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Challenging My View On Margins

Trough to peak apparel margins more than doubled from 6% in 2Q01 to 13.2% in 3Q06. Impressive run indeed – almost as impressive as the six-point collapse to 7.1% over the ensuing 7 quarters.

When I objectively look at the chart below, I have to ask myself whether the industry has officially round-tripped it, and margins have bottomed. As much as I want to believe this to be true, I can’t bring myself to believe that the late 1990s serve as an appropriate proxy for what real margins in this industry should be. My long standing math suggests that after adding the $3-$5bn in annual sourcing savings as well as the favorable impact of the weakening dollar, real margins were actually down over the past 4 years.

We still have not seen a) the full impact of the raw material cost hit that will happen starting in holiday, b) FX benefit that will turn the other way and eat into the supply chain’s margin kitty, and c) the additional names likely to be added to the bankruptcy honor roll.

I truly think we’re getting to the bottom for some names, but the industry still needs a healthy session of blood-letting. On top of all that, expectations still call for up margins in ’09. Not gonna happen…Favorites remain KSWS, LIZ, RL, FL, TBL, PSS and ZQK. I don’t like GES, WRC, SKX, GIL, DKS, PVH, and VFC.

Lehman (LEH): No Government Bailout For Fuld...

With Paulson tying the US government's balance sheet up with the GSE's and a dance with the FDIC pending, investors are wondering when, where, or if there is capacity on the balance sheet to deal with another investment bank’s issues... LEH closed down -13% today on more than 2x average daily volume (using the last 10 days of trading as the avg). Someone knows something.
  • LEH's short term downside support now rests at $12.65
    KM
chart courtesy of stockcharts.com

Eye On Puting Power...

(CNN) -- "Russian ships will make a port of call in Venezuela later this year, and the two nations could hold joint naval exercises for the first time, both sides said"

  • link to story: http://www.cnn.com/2008/WORLD/europe/09/08/russia.venezuela/index.html

    Andrew Barber
    Director
http://cache.daylife.com/imageserve/0axo23w6fsgPV/610x.jpg

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China: The Chart People May Have Missed This Morning...

The Shanghai Composite Index didn't care much about the US government's latest bailout scheme. Chinese stocks lost another -2.7% overnight, taking the index to fresh lows at 2143.

Chinese growth is slowing, and the locals know it. Don't forget that post Japan's Olympics in 1964, their annual GDP growth dropped from +13% y/y to 5%.
  • China's Stock Market has lost 64.8% of it's value since the October "It's Global This Time" high.
    KM
(Chart courtesy of StockCharts.com)

The UK Finally Prints A Downtick In Inflation

Producer Prices in the UK for the month of August came in well below expectations. In fact, this was the largest sequential (month over month) drop in prices in 22 years (see charts below).

Dropping -0.6% sequentially is better than bad, but it's important to keep in mind where these prices are falling from! The charts below show 1 "Trend" line inflation. Output prices are still close to +10% year over year.

Europe is starving for relief in headline economic reports however. This should feed them, for a day.
KM

MCD – EVERY QTR MCD GIVES AWAY FOOD!

Sunday newspapers are the coupon source for more than half of American households, according to Scarborough Research. Many companies have responded to sluggish consumer spending by boosting the volume of "coupon drops" in Sunday newspapers around the country. During the first six months of this year, manufacturers delivered more than $173 billion in consumer incentives through 129 billion coupons in Sunday newspapers nationwide. Retailers' participation in freestanding insert promotions increased 31.3% YoY.

A McDonald’s “Flavor Saver” coupon Book was in this weekend’s NY Times -8 individual coupons in English and Spanish. The NYT Sunday circulation is 1.6 million. The coupons are for:

$2 off: Southern Chicken Sandwich extra value meal ($1 off in Manhattan)
$3.49: 20 pc Chicken McNuggets ($3.99 in Manhattan)
$2 off: Angus Third Pounder Extra Value Meal ($1 off in Manhattan)
Two Coupons: Buy any Bagel or McGriddles sandwich get a second free
$1 off Southern Style Chicken Biscuit
Two Coupons: Buy any Large Sandwich (Quarter Pounder with Cheese, Big Mac) and get a second free

Couponing is never good for profitability, but it’s clearly a sign of the times.

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