APPAREL SIGMA: NUMBERS DON’T LIE

Unless we we’re completely off base with the analysis behind our bearish industry call, the number of companies in the quadrant of our SIGMA framework that is most linked to stock blowups will double over 2 quarters. Our updated book is available for your enjoyment. Please let us know if you'd like a copy.

 

Sales/inventory spread drifting lower, gross margin improvement eroding, sg&a and capex starting to build. It’s all plain as day in the attached apparel supply chain SIGMA chart, and we just inked the fourth quarter of easy compares.  Mind you, this is completely retrospective, and does not account for the rise in input costs we’ve seen in just 3-weeks.  All this, and the consensus still has margins reaching new highs in 2011, and the market is sporting a 15x p/e on 15% forward earnings growth consensus expectations.  

 

Out of the 107 companies we track in this framework, 75 were in the ‘sweet spot’ (positive sales/inv spread with improving margins) last quarter, and that has since fallen to 53.  Conversely, the number of companies in the quadrant of our chart that is most often linked to stock ‘blowups’ went from 7 stocks last quarter to 26 in 2Q. Unless we we’re completely off base in our bearish industry call, the number of companies in the SIGMA ‘sweet spot’ will be cut in half over 2 quarters.

 

APPAREL SIGMA: NUMBERS DON’T LIE - SIGMA Industry Positions Q2 10

 

APPAREL SIGMA: NUMBERS DON’T LIE - Industry SIGMA

 

ABOUT SIGMA

One of the cornerstones of our analytical process is our SIGMA (Sales Inventory Gross Margin Analysis). Once you take a minute to understand it, you see that this is not only a strong analytical tool, but also a way to monitor the behavioral changes of how a management team (or group of them) trades one line of the P&L or balance sheet against each other in the face of volatility in the Macro environment.

 

Here is a quick overview of how to read the chart:

 

  • The vertical axis illustrates the difference between sales growth and inventory growth, while the horizontal axis represents the year-to-year change in the operating margin.  We then plot the past 8 quarters of data to visualize the trend. The ultimate fundamental outcome for any company occurs when the data points line up in the upper right hand quadrant (sales outpace inventories and margins up).
  • The background of the SIGMA chart depicts the year-to-year changes in gross margin and SG&A margin, along with a line representing capex as a percent of sales on a trailing twelve month basis. This allows us to track margin and cash flow comparisons on a quarter-to-quarter basis.

 


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