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Adjusting For The “New Normal” Consumption
Jeff Klinefelter
Senior Research Analyst
612-303-5537
[email protected]
October 2009
Disclosures for universe of: Jeff Klinefelter
1. I or a household member have a financial interest in the securities of the following companies: none
2. I or a household member is an officer, director, or advisory board member of the following companies: none
3. I have received compensation within the past 12 months from the following companies : none
4. Piper Jaffray or its affiliates beneficially own 1% or more of any class of common equities of the following companies: none
5. The following companies have been investment banking clients of Piper Jaffray during the past 12 months: none
6. Piper Jaffray expects to have the following companies as investment banking clients within the next three months: none
7. Other material conflicts of interest for Jeff Klinefelter or Piper Jaffray regarding companies in my universe for which I am aware include: none
8. Piper Jaffray received non-investment banking securities-related compensation from the following companies during the past 12 months: none
9. Piper Jaffray makes a market in the securities of the following companies, and will buy and sell the securities of these companies on a principal basis:
CROX, CTRN, DECK, HOTT, ICON, PSUN, ROST, VLCM, WTSLA, ZUMZ
10. Piper Jaffray usually provides bids and offers for the securities of the following companies and will, from time to time, buy and sell the securities of these companies
on a principal basis: ANF, ARO, AEO, GCO, GES, GPS, JCG, JCP, KSS, PVH, RL, TGT, UA, VFC, WRC, ZQKa
2
CONTENTS
Economic Synopsis
Retail Sales
Consumer Thesis – “The New Normal”
Employment
Housing
Personal Savings Rates
Sector Themes
Channel Consolidation
Inventory Control
Pricing Dynamics
Sourcing Deflation
Recent Teen Survey Results For Fashion Spending
3
ECONOMIC SYNOPSIS – THE CONSUMPTION DILEMMA
• U.S. economy dependent on consumption, personal consumption expenditures (PCE) represent approx 70% of the
$14.2 trillion annual GDP
• Trends improving, real GDP growth negative 5 of past 6 quarters, but initial FQ2 estimate down only 0.7%
• Real PCE of approx $10 trillion annually has trended negative in 4 of past 6 quarters with initial FQ2 estimate down 0.9%
• Retail sales represent approx 45% of PCE or $4.5 trillion; trended negatively last 11 months and have declined by an
average of 9.6% during this time
• Clothing/Accessories have been negative for 12 consecutive months and have averaged an 8% decline during this time
Source: Bureau of Economic Analysis
4
RETAIL SALES TRENDS – EASING COMPARISONS
RETAIL AND FOOD SERVICES SALES Y/Y CHANGE - UNADJUSTED
15%
Avg. 4.5%
10%
5%
0%
-5%
-10%
Ja
n9
Ju 3
l-9
Ja 3
n94
Ju
l-9
Ja 4
n95
Ju
l-9
Ja 5
n96
Ju
l-9
Ja 6
n9
Ju 7
l-9
Ja 7
n9
Ju 8
l-9
Ja 8
n99
Ju
l-9
Ja 9
n00
Ju
l-0
Ja 0
n01
Ju
l-0
Ja 1
n0
Ju 2
l-0
Ja 2
n0
Ju 3
l-0
Ja 3
n0
Ju 4
l-0
Ja 4
n05
Ju
l-0
Ja 5
n06
Ju
l-0
Ja 6
n07
Ju
l-0
Ja 7
n0
Ju 8
l-0
Ja 8
n0
Ju 9
l-0
9
-15%
Source: Census Bureau
• Significant change in consumer behavior; first negative months going back to 1988
• Retail represents 45% of PCE; Retail sales have declined 10.3% YTD
5
CONSUMER INVESTMENT THESIS – THE “NEW NORMAL”
Changes in critical economic measures; Looking for inflections in key statistics
Employment – A pivotal leg in the consumer’s ability to support consumption
• Initial unemployment claims – Y/Y change in unadjusted claims has marked the end of recessions in prior cycles
Housing – Declines in the consumer’s largest asset is impacting confidence
• Wealth Effect – Every $1,000 of home price depreciation is ~$3.6B impact on PCE
Personal Savings Rate – A derivative of many variables, but will directly impact PCE
• Impact On PCE – 1% increase reduces consumption by ~$100B; Currently
Source: Piper Jaffray & Co.
6
CRITICAL ECONOMIC MEASURES - EMPLOYMENT
INITIAL UNEMPLOYMENT CLAIMS - ROLLING 4 WEEK AVERAGE Y/Y CHG - NSA
120%
100%
80%
60%
40%
20%
0%
-20%
-40%
-60%
8
-6
n
Ja
0
-7
n
Ja
2
-7
n
Ja
4
-7
n
Ja
6
-7
n
Ja
8
-7
n
Ja
0
-8
n
Ja
2
-8
n
Ja
4
-8
n
Ja
6
-8
n
Ja
8
-8
n
Ja
0
-9
n
Ja
2
-9
n
Ja
4
-9
n
Ja
6
-9
n
Ja
8
-9
n
Ja
0
-0
n
Ja
2
-0
n
Ja
4
-0
n
Ja
6
-0
n
Ja
Source: Bureau of Labor Statistics
• Peak year-over-year change in initial unemployment claims has typically marked the end of recessionary periods
• Y-o-Y changes peaked the week of March 7th at +88%, near the trough of the S&P 500 index
7
8
-0
n
Ja
CRITICAL ECONOMIC MEASURES - EMPLOYMENT
Y/Y $ CHANGE - COMPENSATION OF EMPLOYEES VS. PCE
CORRELATION: .95
$700
$600
$500
$400
$300
$200
$100
$0
-$100
COMPENSATION OF EMPLOYEES
PCE
-$200
-$300
Q
15
3
Q
45
4
Q
35
6
Q
25
8
Q
16
0
Q
46
1
Q
36
3
Q
26
5
Q
16
7
Q
46
8
Q
37
0
Q
27
2
Q
17
4
Q
47
5
Q
37
7
Q
27
9
Q
18
1
Q
48
2
Q
38
4
Q
28
6
Q
18
8
Q
48
9
Q
39
1
Q
29
3
Q
19
5
Q
49
6
Q
39
8
Q
20
0
Q
10
2
Q
40
3
Q
30
5
Q
20
7
Q
10
9
-$400
Source: Federal Reserve, BEA
Y/Y $ change in compensation is highly correlated w/ PCE $ growth; Not surprising, but stagnant wages and fewer jobs, will
make robust economic growth difficult
8
CRITICAL ECONOMIC MEASURES - HOUSING
CASE-SHILLER 10-CITY INDEX
250
Dow n 13.0% for JUL Y/Y
200
150
100
3.5% annual growth, 11.5% below current
50
Ja
n87
Ja
n88
Ja
n89
Ja
n90
Ja
n91
Ja
n92
Ja
n93
Ja
n94
Ja
n95
Ja
n96
Ja
n97
Ja
n98
Ja
n99
Ja
n00
Ja
n01
Ja
n02
Ja
n03
Ja
n04
Ja
n05
Ja
n06
Ja
n07
Ja
n08
Ja
n09
0
Source: S&P Case-Shiller Index
9
CRITICAL ECONOMIC MEASURES - HOUSING
Quantifying the Housing Wealth Effect On Personal Consumption
Housing Wealth Effect - Spending Increases $X/ $1 of Home Value Appreciation
$'s
%
$0.02
$0.03
$0.04
$0.05
$0.06
12
-6%
$12
$20
$28
$36
$44
14
-7%
$14
$23
$33
$42
$51
16
-8%
$16
$27
$37
$48
$59
18
-9%
$18
$30
$42
$54
$66
Decline in
20
-10%
$20
$33
$47
$60
$73
Median Home
Value ($1000s)
22
-11%
$22
$37
$51
$66
$81
24
-12%
$24
$40
$56
$72
$88
26
-13%
$26
$43
$61
$78
$95
28
-14%
$28
$47
$65
$84
$103
Source: National Center for Real Estate Research; Dollars in Billions
Every $1000s in home price decline is $3.6B in lost personal consumption expenditures.
Assumes for every $1 of home price appreciation that 5.5 cents is spent on personal consumption.
It also assumes that 80% of the gain in annual increased consumption comes in Yr 1.
$0.07
$52
$61
$69
$78
$87
$95
$104
$113
$121
$0.08
$60
$70
$80
$90
$100
$110
$120
$130
$140
$0.09
$68
$79
$91
$102
$113
$125
$136
$147
$159
• Every $1000s in home price decline is roughly $3.6B in lost PCE, that said, Case Shiller index has been positive for 3
consecutive months after 34 months of sequential declines
10
$0.10
$76
$89
$101
$114
$127
$139
$152
$165
$177
CRITICAL ECONOMIC MEASURES - SAVINGS
7%
Changing consumer behavior
5.9%
6%
Stimulus benefit
5%
4.5%
4.2%
4.0%
4%
3.0%
3%
2%
1%
Source: Bureau of Economic Analysis
• Consumer savings rate increased 220bps since Apr. trough of 0.8%
11
Aug-09
Jul-09
Jun-09
May-09
Apr-09
Mar-09
Feb-09
Jan-09
Dec-08
Nov-08
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
Dec-07
Nov-07
Oct-07
Sep-07
Aug-07
Jul-07
Jun-07
May-07
Apr-07
0%
CRITICAL ECONOMIC MEASURES - SAVINGS
PERSONAL SAVINGS RATE - ANNUAL
30%
25%
20%
15%
10%
Avg. 7%
5%
Avg. 2.7%
0%
19
29
19
32
19
35
19
38
19
41
19
44
19
47
19
50
19
53
19
56
19
59
19
62
19
65
19
68
19
71
19
74
19
77
19
80
19
83
19
86
19
89
19
92
19
95
19
98
20
01
20
04
20
07
-5%
Source: BEA
• Since 1993, average personal savings rate is 2.7%.
• Based on preliminary Aug results, the savings rate is now 3.0% up 220bps since Apr ‘08.
12
TEEN RETAIL; MASS MERCHANTS; APPAREL & FOOTWEAR
BRANDS
Investment Highlights
•
•
•
•
•
•
•
Channel consolidation; capacity rationalization; intra-channel share displacement
Gross margins expanding due to price stability and sourcing deflation
Inventory controls in place, inventory per square foot index down 35% from 2001 peak
Changing consumer psychology; sentiment moving to social, local, natural, authentic over status
Demographic swells favor boomers, young adults, and youth
Fashion cycle; 4 years from prior peak; newness emerging
E-commerce taking a bigger piece of overall spending
13
INVENTORY PSF – SPECIALTY CHANNEL
Piper Jaffray Teen's Specialty Apparel
Inventory Per Square Foot Index
$70
Peak: Jan-01
$66
$65
$60
$55
Trough: Jul-09
$43
$50
$45
$40
$35
$30
$25
14
l-0
9
9
Ju
8
l-0
n0
Ja
8
Ju
7
l-0
n0
Ja
7
Ju
6
l-0
n0
Ja
6
Ju
5
l-0
n0
Ja
5
Ju
4
l-0
n0
Ja
4
Source: Company Reports & Piper Jaffray
Estimates
Ju
3
l-0
n0
Ja
3
Ju
2
l-0
n0
Ja
2
Ju
1
l-0
n0
Ja
1
Ju
0
l-0
n0
Ja
0
Ju
n0
9
l-9
Ju
Ja
9
8
n9
Ja
l-9
Ju
Ja
n9
8
$20
GROSS MARGINS – SPECIALTY CHANNEL
SPECIALTY RETAIL GROSS MARGINS - TTM
45%
Peak: 41.7%
Jul-08
43%
Trough: 33%
Apr-02
41%
39%
37%
35%
33%
31%
29%
27%
Source: Company Reports and Piper Jaffray Estimates
15
Ju
l-0
9
Ja
n10
Ju
l-0
8
Ja
n09
Ju
l-0
7
Ja
n08
Ju
l-0
6
Ja
n07
Ju
l-0
5
Ja
n06
Ju
l-0
4
Ja
n05
Ju
l-0
3
Ja
n04
Ju
l-0
2
Ja
n03
Ju
l-0
1
Ja
n02
Ju
l-0
0
Ja
n01
Ju
l-9
9
Ja
n00
Ju
l-9
8
Ja
n99
Ja
n98
25%
APPAREL IMPORTS BELOW SALES GROWTH
RETAIL APPAREL/ACCESSORIES SALES VS. TOTAL IMPORTED APPAREL DOLLARS
ROLLING 3MONTH AVERAGE
15.0%
10.0%
5.0%
0.0%
-5.0%
-10.0%
-15.0%
Ja
n06
M
ar
-0
6
M
ay
-0
6
Ju
l-0
6
Se
p06
No
v06
Ja
n07
M
ar
-0
7
M
ay
-0
7
Ju
l-0
7
Se
p07
No
v07
Ja
n08
M
ar
-0
8
M
ay
-0
8
Ju
l-0
8
Se
p08
No
v08
Ja
n09
M
ar
-0
9
M
ay
-0
9
Ju
l-0
9
-20.0%
Source: U.S. Commerce Department and Census Bureau
RETAIL APPAREL/ACCESSORIES SALES
16
APPAREL IMPORTS
APPAREL IMPORT PRICES VS. APPAREL CPI
COST PER IMPORTED APPAREL UNIT VS. CPI APPAREL UNADJUSTED
4.0%
2.0%
0.0%
-2.0%
-4.0%
-6.0%
-8.0%
Ja
n0
Fe 7
b0
M 7
ar
-0
Ap 7
r-0
M 7
ay
-0
Ju 7
n07
Ju
lAu 07
g0
Se 7
p0
O 7
ct0
No 7
v0
De 7
c0
Ja 7
n0
Fe 8
b0
M 8
ar
-0
Ap 8
r-0
M 8
ay
-0
Ju 8
n08
Ju
lAu 08
g0
Se 8
p0
O 8
ct0
No 8
v0
De 8
c0
Ja 8
n0
Fe 9
b0
M 9
ar
-0
Ap 9
r-0
M 9
ay
-0
Ju 9
n09
Ju
l-0
9
-10.0%
Source: U.S. Commerce Department and Bureau of Labor Statistics
CPI
• Lower import costs and consistent pricing creates margin opportunity
17
Y/Y % CHG IN UNIT COST
02
03
04
05
Source: Baseline, Piper Jaffray
18
06
07
08
Fa
ll 2
00
8
Sp
ri n
g
20
09
Fa
ll 2
00
9
Sp
ri n
g
Fa
ll 0
7
Sp
ri n
g
Fa
ll 0
6
Sp
ri n
g
Fa
ll 0
5
Sp
ri n
g
Fa
ll 0
4
Sp
ri n
g
Fa
ll 0
3
Sp
ri n
g
Fa
ll 0
2
Sp
ri n
g
Y/Y % CHG
FASHION SPENDING –SCHOOL SURVEY
RLX: .8 Correlation
40%
30%
20%
10%
0%
-10%
-20%
-30%
Teen Spending Change
RLX
FX A HEADWIND FOR U.S. COMPANIES W/ GLOBAL SALES
CALENDAR CHG IN FX - MAJOR CURRENCIES
20%
15%
Y/Y Chg US $
10%
5%
0%
-5%
-10%
-15%
Source: Federal Reserve Board and Piper Jaffray Ests.
• Tailwind starts in FQ4 through FQ3 next year
19
Q210
Q409
Q209
Q408
Q208
Q407
Q207
Q406
Q206
Q405
Q205
Q404
Q204
Q403
Q203
Q402
Q202
Q401
Q201
Q400
Q200
Q499
Q299
Q498
Q298
Q497
-20%
Jeff Klinefelter Biography
Jeff Klinefelter
Managing Director, Senior Research Analyst
T: 612-303-1537
E: [email protected]
Jeff Klinefelter joined Piper Jaffray in 1997 as a research analyst on the consumer team. He follows
retail
companies, focusing on specialty retailing, youth/teens; mass merchandising; and apparel and
footwear
brands. Klinefelter is nationally recognized for conducting proprietary teen retail research twice each
year with
high schools across the country.
Prior to joining the firm, Klinefelter worked for Universal Asset-Based Services, Inc., performing asset
Evaluations for commercial lending institutions. He also worked at Target Stores for six years in
various
merchandising, operations and strategic planning positions, including working in inventory
management for
multiple merchandise divisions (including apparel) and managing a staff of merchandise analysts in
one of
the apparel departments.
Klinefelter has a bachelor's degree from St. Olaf College in Northfield, Minnesota, and a master's
degree in
20
business administration from the University of Minnesota
Carlson School of Management.
Analyst Certification—Jeffrey P. Klinefelter
The views expressed in this report accurately reflect my personal views about the subject company and the subject security. In addition, no part of my
compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report.
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