Strong Buy: Nike Men’s 11 ½

A college friend of mine has an incredible memory. While in college, instead of using his talent to make stellar grades, he memorized movie scenes, comedian acts, and whatever else he found entertaining. In addition to having a great memory, he was, and still is, very good at delivering what he memorizes – it’s often better than the real show!

I recently had lunch with my friend. It’s always an enjoyable and easy lunch. All you need to do is sit back and wait for him to start entertaining. During our last lunch, he asked if I’ve ever seen the comedian Louis CK perform. “I have not,” I said. He seemed to be excited. “Oh, he’s great, you’re going to love this.” He immediately started into his Louis CK performance.

The short and clean version (profanity-filled version google Louis CK Bill Gates):

“I was reading about Bill Gates…he has like $85 billion.”

“Do you know what you could do with $85 billion? You could buy every baseball team and make them wear dresses, for like $3 billion and still have $82 billion…how do you not do that!? I would do s&%# like that every day.”

“One day I’d go out and buy all the pants in the world and just burn them. #*&% everybody. No more pants. Start over with making pants. They’re all gone.”

As my friend continued with his show, my mind unexpectedly shifted to the consumer. Louis CK’s idea of buying all of the pants reminded me of Kohl’s (KSS) recent quarterly report and its vanishing inventory. Kohl’s recently announced quarterly same-store comps of -2.2%. Comps probably would have been worse without a 3.7% increase in average price at retail. Transactions per store declined a whopping -6%.

In a sluggish consumer environment with declining traffic, retailers and restaurants seem to be taking two very different approaches. They’re either discounting in an attempt to improve traffic, or increasing price and reducing promotions to protect margins. Kohl’s appears to be protecting margins. This can be seen in their gross margins and inventory. Despite declining same-store comps, gross margins increased 33 basis points during the quarter as they “improved both permanent and promotional markdowns.” Management also noted inventories by year-end declined 5% in dollars and 7% in units (disappearing pants!).

What do lower promotions and lower inventory mean for consumers? Higher prices of course. Increasing signs of inflation is a theme I’ve noticed over the past few months and a trend I continue to monitor closely. Even the government seems to be picking up on higher prices. Today the Commerce Department reported the personal consumption expenditure price index rose 0.4% in January and is now up 1.9% year over year. With the fed funds rate remaining well below the rate of inflation, it’s rational to question the Federal Reserve’s commitment to containing the recent uptick in consumer prices.

With the Federal Reserve falling behind the curve, how can consumers protect themselves from the rising cost of living? If hard assets aren’t your thing, what about taking advice from Louis CK and “buying all of the pants”? The concept of making money from inventory isn’t new. For example, Core-Mark (distributor to convenience stores) often reports gains on its inventory of cigarettes as manufacturers consistently raise prices. The consumer can replicate this strategy by buying pants, shoes (Foot Locker recently reported higher average selling prices), or whatever else in their life is going up in price.

My latest investment idea is to corner the market of men’s size 11.5 running shoes (my size). It’s my hedge against rising consumer inflation, possible trade wars, and import taxes. I’ll make a killing assuming retailers continue to reduce inventory and the world’s largest shoe producing nations say, “No more shoes. Start over with making shoes. They’re all gone.”

You know stocks are expensive when comedians become your best idea generators. How appropriate!