This Is What Happens To Growth Stocks When They Slow

Today the Shanghai Securities News broke down some of the aggregate listed company profitability metrics for 2008 to date. For the 73% of companies who have reported, profits have put in a perfect Chinese Olympic nosedive. According to Xinhua, "reports showed they earned 323.14 billion yuan (47.2 billion U.S. dollars) in all, up 30.9 percent year-on-year. The year-earlier growth rate was 70 percent." If you are a mo mo global "growth" investor, and growth goes from great to good, watch out below.
  • China's stock market lost another -0.34% last night, taking the cummulative swan dive to -61% since the October 2007 highs.
chart courtesy of

DSW: I'm Not Making This Up...

As I flipped around through different company web sites checking out store additions in troubled states (CA, NV, AZ, FL), guess what started at me on the DSW homepage? Yes, the image below. I'm not joking. They continue to pay up for real estate that is way too expensive for a format that is way too large at margin and asset turn structures that are way too low.

"Trend" vs "Trade" factors aside, this is as flawed a business model as I've seen in a while.

BWLD - Relevant data points on wing prices

According to SAFM, prices for jumbo wings have remained very weak into the summer months. Jumbo wings averaged $0.812 per pound, down 30.1% from the average of $1.16 per pound last year. Wing prices are typically weak through the summer, but prices this summer reflect weaker than usual demand from distributors and casual dining customers. Currently, the market price for jumbo wings stands at $0.83 per pound. SAFM and others hope the kick off of football season will improve demand for wings.

I love this quote from SAFM’s senior management regarding the week leading into Labor Day “we came in Monday, and it was soft everywhere, very low demand for anything. You’d think they’d be hollering for wings, wings and chicken tenders for what we call the watering holes, where they serve beer and hot wings and chicken tenders…not much at retail and just kind of a blah week.”

In 1H08, fresh chicken wings accounted for 21.5% of BWLD’s restaurant cost of sales. In 2Q08, fresh wings were 20.4% of cost of sales. Despite SAFM’s macro comments, BWLD’s same-store sales have remained above industry trends. Above average sales trends and favorable wing pricing should fuel better margins in the near term. Over time, I would still expect chicken prices to move higher as chicken producers are forced to further cut production.

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Famous Footwear: Cartography 101

Don't the strat planners at Famous Footwear use mapping software for competitive proximity analysis? If not, have 'em call Zach Brown at Research Edge.

Notice the tone from Famous Footwear management on performance by region on its 2Q call. Clearly lacking confidence about why certain markets are underperforming. The sad thing is that so many are saying the same thing in the same states. Famous Footwear's store adds in CA, NV, AZ, and FL are underperforming. Well guess what? Same thing goes for Payless, DSW and even Sports Authority. Dick's is adding stores in 3 out of 4 of these states too. Texas would be high on this list too if oil was not over $100.

I don't care what anybody tells me, but as too many retailers add stores in new states at the same time, it simply is not good. I think that the cycle shifting back to athletic footwear will support this for the athletic space, but for the casual/fashion footwear space this means trouble.
Click on map to enlarge and read text.

DPZ – Broadening its Menu and Relevant Dayparts

Domino’s recently announced the national roll-out of its new oven baked sandwiches, priced at $4.99. I have written about the success Subway has had with its $5 price point from a traffic standpoint so these new sandwiches could really help to drive traffic for DPZ (relative to the overall QSR pizza category, which has experienced negative traffic trends for the last 6 quarters, according to NPD data).

Although the sandwiches will not generate the same margins as a one-topping pizza, they should provide incremental business during the lunch daypart and add to the overall ticket. President of Domino's USA Patrick Doyle stated, "This launch springboards Domino's into the lunch business by providing a product that is high quality, priced right and aimed at convenience-minded people without a lot of time. Of course, sandwiches are also available any time our stores are open.”

Eye On Leadership...

Two of my Partners here at the firm, Brian McGough and Howard Penney, we're outstanding Morgan Stanley analysts, and they often talk of their experiences working there. One of their favorite people at Morgan Stanley was hall of fame Strategist, Byron Wien.

In a sign of the times, as supply growth in the hedge fund industry finally begins to slow, and growing pains emerge, Byron Wien has moved to a hedge fund - Pequot Capital. He is their Chief Investment Strategist.

For those of you who missed Byron's interview in Barron's this weekend, it should be on your required reading list. I am not going to dissect why I disagree with two thirds of his current market views; it’s too late in the trading day, and I need to manage the close. I have long been a big fan of Wien's work, and he deserves all the respect our industry has given him.

That said, since Wein points out that the research business has reached a critical crossroad, I’d like to highlight one of the points he made that is indirectly aligned with my views of global macro risk management.

Barrons: "How do you compare this market with others you've seen in your career?"

Wien: "This market is different because globalization has changed the nature of investing. When I started as a securities analyst (1965), I was focused on U.S. equities alone, and I didn't know much about what was going on around the world, and I could do my job very well; today, you can't."

This business is Schumpeterian, on many levels. Creative destruction always allows someone to enter the game and do something that everyone else says "you can't" do.

I for one have lived my life for that very cause. It’s what gets my feet on the floor every morning. It's "Macro Time". Let's drop the puck and get this game started.

(Wien pictured recently in BusinessWeek)

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