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R3: REQUIRED RETAIL READING

October 19, 2010

Against a backdrop of increasing M&A chatter, a study out of the NRF suggests a 2% increase in consumer spending this holiday season – sounds optimistic to us.

RESEARCH ANECDOTES

- With luxury leather goods in short supply, it’s not terribly surprising to also note that prices may be on the rise.  Rumor has it that Chanel is raising prices a second time on the Jumbo handbag by about $300, taking the price to $4,000.  Price changes are expected to take effect in February.

 

- Like it or not, Uniqlo is selling men’s jeggings this fall season.  The 100% cotton, tapered and stretchy pants look like jeans from afar but like sweatpants up close.  Given that Uniqlo is a one store operation here in NYC, it will be interesting if ANY other retailer picks up on this trend.  Chances are this one stays in Manhattan.

 

- The NRF estimates that the implication of a VAT would decrease retail spending by $257 billion in its first year of implementation.  They also estimate it would negatively impact retail sales by 2.5 trillion over the following 10 years.  Recall that the VAT idea is being discussed as a means to close the budget gap.

OUR TAKE ON OVERNIGHT NEWS 

 

JCP Fights Back With Poison Pill - J.C. Penney Co. Inc. chairman and chief executive officer Myron E. “Mike” Ullman 3rd and the rest of its board sent a missile back to activist investor William Ackman on Monday by adopting a shareholder rights plan, or poison pill, that would make it prohibitively expensive for anyone to take over the retailer without the consent of the board. If Ackman ups his stake or if anyone else hits the 10% mark, the rest of the shareholders would get the opportunity to buy a portion of a preferred share of the company for $130. The effect would be to lessen the stake of the would-be acquirer, who can’t participate in the plan, and to jack up the overall price tag by astronomical proportions.With a poison pill in place, Ackman can no longer simply offer to buy shares from other stockholders and gain control at the firm. He would have to come up with an offer that was sweet enough to get the board to remove the poison pill. <wwd.com/business-news>

Hedgeye Retail’s Take: As we stated from the very beginning we believe this will be a long drawn out process which could last for a year.  Score one for JCP and its advisors, but we are sure there is more to come.  Next step is likely Ackman reaching out the board with some sort of strategic plan or proposal.

 

Golden Gate Capital PE Explores Orchard Brands - Private equity firm Golden Gate Capital is exploring options, including a possible sale, for its portfolio firm Orchard Brands, which operates a slew of apparel brands sold mostly in direct channels. Based in Beverly, Mass., Orchard Brands, which generates more than $1.1 bn in annual revenues, is the umbrella firm that owns catalogue and Internet brands including Blair, Haband and Norm Thompson. Two nameplates, Appleseed’s and Draper’s & Damon’s, operate retail locations. <wwd.com/business-news>

Hedgeye Retail’s Take: While the aggregate sales of the combined entity is impressive (if not surprising) and the company has expertise in the direct channel, it’s exposure to catalog business is noteworthy if not concerning. For the first time in a while we’re actually seeing a sale by a PE firm and not a purchase (or rumor of).  With CWTR having trouble, now might be as good as any time to sell yet another business catering to an older female demographic.

 

Sugar Inc. Buys A Private Sale Fashion Site - Sugar Inc., which operates web sites that sell apparel, shoes and beauty products, has bought MyPerfectSale.com, a private sale site with 500,000 registered members focused on sales of high-end designer apparel and accessories. The purchase price was not disclosed. Sugar Inc. will keep MyPerfectSale.com as a separate brand. Sugar operates ShopStyle.com, where consumers can shop for apparel and related items sold by various retailers. <internetretailer.com>

Hedgeye Retail’s Take: With more than 17mm unique visitors monthly, this ‘diversified women’s media company’ has the platform to make a discount luxury sale concept work – particularly one that offers only premium luxury brands like myperfectsale.com. Keep an eye on Gilt which remains the largest, most established private-sale brand that has yet to change hands from the original investor group.

US Shoppers' Holiday Spending Plans Offer Glimmers of Hope - Americans will increase holiday- season spending by 1% this year as they shop less at discounters and focus more on quality and service, a trade group said. U.S. consumers plan to spend an average $688.87 on holiday- related shopping, more than last year’s estimated $681.83, according to a survey conducted for the National Retail Federation by BIGresearch. Of the total, $518.08 will be spent on gifts, up 2.1 percent from 2009, the survey showed. The findings are consistent with Washington-based NRF’s prediction for a 2.3 percent gain in U.S. holiday sales.

 <bloomberg.com>

Hedgeye Retail’s Take: Prospects of increased buying on tighter inventories suggests a backdrop for a more benign promotional environment – reality might be a different story. By the time consumers hit main street for holiday shopping the market is unlikely to be at new highs since April. In fact, in light of our Consumer Cannonball theme here at Hedgeye, we wouldn’t be surprised to see to spending down yy once the consumer is saddled up at the register.

UK Retailer Blacks Leisure Approached by PE Firms for Possible Takeover - Black Leisure has reportedly appointed corporate finance advisory firm McQueen to oversee a potential bidding process from two possible takeover approaches by PE firms. <sportsonesource.com>

Hedgeye Retail’s Take: The company’s posted a brief letter from the board this morning confirming takeover speculation surrounding the UK’s leading outdoor retailer. This hardly comes as a surprise. After embarking on an aggressive turnaround plan in early 2008, the company appears to be at an inflection point having exited its unprofitable Boardwear business and now seeing better than corporate average sales at its new concept stores. Given its leading position in the UK market, the question now is if domestic U.S. based sport retailers are among those inquiring.

Fujian Tanneries to Shut Down - China’s Fujian provincial environmental protection authority said a new pollution control program will be soon launched in the region, causing a number of small tanneries in the cities of Fuzhou, Zhangzhou, Quanzhou and Putian to face closure in the near future. Polluting tanneries with a production capacity of less than 30,000 pieces of cow leather or equivalent will be the first to be shut down. Factories producing fewer than 100,000 pieces will be eliminated by 2012 and those produce fewer than 300,000 pieces will be closed by 2015. The authority is trying to persuade tanneries to move to specially designed leather zones where proper effluent systems have been established so that the pollution level can be easily monitored. <fashionnetasia.com>

Hedgeye Retail’s Take: Few manufacturing processes have such a devastating environmental impact as tanning. As China cleans up its production facilities i.e. tightening capacity and demand continues to shift toward India, there is little indication that leather is likely to see a deflationary environment in the short-to-intermediate term.