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CRI: Product Differentiation Considerations

Takeaway: The root of CRI’s challenges lie in the lack of its differentiation of product by channel.

Here’s one of the 20+ exhibits in our CRI Black Book that we think is worth calling out. It highlights what we think is the root of many of the company’s challenges.

Specifically, CRI has little product differentiation relative to other brands. You can get CRI product in Carter’s own stores, at Wal-Mart, Amazon, Kohl’s, JC Penney, or Macy’s and it all pretty much looks the same. You can get away with that as a small brand – like how big CRI was a decade ago. But with over $3bn in (retail equivalent) sales, you’ve got to be careful – especially with so many new competitors coming into the space today (GILT, Giggle, Children’s Place at Sam’s, etc…).

Take a look at some of the premium branded apparel/footwear manufacturers in retail like NKE, Ralph Lauren, Under Armour, Coach, and you’ll see a very clear product stratification and segmentation strategy. What is sold through company direct channels (owned-retail/e-commerce) is higher-end, often exclusive, and priced accordingly. Product sold through specialty retail channels is often exclusive in some regard (colorways, limited quantity, etc.) along with other premium brand product. Then you have the entry level product at mass/department stores and 3rd party e-commerce, which covers some combination of mass and specialty, but not company direct. This is not how CRI sells through to the market. It’s the same product, same price. Or even worse, similar product, different price.

Is it fair to compare CRI to these brands? As long as people are arguing that CRI will get to 14% EBIT margins, the answer is yes. NKE has 40% market share in footwear, 15% in apparel, and has pricing power. Yet it has only has a 12-13% margin. RL has about 7-8% share in the US. It too has pricing power, and it has a similar retail/wholesale mix as CRI. RL’s margins are about 14%. UA has a high growth trajectory with RL-like market share in an oligopoly with pricing power. Yet it has only 10% EBIT margins.

CRI has a very promotional model, with 90% of the product hitting the floor on day 1 with an average 40% discount. In other words, it has no pricing power. It has 24% market share in its core business, and 12% share in kids – about midway between a NKE and RL. But should CRI have the same margins as these other players? We have a hard time arguing that they do.

For a more detailed analysis, please see our CRI Black Book “CRI: The Margin Rebound Disconnect



CRI: Product Differentiation Considerations - CRIProdDiff



Trade Idea: Shorting EWQ (France)

Takeaway: Hollande’s socialist agenda will push up the country’s debt level and reduce competitiveness. We expect a rising risk premium.

Positions in Europe: Short France (EWQ); Long German Bonds (BUNL)

Keith added EWQ to our Real-Time Positions at $21.58 on 10/15. EWQ’s immediate term TRADE support is $20.34 and intermediate term TREND resistance is $21.84, which is currently broken to the upside.


With regard to the trade Keith said: “Re-shorting a country that has failed in their Keynesian policies to deliver the elixir of GDP growth. France has stagflation instead.”


Trade Idea: Shorting EWQ (France) - bb. ewq


We’ve long had a skeptical eye on Socialist President François Hollande, beginning with his very loud “tax the rich” campaign slogan and lack of focus on reducing France's fiscal fat. 


Late last month Hollande delivered on much of what he promised; the 2013 budget notables included:

  • €10B of spending cuts and €20B of tax increases
  • Tax of 75% on incomes over 1MM EUR
  • Goal to bring the deficit down to 3% of GDP next year from a projected 4.5% this year (vs Spain 4.5%; UK 6.6%; USA 6.3%)
  • +0.8% GDP growth forecast for 2013

We frankly think that both its GDP and deficit reduction targets are overly optimistic.  And with public debt pushing 91% (as a % of GDP), France is above the level of 90% that economists Reinhart and Rogoff have indicated as destructive to growth. 


In recent weeks France's business federation has vetted its frustrations with Hollande’s polices.   The group is rightly concerned about a competitiveness drag, including from Article 6 of the new tax law, which raises the top rate of capital gains tax from 34.5% to 62.2%. For reference these levels compare with 21% in Spain, 26.4% in Germany and 28% in Britain.


Given its debt drag and the square stagflationary position the economy is in (Q2 GDP Final 0.0% Q/Q and 0.3% Y/Y and CPI registered 2.2% SEPT Y/Y vs 2.4% AUG) we expect not only growth to underperform expectations, but an upward inflection in its relatively stable and low yields (see charts below) alongside a heightened risk profile with a likely downgrade of the sovereign by another main credit agencies this year. [Currently, the Standard & Poor’s has cut France to AA+, while Moody’s and Fitch remain at AAA].


Trade Idea: Shorting EWQ (France) - bb. france yields 1


Trade Idea: Shorting EWQ (France) - bb . france yield 2


The most current data also confirms a sagging economy: French PMI Manufacturing fell to 42.7 SEPT vs 46.0 AUG and Services dampened to 45.0 SEPT vs 49.2 AUG, both below the 50 line indicating contraction. Confidence figures also remain depressed:  Business Confidence (down to flat since March 2012); Consumer Confidence (down since June); and Consumer Spending has been negative (year-over-year) for the last two readings.


While Spain is taking the sovereign spotlight light in the Eurozone right now – as rumors swirl today that Madrid is considering requesting a credit line, rather than a full-scale bailout from the ESM, and may qualify for the ECB's OMT – we caution on the rising risk profile of France. We expect growth and competitiveness to take large hits under Hollande’s fist and think combined with the likely downgrade of the sovereign that credit spreads should inflect off their current lows to represent France fiscal imbalances.


Matthew Hedrick

Senior Analyst

MGM: Shorting The Slump

Make no mistake about it: The Las Vegas economy remains depressed and the majority of gaming profits made these days are outside of the Strip in places like Macau. Slot volumes have declined for five consecutive months and will likely continue through the first quarter of 2013. Skewing the odds in the casino’s favor as a “price increase” isn’t a sustainable method of fixing the problem.


The main problem with slots lies in the demographics of gamers. Younger people aren’t interested in playing slots when there’s Blackjack and Hold ‘Em to be played. The average casino visitor continue to rise, with 65+ year olds rising to 35% of the visitors. Baby boomers are dying out.



MGM: Shorting The Slump  - MGM



MGM Resorts (MGM) is highly levered to Vegas whereas other companies focus more on Macau. Thus we are negative on the long-term fundamentals of domestic gaming. We see earnings risk on the near-term duration for MGM and the stock is below our TREND line of resistance from a quantitative perspective.

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Citigroup: Pandit Vs The Market

Citigroup (C) used to be a triple-digit stock if you can remember a time before the financial crisis. There was the 1:10 split back in 2011 of course, but the bank’s stock has essentially been destroyed during the tenure of Vikram Pandit, who resigned as CEO this morning. 


As you can see below, the stock fell -89% between December 2007 when he first became CEO and today. Shareholders will most likely welcome a change in the ranks with that kind of performance haunting them. Meanwhile, The S&P500 has almost returned to its original December 2007 levels, down only -2.1% for the same time period.


Citigroup: Pandit Vs The Market - image001

It Doesn't Add Up







After the first presidential debate, the government released three economic data reports that suggested growth was returning to the US. Advanced monthly retail sales, Jobless Claims and the Jobs Report that Jack Welch got in a stir on Twitter about all seem suspect. The Jobless Claims report was missing one “large state’s” data and the Jobs Report suggested unemployment was at 7.8%? Get real. These kind of numbers don’t just magically appear overnight unless someone is tooling with them in order to achieve specific results. 




Now, if the above shenanigans occurred over the first presidential debate, we can’t wait to see what happens after tonight’s second debate between Obama and Romney. Economic growth is likely to be the key topic between both parties. Considering how close Romney and Obama are in the polls, this is going to be another round that Romney needs to win. If he can repeat the performance of his first debate, Obama will likely go back to spinning the data any which way he can to save face.






Cash:                DOWN


U.S. Equities:   Flat


Int'l Equities:   Flat   


Commodities: Flat


Fixed Income:  Flat


Int'l Currencies: Flat  








Remains our top long in casual dining as new sales layers (pizza) and strong-performing remodels (~5% comps) should maintain sales momentum. The company is continuing to enhance returns for shareholders through share buybacks . The stock trades at a discount to DIN (7.7x vs 9.3x EV/EBITDA) and in line with the group at 7.3x.

  • TAIL:      LONG            



Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

  • TAIL:      LONG



While political and reimbursement risk will remain near-term concerns, on the fundamental side we continue to expect accelerating outpatient growth alongside further strength in pricing as acuity improves thru 1Q13. Flu trends may provide an incremental benefit on the quarter and our expectation for a birth recovery should support patient surgery growth over the intermediate term. Supply costs should remain a source of topline & earnings upside going forward.

  • TAIL:      LONG







“‘We need a lasting solution’ -- Germ fin min Schaeuble, calling for creation of an EU ‘currency commissioner’ $$” -@carlquintanilla




“Cynicism is an unpleasant way of saying the truth.” -Lillian Hellman




Coca-Cola’s (KO) China business slows in quarter. Volume growth slows to 2% in China for Q3, vs. 6% year to date.



Daily Trading Ranges

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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.