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April 1, 2010

TODAY’S CALL OUT: FL: Confirming What We Know

We spent some time at Foot Locker’s NY headquarters the other day with Ken Hicks, Bob McHugh, and Peter Brown.  Overall,  we walked away feeling confident with our positive stance surrounding the company’s near, intermediate, and longer term prospects.  Net, net we got confirmation of what we already knew, but with a little more detail surrounding what’s going on behind the scenes.  Importantly, we got a sense that there is finally “real” change underway within the organization- a topic Hick’s spoke about with passion and at times even compared to his experience with the transformation of JC Penney. 

With another upgrade this morning, buy ratings now constitute 60% of total FL ratings (a level not seen since April ’06).  Interestingly, the “buy side” sentiment (a.k.a short interest) still  remains elevated relative to historical levels, with 6% of the float currently short.  Looking back to the last time the sell-side was as decidedly positive we see that the short interest was under 2% of the float.  Importantly, we believe and confirmed that Foot Locker is very much in the early stages of its turnaround.  The overall environment is clearly providing a strong tailwind, but it’s important to note that many of the company’s merchandising initiatives have still not hit the stores.  We expect to see more meaningful changes as the year progresses, beginning with back to school.

Key takeaways from the Foot Locker meeting:

  1. Robust near-term momentum is largely the result of 1) success with higher price point, technical product (running, hoops), 2) clean inventories across the channel (limiting need for promotion), and 3) growth in toning (Reebok is the brand of choice for FL) which is really more than just selling the shoes, but rather an opportunity to sell the woman apparel as well.   Management is very focused on maximizing the opportunities resulting from the toning-driven traffic increases that are bringing female shoppers into their stores. 
  2. The organization behind the scenes has been realigned and is better suited to 1) apparel growth (Hicks brought in two apparel heads rather than using “shoe people” as in the past), and 2) buyers/planners/merchants now responsible for their own banner, not the entire chain or multiple banners.  Also, Hicks has abandoned the old top-down management style to foster more risk taking and creativity within the organization.  The old mentality was one of more order taking than anything else.
  3. The “buy” mentality days are over.  The company used to place a substantial amount of orders in advance in order to receive bigger volume discounts (think futures).  When product didn’t sell it backed up, became aged, and ultimately hurt margins.  The new approach allows for more open to buy and more product being held centrally to facilitate better flow by SKU, by store.  Expect to see less BOGO’s and mare targeted promotions. 
  4. From a systems perspective, expect to see greater and seamless integration between the .com platform and the physical stores.  While there is some integration currently, management’s goal is to have all shopping permutations available to its customers.  In other words, buy at home, return in the store or buy online in the store, deliver to the home.  We were told the pieces are in place and they must now be connected to allow for a seamless consumer experience.  Conversion rates should improve as a result of this effort.  Additionally, the company expects to install new labor management software which will take the current and antiquated system off of the POS and put it on a central server.  This will allow for central planning of labor, by store, as well as free up capacity on the POS to allow for faster transaction times.  Training modules will also be served centrally, freeing up costs and streamlining the current process.


  • Dollar General noted that it continues to add national brands to its mix, especially as suppliers look for growth opportunities at retail. Notably, DG will launch L’Oreal cosmetics. The line will add four feet of shelf space to the category. Additionally, DG is adding Rexall products to its health and beauty area. Recall that these new branded initiatives follow a recent announcement which brings Hanes to DG as well.
  • Rite Aid management noted that the company’s loyalty program/card, Wellness Plus, has been well received by customers. In the company’s four test markets (launched in October), over 50% of front-end and 40% of pharmacy sales were transacted with the card. The program is now expected to rollout chainwide this year, backed by the largest marketing spend the company has seen in several years.
  • A meeting with Foot Locker management revealed that sales of Reebok’s Easy Tones remain robust. The product is still in short supply and Foot Locker expects to be in “chase mode” for several weeks longer before adequate supply arrives. Importantly, Foot Locker is excited about a possible resurgence for Reebok which could lead other associated benefits. Most notably, the ability to attract the woman consumer into their stores allows for apparel conversion opportunities- something that has proven to be a difficult sale in the past.


R3 - FL: Confirming What We Know - Calendar


China's Textile Exports to US Increased 25.6% yy in February - China's textile exports to the US reached US$2.825 bn in February 2010, according to US Customs data, an increase of 25.6% compared with February 2009. From the structure of China’s export products to the US, in February 2010, US imports of yarn and fiber from China accounted for 12% all products, chemical fiber textile formed 53% and cotton textiles accounted for 33%. Growth of US imports of yarns and fibers reached 65.27%, indicating that the US textile industry has been recovering and is moving towards a rebalancing process between real economy and virtual economy.  <fashionnetasia.com>

LeBron Signs New Deal with Nike - Cleveland Cavaliers star LeBron James has signed a new shoe and apparel deal with Nike, the company acknowledged on Wednesday. The deal is longer than the 7 year $93 mm contract signed in May 2003. <cnbc.com>

Richemont Bids for Net-a-Porter - Compagnie Financiere Richemont SA made an offer to buy Net-a-Porter.com in a deal valuing the online retailer at $532 mm. Richemont currently owns 33% of Net-a-Porter, and will purchase the remaining stake. Net-a-Porter’s business has grown steadily since Massenet founded the retailer in 2000, and sales were approximately $182 million in the year ending January 31, 2010. <wwd.com/business-news>

Talbots Deal Extension - TLB extended exchange offer for BPW Acquisition Corp (BPW) to 18:00ET on 1-Apr from 29-Mar. As of 18:00 on 31-Mar, approximately 87.9% of BPW warrants issued in initial public offering had been tendered. <streetaccount.com>

Australia: Garment and shoe sales drag retail performance in February - Australia retail sales dipped in February due to weak performance of department stores particularly in terms of clothing and footwear sales, according to the Bureau of Statistics. <fashionnetasia.com>

Korea: New Certification Impact on Local Textile Commodities - Korea's Ministry of Knowledge Economy has implemented a new national unified mark, called KC Mark (stands for “Korea Certification”), a legally compulsory certification appears on products as specified in related laws and ordinances including textile commodities. <fashionnetasia.com>

Levi Strauss Files Suit Against Evisu - Levi Strauss & Co. has cried foul over Japanese brand Evisu’s plans to replicate some of Levi's most famous pairs of jeans. The action came a little more than two weeks after Evisu revealed details of the upcoming “Private Stock” line on March 11. Levi’s alleges the Evisu line will lead to customer confusion, cause a false association between the two companies and cause it to lose sales. It's not the first legal match between the two firms. <wwd.com/business-news>

Wrangler to Open Shop-in-Shops in UK - Denim brand Wrangler has announced the expansion of its shop-in shop programme which will see it offer the concept to independents and department stores across the UK. <drapersonline.com>

Men's Businesses Taping Sports - Men’s wear companies are playing a new game as they increasingly look to complex sports partnerships to drive sales and build brands. In the past six months, major nonathletic apparel brands have unveiled far-reaching, and at times surprising, deals with professional sports teams and their players. Izod doubled down on its extensive integrated partnership with Indy Car racing; JA Apparel Corp. and its Joseph Abboud brand inked a deal with the New York Giants, and both Canali and Emporio Armani tapped major sports stars as the faces of their respective spring campaigns.Sports is a more effective, credible and even more cost effective way to reach male consumers than traditional fashion marketing — even if your brand has nothing to do with athletics. Apparel brands are using sports to tap into a deeper level of passion within the male consumer. <wwd.com/retail-news>

New Balance Signs Red Sox Player Dustin Pedroia - New Balance announced Wednesday a multi-year endorsement contract with for the Boston Red Sox second baseman Dustin Pedroia.  Under the terms of the deal, the Boston-based athletic company will be Pedroia’s official footwear and off-field apparel provider. The former league MVP will be outfitted in the New Balance 1101 baseball spike and will have a special make-up in his signature camouflage colors. <wwd.com/footwear-news>

Fila Returns to Basketball - Fila plans to return to the basketball footwear category. The company is partnering with agency Michael T. White, Inc. (MTW) to launch the new DLS Slam performance shoe by Fila along wiht a grassroots initiative targeted to high school, club and collegiate players. A take-down version of the shoe will be available at Foot Locker in mid-July. <sportsonesource.com>

Yue Yuen Declines in Hong Kong on $707 Million Bank Loan, Share-Sale Plan - Yue Yuen Industrial (Holdings) Ltd. fell the most in two months in Hong Kong on resumption of trading after it entered into agreements for as much as $707 million in funding to repay debt, boost working capital and cut financing costs.  <bloomberg.com/news>

UK Retailers Plan to Reverse National Insurance Rise - Retail chiefs including Marks & Spencer executive chairman Sir Stuart Rose, Next chief executive Simon Wolfson and Harvey Nichols chief executive Joseph Wan have backed the Conservative party’s plans to reverse part of Labour’s National Insurance rise. <drapersonline.com>

Nike.com Runs Away with Fastest ResponseTime - In February, Nike.com generated an average high broadband Internet backbone response time of 0.59 seconds to lead a list of 50 top e-retailers, according to measurements from Gomez, the web performance division of Compuware. <internetretailer.com>

Web Sales at Foot Locker Grew for the Year, but Fell Flat in Q4 - E-commerce revenue for Foot Locker increased 6.8% in 2009, despite growing only 1.0% in the fourth quarter.  <internetretailer.com>