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R3: REQUIRED RETAIL READING

August 20, 2010

Another day with supply chain issues in the headlines, this time the Indian subcontinent in focus.  Other headlines include Taiwanese growth opportunities, a sweet spot for men’s suits, DKS, SPLS, and… Groupons???.

RESEARCH ANECDOTES

- Yesterday’s Groupon (if your not familiar Google it) proved so popular it took the site down. The group coupon website offered a deal for The Gap, which gave users $50 in spending power for the price of $25. At 50% off, we’re not surprised the demand was off the charts.

 

- Dick’s Sporting Goods expressed enthusiasm for an upcoming marketing push from Reebok aimed at re-energizing the toning category. Management continues the believe the “category has legs”. Not sure if the pun was intended.

 

- Dollar Tree noted that they are not seeing rising costs out of Asia on their merchandise, despite what other retailers are reporting. In fact, a recent buying trip to Asia resulted in a products with higher IMU’s and improved values for their customer. Management also noted that the company’s business model is not wedded to any specific items and as a result, leaves the company with more direct control of merchandise mix and margins.

 

- Staples noted that it expects back to school to be as promotional as in prior years. Management is pleased with the season so far, but cautions there are still several big weeks ahead in the BTS season.

OUR TAKE ON OVERNIGHT NEWS 

Supply Chain Crisis Looms - Fashion retailers and brands are facing a supply chain crisis as the Indian subcontinent grapples with a triple whammy of natural and man-made disasters and political unrest, which threatens to disrupt deliveries and heap further pressure on costs. The devastating floods in Pakistan have so far destroyed up to 30% of the country’s cotton crops after 700,000 acres of cropland was submerged. This has compounded a string of problems in the region, including the closure of the port of Mumbai in India last week and strike action over low wages at factories in Bangladesh. The result is uncertainty and volatility in terms of deliveries and a forced increase in freight costs to transport stock by different means, including air freight, to the UK and US. Vital overland and shipping routes in Pakistan were blocked soon after the floods started on July 31. Meanwhile, a container ship in the busy port of Mumbai shed its load after colliding with a steamer on August 7, bringing the crucial fashion transport hub to a halt. Both events are set against the backdrop of continuing riots at factories in Bangladesh, where between 10% and 20% of factories in the country have been closed while a new minimum wage threshold is thrashed out. The supply chain disruption could lead to retailers piling into Sri Lanka to pick up the shortfall. But sources said the country’s infrastructure could not cope with extra demand. <drapersonline.com>

Hedgeye Retail’s Take:  When it rains it pours.  Interestingly, many retailers that have reported 2Q so far appear to have had their early Fall shipments already in place or on the water.  Regardless, this should have both cost and inventory implications as the season unfolds.  Possible benefits for off-price as supply chain disruptions normally lead to opportunity. 

 

Consumer Seen Inching Toward Full-Price Stores - The on-again, off-again economic rebound has created a limbo of sorts for retailers, where those consumers who have held onto their jobs are still interested in low prices but are also looking for a bit more. The immediate beneficiaries now appear to include the large, well-funded giants that are stocking up on targeted and exclusive offerings. In contrast, off-pricers, which found themselves in vogue during the recession, continued to click along in the quarter, but their armor showed signs of cracking. <wwd.com/business-news>

Hedgeye Retail’s Take:  We’ve long maintained that off-price strength would eventually wane, but we think this has more to do with inventory in the marketplace vs. consumer tastes.

 

Specialty Retailers Show Weak Spots in Q2 - Thursday’s second-quarter results posted by specialty chains for the period ended July 31 were mixed. ARO management was not pleased with the sales and margin performance in the latter half of the period. BKE experienced a slight increase in the sale of marked down merchandise and an increase in loyalty card redemptions driving gross margins down. NWY fashion missteps and deep discounting widened its loss with additional pain from softness in T-shirts, dresses and shorts.<wwd.com/business-news>

Hedgeye Retail’s Take:  Rising inventories coupled with increased promotions=more risk over the rest of the year.  Teen retail is especially under pressure as ANF looks to sell through its 47% increase in inventories.

 

Taiwanese Retail is Bullish Due in Part to Chinese Tourists - Renewed confidence among Taiwanese consumers and ever increasing arrivals of deep-pocketed Chinese tourists is sparking a retail revival here. Department stores are riding the boom and at least eight major complexes are slated to open over the next two years. Consumer confidence is up in Taiwan and corporations are raising salaries slowly but steadily. Some industry experts expect the shopping boom to continue into the second half of the year. Even if sales by Taiwanese slacken, there could be an increase in sales from Chinese tourists if individual travel is allowed next year.  Taiwan currently requires Chinese tourists to join tour groups. Restrictions on tourists from the mainland were relaxed in July 2008, and this year 1.2 mm Chinese are expected to visit the island, displacing the Japanese as Taiwan’s top visitor group. Many Chinese come to Taiwan to shop for luxury goods. Prices are lower, mainly because Chinese shoppers can circumvent the luxury tax in their country. <wwd.com/retail-news>

Hedgeye Retail’s Take:  Not often on the radar map of many domestic players, it sounds like Taiwan may become a future growth opportunity.  With that said, China controls the spigot in terms of Chinese tourist visits, which makes this still a riskier market over time.

 

Facebook Goes Places - Facebook is hoping to crack the location market with its new offering called Places, a geolocation feature that enables Facebook’s 150 million mobile users to broadcast their location through their Facebook status windows via a smartphone. <internetretailer.com>

Hedgeye Retail’s Take:  Sounds like Foursquare was putting the heat on.

 

$500 Suit is the Sweet Spot for Men's Suit Market - With their popularity bolstered by the lingering recession, branded and private label offerings hovering in the $500 retail range are continuing to gain traction. “The $495 suit has become a meaningful price point,” said Jim Ammeen, president and chief executive officer of Neema Clothing Ltd. “We’ve definitely seen a large increase [at this price] over the past few years in both branded and private label merchandise,” said Ron Wurtzburger, president of Peerless Clothing International. Brands such as Calvin Klein, DKNY, Lauren by Ralph Lauren and Haspel — strong names in the consumer’s mind — are among those getting a boost during these tough times. The men’s suit market overall continues to feel the impact of the economic malaise that just won’t release its grip on the U.S. According to The NPD Group, overall suit sales in department stores dropped 10% in July 2010 compared with 2009 — and that was on top of a 24% decline in 2009 versus 2008. <wwd.com/markets-news>

Hedgeye Retail’s Take:  While $500 may be the bogey on price, it still seems like the economy is the bogey on demand.  The bottom line here is suits are likely to benefit from an improved employment picture.  Importantly, advancement in quality out of Asia will continue to be a key driver behind lower priced tailored clothing.

 

Mammut Sales Growth Slows in 1H - Sales growth has slowed considerably at Mammut Sports Group since April, according to first half financial data released Wednesday by its parent company Conzzeta Group of Zurich. Conzzeta said its Mammut Sports Group generated net sales in the first half of 2010 of 95 million Swiss francs ($87.9mm), up just 1.2% from CHF 93.9 million ($83.3mm) in the first half of 2009. <sportsonesource.com>

Hedgeye Retail’s Take:  We wonder if the slowing demand is weather related (after all it wasn’t just abnormally hot in the US) or something more specific with this high-end outdoor brand.  Domestically, there is no question that outerwear has been most impacted by record heat. 

  

New Technology Offers More Efficiency to Leather Industry - US-based software engineer Spartanics has launched a new product named Finecut Laser Die Cutting to help make the leather cutting process more efficient by using barcodes to automate job changeovers within seconds.  <fashionnetasia.com>

Hedgeye Retail’s Take:  Sounds like this may be an extension of technology already in use in the textile industry aimed at reducing waste and creating more precise seams. 

 

Levelwear to Launch Minor League Baseball Line - Levelwear, a brand division of The Accolade Group, recently signed a multi-year license agreement with Minor League Baseball (MiLBTM), to create a line of apparel that will showcase its patent-pending technologies - High Definition Lithography(HDL) and Level FX imagery. <sportsonesource.com>

Hedgeye Retail’s Take:  Expect the technology to allow for vivid photographic imagery screen printed on the apparel.  The manufacturer describes the product as “wearable art”.