- Levi Strauss & Co is not public, so naturally no one in the equity world on Wall Street cares about it. But let's not forget that Levi is 50% bigger than VFC's Jeanswear business. Levi's and the VFC brands combined account for about 50% share of denim in mass channels. This is a zero sum game, and while slight shifts in share one way or another happen all the time, any major swings in results for one usually flow through to the other. Not good then that Levi's sales in the Americas were down 20% this quarter.
- Granted, VFC just preannounced on the positive side - which suggests that its portfolio in aggregate is tracking better than Levi's (which is dependent on a narrow brand set -- Levi's and Dockers). But when such a big competitor prints the sharpest revenue slowdown in over 5 years, increased order cancellations, and gross margins rolling over on the margin, how can this NOT matter? Tack on the fact that Levi's is not public, and does not have to worry as much about external quarterly expectations and they can make the right business decision when times like this get tough. Top it all off with increased problems in implementing its new ERP system, and exposure to now-defunct Goody's, and it is not a pretty picture as it relates to control over its business.
- Increasingly desperate giants in this business are usually angry and destructive giants. Levi's is huge and its temper is flaring. With VFC, now we face promise of an EPS growth ramp in 2H that is baked into estimates (consensus calls for 14% growth), which also coincides with VFC having to anniversary recent acquisitions. At the same time, short interest remains low, and VFC has been a perennial favorite among the sell side. In fact, there are no sell ratings, and the 'buy rating ratio' of 67% is as high as it has been in over 5 years. While it may not seem expensive at 7-8x EBITDA, it's tough to ignore that it has seen 4-5x in the past. Granted, it was a more asset-based and commodity-driven model during those periods. But even high quality names like Ralph Lauren are at 8x EBITDA. Others in the space are much cheaper.
Short interest is only 2% of the float and we have some "concentrated" hedge fund players on the top holders list that are getting pretty good at buying tops. This continues to look like a great cyclical short.
Earnings season has officially begun.
(chart courtesy of stockcharts.com)
Attached is the chart of GLD. It's up over +7% since the mid May US bear market rally high in US stocks.
*Full Disclosure: I own GLD in my fund.
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That story is getting a lot of air time today, and it should - 18 year lows are statistically significant. Can you imagine what these numbers would look like if they back tested 25,000 PM's performance across real bear market cycles like that of 1973-75?
The numbers for June's quarter end are rolling in, and the tide is rolling out on the levered long community. To borrow Buffet's analogy, now we can see who was swimming naked, without a risk management process.
I've been making this call since November of 2007 when I left the buy side. So now, at the very least, I do not have to endure the countless "you have an axe to grind" emails I was getting 9, 6, and 3 months ago from strangers. They were levered long, and ultimately proven wrong.
- Average check was up 4.3% in 1Q08 (traffic down 0.4%) and RRGB management commented at the Oppenheimer conference today that it implemented its expected late June 2.7% price increase. 3Q08's traffic trends could be hurt significantly by this most recent price increase as the company will be running at about 6% price through mid-August and should average about 4% for the year.
- RRGB launched its national advertising campaign in April of 2007 and ran advertisements for 11 weeks in FY07. This year the company increased this ad time to 23 weeks and its total spending to $18-$18.5 million from $11.5 million in 2007. RRGB's traffic trends benefited in 2Q07 and 3Q07 from this incremental spending but turned negative in 4Q07 when the ads went off the air. There was some sequential improvement in 1Q08 traffic (still slightly negative) when there were incremental weeks of advertising relative to no advertising in 1Q07. 2Q08 advertising levels, however, will be about even with last year. The chart to the right shows the quarters when there was no advertising, increased advertising weeks versus the prior year (upward arrows) or an even level YOY relative to reported traffic results.
- RRGB is scheduled to report its 2Q08 results on August 14, but management issued an 8-K today stating that recent sales trends may trend to the low end of the previously guided sales assumption for the full-year 2008. Because the company had just raised its top-line guidance on its 1Q08 conference call in late May to 2.5%-4% same-store sales growth (from 2%-3.5%), $905-$918 million in revenues (from $880-$893 millions), trends must have decelerated during 2Q. Traffic was most likely hurt by both the increased pricing relative to last year (and this is before the most recent increase) combined with the fact that there was no incremental advertising relative to 2Q07.
Today Communist factions of the ruling Indian coalition abandoned Singh's party to protest the deal, threatening both his administration and joint US/Indian nuclear development.
Despite rabid opposition from his own side of the aisle, Singh has signaled continued commitment to the deal -with rampant inflation driven by higher oil and coal costs his administration is under tremendous pressure to find meaningful energy solutions. It remains to be seen if he can actually get the deal done, a process that will require additional approval from the IAEA, NSG and the US congress.
- Andrew Barber Director Research Edge, LLC
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