GIL: Storms a Brewing

Great analysis here by my top Lieutenant, Casey Flavin, on some implications of the hurricanes on Gildan. We’re clearly running ahead of the ’06 and ’07 pace for storm activity. Gildan’s overseas operations import the majority of cotton (35% of COGS) from the US. Texas, Arkansas and Georgia are the top three cotton-producing states, and we’re starting to see gulf port cities evacuate in advance of Ike. Gildan is already facing macro, industry, and company pressures that I think will intensify and pressure margins that can't support valuation – that’s the real long term call. But after being hit with issues at its Dominican Republic ops last quarter, any form of import disruption to Honduras plants would not be a welcome development.

Brian McGough
  • We are in the midst of peak hurricane season and with Ike bearing down on Texas, it was announced this morning that Galveston and parts of Houston will begin evacuating at noon today. With the memory of Gustov only days old it might seem as if hurricane activity is high this year, well it is. Pressure readings in the tropical Atlantic in August among the lowest on record, an El Nino event that decreases storm activity unlikely this season, and above average water temperatures conditions are prime for an active hurricane season. As a result, forecasters have raised their outlook for major storms this season.

    We are not in the habit of making weather related call outs; however with above average activity so far, we believe there are points to consider.
  • Cotton: According to the latest USDA projections for 2008/09, world cotton production is expected to be down 6% from 2007/08 and U.S. production to be at its lowest in nearly 20 years. Given that Texas, Arkansas, and Georgia are the top three cotton producing states, severe storms in the southeast could further reduce supply and ultimately drive prices higher (note the projected path for Ike). Definitely a consideration for Gildan (GIL) given that cotton is about 35% of COGS, and the majority is imported from the US into its plants in Honduras. Also, given GIL’s Dominican Republic issues in its latest quarter, the last thing it needs now is any Mother Nature-induced supply chain disruption.
  • Shipping: A growing net export position and shift in grain demand for container ships have lead to equipment shortages in the Gulf. This makes it more challenging to catch up when disruptions occur, which have already happened due to Gustov. If more ports are forced to close over the next several weeks, shipment delays could impact companies that export goods or produce offshore.

    Casey Flavin
Most named storms form between the second week in august and the third week in October. Halfway through the 2008 season, we are almost on par with prior season totals (per NOAA).

Footwear: Negative Top Line Data Point

I’m not pulling the alarm yet. But if I am raising an eyebrow over this, I’ve gotta think that some retailers are too.

I’m not loving the incremental change in sales in footwear over the past 1-2 weeks. Keep in mind that footwear was noted as a standout category by many retailers when August sales numbers were released. But since then, sales have decelerated on a 1, 2 and 3-year basis.

I will NEVER get bent out of shape and pull the plug on any investment thesis over a couple weeks of data. I know that inventories out there are clean, and the channel can stomach a slight inventory build. But if I am raising an eyebrow over this, I’ve gotta think that some retailers are as well. Let’s watch this real closely over the next few weeks.
Source: NPD FashionWorld

Liquidity Watch: Revisiting the TED Spread

Treasuries are rising on Lehman jitters, LIBOR won’t budge

The spread between closing 3 Month Treasury Yields and Libor are at the widest level since July. As short term borrowers like the team at Lehman can tell you –in this market those that have liquidity are demanding payment from those that require liquidity.

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PNRA - A VERY favorable CHART!

In addition to a more favorable commodity trends, the company cut capital spending to maximize returns over the next 12-months.


On 8/18/08, I wrote a note on LDG titled California Dreaming. In that note I said;

“In short, selling a company’s undervalued real estate creates an enormous tax burden, which limits the cash available to maximize value for shareholders. I truly believe that Bill Ackman knows this, and I have yet to see a structure from him that would get around the tax issue completely.”

Yesterday, LDG offered these comments in a filing;

“The Company’s owned properties were acquired over the life of the Company and, as such, have a low tax basis. Accordingly, if the Company were to sell these properties outright or in a sale-leaseback transaction it would incur a significant tax liability in doing so. The Company determined that, taking this tax liability into account along with the transaction fees, the after tax proceeds from the outright sale of its owned real estate would not offset the loss of income from the sold properties and that the sum of the amounts that the Company could obtain from the sale of its owned properties and operating business separately would not exceed the value of the consideration offered by CVS. Similarly, that if the Company were to lease back these properties that the capitalized value of the increased rent and property tax expense payable over the lease terms would more than offset the net proceeds of the sale (i.e., after payment of the tax liabilities and transaction expenses) and would accordingly not increase the consideration that an acquirer would pay to acquire the Company.”

From this we can rule out another bidder to take advantage of LDG’s undervalued real estate! Where do we go from here? I believe that it’s unlikely that WAG is going to out bid CVS. So who else wants to buy an underperforming drug retailer? WMT? I still have yet to see a sum of the parts analysis that values the company above $71.50, but WMT has the cash to pay more if it wants to.

Wal-Mart Stores is getting ready to open its first Marketside store in Phoenix, AZ. Apparently, WMT is also looking for locations in Southern California. According to the Financial Times, Wal-Mart has applied for a liquor license for a Marketside unit in Oceanside, a coastal city north of San Diego — a couple of miles from a Tesco’s Fresh & Easy. Marketside stores are modeled around a 15,000-20,000 sq. ft. box and will offer fresh foods and prepared meals. I mention this because the average LDG store is also about 20,000 sq. ft. so LDG’s current stores could fit perfectly with WMT’s Marketside store strategy.

Relative to the market capitalization of WMT, buying LDG is a drop in the bucket. With WMT outperforming TGT and the stock on the new high list, the distraction of buying LDG would not sit well with shareholders.

Allergan (AGN): Bullish headache data on the tape this morning

My Partner, Tom Tobin, who runs our healthcare business, will have a note out on this later on. Bottom line is that this is a positive incremental event for Allergan. Bottom line is that this is a positive incremental event for the company. My short term upside target is $57.83. We are long it in the Hedgeye Portfolio.
  • KM
chart courtesy of

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