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OCTOBER 2, 2009


This morning Bloomberg made the call that our commodities guru, Andrew Barber, made in August (see our 8/28 note). Simply put, stress in the cotton supply chain likely created a floor for cotton prices in the mid $0.50s, and even today’s $0.61 has few fundamental reasons to fall.

With no change in the data out of China (the August report has yet be released) the incremental weakness has stemmed from persistent droughts in India along with regional issues in Brazil where commodity shortages in Argentina have producers rotating to more profitable crops.

Another dynamic worth noting is continued consolidation of the cotton industry’s traders. According to a Bloomberg report this morning, four major traders now control more than 50% of cotton trading worldwide. Not only do smaller traders play a critical role in price liquidity, but they also help mitigate both soft and hard collusion within the industry. Further consolidation means increased spreads and volatility. Heading into ’10, this translates to ‘long pricing power’ and short commodity exposure. Below are the key factors that we outlined back in August:

Stockpiles:  The most recent data point from China, released by the National Development and Reform Commission, was that China imported 131,400 tons in July, which was down 38% yy albeit a slight improvement from 41% yy declines in the 1H. This has led to a tightening of world stocks as reflected in a global stocks-to-use ratio of 51.0% in August down from 51.3% in July. In addition, there has been recent speculation that China might increase cotton volume import quotas over concerns that state stockpiles will not be able to supplement the shortage of supply. Since China is the world’s largest cotton importer, this could be bullish as it relates to future cotton prices.

Production: Global production levels are down with the U.S. at its lowest level in 11 years and estimates for India’s output (world’s second largest producer) is down 15-20% because of drought conditions.

Demand: We’re not making a bull case around global consumer demand, but we find it very difficult to make a compelling bear case. Inventories in the global system of both raw and finished product remain fairly low, healthy, and in synch with current consumer demand. Looking at all the different scenarios, we think it’s more likely than not that demand moves up over the next six months. Inventories are tight around holiday, and then wer’e looking at spring/summer ’10 where we comped against not only a horrible recession, but a weather-impacted period where many consumers simply extended the prior year’s wardrobe. There’s going to be pent up demand at some point.

If we actually start to emerge from this global recession with cotton stockpiles low, production down, and demand picking up on the margin, I’d hate to be on the short side of cotton exposure.

Of course, the theme here will be long pricing power (brands and large retailers), and short commodity exposure (Gildan and to a lesser extent Hanesbrands). It’s too early to see this play out in 2H09, but it will be an increasingly important theme in 2010.



Some Notable Call Outs

  • Amazon UK has launched its standalone footwear and handbag site Javari.co.uk. Javari.co.uk is based on Amazon’s Japanese footwear site Javari.jp, which launched in March. Amazon has sold shoes since 2007, but said that a standalone site will enable it to attract a larger range of brand names. We’re still rather amazed at how retail investors generally don’t realize the power and influence as Amazon scales into these new categories. Amazon has already owned footwear site Endless.com and in June acquired Zappos. Don’t be one of those people that starts to quantify the impact because a blowup in another name in the supply chain is telling you to.
  • Meetings at both Skechers and K-Swiss headquarters this week support our contention that FL is looking to broaden its product portfolio under new CEO Ken Hicks. Lady Footlocker is now carrying Shape-ups and spring orders for K-Swiss’s Tubes (running shoes) are expected to be solidified over the next month.
  • Early testing of Shape-ups in Europe is positive if not better than early domestic demand. Not only is interest accelerating to comparable levels at a faster rate, but demand from men accounts for nearly 30% of sales in Europe. By comparison, the vast majority of domestic demand is from women and children.


As we often say at Research Edge, prices don’t lie. The market is always telling us something. Here are some names that are showing outside movements relative to the market, peers, and volume trends...

  • ICON bounced yesterday after its blo up earlier in the week, but on dramatically lower volume. Too early to say if its found a bottom here.
  • BIG and WAG are up on all durations of price and volume.
  • Not fun to be a Household Durable yesterday. The space was off 4x the market with meaningful pick up in volume.
  • Overstock is still one of the best three-week performers, but is losing price momentum while gaining steam on volume. Interesting turn on an oft hated name.
  • PAG, MHO, FBN, SKS, and SPF are worth noting for negative performance on all durations with volume up across the board.



-Wal-Mart further taps into India & China; Marks down 100 holiday toys to $10 - The world's biggest retailer Wal-Mart is going to further expand its presence in new markets of India and China. As Asia will lead the global economy to recover, the retailer will speed up expansion in the region. It currently operates at about 630 locations in China, India and Japan, with 24%of its sales coming from its international division. Just in time for early holiday shoppers, the $10 toy section at Wal-Mart stores is back. This year the "rollbacks" have been expanded to more than 100 toys. Featured licensed toys in Wal-Mart's promotion include Transformers: Revenge of the Fallen deluxe action figures; Barbie Cut and Style Rapunzel; and Littlest Pet Shop Online Animals and play pack sets. <fashionnetasia.com> <licensemag.com>

-India emerging as the leading organic cotton producer - Indian textile companies are going to take up a leading share in the global organic textile production as the country is emerging as the important organic cotton producer, said Selvam Daniel, Managing Director, global certification body ECOCERT India. "In 2007-08, global organic cotton production increased by 152% to 145,872 metric tons or 668,581 bales," said Daniel. <fashionnetasia.com>

-Clean Energy Bill May Increase Costs for Textile Sector - Climate change proposals before Congress could exact a toll on the U.S. textile industry, which will face a substantial increase in operating costs that could potentially jeopardize tens of thousands of U.S. jobs, according to a report released Thursday. President Obama has made clean-energy/climate-change legislation one of the pillars of his domestic agenda, and Congress is moving on the issue. Sens. Barbara Boxer (D., Calif.) and John Kerry (D., Mass.) unveiled a draft bill Wednesday kicking off Senate consideration for the first time this year. The legislation would mandate a 20 percent reduction in greenhouse gas emissions from 2005 levels by 2020. The House approved a bill in June that would cap greenhouse gas emissions beginning in 2012 and seek to reduce them 17 percent by 2020, relative to emissions in 2005 as a base year. <wwd.com>

-Pets at Home assesses IPO potential - Specialist retailer Pets at Home has moved closer to a flotation with the appointment of JP Morgan Cazenove as joint sponsor, joint bookrunner and joint global coordinator.JP Morgan Cazenove will “examine the options for a potential IPO of the company in 2010, subject to market conditions”, the retailer revealed. <retail-week.com>

-Nike Denies it Re-Signed Michael Vick; Quits Board of U.S. Chamber - Nike Inc. is denying a report that it signed Michael Vick to an endorsement contract. The Associated Press had said that the endorsement deal was announced during a panel discussion at the Sports Sponsorship Symposium by Michael Principe, the managing director of BEST, the agency that represents Vick. Nike spokesman Kejuan Wilkins said no endorsement deal is in place. In other news, Nike said it would resign from the board of the United States Chamber of Commerce, becoming the latest company to break with the group over climate policy. Nike said, however, that it would remain a member of the chamber, unlike three large utilities — Pacific Gas and Electric, PNM Resources and Exelon — which recently announced plans to pull out. The chamber has been under fire for its outspoken resistance to potential carbon regulation from the Environmental Protection Agency or from Congress. <sportsonesource.com>

-CIT Mulls Restructuring as Deadline Arrives - The fashion and retail industry again held its breath Thursday as CIT Group Inc. attempted to stave off bankruptcy for the second time in three months, this time with an exchange offer to eliminate 35 percent of its debt. Fashion industry executives and their lawyers, accountants and consultants were only somewhat reassured by word that, if CIT does go bankrupt, it would be the parent holding company that files Chapter 11 and not operating subsidiaries such as the commercial services arm responsible for the majority of factoring in the apparel industry. A prepackaged Chapter 11 is understood to be developed in case the debt swap fails. <wwd.com>

-Burberry Says Japanese Royalty Payments to Increase Next Year - Burberry Group Plc, Britain’s largest luxury goods maker, said royalty payments from its Japanese licensing partners will increase from next year, boosting annual operating profit by about 4 million pounds ($6.4 million). <bloomberg.com>

-Heelys' New CEO Elected to Board - Heelys Inc. said it has elected current CEO and President Thomas Hansen to its board of directors, according to a filing with the Securities & Exchange Commission. Hansen joined Carrollton-based Heelys in August, replacing former CEO Donald Carroll, who resigned. Hansen had worked in product development and marketing for about 30 years, before joining the company. <sportsonesource.com>

-CVS Union Critics Say FTC Seeks More Information - A union group that alleges anti- competitive practices by CVS Caremark Corp. said U.S. regulators have requested an additional meeting to discuss the issue. Officials of Change to Win, a 6 million-member union federation, said they have an Oct. 15 meeting with staff of the Federal Trade Commission on the group’s contention that the 2007 merger that created CVS Caremark has raised prescription drug prices. FTC Chairman Jonathan Leibowitz declined to comment on the possibility of a formal investigation. <bloomberg.com>

-Zara’s UK operations knocked by £20m pre-tax loss - Zara UK, the UK subsidiary of Spanish fashion giant Inditex, has slumped into the red. The group, which operates the eponymous chain, Pull and Bear, Massimo Dutti and Bershka in the UK, suffered a pre-tax loss of £20m in the year to January 31, versus a £4.5m profit the year before. <drapersonline.com>