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Trend Nuggets: ANF, JWN, GPS, LTD, GES, RL, URBN

I never make fashion calls – ever. Not my place, nor my skill set. But I can’t turn a blind eye on what’s selling. That’s why I hired an expert whose opinion I trust implicitly. Here’s some scoop...

His view from the field…
HOLLISTER:
The stores are stocked with all the Hollister basics: the usual surf influence, short sleeve polos, cargo pants, plaid woven shirts, and witty text print shirts. It works, but I think it might be time for a change of pace…store traffic was almost non-existent. B-

ABERCROMBIE KIDS:
Abercrombie never disappoints with their colors. I think the wall of buttery yellows and creamy whites next to shelves of soft pinks looks extra appetizing. Abercrombie also has new fixtures and visuals that enhanced their basics. Abercrombie is increasingly shifting to a trend of season-less merchandising…they offer tanks, short sleeve knits, shorts, and denim minis all year round on the selling floor until late fall. It’s a bit too much of the “same old, same old.” B

ABERCROMBIE & FITCH:
When you enter the store, you are greeted by new display fixtures showcasing tank tops in 25 different colors. It takes the “same old, same old” and gives it a boost and shows off what A&F excels at – color. There are not enough prints; bordering on nonexistent. A rare mistake.

Classic navy blue is the most important color in the store (all mannequins are dressed head-to-toe in layers of navy. Abercrombie’s assortment includes all the classics, such as ribbed sweaters, knits for layering, plaid woven shirts, and polos. The most beautiful pieces are done in sophisticated neutral colors like stone gray and oatmeal…it keeps the merchandise modern and salable. I also see a return to destroyed denim; many jeans have rips, holes, and fading treatments…all well done. I’m impressed by the uniqueness of the distressed denim, but the denim division has the same disease that all the other divisions have…they look good, but nothing new. B-

RUEHL:
Ruehl is still more sophisticated than Abercrombie & Fitch with better fabrics and more upscale details, but yes, key best sellers from other divisions are also used in Ruehl with a bit of tweaking. Ruehl’s color story consists of deep colors (though not enough black) in vintage washes, perfect for fall. To become a major player Ruehl needs to have a bigger differentiation from the other divisions. B-

NORDSTROM MEN:
Rock & roll continues to be a major trend for fall; even making an appearance at the high-end men’s departments at Nordstrom. There are plenty of cool graphic T-shirts, skinny dark denim, and rugged leather jackets; near the cash register is a table of colorful sunglasses. At $10 a piece, the sunglasses are the perfect impulse buy to complete any rock & roll outfit. Beyond rock & roll, newness is hard to find at Nordstrom in both the men’s and women’s area. C+

GAP
There are some obvious tries to grab a trendy customer, like with Gap’s ruffle-front blouse for women, but bad color, poor fit, and outdated proportions crush those attempts. And again in Gap, I ask myself “where are all the cool things and slim fits we see in Gap Japan?”…Huge disconnect between Gap Japan and Gap America. In America, Gap pushes the same old pant fits: the low rise straight (their “new favorite”), the relaxed fit, and the straight. Does Gap know that the cool guys that are spending money on clothes in a tough economy are buying their pants slim and skinny and slim like in Tokyo? Putting some skinny jeans with all those sloppy tops would make a more interesting pairing than sloppy tops with sloppy bottoms. In men’s there are sloppy hoodies with a waffle knit lining for $79.50 Do we want to look like college students that can’t do any better? Not at all. In kids (another example of a literal gap) some of the items are actually cute! And they have nice clean colors for fall like navy blue, red, and platinum gray. Gap kids also hits the mark with clean wearable plaids and basic salable stripes…perfect for little Mr. and Mrs. Average, but it’s a check year. Where are all the checks? C-

BANANA REPUBLIC:
Everything at Banana Republic looks okay…and just okay; nothing spectacular. Do I want to buy anything? Nope. Maybe next time… C-

VICTORIA’S SECRET:
Victoria’s Secret Pink looks great with fresh ideas (like the Collegiate Collection), graphics, details, and colors. The current color story makes everything looks extra enticing with soft heather fabrics (from heather gray to heather pink and heather green) and a shocking touch of neon. We give them an A. Victoria’s Secret lingerie is more of the same…we have seen it all before. C-

EXPRESS:
The stores are very inconsistent. There are some good things and there is the same amount of bad things. All of it has an edge of sleaze. Boring denim and loads of markdowns bring the store down. C-

GUESS:
The Guess people are smart people. The store is full of good ideas. I love: the lightweight sexy fabrics, the interesting placed prints, the touches of shine, and the excellent denim finishes. The bling-bling people do it again. B+

URBAN OUTFITTERS:
I can understand why Urban Outfitters is the favorite store of people that are hip and cool. The store is ready for fall with right colors, silhouettes, prints, and patterns. Key pieces for both men and women include: the plaid shirt, the long cardigan, and skinny jeans. Adding to the Urban Outfitters success are the mini boutiques of capsule collections. Designers like Steve Alan, Charlotte Ronson, and Geren Ford create lines exclusively for Urban Outfitters. These capsule collections make contemporary designs, usually sold at retailers like Barneys and Saks, affordable for the average college student. Urban Outfitters is an A+ store.

FREE PEOPLE:
It’s a treasure chest of quirky details, delicate fabrics, and eccentric designs. Free People is one of my favorite companies right now. The designers are very clever with mixing prints and fabrics; always two steps ahead in offering the customer something new and different. Though the overall aesthetic may seem a bit overwhelming, Free People anchors itself with a wonderful color story of earth tones and neutrals. Items such as lace dresses, distressed denim, and cowl-neck sweaters are very right for the season. A

ANTHROPOLOGIE:
With their one of a kind visuals plus unique assortments of merchandise, Anthropologie continues to prosper. A true lifestyle store, offering everything from shower curtains to “boyfriend” cardigans, Anthropologie is one of the few retailers to excite their customers. Fashion forward trends like menswear pants and bowtie blouses, as well as current trends like ruffle blouses, painterly prints, and pencil skirts can be found in the store. Anthropologie has also launched a new line – Liefsdottir (think: a grown up Free People for wear-to-work) sold at Anthropologie stores as well as Nordstrom, Bloomingdale’s and Bergdorf Goodman. A-

CLUB MONACO:
The winning streak continues! The visuals are outstanding, the overwhelmingly gray color palette is absolutely right, the shots of color are exciting, and the prints and garment details are on target! Very solid. A+

WHITE HOUSE/BLACK MARKET:
I think these stores are looking a bit old-lady, but hey, there is a population of old ladies with money to spend. White House/Black Market does a great job of borrowing ideas from high-end designers (Oscar de la Renta and Chanel) and contemporary designer such as Alice & Olivia. Sophisticated yet wearable silhouettes and details are available to customers attempting to be a little bit more fashion forward. I think they have great black & white prints; in patterns from animal to floral and abstract…it all looks very sharp and classic….but no, I did not like all of it. B-

NO SURPRISE: UNEMPLOYMENT CLIMBS

Payroll data came out this morning with the largest increase in five years –as we noted on the 25th of September, this increase was anticipated. The average hourly wage was up slightly, signaling that the trajectory of wage inflation, though cooling, is still injecting pressure into the system.

MCD - Follow up the previous post.

The chart on the $$$......

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PENN: A MERE FLESH WOUND

PENN’s pre-announcement looks worse than it is due to Hurricane Gustav and significant pre-election lobbying expenses. However, business is not good for PENN or any gaming company for that matter. Excluding one-time expenses of $18 million, PENN took its EBITDA guidance down about 8% for the quarter.

But let’s be realistic. No one should own PENN for near term earnings results. One owns PENN because it is well managed and very cheap, even on new numbers, as investors lump it in with the overleveraged gaming operators. Unlike PENN, the competition lacks the liquidity to actually take advantage of increasingly attractive acquisition opportunities. At only 2.5x leverage, PENN and its ROI focused management team has the powder to lever up while most of the other guys are scrambling to de-lever. That means the competition is cutting costs and services and not investing for the long term. The line between the haves and the have-nots is clearly drawn and PENN is on the right side of that trend.

As I write this PENN is trading off 15% and down 41% from its recent high just one month ago. To me this is a gift. While there isn’t a definitive near term catalyst, it is not often one gets to buy into a very well managed company as strategically and financially well positioned as PENN for 6x EBITDA.

PENN trading at historical low valuation

MCD – When I see MCD accelerating expansion……

This story appeared on Reuters today:

“Poznan, Poland, Oct 2 - Fast food giant McDonald's Corp will speed up its expansion drive in Central and Eastern Europe to tap into the region's vibrant growth and increasingly affluent middle class, its No. 2 official said.

Over the last several years, McDonald's has not grown significantly in Europe's emerging economies such as Poland or Romania as it focused on improving its image in the continent's more established markets, such as France and Britain.

The group plans to invest another $1-$1.1 billion in its European restaurants next year, McDonald's President and Chief Operating Officer Ralph Alvarez told Reuters in an interview at a newly remodeled restaurant in Poznan, western Poland.”

Given we are now in fiscal 4Q08, MCD senior executives have nearly, if not completed the budget for 2009. The budgeting process at MCD is a bottom up aggregation of profit growth from around the world. Since I don’t believe MCD is going to change its long-term sales and earnings growth rates, if growth is accelerating in Europe, it must be slowing in other parts of the world. Asia – I don’t think so. The U.S. – I thinks so.

More importantly, the dollar is going to be a headwind for the first time in three years. The headwinds continue to build for MCD. I took the chart on the dollar from Farmprogress.com
  • The $ headwinds will be steady in 2009.
A view of MCD Europe

Happy Hunting

According to the Economist’s September 27th issue, “there have been only 13 attacks by black bears resulting in injury (including one death) in the whole of North America this year. Grizzlies have carried out a further 11 attacks, resulting in no deaths. Neither species has averaged more than two kills a year since the 1950’s… there are 70,000 grizzlies and 900,000 black bears sharing the continent with 440M people… that puts bear attacks well below bee stings and lightning bolts as threats to human life…”

Bear markets don’t kill people. So let’s all take a deep breath this morning and relax. If you proactively prepared for this crisis, you are smiling at the opportunity born out of it. You’ve had your bear mace in hand. You don’t have to depend on the US jobs report this morning as your lifeline. You don’t have to pray that US Congress votes “yes” to bail you out. You don’t have to panic. You don’t have to run.

Everyone from the Canadian town where I am writing this note from this morning (Thunder Bay, Ontario) is street smart enough to know that the last thing you do when facing a growling bear is run. If your boss is screaming and running this morning, let him do that – right out the door. Goodbye and good luck. It’s not time to be pointing fingers at your teammates. It’s time for leadership. It’s time to buy low.

As we strap on the global bear hunter pants, we are waking up to a world that’s on sale this morning. From commodities to foreign currencies, the deleveraging and deflationary cycle is in full motion. The CRB Commodities Index has lost -10% of its value this week alone! Currencies from the Russian Ruble to the South Korean Won are running for the exits. Fertilizer stocks and the “smart hedgies” who bought them have been put out to pasture, and Jim Cramer’s buy everything Brazil call from the ‘You Tube’ archives of 6 months ago saw the Brazilian stock market lose -7.3% in one fell swoop yesterday! Sell high. Buy Low. Don’t run.

Asian markets got crushed again last night. As sure as the sun rising in the east, Japan was down again, losing another -1.9% of its perceived “value”. India got mauled by the bear and closed down another -4.1%, leading Asian markets to the downside, and stocks in Hong Kong lost another -2.9%. We’ve been patiently waiting on China via the EWH and FXI exchange traded funds. Prices pending, I may very well step up and buy them in the ‘Hedgeye Portfolio’ this morning.

European equities look less interesting to me than those in Asia, but more interesting than Mexico or Canada who have over 75% of their exports tied to the US panic room. European Central Bank chief, Jean Claude Trichet, is going to be forced to cut bait (interest rates) or dance with the bear himself. Europeans, unlike Americans, actually have some cushion to make some moves on the monetary policy side simply because they held onto their bear mace, and didn’t start running too soon.

On October 29th, expect the US Federal Reserve to do more of the same, and run from reality. They’ll cry wolf, play Japanese, and cut real rates to zero. Rather than providing leadership as lender of last resort, the Fed has been politicized. This is unfortunate, but it’s the truth.

We’re looking for solutions. We’re looking for opportunities born out of our competition’s internal crisis’. One of the ideas we have been suggesting is for Obama to bring in the 6 foot 7’ cigar smoking bear hunter, Paul Volcker. He wasn’t popular with politicians, but he was right. Running from this growling bear is not the answer. It’s time to stand up, cock the hammer, look this “Investment banking Inc” animal in the eyes, and pull the trigger.

Happy hunting,
KM



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