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SKX: Misery Loves Company

At least Skechers has good company in announcing announces capital investment in China AFTER a 20% run in the Yuan. The narrative here is scary…

I think Skechers’ announcement that it is expanding its Asian JV with the Onwel Group is another nail in the coffin for this story. Let’s add this to the narrative of its growth slowdown… A) Shift in fashion towards low profile propels margins from 0% to 9%. B) Low profile growth slows after four years. C) Takes next leg of growth overseas. D) SKX becomes more litigious, suing a smaller brand after years of fighting against economic harm from knocking off styles. E) Opens up more company-owned retail stores to get product to consumers despite less interest from retail. F) Broadening wholesale distribution to more marginal channels (Goody’s, Mervyn’s). G) Bids for Heely’s. H) Now it grows more aggressively into Hong Kong and Macao with a goal to triple sales there in 3-years. Maybe they should have thought of this 3-years ago before a 20% run in FX? FX moves are always hindsight 20/20, but this is another example of a poorly managed company in this space deploying capital reactively. Proactive always wins in my book.

The biggest plus is that its partnership could secure it better capacity in an environment where plant space is becoming extremely more difficult to find. But this is not a positive – it simply helps mitigate a potentially massive negative.

Also, it was announced within a day of Coke offering a 195% premium for Huiyuan Juice Group.

Maybe Skechers and Coke borrow each other’s Macro analysis….
Investing in China at the top!

Unemployment Trends In Japan: Where's the next big move going to be?

The glass half full crowd got thrown a bone by a slight downtick in unemployment numbers in Japan this week. To better understand the employment environment in Japan you must factor in the “Haken” – a chronically underemployed class of young people created as the government introduced regulatory changes over the past decade that made it easier for employers to hire through temp agencies and short term contracts.

In 2007, the Ministry of Internal Affairs estimated that there were 3.3 million people aged 25 to 34 working as temps or contract employees – put in context that is over 4% of total working age population (15-64).

As major domestic employers like Toyota start to reduce capacity these workers will be the first to go, and even those lucky enough to stay employed will feel rising inflation faster and harder than the fully employed.

Andrew Barber
Director

An Ugly Chart Gets Uglier: Japanese Stagflation...

The scariest thing about this chart is that the US one can start to look a lot like it, soon.
Below we have overlaid Japanese inflation with their easy money interest rate policy.

KM
(chart by Andrew Barber, Director - Research Edge LLC)

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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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