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R3: SBUX, KSWS, VFC, Prada

R3: REQUIRED RETAIL READING

January 25, 2010

 

  

 

RESEARCH ANECDOTES

  • Keep an eye on the upcoming spring launch of K-Swiss’ women’s apparel collaboration with Biggest Loser trainer/star Jillian Michaels.  The line will be launched on amazon.com and will aim to bring feminine and flattering looks to women embarking on life-changing weight loss efforts.  With the show still one of the more popular on national television, expect to see K-Swiss leverage this tie-in.
  • With the internet opening the door to just about any possible consumer review, positive or negative, the government is about to join the fray.  The Consumer Product Safety Commission is set to release its 38 year old consumer complaints database to the public on March 11th, when the agency will begin releasing the complaints to the public.  The site will be called SaferProducts.gov.  Score one for transparency.
  • It’s estimated that roughly 4% of the population are using location based apps to “check-in” to locations such as Starbucks, Walmart, McDonald’s, etc…According to Adage, the most “checked-in” merchant last week was Starbucks with 151k, followed by McDonalds with 51k, and Walmart with 31.6K.  Key to growth in location based advertising will be the extension of store-specific promotions which encourage consumers to report their shopping whereabouts.

OUR TAKE ON OVERNIGHT NEWS

 

Li & Fung USA Acquires Beyond Productions - LF USA, a subsidiary of Li & Fung, has put a ring on Beyoncé’s finger. LF USA has acquired Beyond Productions LLC, the apparel and accessories company led by Beyoncé and Tina Knowles. Beyond Productions is a designer and licenser of women’s fashion apparel and accessories whose brands include House of Deréon, Deréon, Curvelicious and Miss Tina. In addition, LF USA has entered an endorsement agreement with Beyoncé for House of Deréon and Deréon. Terms of the long-term deal weren’t disclosed. <WWD>

Hedgeye Retail’s Take: Wondering if there’s a China play here or if this is just a chance to lock in the residual benefits of Beyonce’s likely long-lived star power. 

 

North Face Will Outfit US Freeskiers - The North Face will become the official outfitter of U.S. freeskiers for the 2014 and 2018 Olympiads, according to a report from The Wall Street Journal. The United States Ski and Snowboard Association is expected to announce the deal on Tuesday. The North Face deal is said to be worth more than $6.5 million over the next eight years, sources told the Journal. North Face also gains a  presence at related events throughout the country. North Face has long been a dominant brand for back-country adventure sports, but was said to be looking to expand into a trendy new category. It's also sponsoring the Winter X Games this year. <SportsOneSource>

Hedgeye Retail’s Take: Don’t confuse the “freeskiing” sponsorship with UA’s sponsorship of “freestyle” and “alpine” skiing.  Freeskiing combines the popularity of snowboarding with the progression of freestyle skiing.  Participants are often found in terrain parks specifically designed for tricks.

 

Miuccia Prada Speaks On China - There are fashionable people here that you wouldn’t even find in Paris, New York or London,” Miuccia Prada said of the burgeoning Chinese market. “They have already understood everything that they had to understand.” And Prada’s company wants to tap further into that growing understanding. The luxury goods house last weekend staged its first-ever runway show in China at this city’s Central Academy of Fine Arts Museum, displaying a slightly revamped spring collection. The show is part of Prada’s plan to continue to expand in the region as it opens more stores in Mainland China and nearby territories. <WWD>

Hedgeye Retail’s Take:  Recall that a Prada IPO has been off and on for about five years now.  China would certainly help to boost the brand’s growth profile.

 

Fabric Firms Feel Slow Recovery - As designers put the final touches on their fall collections, they are beginning to think about spring 2012. While there is still much uncertainty in the textile sector, exhibitors, designers and buyers attending textile shows in Manhattan the last two weeks had reason to believe the economic doldrums are starting to lift and the rebound will soon begin to positively impact business. That was the general spirit at the Première Vision Preview New York and Direction by Indigo shows that took place Jan. 11 and 12, and offered designers an early look into fabric and print trends for next year, and sourcing specialist Texworld USA, which ended its three-day run last Thursday. “We are certainly emerging from the worst of the crisis,” said Philippe Pasquet, chief executive officer of Première Vision. <WWD>

Hedgeye Retail’s Take:  Interesting perspective on demand with no mention of costs.  Perhaps the higher end nature of the show makes costs less relevant, at least for now.

 

ANCI Rolls Out New Initiatives - ANCI, the National Italian Footwear Association, is rolling out two initiatives to highlight the country’s storied tradition and know-how in the footwear industry. The first is a new promotional campaign, called Taste Beauty, that aims to inspire consumer confidence in the style and quality of Italian-made footwear by displaying images of a tower of mozzarella cheese, a fresh tomato, a plume of basil and a shoe. The campaign will be used in both print and online advertising to coincide with the principal fairs organized by ANCI. <WWD>

Hedgeye Retail’s Take: It’s no often we see a country promoting its heritage, but it’s clear that the Italians must be looking to gain some share back in the “quality” category.

 

Online Shoppers in the UK Increased Spending by 16% in 2010 - Online shoppers in the United Kingdom spent 44 billion pounds (US$70.4 billion) in 2010, up 16% from the previous year, according to a report released today by comparison shopping site Kelkoo and consultancy The Center for Retail Research.  The report forecasts a 13.6% increase this year for U.K. online spending, to 50 billion pounds (US$80 billion). By contrast, the report says that all retail spending in the United Kingdom will grow only 1.4% in 2011. The report adds that annual online spending in the U.K. accounts for nearly 11% of all British retail spending. That is the highest market share for online retailing among European countries, the two organizations say. <InternetRetailer>

Hedgeye Retail’s Take:   While the online market in the UK is about half the size of the US market, the growth rate appears to be moving forward at a rate about 50% higher than domestic growth. 

 

Website and Email Critical B2B Investments - According to a survey of business-to-business (B2B) marketers, traditional online tactics remain key to marketing success. Just over half of B2B marketers surveyed told BtoB Magazine their budgets would go up this year, mostly by less than 15%. With a primary marketing goal of customer acquisition (69%), the greatest number of respondents expected spending increases to come from online (78%). By contrast, 44% said they would be spending more on events and 36% on direct mail. Online, B2B marketers were most likely to report planned increases in marketing spending on their websites and email programs, followed by social media. <eMarketer>

Hedgeye Retail’s Take: There is a clear shift in spend towards more offensive online marketing tactics underway. With considerable improvement in alternatives to more passive forms of outreach, companies are clearly warming to the sniper versus shotgun approach with customers. 

 

R3: SBUX, KSWS, VFC, Prada    - R3 1 25 11

 

 


EAT: NIRVANA BOUND

In contrast to our view on MCD which trends are taking it into a “deep hole” EAT is headed to “nirvana.”   Ultimately this has implication for the trends in valuation. 

 

While EAT sales remain challenged (adjusting to reflect the one week calendar shift) company-owned comparable restaurant sales were (3.7), (4.9) and (4.1) percent for October, November and December, respectively, resulting in (4.1) percent for 2Q11.  We believe that the worst is over for EAT from a top line perspectives and the company initiatives to drive top line sales will take Brinker's same-store sales into positive territory for the balance of fiscal 2011.

 

Specifically, as I wrote in my post titled, "EAT - A BADGE OF HONOR", on November 14th, the following three points are pivotal to EAT's second half of fiscal 2011.

  1. Chili’s is lapping the introduction of menu changes that caused sales to decline last year
  2. “2 for $20” is to become permanent menu item; this will be incremental to sales in 2HFY11
  3. In January, Chili’s will be rolling out a new lunch menu focused on gaining traction in a day part that has been challenging for the company.

More details after the call at 10am.

 

EAT: NIRVANA BOUND - eat quadrant

 

Howard Penney

Managing Director


CHART OF THE DAY: Will the U.S. Handshake and Currency Earn Respect Again?

 

CHART OF THE DAY: Will the U.S. Handshake and Currency Earn Respect Again? -  chart of the 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 80.65%
  • SHORT SIGNALS 78.64%

THE M3: MACAU VIPs; HO FAMILY DISPUTE

The Macau Metro Monitor, January 25, 2011

 

DOWNSIZING FOR SOME MACAU 'VIPs' DURING 2011 Asian Gaming Intelligence

An industry insider suggested that if the Macau market continues its high-growth trajectory without a significant new supply of live VIP tables, then some of the lower high rollers could effectively be bumped into the mass market.  In this scenario, AGI believes a new segment would be formed, along the lines of the junkets found on mass floors in some properties and some jurisdictions in Asia.  This bump down might result in those players losing some of their existing privileges with retail banks.

 

A full utilization of the VIP tables is unlikely as operators have pointed out that giving their VIP customers the flexibility to move from table to table within the same room is very important.  In addition, given that many junket operators run rooms in several properties, they want to be able to offer players different venue options.

 

FAMILY SEIZED STANLEY HO'S STDM SHARES WITHOUT HIS CONSENT, SAYS LAWYER: REPORT macaubusiness.com

Gordon Oldham, Stanley Ho's lawyer, said Dr. Ho might take legal action against his family for seizing his stake in STDM, without his consent.  Brunswick Group, representing some of the family members, said that Mr Ho provided written authorization of the share transfer.  SJM Holdings suspended trading pending the release of an announcement.



The Last Entitlement

“When a milestone is conquered, the subtle erosion called entitlement begins its consuming grind.”

-Pat Riley

 

It’s Game Time. And tonight, America’s currency needs a big win. So, as a little pre-game prep for President Barack Obama’s State of the Union speech, I thought I’d toss him a little love from 5-time NBA Championship Coach, Pat Riley.

 

On the pre-game wire (US Dollar Index trading $78.16 as of 7AM EST), across durations, world currency markets are betting against America’s credibility and fiscal resolve:

  1. US Dollar Index immediate-term TRADE line resistance remains overhead at $80.05
  2. US Dollar Index intermediate-term TREND line of support ($78.66) is broken
  3. US Dollar Index long-term TAIL line of resistance remains firmly entrenched up at $81.62

Sure, some privileged Americans are willing to turn a blind eye to their sovereign currency, employment, and inflation levels. Some, like The Ber-nank, still fundamentally believe that America’s stock market is the barometer of her long-term health. All the while some “Wall Street Bankers”, according to the #1 headline on Bloomberg this morning, are “partying in Davos.” Ah, the storytelling about the depression and the deflation – nice.

 

The only problem with all of this is the other HALF of Americans who have $2,000 or less in some form of a stock and bond market account. For them, America’s leadership needs to stand ready to sacrifice tonight or else their team, to borrow another thought from Pat Riley, will continue to regard their “former greatness as a trait and a right.” Then, “half hearted effort becomes habit” … and “the champion is sapped.”

 

The world’s history of great Empires sides with me on this. From the Roman and British Empires of political entitlements past, I can only hope we’ve learned something. We’ve already crossed the proverbial Rubicon of senatorial deficit and debt spending. Time is no longer on this entitled state’s side.

 

The Last Entitlement in this country isn’t Social Security or Medicare – it’s cheap capital. And if the US Dollar is abused any further, “subtle erosion” of America’s global economic power will continue its “consuming grind.”

 

If there’s one picture that shows this most obviously (see the chart below), it’s the series of lower-highs and lower-lows that Presidents Bush and Obama have chosen to oversee with their Big Government Intervention, Spending, and Dollar Devaluation policies.

 

Yes, inflation is a policy. And no, it doesn’t have to be this way. It wasn’t this way under Reagan; it wasn’t this way under Clinton either. Both of these Presidents had an explicit strong US Dollar policy that led to two of the most productive decades of job growth in US history. Whereas, under Presidents Bush and Obama, America witnessed a decade (2000-2010) of net ZERO American jobs created and now we’re staring down the pike of American style Jobless Stagflation that we haven’t seen since Jimmy Carter blessed the Fed’s Arthur Burns “monetization” of US debt.

 

The Last Entitlement is perpetuated by a completely politicized US Federal Reserve. It prints the moneys. It prints the asset inflation. It justifies its actions with politicized fear mongering that permeates the American psyche.

 

It also shortens economic cycles. It amplifies asset price volatility. And, if you haven’t noticed, it doesn’t work.

 

All of this can be conquered if America holding the world’s reserve currency in the palm of her hand is respected again. We also need to respect the cost of capital or continue to run the risk of handing it out to these Bankers of America who continue to hoard it and destroy it via the Piggy Banker Spread.

 

Respect, unlike entitlements, is earned. And God help us all if we don’t have it within us to recognize this after the last 3 years.

 

In case you didn’t get the message from China’s President last week, the rest of the world is starting to bet against America’s currency too:

  1.  President Hu called the US Dollar reserve system “a product of the past”
  2.  President Hu warned that Americans need to keep the USD at “stable levels given implications to global liquidity and capital flows”

What he meant by that, Mr. Ber-nank, is global inflation being priced in US Dollars.

 

This morning you are seeing Global Inflation Accelerating continue to have its impact on major Emerging Markets:

  1. China was down another -0.68% overnight, taking it to -4.7% already for the YTD
  2. India was down another -0.95% overnight, taking it to -7.5% already for the YTD
  3. Brazil remains flat for the YTD and broken from an intermediate term TREND perspective.

Meanwhile, it’s not just emerging stock and bond markets telling you that US government sponsored Dollar Debauchery perpetuates inflation. India’s central bank Governor Subbarao just said at a ceremony in Mumbai that he is quote-un-quote “desperate” to cool inflation.

 

All the while, just to highlight the divide between our myopic Keynesian Consensus (that’s somehow patting itself on the back in Washington for “saving” us again) and Free Market Libertarians who are getting ready to move to Canada, consider these 2 American quotes from the last few days:

 

1.  “A more active government also attracts opportunists, who perceive that a national emergency can serve as a useful pretext for achieving their own objective.” –Steve Hanke (“On Democracy versus Liberty, GlobeAsia, February 2011)

 

2.  “Oh, and what evidence is there that the economy’s capacity is damaged during booms?” –Paul Krugman

 

Sadly, the unaccountable Big Government Intervention Bubble Making Machine of the Krugman camp dominates both the President and the Chairman of the US Federal Reserve’s craws. Before you know it, they’ll be asking to regulate food inflation in commodity markets. At least that’s what France’s Nicolas Sarkozy said he wants to do this morning. C’est la regulated socialist market vie!

 

Dear Mr. President, it’s Game Time, and this Burning Buck stops with you.

 

My immediate term support and resistance lines for the SP500 are now 1285 and 1295, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Last Entitlement - respect


Tales from Tunisia

This note was originally published at 8am on January 20, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The darkest thing about Africa has been our ignorance of it.”

-George Kimble

 

Tunisia is the northernmost nation in Africa.  This African outpost of some 64,000 square miles and 10.3 million people is bordered by Algeria to the west, Libya to the southeast, and the Mediterranean Sea to the north and east.  While religious freedom is widely practiced in Algeria, the Tunisian Constitution declares Islam as the official state religion.

 

By global economic standards, Tunisia’s economy is not meaningful.  The nation’s GDP is ~$43.8BN (official exchange rate), which is about 1/8th of the market cap of Apple (currently there are no Apple stores in Tunisia).   The Tunisian labor force is split by occupation as follows: 18% agriculture, 32% industry, 50% services.  Currently that labor force is unemployed to a tune of 14%.  Coincident with this unemployment is rising inflation (CPI from 2009 to 2010 accelerated from 3.5% to 4.5%) and slowing growth (GDP from 2008 to 2010 slowed from 4.6% to 3.4%).  At Hedgeye, we call this Jobless Stagflation.

 

In the West, endemic Jobless Stagflation is fought by the populous at the polls, as we saw in our most recent midterms in the United States.  In nations like Tunisia, the populous often uses other methods:    most recently it was massive rioting and protests, which began on December 17th with the self-immolation of Mohammed Bouazizi (after police confiscated his unlicensed food stand) and ended on January 14th with current President Ben Ali fleeing the country for Saudi Arabia.

 

It seems that the people have spoken in Tunisia.  Now this could just be a Tale from Tunisia, or it could be an emerging Tail Risk from TunisiaOnly time will tell whether the so-called Jasmine Revolution becomes a key export of Tunisia, but there are many nations in the Middle East and Africa with similar characteristics - primarily Muslim, governed by a dictatorial family, slowing growth, rising inflation, high unemployment, and a young population. 

 

The last point on age is likely a key one.  In Tunisia, over half of the population is younger than 25 years of age.  Across the Middle East and North Africa, we see similar demographic patterns.  In demographic circles, this is called the “youth bulge”.  As healthcare broadly improved in these regions in the late 1960s, birth rates went up dramatically.  Currently, it is estimated that around 65% of the regional population is under the age of 30.  This is not a cohort that likes to be unemployed, appreciates costs of living rising exponentially, and, as evidenced by The Jasmine Revolution, is willing to stand idle while their leaders do them harm.

 

Ultimately, this revolution could start and end in Tunisia, and be of no greater impact, but there is certainly potential for much more, and as risk managers “the darkest” thing we could do is show “ignorance” of these facts. 

 

In the United States last night, we saw evidence of our most recent Democratic revolution.   In winning more than 60 seats in the recent midterms, the Republicans have certainly been acting like they have a mandate (even though we view that election as a repudiation of incumbency as much as anything).  Last night, as Keith noted in an email, “it began” with a vote on healthcare.  The House voted 245 – 189 to pass a bill to repeal President Obama’s health care plan.  Not surprisingly, the vote was unanimously supported by Republicans and the backlash from Democratic lawmakers was instant and aggressive.  The most noteworthy comment was from Representative Steve Cohen (D-Tenn), who said:

 

“They say it’s a government takeover of health care, a big lie just like Goebbels.”

 

It is likely no surprise that the US dollar is trading down on this news, with comments like Cohen’s, but also more broadly, as my colleague Tom Tobin noted this morning, “talking doesn’t get the job done.”  The new Republican majority in the House has aggressively gone after the Obama agenda, but in order for the dollar to respond favorably our elected representatives will have to do more than talk on the key economic issues facing the nation (namely the debt and deficit). 

 

On a more positive note, today at 1pm EST our Energy Sector Head Lou Gagliardi will be hosting a conference call on one of our most favorite long term investment regions, the Canadian Oil Sands.  His discussion is titled, “Digging Deep and Powering through the Canadian Oil Sands.”  Lou and his team have put together a 60+ page presentation that highlights the key attributes of the incredibly long term asset in Canada, with a focus on some of his best ideas in the region.  If you are looking for cheap ways to play energy and are a qualified institutional prospect, please email us at sales@hedgeye.com to join the call today.

 

Yours in risk management,

Daryl G. Jones

 

Tales from Tunisia - 3


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