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    MARKET EDGES

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Now that earnings season is over, let's take a little look at earnings expectations for the remainder of the year. We've already established that the group needs positive earnings revisions to take the stocks higher - and in some cases 'run to stand still'.  Like it or not, I think we get that. Let's look at two factors...

1) First is the current bottom-up eps growth rate for the Apparel/Footwear Retail Supply Chain. We're looking at expectations for a 10% decline in earnings over the next 12-months. Is this reasonable? Yes, I think it is. In fact it better be given that the market is awarding a 15x pe on these earnings expectations. I like the names where I think there are meaningful company-specific earnings levers, like RL, UA and PSS. While there will unquestionably be companies at the other end, I find it more frustrating today identifying a miss than any time over the past four months.

Follow The 'E' - NTM June 5

2) So what's so unique about the group right now? Not to sound like a broken record, but the as outlined in our 3/5 group call (I'm Getting Fundamentally Positive on Retail) we're entering a period where sales trends are stabilizing, inventories are in check, capex is coming down by over 10% (25% if we exclude Wal*Mart), and we start to go up against very easy compares on gross margins and SG&A. Tack on conservative guidance by companies who are tired of missing, and we get to a few quarters where it's tough to be bearish in aggregate.  This is best illustrated by our SIGMA chart below, here the latest quarter showed a move towards the upper right - meaning that capital efficiency is improving alongside a better delta on margins. As we've been trumpeting, this will continue into holiday, at which time key companies (especially footwear) will start to really benefit from lower sourcing costs.

Follow The 'E' - Industry SIGMA Q1 09