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February 2, 2009

Our internal process at Hedgeye is one that openly encourages debate and discussion and occasionally we share these exchanges… here’s our take on URBN.


Our internal process at Hedgeye is one that openly encourages debate and discussion and occasionally we share these exchanges.  When our views align, our hit ratio goes up… Here’s our take on URBN.  The bottom line is that this is one of the few growth stories left in specialty retail, which also has near-term momentum resulting from a consistently improving topline and very easy margin compares.  Recall that URBN’s weakness last year came a bit later the most of the sector, which leaves topline comparisons fairly easy through the Summer.

Keith: URBN looks ripe to short.

McGough: Ditto that. This thing is more loved than almost anything in high-beta retail. 31 analysts with not a single Sell rating. Short interest is about 8.5% -- half of where it was 6 months ago. Let’s dig on the fundamentals.

Levine:  First, let’s look at the near-term catalysts- 

  • Earnings reported 3/5/10.  The company already reported 2-month holiday sales, which were better than expected on a company-wide basis at 9%.  The Urban brand was weaker while Anthropologie was better.  Direct was very strong, adding about 300 bps to the total comp (pos for margins).
  • CFO is retiring, with transition complete by June/July. Historically, the CFO has been the key line of communication with the Street.  Often times, his body language has been helpful in gaining color on business trends.  His departure is a game changer for all those trading “data points” on the name.

Unlike most other specialty concepts, URBN’s topline compares here are actually easing post 4Q and remain easy through July.  Nov/Dec ’09  recorded a solid 9% comp increase.  Two-year was flat with 3Q.  Keeping the two year constant implies an acceleration to low to mid teens run rate in 1H10.  Even if the year doesn’t hold steady for the next 2-3 qtrs, sales should still accelerate and leverage on expenses should be attainable at a flat to slightly positive run-rate.

In looking at the margins, compares are easiest in current qtr (4Q09).  Even in the absence of an earnings update with holiday sales, the model suggests that there should be upside when results are officially reported.  Swift clearance and inventory management LY, leaves compares easiest for an additional qtr (Q1).   The back half of the year poses considerable margin challenges.  2009 should end the year about 200 bps off of peak and 300 bps shy of managements goals, for a 17% EBIT margin.  Hard to envision measurable improvement without a sustained topline pickup for full year 2010.

Finally,  inventory was managed well heading into holiday and comps suggest they come out clean as well.  Recall that URBN is still a growth company, adding about 10-12% square footage a year.  You will not see substantial cash flow harvesting here, given the focus on growth and reinvestment in new concepts.  With that said, I don’t see additional cash flow drivers on the cost side.  The upside potential comes mainly from closing the 200bps gap to historical peak EBIT, driven by a sustained mid single digit comp increase and some margin benefit from private brand/sourcing.

Team Conclusion: A review of the model suggests it might be too early too short, especially into earnings on Mar 5th.  We are currently comparing against the sweet spot of compares for URBN and the two-year comp run rate has proven to be stable over the past 6 months.  This alone suggests some further upside into Spring…

R3: Opening up the Debate on URBN - urbn


  • For those on the cutting edge of fashion, keep an eye out for the latest trend which marries luxury with rub-on tattoos. Chanel is launching a line of temporary tattoos in advance of its Spring Paris runway show. The tattoos are expected to come in 55 different designs at a price of $75 each. We wonder if this is a cheap way to “wear” Chanel or an extremely expensive way to sport a fake tattoo? It will be interesting to see how long it takes for bubblegum wrapper tattoos to also become a fashion statement.
  • It’s been a very busy week for Ron Burkle and his investment arm, Yucaipa. First, rumors have been circulating that Burkle is interested in acquiring Barneys NY, adding to his retail holdings which include boutique retailer Scoop and Sean John. Second, the media is reporting that Burkle is interested in acquiring the Pittsburgh Pirates along with Mario Lemieux (they already own the Penguins). Finally, after the close on Monday a letter to the Barnes & Noble board was released in a filing, in which Yucaipa asks for approval to acquire up 37% of the shares (Burkle currently owns about 19%). If we’ve missed anything else, let us know…
  • With Valentine’s Day falling on a Sunday this year, there are some winners and losers. On the positive side, restaurants are expected to benefit because traffic is likely to build over the course of the weekend. On the negative side, the timing couldn’t be worse for florists. Most are closed on Sundays and leaving many to miss out on last minute purchases. Overall, total Valentine’s Day spending is expected to increase by 3.3% this year, according to IBISWorld. An while Valentine’s Day may seem like a frivolous holiday to some, it is expected to generate $17.6 billion in sales this year.


Amazon agrees to a publisher’s demand that it raise e-book prices - Amazon.com says it will give in to Macmillan Publishers Ltd.’s demand that it raise prices for electronic versions of Macmillan books. The decision, which comes after Amazon temporarily stopped selling Macmillan’s books, is the latest example of major publishers and web retailers jockeying for position in the fast-growing e-book arena.

Amazon generally charges $9.99 for e-book versions of new books and best sellers that can be read on Amazon’s Kindle e-book reader. The low prices mean the world’s largest online retailer often takes a loss on e-books; observers say Amazon wants to keep e-book prices low to generate demand for its Kindle reader and to extend its lead among e-book reader suppliers and, more importantly, as the leading web retailer of electronic content. Late last week, however, Macmillan demanded—and Amazon accepted on Sunday—the retailer raise its prices to between $12.99 and $14.99 for new releases, with other titles costing between $5.99 and $14.99. Amazon will earn 30% of the sale price. Macmillan says the new price model will begin in March.  <internetretailer.com>

JJB Sports Chairman Steps Down - JJB Sports, the struggling U.K. sporting goods chain, said David Jones, chairman and architect of its rescue, is stepping down to continue his long-running battle against Parkinson's Disease. The news came as JJB, which saw suppliers hold back shipments as the chain incurred liquidity issues last year, posted further falls in sales and gross margins, albeit at a slower rate. The firm said on Thursday that Jones, a former chief executive of fashion retailer Next who has suffered from the debilitating neurodegenerative disease since 1982, will step down as chairman on January 31 but will remain a non-executive director. Last year, as JJB teetered on the brink of administration, Jones steered the firm through the 83 million pounds ($131.8 million) sale of its fitness clubs, a debt restructuring with creditors and a 100 million pound ($160 million) capital raising. John Clare, the former CEO of electrics retailer DSG International and JJB's senior independent director, will be acting chairman until a permanent appointment is made. Last month, JJB said DSG's retail director, Keith Jones, will be its new CEO but he does not start until March 1. JJB said sales at stores open over a year fell 21% in the three weeks to January 24, taking the cumulative fall for the 52 weeks to January 24 to 37%. Total sales slumped 51%. <sportsonesource.com>

The Finish Line Adds Board Member - The Finish Line appointed Mark Landau to its board of directors. Landau is the managing director and a member of the investment committee at Goldenbridge Advisors in New York. Prior to joining Goldenbridge, Landau was with Merrill Lynch for 14 years, serving in a variety of management positions including his most recent post as managing director, senior relationship manager, investment banking, financial sponsors and hedge fund coverage. For 10 years prior, Landau served as managing director, senior relationship manager, investment banking and real estate. He also created the European real estate investment banking group for Merrill Lynch. <sportsonesource.com>

Wolverine® Receives Eleventh Consecutive Plus Award Win - Wolverine steps into the New Year marking an unprecedented eleven-year tenure as the pinnacle of work footwear brands. The brand will be recognized this week with its eleventh Plus Award win for excellence in design in the work footwear category. “Retailers nationwide have spoken once again, as no other brand has won a Plus Award every year since the industry accolades debuted in 1998”. “Retailers nationwide have spoken once again, as no other brand has won a Plus Award every year since the industry accolades debuted in 1998,” stated Greg Dutter, editorial director of Footwear Plus magazine. “In a category that truly demands design excellence in order to get the various jobs done, Wolverine has proven its work boots do just that.” Footwear Plus conducts its Plus Awards annually, surveying thousands of footwear retailers nationwide and honoring overall design excellence in more than 20 categories. “Working men and women have been the backbone of the Wolverine brand for more than 125 years. The drive to design authentic and supremely comfortable work footwear remains an important part of our business,” said Ted Gedra, President of the Wolverine Footwear Group. “We are honored and thankful that our retail partners and colleagues continually recognize the Wolverine brand as an industry leader.”  <businesswire.com>

New Look Plans to Raise 650 Million Pounds in IPO to Cut Debt - New Look Group Plc, the U.K. women’s fashion retailer controlled by buyout firms Permira Advisers LLP and Apax Partners Worldwide LLP, plans to raise 650 million pounds ($1 billion) by selling stock in an initial public offering to cut debt and fund expansion. The owners may also sell some of their shares in the IPO, the company said in a statement today. The stock will be listed on the London Stock Exchange. Private-equity firms are taking advantage of last year’s decade-high returns in European stock markets to sell assets and return cash to their backers. New Look, taken private in 2004, is returning to the market after adding stores and plans to continue expanding its U.K. and international selling space. “New Look has doubled its space since 2004 and the group continues to perform strongly,” Chairman John Gildersleeve said in the statement.  <bloomberg.com>

ShopNBC hires another executive from competing TV and web retailer QVC - ShopNBC, which has been overhauling its senior management for the past year and a half, has again recruited a top executive from competing TV and web retailer QVC Inc. ShopNBC has named as its new president Bob Ayd, who had been executive vice president and chief merchandising officer at QVC. Ayd will report to CEO Keith Stewart, who joined ShopNBC in August 2008, also from QVC.  <internetretailer.com>

Kicking Into High Gear: FN Platform  - A joint venture between MAGIC and Footwear News — will include more than 500 brands spanning roughly 60,000 square feet of exhibition space at the Las Vegas Convention Center. The dedicated footwear show, running concurrently with the MAGIC marketplace Feb. 16 to 18, will be divided into five distinctly themed sections to service different categories of the shoe market. “Each of the areas of the show has its own neighborhood and is anchored by its own lounge,” said MAGIC president Chris DeMoulin. The Cosmo women’s section will include brands such as Aquatalia by Marvin K., Stuart Weitzman, Steve Madden and Ralph Lauren. Camp features fashion athletic and lifestyle merchandise like Sperry Top-Sider, Auri, Palladium and G.H. Bass & Co. Bond showcases men’s dress brands such as Donald J Pliner, Mezlan, Bacco Bucci and Cole Haan. Comfort brands in the Zen area will include Easy Spirit, Naturalizer and Aetrex. Finally, InPlay features juniors’ and kids’ labels like Stride Rite, Poetic License, Lelli Kelly and XOXO. An additional 200 shoe brands will be exhibited elsewhere in the MAGIC family of shows, but DeMoulin said eventually they would likely move into FN Platform. <wwd.com>

Shaking Things Up: MAGIC Shows Get New Layout - This season, MAGIC is raising the curtain on its two-campus layout for the Feb. 16 to 18 program. The men’s wear venue, setting up shop in The Mandalay Bay Convention Center, comprises MAGIC Menswear, Project, Premium, Street and S.L.A.T.E., a venue dedicated to an edited mix of street, surf and skate brands. An expanded WWD MAGIC will constitute the women’s wear arena at the central hall of the Las Vegas Convention Center, which also will house the Pool Trade Show, Sourcing at MAGIC and the premiere of the footwear expo FN Platform.  <wwd.com>

Obama Budget Gives and Takes From Industry - President Obama proposed more money for trade enforcement and export promotion but called for the elimination of a program for wool manufacturers in the $3.83 trillion federal budget he submitted to Congress on Monday. Obama decreased the outlay for the office of the U.S. Trade Representative, which is responsible for negotiating foreign trade pacts, by $1 million to $48 million. “This budget reflects this administration’s commitment to a leaner fiscal outlook,” USTR Ron Kirk said. “But this budget still invests in sustained efforts to enforce Americans’ trade rights around the world and to enhance economic opportunity here at home.” The Commerce Department’s Import Administration, which monitors textiles and apparel and investigates antidumping and countervailing duty trade cases, received an additional $4 million to $73 million. The International Trade Administration said its outlay rose about 20 percent to $534.3 million to help the agency with efforts to promote exports.  <wwd.com>

WSA Seminar to Focus on Threat Posed by New California Labeling Law - A new California law that could expose footwear manufacturers to expensive lawsuits will be the subject of a seminar at Wednesday's World Shoes & Accessories (WSA) Show. Interek and the American Apparel & Footwear Association (AAFA) have teamed up to comprehensively address how the California-based labeling law is now surprisingly affecting the footwear industry. Late last year, environmental groups targeted footwear brands and retailers for presence of potentially harmful chemicals, such as chromium VI, lead, cadmium and phthalates, through California’s Proposition 65. The new law mandates that products sold in California containing one of over 800 listed chemicals require a warning label noting that the chemicals in these products may cause cancer, birth defects or reproductive harm unless products meet state-defined limits. Footwear sold that lacks printed warnings are subject to legal proceedings by any citizen enforcer, non-profit group or individual that alleges a violation. These agencies and individuals can issue a 60-day notice stating intent to initiate a lawsuit – under which the law covers all legal fees and awards plaintiffs with up to a third of the settlement.  <sportsonesource.com>

Gallup Economic Weekly: Confidence Falls in Late January - Job-market conditions remained anemic while spending bounced back to last year’s new normal. Gallup's Economic Confidence Index was unchanged last week at -28 -- essentially the same as the prior two weeks' readings, and down from the optimism of a month ago (-20). Job-market conditions remained anemic and self-reported consumer spending improved slightly to match last year's new normal.

R3: Opening up the Debate on URBN - G1

What Happened (Week Ending Jan. 31)

  • Economic Confidence was unchanged last week, as Gallup's Economic Confidence Index stood at -28 -- virtually the same as it has been over the prior two weeks (-28 and -29). Forty-six percent of Americans rated the economy "poor" and 10% rated it "excellent" or "good." Thirty-seven percent said the economy is "getting better" while 57% said it is "getting worse." Although economic confidence has been flat over the past three weeks, it is down from a month ago, when post-holiday confidence matched its highest level of the past two years (-20). Even so, economic confidence is much better now than it was at this time a year ago (-58).
  • Job Creation deteriorated slightly last week, as Gallup's Job Creation Index worsened to -1 from 0 the prior week. Twenty-three percent of employees reported that their companies are hiring and 24% said their employers are letting people go. While current job-market conditions remain bleak compared to those of two years ago as the recession got underway (37% hiring and 15% letting go), they are better than what Gallup measured a year ago (21% hiring and 27% letting go).
  • Consumer Spending bounced back somewhat last week from the prior week, when spending was at its lowest weekly average since Gallup began daily measurement in January 2008. Self-reported daily spending in stores, restaurants, gas stations, and online averaged $60 per day -- up 15% from the prior week and up 5% from the same week a year ago. Consumer spending this year has modestly exceeded that of a year ago during three of the past four weeks. As a result, January 2010 spending ($62 per day) essentially matched that of January 2009 ($64 per day) -- suggesting a continuation of what turned out to be a "new normal" for spending during most of last year. Consumer spending during this same week in 2008 was much higher, averaging $104 per day.

R3: Opening up the Debate on URBN - G2