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R3: REQUIRED RETAIL READING

May 27, 2010

TODAY’S CALL OUT

With mixed datapoints out of retail earnings this week as it relates to demand headed into the end of May, we want to put this into context as it relates to the athletic space. The bottom line is that after 2-years of fairly extreme volatility in the athletic space relative to retail – which we best capture by measuring the rate of change in  the weekly ICSC index vs. other data series such as NPD and SportscanINFO – the Athletic space is performing right in line with the rest of the world.

One thing worth noting is that we have just ended nearly a month-long period of tough compares as last year’s spread contracting by 16 points in 3 weeks. We’re now into a period where compares are increasingly easy through through Thanksgiving.

Note that this is the same time period over which we think the product cycle will start to kick up more meaningfully (as we’ve been very vocal about), and we get a little bump due to a little event called World Cup.

The bottom line is that the data started to support our thesis earlier this spring when the sector’s top line accelerated meaningfully. Now we’re in a holding pattern. That does not concern me one bit. If it concerns the market, then it’s a great opportunity to scoop up more UA, FL and NKE – our core three calls.

R3:  Athletic Top-Line Put Into Context - 1

 

R3:  Athletic Top-Line Put Into Context - 2

 

R3:  Athletic Top-Line Put Into Context - 3

 

R3:  Athletic Top-Line Put Into Context - 4

 

R3:  Athletic Top-Line Put Into Context - 5

 

R3:  Athletic Top-Line Put Into Context - 6

 

R3:  Athletic Top-Line Put Into Context - 7

 

R3:  Athletic Top-Line Put Into Context - 8

LEVINE’S LOW DOWN 

-American Eagle noted that the company overbought in the knit tops category, despite the positive customer response to the company’s value pricing strategy. Overall, management simply bought too many units. As a result, the company expects to make less unit buys in 3Q, with an emphasis on higher AUR’s. Interestingly, AEO still remains one of the few specialty retailers that is not chasing inventory, but rather placing more aggressive “bets” that don’t seem to be fully accepted by its customer.

 

- 99 Cents Only management noted that the company continues to experiment with creative pricing schemes as a means to address potential inflation down the road. While the company is not seeing any signs at the current time, inflation creates challenges for the company which historically has remained true to its $0.99 pricing on everything. Test pricing includes efforts to price items on a per unit or per lb basis as well as to sell a gallon of milk at a market driven price (above $0.99).

 

- Fred’s management noted that while the competitive environment was relatively stable in 1Q, promotional cadence has picked up in 2Q. Fred’s CEO went on to say. “ we anticipate the competition becoming much more aggressive relative to price and promotion as we're seeing today and moving forward and throughout Q2 and potentially beyond.” The comments were primarily focused on Wal-Mart’s rollback efforts, which have intensified over the past couple of weeks.

 

- After indications of a trend shift to athletic footwear from casual at Foot Locker and vice versa at DSW, Brown Shoe confirmed they are indeed seeing the former with athletic outperforming other categories in both women’s and men’s businesses. It’s also worth noting that comps up 15.5% at Famous Footwear represented the greatest quarterly gain in more than a decade.

MORNING NEWS 

WMT's Asda Group buys Netto's UK Discount Supermarkets - Wal-Mart Stores Inc.’s Asda Group Ltd. agreed to buy Netto’s 193 U.K. discount supermarkets for 778 million pounds ($1.13 billion) as it fights to retain its No. 2 position in Britain’s food retailing market. <bloomberg.com/news>

Chinese Consumer Remains Loyal to Luxury Brands - Chinese consumer loyalty to luxury brands remains high despite the economic downturn, according to a report released Wednesday by KPMG. Of the consumers surveyed, 72% said they felt little or no impact from the recession, while 62% said they would continue to maintain their luxury goods spending this year. The 927 luxury consumers surveyed were between the ages of 20 and 44. <wwd.com/business-news>

GSI Commerce Extends and Expands Timberland Ecommerce - GSI Commerce Inc. has extended and expanded a multiyear agreement to provide The Timberland Company with e-commerce technology, order processing and customer care services for their U.S. and European Web stores. <sportsonesource.com>

JJB Sports Will Be Unprofitable For A While - JJB Sports Plc said full-year losses narrowed and recovery won’t be “quick or easy.” JJB had trouble getting merchandise shipped last year as it struggled to avoid falling into bankruptcy. Last September, it said performance wouldn’t improve until late 2010 or early 2011 because inventory levels wouldn’t improve soon enough. One encouraging sign was the 7.5% increase in comps for the 16 weeks ended May 23.  <bloomberg.com/news>

J. Crew Bridal Takes Inspiration from a French Salon - Furnished with brass-rimmed vitrines for vintage jewelry, velvet drapes in the window and a graciously spaced showroom downstairs with a crystal chandelier and private suites so family and friends can comfortably witness the fittings, the 4,000-square-foot J. Crew bridal shop opens today on the corner of Madison Avenue and 66th Street. The boutique also retains J. Crew’s signature quirkiness, with an assortment that ranges from a more traditional silk taffeta gown with a floral sash to an offbeat pairing of a delicate Mongolian wool vest with a tricotine skirt with a train. <wwd.com/retail-news>

Hamptons and the Luxury Market - The Hamptons are mellowing out amid the global recession. After last year’s downturn, retail vacancies filled up fast, particularly in East Hampton, where there’s been an infusion of designers and brands — from Hugo Boss to Juicy Couture as well as Chico’s bringing a lower-priced offering to a high-end field. Ater a decade of evolving toward a year-round, spend-with-abandon destination, retailers say there’s contraction. Merchants must grab as much business as they can in July and August, when the real migration eastward occurs. This contrasts with past years, when good traffic could be counted on for a longer stretch, beginning a few weeks before Memorial Day and lasting until a few weeks past Labor Day. <wwd.com/retail-news>

Jimmy Choo Is Going Sporty - The London-based luxury brand, known for its sky-high stilettos, is launching a capsule collection of sneakers for fall ’10. The two-style offering — which comes in white, black, purple and beige — includes one low-top and one high-top style. Embellished with gold details, including a star-shaped eyelet, the sneakers feature patent leather, suede and exotic snakeskin uppers. The styles are set to retail between $495 and $565 at Jimmy Choo boutiques and Jimmychoo.com.  <wwd.com/footwear-news>