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February 18, 2010

WMT’s  triangulation of sales, gross margins and inventory is as good as it’s been this cycle, and now we start to anniversary tougher numbers. Management’s tone shift towards execution could not come at a better time.


Last week we took a look at Wal-Mart in some detail (see our note from 2/11) and walked away with the conclusion that shares are likely range bound.  Our viewpoint stemmed from the fact that Wal-Mart’s fundamental results are likely to remain incredibly consistent, but also contained to a narrow range of outcomes.  Today’s 4Q results further confirm to us that there is little opportunity for a major breakout on the horizon.  However, it is notable to point out that management’s tone is very upbeat on margins and expense control, while at the same time decidedly less upbeat on sales.   2010 appears to be setting up as an execution story, one in which results will not be entirely dependent on a consumer recovery or a meaningful topline acceleration.  Let’s look at the quarter:

WMT came in five cents above the high end of guidance ($1.17 vs. $1.08-$1.12, Street was at $1.12), driven primarily by solid expense control, gross margin expansion, and strong results from international.  F/X did benefit the quarter by approximately $0.02; however, the focus this morning will likely be on the divergence between domestic same-store sales performance and the solid EBIT expansion. Sales came in lighter than expected at -2% in the domestic stores vs. a flattish expectation.  Management attributes the weakness to deflation in grocery and electronics as well as a slight decrease in customer traffic.  This marks a sequential deceleration in traffic from prior quarters (recall that 3Q traffic was up 1.5%).  Management expects difficult comparisons in 1Q to continue to put pressure on the topline, a trend that is expected to improve gradually as 2010 progresses.   On a 2Yr basis same store sales momentum decelerated for the third quarter in a row. 

In a slight shift in tone, management focused on the operational improvements underway at Wal-Mart aimed at driving gross margins higher through better sourcing and efficiencies as well as to leverage expenses even with a sluggish domestic topline.  It is clear that the bar has been lowered for sales expectations in the near term.  Interestingly, the often used term “price leadership” was not nearly as prevalent on the 4Q call as it was going into the holiday.  Perhaps self-driven deflation has been partially to blame for the weakness in sales.  Certainly the law of large numbers creates tough hurdles for traffic growth.  Guidance for 1Q also implies a deceleration in same store sales on a 2-yr basis, a trend which has now been building for three quarters .  The real question now is how much upside can really be generated without a sales benefit.  Clearly 1Q and full year guidance, of $0.81-$0.85 vs. Street at $0.85 and $3.90-$4.00 vs. Street at $3.97 respectively, takes into consideration a topline that will remain muted at least over the next couple of quarters.  With the Street “warming up” to the name since the new year, sentiment may be tempered as customer traffic dipped into negative territory for the first time in while…

Look at WMT’s trajectory on our SIGMA chart. The triangulation of sales, gross margins and inventory is as good as its been this cycle, and now we start to anniversary tougher numbers. Management’s tone shift towards execution could not come at a better time.

R3: WMT: Execution-Mart - 1


  • Whether the WAG/Duane Reade transaction ultimately works is still unknown, but the big win here is for the people of New York. With plans to continue remodeling stores (30 are complete and they are substantially better than the typical store) and to keep the brand name, customers should benefit from improved pricing, better systems (especially pharmacy), and hopefully improved service levels. Imagine if consumers actually didn’t dread going into a Duane Reade?
  • OfficeMax noted that for the first time in many quarters, revenue from new customers exceeded revenues lost from former customers. With that said, sales of lower margin consumables continue to adversely impact the product mix as discretionary sales are still under pressure.
  • With the wind at its back thanks to the Shape-Ups frenzy, SKX is taking several steps to offset challenging comps in the 2H including 10%+ store growth in 2010 and new licensing agreements that include a kid’s apparel line to launch this quarter.  As the company looks to sustain its growing top-line, management noted they expect to break ground for its new DC in the 1H and to become operational in 2011 – towards the back-end of prior expectations of 2H F10 to 1Q of F11. With backlogs up 40% heading into Q1 and new Shape-Up related product extensions rolling out over the next few quarters the timing of the DC transition is likely to become increasingly important as capacity tightens perhaps unsustainably towards the back half of 2010.



Simon Urges General Growth to Accept Bid - Simon Property Group Inc. shot back Wednesday at General Growth Properties Inc.’s rebuff of Simon’s $10 billion takeover bid in a strongly worded letter that urged serious talks and warned the offer “is not open-ended.” The letter from chairman and chief executive officer David Simon addressed to General Growth ceo Adam Metz called on him to accept the unsolicited bid for Simon Property’s bankrupt rival as being in the best interests of General Growth’s shareholders and creditors. For the entire text of David Simon's letter, click here. “I want to reiterate that our offer is not open-ended, and we have a number of other opportunities under consideration,” Simon wrote. “We sincerely hope you will engage seriously with us without further delay.”  Simon emphasized the advantages of doing a deal with Simon now rather than going forward with the bankruptcy process. General Growth said Tuesday that Simon’s offer wasn’t sufficient “to preempt the process we are undertaking to explore all avenues to emerge from Chapter 11 and maximize value for all the company’s shareholders.”  <wwd.com>

Whole Foods, Bed Bath & Beyond to Cut Suppliers Sourcing Fuel from Oil Sands - To cut their carbon footprints, retailers Whole Foods Market and Bed Bath & Beyond are dropping suppliers that source fuel from Canada’s oil sands (also known as the Alberta Tar Sands), reports the Financial Times. While Whole Foods Market has switched to suppliers sourcing U.S. crude oil, Bed Bath & Beyond instituted a new policy that encourages its transportation providers to avoid high impact fuels including those from refineries using Tar Sands. The decisions are not expected to impede the flow of Alberta oil to the U.S., which represents a fifth of all U.S. energy imports, but it does send a signal against synthetic crude oil from Alberta, reports the Toronto Star. Both companies are responding to ForestEthics’ campaign launched last year to urge U.S. corporate companies away from oil sands fuel, which has a higher carbon content than conventional crude oil, reports the Financial Times. ForestEthics is negotiating with more than 30 companies to adopt similar policies, according to the article. The oil sands represent the largest oil reserve outside Saudi Arabia and reduce Washington’s dependence on Middle Eastern fuel, reports the Financial Times. <environmentalleader.com>

True Religion Targets Online Counterfeit Operators - Counterfeits have been a problem for leading premium denim labels like True Religion and Seven For All Mankind. True Religion Brand Jeans is employing a new weapon in its fight against waves of counterfeiters that have taken their wares from the cold streets to the warmer environs of the Internet. The Vernon, Calif.-based premium denim label was among the first brands to enroll in tests of Site Staydown, a new service from online brand security firm MarkMonitor that promises not only to shut down Web sites hawking knockoffs, but also to keep them closed. MarkMonitor began a wider rollout of Site Staydown this week, noting the apparel and footwear brands involved in the pilot program were able to shut down more than 100 sites they identified as selling counterfeit or pirated goods. Deborah Greaves, True Religion’s general counsel, said the company noticed an increase in the number of counterfeits being sold online in the summer. While the brand had seen online counterfeiting before, Greaves said Web activity exploded in mid-2009 on sites with dubious domain names like discountbrandjeans.com and myluxuryjeans.com. Some cyber squatters had gone so far as to register domains that included the company’s name.  <wwd.com>

Bernard Chaus in Default on CIT Facility - Bernard Chaus Inc. has informed the Securities and Exchange Commission that it is in default on its credit agreement with The CIT Group, putting its ability to continue as a going concern at risk. The New York-based sportswear firm didn’t specify which of its financial covenants weren’t met and said CIT was continuing to provide it with financing following an agreement on revisions and amendments to an earlier pact reached on Sept. 10 and now set to expire on Sept. 18, 2011. Chaus is seeking further revisions but noted that its ability to go forward could be in peril should CIT opt to demand immediate payment or terminate the agreement. Obligations under the new agreement are secured by a “first priority lien on substantially all of the company’s assets, including accounts receivable, inventory, intangibles, equipment and trademarks and a pledge of the company’s interests in its subsidiaries.” The September agreement provides Chaus with a $30 million revolving line of credit, which includes a $12 million sublimit for letters of credit. Its covenants cover financial measures such as tangible net worth, minimum EBITDA and leverage ratios, according to the Form 10-Q filed with the SEC this week. <wwd.com>

Ace Hardware adds mobile site to its multichannel toolbox - Retailers going mobile have been making mobile sites, apps and texts a part of their multichannel strategies, especially in using m-commerce to help shoppers get to stores and find useful information while in stores. Ace Hardware Corp. is no exception. The merchant has launched a mobile site that does not complete purchases but instead gives shoppers a tool to use while out and about or in an Ace store. The home page makes the goal of the site clear with a bold headline: “Welcome to the Ace Hardware mobile site. Get in. Get help. Get on with your life.” The first function offered is a store locator, where shoppers can enter a Zip code and get a list of stores ordered by distance. <internetretailer.com>

Yue Yuen's Revenues Climb 14% in January - Hong Kong's Yue Yuen Industrial (Holdings) Ltd, the world's largest contract footwear manufacturer, announced that its operating revenue in January grew 14% to $502.45 million from $438.89 million in the same month of 2009. <sportsonesource.com>

McQueen Business to Continue Despite Founder’s Suicide - The Alexander McQueen business will go on despite the suicide last week of its founder and creative director, said Robert Polet, president and chief executive officer of Gucci Group. "We believe in the future of the brand," said Polet, speaking at PPR’s annual results presentation here. "Lee was very proud of the people working in his company, and so am I." He added that a McQueen collection would be presented during Paris Fashion Week. In 2000, Gucci Group, the luxury division of PPR, swept in and bought a 51 percent stake in McQueen’s company, bringing an end to the designer’s rocky stint as Givenchy’s couturier at rival luxury group LVMH Moët Hennessy Louis Vuitton. The acquisition set the stage for expansion via signature boutiques in the fashion capitals of London, New York and Milan; a secondary line called McQ licensed to Italy’s SINV; men’s wear and leather goods, and collaborations with the likes of Puma, Samsonite and the mass retailer Target.  <wwd.com>

New Credit Card Regulations Take Effect Monday -  Swiping that card at the check out counter will soon have a whole new meeting for some consumers. Beginning Monday, new credit card regulations will kick in some of which will benefit consumers. One of the biggest changes is that credit card companies must give the consumer 45 days notice before making any changes on the account; changes that include interest rate hikes. "If the consumer disagrees, they can close account and will be given 5 years to pay off the balance," Romero said. It doesn't stop there; with part of the new 'Credit Card Act' creditors won't be allowed to charge you over the limit fee instead, your card will be denied. However one regulation states that creditors will no longer allow anyone under the age of 21 to obtain a credit card without a co-signer and that got mixed reactions from consumers. <newswest9.com>