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1) Could see low to mid teen unit volume declines in Q1 and Q2, improving to flat vs. last year – this could be mitigated by incremental promotion opportunities in spring and BTS. (Bill Nictakis noted that outerwear orders are up 25% for Spring and BTS. Outerwear is 28% of total.)
2) Net net is annual sales decline of 4-5% (Street is -7%) assuming similar consumer behavior with scenario of down 8% if Q4 has similar decline as 2008.
3) Goal for GM rate to increase 10-100bps above 2008
4) Cotton costs easing after 1Q
a. Q1 +$15mm ($0.74/lb)
b. Q2 -$8mm ($0.49/lb)
c. Q3 -$12mm (0.49/lb)
d. Q4 30% locked at $0.45 could save $20mm
Annual tailwind of $25mm (+$0.20 to EPS)
5) Pension expense of $21mm in 2009 (~$0.18 EPS impact) compared to $12mm income in 2008 – will remain at these levels until market conditions improve
6) Goal to reduce media and IT by $40mm – mostly in 1H
7) $250mm over 3 yrs after spinoff
8) $222mm announced to date
9) Goal in 2009 to announce final restructuring charges during year
Interest details will become available when amendment is solidified.
LT tax rate 22%-25% (bottom of range in 2009)
2009 1H operating profit depressed below 2009
CapEx: $300-$350mm over 3 yrs
2009: $100-$130mm in 2009
WC: needs now ~$50-$75mm reduce Inventory to $1.15B by early 2010
At down -17.7% for 2009 to date, and down -52% from the 2007 peak, the question for the US market from here is will it enter a Depression? Provided that our government figures out that the best way to ensure that deflation decelerates is to break the buck (de-value the Dollar), I do not think we are going to enter anything that resembles an unemployment rate of 15-23%, and the mother-load of all deflations from today’s prices (i.e. The Great Depression).
Bernanke seems to be suggesting this morning that the US market will recover within the span of a year. Explicitly, this morning he is saying "If actions taken by the Administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability--and only if that is the case, in my view--there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery."
While Wall Street/Washington’s latest meme of prefacing everything it says with “in my view” is annoying (it implies that everyone else on the team may not agree – that’s not a team anyone can trust), Bernanke is finally “making a call” here, with an explicit duration. If Wall Street wanted specificity – that’s as close to what we have received from Bernanke to-date when it comes to timing the turn. He is also mapping out the timing of spending both the TALF (term auction lending facility) and the CAP (Capital Assistance Program). On the margin, this is progress when it comes to transparency/timing.
Economic bottoms are processes, not points. Our US Strategist, Howard Penney, and I believe that housing could bottom (in terms of sequential price declines and inventory growth) in Q2 of 2009, so the timing of Bernanke’s 2009 bottoming process is in line with ours.
Importantly, we “make calls” based on delta’s here at Research Edge. So, to be clear, our call is that year over year deflation in US home pricing gets less toxic. Put another way, going from toxic to bad is good – and we think this starts to play out on the asset side of the US Consumer’s portfolio come Q2. The prices associated with both American homes and portfolios will go down at a lesser rate. This will build confidence from its current record low base.
Ensuring that deflation slows is best accomplished by breaking the US Dollar’s current upward momentum. Ben Bernanke, now is the time to do what you can to break the buck.
Keith R. McCullough
CEO & Chief Investment Officer
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