R3: The Wall

R3: REQUIRED RETAIL READING

March 11, 2010

 

With the earnings season nearly complete (approximately 90% of retailers have now reported), we thought we’d take a look at how the industry performance stacks up from a historical perspective. Importantly, what does this unprecedented run of inventory reduction, gross margin expansion, and earnings acceleration suggest for the back half of 2010 and the first half of 2011?

 

 

TODAY’S CALL OUT

 

With the earnings season nearly complete (approximately 90% of retailers have now reported), we thought we’d take a look at how the industry performance stacks up from a historical perspective. Importantly, what does this unprecedented run of inventory reduction, gross margin expansion, and earnings acceleration suggest for the back half of 2010 and the first half of 2011? The charts below speak a thousand words. The bottom line is the hurdles are high, as we are now less than two quarters away from unprecedented, peak level comparisons. We are coming off of a four quarters in a row in which the number of retailers missing earnings expectations is at historical lows.

 

With management teams now unanimously expressing caution over cost inflation in the back half, there is a small but growing list of factors that are likely to keep margins from moving higher. If you consider the risk embedded in missing sales due to low inventory levels vs. increasing inventories to drive incremental sales, there is yet another reason to be slightly more cautious on the likelihood of margins moving beyond peak. Of course, if sales remain robust (as we have noted in recent weeks) then difficult profit comparisons will not be as big a factor- at least for now. With that said, it’s hard to ignore the “wall” ahead that represents the lapping of the best period in modern retail profitability.

 

R3: The Wall - Retail Beat Miss History Chart

 

R3: The Wall - IndSIGMA 3 10

 

R3: The Wall - Long Term Background SIGMA

 

R3: The Wall - Historical Industry SIGMA

 

 

LEVINE’S LOW DOWN 

  • In an effort to drive traffic and ultimately revenues, American Eagle Outfitters is flowing new goods every four weeks in women’s versus six weeks last year at this time. Men’s will also see an acceleration in “newness” as management looks to improve its business. Success in women’s knit tops remains a key focus as well. Management believes in improvement in this category is key to driving gross margins higher. 
  • The Children’s Place continues to pursue growth, despite already having 950 stores in all types of real estate. Management believes there is an opportunity to open stores in smaller markets, primarily in “value” or strip centers. The company currently only operates 65 such locations and expect to focus growth in this area in the future. For 2010, the company’s square footage growth is expected to be about 5%. 
  • Footlocker noted its enthusiasm for growth in mobile commerce at its recent analyst meeting. While the mobile platform is immaterial at this point it is interesting to note the year over year growth in the channel. In 2009, Foot Locker recorded 4 million product views on its mobile site up from only 60,000 in 2008. Management remains focused on building fully functional, mobile commerce as part of its multi-channel selling proposition. 

 

MORNING NEWS

 

PUMA Acquires Cobra Golf - Puma signed an agreement to acquire 100% of the golf equipment brand Cobra Golf from Acushnet Company, the golf business of Fortune Brands, Inc. The acquisition includes the Cobra brand as well as related inventory, intellectual property and endorsement contracts and is subject to customary closing conditions and regulatory approvals. "Through the acquisition of Cobra Golf, we reinforce PUMA's commitment to our sports performance business by strengthening our growing and successful Golf category," said Jochen Zeitz, Chairman and Chief Executive of PUMA. "Cobra Golf has a history of innovative performance products fused with an edge and is therefore a perfect fit for PUMA, reinforcing our overall mission of becoming the most desirable Sportlifestyle company. With Cobra Golf, PUMA will capitalize on the many opportunities in the Golf category and upside potential ahead of us." In a separate statement, Acushnet announced plans to continue to provide services for an agreed upon period of time beyond the closing of the sale to facilitate a seamless transition.  Services such as production, distribution, field sales and customer service will ensure that Acushnet Company's Cobra trade accounts and golfers continue to receive industry-leading service during this transition period.   <sportsonesource.com>

 

Men's Wearhouse Sets 100-Plus Tux Store Closures - The Men’s Wearhouse will close more than 100 tuxedo rental stores as customers have proven that they prefer to shop in a Men’s Wearhouse store. In a conference call Wednesday following its report of a fourth-quarter loss, George Zimmer, founder and chief executive officer of the Houston-based men’s wear retailer, said: “What we’ve been experiencing since the acquisition [of After Hours] over three years ago is that customers would rather shop in a regular Men’s Wearhouse store than a Men’s Wearhouse and Tux store when given the choice.”  So when the stores are located within close proximity — about a mile or less — the tuxedo rental store will close. “There are hundreds of these stores that are very close to each other and there are about 145 stores that we have right now that we think should probably close when their leases expire or before,” Zimmer said. About 35 such stores have already been shuttered, he noted, stressing that the closures are “going to strengthen our business as opposed to weaken it because we have such a high rate of recapture. Most of those customers are just going to the nearest Men’s Wearhouse store.” And when they get there, he said, it “will provide us the opportunity to sell additional product to those rental customers.” <wwd.com>

 

Wal-Mart Restores 300 Items After Store Visits Fall - Wal-Mart Stores Inc., the world’s largest retailer, returned about 300 items to its U.S. stores after their removal last year hurt shopper traffic. Wal-Mart restored some flavors and package sizes of food products and other consumable goods, even though they didn’t sell well when they were previously on the shelves, Bill Simon, chief operating officer of U.S. stores, said today. The items accounted for a small percentage of the merchandise varieties the retailer removed last year, he said. Narrowing the selections of products such as brown rice disappointed customers who could no longer find the size they were accustomed to buying, Simon told analysts at a conference sponsored by Bank of America in New York. As a result, some customers didn’t shop as often, he said. “What we did discontinue were things that didn’t sell well and were only bought infrequently but cost us a trip,” Simon said. “We disappointed them by taking them out, and we put them back in.” U.S. store remodelings also hurt traffic, he said. <bloomberg.com>

 

Rosenthal to Succeed Newsome as Hibbett's CEO - Hibbett Sports' long-time Chairman and CEO Mickey Newsome will give up the CEO's job and be replaced by the chain's Chief Operating Officer Jeffry O. Rosenthal. Newsome will become executive chairman. Both moves are effective March 15, 2010. Newsome stated, "I am pleased to announce Jeff Rosenthal has been named Chief Executive Officer of the company. I have worked closely with Jeff over the last 12 years; first in his role as vice president of merchandising and marketing, and most recently as president and COO. His extraordinary leadership and 29 years experience in the sporting goods industry have been key contributors to the success and growth of Hibbett Sports. As Executive Chairman, I look forward to working with Jeff as we continue to add value for both our shareholders and our associates." <sportsonesource.com>

 

Gilt's Growth Model - Gilt works because it’s creating a new model, one that is only possible online, believes Gilt chief executive officer Susan Lyne. That’s a useful lesson for any company, not only those in private sales, she said. The company in the past has projected it will do sales of $500 million in 2010. Meanwhile, it has more than 2 million members, has sold 700 brands to date and employs more than 350 people. The company puts up new stores each day, which could not happen in the brick-and-mortar world. Because quantities are limited, stock sells out fast. “That urgency and sense of competition has been a big factor in our success,” said Lyne. “It’s part shopping, but also part gaming, part entertainment.” While not all retailers can get into online private sales, they can all benefit from newness and think about appointment and event shopping, she said. In a typical week, Gilt processes 46,000 orders and speaks directly to 9,000 customers. Forty-eight percent of sales occur within the first hour of any sale. The fastest time any sale sold out was one hour and 12 minutes. About 100,000 people visit Gilt from noon to 1 p.m. each weekday. The store started with women’s ready-to-wear and quickly branched into men’s, children’s, home and travel, and it recently added art. Gilt Noir targets the top 10 percent of Gilt customers with ultraexclusive merchandise. Gilt might go into more mass-oriented sales, but not under the Gilt name, she said. <wwd.com>

 

EBay Ramps Up Fashion Offering - Fashion is moving into a brighter spotlight at eBay. During her forum presentation, Sandra Lin, general manager of eBay Inc.’s clothing, shoes and accessories category, outlined how the online marketplace that connects buyers and sellers is looking to offer its client base more exclusive fashions in the future. She also disclosed how the online giant identifies the different types of shoppers among the 20 million active buyers who regularly connect with some 6 million sellers on the site. Those interactions, she said, offer the company useful insights into consumer trends — from the categories being searched to the type of products and brands consumers are responding to. “We are really looking forward to leveraging the assets that we have in order to capture what we think are additional opportunities in this space and grow those opportunities,” Lin said. “To get there, we always start with the customer, trying to understand who the customer is, who the online buyer is and how is it that we can really tap into their needs.” Lin pointed to the week prior, when eBay registered 80,000 searches for Coach, 58,000 for Ralph Lauren, 18,000 for Tory Burch and 19,000 for Puma. The company can also analyze the types of items that are in demand, typically ranging from handbags to shoes and vintage clothes, but, depending on the climate, can see a rise in rain boots, for instance.  <wwd.com>

 

Dealing with Cross Channeling - How can e-commerce help traditional brick-and-mortar stores, and vice versa? A panel — moderated by Julian Chu, general manager, online retailing for Puma North America, and consisting of Ken Weil, Camuto Group’s senior vice president, e-commerce, and Ronit Weinberg, Diane von Furstenberg’s vice president, e-commerce and online marketing — tackled the idea of cross-channeling, and how online and offline retail can complement each other and enhance the brand experience. For traditional wholesale companies, moving into direct retail through their Web sites can be an adjustment. Camuto Group manufactures shoes for labels like Tory Burch, Lucky Brand and BCBG, holds the master license for Jessica Simpson and owns the Vince Camuto brand, named for its founder. In addition to wholesaling several lines, the company retails the Jessica Simpson and Vince Camuto brands online. Weinberg cited cross-channeling and cross-technology as key challenges today, which includes “working with our off-line stores and having them embrace the technology out there to grow their customer base,” she said.  <wwd.com>

 

IT Holding Plans More Layoffs - IT Holding SpA has reached an agreement with unions to cut about 450 jobs as part of the restructuring of the group. “It was a painful but necessary decision, and a significant step to clearly define the structure of the group in view of a sale,” said Andrea Ciccoli, one of the three state-appointed administrators. IT Holding, parent company of the Gianfranco Ferré, Malo and Exté brands and of manufacturing arm Ittierre SpA, has been in government-backed bankruptcy protection since February 2009. In October, IT Holding was granted temporary and partial state-funded support for about 220 employees. “We have moved from a temporary measure to a structural redesign of the group,” said Ciccoli. In addition to those 220 workers, who have already exited the company, another 230 will leave in the next four to eight weeks. IT Holding is eligible for the state-financed support because it employs more than 15 people and because its bankruptcy is backed by the government. Some employees could be rehired if conditions improve, but that is not often the case.  <wwd.co>

 

Tracking the Spenders - The economy has stabilized, but we are not in expansion mode. What was down is up and what was up is down now versus in late 2008 when the economy halted after Lehman Brothers collapsed. That’s good news for women’s apparel and luxury. This is the view from MasterCard’s SpendingPulse, a controlled panel of retail activity in the U.S. that is available as a reporting service. The reports are based on credit card transactions and other data. In late 2008, people stopped buying anything that cost more than $500, said Michael McNamara, vice president of MasterCard SpendingPulse. Furniture alone contracted about 20 percent. At the end of the first quarter last year, the economy stabilized. Now sales are generally positive, and the areas that are doing best are those that were previously hard-hit. A few relevant statistics: 

• Apparel sales were up 0.6 percent in January. 

• Luxury goods — defined as the top 10 percent of average ticket size in a category — were up 8.1 percent in January. 

• Department stores were down 2.7 percent. 

• Jewelry was up 3.5 percent. 

• Electronics was up 9 percent. 

• Furniture was up 1.5 percent. 

Meanwhile, previously strong categories such as gasoline, tires, auto repair and fast food are down.  <wwd.com


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