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A Bad Idea Exposed

Well, it looks like going up against Nike and Urban/Anthropology by endorsing the likes of Stephon Marbury and Sarah Jessica Parker, paying up for expensive big-box leases, and selling product at prices rivaling Wal*Mart's in an inflating cost environment was not such a good idea after all.

Steve and Barry's started down the high quality/low price retailer path back in 1985. But it ramped up its growth trajectory in - you guessed it - 2005-2007 (up to 250 stores). I'm all for the high quality/low price model -- but there are some spots where it simply does not work. Footwear retail is one of them. Humor me and take a moment to look at my posting from last night on Whitehall's Chapter 11 filing. This period was a statistical anomaly as it relates to the sheer lack of bankruptcies. Steve and Barry's did not file, but it reportedly (WWD) lost key designers several weeks back, and now is looking for a $30mm capital infusion. This is not smelling like it is headed in the right direction.

I should note that there is virtually no receivables exposure here for any major brands given the private label and licensed nature of S&B's product. I'm inclined to think that the biggest constituent on the hook will be the REITs who will have to find a home for the 50k-100k box size to the extent that S&B were to downsize. If S&B went away entirely, that'd be a nice little kicker for Payless.

UA: Brand vs Company vs Stock

I've been back and forth on UA. Footwear is solid, but apparel rolling. I believe in growth, but not margins. Fundamentally, I think I've nailed it. But collaborating with my Partners has me less beared-up on the stock.


At Research Edge, we're all about empowering our clients with both our process and insight to optimize timing and sizing of a position to maximize Alpha. A massively important part of this process is our morning meeting, which - by a long shot -- is the most thought-provoking forum I have ever had the honor of being part of.

This morning I laid out my recent conflicting fundamental thoughts on Under Armour - and how such solid performance and execution I am seeing in the footwear business, is being offset by far greater promotional spend in apparel than I think is perceived to be the case (even after the company's earnings guide down earlier this year).

That's when my Partner Keith McCullough chimed in with something that sounded like this... The stock acts like death, but short interest is mountainous, and the average hedge fund's short thesis is as stale as a 3 month old loaf of bread. At $27.28 it's oversold, and worth a shot on the long side, provided that you have a catalyst that is better than toxic. The last big volume days for UA were on the up days of the week of May 12th. Sharp and fast squeezing of a consensus short position.

Pardon me for sounding cocky, but I think I can rip apart a business model, and identify what margin and capital structure is needed to achieve a given level of top line growth as good as just about anybody. As good as I think I am in this regard, my team here at Research Edge collectively crushes just about any standard I can conjure up. It is when I can draw upon insight from my Partners here at Research Edge to make 1+1=3.

My thoughts on UA the brand and the business model remain unchanged. But after the 10 minute collaborative valuation/trading discussion, I walked out of our morning meeting more upbeat near-term on the stock.

Yes, A Bankruptcy Cycle Exists

Whitehall Jewelers filed Chapter 11 today in yet another reminder to the investment community that a bankruptcy cycle does, in fact, exist. I'm amazed at how short the Street's memories are. People seem to be looking back to the past three years when it was safe to own over-levered, junky consumer names, and think/know that there would ultimately be a strategic or financial bid at some price.

Maybe that was a safe bet in 2005 and 2006 - and even the first half of 2007. But this was a rather unique period. Let's put on our historical hats on for a moment. Looking back all the way to 1934 (when FDIC data first became available) there was at least one (and usually multiple) financial institution bankruptcy filing in every single year, except - you guessed it - 2005 and 2006.

Now that's ticking up again, and yes, these are the same institutions that lend to businesses and consumers alike. As such, retailers like Linens'n'Things, Sharper Image, Goody's, and now Whitehall are paying the price. I cannot possibly imagine that the buck stops here.

Hang on folks, there's more to come...

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If You Do Macro You Won't Do These Stocks

We as a firm are concerned. We have the strongest macro call on the Street, in my opinion, but it's not positive. If you know anything about lodging you know that RevPAR is a function of supply and demand and demand is driven by Macro.
  • I'm not just worried about GDP. This time around the lodging beta could be significantly higher than the typical 1.0. Airline capacity is declining and airfares are going up. About time if you are an airline but clearly not good for the hotel industry. It might be time to invest in video conferencing finally, but probably not the time for lodging stocks. There is no RevPAR story, not here, not globally. As far as I can see the only growth story is global brand penetration driving new units. While certainly an investable story, it is a long term thesis. The near and intermediate story may be margins. We can argue about where the economy is heading but history shows us that margins have a long way to fall should we hit a downturn. As the chart displays, margins fell by a whopping 850 bps during the last downturn (2000 to 2002). Applying that margin degradation to the most recent revenues posted by the big four lodging companies results in an average EBITDA hit of 45%.
  • We don't want to be all gloom and doom. The demand for international branded hotel product appears insatiable. We see Marriott and Hilton as the primary beneficiaries although Starwood should capitalize as well. The supply situation is favorable domestically and more fee based business models could soften the economic blow. However, estimates look like they need to come down, potentially in a big way. In other words, as we like to say at Research Edge: Investors are not bearish enough.

SKX: Irony Can Be So Ironic

Here is a lawsuit that is up there with the guy that sued Starbucks because his beverage was too hot. Skechers, the king of knocking off other brands' IP, has filed a lawsuit against a company called Aetrex for - you guessed it - patent infringement. I can try to describe the irony here, but words cannot do a better job than the picture below.

While this development has little near term investment significance, it is very noteworthy for Skechers. Given how frequently SKX is sued for patent infringement, I wonder how much more juice its plaintiffs will have now that SKX has acknowledged the economic harm caused by such behavior.

I still think that this company is overearning by a good 3 points (see my 6/4 post).

LEH: Revisiting it's prior lows...

We have some good friends at Lehman and, for their sake, we do not like to see the marked to market effects of senior management's lack of judgement, but we would compromise our process if we didn't continue to call this one like it is.

Lehman was down another -5.8% today to $22.80, getting closer to my target, which i am going to move to $21.85...

KM

(chart courtesy of stockcharts.com)

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