Eye on Columbia vs. The North Face (VFC)

The North Face has been the rock star of VFC’s portfolio for the past three years. Similarly, Columbia Sportswear has been the perennial share-loser in the Outerwear category. Recent data suggests that the tides may be turning, which is consistent with my view on each company.

The chart below shows that The North Face dollar share in the sporting goods channel is on a downtrend – hitting parity with year-ago levels after 12 months of impressive share gains. Average price point (a proxy for retailer discounting activity) is flattish to down slightly. Conversely, we’re seeing both average price and dollar market share pick up for Columbia. Note that Columbia’s 20% share of the category in this channel is dwarfed by TNF’s 65%.

I usually don’t get too bent out of shape about this data, but there a couple of things I’d point out. 1) I track the real trends on a trailing 3 week basis, and this is the 3rd week in a row we’re seeing such gains for COLM. I think we can say that this is more than a simple blip. 2) I’ve warmed to COLM in a more meaningful way over the past six months, largely due to the increased investment spending it is allocating to its core content. COLM has been a share loser for a long time – bc it has not invested enough. This share gain is probably not an accident.

As it relates to TNF – it is important to note that the Brand is incrementally growing in its own retail stores. As such, more marginal distribution channels (some of which are in the sample analyzed) are likely seeing smaller allocations. That’s smart from where I am sitting. But that said, I’m not sold yet on TNF’s retail strategy. The company has not proven that it ‘gets retail.’ It’s easy to make money in a store when a brand is hot. But when a brand is cooling, that’s where being a good retailer makes a difference, and is where I think VFC will expose its weakness.
Source: SportscanINFO


The Las Vegas locals market is not like the other regional markets. As we showed in our 11/26/08 post, “A POSITIVE CATALYST? THAT WOULD BE A GAS!”, the macro factors driving gaming revenues in the regional (riverboat) markets have been housing prices, gas prices, and unemployment levels. In Las Vegas, housing is the only macro variable that matters.

On the surface, this looks pretty bad for Boyd Gaming and Station Casinos, both of which have significant exposure to the LV locals market. The sharp decline in gas prices probably won’t help this troubled market. Changes in gas prices have had an immaterial impact on gaming revenues historically. The reason is probably that since Nevada is an unlimited license jurisdiction, unlike other markets, most Las Vegas residents are probably only a die’s throw away from a casino.

Of course, the more obvious piece of the bad news puzzle is housing. The LV housing index has fallen on a year over year basis since February 2007, and the YoY change is down sequentially for a whopping 48 consecutive months. The good news is that Las Vegas housing prices began declining much earlier than the average US market and there are some signs of stabilization. Prices barely fell in October vs. September. Prices have been down so much (30%+) and for so long that gaming revenues probably already reflect the housing impact. Analysts’ projections probably do as well.

The positive for Boyd is that expectations for the LV locals market are very low. Moreover, it’s main competitor in the market is Station Casinos, a private company near bankruptcy. Whether Station goes into bankruptcy or not, Boyd has a huge competitive advantage because of its liquidity. See our recent post, “HOW TO STEAL MARKET SHARE”. Station doesn’t have the cash to upgrade the slot floor or be competitive on the marketing/promotional front. Boyd does.

Locals LV revs track housing prices very closely

Eye On Immigration: The Changing Face of Germany

A survey released ahead of an important German Islam Conference in March of this year found that people of Turkish origin in Germany feel like unwanted guests in their home country. Many of these Turkish immigrants, despite living in Germany for decades, simply have not fully integrated and, as a result, feel ostracized.

Given the deteriorating economic climate in the Eurozone, anti-immigration sentiment is on the rise in Europe, as are the feelings, by immigrants, of being unwanted. Our review of this “Trend” will begin with Germany, a country we are currently long via the EWG exchange traded fund.

In Germany, these immigrants are referred to as Gastarbeiter, or guest workers. They are mostly men recruited by the German government in the 1960s and 1970s to meet the demands of a labor shortage after the Second World War. This period, which become known as the Wirtschaftswunder (or economic miracle), saw the active recruitment of individuals from Italy, Greece, Turkey, Portugal, and Yugoslavia for unskilled industrial sector jobs in West Germany.

Turkish citizens quickly held the lions-share of the Gastarbeiter quota, most of whom were given temporary visas for a couple of years. However, what the government didn’t account for was the reluctance of employers to let trained workers leave, nor the desire on the part of the workers to make Germany home. Instead of heading to their home countries with pockets full of D-Marks, guest workers stayed and brought over their families. Children born to Gastarbeiters received the right to reside in Germany but were not granted citizenship.

This immigration story is an important one that plays out on German streets today. Tour any German city and you’re likely to see Kebab stands—a traditional Turkish sandwich like a gyro—which Germans eat like fast food. Or check out any major German publications and you’re likely to see various exposés about integration issues in Germany, the catch-phrase being multiculturalism (Multikulti), defined as the recognition, celebration and maintenance of different cultures or cultural identities within a society to promote social cohesion.

It’s fair to say that such terminology as multiculturalism exists because there is a concerted effort to reduce the fractious relations between Germans and Turks (as well as other minority groups) over political, religious, and cultural differences. Many of these differences stem from the treatment and perception of the Turks as “guests” of Germany, not citizens, since arriving as far back as 50 years ago.

Certainly citizenship is an important mark in defining a society. In the US we have conveniently devised the terms Salad Bowl and Soup Bowl to describe a people with varied foreign roots; most of the original settlers in this country were not refused citizenship based on ethnicity or religion. Yet within historically more homogeneous European countries, like Germany, such definers as ethnicity (especially skin color) and religion can play an important role in determining “Who is German”.

It is under similar pretext (who belongs and who doesn’t) that many European nations have reservations accepting Turkey (a predominantly Muslim country) into the European Union. In 2000 legislation passed conferring German citizenship to German-born children of foreigners who have lived in the country for at least eight years, and in addition made the naturalization process easier, though dual citizenship is not tolerated. Now, any person possessing it by virtue of birth to foreign parents must choose between the ages of 18-23 which citizenship he or she wishes to retain, and forfeit the other.

Today Germany is home to 2.7 million people from Turkish families (of Germany’s 82 million residents), with an estimated population of 3.4 million Muslims. The city section of Kreuzberg in Berlin has such a high concentration of Turks it has been named “Little Istanbul”.

The crux of the Germany’s most profound social problem is that the guest workers who arrived in the postwar years never really integrated. This has carried over in the form of isolated communities but, more importantly, has had massive repercussions on successive generations. These include children who aren’t exposed to the German language in the household, and therefore are a step behind their German peers as they begin their education, and complex identity issues resulting in integration handicaps.

From the initial movement to bring unskilled laborers to Germany in the 1960s and 1970s, the German landscape has changed. Today, Germany recruits outside its borders for highly skilled workers, generally in the sciences or high-tech fields. Unemployment, which has been high in Germany, especially in the “former” East Germany, today stands at 7.5% (av. Eurozone 7.6%), with Turkish unemployment rates generally double the national average.

The German-Turkish debate as it plays out in politically, economically, and culturally on the street is an important one to follow. Telling is a quote from Turkish Prime Minister Recep Tayyip Erdogan at a mass rally held for Turkish immigrants during his visit to Cologne in February 2008, in which he said: “Assimilation is tantamount to a crime against humanity”. German Chancellor Angela Merkel quickly responded saying she didn’t share the PM’s view. Was it really just a slip of his tongue?

We’ll be monitoring economic fundamentals alongside a host of risk factors (like immigration) in our ongoing evaluation of our long position in the German etf, EWG.

Matthew Hedrick

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Eye On Regulation: Where There's Smoke...

Where There’s Smoke… – Notes for the Week Ending Friday 28 November 2008

In the shadow of the steeple I saw my people.
By the Relief office, I seen my people.
As they stood there hungry, I stood there asking
Is this the land made for you & me?
 Woody Guthrie

We sat at our table this Thanksgiving surrounded by family, aged twelve to 95, and friends from as far off as Bosnia and Israel. We spoke about what makes America great – and about those who have never been part of the Thanksgiving narrative. Lincoln said this nation was “conceived in Liberty…” yet, some deformation appears to have taken place in the birth canal. This is not the place to dwell on issues of race, ethnicity, and dual national identity as part of the uniquely flawed – and yet uniquely great fabric of this nation. But we acknowledge that societies are defined by access: who Gets In, and who Doesn’t Get In, and in every society there are groups that we define as Structurally Dispossessed.

As much as anything else, the recent election is the result of self-assertion by groups who heretofore never believed themselves to be full participants in American society. One need only look at the hundreds of thousands of people who had been registered to vote for years, but who never actually pulled a lever until this year. The rules remain the same. Yet, by broadening to include as “Americans” the Structurally Dispossessed, the American narrative may change dramatically. Many are shocked by this handing of political clout to large groups of people who have never participated in the process. It is the ultimate Trickle Down. Next Thanksgiving will see a different United States of Obamerica.

With all the changes we anticipate at every level of society, what might the implications be for the world of market regulation?

We Americans are unusually prone to injecting morality into our political discourse, no less in our view of securities regulation than elsewhere. We damn short sellers as being evil. When markets get choppy, we outlaw them – despite the fact that short selling is one of the fundamental mechanisms that has made our markets superior to any other securities markets in the world. We can quibble over data sets used to analyze the effectiveness of the Uptick Rule, but the fact is that Shorts are always smarter, as a group, than Longs. Their activities force realistic pricing in the markets, and their capital sustains market liquidity. Thus, regulation trashes the very markets it attempts to salvage.

The Obama Administration promises some tough new regulation. Media reports are full of words like “broad” and “sweeping”. But what philosophy will that regulation support? Rules, as we see over and over again, are meant to hide behind. It is striking to note that the violation of securities rules is often viewed as a business decision. Owners and management assess how much they will make if they violate a rule, versus how much it is likely to cost them if they get caught. It is the nature of the current regulatory process that regulatory penalties paid out by Wall Street firms generally fall short of the profits generated by the behavior that led to regulatory action.

The new Obama administration has assembled an impressive economic team. Now they must define their Narrative. We often hear that Business is more effective than Government, because of the Profit Motive, as though this were an alchemical formula for fiscal policy. As discussed in the Wall Street Journal (“Government By Contractor is a Disgrace” – 11/26/08) paying the private sector to do government work is not only not efficient, but leads ineluctably to corruption and excess. The observation that Government has a lot to learn from the private sector is dead on, but the profit motive is not the silver bullet.

The constant seeking after profits is not what makes businesses successful. It is what makes them lose sight of their long-term objectives, and often it is what makes them corrupt. The success factor in capitalism is neatly summed up by Secretary Paulson’s testimony to Congress on why he diverted TARP funds away from their original intended purpose of buying up toxic mortgages: “When the facts change, I change my mind.” The true genius of Capitalism is its ability to reinvent itself. The key question a successful entrepreneur asks is not “How many of these can I sell?” but rather: “What business am I in today?”

In the current shouting match we have heard some regulators pushing for principles-based regulation, as opposed to the standard rules-based regime, which is inherently prone to abuse. Perhaps government can do no greater service to the people and the markets by guiding the discussion about What Country Are We In? This is by its nature a fluid conversation. It is an ongoing discourse, and the principles by which we will regulate our markets in the future must emanate from that discourse. Put another way: law and regulation are an outgrowth of how the country defines itself. We now have an opportunity to make a conscious decision of what we want America to look like, to be, to do. The Obama narrative rests largely on increased Access for more Americans. If this is to succeed, it will have to very visibly undo Business As Usual, and push creative reinvention. The new administration must lead the national dialogue in asking over and over again, What Country Are We In?

O Lord, won’t you buy me a Ford Pinto?

Are we the only ones who found it odd that the UAW came to Washington together with the CEOs of the No-Longer-So-Very-Big Three? This looks like an ex-spouse looking over one’s shoulder and checking the numbers on a lottery ticket. As curious as it was to see the UAW and the Soon-To-Be-Downsized Three waltzing in arm-in-arm-in-arm-in-arm, it is shocking to us that Congress even debated their proposal. But then, this is the same Congress that approved $700 billion for Fannie and Freddie, but did not summarily fire their bosses. The auto industry conversation, in a nutshell, is: “Our business model doesn’t work. Please give us $25 billion to sustain our unsustainable business, until we can convince you to give enough of your other $700 billion to enough people to force them to buy our trash.” As we all know, What’s good for General Motors…

We note with interest that the President of the atoll nation of the Maldives is actively looking about for a new homeland – and willing to pay for it. The 350,000-odd inhabitants of this island nation feel all too keenly the imminent risk of being swallowed up by a rising sea level. One modest proposal might be to have them move to the interior of China. Half of China’s population now lives in the cities, and more are fleeing daily. The 750 million or so people still living inland are largely older – their children went to Beijing, they stayed behind. They are also largely dependent, in traditional Chinese society, on their children taking care of them as they age, a phenomenon that looks just about to go by the boards. Would they not welcome a new family into their midst, if they came bearing cash? The 350,000 people fleeing the Maldives would be a tiny blip on the radar of a nation whose population is one-fifth of all humanity. “When the facts change, I change my mind.” President Mohamed Nasheed could teach Detroit a thing or two.

Twenty-five billion dollars is a fair chunk of cash. If it is handed to the Big Three it will likely vanish in a puff of smoke. On the other hand, it is approximately $40,000 each for the 620,000 or so members of the UAW. Instead of buoying a sinking ship, we could set up a combination home mortgage guaranty and professional retraining program for auto workers. We could sock $25 billion into an artificially high-paying interest bearing account – say ten percent – and require the auto manufacturers to match the revenues. They should have no trouble doing so. As they have not tired of telling us, if they get rid of their losing US business, their profitable overseas operations will restabilize their finances. With $250 million a year from Government, matched by an equal amount from each of the Three, we have an ongoing stream of $1 billion a year to dole out to UAW members while they redeploy.

Black, Black Friday

This weekend marked the beginning of the holiday shopping season. Preliminary figures appear to indicate that reports of the death of the American consumer have been somewhat exaggerated. Bloomberg quotes the market research firm ShopperTrak RCT as saying sales were up 3% over last year. This would be the smallest increase ever recorded – but an increase, nonetheless. Retailers are on tenterhooks and will be counting every penny of revenues, hoping to pull out a profitable year.

The Bloomberg story reports that retailers advertised “doorbuster” sales nationwide. At least one location proved true to this name, as shoppers at a Wal-Mart in Valley Stream, Long Island, literally not only tore the doors off the building, but trampled a worker to death as they surged into the store. Fellow workers who tried to break up the flow of stampeding shoppers and rescue their colleague were met with angry shouts of “We’ve been waiting all night!” This gives new meaning to the concept of Pent-Up Demand, and shows the folly of the current Washington plan. If consumer spending represents 70% of American GDP, then the $700 billion should not be given to the banks, but to those who will spend it. Washington should hold a contest, with consumers being asked to describe their ideal family shopping spree. We could sponsor the ultimate reality TV show – Shopper For A Day – and Washington, as the producer, could sell advertising time, thus generating additional revenues for the consumer bail-out. Why not offer this opportunity to the UAW? The $700 billion package works out to over one million dollars per Union member. Let’s give them a shopping spree. The money will be handed out on the sole condition that it all be spent within no more than thirty days, and all within the borders of the United States.

Instead of appointing Henry Paulson to fix this mess, we should have appointed Sam Walton. He knew how to stimulate spending!

Moshe Silver
Director of Compliance

* Dedicated to the memory of Jdimytai Damour *

Options Market: VIX Breaking Down?

Although this week the VIX fell to its lowest level since October, calm is not yet restored.

Volatility levels in the options market declined this holiday week with volume slowing to a trickle by Wednesday. Put/call ratios declined for the month of November in the aggregate with the index-option ratio remaining higher by an average margin of 27% --significantly lower that historical averages but still suggesting that investors with broad market exposure are continuing to hedge at these lower price levels.

Some of the major indications of declining volatility for the week were:

•On Wednesday the VIX closed at the lowest level since October 21, declining below its 50 day moving average.

•On Friday, realized 30 day volatility for the cash SPX declined below 71.5 for the first time since Oct. 17th.

•On Friday the VIX traded over 4% lower than its 50 day moving average while second month series VIX futures contracts (January 09) traded 13% lower --the lowest that the contract has trailed the VIX 50DMA since being introduced over four years ago. Other series traded at similar discounts. Clearly the futures market is pricing in declining volatility as we head into year end.

Despite all of this, volatility remains outside any historical corollaries and the options markets retain treacherous liquidity holes that leave plenty of room for short squeezes --this is not a time for amateurs to start selling naked volatility. Conversely, any volatility buyers need to be cognizant of the impact that suspended or decreased dividends will have on long-dated put contracts, while also remembering that the impact of time decay will be massively pronounced on short term contracts at these high vol. levels.

As we said last week, there are still phenomenal opportunities in this options markets for investors with the correct duration and fundamental conviction –it’s just important that they understand all the moving parts before wading in. Feel free to contact me with any question about derivative strategies at

Andrew Barber

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).

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