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June 23, 2010

Lot’s of stuff in here today folks. A) Toys-R-Us banking on Wall Street not having memory that recognizes how it failed in the 1990s, and how Yuan revaluation will hurt w 90% of toys made in China. B) Bangladesh labor unrest shutting 700 factories. C) WSM, AMZN, SHLD, M, etc…


As part of the pre-IPO process, Toys R Us indicated it is significantly increasing its remodel and side-by-side store relocation efforts. As a result, capex is expected to double this year to $400 million. At the same time inventory is on the rise as the company builds a pipeline for holiday pop-ups as well as takes advantage of excess inventory purchases at favorable prices. Management reiterated that one of the company’s competitive strengths its ability to store inventory rather than cross-dock it.

Ok, so let me get this straight…

Toys-R-Us is asking for capital so we can bet on their ability to invest capital in remodels and inventory? Sound vaguely familiar to 13 years ago?  We’re talking toys, not diamonds! Aside from a Monopoly board and diapers, this stuff depreciates rather quickly.  Oh and by the way, the only category in retail that has greater exposure to China from a sourcing standpoint is Toys (over 90%).  So with an appreciating Yuan v. $, either a) the brand eats the cost increase, or b) the retailer eats it, or c) the consumer pays more. Mark my words, consumers will not pay a penny more for a Barbie. Brands and retailers will start beating each other up again.


- As a reminder that Williams Sonoma is one of the forward thinking retailers when it comes to e-commerce, the company reiterated its commitment to spending 20% of its marketing budget (up from 6%) this year on digital. Additionally, the company noted that the bulk of future capex will be centered on technology and ecommerce infrastructure as the core brands are less likely to see major square footage growth from here.


- Yet another chapter in the American Apparel hiring policy saga is unfolding. This time the company has added disclaimers to new hire packets which are aimed at enforcing a confidentiality agreement. According to the language in the document, employees could be penalized $1 million if they breach the agreement by speaking with unauthorized parties. Again, we reiterate that focusing on same store sales and margins may be the best course of action for the company rather than spending so much time on building a retail police state.


China Returns to the Top of the Global Retail Development Index - China returned to the top spot for the first time in eight years while emerging markets in the Middle East and North Africa dominated consulting firm A.T. Kearney’s ninth annual Global Retail Development Index of markets seen as ripe for retail expansion. China, third in the 2009 study, leapfrogged over India, which fell to third from first, and Russia, down to 10th from second, in this year’s study, while Kuwait, not included in last year’s rankings, moved into the second spot. Following the study’s preparation, the floating of the yuan will mean the purchasing power of the Chinese consumer is really going to increase. If you’re sourcing there, prices are going to go up, but selling to the Chinese is going to become easier. The study measured global expansion opportunities in 30 markets based on 25 different criteria, including retail saturation levels, economic and political risk, retail market attractiveness and the spread between rising gross domestic product and retail growth. <wwd.com/business-news>

Hedgeye Retail’s Take:  Putting the list aside, China is pretty much the only market that domestic retailers are increasingly focused on.  Interestingly, recent discussions surrounding India’s loosening of its Foreign Direct Investment laws may soon boost that country’s attractiveness.  On the luxury side, expect Brazil to draw additional focus as many premium brands are looking to tap into the country’s growing pockets of wealth. 

R3: TRU Snowjob Begins - 1 

Labor Unrest Shuts 700 Apparel Factories in Bangladesh - About 700 garment factories in Bangladesh were shut Tuesday after days of violent protests by tens of thousands of workers demanding better wages. The news is likely to undermine confidence in the country's ability to replace China as a low-cost source for apparel and footwear production. On a separate note, Bangladesh is now targeting $400mm RMG exports to Latin American countries over the next 3 years. <sportsonesource.com>

Hedgeye Retail’s Take:  Believe it or not, Bangladesh is the 4th largest exporter of apparel to the US, with just over 7% of our goods cting from this country.  Despite any disruption to the supply chain that may result from a prolonged protest, it appears that this is yet another case where higher wages are likely to lead to higher prices. 

UK Retail Sales Remain Negative in June - UK retail sales remained in negative territory in June but retailers expected a return to sales growth in July, according to the Confederation of British Industry's May survey. Retailers saw a balance of -5 on the sales volume balance - up from -18 in the May survey and better than the expected balance of -15 seen last month. The expected sales volume of balance for July is +11. If sales growth does turn positive in July this would be the fourth positive outturn in 2010. The CBI results have been volatile recently. The CBI said retailers are more optimistic about prospects for sales in July in part becuase of the impact of the World Cup.  The CBI said High Street sales weakened slightly, particularly in footwear and leather goods, with grocers and durable household goods seeing solid growth. <automatedtrader.net>

Hedgeye Retail’s Take:  Will consumers really return to the stores if their team doesn’t make it into the elimination round? 

Travel and Tourism Spending Rose in Q1, But Still Below Pre-Recession Levels - Real spending on travel and tourism rebounded in the first quarter, but remains far below pre-recession peak at levels last seen in early 2005, the federal government reported. Retail spending by tourists rose 4.1% over the fourth quarter, while spending on recreation and entertainment rose 3.1%, According to the Department of Commerce’s Bureau of Economic Analysis. <sportsonesource.com>

Hedgeye Retail’s Take:  Good news for the retailers with a high concentration in tourist areas.  However, recent currency moves are more than likely to keep the spigot of tourists flowing freely. 

Macy's Reassigned Top Merchant Jeff Kantor as President of Online Merchandising - Macy’s Inc.’s Web sites — macys.com and bloomingdales.com — exceeded $1 billion in sales last year, but the corporation wants much more. Macy’s is developing a strategy to speed growth of its e-commerce businesses with Jeff Kantor to become president of merchandising at macys.com, effective Aug. 1. Mobile marketing is another big opportunity. Macy’s has an iPhone app that drives sales, and the retailer will this fall test ShopKick, a start-up retail mobile program, to reward customers who visit Macy’s stores. <wwd.com/business-news>

Hedgeye Retail’s Take:  With essentially no square footage growth opportunities, it’s not surprising that Macy’s continues to focus on e-commerce as a profitable growth engine.  With that said, the challenge of creating a seamless online/offline brand experience persists as the high level of promotional activity and high SKU count makes a department store site difficult to execute.

Men's Fashion Slowly Improving - In a season of anniversaries, Italian men’s wear designers continued to reference their archives while simultaneously moving fashion forward. “The best shows were the ones where designers started innovating again,” said Richard Johnson, men’s wear buying manager for Harvey Nichols. “Past seasons have focused so much on heritage, but this season, the best shows experimented with color, fabric and form.” Overall, the mood was upbeat. Buyers said they were working with budgets that had increased in the single digits, adding more chic sportswear to their offerings. <wwd.com/retail-news>

Hedgeye Retail’s Take:  Sounds like a bit of risk taking is coming back into men’s fashion.  All in, men are never going to move the fashion needle when it comes to sales but it is refreshing to see experimentation begin to accelerate.  Newness is key…

HOTT Goes International to Canada - California-based mall retailer Hot Topic is readying its first international brick-and-mortar push with two store openings in Toronto this August. The apparel and accessories retailer currently operates 681 stores in the U.S., as well as a website for overseas customers.  <licensemag.com>

Hedgeye Retail’s Take:  Yet another retailer heading to Canada in the past few weeks.  Zumiez, Target, and Kohls all make the list of Canadian bound retailers we’ve pointed out recently.

Amazon Looks for Upscale Fashion Push - Amazon is reportedly hiring new developers and graphic designers with high-end fashion backgrounds as part of a more upscale approach to selling apparel and footwear. <sportsonesource.com/news>

Hedgeye Retail’s Take:  We suspected this was the next logical move for AMZN after its purchase of Zappos.  There is no reason why better merchandising mixed with AMZN’s solid customer service and logistics can’t help boost the company’s sales in higher-margin apparel and footwear.

Borders Joins the E-reader Price War - After yesterday’s opening volleys by Barnes & Noble Inc. and Amazon.com Inc. in an e-reader price war, Borders joined the fray by offering a $20 gift card with its $149 Kobo e-reader. <internetretailer.com>

Hedgeye Retail’s Take:  Borders still struggling to keep up, this time waiting a day to throw a gift card into the mix.  This move is yet another in a long history of being a follower in the bookselling space.  Recall that BGP opened its superstores after BKS invented the concept and it launched e-commerce late relative to AMZN and BKS.

Sears To Offer Video Streaming - Sears.com and Kmart.com are joining the increasingly crowded video streaming space that includes Best Buy Co.. Apple Inc., Wal-Mart Stores Inc., Amazon.com Inc., Netflix Inc. and Blockbuster Inc. <internetretailer.com>

Hedgeye Retail’s Take:  We’re still waiting for the re-launch of Wal-Mart’s Vudu to see how a retailer may embrace a revenue opportunity derived from content streaming.  At least in the case of WMT, they own the technology platform designed to deliver the goods.  History suggests you need to not only deliver the content but develop an easy and elegant platform for which to deliver it.  This is something that retailers a) don’t want to spend the money on to develop, and b) really don’t have the expertise to achieve.

Brooks Sports Appoints Director or Apparel Merchandising - Brooks Sports, Inc. added Kurt Heimbach to its management team as director of apparel merchandising. Prior to joining Brooks, Heimbach served as the global apparel director for men's and women's running, tennis, and basketball at Reebok International Ltd. <sportsonesource.com/news>

Hedgeye Retail’s Take:  We suspect the recent boost in the technical running space is fueling a pick-up in apparel related efforts.  While Brooks is primarily known for its quality running shoes, the company’s apparel program is small relative to the overall business.  With some wind at their back, it’s clearly time to pick up their efforts in this high margin category.