R3: COST, DDS, OSTK, Groupon


December 14, 2010





  • While China remains a key growth market for many western brands,  there are some that actually have a disproportionate amount of doors already open.  It turns out that Versace just celebrated the opening of its third jewelry boutique in Beijing, which keeps the luxury brand on track for having 67 stores in China by year end.  Interestingly, this compares to just 10 locations in the U.S.  Sounds like Versace is taking its cues from Yum Brands!
  • While Groupon continues to be the talk of the town stateside, it’s actually growing at a furious pace outside of the U.S.  In just this year alone, the company’s footprint has expanded into 35 countries from just one.  Approximately 52% of Groupon’s website visitors are coming from Europe, 33% from North America, 12% Latin America, 2% in Asia, and .2% from the Middle East/Africa. 
  • According to new data from Comscore, holiday spending online between November 1st and December 10th  has increased by 12%.  Trends over the last week were up 11%.  Free shipping continues to be a key driver of e-commerce and holiday growth, with a full 50% of transactions over the past three weeks including a free shipping component.



Supreme Court Backs Ruling on Costco Copyright Case- Discounters, beware. The Supreme Court’s narrow decision on Monday to let stand an appeals court ruling that found Costco Wholesale Corp. liable for copyright infringement when it sold Omega watches at heavily discounted prices without the Swiss company’s authorization has broad implications in the fashion world. The court’s ruling could have a significant impact on discount retailers and off-price merchants that often purchase imported goods from middlemen and distributors at lower prices, rather than buying direct from a manufacturer or its authorized U.S. distributor. These retailers then sell the products in the U.S. below the brand’s official price, legal experts said. Experts said the Supreme Court’s ruling now will make it harder for retailers to engage in this technique. It also will hit online auction sites such as eBay, they said, because gray market goods are often sold on the site and it could be held liable But while the high court’s decision was a blow to retailers, it was a victory of sorts for brands. The decision upholds a company’s right under U.S. copyright laws to regulate the distribution, price and resale of products that are made overseas and reimported to the U.S.  <WWD>

Hedgeye Retail’s Take: No question that this deals a blow to those procuring goods from a third party and selling them below manufacturer’s suggested retail prices.  While this likely means less “deals” for the consumer at off-pricers, discounters, and private sale operators, it also suggests that when the consumer actually sees a deal it will have been “approved” by the brand itself.  Additionally, the middle man loses out on alternative distribution as they will now be under even greater scrutiny. 


Neiman's Shuffles Buying Staff - Neiman Marcus, in a sweeping realignment of the responsibilities of its top merchants, has put senior vice president and general merchandise manager Jonathan Joselove in charge of designer sportswear, couture, handbags, women’s shoes and accessories. Ann Stordahl, executive vice president and general merchandise manager, will oversee precious jewelry, designer jewelry and beauty. For many years, Stordahl handled all women’s apparel, including designer sportswear and couture, intimate apparel, coats and furs, while Joselove oversaw beauty, coats, handbags, ladies shoes and accessories. In addition, Lisa Kazor, senior vice president and gmm, will be responsible for designer II, which is Neiman’s designation for bridge sportswear; St. John; contemporary sportswear; dress collections; furs; coats; intimate apparel, and children’s. Previously, she had the gift galleries, precious jewelry, designer jewelry, intimate apparel and children’s. Russ Patrick, senior vice president and gmm, will be responsible for men’s, gift galleries and the Cusp division, which operates freestanding stores and shops inside Neiman’s stores, both of which sell contemporary sportswear and accessories. Patrick previously oversaw men’s and Cusp. Neiman’s is examining Cusp to see whether it becomes a rollout strategy or not. <WWD>

Hedgeye Retail’s Take: Management changes as a precursor for an IPO?  With minimal growth prospects, something will have to be different if one of the most expensive takeouts in retail history is going present well on the road.


Dillard's to Launch Cremieux Women's Line - Poised, stylish and approachable, Alexandra Dillard looks to be just the type of customer who will take to Cremieux’s new women’s collection. As brand manager, Dillard, whose father, Alex, is president of the company, is championing this collection, which she described as having “a modern fit and is a little more dressy than casual,” and should compete with labels such as Michael Kors and Kenneth Cole. While the exclusive Daniel Cremieux label has been a men’s wear top performer in the Dillard’s stable for 10 years, this spring will mark the debut of the women’s Cremieux line.  Going forward, the men’s line is being marketed as Cremieux to keep everything in sync. To get shoppers excited about next month’s launch, there will be outdoor advertising, colorful in-store signage, online ads, catalogue placement and e-mail blasts. The fact that many Dillard’s shoppers are familiar with the name, which is also used for home items, should help generate interest, she said. “We are trying to trade off the base of Cremieux customers who are familiar with the label, know that it offers fashion and comfort and that it is exclusive with Dillard’s,” said Dillard, adding that luggage will be introduced this spring. <WWD>

Hedgeye Retail’s Take: Often off the radar screen of many investors, Dillard’s appears to be working harder to differentiate its merchandise.  Even more interesting is that the company made a recent appearance at an investor conference after staying away from face-time with potential investors for several years.


Denim Makers Seeking Next-Generation Fabric -Sustainability was front and center at the two-day Denim by Première Vision salon held at La Halle Freyssinet. Volatile cotton prices were among the factors helping to raise the profile of sustainable alternatives such as recycled denim and cellulose-based fibers. “It’s definitely the season to add Tencel and Modal, which previously have been regarded as premium fabrics,” said Gayle Johnston, head of women’s wear fabric trends and sourcing at Marks & Spencer, which has a major sustainable program under way. Denim guru Adriano Goldschmied said a “widening of vision” will be necessary for the denim industry. “[In the future], jeans could be made out of milk, a tree or bamboo,” Goldschmied said. “Cotton can be a component of that…but there are amazing things that are giving a new look to denim.” He cited as examples Cupro, MicroModal, Tencel, viscose and rayon. <WWD>

Hedgeye Retail’s Take: Between the growing shift toward green/sustainable practices by industry pioneers and the rising cost of cotton, customers will come to expect an introduction of several new alternative materials in the coming year.


Avril Lavigne Sings New Fashion Tune - Avril Lavigne is getting ready for her solo act in fashion. Two years after launching her juniors line Abbey Dawn exclusively at Kohl’s, the entertainer is branching out on her own to sell her rock-inspired tops for men and women directly to customers on the Web and in boutiques worldwide. Working with San Diego-based manufacturer Blank Generation, Lavigne is launching Abbey Dawn’s e-commerce site on Friday, a month before she begins wholesaling to shops such as Trash and Vaudeville in New York and the 14-store Blue Banana chain in the U.K. By introducing monthly mini collections of new product throughout next year, Lavigne is ramping up for the spring 2012 debut of a full-fledged juniors fashion line with sportswear, denim, swimsuits, dresses, loungewear, activewear, shoes and handbags. “[Kohl’s] was a great way to start my line and a great home for it for two-and-a-half years,” said Lavigne, 26, curled up on a purple velvet couch before practice with her band in a San Fernando Valley recording studio. “The thing with me is…I really want my clothes to be available internationally.” <WWD>

Hedgeye Retail’s Take: A bold move by the young entrepreneur to drop the department retailer in order to pursue global reach – the reality is however, no time is like the present to take a shot on her apparel line with music still Lavigne’s primary revenue generator. to Open Tech Center in 2011 – Inc. says it will open a software development center in early 2011 in Provo, UT. The company says it expects to hire 150 software developers to staff it. “We are expanding our tech presence in Utah and actively recruiting. We have more innovation in the pipelines than we have developers,” says president Jonathan Johnson. The company is offering individuals who refer qualified software developers $5,000 if Overstock hires the workers and they stay at Overstock for at least 90 days. The company says it expects to hire 100 developers within a year. The e-retailer employs more than 1,500 people in Utah through a call center and three other facilities.<InternetRetailer>

Hedgeye Retail’s Take: One of the more aggressive internal growth plans we’ve heard about over the past year, OSTK is clearly geared to ramp SG&A investment in ’11. After missing expectations in 4 of the last 5 quarters, a focus on organic growth is not the quickest path to reaccelerate top-line growth, but arguably the most sustainable.


Sen. Schumer Calls for Online Restocking Fee Investigation - A U.S. senator has called on the Federal Trade Commission to pressure retailers to disclose fees charged consumers for returning products bought online. Charles Schumer, a Democrat from New York, sent a letter to the FTC asking the agency to investigate what are commonly called restocking fees for returned goods. “I urge you to investigate whether the failure to disclose restocking fees online could constitute a deceptive trade practice, and to take swift action to crack down on it,” the letter states. “Consumers deserve to know if these charges will apply prior to a purchase.” <InternetRetailer>

Hedgeye Retail’s Take: With e-commerce accounting for a larger portion of holiday spend, this issue is sure to come into greater focus following the holidays when recipients realize the fees associated with returns. As a case in point, <$1,000 computers can generate more than $200 in return/restocking related fees alone, a material portion of ticket product value.



U.S. Deficit Remains Ugly

Conclusion:  The year-to-date U.S. budget deficit is -$290BN versus -$296BN in the same period last year.  Improvement, if you want to call it that.


On Friday, the U.S. government reported the federal budget deficit numbers for November of 2010.  As outlined in the chart below, the deficit for November 2010, the second month in the federal government’s fiscal year, was -$150.4BN, which is the worst November deficit on record and one of the worst monthly deficit numbers ever.  This was also the 26th straight monthly budget deficit.


In the year-to-date, which also includes October, we are actually running at a slightly better pace (in terms of a lower deficit) than last fiscal year.  Currently, the year-to-date deficit is -$290BN versus -$296BN last year.  On the positive side, the key mover has been individual income tax receipts, which are currently up $26.6BN year-over-year.  On the negative side of the ledger, total outlays, or government expenditures, are up $20.2BN year-over-year, or 3.5% growth from last year.


Income tax receipts being up on a comparative basis can be attributed to two factors according to the non-partisan Congressional Budget Office:


“CBO estimates that receipts in November 2010 totaled $148 billion, $14 billion (or 11 percent) more than receipts in November 2009. Individual income and payroll taxes combined rose by $15 billion (or 13 percent), largely because of an $11 billion (or 8 percent) rise in withheld taxes, the result of both the strengthening economy and the effects of an additional working day in November this year.”


Currently, the CBO’s deficit estimate for 2011 is $1,066BN, which is an estimated ~$228BN improvement from their actual reported deficit for 2010 of a $1,294BN. Obviously for this projected number to be met, we will need a dramatic narrowing of the deficit through the remaining 10-months of the fiscal year.


Per the CBO, the deficit actually narrowed from 2009 to 2010.  According to their view, the deficit was $1,416BN, or 10% of GDP in 2009, and $1,294, or 8.9% of GDP, in 2010.  In our analysis, which we have outlined in the table below, we actually look at spending on a normalized basis.  The primary driver of the normalized analysis is to add back TARP and payments to GSEs.  Under this scenario, the deficit actually grew 16% from 2009 to 2010.


U.S. Deficit Remains Ugly - 1


Despite seeing some marginal improvement year-to-date, the U.S. government deficit remains on an unsustainable and unprecedented path, which will eventually require dramatic policy action.  The good news, as David Einhorn aptly described earlier this year, is the deficit problem is no longer our grandchildren’s problem.  It is our problem.


Daryl G. Jones

Managing Director


U.S. Deficit Remains Ugly - US Deficit

CHART OF DAY: The Ber-nanke = Price (In)Stability

CHART OF DAY: The Ber-nanke = Price (In)Stability -  Chart of Day

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%


Overall, low volume trading continues in the restaurant space with some exceptions including notable casual dining names trading down on high volume.


Coffee house concepts such as Starbucks, Green Mountain, and Peet’s declined yesterday as coffee continues along a parabolic path to the upside.  GMCR, saw no bounce after the sharp downward move on Friday due to disappointing guidance embedded in their earnings release on Thursday.  In fact, they underperformed all QSR peers on high volume, declining 5.5%.


Chipotle also declined 5.1% yesterday which was interesting.  I am hesitant to call capitulation here, given how strong this stock has been, but the valuation is certainly egregious and my view on their commodity exposure remains the same.  That is, they are largely un-contracted and food inflation is going to meaningfully impact restaurant stocks over the next few quarters.  Their operating margin performance has been terrific but the task of maintaining that level, with commodity costs rising so sharply, is an onerous one. 


Other notable moves yesterday:

  • RRGB: Activist shareholder, Oak Tree Capital Management, filed a 13-D on Friday
  • CHUX: Closing stores.  Right-sizing a business is a good sign for the long term prospects of a restaurant company and also reflects favorably on the sobriety of the management team
  • CAKE, PFCB, DIN, EAT:  All declined on strong volume.


In terms of commodities, here is a list of headlines to be aware of this morning:

  • Florida Orange Crop to Avoid “Killer” Overnight Freeze
  • Copper Climbs to Record in London on Speculation Demand to Exceed Supply
  • Cotton Advances by Limit as USDA Predicts Inventory Decline to 14-Year Low
  • Australia Reduces Commodity Export Sales Outlook on Weather
  • Oil to Exceed $100 in 2011 as OPEC’s Spare Capacity Shrinks
  • Corn May Extend Rally 5% to End Year on `Strong Note'
  • Gold Demand, Mini-Contract Trade in Korea to Climb, Exchange Operator Says
  • Sugar Production in Australia May Plunge to 19-Year Low, Forecaster Says
  • Corn Futures Decline as Gain to One-Month High Prompts Sales; Wheat Drops
  • Coal Imports May Rise 78% to China, India, Drive Up Prices: Energy Markets
  • Eveready Raises Prices of Some Batteries as Zinc Costs Rise; Shares Jump
  • Marubeni to Spend $297 Million to Double Global Water Assets by March 2013


TALES OF THE TAPE - qsr 1214



Howard Penney

Managing Director


The Macau Metro Monitor, December 14th, 2010



Galaxy said it has not hired anyone from Vietnam to date for its Cotai resort, denying accusations of illegal recruitment abroad. Over 500 people “have already begun work at Galaxy Macau” and the 2,700 MSAR residents already hired will also start work “over the next two months,” Galaxy added.

Fed Fighting

“Pick a fight.”

-Jason Fried & David Heinemeier Hansson


Seth Godin said “ignore this book at your own peril.” Tom Peters said “the clarity, even genius, of this book actually brought me to near tears on several occasions. Just bloody brilliant, that’s what.”


I gave this book to everyone on our team for a recent strategy session. It’s called “REWORK” and I think you can not only apply it to how you think about your company and portfolios, but how you think about your life. Learn, Unlearn, and Rework. It’s healthy.


Some people don’t like to fight. I do. Especially when I find someone on the other side of something that I am passionate about. If you’re going to pick a fight though, and take this from a 5 foot 9 inch hockey player, you better pick the ones you can win.


Conventional wisdom says don’t “fight the Fed.”


We live in unconventional times.


Not only do I think it’s a great time to pick a fight with the Chairman of the Federal Reserve, I think we can win.


“We” isn’t a group of passionate people in New Haven, Connecticut. “We” isn’t all of the Americans who are, pardon the pun, fed up with Big Government Intervention in our markets. “We” are the world’s risk managers.


The Chinese are fighting the Fed. So are the Australians, Brazilians, and Germans.  So let’s line up what’s in our corner this morning and go through who and/or what can help us engage in Fed Fighting:

  1. Global Inflation
  2. Global Bond Yields
  3. The US Dollar

Let’s go in reverse order and start with the US Dollar first. Last week the US Dollar was up another +0.86% for the week.  It closed higher for the 5th week out of the last 6 and +5.3% higher than its YTD low established on November the 4th (post QG2 and the midterm elections).


We’ve been long the US Dollar (UUP) since November the 4th in anticipation of both global inflation accelerating and globally interconnected risk compounding. We’ve also had a keen eye on the macro calendar catalyst pending in the new year of both Ron Paul being able to subpoena the Fed and Republicans having a mandate for American Austerity measures.


Global bond yields are chasing higher and breaking out on both our TRADE and TREND durations. Despite US Treasury yields selling off in the last 24 hours ahead of The Ber-nank’s FOMC decision today, they remain in a very bullish pattern – and, as a result, the entire bond market is in a very bearish immediate-term position.


The TRADE and TREND lines for 2s, 10s, and 30s across the US Treasury Yields curve are as follows:

  1. 2-year yields have TRADE and TREND lines of support of 0.49% and 0.46%, respectively.
  2. 10-year yields have TRADE and TREND lines of support of 2.87% and 2.68%, respectively.
  3. 30-year yields have TRADE and TREND lines of support of 4.26% and 3.94%, respectively.

All of these moves in US yields are being perpetuated by:


A) Asian yields rising on government interest rate hikes, and

B) European yields rising on both inflation and sovereign debt risk.


This morning’s Spanish 12-month bond auction yielded 3.44% versus 2.36% in the prior auction and inflation in the UK remained above the Bank of England’s token target, pushing to +3.3% in November versus +3.2% in October.


Global inflation has been driving bonds lower for the last 6 weeks. No matter what Ben Bernanke says about inflation in his statement today, the market is already running way ahead of him on this. Remember, markets don’t lie; politicians do.


Sure, you can make a case that in the face of tax cut extensions US growth expectations are rising as well. But don’t mistake short-term levered-growth (cutting taxes and ramping the deficit/GDP ratio) for sustainable organic GDP growth.


Whether it’s the price of the CRB Commodities Index (up +20.5% since the day in August that The Ber-nank decided to inflate), or the price of copper hitting an all-time-high of $4.22/lb this morning (+31% since August), I don’t think I’m alone in picking a fight with the Fed on this fine December day of 2010.


Global markets have my back. If you are politicking to debauch the dollar again today Mr. Bernanke, keep your head up.


My immediate term TRADE support and resistance lines for the SP500 are now 1226 and 1246, respectively. We remain short both the SP500 (SPY) and the short end of the US Treasury markets (SHY) in the Hedgeye Portfolio.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fed Fighting - 1

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