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Oppenheimer & Co. Inc. does and seeks to do business with companies covered in its research repora result, investors should be aware that the firm may have a conflict of interest that could affect theobjectivity of this report. Investors should consider this report as only a single factor in making theirinvestment decision. See "Important Disclosures and Certifications" section at the end of this report foimportant disclosures, including potential conflicts of interest. See "Price Target Calculation" and "Keyto Price Target" sections at the end of this report, where applicable.
December 15, 2010
CONSUMER & BUSINESS SERVICES/SPECIALTYRETAILING
Pamela Quintiliano
Wandering with Intent in
the Missy SubsectorInitiating on NWY, TLB, ANN, CHS
SUMMARY
In conjunction with our launch of ANN, CHS, NWY and TLB, we have provided aanalysis of the drivers of the consumer overall and of the missy subsector particular. Given common headwinds impacting the group, we have dug into thosto see who is most and least advantaged. We break the report into five sectionscompany descriptions, backgrounds and business practices; manufacturinpressures; the economy; company-specific operating metrics; and investmetheses. The structure of the report gives a framework to understand each companyits crucial issues and key drivers as well as how it stacks up against its competitors
For company-specific in-depth analysis, please refer to our separate companreports, also published today.
KEY POINTS
s The "missy" sector encompasses a broad demographic with perhaps thonly constant its focus on women. Of the names on which we initiate, thtarget customer is 25-65 years old with a household income $50,000-$120,000. NWY caters to the least affluent while TLB and Ann TayloStores (a division of ANN) cater to the most affluent. By age, NWY and ANNLoft division are the youngest; CHS, the oldest. In general, we believe thpromotional cadence will be elevated among retailers focused on middle-incomcustomers, posing additional near-term execution risk at NWY and Loft.
s Female unemployment (25 years+) has traced national moves, albeit at lower level, with the "older woman" (45-54) faring better than the youngeThis benefits CHS and TLB, both of whom coincidentally also cater to a higheincome demographic. This demographic should also benefit from an extensioof the Bush-era tax cuts.
s Elevated cotton costs and China wage inflation provide costing pressurealthough missies better positioned than most. Cotton is a key fabrication foall but NWY, who primarily uses synthetics. Of the remaining, ANN is the bespositioned as it has fabric through 2011 (with an emphasis in 1H), followed bTLB who is locked-in for spring. All four are shifting out of China, although TLhas an early advantage with only 41% sourced in 2009.
s CHS faces the most-difficult comps on both a 1- and 2-year basis anrecently achieved peak 3Q operating margins. Following CHS- ANN, NWand TLB have the most difficult upcoming compares. From an operating margperspective, ANN and TLB have shown recent improvements but are severahundred basis points below prior peak. NWY has also improved, but is stoperating at negative margins.
s Initiating on NWY and TLB with Outperform ratings and on ANN and CHwith Performs.
EQUITY RESEARCH
INDUSTRY UPDATE
Oppenheimer & Co Inc. 300 Madison Avenue New York, NY 10017 Tel: 800-221-5588 Fax: 212-667-8229
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2
Table of ContentsHot Issue Matrix ................................................................................... 3
Company Descriptions, Background And Best Practices ............... 6
Company Backgrounds ....................................................................... 6
Comparative Pricing Study ............................................................... 10
Loyalty Programs ............................................................................... 11Private Equity ..................................................................................... 12
Manufacturing Pressures .................................................................. 13
Sourcing.............................................................................................. 13
Cotton .................................................................................................. 14
The Economy...................................................................................... 17
Unemployment By State .................................................................... 17
Female Unemployment ...................................................................... 17
Potential Extension Of Unemployment Benefits ............................ 18
Bush Tax Cuts .................................................................................... 19
Consumer Sentiment ......................................................................... 19
Foreclosures....................................................................................... 19Real Personal Consumption ............................................................. 20
Household Net Worth ........................................................................ 21
Debt ..................................................................................................... 22
Savings ............................................................................................... 23
Personal Bankruptcy Filings ............................................................ 23
Fiscal Distress By State .................................................................... 24
Health Insurance Coverage ............................................................... 25
Company-Specific Operating Metrics .............................................. 26
Inventory And Sales Trends ............................................................. 26
Margin Analysis ................................................................................. 27
Comps ................................................................................................. 31Store Count And Longer-Term Growth Opportunity ...................... 32
Direct-To-Consumer .......................................................................... 34
Stock Performance ............................................................................ 34
Short Interest ...................................................................................... 40
Missy Retail: The Players .................................................................. 41
Appendix ............................................................................................. 44
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Hot Issue Matrix
Exhibit 1. Hot Issue Matrix
"Hot Issue" Matrix
ANN CHS NWY TLBPRIVATE EQUITY
Most Attractive Value X X
GEOGRAPHY
MANUFACTURING
China (>50% exposure) X X XCotton X X
ECONOMY
Fiscal Distress Rankings by State XHealth Insurance Coverage XUnemployment
Highest Levels (+20% Store Base) X XX
COMPANY SPECIFIC OPERATING METRICSQuarterly Comp, Sales and Inventory Trends
YoY Inventory Gains (PSF) (3Q10) X X XInventories Growing Faster Than Sales
Monthly Comps
Easiest Comps 1-Yr Basis X XEasiest Comps 2-Yr Basis X X XMost Difficult Comps 1-Yr Basis X XMost Difficult Comps 2-Yr Basis X
Margin Analysis
Gross Margin (close to or at peak) XOperating Margin (close to or at peak) X
Store Count and SF Growth (+5% Growth Est. for '10)Direct-to-Consumer (+10% CY09 Sales) X
Exposure High Foreclosure States
Missy
Source: Company reports, Company Websites, OPCO Estimates
Our proprietary hot issue matrix highlights the similarities and differences
among the companies we are initiating on today (see separate company
reports). A few of the primary differences that stand out include:
ANN (along with Chicos) has the most difficult upcoming compares
on a 1-year basis, but much easier 2-year comps relative to its 1 year
comps. In the most recent quarter its gross and operating margins
were the closest to their respective peaks at 57.2% and 8.1% vs.
previous peak of 57.3% and 8.1% achieved in 2009 and 2007
respectively.
CHS has the most difficult comparisons on a 1- and 2-year basis and
the greatest exposure to those states with financial distress includinglow health insurance coverage, high unemployment rates, and high
foreclosure rates.
NWY has easy compares on both a 1 and 2 year basis. Additionally
it distinguishes itself among the group as the retailer with the lowest
average retail price across nearly every category.
TLB has the least exposure to China sourcing. Along with NWY it
has the easiest 1- and 2-year compares. While its average price
point in each category is the highest in the group, it does cater to the
highest income consumer.
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The missy sector encompasses a broad universe of demographics with
perhaps the only constant being that it focuses on women. Of the names we
are initiating on today the core age ranges from 25-65, with the sweet spot at
35-54. TLB caters to the most affluent in the segment ($120k+ household
income), while NWY focuses on the least affluent ($50k-$100k household
income).
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This report is a comprehensive study of the Missy subsector and the various
industry-specific and company drivers. We have broken the report into several
sections in an effect to analyze the various moving parts. These include:
Company Descriptions, Backgrounds and Business Practices
Manufacturing Pressures
The Economy
Company-Specific Operating Metrics
Investment Thesis (ANN, CHS, NWY, TLB)
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Company Descriptions, Backgroundand Best Practices
Company Backgrounds
ANN
Exhibit 2. ANN: Key Metrics
Age Income ($)
StoreCount
LT StoreOpportunity
Store ClosureOpportunity International DTC
ANN 907 NA 75-80 NA 10.1%
Ann Taylor Mid 30's $125K-$150K 276 NA NA NA 10.8%
Ann Taylor Factory 92 NA NA NA NA
Loft Low 30's $75K-$100K 506 NA NA NA 9.5%
Loft Outlet 33 NA NA NA NA
% of Sales
*DTC is % of sales from most recent quarter
Source: Company reports and OPCO Estimates
History: Ann Taylor was founded in 1954 by Richard Liebeskind, the son of a
dressmaker. In 1956 he opened the first Ann Taylor store in New Haven, CT.Ann Taylor was the name of a best-selling dress style that Liebeskinds father
had given to him as a present. The Ann Taylor design was intended to to
personify the well-dressed woman. In 1977, Liebskind sold his stores to
Garfinckel, Brooks Brothers, Miller Rhodes Corporation and in 1981 Allied
Stores acquired Garfinckel. Ann Taylor quickly became the most profitable
division of all Allied retailers, surpassing Brooks Brothers and Bonwit Teller. In
1987, during the LBO boom, the Campeau Corporation ($153M in revenue)
implemented a hostile takeover of Allied Stores ($4.1B in revenue) after
securing $3B in credit. Separately, Campeau initiated another hostile takeover
of Federated for $6.6B in April 1988. In October 1988, in need of fresh capital
and under the pressure of debt requirements, Campeau sold Ann Taylor to
Merrill Lynch Capital Partners and former Lord & Taylor Chairman Joseph
Brooks for $430M. In 1991, the company went public.
Core Concepts and Customer: Ann Taylor, Inc operates two distinct
concepts, Ann Taylor Stores (ATS) and Loft. As of October 31, 2010 the
company operated 907 stores in 46 states, including 276 ATS stores, 92 ATS
factory outlets, 506 Loft stores and 33 Loft outlets. ATS (25% FY09 sales)
caters to the fashion conscious, professional woman. She is a working mom
in her mid-30s with an average HH income of $125K-$150K. Loft Stores (51%
FY09 sales) caters to a more casual customer. She is in her low 30s with an
average HH income of $75K-$100K. In the most recent quarter, Lofts average
transaction value and average unit retail were 25% and 29% below ATS but
the Loft shopper came into the store significantly more often (an average of
3x/month).
Sales Breakdown: Year-to-date, the company has generated $1.465B in
sales, with Ann Taylor representing $628.8M or 43% and Loft netting the other
$836.1M or 57%. Within Ann Taylor, the stores, factory outlets and e-
commerce site represent 58%, 32% and 10% of the divisions sales for totals of
$362M, $62.4M, and $204.4M respectively. Within Loft, the stores, outlets and
e-commerce site represent 86%, 8% and 6% of total Loft sales or $719.4M,
$66.6M, $50.2M respectively.
Growth Opportunity: While the company hasnt identified its long-term store
goals, it recently announced that it expects to open an additional 35 Loft
Outlets and 5 Ann Taylor Outlets in FY11 on a base of 92 and 33.
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Primary Competitors: Key competitors include Talbots, Chicos, The Gap,
Nordstrom, Macys, and the Limited.
Management: Kay Krill is the Chief Executive Officer of Ann Taylor. She has
held this role since 2005 and has been President since 2004. Previously Ms.
Krill was President of Loft since 2001. Christine Beauchamp has served as
President of the Ann Taylor Stores division since August 2008. Previously she
was CEO/President of Victorias Secret. Gary Muto joined the company in
November 2008 as the President of its Loft Division. Previously since 2001, heheld various senior level positions at Gap Inc. including President of Banana
Republic, Gap North America, and Forth & Towne.
CHS
Exhibit 3. CHS: Key Metrics
Age Income ($)
StoreCount
LT StoreOpportunity
Store ClosureOpportunity International DTC
CHS 1144 1900-2040 NA NA 7.7%
Chico's Stores 46-64 $100k+ 598 675-700 NA NA NA
Chico's Outlets 60 100-120 NA NA NA
WH/BM Stores 35-45 $100K+ 344 450-475 NA NA NAWH/BM Outlets 20 100-125 NA NA NA
Soma 35-64 $75K+ 114 500-540 NA NA NA
Soma Outlets 8 75-85 NA NA NA
% of Sales
*DTC is % of sales from most recent quarter
Source: Company reports and OPCO Estimates
History: Chicos was founded in 1983 by Marvin and Helene Gralnick on
Sanibel Island, Florida as a small boutique selling cotton sweaters and
Mexican folk art. In 1987, the first Chicos franchise was opened and in 1993
the company went public. After initially retiring in 1993, the Gralnicks came
back to the company in 1994 as Marvin Gralnick replaced Jeff Zwick as CEO.
In 2003, the company acquired The White House, owner of White House/Black
Market for $90M in cash and stock. At the time there were 103 WH/BM
stores. In 2004, Chicos opened its first 10 Soma boutiques dedicated to the
undergarment business. The Gralnicks again retired from the company in
2006.
Core Concepts and Customer: CHS is a specialty retailer with three core
concepts for women; Chicos, White House Black Market (WH/BM) and Soma
Intimates as well as outlet divisions for all. As of October 31, 2010 the
company operated 1,144 stores in 48 states including today 598 Chicos
boutiques, 60 Chicos outlets, 344 White House/Black Market stores, 20 White
House/Black Market outlets, 114 Soma boutiques and 8 Soma outlets.
The core Chicos brand caters to the 35+ year old woman with the edit point at
52 years old offering them a combination of comfort and fashion. White
House Black Market (WH/BM) is a more fashion forward clothing and
accessory store primarily offering black and white along with an accent color,and caters to the 25+ year old woman. Soma Intimates offers undergarments
(sleepwear and loungewear) to the 35-64 year old who has aged out of
Victorias Secret and is primarily shopping department stores. Approximately
78% of the core customer for both Chicos and WH/BM customers is described
as having an income level above the U.S. median. Somas core customer has
an average income of $75,000.
Sales Breakdown: Year-to-date the company has generated $1.43B in
sales, with the Chicos division (including Soma) producing $994M or 70% of
total sales and the WH/BM division accounting $436M or 30% of total sales.
YTD, DTC accounted for $90.3M or 6.3% of total sales.
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Growth Opportunity: Longer-term, the company has indicated that it believes
it can operate 1900-2040 locations under its current concepts from 1,144 today
including 675-700 Chicos boutiques from a base of 596, 100-120 Chicos
outlets on a base of 60, 450-475 White House/Black Market stores from a base
of 344, 100-125 White House/Black Market outlets from a base of 20, 500-540
Soma boutiques from a base of 114 and 75-85 Soma outlets from a base of 8.
Management: David Dyer has served as President and CEO of the company
since January 2009 and a director since 2007. Formerly, he wasPresident/CEO of Tommy Hilfiger Corporation and Lands End. Donna Colaco
is the Brand President of White-House/Black Market since 2007. Prior to this
position Ms. Colaco held various other positions with the company. Cynthia
Murray has served as Brand President-Chicos since 2009. Prior to this
position, Ms. Murray served as Exec. Vice President and Chief Merchant of
State Stores.
Primary Competitors: Key competitors of the Chicos Brand include Ann
Taylor, Christopher & Banks, Gap, Talbots as well as department stores
including Bloomingdales, Macys, Nordstroms and Saks Fifth Avenue.
WH/BMs competition includes Ann Taylor, Banana Republic, New York and
Co. as well as Macys, Nordstrom, and Saks. Somas direct competition is
Victorias Secret as well as the department stores listed above.
NWY
Exhibit 4. NWY: Key Metrics
Age Income ($)
StoreCount
LT StoreOpportunity
Store ClosureOpportunity International DTC
NWY 25-45 $50K-$100K 579 NA ~23 by YE NA NA
New York & Co. Boutiques 556 NA NA NA NA
New York & Co. Outlets 23 75 NA NA NA
% of Sales
*DTC is % of sales from most recent quarter
Source: Company reports and OPCO Estimates
History: NWY was founded as Lerner in 1918 by Samuel Lerner and HaroldLane. The company was acquired by Rapid-American in the 1960s and in
1985 Limited Brands acquired 798 Lerner stores for $297M. It operated as a
subsidiary of Limited Brands from 1985-2002 and In 2002, the chain was sold
to as New York and Co. to an investor team including outgoing CEO Richard
Crystal and Bear Stearns Merchant Partners (now Irving Place Capital) for
$153M. The company went public in 2004. In 2005, NWY bought Boston
based Jasmine Sola, an upscale womens chain for $30M or $2M/store for 15
stores. The company closed the division in 2007.
Core Concepts and Customer: NWY offers casual and wear-to-work apparel
and accessories under the New York & Company brand. As of October 31,
2010 the company operated 579 stores in 43 states, with the plan to end FY10
with 552-560 stores. NWYs core customer is a fashion conscious, value
sensitive working mom between the ages of 25-45 (edit point 32) with an
average household income of $50,000-$100,000.
Sales breakdown: Year-to-date the company has generated $718.5M in
sales. The sole division, New York & Company, accounts for 100% of total
sales. The company does not break out its online or outlet sales.
Growth Opportunity: The company sees the long-term potential of its outlet
concept to grow to 75 stores from the current 23. NWY also plans to
rationalize its store base to 552-560 by the end of the year.
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Management: Richard Crystal currently serves as Chairman and CEO of the
company. He was named President/CEO in 1996 and Chairman in 2004.
Previously Mr. Crystal served as Chairman/CEO of Aeropostale (while it was
still partnered with R.H. Macy/Federated). On April 29, 2010, the company
announced that Mr. Crystal will retire from the company when his employment
agreement expires in February 2011. Gregory Scott will succeed Mr. Crystal
and as such been named President as of June, 2010. Previously, he served
as CEO of Bebe Stores; President of Aden B. (WTSLA) Kevin Finnegan is the
Executive Vice President of Global Sales. He has held this position since April
2009 after joining the company in 2001 as the executive Vice President,
National Sales Leader.
Primary Competitors: On the higher-end, NWY is competing with Ann Taylor,
Banana Republic, Club Monaco, Express, J Crew, The Limited and Zara. In
the moderate to lower-end, it is competing with Ann Taylor Loft, Forever 21,
H&M, JC Penney, Kohls, Old Navy, Target and Wal*Mart. Research has
suggested that customers shopping in the value space are not as loyal to
specific brandsthis creates an opportunity for NWY but also forces it to stay
on its toes
TLB
Exhibit 5. TLB: Key Metrics
Age Income ($)
StoreCount
LT StoreOpportunity
Store ClosureOpportunity International DTC
TLB ~55 >$120K 584 NA 75-100 BY FY13 ~3% 19.0%
Talbots 536 NA NA NA NA
Talbots Upscale Outlets 27 100 NA NA NA
Talbots Upscale Outlets 21 NA NA NA NA
% of Sales
*DTC is % of sales from most recent quarter
Source: Company reports and OPCO Estimates
History: TLB was founded in 1947 by Rudolf and Nancy Talbot. Theyopened their first store in Hingham, Mass near Boston and in 1948 began their
direct mail business. With $8M in annual revenues, the Talbots sold their retailand catalog business to General Mills in 1973. Between 1973 and 1980 the
company expanded from 20 to 126. In 1988, General Mills decided to divest
its entire specialty retail division to focus purely on its food business. At this
time, Talbots was producing $350M in annual revenues with nearly 40%
generated from the catalog. After receiving a number of bids, General Mills
ended up selling Talbots (along with Eddie Bauer) to JUSCO Co., Ltd. (now
ON Co., Ltd.), a Japanese retailer. By 1989, with its new owners, TLB
branched out into international operations with a sourcing office in Hong Kong
and Canadian retail operations in 1991. By late 1993, the parent company
announced its plan to take the company public. In November 1993 with 313
stores in 44 states, the company went public, with the parent retaining a 67%
stake.
Core Concepts and Customer: The companys core businesses include its
signature Talbots (Misses) line, Talbots Petites (54 and under), Talbots
Woman, Womans Petites (fuller figures) and Talbots Accessories & Shoes.
The merchandise is classified as mature work and casual wear. Talbots core
customer is a 54-year old well-educated woman, who is active in her
community and has a household income greater than $120k. TLB operates its
business through retail and direct marketing (internet and catalogue) outlets.
As of October 31, 2010, TLB operated 584 stores.
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Sales Breakdown: Year-to-date, TLB has produced $920.5M in revenue with
81.5% or $750.5M derived from the stores, while 18.5% or $170M came from
the marketing segment. The company does not break out its online sales.
Growth Opportunity: While the company has not identified a long term store
count goal, it sees the potential to grow its outlet business to 60 stores from its
current 25, while closing 75-100 stores in its core division by 2013.
Management: Trudy Sullivan has served as President/CEO since August2007. Prior to this position, she was President of Liz Claiborne from January
2006 until July 2007. Michael Scarpa serves as the COO/CFO. Mr. Scarpa
has served as COO since December 2008 and CFO since January 2009.
Previously, he was COO of Liz Claiborne from January 2007 to November
2008. Michael Smaldone has worked as Chief Creative Officer since
December 2007. Previously, he served as the Senior VP of Design for Ann
Taylor Stores from September 2009 until December 2007.
Primary Competitors: Ann Taylor, Chicos and Limited Brands are Talbots
most direct competition in the specialty retailer space. In terms of department
stores, Macys and Nordstrom also represent affordable luxury, albeit to both
genders.
Comparative Pricing Study
We took an inventory of what ANN, CHS, NWY, TLB were selling on their
website. Excluding sale items, we took the median price of all offered in the
following categories: Pants; shirts/blouses; blazers; sweaters, dresses,
intimates and swimwear.
As shown in Exhibit 6, TLBs merchandise is the most expensive in the
group, while NWYs is the least expensive and typically provides further
discounts in-store at check out. Additionally, the disparity in price between
Ann Taylor and Loft is seemingly greater than that of Chicos to WhiteHouse/Black Market.
Exhibit 6. Opco Survey of Online Prices by Company (December 2010)
Pants Shirts/Blouses Blazers Sweaters Dresses Intimates Swimwear
ANN
Ann Taylor $98.00 $78.00 $208.00 $88.00 $228.00 $35.00 NMLoft 69.50 44.50 138.00 59.50 89.50 NM NM
CHSC HS 79.00 89.00 119.00 99.00 89.00 NM NM
WH/BM 88.00 88.00 150.00 88.00 150.00 NM 36.00
Soma 50.00 50.00 70.00 60.00 69.00 40.00 100.00
NWY 30.00 40.00 60.00 40.00 70.00 NM NMTLB 120.00 109.00 220.00 129.00 200.00 NM NM
Source: Company websites;Oppenheimer & Co. Inc
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Loyalty Programs
ANN launched a loyalty program in October 2008 with co-branded or private
label credit cards and style reward certificates specific to either Loft or Ann
Taylor. The co-branded cards can be used wherever credit cards are
accepted. In addition to point accumulation for rewards there are also special
exclusive discount programs throughout the year.
CHS cites its Passport Club/The Black Book card as its best customers. As a
group as in 2Q10 it was up 3% vs. last year. Chicos and Somas Passport
Club affords members a 5% discount once they spend a total of $500 over a
predetermined time frame. WH/BM has the same program, but the threshold
is $300.
NWY launched its NY&C Rewards credit card with MasterCard in July 2010.
Platinum members spend $400 in one calendar year and get exclusive savings
such as $20 discounts on each $200 spent, birthday coupons, and free
shipping. NWY previously had a different loyalty program that it launched in
2007, which had ~3 million members. The purpose of revamping the program
was to tie into their proprietary charge business to get incremental sales. In
addition to its loyalty program, NWY also offers 15% on all purchase when you
show an AAA membership card.
TLB has the highest penetration of private label credit card usage at 49.2% of
sales as of 2009, up from 46% in 2008, and 28% in 2000. TLB has three
levels; Red, platinum, black. You receive points 0.5 points per each dollar
spend regardless of method of payment, 1.0 for each dollar spent on a TLB
credit card, and 1.25 points for each dollar spent on a TLB credit card once
you spend $1000 on the card. As of June 2009, there were 2M members and
the data shows they spend 80% more and twice as frequently as the average
customer.
Exhibit 7. Customer Loyalty Programs
Name Spend Needed Member Benefits Commentary
ANN Enhanced Credit Card Auto-enrolled w ith "Enhanced CC" Choice of private label or co-branded card Launched 10/2008
Points earned on purchases at any brand
Co-Branded cards earn points on purchases at other merchants
Style Rew ard Certificate
CHS
Chico's Passport Club $500 5% off on all apparel/accessory purchases Best Customer, +3% in 2Q10
Soma Passport Club $500 5% off on all apparel/accessory purchases
WH/BH The Black Book $300 5% off on all apparel/accessory purchases
NWY Y&C Rewards Credit Card- Platinum Spend $400 in one Calendar Yr $20 discount card w ith every $200 spend Launched in July 2010
Birthday Coupon (25%),
4 exclusive savings passes/year
Free Shipping w ith $125 purchase
NY &C Rew ards Credit Car d- Blac k A pply for CC $10 dis count card w ith every $200 spend
Birthday Coupon (15%),
2 exclusive savings passes/year
Free Shipping w ith $125 purchase
TLB Classic Aw ards 500 points Receive $25 appreciation aw ard (expire 1 year from issuance) Cards represent 49.2% of sales
Red Not required to have TLB CC Receive 0.5 point for $1 spend (regardless of method of payment) (46% in 2008) (28% in 2000)
Platinum Auto enrolled when open TLB CC Receive 1.0 point for $1 spend (Have to use TLB CC)
Black $1000 on TLB CC Receive 1.25 point for $1/spend (Have to use TLB CC) As of 6/09, 2M members,
they spend 80% more
and twice as frequently Source: Company reports and OPCO Estimates
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Private Equity
With the recent private equity acquisitions of JCG and GYMB there has
been a great deal of speculation regarding which companies could be
next. The conversation runs the gamut, including those retailers operating at
peak margins as well as those that fit into a turnaround mold. Given the recent
flurry of activity we would not exclude anyone from the discussion, yet we do
believe that some make more sense economically than others.
Using an EV/EBITDA valuation metric (Exhibit 8), ANN and CHS appear to
be the most attractively valued, representing a discount to recent
transactions. ANN is trading at 6.2x, 6.0x and 5.3x TTM, FY10E and FY11E
EV/EBITDA while CHS is trading at 6.2x, 6.1x and 5.2x. Both have clean
balance sheets, although CHS cash position is more favorable at $506M vs.
ANN at $223M.
Management willingness to stay on board. Given that senior management
has stayed on at GYMB and plans to stay on post-privatization at JCG, we
thought it would be helpful to also evaluate management tenure and equity
stake across all four names. Kay Krill, CEO of ANN, has been with the
company for 16 years. She owns 0.85% of all outstanding stock, the highest
among any officer of any of these four names. (excluding outgoing NWY CEORichard Crystal)
Exhibit 8. EV/EBITDA vs. Recent Buyouts in Specialty Retail
TTM 2010E 2011E Debt/
EV TTM 2010E 2011E EV/EBITDA EV/EBITDA EV/EBITDA Cash 2011E EBITDA
ANN $1,330.0 $214.2 $222.6 $252.0 6.2x 6.0x 5.3x $223.6 0.0x
CHS 1690.0 272.6 278.8 326.4 6.2x 6.1x 5.2x 505.6 0.0x
NWY 226.4 (12.3) (17.8) 43.8 NA NA 5.2x 22.5 0.4x
TLB 638.6 147.4 128.2 162.9 11.7x 5.0x 3.9x 4.7 0.2x
Recent Retail DealsGYMB 1607.0 216.7 220.2 241.1 8.1x 8.9x 8.1x 176.8 0.0x
JCG 2473.0 315.9 287.7 314.4 7.9x 8.5x 7.4x 311.7 0.0x
EBITDA
Source: Company reports and OPCO Estimates
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Manufacturing Pressures
Sourcing
Thus far in 2010, labor costs in China have increased 8-12% for most U.S.
customers and since labor translates into 25% of the cost of a garment,
this is a significant increase. Labor costs have increased from a series of
work stoppages in which workers protested for higher pay and better working
conditions. This has led to China to enact a series of labor laws. One of the
primary reasons products from apparel to electronics are sourced in China is
its relatively low labor costs. Going forward, with these costs on the rise,
China may have less of a competitive advantage to other countries in terms of
production.
As of the end of fiscal year 2009, the majority of merchandise is still
produced in China with ANN at 50%, CHS at 66%, NWY at 61% and TLB at
41%.
In 2009, CHS and TLB entered into agreements with sourcing agencies to
reduce their dependency on China and achieve greater economies of
scale.
CHS entered into a non-exclusive relationship with the Connor Group,
the second largest sourcing service company in the world. The
Connor group has 35 offices with 1,400 employees in 20 countries
throughout the globe. The purpose of this agreement was to
consolidate and centralize the sourcing operations of all three brands
into one. Previously, each brand had its own internal sourcing team.
China sources accounted for approximately 66% merchandise
purchases in 2009 compared to approximately 58% in the prior fiscal
year. Despite this increase, the company has made a conscious effort
to move sourcing out of China and into other regions in the upcoming
years.
TLB entered into a strategic partnership with Li & Fung, a Hong-Kong
based global goods exporter, to serve as the exclusive global apparel
sourcing agent for nearly the entire Talbots collection with the
exception of swimwear, intimate apparel, footwear, jewelry, handbags
and accessories for which it will serve as a non-exclusive agent. Prior
to the agreement, TLB had operated its own Hong Kong and India
sourcing offices. Li & Fung is the worlds largest exporter with $16.7B
in revenue, 35,000 employees and a network of 80 offices in 40
countries. The partnership has allowed the company to leverage Li &
Fungs global network. Reflecting its new relationship, as of October
2010, TLB has consolidated its sourcing footprint to 69 vendors and
144 factories from 232 vendors and 487 factories in 2008. Going
forward, the company intends to reduce its dependence on
Asia/China. By 2013 Asia, the Mediterranean, and the Americas
should represent 60%, 30% and 10% of the sourcing volume,
according to the company. That compares to 2009, when ~76% was
sourced from and the balance sourced between other regions.
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Cotton
Fabric typically represents ~40% of the cost of manufacturing a garment.
The labor is ~25%, import tariffs ~20% and the remaining 15% goes to trim,
packaging, freight and commissions. As fabric is the most expensive
component of an item, cotton price movement obviously has a tremendous
effect on sourcing costs.
YTD, cotton prices have accelerated steadily, reaching a 140-year high of$1.57/pound on November 10th up from $0.77 on January 1
st. The price
increase has been attributed to poor weather and an increase in demand in
China, the worlds largest producer and importer. Additionally, floods in
Pakistan and Indias restrictive export policies have reduced much of the
worlds inventories.
Since reaching the all-time high in November, the cotton rally has taken a
breather, dropping 7% to $1.46 as of December 3- The recent selloff, which
is in line with other commodities, is attributed to worries that Chinas efforts to
slow its economy (to prevent inflation) will hamper raw-materials demand
growth.
Cotton prices are generally a leading indicator of retailers total grossprofit. In February 2008 when cotton prices increased 28.5% yoy, the 6-9
month period following that saw gross profit declines in the group in the 20%-
30% range. In April 2009 cotton prices declined ~40%. Approximately 6
months later the composite gross profits of ANN, CHS, NWY and TLB
increased by 50%. Currently, we are experiencing not only tremendous YoY
increases in cotton (89% in October), but still close to peak prices despite a
recent pullback (please see further commentary below). As a result, there will
likely be gross profit deterioration in 2011. However, we do caution that this is
an industry-wide phenomenonnot missy specificand companies are
planning their businesses accordingly to reflect the headwinds. However, given
a still struggling consumer who has become accustomed to heavy promotional
activity, we believe the ability to pass on costs will become more limited.
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Exhibit 9. YoY Change in Cotton Prices, Composite Gross Profit, and
Clothing/Accessory Sales
-40%
-20%
0%
20%
40%
60%
80%
100%
Jan-07
Ap
r-07
Ju
l-07
Oc
t-07
Jan-08
Ap
r-08
Ju
l-08
Oc
t-08
Jan-09
Ap
r-09
Ju
l-09
Oc
t-09
Jan-10
Ap
r-10
Ju
l-10
O c
t 1 0
Yo
YChange
Cotton Prices Composite Change in Gross Profit Clothing and Accessories Sales
Source: National Cotton Council of America
We believe that Missy retailers are well-positioned to survive the
escalating cotton costs better than other sub-sectors including teens and
children, given the formers less emphasis on cotton fabrications and a
broader assortment. Among the group CHS and TLB have the most exposure
and are thus the most at risk. NWY has more synthetic fabrications while
ANN has fabric in position through the majority of FY11.
Longer-term, w believe that escalating cotton prices and the problems in
China, Pakistan as well as Indias restrictive cotton export policy issuehave caused companies to look for both new production countries as
well as alternate fabrications. The other regions that manufacturers are
exploring include Bangladesh, Indonesia, Bahrain, Jordan, Morocco, and Sri
Lanka. However, immediate production from these areas should not be
expected, as it takes time to build an infrastructure.
Below please find company-specific commentary on sourcing challenges
and elevated cotton prices. As a reference, most retailers within the
missy space, as well as the broader specialty universe, have indicated
escalating pressures as they look to F2H11.
ANN: But we have a number of strategies underway in the business that give us someoptimism that we will be able to successfully navigate through this crisis. First, as itrelates to advanced commitments, consistent with the fist half activity, we are makingmeaningful commitments on a significant portion of our key core fabrics. Second thing iswe are aggressively looking at opportunities to procure off peak production. That's astrategy that we have historically utilized within the factory outlet channel and we arerapidly expanding that across the full price channels. Third, strong vendor partnerships. Icannot emphasize that enough. It's a tremendous benefit to us as we manage throughthese challenges. And then also just value engineering the product where it makessense. We have our designers and our merchants on the ground in Asia working directlywith our vendors and our factories, and we continue to strengthen our raw materials trimstaff in Asia to ensure that we have flawless execution in this area. From a costingperspective, while we know the situation is clearly more challenging than we've seen, we
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believe we are approaching this in the right way and that we are doing everything in ourpower to mitigate the costing pressures for the back half of 2011.
Source: Ann Taylor Stores Q3 2010 Earnings Conference Call.
CHS: Much has been reported about the escalating prices for cotton and the labor costincreases in China. Cotton prices, though recently easing somewhat, have more thandoubled compared to last year and labor costs in China have risen 8% to 12% this year.While we source substantial quantities of product from China, our experience reflectsthat only 30% of our piece goods are made from cotton and that the labor component is
only about 20% of the cost of one of our garments. These points do not diminish theimpact of higher sourcing costs, but give them the appropriate dimension against abackdrop of increasing concern.
Source: Chicos FAS, Inc Q3 2010 Earnings Conference Call.
NWY: Clearly costs are increasing on both the raw materials and labor side of theequation. At this point, we believe it is important to convey value to our customer, and itis not our intention to raise our overall retail for the spring season. We are working tomitigate these pressures by leveraging our long-term relationships with our key mills andfactories. We benefit from having a flexible sourcing base, and a strong ability to work inand out of fabrication to preserve cost, which will help mitigate some of these pressures.With advanced planning, we have made early commitments to base fabrics, which helpease some of the cost pressures for the early part of fiscal 2011.
Source: New York and Company Q3 2010 Earnings Conference Call.
TLB: Before I share with you our key strategies, we recognize that we are facing somestrong economic headwinds, whether it's rising cotton prices, labor shortages in China,currency reevaluation in Asia and in Europe and freight rate rising; all factors thatinfluence the cost of our product.
Source: Talbots Investor Meeting October 5, 2010.
In September, Chinese officials agreed to have a more open dialogue
with the United States regarding the easing of container constraints.
Maritime shipping accounts for more than 90% of all U.S. foreign trade and
China produces 95% of the worlds containers. The United States needs to
upgrade its ports to keep pace with Chinas shipping infrastructure, which is
among the worlds most modern facilities. Even with inflated prices, ship
owners lost a combined $20B in 2009 from slowdown of trade and the
reduction of ocean shipping.
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The Economy
Unemployment by State
CHS has the most exposure to the five states with the highest level of
unemployment at 25.4% of total store base followed by ANN (22.2%), NWY
(19.3%), TLB (17.4%). All have very high store counts in CA relative to theirbases. CHS has greater than 20% of its store base concentrated in Florida and
California alone.
Exhibit 10. States with Highest Unemployment Rates
Highest Unemployment Rate
Nevada 14.2 1.6 1.5 0.7 0.7
Michigan 12.8 2.0 2.2 2.3 3.0
California 12.4 9.5 11.7 9.5 6.6
Florida 11.9 8.4 9.5 6.3 6.4
Rhode Island 11.4 0.7 0.5 0.5 0.7
Total 22.2 25.4 19.3 17.4
Source: Bureau of Labor Statistics
Exposure to states with improving and low unemployment is minimal. At
5% of its store base, NWY is the most exposed to the states including North
Dakota, South Dakota, Nebraska, New Hampshire and Vermont. ANN, CHS
and TLB have 1.2%, 0.9% and 2.3% of their store base in these states.
Exhibit 11. States with Greatest Improvement in Employment (Rolling 12
months)
BP Improvement ANN CHS NWY TLB
Most Improvement (Rolling 12 months)
Nevada 130.0 1.6 1.5 0.7 0.7
Colorado 90.0 2.0 2.1 1.0 1.6
Utah 90.0 0.4 0.8 0.3 0.3
Louisiana 80.0 1.3 1.5 1.6 1.6
Montana 70.0 1.7 1.9 2.1 1.4
Total 7.0 7.8 5.7 5.6
Source: Bureau of Labor Statistics
Exhibit 12. States with Lowest Unemployment Rates
Unemployment Rate (%) ANN CHS NWY TLB
Lowest Unemployment RateNorth Dakota 3.8 0.0 0.0 0.0 0.2
South Dakota 4.5 0.1 0.1 0.2 0.2
Nebraska 4.7 0.6 0.6 0.7 0.5
New Hampshire 5.4 0.3 0.2 0.5 1.2
Vermont 5.7 0.2 0.1 3.6 0.2
Total 1.2 0.9 5.0 2.3
% Store Base/State
Source: Bureau of Labor Statistics
Female Unemployment
Since 2000, the female 25+ year old unemployment rate has mimicked the
national unemployment rate, albeit at a consistently lower level (~80% of
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the national rate) and sales have been inversely correlated. The previous
peak in unemployment for the 25+ group of 4.8% occurred during the
2001/2002 recession. In 4Q01, despite an unweighted 16% increase in square
footage, total revenue only increased 1.6%. Jumping ahead, as both the 25+
and national unemployment rate bottomed in late 2006, ANN, CHS, NWY and
Talbots composite revenues hit a new all time high in 4Q06 of over $2B.
Exhibit 13. National Unemployment Rate vs. 25+ Woman,
ANN/CHS/NWY/TLB Total Sales
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Apr-00
Oct-00
Apr-01
Oct-01
Apr-02
Oct-02
Apr-03
Oct-03
Apr-04
Oct-04
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
TotalS
ales($)
0
500
1000
1500
2000
2500
Unemploy
mentRate(%)
National Unemployment Rate 25 and Older Women ANN, CHS, NWY, TLB Total Sales
Source: Bureau of Labor Statistics
Within the 25-54 year-old group, there is a direct correlation between awomans age and unemployment rate with older women having a lower
rate. The 45-54 year old segment has consistently had the lowest
unemployment rate (currently 6.8%), while the 25-34 year old segment has
had the highest unemployment rate of the (9.0%). This benefits those retailers
who cater to an older customer base including CHS and TLB. Coincidentally,
this is also a woman who may no longer have children at home and therefore
may have a higher level of discretionary spend when the product supports it.
Potential Extension of Unemployment Benefits
On December 6, President Obama announced a tentative deal to extendthe Bush-era tax cuts that were due to expire at the end of the year,
through 2012, as well as extend unemployment benefits until the end of
2011.
The uncertainty surrounding the extension of unemployment benefits
and the Bush tax cuts remains a central issue for the lame duck
Congress. Unemployment benefits recently provided up to 99 weeks of aid
for more than two million unemployed workers. However, the two million
number included 800,000 workers under a separate state-federal program
(currently 100% federally funded) whose benefits began to lapse as of
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December 1. Additionally, the other 1.2 million Americans could lose aid by
the end of December if an extension is not officially granted.
Bush Tax Cuts
A typical Bush tax cut for a median family of four amounted to about
$2,200 in savings. The typical missy customer has a household income
greater than the median suggesting a greater tax savings. Additionally, the
proposed tax cut included a payroll tax holiday, deducting 2% off the currentpercentage paid for social security benefits from 6.2% to 4.2%. A household
with $50,000 in W-2 income would save an additional $1,000. However,
theres still a chance that these tax cuts will not be renewed and marginal
income tax returns will return to the higher pre-Bush days. As a result, the
missy customer would be directly affected.
Consumer Sentiment
The preliminary Consumer Sentiment Index numbers for December 2010
are 74.2, up from last months 71.6. Sentiment also is at the highest level
since its June 2010, 3 year peak of 76.0. We believe the average consumer
has adjusted to the new economic reality. Improved optimism from the
employment situation as well as retailers deep discounts for the holiday aretwo contributing factors. While these numbers are an improvement, they are
still well off the highs experienced in 2007. The high, albeit stabilized,
unemployment rate, combined the uncertain macro environment, has
contributed to the consumers wariness.
Exhibit 14. Consumer Sentiment
55.0
60.0
65.0
70.0
75.0
80.0
85.0
90.0
95.0
100.0
105.0
Jan Feb Mar Apr May Jun Jul Au g Sep Oct N ov Dec
200 7 200 8 200 9 201 0
Source: The University of Michigan's Institute for Social Research
ForeclosuresWhile the year-over-year incidence of foreclosures is declining, the
number is misleading as many banks are delaying the foreclosure
process and allowing delinquent owners to stay in their homes longer.
This may result in a reversion to increased YoY rates later this year as
unemployment remains elevated and as government refinancing initiatives fail,
which they could.
Foreclosure rates still remain elevated, with CHS having the most store
exposure (36.6%) to the top ten states with the highest incident per
household. ANN closely follows with 32.3%. Although still significant, NWY
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and TLB have fewer locations in the troubled states at 28.6% and 26.0%
respectively.
Exhibit 15. Foreclosures
ANN Ann Loft CHS Chs Wh/Bm Soma NWY TLB
United States 371 (0.2)%
Nevada 69 1.7 1.6 1.1 0.4 1.4 0.7 0.5 0.2 0.7 0.7Florida 148 0.7 8.3 3.2 5.1 9.6 5.1 3.0 1.4 6.3 6.4
Arizona 159 0.3 1.8 0.8 1.0 2.3 1.3 0.7 0.4 1.7 1.4
California 178 0.3 9.4 3.5 5.9 11.8 6.8 3.8 1.2 9.5 6.6
Idaho 204 0.3 0.2 0.1 0.1 0.2 0.1 0.1 0.0 0.0 0.2
Michigan 208 (1.4) 2.0 0.8 1.2 2.1 1.5 0.4 0.2 2.3 3.0
Utah 244 0.8 0.4 0.2 0.2 0.8 0.5 0.3 0.0 0.3 0.3
Georgia 287 (0.1) 3.8 1.7 2.1 3.7 1.8 1.3 0.5 3.5 4.3
Hawaii 317 (0.7) 0.2 0.2 0.0 0.5 0.2 0.4 0.0 0.0 0.0
Illinois 333 (0.9) 4.5 1.6 3.0 4.1 2.1 1.4 0.5 4.3 3.1
32.3 13.2 19.1 36.6 20.1 12.1 4.4 28.6 26.0
http://www.statehealthfacts.org
As of September 2010
YoY Change
(%)
% Store Base in StateForeclosure Rate
(1/every X housing
Real Personal Consumption
While real personal consumption expenditures, including all goods,
tapered into negative territory during 2H08 and most of 2009, it has
rebounded in 2010 with a strong 2.3% yoy growth in October 2010.
Womens clothing experienced the greatest decrease, of 9% in June 2009.
However, during much of 2010, womens/girls clothing has improved more
strongly than both total expenditures as and the entire goods category. In
October 2010, womens/girls clothing increased by 6.6% to $170B.
Exhibit 16. YoY Change in Personal Consumption Expenditures, Goods,
Services
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
2007-Jan
2007-Mar
2007-May
2007-Ju
l
2007-Sep
2007-Nov
2008-Jan
2008-Mar
2008-May
2008-Ju
l
2008-Sep
2008-Nov
2009-Jan
2009-Mar
2009-May
2009-Ju
l
2009-Sep
2009-Nov
2010-Jan
2010-Mar
2010-May
2010-Ju
l
2010-Sep
%Change(YoY)
Personal consumpt ion expenditures Goods Women's /Girl's Clothing
Source: Bureau of Economic Analysis
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Household Net Worth
After plummeting by nearly 20% in 2008, total household net worth
increased 4.3% to $53.6B in 2009. YTD trends have continued to improve,
although on an actual dollar basis, household net worth of $53.6B is still
significantly below its previous peak of $64.1B achieved in 2006. Between
December 2007 and October 2008, the net worth of an average American
hosuehold decreased by 22.8% from the combined impact of weak housing
prices and a faltering stock market. Specficially, wealthier and older
households (ages 55-64) were those whose net worth took the biggest hit.
Stripping out second homes and equity in businesses, average net worth
diminished by only 12%. The 55-64 year old group made up a disproportinate
number of business owners and second home owners. As housing prices
have stablized nationally, and the S&P has returned ~10% YTD, the average
American is seeing a boost in net worth. Those with a healthy exposure to the
equity markets in traditonal taxable accounts and retirement accounts have
seen the greatest rebound.
Exhibit 17. Household Net Worth
$-
$10,000.00
$20,000.00
$30,000.00
$40,000.00
$50,000.00
$60,000.00
$70,000.00
2004 2005 2006 2007 2008 2009
TotalNetWorth(Billions)
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
YoY%Change
Net Worth: Households/Nonprofi t Organizations YoY % Change
Source: Bureau of Economic Analysis
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Debt
In 3Q07, consumers spent an all-time high of 14.0% of their disposable income
on debt service payments (including mortgage and consumer credit). Since
3Q07, consumers have begun to deleverage and in 2Q10, 12.1% of
disposable income went to debt service, the lowest figure since 1Q00. As
lenders have tightened borrowing restrictions and as stock portfolios went
south in 2008-2009, consumers have begun to borrow less and pay back more
quickly. Since 1Q09, there have been year-over-year declines in the total
household mortgage balance and consumer debt outstanding.
Exhibit 18. Debt Service as a Percentage of Disposable Income
11.0
11.5
12.0
12.5
13.0
13.5
14.0
14.5
1Q2000
3Q2000
1Q2001
3Q2001
1Q2002
3Q2002
1Q2003
3Q2003
1Q2004
3Q2004
1Q2005
3Q2005
1Q2006
3Q2006
1Q2007
3Q2007
1Q2008
3Q2008
1Q2009
3Q2009
1Q2010
(%)De
btServ
ice
/Disposa
bleIncome
DSR Source: Bureau of Economic Analysis
Exhibit 19. YoY Percent Change in Household Debt, Mortgage Balance,
Consumer Credit
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10Y
oY%Ch
ange
Change in Household DebtChange in Household Mortgage BalanceChange in Household Consumer Credit Balance
Source: Bureau of Economic Analysis
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Savings
The second quarter of 2009 saw Americans save the highest percentage
of their disposable income (7.2%) since 1992. This was clearly a response
to the global economic meltdown and the fear from the broader stock market
index reaching multiyear lows in March 2009. Although the savings rate has
decelerated since its peak, it still stands at the 5.8% level, aside from its recent
peak it is higher than any other time this century.
Exhibit 20. Household Savings Rate
0
1
2
3
4
5
6
7
8
2000-I
2000-III
2001-I
2001-III
2002-I
2002-III
2003-I
2003-III
2004-I
2004-III
2005-I
2005-III
2006-I
2006-III
2007-I
2007-III
2008-I
2008-III
2009-I
2009-III
2010-I
2010-III
%o
fDisposab
lePersona
lIncome
(DPI)
Personal saving Rate, (% of Disposable Personal Income, DPI) Source: Bureau of Economic Analysis
Personal Bankruptcy Filings
While bankruptcy filings have increased steadily since 2007, the rate of the
increase has decelerated sequentially from a 36.9% yoy gain in 2Q09 to a
6.7% gain in 3Q10.
Exhibit 21. Non-business Bankruptcy Filings
0.0
50,000.0100,000.0
150,000.0
200,000.0
250,000.0
300,000.0
350,000.0
400,000.0
450,000.0
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
1st
Quarter
2nd
Quarter
3rd
Quarter
2007 2008 2009 2010
Total Non-Business Bankruptcy Fil ings % Change
Source: American Bankruptcy Institute
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Fiscal Distress By State
The Fiscal Distress Measure takes into account the number of foreclosures,
levels of unemployment and food stamp participation by state. According to the
most recent composite, which takes into account March and April numbers, the
five most distressed states are NV, FL, UT, ID and CO.
CHS (14.0%) and ANN (12.5%) have the most significant
exposure to the fiscally distressed states. NWY (8.3%) and TLB(9.2%) also have legitimate exposure.
Exhibit 22. Fiscal Distress by State
Rank Across
Sep-10 Rank Rate 09 /10 Change Chg Rank Partic 08/10 Chg Rank Al l Measures ANN ANN LOFT CHS CH S WH/ BM So ma NWY TLB
US Total 371 NA 9.8% (0.2)% NA 17.0% NA NAAL 1352 42 8.9 (1.8) 51 13.4 36 48 1.3% 0.4% 0.9% 1.4% 0.8% 0.4% 0.3% 2.1% 1.6%
AK 1038 37 7.8 (0.5) 32 (tie) 16.3 27 (tie) 37 (tie) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
AZ 159 3 9.7 0.3 12 (tie) 13.9 35 9 (tie) 1.8 0.8 1.0 2.3 1.3 0.7 0.4 1.7 1.4
AR 581 20 7.7 0.2 15 (tie) 9.8 44 27 (tie) 0.4 0.1 0.3 0.7 0.5 0.2 0.0 0.7 0.5CA 178 4 12.4 0.3 12 (tie) 18.5 18 6 9.4 3.5 5.9 11.8 6.8 3.8 1.2 9.5 6.6
CO 357 12 8.2 0.5 5 (tie) 21.4 12 5 2.0 0.9 1.1 2.1 1.2 0.7 0.2 1.0 1.6
CT 695 26 9.1 0.5 5 (tie) 25.5 6 7 2.3 1.0 1.3 1.8 1.0 0.6 0.2 1.4 3.0
DE 643 22 8.4 0.0 17 (tie) 23.0 10 8 0.3 0.2 0.1 0.4 0.2 0.2 0.1 0.2 0.5
DC 923 31 9.8 (1.3) 47 (tie) 16.6 25 41 0.8 0.4 0.3 0.3 0.1 0.2 0.0 0.0 0.2
FL 148 2 11.9 0.7 4 26.1 5 2 8.3 3.2 5.1 9.6 5.1 3.0 1.4 6.3 6.4
GA 287 8 10.0 (0.1) 22 18.2 20 9 (tie) 3.8 1.7 2.1 3.7 1.8 1.3 0.5 3.5 4.3
HI 317 9 6.3 (0.7) 38 (tie) 16.4 26 23 0.2 0.2 0.0 0.5 0.2 0.4 0.0 0.0 0.0
ID 204 5 9.0 0.3 12 (tie) 38.8 1 3 (tie) 0.2 0.1 0.1 0.2 0.1 0.1 0.0 0.0 0.2
IL 333 10 9.9 (0.9) 41 (tie) 10.9 41 33 (tie) 4.5 1.6 3.0 4.1 2.1 1 .4 0.5 4.3 3.1
IN 541 17 10.1 0.0 17 (tie) 14.4 32 (tie) 19 1.4 0.4 1.0 1.5 1.1 0.4 0.0 1.7 1.6
IA 1176 40 6.8 0.4 9 (tie) 12.4 40 31 (tie) 0.3 0.1 0.2 0.5 0.4 0.1 0.1 0.5 0.9
KS 1336 41 6.6 (0.4) 27 (tie) 18.4 19 30 0.7 0.4 0.2 0.8 0.4 0.3 0.1 0.3 0.9
KY 1019 36 10.1 (0.7) 38 (tie) 8.9 48 47 0.8 0.3 0.4 1.2 0.6 0.4 0.2 1.2 1.4
LA 932 32 7.8 0.5 5 (tie) 10.7 42 27 (tie) 1.3 0.4 0.9 1.5 0.9 0.4 0.2 1.6 1.6
ME 2415 45 7.7 (0.4) 27 (tie) 10.6 43 45 (tie) 0.1 0.0 0.1 0.2 0.1 0 .0 0.1 0.2 0.7
MD 620 21 7.5 0.2 15 (tie) 20.4 15 12 2.3 0.9 1.4 3.0 1.8 0.9 0.3 2.6 2.1
MA 676 23 8.4 (0.6) 36 (tie) 13.2 37 37 (tie) 4.2 1.9 2.3 2.8 1.7 1.1 0.0 2.1 4.5
MI 208 6 13.0 (1.4) 49 (tie) 19.3 16 21 2.0 0.8 1.2 2.1 1.5 0.4 0.2 2.3 3.0
MN 690 24 (tie) 7.0 (0.9) 41 (tie) 18.7 17 29 1.6 0.8 0.8 1.8 1.2 0.4 0.2 1.9 1.9
MS 2418 46 9.8 (0.2) 23 (tie) 9.2 46 45 (tie) 0.6 0.2 0.3 0.3 0.2 0.1 0.0 1.0 0.5
MO 705 27 9.3 (0.4) 27 (tie) 9.0 47 40 1.7 0.7 1.0 1.9 1.2 0.5 0.2 2.1 1.4
MT 1163 39 7.4 0.9 2 16.7 24 16 (tie) 0.0 0.0 0.0 0.2 0.2 0.0 0.0 0.0 0.0
NE 2368 44 4.6 (0.2) 23 (tie) 16.3 27 (tie) 35 0.6 0.2 0.3 0.5 0.4 0.2 0.0 0.7 0.5
NV 69 1 14.4 1.7 1 30.0 2 1 1.6 1.1 0.4 1.4 0.7 0.5 0.2 0.7 0.7
NH 690 24 (tie) 5.5 (1.2) 45 (tie) 23.2 8 (tie) 26 0.3 0.2 0.1 0.3 0.3 0.0 0 .0 0.5 1.2
NM 577 19 9.4 (0.4) 27 (tie) 26.6 4 9 (tie) 0.3 0.1 0.2 0.7 0.4 0 .2 0.1 0.3 0.3
NJ 992 35 8.2 0.4 9 (tie) 20.7 14 14 5.2 2.2 3.0 4.3 2.4 1.5 0.4 5.4 4.2
NY 2175 43 8.3 (0.5) 32 (tie) 14.6 31 44 7.4 3.0 4.4 3.7 2.4 1.2 0.1 9.9 4.9
NC 984 34 9.6 (1.3) 47 (tie) 17.1 23 42 2.5 0.9 1.7 2.8 1.6 0.8 0.4 3.0 4.7
ND 5802 50 3.7 (0.6) 36 (tie) 8.0 50 50 0.0 0.0 0.0 0.1 0.1 0.0 0.0 0.2 0.2
OH 388 13 10.0 (0.7) 38 (tie) 12.8 38 31 (tie) 3.2 1.4 1.8 2.7 1.5 1 .0 0.2 4.3 3.8
OK 794 29 6.9 0.0 17 (tie) 15.7 29 25 0.6 0.2 0.3 0.8 0.4 0.4 0.0 0.7 0.9
OR 352 11 10.6 (0.4) 27 (tie) 14.3 34 22 1.1 0.3 0.8 1.6 0.9 0.6 0.1 0.0 0.9
PA 950 33 9.0 0.4 9 (tie) 14.4 32 (tie) 24 4.9 1.9 3.0 4.2 2.5 1 .4 0.3 6.1 5.7
RI 874 30 11.5 (0.5) 32 (tie) 27.8 3 16 (tie) 0.7 0.2 0.4 0.4 0.3 0 .1 0.1 0.5 0.7
SC 509 15 11.0 (1.2) 45 (tie) 12.5 39 39 1.7 0.8 0.9 1.7 1.1 0.5 0.1 1.9 2.8
SD 4576 48 4.4 (0.3) 26 18.0 21 36 0.1 0.0 0.1 0.1 0.1 0.0 0.0 0.2 0.2
TN 1080 38 9.4 (1.4) 49 (tie) 9.6 45 49 2.0 0.9 1.1 2.1 1.3 0.5 0.3 2.6 2.3TX 752 28 8.1 0.0 17 (tie) 25.2 7 13 7.8 3.7 4.1 9.0 5.0 2.7 1.3 8.3 6.8
UT 244 7 7.5 0.8 3 23.2 8 (tie) 3 (tie) 0.4 0.2 0.2 0.8 0.5 0.3 0.0 0.3 0.3
VT 10780 51 5.8 (1.0) 43 (tie) 8.4 49 51 0.2 0.1 0.1 0.1 0.1 0.0 0.0 3.6 0.2
VA 556 18 6.8 0.0 17 (tie) 15.1 30 16 (tie) 3.7 1.4 2.2 2.6 1.9 0.5 0.2 0.0 3.3
WA 493 14 9.0 (0.2) 23 (tie) 17.6 22 15 1.8 0.6 1.2 1.8 1.2 0.5 0.1 0.5 1.2
WV 5540 49 9.2 0.5 5 (tie) 6.7 51 43 0.1 0.0 0.1 0.2 0.2 0.0 0.0 0.7 0.7
WI 525 16 7.8 (1.0) 43 (tie) 22.7 11 20 1.0 0.6 0.4 1.2 0.6 0.4 0.1 1.2 1.2WY 2933 47 6.8 (0.5) 32 (tie) 21.3 13 33 (tie) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Exposure to the Five Most Distressed States: 12.5 5.5 7.0 14.0 7.6 4.7 1.8 8.3 9 .2
Source: statehealthfacts.org, RealtyTrac, Bureau of Labor Statistics, Department of Agriculture and company reports
Foreclosures Unemployment Food Stamp Participation % Store Base in State
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Health Insurance Coverage
Another topic that is heavily in the news is healthcare reform. As it relates to
the companies within our universe, the states with the highest percentage of
uninsured residents are TX, NM, FL, AZ and NV.
Those with the most exposure in the largest uninsured states
include CHS (26.7)% and ANN (24.6)%. NWY and TLB are onlyslightly behind at 22.4% and 19.4% of their store bases respectively.
Exhibit 23. Health Insurance Facts by State
Employer Individual Medicaid Medicare Other Public Uninsured ANN Ann Loft CHS CHS Wh/Bm Soma NWY TLB
US Total 49.0% 4.6% 15.6% 12.4% 1.2% 16.7%
AL 50.8 2.7 16.3 14.8 NSD 14.4 1.3% 0.4% 0.9% 1.4% 0.8% 0.4% 0.3% 2.1% 1.6%
AK 51.4 3.5 12.4 7.7 5.8 19.2 0.0 0.0 0.0 0. 0 0.0 0.0 0.0 0.0 0.0
AZ 44.2 5.1 19.0 11.1 1.1 19.6 1.8 0.8 1.0 2. 3 1.3 0.7 0.4 1.7 1.4
AR 43.6 4.3 16.2 15.1 2.1 18.6 0.4 0.1 0.3 0. 7 0.5 0.2 0.0 0.7 0.5
CA 46.6 5.9 17.9 9.5 0.7 19.3 9.4 3.5 5.9 11. 8 6.8 3.8 1.2 9.5 6.6
CO 54.9 6.4 10.5 9.9 2.6 15.7 2.0 0.9 1.1 2. 1 1.2 0.7 0.2 1.0 1.6
CT 59.7 4.4 10.7 13.8 NSD 11.0 2.3 1.0 1.3 1.8 1.0 0.6 0.2 1.4 3.0
DE 54.6 3.8 13.9 14.7 NSD 12.2 0.3 0.2 0.1 0.4 0.2 0.2 0.1 0.2 0.5
DC 51.8 5.7 21.4 9.6 NSD 11.2 0.8 0.4 0.3 0.3 0.1 0.2 0.0 0.0 0.2
FL 44.0 5.0 11.6 16.4 1.7 21.3 8.3 3.2 5.1 9. 6 5.1 3.0 1.4 6.3 6.4
GA 52.2 3.9 13.0 9.4 2.2 19.3 3.8 1.7 2.1 3. 7 1.8 1.3 0.5 3.5 4.3HI 56.5 3.3 14.4 14.7 3.0 8.2 0.2 0.2 0.0 0. 5 0.2 0.4 0.0 0.0 0.0
ID 51.5 7.5 12.5 12.2 NSD 15.4 0.2 0.1 0.1 0.2 0.1 0.1 0.0 0.0 0.2
IL 54.7 4.5 14.5 11.8 0.6 13.9 4.5 1.6 3.0 4. 1 2.1 1.4 0.5 4.3 3.1
IN 54.0 3.2 15.0 13.9 NSD 13.2 1.4 0.4 1.0 1.5 1.1 0.4 0.0 1.7 1.6
IA 57.1 6.4 12.9 12.3 0.9 10.5 0.3 0.1 0.2 0. 5 0.4 0.1 0.1 0.5 0.9
KS 54.9 6.3 11.1 12.7 2.3 12.8 0.7 0.4 0.2 0. 8 0.4 0.3 0.1 0.3 0.9
KY 48.8 3.8 16.7 13.7 0.9 16.1 0.8 0.3 0.4 1. 2 0.6 0.4 0.2 1.2 1.4
LA 47.4 4.9 16.1 12.9 NSD 18.0 1.3 0.4 0.9 1.5 0.9 0.4 0.2 1.6 1.6
ME 48.4 3.9 21.5 13.9 2.0 10.3 0.1 0.0 0.1 0. 2 0.1 0.0 0.1 0.2 0.7
MD 60.3 4.4 10.2 10.9 1.1 13.1 2.3 0.9 1.4 3. 0 1.8 0.9 0.3 2.6 2.1
MA 59.3 3.3 18.7 13.4 NSD 5.0 4.2 1.9 2.3 2.8 1.7 1.1 0.0 2.1 4.5
MI 54.8 4.1 14.5 13.5 NSD 12.7 2.0 0.8 1.2 2.1 1.5 0.4 0.2 2.3 3.0
MN 58.1 5.7 13.9 12.7 0.8 8.7 1.6 0.8 0.8 1. 8 1.2 0.4 0.2 1.9 1.9
MS 41.6 4.1 22.2 12.9 1.4 17.8 0.6 0.2 0.3 0. 3 0.2 0.1 0.0 1.0 0.5
MO 52.0 5.0 13.8 14.0 1.2 14.0 1.7 0.7 1.0 1. 9 1.2 0.5 0.2 2.1 1.4
MT 46.5 7.8 11.8 15.8 2.4 15.8 0.0 0.0 0.0 0. 2 0.2 0.0 0.0 0.0 0.0
NE 55.7 6.7 11.3 12.8 1.7 11.7 0.6 0.2 0.3 0. 5 0.4 0.2 0.0 0.7 0.5
NV 55.1 3.7 9.3 10.6 1.3 19.9 1.6 1.1 0.4 1. 4 0.7 0.5 0.2 0.7 0.7
NH 63.2 4.4 7.8 13.5 0.8 10.4 0.3 0.2 0.1 0. 3 0.3 0.0 0.0 0.5 1.2
NJ 58.8 3.4 10.4 12.2 NSD 15.0 0.3 0.1 0.2 0.7 0.4 0.2 0.1 0.3 0.3
NM 40.0 3.8 18.7 12.0 2.7 22.8 5.2 2.2 3.0 4. 3 2.4 1.5 0.4 5.4 4.2
NY 48.5 3.9 20.7 12.1 NSD 14.4 7.4 3.0 4.4 3.7 2.4 1.2 0.1 9.9 4.9
NC 48.6 4.8 14.3 13.4 2.1 16.8 2.5 0.9 1.7 2. 8 1.6 0.8 0.4 3.0 4.7
ND 56.4 9.3 8.8 12.7 1.4 11.3 0.0 0.0 0.0 0. 1 0.1 0.0 0.0 0.2 0.2
OH 54.5 4.4 13.4 14.1 0.7 12.9 3.2 1.4 1.8 2. 7 1.5 1.0 0.2 4.3 3.8
OK 48.0 4.1 14.7 14.8 2.2 16.2 0.6 0.2 0.3 0. 8 0.4 0.4 0.0 0.7 0.9
OR 51.0 5.5 12.1 13.6 NSD 17.0 1.1 0.3 0.8 1.6 0.9 0.6 0.1 0.0 0.9
PA 55.1 4.7 14.5 14.6 NSD 10.7 4.9 1.9 3.0 4.2 2.5 1.4 0.3 6.1 5.7
RI 53.4 4.3 16.4 13.2 NSD 12.1 0.7 0.2 0.4 0.4 0.3 0.1 0.1 0.5 0.7
SC 49.6 3.9 13.2 15.0 1.8 16.4 1.7 0.8 0.9 1. 7 1.1 0.5 0.1 1.9 2.8
SD 51.2 7.1 12.2 14.4 2.1 13.1 0.1 0.0 0.1 0. 1 0.1 0.0 0.0 0.2 0.2
TN 46.2 5.0 16.9 14.0 2.5 15.3 2.0 0.9 1.1 2. 1 1.3 0.5 0.3 2.6 2.3
TX 44.3 3.8 15.1 9.7 1.4 25.7 7.8 3.7 4.1 9. 0 5.0 2.7 1.3 8.3 6.8
UT 62.2 6.3 8.2 8.4 NSD 14.1 0.4 0.2 0.2 0.8 0.5 0.3 0.0 0.3 0.3
VT 51.9 3.6 20.6 13.4 NSD 9.6 0.2 0.1 0.1 0.1 0.1 0.0 0.0 3.6 0.2
VA 57.6 4.4 9.6 12.0 3.5 12.9 3.7 1.4 2.2 2. 6 1.9 0.5 0.2 0.0 3.3
W A 53.5 5.6 14.4 11.3 2.5 12.8 1.8 0.6 1.2 1. 8 1.2 0.5 0.1 0.5 1.2
WV 47.5 2.1 15.6 19.2 NSD 14.6 0.1 0.0 0.1 0.2 0.2 0.0 0.0 0.7 0.7
WI 56.6 4.8 14.5 13.9 NSD 9.6 1.0 0.6 0.4 1.2 0.6 0.4 0.1 1.2 1.2
W Y 53.1 6.5 10.9 12.4 2.3 14.8 0.0 0.0 0.0 0. 0 0.0 0.0 0.0 0.0 0.0
Exposure to States with Highest Level Uninsured: 24.6 11.0 13.6 26.7 14.5 8.5 3.7 22.4 19.4
Source: US Census Bureau and statehealthfacts.org
NSD - Not sufficent Data
% Store Base in State
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Company-Specific OperatingMetrics
Due to various company-specific factors, in 2007, results among the missy
sector began to deteriorate ahead of the overall specialty retail universe. As
the missy retailers struggled to improve business strategies and assortments,,
the economy collapsed around them. By their nature, missy retailers do not
have as strong a replenishment cycle as other retailers, and this customer
traditionally stops spending on herself first. Combined with recent loss of
personal wealth due to declines in household income, retirement plans and
property values- businesses have taken a long time to recover.
Inventory and Sales Trends
As of the most recent quarter, the majority of this group is rebuilding
inventory to more normalized levels. ANN (+12.7% vs. -20.8% LY), CHS
(+5.4% vs. -14.9%) and TLB (+12.7% vs. -21%) are rationalizing their
inventory after double digit declines last year NWY, however, maintained
flattish growth on top of a 8.7% increase last year reflecting disappointing sales
expectations.
Exhibit 24. Sales/PSF and Inventory P/SF Analysis
Comp
% $ % Chg $ % Chg
ANN 11.7 95.3 22.2 43.4 12.7
CHS 3.1 176.8 8.7 64.8 5.4
NWY 3.6 75.1 8.5 35.5 (0.5)
TLB (7.1) 75.6 (4.6) 57.6 12.7
Comp Comp
% $ % Chg $ % Chg % $ % Chg $ % Chg
ANN 6.1 91.3 6.1 34.4 8.3 ANN (13.7) 78.0 (18.5) 38.5 (20.8)
CHS 6.4 173.8 12.6 54.5 8.3 CHS 12.8 162.6 11.4 61.4 (14.9)
NWY (1.8) 76.0 1.3 28.7 8.7 NWY (8.4) 69.2 (6.4) 35.6 (23.9)
TLB (1.4) 78.5 (1.0) 40.8 (9.0) TLB (15.9) 79.3 (11.0) 51.1 (21.0)
Comp Comp
% $ % Chg $ % Chg % $ % Chg $ % Chg
ANN 14.1 89.0 14.1 37.5 (2.3) ANN (22.5) 86.0 (12.2) 31.0 (27.9)
CHS 14.9 182.5 15.2 60.4 7.2 CHS 1.3 154.4 (0.6) 50.3 (10.1)
NWY 2.9 74.0 4.2 41.6 11.5 NWY (16.4) 75.0 (14.2) 26.4 (9.6)
TLB 2.4 80.3 0.0 49.0 (18.0) TLB (24.9) 79.1 (21.0) 44.9 (29.0)
Comp Comp
% $ % Chg $ % Chg % $ % Chg $ % Chg
ANN (0.6) 86.6 (2.4) 31.6 0.0 ANN (30.7) 78.0 (28.4) 38.5 (16.0)
CHS 14.6 154.7 14.4 52.9 3.7 CHS (3.2) 158.4 (1.6) 56.3 (13.2)
NWY (7.7) 93.3 (5.4) 27.3 (14.0) NWY (15.0) 71.0 (12.0) 37.4 4.5
TLB (7.2) 81.4 (1.0) 44.4 (29.9) TLB (26.9) 80.1 (9.0) 59.6 (37.0)
3Q10
Sales per Sq Ft Inventory Per Foot
Inventory Per FootSales per Sq Ft
1Q09
2Q10
Sales per Sq Ft Inventory Per Foot
Sales per Sq Ft
Inventory Per FootSales per Sq Ft
Inventory Per Foot
1Q10
4Q09
Sales per Sq Ft Inventory Per Foot
Inventory Per Foot
3Q09
Sales per Sq Ft
2Q09
Source: Company reports and Oppenheimer & Co. Inc. estimates.
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Looking ahead, recent commentary suggests that management teams, in
general, seem comfortable managing their respective inventory
positions. ANN expects to end the year with inventory up mid-single digits
(MSD) on a per square foot basis vs. flat LY with the Ann Taylor brand slightly
above that metric, to support a projected double digit comp increase vs. (7.3)%
LY and Loft is expected to be slightly below to support a projected up low
single digit (LSD) comp vs. 2.1% LY. CHS is also planning its inventory at a
rate 3%-5% below comps of +LSD. NWY expects inventory to be flat at the
end of the year. TLB, too, is comfortable with its ability to control inventory
with a flat to +LSD inventory increase reflecting a comp of (3.5)-(2).
Margin Analysis
Coinciding with the drop in comps, gross and operating margins and
SG&A strongly delevered in 2008 and 2009.The bottom fell out in 4Q08 with
average gross margin of ANN, CHS, NWY and TLB diminishing by 1,030 bps
and SG&A increasing by 730 bps. Among them, TLB was the worst hit with a
1,510 bp decrease in gross margin and a 1,280 increase in SG&A. A year
later, in 4Q09, the companies recouped nearly all the lost SG&A and an
additional 400 bps in gross margin. This was achieved by the average nameoperating on -17% inventory/psf and rationalizing store expenses including
total payroll and headcount. Although these operating metrics did show
significant improvement, comparable-store sales remained flat. In 2010, this
group has continued to manage its business with a reduction in inventories;;
however, a lower top line does continue to be lower. Each of these names has
experienced SG&A leverage in each quarter of 2010, save NWYs 2Q (+910
bps) TLBs 3Q (+340 bps). Otherwise, the group has been able to leverage
stronger comps and manage store expenses more effectively.
What caused the decline in gross and operating margins from peak?
ANN lost 1,300 bps in gross margin in 4Q08, declining to 35.7%, reflecting
a -24.5% comp and aggressive merchandise markdowns. During the
same period, ANN reported operating income inclusive all charges of($439.1M), resulting in the significantly negative operating margin of
(90.8)%. Operating income was significantly impacted by non-cash
charges associated with goodwill, impairment, and other restructuring
charges associated with the companies restructuring program. Excluding
these charges, operating margin was (19.8)%.
CHSs 4Q07 gross margin declined to 47.7%, or 660 bps below the prior
year period. This was mostly isolated to Chico's front line stores, where
merchandise margin deteriorated between 600-680 bps due to higher
markdowns. This reflected not only a 320 bp decline in gross margin, but a
510 bp increase in SG&A to 61.2%. WH/BMs merchandise margin was
pressured from lower initial markups (IMUs) and slightly higher
markdowns while Chicos experienced greater buying costs. The rise in
SG&A was from deleverage in operating expenses due to a (13.0)%
comp.
NWY's 4Q07 gross margin declined 520 bps to 28.6%, 280 bps of which
was from merchandise margin and the balance from buying and
occupancy on a lower comp. NWYs worst operating margin performance
occurred in 2Q10, when a 1440 bps decline in gross margin was
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combined with 910 bps of SG&A deleverage from restructuring charges
related to the shuttering of a test accessory concept. Increased
unplanned promotions resulted in a 1370 bps decline in merchandise
margins, combined with 70 bps of deleverage from a (1.8)% comp.
TLBs gross margin deteriorated by 1510 bps to 14.6% in 4Q08, 960 bps
of which was due to increased markdowns and unplanned promotions with
another 440 bps from deleveraging of occupancy costs due to an (24.6)%
comp. During the same period, TLB posted a (30.8)% operating margin
reflecting a 1,280 bp increase in SG&A from asset impairments as well as
$7.6M of restructuring charges related to the companys downsizing.
Exhibit 25. Gross Margin, SG&A, Operating Margin
Gross Margin
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10
ANN 53.6% 50.6% 56.1% 48.7% 53.2% 52.4% 48.8% 35.7% 55.5% 52.4% 57.3% 52.5% 59.4% 55.0% 57.2%
(310) (360) (60) 110 (40) 180 (730) (1300) 230 (0) 850 1680 390 270 (10)
CHS 61.7% 57.7% 58.3% 47.7% 55.9% 52.7% 53.6% 44.4% 56.8% 55.0% 57.6% 54.6% 58.5% 55.7% 57.0%
20 (250) (140) (630) (590) (510) (470) (320) 100 240 400 1020 160 70 (60)
NWY 29.0% 27.6% 29.7% 28.6% 31.1% 29.9% 25.3% 18.8% 25.3% 22.6% 25.3% 26.8% 24.7% 8.2% 27.9%(60) (90) (350) (520) 210 230 (440) (990) (580) (730) 10 800 (60) (1440) 260
TLB 38.2% 28.5% 34.2% 29.7% 40.5% 29.5% 31.6% 14.6% 31.0% 27.7% 39.9% 35.3% 43.6% 34.9% 42.7%
(120) (160) (270) (120) 230 100 (270) (1510) (950) (180) 840 2070 1260 720 280
SG&A
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10
ANN 45.0% 42.3% 44.6% 45.6% 45.6% 44.0% 48.3% 54.9% 55.9% 51.1% 53.2% 51.5% 51.2% 48.7% 49.0%
(20) (70) (110) 300 60 170 370 920 1030 710 490 (340) (470) (240) (430)
CHS 45.3% 44.5% 52.7% 56.0% 51.8% 50.7% 54.0% 61.2% 51.5% 49.3% 49.4% 48.6% 47.0% 45.5% 47.8%
400 450 890 920 650 620 130 510 (30) ( 140) (460) (1250) (450) (380) (170)
NWY 25.7% 24.6% 26.7% 23.4% 26.9% 25.0% 30.5% 25.2% 28.9% 25.8% 29.9% 25.0% 28.4% 34.9% 29.6%
10 30 (40) 50 110 40 390 190 210 80 (60) (20) (60) 910 (30)
TLB 34.4% 30.7% 35.7% 30.1% 31.4% 31.6% 35.6% 42.9% 36.2% 31.1% 32.1% 31.1% 33.7% 31.0% 35.5%
100 60 250 50 (300) 90 (10) 1280 480 (50) (350) (1180) (250) (20) 340
Operating Margin
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10
ANN 8.6% 8.3% 11.1% 3.0% 7.6% 7.9% (3.8)% (90.8)% (0.6)% (5 .4)% 0.6% 0.3% 8.1% 6.2% 8.1%
(280) (290) (20) (200) (100) (50) (1490) NM (820) (1320) 440 NM 880 1150 750 CHS 16.5 13.2 5.6 (8.4) 4.1 1.9 (0.4) (16.7) 5.3 5.7 8.1 6.0 11.4 10.2 9.1
(380) (710) (1030) (1550) (1240) (1130) (600) (840) 120 380 860 2270 610 450 100
NWY 3.3 3.0 3.0 5.3 4.2 4.9 (5.3) (6.4) (3.7) (3.2) (4.8) 1.8 (3.7) (27.1) (1.7)
(70) (130) (310) (560) 100 190 (830) (1170) (790) (810) 50 820 0 (2400) 310
TLB 3.8 (2.1) (1.5) (1.4) 7.8 (2.9) (5.1) (30.7) (7.3) (4.4) 7.2 1.4 0.9 2.9 6.6
(220) (220) (520) (270) 400 (80) (360) (2930) (1500) (140) 1240 3220 820 730 (60)
2007 2010
2007 2008 2009
2007 2008 2010
2010
2008 2009
2009
Source: Company reports and OPCO Estimates
When further analyzing GM bp change from healthy/peak 2007 levels to
2009, those with the most significant reduction in inventories had the
greatest improvement in gross margin. While obviously other factors play
into results, we find the correlation interesting nonetheless. ANNs gross
margin actually operated 70 bp above its prior peak because the company
ended 2009 with -31.7% inventory/sf compared to 2007. TLB reduced its
inventory by 40.8% over the same period and its gross margin was 70 bp
below its peak. CHSs and NWYs inventory/sf reduction was less significant at
(11.8)% and (12.6)%, respectively. As a result, CHSs gross margin fell 270
bps below peak gross margins while NWY operated at 360 bps below its peak
gross margins.
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Exhibit 26. Correlation Inventory/SF and Gross Margins
4 Q0 7 4 Q08 4 Q09 2008 Change 2 009 Change 20 07- 200 9 Change
4Q 2009 BP off
Peak GrossMargins
ANN $46.3 $31.6 $31.6 (31.7)% 0.0% (31.7)% 70.0
CHS 60.0 51.0 52.9 (15.0) 3.7 (11.8)% (270.0)
NWY 31.2 31.8 27.3 1.9 (14.2) (12.5)% (360.0)
TLB 75.0 64.6 44.4 (13.9) (31.3) (40.8)% (70.0)
Source: Company reports and OPCO EstimatesIn F1H10, ANN and TLB operated above peak gross margins while CHS
and NWY were both below. Reflecting a strong full price business resulting
in a significantly higher AUR (average unit retail prices) and DPT (dollars per
transaction), ANNS 3Q margins were 10 bps below its 2006 peak or 57.2%.
In 3Q, CHSs gross margin deteriorated 60 bps or 270 bps below its 2006
peak to 57%. This was due to an increased level of promotions to clear old
inventory partially offset by improvement merchandise margin in the outlets as
well as improved DTC penetration. NWYs 27.9% GM in 3Q was 530 bps
below its 2006 peak of 33.2%. Due to weak comp sales and merchandise
misses, NWY has operated far below 2006s level since then. TLBs gross
margin expanded to 42.7% vs. last years peak of 39.9%, a 280 bps increase.
Merchandise margin drove the bulk of the results with a 160 bp increase (300bp increase in IMU) and 120 bp leverage from buying and occupancy.
ANNs 3Q operating margin at 8.1% was 300 bps off its peak of 11.1%. While
SG&A decreased by 430 bps to 49.0%, it was still 440 bps above 3Q07s
44.6%
CHS experienced a 3Q operating margin of 9.1% or 680 bps below its 2006
peak of 15.9%. While SG&A decreased 170 bps in the quarter to 47.8% it is
still far below 2006s 43.8%. NWY reported a (1.7)% operating margin in 3Q,
780 bps below its 2006 6.1% peak. While SG&A actually leveraged 30 bps to
29.6% in 3Q it is still 250 bps above 2006s 27.1% level. TLB posted a 6.6%
operating margin, a 60 bps decrease from last years peak 7.2% margin.
SG&A costs increased as a percent of increased to 35.5% from 32.1% due toan increased marketing spend and the reinstatement of employee-based
compensation plans.
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Exhibit 27. Peak vs. FY Gross and Operating Margins
Peak/ Peak/FY3Q10 Prev Peak Year BP Off Peak FY3Q10 Prev Peak Year BP Off Peak
ANN 57.2 57.3 2009 (10) ANN 8.1 11.1 2007 (300)CHS 57.0 59.7 2006 (270) CHS 9.1 15.9 2006 (680)NWY 27.9 33.2 2006 (530) NWY (1.7) 6.1 2006 (780)TLB 42.7 39.9 2009 280 TLB 6.6 7.2 2009 (60)
Peak/ Peak/FY2Q10 Prev Peak Year BP Off Peak FY2Q10 Prev Peak Year BP Off Peak
ANN 55.0 54.2 2006 80 ANN 6.2 11.2 2006 (500)
CHS 55.7 60.3 2006 (460) CHS 10.2 20.3 2006 (1010)NWY 8.2 29.9 2008 (2170) NWY (27.1) 4.9 2008 (3200)TLB 34.9 30.1 2006 480 TLB 2.9 0.1 2006 280
Peak/ Peak/FY1Q10 Prev Peak Year BP Off Peak FY1Q10 Prev Peak Year BP Off Peak
ANN 59.4 55.5 2009 390 ANN 8.1 8.6 2007 (50)CHS 58.5 61.6 2006 (310) CHS 11.4 20.3 2006 (890)
NWY 24.7 31.1 2008 (640) NWY (3.7) 4.2 2008 (790)TLB 43.6 40.5 2008 310 TLB 0.9 7.8 2008 (690)
Peak/ Peak/FY09 Prev Peak Year BP Off Peak FY09 Prev Peak Year BP Off Peak
ANN 54.4 53.7 2006 70 ANN (1.3) 9.6 2006 (1090)CHS 56.0 58.7 2006 (270) CHS 6.3 15.7 2006 (940)
NWY 25.1 28.7 2007 (360) NWY (2.1) 3.8 2007 (590)TLB 33.5 34.2 2006 (70) TLB (0.7) 2.7 2006 (340)
Gross Margins Operating Margins
Operating MarginsGross Margins
Gross Margins Operating Margins
Gross Margins Operating Margins
Source: Company reports and Oppenheimer & Co. Inc. estimates.
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Comps
The unweighted average comp of ANN, CHS, NWY, TLB declined
sequentially for 8 consecutive quarters beginning in 1Q07 (-1.7%)
through 2Q09 (-19.0%).
Exhibit 28. Comps
Comps
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
ANN (3.3)% (6.2)% (0.4)% (3.2)% (4.3)% (10.8)% (19.4)% (24.5)% (30.7)% (22.5)% (13.0)% (0.6)% 14.1% 6.1% 11.7%
CHS (1.6) (5.6) (9.3) (15.7) (17.5) (15.9) (13.4) (13.0) (3.2) 1.3 12.8 14.6 14.9 6.4 3.1
NWY (0.7) 4.9 (4.8) (3.5) (6.6) (2.2) (14.0) (10.9) (15.0) (16.4) (8.4) (7.7) 2.9 (1.8) 3.6
TLB (1.2) (4.8) (7.9) (6.0) (9.8) (12.0) (13.9) (24.6) (26.9) (24.9) (15.9) (7.2) 2.4 (1.4) (7.1)
20102007 2008 2009
Source: Company reports and OPCO Estimates
Comps remain relatively easy in 4Q with the exception of CHS. In
FY4Q09, ANN, NWY and TLB posted (0.6)%, (7.7)% and (7.2)% comps
against (24.5)%, (10.9)%, (24.5)% respectively. CHS, the outlier, posted
strong double digit gain of 14.6% compared to (13)% the year before.
When evaluating comps on a 1-year basis, going forward, ANN and CHShave the most difficult comparisons in 4Q10 and into 2011 of (0.6%),
14.1%, 6.1%, 11.7% and 14.6%, 14.9%, 6.4%, 3.1% while NWY and TLB have
the easiest compares.
Exhibit 29. 1-Year Comps
FY4Q09 FY1Q10 FY2Q10 FY3Q10
ANN (0.6)% 14.1% 6.1% 11.7%
Ann Taylor (7.3) 16.4 15.2 21.9
Loft 2.1 12.5 0.0 4.5
Chico's 14.6 14.9 6.4 3.1
CHS 11.6 14.8 4.3 1.5
WH/BM 21.2 15.3 11.2 7.1
NWY (7.7) 2.9 (1.8) 3.6
TLB (7.2) 2.4 (1.4) (7.1)
Source: Company reports and Oppenheimer & Co. Inc. estimates.
Shifting to a 2-year basis, TLB has the easiest comparisons at (31.8) in
4Q while sequentially only getting slightly more difficult at (23.0) in 3Q.
CHS has by far the most difficult comparisons as the only name in the
group who actually goes against positive 2-year comps in 4Q10 and into
FY11.
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Exhibit 30. 2-Year Comps
FY4Q09 FY1Q10 FY2Q10 FY3Q10
ANN (25.1)% (16.1)% (16.3)% (1.3)%
Ann Taylor (36.7) (21.2) (15.2) 3.5
Loft (19.8) (11.2) (15.6) (4.0)
Chico's 1.6 11.7 7.7 15.9
CHS (5.8) 8.8 4.7 13.7WH/BM 16.2 19.5 14.9 21.5
NWY (12.1) (12.1) (18.2) (4.8)
TLB (31.8) (24.5) (26.3) (23.0)
Source: Company reports and Oppenheimer & Co. Inc. estimates.
Store Count and Longer-Term Growth Opportunity
Throughout the downturn, this subsectors overall square footage
blueprint has remained relatively in tact. Since FY1Q08 through FY3Q10,
the average name has both a flattish store base growth and square footage
blueprint change. We attribute this to the continual shuttering of
underperforming stores equally opposing cheap and accessible real estate.
Going forward, we anticipate an ongoing opportunistic rationalization of real
estate combined right-sizing of existing locations and selective new store
growth primarily in recently introduced concepts.
ANN plans to expand its Ann Taylor and Loft Outlet concepts with 5 and
35 new store openings identified for FY2Q11, respectively. The company
expects these stores to gene