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August 11, 2010

In preparation for Gildan’s print after the close, here are the puts and takes to help navigate the quarter.


For Q3, we are a penny above the Street at $0.49, but starting in Q4 headwinds get considerably more challenging – we’re $0.04 below consensus at $0.42. Assuming management is looking to get paid this fiscal year, they can take down SG&A to make it happen.  But, looking out into next year is when the deviation from Street estimates gets big.  Our model is at $1.46 (down -5% yy) versus the Street at $1.94 (up +27%!). Here are a few assumptions to note:

  1. They’re already at full utilization in their Activewear biz (80%) of total and are building out capacity, but this is not overnight.
  2. It is precisely 1Q11 when higher cotton/labor costs start to kick them where it hurts. With cotton prices up over 10% since the end of June and back at peak levels upwards of $0.85 /lb. last seen in early 2008, this delta is turning sharply starting in Q4.
  3. Can SG&A stay at 12% of sales forever? Especially if they need to kick start top line at a point when HBI is getting more competitive?
  4. One positive offset is that we took incremental cash flow and slapped on an 8% return. Not through any kind of financial product. But they’ll probably buy something, and we assume they will realize a nominal 8% return off the top. They’ve had mixed results in the past. This assumption is batting down the middle.

Following a decent quarter that laps significant Broder related disruptions this time last year, we’d consider adding GIL to the short list in a few months one the dust settles after the quarter and as 2011 approaches.

R3: GIL: Ammo for Q3 - GIL Q3 Prev 8 11 10 


- In another sign that online and offline sales are essentially one in the same, Piperlime is opening a pop-up shop in NYC this September. The Gap-owned footwear site will represent the brand’s first ever attempt at having a physical presence. The opening coincides with Fashion Week.


- In an effort to boost its east coast image and drum up some marketing buzz, word has it that Vans is leasing a 15,000 warehouse in Brooklyn to create an indoor skate park. The site is expected to be used for promotional and marketing events and NOT for locals to use.


- Kmart gets added to the list of discounters looking to make a fashion splash, several years AFTER Target pioneered the concept. This Fall the retailer will launch Kmart Design, an apparel collection created by a team of 250 international designers. The fashion campaign will also launch with an ad campaign in Vogue.


Skechers Defends Toning Footwear - Skechers said that the two recently filed civil class actions disclosed in its Form 10-Q for the quarter ended June 30, 2010 each have only a single plaintiff and both are completely baseless. The complaints, Tamara Grabowski v. Skechers USA, Inc. and Sonia Stalker v. Skechers USA, Inc., allege that the company’s advertising for Shape-ups violates California law. The complaints, which were filed respectively on June 18 and July 2, are in the early stages and that the company will mount a vigorous defense. Skechers claims the lawsuits are inconsistent with numerous scientific studies, including studies cited in one of the lawsuits. Links to key studies, including two published in peer-reviewed journals, are available at www.ToningShoeStudies.com. The company also said that the popularity of its toning shoes provides convincing evidence that customers are pleased with the product.  <sportsonesource.com>

Hedgeye Retail’s Take:  Baseless or not, the volume of studies supporting and refuting the “toning” shoe claims is increasing.  If anything, we expect the media attention to increase here as “consumers” begin to realize walking in a certain type of shoes may not actually be a replacement for going to the gym and eating healthy. 

American Apparel Will Miss SEC Filing Deadline Due to Previous Auditor Resigning After Finding Material Weakness in Internal Control - American Apparel Inc. has informed the Securities and Exchange Commission that its numbers will neither be punctual nor profitable. Its new independent auditor, Marcum, needs more time to work through the figures for Q2, as well as Q1, which have yet to be filed. The summary of Q2 offered by American Apparel was not positive: Q2 loss against a net profit last year, net sales declines from lower retail sales only partially offset by increased wholesale, and gross margin declines from shift in business towards wholesale coupled with higher production costs. Deloitte & Touche LLP resigned the account last month after identifying “material weaknesses in internal control” with respect to the closing and reporting of its figures. Additionally, American Apparel told the SEC, Deloitte became aware of certain information “that if further investigated may materially impact the reliability of either its previously issued audit report” or the financial statements made regarding fiscal 2009. <wwd.com/business-news>

Hedgeye Retail’s Take:  Maybe the clamp down on the company’s dress code was the leading indicator that things weren’t exactly as advertised. 

GSI Commerce Expands to Asia; Appoints Vice President of Japan and Asia Pacific - GSI Commerce Inc. has opened its office in Tokyo, Japan and has appointed a VP of Japan and Asia Pacific. They will open the Japanese office and lead the operation of the company’s existing client commitments in Asia Pacific as well as the development of new clients. <sportsonesource.com>

Hedgeye Retail’s Take:  With more and more retailers taking on their own e-commerce efforts, we wonder if the expansion is purely offensive or a bit of defense. 

JCP Introduces MNG by Mango Shop in Shops - J.C. Penney juices up the contemporary side of its fashion business next Wednesday with MNG by Mango shops inside 77 of its department stores and online. By February, Penney’s intends to have Mango shops in 600 doors. MNG by Mango is one of only three brands in the store with dedicated built-out shops, including Sephora and Call It Spring footwear. The influx of goods will be speedier as Mango collections will arrive every two weeks, differing from other labels which may ship as rapidly, but in limited quantities to supplement what’s already on the selling floor. The speed to market is made possible by Mango’s superior sourcing and design capabilities coupled with Penney’s advanced logistics and planning and allocation systems.  <wwd.com/retail-news>

Hedgeye Retail’s Take:  One of the more exciting collaborations that we’ve seen in a long time.  We do wonder how aggressive the Mango fashion will be for the JC Penney customer however. 

7 For All Mankind Expands into Berlin - The premium jeans label opened a 970-square-foot store last month in Berlin’s tony Quartier 206. The store design features a slick zebra-wood interior, similar to many of its U.S. boutiques, and houses the brand’s current men’s and women’s wear collections as well as perennial best-selling items such as leather and denim jackets and skinny jeans with a low rise. The Berlin opening marks the first of several slated in Germany. A 1,938-square-foot shop will open in Düsseldorf early in September and further units are planned for Hamburg and Frankfurt. <wwd.com/retail-news>

Hedgeye Retail’s Take:  While the US premium denim market appears to have peaked, it’s time to look elsewhere for growth.  We wonder if Seven can be one of those American brands that was born stateside but ultimately becomes a bigger brand outside of its domestic roots.

Puma Appoints New Retail VP - Puma North America announced the appointment of John Trott as Vice President of Puma Retail, who will oversee all Puma North America retail divisions, including Puma Stores, Puma Outlet Stores, and Shop.PUMA.com.  <sportsonesource.com>

Hedgeye Retail’s Take:  An acceleration in growth on the horizon or perhaps a revamp of the store base that seems to have grown lockstep with popularity of low profile footwear?  For those keeping track, Puma is missing the boat at the moment with the resurgence in technical/performance footwear.

Target Brings Back John Derian for Home Line - A new John Derian for Target collection will hit stores this fall, featuring more than 100 exclusive home décor and accessories. The new line will include decorative trays, wall art, coasters, stationery (mini journal sets and paper organizers), fabric-covered storage bins, ceramic mugs and melamine dinnerware.In 2008, Derian partnered with Target for a line of stationery and home décor products. <licensemag.com>

Hedgeye Retail’s Take: Given that the first collection was sold out immediately, this expanded assortment makes sense. 

Perry Ellis International Launches PGA TOUR Collegiate Apparel Program - Perry Ellis International announced the launch of PGA TOUR Collegiate Apparel at retail accounts nationwide, offered through a licensing agreement with The Collegiate Licensing Company (CLC), a division of IMG Worldwide, and the PGA TOUR. <sportsonesource.com>

Hedgeye Retail’s Take:  All of a sudden the college market has become a big source of growth.  Long a sleeper in the world of retailing, we now see BKS, HBI, COLM, and UA tapping the college market in one way or another.   After all, for every graduate there is a freshman needing new gear- year after year.