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Financo Dinner Draws Retail Heavyweights

Call it hustle and flow. That was the game at the 18th Annual Merchandising Industry Chief Executives seminar and dinner, hosted by Financo Inc. at the Harmonie Club...

Stephen I Sadove Jon Asgeir Johannesson and Gilbert Harrison
NEW YORK — Call it hustle and flow.

That was the game at the 18th Annual Merchandising Industry Chief Executives seminar and dinner, hosted by Financo Inc. at the Harmonie Club here, as retail executives and other interested parties (famed corporate raider Carl Icahn, for one) talked about who might buy whom, which brands are in play and the general direction of the beleaguered retail sector.

Icahn's presence had everyone in the room buzzing, and he made no secret of the fact that he smelled blood.

"You retail companies are in major stock trouble and that's what I like," said Icahn at dinner, making a surprising first appearance at the 18-year-old event.

"Things are bad now; they are going to get worse," he told the crowd of 300, referring to economic conditions. However, with the internal workings of retailers, he said he's talked with chief financial officers of some of the majors and likes what he sees. "If you look at the godd--n cash flow, they're doing great. The one question I ask is, 'Why aren't you buying back your stock?' Now is the time to look at these things. That's why I came...."

With Macy's Inc. chief executive officer Terry J. Lundgren a no-show, Icahn saw fit to comment on the chain and the man who leads it: "He's a lovely guy. I see him at the tennis matches, and say, 'Terry, why aren't you working?' As you know, we have a large position [in Macy's] and have been losing a lot of money on it."

Still, with Macy's recently having announced a round of store closings, Icahn characterized the retailer as "a very good" company.

"If you know Carl Icahn, you know he thinks very well, but he operates very much by the gut. His gut is just right," said Buckingham Capital's Laurence Leeds, who followed up on the theme of undervalued retail stocks. "Too many of them are too cheap," like J.C. Penney Co. Inc., which is down from a high of $87 last year to $37, and Macy's, which fell to $21 from $47, Leeds noted. "Look at all these great companies where the stock is down over half. They're not going away. They're fundamentally worth a lot more than they are selling for. I think we're in a recession, but that doesn't mean these stocks are worth nothing."
Leeds concluded that the industry isn't as sick as some think, and cited companies on the upswing, including Urban Outfitters Inc., Guess Inc., Abercrombie & Fitch Co., VF Corp. and Warnaco Group Inc.

One of the sectors being scrutinized is luxury, which has boomed in recent years. Saks Inc. ceo Stephen I. Sadove made the case that there is still plenty of growth ahead. "The well-reported demise of luxury is a little early and not very accurate," he said. "The consumer is out there. Luxury is a great place to be."

"For years I've talked about the rich. I love the rich," said Neiman Marcus Group Inc. ceo Burt Tansky. However, last Christmas, he admitted, "got a little choppy. That's OK — it's all psychological."

Who is the real enemy behind the slowdown? It's "we husbands," said Tansky, answering his own question, for too often invoking the word "enough" to dissuade their wives from shopping.

Regardless of December's slowdown, "there's no trading down. Quality is here, luxury is here....Whether [business] slows down or not, we don't change our strategy," Tansky stated.

Neiman's subsidiary, Bergdorf Goodman, has just completed its fifth year in a row of double-digit comps growth, boasted Jim Gold, its ceo, on a panel moderated by Financo chairman Gil Harrison. "New York's luxury retail has been on a meteoric rise....International tourism gave our store a material lift in October and November," he said.

The category drivers were men's, jewelry and women's shoes. He also noted the best-in-class designers at the top end, those items priced more than $25,000, showed the highest growth. However, European ready-to-wear fashion was a particular weak spot, he acknowledged.

"It's not about whether they can afford to buy, but are they in the mood to buy," Gold said. He also emphasized that the high-end customer does not trade down even when there is an economic slowdown. "They take a breather, but they don't trade down. And they come back, as we saw after 9/11, with a vengeance," Gold said.
Meanwhile, premium denim sales are still strong, with the so-called sweet spot at $175, topping out at $300. "Dolce & Gabbana would probably rip it up, and the more ripped up and shredded it is, the more expensive it is," Gold said.

But if business has been good at the high end among U.S. stores, it's been even better overseas.

Also on the panel, Bonnie Brooks, president of Lane Crawford Joyce Group, said the retailer's business "was nothing short of sensational" at holiday. "Christmas was our best ever this year," she said, citing mind-boggling comp sales gains of 50 percent in some stores.

So far, her company is not planning for any luxury slowdown. "Quite the opposite — we are moving forward with our expansion," she said of the group, which now has 300 stores in China in 22 cities. "It's not just Beijing and Shanghai," she said.

Brooks noted that expansion can sometimes be difficult. "One of the challenges is rolling out in appropriate locations. Quality space is limited," she said.

In addition, e-commerce is still in a slow-moving pattern across Asia. While Brooks sees it as a growth opportunity down the road, the Asian customer's primary experience so far is "carrying out the [purchase] in a shopping bag."

But she stressed Lane Crawford has no plans to expand into the U.S. One overseas retailer who does, Baugur International, also was at the conference and dinner, and had everyone in the room wondering whether it would proceed with a bid for Saks.

Jón Asgeir Jóhannesson, Baugur's executive chairman, was relatively tight-lipped, saying only: "Saks is an opportunity." He added that Baugur, which has extensive holdings in Iceland and the U.K., is "always actively looking in the U.S."

Jóhannesson spoke of how his firm has evolved from a privately owned grocery store to a conglomerate of 60 brands, mostly retail-focused ranging from toys, jewelry and fashion, that has a combined volume of $20 billion. But he noted that Baugur has been expanding more and more in the fashion sector. A key U.K. holding is the House of Fraser, while a top-notch U.S. apparel brand under the Baugur umbrella is Karen Millen.
"We've been looking at the U.S. for some time. We're looking for interesting opportunities and to export our brands from the U.K. to the U.S.," he said.

He noted that Christmas came late in the U.K., with the last 10 days the best. Overall, the market has been slow, and the higher-end market is faring better than the middle ground. Elsewhere in Scandinavia, the market is "booming," he said.

According to Jóhannesson, Baugur also is looking at opportunities in India and China. Another area of opportunity is e-commerce, which he said is great marketing for the store. "People see it on the Internet, go to the store to see and feel the product, and then [go back and] buy it on the Internet," he said.

Myron E. "Mike" Ullman 3rd, chairman and ceo of J.C. Penney Co. Inc., was quick to note how Penney's, an American icon, almost disappeared from the retail landscape about six to seven years ago. "We believe we have a unique offering, with the highest penetration of private label, or about eight brands in which some do $1 billion a year," he said.

A deal with Sephora has helped the retailer get younger consumers into the store. And while she has been shopping, the challenge is getting them to shop even more.

Another change for the iconic retailer is its Internet presence, which is now larger than its catalogue business. However, it was the catalogue business that, in the company's reengineering, allowed J.C. Penney to have the Web presence it has today. "The Internet is the hub of our business model. We have sitelets, when one can go to Arizona jeans as a separate site" from jcpenney.com, Ullman boasted.

He doesn't see the catalogue business disappearing, just the Internet as being a bigger component of the overall operation.

"Consumers relying on their home equity are starting to understand that [the current economic environment] may last a year or two longer. The concept of savings separate from home [equity] means traffic in the malls is slower," Ullman said. He noted that, at J.C. Penney, the apparel category is strongest, so the company has been focused on marketing to enhance the brand equity of the businesses. He disclosed that the retailer's largest partner is Levi's.
"We collaborate with Levi's and are pleased to be big in brands that innovate and excite the customer....We believe in working together versus being on opposite sides of the table. That is the same for all our private and brand partners," Ullman emphasized.

Robert Hanson, president of Levi Strauss North America, told attendees, "Great companies often have the same strategies. It's how you execute them."

Hanson, noting that the robust growth opportunities are in Europe, Russia and Asia, joked about how the "industry is full of control freaks," and how at Levi's, "we try not to manage our business in a controlling way."

He also said the company is trying to be quick on cutting lead times, and especially trying to "be clear about what the brand is about." He noted that not many people know that the original Levi's product was a tent, but evolved into pants because that's "what people wanted."

But it was deals, deals and more deals that had many attendees in whispered conversations on the sidelines. George Feldenkreis, founder, chairman and ceo of Perry Ellis International Inc., was forthcoming about his desire to make some acquisitions, provided they can be bought at the right price.

"This is a good opportunity for companies to make some acquisitions. It is the first time in years where you will see some strategics out looking along with the investment community," Feldenkreis said.

Harrison tried his best to help the deals along — whether or not Financo is involved. Acting as emcee, Harrison touched upon a wide range of issues from expansion plans to e-commerce and the possible slowdown in luxury. At one point, he even interrupted his own event to highlight the arrival of — and lend a little sympathy to — Wayne Weaver, owner of the NFL's Jacksonville Jaguars. Former chairman of Shoe Carnival, Weaver's team lost to the New England Patriots on Saturday.

William Susman, president and chief operating officer of Financo, opened the event with comments on how holiday 2007 had few fashion must-have items, and how every household has enough iPods.

That said, Financo isn't down on 2008. On the contrary, "Financo is bullish on 2008. We believe retail is poised for a good year [as the country] is heading into an election year....Capital is plentiful as private equity still has funds to deploy, even as banks [are] pulling back," Susman said.
He was quick to note that, in fashion and retail, "brands matter."

When asked for their favorite brands, other than their own, three of the five panel participants cited Apple. Brooks liked Cathay Pacific because it provides first-class service to all passengers. Gold has a preference for Apple, BMW, Loro Piana and Chanel. Hanson cited Apple, as did Jóhannesson. Ullman also liked Apple, but added Louis Vuitton, noting that it is a brand that "never goes on sale and it has a 40 percent operating profit."

Elsewhere in the room, Crate & Barrel's Gordon Segal said 2007 was "an amazing year with nine great months. All of a sudden, Christmas disappeared. One of the great things about this dinner is that you realize all of the problems of retail aren't unique to you. There seems to be a worldwide slow up."

"I'm the neophyte in the room," said Lord & Taylor chairman Richard Baker. In the 14 months since his NRDC Equity Partners firm bought L&T, he said he's received plenty of advice from many who were on hand. "I'd really appreciate more help and having someone tell me what I'm supposed to do in a recession. It's my first one."

A bit of wisdom came from Matt Rubel, ceo of Payless ShoeSource. If you provide shoppers with "freshness and new ideas, they are still coming," he said. "Focus on excitement. You can't focus on price."

— Vicki M. Young, David Moin, Lisa Lockwood and Jean Palmieri