Needham & Company on Specialty Apparel 2011 Review & 2012 Outlook
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Rating Summary:
11 Buy, 27 Hold, 3 Sell
Rating Trend:
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Today's Overall Ratings:
Up: 7 | Down: 4 | New: 2
Rating Summary:
11 Buy, 27 Hold, 3 Sell
Rating Trend:
Down
Today's Overall Ratings:
Up: 7 | Down: 4 | New: 2
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Needham & Company on Specialty Apparel 2011 Review & 2012 Outlook
Needham analyst, Christine Chen, said, "2011 provided challenges for both consumers and retailers, with global macro uncertainty resulting in a promotional environment that intensified as the year progressed, resulting increased “retail therapy” as deals are too good to pass up, despite consumer confidence weakening in the Fall. F1H saw improvement in consumer sentiment which, combined with warm weather, drove sales of seasonal product. Consumer confidence weakened in August, coinciding with the U.S. credit downgrade and worsening of the European debt crisis, which combined with warm weather, made it difficult for most retailers to pass along price increase to offset peak sourcing cost increases of +LDD% to +MidTeens%. As a result, BTS/Fall Promotions for most non-luxury retailers started earlier and were broader (though not as deep as during the 2008 recession), which negatively impacted GMs in F3Q and likely F4Q. Retailers will be up against easy margin comparisons in F2H12 as sourcing cost increases are anniversaried in F1H12 with minimal to neutral impact and lower costs could potentially provide GM expansion opportunities in F2H12. We believe that traffic will continue to improve, though remain constrained. Pent-up demand and compelling promotions have led to surprisingly store sales momentum for Holiday so far (at the expense of margins), driven by self-gifting. Years of being frugal have left consumer balance sheets in better shape and positioned to cautiously spend savings which combined with rewardrobing due to fashion shift and color likely drives modest apparel sales increases in 2012. Thus, retailers with strong brand identity and unique merchandise will continue to gain market share once consumer spending accelerates in FY12. We recommend investors shop for names that have potential for margin expansion and top line growth driven by the fashion shift next year, such as Urban Outfitters (Nasdaq: URBN) (Strong Buy), True Religion (Nasdaq: TRLG) (Buy), and Guess? (NYSE: GES) (Strong Buy)."
"Consumer Enters 2012 Healthier with More Savings and Less Debt than Pre-Recession Levels: We believe consumer confidence will continue to improve in 2012 as the markets stabilizes now that the fear factor seems to have passed. While we realize unemployment is still high (8.6% in November), the remaining ~91% of the population, or 85% to be conservative (to account for what is likely the real UE rate) feels more confident that they will remain employed for the foreseeable future. In addition, after 4 years of paying down debt (now 11.1% of disposable income down from all-time high of 14.0% in September 2007 and below the long term average of 12.1%) and building savings (reaching a high of 8.3% in May 2008) consumers have been spending within their means by using savings to fund consumption (a novel concept it seems in the U.S.)...The higher income consumer who began spending again in 2010 with less price sensitivity will likely continue to rewardrobe in 2012, especially given the shift in fashion. As a result, we would expect True Religion (Buy), Coach (NYSE: COH) (Buy) and Ralph Lauren (NYSE: RL) (Buy) to benefit in 2012."
"...Retailers who were most impacted by cotton cost increases (Aeropostale (Nasdaq: ARO), Abercrombie & Fitch (NYSE: ANF), American Eagle (NYSE: AEO), and Gap (NYSE: GPS)) will likely see margins improve in F2H12 at a minimum due to lower input costs."
Needham analyst, Christine Chen, said, "2011 provided challenges for both consumers and retailers, with global macro uncertainty resulting in a promotional environment that intensified as the year progressed, resulting increased “retail therapy” as deals are too good to pass up, despite consumer confidence weakening in the Fall. F1H saw improvement in consumer sentiment which, combined with warm weather, drove sales of seasonal product. Consumer confidence weakened in August, coinciding with the U.S. credit downgrade and worsening of the European debt crisis, which combined with warm weather, made it difficult for most retailers to pass along price increase to offset peak sourcing cost increases of +LDD% to +MidTeens%. As a result, BTS/Fall Promotions for most non-luxury retailers started earlier and were broader (though not as deep as during the 2008 recession), which negatively impacted GMs in F3Q and likely F4Q. Retailers will be up against easy margin comparisons in F2H12 as sourcing cost increases are anniversaried in F1H12 with minimal to neutral impact and lower costs could potentially provide GM expansion opportunities in F2H12. We believe that traffic will continue to improve, though remain constrained. Pent-up demand and compelling promotions have led to surprisingly store sales momentum for Holiday so far (at the expense of margins), driven by self-gifting. Years of being frugal have left consumer balance sheets in better shape and positioned to cautiously spend savings which combined with rewardrobing due to fashion shift and color likely drives modest apparel sales increases in 2012. Thus, retailers with strong brand identity and unique merchandise will continue to gain market share once consumer spending accelerates in FY12. We recommend investors shop for names that have potential for margin expansion and top line growth driven by the fashion shift next year, such as Urban Outfitters (Nasdaq: URBN) (Strong Buy), True Religion (Nasdaq: TRLG) (Buy), and Guess? (NYSE: GES) (Strong Buy)."
"Consumer Enters 2012 Healthier with More Savings and Less Debt than Pre-Recession Levels: We believe consumer confidence will continue to improve in 2012 as the markets stabilizes now that the fear factor seems to have passed. While we realize unemployment is still high (8.6% in November), the remaining ~91% of the population, or 85% to be conservative (to account for what is likely the real UE rate) feels more confident that they will remain employed for the foreseeable future. In addition, after 4 years of paying down debt (now 11.1% of disposable income down from all-time high of 14.0% in September 2007 and below the long term average of 12.1%) and building savings (reaching a high of 8.3% in May 2008) consumers have been spending within their means by using savings to fund consumption (a novel concept it seems in the U.S.)...The higher income consumer who began spending again in 2010 with less price sensitivity will likely continue to rewardrobe in 2012, especially given the shift in fashion. As a result, we would expect True Religion (Buy), Coach (NYSE: COH) (Buy) and Ralph Lauren (NYSE: RL) (Buy) to benefit in 2012."
"...Retailers who were most impacted by cotton cost increases (Aeropostale (Nasdaq: ARO), Abercrombie & Fitch (NYSE: ANF), American Eagle (NYSE: AEO), and Gap (NYSE: GPS)) will likely see margins improve in F2H12 at a minimum due to lower input costs."
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