R3: REQUIRED RETAIL READING
February 23, 2010
If there are any themes starting to take shape, they relate to capital allocation and changes in capex, working capital, and SG&A needed to fuel demand from here.
TODAY’S CALL OUT
JWN: Missed by $0.02. Lots of moving parts, but the bulk seems to be in higher bad debt expense as they flush out the garbage heading into a new year. First positive in 9 quarters (already known) is nice, but the capital setup bugs me. Operating margins are close to historical lows, but FCF margins are at all time highs as the company has pulled back so far on capex and working capital. In fact, mgmt touted a 5.4x working inventory turn as its highest in history. JWN is at the point where it needs to grow, and will need capital – capex, working capital, and SG&A – in order to do it. Our question is simply “are people willing to pay for a department store growth story?”.
SHLD: Kind of a boring quarter for SHLD – which is an outlier in itself. SIGMA position is nearly identical vs. 1 quarter ago, and it has another 1-2 quarters until it should start to feel pressure. The Craftsman deal to extend the brand outside Sears’ broken box is a positive, and opens the door for other Sears content to follow (ie Die-Hard and Kenmore). We don’t believe in the sustainability of this box, or its financials, by any stretch. But there’s a time for everything. We’re not there yet for SHLD.
HD: Smoked the quarter. $0.24 vs $0.16 consensus. This is right in line with our view. But as we noted in our 2/11 note (Keep a Trade a Trade), from this point in order to own HD you need to believe in a housing recovery. It did not matter in 4Q. Now it does.
HBI: In advance of its analyst meeting, HBI guided to 5-8% top line growth for the year. I don’t get it. This is an underwear company, folks. This range is 3x what it should be growing. Is there catch-up/restocking at retail? Maybe. Could growth in the dollar store channel (that should not be happening) be adding 1-2% to growth? Yes. Does the company have margin savings to use as an offensive weapon to gain share like Gildan did 5-years back in T-shirts and fleece? Yes. Regardless, they put the goal out there, and near-term they will not miss it. The next 2 quarters appear to be a lock, and look solid. But then we need to bank on their expectations in 2H, at the same time the company is more exposed to cotton prices (which don’t want to go down). Then in 2011 they have to anniversary a big number. Duration matters a lot on this one. Near-term I like it. For those with a 6-9 month time horizon, I don’t.
LEVINE’S LOW DOWN
- While we normally focus on the impact of Winter weather on sales of seasonal merchandise or potential business disruption, it is rare that we see it show up as a hit to corporate expenses. In the case of Lowe’s, management noted that with snow simultaneously on the ground in 48 states a few weeks ago, they have tempered both sales and expense forecasts. Interestingly, the shear amount of snowfall and the related removal costs are now expected to be a 15 bps negative impact to SG&A in the company’s first quarter. So far, other big box retailers including Wal-Mart have not mentioned snow removal as a headwind in 1Q.
- In a rare glimpse into the fashion business of Marc Jacobs, CEO Robert Duffy offered up an interview during Fashion Week to talk about Twitter. Yes, of all things he focused on Twitter and his fascination with the real-time communication tool. Interestingly, Duffy noted that he receives hundreds of Tweets from young people looking for business advice. He went on to note that Marc Jacobs has been in business for 26 years, but did not turn a profit until year 20.
- Nordstrom management noted that a positive mid single digit same store sales trend could produce historically high EBIT margins given the company’s currently lean cost structure. While sales per square foot trends are now back to 2004 levels, management was quick to highlight that SG&A per foot is now less than the levels exhibited in 2004. Any sustained pick up in topline should yield positive incremental profits…
Adidas and NBA Launch NBA Shop at Champs Sports - The National Basketball Association (NBA), adidas, and Champs Sport announced the launch of the Official NBA Shop at Champs Sports. The NBA Shop will debut in 69 Champs Sports stores this month and will be in the remaining 486 Champs Sports stores nationwide by the start of the 2010-11 NBA season. The NBA Shop at Champs Sports will be a dedicated retail space featuring a wide assortment of adidas NBA performance and lifestyle apparel, including on-court products, fashion collections, and exclusive adidas NBA apparel and accessories year round. adidas is the league's official uniform and apparel provider. The NBA Shop at Champs Sports will feature player imagery, a replica NBA backboard and a hardwood floor graphic to provide fans with the league's authentic look and feel. Each shop will have a dedicated selection of local team products and an assortment of products representing some of the NBA's most popular players. This assortment will include swingman jerseys, on-court shooting shirts, exclusive T-shirts, shorts, headwear, and track jackets. Each season, Champs Sports will bring in exclusive NBA fashion collections catering to fashion-forward NBA fans, beginning with the adidas White/White Collection this spring, which will include a white swingman jersey, track jacket, and T-shirt. <sportsonesource.com>
J.Crew's Overseas Push: Retailer Going Global on Net-a-porter - J. Crew is going global with Net-a-porter.com. In its first major push overseas, the retailer’s products will be featured on Net-a-porter’s Web site starting in mid-May. Currently, J. Crew operates stores only in the U.S. and is available in North America and Japan through its catalogues and Web site. However, the brand’s recognition factor and distribution could grow considerably since Net-a-porter ships to over 170 countries. J. Crew’s growth via Net-a-porter will also depend on the degree the Web site plays up the brand’s merchandise. “When we go live in May, this will be announced to our millions of subscribers, celebrated with a cover and a story in our weekly magazine. It is going to be a big deal for us,” said Natalie Massenet, the founder and chairman of Net-a-porter.com. Net-a-porter, which is strictly women’s and offers over 300 designer and contemporary labels, will carry an edited selection of J. Crew’s women’s apparel, shoes and accessories. In addition, J. Crew will provide some exclusive styles and colors to the London-based site. <wwd.com>
Sears Plans to Close 21 Underperforming Stores in April and May - Sears Holdings Corp., the largest U.S. department-store chain, said it will close 21 underperforming stores in April and May. Sears, based in Hoffman Estates, Illinois, will shut 13 Kmarts, 4 full-line Sears stores and 4 Sears Essentials, which sell groceries, Kimberly Freely, a company spokeswoman, said today by telephone. The closings will affect about 1,000 full-time and part- time workers, she said. <bloomberg.com>
DKNY Jeans Taps President - Debbie Elmore has been named president of Liz Claiborne Inc.’s DKNY Jeans and DKNY Men division. Elmore replaces Kevin Monogue, who has left the company to pursue other opportunities, according to Claiborne. Monogue had served as president since June 2007. Elmore is a 30-year industry veteran who spent more than half of her career with Macy’s. She was most recently president of sales and design for the Ecko Red label at Paul Davril. She’ll take over a brand that has been a strong performer for Claiborne and one that has joined in the celebrity cross-promotion frenzy of recent years. DKNY Jeans has partnered with Fall Out Boy Pete Wentz and actress Rachel Bilson to create lines over the last several years. Last fall saw the introduction of Femme for DKNY Jeans, a collaboration with singer and actress Hilary Duff. <wwd.com>
American Apparel, Dov Charney Still Betting On Soft-Core Porn Ads - Dov Charney, sleazeball CEO behind hipster clothing emporium American Apparel, is known for lecherous behavior, especially when it comes to the young girls he photographs/films for his company’s ontroversial ad campaigns. The latest example can be seen in the company’s Panytime! videos (click here), part of an annual February sales promotion. <trueslant.com>
Zumiez Relocating Washington Distribution Center to California - Zumiez Inc. will be closing its Everett Distribution Center and relocating this portion of its business to Corona, CA. The company's headquarters, corporate offices and e-commerce division will remain in Everett, WA. About 170 jobs will be eliminated. As a result of this process, Zumiez will vacate Building C on Merrill Creek Parkway, the smaller of the two buildings it leases, in Everett, Washington and will be purchasing a new 168,450 square feet Silver Certified Leadership in Energy and Environmental Design building in Corona, California. The company anticipates hiring 180-200 people in California. <sportsonesource.com>
Pacific Sunwear spotlights a new senior vice president of marketing - Apparel and accessories retailer Pacific Sunwear of California Inc. has named Robert Cameron senior vice president of marketing. Cameron will be responsible for ensuring the consistency between the customer experience at PacSun.com and the company’s retail stores, the retailer says. Cameron most recently served as vice president of Levi’s brand marketing, where he was charged with modernizing the company’s brand strategy and implementing new media strategies. Prior to Levi’s, he was a founding partner and chief creative officer at strategic branding agency Fantascope Inc. <internetretailer.com>
Michael Kors Taps Marketing Execs - Michael Kors has named Anne Waterman senior vice president of global image and Jill Fishman senior vice president of global marketing and licensing, reflecting the company’s increased focus on global expansion and online presence. Since joining the company 14 years ago, Waterman has occupied various roles, most recently senior vice president, fashion director. In her new post, she will continue to head creative service with the added responsibility of public relations and special events. Billy Daley, vice president of global communications, is leaving the company. “Anne has worked with me for almost 15 years and totally gets my point of view,” Kors said Monday. “It was a logical progression as we expand on a global scale.” Michael Kors Inc. is focused on increasing its international presence, specifically with press offices planned to open in Milan, Munich, London and Tokyo in the next 12 months. “As we expand globally, it makes sense that our communication with the public be housed under one division, one person,” said John Idol, chief executive officer of Michael Kors. “Whether it’s a feature story, ad campaign or event, the seamless progression from one to the next is essential in the fast-paced environment we live in today.” <wwd.com>
Retailers Criticize Obama's New Health Care Plan - President Obama outlined a health care reform compromise on Monday that would increase government fees on employers that don’t offer full-time health insurance to subsidize eligible workers applying for aid in an insurance exchange. Retail groups criticized Obama’s proposed compromise — an effort to resuscitate his signature domestic issue — over employer health insurance coverage requirements, saying they would impose undue cost burdens on companies. The White House estimated the package would cost $950 billion over 10 years, but would be paid for by new taxes and fees on business. “From an employer’s perspective, if you make a good-faith effort to offer health care coverage and have employees go to an exchange [for coverage], why should you as an employer be penalized?” asked John Emling, senior vice president for government affairs at the Retail Industry Leaders Association. “We need more details about the President’s proposal, but if it is consistent with the Senate bill, it is still problematic for us.” Under Obama’s proposal, firms with more than 50 workers and not offering coverage would be required to pay a $2,000 fine for every employee if just one received a subsidy. By contrast, the Senate bill that never came up for a full vote in the chamber requires employers that do not offer coverage to pay a $750 fee for every full-time worker receiving subsidies. <wwd.com>
Research and Markets: An Essential Report on The Future of Retailing in Japan -
Key Market Trends
- Japan - the second largest retail market: Japan continues to be the second biggest retail market in the world with 127 million sophisticated consumers in spite of the global economic downturn. In terms of retail market size, Japan still accounts for more than 55% of the entire Asian market. Though the retail market has been adversely affected due to the recession in 2008, the market is expected to witness growth in 2009 with retailers adopting various strategies such as mergers and acquisitions to increase the revenue.
- Decline in Household Expenditures: The Japanese household expenditures fell by 70,000 on average in 2008. The category taking the biggest hit due to the decline in expenditure was food, which decreased by 17,000. The consumers have become more practical and selective by opting to purchase necessary products that have value. This has resulted in higher demand for private label products. In Japan, the number of consumers purchasing cheaper private-brand items has increased by 44% over last year.
Key Channel Trends
- Continuous decline in department store sales: The department store channel revenues in Japan continued to decline consecutively for the tenth year in 2008. In the past decade, 1.5 trillion ($15.2 billion) in sales, which is almost equal to the entire annual sales of Japan's largest chain, has been wiped out. The department stores are also facing stiff competition from drugstores and suburban shopping malls that are encroaching on their turf. Hence, to increase their efficiency to face the competition and economic slowdown, department stores have been joining hands.
- Non-Store Retailing to Drive Growth: The growth in the retail market in Japan over the forecasted period is expected to be marginal. With the growing popularity of online retailing and home shopping, non-store based retailing is expected to drive the growth. Store-based retailing is expected to continue to decline, with department stores and supermarkets witnessing further drop in sales. Online retailing is expected to offer good opportunities for retailers to expand their sales and customer base.
Key Category Trends
- Dominance of food & groceries: Food & drinks dominate retail sales in all countries, due to their vital importance in everyday life. In Japan, the food and groceries category accounted for around 52.5% of the total retail market in the year 2008. Packaged food had the largest contribution to the category sales with a value of 31,961.8 billion (US$310.0 billion), registering a CAGR of 2.5% over the period 2004-08.
- Recession effect on Luxury goods: Japan, one of the world's top markets for luxury goods, consumes nearly 40% of all the luxury goods worldwide sold every year. However, with recession setting in Japan, the consumers have decreased their spending on luxury goods.