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UA: Impressive Consistency

I am incredibly impressed with the consistency in price point of Under Armour's cross trainers in the weeks since its launch. In fact, a full 7 weeks after launch, average price is hovering at $80, which has hardly budged off of what we saw in the initial week-1 hype, and it is happening without sacrificing any meaningful unit sale momentum. This is highly unusual for most launches in this space. The football cleat, for example, saw a precipitous decline in price point over the first 2 months (from $85 to $64) back in 2006. The x-trainer launch is being handled extremely well by Under Armour management, in my humble opinion.

My issue with this story has never been with the top-line growth, but with the margin necessary to sustain top line growth. I still believe that to be true, and that the real margin level for UA is 1-2pts lower than what we see today (we'll see higher marketing and sourcing costs than anyone is banking on). But I am definitely leaning more towards the camp that better top line could offset some of this in 2H08. Estimates still look too high, but maybe not as high as they looked before the current trends I'm seeing in footwear.


Chart below shows price point for football cleats vs cross trainers in the 7 weeks post-launch for each product. Source: NPD Fashionworld.

Restaurant Anthology - Part 2

For more details regarding any of the following highlights, please refer to this week's relevant postings, which are sorted by date.
  • Institutions appear to be net buyers of SBUX and net sellers of MCD. As I keep saying, Starbucks is now making the right capital allocation decisions (evidenced by the company's announcement to partner with SSP for expansion in key European travel channels - posted June 12) while MCD's results will eventually reflect the stress that is emerging in its franchise system from the unprofitable Dollar menu and broadened beverage platform - posted June 13 (SBUX, MCD).
  • MCD's Europe results have been helped by the strength of the Euro in the last 7 quarters. The spread between reported operating income growth and currency-neutral growth has accelerated recently and the F/X comparisons will become more difficult going forward - posted June 12 (MCD). MCD posted another month of strong comparable sales trends in May, up 7.7% globally. This number was benefited by about 2% from a calendar shift, which will reverse in June. Although the U.S. top-line number looked strong, Dollar menu sales have been driving traffic in the U.S. at the expense of margins (company restaurant margins have been down in the last 5 quarters) - posted June 9 (MCD).
  • After coming across a story on the Dow Jones news wire that said the Xuzhou Construction Machinery Group is going to exit its JV with Caterpillar, I realized I don't know how secure YUM's relationships with its partners in China are because they are essentially state-owned enterprises. Despite having a majority ownership position, YUM historically has not consolidated any entity in China, instead accounting for the unconsolidated affiliate using the equity method of accounting - posted June 11 (YUM).

Restaurant Anthology - Part 1

This week's macro call outs all point, not surprisingly and not new, to rising costs for both restaurant companies and their customers, alike.

For more details regarding any of the following highlights, please refer to this week's relevant postings, which are sorted by date.
  • Despite optimism around this week's reported May retail sales, BIGResearch's Consumer Intentions & Actions Survey, which monitors over 7,500 consumers, refuted this bullishness, reporting that in June, 53.8% of consumers are shopping for things they need rather than want (up 7 points from a year ago). Although meant to jumpstart consumer spending, only 5% of those consumers who have received their economic stimulus checks have put them toward discretionary purchases - posted June 12.
  • Another data point affirming that less than optimistic view of the consumer's purchase outlook was that at $4.00 a gallon, gas is now eating up 85% of every incremental retail dollar (provided by SixthManResearch.com) -posted June 13. These higher gas prices are hurting consumers in certain regions of the U.S. more proportionately than others relative to income levels. The O'Charley's concept, LongHorn Steakhouse, Steak n Shake and Ruby Tuesday are most exposed to these hardest hit areas (based on % of store base) - posted June 11 (CHUX, DRI, SNS, RT).
  • This week's commodity price moves spared coffee and dairy users (i.e. Starbucks) as they were the only commodities on our screen that declined. Coffee prices are down nearly 19% from March peak levels. Corn, wheat and soybeans all moved up substantially again this week, and are more relevant to the restaurant industry at large - posted June 13. The July minimum wage increase will put increased pressure on restaurant margins in the upcoming quarter (3Q08) - posted June 12. Faced with both a tightened consumer and higher costs across the board, restaurants must strike a balance between driving traffic and preserving margins. NPD Group data point to a recent decline in the % of visits on deal (still up YOY) at casual dining restaurants, which should bode well for margins - posted June 9 and 11.

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SBUX Vs. MCD - I can't Let Go

If you have been following the commentary I have been writing on SBUX and MCD, it's clear that I am not aligned with consensus. At least from a sales and earnings standpoint, SBUX has been a dud and MCD has been explosive. I continue to believe that, despite the current trend in sales, SBUX is making the right decisions and we will see some positive data points by year end.

While MCD trends remain strong, signs of stress are creeping into the system. Importantly, the stress is not coming from difficult comparisons, but from stress being put on the franchise system that will impact sales trends in the coming months.
  • The biggest issues facing the MCD system stem from the Dollar menu and the aggressive move into beverages. I have written extensively about the Dollar menu and the problems with increasing traffic at the cost of margins. The move to broaden MCD's beverage platform is a completely separate subject, however, and the resulting issues will take time to manifest. In short, any beverage the company sells in a bottle or can in place of a fountain drink will carry a lower margin. Enough said!
  • Recently, McDonald's has seen its fair share of insider selling and apparently, institutional selling, too. We came across the two charts to the right on InsiderTrading.com. Over the past three quarters, there has been a clear trend among the investment community to sell McDonald's. In 4Q07, the last time the stock was in the high 50's, the net selling was the highest in four quarters.
  • In contrast to MCD, the trends at SBUX are completely reversed. In 1Q08, SBUX saw net buying from institutions for the first time in a year! The current owners of SBUX know the issues and understand that the brand and the company are on solid footing. All we need now is that first positive data point and the herd will follow.

$4.00 Gas Is Not Good!

Yesterday, consumer stocks rallied on better than expected retail sales. As I said yesterday - I don't believe it! In conjunction with those comments, I highlighted a consumer survey that pointed to a consumer that continues to struggle.

Today, we have yet another data point, courtesy of Mark Lapolla at SixthManResearch.com, confirming that commodity inflation is draining the trends in the cash economy.

As Mark Lapolla points out, the move to $4.00 a gallon gas is now eating up 85% of every incremental retail dollar.

Eye on Commodities: Some Positive Moves for Coffee Houses

Coffee and dairy prices were the only commodities to post declines this week. Coffee was down 0.9%. Coffee prices are only down 1.2% year-to-date but have fallen nearly 19% from March peak levels. Milk prices were down 0.7% and cheese was down 6%, but both are still up year-to-date, +6.5% and +3%, respectively. The commentary coming out of the Indian Coffee Trade Association reflected hopes of higher production in 2008 and 2009 and a slowdown in exports. It is estimated that India's coffee production in the fiscal year ending September 2009 will rise 12% and global coffee production 9%. The Indian coffee crop is benefiting from a better growing season.
  • Along the Mississippi in Missouri and Illinois, the National Weather Service is predicting the worst flooding in 15 years. To date, flooding has destroyed nearly 20% of the Midwest's crops. Many farmers have commented that the current condition is 2x as bad as 1993. The flooding is hitting the corn crop hard, with some forecasters saying the crop will be down 10% this year. The biggest movers this week were once again corn (+10.2%), wheat (+8.3%) and soybeans (+5.8%). Corn prices are now up 56% year-to-date and up over 80% YOY.
  • The company most levered to declining milk and coffee prices is Starbucks.

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