prev

HBI: Numbers looking too high…

I like the HBI story, but I think expectations are too high headed into 3Q. Let’s not forget that the average EPS surprise for HBI is +40% over the past 6 quarters. This qtr won’t be different.

My model is shaking out about 20% below the Street for the back half. I think that the top line is fine. Volume trends have been decent enough in mass channels, and I think that price increases from Wal*Mart are coming through at a magnitude needed to offset higher cotton costs through mid-2009. It’s the non-commodity costs that are a true moving target for this company. A simple tweak in labor or ad spending accounts for wild swings in EPS. That’s why my Jr Analyst Zach Brown cranked out the file below, which is a complete sales and margin walk of all the puts and takes over each of the past six quarters. It highlights some interesting points for the upcoming quarter.

1) On the top line, 3Qand 4Q07 were the two biggest top line quarters of the year.

2) In 3Q HBI was nearing the end of a 1-year period where Champion ramped up in Sporting Goods channels.

3) 3Q07 started a 4-quarter period where International sales accelerated from no growth to double digit. Now FX is going the wrong way and growth comps get tough.

4) HBI is comping against 375bp in combined labor and manufacturing cost savings margin enhancement. Remember that the company let go 150 employees at corporate in late summer ’07. Now it needs to find a new bag of tricks.

5) 250bp of this went to fund the write-off of obsolete inventory. But net/net, that still leaves HBI 125bp in the hole this quarter.

Check out Zach’s table below for more details (click on each one for an enlarged picture with better detail).
If the company does, in fact, miss and/or guide down, I’m likely a buyer. I like the longer term margin progression. This is one of the few companies left in this industry that can offshore its production and free up what I think is 8 points of margin to be used as an offensive weapon to grow the business, pay down debt, and improve returns.

Sports Apparel Data: 'Less Strong'

The growth rate eased over the past week for sports apparel sales, though not to a point that leaves me concerned. Sales are running at about +1.4%, which slowed by half vs. prior 3-week run-rate due to incremental weakness in the mass channel. On the flip side, the Sport Retail channel is hanging in at about 10% -- not bad for FL, FINL, DKS and HIBB. Tough to find these growth numbers elsewhere in retail. I still think that we’re entering a better part of the cycle for this group.

Source: SportscanINFO

JO: EYE ON COFFEE

Traders love coffee. Lloyd’s coffee house was a gathering place for speculators in shipping insurance and commodities in 18th century London that turned into Lloyd’s of London (the saloon across the street, Jonathan’s, became the London Stock Exchange –traders also love alcohol).

A data point on coffee this morning had traders taking note: the National Federation of Coffee Growers of Columbia is predicting a cyclical decline in Brazilian Coffee production will cause a global deficit as supply falls below demand that has grown dramatically in recent years.

To put in context, the grade of coffee produced in South America is the premium Arabica grade. Starbucks and other retailers have re-introduced premium South American blends to new audiences from the less urban parts of the US to developing Asian and Eastern European markets in recent years and Columbian Growers are betting that despite slowing growth one of the last sacrifices that people in those markets will make is their premium coffee in the morning.

Coffee Futures felt the same pressure as other soft commodities in recent months as the great deleveraging process saw a tremendous amount of capital flow away from static log index investments which were based on rolling front month positions. Unlike Oil or Gold, Coffee does not enjoy the same following among institutional investors as a standalone investment and so the absence of index investors will significantly impact open interest and volume. JO is an Ipath ETN based on the Dow Jones AIG Coffee sub index, which consists solely of front month NYMEX Coffee Futures on premium South American Arabica.

Andrew Barber
Director

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

FXC: GOING LONG THE “LOONIE”

The Canadian Dollar has been hammered by declining energy commodity prices, but we are buyers here. Remember that this is a nation that printed a 5.8 Billion dollar trade SURPLUS for the last reported month and that the benchmark rate there is 2.6% while we expect the fed to cut US rates in the near term. From both a technical standpoint and a relative value standpoint, this trade looks solid.

Andrew Barber
Director

SPX: TESTING OUR LIMITS

Our breakaway level on the S&P 500 is 949. If the market closes above that line we have an upside target of 1024. If it closes below that line our downside target is a lower low of 875.

In general, the data this morning held more bullish indicators than bearish:

· The VIX declined yesterday with a closing level of 53.11
· Yesterday’s volume was comparatively light yesterday –less than half the level we had seen during the capitulation sessions in previous weeks
· Sentiment indicators continue to come in at historic lows
· Credit spreads continue to show signs of contraction
At the time of this update, our marginally bullish stance is being tested, but we rely on a disciplined process and will adjust our market levels accordingly.

Andrew Barber
Director

INVESTNG IN THE DELTA

Capitalism rising in the east and setting in the west – Todd Jordan

With Keith McCullough unavailable today, it is once again my turn at bat. I recently spent a week in China so it seemed to be the appropriate topic for this morning’s note.

“Go west young man” – John Soule, 1851



Horace Greeley may not have coined this phrase but he certainly popularized it. That was in the second half of the 19th century. The first half of the 21st century is a very different time. My advice to our junior generation would be to “Go East Young PERSON” or at least look Eastward. One has to be politically correct here in the west, but not in China where capitalism is not an evil word.

So if you’re a young capitalist, go where you can be you. There is no shortage of opportunities. As reported by the China Daily there is a paucity of individuals with global financial experience, particularly in the investment arena. Shanghai banks are looking to Wall Street to fill that void.

I’m not suggesting China is actually a freer economy than the USA, yet. But on the margin, we are moving more towards socialism and China is moving the right way. Yes, China is an authoritarian regime and no, the country is not free.

But we invest in deltas here at Research Edge and the China delta is now positive. Keith was on the correct side of the China trade for most of this year and I’ve been negative on Macau, but when facts change, we change. One theme you will be hearing from us is China’s transformation from an industrial based economy to one that is based on consumption. Singapore made this transition and now generates per capita consumption 15x the rate of China. Now that is a huge potential delta.

In my narrow world of gaming, lodging, and leisure, it’s the Pearl River Delta that matters. Macau resides on this Delta and will continue to benefit from the capitalist delta sparking mainland China. One casino market, serving over a billion people with rapidly rising incomes and a cultural propensity to gamble; if there is one other gaming market with a decent growth profile, I’d like to know.

Here in the US, notwithstanding the recent government interference in our free markets, I see many signs of a leftward economic shift in our country. Not to be outdone by the free spending Bush administration and Republican congress, Democrats will have their own agenda to pursue, rather easily under Obama I might add. Get ready for a curbing of free trade, windfall taxes on profitable industries, higher overall taxes and even more spending, nationalized healthcare, government interference in mortgage contracts, equal pay legislation, onerous environmental restrictions, prescription drug controls, higher minimum wage, etc.

I’m making a purely economic argument. I’ll leave the discussion of whether there are social benefits that may accrue from some or all of those initiatives to Keith Olbermann and Bill O’Reilly to argue about. What I can say with some certainty is that a socialist agenda is bad for business, it’s bad for the economy, and it’s bad for the stock market.

Two other items I haven’t mentioned yet are more near and dear to my sectors: regulation and union power. Look, I’m all for regulation. Regulation of the government, that is. We could’ve used that earlier this decade with Fannie and Freddie but that was thwarted at every turn by Barney Frank-Lin Raines and “their” band of “ownership society” boosters, Democrats and Republicans alike.

The union issue is a big one, although I don’t know if executives and investors fully grasp it. We have written extensively on the prospects and ramifications of “The Employee Free Choice Act”. People don’t know this but the original name was “The Act To Eliminate The Cornerstone Of Our Democracy: The Secret Ballot”. That was too long so I see why they went with the shorter name.

Unions will prosper under Democratic control and “The Act” is a major tool of that newfound prosperity. The Employee Free Choice Act will be at the top of the 2009 legislative agenda. It will pass and it will affect businesses, particularly consumer businesses. In an environment with declining consumer spending, higher labor costs will deliver a near fatal blow to many companies.

The choice seems pretty clear. One can invest in a socializing market priced for capitalism or a capitalizing market priced for socialism. I think you know where we stand.

Todd Jordan
Managing Director


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

next