R3: Really?!? With Hedgeye Retail

R3: Really?!? With Hedgeye Retail

 

Toys R Us is coming public – again. Really!?! Oink oink. Really?!?

 

 

As my team and I went through the news and our research form the past day, in the back of my head I kept hearing a perverse iteration of “Really? With Seth and Amy.” For those who are not SNL fans, this is part of the Weekend Update where Seth Meyers and Amy Poehler tear into current events with a super sarcastic tone. I can try to describe it here… but there are these things called You Tube and Hulu that can show it better.

 

- Goldman Sachs Hired for 800 mm Toys R Us IPO - KKR & Co. LP and Bain Capital Partners LLC hired Goldman Sachs Group Inc. for a $1 billion initial public offering of Toys R Us Inc., the retailer the buyout firms purchased in 2005, according to people with knowledge of the matter. The filing for the U.S. listing may come as soon as today, said the people, who declined to be named because the discussions are private.
Hedgeye Comment: Really?!? Like we really need this piggy to be public again? First Dollar General, now Toys R Us, and yes, Sports Authority next. Really?!? Oink oink…

- Add Big Lots to the list of retailers looking for “A” location real estate. Following the successful trial of eight test locations in ’09, the closeout retailer is looking to add nearly half of its new stores in “A” locations this year. While a closeout concept in higher-income demographic areas may not sound like a natural fit, management raved about the productivity of its stores with sales at $180 to $200 per square foot.
Hedgeye Comment: The sustainability of these results is a concern given that closeout inventory was both the most plentiful and arguably of the highest relative quality over the last 12-months in a very long time and perhaps ever.  You’re looking for prime real estate Big Lots? Really?!? Check out what happened when DSW went this route. How bout Circuit City? Shift to more expensive locations in a business model that in structurally not set-up to cover these rents and let’s see how you stack up.  

 

- Costco noted that the lack of promotional activity in televisions is one of the key drivers behind the category weakness. Management also went on to explain that increasing demand from Chinese consumers for the same products has been a key reason why manufacturers have been less aggressive on price. However, COST does expect pricing to loosen up over the summer as efforts to stimulate demand are likely to reaccelerate.
Hedgeye Comment: Price cuts just in time to buy your gazillion inch flat screen for World Cup. This price/demand trade-off actually makes a whole lot of sense to us.

 

- China: Demand For Luxury Unaffected by Economic Downturn - A survey from consultancy KPMG showed the economic situation had little impact on most respondents’ spending habits. The survey, which interviewed more than 900 people in 15 cities, found that 62% continued their spending on luxury goods in 2009 and 2010. Despite a tougher economic climate, respondents demonstrated their brand loyalty, as they chose to stick with existing brands rather than downgrading to less prestigious options.
Hedgeye Comment: Note that China has the world's second-highest number of dollar billionaires after the United States, and a new class of wealthy Chinese created by the country's three-decade boom has latched onto foreign luxury brands as status symbols.  Don’t underestimate the impact of the Iron Rice Bowl being broken.

- Swiss Wath Exports Growth Slows in April - Swiss watch exports continued to rise in April, albeit at a slower pace than in the first quarter, growing 11.5%. Watch exports in April returned to their 2007 level over the first four months of the year, the sector posted a rise of 16.4% versus 2009. The increase in April was driven by timepieces at both ends of price spectrum. China confirmed its position as the leading growth market, with a rise of 150.2% on the month, while the United States progressed by a modest 1.6% and Germany saw sales slide 15.2%. <wwd.com/business-news>
Hedgeye Comment: Demand for watches, TVs, other luxury goods all solid in China.

- While Tiffany reported solid sales gains across all regions and product price points, it did note that jewelry over $50,000 posted substantial increases. However, management was also quick to point out that the fine jewelry category also had the easiest comparisons with last year’s trough performance.
Hedgeye Comment: It’s easy to take a quote like “items over $50,000 are posting increases’ wildly out of context. It’s clear that ‘easy compares’ are a key driver here.

- Genesco continues to make progress with rent negotiations on its existing store base. Management noted that the company successfully renegotiated 100 leases in the first quarter, resulting in a 9% reduction in rents in those stores.
Hedgeye Comment: GCO is the ugly red-headed stepchild in footwear retail. But these guys have been managing their lease portfolio like champs.

 - When discussing the performance of discretionary vs. non-discretionary merchandise, Costco’s CFO responded with “my favorite article that I read about all of this was called, Frugality Fatigued. People were frugal last year. Some of them are a little tired of being frugal and they're buying things for the home. And whether it is door mats or housewares or coffee machines or live goods, plants, that's stuff that has been strong.”
Hedgeye Comment: Good for Bed, Bath and Beyond.

 - In an effort to expand owned retail, Australian-based Billabong acquired all but the most valuable assets of Becker Surf and Sport – its branded surfboards. The deal included the brand’s 5 brick and mortar stores in SoCal, which will double the company’s presence in CA, as well as the rights to the Becker’s online business. With only 27 stores stateside.
Hedgeye Comment: It’s too early to tell if this is the beginning of more aggressive expansion plans to roll up smaller brands in the U.S., or simply an opportunistic deal among long-time friends.  

MORNING NEWS 

GCO's Hat World to Acquire Sports Avenue - Genesco Inc. announced that its Hat World subsidiary has entered into an agreement to acquire the assets of Sports Avenue and related entities. Sports Avenue operates 46 retail stores across the United States and 13 ecommerce sites, selling officially licensed NFL, NCAA, MLB, NBA, NHL and NASCAR headwear, apparel and accessories, and had revenues of approximately $42 million for its most recent fiscal year.
Hedgeye Comment: Accountability check… When GCO bought Hat World, I thought it was absolutely ridiculous. It turned out to be a high ROI deal. At face value, this one looks equally ridiculous. But they’ve earned the benefit of the doubt.

FINL Cofounder and Chairman to Retire - The Finish Line, Inc. announced that Alan H. Cohen, the company's co-founder and chairman, has informed the board of his decision to retire as chairman and as a member of the board at The Finish Line's 2010 Annual Meeting of Shareholders to be held on July 22, 2010. TGlenn S. Lyon, currently chief executive officer and a member of the board, will succeed Cohen as the company's chairman <sportsonesource.com>
Hedgeye Comment: Non-event

Finish Line Finds Mobile Is A Good Fit - Finish Line says 3% of its e-commerce revenue comes from m-commerce. And 8% of its online customers access its sites though mobile devices. It’s stats like this, Finish Line says, that show a mobile strategy is important. <internetretailer.com>
Hedgeye Comment: Is it me, or is this an uphill battle? One form of distribution growing another form of distribution for content that it does not own or control. Really?!? Can anyone find me someone in their right mind that would invest in this? This is not to say that FINL can’t work. In fact, it likely will, along with the rest of the Athletic space over the next 2 years. But using an e-commerce angle is sad.

ANF Settles Stockholder Lawsuit - Abercrombie & Fitch Co. said in a Securities and Exchange Commission filing Thursday that it had agreed to settle a five-year-old stockholders’ lawsuit for $12 mm. Plaintiff Robert Ross filed the class-action suit in 2005 on behalf of investors who bought the company’s Class A shares between June 2 and Aug. 16 of that year. The suit alleged that, during the period, Abercrombie executives made misleading statements about the strength of its business and caused an inflation of the firm’s stock price. <wwd.com/business-news>
Hedgeye Comment: Really?!? ANF management make misleading statements?

CVS Caremark Says Computer Error Caused Customers to Overpay - The company says an error in data that it gave the Medicare website resulted in SilverScript Medicare prescription-drug customers' being charged higher prices than advertised since the start of the year, the WSJ reports. Generic drugs were not subject to the same problem. A Medicare spokesman says the company will refund the price difference to customers specifically requesting it, and it will also help anyone who, using the correct prices to make their comparisons, wants to switch plans.
Hedgeye Comment: Computer errors and fat fingers don’t just cost us in equity values…