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May 17, 2010



Here are some of our thoughts on Dick’s headed into the print on Tuesday. The bottom line is that the company should print something starting with at 2, vs. the Street at 13 cents. The comp and GM% setup looks solid. SG&A is up in the air due to catch up spending on systems, but they guided there already. We’re 10% ahead of consensus for the year. The cycle is still shaping up very nicely for this space – which has been core to our NKE and FL calls. But if Tricky Dick sandbags, lowers 2Q, and causes a selloff on the print, you’ll hear me get much louder on this name.

1)      As it relates to EPS – Our model is coming in hot for the quarter. $0.20 vs. Street at $0.13/$0.14 and guidance of $0.13. The key driver is comps. I simply can’t get to anything as low as the 3% comp they guided to. Sales have been strong in the channel based on reports out of competitors, and anecdotes from suppliers.  Weather was less favorable in DKS territory than in other parts of the country – but nothing so debilitating that it should hurt numbers. In addition, they are going up against -3-5% traffic trends in both 1Q08/09, and a 3-4% decline in both traffic AND ticket in 1Q09. To boot, this is the quarter where dot.com starts to get booked in SSS. We should be seeing acceleration in the 2-3 yr trends. In order to get there, I’ve got to double the company’s guidance (and Street estimates). I’m at 7%.

2)      GM%: +100bp sounds about right. Sales/Inventory spread ended last quarter in relatively good position on our SIGMA chart – suggesting that inventories were not a problem. Plus, they should lap Chicks liquidation and golf galaxy clearance last year. If anything, I may be light with 100bp GM improvement.

3)      SG&A: This is the biggest question mark. They deferred investments last year in systems to optimize regional product assortment (i.e. more like how HIBB does it). They noted that it should cost $0.16 ps throughout this year – or an even $0.04 per quarter.  Maybe they sandbagged there, but the reality is that I have no reason to doubt this number. If I back into P&L impact, $0.04 = $4.8mm after-tax (120mm shares), $8.0mm pre-tax, or 3-4% growth to each quarter in SG&A – all else equal. I think I’ve got that plugged into my model appropriately.

For the year, I’m at $1.55 vs Street at $1.37. Next year is $1.70.

Sell-side sentiment is about 50/50 split between bulls/bears.

Buy side is slightly more bearish. Short interest has come down from 16%, but still stands at just over 10%.

No way would I be short this thing headed into the print – even if it is expensive and has tripled off the low. There’s going to be many reasons as it relates to the industry cycle why this thing will make sense as one of the best houses on a bad street. In addition, earnings revisions will be supportive.  There’s still other places I’d rather be in the space as it relates to riding the upside – most notably FL and NKE, but if Tricky Dick beats the quarter yet sandbags guidance and the stock sells off, this one will make it towards the top of my queue pretty quickly.


- Unlike most retailers which are seeing their online businesses grow at rates far greater than their core same store sales, JC Penney.com continues to underperform. The .com business grew 1% in the first quarter, essentially in line with overall sales growth. The e-commerce business continues to be negatively impacted by weak home furnishings sales. While the company is seeing a slight pick-up in soft home, management notes there is still much work to be done here to impact a measurable pick up in this key category.


- Keep an eye of Gap’s efforts to expand and grow its “1969” denim sub-brand and freestanding shops. With a handful of stores already open in LA, NYC, and now Chicago, the company has tapped a former 7 For All Mankind executive to become the creative director of the company’s heritage denim line.


- While most are fixated on Skechers wild success with its ShapeUps toning shoes, the company continues to grow in other ways. SKX announced a recent licensing deal to launch a line of leather goods, including belts, wallets, and coin purses for adults and children. Also on the way are licenses for apparel, sunglasses, legwear, bags, backpacks, and medical scrubs. It’s not clear how the medical scrubs fit into the company’s merchandise mix, but we suspect it has something to do with those in the medical profession already wearing the company’s footwear.




R3: Tricky Dick’s Gonna Beat - Calendar


H&M April Sales fall 6% - Hennes & Mauritz AB  said same-store sales in April slipped 6 percent as the Swedish fast-fashion giant came up against tough comps, cool spring weather and an early Easter holiday. Including new stores, sales for the month grew 4%. As of April 30, the Swedish fast-fashion giant operated 2,037 stores. The April figures represent a slowdown from March, when like-for-like sales grew 9 percent. <wwd.com/business-news>

R3: Tricky Dick’s Gonna Beat - H M 1yr 

Affordable Footwear Act is Back - The footwear bill, which would eliminate duties on certain types of lower-priced and children’s footwear, is being attached to the jobs bill. They asserted that some international manufacturers are circumventing the U.S. tariff system and paying lower duties on some types of imported footwear than their American counterparts by using textiles in the soles of shoes to get a textile tariff classification, which is subject to lower duties. A provision in the Affordable Footwear Act would close the loophole that “allows importers to evade duties that help the domestic manufacturers compete in the U.S. and global markets,” they said. The bill states that textile materials inserted into soles does not change the character or classification of the soles or the shoes, and thus, is subject to the higher duties. The centerpiece of the duty-dropping footwear bill, which the industry has been pushing for a few years, would eliminate some $800 million in tariffs on approximately$1.7 billion collected each year. It would also eliminate tariffs on about 60% of shoes imported into the U.S., or nearly 1.5 mm pairs annually, according to industry figures. <wwd.com/footwear-news>

Chinese Labor Shortage - A year ago, footwear manufacturers, deep in the trenches of the recession, were desperate for consumers to buy shoes. Now, the challenge has shifted to finding someone to make them. Footwear factories have so many orders that they are overwhelmed. Footwear Distributors and Retailers of America claimed after a recent poll that 88% felt the industry had a significant labor shortage, with 86% reporting that the problem had caused deliveries to arrive from one to four weeks late. There is also a generational change with young people having higher expectations of career paths. Footwear companies are feeling it the worst of any segment. <wwd.com/footwear-news>

TRLG Hires Apparel President - Michael Egeck, the former president of The North Face brand, was named president of True Religion Apparel, the designer jeans company.  <sportsonesource.com>

Bulgari Not For Sale - Bulgari SpA, the world’s third- largest jeweler, isn’t for sale, and doesn’t plan to make acquisitions, Chief Executive Officer Francesco Trapani told Corriere della Sera in an interview. The family is “completely resistant” to the possibility of a sale, Trapani said in the interview with the weekly business supplement of the Italian newspaper. Trapani is the nephew of Chairman Paolo Bulgari, grandson of the company’s founder. The Bulgari brothers, Paolo and Nicola, along with Trapani, own about 51% of the company. <bloomberg.com/news>

Senators Approve a Measure that Could Cut Retailers` Debit Card Fees - The fees that merchants pay to accept debit cards, including for online retail transactions, could decline under a measure the U.S. Senate passed yesterday. <internetretailer.com>

Gilt Groupe Goes From Fashion to Furniture - Members-only luxury sale site Gilt Groupe is expanding into home goods, the retailer announced yesterday. Gilt Home will offer 15 sales per week from more than 200 brands that sell products such as outdoor furniture, rugs and bedding. <internetretailer.com>