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COLM: 2H Margin Pop?

Columbia Sportswear cut headcount today according to SportsOneSource (I've found them to be fairly accurate on nuggets like this). While I don't make it a practice of commenting on news stories like this, I have to point out a few important themes.

1) Based on my sources, the report appears true, and seems to be above and beyond any cost reduction efforts the company noted on its recent conference call.

2) This is literally days after K-Swiss instituted layoffs in its salesforce.

3) Kind of ironic that US companies are laying off, while workers in Vietnam are striking because recent 14% wage hikes are not enough! So the people making the product are refusing to work, and the people designing and selling the product are being fired. That's matching up supply and demand the hard way. How can this be a positive trend??

4) SG&A trends for COLM have been trending up in recent quarters due to investments in new brand initiatives (see Exhibit below, courtest of FactSet). That's a solid move - especially given the fact that sales have been struggling to find a bottom. COLM is 2 quarters away from much easier year-year margin compares. With cost cuts hitting in full in the 3rd quarter, could this thing be setting itself up for a margin pop in 2H even without a rebound in sales? At 5x EBITDA and 12x EPS this probably matters...

Vietnam Strike = Bad Bad News

Here's a major call out for you. 5,000 workers at a Vietnam footwear manufacturing plant went on strike shortly AFTER getting a 14% wage increase (by 100,000 dong to 800,000) -- noting that it is not enough to offset inflationary pressures. With consumer prices in Vietnam up 21% versus last year, I can see the logic. Is it any coincidence that this happened simultaneously with a 325bp overnight hike in rates in Vietnam? Not a chance.

Vietnam might seem like a rounding error relative to China, but it is not. It's the number 3 producer of athletic footwear, and is a perennial top 10 apparel maker. Though share is only 5% compared to China's 85% in footwear and 40% in Apparel, Vietnam serves as an important buffer for the industry when Chinese prices go up. (Recall that the same dynamic holds true for India, and as I noted last week, price trends are decoupling from what we've seen historically vis/vis China).

The bottom line is that growth is slowing in Asia, at the same time costs are headed higher. This plays into our key theme in Apparel and Footwear that an 8-year margin bubble is bursting. The US retail industry has only seen the beginning of the pain that is to come...

QSR Valuations - "Global This Time"

A quick look at how the global this time theme is manifested in stock prices of select restaurant companies. The chart below shows the divergence in EBITDA valuations between MCD, YUM CKR and JBX.

Research Edge observations:
All four companies are experiencing declining traffic and margins in their respective U.S. business.
JBX and CKR are California centric companies.
YUM and MCD have strong international operations.
YUM and MCD are returning significant amounts of cash to shareholders.

The premium valuation for YUM and MCD are due to the safety net that investors seek from the global this time theme.

See Keith McCullough macro portal for more on the global this time theme!

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SBUX - Starbucks France

The Starbucks brand has tremendous opportunity overseas, but it will not come easy. Starbucks's JV partner is proof that there are a few bumps in the road. For the third time in four tears, Starbucks appointed a new managing director to run the operations. Starbucks, which opened its first outlet in France in 2004, only has 41 stores in the country. One of the issues the company faces is the French culture is not a to-go culture.

Reading the Starbucks blogs in France I found a post that sums it all up:

Let's compare a shot of espresso in France to one in a Starbucks:

In France: a piping-hot demitasse served in a small ceramic cup with a couple cubes of sugar, the rich aroma suffusing the atmosphere.
In Starbucks: 1.5 ounces of weak, rapidly cooling beverage in the bottom of a 12-ounce "Dixie cup", that both smells and tastes like cardboard.

KSWS: Beware the Shrinking Salesforce

Not a secret that the top line at K-Swiss has been under massive pressure. The 2 and 3-year trend line is just about as bad as I can find in retail. That said, the sales decline has been flattening out, and SG&A growth recently rolled over, which is a pretty attractive inflection point in the operating profit trajectory from my perspective.

My interest in this one was all but squashed today when my sources realized that KSWS has taken the knife to its salesforce, with some senior layoffs over the past 2 weeks. Could we see the SG&A trend continue to improve at face value? Perhaps. But it always gives me the creeps when cost saves come at the expense of a salesforce.

Note: Chart below shows the change in market share for K Swiss in its 2 largest categories; Tennis and Lifestyle. Not a pretty trend. Data compliments of NPD Fashionworld.

UA: Zero to 30 in 2 Weeks

By the end of this past weekend, my sense is that sell-throughs on the new Under Armour Cross Trainers ticked up by 200-300bp from the 6-10% sell through rates we initially saw earlier in the week. While these are not 'knock-out' numbers (remember that UA's cleat launch was 20-30% sell through), they remain very respectable.

But if looked at on a very narrow 2-week market share view, UA has grown the cross training market by 19%, and has taken 30% of that segment out of the gate. Nike's share went from 56% to 36% and Reebok went from over 5% to about 1%. While not sustainable given that product supplies are likely to dwindle throughout the summer, this is no doubt, a number being flashed around Baltimore these days.

The "Proto Evade" at a $79.99 price point is the lead dog of the cross trainer line. The low cut styles are doing very well, followed by the mid-cuts. The higher cut styles (and highest price point at $100) are nowhere near as successful.

One consideration is that week one numbers for any major product launch tend to be buoyed by both pre-sells and in-house employee promotions. All of the majors - Sports Authority, Hibbett's, Dick's, and Finish Line did a solid job here.

Overall, the attitude at retail across the US is upbeat regarding the launch. Interestingly, more than one person we spoke with used the following terminology regarding the launch; "The launch was not Jordan-esque, but it more than satisfied expectations". Sounds like this has been spoon fed as the standard line...

Keep an eye on the UA investor day next Thursday in Baltimore. I can't imagine anything but solid news/spin will come of it. As it relates to footwear, my bet is that the Tech Running initiative for Spring '09 gets some solid bandwidth. Keep in mind that this is a category that is perhaps the most competitive in all of footwear, and also one that is farthest from UA's core competency. We're even seeing brands like K-Swiss, the perennial tennis brand, get into running next Spring, as well as a more meaningful push by Asics. It'll be interesting to hear how UA will keep market spending under control as this initiative launches.

Chart below shows 2 week yy change in Cross Training market share. Courtesy of NPD Fashionworld.

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