Retail Industry Update by Risa Kaplan (MF Nanny) San Francisco, CA (April 24, 1997) -- SHADES OF SUMMER: Tom Cruise made black Ray Bans chic in "Risky Business", dancing in his briefs and big white shirt, donning those dark shades, and singing "Gimme that old time Rock n Roll." Who can imagine the late Jackie Kennedy Onassis without remembering her wearing those beautiful oversized signature sunglasses. Of late, even the Coppertone girl covered her bare bottom and wore sunglasses and a T-shirt. No self-respecting Hollywood couple would be caught dead outside or inside without sporting a pair of Oliver Peoples shades or the latest pair called Web, from Italy, designed after the 1930's aviator glasses. Over the last few years sunglasses like Mont Blanc pens, Hermes scarves, and Rolex watches have become signs of status. As spring moves toward summer and the sun shines brighter for more hours each day, sunglasses become a must. The premium sunglasses industry has a domestic market of about $1.7 billion in retail revenues and an estimated annual growth of 7-10%. In addition, in the last few years, there has been a frenzy over the stocks in the sunglass sector. So lets scour the racks at the beach and examine a few pairs. OAKLEY INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OO)") else Response.Write("(NYSE: OO)") end if %> may need to put on its high-end sunglasses to view its latest quarterly earnings report that came out last week. These earnings are blinding, showing a 95% plunge in first-quarter net income. Earnings for the Irvine, California-based maker of high-performance sunglasses and goggles dropped to $550,000, or a penny a share, from $10.97 million, or $0.15 a share in the year-ago period. Analysts surveyed by First Call expected Oakley to earn three cents a share. Revenues tumbled 30% to $34.40 million, from $48.70 million in the latest quarter. The company reported net sales for the first quarter of $34.4 million vs. $48.7 million for the prior-year period. Domestic net sales for the first quarter totaled $17.6 million and international net sales were $16.8 million, compared with $30.5 million and $18.2 million, respectively, for the comparable 1996 quarter. The company reported a gross margin of 57.1% vs. 69.9% for the prior-year period. The decrease is attributable to a number of factors related to lower sales and production levels experienced during the quarter. Oakley said the expected impact of troubled retailer SUNGLASS HUT INTL. INC.'s <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: Rays)") else Response.Write("(Nasdaq: Rays)") end if %> higher inventory levels, along with sluggish sales to its remaining retailer base, contributed to a "disappointing" quarter. Hoping that new designs will help sales this year, Oakley released Romeo, the first product in its X Metal sunglass line, to selected high-end optical dealers. In early May, a new product line, Fives, which features a smaller, sleek frame design will be introduced targeting women and younger consumers. As reported in yesterday's news wires, Oakley has been successful in uncovering a major counterfeit operation in California. The items and equipment were valued at about $10 million. When teenage boys who can't afford the real ones can buy fake ones for $10 (check out my son's dorm at boarding school) and wear them around town, it diminishes the status of wearing what is perceived as "expensive eye wear". Further, fake Oakleys affect the reputation for quality products that this manufacturer has earned. The other major problem facing this manufacturer is competition. When expensive sunglasses (which have a tremendous mark-up) became chic and money was being made, everyone and his mother went into the business, from Gucci to Kenneth Cole. Oakley closed today at $10 3/8. A major retailer of sunglasses in kiosks and stores, Sunglass Hut reported at the end of March a bigger-than-expected loss for the fiscal fourth quarter, as soft sales of key products and several charges for store closings, order cancellations and product returns chilled this company. The sunglasses retailer reported a loss of $24.4 million, or $0.45 a share, for the period ended Feb. 1, compared with year-ago earnings of $4.9 million, or nine cents a share. The latest quarter includes an after-tax charge of $18.8 million, or $24.8 million pretax. That reflects roughly $18.7 million for restructuring and store closing costs, $5 million related to poor sales of certain products, which resulted in fewer incentives and returned products, and $1.1 million for legal and other expenses. A survey of nine analysts by First Call had projected a mean loss of seven cents a share. Sales rose 17% to $124.9 million from $106.6 million the previous year. However, the company said comparable-store sales fell 3.7% for the quarter. The company also said it plans to take a charge of $18.7 million, or $15.2 million after taxes, to close 150 locations, including 90 Sunglass Hut stores in the U.S., 30 stores abroad, and 30 licensed locations within department stores. So far, about 50 stores have been closed. Sunglass Hut also plans to close its high-end optical EyeX unit, with 28 stores, some of which will be converted to other stores. Gross margins in the fourth quarter fell to 34% from 40% a year ago. Sunglass Hut traded at $7 9/16 at the end of today. BAUSCH & LOMB <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BOL)") else Response.Write("(NYSE: BOL)") end if %>, which manufacturers glasses, sunglasses, contact lenses, lens-care products and ophthalmic pharmaceutical products, announced yesterday details of a major restructuring plan that is expected to result in annual savings of more than $100 million in 1999. The company said the savings will be reinvested to ensure long-term growth and will provide a more predictable economic return for its investors. The company estimated that the program will cost approximately $80 million (before taxes) to implement over the course of 1997 and 1998. The company also reported today results for the first quarter ending March 29, 1997. Net sales from ongoing businesses totaled $451.2 million, down slightly from the $454.4 million reported in the first quarter of 1996. This comparison excludes $14.9 million in revenues recorded in the first quarter of 1996 from the company's oral care and dental implant businesses, which were divested in the latter half of 1996. Including restructuring charges and write-offs, the company reported net earnings for the quarter of $3.3 million, or $0.06 per share, compared to earnings in the same period last year of $22.5 million, or $0.39 per share. Earnings this quarter were reduced by a charge of $7.7 million after taxes, or $0.14 per share ($12.8 million before taxes). In order to compete more effectively, Bausch & Lomb Inc. and France's Essilor International SA two weeks ago unwrapped plans to jointly manufacture, market and sell premium prescription sunglasses, starting with Bausch & Lomb's Ray-Ban sunglass line. Bausch & Lomb said distribution of the Ray-Ban prescription line will begin in Florida in April, and nationally in the second quarter of 1997. During the first year, consumers will be able to get prescription sunglasses in about five business days after placing an order. Delivery time should be reduced to 24 hours in the future, the companies said. By the end of the year, the alliance expects to expand to sunwear markets around the world. In time, other Bausch & Lomb sunglass products -- such as Revo, Killer Loop and Arnette -- could join the prescription-sunwear portfolio, said Bausch & Lomb, which closed at $38 7/8. Back in March, GARGOYLES PERFORMANCE EYEWEAR (Nasdq: GOYL), continuing its dramatic growth, reached a preliminary agreement to acquire Sungold I-Wear, a Farmingdale, N.Y.-based manufacturer of premium sunglasses. Sungold manufactures two principal lines -- Stussy EyeGear, a successful young men's fashion brand; and Anarchy Eyewear, a cutting-edge brand popular with snowboarders, skateboarders and other alternative sports enthusiasts age 15-25. "The acquisition will allow Gargoyles, known for innovative styling, leading-edge optics and a sports-oriented lifestyle image, to expand its presence in the premium sunglass market by reaching new consumers, said Doug Hauff, president and CEO of Gargoyles. "This acquisition gives us entree into two new areas that will incrementally grow our business," he said. "One of our key strategies is to acquire brands that can expand our distribution channels." The consumers served by the Stussy and Anarchy brands have been two important targets for Gargoyle. Stussy EyeGear is the only licensed brand of Stussy, Inc., a leading designer and manufacturer of "streetwear" apparel and accessories featuring styles that reflect everything from easy California living to the grit of inner city culture. Sungold also produces private label sunglass brands for a number of major retailers. According to Hauff, the acquisition of Sungold will elevate Gargoyles to the number three position in domestic premium eyewear sales, behind Bausch & Lomb and Oakley. Gargoyles' net sales have grown from $6 million in 1992 to more than $33 million in 1996. This stock closed at $7 1/2 on very thin volume. Yesterday NEW WEST EYEWORKS, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq:NEWI)") else Response.Write("(Nasdaq:NEWI)") end if %> (PSE:NWE) was looking pretty rosy as it reported that sales for the first quarter of its 1997 fiscal year ending March 29, 1997, increased 11.3% to approximately $12.8 million, compared with $11.5 million in the corresponding period of the previous fiscal year. Comparable-store sales rose 7.4% during the first three months of 1997. The company's same-store sales have increased for 21 consecutive quarters and rose 8.8% for the whole year, which many insiders a key indicator for retail sales. The company's main marketing and merchandising strategy focuses around a "signature" $59 price point for a wide selection of quality brand-name eyeglasses (frame and lenses). New West also sells brand-name contact lenses and non-prescription sunglasses and offers customers on-site eye examinations by independent optometrists in its stores. Remember as we all get older we will be forsaking those contact lenses for bifocals. Last month the company reported a striking turnaround in operating profitability for the quarter and fiscal year ended December 28, 1996. For 1996 the company reported a net profit of $802,000 ($0.13 per share after payment of preferred dividends) on a 9.8% gain in sales to approximately $43.9 million. This compares with a net loss of $2,025,000 ($0.63 per share after preferred dividends) and sales of $40.0 million in 1995. Sales for the three-month period ended December 28, 1996 increased 9.9% to approximately $9.9 million, compared with sales of $9.0 million in the fourth quarter of 1995. The company reported a net loss of $100,000 ($0.05 per share after payment of preferred dividends) during the fourth quarter of 1996, versus a net loss of $1,574,000 ($0.45 per share after preferred dividends) in the prior-year period. Comparable store sales rose 7.1% in the fourth quarter of 1996. Barry Feld, President and Chief Executive Officer, said "Consumer enthusiasm for our value-oriented merchandising strategy was evident in the fact that over 40% of last year's sales resulted from repeat customers and referral business." The company opened three new stores during the January-March 1997 fiscal quarter. New openings included two Vista Optical stores in Iowa and one Vista Optical store in Colorado. New West Eyeworks ended its first quarter with 149 retail stores operating in twelve Western and Midwestern states. With 1,000 shares traded the stock closed today at $5 1/2. Finally, LUXOTTICA GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:LUX)") else Response.Write("(NYSE:LUX)") end if %> of Italy, designs, manufactures, and distributes eyeglass frames and sunglasses. It offers more than 2,000 traditional and designer frames and introduces roughly 350 new styles each year. Brand-name eyeglass frames include Berdel, Luxottica, Sferoflex, Avant-Garde, and Mirari. The company also produces frames under license from Giorgio Armani, Yves Saint Laurent, Valentino, and Byblos. In May 1995, it acquired U.S.-based U.S. Shoe, which owns the LensCrafters retail chain. Exports account for roughly three fourths of sales; U.S. sales account for 54% of all revenues. On April 2, CS First Boston said it initiated coverage of Luxottica Group SpA with a hold rating. Earnings estimates for this quarter are $0.83 a share, up from $0.77 for the same quarter in 1996. Analysts predict that fiscal 1997 earnings will be $3.25 a share and $3.80 for fiscal 1998, up from announced 1996 earnings of $2.97. The company will be reporting its figures the first week in May.The stock closed at $58. RETURNS, EXCHANGES, and REFUNDS Yesterday STRIDE RITE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:SRR)") else Response.Write("(NYSE:SRR)") end if %> announced that it had signed a licensing agreement with Levi's to manufacture footwear for men women and children First shipments will be in July 1998 and will sell between $55 -$110. The approach is to have this footwear line, which included casual shoes, sport shoes, hikers and boots, to complement Levi's jeans. Stride Rite is creating a separate new division dedicated to this line. Presently the company manufactures high quality casual footwear under the brand names Stride Rite, Keds, Sperry Topsider, Grasshoppers, Street Hot and Tommy Hilfiger. Stride Ride closed at $13 1/2. SAKS HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SKS)") else Response.Write("(NYSE: SKS)") end if %> didn't know which end of the shopping bag was up this week. The Wall Street Journal reported Tuesday that a deal was in the offing to nab Barney's, the opulent New York clothing retailer, out of bankruptcy proceedings by offering a cash and stock deal totaling $290 million. The next day Saks saw the rug pulled out when the stock dove $9 3/4 points on extremely heavy volume, on news that weak first-quarter earnings outlook had prompted at least two brokerages to downgrade the stock. Donaldson Lufkin Jenrette Securities Corp. cut the rating of Saks stock to "market perform" from "buy," and clipped the first-quarter outlook to $0.20 from $0.31, and 1997 view to $1.52 from $1.75. Meanwhile, Robertson Stephens & Co. downgraded Saks to "long-term attractive" from "buy." Saks said it expects to report net income of $0.20 a share on sales of $520 million for its first quarter ending May 3. A First Call survey of 12 analysts yielded a mean estimate of $0.32 a share for the period. The company said it expects to report first-quarter results on or about May 15. Saks said its year-ago first-quarter net income was $0.09 a share on sales of $465 million. Year-ago figures are pro forma, because the company completed its initial public offering in May 1996. The upscale New York retailer said late Tuesday that earnings for the first quarter could be more than a third lower than Wall Street expects because of poor sales in the subdesigner price range, slower sales at its outlet stores and continuing slow catalog sales. Of course one could argue that in the long run this wakeup call is good. Maybe this luxury retailer should accept that it can't and shouldn't continue to market to the moderately priced consumer and should concentrate more on strengthening its luxury empire and catering to its high end customers. Time will tell whether Saks will still bid for Barneys. Another retailer who would love to own Barney's is NEIMAN-MARCUS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NMG)") else Response.Write("(NYSE: NMG)") end if %> in order to expand its market in luxury goods. It will be interesting to watch this unfold, as each store believes it is important to keep this choice franchise out of the other's hands. Yesterday the stock plummeted $9.75, to $19.625, and closed today at $19 1/2 on strong volume. **Extra Extra** This afternoon, the president of Barney's Inc. announced he received and rejected a $330 million bid from Saks Holdings Inc. in February, well before Saks teamed up with Barney's nemesis Isetan Co. to make a separate low ball offer $290 million earlier this week. "Let the games begin". Last week this update reported on various women's apparel stocks. Two of the companies reported record sales and earnings for the first quarter of 1997: JONES APPAREL GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JNY)") else Response.Write("(NYSE: JNY)") end if %> yesterday today announced record sales and earnings for the first quarter of 1997. Net income for the first quarter 1997 increased 45% to $29,540,000, an increase of $9,201,000 over net income reported in the 1996 first quarter of $20,339,000. Net sales for the quarter increased by 22% to $317,990,000, from $260,351,000 reported for the first quarter 1996. Earnings of $0.55 per share for the first quarter increased by 45% over prior year earnings of $0.38 per share. Chairman Sidney Kimmel commented, "We are extremely pleased with our dynamic first quarter results, which are reflective of a strong contribution from the Lauren Ralph Lauren sportswear collection, as well as continued strength across all of our businesses. The spring 1997 season registered extremely healthy retail performance across all of our career sportswear resources. Our casual sportswear and dress businesses returned a solid performance as well." It was reported that the company's backlog of open orders at the end of the first quarter 1997 was 32% higher than the prior year and the company is receiving excellent customer response to fall collections, especially Jones New York, Evan-Picone and Rena Rowan for Saville. Based on the continued retail success of the Lauren Ralph Lauren product, the company anticipates exceeding $200 million in net sales for 1997. This increase includes the addition of coats and suits to the fall 1997 product line, as well as the introduction of petite shops for the fall season. At the bell the stock was trading at $40 5/8. LIZ CLAIBORNE, INC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LIZ)") else Response.Write("(NYSE: LIZ)") end if %> Monday reported a 17% increase in first-quarter earnings, aided by growth in sales of men's apparel. For the quarter ended April 5, the New York-based clothier reported net income of $42.12 million, or $0.59 a share, up from $35.8 million, or $0.49 a share, in the year-ago period. The results beat analyst estimates by three cents a share. Sales increased 7% to $596.55 million from $556.55 million. Liz Claiborne said it reported particularly strong sales increases in its Casual Sportswear Group, Dana Buchman and its Mens Sportswear division. Based upon trends in wholesale bookings, the company is optimistic about its ability to continue to report improvement in sales and earnings for the remainder of 1997. For the year ended Dec. 28, 1996, the company reported earnings of $155.7 million, or $2.15 a share, on sales of $2.2 billion. At the close, this retail stock was at $45 5/8. CVS CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CVS)") else Response.Write("(NYSE:CVS)") end if %> a leading drugstore chain in the Northeast and Middle Atlantic regions today reported strong financial results for the first quarter ending March 29, 1997. Net sales from continuing operations for the first quarter of 1997 increased 20.4% to $1.52 billion, from sales of $1.26 billion for the first quarter last year. Same store sales for the quarter rose 15.5% with pharmacy same store sales rising 22.3%. Pharmacy sales represented 46.7% of total sales for the quarter. Front store sales for the quarter benefited from the timing of the Easter selling period, which occurred one week earlier in 1997 than in the prior year. Operating profit from continuing operations for the first quarter increased 32.5% to $94.6 million, from $71.4 million in the comparable period last year. Consolidated net earnings from continuing operations for the quarter were $58.4 million, or $0.51 per share, compared to $40.6 million, or $0.35 per share, for the first quarter of 1996, representing a 45.7% increase in EPS from 1996. CVS closed at $49 3/4 at the end of the trading day. What do you mean you can't get it in my size? Here is major frustration: You find the perfect shirt, it is just what you have been looking for, but it is the wrong size and the salesgirl announces "Sorry, I can't get it for you." Sometimes an investor feels that way. He finds a product he wants to invest in but he can't. In the case of the newest craze among pre-teen girls, an individual investor profiting may be almost impossible. I first read about the Bean Babies in the Industry & Market Analysis (retail area) Message Boards here at the Motley Fool. Bean Babies the newest toy sensation are manufactured by a privately held company Oak Brook, Illinois-based Ty Inc. Even thought we can't buy into Ty there are a few good marketing lessons. Since 1993, demand for this product has been enormous. Last year, Ty did more than $250 million in wholesale business. Beanies, which generally retail for $4.99, are priced for kids to buy them with their allowance money and therefore by pricing the product, inexpensively, the consumer (in this case young girls) can buy them on their own, without checking with mom and dad (unlike expensive Cabbage Patch Dolls). Second, the company created demand through exclusivity and time-limited availability. Ty fuels demand by tightly controlling distribution. Beanie Babies currently are sold in small specialty stores, generally located in upscale neighborhoods The toys have no distribution in mass merchandise outlets like Toys-R-Us. Ty frequently introduces new Beanie animal designs and retires older ones. This scarcity strategy has worked, as they are marketed as a collectible in much the same way as trading cards. Similar to what WALT DISNEY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DIS)") else Response.Write("(NYSE: DIS)") end if %> has done over the years in releasing some of its classic movies on video for a limited time: "Buy now because after February 29 it will be gone." So is there any hope for the investor looking for possible plays, if the company is private? Beginning April 11, MCDONALD'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MCD)") else Response.Write("(NYSE: MCD)") end if %>, another Oakbrook based company, handed out one of ten specially made Ty Teenie Beanie Babies with its Happy Meals. For Ty, which does not advertise, license or otherwise publicly promote its product, the McDonald's deal represents a rare foray into conventional toy marketing techniques. Commercials are running the Northeast publicizing the toys and warning parents that certain McDonalds' have no more teenie beanies in stock. NOODLE KIDOODLE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NKID)") else Response.Write("(Nasdaq: NKID)") end if %>, one of the few small specialty publicly traded stores, carries these adorable creatures. Further, it has been reported to me by my dapper and charming cohort TMF Edible that the popular restaurant RAINFOREST CAFE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAIN)") else Response.Write("(Nasdaq: RAIN)") end if %> carries a decent amount of inventory. Remember your plastic -- "We never leave Fooldom without it."

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