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The Singapore Sling: Why We Are Long...

This insight was published on July 14, 2010. RISK MANAGER SUBSCRIBERS have access to SELECT MACRO content in real-time.




The Singapore Sling: Why We Are Long of Singapore



Position: Long Singapore via the etf (EWS); Bullish on SGD-USD.
Conclusion: As part of our call that growth will slow globally in 2H10, we want to be long currency and equity markets that are poised to accelerate domestic consumption. Singapore is one of those economies and, as a result, is one of Hedgeye’s top Macro investment ideas.
Based on recent strength in manufacturing and exports Singapore posted a 2Q10 GDP growth number of 19.3% Y/Y. The record gain was fueled by strong industrial production growth, which accelerated in May to +58% Y/Y. Manufacturing in Singapore has grown by an average of 45% in the first five months of 2010, led by strong output in the pharmaceutical and electronic sectors – two of Singapore’s largest export bases.
Despite the EU’s sovereign debt issues, the large growth in exports during the 2nd quarter, the net of which compromised 25% of GDP in 2009, is an incrementally bullish read-through in conjunction with the 2Q GDP release. Singapore’s non-oil, domestic exports accelerated on the margin in June to +29% Y/Y vs. +24% Y/Y in May. Upon further scrutiny, however, we find that European austerity and economic stagnation in the U.S. paints a more sober picture of the intermediate term trade outlook for the $182 billion economy. Today, the Trade Ministry of Singapore stated:
“In the European Union, domestic demand remains depressed as concerns over the sovereign-debt crisis persist… The implementation of fiscal austerity measures in some of the economies may further weaken their domestic demand. The weakening of the euro against key trading partners will also dampen import demand in the European Union. Signs of a slowdown in the labor market in the U.S. have affected consumer confidence, and sluggish final demand from the world’s largest economy as well as Europe has led to a moderation in manufacturing in Asia.”
The consensus belief that European Austerity may negatively negative impact Singapore’s exports has upside risk.  Nominal exports to the EU are less than 8% of the total with the economically healthy Germany compromising 20% of that share. That said, just last week, the EU Delegation to Singapore plainly stated that trade between the two entities would remain vigorous in 2H10, despite austerity measures.
Breaking down the most recent trade numbers in more granularity, we find that growth of non-oil, domestic exports (NODX) to the EU accelerated in June (+75% Y/Y vs. +5.7% Y/Y in May) due to a favorable inventory cycle for pharmaceuticals, electrical machinery, and computer parts. This is likely to moderate going forward, as Singapore PMI slowed in June (though still showing expansion in all major categories: total, new export orders, new orders, and order backlog). The takeaway from this is that, while cause for concern, European austerity fears  should not be overstated in an analysis of Singapore’s trade outlook.



The Singapore Sling: Why We Are Long... - chart1



Trade Outlook: Moderate
In fact, the majority of Singapore’s exports go to Asian economies, with the largest recipients being: Hong Hong (11.6%), Malaysia (11.5%), China (9.7%), Indonesia (9.7%), and Japan (4.6%) (CIA Factbook, 2009). The U.S. is a destination for roughly 11% of Singapore’s nominal exports, so continued weakness (Y/Y growth flat sequentially from May to June) from that market – which we expect – may continue to weigh on Singapore’s export growth throughout the remainder of this year. Conversely, bullish demand from China – supported by government stimulus and recent wage growth – may help offset any potential declines in exports caused by the U.S., which we’re already seeing evidence of. While growth of NODX to both China and Hong Kong slowed marginally in June, the Singapore Trade Ministry has credited one or both of these markets as the largest contributors to overall export growth in every month this year except February. Even then, Taiwan and Indonesia picked up the slack in February as two of the largest contributors to growth. Asian markets will likely be the key drivers to Singapore’s export growth going forward and the recently launched China-ASEAN Free Trade Area agreement holds the potential to greatly accelerate intra-regional trade.
All said, Singapore’s export growth is still likely to moderate from here and, like many world economies, will slow in 2H10. Despite this, we contend that the economy is in a bullish setup supported by internal demand, as supported by the Ministry of Trade’s third upwardly-revised 2010 GDP estimate today (+13-15% Y/Y vs. previous forecast of +7-9%).


Domestic Consumption Outlook: Bullish
At a mere 2.2% in 1Q10, Singapore’s latest unemployment rate is at its lowest level in 18 months, thanks to private and public efforts to bolster the services sector the Southeast Asian economy. The opening of two casino resorts by Genting Singapore Plc and Las Vegas Sands contributed to a net addition of 36,500 jobs in the quarter and record tourism for the sixth consecutive month (+30% Y/Y in May and driven by intra-Asian visitation). Singapore has a resident population of roughly only 5 million, so 36,500 job adds and high tourism rates will have an measured impact on the economy. Further, Singapore also has an open policy of importing highly-skilled labor to meet its growing demands (1.5 million immigrants from China, India, and Malaysia).
The demand for highly-skilled labor is particularly prevalent in the financial services, construction and energy sectors. For the third consecutive year, the World Bank has ranked Singapore as the easiest place in the world to do business and the fundamentals behind that calculation make Singapore a likely destination for relocated financial services as a result of global industry regulation. Singapore is already Asia’s leading OTC commodity derivatives hub with more than 50% of the region’s volume. According to Singapore’s Ministry of Trade and Industry, increased intra-regional trade will likely result in the need for upwards of $8 trillion of infrastructure and insurance investment over the next decade, so the government has been busy making concessions to accommodate this growth. In the construction sector, the government has set aside 25% ($250 mil.) of the National Productivity Fund for manpower development and technology adoption. In the energy sector, Singapore is developing a facility to store liquefied natural gas to reduce dependence on imports from neighboring countries where the pricing outlook is uncertain. All in all, Singapore is making moves in line with our TAIL thesis that Asian markets will continue to take share from the U.S. and the EU in the global economy.



The Singapore Sling: Why We Are Long... - chart2



Risks: Moderate in the Absolute; Negligible Relative to the Downside Risks of Other Advanced Economies (U.S., Spain, France, Greece, Mexico)
So what are the downside risks to the bullish case on Singapore’s economy? With the equity market up only 1.9% YTD and far from the top of the performance leaderboard, this leading indicator suggests there are risks associated with this thesis. Those risks include: an expedited move in the Singapore Dollar vs. the U.S. Dollar, which would further dampen export prospects to that market; and a potential for a hiccup in pharmaceutical manufacturing, which itself is a very volatile industry subject to large production swings by big companies such as Sanofi-Aventis SA.
With 19% Y/Y GDP growth and CPI currently running at the highest level since Dec. ’08 (+3.24% Y/Y), the Singapore Dollar is in a hawkish setup ahead of the next Monetary Authority of Singapore policy review in October (the Monetary Authority uses the Singapore Dollar instead of interest rates to manage inflation). The currency rose as much as 1.2% on the day of the last MAS meeting back in April when the board allowed a revaluation of the Singapore Dollar and shifted to a stance of gradual appreciation. If the currency continues to strengthen against the U.S. Dollar from here, export competitiveness to the U.S. market may come under pressure. SGD-USD has gained 1.5% against the last two weeks alone and our Short the US Dollar thesis makes this trend likely to continue. If the euro appreciates further from here, however, relative strength in that currency may offset a portion of this pressure. Fifty-eight percent of the U.S. Dollar Index is Euros, further U.S. Dollar debasement from here will provide reasonable support for the EUR-USD, which is teetering on a TREND line breakout above $1.28. SGD-EUR supports this view, down (-0.3%) in the last two weeks.



The Singapore Sling: Why We Are Long... - chart3



The Singapore Sling: Why We Are Long... - chart4



A second risk to Singapore’s go-forward outlook is the prospect of an eventual overheating in the housing sector. An alarming report by CIMB suggests that overall housing affordability in Singapore is now inching closer to the banks’ mortgage-to-income threshold ratio, after a 10% YTD increase in private home prices which has elevated those levels above the 1996 peak. While appropriate cause for alarm, further analysis suggests that housing prices are far from a China-like bubble. First, housing CPI (the largest component of the consumer price index) has lagged overall inflation for the past 12 months. From the November 2008 peak-of-peaks, housing CPI has experienced a (-4.2%) decline. Furthermore, a marginal deceleration of Y/Y growth in the latest housing CPI reading suggest that concerns are likely overdone for now. In the event that they aren’t, however, expedited appreciation in Singapore’s housing market will likely put more pressure on the MAS to raise the value of the currency – which would further augment our bullish consumption thesis. Moreover, immigration policies designed to expand Singapore’s population by over 50% in 10 years suggest there won’t be any “ghost towns” on the island anytime soon.



The Singapore Sling: Why We Are Long... - chart5



Conclusion: Long EWS; Long SGD-USD
In summary, we like economies in the back half of 2H10 and 2011 that are setup to accelerate domestic consumption to offset a decline in global trade and industrial production (China, Brazil, Singapore). Keep in mind, however, that every market and currency has its price and with growth poised to slow globally, relative economic performance will matter even more in 2H10. We are no longer in a “rising boat lifts all tides” investment environment, so we’re waiting for price confirmation in markets like China and Brazil on the long equity side. From a quantitative standpoint, Singapore’s price is right. We expect Singapore’s FTSE Straits Times Index to outperform many global equity markets throughout the remainder of the year. From a currency perspective, Singapore’s hawkish economic setup and low deficit-to-GDP ratio (2.6% in 2010) makes the Singapore Dollar a strong FX play - particularly relative to the $USD.



The Singapore Sling: Why We Are Long... - chart6



Darius Dale


As expected, BYI missed the Street slightly and provided lower than consensus FY2011 guidance. However, we don't think the Q or guidance was too far off from the whispers.




  • Increased game operations revenue was helped by Cash Spin
  • Repurchased $62MM of their stock since April 1st
  • EPS was negatively impacted by 2 cents of FX and 2 cents related to discrete
  • For systems, $2.1MM less revenues reported in the quarter under the new accounting standards
  • Estimate NA ship share of 18% in the quarter
  • With the introduction of the new Pro Series cabinet, they expect that their margins will be initially impacted, but over time their margins will exceed legacy margins
  • Margins on gaming operations were negatively impacted by jackpot expense
  • For FY2011: Effective tax rate between 35-36.5% 
  • Expect to net $60-65MM on Rainbow, post taxes
  • Have $88MM remaining under their shareholder buyback plan
  • Leverage is well under 1x
  • Product sales, NA sales: 2,605, of which 2,264 were replacement sales. ASP increase was due primarily to product mix. Pro-Series Alpha II Cabinet feedback continues to be very positive, but timing of the release has impacted their share
  • Focused on improving their low denomination game performance
  • Executed agreements with 2 concessionaires in Italy for the placement of 3,600 games.  Expect to place games/collect revenues in early 2011. Expect to get more contracts.
  • Will launch in Australia in early 2011
  • Gaming operations: Launch of Cash Spin has been "phenomenal," having placed 750 units and have commitments for 750 units. Next month it will be available as an application on iPhone.  Margins on gaming operations were in the mid point of their range - but they had higher than usual jackpot expense. 
  • Refreshed their WAP product and it's growing well.  Net installed WAP base grew by 20 units.
  • Engaged in expanding their already strong position in Mexico as that market transitions into Class III
  • Do not expect a pick up in replacements for the rest of calendar 2010, but believe that replacement demand will modestly pick up in 2011
  • Systems business: International revenues comprised 40% of total systems revenues. Maintenance revenues were $15.1MM. Approximately 70% of 2010 systems revenues came from existing customers.
  • More than 610 casino sites that are either using or getting installations of BYI slot/table tracking systems
  • Signed their systems first contract with a New Zealand customer. They expect to sign additional contracts in the region over the next few months.
  • Galaxy Starworld went live with iVIEW DM across 90% of their floor
  • FQ12011 will be weak for them in systems due to timing of installations, however, systems revenues should hit a record of $220-235MM in FY2011
  • Expect revenues in each of their 3 business will increase YoY, but with a back end loaded year (IL/Italy/Australia etc).  About 40% of revenues in 1H2011, with 2Q being better than 1Q.


  • Cash Spin impact?
    • Budgeted a higher churn, but Cash Spin placement was 2.5-3x better - meaning that most of the units placed were incremental
  • Diluted share count at the end of the quarter - 57,582; for the year, 57,675.
  • Does the guidance contemplate buyback? Yes.
  • Quantify Italy and IL impact:
    • IT: will be a mix of recurring revenue and sale, expect to start shipping units in 1H2011
    • IL: in the hands of the regulators, anticipate some IL late in their fiscal year
  • Think that their ship share will get to above 20% again next year
  • How are the Alpha II Pro Series trials performing
    • There is the slant and V22 upright cabinet: had some technical issues on the slant that were fixed, but the V22's have only been out there for 2 weeks
    • Pricing premium - $2,500 to $4,000 - probably won't get the full premium in the beginning
  • Why the wide range of guidance?
    • Replacement sales
    • Acceptance of Alpha II
    • New markets: Italy/ IL/ Australia
    • Does Alabama come back?
  • Have no more Alabama units - they have written it all down. 
  • Its also possible that Acqueduct opens - but it's unlikely
  • Did ship 1/3 of their order to Sugar house in the June quarter, balance will be in the September quarter
  • MD order are all on lease / 8% revenue share and not in the quarter
  • At these prices, they view their stock as an attractive investment, given their view of 2011 & 2012
  • Fireballs are doing well, but they are cannibalizing their existing base
  • Italy and IL are not the sole cause for the gap of their guidance range.  IL isn't as material to 2011 as Italy right now.
  • Sense is that if there isn't a double dip that customers will start spending more on replacements next year
  • Mexico update?
    • They are in the hands of the partners. They supply their partners with the conversion kits.  Properties in the North have already been converted to Class III; the South still has some Class II which should be converted in a few months.
    • Mix of conversions and new Class III product has been 2/3 conversions
  • Why the dip in international sales?
    • There was a large shipment to Mexico and Singapore last quarter
  • Acqueduct - They are used to delays in New York - so they are hopeful that a facility can open in 6 months, but it's prudent not to count those. They would expect to get 50% - which is under contract.  However, if they open with a temp facility it will be in 2 stages.
  • Impact of the incremental jackpot expense was about 2 cents in the quarter
  • $1.93 EPS in FY2010 excludes Rainbow results and gains
  • They have been doing less financing then their competitors. Their DSO's were actually down.
  • Think that their share in March was more of an aberration than this quarter being a huge improvement in ship share.  It will take them 9-12 months to build a library for Alpha II.
  • Big release of the iVIEW applications is occurring now, and the impact should be seen through the sale of the DM units. Unclear how much they will be able to sell the applications for.  There could be some upside from that. Race game and cash wheel have gotten good feedback.


I’m surprised that this stock was not down today


The consensus was right; EAT did not have a good quarter and chances are they are not going to have a good 1Q11 either.  4Q10 was not a disaster and the balance sheet and free cash flow are helping to support the stock (EAT could buy back as much as 25% of the market capitalization).  The short interest doubled during the quarter which speaks volumes to how the stock is trading today.  As a client told me today, ‘Chuck is scaring the shorts with the “I’m gonna start buying tomorrow speech”’.


I‘m completely on board with the changes the company is making to the Chili’s business model and convinced that at some point in the not too distant future the pay off will be what the company is expecting.


The trick is getting from point A to B.  As I sit here today the process seems slightly more challenging than it did when first proposed.  The current guidance is as expected; EPS from continuing operations is expected to increase between 10% and 20%, including a lap of the 53rd week.   


What scares me from today’s call is this: “we do need better top line results than we originally forecasted to hit that goal but were not prepared to walk away from the target today.”  My translation: “current sales trends are not good and we need to see a significant improvement to make the numbers.”  Chili’s same-store sales decelerated in 4Q10 and have continued to slide in 1QFY11 - not good.


Right now current guidance is for same-store sales to be flat to down 2%, while revenue will be down 2% to 4%.  Excluding the impact of the 53rd week, revenue will be flat to down 2%, and franchise revenue to increase in the mid single digits.  Traffic growth needs to improve over 500 bps in an extremely difficult environment. 


With 64% of their commodity exposure contracted for the fiscal year, lower cost of sales should be supportive in 1HFY11. Unfortunately, top line sales will likely not gain traction until FY 2H11.  Three months ago I thought we were 6 months away from seeing a turn in the fundamentals; unfortunately it now seems that we are still 6 months, or possibly even 9 months, away. 


I’m very much supportive of the direction the company is headed, but relative to current guidance for the top line, we are set up for more disappointments. 






Howard Penney

Managing Director

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GIL: 3Q10 Conf Call Notes

GIL topped expectations in Q3, but the outlook for 4Q and 2011 are now even less certain.



A few of the more notable concerns coming out of this morning’s conference call include:


-  Sales pull forward into Q3 was acknowledged ahead of price increases implemented in Q4

-  Plant inefficiencies (ramp of new underwear programs, transition to new DC, and 3rd party sock inefficiencies) impacted 3Q by $0.04 and are expected to impact Q4 by $0.05

-  After originally downplaying the impact of the Haiti earthquake disaster, GIL now assumes the net impact (provided that insurance proceeds of $0.07 are received in Q4 as expected) is now $0.09 in 2010 – another ~$0.03+ in Q4

-  Reduction in full-year capex from to $130mm from $155mm will be realized in 2011

-  If cotton stays at current prices ~$0.80/lb. that will equate to a negative $0.50 EPS impact in 2011

    > 3% price increase in screenprint channel already implemented equates to a positive ~$0.30 in 2011

    > Absence of plant inefficiencies and benefits of investments in capex "should bridge the gap"


Gildan’s track record of forecasting/projecting broad-based earnings impacts from “one-off” events is less than consistent.  Recall that the Dominican Republic disruptions and $0.40 of related inefficiencies were “wiped out by downtime taken to minimize inventories after Broder.”  While the dynamics currently driving elevated cotton prices appear to have staying power beyond the near-term, the assumption that efficient operations will be the key variable offsetting margin pressure appears to be overly optimistic. Despite the assertion that recent labor disputes in Bangladesh have not affected initial operations, it’s hard to believe that 2011 will not be without unexpected challenges. We maintain that earnings will contract in 2011. The fundamentals warrant keeping a very close eye on price vs. expectations in the coming months. Should we see any material recovery in shares following today’s pullback we’d be looking to address a position from the short side.



P&L Notables:

  • Activewear and underwear sales were $351mm, up +36% (down on 1Yr & 2Yr basis) reflecting:
    • Higher market share in U.S. wholesale distributor channel
    • Overall strength in industry demand up +10.5% yy
    • Continued growth in Int'l  and other screenprint markets
    • Unit shipments of underwear and activewear for retailers up more than 2x yy
    • ~2% increase in net selling prices for activewear, more favorable activewear mix and increased shipments
    • Some pull forward ahead of expected price increases effective at start of Q4
    • Unit growth according to S.T.A.R.S. data reflects 20%+ growth across all categories (Sport shirts, Fleece, T-shirts, and all products) compared to 3%-11% industry growth 
      • unit growth up +60% yy


  • Socks sales were $44mm down -11.5% yy (sequential improvement on 1Yr, significant decline on 2Yr) reflecting:
    • 'short-term' issues related to 3rd party contractors during ramp of Rio Nance IV & transition to U.S. DC
    • ASPs lower yy from shift to more basic mix = ~$2.5mm impact
    • Expects to gain share in socks in mass channel
    • July has been a strong month with sales up +15% yy
    • Expect retail sales in Q4 across all categories up significantly higher yy driven by BTS placements in socks and underwear


  • Continue to get new retail programs for 2011 in all categories
  • Expect growth in screenprint channel as production ramps in 2011


  • GMs 27.1%, up 269bps reflecting:
    • Better pricing for activewear and more favorable mix
    • Lower cotton costs
    • Offset by ramp in underwear/activewear programs
    • Add'l costs related to 3rd party sock contractors & Haiti earthquake disruptions
    • Cost of cotton Q4 price will be ~$0.73/lb.; Q1 expected to be $0.78/lb.


  • SG&A up $4mm (+10.2%), down -167bps reflecting:
    • Higher volume distribution expenses
    • Impact of initial ramp of Charleston retail DC
    • Higher value of Canadian dollar on corporate expenses & variable comp


  • Haiti Earthquake Impact:
    • ~$19mm ($0.16 in EPS in Q2-Q4) – partially recoverable via insurance coverage (max recovery of $8mm, $0.07 per share)
    • Assuming insurance recoveries will be realized in 4Q
      • $0.03 in Q2; $0.015 in Q3; $0.015 in Q4
    • Net impact assuming insurance proceeds of $0.07 as expected = $0.09 in 2010 
    •   Roughly $0.10 impact from lost sales opportunity from lost production
    •   ~$0.06 from inefficiencies


  • Plant inefficiencies (ramp of new underwear programs, transition to new DC, and 3rd party sock inefficiencies) impacted 3Q by $0.04 and are expected to impact Q4 by $0.05

Balance Sheet:

  • $201mm in cash
  • Generated $82mm in FCF

F10 Outlook:

Sales: ~$1.3Bn (+25% yy)

  • Unit sales volume growth in activewear and underwear of approx. +30%
  • Activewear shipments in the 4Q are assumed to be constrained by current low level of finished goods inventories
  • Socks flat based on weaker than expected sales in Q3 (had expected unit sales up +6% in FY10)

GMs: ~27.5% (was 27%)

  • Due to better pricing for activewear and more favorable mix
  • Partially offset by lower than projected benefit of July 5th price increase that is not being applied to back orders
  • Re 2011 - mgmt believes higher selling prices + efficiency gains + lapping inefficiencies will offset cost inflation in cotton, energy and other purchase costs


  • Impact from Haiti earthquake ~$19mm ($0.16 in EPS) – partially recoverable via insurance coverage (max recovery of $8mm, $0.07 per share) expected to be realize in Q4

CapEx now expected to be $130mm (down from $155mm – pushed out to 2011)

  • The Company continues to believe that higher selling prices in fiscal 2011, combined with the impact of projected manufacturing efficiency gains from new capital investments and the non-recurrence of supply chain inefficiencies incurred in fiscal 2010, will fully offset increases in the cost of cotton, energy and other purchased cost inputs.

Production Capacity:

  • Expect to exit 2010 with production capacity for activewear and underwear of more than 60mm dzns + 2-2.5mm dzns of capacity in Bangladesh
  • Approx. 2mm dzns of planned production needed to rebuild activewear finished goods back to optimal levels
  • Ramping Bangladesh facility as Asian hub
    • It was confirmed in Q3 that Bangladesh will indeed have duty free access to China
    • Hasn't been impacted by recent labor disputes
  • Have started development of Rio Nance V facility
    • Expect to be completed in Q4 2011
    • Will provide sock capacity of 6mm dzns in 2011



Decline in Socks:

  • Delay of Rio Nance production in 2009 necessitated the use of 3rd party contractors that were late in deliveries to GIL
  • Initial BTS unit shipments on time - 100% complete
  • Initial sales in July up +15%
  • Charleston DC disruptions now behind them
  • Service and in-stock levels all at high 90% levels
  • Will be using 3rd party distributors through end of Q4 until Rio Nance IV ramps

Pricing on Socks:

  • There was one last large program that was exited at beginning of Q4 so now all disc. programs have been lapped

Program Updates:

  • New programs in all categories in 2011
  • Extension into activewear programs
    • mgmt expects significant growth in activewear next year 3x 2010
    • 2x in underwear
    • Socks will fill year end stated incremental capacity

Deferred CapEx:

  • Reduction in year-end capex from $155mm to $130mm will be realized in 2011
  • Mostly related to timing of equipment purchases
  • Roughly $5mm of small projects that were eliminated - won't impact 2011

Activewear Growth:

  • Private label to big box retailers and branch with regional accounts
  • Expect both t-shirts and sweatshirts to grow significantly from incremental programs


  • Don't see evidence of restocking here, see inventories at retail in "good balance"
  • Didn't have enough sock inventory to meet demand
  • Project significant increase in Q4 into 2011

Capacity Recap in 2011:

  • Caribbean textile facilities exit 2010 north of 60mm dzns (activewear and underwear)
  • Bangladesh (primarily activewear) ~2.5mm dzns in 2011 (exit at ~3.5mm run-rate)
  • Sock capacity with ramp of RN IV will be 65mm dzns
  • In 2010 ~52mm dzns activewear; ~52mm dzns socks

Retail Profitability:

  • Objective to achieve comparable profitability to screenprint channel
  • Believe inefficiencies will be eliminated in 2011
  • Ramp of RN IV will also result in lower costs

Starter Program:

  • Doing well, had major rollout for BTS
  • Looking to expand within that product category and develop new products as well
  • Sole supplier for underwear, but not for socks

Haiti Insurance Recovery:

  • $0.16 total impact to EPS in 2010
  • Roughly $0.10 impact from lost sales opportunity from lost production
  • ~$0.06 from inefficiencies
    • $0.03 in Q2; $0.015 in Q3; $0.015 in Q4
  • Receipt of insurance funds reflected in year-end gross margin projections


Tax Rate: Expect 2% for FY

SG&A: Expect 10%-11.5% of sales

Depreciation: ~$70mm


Market Share:

  • Down to 63.9% from 64.4%
  • Mentioned that with inventories tight heading into Q4, likely to lose some share near-term
  • Expect to get pricing in across all categories going forward

Bangladesh Operations:

  • Labor rate only 1/3 of wages in China after recent increase
  • Energy cost also 1/3 of comparable costs in China (nat gas vs. coal & steam)
  • Less expensive RMs, can buy cotton cheaper relative to regulated cotton in China that has be domestically produced, or highly taxed
  • Japan, Australia, Europe, & China (as of July) are all duty free from Bangladesh
  • Are seeing broader rotation towards Bangladesh

Wal-Mart RFID program to include Underwear:

  • WMT has compensated GIL for add'l cost of applying RFID to other products - expect same for underwear

Industry Capacity:

  • Both inventories and supply is tight in all categories
  • Service levels both at retail and wholesale are particularly tight due to RM price inflation
  • Expect supply to remain tight into 2011
  • GIL doesn't have all yarn secure for 2011 programs yet

Sock Profitability:

  • Below corporate average (~27%) but 'moving in the right direction'
  • Underwear also a bit low, but expect to hit margin tgts in 2011
  • Of the 52mm dzns of socks produced in 2010, 20mm dzns produced in less efficient US facilities or by 3rd party contractors
  • Will be out of RN IV next year generating incremental margin

Pricing Environment:

  • GIL's price increase of 3% not significant relative to higher prices in marketplace
  • $1.50 t-shirts marked up to $22-$30 a piece by the time it gets to retail
  • Pricing in asia has gone up 25%-30% on basic t-shirts YTD, more significant than 3% increase GIL projected
  • Feel they are globally competitive - creating demand opportunities
  • Could be room for add'l increases going forward if cotton stays at ~$0.80/lb.

Int'l & Other Screenprint Channel Opportunity:

  • See growth in Eur, Mexico, Japan, China, etc.
  • Project ~50mm dzns in overall production over next 5-years with upside

Wal-Mart Program Expectations/Shifts:

  • Believe focus will continue to be on basics despite recent mgmt chgs - believe they remain aligned

Change to GM Outlook:

  • Primarily due to higher selling prices in the 2H of the year
  • Offsetting more favorable mix coupled with inefficiencies


  • If cotton stays at current prices ~$0.80 that will equate to a $0.50 EPS impact
  • 3% price increase in screenprint channel = ~$0.30 in 2011
  • Nonrecurrance of inefficiencies and benefits of capex "should bridge the gap"
  • Q4 price will be ~$0.73/lb.

Yarn Supply:

  • With capacity striped out of the system in 2008, expect tight market to continue through 2011
  • Takes 12-18+ months to build and ramp new facilities to add capacity
  • "The cost of producing a basic t-shirt globally has relatively hit the bottom"

GIL: 3Q10 Conf Call Notes - GIL S 8 10 post




Hedgeye Macro Mixer – 3Q Theme: American Austerity - Deficits Are Bad

According to the American Pulse™ survey, 77% of consumers say the federal deficit is the result of government spending too much.  77% also say that the deficit will impact the current economy in a negative way.


I was not looking for a survey to confirm one of our key 3Q themes, but I came across this one that highlights a theme that we have been writing about for the past couple of months. 


According to the latest American Pulse™ survey of 5,005 respondents, 72% of consumers say the deficit will negatively affect the future growth of the economy.  As an aside, we explored the math behind the negative impact of deficits on growth during last week’s MACRO conference call. 

The survey noted that 77.2% of Americans believe that the deficit is a result of government spending being out of control.  And given the deficit, 57.5% think that it wasn’t wise for Congress to skip voting on a budget this year (16.3% think it was smart).

Not surprisingly, a staggering number of people have no confidence in politicians.  Some interesting stats:

  1. 78.8% believe that politicians are mismanaging taxpayer dollars, compared to only 6.9% who think they are using them wisely.
  2. 71.8% have little-to-no confidence that the government’s economic policies will get the economy back on track vs. 28.2% who are confident/very confident
  3. 70.1% say the federal deficit will have a negative impact on job creation
  4. 74.9% have little-to-no confidence that the government’s economic policies will help lower unemployment vs. 25.1% who do
  5. 54.1% feel the Obama administration is not listening to the voice of the people, while 31.1% say it is. 

What does this all mean for President Obama? He currently trails an unnamed Republican candidate among registered voters, independents and women, which, on the margin, is bullish for the extension of the Bush Tax Cuts, should sentiment be reflected at the polls come November. See the chart below.


Howard Penney

Managing Director


Hedgeye Macro Mixer – 3Q Theme: American Austerity - Deficits Are Bad - obama vs rep

Growl . . . Oil Demand Data Is Bearish

Conclusion: Recent demand data points from two of the world’s largest importers of oil, China (third largest importer) and the United States (largest importer), are meaningfully bearish for price.


We want to highlight a couple of recent data points related to oil demand globally that are solidly on the bearish side of the ledger.  While oil has had a good move over the last couple months based on U.S. dollar weakness, its move has been somewhat muted versus other periods of U.S. dollar weakness.  This is likely primarily related to a realization that future economic growth in the U.S. is slowing, and based on emerging negative demand data points.


The first point to highlight on the demand side is related to distillate stocks in the United States. In the chart immediately below, we show that distillate stocks are currently at a 27-year high in the United States.  Distillate stocks are primarily comprised of heating oil and diesel fuel. The massive build in distillate stocks obviously reflects very weak end market demand.


Diesel, specifically, accounts for ~18% of all petroleum demand in the United States (second only to gasoline) and 95% of all goods transported in the United States are done so via diesel engines.  A drop off in demand for diesel is therefore meaningful to overall oil demand in the U.S., but also an indicator for economic activity in the U.S.  On both fronts, this increase in distillate stocks seems to be a bearish indicator.


Growl . . . Oil Demand Data Is Bearish - 1


The second data point to highlight is from China and relates to Chinese imports of oil in July, which fell off somewhat precipitously from June.  Specifically, oil imports were down 3.2% year-over-year and down 14.7% month-over-month.  While we aren’t ready to take one month and extrapolate, it is in the short term, bearish for price.


Growl . . . Oil Demand Data Is Bearish - China Crude Oil Imports


As we wrote in late July:


“U.S. dollar correlation - In 2009, the key macro factor driving the re-flation trade was U.S. dollar down, and everything priced in U.S. dollars up.  Simply, the decline in value of the U.S. dollar versus other currencies increased the inherent value of those global commodities that were priced in U.S. dollars.  Oil was a primary beneficiary as its price increased by almost 80%.  The correlation, or at least the strength of it, is no longer intact.  In fact, since late June we have seen a dramatic decline in the U.S. dollar versus other major currencies, north of 7%, but have not seen a similar move in oil.  In 2009, oil moved inversely to the dollar with a factor of more than 4:1.  As noted, recently that correlation has gone away, so despite being bearish on the dollar, we are not seeing a corresponding correlation that makes us bullish on oil.”


The fact that oil is not inflating with the same vigor as in 2009 combined with the fact the bearish data point continue to pile up, makes us bearish of oil from a supply / demand perspective.


Daryl G. Jones
Managing Director

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