MARKET INTELLIGENCE
SHORT READ
PART 2
2023 APRIL ISSUE
Written by : Andrew Sia
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From the Desk of the Publisher
This time many of the short-read articles are relating to the different business practices and their scenarios. We have the chance to report them and hopefully that this can inspire you when you are running your business. Not to forget that the business environment has changed a lot after the lockdown during the pandemic.
What else can be better when we can learn from the market and try to improve our situation? I ask you to study these articles and study them carefully just like the way when I was preparing them.
Contents:
Beyoncé Fashion in Adidas
Footwear’s Marketing Trend
Lacoste is Adding More Brands
U.K. Government is Taking Away VAT-Free Shopping from Tourists
Shein Sets for $60 Billion as Goal by 2025
Adidas Sent Out Warning for Its Earnings
Retailers Report About the Apparel Market
Gucci is Launching a Hub to Promote Durability and Minimize Waste
Gina Lollobrigida Passed Away at the Age of 95
Inventory of Yeezy Sneakers Has Grown Sticky in Adidas’s Hand
Lego, A Successful Business Case in 2022
Gap Is Resetting Its Business
LVMH’s Successful Story
Dillard’s Traditional Retail Skill Outperforms the Competitions
Nordstrom’s Holiday Sales
Shein is Taking Exceptions to Avoid Paying Tariffs
Beyoncé Fashion Line in Adidas – WSJ, February 9, 2023
Beyoncé is known as one of the world’s most successful music artist who has just set the record for most Grammy Awards and has nearly 300 million Instagram followers. But Beyoncé’s fashion partnership with Adidas has not been successful. Sales of Ivy Park tumbled by more than 50% to about $40 million in 2022.
This shows the challenge with Adidas’s strategy to sell more streetwear and fashion sneakers by collaborating with celebrities like Beyoncé, Pharrell Williams and Kanye West.
Adidas, being a global sportswear conglomerate with roughly a market capitalization of $30 billion had lowered its earnings outlook in November after it cut the ties with Kayne West, better known as Ye. For years Adidas built up the Yeezy brand into its biggest seller and have to find the way to liquidate its stock.
The contract between Adidas and Beyoncé is set to end after 2023, Adidas is discussing whether to end the arrangement or to revamp it. The partnership is still strong and they are satisfied with the collection. Although Ivy Park has been losing money for Adidas, Beyoncé still receives $20 million as an annual income.
Beyoncé’s debut in the clothing line began with Philip Green, the UK retail tycoon who used to own Topshop. Its line, Ivy Pink, was launched already in 2016 and initially it was featuring running shorts, hoodies, jackets and backpacks. Beyoncé bought full ownership of the brand in 2018. It was in 2019 Adidas started the collaboration with Beyoncé but somehow the Ivy Pink line has never been successful.
Ivy Park’s sales was on track to reach $40 million in 2022 but it was down from $93 million the year before. Earlier on Adidas was targeting for $335 million which was way off.
This leaves now a very hard decision for Adidas to continue or not with Beyoncé.
Ivy Park offers inclusive sizing and gender-neutral styles along with neon-colored sweatshirts, sneakers, dresses and accessories.
Footwear’s Marketing Trend – WSJ, February 7, 2023
Wholesale distribution is coming back in footwear. In recent year’s DTC, or direct-to-customers, by cutting out the wholesale middlemen offered to deliver the higher profit and to establish the direct relationship with the customers have changed.
At that point of time, Nike, Adidas and Under Armour were all in favor of selling through their own website or stores.
Two new brands, Allbirds and On, are sneakers that made their names among those professionals in Silicon Valley, made their public debuts in 2021. Allbirds was doing $194 million and On was doing $269 million.
Allbirds started to offer products at retailers such as Nordstrom and Dick’s Sporting Goods in 2022 and it represented just about 5% of its revenues.
On started off with a distribution strategy for third-party retailers which resulted in 67.5% of its sales in the third quarter. And this wholesale-forward strategy has not only pushed its sales growth, but also its productivity for the past three quarters.
The two companies’ fourth-quarter sales are in line with Wall Street estimates—Allbirds compound annual growth at roughly 17% since 2019, while On grew at a rate of 66%.
Nike has also slowed down its withdrawal from key retail partners. It is easy to understand: Nike had 1,046 stores globally as of mid-2022 which is only 37% of Foot Locker’s store count. Foot Locker’s sales of New Balance grew nearly 70% compared with a year earlier.
The period of the Covid-19 lockdown initially decimated foot traffic to retail. Now consumers have returned to their normal shopping behavior and it has boosted the bricks-and-mortar retailers. Both Foot Locker and Dick’s Sporting Goods are benefiting.
Lacoste is Adding More Brands – WSJ, January 13, 2023
The French parent company has reported record annual sales and also announced to look for acquisition to expand its portfolio of brands. Lacoste is best known for its crocodile-logo polo shirts rose its annual sales by 26% to more than €2.5 billion. It has gained its market through a more fashionable offering and buzzy collaborations with musicians and artists in recent years.
Lacoste is owned by MF Brands Group, a Swiss company who also owns Gant, Aigle and Kooples. The company is owned by the descendants of Léon Nordmann and Ernest and Henri Maus who opened a department store in Lucerne, Switzerland more than a century ago. Its present CEO is Thierry Guibert.
The company is looking for brands who have at least $500 million in turnover, not necessary to be in fashion, but in areas like hospitality, and need to be in upmarket.
Lacoste was founded in 1933 by René Lacoste, a top tennis player nicknames “the Crocodile” by fans. He reinvented traditional tennis white and started to wear open-necked, short-sleeved cotton shirt on court. Lacoste sponsored tennis stars like Novak Djokovic and Venus Williams.
When MF Brands bought back licenses for sneakers, leather goods, and underwear, it put more emphasis on its own retail stores rather than wholesale to give the brand more control.
The brand favored larger flagship stores in key locations like the Champs Elysees in Paris and Regent Street in London. It closed smaller stores and grow business through online which accounted one-quarter of its sales last year.
U.K. Government is Taking Away VAT-Free Shopping from Tourists – WSJ, February 13, 2023
As effective 2023, all tourists can’t claim the VAT for their spending in the UK. In another word that London is now the only major European shopping destination where tourists can’t get back the 20% value-added tax they spent on luxury purchases. This tax rules are not an issue for major brands like Louis Vuitton or Gucci who can recoup their loss in their sales in London from other European cities. Even Burberry who is global enough, can make up the revenue elsewhere. But for the brand like Mulberry, immediately it loss half of its sales in the UK after the change of the tax rules.
Already big stores like Harrods and Selfridges, who relied on tourist spending during the pandemic, this issue is becoming urgent. Those landlords would also suffer if the tourists stop spending as already in 2022 London’s New Bond Street slipped out of the top-three ranking of the world’s most expensive retail street to Via Montenapoleone in Mila.
China has also reopened its border and started to allow their tourists to shop for luxury goods in the international cities. Unless the UK government will change its policy, they will take their shopping elsewhere. According to the UK government, this VAT means $2 billion a year to their Treasury.
Shein Sets for $60 Billion as Goal by 2025 – FT, February 18, 2023
Online fashion group Shein projects its revenue will be more than double to nearly $60 billion in 2025. Its last year’s sales revenue was $22.7 billion. In the meantime, it is seeking for investors for their IPO this year.
This would put Shein further ahead of its competitors, Zara and H&M, the two-fashion retail giant. And if the IPO will take place, it will be one of the largest listings yet of Chinese companies in the U.S. this year.
Analysts pointed out that the enthusiasm of young women for Shein are belonging to the Gen Z, born between 1997 to 2013, and they are more open to new apparel brands than other generations. It is important to retain their loyalty and Shein should learn how to sell more diverse and expensive clothing lines. In 2022, about 60% of its total 14 million customers shopped on the platform for the first time. But according to the management’s presentation, by 2025 they aim to convert most of their customers into loyal customers. It further projected that with their 261 million shoppers by then, about 60% of them of them, or 156 million, will be their repeated customers.
It also mentioned to sell third-party products on their website, just like what Amazon and Asos are doing.
Personally I think that Shein is speculating its numbers to attract the investors’ attention. In my opinion that they are building their sand castle on the sand. It is not the first time that I heard from customers who questioned about the origins of their products and if they have been carried out under fair trade and not in the sweatshop operation. The question about the awareness of environment and sustainability is something that they would also need to disclose in their company report.
Adidas Sent Out Warning for Its Earnings – WSJ, February 10, 2023
Adidas AG warned it would turn to a loss in 2023 should it fail to sell its inventory of Yeezy shoes. This is after its termination with Kayne West in October 2022.
It said that it is expecting the projected sales to fall at a high-digit rate in currency-neutral term. This would mean the sales revenue will lower by $1.29 billion and operating profit by €500 million.
Adidas has to decide if it would sell the Yeezy stock of the sneakers under a new brand name. Failing to do so and result in an additional €500 million in operating profit which can lead to a €700 million operating loss.
Earlier on Adidas announced its earnings for 2022 with revenue rose 6% to €22.5 billion with operating profit at €669 million, down by two-third from 2021.
Kanye West’s anti-Semitic comments led to his ousted from Adidas by public complains.
Adidas has a lot of restructuring work to do now. This is also part of the company’s lifestyle sector, which in recent year has been the key to lift the brand’s popularity with wider audiences, but it is taking an adverse result to the company. It is very unfortunate.
Retailers Report About the Apparel Market – WSJ, February 11, 2023
Several major apparel and accessory brands have reported weaker sales to reflect the last year’s excessive inventory and a weak consumer spending. This is followed by the companies discounting everything and as a result their profits are squeezed as reflected in their financial reports.
Department stores have also been slow in replenishing merchandise and even cancelled orders because the customer demand remain weak.
We read that brands who have their own physical stores and websites, selling through wholesale also the third parties have their reports as the following.
Capri Holdings Ltd. – Corporate owner of Versace and Michael Kors, said that sales to department stores and third parties dropped by 20% in the last quarter of 2022.
Levi Strauss & Co. – They enjoyed strong direct-to-consumer sales but weak in their wholesale business.
VF Corp. – Owner of North Face and Vans mentioned that their business with wholesale partners have been conservative. Their inventory as of December 31, 2022 was more than double from a year ago. This was due to less accurate inventory purchases, higher order cancellations and lower consumer demand.
Under Armor – Reported an increase of 50% inventory from March to December.
Nike Inc. – Reported in late December stock peak level receded because their third party’s channels, Dick’s Sporting Goods Inc. and Foot Locker Inc. are doing well.
Ralph Lauren Corp. – Profit margins suffered as a result of high promotion cost. The wholesale business grow in the current quarter. Big retailers like Macy’s Inc., Nordstrom Inc., Walmart Inc., and Target Corp. are all due for release in March.
Gucci is Launching a Hub to Promote Durability and Minimize Waste – WSJ, February 23, 2023
In its headquarters in Tuscany, Gucci is launching a hub to promote more durable and less wasteful fashion. This is to meet the coming European regulations to limit the fashion companies on their impact on environment.
The hub is a research-and-development center to study ways to improve circularity and recyclability of products, as well as minimizing waste and pollution from production to waste.
Last year the European Union set out a plan to reduce the environment damage of the apparel industry knowing that it is responsible of 8% of the total greenhouse gas emissions. It is said that clothing should be long lived and recyclable and on its label should let the consumers to know the impact the product is carrying.
France introduced a law obligating clothing producers and retailers to let the consumers know the impact of their products and their recyclability. This regulation will first apply to those companies with an annual revenue of €50 million and will apply to smaller companies from next year onward.
The EU also planned to require the retailers to disclose how they deal with the unsold textiles as the luxury brands have the tradition of incinerate their unstock to avoiding discounting their products and diluting their brand image. Now they may pass the law to ban them on destroying unsold or returned clothes.
Gina Lollobrigida Passed Away at the Age of 95
Italian film legend, Gina Lollobrigida, achieved international stardom during the 1950s, was also dubbed “The World’s Most Beautiful Woman”. She was named after the title of one of her movies.
“Lollo” was fondly called by her Italian fans began making movies in Italy right after the World War II.
Besides “The World’s Most Beautiful Woman” in 1955, her career highlights included Golden Globe-winner “Come September”, “Trapeze”, “Beat the Devil” and “Buona Sara, Mrs. Campbell”.
She played in the movies with the leading male actors: Jean-Paul Belmondo, Marcello Mastroianni, Yul Brynner, and Yves Montand.
I read this quote some time ago and it went like this: Gina Lollobrigida according to Humphrey Bogart made Marilyn Monroe look like Shirley Temple. It was also quoted that Gina Lollobrigida and Howard Hughes were the longest seduction in Hollywood history. Howard Hughes didn’t succeed.
Inventory of Yeezy Sneakers Has Grown Sticky in Adidas’s Hand – New York Times, March 9, 2023
Adidas’s lifestyle sector of the business with engagements of Beyoncé, Pharrell Williams and Kanye West has not been going well lately. It started with Kayne West’s anti-Semitic remarks in Twitter and Adidas was criticized for not acting quickly enough to cut its relationship with him. Now the agreement severed resulting Adidas a potential loss of €1.2 billion in sales and about €500 million in profit this year.
When the contract was severed, Adidas decided to continue with the production of Yeezy goods that were in the pipeline to prevent thousands of workers from losing their jobs immediately. Now the question is for the inventory of Yeezy sneakers.
If the inventory was sold, Ye would still entitled to a portion of the proceeds as the royalty agreement stipulated, even if Adidas doesn’t make a profit.
Another way is to donate the proceeds, still Ye will have a cut, than just giving it away. It is estimated that its unsold Yeezy inventory is about €700 million.
Yeezy sneakers have an outsized value on the resale market among its collectors and fans. They would often be sold for hundreds of dollars.
But this has drawn the attention of the Jewish group who were the strongest voice urged Adidas and other companies to sever ties with Ye. Both Jewish communities in Munich and Upper Bavaria warned what happened to the proceeds, returning the Yeezy shoes to the market would send the wrong signal no matter how the whole matter was treated.
This has put Adidas in a very difficult position although the company reported a 6% gain in its net sales in 2022 to €22.5 billion, but its operating profit dropped 66% to €669 million with its pull out from Russia and the zero-Covid lockdown in China for almost the whole of 2022. They have to catch up with their loss of 36% sales in that market which was at one time its crucial source of growth.
With its $6 billion of unsold inventory, this time the company is going to order 800 million items, instead of what their usual practice of ordering about one billion items per year. It was also the result of the supply-chain scenario during the Covid where an industrywide reaction was to order more.
Going forward, Adidas is going to refocus on its core: products, consumers, retail partners, and athletics. Its partnership with Beyoncé, whose Ivy Park line would need to generate more sales. Hopefully that Pharrell Williams, who was recently named executive director for menswear at LVMH, can help to fill the gap.
Also rebuilding the China market will be its focus
Adidas faced numerous challenges beyond its breakup with Ye. The market has been losing market share to Nike and other rivals including Puma.
Both Adidas and Puma came from the same town in Bavaria, Herzogenaurach where the Dassler brothers, Rudolf and Adi, founded their companies after World War II.
With Adidas’s new chief executive, Bjorn Gulden, whose hand is full as he has to rebuild the group’s reputation with investors. To sort out the Ye’s situation is important, but more important is to put the business back on track with a return to double-digit sales growth and profit margin. We will hear more about him in the future.
Lego, A Successful Business Case in 2022 – WSJ, March 8, 2023
Lego AS, the maker of those brightly colored bricks in generating almost twice the revenue of Mattel. Ten years ago it was Mattel Inc. the maker of Barbie doll, who was the world’s biggest toy company.
Lego announced that its sales in 2022 rose 17% to $13.8 billion, compared with the previous year, and its profit at $1.98 billion. Despite the economic turbulence from Russia’s invasion of Ukraine, the company’s investment in new stores and products, as well as in its e-commerce and digital engagement, made the last year’s performance over the company’s expectation.
Lego taped into new markets, such as China, and engaged with new generations for movies and videogame with themed sets notably with “Star Wars” proved beneficial. Also having more stores and its own dedicated factories, located close to the market for instance, reduced its supply chain snag.
The company’s digital activities such as Lego Builder app and the “Lego Star Wars: The Skywalker Saga” videogame, have drawn children into Lego experience and attracted them to buy physical toys.
It planned this year with Epic Games Inc. to launch a child-friendly version of the metaverse, which was made by Lego with spending $1 billion in investment last year. The 90-year old Danish company is not slowing down even under the turbulence of the market as complained by other leading toy makers.
Mattel Inc. said that its 2022 sales were flat at $5.4 billion. Hasbro, maker of the Monopoly board game, said its revenue declined by 9% to $5.9 billion. And both complained the tough holiday period.
Lego said that its brick sets were selling strong over Christmas and parents continue to buy Lego for their children even in tough economic times because they perceive it as an educational toy that can remain in use for many years.
The company opened 155 new stores, many of them in China over the course of last year. It helped to offset its closure of 81 stores in Russia. Overall, the company reached a total store count of 904.
The company will continue to grow in a single-digit percentage and to help to meet its growing demand, it is opening a new factory in Vietnam and another manufacturing plant in the U.S. in 2025.
Gap Is Resetting Its Business – WSJ, March 10, 2023
Its net sales fell 6% to $4.24 billion in the first three months to January 2023, compared with the same period last year. Its net loss widened to $273 million from $16 million a year earlier. The company is resetting its business in 2023 and the board is close to pick a permanent chief executive said by the interim CEO Bob Martin.
Its Athleta CEO, Mary Beth is about to leave the company and its sales fell 1% from a year earlier to $436 million. It has lost ground to other competitors in the athleticwear such as Lululemon Athletica Inc.
The wind-down of Gap’s partnership with Kayne West hurts Gap’s sales.
LVMH’s Successful Story – FT, March 8, 2023
It was two years ago when LVMH overtook Nestlè to become Europe’s largest company. Since then, its share surged by a half. Actually its performance over the past decade has been phenomenal, investors have received total returns, with dividends invested of 700%. Now the shares trade on a forward price/earnings ratio of 26. This is about 15% higher than the 10-year average and implies a forward PEG ratio (price/earnings divided by earning growth) of more than two times. Now investors consider it expensive.
What makes LVMH successful? First of all, the group is controlled by its chair and chief executive, Bernard Arnault who is known for his shrewdness.
LVMH’s beauty division is joined by Stephane Rinderknech, who came from L’Oréal. With most luxury brands license their businesses to specialists such as Coty, but LVMH insisted on managing the business in-house. It also manage its tight controls over distribution, rely heavily on its own retail network. The group doesn’t allow sale of stock at a discount during the pandemic. As a result, the perfume and cosmetics division accounted for a tenth of the sales, had an operating profit margin of 9%.
With its luxury brands increasingly extended into beauty, that makes it in close rivalry with companies like L’Oréal, Estée Lauder and Coty.
LVMH also has its risk, China’s reopen helps the surge of LVMH’s price. It will also suffer if its Chinese customers turn away from foreign brands. Its customers in the free world seemed to be inflation-proof and it makes LVMH stands out among its peers. Its pricing power, its market prowess and distribution model are all its successes.
We attached the map of LVMH’s brands and its holdings in luxury fashion for your study.
Dillard’s Traditional Retail Skill Outperforms the Competitions – WSJ, March 6, 2023
It is one of the best performing stocks who is neither a tech giant nor a highflying startup. It is a family-owned department store chain with its headquarters in Little Rock, Arkansas with 280 stores. The shares have soared more than 1,500% since April 2020. It is one of the very few department store chains still run by its founding family members. The company’s market value is similar to that of Macy’s Inc., even though it has less than one-third of Macy’s annual revenue.
The chief executive and president, both sons of the company’s founder, visited the stores weekly and know down to the item for what is selling best in each location. They instilled a sense of loyalty among staff and many of them have been with the company for decades. And employees are encouraged to give customers personalized attention that in turn keeps the customers coming back.
Dillard’s owns majority of its stores that helps the balance sheet. It is with $6.9 billion in annual sales and shy away from hosting quarterly conference calls and receives interviews.
Company founder, William Dillard, learned the rope for retailing at his father’s general store. He studied in both the University of Arkansas and later Columbia University. In 1938 he opened his first store and expanded the business in the mid-20th century when his sons joined the company. He eventually handed the stewardship to his five sons and one of his sons, William II became the CEO in 1998. Two other sons, Alex and Mike, serve as president and executive vice president. Mr. Dillard passed away in 2002.
Both brothers William II, who is 77 years old, and Alex 73 years old are holding the rein.
The company survived a raid in 2008 by the activist investors and it controls through ownership of most of the Class B stock that elects two-third of the directors. Dillard family members and employees participate in the company’s 401K plan owns more than half of the Class A shares that trade on the New York Stock Exchange.
The skyrocketing share price plus two special dividends of $15 per share paid in December 2021 and January 2023 have enriched its employees and stock buybacks have helped to make the remaining shares more valuable.
There are complains about the company for its lack in innovation, but it makes up with the traditional retail skills.
Their inventory was reduced during the pandemic and stay thin all the way. It is down by 23.5% compared with what it was in 2019 where everyone was overbought and ended up in huge discount.
Like all the retailers, Dillard’s is facing the slow in demand from inflation-weary shoppers. Retail sales in the fourth quarter was flat. Its profit margin is down by 11%.
Although they have also set up the e-commerce, but it doesn’t disclose its revenue that is derived from on-line sales.
Nordstrom’s Holiday Sales – WSJ, January 20, 2023
Nordstrom Inc. reported the decline during the holiday sales. The sales during the nine weeks that ended December 31 declined by 3.5% from a year earlier. Its chief executive, Erik Nordstrom said the holiday season was highly promotional, and sales were soft than pre-pandemic levels.
The inflation factor pressured the consumers and they spent less on electronics and jewelry. More spending was made on food and those nondiscretionary items.
Over the holiday period, Nordstrom Rack sales declined 7.6%, while under the Nordstrom banner, the sales dropped 1.7%. It is expecting its 2022 revenue growth to be at the low end of what it was predicted at 5 to 7% earlier on. Like everyone else, it is working hard to reduce its inventory level with more markdowns.
Competitors like Macy’s is saying more or less the same. That sums up with the National Retail Federation reported the overall situation of 2022 holiday sales grew 5.3% to $936.3 billion which was falling short to its forecast. I hope that I was reading it correctly as after all it was a growth of 5.3% nevertheless.
So that you know, Nordstrom remains one of the few department stores that are still owned by the family.
Shein is Taking Exceptions to Avoid Paying Tariffs – WSJ, March 14, 2023
Shein is founded in China but it is now based in Singapore and has become one of the world’s largest online fashion retailers. It is known for its extremely low-price merchandise manufactured from China and ship directly to customers in more than 150 countries. You can find prices as little as $2 for a top and $5 for a dress. This unfair practice has drawn the attention of the countries that they are shipping their merchandise and we are starting to hear complains.
The U.S. manufacturers and labor unions are complaining that Shein and the other Chinese retailers are taking advantage of an exception treatment in the U.S. customs law that allows them to import small packages of goods without paying tariffs.
The South African government is investigating Shein following complain from the local textile union and industry association that it may exploit tax loopholes to gain an unfair advantage in Africa. This South African probe is the first time a government has confirmed an official investigation into Shein’s import practices. The Southern African Clothing and Textile Workers’ Union and the National Clothing Retail Federation of South Africa allege that Shein deliberately sends its goods in small packages of lesser value to reduce import duties. Those duties are supposed to be used to protect the domestic industry against cheap imports from China for instance.
This practice is a loophole which normally is used by individuals for shipping personal items and not in the commercial scale. But obviously Shein and the other Chinese e-commerce have discovered this and have been used as a business model for them to rip off the import countries.
In South Africa, the normal tariffs is between 40 and 45%, but Shein can pay now as little as 10 to 20% and they can also undervalue the package to gain more.
In the U.S. the Coalition for a Prosperous America which includes the U.S. manufacturers and labor associations have raised similar concerns about a law known as the “de minimis” rule.
This law allows tourists to bring home souvenirs from overseas duty-free and is used now by companies to avoid paying the tariffs.
The law in the U.S. allows the U.S. retailers to sell Chinese imports directly to American consumers to avoid tariffs as long as the goods fall below an $800 cap. A lot can be done here already.
Shein is already using its price point as a weapon and also business practice that fall into the grey area. They ought to be stopped. The problem is that they have built their network already in 150 countries and to block them is not going to be easy.
There are other issues about the factories that they are using. They are operating a sweatshop operation and there is no labor compliance as Shein claimed that they don’t own any of those facilities. The fabrics that they are using are very questionable. If you test them, you would find them fail in any test and they can cause health hazards.
A Shein spokesperson said that the company is committed to comply with local laws and regulations in the markets they operate.