What's New Today in Retail (11/7)

Takeaway: Sports apparel solid. Adidas rev miss, inventories dicey. WMT PR takes punch to the jaw. Labor unrest building in Bangladesh and Indonesia.



FNP - Earnings Call: Thursday 10/7 10:00 am

BEBE - Earnings Call: Thursday 10/7 4:30 pm

TUMI - Earnings Call: Thursday 10/7 4:30 pm




Athletic Apparel Data


Takeaway: Trends in athletic apparel are like a broken record -- but not broken. The industry put up 27% growth vs last year. We estimate that about 1,000bps is due to easy comparisons from a storm-impacted 2012. But still…a mid-teens organic growth rate is nothing to shake a stick at.  The biggest surprise for the week was Reebok, which has been a perennial dog. But over the past three weeks its' sales went from -28% to +22% to +74%.  UnderArmour is also putting up some solid numbers. One thing worth noting is that this Sportscan data tends to include the more marginal retailers in its sample.  Perversely, we almost don't want to see a high-end brand like UA do too well with this sample.


What's New Today in Retail (11/7) - chart1 11 7

What's New Today in Retail (11/7) - chart2 11 7

What's New Today in Retail (11/7) - chart3 11 7

What's New Today in Retail (11/7) - chart4 11 7




ADS - Adidas looks to World Cup as sales and profit drop



  • "Adidas, the world's second largest maker of sports gear behind Nike, said third quarter operating profit dropped 6% on sales down 7%, hit by distribution problems in Russia, currency effects and poor sales of golfing products."
  • "Adding to its woes, it has been outperformed by Nike on its home turf. Nike reported an 8% rise in sales in western Europe in its first fiscal quarter to the end of August, compared with a fall of 6% for Adidas at constant currencies in its third quarter."
  • "One bright spot for Adidas this year has been the Reebok brand, which saw sales rise 5% in the three months to the end of September, the second quarter in a row of growth as a renewed focus on fitness pays off."


Takeaway: Adidas puts up a slight miss -- entirely driven by top line weakness. (looks like the stronger Reebok apparel sell-through is happening just in time). The company missed top line expectations in every region of the world except Western Europe. Most troubling is the company's inventory levels, as its sales/inventory spread plummeted by 1,500bp. As evidenced by the SIGMA chart below, Adibok is looking at bloated inventories and positive margins. That's one of the worst places to be -- as the margin level gives management some degree of confidence that it can clear inventory profitably. But that it almost never the case. The company reiterated guidance…we'd question that move.


What's New Today in Retail (11/7) - chart5 11 7


AEO - American Eagle Outfitters Updates Third Quarter EPS Guidance to $0.19



  • "American Eagle Outfitters, Inc. is updating its third quarter EPS outlook to $0.19 per diluted share, which excludes non-cash charges associated with closing a distribution center, as previously disclosed. This compares to EPS from continuing operations of $0.41 for the same period last year. The company’s previous EPS guidance was $0.14 to $0.16. The revised outlook reflects slightly better than expected margin results."
  • "Total net revenue for the thirteen weeks ended November 2, 2013 decreased 6% to $857 million from $910 million for the thirteen weeks ended October 27, 2012. Total consolidated comparable sales decreased 5%, including sales from AEO direct, against a 10% comparable sales increase last year. AEO direct sales increased 17% during the period."


Takeaway: This was pretty much AEO kicking sand in Abercrombie's face, which slashed guidance yesterday in its latest admission that it can't do anything right.


NKE - Nike Names New Vice President of Action Sports 



  • "Nike, Inc. announced that effective immediately Scott LeClair, currently VP and GM of Nike Skate and Nike Snow, will become Nike's new VP of Action Sports. He will be responsible for leading the category as well as for Hurley International, LLC. Nike veteran Roger Wyett, 56, who was previously in the role, has decided to retire."
  • "LeClair, 47, joined Nike in 1992 and has led Nike's skate and snow business since June 2012. He has held previous roles in North America and was GM of Nike's West Territory based in Los Angeles, before moving to Japan to lead the running category and then the merchandising function. He will report to Jayme Martin, VP & GM of global categories."


Takeaway: Roger Wyatt is a loss for Nike. The level of role shuffling inside the company right now is unprecedented in Nike's history. We don't love it.


WMT - Wal-Mart Web Glitch Creates a Frenzy



  • "Wal-Mart Stores Inc. suffered from a website glitch Wednesday that set off a shopping frenzy as customers tried to snap up expensive items, such as computer monitors and televisions, for less than $10."
  • "The retailer said it would not honor customer orders. Instead, it will send these customers a $10 Wal-Mart gift card in the next five days that can be used toward future purchases.
  • 'Given the wide discrepancy in pricing, we are notifying customers who ordered these items that their orders have been cancelled and that they'll be refunded in full,' said spokesman Ravi Jariwala. 'We apologize again for any inconvenience this may have caused our customers.'"
  • "The error led to very low prices being displayed for items such as treadmills that normally cost $600 being offered at $33, televisions priced at $2,000 on sale for a couple hundred dollars, and videogames such as 'Grand Theft Auto V' that typically sell for $60, going for $18 on"


Takeaway: WMT simply can't get out of it's own way. First there was the debit card debacle several weeks back, and now this. It's hardly going to hurt customer loyalty in aggregate, but for a company that is in a constant battle to enhance its image, this hardly helps.


GPS - Old Navy will give away $1 million to one lucky Black Friday shopper



  • "Gap Inc.’s. Old Navy discount clothing chain will be giving  the first 500 shoppers in line at North American stores when they open at 7 p.m. on Thanksgiving Day the chance to enter a sweepstakes to win $1 million. The sweepstakes game is titled 'Overnight Millionaire.'"
  • "To be sure, Old Navy has hosted $1 million giveaway contests in the past for other occasions, even though it never had an actual winner, spokeswoman Andrea Hicklin said, adding the Overnight Millionaire sweepstakes will guarantee a winner and is the largest giveaway the company has ever had for Black Friday."


Takeaway: The sad reality is that this will probably work.  If it doesn’t, it's a bad sign for GPS.


7936 - Asics Americas Revenues Jump in Six Months 



  • "Asics  Corp. reported revenues grew 21.4 percent in the first six months through Sept. 30, to ¥153.66 billion ($1.56 bn) from ¥126.6 billion a year ago. The gains were due to strong sales of running shoes in the Americas, Europe and other regions and the effect of foreign exchange rates. On a currency-neutral basis, sales grew 12.0 percent in the Americas and gained 7.3 percent in Europe. Sales dipped slightly in Japan."


Takeaway: We see so many US companies getting dinged by FX. But here's the inverse. US sales up 12% -- and is the strongest-performing region. Yet consolidated sales are up 21%.


COST - Costco Wholesale Corporation Reports October Sales Results



  • "Costco Wholesale Corporation today reported net sales of $8.15 billion for the month of October, the four weeks ended November 3, 2013, an increase of six percent from $7.66 billion during the similar four-week period last year."
  • "For the nine weeks ended November 3, 2013, the Company reported net sales of $18.01 billion, an increase of six percent from $17.00 billion during the similar period last year."


  • US - 4% (4 weeks), 4% (9 weeks)
  • Intl - 3% (4 weeks), 1% (9 weeks)
  • Total - 3% (4 weeks), 3% (9 weeks)

Comps ex. Gas & FX

  • US - 5% (4 weeks), 5% (9 weeks)
  • Intl - 7% (4 weeks), 6% (9 weeks)
  • Total - 6% (4 weeks), 6% (9 weeks)


Takeaway: Note how the big delta in sales is entirely FX-related…per the comment above on Asics.  Gas is slightly hurting reported comps as well -- something that will only intensify in the coming two quarters as we anniversary a spike in oil in Jan-Mar of 2012.




BANGLADESH: Factories threaten shutdown over wage plans



  • "Bangladesh's apparel manufacturers have reacted angrily to plans announced this week to raise the minimum wage for millions of garment workers by 77%."
  • "Factory owners have threatened to shut down all facilities if the government-appointed national wage board does not review its recommendation to lift wages to BDT5,300 (US$68.17) within the next 15 days."
  • "'The country's ready-made garment (RMG) sector is not in a position to afford this amount,' says Atiqul Islam, president of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA).
  • The BGMEA chief also said the proposed new minimum wage for entry-level workers would be 'suicidal' for the sector."
  • "'We'll request the board to revise its proposal to BDT4,500 (US$57.88) as the minimum wage,' Islam said. "If it is not solved within 15 days, the BGMEA and the BKMEA will announce shutdown of all factories.'"
  • "Islam also claims the country's garment sector will lose 37% of its competitiveness if the recommended wage is implemented, since the cost of production has increased by 13% over the last few years."
  • "Meanwhile, more than 50 factories closed yesterday (5 November) as several thousand apparel workers went on the rampage in the Gazipur industrial belt, protesting that the latest wage proposal is still too low."


Indonesian Workers Stage Massive Protests



  • "A recent two-day nationwide strike of Indonesian workers demanded an increase in wages, health insurance coverage and an end to violations of labor outsourcing laws and new legislation to protect workers’ rights."
  • "Workers across the board – garment, textile, teachers, transport and other skilled, semi-skilled and non-skilled laborers – formed a coalition of  employees who participated in the protest."
  • "Although some three million workers were expected to strike, less than 50,000 reportedly took part in the walk-offs and shutdowns."

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TODAY’S S&P 500 SET-UP – November 7, 2013

As we look at today's setup for the S&P 500, the range is 20 points or 0.93% downside to 1754 and 0.20% upside to 1774.                                                             










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.35 from 2.35
  • VIX closed at 12.67 1 day percent change of -4.52%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: BoE seen holding bank rate at 0.5%
  • 7:45am: ECB seen holding rates at 0.5%
  • 8:30am: ECB’s Draghi holds press conference
  • 8:30am: Init. jobless claims, Nov. 2, est. 335k (prior 340k)
  • 8:30am: GDP, 3Q, est. 2.0% (prior 2.5%)
  • 8:30am: U.S. announces amounts of 3Y notes, 10Y notes, 30Y bonds to be sold at following week’s quarterly refunding
  • 9:45am: Bloomberg consumer comfort (prior -37.6)
  • 10am: Mortgage delinquencies, 3Q (prior 6.96%)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 11am: Fed to buy $1.25b-$1.75b in 2036-2043 sector
  • 1:30pm: ECB’s Draghi speaks in Hamburg
  • 1:30pm: Fed’s Dudley speaks in NY
  • 1:50pm: Fed’s Stein speaks in Chicago
  • 3pm: Consumer credit, Sept., est. $12b (prior $13.625b)


    • FAA to outline civilian drone guidelines
    • 9:30am: Army Chief of Staff Gen. Raymond Odierno; Chief of Naval Operations Adm. Jonathan Greenert; Commandant of the Marine Corps Gen. James Amos; and Chief of Staff of the Air Force Gen. Mark Welsh III, testify before Senate Armed Svcs Cmte hearing on sequestration and national defense
    • 10am: Treasury Sec. Jack Lew tours exporter of telecom equipment in Gaithersburg, Md.
    • 10am: Senate Banking, Housing and Urban Affairs Committee holds hearing on “Housing Finance Reform: Essential Elements to Provide Affordable Options for Housing.”


  • Twitter IPO raises $1.8b at $26/shr, pricing above range
  • Twitter IPO yields one of smallest fee rates this year
  • Microsoft’s internal CEO candidate list said to include Turner
  • Toll Bros. to buy Shapell Homes for ~$1.6b
  • Emirates pressing Boeing on 777X performance before deal
  • Southwest, JetBlue showing interest in AMR-US Airways slots
  • Qualcomm looked at some BlackBerry assets, CEO says
  • Fmr. AIG real estate exec. settles pay case for $274m
  • Washington voters defeat measure requiring GMO food labels: AP
  • Chinese domestic fund managers to offer U.S. products: WSJ
  • U.S. Oct. retail sales may have slowed vs Sept.


    • AES (AES) 6am, $0.34
    • AMC Networks (AMCX) 8:30am, $0.87
    • Ameren (AEE) 7:48am, $1.23
    • American Realty Capital (ARCP) 6am, $0.19
    • ANSYS (ANSS) 7:09am, $0.75
    • Apache (APA) 8am, $2.16 - Preview
    • Apollo Global Management (APO) 7am, $0.93
    • BCE (BCE CN) 6:52am, C$0.78
    • Cablevision Systems (CVC) 8:30am, $0.12
    • Calpine (CPN) 6am, $0.65
    • Canadian Tire Corp (CTC/A CN) 7:31am, C$1.77
    • CI Financial (CIX CN) 11:27am, C$0.39
    • Coty (COTY) 6am, $0.29
    • Crescent Point Energy (CPG CN) 8am, C$0.30
    • Dynegy (DYN) 7:30am, $0.14
    • Fifth & Pacific (FNP) 7:32am, $(0.01)
    • Flowers Foods (FLO) 6:30am, $0.21
    • Great-West Lifeco (GWO CN) 10:24am, C$0.59
    • Himax Technologies (HIMX) 6am, $0.11
    • IGM Financial (IGM CN) 10:30am, C$0.79
    • International Game Technology (IGT) 6:30am, $0.34
    • Laredo Petroleum Holdings (LPI) 6:55am, $0.16
    • Manulife Financial (MFC CN) 6am, C$0.32
    • Martin Marietta Materials (MLM) 8:10am, $1.46
    • New Residential Investment (NRZ) 6:30am, $0.18
    • Radian Group (RDN) 7am, $(0.07)
    • RioCan Real Estate Investment (REI-u CN) 7am, C$0.40
    • Rockwell Automation (ROK) 7am, $1.53
    • Royal Gold (RGLD) 8am, $0.24
    • Saputo (SAP CN) 9:39am, C$0.76
    • Scripps Networks Interactive (SNI) 7am, $0.84
    • SouFun Holdings (SFUN) 6:45am, $0.88
    • Starwood Property Trust (STWD) 6:45am, $0.54
    • Stratasys (SSYS) 7am, $0.42
    • Tim Hortons (THI CN) 7:30am, C$0.77
    • TMX Group (X CN) 6am, C$0.74
    • Towers Watson (TW) 6am, $1.33
    • Vermilion Energy (VET CN) 6:55am, C$0.77
    • Visteon (VC) 6am, $1.16
    • Wendy’s (WEN) 7am, $0.06 - Preview
    • Westlake Chemical (WLK) 6am, $2.20
    • WhiteWave Foods (WWAV) 8am, $0.18
    • Windstream Holdings (WIN) 6:15am, $0.09
    • WPX Energy (WPX) 7am, $(0.21)


    • Allscripts Healthcare (MDRX) 4:01pm, $0.09
    • Amarin (AMRN) 4:02pm, $(0.32)
    • Arena Pharmaceuticals (ARNA) 4:03pm, $(0.12)
    • AuRico Gold (AUQ CN) Aft-mkt, $0.02
    • AVG Technologies (AVG) 4:15pm, $0.47
    • CareFusion (CFN) 4:02pm, $0.39
    • Clean Energy Fuels (CLNE) 4:05pm, $(0.23)
    • Credicorp (BAP) 6pm, $2.43
    • CubeSmart (CUBE) 4:30pm, $0.24
    • Groupon (GRPN) 4:01pm, $0.01 - Preview
    • Mettler-Toledo Intl (MTD) 4:01pm, $2.60
    • Molycorp (MCP) 4:01pm, $(0.28)
    • Monster Beverage (MNST) 4:05pm, $0.57
    • Nektar Therapeutics (NKTR) 4:15pm, $(0.40)
    • Northern Oil and Gas (NOG) 4:30pm, $0.32
    • NVIDIA (NVDA) 4:20pm, $0.25
    • Pengrowth Energy (PGF CN) 4:30pm, C$0.02
    • Pharmacyclics (PCYC) 4:01pm, $0.76
    • (PCLN) 4:01pm, $16.22 - Preview
    • Santarus (SNTS) 4:05pm, $0.33
    • tw telecom (TWTC) 4:01pm, $0.12
    • Walt Disney (DIS) 4:15pm, $0.76 - Preview
    • Westar Energy (WR) 5pm, $0.99


  • LME Changes Warehousing Rules to Shorten Withdrawal Times
  • Brazil Soy Crop Surpassing U.S. Expands Global Glut: Commodities
  • Coffee Falls to 7-Year Low on Latin American Supply; Sugar Drops
  • Corn Touches Three-Year Low as USDA Seen Raising Crop Outlook
  • Brent Falls to Lowest Since July on Warm Weather Across Europe
  • World Food Prices Advance for First Time in Six Months on Sugar
  • Rebar Climbs on Speculation Air Quality Efforts May Curb Output
  • Gold Swings Between Gains and Losses in London Before U.S. Data
  • Tin Shipments From Indonesia Jump as Trade Rule Gains Traction
  • ArcelorMittal Turns Optimistic on 2014 as Profit Beats Estimates
  • China Seen by Klapwijk Boosting Gold Reserves as Prices Drop
  • Crude Forecasters Diverging as Contango Emerges: Energy Markets
  • Warmer Start to Winter Weakens Gas Demand Throughout Europe
  • Crude Traders Sticking With Brent Amid Manipulation Claims


























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Soft Tyranny?

This note was originally published at 8am on October 24, 2013 for Hedgeye subscribers.

“The will of man is not shattered, but softened, bent, and guided…”

-Alexis de Tocqueville


If we need a French guy to tell us what, precisely, is wrong with an un-elected US Federal Reserve whose Chairman has unlimited power over both the value of your currency and rate of return on your savings, so be it.


“… men are seldom forced by it to act, but they are constantly restrained from acting. Such a power does not destroy, but it prevents existence; it does not tyrannize, but it compresses, enervates, extinguishes, and stupefies people, till each nation is reduced to nothing better than a flock of timid and industrious animals, of which government is the shepherd.”


Isn’t it sad? But which part is the saddest? Is it the cowardice in free-market leadership, or the groupthink grounded in how much people will pander to a man that gets them paid? I don’t know anymore. I read this Tocqueville passage at a picnic table at a rest stop in Maine last night. I lit up a cigar, and I felt like I was going to puke.


Back to the Global Macro Grind


The thought of Gold ripping and #GrowthSlowing because an un-accountable central planner doesn’t allow economic gravity to get marked-to-market makes me sick to my stomach. I run a small business in America. I have a payroll to meet and people to inspire – it gets a lot tougher when the economy slows than when it’s accelerating.


Not that anyone in Washington cares, but I’ll be fine. I started this firm during the thralls of 2008 when Bernanke thought the “shock and awe” rate cuts to 0% were going to save government from itself. So I can take a P&L punch. But if the buck keeps burning and rates keep falling, Bernanke, Obama, and “progressive” Republicans are going to knock some people right out.


I don’t agree with everything he says or thinks, but I think Mark Levin has this part of it right: “The nation has entered an age of post constitutional soft tyranny” (The Liberty Amendments, pg 4). And I’m not talking about politicized social issues or anything outside of my domain of required reading – I’m talking about the economy and markets.


How else would you describe a market that hangs on every breath of what an un-elected body @FederalReserve says and/or hints next? Forget the soft stuff – this is hard core tyranny.


So, after being the US #GrowthAccelerating bulls for the better part of the last year, how do we reposition for?


1.       Down Dollar

2.       Rates Falling

3.       #GrowthSlowing


Whether you like the probability of these things occurring or not, it’s officially rising. But you already know that. You can see the “growth style factors” in your portfolio slowing.


Yesterday’s US stock market correction (from the all-time highs) was led by the Financials (XLF). The only S&P Sectors in our 9 Sector Model that were up on the day were the 2 slowest growth sectors – Utilities (XLU) and Consumer Staples (XLP).


What else has been working this week?

  1. Gold
  2. Bonds
  3. Volatility

Isn’t that just great? Think about that for another few seconds – AT THE ALL-TIME HIGH IN THE US STOCK MARKET, GOLD, BONDS, and VOLATILITY WENT UP! And CNBC’s big government access ratings hit new lows.


This has never happened before…  that’s why it “enervates, extinguishes, and stupefies people.”


Why has it never happened before? That’s easy. We have never been at these all-time highs before – and the Bush/Obama Bernanke legacy now has plenty of “this time is different” economic policy that history will have plenty of time to review.


Is this time really different? Is it still 2008? Or do the people in Washington who are plundering your currency for political gain look like they are living through Bernanke’s said 1936 depression?


Or is it 2013 – the year when de Tocqueville finally nails it on US monetary policy being that soft tyranny that we are all so numb to that we just allow it to exist?


2013 FACT: as US economic growth accelerated (Dollar Up, Rates Up), the bond, currency, and stock markets all had this right. That’s why Gold got tapered. On September 18th, 2013, Ben S. Bernanke restrained market forces from acting as they were.


I don’t think torching the currency, starving savers or a risk free-rate of return, and trying to arrest economic gravity ends well for Americans. That’s why I went to 58% cash yesterday and I still feel like I am going to puke.


Our immediate-term Global Macro Risk Ranges are now as follows:


UST 10yr Yield 2.47-2.60%

SPX 1728-1754

VIX 12.01-14.62

USD 78.99-79.98

Euro 1.36-1.38

Gold 1316-1341


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Soft Tyranny? - Chart of the Day


Soft Tyranny? - Virtual Portfolio

[video] Twitter's IPO: $TWTR Too Expensive?

RL: We're Concerned

Takeaway: We give the print a C, quality of EPS = D- and cash conversion = F. If you doubt RL is in serious transition, this conf call is your proof.

CONCLUSION: We did not like RL's quarter one bit. Almost every line of the P&L failed to impress us, and the erosion in the cash cycle further impeded RL's ability to convert GAAP profit to cash.  Though CFO Peterson crushed it on the call, Roger Farah was definitely missed. We took our numbers down to be about in-line with RL's guidance. This is the first time in nearly a decade that we don't have confidence that RL will meaningfully beat expectations. We need a sit-down with management to reignite our confidence in the story.


This quarter did nothing to ease our growing concerns about RL. We were upbeat into the print, but despite the beat, we did not like the quarter one bit. Specifically…

  1. RL technically beat the quarter -- with EPS of $2.23 versus the consensus at $2.20. But by our math, it had a $0.09 tax benefit relative to expectations. We call that a miss.
  2. Sales were up only 2.8%, but the company somehow managed to translate that to EBIT down 15%. Yes, there was a business model change with its Chaps business moving from Licensing to Wholesale -- and FX hurt as well. But even excluding those items operating cash flow was down.
  3. Inventories were up 15%, or nearly 6x the rate of sales growth. That amounts to seven more days inventory on hand than a year ago. That would maybe be palatable, but last year's DIH was up a whopping 17 days. In other words they had an easy comp and couldn't comp it.
  4. On the plus side, Receivables were down 4%, which is great. Unfortunately, the DSO decline was entirely offset by weaker payables. In the end, the cash conversion cycle (DSO +DIH less DPO) came crashing in at 137 days -- up 7.7 days vs last year. This marks the worst 2Q cash cycle in 13 years.
  5. One thing we still don't get is how net PP&E came in at $1.28bn -- a 36% sequential increase, or $336 million.  That's the size of RL's entire capex budget this year. And in fact, it spent $148mm this quarter. Perhaps there's a simple answer that we're just unaware of, but it's rare to see PP&E go up 2x the rate of capex. (Chaps closed in 1Q, not 2Q -- so that shouldn't explain it).
  6. Comps at retail stores were down 1%. Bulls will point to the fact they'd have been up 1% excluding FX. But is +1% really anything to be bullish about?
  7. Roger Farah was not on the call. I guess that was inevitable given that he's operating in a diminished role versus the past 10+ years. But for anyone wondering about his level of involvement in the day to day operations of the company, his absence from the call sent a pretty clear signal. It's possible that he chose to abstain in order to give more limelight to Jackie Nemorov, as Roger's presence on the call might have undermined her role to the employee base. But still, it clearly tells the Street that he's handing over the reins.
  8. As for Jackie Nemorov, we'd give her a C+ for how she came across on the call and the confidence that we think she instilled in the investment community. Seriously, did we have to hear about why it's a good idea for us to buy our wives a Ricky bag? Or that the company hosted a fashion show for dogs this quarter?  The answer there is a big No from our perspective.  She should have used her Presidential debut as a venue to highlight her precision on the numbers and focus on a smaller number of key big ideas. The sad thing is that we think that Nemorov is extremely competent, and is a very good leader internally. But it did not come across on the call.
  9. At risk of playing favorites, we think that Chris Peterson was absolutely fantastic on the call. He gets an A+. He was crisp, clear, confident, and answered every question in a way that both gave good insight into the company, but also furthered RL's agenda. It's amazing to thing that he has only been the CFO of a publicly-traded company for a year.  Truth be told, if Peterson was not at RL, we'd be extremely negative on it right now. His presence numbs the blow of Farah stepping back to a huge extent.
  10. Its SIGMA trajectory is horrendous. Last quarter was bad enough when margins turned down by 260bp, but at least inventories were somewhat manageable (-5% relative to sales). But in 2Q14 we saw a 330bp erosion in margins on top of a -12% erosion in the inv/sales ratio.  As a point of reference, it's been 14 quarters since RL's sales/inventory spread has been positive.
  11. The biggest plus is that we're likely to see a 25% acceleration in growth over the next two quarters. Chaps coming online to RL's wholesale division is a big help, and it looks like Europe is finally in a good enough place to start taking more inventory. In addition, Peterson made it clear on the call that the first two months of the quarter were weak, but September was significantly stronger. That's a trend that is impossible to ignore.


RL: We're Concerned - 11 6 2013 3 24 36 PM




RL: ST and LT Calls Are Very Different



CONCLUSION: We have a bifurcated view on RL right now. We like it from both a TRADE and TREND perspective, as expectations are too low headed into Wednesday's print, as RL guided to a msd decline in EPS, but in reality they’re going to post EPS growth of at least 1,000bps higher. Furthermore, the company will begin to show a meaningful acceleration in EPS growth over the next two quarters (near 30%) that should put it in the top decile of earnings growers in retail.


But from a TAIL vantage point, we're far less constructive. As much as we like how the company is executing on its long-term initiatives (international expansion,, and real estate), we're concerned about the recent changes in the C-suite. In the end, our degree of confidence in how the company will be executing three-years out is partially diminished.



So why are we concerned about management? Roger Farah shifting 50% of his time away from the company simply does not sit well with us.  The fact is that Roger has been incredibly effective over the past decade. Ralph might be the CEO, but Roger has basically executed on everything that is outside of the creative side of the organization. Yes, it's a positive that the company still has him given that it was a risk that he'd leave entirely. But we just don't buy the concept of a part-time COO. The way we see it, you're ether in or you're out. It's like being half pregnant.


On the flip side, the promotion of Chris Peterson is a big positive. He's one of the top 5 retail CFOs we've met -- which says a lot. At P&G he was heavily responsible for parts of the organization outside that of a traditional CFO (and his division of P&G was 5x the size of RL).


Similarly, Jackie Nemerov, who was also promoted and reports directly to Ralph Lauren, is far more capable than many on Wall Street likely give her credit for. There's no one at the company (perhaps with the exception of Ralph himself) who has earned more respect and loyalty by her direct and indirect reports. In the end, as incredibly effective as Roger has been over the years, the reality is that some of that was likely Nemerov adding to the size of his halo.


Lastly, we need to consider Ralph Lauren himself. He's one of the more successful CEOs in retail, and has created one of the best brands in apparel. But we can't ignore the fact that he just turned 74. There's not a whole lot of CEO's in the S&P that are over 70. In fact, there are only 14 CEOs in America who are older than 74. Not that there is a set formula for when a person needs to stop working, but it’s worth noting that the average retirement age for CEOs is between 60-65.


We're not questioning Mr. Lauren's competence. How could we? But he's such a powerful force inside the company, and the likelihood of him being the boss in another five years -- at least in his current capacity -- is not too great. We don't have a problem with this at all. But where we're more concerned is that we're not sure the Board has any clear succession plans for Mr. Lauren. That's probably because the Chairman of the Board is also the CEO -- and he has no plans to go anywhere anytime soon.


In the end, there are two things that are certain; 1) The company is executing and has increasing momentum in its business, but 2) The company is undergoing the most significant period of transition in the executive offices that RL has seen since before 2000. 

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