The Song Remains The Same

My fingers started off typing about Columbia’s miss and guide down. Then I realized that I was getting caught up in the weeds. COLM was not a horrible performer relative to its peers. The reality is that this space just stinks. Organic sales under pressure, order cancellations ticking up, FX benefits are easing, cost inputs are rising, pricing power is nil/negative, GM% eroding, and SG&A is heading higher. Not pleasant. Most companies are answering by opening up their own stores, hence taking up their respective capital plan and operating asset base at exactly the wrong time. This means greater margin volatility, which means little reason for valuations to emerge from the basement. Whether it’s COLM, VFC, VLCM, SKX or CROX (all have reported over the past week), the song remains the same. Margins are coming down another 2-3 points for this industry over 2-3 years.

Our recent mantra in the halls here at Research Edge is that it’s time where stock-pickers can once again earn their keep. I’d take it a step further. In that it is more important now than ever to understanding the extent to which management teams ‘get it’ and can properly allocate capital (or realizing that the best allocation is to pull back deployment meaningfully).

Names that have yet to suffer the same fate, that I think will over 2 quarters, include VFC, WRC, PVH, GIL, DSW, ADS.DE,DKS and (still more to come) in SKX. I continue to like companies that are entering harvesting mode as it relates to brand investment and capital deployment. These include RL, TBL, LIZ, FINL and PSS.
Here's a chart showing aggregated sales, GM, and inventory/sales for all companies that have reported in this space thus far. Not a pretty picture whatsoever.

A Lesson in Resisting Temptation

CROX wins the award for the name I’ve been most tempted to turn positive on over the past year. Yes, the core product is a complete fad that is heavily dependant on consumers under the age of 12 and over the age of 50 (i.e. not good). Yes growth is negatively inverting, asset turns are eroding as CROX grows away from its core, and yes, margins are coming down.

But the stock has been trading like the brand is terminal – which I absolutely do not think is the case (nor do any retailers I speak with regularly), and the international opportunity remains rather huge. I’ve been increasingly tempted by the numerous SG&A, capex and working capital levers that are available to management to recapture margin. With investors giving up hope and the stock trading off 45% after hours and trading at sub-1x sales and tangible book, it’s tough to resist the temptation to do the deep dive here. Expect to hear back from me soon with some deep analysis.

In the spirit of maintaining my role as my own worst critic, my biggest regret here is not having a mechanism to catch the divergence between shipments and retail sales. The chart below shows how wholesale sales are falling short of retail relative to prior quarters based on the numbers CROX reported after the close and meshing with NPD data we received last week (which appeared to check out OK). Catching this just days earlier would have offered me the foresight to catch a nice trade and, more importantly, preserved capital for our clients who own the stock. Research Edge clients can rest assured that I’m on the case to capitalize on this next time around – for CROX as well as everyone else in the industry.
Wholesale sales are falling short of retail relative to prior quarters based on the numbers CROX reported after the close and meshing with NPD data we received last week.


My sources indicate that IGT may have begun an aggressive cost cutting program by targeting approximately 500 employees (10% of the workforce) for dismissal. The cuts appear to be concentrated in the manufacturing and service areas but probably will impact all divisions. This aggressive move by IGT could generate $40-50m ($0.08-$0.10) in annual cost savings. My sense is that layoffs are only the first bite out of a pretty comprehensive cost reduction apple. IGT management was deliberately vague on their conference call but I suspect there will be details forthcoming. We may have a margin story forming here people.

I’ve followed IGT for 12 years and I’ve known them to be many things including resourceful, creative, shareholder friendly, etc. But I’ve never known them as “cost focused”. Okay I’m being nice. IGT is chunky, obese, rotund, wears long loose clothing, etc. I think that mentality is changing and investors may be underestimating the impact. IGT could emerge from this fat boot camp “a lean, mean, fighting machine” (Dewey Oxburger, Stripes, 1981).

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We at Research Edge make an effort to be a step ahead of consensus. Front page headlines from today’s Wall Street Journal highlighted the projected $40 billion budget deficit facing state economies in FY 2009. A slumping housing market and escalating gasoline prices were cited as the primary factors for the upcoming state budget crisis.

Since June 19th we’ve highlighted the historic relationship between state budget deficits and the gaming industry at length. In “Budget Deficits = Craps for Casinos” (posted 6/29) we discussed the state budget crises of 2002-2003 and the resulting state levied tax hikes on the gaming industry to cure over $80 billion dollars in shortages.

Now with deficits reaching nearly $40 billion watch out for legislators once again dipping their hands into gaming’s cookie jar to feed their economic sweet tooth. History has a way of repeating itself. We hope this time it’s more gaming and not more taxes.

Alec Richards
Intern – Research Edge LLC

Financials (XLF): Stuffed Like Lehman's "Level 3" Book

We wanted to stay clear of the Luskin, Gartman, triple bullish Deutsche Bank buy call on the US Financials, so we advised you to do the same. Predictably, the bullish narrative rolled into to the Financials right at the goal line, then ran head first into a Canadian Football League goal post.

The goal line for the consensus crowd is the 50 day moving average (see chart). I don't use the 50 day to make capital decisions, but it's important to watch behavior around that line. It’s kind of like watching pigeons flock to bread crumbs.

The XLF was down -6.3% today, going out at 21.07. If this US Financials index breaks my support line at 20.58, and closes there, I see 23-24% of expeditious downside.

(chart courtesy of

The Russian Bear Hunter Chart

Russia's RTSI Index is clearly breaking down.
Andrew Barber, Director

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