UA: Get Used to Revenue Beats


For a name with so much emotion surrounding it (mostly negative), the results were here were pretty dang predictable in the context of our call. Revenue beat, the footwear launche(s) are moving according to plan, and apparel revenue is actually picking up slightly on the margin. Yes, gross margins are in tank - as we expect given the high fixed costs that need to be amortized in the face of a new product launch like running footwear - but this is more than made up for by SG&A, which is down meaningfully vs. last year. To top it all off, with sales +27% we're looking at inventories -2%, which leaves us with the biggest positive spread in these metrics we've seen out of UA in 3 years. Capex coming down by 20% this year is gravy.


What does all this mean? This is an incredibly solid brand that the consumer genuinely wants to succeed - something this space has not seen in a while. It went through a year and a half where sales slowed, margins rolled over, SG&A costs rose, inventories built, and capex headed up. Yes, this was a rapidly growing free cash flow monster that pulled a 180 and financially morphed into something ugly and confusing in 2008 for those not willing to look through all the noise. Now we've got this company coming out the other end with accelerating sales, margins and cash flow - which I don't think is a one quarter event.


I still think that the addition of $300-$400mm in footwear revenue over 3-4 years plus another $100-$200mm internationally (as it branches away from dependence on US football and into running, basketball and training) should keep UA in the upper echelon of growth in the world is US consumer companies.  Off a base of $750mm in revs? Not bad at all. And yes, this can happen even in a prolonged US/global recession.


UA: Get Used to Revenue Beats - UA SIGMA


To repeat what I said last month:  As we have been saying every month since early January when we made our call on housing bottoming, the S&P/Case-Shiller index is a lagging indicator and housing prices will bottom in 2Q09.  To be clear, I said that housing would bottom in terms of sequential price declines and inventory growth in Q2 of 2009.  We are getting closer by the day!

Guess what today is? Today is that day!

According to the S&P/Case-Shiller index, home prices in 20 U.S. cities fell 18.6% in February from 19% in January – the first sequential improvement since January 2007.  We are well into the 2Q09 and the housing market is less bad.


Arresting the slide in residential real estate should become the leading indicator that the worst of times is over; or at the very least, that the bottom is near.  Increased confidence in the real estate asset class will allow the assets to obtain higher prices, and that is what happening to market at the time of writing.


Howard W. Penney
Managing Director

Higher Lows: Don't Doubt The Calendar...

Every time this market sells off, it's to a higher low.


The Depressionistas continue to fight the facts - on both scores of housing (Case Shiller) and consumer confidence, the numbers are what they are this morning - better...


What's next?


The macro calendar is always tough to fight and the news cycle is too... in the next 48 hours both will change (sorry Swine Stressionistas):


1. Obama's 1st "100 Days" is tomorrow, and his 8PM prime time TV speech may not appear on Fox, but it won't be a bearish catalyst either.


2. Month end for April = Thursday. It's been another fantastic month to be long stocks here in the USA, and that is what it is...


Now that we've made higher lows, will we make higher highs and close above 869 on the SPX next? I'm definitely on the long side of that TRADE.


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CKR – Uninspiring

I understand the motivation for not wanting to discount. It hurts margins and could put the company’s brand positioning at risk, particularly once the economic environment improves. Holding the line on value in the near-term, however, is going to continue to put pressure on Carl’s Jr’s sales performance relative to its competitors. As I have said before (please refer to my March 26 post titled “Is Market Share Shifting?” and April 24th “fighting Back”), I think that given the current casual dining discounts, the big market share shifts to QSR from casual dining are likely over. With casual dining restaurants offering more competitive value options, it will become increasingly more difficult for QSR players to win market share with premium-priced menu items.


I think this is made clear by Carl's Jr's declining traffic trends. On a two-year basis trends did improve, but the chain continues to lose market share.


The issues at Carl's Jr. have been magnified by today's more challenging environment, especially in California. Looking at the concept's same-store transaction growth trends, 2-year average trends have been negative for some time now, highlighting the fact that trying to sell higher-priced menu items in a difficult economy is not the only problem facing Carl's Jr.

CKR – Uninspiring  - hardeesp3



Mother Russia’s Allure

We’ve had a watchful eye on Russia all year as it plays into one of our main macro themes, owning countries that will benefit from commodity reflation and can supply THE client (China) with the resources it needs for domestic growth.
As we’ve noted in previous posts, despite the risk premium associated with owning the Kremlin’s leadership and negative fundamentals, you can’t argue with the Russian stock market’s (RTS) +27% YTD performance, despite today’s pullback.
Below are negative and positive fundamentals and data points to consider when owning Russia:
1.      Increased corporate debt default risk. By some estimates Russia has $780 Billion of corporate debt, $135B-$220B of which is short term debt due this year.  The deterioration of internal credit markets has pushed rates up to 15% and 20%, prohibiting refinancing of many loans.
2.      Uncertainly and lack of transparency with respect to Russia’s banking crisis.
3.      IMF forecasts the economy to contract 6% this year, versus government’s forecast of 2.2% contraction.
4.      Unemployment currently stands at 9.5% and should continue to climb this year and next, according to anecdotal evidence.
1.      Russia will likely remain a strong horse as long as commodities reflate. Our underlying thesis here is that if the USD can break down equity and commodity asset classes will get a bid to reflate.  Oil is up 16% YTD.
2.      Monetary Policy. On 4/24 the central bank lowered its main (refinancing) interest rate 50bps to 12.5%, the first cut in nearly two years. (See charts). Additionally the central bank raised its minimum reserve requirements on all retail deposits to 1% as of May, and will increase the rate at an interval of 0.5% until August.  The take-away here is that Russia has plenty of room to cut, unlike the US, UK, Switzerland, Canada, and Sweden to name a few. The ability of Russia to influence the direction of its economy through monetary policy is bullish, and raising reserve requirements shows central bank leadership to demand higher standards for lending.
3.      Currency. The Ruble has shown relative stability versus the USD and EUR in Q1.
4.      Russia’s international currency and gold reserves, the world’s third largest, increased to $900 Billion. Russia’s strong reserves (at the very least) bode well should the government need to address corporate or sovereign default issues. 
Look for us to buy Russia via the etf RSX if we can get our price from a technical level. We last bought Russia on 3/27 and sold it on 4/09 for a 15.79% gain.
Matthew Hedrick

Mother Russia’s Allure - image001

Pop, Pop, Bang...

Whether it's McGough with that UA call or Penney on this Consumer Confidence report coming in better - the shorts in Consumer Discretionary remain on the ropes...

Pop, Pop, Bang...  - 11

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