GLG News by Mark Sussman

Implications: -          Best Buy’s (BBY) initiative to facilitate the customers need for their consumer electronic needs with their “end to end” solution differentiates them from their major competitors and the big box stores in the CE sector.

Analysis:  -          Their focus on customer service is exactly what the customer needs. It does not take long for the majority of customers to realize that they need help in setting up their home theater. With BBY’s consumer orientated business model that offers the average customer help from the store to their sofa. This customer centric model will help the company develop an economic moat between their competition as it is well worth the extra expense to have a “working” system set up by professionals to optimize the home theater experience. -         


BBY is also entering the Canadian and Chinese market this year to learn the idiosyncrasies in their business environment to allow them a rapid expansion when it is time to pull the trigger. Obviously it is intuitive to spread out the business into as many markets as possible to avoid the effects of an economic downturn in any one market. - 


         BBY is also entering a strategic relationship with Apple to sell their assortment initially in 200 doors with plans to expand this to the majority of their doors. -         


BBY will continue to open stores at a net rate of 100 to 150 doors/year over the next 4 years. They are shrinking their foot print down to about 20,000 sqft. which will maximize their inventory levels and sales/sqft. -         

The Geek Squad initiative in addition to providing services fore mentioned is expanding rapidly in servicing home consumer electronic and computer users who purchased their hardware elsewhere. Geek Squad margins run at a rate above BBY’s core I.M.U.’s which will increase the margins somewhat significantly. -         


BBY continues to out perform their competitions CAGR over the last 4 years and there is no reason why this trend should not continue. The same holds true for their ROIC which surpasses the other players in the CE sector. -         


The focus on their productivity, innovation and the re structuring of their supply chain are a big factor in their comparatively outpacing of the other players in the CE sector. With the outsourcing of the IT function BBY has been able to focus more on the customer and productivity. Corporate governance has shown innovative thinking resulting in what should be a strong future when the current macro economic conditions improve.

Implications: TJX is projecting a growth rate of 12% for the next 3 years. Given the leadership of CEO Carol Meyrowitz and the strong emphasis she gives to the merchandising of the assortments the company should easily be able to achieve this number. There has been a marked improvement in the trading up of in season designer labels aligned with the timely delivery of furnishings, shoes and accessories that is driving the customer into the T.J. Maxx and Marshall’s stores. These 2 divisions account for almost 70% of the top line sales accounting for over $11 billion in sales.

Analysis:  TJX has managed to “pick off” the strong merchants from the department stores who bring their relationships with the vendor community with them. They now have about 400 merchants/buyers who source from about 10,000 vendors. The team is very strong both qualitatively and quantitatively. They plan well and purchase/negotiate at aggressive prices which has been proven out by their margin growth and improved inventory management.
 

With comp. store sales being projected as high as 5%, although 3% is a more realistic number, they will be able to leverage their backroom expenses and SG&A that can support the growth. The fixed costs are in place to support the increased business without additional expense which will in turn generate the higher operating margins that result from this dynamic.


TJX is among the leaders in earnings in the retail sector and given the current business and forecasts they along with most analysts expect this to be sustained. TJX is benefiting from this tough economic time as many customers are going to the stores for their designer labels to save the price of shopping at the traditional department stores. Their market share is increasing and there is no reason why this new consumer will not continue to shop at TJX now that they have “discovered” the value.


If you were to do a through S.W.O.T. analysis of the company it would be intuitive that a threat to their business is the continued supply of merchandise to be purchased off price from the designers. There is a reason that there will always be an abundance of off price available to TJX and to some extent other off price stores. With most individual designers running their own outlet stores it is logical that they should be able to handle their own overages through that channel of distribution. What is not plainly visible is that when the vendors are building their plans, they are cleverly planning and manufacturing for both themselves, their proprietary outlets and the off price retailers. 75% of the outlet assortment is manufactured exclusively for their outlets as this channel cannot depend on an inconsistent assortment flow given their continuing increase in their margin contribution to the vendor. The vendor is also over producing their assortments with the plan to sell the off price retailers as this is an important profit center for them and adds to the economy of scale in pricing with the manufactures. It is now acceptable to see the designer's  label in T.J.Maxx and Marshall’s as the stores are a constant and acceptable channel of distribution.


The Homegood’s and  A.J. Wright dynamic has been a bit tougher. This is the result of the stores being spread out in too many markets making the marketing, advertising and flow of merchandise a challenge. TJX plans are to remedy this by focusing on strong penetration in existing markets and slowing the introduction and opening of stores into new markets until they can sustain themselves and show organic profitability.


Lastly TJX is expanding internationally. They have selected “safe” markets such as Canada and the UK. This mitigates any political instability and facilatating entering and saturating new markets with the Marshall’s and T.J. (T.K.) Maxx nameplates. They have announced that they are aggressively looking into expansion into the German markets next. TJX and management are executing very well and given any unforeseen turmoil are setting themselves up for long term sales and margin growth. This company is one of the brighter spots in the retail sector.

Implications: All the positives written in the article are pretty much on target. The American Living assortment across the classifications is quite impressive. The big problem is that the launch is coinciding with one of the worst economic downturns retail and the macro economy has experienced in the last 20 years.

Analysis:  With Management touting all the positives I think it is incumbent to point out the down side of what should be an otherwise very positive initiative for both Ralph Lauren and J.C. Pennys.


The quality and design are very consistent and prove to have a good price value relationship. The problem is that with the Logo. I do not feel the consumer will get the connection between American Living and Ralph Lauren. The Logo is an American Flag and Eagle that evokes no association with the Polo Pony. There is nothing on the product telling the customer this is a Ralph Lauren designed and aspirational product.  


Another potential problem is the price points. The consumer will undoubtedly see a cohesive life style brand that is preppy, clean and very different than the Penny’s core assortments. The question is: will the Penny’s customer understand a $50 price point for a knit polo shirt. The clothing is priced well above the Penny’s product and a handbag at $115 stood out in particular.  


The risk is that the existing customer may not be able to make the jump to the new collections based on price point or not understanding the preppy collection and the new customer Pennys hopes will shop the line may just continue to shop the Polo brand. Time will tell and JCP is committed for the long run betting on the aspirational nature of American Living to move the existing customer up and attract a new more affluent clientele.

Implications: Wal – Mart (WMT) barely squeaked out January with a 0.5% comp. store increase. This result is rather dismal given their aggressive promotional activity in January. WMT stores showed a weaker gain than Sam’s club and the International Divisions, although they don’t reveal comp. store sales was up over 20% connoting that the domestic business is in distress.

Analysis:  Wal Mart is indeed by far the largest retailer in the world and is a very well run company. Problems arise and worries occur because the “bar is set so high” that any blip in their performance sends shock waves throughout not only the retail sector but the global economy. There is still room for Wal Mart to increase their market share domestically, increase their acquisition of real estate and most importantly grow in emerging and new markets. That being said they need to be careful of cannibalization within their markets, poor new store productivity, over expansion and selecting of prime real estate where they compete with many inside and outside their sector.


WMT has experienced a fall off in store visits and traffic in the past 3 years and if not for the AUR increasing comp. sales would be negative. It has yet to be determined why traffic is down given the price/value relationship of WMT’s assortment. This is an initiative management is putting a lot of focus on due to the counter intuitiveness of the dynamic.
 


Apparel and Home continue to be the laggards in their assortment. With the move of the apparel divisions into New York inspiration may be easier to come by for the merchants who have resided in Bentonville. Hard Goods, Groceries and other ancillary assortments are performing well so the importance of figuring out the Apparel and Home business is crucial.



Mexico is the laggard in their international division and management is working on the assortments as they feel the problem lies in the penetrations of hard Goods, Soft Goods and Groceries. In summation a + $375 billion business is a high class problem and I would bet that WMT will figure out their problems and be regarded as best in class.

Implications: -          As written in the title of this commentary, assortment planning and merchandise management should no longer be an issue. With the expediency of the new planning software, a strong strategic relationship with each vendor and a merchandising team that keeps good history it is not the “blind” challenge posed 10 -20 years ago.

Analysis:  -          Not to insult the retailer, but it is only weak management and individual merchants that should be stuck with overages resulting in abnormal high rates of markdowns. If the merchant opts for the correct assortment, the product development team negotiates a solid price (the definition of their core competencies) and the input of this into a planning software program, a reliable algorithm should result directing the quantity, the allocation, the timing even the prepacks that should hit the stores. Along with markdown optimization software which will aide in determining when markdowns should be implemented to maximize margins the merchandising job has changed complexion since the mid nineties. -         


The importance has shifted into developing strong relationships with key vendors making them “business partners” instead of the old cat and mouse game of over selling and blind price negotiation. JIT needs to be a focus along with the agility and the management and buying of the raw material and hardware that go into the item. -         


GMM’s & DMM’s need to be focused on developing realistic sales and margin goals and not be forced into a number that is un achievable. They also need to be more involved with the design, product development and planning silos to ensure everyone is on the same page. Their presence in the factories and with the vendors is more important than ever before. It is a buyers market, if you will, and retailers need to take advantage of this. -         


The piles of cashmere left over in the department stores were inexcusable this past January. The only excuse for this would be that the assortment’s I.M.U. was high enough to make these items profitable through a 100% sell through. -         


For sure the merchant is going to get the assortment a bit wrong but the days of huge mistakes are over. A string of these colossal over bought situations will surely and eventually spell the end to either the merchant in charge or the store in question.

Implications: -          Costco debatably has the strongest management team in the vast retail sector. Although this dynamic is probably “baked” into the valuation of the company it is still under rated and yet to be a neutral factor.

Analysis:  -          One of Costco’s (COST) large advantages over its closest competition (Sam’s Club and BJ’s Warehouse) is the diversity in the products they offer and sell. Their mixed assortment of Sundries, Food, Hard lines, Soft lines and other adjuvant businesses are all important and no one area accounts for more than a third of the business. This diversity mitigates the slow down in the macro economic conditions we are now experiencing. -         


A large % of Costco’s business is B to B which is less sensitive to the day to day pressures of filling the gas tank and paying for the groceries. Along with their International business (Canada, UK, Mexico, Korea and Japan) COST is better insulated from the tough domestic economic conditions. -         


COST is in a position to apply a bit more pressure to their suppliers but seem a bit reticent to strong arm the vendor community. This is of course positive and negative. In the short term they could experience margin growth but in the long term they run the risk of alienating their vendor matrix. -         


The debt COST has on the books excluding their lease obligations is about half of their competition in this sector which sets them up nicely for both domestic expansion and international growth. There is indeed cannibalization taking place domestically but management has the opinion that they would rather sacrifice a bit of top line sales in order to dominate the markets they are strongest in. -         


COST needs to be careful of controlling expenses while not eroding what got them to the dance in the first place. With the rising payroll expense due in cause that the average employee makes twice that of the competitions (it pays off through productivity) controlling the rest of the SG&A is imperative for management.   -         


With the top flight management team execution needs to remain seamless as Costco has plenty of competition from BBY, Loews, HD, and all the other big box retailers. This is for sure a fluid dynamic but Costco is winning the game as of now.

Implications: -          As written in the article ANF is doing well in a difficult macro economic environment which is beating down the retail sector in particular.   -          This has been achieved through both creativity, introduction of new product lines, classification extensions and lastly through good operational management both at the store level and most importunately in the merchandising and inventory management.

Analysis:  -          The management of the inventories has been nothing short of excellent. In the 4th quarter of FY ‘07 inventory/psf declined >28% while sales have been trending up >20%. Management has stated that their goal is to continue to reduce inventories by 15% - 20% while sustaining an increase in top line sales. Every retailer promises these types of #’s (or hopes for them) while ANF has shown the ability to deliver... -         


ANF has encountered challenges with their Tokyo flagship store and will feel the affects of the increase in wages, the development costs of all that is involved in the introduction and launching of new concepts and the continued international expansion. This being stated the assortment should be able to shoulder the strain of these challenges. -         


ANF is wisely showing prudence in the expansion plans internationally that demonstrates their normal lack of hubris and are looking at the #’s to develop a well thought out go forward plan in this initiative. -         


ANF was helped by the favorable tax adjustments and international expansion while at the same time increasing their I.M.U.’s and decreasing their Markdowns from last year. This resulted in an > of 80 basis points in the gross margin and bodes well for 2008. -         


There is an opportunity to grow the direct businesses while lowering the expenses associated with this channel. With the direct business growing and the continued decrease in MG&A through a more expeditious use of travel, sampling and marketing, margins should also be positively affected. -         


The introduction of Gilley Hicks and the continuation of Ruehl will in the short term have a negative affect on margins, if executed correctly these businesses will be very attractive in the incremental growth of top line in 2009 and beyond. -         


In summation ANF is showing that they are not only strong in assortment and the qualitative side of the business but are becoming very adept at inventory control and the management of operating expenses across all their businesses which makes them strong quantitatively. All this adds up to are an increase in top line sales and margins -           

Implications: As the majority of retailers are experiencing difficulties due to the macro economic conditions, Dicks Sporting Goods, Inc. (DKS) has yet to feel the squeeze. Although comp. store sales could be stronger, DKS has positioned itself as a head quarters store for their sector while also capturing new market share through expansion and acquisition. (Golf  Galaxy)

Analysis:  -Dicks has made several strategic moves both in their merchandising, marketing and operating efficiencies. They have seen an improvement in their brand recognition facilitated by a change in their marketing strategy. They have migrated their spending from mailings and catalogs into Broadcast campaigns which are now ubiquitous on ESPN and the Golf Channel.
 
- DKS has been constantly improving their assortment into better brands which takes them out of the competition with the big boxes. Where just a few years ago about 40% of the assortment could be found at Wal Mart, that number has diminished to < 10%.  Through the acquisition of Golf Galaxy they can now offer an assortment that is closer to green grass golf shops than the pedestrian assortment golf assortment found in their competition and big boxes. A golfer can now find the latest Taylor Made Drivers and all the latest equipment in their stores.

- DKS has also made strategic partnerships with companies such as “Under Armor” that gives them the veneer of being a bit more sophisticated than mainly offering the basic Nike and Adidas assortments. The other big initiative is the introduction of their own private label. The apparel looks strong and not an after thought as in their competitors’ assortments. This will surely have a positive effect on margins as they slowly replace and integrate their brand into the assortment and reduce the penetration of lower margin branded merchandise.
 
- DKS cannot stop evolving due to the competitive sector that they are in and need to continue introducing new product both private and branded. They need to pressure their vendors for exclusives and have items that are first to market. As there is a shift into non sporting good recreation (i.e. video gaming) DKS needs to aim more focus onto the younger demographic and tailor their assortments to each market they are in. The analogy would be having a large lacrosse section in the north east while doing the same with fishing and hunting in the south and south west.

- DKS is financially healthy as they are paying down their debt from acquisitions and improving their operating margins.      

Implications: -Sears has done nothing to maximize, let alone exploit the Land’s End Brand. This is really one of the most overlooked stories in the retail sector since the acquisition by Sears.

Analysis:  

-With the stock price at a low due to the housing crunch it is hard to argue the financials of this deal. In the order of magnitude what is a little over $265,000,000 to SHLD.

-Perhaps Ed Lampert will decide to follow Catterton’s game plan and forecast a 10% top line increase in sales based on the expedited increase in driven by the direct business. RSTO under Catterton’s direction was to increase pages and distribution almost exponentially to get the assortment in front of the consumer’s eyes.

-With RSTO’s CAGR in the last 3 years at 19% and direct at 46% during the same time there is a compelling reason for the acquisition. RSTO took a comparable beating on their ROIC but should see improvement as the catalog expense will now start reaping the benefits.

-The bottom line is that the assortment is what always separated RSTO from WSM and Crate & Barrel, their main competition. With out G.Friedmans merchandising eye and expertise it will be a challenge to keep the assortment compelling. Friedman is to RSTO what Mickey Drexler is to J. Crew, Reed Krakoff is to Coach and on and on.

-Among the positives is that RSTO owns and operates Michaels Furniture which is domestically made and this, if marketed correctly will give RSTO a nice hook.

-The question returns to, why is there not a 15,000 sq/ft Land’s End shop in shop in all Sears locations and will they squander the RSTO nameplate as they seem to have with Land’s End?

Implications: Given the brand equity and name prestige of the Saks Fifth Avenue label the company looks to be an attractive target for acquisition given the strength of Neimam Marcus, Nordstrom and Bloomindales.

Analysis:  

With the fore mentioned luxury department stores out pacing Saks with their top line sales and operating margins it is intuitive that a merger or takeover is a real possibility. A strong operator could maximize the nameplate and increase Saks diminishing market share of the luxury goods business. If left to the current management team, led by Steve Sandove, Saks is very unlikely to maximize their potential.

The assortment is stronger than the previous 3 year period but the private label potential has not been maximized and the margin dollars from this segment have been left on the table. The Saks label is as strong as the majority of brands that are in the current assortment and carry a cachet that needs to be expedited.

The operating margins have been the lowest in the sector and this is a direct correlation to the penetration of private label in the assortment when compared to Neiman’s, Nordstrom’s and the other players in this sector. The current merchants do not seem to have the core competencies required to develop and execute this strategy.

With the strong merchants working the assortments at the competition it would seem that either these players or an outside investor would be an ideal fit to manage the merchandising of the stores to maximize operating margins.

The current corporate governance seem to be financially and operationally sound given their improvements in these areas but in the end Saks is a luxury retailer and requires a strong merchant led management team.

Implications: With American Eagle (AEO) stock price down almost 40% since January the upside should be on the horizon for this down beaten equity. This is a factor of the stock already priced taking into account the poor 3rd quarter results and the pent up demand created by the unusually hot (temperatures at 40 year highs) in the 3rd quarter

Analysis:  

With the assortment geared towards the cooler weather as it should be the forecasted cooler holiday season should facilitate an increase in top line sales. The company did not over react to the tough October by taking deep markdowns so the margins in the core assortment should hold if the weather cools.

AEO does have some other pressing problems: namely, Aerie and Martin + Osa. The former has a very high inventory build right now due to the optimism of the strong top line sales results from its introduction. As Victoria Secret’s Pink holiday assortment targeting the same demographic looks strong Aerie could sustain heavier mark downs than originally planned. The latter has yet to find its niche and is a drag on the company.

AEO, as with most other apparel retailers, had a strong BTS season that gave them confidence in the holiday projections. The inventory is heavy in comparison to the square footage and regardless of how strong the next 9 weeks prove the markdowns will indeed be heavier, cutting right into the margins. The bottom line is that AEO will come no where near their peak operating margins of close to 20% in 2007 (21% in 2006) and this will give a negative vibe to the stock. The street knew that the 20% operating margin was not sustainable but when there is a decline in operating margin the reality becomes compounded.

Implications: With oil prices inching towards north of $100/barrel, housing starts and home resale’s yet to reach their nadir, the spiraling down of the US dollar, the sub prime mortgage debacle hitting blue chips like Citigroup and other industry stalwarts the American consumer will catch cold in their consumer confidence in the next few weeks.

Analysis:  

If one examines all the retail P&L statements of the retailers, you will see inventories and on order in some cases almost double than those of last year. This is a result of the retailers experiencing a strong BTS season which gave them the façade of a looming strong holiday season. All indicators led the retailers to believe their assortments were right on inclusive of Kohl’s, Target and other leaders. These companies did an outstanding job of developing, implementing and executing strong strategies which all may be for not.

Today (11/6/2007) Morgan Stanley came out with their new forecasts for the retailing sector and the prognostications were bleak. It would not have been surprising to see M and SHLD and the other companies that are still in reorganization mode to be forecasting sales and margins down but with Kohl’s, Target, J.C. Penney’s and Nordstrom’s also being downgraded the season looks bleak.

The consumer in the short run will do fine as the price wars have begun. The slashing of Consumer Electronics, Toys and other “packaged goods” is already fierce. Top line sales should be o.k. if not strong but the margins are going to take a big hit! As for apparel, which is some what more blind price discounting has been running since prior to Columbus Day.

All the Markdown optimization software and other new efficiencies will not be able to allow the retailers to clear their inventories profitably by December 26^th. The math does not work and margin erosion will be the worse the industry has seen in years.

To make matters worse, the shift to the direct E - tail channel of distribution is proving troublesome for many retailers. The fill rates projected are all over the map as the companies are experiencing shipping and warehousing issues that are inherent with any new dynamic.

The consumer will pick up the “early bird” deals and keep their “powder dry” waiting for the retailers to continue slashing prices. The smart consumers will be giving each other cash or gift cards so they can pick up the bargains after the smoke clears in the weeks following the holidays.

The last and very telling indicator is that the luxury brands are running tepid from Tiffany’s; L.V.M.H. and Coach who have always been pretty much macro economic proof.

Implications: With the B.T.S. boost in sales, JCP believes that their assortment is trend and brand right to mitigate the forecasted tough holiday season. JCP, along with their competition, Kohl’s. Target and the others feel that results for the holiday season may indeed be in consistent with original forecast and plans but given their vast improvement in operating and merchandising they are rightfully bullish on their long term growth and financials

Analysis:  

The 2^nd Quarter sales were up 3.6% with an increase of 1.9% in comp. sales. The response to their fashion assortment in women’s was very good helping them achieve an overall positive result. With the initial reads for Sephora in the 35 test stores also being strong the company wide rollout bodes well for top line sales in the upcoming quarters.

With the improved inventory management, markdown optimization software and the B.T.S. calendar shift into the 2^nd quarter operating margins improved 80 basis points to 7.2% for the quarter. With the continuation of SG&A and fixed costs being amortized over the increasing sales base this improvement in operating income should be more than sustainable.

With plans to open 175-200 off mall locations by the end of FY ’09 JCP is further insulating themselves from the erosion in mall traffic. With the kick off of the “American Living” life style concept by Ralph Lauren along with their other improvements in both their private label and initiatives such as the fore mentioned Sephora partnership, JCP is further positioning themselves as a destination store reducing their reliance on mall based traffic.

JCP indeed has taken advantage of the distractions that Macy’s and SHLD have experienced in their recent consolidation efforts but at the same time Kohl’s and Target have been keeping pace and out shining JCP in many areas so the competition for this consumer is intense. This is going to make it difficult for JCP to dominate in this sector. MR. Ullman and his management team are going to have to continue their diligence in all areas which may prove to be a challenge.

We all know the difficult competitive landscape despite negative or positive macro economic environments so it is important that JCP continue making strategic partnerships, improve operating efficiencies and constantly tweak the assortment. It is a 365 day/year task which can prove quite difficult. The future looks bright for JCP but it also looks good for Kohl’s and Target. The question is: Are there enough consumer dollars to sustain the 3 big players and any new competition on the horizon?

Implications: Despite the lower sales of 9.4% (8.6% comp.). Radio Shack Corp. (RSH) posted an operating margin of 7.55% compared to 0.3%, last year. The improvement was the result of controlling the SG&A. Julian Day and his management team are good operators but time will tell if they under stand the merchandising side of this highly competititive sector.

Analysis:  

Getting the SG&A in line is pretty much simple math or plugging the dynamic into staffing software to fill out what used to be manual time sheets. This is not “low hanging fruit” but instead, fruit that has been rotting on the ground. The challenge will be if management has a grip on the business they are in and can re create the niche that Radio Shack once served. Improving the flow of merchandise is another dynamic that is purely operational and still fails to address the brand identity and who the company wants to serve going forward. There has been indeed been a noticeable shift into higher margin products but these items are readily available at Best Buy, Circuit City and to a certain extent Office Depot and Staples.

Management realizes that in order to make RSH an attractive investment it is going to have to improve top line sales and margin A.S.A.P. Their current plan of expanding into the assortment of consumer electronics is not going to get them to the Promised Land. Right now their only discernable edge is that they are conveniently located and a customer can avoid the big box C.E. retailers if they prefer.

With it’s plans to increase the penetration of C.E. into the assortment and the companies continued reliance on the wireless business prospects do not look promising. The competition is too fierce in all these classifications to ensure top line growth and margin growth simultaneously.
 

RSH needs to compliment its unique mix of hard to find adapters and gadgets in order to make them somewhat of a destination store where they can then sell the ubiquitously available wireless and C.E. segments of their assortment. They need to turn their core competency of specialty items into an aspirational assortment and market the fore mentioned  as “must have” items in order to drive consumers into their stores.

The good news is that current management has indeed turned around the business operationally and even the smallest improvements in profitability and continued improvements in SG&A will bear greatly in ROIC given RSH’s large revenue numbers.

Implications: With all the co branding that Kohls has done, delivered, set on the floor and begun selling along with the American Living line to be introduced at J.C. Pennys, this announcement of an exclusive agreement between Macy’s and Hilfiger is pretty much a yawn.

Analysis:  

The Hilfiger label is so watered down right now that it is hard to discern what it means if any thing. The last time the label was considered “cool” (sic:aspirational) was the Snoop Dogg music video in the late nineties.

The yarn dye woven assortment of about 6- 7 years ago was strong and quickly knocked off by everybody. This not only hurt the look but the entire woven classification, driving the consumer back to knits and fine gauge sweaters.

Log on to the Tommy Hilfiger site and see for your self if there is any hint of innovation! The collections (Men’s, Women’s, Home, Children’s) is pretty much indistinguishable from dozens of competitors in the same sector. These collections represent the cream of the line, what will Macy’s be left with that is exclusive? (not available in Tommy stores)

As the new Martha Stewart collection initial reads have been encouraging I doubt the same will be repeated for Hilfiger. This is a great deal for Apax Partners who owns the Hilfiger name but will not do much for Macy’s. The reason that the deal for exclusivity was made is that demand in the competition for the product was not there. So in the end Macy’s has the exclusive to Hilfiger product but it is not compelling enough to drive people into the store at full price.

Hilfiger is not Ralph Lauren or Calvin Klein, never was, never will be!

Implications: Bill Ackman, the investor whiz, sees something in Sears and is putting his money where …………….well, his money is. He is currently putting in an in vestment of 5,000,000 shares which represents about 3.5% of the total company.

Analysis:

This is the same gentleman who prodded management of Mc Donald’s Corp. and Wendy’s Intl. Inc. into changing their strategies resulting in success. This guy has a way of getting to the problem, agitating and prodding management and getting the positive results from a company in stasis. The problems at Sears, although in a totally different sector are similar. MANAGEMENT IS SLUGGISH!

Ackman sees something in the current C.E.O. of SHLD, Ed Lampert and will obviously be working closely to actualize the potential of the company.

As Ackman has a proven record of pointing out and getting management to execute changes in equity improvements, his current stake in SHLD will allow him to do the same. He has a record of dissecting companies, prompting them to sell off underperforming sectors of their businesses, manipulating debt load to buyback shares and other shareholder positive actions. With his 10% holding in Target, he finally got the company to divest their credit card unit which has been a drain and a distraction for years.

With Ackman working with Lampert, the combination of the two should finish off the picking of the “low hanging fruit” still on the metaphorical SHLD tree.

The only downside is that Ackman is in no way interested in the retail side of the business. He views the company as a real estate play. That is great for the equity and bringing efficiencies to the financials but SHLD is a retailer first and a strong merchant and team still has to be developed to get the most out of this company. The vast opportunities are still not being realized and a “Wish Book” re introduction is just not a big story!

Where is the go forward plan for the merchandising strategies for the company? I see very little change in all SHLD’s holdings. This will be the big story in the next few years and Mr. Ackman will be long gone at this point counting his profits from his investment on the financials of the company.

Implications: In listening to what the board had to say at Home Depots (HD) latest meeting it is encouraging that the board members were very candid in their “read & react” of the business and go forward plan. The board basically admitted that HD had historically underinvested in the stores, IT and other CAPEX spending initiatives. The company underinvested resulting in bloated over earnings while their competition (sic: Lowes) has spent time, CAPEX and focus on their operations, stores, IT and merchandise assortments.

Analysis:  

The board at HD talked about how their main focus will be on improving the stores and all that entails. They have correctly identified the keys to success going forward. They are projecting a $1,000,000,000 spend annually in the stores to include store remodels, fixturing and internal upgrades and new internal floor layouts. They realize that they have somewhat alienated the customer and are returning focus to the consumer experience inside the store. The merchandising will be focused with localized assotments in order to serve the specific demographics of the store’s particular consumer. They want to return to the dynamic of having “expert” sales associates in each classification in order to provide direction and advice to the customer.

The IT and supply chain side of the business will have to be quickly improved upon as necessitated by the fore mentioned “localized” merchandising initiatives. Their current IT platform is not set up to manage the current assortments let alone the new specialized mix. The board mentioned that they are currently testing a beta system in Canada and if it proves to be successful they will tailor the system and implement the new systems in the U.S. market. They gave no time frame for this except to say that they will roll out all improvements as quickly as possible. The lack of a physical time/action calendar with key dates makes the discussion less compelling.

Although the board was very good in their explanation on how they have identified the problems and shared their plans with a great transparency, the lack of more granular details was missing from the discussions. The direction the company wants to pursue is sound but there needs to be time/action bullets attached to each initiative in order to provide a tool for measuring their progress.

Lastly the divesting of their THDS business to a new owner should help the margins substantially and give the company and management the singular focus needed on improving their core business.

Implications: Dicks had a strong 2nd quarter and with a bullish declaration, have boosted their forecasts for the remainder of the year. Dicks had a 7% increase in S.S.S. with a total top line sales > exceeding 38%.

Analysis:  

The new “Golf Galaxy” stores (Their most recent acquisition). is making Dicks into the largest seller of Golf product in the country.

 As Dick’s continues to attract the “pure play” athlete and "week
end warrior" they are lessening their exposure to the more fashion driven parts of their assortments. With Dick’s establishing it’s self in their markets as the “must go to” sporting goods destination store they are insulating themselves from the threat of the decrease in mall based sporting goods stores who by nature are more apparel and fashion driven.

Dicks is now just now about to enter the entire U.S. market and the room for store expansion, new markets etc. should enable them to reach a store count of close to 800 up from their current count of a bit over 300 doors. The very short term plan is to open up about 50 full line Dick’s stores and 20 focused Golf Galaxy doors. This will surely facilitate a double digit increase in top line sales and facilitate all the synergies and expanded amortization of fixed costs associated with this dynamic.

Dicks is now beginning to develop strategic relationships with the majority of their vendor matrix which is a nice way of saying “We are buying more, We are paying less”. With the national marketing campaigns and synergies with the Golf Galaxy stores operating margins should continue their precipitous rise.

One has to walk into a Dick’s sporting goods store to experience why they are differentiating them selves with in this highly competitive sector. They hire experts in most of the areas they service who can help the consumer beyond the sale. The store is made up of “shop in shops” and the running expert has a total different knowledge base than the fishing associate.

Dicks needs to continue looking for acquisitions like their Gaylan’s acquisition to quickly get them into the new markets before the competition gets a foot hold. This is still a highly fragmented business where the top 5 players account for about 15% of this $50,000,000,000/year business. Dicks needs to be aggressive in either acquiring the competition or stealing their market share by offering a far more compelling experience.

With the new demographic of younger consumers who tend to play 2 sports well (Spring/Fall) and training for both year round the seasonality of assortments is becoming less acute. This will mitigate markdowns and increase turns.

It is important to understand that Dicks stands out from its competition and the Mass Merchants as they carry the newest top of the line product. If you want the latest “Taylor Made” club, Dicks has it and the price is lower than the competition. Another example of their merchandising forecasting is their recognition of the “Under Armor” performance line making them the headquarter channel for this brand. (This type of planning will also help them mitigate the ever expanding channels of Nike sales, which left un checked would pose a threat to Dicks)

Dicks is creating  distance from their competition and with their expansion into the lucrative Florida and Texas markets the future should be quite bright. This is a long term horizon investment as it is a long term play.

Implications: Wal Mart is changing their 19 year old message of “Always low Prices” to “Save Money. Live Better". The advertising campaign update is a long over do necessity but this campaign appears to be a change for change sake.

Analysis:  

The new campaign fails to make an emotional connection between Wal Mart and the consumer. The savings that the company is touting is about $2,500 per family annually. The implication is that this money will help in the purchase of a home, defraying education and tuition costs and other non Wal Mart channel expenditures.

The campaign is the antithesis of the Target message. Wal Mart is still connoting that you HAVE to shop at the stores for the sake of savings while Target has taken the high road and lured the consumer by making the store a "must see" destination.

The campaign might as well say “Always low prices on merchandise and stock value”. This campaign is not compelling in any way. If a family of 4 wants to lower their spending why not join Costco or other like dynamics? If the consumer does the math the low prices at Wal Mart do not really save you any money when compared to their direct competitors.

Wal Mart indeed needed to change their marketing direction and message but it should be a qualitative change not a change re focusing on price. Hopefully they will recognize this and come up with a more aspirational message to drive traffic into the stores.

Right now management is exposing their weak underbelly and in ability to think out side the traditional box. They may be operationally the best in the business but creatively they are showing the consumer nothing new. This is a miss step of hubris or stupidity.

Implications: Since Coach (COH) became independent of their previous owner (Sara Lee Corp.) Lew Frankfort has fully achieved his vision of transforming the company from a commodity driven hand bag and small leather goods wholesaler into an aspirational, multi channel brand. Under the design and fashion conceptualization of Reed Krakoff the brand has established its self as an upper end name, competing more with the likes of Gucci than with Dooney & Bourke. The assortment has widened greatly, the retail division has exploded and the label is now a global nameplate.

Analysis:  

The question arises: why can Coach not expand their product line into apparel and other product extensions akin to Burberry and the like. Where Burberry was once a “2 trick pony”, with well over 75% of their global sales derived from the house plaid and rainwear, they are now considered a fashion house across all categories in Women’s, Men’s and Accessories. The answer is obvious.

With all the opportunity that remains on the table, management is now aggressively going after the “low hanging fruit” by expanding in existing, developing and new markets both domestically and internationally. The company is projecting to double their sales in 3 years from $3,000,000,000 to $6,000,000,000. This should facilitate the CAGR of 55% in earnings enjoyed over the last 5 years. With this expansion SGA and all other fixed operational costs  will enable COH to sustain these almost unbelievable results through the leveraging of the fore mentioned. 

The team Mr. Frankfort has put together may is among the best in the sector both in a qualitative and quantitative sense. The operators understand fashion and the designers understand operations. This is an extremely rare circumstance that allows the company to move forward with a minimum of inter company squabbling that occurs in almost all other retail/wholesale dynamics.

The wholesale division under the leadership of Kathy Nedorostek has reached over $500,000,000 (U.S.A. only) an > of 200% in 5 years. The sales foot productivity exceeds $1,300 in their customer’s shops which portends additional expansion for the foreseeable future. The brand can now intensify their exposure in the upper end department stores (Neimans, Saks, Etc.) and drop their lower end customers adding to the aspirational nature of the brand.

Both the C.F.O. and C.O.O. have been constantly improving the “back of the store” effciencies with software optimization to improve everything from D&A to store design. This has given COH an amazing balance sheet with ample cash flow. They are able to expand stores organically, spend CAPEX on stores and I.T. and re purchase stock simultaneously. This bodes well for the stock and its future.

It would be a distraction to expand their assortments beyond their core competencies when there is so much opportunity to be had in their current model. They should (and will) stick to the easy extensions of shoes, eyewear and fragrance and leave the apparel to another time.