'The Bifurcation Trade' Emerges into ’09

The gaping hole between economic reality and Street earnings estimates is no secret to anyone. What is increasingly news to me is that the gap is beginning to narrow.

Fundamentally, not much has changed over the past three months. Organic sales are under pressure, order cancellations are up, FX benefits are going the other way, pricing power is negative, GM% eroding, and SG&A is heading higher. We’ve been pretty vocal that margin assumptions still need to come down next year by 2-3 points in aggregate. Unfortunately, we’re nowhere close yet as it relates to estimates. That’s the bad news.

But multiples as low as 2-3x EBITDA on certain names in the space (i.e. ANF) account for this to some degree. The kicker is that over the past week, we saw the greatest estimate realignment we’ve seen in this group since the recent downturn began, with EBIT margin estimates coming down a full 45bps. For an entire industry of stocks (there are 60 in our index), that’s pretty meaningful.

This is not the bottom. Far from it. But it gives me greater confidence that ‘The Bifurcation Trade’ in retail will be the big theme for ’09. Some companies will dominate (UA, RL, LULU, ANF and FINL), while others will show their real pale or dying stripes (DKS, GIL, DSW, BWS, GES).

Casey Flavin and Brian McGough