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R3: REQUIRED RETAIL READING

March 15, 2010

The earnings season is now pretty much over and the better than expected results were met with a sizeable move to the upside for the retail sector. So after a major “sell the news” day that came with better than expected same store sales in early February, we’ve seen the opposite reaction just one month later. So what gives?

TODAY’S CALL OUT

The earnings season is now pretty much over and the better than expected results were met with a sizeable move to the upside for the retail sector. So after a major “sell the news” day that came with better than expected same store sales in early February, we’ve seen the opposite reaction just one month later. So what gives? Now good news is actually good news for a change. Perhaps it’s the group’s high short interest or the reality that there is still a quarter or two of easy compares. Earnings appear to be heading higher, at least for the first half of the year. Whatever the reason is, after a brief pause, the earnings revision factor appears to be on the upswing.

However, reality is also setting in and the consensus earnings growth rate for the next twelve months is now just 19% (down from 27% when we last ran the numbers on February 8th. and now being measured off of a much higher base which includes 4Q09). Everyone knows comparisons are tough on many fronts in the back half, but it now appears this reality is finally being incorporated into guidance and expectations. Commensurate with the drop in expected growth is a slight reduction in the group’s forward multiple, which now hovers around a 19x P/E- a full point lower than our last reading. While it may be a subtle change, especially against a strong tape for retail, it’s becoming more clear that sustaining peak growth and peak margins is becoming a more difficult task.

R3: Revisions Revisited - NTM and Consensus Chart short term

R3: Revisions Revisited - 90 Day chart short term

R3: Revisions Revisited - Valuation Table

Eric Levine

Director

LEVINE’S LOW DOWN 

  • Good news. Target’s collaboration with Liberty of London appears to be a huge success, even before the national rollout begins today. The company’s pop-up store in Bryant Park, NYC was so successful it ended up closing almost a full day early after selling out. The buzz online is also widespread, with bloggers and fashionistas declaring this the best designer collaboration the company has done in years. 
  • In an effort to drive customer traffic and meet the demands of consumers seeking value, Ann Taylor has taken dramatic cuts to its initial retail pricing. Across the board, average initial retails are down 15% year over year. Pants and sweaters are two categories that received the biggest pricing adjustments, while suiting and accessories remain unchanged. 
  • Hibbett’s noted that it had 96 real estate deals agreed upon by landlords in 2009, but only 42 stores actually came to fruition. The remaining stores that did not move forward were the result of developers and landlords that were unable to secure loans or get their projects built. Despite the difficulties in getting new stores opened, Hibbett’s remains committed to accelerating store opening growth beyond the 3-4% current run-rate when the environment allows. 

MORNING NEWS 

Hanesbrands Focuses on Innerwear Growth Initiatives - After declines in annual profits and sales, Hanesbrands Inc. wants to leverage its brand muscle in the innerwear sector. The apparel giant has set a goal of growing through international expansion in countries such as China, India, Brazil and Japan, acquiring a midsized company with annual volume of $200 million and tapping several retail partnerships, including a multiyear contract with Wal-Mart Stores Inc. to be the sole supplier of plus-size women’s apparel and select innerwear through the Just My Size brand. The deal is projected to generate sales of $50 million to $75 million this year. Hanesbrands, which spun off from Sara Lee Corp. in September 2006, is seeking to generate annual net sales growth of 2 to 4 percent and yearly earnings per share gains of between 10 and 20 percent over the next several years. In fiscal 2009, the Winston-Salem, N.C.-based company reported profits of $51.3 million, or 54 cents a share, compared with $127 million, or $1.34 a share, in the previous year. Revenue fell 8.4 percent to $3.89 billion. The company in January reported a fourth-quarter loss of $1.1 million. In an industry that’s been transformed by consolidation for almost two decades, Hanesbrands retains a powerful portfolio that includes Hanes, Champion, Playtex, Bali, Wonderbra and L’eggs. The innerwear unit, which consists of intimate apparel, men’s underwear and socks, generated wholesale sales $1.83 billion in 2009.  <wwd.com>

Phillips-Van Heusen Said to Be Close to Hilfiger Deal - Phillips-Van Heusen Corp. may reach an agreement to buy apparel maker Tommy Hilfiger from Apax Partners LLP for about 2.2 billion euros ($3 billion), according to a person briefed on the discussions. A cash-and-stock deal may be announced as soon as today, the person said. The talks were reported yesterday by the New York Times. Apax, the London-based private-equity firm, bought Tommy Hilfiger in 2006 for about $1.6 billion. A purchase would add Tommy Hilfiger, which introduced its first menswear collection in 1985, to Phillips-Van Heusen clothing lines that include Calvin Klein and Izod. Phillips-Van Heusen is seeking brands that can grow globally and boost profitability, Chairman and Chief Executive Officer Emanuel Chirico said last week at a Bank of America Merrill Lynch investor conference. He declined to identify potential targets. “What is key to us is a strong brand that has enormous growth potential in North America and around the world,” Chirico said at the March 11 conference. “Any acquisition we do would be accretive to margins in the first full year.” <bloomberg.com>

VF Corp. to Open Panama Sourcing Office - VF Corp. will establish a supply chain office to manage purchasing in the Latin America region in Panama City, Panama by October, The Business Journal of the Triad Area reported. The news indicates a growing committment to manufacturing and sourcing operations in the Western Hemisphere at a time when many apparel makers are looking for closer-to-home sourcing alternatives to Asia and particularly mainland China. VF's Outdoor Coaltion already sources much of its fleece from Central America. VF Corp. told The Business Journal it will also be relocating an office currently in Plantation, Fla. VF Corp. expects to eliminate up to 20 positions at its Greensboro, NC headquarters as part of the changes with some of those employees being offered the opportunity to relocate to Panama. <sportsonesource.com>

Cartier Launching E-Commerce in U.S. - Cartier is launching e-commerce in the U.S. today, a key initiative in the fine jewelry and watch industry, which until recently has been wary of the virtual marketplace. Emmanuel Perrin, Cartier North America president and chief executive officer, said the demand for online selling is too great to ignore. Branded fine jewelry and watches are fairly new to the buying on the Internet, partly because a lot of the merchandise sold online in the U.S. involves counterfeit, diverted or gray goods offered at lower prices. However, advanced technology — Tag Heuer, for example, has created a special hologram to denote an authorized e-tailer — has enabled more brands to get in on the act. In recent years, De Beers, Bulgari, Harry Winston and Boucheron began selling jewelry and watches on their Web sites. Cartier launched e-commerce in Japan in 2008. Last year, Cartier tested a “call-to-purchase” service on cartier.us, which was a step on the road to an e-commerce presence. Perrin predicted cartier.us will be one of the firm’s top five producing stores in the U.S. by 2012. The Web site offers styles from the firm’s multiple categories including jewelry and timepieces. High jewelry, corrective eyewear and engagement rings are not being sold online. The Web site offers accessories and fragrances with retail prices starting at $80 for a business card holder and ranging to as much as $16,000 for a piece of jewelry or a watch. The broad assortment of Cartier’s iconic Love, Trinity, Santos and Tank collections also will be sold.  <wwd.com>

Nike Brand Awareness Pushing 99% for Athletic Footwear Buyers - Even before the most recent Olympic Winter Games gave it yet more lift in the market place, the Nike brand was recognized by nearly 99% of all respondents to a recent survey conducted by The SportsOneSource Group as a component of its annual Brand Strength Report. Brand awareness was 98.8% among the consolidated respondent pool aged 13 years old and up that had purchased athletic footwear or apparel over the past year.  Somewhat surprisingly, the awareness level for female respondents was slightly higher than the male group, topping out at 99.1% awareness.  Adidas was second in brand awareness at 95.2% and Reebok/RBK brand awareness stood at 93.2%.  Converse (87.6%) and Puma (86.1%) rounded out the top 5. The brand awareness responses in the survey, which was conducted in late 2009, are a key component in the firm’s annual Brand Strength Report and the formulation of the Brand Strength Index.  The Brand Strength Index was formulated in early 2009 by The SportsOneSource Group in an effort to more effectively measure the overall consumer perception of a specific brand.  Each brand measured was tested across four main criteria, with those criteria each individually weighted to reflect their importance in the overall indexing formula.  <sportsonesource.com>

Even without sites customized for foreign markets, global sales are rising - Few U.S. retailers offer web experiences tailored to consumers in foreign countries, but many nonetheless are reaping online sales from abroad. 14.5% of the 75.2% of merchants selling internationally, which includes Canada, report that in 2009 more than 25% of their total web sales came from customers outside the United States, according to Internet Retailer’s new international e-commerce survey of 247 web-only retailers, chain retailers, catalogers and consumer brand manufacturers. 4.8% report 21% to 25% of sales came from outside the borders of the country, 7.0% report 16% to 20%, and 5.9% report 11% to 15%, the survey finds. 9.1% say 8% to 10% of 2009 sales were derived from international shoppers, 12.4% report 5% to 7%, 18.3% say 2% to 4%, and 28.0% report less than 2%. Of the 24.8% not selling internationally, 60.3% are assessing the viability of selling to consumers outside of the United States; and, of those merchants, 70.3% plan to start selling internationally within a year. According to the survey, however, only 18.6% of U.S. merchants offer a currency converter, 15.4% show the fully landed cost of delivering an item to the consumer’s door in local currency, 15.4% offer product content in a local language, 15.0% feature customer service content in a local language, and 14.2% offer telephone support in a local language. <internetretailer.com>

E-retailers make gains in multiple customer service channels, study finds - Online retailers posted gains in just about every area of customer service—from e-mail to self-service to contact center—according to a test by eGain Communications Corp., a provider of customer service software. Analysts conduct the test annually by “mystery shopping” the web self-service and contact center customer service at 175 companies spread across eight industries—financial services, retail, communications, consumer goods manufacturing, insurance, health care and pharmaceuticals—in the U.S. and Canada. Online retail’s overall service score was 2.3, up from 1.8 a year earlier. The average score across all industries was 1.8. eGain considers scores less than 1.0 poor; less than 2.0 below average; less than 3.0 above average; and 3.0 or better exceptional. “Retail sector performance was a bright spot in this year’s ‘mystery shopping’ customer service research,” says Anand Subramaniam, eGain vice president of marketing. “However, channel silos still remain across knowledge, policy and process.” Following are online retail’s customer service scores in each evaluated category, along with the previous year’s score:

  • E-mail: 3.0, up from 2.5
  • Self-service: 2.4, up from 1.9
  • Choice: 2.3, up from 2.0
  • Cross-channel: 1.9, up from 0.9
  • Cross-agent: 1.9, down from 2.0
  • Telephone: 2.7, n/a

 <internetretailer.com>

Americans Say Jobs Top Problem Now, Deficit in Future - Unemployment now stands alone as the top issue in Gallup's latest update on the most important problem facing the country. Thirty-one percent of Americans mention jobs or unemployment, significantly more than say the economy in general (24%), healthcare (20%), or dissatisfaction with government (10%).

R3: Revisions Revisited - G1
This month, unemployment overtook general mentions of the economy, as the percentage naming unemployment held steady at 31% while the mentions of the economy dipped from 31% to 24%. Unemployment, the economy, and healthcare have been the top three cited problems each month since last May.

R3: Revisions Revisited - G2
The economy had ranked No. 1 in Gallup's monthly most important problem measure since February 2008, when it overtook the Iraq war. The war in Iraq had been the top issue (or tied for the top) each month since April 2004. Thus, unemployment's position at the top of the list marks the first time in six years that something other than Iraq or the economy in general has led Americans' list of national concerns. More broadly, the economy's struggles are apparent, as 66% of Americans mention some economic issue as the nation's most important problem. At least half of Americans have done so each month since March 2008. <gallup.com