Manage episode 180803146 series 98062
EP087 - UBS Equity Research Analyst Michael Binetti
An interview with Michael Binetti, Equity Research Analyst at UBS, covering apparel and footwear brands, department stores and speciality retailers. His coverage universe includes: Abercrombie & Fitch Co,, American Eagle Outfitters Inc, Chico's, Coach, Express Finish Line, Foot Locker Inc, Gap, Hanesbrands, J. Jill Inc, JC Penney Co ,Kohl's Corp, L Brands , Lululemon, Macy's, NIKE, Nordstrom, PVH Corp, Ralph Lauren Corp, Ross Stores Inc, TJX ,Under Armour Inc, Urban Outfitters and VF Corp.
In this interview, we discuss Omnichannel, Mallageddon, Brands vs Retailers, and of course Amazon.
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Episode 87 of the Jason & Scot show was recorded on Tuesday, May 30, 2017.
Join your hosts Jason "Retailgeek" Goldberg, SVP Commerce & Content at Razorfish, and Scot Wingo, Founder and Executive Chairman of Channel Advisor as they discuss the latest news and trends in the world of e-commerce and digital shopper marketing.
New beta feature - Amazon Automated Transcription of the show:Transcript
Jason: [0:25] Welcome to the Jason and Scott show this is episode is being recorded on Tuesday May 30th 2017 I'm your host Jason retailgeek Goldberg and as usual I'm here with your co-host Scot Wingo.
Scot & Michael: [0:39] Hey Jason and welcome back Jason Scott show listeners Jason you're on the road again.
Jason: [0:46] I am I am in not Sunny New York City today.
Scot & Michael: [0:50] Cool well I finally get to ask if you've been to the Amazon store it's opened and there was a lot of Twitter activity over the weekend and I'm assuming that's going to be on your list of places to visit.
Jason: [1:02] It is today was my first day here and I did not make it today but I will over the next couple of days candidly, I'm not expecting to see anything that we haven't seen in the Chicago store and in fact it sounds like it may be a subset of the Chicago store so what for a full report in the next podcast.
Scot & Michael: [1:21] Copo listeners I'm sure on the edge of their seat for that, and what folks one of the topics we cover a lot here on the Jason Scott show is what I like to call mall again that's the Relentless drum beat in the last year year-and-a-half of store closures Mall closures and pressure pressure on physical brick-and-mortar retail, top listeners understand better what's going on out there in the exciting world of physical retail we decided to go right to Wall Street. Jason physically went but we're virtually going to take you there today on the show or excited to welcome Michael binetti, Michael is a managing director at UBS covering apparel and Footwear brands, department stores and Specialty retailers he has a very broad coverage universe and it may actually be simpler to list the things he doesn't cover but let me take a shot at this is a covered Universe includes Abercrombie & Fitch American Eagle Outfitters Chico's coach Express Finish Line Foot Locker, Gap hanesbrands J.Jill, JCPenney Kohl's L Brands Lululemon Macy's Nike Nordstrom PVH Corp Ralph Lauren Corp Ross stores TJ Maxx Under Armour Urban Outfitters and VF Corp, well that was a mouthful Michael were real excited to have you on the Jason and Scott show exercise 3 guys thanks so much for having me.
[2:40] Cool and you are one of those rare while shooters that is not in New York is that right actually when we work at I work at in New York for a month and I'm in Chicago.
Jason: [2:51] I love to have Fellowship Coggins on the show of Michael good deal.
Scot & Michael: [2:55] Although you're not here very much I think.
Jason: [2:58] This is true I am not there as much as I would like to be but the next time I'm there we'll have to have you back on the show and we can make fun of Scott together.
[3:07] Good deal so before we jump into it love to get the listeners a little bit of background about how you came to the retail business can you sort of walk us through your your background a bit.
Scot & Michael: [3:20] Absolutely so, quick intro on me and I want to go into research and Dustin research straight out of business school I'm about 14 years ago ready I got really lucky. Right out of school I got a job at a big global bank UBS I've been here the whole time I started out just randomly getting a job on the consumer and Retail team as an associate on the restaurant sector but that sector didn't have enough Amazon risk for me so about 9 years ago. Ask me if I wanted to cover some of the retail stocks and so I started out covering the Branded apparel and Footwear companies that you just mentioned Nike and Under Armour and Ralph Lauren and Coach it's been super fun in the best part of my job is. Even though we're just grinding it out here analyzing spreadsheets and income statement I cover the consumer sector, and not just any sector the apparel and Footwear names so when you tell people that they jump right in and everybody's got an opinion on these brand cuz we all interact with them every day and use them and I can't tell you how many times. Ghetto people outside of the industry to try to help me out with my stock calls with stories about how many kids on their kids soccer team or wearing Under Armour and Nike and versus what they used to be so it's great everybody knows he's breath. I'm about five years ago UBS asked me to have the department stores those guys have a lot of secular challenges today but they're still really big companies, and it's really important where American shop for these categories and then about two years ago we had of the off-price retailers you just mentioned like TJ Maxx and some of them all retailers like Lululemon American Eagle so pretty broad coverage at this point, we really liked at the heart of everything that's in the consumers closet the brands they buy and where they go to buy them.
Jason: [4:55] Nice and Michael is it's ironic if you would have stuck it out in the restaurant industry long enough I have a feeling the Amazon risk would have eventually gotten there.
Scot & Michael: [5:03] Tranchulas will get their boobs getting there too.
Jason: [5:06] Exactly.
Scot & Michael: [5:07] Yeah or you could have jumped to cloud computing and avoided it with nothing.
Jason: [5:14] Maybe like Logistics or telecommunications or something like that maybe.
Scot & Michael: [5:21] Cool what let's kick it off kind of it at thirty thousand foot level it's right in the middle of Q2 kind of 2/3 way, done with the quarter we've seen the q1 results come out and then we're starting to see the same store sales for May so we have pretty good read on the house 17 is shaping up for folks give us a, it was kind of broad overview of what you're seeing out there quite a disappointment. First quarter earnings season conference call this when we heard from. Anna management teams of these companies giving us their outlook for the year for second quarter and I would say the thing that's different is, that they're trying to embrace him more conservative posture and realize that you know they don't know what's coming as well as they thought they had the last few years so he's learned, and I'll from some painful quarters in retailer last 2 years it will become more conservative as they is they look at and the first quarter results which broadly, guest in our expectations the bad internally in our own expectations on Wall Street and they've taken a pretty conservative posture, for me the results of Ben mix a lot of these guys reported in a middle of months when they had you know. Sales numbers moving around around Mother's Day and things like that so I think people if it's tough to say if if, these companies are being conservative because they don't have a clear view with the calendar shifting around or they're just playing, not liking what they're seeing and wanting to stay on the very cautious side though say in general the same-store sales outlook for the near-term and for the year have moved down.
[6:57] I from these companies as a gauge of what they think is going to be happening over the next three six nine months. Interesting are there so if you'll hear coverage Universe who's kind of on you know I don't know how you you do your ratings but you know, anyone anyone that you know when when you're out there talking to investors who do you usually kind of .2 is as someone that's kind of surviving or are doing well right now.
[7:26] Yeah I would say probably the best example to be in a PVH Corp which listeners may remember the old Phillips Van Heusen company. Am980 PVH few years ago they own Calvin Klein and Tommy Hilfiger name brands that they're much more well-known for these days and they're just really position themselves well it's it's privately you know within a group. Includes Nike it's the most Global name in our coverage of a full loan for region business Asia Latin America Europe so they've got a lot of global whitespace to attack and they're they're doing a really good job with it. I'm in and I would say the names of this mushroom animus is that right now are very few and far between. Ross stores at a good you know if prices everybody loves value America after all right he doesn't love low prices gas prices Ross stores and TJ Maxx headquarters. Mainstream retailers PVH is fairly limited story right now, pdhc sarson cuz when I think of Tommy I think Ralph Lauren Ralph Lauren you know is is not doing terribly well right now it isn't that Global diversification that they have or like what what is a dissenting apart. Yeah, some much you know is much as you listen to me be in the u.s. here and no no the brand here it's a much more powerful brand in in Europe even than it is here and now starting to expand pretty aggressively, into Asia for Tommy that has its Origins obviously in the u.s. in the in the 90s it was very popular and it kind of went by the wayside went out of fashion but they really restored a lot of strength to the Brandon.
[9:06] And you're up and it's really a great sound Basics preppy red white and blue type brand and in Europe is got a lot of momentum there. Ralph Lauren on the other side I guess and tell me was coming from a lower base so you know for them to grow and succeed was a little bit a little bit easier during the most recent few years when Ralph got really big. And really broadly distributed selling lot of similar products in the red white and blues and you know what's happening in the end markets in the Retailer's I'm right now that are. Motion are going backwards I'm so if you were really big heading into the going backwards been even more painful for for Brands like Ralph Lauren.
Jason: [9:46] And Michael one of the things that that I've known as it sounds like in North America like the biggest compliment you give someone is that they're doing less badly than the than the industry is it.
[9:59] I mean.
[10:01] Is that right like are there any even like really small apparel brands that you think of and you say like wow they're really growing or bucking the trend or or is it like. Just answer the universal accent at the emit the moment that that apparel is pretty tough in North America.
Scot & Michael: [10:16] Yeah it's more Universal than it has been when I, first cover the sector in the late 2000 even in the recession there was there was moonshot little companies that were clearly going somewhere like Under Armour and Lululemon they were just moving really really fast, any big enough to be on people's Radars in the investing Community is not clear-cut set subset of small Brands and retailers like that, today the ones that are the most interesting are ones that are kind of got one foot across the bridge into. E-commerce and digital and they're not quite big enough to be public companies yet to recover Brands let we got cover company like VF Corp and owns about 30 brands. They're probably looking around for some Acquisitions in areas like that PVH which we mentioned before on recently bought in and online Intimates business, True & Co which is base pay, Mia women go on and do a fit quiz for their their bras and for some of their Intimates in and you come out of that quiz really feeling like I just retail ask me some really good intuitive questions I'm going to trust them with purchases in this category that's really specific, the teeny tiny brand you know there are just there just aren't that many. I'm Like You Under Armour to lose of a couple years ago that are a big enough SB public company stocks that still fit in that have very high growth rate today.
Jason: [11:36] Interesting it it it it seems like one of the potential challenges even on the acquisition front like some of the SharePoint the sort of the the pre public.
[11:46] Play the pure digital plays the revolves are bonuses or something I know they're not pure digital but digitally native Brands the.
[11:55] It almost seems like they're struggling to get big enough that they're even an interesting acquisition Target for the vfc of the world.
Scot & Michael: [12:03] That's a very very good point in, analyst Urbana bus Which whichever you prefer to grab that it had and I've had a relationship with Nordstrom for a long time so some people have wondered if, that would be something I would make a good pairing or if Knorr would want to have them in house for whatever their reasons are that hasn't even come about, that's the kind of model that people need to be thinking of scaling it up into the Brave New World or you know verses in the past Under Armour new how to become a big brand. Able to look at a lot of things Nike did and they had a booth blueprint a Michael Kors was able to look at. How to say here's how we're going to do this cuz he's guys are trying to figure out how to have inventory list stores and different kinds of shopping experiences and still you don't have, very strong online presence to your kind of wandering off into the Wilderness turn yourself in a lot of ways and it's not quite as easy as it was back in the day.
[12:57] What's that scale need to be for this may we have some fledgling Brands out there listening what what do have to be for a one of these brand houses too kind of consider you to be interesting.
[13:09] I guess there's a couple ways to think about that but or if he has since we brought them up I mean and we mentioned trueandco which is you know, TVH didn't mention how big it was my son says that is very small they characterize it is in significant earnings of a really that was a very small acquisition but they really wanted to latch onto the technology and the expertise inside of that company and frankly if they can. Take what they learn from that acquisition and use it for Calvin Klein's women. Intimates business and lay that Big Brand on top of a new capability while that that could end up being a homerun for them for VF Corp which is a much bigger. Company uses the last big acquisition they did was Timberland. And that was that years ago and why the big gap is now they said look we really, find something at the billion dollars and revenues are bigger we really want something that'll move the needle it or company that we can sink our teeth into and those billion dollar Acquisitions have proven very hard to come by. So I wouldn't I wouldn't be surprised if the industry shakes out and start settling on things closer to the three four hundred million dollar range on as being a very you know good sweet spot even the ones that thought in the past billions Where I Wanna Be. 2000 scale or business.
Jason: [14:23] We seeing some other segments where you could just pay a billion dollars for a company that's probably only worth three or four hundred million to get there too I'm not sure that's a good strategy but.
Scot & Michael: [14:32] TV tray you be trading some balance sheet flexibility be paying up for a brand and I'm to try and bolt on some earnings in that case and, can work your benefit that's about on yourself and your board of directors like letting you down on yourself you know, coach just bought Kate Spade in a lot of people's eyes are very similar Brands if you peel back the onion a little bit there fairly different cake too much younger brand and Coach to set look we think we can run this better we can put it on our supply chain. We can use our big Global Assets in China to to Really tap into these guys opportunity fast coach the thinks they can take it and they can extract or any doubt of this fashion the company could on a standalone basis. So you know definitely there's people out there looking for a particular environment to your point earlier if it's very very tough out there and the guys, we're feeling most comfortable with as stock Investments are the ones that don't necessarily need the economy to get better the consumer to get better for the stock to work they have internal projects like, coaches. Cuz they have to work on and pound some earnings out of that even if the consumer is pretty tough.
Jason: [15:41] Sure what are the things we hear from a lot of the traditional brands that have big investments in brick and mortar is. You know the beat the omni-channel drum they like a one of our competitive advantages is going to be on the channel and and you know there's all these unique advertising and customer experience advantages around, having physical stores super question, do you buy into that do you do you feel like there is a potential competitive advantage in having stores and if so are there any brands that you think of is doing.
[16:14] Omni-channel particularly well.
Scot & Michael: [16:17] All those two answers to that there's there's the guys to have a lot of stores today that are saying you know stores are in advantage. But the reality is they probably need to go backwards, start app like you mentioned a couple of us like that it don't in stores today that don't have to distract themselves it how do we sublet these things how do we sell real estate in monetize it over the next two years they can just say look like we starting from scratch. We don't want to get you a thousand stores you want to get to 100 and that's a much cleaner path forward those are most of those are small company. I'm not as far as I think the second part of your question was just in our they was it are they good yummy channel breaking motor guys.
Jason: [16:57] Yeah or is there any particular brand you think of his being better than the pack in terms of of leveraging those stores for a competitive advantage.
Scot & Michael: [17:05] Yeah I would say that the sum of the, teenage brands that cater to a customer is a digital native and her much more digital fatty Urban Outfitters has a very very big e-commerce business I think it's up over over 30% which would be at the high end of, of the group that we cover one interesting little fact the way was I think American Eagle asking no smaller, Henry Taylor in the malls in the US on their first court all I think they said that.
[17:37] Internet penetration as a percent of sales was up something like 700 basis points year-over-year. And I know just from listening to your show you know the average for overall retail in the US much less the apparel sector and much much lower in that so that's kind of a. Now that's kind of a heart-stopping comment when you hear small retailers hitting that much of their traffic Move online obviously speaks well to how well they're doing. I'm sure digital business but I'm fat that's kind of datapoint the stops if you cover your socks like I do to have several hundreds of thousands of stores at that kind of day point makes you stop and say well where where are we really headed here.
Jason: [18:14] Yeah even if you're starting it even if you're starting at a really nice and base that's a big number so.
[18:22] That that's very interesting one of the the.
[18:27] Certain narratives you hear a lot speaking of eCommerce and and seeing it get bigger for some of these these retailers in the e-commerce industry the story is All oh well the. Apparel is in the tank and department stores are going away largely because of.
[18:44] Of the shift 2 online buying right and inside that you know the digital guys are convinced it's that that that's really the Big Driver and you know they're these Church floating around on the on the internet that show sort of you know.
[18:58] 20 years ago department stores being 10% of of consumer spending and other down to a couple and and you know 20 years ago e-commerce was 2% of consumer spending and now it's up to 10 and so it sort of looks like they flip-flopped and you could say oh well. That's where it went but then I know, you you look at all the growth in those those discount stores in it you know that they've taken a bunch of market share from someplace and so is I'm guessing the answer is both but do you have a.
[19:24] A sense for.
[19:26] For where the consumer is Shifting is it going from from brick-and-mortar to digital or is it going from full price to off-price what's the.
Scot & Michael: [19:35] I mean both of those I would say those are very much both themes in a very both very very powerful obviously he Converses you're suitably powerful but if you look at if you just look at it. Big off prices you think about TJ Maxx and Ross and then Burlington which is gotten to be a bigger business your last few years and just look at what those those companies percentage of total, us consumption in in the apparel category. Can you look at the period before the Great Recession and there was kind of humming along as a small percent of the total industry and then when the recession hit it was just unbelievable ramp. Kids coming out of college with no job so maybe in the past they would have said to themselves you know I'm really a department store Macy's or Kohl's person. Yeah that's where I go to shopping and maybe TJ's like out of a secondary. Destination for me those days are over when you come out and you are on it an unbelievable budget that you never thought you'd be pressed to and and it became a very primary, call source of the primary destination for parallel for a lot of those consumers that were really stretched and you just saw the numbers hit the ramp and then the recession ended and the consumer just never left those stores. Today just kept growing boxes and it seems or sales growth I'm in there just in boxes that's been way on top of what the industry Trends are there, Panther outpacing the department stores by anywhere from. 606 10 percentage points as far as their growth rate every quarter that goes by at this point so that is you know it's not e-commerce which is the sexiest thing to talk about.
[21:13] But it is a very powerful value equation and drives a lot of customers into those boxes on eCommerce is obviously the other one. And if there's different in again within my group there's the retailers that have to deal with their traffic being down significant amount and the Brand's figuring out look you think the consumers to once he's products we just got to figure out how, give it to them where they want to buy them and that they should be in OK shape longer-term but there's still it's not it's not a graceful transitional put it that way. When did ironic things about that is the Discounter is usually don't they under index on eCommerce so you mentioned like some of them all bass team folks are kind of in the thirties my understanding is department stores are pretty anemic when it comes to e-commerce.
[21:58] Yeah I think they're around there many many years behind and again they're trying to they're trying to retrofit Legacy assets that were built to, yeah I have back rooms and some consumer and some customer service people on the floor and cash registers to trying to retrofit those things to be able to ship from the stores make their inventories more efficient, yeah I think. Tell very well aware of the situation they face trying to make the generator return off those old assets but if they you know if any one of the executives in these businesses had to add it to start over if you ask him how many stores would you have old you differently.
[22:36] I know you hear a lot more discussion about building for the digital future from the ground-up hope there's no doubt that in their DNA and in their hearts they're very much trying to figure out what to do but I do know that it's obvious, just from looking at stock prices as a scorecard that it's here at your at a generational change in the pressure on that on that category right now.
[22:58] Yeah I mention of the top of the show the mall again, you know there's there's been this I just read an article today that was on Business Insider that you know there's 3600 store closure so far this year and they I think they just straight line to that and they said all that equates probably 10,000 this year, do you have a model on that or like what's what's your point of you of your how bad is it is where are we are you know your Chicago and saw use a baseball analogy is this like just the first inning of this whole thing are where are we in the, the stretch what's going on here I mean for sure, Helen am I working on getting the department stores under a lot of pressure but they're still the center of the Wardrobe for a lot of, in the Middle America if you look at them as like a Bellwether you've had Macy's come out and say we're going to. Close 100 stores you that JCPenney come out and say we're going to close 138th and Sears is not a stock to recover their closing a bunch of stores. I'm struggling for a long time so you look at those you think about with those malls are going to do in the Macy's drops off the end of it you know. We're not even close but not everybody's announced.
[24:08] Got everybody say after first quarter with just a little. Time to judge you know we have to bunch of these retailers have you noticed any impact in the malls where. Macy's or JCPenney went away and I say you know probably not enough time somebody that won't we can probably fast forward for you what's going to happen in that mall. And they just know it must sees companies have not yet, straight down analyze the data on come out to their investors and say look here's how many stores we're going to have to close based on what's going on base and all the traffic going to e-commerce based on our co-tenants me Smalls going away so there are there are. Hi Times of closures, I mean the article you read today. I wouldn't be surprised as a very close and and frankly even for Macy's and JCPenney the world that is in town so many stores, to tell you what they think they need to do today based on the situation that's still a moving Target I've you know I've no doubt in my mind they'll be closing more stores on as time goes on. Interesting Lee when we talked to retail experts about it and say you know Macy's going to go from. Call middle 700 stores down to Mid 650 store that I don't mean to pick on Macy's just that they're good bellwether, how did they know that's enough and do you know what an organizational undertaking it is to close 100 stores and so. You have a wanted to see Penny 1000 stores wanted to.
[25:38] It's so physically hard I mean employment lawyers in the retail industry to go through each store and figure out how to unwind a very old lease agreement how to, I don't mind the coach energy cause you have a lot of these malls at Macy's goes away that lets store like the gap.
[25:57] Abercrombie look at their lease and say hey we sign this you know under the agreement that you were going to have a Macy's here and look I'm going away we don't we can get out of this lease right it's it's a very very very much of a. Spider's web gets kicked off anything start, I'd no idea I had for bigger numbers explain that a little bit more so I'm I'm I'm in e-commerce guy so the co-tenants he thinks it sounds like what you're saying is the anchors they have their deal with them all but then like the small stores they have some way of attaching and saying, alright we'll pay you this rent but we want that anchor to stay is that a pretty common thing and, it is if they look at them all they say look them all desirable times has the set of characteristics they're going to want and I'll population surrounding them all within 20 minutes drive time to has so much in so many over 100,000. Income household incomes when you look in the mall and a market that's got to malls and one of them's older mall like if your coach think about it you say you know. Honestly you so agree to these terms that are at the top of the industry for good amols on rent but you know it's it's contingent on it being enough demand from consumers over time. In that mall and one way to become lock that in and she say what we want co-tenancy with. Call or some such as the following ten retailers and we want to see an Apple store they're going to the store that because we don't go to the store we don't go and open a Coach store in the mall. Populations moved on and all the guys in a nail salons and ice cream shops left it there by such a way of protecting themselves so.
[27:31] When you go to say we're going to close on you stores boy there's a big group of people at the table for the sit down and stare at you know the Macy's closes. How many retailers it triggers Arco Tennessee cause it allows them to get out of here allows him to move 10 miles down the street to the newer shopping center that got better traffic or we can renegotiate the run slower. Turn down if we don't try to keep them it's just he becomes a very complex process and lots and lots of hands are at the table during those discussion.
[28:02] Do you have a estimate of how many malls will close if if you're if you kind of think 10K is directionally right on stores do you guys look at kind of what them all Impact is.
[28:13] You know our retail experts that we lean on to help us was thinking through that pointed to the maybe twenty 30% of the malls in the US eventually rule will go away. No time frame on it cuz it for example we hosted we hosted a dinner recently with a couple of very very prominent experts and in. Real estate in retail real estate II said just as an example and its much-talked-about you know if its ears was to end up going away. It would take ten full years to repurpose. Chose those Sears boxes is Sears literally just went lights out at some point and I don't have a view on whether they will but if they literally want lights out. It would take ten full years to sit down store by store and say what is this community need. Can we convert this into a Cheesecake Factory can we turn this into a bowling alley return a new brew pub. You need to be a call center Industrial Center or does it just need to be pulled down so it can if there's going to be. A lot of in a one-off evaluation what to do with each of these at the end of the day I wouldn't be surprised to get the 20 or 30% of the malls and not the numbers you were talking about. Call now to include things like obviously Sports Authority went away last year I put some of those stores or not, yeah those are all there's a mix there it just kind of put some balance on it 20 to 3% of miles how many malls are there in like fifteen hundred miles are in.
[29:36] Yeah I've heard numbers like that it depends on how you get into definition like cold as a retail recover them they're largely off mall that there any power centers that include, you know a Lowe's or a Target or Best Buy a lot of times it's you know that the numbers changed a little bit depending on how you define it but I would say 1500 gas, so 30% would be like 500 Miles closing or some some period of time down the road. And probably several hundred of those you can't even if you live near one you probably forgot it was there like there's some pretty old real estate there. So that's pretty gloom-and-doom any any Silver Linings in there you know I think that you know in.
[30:17] I think that I'm not a Retailer's is Dad kind of person but I do think we need to know.
[30:24] Total industry store countdown much much lower before returns in margins can stabilize on note from a lower base of assets from smaller number of stores I'm so I think that. Who's going to be on right now on the retailers too. Remove a Crosley to reposition themselves to be able to kind of work through some of what's coming so next year's is a consumers continue shifting online, equilibrium of stocks will have a little bit easier time Brands like I said though the brands are sold within those part of it right like you think about.
[30:56] You know Macy's or even a Sports Authority or Footlocker there's a lot of businesses selling other people's brands. And then you Grandpa Foot Locker Nike and Adidas and Under Armour they went and built big strong Cool website for the last five years - Question exist before she's got a brand that are sold inside your boxes. Available to Consumers elsewhere in some situations you going to work through that you can see some natural advantages for the Brand's who they don't have to worry about. And taking down all these brick-and-mortar that they set up over the last hundred years or whatever might be but they got to figure out how to get there. Product to where the consumer wants to buy it and big size and Ricky in in Europe they've got it. Big online retailers that are not cold Amazon believe it or not and they got like a midday so since the londos and things things that are. Call different names and Amazon it's not everybody wants to shop for everything on Amazon we don't really have any that's not have any public companies to cover. In better just retail apparel apparel and Footwear retailers online so that it's really about just figuring out, Mia where the consumers going to buy these products in 5 years and frankly that's the that's the question that would Flomax these Brands the most right now if you ask him the very simple question to a Big sophisticate Brand company, just say hey you know right now you're sold in everyone in Macy's doors or everyone of. With some other sporting good stores stores where is the consumer going to buy your product and five years.
[32:27] Is it surprising to hear unsophisticated of an answer you get from some people and it just tells you the very smart people I really don't know exactly where the ball is headed right now.
Jason: [32:38] Yeah I mean it is the obvious answer for those brands that they have to go direct is that what you're saying or what are the answers do you.
Scot & Michael: [32:49] Some of them well yeah they should all they all have to have a direct there's no doubt about it you're your own website. Will be worried you know you have to skin the game to leave the Retailer's to show any third-party retail if your Nike you say look we we showcase this product this way it did really good here's a bunch of the day to behind it, let's build out some things on your website to maximize this opportunity came along I'm use it showcase your very best product you relief pentacle. Product you can use it to Showcase a very wide array of your product and then you have to go out to the brick-and-mortar world or to the.
[33:28] Together by retailers any other thing with the product you got to make sure it's not the same, your Nike exercise shirt at Macy's that it is a Kohl's that is a JCPenney's got to be different product and consume any to get different things in different places so that it does you know I think the next five years will be easier for the brand cuz you don't have to deal with, they're not they're not free of things like that is scratch your head about and say okay this stuff is quite a bit of burden to us do we go to Amazon do we even go. A lot of a lot of the concerns they have at Amazon today or concerns they had with other blank you know insert name of huge retailer from the past. Hanesbrands recover they they've been dealing with in Walmart's temptation to want to carry this very strong brand at a lot of mericans like on their shelves. Same time it's really profitable for Walmart to go manufacture their own private label underwear and put it on the Shelf next to Hanes you know Amazon a lot of problems and concerns they have about going in the Amazon and what it means for them, not exactly brand new to them but it is the next round of old retail problems.
Jason: [34:32] Yeah that it's interesting so you know we've had a lot of brands on this show and obviously a big topic for them as is going direct like it feels like one of the big impediments to go Hinder. None impediments but downsides to going direct for them is they sort of benefit from the in efficiencies of the wholesale market so your your Nike and you you come out with a new skew and before there's any consumer demand for that skew. All the wholesalers have to buy enough to fill all their shelves and so when when your distribution channel gets way more efficient and you're you're selling through Amazon on Demand or through your own website on demand. Suddenly you're not selling those shoes until the consumers actually want them so that feels like that's a little bit of a challenge on the brand side and then.
[35:17] At the same time those wholesale retailers are looking at their future and saying.
[35:21] Shoot there aren't going to be a lot of middlemen in the future if we want to maintain a relationship with a consumer we need to build our own Brands and it seems like we're watching a lot of retailers.
[35:32] Can a moving beyond private label and trying to build their own aspirational Brands and you know you certainly like Amazon's got a full complement of a of.
[35:41] New apparel Brands but you also see.
[35:44] Target and you know rumor BestBuy rumored Walmart Acquisitions and all these these.
[35:52] Traditional wholesale retailers look like they're investing in the brand space are we on a collision course.
Scot & Michael: [35:59] I guess I knew problem you know I'd probably half of the products sold at JCPenney or Kohl's or private Brands private exclusive brands with a new design and develop in house so it won't be a new problem. But it's same time as you know I just have a natural bias when any company brand or retailer tells you here's this thing that we're going to do big part of our strategy and our growth and. Top really that related to what amazing at it's an encore saying we're going to do great and I got to develop. Luxury an aspirational brands in here. Hodges Companies got a lot of expertise in real estate selection and product you know procurement and interation of really cool questions of apparel for consumers all the sudden we're actually design and now we're going to find, relationships of factories in China to do this efficiently in and build sourcing offices on the ground neck it's a tricky it's a tricky game. The brand that there is Thursday you know Karen the stick to going to going to rock you on all the retail you own all the pain there's a lot you can make a lot of money if you your Nike and you sell a pair of shoes through your own website and it really efficient, and I really high price points and don't have to mark it down and sometimes that can be for example higher than you would sell it for at Footlocker or Finish Line and that that's great and you get all the rewards right what if it's really doesn't sell, you get all the pain, there's no one no one to share the pain with that scenario a lot of these realities wholesale Brands If the product doesn't perform they'll go.
[37:37] They'll go back and it'll go back to the Retailer's know if they will offer you some money after the fact to help with marking down the product I didn't perform it will take them back when we Tire Factory Outlets will clearstone some through spell for consumers don't walk in here and see, stacks of shoes or shirts on sale and start thinking bad things about our brand on the brand want that either. So yeah that's when it kind of comes to Village and everybody's got a vested interest in not having a leftover inventory they didn't perform laying around.
Jason: [38:04] For sure I feel like some of the other.
[38:08] Challenges you hear about apparel brands in particular is I've never to bunch of times that, did the trend is just that apparel like good apparel Casa lesson so you know pretend to be the consumers buying as much apparel as she ever did but it just.
[38:24] Cost less and therefore less Revenue to those Brands than it used to be as by chains get more efficient to manufacturing gets more efficient than all of that is that a risk for these apparel Brands is that they're there a RVs are just going down.
Scot & Michael: [38:40] If you look at your point earlier about near the off-price there's our who Pride themselves on having product if you're 60% below equivalent product at department stores they've obviously occupied a lot of the incremental. Retail square footage in the country over last 10 years also you've had names like H&M. Zara Zara in a new one if you start a Primark is coming over from, call from the UK there you know to start a build stores on the East Coast never even lower price than any of these guys is if you think about it all every square foot of retail that's being added in the physical world and in the US, is charging lower prices than the square than the square footage that was here before there is pretty consistent downward. Pressure on on pricing and its industry. Overton over time these brands of been able to manage it when you have things like a big shock to the system like, Manufacturing in China and currency goes one way on you and all the sudden you're buying things a lot more expensive than you thought you were when you build a factory there then they can't really keep up, with some notification Airy pricing on Apparel in the US over time in Spanish been okay but if it's not a, can a great situation to be in when your ear pricing mechanism is going backwards on a consumer's, Sesame looking over their shoulder and saying look I can get this you know whatever Levi's are Skechers shoes whatever it is I can get these at TJ Maxx and Knots last season's. Product but it's so much lower on price point than enough going to win the day for me as that wind of my purchase.
Jason: [40:15] Yeah I got it and then I guess just one more on Brands the other thing you here is that the, just the basic model for creating desire for a particular apparel brand is. Dramatically getting disrupted right and so you know that you hear the old model, tell it you know yet the merchant princes the Mickey drexler's or whatever they decide what's going to be hot and they they.
[40:38] You know go to Fashion Week and show that stuff and it takes him like nine months to get those products into the market and everyone buys the same thing because it has the same logo on it and you know that these days, it's a lot more likely to be some micro influencer on YouTube that's that's driving demand for something you know in a much shorter turn then then it is Mickey.
Scot & Michael: [40:59] Yeah that's a great Point example of Mickey Drexler J.Crew example, they own all their own products or they can say this is catching on Fast let's go quickly where's you think about the relationship you point to before with Leica, Ralph Lauren in the main cheese or Calvin Klein at Macy's so much can speed up when there's no more people in the decision-making chain so there's advantages and disadvantages to being able to speed up and Chase Trends these days and say that. There is a degree of every brand that opens their mouth and retails up in their mouth they've got a speed and issues going on to try and speed those things up to chase Trend faster I'm to your other point and back in the day what you know what you want to say to wear until I was cool as what. Okay, cuz they're good Dell Latitude to a good people at Macy's, found the product they brought to your town in the stores that and I'll meet you looked at it said that's an aspiration purchase me this when I want to look like it's what I want people think of me when I dress and. Remember being a kid and you know we had to go we had to go on vacation California for me to get a pair of vans that I saw in a movie on some guy or something like that right like those days are done. So now your point see somebody I didn't scream she somebody music video she somebody on YouTube that's an influencer or so you know like coach just signed Selena Gomez one of the most. The highest Instagram following as you can imagine the amount of viewership that they get by going through her and is also.
[42:32] And with younger consumers there's a bit of a bit of social currency that happens within the first kid at your high school to show up at the party on Friday night with some Brandy song. Funny YouTube clip in the background and you know you figured out where to find it if some small retail in California on the internet and how to ship to you and I was yours you found it in your first and you want when call that social currency. I'll be in the first one to find that those kind of things just did not happen, 15 years ago or more so for sure these things are changing very very quickly it's a whole different mindset than one old Merchants who used to really do a great job of picking out very good collections with her own for 12 people. Thought about it some it is very different than it was.
Jason: [43:13] Yeah yeah God bless Sean Penn for wearing those vans in the Fast Times at Ridgemont High.
[43:19] I'm tracking you know one of the insightful things I heard recently and I wish I could remember who I first heard it from but they were talking about that, Instagram problem and that like in the old days you were you know if you were a kid in high-school you were one of two hundred or maybe even one of 2000 and you know it was possible to be, pretty unique by just getting to a good store and you know spending a little bit more for the the premium product or whatever but but. Trying to be unique amongst your your pool of 10,000 Instagram friends is a is a whole new level of Challenge and you basically can't do it in a mall.
Scot & Michael: [43:59] Yeah it's pretty tough now it's um.
[44:02] Yeah I'm a girl and going to school and then in the very clear Trends just ran through your school like wildfires like if this was the aspirational brand if you remember some of the Brand's eighties and nineties that ran through like in big big size, as friends you know like we just had a big one was already we still have on with you know with Adidas selling their very old decades-old 30 year old, Superstars and Stan Smith every kids got have a pair and I was like a clear, old school trying to me like I just came through and that's what everybody wanted that's how I used to be those are getting fewer and further between it's much more and micro merchandising and individuality. You know the formula for that is really not you know going to your traditional department store, and seeing you know what they got in in the stacks and racks in the stores he's this what num, one follow-up on Canada brand topic, what do you think the answer is in five years where is the consumer going to buy your product what brand and I know this isn't your business but if if you left Wall Street and went into Consulting and you're you're sitting there at McKenzie or, what else kind of Consulting places and debris and asked you what what what you think the answer is.
[45:18] I do think we need I think we'll get to a point where there's going to be some platforming I think that right now if you and I wanted to go start a brand today. Very affordable relative to history to do that to find decent manufacturing capacity and in Asia or elsewhere bring it on to the US stores to get good distribution from. Yeah most of the digital native eCommerce sites with you know that are. Trying to be better brand your good best in the inspections good better best trying to be better and best there still you know they're still fighting for their namesake as well, so you can probably find pretty good butiki at distribution for a brand right now if you're a startup, no good better better best friend though so that guy was his barrier to entry right now is fairly low but I don't think it stays well I think it's going to go up I think it's getting and he's getting harder to compete I'm priming, everybody walking around with them all in their pocket these days straight you don't have to walk in the store and haggle with somebody I know the lowest price immediately thanks a lot to hear your good friends at Amazon I know the lowest price that I can find this thing on, quickly and I walk into the store armed with it I think it's going to get harder and you're going to see you know prices continue to compress and I don't know if manufacturing of it cheaper or more expensive but, listen to chasing low-cost manufacturing overtime, then you go through some of the things we were thinking about early in the year were a lot of these stocks got hit really hard when there was talk coming out of Washington they were going to put a tax on the border well guess what industry Imports just about everything.
[46:51] From across the border to these stocks got hit really really hard. I'm at station one that was like a primary conversation you think about that and I think you're going to get to a point where you going to find more these brand saying you know what, I want to get myself attached to a big supply chain like a VF Corp mph owns a basket of brands are coaches now certain owns and Brands I want to leverage their manufacturing efficiency, relationships in Asia there and branding internal consultancy whatever the hell you know if you have courses very good at building, you have them on the show before like North Face and Timberland and vans they're very good a Consulting these guys on on their marketing strategies in their distribution strategies I think the value of that is going to go up. I won't be surprised they're still companies of some size but I wouldn't be surprised if you see much more fragmented apparel and Footwear Market going forward.
[47:45] Got it that's a good Segway the you know what kind of nibble around the edges and it wouldn't be a Jason Scott show if we didn't spend a fair amount of time directly talk about Amazon I realize they're not in your coverage universe so I'm not going to ask you like Eva. A three decimal places or anything but, you know how from, The Winds of your coverage Universe you had kind of Macy's probably 3 years ago Terry Lumber and kind of famously said oh good luck and apparel you know you guys won't be able to, deal with returns without having stores and now that that that turned out to be a bit of a bad call are these guys still in denial about Amazon do they have a strategy or where where are retailers when it comes to their their Amazon strategy. You know there's been a lot of turnover among Executives in the space lately and one of them on our way out the door actually said to me recently.
[48:35] I sexy and I probably a lot of headaches and over next few years probably retiring a great times I like that, Amazon the competitor to corrected me on that answer you know or Amazon is just you know if you think about your Harvard case study were the four drivers of consumer purchase and think about how big convenience is in the fact that everything can get delivered to you. Today's our last now that's a real kick in the gut have to deal with for anybody so I would say though I don't think Terry was, strong though I don't say no I think that the consumer does like having a place nearby to go return things and you think there is value in brick and mortar it doesn't look like it and looking at some of the stock prices in my group. Because they're all got to go from a lot of brick-and-mortar to a lot less brick-and-mortar but I do think there's value in store count of a certain size and then there's a lot of. There's a lot of reality in in his comment that you know about what Amazon has been are not going to want to deal with and look they're not going to go away it's a high margin category and you can make a lot of money on it but.
[49:40] Right now if you look on their on their website it really looks like it's it's much more focused on predictable. Inventories and in categories that are more basic that they can look at and say we know with some certainty, how much is it going to go out the door and it's much less in categories like you would expect to see at like Nordstrom, make an example of those guys got a nail fashion every quarter it's like we're a very fluent person who cares a lot about this season, does the shop for their clothes and when that stuff doesn't sell, spring they got to sit down and come up with a markdown strategy get it out the door figure out how to work with friends to you know move product Crown all those things that's a whole different part of retail and just figure it out you know, predictable inventory flows and categories like you're basically vies jeans or basic hanesbrands, underwear and t-shirts and stuff like that but a little left over at the end of the season, coin in Iran this a Tad earlier but I want to drill into it you've you've done some really interesting research on you know what, lbrands dagradi Amazon be kind of the in your coverage Universe you have the book in so you have Under Armour who is dramatically embraced Amazon and you have Nike that's essentially shunned Amazon yeah what.
[51:00] Where do you think bran should fall on that Spectrum or you know what are they talking about what are the kinds of topics that the brands are thinking about in this hole kind of Amazon dilemma.
[51:09] How's it going question we do a lot of work on that and talk to a lot of people in the Amazon ecosystem on that at the end of the day in this category would specific is Brands care the most about what their product. Looks like and and pricing of spray there because our pricing but. I want name brand but she go on Amazon right now and search on one of the Brand's I covers very very. Basic product and is it in one of Ryan's doesn't have a relationship with Amazon the search that it comes that comes up on Amazon is, it won't take you long to realize that is not what that company wants its product looking like a lot of it is like doo took a shirt out of a box, it's like rain cold and they just threw it on table and took a picture of it now it's on Amazon instead there's a lot like there's not like a wrinkled shirt. I am at the top of the searching right so. Those are the things that these Brands care about like they need to inspire you to like live a better life by the clothing that you wear and that's what he seen all the Billboards right and that's not always reflect and I am so, that's what I'm thinking about there's trying to think of it then you go like I'll call it out because it's writing it down really nice job but like Levi's, research on Levi's on Amazon and you click on the red Levi's logo itwist you away to a virtual Levi's shop and shop at Scot. They're advertising campaign videos that they created at Levis that show the product exactly how they want on their models you put into the product full size runs full color runs it's like you know you're actually dealing with like.
[52:44] Hundred percent legitimate Levi sales and leveraging all the great things about Amazon same time.
[52:50] That's what all the brands are trying to figure out now I don't know if if it is Levis just happens we first there because they cut some kind of a different deal or accept less profits upfront or anything like that but, they're in their first brand of the great example of really doing Amazon well in the consumers us, consumers I think everybody wants to figure I will have to figure out how to do that, eventually because look there's not a lot of transaction growth in the US you're either talking to folks like you J Max and Rossiter. Drawing category you talking Amazon if you want category gross everything I have to wrestle with this eventually. But those are things that they care about the most and probably the things that you know the only sit down to table impound out fama's on the most of the next few years, yep and then I'm by no means a fashion Guru but I figured you'd have a point of you on this they just announced today that they've hired, I'm going to totally butcher this but Christine Beauchamp is that it, and I think she's been around a lot of your coverage universe as kind of a well-known fashion executive Williston It Ralph Lauren and other places maybe Jason, nose better not do that is that a what's that mean to have her at Amazon.
[54:03] Go to the point of seeing when I said earlier that they're not going away in this category and there's some things that there maybe not the best at. But in no way should anyone expect them to go away they're going to keep investing in it I think they bought a full. Square Block in Brooklyn to build a photo studio for their apparel business a few years ago and I remember riding around in cabs in New York and half the taxis in town had a Amazon fashion. Advertising on the top of the cab there you know you're not going to go away I don't I don't I don't think I was foolish enough to think that they're going to go away and stop pushing in this category. But you do see you just keep moments like that go by and you're like well this is a turning point this is the datapoint to they're getting more not less. Serious about this category they want these brands in I guarantee you they're circling the Nikes and Ralph Lauren's of the world of European luxury guys they want they want those guys on Amazon, very very badly and I'm sure some extent all those guys want to figure out how to have a very and profitable relationship with Amazon to, recently back around like firing her like a reminder very serious about this.
Jason: [55:07] Yep in that. I'm always trepidatious when I anytime I hear this sentence yeah but this this next category will be extra hard for Amazon and have unique barriers because I just feel like they've. Knock down so many barriers in categories that they moved into.
[55:23] The one you do hear about a lot lately is that the higher fashion guys go yeah Amazon has totally done great in apparel but.
[55:35] Fashion is a whole different thing from apparel and and you know Amazon doesn't have the right DNA to win in fashion like.
[55:42] Do you hear that and what what what's your point of view there is like should the fashion guys be worried about Amazon.
Scot & Michael: [55:49] Absolutely you know there's there's a bit there's a bit of a stigma about being you know what, how do you call the everything store for anybody right like what I'm Walmart or Target or any retailers in the past is the commonly everything store in the country there's a certain amount of like you know I'm going to, going to go to the new store in town called cold cuz I don't, I don't really like buying my shirts at the same place I buy my dog food in toothpaste and I want to feel like a fashion relevant human being and and things like that but you know at the end of the day if you kick out that.
[56:22] A leg under the stool that is convenient it's just so easy to get the stuff and it kind of got the product that I want anyway and it's called fashion and and high fashion stuff if they get their hands on it and they can. And they can sell it to me in this way that I like buying things, I would not assume that they're not going to be able to figure out fast and look a lot of stuff at shirts and pants at lightweight foldable it's very easy to ship it's you know I think I'm on your last so you were talking about them getting into Pharmaceuticals and stuff. What can seem Easier by comparison and selling high-end shirts on you talk about trying to figure out how to get into Pharmaceuticals.
Jason: [56:57] That absolutely one of the X and a gun.
[57:00] Amazonians on the show was talking about a category like live plants being a little tougher and then I finish that show only to find out that my wife had ordered a bunch of live plants for aquarium from Amis.
Scot & Michael: [57:13] Nothing safe yeah I got a life plan for Mother's Day on Prime now it it came it was really well done.
Jason: [57:25] Impress events Garrett.
[57:28] A couple things I just want to cover up quickly one of the plays were seeing from a lot of the traditional department stores is the if you can't beat them join them strategy and it seems like every department store now has a, in an off-price concept is that.
[57:45] Of a long-term viable strategy for those guys is that you know they they they make a lot of noise about it not being cannibalistic and and stuff but.
[57:54] That that seems questionable.
Scot & Michael: [57:57] Yeah we'll see I say it's now it's it's always easy to set up 10 or 20 stores in and look at the economics and said he was first time 20 that we put in the very best markets we could think of to do this they're going really is going really well what's going to the next 20 that's fine, mistake to think like that that's good economics but you know we'll see when it when it become you know to become a scalable business you know what.
[58:20] If it's tough to think about you think about it like what people at TJ Maxx and Ross to their kind of like you know there's other Like the Wolf in Pulp Fiction either here to fix problems for you if you got too much inventory at the end of the season, or TJ Maxx we can buy some of this leftover stuff from you Levi's or PVH Calvin Klein whatever it is we can buy, a lot of it we got a lot of stores and we can break it up and then do it we call camouflages for you across thousands of stores that consumer doesn't come in and see. Tile to the ceiling of Calvin Klein shirts in there like there's a problem with Calvin Klein based on the small number of units in here right so, that's a lot of value for them to you know that they put cash on the barrelhead take a huge amount of inventory off your hand at the end of season and they never come back from Mark talamonti so the off-price there's a lot of value like that you know I think about. Your Kohl's or Macy's or even Stacy Penny tries to get in something like that different animal, same guys that are buying NC's and stuff from you her going to coming back to you and saying every want to cut it also serve this functionality of like solving problems but likes on the problems occur in our other stores so we're going to, figure out the sitter's processes you it's it's a much more complicated say.
[59:33] Got it one of the so one of the other Trends who wanted to kind of. Check in with you on is this athleisure kind of trend it is very hot and and going really well and you glue lemons in there you put Nike and Under Armour in there and there's a lot of other kind of things going on there but it seems like Nike and Under Armour have kind of, slow down is that something else going on there or is athleisure kind of run its course.
[1:00:00] I don't think I've leaders down there still a lotta man from the retailers who are, questions like that I was think about who's standing closest to the consumer and has good insights as to what consumers town and they want in your calls in your Macy's in your JCPenney's or they're all you know still expanding their, space dedicated to these Brands you talking about and Lululemon slow down a bit and on most recent quarter but if you know I would say there there, far from the worst situation I have in my in my coverage groups I still think athleisure is very much a, Megatron it's been going on with a Lulu Lulu I killed in 2007 Under Armour 2005 it's a little it went on for a little too long they call it a fad or Trend I happen to think that a lot of problems right now, yeah even the best of the brands we have trouble when the top 5 retailer in the US goes bankrupt and that'
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