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Sporting Goods: Return of the Wild West?

March has been a difficult month for marginal sporting goods players. On the heels of G.I. Joe’s Ch. 11 filing on March 4th, Sportsman Warehouse filed this past weekend. Both companies are based in the Pacific Northwest, a region typically dominated by Big 5 and The Sports Authority. While both companies plan to reorganize under bankruptcy protection, Sportsman’s Warehouse is either selling or closing more than half its original locations.

Presuming Big 5 and TSA have the liquidity to pursue these locations, this could offer up an opportunity to fill out their respective stores bases west of the Mississippi.

If these players bow out, don’t completely count out Dick’s. For those who might have missed Dick’s remarks on the Q4 earnings call, they specifically identified G.I. Joe’s filing as a potential opportunity to move into that area and hinted at another in distress (i.e. Sportsman’s). With several states “up for grabs” in terms of a market share leader, we could see a return of the Wild West as Big 5, TSA and Dick’s grab for share.

As a sidenote, among the list of unsecured creditors is Columbia at #22 with $628k at risk, or just over $0.01 per share. We note that the company also has roughly $0.02 at risk related to the G.I. Joe’s filing in a quarter where it guided to $0.06. We have earnings closer to $0.20.

Casey Flavin
Sportsman Warehouse Locations (67): The company plans to operate 29 stores during the restructuring process recently sold 15 stores, and plans to close another 23 stores.
G.I. Joe’s Locations (31):

Quadrants Don’t Lie

With earnings season largely past, let’s do a post-mortem to see where each apparel/footwear name is in its earnings cycle. The bottom line is that we continue to see net positive change. You all know our quadrant analysis – if not you should. It is a great way to gauge a management team’s behavioral make-up when presented with challenges to their respective operating models. Do they tend to over-order inventory? Are they proactive vs. reactive in clearing it out? We keep this warehoused in detail for almost 100 retail-related companies. Some key call outs (in the following graph) are as follows…

Quadrant 1: This is where sales are growing faster than inventory, and margins are positive. The percent of companies falling into this basket went from 23% to 6%. Counter to what might initially seem to be the case, this is quite bullish. Statistically, the best shorts are sourced in this quadrant. ROST is the one that stands out to me here as being the most vulnerable.

Quadrant 3: This quadrant is the inverse of Q1. Inventory is building AND margins are off. Some of the worst companies can spend years in this quadrant. But it is also the source of some of the best longs, as the next move (within 2 quarters) is historically a move into Q4 (margins off, but the balance sheet gets clean). Names that stand out to me include Bed, Bath and Beyond, Hibbett, J Crew, Under Armour, Ralph Lauren and Liz Claiborne. This quarter, we saw 63% reside here vs. 46% last quarter.

Putting This Rally into Perspective

Retail stocks ripping 15% month-to-date is not simply a function of the market’s performance. Our call has been for a fundamental improvement in the delta on nearly every line of the P&L and operating cash flow statement. I still think that holds (note, I don’t need an improvement in the consumer to make this work). But more near-term, we’re already starting to see the stocks move more tightly with earnings revisions, which have – without question – been getting better. I think that will continue for a while as downward revisions for the industry in aggregate prove to have bottomed.

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• Financial situation began to deteriorate in 2007 with new competition, collapse of the housing bubble, smoking ban passage, and weakening economic environment

• Requested a waiver of financial covenants under its Senior Revolving Credit Facility in July 2007
– By 3Q07 route gaming EBITDA was down 46% and casino EBITDA was down 22% (y-o-y), and down 37% and 17% YTD, respectively.
– Amendment completed on 12/14/2007

• In February 2008, Herbst hires Goldman to evaluate strategic alternatives (recapitalization, refinancing, restructuring, reorganization)

• On March 11, 2009 Herbst reached an agreement with the majority of its lenders to accept its proposed pre-packaged Chapter 11 plan
– Casino and slot business split into two separate holding companies
– Herbst family will receive 90% of new plan equity in the slot route company in exchange for contribution of the new gaming device license agreement
– Conversion of the Senior Credit Facility into debt and equity of the reorganized companies, with bank lenders getting 100% of the equity in the new casino company and 10% of the new equity in the slot company
– Termination of the company's 8.125% Senior Subordinated Notes and 7% Senior Subordinated Notes and cancellation of all existing equity in the company.

Shark Bite, Part Deux: SP500 Levels, Refreshed...

There is nothing quite like the most expedited 2-week short squeeze that we have seen in the US stock market since 1939.

Political calendar catalysts from here?

1. Geithner speaks tomorrow (House Financial Services Committee) – could easily be a negative
2. Bernanke speaks tomorrow (House Financial Services Committee) – could easily be a positive
3. Obama has an 8PM nationally televised speech tomorrow – heck, the guy is the new Warren Buffett with his “market is a bargain call”

Economic calendar catalysts from here?
1. New Home Sales = Wednesday
2. Michigan Consumer Sentiment = Friday
3. Morgan Stanley kicks off reporting for the bankers

Quantified Risk Management catalysts from here?
1. Price momentum = SP500 TRADE resistance at 817; TREND resistance at 829
2. Price
3. Price

That’s right – despite the Oracle of Obama’s “bargain” call this market doesn’t move on valuation, it moves on price. Everything else is part of a macro mosaic where we need to stay with the proactively risk management process, because no matter where you go in this market, there those prices are.

SP500 support continues to build to higher lows. Now I’m a buyer in the SP500 range of 753-768 (see green waters below, and beware of the Shark).

Keith R. McCullough
CEO & Chief Investment Officer

US Housing Is Finding A Home!

Everything has a price and housing is finding a home!

Increased access to credit lowers borrowing costs and the significant decline in prices are making home ownership more affordable. Today, sales of previously owned homes increased 5.1% in February to an annual rate of 4.72 million from 4.49 million in January. Also, the National Association of Realtors said today the median price declined 15.5% year-over-year; and distressed properties accounted for 45% of all sales.

The increase in home sales kept the months’ supply of unsold homes on the market at the end of February at 9.7 months; the same as in January. Every region in the country showed an improvement in sales and the median listing price rose in California in February for the first time in three years.

Today’s housing numbers support our view that the worst is over and 2Q ‘09 will mark a positive inflection point for the housing market. We have been very clear about our view on the consumer (think M.E.G.A) and the consequences of Chairman Bernanke’s actions that a weak US $ will inflate assets domestically where Americans need it most – in their 401ks and home values.

Trading intraday here at 801, the SP500 has re-flated +18.5% since the March 9th low and now housing is making a bottom. Stock market prices are leading indicators, don’t forget!

Not surprisingly, the industry is still very cautious. Ara Hovnanian, CEO of Hovnanian Enterprises, recently said, “We expect demand for all homes, both new and existing, to remain far below normalized levels.” The historic collapse in the real estate market raises questions about whether the Real Estate companies will ever again see the pace of sales it did a few years ago. The easy answer is no! The death of the consumer credit cycle will mean that there is a “new normalized level” of sales.

Just remember, don’t rely on the same corporate exec that missed housing’s top lead you to believe they know where we’ll bottom. They don’t do macro.

Howard Penney
Managing Director

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