• Navigate This Market Turbulence: All Hedgeye Research → 3 Months 66% Off

    Preserve. Protect. Grow. Former hedge fund manager and CEO Keith McCullough has successfully navigated the Dot Com Bust, Great Financial Crisis and Crash of 2020. Get 66% off the smartest investing insights money can buy.


13 JULY 2009

How can I not comment on the Sterne Agee UA downgrade this morning...

The rationale? "Current Macro Trends and Retail Inventory Levels Are of Concern."  Ok... thanks for that insight.

Are these trends concerning? You bet. That's why it's never been easier to craft a short case. Core apparel sales are flattish, footwear is performing 'fine' (i.e. not stellar), management has been selling stock, key internal positions have turned over, prior guidance is vague, 2Q just closed after it rained for 80% of the most important month of the quarter, and at 26x earnings it is one of the most expensive stocks in retail.  The stock is resting right on top of $21 TREND support.  I can't say that I blame the bears...

But whenever it is so easy to craft a short case, one needs to ask what the long case is. NO ONE who owns UA does so because they think that the company will smoke the upcoming quarter or year. They largely own it because they think that this company can, and will double in size over 3 years. 

Bulls are unlikely to throw in the towel unless the company does. UA will definitely not back off its growth strategy, and in fact is likely to highlight organizational changes to take the footwear organization to the next level.

Also, what about the call option of better footwear pricing out of Asia in the coming 12 months (which I think is underappreciated)? How about ANY success in moving the needle with women's biz? How about the new CEO at Foot Locker that wants nothing more than smaller brands to succeed as he looks to make something out of the disaster that is Foot Locker?

Are the 'challenging environment' trends new to the 29% of the float that is short the stock already? Probably not.

With only 2 out of 21 analysts on UA still bullish, we can't see a slew of additional downgrades around the event.

I'm still in the camp that a nugget of positive news will have a disproportionate impact on the stock than negative news. Check out our 7/8 note - UA: The Duration Bifurcation). 


Some Notable Call Outs

  • Over the weekend it was reported that Ecko is putting its headquarters in Manhattan on the market. The space commands $9 million/year in rent. This move is just one of many the company has undertaken recently to pay off debts in an attempt to avoid further steps towards bankruptcy. While apparel in general remains under pressure, the urbanwear market is suffering a severe downturn as its core customer base has shown it is not wedded to one particular style or brand. The entire market has been in decline even before the economy took a turn.
  • Lost in the news shuffle over the past week was a story in the Silicon Alley Insider indicating private-sale ecommerce operator Gilt Groupe was raising another $40 million. The capital raise values the business at $400 million. I've mentioned this business before and I'm sure many people are already familiar with the concept. However, the growth here is truly impressive. In just two short years, the closeout retailer of luxury goods is expected to do $150 million in revenue. According to other articles, management expects that figure to grow to $500 million next year. The company is expanding into new geographies as well as product categories. This is one to watch as we'll likely be seeing an IPO at some point. Before we get an S-1 however, I suspect competition will grow rapidly alongside an eventual improvement in the economy. The dislocation in the luxury apparel market over the time frame in which Gilt has blossomed is likely to be unsustainable, which will make it tougher for the online retailer to obtain such high-end product at steep discounts. A designer I spoke with recently explained to me that Gilt generally pays ten to twenty cents on the wholesale dollar when procuring goods.
  • A lesson in 'false bottom' avoidance. Kellwood is the latest potential casualty as it works through 11th hour discussions to avoid Chapter 11. The company, which private equity firm Sun Capital Partners Inc. bought for $762 million in February 2008, has been in talks with its bondholders for two months concerning $140 million in notes that mature at midnight on Wednesday. As is usual in the final days before a maturity of this nature, there's the usual posturing by all parties involved in the press. The irony here is that Kellwood is a perennial underperformer that was bought by Sun Capital about six months after the market for such assets cratered. Sun in itself has had 12 portfolio companies file for bankruptcy protection since the start of 2008, including the high-profile Mervyn's LLC filing. Other Chapter 11 filings include auto-parts supplier Mark IV Industries, pharmacy chain Drug Fair Group Inc. and clothing stores Anchor Blue Retail Group Inc. Tempting to act on KWD the time, I'm sure, to the extent that we were not heading into a prolonged period of consumer spending winding down and cost of capital going up. Now we're sitting here 17 months later with a $2bn revs company with 6% margins. Not horrible, perhaps, but tack on 100% debt to equity and it's less rosy. In the end, content usually wins. And the content here is bottom of the barrel.


Apparel Import Trends, Vietnam and Bangladesh Only Countries in Top 10 with Increase in May - Apparel imports from China, Vietnam and India increased in May despite the continuing overall decline of combined textile and apparel shipments to the U.S. The Commerce Department's Office of Textiles & Apparel said Friday that shipments of apparel from China increased 8.9 percent to 592 million square meter equivalents in May compared with a year earlier. Shipments from Vietnam rose 2 percent to 120 million SME, and imports from India spiked 17.1 percent to 83 million SME. Combined shipments of textiles and apparel to the U.S. from all trading partners declined 11.5 percent to 3.8 billion SME in 12-month comparisons. Apparel imports fell 9.2 percent to 1.6 billion SME in May, and textile shipments decreased 13.1 percent to 2.2 billion SME. Apparel and textile imports have been dropping in year-over-year comparisons for 13 consecutive months, the Commerce Department office said. Year-to-date apparel and textile shipments dropped 11.1 percent to 17.9 billion SME, the lowest level for the five-month period since 2005. China's overall shipments of textiles and apparel in May declined 5.3 percent to 1.7 billion SME, dragged down by a double-digit drop in textile imports. Vietnam continued to show overall growth. Imports of textiles and apparel grew 27.2 percent to 176 million SME for the month. Bangladesh increased shipments 2.5 percent to 145 million SME. Vietnam and Bangladesh were the only countries in the top 10 to show higher import levels. "Those are still the go-to countries," said Julia Hughes, senior vice president of international trade for the U.S. Association of Importers of Textiles and Apparel. "If you're talking about where apparel executives are sourcing from, if they are going to expand, you're looking at what we should call the big three: China, Vietnam and Bangladesh."  <Women's Wear Daily>

A&F Going Big With 40,000 sq. ft. Hollister SoHo Store - Despite a dramatic slump in sales, Abercrombie & Fitch Co. is thinking big and not letting up on its strategy or image-building.The sexual overtones, aspirational product and defiant nonpromotional stance go on vivid display Wednesday with the opening of Manhattan's first Hollister store in SoHo, the initial flagship for A&F's mall-based teen chain and a linchpin to the brand's goal of global growth. It's the mother ship - four levels and 40,000 square feet - being aggressively marketed as "The Epic Hollister Store." "Considering the scale of the store, epic seemed appropriate," said Michael Jeffries, chairman and chief executive officer of Abercrombie & Fitch Co., the parent of the Hollister, Abercrombie & Fitch, abercrombie, Gilly Hicks and soon-to-be-shuttered Ruehl brands. "Those that share the experience with us will understand." With same-store sales dropping more than any competitors - 32 percent companywide in June and 28 percent in May - A&F is under enormous pressure.The outlook from both inside and outside the company is for some closings next year. Certain analysts expect a significant number of them, along with a few openings and relocations. The company has started scrutinizing locations in malls across the country, with 70 leases across all brands coming up for renewal at the end of this year, and another 210 leases expiring between 2010 and 2011. Rents and other terms will be negotiated with landlords, as well as closings. <Women's Wear Daily>

JCG Lunches Skinnier Skinny Jean - Millard "Mickey" Drexler is bullish on denim. And with the launch today of the Madewell '37s jeans collection, Drexler, chairman and chief executive officer of Madewell parent J. Crew Group Inc., is out to prove it. The line is launching with a single "skinny skinny" ultralean, detail-free silhouette priced at $59.50, well below Madewell's opening jeans price point of $78. The jeans are available in five washes: black, plume, avalanche (modified acid-wash), dark ash and chimney (a bleached-out black-on-gray). The '37s launch is an important one, considering denim is a core component of Madewell, representing 20 percent of the three-year-old brand's volume, according to market sources. Boots, T-shirts and scarves are also big. "Instead of having an assortment [of jeans], we said, 'Let's go with the skinny skinny,'" Drexler said. "That's our best shot. Most girls and women are wearing skinny jeans these days. <Women's Wear Daily>

Vietnam Footwear Exports Down ~9% in 1H - Vietnam's footwear exports totalled US$2 billion in the first half of 2009, representing a year-on-year decline of 8.8%, largely due to the global financial crisis. The Vietnam Leather and Shoe Association (Lefaso) reported that the exporting activities saw recovery in the second quarter after deep decline in the first quarter. Footwear exports to the US during the interim period saw growth of 9% as compared to the same period last year.<FashionNetAsia>

Indian Cotton Exports Down - Indian cotton exports have slumped because of higher state support prices and lower international demand. Domestic cotton prices are higher than international ones, while major importers are also buying less of the fibre, said Junior textile minister Panabaaka Lakshmi. The Cotton Advisory Board has previously said that exports are likely to by 5 million bales in 2008/09, well down on the 8.5 million bales exported in the previous year. Industry officials expect exports to be 40% below the government estimate, with weak Chinese demand, lower production and higher state purchase prices all to blame. <FashionNetAsia>

Gearing up for BTS - Retailers aren't likely to get high marks this back-to-school season. With early reads less than reassuring, most storeowners are prepared for flat comparisons or slight declines during the critical selling period. "The reality is that the average price point could be less than last year," said Scott Collins, GMM of DTLR. "When you couple that with people buying fewer pairs of shoes, it's a recipe for disaster."  Still, most believe that footwear will be a relative bright spot during the upcoming season, outpacing sales of other b-t-s items, such as apparel and electronics."Footwear is going to be a stride ahead of many other industries during back-to-school," said Marshal Cohen, chief industry analyst at the NPD Group. "People either look at shoes as a necessity, or a passion that they're not willing to give up. But people are going to be buying two pairs instead of four, and they're going to be buying closer to need."  <Women's Wear Daily>

Escada at Risk of Insolvency - Saelzer reportedly told German newspaper Welt Am Sonntag that talks had already taken place with insolvency experts. He said he hoped it would not come to that, but that the group was in a difficult situation. He said it had enough liquidity to last until August but not beyond. Escada has put a debt restructuring plan to its creditors which must be approved by 80% of them by July 31. If that fails, Saelzer said it would be "inevitable" that Escada would cease trading because "98 out of the 99 possible measures" to save the company had already been taken. In the UK, Escada has a standalone store in London's Sloane Street, concessions in Harrods in London and Gleneagles Hotel in Scotland, and a store at Heathrow Terminal 4.  The Escada mainline collection has 27 wholesale accounts in the UK and the Escada Sport range has 43 UK doors. Escada sold its mid-market subsidiary Primera, which included brands Laurèl, Cavita and Apriori in May. <Draper's Online>

New Female Face for Adidas Tennis - Adidas has a new face for the fall-winter 2009 Adidas by Stella McCartney tennis line - Danish star Caroline Wozniacki. The 19-year-old up-and-comer, ranked ninth on the World Tennis Association tour, will kick off her new role at the U.S. Open in Flushing Meadow, N.Y., which starts Aug. 31. Wozniacki will play tournaments in Adidas by Stella McCartney apparel and footwear and will be featured in promotional and retail materials. Terms of the long-term deal weren't disclosed.  The Adidas by Stella McCartney tennis collection will arrive next month in stores such as Lane Bryant, Isetan, Harrods, Holt Renfrew and Nordstrom, as well as shopadidas.com and sports retailers worldwide. Prices include $175 for the Skynde shoe; $130 for the performance dress and $175 for the tennis image jacket. The tennis collection includes colorful Eighties-inspired skirts combined with feminine ruching and gathering, as well as tops with draped sleeves. Launched in 2005, the Adidas by Stella McCartney collaboration consists of apparel, footwear and accessories for golf, running, gym dance, gym yoga, gym studio, tennis, swim and winter sports. <Women's Wear Daily>

Empty Woolworth Stores Suggest Retail Prices Still Inflated - According to The Times the figures highlight the troubled state of the retail property market and will heighten fears about the decline of the high street as discount stores replace mainstream retailers. A survey for the newspaper by the Local Data Company showed that retailers including Iceland, Bargain Madness, 99p Stores and Poundland, among other businesses, have taken some of the former units of Woolworths, which had around 800 shops. While more than half the Woolworths stores in Greater London have been let, 80% of sites in Scotland, and 90% of those in the North East are still empty. Landlords have been forced to offer reduced rents and incentive packages to let the shops, causing a drop in high street rents across the board. Rob Alston, retail partner at property firm Cushman & Wakefield, told the newspaper: "The fact that only about 20% of the Woolworths stores have been sold by the administrators says a lot about the current retail demand, and while a substantial number of other units have either been let or are currently under offer via the landlords, there is still a huge hole in many towns in the UK." <Draper's Online>

NY City Sales Tax Increased, Clothing Exemption Remains - After a five-week standstill in legislation because of political infighting, members of the New York State Senate worked until 2 a.m. Friday passing more than 100 bills including a sales tax increase for New York City. After much debate, senators agreed to raise the sales tax by one-half of a percentage point to 8.875 percent, making it one of the highest rates in the country. It was passed by a measure of 43 to 19. However, the exemption on clothing purchases for $110 or less remains. That may come as a relief to critics of the sales tax increase who worried it would deter today's already cash-strapped shoppers from spending. <Women's Wear Daily>

Desperate Need for Children's Shoes in NYC? - The York footwear indie, which sells men's and women's brands including Paco Gil, Beatrix Ong and Jeffery-West, has doubled the size of its Gillygate shop. Exclusive Footwear director Frances Chalmers took over the building next door to the original shop and knocked the wall through to create an open plan 700sq ft space, half of which is dedicated to kids' footwear. She said: "I believe that adding kids' footwear will more than double our business this year." Exclusive Footwear, which does 85% of its business through its website, has also added kids' footwear to its online offer. Chalmers is searching for a second Exclusive Footwear site in an undisclosed northern city, which she said would focus on kids' footwear with a smattering of women's styles and specialist footwear by the likes of MBT. She added: "Customers were always asking if I'd add children's shoes. It wasn't until my own children got a bit older that I realized there was a desperate need in York." Exclusive Footwear saw like-for-like sales increase 47% in May. <Draper's Online>

New Lingerie Brands in '09 - The recession isn't stopping a crop of new lingerie designers and iconic brands and licensees from filling the marketplace. Fresh resources said despite the harsh economy and retail climate, there is still a demand for creative, innovative merchandise, especially at a time when inventories are practically bare and selling floors are ready for innovative product, ideas and concepts. Although intimates have been regarded as a recession-proof category, sales the first half of the year were down 10 to 12 percent, industry executives said. Three major players are headlining the entry in the lingerie category: Jessica Simpson Intimates, a full range of lingerie, undies, shapewear and sleepwear produced under license by Vandale Industries Inc.; XoXo, a licensed line of bras, panties, daywear and bustiers at Dreamwear Inc., and the licensed Lucky brand that will feature contemporary fare at the D2 Brands division of Delta Galil Industries Ltd.  <Women's Wear Daily>

Seven For All Mankind has signed leases for five new stores. The premium denim label plans to open shops in San Diego and Newport Beach, Calif., Scottsdale, Ariz., Honolulu, and Houston between August and October. Designs for the stores will continue to push the label's modern contemporary aesthetic with the use of Zebrano wood, stone floors and polished marble. The label has 18 boutiques in the States and 15 international locations. Its first store opened in Los Angeles in November 2007. <Women's Wear Daily>

RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough):

07/10/2009 10:06 AM


We're short Consumer Discretionary, and this position is making less and less sense. Stopping ourselves out and taking our loss before it expands. KM


Retail First Look: Growers vs. Filers - SV 7 13 09