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The REAL CIT Investment Theme

People are asking all the wrong questions about CIT - it's not about direct exposure to CIT - but rather derivative exposure to a) the small, non-public companies that will be hurt, and 2) the private equity portfolios that will be pushed to brink.

With CIT on the ropes, we're getting barraged with speculation related to which companies have exposure to CIT financed receivables.  In addition to the work we're recently published, there are a couple of facts to consider before making broad generalizations...

  1. According to the American Apparel and Footwear Association, 60% of the factoring volume in apparel/footwear is exposed to CIT. Yes, this is a scary number at face value.
  2. But it's smaller than one might think when put into context. CIT disclosed that in 2007 its factor exposure to the footwear industry was $2bn. We also know that this is a $60bn industry at retail, or which about $35-$40bn is wholesale (here the exposure lies).
  3. Stronger companies with exposure to CIT have been shifting away from CIT over the past 3 months as they played offense given what was coming down the pike.
  4. These 'exposure' numbers thrown around are annual. Yet we should be thinking of them as a snapshot in time - and a snapshot in time taken at the beginning of summer, when working capital needs in this area of the supply chain are low.

One of the most important points we can't forget is that CIT operates BOTH a factoring business and a commercial lending business.  Some larger companies, including GIII, have revolving credit agreements that include CIT as part of their lending consortium.  However, this is quite different than having CIT as a "factor".  Factoring is a transactional based process which is conducted on an invoice by invoice basis.  In general, it is not cost effective for a larger company to use CIT for this service.  With that in mind, CIT has 300,000 small and medium sized customers of which the majority are producing annual revenues of $10m or less.

What does all this add up to? There's no company-specific call as it relates to individual exposure to CIT. But where the juice lies is related to 1) the rate of bankruptcies of small, non-public companies, and 2) the private equity hangover.  The first point is pretty simple. The second is more complex.

What do I mean by pe hangover? Take a look back over 4 years at all the LBO transactions in retail. These were done when cost of capital was falling, and halfway decent ideas made millions for Average Joe Private Equity Guy. Now private equity firms are saddled with many weak businesses that are barely profitable - and that's before paying interest expense in a rising cost of capital environment.  So what does this all add up to? We need to drill down on the portfolio of each major private equity player to assess the domino effect.  For example, Leonard Greene owns Sports Authority, PetCo and part of Whole Foods. If PetCo goes punk, then there's less of an appetite to invest in TSA, which ultimately raises the prospect of filing for protection. The derivative play would be a positive one for Dick's in the case of TSA, and PetSmart in the case of PetCo.  These are just illustrative examples, but I think you get the point.

We have done meaningful analysis on the historical transactions. Please contact us for more detailed info.  We'll be using this as a source for new investment ideas in weeks and months to come.


Some Notable Call Outs

- The first day of business for ANF's flagship Hollister store in NY was reported to have been crowded and well received. However, upon more careful inspection of the clientele roaming the store, it became apparent that ANF hired customers (models) to mill about and fill the store. I remember the unveiling of Reuhl to the analyst community which included a mysteriously good looking staff, but this is a whole new approach to experiential marketing. Or better yet, a new way to create the appearance of demand on day one of this very costly, high profile Manhattan location.

- In a conversation with Charming Shoppes, we learned that the company is becoming more bullish and committed to its ecommerce opportunities. Earlier this week the company hired new leadership for each of the company's three brands. With ecommerce at only 4% of total sales and fulfillment infrastructure already in place, we expect to see this business grow measurably as the core retail chain is right-sized. And because we had to ask, the company does not have any direct relationship with CIT but does have a few small vendors that do.


- Bangladesh and the apparel manufacturing industry - The apparel manufacturing industry has started to heal after labor unrest, arson attacks and vandalism last month that left two workers dead and hundreds of people injured. A major apparel factory, Ha-Meem, was destroyed by fire in the suburb of Ashulia. Ha-Meem's customer portfolio includes major U.S. firms such as American Eagle Outfitters Inc., Gap Inc., J.C. Penney Co. Inc., Kohl's Corp., Sears Holdings Corp., VF Asia, Target Corp., Charming Shoppes Inc. and Wal-Mart Stores Inc. Bangladesh still bears the impact of layoffs, wage cuts and the resulting violence, but production has resumed and exports are getting back to normal, manufacturers said. "We are trying to keep supplies to our buyers abroad unaffected in spite of destruction of 90% of our production facilities that was burned down," said Nazrul Islam, executive director of Ha-Meem Group. <wwd.com/business-news>

- Poor countries to experience economic slowdown - The world's 49 poorest countries have been hit hard by the global economic downturn, including the export-dependent apparel sectors in some nations, a United Nations report said Thursday. The study forecasts the 49 nations will grow this year by only 2.7%, down from the 7.4% growth they averaged between 2003 and 2008. The slowdown forecast is 2.1% if Bangladesh, which accounts for about 25% of the total gross domestic product of the group of Least Developed Countries, is excluded. The report, compiled by the U.N. Conference on Trade & Development, concludes that poor African nations are likely to be "more severely affected" than Asian counterparts such as Bangladesh, which have more diversified economies. <wwd.com/business-news>

- Mauritius plans to send back Bangladesh migrant workers - In face of acute financial crisis, the Mauritius government is planning to send back thousands of Bangladeshi migrant workers, a majority of whom work in garment factories in the country.  By taking this action of repatriating migrant workers, the government is attempting to save jobs for local people. There are great concerns over whether the repatriated workers are able to get jobs back home of which the clothing industry has also been hit due to the global slowdown. <fashionnetasia.com>

- Obama administration and trade - The Obama administration will seek to lower trade barriers U.S. companies face abroad and increase pressure on countries to correct labor violations as it puts enforcement center stage in trade policy, U.S. Trade Representative Ron Kirk said Thursday. <wwd.com/business-news>

- Kellwood Co. has bought itself a few more days of breathing room - The apparel firm has reached an agreement to extend the maturity date of $140 million in notes until Friday at midnight. A deadline of midnight on Wednesday passed without a resolution. In addition, the company reached a forbearance agreement with its lender. The agreement allows for the financing to stay in place so that a default on the notes wouldn't trigger any covenants and jeopardize a shutdown of the loan facility. <wwd.com/business-news>

- Nordstrom at the top of a luxury report - The Luxury Institute reported Thursday that Nordstrom department stores ranked first in its annual report of top-rated high-end retailers. According to the results of its annual Luxury Customer Experience Index, Neiman Marcus was rated second and Brooks Brothers rated third among wealthy consumers who were polled online about such areas as satisfaction, personnel and store environment.  <wwd.com/footwear-news>

- ASPs for outdoor footwear increased in June - Average selling prices for outdoor footwear inched up ever so slightly in the month of June, led by strong increases in the sport specialty retail channel, according to retail point-of-sale data compiled by SportScanINFO. The slight increase for the month of June versus the year-ago period was negatively impacted by a 4.2% decrease in average selling prices in the full-line sporting goods channel as promotions took their toll. <sportsonesource.com>

- UK disposable income decline slows down - UK Households' disposable income declined at a slower rate in July than previous months, but spending remained broadly unchanged. <drapersonline.com>

- Extra rainfall will boost Australian cotton production 10% in 2010 - Australia is expected to raise its cotton production by 10% in 2010, according to an industry executive, because of strong gains in this year that came after heavy rainfall boosted the crop. Gordon Cherry, chief executive of Australia of Dunavant Enterprises Inc, said this year's crop increased to 1.45 million bales which is the best for four years and double last year's drought-affected amount of 700,000 bales. "Prospects for next year are quite good and if we get spring rain they will be even better. There may be 10% more harvested next year than this year," said Cherry. <fashionnetasia.com>

- South Korea's Department Store Sales Climb 3.6% in Fourth Monthly Increase - Sales at South Korea's major department stores rose for a fourth month in June as consumers bought home appliances and accessories amid signs the economy is recovering from the global recession.  <bloomberg.com>

 - Despite bigger discounts, France's summer sales have flopped - L'Institut Français de la Mode (IFM) - the French Fashion Institute in English - reported business over the first two weeks of sales, which began on June 24, was down between 3% and  5%. Hypermarkets suffered the biggest decline, with sales down at least 10%. Only department stores managed to maintain 2008's levels. Traffic appeared to be in strong decline at a majority of the retailers surveyed, and the average shopping basket was also less than last year's. The FEH said when sales kicked off the discounts were noticeably higher than last year, which weighed on retailers' business. The FEH said its members had anticipated a decline in consumption and adjusted their buying patterns and inventory levels. Sales continue across France until July 28. <wwd.com/business-news>

- Redcats management changes - Redcats, the home-shopping unit of French retail-to-luxury group PPR, has reshuffled the top management of fashion and home furnishings catalogue La Redoute in a bid to improve its competitiveness. Nathalie Balla has been named managing director of La Redoute, effective Aug. 31, and Redcats' chief executive officer, Jean-Michel Noir, will become chairman of the unit. Balla and Noir will replace Nicolas Bernard, who is leaving the helm of La Redoute because of "diverging views" with management, Redcats said. Bernard, a Redcats veteran since 1982, had been ceo of La Redoute since May 2008. <wwd.com/markets-news>

- Eddie Bauer auction in progress - The bankruptcy court auction for bankrupt Eddie Bauer Holdings Inc. started late Thursday and, at press time, was expected to continue into today.  According to sources at the auction, VF Corp., which expressed interest earlier in the week, is looking only at the intellectual property assets of Bauer. Other bidders are understood to be stalking-horse bidder CCMP Capital Advisors LLC, an affiliate of Rainier Holdings; private equity firm Golden Gate Capital; Iconix Brand Group Inc., working in tandem with an unidentified strategic retail partner, and liquidation firms Gordon Brothers and Hilco Consumer Capital, which are said to be planning a joint bid.  A hearing is set for July 22 to approve the buyer selected at auction.  <wwd.com/business-news>

- Tiffany and eBay lawsuit in appeal court - The five-year legal battle between Tiffany & Co. and eBay Inc. moved to a federal appeals court on Thursday. The two sides agree on at least one thing: there are counterfeits for sale at the online auction house. But they differ on whose duty it is to prevent those knockoffs from being sold, which formed the crux of legal arguments before the U.S. Second Circuit Court of Appeals.  <wwd.com/business-news>

- Bloomingdale's has new brand with new fiber - Bloomingdale's will devote some of its floor space this fall to showcase not just a new brand, but a specific fiber. The high-end retailer has agreed to introduce an in-store shop concept exclusively featuring a collection of apparel made from Supima, the brand of extra-long staple cotton grown in the U.S. The fiber is generically known as pima cotton. The Bloomingdale's flagship here on 59th Street will launch the concept in September near its men's department with a collection of T-shirts, henleys, hoodies and other luxury basics. Following the launch at the flagship, Supima in-store shops will open in Bloomingdale's SoHo location here and then on to 16 stores across the country.  The goal will be to expand the Supima apparel brand into from knits into more categories, including underwear and slacks. <wwd.com/markets-news>

- Carrefour SA reports sales declines - Carrefour SA, the world's second-largest retailer behind Wal-Mart Stores Inc., reported a 1.2% decline in second-quarter sales Thursday. Sales from established stores dropped 2.2% in the quarter. Carrefour said it saw some encouraging results during the second quarter, including market share gains in France; the testing of new store concepts such as discount brand Dia and convenience supermarket Carrefour City; the turnaround of its troubled operations in Belgium and Italy, and faster growth in Brazil and China. <wwd.com/markets-news>

- Callaway Golf lowers full year estimates - Callaway Golf Co. poor Q2 results prompted the company to lower its guidance for the rest of the year. Changes in FX rates adversely affected net sales by approximately $19 million. <sportsonesource.com>

- Spyder Active Sports, Inc. named Thomas McGann as its new CEO - McGann was formerly president of Burton and CEO of Motorsport Aftermarket Group. He replaces Jake Jacobs. <sportsonesource.com>

- VF promotion for its Outdoor & Action Sports EMEA group - VF International promoted Patrik Frisk to president - Outdoor & Action Sports EMEA, responsible for the JanSport, The North Face, Reef and Vans brands in the EMEA (Europe, Middle East and Africa) region. <sportsonesource.com>

- Zumiez settles class action lawsuit - Zumiez reached a tentative agreement to settle a class-action lawsuit in California for about $1.3 million. A former employee accused Zumiez in the lawsuit of not paying all the overtime it owed him, not providing meal breaks as required by California law, and not properly itemizing pay stubs, among other things.  <sportsonesource.com>

- Wal-Mart, Best Buy Are Sued by Chinese Company Seeking to Block Knockoffs - Best Buy Co., Wal-Mart Stores Inc. and other companies were sued over dashboard mounts for navigation devices in a rare case of a Chinese company seeking to enforce patent rights in a U.S. court. <bloomberg.com>

- Negative article on Crocs - Many people were ready for the Crocs trend to be over even before the shoes hit stores in 2002. Blogs were launched that attacked the shoe company for its colorful $30 foam footwear. Maxim even named Crocs one of the "10 Worst Things to Happen to Men in 2007." Now, the company has until September to pay back its losses. But as people continue to throw their Crocs in the back of the closet, the company is left with a surplus of shoes and little consumer interest.   nydailynews.com

- Nine West is looking for the voice of its Vintage America Collection - The fashion retailer tapped singer/songwriter Miranda Lee Richards to help conduct an online talent search at Youtube.com/ninewestfashion. The winner of the "Vintage America Voices Contest," which began July 14, will receive the opportunity to record and release a single through Sony/ATV Music Publishing's in-house label, Hickory Records. Judges include Richards, Nine West Creative Director Fred Allard, Lucky Merchandising Director Rebecca Babcock and Co-President of Sony/ATV Music Publishing Danny Strick. The winner will be announced Sept. 16.  In addition to landing a single record release through Sony/ATV, the winner will be featured in the December issue of Lucky, receive Vintage America product, and the opportunity to meet Miranda Lee Richards. Lucky partnered with Nine West to promote the campaign.  Richards is promoted extensively at Ninewest.com/vintageamericacollection where fans can download her new single, "Early November." <brandweek.com>


RL: Ralph Lauren, CEO & Chairman, sold 127,600shs ($6.8mm) less than 1% of common holdings as part of 10b5-1 plan.

HIBB: Michael Newsome, CEO & Chairman, gifted 5,000shs ($90k) less than 2% of common holdings.

TJX: Carol Meyrowitz, President & CEO, sold 46,568shs ($1.6mm) less than 10% of common holdings.

ROST: Gary Cribb, Executive VP & COO, sold 99,057shs ($4mm) roughly 60% of common holdings.

NKE: Trevor Edwards, VP, sold 16,000shs ($830k) after exercising the right to buy 16,000shs as part of 10b5-1 plan.

RBI: Richard Ellman, Director, purchased 2,304shs ($20k) increasing common holdings by ~50%.

RBI: Jeff Davidowitz, Director, purchased 2,304shs ($20k) increasing common holdings by ~30%.

RBI: Williams Watkins, Director, purchased 2,304shs ($20k) increasing common holdings by ~15%.


The REAL CIT Investment Theme - SV 7 17 09