Despite my view that the consumer would not notice if half of JNY’s portfolio ceased to exist, I was not expecting such a meaningful 3Q miss. In tearing it apart, it’s interesting to see that sales were decent enough relative to expectations – with no sequential erosion in aggregate versus 2Q levels. Gross margins were quite good, actually, as the company continues to decimate its moderate apparel business. But unfortunately it delivered SG&A by over 300bp. I think that the current management team is doing the right thing by investing in a portfolio that has long been ignored and undercapitalized by the former CEO. Unfortunately, keeping such discipline makes for painful deleverage on the way down. Even more unfortunate is that my confidence that JNY’s EPS will ever poke its head above $1.00 is close to nil.
I’m less concerned about JNY this morning as I am with how the market will take the rest of the group out back and shoot before aiming. Some will be justified, while others will not. Here are a few standouts…
1) LIZ: forever JNY’s top comp, it is almost a mathematical certainty that LIZ will trade down today. I’m buying into that. The key part of the LIZ story that people don’t seem to appreciate is that the company is cutting capex – potentially in half in FY09 – as it slows growth meaningfully and corrects margin. With a 42% SG&A ratio – to JNY’s 28% and industry norm of 35% -- we should see cash flow accelerate meaningfully in FY09. I like this name at current levels.
2) RL: Am I increasingly worried about wholesale sales? No. But Europe (near 1/3 of sales) is more of a concern for me given the sheer uniformity we’ve seen across Europe across all consumer spending categories (note Burberry on Monday). I still think that numbers are too low for RL, but my confidence level in the ‘smoking expectations factor’ has come down a notch. If RL simply hits the consensus, then even though it is sub-6x EBITDA that’s not cheap relative to other names in this new valuation paradigm.
3) VFC: VFC is unlikely to tank the quarter on Friday. Jeans business is hanging in just fine, Outdoor business is losing share on the margin to Columbia in the sporting goods channel, but is being shifted to TNF’s company-owned stores (which scare me). Acquisitions help this quarter as well. But starting in 4Q there WILL be a meaningful deceleration in top line due to acquisitions and FX, and cash flow compares get much more difficult. I still don’t understand how this name trades at 6.5x EBITDA in that context (several notches above all else). Is it the 3.7% div yield? I have to admit that I like that. But I’m still not owning this puppy at these levels.
4) PVH: Likely to get shot this morning. Given earnings risk associated with core men’s shirt and dress furnishings businesses, it should. I’m not comfortable going near this name without a 20% hit.
More updates later…