The ‘Other Side’ Of The FX Trade

Yes, companies are starting to show their negative exposure to currency fluctuations. This was inevitable. But a theme in ’09 will be those companies that have proactively managed around this.

One theme I think is consistently misunderstood is ‘Imported Cost Inflation’ from China. Is it a big deal? You betcha. But to really understand the dynamics, we need to understand that FX changes and the shift in China from an export economy to a consumption-based economy impacts two parts of the P&L. Some companies are better positioned than others.

The ‘no brainer’ here is that as China’s currency continues to appreciate on both a cyclical and secular basis, it puts pressure on the COGS line for companies who overwhelmingly depend on Chinese labor. Unfortunately for the footwear industry, almost 88% of US footwear consumption comes from China. Yes, that’s bad.

But where’s the offset? It comes from the few that have though ahead and proactively planned for such an imbalance. No, this is not a 1-year investment. These are the companies that saw this coming 3-4 years ago (and in some instances 10+). Nike, Ralph Lauren, Adidas, and dare I say 3nd class citizens like CROX and Skechers. These are companies that have built-up sales organizations in anticipation of hitting a time when the revenue opportunity would eclipse sourcing cost challenges.

What’s the math? Let’s look at two examples…

Company A (Nike) has 32% of COGS sourced in China, or about 16% of sales (given that COGS is about half of revs for Nike). The company also has about 8-9% of revenue based in China. That’s only an 8-9% spread between the two, and given that incremental top line growth is coming from China while incremental sourcing costs are coming from elsewhere in Southeast Asia, this gap will continue to narrow.

Company B (K Swiss) has better than 90% of COGS sourced out of China, and less than 3% of revenue. I probably don’t even need to go through the math to show that the challenge here is very meaningful.

The companies that look best in this regard are Nike, Adidas, Timberland, Coach and Ralph Lauren. On the flip side, Brown Shoe, Payless, K Swiss, Foot Locker, Dick’s and many small footwear and apparel brands are at a meaningful disadvantage.

I don’t think that this analysis gives us much of a feel as to who the near-term longs and shorts might be, but for those that can invest with a duration of a year or more, this is an incredibly relevant issue to consider.
Here's a sampling of companies that disclose exposure to China (including some that do not, but should).

Did the US Economy Just “Collapse”? "Worst Personal Spending Since 2009"?

This is a brief note written by Hedgeye U.S. Macro analyst Christian Drake on 4/28 dispelling media reporting that “US GDP collapses to 0.7%, the lowest number in three years with the worst personal spending since 2009.”

read more

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more