Blog: Leonie BarrieInvestment has long-term resonance

Leonie Barrie | 31 January 2011

Of the two announcements made by department store retailer JC Penney last week, one had immediate relevance, but the other should have far greater resonance in the longer term.

The US company said it would close six of its stores, as well as axing its catalogue and outlet businesses, also trimming the perceived fat on its call centre and a sideline decorating business. In post-recession 2011, that amounts to a little judicious corporate pruning, enough to increase earnings by US$25-30m in fiscal 2012.

But all the attention of Wall Street was focused on an ancillary announcement of apparently less weight: the appointment of two new board directors. Not just any two new directors, mind, but Bill Ackman and Steven Roth. The pair, who have acquired reputations for being so-called "activist" investors, have targeted JC Penney as ripe for turnaround since last autumn.

For luxury leather goods firm Coach, strong holiday sales especially in North America helped lift second quarter earnings by 25.7% to US$303m. The results also owed much to strong growth in China, where Coach plans to have 175 stores within five years. But the country's appeal as a major sourcing destination seems to be waning, with rising salary and raw materials costs an increasing deterrent.

Swedish fashion chain H&M is also keeping a close watch on cost inflation and prices after its profit dropped 10% in the final quarter of the year. "Prices are at an all-time high at the moment and who knows when they will peak," the company said last week. Nevertheless, for the year as a whole, profit rose 13% to SEK25bn - with the retailer promising to continue to offer customers fashion and quality at the best price.

Another threat facing clothing retailers is the increasing focus of internet giants like Google, Amazon and eBay, all of whom are vying for growth in the global online apparel market. To succeed, the internet giants must offer greater value than the clothing stores. Unfortunately, given the nature of our industry, this may not prove to be difficult. After all, just look at what happened to the book stores.

But leading Dominican Republic apparel maker Grupo M is growing its competitive edge by applying its technical expertise to neighbouring Haiti, where the Haitian Economic Lift Program is opening up new prospects for trade with the US.


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