Day 2: Weblights

More “weblights” from company presentations over the past 24 hours.  Key takeaways: back to school ending better than it began but still very promotional (especially denim), and not one CEO or management team is expecting the economy to improve over the next 6-12 months.  On the flip side, not one management team expressed that the macro backdrop is going to get worse.  Unfortunately, managing inventory, growth, and expenses for the status quo backdrop macro is not an easy task. 

On the unit growth topic, retailers remain reserved with their development pipelines, preferring to almost unanimously invest in e-commerce infrastructure and/or internal systems rather than speculate on real estate acquisition.  Dollar Tree and Ross Stores stand out as the two companies with bullish outlooks on unit growth, with both looking to add 7% square footage over the foreseeable future. 

More callouts below:

  • Radioshack noted that the benefits of selling the iPhone are not really in the economics of a unit sale itself, but rather in the traffic and demographic that the product attracts.  In order to maximize the iPhone business, RSH must sell additional items in the basket (mainly accessories at higher margins).

  • ANF noted that both cost pressures and the competitive environment are larger than expected sixth months ago, making gross margin expansion in 2010 unlikely.  Management believes they will be able to see some expansion beginning in 2011.

  • ANF’s CFO suggested that inventories will remain high through 3Q, possibly ending even higher than the 47% increase in cost at the end of the second quarter.  Management believes that company was under-inventoried over the of the back half of ’09, which ultimately hurt sales.

  • HD believes that e-commerce is “critical” to the company over the next decade or so, as consumers expect an interconnected retail experience.  Currently, 70+% of HD customers have researched a product or project before they enter the HD retail store.  Management also believes the real-time dialogue that can exist with customers as a result of the internet (i.e. blogs, comments, Twitter) allows the company to indentify and target concerns before they turn into bigger negative events.

  • DLTR reminded investors that the company employs an extremely dynamic and flexible merchandising model, which aims to find the best “dollar” items available at any time for its customers.  Approximately 50% of the company’s merchandise changes each year and the store is not merchandised via a central planogram.

  • WMT reiterated that it prefers to sell national brands over private label because these items tend to showcase Wal-Mart’s pricing advantage vs. the competition.

  • WMT’s recently appointed CEO of U.S hinted that the company’s growth plans will include some newer formats aimed at complimenting the supercenter.  More details are expected at the company’s analyst day in October.  Could this be the ramp in Neighborhood Markets or perhaps an urban format?

  • WMT noted that it is testing a site-to-pickup program in which a customer can order an item online and have it ready for pickup at a local Fedex store (Kinko’s).  This is definitely an interesting way to leverage both the logistics of Fedex and the consumer’s desire for convenience.  Shipping is free in the test.

  • When asked about WMT’s apparel strategy, the new CEO responded with “I'm not going to be the second, third, fourth, fifth or sixth person to stand up here and tell you they are going to fix our apparel business, but we are going to work as hard as we can to fix our apparel business. I think we know what to do. Andy is somebody who has had success in apparel, and both men's and women's.”  Clearly management is backing off from any timeline for improvement, despite recent comments that 4Q should show signs of better results.

  • ROST noted that the single biggest driver to further expanding margins beyond peak levels is sales.  Without sales growth, management believes it can maintain the gains they have achieved via substantial inventory reductions and more efficient operations.  In other words, it’s all about sales from here on out.

  • Nordstrom is not planning on any negative impact from potential inflation next year, but rather believes better inventory turns, reduced markdowns, and having the right goods mitigates any minor moves upward in product costs.

  • One of the few rare examples of “trading up” is occurring within the pet space at PetsMart.  The company is seeing consumers trade up in food and wellness categories as well as hardgoods, driven in part by recent merchandising initiatives including Martha Stewart.  The company also noted that the vitamin/wellness trend that has been a big growth area for humans is now beginning to trickle into the pet space.  Management believes pet vitamins and wellness will become a meaningful category over the next several years and as a result, the company is allocating resources towards this growth area.

  • PETM noted that for the first time in 15 years, the number of households that have pets dropped from 62% to 61%.  Management believes job growth is key to an improving housing situation, which in turn drives pet ownership.

  • PSUN’s CEO noted that promotional levels in the denim category in July and August were at levels they haven’t seen before.  The promotional environment remains a key wildcard in the company’s ability to expand margins in the near term. 

Eric Levine

Director