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As I combed through my notes from the ICR Exchange, I came across a subtle, but relevant call-out that was overlooked in the two-day confluence of buy-siders, sell-siders, bankers, and CEO’s. (For what it’s worth, there were more bankers than Sell Side analysts – that’s sad). During  the breakout session for True Religion, there were many questions surrounding the company’s retail growth, salesforce transition, new hires, lower price point offerings (aka “cleaner looks”), and the state of the wholesale business. 

Aside from some fashion commentary regarding the validity of the term “Jegging” (think skinny jean meets legging), the most interesting comment came from the CFO.  He stated that he was surprised at the level of discounting on the company’s premium denim over the holiday period at major wholesale customers.  Without getting specific on which retailers were promotional (it has to be any combination of Saks, Neimans, and Nordstrom), he also went on to say the company doesn’t really engage in “markdown” allowances so it shouldn’t be an issue.  Fair enough.  But, the real issue lies in the fact that the retailer(s) pulled the promotional trigger to sell the $250+ denim.   If you believe discounting was a byproduct of slower product sales, then this may be something to watch as Spring rapidly approaches.

In addition, we’ve seen this film before. A brand that thinks it walks on water says ‘we don’t pay for markdowns’, but the reality is that the consumer votes with its wallet, and the CFO validated it in breakout discussions. So let me get this straight… we’ve got a high-end denim brand that is underperforming at a time when peers in other luxury categories are showing signs of life. This is at the same time the company is downshifting in price point as it expands into a lifestyle model, and it is opening up more of its own shops due to a weaker ‘pull model’ in the wholesale channel.  I know the stock already crashed and burned, but are we the only ones that are concerned that we’re still looking at a company with 25.6% EBIT margins, and only a 1.4% marketing ratio? I repeat… only 1.4% of sales goes towards marketing. That might be fine when you sell a hundred million in revs to a few customers, but is low by a factor of 2-3x if the company really wants to make the jump to a sustainable growth trajectory at respectable and consistent margins.

-Eric Levine