• It's Here!

    Etf Pro

    Get the big financial market moves right, bullish or bearish with Hedgeye’s ETF Pro.

  • It's Here


    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.


June 16, 2010

A couple of interesting observations out of Yue Yuen, the largest global footwear manufacturer, from Q2 results…


Here are a couple of interesting observations out of Yue Yuen, the largest global footwear manufacturer, from Q2 results. While the company reports interim 2010 results on a 6-month basis, our models, which quaterize results, highlight some rather telling trends with broader implications for the industry:

- In addition to continued strength at Retail, Q2 marked a substantial pickup in footwear sales across all categories at wholesale as illustrated in the charts below. The outperformance of Soles, Components, & Others is of particular interest as a indicator of future production suggesting positive demand forecasts across the industry.


- Geographically, Asia continues to stand out as a pillar of strength supporting our belief that Chinese footwear companies (Li Ning included) are increasingly focused on local demand.  This is best evidenced by the continued growth in Yue Yuen’s growth in retail sales as a percentage of total business, which grew to 22% of sales up from 18% last year.


- As demand builds domestically for Asian manufacturers there are potentially negative implications for pricing as capacity becomes tighter – a factor that has benefitted US-based manufacturers over the last 12-18 months.   Recall that excess factory capacity coupled with increased Chinese VAT rebates created a meaningful tailwind for sourcing costs over the past year.

- Longer term, growth in domestic (Chinese) retail by Asian-based manufacturers and brands is likely to add competitive pressure to the incumbent global brands such as Adidas and Nike.   It’s too early to worry but it’s important to note this market is not simply a “free for all”.

 R3: Footsteps in Asia - 1


R3: Footsteps in Asia - 2


R3: Footsteps in Asia - 3


R3: Footsteps in Asia - 4 


- Best Buy noted that employee retention is at an all time high, with turnover coming in under 40% for the first time. In management’s view, turnover has improved as result of employees’ being behind the company’s strategic direction. However, what BBY failed to mention is that employee turnover across all retailers is down, and in most cases at historical lows. Clearly people are staying in their jobs longer given the current state of employment across the country.


- On the heels of Calloway’s disappointing earnings announcement, Dick’s Sporting Goods CEO noted that the company has not seen any slowdown in its golf business and that they remain pleased with what’s going on in the golf area. Recall that Golf Galaxy posted a 12% same store sales increase in its latest quarter. Clearly the benefits of staying power and consolidation are beginning to accrue to one of the few well capitalized survivors.


- In the latest American Apparel soap opera, the company recently responded to allegations about questionable hiring practices for store employees. For those familiar with Abercrombie’s past troubles with only hiring “good looking” employees, this is essentially the same story all over. However, this time American Apparel responded by not only denying its potentially questionable hiring standards, but by posting CEO Dov Charney’s phone number and email for those who want to discuss the company’s hiring practices. Shouldn’t he be more focused on same store sales?


Metropark USA Withdraws IPO Plans - Specialty retailer Metropark USA Inc. has withdrawn its shelf registration for an initial public offering. The original filing was on June 13, 2008. In a Securities and Exchange Commission filing on Friday, the City of Industry, Calif.-based retailer cited “changed circumstances regarding the securities markets” as the reason for the withdrawal. Since opening its first four stores in California in 2004, the 69-unit, mall-based chain has targeted men and women ages 20 to 30. <wwd.com/business-news>

Hedgeye Retail’s Take: Another one bites the dust… as it should.

BBY to Enter Used Video Game Market - Best Buy Co., the world’s largest consumer-electronics retailer, plans to let customers trade in their used video games at more than 1,000 U.S. stores to grab sales from competitors. Shoppers will be able to exchange the games for Best Buy gift cards that can be spent on any merchandise. The program will start late in the summer.  <bloomberg.com/news>

Hedgeye Retail’s Take: This is not the first time retailers other than GME have entered the used game market.  The key here is the consumers’ opportunity to used used games as currency towards anything Best Buy sells.  With that said, GME still has a competitive advantage with core gamers as well as its systems which help to manage the unique inventory dynamics of buying and selling used product.

LIZ taps Media Firm for Juicy Couture and Kate Spade - Independent PGR Media in Boston has been tapped by Liz Claiborne brands Juicy Couture and Kate Spade New York. The brands spend about $20 mm combined annually in measured media, with Juicy backed by close to $15 mm, per Nielsen. The assignment covers media strategy, planning and buying, and fits into the shop's fashion-friendly roster that already includes Tommy Hilfiger, Bulgari, Espirit and Chico's. Kate Spade media was previously handled in-house and Juicy's media was with Laird + Partners in New York. <brandweek.com>

Hedgeye Retail’s Take:   Changes in media/pr/advertising usually mean there is a story to tell.  This also seems like it may be a cost saving measure with the consolidation of the two brands now sharing one resource. 

JCG Claims Madewell is Worth Spending On - With the official launch of its e-commerce site last week, the four-year-old Madewell brand has “arrived” and is ready for a new growth phase. CEO Mickey Drexler stated, "We feel we’ve progressed enough to commit capital and a growth plan to the business. We’ve been through four intense, creative years of putting together something we are very passionate about. The collection is ready and the way we want it to be.” Madewell.com actually quietly made its debut May 27, without any marketing, and since then, Drexler said he’s been watching it “every minute of every day, like a new baby. <wwd.com/business-news>

Hedgeye Retail’s Take:  It was only a matter of time before Madewell became a bigger deal.  This gives J Crew another growth vehicle for sure and adds confidence that the core brand will not overbuild.  Certainly seems like a good time to take advantage of some real estate opportunities while they’re still out there as well. 

Quiksilver Announces Debt-for-Equity Exchange with Rhône - Quiksilver, Inc. has entered into an agreement with Rhône to exchange $75 mm of the outstanding principal amount of Quiksilver's senior secured term loans for an aggregate of approximately 16.7 mm shares of its common stock at an exchange price of $4.50 per share. <sportsonesource.com>

Hedgeye Retail’s Take:  Another step in the balance sheet clean-up process which gradually continues to change the risk profile of the company.  Recall that the prior clean-up maneuver was to dramatically curtail inventories while at the same time sales picked up.   

Take Aways From Department Store Discussions - The take-home points, emerging through presentations and panel discussions with senior officials from some of the world’s most iconic retailers and brands including Macy’s, Selfridges, Marks & Spencer, Printemps, The Bay and Coach, were: 1) Embrace change, particularly social media, the Internet and mobile technology. “The [personal computer] is dead. It will all be on your wristwatch,” predicted Stuart Rose, executive chairman of Marks and Spencer Group plc. 2) Think small and local with marketing — tailor service and amenities to customers depending on their level of spend. “Developing local marketing plans has been transformational,” Sadove said of the Saks strategy to shift a percent of marketing dollars from national to local campaigns and install local marketing directors. 3) Work hard to “wow” the customer, go younger with the appeal and add sustainability and value-over-price to the formula. “How do we surprise her? How do we surprise her enough so she has a smile on her face and says, ‘That’s great. I really love it,’” said Lauder. 4) Speed to market of new products and trends is critical. “The biggest threat to department stores is fast fashion,” observed Myron E. “Mike” Ullman 3rd, chairman and ceo of J.C. Penney Co. Inc. Forever 21, H&M, Zara, Uniqlo and Mango are taking “a big bite” out of department stores. While Penney’s has significantly cut its product cycle time, it’s also launching Mango shops inside its stores, joining the fast-fashion bandwagon. “Retail has been a bit slow in understanding the customer,” Ullman said. 5) Think young. “The biggest challenge is attracting new, young consumers into the department store channel,” said Lew Frankfort, chairman and ceo of Coach Inc. He advised replicating the “intimacy” of the specialty store experience within the department setting by subdividing it. “Use micro marketing or laser marketing in unorthodox ways to get these young people,” he said. 6) Think local. “This whole localization has got such legs and potential,” said Macy’s chairman, president and ceo Terry Lundgren of the My Macy’s localization organization. Asli Karadeniz, ceo of Boyner in Turkey, stressed the success of her company’s marketing efforts with local cell phone carriers to target young people.  <wwd.com/business-news>

Hedgeye Retail’s Take:  Lots of focus on the younger demographic here from the one of the oldest, most outdated forms of retail.  Unfortunately the young consumer is the most informed and easily influenced consumer, which means department stores will have to embrace “real” change and not token efforts.  Creating a Macy’s Facebook page does not add instant credibility to young consumer base. 

New Brand in Men's Wellness - New York-based Deer Stags is taking a step into the men’s wellness category. Marketed under the Walkmaster label, the collection of men’s styles carries the tag line, “What Walkmaster does for your body, goes straight to your face.” The company suggests the collection’s benefits, from improving posture to putting a spring in one’s step, will bring a smile to the wearer, communicated through caricature. The shoes will retail for $60. Delivery is slated for October through independents, chains and department stores. <wwd.com/footwear-news>

Hedgeye Retail’s Take:  More toning, but this time with a male focus.  Less competition here in men’s (at least for now) but also less of a market.   

Aetrex Offers Toning Through Comfort, Pedorthic, and Running Channels - Expanding its reach into the toning sector, Aetrex Worldwide Inc. is introducing its take on wellness with BodyWorks. The series of men’s and women’s styles feature a rocker outsole designed to transfer pressure from the rear and forefoot to the mid-foot, thereby reducing pressure in those areas that absorb the most pounding. The shoes retail for $135 for women’s and $155 for men’s. Set for an early spring ’11 launch, the sneakers will deliver in November. Distribution is targeted to service-oriented comfort, pedorthic and running stores. <wwd.com/footwear-news>

Hedgeye Retail’s Take:  Hopefully the launch doesn’t come before it’s too late. 

NRF Reports Merchandise Loss Declines - The National Retail Federation on Tuesday released a survey of 75 retailers who collectively reported that merchandise losses, or shrinkage, in 2009 declined to 1.44% of $2.33 trillion in retail sales last year, down from 1.51% in 2008. Retailers lost $33.5 bn to shrinkage last year, down from $36.5 bn in 2008. The majority of the shrinkage was due to employee theft, which accounted for 43%, shoplifting 35%, admin error 14.5%, and vendor fraud 3.8%. <wwd.com/business-news>

Hedgeye Retail’s Take:  On one hand employee turnover is down which helps while on the other the economy is tough which hurts.  Net, net a focus on shrink when times are tough yields some improvement.

Online Advertising Spending Growth Estimates - eMarketer estimates that US online advertising spending will reach $25.1 bn in 2010, representing 10.8% growth over last year. Relatively healthy economic gains, along with the ongoing shift of marketing dollars from traditional to digital media, have contributed to the double-digit increase. Steady gains in online ad spending will mean an additional $11 bn flowing into the space over the next four years, increasing the Internet’s share of total media ad spending from a bit more than 15% in 2010 to over 20% in 2014. In addition, both offline and online ad spending models are being restructured by the shift toward more non-advertising marketing. In the online space, marketers are focusing more on social media and building up their Websites or brand microsites. <emarketer.com>

Hedgeye Retail’s Take:  With TV essentially moving online we wouldn’t be surprised to see adoption of online advertising move even faster.  The ability to marry interactivity and customized offers on an individualized basis is clearly a selling point vs. the old wholesale, push model.

R3: Footsteps in Asia - 5


R3: Footsteps in Asia - 6