- CBRL's CEO Michael Woodhouse started today's conference call, saying: With that let me begin by acknowledging that we are in a very challenging consumer environment. We are often asked; how the higher gas prices will affect summer travel. First, about 60% of our customers are local and our focus is to drive traffic from the local market as well as the traveler. But to answer the question directly a Triple A study released a couple of weeks ago said that 1% fewer people were expected to travel by car over the holiday week end. Our studies show that 70% of the Cracker Barrel guests are planning to travel as much or more than usual.
- My first question is can you share those studies? Although he points out the challenging environment, his other comments (particularly his last one) imply that he is not too worried about the impact higher gas prices will have on summer travel, which is a little hard to believe. The company's most recent 10-K highlights the importance of the upcoming summer months on the company's bottom line: Historically, our profits have been lower in the first three fiscal quarters and highest in the fourth fiscal quarter, which includes much of the summer vacation and travel season. We attribute these variations primarily to the increase in interstate tourist traffic and propensity to dine out during the summer months, whereas after the school year begins and as the winter months approach, there is a decrease in interstate tourist traffic and less of a tendency to dine out due to inclement weather.
- According to the U.S. Department of Transportation, travel on all roads and streets in the nation declined 4.3% in March (down 2.3% year-to-date through March), and this is before the more recent upticks in gas prices. Making matters worse for CBRL is the fact that about 88% of its restaurant store base is located in regions of the country that are experiencing year-over-year travel declines that are worse than the already bad national average. As of September 28, 2007, 71 of the companies 565 stores (about 13%) were off-interstate stores, which leaves the rest located primarily along interstate highways. Although the company is switching its development mix to include more off-interstate stores going forward (plans to open approximately 45% of its new stores along interstate highways as compared to 68% in 2007), based on the company's current mix, gas prices could impact travel (and traffic) during CBRL's critical summer months.
That's very good of them, but this is absolutely immaterial for the apparel industry in the US. Yes, availability of raw materials is a big issue. But a bigger issue is getting migrant workers to the factories to actually cut, sew and assemble the materials. (Check out our past postings on this topic).
Too bad the Chinese government can't import and drop-ship workers.
A friend of mine has one of those mini Pug dogs - the ones with the mashed-in face and bulging eyes. The kind of dog that's so ugly that it's cute. That's how I increasingly feel about Foot Locker. While the best investors divorce all emotion from investing, I've got to admit that it's extra tough with this one. The company is a perennial underperformer, with one of the worst track records in all of retail. From a GMROI perspective, the only companies I can find that historically rank below Foot Locker on such a consistent basis are Sears and the former K-Mart. Without giving away my age, let me just say that if I was gifted a share of Foot Locker on the day I was born, my cumulative return would have been close to zero. Based on all my 'margin squeeze' preachings, with all the Asian cost pressure coming down the pike, Foot Locker should be a big loser. Then why am I changing my mind on the FL's fortunes? Consider this...
- THEN 1) For most of the past 5 years, almost every last bit of the industry's growth has come from the 'low profile category.' In fact, 5-years ago the industry run-rate was about 220mm pairs of athletic shoes annually. Now we're at about 250. But over the same period, the 'low profile' category added about 30mm pair. In other words, consumption of core athletic footwear simply did not grow. Last I checked, this is about 80% of Foot Locker's business. 2) While FL suffered through the 'low performance' drought, it relied increasingly upon Nike to drive traffic and stabilize comps. As a percent of total sales, Nike went from 40% in 2003 to just over 50% today. Nike keeps a disproportionate share of the aggregate margin in exchange for driving traffic into the retail stores. FL gave up the margin, got the traffic to some extent, but did not convert it to sales. 3) So we're talking a share-losing, zero-square footage growth retailer with a big fashion headwind and a shift in mix towards a lower-margin mix of business consolidated with one massive customer. It's no surprise that Gross Margins went from 27% to 23%, and EBIT margins tumbled from 7% down to 1%.
- NOW 1) As I noted in prior postings, the footwear retail channels overall appear to be very clean from an inventory perspective - as evidenced by 2-5% increase in average selling prices and sharp declines in aged inventory versus last year. 2) The 'low profile' shift is absolutely, positively waning. For the past three months the category grew at a rate less than the total industry, and April marked its first down month -- ever. 3) Even the removal of a fashion headwind could give a modest sustained comp lift. A revival in performance product would be icing on the cake. Under Armour's foray into footwear could be the boost FL is looking for. This is currently a Finish Line exclusive, but will be available at Foot Locker in Fall '08. Then UA follows up with performance running product in Spring '09. What's nice about this industry is that it competes on innovation, not price. As UA and Nike duke it out, Foot Locker is likely to win. 4) Keep in mind that when the environment gets incrementally healthy, FL can shift orders on the margin to non-Nike brands. Assuming no traffic fall-off, this helps FL's margin economics. 5) Despite the margin downdraft over 2 years, Free cash flow margin has held steady at (an admittedly appalling) 2.5% as FL exited bad leases, closed down underperforming stores and converted associated inventory to cash. 6) The bottom line is that the leverage is pretty meaningful at both the operating and cash flow line, and to the extend any of these trends continue, we could be sitting here looking at a 3-4 point margin pop without making heroic assumptions - or about $1.50 in ES power (35% better than consensus).
- BALANCE SHEET CONSIDERATIONS I'm torn on the 'this thing has a great balance sheet' argument. Ok, $2 per share in net cash and tangible book value of $12ps. Not bad at all. But 2/3 of book value is comprised of finished goods inventory. While that's a solid liquid asset, this is carried at cost, and I've seen inventory liquidated for a fraction of cost. In addition, FL has $1.9bn in lease obligations that I'd be remiss to leave off the balance sheet. What I like, however, is that FL's lease terms are about as good as they get. Its annual lease obligations rate declines meaningfully - by the tune of about 60% based on my math. Unlike some other retailers that are pushing out lease obligations to print higher margins today (DKS, DSW, to name a few). The point here is that if for whatever reason FL opted to extend terms on its leases, it can push obligations out and take margins up. I'm not recommending that FL does this by any means - but it is one of the few companies that has the option (others being PSS and HIBB). If there's one think I like in this environment, it's flexibility. This balance sheet has it.
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- 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.
Think YUM and MCD!
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