Clarification on COH from Tourist Post

Only $20mm/yr (<1% of sales) comes from the NYC flagship. The 12% previously noted is for TIF . The point about 18% of COH stores in travel markets is correct. Apologies for any misunderstanding.

Notable Cotton Development

Here’s a great cotton overview by Andrew Barber. It smells bad from an apparel standpoint (the trend, not the analysis!). India, which accounts for 15-20% of global cotton production, also has the lowest yield of any cotton-producing country. With 60% of the population (more than 2x the entire US population) tied directly to agriculture, and with social unrest building meaningfully in 2008 to a point that almost cost Singh the election, he needs to appease the masses. As such, he backstopped the cotton farmers with a 48% price increase vs last – despite the fact that India’s prices are already 15% above the global market price. The massive Indian textile industry is bracing itself as it has already felt the pushback from China and other major partners before this increase. I still think that the worst has yet to come from input cost pressure in this industry – nevermind the strengthening dollar. I sound like a broken record, I know, but next year’s estimates are still too high. I continue to like RL, FL, LIZ, TBL, KSWS, PSS and ZQK. I don’t like GES, WRC, SKX, GIL, DKS, PVH, and VFC.

Brian McGough

Last week the Indian Government increased price guarantees for cotton farmers by up to 48% over last season, creating a back-stop price of 3,000 INR per bale of long staple and 2,500 INR of medium Staple via the federally controlled Cotton Corp. of India. Cotton prices have already been under pressure as total hectares planted for this season declined 2% from last year as farmers shifted to food staples such as rice to capture skyrocketing prices. Critics are charging that this increase will raise domestic prices for cotton above the current global average.

A question of Yield: Manmohan Singh’s populist socialist government is obliged to provide this level of price protection to the nation’s 4.5 Million cotton farmers to maintain political support among the rural poor. For India’s farmers, every rupee counts: although improved technology (most notably the introduction of Monsanto Bt seeds) and irrigation have helped increase crop yields from 300kg per hectare five years ago to 560kg last year, Indian yields still lag every other major global producer significantly. Put plainly, Indian farmers realize smaller returns for their labor than their competitors abroad. In a socialist nation were 60% of the population is employed in agriculture that creates pressure for the government to intervene, particularly an administration that has barely survived a recent parliamentary vote.

Exports: India is the second largest producer of Cotton on earth but, thanks to its huge textile industry they remain a less significant player in the global export market than smaller producers such as the US and Brazil. Not surprisingly the biggest buyer for Indian Cotton exports is China, and rising prices and lower yields have already been felt by buyers there.

Textiles: The price increase raised howls of protest from textile industry groups. P.D. Patodia, chairman of the Confederation of Indian Textile Industry, was quoted in the Indian media on Thursday saying “It has come as a rude shock to the industry in the throes of a crisis; domestic prices are already 15% higher than international prices. This would trigger another price spiral which the industry will not be able to afford."

The textile industry argument is, basically, that the slowing trajectory of textile sales growth for Indian mills has been more than offset by increasing Chinese demand for raw cotton and that increasing the domestic price of fiber now will put Indian textile and apparel manufacturers at a grave disadvantage with competitors for their two key markets, the US –which has already provided preferential status to Central American producers, and Europe.

Andrew Barber

Unpack Your Bags

Yes, a stronger dollar hurts translation of foreign denominated profits. That’s a no-brainer to quantify. But what about the impact of weaker spending in tourist markets as the US becomes a more costly destination market for foreigners? We’re pulling out the big guns to nail down which retailers are most exposed. There are so many different angles to explore here that it will take many more hours of research to drill down all of the answers to the key questions. I’ll post ‘em as my team and I answer them.

Our analysis looks at every apparel and footwear retailer in the US – public and private – with more than 5 stores. We look at the exact lat/long for every single store, and gauge tourist exposure. We defined “tourist cities” based on the top 10 most visited cities by international tourist as defined by the Office of Travel and Tourism Industries.

Why include private companies? Because last I checked, many brands that are public sell goods in private retailers. Goody’s was private. So was Boscov’s. Get the picture?
Some notable call outs…
1. The top 7 companies are private – ouch!
2. Quiksilver and Tiffany at 44%.
3. Burberry (39%) and Hugo Boss (45%)
4. Adidas at 27% has 3x Nike’s direct exposure.
5. Ralph Lauren very notable at 37%.
6. Modell’s (important Nike, Adi, UA customer) at 30%.
7. Levi’s 28% (a desperate Levi’s puts pressure on VFC).
8. DSW – a company I think is terminal – is over 20%.
9. Coach surprisingly low at 18%.
10. Guess at only 24%, despite management’s comment that 80% of North American retail stores are in travel markets. This brings up the next factor for us to slice and dice. The difference in sales productivity for these stores versus non-travel market stores. We need to strip out outlets and look at the top producing stores only. Coach, for example, has only 18% of stores in tourist markets. But 12% of its sales come from its NYC Flagship store. The bottom line is that the percentages you see in the table below might understate the real revenue exposure.
The font is impossible to read, I know. Please click the chart for an enlarged version. For the data feed, email me.


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Middle Class Piggy Banks: Home Prices and Savings Charts Inflecting...

Below, we have overlaid the Case Shiller Home Price Index with the US Personal Savings Rate. As I have said many times before, we are aware of the imperfections of the savings rate calculation, but that's not the point. The point is always what happens on the margin. Rates of change is what I care about.

The US Personal Savings Rate went to 12% in the 1970's. Going from zero to half way there will be the first move, but all of the facts concerning access/cost of capital tell me we could quite conceivably see double digits again.


Eye On Social Unrest ...

South African CPI data released last week hit a record +13%, spurred on by rising energy and food costs. Bracketed by annual household expenditure, the numbers are even more grim. The more than 22 million people (50% of the population) living below the poverty line faced year-over-year inflation of well over 15% last month.

2008 has been difficult for South African industry as the hopelessly overstretched power grid has subjected factories and mines to blackouts repeatedly, causing foreign investors to cool on new projects. For a nation with an unemployment rate in excess of 20%, this is very, very bad news.

As the South African Rand depreciates versus the US Dollar, and domestic cost of living climbs for the residents of Sub Saharan Africa’s largest economy, so too does the risk of more ugly civil unrest like the riots this spring.

Its global this time, indeed.

Andrew Barber

TSN and PPC: Stay Short The Chickens

We recently spoke with the "Chicken Man", David Harvey, who oversees the poultry data at the National Agricultural Statistics Service, who said that the total number of chickens currently slaughtered on average in the United States equals approximately one million birds an hour. "That’s one million every hour, day and night, every day of the year”...

Andrew Barber has charted US chicken production as a percentage of the total estimated US population since the US Depression as well as the per capita estimates that Dave and his team prepared (see charts below).

Tops are processes, not points. This top in per cap chicken consumption is a pending tsunami for TSN and PPC, who we continue to be negative on. While I covered our TSN short position on a big down move on Thursday, look for me to re-short it on strength. For PPC, which I re-shorted on strength on Friday, I'm looking for $10.01 next (26% lower from Friday’s close). There are some big concentrated holders on the PPC shareholder list that may not see the fundamentals here that we do. That’s what makes a market, so we’re looking forward to the debate. Concentration on a holders list like this is a massive liability when company fundamentals begin to structurally unwind. If you own Pilgrim’s Pride (PPC) today, you must think it’s cheap and washed out. We think you think it’s cheap because you are using the wrong numbers.

See charts, courtesy of, below. Our restaurant/food/beverage Partner, Howard Penney, remains negative on the chicken processors. See his Research Edge Portal for more.

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