The Consumer Stock Network

West Marine (NASDAQ: WMAR): West Marine will report full 1Q08 results on Wednesday morning, followed by a conference call at 11:30 am EST (Dial-in number: 888-756-1546). The company previously reported 1Q08 revenue of $113.3M, a 10% decrease y/y, on a same-store sales decline of 9.4%. Given the weak sales figures, we do not expect much in the way in earnings and neither does the Street (the consensus estimate is -$0.58, according to Yahoo!). Expect this stock to trade down this week, not because of the quarterly results, but because of the impact that rising gas prices (ask any boat owner if they plan to use their boat less or more this season) will likely have on upcoming boating season. However, at $5 per share, the stock may not provide enough incentive for short sellers.


Big 5 Sporting Goods (NASDAQ: BGFV): Big 5 will report 1Q08 results following the markets close on Wednesday, with the conference call at 5:00 pm EST (Dial-in: 800-762-8908). Estimates for this stock have come down in recent weeks, and probably rightfully so. The best-of-breed in the sporting goods sector, Dick's Sporting Goods (NYSE: DKS), already warned about potentially weak 1Q08 results, and Big 5 will likely be no different (consensus revenue and EPS estimates are $214.4M and $0.19, respectively) . Compounded by a particularly challenging economic situation in its home state California, we would not be surprised to see the stock retreat into the $7-$8 range later this week.


Town Sports International (NASDAQ: CLUB): Town Sports will report 1Q08 results Thursday afternoon, and the conference call will be held at 5:00 pm EST (Dial-in: 800-659-1942; Pwd: 95822148). The Street is calling for $124.9M in revenue and $0.15 in earnings. In general, we believe the fitness club space is more resilient to slowdowns in the economy because of the subscription nature of memberships (one- and two-year contracts make it more difficult for members to cancel). However, the economic situation in several of Town Sport's key markets has deteriorated, and could make mature-club membership acquisition more difficult. We like this stock as a long-term holding because of the economies of scale, but more attractive entry points will likely present themselves. We will look deeper at the investment thesis for Town Sports later this week, as we believe it makes for an interesting case study regarding investor psychology.


Employee of The Consumer Stock Network, LLC is a member of the Board of directors or an advisor or officer of the Subject Companies. No
Analyst or household of analyst is a member on Board of Directors or serves as an officer, director or advisory board member of the Subject Companies. No
Analyst or household of analyst owns shares in Subject Companies. No
Analyst or household of analyst owns options warrants, or futures in Subject Companies. No

Investment recommendation: The investment strategy for Carter's (NYSE: CRI) stock depends on your vantage point. On one hand, baby and children's apparel are a consumer staple, and the Carter's/OshKosh brands certainly resonate with mothers everywhere. Sales should remain healthy even in a challenging environment. On the other hand, OshKosh's return to profitability remains a work and progress, and the market will not reward the stock with a mid-teen earnings multiple until there are more concrete signs of margin improvement. Our advice: take a pass on this stock for now, but keep it on your radar screen for possible buying points towards the end of the year.

Key considerations:

• "I think its reasonable to assume that earnings this year could be down 5% or more." Sometimes earnings conference calls boil down to a single comment. This line, spoken by CFO Mike Casey during the guidance portion of this morning's conference call, pretty much sums up the situation at Carter's. Citing general consumer weakness and OshKosh's sluggish performance, management now believes that its full-year earnings could fall 5% below last year's adjusted $1.43 figure (or roughly $1.36 per share). Applying the low double-digit earnings multiple that we mentioned in our preview (let's assume 10x, in-line with last year's operating margins), we arrive at a price of about $13.60, which is where we find the stock trading midway through today's session.
• Re-examining the business model. Management discussed 5 components to make its business model more competitive, which were (1) product leadership via design and development; (2) price cuts, including 8%-10% reductions at Carter's and 10%-15% at OshKosh; (3) more effective branding efforts, including additional shop-within-shops at Kohl's (NYSE: KSS), Macy's (NYSE: M), and JC Penney (NYSE: JCP); (4) increasing wholesale customer profits; (5) increased inventory turnover via new POS systems and planning/allocating tools. Though these goals are admirable, we still question whether or not any progress can be shown in today's environment. Perhaps the most troubling of these components are price cuts mixed with improved wholesale customer profitability, which will likely drag on top and bottom line results unless product velocity materially improves. Although management concedes that these measures will likely have a negative impact on margins through 4Q08, we have concerns it may take until 2009 to fully realize the benefits.
• OshKosh, my gosh. Though the OshKosh brand appears better positioned compared to two years ago, profitability remains elusive. Every time it appears the segment has turned the quarter, operating margins seem to disappoint. There weren't as many calls for a strategic sale of OshKosh business as there were on the 4Q07 conference call, but shareholder patience remains low. We do not expect the stock to show meaningful gains until there is evidence that OshKosh can grow and sustain acceptable low-to-mid teen operating margins.
  
• Earnings and guidance analysis. In a nutshell, the sales outlook is bright, but earnings are less visible. The implied full-year EPS guidance of $1.36 seems reasonable, but gives the company an achievable target if the aforementioned business model changes are effective. However, markdown activity and wholesale customer provisions will likely continue to eat away at margins for the near-term. Retail sales should remain strong at the Carter's brand throughout the coming months, spurred by the season change, easy year-over-year comparisons, and the arrival of federal stimulus checks. Look for high single-digit/low double-digit comps in 2Q08, with a moderation in the back half. Carter's wholesale sales growth will likely remain in the mid-single digits for the foreseeable future, based on booking trends. OshKosh retail trends are much more difficult to predict, but easing comparisons should at least help the company "improve meaningfully" as it discussed on the call. Mass-channel sales should improve steadily throughout the year.

Disclosures
Employee of The Consumer Stock Network, LLC is a member of the Board of directors or an advisor or officer of the Subject Company. No
Analyst or household of analyst is a member on Board of Directors or serves as an officer, director or advisory board member of the Subject Company. No
Analyst or household of analyst owns shares in Subject Company. No
Analyst or household of analyst owns options warrants, or futures in Subject Company. No

Retail store expansion and closures are a topic we want to discuss further in the coming weeks, but in the meantime, we thought we would pass along you with some recent articles on the rise in retail chain bankruptcies.

• Retail Chains Caught in a Wave of Bankruptcies [The New York Times]
  
• Office, Storefront Vacancies Mount [Yahoo! Finance via Minyanville]
• Empty Stores Across LI Keep Brokers Busy [newsday.com]

Carter's (NYSE: CRI) will report 1Q08 results following the market's close later today. Management will host a conference call tomorrow morning at 8:30 AM EST (Dial-in number: 913-981-5588). According to Yahoo! Finance, analyst expectations call for 1Q08 revenue of $323.7M and EPS of $0.16.

Key considerations:

• Expect a robust retail top-line... Despite increased caution among consumers, the baby and children's apparel space has held up relatively well in recent periods. Sales at competitor Gymboree (NASDAQ: GYMB) were strong in both 4Q07 and 1Q08, and despite dismal sales numbers from The Gap (NYSE: GPS), the baby segment has outperformed its other operating segments. We expect this to show up in Carter's retail sales results during 1Q08, aided by easy year-over-year comparisons. Management's earlier projection of high-single digit positive comps at Carter's and low-single digit negative comps at OshKosh will likely be somewhat consistent with actual results. Also expect Easter, a key children's apparel holiday, to help the top-line as it fell in 1Q this year while it was a 2Q event in 2007.
  
• ...but wholesale sales were almost certainly sluggish. However, wholesale sales will not likely show the same strength as the retail segment. The easiest way to decipher Carter's wholesale sales is to monitor customer traffic at its largest wholesale accounts - namely, Costco (NASDAQ: COST), Sears (NASDAQ: SHLD), JC Penney (NYSE: JCP), and Kohl's (NYSE: KSS). With the exception of Costco, 1Q08 results have been tepid at best, which does not bode well for wholesale results.
• Markdown activity and provisions for wholesale customers will weigh on margins. Management has already suggested that 1Q08 EPS would come in below last year's $0.22 per share ($0.16 per share including one-time items such as accelerated depreciation and distribution facility closure costs), and we see no reason to disagree. Our wholesale store visits in recent weeks showed similar traffic trends and more pronounced markdowns than last quarter, meaning more provisions to support wholesale customers and reduced profitability. The analyst consensus of $0.16 will probably be close to the reported EPS number.
• Are there any signs that the troubled times at OshKosh have subsided? The Carter's brand appears to have successfully turned around after a lackluster 2007, but the key question for investors is whether or not there will ever be a meaningful return on the capital used to acquire OshKosh. We admire the changes that new executives (including new retail head Jim Petty) have implemented with respect to the product assortment in just a short period time. However, the truth is that it will be difficult to gauge customer response to the simplified product assortment and reduced opening price points until there is a rebound in customer confidence. And frankly, we do not see that until late 2008, if not 2009.
• What should you do with the stock? Unfortunately, there is not a clear-cut investment strategy for this stock. We would not be buyers in advance of the quarterly announcement or conference call given our expectations for wholesale sales and margin pressures. However, shorting may not be the right answer either. The stock found support at $14 after last quarter's disappointing results, and it would take a colossal failure this quarter to fall through those levels later this week. Most analysts seem to be valuing this stock with a low double-digit forward earnings multiple (appropriate in this environment), and unless there was a reversal to substantially negative earnings this quarter, the stock will likely remain in the low-to-mid teens. This does not give short sellers enough incentive, in our opinion. Long-term value investors may want to look to buy at these depressed levels, but until there is more tangible evidence of a turnaround at OshKosh, there may be better places in baby/children's apparel for your money (like Gymboree, perhaps).
  

Disclosures
Employee of The Consumer Stock Network, LLC is a member of the Board of directors or an advisor or officer of the Subject Company. No
Analyst or household of analyst is a member on Board of Directors or serves as an officer, director or advisory board member of the Subject Company. No
Analyst or household of analyst owns shares in Subject Company. No
Analyst or household of analyst owns options warrants, or futures in Subject Company. No

Welcome to The Consumer Stock Network, an independent research site devoted to retail and consumer-related equities. First and foremost, our goal is to provide unbiased, fundamental analysis. Though we prefer long-term investment horizons, we recognize that timing is everything in today's market. As such, we will provide you real-time analysis for the consumer/retail sector so that you may take advantages of market irregularities. This includes earnings previews well before a company's release date, instant earnings reviews, and real-time analysis of any company or market specific catalysts.

That said, we hope to differentiate ourselves from other consumer/retail strategists by offering a comprehensive site. Other features we hope to offer include:

• Top Picks. In May, we will introduce the Consumer Stock Network Top Ideas List. This will be a ongoing feature where we provide our favorite investment recommendations in the consumer/retail space, including both long and short plays. Because accountability is very important to us, we will also personally invest in our top ideas. As new ideas present themselves, we will make adjustments and keep you abreast of the situation. To measure our overall performance, we benchmark our Top 10 List against the Standard & Poor Retail Index.
  
• Tutorials. Though it may seem relatively straightforward, the truth is that the consumer/retail industry features a number of complexities that may influence your investment analysis. From time to time, we will try to provide you with the finer points of consumer/retail stock investing, including commentary on same-store sales, markdown activity, inventory controls, weather, calendar shifts, and any other topics of interest.
  
• Management Insight. Over the course of 10+ years of personal and professional investing, we have been fortunate enough to encounter many of the best and brightest minds in retailing. At present, we have working relationships with the management teams of approximately 60-70 publicly traded and privately-held consumer companies. Whenever possible, we will provide retail management perspectives through interviews and panel discussions.
• Store-Level Analysis. It is one thing to grasp a company's fundamentals, but we believe a well-rounded consumer/retail investor understands a company down to the store level. Throughout our time as a sell-side analyst, we prided ourself on continuous store visits, conversations with distributors, and other pertinent channel checks. From these visits and discussions, we have built an expansive network of retail store and supply chain managers, and we hope to provide you with ongoing commentary from our sources to augment your investment strategies.

We have experience with the majority of companies we have linked to on this page, but would certainly welcome additional ideas or investment opportunities you have been working on yourself. Feel free to e-mail us at rjhottovy@consumerstocks.net with any comments, questions, or any additional feedback.