The Economic Data calendar for the week of the 12th of April through the 16th of April is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.
Indonesia is noting an uptick in orders – both cyclically and with new long-term capital projects. Political posturing? Perhaps. But the rationale makes sense.
Here are some important takeaways from a senior executive from the Indonesian Footwear Association.
1) Footwear exports ($2bn vs. $140bn total exports) are trending up 11% this year. That should accelerate as the current factory build plan has accelerated due to pressure from the major brands and retailers to move production on the margin outside of China.
2) Adidas and Nike have increased their orders to local manufacturers.
3) Production of New Balance shoes will increase from 50,000 pairs last year to 500,000 pairs by the end of this year and would eventually reach 1 million pairs per annum next year. Why is this one particularly noteworthy? New Balance has been known forever as the “made in the USA” footwear company. An incremental shift to Asia will help it be more price competitive. 1mm pair is not a game changer on a base of what we estimate to be 30-35mm pair for New Balance. But let's watch it.
Overall, any evidence of a shift away from China in this industry is good...given that 86% of the shoes on our feet originate in China.
PVH: The Risk That No One Talks About
PVH has its cookie jar of special charges to make the Tommy deal fuel EPS. But does anyone care that this is the merger of the two companies in retail with the greatest and fattest-tailed off-balance sheet compensation liabilities for two individuals that have proven risqué, to say the least?
You gotta love the raging love PVH is getting in the wake of its Tommy acquisition. Several upgrades, Cramer pounding the table... and that’s AFTER a 55% move in the stock (3x retail peers) since the deal was first rumored. I guess I should probably mention that this price is roughly 2x the EV where TOM was taken out back in 2005.
The deal will be accretive immediately per management with about $1.00 in incremental EPS over the next year. But that’s if we exclude about $1.00 in special charges. Huh? In my language, that’s not immediately accretive.
I’m not here to drag this deal through the mud. In fact, it does make a fair amount of sense from PVH’s perspective, and Tommy is actually a far better brand globally than most people in the US think. But there are underlying risks to NewCo that should at least be considered, and they’re not all apparent on financial statements.
The crux of it revolves around taking brands that are based on two individuals that license their respective names to a company. It’s notable enough to have one such individual in Calvin – remember when he was ejected from a Knicks game in ’03 after interfering with a Spreewell inbound pass? But then adding Tommy to the cocktail? Remember that this is a guy that got into a fistfight with Axl Rose at a nightclub a couple years back. We can have fun with the tabloid facts and You Tube videos, but let’s simply revert to the financials. That’s where I’m most comfortable.
Consider the following…
When I net it all out, PVH/TOM has forward compensation obligations that are greater than any other off-balance sheet liability, and they are headed up over time. Liabilities should go down over time, not up. The only way PVH/TOM’s go down is if revenue goes down. That’s not a very good option either.
Expectations are high in this name, and the company has enough to snack on in its cookie jar of special charges that earnings will be fine for at least a couple of quarters. For now, I view this as a ‘do nothing’ stock.
But given the underappreciated off-balance sheet/financial risk, let’s hope that the board is keeping them away from sporting events, rock stars, and other crowded places.
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Position: Long Germany (EWG); Short Euro (FXE)
We got a bullish export report (though lagging) from Germany today, with exports up +5.1% in February month-over-month. The chart below shows an improving trend in exports, up +9.4% in February Y/Y, with favorable comparisons for the months ahead as global demand continues to melt higher. We bought Germany via the etf EWG in our model portfolio on 4/7/10 to take advantage of the strength we see ahead.
As we’ve highlighted in our recent work, Germany fits one of our investment themes of owning High Grade versus High Debt. And recent fundamental data helps confirm our bullish bias on Europe’s largest economy:
To take advantage of present weakness in the Euro due to the sovereign debt issues associated with the PIIGS, we remain short the EUR versus the USD via FXE. The anchor of our bullish case for Germany remains the fiscal conservatism of German Chancellor Angela Merkel and her government. You’ll remember that she initially supported a unilateral IMF-led campaign to bailout Greece to prevent paying for Greece’s debt out of German coffers, and at her command the government has maintained budget deficit and federal debt at a level far lower than her European peers (see our portal for more information). As countries (globally) further extend their debt obligations, Germany will be our lower beta play on safety, underpinned by improving fundaments.
R3: REQUIRED RETAIL READING
April 9, 2010
TODAY’S CALL OUT
It’s obvious that a confluence of half-dozen factors came together to drive yesterday’s solid results. But consider the underlying change in behavior around mortgage defaults. A recent study raises some good points that we think could explain away $67bn in annual PCE.
If there’s one head-scratcher that came from yesterday’s strong sales numbers, it is the extent to which the consumer is actually improving, and what underlying factors are really driving higher retail sales. Was the 9% comp (highest in 11 years) due to a) higher tax refunds, b) holiday shift, c) weather, d) penned up demand as consumers had not bought Spring apparel in 23 months, e) a wealth effect from higher equity prices, or simply f) a rebound in the economy. My sense is that we can spend all week trying to quantify precisely how much of these factors are contributing to sales strength (which we are doing, by the way). But there’s another theory that Allison Kaptur on Josh Steiner’s Financials team brought to my attention this morning that is tough to ignore.
It is from an article written by Paul Jackson of HousingWire.com. The crux of the argument is that consumers who are either in default – or on the brink -- are simply spending their mortgage payments on something other than their home. He states the following…
While this is purely anecdotal, Jackson highlights a HAMPlicant case study whereby the applicant had an $1,880 monthly payment on their mortgage they’d defaulted on, yet their bank statements for the past 30 days included the following expenses:
If just half of the current 7.4 million currently delinquent mortgages are ‘spending their mortgage’ and we assume a $1,500 average monthly mortgage payment – we get about $67bn in higher annualized discretionary spend – or about 1.4% growth.
LEVINE’S LOW DOWN
Consumers to Aid U.S. Economic Rebound as Unemployment Drops, Survey Shows - Consumers are emerging from a two- year hibernation to play a more active role in the U.S. recovery as unemployment recedes, according to economists surveyed by Bloomberg News. <bloomberg.com/news>
Consumers Praise Private Label Brands - Respondents to a 23-country survey largely agreed that store brands are at least as good as national brands in many respects. Released yesterday by Ipsos Marketing the Consumer Goods poll (conducted last November through this January) found 89% of respondents saying store brands are "the same as or better than" national brands when it comes to "providing a good value for the money." But it's not just that they're seen as a bargain. Large majorities of respondent also said store brands are at least the equal of national brands in "offering products that meet my needs" (87%), "offering products that are good for the family" (86%), "offering food products that taste good" (81%) and "offering home products that work well" (81%). <brandweek.com>
UK Fashion Industry Calls for Clarity on Party Policies as Election Approaches - Fashion industry leaders have called for the three main political parties to clarify their plans to stabilise the economy and consumer confidence and give transparent information on issues such as National Insurance (NI), VAT and business rates ahead of the general election on May 6. <drapersonline.com>
India: Government Cancels Yarn Export Duty Concessions - Indian government has withdrawn the 7.61% concession of cotton yarn exports under the Duty Entitlement Pass Book (DEPB) scheme to control prices of textile products. Knitwear exporters have been protesting against the unusual hike in cotton yarn prices, which have increased by nearly 30% in the last few months, while garment exporters have been badly hit by the slowdown in global markets. <fashionnetasia.com>
EU: Euro-Zone Retail Dipped in February - Retail sales in the 16 countries of the Euro-Zone fell once again in February, indicating that consumer spending will remain weak due to a slow economic recovery, according to the European Union's statistics agency Eurostat. The retail sales figure dropped by 0.6% from the previous month unexpectedly. That was the second straight drop this year and undermines hopes that the eurozone economy is poised for a solid return to growth in the first quarter of 2010 after stagnating in the last three months of 2009. <fashionnetasia.com>
China Signs Free Trade with Costa Rica - China has signed a free trade agreement (FTA) with Costa Rica, paving the way to lift almost all tariffs on Chinese textiles, chemicals and machinery to the Central American nation. When the agreement takes effect, 90% of commodities will be tariff free within a few years. China is Costa Rica's second biggest commercial partner after the United States, while Costa Rica is the Asian nation's ninth largest trade partner in Latin America. <fashionnetasia.com>
Seven & I, Fast Retailing Rise After Forecasting Higher Earnings on Demand - Seven & I Holdings Co. and Fast Retailing Co., Japan’s biggest retailers by market value, advanced in Tokyo trading after forecasting higher earnings amid signs consumer spending is recovering. <bloomberg.com/news>
J. Crew to introduce Warehouse Collaboration - J. Crew will have something to offer the most diehard of denim aficionados next month. The retailer has collaborated with Japanese selvedge denim label Warehouse on an exclusive men’s style that will sell for $300 on its Web site, and at its Men’s Shop and Liquor Store locations here. The style’s name, Lot 484 jean by Warehouse for J. Crew, is a nod to the address of the Men’s Shop at 484 Broadway. <wwd.com/markets-news>
The iPad Impact - With its sleek design and game-changing visual capabilities, Apple’s newly released iPad could be just what the fashion industry always wanted. “The screen real estate is perfect for what we do,” said Jag Bath, VP of product management for Gilt Groupe, which launched an iPad app last week, in the days leading up to the device’s debut on April 3. Other companies seem to be enjoying the benefits as well. Both eBay and Gap launched apps earlier this month, as did several fashion magazines, including Interview and GQ. <wwd.com/footwear-news>
Timberland Is a Little Greener - The Timberland Company announced that it has achieved a significant reduction of greenhouse gas emissions. The company successfully reduced its emissions by 36% in 2009 over its 2006 baseline coming from Timberland owned and operated facilities and employee air travel. Timberland is on pace to reach its goal of a 50% emissions reduction by the end of 2010. <sportsonesource.com>
Cotton Inc. Unveils New Ads - Cotton Incorporated is looking to link consumers’ associations to cotton with high fashion in the next evolution of its “The Fabric of My Life” campaign. The original Fabric of Our Lives campaign from the Nineties was successful in getting consumers to recognize how cotton was a crucial and desirable fiber in everything from socks to jeans to towels. For the last several years, the message has shifted to presenting cotton as a fiber equally suited to designer apparel. <wwd.com/markets-news>
The S&P 500 finished higher on Thursday after selling off in early trading. The market can go down but it will not stay down. Each move down is followed by a rebound, and each move higher is a BETA shift up. The best performing sectors yesterday were the high beta XLY, XLE and XLF. The underperformers yesterday were XLU, XLV and XLP. On the MACRO front, U.S. stocks rose for the seventh time in nine days as strong retails sales more than offset any fears triggered by concern over Greece’s debt crisis.
Following the European Central Bank’s decision today to keep its main interest rate on hold at 1%, ECB President Jean-Claude Trichet held his usual follow-up press conference. Notably, the media pressed him in the Q&A session to explain the economic conditions (parameters) that will initiate the EU and IMF to inject funding for Greece, or conversely the market conditions that should initiate the Greek government to request capital. In typical Trichet fashion he was tight-lipped on such questions, but did express that “a default is not an issue for Greece”.
As head into next week’s earning season, the corporate calendar looks to be a bright spot, as most retailers reported stronger-than-expected March same-store sales. The retail sector extended its outperformance vs. the broader market on the news. The S&P retail Index advanced 1.3% yesterday and is up 3.2% for the past week. The Thomson Reuters same-store sales index rose 9.1% in March vs. final consensus expectations for a 6.3% gain, marking the seventh consecutive positive reading. The Street Account beat/miss ratio improved to 83%/17% in March from 79%/21% in February and marked only the second 80+% reading since they began tracking the figures closely nearly five years ago.
Yesterday, the Financials (XLF) was a big driver to the upside in the market, the banking group leading the way; the BKX was up 1.0% on the day.
The increased M&A speculation in the airline industry offered additional support for market stocks yesterday and the Transports +1.4% outperformed the broader market. The bulk of the upside leadership came from the airlines, with the XAL +3.3%. The group was underpinned by renewed consolidation speculation following reports that UAL Corp. and Us Airways are in advanced merger talks.
Technology (XLK) was unable to keep pace, just slighting underperforming the S&P 500. Storage-related names were among the worst performers as CML bombed after guiding Q1 revenue below the Street. The Semis also took it on the chin with the SOX declining 1.4%.
Healthcare (XLV) can’t get out of its own way, declining again for the fourth straight day. Managed care was a laggard again today with the HMO down 1% yesterday and down 2.2% over the past week. The pharmacy group also struggled with the IHE down 0.4% yesterday.
In early trading, crude oil is looking lower for a second day in New York after a report showed U.S. crude inventories increased more than forecasted last week.
In early trading, gold is looking to decline on the back of a stronger dollar.
In early trading, copper fell in London for a second day, extending a decline from a 20-month high, on concern that recent advances were not supported by demand from China.
In early trading, equity futures are trading above fair value in a continuation of yesterday’s late-session recovery which saw a reversal from earlier losses, which were helped by stronger-than-expected retail sales and in reaction to comments from ECB President Trichet. Today's macro agenda is thin with only Wholesale Inventories scheduled for 10:00 ET. As we look at today’s set up the range for the S&P 500 is 16 points or 0.7% (1,178) downside and 0.6% (1,194) upside.
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