R3: REQUIRED RETAIL READING
April 22, 2010
TODAY’S CALL OUT
HBI’s results after the close last night confirm the pickup in consumer spending that has been building over the past few months. In fact, the pick-up occurred even sooner than expected, during what are seasonally slower months for HBI. Stronger topline and solid gross margin expansion resulted in an upward earnings revision to the year and now has management focused on driving 2011 growth. The call suggested that management believes 2010 is essentially ‘in the bag.’
Growth for the balance of the year will continue to be driven by retail shelf-space gains accounting for 5% of HBI’s 6%-8% full-year top-line guidance, with the remaining 1%-3% of growth expected from further consumer spending improvement, pricing increases, and/or more aggressive restocking. To the extent there’s further upside, the company is going to reinvest it right back into the business- much like it’s done for the past 3-years.
Looking forward, we are mindful of the inflationary commodity cost increases beginning to mount. What’s interesting to note is that management doesn’t expect the need to take pricing to offset increases until 2011. Based on Q1 results, it appears that HBI is likely to have its first year of positive top-line growth since its spin-out from Sara Lee giving management ample opportunity to manage costs if needed.
Below are some of the highlights from the call:
Sales growth: +8.2% (7% cc) -- Revs higher due to shelf-space gains of 6%, increased sell through, retail inventory restocking, and FX contributed the remaining 2%. Every business segment except Hosiery had positive sales growth. All geographies except Japan and Western Europe were positive. Sales growth jumped on the 2 year trend sequentially to -2.6% from Q4 09’s -7.6%.
GM %: 35.3%, up 458 bps yy. Increase due primarily to the benefits of higher sales, lower commodity cost, lower manufacturing cost, and favorable timing of $5 mm or 54 bps. Lower cotton costs contributed $13 mm or 140 bps to GMs.
SG&A: +8.5%, +8 bps of margin growth, Media and other marketing spend increased $13 mm or 140 bps compared to last year. Distribution and selling expenses were also higher due to increased sales. Direct-to-consumer operating profit declined due to planned investment for growth in stores and Internet businesses.
Q&A Call Outs:
Cotton: Cotton costs for the first quarter were $0.52 per pound, a $13 million positive impact. Cotton costs for the full year of 2010 should average $0.69, compared to $0.55 in 2009, up $34 million. Q2: $0.61 -$7mm impact, Q3: $0.72 -$13mm impact, Q4: $0.80 -$27mm impact.
Costs and Pricing: Cotton and Oil going up. As they have said before, if HBI sees systemic inflation they will increase price. With the sustained increases they are currently seeing they would need to increase prices by 2011. Timing will be between back-to-school or holiday, or at the beginning of their retail year, which would be early in 2011 (most likely). Incremental cost of $5 mm to execute price increase. Need about a good 90 days on the retail side to be able to implement a price increase and need to talk to retailers about a month or so in front of that. The supply chain is starting to feel price cost pressures working its way through the supply chain that start to show up in people's fourth quarter.
Weather: direct-to-consumer business had mid-single digit gains for the quarter despite significant weather disruption.
Outerwear: sales grew 11%, driven primarily by Just My Size growth. Outerwear is a segment where price increases happen more regularly and will start happening with pre-booked orders. The outerwear business is where there are early commitments, about two-thirds of that segment is pre-booked with commits. HBI already has some visibility into 3Q and 4Q and that is where some of the guidance upside is coming from.
Consumer: consumers are still value conscious, seeing their willingness to trade up products and channels. This behavior has been consistent across all categories in the US. Additionally, domestic retailers seem increasingly optimistic and are raising both inventory and pre-booked order levels.
Guidance Upside Discussion: HBI had always discussed a 6% increase in the first half from shelf space and in fact saw 6% in the first quarter. What they didn't expect was actually stronger consumer spending and having it actually begin to impact in Q1, so that’s where the upside is fitting in.
Programs: all of the early reads show the programs are working and on track to being able to hit their goals, pleasing both HBI and obviously their retail partners. Those programs, as consumer spending may continue to go up, actually have the chance for exceeding their plans.
M&A: Strategy is to invest in brands to grow topline and use supply chain to improve operating margins. One tactic of cash could be acquisition, but this is not a growth strategy. More focused on executing business strategy than M&A.
Long Term Growth: Believe the company can grow 2-4% consistently (goal of 3-4%) each year through share gains, category growth, inflationary apparel environment, and international strategy.
Geography: Japan and Western Europe went into the recession on a lagged basis and they look like they're coming out a little bit more slowly
Consumer Spending Increase: Management believes there is at least 1% to 3% of sales growth this year from a consumer spending rebound. Has been pretty consistent since Christmas, seeing strength in periods of time that aren't key selling periods. Saw a little bit of strength at back-to-school, but it came for a few weeks and then sort of dissipated. “The fact that we saw the sustained increase in January and February and early March, when people don't normally get out there and shop, is what told us that it was something macro going on.”
LEVINE’S LOW DOWN
- In what is truly a humanitarian move, executives from brands including Nike, Ralph Lauren, Ed Hardy, True Religion, and Diesel have agreed to allow seized counterfeit apparel to be sent to Haiti. The 125,000 tons of merchandise are being shipped to Haiti to help clothe victims of the recent earthquakes. This certainly beats the normal incineration process.
- It’s no secret that Liz Claiborne has been on the hunt for new leadership and creative inspiration for the company’s Juicy Couture brand. The track suits are no longer pulling all the weight and the original founders have since moved on. Enter up and coming designer, Erin Fetherston. Fetherston and Juicy will collaborate on the summer-fall 2011 collection as well as Holiday 2011. She will also be the guest creative director. For those wonder where Juicy may be heading take a look at http://erinfetherston.com/index.html
- Add New York designer/retailer to the growing list of partners aiming to reinvigorate Keds. The retailer will begin selling a Keds slip-on in a special Ikat print beginning next month. Fashion mags are already on top of this one, much like previous buzz surrounding Keds collaboration with Neiman’s, The Gap, and Alice & Olivia.
SportsOneSource 2010 Brand Strength Report - Brands like Converse, Skechers, Puma and Jordan found increased support from consumers that signaled the ultimate in brand commitment when they indicated they would leave a retail store to buy the brand elsewhere if the store they were shopping in did not carry the brand they wanted. Converse and Jordan, both owned by Nike, Inc., leapfrogged over a number of other brands into the top ten brands that consumers found to be “non-negotiable” brands. Overall, Nike (26.5%) led the field, New Balance (12.7%) came in second, and Adidas in third (7.7%). Several prominent outdoors companies made the list including Timberland (2.8%), The North Face (2.7%), and Columbia (2.1%), which finished 11th, 13th, and 14th, respectively. <sportsonesource.com>
WSM Jumped on Acquisition Prospects - Williams-Sonoma Inc.’s shares jumped to a two-year high and trading of bullish options surged to the highest level since July on renewed speculation that the U.S. gourmet-cookware retailer may be acquired. Williams-Sonoma increased 6.1% at 4:15 p.m. in New York Stock Exchange composite trading. <bloomberg.com/news>
Fast Fashion Retailers Hurt by Volcanic Ash - As the volcanic ash made its way to northern Europe over the past week, the massive air transportation gridlock that has brought the region to a halt has also had impact on the apparel industry. The fast fashion sector that relies heavily by air transportation now face some great challenges as well, for instance, fast fashion retailers who move products by air to ensure a regular flow of new designs into their stores or product samples that need to be move several times between overseas factories and buying offices in Europe, have all been fall behind the schedule, backlogs will further delay the logistics. Supply chains has also been affected as manufacturers depend on air freight are missing buyers’ deadlines. There are reports that Europe-bound garments are starting to pile up at factories and airports stretching from Bangladesh to China. <fashionnetasia.com>
Swiss Watch Exports Jump - Swiss watch exports confirmed a strong rebound in the first quarter with a rise of 32.8% in March compared with the same month last year to $1.14 bn. “The recovery is therefore clearly confirmed, with the first quarter showing an upturn of 16.6% and a return to levels recorded in 2007,” the federation stated. Sales of timepieces priced above $468 grew by more than 40% in value terms, signaling a return of consumer confidence following a sharp drop in luxury watch sales in 2009. The top three markets showed a marked pickup, with sales in the U.S. up 56% versus March 2009, while Hong Kong sales jumped 67.7% and China saw a rise of 89.8%. <wwd.com/business-news>
Simon Property Group Adds Investors for GGP - Simon Property Group Inc. said late Wednesday that it had added $1.1 billion in commitments from four investors — ING Clarion Real Estate Securities, Oak Hill Advisors, RREEF and Taconic Capital Advisors — as part of its effort to effect a recapitalization of General Growth Properties Inc. The funds are in addition to the $2.5 billion previously pledged by SPG and $1 billion from Paulson & Co. and follow GGP’s rejection in February of Simon’s offer to purchase bankrupt GGP for $10 billion. <wwd.com/business-news>
S&P Ratings to Review Barneys - Standard & Poor’s Ratings Services put Barneys New York Inc.’s corporate credit rating on review with positive implications Wednesday in another sign of the improving prospects for luxury apparel. Barneys is rated “CCC,” meaning its obligations are vulnerable to nonpayment. A review, typically completed within 90 days, could bump it up to a “CCC-plus” or possibly into the more desirable, although still speculative, “B” family. <wwd.com/business-news>
Benetton Looks to Grow Again in the US - After paring its U.S. retail fleet years ago, Benetton has kept a low profile. But last week, the Italian fashion firm stepped out with a party in the Meatpacking District’s Boom Boom Room to spotlight the winners of the global online casting session for the fall ad campaign, “It’s My Time,” and hinted Benetton may get some second wind Stateside. According to another Benetton source, the company is definitely looking at new initiatives in the market. It could be renovations or expanding stores, or something else. It’s about finding the right formula. In the Eighties, Benetton peaked in the U.S. at 600 stores. The count is down to about 100 units, either company-owned or franchised. <wwd.com/retail-news>
Miss Sixty to Close 10 US Stores - Miss Sixty is closing 10 of its remaining 20 stores in the U.S. The Chieti, Italy-based company suffered a series of financial setbacks during the height of the recession, entering administration, a British bankruptcy process, in the U.K. Miss Sixty in 2008 lost $28.6 mm, compared with a profit of $13.1 mm, in 2007. Last year, Miss Sixty closed two full-priced stores in Honolulu and Dallas. At the time, Miss Sixty SpA founder, chairman and creative director Wichy Hassan said the company’s U.S. stores were simply not working, in part due to mismanagement. <wwd.com/retail-news>
Lane Bryant Says TV Networks Censored Saucy Spot - Lane Bryant is up in arms that two networks—Fox and ABC—have resisted airing a sexy lingerie ad from the company in time periods where the networks have broadcast other racy fare. In a post on LB's Inside Curve blog, the company complains that "ABC and Fox have made the decision to define beauty for you by denying our new, groundbreaking Cacique commercial from airing freely on their networks." The ad, which was initially available on YouTube and at lanebryant.com/sexy, has since been removed. It was created by Omnicom Group agency Zimmerman. The post also claims that ABC "restricted our airtime" and refused to air the spot during Dancing With the Stars, while Fox "demanded excessive re-edits and rebuffed it three times before relenting to air it during the final 10 minutes of American Idol, but only after we threatened to pull the ad buy." <brandweek.com>
U.K. Wal-Mart Subsidiary Asda is Planning for More Online Sales - Asda, a U.K. grocer and retailer owned by Wal-Mart, has completed rolling out a national service enabling shoppers to receive goods ordered online at the local store or at their home. <internetretailer.com>
Down to Earth Footwear - This spring, Waltham, Mass.-based Earth Footwear is celebrating the 40th anniversary of Earth Day with a spring ’10 launch of its biodegradable sole, which will be rolled out across the line. Joining athletic company Brooks and sneaker brand Simple, Earth will use an additive that helps outsoles biodegrade 10 times faster than a normal shoe. The additive is the newest environmentally oriented action from the brand, which already uses water-based adhesives, recycled PET linings and insole boards made of recycled milk cartons. <wwd.com/footwear-news>
VFC Sponsoring 2011 US Figure Skating Championships - VF Corp. will be a local "presenting sponsor" for the 2011 U.S. Figure Skating Championships that will take place in Greensboro, NC, in January. VF is based in Greensboro. Sponsorship activities will focus on the company's Lucy and Kipling brands. <sportsonesource.com>