R3: REQUIRED RETAIL READING
August 06, 2010
“Expectation is the Root of All Heartache” – William Shakespeare. That’s one of the most common phrases used in our office. With 60% of retailers missing sales expectations in July vs. 52% in June and 28% in May, this is more relevant than ever.
TODAY’S CALL OUT
- Teens: ANF outperformed as it beat estimates while ARO and AEO missed meaningfully
- Department Stores: JCP underperformed with a miss versus its peers M, SKS, and KSS
- Discounters: Disappointing with misses across the board with ROST standing out as the worst in the group
- Food: Called out as a top performing category by COST, BJ, and TGT
- Home: Performed well for TJX, ROST, COST, TGT, and SMRT; weak for DDS and BONT
- Children’s Apparel: underperforming category in July for BONT, TGT, and ANF; positive for SSI
- Inventories: across the board inventories are still declining on a per square foot basis
- Margins: merchandise margins continue to grow, in a few cases because of fewer promotional events which hurt top-line
- Denim: mixed results with ANF citing weak denim while GPS noted strong
- Shoes: strength noted by BONT, DDS, SKS, ROST
- TV/Home Entertainment: weak trends noted by TGT, COST, BJ
- Back to School: Back to School continues the trend of getting pushed back further as consumer shop closer to the event, weakness in overall trends for July can be partly attributable to less school shopping in July
- California: remains a negative callout, notably it turned negative for ROST and called out negatively by TGT
- South: best performing region for ZUMZ, ARO, KSS
Raised Guidance/High End of Guidance
- LTD: raised to $0.34 - $0.36 vs. $0.27 - $0.32
- ZUMZ: raised to -$0.02 to -$0.03 vs. -$0.07 to -$0.10
- ROST: raised to $1.06 - $1.07 vs. $1.00 - $1.02, due to shift in distribution cost from Q2 10 to Q3 10
- TJX: guided to high end of $0.70 - $0.73 guidance
Lowered Guidance/Low End of Guidance
- HOTT: lowered to -$0.14 vs. -$0.07 to -$0.10
- ARO: guided to low end of previous guidance, $0.45 - $0.46 vs. $0.45 - $0.48
- AEO: guided to low end of previous guidance, $0.12 - $0.13 vs. $0.12 - $0.16
- WTSLA: guided to low end of previous guidance at $0.02 vs. $0.02 - $0.04
- JCP: guided to low end of the previous guidance $0.05 - $0.08
- SSI: guided to low end of the previous guidance $0.26 - $0.30
LEVINE’S LOW DOWN
- Despite expectations of cost inflation, WRC is one of the few retailers calling for gross margin expansion in the 2H driven by growth both at retail and internationally. Retail performance in July was particularly noteworthy with domestic comps accelerating in July to up +10% from LSD in Q2 as well as in Europe up +14% from +2.7% in Q2. Contrary to recent trends, Italy (WRC’s largest market in Europe) was one of the strongest regions in July up +16% from +6% in Q2 – undoubtedly catching the ear of GES shareholders.
- Add home to the list of 30+ categories LIZ will have at JCP in the 2H beginning next month. While new to the LIZ lineup, we expect additional category extensions are likely as the company looks to leverage core strengths of its new partner.
- With a shift underway towards direct/retail, CROX is clearly focused on ramping its Asia business having accounted for nearly 50% of new stores openings in Q2 and plans to open five new websites in Asia starting this quarter. With international accounting for 60%+ of total sales and aspirations of building China into a business nearing $100mm over the next 3-years, the success of these efforts will be closely followed by many.
NPD Bullish on Back to School Outlook - According to a survey conducted by Port Washington, N.Y.-based The NPD Group Inc., fewer consumers are reporting plans to spend less this year. Only 38% of consumers polled say they will shop less for back-to-school, compared with 44% of consumers last year. While school supplies top consumers’ shopping lists, footwear is also a priority. This year, 45% of shoppers plan to buy shoes during back to school, compared with 39% last year. And though shoppers said they are feeling better about buying this year, they are in no rush to begin the back-to-school shopping season. Only 3% of those surveyed have already started making purchases, compared with 6% who had begun by this time last year. When consumers start their shopping, most will head to national chain stores, followed by mass merchants, office supply stores, department stores and footwear specialty stores. <wwd.com/footwear-news>
Hedgeye Retail’s Take: I always take these surveys with a grain of salt. But so interesting to see apparel and footwear actually gaining share in planned purchases this fall. Two factors, however, are that 1) people do not plan for inflation in food, or other more essential categories . 2) No one plans for a double dip – or any other pinch to their wallets that might make that ‘plan’ for a third cashmere sweater seem less appealing.
India Sees Cotton Prices Stabilize With Strong Season - India, the world’s second-biggest exporter of raw cotton after China, is positioned to produce a healthy harvest this year that could help lower world prices and lift global garment manufacturers. During July, the wettest month in India’s June-to-September monsoon season, farmers planted 9.5 million hectares of cotton, up from 8 million last year. Cotton farmers have been encouraged to plant bigger crops to cash in on higher prices amid concerns over global cotton shortages. The U.S. Department of Agriculture has warned that demand this year may outstrip supply. World cotton production is forecast to increase to 113.9 million bales in 2010-11, an 11 percent increase from 102.9 million bales in 2009-10, the USDA said. However, world consumption may rise to 119.1 million bales next season from an estimated 115.9 million. India’s repeal of curbs on raw cotton exports also has given a boost to cotton farmers.While that’s good news for Indian cotton farmers and global textile manufacturers, especially in textile-dependent countries such as Pakistan and Bangladesh, Indian garment manufacturers are unhappy the ban has been lifted. As prices rise and cotton stocks fall, their margins could suffer. <wwd.com/business-news>
Hedgeye Retail’s Take: With prices up over 10% since the end of June and back at peak levels upwards of $0.85 /lb. last seen in early 2008, this crop will be one of the more highly anticipated in years as a strong yield is critical to keep prices from hitting new heights in the near-to-intermediate term.
Online Retailer Yoox Continues to Grow - International expansion and brisk orders pushed Yoox Group’s revenues up 39.2%. The 10-year old online retailer also manages e-commerce sites for designer brands such as Marni, Emporio Armani, Roberto Cavalli and Pucci. Sales in North America rocketed 85.8%, while Japan surged 51%. With a monthly average of 8.1 mm visitors, Yoox said its orders in the first half rose to 717,000 from last year’s 536,000, with an average order value of 174 euros or $231. <wwd.com/retail-news>
Hedgeye Retail’s Take: The initial growth of these models is obvious. The bigger question is the scalability thereafter. No one has succeeded yet, and there appears to be little about Yoox’ model that will allow it to succeed where others have failed.
Switzerland's Swatch Group Sees Strong Demand in 1H and Solid Growth in July - Strong demand for timepieces across all segments and regions helped grow sales 24.1% for 1H, sharply outperforming overall Swiss watch exports during the period. Growth has been solid in July, and they expect a strong result for the second half of 2010 in terms of both sales and profit. The major challenge will be to quickly overcome the capacity bottlenecks which already exist in some production areas. <wwd.com/business-news>
Hedgeye Retail’s Take: Missing out on top line opportunity due to capacity constraints is embarrassing. That said, the demand for the product is definitely notable given that Swatch is squarely in the mid-zone of the casual timepiece pricepoint.
Asics America Corporation Saw 17% Sales Growth in 1H - For the second quarter (April-June) all categories are seeing double-digit growth, which is in line with the momentum from the first quarter of 2010. Growth was attributed to a 20% increase in apparel and accessories while retail distribution expanded product offering for volleyball, wrestling, track and field, and field hockey. Footwear remains strong at a 15% growth rate. <sportsonesource.com>
Hedgeye Retail’s Take: Initially, the headline struck me as added fuel to the fire that Running footwear continues to outperform. But on the flip side, isn’t it interesting that a running brand like Asics mentioned 4 sports that aren’t running? Either the category is slowing, or they’re managing around increased competition from Nike, UA, and even SKX.
Columbia Sportswear to Acquire OutDry Technologies - Columbia Sportswear Company signed an agreement to acquire OutDry Technologies S.r.l., which owns the intellectual property and other assets comprising the OutDry brand and related business, via a cash purchase from Nextec S.r.l., based near Milan, Italy. The transaction is expected to close during Q3 and will not have a material effect on the company's 2010 operating results. OutDry's technology is the 'gold standard' for producing waterproof, breathable footwear and gloves that outperform products still relying on the 25-year-old method of internal booties and bladders. OutDry will be deployed across COLM's portfolio of outdoor brands, including Columbia, Mountain Hardwear, Sorel and Montrail. <sportsonesource.com>
Hedgeye Retail’s Take: This deal will undoubtedly be overshadowed by the company’s highly anticipated Omni Heat launch, but firm’s focus on delivering innovative technologies is clear – whether it be organic or by acquisition, Columbia is taking the right steps towards rebuilding the brands authenticity.
Strid Rite Rebrands Robeez - Robeez is officially moving under the Stride Rite banner. The baby shoe brand, which was acquired by Lexington, Mass.-based Stride Rite in 2007, will now be branded as Robeez by Stride Rite. According to the company, the move is designed to better streamline Stride Rite’s product offering and make the different developmental stages of the collection more understandable for consumers. Robeez by Stride Rite will continue to offer its Soft Soles and Mini Shoez collections, geared toward pre-walkers and early walkers. The Robeez Tredz line, designed for more confident walkers, will be discontinued. <wwd.com/footwear-news>
Hedgeye Retail’s Take: The consolidation makes sense. At this point, PSS’ biggest focus will increasingly to get more content – even acquired content – into its Payless stores. Getting the house in order for its existing content first makes a lot of sense here.
ZQK Introduces New Junior Line - Quiksilver is trying to lure teen shoppers from fast fashion with a new junior line to be marketed under its namesake brand. Starting next spring with more than 100 pieces, the line is intended to complement the surf styles from the company’s existing junior label, Roxy, and serve as a bridge for customers to its two-year-old young contemporary line sold under the Quiksilver label. Roxy targets a 17-year-old customer, the junior collection aims to reach a 19-year-old, and the young contemporary line pursues women age 25 who have outgrown Roxy and other junior brands. Seeking a quick global launch of the junior line, Quiksilver hired Pencil on Paper Studio, not the first time it has used some outside resources to augment design, but this is the first time it has outsourced an entire line. Priced similarly to Roxy, ranging from $24 for T-shirts to $88 for dresses, the junior line is promoting what Florie called “modern coastal classics.” <wwd.com/retail-news>
Hedgeye Retail’s Take: Natural extension in an effort to maintain customer retention – this is a solid step by ZQK to leverage one of its core brands (Roxy) to help ensure the success of its young contemporary line. The concern we’d have is that the attempt to lure a consumer away from fast fashion is probably a losing one – unless your spot-on with what the consumer wants and needs.
Victoria's Secret Launches NFL Team Branded Clothing - The National Football League and Victoria's Secret Pink have teamed up for a co-branded clothing collection to hit stores Aug. 10. The line will include tees, sweats, hoodies and tanks with the names and logos of the Chicago Bears, Dallas Cowboys, Denver Broncos, Minnesota Vikings, New England Patriots, New York Giants, New York Jets, Oakland Raiders, Philadelphia Eagles, Pittsburgh Steelers, San Diego Chargers, Washington Redskins and Carolina Panthers. <licensemag.com>
Hedgeye Retail’s Take: This makes more sense than one might think. Mariah Carey arguably started the trend in 2003 by wearing a Jordan #23 dress at the NBA All-Star game. Since then, wives of NBA players, and more importantly, European Footballers, have been requesting similar garbs. It makes perfect sense for the NFL and MLB to get involved.
Kmart Rolls Out Kmart Smart Campaign for BTS - Kmart Smart is Kmart's value proposition for back-to-school this year with a three-pronged strategy involving more fashion, more value, and more ways to shop. In apparel, Kmart has introduced three new brands. In addition to GLO [the Jones Apparel Group jeans and accessories line], there’s also Dream Out Loud by Selena Gomez, Bongo and Rebecca Bonbon. More value is presented in lower prices and higher quality product with a longer shelf life. More ways to shop is seen in mobile apps and Kmart.com. <brandweek.com>
Hedgeye Retail’s Take: This is counter to what we’ve seen by other retailers that have pared back the number of brands offered…we’ll see if others care to follow Kmart’s lead. Our sense is no. Is it me, or is ‘Kmart Smart’ one of the biggest Oxymoron’s in retail?
UK Shop Price Inflation Unchanged, Food Inflation Increases - Overall shop price inflation remained unchanged at 1.5% in July. Food inflation increased to 2.5% in July from 1.7% in June. Non-food inflation slowed to 1.0% in July from 1.4% in June. Shop prices have remained stable largely due to aggressive discounting driving non-food inflation down to its lowest rate since November 2009. The price of furniture and flooring fell for the first time in seven months. Food inflation was higher than the previous month - driven by global factors putting pressure on the cost of fresh food, such as meat and fruit. The recent dry weather has increased the price of animal feed and poor harvests have reduced some fruit crops. Problems with production in large wheat exporting countries, such as Russia and Canada, could put pressure on overall food inflation in the coming months. <brc.org.uk>
Hedgeye Retail’s Take: Now that Russian Prime Minister Putin as officially banned grain exports through year-end, expect more of the same in terms of rising food inflation.