Citi Comments On Apparel & Footwear Outlook

For 2011, Citi recommends stocks based on sales acceleration potential, margin recovery, & inventory control; company ability to protect margins by passing on costs/mitigating cost increases; and/or compelling valuation. Citi's top athletic/footwear plays: Nike NKE & Dick's DKS; Top apparel plays: Polo Ralph Lauren RL & Phillips Van Heusen PVH. In Citi's view, the best names will be able to protect margins by executing on: a combination of strategic price increases (RL, NKE, PVH), reverse product engineering (NKE), & supply chain scale/expertise given pro-active/early price elasticity testing/factory partnerships. The footwear cycle continues to drive sales productivity (DKS, NKE). Citi sees sales accelerating at RL and PVH from new short and long term growth initiatives.. Citi upgrades RL to Buy. It believes rev upside, mix changes, lower SG&A spend could yield accelerating EPS & could avg ~21% growth over the next two yrs. We lower Risk Rating to Medium w/ downside limited on: RL's net cash/share $7, FCF yield 5%, and powerful mono-brand growth runway. Citi's new target price is $138. RL closed Monday at $111.69 NKE closed Monday at $86.09 PVH closed Monday at $ 63.26 DKS closed Monday at $37.32