From: Nicole Urken
Sent: Friday, November 18, 2011 11:34 AM
To: James Cramer
Subject: going thru the dks transcript


When we did our DKS segment, the stock was at $39.14 (we had noted it ran up from $31.50 in early oct and urged caution going into quarter). While quarter was v strong, it is currently at $40.06—not much of a change.

From: James Cramer
Sent: Friday, November 18, 2011 12:49 PM
To: Nicole Urken
Subject: RE: going thru the dks transcript


We need to revisit this next week and explain how we were too negative in light of: 1. UA, 2. NKE, 3. Footlocker, 4. Hibbett.  The preponderance of doubt goes to DKS and our errant analysis didn’t cost you anything. Chance to re-recommend NKE

From: Nicole Urken
Sent: Friday, November 18, 2011 1:28 PM
To: James Cramer
Subject: RE: going thru the dks transcript


Right. Sounds good—we will organize as rec for NKE… As a more risky play, LULU reports Dec 1—but given high expectations, could be risky ahead of earnings

From: James Cramer
Sent: Friday, November 18, 2011 1:29 PM
To: James Cramer
Subject: RE: going thru the dks transcript


We have to focus on NKE.  Footwear piece should be the clues why Nike raised its dividend despite the NBA strike—it is putting together the pieces of the puzzle. LULU too risky into earnings

The above exchange poses an interesting lesson that we always emphasize on "Mad Money" —how you SHOULD play earnings vs. how you SHOULDN'T play earnings.

THE “SHOULD”? We looked through the strong recent reports from Dick's Sporting Goods , Hibbett Sporting Goods and Foot Locker — along with Nike’s 16 percent dividend hike — to determine that the National Basketball Leauge's lockout (still a big question mark at the time of our segment) was not affecting Nike sales to the degree many analysts feared. Instead, the piecing together of the recent clues (Sherlock Holmes style—with a bit more conference call reading and a bit less thrill) told us that Nike represented an interesting bargain.

In other words, we used earnings reports from OTHER companies as ‘clues’ to form a thesis on what was happening with Nike, which had pulled back about 5 percent. It was not a “play” on Nike’s upcoming December 20 earnings but instead a read on whether it was worth coming into the stock at attractive levels. In addition to looking at positive commentary from companies that sell Nike merchandise, such as Dicks, Foot Locker and Hibbett, we looked back at trends in the outdoor space from the likes of VF Corp — the maker of North Face jackets and Vans sneakers — and NKE peer Under Armour — both which reported strong quarters back in October.

Our November 22 recommendation of Nike at $91.63 ultimately was well-timed and particularly given the announcement the following week that the NBA owners and players reached an agreement to end the lockout and begin the season on December 25, allowing investors who watched that segment to lock in a nice gain. But, importantly, the rec was not a game on the upcoming quarter (which is still yet to report). Frankly, that’s just too hard. Instead, we looked at the European woes vs. the long-term visibility based on the company’s decision to increase its payout dramatically… along with upcoming catalysts of the 2012 London summer Olympics and continued strong execution and brand management make this compelling.

THE “SHOULDN’T”? Trying to game a company into its earnings report. The decision to focus on Nike vs. playing Lululemon into the quarter was a prudent one, as Lululemon sold off steeply right after its report, providing a more compelling entry point from where it has since rebounded. Look, Lululemon has been a strong "Mad Money" name ever since we recommended it on September 27 of last year at $43.24 and it remains a unique “junior growth story” given its market size opportunity and niche market. We can see that from the stock’s resilience after its ho-hum report. But that doesn’t mean it’s a buy into its earnings report.

Bottom line: Don’t play names into earnings—particularly high-flying ones like Lululemon. Instead, use other earnings reports to give clues about the long-term potential of your names—like we did with Nike’s peers. Both Nike and Lululemon remain buys here for very different reasons—the former on continued global growth of its supreme brand with an Olympic catalyst; the latter because of its secular growth potential and niche market. But neither are plays into earnings.

Last kicker: Other global retailers well positioned here? PVH Corp whose CEO Manny Chirico came on "Mad Money" on Thursday after a solid quarterly announcement. Another junior growth names that have long-term expansion potential? Columbia Sportswear, Under Armour and Deckers . Inventory growth at all of these names—like Lululemon—have outpaced growth, but as long as strong demand trends continue, they will continue to trade on their long-term growth trajectory.

"Inside the Madness" appears twice a week at madmoney.cnbc.com

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