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Finally, A Fed Member Who Agrees With Me On Something!

From our friends at Street Account who do a great job intraday!

9/03/2008 12:21:27 PM "Boston Fed President Rosengren says US unemployment rate may rise above 6%"

I'm continue to be in print with an estimate for the US Unemployment rate to hit 6-7% by the end of 2008.

Stagflation remains, despite the selloff in commodities.
KM

US Dollar Is Finally Overbought

Here's a chart of the +9% move that the US Dollar had since July 14th.
  • In our "Hedgeye Portfolio", I shorted the US$ via the UUP (etf) yesterday at $24.17
    KM
chart courtesy of stockcharts.com

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...


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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.
KM

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.
KM

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…


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