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October 19, 2009





Here’s a look at the setup headed into this week for some key names in retail. SKX will smoke numbers, but it needs to. COH is teed up for a gross margin beat, but I don’t know if I care. DECK has tanked on every print over 4 quarters, but I don’t think it will this time.


COH (Tues am): Estimates appear reasonable, though those looking to call the bottom will be early.  This company has perhaps the best setup of anyone as it relates to going up against easy Sales, GM, and SG&A compares.’  Unfortunately, that approach is as consensus as consensus can be. Increased unit sales due to lower price points sounds great -- but isn’t this a company that had a tremendous 7-year run by taking UP price point? Now why is it a good idea to undo that? Also, if you take price down 10%, guess what you need to do in order to keep revenue even…  Coach’s saving grace here is that last quarter ended with its best sales/inventory spread in over 2 years. When I do the math, it sets up for a potential Gross Margin beat.


COH sentiment: The Street likes this one, with short interest in the low single digits, and 64% of ratings ‘Buy.’ The only ones not buying is management, who bought at $10, but has been absent since (stock now at $34).


SKX (Wed pm):  Best fundamental setup of the week, but ‘expectations game’ matters big time. Revenue trends both accelerating in their own right as ‘Shape Ups’ continue to gain momentum, and are also going up against easy numbers vs. last year on virtually every line of the P&L and balance sheet.  We’re at $0.41 vs. the Street at $0.35. Keep in mind that SKX is second only to PSS as it relates to exposure to China, and should benefit from lower sourcing costs in 2H (i.e. it should start with the numbers about to be reported).  The math is working out in a way where net years’ numbers are looking low by as much as 50%.  Given my massive aversion to owning this name from a quality perspective, I need to quantify potential downside six ways ‘til Sunday before I really jump on the bandwagon. For those of you that are less risk averse, this one looks good – though you may need to model something in the higher $0.40s to get to upside on the print.


SKX sentiment: With a move from $6 to $22, do you think that just MAYBE the market has figured out what I noted above? Yes, of course. If we use $1.50 in EPS as a 2010 base (Street is just shy of a buck) then we’re at 11.3x EPS today after netting out $5ps in cash. That’s fair to me. Short interest has come down to 9% -- a level not seen since Dec 2007.


DECK (Thurs pm):  Let’s face some facts, it has not been fun for any DECK shareholder on the day of each of the last 4 prints – with the stock down every time at an average of -16% despite smoking the quarter every single time. I think numbers are doable, but don’t think this is a quarter where we’ll see a ‘smoke.’  I’m also not sure that’s bearish with short interest having gone from 12% to 22% over 4 months.  Another fact to face… UGG is a brand that continues to work. It is not a fad, nor is it a trend. Call any buyer at Nordstrom – not even in the shoe department, but also outerwear and accessories. If you don’t have time, check out the UGG site, and then try to buy things on the site (near impossible given tight allocation and distribution). These guys did it right. It is here to stay.


DECK sentiment: So what are we looking at? A company with $8 in earnings power and $13.50 in net cash trading at $88. That’s 9.3x earnings. It also compares to COH at 15x. I’ll take the over/under on DECK.












Some Notable Call Outs


  • At a time when most companies remain cautious of 4Q expectations, Joes Jeans set the tone stating that it expects to top its 16% top-line growth in Q3 with an even better Q4 sending shares to the moon up 50% on Friday. It looks like Kellwood, which has been vocal about its desire to acquire a denim brand, just missed its chance at the California-based company.


  • After years of investing in its online business, AEO reiterated its sales goal of $0.5Bn by the end of 2010, which would account for nearly 20% of sales – among the highest for traditional brick and mortar retailers. The company was also quick to point out its conversion rate of ~3% nearly twice the Internet average. While most retailers are in the early stages of building out their online presence, AEO is realizing double-digit growth and meaningful contributions from its efforts.





Kathmandu to Raise as Much as A$375 Million in IPO - Kathmandu, an outdoor equipment retailer in New Zealand and Australia, plans to raise as much as A$374.9 million ($344 million) in an initial public offering, following department-store operator Myer Group in selling equity as stocks rally. Kathmandu, owned by Goldman Sachs JBWere Pty and Quadrant Private Equity, will offer shares at between A$1.65 and A$1.90 each, it said in a prospectus today. The IPO values the stock at between 13 to 15 times Kathmandu’s estimated earnings in the year that ends in July 2010. Myer, Australia’s largest department store operator, plans to raise as much as A$2.34 billion next month, tapping a local stock market that has surged 53 percent from a March low. <bloomberg.com>


Li & Fung Plans IPO For Trinity - based sourcing giant Li & Fung Group is planning to take its luxury menswear retailer Trinity public. Over the weekend, Trinity sent out an invitation to a press conference on Tuesday at which executives will outline the details of its upcoming IPO. Back in August, Li & Fung managing director William Fung declined to comment on speculation that Trinity was preparing to list on the Hong Kong stock exchange. One local newspaper had reported that Trinity was aiming  to raise at least $200 million through an offer by the end of this year. Trinity operates over 300 retail stores in Greater China, including more than 30 retail stores operated through joint ventures in South Korea, Malaysia, Singapore and Thailand. <wwd.com>


Europe: Anti-dumping taxes on footwear to continue - The European Commission (EC) is proposing to extend anti-dumping duties on footwear imports from China and Vietnam for another 15 months. According to an EC document, "the anti-dumping measures on leather footwear should be maintained", which has upset many retailers who have been hoping to eliminate all taxes by the end of the year. However, the relevant EU trade committee is going to discussed this proposal before a final vote by all 27 member states in December. If the taxes - 16.5% on Chinese and 10% on Vietnamese leather footwear imports respectively - are adopted, they will take effect from January 2010 and lapse at the end of March 2011. <fashionnetasia.com>


CIT Amends Debt Offer - CIT Group Inc. on Friday amended the debt restructuring offer that began on Oct. 1 to include an acceleration of the repayment of new notes and the shortening of maturities by six months for all new notes and junior credit facilities. The company said the amended plan also increases the amount of equity offered to subordinated debt holders to reflect agreements with holders of the majority of its senior subordinated debt, and the plan now includes notes maturing after 2018 that were not previously solicited as part of the exchange offer. The exchange offers are set to expire on Oct. 29, except for the additional notes maturing after 2018, which have an early acceptance date of Oct. 29 and an expiration date of Nov. 13. <wwd.com>


Walmart Green Push Drives BASF Swapping Crackers for Lab Coats - Wal-Mart Stores Inc.’s new line of food containers made from corn starch also hold the promise of a revolution by global chemical companies including BASF SE. BASF is developing chemicals from bacteria and fungi instead of processing oil derivatives, cutting back on smokestacks that belch carbon dioxide into the atmosphere. Royal DSM NV will start a project by year-end with enzymes to produce succinic acid for car coolants. Mass production may start 2012. <bloomberg.com>


India: Textile industry hopes to create 12 million new jobs - Indian textile companies are going to generate 12 million new jobs for the country by 2010, a recent survey revealed. Generating 27% of the country's foreign exchange revenue, textile exports from India are expected to reach $50 billion by 2010 with continuous improvement in design skills and other factors. The industry is also set to meet international standards by planning to invest $5 billion in new machinery in the near future. <fashionnetasia.com>


Vietnam: New eco-tannery launched trial in Saigon - Atest run has recently been successfully completed at ISA Tan Tec’s new eco-tannery in Saigon, Vietnam. Company founder and managing director Tom Schneider said: "Our planners, technicians and builders have all worked incredibly hard. The test run has already made it clear that the quality of the products we make in Saigon is outstanding. We will more than meet our extremely ambitious targets for energy and water consumption."The leather produced at the new tannery uses 35% less energy and 50% less water than is required compared with the industry average. <fashionnetasia.com>


Room for Growth Seen in China's Smaller Cities - Investment organizations and multinational companies are plotting their expansion in China’s third- and fourth-tier cities, according to a new report from Asian marketing company Bates 141. While the first- and second-tier cities such as Beijing, Shanghai and Guangzhou are over saturated, some 4,000 smaller cities still have plenty of growing room for consumer companies, according to the study. These cities are home to 55 percent of China’s population. According to China’s National Bureau of Statistics, consumer retail spending in China’s regional cities in 2008 stood at 3.48 trillion yuan, or about $511 billion at exchange rates at that time. That figure compares to 1.84 trillion yuan, or $223 billion, for 2004. Bates 141 conducted interviews with consumers in eight regional cities throughout 2008 and 2009 to better understand their buying habits. According to the report, those living in rural areas evaluate and identify brands by quality assurance, reputation and real life experience. <wwd.com>


Jimmy Choo to Accessorize H&M - Fond of glamorous, oversize sunglasses and sky-high stiletto boots, Tamara Mellon is not a person one would associate with the word “bargain.” And dressed head to toe in an ultraviolet suede minidress and strappy sandals from the Jimmy Choo for H&M capsule collection, Mellon, founder and president of the luxury shoemaker, admitted: “It was a challenge for us to create high-quality pieces at an H&M price point.” The Jimmy Choo for H&M line, which hits some 200 H&M stores Nov. 14, is the first time the fast-fashion retailer will collaborate with an accessories brand after doing successful one-off apparel collections with the likes of Karl Lagerfeld, Stella McCartney, Viktor & Rolf, Roberto Cavalli and, most recently, Matthew Williamson. <wwd.com>


Dick's SG to Open Oregon Stores - Dick's Sporting Goods announced plans to open six new stores in Oregon, including the new Eugene location in a former Joe's Sports location in the Delta Oaks shopping center on November 8th.  It will be Dick’s SG's second store in Oregon. Dick's SG will also open stores in Hillsboro, Gresham, Lake Oswego/Tualatin, Bend and Salem. It currently has one store open in Tigard, OR. <sportsonesource.com>


Gap to Open in China, Web Shop in Canada, U.K. - International expansion plans for the U.S. clothing chain Gap are in the works. The retailer will open its first store in China next year, as well as e-commerce sites in Canada and the U.K. Glenn Murphy, the company's chief executive officer, told investors last week that the chain also plans to expand its outlet store presence. Gap will return to TV in November with a new U.S. advertising campaign. A 1 percent decline in September same-store sales were reported for the Gap. The Old Navy brand, which saw a 13 percent increase in September same-store sales, will see the unveiling of a new store design in nearly 50 stores by the end of the year. In September 2008, Old Navy had seen a 24 percent decline in same-stores sales <licensemag.com>


U.S. Retail Sales Rebound Into Xmas as Shares Show Consumer Not Dead - From Intel Corp. to TJX Cos., it’s beginning to look a lot like the retail holiday season will be happier than forecast. Intel, the world’s biggest chipmaker, cited stronger consumer demand in projecting Oct. 13 that its sales in the fourth quarter would be $9.7 billion to $10.5 billion, compared with a $9.5 billion average prediction in a Bloomberg News survey. TJX, the Framingham, Massachusetts-based operator of clothing-store chains T.J. Maxx and Marshalls, raised its fourth-quarter comparable-sales estimate Oct. 8 to a gain of 3 percent to 5 percent from an increase of 2 percent to 4 percent. <bloomberg.com>


London September Retail Sales Rose the Most in a Year, BRC Says - London retail sales rose the most in more than a year in September as warmer weather encouraged people to go shopping, the British Retail Consortium said. Same store sales gained 7.5 percent, the group said today in London. Middle Eastern investors returned after Ramadan, and the pound’s weakness against the euro continued to attract western Europeans, the BRC said in a statement. <bloomberg.com>


Hugo Boss in Union Talks Over Cleveland Factory - Six months after union officials said Hugo Boss intended to close its Cleveland suit factory, and with it cut hundreds of jobs, the company has reversed its thinking and confirmed it is negotiating with the plant’s union, Workers United. A new contract could extend the jobs for the factory’s 400 workers, 320 of which are union members. The facility, which has served as the center of Boss’ American suit production for 20 years, produces 150,000 sleeves annually.



Martha Stewart, Kmart Part Ways - Sears Holdings and Martha Stewart Living Omnimedia have ended their long-standing relationship. Martha Stewart issued a statement late Friday, indicating that the Kmart deal, which ends in January, was unable to be renewed.In September, Stewart landed a deal with Home Depot for a line of Martha Stewart Living-branded home improvement products. The line will hit U.S. Home Depot stores in January, followed by Canada in February. <licensemag.com>


JJB shareholder sells 22 million shares - Crystal Amber Fund, one of JJB Sport’s largest shareholders, has divested over half of its shares in the sportswear retailer but will support the proposed capital raising.

Crystal Amber sold 22 million JJB Sports shares on Friday. It now has a 5.45% stake in the company.

Crystal Amber chairman William Collins said: “We have been actively involved with recent developments at JJB and welcome the proposed fundraising. <drapersonline.com>


Lotte Said to Acquire Control of China’s Times, Beating Wumart - Lotte Shopping Co., South Korea’s biggest department-store owner, agreed to buy control of Times Ltd. to gain 66 outlets in China, beating Wumart Stores Inc., two people with knowledge of the matter said. In a deal valuing Times at about $625 million, Seoul-based Lotte Shopping will purchase a 72.3 percent stake in Times from Chairman Kenneth Fang for about HK$5.50 per share and will make an offer for the rest of the company, the people said, asking not to be identified because the talks are private. The offer is 19 percent higher than Times’s last traded price. <bloomberg.com>




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


10/16/2009 03:28 PM


See Levine's notes on the SWY quarter. It looks like someone has (or thinks they have) material information on KR that we definitely don't have! Shorting that speculation high. KM





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...


  • Apparel, accessories, and luxury goods and internet and catalogue retailers underperformed the market on positive volume.
  • Family footwear and leisure equipment and products outperformed the market.
  • DSW led family footwear retailers up with strong volume for the week after preannouncing earnings double that of the street's expectations, BWS got a free ride.
  • SKX has been making significant gains over the last three weeks on positive volume leading into earnings on Wednesday which are expected to best the street by a significant margin.
  • ZQK and CMRG took losses across all three durations on positive volume. 
  • The top losers of Friday were dominated by apparel companies and household durables. 
  • COLM is trading up into Thursday's earnings on strong volume indicating that the quarter could be better than expected. 

COH/SKX/DECK: Set ‘Em Up - 4


COH/SKX/DECK: Set ‘Em Up - 5


Incompetent Pilots

“We are entering upon waters for which I have no charts and in which I therefore feel myself an utterly incompetent pilot.”
-James Warburg
When a 37-year old James Warburg made that comment, it was a similar time for the US currency market as the one you are witnessing today. With the critical clean cut difference being that FDR made his intentions to devalue the Dollar explicit. President Obama’s cast of politicized characters at both the Fed and the US Treasury do not have that Currency Credibility to serve up alongside fire-side chats.
James Warburg was the son of Paul Warburg (one of the founding fathers of the US Federal Reserve) and, at the time of this quote in 1933, he was the youngest chief executive on Wall Street. He was considered to be one of the “smartest” men in New York. That’s not always a good thing to be…
There was this other guy overseas who was Warburg’s age by the name of Keynes. The two men couldn’t be more different in their views of what a Burning Buck might mean for capital markets. Keynes wasn’t a banker – he was a currency trader who happened to be signed off on by Bank of England bankers.
The point of this historical contrast is that you can get emotional and enraged by the US Government Burning the Buck, or you can simply understand its implications and make money on them. Bringing your politics or emotions into your portfolio is going to do absolutely nothing but erode your returns. To date, the bottom line for 2009 has been that Dollar Down = almost everything priced in US Dollars up. That’s it.
In the long run, Sir Keynes will remind you where you’ll be – 6 feet under. In the immediate and intermediate term, you are best served trading the game that’s in front of you. Do you think for a second that the politicians in Washington or those at the NY Federal Reserve in Manhattan give a damn about the long term implications of US Dollar Devaluation? Of course they don’t; so neither should you.
Being patriotic in your portfolio won’t help you any more than your politics. So, roll up your sleeves this morning, like Keynes did in 1933 and make sure that you aren’t missing out on the easiest carry trade in the world. Being short the US Dollar and long anything priced in those dollars.
Theoretically, at a point, the US Federal Reserve should raise rates and end this Massive Macro Diversification trade away from US Dollars. Theory and some lip service about how you think things might play out in certain weather conditions might just render you a 59-0 loser like the Patriots made the Titans yesterday in Boston. So be aware of Practitioner’s Rules and re-read that Warburg 1933 conclusion before getting too theoretical about this…
Last week the Buck Burned to lower-lows, taking it down for the second consecutive week and eight out of the last ten. This morning, no matter where you go, there that Burning Buck is again, trading down another -0.21% at $75.44 and hanging on to hopes that another hedge fund manager doesn’t get YouTubed in Sri Lanka.
When any of the perpetually and willfully blind US Dollar bulls tells you that the marked-to-market price of the US Dollar isn’t what you see on the chart (testing a breakdown to its lowest levels in 38 years), ask them what they think the Credibility side of this US Dollar analysis looks like. Madoff, Stanford, Rajaratnam… the Transparency list of what it is that some American financiers have been doing for the last decade is getting longer…
If the Buck’s Bulls don’t see Credibility as a factor in the fundamental analysis of say the Chinese or Brazilians, maybe some of the following factors will help:
1.      The US Federal Reserve’s Balance Sheet went up another +$55B last week, with MBS buys being the highlight (up +10% week over week!)

2.      Bank of America and General Electric’s low quality levered earnings reports

3.      US Federal Reserve rhetoric being explicitly dovish again with weekly comments out of Donald Kohn (Vice Chairman)

At 11AM EST today, Ben Bernanke will have one more opportunity to prove the likes of Warburg and my long term monetarist understandings on inflation wrong. Reading the tea leaves, unfortunately, there is nothing but hope that Bernanke keeps the long run in mind. Hope is not an investment process…
Across durations, the US Dollar remains broken. Here are my risk management levels:
1.      TAIL (long term) =  82.39

2.      TREND (intermediate term) = $78.29

3.      TRADE (immediate term) = $76.54

Yes, maybe there is a hope that Bernanke being objective gets the US Dollar above the TRADE line. If it does, I suggest you keep all of your REFLATION shorts at just that – a trade. We don’t want to have to call ourselves “utterly incompetent pilots.”
Throughout last week, I took down my Asset Allocation to US Cash. What’s the point in being theoretical on the wrong duration (long term) when using Burning Bucks to buy things priced in bucks can make us right? My immediate term upside/downside risk management levels in the SP500 are now 1103 and 1074.
Best of luck out there this week,



XLU – SPDR Utilities We bought low beta Utilities with a reasonable dividend yield on 10/13.

EWT – iShares Taiwan
With the introduction of “Panda Diplomacy” Taiwan has found itself growing closer to mainland China. Although the politics remain awkward, the business opportunities are massive and the private sector, now almost fully emerged from state dominance, has rushed to both service “the client” and to make capital investments there.  With an export industry base heavily weighted towards technology and communications equipment, Taiwanese companies are in the right place at the right time to catch the wave of increased consumer spending spurred by Beijing’s massive stimulus package.

EWG – iShares Germany Chancellor Angela Merkel won reelection with her pro-business coalition partners the Free Democrats. 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.

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.

FXB – CurrencyShares British Pound Sterling
The Pound is the only major currency that looks remotely as precarious as the US Dollar. We shorted the Pound into strength on 10/16.

XLP – SPDR Consumer Staples Strong day for Consumer Staples on 10/16, prompting a short versus our low beta long position in Utilities (XLU).

XHB – SPDR Homebuilders We were the bulls on a Q2 housing turn but, as the facts change so do we: now we are getting cautious on 1H 2010 US Housing. Rates up as access to capital tightens is not good for new home builders as we enter into a new year and series of potential catalysts for renewed pressure in the secondary market, including the expiration of the $8,000 tax credit.

USO – US OIL Fund WTIC Oil traded just north of our overbought line on 10/12. With the US Dollar hitting another higher-low, we shorted more of oil’s curve.

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 recent indications from the Macau government that additional regulation of the gaming industry could be implemented soon, MGM Mirage and partner Pansy Ho are considering expanding their operations in Macau.  Part one of the plan would be to expand their current operations.  Part two would be to search for sites for a potential casino resort. 


In light of Wynn Resorts’ successful initial public offering, MGM’s future plans also include an IPO.  Some commentators have stated that operators could be looking to expand before authorities clamp down on the industry. 

Retail Productivity Is Worse Than It Appears

Employee Productivity Is Worse Than It Appears


I’ve been hammering the US Retail industry for excess SG&A cutting. This analysis suggests that it might not be cutting enough.  


It’s easy to look back at the past 5 or 10 years and nitpick the changes in retail employee productivity. But Zach went back to the Johnson administration to see how these trends have ebbed and flowed since the late 1960s through today. The answer? Yes, overall productivity is certainly higher, as it should be given inflation and technology’s impact on productivity. But over 40 years, the year/year trend has only gone negative 3 times before the current recession – and the math adds up in a way such that the erosion in the preceeding 3 periods combined just about equals what we’re looking at today.


What does this mean? How does it tie into a stock call? I’m really not YET sure. But I know that I’ve been hammering the US Retail industry for excess SG&A cutting over the past six months. This analysis suggests that either 1) perhaps the industry has not even cut enough SG&A (polar opposite to what I thought), or that 2) the revenue hit was truly more massive and perhaps anomalous than I gave it credit for.


I’m gonna stew on this one…but in the interim I figured I’d throw it your way in case you’d like to do the same.  


Retail Productivity Is Worse Than It Appears  - Retail Sales Per Employee Historical


UA: How Have Expectations Changed?

UA: How Have Expectations Changed?


Expectations are growing less apocalyptic, though the fundamental story is shaping up as it should. The one factor that could derail near-term earnings (SG&A spend around footwear) is the biggest revenue catalyst for 2010.



UA has been one of our favorites for most of 2009. As we do with all of our ideas, we step back daily, re-evaluate the facts, and see how reality does (or does not) synch with expectations. The bottom line is that this is still one of our favorites, and the only thing that has changed since we rolled out our Under Armour Black Book is 1) the price has gone up, and 2) evidence that the story is, in fact, playing out with the company’s fundamentals. As quantified in our report, we still believe that next 2-years’ estimates are low by 15% and 25%, respectively. Looking at this on an EV/Total Addressable Market Value basis, we still think that there’s no cheaper stock in Consumer Discretionary.


But looking into the quarter, what we won’t do, however, is turn a blind eye to changes in near-term expectations. Over the last month, consensus 3Q revenue growth forecasts have risen to 6-7%, about in line with our model. Though we still think that the Street is off with margin estimates, now we’re looking at around 7% EPS upside instead of the 10-12% we had after the last print. Also, while this name remains very much hated (only 2 of 20 Analysts have it rated ‘Buy’) short interest has come down to around 20% of the float (still understated, we think given certain long term holders that won’t sell), Is sentiment ugly? Yes. But it has grown somewhat less apocalyptic as the stock has more than doubled off its low.


So what could UA do or say on Oct 27th to change the thesis? Over an intermediate-term (and certainly a long-term) duration I don’t think there’s much that can slow this beast down. Over the near-term, we’d have to see either a meaningful slowdown in core apparel, or UA back off of footwear goals. We have 13 weeks of POS data under our belt, and the trends look good for UA. Tack that onto in-line inventories at the end of last quarter, and it smells fine by me – especially with 4Q starting off on a positive note as it relates to apparel growth industrywide.


As for footwear, the biggest and baddest thing the company can do is have Gene McCarthy get on the conference call and talk about how he is hiring 50 people to fill out his new footwear organization, which will take up the SG&A base this year.


Is this possible? Yes, very (as stated in our Black Book), and will make my EBIT numbers be too high. But the other numbers it will make unrealistic are my 2010 revenue numbers for footwear – they’ll prove too low. You see… this guy ‘gets it.’  How many times have we heard companies like Columbia Sportswear talk about ‘hiring a new footwear guy’ to solve their ills and capitalize on a ‘great brand opportunity’? Something that is consistently ‘a great brand opportunity’ but is never realized is not really an opportunity afterall…


McCarthy went in to Plank’s org chart with the understanding that he would build out his talent pool. Note that he started to do this with TBL’s Authentic Youth biz – and it started to work immediately. Then they made him Co-President of the company, did not back fill his efforts in the Authentic Youth segment and pulled resources accordingly in that area. 


Simply put, the ‘rock star’ approach does not work here. It takes a team, and McCarthy will build it. If people freak out because of higher spending to get this team built – then this will be a gift for a risk manager.


Revenue Analysis

Historically, the correlation between reported UA wholesale apparel revenue and the corresponding Sportscan athletic apparel data (lagged by one full quarter to account for wholesale to retail timing) is 76% based on analysis of the last 12 quarters. 


With the benefit of the late 1Q09 launch of running shoes, footwear revenues are forecast to benefit from an incremental $15 million in the quarter.  We’re assuming the legacy footwear base (cleats & trainers) will decline by 30% to ~$9 million due in part to difficult comparisons and insight we’re gleaning from the channel.  On the whole, we are modeling 85% growth in footwear during Q3.  While revenues are still challenging to pinpoint with a high degree of accuracy given the lack of history for running, we believe the directional trends highlighted in the weekly scan data support our estimates. 


Furthermore, while running and additional category expansion in footwear remains key to our longer-term thesis, we’ve got to keep in mind that we are still in the very early stages of the footwear maturation curve.  Anecdotally, in a recent meeting with Dick’s management, they candidly discussed their surprise that UA’s footwear launch was met with such mixed reviews, and that it met their launch expectations.


Take a look at the chart below depicting the historical relationship (spread) between UA reported results and Sportscan trend data.  It’s important to note that over the last four quarters the spread has been within a +/- 5% range, reflecting a fairly high degree of correlation.


UA: How Have Expectations Changed? - UA apparel1


UA: How Have Expectations Changed? - UA Footwear1


Margin Analysis


Despite a smaller portion of lower margin footwear sales compared to the 1H, higher reserves, and increased liquidation activity will weigh on margins, which we are modeling down 200bps in Q3. Offsets will include strong higher margin direct-to-consumer sales that were impacted by ~100bps last year related to IT interruptions as well as fewer discounts in the outlets for apparel liquidation due to tighter inventories and a more stabilized retail environment. In addition, product costs are starting to swing the other way, which could lead to upside.  At the same time while UA will continue to invest in the brand growing SG&A roughly in-line with revenues, we expect modest deleverage of 90bps in the quarter as the company manages costs while the top-line recovers.


UA: How Have Expectations Changed? - UA Rev Waterfall


UA: How Have Expectations Changed? - UA EBIT Waterfall


UA: How Have Expectations Changed? - UA FCF Waterfall

“Weighty” Euro


Position: Long Germany via EWG


Although rear-view, it’s worth looking at today’s Eurozone trade balance release as a preview of the impact that a strong Euro is having  — exports were down 5.8% in August month-over-month, with imports declining 1.3%, dropping the trade balance to 1 Billion EUR from 6 Billion EUR in the previous month when exports rose 4.7% sequentially.


We’ve been hitting on the implications of currency strength in our European posts. With the Euro trading at an increase of +6.3% YTD versus the USD or +15.4% over the last 7 months, the impact on trade will be pronounced. As noted in yesterday’s post, ECB President Trichet has recently signaled his displeasure with a strong Euro, yet has not made explicit comments on raising rates in the near term.  


In order of absolute EUR of trade, exports from the Eurozone in the first seven months this year versus a year earlier declined to the UK by 26%, followed by a -20% contraction to the US, and declines of 10% and 4% to Switzerland and China respectively, according to Eurostat.


We continue to monitor the Euro versus major currencies. Certainly for Germany’s export-led economy, a strong Euro is a major headwind.  Today’s report shows that from January-July 2009 versus a year prior Germany far exceed any other country in the EU with a trade surplus of 73.4 Bill EUR, followed by Ireland (+23.3 Bill EUR) and the Netherlands (+20.9 Bill EUR). Conversely the UK far exceeded any other country with a trade deficit of -54.4 Bill EUR over the same period, followed by France (-30.4 Bill EUR) and Spain (-26.9 Bill EUR).


We’ll have our EYE on the Euro and its impact on trade, especially as it relates to Germany, which we’re currently long in our model portfolio.


Matthew Hedrick



“Weighty” Euro - a1



“Weighty” Euro - a2



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