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R3: REQUIRED RETAIL READING

February 9, 2009

If we take a step back and look at yesterday’s licensing agreement between Collective Brands and Lucasfilms (Star Wars), we see that this marks the latest in a series of announcements that are likely to be key drivers of improved content at PSS – a key tenet of our thesis. PSS remains one of our top long ideas.

TODAY’S CALL OUT

If we take a step back and look at yesterday’s licensing agreement between Collective Brands and Lucasfilms (Star Wars), we see that this marks the latest in a series of announcements that are likely to be key drivers of improved content at PSS – a key tenet of our thesis. While any brand and/or merchandising upgrade won’t necessarily translate into an immediate sales benefit, we do believe that enhanced content will 1) differentiate Payless and further separate it from the low priced commodity footwear business, 2) help to minimize promotional activity, as recognizable brands tend to command higher like for like pricing, and 3) allow Payless to become a destination for key exclusive brands, which over time should drive traffic. As the largest seller of footwear in the U.S. (by pairage), the opportunity to develop, own, and license exclusive content should continue to be a key driver of the Payless story for years to come.

Aside from the Lucafilms tie-in,  Payless announced in January the addition of Above the Rim (Reebok’s dormant basketball line) to the Collective Licensing portfolio. We suspect this gives PSS multiple distribution angles for the brand. Is it possible that we see the Above the Rim brand at Payless stateside and as a licensed brand in basketball-frenzied China?  Why not?  Then, a few weeks ago came the soft launch of the new Champion Fitness line (think knock-offs of Shape-Ups, EasyTones, and FitFlops). At roughly 1/3 of the price of the leading branded competitors and with EasyTones currently out of stock until March/April,  this offering is poised for a strong start. Impressively, management already tested the shoes back in Spring ’09, further validating the prospects for the category.  Yes, they actually test product and really work to understand the their customer. Importantly, the fitness line ranges in price from $24.99-$39.99, well above PSS’s average $17-$18 ASP.

Shifting to the revitalization of Keds, we note a series of high profile collaborations. First, Keds teamed up with ultra fashionable retailer/wholesaler Opening Ceremony to create a limited offering of faux animal fur shoes (Zebra & Leopard). Just yesterday, Keds announced a collaboration with women’s sportswear line Alice & Olivia (Payless already collaborates here as well) to produce a limited offering of sequin covered slip-ons for Spring ‘10.  And finally, rumor has it that Keds and The Gap are teaming up to offer a line designed by Patrick Robinson for the Summer. We now wonder if 2010 will finally be the year of the Keds, especially now that Mischa Barton has faded away?

Another interesting aspect of the Lucasfilms/PSS partnership is the announcement that PSS is planning to distribute the Star Wars footwear through both the Payless and Stride Rite channels.  Pricing is expected to be $15-$20 for the Payless offering and $35-$55 via Stride Rite.  This plays right in-line with management’s stated goal at Stride Rite to both expand beyond infants to youth as well as drive profit improvement, which has proven to be a challenge. Content is king, especially in children’s footwear, and we believe this is a major upgrade for both distribution channels.

While we don’t want to get ahead of ourselves by all of a sudden making product calls, we do believe it’s worth noting that traffic compares ease substantially over the next 3-quarters.  Any boost in average ticket against easing traffic, could ultimately drive upside to our current above-consensus estimates.  We are currently looking for a  4.8% increase in topline, based on a 4% increase in same store sales and ~9% growth in wholesale and EPS of $2.10 in FY10 – 30% above consensus. With shares trading at $19, PSS remains one of our top long ideas.

R3: PSS: Content Upgrade Underway - PSS CompTrends 2 10

R3: PSS: Content Upgrade Underway - PSSChmpFit Shoes Campaign 2 10

R3: PSS: Content Upgrade Underway - PSSChmpFit Shoes 2 10

Casey Flavin & Eric Levine

LEVINE’S LOW DOWN 

  • Burberry continues to push the technological envelope, this time with an announcement that it will be streaming its Autumn/Winter runway show in London live in 3D. The 3D broadcast will screened in real time at local screening venues in Tokyo, Paris, Dubai, and New York. Unfortunately the average Burberry fan will only see the show in two dimensions, although it will be streamed live and revealed to the entire world at the same time.
  • In another take on technology and luxury, LVMH has been developing prototype handbags that incorporate HERM (heart rate and emotion monitors) in the form of jewelry. These electronic devices can then be attached to a consumer’s handbag which in turn transmit location and “heartbeat” via Bluetooth/WiFi to a smartphone. The owner is then able to track movement and “journey’s” taken with the bag, which then become the backbone of a broader Louis Vuitton social network.
  • As the quest to revitalize the Keds brand continues, a series of high profile collaborations have been announced. First, Keds teamed up with ultra fashionable retailer/wholesaler Opening Ceremony to create a limited offering of faux animal fur shoes (zebra & leopard). Now Keds announced a collaboration with women’s sportswear line Alice & Olivia (Payless already collaborates here as well) to produce a limited offering of sequin covered slip-ons. And finally, rumor has it that Keds and The Gap are teaming up to offer a line designed by Patrick Robinson for the Summer. We now wonder if 2010 will finally be the year of the Ked now that Mischa Barton has faded away?
  • Just 6 days after highlighting that it will aggressively grow its store count in 2010, Joe’s Jeans announced they will increasingly take control of its distribution by opening 9 outlet stores in Simon Premium Outlet Centers across the country. The move will give the company a total store count of 15, with more full-priced stores likely before year-end. On the recent earnings call, CEO Marc Crossman noted that comps at its existing retail locations were up 40%! While the sustainability of this performance is clearly unachievable, on the surface it appears to be the right move to accelerate both top-line and margin expansion for the CA-based brand.

MORNING NEWS  (and Hedgeye Retail’s 2 Cents)

American Eagle Weighs M+O Future - American Eagle Outfitters Inc. may be preparing to close its Martin + Osa stores, which the teen retailer began operating three years ago to broaden its appeal to adults. The decision may come as soon as next month, when American Eagle posts fourth-quarter results, a spokeswoman said on Monday. Martin + Osa is depressing American Eagle's bottom line as the concept stores, meant to appeal to 28- to 40-year-olds, lost its president late last year and American Eagle Chief Executive Jim O'Donnell was a bit non-committal about the stores' future at a recent industry gathering.  <wsj.com>

Hedgeye’s 2 Cents: This move can’t come soon enough.  Not news though. Nor is it new to AE. Remember many moons ago when it closed its Canadian ops after years of pain? Stick to the core, guys…

Rue La La appoints an industry veteran to head up its travel division - Members-only web retailer Rue La La has appointed travel industry veteran and entrepreneur Marka Jenkins Waechter general manager of its experiences division. She will be responsible for expanding Rue La La's partnerships with luxury travel providers. Most recently, Jenkins Waechter provided business management and strategic planning consulting services to companies and non-profits. She was brought in last year by Rue La La to help shape its travel and experiences strategy. Before that, Jenkins Waechter was CEO of Seattle-based Metropolitan Travel, which provided corporate travel services to companies including Amazon.com, Nordstrom and Starbucks. Metropolitan Travel was acquired by travel booking web site Expedia in 2002. While at Metropolitan, Jenkins Waechter was also co-founder and CEO of Highwire, an online corporate travel software company. Highwire was sold to Cendant Corp., now Travelport, in 2001. <internetretailer.com>

Hedgeye’s 2 Cents: Rue La La needs to invest in these non-apparel parts of its business – simply because the tightly allocated invite-only apparel sales model is simply not scalable.

Gaiam to Make Reebok Fitness DVDs and Kits - Reebok inked a multi-year licensing agreement with Gaiam, Inc. to launch a new line of Reebok DVDs, fitness accessories, and workout kits.  The Reebok branded fitness DVDs are scheduled to launch in March 2010, with accessories following in summer and fall of 2010. Gaiam and Reebok will produce a series of Reebok branded DVDs to be released throughout the duration of the multi-year agreement. Two new programs, Cardio Tone and Boot Camp, will launch in March 2010, and will be available wherever fitness DVDs are sold. The fitness content of the DVDs was developed by Reebok and Reebok Global Instructors Sara Haley and Tanja Djevelic. <sportsonesource.com>

Hedgeye’s 2 Cents: After all the ups and downs (and downs, and downs) for Reebok over the years, it always ends up coming back to fitness (remember that it got its start in the US after the NYC subway strike in 1980 when women wore Reebok’s instead of heels to walk to work). Anything centered around fitness is probably not a bad idea even for the current day Reebok – especially given that it can’t do anything else right.

Ariat Expands Into Apparel - Ariat International is expanding its repertoire with a collection of denim wear for spring ’10. The Union City, N.J.-based company, known for its equestrian and Western footwear, will debut Ariat Denim, focusing on performance riding jeans for men and women designed with such features as waistbands that don’t gap. They are also made to transition to all-around city wear. Included in the offering are three styles each for women and men, with the women’s retailing at $65 and $70, and men’s at $55 and $60. The jeans are set to hit Western specialty stores this month. <wwd.com>

Hedgeye’s 2 Cents: Watch out Ralph! Well, not really… But interesting nonetheless. I’ll keep an eye on this one, as it has a strong name in a defendable part of the footwear market.

New Tariffs Cutting Into Domestic Industry - It’s been more than a month since Congress let legislation expire that suspended duties on millions of dollars worth of certain textiles, apparel components and footwear, and the industry is feeling the pain. Yarn spinners, fabric firms, footwear brands and retailers have had to fork over tens of thousands of dollars in duties since Jan. 1, which could potentially lead to price increases or the unavailability of some styles. There has been no signal yet from the House or Senate that it will act on renewing the temporary duty breaks, or if the tariffs will be reimbursed retroactively, which has many executives nervous about the fallout from rising production costs. Lobbyists have said lawmakers could potentially act on a bill by the end of March. The House introduced a miscellaneous tariff bill in late December that would renew the expiring tariff suspension for three years on more than 600 imported products, but the Senate has not yet introduced a bill. David Trumbull, vice president of international trade at the National Textile Association, said the majority of his 100 members are being affected by the duty increases. <wwd.com>

Hedgeye’s 2 Cents: This is more political noise than anything else. Don’t sweat it.