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GES gave the bulls and the bears each a little to chew on this quarter. After stepping back and objectively reviewing the story, I’m still in the bear camp.

Let’s state the obvious… How could you not like the income statement algorithm? Sales +33%, GM +42bps, SG&A ratio -80bps, and EBIT growth +43%. Inventories were very much in check at face value, with day’s inventory down 12.6 days vs. last year. The balance sheet is clean, the brand is strong relative to competitors, and this company can seemingly do no wrong.

But what concerns me? I have a few nits on the quarter, and then one much more meaningful concern.

1) The quarter included $0.03 per share in revenue that was pulled forward in GES’ European business. On top of an aggregate $0.04ps FX benefit (though I think it was much more) that accounts for most of the $0.08 beat.

2) GES tempered guidance for 2H – largely due to shipment timing. This is perfectly legit, but it is also the same time the company hints at FX risk in a separate part of its call. Management went as far as to say that the 1H09 benefit may need to be removed from FY10 (Jan) estimates.

3) This is also the same time we’re seeing Euro zone retail sales down 2.8% and the region slip into recession. Not immaterial given that Europe accounts for 40% of sales and nearly half of cash flow.

4) Stepping up investment in China? I posted something today on Skechers and Coke discussing the irony of how they are investing capital in China AFTER a 20% run in currency.

5) North American Retail comps looked good at +8%, but margins were down 134bps, and non-EMEA wholesale was down 3 full points. Remember that 80% of its US stores are located in travel markets. What happens when the translation benefit wanes, and Europeans stop coming to the US for ‘shopcations.’

6) The biggest concern I have is in the Exhibit below, which suggests that FX revenue is flowing through the P&L at an unsustainable rate. Yes, the company says that the EBIT impact from FX was just under $6mm, or about 23% of EBIT growth. That’s big enough in my book. But when I take a basket of currencies (Euro, Canada, China) and apply appropriately to GES’ mix it gets me to gross FX revenues of $31mm, or about 800bps of the 33% sales growth in the quarter. When I look at that number vis/vis the incremental EBIT contribution vs. last year of $26mm, it paints a different picture. Yes, there are higher COGS and SG&A costs associated with this revenue. But in the last two quarters alone, the FX revenue contribution was greater than the incremental EBIT. If the FX revenue really is being booked at a high-teens rate as management suggests, then what does this say about the rest of the revenue base?

There are just too many parts of this story that smell to me like they are unwinding. Am I saying that the earnings stream is going to crash and burn? No. But with all ‘Buy’ ratings, expectations for 20% EBITDA growth for the next 2 years, and stress fractures that I think should start to show in what has been viewed as a low risk global retail growth story, I come away in the bear camp at 9x EBITDA.