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US Jobs: Not Horrendous Enough...

At 623,000 this week’s initial jobless claims came in 8,000 less than the last week (last week was revised up by 5,000 to 631,000) and 15,500 above the 4 week moving average.

While this nudges up the moving average, I don’t think it provided the kind of shock that the US Financial system really needs. A horrendous number relative to the already sufficiently bearish expectations out there is what we need to break the US Dollar. Until we get that, the US Dollar is going to continue on the path of least resistance – higher.

Today the US$ Index us up another 50 basis points to $86.24, hammering home the same inverse correlation that has held steady for the better part of 2009 – US$ up = stocks down. This equity market continues to be worried about her government’s credibility. A Crisis in Credibility leads people to hoard cash and gold – that’s what people do when they don’t trust the system.

Keith R. McCullough
CEO / Chief Investment Officer

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?

No

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.

MAR: BETTER CASH OUTLOOK

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.

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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.

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.

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