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February 5, 2009

In light of yesterday’s post-holiday gift card promotional euphoria, which was a key driver to ANF’s first positive comp in almost 2 years, we wanted to share a sobering perspective on the company’s recent entry into Japan. Before US-centric analysts get carried away with the “huge potential” for Abercrombie across the globe, it’s at the very least worth considering the cultural challenges that exist from Milan to Ginza. 


In light of yesterday’s post-holiday gift card promotional euphoria, which was a key driver to ANF’s first positive comp in almost 2 years, we wanted to share a sobering perspective on the company’s recent entry into Japan. ANF is currently in the midst of a major shift towards international growth and a strategy which is heavily dependent on high profile, high cost flagship locations. With the bulk of the business still stateside and struggling, it’s really not that surprising that both management and bullish investors are increasingly positioning the international growth story with tremendous potential.

Practically speaking, a heavy reliance on flagships in cities like London, Tokyo, and Milan makes it much more difficult to see what’s going on first hand for equity analysts. Especially those with limited travel budgets and little time for such exotic “channel checks”. Thankfully, the world is smaller these days with the Internet, and the feedback loop in the fashion world is about as instantaneous as a free stock quote on Google. With that said, take a look at the following key points pulled from a recent article about ANF’s early challenges Japan, written by W. David Marx for The Business of Fashion.

  • The initial opening of the 11 story Ginza store was met with the usual fanfare- long lines and plenty of excited first-time shoppers. Rumors suggest opening day sales were $550,000. That’s the positive.
  • Japan is in the midst of a low-price fashion boom, led by the success of UNIQLO, H&M, Forever 21, and cheap domestic labels. Against this backdrop, ANF came to market with a pricing strategy that offers the same US goods at nearly 2x US prices. We know that ANF is “aspirational”, but this might be taking the brand to a more “luxury” level.
  • A poll of first-day A&F shoppers in Nikkei’s Marketing Journal showed that 61.7 percent of people found the prices “a bit high” while 18.3 percent declared them “too high.” Less than one-fifth of consumers thought the prices were on target.
  • Unlike other multinational brands that have traditionally partnered with locals to adapt marketing and communication strategies to the Japanese consumer, ANF is taking a 100% American approach. In fact, the store and brand image is virtually identical to what we see on 5th Avenue in New York. The author makes the following points about how this approach clashes with the Japanese culture:
    • The staff is handpicked to be almost entirely “American”, with virtually no employees appearing to be authentically Japanese. Customers are greeted and approached in English, a language that natives are not normally expected to use while shopping in their homeland.
    • The boisterous store environment which includes loud music, singing, and dancing by staffers flies in the face of the principles of Japanese politeness.
    • Bare chested male models floating around the store is both out place with Japanese fashion culture and is off-putting to the Japanese customer.
    • Believe it or not, the Japanese culture is “perfume adverse”. This certainly doesn’t match up well with the in-store aroma that gets constantly pumped with cologne as it is throughout the entire chain.
    • A&F logos are prevalent across the merchandise offering. Interestingly, this positioning comes at time when the Japanese fashion culture is less interested in logos and more interested in subtle branding.

To be fair this is just one author’s opinion, and a fairly negative one at that. Nonetheless, the ANF strategy is extremely Americanized and differentiated as a result. Before US-centric analysts get carried away with the “huge potential” for Abercrombie across the globe, it’s at the very least worth considering the cultural challenges that exist from Milan to Ginza. For the full article take a look at the link here: http://www.businessoffashion.com.

R3: A Sobering Perspective on Japan - ANF Japan 2 10 

-Eric Levine


  • The timing of the Super Bowl this year negatively impacted January sales and will benefit February sales. COST and BJ both noted that the impact from the calendar shift is about 100-200bps. We suspect that while the impact may not be as great across the board for all retailers, any company with a high concentration of consumables in their mix will likely see a benefit in February as well. In addition, all retailers of electronics noted the impact of the shift on TV sales.
  • Nordstrom indicated that traffic in its full-line stores, as measured by the number of transactions, increased for the fifth month in a row. The average ticket was flat compared to the same period last year.
  • Timberland pointed out that transportation costs as well as input costs are expected to increase by the middle of the year. In fact, the CFO said, “We are already facing transportation cost increases now versus where we were last year. As the capacity has been constrained they are driving prices up on container shipments.”
  • Footwear sales were consistently cited as a standout during the month of January, with the category leading sales increases for ROST, JWN (women’s), and KSS.
  • Most people are probably unaware of the “Bag War” taking place at Wal-Mart. Beginning late last year, WMT indicated it was looking to consolidate brands in the food bag category. As a result, Ziploc, Glad, and Hefty began to invest heavily in store tests and advertising to save their business with the retail giant. Well now the results are in, and it appears that Ziploc will be the sole remaining national brand alongside WMT’s own private label, Great Value. Importantly, this is likely just the beginning of further consolidation amongst SKU’s at WMT and other discounters, especially in commodity categories.

MORNING NEWS  (and Hedgeye Retail’s 2 Cents)

Claiborne Sued by Licensee Over Penney's Deal - A Liz Claiborne Inc. outerwear licensee has filed a $100 million breach of contract lawsuit over the company’s exclusive deal with J.C. Penney Co. Inc. The Levy Group Inc., which has held the license for Liz Claiborne rainwear since 1997, filed the complaint in New York State Supreme Court in Manhattan on Jan. 21. In October, Liz Claiborne announced that Penney’s would have exclusive rights to sell its namesake brand starting for the fall. The Levy Group alleged in the lawsuit that the deal will “destroy” the business it has spent more than 10 years developing by taking the brand out of better retailers and ultimately tarnishing the reputation of the trademark. “Even a robust business with J.C. Penney will not replace The Levy Group’s current volume, as sales at J.C. Penney stores are a fraction of those at the network of multiple ‘better zone’ department stores that The Levy Group has cultivated,” according to the complaint. “The Levy Group’s right to sell merchandise to ‘better zone’ department stores is meaningless unless Liz Claiborne protects the reputation and prestige of the marks and maintains the ‘better zone’ standard.” <wwd.com>

Hedgeye’s 2 Cents: I won’t comment on the merit of the lawsuit without having seen the original contract, but this is yet another reason why running a model of licensing another company’s content is simply bad. (You listening, Warnaco?).

Men's Wearhouse Names Chief Marketing Officer - Diane Ridgway-Cross has joined Men’s Wearhouse as senior vice president and chief marketing officer, a new position. A 17-year veteran of the retail and consumer products industries, Ridgway-Cross was most recently with Mullen Advertising, where she directed new business growth and was the managing partner of Frank About Women, a marketing-to-women communications company. She also has worked for The TJX Cos. Inc., DSW Shoes, Hasbro, Kimberly-Clark and Nestlé USA. <wwd.com>

Hedgeye’s 2 Cents: No strong opinion here on this hire. But ‘Men’s Wearhouse’ hiring the managing partner of ‘Frank About Women’ is initially a head scratcher. All that said, check out the site (www.frankaboutwomen.com). If she can translate the approach to a different gender, then this might actually be a decent move for Men’s Wearhouse after all.

SKECHERS Named Company of the Year by Footwear Plus Magazine - SKECHERS USA, Inc. (NYSE: SKX), a global leader in lifestyle footwear, today announced that it has been named 2009 Company of the Year by Footwear Plus, a leading footwear trade publication. This Plus Award for Design Excellence marks the fourth time in five years that SKECHERS has claimed the top prize. “It is a great honor to be named Company of the Year by our industry for the second consecutive year,” began Michael Greenberg, president of SKECHERS. “Considering the strong brands also nominated – including Nike – and the challenging economy of 2009, we are particularly proud of this award. We believe it is a testament to the strength of our brand, our determination to deliver fresh, innovative product, and the hard work of the entire SKECHERS team.” “For the second straight year, SKECHERS has taken home the Plus Award in the prestigious ‘Company of the Year’ category,” stated Greg Dutter, Editorial Director of Footwear Plus magazine. “Amid a difficult retail climate, SKECHERS adapted and thrived, turning in record-setting third quarter sales and has projections for a record fourth quarter as well. The Company continues to deliver on-target and affordable fashions across a wide range of footwear segments. Collectively, SKECHERS hits on America’s sweet spot when it comes to its everyday footwear needs.” <benzinga.com>

Hedgeye’s 2 Cents: Is this serious??? A company that has never had an original design in its history winning a design award?

China Protests EU Tariffs - China filed a complaint against European Union shoe tariffs at the World Trade Organization as Beijing continued its legal assault on what it says is unfair Western protectionism. Europe has grown increasingly concerned about China's balance of trade and what some critics view as its artificially weak currency. China, which joined the W.T.O. in 2001, filed its first unfair trade case against the European Union in July 2009, also involving antidumping duties. The latest move appeared intended to increase pressure on the European Union, which had itself been sharply divided over extending the shoe tariffs. In a statement issued by its mission in Geneva, where the WTO is based, the Chinese government said Europe's actions "violated various obligations under the W.T.O., and consequently caused damage to the legitimate rights and interests of Chinese exporters."  It added that China "had repeatedly consulted" with the European Union but said that its concerns "had not been properly addressed or settled." In an eight-page legal complaint, the Chinese government requested consultations on both the original 2006 decision to impose the shoe duties and last year's move to extend them. The EU and the U.S. have sought to stem the flow of Chinese imports with special duties. In the EU case, China is taking on one of the most important tariff increases ever levied, which has taken a bite out of its expansive shoe industry. The 16.5% tariffs are antidumping duties, meant to punish goods that are sold below cost and hurt the sales of domestic producers. The EU duties were inaugurated in 2006 and extended for 15 months in December 2009. At the same time, shoe imports from Vietnam were hit with a 10% tariff. <sportsonesource.com>

Hedgeye’s 2 Cents: This smells really bad. The China vs the West trade war covertly builds… at the same time its appetite for accepting dollars for locally manufactured goods is waning, and Asian nations are gearing up for increased local consumption in a post-free trade agreement environment.

Beyoncé's House of Deréon Accused of Breach of Contract - Beyoncé Knowles’ House of Deréon clothing line has been named in a breach of contract lawsuit filed by a Hong Kong manufacturer. In a complaint filed in U.S. District Court in Manhattan Monday, lingerie and women’s apparel maker Vier International Ltd. said New York apparel firm Donna Loren LLC and Brooklyn shipping firm HJM International were “conspirators who induced the shipment of goods to the United States with the intent to convert them or pay less than the agreed upon contract price.” Vier alleged that “defendants Beyond Productions LLC and The House of Deréon were parties to the breach and conspiracy providing purchase orders and specifications of manufactured goods.”  <wwd.com>

Hedgeye’s 2 Cents: Kanye West should take the fall here.

FTC Warns 78 Companies to Scrutinize Bamboo Labeling - Seventy-eight companies nationwide have received Federal Trade Commission letters warning that they may be breaking the law by selling clothing and other textile products that are labeled and advertised as “bamboo,” but actually are made of manufactured rayon fiber. The letters, which the agency’s staff sent last week, make the retailers aware of the FTC’s concerns about possible mislabeling of rayon products as “bamboo,” so the companies can take corrective steps to avoid Commission action. In the letter, the FTC tells the companies they should review the labeling and advertising for the textile products they are selling and remove or correct any misleading bamboo references. The more commonly known retailers to receive the letter include: Amazon.com, Barney’s New York, Bed Bath & Beyond, BJ’s Wholesale Club, Bloomingdale’s, Costco Wholesale, Garnet Hill, Gold Toe, Hanes, Isotoner, JC Penney, Jockey, Kmart, Kohl’s, Land’s End, Macy’s, Maidenform, Nordstrom, Overstock.com, QVC, REI, Saks Fifth Avenue, Sears, Shop NBC, Spiegel, Sports Authority, Target, The Gap, The Great Indoors, Tommy Bahama, Toys R’ Us, Wal-Mart, and Zappos.com.  <sportsonesource.com>

Hedgeye’s 2 Cents: This highlights an often overlooked issue as it relates to components in shoes. False labeling is one thing…but the componentry is another. For example, certain types of shoes have to have a certain percent of certain fabric or materials in them to the point where shoe companies will sometimes pad the liner or insole with them to avoid trade duties.