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CRI: Product Differentiation

Carter's (CRI) is a company full of challenges that lie ahead and our Retail Team has focused its attention on product differentiation, or lack thereof in the case of Carter's, which impacts the company's ability to command pricing power with wholesale accounts. Going forward, Cater's will find it difficult to justify its EBIT margins with its current setup.

 

Consider that you can get Carter's products in its own stores, Walmart, Amazon and other places. The same goes for produce from Nike (NKE) and Ralph Lauren (RL) but the difference is in the product stratification by availability and price. For instance, Ralph Lauren and Nike have their own direct channels via Nike and RL stores. Here they sell higher-end products that are priced as such. They can also sell entry-to-mid level product to retailers like department stores, Kohl's, online websites, etc. 

 

 

CRI: Product Differentiation  - CRIProdDiff

 

 

Carter's on the other hand just sells the same product at the same price across all channels. 90% of the product hitting the floor on on the first day comes 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.


CPI DATA REMAINS BEARISH FOR RESTAURANTS

Takeaway: We remain bearish on $DRI, $BLMN, and $TXRH

The Bureau of Labor Statistics released CPI data for the month of September this morning.  The spread between CPI for Food at Home versus Food Away from Home continues to grow.  Inflation in the restaurant check is far-outstripping inflation in the grocery aisle.

 

The advantage that restaurants enjoyed over grocers in 2011, in terms of lower price increases year-over-year, has reversed.  Restaurants’ pricing power is much-diminished.  As CPI for Food at Home decelerated to 0.8% in September, CPI for Food Away from Home continues to grow at 2.8%. 

 

CPI DATA REMAINS BEARISH FOR RESTAURANTS - food at home vs food away from home

 

 

Casual Dining

 

As we wrote in our recent post, “RELATIVE VALUE MATTERS FOR CASUAL DINING”, our research indicates that the Restaurant Value Spread, or difference between CPI FAH and CPI FAFH, is highlighting downside risk for casual dining same-restaurant sales expectations.

 

CPI DATA REMAINS BEARISH FOR RESTAURANTS - cd rvs

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


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

 

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.32%
  • SHORT SIGNALS 78.48%

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.


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


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