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February 2011 NEWSLETTER v2

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February 2011 NEWSLETTER v2 Powered By Docstoc
					                                    DALLIMORE & CO            JANUARY/FEBRUARY 2011


SHOP TALK: Jonathan Saven, President, Splendid
Jonathan Saven is President of Splendid. Best known for its luxuriously soft fabrics and bold stripes, Splendid has a devoted
following among women, men and children and currently operates three full-priced stores and one outlet. Jonathan took time
to discuss the brand’s focus on retail growth and the importance of the in-store experience for customers.

When did the brand start? 2002

How many employees does the brand have? 300

How would you describe your brand; what differentiates it
and what is something that you are proud of? We are known
for our ultra soft fabrics, our contemporary styling and being
able to outfit the whole family. Splendid is also a fast paced,
exciting business that is well known for colors and stripes, two
things we always incorporate into our designs.

What challenges have you experienced in your business?
The specialty store channel has been a challenge for the last
two years, given the credit issues and it has been tough for a
lot of these stores to stay in business.

Has the volatile economic climate changed your strategy in
any way? Has the environment created any opportunities for Splendid? Actually, the same challenge with specialty stores
struggling has also created opportunities in certain markets where now there is a larger demand than ever for owned retail, as
consumers in these markets need to be served. Our fast fashion approach has also allowed our customers to see us a go-to re-
source.

How do you envision your brand will grow in the next few years? How many stores do you plan on opening, if any? We
expect solid wholesale and aggressive international growth, as well as have plans to open 8-10 stores per year and will be pru-
dent in both timing on brand right and economic decisions.

How do you use social media and web to attract people to your brand? Our direct to consumer efforts are very concen-
trated on social media awareness, and converting that awareness to building brand loyal followers and customers. We tie it
into our PR efforts, including celebrity as well as tie it into store events and local community outreach. We recently were the
title onsets for an event called Crafting Community which was a huge success and had a continued social media component.
We are also launching an upgraded Splendid website next month, which will incorporate the rebranding we completed last
year for the brand.

In your opinion, what is Splendid’s biggest opportunity in looking at the next five to ten years? Our opportunities and fo-
cus are in the retail space and international arena. We are putting many of our strategic resources in these areas as we see
tremendous opportunity for growth there. Our retail expansion will be managed closely and we plan on tailing advantage of
the brands momentum in developed and developing global markets.

What customer experience do you hope to create in your stores? The most important experience is the one on a customer
being able to experience the full Splendid offering of styles. No one can represent the product as fully as we do in our own
stores. The experience is also one of an inviting open environment, comfortable for all shoppers, with abundant light and a
very unique and fun experience as well. (Interview cont’d on pg. 4)                                                          1
2011 OUTLOOK
The phrase “cautious optimism” was heard often in 2010 with respect to the outlook on the economy and specialty retail. The
year ended with consumer confidence and unemployment exhibiting stability, albeit at persistently uneasy levels. Unlike 2009,
however, consumers confronted uncertainty by opening their wallets in search of value. The holiday season and January 2011
comp sales were stronger than anticipated, but promotional activity was elevated.

Heading into the remainder of 2011, we have identified a number of factors, trends and risks that will play an important role in
shaping performance for specialty retail and result in our continued “cautiously optimistic” outlook for the rest of 2011.

Rising sourcing costs: Cotton and other material prices rose steadily throughout 2010 and brands must now rethink materials
and supply, if they haven’t already, and pricing to address margin impacts. In addition, the inflationary pressures exerted by
other input costs such as shipping and labor as well as capacity issues will force companies to adapt their supply chain and value
proposition. Some companies have already sought to diversify their manufacturing base away from China to other lower cost
coutries such as Vietnam, Bangladesh, India and Thailand. Luxury and stronger brands will have an easier time adjusting prices
in response to rising costs while lower end players and weaker brands may have to increase focus on inventory management and
operational optimization. Response to cost inflation will be a key point of focus throughout the new year. Can comp sales keep
pace?

                                                                                      Luxury Outperformance: The higher end
                                                                                      of the market has outperformed expecta-
                                                                                      tions across the retail sector. High income
                                                                                      consumers aggressively returned to the
                                                                                      market and have driven luxury spending.
                                                                                      Reduced vacancy in prime shopping corri-
                                                                                      dors has put upward pressure on rents for
                                                                                      premium locations and attracted increased
                                                                                      investment in the top tier sub-sector.
                                                                                      Class A real estate and premium retail re-
                                                                                      lated financings, mergers and acquisitions
                                                                                      and market valuations showed signs of
                                                                                      strength relative to non-premium assets.
                                                                                      This is expected to continue into 2011.

Growth of Outlets: Consumers are more price conscious, deal/value seeking, increasingly frugal and trained to expect promo-
tions, which makes the outlet channel an attractive alternative for brands to reach their customer. Excluding e-commerce,
outlets are outperforming traditional full-price retail as the fastest growing distribution channel for many brands. Many brands
are underpenetrated in outlets, which will continue to become a focused source of growth in 2011. This trend will potentially
take share from class C malls as select retailers assess the opportunities.

Stabilizing real estate markets: Vacancy rates have stabilized and begun shrinking across the board, particularly in class-A
properties, which exhibited a V-shape recovery in certain high end markets. Overall, rents are shifting upwards, albeit at re-
duced levels versus pre-recession. Outlet sales per square foot are near all time highs with little relief in sight. Although va-
cancy rates have stabilized, class B and C locations remain more challenged. This is reflective of the bifurcation of growth to-
wards opposite high and low at the expense of mid level players, as highlighted in the prior two trends.

E-Commerce and Social Media: E-Commerce is expected to grow in the mid-teen’s CAGR range over the next five years and is
now approximately 8% of total retail sales. For most retailers, e-commerce does or will represent their largest single point of
distribution or their largest store. As brands discover the most effective use of social media, it will be a key differentiator and
way to connect with consumers.

International: With low single-digit GDP growth expected for the United States for a prolonged period of time, retailers will
search globally for additional growth. Many brands will venture abroad in search of proof of concept and scalability in new mar-
kets. We expect opportunities to arise to address this trend including franchise and JV partnerships as models to enter unfamil-
iar international markets.

Differentiation in a Saturated Market: With so many premium brands competing for limited real estate and share of wallet,
differentiation will be key. Department stores have stabilized and grown with less space dedicated to specialty brands, promo-
tions have increased across the board, third party online websites and outlets are growing rapidly. Many of these trends are
emerging at the expense of vertical specialty retailers. Increased focus on branding, offering a strong value proposition, devel-
oping an engaging store experience, superior social media and integration and of course, product differentiation are keys to
                                                                                                                                2
outperformance.
NEW DOOR REPORT: Pierre Hardy (West Village, Manhattan)
Pierre Hardy recently launched his first U.S. venture – a small, industrial
looking boutique in New York City’s West Village. At first blush, the Jane
street shop seems like a strange choice, away from the conventional noise
of Bleecker Street or more prominent shopping areas like SoHo. Hardy con-
firms however, that he “wanted a space that would be a destina-
tion...something that was chic and intimate and special, not in the obvious
location” (Racked). The space mimics his vision and exhibits subtlety at its
best. The interior is minimalist and done entirely in grayscale and feels
like a mix between a high-end kitchen and construction site. Either way, it
works: Pierre Hardy’s towering shoes stand out as if in a museum. The
towering neon and animal print pieces pop out against the modest back-
ground. Hardy explains his vision: “We wanted to bring a feeling of pre-
ciousness and intimacy to something that was not. I tried to organize a
space with intimacy and some protected space to try shoes and feel okay” (Daily Front Row). In addition to shoes, the store
carries handbags and men’s footwear and accessories.


NEW DOOR REPORT: Crewcuts (Tribeca)
                            J.Crew’s children’s apparel line Crewcuts opened a 2,000-square-foot store on February 2nd at 50
                            Hudson Street in TriBeCa. The store marks the 10th freestanding Crewcuts in the country. Like its
                            counterparts, the shop features both boys’ and girls’ apparel and shoes and touts “exclusive part-
                            nerships with Levi’s, Belstaff and Sven clogs as well as a selection of toys and accesso-
                            ries” (Racked). Crewcuts expansion plans do not stop in Manhattan either – the store has plans for
                            international expansion. Additionally, the line recently extended its clothing sizes to 14.

                            The Crewcuts Tribeca is spacious and whimsical with chartreuse walls and clean-looking wooden
                            floors; the shop falls somewhere between nursery and glitzy. Additionally, the space boasts a wall
                            sculpture by Confetti System made from Mylar and tissue paper leaves, flowers and fringe. Accord-
                            ing to Women’s Wear Daily, “Rebekah Maysles, the daughter of filmmaker Albert Maysles, hand-
                            painted animals, flowers and surreal images on wallpaper, depicting buildings in the neighborhood
                            lining the entryway and bathroom walls.” J.Crew is adamant that Crewcuts isn’t simply a “shrunken
                            -down” version of its adults apparel, but an entirely different offering: design “for parents who
                            want sophisticated, better clothing.” (Women’s Wear Daily)

According to Racked, Jenny Cooper, Crewcuts designer, told the Tribeca Citizen, "We try not to speak down to children. We
keep it simple, sophisticated. The goal is that both parents and kids will respond." To live up to this decree, the store recently
hosted an opening from noon until 4pm with their young clientele in mind – the party featured a bouquet of bonbons and bal-
loons to entertain even the smallest customers. Additionally, in an effort to lure Tribeca locals, Crewcuts will be donating five
percent of sales to New York City based nonprofit Friends of Hudson Park (Tribeca Citizen).


RETAIL NEWS
Dallimore & Co. Client Store Openings
Accessories retailer Accessorize opened its second New York store on January 21st in Union Square.
Accessorize currently operates six other stores in the U.S.: three in Washington D.C., one at Roo-
sevelt Field mall in Long Island, and one on Bleecker Street in Manhattan’s West Village. The Brit-
ish brand has over 750 stores in 63 countries and is working to aggressively grow its U.S. footprint.

The Union Square flagship, next to the Diesel store on the southwest corner of the park, “stocks
the brand's usual charming, young Bohemian goods—handbags, purses, heaps of sparkling neck-
laces, earrings, bracelets, rings, and even umbrellas” (Racked). The shop has the same glitzy feel
as its Bleecker Street counterpart, with the walls of the store barely containing the glitzy baubles
brimming from within. Additionally, the line recently launched its Spring/Summer 2011 collection,
available at the Union Square store. With over 1,500 new designs introduced every season, shop-
pers are sure to find deals they love.                                                                                           3
CONT’D from page 1: SHOP TALK: Jonathan Saven, President, Splendid
Are you planning on targeting any new customer segments or markets in the future? We already cater to all ages and men
and women alike in our stores, and we will supplement the demographic with a stronger cold weather strategy as we round out
the collection. Additionally, we will add additional categories that are brand right, when the time is right.


REAL ESTATE UPDATE:                                        2010 Retrospective & The Road to Recovery
The commercial real estate market started to dig its way out of a devastating 2009. Washington D.C. led the U.S. market with
the help of the federal government’s demand for office space from contractors, lawyers and lobbyists. More generally, urban
areas have rebounded more quickly than suburban areas, which are still flooded with capacity from excessive construction pre-
2008.

According to the Wall Street Journal, 2010 saw “Vacancy rates…near historic
highs, from 10.9% in retail space to 17.6% for office buildings across the coun-
try.” Moreover, construction for commercial real estate continued to slow
this year due to industry uncertainty. 2010 construction investment fell by 8
percent since 2009, with a conservative $47 billion in commercial construc-
tion projects begun from January to November 2010 (Reed Business Informa-
tion).

However, real estate investment surged in Q4, signaling that the industry
may be staging a comeback. According to the National Real Estate Investor/
Marcus & Millichap Investor Index, investor confidence jumped to record lev-
els in Q4. Recent activities indicates increased investor optimism and poten-
tial intent to invest in commercial real estate in 2011. The 2011 index came
in at 152, easily topping a rating of 119 in Q3 2010 and beating the index’s all
-time record of 148.

Investor optimism is due in part to the sentiment that the worst is behind us:
we’ve bottomed out and the only direction to go is up. According to Hessam
Nadju, a managing director at Marcus & Millichap, “several converging fac-
tors,” such as low interest rates, modest economic growth and improvement
in capital markets, “are beginning to shift the attitude of investors toward
more risk tolerance” (National Retail Investor).

                                                                      According to Retail Traffic, retail investment sales volume
                                                                      in the fourth quarter amounted to $7.8 billion—up from
                                                                      $5.6 billion in the second quarter. It was the most active
                                                                      quarter for significant retail deals since the fourth quarter
                                                                      of 2007. Total volume in the retail sector amounted to
                                                                      $20.2 billion. 2009 volume was just $13.1 billion.

                                                                      The financial markets offer a positive outlook for 2011,
                                                                      with the commercial mortgages market forecasted to
                                                                      grow. Investors are feeling more confident and secure
                                                                      about where the market is going and the credit markets
                                                                      are showing signs of life. For example, J.P. Morgan Chase
                                                                      predicts that around $45 billion worth of commercial-
                                                                      mortgage bonds will be issued for U.S. assets in 2011.
                                                                      While this beats last year’s conservative $10 billion level,
it is unlikely to return to 2007 levels of $228 billion.

While growth in the real estate industry will remain slow, “the pace of store openings will gradually improve throughout the
coming months” (Retail Traffic). Experts believe that the current high vacancy rates and availability of low rent spaces will
encourage expansions plans, and that occupancy will continue to stabilize over the course of 2011.

Analysts believe looser credit markets will fuel growth as retailers gain increasing access to capital to finance transactions.
With cap rates either flat or trending down, sellers that were previously reluctant to bring properties to market are beginning
to jump into action. Data from Real Capital Analytics “forecasts that next year retail investment sales volume will reach any-
where between $30 and $40 billion, a level of activity last seen in 2004” (Retail Traffic). The risks are still high but the consen-
                                                                                                                                   4
sus in among industry experts and analysts is that the road to recovery is indeed real.
NATIONAL OUTLOOK
Teen Retailers Say No to Same-Store Sales
The A-list of young adult apparel is saying sayonara to same-store sales reporting. Abercrombie & Fitch Co., American Eagle
Outfitters and Aéropostale Inc. are ending their participation in the “comparable-store sale routine” (Women’s Wear Daily).
The companies’ decision comes as part of a growing trend among retailers seeking shelter from the spotlight in a trouble-
some economy. However, some analysts believe the move “could be more indicative of precipitous pressure in the teen
space, according to analysts” (WWD). The question remains to be seen whether teen retail will go the way of the “Misses’”
sector. Initially criticized for being “overstocked” and moving towards commoditization, seven out of eight retailers ended
same-store sales reporting from in the period 2006-2009. Interestingly, all three of have also been the subject of potential
buyout rumors in recent months.

The value of same-store sales reporting is a topic of contention among analysts in retail executives, many of who say that
offering comps “puts too much focus on short term results” (Bloomberg). “The shift enables American Eagle to align its re-
porting schedule with the company’s long-term strategic focus,” Jani Strand, a spokeswoman for American Eagle, said in an
e-mail.

Investors use same-store sales data as key indicators of grow and sector health; however, retail chains are not required to
release them monthly. Similarly, they can stop or start posting them according to their wishes. According to Walter Hellwig
of BB&T Wealth Management, “reporting same-store sales each month is good for investors if it’s a growth company be-
cause it can support the stock, [but] for mature companies, it reflects noise and may hurt the stock price in the short
run” (Bloomberg).

AnnTaylor Stores Corp., Chico’s FAS Inc. and Pacific Sunwear of California Inc. have all stopped releasing comps since 2008,
and more often than not, the move coincides with declining sales. For example, Wal-Mart Stores Inc. ended same-store
sales reporting in 2009 while sales revenues at Wal-Mart’s U.S. stores (open at least a year) have steadily fallen for six con-
secutive quarters (Bloomberg).

M&A Update
Nordstrom is acquiring HauteLook Inc, one of the leading online sites offering “flash sales” focusing on contemporary brands,
as reported by Women’s Wear Daily. In a stock deal valued at up to $270 million, this acquisition marks the first time a re-
tailer has purchased a private sale site and is set to close in the first quarter of 2011.

This move into cyberspace is a strategic one for Nordstrom as more and more people are utilizing mobile devices to shop,
which president of Nordstrom Direct, Jamie Nordstrom, discusses, “It’s clearly one of the fastest-growing ways of shopping”
and he believes this acquisition will pave the way for future innovation.

                                           J.Crew’s leveraged buyout continues to be marred by controversy. Shareholders
                                           recently walked away from a newly formed settlement, which was aimed to solicit
                                           additional offers for the apparel company, and the latest developments continue to
                                           bring more complications for a potential deal.
                                           The “go shop” period, a term of the settlement, failed to yield any bids to counter
                                           the Texas Pacific Group’s $3 billion bid. According to the Wall Street Journal,
                                           “Urban Outfitters Inc. and Sears Holdings Corp. were two retailers that had signed
                                           nondisclosure agreements to view J.Crew's financial information, but both decided
                                           not to bid.”
The shareholders, a group of pension funds, questioned whether the company fetched the highest possible price in its sale.
Shareholders found troubling “the fact that J. Crew’s chairman and chief executive, Millard S. Drexler, waited seven weeks
after beginning discussions with TPG and Leonard Green before informing the board of the talks.” Moreover, after the go shop
period failed to yield results, the shareholders announced their intent to proceed with their lawsuit.
The latest grief facing the popular brand is coming from Institutional Shareholder Services Inc., a prominent investor advisory
firm. Women’s Wear Daily reports that ISS advised shareholders to vote against J.Crew’s $3 billion deal for TPG Capital and
Leonard Green & Partners to take the company private because there was a “less-than-compelling strategic rational to sell
the company at a lower-than-prevalent market premium,” as well as “serious issues in the sales process that gave TPG a sig-
nificant advantage.”
As reported by Reuters, the retailer’s shareholders are set to vote on the proposed takeover on March 1st.
                                                                                                                                  5
NATIONAL OUTLOOK
JANUARY RECAP
January’s retail spend maintained impressive momentum com-
ing out of the holiday, however, analysts estimate January
sales took a hit due to low inventories. According to Women’s
Wear Daily, “January exhibited the balancing act retailers
                                          lean, but not so CO
face for all of 2011: keeping inventories DALLIMORE &low            OCTOBER 2010
that they lose sales.”

Citi analyst Deborah Weinswig agreed that light inventories
hampered sales. “ It wasn’t product mix that harmed sales
among midlevel players, as both Macy’s Inc., up 2.6 percent
for the month, and Penney’s seem to be pulling ahead in new-
ness with exclusive merchandise programs.” Not to mention,
unprecedented harsh winter weather kept shoppers locked
away, tying up potential revenues.

According to Women’s Wear Daily, data from Mastercard
SpendingPulse estimated a 5.3 percent drop in U.S. retail
sales. Spendingpulse measures total retail sales made by cash,
check or credit card and sales at department stores (excluding
those at luxury price points). Within total retail sales, apparel
sales gained 6.2 percent, 8.1 percent from men’s wear and
3.4 percent in women’s apparel.

Limited Brands, Inc. stood out as a lead performer in January
after reporting an impressive 24 percent jump in same-store
sales. The boost came largely thanks to a 35 percent gain in
the company’s Victoria’s Secret division. The street reacted
positively and Limited Brands shares rose 7.4 percent to
$31.29 after reporting comps on February a3rd (Women’s
Wear Daily).

Additionally, upscale department stores held their ground last
month. Neiman Marcus, Inc. led the sector with a 9.8 percent
increase. Similarly, Nordstrom Inc. and Saks Inc. posted 4.8
and 4.4 percent gains, respectively; although, both retailers
were down from their respective 14 and 7 percent increases in
same-store sales the same time last year.




                                                                                   6
                                  DALLIMORE & CO               JANUARY/FEBRUARY 2011

                                                                   Denim Dossier Gives Guidance
CLIENT UPDATES                                                     It's happened to all of us at one
                                                                   time or another. You get a new
Agent Provocateur Heats Up Madison Avenue
                                                                   pair of jeans that you love, love,
                                    The sexiest thing to
                                                                   love and then you make the mas-
                                    happen to the Upper
                                                                   sive mistake of laundering them
                                    East Side is without a
                                                                   incorrectly and realize you really
                                    doubt the newest
                                                                   should have gone with the smaller
                                    store for famous Brit-
                                                                   size like the salesperson told you
                                    ish retailer, Agent
                                                                   and you kick yourself for days
                                    Provocateur, located
                                                                   for throwing them in the dryer and
                                    at 675 Madison Ave-
                                                                   shrinking them. They then become
                                    nue.     The     store
                                                                   the pair in the back of your closet
                                    opened February 13th
                                                                   that you keep because you feel guilty for spending so much
                                    and never has a store
                                                                                      on a pair and you can't possibly throw
                                    made you want to get
                                                                                      them out. Maybe some day you will fit
                                    down to your unmen-
                                                                                      into them in their new shrunken state.
                                    tionables more than
this one, with it's beautifully muted tones and luscious                             7 For All Mankind's blog, Denim Dossier,
fabrics everywhere. The store strikes the perfect balance                            offers some tips on how to avoid such
between elegance and heady hedonism and truly epito-                                 follies and how to properly treat your
mizes what I imagine the perfect boudoir to be like.                                 favorite pair. In the words of the wise,
                                                                                     "Your jeans treat you right, so you
I hear the opening party was a smash with lovely ladies
                                                                                     should treat them right!"
everywhere showcasing the latest pieces from the brand,
and even stopping traffic as they danced in the windows.           Accessorize News (Huge!)
We would expect nothing less from the brand, naturally.            Massive news on the accessories
To check out more photos from the opening party, visit             home front. Are you ready? I really
Agent Provocateur's Facebook page.                                 don't know that you are, but here
Swatch Group’s Strong Performance in 2010                          goes....Our very favorite British
                                                                   accessories company, Accessorize,
                                                                   is FINALLY offering all of us Ameri-
                                                                   can devotees the option to browse
2010 proved to be an exceptionally strong year for Swatch          and pay in US dollars, AND we get
Group, despite unfavorable currency rates. Net income for          fixed rate shipping for the meager
the company rose 41.5 percent last year and "gross sales           amount of $5.
totaled 6.44 billion Swiss francs, or $6.19 billion, up 18.8
                                                                   I am still trying to wrap my head
percent in organic terms versus 2009 and up 8 percent
                                                                   around this amazing develop-
compared with 2008, its previous record year," as reported
                                                                   ment as I have been waiting for
by Women's Wear Daily this morning.
                                                                   this desperately and now that the
Following a successful 2010, January 2011 brought strong           moment has arrived, I can't decide
performance, as well, and Swatch Group feels positively            what to do first. I think my first
about the remainder of 2011, even with continued cur-              move might be to stock up on beach
rency headaches. As Reuters reports, the strength of the           attire for my imaginary spring break
current Swiss franc may lead to increased prices in order          I have yet to plan. The options are
to battle the weaker euro and U.S. dollar.                         now endless. Let the chaos begin!                            7

				
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