Another Chapter 11 Coming?

When we conducted our Bankruptcy call on 7/16, someone asked me if we were late given that some companies had already filed. Well since then, we’ve had 2 more banks file, and one more retailer (Shoe Pavilion). In addition, now it appears that Boscov’s, the second largest private department store chain, may be headed in the same direction. The factoring arm of CIT’s trade finance group is still supporting backorders, but put a “hold” on future orders to fill fall/holiday inventory.

Some things you should know about (little-known) Boscov’s.
1) Largest family-owned dept store chain in the US, with revenue over $1 bn.

2) 49 stores in 6 states in the mid-Atlantic (from NY down through VA).

3) In 2Q06, Boscov’s bought 10 stores from Macy’s, in conjunction with satisfying anti-competitive claims when Federated bought May Dept stores.

4) The remainder of the portfolio used to be in line with the Macy’s of the world, but now competes more with JC Penney, Sears and other moderate retailers.

5) Also sells categories in addition to apparel – such as toys, candy, sporting goods, and stationary.

6) Inventory consists of virtually every publicly-traded wholesale brand.

Strategic issues to consider.
1) Could this be a positive as the industry right-sizes capacity to be in line with end demand? The answer is yes – but unfortunately we need about another 10 Boscov’s to put a dent in the macro call here.

2) A $1bn retailer acting desperate is not good. Excessive closeouts/promotions and striking more aggressive deals with vendors to secure any product to keep its head above water is not a positive sustainable trend. Note that this even holds outside of traditional. Dick’s Sporting Goods, for example, has a similar footprint and Boscov’s sells many of the same hardgoods and lower-end softgoods.

3) Keep in mind that it is often difficult for a bankrupt anchor tenant in a mall (which represents a fair proportion of Boscov’s stores) to actually end up as capacity being removed from the industry. Given the convoluted deals with the mall REITs, the property simply changes hands to others who fill the shelves with much of the same product.

We’ll be back soon with some deeper analysis on industry capacity.

Watch out For FX!!

Here’s a scary chart. My Jr Analyst, Zach Brown, backed-out the FX impact of the companies that have reported 2Q EPS thus far.

As I’ve noted in outlining the thesis for companies that are most materially over-earning (including WRC, VFC, SKX, GES, COLM, ADS.DE, and others…) the key factor that will emerge is what the companies have been doing with the FX benefit. Reinvesting in their own business to build a better base for when FX goes south? Or printing on the P&L in the form of higher margins?

This will be a period that separates the winners – like RL, TBL, LIZ, and NKE, from the losers noted above.

Aside from my view that supply chain pressure will intensify meaningfully on the P&L by holiday, now we can add on the impact companies being exposed for aggressive and irresponsible FX strategies as well. Remember that 80% of the companies in this space (as they exist today) have not lived through a down FX cycle. Rarely is the first crack at managing FX pleasant.

Volatility is going up in this space, folks. The dispersion in cash flow trajectory between winners and losers will be massive. (Check out our prior post where Casey outlines how the consensus does not yet ‘get it’).

We’re going to be all over capturing that opportunity for clients here at Research Edge.

Brian McGough
This chart shows FX impact to sales for each of the companies reporting EPS thus far. Pretty self explanatory, no?

US Market Performance: Week Ended July 25, 2008...

Index Performance:

Week Ended 7/25/08:
Dow Jones (1.1%), SP500 (0.23%), Nasdaq +1.2%, Russell 2000 +2.5%

July 08’ To Date:
Dow Jones +0.18%; SP500 (1.7%); Nasdaq +0.77%; Russell 2000 +3.0%

2008 YTD:
Dow Jones (14.3%), SP500 (14.3%), Nasdaq (12.9%), Russell 2000 (7.3%)

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.52%
  • SHORT SIGNALS 78.67%

Australia vs. Japan: Sobriety vs. Socialism

I am short Japan for a variety of reasons that I've discussed in prior portal postings. These two charts that we put together this weekend depict the Reserve Bank of Australia’s inflation fighting vigilance versus the Bank of Japan's easy money political pandering.

*Full Disclosure: I remain short Japan via the EWJ etf.
Australian Sobriety
Japanese Socialism

Apple (AAPL): Macro Short?

Precisely 2 years ago, AAPL was trading at $50/share and plenty of doubt surrounded the company’s ability to continue to deliver product momentum. On Friday, the stock closed at $162/share (19x trailing cash flow!), and we’re looking at a company that is rightly the apple of every investors qualitative eye – pardon the pun.

I am very weary of letting our analysts hang their hats on qualitative thesis’. Research Edge was built on quantifying everything we can. From a quantitative factor perspective, AAPL is finally breaking down. We saw $189/share tested and tried on 3 separate occasions since mid May (May 13th, May 15th, and June 5th). Today, the stock is -14% lower, and it’s in a very precarious position, both fundamentally and technically.

From a fundamental modeling perspective, six months from now the Street will be forced to look a what was the best revenue quarter that a high growth consumer product company can deliver. Year over year growth will slow materially, and the momentum community will be out of this stock faster than they got in. Apple’s management gets this, and as our friend, Michelle Leder, at ‘Footnoted.Org’ called out this week, they are already preemptively calling out “macro” as the reason.

We’ll let you pull up the 10Q and read it, but Michelle’s posting on this does it for you just the same: “While some people continue to debate whether or not we’re actually in a recession, Apple went a step further in the 10Q it filed… using stark new language to describe the state of the economy in its risk factors section.”

This isn’t Apple’s fault. This is called macro – and it matters. Apple’s shareholder’s list is decorated with all of the top mutual funds in the world, and short interest is remarkably low at 2.2% of the float. Shorting Apple is far from consensus, and if it breaks down closing below $160.34, the institutional selling will look far from over.
(Chart courtesy of

Rose Colored Kool-Aid

Brian McGough has been clear about our negative multi-year apparel thesis, where the industry will lose 3 points of margin over 2-3 years. As noted in his post yesterday ‘The Song Remains the Same’ it’s clearly playing out this quarter -- organic sales are 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. This has been extremely consistent with most companies thus far.

While it might be tempting to think that our view is now consensus – guess again. These headwinds are going to strengthen before they subside. This is not a fast moving storm front, and the Street still does not get it.

Current estimates across every publicly-traded apparel retailer and brand suggest that the worst is already over. Consensus is looking for a 31bp decline in margins this year, and for nearly all of that to be recaptured in FY09. It looks like most analysts are keeping on the rose-colored glasses and drinking managements’ Kool-Aid.

Stay tuned for further developments on the earnings front, but expect downward revisions as analysts ditch the glasses, dump the Kool-Aid and start to see the light. Until then, be very cautious about which EPS estimates you believe.

Casey Flavin
Global Softlines Team
Gross Margin expectations are looking past the fact that a massive sourcing tailwind reverses.
Same holds true for Operating Margins.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.