CKR - Moving The Compensation Goal Posts Mid-Year

Shareholders can't be happy about this!

Determining Executive Compensation......

The Employment Agreements for senior management permits bonuses to be paid based on the discretion of the Board. In FY 2008 CKE restaurants did not hit the targeted income for management to receive a performance bonus. So, the Board felt that it was important to analyze why the company missed numbers and determine if senior management should get a bonus.

And guess what........ The market value of the company declined nearly by $600 million The CEO made $6.2 million, down from $6.8 million last FY.

According to the CKE proxy - During fiscal year 2008, a number of material events occurred which were not anticipated at the time the original target income was approved and which changed the Company structurally. Since these events were not anticipated, they were not factored into the original budget.
These events included the following:

(1) In July of fiscal year 2008, the Company sold its La Salsa brand. The original budget contemplated owning La Salsa for the entire year.

(2) The Company refranchised 136 Hardee's restaurants pursuant to a refranchising program the Company announced in April of fiscal year 2008. The original budget contemplated owning these Hardee's units throughout the fiscal year.

(3) The Company repurchased $266,640,000 of its common stock during fiscal year 2008. The Company increased its borrowings under its credit facility by $219,404,000 in fiscal year 2008 principally as a result of the share repurchases, thereby increasing interest expense during the fiscal year. The original budget did not contemplate this volume of share repurchases or the attendant interest expense.

(4) The primary unforeseeable events creating these adverse consequences were the significant increase in commodity costs, the extent of the increase in the minimum wage, and the substantial decline in interest rates resulting in mark-to-market accounting charges which the Company was required to take on the interest rate swap agreements the Company had entered into with respect to certain of its debt.

Because of the structural changes to the company and unforeseen events the board believed that the original budget was no longer relevant in determining management compensation. As a result, there was no impact to senior management compensation, despite a nearly 50% decline in the value of the company.

India to the Rescue (Not)

We think that the slowdown in India's industrial production has particularly strong implications for the apparel industry -- and we feel even stronger that this will likely fly right under Wall Street's radar screen.

Consider this. Indian Industrial Production slowed to 3% in March from an 8.6% rate in February. Not good. Aside from increased signs of a slowdown in Asia, we need to highlight the Indian/Chinese production trade off.
The chart below shows that over the past 7 years, China's share of US apparel imports went from 8% to 30%. That was a seismic event for the industry. The share gain was very steady, with one major exception - the first 3 quarters of 2006. During that time period, China began to hold firm on price, subsequently lost share, and it went right into India's pocket.

Now, China is holding firm on price again, simply because it can. But with both production and exports slowing in India as Singh tames the inflation beast in hopes of securing re-election, we're not so sure if India will be there to bail out US apparel importers by hacking prices and eating the margin pinch like it did in 2006.

Yet more proof that the US apparel industry needs to pick one of three options; a) either succumb to the prospect of sustained higher prices out of Asia, b) find some ingenious way to grow margins in a slow growth, high-cost environment (i.e. M&A), or c) attempt to pass through higher prices to consumers, and likely take it on the chin with unit demand.

Bad stuff all around.

MCD - Global Growth Trends

How long before McDonald's European Trends look like the US?

On May 14, The Bank of England will talk about the outlook for interest rates as the UK struggles with faster inflation and signs the economy might be headed for a recession. The UK economy is struggling with record food and oil prices, a global credit crisis and the worst housing downturn in 12 years. Additionally, with consumer confidence in Germany slowing the grey clouds are forming for McDonald's most important European country.

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

Surprising Read on UA Trainers

Under Armour's much anticipated cross-trainer launch did not break any sales records last week -- by a long shot.

Our contacts suggest that initial sell-throughs were around 10% in the mall (i.e. mostly Finish Line). Fyi, 'sell through' refers to the percent of allocation sold through in a single week.

The surprising aspect of this statistic is that it is actually above the 6% we're seeing in some major sporting goods retailers. We'd think it would be the opposite given UA's stronghold in the sporting goods channel.

These are not disastrous numbers by any means, and we certainly won't judge the success of UA's footwear initiative by a mere week -- or even a full season. In fact, these numbers are pretty good in the context of such a weak retail environment.

But let's not forget that UA's initial launch of its cleated footwear business last year sold through at a rate of about 20-30%.

Such a wide divergence is simply too great to ignore.

The Bottom of the Boot?

It's tough to call the precise bottom in any business cycle - particularly in the fashion realm. If you were to walk into the Research Edge HQ, you'd see quickly that no one here comes even remotely close to having a viable opinion on fashion (except Mick, our eccentric VP-Brand design). Fortunately, we don't make fashion calls at Research Edge. We'll leave that up to the sell-side. We dig deep into industries, companies, balance sheets and business models. That's where we think there are a couple of interesting call-outs on Timberland.
  • 1) First, the bad news. Anything remotely resembling strength in the brand is coming at the family footwear channel - hardly a sign of regaining traction with real brand influencers. In addition, with the initial push into more fashion-forward product almost a year ago having fallen flat on its face, our read is that TBL has pulled the good 'ol retail one-eighty. It went from experimental fashion to ultra safe basic product. In that context, TBL is not taking up any prices (because it lacks brand strength to do so) despite higher input costs. There's very little to get excited about here.
  • 2) But here's what piques our interest. A) Our read from retail is that inventories are very clean. B) While average selling prices for TBL's boot business is down per NPD, the trend is hitting higher lows. C) Market share is still off, but at a materially lower rate than in at least 8 quarters. D) Surprisingly, the strongest channel aside from the family retailers is the department stores. A brand performing well there has got to be doing something right.
  • 3) Gross margins are still under pressure - which is no secret. But what's misunderstood is that TBL's gross margin pressure for the past 3 years has been magnified by a factor of 4 on the EBIT line. In other words, SG&A investment went up instead of down when things got tough, and TBL took it on the chin when it could have otherwise cut muscle to print a better number. We like TBL's course of action. That's a big lever to pull when things get tough. TBL is starting to pull it.

All sourcing risk is not created equal

For those tracking the Asian environment, the chart below should be particularly relevant. With 85% of US footwear consumption being sourced in China, it's interesting to see each company's relative exposure. A couple of takeaways...

1) Nike very low at 35% and trending lower.
2) Adidas not too far behind at 46%
3) Payless and K-Swiss painfully high at 96% and 98%, respectively.

On one hand, Nike and Adi are materially underweight China, and could keep relative exposure low by increasingly dominating factories in Vietnam, Thailand and the Philippines.

But what does that mean for everybody else? In a zero-capacity-growth environment, it tells us that they'd better have incredibly relevant product and subsequent pricing power. Otherwise, margins could be at risk.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.