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The Ancient Art of Chinese Seduction and Retail

By Stansberry Research Interview Series
Monday, October 9, 2006

I was getting handsomer, wiser, and more brilliant by the second.
 
The old Chinese shopkeeper was following me so closely she could have been my shadow. No matter what I did, she was right behind me showering me with compliments. If I tried something on I was “handsome,” if I perused the scrolls I was a “wise”... it was getting to the point that I could have run into the wall and she probably would have called me “headstrong” or “powerful.”
 
I was in San Francisco visiting a trader friend of mine. During my stay, I decided to visit the city’s famous Chinatown. What followed was hour after hour of Chinese shopkeepers congratulating me on visiting their shop, complimenting me on my tastes, and thanking me for just walking around.
 
So far, I’d managed to avoid falling for these retailer ploys... but this latest shopkeeper was something else. The minute I walked into her store, I found myself playing a part in a script I had neither written, nor auditioned for. I was the American consumer, she was the Chinese producer. She had cheap products for sale (all made in Taiwan, of course), and I had American dollars.
 
I really shouldn’t have bought anything. I didn’t really want a robe and didn’t have space in my luggage to take it back to Baltimore. I certainly didn’t feel like carrying it around with me all day. And yet, there I was, handing over my cash like an idiot.
 
This same irrational behavior is playing out on the world stage today. The U.S. economy looks to be decelerating, hampered by the slowdown in housing and real estate. Consumer confidence levels have been slipping. And yet retail sales are soaring. Last Thursday, the International Council of Shopping Centers announced that same-store sales jumped 3.8% in September. Excluding retail behemoth Wal-Mart’s disappointing results, it was 6%.
 
Consumer spending had already hit its highest 2006 levels in August. And it keeps rising. Meanwhile, consumer savings has mainly been negative since early 2005.We shouldn’t be buying stuff we don’t need right now. Yet Nordstrom, Federated Department Stores, JC Penney, Kohl’s, American Eagle Outfitters, Abercrombie & Fitch, Limited Brands, Saks – practically any retail stock you can name – are beating estimates and surging upwards.
 
Many investors have historically avoided retail stocks because they are low-margin businesses. But few things in finance have proven as reliable as U.S. consumers’ determination to spend money they don’t have at times when they shouldn’t.
 
Insiders are certainly banking on it. Most of the above companies will look familiar to those among you who track corporate insiders. Federate Department Stores, Nordstrom, and Limited Brands have all experienced significant insider trading in the last six months.
 
It’s not going to let up either: Consumer discretionary was the leading sector for insider bulls at the end of September. On top of this, the momentum is on our side: the Retail ETF (RTH) is now trading at a 52-week high and nearing its three-year high.
 
One particular retailer has jumped out at me: Chico’s FAS (CHS). Having fallen steadily for most of 2006, Chico’s shares began an uptrend in early September. And last week, the company announced better-than-expected same-store sales for September.
 
Chico’s has some of the best margins in retail: gross margins of 61%, operating margins of 21% and net margins of 13%. On top of this, it’s cheaper than its five year averages for its price-to-earnings, price-to-book, price-to-sales, and price-to-cash flow multiples.
 
And the insiders have been buying: Director Ross Roeder bought $238,000 worth of Chico’s stock just a few weeks ago. Other directors were buying as early as March and April 2006.
 
Are we handsome and wise, yet?
 
Good trading,
 
Graham




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Market Notes
Top Performing Market sectors:
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  • Retail – Wholesale
  • Telecom – Services
  • Food – Meat Products
  • Food – Dairy Products

Worst Performing Market sectors:
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  • Building – A/C & Heating
  • Oil & Gas – Drilling
  • Building – Wood Products
  • Mining – Gems

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52-Wk
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Big Pharma 63.99 -0.2% -3.2%
Internet 72.58 +0.7% +25.0%
Semis 16.18 -0.3% +26.4%
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Biotech 20.56 +0.1% +26.6%
Retail 19.59 -0.6% +26.6%
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Construction 13.20 +0.8% +14.8%
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Consumer Svcs 67.38 0.0% +23.4%
Financials 55.01 -0.1% +5.7%
Health Care 63.90 -0.6% +1.2%
Industrials 63.51 -0.1% +19.3%
Basic Mat 74.64 +0.4% +27.8%
Real Estate 55.35 +0.1% +21.8%
Transportation 91.39 -0.4% +23.9%
Telecom 22.65 +0.3% +16.8%