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R3: REQUIRED RETAIL READING

July 23, 2010

Korea gives yet another leg of growth to one of the most consistent growth stories in retail. Will RL sandbag integration costs, etc…1Q print? Yeah…probably. But there’s enough gas in the tank in this model that it shouldn’t matter. Consensus numbers are too low. 

TODAY’S CALL OUT

RL’s announcement to repo its South Korea license from Doosan Corp is a slam dunk.  The price seems fair, and the integration costs are likely to be relatively small in light of RL’s ability to leverage recent structural investments in China.  Consider the following…

1)      This is spot on with the company’s strategy to control all of its brands, at all price points, in all channels of distribution, in all regions of the world. Have you ever visited a RL store in Korea? Not pretty…

2)      Korea is one of the more attractive ‘accessible luxury’ markets in the world. For comparison, Korea’s per capita spending is #30 in the world at $27,978, China is #95 at $6,567.

3)      Doosan has 5 freestanding locations and 175 shop in shops through S. Korea. By way of comparison, the Chinese license got RL 40 stores and 100 shop in shops.

4)      Interestingly enough, the risk profile in Korea is meaningfully less than in China – largely due to a more established and sophisticated consumer.

5)      Not only is the Korean consumer base more stable, but as of January 1 2010 RL has a major DC open in China. This allows them the luxury of materially ramping utilization of a new expensive asset.

6)      If you’re living in Europe or Asia, try going online and buying RL product. Good luck… Dot.com is not yet ‘turned on’ there. They’ve only got the US humming. International in dot.com begins later this year. As it relates to Asia, try selling a 60% margin business when there is an unconsolidated partner who has full control over retailing similar product in a given region. 

7)      The price tag here seems reasonable. Keep in mind that most of these license acquisitions seem very expensive at the time as RL is buying an underloved asset who’s real growth potential has not been realized due to lack of integration with the rest of the company. The license cost $47mm (including $22mm of variable inventory and assets) compared to $18mm for China, and $26mm (10 years ago) for Japan.

8)      Two geographical licenses remain. One controlling Oceania, and the other controlling the Virgin Islands and parts of Latin America. The LatAm license makes sense next (tourist shopping markets), but Oceania is likely a rounding error.

The punchline here is that this gives yet another leg of growth to one of the most consistent growth stories in retail. Will the company start sandbagging integration costs, etc…when they print their upcoming quarter? Yeah…probably. But there’s enough gas in the tank in this model that it shouldn’t matter. Consensus numbers are too low. 

MORNING NEWS 

 

Adidas Preannounces Postive Earnings From World Cup - World Cup success isn't limited to Spain. Releasing preliminary results on Thursday, Adidas AG, the world's second-largest sporting goods company, said second-quarter profit jumped to 126 mm euros , from 9 mm euros during the same period a year ago, boosted by sales of soccer gear. Sales increased 19% and first half of 2010, profit reached 295 mm euros. Adidas outfitted 12 of the national teams competing in the FIFA World Cup in South Africa, including Spain.  <wwd.com/business-news>

Hedgeye Retail’s Take: Lets not forget the impact of Easy Tones boosting Reebok sales, either.  World Cup goes away next year. Let’s hope for Adidas’ sake that the ‘toning’ category accelerates.

Fashion World To Experience Inflation - Life is getting more expensive in the fashion world, and consumers could get stuck with some of the bill. “The era of apparel deflation is now over,” said Richard Noll, chairman and chief executive officer of Hanesbrands Inc. Cotton prices are up more than 50% from a year ago, labor and transportation expenses are rising and factories that closed during the recession remain dark, keeping a cap on supply as demand perks up. To top it off, Chinese officials have become more willing to allow the yuan to appreciate against the dollar, which could make goods made in the country even more expensive. “You’re starting to see price increases come through the entire supply chain, not just from commodity costs, but also from a supply and demand imbalance,” Noll said. “There is no question that costs are working their way through the supply chain and you will see a broad-based increase, I think, in retail prices for apparel in 2011.”

 <wwd.com/footwear-news>

Hedgeye Retail’s Take: If ‘The era of apparel deflation is now over’ is not the quote of the year, then I don’t know what is. Now someone answer me this… If cost deflation is history, then it means that to purchase the same number of units, consumers to stomach a price increase for apparel. Anyone want to check the record books and see when the last time was that consumers took an apparel price increase?

New Balance Concept Store Opens in Dedham - New Balance opened its new concept store in Dedham, MA. The Dedham store will showcase a new design concept that highlights New BalanceÂ’s strong performance and technology brand story. <sportsonesource.com>

Hedgeye Retail’s Take: Too bad New Balance still can’t make money.

Supply-Side Limitations in Asia Hit the Top and Bottom Lines at LaCrosse Footwear - BOOT reported a second-quarter net profit of $0.1 million, or 2 cents a share, which is down 94% from $1.7 million, or 26 cents, in the same period a year ago. Net sales were down 11% with both the work and outdoor categories suffering declines in the quarter. Sales in the work market were down 15% due primarily to the timing of U.S. government orders. Sales in the outdoor market declined 2% from constraints on the supply of finished goods caused by capacity limitations at the firm’s manufacturing partners in China. <wwd.com/footwear-news>

Hedgeye Retail’s Take: Capacity limitations = harbinger of higher prices.

 

Skechers Hires The Licensing Company To Oversee European Expansion - The Licensing Company has been appointed to oversee a European-focused merchandise program for Skechers. As agent, TLC will seek partners for the brand in apparel, fashion accessories, hosiery, bags, outerwear, sporting goods and luggage for men, women and kids. Skechers joins TLC's other clients, including Airwick, Bic, Jim Beam, Umbro, Cosmopolitan, Lysol, Jelly Belly, Perrier, Jeep, Michelin and Welch's. In the U.S., Skechers licensees include children's apparel, bags, eyewear, legwear, medical scrubs and leather accessories.  <licensemag.com>

Hedgeye Retail’s Take: SKX smells really bad to me here. A) They’re riding a massive unsustainable wave, b) They’ve underinvested in the base (ie they’re overearning), and c) are now outsourcing the job of finding ways to license out content in foreign markets.

Gilt Groupe Continues App Success With a Droid App - The limited-time sale retailer is building on its iPhone app’s success with a new Droid app. “We are starting to see downloads of the Android app and sales through it already this morning,” Shan Lyn Ma, senior director of product development at New York-based Gilt Groupe Inc., said earlier today. “The main insight we’re seeing so far is that the orders have been primarily from men.” That wasn’t surprising because men are known to be strong users of smartphones that run the Android operating system. And they’ve been an important part of the early growth in mobile activity on Gilt’s iPhone and iPad apps, which the retailer launched in August 2009 and April 2010, respectively.  <internetretailer.com>

Hedgeye Retail’s Take: These retailers continue to fascinate me. They’re definitely doing the right things to navigate the fact that their models are not scalable.