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May 18, 2010


Each of these four names seems to have a mind of their own in trading off balance sheet for P&L. The key takeaway from earnings season thus far is that the volatility of these financial rates of change is picking up.

TJX: By far and away the best, with a 23% spread between sales and inventories. But the off price channel – led by TJX has just put up what is likely to be the peak. Companies can’t maintain peak margins and double-digit sales/inventory spread while margins are near peak.


DKS: Tricky Dicky pulled a nice little ‘about face’ and swung back into the upper right hand quadrant after falling off the wagon in 4Q. One thing I like about layering the different trajectories over one another is that you can see the relative volatility in financials. Interesting how DKS looks more like WMT as it relates to P&L/Balance Sheet volatility than it does TJX or ANF.


ANF: Woof. Seriously. It’s so rare that a company has a few quarters of clearing inventory, and drops right back into Quadrant 2. That’s a VERY dangerous place to be. I’m trying to balance 1) higher SG&A + Int’l growth commitment against 2) lower capex guidance at a time when the dollar is strengthening. The delta in capex reduction can’t be explained away entirely by fx. I still think this could be a big stock – but I don’t mind being late on it. In fact – unless answering the question noted above gives me any particular insight, I’m more inclined on the other side.


WMT: Ironically, the all-powerful Wal-Mart didn’t look so hot here – relatively speaking. The quarter looked good and the sales/inventory spread looks good relative to margins -- but the latest data point is a negative change on the margin.

DKS/ANF/WMT/TJX: Notable Divergences - 5 18 10 Agg SIGMA


- With excess supply of big box real estate in the market, landlords are joining the trend of downsizing in retail by sub-dividing existing space in an effort to drive occupancy. Demand from businesses that can fill stores left behind by Linens ‘N Things, Circuit City, and G.I. Joe’s has not been sufficient to offset excess capacity. The upside of this recent trend is that with new construction still limited by tight financing, smaller format concepts will have more options for growth then may have otherwise been available only months ago.   


- One of our favorite discount luxury online retailers – Gilt Groupe is now expanding into home goods again exhibiting the lack of scalability of this model (recall they recently offered gourmet salami). This is further evidence suggesting that sourcing higher-end apparel continues to be a challenge as luxury players seek to meet increased demand at traditionally legacy channels.


- With the reporting of the first positive same store sales result in 15 quarters, Lowe’s noted that the results were in some part driven by extremely favorable weather conditions and the government subsidized “cash for appliance” programs.  With that said, the trend did improve within the quarter, with a notable pick up in bigger ticket items such as kitchen and bath.  Overall, 21 of 23 regions posted positive sales growth for the quarter.


Estee Lauder to Buy Smashbox Cosmetics - The Estée Lauder Cos. Inc. has gone Hollywood, nabbing the photo-studio-born makeup company Smashbox Beauty Cosmetics Inc. in a bid to move deeper into the fast-growing, alternative retail channel and gain entrée into the digital media space. <wwd.com/business-news>

College Hiring Sees Small Uptick - The prospects for new college graduates looking for fashion and retail jobs are improving. Small fashion firms have reduced payrolls and have brought in unpaid interns to take up the slack. Despite some 290,000 jobs created in April in areas ranging from manufacturing to professional services, the unemployment rate for the wholesale and retail trade was 9.5 percent, according to the U.S. Bureau of Labor Statistics.According to the 2010 job outlook from the National Association of College and Employers, firms plan to hire 5.3% more new college graduates in 2009-2010 than in 2008-2009. That’s the first positive news since October 2008. <wwd.com/retail-news>

Report: Young Consumers Shift Brand Loyalty in College Years - Nike is still clearly the brand to beat among younger consumers, but support for the brand wanes as teens move into their college years and then builds again as they age. Conversely, Adidas picks up steam with the college and post-college consumer. While Nike finished with a BSI score well over 700 points overall, both genders, and the 13-17 yr olds, it dropped to 683 among the 18-24 year old group. Adidas has a solid hold on the second spot finishing nearly 100 points higher than Under Armour in the #3 spot. <sportsonesource.com>

Li & Fung Ltd., the world’s biggest supplier for retailers including Wal-Mart Stores Inc., has $1 billion to buy other companies, President Bruce Rockowitz said.

A bond sale earlier this month boosted its acquisition fund, Rockowitz said in Hong Kong today. The company sold $400 million of 10-year bonds denominated in U.S. dollars. Li & Fung, founded in southern China in 1906, has announced a sales target of $20 billion this year, a 49 percent jump from 2009, when revenue fell for the first time since the Hong Kong- based company first sold shares to the public in 1992. Acquiring rivals, and a new contract to supply Wal-Mart, will enable it to reach the sales goal, the company said.  <bloomberg.com/news>

Target Ups its Electronics and Video Games Department - Target stores are rolling out a new open layout with 30% more space for its electronics and video games department. U.S. video games hardware, software and accessories sales in 2009 generated revenue at nearly $19.66 bn, according to The NPD Group. The revamped layout, expected to be completed by June, will feature product accessible fixtures, organized by platforms and game genres. In addition, many stores will also have Learning Centers and Trial Stations.  <licensemag.com>

Indian Ban on Raw Cotton Exports - Indian apparel manufacturers feel the country’s ban on raw cotton exports and abundant supplies of cotton at lower prices, combined with the global economic recovery, will help clothing exports rise about 10% this year. Elsewhere in the region, however, India’s protectionism is having a decidedly negative effect, especially in Pakistan and Bangladesh, textile-producing countries that are heavily reliant on comparatively cheap Indian cotton. Indian farmers and merchants, meanwhile, are angry they have been shut off from their international buyers. On April 19, India indefinitely suspended exports of raw cotton shipments in a bid to bring down domestic prices and ensure there was sufficient cotton for manufacturers here. The ban has hit the countries that buy large quantities of cotton from India, which became the world’s second-largest cotton exporter after adopting genetically modified strains of the plant. In the first two months of the year, it replaced the U.S. as the biggest exporter of cotton after China bought in 265,460 tonnes of Indian-grown cotton, a rise of 1,694 percent from a year earlier. <wwd.com/business-news>

Gap to Open Stores in Italy - Gap Inc. revealed plans to open the first Gap and Banana Republic stores in Italy this year. The stores will be located in central Milan, next to one another in Corso Vittorio Emanuele, one of the busiest shopping streets in the city. Next year, the company is expected to roll out stores in Rome and other Italian venues. The company is expanding its presence globally and, in light of its strong customer base in London and Paris. Gap brand has stores in Japan, the U.K., France and Ireland, while Banana Republic has units in Japan and the U.K.  <wwd.com/retail-news>

Lucy Activewear Hires a Nike Exec as its President - Former Nike Training global director of business development Shaz Kahng is the new president of Lucy Activewear, a brand owned by consumer brand manufacturer VF Corp. Kahng will oversee all aspects of the Lucy brand, including e-commerce and marketing. <internetretailer.com>

Coach and Target Settle Case - Coach Inc., Target Corp. and LF USA reached a settlement Monday that ended an infringement lawsuit the accessories maker brought last year. Court records said the suit, filed in U.S. District Circuit in Manhattan, was voluntarily dismissed. “We are pleased to have reached a settlement that is satisfactory to all parties,” said Todd Kahn, Coach senior vice president and general counsel. Coach accused Target of selling handbags that infringed on the trade dresses of its Patchwork and Ergo designs.<wwd.com/business-news>

Sears Picks New Digital Agents - Publicis Groupe's Digitas has won digital media planning and buying duties for Sears Holdings after a review, according to sources. Annual spending on the account is estimated at $30 million. <brandweek.com>

African Growth & Opportunity Act Missing the Mark - Ten years after the African Growth & Opportunity Act was enacted, it is clear the extension of duty free benefits alone were not enough to build a vibrant, regional apparel industry. When the agreement known as AGOA extended duty free preferences to more than two dozen eligible African countries, it was hailed as a positive model for linking trade with aid for developing regions. Apparel producers, enticed by the duty free benefits the act extended, shifted production into the region. In 2005, five years after AGOA was enacted, it looked like the initiative was on track to be a success as the region’s share of U.S. apparel imports doubled. But in the intervening years, AGOA’s slice of the U.S. market has shrunk back to pre-agreement levels. In February 2010, AGOA countries claimed a 1.12 percent share of U.S. apparel imports, up only slightly from 2000 when the region shipped 1.02 percent of apparel to the U.S. At their peak in 2004, AGOA imports represented a 2.24 percent share of the U.S. apparel market. <wwd.com/business-news>