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July 27, 2010

UA had a critical setup into this quarter. It delivered. But the market was ready for it.


The setup heading into this eps release was questionable at best. On one hand, apparel trends clearly looked good at retail, inventories were in check across the board, channel partners consistently leaked out indications that a bigger footwear push was happening sooner than later (in line with our view), and the consensus estimates were just flat-out low across the board. In fact, our estimate for next year still stands head and tails above the Street at $1.75 vs. the Consensus at $1.30.

But then Kevin Plank threw a changeup and booted his President of just 2-years just 2 weeks ahead of the quarter – and the seasonally weakest quarter at that. This thing was primed for fireworks. But every analyst came out and defended the stock in the face of the event. Even I thought the management change was perfectly rational – though would never have thought the stock would tread water (nevermind go up!).

In the end, this quarter was another outstanding one for UA. 24% top line growth with 1% inventory decline? Sweet…  Also, I love the fact that the company delivered its SG&A in spite of such big top line numbers. The punchline there is that it is spending when it should in order to sustain its growth trajectory – instead of printing unsustainably high margins in a period of questionable growth (i.e. Skechers).

The question here is whether the recent run has this stock priced for perfection. If so, then UA delivered. But if the company says anything remotely cautious on its call, I can’t imagine that the stock cannot be bought lower. Will be back after the conference call as warranted.


- Luxury retailer, Saks Fifth Avenue, is about to launch designer plus size apparel with partners including Chanel and Dolce & Gabbana.  However, the store’s merchandising approach will be slightly different than a traditional retailer which would normally have a “department” devoted to the larger sizes.  Saks will mix these items in with existing stock, extending the traditional size runs.


- According to the 2010 American Pantry Study, 93% of consumers expect to remain cautious with spending even when the economy improves.  Interestingly, 55% of those cutting back suffered no decline in income, but felt they “should be” cutting back.  When it comes to using loyalty cards and coupons, 81% of respondents indicated the process is “fun”.


- Sales of significant retail properties (over $5 million) slipped again in the second quarter, declining 9% sequentially from 1Q to $2.9 billion.  This marks the seventh time in eight quarters that investment spend in retail real estate has remained below $5 billion.  From 2001-2008, total investment in retail properties topped $5 billion consistently, quarter after quarter.



China Labor Shortages May Impact Fall Sporting Goods Deliveries - Of all the challenges facing the U.S. sporting goods industry in 2010, one would hardly think labor shortages in China would top the list but whether it comes to making golf clubs, toning shoes or hiking boots, the topic is dominating earnings calls and boardroom discussions across America. The deep recession and a steep rebound in orders this spring have made it difficult for Chinese factory owners to fill jobs. <sportsonesource.com>

Hedgeye Retail’s Take:  It’s been a long, long time since we’ve talked about out of stocks and product shortages.  Good for margins, not so good for the topline.   

Bangladesh Garment Factories Unwilling to Meet Minimum Wage Demands - As garment factory owners in Bangladesh are unwilling to offer workers as per their minimum wage demands, the government is indirectly intervening into the matter. The country’s Prime Minister, Sheikh Hasina, stressed that apparel factories paying their workers are insufficient as well as inhuman. The government will reveal the minimum wage structure for garment workers by July 28th. The Labor Ministry has been in talks with the garment factory owners to fix an apposite wage structure for their workers although the government cannot directly intervene into the privately-run industry.  <fashionnetasia.com>

Hedgeye Retail’s Take:  More inflation.

China Shuts Down Five Tanners in Fuzhou City - Five tanneries in Fuzhou city, China are closing down their operation by October this year as part of a plan to eliminate outdated production capacity and clean up the environment. All 5 of the Tanneries have annual production below 20,000 pieces of standard cattle equivalent. The announcement has shown China’s plan to eliminate outdated production capacity. Production and effluent treatment systems that fall below environmental standards and those tanneries that have a low production volume under 30,000 pieces per year will be the target of elimination. <fashionnetasia.com>

Hedgeye Retail’s Take:  Keep an eye on leather pricing as China continues to crack down on a substantial number of tanneries that are harming the environment.  China has said it expects to close 1,000 small and medium tanneries in its effort to eliminate harmful pollution created from such facilities.  Approximately 700 large and more environmentally friendly factories will remain.

Brazilian Footwear Brand Corso Como Growth Spurt - Since its 2006 launch, the Campo Bom, Brazil-based brand has been steadily adding new categories, expanding its retail and online presence and bolstering its name in the U.S. and abroad. Sold in 870 doors in the U.S., including Nordstrom, Bloomingdale’s and Anthropologie, and in another 250 shops internationally, Corso Como in May made its first move into branded retail with a website and e-commerce platform. The company also is eyeing expansion across Europe, particularly in England, France, Italy and Spain, and plans to up its trade show presence in the region. Corso Como has made its mark in the women’s market with its collection of low-key, sophisticated and comfort-driven designs at accessible price points, and is growing the category mix. <wwd.com/footwear-news>

Hedgeye Retail’s Take:  While most brands see Brazil as a substantial end-user market, it appears competition is brewing on domestic soil.  Brazil has been a large player in the footwear market for years, but branded exports to the US have not been a huge part of the equation, until now.

Warnaco Names Jim Gerson President, Swimwear - The Warnaco Group, Inc. appointed James B. Gerson as president of its Swimwear division. Jim joins Warnaco from V.F. Corp, where he most recently served as president of Reef.  <sportsonesource.com>

Hedgeye Retail’s Take:  Another high profile defection from VF Corp.  Recall that VFC has been trying to build Reef into another of the company’s large lifestyle brands, like Vans and TNF.

Nike Saves Face on Honduran Labor Issue - Although this has virtually no financial impact, Nike saved face by pledging to pay $1.54 mm for a worker relief fund to Honduran workers after University of Wisconsin at Madison terminated its agreement and Cornell warned it would follow. Nike’s action is a reversal of its stance in April, when the company said the contract factories bore sole responsibility for paying the workers’ severance. <wwd.com/business-news>

Hedgeye Retail’s Take:  For a company of its size, Nike is keenly aware of how important image and social responsibility is to today’s consumer. Score one for the college students.

Eastern European Malls Use Dinosaurs, Spas to Lure Shoppers - If Christian Dior’s brand name can’t attract customers, maybe dinosaurs will. That’s the plan behind Galerie Harfa, a half-built shopping mall perched above Prague’s Vysocany suburb that will have a dinosaur-themed amusement park, fitness center and rooftop swimming pool. As the economic slowdown squeezes retail sales in the Czech Republic and Hungary, companies such as Hochtief AG, Strabag SE and Skanska AB help construct venues with spas and electric-car tracks to lure shoppers. Mall space has more than quadrupled since the former Communist nations joined the European Union in 2004, exacerbating the need to offer more than just shopping. “It’s not enough to line up the usual suspects like Zara, Esprit and H&M,” said Lenka Hartmanova, a Prague-based analyst at real estate company DTZ Holdings Plc. <bloomberg.com/news>

Hedgeye Retail’s Take:  If only they could take apart and move the failed Meadowlands, NJ mall, Xanadu, to eastern Europe.

 Drugstore.com Branches Out - The e-retailer today unveiled VitaminEmporium.com, which sells vitamins and supplements as well as such items as shampoo, toothpaste and pet products. The site went live quietly a few weeks ago, but drugstore.com only announced it today. <internetretailer.com>

Hedgeye Retail’s Take:  Competition is heating up in the vitamin and wellness category, this time drugstore.com is taking a stab at the market.  Haven’t we seen this before?  Remember St. John’s Wort?