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Industry Insights from ICR Conf


We think that investors, in aggregate, walked away from this conference with the least amount of insight than at any time in all the years we attended. Why? Pardon the condescending tone here, but the companies simply do not have a clue, and therefore cannot lead the consensus.  Everyone wanted clarity on costs – but they did not get it. Hardly anyone we spoke with acknowledged the impact on earnings when heavily discounted product (due to weak demand) crosses the input cost barrier.  Management teams were generally dismissive when we discussed it with them.


Overall, we came away with a stronger view that estimates need to come down in most parts of retail (JCP, GPS, CRI and M). We’re incrementally constructive on the athletic space, where estimates should still head higher (FL, NKE, HIBB, KSWS).  On the margin, we’re less bearish on PVH due to management’s approach to managing risk. In addition, we’re also incrementally positive on WRC. We entered the conference incrementally positive on SKX. But we left squarely negative.  Please see other call outs below, and give us (or ) a shout if you’d like to discuss.




  • Overall most people we spoke with did not appear to get the “nuggets” they were on the hunt for.  “Is this companies cracking down on ’off the record’ comments or just that they have nothing to say”.
  • Increasing uncertainty re the impact of cost inflation and pricing power is resulting in duration elongation as many companies issued 5-year guidance outlooks/targets relative to year’s past.
  • Also, keep in mind the BIG issue here… Cost inflation is manageable and has a good enough window of planning and execution. But the problem will rear its’ ugly head at the end of the season, when the industry realizes that it has too much product (after 2 years of taking down inventories), and then excess discounting begins.
  • Most honest and thoughtful answer to the questions about cost pressure on sourcing came from URBN’s CEO:  “The way I see it, if you create good product that the consumer wants or must have, the cost pressure takes care of itself.  We’re in the business of creating products that our customers want.”  In other words, the consumer will pay for something if they really want it and the Street and many other companies are overly focused on defense, not offense.
  • Another positive came from PVH – who wasn’t even at the conference.  They are planning for costs to be up 10-15%. As such, they’re planning for units to be down 10-12%. It’s been a while since we heard a management team in this biz talk about buying in units. THAT’s the way to do it. Buying in dollars with little strategy around costs/ASP/units is a dangerous game. Unfortunately we need a LOT more companies to act this way – and that won’t happen. But this made me incrementally less bearish on PVH.
  • In a somewhat similar vein, PERY management suggested that consumers will be faced with the choice to either pay higher prices, or risk not having product from which to choose due to industry-wide inventory shortages. While the company is currently ordering ~10% fewer units in order to offset higher cost increases, our sense is the perception of tight supply is unlikely to drive consumer spending in 2011. Economic reality will trump perception all day.
  • Most talked about new (growth) story: SODA (Sodastream).  Expect Target distribution in ’11 as well as expanded products at BBBY.  Challenge is filling demand with high service levels.  Met the challenge with BBBY for holiday. 
  • URBN quotes:  “Our customer that shops all three channels spends 5x as much as the average customer with us”.  Perhaps this is why they are so excited to finally have a fully integrated multi-channel platform.
    • “The sourcing environment is the toughest we’ve seen in 17 years”.
    • “You will be happy with our inventory levels at year end”.
    • “We were never in low cost factories to begin with.  So on a relative basis, we’re just not seeing the increases in labor that others may be seeing”.
    • “Most of our costs are not in raw cotton textiles, but rather in trims, buttons, and embellishments.”
  • E-commerce and mobile initiatives were consistently one of the top topics of discussion. While many companies with sales below 5% of their total spoke to the continued opportunity for growth, Wolverine Worldwide with ~7% of sales coming from e-commerce stood out by highlighting their goal of achieving 15% of sales overtime.
  • Outlier Callouts:
    • While most footwear brands are quickly shifting production out of China, Skechers plans to continue to source over 90% of its production from China for the near-to-intermediate term.
    • While most companies are planning to leverage SG&A costs in order to offset margin pressures over the next 12-months, Deckers is planning to increase UGG marketing costs by 1.5% of sales in 2011.
    • At this point, most if not all retailers know exactly what cost increases they will face in the 2H of the year – whether it be high single-digit or low double-digit inflation, consumers and retailers are clearly waiting to see who blinks first.   
    • Most crowded breakouts: LULU, URBN, SKX, ARO, VFC, GES, PSS



DDS: (D)riving (D)epartment (S)stores Higher

On a day where news out of retail land is scarce, the following brief statement/filing appears to be taking the mall anchors for a ride, to the upside:


Dillard's, Inc. (the "Company" or "Dillard's") intends to form a wholly-owned

subsidiary that will seek to operate as a real estate investment trust (the

"REIT"). Dillard's believes the formation of a REIT may enhance its ability to

access debt or preferred stock and thereby enhance its liquidity. It is

intended that various Dillard's entities (the "Dillard's Parties") will

transfer to the REIT interests in certain real properties (the "Properties")

currently owned by the Dillard's Parties, who will lease the Properties back

from the REIT under "triple net" leases.


We’ve been asked a couple of times what is driving the strength in the department store space, mainly Macy’s but it’s hard to ignore the strength in Sears and JC Penney.  Yes, Macy’s was stamped with a “buy” last night from Cramer but this is likely coincidence more than anything else.  The bottom line is the group is trading up in sympathy with speculation that each of this country’s mall anchors could/should employ a similar REIT subsidiary structure.  While in theory this could be viewed as a valid reason to unleash real estate value and separate the “operations” from the “assets” we have to question whether it makes sense for each of these companies.  The key differentiating factor between DDS and the others primarily surrounds the company’s “ruling family”.  The Dilliard’s themselves are still in complete control of DDS with voting rights that comprise 99.4% of the B share super-voting stock (which in turn is entitled to electing two-thirds of the board).  It’s also no secret that the Dillard family has long held interests in real estate (i.e entire malls) that Dillard stores operate in. 


Interestingly the company notes in the filing that they believe this strategy with enhance the company’s access dept or preferred stock markets.  This is clearly financial maneuvering at its best.  To our best knowledge the company is as mature as it gets and really has little true capital (i.e growth) requirements.  In looking at JCP specifically, we know that debt reduction is a company-stated top priority- even surpassing the desire to buyback stock.  So, if access to debt capital markets is a key reason for engaging in such a structure, does this even apply to JCP or the other levered mall-anchors?  Anything is possible for sure, but we’d be surprised to see the others following suit given their unique ownership characteristics as well as wide range of differences between each of the company’s operational strategies.


Eric Levine


The Golden Haze: Gold Position Update

POSITION: Covering our short GLD position today


It never ceases to amaze me how universally accepted bullish cases can start to quickly come unglued. Gold has gotten us all paid since 2003 on the long side – we get that. But we also get that playing today’s risk management game has nothing to do with past results. Generally speaking, when real-interest rates are negative, gold outperforms. Not so much when they move, on the margin, from negative to positive.


Today, Gold is finally immediate-term TRADE oversold at or lower than $1348, so we’re covering the short position. That doesn’t mean we are no longer bearish on gold. Neither does it mean that we don’t reserve the right to get bullish on gold again if the professional politicians of the 112th Congress start to debauch the US Dollar again…


As a reminder, for accountability purposes, our recent moves in Gold have been as follows: 

  1. DEC 6th, 2010 sold our long position
  2. DEC 29th, 2010 initiated a short position
  3. JAN 20th, 2011 covered our short position 

Oversold is as oversold does, but as long as the intermediate-term TRENDs in both the USD and UST Yields continue to make higher-intermediate-term highs, I think gold will do the opposite. If these facts change, I will try my best to do the same.


My updated TRADE and TREND lines of resistance for Gold are in the chart below at $1387 and $1373, respectively.




Keith R. McCullough
Chief Executive Officer


The Golden Haze: Gold Position Update - 1

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January 20, 2010





  • It didn’t take long for Amazon’s investment in livingsocial to result in a deal.  Yesterday livingsoical featured a $20 Amazon giftcard for $10 which resulted in 1.3 million cards purchased!  This beats the previous social/local coupon record in which Gap sold $11 million worth of Groupons.  While the total value of the Amazon deal is unlikely to move any needle, it’s interesting to see the online retailer using new methods to universally promote given that the company is historically known for its everyday low price strategy and targeted promotion.
  • Green manufacturing takes a step forward with the impending introduction of Levi’s WaterLess jeans.  The new denim pants use 11 gallons less water to manufacture conventional jeans, for a reduction in water consumption of 26% to 96%.  A normal pair of jeans takes about 11.1 gallons to produce as a result of the washing process which spans three to ten cycles!  Perhaps it’s just coincidence but the new “line” arrives just at a time when costs are on the rise and “content” will be more important than ever to facilitating pricing power.
  • In an effort to five fashionistas, bloggers, and consumers a sneak peak at what’s in-store for Spring, TJ Maxx and Marshalls offered a live spring/summer preview in NYC.  The event featured a wide range of merchandise that is likely to be available over the coming months, complete with price comparison signage highlighting the massive savings on like-items between the offpricer and traditional department stores.  We suspect the pricing message is about to get louder as cost pressures mount.



Dillard's to Form REIT - Dillard’s Inc. — a family-run but publicly traded department store chain known for going its own way in areas of corporate policy — plans to spin off some properties into a real estate investment trust and then lease the properties back. Real estate investment trusts, or REITs, bring certain tax benefits that aren’t available in other corporate structures. The Little Rock, Ark.-based firm has doors in 29 states and, according to last year’s annual report, owned 241 of its 309 stores. <WWD>

Hedgeye Retail’s Take: With the Dillard’ family in complete control of DDS, this is just another chapter in the clever structuring of the pubicly traded, but family run business.  Regardless of the REIT structure, has anyone noticed the company’s high single digit holiday comps?


Brown Shoe Reportedly Looking at Acquiring American Sporting Goods - Brown Shoe Co. Inc. is said to be in talks to buy American Sporting Goods Corp., but analysts are undecided if the purchase will be good for the Missouri-based firm. According to a report by Sporting Goods Intelligence, Brown Shoe may pay $150 million, which BB&T Capital Markets said is as much as 10 times the earnings potential of ASG. ASG, the parent of Avia, Ryka and several other brands, reportedly had sales of $220 million last year and earnings in the range of $10 million to $15 million. The California-based company has been on the market since 2005, and has gone through at least two unsuccessful formal auction processes due to the relatively weak stature of its key brands in an increasingly concentrated athletic market, according to the note. <WWD>

Hedgeye Retail’s Take: While it can be argued that acquiring brands falls into one of management’s key priorities for 2011 (i.e. people and product) – integrating a deal could easily prove to be more of a distraction. That said, adding a few athletic brands to the BWS portfolio could be viewed favorably with more exposure to one of the more robust categories within the space.  


Tony Fisher Appointed Head of Target Canada - Target Corp. has promoted Tony Fisher to the new post of president of its Target Canada unit. Fisher, with Target since 1999 and vice president of merchandise operations since his promotion last year, will be responsible for “building the team, establishing the headquarters and leading the day-to-day operations” of the company’s expansion into Canada, details of which were disclosed last week. <WWD>

Hedgeye Retail’s Take: While this is a large opportunity for TGT over the next 3-5 years, expect numerous announcements to trickle out as the team, infrastructure, and strategic plans begin to take form.  This will be a long, methodical process and one that will not accrue overnight benefits. 


SKNL and Li & Fung Eye JA Apparel  - JA Apparel Corp. could have a buyer in the wings at last. The owner of the Joseph Abboud and Joe by Joseph Abboud brands has been on the market since 2006 but is coming under closer scrutiny as potential buyers kick the tires, according to market and financial sources. Two prospective buyers said to have signed confidentiality agreements are SKNL International, the owner of HMX Group, and Li & Fung, the Hong Kong-based conglomerate. <WWD>

Hedgeye Retail’s Take: With both bidders entrenched in sourcing, it’s clear that the synergy lies with marrying a well known US mens brand with lower-cost, efficient manufacturing.  Interestingly, a purchase by SKNL would mark one of the first brands to be bought by an Indian retail/textile conglomerate.  On the Li & Fung side, this would be just another step in building out the company’s diversified content portfolio.


Nau Introduces QR Coded Hangtags - Urban + Outdoor apparel maker Nau will showcase how QR codes can be used on hangtags to help outdoor specialty retailers engage smartphone users in their stores by directing them to branded websites and away from price comparison sites.  Nau will showcase key styles labeled with QR codes designed by ExtraTags, a company launched earlier this year by the man who helped build Amazon.com's outdoor business. The demo at Nau's booth (#30049) comes as Nau and its sister company's Horny Toad and Lizard Lounge launch a blog to help specialty outdoor retailers improve their merchandizing and share best practices.<SportsOneSource>

Hedgeye Retail’s Take: Even before mobile price comparison has been fully adopted, we’re beginning to see moves to divert attention away from price and towards content.  With smartphones essentially turning in to personal POS’s, will charging stations become commonplace in the mall? 


Usablenet and PayPal Team Up to Ease Mobile Checkout - Mobile commerce technology provider Usablenet Inc. has teamed with eBay Inc.’s PayPal to integrate the online payment company’s Mobile Express Checkout with Usablenet m-commerce sites, mobile apps, tablet apps, Facebook applications and kiosk systems. Consumers with PayPal accounts enter their user name and password and then buy with one touch; the system uses the consumer’s stored default shipping and billing information.<InternetRetailer>

Hedgeye Retail’s Take: Paypal’s involvement in the mobile transaction landscape is likely to ease consumer fears regarding security, or more aptly the lack thereof over mobile devices. While a step in the right direction, it’s going to take far more to get most consumers over the hurdle in this regard.


TSA to Open Largest Store in U.S. - The Sports Authority plans to open a 56,000 square-foot in August to open in Orland Hills, IL, representing its largest store in the U.S. The store will be located in a site of a former Circuit City and an Office Max. Orland Towne Center owner Tony Youshaei, speaking to the Orland Hills Patch, described the new store as a "flagship" for the national chain. The new store will represent a relocation. A 40,000 square-foot Sports Authority store now operates in the Orland Park Place shopping center, next to a Dick’s Sporting Goods store.  When the Orland Park Sports Authority will close for the relocating has not yet been determined. < SportsOneSource>

Hedgeye Retail’s Take: Within a year of launching its smaller S.A. Elite concept, Sports Authority comes out with its biggest store yet. While contrary to the company’s growth initiative in smaller format stores, empty Circuit City boxes are more readily available while smaller footprints continue to be more challenging to line up.




In preparation for IGT's FY Q4 2010 earnings release this afternoon, we've put together some forward looking commentary from the company's FY Q3 and subsequent conferences.



Post Earning Conference Commentary

  • “As we mentioned back in November, when we laid out guidance for the current fiscal year, we anticipate replacement sales ranging anywhere from flat in 2010 to slightly up, and that’s really what predicated the range in our guidance.”
  • “So at the low end of your guidance you’re assuming a flat replacement environment and at the high end you’re assuming up 10%?”
    • A: “Right, correct”
  • “I think on the operating expense line, I think as where we sit today, we’re probably comfortable at the level of operating expenses, but if things should stay protracted for a longer period then I think we have to take a harder look at  what we need to make some structural changes in how we operate the business.”
  • “You’ve seen us in the area of R&D really stick to holding that number right around 200 million year. The big difference that’s going on there is how we’re spending those R&D dollars. I think today much more focus, lot of analysis going into every dollar that’s deployed in R&D so that we make sure that we’re managing the ultimate returns of products, so killing products sooner in the development lifecycle.”
  • “We’re going to continue to take costs out of the margin through consolidation of product lines, reduction of the number of products we support where there isn’t incremental value being derived from offering, let’s say, 11 cabinets versus what you could accomplish with, say, 6 or 7.”
  • “We probably have another year or so before we’re on a – what I’ll say a standardized platform.”
  • “I think American Idol has been out there now about 60 days. I think the indicators on it are that it’s a pretty successful game, so we’ll see how well it does as it gets out into broader deployment. It’s been on an exclusive with, I believe, 9 of the MGM properties for the first 60 days, but we’re encouraged”
  • “I mean we’re always looking for opportunities to grow the installed base.”
  • “So we have a promotion running right now that entitles the customers to some additional discounts above their normal discounts as dictated by the volume of business they do with us. And that really is for them to commit to product between now and the end of the calendar year. And then we have some others that will be introduced as part of G2E”
  • “We’re going to run out of pre-payable debt here before too long. And so one of the things we’re looking at right now is what, if anything, maybe we should do with some of our long-term debt. So stay tuned. It’s still unclear. We’ll, early part of next year, be sitting down with our bank group to redo our credit facility, which goes current in June of ‘11.”
  • “I think the more likely area for us is really in the online space or things that could be complementary to our business, when you think about technologies that maybe we can incorporate into the products, either online or in the core business.”


4Q2010 Earnings Call Commentary

  • “Moving into 2011, we may see SG&A stay about flat on a total dollar basis when compared to the full year 2010 as we invest in the people and processes necessary to take advantage of the expected industry turnaround and new business opportunities.”
  • “We expect R&D to be about flat to up slightly for fiscal 2011.”
  • “We will plan to further reduce our reliance on the North American replacement cycle by taking advantage of our diverse global revenue sources.”
  • “We expect to begin to see improvement in our Gaming Operations yield. We believe we have the most exciting titles both on the floor and in our pipeline and I cannot wait for the world to see some of the best games IGT has ever introduced at G2E this year.”
  • “We are planning for increased adoption of our improved systems products and heightened returns on our vast intellectual property portfolio.”
  • “We will continue to find ways to drive our improving profitability and margins even higher.”
  • “We are planning to accelerate our growth in the online and mobile business.”
  • “For the current fiscal year 2011, we offer GAAP earnings guidance of $0.77 to $0.87 per share.”
    • Guidance includes: “Very little if any for Illinois; and I want to say about 1500 units for Italy.”
    • “At the higher end, we’d assume we see some improvement in replacement activity."
  • “2 cents of potential upside depending on the timing of some software recognition at ARIA I think it was. Did that 2 cents happen in this quarter or was that not recognized in the September quarter just yet?”
    • A: “It was not…It will more than likely happen in FY 11.”
  • “I think another thing that’s worth noting, Joe, when you look at the international business in the quarter, not only were the units that we recognized up from the expectation, but the ASPs were up pretty significantly, so $3,000 year-on-year and $1,200 sequentially, so we’re finding that the health of the business in the international marketplace is really holding up”
    • “We hope it’s not a one-time thing, one of the opportunities that IGT has is it has a broad portfolio of markets to sell within and a broad portfolio of products to sell.”
  • “I would expect for the next couple of years that we would expect outsized growth in our international marketplaces. I think it’s a combination of jurisdictional expansion and an ability for us to take some share in markets where perhaps we haven’t been as aggressive as we have in North America. So I would expect to see the international business closing the gap a bit on the U.S. business, if you will, I would say in 11 and 12.”
  • “This year’s fourth quarter had fair amount of MLD carry-over from the dynamics promotion that ended the end of June, i.e. people had to have their orders in. Some of those orders came in in Q4. That’s really what explains the lower ASP.”
  • Game ops margin guidance: “I think 58 to 60% is the right kind of range”
  • “Do you have any intentions of … trying to take out the convert?”
    • A:  Actually studying all that right now... Because at the rate we’re generating cash we won’t have any pre-payable debt before too much longer, so a lot of analysis being done at this time around that.”

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