Consumers Buying Premium Denim, But Category Showing Wear

Consumers Buying Premium Denim, But Category Showing Wear
Dow Jones
March 05, 2009: 12:54 PM ET

NEW YORK -(Dow Jones)- Premium denim might have withstood the recession so far, but those jeans with hundred-dollar price tags are starting to show some signs of wear as the downturn drags on.

Consumers have abandoned everything from that daily latte to designer handbags. But they've seemed reluctant to give up pricey jeans, from companies such as True Religion Apparel Inc. (TRLG), VF Corp.'s (VFC) 7 For All Mankind and Joe's Jeans Inc. (JOEZ), making the $425 million market a relative standout in an otherwise dismal retail universe.

The category outperformed its lower-priced brethren and many other types of apparel last year, even amid an abysmal holiday-sales season.

Unit sales for $100-plus denim in department stores and national chains rose 20% in 2008 to $425.5 million, according to market research firm NPD Group.

Premium denim, whose prices can range from $100 to more than $300, has driven excitement in the approximately $4 billion total denim market for a while, as consumers snapped up the jeans with a celebrity following and flashier back- pocket designs.

But there are some signs that consumers are cutting back on expensive jeans, providing a test for True Religion, 7 and Joe's, the sector's three publicly traded players.

And while all three companies have started to expand into other clothing categories and even operate their own stores -- aiming to become recognized worldwide brands like Guess Inc. (GES), Deisel and Calvin Klein Industries Inc. -- most sales still come from denim. They also sell a lot of their products in specialty department stores like Nordstrom Inc. (JWN) and Saks Inc. (SKS), which have seen sales deteriorate in recent months.

That's largely the reason investors have sold off premium denim names. So far this year, True Religion's shares have lost about a third, and were recently trading around $8.39. Apparel giant VF, which owns True Religion competitor 7 For All Mankind and other labels such as North Face, has lost about 13%, recently changing hands around $47.70. Joe's Jeans shares have fallen further into penny-stock category, down about 19% year-to-date, recently trading around 29 cents.

Still, sales at True Religion, known for a horseshoe-shaped design on its denim back pockets, have held up fairly well. The company, which last week reported a profit that beat analysts' expectations, said revenues at its domestic wholesale division grew about 14%, driven by more shipments to department stores like Nordstrom. But that growth was offset by continued weakness at boutiques, some of which are struggling to survive the downturn.

U.S. department stores and boutiques drive about half of True Religion's sales, while approximately 16% comes from international retailers. Its 42 company-branded stores and Web sales bring in the remaining 34%.

True Religion's management is being realistic about challenges, analysts say. For the year, it expects U.S. wholesale sales to fall between 17% and 19% on continued weak sales at boutiques and a mid-single-digit percentage sales decline to major department stores and off-price retailers.

"We are operating in unchartered territories," said Chief Executive and Chairman Jeffrey Lubell in the company's earnings call. "While True Religion is certainly not immune to these events, we remain acutely attuned to the changes in the macro environment."

True Religion expects to offset expected weaker wholesale sales some with the continued growth of its own stores. The jeans maker plans to add 25 new locations this year and have a total of 80 stores by the end of 2010.

Competing brands are also feeling some pain from the economy. 7 For All Mankind's wholesale business began seeing some softness around October, with consumers opting to buy jeans in the $150 to $200 price range, instead of those costing north of that, said VF's President of Contemporary Brands Coalition, Mike Egeck. In general, shoppers also bought one pair of jeans, instead of the usual two or three, Egeck said.

"Across our distribution channels (including Barneys, Nordstrom and Saks), their businesses have been challenged," Egeck said in an interview, noting retail partners were staying conservative as they aimed to keep inventories lean.

But Egeck said 7's 15 standalone retail outlets were performing in line with the company's expectations, and VF still planned to open nine to 15 new locations this year.

"We're still bullish on the long-term viability of this brand," said Egeck, noting 7 could grow to be a $1 billion business.

The smallest of the three players, Joe's Jeans, also expects 2009 to be "a much more challenging environment," one executive said at a recent Roth Capital Partners analyst conference. The brand, which opened its first full-priced retail outlet last year, is launching a lower-price point jean of $138 this year "to capture a wider market."


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Retail Round Up:February

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Foot Locker expanding in skate in 2009

One of Foot Locker's key initiatives in 2009 is to expand its skate shoe business, company executives said in a conference call with investors yesterday.

In addition to capitalizing on its recent acquisition of online skate retailer CCS, the company plans to expand the skate category in its brick-and-mortar stores.

Here are some excerpts from CEO Matthew Serra's comments about action sports and skate during the conference call:

"... We believe that we have a very meaningful opportunity in 2009 to enhance our business by expanding further in the action sports categories.

"Our purchase of CCS was a significant step in capitalizing on this opportunity. Our fourth quarter profit from CCS was in line with our expectation. ... CCS has an opportunity to generate double digit operating profit margins during 2009, in line with those of Footlocker.com.

"Additionally, we will continue to pursue opportunities to expand our skate business in the bricks and mortar segment of our business."

Other interesting notes from the call:

- While same-store sales declined 7.3 percent in the fourth quarter, the company's gross margin rate increased 330 basis points because Foot Locker saw the slowdown coming and reduced inventories and cut operating expenses. That meant they did not have to be promotional to chase sales.

- The company ended the year with inventories 13 percent lower than the same period last year.

- Tapout is a new apparel line in Foot Locker stores and the company said it is doing well.

- CCS was accretive to earnings in the fourth quarter.

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VUITTON HIGH TOP X KANYE WEST

This collaboration between the french house and the american artist is really interesting and significant on the high-fashion market, and sneaker market. It means that sneaker culture and sneaker market (sportswear one) as we knew it are dead. The mass market is gonna totally absorb it. And it means also lots of thing about the fact that LOUIS VUITTON wants to extend his consumer targets. LOUIS VUITTON want to have this new consumer : older with some money, and a new fashion culture.

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So much for capitalism

FOR two decades, in the 1980s and 1990s, China pushed forward a series of economic reforms that came at a vast cost, exceeded only by their vaster rewards. Now, as the financial crisis sweeps across the world, those reforms are going into reverse. It is a sign of how hard governments find it to shake off the habit of ownership.

When China began to extract production from the hands of the state, big firms were broken up, reconfigured or closed. Ever so slowly, the government began to privatise its largest industries, selling slices of companies in public offerings on foreign exchanges, and making them adopt at least the pretence of modern governance.

How far China has gone in transforming its economy is a matter of debate. Unarguably, it remains a place where companies face heavy direct and indirect state control. But in places there has also been dramatic change, and China has prospered as broader economic freedoms contributed to growth. Outright criticism of the shift was muted, even among bureaucrats opposed to the new approach. But over the past year this reticence has begun to wane, as the crisis in the West has led to intense criticism of capitalism—and one domestic industry after another has, as in the West, gone back to the government for support.

In December China Investment Corporation, one of the country’s many sovereign-wealth funds, acknowledged buying shares of Chinese banks on the open market. Other government-backed funds are thought to have been buying as well, which may explain why the banks’ share prices have held up even as banks elsewhere totter. Meanwhile, the state-controlled China Development Bank is said to be negotiating a takeover of Shenzhen Development Bank, one of the few financial institutions controlled by foreigners.

It is a similar story in aviation. In the late 1980s the government created three gigantic carriers—Air China, China Eastern, and China Southern—to provide competition and service where there had previously been none. The carriers have succeeded in a limited way, dramatically expanding coverage across China, but management has undergone frequent shifts and none of the airlines has a good reputation. All three operate at a loss, and two of them, according to the Chinese state-run press, have received large capital injections from the central government in recent months. A broad, government-driven reorganisation is expected in the next 18 months.

Similarly, five big power-generation firms were split out of a single company in 2002 to foster competition. Any sense of true operating independence was badly undermined last year, however, when the government imposed price caps on electricity, even as the utilities grappled with rising coal and oil prices. Those prices have since fallen, but so has demand. On February 20th the Chinese press reported that the government was injecting $13 billion yuan ($1.8 billion) into the companies, indirectly boosting its stake.

Even China’s car industry, which is alive with competitors, is coming further under the government umbrella. More than 10 billion yuan in subsidies is being paid to carmakers, and billions of yuan more are being granted to encourage car sales. Various deals are being mulled between Chinese firms and distressed foreign brands, and these too would need financial support from the government. Beyond that, Chinese newspapers report that a broad restructuring is in the offing, which would reorganise the industry into four state-controlled giants.

In the West the prospect of nationalisation causes companies’ share prices to collapse, but the opposite often occurs in China, and share prices rise instead. In a state-controlled system, it is good to have the state’s explicit endorsement and protection. But it comes at a cost. The reason China initially backed away from state control was because companies were inefficient and corrupt, and ultimately people suffered. In today’s panic, perhaps, that is a secondary concern. But times will eventually change for nationalised firms in China—and for those in the West, too.

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Circe Snow

Former pro shred and star talent manager Circe Wallace has worn many hats in the snow game, and in her latest venture, Circe Snow, she’s designing her own. The new company’s initial offering is a high-end ladies’ line of outerwear and accessories featuring an interchangeable “kit” that includes a clutch you can attach to your belt, cuffs, collars, pocket adornments, and belts that let ladies switch up their look without buying new outerwear.

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Skatelab Launches Apparel Line In Wal Mart

Owner Todd Huber explains the apparel licensing is nothing new, and has in fact been a part of the plan all along. “We’ve always wanted to expand beyond our building, he says, “so we’ve been licensing our name in several categories. We started with a few shirts in Macy’s, Taget and JC Penny’s, and after presenting our line to Wal Mart it was a really good fit. We came to them but they knew of us already.”

Huber says Wal Mart tested the line in a few stores last year, but by summer Skatelab apparel should be available in 1,750 stores. Shorts, backpacks, and other items are currently in development.

When asked if any Skatelab devotees were opposed to the licensing, Huber says: “Why would my customers give a shit? I think by now everyone knows it is almost impossible to build and keep a private indoor skatepark running and we have been doing it the right way for almost twelve years. I think my “core” customers know that all of our profits go right back into improving the skatepark so they will support it.”

In a recent Thrasher interview, Girl pro Mike Mo Capaldi offers his take. “They get to remake the park because of it,” he says. “Make it way better than it is now. They can sell out all they want; it’s just going to give me and my friends a way better place to skate now.” Capaldi grew up near the Skatelab, and honed his skills in the park.

“People instantly think dollar-signs,” Huber explains, “but if you know us—me and my partner Scott Radinsky—then you know it is not about the money. It’s about the skatepark, and always has been. Shit, I drive a rusty 1980 p200 Vespa everywhere.”

Tee shirts and hats sell for $7.50

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