R3: REQUIRED RETAIL READING
June 21, 2010
A revaluation of the Yuan is sending ripples through the retail industry this morning. As a result, we revisit one of our Top 10 Predictable Unpredictable themes from back in January, “The Bombed Out Buck” and its impact on the supply chain.
TODAY’S CALL OUT
After a rally in the dollar through the 1H of 2010, a stronger Yuan serves as a reminder that the US dollar is in a longer-term decline. This trend whereby it ceases its reign as the world’s reserve currency begins to impact the sourcing economics of the apparel and footwear industry. The bottom-line here is that as China’s currency appreciates on both a cyclical and secular basis, it puts pressure on the COGS line for companies who overwhelmingly depend on Chinese labor.
What does this mean? The ante for sourcing intermediaries like Li& Fung goes higher as smaller brands must pay a premium to compete. Smaller brands that choose to go at it on their own need to build the sourcing expertise, which cost P&L dollars and working capital. This trend will also accelerate the consolidation trend in the apparel/footwear industry as marginal players start to fall off the map either by choice or necessity.
In an effort to differentiate the companies that have proactively prepared for this shift, we updated our file highlighting the companies with meaningful exposure to China from a COGS perspective as well as the revenues derived from China. The bigger companies and those that have a Macro process and have been proactively preparing to compete in the New Reality will be the share gainers.
The companies that look best in this regard are Nike, Adidas, Timberland, Coach, Columbia, and Ralph Lauren. On the flip side, Brown Shoe, Payless, K Swiss, Lululemon, and many small footwear and apparel brands are at a meaningful disadvantage.
We don’t think that this analysis gives us much of a feel as to who the near-term longs and shorts might be, but for those that can invest with a duration of a year or more, this is an incredibly relevant issue to consider.
LEVINE’S LOW DOWN
- Bad news for men’s fashion out of Milan’s Spring ’11 fashion shows. Word has it that “jeggings” (jeans crossed with leggings) are being shown for men! While European trends sometimes take their time to make it stateside, we hope this is one trend that dies out before hitting the mall.
- According to online coupon aggregator Retailmenot, Victoria’s Secret, Kohl’s, and JC Penney were the most searched coupons for the month of May. Overall coupon traffic for the month grew 42% y/y.
- With Gulf oil tragedy persisting, it’s no secret that the region’s seafood industry is in danger. In Louisiana, shrimp fishing is down to just 30% of normal production levels. As a result, shrimp pricing is on the rise. Estimates suggest Gulf shrimp prices have already risen by 40% while imports are up about 13%.
World Cup Impact To US Geographies, Demographics - Consumer enthusiasm for the 2010 FIFA World Cup has been a boon for soccer retailers in the past few weeks, but analysts said the overall impact will depend on the outcome of the tournament. Storeowners polled last week said they are seeing a noticeable uptick in sales, particularly at stores in areas with a large Hispanic population. The Hispanic population drives the soccer market in Los Angeles because it’s a major sport embedded into the culture. In Boston, athletic footwear is also seeing a lift from the World Cup as a result of the local culture. <wwd.com/footwear-news>
Hedgeye Retail’s Take: Measuring enthusiasm and the pulse of retailers selling World Cup gear during the event is pretty likely to come out with a positive read. The real question is how long the excitement lasts over the next four years until the next cup.
Republic Sold - Change Capital Partners LLP, the London-based private equity firm, has sold the multi-brand denim and sportswear retailer Republic to TPG Capital, formerly known as Texas Pacific Group, for an estimated 300 million pounds, or $447 million at current exchange. In a joint statement, the companies said that Republic’s management, including co-founder and chief executive Tim Whitworth, would remain in place. Republic operates 105 stores throughout the U.K. and sells brands including G-Star, Diesel and Firetrap.Change purchased a controlling stake in Republic in 2005 and has since doubled the firm's turnover to 200 million pounds, or $298 million, and trebled earnings before interest, taxes, depreciation, and amortization. <wwd.com/business-news>
Hedgeye Retail’s Take: Another premium denim manufacturing changes hands, making this apparel sub-sector one of the most frequently traded. This time around the assets are retail specific and European.
CHRS Appoints New President to Fashion Bug Unit - MaryEllen MacDowell, most recently president of Charming Shoppes Inc.’s Lane Bryant Outlet division, has been appointed president of the company’s Fashion Bug unit. She succeeds Jay Levitt, who has left the firm after two years in the post. Additionally, Laura Johnson, previously president and chief executive officer of Zac Posen/House of Z LLC, has joined Fashion Bug as executive vice president, merchandising and product development, reporting to MacDowell. <wwd.com/retail-news>
Hedgeye Retail’s Take: More management changes for the plus-size retailer which is still struggling to re-energize the topline. On paper anyway, the current team seems to be the first step towards revitalizing the specialty retailer.
Under Armour Partners with IMG Soccer Academy - IMG Academies announced a deal for Under Armour to become the official apparel and shoe provider to the IMG Soccer Academy. <sportsonesource.com>
Hedgeye Retail’s Take: Add this to the already long list of grassroots efforts to get young athletes wearing the UA brand. Also a cost effective way to build longer-term brand equity without breaking the bank via a major endorsement.
1000 Chinese Tanneries to Shut Down in Next 5 Years - Energy saving and emission reduction are the top concerns for China's leather industry as the drafted plan of the government's twelfth five-year plan will be announced next year. According to the secretary general of China Leather Industry Association Su Chaoying, during the twelfth five-year plan around 1,000 tanneries will be forced to shut down in order to achieve a reduction of 10% of COD and ammonia nitrogen compounds emissions. By the end of this year the Ministry of Environment Protection will reveal the list of tanneries which comply with the environmental protection standards, while the preparatory for survey conducted by the tanning self-regulation group is under way. <fashionnetasia.com>
Hedgeye Retail’s Take: Can’t be good for leather prices if capacity is shuttered. Though a longer term process, it’s worth keeping an eye on footwear and accessories margins as China clamps down on environmental hazards.
Japanese May Department Store Sales Less Bad - Japanese department stores' May sales slid 2.1% , representing an improvement on previous months' performance. The stores registered their 27th straight month of declining sales but the drop was smaller than that of previous periods. The association said that warm weather and some holidays boosted sales of spring and summer clothing early in the month. Two stores closed their doors in the month of May, bringing the total number of department stores in the country to 265. <wwd.com/business-news>
Hedgeye Retail’s Take: Wow, there are more Macy’s in the US than there are department stores in the entire country of Japan.
Reef Expanding Products, Redifining the Brand - Reef is returning to its roots and expanding into the closed-toe business. President Jim Gerson, who has been at the VF Corp.-owned brand for a year, said his priority has been to reposition Reef as a more authentic surf player. “We spent a lot of time focusing on the brand DNA,” said Gerson. “We revamped ourselves as the exotic beach and surf brand, and we now run everything through that filter.” That includes bringing back the Reef girl ads, featuring exotic women shot from behind in remote tropical locales, and debuting shop-in-shops and fresh product. The new five-style closed-toe men’s collection, dubbed Coastal Cruisers, has canvas uppers built on the brand’s pebbled texture footbed and will retail from $43 to $55. The outsole of the shoes has a wave texture, emphasizing the brand’s connection to the beach. Gerson said he knows the category will take time to grow, but his hopes are that closed-toe footwear could make up as much as 15 percent to 20 percent of sales within five years. <wwd.com/footwear-news>
Hedgeye Retail’s Take: It was only a matter of time before VF got traction on turning Reef into a lifestyle brand. With sales so dependent on flip-flops, a year-round product offering (i.e closed toe) is the first logical move. Longe-term we wonder how Reef is ultimately positioned vs. Vans.
Tiffany to Launch Leather Collection - Luxury retailer Tiffany not only plans to open 16 new stores within the year, but also will launch a leather goods collection to expand their merchandise offerings. The collection will be developed by designers Richard Lambertson and John Truex and will feature wallets, key holders, business card holders, and luggage tags to sell for US$100 or US$120. Tiffany’s CEO Jim Fernandez anticipates the leather goods collection will boost sales by 6-7%. <fashionnetasia.com>
Hedgeye Retail’s Take: Nothing new here, except the leather-goods launch is finally drawing closer. Recall that TIF purchased Lambertson Truex out of bankruptcy in an effort to grow it’s non-jewerly presence.
Big Weekend for Golf Retailers - With the U.S. Open and Father's Day, Golf retailers scrambled to make the most of the holiday. Golf retailers offered video cameras, free lessons and contests ahead of Father’s Day and the U.S. Open to spur demand as the highest sustained unemployment since 1982 deters shoppers. Golfsmith International Holdings Inc. ran another promotion to give cash back to some shoppers depending on who wins the U.S. Open this weekend. Callaway Golf Co. is giving Kodak PlaySport cameras to customers who buy new drivers. The tournament and Father’s Day usually make June the biggest sales month for golf companies, topping the Christmas season. <bloomberg.com/news>
Hedgeye Retail’s Take: The real question is whether Dad was actually playing golf or shopping for golf?
Nike's Ambush Marketing Paying off at World Cup - With its highly-popular "Write the Future" ad campaign, Nike is said to be gaining greater awareness around the World Cup than the event's official sponsor, Adidas. Two separate surveys show Nike is emerging as the most recognized company of the World Cup. <sportsonesource.com/news>
Hedgeye Retail’s Take: Official sponsorships may be on the demise, as this is not a new trend. Unfortunately for the sporting events themselves, this may ultimately have an impact on funding and overall success. Clearly the better ROI for a brand is to avoid the “official” sponsorship, while thinking creatively to drive awareness.
Nike's Pop-Up Stadium to Open in Selfridges - Next week, Nike will open a pop-up stadium in London's Selfridges, filled with 62 plasma screens and surround sound so that shoppers can watch World Cup matches in the store. The Nike Stadium will be on the lower ground floor in the Selfridges Ultralounge, an arts and exhibition space. Adjacent rooms will host table football and video games and an exhibition of iconic Nike football kits. The pop up coincides with the launch of a Nike concession in the department store, stocking many sportswear pieces unavailable elsewhere in London. <licensemag.com>
Hedgeye Retail’s Take: No wonder Selfridge’s is the department store of the year! Sounds like it could be even more exciting if Team England makes it into the elimination round. Certainly the mood for shopping would not be overshadowed by depression.
Puma City in New York is the Ultimate World Cup Spot - The Puma City installation, which will dominate Manhattan’s South Street Seaport until July 11, is prime World Cup territory. Insider took a walkthrough of the space on opening day of the tournament, when it was thronged with the football faithful. There are human foosball and soccer clinics on the fenced-in pitch, ping-pong tables, a beer garden run in collaboration with Red Bar and, of course, plenty of retail space. The footwear and apparel sold at Puma City crosses from soccer performance to lifestyle, with some Puma City exclusives. During the day, it’s a retail space that shows Puma’s World Cup-themed artwork and photos, but when the sun goes down, it converts into a bar/lounge, with chalkboard walls, bar games, “DJ Hero” and flatscreen TVs. “It’s soccer by day, party by night,” McCrae said with a smile. <wwd.com/footwear-news>
Hedgeye Retail’s Take: More World Cup excitement, but this time in NYC style. Sounds a little more dynamic than Nike’s London effort, but to be fair this is really a glorified bar.
Viral Marketing Top 10 Sites - Viral marketing is nothing new, but Nike raised the bar recently with its World Cup film “Write the Future,” starring a dozen marquee soccer players (plus Roger Federer, Kobe Bryant and, er, Homer Simpson). The day it hit, the ad logged 7.8 million views, a new digital record. Below are most trafficked online video sites, where you can find the Nike flick and other hot clips. 1) You Tube 101.3 mm, 2) Facebook 26.2 mm, 3) Yahoo 24.2 mm, 4) Google 18.9 mm, 5) Hulu 15.5 mm, 6) MSN/Windows Live/Bing 14.4 mm, 7) CNN Digital Network 12.4 mm, 8) Fox Interactive Media 11.5 mm, 9) The CollegeHumor Network 8.2 mm, 10) MLB.com 7.8 mm. <wwd.com/footwear-news>
Hedgeye Retail’s Take: Expect to see more and more viral campaigns now that the reach has far surpassed traditional TV viewership.
Average Value of a Facebook Fan - Many social media marketers are eager to tie a hard number to the value of their efforts. To that end, firms have attempted to analyze the worth of fans and followers on social networking sites like Facebook. Digital consulting firm Syncapse and research company Hotspex have come up with an empirical formula that puts an average value of $136.38 on the Facebook fans of the site’s 20 biggest corporate brands. Most of that value comes from how much the fans will spend on the brand’s products, with additional dollars coming from customer loyalty, recommendations and earned media. <emarketer.com>
Hedgeye Retail’s Take: Interesting, but this still seems like a very loose estimate. Given the limited history with converting a “Facebook Fan” into a full on consumer of a particular brand, we suspect it will take more time to truly understand the monetary value of an individual social networker.