Welcome to our second issue of the Weekly Spin Cycle. Each week, we’ll deliver some news and commentary about the retail industry. Whether you’re an industry insider, investor, or outside observer, the articles/commentary you read here are designed to enhance your understanding of the retail sector and the issues facing it.

In addition, we’ll pay close attention to the “managerial spin” and will on occasion offer a contrarian view. You are encouraged to provide any feedback to info@RetailGeeks.com. Click to Open PDF

Hope Is Not a Strategy – BHAG at CHS Now a Pipedream

This week, Chico’s (CHS – $10.11) reported Q3 2011 earnings that fell well short of expectations. Three months ago, CHS management “hoped” that markdowns in 2H 2011 would be lower than LY. Investors that banked on that “hope” were burned.

On the quarterly conference call, CEO Dave Dyer essentially admitted that he made an aggressive inventory bet in 2H 2011. We’re not used to management teams admitting failure, so his candor is appreciated.

Yet, before we give Mr. Dyer too much credit for accepting responsibility for his inventory bet, let’s go back 9 months to the Q4 2010 conference call in February 2011.

In February 2011, CHS reported Q4 2010 EPS that fell two cents shy of consensus expectations (when excluding a beneficial tax rate boost). In addition, the company ‘missed’ its Q4 2010 GPM% guidance and announced bloated levels of inventory (with standard in-transit excuse).

But, here’s where it gets interesting. At that time, Mr. Dyer decided to double-down on his previous pie in the sky $1.00 EPS ‘target’ for FY 2011 by announcing a more ridiculous $1.50 EPS ‘target’ for FY 2013.

On that day, Mr. Dyer successfully turned “lemons into lemonade.” Clearly, Mr. Dyer knew the market would react negatively to an EPS ‘miss’ and, in our view, he came out on the February 2011 conference call with both guns blazing… glossing over Q4 2010’s EPS/GPM% shortfall and introducing a FY 2013 EPS ‘target’ and a mid-teens EBIT margin goal.

Therefore, we’re not overly impressed with Mr. Dyer’s admission of a failed inventory bet this week. His BHAG of $1.00 in FY 2011 appears to be out of reach for FY 2012 despite the ‘bought’ earnings (Boston Proper acquisition) and a large-scale share repurchases.

PSS Management Performs Magic Trick – Inexplicably, EPS of $0.13 Turns into $0.61

Collective Brands (PSS – $12.52) earned our respect last quarter when the new management issued a mea culpa and (finally) admitted that the company had ignored its core customer over the past few years.

Gone was the old CEO’s foolish attempt to focus on an “expressive” customer. Instead, the remaining management team members appeared reinvigorated and excited that their strategic voice (of reason) could be heard. As analysts, we were excited that PSS management appeared to be entering a period of Glasnost and that the proverbial Berlin Wall had fallen.

So, just three months later, what does the new management team do? They try to convince folks that Q3 2011 non-GAAP EPS of $0.13 (our estimate) equals $0.61. The majority of the difference between reality (our $0.13 estimate of a ‘true’ non-GAAP number) and $0.61 appears to be related to a “catch-up” of the go forward tax rate in Q3 2011. The consensus EPS estimate going into the print was $0.49.

Let’s ignore the non-GAAP EPS number and instead focus on non-disputable facts. The company’s profitability has imploded this year. The core Payless Domestic division lost $17.2 million (ex-items) over the trailing 4 quarters. The PLG Retail division lost $3.3 million (ex-items) over the trailing 4 quarters. Not good.

Yet, despite positive comp sales at many of his peers, PSS CEO Michael Massey suggests that “we have seen signs that confirm we are on the right track.” Uh, huh. Good luck with that.

Finally, on the quarterly earnings conference call, LuAnn Via, President/CEO of Payless, doubted that Wal-Mart’s recent success with shoes “has had any impact on the Payless business.”

Yes, it’s wonderful that Ms. Via believes that Payless needs to focus on its core demographic and offer more “good” price points. But, her belief that Wal-Mart is having little impact on their business may be indicative that even more wholesale managerial changes are needed at PSS.

Check out the company’s operating profitability implosion below:

Just When You Thought Gymboree’s Inventory Situation Could Not Get Worse – Think Again

This week, Gymboree (ex-GYMB) reported its earnings for Q3 2011. Wow! Take a look at the company’s bloated levels of inventory. It’s still a major issue. Inventory growth has MATERIALLY exceeded sales growth in each of the past 6 fiscal quarters (see chart below).

What’s hilarious is that management tried to blame “higher product costs” as the reason for the company’s -530 Bps GPM% decline in Q3 2011 versus LY. Yep, that’s it. Simply higher product costs. Nothing was said in the company’s prepared remarks re: markdown levels and management (per conference call) feels “good about the overall mix of the inventory.” Amazing.

We can’t think of a more opportunistic sale of a retailer over the past decade. We’re still of the belief that ex-GYMB management saw the ice cube to begin rapidly melting over a year ago prior to the sale to Bain Capital.

ShopperTrak: Dec 26 Traffic Could Rise 60% Click to Open PDF
There are no built-in excuses in fiscal December this year. Retailers have an extremely favorable calendar versus LY.
Posted: Monday, November 21, 2011
Source: WWD

Promotions Galore Seen as Black Friday Looms Click to Open PDF
Earlier openings have the potential to spur sales. But, will profits disappoint?
Posted: Monday, November 21, 2011
Source: WWD

Price, Premium Effect Lift Denim’s Profile Click to Open PDF
Denim has rebounded this year, likely via the need for replenishment. But, what’s interesting is that many are expecting on maintain pricing in 2012 as sourcing costs decline. We’re not so certain.
Posted: Tuesday, November 22, 2011
Source: WWD

Goldman: Sell Options in Retail Stocks Click to Open PDF
While November is typically a volatile month for retail stocks, December is one of the lowest.
Posted: Friday, November 25, 2011
Source: WSJ

Earlier Black Friday Openings Draw Crowds Click to Open PDF
The earlier openings worked. We predict 6:00pm Thanksgiving openings next year.
Posted: Saturday, November 26, 2011
Source: WSJ

Welcome to our inaugural issue of the Weekly Spin Cycle. Each week, we’ll deliver some news and commentary about the retail industry. Whether you’re an industry insider, investor, or outside observer, the articles/commentary you read here are designed to enhance your understanding of the retail sector and the issues facing it.

In addition, we’ll pay close attention to the “managerial spin” and will on occasion offer a contrarian view. You are encouraged to provide any feedback to info@RetailGeeks.com. Click to Open PDF

ANF Management Loses Credibility with Investor Community

Jonathan Ramsden, EVP & CFO at Abercrombie & Fitch (ANF – $47.30), maintained the company’s FY 2012 EPS target of $4.75… despite reporting disastrous financial results for Q3 2011. A reasonable EPS estimate for this year is $2.64 with an implied EBIT margin of 8.4% (only +50 Bps versus LY).

To reach $4.75 next year, ANF needs to deliver at least +MSD comps and an estimated 12.0% EBIT margin.

This week, by maintaining next year’s EPS target, Mr. Ramsden just lost any and all credibility he had with the investment community.

ANF management has been “hoping” for a less promotional environment here in the U.S. for some time. Simply, “hope” is not a strategy or even a reasonable expectation in light of today’s macroeconomic environment.

Finally, it’s worth noting that even Urban Outfitters (URBN – $25.96) management suggested that its sales in Europe were relatively strong as comparable sales there “improved sequentially throughout the quarter.” Not so at ANF. Is ANF experiencing worse troubles in Europe than of a simple macroeconomic variety?

GPS CEO Murphy ALWAYS Promises Improved Product is Right Around the Corner

The Gap (GPS – $18.76) continues to materially underperform versus its peer group. But, we chuckle when listening to the quarterly conference calls because CEO Glenn Murphy always seems eager to suggest that improved product is right around the corner. An example from this week’s conference call:

“I’d like to think that when people go to stores in December, they will start seeing the beginning of some changes to the business when it comes to its aesthetic, in terms of quality of the product, in terms of acceptance of color.”

Good luck with that prognostication. While his expense management and strategic vision has been stellar and kept the company’s financials from imploding, Mr. Murphy’s track record on predicting improved top-line performance is near zero.

Just How Profitable is China for Retailers? Maybe Not As Much As We’re Being Led to Believe

That said, there was one other interesting topic that was discussed during this week’s conference call. Many investors are assuming that most retailers are having a tremendous amount of success in China. But, take a look at the following quotes from GPS CEO Mr. Murphy that suggests ‘profitability’ in China may be more elusive than many investors have contemplated to this juncture:

“Our China store performance, from a sales perspective, has been very positive.”

“But, you have to invest in China. It’s a busy market and there’s lots of brands coming in. You have got to put marketing money into that business in order to make sure that long-term you have a sustainable, healthy profitable brand.”

“We knew that China would take the longest to become accretive. Definitely dilutive this year, likely dilutive next year as well.”

“It’s taking more headcount. It’s more burdensome administratively. So, those costs are heavier than initially envisioned. We’re also putting a lot of money into marketing.”

It’s time for investors to stop being so enamored by the top-line metrics for China being bandied about by retail management teams and to instead begin to better understand a retailer’s profitability in the country. It may be that other retailers are having similar bottom-line problems in China as GPS is having today.

Free Shipping May Not Be the Margin Robber that Many Retailers Are Claiming

Target (TGT – $53.00) management disclosed that the impact of free shipping on GPM% is “not one of the larger items” when looking at the company’s GPM% decline versus LY.

Why interesting to us? We suspect that many other retailers are using free shipping (in addition to the higher product cost environment) as excuses for GPM% degradation versus LY. It’s much easier to lay the blame elsewhere… as opposed to your own merchandising missteps and/or strategic failures.

TGT delivered fairly impressive EBIT margin expansion in its U.S. Division in Q3 2011 and we believe that there is further EPS upside versus the consensus estimate in Q4 2011.

Don’t Want to Issue Downside Forward EPS Guidance – Do What JCP Did This Week

In our view, J.C. Penney (JCP – $31.57) management came up with a novel approach on how to avoid the issuance of EPS guidance that is materially below consensus.

In what may have been one of the more ridiculous disclosures we’ve seen in our career, this week, JCP management stated the following in their quarterly earnings press release:

“This guidance does not include the financial impact that is expected to be incurred in the fourth quarter as the Company executes changes to its pricing strategy in preparation for the Spring 2012 season. The Company expects to disclose the financial impact of these changes with its fourth quarter results.”

Simply, the above disclosure is unprecedented. Why is this unusual and of the non-recurring variety? Is sounds more like a heavy markdown quarter or possibly that the markdowns reserve for Q3 was light.

Also, it’s odd given that if the company convinces investors to view the above as a non-recurring item, next year’s fiscal Q4 results will be tougher to compare against (the incoming CEO’s problem).

When pressed during this week’s conference call, JCP management gave no additional color on this topic.

DTC Sales Higher at URBN – What About Catalog/Internet Advertising Spend?

We love how Urban Outfitters (URBN – $25.96) CEO Glen Senk suggested that the core brand’s DTC sales in Q3 2011 “improved sequentially versus the second quarter.”

Why important? There was no discussion of the brand’s increased level of catalog circulation (materially higher over the past 12 months versus the prior year… per 10-Q filings) and/or possibility of an increased level of Internet advertising spend versus LY.

Also, Mr. Senk suggested that the better performance by the DTC channel is a function of the ability to “adjust the web site much more quickly” than the retail stores.

It’ll be interesting to see the company’s catalog circulation disclosures when the 10-Q is filed. The sequential improvement in the core brand’s DTC channel may have much more to do with the increased level of catalog circulation/Internet marketing than anything else.

The same holds for any retailer reporting DTC/Internet sales growth. Investors should ask management teams how much incremental dollars they’re investing to drive this particular channel’s top-line growth.

That said, we’ll give Mr. Senk credit for admitting his ability to predict an improved trend in the business has been miserable of late. During his prepared remarks, Mr. Senk finally admitted he’s no Nostradamus:

“As a merchant at heart, I realize that I am an eternal optimist, so I ask that you not misconstrue my enthusiasm as an indication of our performance. This is a cyclical business and I cannot tell you when our trend will improve.”

WMT Takes a Margin Hit & Makes a Heavy Inventory Investment – Yet, Sales Still Lag Peer Group

In Q3 2011, Wal-Mart (WMT – $57.23): was facing a materially easier 2-year GPM% comparison. Yet, GPM% imploded in Q3 2011 versus LY (-52 Bps versus LY). All 3 operating segments reported a GPM% decline versus LY.

On the earnings recording, the head of the U.S. Division made the following statement:

“Cost increases in numerous categories were not passed on to our customers in the form of increased prices.”

It’s worth noting that the company suggested that its grocery inflation (U.S. Division) increased +4.0% in Q3 2011 versus LY. This compares to the +3.5% inflation that was disclosed in Q2 2011.

Inventory growth eclipsed sales growth at the U.S. Division for the 6th consecutive quarter. The company talks about an “investment in price” as a primary reason for GPM% degradation versus LY. But, the “investment in inventory” should be having a material impact on comp store sales growth (via higher fill rates). That, coupled with food inflation, should be driving greater top-line improvement than the company has reported of late.

In addition, we find it odd that WMT made essentially no mention of its e-commerce business in Q3 2011. Historically, the company’s U.S. Division would report the total sales growth of its e-commerce business. But, in Q2 2011 and Q3 2011, there has been only a limited qualitative disclosure.

For example, in Q3 2011, WMT’s U.S. Division made the following statement:

“The sales trends I’ve outlined here are also reflected in our dotcom sales, with stronger performance in electronics, home and toy categories.”

Why no disclosure of sales growth for the company’s Internet business? Hmmm.

When Was the Last Time NWY Product Resonated with Anyone?

We have to chuckle when reading the New York & Company (NWY – $2.42) quarterly earnings press release. The company suggested the following when discussing the poor top-line performance:

“We believe our product continues to resonate with our customers as evidenced by our improved retail inventory turns.”

Question… when did NWY’s product ‘resonate’ with customers? 10 years ago? 15 years ago?

CEO Gregory Scott should be embarrassed to make a statement like that on his press release. The fact is that comp store sales declined -5.2% in Q3 2011 and merchandise margins declined -200 Bps versus LY in the quarter.

Given those metrics, to suggest the product “continues to resonate” is beyond the pale for a retailer that will likely report a -2% to -3% annual EBIT margin this year.

Mexico Introduces Its Own Version of ‘Black Friday’ Style Shopping Blitz Click to Open PDF
Mexicans are now joining the Black Friday party. They’re calling it “El Buen Fin.” The government has even gotten involved.
Posted: Friday, November 18, 2011
Source: WSJ

Wanted: Chief, E-Commerce Click to Open PDF
Web chiefs are in high demand. Recruiters say the “dream person” comes from Google.
Posted: Tuesday, November 15, 2011
Source: WSJ

Consumer Behavior: The Psychology of Now Click to Open PDF
According to one consultant, the new branding rule is to NOT have a branding strategy, but to “have a social voice, and that’s very different.” Another suggests that “really smart retailers” are “trying to figure out where their customers are headed and how they can guide that journey.” A wonderful read.
Posted: Monday, November 14, 2011
Source: WWD

Retail CEO’s Priorities: Online, More Exclusives Click to Open PDF
Retail CEO’s at the WWD CEO Summit suggested that their single highest priority is the “increased use of e-commerce.” Interestingly, some CEO’s admitted that the “control had started to shift from brands to the consumer.”

Finally, one CEO suggested that they were making sure that a retailer offers the “right brands and value” and that this is “much more crucial than adding low-cost opening price points.”
Posted: Monday, November 14, 2011
Source: WWD

Amazon ‘Primes’ Pump for Loyalty Click to Open PDF
AMZN continues to add services to its Prime loyalty offering. Clearly, this comes at a cost.
Posted: Monday, November 14, 2011
Source: WSJ

Reminder: We like to look at the Commerce Department data on a comp basis (year-over-year change). Hey, it’s government data, so caveat emptor. See Full Report Here

Big picture, our favorite measure of “what’s happening at the mall” (excludes Motor Vehicles, Gasoline, and Building Materials) suggests a +6.0% year-over-year sales improvement in October 2011 versus LY. This represents a modest acceleration versus the +5.8% growth in September 2011.

The most compelling category specific storylines in October 2011 were:

October 2011 represented the 24th consecutive month of positive year-over-year gorwth for our favoirte mall measuring stick.

Electronics & Appliance Stores reported strong +3.5% year-over-year growth in October 2011 versus LY. This followed a disappointing -0.9% decline in September 2011.

Sporting Goods, Hobby, Book, Music Stores reported a jaw dropping +9.1% year-over-year growth rate in October 2011 versus LY. This represents the category’s strongest year-over-year growth rate since at least 1998.

Furniture & Home Furnishing Stores again reported impressive year-over-year growth in October 2011 (+3.4% in October 2011 followed +3.4% in September 2011). That said, the category remains the worst performing category versus calendar 2007 (-17.8% in October 2011 versus October 2007). Motor Vehicles & Parts Dealers are down -9.8% over the same timeframe.

Food Services & Drinking Places continued to report impressive year-over-year sales growth in October 2011 versus LY (+6.7%). The category has now reported 13 consecutive months of year-over-year growth that is greater than +4.0%.

Monthly “Big Picture – what’s happening at the mall” year-over-year results for the trailing 12 months: