K-Swiss top line trends in the US continue to improve on the margin, due in part to the launch of its new ‘Tubes’ running product. Key callouts are…
1) Dollar sales and market share both continue to trend higher on a fairly consistent basis.
2) Before the launch of this product, KSWS’ share of the running category was 0.02%. Now it sits at about 0.11%. That might not seem like a big number, but for a category that measures about $4bn at retail, these bps add up pretty quickly.
3) The new launch nearly doubled the average selling price of K Swiss’ existing running offering.
Is this a game changer for KSWS? No… But for a company that has been decimated by fashion trends, over reliance on one category, poor brand management, excess cuts from Foot Locker, supply chain pressure, and a money-losing subsidiary, we need to keep in mind that ANY stabilization has meaningful margin implications. Keith recently removed this one from his virtual book due almost entirely to liquidity (or lack thereof), which is a factor he places increased emphasis on today as we head into a stagflationary environment in 4Q. Over longer durations. I still really like both the trajectory of the P&L, balance sheet, and ultimately risk/reward.
We have thankfully stayed on the sidelines of the natural gas market this year and used our commodity wherewithal to successfully trade the oil and gold markets. Broadly, commodities have been “ripping” this year on the back of U.S. dollar weakness and the perception of future inflation. As many of you know, natural gas has much different price drivers than its commodity peers. It is both a local commodity and very seasonal in nature.
I grew up in the heart of the Western Canadian Sedimentary Basis (“WCSB”) in a little prairie outpost called Bassano, which is in the Canadian province of Alberta. Only three things come out of Bassano – farmers, oil field workers, and hockey players. I was the latter. Despite the luck, or perhaps misfortune in inflationary times, of being better at playing hockey versus growing wheat or drilling for oil / natural gas, I still know a thing or two about those commodities. As it relates to natural gas, I can definitely tell you, supply matters.
Our Lead Desk Analyst Andrew Barber put together a chart below that outlines the supply of natural gas going back ten years. As we can see, inventories for natural gas have been building steadily since September 2008, which has led to the dramatic and steady decline we have seen in the price of natural gas.
Portfolio managers at commodity funds across the continent are chasing performance and natural gas is the most washed out commodity. Naturally, they are asking their analysts, “Should we buy? Should we buy? Should we buy?”. Everyone wants to call the bottom and natural gas does look washed out on many metrics. That said, the supply data is bearish and likely to get worse. So we have a classic game of chicken going on. The analysts know that fundamentals are bad, but the portfolio managers know that from a price perspective there is massive potential upside in “Natty”. So, who will budge first, the price or the fundamentals?
Admittedly, we’ve had the same scenario internally. Keith has hit me with his levels on the natural gas, and noted breakouts from a trade perspective, but I’ve had a hard time telling him I think he should pull the trigger. Currently, as of the month of September, natural gas inventories in the United States are 17.7% above their 10-year average (the September bar on the bottom chart).
Natural gas collapsed in August because storage levels were butting up against 80%, which is the max they can be prior to September, so excess natural gas was sold into the market, which depressed prices. Storage can now be filled to 100% of capacity, so excess natural gas has been going into storage in September versus sold into the market, which has been a key driver of the price of natural gas this month. Obviously, the commodity was also dramatically oversold and the economic outlook has improved, which have helped the rally.
Last week storage hit 88.9%, which is its highest level since 2006. This is noteworthy in that we are only halfway through the month and storage will likely be at 100%, or close to it, by the end of the September. The implication of this is that we may revisit the price dynamics of August in which no more gas could go into storage, so it was sold to the market which pushed prices down again. This is obviously a short term dynamic, but I have to be honest, high inventories and the potential reality of storage being filled by late September are making me a little . . . ummm . . . chicken.
Daryl G. Jones
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Ben Bernanke, fully loaded with his new job security, still panders!
As incredible and scary as this completely politicized US Federal Reserve has become, we have no choice but to react to its compromised outputs. In our Pre-Game note, we noted that the US Dollar was strengthening alongside 2-year yields. Bernanke’s Game Time decision was to reverse that. Once again, he decided to Burn The Buck.
Highlights of his pandering included:
- No change to rates (or rhetoric)
- Setting expectations for “exceptionally low” rates for an “extended period” of time
- Extending the MBS/Agency program to the end of Q1 2010
Don’t get upset with this. Deal with it.
At $75.86, the US Dollar Index is now making fresh YTD lows. At the same time, the associated REFLATION with a Burning Buck has the US stock market making fresh YTD highs. The Pain Trade in anything priced in US Dollars remains UP.
This is an “exceptionally low” point for the once vaunted American financial system’s credibility.
I am moving my immediate term TRADE (upside) target in the SP500 to 1085.
Keith R. McCullough
Chief Executive Officer
Putting the fundamentals and a slight Street miss aside, how could we not zero in on the irony of the repurchase activity? AutoZone continued its aggressive share buyback during its fiscal fourth quarter and for the full year. Over the course of the quarter, the company repurchased 3.8 million shares at a cost of $587 million. For the year the tally was 9.3 million shares at a cost of $1.3 billion, leaving total shares outstanding down 15% year over year. Of course, aggressive share repurchase is nothing new for AZO, nor is using leverage to fund such purchases.
Over the same time, the company’s largest shareholder, ESL Investments, disposed 3.78 million shares of its holdings on the open market. Now we know Eddie Lampert did resign from his position on the board, but the relationship between the company and its largest shareholder obviously remains tight. With ESL’s sales offset by AZO’s purchases, ESL reduces its ownership stake by 5% after taking in almost $600 million in proceeds.
Sports apparel numbers (as reported today by SportscanINFO) slowed for the third consecutive week, reversing an otherwise encouraging trend since August. Weekly ebbs and flows in this data is routine, but we start to pay attention to three consecutive data points. What’s most intriguing is that the sports retail channel remains very solid – as is the family channel, but is weakness in mass channels that took down the average yet again.
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