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HIBB Quick Take: I Like The GM

Trendline comp trends were right in line with competitors (if not slightly better). SG&A was a bit above my model -- as is often the case with HIBB (one of my lingering concerns with the company). The 25% boost in D&A did not help either -- but I'll take that given the capex spent on JDA and DC build-out as those two items should start to help Gross Margin. Interestingly enough, the 159bp boost in Gross Margin is what made this quarter.

I like the square footage growth here, as well as the gross margin story in conjunction with cape rolling over. Tough to find that in retail these days. My lingering concern is SG&A control. If I can gain comfort that this won't eat into cash, I'll get more excited.

Less bad; the new good!

On March 6th when I wrote the Early Look "The Wall of Worry," the market was making new lows, but we were seeing a number of companies in a disparate group of industries that were seeing new signs that things were not continuing to accelerate to the downside - things were becoming "less bad." Now less bad is the "new good."

We continue to see signs that the "new good" continues. Today, we learned that February sales at U.S. retailers fell less than forecast and the "made up" gain in January was even better than the previous government number, suggesting that the consumer, the most important part of the economy, may be stabilizing. We will likely learn tomorrow that consumer confidence is stabilizing - the "new good" is that confidence hasn't slipped any further from last month's. Importantly, if the market holds its recent performance, March will improve from February. You don't need a survey to tell you that most Americans are not very confident in the economy. The "new good" is that confidence looks to be bottoming.

In this environment the consumer is increasingly rethinking or being more thoughtful with his purchases. Consumers are more focused on needs over wants...... Job insecurity and other macro factors have definitely caused consumers to pinch on spending, but importantly, today's better than expected retail sales number indicates there is still some level of spending. What is more important is the behavioral changes to the pattern in consumer spending. You can bet consumers will be more thoughtful when spending their hard earned buck. Most are likely to consider each purchase more carefully and be more price conscious even when it comes to non-discretionary spending. It's likely that discretionary spending will suffer disproportionally, particularly as it relates to purchasing high-end goods, as sticking to a budget will become the "new normal" and large credit card balances will be considered a sin.

Critical to the behavioral changes is the fact that these changes are not limited to one demographic or income group. A survey done by an Ohio-based group suggested that more than "eight in ten people earning in excess of $150,000 or more indicate the current economic crisis will impact their lifestyles over the next five years."

Less bad; the new good!

On March 6th when I wrote the Early Look “The Wall of Worry,” the market was making new lows, but we were seeing a number of companies in a disparate group of industries that were seeing new signs that things were not continuing to accelerate to the downside – things were becoming “less bad.” Now less bad is the “new good.”

We continue to see signs that the “new good” continues. Today, we learned that February sales at U.S. retailers fell less than forecast and the “made up” gain in January was even better than the previous government number, suggesting that the consumer, the most important part of the economy, may be stabilizing. We will likely learn tomorrow that consumer confidence is stabilizing - the “new good” is that confidence hasn’t slipped any further from last month’s. Importantly, if the market holds its recent performance, March will improve from February. You don’t need a survey to tell you that most Americans are not very confident in the economy. The “new good” is that confidence looks to be bottoming.

In this environment the consumer is increasingly rethinking or being more thoughtful with his purchases. Consumers are more focused on needs over wants…… Job insecurity and other macro factors have definitely caused consumers to pinch on spending, but importantly, today’s better than expected retail sales number indicates there is still some level of spending. What is more important is the behavioral changes to the pattern in consumer spending. You can bet consumers will be more thoughtful when spending their hard earned buck. Most are likely to consider each purchase more carefully and be more price conscious even when it comes to non-discretionary spending. It’s likely that discretionary spending will suffer disproportionally, particularly as it relates to purchasing high-end goods, as sticking to a budget will become the “new normal” and large credit card balances will be considered a sin.

Critical to the behavioral changes is the fact that these changes are not limited to one demographic or income group. A survey done by an Ohio-based group suggested that more than “eight in ten people earning in excess of $150,000 or more indicate the current economic crisis will impact their lifestyles over the next five years.”

Howard Penney

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Russia Breaking Out?

For the first time in a long time—despite how antithetical it may sounds if you’ve been listening to our “I wouldn’t touch Russia with a ten foot pole” call over the last months—we’re getting bullish on Russia from a trend perspective as the fundamentals are lining up with our multi-factored quantitative models.


Here are the main Macro Factors that line up with this call:

1. Market Performance - The Russian Stock Market (RTS) is up 11.5% from its October lows (or +9.2% since its Nov. low). As reference, major European indices (Germany, France, UK) as well as the SP500 are all trading below their November lows. The RTS, after an intermediate bottom on February 20th, is up 18.4% YTD and up 12.5% March-to-date. These are alpha-generating numbers you cannot afford to ignore.

2. China is the Client - Importantly Russia understands that China is an very important client. On February 18th China announced it will lend $15 Billion to Russia’s state-owned oil firm Rosneft and $10 Billion to pipeline monopoly Transneft. In return the Russian firms ensured China will receives 300,000 barrels of crude a day for 20 years and the completion of the long-awaited extension of Russia’s Siberia-Pacific coast pipeline to China. The agreement will boost Russia’s energy firms who have struggled to raise capital since crude prices crashed since their summer highs last year.

The deal signifies that Russia’s export focus (oil and natural gas in particular) have shifted from the West (Europe) to its new market, China. Russia took a sharp hit from the EU in reaction to its decision to turn off natural gas supplies to the Ukraine and most of continental Europe over New Years over contract disputes. EU officials have already formally convened this year to discuss alternate sources of energy; certainly this helps confirms that Russia’s attention for a new market is East.

3. Stability at Home: we’re bullish on a relative basis Russia’s ability to purge itself of the financial crisis. The RTS is down 75.4% since its high on 5/19/09. Russia has mark-to-market pricing and has faced the reality that oil is currently down in the $40-50 range. The market has shown a more stable trading range (a “bottoming”) since January 20th. Equally, the Ruble has stopped going down, a bullish signal for the investors.

4. The USD/Oil Equation: with the Ruble signaling more stability in the intermediate term, this is bearish for the USD, which is perversely bullish for global equities and commodity reflation. On a trend basis we see oil breaking out if we can get through the $44.50 line.

What might not be discounted in today’s price is the potential for Russia’s debt credit rating to be downgraded, but our quantitative models are close to signaling an entry point opportunity via the Russian etf - RSX.

Matthew Hedrick
Analyst

UA Nugget: Sales and Sentiment

UA's stock went vertical into Kevin Plank's presentation at the BofA/Merrill (or whatever the proper name) conference. It sold off literally when he opened his mouth, but then had a solid recovery. Pardon me for stating the obvious, but I'm fascinated by stock moves in and around conferences. (Check out the post I put up when Warnaco pre-announced without a press release at the ICR conference).

This one, however, did not come as a shocker to me. UA's numbers at retail have looked good -- and continue to do so this week. Footwear share continues to grow at an obscene $92+ price point for running, and though apparel ticked down this week, it's share is up by over 100bp on average in each of the pat 6 weeks.

I still like this name a lot in 2009.

CHOMPING AT THE BIT

INDUSTRIAL OUTPUT: STARTING TO FLEX

We received further confirmation overnight from China that the stimulus package is having an impact. Industrial output increased at a rate of just 3.8% in the first two months on 2009; following December’s 5.9% and November’s 5.4% clip. February rose 11% on its own however, a figure heavily skewed by the placement of Lunar New Year (which increased the number of working days), but the data still suggests that the pace is picking up for heavy industry. Major signals of this increase in activity included a 39.13% Y/Y increase in cement production and a 22.9% increase in automobile output.

The increase in cement manufacturing is directly correlated to the larger than expected growth in fixed asset investments which we discussed yesterday in depth. As the government has increased its infrastructure projects the impact on heavy industry is being felt rapidly -for example the announced tripling of railroad investment spending which helped drive an increase in steel production during February.

The pickup in automotive production is evidence that consumer demand has not completely disappeared. Sales of domestically made vehicles rose 25% in February according to the China Association of Automotive Manufacturers following the reduction in the sales tax on small cars, part of November stimulus program. Further government action -such as a program to subsidize vehicle purchases by farmers, are expected to take effect this month. The fact that a government incentive got Chinese consumers making major purchases is a massively positive data point for the automotive industry as it continues to consolidate an expand.

Clearly the combined YTD output data, the lowest growth rate in 5 years, is an unwelcome reminder of how bad the external demand picture is for China’s critical export industries. We continue to be bullish however, and view the positive data points emerging from the heavy industrial sectors as a signal that the stimulus plan is working and that the pace of growth will return to higher levels in the coming months. It’s a hard road ahead, but the Ox has the brute strength to get the job done.

RETAIL SALES: BETTER THAN BAD

The National Bureau of Statistics released data showing that growth in retail sales contracted in January and February, increasing 15.2%, compared to a 20.2% increase in the same period last year, signaling a continuing trend of slowing demand. This is the third straight decline, following December’s 17.4% growth and 22% in October. Consumption was 2 trillion Yuan ($290billion) during the first two months of 2009. Retail sales for 2008 were up 21.6% when Chinese GDP growth was approximately 9%, slipping into single-digit growth for the first time in six years. Retail sales in urban areas increased by 14.1%, Y/Y, while sales in rural areas increased 17%.

This data, while underscoring the fragility of the developing Chinese consumer base, is still better than bad on the margin. We are taking a somewhat contrarian view in arguing that still-double-digit growth levels in consumer spending, combined with the signal sent by automotive sales, suggest that consumers can still be coaxed back into the market. Obviously, with deflationary pressure and rising unemployment, retailers are not even close to being out of the woods yet -we will be following the situation closely.

CREDIT & INVESTMENT: STARTING TO FLOW

Official credit data released last night confirmed the estimates we referenced in yesterday’s post. The People’s Bank of China reported that banks extended 1.07 trillion Yuan in new loans in February, as state companies and government agencies borrowed to finance stimulus projects - a 30% Y/Y increase. This follows January when a record 1.62 trillion Yuan of new loans were extended to finance the increase in investment, increasing total outstanding Yuan denominated loans to 33 trillion Yuan by the end of February, 24.2% higher than the previous year, as M2 reached 50.7 trillion Yuan. At the same time, Liu Mingkang, chairman of the China Banking Regulatory Commission (CBRC) requested that lenders increase their provisions to 150% of their non-performing loans, up from 130%, as a precaution over solvency risks -suggesting that the reality of defaults in the face of massive export contraction is being prepared for proactively, a positive signal.

The Ministry of Commerce has announced that going forward; provincial commerce officials will have the power to authorize the establishment of foreign owned ventures and inflows of foreign direct investment (FDI). These officials will also have the power to approve foreign acquisitions up to $100 million, although foreign strategic investments in listed Chinese companies will still require approval by the central government. This move is in direct response to the four straight months of contraction in FDI, which fell 32.6% in January, Y/Y, as capital flows essentially dried-up globally.

The active encouragement of increased foreign investment, coupled with decentralization that could expedite the process significantly strikes us as a very positive development which, when coupled with the expansion of credit and proactive risk management measures adopted by Beijing show the government’s firm commitment to meeting growth targets.


We have been bullish on China consistently since December of 2009 and remain so – we are long China via the CAF closed end fund.


Andrew Barber
Director

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