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Weekend Stops in Copper, CO, Northstar-at-Tahoe, CA and Hunter Mountain, NY

Burlington, VT (January 3, 2008)

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• January 03 2008 | 54 views

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Sullen Clothing Increases Total Sales 110 Percent During 2007

Art-Driven Lifestyle Apparel Brand Enters New Mall Majors and Key Core Shops; Expands Sales Team and Operations Staff; Expands Women

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• January 03 2008 | 16 views

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Jordy Smith Signs With DVS Shoes

While no press release has officially been released, Jordy Smith has been seen rocking the brand’s kicks on the North Shore and slapping the logo on his boards. While the details are not yet available, it’s been reported that the brand will be launching a Jordy Smith signature sandal sometime this year. Stay tuned for more info right here at transworldbusiness.com.

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• January 02 2008 | 30 views

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Rip Curl USA Appoints Mary Miller As VP Of Juniors Design

Costa Mesa, CA (December 19, 2007): Rip Curl USA is ecstatic to announce the addition of Mary Miller to the refurbished executive team as the VP of Juniors Design. In her new role, Mary will utilize her talents to oversee the design of Junior

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• January 02 2008 | 25 views

• Features

Subprimes, Teen Spending, and the Economy: Is Anything Bad Going to Happen?

By Jeff Harbaugh

Daniel is my favorite economic indicator. He and his guys install wood floors. To get him to do some work at our house this summer, we had to book him two months in advance. When I called him to do another room this fall, he said: “How about next Tuesday?” He told me people were becoming a bit more cautious and pulling back on projects.

With the Daniel Indicator in the caution zone, I decided it was time to look at the possibility of a recession for a second time in my writing career. The first time was, I think, in 2001 in the midst of the Great Skateboard Boom. Shops I talked with about any softening of their sales pretty much laughed uncontrollably after they realized I was serious. The recession was short and shallow, and the only damage done in our industry was to my reputation for asking retailers such stupid questions.
I’m going to try again. Let’s look at some current economic indicators with particular attention to the subprime mess. Then I’ll review the latest stock-market results for the publicly traded big retailers as well as the companies that are specific to our industry and talk to some specialty retailers to see if they laugh me off the phone again. Hope so.

Housing And The Economy
Consumer spending represents 70 percent of our gross domestic product. Keep that in your mind while we talk about the subprime situation. I need to describe in about 200 words something people are writing entire books about. Since a picture is worth a thousand words, check out the chart below.

Source: “The Mortgage Pig In The Python” by John Mauldin. August 3, 2007

What this says is that without people taking lots of money out of their rapidly appreciating homes and spending it, gross domestic product growth would have been a fraction of what was reported, especially in recent years. Now, here’s another cheery table from the same source.

This table shows the dollar amount of adjustable rate mortgages that reset, or will reset, each month in 2007 and 2008. You can see that the peak isn’t until next March. These resets are what lead to foreclosures because people suddenly have a payment they just can’t afford to make and the expected refinancing is no longer available.
The house price run-up started with low interest rates and a generally strong economy. It accelerated when banks stopped being banks. It has historically been the role of banks to evaluate credit, make loans based on that credit, and then get paid back. Then they learned how to “securitize” loans. They bundled them all together, got one of the rating agencies to rate them AAA, and sold them to all kinds of investors who relied on that AAA rating. Suddenly, they’re earning their money from making the loans and servicing them—not from collecting them. They don’t care about the credit risk. Neither do the loan brokers or the appraisers or the escrow companies. Neither do the investors who are buying the bundled loans, because the rating agency says they are AAA. And through some financial magic, you can package some AAA-rated loans with a bunch that aren’t AAA rated and still end up with an AAA rating on the whole security. Go figure that out.

Lots of money available, lots of fees to be earned, no worries about credit, and everybody wants to get on the house-buying bandwagon. So they did. And, as you’ve read, many of the loans that financed this spree, especially in the last couple of years, were interest-only, or nothing down, or no income verification, or/and adjustable rate. No worries about those low teaser rates on the adjustable loans though. When it’s time for the rate to adjust upwards, you’ll be able to refinance because of all the easy money and the fact that your house will be worth even more.

Oops. Didn’t quite work out that way. Foreclosures have doubled since the third quarter of 2006. The National Association of Consumer Advocates reports that four-million subprime borrowers will see their monthly mortgage payments increase by an average of 40 percent in the next eighteen months. [From the International Herald Tribune, Nov. 9, 2007 “Bankruptcy Overhaul Backfires” by Kathleen Howley] House prices have fallen a little or a lot depending on where you live, lending standards have tightened as a result of loses on subprimes, and refinancing your mortgage has gotten more difficult, assuming you can even do it. If you put no money down and your house is worth less than at the time you purchased it, what’s the motivation for the bank to refinance the house since they know they won’t be able to sell the loan? You probably aren’t surprised to learn that the market for bundled loans, even ones that the raters say are AAA (whatever that means now), isn’t what it was some months ago.
This isn’t just impacting the subprime market. All the credit markets are affected. There’s no lack of liquidity—there’s a lack of confidence. Even perfectly good corporate debt has taken a hit. Between the various forms of these bundled securities and the derivatives associated with them, there’s real confusion about how big the risk is and who is holding it. How do you decide how much a security is worth if it’s not trading?

You’ve seen some write downs of these securities and you’re going to see more. But so what? All we want to do is sell a few decks, some shoes, and various jackets, T-shirts, and beanies. Should we be worried that the consumer spending is going to slow in our little part of the world?

Stock Market Wisdom
The University of Michigan Consumer Sentiment Survey fell to 75 in November, down from 80 in October. That’s the lowest reading since October of 2005 and the second lowest since the 1990s. The survey also reported that inflation expectations rose sharply, but I don’t suppose that’s a surprise to anybody who buys food and gas.

Meanwhile, the people who watch the stock market seem to think consumer spending might slow down. The S&P 500 department store index is down 30.3 percent from April 20 through the end of October. The stocks of Dillards, JC Penney, Nordstrom, Kohl’s, Sears, and Macy’s are each down between 28 percent and 40.5 percent over the same period.

But we can argue, and I think accurately, that those retailers don’t necessarily represent our market. Let’s look at some publicly traded companies that do. In alphabetical order, let’s see what’s happened to the stocks of Dick’s Sporting Goods, Hot Topic, Pacific Sunwear, Quiksilver, Urban Outfitters, Volcom, and Zumiez over the same period.

It’s not exactly beautiful, but it’s an overall better result than of the larger retailers discussed above. What is the collective wisdom of Wall Street telling us? I’d say they are suggesting that our market, while not impervious to a consumer spending slowdown, is less vulnerable than the broader market. That makes intuitive sense to me and has been an article of faith in the industry for a while. Whether it’s true or not, I hope we don’t have to find out.
There’s reason, then, to think we’ve got some further softening ahead in the broad economy. Large retailers have seen their stock prices hit hard the last six months. So have public companies in our industry, though generally not quite as hard. What about where the rubber really hits the road—out in our industry’s core retailers? Let’s talk to the people who really know.

Yes! No! Maybe!
The first thing we have to recognize is that when I call up these guys, ask them how the season is going, and tell them I want to report it in Transworld Business, they may not be disposed to be completely frank if everything is going to hell in a handbasket. Still, it couldn’t hurt to ask.

Steve Carlson at Central Coast Surfboards in San Luis Obispo, California is a pretty honest guy. “There’s a bit of hesitation in the consumer for sure,” he says. “They grab one item, but not the second.” Steve points to the property tax laws in California that only allow the taxes to go up when the house changes hands. Half of those taxes are due December 10 and, he points out, those who bought a house maybe six months ago may find themselves paying big property-tax bills based on values before the price drops. That could ruin your whole holiday season.

He also talked about managing in a possibly recessionary climate. “The retailer who isn’t militant on their open to buy at this point is a train wreck,” he subtly puts it. Inventory management is important even in good times.

Josh Roberts, president of Milosport in Salt Lake City, says his business is up over last year. He attributes it to their longevity and reputation in the community. He also points out that they “try to carry a lot of new and smaller brands,” which he considers important. He is, on the other hand, “seeing a lot of retailers panicking.” He thinks one advantage they have is that they always get snow in Utah. “It can be better or worse,” he says, “but we’ve always got some.”

Coast 2 Coast President Marc D’Emilia in New York says it isn’t one of those years where you see steady growth: “It’s a tough year.” Marc has been cautious on his buying. He attributes part of this to the poor year on the East Coast last season and the resulting inventory overhang that has to be managed.

Dan Dziuban at Theory (two stores and an indoor skatepark in the Springfield, Massachusetts area) isn’t so much worried about a recession as about competition from the big-box stores and mall shops carrying the brands he used to have exclusively. In response, he’s “carrying more brands I wouldn’t have carried before.” He is being a little cautious in managing his inventory, taking advantage of as many off price opportunities as he can find. “You go too deep in snow out here and you could be done in one season,” he says.

That we’re going to have, or maybe are having, some slowing in consumer spending seems obvious to me. Especially since the morning paper announced that Starbucks saw a one-percent falloff in store traffic last summer. We in Seattle take stuff like that seriously, and that seems as good as the Daniel Indicator I started this column off with.

How vulnerable is our industry? The evidence says we can expect some impact. But given the time of year maybe, as usual, the important thing, to retailers at least, is when and how much it snows. Like snow covers rocks, to some extent we can hope it shields us from any economic downturn. Let it snow, let it snow, let it snow.

Reach consultant, investor, writer Jeff Harbaugh through www.jeffharbaugh.com or at (206) 219-9063.

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• January 01 2008 | 290 views