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Footwear ASPs Remain Healthy

NPD's weekly footwear sales for the week ending this past Sunday were just released, and the numbers kept me in the 'mildly encouraged' camp as it relates to the state of sales out there right now. We're still running with dollar sales about flat on a 1 and 2-year trend, but average selling price is still up mid-single digits. Is Under Armour's (higher-priced) cross trainer launch helping these figures? My math says yes -- but by no more than 20-30 bps. My gut is still that inventories in this space have found a near-term bottom.

Let's see what Foot Locker and Hibbett say later today. Though their business still is pretty bad, I think they'll agree with my take on inventory trajectory.

As a sidenote, Under Armour's trainer numbers look good. Not great -- as price point eroded $2 over 2 weeks -- supporting my take that the $100 price point shoe is not catching on as well as the lower cut models). But the momentum at retail is certainly still healthy for UA.

1 and 2-year sales hart below courtesy of NPD Fashionworld.

BigResearch Consumer Survey

According to a BigResearch survey of 4,198 respondents, 3 in 5 Americans (62.3%) think the economy is in the worst shape they've experienced in their lifetime. The May American Pulse Survey showed 77.1% of Democrats and younger people between 18-34 years old (65.8%) are most likely to echo this sentiment.

Less than six months out from the November election, most Americans (77.8%) are already tired of it and wish it was over. Regarding the media coverage they have heard to date, 31.5% feel the media favored Obama in their coverage during the primaries. Only 10.4% say the media favored Clinton.

Other key findings:
With the economy weighing on Americans' minds it may not only affect their vote in November, but also their campaign contributions in the interim. 36.5% say they will give less contributions to political candidates this year.

Regarding gas prices, 52.9% think the U.S. government should open the Alaskan Wildlife Refuge (ANWR) for drilling...71.6% of Republicans and 46.4% of Democrats agree.

Americans are using all forms of media more frequently than in 2004 getting information on the candidates for the Election, with television (62.9%) being the preferred medium followed by the Internet (45.9%) and newspaper (43.4%).

MCD - Holding The Line On The $ Menu

The news flow from the McDonald's annual meeting was consistent with past comments, but uncertainties remain.

Jim Skinner, McDonald's CEO, said the company remains committed to its low-price dollar menu. "This is not the time to be passing that on to consumers. They have long memories. We're the value leader. We always have been, and they expect us to continue to be the value leader. The company's low-price dollar menu, which offers items like double cheeseburgers for $1, has been popular with cash-strapped customers. The menu drives traffic to stores, and the additional volume has helped protect profits by knocking out some of the pressure from higher commodity costs.

Given the inflation pressures the company is seeing, holding the line on the Dollar menu puts the McDonald's system in a difficult position. In 1Q08, despite 2.9% same-store sales, higher commodity costs drove U.S. margins down 20 basis points for the quarter. In 1Q08, in the U.S. cheese costs rose 30% while beef and chicken both increased nearly 4%. For 2008, McDonald's expect U.S. chicken prices to rise nearly 6%, cheese up 14% and beef up slightly.

We understand the need to drive traffic, but at what cost and who is paying the price?

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Democratizing Earnings Season

Ok, I've stuck to raw analytics with my postings, but I'm going to break rank for a quick minute. With earnings season just about done, we've all been dialed in to conference calls constantly. My math suggests 13 hours of time wasted on stupidity. The answer is to open up the queue beyond the sell-side. Let me vent for a minute...

1) If I hear one more analyst congratulating management on quarterly performance, I'm going to pull my hair out - especially when earnings are down 20% and they are beating their own guidance. Do I get congratulated for cranking out analytics? Does an investor get congratulated for having a good stock picks? No. Why? It's called a job...

2) Is it me, or is the number of analysts who are picked late in the queue and say All my questions have been answered increasing? That's like walking out of a library and saying 'I've read all these books already.

3) Here's a retail industry pet peeve. Why do analysts bother asking CEO's to comment on the supply chain partners that account for 25% of sales? What do they really expect to hear?? Yes, Wal*Mart has really messed up on our new product launch. Is Under Armour taking share from Nike? Well I'm glad you asked. The answer is that UA's share gain has slowed dramatically and we have more inventory than we'd like. These are things we'll never hear on a conference call.

I listened to 40 conference calls over 3 weeks. About an hour each. Roughly 35 minutes of Q&A. About 20 of them were excruciating. That's 13 hours of time wasted. Ironic that the best question tends to come from the constituent that naturally does not get air time on calls - the buy-side. Yes, this is partially by choice, but I'd argue it is more driven by the tradition of exclusion.

Exclusion is bad in any business.Especially this one.

WEN - Talking Up His Book

As Keith pointed out yesterday, Bill Ackman would be talking up his book at the Ira Sohn conference.

Well apparently he made some comments about WEN!

Bloomberg is reporting that William Ackman believes WEN is worth $42. The WEN board has already determined that company is only worth $27 and agreed to be acquired by TRY. If Ackman is right the Peltz mystique will only grow bigger.

Personally, I think $42 is a pipe dream....


GMCR - Keeping an EYE on GMCR

Senior management at GMCR believes that there is a true evolution underway in coffee making with Keurig holding the number one market share. The coffee evolution goes like this - first, there was percolated coffee, then there was drip, now there is single-cup brewing. How big is the market? Currently, there are 90 million U.S. households that have coffee makers and now they have the opportunity to buy a single-serve system. And the numbers are impressive. In 1Q08, at home brewer unit sales were up 144% and Green Mountain K-Cups were up 68% YoY, respectively. The best part of the story is that that the razor-razor blade model is in full force and the more machines in the marketplace, the more K-Cups will be sold.

If all this is true why are key executives leaving and other insiders selling record levels of stock?

  • ValuationAt 20x EV/EBITDA the current rate of growth needs to be maintained or there will be multiple compression quickly. The chart is from our friends at FactSet.
  • Gross margins - Selling more, but at lower GMsIn 1Q08, GMCR's gross margin declined 220 basis points. The decline is largely due to the increase in sales of Keurig at Home brewers and related K-Cups, which have lower gross margins than most of the other products. GMCR is also experiencing higher green coffee and other commodity costs, and higher manufacturing costs due to the continued capacity investments. None of these issues appear to be going away any time soon, if ever. Despite a severe drop in gross margins in 1Q08, GMCR operating margin improved to 9.6% from 8.5%. The improvement in EBIT margins was driven by the lower SG&A as a percent of sales. Again, I believe that this is a trend that can last only so long, considering the current growth rate of the business.
  • The profitability of the Blade...From a consumer's point of view, brewing a cup of coffee from a Keurig home brewing system is slightly more expensive than traditional brewing methods. Therefore, critical to the GMCR investment case is the profitability of the K-Cups. On the internet, we find Retail prices for K-Cups are around $0.55 per K-Cup. On the most recent conf call management did not argue against prices in the wholesale channel at $0.30, with a 20% contribution margin. That implies a $0.06 profit per K-Cup. For licensed roasters, GMCR raised the royalty rate to $0.064 per K-Cup. The conclusion we can draw from this, is that on the surface there does not appear to be enough margin in the K-Cups for the supply chain to make any money.
  • The current need for cash is growing.The current need for cash is growing.

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