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January 4, 2011





  • Add “The Aisle New York” to the growing list of private sale/flash sale sites.  The site intends to exploit a niche in the designer bridal fashion and wedding business by offering closeouts for the big day.  Most interesting will be the company’s return policy given dress fittings are an integral part of the wedding dress buying process.  Still, the lack of seasonality in the bridal biz certainly makes for an interesting merchandising opportunity.
  • With Asia representing one of the largest growth markets for luxury goods, Louis Vuitton is adjusting its marketing campaign to target the local market.  For the first time ever, the brand will feature an Asian male as the face of the company’s spring campaign.
  • The idea of trading in your old gadgets and electronics for credit towards something new is gaining steam.  Best Buy’s “buy back” program is expected to launch tomorrow for phones, laptops, tablets, and TV’s.  Consumers will receive a prorated percentage of their original purchase price depending on the age of the product they sell back.  All credit towards new purchases will be issued in Best Buy Gift cards.  The question remains how this may impact the speed of the product upgrade cycle, but it certainly seems like a win for the consumer who in the past would have received nothing for their rapidly depreciating TV or phone.



Nike E-Commerce - As the CEO sees it, Nike Inc.’s e-commerce business is thriving. Though Nike, No. 48 in the Internet Retailer Top 500 Guide, doesn’t break out web sales in its earnings reports, CEO Mark Parker recently told Wall Street analysts that Nike has now grown its e-commerce business for 15 consecutive quarters. “Our Nike direct-to-consumer businesses grew double-digits, including strong comparable-store growth and the 15th consecutive quarter of double-digit sales growth online,” Parker said on Nike’s second quarter fiscal 2011 earnings call. “Our performance in the second quarter is not just about the last three months. It’s about the last three years and the steps we’ve taken to grow the market worldwide, creating strong momentum around the brand even in uncertain times. <InternetRetailer>

Hedgeye Retail’s Take:  No surprise here as e-commerce remains the pre-eminent growth vehicle for many established brands, with most actually seeing robust growth consistently throughout 2010.  Expect to see increased investment in infrastructure to support outsized top-line growth over the next couple of years.


J. McLaughlin’s New Flexible Store Model - J.McLaughlin has created a flagship that does some justice to the term. The specialty retailer is experimenting with a 5,500-square-foot format that is five times larger than the average J.McLaughlin unit and presents opportunities for testing new products and categories, and romancing all the merchandise with enhanced visual presentations. The store, which opened late last year at 1026 Post Road East in Westport, Conn., draws inspiration from the former “street of shops” merchandising concept first seen on the first floor of Henri Bendel on 57th Street in Manhattan until the business relocated to Fifth Avenue. Like the old Bendel’s, J.McLaughlin in Westport is divided into a souklike array of shops, each of which can easily be changed depending on the season, or whatever product the Brooklyn-based J.McLaughlin develops.“We plan to do a lot of experimentation in Westport,” said Steve Siegler, president and chief executive officer. “The whole spirit of the store is flexibility. You’ll find something to wear to go to the beach, to go sailing, to play golf in, or just to stay home and entertain. We feel the customer is ready for a format where if they come visit consistently, they see something different all the time.”<WWD>

Hedgeye Retail’s Take:  Given the high fixed cost of investing in visual merchandising, displays, and fixtures we wouldn’t be surprised to see this more “flexible” approach trickle through to other retailers.  The ability to change and adapt the store environment at a low cost is key to keeping any brand fresh and exciting.


Garmin Launches iPhone App - Garmin International Inc., a unit of Garmin Ltd.announced its first turn-by-turn navigation app for iPhone, StreetPilot, as well as its full lineup of new smartphone applications for both iPhone and Android. Garmin's new mobile applications -- including StreetPilot for iPhone, Garmin Tracker, myMechanic, and My-Cast Lite -- will be on display in the Garmin booth (South Hall #35831) at the 2011 Consumer Electronics Show in Las Vegas. Designed specifically for iPhone, the $39 StreetPilot App gives iPhone owners unlimited use of Garmin’s industry-leading navigation with traffic alerts. The intuitive interface greets users with two simple options: “Where to?” and “View Map.” Customers can easily look up addresses and services and get voice-prompted, turn-by-turn directions that speak street names to their destination. <SportsOneSource>

Hedgeye Retail’s Take: Still seems too expensive to compete with the free apps. 


Brazil's Luxury Boom Gains Momentum - If overseas visitors with an appetite for luxury brands landed here for the first time, they’d now feel right at home in shopping areas such as the Jardins neighborhood and in the city’s most sophisticated malls, Shopping Iguatemi and Shopping Cidade Jardim. Strolling around the streets or malls, the visitors would see brands such as Chanel, Hermès, Emilio Pucci, Burberry, Christian Louboutin, Diane von Furstenberg, Jimmy Choo, Carolina Herrera, Marc Jacobs, Celine, Goyard, Alexander Wang and Isabel Marant. All of these companies have arrived in Brazil in the past two years, most by opening stand-alone stores that are either directly operated or run by local franchisees. And the momentum is only expected to grow. Brazil currently accounts for just $7.59 billion in luxury revenues, or about 1 percent of the total global market. But it is growing at 22 percent a year — far outpacing more established markets and even Brazil’s general retail sales, which rose an estimated 11 percent in 2010. And the country’s luxury sales are now almost twice as high as they were in 2006. Although São Paulo represents 70 percent of Brazil’s luxury market, Pavlovsky sees the country’s capital, Brasília, and Rio de Janeiro “as very promising” for future Chanel stores, although nothing has been confirmed.<WWD>

Hedgeye Retail’s Take: At nearly twice the size of Brazil’s next largest regional market (Rio de Janeiro), Sao Paulo is the natural inroad to what is one of the fastest growing emerging markets. Expect Brazil to be one of the more attractive markets behind China that "brands" highlight as a key growth opportunity in the coming year. Importantly, luxury brands are just beginning to scratch the surface.


New Congress Faces Range of Industry Issues - A divided Congress begins a new two-year session on Wednesday and will immediately face pressure to consider a long-term extension of trade-preference programs, while a trade deal with South Korea will also likely figure prominently in early action. Given the new pro-trade, business-friendly Republican regime in control of the House and a weakened Democratic caucus controlling the Senate, the session could produce more gridlock than new policy. But international trade is one of the few areas where the two parties could find common ground. There are several fashion-industry legislative initiatives hanging in the balance in the 112th Congress, ranging from pending trade pacts with South Korea, Panama and Colombia to a design copyright bill that would extend copyright protections to “unique and original” fashion designs for three years and a controversial bill targeting China’s undervalued currency. The first order of business could be to revisit the scaled-back trade bill that Congress passed in the final hours of the lame-duck session in December, which disappointed many in the business community. <WWD>

Hedgeye Retail’s Take: After the House passed a currency bill in September that addressed the undervalued yuan, which the Senate ultimately failed to approve, the 112th Congress is back on the path of pursuing similar measures. Among the potential changes for retail companies include the ability to treat currency undervaluation as a subsidy whereby they could apply for countervailing duties against imports from China. This is likely to do little to resolve existing tensions between the U.S. and China.


Flooding May Threaten More Cotton Crops in Queensland - Growers Group Says Flooding in Australia, the fourth- largest cotton exporter, may threaten more crops in Queensland state as rivers continue to swell and with further rain forecast for growing regions. The Balonne River is at risk of flooding crops at St George as damage is assessed around Theodore and Emerald, where waters are receding, Sydney-based Cotton Australia spokesman David Bone said. The floodwaters at St George, where cotton crops were inundated in March, may peak next week, according to the Bureau of Meteorology. Cotton futures surged to an all-time high last month on speculation that global demand led by China will outpace supply. Heavy rainfall may curb yield potential in Queensland state after Cotton Australia said Dec. 8 that national output this year may reach a record 4.2 million bales from 665,000 hectares (1.6 million acres). <Bloomberg>

Hedgeye Retail’s Take: With Australia expecting to more than double production this year and jumping from ~2% to ~5% of global production – threats from flooding is just one of the latest in a long line of supply concerns.


China to Lower Cotton Import Quota - China is reducing its cotton import quota for 2011 to 2.6 million metric tons and will soon release the official quota, according to the China National Cotton Information Center. About 1.71 million metric tons of cotton will be imported under sliding duties, while 894,000 metric tons will be imported under a 1% duty. In 2010, China issued a total of 3.59 million tons of cotton import quota. In the first eleven months of this year, China imported 2.38 million tons of cotton, up 81.4% compared with the same period of last year, due to a shortfall in the domestic market caused by a decline in domestic output. The China Cotton Association estimated that the country's cotton output will drop 2.1% year on year to 6.65 million metric tons in 2010. <FashionNetAsia>

Hedgeye Retail’s Take: Lowering import quotas by 1mm metric tons should in theory ease global demand, however, with local production forecast down 2% supply continues to be tight.


VAT Increase Raises Retail Concerns in Britain - Retailers, which saw shoppers flood the high street in the new year in a bid to beat today’s VAT increase, are braced to phase in price increases in the coming weeks. After one of the toughest pre-Christmas trading periods due to the snow, shoppers sought bargains in the January Sales ahead of the 2.5% hike in VAT to 20% today. Some retailers are set to absorb the rise initially but will pass the costs on to shoppers eventually. The British Retail Consortium, which found that four out of five retailers think the increase will undermine sales with nearly two-thirds polled saying that 2011 will be a worse year for sales than 2010, said: “The prospect of the VAT rise gave a modest boost to the sales of big-ticket and high-end goods in December. “Retailers are discounting in a big way now to make up for missed sales [caused by the snow]. That may mean the impact of the VAT rise is lost amongst discounts, but ultimately retailers can’t absorb the cost indefinitely.” <Retail-Jeweller>

Hedgeye Retail’s Take: Hard to paint a rosy picture for UK retail sales (and margins) once the dust settles on post-Christmas discounting.  With a VAT occasionally floated as an idea stateside, expect this UK case study to be under the microscope as “experts” look to weigh in on the incremental sales hit resulting from the tax increase.






CHART OF THE DAY: STARING AT THE SUN -  chart of the day


The Macau Metro Monitor, January 4, 2011


According to sources, at least 10 banks have joined syndication of the S$4.1925BN fully underwritten refinancing for RWS, committing around S$2BN.

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Some news items from the restaurant world:

  • EAT was initiated with a “buy” rating and traded up on strong volume
  • RT is scheduled to report Q2 (Nov) earnings tomorrow after the market close.  Yesterday the stock was upgraded and outperformed its peer stocks, finishing the day up 10%.
  • SONC is expected to report fiscal Q1 (Nov) earnings today after the close.
  • MCD traded down on a positive day for the market and the restaurant space.  Volume also accelerated which is a bearish indicator.  We will be publishing a Black Book on MCD next week; our outlook for 2011 is decidedly bearish for the stock.
  • MCD officially rolled out oatmeal nationwide as part of its breakfast menu
  • SBUX is now offering a $2 breakfast sandwich with any beverage as part of a special offer
  • SBUX: There is a story on Bloomberg this morning.  In my view, there is more to the Kraft deal than the single serve business.  Starbucks wants to control the distribution channel.
  • COSI traded up on strong volume as the company’s turnaround continues.
  • PEET was rated "Hold" at McAdams Wright Ragen 24-month target price is $48.00 per share.
  • Bar and Grill traded well yesterday, trading up on accelerating volume.



Howard Penney

Managing Director


US hotel transaction market snowballed in 2010, gathering momentum for 2011



Market M&A Trends for Q4 and Year 2010

  • 2010 US transaction volume shot above $8BN.  Global transaction volume also soared this year, not far from 2008 levels.
  • Q4 saw as many portfolio deals as Q3.
  • In Q4, there were several luxury non-US property sales that surpassed $1MM in average price per key (APPK).      
  • REITS (existing and newly formed) have dominated the M&A market this year.
    • Chatham Lodging Trust and Chesapeake Lodging Trust were the two hotel REIT IPOs.
  • Financing still weak but lenders coming back
    • For Q4, LTV for first mortgage debt trended between 40-55%, lower than the median LTV of 60% in 3Q, according to STR.
      • Most of the loans have a 3-5 year maturity.
    • According to Fitch, CMBS hotel loans continue to default at a relatively high rate.  November delinquencies reached 14.27%. 
    • Lenders—BofA, Deutsche, GS, Wells Fargo, and JPM—are returning, albeit slowly, to the hotel lending market.

Luxury Segment

  • Average Price per Key
    • $998,687 (9 transactions in Q4)
    • $529,161 (42 transactions in 2010)
      • US average: $383,831

Upper Upscale Segment

  • Average Price per Key
    • $257,295 (11 transactions in Q4)
      • US average: $291,945
    • $229,265 (42 transactions in 2010)
      • US average: $264,971



Q4 Transactions (Summary)



Staring at The Sun

“It's best not to stare at the sun during an eclipse.” 

-Jeff Goldblum


As a younger man who came to America in the mid 1990’s wearing Canadian cutoff jean shorts, I enjoyed sunning myself. As I age, I try not to do that as much; especially during an eclipse.


Today the world will see the first partial eclipse of 2011. Africans and Europeans will witness it at sunrise. Russians and Chinese will get their eclipse at sunset.


No matter where you are in this world this morning, there it is – a new year, new investment opportunities, and new risks. If you are staring at a market price that’s already gone straight up in 2011, our best recommendation is to heed Jurrasic Park’s Jeff Goldblum’s risk management advice – don’t stare at it – it’s going to be a long race.


As market prices around the world race higher this morning, the sun is shining on the bulls. While I’m certainly not basking like Countrywide CEO Tan-gelo Mozilo did back in the day (my SPY short position is currently -3.80% against me), I’m as happy as the next clam who is long anything. Market prices that go lunar ahead of an eclipse are cool that way. Everybody gets paid.


In yesterday’s Early Look, I walked through our Hedgeye Asset Allocation Model. This morning I’ll focus on the Hedgeye Virtual Portfolio. They are 2 separate risk management products and I call them “virtual” because instead of running money, I run my mouth.


Currently the Hedgeye Portfolio is in what I consider a neutral position. We have 12 LONGS and 12 SHORTS.


As of last night’s close, our biggest un-realized winners and losers are:

  1. Top Winner: LONG Starbucks (SBUX) = +188.63%
  2. Top Loser: SHORT American Express (AXP) = -4.81%

Not unlike anyone who runs real money in this business, all of the positions I take in the Hedgeye Portfolio are marked-to-market every second of every day. Unlike most of the conflicted and compromised broker ratings and market pundits out there, we are accountable to every position we take.


Yesterday, I made the following risk management moves in the Hedgeye Portfolio:

  1. Shorted Tech (XLK) on the Facebook “news” as it was immediate-term TRADE overbought
  2. Shorted Industrials (XLI) after the sector closed up +25.5% in 2010 and was also immediate-term TRADE overbought
  3. Bought US Treasury Curve Flattener (FLAT) as the yield spread continues to make what we call lower-highs at 274bps wide
  4. Sold Suncor (SU) as the stock and commodity prices were hitting new highs (it too was immediate-term TRADE overbought)
  5. Shorted Bank of America (BAC) on the “settlement news” after our Financials Sector Head, Josh Steiner, made a call on it

Booking gains and/or searching for new absolute return ideas on the long and short side is what risk managers do. Some people buy-and-hold. Some people day-trade. The market doesn’t really care what your style is – like an eclipse, it’s going to do what it is going to do.


While you may need to be staring directly into the sun right now to be willfully blind to Global Inflation Accelerating, you don’t need an eclipse to generate inflation when market prices are inflating. Post daisy dukes ditching at Yale, I paid my own room and board to learn that’s what happens when prices go up.


On the topic of inflation, while it will be interesting to read the Fed’s Minutes later on this afternoon, the rest of the world has already agreed with us that a +10% monthly spike in the 19 component CRB Commodities Index since the beginning of December to new highs of 333 yesterday is indeed inflationary.


In fact, in the last 24 hours these are the 2 words that the Brazilians and South Koreans used to describe inflations:

  1. Brazil = “plague”
  2. South Korea = “war”

We think they are serious. So is staring at the sun.


In addition to being long German Equities (EWG), US Healthcare(XLV), Oil (OIL), Sugar (SGG), and Treasury Inflation Protection (TIP), I remain bullish on American and Chinese Cash (UUP and CYB). I’m bearish on US Treasury bonds (SHY) and bearish on Gold (GLD) – those are 2 of the 12 positions in the Hedgeye Portfolio that were working for us yesterday. There’s always risk to be managed somewhere.


My immediate term support and resistance levels for the SP500 are now 1259 and 1273, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Staring at The Sun - sun

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