NKE: Holding the Conch

NKE: Holding the Conch

SEPTEMBER 30, 2009





Gotta hand it to these guys. Nike definitely has control of its business and is proactively planning for the next burst of growth. Was this a pretty quarter? Hardly. With revenue and EBIT down 11.7% and 5%, respectively, futures down mid-single digits, and the cash cycle eroding by 10 days this is hardly a ‘victory lap’ quarter for Nike. Revenue missed my number by about 500bp, but the gross margin offset much of this (this was my biggest positive take away for NKE and the group overall). SG&A more than compensated for the rest. I can go back and forth on the puts and takes of the quarter, but the heart of the matter is that there are way too many companies out there that are printing junk numbers and sound like headless chickens on their conference calls. This is not one of them. It’s all about being in control in this business, and Nike is holding the conch.


Does this change my view on the name? No. No meaningful changes to estimates – as lower revenue and higher GM% are a wash. As noted earlier this week, I still think that we’re in a period of duration mismatch. There will be fits and starts. This quarter was a start. There will be fits – I have no doubt about that. But I also think that in fall ’10 the consensus is meaningfully underestimating the ramp in the model once the organization hits stride.  Check out my note from Monday.




Some Notable Call Outs


  • Aside from a better than expected quarter, there were a couple of noteworthy callouts from Walgreen’s 4Q conference call. First, WAG confirmed that the flu season is off to a record start. The company has already distributed more than twice as many flu shots this year so far vs. the entire flu season last year. Secondly, Walgreen showed impressive inventory management. On total sales growth of 7.6%, inventories were down 6.3% overall and 11.1% on a per store basis. These results are worthy of a double take as we normally see this type of sales/inventory spread at an apparel retailer!


  • It’s no secret, but it bears repeating. Zappos is making a big push into apparel and its Chief Merchant believes it will be the company’s largest category in 5 years. We’re assuming that does not include any existing Amazon business but if they do, it will be even larger. As more details emerge from Zappos recent advertising agency review, it is becoming clearer that the strategy to tap into apparel is slowly and steadily building.


  • If you’re already annoyed by e-mail spam or a mailbox filled with catalogs, then be on the lookout for your UPS deliveryman. UPS announced that it is joining the direct-marketing business with a test, which delivers targeted promotions, premium offers, and samples from national retailers and consumer product companies. These “packages” will be delivered by hand along with orders a customer is already expecting. As most of the world looks to go “green” it seems that “Brown” is taking the opposite approach.


  • Nike's conference call highlighted action sports, basketball, and women's training apparel as strong growth categories in North America while running, football, men's training apparel, and sportswear were weak. Charlie Denson noted that overall running was down in pretty much every geographic region. Nike’s comments on the running category come as some surprise, as most U.S footwear retailers have been highlighting running (especially performance) as the top category within athletic footwear.





-ICSC retail industry report predicts holiday sales up 1% for 2009 - A retail industry report released Monday predicts holiday sales will rise by about 1% or slightly higher, marking one of the first positive holiday forecasts this year. The International Council of Shopping Centers, a New York-based trade association for the shopping center industry, forecast sales at major chain stores, excluding Wal-Mart Stores Inc., will rise 1% for the combined months of November and December and gain 1.5% for the extended November-through-January season. Retail sales at a broad base of stores, as defined by the Commerce Department, are forecast to gain 0.9% for November-December and 1.6% for the November-through-January period, the group said. <>


-Moody's Investors Service said Tuesday it lifted its outlook for the U.S. retail industry to stable from negative - Moody's still cautioned that consumers are still facing layoffs, tighter credit and low housing prices, all of which are dampening spending. The revised outlook means that Moody's expects fundamentals in the retail sector will remain stable in the next year to 18 months. But Moody's warned that consumer demand for apparel still remains weak, and department stores are cutting back on inventory. That hurts revenue for apparel companies, which stock their merchandise in the stores. The ratings agency doesn't expect this holiday season to be as promotional as last year because inventory and demand are better aligned. Moody's believes retailers that will fare better are those with somewhat less discretionary products, such as children's clothing, and those who offer clothing at cheaper prices. <>


-U.K. Consumer Confidence Jumps the Most in 14 Years - U.K. consumer confidence jumped in September by the most since 1995 as optimism about the economy’s prospects rebounded, GfK NOP said. An index of sentiment rose to minus 16, the highest since January 2008, from minus 25 the previous month, the market researcher said in an e-mailed statement today in London. A gauge of confidence in the economy for the next year increased 13 points to 4, the highest in more than a decade. <>


-Global: Steady growth in global apparel manufacturing despite downturn - Revenues in the global apparel manufacturing industry are forecast to grow at an average annual rate of 3.5%, to $476.8bn from 2008 to 2013, according to forecasts from market research firm IBIS World. Despite the world growth will still be low due to the current financial crisis, demand for basic clothing is likely to remain fairly constant. <>


-India: Clothing exports slid 6% in July - India's garment exports fell by more than 6% in July due to the slowdown of its major markets of Europe and the US, according to the latest figures from the country's official body of apparel exporters APEPC. During April to July, garment exports decreased by an even higher 9.3% to $3.31bn, from $3.65bn in the same period last year. <>


-Big 5 Sees Q3 EPS at Top of Range, Comps Ahead 1.6% - Big 5 Sporting Goods Corp. said comparable store sales for the third quarter increased 1.6%. The company now expects earnings per diluted share for the third quarter to be at or near the upper end of its previously issued guidance range of 27 cents to 34 cents. For comparative purposes, the company's EPS share for the third quarter of fiscal 2008 was 21 cents.

The sporting goods chain updated its guidance in anticipation of the company's upcoming presentation at the Thomas Weisel Consumer Conference on October 1, 2009 in New York. <>


-It’s a pivotal season for the 120-year-old Modell’s sporting goods, apparel and footwear chain - The $600 million, 144-unit regional retailer hopes to score big with a prototype opening Thursday in the Post Road Plaza in Pelham Manor, N.Y., representing the first dramatic updating in 15 years for the family-owned business. Compared with other Modell’s locations, the prototype is streamlined with delineated “category shops” devoid of clutter, has more seating, wider aisles and a virtually unobstructed vista across the selling floor. “Consumers want a convenient and compelling shopping experience. Those are our two catchwords,” said Seth Horowitz, president of Modell’s Sporting Goods, during a preview of the 18,000-square-foot, one-level Pelham unit. “Although much of what we’ve done here seems simple, it’s game-changing,” Horowitz said. The project reflects extensive consumer research over the past year, including 24 focus groups, 12,000 consumer surveys by e-mail, and accompanying 200 shoppers through the stores to gauge reactions. It also reflects the Modell family’s desire to shed the chain’s outdated image and invest in brick and mortar despite the tough economy. Since the mid-Nineties, growth has stemmed from store openings. Modell’s stores typically range from 13,000 to 20,000 square feet and are located in power strip centers, regional malls and high-traffic urban locations in the Northeast. <>


-M&S Says Sales Are Stabilizing, Predicts Rising Costs - Marks & Spencer Group Plc, the U.K.’s largest clothing retailer, said sales are stabilizing after two years of declines and forecast an increase in costs as it takes on more temporary workers at Christmas. Sales at U.K. stores open at least a year fell 0.5 percent in the 13 weeks ended Sept. 26, the London-based company said today. That beat the average estimate of nine analysts surveyed by Bloomberg News for a 1.6 percent drop, and represented an improvement on the previous quarter’s 1.4 percent decline. <>


-American Apparel has fired about 1,500 immigrant production workers in the last month - The firings occurred because the immigrant workers were unable to prove to federal authorities they had the legal right to work in the U.S.  American Apparel’s made-in-the-U.S.A. and pro-immigrant stance have become integral parts of its brand image. The 1,500 employees who have departed represent 27% of the 5,600 factory workers employed at American Apparel before the federal investigation. In a filing with the Securities and Exchange Commission, American Apparel has said the firings would not have a material impact on the company because of its healthy inventory levels and continuing manufacturing capacity. American Apparel also has hired a “substantial” number of new employees over the past year, and may seek to hire “a few hundred” replacement workers in the near future for the 1,500 who have left, Schey said. <>


-ANN TAYLOR’S NEW SPOKESWOMAN - Catherine Fisher, former senior vice president of corporate communications at Tommy Hilfiger, has joined AnnTaylor Stores Corp. in the new post of vice president of corporate communications, reporting to Kay Krill, president and chief executive officer. The company said Fisher will be responsible for corporate media relations, internal corporate communications and philanthropic initiatives. Prior to her time with Tommy Hilfiger, she held marketing and public relations positions with Joseph Abboud Co. GFT (USA) Corp. and Calvin Klein Menswear. <>


-Sears Holdings Corp. on Tuesday agreed to pay $6.2 million to settle a class-action lawsuit filed by the U.S. Equal Employment Opportunity Commission for alleged disability bias. The EEOC filed the case against Sears, claiming it failed to provide the required accommodations for employees returning from workers’ compensation leave who remained disabled, as mandated by the Americans with Disabilities Act. <>


-Wellco Enterprises will open a new manufacturing and distribution center next month - The maker of Wellco Footwear and Smith & Wesson shoes will open a new manufacturing facility and distribution center in Morristown, Tenn., next month. The 110,000-sq.-ft. facility will be used to manufacture military shoes, work boots, outdoor sporting footwear, as well as law enforcement shoes. The opening is expected to add more than 100 jobs in the area and concludes a multistage reorganization that included shifting production elements and closing a smaller facility in North Carolina. <>


-Giorgio Armani SpA announced three senior management changes, which signaled an easing of the 75-year-old founding designer’s workload - Effective Jan. 1, Gianni Gerbotto will leave his post as general manager of the Italian fashion group and take board responsibility for financial management and investments. Livio Proli, currently general manager of subsidiary Simint SpA, will replace Gerbotto as general manager of Giorgio Armani. John Hooks, who is currently deputy general manager, will become group deputy chairman and will join the board of directors with responsibility for global strategy and markets and brand development. Hooks will maintain all his current responsibilities for the group’s foreign subsidiaries, Armani said. <>


-Women’s footwear brands are taking cues from the sailing sector for resort ’09 and spring ’10 - Nautical-inspired flats and heels embellished with anchor hardware and rope and cork details make a statement in standout reds, whites and blues. <>


-Alabama Retail Association honored Hibbett Sports - Statewide retailers gathered Tuesday at The Club to honor their own and hear from one of Alabama’s most experienced retailers. The Alabama Retail Association and University of Alabama at Birmingham School of Business hosted the 2009 Retail Day, where Hibbett Sports CEO Mickey Newsome shared strategy on his sporting goods company. Strong information systems and low operating costs have been key to Hibbett’s success throughout its history, as cardboard boxes are continuously reused – for a savings of about $100,000 a year – and pennies are scraped starting at the top, he said. “Water runs downhill and it has to start at corporate,” he said.  <>


-Kohl's to Launch 35 New Stores, Lauren Conrad Line - Mid-priced department store chain Kohl's will open 35 new stores at former Mervyns locations this week, as well as launch an exclusive clothing line from MTV reality star Lauren Conrad. Thirty of the new store openings are located in California. <>


-Nautilus to Divest its Commercial Business - Nautilus, Inc. said it is actively seeking buyers for substantially all of the assets, liabilities and ongoing operations of its commercial business. The fitness company said the move will enable it to focus its resources solely on its branded consumer businesses.

Nautilus said this is a further step in the company’s restructuring plan of improving its cost structure and focusing on the consumer market through the direct and retail businesses. <>


-Kmart Rolls Out First "Fab 15" Holiday Toy List - More than a dozen Santas were on hand to help unveil Kmart's first-ever "Fab 15" holiday toy list. A number of licensed items based on popular kids' properties made the lineup, which was revealed yesterday morning in New York City. <>




RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough): AZO, WRC, DKS


09/29/2009 10:45 AM


See Levine's note "The Repurchase Zone" from 9/23, and you'll get the point. Stock is up today, so we're re-shorting it on green. KM


09/29/2009 10:35 AM


Looking for names in Discretionary that have seen massive short covering. McGough made cautious comments on BofA's bullish WRC initiation this morning. Shorting high. KM


09/29/2009 10:07 AM


Keeping a trade a trade. Booking a small gain in DKS after a weak consumer confidence read-through and a solid 2-day move. KM

DRI – Comments on September sales

Senior management at DRI just made comments about sales trends in September.  In September, DRI blended SSS are running similar to August levels (OG -2% to -3%, RL -6% and LH -8% to -9%).  They also believe the industry trends in September are running similar to August (MK SSS – 5.4%).


The chances that same-store sales for the industry are positive in Q4 are looking slimmer every day. 








Despite a recent “glut of Asian stock deals”, Wynn Resorts sold 1.5 billion Hong Kong listed shares in its Asian IPO at the top of its price range to raise $1.63 billion.  The IPO’s range was HK$8.52 to HK$10.08, with Wynn selling 25% of the business to the public.  Some commentators are see valuations as being too high and believe that a strong debut will be difficult for Wynn.  Wynn’s successful sale will now put pressure on Las Vegas Sands ahead of their public offering at the end of November or early December. 





The Finance Services Bureau announced that the government’s income from direct gaming taxes fell 9.5% in the first eight months of the year when compared to the same period in 2008.  Gaming taxes accounted for 73.6% of the government’s total receipts during the same period, as compared to a share of 80.2% in the same period of last year. 





LVS’ halting of their construction projects on Macau’s Cotai Strip brought the city’s explosive construction activity to a standstill.  Some real estate funds, such as Telok Macau Real Estate Fund, are now focusing on going “back to basics” and building residential projects rather than the large “glamour projects” that typified the construction boom of a few years ago. Genevia Lam, a VP at Telok, says that the developers at the time ignored the reality that the luxury apartments, measuring from 1,200 to 2,700 square feet and priced at upwards of HK$3 million each, were “beyond the reach of the general public.”


To get back to basics, Telok Macau Real Estate Fund is building a residential project, scheduled for completion in October 2010, where units will be prices between HK$1.3 million and HK$3.5 million or at an average of HK$3,000 per square foot.  Commentators are predicting that mass residential prices in Macau will rise to between HK$3,500 and HK$4,000 per square foot from the present average of HK$2,800 per square foot.  Residential prices in Macau are said to be 30% below the market peak of December 2007.





Tomorrow is the 60th anniversary of the establishment of the People’s Republic of China.

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.


“Yes, we have to divide up our time like that, between our politics and our equations. But to me our equations are far more important, for politics are only a matter of present concern. A mathematical equation stands forever.”
-Albert Einstein
Math is important. Economics isn’t math, yet. It’s a social science that continues to evolve, particularly in Washington and on Wall Street.
In the last 3 market days, we have had 3 Fed Heads come out hawkish. Warsh, Plosser, and Fisher – I’ll call them The New Reality’s 3-some.

When I think about the interconnectedness of politics and equations, I really use one as a backboard to make a macro call on the other. After all, politicians are proactively predictable. Math is marked-to-market.
I’ve been calling for a Reflation Rotation in Q3. Every quarter, my Macro Team here at Research Edge comes out with 3 intermediate term Macro Themes. Intermediate term, by our definition is 3 months or more in duration.
Reflation Rotation simply means moving from year-over-year DEFLATION in Q3 to accelerating year-over- year inflation in Q4. Because everything that really matters in our Macro models happens on the margin, this directional move from depressed/deflated prices to reflating ones becomes math that the Fed Heads aren’t allowed to ignore.
Charles Plosser is the President of the Federal Reserve Bank of Philadelphia. He’s a business cycle economist. So am I. He earned both his Ph.D. and MBA at the University of Chicago. My teammate, Todd Jordan, got his MBA there too and, as Jordan likes to say, “we’re math guys”…
Plosser found a special place in Research Edge’s heart last night while speaking at Lafayette. First, he used 2 of our 3 durations. In speaking about inflation risks, he talked about the “intermediate term and long term.” In Research Edge speak, those are called TRENDs and TAILs.
Secondly, he went on to say that “Our credibility depends on it”…
“Our”, being the Fed, and “it”, being the math.
Thirdly, and most emphatically, Plosser reminded Americans that the US Federal Reserve must “take the necessary steps to prevent a second Great Inflation”… Finally, he said that the Fed would need to raise rates “well before unemployment rates and other measures of resource utilization have returned to acceptable levels”…
Now, combined with Fed Governor, Kevin Warsh’s comments on Friday and President of the Federal Reserve Bank of Dallas’ (Richard Fisher) comments yesterday, this 3-some is teeing us up for a Q4 from the TIPs!
Pardon the pun, but TIP (Treasury Inflation Protected Bonds), is where we have had our highest allocation in our Asset Allocation Model for the better part of the last 3 months. The “tips”, are also where the world’s greatest golfers hit the ball from. For the Credibility Crisis facing America’s Financial System, this is some serious progress.
The Fed doesn’t change it’s rhetoric haphazardly. Never forget that this is an extremely politicized organization. Explicit changes in Fed rhetoric are more important than interest rate changes themselves. Markets move on expectations, not yesterday’s news.
This morning, you are seeing the Macro Market move like this 3-some just did off of the tee. US Treasuries are getting pounded into the sand trap and the Piggy Banker Yield Curve continues to compress. You know we math guys like 3s. I like this 3-some, and I’d like to give you these 3 macro lines to consider:
1.      Rates: Immediate term TRADE breakout line for 2-year US Treasury Yields = 0.97% (the market has driven the green here to 1.03% this morning).

2.      Spreads: Yield Spread is 229 basis points. For the Bankers, that’s a bunker (10-year minus 2-year UST yields peaked at 276bps in May of Q2 – as good as it gets).

3.      Currencies: immediate term support for the USD is now at a higher-low for the 1st time this year; $75.97 on the USD Index needs to hold the green!

While this 3-some has every opportunity to get hammered by a Bernanke ball from behind, understand that the game has changed here this morning. We, as risk managers of this crash course of US politics and equations, are being paid to pay attention.
I have sold out of all of my Commodity exposure other than Gold (gold price had a fantastic Q3, tacking on an impressive +8% gain). As Reflation Rotation finds its way into US Q4 CPI and PPI reports, I do not want to be long everything oil and copper anymore. This 3-some is finally fighting that REFLATION wind with 3 extra clubs.
My immediate term TRADE lines of support for the SP500 are now 1044 and 1077, respectively.
Best of luck out there today,




EWG – iShares Germany
Chancellor Angela Merkel won reelection with her pro-business coalition partners the Free Democrats over the weekend. We expect to see continued leadership from her team with a focus on economic growth, including tax cuts. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; with fundamentals improving in a low CPI/interest rate environment, we expect slow but steady economic improvement from Europe’s largest economy.

CAF – Morgan Stanley China Fund
A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the more volatile domestic equity market instead of the shares listed in Hong Kong. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth. Although this process will inevitably come at a steep cost, we still see this as the best catalyst for economic growth globally and are long going into the celebration of the 60th Anniversary of the People’s Republic.


GLD – SPDR Gold We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.   

XLV – SPDR Healthcare We’re finally getting the correction we’ve been calling for in Healthcare. We like defensible growth with an M&A tailwind. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.

CYB – WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP – iShares TIPS The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

XLP – SPDR Consumer Staples Looking for low-beta short exposure to US Consumer spending. Consumer Staples short interest is low, and the stocks are over-owned.  

LQD – iShares Corporate Bonds Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates that bonds will give some of that move back. Shorting ahead of Q4 cost of capital heightening as access to capital tightens.

DIA  – Diamonds Trust In the US, we want to be long the Nasdaq (liquidity) and short the Dow (financial leverage).

EWJ – iShares Japan While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

SHY – iShares 1-3 Year Treasury Bonds  If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.


Despite an easy comparison – slot hold % was abnormally low last year – Strip revenue may decline in the mid-teens in August based on an ugly 10% passenger drop at McCarran Airport.


McCarran airport announced that August passenger traffic declined 9.8% year-over-year.  We’ve run our model and conclude that, assuming normal table and slot hold percentages, Strip gaming revenues will have declined 16% when Nevada releases the monthly figures in two weeks.  A decline of this magnitude is not pretty under any circumstances but considering that slot hold percentage in August of 2008 was only 5.9%, well below the typical 7%, the 16% drop is particularly telling.  As a result of the slot hold delta, slot revenue declined 15% on a volume decline of only 3.5% last year.


The chart below provides our projections.  We expect slot and table volumes and table revenues to each decline over 20%.  The only bright spot will be slot revenue which we believe will fall by only 8%.  The August downturn is exacerbated by this year’s calendar when most of the Labor Day weekend fell in September of this year versus August of last year.  If we’re right, August could be the worst performing month since February when Strip gaming revenues fell by 23%.







HOUSING: Euphoria is getting priced in!

U.S. home prices as measured by the S&P Case-Shiller 20-city home price index fell by a smaller than expected 13.3% year-over-year to a level of 144.23 in July.  The consensus economist view was expecting prices to fall by a larger 14.2% year-over-year.  Looking at the month-to-month trends, the 20-city home price index rose 1.6% for the month after increasing 1.4% in June.


Case Shiller is a very important data point when looking at the health of the housing market, and we used it successfully early in the year to call the bottom in the housing market.  It is important to understand, however, that by the time of release the data is so old that it is primarily relevant as a historical trend indicator.   


As such, the data that was reported today is a lagging data point – it is July data - and we are in September.  To that end, it really shows the rear-view that people are imputing into the forward look for equity prices: Bullish confidence that the worst is behind us.


While it is too early to get bearish on the marginal change in housing, we are getting closer.  To give you a preview for one of our themes as we look toward 2010 is a bearish stance on housing.  We will continue to monitor how things progress, but the acceleration in month-to month trends should begin to slow at the end of 1Q10.


Howard Penney

Managing Director


HOUSING: Euphoria is getting priced in! - hp1a


HOUSING: Euphoria is getting priced in! - hp2b


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.