canada aren’t affected by the transaction either. “The Liz Claiborne Canada retail division has struggled over the last two years and, after reviewing our options, we concluded that the assignment of the Liz Claiborne Canada retail leases was the best decision for the future of the brand in that country,” said Andrew Warren, executive vice president and chief financial officer of Liz Claiborne.  <wwd.com>

Designer License Holding Files for Bankruptcy - Designer License Holding Co. LLC, the Bill Blass licensee partially owned by apparel entrepreneur Arnold Simon, has filed for Chapter 11 bankruptcy court protection. The voluntary filing was on Dec. 31 in a Manhattan bankruptcy court. The petition listed total assets of $18.7 million and total liabilities of $15.5 million. The petition listed Israel Discount Bank as a secured lender holding a $6.7 million claim. Among its 20 largest unsecured creditors, Sterling Factor Corp., New York, is listed as holding a claim for $534,580. Equity holders of Designer License include: Jubilee Limited Partnership, holding a 27.8 percent stake; Simon, 24.5 percent; Timothy Fullum, 24.5 percent; The Leiber Group Inc., 16.6 percent, and Daniel Gladstone, 6.6 percent. <wwd.com>

Duffy to Head Performance Footwear for Timberland - The Timberland Co. appointed Gregg Duffy as senior director of performance footwear. In this role, Duffy is responsible for the overall management of Timberland’s global performance footwear portfolio, including multi-sport, hiking and seasonal offerings.  He reports to Brian Moore, Global Vice President of Men’s Footwear and Outdoor Performance for Timberland.  Duffy has more than 17 years experience in the performance footwear industry, having held senior positions in product design and management for such brands as Puma, Saucony, Burton-Gravis and most recently, Merrell. <sportsonesource.com>

Prada Confirms Hiring of Kress - François Kress has joined New York-based Prada USA as chief executive officer, a Prada spokesman said. This confirms a report on WWD.com. No further details were available, and the company has no plans to formally announce his hire. Kress was previously managing director of Bulgari’s jewelry, watch and accessories division. At Prada, he succeeds Graziano de Boni, who left the Italian brand in late October to head up the Reed Krakoff division at Coach Inc. <wwd.com>

Cabela’s Names Head Merchant; Sets of String of Executive Promotions - Cabela’s Inc. announced that Brian J. Linneman would become its executive vice president and chief merchandising officer. Previously, Linneman was senior vice president of global supply chain and operations, Linneman will be responsible for merchandising, planning, inventory, visual merchandising and strategic planning/process improvement. Linneman's transition was included among a number of other senior level promotions: The other promoted executives now hold these titles and responsibilities: Patrick A. Snyder, Executive Vice President and Chief Marketing Officer. Snyder previously served as Senior Vice President of Merchandising and Marketing. Under Snyder’s leadership, the Company is consolidating responsibility for its e-commerce and catalog businesses. Snyder will continue his current responsibilities for market research/analysis, retail advertising, brand management and media relations. Ralph W. Castner, Executive Vice President and Chief Financial Officer of Cabela’s and Chairman of the Board of World’s Foremost Bank. Previously Vice President and Chief Financial Officer, and Chairman of the Board of World’s Foremost Bank, the Company’s wholly-owned bank subsidiary, Castner will continue his current responsibilities for finance, accounting, investor relations, tax, internal audit, legal, and risk management. Castner will also take on responsibilities for real estate, construction and facilities. Joseph M. Friebe, Executive Vice President of Cabela’s and President and Chief Executive Officer of World’s Foremost Bank. Previously Vice President, and President and Chief Executive Officer of World’s Foremost Bank, Mr. Friebe will continue to lead World’s Foremost Bank. Charles Baldwin, Executive Vice President and Chief Administrative Officer. Previously Vice President and Chief Human Resources Officer, Baldwin will continue his current responsibilities for human resources and take on responsibilities for information systems, call centers and the Company’s Outdoor Adventures division. Michael Copeland, Executive Vice President and Chief Operations Officer. Previously Vice President of Retail Operations, Copeland will continue his responsibilities for retail operations in the United States, as well as asset protection, and will take on responsibilities for operations in Canada. <sportsonesource.com>

Gregory Scott Said Offered New York & Co. Post - Gregory Scott, who resigned as Bebe Stores Inc’s chief executive officer in January 2009 after a stormy five-year tenure, could be next in line to run New York & Company Inc. Sources said Scott is being offered a top post at New York & Co., which would establish him as the lead candidate to succeed Richard Crystal, the 64-year-old chairman, president and ceo. Crystal’s employment contract was extended last year to February 2011. Sources also said Scott, considered a strong merchant more so than an operations executive, has been actively seeking a job and has been talking to companies in New York. Crystal declined comment. He is recognized as building New York & Co. into a national specialty retail force, and earlier in his career was a high-level Macy’s merchant. Scott could not be reached Tuesday.  <wwd.com>

Retailers spent 17% more on search marketing in Q4, report finds - Search engine marketing firm Efficient Frontier says its retailer clients spent 17% more on search engine marketing in the fourth quarter than they did in same period in 2008, and 46% more than in the third quarter. SearchIgnite, also a search marketing firm, says its clients spent 12% more in the fourth quarter on paid search ads than they did a year ago. Efficient Frontier also reported a 90% increase in retail-related search queries. But that didn’t necessarily increase sales. Click-through rates declined 40%, orders per impression fell 30% and conversions per click were flat. Cost per click was 9% lower for the quarter than the same time last year.  <internetretailer.com>

Retail's Technological Revolution Takes Off - Major initiatives are under way in cloud computing, social media and mobile that have the power to upend the business. Here is the vision: Retailers — and, not incidentally, apparel makers and consumers — will get any kind of computing power they need from the “cloud” — which provides an application or service available to anyone at any time as long as they have an Internet connection. Everything will be knitted together by social media and accessible from any mobile device anywhere. Call it the third-wave Web. The result could be new competitors, and a blurring of the distinctions between customers, designers and retailers. Examples include user-designed clothing and inexpensive, easy-to-use point of sale systems that small retailers can log onto online — or from their iPhones. Five-year-long implementations of business software will be history, as will the need to maintain a data center. Startup and operating costs will fall dramatically, and small companies and individuals will have access to previously unaffordable resources such as enterprise-level security. Take ShopKeep.com. Still in beta test mode, this cloud POS for small retailers is cheap and easy to use, yet it has the security of a big company because it is hosted by Amazon.com (on its own cloud offering, Amazon EC2). Two other behind-the-scenes partners provide secure credit-card processing and full PCI compliance.  <wwd.com>

Obama Pressing for Protections Against Lenders - President Obama on Tuesday stepped into the middle of a fierce lobbying battle by reinforcing his support for an independent agency to protect consumers against lending abuses that contributed to the financial crisis. The president’s move also signaled a tougher line and a more direct role as Congress weighs an overhaul of banking regulation.The financial industry and Congressional Republicans have singled out the administration’s proposed consumer agency in particular, hoping to greatly weaken if not kill it. With liberal Democrats and Web commentators fighting just as hard for a strong independent office, the issue is becoming the central flashpoint in the debate over regulation. Mr. Obama personally weighed in on Tuesday in a one-on-one meeting at the White House with Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Senate Banking Committee. Reports last week suggested that Mr. Dodd might drop the consumer agency from the emerging Senate bill in order to attract support from Republicans and some centrist Democrats on his committee, but Democratic aides disputed that. <nytimes.com>