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3 O'Clock High: Celebrity Gap Mailbag!


The Seahawks would be a lock if the QB had a Full Macke haircut.

Star Minyan Mike "The Hair is Real and it's Spectacular" Santoli writes:


This is me responding belatedly to Jeff's spot-on misty reminiscence of his coming of age at that Specialty Consumer conference in '97. It made me laugh, it made me cry. It made me want to kidnap Jeffmacke and take him to a ballgame followed by a forced trip to the baseball diamond I've constructed in my apartment.

I don't think it's possible to emphasize Jeff's [
SIC] points enough - about the way every specialty retailer's success begets its own eventual decline, about the way these stocks can go from bulletproof to swiss cheese in a blink, and the way that investors always overestimate the predictability and stamina of successful retail growth concepts, especially when they are encouraged by CEOs preaching corporate Peter Pan-ism.

I would add, though, that for those betting against proven retail concept stocks, they can work a whole lot longer than smart observers think possible. Note that after Drexler's patently destructive "strategy" was articulated at that conference, Gap (GPS) shares tripled in the ensuing 18 months. Now, this wasn't really Drexler's genius at work as much as a strong economic tailwind and a once-in-a-lifetime proliferation of khaki across this great country as the business-casual religion spread to all corners. But, nonetheless, comeuppance doesn't arrive on schedule, even if it always shows up eventually.

Another quick observation about highly valued, can't-miss, glamour-drenched specialty-retail stocks: sometimes they don't collapse in a satisfying, morally just heap. Many times they simply do nothing as the slow, grinding process of maturation and multiple compression frustrates the surplus of bulls.

I invite anyone to punch up a 3-year chart of Bed Bath and Beyond (BBBY) for an illustration. When looking at this, consider several questions:

-Did this company prove itself a true category killer, executing almost flawlessly and meeting its square-footage and sales plans? Did it not send its feeble competition either into also-ran status or into the tough-love reformatory of private-equity ownership?

-Did it compound earnings at close to 20% a year?

-Was the market and, in particular, retail in a bullish phase during this time?

-Was the consumer in the midst of a damn-it-all love affair with houses and home furnishings all this time?

The answer to all the questions is: yes. And yet the stock has done….nothing at all.

I recall in '02 when I timidly wrote that BBBY was priced for something approximating perfection. The CFO called to ridicule me that the same things were written in Barron's five years earlier (by someone else). I thanked him and said I could easily be wrong or early, but the passing of five years raised the chance of my being lucky with the call. And I do mean lucky, because I did very little "work" on it. But, there we have it.

I'm not brave enough to say that, say, Coach (COH) is now at the stage of entering complicated adulthood in a similar way, but I continue to look for my entry point.

All best-

Print and Broadcast Journalism's Michael Santoli


Thanks for a great email. Bed, Bath & Beyond and Coach are two darn fine examples of the difference between "Recognizing a Predictable (Negative) Outcome" (BBBY and COH hitting the familiar wall) and "Figuring out a way to Profit from Said Outcome."

I know more than one savvy trader fighting Coach on the shortside at the moment and I, personally, have smashed my head against the wall trying to short BBBY over the years.

I'll get to the merits of those as retail ideas next week and let your email stand on its own in that regard for now.

For Monday, I'm going to pair this note with another reader email I got on the topic of Google (GOOG) and the moral hazzard of discussing equities in public.

Again, thanks for the free-standing column of an email. I guess I'll have to retract all that stuff I've said about you old-school print guys not "having the mental squash to come up with anything to say more than once a week."

At least in your case, for sure...
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