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.

Michael Kors Holdings Limited BUY

KORS : NYSE : US$90.31
BUY
Target: US$119.00

COMPANY DESCRIPTION:
Michael Kors Holdings Limited designs, markets, and
distributes branded women s apparel and accessories,
and men s apparel. The company sells its products
primarily under the names of Michael Kors, MICHAEL
KORS, MICHAEL MICHAEL KORS, and KORS MICHAEL
KORS. It operates in three segments: Retail, Wholesale,
and Licensing. The company has over 230 stores across
North America, Europe, and Japan.
All amounts in US$ unless otherwise noted.

Consumer & Retail — Footwear and Apparel
ALL (SHARE) GAIN, NO (MARGIN)
PAIN; REITERATE BUY, NEW $119 PT
Investment recommendation
Once again, KORS trounced our and Street expectations with impressive
execution across the entirety of its business, posting comps/EPS of
27.8%/$1.11 vs. our 18%/84c estimate (consensus was 20%/86c).
Surprisingly, the significant comp upside did not come at the expense of
gross margin as Q3 promotional levels were similar year/year. Clearly,
KORS is taking share from its direct competitor in COH, but more
importantly it is also taking share from luxury brands (e.g. Gucci and
LV) as the accessibility of its price points is creating a swell of demand
for the brand globally. We expect continued share gain benefits to
materialize as 1) brand awareness grows in Europe/Japan; 2) categories
gain further traction (e.g. accessories, men’s/women’s, footwear, and
fragrance); and 3) 70% larger retail store openings plus incremental
shop in shops in NA persist through 2015. Given 3 new DC openings
planned over the next 24 months, we believe KORS’ global growth
opportunity is robust and view it as a core growth holding; thus we
reiterate our BUY.
Investment highlights
The astounding strength in Europe (73% comps) is having an
increasingly positive impact on gross margins; meanwhile KORS has
yet to see an increase in markdown allowances in wholesale
suggesting further gross margin expansion opportunities in 2015,
particularly as both retail and product mix trend favorably (we are
estimating a conservative 30bp improvement).
Valuation
Our $119 target is a blend of 30x 2015E EPS/17x EBITDA/DCF.

Hudson’s Bay Company

HBC : TSX : C$16.89
BUY 
Target: C$22.50

COMPANY DESCRIPTION:
The Hudson’s Bay Company is a leading North American department store retailer, operating stores under the Hudson’s Bay and Home Outfitters banners in Canada, and under Lord & Taylor in the United States.
All amounts in C$ unless otherwise noted.

Consumer & Retail — Merchandising
ANNOUNCES FLAGSHIP LOCATION SALE & LEASEBACK TRANSACTION
Investment recommendation
Hudson’s Bay announced the sale of its downtown Toronto location, along with its ownership of the ~400,000 square foot Simpson’s Tower to Cadillac Fairview for $650 million. Hudson’s Bay will lease the location back for a base term of 25 years, with renewal options for just under 50 years. After incorporating the transaction into our valuation, we are maintaining our BUY rating and increasing our target price to C$22.50 from C$21.00.
Investment highlights
 Utilizing an average $25 rent per square foot implies a 4.75% cap rate for the transaction. Incorporating the $650 million sale price, as well as the aforementioned increase in rent against our annual EBITDA estimates, our sum-of-the-parts valuation increases from C$20.33 to C$22.79.
 Assuming all proceeds are initially directed toward debt repayment, our fiscal 2014 year-end net debt/ebitda estimate falls from 3.9x to 3.2x, leaving Hudson’s Bay much more latitude to pursue Saks-related expansion plans and pursue additional growth opportunities.
 Concurrently, the company announced the locations of the first two Saks stores in Toronto. A full-line, multi-level Saks will be co-located with the current Hudson’s Bay location at Queen/Yonge and is planned to open in the fall of 2015. Also, the company plans to open a location at Sherway Gardens.
Valuation
Our target price reflects our updated sum-of-the-parts valuation and represents 8.5x our F2014 EBITDA estimate of $$643 million. Although Q4/F13 appears challenging given both a heavily promotional environment and very unfavorable weather, HBC remains committed to reducing excess SG&A costs and leveraging the recent acquisition of Saks. Meanwhile, we believe investors will be rewarded through further monetization of HBC’s significant real estate assets during F2014

lululemon athletica inc. Update

I can’t resist the temptation to make an issue of the pants or the stock being the butt of jokes in poor taste.

LULU : NASDAQ : US$60.39
BUY 
Target: US$82.00

COMPANY DESCRIPTION:
lululemon athletica Inc. is a designer and retailer of
technical athletic apparel operating owned retail stores
primarily in North America and Australia. The company
offers a range of performance apparel and accessories
for women, men and female youth. Its apparel
assortment, including items such as fitness pants, shorts,
tops and jackets, is designed for healthy lifestyle
activities like yoga, running and general fitness.

Consumer & Retail — Footwear and Apparel
FRUSTRATING BUT FIXABLE; LOWERING ’14 EPS, MAINTAIN BUY
Investment recommendation
Despite a solid Q3 report (45c vs. our 41c estimate), LULU guided to a
highly disappointing flat Q4 comp implying a 1300bp two year
deceleration from Q3. Traffic issues (2/3) coupled with continued
product delivery delays (1/3) were the culprits. We surmise that
generally poor mall traffic (-5% in Nov. and -10% in Dec. thus far),
exacerbated by the poor comments by founder Chip Wilson, is at play
rather than competition taking share from LULU as Q4 comp guidance
with e-commerce would have been a strong +8%. We continue to view
LULU as a premier athletic retailer whose current setbacks, while
frustrating, are transitory. That said, the stock is likely to tread water in
the near term until the next catalyst (ICR) and/or Q4 earnings in March.
While LULU’s growth potential remains vast, it must begin to show
progress on the investments it is making or risk alienating more of its
customers. 2014 should be that year of improvement, and thus we
maintain our BUY.
Investment highlights
 We lowered our 2014 EPS estimate by 28c to $2.35 (20% EPS
growth) largely driven by a reduced comp outlook to 6.4% from
14.7% previously. Our new estimates assume no improvement in
the business (either in traffic or supply chain), an assumption we
view as highly conservative given our belief that none of LULU’s
current issues are systemic or competitively driven.
Valuation
Our $82 target (from $90) is based on 35x 2014E EPS/20x EBITDA/DCF.

Steven Madden, Ltd.

SHOO : NASDAQ : US$36.78
BUY 
Target: US$41.00

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 ecommerce
platform and its own retail stores.

Consumer & Retail — Footwear and Apparel
SPRING ’14 PRODUCT PREVIEW HIGHLIGHTS NEWNESS: REITERATE
BUY, $41 TARGET
Investment recommendation
After spending last week with SHOO in their showroom previewing the
2014 spring product line, we came away positive on the level of newness
in the line that should bolster its competitive position next year. More
importantly, we believe SHOO’s wholesale customers were equally as
enthusiastic with what they saw. In particular, wedges with chunkier
heels, canvas sneakers with pony hair, and the Stingray Oxford booties
were standouts in our opinion. Interestingly, the chunky heel wedge is a
function of an emerging wider pant leg trend. ASP trends are looking to
be consistent with spring ’13; however, if the wide leg pant trend holds,
it could spur a significant increase in units next year. With plenty of new
fashion coming in 2014, we reiterate our BUY rating.
Investment highlights
 The persistent discounting in the mall by most retailers is driving
SHOO to respond with elevated promotions just to maintain its
competitive stance. As such, we have moderated our retail gross
margin estimate down by 30bps to 63.2%. Offsetting the
promotional impact to retail, however, is the market share gain in
wholesale, resulting in our wholesale footwear growth estimate to
increase to 12% from 11.5%. Auto-replenishment of on-point
fashion (e.g. Troopa bootie) is helping further its market position.
Valuation
Our $41 target is based on a blend of 15x 2014E EPS/ 10x EBITDA/DCF.

Gap Uddate Hold Target Price $ 44

GPS : NYSE : US$39.68
HOLD 
Target: US$44.00

COMPANY DESCRIPTION: Gap is a global specialty retailer of clothing and accessories for women, men, and children. GPS brands consist of Gap, Old Navy, Banana Republic, Athleta, and Piperlime. The company operates around 3,100 stores
worldwide, and GPS products are sold through 300 franchise locations.
All amounts in US$ unless otherwise noted.

Consumer & Retail — Specialty Retail
SEPTEMBER SSS DECLINE AMID SLUGGISH TRAFFIC TRENDS
Investment recommendation
GPS reported a SSS decline of 3% on top of +6% in September. We had forecast +3%, and the consensus estimate was +2%. The company noted traffic decelerated throughout the month, particularly as the government shutdown approached. According to ShopperTrak, U.S. retail traffic was down 5% in the last week of September and has declined in 12 of the last 15 weeks.

We are  maintaining our HOLD rating as we do not see any near-term catalysts that would propel shares out of their current range, especially given the deteriorating retail traffic environment.
Investment highlights
 GPS suffered September SSS declines across all core categories. Gap global SSS were -3% on top of +3%, Banana
Republic global -5% on top of +4%, and Old Navy global -2% on top of +10%.
 We are lowering our Q3 EPS estimate by $0.03 to $0.65, $0.04 below prior consensus. We now forecast a SSS decline of 0.7% on top of +6%, versus our prior +1.8% estimate. This would be GPS’s first down quarter since Q4:11.
 Our long-term projections move higher as we are increasing our share buyback assumptions. We now estimate an
average $1.2B in annual buybacks from FY14-FY17. We had previously not modeled for any repurchases in the out years.

 

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