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R3: REQUIRED RETAIL READING

October 14, 2010

A new VAT tax on consumer products under consideration in Washington could add more than a few pounds to the Consumer Cannonball theme we’ll be discussing tomorrow.

As a reminder, we will be hosting call on “The Retail Aftermath” tomorrow at 10am exploring who wins and losses in a Consumption Cannonball scenario. Please contact sales at if interested. 

RESEARCH ANECDOTES

- A look back at the Target/Ackman proxy battle reveals that the process doesn’t come cheap.  All in, it was reported that the cost of Target’s defense was $11 million.  Ackman also acknowledged his costs in the fight amounted to $10 million.  At similar levels (assuming the same type of tactics are used), JCP is looking at legal and banking fees of about $0.03 per share.

 

- Teens are highly skeptical about their privacy when it comes to search engines and social networks.  A whopping 88% of teens aged 15-18 believe search engines monitor their browsing habits in order to sell advertising tied to their interests.  A slightly lower amount, 79%, believes that social networks also monitor their online behavior in an effort to target advertising. 

 

- In what might be a sign of a revival at New Balance, sales turned positive for the first time in nearly 3-years according to our weekly NPD runs. While much of the recent growth is likely due to the brands participation in the toning category, it’s at least worth noting as the brand has fallen off most radars in terms of relevance over the last 2-years.

 

OUR TAKE ON OVERNIGHT NEWS 

 

Ralph Lauren Unveils Its First Women's Flagship - Ralph Lauren now has two Madison Avenue mansions. The designer will today unveil his first women’s flagship — an imposing, 22,000-square-foot Beaux Arts building at 888 Madison Avenue that was built from scratch across the street from his Rhinelander Mansion. Just like his first flagship, which is now a men’s-only store, the new women’s one has all the ingredients to become a retail icon. Polo declined to disclose sales projections for the store, or the cost of building it, though industry sources estimate a project of this scale would cost in the region of $40 million to $50 million. <wwd.com/retail-news>

Hedgeye Retail’s Take: Following the unveiling of Ralph’s flagship men’s stores across the street just last month, focusing service and assortment on only one customer only will have its advantages in these two locations. More importantly, the collective ‘Madison Project’ has now officially shifted from a liability to one that’s generating revenue.

 

Calvin Klein Expanding Rapidly in Hong Kong - With two new shops in two days and high-profile visits by executives and the brand’s creative director, Calvin Klein put on a show of strength and ambition in Hong Kong. Ck Calvin Klein officially opened its eighth ready-to-wear store in the city, a two-level, 4,000-square-foot flagship in Central that is its largest in the region. Adding additional arsenal to the expansion of the brand in the region, Warnaco Group Inc., opened a combined Calvin Klein Jeans and Calvin Klein Underwear shop at Elements that is expected to generate updwards of $1,000 per sq ft. Calvin Klein began operations in Greater China about 15 years ago and now has 20 Calvin Klein Underwear and 13 Calvin Klein Jeans stores in “well-penetrated” Hong Kong, but Gromek said there is room for more with another 8 to 10 stores to open over the next 2 to 3 years. Still, those numbers pale in comparison to the number of Jeans and Underwear shops in China — 100 doors directly operated by Warnaco and another 250 run by third-party partners. <wwd.com/retail-news>

Hedgeye Retail’s Take: China remains a substantial growth opportunity for retailers…surprise, surprise. More notable here is the fact that come August 2011, PVH takes back the license in China at which time you can expect buildout plans in the region to accelerate.

 

Bon-Ton Fights Back - While Macy’s continues to flex its muscle as a national department store chain with high-profile exclusives and proprietary brands, local retailers aren’t prepared to roll over and play dead just yet. Those that remain are reaching into their arsenal for ammunition of their own, whether it’s designer associations or aggressive marketing plans designed to appeal to customers seeking that hometown department store experience. In the past few weeks, The Bon-Ton Stores Inc. revealed its license and design agreement with Tharanco Lifestyles LLC and John Bartlett for Bartlett to take over the design of its Consensus private label men’s apparel and accessories collection. This followed on the heels of a deal a few days before, when Bon-Ton contracted with Casual Male Retail Group Inc. to supply big and tall men’s apparel through the store’s e-commerce site and, beginning in the spring, a limited number of its stores. <wwd.com/retail-news>

Hedgeye Retail’s Take: The shift towards fewer albeit more exclusive partnerships across retails continues to take shape. Good for retailers, not so much for marginal designers.

 

Wal-Mart Bolsters its Fulfillment Offerings - Wal-Mart Stores Inc. says that on Thursday it will expand a pilot that allows consumers to purchase items online and have them shipped for free to a FedEx Office location. The retail giant also announced that later this month it will expand a test that allows consumers who place an order online to pick up that item the same day from nearly 800 Wal-Mart stores in large metropolitan areas throughout the United States. The “FedEx Site to Store,” which has already launched in Los Angeles and Boston, will expand to FedEx Office locations in New York, San Francisco, Chicago and Washington, D.C. Wal-Mart worked with FedEx to choose locations that are not near a Wal-Mart bricks-and-mortar store, says a company spokesman. <internetretailer.com>

Hedgeye Retail’s Take: As expected, the FedEx program is rolling out across the country further expanding the retail giants’ reach within a car ride of 98% of the American population.

 

The North Face Tests Geo-Fencing Technology - The North Face is currently testing geo-fencing, as the retailer has rolled out the strategy across each of its 31 locations in recent months. Geo-fencing allows stores to offer an opt-in "auto check-in" service to their patrons, no matter if they use a smart phone or regular cellular device. While quick-serve brand Sonic and retailers American Eagle and REI have tested the concept in single markets, The North Face is one of the first to take the idea to a national scale. <sportsonesource.com>

Hedgeye Retail’s Take: After testing the market back in February, TNF has aggressively rolled out its pioneering geo-fencing program, which enables it to feed nearby customers texts with product, promotion, and program updates only after opting into the service. Yet another conversion enhancing technology you can expect to see more of from retailers in 2011.

 

CHRS CEO Fogarty Steps Down - James Fogarty, who brought a career of turnaround experience with him when he joined Charming Shoppes Inc. as president and chief executive officer 18 months ago, has stepped down from the post and from the firm’s board. Anthony Romano, currently executive vice president of global sourcing and business transformation, has been promoted to chief operating officer. The company’s brand presidents and top department heads will report to Romano while Spencer Stuart works with the board on the search for a new ceo. <wwd.com/business-news>

Hedgeye Retail’s Take: The ‘plus-sized’ consumer remains one of the most elusive segments within retail to crack. Fogarty wasn’t the first, and he certainly won’t be the last to fall victim to the endeavor.

NRF Releases Study on Potentially Devastating Effects of a VAT Tax on Consumer Products - Amid rising concern in the retail community that policy makers in Washington are considering a new add-on tax on consumer products to reduce the federal deficit, the National Retail Federation released an economic study on Wednesday showing retail spending would drop by $2.5 trillion over 10 years with the tax. The study’s key findings include a projected drop in retail spending of $260 billion, or 5%, in the first year and a $2.5 trillion decline in spending over the next decade; an estimated reduction in gross domestic product for three years; an estimated loss of 850,000 jobs in the first year, and a reduction in real income for working Americans.The NRF plans to submit the economic analysis, conducted by Ernst and Young LLP and the economic research firm Tax Policy Advisers, to the President’s National Commission on Fiscal Responsibility and Reform, which is preparing recommendations for Congress by Dec. 1. The commission is expected to consider significant changes to federal entitlement programs, defense and nondefense spending, and the tax system, including the possibility of a new and controversial federal value-added tax, or VAT, to address the federal deficit in the short term and long term.

 <wwd.com/business-news>

Hedgeye Retail’s Take: Layering a VAT of this proportion on top of the Consumer Cannonball scenario would certainly hamper growth prospects across retail. The upshot here is that given the speed at which Congress moves, the Cannonball scenario is likely to start playing out before any bill is passed on the VAT.

Bangladesh Leather Exports Increase 50% - Bangladesh leather exports have jumped 50% during the first two months of the financial year from July to August, with all segments performing well. The breakdown showed that Bangladesh exported finished leather grew 58.4%, footwear grew 33.2%, and leather bags and purses grew 204.5%. <fashionnetasia.com>

Hedgeye Retail’s Take: Luxury bags continue to drive leather demand ahead of the holidays with many brands short inventory.