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SCARY SAME STORE SALES CALL-OUT

The dispersion is growth between apparel retailers and discount stores was 9.3% for the month of July – which is the 2nd biggest number in the 20-year period for which I’ve collected this data. The biggest gap was the post 9/11 fall-off (-10.7%). We’re edging out levels hit in the 90/91 recession.

TBL: Hold The Line!

I remain a fundamental bull on TBL. I like the margin and cash flow direction over 12 months, as noted in my 7/29 and 5/12 posts. But when my Partner Keith McCullough (and his factor-based pricing models) tells me "TBL faces critical support of 15.23 or watch out below" my short-term capital preservation radar goes up.
TBL stock chart courtesy of FactSet.

WRC: Peaks Are Processes, Not Points

The bull case here is best represented by the reported financials. The company smoked numbers for the 7th quarter in a row, appears, printed a 22% sales growth rate, 236bp improvement in GM rate, AND levered SG&A on top of that. Mix those together and out pops a 74% EBIT growth rate. Layer on incredibly bullish statements about the global business, input cost containment, and that WRC is not feeling the impact of any form of regional slowdown. A very powerful concoction indeed.

It’s very easy to get caught up in the ‘beat/miss vs. expectations game’ as well as all the noise around door openings and product launches. I sat on this thing for way too long today trying to make sense of it. But there are several MAJOR questions I have that are better answered by simple mathematics.

The key questions I have revolve around FX, sourcing, and margins. WRC noted that FX was a 3.4% boost to revenue in the quarter. What I want to know is how a company with a 22% sales growth rate and 50% of sales outside of the US could only benefit by 3.4% when weighted FX change is 10-15%??

My math gets me to something closer to a $65mm top line benefit. Assuming a 30% incremental margin, this is about $20mm, or 4 points of margin. In other words, excluding this FX impact we’d be looking at 6% sales growth (not 22%), margins closer to 6% (not 9.7%) and operating profit that is flattish with last year.

How can this be good if the Euro continues to roll? What if cotton goes to a buck vs. the sub-0.70s? What if the sourcing environment continues to erode as factories close in Asia to the tune of 5-10 per day? WRC management noted that costs are under control. Everyone says that. What no one says is how they are planning for the unexpected – the extent to which they will be in the pole position when the industry acts irrationally as margins go away for the companies that have underinvested at the peak.

It’s tough for me to fight the tape on this one. Heavily shorted stocks that beat numbers don’t go down. In fact, a close above 45.01 is a bullish signal from a quantitative standpoint per Keith. Not as bullish as we see with RL. But bullish enough. Could we see WRC’s multiple defy gravity for a while longer? Yes. Ultimately, however, something’s gotta give. And when it gives, run.

Asset sales have helped margins, but not as much as FX and sourcing.

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From Harvard to D.E. Shaw, Without Love

In the Financial Times today, D.E. Shaw’s Managing Director, Larry Summers, wrote one of the more impressive and well rounded treatises on the US economy. The article was called “The Big Freeze”, and it’s definitely on the macro required reading list.

On most mornings when my alarm goes off at 4am, I have no idea what I am going to write my “Early Look” about. I am data dependent, and that’s just the way that it is. Summers, however, looks to have had plenty of time to coagulate a lot of the thoughts that I have alluded to in my 2008 missives.

I’m an aspiring Yale economist, of sorts – at least that’s what the B.A. on my resume says. Summers is an established Scribe, and the former head of both the US Treasury and Harvard University. If you think I am too negative on the “Trend”, read his take.

Summers correlates today with the central banking credibility issues associated with the 1970’s, but he points consistently to the 1930’s in the US and the 1990’s in Japan. “Just as the bottom was called a number of times in Japan in the early 1990’s and in the US in the early 1930’s, we have seen and no doubt will see moments of sunlight that create hope that the worst is past”, he wrote.

Other quotes by Larry Summer’s that I wanted to highlight:

• “Then there is the problematic situation of the banking system. Where traditional non-mark to market accounting is in use, banks have not yet revised estimates of their capital to reflect likely future losses… they have instead assumed that the market’s valuation of their assets reflects transient liquidity factors rather than underlying problems.”

• “We do not have a framework in place in which authorities can do what is necessary to counter systemic risk”

• “Government involvement in recapitalizing financial institutions is like devaluation: a very unattractive last resort”

KM
Article at (http://www.ft.com/cms/s/0/794801a8-63e8-11dd-844f-0000779fd18c.html)

Re-Regulating Wall Street: The SEC Tells Citi To "Make Investors Whole"!

The Feds are in the building folks. Citigroup's malfeasance is being called onto the accountability carpet today. This is a very consequential "settlement" for Main Street America as it sets a precedent for more to come. The days of no transparency within the hallowed halls of Wall Street are ending.

If you think the "Tech Bubble" settlements were bad for Wall Street, wait until the lawyers get their nails under this moldy rug.

This is the "R" (Re-Regulation) factor within our RIPTE model. Citigroup (C) has rallied to $20 in recent weeks. On a break down through the $17.79 line, I see $14/share being re-tested. Don't forget what happened to this company in 1991.
KM

Chart Of The Day: McCain vs. The Dow

My Partner, Todd Jordan, is a 'math guy' from the Chicago School of Economics. With a "T" Stat of 2.44, his work below suggests that these correlations are statistically significant. The correlation was 0.45, and the R Square 0.21.

The question for the US stock market is where does Johnny Mac go from here?
KM
  • McCain's Runnup Signalling A Near Term Top?
Todd Jordan's Overlays

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