NKE: Duration, Duration, Duration

It's been a while since I've seen such a gaping hole in buy-side sentiment on Nike heading into a quarter. We all know the consensus sell-side call "taking up numbers because FX is turning positive on the margin, and SG&A cuts will pad any profit erosion from the weak business climate."  But as much as this is the uniform sell-sider view, the buy-side is in to separate ballparks. I think it's all about duration.


The bottom line is that this stock is locked into a trading range for the next 12-18 months at which point the market can start to see, and subsequently discount, Nike's next growth acceleration.  Until then, there will be fits and starts in the business - i.e. sales, inventories, and futures moving a few points here or there. If you want to play those fits and starts, by my guest. In fact, I'll help you do so as the market embraces and discounts information that is out of synch with economic reality. In the high $50s this thing had too much optimism in it - especially with no major swing coming our way as it relate to futures. But with a $54 stock, I'm squarely in the 'do nothing' camp into the print.


Here are some key things do consider.


Fact 1: Nike's current restructuring is definitely the right thing to do. Look back in time... Growth here is anything but slow and steady. This company grows in bursts, then resets the organization. That's what great companies do. They hurry up and evolve. The chart below says it all.


NKE: Duration, Duration, Duration - 6 23 2009 7 01 06 AM


Fact 2. We're only halfway through the current reset. Earnings at this company will not grow at a sustainable rate for another 12-18 months. Will FX help on the margin? Yes. In fact, the quarter Nike is about to report will mark the trough quarter, as evidenced by the following chart (FX weighted by Nike sales by country). 


NKE: Duration, Duration, Duration - NKEFX 6 09


Also, one can argue that the 5% headcount cut will help by around $0.20 per share - or 5%. But do you think that will REALLY flow both FX and SG&A saves through to EPS??? 


Anyone that thinks the answer is 'Yes' is living in a parallel dimension. In fact, if Nike did flow it through, then I'd start to question top line growth assumptions as the next leg of the story starts to rip. EVERY TIME Nike has gone on one of those blistering share-gaining runs of double digit top line growth, it has come after a prolonged period of investment. You can either bank on seeing the cost cut benefits today on the P&L, or the top line growth later. We'd need to have seen a major change in Nike's DNA to ignore the growth. Trust me...that has not happened.


Ok McGough... If that's the case, can we at least bank Nike delivering a knock-out punch to struggling competitors?  Unfortunately, the answer is 'No.'  I can't give a great answer as to why, other than to say that in all my years dealing with Nike, one of my few frustrations has been that the company does not take advantage of competitors being on the ropes as often as it should. It is a fierce competitor, but for some reason is content to leave a competitor on life support instead of pulling the plug. Translation = if you are going to take my comments and look for someone that will feel the pain as a result of Nike's investment rate, you're gonna have a tough time.

EYE ON HOUSING – A mixed blessing

Expectations were high for today's number from the National Association of Realtors. 

Existing U.S. home sales rose in May, up 2.4% to a seasonally adjusted annual rate of 4.77 million units during the month from a downwardly revised 4.66 million units in April.  Total sales were still down from a year earlier however, when the annual pace reached 4.95 million units.  Using a three month moving average, which incorporates seasonally good and bad months, we are settling in at a run rate of slightly more than 4.6 million homes.  The national median home price fell in May, though, to $173,000, down 16% year-over-year. 

While the printed number was below expectations, the decline in the month-supply is a net positive surprise.  The month's supply declined to 9.6 months from 10.2 months in April.  Given all of the foreclosure news, this supply number is most likely understated.

The national average for a 30-year, conventional, fixed-rate mortgage edged up to 4.86% in May from a record low 4.81% in April.  Last week, it was reported that the 30-year fixed rate is at 5.38%.  The increase in rates may discourage some new buyers in the coming months while motivating others to jump in and buy now before rates move even higher. 

The incremental news on the consumer continues to suggest that momentum is slowing in a number of key areas.  Along with the air coming out of the reflation trade, the Consumer Discretionary (XLY) is the third worst performing sector over the past week, declining 5.5% versus the S&P 500's decline of 2.9%.  We remain short Consumer Discretionary (XLY).  

Howard Penney

Managing Director

EYE ON HOUSING – A mixed blessing - hpch



Icelandic investment group and insurer Sjova-Almennar Tryggingar have cancelled plans to purchase the sixty-eight unit Tower Four of One Central Residences for HK$782.74 million or HK$4,410 per square foot and walked away from a 30% deposit.  

The insurer had been looking for a new buyer in the second half of last year before it completed the deal, as Iceland was among the countries worst hit by the global credit crunch.  The balance was due before the delivery of the units at the end of this year.

According to a managing director at Jones Lang LaSalle in Macau, many buyers had shown interest in the project and were willing to take it over at HK$3,800 to HK$4,000 per square foot. Owners needed to spend about HK$700 to HK$800 per square foot to furnish the units, as they would be bare upon delivery, he added.

Units at One Central Residences, launched for sale in the second half of 2006, fetched more than HK$8,000 per square foot when the market peaked in 2007. But selling prices have dropped to between HK$4,800 and HK$5,000 per square foot in the secondary market.  

"Taking up the properties by cancelling the sale-and-purchase agreement will provide an opportunity for the group to realise an attractive return and ... to benefit from the positive outlook of the property market," Shun Tak said in a statement. He expected Macau's property market to catch up with the Hong Kong and Zhuhai markets soon.  If this were true it would certainly benefit the likes of LVS which has a bunch of apartments to unload at Four Seasons.



Macau had a positive budget balance of around 10.451 million patacas at the end of May, according to The Macau Daily Times. This figure represents a decline of 35% over the same period of last year.   There were some positive signs, however; public revenue for the YTD rose 0.8% year-over-year.

The gambling sector is reported to have contributed 15.32 billion patacas through the direct taxation of 35%.  Total current expenditure reached 10.89 billion patacas for the first five months of the year, up by 111% over the same period of last year.

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Retail First Look: 6/23/09


 Several key International happenings overnight in the apparel/footwear retail industry...but the most notable is added rhetoric out of India on keeping up with recent moves by China to lower VAT (taxes) and/or increase rebates for Indian textile manufacturers in an effort to stimulate both production and exports. This supports one of our key themes headed into 2010, though the interesting twist is that China is largely a footwear play (where 86% of US footwear is manufactured), but with India joining the game, this scales up the impact for apparel as well. Not all will win, as we've been highlighting - and mark my words - some will lose big time. Though this datapoint helps solidify that this is a theme that absolutely can't be ignored. I still think the impact will be far greater than what is currently being quantified (for those that are taking time to do the math).



Some Notable Call Outs

  • The streak is over! Monday marked the first day that gas prices declined, reversing a record 54 day streak of increases. 
  • European M&A following US? Mario Moretti Polegato, through his investment vehicle LIR, has entered into an agreement to acquire Diadora S.p.A. from Geox SpA. Both Polegato and Diadora are based in Italy.
  • Furniture makers in Bangladesh on Monday urged the government to withdraw the proposal for increasing VAT on furniture products in the budget for the FY 2009-10 to 15% from 4.5%. 
  • According to Reliance Retail India, Sr. Executives of Pantaloon Retail India Ltd sounded positive about the business. "Consumer demand has picked up sharply in the last two weeks, and the company has various alternate funding plans to expand its business."
  • Bata India, the subsidiary of the Switzerland based Bata Shoes Organization, has appointed Promodome Communications as its creative and media planning and buying partner. The decision follows a multi-agency pitch which saw incumbent creative agency Saatchi & Saatchi and media agency ZenithOptimedia miss the cut. [Note: any short portfolio that tracked changes in consumer products' ad agencies over the ensuing 12-months would have meaningfully outperformed over the past 10 years]. 
  • More weather woes through the weekend. There's no question that by the time June is complete, the weather will have impacted seasonal apparel sales. In particular, the northeast region is now on track to be the coldest in 27 years and one of the wettest June's on record. Couple the weather with the most difficult comparisons we have seen in a year and June is setting up to be a tough month for most retailers. There are little signs of heavy discounting to clear goods at this point, but we expect markdowns to pick up soon the keep inventories clean.



ZachHammer's overview of items you're unlikely to find in the general press.

  • Pakistan is set to give its struggling textile industry a major financial boost to aid its ailing textile industry with a policy to be introduced next month that will mirror their regional competitors.  China gives a 17% rebate to its textile exports and India gives between 8% and 9%.  Pakistan's textile industry needs the support after exports fell by 7% between now and last year.  Pakistan is the world's fourth largest producer of cotton, but is only the 12th largest exporter of cotton products. Fifty percent of the country's cotton exports are value-added products, but most are at the lower end of the price spectrum, while the rest is raw cotton, yarn or greige fabric, he noted. <>
  • China's decision to direct stimulus spending toward domestic products first, after months of complaining about a U.S. policy of the same nature, could spell further trouble for trade relations between the two nations as concerns rise about protectionism amid the global economic downturn.  China's $587 stimulus packaged has a clause directing spending on domestic goods and services and not imports.  China has ridiculed the US since February for encouraging its consumers to buy domestic with the American stimulus package. <>
  • Indian retail companies in the organized retail sector want the government to take a series of initiatives in the forthcoming budget that would boost consumption and have sought 'industry status' as well as abolition of the service tax to beat back the slowdown. Vishal Retail group president Ambeek Khemka said that besides granting industry status to the sector, the government should allow FDI into multi-brand retailing and announce some special sops for the sector.  "There should be less restrictions on the retail sector and the government should grant it industry status. It's a very big sector and a major employer," he said. Only a small portion of the retail sector is organized and falls under the purview of local laws. Khemka also said the central service tax should be abolished as it is having a negative impact on the sectors profitability. <>
  • Furniture makers Monday urged the government to withdraw the proposal for increasing VAT on furniture products and at the same time recognize furniture production as a manufacturing sector instead of service sector. Chairman of Bangladesh Furniture's Industries Owners Association (BAFIOA) KM Akhtaruzzaman said budget for the FY 2009-10 has proposed 15 per cent VAT replacing existing 4.5. <>
  • Online Brands Turn to Traditional Ads - Kayak is among a handful of online brands, including and, that are now seeking traditional agencies (and offline tactics) to create mass awareness and define more broadly what they do. Zappos and Amazon, for example, are frustrated that many consumers don't know that they sell more than shoes and media content, respectively. And while online efforts, including paid search ads, are part of the answer, they are clearly falling short in the eyes of companies with ambitious growth plans and money to spend.
  • In an RFP Zappos issued two weeks ago, the Las Vegas-based company said it was seeking "traditional mass advertising (print, TV, OOH, etc.), online advertising (brand awareness, co-op partnership development), grassroots/word-of-mouth and social media." And this month Amazon launched an online contest to solicit potential TV spots from consumers. <>
  • Saks Chief Cuts Orders to Avoid Discounts on Stiletto Heels, Men's Suits - Saks Inc., Neiman Marcus Group Inc. and other luxury retailers are reducing orders this year to limit supply and boost profitability. <>
  • The European Confederation of the Footwear Industry named Vito Artioli as president of the organization. Artioli was previously the president of the Italian Footwear Manufacturers' Association. Artioli said he would pursue compulsory labeling for products that come from outside the European Union,  investigate  into trade practices carried out by China and Vietnam, and work toward geographically expanding the European Confederation of Footwear's membership base. <>  
  • The ESCADA Group, an international fashion group for women's apparel and accessories, reported a weak first half of the year and a negative outlook ahead.  Sales for the first half of the year were down 24% (Europe -27%, North America -31%, and Asia -19%), and down 33% for the second quarter of 2009.  Gross profit declined 260 basis points from moderate price adjustments.  SG&A declined from cost cuts by 2.4% for 1H 09 and 4% for Q2 09. The company sold the entire PRIMERA segment (comprised of the apriori, BiBA, cavita, and Laurel labels) earlier this year.  ESCADA Group cited an OECD economic report that claimed the economic output of their targeted countries would decline by 4.3% this year.  ESCADA, a German based company, expects Germany to shrink by 6% in 2009 and destabilization until 2010.  ESCADA Group's largest losses come from the US and Russia where consumers are trading down from the luxury good industry.  Other events that occurred in 1H 09: appointed a Chief Restructuring Officer, improved the liquidity situation, sold their 40% stake in the fashion distributor Schustermann & Borenstein GmbH, prematurely terminated ESCADA's New York 5th Ave Flagship, and cut jobs and expenses. <>
  • Hong Kong-based global consumer goods exporter Li & Fung Limited is enhancing its supply chain management capabilities with a revolutionary portal to support its extensive supplier network. Provided by ecVision, Li & Fung has deployed a supplier portal that will be used by vendors and internal sourcing teams as they collaborate on global supply chain management and shipment tasks. The web-based, role-based application serves as a common platform to standardize trade and customs documents, consolidate shipment data, and provide a means of collaboration between the vendors and the agents. With its extensive global presence, Li & Fung operates a sourcing network of over 80 offices covering over 40 economies across North America, Europe and Asia. <>
  • Isaac Mizrahi, known for his products lines ranging from Target to Liz Claiborne, is turning a renovated brownstone in New York into a showcase for his own Isaac Mizrahi New York collection. The 1500-square-foot store, on East 67th Street between Madison and Fifth Avenues, is the designer's first freestanding store and will showcase his accessories, shoes and sportswear.
  • German shopping center developer Management für Immobilien AG (Mfi-Group) has emerged as a second potential candidate to take over some of the 90 insolvent Karstadt department store doors. But the Essen-based group denied reports it is actively pursuing plans to bid for any of the Karstadt properties. <>
  • Marks & Spencer will start the search for a new chief executive in September, making it likely that executive chairman Sir Stuart Rose will leave the company early next year, according to The Sunday Times. The newspaper reported that M&S had been inundated with calls from headhunters looking to win the search contract to find Rose's replacement. It added that M&S planned to start the search after the summer which was likely to mean Rose was almost certain to leave a year earlier than the previously agreed to 2011. <>
  • A survey of 1,067 consumers ages 18 to 65 by Chicago-based market research firm Information Resources Inc. found: Seventy percent reduced clothing purchases, with 56 % saying that they will do so in the future, 60% wear clothing multiple times before washings to save on cleaning costs and 30% said they will continue to do so, 82% wash laundry only when they have full loads and 60% plan to keep doing that, and 51% repair clothes by sewing and patching them. <>
  • Kitson is ratcheting up its global footprint with store plans for new units in Tokyo, with the first opening Sept. 6 in the Harajuku area and the second in March 2010 in the high-end Omotesando district. Under a licensing agreement, all of Kitson's stores in Japan are owned and operated by Itochu Corp. Kitson founder Fraser Ross said he is in talks to open boutiques in China, South Korea and Singapore, possibly in the next year. <>
  • Following up on its successful collaboration with "Sesame Street," Boston-based New Balance has partnered with licensing and syndication firm United Media to create a line of co-branded children's sneakers based on the popular comic strip "Peanuts," penned by the late Charles M. Schulz. The launch will hit stores in October and initially feature three versions of New Balance's heritage running shoe, the 574, that bring to life three of "Peanuts'" most popular stories: "It's the Great Pumpkin, Charlie Brown;" "A Charlie Brown Thanksgiving;" and "A Charlie Brown Christmas." All three sneaker styles will be available in infant, preschool and grade-school sizes. Retail prices will range from $38 to $60. <>
  • W.L. Gore & Associates, which works with apparel, outerwear and even architectural fabrics announced that footwear will be its focus, aggressively expanding from rugged outdoor footwear into new categories. To do it, the company has partnered not only with the brands it supplies (including The North Face, Nike, New Balance, Ecco, Merrell and Salomon) but with the entire manufacturing chain - and it is seeking to bring its partnership model to more retailers, factories and brands. <>
  • German Consumer Confidence Rises for Second Month on Outlook, Price Drop - German consumer confidence rose for a second month as the economic outlook brightened and retreating prices boosted household purchasing power. <>
  • French consumer spending fell by more than expected in May, underlining worries about fragile domestic demand but business morale ticked up in June
  • Carrefour Gains Most Since April on Report Costs to Be Cut by $2.8 Billion - Carrefour SA, Europe's largest retailer, rose the most in more than two months in Paris trading after Le Figaro reported that the company is planning annual cost savings of 2 billion euros ($2.8 billion) by 2012. <>



 Retail First Look: 6/23/09 - 1 


Retail First Look: 6/23/09 - Calendar

Broke Down Engine?

"Feel like a broke down engine, aint got no driving wheel"
 -Blind Willie McTell
The World Bank's annual Global Development Finance report issued yesterday provided a grim assessment of the near term situation including estimates of a 2.9% decline in global output, a 10% contraction in world trade and a projected decline in private capital flows from $707 billion last year to $363 billion for 2009.  It wasn't the bad news in the report for this year that really spooked investors however, but rather the diminished expectations for recovery in 2010 -with a new global GDP growth forecast of just 2% and a predicted contraction for the developing world, excluding China and India. In short, the World Bank's annual report failed to identify any catalyst that could drive growth rates to pre-crisis levels over the next 24 months. Not a "V" recovery on the horizon, not even a "W" recovery, just a great big capital L for the next several years.
For our portfolio, yesterday was an unwelcome stress test as our commodity, energy and international long positions were pummeled by waves of selling. Yesterday's broad market action felt like an inflection point when short term consensus shifted focus from inflationary to deflationary concerns and the safety trade returned in a concentrated form: with treasuries and the Dollar as the only safe haven left for the timid.
While the market reaction to the World Bank's conclusions caught us off guard, we expected their argument. With conservative estimates drawn from rear view mirror observations, the data they released was hard to challenge but their conclusions were not. We are not joining this dash for the exits trying to stay ahead of a cyclical asset class shift, but rather are remaining firm in our convictions that the fundamental facts have not changed, and are as comfortable with our strategic convictions now as we were in January -before the 60% and 30% rise in the Shanghai Composite and the Bovespa respectively made our Q1 call consensus.  
Chinese data continues to support our thesis. With Q1 GDP still registering above 6% growth, Industrial production levels rising back towards double digits, imports of base metals and coal showing resilience,  new ground breaking daily on infrastructure projects and domestic consumption for durable goods from cars to laptops -Chinese internal demand measures continue to expand across the board. This weekend Premier Jiabao pledged to continue to pump more liquidity into the system, showing that Beijing continues to be willing to put their money where their mouth is and take risks to drive internal demand expansion.  
A fresh report released by the National Bureau of Statistics, written by Guo Tongxin, even tackles the omnipresent concerns over Chinese data quality, presenting greater transparency of the inner workings of Beijing's accounting process -not a fix by a long shot, but a promising start.  And, by the way, while the Chinese may make up their numbers, so do we!
Make no mistake: Chinese demand can't save the whole world on its own, but like the proverbial butterfly wings that drive hurricanes a thousand miles away, demand from "The Client" continues to be felt throughout the global supply chain.
Not that we dismissed all of the World Bank's conclusions entirely. The argument for a longer recovery period for weaker emerging economies seemed spot on to us -as long time readers know we have never bought into the emerging markets craze and have remained skeptical of the prophets of profit who espouse "frontier economies" from Ghana to Kazakhstan.
We diverge from their thesis on demand from the "developed portion of the developing world" if you will. As such, we continue to see growth prospects that can jump start global demand in the major Asian economies ex-Japan, combined with the smaller markets that stretch along the supply chain connecting them all the way back to commodity producers like Australia -which has thus far managed to avoid recession, and Brazil -which although challenged by commodity dependence continues to navigate the choppy waters with pragmatic leaders and significant room for policy loosening.  Furthermore, since all of this will occur inside a central bank sponsored free money vacuum, we expect this resurgent demand will drive inflationary pockets inside the global commodity matrix and drive rates higher ahead of policy shifts during the fourth quarter of this year.
As such, we won't be anchoring on one report from the World Bank. While our longs hurt us yesterday, our shorts made us money and we have better things to do than sit and sing the blues.
Andrew Barber

MCD - Nearly Free Food

The level of discounting is truly amazing and it's everywhere!


(1) The McDonald's Family Restaurants of Greater Baltimore are proud to offer customers a FREE McMuffin or Biscuit breakfast sandwich with the purchase of any McCafé Coffee from June 22 - 28, 2009.


(2) McDonald's restaurants are giving their Southwest Florida customers some financial relief Thursday as they can purchase a second Big Mac sandwich for 25 cents after buying the first one at regular price. The offer is valid from lunch to midnight.


How are BKC and WEN going to get same-store sales in this environment?

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