Retailers : Closing Up Shop

Retailers are closing up shop. Here's why...
.

Another day, another retailer trimming its store count.

On Thursday, J.C. Penney (JCP) said that it will close 40 of its locations -about 4 percent of its stores-this year. Then Macy’s (NYSE:M) said it would close 14 stores in early spring. The announcements came one day after teen retailer Wet Seal (WTSL) said it will shutter about two-thirds of its 500-plus stores , and a bankruptcy judge in Delaware ruled that Deb Shops can shut down nearly 300 stores as part of its liquidation.

These are far from the only retailers whittling down their square footage.

When it filed for Chapter 11 bankruptcy protection last month, teen name Delia’s said it will seek court approval to close all of its stores.

Also last month, Aéropostale (ARO) said it would close 120 stores soon, a significant increase from the 40 or 50 it had originally planned. The company will also close about 125 of its P.S. by Aéropostale children’s stores by the end of the month.

Sears (SHLD), which is trying to turn around its performance after a string of declining sales reports, said last month it would accelerate the number of closings during the year, from 130 to 235.

And RadioShack (RSH), which is negotiating with lenders to gain approval to shutter 1,100 stores,said last month that it had closed 175 locations in 2014 .

Several macroeconomic factors are driving this push toward a smaller store base, analysts said. For one, retailers simply have too many stores, particularly as more consumers shop online. For another, the demographics no longer make sense for stores to exist in certain suburban locations, as more young Americans are flocking to cities and staying there longer.

But it’s more than just external factors. Many of the retailers closing stores are facing company-specific problems that in some ways forced them to downsize.

“When you have a fleet of 1,000 stores, you’re going to have some in lousy locations,” said Craig Johnson, president of Customer Growth Partners. “That’s a tiny subset of the issue.”

One of the biggest issues is that retail is simply overstored, Johnson said. He attributed this supply versus demand imbalance to the fact that retail sales growth has been too tepid to account for an increase in retail real estate. The situation developed even though 2014 saw limited new construction, according to Jesse Tron, a spokesman for the International Council of Shopping Centers.

“If we start most broadly, you have a retail sector that has basically been in slow-growth, no-growth mode for a number of years,” Johnson said. “Meanwhile, store square footage has kept expanding.”

Location also plays a role. Belus Capital Advisors analyst Brian Sozzi said suburban markets are particularly vulnerable, as more Americans move into cities. He used Target (TGT) as an example; although the discounter announced a round of store closures in November , it’s also opening new stores in urban markets.

Johnson added that mall-based locations are facing greater challenges than off-mall concepts, which are stealing share.

 

It should also come as no surprise that the rapid growth of the Web is causing a traffic decline at physical stores. Johnson said that for the merchandise category, online sales now account for about 13 percent of all retail sales.

While there are certainly external factors to blame, it’s important to note that the companies shuttering a large quantity of stores are also victims of their own mistakes.

For example, much of the trouble facing teen retailers is the fact that their target demographic no longer finds their product appealing. Instead, they’ve begun shopping at fast-fashion stores such as H&M (Stockholmsborsen:HM.B-SE) and Zara (Mercado Continuo: ITX-ES)-which, in contrast, are growing their U.S. square footage.

 

In a similar vein, Johnson pointed out that department stores’ woes are due, in part, to the fact that their overall share is shrinking. A few years ago, these big-box locations accounted for well over 10 percent of the retail market; now, it’s about 3 percent, he said.

“[J.C. Penney] has to shrink the size of its store base to fit the addressable demand that it can reasonably capture,” he said.

Not all store closings should be viewed as a sign of distress for the retailer. That’s because the beginning of the year is when most retailers evaluate their portfolios. According to preliminary estimates from ICSC, about 45 percent of last year’s announced store closings occurred in the first quarter.

Companies that close underperforming stores to strengthen their portfolio stand in sharp contrast to names such as RadioShack, which “need the store closures to stay alive,” Sozzi said.

Although analysts have long been calling for retailers to trim their square footage, it does come with pitfalls. Closing a store cannot only cause someone to switch to a competitor-it can also limit a company’s distribution network.

 

“If you’re aggressively closing stores, well now you can’t do this ship from store,” he said.

The past four years have seen the death of more than two dozen indoor malls, with another 60 teetering on the edge, according to data from Green Street Advisors that was first reported by The New York Times. But ICSC’s Tron said he does not foresee a year when the industry will post a net decline in retail space.

He added that occupancy rates were at 92.5 percent in the third quarter, which is back above prerecession levels.

“We kind of see this every year,” he said. [In the] first quarter a bunch of stores close and there’s a little bit of panic. And then new retailers emerge.”

Among new tenants filling these vacancies are gyms, minute clinics, clicks-to-bricks concepts such as Rent the Runway, and international retailers such as Primark. The latter signed a deal for space in seven Sears locations last year.

“For all these deaths there will be life,” Sozzi said.

Offshore Portfolio Tax Reduction  http://www.youroffshoremoney.com

Michael Kors Holdings Limited

KORS : NYSE : US$77.01
BUY 
Target: US$123.00

Consumer & Retail — Footwear and Apparel
SOLID Q1; BIG PICTURE GROWTH INTACT: REITERATE BUY, $123 PT
Investment recommendation
KORS reported solid Q1 EPS results of 91c vs. our 82c estimate. Stronger
comps (+24.2% vs. our 20% est.) and gross margin expansion (+20bps
vs. our -20bps est.) drove the beat. Broad based growth across
geographies and categories continues to be robust as evidenced by NA
comps of 18.7%, European comps of 54.2%, and Japan comps of 48.8%.
Not only does KORS continue to take share domestically, but it is also
taking share from luxury brands across Europe.

With respect to gross margins, wholesale margin expansion of 62 bps more than offset
incremental markdowns at retail (-48bps) that were driven by a higher
sell thru mix of markdown product despite the same SKU count and rate
of markdowns y/y. That said, margin guidance for Q2 and the year is
-50bps from down slightly previously as the much anticipated and very
natural evolution of margin normalization has begun. We therefore
expect to see modest margin contraction in both retail and wholesale in
the near term, until retail mix helps margins mix higher.

Overall, F2015 guidance was raised by a few pennies in excess of the beat. We believe
the stock’s reaction (-6%) is unwarranted given the momentum the
brand has across its business. Moreover, the current valuation (18x
forward EPS) puts KORS at a 30% discount to its growth rate. With still
vast market share growth opportunities in Europe and Asia, which
combined represented just ~16% of total sales last year, we would use
this weakness as a buying opportunity. We reiterate our BUY.
Investment highlights
Europe continues to experience dramatic growth (+128% in Q1).
With greater confidence in its brand positioning, KORS increased its
long term market opportunity to $1.5B in sales from $1B

Steven Madden, Ltd.

SHOO : NASDAQ : US$32.83

BUY 
Target: US$43.00

COMPANY DESCRIPTION:
Steven Madden, Ltd., together with its subsidiaries,
designs, sources, markets and sells fashion-forward
footwear for women, men and children. The company
was founded in 1990 and is headquartered in Long
Island City, New York. SHOO has a portfolio of brands that
reaches globally among all economic tiers. SHOO offers
products through wholesale partners, an e-commerce
platform and its own retail stores.
Consumer & Retail — Footwear and Apparel
ACCENTUATING THE BRAND’S
STRENGTH VIA EXCLUSIVES
Investment recommendation
We visited the SHOO showroom to preview the late summer/early fall
’14 fashion deliveries. While the latest fashion trends were key topics of
discussion, underlying questions around consumer demand and recent
performance of SHOO’s wholesale customers were also top of mind.
First, traffic (both at retail and wholesale) is the main concern, not the
lack of trends. To combat pervasive discounting of similar products
across competing retailers, SHOO is implementing an “exclusives”
strategy to segment the market, much like Nike does with its marquee
basketball product. The exclusive shoes will be advertised as “in store
only” and should help redirect traffic back to stores while also limiting
unnecessary discounting. As for what is selling well, dress and sneakers
(pony-hair/quilted/perforated etc.) are outperforming sandals, which
have yet to rebound (although the last two weeks have been better). The
sneaker trenConsumer & Retail — Footwear and Apparel
ACCENTUATING THE BRAND’S STRENGTH VIA EXCLUSIVES
Investment recommendation

SHOO showroom  – to preview the late summer/early fall
’14 fashion deliveries. While the latest fashion trends were key topics of
discussion, underlying questions around consumer demand and recent
performance of SHOO’s wholesale customers were also top of mind.
First, traffic (both at retail and wholesale) is the main concern, not the
lack of trends. To combat pervasive discounting of similar products
across competing retailers, SHOO is implementing an “exclusives”
strategy to segment the market, much like Nike does with its marquee
basketball product. The exclusive shoes will be advertised as “in store
only” and should help redirect traffic back to stores while also limiting
unnecessary discounting. As for what is selling well, dress and sneakers
(pony-hair/quilted/perforated etc.) are outperforming sandals, which
have yet to rebound (although the last two weeks have been better).

While SHOO will not cycle the deceleration of booties (i.e., Troopa) until late Q3, we believe the implementation of a
segmentation strategy in the fall will set up 2015 for a resumption of strong double-digit EPS growth. As such, we reiterate our BUY.

Valuation

PT $43 – a blend of 15 x 21-5 earnings, 10x EBITDA and DCF

 

Deckers Outdoor Corporation BUY Target $ 103

DECK : NASDAQ : US$78.53

BUY 
Target: US$103.00 

COMPANY DESCRIPTION:
Deckers Outdoor Corp. engages in the design,
manufacture, and marketing of footwear and accessories
for outdoor activities and casual lifestyle use. DECK
distributes their goods through specialty retailers,
department stores, outdoor retailers, sporting goods
retailers and online retailers. DECK also sells directly to
consumer through its websites and retail concept stores.
The company was founded in 1973 and headquartered
in California.

All amounts in US$ unless otherwise noted.

Consumer & Retail — Footwear and Apparel
SOLID Q, IMPRESSIVE BACKLOG; REITERATE BUY, $103 TARGET
Investment recommendation
DECK reported a solid EPS beat of -8c vs. our -14c estimate driven by
stronger sales growth (+11.7% vs. our 6.4% estimate), greater gross
margin expansion (+210bps vs. our +35bps), and modestly better
expense leverage. As we anticipated, the extended cold winter helped
drive sales of UGG boots and slippers, while spring product has recently
begun to sell well in warmer weather markets. As such, inventory was
down 18%, indicating a healthy position heading into the new fiscal
year. In no uncertain terms, this was a solid, clean quarter. In addition,
the backlog ending March 31, was up a very strong +19% vs. our 10%
estimate driven by strong demand for UGG, HOKA, loungewear, and I
Heart UGG product. That said, wholesale growth was guided +LDD,
suggesting strong upside potential to w/s estimates. Nonetheless, given
the strength across all brands, DECK raised F14 guidance. With all
aspects of the business working well, we reiterate our BUY rating.
Investment highlights
 DECK is taking its German UGG distribution in house beginning July
1, 2014. We expect both sales and gross margin will benefit from
the transition, thus contributing incrementally to FQ2 and FQ3 EPS.
 New store growth is increasing from 25 to 30-35 stores as DECK
takes advantage of opportunistic real estate openings. E-commerce
(+45%) experienced robust growth as well, and should continue to
aid in brand awareness, particularly internationally (e.g. Germany).
Valuation
Our $103 target is a blend of 19x 2015E EPS, 11x EBITDA , DCF

Under Armour BUY Target Price $ 60

UA : NYSE : US$53.01
BUY 
Target: US$60.00

Consumer & Retail — Footwear and Apparel
SOLID Q1 SALES MOMENTUM;
UPDATING EPS FOR STOCK SPLIT
Investment recommendation
We are expecting another solid Q1 print from UA when it reports
earnings on Thursday, April 24 BMO. Our consensus 4c EPS estimate
could prove conservative by 1-2c as we believe solid apparel and
footwear sales will likely drive top line growth in excess of our 25.3%
estimate. Specifically, we believe apparel categories in women’s and
kids continued to lead the momentum as new product introductions (e.g.
Amour Vent) along with updates to existing apparel lines continue to
resonate well with consumers. Our store checks also suggest recent
footwear launches (e.g., the Speedform Apollo) were very well received,
supporting our belief that UA is making strong progress in the category.
We believe UA is one of the few outperforming brands in retail, and as
such we would use the recent 15% pullback to add to positions.
Investment highlights
 We believe gross margin will likely top our +88bps estimate, largely
due to the continued supply chain benefits partially offset by
stronger yet lower margin footwear sales. We believe the work UA
has done to enhance its supply chain by instituting a longer term
forecasting methodology is translating into higher fill rates and
more on time deliveries while not stressing the system.
 Now that UA will have full visibility into its fall order book, we
expect FY14 sales/EBIT guidance to be raised, albeit modestly, as
has been the custom for the past three years.
Valuation
Our split adj. $60 target is a blend of 50x 2015EPS/25X EBITDA/DCF

NIKE Update HOLD

NKE

 NYSE : US$79.27
HOLD  Target: US$71.00

COMPANY DESCRIPTION: Nike, Inc. designs, develops and markets footwear, apparel, equipment and accessories for men, women and children worldwide.  NKE focuses on sports-inspired apparel, footwear and accessories.  NKE was founded in 1964 & headquartered in Beaverton, Oregon

Consumer & Retail — Footwear and Apparel STRONG DEMAND TRENDS MITIGATED BY FX AND EXPENSES
Investment recommendation

NKE reported F3Q results of 76c vs. our/consensus 66c/72c estimate. A push-out of World Cup expenses (+9c) into Q4 comprised the largest contribution to the beat (relative to our model). Additionally, stronger sales growth (+2c) and lower taxes (+3c) were partially offset by less gross margin expansion (-1c) and higher other expense (-3c). The solid sales momentum NKE is experiencing across product categories (e.g., basketball, running, footwear, apparel) and geographies (NA, Western Europe, and Emerging Markets) coupled with 14% futures growth, is impressive. That said, FX headwinds hurt Q3 results and will continue to mount through F2015 with added pressure from continued investments in women’s, DTC, and digital. As such, F2015 EPS growth is now likely at ~12% with little upside opportunity. Given NKE’s premium 24.5x valuation, we prefer to leverage its product strength via the retailers (FL and FINL) and as thus maintain our HOLD rating.
Investment highlights  Solid 14% futures were driven by outstanding growth in WE (+30% vs. our 25%), while NA (+9% vs. our 12%) showed early signs of deceleration (down 500bps sequentially). Also, we do not expect the rebound in China (-3%) to materialize until late F2015 given the new seasonal ship-in strategy that just began, despite clean inventories.
 ASPs/DTC helped Q3 GM; however, product costs/FX muted the gains to 28bps (10bps below us). Mix should help Q4 by 50-75bps.
Valuation Our $71 target is a blend of 21x 2015E EPS / 14x EBITDA / DCF.

Columbia Sportswear

COLM : NASDAQ : US$78.67 
HOLD

COMPANY DESCRIPTION:

Columbia Sportswear Company designs and distributes outdoor apparel, footwear, accessories and equipment in the US, LAAP, EMEA, Africa and Canada. The company sells its products through wholesale distribution channels, licensees and via a direct-to-consumer channel that includes retail stores, outlets, and e-commerce.  

Target: US$75.00

Investment recommendation COLM reported solid Q4 adjusted EPS of $1.21 vs. our 98c (consensus of 92c). We recently raised our Q4 estimates on expectations of stronger sales in cold weather gear; however, COLM managed much healthier growth than we anticipated (+6.4% vs. our 1% estimate adding 6c to EPS). Gross margin was also a standout (+330bps) as full price selling at both DTC and wholesale drove 25c of the beat, partially offset by higher taxes (-8c). Inventory (-15%) is healthy at both COLM and at retail as evidenced by solid fall ’14 order growth (+DD). This was a solid Q4 in which COLM executed well. That said, full year 2014 guidance (15%- 17% sales growth on 8% EBIT margin) implies an EPS of ~$3.42 suggesting a valuation of 24x. Given the incremental $100M in expenses (e.g. Swire JV, marketing costs, ERP implementation, DTC), we are hard pressed to chase COLM here and thus maintain our HOLD.
Investment highlights  The transition of the China JV with Swire is now complete, yet the expected 2014 EPS accretion has been lowered to 13c (we had estimated 25c of accretion). Excess inventory in the market and stepped up promotions are reducing COLM’s sales outlook in China.
 Total organic sales ex-Swire are expected to be up ~8%, consistent with history and mainly driven by the US fall orders +DD, partially offset by -LSD spring ’14 orders due to weak Argentina/Venezuela.
Valuation Our $75 target is based on 20x 2015E EPS, 10x EV/EBITDA, and DCF.