Cost Spreads Matter

9 out of 10 CEOs can’t tell me within a 20% band how many units of apparel are consumed in the US. That’s why I think monitoring the relationship between unit cost and sales matters so much.

Now that so many are realizing the importance of factoring in a macro view with the (always important) company fundamentals, I am getting more questions about changes in the import price environment.

A common mistake out there is that many people look at the percent change in apparel/footwear CPI vs. the percent change in the import cost. If import costs are off by 1%, but consumer prices are off by 2%, then that’s actually a POSITIVE margin event, right?


Think about it. The average retail price for a garment of apparel is about $10, yet the average fully manufactured/imported cost is $3.50. If costs are down 1%, then that saves $0.035 per garment. This might not seem like much, but multiply it by the 23 billion units of apparel consumed in this country last year and that’s $800mm – yes folks, that’s real money. But if consumer price is down by 2%, then we’re talking a $0.20 hit on each of those garments, or about $4.6bn. So net out the two and the industry is in the hole by $3.8bn. Not good… This is the basis for much of the multi-year call I’ve had – and continue to have – on the industry. Most CEOs I talk to cannot tell me within 5 billion units (yes, that’s 20%) how many units of apparel are consumed each year. Macro might not have mattered over the past decade. But now it does.

That’s why I track the chars below so closely. I don’t care as much about the percent change in cost vs. retail sales as I do in the dollar spread. That’s what really matters. The notable point here is that the past 6 months has actually shown a positive trend for consumption vs. manufactured cost. The latest month turned down again meaningfully. The data is on a one month lag, so we’re looking at Dec – which is hardly relevant about what is to come. But straight lining the trend throughout ’09 does not bode well for margins through mid-year.
Unit cost/revenue spreads have been so positive for so long. They even looked good for 2H08 but recently turned down.


I thought the MAR earnings call was positive on the cash flow front. The rough lodging environment is no secret. MAR’s ability to drive cash flow significantly higher might have been. Here are the highlights:

• MAR cut capex by $400MM YoY, is financing fewer loans to owners, and will still sell off timeshare notes receivable even at a loss. This strategy is very positive for cash flow.
• I think that the guidance was conservative, certainly more so than HOT. HOT probably couldn’t give realistic guidance because that would show a covenant breach. MAR has no covenant issues.
• The capex cuts were good but they still can cut another $200-250MM per our math, and I think they will.
• Timeshare will be a positive free cash flow generator in 2009
• MAR doesn’t have the same nasty tail on the flow through here because of the fee-based model, so 2009 could be a real bottom.

We will follow up with a more detailed post.

Surprisingly Positive Price Point Trends

I’m surprised with how uniformly strong price points are in the athletic specialty channel – in both apparel and footwear. Yes, there has been a slight shift in mix to outerwear (higher price), the shoe companies are coming out with better product (to defend against UnderArmour), and retail is cycling weak price points last year. But facts are facts and the numbers don’t lie.

The offset is that unit sales are not keeping up, and the supply/demand equation is adding up to flattish trendline sales. But hey, is that really a disaster in this climate? Something to consider as it relates to DKS, HIBB, FL, and FINL. I have to dust off those files.

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UA/NKE: The Two Horse Race Begins…

Nike proactively launched 3 new running shoes (one of which is the Air/Shox hybrid 'Shox Experience +2') at the same exact time as UnderArmour’s running launch. The result? Adidas, New Balance, Saucony, Asics and Puma all took a dive.

The common view out there is that for UnderArmour to win in running, Nike has to lose. That’s simply not true – at least not yet. Nike’s share is nearing 70%. Yes, that’s huge, and it is probably not headed higher. But there’s no way that Nike will roll over and play dead in this category – the category that the company was built on. As an aside, Nike’s first athlete was NOT Michael Jordan, but rather Steve Prefontaine -- perhaps the best middle-distance runner in US history, and the first Nike athlete a decade before MJ.

This means that brands like Adidas, New Balance, Asics, Reebok, K Swiss, Saucony, and Puma need to watch out. Someone is going to lose. In fact – this past week ALL of them did. One to watch is Saucony. I like what Collective Brands (PSS) is doing there. K-Swiss as well. Adidas, Reebok and New Balance have the most to lose – and lose they will.

DIN – Eventually there will be nobody left

Yesterday, DIN announced that IHOP President Desmond Hague is stepping down later this month after less than a year in the position. Jim Peros, IHOP’s senior vice president of operations, will serve as interim president until a successor is found.

This move by Julia Stewart is consistent with other CEOs that are in trouble – they keep throwing senior executives under the bus until there is no one left!

DIN is toast.

Gold Diggers

“She take my money when I'm in need… Yea she's a triflin' friend indeed…Oh she's a gold digger way over town… That digs on me”
-Kanye West
These are lyrics from Kanye West’s “Gold Digger”, which went straight to the top of the US Billboard Hot 100 back in 2005. Oh baby did this song have some momentum! Jaime Foxx provided the guest vocals and this All-American rapper turned prospector had himself a smash hit – little did he know he was signaling one of the biggest calls in Global Asset Allocation that we have seen in the last 3 years!
Gold started to find her global inflation bid in 2006, testing $700/oz by summertime, only to fall right back to $575/oz come the fall. By the time 2007 rolled around, all gold wanted to do was signal one of the greatest positive auto-correlations in asset prices (across asset classes) that the global economy had ever seen.  By the end of 2007, gold was chugging toward $800/oz, and kept riding the rocket of momentum up to $1000/oz by early 2008.
This asset class, much like US Treasury Bonds, has been one of the few that haven’t seen her bubble pop. This morning gold is pushing higher towards $945/oz, and at +7% for 2009 year-to-date, everyone and their brother is all of a sudden a prospector of this solid gold tune.
Now, as most of you know, I have been a gold bull. While I think you can still trade gold with a bullish bias, right here and now it is borderline reckless to be considering it a unique investment idea. I shorted it into yesterday’s close, for an immediate term “Trade.” If you remain objective, you can buy gold low and sell it high. There are no rules against doing so. This is how I manage risk.
Call me stupid, or call me competitive. I, like Kanye, can be “down with that”, at a price. When CNBC’s Joey “The Contrarian Indicator” Terranova is ramping up his buy gold idea on Fast Money like he did last night, the best thing you can do… at a bare minimum… is sell what you are long right into his bid.
Once a week, I say a prayer that the likes of Terranova stay on prime time TV. Alpha is hard to come by these days, and sometimes the only way to pick off passes is to have arm chair quarterbacks step onto the field throwing real passes. Remember, in Disney’s “Invincible” Joey Papale (played by Mark Walberg), was the only man, out of the entire city of Philadelphia, who had a repeatable enough of a process to play with the pros.
The manic media’s favorite book salesman, Peter Schiff, of Euro Pacific Advisors, was on Kudlow last night, talking up his latest paperback suggesting that the Dow Jones Industrial Index could trade at the equivalent of “ONE ONCE of gold by the time Obama leaves office.” Peter, “C’mon Man” – I get the whole pushing your paperback thing, but why not show the Street how your actual book (as in portfolio) is doing so far in 2009. The Dow closed at 7,939 yesterday – are you suggesting that the Dow has 88% downside from here, or gold 88% upside? Or neither, and just trying to be your usual alarmist self?
While I am short the Dow in our Hedgeye Portfolio, I certainly don’t share Peter’s apoplectic views. The reality is that while Joey is really trying hard at becoming an entertainer (and I admire his effort) Peter remains one of the many people who have always been bearish on the US stock market, and are now trying to say they called it. There is no honor in that Peter – if you want to sell books, do that – if you want to wear the jersey as Connecticut’s top macro man in global macro, show us your book.
The 2007 bulls are bearish, and the 2008 bears are trying to sell books. That’s what we have left here, and that’s why no one is really allowed to be bullish on the US stock market, yet…
The way that this business works is that you can only be bullish on something when everyone else in the room is, or you run serious career risk, particularly if you are an analyst. Momentum managers have no patience for an analyst like say, Kanye West, to be bullish on gold in 2005. What these masters of consensus want is for their analysts to jack up the volume and get their hedgie friends to be bullish on gold today!
Today is actually “Darwin Day” – it’s his 200th birthday – and he would get a chuckle out of this note, because this is exactly how Wall Street creatively self destructs the consensus trades of lemmings, and rewards the next set of market wizards in the making.
For an immediate term “Trade”, I bought oil yesterday, and shorted gold. Unless I ran my own firm, I probably wouldn’t be able to do that in this environment for someone else – not with real capital at least. Very few firms are allowing their traders to take on any risk, let alone something wild and crazy like buying oil while it is on the clearance racks at -76% off. That’s both a sad point about where momentum investing has brought this profession, and a wonderfully obvious opportunity for the next generation of American capitalists to take advantage of.
In global macro, the South African and Middle Eastern equity markets have always been stealth leading indicators for where gold and oil can trade in the immediate term. South African stocks are down -1.4% this morning and those in the United Arab Emirates are +1.4%. Oh what are Peter and Joey to do with these little critters that we call global macro factors? Do these guys have an investment process? What is it, gentleman, that you do?
Kanye West is a rapper; Schiff is a book salesman; and Terranova is a momentum entertainer – and at least one out of these three men would agree with my conclusion. Today is Darwin Day, and we’ll have to let the market decide on the other two from here.
My downside target for the SP500 is 808. I am short the Dow, and I still think that the US market continues to make higher lows on selloffs.
Best of luck out there today.


 Gold Diggers - etfs011209