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April 9, 2010


It’s obvious that a confluence of half-dozen factors came together to drive yesterday’s solid results. But consider the underlying change in behavior around mortgage defaults. A recent study raises some good points that we think could explain away $67bn in annual PCE.

If there’s one head-scratcher that came from yesterday’s strong sales numbers, it is the extent to which the consumer is actually improving, and what underlying factors are really driving higher retail sales.  Was the 9% comp (highest in 11 years) due to a) higher tax refunds, b) holiday shift, c) weather, d) penned up demand as consumers had not bought Spring apparel in 23 months, e) a wealth effect from higher equity prices, or simply f) a rebound in the economy. My sense is that we can spend all week trying to quantify precisely how much of these factors are contributing to sales strength (which we are doing, by the way). But there’s another theory that Allison Kaptur on Josh Steiner’s Financials team brought to my attention this morning that is tough to ignore.

It is from an article written by Paul Jackson of HousingWire.com. The crux of the argument is that consumers who are either in default – or on the brink -- are simply spending their mortgage payments on something other than their home. He states the following…

  • “We’ve got 7.4 million non-current loans in this country, according to data source Lender Processing Services, Inc.”
  • “The average age of a loan in foreclosure is now 410 days delinquent, after all, according to LPS; and that’s just the average. Many delinquent borrowers are able to stay in their homes for even longer than that.”
  • Data is clear that “Americans are now more likely to stop paying their mortgage first relative to other debts, meaning that they will continue to pay their credit cards, auto leases and other financial commitments.”

While this is purely anecdotal, Jackson highlights a HAMPlicant case study whereby the applicant had an $1,880 monthly payment on their mortgage they’d defaulted on, yet their bank statements for the past 30 days included the following expenses:

  • visits to the tanning salon
  • visits to the nail spa
  • some kind of gourmet produce market
  • various liquor stores
  • A DirecTV bill that involved some serious premium programming or pay-per-view events
  • Over $1,700 in retail purchases, including: Best Buy, Baby Gap, Brookstone, Old Navy, Bed, Bath & Beyond, Home Depot, Macy’s, Pac Sun, Urban Outfitters, Sears, Staples, and Footlocker

If just half of the current 7.4 million currently delinquent mortgages are ‘spending their mortgage’ and we assume a $1,500 average monthly mortgage payment – we get about $67bn in higher annualized discretionary spend – or about 1.4% growth.

-Brian McGough


  • Pier One is one of the most successful large retail chains at negotiating rent rate reductions. Over the past two years, the company has successfully reduced rents on 350 stores (over 1/3 of the chain) resulting in an average reduction in rates of 23%. Management still believes there is opportunity for additional stores to be adjusted. Over 2009, the savings resulted in a $6 million improvement in SG&A and $10 million in cash savings.
  • A study released by Kline and Company suggests that sales nail polish are coming off a banner year, despite the historical view that lipstick sales benefit when the economy suffers. The “lipstick theory” was based on the idea that women will spend on lipstick as a way to improve their appearance given the low price point of the product. With overall cosmetic sales down 0.8% for 2009, nail polish bucked the trend with a 14.3% increase. The new “nail polish theory” suggests that women have curtailed spending on manicures in favor of doing their own. Oddly, lipstick sales were down 5.3% last year, suggesting there was some sort of trade-off between the two categories.
  • Cult favorite Brazilian flip-flop maker has entered the market for traditional footwear. Havianas recently launched a small collection of sneakers and espadrilles at Harrods in London. It’s still too early to know when the moderately priced ($55/pair) footwear will make its way stateside.


R3: Keep the Beemer, Risk the House - Calendar 


Consumers to Aid U.S. Economic Rebound as Unemployment Drops, Survey Shows - Consumers are emerging from a two- year hibernation to play a more active role in the U.S. recovery as unemployment recedes, according to economists surveyed by Bloomberg News. <bloomberg.com/news>

Consumers Praise Private Label Brands - Respondents to a 23-country survey largely agreed that store brands are at least as good as national brands in many respects. Released yesterday by Ipsos Marketing the Consumer Goods poll (conducted last November through this January) found 89% of respondents saying store brands are "the same as or better than" national brands when it comes to "providing a good value for the money." But it's not just that they're seen as a bargain. Large majorities of respondent also said store brands are at least the equal of national brands in "offering products that meet my needs" (87%), "offering products that are good for the family" (86%), "offering food products that taste good" (81%) and "offering home products that work well" (81%). <brandweek.com>

UK Fashion Industry Calls for Clarity on Party Policies as Election Approaches - Fashion industry leaders have called for the three main political parties to clarify their plans to stabilise the economy and consumer confidence and give transparent information on issues such as National Insurance (NI), VAT and business rates ahead of the general election on May 6. <drapersonline.com>

India: Government Cancels Yarn Export Duty Concessions - Indian government has withdrawn the 7.61% concession of cotton yarn exports under the Duty Entitlement Pass Book (DEPB) scheme to control prices of textile products.  Knitwear exporters have been protesting against the unusual hike in cotton yarn prices, which have increased by nearly 30% in the last few months, while garment exporters have been badly hit by the slowdown in global markets. <fashionnetasia.com>

R3: Keep the Beemer, Risk the House - cotton

EU: Euro-Zone Retail Dipped in February - Retail sales in the 16 countries of the Euro-Zone fell once again in February, indicating that consumer spending will remain weak due to a slow economic recovery, according to the European Union's statistics agency Eurostat. The retail sales figure dropped by 0.6% from the previous month unexpectedly. That was the second straight drop this year and undermines hopes that the eurozone economy is poised for a solid return to growth in the first quarter of 2010 after stagnating in the last three months of 2009. <fashionnetasia.com>

China Signs Free Trade with Costa Rica - China has signed a free trade agreement (FTA) with Costa Rica, paving the way to lift almost all tariffs on Chinese textiles, chemicals and machinery to the Central American nation. When the agreement takes effect, 90% of commodities will be tariff free within a few years. China is Costa Rica's second biggest commercial partner after the United States, while Costa Rica is the Asian nation's ninth largest trade partner in Latin America. <fashionnetasia.com>

Seven & I, Fast Retailing Rise After Forecasting Higher Earnings on Demand - Seven & I Holdings Co. and Fast Retailing Co., Japan’s biggest retailers by market value, advanced in Tokyo trading after forecasting higher earnings amid signs consumer spending is recovering.  <bloomberg.com/news>

J. Crew to introduce Warehouse Collaboration - J. Crew will have something to offer the most diehard of denim aficionados next month. The retailer has collaborated with Japanese selvedge denim label Warehouse on an exclusive men’s style that will sell for $300 on its Web site, and at its Men’s Shop and Liquor Store locations here. The style’s name, Lot 484 jean by Warehouse for J. Crew, is a nod to the address of the Men’s Shop at 484 Broadway. <wwd.com/markets-news>

The iPad Impact - With its sleek design and game-changing visual capabilities, Apple’s newly released iPad could be just what the fashion industry always wanted. “The screen real estate is perfect for what we do,” said Jag Bath, VP of product management for Gilt Groupe, which launched an iPad app last week, in the days leading up to the device’s debut on April 3. Other companies seem to be enjoying the benefits as well. Both eBay and Gap launched apps earlier this month, as did several fashion magazines, including Interview and GQ. <wwd.com/footwear-news>

R3: Keep the Beemer, Risk the House - ipad

Timberland Is a Little Greener - The Timberland Company announced that it has achieved a significant reduction of greenhouse gas emissions. The company successfully reduced its emissions by 36% in 2009 over its 2006 baseline coming from Timberland owned and operated facilities and employee air travel. Timberland is on pace to reach its goal of a 50% emissions reduction by the end of 2010. <sportsonesource.com>

Cotton Inc. Unveils New Ads - Cotton Incorporated is looking to link consumers’ associations to cotton with high fashion in the next evolution of its “The Fabric of My Life” campaign. The original Fabric of Our Lives campaign from the Nineties was successful in getting consumers to recognize how cotton was a crucial and desirable fiber in everything from socks to jeans to towels. For the last several years, the message has shifted to presenting cotton as a fiber equally suited to designer apparel. <wwd.com/markets-news>