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R3: REQUIRED RETAIL READING

July 21, 2010

Shuttering the Liz Claiborne branded outlet business ends one of the more substantial drags on the Partnered Brands segment and keeps management focused on returning to profitability in the 2H of F10.

TODAY’S CALL OUT

After the close yesterday, LIZ announced that it will be closing its Liz Claiborne branded outlet stores (a ~$90-$95mm business at about $1mm/store) over the course of 2010 and into early 2011.  The shuttering of these locations (which obviously have very little reason to exist given JCP’s “ownership” of the brand now) ends one of the more substantial drags on the Partnered Brands segment.  This move makes a ton of sense, it’s an unprofitable channel with outdated, oversized stores and extremely poor productivity (<$112/sq. ft.) that has been a substantial money loser. While the company originally had hopes for turning the business around, these decisive steps to clear the decks of residual drags on the business keep management focused on returning to profitability in the 2H of F10.

In an effort to quantify the impact of the news, we looked at the sub-segments within Partnered Brands that have been losing money. Liz outlets account for ~10% of Partnered Brands revenue.  Liz International accounts for modest losses in 1H FY10 and the DKNY Jean business is about twice the size of the Liz outlets with similarly poor profitability.   Excluding these other factors, we attribute ~$5-$10mm in losses to the outlet business in the first half of 2010, or about $10-$15mm annually which equates to a drag of ($0.05-$0.12) in EPS in FY10.

Looking at the business going forward, a portion of the investments in the Liz outlet business will be reallocated toward higher ROI QVC/JCP initiatives with the balance of losses largely eliminated. After renovating ~12-15 outlets last year at ~$150k/door, the company had held off an any additional spend once the JPC/QVC deals were on the horizon. The investment in outlets last year will be part of the $7mm non-cash write off realized in Q2.

The bottom-line here is that LIZ is taking the steps necessary to return to profitability and on the eve of the JCP/QVC transition in August and the first launch of product from the ‘new Mexx’ business under Thomas Grote’s leadership. With a big month ahead for the company and business at an inflection point, we expect to be increasingly focused on this story in the near-term.

-Casey Flavin

R3: Cutting Losses - 1

 

LEVINE’S LOW DOWN 

- In an effort to boost sales as well as generate some “buzz” Target is teasing customers with its “Back in Black Friday” promotion this week.  The online-only event takes place this Friday, with the full selection of sale items to be revealed at that time.  For now the company’s splash page suggests prices will be almost like the “real” Black Friday.

 

- A recent study by Nielsen suggests the Boomers (78 million consumers) spend 38.5% of CPG dollars.  Interestingly, only about 5% of the industry’s marketing dollars are targeted at the demographic spanning ages 35-64. 

 

- Despite troubles off the course, Tiger Woods retains his status as America’s favorite sports star for the fifth year in a row according to Harris Interactive.  Kobe Bryant was also tied for the first place spot with Woods, moving up from number 4 last year.  Michael Jordan is the only retired athlete on the top 10 list, occupying the number seven spot.  A full 50% of the top ten favorite sports stars are Nike endorsed.

MORNING NEWS 

 

Consumers Plan to Spend More Online in Q3 - The eBillme Online Spending Index, which is based on a survey of 1,200 consumers, notes that consumers plan to spend an average of $271.77 online in 3Q, up 20% from what surveyed consumers said they planned to spend in 2009’s 3Q. The report notes that 30% of consumers plan to spend $250 or more online in Q3, including  13% who plan to spend $500 or more online, 5%, $1,000 or more and 2%, $2,000 or more. <internetretailer.com>

Hedgeye Retail’s Take:  Consistent with results seen out of retailers with solid .com businesses, double digit growth has been common for the past several months.  As such, we’re seeing retailers like KSS, DKS, and TGT all investing meaningfully in .com infrastructure to support such rapid and substantial growth. 

R3: Cutting Losses - 2

 

R3: Cutting Losses - 3 

Fear of Brazilian Slowdown May Affect Brands Exposure to the Country - As fashion brands such as Giorgio Armani, Diane von Furstenberg, Burberry, Chanel and Christian Louboutin flock to tap into the booming market with freestanding stores, joining the likes of Gucci and Louis Vuitton that are there already, there are growing concerns Brazil’s growth could slow down over the next 18 months, even as more brands enter the country. The following are risks of the Brazilian market: Lula da Silva stepping down and a new leader take over, massive income inequality, poor infrastructure, a fashion market that is centered almost entirely in São Paulo, and continuing high duties on fashion imports. <wwd.com/business-news>

Hedgeye Retail’s Take: Yes, Brazil has risks just like every other country, but our macro team has Brazil on its shortlist of economies it likes in the 2H of F10 and into 2011 as one of the few setup to accelerate domestic consumption to offset a decline in global trade and industrial production – last we checked, that’s bullish for retail.

 

TJX Canadian Push - The TJX Cos. Inc. said Tuesday that it will open its first Marshalls store in Canada in the spring as part of a six-unit rollout in the country next year. Like TJX’s Winners, HomeSense and StyleSense nameplates, the Marshalls stores will be managed by the company’s TJX Canada group. TJX Canada provides the company its highest financial returns and has been estimated support of 90 to 100 Marshalls units. <wwd.com/business-news>

Hedgeye Retail’s Take:   Add Marshall’s the list of other U.S  based big box retailers heading north.  All in Canada is more profitable than the U.S for most retail chains, but unfortunately the population does not support enough stores to really move the needle much. 

TRLG Re-Enters Footwear - True Religion announced Tuesday it will launch a True Religion Brand footwear range for women with Titan Industries Inc., which also holds footwear licenses for Badgley Mischka, Betsey Johnson, Bebe and L.A.M.B. The collection will launch in spring ’11 with approximately 30 styles, featuring leathers in neutral and metallic hues and bright exotic skins, in flats, wedges and stilettos. The True Religion women’s shoes will be priced from $125 to more than $250 at retail and will be distributed in major department stores and specialty stores both nationwide and internationally. The denim brand previously launched a footwear line in fall ’07 with licensee GMI Footwear.  <wwd.com/footwear-news>

Hedgeye Retail’s Take:  Interesting price point for the shoes relative to the $200 +/- price point for the company’s core denim products.  It almost makes the shoes seem like a bargain. 

UK Outdoor Retailer Blacks Leisure Wilts in Summer Heat - British outdoorwear retailer Blacks Leisure posted a sharp fall in first-half sales, blaming the hot summer weather and faltering consumer confidence in the weeks following the May 6 general election. The 313-store company experienced a 7.5% decline in comps over the 17 weeks to the end of June. Chief Executive Neil Gillis stated: "If it's very dry and you're worried about your job I'm not sure you're going to go out and buy a 200 pounds ($306) waterproof jacket." On a positive note gross margins improved 110 bps from more targeted promotional activity. <reuters.com>

Hedgeye Retail’s Take: Interesting example of when too much heat can trump the benefits of increased seasonal sales.  To be fair, the UK sporting goods market has been challenged for quite some time, hot or cold. 

 

Nike Names Craig Cheek VP and GM of Greater China - Intent on doubling its business in China by 2015, Nike Inc. on Monday named Craig Cheek vice president and general manager of Greater China. He succeeds Willem Haitnik, who will become vice president and general manager of Converse’s European, Middle Eastern and African businesses.  <wwd.com/business-news>

Hedgeye Retail’s Take: Moving a VP and GM of North American ops to head its efforts in China is reflective of just how important this opportunity is to Nike.

 

Uniqlo Renews Textile Partnership with Toray - Japanese fast-fashion retailer Uniqlo is renewing its strategic partnership with textile manufacturing giant Toray for another five years to co-develop new fabrics and products. The original partnership began in March 2006 and expires next year but now the two companies will continue to work together through 2015. Toray and Uniqlo are aiming for total transactions between the two companies over the five-year period to total 400 bn yen, or $4.6 bn. For the period between 2011 and 2015, the two companies will also focus more on developing the global scope of their business, both on the production and the sales end. Toray opened a new factory in Bangladesh, called TM Textiles & Garments Limited, on July 8, and this operation will join other Toray facilities in supplying Uniqlo with its products and materials.  <wwd.com/business-news>

Hedgeye Retail’s Take:  This type of strategic partnership is precisely what allows Uniqlo to offer such compelling price points while at the same time delivering innovation at the same time.  Recall that the company’s Heatech product (essentially a very well priced technical base layer) sold out during the winter, which is likely the reason for this renewed deal. 

Swiss Watch Exports Jump 35% - In June, foreign sales of Swiss watches increased 35% year-on-year to $1.28 bn, driven largely by bimetallic watches and gold timepieces, the Federation of the Swiss Watch Industry said. “All price segments registered an increase in June, with rates of growth rising in proportion to the value of watches,” the federation stated. Sales in Hong Kong, the largest market for Swiss timepieces, rose 58.6%, while China’s business grew 69%. <wwd.com/business-news>

Hedgeye Retail’s Take: Following strong results in May, watch sales continue to benefit from a favorable currency arb in the far east. 

 

Hermès International Sales Increase 27% in Q2 - Q2 was well above the expectation outlined for sales growth target of 10% to 12% for the year. In the three months ended June 30, the French luxury firm posted a solid performance in its own stores — up 27.7% — with all key divisions showing strong increases. Sales of leather goods were up 31.5%, while ready-to-wear and fashion accessories posted a 25.7% rise. Sales of silk and textiles, including the company’s iconic silk scarves, rose 24.3%. Wholesale revenues were up 19.8%, with most of the increase due to watches, which saw sales rise 35.9% as consumers regained their appetite for luxury timepieces. Perfume sales were up 16.9% , helped by the launch of Voyage d’Hermès, though the increase was down from the 38.1% jump registered in the first quarter. In regional terms, non-Japan Asia registered the strongest performance in the quarter, up 57.1%, with the Americas up 35.5% and Europe – excluding France – up 26.3%. In Japan, sales were up 10%. <wwd.com/business-news>

Hedgeye Retail’s Take: Further evidence that Asian-based demand for leather goods is almost single-handedly driving the recovery in luxury leather goods.

 

Indian Luxury Consumer Prefers to Shop Abroad - Many Indians prefer to travel more than 4,000 miles to London to get suits from their favorite brand, Ermenegildo Zegna, than to drive half an hour to New Delhi’s luxury mall. The feel-good factor and the whole experience of shopping abroad is better than in India because of  the ambience, wider selections and lower prices to be found overseas. Luxury spending in India, the world’s second-most populous nation, was less than a tenth of that in China last year, according to Bernstein Research. Wealthy shoppers’ penchant for the shopping centers of Paris, London and Milan pose a challenge for companies luxury companies entering the domestic Indian market such as LVMH and Gucci. One luxury retailer stated he didn't see luxury taking off for at least another decade.  <bloomberg.com>

Hedgeye Retail’s Take:  The bigger issue in Indian retailing still lies within the country’s willingness to allow foreign direct investment in retail.  If the laws are relaxed, it’s likely we’ll see a bigger wave of “mainstream” brands looking to enter the market and tap the worlds second largest population. 

Email Still Driving Shopping over Social Media Marketing - Social media marketing is undeniably important for retailers, but most consumers prefer to receive communications by email. And the more traditional online tactic seems to be driving more in-store shopping. <emarketer.com>

Hedgeye Retail’s Take:  Hard to believe consumers are still willing to deal with spam as a primary motivator to hit the mall.  With that said, social media efforts for most major retailers have barely scratched the surface.   

R3: Cutting Losses - 4