TBL/NKE/VFC: Love Triangle?

Let’s be clear, I am not putting TBL in play, but five people have asked me over the past 30min for my thoughts on TBL as a takeover target. For others thinking the same, I’ll save you the effort…

TBL has been one of my favorites due to my expectation for an underappreciated improving free cash flow trajectory over the next 12-months with a takeout as a nice call option. As it relates to the latter, TBL makes an ideal takeover candidate by two companies in particular – Nike and VF Corp. I have no edge on who, when, or where. But I certainly can read the tea leaves as to the 'why.'
For Nike, it’s rather simple – the one business where it has consistently failed is in Outdoor. It tried for years to make its ACG business stick (All Conditions Gear), but it simply did not work. My own view is that Nike’s brand is too closely tied to a performance athlete, and an outdoor enthusiast cannot easily be wooed by the likes of Jordan, LeBron James, Tiger Woods, or Rafael Nadal.

In addition, Nike has cash burning a hole in its pocket, is seeing ROE decoupling from ROIC because it cannot reinvest capital fast enough back into the business, and probably would not mind strengthening its link with the urban consumer through the Timberland yellow boot business (which I think has bottomed) as its Jordan brand enters maturity.

Nike would want no piece of TBL when TBL still owned its money-losing US retail and apparel businesses, and was overdeploying capital into non-core assets like iPath, Go-Lite and Mion. But with retail closed, GoLite sold, apparel outsourced to PVH, and 5 of the top 6 managers cycled out over 2 years – I think this finally makes the cut for a company like Nike. The biggest negative would be that Nike would inherit a royalty agreement with PVH. Though sub-optimal, I don’t think it’d be a deal killer.

As for VFC, the driver to its business for 3 years has been The North Face, and the company has made it no secret that it is shifting away from basics (underwear biz sold) and towards the Outdoor and higher-end fashion arena. It has also not denied its interest in VFC in the past. If you were to ask me if The North Face is closer to its 1st inning of growth or 9th inning, I’d say we’re in the 7th inning stretch. VFC needs bench growth in Outdoor.

Another major call-out that matters to VFC is that capacity is very tight in Asia right now, and is only getting tighter. While large footwear brands can flex muscle and weather the storm, a smaller footwear company will have a harder time standing on its own. This means M&A makes more sense to gain leverage with factories, as well as to drive back-office synergies through cost cuts.

In addition, as I noted in my earlier post, VFC needs a deal...soon...

American Consumer Less Than Toxic?

That's what I am hearing from the consensus network of hedge fund data point chasers this morning. There are two data points that actually pseudo support that view:

1. Weekly ABC/Washington Post Consumer Confidence came in at -47 this wk vs. -50 last
2. MBA Mortgage applications popped for a +10.5% wk/wk move

The problem, of course, is that these numbers are off of abysmal all time low bases, and these numbers represent one week of data points - this hardly constitutes a "Trend".

That said, my models are data dependent, and I respect that these facts are less than toxic, for once.

Scary Global Chart Of The Day: European Retail Sales

European retail sales came in down again. This time the July monthly sales figures were down -2.8% year over year. Within the context of the Euro existing as a unified currency for the region, we thought it might help to show you the context of the y/y sales declines. Below is the chart from 1.

Europe didn’t issue their citizens bailout rebate checks like the US Government did...

It is global this time, indeed.

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

VFC: Needs Another Deal

This name does not smell right to me here. This is not a story like WRC, GES, GIL or SKX where I think the margin structure is grossly overstated today, as I think that VFC is one of the better companies in this industry and it manages its margin trade-offs within reason. But there are some battles that even solid management teams can’t win. Consider the following.

Throughout 2006 and 2007, VFC posted a solid organic growth rate between 7 and 13%. This was largely driven by growth in Outdoor businesses such as The North Face, as well as scaling up its’ portfolio’s global presence. As a kicker, the impact of FX and the addition of acquisitions roughly doubled reported top line growth over that time period.

In the first two quarters of 2008, VFC still benefitted from its Lucy and Seven acquisitions (3Q07), and realized partial benefit from its purchase of Eagle Creek (1Q07) and North Face China (2Q07) business. But in stripping out these acquisitions as well as the impact of FX, organic growth was only 4% in the first half – the lowest rate in 3 years.

Now, heading into 2H, VFC has fully lapped Eagle Creek, TNF China, and is just about to lap Lucy and Seven. This is happening at the same time that the yy Euro compare goes from +20% in 1H to flat heading into 4Q, and negative in another 9 weeks assuming current FX rates prevail.

Based on consensus estimates in 2H, we need to see organic growth accelerate to 5% in 3Q, and 9% in 4Q with margins accelerating into 2009. With cost headwinds accelerating into spring '09, I have a hard time digesting these expectations.

One positive is that the company is hosting an analyst meeting (one of several it hosts throughout each year) at the end of this month to highlight its Outdoor business. Yes, there are good things to say about this division (35% of total). But those fourth quarter numbers don’t look like a slam dunk to me.

Organic growth slowing and compares getting tough, FX waning and acquisition benefit going away. Yes, VFC is a good company, but at 8.5x EBITDA and high expectations, this does not smell right.

VFC needs another deal…

Weathering The Storm

The levees in New Orleans held. The Republican convention is underway, and “drill, drill, drill…” is Larry Kudlow’s partisan answer to all that ails this domestic economy. All the while, the emotionally removed and analytically objective are surveying the world’s proverbial storms.

I have maintained for some time now that the largest market flood gate that has yet to open is that of the hedge fund industry. This has not been a popular call amongst my industry peers, but it has been the right one to stay with. As Bloomberg all-star Kathy Burton (author of Hedge Hunter’s) pointed out yesterday, “"Sixty-one percent of the 2,795 funds managing more than $100 million that are in New York-based's database are losing money in 2008."

Bubbles popping are processes, not points. As the facts get louder, revisionist historians are issued more impactful ones. This morning, that high profile fact is that commodity levered long hedge fund, Ospraie, is being forced to liquidate. Being from Thunder Bay, Ontario, has its analytical advantages. One of the local facts is that it has harbored the most contiguous grain elevators for one port in the world. At the peak of the commodity bubble, Ospraie was buying grain elevators! No, unfortunately I cannot make this stuff up.

My grandfather, Russ, proudly worked in Thunder Bay’s harbor for Provincial Papers as a Stationary Engineer for over 40 years, and was a member of IUDE # 865 Boiler Makers Union. He was not a hedge fund man, but I can tell you this, if he heard of this hedge fund “Trade” for elevators, he would have snickered, and asked “how many beers did the buyer have?!?”

From Goldman’s prop desk to lesser known hedge funds, the commodity bubble popping will reverberate deep into the moorings of the US Financial system. Commodities are what they are by definition – commodities! Putting leverage on top of commodity leverage is what Dick Fuld did when he had Lehman take a 20% stake in Ospraie in 2005. Fuld clearly didn’t “do macro”, so how can you blame him for Ospraie being down -27% in August. At least he can’t blame and fire his former CFO, Erin Callan, again – she’s left the Lehman building and now oversees hedge fund strategies at Credit Suisse First Boston. Nope, I can’t make that up either.

As global growth slows, the levered bet on global commodities pops. As commodity levered hedge funds liquidate, the commodity “prop desks” at US investment banks have to de-lever. As the world de-levers, the velocity of capital markets screeches to a halt. Asian growth slows, their currencies break down, and all that “Sovereign” cash begins to de-flate.

Incidentally, that’s my answer as to why the US market had a nasty intraday reversal yesterday…

All the while, the men running Citigroup, Lehman, and the US Treasury, are the ones who oversaw and oversee these global proverbial storms. Pandit at Citi blew up a hedge fund; Fuld’s news is on the tape; and Paulson’s Goldman Sachs is getting banged up all of a sudden. Maybe we should get these three “leaders” of what used to be American Capitalism some of them CNN red hurricane jackets and put them out in the “field” to report on this situation live. Maybe we shouldn’t… that would really be embarrassing.

The world economy is as interconnected as it has ever been. This storm is real, and “global this time”, indeed.

Good luck out there weathering it,


If you’ve been following Atlantic City for awhile I’m sure you’ve heard the “under roomed” description tossed around quite a bit by managements and analysts alike. Similar to Las Vegas’s investor tag line, “new supply drives visitation”, the description is starting to ring hollow. Harrah’s Atlantic City opened its new 961 room Waterfront Tower in May and Borgata (50/50 JV between BYD and MGM) followed with 800 rooms at The Water Club in early June. Market implications were not positive in terms of RevPAR or gaming revenue.
  • As can be seen in the first chart, Atlantic City market RevPAR fell 6% in Q2. Harrah’s and Borgata fared even worse, suffering cannibalization to the tune of down 7% and 16%, respectively. Q3 looks even worse considering both towers opened after the 2nd quarter mid-point. On the gaming side, the market gained nothing from almost 1,800 new rooms. Contrary to the commonly held wisdom that new rooms bring new visitors, market gaming revenue fell 7%. I understand that AC continues to battle new competition from Pennsylvania, but the June/July decline was more severe than the YTD drop.
  • If Borgata is benefiting from the new tower, it is hard to see it in the numbers. The huge RevPAR decline and flattish June/July gaming revenues do not bode well for an acceptable ROI, despite the quality of the facility. On the other hand, Harrah’s posted a solid 20% gain in July gaming revenues following only a 5% June increase. For its 4 properties combined, however, gaming revenue actually fell 1%, once again bringing cannibalization into consideration. The guys at TRMP have to be sweating a bit following this weekend’s opening of their 782 room Chairman Tower.
Market and properties not absorbing new rooms
No market gaming revenue growth from new towers

real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.