UA: Squeaky Clean

It’s rare that I come up with a goose egg when I try to find a bear case in a company’s results. But Under Armour represents just that. The company beat meaningfully on revenue – in both core apparel and in footwear – with revs growing +16% on a 7% decline in inventory which has bullish implications for 4Q gross margins.  My only concern headed into this quarter was not really a concern at all – it was that Gene McCarthy’s effort to build a footwear organization would results in higher SG&A spend. That’s exactly what UA did. But they completely funded it with better sales and margins. 


Uber-bears will point to the fact that annual guidance did not go up as much as 3Q beat. If they're going to hold their hat on that one, I wish them the best of luck. 'Wishing for luck' however, is not an investment process.


This has been one of two key Retail Focus long ideas for the past six months. Expectations on this hated name have come up in recent weeks, with short interest coming down to around 20% (still very high) and 2 analysts actually coming out positive over two weeks. (The 90%+ bears are going to have some explaining to do today).


Why does any true investor own this company? It is because they think, as we do, that sales will double over 3 years, which will be an intermediate stopping point (check out our S-curve analysis posted this past weekend). The 3Q result gives all the confidence I need to see that Kevin Plank, David McCreight, and now Gene McCarthy are building a world class organization to win.


UA: Squeaky Clean - UA S 10 09

The Resident Bear

“You are the most bearish person at the firm”
 -Keith McCullough
Yesterday, in our internal research meeting, Keith said that I’m the most bearish person at the firm.  I’m OK with that.  I would much rather be called a bear with the S&P 500 at 1,066, than the index at 672.  Just to point out, I’m a survivor on many different levels so I’m happy to be alive and always an optimist.    
As I have said consistently for the past three months, as we head into 4Q09, there has been a disconnect between the demand side of the equation and stock prices within some sectors of the market.  As a consumer analyst, I see it every day and at times it’s frustrating.    
The Conference Board’s consumer confidence will release the October number shortly, and I don’t expect it to be much different than consensus, it actually may tick up slightly versus the 53.1 reading in September.  With unemployment drawing closer to 10% and consumers still skeptical about economic recovery rumblings, it’s hard to make a case that more people feel confident and /or very confident in chances for a strong economy.
And since I’m the resident bear, this is not a very merry sign for retailers headed into a critical holiday season.  I know this is consensus thinking, but the current unemployment trends and the implications for consumer demand are bad for some stocks.
The following has been engraved on every Research Edge employee’s forehead – Dollar down = Stocks up!  In January, walking down the streets of NYC we got some funny looks.  Today, being dollar bearish is the consensus!  It’s always dangerous to bet on the consensus being right, so I’ll take the other side of that trade!  So what is going to change the course of the dollar?  I have no idea, but this is what I do know….
(1)   The Obama train is off the tracks.  The decline in Barack Obama's popularity since July has been the steepest of any president at the same stage of his first term for more than 50 years - DOLLAR BULLISH!
(2)   Crude is up 81% year-to-date for the wrong reason – everything priced in dollars has gone up with the decline in the dollar. It does not matter what letter of the alphabet you use to describe the recovery.  It is the US dollar that has driven the price of oil so far beyond the realities of what normal supply and demand fundamentals appear to be - DOLLAR BULLISH!  
(3)   According to a BLOOMBERG survey, beginning in 3Q09, GDP growth will remain positive in each quarter through the end of 2010.  If this is correct, interest rates are headed higher – DOLLAR BULLISH!
(4)   Setting aside the Case-Shiller data due out at 9 am, the news on housing will be an incremental negative in 1H10 - DOLLAR BULLISH!
(5)   We are losing the WAR in Afghanistan and the outlook for democracy in Iraq is slim – DOLLAR BULLISH!
(6)   The improvement in the US financial system is over shadowed by continued bankruptcies.   The KBW Regional bank index is down 27% year-to date and 3.6% over the past month.  Behind the headlines of the “too big to fail” banks, there are still significant issues lingering within the US financial system.  Shelia Blair is still putting out fires and is running out of money.  Yesterday, regulators seized seven banks bringing this year’s number of seized banks to 106 and the total since the recession started to 131. As a point of reference, 181 institutions collapsed during the savings-and-loans crisis.  Currently, 416 banks are on the FDIC’s watch list.  According to Bloomberg, to date bank failures have cost the FDIC’s fund about $25 billion and is expected to cost $100 billion through 2013.  This has negative connotations for risk – the VIX was up sharply again yesterday – 9.7%.  The VIX closed at 24.31, above the immediate term TRADE line of 24.19 - DOLLAR BULLISH!  
Yesterday the S&P 500 did not break down and close below her trade line at 1,065, which is bullish, as the futures are trading slightly higher when I got up today.  Earnings season is winding down and we are now headed into the MACRO season.  The upcoming MACRO season is setting up to be more Dollar bullish than we have seen at any time in 2009.  
The dollar is the world “reserve-currency” and will be for some time to come.  Between our blundering politicians and the current financial crisis, right now it’s easy to take shots at the US Dollar and question her status as the world’s “reserve-currency.”  This too shall pass.
Yes I’m the resident bear at Research Edge, but I’m not alone, just outspoken.  I’m also proud to be an American!
Function is disaster; finish in style.
Howard Penney

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.

XLU – SPDR Utilities
We bought low beta Utilities on discount (down 1%) on 10/20. Bullish formation for XLU across durations.

FXC – CurrencyShares Canadian Dollar
We bought the Canadian Dollar on a big pullback on 10/20. The currency ETF traded down -2%, but the TRADE and TREND lines are holding up next to Daryl Jones’ recent note on the Canadian economy.
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.


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.

XLY – SPDR Consumer Discretionary Consumer Discretionary has rallied from the freak-out “short everything consumer” lows, prompting a short on 10/22 as a hedge for a TRADE.

UUP – PowerShares US Dollar We re-shorted the US Dollar on strength on 10/20. It remains broken across all 3 investment durations and there is no government plan to support it.

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.
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.


The Macau Metro Monitor. October 27th, 2009





The total number of visitor and non-resident arrivals was 2,204,014 in September 2009; visitor arrivals for September 2009 increased by 3.8% year-over-year to 1,689,007.  


Analyzed by place of residence, visitors from Mainland China grew by 16.1% year-over-year to 878,479 (52% of total visitor arrivals), with 354,443 travelling to Macau under the Individual Visit Scheme (unchanged year-over-year). Visitors from Japan (44,763) and Indonesia (30,098) rose by 24.8% and 65.5% respectively; however, those from Hong Kong (492,603); Taiwan (96,382) and Malaysia (22,714) decreased by 9.6%, 6.4% and 29.1%. Same-day visitors (851,758) accounted for 50.4% of the total visitor arrivals, with 446,735 coming from Mainland China.





Grant Bowie, President of MGM Grand Paradise Limited, said that he is not concerned by visa restrictions being imposed by Beijing in Guangdong. He was quoted as saying, “Macau has a very fortunate and experienced industry. So we are in a much stronger position than anywhere else of the world. We should feel quite comfortable with that… [The territory] is very flexible and dynamic, and we’ll be able to respond to this issue (visa restrictions). It is a matter we can manage on a day-to-day basis. We will work positively to operate within the situation we have available to us."

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WMS reported in line earnings and reiterated guidance. Given WMS's lofty multiple, in-line probably wasn't quite good enough for the stock. WAP's performance and backlog provide optimism though.



WMS reported Adjusted EPS of $0.36 in line with consensus and revenues of $165.3MM which missed street numbers by $2.5MM. WMS came in a penny light of our EPS number and $1.6MM shy of our revenue number.


3Q09 Detail: 


The entire revenue miss vs our expectations came from lower "other product sales revenues" while the Street was too aggressive on slot shipments.  WMS sold 4,851 new units, well below the Street projection of 5,500 units - one analyst actually projected 6,829 units.  We suspect that at least one analyst was incorrectly telling clients that WMS's shipment to Firekeepers was excluded from 4Q09 results and would be in 1Q2010.

  • New unit sales revenues came in line with our estimate, with higher ASPs compensating for slightly lower shipments
    • NA new unit shipments of 4,851 were 43 units below our estimate and international unit shipments were 77 light of our estimate
    • We estimate that WMS got 15% of new openings and expansions in NA and over 30% of replacement shipments - although we will have to wait for the other suppliers to report their results to confirm those numbers
    • Higher ASP's made up the revenue gap.  This is not unexpected, since any upside to new shipments would likely come from Class II or Helios platform jurisdictions, which have lower ASP
    • WMS expects flattish ASP's to from the current quarter starting in the 2H2010 with higher Blue Bird 2 (BB2) mix being offset by lower priced Helios sales
  • "Other product sales revenues" missed our mark by $1.6MM despite higher conversion kit shipments
    • Most of what was in used games this quarter were trade-in resales, not BlueBirds, so they were very low margin. Some quarters in the past they sold refurbished units which had higher prices and better margins
  • Gross profit was in line with our number, due to margins being 90 bps higher mix of BB2's 


Gaming operations revenues were in line with our expectations and gross margin was $1MM better than our estimate. As we wrote in our preview for the quarter on 10/23/2009, it was "all about WAPs"

  • WAPs had another huge quarter, adding 374 units sequentially after adding 386 units last quarter. Not only did the install base for WAPs growth 15% sequentially, but we estimate that average revenue per day also increased y-o-y
    • While there were many questions focused on growth in revenue per day and it's sustainability, a large portion of the growth was also mix driven, as WAP's generate more then 2x the average daily win of other participation products
  • Gains in WAP placements were offset by sequential declines in the install base for LAPs (116 units), stand alone games (271 units), and casino-owned daily fee games (101 units)
    • From a development standpoint WMS has put more emphasis behind the WAP platform, as can be seen with 3 major WAP game launches in the quarter. WMS has a large backlog for WAPs and should have another strong quarter in Dec. 
    • Some of the standalone's had very good longevity and that caught up with them this quarter.  We should see similiar attrition on standalone and LAPs next quarter.  In the second half of the year standalone units should grow if WMS's new games are successful, while LAPs are expected to stabilize and stay flattish in the back half of FY 2010. 

Below the gross margin line, R&D came in $2.3MM, or 10%, above our estimate, while D&A came in $0.4MM below our estimate due to the lower number of net additions to the participation install base


FY 2010 guidance was left unchanged but revenue guidance for 2Q2010 of $184-190MM is below consensus of $192MM. 

  • The December quarter should have higher domestic unit sales as there are materially more new openngs and expansions shipping in the quarter, including:
    • City Center (1,940 slots), River City (2,000), Choctow Casino in Oklahoma (3,000)
  • The December quarter is also seasonally slightly stronger for replacements than September ahead of New Year's and the holidays

LULU: Oh Happy Day

On Friday evening, LULU issued a Form 4 on behalf of CEO Christine Day noting that her spouse’s IRA had acquired 3,000 shares of LULU in an open market transaction on October 15th at $25.41. I guess that was not super noteworthy to me in light of the dozen or so filings I see every day and the fact that at $76k the dollar amount did not bowl me over.


But then after the close today I had a double take when I saw LULU positively preannounce the quarter.


Maybe I’m missing something… but am I the only one who thinks this is a wee bit peculiar?

VFC: More Cons than Pros

No growth, peaky margins, above average portfolio, $5.25-$5.35 in EPS power next year, and a $78 stock (14.7x earnings). For VFC? I don’t get it.


This is one of those quarters that really makes me step back and scratch my head on VFC.


On one hand, it’s kinda tough to argue with the company’s financial management, portfolio strategy, and how they set expectations with the Street. We’re seeing improved profitability in Jeanswear and Outdoor – its two largest coalitions, and the sales/inventory spread took a meaningful turn up for the first time in 2-years. CFFO outlook went from $750mm to $800mm due to inventory reductions. And Nautica, the perennial doggie in the portfolio, actually rebounded – not bad at a time when there’s about $400-$500mm in LIZ business in department stores that’s up for grabs in the Spring.


But on the flip side, this company simply has no growth. The top line was down 5% -- no good. When we look at the underlying 2-yr run rate by stripping out FX, and acquisitions (from 2 yrs ago), we’re still looking at a 5% hit to revenue. When we look at Outdoor/Action Sports – VFC’s core growth driver – it was down 1%, and down 4% after we account for the fact that incremental growth is coming from company-owned retail. In addition, VFC has not conducted any acquisitions at a time when there are more undervalued assets than I’ve seen in years. If there was ever a time for a ‘deal company’ to do deals, wouldn’t this be it? This is concerning. It reinforces my view that business models that rely on acquisitions simply don’t fly relative to other quality growth businesses out there. I can't make a perma-bear statement there, but rather need to consistently ensure that the appropriate valuation gap exists between companies like VFC, and others that can grow.


What does that leave us with? No growth, peaky margins, above average portfolio, $5.25-$5.35 in EPS power next year, and a $78 stock (14.7x earnings). For VFC? I don’t get it.


VFC: More Cons than Pros - VFC OrgRev 10 09


VFC: More Cons than Pros - 10 26 2009 10 28 57 PM


VFC 3Q FY09 Earnings Call


Quarterly Highlights:

  • Jeanswear sales improving on 1yr & 2yr basis with sequential trends in margins improving
  • Outdoor sales lacking growth, but margins improving notably up 230bps yy;
  • Imagewear continues to struggle most of smaller coalitions
  • Raised lower end of guidance to $4.85-$5.00 up from $4.70-$5.00; and CFFO up to $800mm from $750mm
  • Increased expectation for stores to 80 up from 70 by FY09 year end


P&L Notables:

  • Gross margins down 5bps yy reflecting:
    • Improved margins in Outdoor and Action Sports business as well as Jeanswear
    • Greater % of full price retail sales
    • Expect GMs to exceed 45% in Q4
  • SG&A +68bps yy reflecting:
    • Higher pension expense (~100bps)
    • Retail growth
    • Offset in part by cost mgmt efforts
    • Expect SG&A margins to remain relatively flat to up slightly yy



  • Revs flat, up 3% in constant $$
  • Direct-to-Consumer up 17%
  • Expect even higher rev growth in Q4
  • Retail:
    • Stores: expect to end the year with 80 stores
    • Retail stores doing well



  • Revs down 10.5%, down 7% in constant $$ in 3Q
  • Domestic down 6%
    • Lee continues to gain share; revs down 1%
    • Wrangler strong at WMT with enhanced signage, but hurt in the mass market from loss of Riders brand programs (noted in Q2)
  • Int'l down 10% in constant $$ - partially offset by 17% growth in Asia jeans business
    • European Jeans business continues to be challenging
  • Op. margins expected to be nearly 2x Q4 F08 driven by higher gross margins (incl. 1x OMs were 8.4% in Q4 FY08)



  • Revs up 3%
  • Seven for All Mankind revs negative (mid-teen operating margins)
  • Direct-to-consumer and Asia were bright spots in the business, both had positive growth
    • YTD opened 13 stores and expect 20 by year-end



  • Revs down 15%
  • Uniform business struggling in current environment  - and poor attendance at sporting events hurting sales for licensed product



  • Revs up 4% - helped by a timing shift of shipments
  • Op. Margins up to 16% level and is expected to sustain DD in Q4
  • Kipling - agreed to distribute handbags on an exclusive basis to Macy's in U.S. starting in spring 2010 to 375 stores



  • International business down with revs down 6% in Europe in constant $$ (accounts for ~70% of Int'l sales)
    • Asia was a partial offset up 32% (~12% of sales)
    • Expect an increase in Int'l sales in Q4 on both constant $$ and reported basis
  • Retail: up 6% with 23 new stores opened in qtr (80% in full price format)
  • Buzz related to reorders due to lean retail inventories
    • Trend bodes well for NT margins



  • Inventories down ~$170mm (-13%) yy
  • CapEx $21mm
  • Repurchased 750,000shs in 3Q, expect similar amount in Q4


Outlook (Q4):

  • Revs
  • GMs above 45%
  • Expect SG&A margins to remain relatively flat to up slightly yy
  • Tax Rate of 26% for FY09 - implying 24% rate in 4Q
  • Repurchased 750,000shs in 3Q, expect similar amount in Q4






  • Seeing improvements from major rebranding
  • Chg in 2H of the year is the shift towards lower price points - more value focused product working much better
  • Reduction in off-price channel is ~15% yy


F2010 Fx & Pension Exp Outlook:

  • Fx could benefit the 1H of next year - Int'l stronger in Q1 and Q3 (assuming rates remain flat ~1.49 Euro, Fx would benefit revs by ~$110mm, or 3.5% and ~$0.15 in EPS benefit in 1H of F10 assuming 20% incremental margin)
  • Pension impact of $0.70 in EPS….all else being equal would equate to $15-$20mm favorable impact in FY10


Comp Store Trends:

  • Comps were flat to down slightly - expect to see improvement in Q4
  • Outdoor related stores were up mid-single digit


Retailers Short Inventory - Ability to Chase Demand:

  • Jeanswear has lots of capacity
  • Can go from purchase order to DC in 20 days
  • Most Outdoor related goods (i.e. tents, equipment) made in Asia could not be turned around in time to be realized in Q4
  • Believe they are better positioned than most to be able to chase demand in Q4
  • VFC lean in terms of inventory - rather chase sales


FY09 Outlook:

  • Some uncertainty related to 2H is past so brought up low end
  • Cautious to the upside due to uncertainty surrounding Q4 holiday season


TNF Spring Orders:

  • Spring orders positions stronger - up mid-single digit (in constant $$)
  • International might be even stronger
  • In U.S. ~80%-85% of business done off of pre-book business


SG&A Expense Control:

  • Less of a reduction compared to Q2 yy decline
  • Pension and retail driving SG&A higher offset in part by cost reduction efforts
  • Advertising spend was down 50-60bps, but still at relatively high level


Inventory Levels:

  • Have ~100 days of inventory - can supply 3mo+ with no further production


Shift Towards Lower Price Points - Brands/Segments Positioned to Benefit:

  • No specific call outs, but do believe they are gaining share in certain markets with weaker branded competitors


Retail Doors:

  • Now expect up to 80 stores in F09 up from 70 as of Q2
  • Roughly 80% full-price
  • Outlet openings only driven by capacity to move excess product
  • U.S. makes up greater % of growth ~75%+


Jeanswear - Regional Trends:

  • European business is still challenging
  • Eastern European business built over the last several years is struggling



  • Still busy and active, nothing to report at this time


Licensing Model:

  • Chance of moving any wholesale businesses to license model?
  • Have hired a new leader still in first 90-days on the job
  • Looking for new brands as well as evaluating ones in current portfolio


Gross Margin - View Above 45%:

  • Restructuring impacts of last year had no impact on GMs
  • Retail business will boost margins by ~100bps
  • Rest is primarily driven by operations
    • Both in U.S. and European businesses


Industry/Company Capacity:

  • Own ~25% of manufacturing
  • Roughly 50% of jeans are sourced


Pricing - Targeted Channels of Distribution:

  • In Lee AUR in mid-tier is actually up and its taking share
  • Claim to be taking share at KSS and JCP and Sears with higher AUR
  • Higher end of retail spectrum (Saks & Nieman Marcus) comps have been weaker than mass and mid-tier
  • Expect global revs to be down slightly Fx neutral - pleased with that


Product Costs:

  • Helping in 3Q and especially in 4Q - had been a drag in 1H of F09
  • Don't see any reason for these benefits to change significantly


Smaller Brand Call Outs:

  • Lucy - in a tough stop right now (LULU just preannounced better 3Q results AMC)
  • Kipling and Napapijri have had a great run internationally
  • Reef is stable, but has not grown the way they would have liked


Vans Trends/Outlook:

  • Hasn't lost momentum due to the recession
  • Terrific geographic opportunity - particularly in Asia
  • Still growing strong in US

 Casey Flavin

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