Positive Family Footwear Trends Mirror Athletic

With the majority of family footwear retailers reporting this morning a few things are clear, boots are working - again, traffic’s improving, and comps are rivaling what we saw in the athletic channel last week. With PSS the last to report coming out next week, the read-through is unquestionably positive. Comp trajectories suggest our prior estimate of -8% comp in Q3 is simply too low at PSS. Here are our key callouts both at the channel level as well as by retailer from this morning’s calls:


Family Channel Callouts:

   - Consistent with what we saw in the athletic channel, EPS beats across the board with upward revisions to guidance.

   - Inventory build ahead of sales growth at all 3 companies in the channel, which better positions each to capture Q4 sales 

     strength compared to chase mode several were in last year. Also embedded in inventory growth is higher toning related

     inventory that accounts for more than 50% of inventory growth at some retailers (i.e. BWS & SCVL).

   - Comps slowing more modestly on 1yr basis in 2H reflecting a substantial acceleration in the 2yr

   - Early reads for Q4 reflect accelerating trends even from Q3 levels

   - Traffic improving (up 6% at DSW; +2.5% at SCVL, and up LSD as BWS)

   - Boot comps up +10% on a +47% last year at DSW, 40%+ at SCVL confirms trend remains robust

   - Better than expected BTS sales across the board appears to have legs into Q4

   - Promotional environment has and continues to remain more benign compared to last year



DSW: EPS of $0.79 vs. $0.75E ($0.60 last year)

Sales +10%

Inv +15%

  - Better than expected sales through first 3-weeks of Q4

  - Outlook:

  • Raised EPS to $2.30-$2.40 (was $2.20-$2.30)

  - Add’l gross margin compression expected in Q4 against significantly more difficult comps (+850bps)

  - SG&A leverage largely due to lower bonus expense compared to last year

  - Inventory per sq. ft. up 13% vs. down 11% last year so up modestly on 2yr basis

  - 2yr comp (9%+ in Q3) accelerating even higher so far in November

  • Traffic up 6% in stores (.com up 22%)
  • By category: +10% in women’s; +6% men’s; +9% athletic; +19% in accessories
  • Boots posted a +10% comp on a +47% last year

  - DSW Rewards a factor in driving sales growth with 87% of sales YTD part of program – 4mm accounts added this year

  - Now have nearly 20% of stock on replenishment system helping to increase conversion rates by 4% at the store level

  - Nike assortment expanded to include men’s running in Q3 as company broadens into more athletic

  - Toning still accounts for ~2% of total sales; unit sales consistent with 1H reflecting lower ASPs

  - Bigger focus looking forward is lightweight footwear

  - Store growth:

  • plan to open 20 new stores next year
  • 3 in smaller markets that co. has previously avoided, if successful equates to additional 50+ market opportunity
  • Seeing ‘a lot of deals’ coming up for attractive real estate opportunities – positive chg on the margin

BWS:  EPS $0.45 vs. $0.30E ($0.42 last year)

Sales +14.5%

Inv +20%

 - Better than expected BTS sales driven by athletics, dress, and casual styles

 - Less promotional activity than last year (19 fewer BOGO days)

 - Stronger initial margins in mid-tier and mass channel

 - Most significant growth at wholesale up +34% in a decade

 - E-commerce up +14%

 - Comp up +10.6% on +4.7% last year at Famous Footwear

  • Traffic up LSD and AUR with double-digit increases in conversion
  • Increases across all categories and regions
  • Women’s up HSD; Men’s up MSD; Kids & Acc’s up LDD
  • Toning accounted for +4.5% of comp (most over-indexed of family channel peers)
  • Boot and dress shoe demand drove sales at Via Spiga and Vera Wang up over 50%+

  - Sales/ sq. ft. up to $184 vs. $164 last year edging closer to goal of $200+

  - Toning accounts for ~3/4 of inventory growth in Q3 with core inventory up only +5.6% excl. toning

  - 30% of customers purchasing toning product new to FF; 1/3 of which have bought other product

  - Toning category expected to represent 6%-7% of volume in Q4.

  - Comps Q4-to-date trending up HSD

  - Wholesale backlog up +25% reflecting positive forward demand

  - Strong top-line key to offsetting $17mm after tax cost ($0.25 in EPS) related to higher incentive comp and marketing

  - Net store closings continue with 14 locations vs. opening 4 in the quarter

  - Outlook:

  • FY10 EPS to $1.00-$1.05 vs. $0.90E
  • Initial outlook for FY11 - Famous Footwear same-store sales growth in the low to mid single-digit range;

GCO: EPS $0.77 vs. $0.59E ($0.49 last year)

Sales +19%

Inv +25%

  - Comp up 9% on -2% last year

  • Up +11% through first 3-weeks of November
  • By seg: Lids +13%; Journeys +9%; Johnston & Murphy +7%; Underground Station +3%
  • Johnston & Murphy one of strongest qtrs in years driven by casual business and higher full-price selling
  • Slow start to boot sales in October – accelerating in November

  - Mix shift towards casual away from dress continues


SCVL: EPS $0.70 vs. $0.66E ($0.59 last year)

Sales +6.7%

Inv +12%

  - Sales trends by category and region all positive during the quarter

  - Comp up +7.2% on +10.2% last year

  • Both traffic (+2.5%) and conversion rates increased
  • Would have still been up MSD excl. toning
  • Women’s non-athletic up MSD driven by strong sandals selling at higher rates, men’s up MSD as well
  • Adult athletic up HSD driven by running up 20%+
  • Boots up double-digit in first 2-months of Q3, trended down in October, back up 40%+ in first 2-weeks of Nov.
  • Toning $$s down in Q3 though pairs remained flat sequentially

  - More than half of inventory build due to toning (up only MSD ex toning), aged levels at all-time lows

  - Still expect to ramp store openings in FY11 to 20 stores from 10 this year – mostly in existing markets

  - Outlook:

  • Q4 EPS of $0.30-$0.32 vs. $0.25E
  • Comps +4%-6%
  • Expect strength in boots to increase throughout the holiday season (Nov & Dec strongest months)
  • Also expecting continued strength in athletic and toning categories

Positive Family Footwear Trends Mirror Athletic - Comp Table 11 10


Positive Family Footwear Trends Mirror Athletic - Comp 1yr 11 10


Positive Family Footwear Trends Mirror Athletic - Comp 2yr 11 10


Positive Family Footwear Trends Mirror Athletic - FamFW SIGMA 11 10


Casey Flavin


Voted Off the Island

Hedgeye Position: Long Germany (EWG)


Positions Covered today:  We covered the EUR-USD via the etf FXE for a gain following its sizable move since we shorted it on 11/4.


After an appropriate re-pricing of sovereign debt risk in the last week, we booked an immediate term gain on the short side of Italy (EWI). We remain bearish on Italy for the intermediate term TREND.



News out yesterday afternoon was icing on the cake in support of our conviction: don’t trust politicians, trust the markets. In a clear about-face statement from Ireland’s PM Brian Cowen late yesterday, who days before said he wasn’t going to be the scapegoat for the country’s fiscal state, he announced:


"It is my intention at the conclusion of the budgetary process, with the enactment of the necessary legislation in the new year, to then seek the dissolution of parliament.”


However, the dissolution of parliament could come far sooner than sometime next year. Here’s the political scene that’s playing out:


Having accepted an undefined bailout from the EU and IMF on Sunday (11/21) – projected at €80-95 Billion—Cowen and his party, Fianna Fáil, continue to wrestle against severe opposition to step down, especially as his narrow 3-seat parliamentary majority with his junior coalition partners, the Green Party, threatens to vote against him.


Cowen, however, continues to stress to the opposition parties of Fine Gael and Labour, as well as to defectors from his own party, that it is in the interest of the country (and markets) to first pass the scheduled 2011 budget package on December 7th, which is expected to shave €6 billion from the budget through spending cuts (~€4.5 Billion) and tax hikes of ~€1.5 Billion, to ensure a funding (bailout) agreement from the EU and IMF before a new election is called.


Yet standing in the way of his already paper-thin credibility, are calls from the opposition for a snap election and the uncertainty of a critical by-election vote this Thursday for one of the Green Party seats in parliament that could further turn sentiment against Cowen. The Green Party maintains support of the passage of the 2011 budget before elections are called.  However, they appear resolute in their wish to see elections held by mid-January.


Finally, the government is due to publish a four-year economic recovery plan on Wednesday aimed at “bringing stability to the economy”, according to Cowen. Suffice it to say, we’re expecting a lot of pin action from Ireland over the coming weeks, and the Eurozone at large.


Below we show the familiar charts of the 5YR Sovereign CDS and 10YR government bonds yields as a proxy for the risk trade we see developing in Europe, especially from its peripheral countries. As you can see, despite Ireland’s bailout, yields continue to rise for the PIIGS; if Greece is any example, and we think in this instance it is a good one, the risk premium to own peripheral debt should remain elevated at least over the intermediate term, which in and of itself will pose significant challenges as government still require debt servicing to meet their fiscal imbalances.


And today was a great example of this: Spain issued €2.09 Billion of 3-month paper at 1.743%, almost double the 0.951% commanded for a similar issue on Oct. 26th.


As we’ve made clear in our research, we see a long road ahead for Europe’s Sovereign debt “crisis”. Ireland is but one piece of the puzzle.


Matthew Hedrick



Voted Off the Island - mh1


Voted Off the Island - mh2


Conclusion: No change to our view that the pillars supporting the US economy are weakening. 


Here are some key factors to consider in the outlook for U.S. GDP growth:

  1. The boost to growth from the fiscal stimulus is fading.
  2. State and local governments will be a significant drag as they cut spending and employment. 
  3. The boost from the inventory cycle will also weaken.
  4. While exports continue to rise, imports are also increasing and the trade deficit is widening.
  5. Global growth is slowing and the sovereign debt crisis will exacerbate this weakness.

Today, the Bureau of Economic Analysis announced that the U.S. economy grew at a rate of 2.5% in the third quarter, 0.5% more than previously calculated.  The upward revision in U.S. GDP for the third quarter was due to upward revisions to consumer spending, exports, and state and local government spending.  Our view is that the trends in consumer spending and state and local spending are not sustainable.  One supporting anecdote pertaining to consumer spending is the Redbook news today that retail sales were 0.0% for November month-to-date versus October.  That compares to +0.1% month-to-date reported in the week prior.


In 2011, GDP growth will be increasingly dependent on the internal demand drivers: consumer spending and the corporate sector driving investment.  While corporate profits have returned to their pre-recession levels, confidence needs to improve.  The hoarding of cash by Corporate America underlines their reluctance to hire and invest in long-term fixed assets.  The political volatility in Washington, and the lack of predictability that goes with it, has been cited by several major CEO’s as a cause for concern. 


The most significant downside risk is the continued weakness in the labor market, which is needed to sustain continued improvement in consumer fundamentals.  Under an optimistic scenario, 1-2% GDP growth will prove to be inadequate in an effort to reduce the unemployment rate.  Add to this slowing global growth and the European sovereign debt crisis and it seems that we are far from seeing a significant acceleration in GDP.  Downside risk for the economy is still alive and well.


Howard Penney

Managing Director



The Korea Boy King Rattles His Saber . . . Does It Matter?

Conclusion: While North Korea’s actions shouldn’t be taken lightly, the nation’s wherwithal to actually accelerate military activity is limited and this appears to be another attempt to get the nation noticed and make themselves relevant.  We’ve posted a replay of our May call below.


Overnight North Korea fired artillery shells at a South Korean island near their border, killing two soldiers and setting houses on fire. South Korea responded by firing 80 rounds at its Northern neighbor, in addition to dispatching F-16 fighter jets to the area and raising the military alert to its highest level. Tensions on the peninsula haven’t been this high since North Korea sank the South Korean warship Cheonan back in March – an attack that killed 46 sailors. Unlike the March attack, however, this attack was on a civilian-occupied island and could be considered the most serious provocation in at least two decades.


Back in May, when the struggle was expected by many pundits to escalate into a full-blown war, we hosted a conference call with our subscribers with renowned Yale Historian Charles Hill. On the call, Professor Hill discussed in great detail the likelihood of an outbreak of war on the peninsula, while masterfully weaving in the history of the relationship and his first-rate knowledge of North Korean leaders and psychology to deliver an actionable roadmap for navigating this geopolitical risk.


Some key takeaways were:

  • North Korea’s leadership and military is more divided than most pundits believe;
  • North Korea has a history of creating skirmishes to get attention/get what it wants via negotiations, be it food, humanitarian aid, etc.; and
  • North Korea’s ailing economy forces its administration to use its sovereign powers to run a large-scale “criminal organization”.

For a replay of the call, please copy and paste the following link into the URL of your browser:


Yours in risk management,


The Hedgeye Macro Team



The Macau Metro Monitor, November 22nd, 2010



Total visitor arrivals rose by 7.5% YoY to 2,092,343.  Visitors from Mainland China increased by 6.7% YoY to 1,124,061 (53.7% of total), with 479,516 traveling to Macau under the Individual Visit Scheme (up 3.9% YoY).  Visitors from Hong Kong (629,233), Malaysia (27,454) and Republic of Korea (21,931) grew by 14.0%, 5.9% and 59.8% respectively, while visitor arrivals from Japan (29,637) held stable compared with that of October 2009; however, those from Taiwan (98,674) decreased by 6.8% YoY.    




OCT INFLATION HITS 3.5% Strait Times, RTT News

Oct CPI of 3.5% was lower than the market's forecast of 3.7%.  Month-on-month, CPI rose 0.5%.



MCA national organizing secretary Tee Siew Kiong believes Malaysians gamble away about RM230 million (S$96 million) a month.  His calculation is based on 3,200 people crossing over in buses or cars to gamble in the two S'pore IRs, spending an average of S$1,000 (RM2,400) every day.  The casinos have been giving free meal vouchers and free return trip for those who bought a minimum token of RM240 to gamble.  Also, transport operators get a RM900 bonus if they bring in a busload of passengers to the casinos.


TODAY’S S&P 500 SET-UP - November 23, 2010

As we look at today’s set up for the S&P 500, the range is 51 points or -2.16% downside to 1172 and 2.10% upside to 1223.  Equity futures are trading lower as uncertainty prevails over the Irish bailout and following reports of North Korea firing artillery shells on a South Korean island.


In important MACRO data today: Q3 GDP (first revision), Oct Existing Home Sales and Nov FOMC Minutes.

  • Brocade Communications Systems (BRCD US) sees 1Q adj. EPS, rev. below est.
  • Hewlett-Packard (HPQ) boosted FY adj. EPS forecast above est.
  • La-Z-Boy (LZB) 2Q sales missed est. 
  • Oxford Industries (OXM) prelim. 3Q adj. EPS above est.
  • China Xiniya will start trading today on the New York Stock Exchange under the ticker XNY. Zogenix will list on the Nasdaq
  • Stock Market under the ticker ZGNX.


  • One day: Dow (0.22%), S&P (0.16%), Nasdaq +0.55%, Russell +0.41%
  • Month-to-date: Dow +0.54%, S&P +1.23%, Nasdaq +0.98%, Russell +3.41%
  • Quarter-to-date: Dow +3.62%, S&P +4.96%, Nasdaq +6.9%, Russell +7.57%
  • Year-to-date: Dow +7.2%, S&P +7.42%, Nasdaq +11.58%, Russell +16.3%
  • Sector Performance: Tech +0.59%, Consumer Discretionary +0.33%, Utilities +0.24%, Materials +0.16%, Healthcare (0%), Consumer Staples (0.08%), Telecom (0.31%), Industrials (0.33%), Energy (0.39%), and Financials (1.41%)


  • ADVANCE/DECLINE LINE: 58 (-476)  
  • VOLUME: NYSE: 918.82 (-16.60%)
  • VIX: 18.37 +1.83% - YTD PERFORMANCE: (-15.27%)
  • SPX PUT/CALL RATIO: 2.21 from 1.09 +102.44%


  • TED SPREAD: 15.56 -0.406 (-2.544%)
  • 3-MONTH T-BILL YIELD: 0.15% +0.01%
  • YIELD CURVE: 2.31 from 2.36


  • CRB: 298.02 -0.29%
  • Oil: 81.74 -0.29% - NEUTRAL
  • COPPER: 376.20 -2.09% - BEARISH
  • GOLD: 1,358.43 +0.33% - BEARISH


  • EURO: 1.3588 -0.62% - NEUTRAL
  • DOLLAR: 78.682 +0.23%  - BULLISH


European markets:

  • FTSE 100: (0.62%); DAX (0.19%); CAC 40 (0.95%)
  • Indices are trading firmly lower as concerns over the state of the European debt crisis and North Korea shelling South Korean positions triggers risk aversion.
  • A stronger dollar keeps Basic Resources shares lower, while banks stay below the gain line reeling from uncertainty amid the economic crisis.
  • Eurozone Nov preliminary Manufacturing PMI 55.5 vs consensus 54.4 and prior 54.6
  • UK Oct mortgage approvals for home purchases 30,766 vs consensus 31,000 and Sep 31,058
  • Germany Nov Flash Manufacturing PMI +58.9 vs consensus +56.8 and prior +56.6
  • Germany Nov Flash Services PMI +58.6 vs consensus +56.0 and prior +56.0
  • Germany Q3 Final GDP +3.9% y/y vs preliminary +3.9%
  • France Nov preliminary Manufacturing PMI 57.5 vs consensus 55 and prior 55.2
  • France Nov preliminary Services PMI 55.7 vs consensus 54.8 and prior 54.8.
  • France Nov Business Climate +100 vs consensus +102 and prior +102
  • Spain sells €2.09B 3-mth t-bills, bid-to-cover ratio 2.3 vs 2.8 in last auction, average yield 1.743% vs 0.951% last auction  

Asian markets:

  • Nikkei (closed); Hang Seng (2.7%); Shanghai Composite (1.94%)
  • Asian markets went down today on worries about European debt. Sentiments were further dampened when news broke of military hostilities on the Korean peninsula just after South Korea closed. The news caused investors to run to the US dollar, adding pressure to commodities prices and resource shares.
  • In sluggish trading, South Korea fell. Hyundai fell 3% on worries about labor disputes; Kia Motors declined 2% in sympathy.
  • Australia weakened on concerns about European debt and weaker demand for metals from China. Banks and miners fell.
  • Commodities stocks were the biggest drag on China, though the market did recover more than a third of its loss in the late afternoon. Energy and mining shares were hit when the National Development and Reform Commission ordered coal miners to stabilize their prices after recent rises.
  • Hong Kong Exchanges and Clearing fell 3% despite announcing it will extend its trading hours in March. Li & Fung fell 2% after saying it would buy Oxford Apparel. Large property stocks gave up 2-3%, and CNOOC lost 3%.
  • Japan was closed for Labor Thanksgiving Day.

Howard Penney

Managing Director
















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