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Retail: Exhausting Positive Momentum

As we do every morning here at Hedgeye, we gather in our locker room (some people call it a conference room) pre-game and both discuss and debate key issues in our respective industries and contextualize them vis/vis changes in the global inter-connected web that we call Macro. 


Yesterday, we published a note on earnings revisions in retail, and our view that such revisions are likely to go negative sooner than most people think (see those charts below). Consider the timeline...

  1. We had Holiday sales, which most would agree came in ahead of expectations. 
  2. But remember folks... this is a 100% 'top-line' news item.  What we did not hear is the level of promotional activity needed to ensure such sales. 
  3. We'll start to get a hint of that this coming Thursday. It won't be a disaster by any means. But we look at everything on the margin at Hedgeye, and in that vein, we'll get more commentary as to inventories and Gross Margins on that $400 cashmere sweater you got from your S/O.
  4. Then just a few days later, we have the ICR conference in SoCal. Yes, this is where most companies that matter in small/mid cap retail and restaurants converge in a flock of sidebar conversations with the sell-side, buy side, bankers, and yes even with each other. While major press releases on the quarter are not likely to flow, you can bet your bottom dollar that management teams will spill the beans on the 'tone of business' in their double-secret one on ones.  
  5. Again, I'm not saying that these will all be horrible conversations. But simply that the chance they are BETTER than what was already dished out over the prior 6-weeks is exceedingly low.
  6. Also, one key component to our 'Cannonball' theme, is that it will be nearly impossible for any of the companies present at the conference to accurately articulate how their competitors will react to a clear reversal of what has been a 3rd standard deviation positive influx of margin dollars in 2010. Remember folks, 95%+ of product in this industry is sold at the end of each season. The steepness of the curve to get all the 'stuff' sold in environments like this tends to change over VERY short durations.  Things might seem 'ok' to a retailer at ICR -- at least good enough to keep a smile on their face. But that's not to say that there can't be meaningful downward revisions as the year progresses.

Let's take this full circle as it relates to how this note started.


Just before Christmas (the 23rd, to be exact) Keith made a statement about Gold, which rings true for retail today. He had been a bull on gold, and kept being asked when he was going to buy it back. But the reality is that he was more inclined to short it. Please check out his note below. Also, his levels on the RTH suggests downside/upside of 5 to 1.


See you out in Cali.



Retail: Exhausting Positive Momentum - 1 4 11 Note RTH MVR


The Golden Haze: Gold Levels, Refreshed
12/23/2010 01:51 PM



While we don’t currently have a position in Gold (GLD), we’ve been very active in foreign currency as of late. We did make the call to sell our entire long Gold position in both the Hedgeye Portfolio and Asset Allocation models on December the 6th. I’ve been following up with notes on why (Early Look note from December 17th, “The Golden Haze”) since.


The question in my mind right now isn’t where do I buy gold back? It’s where do I short it?


Gold is competing against rising bond yields. Gold is also fighting the Fed’s policy to inflate. Gold is always a lot of different things to a lot of different people, but the most important thing about gold is its last price.


If gold closes below $1379/oz this week, this will be the 3rd consecutive week of gold closing down on a week-over-week basis. That would be bad for the immediate-term price momentum in gold but, by our risk management score card, its already broken from an immediate-term TRADE perspective anyway.


In the chart below we show the refreshed immediate-term TRADE line of resistance for gold up at $1399. There’s significant resistance between $1, so you can also use that as a range of resistance.


There’s an immediate-term TRADE line of support down at $1368, but it’s a weak one. The more important line to manage risk towards is the mean reversion move down to gold’s intermediate-term TREND line of $1313.


Last year I gave my Dad gold bullion coins for Christmas – this year I hope he doesn’t give them back!





Keith R. McCullough
Chief Executive Officer


Retail: Exhausting Positive Momentum - Gold 1 4 11




SBUX’s battle with Kraft to gain control of its distribution is an important milestone for the company as it can gain control of a very important sales channel for the company, which will provide new avenues for growth. 


In my view, the recent article on Bloomberg regarding Starbucks, Kraft and the single serve segment misses the most important point.  The article rightly points out that the terms of the current deal with Kraft prohibit Starbucks from putting its coffee in the Keurig Home Brewer.  However, I believe Starbucks’ strategy is not focused on that area.  Starbucks is not getting out of the Kraft agreement so it can sell Starbucks coffee in a in the Keurig machine. 


The best analogy I can use to describe what will happen in the single serve market is that Starbucks will do to the single serve coffee maker what Apple did to the portable market for mp3 players.  By the end of FY2011, I believe we will be hearing that Starbucks is testing a Starbucks branded single serve coffee with new technology that is far superior that what is currently available.  The machine will likely be manufactured by a third party and sold in Starbucks stores, supermarkets and club stores.  For example, the company is working closely with Nuova Simonelli on a number of different types of machines.


I see Starbucks as posing a threat to Keurig’s 71% market share, not a benefit.  There is no doubt that growth of the single serve segment has cut into Starbucks’ grocery sales, but buying Green Mountain or aligning themselves to the Keurig brewer is not going to happen.  Starbucks has already made the mistake once of leaving control of the brand in the hands of Kraft, there are not going to make that same mistake with Keurig or Green Mountain. 


The recent success of VIA is a great example of Starbucks controlling and putting its marketing muscle behind it’s the instant single-serve product.  The introduction of VIA was about entering the “instant” coffee market and not the “single serve” segment.


In the short-term, the diatribes between Kraft and Starbucks will continue to fly around and the rumors about Green Mountain will continue.  Once Starbucks does get control of its distribution system, the opportunities for Starbucks will be made clearer.  At that time it will also make more sense as to why Starbucks should buy Peet’s Coffee & Tea. 


Howard Penney

Managing Director

Gold: Bearish Is As Bearish Does



Lower-highs and breaking down through Hedgeye’s immediate-term TRADE line of support ($1398). That’s bearish.


We get the bullish position in gold (we sold our long position on December 6th, 2010). We get the bearish position on Fiat Fools (we coined the term in 2010). We also get that gold can go down when global bond yields are going up. Gold, like any other asset class, has to compete with yield (we shorted GLD on December 29, 2010).


If you’re in the ‘I love Heli-Bens’ camp and you don’t see inflation, you’ll only perpetuate my bearish case for gold. That’s because when I am talking about competing with yields, I’m talking about real-interest rates (adjusted for inflation). If your inflation assumption is lower than mine, you should be more short of gold than I am.


I don’t plan on being short gold in perpetuity. But I am going to try my best to stay short it until we anniversary January 21, 1980. If you have a 23 year old gold trader on your desk who didn’t see that historical time stamp, send him my twitter link.


There’s no support for the gold price down to the intermediate-term TREND line at $1352/oz.


There’s always risk to be managed somewhere,



Keith R. McCullough
Chief Executive Officer


Gold: Bearish Is As Bearish Does - 1

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Bearish: SP500 Levels, Refreshed



Before this morning’s market open we outlined daily probability (on our Macro Morning Call and in Early Look levels) of 4:1 risk (downside) versus reward (upside) in the SP500. As of 11AM EST, alongside lower prices, that’s gap is starting to narrow.


What’s bearish about today versus yesterday is that we just saw an Outside Reversal in the SP500 (higher opening highs, above the cycle high, reversing below the prior closing high of 1271). While these aren’t always bearish signals, they certainly aren’t bullish ones.


We’ll see where we close today because that’s the price that matters most, but a close below 1260 (our immediate-term TRADE line of support) would be bearish and a close above it would be bullish.


Don’t forget the Fed’s Minutes are due out intraday – we think they’ll be hawkish, on the margin. Maybe that’s why commodities are getting clocked.



Keith R. McCullough
Chief Executive Officer


Bearish: SP500 Levels, Refreshed - 1



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.






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