- Hardee's - the three consecutive months of declining same-store sales are now a trend.It's clear that management needs to reconsider the growth capital being allocated to the Hardee's concept.
- Stimulus Check SpecialHow are consumers planning to use their gift checks from the government? Given that piggy banks have been drained in prior months in order to pay increasingly for food and gas, it appears that more than one in three (31.0%) plan to save their stimulus checks...one-quarter (24.2%) plans to pay down credit cards, while 16.4% will use their checks to pay down debt (installment loans). However, plans among those who are expecting a rebate check and those who still aren't sure if they'll receive one differ slightly...those who aren't sure are more likely to use the money for savings or gas purchases, while those who know it's in the mail (or already in their bank account) are more apt to pay down debt and purchase necessities like groceries.
- The Impact Of Rising Gas PricesRecord high fuel prices have drivers feeling deflated as they pump gas in their autos in May...this month, 84.0% contend they have been affected by rising gas prices, up from 82.2% in April, 74.2% in '07, and a new high. To cope, consumers are resorting to taking fewer shopping trips (47.9%), shopping closer to home (43.7%), hunting for sales more often (39.8%), clipping more coupons (34.6%), and buying more store brands and generics (31.0%):
Not surprisingly, energy and food costs are to blame for the slowdown in consumer spending.
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Some considerations if this holds...
1) Near-term, industry inventories are clean, which is a positive margin event. But as '09 approaches I am convinced that the world at large is underestimating the negative margin impact from 'everything Asia' (rising inflation and slowing growth). A couple points in share gain of the total footwear market could give the athletic space a well needed shot in the arm to keep margin pressure at bay -- at least to some degree.
2) Foot Locker would be the big winner. By no means could a simple cyclical boost elevate FL's status from the 'bottom quartile' list of virtually every mall REIT. But at 1x tangible book with $2 in net cash on the balance sheet, and margins having gone from 7% to 1% over the past 2 years - even the slightest tweak in top line could be meaningful.
3) Nike risk?? How could Nike possibly be at risk in the event of a strengthening US athletic cycle? Well, it's probably not - if nothing else due to the global portfolio diversification. But in a backward kind of way, we should keep in mind that Nike absolutely dominates US footwear retailers when times are tough. When the environment picks up, the retailers become less risk averse, and are usually willing to push back and try smaller brands.
The exhibit below shows year/year change in low profile footwear units. Courtesy of NPD Fashionworld.
- 1) Units sold are not knocking the cover off the ball by any means, but this is entirely offset (and then some) by higher ASPs. Athletic Specialty, Department Store, National Chain, and Shoe Chain are all up 2-5%.
- 2) The National Chain channel is showing the greatest strength in ASP, but there's a dark side to this. My sense is that nearly all of this is driven by Target. My sources indicate that Target is planning its footwear unit sales down better than 10% for the balance of the year.
- 3) I'm liking these trends as it relates to Payless. This company's margin potential is tremendous, but has been crushed over the past year because an ill-timed (overpriced) acquisition coincided with a meaningful downshift in industry sales. That's painful for a company with zero square footage growth and a highly levered balance sheet. If this turn in industry fundamentals is for real - even for a couple quarters, then 2H numbers could prove to be way too low. That matters at 3-4x EBITDA.
The global this time theme is making life very difficult for the board members of the Hershey Trust. From this point forward, with every passing day life becomes increasingly more difficult for the trust to sit and do nothing. It's clear that the changes in the competitive landscape, rationale for the InBev/BUD merger, the decline in the dollar and commodity trends are making the board look like they are out of touch with reality. The Hershey Co. has operated in its own little world and has remained (mismanaged) and independent through the years of corporate raiders, shareholders activists and the lure of the private equity bubble.
- Relative Shareholder Returns have been disastrous.......Hershey's two-year decline in market share and profitability is catching up with the company. As a consequence, in July 2007, Hershey announced that it will be closing multiple plants, cutting its workforce by 11.5% and moving jobs to a new plant in Monterey, Mexico. Shortly after this announcement, the company announced 2Q07 earnings, in which the company saw a 700 basis point decline in EBIT margins. The largest decline in the company's history! With this announcement it became clear that LeRoy Zimmerman, Chairman of the Hershey Trust, is out of touch with the realities of the business and has lost control over the operational issues facing the company. As you can imagine, the response to the free fall in profitability was predictable! The company announced the retirement of the current Chairman and CEO Richard H. Lenny. Filling his shoes was a Hershey insider David West - I guess there was no thought to looking outside the company to bring in some new blood! The bloodletting continued as six independent directors resigned from the Board at the request of the Hershey Trust. I guess shareholders should take heart in the fact that LeRoy still has his job!
- The Hershey Co. is a strong company with great brands, a strong market position and significant cash flow. Where did things go wrong? Management has underinvested in the business. Over the past five years, the company reinvested less than 40% of its operating cash flow back into the business. Second, the company has been lowering advertising expenditures as a percentage of total sales to keep margins stable, resulting in an extended period of market share declines and trying to compete in the international market. In addition, the company failed to diversify from the slow growth mainstream U.S. chocolate market into the fast growing dark and premium segment of the industry.
- In an extremely difficult operating environment, the company is forced to right size the organization and look to the international markets for growth. Unfortunately, given the value of the dollar this could not be a worse time to be looking at trying to grow overseas. In fact, it is the primary reason why they should sell to Cadbury.
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