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R3: REQUIRED RETAIL READING

February 26, 2010

February is shaping up to be a solid month for both athletic footwear and apparel, with the latest data points showing a slight acceleration in trend. Additionally, most retailers reporting earnings over the past couple of weeks (across a wide range of product categories) are noting that February has been solid, even with record snowfall.

TODAY’S CALL OUT

By now you we hope that you have seen at least one announcement for our 11 AM conference call this morning to discuss one of our top ideas for 2010, Nike (if not, please contact for access). In addition, we’ll be releasing our Blackbook, which takes an in-depth look into how the company’s actions over the past three years are now setting up for an re-acceleration in earnings growth.

We have plenty to discuss later today, but in the meantime we thought it would be useful to take a quick look at the latest weekly data points for the athletic apparel and footwear sectors. Bottom line, February continues to be a solid month for both product categories. We’d also point out that strength in February, despite abnormal snowfall across much of the country, has been consistently noted by retailers that have reported earnings over the past couple of weeks.

THE WEEKLY UPDATE

Athletic footwear industry dollar sales growth accelerated sequentially by +200bps for the week ended 2/21. On a rolling three-week basis, the rate of industry sales growth has accelerated on the margin, which is consistent with sports apparel trends in the sporting goods channel, as well as ICSC weekly retail sales.

On the brand front, this week’s data shows a slight divergence between Nike Brand dollars sales and the sales of Brand Jordan and Converse. The latter two have both shown decelerating trends over the past couple of weeks. Under Armour dollar sales improved markedly for the week, increasing by 5.9% (after being down about 3% month to date). We expect this trend to continue as the company’s comps become sequentially easier over the next month or so.

R3: February Shaping Up Nicely - 1

R3: February Shaping Up Nicely - 2 

As a reminder we will be hosting a conference call today, Friday (2/26) at 11am highlighting one of our Top Ideas for 2010 – Nike. Please contact to request access.

Eric Levine

Director

LEVINE’S LOW DOWN

  • In advance of the launch of Carter’s first e-commerce effort in the first half of this year, management noted that they already have a head start on target marketing. The company has an above-industry standard capture rate of 80% for gathering customer information (email addresses, etc…) in its stores. Additionally the company’s customer database doubled in 2009. Management believes it is not unreasonable to assume the .com business can be a $100 million business with 10% EBIT margins over a five year time frame.
  • Kohl’s highlighted very strong growth in its e-commerce business in 2009. The platform delivered a 38% increase in sales on top of a 48% increase in 2008. Total sales for the business are now $500 million. Given the rapid growth, management indicated it will be investing in additional infrastructure to support future growth as well. Interestingly, Kohl’s now believes its online opportunity is substantially greater than it originally envisioned.
  • Steve Madden indicated that it expects the boot trend to continue in 2010, but with different styles than those that drove strength in 2009. Additionally, the company noted that the men’s casual category is seeing a dramatic rebound.
  • Safeway’s CEO Steve Burd indicated that there are some signs that the company’s customers are beginning to trade up in certain more discretionary categories. Evidence of “trading up” is taking place in the company’s floral departments, where volumes have picked up dramatically. Additionally, the company continues to see an uptick in its licensed Starbucks locations as well is trading up within its wine department.
  • Gap indicated that it will not being returning to television this Spring with an advertising campaign. Management also noted that while TV ads during the holiday did have some return, the impact came in at the lower range of expectations. Advertising and marketing for the Gap brand will be centered around denim for the Spring.
  • Decker’s management indicated that the company is more focused on acquisitions than they have been in the past, especially with a growing cash balance. The company believes they are now in a position to look both larger potential deals as well as lifestyle brands that lead with either apparel or footwear. 

MORNING NEWS

Li & Fung Buys UK Producer - Li & Fung Ltd. extended its U.K. reach Thursday, acquiring Manchester-based private label producer Visage Group Ltd. for as much as 173 million pounds, or $266.9 million at current exchange. Bruce Rockowitz, president of the Hong Kong sourcing giant, said the deal would generate business with the majority of leading British retailers. “This acquisition dramatically strengthens LF Europe’s growth platform,” Rockowitz said. “It will add substantial scale to our existing operation and further our objective of developing a significant European onshore presence.” Visage designs and produces men’s, women’s and children’s apparel for high street and mass retailers in the U.K. The firm, which has about 500 employees and branch offices in Hong Kong, Shanghai, Guangzhou, Dhaka and Delhi, posted profits of 14 million pounds, or $21.6 million, for the year ended Jan. 31. Annual sales tallied 186 million pounds, or $287 million. The initial purchase price was 57.5 million pounds, or $88.7 million, and future performance-based payments could total up to 115.5 million pounds, or $178.2 million. Li & Fung funded the deal itself. Shares of the firm dipped 0.1 percent to 35.70 Hong Kong dollars, or $4.60, Thursday. This is the latest in a string of acquisitions for Li & Fung. Although it has a cash stockpile of about $1 billion and an itch to buy, the firm has also been cutting sourcing deals with companies such as Wal-Mart Stores Inc., Hudson’s Bay Trading Co. and Liz Claiborne Inc. <wwd.com>

John McCarvel Named President and CEO of Crocs - Crocs, Inc. promoted John McCarvel to president and chief executive officer effective March 1, 2010. He succeeds John Duerden, who is retiring from the company and resigning as president and CEO and also from his position on the company's board. Duerden will assist with McCarvel's transition as needed. McCarvel has spent the last six years in various executive management positions at Crocs, serving as chief operating officer and executive vice president since 2007. Previously, McCarvel was senior vice president for global operations from October 2005 to February 2007, and as vice president for Asia from January 2005 to September 2005, after providing consulting services to Crocs during 2004. "In 2009, we made significant progress in strengthening both our financial position and our market position," said Richard Sharp, Crocs chairman of the board. "John Duerden has led this remarkable turnaround. With his leadership, we have taken steps to strengthen our product line, re-engage the consumer and reposition our iconic global brand. We also have improved our capital structure and liquidity significantly, repaid all of our debt and entered into a three-year asset-backed securitization agreement. On behalf of our board, I want to thank John for his leadership and contributions during the past year."  <sportsonesource.com>

Skechers Expanding Across the Globe - After launching a subsidiary in Brazil and establishing a successful joint venture in China, Skechers USA Inc, the California-based lifestyle footwear brand announced the launch of the fashion footwear brand Skechers in India. Along with its current distribution in Indonesia and powerhouse brand status in the United States, the launch in India will establish Skechers as a global footwear leader with a major presence in the world’s five most populated countries. Skechers will be available at leading footwear multi-brand footwear retailers such as Regal, Metro, Lifestyle, Planet Sports, Pantaloons and Central and other leading footwear and department stores across India.  SKECHERS USA,also announced that the Company has opened a flagship store in the heart of Covent Garden, London’s premier destination for culture and leisure. Exclusively located on the Royal Opera House property across from the famed Covent Garden Market, the new SKECHERS location is a central magnet for shoppers worldwide. “SKECHERS Covent Garden is the ultimate sales and branding tool,” said Michael Greenberg, president of SKECHERS. “Consumers can’t get enough of this world-famous district because it’s known for having it all – shops, restaurants, architecture, entertainment. And now, it’s also got SKECHERS – which means that millions of new customers and fans of the brand can enter our world, try on our styles, buy our product, and take the SKECHERS experience home to their countries.” Designed to infuse the Opera House’s architectural design with SKECHERS’ sensory retail philosophy, the flagship store showcases sculptured gypsum wall panels and premium solid black oak flooring, as well as signature SKECHERS looks such as blue florescent acrylic wall displays and table tops, LCD screens, color-changing LED lighting, and light box graphics. <businesswire.com>  <indiaretailing.com>

 Conaway Fined $10M in Kmart Case - A federal judge on Thursday ordered former Kmart chief executive officer Charles Conaway to forfeit more than $10 million for deceiving shareholders, but stopped short of banning him from future front-office jobs altogether. In June, a jury found that Conaway had misled investors in the run-up to the retailer’s 2002 bankruptcy. The verdict came after a civil trial in U.S. District Court in Ann Arbor, Mich., over a 2005 Securities and Exchange Commission lawsuit. In his opinion on remedies in the case, U.S. Magistrate Judge Steven D. Pepe ordered that Conaway repay a $5 million retention loan Kmart gave him and eventually forgave, $2.6 million in interest and a $2.5 million civil penalty. Pepe ruled against an SEC motion that sought to prohibit Conaway from working as an executive at a public firm. “I was considering a 10-year injunction or bar from the time of the offense,” Pepe wrote in his 70-page ruling. “Yet, in reality I cannot find that there is a realistic likelihood that Mr. Conaway in the short term will be hired to serve as an officer or director of a publicly traded corporation given the serious damage to his reputation this case and the jury’s findings have caused him.” Conaway’s attorney, Scott Lassar, said Thursday he was “very disappointed” by the ruling and noted an arbitration panel had exonerated his client before the SEC filed suit.  <wwd.com>

H&M Launches Sustainable Line - The fast-fashion retailer’s theme of flowers and nature for spring will be delivered to all U.S. stores on March 25 with The Garden Collection, its first fully sustainable line. The bright designs made from organic cotton and linen, recycled polyester and Tencel feature prints with splashes of deep color, generous embroidery and rosettes and appliqués on shoulders, skirts and necklines. When H&M began manufacturing apparel made from organic cotton in 2004, it unveiled a goal of increasing its organic cotton use by 50 percent each year through 2013. The retailer last year used 3,000 tons of organic cotton, a spokeswoman said, adding: “We want to invest in a better environment.”  The Garden Collection, she said, is also “a response to demands from our customers.” “The demand for organic cotton is much higher than the supply, globally,” the spokeswoman said. “All retailers are attempting to add more organic materials to their collections. We are also trying to broaden the range of sustainable materials that we use, including recycled wool and recycled polyester, which is made from recycled PET [polyethylene terephthalate] bottles and textile waste.”  <wwd.com>

Debenhams Eyes More Acquisitions - Debenhams, the U.K.'s second-largest chain of department stores, has said it may acquire more chains, in a similar move to its acquisition of Denmark's Magasin du Nord in January for $19 million. Expansion this way would leave the retailer less dependent on the slack U.K. market. Debenhams is rolling out its strategy of featuring exclusive designer ranges to branches of Magasin du Nord, which is a more upscale shop than the U.K.'s Debenhams. Debenhams has 142 shops in the U.K., and until the acquisition, just 11 others in Ireland and about 50 run by franchise partners elsewhere. The chain said that franchising was another route. Four new Debenhams-branded outlets are due to open in the spring in Slovakia, Egypt, Malta and Azerbaijan. <licensemag.com