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June 15, 2010

TV sales appear to be the culprit, directly and indirectly, in today’s BBY shortfall.  Expect the environment to heat up as inventories look bloated against lackluster sales trends. 


Embedded in today’s disappointing BBY results are a few key messages.  First, the shortfall came primarily in two areas, sales and expenses.  Domestic comps were weaker than expected, due in large part to weakness in the TV, entertainment, and media categories.  As it relates to TV’s, the negative low single digit performance was a measurable slow down from 4Q’s high single digit increases.  So why the weakness?  Management attributes the slowdown to lack of compelling promotions (thanks to Costco for pointing this out two months ago) in the category, both from a price and innovation perspective.  Of course, the benefit here is higher ASP’s than anticipated.  This quarter marked the lowest year over year decline in average selling prices for TV’s in over two years!  Good news?  Not really.  It’s clear that the consumer is highly motivated by price and without promotional activity, traffic suffers. 

As it pertains to expenses, management suggested the company’s SG&A was a bit over-budget in the first quarter at time when sales were described as being volatile.  This really leads to a question of execution and control.  Expenses and inventory are the two main areas that management should optimize in the wake of an unclear topline trend.  Unfortunately, both areas were not managed in synch with the choppiness in sales.  The balance between near term investments in SG&A (focused on store resets highlighting connectivity, development of a used video game business, and growth in mobile as well as international markets) and potential benefits to gross margins in the future is out of alignment.  With that said, we realize (and were reminded several times on the call) that the first quarter is  a) a small quarter and b) normally not a predictor of holiday upside/downside. 

Regardless of the importance of 1Q historically, it’s still worth noting that overall inventories increased 15% while sales were up 7%.  On a comp basis, US inventories increased 10% against a 1.9% increase in comp store sales. Either way we slice it, we believe a better time to buy TV’s is on the horizon.  Something has to give and it’s either a step-up in promotional activity led by BBY or a pick-up in vendor driven promotions in an effort to stimulate unit demand.   Either way, we’re likely to see the competitive environment change as efforts to boost sales and help mitigate inventory risk take place before the holiday season arrive in five short months. 

Eric Levine


BBY: The TV Tell All - BBY SIGMA


-A few weeks back we noted that Sears is looking to monetize its real estate by subleasing floor space within it’s existing (and operating) stores. It seems that Forever 21 may actually be a potential tenant, with word coming from Costa Mesa that the specialty retailer is in discussion to take a 40,000 square foot space inside a Sears store. While this is a unique arrangement for sure, being a landlord may actually be a better business than selling Craftsman tools. We do wonder however, how much control a mall-owner and its other tenants may have over what types of retailers are permitted to sublet Sears’ space.


-This year’s Best Department Store in the World award goes to U.K retailer, Selfridges. Yes, this is a real award given by the Intercontinental Group of Department Stores.


-Keep an eye on the rumor that Coach and JC Penney may be in talks to collaborate on an accessories line. Nothing is official but Coach’s CEO noted this could be a possibility. He further went on to note that the Coach brand would not be included in any such effort with JCP.



World Cup Drives More Demand for Indonesian Footwear Manufacturers - Indonesian shoe manufacturers has recently acquired additional orders worth US $360 mm from six international and important footwear brands, partly due to the forthcoming World cup held in South Africa this month, according to Aprisindo Indonesian Footwear Association for Indonesian shoe manufacturers. US-based, Nike Inc and New Balance; France-based, Lacoste, Japan’s Mizuno and Adidas Group and Puma from Germany are the six international key footwear brands, which have placed their future orders with Indonesian shoe manufacturers, owing to quality assurance. With the World Cup being held in South Africa later this month, the demand for shoes has further increased and close to 70% of the sports shoes required for the championship will be delivered by Indonesia. The new duties imposed on footwear produced in Vietnam and China has also helped the Indonesian shoe industry. <fashionnetasia.com>

Hedgeye Retail’s Take:    We’re wondering who buys shoes to sit in front of a TV to watch the World Cup.  Now, jerseys on the other hand are a no brainer.  More importantly, we see here an example of how nimble the brands can be in shifting production throughout Asia to take advantage of favorable pricing dynamics. 

India Might Overtake US in Cotton Exports this Season - The Department said India is making ongoing improvements in ginning practices and export logistics, which are enhancing its long term competitiveness. China's growth as an importer is favoring in particular Indian exporters and the dramatic shift reflects both tight American supplies and the development of India's cotton sector, it said. Demand for cotton is being driven by China, the biggest textiles producer, whose consumption will rise by 1.5m bales to 49.0m bales. <fashionnetasia.com>

Hedgeye Retail’s Take:  Hard to believe the U.S has one last stake in the ground in the apparel manufacturing process.  Quality has long been an issue with foreign cotton supply, but it appears that this is finally changing.  Overtime, this probably leads to some pricing opportunity as well as a more stable global crop given the weather dependence of the this key textile ingredient. 

Chinese Labor Hikes - A spate of suicides at the world’s largest factory has drawn international criticism of the Chinese manufacturing model, raising new questions about whether low-cost production is worth the potential consequences. The suicides have prompted the Taiwanese-owned company and others to increases salaries. But labor-rights groups say much more work is needed and low wages are only one part of the problem with China’s manufacturing industry. They argue that vast structural changes are required and that the world can no longer expect this country’s workers to work themselves to death to make consumer goods. All this has raised new questions about whether China has reached a critical juncture, moving away from being the world’s low-cost production center. Such a move is in line with the government’s ambitious but far-off goal of becoming an economy based on innovation by 2020.  <wwd.com/business-news>

Hedgeye Retail’s Take:  One word: inflation. 

Sam's Club Focused on Apparel Offerings - If there is a bright spot for apparel at Wal-Mart Stores Inc., it may be at Sam’s Club. “We’re seeing good trends in apparel, and we’re bringing in new brands that are appropriate on a seasonal level,” Brian Cornell, CEO of Sam’s Club, said after the WMT annual meeting on June 4. In contrast, vice chairman Eduardo Castro-Wright characterized Wal-Mart’s apparel business as “disappointing” and “a work in progress.” Without the constraints of Wal-Mart’s “low-price leadership” strategy, Sam’s Club can sell department and specialty store brands but still at significant savings. The approach of Sam’s Club to apparel “is generated by aspirational brands and a treasure hunt vibe,” said Linda Hefner, executive vice president of merchandising. The warehouse club still sells organic cotton apparel. In addition, Sam’s Club features Nicole Miller New York, manufactured by Delta Galil, as a club channel offering for Sam’s; along with Levi’s boot-cut jeans, Calvin Klein shorts, Speedo swimsuits, Anne Klein Sport, DKNY, Reebok, Everlast, Champion, Cole Haan, Chaus and Lizwear. <wwd.com/retail-news>

Hedgeye Retail’s Take:  Maybe the discount stores should adopt the club’s merchandising strategy.  Limited SKU’s + national brands=simplicity. 

Hat World to Expand HQ - Hat World Inc. a multichannel retailer and manufacturer of hats and sports apparel, announced it will expand its Indianapolis headquarters and distribution operations. The company, which acquired two other sports apparel retailers in May, says the facility will allow it to consolidate its manufacturing and warehouse operations that are now located in  Wisconsin. Hat World, No. 381 in the Internet Retailer Top 500 Guide, says it plans to invest up to $22 mm to lease and equip the additional space. The retailer says it plans to begin hiring manufacturing and warehouse positions later this summer as it phases in up to 571 new jobs at its headquarters by 2015. <internetretailer.com>

Hedgeye Retail’s Take:  It seemed like this business had run out of room to grow about three years ago!  Clearly there’s value and opportunity in operating the largest (and only) chain of headwear-specific stores. 

Former ARO Supplier Indicted on Fraud Charges - Douglas Dey, the owner of a former supplier of Aéropostale Inc., was arraigned on Monday in Brooklyn federal court in connection with a multimillion-dollar kickback scheme that also has ensnared Christopher Finazzo, the chain’s former chief merchandising officer. According to the U.S. Attorney’s Office in Brooklyn, the 28-count indictment — unsealed on Friday — charged the two with mail and wire fraud, money laundering conspiracy and conspiracy to violate the Travel Act. Finazzo was also charged with “causing Aéropostale to make a false statement in a report that was filed with the Securities and Exchange Commission.”  <wwd.com/business-news>

Hedgeye Retail’s Take:  Given ARO’s post-Finazzo success, it’s fair to say this probably has little relevance beyond the headlines. 

Frederick's of Hollywood Looks to Expand Product Offerings Through Licenses - Frederick’s of Hollywood Group Inc. is looking to move the brand beyond intimate apparel. After licensing Blue by Yoo to produce and market a line of Frederick’s swimwear on an international basis, the firm is looking to expand into other product categories. In addition to swimwear, the company has identified domestic and international licensing opportunities that will allow them to expand beyond intimate apparel and into a lifestyle brand, which includes product categories such as fragrance, jewelry, accessories, footwear, headwear, handbags and costumes. The company is also exploring partnerships with international distributors in countries including South Korea, Brazil, Japan, China and Canada. Frederick’s of Hollywood recently began a strategic marketing initiative with the Hard Rock Hotel & Casino in Las Vegas and launched a social media and online marketing campaign.  <wwd.com/business-news>

Hedgeye Retail’s Take:   Sounds like this strategy will need a bit of luck.  Frederick’s definitely has a brand image associated with lingerie and we wonder how easily it can be translated into other categories.