UA: Maintaining Dominance in Compression

I’m always fascinated by the market share trends in the Compression category – the place where Under Armour made its mark. The key call out above all else is that despite virtually every brand placing a massive bulls-eye on UA’s back, its share has held in remarkably well at about 76% of the space (which is still growing double digit, by the way). Nike stands at about 17% -- which represents a 2-3 point gain from a year ago (on a ttm basis) – proving that Nike is the only brand that could give UA a run (or a jog) for its money in the compression arena. The two trade off share points rather consistently (See Exhibit 1), but UA still maintains 4.5x the share as Nike at a time when Nike will incrementally shift resources toward combating UA in footwear. Bottom line is that UA remains squarely in the pole position here.

Perhaps the biggest point is that no other brand has greater than 2% of this space. No kidding… Adidas and Reebok own the NFL license, and have some other incredibly valuable sports marketing assets in the US (Notre Dame, The Yankees, David Beckham, Yao/McGrady, etc…) – and have combined share of less than 1%. Is this a massive opportunity for Adidas? Yes. But it was an opportunity as well 3 years ago and its share has actually been cut in half during that time period. When an ‘opportunity’ remains present for that long, I consider it a ‘failure.’

Zach Brown/Brian McGough

Making a bad situation even worse

I was struck by the recent 8K filing by Buffets Holdings, Inc. Earlier this year, Buffets filed for bankruptcy under a mountain of debt, rising commodity prices and a sluggish consumer. At the time Buffets filed for bankruptcy, the credit crisis had not yet hit full stride. If Buffets were to file today, my bet is they would be in liquidation and not battling for survival. The Buffets 8K disclosed that lenders needed to amend the DIP credit agreement so the company would not be in default.

This highlights a big problem; companies seeking bankruptcy protection have a new hurdle: finding money to survive the bankruptcy process. While Buffets has some financing to survive for now, it sure looks like it’s over for that concept.

If banks are not lending to healthy companies, who is going to lend to bankrupt companies? The frozen credit markets are going to limit lending to struggling companies that need loans just to make it through Chapter 11 restructuring. Without the debtor-in-possession financing, companies filing for bankruptcy might not have any choice but to liquidate. This issue was made clear by Bennigan’s and Linens 'n Things, which was forced to liquidate last week.

SHLD: The Blue-Light Predatory Layaway

Am I the only one who thinks it is bad form for Lampert & Co to bring back the ‘Layaway Plan’ at the exact time where consumers should be dialing back spending, not reserving things that they can’t afford? Kmart is launching broadcast spots for its new initiative this week, with print ads beginning in November. At least the company will be able to attach a customer name tag to the 100+ days of inventory sitting in trailers in the rear parking lot. I think I know retail at least as well as the average guy on the Street, and I still can’t figure out why this ‘company’ exists.

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I’ve updated the PCE chart from my 08/08/08 post, “SCARY MACRO CHART FRIDAY”, that showed gaming would suffer a $20bn loss just on mean reversion of gaming spend % of PCE. Gaming was more levered on the upside to housing than other consumer sectors and could be on the downside as well.

Personal consumption expenditures have been a rocket ship over the past 20 years. Gaming revenue growth has been even more impressive. Gambling spend accelerated from 0.3% of PCE in 1990 to a peak of 0.94% in December, 2006. The trend broke soon after that all the way down to 0.79% in June of 2008. As a point of reference, if gambling reverts to the mean since 1990 of 0.6%, revenues would fall by $20bn annually or over 20% of the current level. This trend could be a double whammy in a prolonged consumer slowdown.

PCE likely to fall as is gaming's share. Ouch

Going "Loonie": Buying The Canadian Dollar...

We're looking to get long another currency other than the US Dollar. The Rydex Canadian Currency Shares (FXC) is likely where we’ll make a currency investment, on a down day. The FXC has lost -13% of its value since the last week of September; it also pays a 2.6% yield. Buy low.

Below is our chart and our levels.

BUY for a "Trade" = $82.10
SELL that "Trade" = $86.28

This is simply another way for us to express our investment idea that the US Federal Reserve will de-value the US$ again by cutting interest rates to negative (on a real basis). This will be inflationary, for a "Trade", and countries (Canada) levered to commodity price strength should benefit.


The only thing I’d add to McGough’s excellent analysis (re-posted below) is that Consumer Confidence plunged to 57 this week. Consumer spending on recreational products and leisure services of almost $500bn (including almost $100bn for casinos) is under attack. For those of you expecting a v-shaped bounce in anything consumer any time soon, think again. We’ll be lucky to get a U.

Todd Jordan
Managing Director


By my math, the year/year deficit in consumer spending in 2009 rivals the size of the US apparel/footwear industry in its entirety. Here’s how I get there…

Seems rough out there for the consumer, huh? I’m really sorry to say this, but you ain’t seen nothin’ yet. I know this seems like my typical ‘doom and gloom, margins are going away’ rant. But I spent the better part of this weekend going through the math. Many people don’t realize this, but real consumer spending is actually trending up yy. My model suggests that discretionary spending will finally turn negative in 1Q09. This would be the first time in 66 quarters consumer spending will have gone negative.

I think we’re also looking at discretionary spending down about $170bn next year. The icing on the cake is that the yy delta (prior year’s increase less current year’s decrease) is tracking close to $245bn. As a frame of reference the entire apparel and footwear retail industry is about $300bn. I have a one word answer for this. BANKRUPTCY. I outlined my list of bankruptcy candidates several times over the past few months. But that list is growing. I’ll be back with more meat on the bone there shortly.

I realize that I’m not the only person that has a detailed consumer model. So let’s take a look at some key assumptions, and you can come up with how you’d tweak it one way or another.

1. Gross personal income reflects a 7% unemployment rate, which takes total income growth down by 400-500bp sequentially over 3 quarters.

2. Zero change to the personal tax rate, which averages at 12% across the US.

3. Sub-1% savings rates is unsustainable given negative wealth effect from state of housing and equity markets. (Check out my prior post).
4. Personal interest payments head higher by 0.1% per quarter due to higher debt levels and interest rates.

5. Oil stays at $80, and gas/distillate stay at current levels. YY comps get easier in 4Q.

6. We went through all consumption categories we deem ‘Essential’ such as food, medical, housing, etc… and input growth forecasts based on my fellow analysts’ assumptions.

Tweaks to the many assumptions in our model would alter the $245bn yy delta in spending (2.5% of consumer’s wallets). But even if the geniuses at the Treasury, Fed or in the new political regime find a way to cut it in half, that would still represent 40% of the apparel/footwear retail space.

Brian McGough
President and Director of Research

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