R3: WMT, HD, NKE, UA, FL, APP

R3: REQUIRED RETAIL READING

August 18, 2010

 

WMT needs bank charter. Officially stick a fork in high end denim. HD's inventory miracle. NKE, UA, FL, APP, and more...

 

 

LEVINE’S LOW DOWN 

 

 

- In an interesting collaboration, Target and Gilt.com are teaming up to launch the discounters latest designer collaborations. Items from the John Derian, Tucker, and Mulberry collabs will go on sale before they appear in stores. Looks like Gilt is evolving beyond closeouts.

 

- Wal-Mart noted that sales of its financial service products (check cashing, prepaid debit cards, etc…) increased by double digits in the quarter. Given that groceries were slightly positive and other discretionary categories including home, apparel, and hardlines were negative it appears that this may have been one of the best performing areas in the store. Now if only WMT got its bank charter…

 

- Saks noted that denim remains one of the weakest categories in the store. It finally looks like premium denim may have run its course. Not good for True Religion or VFC’s Seven For All Mankind.

 

- Home Depot showed its third quarter in a row of inventory turn improvement, which comes as a result of recent systems and logistics investments. Prior to this recent improvement, HD had not reported an improvement in inventory turns in a decade!

 

  

MORNING NEWS 

 

Vietnam Overseas Footwear Orders Increases by 16% - Vietnam’s overseas footwear orders in the year to date has increased by 15-16% year-on-year at the expense of the labor shortage problems in China, according to Vietnam Leather & Footwear Association (Lefaso). Several local footwear producers claimed that they received a good volume of orders and big contracts. China has been facing worker shortage in labor-intensive industries, including the shoe-making sector, causing some of its partners to switch to Vietnam for footwear products. Footwear exports reached US$2.75bn in the first seven months of this year, up 13.8%.  <fashionnetasia.com>

Hedgeye Retail’s Take: Despite strong export numbers to the U.S. yesterday, news of this shift is not new news – expect the trend to continue. Also expect higher prices out of Vietnam.

 

 

American Apparel's Future Is Dim - Without a concession from its lender, the company will likely trip a financial covenant next month, causing a potential cascade of debt repayments. CEO Dov Charney expressed confidence American Apparel would live on claiming: “The capital structure issues will work themselves out.” That will take between 6 and 15 months, predicted Charney, who owns 45% of the company’s stock, inclusive of warrants. Much of the current problems can be linked back to difficulties at the firm’s Los Angeles factory, which hired 1,600 new workers in the second quarter due to the equivalent amount of illegal workers that were dismissed. The company’s debt load ballooned by $28.9 million to $120.3 million over the course of the second quarter ended June 30. And it expects operating losses of $5 million to $7 million during the quarter. First-half losses were described by the firm as “substantial.” American Apparel said it was “probable” that it would not meet the requirements of its minimum consolidated EBITDA covenant by Sept. 30. In June, Lion amended its credit agreement with the firm for a third time, adjusting the covenant and extracting an even higher interest payment in the process. <wwd.com/business-news>

Hedgeye Retail’s Take: This is one concept that wouldn’t be sorely missed if it ceased to exist tomorrow. Newsflash Charney, capital structure issues don’t “work themselves out,” management does.

 

Wal-Mart Pressured by Home Electronics Manufacturer For Labor Rights Issues - A Hong Kong labor-rights group is calling for U.S. retail giant Wal-Mart Stores Inc. to investigate Elec-Tech International Co., a home electronics supplier in China, following a rash of lost limbs and other severe workplace injuries that workers say were caused by unsafe equipment and no training. In a report slated for release this week, the labor-rights group Students and Scholars Against Corporate Misbehavior investigated a string of severed limbs and digits at the Zhuhai-based production center of Elec-Tech, a company that makes electronics, including small home appliances like toasters, coffee makers and electric skillets.  <wwd.com/business-news>

Hedgeye Retail’s Take: As if child labor concerns weren’t enough, heightened severed limb occurrences certainly falls into the “we have an issue” bucket. This one could become a serious black-eye in the media if not addressed yesterday.

 

World Basketball Festival Benefits Nike, Foot Locker - Athletic companies were looking for a boost in sales as a result of Nike’s World Basketball Festival, which took place in New York last week. The four-day basketball celebration, that included events at Foot Locker, House of Hoops and Champs banners throughout the city, were a positive for the New York-based athletic retailer which saw a lot of traffic in the New York stores. According to Nike Brand President Charlie Denson, retail partnerships were a key factor in planning this brand-building event. <wwd.com/footwear-news>

Hedgeye Retail’s Take: In light of recent concerns surrounding basketball sales despite our trend data suggesting otherwise, this is just one of several initiatives underway within Foot Locker’s merchandise mix. We expect this event to accelerate the positive sequential trend we’re seeing in basketball of late and expect to hear more about it on Thursday’s call when the company reports. By the way, we expect FL to come in well ahead of consensus.  

 

 

Mizuno Looking to Gain US Market Share on Road Trip - Mizuno Corp., the Japanese maker of baseball gloves and bats for major league stars Ichiro Suzuki and Hideki Matsui, is on a summer road trip to win a better position on U.S. baseball and softball diamonds. The company has deployed a caravan of royal blue-and-white vans bringing gear and glovemakers to stadiums, amateur fields and sporting-goods stores in California, Ohio, Indiana and Kentucky as it tries to boost its sales in the $1.8 bn diamond-sports retail market by 33% within five years.  Mizuno is fighting Nike Inc., Rawlings Sporting Goods Co. and Spalding for shelf space after the Osaka-based company’s baseball sales in the U.S. peaked at $75 mm in 2008. The company aims for sales of $100 mm by 2015, and it pulled out of Europe and Latin America to funnel resources into that effort. Mizuno ranked No. 6 in the U.S. baseball and softball retail market last year with an 8.2% share. Easton-Bell Sports Inc. led with 22%, followed by Rawlings, Wilson Sporting Goods Co. and Nike.  <bloomberg.com>

Hedgeye Retail’s Take: This sounds like a good idea. Nike is deploying capital around a category focus – and baseball is not one of them. Under Armour is diversifying out of cleats. Mizuno is striking while it can, and we'll be watching.

  

Wholesale Apparel Prices Made in US Increases Y/Y but Decline Sequentially - Wholesale prices for U.S.-made apparel declined 0.3% in July compared with June, but rose 0.1% from a year earlier, the Labor Department reported Tuesday in its Producer Price Index. Women’s apparel prices fell 0.5% for the month and 0.8% year-over-year. Men’s apparel prices declined 0.3% month-to-month, but rose 0.9% in 12-month comparisons. <wwd.com/business-news>

Hedgeye Retail’s Take: With cotton prices turning sharply higher coupled with wage inflation we expect these trends to turn higher not only on a yy basis, but also sequentially before long.

 

 

Firearm Parent Company Reports Sales Declines - Freedom Group, Inc., the parent company of firearms and ammunition brands such as Remington, Bushmaster and DPMS/Panther Arms, reported consolidated sales for the quarter ended June 30th fell 23.8%. The company also disclosed that it will pay $6 mm for its 75% stake in the outdoor apparel company Mountain Khakis, not including $1.6 million of debt the company assumed in the deal. <sportsonesource.com>

Hedgeye Retail’s Take: The ammunitions stockpile play is officially played out.

  

Perry Ellis Preannounces Positive Q2 - Perry Ellis International, Inc. said that based on preliminary estimates for Q2 it expects revenue of approximately $162 mm, compared to $159 mm during the comparable period last year. Revenues grew approximately 9%, excluding the planned exit of $11 million in unprofitable businesses from last year. Perry Ellis branded wholesale business as well as its owned retail stores were significant contributors to the company's revenue growth and earnings during second quarter fiscal 2011. <sportsonesource.com>

Hedgeye Retail’s Take: Hardly a surprise, but not a positive one with consensus above PERY’s preannouncement results.