Archive for the ‘Retail / Apparel’ Category

Optimism in the Retail Sector….?

August 25th, 2009 Comments off

            For so many months I essentially ignored what was happening with stock prices for the Retail sector since they were getting so badly crushed. All you had to do was look across the board and it was nothing but shades of red across the daily pricing action, 50-DMA, as well as the 200-DMA. To put it in perspective, there are 34 Retail stocks that I have in my listing that I peek in on and see what’s happening. However, the mood is definitely changing as many have seen some dramatic reversals from their 50-day and 200-day averages. In fact, it’s now the rare exception for one of these to be showing in the red on this number.

            Previously, there was not a single stock that was trading in excess of 1x Sales. There’s now seven stocks that are trading at a multiple > than 1x sales. I’m also starting to see valuations that are recognizing emerging performance while I see other retailers that are still being hit with low valuations because they have not seen a turnaround in their performance or still have yet to exhibit any consistency with previously stated strategies. Of those still being hit with valuation issues, Pacific Sunwear (PSUN) is currently trading at an 80% discount to sales. Charlotte Russe (CHIC) is trading at a 57% discount, and were it not for the recent buyout offer of $17.50/share, the effective discount on CHIC would be much higher. These are two retailers that can’t seem to stick with a strategy and have lost their way.

            There are still a number of other problem children out there in Retail and Apparel, but the strong players are capitalizing on the weakness. Even for our own small company, we have been buckled down and concentrating on what’s good for our brand, our customer, and not getting caught up with all the negativity. We’re being rewarded for that focus as we continue to see revenue growth as well as great financial results from the restructuring we have put in place over the last year. It’s senseless to get caught up in the sector speculation, negative press, and indecision paralysis waiting to see who moves first. Run your analysis, be familiar with your brand and customer, and capitalize on the opportunities that are sitting in front of you right now….


Thanks for reading . . . .


Jeffrey Ishmael

Inventory Planning in an A/O Environment….

August 5th, 2009 Comments off

                In some of my previous posts I’ve discussed the diligent efforts our Company has put in place to bring inventory levels down over the last year and the focus put on working capital levels overall.  However, if you are a follower of Retail or Apparel companies, you’ve probably been reading lately the shift of retailers, across all segments, to decrease their pre-book activities and move towards buying on an At-Once (A/O) basis depending on how the current season progresses. We started to see this trend in the Fall selling season, but it has become more pronounced as we moved into Holiday. It’s worth noting though that this trend is primarily occurring within the smaller retail operations, which may have 10 doors or less. This is a much more difficult, and extremely risky, proposition for the larger retail operations which are under pressure for comp performance and risk not getting the product they need to drive their comps.


                So what’s a manufacturer to do in such a situation?  What do you do when you’re lead times are 90-days+ out of Asia and you can’t just do a quick ramp-up in a domestic manufacturing facility? Don’t start looking through your B-school textbooks looking for the answer, because you won’t find it. Unfortunately, this is really one of those game-day calls that need to be exhaustively discussed before committing the capital. It’s an especially difficult commitment when you’ve spent the last year right-sizing your inventories, increasing the velocity of your turns, and no longer have that “problem” inventory that’s affecting your gross margin results.


          Do you go increase your current inventory buy based on low-volume Holiday bookings?

          Do you bring in an early release of Spring-10 product based on great verbal feedback?

          Do you offer extended dating to prompt retailers to step up to the plate for the season?

          Do you offer discounts to keep make sure you keep that valuable shelf space?


                Ultimately, it’s the shelf space we’re all fighting for and don’t want to find ourselves in any situation where that space is jeopardized. Especially when the smaller shops aren’t pre-booking. What are they planning on filling that space with if you don’t order the necessary product to accommodate their A/O needs?  How do you service the needs of your dealer base when they aren’t providing the necessary insights for you to make appropriate inventory decisions?


                It’s really a judgment call that involves the entire management team and determining the level of risk that the company is willing to take. Any poor buying decisions will effectively saddle the company with more working capital issues and poor margin performance for at least the following 2-Quarters, if not more. Unless, of course, you take the step of blowing out that inventory through your available close-out channels at a loss. Fantastic, right back in the same place you were previous to this shift in buying mentalities. So what’s your game-day call for inventory planning when you’re customers shift to an A/O purchase mentality?


Thanks for reading . . . .


Jeffrey Ishmael

Baird & Co. Breakfast Summary…..

July 16th, 2009 Comments off

     Yesterday I was fortunate enough to receive an invite to a breakfast sponsored by Baird & Co., a St. Louis-based investment bank that specializes in the Small and Mid-Cap sector. Good folks that I have known for some time. The breakfast was to feature Paul Purcell, the CEO of Baird, where he was to discuss his insights on the market and what we might expect. I was pleasantly surprised when I showed up and found a table set for only 16!  I was expecting to be part of a group of 50 or more considering the status of the keynote. Another fantastic surprise was seeing Peter Ueberroth seated at the table across from me! While no stranger to controversy, Peter Ueberroth is an amazing businessman with an endless history of success on the resume.

     Another pleasant surprise was that the group that was assembled was very Retail and Apparel centric and represented a number of different segments. After Purcell delivered his opening remarks on the current results of Baird and how they were positioned to deal with the current market, he had two main topics to discuss with the group – the California economy and CIT Group. I’m not going to touch the California topic since I don’t have enough time to table that topic. Regarding CIT, the group seemed to be split on whether the government should provide any type of bailout to CIT. There were the typical positions….the logical approach of letting them fail and the risk-averse position of bailing them out to avoid more serious ramifications. If you’re unfamiliar with CIT, they provide approximately 60% of the available financing for the Retail and Apparel sector. I’m fortunate enough that I don’t have to rely on them to factor invoices or provide any other level of trade credit, however, we do have a high number of competitors in our industry who do rely on them. There are also a large number of retailers who have a broad portfolio of suppliers who also rely on CIT. The risk to both are high. I’ve already been working with a number of our suppliers to secure discounts for early pay since we are in a good capital position. For my vendors who are currently working with CIT, I’m working towards offering contingencies that have us shifting any factoring discount away from CIT to us, in return for an early payment.  No question, CIT poses a huge risk to the sector I participate in.

     Paul Purcell also discussed a number of other topics as well. While their operating income has slipped in recent quarters, they are still very profitable. He was also very encouraged by the recent results of Goldman Sachs, which he cited with a high level of respect. It should be noted that Baird was recently named a Top-100 employment firm by Forbes, ranked at 14th, and only surpassed by Goldman. While Purcell also acknowledged, that in hindsight, he would never have predicted the liquidation of top-tier firms in his industry, he was very optimistic that the next 12-18 months would provide an incredible period for investment opportunities. There was also further discussion about the increasing presence of foreign wealth within the U.S. market, particularly real estate. This point was confirmed by Ueberroth, who cited a number of statistics relative to the Southern California coastal market and homes that were being purchased by foreign parties for use as second homes or L/T investments.

Definitely a great opportunity to hear the views of everyone in attendance.

Thanks for reading. . . .

Jeffrey Ishmael

It’s December & the Budget isn’t finalized…?

December 10th, 2008 Comments off

Needless to say the last month has been extremely hectic trying to reengineer the financials of a new company, as well as trying to finalize the 2009 Budget. While it’s kept me from regular updates on the blog, it’s been a great exercise in a truly unique economic environment. As of now, I am looking to present the final 2009 Budget to the Board next week for approval. If this was any of the prior years I had gone through the budgeting process I would have been infuriated if the Budget had not been completed by the beginning of Q4, but then again, this is no ordinary year.

Considering that we are focused within the Retail / Apparel sector, we have obviously been closely watching the retail comp results of the last quarter and trying to anticipate the impact to our own business. Fortunately, one of our larger customers, Journeys, has been posting positive retail comps, which has been a bright spot in the Genesco portfolio. However, others have not been so fortunate. We also distribute product through the “Core” channel, which is primarily comprised of “Mom & Pop” shops, which have exhibited some surprising resiliency over the last half-year. Clearly, this holiday season will be the true test for them. Regardless, we have ended up using every bit of time in this calendar year so that we can finalize and commit to a 2009 Budget that is as accurate as possible and not having to explain obvious variances for the remainder of the year.

One of the more challenging fronts has been the International side where we distribute product through more than 45 countries and negotiate our transactions in both the U.S. Dollar and Euro. For our Euro accounts, although we have had discussions with some of our customers about decreased purchasing power and weakened markets, those customers have also shown surprising resiliency. However, for those subject to exchange rates based on their native currency, there’s a different story. We’ve seen decreases of any where from 25% in the U.K., to 40% in Australia, and outright currency freezes in a number of other countries. Will the currency situation reverse as the oil situation did from its highs this year? Hard to say, but at this point we’re planning for an “As-Is” scenario.

So as we move into the final weeks of 2008 and prepare the final Budget for submission to the Board, I’ve been able to effectively incorporate the conditions currently reflected in our sector, which would not have been included were the Budget completed at the beginning of Q4. We’ve made changes to all aspects of the Budget and will be moving into 2009 with a degree of confidence knowing we’ve been able to reflect all aspects of the current environment. We’ve also had the luxury of being a smaller company and having the agility of moving quick to adapt to market conditions, which is much more difficult in a larger entity. So yes, it is December and only now is my Budget being finalized. When was your Budget completed? Are you going to spend the year explaining countless variances or have you been able to incorporate current market conditions?

Thanks for reading . . . .

Jeffrey Ishmael

IFRS reporting & equality in reporting . . . .

October 6th, 2008 Comments off

I’m a bit off in the last week as I have not been reading all the info that has been getting published with respect to the pending IFRS standards. However, one of the primary drivers in the adoption of IFRS is to have standardized reporting for public entities, whether there in Italy, France, or here in the U.S.. So once these new standards have been rolled out then we’ll be able to view each company in the same light and make equal comparisons? Wrong. A reader of SEC reporting for a handful of companies in a similar industry can easily start to see the differences in the manner in which those companies report. Yes, there are standards that they all need to follow, but that doesn’t mean those standards extend to every section of a 10-Q or K.

Let’s jump into a very simple example, and with some brands that most consumers are pretty familiar with . . . K-Swiss, Skechers, and Heely’s. As I read through each one of their most recent 10-Q filings, I wanted to learn a little more about how each one of these companies was tracking their Cost of Goods. The observation that prompted my curiousity was the drastic differences in Gross Margins between these three entities.

The worst performer of the group appeared to be Heely’s, but they also took the approach of burdening their COGS with every cost element that touched the flow of product through the design & manufacturing process. These costs included all freight, warehousing, tooling, tooling depreciation, royalty expenses, shrinkage, quota fees, and agent fees/commissions. This same approach is also taken by Skechers. However, compare this to K-Swiss, who didn’t break out the different elements of COGS, but recorded their warehousing fees within their SG&A expenses. Ultimately, you have Gross Margin levels that range from the mid-30% to high-40% range. While some of the discrepancies can be attributed to performance levels and buying efficiencies, it’s clear from the K-Swiss example that not all margins are created equal.

While all of this ultimately flows to the bottom line and it’s only a mapping issue prior to the EPS calculation, there’s the management of perceptions when it comes to comparisons with your peers. “You’ve got a lower Gross Margin so you can nearly be performing as well as Company XYZ….”. Not necessarily the case so make sure you know how you’re presenting your financials in comparison to your competitors.

Thanks for reading . . . .

Jeffrey Ishmael