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R3: REQUIRED RETAIL READING

March 10, 2010

In 2H US retail needs to bank on a stronger consumer – we all know that. But now the ‘Cotton Factor’ is rearing its ugly head. Prices over $0.80/lb today impact margins 9+ months out. Mind your modeling assumptions. Not all companies are created equal.

TODAY’S CALL OUT

2H US retail needs to bank on a stronger consumer – we all know that. But now the ‘Cotton Factor’ is rearing its ugly head. Prices over $0.80/lb today impact margins 9+ months out. Mind your modeling assumptions. Not all companies are created equal. 

Many retailers and manufacturers are expecting sourcing costs to rise over the second half of the year due to a confluence of factors.  While tougher comparisons against last year’s substantial cost declines is one reason, below the surface there are additional factors looming.  On the obvious side of things, fuel and subsequent freight costs are up.  On the less obvious side of things are material cost inflation.  Take a look at the recent spike in cotton since the new year:

Global production remains stressed and at historically low levels with the U.S. cotton crop estimated at 12.0mm bales (3% below 2008 levels) and India’s output under pressure because of drought conditions.  Furthermore, the big move last week came after China stated its 2009 crop fell by 14.6% last year. With U.S. stockpiles low and China (world’s largest consumer) continuing to run a substantial deficit, prices continue to head higher as exports increase.  A recent statement from India’s textile ministry highlighted that exporters have sought permits to ship 3x more cotton in February compared to the same time last year.  Additionally, concerns over supply shortages beyond April are also contributing to further tightening in the global market.

As cotton prices test the prior highs of early 2008, current factors suggest that we are likely to see demand continue to outstrip supply in the near-term and prices may still be moving higher from here.

This is when you need to give credit to those companies that have defendable positioning in the supply chain (NKE, RL, UA, WMT, etc…), and questioning 9-12 month modeling assumptions for those who lack any semblance of pricing power (JNY, GIL, HBI, VFC, GIII, etc…).

R3: Cotton’s Ugly Head - Cotton Futures Chart

LEVINE’S LOW DOWN  

  • Dick’s Sporting Goods management noted that it expects to see product costs increase over the second half of 2010, but that it hasn’t been able to fully quantify the impact at this point. On its private label and direct sourced product, management expects to pass on higher costs leaving gross margins unaffected. 
  • Kroger management believes the promotional environment remains very aggressive, but it is no longer getting more aggressive. As a result, management believes the environment is now a little more predictable. 
  • Despite a recent pick up in same store sales at Neiman Marcus, management is not planning any meaningful store growth in the near to intermediate term. With the exception of one new store opening in Spring 2012, the pipeline is essentially empty at this time. 
  • Collective Brands management noted that the J. Crew/Sperry relationship has been a win-win for both parties. As a result, management believes the opportunity for its Keds/Gap partnership this Spring and Summer is also promising. If successful, this could be the beginning of a long awaited turnaround for the Keds brand. 
  • American Eagle is clearly bullish on denim. Management attributes the 8% increase in inventory at cost per foot to the increased penetration of denim in its product mix. It is also noted the “strong demand” for AE denim is the main reason for the inventory investment. This represents one of the more noticeable inventory investments across the specialty landscape. 

MORNING NEWS

Foot Locker to Increase Apparel Emphasis, Expand Globally - Apparel — both private label and branded — will be a primary focus for Foot Locker Inc. over the next five years as it strives to significantly increase sales and profitability. Calling it his “coming-out party,” chief executive officer Ken Hicks, who joined the company from J.C. Penney Co. Inc. in August, laid out Foot Locker’s plan to become “the leading global retailer of athletically inspired shoes and apparel” at an analysts’ meeting at the firm’s headquarters on 34th Street in New York on Tuesday morning. The goal, executives said, is to increase sales to $6 billion from $4.9 billion in 2009; raise sales per square foot on average to $400 from $333; increase the earnings before interest and taxes profit rate to 8 percent of sales from 2.6 percent; elevate the net income margin to 5 percent of sales from 1.8 percent, and boost inventory turnover to 3 times from 2.2 times last year. Gross margins are projected to increase to between 30 percent and 31 percent of sales from 27.7 percent, while sales, general and administrative expenses are expected to fall to 20 percent to 21 percent of sales from 22.6 percent. The main drivers of these improvements are creating differentiation among the company’s divisions, which include 3,500 stores under the Foot Locker, Lady Foot Locker, Kids Foot Locker, Footaction, Champs Sports and Eastbay names; enhancing the apparel and footwear assortments, and aggressively pursuing growth opportunities both domestically and overseas.  <wwd.com>

Madonna, Iconix Form Fashion Joint Venture MG Icon LLC - Madonna and Iconix Brand Group Inc. are ready to cause a commotion and dress you up at retail. The pop icon and the brand management firm will today reveal the formation of a joint venture called MG Icon LLC, which will bring multiple fashion-related projects to retail racks across America and around the world. The first initiatives under the agreement are a juniors’ line called Material Girl, which will launch exclusively at Macy’s in August. MG Icon is also close to announcing a collaboration with a designer label for a co-branded eyewear collection. “Joining forces with Iconix to bring my fashion ideas to consumers is very exciting for me,” said Madonna. WWD first reported on Feb. 16 that Madonna was in talks to launch the Material Girl collection with Iconix and Macy’s. MG Icon will be 50 percent owned by Iconix and 50 percent by Madonna and Guy Oseary, her longtime manager and the “G” in the joint venture’s name. MG Icon will develop a range of fashion-related business projects, including the creation of new brands, the acquisition of existing labels and the exploration of opportunities within the portfolio of 21 brands that Iconix and its other joint ventures already own, said Neil Cole, chairman and chief executive officer of Iconix. <wwd.com>

Target Gets Set for Liberty - The Target + Liberty of London collection will be in full bloom Sunday in most Target stores. But first, the 300-item line with Liberty’s microflorals and explosive blossom prints splashed over apparel for women, men, girls and infants, as well as home products, bedding, garden tools, stationery, candles and bicycles, will be unveiled at a 5,285-square-foot pop-up shop here. The Target + Liberty of London Experience at 1095 Sixth Avenue near Bryant Park, features an indoor garden with 12,500 live flowers, green foliage covering the cash wrap and digital projections of 12 Liberty prints onto larger than life size products such as a giant tea cup and enormous umbrella, create a sensory experience. The pop-up shop is open today from 11 a.m. to 8 p.m., and Thursday through Saturday, 9 a.m. to 8 p.m.  <wwd.com>

L.L. Bean will launch its new line and web site next week - Outdoor apparel and gear retailer L.L. Bean on Monday will launch L.L. Bean Signature, a contemporary apparel and accessories line along with a dedicated e-commerce site www.llbeansignature.com and catalog. L.L. Bean already has launched a dedicated Facebook fan page for the brand. The page, which offers fans a preview of the line’s spring collection, had 883 fans as of 1 p.m. EST. The retailer began making limited quantities of seven items from the line available on the L.L. Bean Signature web site on Jan. 19. All the items sold out within three days. <internetretailer.com>

Container Imports to Grow 17% in First Half - Import cargo volume at the nation’s major retail container ports is expected to rise 13% this month compared with the same month a year ago, and double-digit increases are expected to continue through the summer as the U.S. economy begins in improve, according to the monthly Global Port Tracker report released today by the National Retail Federation and Hackett Associates. “These numbers show that retailers continue to anticipate improvements in the U.S. economy,” NRF VP for supply chain and customs policy Jonathan Gold said. “This is very different from the past two years when merchants were continually cutting their imports in an effort to manage inventory.” U.S. ports handled 1.08 million Twenty-foot Equivalent Units (TEU) in January, the latest month for which actual numbers are available. That was down just under 1% from December as imports wound down after the holiday season, but up 2% from January 2009. It was also the second month in a row to show a year-over-year improvement after December broke a 28-month streak of year-over-year monthly declines. One TEU is one 20-foot cargo container or its equivalent. <sportsonesource.com