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Placing 4th in a 3-Person Race

Placing 4th in a 3-Person Race

SEPTEMBER 23,  2009





Cash Cycles: Here’s an interesting call-out. We all know that “inventories are lean” as just about everyone is managing to margin over growth. But check out the directional trend in cash cycle in both footwear and apparel. The punchline is that not only is the cash cycle turning up, but it is turning up across all three major components of the supply chain. Usually we see changes in cash cycle components roughly net each other out as Brand, Retailer, and Manufacturer play against one another. But with more cash being pumped into these models – perhaps they are more focused on managing for growth than we are lead to believe. I know I’ll get hate mail with dozens of examples as to why such build could happen mathematically given where we are in the cycle (note: I love being at the center of such comments…so keep ‘em coming!). But like it or not, inventories and receivables are headed up and payables are headed down.



Placing 4th in a 3-Person Race - FTWR Cash Cycle


Placing 4th in a 3-Person Race - Apparel Cash Cycle



Retail Trading Call-Outs:


The table below is an overview of both price trajectory and volume trends to support that trajectory.

Perhaps the main callout is that the group’s return over the past three weeks was 13.8%, 3.27% (1 week), and -0.3% (1-day). This has happened with volume momentum going in the exact opposite direction. Mind you, this also coincides with upwards earnings revisions finally coming to halt. Relative underperformane in that context is not only understandable, but expected.



Placing 4th in a 3-Person Race - 3





Some Notable Call Outs


  • I (McGough) got a chuckle in the car this morning while listening to an interview with Burberry CEO Angela Ahrendts live from London Fashion Week. “Our UK business has been on fire for quite a while now, and the luxury market 'can only get better' as it anniversaries last year’s pain." Don’t get me wrong…I think that Burberry is a decent company with astounding content (they are two separate things), but don’t you think that’s kind of a bold statement AFTER a 91% move in the stock? Unlike when you were at Liz Claiborne or Donna Karan, this is a YouTube world. Expectations are now officially that your business will improve meaningfully. Let’s hope you deliver.


  • Keep your eyes on a newly announced iPhone app called Micello which provides interactive indoor maps of shopping malls, college campuses, convention centers, and stadiums. The software essentially aims to be the “indoor” version of Google maps. This is particularly noteworthy for retailers as the software can point the user to locations within a mall that may sell a particular product. It’s probably too early to take the browsing aspect out of a mall visit entirely, but the technology nonetheless suggests more efficient and targeted shopping trips may become more commonplace in the future. Furthermore, mall operators are likely to embrace the partnership with Micello in an effort to get even closer to their customers. Could hyper-local marketing be the next step here? Scary, but possible…


  • Over the past year, a visit to Costco has provided lots of surprises given the dearth of excess inventory in the apparel and footwear pipeline. Last evening, while making a run to stock up some staples, I discovered a large selection of men’s Seven For All Mankind denim. The selection ranged from size 30-38 and was priced at $89.97 per pair.


  • As a follow up to yesterday’s IPO callout, Peak Sports (Hong Kong listed) completed its IPO yesterday. While the shares will begin trading on September 29th, early reports are suggesting the offering was 20 times oversubscribed by local investors and 8 times by international investors. The company raised $221 million in the offering, which appears to be in the middle of the expected range of $200-$250 million.





-Holiday 2009 could see profits victory snapped from the jaws of sales defeat - The annual guessing game that surrounds the all-important holiday season has become a study of contradictions — with observers believing that even as the holiday sales performance could be one of the worst on record, retailers’ moves over the last nine months to slash inventories and control costs could mean their bottom lines actually improve in the fourth quarter. A forecast from Retail Forward on Tuesday indicated a 2% drop in apparel and accessories sales for the fourth quarter, reflecting a continuation of the consumer retreat that pushed sales down more than 9% in the same period a year earlier. Overall retail sales, excluding auto, food and drug sales, are projected to come in flat after falling 4.5% a year earlier, teeing up the upcoming fourth quarter as the second worst in 42 years. The Retail Forward study adds to the steady knell of downbeat projections for holiday, with most projecting the season’s performance to range from flat to down in the single digits. And the consensus is that consumers — having been trained by last year’s steep discounts at retail — are going to wait until the last possible moment to see who blinks first. Even with the poor sales outlook, Wall Street remains generally bullish on the sector. Retail stocks, which dipped modestly Tuesday, are up 37.8% so far this year, and Wall Street is trumpeting the industry’s gross margin potential in the wake of better inventory controls and price reductions from factories. <wwd.com/retail-news>


-Students are spending more on gadgets and less on apparel - With classes under way on college campuses across the U.S., students are spending more on computers, cell phones, MP3 players and other electronic gear and cutting back on apparel.  A survey by the National Retail Federation said just less than $13 billion would be spent on electronics and computer-related equipment, compared with $11 billion last year. Clothing and accessories ranked second at $5.77 billion, down from $7 billion; dormitory and apartment furnishings, $3.9 billion, versus $4.74 billion, and shoe purchases, $2.82 billion, down from $3 billion in 2008. Despite the recession, college students and their parents will spend about $34.4 billion to return to campus this year, up 33.8% from 2004. Clothing and accessories purchases will average $118.56 per student, down from $134.40 last year and $149.85 in 2007, the NRF said. Footwear sales will average $57.85, compared with $58.46 last year. Electronics sales will rise to $266.08 per student, compared with $211.89 last year. The NRF study, conducted by BIGresearch and based on the responses of 8,367 consumers, found that 83% of students and parents said the recession had affected their spending, with 48% planning to spend less. <wwd.com/retail-news>


-Retailers, Non-Finance Firms Exempt From Obama Consumer Agency, Frank Says - Retailers, merchants and non- financial businesses will be spared from oversight by a consumer protection agency, Representative Barney Frank said in proposing to alter the Obama administration’s proposal.  <bloomberg.com>


-Strong demand for clothing and footwear was seen in the UK, contributing to a 16% year-on-year jump in online sales - According to IMRG Capgemini e-Retail Sales Index, British consumers spent an estimated GBP3.8bn (US$6.2bn) during the month, while total month-on-month sales dropped by 10% in August. However, online shoe sales rose by 3% as parents purchased back-to-school uniforms. "The continued annual growth in the online retail market is evidence that this medium is withstanding the challenges of the economic downturn and the retailers that continue to expand and improve their online presence will no doubt reap the benefits during the festive trading period," notes Tina Spooner, director of information at IMRG. The Group also points out that clothing sales was boosted as retailers offered greater choice, price competitiveness and convenience from buying online. <fashionnetasia.com>


-USDA projections for 2009/10 indicate that world cotton stocks are expected to decline for the third consecutive season - Global ending stocks are currently forecast at 56.3 million bales for 2009/10, 5.2 million bales (8.5%) below 2008/09 and the lowest since 2003/04s 48.1 million bales. For 2009/10, the world stock reduction is largely attributable to China—the leading cotton producer and consumer—where 45% of the global decline is expected. However, stocks are expected to decline in most of the cotton-producing countries this season. In China, stocks are forecast to decline 2.3 million bales to 17.6 million, their lowest in 7 years. US ending stocks are expected at 5.6 million bales in 2009/10, 600,000 bales below 2008/09 and the lowest in 5 years.  Meanwhile, stocks in India—the second largest producer and consumer—are forecast only marginally lower and will likely play a key role in the global trade of raw cotton in 2009/10.  <fashionnetasia.com>


-Severe floods affect Atlanta mall traffic - Some retailers here are suffering because of torrential downpours and record flooding that have caused major disruptions and at least eight deaths. There was reduced activity at a few malls that depend on major roads such as Interstates 75 and 85, which were partly shut as floodwaters trapped motorists in their cars during the evening rush hour on Monday. The Arbor Place mall in Douglasville, which has 140 stores and is about 20 miles west of downtown Atlanta, closed Monday afternoon, although department stores such as J.C. Penney and Belk stayed open for regular hours. There was a fallout in traffic as consumers have sort of hunkered down over the last couple of days. The Perimeter Mall, which features Bloomingdale’s, Macy’s, Nordstrom and Dillard’s among its almost 200 stores and is 13 miles north of downtown, had “very light” shopper traffic Monday, said general manager Dennis Kemp. The National Weather Service forecast more rain this week, but said the severity will decrease. <wwd.com/retail-news>


-Shoebuy.com has joined the ranks of companies offering designer footwear on the Web -  The IAC-owned company this week launched a new Web site called Designer.Shoebuy.com, which features high-end designer names in shoes, accessories and apparel. The site offers more than 150 brands for men, women and kids, including Hugo Boss, Stuart Weitzman, Kenneth Cole and Bally. Like its sister site, Designer.Shoebuy benefits include free shipping, free return shipping and user reviews. However, the site's layout has been pared down and includes features such as brand microsites. With Designer.Shoebuy.com, we are now able to offer our design-conscious customers a streamlined way to shop for their favorite brands, while extending the same great benefits we offer to all Shoebuy.com shoppers," Shoebuy COO Bill Pryor said in a statement. <wwd.com/footwear-news>


-EPA Sues VF Corp Over TNF Foot-Odor Prevention Claims - The U.S. Environmental Protection Agency has filed suit against VF Corp., claiming The North Face made unsubstantiated public health claims regarding unregistered products, and their ability to control germs and pathogens. VF Corp is facing nearly $1 million in fines over the issue. VF Outdoor, TNF's parent, said the EPA had "not made any claims that The North Face products are unsafe or contain any unsafe substances." <sportsonesource.com>


-The Forzani Group Ltd. reported that consolidated same-store store sales for the back-to-school period increased 0.1%  - Corporate store comps were down 1.6% for the period and franchise stores rose 3.8% for back-to-school. Forzani reported that comps jumped 7.0% in the corporate stores in the last two weeks.  <sportsonesource.com>


-Perry Ellis reaches licensed agreements for Jantzen and ProPlayer - Perry Ellis International has signed two new licensing agreements for its Jantzen and ProPlayer brands with MAG Brands LLC/Millennium Apparel Group and IFG Corp. (Innovative Fashion Group), respectively. Both MAG Brands and Innovative Fashion Group are part of the Adjmi Apparel group of companies. <sportsonesource.com>


-Macy`s predicts a 13% rise in web sales this year, CEO says - The department store retailer`s web sales are expected to surpass $1 billion this year, CEO Terry Lundgren said today at the Shop.org Annual Summit. <internetretailer.com>


-Burberry Climbs After Chief Ahrendts Says U.K. Luxury Market Is `On Fire' - Burberry Group Plc rose as much as 5.8 percent in London trading after Chief Executive Officer Angela Ahrendts said the clothing maker’s U.K. business has been “on fire” as demand for luxury goods improves.  <bloomberg.com>


-Hanesbrands Inc. and Its Champion and Duofold Apparel Brands Launch Mount Everest Expedition  -  Hanesbrands Inc. announced today that its Champion and Duofold apparel brands are going to the top of the world, leading a Mount Everest expedition to drive brand awareness and showcase the company’s research and development innovation and textile science leadership. "Expedition Hanesbrands: Climb With Us” will be lead by accomplished international mountaineer and motivational speaker Jamie Clarke and will begin next month with a training climb of Mount Pumori in Nepal, a 23,494-foot-high Himalayan neighbor to Mount Everest. The Everest summit bid will take place in the spring 2010 Himalayan climbing window.  An expedition launch news conference will be held live today at 10:30 a.m. EDT from North Carolina State University’s College of Textiles in Raleigh, N.C. <newsticker.welt>


-Bernard Krief Consultants, which has submitted an offer to buy Christian Lacroix out of administration, also has made a bid to acquire embattled lace manufacturer Societé Lucien Noyon SAS with a view to developing a pole of luxury French textiles artisans, said Krief’s international director, Beatrice Alba. Battered by competition from Asian lace manufacturers, Noyon is in the final stages of its administration period. It is not known if any other suitors are after the company. Alba noted Bernard Krief’s bid concerns only Noyon’s Calais, France, site and not its factory in Sri Lanka. Krief plans to maintain the company’s Leavers lace department, which employs 80 workers, she said. <wwd.com/business-news>



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


09/22/2009 09:53 AM


Kroger is down again today, making new lows. I like new lows, especially when I can cover for gains. Great call by Levine and McGough. Re-short higher. KM





GES: Paul Marciano, Vice Chairman & CEO, sold 50,000shs ($1.9mm) less than 3% of total common holdings.


BGFV: Steve Miller, President & CEO, sold 2,000shs ($30k) less than 1% of total common holdings pursuant to 10b5-1 plan.



  • John Fisher, General Partner of Fisher Holdings (founding family), 500,000shs ($11mm) less than 3% of total common holdings
  • William Fisher, General Partner of Fisher Holdings (founding family), 1,000,000shs ($22.1mm) nearly 10% of total common holdings


CHS: Manuel Jessup, EVP – Human Resources, sold 6,666shs ($89k) after exercising the right to buy 6,666 shares less than 15% of total common holdings.


DECK: Constance Rishwain, President Simple & UGG, sold 2,000shs ($160k) approximately 5% of total common holdings pursuant to 10b5-1 plan.


JWN: Ernst Campbell, VP & Treasurer, sold 3,221shs ($101k) nearly 25% of total common holdings.




Many commentators are claiming that Macau casino revenues have increased up to 60% year-over-year after the first 20 days of September and are on pace to repeat August’s record of MOP11.27 billion.  The growth is said to be due to Beijing relaxing visa restrictions, increased spending per gambler, and an easy comp with last year. 


The head of Macau’s Travel Industry Council said last month that Guangdong residents could visit Macau once a month from September 1, up from once every two months previously.  In addition, effective yesterday, the official implementation of a VIP junket commission cap will further help operators’ earnings.




Steve Wynn, speaking at a news conference Wednesday, confirmed that Chinese authorities recently relaxed travel restrictions for Guangdong residents visiting Macau.  Wynn said the Chinese government considered macroeconomic factors and made the decision in conjunction with the Macau government.  Wynn Resorts is planning to raise up to US1.6 billion in a Hong Kong initial public offering of its Macau assets.


PFCB’s Co-CEO Bert Vivian presented at an investor conference this afternoon and provided some commentary on 3Q trends and a first glimpse at 2010.  Mr. Vivian maintained his less than encouraging near-term outlook for the industry but appeared optimistic about the long-term prospects at PFCB.  In 2Q09, same-store sales growth declined 6.8% at the Bistro and was relatively flat at Pei Wei.  At that time, management had said that the Bistro had underperformed relative to internal targets while Pei Wei outperformed.  Looking at 3Q09, Mr. Vivian stated that sales trends at both the Bistro and Pei Wei are similar to what we saw in 2Q with the Bistro continuing to struggle. 


The company is currently planning for muted development in 2010 with about 4-5 Bistros in the pipeline and about 2 Pei Wei units.  Management is exploring additional sites for Pei Wei development, primarily in existing markets, but these sites are most likely slated for 2011 openings.  So, overall, new unit development will come down again in 2010.


Mr. Vivian stated that he has to believe that the environment will get better in 2010.  That being said, with reduced unit growth, he is not expecting much in the way of revenue growth.  He even said, “If comps somehow magically went plus 10%, you’d probably find me dancing naked in the streets.”  Instead, he thinks that -5% to +5% revenue growth is a more reasonable range.  Assuming flat revenues in 2010, Mr. Vivian expects that based on the company’s current outlook that cost of sales will be somewhat favorable relative to 2009 (outside of produce which is not contracted), PCFB will be able to hold labor and cost of sales (60% of restaurant expenses) flat as a percent of sales. 


If these revenue and cost expectations prove to be right, the company should continue to generate more free cash flow in 2010 (guided to $70-$80 million in free cash flow in 2009).  With this cash, PFCB will continue to pay down debt (and expects to be debt free by mid 2010) and buy back shares.  Additionally, Mr. Vivian said that management could discuss paying a dividend.

Early Look

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Risk Management: SP500 Levels, Refreshed...

Today, it looks like we are going to lock in another higher-high for the YTD. With higher prices, our risk management models are registering higher immediate term TRADE targets.

  1. Immediate term TRADE resistance = 1080
  2. Immediate term TRADE support = 1058

Higher-lows of support with multiple support lines below them, is what it is – bullish until it isn’t. If something gets this market to crack and close below 1058, that puts the dotted-green line at 1037 in play. Otherwise, the bullish TREND in the SP500 shall remain your friend.



Keith R. McCullough
Chief Executive Officer


Risk Management: SP500 Levels, Refreshed... - a1



By Rebecca Runkle and Team


“It’s choice -- not chance -- that determines your destiny” Jean Nidetch


I always find it worthwhile to take a fresh look at change after a (hopefully decent) night’s sleep.  My head is clearer and less biased with my knee-jerk reaction and I am better able to digest the situation with a rational mindset.  This morning my mind is filled with Dell’s proposed acquisition of Perot for $3.9 billion.  Taking all things into consideration, this will prove a decidedly strategic and positive deal for Dell.  See Rebecca Runkle’s portal for more details.


TODAY’S TRADE - Runkle was one of the first in 09' to be bullish on DELL, and after CS downgraded it, she's the first to defend this Perot deal (see her note for details). Buying red!



HEALTHCARE: Doctors Behaving Badly 

By Tom Tobin and Team


President Obama keeps talking about ways to fix "runaway healthcare costs" without talking about the way Medicare pays for services.

The payment process has avoided scrutiny throughout the Health "Insurance" Reform debate. Payment Reform should be well ahead on President Obama's to-do list than banter with David Letterman.  The debate is still not changing, although 500 amendments to the Baucus proposal would suggest an intense interest in getting something done despite the political stalemate.  I see lawmakers staking out a new sphere of political influence rather than dealing with Obama's 8 core principals and it’s not dissimilar to watching the specialist dominated AMA (70% of its membership) write the reimbursement codes which Medicare uses to pay physicians for services (self-dealing).  Check out the links below for a more thorough discussion of why this is a bigger problem than mandates and taxes on Cadillac health plans.


We are long the XLV and AMGN, QGEN and UNH are our favorite names in Healthcare.


See Tom Tobin’s portal for more details. 




By Brian McGough and Team


While Dollar General’s impending IPO is likely one of the largest and most visible IPO’s on the calendar, it is worth noting that there are a handful of other apparel/retail companies lined up to go public in the coming months. For now, the list is as global as we’ve seen in a long time, but we suspect many U.S. private equity firms will be watching closely to see how these offerings fare as they too contemplate monetizing some of their “peak-market” acquisitions.  See Brian McGough portal for more of the details …  


UA continues to be our favorite long-term names…


Is Your Team Effective?

Most of us in the money management business have experience working and making decision in teams.  Whether it be on the athletic field during collegiate sports, in graduate school for study teams, or in the actual work place, working and interacting effectively as a team can be critical for success.  This weekend we read an interesting study relating to the most effective teams for investment committees that was written by Michael Mauboussin from Legg Mason Capital Management. 


Some of the key takeaways from Maboussin’s work, which was a summary of other studies,  was as follows:

  • According to J. Richard Hackman, a professor of psychology at Harvard University: “My rule of thumb is that no work team should have membership in the double digits (and my preferred size is six), since our research has shown that the number of performance problems a team encounters increases exponentially as team size increases”;


  • Brooke Harrington, a research at the Max Planck Institute for the Study of Societies, analyzed investment groups and found: “The larger the proportion of friendship and other socioeconomic ties within a group, the worse its portfolio performs; the larger the proportion of relationships based on professional, financial, or academic ties, the better the group performs”;


  • A survey by Arnold Wood and John Payne found that 85 percent of investment committee members were white males over 50 years old, they found no members under 30, only 15% were women, and only 5% were minorities; and


  • A recent survey of defined contribution committees found that they spent over one-half of their time, more than that on any other issue, discussing past investment performance – an unimportant knowable. Unimportant in the sense that there is nothing the committee can do about it ; and


  • In putting together committees, leaders sometimes seek to find experts to match the problems the committee will face.  So if the committee needs to decide about an allocation into alternative investments, they seek a member with experience in alternatives.  According to Phillip Tetlock, a psychologist at the University of California-Berkeley, writes: “People who devoted years of arduous study to a topic were as hard pressed as colleagues casually dropping in from other fields to affix realistic probabilities to possible future outcomes.”

The conclusion of all these points is that most effective decision making teams should have a number of attributes.  First, these teams should be a manageable number.  Second, the group should not be incestuous in terms of social ties.  Third, there should be a diversity of experiences within the group.  Fourth, groups should not overweight “expertise” for longer term decision making.  Finally, time allocation is critical and groups should focus on finding solutions to important questions (not debating the market or prior performance).


Our firm is comprised of quite a few Yalies and, as many of you know, we are located on the outskirts of Yale’s Campus in New Haven, CT, so we are obviously predisposed to like all things Yale.  We are not beyond You Tubing ourselves though, and a quick look at Yale’s Investment Committee suggests that it may not have the most optimal structure.    The Yale University Investment Committee has ten members, and eight of those members are white males.  Two of the members, Richard Levin and Shauna King, work for Yale.  Of the remaining eight that do not work for Yale, seven work in the finance industry.  The only outlier is Judge Barrington Parker.  So, in aggregate, the Yale Investment Committee has a very white, male, and finance oriented Investment Committee, with very comparable social levels.   In theory, this is a very suboptimal structure.


That said, it is possible for some investment committees or decision making teams to outperform.  This will occur when the individual members of the groups are better individual decision makers than average.  A political scientist at the University of Michigan developed the diversity prediction theorem and the equation reads as follows:

  • Collective Error = Average Individual Error – Prediction Diversity

The takeaway is that if the average individual error is lower for a group then that group may be able to overcome a deficiency in diversity.


In conclusion, as we make strategic decisions as teams, whether it be for investments or the strategic direction of a business unit or company, we can structure teams in such a way to make much, much better decision and plans, so as to increase our probability of success.  The days of a small group of white men going on an offsite to make strategic decisions are behind us, or at least the research tells us they should be.



Daryl G. Jones
Managing Director


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