Another impressive quarter put a little squeeze on the shorts. I’m surprised that investors continue to short this stock and this management team. I’m not saying it will never be a short but you better have a catalyst. BYI beating yet another quarter, particularly in an environment where everyone else is lowering guidance, is not exactly the kind of catalyst to short.

  • I wish I had put out a long call ahead of this quarter but I think there is still upside in this stock. Take a look at the quadrant chart. Management has certainly put in an impressive 2 year performance, operating the company mostly in the sweet spot. Since Q1 2006, BYI consistently generated sales growth in excess of inventory growth and improved gross margin in all but 2 quarters. Gross margin has increased the last 3 quarters. In Q2, gross margin expanded over 400bps and sales grew slightly faster than inventory. One could argue that inventories are catching up to sales but BYI does have an impressive backlog. I for one am not worried about the inventory picture.

  • BYI reported EPS of $0.54, slightly ahead of consensus. I tend to watch the SG&A line pretty closely to make sure companies are still investing but also to monitor how they are managing earnings. Most companies maintain the ability to manipulate SG&A somewhat. Making the quarter because of a big SG&A drawdown is not typically a good sign. BYI actually spent 17% more on SG&A than last year, a good sign in my opinion. This was a solid revenue and gross margin quarter.

  • Turning to the 2nd chart, the deferred revenue picture looks solid. Deferred revenue stayed at roughly the $183 million level experienced in Q1 2008. Moreover, deferred revenue growth YoY remained above sales growth with a spread between the two of 18%. The high level of deferred revenue and strong backlog provides visibility on the upcoming revenue picture. Significant profit growth should continue to “Reign O’er” BYI.

Operating mostly in the sweet spot
Unearned revenue remains at high levels and the YoY increase exceeds sales growth

They are getting "fired up" in Jackson Hole

At least that's what Tom Keen just said on Bloomberg (he is their Editor at large) - "there is a fervor out here - people are fired up".

That's all good and great for them. For we free market capitalists, the thought of government getting "fired up" to re-regulate financial markets is one of the scariest thoughts in my head.

Find me the 'Cowboy Bar'. This is going to be painful to watch tomorrow.


• Macau Financing: This situation may not be as dire as the market perceives. Less demand certainly contributed to the scaled down financing effort from $7bn to $5.25bn to below $5bn. However, it may not be the type of demand problem people think. Apparently, there is interest from the banks in providing funds to LVS but the company may be scaling back its development on lots 7 and 8. Given the uncertain demand picture in Macau, less capex is probably a good idea.

• Four Seasons: Yes the property opened in August but no, it is not fully open. As far as my guys can see, only 50 rooms are open and the website is still not taking reservations until September 15th.

get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

US Dollar Getting Hit Hard Today

Since the US Dollar put on such a big move in such a compressed period of time (+8% in a month), it has the potential to correct expeditiously. Today the US$ Index is down 94 basis points at 76.22, which is the biggest down move we have seen in weeks. Immediate term support was at 76.57, so that line is broken. Next stop is 75.70, then we have the more meaningful support line at 74.17. If Bernanke panders to the easy money crowd tomorrow in Jackson Hole, this move down in the US$ and coincident re-flation of crude oil, gold, etc. will continue.
  • US$ Support is way down at the $74.17 level

30 Year Mortgage Rates 1982-2008

Below, my colleague, Andrew Barber, put together a chart that overlays the long term chart of fixed mortgage rates with its spread to 10 year Treasury yields.

This morning the 30 year fixed mortgage rate hit a new short term high of 6.37%. As access to capital continues to tighten, these rates can go a lot higher. Historical context makes this point crystal clear.

Don’t forget that over 70% of new home loans in this country are either bought or guaranteed by US government sponsored issuers.

Positive on FL, Negative on SKX

I continue to gain confidence that we’re going to see a reversal in margin trajectories between Foot Locker and Skechers. Though clients know my thinking as to why, there have been 2 nuggets in as many days that strengthened my view that SKX margins are heading lower by at least 3pts, and FL is going up by about the same.
1) FL: Industry sales trends continue to look good in aggregate. But when peeling back the onion and seeing which channels look good and which look bad, it is clear to me that the strength is in the athletic specialty channel, and weakness is confined to channels that are overweight low-profile (i.e. National Chains).

FL reports EPS after the close tonight. The company has missed each of the past six quarters. Not a great track record, by any means. But expectations look like they’re in check, and I think that inventories are under control. I still like the margin leverage on this name as traffic picks up and the major brands (esp. Nike and Under Armour) get into the ring and duke it out with running and basketball offerings over the next 12 months. There’s enough juice here to sidestep industry margin/sourcing pressure for at least a few margin points.

2) SKX: This Skechers situation is fascinating. After upping the bid and getting shut out twice, Skechers management is still trying to get sucked into this black hole by publicly pursuing HLYS. I won’t elaborate again on my thoughts (check out my 8/13 post “Deal or No Deal, The Damage is Done”) other than to reiterate that this is the last straw for a company that is over-earning in the wrong part of its cycle.
Share gain is coming from the right place for FL, not for SKX.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.