by Brian Sozzi
Not sure about your feelings on the topic, but don't the month long weather patterns globally seem too "Day After Tomorrow" for the liking? Far be it from me to go all Nostradamus as I am a stock picker, not a long range weather forecaster or trained psychic. While I work from home, peering out the window at my snowed in two-door Japanese sports car and pop in P90x DVDs to support my workout infatuation, I am scouring the market for snow-centric stock trades. To that end, I say to investors, embrace the remnants of Mother Nature's wrath and seek short-term opportunities where variables, in this case unplanned for weather, could lead to big-time surprises on 4Q10 earnings later this month or in mid-February.
Focusing on the retail sector, the predominant theme post those chilly December same-store sales results on January 6 has been to dump the names. It's a notion that I subscribed to back on Cyber Monday in November, believing December sales would be soft and analysts too rosy with their forecasts for my taste. Though still remaining cautious on the sector, I think one of the short-term plays in retail is on those companies in which Mother Nature has caused increased demand for winter related items. It could be snow blowers at Home Depot (HD) and Lowe's (LOW), or the company selling such products, Toro (TTC). However, to obtain the biggest bang for your investment dollar, I like companies selling products that are solely winter related rather than having a percentage of the inventory dedicated to the category.
My call is to go with boot makers, including Columbia (COLM) and Timberland (TBL). I have left Ugg maker Decker's Outdoor (DECK) off the list for two reasons; one, the stock is signaling being overplayed near-term and two, many of the company's products are not waterproof, offering little benefit to the consumer amidst the suspect weather. In a heavily promotional, inconsistent post-holiday retail environment, which is the case currently, I think boot makers are in the driver's seat with their vendors. They have the product, vendors don't, and therefore greater reorder activity and prices are poised to enhance sales and earnings. With snowstorms and wet weather being the norm in November (internationally), December (U.S.), and now in January (U.S.) the backdrop is fertile for these companies to surprise on 4Q10 earnings. Note you do not have to own both names.
Although the stock's valuation gives me reservation (P/E multiple of 23x my estimate for earnings in 2011, sizable premium to sector average of 16x or so, and 9-year mean of 14.2x) I think the stock may be ripe for a trade into earnings later this month. Key considerations include:
Global weather conditions meets conservative 4Q10 guidance: In reviewing Columbia's 4Q10 earnings guidance, it was very conservative on margins (gross margin and operating margin). However, I think Columbia was in the driver's seat with department stores for much of the fourth quarter; snowstorms globally plus really innovative product (Omni-Heat launched in 3Q10 with a comprehensive marketing program) in my view suggests good pricing integrity on most merchandise in the stores and on reorders (upside to volume is there in addition to the pricing aspect). If there is downside to my rationale, it's competitive pricing this past holiday season on non Omni-Heat Columbia products at mid-tier department stores and traveling constraints by Europeans as a result of the aforementioned weather conditions.
Share gain: Columbia took a pill of poison in 3Q10, deciding to expedite orders to gain shelf space at retailers which in turn weighed on margins. In hindsight, the short-term pain may have left Columbia in a position of strength during and after the holidays.
Is everything going completely right at Timberland? Not necessarily, but I think the market has baked that into the stock's valuation. The company's classic yellow boot still casts a shadow over the successes being realized in other areas of the product portfolio. That classic yellow boot, so popular in the macho prep heydays of the late 1990s, has fallen out of favor with kids but incrementally in favor once again with construction workers getting called back to work in the U.S. and those in Asia that are building infrastructure. It's a sluggish sales category for Timberland despite management putting greater resources behind the product's design and development. The positive here is that Timberland's management has finally gotten inventory of the product under control.
Where Timberland boots are sprouting up: If you don't follow Timberland as closely as I do, it's natural to reason that the brand remains one stuck on the shelves at Sears (SHLD). Times have changed, however. Although Timberland's women's boots are underrepresented at Nordstrom (JWN), Saks (SKS), and Macy's (M) the men's category has garnered increased shelf space in stores and positioning on related websites. Nordstrom carries Timberland's environmentally friendly line Earthkeepers, selling at $170 a pop. The Counterpaine chukka sells for a cool $315. At Saks, Timberland has shipped exclusives, with the Tackhead chukka selling for $325. One common thread amongst user reviews on the Saks website is that the Timberland boots are "stylish." Even Macy's sells Timberland chukkas (price range: $90 to $125) and Earthkeepers ($145). Timberland is quietly changing the perception of its products in the marketplace. Retailers appear to be listening, and they only listen if the product is designed correctly for trend and the consumer is buying.
Weather in Europe: The countries in Europe that experienced nasty weather early in the quarter are where Timberland has momentum in its business, such as Central Europe and France. The Benelux region, challenging for Timberland in 3Q10, was also under the grips of inclement weather, which may spur improved 4Q10 results. Europe as a whole is Timberland's highest operating margin business, ahead of the U.S. and Asia.
Asia: Timberland's Asia business is profitable and growing. While others in retail are operating at losses in Asia as they build infrastructure and giant flagship stores, Asia for the nine-months ended October 1, 2010 posted a strong 12.90% operating margin for Timberland. The company has 95 stores in Asia, and CEO Jeff Schwartz during a recent trip to China stated his intention to double the store base in the country. Timberland products sell at a premium price in Asia based on my observations.