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R3: RL, PVH, FOSL, AEO

R3: REQUIRED RETAIL READING

November 10, 2010

 

 

 

RESEARCH ANECDOTES

  • Burberry continues to push the digital envelope with the unveiling of it latest online effort, custom trench coats.  The ecommerce site, to launch next year, will allow consumers to customize a trench coat of their own in up to 12 million style combinations.  Fabrics, colors, and trim will all be customizable.
  • In honor of Ralph Laurens re-opening of its NY flagship stores, the company is sponsoring a “4D”  public art show tonight.  The spectacle will included music, light projections, an artificial breeze, and the fourth-dimension (fragrance!).  Look for the media to compare this effort to Target’s recent show which rented an entire hotel so performers could dance in every one of the hotel’s windows.
  • In an effort to become a truly global ‘head-to-toe’ brand, FOSL is one of the few retailers planning to aggressively ramp catalog distribution as it expects to mail 20mm this year compared to only 11mm just last year. While the incremental increase will be largely aimed at growing the company’s international sales base, the increased cost of what has become a legacy medium is certainly notable.

OUR TAKE ON OVERNIGHT NEWS

 

AEO Opens Second Flagship in NYC - American Eagle Outfitters yesterday opened the doors to its second Manhattan flagship, a 24,000-square-foot three-level store at 599 Broadway at Houston Street in SoHo. The store is three times the size of the previous unit a few doors away. The ground level features women’s apparel and accessories, including key items for holiday such as sweaters and cargo pants. Jeggings and skinny jeans are well represented in the denim assortment and are double the presentation of the average American Eagle store. There’s an accessories area with scarves, jewelry, sunglasses, hats, shoes and other seasonal items, followed by New York-exclusive merchandise, including NYC graphic Ts, tote bags, hats, gloves and hooded sweatshirts . The upper level features men’s apparel, including a denim room and an underwear shop. There are two exclusive styles of skinny jeans offered here. The lower level features an intimate Aerie boutique offering bras, boyshorts, boy briefs, tangas, thongs and bikini underwear, as well as “cozy” apparel such as homespun knits, T-shirts, denim and outerwear. <WWD>

Hedgeye Retail’s Take:  Enticed by a free $50 gift card, it’s estimated that 1,000 customers lined up beginning at 4:30am to enter the latest teen apparel haven.  For those not familiar, this location is just 50 feet from ANF’s Hollister flagship.

 

Polo Appoints New APac President - Mark Daley has been named president of Asia Pacific for Polo Ralph Lauren Corp. He succeeds George Hrdina, who plans to retire after assisting with the transition. Most recently, Daley was chief executive officer of Dean & DeLuca for its U.S. and international markets. Before that, he was group president of worldwide operations and business development at DFS, a division of LVMH. During his 22-year tenure at DFS, he gained extensive experience in the Asia Pacific markets including China, Korea, Japan, Australia and Guam. Daley will report to Jackwyn Nemerov, executive vice president of wholesale brands, licensed products, sourcing, merchandising, home and Asia Pacific at Polo. <WWD>

Hedgeye Retail’s Take:  Food courts coming to Asia?  Probably not, but it’s not often you get a luxury exec crossed with a luxury food service exec.

 

Hilfiger Taking to the Road - Tommy Hilfiger, a man with an enduring passion for collegiate style, is heading to Britain’s oldest university — Oxford — to address the student union today. Hilfiger follows in the footsteps of Diane von Furstenberg, Roberto Cavalli, Anna Wintour, Emanuel Ungaro and others and is scheduled to give his talk at noon. “I just want to know one thing: Do I pick up my diploma beforehand or on my way out?” he asked during an interview at his Regent Street flagship and showroom here on Tuesday. Hilfiger said he planned to talk to the students about “25 years of Tommy Hilfiger, how we developed the brand, how it’s evolved and how we continue to celebrate it.” He said he planned to work an “American Ivy League” look for the occasion. After the address at Oxford, he’ll head to Copenhagen, Lisbon, Milan and — finally —Paris to open his 8,850-square-foot European flagship on the Champs-Elysées on Nov. 17. Separately, the company on Tuesday revealed plans to open its largest flagship in Asia, a 10,946-square-foot unit in Tokyo that will span three floors and carry the sportswear and runway collections and Hilfiger Denim. The store will open in March 2012 and the company said it will anchor the 108 Tommy Hilfiger stores currently in Japan. <WWD>

Hedgeye Retail’s Take:  With international growth key to PVH’s Hilfiger brand, what better way to spread the preppy lifestyle than to have its 59 year old founder go on a PR tour.

 

Changes Underway at Barneys Co-Op - Barneys Co-op called out the contemporary category years before Scoop, Intermix and Cusp were in business. Yet the vision has never been quite fulfilled. That’s now up to Mark Lee, the former Gucci chief executive officer who joined Barneys as ceo eight weeks ago and is about to write a new road map for the Co-op division. “He is starting to make the rounds,” said David New, Barneys executive vice president of creative services for Co-op and its big brother, the Barneys New York luxury chain. “He needs time to sit back and look at everything. There will be a lot of analyzing of what we do and how we do it.” “You’ve got to believe Mark Lee will drill down into this business in a way not seen in a while,” said a ceo of a major supplier to Barneys Co-op. “He will give Co-op a different perspective. They buy a line with their own specific aesthetic and point of view that’s just different from other retailers. It’s very urban and esoteric. It’s worked for a number of years, but sometimes it’s a little too esoteric. Barneys could have a little more feminine perspective.” Locations, the marketing and the merchandise mix — premium denim, established contemporary designers such as Diane von Furstenberg and Theory and emerging designers such as Carven — are under review.< WWD>

Hedgeye Retail’s Take:  Big win for consumers living in a co-op trade area as it appears change is underway.  The Barney’s sub-brand, while once a fashion leader, has been directionless ever since its parent’s financial situation became cloudy.  We wonder if the private label program will be amped up or cut given it’s clear goal was to juice gross margins.

 

FitFlop Plans Expansion - FitFlop USA LLC is staking a bigger claim in the wellness market with an expanded men’s collection and the debut of its first U.S. headquarters. After launching a men’s sandal collection in 2009, the company is rounding out the offering for spring ’11 with six new styles that include the FF Supertone M sneaker, a sports recovery shoe. Set to retail from $60 to $130, the line will hit retail in January. And to stay better connected to its U.S. customers, the company has just signed a 10-year lease for space at 10 Bank St. in White Plains, N.Y. <WWD>

Hedgeye Retail’s Take:  With toning over a year into its record breaking growth trajectory, it’s hard to know why FitFlop is just now investing heavy into the US market with new styles and a local office.  Recall that over 3 years ago The Limited had a US exclusive on the FitFlop which sold out immediately, but then didn’t sell as well in its second season. 

 

Sears' Cross-Platform Holiday Gift Guide - Sears Holdings Corp. today began offering for the first time its holiday Wish Book gift guide catalog on Facebook, its iPad app and mobile site. The retailer previously had only offered the Wish Book on Sears.com and in print. Customers who Like Sears on Facebook can access the Wish Book using a separate tab on Sears’ profile page. Within it, consumers can create and share wish lists with their social network, and add items to their Sears.com cart on Facebook. Consumers also can enter sweepstakes available only to customers who Like the company on the social network. Sears has about 220,000 Likes. “Sears is constantly seeking for ways to become more innovative, improve customers’ shopping experiences and ultimately make shopping even more social, especially around the holidays,” a Sears spokesman says. Online at Sears.com/wishbook, customers can browse items in top gift-giving categories such as jewelry, tools and electronics, or view a digital version of the print catalog. <internetretailer>

Hedgeye Retail’s Take:  While the goal is always to bring in younger customers, we wonder how impactful Sears’ social networking efforts will really be given their aging customer base.  How many twenty somethings are out there looking to Sears to fulfill their holiday needs?

 

Integration of Branded Online Communities Grows - According to the second annual “State of Online Branded Communities” study by full-service social engagement firm ComBlu, which examined practices in the online communities of major brands, marketers have adopted a wide variety of best practices and begun to integrate their online community efforts across a variety of social media. In 2009, just under a third of communities studied were integrated with Facebook, Twitter, YouTube or other social sites that the marketer had a presence on. By 2010, the proportion had more than doubled, to 68%.

Comparing a variety of features studied in 2009 to levels of adoption in 2010, the study found online branded communities had increased adoption of best practices across the board. Some of the biggest jumps were in availability of faceted search, inclusion of rich media content, integration with social media and the use of “fun” engagement tools. <emarketer>

Hedgeye Retail’s Take:  Not terribly surprising given the underpinnings of Facebook, Twitter, and YouTube are all rooted in ease of use.  Marketers are simply enjoying the simplicity of these platforms rather than having to build their own.

 

R3: RL, PVH, FOSL, AEO - R3 11 10 10

 

Shoe Production in Spain to Grow 3% in 2010 - Footwear exports in Spain grew by 6.7% in terms of volume to 57 million pairs and 4.7% in terms of value to Euro 895 million for the first half of this year, according to figures released by the Federacion de Industrias del Calzado Espanol (FICE). Exports to Portugal rose by 29%, while export growth to Germany, the UK, Italy and France are 15.5%, 13.7%, 9.8% and 5.3% respectively. Meanwhile,  exports to the US and Japan reported the first time of growth in recent years. The industry’s target for the year is to achieve a 3% growth in terms of production. To realize this goal, strategic expansion into emerging markets need to be implemented. For example, exports to Brazil increased by 287%. New markets including Turkey, China and South Africa are also gaining importance. <FashionNetAsia>

Hedgeye Retail’s Take:  Perhaps this is the one bright spot in Spain’s economy?  With inflation on the horizon in the major Asian footwear producing countries, we suspect the smaller, more specialized manufacturing centers to continue to see growth. 

 

 

 

 


Initial Claims Fall Sharply - Starting to Get Interesting

Initial Claims Fall Sharply - Starting to Get Interesting

The headline initial claims number fell 24k last week to 457k (22k net of the revision). Rolling claims came in at 446k, a decrease of 10k over the previous week. This significant improvement moved claims near the lows of the year on both the rolling and reported series. There have been five weeks in 2010 where rolling claims fell by 10,000 or more. Today’s report brings the series closer to the 375-400k range we are looking for before unemployment can begin to improve.

 

Initial Claims Fall Sharply - Starting to Get Interesting - 1

 

Initial Claims Fall Sharply - Starting to Get Interesting - 3

 

In the table below, we chart US equity correlations with Initial Claims, the Dollar Index, and US 10Y Treasury yields on a weekly basis going back 3 months, 1 year, and 3 years.

 

Initial Claims Fall Sharply - Starting to Get Interesting - 2

 

Joshua Steiner, CFA

 

Allison Kaptur


THE M3: LVS PENALIZED BY SAFE; SO SELLS SHARES; MORE IMPORTED WORKERS; CHINA DATA; HENGQIN

The Macau Metro Monitor, November 10th, 2010

 

LAS VEGAS SANDS: NOTIFIED BY CHINA SAFE OF PRELIMINARY PENALTY OF CNY10.8MLN WSJ

LVS said the State Administration of Foreign Exchange (SAFE) issued a preliminary penalty of US $1.63MM against one of LVS's wholly-owned foreign enterprises in China.  The enterprises "were established to conduct non-gaming marketing activities in China and to create goodwill in China and Macau for the company's operations in Macau."   As disclosed in its 2008 annual report, SAFE had made inquiries and obtained documents relating to payments made by company-owned foreign enterprises to counterparties and other vendors in China.  Also, in its latest 10Q, LVS said that SAFE's decision will become final unless contested.

 

AMBROSE SO SELLING SHARES IN SJM macaubusiness.com

SJM CEO Ambrose So and Executive Director Ng Chi Sing are selling 67MM shares.  They are selling the shares in a price range of HK$11.75-HK$12.25 each, in a deal bookrun by Deutsche Bank AG.


IMPORTED WORKERS CONTINUE TO RISE macaubusiness.com

In September 2010, the total number of non-resident workers in Macau stood at 74,525, up by 806 people MoM.

 

CHINA'S HOME PRICES GROW AT SLOWEST PACE IN 10 MONTHS Xinhua News, BusinessWeek

October home prices in 70 cities climbed 8.6% YoY--the lowest YoY increase this year--and 0.2% MoM.  This missed estimates of 8.9% growth.  Property sales volume dropped 11.2% MoM.


PBOC: TO RAISE RESERVE REQUIREMENT RATIO 50 BPs TUESDAY WSJ

China's central bank said it will raise banks' reserve requirement ratio by 50 bps from Nov 16, the fourth such hike this year.

 

HENGQIN BORDER TARGETING 24-HOUR CROSSING Macau Daily Times, macaubusiness.com

According to Macau govt spokesperson Alexis Tam Chon Weng, The Central Government’s approval of round the clock immigration clearance at the Hengqin checkpoint is expected to be obtained by early 2011.   “Everything is ready right now except the permission from the Central Government,” said Tam.  Expectations are that the scheme will later be extended to the Barrier Gate border.


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TWO POSITIVES FOR FINANCIALS THIS MORNING: MORTGAGE APPS & INITIAL CLAIMS BOTH IMPROVE

Rates Fall and Purchase and Refi Applications Rise

MBA Purchase Applications rose 5.5% WoW in the first week of November. We think the public is finally responding to lower mortgage rates. Zillow reports that 30-Yr mortgage rates hit an all time low of 4.07% last week. We don't yet have Freddie Mac data yet for last week to confirm, however (that comes out tomorrow). Refinance Applications rose 6% to levels near the highs of the year.  For reference, November refinance application volumes are running at 92% of 2003 levels - the all-time high.

 

TWO POSITIVES FOR FINANCIALS THIS MORNING: MORTGAGE APPS & INITIAL CLAIMS BOTH IMPROVE - shark chart

 

TWO POSITIVES FOR FINANCIALS THIS MORNING: MORTGAGE APPS & INITIAL CLAIMS BOTH IMPROVE - shark chart long term

 

TWO POSITIVES FOR FINANCIALS THIS MORNING: MORTGAGE APPS & INITIAL CLAIMS BOTH IMPROVE - refi

 

TWO POSITIVES FOR FINANCIALS THIS MORNING: MORTGAGE APPS & INITIAL CLAIMS BOTH IMPROVE - refi long term

 

 

Initial Claims Fall Sharply - Starting to Get Interesting

The headline initial claims number fell 24k last week to 457k (22k net of the revision). Rolling claims came in at 446k, a decrease of 10k over the previous week. This significant improvement moved claims near the lows of the year on both the rolling and reported series. There have been five weeks in 2010 where rolling claims fell by 10,000 or more. Today’s report brings the series closer to the 375-400k range we are looking for before unemployment can begin to improve.

 

TWO POSITIVES FOR FINANCIALS THIS MORNING: MORTGAGE APPS & INITIAL CLAIMS BOTH IMPROVE - rolling

 

TWO POSITIVES FOR FINANCIALS THIS MORNING: MORTGAGE APPS & INITIAL CLAIMS BOTH IMPROVE - raw

 

Yield Curve Improves WoW - Quarter-to-Date Sequential Now Flat

The following chart shows 2-10 spread by quarter while the chart below that shows the sequential change. The 2-10 spread (a proxy for NIM) has fell dramatically in 2Q and 3Q, but has stabilized thus far in 4Q10. Yesterday’s closing value of 221 bps is up from 216 bps last week.

 

TWO POSITIVES FOR FINANCIALS THIS MORNING: MORTGAGE APPS & INITIAL CLAIMS BOTH IMPROVE - spreads

 

TWO POSITIVES FOR FINANCIALS THIS MORNING: MORTGAGE APPS & INITIAL CLAIMS BOTH IMPROVE - spreads QoQ

 

The table below shows the stock performance of each Financial subsector over four durations. 

 

TWO POSITIVES FOR FINANCIALS THIS MORNING: MORTGAGE APPS & INITIAL CLAIMS BOTH IMPROVE - subsector perf

 

 

 

Joshua Steiner, CFA

 

Allison Kaptur


RL Quick Take: Knockout Punch

The 2Q11 print of $2.09 compares to our estimate of $1.89, and the Street at $1.71.  It looks relatively clean (in fact the tax rate was on the high side)…though there may be items related to accounting for China and Korea that come out on the conference call. That said, the source of the upside came from US and European wholesale revenue, as well as considerable delevering.  There was even strength across the board as it relates to regions, channels, and products. Handbag line appears to have started on the right foot. E-commerce accelerated AGAIN, and that’s before launching in the UK in October. There was nearly a 400bp delta between reported EBIT margins (+180bps) vs. guidance (-100-150bps).  The icing on the cake from my perspective is that the company stepped up its share repo, which not only was accretive, but also sends the right message to those who bought into Mr. Lauren’s offering 2 quarters ago.

 

What did I not like? As solid as EBIT margins were, the Gross Margin rate was up only 90bp. That’s hardly a number to get freaked out about. But RL does have to deal with cotton costs the same way everyone else does, and that will show up in the RL’s 4Q11 (Mar). On the same token, RL’s sales/inventory spread took nearly a 20 point tumble. Does an inventory build make sense as it relates to launching handbags, Korea, UK e-commerce, and having opened up two major flagships during the quarter – this will explain away much of it. But is it 3pts or 30pts? It’s a question to answer. A massive comforting factor is that they guided to a HIGH-TEENS top line growth rate in 3Q. Find me any other name in this space with those characteristics…

 

All in all, this was a knock-out punch for RL.  

 

RL Quick Take: Knockout Punch - RL S 11 10

 

 


THE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - November 10, 2010

As we look at today’s set up for the S&P 500, the range is 34 points or -0.94% downside to 1202 and 1.86% upside to 1236.  Equity futures are trading higher following yesterday’s lower close on Wall Street and ahead of key claims data later today. Economic data indicating slowing imports in China triggers concern over the demand outlook, keeping European equities under pressure.

 

Following some market speculation, the Bank of China confirmed it raised the reserve ratio for banks by 50 bps. In MACRO data today we have September Trade Balance and Initial Jobless Claims.

  • Briggs & Stratton (BGG) cut FY 2011 EPS forecast to $1.13-$1.35 from $1.20-$1.40, vs est. $1.29
  • Global Indemnity (GBLI) said it will cut U.S. workforce by 25%, close underperforming facilities
  • Grand Canyon Education (LOPE) reported 3Q EPS 28c vs est. 30c
  • Higher One Holdings (ONE) sees 4Q adj. EPS 12c-14c vs est. 11c
  • Insulet (PODD) raised full-year sales forecast to $95m-$98m vs est. $97.1m
  • Invesco (IVZ): Morgan Stanley said it will sell its $717m stake in 30.9m secondary offering
  • Jamba (JMBA) said it sees 2011 comp. sales up 2%-4%
  • Medidata Solutions (MDSO) reported 3Q adj. EPS 29c vs est. 18c
  • Ngas Resources (NGAS) reported 3Q loss-shr 6c vs est. loss- shr 5c; said it is evaluating options including possible sale
  • Starwood Property Trust (STWD) boosted Q dividend to 40c-shr from 33c-shr, in line with est.; 3Q core EPS beat est.
  • Tesla Motors (TSLA) reported 3Q rev. $31.2m vs est. $28.1m
  • Tennant (TNC) boosted Q dividend to 17c-shr from 14c-shr
  • Weight Watchers International (WTW) boosted full-year EPS forecast to $2.47-$2.52 vs est. $2.47
  • Werner Enterprises (WERN) says it will pay special one-time dividend of $1.60-shr in addition to regular div.

 PERFORMANCE

  • One day: Dow (0.53%), S&P (0.81%), Nasdaq (0.66%), Russell 2000 (1.46%)
  • Month-to-date: Dow +2.05%, S&P +2.55%, Nasdaq +2.22%, Russell +3.22%.
  • Quarter-to-date: Dow +5.18%, S&P +6.33%, Nasdaq +8.21%, Russell +7.38%.
  • Year-to-date: Dow +8.81%, S&P +8.82%, Nasdaq +12.95%, Russell +16.09%
  • Sector Performance: Financials (2.2%), Materials (1.6%), Industrials (0.9%), Consumer Disc (0.9%), Utilities (0.6%), Healthcare (0.5%), Consumer Spls (0.4%), Tech (0.3%), Energy (0.3%), Telecom (0.1%)
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Priceline +8.14%, EQT Corp +5.08% and Range Resources +4.57%/Dean Foods -17.95%, AK Steel -5.50% and HPC Inc. -5.38%.

 EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -1448 (-1210)  
  • VOLUME: NYSE: 1112.05 (+22.28%)
  • VIX: 19.08 +4.32% - YTD PERFORMANCE: (-11.99%)
  • SPX PUT/CALL RATIO: 1.59 from 1.25 +27.54%  

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 17.00 -0.101 (-0.592%)
  • 3-MONTH T-BILL YIELD: 0.13%
  • YIELD CURVE: 2.26 from 2.19

COMMODITY/GROWTH EXPECTATION:

  • CRB: 319.11 +1.22% - up 9 straight days
  • Oil: 86.72 -0.39% - BULLISH
  • COPPER: 404.30 +2.19% - BULLISH
  • GOLD: 1,422.75 +1.25% - BULLISH

CURRENCIES:

  • EURO: 1.3850 -0.65% - BEARISH - looking to be down for 4 days in a row
  • DOLLAR: 77.443 +0.54%  - BULLISH

OVERSEAS MARKETS:

 

European markets:

  • Markets are trading in the red hit by data that indicated slowing imports in China suggesting the growth is slowing.
  • Basic Resources and Energy sectors are among the worst performers on demand concern.
  • Utilities, Health Care are among the four sectors trading above the gain line.
  • France Sept Industrial production +0.1% m/m vs consensus +0.4%  

Asian markets:

  • Nikkei +1.40%; Hang Seng (0.9%); Shanghai Composite (0.63%)
  • Asian markets were mixed today.
  • On foreign sales figures, carmakers were strong in South Korea, and brokerages joined them on the stock market’s recent steady rise. Korea Exchange Bank rose 2% on results and promising a dividend, but other banks fell on caution before the central bank’s policy decision tomorrow.
  • Technology stocks were also down.
  • Australia reversed early gains, with profit-taking in banks and resource stocks taking the market down.
  • Hong Kong and China fell on concerns that China may raise interest rates after the country reports inflation figures tomorrow. Being particularly rate-sensitive, banks fell 1-2% and property shares dropped 4-5%.
  • Pharmaceuticals rose in China on expectations that their prices will rise after the government told them to increase their quality. In Hong Kong, Bank of China and Bank of Communications lost 3% each, as they were said to have had their reserve requirements raised.
  • China October trade surplus $27.15B vs consensus $26.4B.

Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends

 

THE DAILY OUTLOOK - S P

 

THE DAILY OUTLOOK - VIX

 

THE DAILY OUTLOOK - DOLLAR

 

THE DAILY OUTLOOK - OIL

 

THE DAILY OUTLOOK - GOLD

 

THE DAILY OUTLOOK - COPPER



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