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R3: REQUIRED RETAIL READING

August 26, 2010

M&A still rolling along with the proliferation of shopping apps.  This morning we get a deal from Kellwood and an app from Limited.

RESEARCH ANECDOTES

  • In a statement contrary to much of the industry with both sourcing and freight cost pressures key topics of discussion, American Eagle highlighted that costs were actually going down for them in the back half of the year. Explained as a better balance between ocean versus air freight internally, one has to question just how much the company relied on air freight for fulfillment last year.
  • Confirming that boots are again in high demand for fall of 2010, BWS suggested that retailer backlogs are likely to be overstated as retailers move up typical ordering schedules due to disruptions in the supply chain in the Far East. This goes to show that despite the importance of discount footwear retailers given their high volumes of light freight cargo, even ‘preferred’ customers are having to adjust.
  • In a sign that commercial real estate development may be on the rise, half of Shoe Carnival’s 2011 store growth plans for 20 locations are expected to come from new rather than redeveloped existing locations. With the company’s forecast based on current activity of new strip centers rather than simply development forecasts, this is encouraging for retailers whose growth has been stunted by a lack of new space – especially those largely based in strip center like Hibbetts.

OUR TAKE ON OVERNIGHT NEWS 

UK Retailers Optimistic as High Street Sales Lift in August - High street retail sales increased in August, and most retailers expect that to continue through September, according to the latest CBI Distributive Trades Survey. According to the report, 53% of the retailers polled said sales had increased compared to the same month last year and 18% reported a decline, resulting in a positive balance of 35%. This was similar to the pace of sales growth in July 33%, and is the fastest since April 2007. Clothing and footwear was one of the strongest performing sectors in August with a positive balance of 76% fashion retailers reporting an increase in sales volumes. The CBI said this uplift was likely to be a result of better weather at the beginning of August, strong summer Sales and increased spend during the school summer holidays. Looking to September, a positive balance of 39% of retailers said they expected sales volumes to be higher than a year ago. In wholesaling, sales volumes rose in August compared with a year ago, despite expectations that they would fall. Of those wholesalers polled, 41% said the volume of trade was up, while 18% said it was down, giving a positive balance of 23%. <drapersonline.com>

Hedgeye Retail’s Take: Regardless of what factors drove August sales higher in the UK, the disparity between 76% of retailers reporting net sales increases and a 39% prospective forecast from retailers for further increases in September suggest confidence remains tepid at best.

Consumers Pullback  on Home Renovations - Spending on home renovation for the 12 months ending Sept. 30 will fall 25 percent to $107.7 billion compared with the same period in 2007, according to Harvard University’s Joint Center for Housing Studies. The pullback is hurting companies large and small -- from Home Depot Inc. and Lowe’s Cos. to building contractors and interior design shops. “There are still consumers putting in new kitchens,” Robert Niblock, the chairman and chief executive officer of Lowe’s, said in a telephone interview. “But they’re doing it because they’re going to be in their homes longer. That’s the change from the go-go days.” Many homeowners are painting, caulking and re-carpeting, he said, and many are doing it themselves.  The two home-improvement chains LOW and HD are trying to counter a drop in big-ticket transactions, such as kitchen cabinets, that is depressing how much shoppers spend each visit. Home Depot is holding more DIY classes for customers online and in its stores. The retailer said attendance at “do-it- herself” classes for women climbed 20% in June, a sign homeowners are tackling projects they once paid others to do. <bloomberg.com>

Hedgeye Retail’s Take: As we highlighted in our Housing Headwinds call in July, consumers have become increasingly empowered over the last several years while household maintenance services have declined, a trend we don’t expect to change anytime soon.

Express Locates Customers With an App - The apparel retailer steps into m-commerce with a geolocation app that serves up special promotions when customers are nearby. The marketing tool ties together the new mobile channel with bricks-and-mortar stores. <internetretailer.com>

Hedgeye Retail’s Take: Yet another example of ‘smart’ apps in retail. While the technology is certainly impressive, we wonder just how long it will take before consumers start pushing back on privacy matters as retailers literally track their every move.

Fossil Tops the List of Paid Search Rankings For Accessories - Fossil held the top position in the paid search rankings among Accessories merchants in Internet Retailer’s new 2011 Search Marketing Guide, garnering 102 total points. Zappos.com Inc. came in second with 97 points, with The Neiman Marcus Group (87) and Oakley Inc. and Ashford.com (50 each) rounding out the top five. Fossil topped the list by outbidding other retailers for the keywords: Belts, Wallets and Watches. Those keywords were among 16 in the Accessories category that were tested over nine weeks from late 2009 to early 2010. When those terms were searched again this week, Fossil came up within the top three paid positions for the three terms.

<internetretailer.com>

Hedgeye Retail’s Take: Paid search doesn’t come cheap, but the results don’t lie. With direct sales up +26% and +44% in Q1 and Q2 respectively, FOSL is among the leaders in dot.com growth within retail, a spot we would expect the company to maintain given its level of spend.

Kellwood To Acquire Contemporary Sportswear Brand - Kellwood Co. has inked a deal to acquire Adam, the six-year-old contemporary sportswear brand for men and women. Adam founder Adam Lippes will stay on at the brand. In comparison to earlier deals such as Vince in October 2006 and Isis in January, Michael Kramer, chief executive officer and president of Kellwood, said Adam’s volume falls between the two. “When we acquired Vince, it had annual wholesale volume of $30 million to $35 million. It will do $110 million to $115 million this year. We’re looking for more Vinces — firms in the upper and moderate price points that have room for growth as a brand. You can control your brand better in a wholesale environment, and you can complement your wholesale with other distribution channels in e-commerce and retail,” Kramer said, adding that Adam’s annual wholesale volume is around $20 million. <wwd.com/business-news>

Hedgeye Retail’s Take: Another bolt-on, but notably not a premium denim brand, which Kellwood has been coveting for years now.

Saks Opens Flagship - The designer Elie Tahari was greeted like a star when he arrived at the flagship for the ribbon cutting of his new 2,250-square-foot shop, the biggest on the fourth floor. Many of the guests, which included Saks and Tahari employees, wore “I [heart] Tahari” T-shirts, and some had accessorized with special “I [heart] ET” pins. Sadove referred to the Tahari space as the “cornerstone” of the new Wear department, which aims to provide customers with trend-right clothes at a more accessible price point. The Wear department offers European brands such as M Missoni, Red Valentino and Rivamonti. It’s still primarily geared to a woman who has a career, but it’s not mother career clothes. <wwd.com/retail-news>

Hedgeye Retail’s Take: Consistent with similar moves from other high-end retailers, increasing investments in a more concentrated portfolio of designers/labels continues to be a common theme as retailers look to reduce risk by placing bigger bets on better known entities.

Target Taps Designer Gaby Basora for Fashion Line - Designer Gaby Basora, known for her silk-printed blouses and dresses, will create Target's next limited-edition fashion line. The Go International collection, called Tucker for Target, will hit U.S. stores on Sept. 12. The women's apparel line will include tops, bottoms, dresses, outerwear and knitwear. The collection, retailing from $19.99 to $79.99, will be available until Oct. 17.  <licensemag.com>

Hedgeye Retail’s Take: Other launches this month at Target include Mulberry’s handbag line and John Derian’s housewares.  Expect to see marketing pick up around all three collections.

Read Through From Trade Shows - Economic uncertainty cast a shadow across men’s vendors and retailers at the trade shows last week. Retail buyers sought to navigate price increases and lackluster fashion trends for spring. In addition to a stumbling recovery, key challenges for vendors in the back half of this year and in 2011 involve issues related to raw materials shortages, rising production costs in China and increased expenses for shipping internationally. Buyer traffic was uneven, appearing strong during some periods of the shows but sparse at other times. And attendees sent mixed messages about the outlook for spring, with some reporting an uptick in business but others less optimistic.  <wwd.com/retail-news>

Hedgeye Retail’s Take: In summary, uncertainty appears to be the only consistent message across retail heading in the 2H, this we already know.