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23 JULY 2009


“All the busy little creatures chasing out their destinies… living in their pools they soon forget about the sea...”

– Neil Peart

Ok, Keith quotes Nietzsche, and McGough quotes lyrics from Canada’s most successful progressive rock trio.  Poke fun if you’d like, but no one can ever claim that we at Research Edge are not open to inspiration from all angles!

But this quote hit home with me yesterday as I drove down I-95 from Boston to Connecticut. I had the pleasure earlier in the day of having lunch with one of the future leaders of Wall Street.  Half of our conversation revolved around the obscenity surrounding how so many people are trying to time little ripples of info related to 3Q and 4Q EPS instead of focusing on 30-foot waves forming on the horizon. Ever sit on a surfboard and get caught up watching the beach instead of the horizon? I don’t suggest you try. It hurts…

But that is what we’re seeing now on the Street. There’s no shortage of stats that should make us step back and question where the long term opportunity really is. Consider the following…

US retail sales growth came in at -8.99% last month, and the ‘chatter’ was all about how this was a positive development because it was better than expectations. But what about the 15% growth number we saw in China?

  1. 860k autos were sold in the US in June per Motor Intelligence. But that compares to 1,142k in China in the same period.
  2. 510,563 total new accounts opened throughout the second quarter at Etrade, TD Ameritrade and Charles Schwab combined. Yes, that’s a big number. But what about the 484,799 new individual equity accounts opened in China LAST WEEK?

I won’t beat this China horse any more. Our Macro team just published a China Black Book that more than covers everything any investor needs to know on the topic. (If you’d like a copy, feel free to email .)

But what about investors that are staying closer to home (either by choice or by mandate)? Even within the US, I feel like people are hyper focused on the tidal pools. The best example is CIT.

I can’t even count the number of calls I got last week on this whole CIT situation. “Hey McGough… what name can I play on this theme?”  The answer? No one. To try and pick one company that will get hurt is a useless exercise. Spending effort on that is completely missing the potentially HUGE call, which is picking the second and third derivative of this situation. This all boils down to private equity as a three-legged bar stool. What do I mean?

  1. Let’s look at all the PE deals done over 5 years at peak multiples and peak (single digit) margins. Now layer on a weaker consumer and 100% debt to total capital. Cash flow ain’t looking too good. These smaller and/or private companies are the ones that will be most impacted by tightening credit/factoring.
  2. Now let’s look at the portfolio of companies for each private equity firm – it’s not that tough to do. All it takes is for one domino in the portfolio to topple, and then others could follow as they trip covenants, and act irrationally as they try to keep their heads above water. (2nd derivative).
  3. Then this plays into the third derivative (mathematically speaking, there’s probably a better way to frame this up – but you get the drift). This includes the impact of the vendors, retailers, sourcing companies, and other trade partners that will be impacted as dominos fall. You can go to your little one-on-one meeting at a conference and have a CEO tell you that all is hunky dory. But I can all but guarantee you that 90%+ of them are not spending a whole lot of time on whether this key critical uncertainty even exists – nevermind how to come out on top.

This is when investors get paid to not only think a step ahead of the competition, but to think a step ahead of the people running the companies.


Some Notable Call Outs

- Sherwin-Williams’ CEO reminded us that the excess in the home and commercial building market is still being unwound and is showing a muted path towards recovery. On the company’s 2Q conference call, CEO Chris Connor stated, “We believe the significant challenges that we face in the first half of 2009 will certainly continue into the second half. Based on industry estimates for full-year 2009, the past three years have erased a decade of volume growth in the US architectural market. Although we do not believe industry volumes are sustainable at this low level over the long term, any significant impetus for recovery has not yet materialized, and we believe that the recovery itself will be slow once it begins.”

- Add Charlotte Russe to the list of retailers taking advantage of advantageous real estate deals. As the company looks to downsize its store prototype to 5,500 square feet and also accelerate the rollout of an outlet strategy, it is seeing favorable pricing in both “A” malls and premium outlet centers. The company is benefitting on two fronts including rent reductions as well as an upgrade in location quality. As the economy recovers, we expect that a trade up to higher quality real estate will likely lead to higher sales productivity.

- When pressed on VFC’s 2Q conference call to highlight examples that helped management come to the conclusion that the environment is “stabilizing”, the company highlighted positive comps at Van’s and a “flattening” in the trend line at the company’s own stores. For a company that is so diversified on both a brand and geographic level, it’s a bit surprising to hear that Van’s is being used as a barometer. Additionally, when asked about fall bookings, management highlighted that Nautica is running at a similar run rate to current trends and that they didn’t have the fall bookings for North Face available off the top of their heads. The comment, or lack of, on North Face is particularly surprising in light of the brand’s size (#2 brand for the entire company) and the fact the brand’s reported momentum continues to slow.

- As Fall collections begin to trickle in to luxury boutiques, we’re hearing that initial pricing is below last year. There has been some indication that some collections at Gucci and Prada are priced 25-33% below Fall ’08 initial selling prices. While this is certainly noteworthy, and counter to the measurable price inflation we have seen in the luxury sector over the past several years it remains to be seen if the price adjustments will stimulate demand. Given the high level of discounting over the past year in the 50-90% off range, the customer has certainly become accustomed to shopping for a deal.

- In another sign that retailers are ordering much closer to need, Skechers highlighted that July may become its biggest shipping month of the year. Historically for the past 10 years, June has been the biggest month as retailers accepted deliveries for the key back to school selling season. This coincides with similar commentary from Wolverine last week. Customer’s ordering closer to need is a bit of a catch-22 for the wholesale community. On one hand, it should theoretically increase turns across the supply chain and reduce inventory levels. On the other hand, it is also a sign that demand remains volatile and retailers are still operating with low visibility. In the intermediate term, lower visibility results in wholesalers having to carry back stock to meet at-once demand that may arise at any time.


- Amazon has acquired the ecommerce footwear company Zappos – confirmed in an open letter from Zappos CEO Tony Hsieh. The deal is officially for $807 million in Amazon stock, plus about $40 million in cash and restricted stock, based on the July 21st closing price. <mashable.com>

- Neiman Marcus upgraded to stable by Moody's - Neiman Marcus Inc. got a thumbs-up from Moody’s Investors Service, which switched its rating outlook on the firm to “stable” from “negative” after the company extended a $600 million credit agreement last week.  The debt watchdog also upgraded the retailer’s speculative grade liquidity rating to “SGL-2” from “SGL-3.” Neiman’s took advantage of some loosening in the credit markets and renegotiated its asset-based revolving credit agreement, pushing its maturity date back to January 2013 from October 2010. <wwd.com/footwear-news>

- Avon Products will restructure and cut jobs - Avon Products Inc. said Wednesday it will restructure and eliminate about 1,200 jobs in the next three to four years, putting itself on track for $200 million in annual savings. Details of the realignment, first outlined in February, include the shutdown of manufacturing facilities in Springdale, Ohio, and Neufahrn, Germany; the streamlining of a facility in Naro-Forminsk, Russia, and more centralized structures for Latin America and the division covering Western Europe, the Middle East and North Africa. <wwd.com/footwear-news>

- CIT Clients Advised to Seek Alternatives - For now, CIT has reopened the credit spigot and was back providing advances to clients, according to sources. But the commercial lender said in a regulatory filing Tuesday that a Chapter 11 bankruptcy filing remained a possibility if some bondholders declined to tender their holdings by Aug. 17 and agree to take less than face value for the $1 billion in debt coming due next month.  “It’s a difficult position for our clients to be in,” said Victor Wahba, a partner at accounting firm Weiser LLP. <wwd.com/retail-news>

- Top 10 Retail Industry Executives Pay Compensation - WWD’s annual ranking of key retail industry executives by compensation reflects Wal-Mart’s dominance over the past year. Four officers of the world’s largest retailer made the top 10, with a combined $61.9 million in compensation. The top ten are: 1) H. Lee Scott Jr. former President and CEO of Wal-Mart with $30.2, 2) Michale S. Jeffries Chairman and CEO of Abercrombie & Fitch with $15.9, 3) Paul Marciano Vice Chairman and CEO of Guess with $15.2, 4) Julian R. Geiger CEO of Aeropostale with $14.2, 5) John J. Donahoe President and CEO of Ebay with $13.2, 6) Michael T. Duke Vice Chariman, President, and CEO of Wal-Mart with $12.2, 7) Myron E. Ullman Chairman and CEO of JC Penny with $10, 8) Eduardo Castro-Wright Vice Chairman of Wal-Mart with $9.99, 9) Lew Frankfort CEO of Coach with $9.65, and 10) Thomas M. Schoewe Executive VP and CFO of Wal-Mart $9.48. <wwd.com/retail-news>

- PSUN preannounces lower comps - Pacific Sunwear of California, Inc. updated earnings expectations for the second quarter of fiscal 2009, announcing same-store sales for the second quarter are projected to decrease by approximately 24% versus original expectations of negative 17% to 20%. Additionally, the company expects a lower effective income tax rate and higher store asset impairment charges for the quarter <sportsonesource.com>

- COLM opening new store in Frankfurt, Germany - Columbia Sportswear Company has announced the upcoming opening of a new Columbia-branded store to be located in the heart of Frankfurt's famous Zeil Strasse, in the recently opened My Zeil shopping centre. The new store, which will occupy 325 square meters, will present the company's Columbia brand outdoor apparel, equipment and footwear and Sorel brand footwear to millions of outdoor enthusiasts who live in Germany <sportsonesource.com>

- Wal-Mart agrees to pay another class action lawsuit - Wal-Mart Stores Inc. has agreed to pay up to $35 million to settle a class-action lawsuit brought on behalf of 88,000 workers at Washington state stores who were forced to skip meal and rest breaks, or work off the clock. <capitaliq.com>

- U.K. Retail Sales Growth Beats Estimates Fourfold as Confidence Returns - U.K. retail sales jumped four times as much as economists forecast in June as signs of improvement in the economy and discounts encouraged shoppers to buy more food and clothing. Long period of sunny weather lifted purchases of clothing and footwear and sales at department stores, data from the Office for National Statistics showed Thursday. The volume of retail sales rose 1.2% from the previous month and was up 2.9% from a year earlier in June, the largest annual gain since December last year. May's sales were downwardly revised to show a 0.9% gain on the month and a 2.0% fall on the year. <online.wsj.com>  <bloomberg.com/news>

- UK's clothing manufacturing industry could see shifts of ownership - The current global financial crisis has impacted the UK's clothing manufacturing industry, with one-in-five companies could see shifts of ownership, according to a new research from financial analysts Plimsoll. There were numerous "cash-rich" competitors circling, meaning the market could be set for a lengthy period of consolidation, said the research. "In the current climate, there are simply too many companies chasing too little market," said study author David Pattison. "With many directors eyeing the exit doors and highly leveraged buyouts consigned to history for the time being, it really is a buyers' market out there for cash rich companies." The research has also identified 166 companies with sizable cash reserves which, due to low interest rates, was unable to generate income.  "These companies are now in the position to buy up large chunks of market share at rock bottom prices and make that money work for them. They must be like kids in a sweet shop at the moment – all those distressed competitors available at a fraction of their true value," Pattison said. <fashionnetasia.com>

- Australian Wool Innovation will invest more in marketing and less in research - Australian Wool Innovation (AWI) is planning to invest more in marketing and cutting back on farm research in response to the industry concerns. Wool growers are voting in the WoolPoll over the next few months, which will determine how much money from each kilogram of wool sold goes to AWI, and chief executive Brenda McGahan said those in the industry had called for more help with promotional aspects. "The feedback we've had from growers is they say we can grow the wool, but we need help in marketing and need help to take this product to the markets overseas," McGahan said. <fashionnetasia.com>

- Minneapolis sees highest retail vacancy - Twin Cities retail property owners continue to feel the brunt of the economic recession, with store closings and canceled expansion plans causing a glut of empty space not seen in at least 14 years, a new report says. The report, released this week by Bloomington-based brokerage NorthMarq, puts the vacancy rate for all types of retail space in the Twin Cities at 9% as of June 30, and 10.3%including subleased space put on the market. There's no immediate sign that the climb in vacancies that began in 2006 will stop anytime soon, NorthMarq said. The rate of store closings might slow during the second half of the year, but more are expected, said Stefanie Meyer, a NorthMarq senior vice president who specializes in retail. The downturn has affected every type of retail center, from large regional shopping malls to smaller neighborhood and community strip centers, the report said. Regional and lifestyle malls have found themselves especially vulnerable to cutbacks by struggling fashion merchants such as Ann Taylor, Chico's, Gap and Zales. <startribune.com>

- Americans love affair with the mall isn't dead after all - Consumers are spending less as they worry about their jobs and retirement savings, but they're still hanging out at the mall, according to a new report from ShopperTrak RCT Corp., a Chicago-based firm that tracks retail foot traffic. After falling 4% in January, visits to shopping malls have rebounded and are now on par with "pre-recession" traffic levels, the firm said. May and June both showed foot traffic unchanged from the periods a year earlier, before the recession deepened.  "Store visits are declining, but people still want to use that element of going to the mall as a social release," said Bill Martin, co-founder of ShopperTrak. The figures represent trips to the nation's roughly 1,300 enclosed malls. Overall retail traffic fell 13.4% in May and dropped 12.2% in June from a year earlier, Martin said. The report signals that Americans are still attached to their local malls, even if they aren't walking away with many shopping bags. Malls had lost some ground in 2004 through 2006 as big-box stores and power centers lured shoppers, offering discount prices and a chance to get in and out quickly. But discounts are now common at the department stores and specialty chain shops the populate the mall. Most likely, consumers are looking at the mall as a source of entertainment -- where they can go to the movie, dine out and window shop -- rather than just shop, Martin said. <chicagotribune.com/business>

- Fotunoff founders have purchased intellectual property of the company - The families who owned and operated Fortunoff before its sale to private equity firms have purchased all the intellectual property of the now-bankrupt company and are researching ways to relaunch the brand, family members said Tuesday. The Fortunoff and Mayrock families, who built the iconic regional retailer of gifts, housewares, furniture and jewelry over four generations, bought the property for about $1.8 million. The purchase - approved July 6 in U.S. Bankruptcy Court in Manhattan - included the brand name, related trademarks, customer lists, domain names and copyrighted material. The company has been liquidating its assets since February, when it filed for bankruptcy and its parent company, NRDC Equity Partners Llc, was unable to find buyers to continue running the chain. David Fortunoff, who ran Fortunoff.com as well as the company's bridal registry, credit card and database marketing, noted that the Fortunoff name still resonates with consumers and that "tremendous opportunity" in the outdoor furniture, jewelry and bridal niches still exists. <newsday.com/business>

- Charming Shoppes keeps Figis.com, but gives ShoeTrader.com the boot - Charming Shoppes will stay in the food and gifts business after deciding to keep its Figi’s e-commerce site and catalog, but will exit online shoe retailing by closing ShoeTrader.com, the company says. <internetretailer.com>

- Coldwater Creek is the most consistent retailer in June - ColdwaterCreek.com led seven major retailers that achieved an "excellent" web site consistency rating in June, according to Gomez Inc. The top 48 retail web sites measured last month had an average site availability rate of 95.01%. <internetretailer.com>

- Sales at Overstock.com decline in Q2 - But Overstock.com improved its bottom line in the second quarter. While revenue declined 6.7%, Overstock posted Q2 net income of $389,000 vs. a net loss of $7.4 million in the prior year. <internetretailer.com>

- Footwear brand MBT announced addition of new North American Managing Director - Comfort footwear brand MBT announced Monday the addition of Paul Grimble as the North American managing director. Grimble, formerly of Ecco and Clark’s, will head up the U.S. and Canadian businesses for the Hailey, Idaho-based brand. CEO Ken Pucker had been in charge of this aspect of the business, but will now relinquish these responsibilities to Grimble. “We are pleased to have someone with such solid retail relationships and depth of experience,” said Pucker in a statement. “Paul’s brand-building skills and track record developing functional, premium brands are very well suited to MBT.” <wwd.com/footwear-news>

- Skechers Shape Up Shoes selling well in UK Fitness Footwear retail - For the web's widest choice of sports and outdoor shoes, Fitness Footwear was one of the first UK retailers to stock Skechers Shape Ups while offering a wider range than anybody else online.  Sales started from the moment Fitness Footwear put them on site and they haven't stopped.  Sales of Skechers Shape Ups started slowly at first, but after regular appearances in OK!, Cosmopolitan, Women's Fitness and many other publications, Shape Ups have become the fitness shoe to be seen in this summer by blending fitness and fashion into a desirable product.  To build trust in their new range of Shape Ups trainers, Skechers were prompt to commission an independent trial of their latest product. The Skechers Shape Ups clinical case study, conducted by Dr Steven Gautreau D.C. comprised of ten women who were selected to wear Shape Ups for a trial of 6 weeks during which their body weight, body composition, glutei strength and low back endurance was measured.  The end results were remarkable with an average weight loss of 3.25 pounds, a 1.125% reduction in body composition, 41% increase in glutei strength and a significant increase in lower back endurance. All women taking part in the tests commented on the effects of wearing Skechers Shape Ups as part of their daily routine and consciously enjoyed the benefits, noting the physical improvements, particularly in their posture.   <uk.sys-con.com>

- Somebody Wants to Destroy American Apparel for Supporting Gay Marriage - Vandals attacked a window display that featured pro-LGBT T-shirts at the Silver Spring American Apparel store on Monday morning, The Sexist reports, shattering a window in the process. The Georgetown location of American Apparel also received a telephone threat later that day about their similar window display. The T-shirts in the window bore the logo of the company's "Legalize Gay" campaign, which is designed to raise awareness about opposition to California's Proposition 8. The Silver Spring store has since removed its front window display. American Apparel has issued a statement in response to the attack and threats. "We don't find this kind of thing funny and we definitely don't find it intimidating," reads the statement in part. The company also offered to send "Legalize Gay" T-shirts to any group in Washington D.C. that is fighting for gay rights.  <dcist.com>

RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough): XLY

07/22/2009 01:59 PM


As Reflation morphs into inflation, the US Consumer Discretionary rally will run out of its short squeeze steam. KM



  • Larry Sablosky, Director, sold 13,974shs ($112k) after converting Class B shares representing entire common holdings.
  • David Klapper, Director, sold 63,114shs ($508k) after converting Class B shares representing entire common holdings.
  • Alan Cohen, Chairman of the Board, 200,000shs ($1.6mm) after converting Class B shares representing entire common holdings.