J. Crew (JCG – $43.27) appears to be encouraging TPG Capital and Leonard Green & Partners LP to sweeten their $43.50 a share offer to acquire the company. This is an attempt to sway skeptical shareholders.

This deal has been fraught with accusations of CEO Millard Drexler insisting of only dealing with TPG and keeping early-stage talks of the deal from the company’s Board of Directors. We’re not sure anyone is surprised about these accusations.

Here’s what is interesting from our perspective.

In our view, JCG management has a spotty track record when it comes to its communication with the investment community. While Mr. Drexler has generally been upfront re: merchandise issues on quarterly conference calls, we’re reminded of a couple of situations in which management may have been less than forthcoming.

For example, the company’s dramatic losses on the Madewell chain were always sugar coated. It’s hard to fathom how a chain with only 17 stores at the end of FY 2009 lost $13 million at that particular stage of development. Will Madewell will go the way of Ruehl and Martin + Osa once Mr. Drexler exits the public arena and no longer needs a growth vehicle to keep a wide range of investors happy?

Also, we never believed that the company’s Crewcuts product ever attained the level of success that was generally suggested by management in FY 2008 & FY 2009. The fact is that the company’s SEC disclosures (Crewcuts = 4% of the company’s sales mix in FY 2009) never warranted the puffery by management on quarterly conference calls (it’s worth noting that JCG management finally stopped “talking up” the Crewcuts product when the company began removing the product from select shop-in-shops in FY 2009).

Finally, JCG management had a somewhat disingenuous track record re: its DTC Channel system upgrade issues on FY 2008. See comments below.

Let’s not forget the time back in Q3 2007 when the company suddenly changed its sales return reserve in its DTC channel. This adjustment was not mentioned in the company’s press releases and was only given a subtle mention in the company’s prepared remarks on its conference calls (with no mention of the positive impact on EPS).

Big picture, we’ve seen this movie before. A company (e.g. JCG, ex-GYMB) starts to see material EPS downside versus consensus expectations ahead and tries to quickly locate a suitor (in this case TPG/Leonard Green) willing to buy at a price that contemplates a much higher level of profitability than will be the case 3-6 months from today.

Gymboree management clearly wrote checks that the company could not cash (click here to see press release indicating that Q4 2010 earnings ended up being well short of consensus expectations prior to deal closing).

JCG management may be trying to get this shotgun wedding completed before they have to fully come clean re: their view of the company’s earnings expectations for FY 2011. Makes sense, if you’re the seller.

We’re at $1.86 in FY 2011 and that may be a bit optimistic (click here to see our EPS model).

It will be interesting to see how this plays out. But, in our view, the shenanigans that some are suggesting about the deal’s dynamics appear to mirror those of the company’s past communications with the investment community.

The Dirty Little Secrets of Search Click to Open PDF Article
Very interesting article re: “black hat” approaches to boosting search term performance at Google. Apparently, JCP has employed deceptive tactics to enhance its search-term performance in recent months. What’s interesting is that the company continues to deliver online sales growth well below that of its peers.
Posted: Posted: Saturday February 12, 2011
Source: New York Times

Retailers Struggle in Amazon’s Jungle Click to Open PDF Article
Everyone is talking about commodity inflation beginning to reach to consumer in the form of higher prices. Let’s not forget sales tax inflation. This articles suggests that average sales tax reached a record high of 9.64% in 2010 versus 6.63% in 2009.
Posted: Tuesday, February 22, 2011
Source: WSJ

Wal-Mart Tries to Recapture Mr. Sam’s Winning Formula Click to Open PDF Article
WMT is even getting beaten up by PG CEO Robert McDonald for the chain’s inability to execute.
Posted: Tuesday, February 22, 2011
Source: WSJ

New Logo, Slogan for J.C. Penney Click to Open PDF Article
How much did the company pay the 14-year old to design the new logo? Not much change versus the old logo.
Posted: Tuesday, February 22, 2011
Source: WWD

Buyers Bet Cautiously in Vegas Click to Open PDF Article
Nice recap of the recent MAGIC trade show in Las Vegas. Caution still rules.
Posted: Wednesday, February 23, 2011
Source: WWD

That, my friends, is how you turn lemons into lemonade.

Chico’s (CHS – $13.69) essentially ‘missed’ the Q4 2010 consensus EPS estimate by $0.02 on Wednesday. A beneficial quarterly tax provision (gosh, boosted in part by a “charitable donation of un-merchantable inventory”) padded EPS by $0.01. Therefore, the company essentially delivered Q4 2010 EPS of $0.11 versus the consensus estimate of $0.13.

That said, you never would have discerned that sort of black eye when listening to the quarterly conference call.

Comp store sales have sharply decelerated at CHS over the past 3 fiscal quarters, unlike the broader trend at the mall, or at peer Ann Taylor (ANN – $23.43). Sales are decelerating in spite of the company’s +31.3% marketing dollar increase in FY 2010 versus LY.

GPM% has declined in both Q3/Q4 2010 despite a material boost via improved outlet channel merchandise margins (via “made for outlet” product).

Inventory growth has exceeded sales growth in 3 straight quarters. While CHS management suggested in the Q2/Q3 2010 conference calls that it was “comfortable” with its inventory levels, yesterday management suggested otherwise:

Was the company trying to creatively ‘spin’ the now apparent inventory problems on the Q2/Q3 2010 conference calls?

Big picture, profitability improvement has stalled at CHS. Trailing 4-quarter EBIT margin appears to be stuck in the 9.4% range.

Here’s where it gets interesting. Yesterday, CHS management provided a textbook example of how to sugar coat an earnings miss AND to re-energize your stock price at the same time. It boils down to creative ‘spin’ doctoring that would make a seasoned political operative blush.

Here are the key ingredients of the lemonade that was served by CHS management to the investment community yesterday:
Lemons into Lemonade Ingredient #1…
Recognize a beneficial tax rate to boost EPS by $0.01 in Q4 2010. Make no mention of the EPS benefit in the press release or conference call script.

Lemons into Lemonade Ingredient #2…
Start out the conference call by suggesting weather cost the company “$10 million to $12 million in sales” in Q4 2010. Make certain to quantify the impact. Of course, don’t tell anyone about the impact of the relatively strong comp store sales once the inclement weather subsided.

Lemons into Lemonade Ingredient #3…
Suggest that a fashion miss in December 2010 at White House Black Market was only a “temporary hiccup” that happens “now and then.”

Lemons into Lemonade Ingredient #4…
Announce the month-to-date comp sales (now materially aided by DTC) are +13% versus LY.

Lemons into Lemonade Ingredient #5…
Completely ignore the astute question (by Paul Lejuez of Nomura) re: February 2011 merchandise margins and/or full-price sell-through versus the prior year. We believe that promotional activity in February 2011 at both key chains has been materially greater than LY.

Lemons into Lemonade Ingredient #6…
Despite completely missing the Q4 2010 GPM% guidance (“slightly below last year”), suggest that it’s completely reasonable given that WHBM was up against ‘record’ merch margins versus LY.

Lemons into Lemonade Ingredient #7…
Announce bloated inventory levels at the end of Q4 2010 (inventory growth greater than sales growth), yet suggest that much of the incremental inventory was (of course) “inventory in-transit.”

Lemons into Lemonade Ingredient #8…
Double-down on your previous “pie in the sky” goal of $1.00 EPS in FY 2011 (in our view, not a chance) with an even more ridiculous “$1.50 stretch goal” for FY 2013. Then, call it a “big hairy audacious goal.”

Lemons into Lemonade Ingredient #9…
Essentially, provide financial guidance. But, suggest that it’s not “guidance,” but rather a “goal.” Weak.

Lemons into Lemonade Ingredient #10…
Suggest that GPM% will be slightly higher in FY 2011 than LY. Yet, warn folks that today they’re “buying September” and that IMU is expected to decline by 2H 2011.

Lemons into Lemonade Ingredient #11…
Avoid the product quality issue question on the conference call (by Edward Yruma of Keybanc). Then, suggest that the company is moving a material portion of its sourcing “out of China as fast as we can” while implying that the company has not even tested the product yet coming out of the new factories (theoretically, that is to be solved by putting “feet on the ground” this year).

Is the company attempting to attract a private equity suitor? Why else would the company so creatively spin short-term information and throw out unrealistic forward earnings guidance (ahem, ‘goals’)?

In our view, CHS management did a great job getting to where they are today. A 9% to 10% EBIT margin in their space (Missy) is commendable.

But, profitability has stalled of late and there are many unknowns ahead. In our estimation, Gymboree may have pulled similar punches as CHS management is pulling today prior to selling the company to Bain Capital (see the early-February 2011 press release in which it became clear that ex-GYMB’s profitability dramatically declined in Q4 2010).

Is CHS management beginning to understand the second act is materially more difficult than the first act? Are they attempting to maintain this facade in the hopes of being acquired before investors begin to fully grasp how difficult it will be for CHS to achieve an EBIT margin north of 10%?

We’re not sure. But, the skill that was employed this week to re-energize the company’s stock price in the face of disappointing quarterly results reminds us of similar shenanigans employed by Talbots (TLB – $5.85) 9-12 months ago and we know how that movie ended.

Given Target ($51.07) expected an approximate +200 Bps to +300 Bps comp store sales boost in Q4 2010 via PFresh, RedCard, and store remodels, the +2.4% comp store sales result in Q4 2010 should be regarded as a major disappointment.

Therefore, we’re perplexed as to why the company has seemingly doubled-down on its irrationally exuberant top-line guidance. In the Q3 2010 earnings press release, the company made the following statement:

Oops! The company’s +2.4% comp store sales in Q4 2010 fell short of the +2.9% needed to exceed the highest comp store sales performance over the past 3 years.

So, what’s a company to do when they come up short of last quarter’s misplaced bravado? On February 3rd, the company again thumped its chest by suggesting that the RedCard and PFresh initiatives would “drive even more meaningful increases in Target’s fiscal 2011 comparable store sales.” Good grief.

That said, dramatically improved credit card profitability continues to boost EPS versus LY. In FY 2010, Credit Division profitability versus LY will boost EPS by $0.28. Will there be incremental Credit Division earnings in FY 2011?

The below table reflects the material EPS boost in FY 2010 via Credit Division profitability improvement versus the prior year (numbers in italics/yellow indicate forecasted amounts).

Target (TGT) Credit EPS Impact vs. LY

Apparel Prices Primed to Rise Click to Open PDF Article
Yes, we’ve all heard about cost pressures. But, in this article, Esprit’s CEO provides investors a clue re: a major issue that folks will likely be talking about in 6 months. Mr. Van der Vis suggests that his company is trying to offset cotton inflation, for example, by consolidating sourcing (e.g. moving from 117 to only 11 suppliers for its sweater business). This “buying deeper” approach will (1) force retailers to place earlier, deeper orders and (2) limit a retailer’s ability to ‘chase’ product.

Some analysts believe that JCP, having placed its FY 2011 orders earlier than others, is better positioned this year (see Citi note this week). We’ll see.
Posted: Posted: Tuesday, February 15, 2011
Source: WWD

Shoe Execs Debate Market Drivers Click to Open PDF Article
There is still no one that knows whether consumers will stomach higher prices this year. One executive in this article suggests, “It will be interesting to see how much we can get from consumers on the product.” Another suggests, “We have to figure something out because we’re not going to make less money.” Simply, even these CEO’s have no clue how this year is going to play out.
Posted: Tuesday, February 15, 2011
Source: WWD

Edward Lampert Moves In on Gap Click to Open PDF Article
Let’s turn this around. Mr. Murphy at GPS should replace Mr. Lampert at SHLD.

Mr. Lampert has failed miserably at turning around SHLD and it could be argued that he IS THE PROBLEM at SHLD. Glenn Murphy at GPS has done a wonderful job at GPS. Mr. Murphy and GPS will deliver a 13% or greater EBIT margin in FY 2010, a miracle given the company’s historically bloated store size and miserable top-line.
Posted: Wednesday, February 16, 2011
Source: WWD

Big Lots Settles Suit With Researcher Click to Open PDF Article
What is it these guys at Retail Intelligence Group do to “dupe store managers into revealing trade secrets?” While BIG should do a better job at training their store employees from disclosing ANY information re: the business, the methods of the research firm sound a bit sketchy.
Posted: Friday, February 18, 20111
Source: WSJ

Nordstrom Buys HauteLook for $270M Click to Open PDF Article
On yesterday’s quarterly earnings conference call, JWN management suggested that they will no longer provide separate full-line store results and direct-to-customer results. Over the past 1-2 years, JWN scaled-back the disclosures related to its credit card operation. Now, they’re scaling back their online channel disclosures at a time when it becomes even more material.

This is how companies limit the ability of analysts/investors to adequately assess the success or failure of an acquisition.
Posted: Friday, February 18, 2011
Source: WWD