R3: Top-Line Deceleration

R3: REQUIRED RETAIL READING

August 17, 2010

   

In an effort to ensure that we deliver the R3 to you, our valued subscribers, on a consistent timely basis each and every morning we are removing the Call Out section of this product. Instead, what you typically find in our Call Outs will be posted as separate stand alone posts.

 

 

This morning’s confluence of earnings events confirms broad-based top-line shortfalls, a gnarly setup in light of the headlines we expect out of the Housing Finance Conference today.

 

 

LEVINE’S LOW DOWN 

 

- This morning’s confluence of earnings events confirms what we wrote yesterday in our WMT: Our Tone is Changing note.  First, a light topline and little to suggest that merchandising efforts are going to move the needle in the near-term at the discounter.  Inventories also coming in at 4% growth against sales up 2.8%.  Perhaps some apparel markdowns are on the horizon?  Second and as expected, HD comes in with light sales but EPS slightly better.  Guidance goes up slightly and you again have another quarter in which HD controls its own destiny while LOW looks a little worse on a relative basis.  Finally, ANF comes in with the surprise of the morning.  Inventories up 47%, sales up 17%.  Not good.

 

- Lowe’s noted that extreme summer heat had both it’s positives and negatives for the quarter. On the positive side, sales were strong in appliances (primarily air conditioning), dehumidifiers, and seasonal cooling. On the negative side, consumers were hesitant to spend on nursery and related items. Yard work was one of the first items the consumer gave up on when it became too hot to be outside.

 

- Canada continues to benefit from limited growth opportunities in the U.S for large retailers. Today marked the opening of the first Victoria’s Secret in Canada, which had approximately three hundred customers waiting in line prior to the doors opening for the first time.

 

- Keep an eye on Metail, a website plugin that allows the user to enter their specific measurements and ultimately get a realistic 3D model of their body. The model is then used to show how a specific piece of apparel or outfit would look without having to try it on or go to a store. If successful, this adds yet another reason why ordering online is becoming more and more like shopping in the “real” world.

 

MORNING NEWS 

 

Chinese Footwear Exports Increase 27% - Despite rising labor and sourcing costs, China’s export of footwear to the U.S. continued to grow in double digits in June. Imports from China increased 27% over last year to 179 mm, according to data from the Commerce Department’s Office of Textiles and Apparel. The import value increased 26%. Vietnam, the next largest supplier, increased its footwear shipments 10% to 13.4 million pairs. Indonesia increased shipments 22% to 4.7 million pairs and  Mexico’s shipments rose 46%. <wwd.com/footwear-news>

Hedgeye Retail’s Take: While China’s continued growth isn’t surprising – Mexico’s outperformance is. Over the last decade, Mexico has lost share within the U.S. import mix both in footwear and apparel to far east competitors – this may be a byproduct of more “localized” sourcing given the advent of higher shipping costs of late.

 

India Under Scrutiny Over Child Labor Issues and Fearful of Potential Boycotts - Apparel manufacturers in India are increasingly anxious about a boycott because of child labor abuses. The U.S. Department of Labor’s Bureau of International Affairs last month included India’s textiles and apparel industry on a list of countries and industries that use forced or indentured child labor. With the U.S. market receiving about one-third of India’s textiles exports, which last year totaled $22.4 bn, Indian manufacturers have a right to be concerned. More than 12 mm Indian children under the age of 14 are thought to work in a wide range of jobs — from cloth weaving to cleaning up in restaurants and homes. Since India increased its use of genetically modified cotton, there have been reports that children are employed to harvest bacillus thuringiensis (or Bt) cotton because it is smaller than normal cotton and easier for small hands to pick. <wwd.com/business-news>

Hedgeye Retail’s Take: India is certainly not the only country under such scrutiny, but it might just be the largest behind only China. Swift and comprehensive action by the Indian government will be needed to ease global scrutiny.

 

Retailers Plan for the Road Ahead - Retailers continue to keep inventories lean and reduce buying for spring until the economic situation stabilizes. But at the same time, they need to scour the market for interesting new products and categories to lure a reluctant shopper to the cash register. Among the categories primed for growth, many stores believe, are men's woven and plaid shirts and non-denim bottoms, flat-front shorts, striped v-necks or polo shirts, military-inspired jackets and novelty swimwear. In women's, long, lean dresses; tubular knits; retro tropical prints and florals; skinny-ankle pants; head-to-toe white, and American Indian influences are expected to be key to the season for spring, according to the Doneger Group. <wwd.com/business-news>

Hedgeye Retail’s Take: Sounds like “Bill & Ted’s” meets “Austin Powers” come spring 2011…can’t wait. Anyhow, the key is that retailers remain hesitant to ramp inventories heading into the holiday season. We will be keeping an close eye on those that will inevitably “hope” to capture any potential uptick in consumer demand by building supply prematurely.

 

Retail Footwear Prices Rise 0.6%, But Children's Footwear Drops 4% - Retail footwear prices rose 0.2% in July and advanced 0.6% compared with a year earlier, the Labor Department said Friday in its Consumer Price Index. Women’s footwear prices rose 0.4% in July compared with June and increased 2% compared with a year earlier. Men’s footwear prices fell 0.4% month-to-month and rose 1% in 12-month comparisons. Boys’ and girls’ footwear prices fell 1% compared with a month earlier, and declined 4% year-over-year. <wwd.com/footwear-news>

Hedgeye Retail’s Take: Men’s footwear continues to lag, not a surprise given persistent economic weakness. Either way, declining ASPs are likely an indication of heightened promotional activity given lighter than expected demand.

 

Pakistan Floods May Drive Cotton Even Higher - The worst floods in Pakistan’s history have disrupted the lives of 20 million people, with much of the devastation in smaller towns and villages near rivers, including the standing cotton crop. The crop, at the point of being harvested, has taken a substantial hit with 10% to 30% ravaged by the floodwaters. An estimated 700,000 acres of cotton cropland is under water and from 1 to 3 million bales out of an estimated 2010 harvest of 14 million bales of cotton, has been laid waste. This includes about 5 percent of the crop in Punjab and 20 percent in the harder hit province of Sindh. Pakistan is the world’s fourth largest cotton producer after China, India and the U.S. There are mixed messages of how severe of an impact this may be, but some officials claim that since it was a bumper cotton crop to begin with, and most of the flooding occurred in the reclaimed land of riverbeds the impact shouldn't be too severe. <wwd.com/business-news>

Hedgeye Retail’s Take: As we noted yesterday, on the heels of the USDA’s crop report last Thursday, this floods continues to be one of the key drivers pushing cotton higher – stay tuned.

 

Data Confirms Holiday Shopping Pushed Forward Earlier - In 2009, holiday shoppers were on their marks and ready to go long before the traditional Black Friday start to the season, and some retailers were behind the curve. Evidence is coming in to suggest this year will be no different. According to a May 2010 survey by Google and OTX, 35% of US internet users have already begun their holiday shopping and research as of August. That proportion is equal to the 35% who said they planned to start in November or later.  <emarketer.com>

Hedgeye Retail’s Take: As we highlighted in yesterday’s anecdotes, retailers stand ready pushing promotional activity for holiday shopping earlier as well blurring the lines between which is the chicken and the egg.

 

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Shopkick: Retailers Embrace Mobile Commerce App Used in Retail Stores - Shopkick is a mobile device that allows the shopper to enter a participating retailer equipped with a transmitter and instantly learn of deals at the store. In addition, there are opportunities to earn “kickbucks,” Shopkick’s currency, which can be redeemed for rewards or donated to charity.In a move that merges mobile commerce with retail’s brick-and-mortar, American Eagle Outfitters is launching the Shopkick application today in 52 stores in NYC, Chicago, San Francisco, and LA and the form of the rewards is a gift card. Macy’s launched the app Monday in New York, San Francisco and Los Angeles. In two weeks, it will launch in Chicago as well, bringing the total number to 157 stores in four cities for the initial test run. Best Buy has already launched the app. <wwd.com/retail-news>

Hedgeye Retail’s Take: This is only the beginning – let the period of best practice discovery begin…

 

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COLM's Mountain Hardwear Launches E-commerce -  Mountain Hardwear officially launched www.MountainHardwear.com, a new e-commerce site where consumers can buy Mountain Hardwear products online directly from the company for the first time. <sportsonesource.com>

Hedgeye Retail’s Take: Buried among bigger headlines re its new OmniHeat technology and related product, dot-com will only provide an added boost to the top-line.

 

Simon Doonan to Design Halloween Apparel and Costumes For Target - Asking Simon Doonan to design Halloween costumes is like giving a sugarholic the keys to Dylan’s Candy Bar. Costume Couture by Simon Doonan for Target, is a more sophisticated approach to playing dress-up. Doonan approached the assignment “through the prism of fashion and popular culture. No one wants to look supergoofy. Halloween is the time for people to dabble in the more crazy aspects of popular culture that they don’t normally participate in the rest of the year. They get to be a little hedonistic.” <wwd.com/retail-news>

Hedgeye Retail’s Take: Let the battle between the homemade marvels and Target styles begin…you be the judge come October.

 

Charlotte Russe Seeks to Entice Twentysomethings and Teens - Charlotte Russe has generated a store prototype that is intended to simplify the shopping experience. New management has retooled the 515-store chain, opened creative offices in San Francisco, updated the logo and assembled an in-house design team. The fresh look for the stores made its debut this month in the revamped Southern California shopping center Santa Monica Place. <wwd.com/retail-news>

Hedgeye Retail’s Take: There’s a reason to chase this market – it’s HUGE, but it doesn’t happen overnight. The results will such efforts will take time to come in, but it’s a start.