Stock Interest List Update

MW - reported 4Q08 results last week and surprised analysts on the back of margin strength from cost containment and more stable than expected sales declines. It appears the promotions that MW is running (2-for-1 suits) are driving traffic more than expected. So although the product margin is low, the volume and the general cost reductions are supporting earnings. It is not surprising to have a huge stock reaction in a company's share price that was as beaten down as MW. The shares are up 51% from the time I left for vacation on 3/6. That is the problem with shorting very "cheap" stocks - little margin for error especially if the Company is doing "less worse" than expected. However, at today's valuation and in the current environment, I would still keep it on the Short interest list.

WFMI - Whole Foods Market, Inc. is a name which a lot of readers probably know. Based on the recent run back up in share price following 1Q09 earnings, FTC clarification on the Wild Oats litigation, and Yucaipa (an investment company) increasing its stake, I think the risk/reward of a WFMI short makes sense. I tweaked two Wall Street firms' earnings models a bit, essentially extrapolating SSS and Identical Store Sales trends as well as 1Q09 gross margin, and pretty easily calculate 62-63c for FY09 compared to consensus of 70c.

The key issue in my mind is Same Store Sales (SSS). SSS deteriorated at WFMI for the first time in history during 1Q09. The cadence got a bit better in January, but then trailed off again the first four weeks of 2Q09 at (4.5%) and ID sales at (5.4%), including currency. The numbers for 2Q08 were 6.7% and 5.1%, the numbers for 3Q08 were 2.6% and 1.9%, and the numbers for 4Q08 were 0.4% and (0.5%). The Street seems to tout the idea of slowing growth leading to increasing profitability, but in that case I don’t understand the growth multiple the Company receives.

In conclusion, it seems as though besides the general market run-up, there has been a lot of positive news that has recently been baked into WFMI’s share price. Given the environment and the desire of the consumer to trade down, I view this as an attractive entry point for a short. However, I do note that WFMI has traded at crazy multiples in the recent past – including 55x earnings and 28x EV/EBITDA, which must be taken into account in order to have real interest in the name.

HBI - Hanesbrands Inc is another name almost all readers will know. The Company makes the eponymous t-shirts, as well as many other wearable products. The reason this Company is on the Long interest list is because the management assures it will generate $300 million in Free Cash Flow (FCF) this year and continue to drive down its debt load, while maintaining enviable market position in categories that are almost consumer staple rather than consumer discretionary.

The catch though is that investors have driven down the share price because HBI still has a ton of historic debt from when it was spun out of Sara Lee in 2006. In fact its net debt level is almost 3x its stock market capitalization. But HBI was recently able to push out one of its debt covenant changes for two years, therefore getting rid of some of the risk surrounding the Company's debt covenants.

If HBI can battle through its recent sales declines and keep its price increases, which have been taken in February, and benefit from supplier cost structure improving, there is a chance that HBI can meet Wall Street estimates for the year. If the Company also delivers on its net debt reduction target of $300 million and keeps up that level of FCF generation, this is a clear Buy.

If the stock price drops down to between $6 and $7/share like it did recently, it should really be interesting. There was quite a bit of insider buying at these levels and certain management members were very proud of such well timed purchases.

SHOO - As a follow-up to a prior post, SHOO still looks of interest on the Long side. The Company posted free cash flow (FCF) in its 10K filing with the SEC of $33.5 million. Even though there was a 13% uptick in inventory levels (on a days sales basis), that kind of free cash generation is at least supportive of the current stock valuation, even if FCF declines meaningfully over the next couple of years (i.e. there seems to be a decent built in margin of safety).

-2outof4