Friday, April 9, 2010

4/9/10 Midafternoon Report: Greek bail out back on causing market to fly like Icarus (though hopefully not quite as close to the sun)

The markets are higher today as fears of a Greek blow up subside for about the 69th time which is one more time than Ben Bernanke has taken an "accomodative stance" for the market in the past two months (and Money McBags isn't quite sure what that means).  In macro news, Retail sales were out yesterday and they posted their strongest monthly gains since the data started being collected in 2000 and since the introduction of the Snuggie.  Sales were up 9.1% over March 2009 as people are feeling safe in their jobs and are now willing to once again run up their credit card debt and buy those Joe's jeans that fit so snugly (and Money McBags will get to JOEZ later with their 40% revenue growth that avoided falling to the bottom line like Gabrielle Sidibie avoided salads).  Easter falling a week earlier this year helped boost sales a bit so retailers aren't quite ready to pop open the beluga and take the Dom off ice, but the number was much stronger than analyst guesses and bodes well for the recovery.  A number of retailers including Target, Macy's, Ross Stores, and Vivid Video (ok, Money McBags is just speculating on the last one based on his consumer spend) said their results beat expectations which is more positive news on the strength of the consumer.  In other macro news, US wholesale inventories rose .6% in February which was apparently well above guesses, while wholesale sales were up .8%.  What is interesting is that wholesalers still only have 1.16 months of inventory on hand which means there is still a fuckload of restocking potential (or un-destocking potential for those who want to nit pick).  Money McBags has doubted the path of the economy for quite some time because the labor market is still weaker than a sand in the face Charles Atlas (shout out to the over 70 crowd.  All the ladies in the house yell "Arthritis."), but things look like they are legitimately getting better.  Sure there could be more issues in Europe, and sure the S&P isn't hella cheap, and sure with earnings season kicking off next week companies are going to have to put up better results than GE when they used to manage earnings or Tiger Woods in a full of shit contest, but things seem like they have a worst plateaued.  Money Mcbags got longer the market today, at least for the short run.

In international news, the Greek bailout plan is on again today which is less surprising than when Ricky Martin came out of the closet, when Colin Powell admitted there were no WMDs in Iraq, or when Jennifer Aniston's latest movie flopped.  Greece still needs to raise around 15B euros by the end of next month which means they have to sell a whole lot of gyros and Julia Alexandratou sex tapes, but the rest of Europe will be buyers.  The EU, IMF, and NAMBLA will not let Greece default and will issue them bilateral loans (which have all the benefits of lateral loans, only I am told the interest goes both ways).  Look, Greece has been around for roughly 5k years since the Cyclades in the Bronze Age and has been through wars, revolutions, and prodigal son Yanni's musical career, and none of that was enough to bring them down so a few poorly written CDOs/subprime mortgages/bad loans are not going to be the demise of this once great country.  It's not happening.  There is more chance of Michelle Hunziker stopping by the When Genius Prevailed offices and handing out free ice cream sundaes than there is of Greece going bankrupt so buy anytime the market gets freaked out by Greek bond premiums shooting through the roof.  In other Greek news,  Fitch downgraded Greece's credit rating today just in time for the latest bail out, so again great timing by credit rating agencies who continue to have less credibility than Amy Winehouse's stylist and Greta Van Susteren's plastic surgeon.

In stock news, despite yesterday's strong retail sales report WMT announced a plan to lower prices in furthering their quest for world domination.  With slowing same store sales, WMT is hoping lower prices will win back middle class customers, make them more competitive with grocery stores, and allow their shoppers to upgrade their wardrobes.  In other stock news, PALM is mimicking their phones and flying through the roof (of course the roof their phones fly through is a sun roof as users forcibly and angrily chuck them out of their cars when the Pre's operating system crashes on them for like the 42nd time) on rumors of being acquired.  A large scale PC maker is said to be interested in buying Palm's phone and technology because rather than being in just one ultra-competitive commodity business, they'd apparently like to be in two.  A PC maker buying Palm makes a bit of strategic sense if there were no iPhone and blackberry, but given that the market is already saturated and with better products, a deal seems a bit implausible unless it is at bargain prices.

In small cap news, Money McBags bought more KITD today and is probably done buying for now unless it gets stupid cheap again.  The stock is simply worth a fuckload more than it is trading for today so Money McBags is a bit less price sensitive than Richard Branson at a McDonalds.   As discussed earlier, JOEZ announced their quarter last night and is selling off like their quarter created AIDS (and not regular AIDS, but AIDS of the anus).  The stock is down 16% despite 40% top line growth because bottom line growth was non-existent (though showing a picture of Alice Eve would have caused Money McBags' bottom line to grow).  JOEZ exhibited less leverage than the immortal He Ping Ping on a see saw with Kirstie Alley (and that's not just because He Ping Ping was only 29 inches tall, but because he's dead).  JOEZ margins were essentially unchanged with gross margins coming in a bit worse at 49% from 50% and operating margins improving by less than 100bps.  What hurt them most was their tax rate jumping from 15% to 47% as a result of NOLs running out and having to accont for an earnout from their acquisition of the Joe's business.  Plus, they said they had an extra $700k in advertising expenses and a $150k expense from moving their headquarters, but even taking out that $850k in "one-time" expenses, that would have barely added back another penny.  This business simply needs to figure out how to grow while managing expenses.  As a quick exercise, do 25 jumping jacks. As a quicker exercise, assume the company grows sales 40% to $111MM for calendar 2010 (which is very aggressive, but work with me here).  Then hit them with 50% gross margins (even though those might actually be getting worse as they are moving downstream in their pricing and products), 39% operating margins (which is what they were this Q absent the $850k "one-time" costs), hold interest and depreciation constant (though depreciation should grow as they open more stores), tax them at 46% (they said over time that should drop to 40%, but the earnout is over 7 years), and keep their diluted share count at 63MM.  If you do all that and say Beetlejuice 3 times quickly, you get to earnings for the year of about $.07 per share.    You see, that's the problem with running a low margin no leverage business, you're kind of fucked unless you can get scale quickly by ramping up sales faster than Lindsay Lohan snorts a dime bag.  So if they can't get any leverage and earn $.07 per share in 2010, they are now trading at 40x that which is way too expensive for anything not involving Hannah Hilton putting her musical skills to use and playing Money McBags' rusty trombone.  And remember, the exercise we just walked through assumes 40% topline growth which is huge.  Now look, the company is doing a very good job of growing the top line and despite burning through $2MM of cash from operations, still has a decent balance sheet with $10MM cash and no debt, so it is possible they start figuring out how to manage the bottom line, that said, Money McBags is going to continue to take a pass on this until they fire the the Underpants Gnomes and figure out how to turn revenue into profit.  Obviously a business growing top line at 40% has some good qualities, so it is worth monitoring, but unless Money McBags' math was wrong in the analysis he laid out above (and while Money McBags has an MBA in Finance and a BA in Economics, he is not a maffamatecian so often has to work it out with a pencil), the numbers don't make sense.  If any of you have a better grip on the numbers, let Money McBags know because he wants to like this stock, but with crappy and unimproving margins, it's not clear he can.

And don't forget to enjoy your weekend.

1 comment:

Anonymous said...

JOEZ: Where are you wrong? (1) Assumption of 40% sale growth to 2009 is actually conservative. They have already done that this quarter. Should not sales increase more if the economy keeps improving? If sales improve to 30mil in Q1 2011, operating margin will come down to 36% and 12-months earnings will be 0.13/share.
(2) Their sales channel is changing. Are they going to get better operating margins from operation of JOEZ own stores?
(3) SGNA in Q1 includes extra pre-openning cost for 5 new stores before Memorial day. The cost is up to one-month store expenses.
(4) Great trading stock, subject to emotional swings of investors.
(5) They have not "burn" the cash. It is now the inventory. Inventory went up by amount of used cash in Q1. Richard.