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Normalcy Accompanies Growth and American Apparel Bounces Back

One of Northlake's biggest portfolio headaches is a lot better today. Pain relief came in the form of very solid quarter from American Apparel (APP). 2Q results were inline to a bit better than the few analyst estimates. Revenues of $133 million exceeded the estimate of $126 million. EPS of 10 cents matched estimates despite much higher expenses to beef up corporate support and dramatically increase manufacturing personnel in support of rapid overall and same store sales growth. Guidance was confidently affirmed. Given the history of controversy surrounding the CEO and accounting and reporting issues, the 2Q results should come as a great relief to investors and leave shorts scrambling.

Leaving aside the controversies, APP is executing quite well in its growth initiatives. Revenues rose 39% with retail only sales up 51%. Gross margins expanded by 300 basis points. Operating income grew 29% despite the aforementioned expense ramp. Net income rose 42% thanks to lower interest rates and some debt reduction. Same stores sales for 2Q were up 23% and are on track to exceed full year guidance of 15% even with a 40% comp coming up in 4Q.

Given this growth profile the shares are cheap at less than 20 times 2008 estimates and just 12 times 2009 estimates. Growth in 2009 will be driven by aggressive new store growth, high single digit to low double digit comps and leverage of operating expenses that are finally reaching the point at which a public company should operate. On the call, management indicated that over the next few years operating margins could expand by 600-800 basis points.

Were it not for the controversy surrounding CEO Dov Charney....

....APP would be the hot teen retailing stock of the moment. It is understandable why many investors will never invest with Charney. However, I challenge anyone interested in growth retailing to listen to the Q&A on the conference call and come away without thinking that Charney is a thoughtful, creative, and decisive retailer. He may be an asshole to some folks but the guy can do retail.

If 2H08 results support current 2009 estimates, a permanent CFO is hired, and Sarbox compliance is achieved, APP shares are headed to at least $10, possibly the teens. I think those things will happen and the upside is worth the risk of dealing with Charney's chaotic and controversial personality and management style. This quarter was going to be the one that made me either throw in the towel and take the losses or build confidence and convince me to hold on. I am not sure yet if I will average down but I am definitely planning holding onto client positions.

Why Is CETV Struggling When I Think It Will Double

Central European Media Enterprises (CETV) remains my favorite media stock for all time horizons. Despite my enthusiasm the shares have performed poorly this year. Although, within the media stock universe, the 20% drop since June is not unusual. Neither is the 36% decline from the 52 week high.

However, there is one big difference. CETV is beating consensus handily and estimates are rising while virtually ever other company in media is missing consensus and estimates are falling. As a result, CETV shares have gotten to ridiculously cheap levels given the outstanding historical and projected growth profile – 8 times 2008 Estimated EBITDA. EPS are too volatile because the company's euro denominated debt causes foreign exchange fluctuations to distort results but on normalized numbers the stock trades at 16 times 2008 and 13 times 2009. CETV's EBITDA and P-E valuation is similar to other TV based media assets such as CBS, Disney, News Corporation, Viacom, and Scripps Interactive.

You might be thinking valuation is in line with the group so why do you say it is cheap. The answer is growth and an almost perfect track record of beating estimates. In its just reported 2Q08, CETV saw revenue rise 41% and segment EBITDA grow 53%. Year to date, revenues are up 45% and EBITDA is up 64%. In 2007, revenues and EBITDA grew 39% and 46%, respectively. Barring a major slowdown in Central and Eastern European economic activity, no signs of which have yet appeared, growth in 2009 should be at least 15-20% in local currencies. Sure, CETV's reported results have benefited from the weak dollar but local currency growth has been in the range of 15-25% across the entire company for the past several years....

Growth emanates from rapidly growing economies in the region which is driving per capita income and spending leading advertisers to aggressively grow their budgets. CETV's stations are ratings leaders pretty much across the board and operating management is widely acknowledged to be best in the business. Besides growing interest from advertisers, CETV has aggressively raised ad prices to begin to close the monumental gap that exists between rates in Western vs. Central and Eastern Europe.

There are two bear arguments that have been circulating. First is the macro argument: Central and Eastern European economies will rapidly decelerate due to rising inflation and slowing global growth. If this happens, CETV's 2009 outlook is not nearly as good as I or the consensus believes. Revenue projections are too high and best in class operating margins will come under pressure.

I can accept this argument and I understand why a short would take a position on it, a long would sell, or a potential long would pass. However, as I mentioned so far CEE economies are holding up just fine. Inflation pressures are a problem but for CETV they also make the ad prices increases easier to implement. I also believe that CEE economies are much less reliant on natural resource based growth than other emerging markets. The growth in the region is a function of low cost labor and manufacturing leading to very rapid growth in foreign direct investment. Maybe I am naïve but I don’t see this trend abating due a cyclical downturn given that the FDI is designed to lower cost structures for companies that are currently seeing lower growth in their mature home markets and open new opportunities in aster growing markets.

The second bear argument revolves around valuation. If you read analysts reports, they will tell you the stock is trading at 10 times EBITDA. Only one of the six reports I read reviewing 2Q results bothered to point out that two of the six countries CETV operates in are at breakeven.

Croatia just had its first ever EBITDA positive quarter following a period of investment that moved the station from #3 to ratings leader. Revenues have grown north of 60% per quarter since 4Q06. EBITDA is on its way toward $30 million in 2010. CETV just paid $172 million for 80% of the money losing #3 station in Bulgaria. I am extremely confident that if Croatia were sold today the price would be at least $250-300 million.

CETV has been in Ukraine for many years. Since 2004, revenue growth has been 30-40% with uneven EBITDA due in part to CETV's lack of control over day-to-day management of its station. The company just completed acquisition of the control stake in the station. Ownership is now 90% and will move to 100% at the end of this year. The two step buyout places a value of $800 million on Ukraine. Two recent events make this look conservative. First, CETV just issued detailed five year guidance for Ukraine projecting 2012 revenue and EBITDA of $500 million and $200 million, respectively. Second, Modern Times Group, one of CETV's primary competitors, purchased the #2 station in Bulgaria for almost $1 billion. Bulgaria's population is about 1/7th the size of Ukraine's.

I believe that at least $1.2 billion in hidden value exists at CETV in its Croatian and Ukrainian operations. Analysts and investors are ignoring the fact that these businesses are operating at breakeven providing zero value in any EBITDA, DCF,. or EPS based valuation.

Back out $1.2 billion and the EBITDA multiple is 8 times. Given the growth profile and history of consistently meeting or beating expectations, the shares surely deserve a premium to other TV based media assets. Even if you are worried about CEE economies, you have to admit that parity valuation with mature assets that are lucky to grow in the mid to upper single digits discounts the risk.

And if you are worried about emerging markets you are probably paying up for defensive stocks like Procter and Gamble. Did it ever cross your mind that one of the reasons that P&G is defensive is because of rapid growth in emerging markets? Now consider the fact that P&G is one CETV's major advertising customers.

I stand by my belief that CETV shares should be trading near $130 on 2008 prospects. If the company hits my 2009 estimates, I see the shares doubling. It will take a better market environment, improved sentiment toward emerging markets, and less risk aversion from investors to get the stock moving. But given this kind of upside, cheap valuation, great management, and an almost perfect track record at the operating level, the risk-reward trade off is the most compelling in the media universe.

....Growth emanates from rapidly growing economies in the region which is driving per capita income and spending leading advertisers to aggressively grow their budgets. CETV's stations are ratings leaders pretty much across the board and operating management is widely acknowledged to be best in the business. Besides growing interest from advertisers, CETV has aggressively raised ad prices to begin to close the monumental gap that exists between rates in Western vs. Central and Eastern Europe.

There are two bear arguments that have been circulating. First is the macro argument: Central and Eastern European economies will rapidly decelerate due to rising inflation and slowing global growth. If this happens, CETV's 2009 outlook is not nearly as good as I or the consensus believes. Revenue projections are too high and best in class operating margins will come under pressure.

I can accept this argument and I understand why a short would take a position on it, a long would sell, or a potential long would pass. However, as I mentioned so far CEE economies are holding up just fine. Inflation pressures are a problem but for CETV they also make the ad prices increases easier to implement. I also believe that CEE economies are much less reliant on natural resource based growth than other emerging markets. The growth in the region is a function of low cost labor and manufacturing leading to very rapid growth in foreign direct investment. Maybe I am naïve but I don’t see this trend abating due a cyclical downturn given that the FDI is designed to lower cost structures for companies that are currently seeing lower growth in their mature home markets and open new opportunities in aster growing markets.

The second bear argument revolves around valuation. If you read analysts reports, they will tell you the stock is trading at 10 times EBITDA. Only one of the six reports I read reviewing 2Q results bothered to point out that two of the six countries CETV operates in are at breakeven.

Croatia just had its first ever EBITDA positive quarter following a period of investment that moved the station from #3 to ratings leader. Revenues have grown north of 60% per quarter since 4Q06. EBITDA is on its way toward $30 million in 2010. CETV just paid $172 million for 80% of the money losing #3 station in Bulgaria. I am extremely confident that if Croatia were sold today the price would be at least $250-300 million.

CETV has been in Ukraine for many years. Since 2004, revenue growth has been 30-40% with uneven EBITDA due in part to CETV's lack of control over day-to-day management of its station. The company just completed acquisition of the control stake in the station. Ownership is now 90% and will move to 100% at the end of this year. The two step buyout places a value of $800 million on Ukraine. Two recent events make this look conservative. First, CETV just issued detailed five year guidance for Ukraine projecting 2012 revenue and EBITDA of $500 million and $200 million, respectively. Second, Modern Times Group, one of CETV's primary competitors, purchased the #2 station in Bulgaria for almost $1 billion. Bulgaria's population is about 1/7th the size of Ukraine's.

I believe that at least $1.2 billion in hidden value exists at CETV in its Croatian and Ukrainian operations. Analysts and investors are ignoring the fact that these businesses are operating at breakeven providing zero value in any EBITDA, DCF,. or EPS based valuation.

Back out $1.2 billion and the EBITDA multiple is 8 times. Given the growth profile and history of consistently meeting or beating expectations, the shares surely deserve a premium to other TV based media assets. Even if you are worried about CEE economies, you have to admit that parity valuation with mature assets that are lucky to grow in the mid to upper single digits discounts the risk.

And if you are worried about emerging markets you are probably paying up for defensive stocks like Procter and Gamble. Did it ever cross your mind that one of the reasons that P&G is defensive is because of rapid growth in emerging markets? Now consider the fact that P&G is one CETV's major advertising customers.

I stand by my belief that CETV shares should be trading near $130 on 2008 prospects. If the company hits my 2009 estimates, I see the shares doubling. It will take a better market environment, improved sentiment toward emerging markets, and less risk aversion from investors to get the stock moving. But given this kind of upside, cheap valuation, great management, and an almost perfect track record at the operating level, the risk-reward trade off is the most compelling in the media universe.

Why Is CETV Struggling When I Think It Will Double

Central European Media Enterprises (CETV) remains my favorite media stock for all time horizons. Despite my enthusiasm the shares have performed poorly this year. Although, within the media stock universe, the 20% drop since June is not unusual. Neither is the 36% decline from the 52 week high.

However, there is one big difference. CETV is beating consensus handily and estimates are rising while virtually ever other company in media is missing consensus and estimates are falling. As a result, CETV shares have gotten to ridiculously cheap levels given the outstanding historical and projected growth profile – 8 times 2008 Estimated EBITDA. EPS are too volatile because the company's euro denominated debt causes foreign exchange fluctuations to distort results but on normalized numbers the stock trades at 16 times 2008 and 13 times 2009. CETV's EBITDA and P-E valuation is similar to other TV based media assets such as CBS, Disney, News Corporation, Viacom, and Scripps Interactive.

You might be thinking valuation is in line with the group so why do you say it is cheap. The answer is growth and an almost perfect track record of beating estimates. In its just reported 2Q08, CETV saw revenue rise 41% and segment EBITDA grow 53%. Year to date, revenues are up 45% and EBITDA is up 64%. In 2007, revenues and EBITDA grew 39% and 46%, respectively. Barring a major slowdown in Central and Eastern European economic activity, no signs of which have yet appeared, growth in 2009 should be at least 15-20% in local currencies. Sure, CETV's reported results have benefited from the weak dollar but local currency growth has been in the range of 15-25% across the entire company for the past several years....

Growth emanates from rapidly growing economies in the region which is driving per capita income and spending leading advertisers to aggressively grow their budgets. CETV's stations are ratings leaders pretty much across the board and operating management is widely acknowledged to be best in the business. Besides growing interest from advertisers, CETV has aggressively raised ad prices to begin to close the monumental gap that exists between rates in Western vs. Central and Eastern Europe.

There are two bear arguments that have been circulating. First is the macro argument: Central and Eastern European economies will rapidly decelerate due to rising inflation and slowing global growth. If this happens, CETV's 2009 outlook is not nearly as good as I or the consensus believes. Revenue projections are too high and best in class operating margins will come under pressure.

I can accept this argument and I understand why a short would take a position on it, a long would sell, or a potential long would pass. However, as I mentioned so far CEE economies are holding up just fine. Inflation pressures are a problem but for CETV they also make the ad prices increases easier to implement. I also believe that CEE economies are much less reliant on natural resource based growth than other emerging markets. The growth in the region is a function of low cost labor and manufacturing leading to very rapid growth in foreign direct investment. Maybe I am naïve but I don’t see this trend abating due a cyclical downturn given that the FDI is designed to lower cost structures for companies that are currently seeing lower growth in their mature home markets and open new opportunities in aster growing markets.

The second bear argument revolves around valuation. If you read analysts reports, they will tell you the stock is trading at 10 times EBITDA. Only one of the six reports I read reviewing 2Q results bothered to point out that two of the six countries CETV operates in are at breakeven.

Croatia just had its first ever EBITDA positive quarter following a period of investment that moved the station from #3 to ratings leader. Revenues have grown north of 60% per quarter since 4Q06. EBITDA is on its way toward $30 million in 2010. CETV just paid $172 million for 80% of the money losing #3 station in Bulgaria. I am extremely confident that if Croatia were sold today the price would be at least $250-300 million.

CETV has been in Ukraine for many years. Since 2004, revenue growth has been 30-40% with uneven EBITDA due in part to CETV's lack of control over day-to-day management of its station. The company just completed acquisition of the control stake in the station. Ownership is now 90% and will move to 100% at the end of this year. The two step buyout places a value of $800 million on Ukraine. Two recent events make this look conservative. First, CETV just issued detailed five year guidance for Ukraine projecting 2012 revenue and EBITDA of $500 million and $200 million, respectively. Second, Modern Times Group, one of CETV's primary competitors, purchased the #2 station in Bulgaria for almost $1 billion. Bulgaria's population is about 1/7th the size of Ukraine's.

I believe that at least $1.2 billion in hidden value exists at CETV in its Croatian and Ukrainian operations. Analysts and investors are ignoring the fact that these businesses are operating at breakeven providing zero value in any EBITDA, DCF,. or EPS based valuation.

Back out $1.2 billion and the EBITDA multiple is 8 times. Given the growth profile and history of consistently meeting or beating expectations, the shares surely deserve a premium to other TV based media assets. Even if you are worried about CEE economies, you have to admit that parity valuation with mature assets that are lucky to grow in the mid to upper single digits discounts the risk.

And if you are worried about emerging markets you are probably paying up for defensive stocks like Procter and Gamble. Did it ever cross your mind that one of the reasons that P&G is defensive is because of rapid growth in emerging markets? Now consider the fact that P&G is one CETV's major advertising customers.

I stand by my belief that CETV shares should be trading near $130 on 2008 prospects. If the company hits my 2009 estimates, I see the shares doubling. It will take a better market environment, improved sentiment toward emerging markets, and less risk aversion from investors to get the stock moving. But given this kind of upside, cheap valuation, great management, and an almost perfect track record at the operating level, the risk-reward trade off is the most compelling in the media universe.

....Growth emanates from rapidly growing economies in the region which is driving per capita income and spending leading advertisers to aggressively grow their budgets. CETV's stations are ratings leaders pretty much across the board and operating management is widely acknowledged to be best in the business. Besides growing interest from advertisers, CETV has aggressively raised ad prices to begin to close the monumental gap that exists between rates in Western vs. Central and Eastern Europe.

There are two bear arguments that have been circulating. First is the macro argument: Central and Eastern European economies will rapidly decelerate due to rising inflation and slowing global growth. If this happens, CETV's 2009 outlook is not nearly as good as I or the consensus believes. Revenue projections are too high and best in class operating margins will come under pressure.

I can accept this argument and I understand why a short would take a position on it, a long would sell, or a potential long would pass. However, as I mentioned so far CEE economies are holding up just fine. Inflation pressures are a problem but for CETV they also make the ad prices increases easier to implement. I also believe that CEE economies are much less reliant on natural resource based growth than other emerging markets. The growth in the region is a function of low cost labor and manufacturing leading to very rapid growth in foreign direct investment. Maybe I am naïve but I don’t see this trend abating due a cyclical downturn given that the FDI is designed to lower cost structures for companies that are currently seeing lower growth in their mature home markets and open new opportunities in aster growing markets.

The second bear argument revolves around valuation. If you read analysts reports, they will tell you the stock is trading at 10 times EBITDA. Only one of the six reports I read reviewing 2Q results bothered to point out that two of the six countries CETV operates in are at breakeven.

Croatia just had its first ever EBITDA positive quarter following a period of investment that moved the station from #3 to ratings leader. Revenues have grown north of 60% per quarter since 4Q06. EBITDA is on its way toward $30 million in 2010. CETV just paid $172 million for 80% of the money losing #3 station in Bulgaria. I am extremely confident that if Croatia were sold today the price would be at least $250-300 million.

CETV has been in Ukraine for many years. Since 2004, revenue growth has been 30-40% with uneven EBITDA due in part to CETV's lack of control over day-to-day management of its station. The company just completed acquisition of the control stake in the station. Ownership is now 90% and will move to 100% at the end of this year. The two step buyout places a value of $800 million on Ukraine. Two recent events make this look conservative. First, CETV just issued detailed five year guidance for Ukraine projecting 2012 revenue and EBITDA of $500 million and $200 million, respectively. Second, Modern Times Group, one of CETV's primary competitors, purchased the #2 station in Bulgaria for almost $1 billion. Bulgaria's population is about 1/7th the size of Ukraine's.

I believe that at least $1.2 billion in hidden value exists at CETV in its Croatian and Ukrainian operations. Analysts and investors are ignoring the fact that these businesses are operating at breakeven providing zero value in any EBITDA, DCF,. or EPS based valuation.

Back out $1.2 billion and the EBITDA multiple is 8 times. Given the growth profile and history of consistently meeting or beating expectations, the shares surely deserve a premium to other TV based media assets. Even if you are worried about CEE economies, you have to admit that parity valuation with mature assets that are lucky to grow in the mid to upper single digits discounts the risk.

And if you are worried about emerging markets you are probably paying up for defensive stocks like Procter and Gamble. Did it ever cross your mind that one of the reasons that P&G is defensive is because of rapid growth in emerging markets? Now consider the fact that P&G is one CETV's major advertising customers.

I stand by my belief that CETV shares should be trading near $130 on 2008 prospects. If the company hits my 2009 estimates, I see the shares doubling. It will take a better market environment, improved sentiment toward emerging markets, and less risk aversion from investors to get the stock moving. But given this kind of upside, cheap valuation, great management, and an almost perfect track record at the operating level, the risk-reward trade off is the most compelling in the media universe.

August 2008 Model Signals

Once again there were no changes to Northlake's monthly Market Cap and Style models. The Market Cap signal remains mid cap and the Style signal remains growth. As a result, Northlake continues to own the S&P 400 (MDY) and the Russell 1000 Growth (IWF) for assets devoted to this strategy.

The Market Cap model remains a split decision with half the indicators favoring small caps and half favoring large caps. The resulting signal is mid cap. The indicators did move significantly in favor of small caps for August. In fact the unsmoothed signal month reading is just barely in small cap territory. The two month average remains in mid cap but leaning toward small cap. The only indicators to shift this month were the technical trend measures.

The Style model remains firmly in growth territory as it has been for over one year. The growth signal has weakened form earlier this year due to the steepening of the yield curve and the valuation measure which is reflecting the massive underperformance of value during the last twelve months.

Last month the mid cap and growth signals were inaccurate....

....Both large caps, as measured by the S&P 500, and small caps, as measured by the Russell 2000, produced a return great than MDY. Mid cap indices have been big beneficiaries of their relatively greater exposure to the energy and basic materials boom and relatively lesser exposure to financials. In July, those sectors pulled back sharply and financials rallied. Growth lagged last month as well as financial heavy value indices got a boost from the sharp bounce in that sector and technology stocks lagged.

Big Media Fundamentals Holding Up For Now

Catching up some email, I found a couple of interesting pieces on the major media companies from Merrill Lynch analyst and my friend, Jessica Reif Cohen. Back in early March, Jessica noted that as a group the media companies she follows reported 4Q07 earnings ahead of her estimates. Her universe had revenue growth of 15% and EBITDA growth of 12%, ahead of her estimate for 10% and 6%. Jessica's estimates weren't far off consensus. Among major companies, Disney and News Corporation easily beat estimates as did Dreamworks Animation. Viacom reported at the high end and Time Warner reported inline. CBS results showed no growth but were close to consensus as well.

In this initial report, Jessica noted that she thought 1Q08 results would be similarly strong but she was worried that this was a "head fake" as media company results tend to lag the economy by a few quarters, especially when the economy has slowed significantly.

I own DIS and NWS on behalf of Northlake clients and even as the I reported favorably on the 4Q results and higher guidance from both companies I was worried that results could slow quickly if not unexpectedly. The fact that DIS and NWS have reported a string of positive surprises but seen their absolute and relative valuations sink to historic lows strongly suggests the market has a similar worry.

With this in mind, I have been on the lookout for any evidence that fundamentals were slowing for the major media companies. Mostly, that means that TV advertising slows. DIS has the added issue of slower sending on vacation travel....

....Jessica's report of March 14th had the first commentary that suggested TV advertising might be slowing. She mentioned that News Corp said that Fox TV stations are running about 5% under budget and that CBS mentioned slower advertising growth in some smaller markets. Both companies mentioned strength elsewhere that would at least offset the weaker TV ad trends but this is definitely something to watch.

The bottom line is that if TV ad trends (and travel trends for DIS) do not slow markedly over the next quarter or two the shares of the major entertainment companies are deeply undervalued. Another question is whether current prices reflect enough of a slowdown to insulate stock prices against lower estimates. I am not sure how this plays out but I think in the case of NWS and DIS downside is about 10% while upside is 20%. That is a risk-reward tradeoff that encourages me to maintain my positions in both stocks.

Good News From American Apparel But Stock Remains Under Pressure

I was quite pleased with the 4Q07 results, 2008 guidance, and conference call from American Apparel (APP), which reported after the close last night. The consensus I was using consisted of just one analyst so it wasn't really meaningful. Just three analysts asked questions on the call but they were enthusiastic, asked a lot of questions, and seemed very pleased by the answers they were getting. The only meaningful negative in the quarter was the announcement that the company has material weakness in accounting per Sarbanes Oxley. I think this is a routine matter for a newly public company via blank check IPO but some may not like it.

For 4Q07, APP reported revenues of $111.2 million, up 48%. This figure was a little higher than I was expecting driven by the retail business (the company operated 182 stores at year end), where same stores sales rose a stunning 40% in the quarter. Adjusted EBITDA came in at $13.3 million, up 56%. This was slightly short of the $60 million figure I hoped reflecting heavy investment by the company in its transition to public reporting standards and by its commitment to set the stage for America Apparel to be a major global brand with 100s of new stores over the next five years. The company reported a small net loss for the quarter after backing out a tax benefit. I was expecting a small net profit and the difference was due to the higher expenses I just mentioned and greater than expected net interest expense. Overall, I fund these numbers to be excellent for a growth retailer like APP and the analysts on the call all congratulated the company on the results.

APP provided detailed guidance for 2008, pointing to revenues of $470-485 million and EBITDA of $70-64 million, both up 24%, and EPS of 32-36 cents, vs. the adjusted 2007 result of 19 cents. At first I was a bit disappointed that EBITDA and EPS guidance was not higher but on the call it became pretty call that guidance is conservative. First, guidance is based on comps of 15% versus the 2007 figure of 29%. Tougher comps will lead to a slowing but January and February are up 40% and 45%, respectively! Also conservative is the projection for $15 million net interest expense given a total debt level of $117 million and current cash of over $80 million. Finally, at 74 million, the share count is about 4 million ahead of my spreadsheet. I strongly believe APP will easily beat guidance on the revenue, EBITDA, and EPS line in 2008....

....One other important takeaway from the call was the superb performance of CEO Dov Charney. Charney is a controversial figure because of an outstanding sexual harassment suit, two prior settled suits, and his flamboyant and "different" attitudes toward corporate culture and sex. That said, anyone listening to the call would have heard a superb merchant totally in command of every detail. Additionally, Charney clearly wants to please the street and to do so he said the company will now be announcing monthly comps. He talked in detail about specific stores, mall architecture, international expansion, foreign currency impact, inventory management, store productivity plans, gross margins, operating margins, apparel trends, and competition in the retail and wholesale business segments. APP will trade with a Charney discount for a bit but if the numbers continue anywhere close to recent results I don’t think it will last.

The shares have been crushed recently, mostly I think due the March 7th exercise of 16 million warrants. I believe the quarter cleared the air and the stock is headed higher. At 12 times EBITDA, the shares would be around $11.50 and trading at less than 30 times this year's probably EPS. I think that is a bargain for a very hot apparel brand that is executing superbly and comping at an incredible rate. I've been a buy for slightly over a year at prices ranging from the mid 8s to $13. I plan to buy more in the next few days if the stock stays near current levels.

CETV Presents At Bear Stearns Conference

Central European Media Enterprises (CETV) shares have steadied since the sharp fall last week following announcement and pricing of their convertible deal. The timing on the convert was terrible coming in the midst of the market's meltdown. I think the fact that it included a complicated capped call transaction made folks shutter as complicated is a bad word in securities these days. The capped call requires use of about 13% of the deal size to purchase calls which will eliminate dilution between the conversion price of $105 and $151. According to management, essentially they converted a 3.5% up 25% convert into a 7.2%, up 80% convert. I trust these guys deeply so I'll accept that this was best way to raise money for buying out their partners in Ukraine and reloading for future deals including a rumored entry into Turkey.

After the close on Tuesday, CETV CEO Michael Garin presented at a Bear Stearns conference. I listened to the webcast and came away with these observations which are incremental to what I feel is a deep knowledge of this company:

(1) Garin said CETV would double through organic growth in “4 or 5 years.” Might be minor but the official guidance on this measure issued just two weeks ago is five years.

(2) Garin noted that CETV knows 80% of their revenue by the end of March and though it has not happened in the company's history if there were a shortfall they had nine months to adjust their cost structure.

(3) Regarding the convert, Garin noted the goal was to have two years of “activity” on their balance sheet. He said this required them to do a $400 million deal. The bankers came up with the idea to raise it to $475 million so they would have the funds for the capped call.

(4) Just prior to Q&A Garin addressed a bearish Merrill report on the company which centered on concerns about Romania’s economy. He said that based on the fact that they have received no resistance to price increases on advertising this year (most of the year has been sold since January 1st) they don’t see a problem for CETV. He also said based on their on the ground observations and actual trends they monitor in retail sales, Merrill is wrong. Later in Q&A someone asked about Romania and to a room full of laughter, Garin said again that Merrill is wrong. I would add that CETV's COO is their long-time Romanian partner who is one of the most revered businessman and richest people in Romania. I am very confident that CETV has a better read on Romania than anyone at Merrill Lynch.

(5) Maybe most meaningful, Garin said that if they owned and managed Ukraine last year they would have made $50 million EBITDA instead of the $27 million reported. 2008 will be an investment/restructuring year in Ukraine so I don’t look for much more than 5% EBITDA growth but this comment does give you a sense of the upside in 2009 and beyond.

(6) In response to a question on free cash flow, Garin said they have about $100 million in FCF before capital spending. Capex in 2008 will be about $130 million so no FCF this year but maintenance capex is $65 million and that is where he thought they would be in 2009 when they would be FCF positive after capex again.

Put it all together and CETV remains the both growth stock in traditional media, fully financed, and deeply undervalued.

Weekend Box Office and Weather Channel Updates

The weekend box office fell by 33% against what is probably the toughest comparison it will face until May. The box office has now declined for 5 straight weekends but remains up almost 7% year to date. Comps may remain negative for a few more weeks but the rate of decline should moderate significantly. Analyst estimates for 1Q08 box office are in a range from a mid-single digit decline to a small gain. As a result, the slump should not cause estimates to fall and earnings misses. And to reiterate, a single month or even a whole year of bad comps does not mean that the box office is facing secular decline. Ticket sales are stable for the last ten years and we are coming off a two year run of higher box office including the all-time record year in 2007. I am glad I sold Regal Entertainment off its good 4Q and guidance increase but I won’t hesitate to buy it back if the current box office slump leads to another round of "the box office dying" stories. The next big film that could improve the outlook is Horton Hears A Who which debuts this coming weekend.

Separately, last week the Wall Street Journal and SNL Kagan provided an update on the sale of The Weather Channel and the Weather.com website. Apparently initial bids were due last week and might be coming in under the hoped for sale price of $5 billion. Among the bidders mentioned were NBC, CBS, Comcast, and Liberty Media. I'd guess that the Liberty Media interest is probably referencing a bid from Discovery Communications. There is logical reason for each of these bidders to be interested. NBC already operates a weather business that could quickly gain scale. CBS is looking to diversify and like other owners of major market TV stations, they are already providing weather services. Comcast is also looking to beef up its content both online and on TV. Comcast.net is a very heavily trafficked portal and weather is an obvious draw for a company that already reaches 24 million homes with TVs. Discovery is the leading content player focused on non-fiction content. I am not sure how this is going to play out but a $4-5 billion transaction is a big deal for the buyer and will set a standard for valuing cable networks at a time when the business is in the news due to the Scripps breakup, the Discovery recapitalization, and Viacom's attempted turnaround. Complicating the ability to draw conclusions about cable networks is the fact that Kagan and others believe that weather.com may be as valuable as The Weather Channel. Look for the winning bidder to see their stock price pressured.

Studios and Theatres Finalize Plans for Digital Upgrade

Reuters is reporting that theatre chains representing 40% of North American screens and the major movie studios have finally agreed to a financing plan to upgrade 14,000 movie screens to digital and 3-D capable technology. The upgrade will cost about $1.1 billion or $70,000 to $75,000 per screen. Studios, theatres, and other content providers would pay fees to use the newly installed equipment with the fees being passed through to bondholders that would be financing the transaction. Obviously, the current credit markets might make completing the deal difficult but the stability inherent in the theatre business should make this a low risk transaction. Digital and 3-D upgrades are a win-win for theatre and studio owners. Studios will save on storage and distribution by downloading films to theatres. Theatres will get better quality digital images, have the capability to receive non-movie content that might fill seats during slower times, and most importantly sell 3-D tickets at a premium. The success of the Hannah Montana 3-D film earlier this year at $15 per ticket has studios and theatres drooling. Dreamworks Animation is committed to issuing all of its movies starting next year in 3-D. Ultimately, the impact is going to be marginal in an absolute dollar sense but it will be enough to improve the operating growth profile of studios and theatres. I'll take incremental growth any place I can get in mature industries.

Final Wrap-Up of 2007 Box Office

The Motion Picture Association of America (MPAA) released its package of theatrical market statistics for 2007 last week. Most of the data I have already recounted in my many updates about the box office. However, there is some interesting data, especially as it relates to the major movie studios which are owned by Disney, News Corporation, Sony, Viacom, and Time Warner. The data referencing MPAA members only covers studios owned by these five companies but industry box office data includes all studios and all movie releases.

The MPAA data confirms previous reports that the 2007 domestic box office rose by 5.4% to $9.63 billion. This builds on the 2006 gain of 3.5% which broke a three year slump that saw 2003, 2004, and 2005 box office change by -1.2%, 0.5%, and -4.2%, respectively. Also, as I previously noted, ticket sales were up just 0.3% in 2007 so the domestic box office gain was driven by a 5% increase in ticket prices. The ticket price increase accelerated from 2002 thru 2006 when price increases ranged from 2.2% to 3.8%. In the three prior years, from 1999 thru 2001, ticket prices increased rapidly in the range of 4.9% to 8.3%.

Despite rising ticket prices, total admissions in 2006 and 2007 are almost exactly equal to 1997 and 1998. Admissions are down about 10% from the 2002 peak but ten years of unchanged ticket sales with the last two years up by about 2% cumulatively seriously challenges the myth that the box office is dying. This is a critical conclusion as far as analyzing the prospects for theatre and studio owner stocks.

Last year was also very good abroad as the international box office reached an all-time high of $17.1 billion, up 5%, representing 64% of the worldwide box office of $26.7 billion. International box office has doubled since 2001 with growth every year except 2005. Total worldwide box office has risen in five of the last six years and was 60% higher in 2007 than in 2001. Hollywood studios produce their films for a worldwide audience making the growth in international box office over the past decade another dagger in the myth that the movie business is dying.

Completing the 2007 recap, MPAA produced some other statistics confirming data I have previously supplied. The data shows that 2007's record box office was driven by blockbuster films. 2007 had 4 $300 million films vs. just 1 in 2006 and 28 films reached the $100 million blockbuster status vs. 19 in 2006. Growth in the domestic box office in 2007 was driven by the record breaking summer. MPAA notes that the top ten summer movies in 2007 grossed 23% more than the top ten in 2006. The next ten were up an astounding 39% but the third ten fell by 25%.

2007 was a blockbuster driven year which is why 2008 faces difficult comparisons which started last weekend and will extend pretty much continuously through summer. This was the main reason why I sold my multi-year long position in Regal Entertainment. I plan to stay on the sidelines until Regal makes a new 52 week low or we learn that this summer's slate will show better comps than currently expected.

MPAA confirmed one other point I have written about: in 2007, R-rated films did well generating 15% of the total domestic box office, up from 10% in 2005 and 2006. 15% is not an unprecedented level, as it was matched or exceeded in 2003 and 2004, but it does show that records are made when there is depth of interesting movies across all movie going demographics.

The most interesting new data in the MPAA report concerns the cost of making movies and the impact of new media on the movie business.

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The graph on the left shows that for major releases by the five MPAA members the cost of producing and marketing a movie grew by 8% last year to $107 million. The major studios are also starting to dominate the independent business. Each major has started its own independent studio, which are competing with the independents traditionally associated with films festivals like Sundance. The graph on the right shows that the costs associated with these films has skyrocketed and is not too far behind the traditional big budget, widely released film. How the studios are coming to dominate the "independent" business is a topic for another column.

Facing rising production and marketing costs, the studios are increasingly turning to outside financing. Unfortunately, this MPAA data excludes the portion of costs that are paid by outside film financing ventures. David Poland, founder of Movie City News and author of the The Hot Button and , estimates that outside financing would push the actual cost up 30%. The idea behind outside financing is for the studio to slice revenue and costs on a film into lots of pieces to increase predictability on their own piece and give outside investors the ability to match their own risk tolerance to the appropriate investment vehicle (insert your joke about the credit crisis here!).