R3: REQUIRED RETAIL READING
April 14, 2010
TODAY’S CALL OUT
Most equity analysts skip the Levi Strauss conference call in favor of letting their fixed income peers do the dirty work. And while there’s no equity to trade here for one of the world’s largest apparel companies, there’s actually some interesting commentary. There were two big takeaway’s from the company’s FQ1 results. First, it is clear that a recovery is underway for the global denim maker. This was evident with the company reporting positive sales trends across all three of its major geographic regions- the first time we’ve seen this in five quarters. Secondly, Levi’s is extremely focused and dedicated to investing in its two major brands- core Levi’s and Dockers. This year and likely next will be major investment years for marketing and in-store brand presentation. This will directly impact SG&A and is a 100% offensive move to grow market share and resurrect Dockers. Our immediate reaction here is to turn to VF Corp and its denim business. Could this be the beginning of some sort of mass-market denim war? Probably not, but we’re watching closely to see how VF Corp plans to defend its share in the wake of a meaningful and sustained step-up in marketing activity from the company’s primary competitor.
- For the first time in five quarters, all major regions of Levi’s business trended in positive territory. Strength was driven by a continued improvement in the core business, coupled with incremental sales from recently acquired outlet stores. Areas of weakness included Docker’s in the U.S (now stable but still down) and the company’s Signature brand at Wal-Mart. Asia continues to benefit from expansion initiatives in China and India. Management also noted that is saw domestic strength in its more fashion-forward jr’s categories.
- The company is pursuing a meaningful step up in advertising and in-store marketing for both its core Levi’s brand and Dockers. While the effort is a global one, particular emphasis is centered in the domestic market. This effort includes the rebranding of Docker’s with the “Wear the Pants” campaign as well as a meaningful step up in in-store display and fixturing efforts.
- Competitively, Levi’s is extremely focused on market share for its core brand and as such believes 2010 and perhaps 2011 will be heavy investment years to support brand building/reinforcement. It was clear that this incremental spend should be expected to have an overall negative impact to the bottom line in the near-term, with future results coming in the form of international growth (primarily China & India) and market share growth in existing markets.
- Sourcing and transportation costs are on the rise, but the company is not seeing anything beyond what they would have expected with an overall global economic rebound. Cotton costs were singled out as being on the rise, but were not specifically addressed as a major risk factor.
- Efforts to revitalize and re-position Dockers are off to a good start, but management was cautious on the length of time it would take to see meaningful results. In the America’s the brand was still down for the quarter, but appears to be stabilizing. The biggest marketing push (so far) for Docker’s will come with Father’s Day. The efforts will include a meaningful step up in in-store presentation.
- The company continues to manage its business with shorter lead times and with lower absolute inventory levels. Management believes its wholesale partners are very comfortable with operating on lower inventory levels on average and believes higher turns are more the norm going forward.
- Management noted that the Japanese market remains sluggish, especially in the department store channel. Interestingly, the company also noted that the “fast fashion” trend continues to impact their business and the overall market. This trend towards high volume, low priced denim was described as causing the market to recalibrate. UNIQLO’s $29 denim is clearly having an impact here.
Eric Levine
Director
LEVINE’S LOW DOWN
- In a large effort to support sustainability and eco-friendliness, Puma announced it will be the first major athletic shoe maker to eliminate the use of traditional shoeboxes. Instead, the company is planning to ship its shoes in reusable bags, supported by an internal cardboard frame. The company estimates that the efforts will save 8,500 tons of paper, though the actual cost of the change may result in immediate savings. Other benefits of the change include water and energy savings as well as reduced transportation costs (due to lighter and more efficient packaging).
- Levi Strauss indicated that sales of its Signature Brand (primarily sold through the discount channel) were down largely as a result of Wal-Mart’s efforts to de-emphasize non-apparel categories and to focus on lower priced brands in the men’s segment. Given that the Signature product retails for $18-$20 and represents the “best” product category for WMT, this is further confirmation that the world’s largest retailer continues to struggle with its apparel offering. Additionally, by way of eliminating higher priced, branded goods we expect that self inflicted deflation is still very much a large part of Wal-Mart’s topline challenges.
- Contrary to conventional wisdom, online retailer Zappos.com recently indicated that the higher the return rate, the better the customer. Management claims that even with a 50% return rate for those customers that purchase the company’s highest priced products, the gross margin of the item offsets incremental (and more frequent) shipping costs. And, as result, these are the company’s best customers. While the company is known for its liberal return policy and great customer service, Zappos’ chief marketing officer went on to say, “Customer service is the new marketing”. Oddly, most retailers still don’t understand this concept.
HEDGEYE CALENDAR
MORNING NEWS
Textile and Apparel Imports Rise, Prices Remain Suppressed - Textile and apparel imports to the U.S. posted double-digit increases in February for most major suppliers, showing signs the industry could be on the road to recovery, the Commerce Department’s Office of Textiles & Apparel said Tuesday. Shipments of textiles and apparel to the U.S. rose 19.3% to 3.9 bn square meter equivalents in February compared with a year earlier. Apparel imports to the U.S. were up 15.6% to 1.8 bn SME and textile imports increased 22.6% to 2.1 bn SME. Combined shipments of textiles and apparel from China spiked 36.7% to 1.7 bn SME. <wwd.com/business-news>
Malls Still Struggle in the West - The pain of the recession is lingering at U.S. shopping centers, and the sting is worst in the once-booming Western states of California, Arizona and Nevada. Retail vacancy rates keep rising partly because unemployment remains high at 9.7%, and also because stores are having financing difficulties. The foreclosures that ravaged residential real estate in 2008 and 2009 are likely to take a toll this year on the commercial real estate market, including retail. Hardest hit may be newer properties and mid- to lower-tier malls that don’t command marquee tenants. Mall owners lowered rents about 3.6% last year. Retail vacancies in the first quarter of this year rose to their highest level in at least 10 years, despite lower rents intended to lure tenants. Vacancies at the biggest malls increased to 8.9% in the first quarter from 8.8% in the previous three months. Vacancies at smaller neighborhood and community centers rose to 10.8%, the highest percentage since 1991. <wwd.com/business-news>
Fashion Brands Connect with a Clear Marketing Message - A fashion brand’s value is now defined by a clear point of view and a consistent marketing message among consumers trying to decide what to buy, according to a new study. The 10th annual Brand Keys Fashion Brand Index poll found labels with strong images, such as Ralph Lauren, Armani, Nike, Brooks Brothers and Levi’s, were “more important” or “much more important” to 28% of those surveyed, a 14% increase compared with last year. The survey in February of 3,750 men and 3,750 women, ages 21 to 65, from across the U.S. posted the highest increase in a decade and gives a real clear picture of what is resonating with consumers. Five years ago, fewer than 3% of U.S. apparel shoppers rated fashion brands and logos more important when deciding what to buy. Ralph Lauren is the “gold standard” of this new consumer attitude because of its long-standing and unwavering association with classic Americana. <wwd.com/business-news>
JD Sports Beats Expectations - Sportswear and fashion retailer JD Sports Fashion predicted a fillip to sales from the soccer World Cup as it beat forecasts with a 26% jump in full year profit and hiked its final dividend 65%. After beating estimates, JD Sports is now looking forward to the lift from the World Cup (begins June 11) that should impact all of its 530 stores. JD Sports is hopeful that a successful World Cup for England (getting to semi-finals) would spark a movement towards sports and leisurewear. Revenue increased 14.8%, benefited from store closures by struggling rival JJB Sports, which came close to administration in 2009. JD Sports was also boosted by the popularity of exclusive product from external brands such as Nike and Adidas and owned brands, such as McKenzie and Carbrini. Same store sales growth has slowed from 2009 at 2.5% to 2% for the 10 weeks to April 10.
"In our field we are the trend setters rather than the trend followers," said Cowgill. <uk.reuters.com>
WMT Says Foreign Investment Will Help Tame India's Rising Inflation - Wal-Mart Stores Inc. said India’s inflation would slow by at least two percentage points should the government agree to allow an increase in foreign investment in retail. <bloomberg.com/news>
Best Buy and Wal-Mart Gained Most of Circuit City’s Market Share - Since consumer electronics retailer Circuit City closed its doors and sold its assets to Systemax, Best Buy and Wal-Mart have taken about two-thirds of their former rival’s market share, according to a new NPD Group report. <internetretailer.com>
Nike Sues Businessman - Nike Inc. is is suing a businessman who licenses the names and images of famous dead people and the family of Hall of Fame coach Vince Lombardi. <sportsonesource.com>
LaCrosse Footwear Expands Workboot - LaCrosse Footwear Inc. is expanding its presence in the workboot market with launches under its LaCrosse and Danner labels. The company is introducing the Extreme Tough series of boots, made for maximum protection and durability. Available for immediate delivery, the series retails for $90 to $125. Danner’s new Corvallis series of core work product with an athletic influence includes an abrasion-resistant toe and heel, speed lacing for a more secure fit, waterproof Gore-Tex lining and Danner’s proprietary Terra Force X platform for enhanced side support. Priced at $146 to $160, the line hits stores in July. <wwd.com/footwear-news>
Birkenstock Launches Steel-Toe Chef Shoes - Alpro by Birkenstock is giving chefs a new kitchen tool with the addition of a steel-toe version of its popular polyurethane clog. The slip-on also comes equipped with an oil-and slip-resistant outsole and can even be dishwasher cleaned in up to 149 degrees. For added comfort on the job, there’s an anatomically designed cork and latex footbed that can be washed in temperatures up to 86 degrees. Set to hit stores in July, the clog retails for $95.
