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  • Oppenheimer Analyst Upgrades Specialty Retail – Firm’s Investor Conference Next Week – Coincidence?

    While we’ve not seen the actual report (feel free to forward), today an analyst at Oppenheimer upgraded a laundry list of specialty retailers to outperform.  Why?  This analyst (we believe it to be Pam Quintiliano but are not 100% certain) suggests that “select chains with the strongest fundamentally driven price value equation” will replace the broad-based momentum the group has seen over the past year.   

    24-Jun-10 06:52 ET

    Oppenheimer changes their rating on select specialty retail stocks

    Oppenheimer says following a steep rally in the Specialty Retail Sector which began last July and continued through May, the group has recently taken a breather. Given that much of the past year’s excitement was a function of abating doomsday fears rather than improving fundamentals, they look upon the recent pullback as understandable. Firm believes this pullback sets up for the next and potentially more sustainable change in the softlines recovery, wherein select chains with the strongest fundamentally driven price value equation replace broadbased momentum. Firm is upgrading Aeropostale (NYSE:ARO) to Outperform from Underperform; and J Crew (JCG), Pacific Sunwear (NASDAQ:PSUN), and Zumiez (NASDAQ:ZUMZ) to Outperform from Perform. The firm also upgrades Ross Stores (NASDAQ:ROST) and The TJX Co’s (NYSE:TJX) to Perform from Underperform. They downgrade American Eagle Outfitters (NYSE:AEO) to Perform from Outperform.

    While we tend to agree with the above thesis (select chains will outperform weaker chains), Ms. Quintiliano has the audacity to include Pacific Sunwear (PSUN – $3.40) in her group of retailers that has a strong “fundamentally driven price value equation.” 

    Say what?  PSUN?  This is a company that delivered a mind-boggling -5.16% EBIT margin (ex-items) in FY 2009 and appears poised to deliver even worse profitability performance in FY 2010 (click here to see our earnings model for PSUN).  Despite significantly reducing its inventory levels over the past year, the company has yet to materially improve its merchandise margins (not a good sign for the longer-term ability to return to profitability).   

    Ms. Quintiliano starts out with a reasonable thesis, yet blows it completely by including PSUN in the list of chains with a “strong fundamentally driven price value equation.”  The fact is that PSUN may never make money again.

    Then again, maybe Ms. Qunitiliano felt the need to upgrade all of these stocks ahead of her firm’s analyst conference next week in Boston?  Do you think it’s just a coincidence that she upgraded these stocks ahead of the Oppenheimer 10th Annual Consumer, Gaming, Lodging & Leisure Conference that will be held next week in Boston?  Probably not.

    Disclosure: No positions
    Jun 24 5:11 PM | Link | Comment!
  • Confessions of a Retail CEO: JCG’s Mickey Drexler Admits that IMU is a Flawed Metric

    On the Q1 2010 earnings conference call, J. Crew (JCG – $42.61) CEO Mickey Drexler suggested that merchandise margin (or, “maintained margin” per most veterans of the industry) is all that matters at the end of the day.  Here’s the relevant quote below:

    I spoke to a company last week that they have an automatic initial margin, and you know what the merchant said, who is clearly not the big boss?  He said the more we are forced to do initial margins at this point, the more markdowns we take. 

    “We don’t take automatic mark-ups.” 

    We wrote about this topic almost a year ago when URBN management reported a dramatic initial mark-up (IMU) improvement in Q2 2009 and the hoped for a “continuation of this trend.”  Yet, the company also suggested late in the same conference call that the markdown rate at the Urbanchain was “significantly greater” than they would like.  Management also suggested on the call that “merchandise margin” was flattish versus LY (i.e. IMU improvement versus LY offset by higher markdowns than LY).     

    IMU should not be viewed by itself.  IMU is part of a complex algorithm with many variables.  In reality, IMU gains mean nothing if a company has to offset its bloated price points with heavy markdowns. 

    IMU improvement is only worth discussing when it relates to sourcing strategies/savings that a retailer can ‘pocket’ without passing on the savings to the consumer or a sales mix shift towards higher-margin product (that will again be ‘pocketed’).   

    Let’s not forget that a retailer determines its IMU rate.  But the consumer essentially determines the company’s merchandise margin based upon the markdowns needed to move the product at the company’s IMU.

    The moral of the story… Any retail management team can laud its IMU improvement all it wants.  Anyone can go out on a street corner and try and sell a t-shirt for $10 that was sourced for $1 (i.e. 90% IMU).  But, the average selling price (determinant of merchandise margin) and the rate of sale is what counts at the end of the day.

    We’re amazed that so many sell-side analysts spend so much time inquiring about IMU when they should be more simply focused on merchandise margin.

    Disclosure: No positions
    Jun 11 12:53 PM | Link | Comment!
  • PSS CEO May Want to Re-Think the Company’s CRM ROI Calculation

    Well, it’s not “sexting.”  But, Payless ShoeSource (PSS – $19.20) has upset some of its shoppers with its text messaging marketing initiative (click here to read the article and watch the video).  Check out the company’s comments below, approximately 7-8 months AFTER receiving a notice of a class action lawsuit (click here to view the lawsuit) complaining about the invasive marketing practice.

    What’s interesting is that despite the increased marketing “engagement” and theoretically high ROI of its CRM programs, PSS continues to materially underperform on the top-line versus its peers in the sector. 

    The company’s CEO has a history of talking about EVERY top-line initiative… ad nauseam on the company on quarterly earnings conference calls.  That may be why he felt compelled to discuss something as mundane as text message marketing.  But, given the lawsuit, we would have suggested that he had left this topic out of his script. 

    Of course, many institutional investors that we talk to marvel at how the company’s CEO continues to toot the horns of the plethora of top-line initiatives in play at the company… only to report comp store sales results that are consistently a major disappointment versus its peer group.  Only now he’s talking about an invasive marketing program that may cost the company a pretty penny once it works its way through the court system.


    06.01.2010 PSS Q1 Earnings Call:

    Matt Rubel – Payless ShoeSource – CEO

    We continue to use customer relationship management to increase engagement with existing customers to reach prospective customers with similar characteristics as our best customers, and to better select our medium mix. We increased our CRM spending at Easter to drive customer traffic and conversion through our targeted one to one marketing vehicles, including text messaging, e-mail and direct mail. The return on these programs exceeded our return on investment requirement. Customer conversion was high at the time of the programs and we acquired incremental customers. Given the success of our CRM program, we expect to double our CRM investment this year.

    Now on to the Payless International operating segment. Sales were up 18% higher and operating income nearly quadrupled driven by a number of initiatives, aided by improved macroeconomic conditions. In Canada sales and profit increased due to good business performance including higher customer conversion and higher units per transaction, as well as favorable exchange rates. We had improved styles and fresh inventory flowing at the right time which reduced markdowns. Solid demand and expense management also helped financial results in Canada. We have also been building our CRM database through texting campaigns and intend to leverage the database with direct marketing programs starting in August.

    Disclosure: No positions
    Jun 11 10:28 AM | Link | Comment!
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