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R3: REQUIRED RETAIL READING

July12, 2010

TODAY’S CALL OUT

In just over a quarter, the world according to earnings revisions and earnings growth for retail, apparel, and footwear is looking like a dramatically different place.  For the first time since November 2008, our index of consensus EPS growth expectations has turned negative.  All the while, positive earnings revision trends have begun to erode along with the group’s multiple (currently just above 14X).  There’s no question that the focus has shifted to the second half, earnings guidance, and tough compares.  What’s most surprising however, is that Street estimates are already in the process of discounting lower earnings.  As such, those holding out on the long side with the “Isn’t everyone already aware of the tough comparisons?” mentality may have a point.

Unfortunately, what is not reflected here is an expectation for a measurable slowdown in the topline, which would render the negative EPS outlook to still be optimistic.  Even at a negative growth rate, things could surely get worse as multiples in the 10x-12x range back in early ’09 indicate.

 

 R3: Revision’s Reality - 1

 

R3: Revision’s Reality - 2 

LEVINE’S LOW DOWN 

- In an effort to juice city revenues, New York City’s Department of Consumer Affairs is cracking down on a law that prohibits retailers from leaving their doors open while blasting cold air. It turns out, the often used tactic in heavily shopped areas is technically illegal according to a law put in place in 2008. The law, which is clearly aimed at preventing retailers from being wasteful with the A/C (a.k.a energy), carries a $200 fine if violated.

 

- A report from luxury thinktank L2, sheds some light on the opportunities in China for luxury players. The report suggests that in three years, 840 million Chinese will be online, surpassing the entire online user base of the U.S, Europe, and Japan combined. More importantly, it is estimated that 80% of China’s luxury customers are 45 or below. The combination of the two demographics is sure to make a luxury players salivate, while at the same time adjust their go-to-market strategies beyond traditional high street locations and shop-in-shops.

 

- Whole Foods continues to the lead the organic and natural industry with its strict guidelines requiring suppliers to verify their product claims. This time, WFMI is requiring personal care and beauty suppliers to substantiate their “organic” claims via third party verification, beginning June 2011. The products will be required to meet the SAME standards as those set for organic foods under U.S law.

MORNING NEWS 

Sri Lanka Loses Duty Free Access to EU - Sri Lanka will lose duty free preferential access to the European Union from Aug. 15 for goods valued at 1.24 bn euros, or $1.5 billion at current exchange — of which the most affected are apparel items and fisheries products — following EU claims that Sri Lanka has failed to agree to a set of demands to improve its poor human rights record. EU member states initially decided on Feb. 15 to temporarily withdraw Sri Lanka’s lucrative Generalized System of Preferences tariff benefits, but had given the Asian nation six months to usher in the necessary reforms. The suspension of the GSP+ effectively means that, from Aug. 15, Sri Lankan exports that have benefited from duty free access under the scheme, such as some apparel products like T-shirts, would revert to the standard GSP tariffs, which for apparel is around 9 to 12 percent. <wwd.com/business-news>

Hedgeye Retail’s Take: A stiff blow to a country that is the 13th largest of origin for apparel imports to the U.S. While accounting for only 1.6% imports this will be a far greater issue for Sri Lanka as the U.S. shifts demand to more competitive countries.

Footwear M&A Pace to Quicken? - While consumers are still pinching pennies and looking for deals, footwear firms appear to be in the mood to spend. Mergers and acquisitions are on the rebound, as many footwear companies have built up liquidity on their balance sheets, said industry analysts. The industry is awash with cash after implementing heavy cost-cutting measures last year. Private equity firms are sitting on a lot of stagnant capital, while strategic buyers are seeking ways to plow back their excess funds. Analysts singled out cash-rich companies such as Nike Inc., Deckers Outdoor Corp. and Wolverine World Wide Inc. as being on the prowl for deals. Already this year, the value of global acquisitions of apparel manufacturers, as well as apparel and shoe, jewelry and department stores, jumped 133% to $11.28 bn , according to Dealogic. However, the total value of completed and announced global retail M&A deals is still well below the $29.09 bn seen at this same point in 2007, and no one expects to see that level of activity for some time. <wwd.com/footwear-news>

Hedgeye Retail’s Take: With the tax on capital gains expected to increase in 2011 and beyond coupled with what some refer to as excess cash, we expect activity to remain brisk for the balance of the year.

Rebound in Container Imports Expected to Slow - Import cargo volume at the nation’s major retail container ports is expected to be up 16% in July compared with the same month a year ago, but double-digit increases seen in recent months should taper offer this fall as retailers cautiously manage their inventories, according to the monthly Global Port Tracker report.  <sportsonesource.com/news>

Hedgeye Retail’s Take: With container traffic well above normalized levels YTD (15%+) and compares getting less favorable over the balance of the year this is to be expected, even in light of lean inventories still across much of retail.  

Hot Weather Sparks Sandal Sales - A record-breaking heat wave in the Northeast last week drove consumers into stores, giving a boost to footwear sales. Weather forecasting firm Planalytics Inc. tracked the impact on sandal sales for the week ended July 10, and sales in New York rose 19% compared with last year. When looking at the five-week period from May 30 to July 3, sales in the city were up 13%. Sandals and summer accessories are hot. Footwear retailers in outdoor malls could be negatively impacted because the hot temperatures are not conducive to leisure shopping. Not everyone benefits from the heat as running stores have fewer customers because no one runs in 100 degree temperatures and many people spend more time at the beach in hot weather. <wwd.com/footwear-news>

Hedgeye Retail’s Take:  An end of season kicker to limit seasonal markdown activity.  Add this to the list with air conditioners and sunscreen.

Tariff Bill Would Provide Less Duty Relief for Outdoor Footwear - Outdoor footwear retailers and vendors got mixed news Thursday when the House Ways & Means Committee posted a Miscellaneous Tariff Bill that would restore duty relief on trail runners and other outdoor products retroactive to Jan. 1, 2010, but at higher rates than stipulated in the bill that expired last year. Congress had failed to renew the MTB last year, causing tariffs on rapidly growing categories of waterproof/breathable footwear to rise to the maximum 37.5%. Outdoor Industry Association (OIA) and the American Apparel and Footwear Association have been working ever since to have Congress revisit the legislation, which is typically renewed every two years. <sportsonesource.com>

Hedgeye Retail’s Take: Definite positive for the brands that have exposure here (i.e. TNF, NKE, etc.) as cost relief engenders pricing and margin flexibility in this strong sub-segment of footwear.

 

Management Changes at Macy's with Fashion Director and LVMH Japanese Chief - Macy’s Inc. has its fashion guru: Molly Langenstein has been promoted to executive vice president of fashion and new business development, establishing the Macy’s veteran as the department store chain’s first national fashion director. It’s the one top national slot Macy’s hasn’t filled since it centralized into a national chain from four divisions last year and seven divisions two years ago, and reorganized the top management with new assignments and titles. LVMH Moët Hennessy Louis Vuitton has tapped Frédéric Grangie, managing director of Goyard, as president and chief executive officer of Louis Vuitton’s Japanese subsidiary, effective Sept. 1. <wwd.com/business-news>

Hedgeye Retail’s Take: With the last position now filled, perhaps we will actually start seeing tangible results from Macy’s centralization efforts? With the hire coming internally for a position open since last year, something tells us this alone might not be the catalyst.

Lacoste To Launch Sub-brand - Clothing and footwear brand Lacoste will launch a new sub-brand in autumn aimed at a younger customer. <drapersonline.com>

Hedgeye Retail’s Take: Yet another retailer getting into the what is quickly becoming a crowded youth category as apparel retailers search for pockets of strength.

Ed Hardy Licensee Bows New Lines - Philip Chemla, owner of the Los Angeles-based Philip Simon Development Inc. footwear firm and longtime licensee for Ed Hardy shoes, is branching out beyond the brand’s signature sneaker look. For spring ’11, Chemla, who founded PSDI in 2002 and has created private-label footwear for Von Dutch and Hale Bob, is readying a line of his own and making moves to establish his company as a prominent industry player. The Philip Simon collection will start with 34 men’s and women’s styles. The women’s offering ranges from flip-flips to stilettos, with a selection of sneakers and casual looks for men. Priced between $39 and $200 at retail, the line is being targeted to major national department stores and larger retailers in the U.S. and across Europe and parts of Asia. <wwd.com/footwear-news>

Hedgeye Retail’s Take: Classic example of a fashion apparel brand expanding into footwear, however this one could have legs given the brand’s strength.  Penetrating national department stores at the same time they’re significantly reducing vendors will likely prove to be the brands greatest challenge – perhaps more so than consumer demand.

Easton Sports Hires Branding Agency - Easton Sports has selected Agency 215 as its branding agency to generate national awareness and excitement for the brand and its sports equipment.  <sportsonesource.com>

Hedgeye Retail’s Take: …with M&A activity at heightened levels in the sports equipment market this reads as a concerted effort to gain visibility perhaps more with potential investors than consumers.

Comfort Trend: Perforations and Cutouts - Comfort brands are keeping things light and breezy, opening up spring looks with perforations and laser cutouts. These airy touches create a cooling effect, while providing plenty of coverage. <wwd.com/footwear-news>

Hedgeye Retail’s Take:  Now if could figure out a way to be long pedicures we’d be in good shape.

R3: Revision’s Reality - 3