Retail First Look: 6/25/09


How can we not call out the Dress Barn/Tween Brands deal this morning. I could care less about that combined entity right now, but you gotta take note that the deals we're seeing in retail have gotten bigger and bigger and bigger. This is at the same time that companies are successfully shoring up balance sheets even if it takes up their WACC meaningfully (Quiksilver and Liz), the number of licensing deals is accelerating (Gap/Stella McCartney), well-known brands are broadening distribution (OXM w Tommy Bahama) and weak brands (Eddie Bauer) are filing Ch 11, or flat-out shutting down.  So what's next? 

I have no doubt that this will continue, but my gut is that the rate of acceleration takes a breather for a quarter or two. Why? As the entire planet now knows, 2H is a time period where sales comps get quite easy, GM stabilizes due to lean-ish inventories, SG&A cuts kick in, and capex continues to come down meaningfully. By my math, this leads to a 100 point swing in the industry's FCF growth rate (from -80% to +20%). My point is that there will be more desperate companies that can keep their heads above water and can resist the need for sweeping strategic change (even if every banker on the Street is clamoring to up the deal flow in an effort to get paid this year).  

But as much as this rate of change may take a breather in 2H, I expect the M&A cycle to step up dramatically starting in 1Q10. This is when we separate the men from the boys. There are so many companies out there that are making numbers today via SG&A cuts. As I've been pretty vocal about - this is a finite strategy. Yes, optically it will boost - or buouy - margins near term. But does it leave in place any growth investment/infrastructure from which to proactively drive business in '10? That's when we're going to see a massive diversion between quality and junk. And that's when investors really get paid for doing the deep dive on company-specific stories.



Some Notable Call Outs

  • On the real estate front, Rite Aid has contracted with a 3rd party to negotiate rent concessions for about 500 under performing locations. Several other retailers have engaged in similar arrangements, although none have reported back with updates on the success of such large scale real estate cost reduction efforts.
  • Just one day after Kroger reported solid and stable results, SuperValu pre-announced a weaker than expected quarter. While the release was brief, it pointed to cautious spending by its consumers as the culprit. The net result was both sales and margin pressure. The interesting callout here is that margins were worse than expected, especially given the general industry trend towards higher-margin private label products. I suspect that the bigger driver here was the competitive environment, although there was no mention of this in the press release.
  • A one-time designer denim promotion at Saks Fifth Avenue this week translates to weaker denim sales and ultimately tighter inventories.  This may indicate that denim sales were weak for the late spring season and/or Saks is attempting to bring inventories in line with sales following a Q1 sales drop of 27% (inventories only came down 7% in the same qtr).  The sales to inventory spread was the worst in the past ten years.  Discounts on the denim averaged 25% with price reductions reaching as high as 60%.  Three brands had more units on discount than the rest: VFC's 7 For All Mankind, Citizens of Humanity, and Joe's Jeans (JOEZ). 
  • A much needed improvement in footwear sales occurred last week.  Although sales were down 6%, the improvement from -26% the prior week is significant.  Footwear ASPs remained flat for the second week in a row, but remained down relative to the trend of high single digit increases that we have seen throughout most of 2009.
  • Under Armour, Converse and Nike are the positive call outs, while Reebok and Vans pick up the rear.
  • With orders down across the board by region, NKE confirmed that Western Europe will continue to be one of the most challenging markets both economically and from a consumer standpoint due excessive unemployment numbers.
  • Because of their favorable inventory position, NKE remarked that they will not be forced into heavy discounting.
  •  Last week US cotton production was down year over year and the condition of the cotton crop is tracking below last year's levels. These statistics are sequentially worse than the prior week.  Nationally, 20% of the cotton crop was budding by week's end, 5% behind last year and 13% behind the 5-year average. The crop's progress is behind the 5-year average in all states except Louisiana and North Carolina, where the weather has been slightly warmer than normal during most of the growing season. Overall, 44% of the cotton crop was rated in good to excellent condition, compared with 45% last week and 49% a year ago.  



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

  • China: 1st Quarter Import/Export Data encouraging for leather industry - As was to be expected both imports and exports of Chinese leather industry products declined by 8% in the wake of the slowdown in the global economy. Finished product imports all rose validating the point that consumer activity continues to be robust in the Chinese retail sector when compared to a lack of consumer confidence in Europe and the US. Experts are predicting an upturn in the Chinese leather sector by the third quarter of 2009. Overall consumer activity in China increased in April 2009 by 14.8% which is encouraging for western manufacturers and exporters of high end bags and footwear. Demand for travel ware, shoes, garments and gloves all increased. In contrast, the fall in raw material imports is not surprising after the collapse in hide and leather prices in the final quarter of 2008 when many contracts were not honored. Chinese factories received less outsourcing contracts as the recession in western countries started to bite, which caused many to shut down operations. <>

Retail First Look: 6/25/09 - image1

  • H&M Profit Beats Estimates on Accelerated Store Openings, Stronger Euro - Hennes & Mauritz AB, Europe's second-largest clothing retailer, reported a 6% profit increase for the second quarter after store openings and the stronger euro offset slower consumer spending. Spring collections met with success, especially in countries where the world's third-largest fashion retailer has recently expanded.  But the Swedish fashion giant also reported flat sales in May, while comps declined 9% in the same month, in line with analysts' expectations.  For 1H 09 sales excluding value-added tax advanced 22.8%  and comps declined 2%. H&M said the recession has dampened consumer spending in all of its markets, especially Spain, the U.S. and Scandinavian countries.  However, sales in countries where H&M has recently expanded, such as Japan and Russia, have exceeded expectations. H&M reiterated future expansion plans, saying that it still expects to open 159 stores in the second half of the year, while closing 18. Most of the stores are planned to open in the U.S., U.K., Germany, France, Italy and Spain. Gross margin, a key indicator for retailers' profitability, declined to 190 bps due to  the strengthening U.S. dollar in the quarter, although the currency move was partly offset by lower raw material and transportation costs, H&M said. <>,  <>
  • The retail industry's two largest trade and lobbying groups have called off merger talks and will continue to operate as separate organizations with their own memberships and agendas. The Retail Industry Leaders Association and National Retail Federation said Wednesday they were ending merger discussions and declined to provide any further details. The initial talks in April were geared towards bringing together the memberships and financial clout of the industry's two powerful lobbying groups against a backdrop of a shrinking retail landscape struggling to survive the recession. The NRF's annual budget is $35 million and RILA's annual budget is an estimated $13 million. RILA represents 65 retailers and 200 members, including most major discounters and mass merchants such as Wal-Mart Stores Inc., Home Depot Inc., Best Buy Co. Inc., J.C. Penney Co. Inc. and Target Corp. Its membership also consists of product manufacturers. The NRF includes 2,500 members such as Macy's Inc., J.C. Penney, J. Crew Group, Levi Strauss & Co., Limited Brands Inc., Liz Claiborne Inc. and Neiman Marcus Inc. <>
  • U.S. textile groups concerned that the energy bill could lead to substantially higher operating costs, putting domestic producers at a disadvantage against global competitors. The bill is designed to obtain a clean energy transformation that will reduce our dependence on foreign oil and confront the carbon pollution that threatens our planet. But prominent textile trade groups, including the National Council of Textile Organizations, American Manufacturing Trade Action Coalition and National Textile Association, came out in opposition to the bill, in a letter to Congress on Wednesday. "As an industry that is heavily reliant on low-cost energy to produce more than $16 billion in exports, this bill would cause an undue financial strain through the increased costs of regulations with respect to the escalating demand (and therefore price) for natural gas, our main energy source, which has a carbon advantage over other main energy sources, as well as our coal-reliant energy utilities," the textile groups wrote. <>
  • Rents have dropped in several of the hottest retail corridors by an average of 11%, including the Meatpacking District and Madison Avenue, since spring 2008. The Real Estate Board of New York's spring 2009 report said a few areas, such as the West Village and the Financial District, have shown modest gains in the last year. However, since fall 2008, the average asking rent for available retail space has fallen 11 percent, to $115. "When the market tumbled in September, retailers wanted to hold out until the holidays to see what would happen," said Mike Slattery, senior vice president of REBNY. "Building owners had the same frame of mind during the winter. Owners have been more willing to negotiate free rents and provide allowances for tenants...a softer market provides an opportunity for people to get a foothold into a market." <>
  • A new breed of online retailer in Europe is seeking to fuel and meet demand by providing a service: part shop, part editorial. Among them are the U.K.'s, and; France's and; Italy's, and  Sweden's, all of which combine news, interviews, events and exhibitions with retail to enrich the shopping experience. "Our job is to inform the public," says John Skelton, creative director for Oki-Ni. "Until now, retailers have second-guessed what the consumer wants and often given a skewed approach or story of what you are trying to sell. Our objective is to put across our take of what is going on, what we think is relative and hot and what we like in a humble way." Founded in 2001, Oki-Ni first began as a catalyst for collaboration projects and special edition lines, but relaunched in 2007 to sell coolerthan-thou styles and cult brands from across the globe. <>
  • Madewell offers affordable vintage pieces that complement Madewell jeans at the Brooklyn Flee Market - Madewell hopes The Flea's indie spirit will appeal to Madewell's consumers, and are spreading the word via e-mails, Madewell's Facebook page and word of mouth. "It operates as a real community," Guerra said of The Flea, which typically has 150 vendors in Fort Greene on Saturdays and 110 underneath the Brooklyn Bridge on Sundays. Straw hats, crocheted dresses, sunglasses, tops and bags will be among the vintage pieces sold in the Madewell stores. By and large, the flea market goods will retail for less than $100 and everything is meant to be mixed with the Madewell collection, especially its forthcoming more affordable 37s jeans. Due in stores next month, 37s - named for 1937, the year Madewell was founded as a family-owned workwear business - will retail for $59.50. In 2006, the J. Crew Group relaunched Madewell and opened the first Madewell store.  <>
  • American Apparel has announced they plan to have their FIRST EVER flea market sale in NYC, with prices ranging from 2-25 dollars! Details: 185 Orchard St. (Between Houston and Stanton, next to the American Apparel store) Sat. Jun 27 12pm - 8pm; Sun. Jun 28 12pm - 8pm
  • Accessories buyers are shopping more judiciously, with a focus on immediates. Given today's economic downturn, buyers are shopping accessories trade shows more cautiously and judiciously, but according to show organizers, they are still shopping. Exhibitors have been "pleasantly surprised" with the first half of 2009. Buyer turnout has been strong and vendors have adjusted their turnaround times to meet the needs of buyers, many of whom are now shopping closer to season. The traffic density (the ratio of retailers to exhibit space) has increased by 20% this year. <>
  • New York-based Brand Matter has entered into a licensing agreement with Anthony L&S LLC for men's and women's footwear under its Caribbean Joe brand. The license will also include footwear for Brand Matter's Jamaica Bay, Havana Jack's Café and the CJ Breeze brands. "We talked for a while about doing footwear in-house, but our strategy is to put the experts in the business in control," Rick Platt, president of Brand Matter told Footwear News. The footwear, which is debuting for resort '09, will include casual styles such as sandals and boat shoes and will feature prints consistent with the apparel collections. Department stores and specialty stores will be the target accounts. "Anthony L&S will focus on our largest Caribbean Joe apparel retailers, including Belk, Dillard's and Bon Ton," he added. Though price points have not yet been confirmed, Platt said the opening price point will fall somewhere above that of private-label product, but below the designer collections. <>
  • Case Study: How Search Ads Helped Pier 1 Stay Afloat - The Challenege: The marketing team at Pier 1 Imports chose a challenging time to launch a new campaign and  panic-stricken consumers just weren't buying. The Plan: The "test" in question referred to a series of online search ads, developed in conjunction with Google, to drive store sales in select markets from Sept. 21 to Oct. 11. The Results: In markets where stores were operating on a "performing" basis, the retailer experienced a 2% sales lift and a 300% return on advertising spend. In areas where Pier 1's same store sales were declining, the retailer experienced a 5.3% lift. The Next Step: Incorporate both search and display at the same time by weighing the different channels to get an idea of their effectiveness in store. <>
  • Abercrombie & Fitch is being sued by a woman who alleges the US retailer made her work in the stock room instead of on the shop floor because her prosthetic limb did not fit with the chain's image. <>
  • Web sales fall but not as far as other channels for Talbots in Q1 - E-commerce revenue declined by 11.7% in the first quarter as total sales and comparable-store sales decreased 26.2% and 26.9%, respectively. Direct sales, which include catalog and web, declined 28.6% <>
  • First quarter web sales drop at Coldwater Creek - For the first quarter ended May 2, web sales at Coldwater Creek decreased 27.2%. In comparison total sales and comparable-store sales dropped 15.8% and 18.6%, respectively. <>
  • Apparel and accessories merchants delivered the best response time in May to shoppers with a high broadband connection, says Gomez Inc. Shoppers with a high broadband connection could visit an apparel and accessories retailer's web site in an average time of 6.11 seconds compared with computers and electronics retailers (6.82 seconds), mass merchants (7.06), and specialty merchants (7.89).  <>
  • Best Buy appoints Brian Dunn as its new CEO - Best Buy has named president and chief operating officer Brian Dunn the company's new CEO. Dunn takes over at a time when Best Buy is expanding its e-commerce business. <>
  • NBA draft pick shoe endorsement deals worth a lot less than last year - Shoe endorsement deals were worth more than $1 million a year ago and now is down to $750,000. All is quiet from Nike, who famously agreed to pay LeBron James and Carmelo Anthony a combined $108 million in 2003. Last year, Nike signed the kid who was once termed "The Next LeBron James," O.J. Mayo, for $400,000 a year. Adidas, which spent money on Derrick Rose and Michael Beasley last year, also has nothing to announce. Either does the new player in the game, Under Armour, which signed Brandon Jennings last year before he went off to Italy. <>
  • LIZ today announced it has completed its previously announced offering of $90 million principal amount of its 6% convertible senior notes due 2014 (the "notes"), which includes the exercise in full of the initial purchasers' option to purchase additional notes on the same terms and conditions. The Company received total net proceeds from the offering of approximately $86.6 million, after deducting fees and offering expenses payable by the Company. <,+12:52+PM>
  • A group of 26 mostly Saudi women completed the first course of how to fit, stock and sell underwear from Victoria's Secret -- Training organizers hope to help boost a campaign to lift the ban on women selling underwear in the kingdom. The graduates held a small ceremony at a college in the western seaport of Jiddah on Tuesday, capping 40 hours of instruction during which they learned to overcome their embarrassment at doing bra fittings, deal with customer complaints and display the stock in an appealing manner. The 10-day course comes three months after a group of Saudi women launched a campaign to boycott lingerie stores until they employ women. Almost all the stores in the kingdom are staffed by men. The only exceptions are a few women-only boutiques, some of them inside popular shopping centers. The restrictions are ironic in a country that goes to great lengths to segregate the sexes. Men and women, for instance, who are not close relatives cannot stand in the same line at fast-food outlets or even be in the same car together. Conservative clerics have strong influence on government and society, and they ban anything they believe might lead to women's emancipation, such as driving or voting.
  • Zudaas France, manufacturer and retailer of kids fashionwear and apparel, plans to have 250 outlets across India in this fiscal year and aims to become a Rs200-crore company by 2010-11. "This is the best time to expand our retail network as real estate prices are down and the estimated Rs12,000-crore Indian kidswear market is growing annually at 15%. We are scaling up our operation pan-India and plan to have 200 stores by March 2010 (in the kidswear segment)," Zudaas France MD Hitesh Mehta said. At present, the company has 57 stores in the country. It is diversifying into exclusive men's and women's wear and of their newly planned outlets 50 will be 'Zudaas Family´ stores, which would be launched soon. He said most of the outlets would be franchise-operated and the company is looking at both metros, and Tier I and II cities and the stores will be in the size of 250-800 sq ft. "Our first family store will open in July in Delhi and the target is to have 50 Zudaas Family stores by the end of this fiscal," Mehta added.
  • Safilo Group SpA said it expects to breach its debt covenants and is negotiating with banks to postpone a loan payment due later this month, as talks continue with potential suitors. Safilo chief executive officer Roberto Vedovotto had hoped to secure a sale before the summer. "In this context, considering the possible misalignment of the results at 30th June 2009, compared to the financial covenants of the existing senior loan, the company has also begun negotiations with the financing banks in order to request a waiver with reference to such covenants, as well as the postponement of a payment due on 30th June 2009," Safilo stated late Tuesday. The Italian eyewear group's majority shareholder, Only 3T SpA, is in talks with at least two private equity bidders, believed to be Bain Capital and PAI, to ease Safilo's debts amid declining demand. As of March 31, Safilo had net debts of 617.7 million euros, or $861.2 million at current exchange. The Tabacchi family controls 39.9 percent of Safilo via Only 3T. <>
  • Textile group Devanlay SA, the manufacturer and distributor of sports brand Lacoste, has appointed José Luis Duran, former chief executive of French food retailer Carrefour, as president of its management committee. Duran's appointment will be effective July 1.  Duran, 44, will be appointed chief executive of the company in September and is expected to take the helm of Swiss-based Maus Frères, Devanlay's holding company, in 2010, succeeding Guy Latourrette. <>
  • Paramount Licensing plans to showcase several of its movie-based fashion T-shirts in August at MAGIC - The tee collection will feature: Top Gun by Changes for men and juniors (available now at Kohl's, Sears and JCPenney for $18), Up in Smoke by Fifth Sun for men (available now at Spencer's, specialty stores and online for $18.99), Footloose by Fifth Sun for juniors (available now at Wet Seal, Charlotte Russe and Delia's for $18.99), Flashdance by Fifth Sun for juniors (available now at Wet Seal, Charlotte Russe and Delia's for $18.99), Top Gun by Famous Forever for boys (available this summer in the U.K. at children's boutiques and specialty stores for £10.30, $16.99) <>
  • Fashion programs for the upcoming release of The Twilight Saga: New Moon and recently premiered Transformers: Revenge of the Fallen have been secured with Jem Sportswear and its high-end women's division Awake. Summit Entertainment, producer of the Twilight movie franchise, is working with Awake to produce an exclusive New Moon-inspired women's apparel line for Nordstrom's BP. brand, as well as a window launch at Kitson on Oct. 15. The clothing line will include high-end tees, tanks, tunics, leggings, dresses, jackets and hoodies. DreamWorks' and Paramount's recent Transformers sequel, in association with Hasbro, teamed up with Jem Sportswear and Awake for a men's, women's, boys' and girls' apparel collection. Jem Sportswear and Awake also signed a licensing deal with Live Nation to design a "Summer of Love" promotion with Target.  <>



PVH: Margaret Jenkins, Director, sold 1,240shs ($34,100) or ~28% of common holdings.



 Retail First Look: 6/25/09 - Calendar


The Dance Of The Veils

"Thou art not listening to me. Be calm. As for me, am I not calm? I am altogether calm."
- Oscar Wilde, "Salome"
The ink is not yet dry on President Obama's proposals for overhauling the financial regulatory system, and already it looks like it is being sidelined.  In order to succeed, this behemoth of a proposal must satisfy two key requirements.  It must materially increase transparency across all markets, and it must address the special interests, so as to hold water politically.  
The largest and most complex financial institutions are those that benefit most from the cloaking provided by regulatory inefficiencies.  This is no secret, and it lies at the heart of President Obama's credibility.  What everyone from the highest levels of government, to the popular media are calling the "interconnected" financial firms are, in fact, the most conflicted ones, and those most likely to balk at lifting the veils.
But lift them we must.  Systemic Risk Czars and resolution authority over large institutions are all to the good.  These mechanistic repairs will plug gaping holes in the system - assuming they are unambiguous as to authority and staffed with the right people - two big "ifs".  But fundamental and lasting benefit will result from Mr. Obama's proposals only to the extent they result in greater disclosure of information, and greater uniformity of that information, for the future of the marketplace rests in transparency.
While the world is still enamored of Mr. Obama, the world is very decidedly not in love with the US model of market capitalism.  This leaves us at a precarious tipping point: on the one hand, we have the moral momentum of a new President with the world's backing to force dramatic change.  At the same moment, we are the inheritors of what the world considers a failed and discredited model.  The press today is referring to the reigning "Anglo-American" market model that the entire world has definitively rejected.  
This explosive convergence - damning failure of our market model, coupled with the resounding success of our political choice - has created a window of opportunity that is at once quite large, but that will not remain open for long.
We fear that President Obama's power is already on the wane domestically, and the lack of muscularity in his White Paper proposals will not be seen by the world as hope they can cling to.
While the markets are being roiled by fits of economic uncertainty, we fear that regulatory uncertainty will prove to be most devastating of all.  If the United States does not lead a massive charge to restructure the oversight of financial markets, the certainty is that fragmentation will rule for some time to come.  Then markets will not be able to coalesce into a global engine for recovery for transnational capitalism.  Rather, countries with closed-off markets and tightly controlled economies will assert themselves, both regionally, and in those markets where they have clout.
Think China, which has replaced the Dictatorship of the Proletariat with dictatorship of the Bourgeoisie, and which controls enough US dollars to dictate the direction of our hedge funds industry.  Think Russia which, now that oil has struck a speed bump, may need geopolitical unrest to restock its coffers.  Think Europe, whose low-octane capitalism has not managed to drag itself even to the level of indecision of the US, and that will hobble the engines of growth with a Vonnegutian web of regulation.
Think how quickly political unrest can rock the cradle - or how quickly it can be snuffed before it even draws breath.  We have another hour to show real leadership.  Bland as much of Mr. Obama's proposals are, they will be seen as meaningful if he attacks Congress, Wall Street and industry with a muscular and even-handed ruthlessness to make the plan a reality.
Alas, it looks as though President Obama intends to throw the overhaul of the financial markets to the political process.  Already we hear talk of the all-important health care and global warming bills before congress.  Already, our expectations are being managed to a certainty that the debate on financial markets reform will not even begin before next year.
While there are indisputable social and economic issues to be addressed in the areas of health care and the environment, every day we put off definitive changes in our financial markets, we lose credibility and stoke anger worldwide.
Obama's promised reform - the one with immediate global implications - will be eviscerated before the debate even starts.  By placing what will be perceived as domestic initiatives ahead of market reform, Obama is paradoxically signaling to the world that the Business of America is Business as Usual.
Be afraid.  Be very afraid.

Moshe Silver
Chief Compliance Officer


EWZ - iShares Brazil-President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt -leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country's profile matches up well with our re-flation theme.

QQQQ - PowerShares NASDAQ 100 - We bought Qs on 6/10 to be long the US market. The index includes companies with better balance sheets that don't need as much financial leverage.

EWC - iShares Canada - We want to own what THE client (China) needs, namely commodities, as China builds out its infrastructure. Canada will benefit from commodity reflation, especially as the USD breaks down. We're net positive Harper's leadership, which diverges from Canada's large government recent history, and believe next year's Olympics in resource rich British Columbia should provide a positive catalyst for investors to get long the country.   

XLE - SPDR Energy - We think Energy works higher if the Buck breaks down.  

CAF - Morgan Stanley China Fund - A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package.  To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.

TIP- iShares TIPS - The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%. We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.


EWI - iShares Italy - Italian Prime Minister Silvio Berlusconi has made headlines for his private escapades, and not for his leadership in turning around the struggling economy. Like its European peers, Italian unemployment is on the rise and despite improved confidence indices, industrial production is depressed and there are faint signs at best that the consumer is spending. From a quantitative set-up, the Italian ETF holds a substantial amount of Financials (43.10%), leverage we don't want to be long of.

XLY - SPDR Consumer Discretionary - We shorted XLY on 6/19 as our team has turned negative on consumer in the last week.  

XLP - SPDR Consumer Staples - We shorted XLP on the bounce on 6/17.   

SHY - iShares 1-3 Year Treasury Bonds - If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.

UUP - U.S. Dollar Index - We believe that the US Dollar is the leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. Longer term, the burgeoning U.S. government debt balance will be negative for the greenback.
EWW - iShares Mexico - We're short Mexico due in part to the repercussions of the media's manic Swine flu fear.  The country's dependence on export revenues is decidedly bearish due to volatility of crude prices and when considering that the country's main oil producer, PEMEX, has substantial debt to pay down and its production capacity has declined since 2004. Additionally, the potential geo-political risks associated with the burgeoning power of regional drug lords signals that the country's economy is under serious duress.


BBBY: P&L/Balance Sheet Synch

It's rare to see a sales/margin/balance triangulation set up as well as with Bed, Bath & Beyond. The graph tells all...

BBBY: P&L/Balance Sheet Synch - BBBY Sigma


Yes, It's confusing, I know.

If you need interpretation, shoot me an email.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%

Greek Goddess of Duration


Greek Goddess of Duration


You might think I am nuts, but I'd call this an in-line quarter. Puts and takes ignore the real call - but that's a full year out. If the market shoots first and thinks second, a sell-off might = opportunity.


I'm sitting here staring at my keyboard wondering what to say about Nike's quarter. The sell-side will talk about how 'management is executing in a tough retail environment' (while Analysts take down numbers and justify ratings), or that we are in a 'swoosh-shaped recovery'.  But I'm coming up dry. You're gonna think I'm nuts, but despite management's cautious tone and guidance, I really think that this Q was right in line. Yes, NKE beat by a couple pennies, and yes, the numbers Nike is printing in light of 1) its reorg and 2) the economy are commendable. But on the flip side, orders are down both sequentially and yy nearly across the board. Inventories have stopped rising, which is great, but receivables and payables went the wrong way. The balance sheet still looks stellar, but not buying any stock in the quarter is a negative.  Put, take, put, take...blah blah... I could go on, but these items add up to one big push in light of what the REAL call should be.


I'm going to tie this all back into my thesis that with Nike, we're in a period where you simply can't look at a few points either way in inventories, futures or EPS. It's pretty irrelevant in the grand scheme of this story. Nike is setting itself up today for one of those massive bursts where futures take off, inventories contract, and we're looking at 20-30% EPS growth. The bad news is we won't see this until fall 2010. Even if the market starts to discount this 2 quarters out, we've still got to wait a year.  Check out my note from 2 days ago titled 'Duration, Duration, Duration.' If you can be a year early on a stock, then knock yourself out here. But my sense is that we're looking at a range bound name for the better part of a year. I walk through why in my 'Duration' note.


What could change near-term?  The Street may or may not know. But Nike's CFO just sandbagged them big time. If we're looking at $0.20-$0.30ps reduction in consensus estimates heading into lowered 1H10 (May) guidance, then I'd be prepared to be nimble on this sucker if it sells off into the mid $40s.

CKR - Is Management Changing its Tune?


In today’s FY1Q10 press release the company made a very significant announcement about a potential value initiative.  Please see today’s post on SONC as a case study on the P&L impact when a company goes after a value initiative.

CKR’s period 5 same-store sales declined 7.1% at Carl’s Jr., accelerating the 2-year average declines at the concept to -2.3% from period 4’s -1% and fiscal 1Q10’s -0.6%.  The company blamed the weak California economy and the lapping of last year’s stimulus check spending for softness in sales.  Although these factors most definitely impacted numbers, Carl’s Jr.’s same-stores sales continued to underperform its QSR peers that are facing the same issues.  Carl’s Jr.’s underperformance stems from the company’s adherence to its premium menu strategy.  CKR’s recent press releases are loaded with comments like “not resorting to deep discounting practices designed to boost same-store sales in the short-term” and being “prepared to ‘tough-it-out’ to protect brand image.”  This premium brand focus, however, has not worked and sales have suffered as a result.  Like SONC said yesterday, value is the number one driver of traffic in this environment.

CKR announced last quarter that it would add some lower priced products to its menu but that it would not use media support for these lower priced items.  In today’s quarterly earnings release, the company said it “intend[s] to launch initiatives that increase the awareness of the value of our premium products relative to casual dining as well as our existing value items that we have previously only promoted in the restaurants.”  The key word in that sentence is "previously" as it signals that the company will begin to promote these value items outside the four walls of its restaurants.  Although I am sure the company will downplay the significance of such a change in strategy as management seems proud of its having not succumb to the deep discounting tactics of its competitors, this is a definite change in strategy, and a welcomed change as Carl’s Jr. significant same-store sales declines are evidence of recent share losses.  Too much focus on value could hurt margins, but not getting enough customers in the door will have the same impact.  The question is will management change its strategy enough to really drive traffic?

CKR - Is Management Changing its Tune? - CKR Carl s Jr Period 5 sales


BBBY: One Word...'Solid'

One word: Solid


Ok, a few more words...


BBBY reported 1Q EPS of $0.34, substantially ahead of the Street which was looking for $0.25.  Our model was looking for $0.27.  The beat came on all three key line items.  First, same store sales came in at only down 1.6%, about 80 bps ahead of the Street.  We were looking for down 2%.  Gross margins were much better than expected, down only 44bps vs. our model which had them down 80bps.  Sequentially the performance was better than 4Q. This further indicates the real opportunity in the near term from the Linen's liquidation still lies with a more benign promotional environment and fewer coupons.  SG&A was much better as well, with the expense ratio down 163 bps.  We were modeling a slight decline.  Finally, the balance sheet was solid with inventories down just over 1%, against total sales that grew by 2.8%.  Still no debt and a growing cash balance now standing at $855 million.  With almost $900 million remaining in share repurchase authorization, perhaps we'll see some activity there as the cash generation accelerates.


Bottom line here is solid outperformance with all of the key metrics coming in better than expected.  I still believe there is more upside to come as the year progresses and the couponing subsides.  To report a down 1.6% comp in what most would consider a very tough environment for home-related products is a standout on its own.  EPS growth of 14% is also a rare commodity these days.


 Our thesis here remains unchanged.

  • Over the next 12-24 months BBBY is a "mean revision" story, driven by an improving economic backdrop, the elimination of the company's most direct competitor, and the bottoming of the worst period in modern history for home furnishings consumption.
  • Gross margin recovery is the most overlooked item by the Street and the source of upside over the near and intermediate term. A more rational promotional environment driven by Linen's absence is key to the story.
  • Modest square footage growth of 5% coupled with operating margin recovery should drive FCF growth in excess of 15% over the next 2 years. Cash flow yield remains attractive at 6.1% ('09) and 9.0% ('10) respectively.
  • Multiples are full, so this needs to be an earnings-driven story. The good news is that the Street's numbers are 1-year behind. $0.25-$0.30 beat per Yr1 and Yr2  x current multiple = $5-$6 in share price/yr.


Eric Levine


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