apparel, footwear, and softlines: key themes for 2013
TRANSCRIPT
Apparel, Footwear, and Softlines:
Key Themes for 2013 January 04, 2013
Christian Buss ([email protected], 212-325-9667)
Bilun Boyner ([email protected], 212-325-8717)
Darla Shay ([email protected], 212-325-2379)
Apparel, Footwear, and Softlines:
Key Themes for 2013
Macroeconomic Backdrop
Domestic Spending Outlook Remains Healthy at 3-4% Growth
Some Reasons For Modest Optimism in Europe and Asia
Sector Themes
A Favorable Sourcing Environment For The First Time In Years
eCommerce Reaches an Inflection Point; Finally an Investable Theme
Heightened Competition in Hot Women’s Categories (Athletic Apparel and
Accessories)
2
Upgrades and Downgrades
Upgrading Under Armour to Outperform, TP to $59 from $57.
We see 5 positive catalysts in FY13, with primary benefits from channel expansion, a favorable sourcing environment, and improved supply chain operations. We believe
near-term downside risk from weather is largely baked in.
Upgrading Urban Outfitters to Outperform, TP to $48 from $42.
We expect outsized margin and revenue drivers driven primarily by merchandise improvements, price repositioning, and outsized ecommerce growth. Modest upside to consensus estimates should allow multiple expansion back to historical growth range.
Downgrading lululemon athletica to Neutral, TP to $80 from $86
Decelerating trends in mature markets and signs that product extensions have not met with strong consumer response suggest comp slowdown and further merchandise margin pressures are likely. We believe shares are range-bound near-
term.
3
Picking Winners
Stocks For 1H13
Limited Brands
Tumi
Under Armour
Urban Outfitters
Stocks For The Long Term
Nike
Ralph Lauren
VF Corp.
Wolverine World Wide
4
Near-Term Areas Of Concern
Abercrombie & Fitch
Coach
Columbia Sportswear
Deckers
lululemon athletica
Zumiez
5
Apparel, Footwear, and Softlines:
Key themes for 2013
Macroeconomic Backdrop
Domestic Spending Outlook Remains Healthy at 3-4% Growth
Some Reasons For Modest Optimism in Europe and Asia
Sector Themes
A Favorable Sourcing Environment For The First Time In Years
eCommerce reaches an Inflection Point; Finally an Investable Theme
Heightened Competition in Hot Women’s Categories (Athletic Apparel and
Accessories)
6
Personal income growth to remain healthy, in the 3-4%
range, even with a higher tax burden …
Personal income
growth to remain in
the 3-4% range,
supported by steady
wage growth, with a
partial offset from
higher tax burden.
(Our model
assumes $130B in
incremental tax
burden.)
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
Y/Y
Ch
an
ge
in
Pe
rso
na
l In
co
me
(%)
Y/Y Change in Personal Income (SA)
y/y change in Personal Income (SA)
7
Source: Credit Suisse Estimates, BEA
Personal spending growth continues to emphasize
discretionary spending. Modest deceleration is likely,
however, with higher household operation spending
requirements
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
1Q
05
3Q
05
1Q
06
3Q
06
1Q
07
3Q
07
1Q
08
3Q
08
A1
Q0
9A
3Q
09
A1
Q1
0A
3Q
10
A1
Q1
1A
3Q
11
A1
Q1
2A
3Q
12
E1
Q1
3E
3Q
13
E
(y/y
ch
ange
no
min
al)
Y/Y Change in Personal Outlays
Non-Discretionary y/y Discretionary y/y
We expect
discretionary
spending growth of
3.9% in 2013
(a modest
deceleration from
5% growth in 2012).
8
Source: Credit Suisse Estimates, BEA
Discretionary spending growth likely to reach alignment
with income growth with lower levels of catch-up
spending in 2012 (which followed several years of under-
buying)
Discretionary
spending growth
likely to be well
aligned with income
growth in 2013.
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
1Q
10A
2Q
10A
3Q
10A
4Q
10A
1Q
11A
2Q
11A
3Q
11A
4Q
11A
1Q
12A
2Q
12A
3Q
12E
4Q
12E
1Q
13E
2Q
13E
3Q
13E
4Q
13E
Personal Income Growth Vs. Discretionary Spending Growth
Personal Income - Annualized Growth
Discretionary Spending - Annualized Growth
9
Source: Credit Suisse Estimates, BEA
Savings rate likely to take a hit, though …
Expecting savings
rate to decline to
2.7% by 4Q13 from
3.6% in 4Q12.
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
(y/y
change n
om
inal)
Savings Rate
Personal savings
10
Source: Credit Suisse Estimates, BEA
Consumer credit usage is increasing but remains in a
range that has historically proven sustainable
Consumer short-
term credit usage is
increasing, but
remains in a range
that has historically
proven sustainable
($100-200B).
-$200.0
-$150.0
-$100.0
-$50.0
$0.0
$50.0
$100.0
$150.0
$200.0
4Q
20
08
1Q
20
09
2Q
20
09
3Q
20
09
4Q
20
09
1Q
20
10
2Q
20
10
3Q
20
10
4Q
20
10
1Q
20
11
2Q
20
11
3Q
20
11
4Q
20
11
1Q
20
12
2Q
20
12
3Q
20
12
Increase/Decrease in Consumer Credit ($B)
11
Source: Credit Suisse Estimates, BEA
Most importantly, household balance sheets continue to
improve, with Asset/Liability ratios up to 5.8x … and likely
improving to 6.0x in 2013
Asset/liability ratios
are up to 5.8x from
trough level of 4.7x
in 1Q09 and are
likely to improve to
6.0x in 2013.
$0$10$20$30$40$50$60$70$80$90
4.0x
4.5x
5.0x
5.5x
6.0x
6.5x
7.0x
7.5x
8.0x
Ho
us
eh
old
As
se
ts (
$tn
)
As
se
t/L
iab
ilit
y R
ati
o
Household Assets & Asset/Liability Ratio
Household Assets Asset/Liability Ratio
12
Source: Credit Suisse Estimates, BEA
Apparel, Footwear, and Softlines:
Key themes for 2013
Macroeconomic Backdrop
Domestic Spending Outlook Remains Healthy at 3-4% Growth
Some Reasons For Modest Optimism in Europe and Asia
Sector Themes
A Favorable Sourcing Environment For The First Time In Years
eCommerce reaches an Inflection Point; Finally an Investable Theme
Heightened Competition in Hot Women’s Categories (Athletic Apparel and
Accessories)
13
Consumer spending in Europe is likely to remain tepid,
but return to positive territory is expected in early 2013,
with benefits from rising business confidence, declining
mortgage rates, and modest inventory restocking
We expect European
growth to rebound
in 2013, but remain
tepid at below 2%.
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
An
nu
aliz
ed
GD
P G
row
th
Euro Area
14
Source: Credit Suisse Estimates
Consumer spending in Asia is expected to remain above
6%, with China re-acceleration supporting the region
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
2013E 2014E
With China re-accelerating, we expect Non-Japan Asia to
grow at 6.6% in FY13, versus 6.2% in FY12.
15
Source: Credit Suisse Estimates
Further Reading
European Economics - The consumer on the ropes
Global Economy: Monthly Review - Cyclical uptick, more likely
than not
Restaurants - Restaurants and the Fiscal Cliff
16
Apparel, Footwear, and Softlines:
Key themes for 2013
Macroeconomic Backdrop
Domestic Spending Outlook Remains Healthy at 3-4% Growth
Some Reasons For Modest Optimism in Europe and Asia
Sector Themes
A Favorable Sourcing Environment For The First Time In Years
eCommerce reaches an Inflection Point; Finally an Investable Theme
Heightened Competition in Hot Women’s Categories (Athletic Apparel and
Accessories)
17
0.3
0.4
0.5
0.6
0.7
3/2009 9/2009 3/2010 9/2010 3/2011 9/2011 3/2012 9/2012
Polyethelene (NYM $/T)
Polyethelene (NYM $/T)
Polyethylene chip prices are up 5% Y/Y, but still 16% below May'11 peak levels
Core commodity costs have stabilized …
Core commodity
costs have
stabilized, with
cotton,
polyethylene, and
wool at normalized
levels.
$5.00
$10.00
$15.00
$20.00
1/2009 7/2009 1/2010 7/2010 1/2011 7/2011 1/2012 7/2012
19m Fine Wool (SFE AUD/KG) in USD
19m Fine Wool (SFE AUD/KG) in USD
Wool prices are down 19% Y/Y
$0.00
$0.50
$1.00
$1.50
$2.00
Jan-
09
Apr
-09
Jul-0
9
Oct
-09
Jan-
10
Apr
-10
Jul-1
0
Oct
-10
Jan-
11
Apr
-11
Jul-1
1
Oct
-11
Jan-
12
Apr
-12
Jul-1
2
Oct
-12
Cotton #2 (NYF $/IBS)
Cotton #2 (NYF $/IBS)
Cotton prices are down 19% Y/Y and 62% from the March'11 peak
18 Sources: FactSet
… and while labor rates are up …
Labor rates continue to rise double-digits across
developing markets.
39.5%
30.0%
14.1%
4.2%
Thailand Vietnam Brazil Mexico
2012 Wage Increases - Developing Markets
15.9%
8.6%
23.4%
Shenzhen Beijing Sichuan
2012 Wage Increases -China
19
Sources: Credit Suisse Estimates
… textile mills are in an oversupply situation …
Company - Type Date CS Analyst / Company Commentary
Texhong Textiles (2678.HK) - Textile Manufacturer
10/9/2012 Texhong indicated Jan-Sept and full year 2012 earnings are expected to increase substantially YoY, due to stable demand and the
cost advantage from the price difference between the international and Chinese cotton. The details indicated that the business
development in 3Q12 was ahead of our expectation. The company is likely to leverage more next year as 17% total capacity increase
(170,000 spindles) will all be in its new factory in Vietnam (trial production expected in 1Q13). The sales volume in Jan-Sept 2012
increased by 34% to 179,000 tons, or 78% of our old full year estimate. Although the overall market was only marginally better in
September, Texhong’s yarn sales volume showed significant sequential improvement, up 29% in 3Q12 versus the average of 1Q and
2Q12.
Shenzhou International (2313.HK) - Textile and Garment Manufacturer
9/4/2012 The company is likely to regain growth momentum again in 2013 with new fabric factory and new apparel capacity.
Weiqiao Textiles (2698.HK) - Textile and Garment Manufacturer
9/19/2012 During the first half of 2012, the Group's production volume of cotton yarn, grey fabric and denim were approximately 206,000 tonnes,
498 million meters and 42 million meters, representing decreases of approximately 37.6%, 14.1% and 16.0%, respectively, over the
corresponding period of last year. The decrease was mainly due to the Group's adjusting its production plans to lower the output with
a view to reduce inventory levels on the back of intense competition, caused by weak market demand for textile products and large
cotton price gap between domestic and overseas markets.
Outlook: Looking ahead, we expect the global economy to continue to pose challenges, and this will likely cause demand from
international markets to remain weak. On the domestic front, surging labor and other production costs, funding difficulties, and other
issues are not expected to be resolved in the near future. The trend for the cotton price gap between domestic and overseas markets
remains uncertain. As such, the operating environment for the textile industry in China will most likely remain challenging. With
growing domestic consumption, demand for various middle and high-end textile products and apparel is expected to grow. And
following recent reserve requirement ratio and interest rate cuts, it is expected that more favorable policies to stabilize the economy
will be issued in the second half of 2012, which would support the steady development of the textile industry in China. Although the
operating environment for China's textile industry in the second half of 2012 will remain challenging, we believe the industry will show
low, but positive growth.
Pacific Textiles (1382.HK) - Textile Manufacturer
9/12/2012 CS's recent channel checks indicated that the overall environment remains tough for export textile manufacturers in general. Pacific
Textiles is expected to record 6.0%YoY ASP decline and 5.8%YoY volume drop in 1H FY3/13E, while maintaining its gross margin
stable HoH.
Texwinca Holdings (0321.HK) - Textile Manufacturer
9/12/2012 CS's recent channel checks indicated that the overall environment remains tough for export textile manufacturers in general.
Texwinca is expected to post 15% YoY ASP decline and 5% YoY volume drop in 1H FY3/13E for its textile business. This time the
situation is even worse than the financial crisis in 2008. Following a record-low gross margin of 11.5% in 2H FY3/12 (vs the historical
range of 16%-23% for textile), we expect a further gross margin decline to 7.0% due to Texwinca’s inventory position and the
uncompetitiveness of domestic cotton price which hurt the exporters.
20
… as are major manufacturers
Company - Type Date CS Analyst / Company Commentary
Yue Yuen (0551.HK) - Footwear Manufacturer
12/4/2012"footwear manufacturing has entered into a new era of competitiveness." 3Q Revenue down 6.6% Y/Y, net product down 22% Y/Y. ODM volume down 13.2%
Y/Y.
10/11/2012 September operating revenue was down 4% Y/Y to $572M.
9/3/2012 Yue Yuen reported 9M FY9/12 results with revenue up 7.3% YoY, profit before tax up 10.0% YoY and net profit up 22.3% YoY. While the OEM/OEM margin
improvement slightly helped, the main net earnings difference was from taxation and minority interest.The OEM/OEM business achieved flat revenue in 3QFY9/12
alone, with ASP improvement in shoe manufacturing offset by sales volume decline. We believe this demand slowdown from major clients may last longer than
expected.
The retail business continues to see profitability pressure. We believe the inventory issue and fierce competition in the domestic sportswear retail market will
continue to affect it adversely. Therefore, we do not expect a quick turnaround in the near term.
Belle International (1880.HK) - Footwear Manufacturer/Retailer
8/21/2012 The Group’s revenue increased by 15.4% to RMB16,024.1 million for the six months ended 30 June 2012 from
RMB13,890.9 million for the six months ended 30 June 2011. This was mainly attributable to the continuously steady
growth of sales generated from both the footwear business and the sportswear business as compared with the
corresponding period of last year.
The gross profit margin of the footwear business was slightly lower than the same period of last year. The main reasons include 1) there was a high base last year.
In the first three quarters of 2011, market sentiment was strong, pushing unit price higher for footwear products, which in turn resulted in a higher-than-usual gross
profit margin for the Group.
2) in January and February of this year, there was excess inventory in the market and thus more discounting and promotional activities than the same period of
last year, which to a certain extent pressured gross profit margin for the first half of 2012. The promotional environment returned to normal levels since March 2012
as inventory clearance was largely completed, which helped gross profit margin normalize.
Footwear - Revenue increased by 17.2% as compared with the same period of last year. Same-store-sales growth, albeit lower than the high levels in the previous
two years, still stood at a healthy level in the mid-single-digit. Within the same-store-sales growth, the increase in average selling price was only low-single-digit, a
slowdown from last year’s relatively high levels. A
reasonable moderation of price increase reflects a moderating cost environment.
Stella International Holdings (1836.HK) - Footwear Manufacturer/Retailer
8/16/2012 Total revenue rose 1.6% Y/Y, as pressure on our manufacturing business was partially offset by the growth of our retail business. However, a combination of
slowing global demand and temporary capacity constraints caused by the
rationalisation of our production base and the control of overtime labour hours saw shipment volumes fall 11.9% to
22.9 million pairs, compared to 26.0 million pairs in the same period of last year.
The average selling price (“ASP”) of our footwear products rose 12.5% year-on-year to US$27.9 during the period,
which was mostly attributable to the inflation of input costs, higher recognition of our quality products, as well as ongoing
improvements in our product mix.
We experienced temporary constraints on our production capacity in the first half of this year following the closure
of a trade-processing factory in Dongguan (upon the expiration of the trade-processing contract with the local
government) and stricter controls on overtime hours. This was partially responsible for the fall in shipment volumes
over the period.
Outlook: We expect demand for our customised footwear products to remain steady, even as some clients delay orders due to
global economic uncertainty. The Group will continue to implement strict cost controls in order to maintain margins and profitability. ASP is expected to decrease
in the second half of the year, in line with declining input costs. However, this decline will be partially offset by continuous efforts to upgrade our product mix.
The Group expects to close the temporary capacity shortfall in the second half of the year as we ramp up production
at our new Guangxi, Hunan and Indonesian facilities
We also continued to implement our long-term plan of gradually shifting labour-intensive operations away from
coastal regions to our new low-cost facilities in inland China and South-East Asia. This will allow us to eliminate
long-term capacity constraints, secure a stable labour supply and control costs.
21
… the end result of which is favorable buys, with average
costs down 4-6% for spring and 2-4% for fall
9%
4%
-4%-5%
-4%
-8%-6%-4%-2%0%2%4%6%8%
10%
8-10% 3-5% -3-5% -4-6% -3-4%
2H11 1H12 2H12 1H13 2H13
Y/Y Change In Apparel
Costs (FOB)
6%
4%
-1%
-4%-3%
-6%
-4%
-2%
0%
2%
4%
6%
8%
5-7% 3-4% -2 to 0% -3-4% -2-3%
2H11 1H12 2H12 1H13 2H13
Y/Y Change In Footwear
Costs (FOB)
Favorable Apparel and Footwear buys likely to benefit
2013 margins.
22
Sources: Credit Suisse Estimates
Apparel advantaged over footwear given more
fragmented manufacturing base
-5%
-4%-4%
-3%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1H13 2H13
Y/Y Change in Costs
(FOB)
Apparel Footwear
Apparel
manufacturers and
retailers are likely to
see the greatest
benefit, particularly
in 1H13.
23
Source: Credit Suisse Estimates
Further Reading
Sourcing Environment Looks Increasingly Favorable Heading Into
2013
24
Apparel, Footwear, and Softlines:
Key themes for 2013
Macroeconomic Backdrop
Domestic Spending Outlook Remains Healthy at 3-4% Growth
Some Reasons For Modest Optimism in Europe and Asia
Sector Themes
A Favorable Sourcing Environment For The First Time In Years
eCommerce reaches an Inflection Point; Finally an Investable
Theme
Heightened Competition in Hot Women’s Categories (Athletic Apparel and
Accessories)
25
eCommerce Reaches Inflection Point – Finally An
Investable Theme
eCommerce continues to gain share of the consumer’s wallet
− Retailers are investing more heavily into eCommerce channel to capture
incremental sales
With eCommerce growing as a percent of sales (long-term potential to
account for 20% of U.S. retail sales, from 6% in 2011), revenue growth
and leverage of fixed expenses for eCommerce advantaged will
outperform
Margin outperformance is also likely from companies driving sales into
higher-margin online channels (est. 500-750bp higher margin in online
business) Margin story developing with
eCommerce outgrowth
26
eCommerce to generate disproportionate incremental
retail revenue – retailers with eCommerce growth rate to
almost double brick-and-mortar
$2.25
$2.65
$3.05
$3.45
$3.85
$4.25
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
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21
20
22
20
23
20
24
20
25
20
26
20
27
20
28
20
29
20
30
20
31
(in
tri
llio
ns)
Retail Industry Revenue
US Retail Sales US Retail Sales (ex e-Commerce)
2.0% CAGR
1.2% CAGR ex. e-Comm
Source: Credit Suisse estimates, Comscore, US Census Bureau
We see long-term U.S.
retail sales CAGR
almost double that of
traditional brick-and-
mortar stores given
accelerated
eCommerce growth.
27
With higher profitability than stores, rising eCommerce
sales should lift retail’s overall operating margins by
~100bp
Source: Credit Suisse estimates, Comscore, US Census Bureau
eCommerce
penetration increase
should lift retailers’
overall operating
margin (~500-750bp
higher OM for
eCommerce). 9.00%
9.50%
10.00%
10.50%
11.00%
11.50%
12.00%
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
20
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20
22
20
23
20
24
20
25
20
26
20
27
20
28
20
29
20
30
20
31
Retail Industry Operating Margin
Blended Operating Margin (Retail) Operating Margin (ex e-Commerce)
Retail's OM should rise as e-Com penetration increases
28
$250
$300
$350
$400
$450
$500
20
11
20
12
20
13
20
14
20
15
20
16
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17
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20
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20
23
20
24
20
25
20
26
20
27
20
28
20
29
20
30
20
31
(in
bill
ion
s)
Retail Industry Operating Profit
Retailer Operating Profit
Retailer Operating Profit ex e-Commerce Growth 2011-2031
2.5% CAGR
1.1% CAGR ex. eComm
Given faster sales growth and stronger margins, retailers
with greater exposure to eCommerce should see outsized
profit growth
Source: Credit Suisse estimates, Comscore, US Census Bureau
With eCommerce’s
faster revenue growth
and stronger margins,
retailers with greater
eCommerce exposure
should see outsized
profit growth.
29
Look towards companies with high exposure to
eCommerce channel that can capitalize on current growth
1.7%
1.9%
3.5%
5.0%
6.0%
7.3%
7.7%
10.6%
13.3%
15.0%
20.4%
– 5.0% 10.0% 15.0% 20.0% 25.0%
COH
VFC
UA
RL
TUMI
ZUMZ
DECK
LULU
ANF
LTD
URBN
e-Commerce As Percent of
Sales
Source: Company data, Credit Suisse estimates. LTD reflects Victoria’s Secret Direct
Retailers with a historical catalog
business (notably URBN, LTD)
are currently ahead of the game.
Traditional specialty retailers
are investing to catch up.
Vendors are disadvantaged given
competition with multi-branded
sites and typically less direct
communication with customers.
30
Apparel, Footwear, and Softlines:
Key themes for 2013
Macroeconomic Backdrop
Domestic Spending Outlook Remains Healthy at 3-4% Growth
Some Reasons For Modest Optimism in Europe and Asia
Sector Themes
A Favorable Sourcing Environment For The First Time In Years
eCommerce reaches an Inflection Point; Finally an Investable Theme
Heightened Competition in Hot Women’s Categories (Athletic
Apparel and Accessories)
31
Heightened competition in categories where women are
(actually) still spending – activewear & accessories
We see increased competition in the two areas of strength within the women’s retail sector: athletic apparel and handbags/accessories
Activewear
1. Increase in dedicated specialty retail doors
2. Multi-branded retailers dedicate more floor space to women’s
activewear
3. Vendors place renewed emphasis on product
Handbags
1. Traditional apparel companies entering market more aggressively
2. Increased capital requirements
3. Limited price and product differentiation
Long-term threat to LULU
Long-term threat to COH
32
Retailers and vendors make greater push in women’s
activewear, as athletic and fashion continue to converge
With the convergence of athletic and fashion in women’s apparel, specialty, department, and sporting goods stores, AND vendors have place renewed emphasis on this category
Investing In Athletic Fashion: − GPS’s Athleta store expansion, GapFit, Active by Old Navy
− FL’s renovated Lady Foot Locker, new SIX:02 concept
− VFC to remodel 70% of Lucy stores and open 10 in ’13
− LTD’s VSX offering and increase in PINK’s yoga/activewear
− Department stores’ private labels
− UA’s hired new creative director for Women’s
− NKE to introduce new women’s retail concept in Spring ’13
− Fila launching three lines of ‘luxury’ fitness apparel
LONG list!
33
With additional focus on activewear, increased long-term
risk to lululemon’s competitive positioning and pricing
power
We believe lululemon brand and its product positioning has fended off competition due to: 1. Casual Luxury Positioning – Merchandise is an alternative to casual apparel
2. Broad Cross-Sports Appeal – Assortment balanced between specialized and
general athletic
3. Insider Status – Brand cachet, authenticity
However, we see long-term risks to its competitive positioning and pricing power as: − Women’s activewear gains shelf space across retail channels
− Vendors (UA, NKE et al) improve the fit and style of women’s offering
− Additional entrants are priced at a discount to LULU (LULU lowered prices on
select items for Winter ’12)
LULU has to offer the right balance of fashion and
athletic innovation to command premium prices.
34
Competition picking up across accessories market
Competition in the U.S. handbag market has intensified with entry of
traditional apparel brands into the category. Our analysis of the current
handbag market include:
1. Price is not a differentiating factor, comparable items sold within narrow pricing bands
across brands
2. Capital-intensive enhanced brand presentation (premium real estate, shop-in-shops) is
increasingly being used to help differentiate brands
3. Product innovation is increasingly challenging with fast followers quick to capitalize on
novel trends
Harder To Differentiate As Brand Offerings Increase
35
Will likely be costly for Coach to maintain market share of
handbag market, margins at risk if COH wants to maintain
share
With 28% market share, we believe new entrants target Coach, placing
the company in a more challenging competitive, particularly in the
department store channel.
Coach is responding by:
1. Developing high profile product launches
2. Investing in remodeled stores and shop-in-shops at
department stores
3. Ramping promotions to stimulate purchases,
particularly in the full price channel
If COH elevates discounts to maintain
market share, we see risk to its premium
margins
36
Picking Winners
Stocks For 1H13
Limited Brands
Tumi
Under Armour
Urban Outfitters
Stocks For The Long Term
Nike
Ralph Lauren
VF Corp.
Wolverine World Wide
37
See 5 Positive Catalysts in 2013
Benefits from channel expansion into department stores and athletic
footwear doors 1H sourcing environment should jump start margin
expansion (a long-term opportunity with UA OM’s 300-500bp below
peers.)
Benefits likely in 2H from recent investments in new supply chain and
sourcing staff
Likely validation of long-term growth targets from rollout of 2015 plan at
mid-year analyst day
Easy margin comparisons heading into 2H13 given mis-execution in
2H12
Upgrading Under Armour to Outperform, Raising TP to
$59
Under Armour has ample opportunity to
drive margin via improved supply chain
efficiencies.
38
Upgrading Under Armour to Outperform, Raising TP to
$59
Risks from weak 4Q Weather and demand look priced In
Shares down 14% over past 3 months, (S&P 500, XRT up 1%)
Company guided conservatively heading into 4Q
− “With this updated outlook, I would like to provide some additional color
on several items. First on net revenues, the drivers of our net revenue
guidance remained relatively unchanged from our prior guidance and
assumed similar winter weather patterns as last year and more
moderate expectations within our e-commerce business.”
Company has already guided to 2013 revenues at low end of long-term
range suggesting limited guidance risk
See limited downside risks from weak
winter weather, but rather a cap on upside
potential
39
Upgrading Under Armour to Outperform, Raising TP to
$59
Valuation premium justified with top-line growth remaining in 20-
25% range and margin expansion likely
Forward P/E of 30-35x has been sustained in periods of rising ROIC
− (Our model has lease-adjusted ROIC increasing to the high 20s over
the next 5 years, from 20%)
Under Armour trading at 31x forward P/E at the low end of its 5-year
range of 31-36x, and below the 5-year median of 32x
Expecting modest upside to consensus estimates, with an upside scenario
for $1.65+ in FY13 EPS (current consensus $1.49)
Valuation Weighting Price
Comparable Multiples 50.0% $58
Long-Term Growth Driver 50.0% $59
12-Month Price Target $59
40
Source: Credit Suisse Estimates
Downgrading lululemon athletica to Neutral, Lowering
estimates and TP to $80
Signs of slowing momentum in more mature markets gives pause
Low single digit Canada comp in 3Q highlights challenges driving comps
in mature markets
− Canada stores are doing ~$3000/square foot, versus U.S. at $2000
If mature stores can’t comp at high-single digits or better, there is risk to
our prior sustained double-digit comp thesis
BASELINE UPSIDE DOWNSIDE
Comp Stores Sales - 2013
% Comp
Stores
Baseline
Comps
Contribution
to Comps
Upside
Comps
Contribution
to Comps
Downside
Comps
Contribution
to Comps
Year 2 Stores 17.5% 20.0% 3.5% 20.0% 3.5% 20.0% 3.5%
Year 3 Stores 17.5% 15.0% 2.6% 15.0% 2.6% 15.0% 2.6%
Year 4 Stores 6.2% 12.0% 0.7% 12.0% 0.7% 12.0% 0.7%
Year 5+ Stores 58.8% 5.0% 2.9% 10.0% 5.9% -2.5% -1.5%
Total Comps 9.8% 12.8% 5.4%
Slowing comp momentum in mature
markets adds risk to our prior “double-digit
comps are sustainable” thesis
41
Source: Credit Suisse Estimates
Downgrading lululemon athletica to Neutral, Lowering
estimates and TP to $80
Winter product lines designed to appeal to a mature customer base
appear to have stretched outside of the company’s comfort zone, with re-
pricing actions, broader discounting, and elevated markdown levels than
we have historically seen.
6%
9%
11%
8% 8% 7%
12% 11%10%10% 9% 9%
12%
8%
18%
0%2%4%6%8%
10%12%14%16%18%20%
6/1
1
6/1
8
6/2
5
7/9
7/1
6
7/2
3
7/3
0
8/6
9/4
10
/17
11
/5
11
/6
11
/27
12
/18
12
/28
Percentage of Apparel on Sale
32%31%31%
28%27%27%29%
30%
28%
33%33%33%31%31%
38%
20%
22%
24%
26%
28%
30%
32%
34%
36%
38%
40%
6/11 6/25 7/16 7/30 9/4 11/5 11/27 12/28
Average Markdown on Sale Merchandise
18% of product was on sale,
the highest level in recent
history
The average discount is also
at the highest level in recent
history, at 38%
42
Source: lululemon.com
Source: lululemon.com
With additional focus on activewear, increased long-term
risk to lululemon’s competitive positioning and pricing
power
We believe lululemon brand and its product positioning has fended off competition due to: 1. Casual Luxury Positioning – Merchandise is an alternative to casual apparel
2. Broad Cross-Sports Appeal – Assortment balanced between specialized and
general athletic
3. Insider Status – Brand cachet, authenticity
However, we see long-term risks to its competitive positioning and pricing power as: − Women’s activewear gains shelf space across retail channels
− Vendors (UA and NKE) improve the fit and style of women’s offering
− Additional entrants are priced at a discount to LULU (LULU lowered prices on
select items for Winter ’12)
LULU has to offer the right balance of fashion and
athletic innovation to command premium prices.
43
Downgrading lululemon athletica to Neutral, Lowering
estimates and TP to $80
With slowing comp momentum likely, and further merchandise
margin pressure a distinct risk, multiple likely to be pressured
Forward P/E of 30-35x has come under pressure in periods of
decelerating momentum and lowered earnings power
See risk to consensus estimates with comps potentially coming in below
expectations. See downside scenario for $2.10-20 in FY13 earnings
power
Lowering FY13 estimates from 12.5%, $1.76B, $2.40 to 10%, $1.73B,
$2.29
Weighting Price
Comparable Multiples 33.3% $80
DCF 33.3% $84
Long-Term Growth Scenarios 33.3% $75
12-Month Price Target $80
44
Source: Credit Suisse Estimates
Upgrading Urban Outfitters to Outperform, Raising TP to
$48
We believe URBN has secular revenue drivers and margin expansion
opportunities that should drive modest upside to consensus 2013
Expect URBN to return to historical comp momentum with:
Improved merchandising as the new design team fully takes hold
− Holiday sales a validation point of return to authentic product and
differentiation. We expect URBN to outperform peers through holidays
(comps tracking HSD through early December) and in 2013
Anthropologie pricing adjustments including: 1) increased planned and
targeted promotions, 2) increased sub $100 product penetration and 3)
increased number of small ticket items (sub $50)
Outsized e-commerce growth with targeted investments in online
exclusives and differentiated online content
Easy comparisons, especially in 1H
45
Upgrading Urban Outfitters to Outperform, Raising TP to
$48
Distinct Drivers for Margin Expansion. Conservatively expect 150-
200bp Gross Margin Recapture Driven by:
Improved Full Price Selling with:
− Better inventory management: URBN inventory has been improving
through 2012; we expect URBN to enter 2013 with largely clean
inventory position
− Improved merchandising: Expect URBN to outperform highly
promotional teen retail environment with authentic product offerings
− Adjustments to opening price points (at Anthropologie): We believe
more appropriate opening price points will decrease the need for
clearance sales
Benefits from the more favorable sourcing environment
Outsized e-commerce growth (expect over 40% of incremental growth to
come from e-commerce over the next 3 years)
46
Upgrading Urban Outfitters to Outperform, Raising TP to
$48
eCommerce leadership, with 2013 benefits from accelerated
investments
Urban Outfitters has one of the highest E-Commerce penetrations of any
specialty retailer, with direct generating 20% of FY12E revenue.
− The company also has aggressive targets for E-Commerce penetration,
highlighting potential for E-Commerce to represent over 50% of sales
over the long term.
Big investments starting to generate returns, with growth accelerating to
36% in F3Q, from 16% in FY11, and 19% in 1H12:
− Doubling of web-based marketing;
− Re-launch of the Anthropologie customer loyalty program;
− Launch of an Urban Outfitters loyalty program;
− Hiring of Bob McElroy as Global Head of Direct-to-Consumer;
− Hiring of David Norton as Chief Analytics Officer; and
− Establishment of West Coast e-Commerce fulfillment and data centers.
47
Upgrading Urban Outfitters to Outperform, Raising TP to
$48
With early signs of return to robust growth momentum, double-digit
sales and high-teens earnings growth, we believe a significant
premium to mall based retailers and modest discount to more
immature concepts is justified.
URBN is trading at 21x forward P/E, slightly above the mid point of 5-
year range of 9-28x. We believe with signs of improvements in
merchandise and outsized e-commerce growth, a 23-25x multiple,
towards the high end of the historical range, is justified.
Weighting Price
Comparable Multiples 33.3% $47
DCF 33.3% $48
Long-Term Growth Driver 33.3% $48
12-Month Price Target $48
48
Source: Credit Suisse Estimates
Further Reading
The Rise of Athletic Apparel Across The Mall - NKE, UA, VFC Long-Term Beneficiaries As
Retailers Focus On High-Growth Activewear
COH: Downgrade to Neutral On Valuation And Signs Of Increasing Competitive Pressure
in North America
UA: Channel Expansion Opportunity, Supply Chain Initiatives Position Company For
Continued Earnings Momentum. Raise TP to $115
LULU: Product Availability Improves Modestly; New Assortments Extend Beyond Core
Athleticwear
URBN: Improved Full Price Selling and Pricing Adjustments Translates to Margin Capture
URBN: Pricing Study Highlights Improved Competitive Positioning At Anthropologie. TP
to $42.
49
50
Companies Mentioned (Price as of 03 Jan 13)
Abercrombie & Fitch Co. (ANF, $47.11, NEUTRAL [V], TP $46.00) Coach, Inc. (COH, $54.95, NEUTRAL, TP $63.00) Columbia Sportswear Company (COLM, $53.45, NEUTRAL, TP $55.00) Deckers Outdoor Corp. (DECK, $39.24, NEUTRAL [V], TP $34.00) Five Below, Inc. (FIVE, $33.18, NEUTRAL [V], TP $37.00) Gap, Inc. (GPS, $32.09) Limited Brands, Inc. (LTD, $44.71, OUTPERFORM, TP $56.00) lululemon athletica, Inc. (LULU, $75.09, OUTPERFORM [V], TP $86.00) Nike, Inc. (NKE, $52.37, NEUTRAL, TP $51.00) PVH Corp. (PVH, $113.70, RESTRICTED) Quiksilver, Inc. (ZQK, $4.53, NEUTRAL [V], TP $4.00) Ralph Lauren Corp. (RL, $157.21, OUTPERFORM, TP $177.00) Tumi Holdings, Inc. (TUMI, $19.91, OUTPERFORM [V], TP $25.00) Under Armour (UA, $49.66, NEUTRAL, TP $57.00) Urban Outfitters, Inc. (URBN, $40.74, NEUTRAL, TP $42.00) VF Corp. (VFC, $151.79, OUTPERFORM, TP $182.00) Warnaco Group, Inc. (WRC, $71.90, RESTRICTED) Wolverine World Wide, Inc. (WWW, $40.91, OUTPERFORM, TP $52.00) Zumiez, Inc. (ZUMZ, $21.22, NEUTRAL [V], TP $23.00)
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I, Christian Buss, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption
amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.