CRI: One of the Worst Stories in Retail

CRI: One of the Worst Stories in Retail


I tried to think of a clever title. But with CRI there’s really no more appropriate way to tee up the story. This company is over-earning by 400bps in margin.


Let’s be clear about something. The Carter’s brand is dominant, and the core business is extremely defendable. Everyone reading this who has a child under the age of 2 probably has Carter’s layettes, onesies and booties all over the place.  Our point in this note is not that the business is a fade, but simply that the sustainability of the current revenue trajectory at a 13% margin is an absolute pipe-dream.  Our model is at $1.87 in FY11 – the consensus is $2.51. Our confidence in this number is high. Timing and sizing of the position will depend on Mr. Market. Keith shorted CRI in the Hedgeye Virtual Portfolio yesterday. Game on…


Macro Chimes-In:  Before we lay out the research behind why margins need to come down, here’s Keith McCullough’s view on CRI from a Trading/PM perspective.


“CRI is bullish immediate term TRADE and bearish intermediate term TREND /long term TAIL. Immediate term bullish is what I call a short selling opportunity. The long term TAIL line of resistance for this stock is where it collapsed from this summer = $27.91; use that as your stop. From an intermediate term TREND perspective, there is a wall of resistance at the $26.68 line and I’d short it all the way up to that level, averaging in. Immediate term TRADE support is $23.69, and a breakdown/close below that line will put lower all-time lows in play.”




 As we usually do, let’s start off here with some historical context. It’s vital to the call.


Nov ’03: Carter’s goes public. The ‘pitch’ crafted by the bankers at Morgan Stanley was that the company was reaccelerating growth around its core baby business to playwear, mass channels, and company retail. This was being facilitated and funded by a deeper sourcing relationship with Li&Fung.


May ’05: Carters buys Osh Kosh for a staggering 312mm. As a frame of reference, that’s 10.8x TODAY’s EBIT.  It’s old hat that this deal was a complete failure. But the context matters.


You gotta hand it to the MS Bankers. Their pitch at the time was spot on. That’s probably why the stock ended up being a 3-bagger in 2-years.


But there was one very big problem brewing beneath the surface. Simply put, the company was morphing its business model from that of a stable and predictable packaged goods company, to one that is more fashion related.


C’mon McGough…Isn’t it a stretch to call Carter’s fashion??? The answer is No. The core wholesale baby (onesies, blankets, etc…) used to account for 75% of cash flow. Now it is closer to a third. The stone cold reality is that the Playwear business competes with Old Navy, Children’s Place and Gymboree. The retail segment is a completely different ball game, has extraordinarily low visibility, and added significant volatility to internal forecast accuracy. The mass business can be a great asset, as the Target partnership has proven to be. But Wal*Mart woke up one day in 2009 and decided to shrink Carter’s. Not good for a company that’s never had to deal with key customer risk.


This all adds up to a business that has changed so much at the front-end as it relates to product and customer mix. That’d be great, but unfortunately the back-end of this company still looks and functions like a packaged goods business.


That’s why it was so amazing to see the business deteriorate from ’06-’08, and yet margins still never moved more than 100bp off of 10%. The reason is that CRI cut infrastructure – almost entirely on the creative side of the business – to keep margins and EPS high.  An example is that when CRI bought Osh Kosh it had over 400 employees, and by the time of the management shake-up the Osh Kosh employee count was well below 200. Philosophically, I don’t see how any consumer business can reaccelerate growth by cutting heads by 50%.


The punchline is that this is what led to the shake-up in top brass in the summer of 2008. I was a big fan for all the above reasons, and specifically noted at the time that a guy like Mike Casey (then CFO) would ‘get it’ that margins needed to come down due to infrastructure investment before they could go back up to a level that would sustain profitable top-line growth. But I could not have been more wrong. Over the past 2-years margins have come up by a full 500bp. This is the same time over which the spread between consumer prices for apparel and input costs widened to 3-standard deviations above the mean – implying about $10bn of profit was freed up in the supply chain of an industry that’s only $280bn in size.


CRI: One of the Worst Stories in Retail - Apparel Kity Margin 


 CRI: One of the Worst Stories in Retail - CRI  Industry  and CPI Apparel Import Spread


That brings us to today… What do we know? We know that we’re in a margin bubble, and in YouTubing management, synching with changes on the margin in the Macro and Retail landscape, and applying some analytical muscle – it paints a story where margins appear to have meaningful downside. 


1)      There has been a disproportionate shift in talent in Carter’s from product/merchandising towards finance and accounting. Is it bad to have better accounting? NO!!! But it needs to be additive to headcount, not replacement for creative talent.  This is one reason why margins popped like they did over 2-years. A nice bonus, but not sustainable.


2)      During this period, Carter’s had its little run-in with Kohl’s over accounting for markdowns – something that did not make KSS happy in the least. It also ran out of steam with Wal*Mart and subsequently had a 25% decline in WMT revenue. We’re seeing a pick-up at WMT this year per CRI. But with WMT completely uprooting apparel merchandising organization, this business is hardly a lock. The bottom line is that a question mark behind WMT and KSS is not something I want to see when I’m incrementally concerned about product.


3)      Here’s management’s comment on cost inputs as of the conference call in July vs. our take (in bold).  

    • CRI: “The cotton cycle has typically run some portion of a year.  Nothing cures high prices like better-than-high prices, so as prices are up, people plant more cotton and the prices will come down.  So cotton and freight will settle down in the next year or so.”
      Hedgeye Retail: Since this statement – by far and away the largest component of COGS at CRI – is up 19% sequentially. That’s 56% year on year, 56% year on year, 56% year on year.  Get the point? The company is planning for 10%.
    •  CRI: Higher labor rates will continue with us. Li & Fung says to expect higher labor rates to continue as there will be an inflationary cycle in the foreseeable future.
      Hedgeye Retail:  This is the second-highest input cost.

 4)      Pricing/Promotional Considerations


a.      CRI On prices: “So going into spring ‘11 where products costs have gone up, 10%, we’ve raised prices in both wholesale and retail, I would say selectively. We’ve raised in where we thought unit velocity wouldn’t be significantly impacted and that’s a balance. We could take prices up on everything tomorrow, but if you take that spread beyond what makes sense relative to private label, you’ll start to lose unit velocity. So we’re trying to find the right balance between what price would the consumer be willing to pay, what continues to drive very strong top line growth because growth – sales growth solves a lot of issues.”
Hedgeye Retail: We know that this company needs pricing power to keep margins high. The price/cost gap has turned meaningfully against CRI over the past 3 weeks.


b.      Promotional Flexibility: CRI: 50% of business is in retail, so [we have] plenty of flexibility.  Typically the day new product hits the floor in owned stores its 40% off, only when the product is selling really well will they moderate the level of promotion to 25%-30% off.  If traffic is better, product performance is better, if traffic is weak, it’s easy to get promotional.
Hedgeye Retail: 40% off on day 1! Does this sound like a business with pricing power? And this represents 50% of CRI’s business. 


c.      Long-term Cost Cycle: CRI: “Li & Fung has said publicly, listen, we’re probably going to be in an inflationary cycle whereas over the past 10 years it’s been a deflationary cycle, on product costs, probably going to be in an inflationary cycle. People got to have to figure out how to get paid more because we’re all public companies, we are not interested in lower margin, business isn’t making less money. So it’s going to – the consumer ultimately is going to have to pay a bit more for the product that they’re buying. Yeah, so I think it has more of an inflationary issue than it’s what Target and Wal-Mart are doing.”
Hedgeye Retail: JC Penney and Kohl’s are also out recently saying that inflation will be good for the apparel industry. It seems like everyone is banking on all of us paying higher prices. SO let me ask you this…with a 56% boost in the primary cost input, you’re looking at paying $11.50 on a layette that would otherwise cost $10. Not a chance… 


d.      CRI on what we’ll refer to as Anniversarying a Temporary Pricing Bubble: “Everybody was running very lean over the past 12 to 18 months. [Are people shifting] to be more aggressive with building inventories? I hope not, because when they were running lean, they were running out of goods, calling us to say hey, we’re too light on inventories. Can you ship the – that third delivery earlier? Can you get us some things? What do you have? Can you dip into the safety stock levels and get us product earlier. And for us, it was a beautiful thing. We had a strong consumer pull model and the sales were better, margins were better.”
Hedgeye Retail: Kind of ironic that this happened during the period when the new management team was put in place and margins went up 500bp. 


e.      On Private Label: CRI: “We’re most conscious on the spread between Carter’s and Osh Kosh brands vs. private label.  Private label is primary competitor and as long as management keeps the price $1 to $2 above private label, consumers will pay the premium for the branded product.”
Hedgeye Retail: Again, pricing for this company will be based on the least common denominator in the competitive landscape. CRI is not planning for this. Nor are the retailers. Who in their right mind would step up now on a conference call and say ‘we’re preparing for a price war with our competitors’ or ‘we’re going to break rank with retailers and breach price integrity’? 


The bottom line is that we’re just coming off a 2-year period where margins skyrocketed by 500bps despite no change in the trajectory of revenue. Input costs and supply chain dynamics worked in CRI’s favor, as did an accounting-led management team. Along the way product has suffered relative to strengthening competition, relationships with key retail partners became strained, and input costs have done nothing but go up. The level of price increase that we as consumers need to pay without department stores or Li&Fung picking up the tab in order for CRI to protect margin is something they’ve never seen – ever. The sell-side has adopted an extend-the-trend model here and has the company reaching margin levels in 2011 that are above Nike, Ralph Lauren, Under Armour, Columbia, and a host of others who have something called sustainable top line growth. We’ve got high conviction that this is a blow-up waiting to happen. 


Where could we be wrong? 

  • CRI is seeing a rebound in its Wal*Mart business next year. They’re budgeting $125mm – which is up roughly $15mm vs. this year, and over $25mm in 2009. Even though there is new leadership in Wal*Mart’s merchandise org for apparel who has little brand loyalty, this is a good direction. If the brand performs and the desired price and margin, there’s no reason why it can’t head higher.
  • CRI brought in a new product leadership team at Osh Kosh earlier this year. They plan to strut their stuff for the Street at an analyst event in October. Wholesale orders are currently up about 10% at Osh Kosh – that’s about $10mm, or less than 1% incremental growth to the company.
  • is an opportunity for CRI. They’re investing in this business and are likely to see an acceleration therein. makes sense here.  Think about it – you’re a new mom and you need a bunch of booties. Do you want to haul all the way to a Carter’s store? Probably not.  That said, it makes more sense to us to leverage the model of a Baby’s-R-Us or Buy Buy Baby – where you’re likely doing one-stopping for the wee one beyond apparel.
  • Pricing: If the industry as a whole pushes higher pricing and no one breaks rank, then our numbers next year may be too low. It would be one of the first times in the modern history of the apparel retail industry that this happened. But it’s a risk we can’t ignore.
  • The 3Q print is the most challenging one from a top line perspective. Then the 4Q compare is quite easy before the margin story really starts to unwind. Whether CRI lets the margin story out of the bag with guidance in the 3Q call is questionable. We’re probably going to have to wait til 1Q for the big blow-up. 

Where could the stock go?


If you think that our work is completely off-base and you believe that the company can earn $2.51 next year and continue to grow sales in the mid-single digits, EBIT at 10, and EPS in the teens, then be my guest and buy it at $25.  But if I’m ultimately right on the model, then we’re looking at Under $1.90 in EPS. We can slap a 10x p/e on that, but the reality is that I’m looking for a severe event that will blow earnings credibility out of the water. At that time, I’m not so sure how many people will be so rational or fixed on price target methodology. If the event makes $1.87 apparent, then there will be times where the market will wonder – why not $1.25? Why not $0.50? That’s not what I’m calling for, mind you. But simply to use 10x $1.87 as a floor would be irresponsible from a risk management perspective. Realistically, this has $5-10 downside. As noted, Keith is likely to trade around this for a quarter or two based on his own risk management parameters. Stay tuned. 





Rove's election predictions: not bearish enough on Dems

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%

Bear Market Macro: SP500 Levels, Refreshed...

Pick your duration and I’ll tell you whether it’s a bull or a bear. On both our intermediate term (TREND) and long term (TAIL) durations it’s a bear. From an immediate term TRADE perspective (3 weeks or less) it’s a bull. Bears become bulls and bulls become bears – or they just go out of business.


In a debate I was in yesterday, Steve Roach reminded us what his net worth has done (Morgan Stanley stock) over the course of the last 3 years. That’s what we call a long term bear. Using our long term TAIL duration, the SP500 has obviously lost 1/3 of its value. When it comes to managing risk on any duration the long term history of price matters.


From an immediate term TRADE perspective, the SP500 will be overbought at 1131. From an intermediate term TREND perspective, the SP500 continues to trade below our Bear Market Macro line of resistance = 1144 (see chart). If the SP500 were to break its refreshed immediate term TRADE line of support of 1110, you tell me what the super duper alchemists of this business are going to do…


We’re not short the SP500 here but we will be, at a price. Bullish is as bullish does, until it doesn’t.



Keith R. McCullough
Chief Executive Officer


Bear Market Macro: SP500 Levels, Refreshed...  - S P

Day 2: Weblights

More “weblights” from company presentations over the past 24 hours.  Key takeaways: back to school ending better than it began but still very promotional (especially denim), and not one CEO or management team is expecting the economy to improve over the next 6-12 months.  On the flip side, not one management team expressed that the macro backdrop is going to get worse.  Unfortunately, managing inventory, growth, and expenses for the status quo backdrop macro is not an easy task. 


On the unit growth topic, retailers remain reserved with their development pipelines, preferring to almost unanimously invest in e-commerce infrastructure and/or internal systems rather than speculate on real estate acquisition.  Dollar Tree and Ross Stores stand out as the two companies with bullish outlooks on unit growth, with both looking to add 7% square footage over the foreseeable future. 


More callouts below:


  • Radioshack noted that the benefits of selling the iPhone are not really in the economics of a unit sale itself, but rather in the traffic and demographic that the product attracts.  In order to maximize the iPhone business, RSH must sell additional items in the basket (mainly accessories at higher margins).

  • ANF noted that both cost pressures and the competitive environment are larger than expected sixth months ago, making gross margin expansion in 2010 unlikely.  Management believes they will be able to see some expansion beginning in 2011.

  • ANF’s CFO suggested that inventories will remain high through 3Q, possibly ending even higher than the 47% increase in cost at the end of the second quarter.  Management believes that company was under-inventoried over the of the back half of ’09, which ultimately hurt sales.

  • HD believes that e-commerce is “critical” to the company over the next decade or so, as consumers expect an interconnected retail experience.  Currently, 70+% of HD customers have researched a product or project before they enter the HD retail store.  Management also believes the real-time dialogue that can exist with customers as a result of the internet (i.e. blogs, comments, Twitter) allows the company to indentify and target concerns before they turn into bigger negative events.

  • DLTR reminded investors that the company employs an extremely dynamic and flexible merchandising model, which aims to find the best “dollar” items available at any time for its customers.  Approximately 50% of the company’s merchandise changes each year and the store is not merchandised via a central planogram.

  • WMT reiterated that it prefers to sell national brands over private label because these items tend to showcase Wal-Mart’s pricing advantage vs. the competition.

  • WMT’s recently appointed CEO of U.S hinted that the company’s growth plans will include some newer formats aimed at complimenting the supercenter.  More details are expected at the company’s analyst day in October.  Could this be the ramp in Neighborhood Markets or perhaps an urban format?

  • WMT noted that it is testing a site-to-pickup program in which a customer can order an item online and have it ready for pickup at a local Fedex store (Kinko’s).  This is definitely an interesting way to leverage both the logistics of Fedex and the consumer’s desire for convenience.  Shipping is free in the test.

  • When asked about WMT’s apparel strategy, the new CEO responded with “I'm not going to be the second, third, fourth, fifth or sixth person to stand up here and tell you they are going to fix our apparel business, but we are going to work as hard as we can to fix our apparel business. I think we know what to do. Andy is somebody who has had success in apparel, and both men's and women's.”  Clearly management is backing off from any timeline for improvement, despite recent comments that 4Q should show signs of better results.

  • ROST noted that the single biggest driver to further expanding margins beyond peak levels is sales.  Without sales growth, management believes it can maintain the gains they have achieved via substantial inventory reductions and more efficient operations.  In other words, it’s all about sales from here on out.

  • Nordstrom is not planning on any negative impact from potential inflation next year, but rather believes better inventory turns, reduced markdowns, and having the right goods mitigates any minor moves upward in product costs.

  • One of the few rare examples of “trading up” is occurring within the pet space at PetsMart.  The company is seeing consumers trade up in food and wellness categories as well as hardgoods, driven in part by recent merchandising initiatives including Martha Stewart.  The company also noted that the vitamin/wellness trend that has been a big growth area for humans is now beginning to trickle into the pet space.  Management believes pet vitamins and wellness will become a meaningful category over the next several years and as a result, the company is allocating resources towards this growth area.

  • PETM noted that for the first time in 15 years, the number of households that have pets dropped from 62% to 61%.  Management believes job growth is key to an improving housing situation, which in turn drives pet ownership.

  • PSUN’s CEO noted that promotional levels in the denim category in July and August were at levels they haven’t seen before.  The promotional environment remains a key wildcard in the company’s ability to expand margins in the near term. 


Eric Levine


R3: RL, TNF, SKS, and Fashion Trucks


September 16, 2010


For first time in a while we’re seeing a handful of news items centered on growth and new concepts.  However, none of them are in a conventional sense.  Keep an eye out for another British invasion as well as mobile stores (in the form of trucks).





- With smartphones now representing 25% of cellphone ownership, mobile advertising is quickly becoming the fastest growth vehicle in the advertising industry.  As a result, mobile advertising is expected to account for about 20% of online ad budgets next year.


- Keep an eye on U.S expansion by British retailer, All Saints.  The company which is centered around a dark, vintage aesthetic has plans to open 50 U.S. stores over the next 5 years.  There are currently 6 domestic locations.  In the U.K. the retailer has amassed over $200 million in sales in just over 4 years.


- First it was a food truck revolution and now it maybe a fashion truck revolution.  In accordance with LA’s fashion week, a handful of designers and brands are setting up mobile stores.  These trucks are then tied in to Twitter or other mobile-based location tools to alert customers where they are parked at any particular time.  While this trend is still too small to matter, it certainly puts a twist on a traditional pop-up shop and calls “rent” into question.  Furthermore, it seems like this may be the ultimate “store” for testing new products or new markets.





RL and TNF Score Victory Against Chinese Cybersquatters - Polo Ralph Lauren Corp. and VF Corp.’s The North Face unit scored a major victory against Chinese cybersquatters, but collecting the damages may be another matter entirely. A court in the Southern District of New York awarded the brands $78 mm, which is believed to be the highest sum of damages ever awarded in an Internet counterfeiting case. Initially filed in March, the lawsuit pitted the apparel brands against a network of more than 130 Chinese Web sites selling counterfeit goods to U.S. customers through up to 6,500 domain names such as and <>

Hedgeye Retail’s Take: While not often talked about, counterfeiting remains a huge challenge for these brands and others, especially within the Chinese market.  Interestingly, the Chinese government has recently been more sympathetic to Western brands in helping to crack down on the problem.


Dolce and Gabban Unveil New Retail Concept - Domenico Dolce and Stefano Gabbana are about to unveil a groundbreaking new retail concept — and this time, the Milanese fashion duo isn’t shy about highlighting the work of other designers. This weekend, Dolce & Gabbana will open Spiga2, a multibrand boutique that is curated by Dolce and Gabbana and features the work of young, emerging designers from around the world. The store is located at Milan’s Via della Spiga 2, which was previously an accessories-only store for the brand. Dolce and Gabbana handpicked the pieces they are planning to sell in the store, and the first run of designers includes Behnaz Sarafpour, Sophie Theallet, Yigal Azrouël, Fannie Schiavoni, Erkan Coruh, Peter Jensen and Heather Williams. <>

Hedgeye Retail’s Take: The focus on emerging designers remains high, as it seems many larger brands are searching for their next big growth vehicle.  Given the cost to start a fashion brand, it makes sense for lesser established designers to partner with those that can help expand reach and broaden distribution and awareness. 


Footwear News Teams Up with SKS - Footwear News has selected this seasons’ hottest heels — and starting now, consumers can vote for the sexiest pair. A special limited-edition magazine will launch today in select Saks Fifth Avenue stores, as will the “Sexy Shoes” contest. Voting is open to the public and will take place online, as well as at the 10022-SHOE boutique in the flagship Saks Fifth Avenue store in New York. Top designers featured in the contest include Christian Louboutin, Manolo Blahnik, Jimmy Choo, Chanel, Miu Miu and Dolce & Gabbana, among other big names.


Hedgeye Retail’s Take: In other words, the women’s fashion footwear department at Saks has turned itself into a NCAA-style bracket.  Yet another example however of the democratization of fashion.  Online campaigns such as this one continue to encourage consumers to “vote” for what they like, which in theory should help retailers and brands better align themselves with what the market is looking for. 


New York Retailers Benefit from Fashion's Night Out - New York retailers said they were ecstatic over the boost they received from the second-annual Fashion’s Night Out. For brand Ralph Lauren, the citywide event that took place last Friday, was a major improvement from the previous year.  Stuart Weitzman, who spent FNO making appearances at his Columbus Circle and Madison Avenue locations, said the night drew more consumers into his stores than last year’s event. The designer added that being open until 11 p.m. instead of closing at the normal 6 p.m. time helped add to sales. The 2010 event equated to more than just extra foot traffic, it doubled some retail stores best sales days yet. <>

Hedgeye Retail’s Take: Not only did it seem like this year’s event was better marketed, it also compares against one of the more difficult years for Fashion Week.  If anyone was in NYC this week, then it was pretty hard to ignore all things fashion. 


D6 Sports Licenses Action Sports Brands - D6 Sports announced its licensing acquisitions of World Industries, Zoo York, Mark Ecko, Bratz, Moxie Girlz, BFC Ink and Skelanimals. Along with the Airwalk, TapouT, Jester and No Rules action sports lines it already holds, D6 Sports said its poised to become the leading provider of action sports licensed products to the sporting goods channel. <>

Hedgeye Retail’s Take: With this stable of growing brands, we wonder how long before Iconix takes a hard look at D6. OR, maybe they already have. 


Theory Looking to Buy Proenza Schouler Brand - According to several sources, Theory’s Andrew Rosen is looking to buy the Proenza Schouler brand from European private equity fund Permira. The rumor first surfaced in the early spring, but Rosen, Theory’s co-founder and president, denied it at the time. However, talk of a deal resurfaced this week, and sources are confident Rosen and the Proenza Schouler designers are up to something this time. <>

Hedgeye Retail’s Take: Recall that Proenza changed hands as a result of its parent, Valentino, also landing in the hands of Permira.  The brand has long been rumored to be for sale, although this time the potential buyer seems more feasible than prior whispers.


Coalition Asks Congress To Aide in Lower Shipping Rates - A coalition of importer, exporter and logistics associations is asking Congress to help change the law governing antitrust immunity for international ocean carriers, arguing that shipping rates should be set by market forces and not foreign-based companies “acting in concert.” Retailers, importers and exporters argue that carriers, particularly in the U.S. westbound and eastbound Pacific trade routes, charge identical or similar rates, break contracts to enact surcharges, bump containers off ships and refuse to load cargo without additional compensation. <>

Hedgeye Retail’s Take: A fair request indeed as price fixing rarely benefits the customer and is typically immune to the underlying supply/demand forces, but there are no quick fixes here. Don’t expect these efforts, which have been cited regularly as a key inflationary factor in the near-term to save retailer’s margins in the 2H.


The Game of Online Free Shipping - Although free shipping of one form or another has become common on e-commerce sites, merchants must decide whether it really improves business or becomes just another cost to bear. Several merchants advise testing what works best with different product categories and pricing strategies—for example, offering free standard shipping only for light-weight but high-margin products, or setting a minimum order value., an online-only retailer of office and restaurant supplies has experienced conversion rate hikes of 20% to 30% through free shipping offers.  has found free-shipping works best by offering it as standard fare on more than 100,000 of its higher-margin products. <>

Hedgeye Retail’s Take: The cost of shipping heavier and therefore more expensive items is not as important in retail than some other industries, perhaps aside sporting goods/exercise equipment, but as we highlighted in our August e-commerce Black Book and have included below, there is no question free shipping is a critical factor in the consumer’s purchasing decision tree.


R3: RL, TNF, SKS, and Fashion Trucks - 1


Bangladesh: New Fiscal Package for Garment Exporters - Funded by the Export Development Fund, Bangladesh is offering a second stimulus package for ready-made garment exporters, which includes offering $10 million loans as well as continuing the five-percent cash incentive programme on the total value of exports. <>

Hedgeye Retail’s Take: A 5% incentive program when new minimum wages remain at unacceptably low levels at $43 versus the $75 proposed, is likely to do little to drive productivity in a country with a disenfranchised workforce.


Pakistan: Discussion Over Trade Concessions with the EU - After a two-day meeting with the European Union foreign ministers in Brussels last week, Pakistan will be granted extraordinary trade concessions, which are set to bolster flood-devastated nation and help Islamabad tackle extremism. <>

Hedgeye Retail’s Take: With floods impacting nearly 15% of the Pakistani population, the #4 global producer of cotton is going to require continued relief. This issue will continue to weigh on prices near-to-intermediate term.


Cost of Cotton Production Rises - The International Cotton Advisory Committee (ICAC) Secretariat undertakes a survey of the cost of cotton production at three-year intervals. During the last three years, the cost of production of seedcotton increased to US$0.43 per kilogram. The cost of production of cotton lint (net of land rent and the value of seed) increased to $1.22 per kilogram, a 17% increase from the average cost estimated in 2006/07. Lower yields in 2009/10 compared with 2006/07 were the main factor resulting in the rise in production costs. The net cost of production averaged about $1.15 per kilogram in Asia and West Africa. The Fruitful Rim region of the US, followed by Colombia and China, had the highest costs of production. India, whether irrigated or rainfed, had the lowest production costs for cotton because of recent increases in yields and high values for seed. The most recent survey was completed this month using data from 2009/10. Thirty-four countries participated in the latest survey, providing 63 entries, including rainfed and irrigated regions and regions within countries. <>

Hedgeye Retail’s Take: Cotton / apparel cost inflation is likely to continue impacting prices, however remains secondary to the critical factors of global supply/demand dynamics.

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