January 2012

Sartorial Views
Apparel and accessories sector update
Comments from the Ernst & Young desk
Welcome to the January 2012 edition of Sartorial Views. 01 02 We wish you a very happy new year! Sartorial Views is a digest featuring domestic and global news on the apparel and accessories sector. It is a collection of news articles and analyses that aims to highlight key issues and trends prevailing in the market. On the domestic front, leading players are focusing on their long-term expansion plans, although uncertainty looms in the short term. The end of season sale (EOSS) season has begun and retailers are hopeful of clearing their inventory. Globally, major apparel retailers are looking to expand their operations across the Asia Pacific. Some players have reported company-level revenue growth in the last quarter. However, same store growth is still under pressure. In the In focus section of this issue, we have analyzed the market for sportswear retail in India, covering the market landscape as well as identifying growth drivers and the key challenges faced by Indian and international players. On the market performance front, the Appex and Sensex both registered a negative return of 21% and 4%, respectively, for the month ending December 2011. Only 1 out of 15 Appex scrips registered a month-on month increase in its market capitalization. We hope you find the newsletter interesting and informative, and we welcome your feedback on it. Please write to us if you require any further information or want us to add other names to our mailing list.
Note: From this edition onwards, Sartorial Views will be issued on a bi-monthly basis (once every two months).

In this edition:
Comments from the EY desk In focus sportswear retail India: sector news A. Company buzz B. Market watch International sector news Apparel and deals A. International deals B. Indian deals References 06 09 10 11 11 12 13

In Focus sportswear retail

Introduction
Indias sportswear market has evolved from a niche segment, which was exclusively aimed at sportspersons, to a burgeoning consumer sector. The industry has witnessed rapid growth over the past few years, driven by growth in income levels, changing lifestyles and the entry of foreign players after liberalization. The ever-increasing popularity of cricket, combined with the growing interest in sports such as football, hockey and tennis, has contributed to the growth of the functional sportswear market in the country. In addition to this, the trend of using sportswear as casualwear has expanded the definition of target consumers for leading brands. Some brands also offer collections to cater to this demand for casualwear.

Market overview
The sportswear retail market in India is estimated at INR365.8 billion and is expected to grow at a robust CAGR of 33% during 20102014. The market includes sports apparel, footwear and accessories, with footwear being the largest segment, accounting for around 60% of the total market. The countrys sportswear segment is largely unorganized with organized players constituting only around 30% of the market. Franchised exclusive brand outlets (EBOs) and multi-brand outlets form the core retail channels for sportswear in India.

Key players
Company Indian Bata Liberty Woodland Planet Sports International Adidas AG Nike Inc Reebok International Ltd. Puma AG Fila Lotto Sport Italia Rockport Kappa Skechers USA Inc Royal Sporting House (RSH) O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O Apparel Footwear Accessories

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In 1994, Nike entered the Indian market through a licensing arrangement with Sierra Industrial Enterprises Pvt. Ltd. The company later established a wholly owned subsidiary in India in 2004. Today, the organized sportswear market in India is dominated by the big four (Adidas, Reebok, Nike and Puma) global players, which have over 80% market share of the organized market, with several others such as Fila and Lotto ramping up their presence. These brands face competition from multi-brand sportswear retailers such as Planet Sports and Royal Sporting House (RSH).

Key drivers
Awareness of health and fitness Growing middle class population Increase in sporting events Growth in organized retail

Growth drivers
Source: Ernst & Young analysis

The Indian sportswear market is poised for strong growth over the next few years. Several factors, including a booming middle-class population, a paradigm shift in consumers attitude to health and fitness, an increase in the number of sports events and the growth of organized retail are driving this market. Recent changes in government regulations on FDI in retail, passed by the Union Cabinet, are expected to give a further impetus to the organized sportswear market. The Government has increased FDI in single-brand retail from 51% to 100% with conditions largely around domestic sourcing.

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Key challenges
However, the domestic sportswear industry is facing several challenges, including the following:

Counterfeiting
Counterfeiting is one of the biggest challenges sportswear brands are facing in India today. Unorganized players imitate product styles, brand logos and names, which adversely impacts the brand equity and sales brands.

Low participation in sports

Although there is high viewership of sports (particularly cricket) in India, participation continues to be low, with only an estimated 1% of the population engaging in sporting activities. Therefore, in line with this market reality, several sports brands have positioned themselves as lifestyle instead of fitness brands.

Rising costs
In the Union Budget 2011, the Government revised optional excise duty for readymade garments and made-up textiles, and levied a 10% mandatory excise tax on all branded apparel manufacturers. As a result, branded garments, including sportswear apparel, are likely to witness a price increase of 5%10%.

Unorganized market
Players face major competition from unorganized players that constitute around ~70% of the overall sportswear market, since the latter have a significant advantage over their organized counterparts in pricing.

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Emerging trends
Online shopping
Increasing penetration of the internet in India is fueling the growth of online shopping. Brands such as Reebok (www.shop4reebok.com) and Lotto (shop.in.lottosport.com) have initiated their online shops in India. Companies such as Puma and Nike have partnered with online retailers such as Myntra and Bigshoebazaar to expand their distribution beyond conventional multi-brand outlets and large retailers.

Sports merchandising
Sports merchandising is an emerging concept in India. Brands have successfully tapped the market by associating themselves with popular sports such as cricket, and using popular sportspersons as their brand ambassadors for clothes, shoes and other products. Moreover, with the debut of new sports such as Formula 1 (F1), brands such as Puma have begun stocking collections inspired by F1 racing. Nike, the official apparel sponsor of the Indian National Cricket Team since 2005, has extended its contract with the Board of Control for Cricket in India (BCCI) for a period of five years. Other brands such as Reebok, Lotto and Puma are also cashing in on the popularity of cricket by hopping on to the IPL bandwagon.

Product innovation
The sportswear industry has been witnessing significant innovation in the premium as well as the mass segment. Brands such as Reebok have introduced new products such as Easytone and Zigtech, and Nike the DriFIT apparel technology.

Lifestyle positioning
The sports lifestyle business has been growing at 30%40% per annum. Players are increasingly positioning their sportswear brands as lifestyle products by collaborating with well-known designers such as Manish Malhotra, Shantanu, Nikhil and Aki Narula. Other apparel retailers such as S Kumars Nationwide and Reliance Retail have also forayed into the lifestyle sportswear market.

Targeting hot spots of consumption

Having covered large cities, sportswear brands are now trying to ramp up their presence in tier-II and tier-III cities. Companies are using a reduced pricing and localization strategy to drive sales in these cities. In addition to investing in brick-and-mortar stores, they are also reaching out to these cities through online channels that are contributing increasingly to the overall revenues of such players.

Future outlook
Today, India has become a strategic market and offers strong growth opportunities to sportswear brands. Several of them are trying to strengthen their presence in the country by expanding their retail footprint and driving their volume growth. Furthermore, the recent regulatory changes made in FDI in single brands are expected to give a further impetus to sportswear brands.

Sartorial Views

India: sector news

A. Company buzz
1. Shoppers Stop to open 66 stores by 2013
Department store chain Shoppers Stop plans to increase its store count to 66 by the end of 2013. In the future, they are also planning to launch more stores in areas where the customer base is strong. The company has recently opened its 49th store in Mumbai. With the launch of this 75,000 square feet store, the retailer plans to open more such stores in the suburban areas of metropolitan cities. The company is expecting a turnover of at least INR22 billion by the end of this financial year The company is expecting to set up its 50th store in Bangalore by the end of this financial year.

2. Sri Lankan womenswear brand Avirate debuts in India

Sri Lankan womenswear and accessories brand Avirate has established its presence in India, joining several international brands in the lifestyle segment. It is owned by the Timex and Fergasam Group, which has manufacturing plants in Sri Lanka, India and Bangladesh. The company has partnered with Fashion 365 to distribute and market Avirate in India. The brand was launched in Sri Lanka in 2010 and has a presence in premium stores such as Miss Selfridge and House of Fraser. In India, it has opened its first store at Bangalore and plans to launch outlets in New Delhi and Mumbai by May 2012. The company will invest US$2US$3 million in opening five more stores in India over the next six months.

3. Madura Fashion launches new retail format Planet Fashion Grande

Madura Fashion & Lifestyle Retail has launched a new retail format, Planet Fashion Grande, which focuses on style-conscious consumers. The company has opened its first Planet Fashion Grande store in Bangalore and plans to set up 15 more stores by FY12, designed by Blocher Blocher Partners, an internationally renowned German architectural company. The stores will stock merchandise from brands such as Calvin Klein, Nautica, Esprit, Louis Philippe, Van Heusen, Allen Solly and Satya Paul, and also have a stylist who will personally attend to customers to advise them. The company is also looking at smaller cities such as Surat, Indore and Dehradun.

4. Tanishq eyes 35%40% growth in FY12

Tanishq, the branded jewelry retail chain of Titan Industries Ltd., aims to achieve a growth of 35%40% in 201112, despite high gold prices and the economic slowdown. To achieve this, the company seeks to continue with its strategy of opening stores and introducing new collections. It plans to open five to six large-format stores across the country over the next one year to gain a significant market share. Tanishq currently has 133 stores in 76 Indian cities.

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5. Arvind Ltd. to focus on brands

Textile-maker Arvind Ltd. plans to increase its revenues from apparel and fabric retailing to 40% in FY13 from 33% at present. While Arvinds textile business, mainly led by denim, grew by 20%, its retail and brand business grew by 47% in FY11. The company is targeting nearly INR2.5 billion worth of revenues and will add 300,000 square feet of space annually. It also plans to increase its exclusive store space for Arrow, US Polo and Flying Machine from 0.3 million square feet to 0.6 million square feet by 201314 as well as increase its share in department stores such as Pantaloons, Shoppers Stop and Lifestyle. Arvind has also launched its Arvind Store, which retails fabrics as well as its own ready-made garments and ready-to-stitch products. The company plans to open 100 exclusive stores under this brand in addition to its more than 10 stores across South India at present.

6. Koutons closes Charlie Outlaw stores to meet debt-restructuring conditions

Apparel manufacturer and retailer Koutons Retail is in the process of reorganizing its operations. The company has closed down 150 shops, mainly those stocking casual menswear brand Charlie Outlaw, to cut its losses. Koutons carries a debt of INR6 billion on its books, with an average interest cost of 14%. It is trying to meet the conditions of the corporate debt restructuring package approved by the Reserve Bank of India (RBI). The Charlie Outlaw stores are either being closed or are being converted into Koutons brand stores.

7. Manchester United opens exclusive store in Mumbai

Manchester United Merchandising Limited has launched its exclusive Manchester United store in Mumbai in partnership with Future Group-promoted Indus-League Clothing. During the first phase of its store launches in India, Manchester United plans to open three stand-alone outlets in Mumbai, New Delhi and Kolkata, where consumers will be able to buy authentic sports goods and accessories. Manchester United is one of the most popular football team in the world and has a large Indian fan club.

8. Reliance Retail in partnership talks with foreign single-brand companies

Reliance Retail is in partnership talks with several international single-brand retailers that are looking for opportunities to enter India. However, the company is not currently looking for international partners in multi-brand segments such as food retail. The Indian Government has relaxed rules for the retail sector, allowing singlebrand retailers to bring in 100% FDI into India, up from 51% earlier. The company plans to continue with its current partnerships in single-brand retail, despite the change in rules. It currently has tie-ups with 8-10 single-brand retailers including Marks & Spencer, Office Depot and Hamleys.

9. Marks & Spencer to increase retail footprint in India

UK-based apparel retail chain Marks & Spencer (M&S) plans to continue opening more stores in India and increase sourcing from the country. The company will continue its partnership with Reliance Retail to expand its business in India, despite the Governments proposal to allow 100% FDI in single-brand retail. M&S operates 22 stores in India and plans to open 4 more by the end of the current financial year. The company also seeks to increase its sourcing from India from 52% of the products sold in the country to 60%.

B. Market watch
The Appex Index, as compared to the Sensex, provides a snapshot of the performance of Indias apparel companies. It covers 15 apparel retailers and/or manufacturing companies 1 listed on Indian stock exchanges.
125 100 Index number 75 50 25 0 Feb'11 May'11 Jul'11 Aug'11 Sept'11 Oct'11 Nov'11 Jan'11 Mar'11 Jun'11 Apr'11 Dec'11

BSE Sensex

Appex

Source: BSE, Cap IQ and Ernst & Young research

Note: The Appex and the Sensex have been indexed by taking the value of the last trading day of January 2011 as the base 100. The Appex was calculated, based on the sum of the market capitalization of 15 selected apparel retailers and/or manufacturing companies.

For the period being reviewed, both the Appex and the Sensex registered a negative return of 24% and 16%, respectively. Similarly, for the month ending December 2011, both the Appex and Sensex registered a negative return of 21% and 4%, respectively. Only 1 out of the 15 Appex scrips registered a month-on month increase in their market capitalization. The last quarter of 2011 was tough for most retailers. However, 100% FDI approval in single-brand retailing may change sentiments and drive a rally of the concerned stocks.
1. Appex covers (1) Pantaloon Retail, (2) Store One Retail, (3) Provogue, (4) Shoppers Stop, (5) Trent, (6) Koutons Retail, (7)Zodiac Clothing, (8) Celebrity Fashions, (9) Kewal Kiran Clothing, (10) Alok Industries, (11) Arvind Ltd., (12) Raymond, (13) Gokaldas Exports, (14) GIVO Ltd. and (15) Vishal Retail.

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International sector news

1. H&M resumes China expansion plan; 4Q sales up 6%
Swedish clothing retailer Hennes & Mauritz AB (H&M) plans to focus on China. H&M, which already has a presence in mainland China cities such as Changchun, Nanjing, Guangzhou and Kunming, plans to open stores in more cities next year. The retailer seeks to focus on setting up stores in tier-II and and tier-III Chinese cities unlike several global fashion companies that have built a significant presence in tier-I cities such as Beijing and Shanghai, leaving smaller cities less explored. The company entered the Chinese market in 2007 and has 64 stores in the country and a total of 2,410 around the world. H&Ms gross sales in the fourth quarter increased by 6% to 36 billion kronor (US$5 billion) as compared to the same period last year, driven by the favorable impact of currency, while comparable store sales decreased by 3%.

2. Swatch to reduce delivery of watch parts in 2012

Swiss watchmaker Swatch may reduce its supply of watch mechanisms to competitors in 2012, following a ruling of the Swiss Federal Administrative Court. In June 2011, Swatch asked local competition commission Weko to determine whether the companys planned withdrawal from delivery of watch components to its competitors breaks the antitrust law. Until a decision was reached, it was obliged to supply third parties with watch parts till the end of 2011. In 2012, the Swiss company has been allowed to reduce its deliveries of watch mechanisms to 85% and of some components to 95% of its supply levels compared to 2010, until the commission completes the investigation.

3. American Eagle Outfitters to enter Japan

American Eagle Outfitters (AEO), the third-largest casual wear retailer in the US, plans to foray into Japan in April 2012, joining its US and European peers that are expanding in the Japanese market. AEO will open two stores in Tokyo in April 2012. These will be managed by a subsidiary of Aoyama Trading Co., a mens apparel retail chain with a franchise chain contract with the company. AEO plans open around three outlets every year to put in place a chain of 10 stores, mainly in Tokyo, in FY14. With each outlet having a floor space of 8001,000 square meters, the company hopes to ramp up its sales in Japan to YEN10 billion in five years.

4. Nike posts strong 2Q results, leveraging its brand power

Sports goods company Nikes 2Q results beat Wall Street expectations by posting an impressive revenue growth of 18% across all regions except in Japan. The companys net profit increased by 3%, which was partially offset by a decline of 260 basis points in its gross margin to 42.7%. High product costs continued to pressure the company, despite the positive effect of its increasing its direct to consumer sales, price increases and cost-reduction initiatives. Nike is banking on the power of its brand, and the quality and popularity of its products. The company is continuing with its recent trend of price escalation to offset input cost increases, and plans to implement more significant price rises in 2012.

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Apparel and deals

A. International deals
1. LVMH raises stake in Hermes International
French luxury group LVMH has raised its stake in competitor Hermes International to 22.28% from 21.40%. LVMHs voting rights in Hermes have increased to 16% from under 15%. The rise in the proportion of its voting rights is a result of the rise in LVMHs stake and a decrease in Hermes total number of voting rights. Hermes family members have recently created a holding company that controls 50.2% of the companys shares, to avoid any attempt to take over the company, since this would require the approval of the majority.

2. Limited Brands targets purchase of La Senza

Victorias Secrets brand owner Limited Brands is believed to be close to buying the lingerie brand La Senza. The company is supposed to be buying the brand, but not its 158 shops. Limited Brands has emerged as the front-runner after La Senza held talks with potential buyers. The former owner of La Senza, Theo Paphitis, is also believed to have offered his undisclosed assistance to the company.

3. PPR to sell Somewhere

French luxury goods company PPR has decided to sell its clothing retailer Somewhere, which is part of the formers Redcats division. The sale is driven by the deterioration of the French womens clothing market, whose sales declined by 5.7% year-on-year in October 2011. Possible buyers of Somewhere include Dominique Giusiano and Philippe Defontaine, the General Director and Financial and Organisation Director of the childrens fashion division of Redcats. In addition, PPR is evaluating a possible divestiture of Redcats. This has attracted four or five potential candidates.

4. Sycamore Partners makes US$212 million offer for Talbots

Private equity (PE) firm Sycamore Partners, which owns 9.9% of womens retailer Talbots, offered to buy the company for US$212 million. Talbots will review the Sycamore proposal with the help of its legal and financial advisers, Dewey & LeBoeuf LLP and Perella Weinberg Partners. Sycamore has cited several concerns, including the loss of Talbots Chief Creative Officer, disappointing quarterly results as well as its declining stock prices and liquidity position, which has led the company to make the offer.

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B. Indian deals
1. Lilliput gets Bain Capital and TPGs nod to raise INR5 billion
Kidswear company Lilliput plans to raise up to INR5 billion through private placement of shares as shareholders. Bain Capital and TPG have approved the companys fundraising proposal. The stake of promoter Sanjeev Narula (a 55% stake) and the rest of the two PE investors is likely to decline by roughly 10% each. Grant Thornton and Avendus Capital will help the company raise the amount through a fresh issue of shares. The company plans to use the funds to fuel expansion, cut debt and meet its fixed cost. Lilliput plans to add 5,00,000 square feet of retail space annually, which is expected to translate to 8090 store openings every year.

2. Raymonds subsidiary Silver Spark Apparel to divest its equity holdings

Silver Spark Apparel, a 100% subsidiary of Raymonds, has entered definitive agreements to divest its entire equity holding of the 7,40,000 equity shares (one-third of its total share capital) it holds in the joint venture (JV) company Rayves Automotive Textile Company Private Limited to Japanese company TB Kawashima Company Limited.

3. Blume Ventures funds sports goods e-commerce portal SportsNest.com

Sports Nest Retail has launched SportsNest.com, an e-commerce company focused on online sale of sporting, fitness and adventure gear. The company has been funded by Blume Ventures, a micro-venture fund that invests funds amounting to up to US$250,000 in tech-enabled businesses. In addition to its online store, SportsNest also plans to allow its customers to buy its products offline. The company currently has over 5,000 products that are available on the online store. This number is expected to rise to 25,000 SKUs soon. Customers can also get their products shipped for free across India, with the option of cash-on-delivery.

4. Online fashion brand FreeCultr raises funds from Sequoia Capital

FreeCultr, an exclusive online fashion brand launched in December 2011, has raised more than US$4 million from Sequoia Capital. FreeCultr is a new venture launched by the Smile Group, and Sequoia Capital is its first investor. The investment will be used to develop an in-house design team and an e-commerce platform. The funds will also be utilized for inventory management and talent acquisition. In addition, FreeCultr plans to rapidly expand its global and domestic operations in the future.

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References

Shoppers Stop to open 66 stores by 2013, Franchise Plus, 27 December 2011, via Dow Jones Factiva, 2011 Adsert Web Solutions Pvt. Ltd. Sri Lankan womenswear brand Avirate enters India, The Economic Times, 13 December 2011, via Dow Jones Factiva, 2011 The Times of India Group. Madura Fashion & Lifestyle Retail has launched a new retail format, Planet Fashion Grande, The Economic Times, 22 December 2011, via Dow Jones Factiva, 2011 The Times of India Group. Tanishq eyes 35 40% growth this fiscal, The Economic Times, 16 December 2011, via Dow Jones Factiva, 2011 Times of India Group. Titan to double market share in jewellery business in 5 years, Indo-Asian News Service, 15 December 2011, via Dow Jones Factiva, 2011 Indo-Asian News Service. Arvind: Less of denim, more of brands, Business Standard, 12 December 2011, via Dow Jones Factiva. Koutons Shutters Charlie Outlaw (the company is trying to meet the conditions of the CDR package approved by RBI in September 2011 within three months), Indian Business Insight, 5 December 2011, Dow Jones Factiva, 2011 Informatics (India) Ltd. Manchester United opens exclusive store in Mumbai, India Retail News, 7 December 2011, via Dow Jones Factiva, 2011 Contify.com. Reliance Retail Talking To Foreign Single-Brand Firms For Local Pacts, Dow Jones Business News, 1 December 2011, via Dow Jones Factiva, 2011 Dow Jones & Company, Inc. Britains Marks & Spencer To Open More Stores In India, Asia Pulse, 12 December 2011, via Dow Jones Factiva, 2011 Asia Pulse Pty Limited. H&M Resumes China Expansion Plan, SinoCast Consumer Products Beat, 16 December 2011, via Dow Jones Factiva, 2011 SinoCast LLC; Swedens H&M sales up 6 pct in Q4, Xinhua News Agency, 15 December 2011, via Dow Jones Factiva, 2011 Xinhua News Agency. Court allows Swatch to reduce watch parts deliveries in 2012 report, ADPnews Switzerland, 20 December 2011, via Dow Jones Factiva, 2011 AII Data Processing Ltd. American Eagle Outfitters to Land In Japan In April, Nikkei Report, 26 December 2011, via Dow Jones Factiva, 2011 Nihon Keizai Shimbun, Inc. Nike puts faith in brand as profit pressures grow, Just-Style, 23 December 2011, via Dow Jones Factiva, 2011 Aroq Limited.

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 LVMH Raises Stake In Hermes International To 22.28%, Dow Jones International News, 20 December 2011, via Dow Jones Factiva, 2011 Dow Jones & Company, Inc. Victorias Secret owner front-runner to buy La Senza, Retail Week, 19 December 2011, via Dow Jones Factiva, 2011, Emap Limited. PPR to sell Somewhere, European Intelligence Wire, 6 December 2011, via Dow Jones Factiva, 2011 AII Data Processing Ltd. All Rights Reserved. UPDATE 3-Sycamore Partners makes $212 mln offer for Talbots, Reuters News, 7 December 2011, via Dow Jones Factiva, 2011 Reuters Limited. Lilliput Gets Bain Capital, TPG nod to raise Rs 500 crore, The Economic Times, 6 December 2011, via Dow Jones Factiva, 2011 The Times of India Group. Raymonds subsidiary Silver Spark Apparel to divest its equity holdings, Indiainfoline News,13 December 2011, via Dow Jones Factiva, 2011 Indiainfoline Ltd. Blume Ventures funded sports goods ecommerce portal SportsNest.com launched, Alootechie, 16 December 2011, via Dow Jones Factiva, 2011 Alootechie. Smile Groups online fashion brand FreeCultr raises $4mn from Sequoia Capital, Alootechie, 16 December 2011, via Dow Jones Factiva, 2011 Alootechie.

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