- The first chart is US chicken production as a percentage of the total estimated US population since the depression. The industry is losing millions every day and there has been no real change in capacity. This can’t continue!
- The second chart is the per capita estimates that the National Agricultural Statistics Service team prepared. Do you think we eat enough chicken? Also, per capita consumption is clearly on the decline. The theory of trading down to chicken in a slow economic environment looks to be a myth.
- The excess capacity of broiler production in this country is staggering. It’s going to take a massive cut back in capacity to fix the supply issues. The question is who will blink first? The answer lies in the balance sheets….
My point here is that retail is trading at 7.3x EBITDA. Yes, that seems cheap at face value if we look back 5 years. But taking a historical view I can easily argue anything between 4-6x.
This remains a stock-picker’s space. I like RL, FL, LIZ, TBL, KSWS, PSS and ZK. I don’t like GES, WRC, SKX, GIL, DKS, PVH, and VFC.
- We can’t even blame this on the fact that it is government data, which has historically been mediocre. The second chart maps the inventory/sales trend for public companies versus the US retail universe as defined by the government. Pretty close.
- Yes retail is more mature now than it was 15 years ago. Yes there are better inventory management systems in place today versus the 1990s. But neither of these hit critical mass in 1Q07. What did happen in ’07 is that much of the margin benefit from sourcing and quotas went away. Then several quarters later the consumer turned down. We saw inventory cuts, and we saw them big time.
- Then we had rising input costs. Now we’re faced with a strengthening dollar. Both of these last through ’09 at least in my opinion. In fact regardless of the consumer, I think we see this sourcing pressure (due to supply/demand imbalance out of Asia) through at least 2010.
- We’ve all heard management teams say “we’re managing our business conservatively in this tough retail climate.” In other words “we don’t have a clue what sales will be like, so we’ll err on having less tied up in our supply chain.” A defensive strategy, but not one that promotes growth.
- I still think that the bifurcation between winners and losers in this space will be massive heading into ’09.
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According to the FT, Dick Cheney, the US vice president, pledged on Thursday that Washington would stand behind Georgia, helping rebuild the country’s economy and promoting Georgian efforts to join NATO to protect against Russian aggression. If I’m a CEO of one of the major chicken processors in the US, I could not be happy with the Bush Administration. If Putin is punishing the US chicken processors because of our stance on Georgia, the future of that export market can’t be good.
Today in NYC, the CEO of SAFM said the loss of Russia as an export would be devastating to the industry. We also learned today that TSN is increasing its liquidity position by selling equity. Why would TSN be increasing it liquidity position as this point in the cycle? Interesting timing on the part of TSN!
I’m taking the cynical view of this move….
Of course, in this business, bad team's point fingers when they are losing - so this emotional response is not a surprise. What is a surprise is that people refuse to respect the math. See the two 10 year charts below that overlay Europe's reality - stagflation.
There is a reason why Paul Volcker raised rates in a stagflationary environment. It's the only way out!
The gap between sales growth and comp growth for US retail has widened by 4 points in 14 months ending August. What does that mean? Either a) new store productivity is knocking the cover off the ball, or b) square footage growth remains unchanged despite ominous signs that square footage growth is too high. I think we can all agree that it’s the latter.
We’re at a critical juncture. Looking at the past two recessions (90/91, and ’01) as well as 4 other notable consumer slowdowns (’94-’95, ’97, ’03, ’06), we’ve never seen this gap widen consecutively by more than 15 months. Something’s gotta give. Either a) the consumer needs to pick up, b) square footage growth needs to slow, or c) productivity continues to erode.
I’m hoping for option ‘B’. But as we say here at Research Edge, ‘Hope’ is a lousy investment process.
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