Adidas: Time To Dust Off The Short File

I'm getting more cautious on Adidas. Yes, it is a great global brand, and overall a reasonably well-run company. CEO Hainer reaffirmed guidance again today, the same guidance he said in the past that he would hit 'come hell or high water.' To his credit, it appears that he's hitting it. But I think they're pulling out all the stops this year, and with margins at peak, I wonder how much gas is left in the tank in '09. Here's what concerns me...

1) The German consumer confidence number came out today. Not good. -53% vs. expectations of -42%. While Germany is not its biggest European market despite its domicile, Europe overall accounts for 45% of sales and 75% of operating assets. Weaker German confidence, higher UK inflation (+3.3%) and a downturn in UK retail sales will not help this story - especially if the dollar strengthens.

2) The Euro Champs (going on right now) are boosting the athletic space. Then we deal with the hangover.

3) Same goes for the Olympics - for which Adidas is the sole apparel sponsor. 2Q and 3Q09 will be tough to anniversary.

4) US will not get any easier. The Reebok brand is seemingly going away. Retailers don't want it, consumers could care less, and market share for both Adidas and Reebok combined in the US is about in line with New Balance. That's sad. With Under Armour aggressively pushing into the footwear space, this should put pressure on the incumbents (especially Reebok). Let me know if you want any specific market share numbers.

5) Did I mention that cost pressures in the industry are exploding? Check out my early posts outlining the emerging secular margin challenges. Bottom line is that capacity growth in Asia is slowing, pricing is headed higher, and the supply chain is being stress-tested to a greater degree than we've seen in 10 years.

There's got to be some really powerful bull case out there to justify 9x EBITDA. I'm having a tough time finding it. This is officially a name where I need to dust off the short file.

CKR - Circling the Clouds in a Cessna Citation X

Back on May 3, I posted my concerns about the level of G&A spending at CKR, highlighting the fact that although the company's system-wide store count had declined by 8% since 2002, G&A per store had grown nearly 40%. On May 15, I pointed out that CKR's aggressive capital spending over the past 2 years has not led to incremental returns for shareholders and said that management needed to change its long-term unit growth strategy in order to reverse declining returns. It turns out I am not the only one with these concerns as Ramius LLC (owns 3.6% of CKR's shares) sent a letter today to Andrew Puzder, CEO of CKR, in which it calls for the company to:

1. Significantly Reduce Operating Costs
2. Shrink the Capital Spending Plan to Improve Free Cash Flow

My letter to management, however, would not have been as nice. First, I would have spent more time pointing out that senior management is significantly overpaid. Please refer to my posting from May 12 for more details about my frustration with management's recent bonuses relative to company performance, but I can't help but reiterate the point that in FY08 despite a nearly $600 million decline in the company's market value, the CEO still made $6.2 million (down only slightly from the $6.8 million he made the prior year). The Board pretty much made excuses (they called them material events ) about why CKR did not hit the targeted income for management to receive a bonus so in the end, they received their money while shareholders did not.

More importantly, it would have been easy to show that the company's senior executives fly around the country in a Cessna Citation X. They justify the expense of the plane due to the vast number of restaurants around the country. Not! I can name several restaurant companies that are significantly bigger than CKR and the senior executives fly commercial. As the Ramius letter suggests the company should consolidate its headquarter operations in California. If management did this, I would guess that most of the flights on the Cessna Citation X would stop! The hourly cost of flying a private jet has increased 100% over the past two years and management continues to abuse shareholders money.

Although I agree with all of the initiatives outlined in the letter and think that reducing both operating costs and capital expenditures are necessary to improve operating margins (which fell 170 bps in FY08) and to increase returns on incremental invested capital, I do not think this one letter will spur any immediate changes or even cause management to miss a step as it my understanding that CKR management does not listen to its shareholders. Ramius LLC points to this very point in its letter, saying we have repeatedly stated in conversations with you and with the senior management team, we believe there is currently a substantial opportunity to improve shareholder value at CKE. If management were to get its heads out of the sands, well, then, maybe things would be different...

Significantly Reduce Operating Costs
There is substantial opportunity to drastically reduce overhead costs at CKE. The Company currently operates three headquarter facilities, one of which occupies some of the most valuable real estate in the U.S., west of the Pacific Coast Highway in Carpinteria, California. Two of the three facilities are located less than 100 miles apart. Given the close proximity of the Company's two offices in California, one in Carpinteria and one in Anaheim, it is prudent for CKE to consolidate both offices into a lower cost facility as well as to simultaneously explore the feasibility of combining all locations into one facility. In addition to consolidating offices, there is an opportunity to meaningfully reduce general and administrative expenses ( G&A ) per store. As you can see in the table below, since 2001 the absolute level of G&A has remained almost unchanged yet the store count has been reduced by almost 20%. This has created a substantial increase in G&A per store from $38,400 in 2001 to $46,700 in 2008, an increase of 22%.

The Company was able to maintain a positive trend in lowering G&A in proportion to store count from FY2000 to FY2004 with G&A being reduced by $39.8 million and store count decreasing by 16%. However, since FY2004, while store count dropped by an additional 5%, G&A actually rose by $36.6 million.

From FY2000 to FY2004, the Company on average reduced G&A by $2.5 million for every 1% reduction in store count. The average G&A per store achieved by FY2004 was $33,100. By applying the FY2004 average G&A cost per store to the current store count, excluding any additional necessary public costs such as FAS123, the Company would operate at a G&A of $102.0 million, or $42.1 million lower than the current amount.

Our analysis indicates that CKE's G&A costs as a percentage of total revenues, company owned revenues, and on a per employee basis are out of line with competitors in the QSR industry and clearly demonstrate an opportunity for improvement.

Shrink the Capital Spending Plan to Improve Free Cash Flow
In light of the current economic outlook, the Company's $145 million capital spending plan for FY2009 is too aggressive and unwarranted. The Company is expected to generate $155 million of EBITDA based on analysts' 2009 consensus estimates and has roughly $50 million in annual interest expense and cash taxes, thereby producing $105 million in cash flow from operations excluding working capital adjustments. A capital plan of $145 million would yield a $40 million free cash flow deficit which we believe is unacceptable given the current environment and balance sheet leverage. Furthermore, we fail to see the rationale for such a large capital spending plan since the Company has failed to achieve a measurable increase in returns on investment from past spending.

GM: Revisiting Our Short Call From 5/31/08

Barron's wasted an entire cover page with a "Buy GM" call that weekend.

Accountability is the name of the game here. GM is down -14% from where you should have shorted that "Barron's pop." Next support for GM is $15.53; that's where I'd book the "Trade".

(chart courtesy of

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

LEH: Is Dick The Next Willie Randolph?

Yesterday, during Lehman's conference call I posted a note on the portal calling out "$28.15 as important short term resistance. How LEH is trading now doesn't matter; how the stock closes does."

The stock did test my level intraday yesterday, but failed right at the goal line, and closed lower than its intraday peak. Today, the stock opened at $27, but closed miserably, down another -7.6% at $25.14. This chart remains as bearish as any high profile name I follow. Unfortunately, Lehman's hard working faithful have not yet seen the end of the doubt that the Street has in their CEO's ability to deliver on expectations.

The question now is does the stock hit my target of $20.44 before or after the Board is forced to fire Dick Fuld?

(chart courtesy of

Melco (MPEL): Staying Short

My Partner, Todd Jordan, has not liked this fundamental picture as of late, and this chart lines up with his view. Ugly. Next support is $9.94. Short interest is relatively low at 4.4% of the float, and that's why i am short MPEL instead of LVS right now (LVS is a consensus hedge fund short, getting crowded at -15% of the float).

This remains a backdoor way to be long the puts associated with the Chinese stock market crashing, which has turned into a daily affair.

Gambling in Macau anyone? We have an office there, and the edge in the sector.

*Full Disclosure: I am short MPEL in my fund.

(chart courtesy of

Re-Shorting India via IFN into the close today...

Fortuitously, I covered this short position while it was swooning. This puts me in a position to get back to where i like to be paired off in Asia, long Australia (EWA), short India (IFN).

Long commodities, short "growth" expectations.

*Full diclosure: I re-shorted IFN today.


Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.