LIZ: Losing the Ball & Chain


CORRECTION: The $85mm value of this morning’s deal was net of debt disposition, not gross that we previously implied. The difference is not immaterial though it does not change our call on LIZ, which is all about driving RNOA sharply higher as it sheds underperforming assets while driving EBIT higher and delevering along the way.




LIZ officially announced the sale of its Mexx business this morning removing one major drag and improving another other – its balance sheet. According to the terms of the deal, the company will receive $85mm in total cash consideration consisting of $25mm of cash in hand and $60mm of debt that will be assumed by the newly formed JV between The Gores Group (81.25% owner) and Liz (18.75%). The deal values Mexx’s ~$700mm in revenue at $105mm and marks the second asset sale in the past 30-days.


The terms are below what was rumored by the press last month, but keep in mind a few things… 1) while the market was melting down this deal was widely rumored to be falling apart, 2) The stock was off 37% during this period, and 3) at the same time, its net debt improved by almost 20% . Most importantly, the stock price is at the same level today – and the Enterprise Value 10% lower – than when the biggest pushback we got on our call was “this Board is inactive, management stinks, the balance sheet is too levered, and this company could go bankrupt.’ Anyone want to make sense of that for me?


Between this deal and the fragrance business they sold last month, the company is getting ~$83mm in cash and a $60mm reduction in debt providing added flexibility with which to manage leverage during Q3 before paying down a large portion of their debt in Q4. It’s also worth noting that this would get the company within ~$50mm of its goal of $578mm by year-end.


Looking out to next year (perhaps sooner), we suspect the company is likely to execute additional sales within its Partnered Brands business that could amount to another $100-$200mm that could be put towards deleveraging the business further.


So what’s left after these sales? We have the Partnered Brands business that we expect to generate nearly $20mm in EBIT next year and the three remaining Direct Brands (Kate, Juicy, and Lucky) that we expect to generate at least $80mm. With aggressive deleveraging underway, we are modeling approximately ~$15 in interest expense reduction generating earnings north of $0.45 next year assuming conservative operating improvement among the Direct Brands. We don’t have to drum up heroic assumptions to get earnings over $0.75.


With the company actively unlocking value through asset sales, it’s worth considering our sum-of-the-parts analysis below, which suggests a value of $12-$14 taking into account recent sales and a 10% breakup discount. That’s a double from current prices.


We think investors will get at least that on LIZ. This remains our favorite small-cap TAIL idea.


LIZ: Losing the Ball & Chain - LIZ SOTP Sales 9 11


Casey Flavin




Weekly Asia Risk Monitor

As usual, we’re keeping it brief. Email us at if you’d like to dialogue further on anything you see below. Also, we are always happy to forward along prior notes which may contain additional color on the specific topics/countries you see below.



QE3 speculation puts hawkish policy back into the forefront.



Asian equity markets had a great week, closing up +2.7% wk/wk on both an average and median basis. The key outlier to the downside was China’s Shanghai Composite Index, which closed down -3.2% on QE3 speculation (more Fed-sponsored inflation). The +22bps wk/wk jump in China’s 2yr sovereign debt yields and +26bps wk/wk increase in China’s 1yr on-shore interest rate swap spreads is supportive of our view that the market will expect incremental tightening out of the PBOC alongside incremental speculation for additional easing out of the U.S. CDS declined broadly across Asian credit markets, with the fiscally conservative Australia and New Zealand leading the way on the downside from a wk/wk perspective.


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China: Inflation remains the topic du jour in China, with Prier Wen Jiabao saying earlier in the week that “China’s top priority is stabilizing food prices” and that Chinese officials “do not plan to alter the direction of economic policy”. Though we expect Chinese CPI to decelerate going forward, we do think it will remain sticky enough on an absolute basis to justify the government’s hawkish bias – particularly if Chuck Evans and his Fed colleagues decide to pursue incremental monetary easing over the intermediate-term. China’s August manufacturing PMI, which accelerated marginally on a headline basis to 50.9, confirms our view with the input prices subcomponent ticking up to 57.2 vs. a prior reading 56.3. We have highlighted in the past the strong relationship between this series and China’s headline inflation reading.


As it relates to inflation on the fiscal policy front, Beijing decided to link a range of welfare payments to CPI (think: COLA) in order to boost the incomes of those most impacted by inflation. The change was fully implemented nationally at the end of August and should provide yet another incremental boost to Chinese consumption growth in 2H.


On the credit front, we highlight the drying up of China’s Local Government Financing Vehicle debt market as a key risk to Chinese banks, which coincidentally have seen their swaps widen dramatically over the last month (on the order of 60-70bps broadly). To the former point, this market, which is a key source of refinancing for China’s 10.7 trillion yuan of LGFV debt (24% of which matures this year), saw the least amount of issuance since Nov. ’08. Should investors start to materially lose confidence in this market, we could start to see a dramatic underperformance of Chinese financial shares as calls for a widespread uptick in defaults, NPLs, and capital raises become louder on the margin.


Japan: Earlier in the week, it was confirmed that Finance Minister Yoshihiko Noda will succeed the now-departed Naoto Kan as Japan’s next prime minister – the country’s sixth in five years and the third since the ruling DPJ party took control of the lower house in 2009. Noda, who is among Japan’s most fiscally conservative officials, has upheld rhetoric suggesting that he won’t back away from Kan’s desire to rein in Japan’s fiscal deficit (currently at 8.1% of GDP) and produce a balanced budget in ten years. In fact, he flat out said that the DPJ had let the country down in this regard and called for raising the 5% consumption tax by “the middle of the decade” in order to secure funding for accelerating social security expenditures and a third reconstruction stimulus package totaling around ¥10 trillion. Additionally, Noda appears to have enough internal support to at least begin to have a healthy debate about balancing Japan’s budget without letting politics get in the way of progress.


Elsewhere in the Japanese economy, the tired Japanese consumer continues watch from the sideline as consensus carries on with its bullish “reconstruction” storytelling. July retail sales growth slowed to a mere +0.7% on a YoY basis and also slowed to a -0.3% rate on a MoM basis – supportive of our call that upside to sequential gains in Japan’s economic statistics was limited from here. Small business confidence is supportive of this view as well, falling in Aug. to 46.4 vs. a prior reading of 47.1. All is not bearish, however; July housing starts growth exploded to +21.2% YoY (vs. +5.8% prior) alongside an acceleration in annualized housing starts to +955k MoM. Reconstruction lives on!… it just remains to be seen how the heavily-indebted sovereign plans to help finance it.


India: 2Q real GDP growth in India came in at a marginally slower rate of +7.7% YoY, which suggests to us that the Reserve Bank of India is more than likely to maintain its hawkish bias over the intermediate term. In fact, RBI Governor Duvuuri Subarao, architect of the fastest tightening in the RBI’s 76yr history, echoes this sentiment with his recent commentary:


“If global financial problems amplify and slow down global growth markedly, it would impart a downward bias to the growth projection. Still, the immediate challenge to sustaining growth lies in taming inflation.”


This view is in stark contrast to Brazil, which earlier in the week cut interest rates by -50bps to help support its ailing economy. This is to be expected, however, given that India’s real GDP growth is running at nearly double the rate of Brazil’s.


Still, Indian GDP growth is slowing, as evidenced by the country’s manufacturing PMI reading falling in August to a 29-month low of 52.6, which is still healthy on a relative basis to the world’s larger economies. Looking past the intermediate-term slowdown and viewing India from a longer-term perspective, we believe that Prime Minister Singh’s tax regulatory overhaul and the recently enacted anti-corruption legislation (Lokpal) are going to reduce the inflationary pressure within the Indian economy and help the country’s real-adjusted economic growth rates accelerate on the margin. The “flows” support this conclusion, with longer-duration FDI accelerating to an all-time high of $13.4 billion in 2Q. This is in heavy contrast to a near three-year high in monthly foreign capital outflows from Indian stocks through Aug. 25 ($2.3 billion).


Korea: In a contrarian research note published in early June, we appropriately signaled that Korean economic growth was going to have a meaningful deceleration alongside a pickup in inflation, which would cause the Bank of Korea to be hawkish or, at the very least, limit their ability to respond to the slowing Korean economy via monetary easing. CPI came in much hotter in August, at +5.3% YoY vs. a prior reading of +4.7% and the rate of core inflation also increased to +4% YoY.


Meanwhile, Korean economic data – especially the cyclical components – came in quite soft this week: manufacturing business survey ticked down in Sept. to 86 (vs. 91 prior); Sept. non-manufacturing business survey came in flat at 83; industrial production growth slowed in July to +3.8% YoY (vs. +6.5% prior); manufacturing PMI slowed in Aug. to 49.7 (vs. 51.3 prior) – indicating a contraction; and trade balance growth decelerated in Aug. to -$384.5 million YoY (vs. +$1.3 billion prior). It’s no wonder South Korean Finance Minister Bahk Jae Wan hinted that the government might cut its 2011 GDP growth forecast on Monday. Moreover, our model suggests their forecast of +4.5% YoY real GDP growth in 2011 is indeed too high (by roughly 100bps).


Thailand: This is yet another Asian economy where inflation remains the key focus of policymakers, which means we’ll continue to see a hawkish lean out of the Bank of Thailand over [at least] the intermediate term. Headline CPI accelerated in August to +4.3% YoY (vs. +4.1% prior) and core inflation also came in faster at +2.9% YoY (vs. +2.6% prior). Recent growth data is supportive of the BoT’s hawkish bias, as Thailand’s trade balance growth accelerated in July to +$3.5 billion YoY (vs. -$662.6 million prior). Furthermore, falling business sentiment (51.2 in July vs. 53.1 in June) would suggest Thai corporate executives are feeling both the pressure and specter of rising interest rates.


Australia: After a noteworthy plunge in bond yields across the maturity curve, Australia’s consumer, which is 1.6x levered and has a variable-rate mortgage on 90% of all home loans, finally came off of life support and contributed to Australian economic growth (retail sales growth accelerated in July to +0.5% MoM vs. -0.1% prior). It will be interesting to see how long this lasts, given the weakness in Australia’s manufacturing sector which is weighing on employment growth (manufacturing PMI ticked down in Aug to 43.3 – a 2yr low), falling home prices (growth in RPData’s House Price Index slowed in July to -0.6% MoM vs. -0.4% prior), and the consumer’s general distaste for additional leverage (mortgage loan growth decelerated to +5.9% YoY in July – the slowest pace on record).


Net-net, we continue to believe Glenn Stevens and the Reserve Bank of Australia’s next move on the interest rate front is down, though the recent collapse in sovereign debt yields should allow the consumer to cushion the slowing Aussie economy on the margin as its collective interest rate burden declines.


Darius Dale


The Week Ahead

The Economic Data calendar for the week of the 5th of September through the 9th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


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Early Look

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FW: If The Price is Right…

We think the high end is slowing, but if so someone forgot to tell the footwear space. Shoes $130 and above are running 40% ahead of last year.  Great for FL and NKE.


We’ve been getting very mixed reads on the state of the high-end consumer. Tiffany looking good, some European Lux brands softening, and high hardgoods (watches, etc…) slowing meaningfully. But if there is, in fact, a slowdown, someone forgot to tell the footwear industry.


We’re seeing a clear bifurcation between high-end vs. lower end footwear. Simply put, the high end is crushing it. Out of all the price categories the strongest sales performance is $130 and above. While only 10% of the industry in aggregate, its data that we won’t ignore – especially when trending about 40% ahead of last year.


Check out charts below.


FW: If The Price is Right… - FW 70 band 9 1 11



FW: If The Price is Right… - FW 100 band 9 1 11



FW: If The Price is Right… - FW 130 band 9 1 11

The Cowboy Has Staying Power

Conclusion:  As we intimated in our last note, Governor Rick Perry may have staying power, as recent polls suggest such.  Meanwhile, President Obama’s approval numbers continue to deteriorate, which is positive for a politician juxtaposed against him (like a cowboy from Texas for instance).

In politics events often lead to poll bounces, which are typically not sustainable.  The most recent and major example of this was the killing of Osama bin Laden, which was ordered by President Obama.  In response to this decisive and successful action, the President’s approval numbers jumped up fairly dramatically in the short term, to a positive 10-point spread on the Real Clear Politics poll on May 26th.  This peak, which occurred just over three weeks after bin Laden’s death, was to be short lived.  In fact, Obama’s approval numbers have been on a downward trajectory since late May.


Currently, President Obama’s ratings are hitting new lows in almost every major approval index.  The Real Clear Politics aggregate has Obama at its widest negative spread of his Presidency at -8.7, with 52.2 percent disapproving and 43.5 percent approving.  The most recent poll of Likely Voters by Rasmussen, which was taken in the three days ending August 31sthas Obama at a shocking -13, with 56 percent of those polled disproving of his performance.   


The Cowboy Has Staying Power - a. RCP


Interestingly, and in contrast to our point above about the short term benefits of one specific event in political polls, Governor Perry, who officially entered the race for the Republican nomination a few weeks ago, continues to poll very well.  In fact, the two most recent polls, Quinnipiac and CNN, have Perry ahead of Romney by 6 and 13 points, respectively.  Even more interesting, especially for we stock market operators, is the futures contracts on InTrade, which has Perry winning the nomination at 38% and ahead of Romney’s 30% probability. This market-oriented measure has steadily ticked higher since Perry announced his candidacy.


The Cowboy Has Staying Power - a. 2 Perry contract


The most interesting recent poll to be released is a Rasmussen poll that shows Perry beating President Obama by a margin of 44 – 41.  Obviously, this is both only one poll and also within the margin of error, so it doesn’t necessarily inform, yet, how Perry would do against the President head-to-head.   The noteworthy takeaway of this poll is that Perry fares better than any of his Republican peers in a hypothetical match up.  In fact, the next closest to Perry, former Massachusetts Governor Mitt Romney, trails Obama by 43 – 39. 


Despite his favorable poll numbers, Perry’s most substantial competition may not be coming directly from his competitors or the Democratic party, but the Republican establishment.  There is the perception amongst many in the Republican party, especially the George W. Bush crowd, that Perry may be too extreme, too cavalier, and, yes, perhaps too much of a cowboy.  Certainly, Perry has made some outlandish statements at times, including his poor choice of words when recently criticizing Federal Reserve Chairman Bernanke, but he also is charismatic, has a successful electoral track record, has an enviable economic track record in Texas, and is very appealing to the Tea Party base.


As we think about Perry’s chances to attain the Presidency, we are reminded of the old John Wayne movie, “True Grit”, in which The Duke faces off against four gun men and yells, “Fill your hands you sonofaguns!”  We’ve attached a clip of the segment below:


All references to John Wayne aside, the true test for Perry will be coming in September as he faces off against his Republican competitors in a series of debates.  If he can hold his own and articulate his views in an even handed fashion, the Cavalier Cowboy may be riding tall into the general election.


Daryl G. Jones

Director of Research

The Re-test: SP500 Levels, Refreshed

POSITION: Short Financials (XLF), Long Utilities (XLU)


No matter where we go this morning, here we are – right back to the fundamentals. After another very low-volume rally into month-end markups, consensus is being forced to re-calibrate their expectations once again this morning.


I think the quote I used earlier this week from Dan Gardner’s book (“Future Babble – Why Expert Predictions Fail and Why We Believe Them Anyway”) sums up where we are right here and now quite concisely: “feeling good about a judgment is a prerequisite to acting on it.”


If Global Growth Slowing, tanking US Consumer Confidence, and no jobs isn’t making you feel less good this week than you may have at higher prices, then you really are contrarian!


As a reminder, the US stock market is in what we call a Bearish Formation (bearish TRADE, TREND, and TAIL): 

  1. TAIL = 1263
  2. TREND = 1292
  3. TRADE = 1234 

That’s not good.


What is good, however, is that I am registering a higher-low of immediate-term TRADE support than I could have flagged for all of August. I’m at 1146 support now (I used to be in the 1086-1108 range), so this is progress.


And as we all now, progress is important. Repeating prior policy mistakes in this country is not the answer.



Keith R. McCullough
Chief Executive Officer


The Re-test: SP500 Levels, Refreshed - SPX

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