December 7, 2010






  • Keep an eye on the resurgence of Juicy founders, Gela Nash-Taylor and Pamela Skaist-Levy.  Both are eagerly awaiting their non-compete to expire from LIZ (Juicy) before launching their next fashion endeavor.  Don’t expect a reinvention of their famous “tracksuit” however.  Word has it the line will reflect their current fashion tastes, which have matured to feature vintage and rocker looks.
  • Online promotional emails from retailers reached record levels during the week ended December 3rd, according to Responsys.  Consumers received an average of 4.4 promotional emails that week, surpassing the prior peak of 4.1 emails set the week before Christmas 2009.  Promotional email activity is expected to increase even further over the next couple weeks given the seasonality of the holiday shopping period, leaving Holiday 2010 with the highest levels of promotional email on record.
  • During a tour of RL’s New York flagship stores, management highlighted that only 30% of product available on the company’s e-commerce site overlaps with what’s available in its flagship stores. With the UK site launched in October, the company is targeting closer to 50% overlap between product available both in stores and online. Importantly, it was also noted that despite concerns of robust e-commerce sales cannibalizing retail traffic, the reality is that traffic is up both online and at retail so far through the holiday season.  
  • It's been a couple weeks since we've heard of bedbug related store closings, but they're back and at the worst possible time - the holidays! Juicy Couture is the latest retail victim. After closing its doors for nearly a week, the retailer is expected to reopen its 5th Ave store mid-week.




J. Crew Acquisition Details Emerge in SEC Filing - J. Crew Group Inc. had suitors besides Texas Pacific Group and Leonard Green, but it was the belief that Millard “Mickey” Drexler would stay on in a deal with TPG that tipped the scales in its favor. According to regulatory filings with the Securities and Exchange Commission released Monday, J. Crew said that its chairman and chief executive officer told the special committee evaluating the potential sale of the retailer that “if the company were to be sold, given that he is 66 years old, he had significant reservations about the prospect of working for a new boss, but that he had a high comfort level with TPG and had a positive experience with them during the period in which TPG owned the company.” The committee concluded that Drexler would be “unwilling to work for any third party other than TPG.”The private equity fund acquired J. Crew in 1997, brought Drexler onboard in 2003, took the firm public in 2006 and sold off the final remnants of its earlier stake last year. J. Crew agreed to be acquired and taken private by TPG and Leonard Green for about $3 billion on Nov. 22.According to the SEC documents, there have been occasional overtures to J. Crew from entities interested in merging with the retailer, including one in the fourth quarter of 2008 from TPG, but none of those talks proceeded beyond the preliminary stage.r.<WWD>

Hedgeye Retail’s Take:  While JCG has been sued and criticized for its lack of transparency in the selling process, the latest details to emerge certainly offer an inside look into the inner workings of the deal, dating back to August.  We now wonder if this actually helps or hurts those looking to squeeze a few more dollars out of the offer price.


Golden Gate, Limited Plan Sale of Express Shares - Limited Brands Inc. and Golden Gate Private Equity plan to sell 11.5 million shares of Express Inc. common stock, reducing their aggregate holdings to 60.4 percent of the retailer’s shares outstanding from their current level of 73.3 percent. Golden Gate, which acquired a majority stake of Express from Limited in 2007, will sell 8.63 million shares to the public, reducing its total to about 40.2 million from 48.8 million and its stake to 45.3 percent from 55 percent. Limited will sell 2.88 million shares, reducing its total to 13.4 million from 16.3 million and its stake to 15.1 percent from the current level of 18.3 percent. The two companies intend to grant the underwriters options to purchase up to an additional 1.73 million shares. Express will not receive any proceeds from the sale. <WWD>

Hedgeye Retail’s Take:  Maybe a BOGO with DG shares would make sense?  With less than three weeks left in the year, the capital market’s desks across the Street appear to be flush with “holiday sales” (of retail shares).


Supreme Court to Hear Wal-Mart Appeal - The U.S. Supreme Court on Monday agreed to hear an appeal from Wal-Mart Stores Inc. that challenges a lower court’s class-action certification in what could be the largest gender-discrimination case in the nation’s history. The impact of the case might be far-reaching, with Wal-Mart potentially facing billions of dollars in liability. The high court will not address whether the $400 billion retailer discriminated against hundreds of thousands of female employees in pay and promotions, an allegation the company denies. It will rule on whether claims by individual employees can be combined into a single lawsuit that seeks back pay.  “We are pleased that the Supreme Court has granted review in this important case,” Wal-Mart said. “The current confusion in class action law is harmful for everyone — employers, employees, businesses of all types and sizes, and the civil justice system. These are exceedingly important issues that reach far beyond this particular case.”<WWD>

Hedgeye Retail’s Take:  This case goes far beyond WMT and discrimination, as it will likely become a monumental decision on the world of class action suits.  Oral arguments for the case are expected in the Spring with a decision expected in July.


Post Thanksgiving Sales Hangover Stronger than Usual - Overwhelmed by all those big Black Friday deals? Not quite. Consumers crowded the malls again last week but exhibited less readiness to spend compared with Thanksgiving weekend. The mind-set shifted — browsing became more evident amid widespread promoting that persisted aggressively, although down a notch from Black Friday’s cacophony. Still, retailers and analysts contacted Monday said volumes last week were higher than a year ago, and sufficient enough to sustain their upbeat outlook for mid-single digit holiday gains. While last week did see a decline from the end-of-November rush, it was expected, and typical for early December, retailers stressed. They also said they expect shopping to heat up again beginning online around Dec. 15 and on selling floors the week before Christmas. “We are pleased with what we saw happen last week,” said Keith Fulsher, executive vice president and chief merchandise officer of Dress Barn. “The categories that were pretty good and that we think will remain strong are special occasion, sweaters, especially longer-length tunics, jeggings, the denim business and cold weather, especially items with fur trims. We are hopeful. We think it will play out to be a good season, but there is still a lot of time ahead of us. So far, we are OK.”<WWD>

Hedgeye Retail’s Take: A sequential decline in consumer spending the week after Thanksgiving is to be expected, but this year’s appetite for spending appears slightly stronger than usual. In addition to anecdotal commentary through the rest of the month, we’ll be keeping a close eye on weekly sales data out of the athletic channel as a key indicator of consumer demand.


Most Marketers Shift Toward Branded Content - Marketers are recognizing the value of magnetic content over traditional disruptive forms of advertising, according to research from the Custom Content Council in partnership with branded-content newsletter ContentWise. Overall, 68% of companies said they were shifting from traditional forms of marketing to more emphasis on branded content, including 61% who reported a moderate shift and 7% who said their shift was “aggressive.” On average, spending on branded content represented 29% of respondents’ total marketing, advertising and communications budgets in 2010. That was down slightly from 32% last year. The report noted that 2010 had the fourth-highest total marketing spend recorded but the second-highest branded content spend, suggesting that branded content will continue to increase in importance among marketers. About 35% of total spending on branded content went toward electronic forms this year, according to the survey. <emarketer>

Hedgeye Retail’s Take: Think pull versus push with examples of magnetic content including anything created on behalf of a brand such as a YouTube video, Twitter promo, or online game. With magnetic content not only proving to be more effective, but also significantly more cost effective, it’s no surprise to see retailers reallocating budgets away from publications and towards these alternative channels.


Vietnam Plans to Further Develop Shoe Industry- Vietnam’s Ministry of Industry and Trade has approved the overall plan for developing the country’s leather shoes till 2020 and vision to 2025, sources reported. The industry targets to reach export turnover of $9 billion in 2015, $14.5 billion in 2020 and $21 billion in 2025. Total investment capital estimated for the period from 2011 to 2020 is 59.570 trillion dong, of which 43 percent will be raised domestically and remainder from international sources.<FashionNetAsia>

Hedgeye Retail’s Take: Given the country’s rapid growth in footwear exports, investment spend will have to follow if the country hopes to maintain the double-digit CAGR it expects over the next 5-years - as such an incremental positive on the margin.







As part of the Bush tax cut compromise, it looks like Obama’s 2011 proposal for full deduction for equipment purchases will pass. 



As we wrote about in “DARE WE SAY THERE MIGHT BE  A NEAR TERM REPLACEMENT CATALYST” (09/16/10), Obama’s temporary 100% expensing proposal would allow companies to immediately deduct the full cost of equipment purchased between Sept 8, 2010 and Dec 31, 2011.  For equipment purchases, the complete write-off will lower overall effective tax rates and the cost of capital as shown below.




We believe the passage of this proposal comes at an opportune time as casino operators remain cautious about investing during the current recovery.  Accelerated depreciation could help spark the long-awaited recovery in replacement demand.


Appendix: Treasury Report highlights



The Macau Metro Monitor, December 6th, 2010



According to secretary for Transport and Public Works, Lau Si lo, the Macau Government has decided to push forward with the recall of five undeveloped plots and two pending plots.  The process to declare that the concession of these areas has lapsed has already begun, he explained. 



Secretary Tam refused to comment on whether the Macau government is preparing to implement a cap on slot-machines.
“Limiting the number of gaming tables is a first step to control the scale of the gaming industry, and we are reviewing other policies in order to reach a measured development of the gaming industry,” Mr Tam said.  Mr. Tam also said that the government is finalizing a by-law to regulate slot machine parlours, including location, and that the government is keen on increasing the share of the mass market in the overall casino business.

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It’s gotten colder out and frappes and smoothies are slowing down considerably.  The hot lattes are not making up the difference.  McRib was a social media darling but it did not move the needle that much.


McDonald’s is scheduled to report its November sales numbers before the market open on Wednesday, December 8th.  November had one less Sunday, and one additional Tuesday, than November 2009.  Based on this, it seems possible that there may be a negative sales shift. 


Consensus estimates are calling for comparable store sales numbers in line in the U.S., slowing down in Europe, and slightly positive sequentially in APMEA.  On a relative basis, MCD continues to out-gun the competition.  However, I am seeing a slight slowdown in sales trends for MCD and I believe that consensus may be overly optimistic for November. 


To recall, October comparable restaurant sales numbers from McDonalds indicated a slowdown in the U.S. region based on two-year average trends.  For comparison purposes, I have adjusted for calendar and trading day impacts.  Europe and APMEA both slowed in October following strong results in September on a two-year average basis.  In November, Europe and APMEA need to print strong headline comparable restaurant sales numbers to maintain two-year average trends.


U.S. – facing an easy -0.6% compare (including a calendar shift which impacted results by -0.9% to -1.7%, varying by area of the world): As of today, consensus is forecasting a print of 5.1% for McDonalds U.S. region comparable store sales in November. 


GOOD:  A print of more than 4% would be perceived as a good result as it would imply that the company improved two-year average trends by 50 basis points or more.  While this would not bring trends back to the lofty levels seen in the summer months, it is perhaps unrealistic to expect a repeat of those numbers in the absence of hot weather-induced beverage and smoothie sales. 


NEUTRAL:  Roughly 3% to 4% implies two-year average trends that are approximately flat versus trends seen in October.  Of course, this would indicate that two-year average comparable restaurant sales were significantly below summer levels.  The summer sales of frappes and smoothies are well and truly behind the company as winter sets in.


BAD:  Below 3% would indicate a further decline in two-year average trends in MCD’s U.S. business from October’s

significant decline.  It would also imply the lowest comparable restaurant sales number since February. 


MCD – NOVEMBER SALES PREVIEW - mcd chart sales preview



Europe – facing an easy +2.5% compare (including a calendar shift which impacted results by -0.9% to -1.7%, varying by area of the world):  As of today, the consensus estimate is for Europe to post +4.9% comparable restaurant sales growth. 


GOOD:  A print of roughly 7.5% or higher would imply two-year average trends slightly below or above the two year average trends seen in October.  October was a strong month in Europe for MCD but a significantly higher print will be required to maintain two-year average trends.  A 7.5% number would be the strongest result since May 2009. 


NEUTRAL: A result of 5.5% to 7.5% would imply that sequential trends had decelerated by up to approximately 100 basis points.  5.5% is still a relatively high level; in fact, it exceeds all months’ results year to date except for March, May and October.  Offsetting that positive aspect is the fact that two-year trends would slow sharply.  In addition, a relatively high number is to be expected against a poor 2.5% print for November 2009.


BAD: Less than 5.5% would imply a deceleration of more than 100 basis points in two-year average trends from October.  Furthermore, two-year average trends would fall below 5%, which, with the exception of August, has not happened since February 2010.    



APMEA – facing an easy -1.0% compare (including a calendar shift which impacted results by -0.9% to -1.7%, varying by area of the world):  As of today, the consensus estimate is for APMEA to post +6.4% in same-store sales growth. 


GOOD: Roughly 9% or higher would imply a steady-to-slight acceleration from the results seen in October.  October saw a significant slowdown in MCD’s APMEA business on a two-year average comparable restaurant sales basis.  A lofty headline print is likely given the weak result of a year ago.  The two-year trend implied by this print will be important to watch.   


NEUTRAL: Between 8% and 9% would imply two-year average trends slightly lower than those seen in October. 


BAD:  Below 8% would imply a significant slowdown from the two-year average trend in October and a return to the level of two-year average trends seen in June, which was a lackluster month for MCD APMEA.


Howard Penney

Managing Director


A 20% Drop In Home Prices Will Feel Like a Punch In The Face


TODAY’S S&P 500 SET-UP - December 7, 2010


As we look at today’s set up for the S&P 500, the range is 35 points or -1.89% downside to 1200 and 0.97% upside to 1235. 

  • Obama, GOP reach a deal on taxes by extending the Bush tax cuts for two years
  • emerging market demand, Barron’s said
  • AGL Resources, (AGL) and NICOR to combine in $8.6B transaction
  •  FT writes that oil is forecast to pass its current two-year high above $90 a barrel to beyond $100 – this would hinder economic recovery
  • Barron’s reports that an Irish tax hike could hurt some U.S. software stocks.  ADBE, VMW, MENT, MFE, SYMC and others are mentioned in the report
  • William Conway said that Carlyle is gearing up for an IPO to boost buyout-fund capital, according to Bloomberg
  • WikiLeaks founder, Julian Assange, was arrested in London


  • One day: Dow (0.17%), S&P (0.13%), Nasdaq +0.13%, Russell +0.59%
  • Month-to-date: Dow +3.24%, S&P +3.61%, Nasdaq +3.87%, Russell +4.66%
  • Quarter-to-date: Dow +5.32%, S&P +7.18%, Nasdaq +9.55%, Russell +12.53%
  • Year-to-date: Dow +8.96%, S&P +9.69%, Nasdaq +14.36%, Russell +21.66%
  • Sector Performance: Energy +0.26%, Tech +0.07%, Materials +0.02%, Consumer Discretionary (0.01%), Telecom (0.03%), Industrials (0.18%), Financials (0.22%), Consumer Staples (0.27%), Utilities (0.47%), and Healthcare (0.68%)


  • ADVANCE/DECLINE LINE: -42 (-770)  
  • VOLUME: NYSE 803.64 (-11.38%)
  • VIX:  18.02-7.12% YTD PERFORMANCE: -16.90%
  • SPX PUT/CALL RATIO: 1.32 from 1.31 +0.37%


  • TED SPREAD: 17.77 -0.102 (-0.569%)
  • 3-MONTH T-BILL YIELD: 0.15% +0.01%  
  • YIELD CURVE: 2.53 from 2.54


  • CRB: 317.29 +0.360%
  • Oil: 88.92 -0.30%
  • COPPER: 400.65 +0.19%
  • GOLD: 1,414.90 +0.61%


  • EURO: 1.3297 -0.87%
  • DOLLAR: 79.638 +0.33%




  • Europe is trading up at the moment.  News of the Bush-era tax cuts being extended is trumping sovereign debt concerns for now
  • Irish budget vote takes place tomorrow.  Passage of the vote is a requirement of the EU bailout
  • Troubles continuing across the broader Eurozone  but Merkel holding firm and rejecting the proposals for a bigger fund and Europe-wide bonds
  • Tesco increased 2.2% as the retailer said that 3Q sales rose 8.8%, led by growth outside of the U.K. 
  • Unilever also gained on an upgrade
  • U.K. Factory Production grew more than forecast in October.  Output rose 0.6% from September.  This was the strongest growth for seven months.
  • Russia moved closer to WTO membership after signing an MOU with the EU that set the terms to resolve all EU-Russia bilateral issues. 


  • Markets ended mostly higher today following Obama extending the Bush tax cuts and Ireland prepared for a budget vote
    • China Shanghai A Share finished up +0.65%
    • Korea KOSPI 100 finished up +0.55%
    • Japan Nikkei 225 finished down -0.26%
  • Japanese stocks declined on fears that the yen will resume strengthening and hurt exports
  • Australia left the cash rate unchanged at 4.75%, market gained +0.77%
  • Bloomberg reports that speculation is mounting that China may raise rates this weekend

Howard Penney

Managing Director


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