Very strong 2011 guidance. Hope the visibility is there. 



"We continue to characterize demand for our brands as steady and solid and the strength of our third quarter results is certainly a validation of that.  Profitability momentum moving into 2011 is also quite strong with our newest vessels performing exceptionally well and our management team controlling costs very effectively. The economy is still tough, but even facing such headwinds our outlook is remarkably encouraging."

- Richard D. Fain, chairman and chief executive officer



  • 4Q2010 Guidance:
    • Net Yields: 5% constant currency or 4-5% as reported
    • NCC:  +2% as reported or +3% on a constant currency basis
    • $0.05 negative impact from operational disruptions on Pullmantur's Pacific Dream and the Celebrity Century
  • 2011 Guidance:
    • "Expects full year 2011 Net Yields to increase by a similar proportion to 2010"
    • "Expects that the most meaningful yield recovery in 2011 will occur correspondingly during those same two summer quarters"
    • 1Q2011 Net Yields: +2-4%
    • FY2011 EPS: $3.26


  • Bulk of their improvement is coming from their new ships and improvement in marketing of their existing ships
  • Early patterns for next year are very encouraging
  • Should have meaningful positive cash flow
  • Despite Europe being strong, Spain and Pullmantur have not been great. Have assumed that the malaise in the Spanish economy continues for the foreseeable future
  • 3Q result commentary:
    • Alaska and the Caribbean showed the most improvement and Europe was strong as well
    • Yields in the 3Q were still 12% below peak
  • Booking environment:
    • Load factors are ahead for 4Q and all 4 quarters for 2011
    • Customer deposits are running 26% ahead of last year
    • Developmental itineraries are showing the most improvement
  • 2011 Guidance:
    • 1Q bookings are up to a solid start
    • Are starting to see some cost pressures especially on food costs
    • Expect to meet 2011 maturities with cash from operations
  • Royal Caribbean International brand:
    • Initial revenue cruise for Allure of the Seas will be Dec 1
    • Oasis or Freedom class will account for over 33% of RCL's capacity
  • For the first time in history they will sail with more European than American guests on their European brands


  • Guest mix development overtime?
    • Mix is trending more towards guests coming more from outside of the United States
    • The majority is still from the US but it's getting close to 50/50
    • Europe is the clear majority of their non-US mix
  • The onboard and other decline was driven by the tour division. Onboard revenues was flattish. Customers on their developmental itineraries also tend to spend less onboard
  • They are not assuming a large uptick in onboard spending
  • They are going more for profit rather than volume at Pullmantur's tour division
  • Saw good rate demand both from European demand (75% of the demand for European ships) and from US demand - despite rising airfare
  • Forward booking patterns give them reasonable confidence that Europe can absorb the large increase in capacity
  • Don't expect to do any more Oasis class ships but they will have future growth - rate of growth has slowed and will be slower than it has been historically. Right now, they are focused on generating growth from improved yields and margins. Don't expect to add any new ships until 2014.
  • Capacity mix will be similar to 2010 next year with Europe growing faster
  • How much of the net yield increase is due to same store pricing vs. mix factors and new ships?
    • Have a little more than 1/3 of their business on the books for next year
    • Investors are very focused on 2011
    • They continue to benefit from new vessels
    • Roughly 50% of the increase in yields that they expect for next year comes from new ships
  • Very high % of their business is on the books already for 4Q
  • Being 1/3 booked for 2011 is better than the last few years but lower than peak years. Booking curve is 4.5 months.
  • There are new regulations regarding emissions coming online; they will bake those costs into their forecast. No surprises though.
  • Is bringing back the dividend a priority/possibility for 2011?
    • It will be up to the board but even at the peak the dividend wasn't that material to their deleveraging plans
  • Examples of cost programs
    • Changed supply management team
    • Marine departments- put a virtual inventory management program in place
  • 26% increase in customer deposits is a combination of additional capacity, higher load factors and increased pricing
  • Don't see nearly as much volatility as a result of the stock market on their results.  Seems like a much more linear recovery than last time around.
  • Hedges are at prices below current spot fuel prices
  • Too early to give cost guidance for 2011

FL: Sales Upside Increasingly Likely

It’s becoming more apparent that our forecast of a 4.5% same store sales increase for Foot Locker’s 3Q may be conservative.  When we use our proprietary index of NPD and Sportscan weekly data to predict the trend, we now believe we could be understating the results by about 100 bps. 


The chart below speaks for itself. The yellow line is reported FL same store sales (global).  The White and Magenta lines are weekly trends we track via Sportscan and NPD.   White is a blended mix including an 88% weight of NPD footwear and 12% Sportscan athletic apparel.  Magenta is 100% domestic footwear.  Blue is 100% domestic athletic apparel.  We can’t explain with 100% confidence why the domestic scan data matches up so well with FL global comps, but it does.  Over the past 12 quarters, 50% of actual results have been within 100bps of the predicted outcome.  The remaining quarters have hovered between a 100-400bps range of actual results. 


With positive anecdotal evidence in addition to the chart below, it is becoming increasingly likely that we’re setting up for a 5-6% comp at FL.   We remain above the Street at $0.20 for the quarter but believe this could also be conservative given the relatively benign level of promotional activity we’ve observed.  In fact it appears that BOGO may have been wiped from the FL lexicon (at least for the near-term).   Foot Locker remains one of our favorite long ideas.


FL: Sales Upside Increasingly Likely - FL Q3 Comp read 10 25 10


*Note: Our index is compiled from weekly data reported on Wednesdays, based on a reporting period through the prior week ending on Sunday.  The chart above tracks trends through 10/17/10. 


Eric Levine


Japan’s Jugular Continues… Don’t Buy the Hope

Conclusion: Simply put, the broad slowdown within the Japanese economy continues. Don’t buy the hope associated with oncoming yen weakness or hopeful expectations of an economic recovery in the U.S.


Position: Short Japanese equities; Short the Japanese yen.


Per our 4Q10 Macro Themes presentation, the summary of our intermediate-term investment thesis on Japan reads: “Japan’s export-led recovery slows to a halt in 4Q10. GDP could potentially go negative in the next two quarters.”


With the inclusion of Japan’s latest trade data which was released over the weekend, we feel comfortable saying sufficient “progress” towards negative GDP growth in the island economy is being made. Japanese export growth slowed again sequentially in September to the slowest growth since December 2009, coming in at +14.4% YoY. That number was posted against a (-30.6%) “comp” and October 2009 represents the last of the easy “comps” at (-23.3%). The mathematical headwinds get increasingly difficult in November and December of 2009, at (-6.3%) and +12.1% YoY.


Japan’s Jugular Continues… Don’t Buy the Hope - 1


Sell-side analysts and the media alike have gotten the bear case to-date, which is largely driven by the strong yen – which has been trading at or around a 15-year high versus the dollar over the past several weeks. As we have shown in our presentation (email if you need the replay materials) Japan’s economy is leveraged to manufacturing and exports, which are the key sources for employment and investment within Japan.


As we called out back in August, the strong yen is a major headwind for Japanese exporter’s competiveness and profit margins, which, in turn, are negative for the Japanese economy. Per Japan’s Cabinet Office latest annual survey, Japanese companies remain profitable as long as the yen trades at 92.90 per dollar or weaker in FY11, which began on April 1st for many companies. To date, it has averaged around 88 per dollar, despite recent Japanese Bureaucrat efforts to weaken the yen, which have included Comprehensive Monetary Easing and intervention in the FX market (the latter of which has been marginalized due to increasing global opposition to currency devaluation).


Japan’s Jugular Continues… Don’t Buy the Hope - 2


As we’ve said all along, the #1 factor driving yen appreciation is dollar depreciation, i.e. it isn’t that the yen is going up as much as it is the dollar is going down (down -13% since its June 7 high). What could cause the dollar to reverse its decline over the intermediate term and “alleviate” the stresses on the minds of many Japanese manufacturers? The three factors we see as most likely in our models are: 

  1. Hawkish fiscal rhetoric from a more Republican Congress (see Boehner’s recent comments on spending cuts)
  2. Mean reversion
  3. Widespread reflexive declines in emerging market equities and commodities (triggered by tightening in China and the QE2 announcement “missing” lofty expectations); global loss aversion should increase demand for cash holdings 

Of course, when the yen starts to go down, you’ll get your fair share of lemmings touting Japanese stocks because currency headwinds will shift on the margin to currency tailwinds. Don’t buy the hope. Growth in the U.S. (Japan’s second-largest export market) is setup to slow meaningfully over the next 2-3 quarters and I’m willing to bet the family business that anyone telling you to buy Japanese stocks in the next 3-6 months doesn’t see the Consumption Cannonball coming. Layer on tightening in China (Japan’s largest export market) coupled with rising tensions between the Asian rivals, and it looks increasingly like Japan is running out of bullets over the intermediate term.


Overnight, Japanese Prime Minister Naoto Kan’s Cabinet approved a 5.1 TRILLION yen ($63 billion) stimulus package on top of an additional 1.5 TRILLION yen special account available to the Japan Bank for International Cooperation for overseas investment and infrastructure projects. As the chart below clearly shows, this too won’t matter when it’s all said and done. Again, don’t buy the hope.


Darius Dale



Japan’s Jugular Continues… Don’t Buy the Hope - 3

Early Look

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Conclusion:  Many shorts were squeezed by the better-than-expected top line results from earnings thus far.  Watch out for high short interest names and the risk of results surprising to the upside (or being less bad than expected).


Short interest has been building in a selection of names over the past couple of months (of reported short interest data) with PFCB, CMG, DPZ, PNRA, and BWLD being the most notable in both their respective increases in, and absolute levels of, short interest.  PFCB is reporting tomorrow and the street seems convinced that management’s assertion in July that the company stands a “reasonable chance” of achieving roughly $2 in earnings is slightly over-stretched.  There are several reasons why being short the stock ahead of earnings could be ill-advised.  Firstly, Knapp-track data and recent earnings results are showing buoyant top-line trends in the restaurant space.  Regarding PFCB specifically, management expressed confidence that the EPS target of $2 would hinge largely on top line momentum established in 1H10 continuing into the back half.  While my initial reaction to this target was one of skepticism, recent industry data and peer earnings results suggest that – absent significant market share loss – PFCB could be closer to achieving its target than the street thinks. 


CMG is a very different concept than PFCB and is at a different stage of their business development but their recent earnings caught many – myself included – by surprise.  One only needs to look at the surge in short interest over the last two months to realize that.  While there is a cogent short thesis on CMG, timing is everything and the squeeze on Friday underlined this fact.  Other names that I see as being dangerous to be standing in front of are JACK and PEET.  Both names are heavily shorted and trends around their respective categories have been less bad of late.   I believe BWLD will post a good quarter later today on the back of favorable commodity costs and also overall strong industry sales trends.  With the exception of the most recent two weeks reported, short interest has been building significantly in that name. 


SHORT INTEREST DATA - short interest 1025


Howard Penney

Managing Director

R3: WMT, AMZN, DKS, Puma, and UA


October 26, 2010 


As the policies in India allowing direct foreign investment begin to relax, expect to hear a whole lot more about expansion into the world’s second most populous nation.  However, we note that the floodgates are not likely to open immediately or without restrictions.  This will be a long, complicated process as Western companies attempt to accustom the Indian consumer to more modern means of distribution.




- “Green” products continue to be one of the largest growth categories in retailing.  There are approximately 73% more green products on retail shelves this year vs. last, according to a TerraChoice study.  Additionally, the same study notes that 95% of these products commit at least one of the seven sins of “greenwashing” (essentially making false claims about the greenness of the product”.


- Tommy Hilfiger is jealous of Ralph.  In a conversation with Jimmy Fallon for Interview magazine he was quoted as saying, “"Every time I pass a Ralph Lauren store, I think, I know he's been in business for more than 40 years and I've only been in business for 25, but, boy, do I ever want what he's got,".



- Expect to see and hear about Nike’s latest 90 second commercial aiming to rehab Lebron’s image as the NBA season kicks off tonight.  Like it or not, the controversy is already brewing.  See the latest from Nike here:





Wal-Mart `Optimistic' India Will Allow Foreign Retail - Wal-Mart Stores Inc. Chief Executive Officer Michael Duke said he is “optimistic” that overseas companies will be allowed to invest in India’s retail industry. Wal-Mart and rivals including Carrefour SA and Tesco Plc are pushing India’s government to allow foreign investment after the trade ministry invited views from the industry on removing the restriction. The government’s discussion paper said in July that allowing foreign investment in retail will lower prices and benefit farmers. “The opening of dialogue the ministry has initiated is very productive, and I view that as progress,” Duke said at a press conference in New Delhi yesterday. Easing the rules on foreign investment in retail will help curb inflation and may lead to the creation of 3 mm jobs in India, he said today. India is the third most attractive retail market for global retailers among the thirty largest emerging markets. <>

Hedgeye Retail’s Take:  Despite the sheer number of “consumers” in India, we believe the effort to allow foreign direct investment will be one that evolves over time.  We do not expect the floodgates to open overnight.  Furthermore, given the underdeveloped infrastructure across much of the country, we believe it will take substantial time for WMT to build any critical mass in the world’s second most populous country. Gets a Texas-Sized Tax Bill - Amazon is liable for $269 million in uncollected sales tax from December 2005 to December 2009, Texas says. Amazon disputes the bill in the latest skirmish in the battle over whether online purchases should be taxed. <>

Hedgeye Retail’s Take:  We continue to believe AMZN and other online only retailers are close to losing their tax free status.  See our work on e-commerce for specifics on recent efforts to finally even the playing field between brick and mortar retailers and their online only peers.


Puma to Acquire Control of Chinese Operations - Puma said it would acquire full control of its China operations as it reported a 14.2% rise in third-quarter profits. In China, Puma said it would take full control of its joint venture with Swire Resources Ltd., in which it holds a 51% stake, effective Jan. 1. Financial terms were not disclosed. The activewear firm also raised its full-year 2010 sales forecast to a mid-to-high single digit increase, citing an improvement in the overall outlook for the fourth quarter. Revenues in the third quarter rose 16.5% with footwear up 6% cc, apparel up 1.3% cc and accessories up 25% cc. <>

Hedgeye Retail’s Take:  Add Puma to list of Western brands taking back full control over their Chinese operations in an effort to maximize the market’s potential.  


Dick's SG Lays Out State-by-State Expansion Plan - In a filing with the Securities & Exchange Commission, Dick's Sporting Goods outlined a state-by-state plan for where it sees its potential to double its store count in the years ahead. Not surprisingly, its biggest expansion potential was seen in the West but sizeable growth was also forecast in Texas, New York, Maryland, Oklahoma, Arizona, New Jersey, Wisconsin, Louisiana, Iowa, Michigan and Illinois. More mature states were seen as Pennsylvania, Maine, Tennessee, Alabama, and Indiana. <>

Hedgeye Retail’s Take:  With Dick’s plan looking for a doubling of the store base we wonder just how aggressive TSA will be with its IPO growth story.  Overstoring the country with sporting goods boxes is something that always ends badly.


Under Armour Close to Deal for MLB Footwear License - Under Armour Inc. is close to completing a deal that would gain it the rights to manufacture performance footwear with Major League Baseball logos and the ability to use its stable of baseball players in advertising wearing MLB uniforms, according to the Baltimore Business Journal. <>

Hedgeye Retail’s Take:  It appears that the “free” advertising done by players choosing to wear UA footwear may be running out of juice. The more formal arrangement would certainly give UA a boost in its effort to market the category more effectively and inline with other similar league partnerships, although keep in mind the cleated business is and will continue to be of secondary importance to the key footwear growth categories – running and basketball.


Walmart Expands E-book Offerings to Include the Nook and the Kobo - Walmart is expanding its ebook reader offerings in stores. This week, Barnes & Noble's Nook and Borders' Kobo hit shelves. The retailer began selling Apple's iPad earlier this month. Two versions of Barnes & Noble's Nook (the 3G and Wi-Fi) are being stocked at 2,500 Walmart stores, as well as online at The retailer is also launching a Nook-branded ereading area in stores. The Nook Wi-Fi debuted in June. <>

Hedgeye Retail’s Take:  With e-readers making their way into the mainstream via WMT, it’s only a matter of time before we see pricing of the actual books start to erode.  Mass adoption will only occur at a price point that makes the content a compelling purchase for not just higher-end consumers.


Athletic Propulsion Lab's Concept 1 Sneaker Benefits From NBA Ban - With the NBA officially banning players from wearing Athletic Propulsion Labs’ Concept 1 sneakers last week, business has only gotten better. APL debuted in 2009, with the Concept 1, which is targeted to basketball players and has a patent-pending “propulsion device,” a spring technology under the ball of the foot that its makers claim increases vertical leap. The NBA has stated that the shoes give players an unfair competitive advantage. The decision by the NBA has created a considerable market opportunity putting the brand out there in the public consciousness. The company sold more shoes on the day the shoe was banned than the entire previous month. The day the ban was announced, “Athletic Propulsion Labs” and “Concept 1 shoes” were the fourth and fifth most searched terms on Google. The APL website was also unable to deal with the increased traffic and the site shut down for several hours. Expansion is in the works and only a question of strategy.  <>

Hedgeye Retail’s Take:  Nothing like a negative turning into a major positive.  A visit to the company’s website reveals the slogan “Banned by the NBA”. 


Cotton Soars to New High on China Cold - The fiber on Monday hit $1.2471 per pound, rising by 4.2pc, or 5 cents, which is the maximum allowed by the ICE exchange in New York. Chinese weather forecasts are saying that the current cold snap will last for at least another day. Prices rose 9pc last week, adding to the record 140-year high hit on October 15, after hail storms hit in the southern US. There are mixed views as to whether the current price spike will remain. Supplies have not been this tight since 1995 and prices are already up by 58pc in New York this year. There are six key reasons why the cotton price is so high: tightening US fundamentals, the battle for arable land, a deteriorating Chinese crop, the weak dollar, the Indian export ban and floods in Pakistan. <>

Hedgeye Retail’s Take:  Nothing new here except the record highs.  We continue to focus on companies whose process may not have properly and proactively accounted for such a dramatic increase in this core textile commodity.


R3: WMT, AMZN, DKS, Puma, and UA - 1 


EU To Launch New Labeling Law - The European Union is considering launching new labeling laws during the first half of 2011. According to reports, EU representatives voted 525-49 last week in favor of a country of origin labeling law in order to ensure that it is clear where imported goods such as leather, furniture and shoes are made when they are being sold in Europe. Countries in southern Europe such as Italy and Spain have been pushing for this legislation for some time in a bid to protect the European market from cheap imports, particularly from Asia. However, nations such as the UK and Sweden have campaigned against the measure, which they believe is protectionist and threatens competitiveness. <>

Hedgeye Retail’s Take:  Despite improved labeling, it will now be even more clear to see how many goods are coming from Asia.  Labeling alone won’t help the Europeans protect their manufacturing base so long as cost advantages remain in place driving production away from their borders.



TODAY’S S&P 500 SET-UP - October 26, 2010

As we look at today’s set up for the S&P 500, the range is 11 points or -0.64% downside to 1178 and 0.29% upside to 1189.  Equity futures are trading below fair value having closed higher on Monday in what was an otherwise quiet start to the week. Today sees steady flow of corporate earnings, including Dupont, Bristol-Myers and US Steel. In economic releases, Conference Board Consumer Confidence, Aug Case/Shiller Home Prices plus the FHFA House price index are center stage.

  • Amgen (AMGN US) reaffirmed 2010 guidance; 3Q rev., adj. EPS beat est.
  • Berkshire Hathaway (BRK/B) hired Castle Point Capital Mgmt’s CEO Todd Combs to manage a “significant portion” of the investment portfolio
  • Digital River (DRIV) 3Q rev. beats, sees 4Q rev. above est.
  • Edwards Lifesciences (EW) sees 2010 rev. $1.435b-$1.455b vs est. $1.44b, had seen bottom $1.43b-$1.50b   
  • Plum Creek Timber (PCL) sees 2010 EPS cont. ops $1.28-$1.35, had seen $1.35-$1.50 in July vs est. $1.46
  • Prologis (PLD) plans to lower its quarterly div. to 11.25c-shr
  • Rent-A-Center (RCII) exploring strategic alternatives with respect to its financial services business, may include sale or divesture of such business
  • Synovus Financial (SNV) 3Q loss 25c-shr vs est. loss 22c
  • Texas Instruments (TXN) sees 4Q rev. $3.36b-$3.64b, est. $3.52b; 4Q adj. EPS 59c-67c, est. 63c
  • Veeco Instruments (VECO) sees 4Q adj. EPS $1.46-$1.74 vs est. $1.45, sees 4Q rev. $285m-$320m vs est. $316m
  • Williams (WMB) boosted its quarterly dividend payout to 68.75c- shr from 67.25c-shr


  • One day: Dow +0.28%, S&P +0.21%, Nasdaq +0.46%, Russell +0.63%
  • Month/Quarter-to-date: Dow +3.49%, S&P +3.89%, Nasdaq +5.16%, Russell +4.7%
  • Year-to-date: Dow +7.06%, S&P +6.32%, Nasdaq +9.77%, Russell +13.19%
  • Sector Performance: Materials +1.73%, Consumer Discretionary +0.56%, Healthcare +0.47%, Telecom +0.37%, Tech +0.27%, Industrials +0.2%, Consumer Staples +0.17%, Energy +0.1%, Utilities (0.32%), and Financials (0.41%)


  • VOLUME: NYSE: 1007.37 (+30.32%)
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Advance Micro +5.37%, Eastman +5.08% and Dow Chemical +4.50%/Radioshack -9.04%, Avon -4.10% and Legget & Platt -3.43%.
  • VIX: 19.85 +5.70% - YTD PERFORMANCE: (-8.44%)
  • SPX PUT/CALL RATIO: 1.91 from 1.06 +80.63%


  • TED SPREAD: 17.18 -0.203 (-1.169%)
  • 3-MONTH T-BILL YIELD: 0.14% +0.01%   
  • YIELD CURVE: 2.22 from 2.24


  • CRB: 300.31 +1.04%
  • Oil: 82.51 +1.02% - BULLISH
  • COPPER: 386.30 +1.74% - OVERBOUGHT
  • GOLD: 1,335.45 +0.86% - BULLISH


  • EURO: 1.3961 +0.05% - BULLISH
  • DOLLAR: 77.103 -0.48%  - BEARISH



European markets:

  • FTSE 100: (0.62%); DAX (0.11%); CAC 40 (0.49%)
  • Major indices were weaker with the Basic Resource sector hit by a cautious outlook statement issued by ArcelorMittal with banks down despite UBS reporting a return to positive net money flows at its private bank.
  • Sweden's central bank raised its repo rate by a quarter of a percentage point to 1%
  • UK Q3 prelim GDP +0.8% q/q vs cons +0.4%
  • France Oct Consumer Confidence (34) vs cons (36)  

Asian markets:

  • Nikkei (0.25%); Hang Seng (0.11%); Shanghai Composite (0.32%)
  • Markets closed mostly lower in fairly quiet trading.
  • Japan opened slightly lower on a strong yen, turned positive in the afternoon but ended in the red.
  • Investors, however, seemed to be waiting for earnings reports later this week.
  • Tech stocks were mostly lower in South Korea although the market was flat.
  • Financial stocks retreated in Australia after making gains yesterday on M&A news
  • Japan Sep corporate services price index (1.1%) y/y, (0.1%) seq. 
Howard Penney
Managing Director


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