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R3: REQUIRED RETAIL READING

January 21, 2009

Athletic footwear and apparel are setting up to outperform in 2010, which is consistent with our view that this will be a standout space in retail.

TODAY’S CALL OUT

Athletic footwear sales were up again last week marking the 7th straight week of positive sales growth – the longest such trend in over 2-years. Coupled with our visit to Nike headquarters last week, this trend gives us further confidence that 2010 will indeed mark the year that athletic footwear outperforms. Other than a BTS induced two week pop in sales back in September, we have to look back to the 1Q of F09 to site positive sales. So what does this mean?

With sales of footwear strongest in February last year this trend is likely to cool as comparisons get tougher in the weeks ahead. However, the balance of the year lines up favorably with a product-driven demand cycle that we expect to see by mid-year as key players (i.e. NKE & UA) rollout new lines after some internal reorganization and arguably reinvigoration – also good for FL & FINL. This is not to take away the from the strength that we’re also seeing in apparel though less notable on the margin as it has outperformed footwear for the last 12-months.

The punchline? In broader retail, earnings revisions we’re looking at near-20x p/e on 25% consensus EPS growth expectations – a stark contrast to what we saw at the March 9th lows. Earnings revisions have been steadily easing over the past three weeks, suggesting that the magnitude of the upside after the sell-side overshot on the way down is coming to an end. When we combine that with our view that the athletic space will accelerate while the rest of retail decelerates, it is something to keep a keen eye on.

Our favorites include NKE, BBBY, FL, FINL, PSS and UA (we like it more after the print given the recent positive change in sentiment).  On the flip side, we don’t like ROST, JCP, M, FDO, and DG.

R3: ATHLETIC STARTING OFF 2010 STRONG - Footwear and Apparel in the Sports Retailer Channel

LEVINE’S LOW DOWN 

  • In an effort to emphasize Coach’s opportunity for growth in China, management offered some interesting statistics regarding brand awareness. Coach’s unaided awareness in China is currently 8%, while it is 72% in the US, and 63% in Japan. Interestingly, the Chinese consumer’s intent to repurchase Coach is 94%, a figure greater than in the US or Japan. Given the limited growth prospects remaining domestically, we expect to hear more and more about China over the next couple of years.
  • Keeping with the China theme, super-luxury brand Hermes recently (and quietly) purchased a Chinese brand called Shang Xia. The acquisition will allow Hermes to offer a lower priced product, locally sourced and tailored specifically to the Chinese luxury consumer. While it is very clear that the Chinese luxury consumer clearly favors western brands, the move is interesting in that it is an attempt to plant the seeds and cultivate a Chinese-only luxury offering. Additionally, this allows Hermes to appeal to a wider target audience without damaging its high-priced namesake brand.
  • With the winter Olympics on the horizon, marketing efforts are beginning to perk up. Labatt just announced that is joining the “unofficial” Olympic party with the opening of Club Bud, a party venue open for just five nights during the event. Interestingly, Labatt has partnered with the NHL, Lululemon, Under Armour, and Burton to produce themed evenings on each night. Molson is actually the official beer supplier to the Olympic games despite these “unofficial” efforts...

MORNING NEWS 

Deckers Outdoor Makes A Simple Decision - Deckers Outdoor Corp. is shifting some senior brand responsibilities and moving its Simple brand from under the UGG brand umbrella managed by Connie Rashwain to instead report into Teva brand President Peter Worley.  “This is an exciting opportunity for both the Simple and Teva teams to engage, exchange ideas, and collaborate, as we evolve and develop both unique brands,” stated Peter Worley.  “Connie Rishwain has lead and supported the Simple Brand and the Simple team to date.  This move will allow Connie to dedicate more of her time and focus on the UGG Brand and its continued future success.  We look forward to great things from the Simple Brand under Pete’s leadership,” stated Angel Martinez. <sportsonesource.com>

Istithmar's CEO Switch Ignites Speculation About Barneys - With David Jackson, the chief executive officer of Istithmar World, out of the job as of Tuesday, the Dubai-based investment company appears intent on accelerating restructuring efforts for its various operations, including its U.S. retail holdings, Barneys New York and Loehmann’s. Aidan Birkett, the chief restructuring officer of Istithmar’s parent, Dubai World, on Wednesday said Andy Watson would be interim ceo, succeeding Jackson. “We are pleased that Andy is stepping in as acting ceo of Istithmar World,” said Birkett, who is leading the moves by Dubai World to renegotiate $27 billion in debt. “His experience will be vital in actively managing the portfolio of assets held by Istithmar World.” Under Jackson, Istithmar World “expanded rapidly as a private equity investment house during the years before the economic crisis hit,” Birkett said, adding, “Today, Istithmar World is focused on the steady-state management of existing assets to maximize value rather than on private equity investment.”  <wwd.com>

Obama: will insist on consumer financial protection - President Barack Obama said on Wednesday he would keep consumer protection at the heart of his proposed overhaul of financial regulation, despite suffering a serious political setback in the U.S. Senate. It's very important to have a consumer finance regulatory authority that is willing to actually enforce the law, so that people aren't getting gouged," Obama told ABC News in an interview marking his first year in office. The White House separately said that Obama would discuss financial reform in remarks on Thursday after meeting in the Oval Office with Paul Volcker, the former Federal Reserve chairman who heads Obama's economic recovery advisory board. Obama's desire for a new consumer financial protection agency and other parts of his ambitious reform agenda became even harder to achieve after his Democratic party on Tuesday lost its 60-seat Senate majority in an upset victory in Massachusetts by Republican Scott Brown. This "supermajority" allows Democrats to overcome Republican delaying tactics in moving legislation through the Senate to Obama's desk to be signed into law. Republicans oppose key parts of Obama's plans to tighten rules on complex financial firms, whose reckless betting on the property market tipped the financial system to the brink of collapse in 2008. Its members have also opposed a financial responsibility fee he wants to slap on banks to recoup billions of dollars taxpayers spent on corporate bailouts. <reuters.com>

U.S.-Made Apparel Prices Flat in December - Wholesale prices for U.S.-made apparel were flat in December compared with November and rose 0.2 percent from a year earlier, the Labor Department said Wednesday in its Producer Price Index. Women’s domestic apparel prices declined 0.1 percent month-to-month, but were up 0.1 percent from December 2008. Men’s apparel prices were flat in December and increased 0.6 percent year-over-year. Prices for all U.S.-made goods rose a seasonally adjusted 0.2 percent in December, driven by a rise in food prices.  <wwd.com>

Global Output Set for Slow Rebound - World output is forecast to grow 2.4 percent this year, rebounding from a 2.2 percent decline last year, with emerging economies such as China and India leading the recovery, according to a United Nations report. The study estimated world trade volume, which fell 12.5 percent last year, will increase 5.4 percent. The rebound largely will result from $2.6 trillion in fiscal stimulus measures by major economies that “effectively arrested further erosion of confidence worldwide” caused by the recession, the report said. But U.N. economists cautioned the recovery will be uneven and fragile.  <wwd.com>

Americans See Economic Recovery a Long Way Off - Two-thirds (67%) believe it will be two or more years before recovery starts. Americans are thinking in terms of years, not months, when pondering how much longer it will be before the U.S. economy starts to recover. The vast majority (67%) believe it will be at least two years before a recovery starts, and nearly half (46%) think it will be at least three years.The findings are from a USA Today/Gallup poll conducted Jan. 8-9. With a full third of Americans (34%) saying it will be four or more years before a recovery starts, the mean response is 4 ½ years -- putting the average predicted onset of recovery well into 2014. Public opinion about the timeline for recovery is seemingly in conflict with recent economic reports suggesting the U.S. economy grew in the second half of 2009, possibly setting the stage for recovery this year. However, much of the current economic analysis is highly cautious, in part tempered by the continuing high rate of unemployment -- thus, perhaps, contributing to Americans' skepticism about a speedy return to business as usual. Americans' outlook for recovery today is similar to what Gallup found in July 2009. Americans living in households earning $90,000 or more annually are more optimistic about when recovery will occur than are those in households with lower income levels; still, the majority of all income groups expect to wait at least two years before the economy starts to recover. The extent to which the balance of power in Washington influences Americans' economic optimism is evident in the partisan responses. Democrats -- who generally have more confidence in the leadership of President Obama and the Democrat-controlled Congress -- are much more optimistic about an economic recovery in the near term than are independents or Republicans.Much of the responsibility for economic recovery will be assigned -- fairly or unfairly -- to President Obama. Indeed, already more Americans disapprove than approve of the job he is doing on the economy. In general, Americans do believe presidents' policies can influence the direction the economy takes. The poll finds about half of Americans -- regardless of party affiliation -- saying a president has "a great deal" of influence over national economic conditions. Another 35% say a president's policies affect the economy "a moderate amount," while 10% say they have little impact.The American public seems braced for a long road to economic recovery. Not only do most Americans expect to wait two or more years for a recovery to start, but the majority continue to believe the economy is getting worse. While such pessimistic views could help Obama in terms of keeping the expectations bar low, now that he is entering his second year, Americans are likely to increasingly judge his performance on the economy by his own economic policies. <gallup.com>