Athletic Footwear Takes a Leg Down

After getting a relatively positive read on athletic apparel earlier today, it appears that footwear did not follow suit.  For the latest week, athletic footwear in the sporting goods channel decelerated significantly.  Units and ASP’s both showed a sharp deceleration in trend vs. prior weeks.  The move in ASP’s is a trend we’re watching closely.  Anecdotally, the promotional environment as well as the major shifts in product mix remain stable.  However, this data point certainly challenges these observations.  It is still too early in the back to school season to suggest that promos will ramp up aggressively or beyond plans, but a prolonged negative trend in units and ASP’s would warrant some changes at retail.   With inventories still tight on and off the mall, a promotional ramp up would be a large departure from the relatively “stable” environment we have enjoyed for the past two quarters.


Athletic Footwear Takes a Leg Down - Sporting Goods Channel Table

Athletic Footwear Takes a Leg Down - Footwear and Apparel Dollar

Athletic Footwear Takes a Leg Down - Footwear and Apparel ASP chart


Down Under: The World's Best Central Banker


RBA governor Glenn Stevens announced yesterday that the cycle of rate cuts has ended and that the next move by his team will be an increase. With the base rate at a 55 year low of 3%, Stevens has room to maneuver in either direction –unlike Bernanke & Co. (unless they decide to acquiesce to Maxine Water’s call to implement negative rates).


(text continues after chart 1)


Down Under: The World's Best Central Banker - a1


Stevens is signaling an unwillingness to wait for inflation to rear its head, choosing to act decisively now before unemployment peaks. This decision is made easier by the relative strength of the economy down under, but the decision still reflects a degree of integrity in the face of political pressure that is wholly alien to the leadership of the United States.


Evidence that Steven’s inflationary concerns are well founded arrived in today’s ABS June trade data release. At -$441 million AUD the deficit was almost half the consensus estimate, a decline driven by an increase in export value rather than volume as spot prices for ore, coal and precious metals continued to reflect increasing Chinese demand. Australia is able to provide “The Client” with both what they need AND what they want and, despite a slowing trajectory, total exports to China grew by double digits on a Y/Y basis for each of the first 6 months of the year.


 Down Under: The World's Best Central Banker - a2


Although we are not currently long Australian equities or the Aussie dollar, we continue to be bullish on prospects for this well managed economy rich in natural resources feeding off Chinese demand with inflationary tailwinds beginning to blow for core exports.


Andrew Barber

Uh Oh: Lower Highs?

As most US Economic observers know, America is no longer an economy driven by her manufacturing sector. That’s why the ISM Non-Manufacturing Index has become one of our critical macro leading indicators. This morning we saw a sequential downtick (month-over-month) in the Index for the month of July (see chart).


Everything that matters in our macro models happens on the margin. The US market’s negative reaction to this report is well placed.


As you can see in the chart below, since the free money Go-Go days of 2006-2007, this Non-Manufacturing index has had fits and starts – but in the end, has simply made a series of lower-highs. While the Q209’ directional move of going from the toxic to bad was good (see the levels on this chart from late 2008 to Q2 of 2009), what you may be staring at here is an economic picture that simply remains bad.


This morning’s ABC/Washington Post Consumer Confidence report rhymed with what you see in this chart. Although it deteriorated marginally -  the point is that on the margin it deteriorated. For today at least, this is new.


I quoted Buffett earlier this week with this, but I think that it’s the most fitting way to end this post:


“Charlie and I believe that when you find information that contradicts your existing beliefs, you’ve got a special obligation to look at it – and quickly!”


 Before we all run around taking the Greenspan and rear-view looking economic savants word for it that the recession is over, look at this chart again.




Keith R. McCullough
Chief Executive Officer


Uh Oh: Lower Highs? - a1

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Back to school ramp begins

Our weekly sports apparel data showed meaningful sequential and year over year changes.  In the absence of consistent quantitative and anecdotal evidence that true underlying demand has improved, we believe the calendar impact of a ramping back to school selling season is underway.  With that said, the trends on both a sequential and year over year basis are encouraging.  Additionally, the consistency in the sporting goods channel over the past three weeks suggests that volatility is in check.  With more moderate weekly ups and downs, inventory planning and promotional cadence should be easier to manage and inventory risk should be muted.


The overall industry reported a positive week (albeit just north of flat), with trends increasing in most channels of distribution.  On the downside, while still positive, the sporting goods retailers decelerated.   On an absolute growth basis, full-line sporting goods reported a positive week, offset by weakness in the athletic/urban specialty stores.  Regionally, we saw strength on the West coast for the second week in a row with sales up 28%.  The eastern seaboard was quite the opposite, with double digits declines for the week.  Average price point changes were mixed across channels as discount/mass retailers showed the biggest sequential decline in ASPs, while the sporting goods and family channels were relatively stable.  This data confirms that the promotional environment remains rational- at least for now in the very early stages of the back to school season.


Back to school ramp begins - Sports Apparel Table

Back to school ramp begins - Sports Apparel   sales

Back to school ramp begins - Sports Apparel ASP chart



Adidas/Nike 'Disaster Gap'

Results are still abysmal based on every metric I use, and it's an insult to Nike to stack the two against one another. But I think that Adidas finally hitting bottom is a net positive for both.



The ‘Disaster Gap’ between Nike and Adidas is narrowing. Let’s not mince words here…Adidas’ results are abysmal. Sales down 3%, EBIT –63% and EPS – 94%.  But a key takeaway is that it has narrowed the gap with Nike when looking at the rate of change from 13 weeks ago.


This is best evidenced by overlaying each company’s trajectory on our SIGMA chart (time series triangulation of sales, inventories and margins). Adi is still in the ‘death zone’ where inventories are growing too fast and margins are down. But it is clear that we’ve seen the bottom, as the rate of change is improving on the margin (sales-inventory spread going from -30% to -14%, and margins ONLY down 5 points instead of -8.5 pts).


Adidas/Nike 'Disaster Gap' - 8 5 2009 11 21 49 AM 

I’m mixed on this as it relates to Nike. Why? Ordinarily I’d like a desperate competitor as it would presumably give the stronger player the opportunity to step in, take it on the chin, and go on complete offense to crush the competition. Long term, that’d be ideal, and short term it would hurt. Understanding that is traditionally a great way to make money in this name. The problem is that as fiercely competitive as Nike is, it does not think about ‘crushing the competition’. It beats to its own drum. A weak competitor (i.e. Adi with an extra hundred million in inventory) acting desperately is problematic for Nike. A less desperate Adidas (which, mind you, at about $15bn vs. Nike at $18bn is larger than most US investors think) eases potential margin pressure from Nike.


As a sidenote, check out the quality gap between the two companies in the chart. Nike is so dang tight – managing a sales/inventory spread between a band of +5% and -5% and margins between +2 and -2pts yy. Adidas can’t even compare.

JACK – Comments from JACK

The following comments are taken from the JACK 10Q

 “Sales during the quarter started off strong but deteriorated significantly near the end of the quarter. System same-store sales at Qdoba restaurants decreased 2.0% year-to-date compared with a year ago as the macroeconomic environment continued to affect consumer spending at restaurants with higher check averages.”

Plus….   New guidance Q4 FY 2009 guidance

2.5%- 4.5% same-store sales decrease at Jack in the Box company restaurants versus a 0.8% decrease in the year-ago quarter - which is lapping an easier comp than 3Q.

Confuses me as to why stock is up even with better YOY margin

These comments have obvious implications for our cautious stance on CKE Restaurants…..

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