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The ‘Forever Perplexing’ Bid

‘Forever 21’ stepped in as the first bid 149 Mervyn’s stores. This is bizarre on many levels. If it goes through, there’s impact on several others due to competitive overlap.

For those that do not know Forever 21, it is a fast-fashion retailer targeting trendy teens and 20-somethings (but as usual skews higher). The product sells at prices up to 80% off comparably designed product elsewhere in the market. Is the quality the same? No way. But the customer is one that buys the product, wears it 5 times, and then uses it as a car wash rag.

This has ‘disruption’ written all over it. Consider the facts.

1) Forever 21 has 430 stores, and is looking to buy 149 new ones. This is a lot to digest.

2) Mervyn’s average store size was 80,000 square feet, while Forever 21’s stores are 10-20,000 sq ft. It has one larger format flagship store – but even that is only 40,000 feet. Expertise here in mega-box formats is nil – and launching 149 at once? What are they thinking?? Maybe the plan is to partition off half the store and sub-lease, but that’s not my read thus far.

3) Note that this company’s past acquisitions have been smaller in size. It bought both Gadzooks and then 44 Rampage stores from Charlotte Ruse in 2005.

4) Korea funding what the US market can’t. I don’t see how the company can afford this on its own. This is a small growth retailer with about $1.3bn in revs, $200mm in EBIT, and not a whole lot of free cash to speak of. With such poor accesses to capital, how is this possible?? We can’t even hide behind the ‘lease everything’ argument, because 60% of the real estate is owned. Unless there’s a complex sale-leaseback transaction, this thing will be tough to fund. I guess that’s where support from Korea comes in. That’s where CEO Do-Won-Chang founded (and funded) the chain as the first store’s Clerk, Janitor, Buyer, and Salesman (credit where it’s due to his success). That checkbook in Korea runs deep…

5) Who can be impacted? Check out the pic below. We ran the analysis on what percent of each retailers’ stores fall in a 1, 3 and 5 mile radius to one of the Mervyn’s stores. We included footwear retailers – as 15% of Forever 21’s sales come from (extremely inexpensive) footwear (look out DSW). The bottom line is that Wet Seal, Ross Stores, and DSW have the greatest overlap. Aeropostale, American Eagle and JC Penney are next in line.

Alcoa (AA) Kicks Off EPS Season With A Punt

So is Alcoa a cyclical?

After falling over -60% since the "Fast Money" mania bought everything "that hurt if you dropped it on your foot", I think the answer is implied. Alcoa missed earnings big here on the close. They are "suspending" their share repurchase program. Some of these management teams only buy back stock at the top, fancy that. Embarrassing.
  • Next support is $13.27
    KM
chart courtesy of stockcharts.com

Cold Chill: A Russian bail out facility for Iceland

Why does Island, a nation of 300,000 with a GDP of only $20 B matter? As the son of the former commander of the army of Iceland -a ceremonial title formerly assigned to the highest ranking NATO army commander on the Island at any given moment , I have some quick insights:

• Iceland is the only member of NATO that does not have a military.
• Through a long standing treaty the United Stated is bound to defend the sovereignty of the tiny island nation against any aggressor.
• The US shut down our cold war base at Keflavik in 2006 and no longer hold a lease for permanent facility there.
• Iceland holds a critical a strategic position in the North Atlantic, overlooking Russia’s only outlet into that sea.

Apart from the absurdity of the level at which the Icelandic government are attempting to peg their currency at the level they have chosen (the chart attached below show the official exchange rates, dealer banks have reportedly shown levels as much as 30% lower than the lowest level quoted here over the past 2 days) the Russian bailout also has to be leaving EU and NATO leader with knots in their stomachs: with Putin employing the Chavez method of diplomacy through distressed lending they must now consider the formerly unthinkable possibility of a Russian presence in the North Atlantic.

Andrew Barber
Director
Research Edge LLC

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TYPO: SP500 Levels

1022 was the 3pm price, and 1004.33 is our buy/cover for a "Trade" line.

My typo, appologies.
KM

Refreshing Our SP500 Trading levels for the close...

As our business grows and we move to more tailored Macro relationships with our core constituency of RE Macro clients, we need to continue to improve how we express our investment process.

See the chart below. The code is simple: red is bad, green is good.

Our overhead "Trend" line for the SPX is 1196.04.
Our buy/cover for a "Trade" line for the SPX is 1104.33.
Our sell/short the bounce line for the SPX is 1127.55.

Our quant models refresh every 90 minutes. These levels incorporate a cash price in the SPX of 1222 at 3PM.

Be patient, but realize that there is plenty of performance to pick up if you trade this volatility well. Process trumps emotion.
KM

Morgan Stanley down -31% right now; but where are the evil doers?

At $16/share, this is a lower low than the price we saw when John Mack had his Braveheart call to arms (and meeting with Chris Cox) against his prime brokerage clients and short sellers at large...

Could institutions who are long the stock be selling it? Shhh... don’t tell anyone.

As MLK said, "a lie cannot live".
KM

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