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NKE: Consensus Wrong on Two Durations

My tune on Nike remains the same. It’s all about duration with this name. This company is setting up to be a big winner – but not yet. The consensus is clearly negative (only 53% buy ratings – lowest in history) and estimate dispersion is at an all time high, but at the same time seems to share the view that after this quarter, Nike is back to the races (easy revenue compares, etc…). I think that the consensus is wrong not once, but twice; 1) the Street is 2-3 quarters too early in any assertion that the worst is behind NKE, and 2) based on how Nike is resetting its chessboard, I also think that the Street is not bullish enough on the financial impact when the engine restarts. Again, pick your duration wisely.


NKE: Consensus Wrong on Two Durations - 9 28 2009 2 55 15 PM


Fundamentally, there aren’t a whole heck of a lot of reasons I can point to today that make this name attractive to anyone with a duration shorter than 1 year. Growth is slowing, and despite the Street’s estimate that suggests business is turning up (even though sentiment stinks, the math does not lie), my sense is that growth might not yet have put in a bottom.


NKE: Consensus Wrong on Two Durations - NKE Futures 2YrTrends 9 09


In fact, I’m at $0.95 for the quarter vs. the Street at $0.98. To be clear, Nike has not missed a quarter since May ’03 and Feb ’02 – each time it missed by a penney. This company does NOT like to lose, and does not take misses lightly – even if they themselves did not set the expectation (no guidance). Can they find wiggle room this time? Yeah, of course they can. But they’re compensated to hit annual internal targets – not quarterly Street consensus.  Meaningful upside this quarter will need to come from a windfall in SG&A or non-operating income as opposed to revenue to beat my number.


For the year, I’m roughly in-line with the consensus $3.55, but barring a similar windfall, my bias is to the downside.  That said, what are we talking… $3.25, $3.35??? That’s as bad as it’s gonna get. I’m pretty darn sure of that. The reality is that the company is doing what it SHOULD be doing, which is investing in its brands to take share as we come out the other end of this cycle, instead of what Wall Street WANTS it to do, which is showing outsized pre-tax income margins from cost saves. The stock won’t go up if $3.25 is a reality (suggesting 18x today), but will be a great setup for those who want to participate in the next multi-year period of wealth creation in this business.


What is it setting up for? Those students of Nike history know how the company has a burst of growth, and then cools off, resets the organization, and then bursts again. This happened between EVERY stage of Nike’s evolution from a $10mm running shoe company in the 1970s, to a $19bn global powerhouse today. But each reset is incrementally more complex than the last, and therefore takes longer. We are currently 9-months in to what I think will be an 18-month reset. That’s been my call here for 2-quarters now.


We’re going to begin to see the meaningful acceleration in top line in fall of ’10. That means it shows up in futures around Spring 10. No, that’s not too far away. But until then, there will continue to be fits and starts. What do I define as a ‘fit or start’? Sales or futures shifting 2-4% in either direction. The market will fight over finding the datapoints ahead of time. But the REAL call will be there when the organization has fully reset, SG&A dollars fully allocated and amortized, capex creeps lower, customer connection strengthens, orders accelerate, revenues grow by 10%+, inventories decline by 5-10%, margins break through former peak, and the path beyond $5 in EPS becomes crystal clear.  I’m certain that there is only one global brand that has this set up. If I were Nike’s competition, I’d be very afraid of the setup – very afraid.


Given that there’s still a full product development cycle between today and when I think business will pick up, I need to more heavily discount the potential for any unforeseen company or industry events. Two come to mind. I’m not trying to be alarmist here, but risk management is the key.


1)      As it relates to company specific drivers, one factor I’m paying closer attention to today is the product pipeline. I’ve always thought that this portfolio can’t be disrupted by a single product, initiative, or region. But one angle is that there was a 4-month time period (Feb-May) where there was uncertainty within the organization as Nike shed 5% of its workforce. My understanding is that few people were ‘left hanging’ with a major question mark, but it was a dynamic inside the company that we can’t ignore. The development and sales window averages about 9 months, which suggests we’ll be seeing over the next few months the result of what could have been lower productivity levels 9 months back (even though they have since improved).

2)      I can’t shake the ‘Ken Hicks Factor’ (new CEO of Foot Locker) from my mind. He’s due to come out with his 100 day plan (or something along those lines), and who’s to stop Foot Locker from closing a quarter of its US stores? I can make a very good case as to why it should. This will largely not impact Nike’s end-demand. But I’d argue that FL is Nike’s best off-balance sheet asset. Any store closures would be bad. Again, I’m worried about this less the closer we get to Spring ’10. But that’s a ways off…


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Angie, when will those clouds all disappear?

In case you missed it, German Chancellor Angela Merkel—“Angie” as she’s so affectionately called—won reelection on Sunday to form a new coalition government with the Free Democrats (FDP).


Merkel’s conservative party, the CDU, together with their Bavarian Christian Social Union (CSU) allies, garnered 33.8% of the popular vote, to beat out her most significant challenger Frank-Walter Steinmeier of the SPD, which collected 23%.  The FDP attained 14.6%, and with it as coalition partners of the CDU/CSU a majority in the Bundestag (Parliament).


As we highlighted in our German election preview post on 9/25, “Showmanship”, the CDU/CSU coalition campaigned under:  tax cuts of 15 Billion EUR for the highest and lowest income tax brackets and reduction in the corporate tax (currently around 30%) and support for nuclear energy, while the FDP espoused special attention to small and medium-sized enterprise (Mittelstand) and a 3-tier flat tax.


While campaign promises don’t always materialize, we’re bullish on Merkel’s pro-business platform with the FDP, and believe that her continued leadership (ex the center-left SPD) will buoy equity markets and lead the German economy that saw modest growth of 0.3% in Q2 (Q/Q).  Concerning the energy sector in particular, Merkel has not ruled out the need to work with the Russians for supply and intends to extend legislation that would phase out nuclear plants by 2020. Today, German utility names (like E.ON; RWE; EnBW; and Swedish-based Vattenfall) surged on her victory. 


Still up for question is the ability of tax cuts to stoke the economy, which was a major component of her campaign.  While cash for clunkers was a highly successful stimulus program, it’s now rear-view and the government is facing a public debt next year to the tune of 6% of GDP. While this number is manageable, [in context Spain just announced its figure of around 10%, which incidentally prompt the government to raise the VAT tax to 18% over the weekend]—and while its Eastern European peers are even more extended, fiscally conservative Germans will be highly skeptical if Merkel does not reduce the state’s debt in the next 18 months. Further, a rise in unemployment next year could provide a headwind to Merkel’s credibility.


For now, we’re still bullish on the country’s fundamentals. The low CPI and interest rate environment has encouraged spending and anecdotal reports suggest credit is flowing back into the market.  This trend of low inflation was confirmed today by the Federal Statistical Office that reported initial CPI for September to decline 0.3% year-over-year and -0.4% month-over-month (See Chart Below). In the near term we see this as a net benefit to consumers, driven particularly by the lower energy prices.


With last week’s German (Gfk) consumer confidence rising to a 16th month high (and improving over the past 6 months) along with business confidence (Ifo) showing it highest reading in a year, confidence projections look bullish in the intermediate term.  We’ll be monitoring Factory Orders for confirmation that the export-giant is finding global buyers to propel growth. 


While German stocks, from banks to retailers, gained handsomely today, the DAX, as a reflection of the broader German economy, has been a slow moving force year to date, trading 100-300 bps better than the S&P500 for much of year. We like Germany, which we’re currently long via EWG, as a defensive name for positive (moderate) growth.



Matthew Hedrick


Angie, when will those clouds all disappear? - a1



Tomorrow’s Conference board reading might not live up to expectations.


In August, the Conference Board's consumer confidence index was significantly above the consensus forecast of 47.9, coming in at 54.1, up from 47.4 in July. This August improvement followed two consecutive months of disappointment, and was due to the Expectation sub-index increasing from 63.4 in July to 73.5 for the month.


As it stands right now, economist expectations are for more good news for September,  with a consensus forecast reading of 57, which implies another significant sequential improvement.


I just don’t think we can straight line a consumer recovery, and I have four primary factors that lead me to this conclusion:


First, most consumer companies that have spoken publicly on the topic have stated that they do not believe that consumers are ready to buy into the economic recovery narrative prophesied by the “experts” who are taking their clues from the strong equity market.  Second, most consumers think healthcare reform is bad news; President Obama’s full force effort to push healthcare reform over the past month should have a negative effect on sentiment.  Third, BIGresearch released a survey of over 7,000 individuals today that indicating that that ratio of consumers who are confident/very confident in a strong economy was down more than a point from the August reading of 31.1%.  Fourth, while September looks like it will turn out to be a strong month for stocks, it did not get off to a good start.


While energy prices are less of a concern for most consumers today, more of them are focused on other factors such as employment, housing and credit concerns.  If my assessment is right, continued improvement in confidence is not a sure thing. 


Howard W. Penney

Managing Director





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In 3Q09, many QSR operators are struggling to generate incremental visits.  Clearly, the only defense to declining traffic trends is discounting.  This puts QSR margins at risk as companies broaden their discounting schemes.  At the very least, any upside that may have been generated from lower food costs is now being given back to the consumer.


The following new menu changes/promotions signal ongoing guest traffic challenges for the QSR group.


Burger King announced last Friday that starting October 19th, it will be rolling out its $1 double cheeseburger; though some franchisees wanted to shelve the product to protect margins.


Chipotle announced last week that it will be offering free kids meals at its Boston restaurants for three days when a parent purchases a burrito, full-size salad or burrito bowl, or order of tacos.  CMG is running the promotion as a way to test its children’s menu, which is now available. 


I saw a MCD commercial yesterday in Chicago that said drip coffee is now available for $1.  While MCD is testing a $1 breakfast menu in Chicago, the commercial suggested you can get a $1 coffee all day long.  And, I have heard that the company is promoting “2 for 1” children’s meals in some markets. 


In this environment, what MCD does with its current discounting efforts affects nearly every restaurant operator in the country.  A client recently sent me this map of where MCD stores are located.  Yes, we need to pay attention to what MCD is doing!



Chart of The Week: As Good As It Gets...

The three major drivers of Wall Street Bankers getting paid in 2009 are as follows:


1.       The Buck Burning

2.       The Yield Curve

3.       The Associated Resurgence in M&A


At this stage of the game, most people understand that a Burning Buck equates to REFLATION in everything priced in US Dollars. From US Denominated Debt to the Financial Services companies that slog around with those liabilities, Dollar down got the Bankers and Debtors paid.


The Yield Curve, however, doesn’t get as much airtime. Give it some time. It will…


Andrew Barber and I have shown the peak of the yield spread (10-year US Treasury yields minus 2-year yields, in basis points), which, not surprisingly came at +276 basis points wide in May of Q209. Since that peak, the yield spread has made a series of lower-highs. This morning’s yield spread is hitting a 6-month low at +234 basis points wide.


On the margin, lower-highs have an implied question. For the bankers who are able to borrow short and lend long, is the rear-view in the Yield Curve as good as it gets?



Keith R. McCullough
Chief Executive Officer


Chart of The Week: As Good As It Gets...  - a1




SEPTEMBER 28, 2009





Ok, so here’s a winner. Gander Mountain (GMTN) announced its intent to go private this morning. Aside from the fact that retail has largely been left out in the cold as it relates to LBO activity this year – therefore making any transaction notable – the specs behind this one are particularly squirrely.


The two largest shareholders are making a bid of $5.15, which is 38% above Friday’s closing price. Sounds nice, huh? Not so much when you look at the fact that this is the same level where the stock was to months ago, and since then GMTN has underperformed retail (MVR) by 64%. 


But it’s not the price that catches my eye as much as the structure of the deal. The company will do a reverse stock split of 1 to 30,000, and then will then payout a $5.15 equivalent to anyone with less than a share. Based on the current holder list, this means that anyone but the largest 14 holders will be forced to sell. Score one for the big guy.


With only 25% of the shares floating, that makes it tough, if not impossible, for any opposition to have any relevance whatsoever. What if you’re a little guy that bought into the bankers’ and sell-side analyst ‘pie in the sky’ pitches when the deal came out in September 2004? At that time there were 9 analysts covering, sales were growing at 32%, and the pitch was for a 1% operating margin to go to the mid-high single digits. Now there’s 1 analyst covering, sales are struggling to maintain a low-single digit rate, margins are below 1%, and the company still has yet to earn one red cent.


Maybe the problem is not as much with the current deal as it is with the fact that this deal should never happened in the first place. Man…I remember being on the buy-side in Sept ‘04 and having my sales guy at an unnamed regional firm beating the drum on this puppy telling me I was missing out on a ‘big idea'.


Despite all the noise about better ‘transparency and accountability’ it’s amazing the stuff that still goes on.


Buyer beware…





Some Notable Call Outs


  • In perhaps the most dramatic example of rent renegotiations that we’ve seen, FINL management suggested on its conference call Friday that it has achieved rent reductions approaching 50% in some cases. With nearly 40% of its real estate portfolio set for some level of negotiation over the next 18-months, the company is poised to realize reductions in occupancy cost ahead of most peers during this time period. In addition, FINL is accelerating the closing of underperforming stores by year-end further contributing to profitability.


  • COLM introduced a new twist on green last week with its reused box initiative for online customers. Quite simply, the concept is to give outdoor customers the option of using a repurposed box for shipping. In what would be considered a positive response by most, more than 60% of online customers have selected the option in its first month of operation.


  • Despite sporting one of Europe’s weakest retail markets, Spain has announced as part of its 2010 budget bill that it will be increasing its VAT to 18% up from 16% in addition to cutting certain tax rebates. While some far east countries have been reducing VAT rates, Spain’s hike is the first raise that we’ve seen in this cycle. This may help the country tackle budget deficits near-term, but it do little incentivize the country’s consumers to accelerate already weak spending.





-Canadian Trade Group Finds No Injury From Footwear Dumping - The Canadian International Trade Tribunal found that the dumping of waterproof footwear and waterproof footwear in nearly finished form from the People's Republic of China and the Socialist Republic of Vietnam had not caused and was not threatening to cause injury to the domestic industry. Anti-dumping duties will therefore not be collected by the Canada Border Services Agency. The complainant in this case was the Shoe Manufacturers' Association of Canada, of Baie d'Urfe, Quebec.

Pasted from <sportsonesource.com>


-Textile Groups Urge U.S. to Act on Honduras - U.S. trade associations representing the fiber, textile, apparel, import, and retail industries wrote to Secretary of State Hillary Clinton, urging her to take immediate steps to restore stability in Honduras. In the letter, the groups said that the current political crisis in Honduras "has caused commercial traffic to falter dramatically, and textile and apparel plants in United States and Honduras are already being idled and workers told to go home." The letter was signed by the following trade associations: American Apparel and Footwear Association (AAFA); American Manufacturing Trade Action Coalition (AMTAC); National Council of Textile Organizations (NCTO); National Textile Association (NTA); National Cotton Council (NCC); and the U.S. Association of Importers of Textiles and Apparel (USA-ITA). <sportsonesource.com>


-New Look set for IPO - New Look is set to return to the stock market with a float early next year, six years after it was taken private. The retailer, which is owned by founder Tom Singh and private equity groups Apax and Permira, is reportedly considering a £1.7bn IPO. <drapersonline.com >


-Australia’s largest department store group Myer has released the details of its initial public offer – It expects to raise as much as $2 billion. Myer’s shareholders, including Texas Pacific Group and other investors are offering between 479.3 million and 499.5 million shares by both selling off their existing stakes in the company and issuing new shares, according to an ipo prospectus distributed Monday. Myer’s shares will be priced between 3.90 Australian dollars and 4.90 Australian dollars, or about $3.39 to $4.26, when the offer kicks off next month. The ipo will be the ASX’s biggest listing in three years. <wwd.com>


-After a challenging 12 months, the president and COO of Saks Fifth Avenue is forging ahead with a fresh footwear strategy to make the retailer more competitive in the challenged luxury segment - Among the key initiatives: tweaking the product assortment to include more contemporary brands, ramping up exclusives, introducing private label and expanding elements of the 10022-SHOE salon concept across the chain. Already, the retailer’s new efforts are paying off. Frasch said that although he remained cautious, early fall results have been promising. <wwd.com>


-301Sports.com Merges with GetTeamGear.com - 301Sportsonline.com said it merged with GetTeamGear.com to form a newly named company, 301Sports.com. The new online sporting goods retailer headquartered in Washington, Utah, focuses on baseball and softball equipment. <sportsonesource.com>


-Hibbett Sports Honored by State of Alabama  - Hibbett Sports, Inc. announced that Alabama Governor Bob Riley has proclaimed Tuesday, September 29, 2009, Hibbett Sports Day for the state of Alabama. Governor Riley’s declaration cited Hibbett Sports' contributions to the community through the Hibbett Sports Operation Sports Renovation and the Hibbett Sports Superstars programs. <sportsonesource.com>


-Handbag brands Kathy Van Zeeland and B. Makowsky are making the move into footwear with a team of industry veterans - The B. Makowsky footwear line, which debuted during the FFANY show, is launching for spring ’10. Kathy Van Zeeland is expected to follow for fall. The moves come on the heels of last year’s $330 million acquisition of New York-based Van Zeeland Inc., which included the Kathy Van Zeeland, B. Makowsky and Tignanello lines, by LF USA, a subsidiary of Hong Kong-based global sourcing firm Li & Fung Ltd. Plans for expanding both lines developed quickly after the deal, said Rick Darling, president of LF USA. <wwd.com>


-Billy Reid is going deeper into footwear - The Alabama-based designer will debut a women’s shoe line for holiday ’09 and plans to launch a wholesale business for his men’s styles starting with spring ’10. (The designer also just opened a shop-in-shop in Bloomingdale’s in New York.) “Over the past couple of years, footwear has really been a good category for us, so the timing seemed right,” said Reid. The women’s line will start small and grow for spring ’10. The initial holiday offering includes a high-heel boot, a riding boot and an ankle bootie, retailing for $495 to $795. All of Reid’s creations are made in Italy. The new collection is a departure from Reid’s previously planned women’s launch a season before, which included several pumps and wedges. His factory went out of business, and the designer had to start over with new ideas. <wwd.com>


-eBay’s mobile channel has generated $380 million in sales this year - EBay Inc. has made big news in the world of mobile commerce, becoming the first online merchant to break out m-commerce sales, and with good cause: Its mobile app for the iPhone and its m-commerce site, m.eBay.com, have generated $380 million in sales so far this year. <internetretailer.com>


-Shoe Trends - Men’s sneakers aren’t just black and white. This season, it’s all about the softer shades in between. Whether dressed up or casual, alone or accented with color, gray is clearly the new black. Spring footwear is getting cool and breezy with perforated uppers for men and women. Some athletic brands also put a twist on the treatment with bright colors and bold shapes. <wwd.com>

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