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MW: Activism Brewing?

It seems to have slipped under many radars that Men's Wearhouse just added a change in control provision for its top five officers.  The language was strong enough for our affiliate Michelle Leder (footnoted.org) to flag for us, and her track record in spotting these outliers is notable. In addition, the short interest is high at 15% of the float, and the stock looks bullish from a TREND perspective on Keith's models. While we can make a pretty convincing case that the 10%+ margins of yesteryear are a pipedream for MW as unit growth, offshoring and department store destocking themes have largely played out, this is the sort of sleepy name at a trough point in the cycle where activism would not come as a surprise.

 

MICHELLE LEDER'S VIEW

What prompted Mens Wearhouse to suddenly add change in control agreements with its five named executive officers on May 15? The company disclosed the new agreements in both the proxy and a separate 8K filed late Wednesday.

 

We can think of only two likely scenarios here: another company may be looking to acquire Mens Wearhouse or a large investor - think Pershing Square's Bill Ackman and his run on Target here -- might be contemplating a challenge to the company's board. Option A seems a bit more likely, not least of all because if there is an Ackman-like person out there, they've yet to surface.

 

What makes the filing really stand out is that Mens Wearhouse isn't a new company and change in control agreements tend to be pretty standard things. George Zimmer, for example, started the company over 35 years ago and none of the other top executives are new hires. Given that, why would the company suddenly enter into these agreements on May 15?

 

After a quick skim comparing the 2008 proxy to the one filed on Wednesday and throwing the 8K also filed on Wednesday into the mix, it seems pretty clear that something is going on here that's worth paying attention to.

 

 

FUNDAMENTAL CONSIDERATIONS (ERIC LEVINE)

  • Revenue is highly tied to low-fashion "business attire", of which tailored clothing accounts for 55% of core revenues.  This is a company whose core sales have been weakened almost step for step with the overall economy. 

 

  • With very little fashion risk in the assortment, revenues here to do not spike in good times.  However, they do see disproportional downside when unemployment is at historical highs.  A suit is the last thing the average male "wants" to buy.

 

  • Historically the business was successful as they took share from traditional tailored suit distribution channels (i.e department stores exiting the low turning, service intensive business).

 

  • As the top-line grow, margins expanded as well.  The company benefited greatly over the past few years from greater imports and direct sourcing shifting to Asia.  Remember that the tailored business was still being done domestically, but with also a fairly large Canadian and Mexican manufacturing base.

 

  • Additionally, the acquisition of the free-standing tuxedo business in April 2007 has provided a positive benefit to margins.  Gross margins for the tux rental business are 82% vs. core gross margins of 55-57%.  As the tux business continues to grow (expected to be up MSD 1H09) at the faster rate than the base (which is now barely growing with store growth cut to 10 stores, from 40-50 per year), there is a positive mix benefit here.

 

  • Offsetting the tuxedo business is a recent decision to aggressively promote the suit business through BOGO (Buy One Get One) offers.  This is a new strategy that began in 4Q08 and is expected to continue throughout '09 at the very least.  This is a departure from the company's historical EDLP strategy, and is one that will produce gross margin pressure at the very least through 2009.  This is one of the top factors as to why it may be unrealistic to see margins expand again in the near term.  Of course they can cancel this marketing program, but we know from the shoe business how long it takes to wean the consumer off of BOGO's.

 

  • Also as it relates to BOGO, if you don't need a suit because you're not employed, then you certainly don't need two!

 

  • In looking at the CEO Zimmer's health, he did have a surgical procedure in 2005 related to an infected abdominal aortic graft.  Since then however, there have been no public announcements related to his health.

 

  • Bottom line, the boom growth years appear to be over from a store opening/market share perspective.  As the economy recovers, men will resume suit purchases.  However, the duration of the recovery remains to be seen and it certainly won't occur over night. 

What To Do With Copper? Hint: Watch Chinese Stocks They Have the Conch...

 

We have been fairly aggressive on our long copper call in 2009. In fact, on February 25th we sent the following note to a client when he asked us what we though about copper:

 

"This is like holding a massively inflating ball of air, under water - if it gets through 1.54, that's going to ring the bell of every short seller from here to Dubai...

 

Very simply,

 

  • 1. China buying on the LME now, direct - for their Strategic Reserve
  • 2. All of mining is cutting capex for Wall Street's sake - supply coming online in the out years coming down = commodity inflation in the long term
  • 3. Economic should and will continue to see a sequential acceleration from Q4 2008

 

We see this as a buy for a Trade at $1.49/lb and a breakout for a Trend (3 months plus) at $1.54/lb"

 

The rest as they say is history, but copper is now at a much higher price and some recent price action has us more cautions.  After all, even an early recovery indicator that The Client (China) needs, such as copper, has a price.

 

We have an expression (to be fair, we have many expressions) at Research Edge and we say, "She / He has the Conch", which effectively means that whomever has the conch has the voice or the floor to continue to own the debate.  When it comes to copper, China has the Conch.  In fact, in the year-to-date the correlation between the Chinese stock market and copper is 0.88.

 

In the chart below we've outlined the performance of the Shanghai SE Composite versus front month COMEX Copper YTD, which shows this relationship graphically as well.  Below that chart we highlight copper imports into China, which provide the underpinning of the fundamental case for copper from a demand perspective, which is that year-over-year imports into China are up in February by 45%, March by 55%, and April by 62%.

 

As is always the case with China, people debate whether the data is real or whether the commodity is being stockpiled versus used in actual economic activity.   To some extent, it doesn't matter in the short term as demand is demand.  Longer term it will certainly be more relevant.  The Chinese are many things, economically irrational, I don't think so.  They are buying copper either because they need it, or because it is cheap.

 

The recent move in copper (breaking down through our TRADE line of support of 2.08/lbs) may be actually indicating that demand from China may be peaking.  Regardless, and in the short term at least, watch the Chinese when it comes to copper because until the facts change, they have the conch.

 

Daryl G. Jones

Managing Director

 

What To Do With Copper? Hint: Watch Chinese Stocks They Have the Conch...  - conch


UA’s Latest: Muscle Recovery Suit

While the focus for UA (and the Street) has clearly been on UA's footwear initiatives, the company is also keeping its foot on the gas in its apparel business as evidenced by the launch of its' new muscle recovery enhancing body suit (see below).  These garments (priced $89.99 for tops, and $99.99 for bottoms) serve the same purpose as taping a strained area of the body after a workout. The technical benefit is a combination of increased oxygen flow while at the same time expelling excess water out of muscles, and therefore accelerating recovery time.

 

Is this the answer to all the bears who are concerned about lack of growth in apparel? No, it's probably no more than a 5% boost to apparel sales growth based on my math (which ain't half bad). Also, this is a pure performance product which has a more limited audience than would a typical product by an active weekend warrior. But it is another tool in UA's arsenal to solidify its relationship with the high school performance athlete, which ultimately serves as a halo to grow its other businesses that have more mass appeal.

 

UA’s Latest: Muscle Recovery Suit - UA Recovery Suit


Early Look

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Charting Tail Risk: US Dollar Index Chart 1971-2009...

 

Re-accelerating Chinese Demand combined with the REFLATION trade have basically been the dominating global macro factors behind the bullish stance that we have held for the past 3 months. Everything was prefaced on our "Breaking The Buck" macro call, and for a generational short squeeze in most global equity markets our thesis worked.

 

Now the Buck isn't breaking - its crashing... so I am back to hunting from the bear camp. If we have an American currency crisis, very few things will work. I am long Gold (GLD) and TIPs (TIP), Healthcare (XLV), and Energy (XLE), China (CAF), etc... and there is no level of certainty that those will work either. Crisis are called crisis for good reason, and I do not use the term loosely.

 

After trying to resuscitate herself in the early morning, intraday you are seeing the USD break down to lower lows. This is bad. Treasuries are now selling off alongside the US Dollar (which is counterintuitive to people who think Treasuries are "quality"). If US Cash gets trashed, Treasuries are not the "safety trade" that they used to be. The Japanese are already selling Treasuries, and China's order is potentially pending...

 

My critical line of long term support (81.42) on the US Dollar Index is broken. If this downward spiral of US currency credibility holds, you're going to see a real life stress-test of Mr. Secretary of the US Treasury. This could be one that even the almighty ole boy network won't be able to figure out.

 

Perceived wisdom is a very dangerous element to this cocktail, particularly when you mix it up with some glaring levels of Washington/Wall Street groupthink. In the charts below, Andrew Barber and I have outlined the same chart flashing a light on 3 different realities: USD solo, USD since Euro, and USD's long standing 3-year moving average. I started this chart in 1971, because that's when Nixon abandoned the Gold Standard.

 

Think long and hard about these charts, and pass them around to your friends. Who knows, maybe President Obama will get a copy and figure out the point. He claims to "get" it on most things, and I have no reason to believe anyone who is allowed to be objective can't "get" this point. Post 1971 the US Financial System has been based upon the elimination of a post War gold standard and the accepted narrative fallacy of limitless credit creation based on that US Dollar as the world's reserve currency.

 

This is scary,

KM

 

Keith R. McCullough

CEO, Research Edge LLC

New Haven, CT

 

Charting Tail Risk: US Dollar Index Chart 1971-2009...  - us1

 

Charting Tail Risk: US Dollar Index Chart 1971-2009...  - us2

 

Charting Tail Risk: US Dollar Index Chart 1971-2009...  - us3

 


Claiming Confusion?

 

Confusion in markets can breed contempt. Maybe that's why I am quite satisfied to have sold US Equities prior to this morning's jobless claims report - when considering different points of duration, it was confusing.

 

This morning's print of 631,000 claims, while better on a week over week basis vs. last week's upwardly revised report of 643,000, still jacks us up ABOVE the 4-week moving average of 629,000 (see chart). Trading above the 4-week moving average puts the tail risk associated with a potential re-acceleration in unemployment trends in play.

 

At the end of the day, even though a few "strategists" have borrowed my lingo, what happens the margin is what matters most to my global macro model.

 

If the bulls are claiming confusion this morning, that's because they should be. I'll let them do that as I start to wander on over to my ole friends places in the bear camps. I wonder if I'll find anyone left standing?

 

Manage risk in the market that's in front of you, not behind...

 

Keith R. McCullough
Chief Executive Officer

 

Claiming Confusion? - emply1


Casual Dining – April Traffic Trends

April looks like March, but May is will be slower. There was a slight tick down in the April 2-yr traffic trends for Casual Dining. From what we are hearing month-to-date in May we will see another tick down.

 

Pricing continues to run ahead of inflation, so margins are holding - this will not last forever!

 

Casual Dining – April Traffic Trends - cdapril

 

 


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