According to ICSC, chain store sales continued their weak start to 2011. In the latest week, sales fell 1.2% although year-over-year growth improved to 2.8%.  This was the third straight decline and the second largest one and since wintry weather has hit us (again), the inclement conditions were to blame for the weakness.  While growth of 2.8% was the second weakest in seven weeks, it was well above the prior week's 1.4%.


As a result of the weakness, the ICSC lowered its forecast for growth in January to about 2%. It was previously forecasting growth of about 2.5%, below December's 3.1% and the slowest growth since October.  Consistent with our view of consumer spending in 1H11, comparisons remain difficult.  While the Social Security tax cut provides upside risk to this outlook, the timing depends on how quickly the changes can be implemented.


On the positive side consumer confidence rose in January to the highest level in eight months! The Conference Board’s index of sentiment increased to 60.6 from a revised 53.3.  While this is a net positive today, a continued improvement in optimism and an improving labor market are needed to keep the momentum going. 


Is it sustainable?


Working against the potential for continuous improvement in confidence and consumer spending are declining home prices.  As our Financials analyst, Josh Steiner, noted in a note this morning, home prices are falling and he expects this to persist at an accelerating year-over-year rate through July 2011, and will continue to fall in absolute terms thereafter.


While the sales numbers may have been slowed by snowy weather in large parts of the country, overall sales trends remained constrained by weak-but-improving consumer fundamentals.  Specifically, the moderation in private sector job growth in the last two months highlighted that the labor market remains a drag on spending despite the drop in unemployment in December.


Meanwhile, wage income is generally improving, but only gradually and from a low base and most consumers are, voluntarily or involuntarily, not accessing credit to finance consumption.  As a result, expedited improvement in the labor market is needed to generate the necessary wage income to support spending.


Inflation is also a risk.  Gasoline prices continue to rise and are a drag on spending.  The average price gasoline has risen for eight straight weeks and was $3.16 per gallon last week.  Higher energy prices particularly hurt lower-income households who spend more disposable income on energy needs.


One of the key tenets of our Consumer Cannonball theme was the phasing out of government supported income payment.  While the government contribution to income growth dropped to essentially zero at the end of 2010, this has changed in early 2011 when Social Security withholding declined as a result of the tax bill. 


It is now consensus that sales growth in 2011 will accelerate thanks to the renewed government support.  Despite the uptick in confidence, weak fundamentals will remain a constraint and the government support will have a fading impact as we go through 2011, keeping consumers cautious and putting a governor on growth.  Furthermore, the decline in home prices is likely to dampen sentiment, particularly in the event that rates increase.


Despite today’s uptick in confidence, consumers will not lead the recovery in the near or intermediate term.


Howard Penney

Managing Director


THE CONSUMER’S MIXED SIGNALS - housing vs consumer


Brinker put up a strong number that didn’t blow the doors out from a comp perspective but certainly impressed on the margin line.


Brinker’s 2QFY11 results were strong, as I wrote this morning, and the earnings conference call suggested that the upside I am forecasting in comps is within reach.  Some interesting takeaways from the conference call:

  • Chili's guest feedback scores continue to improve with attentive service being a key component of the increase.  Management’s internal metrics are validated by what we see in external research when we compare ourselves to the competition.
  • The strong comp performance was largely due to the year-over-year compare not having very much 3 for $20 during the month.  Management stated that this was a sort of a preview of the effect they anticipate from the lapping of 3 for $20 after 10 week during this current quarter.
  • The kitchen retrofits have been yielding positive results and management stressed that the kitchen process has been simplified. Furthermore, the restaurant level margin improvement seen in 2QFY11 does not include the food prep benefit to labor costs because the changes were not fully rolled out until this month. 
  • Another labor initiative, team service, is working well for Chili’s.  Margins have been enhanced by this initiative and it has coincided with higher earnings for staff along with higher guest satisfaction stores. 
  • The outlook for continued comp acceleration is strong; the new lunch menu has tested strongly in three test markets with no advertising aside from some use of the company’s database.  While it is tricky to extrapolate the results of test markets to the broader system, I am confident that a broader rollout, complemented by a more robust advertising allocation, will perform strongly and bolster a traditionally-soft day part for Chili’s.
  • During a period of slowing top line trends for the casual dining category, EAT saw sequential improvement.  The Gap-to-Knapp, adjusting for the 53rd week, improved by 120 basis points from 1QFY11 through 2QFY11.


My conviction in this stock remains high and I believe further sequential improvement is to come on the top line as well as further margin enhancement.  Below is a chart showing Chili’s comparable restaurant sales and projections for the next two quarters.




Howard Penney

Managing Director

UK: Welcome to Stagflation Country!

Position: Short Italy (EWI); Euro (FXE)


We’ve been hitting on the fundamental trend of stagflation pressure in the UK for months now, however it’s now official given that Q4 UK GDP fell -0.5% quarter-over-quarter (vs +0.7% in Q3) as inflation (CPI) stands at +3.7% year-over-year.


While we applaud the austerity measures the UK government has issued to cut its public debt and deficit levels for its longer term outlook, over the medium term these measures will equate to slow (or negative) GDP. (Versus the previous year GDP rose +1.7% in Q4, a slowdown from +2.7% in Q3 Y/Y).


The UK Statistical Office said that without the impact of weather the Q4 number would have been “flattish”. However the reality remains that with a higher VAT (from 17.5% to 20%), job cuts (~500K over next 4 years), and ~£81 Billion in public spending cuts over the next 4 years, the citizenry is feeling the squeeze (or biting the bullet) so that the economy may see brighter seas 2-3 years out, a strategy we also firmly believe President Obama needs to implement in the US.


The major components that drove the UK’s GDP print Q/Q include:


Services                        -0.5%

Industrial Production      +0.9%

Manufacturing               +1.4%

Construction                  -3.3%


As stagflation rears its ugly head, we’re seeing headwinds for its main equity market, the FTSE 100. The FTSE recently broke our immediate term TRADE support level of 5978, with intermediate term TREND support down at 5790 (see chart). 


UK: Welcome to Stagflation Country! - FTSE100


We sold out of our position in Germany (via the etf EWG) in the Hedgeye Virtual Portfolio yesterday as the DAX flashed overbought on our TRADE duration; we remain bullish on the TREND duration. We remain short Italy (EWI) and the Euro (FXE); we would be shorting the EUR-USD at current levels, with a cover at $1.33.


Matthew Hedrick


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Game Time: US Dollar Levels, Refreshed



After writing about The Last Entitlement in this morning’s Early Look, I am getting a lot of questions surrounding what I am going to do with this US Dollar long position.


The questions are well-placed. To recap my current USD position’s history, we have positive P&L in the position effectively because we bought it at its most recent bottom (November 4th after the Midterms) in expectation of US fiscal reform. That said, most recently my patience with the Fiat Fools has once again run thin, and I now have this position on a very short leash.


While there is an immediate-term TRADE line of support at $77.80, that’s not good enough for me to stay in the game here trusting that professional politicians are going to do good by their word and cut spending. As long as the long-term TAIL and intermediate-term TREND lines of resistance in America’s currency credibility remain overhead, so will many globally interconnected consequences.


So tonight is the night – and watching the US Dollar lose its early morning gains here reminds me that the entire global currency market is betting that the President of the United States panders to the political wind of easy moneys and US Dollar Debauchery.


It wouldn’t be a new strategy – neither would my selling this long position and turning around immediately and shorting it.


Standing by,



Keith R. McCullough
Chief Executive Officer


Game Time: US Dollar Levels, Refreshed  - 1

COH: Questions Trump Answers

On an absolute basis, Coach’s F2Q was a pretty good quarter.  The topline was better than expected (NA comps up 12.6% vs. a whisper of 8-9%) and quarterly EBIT margins of 35.9% by all accounts remain tops across the entire apparel, retail, and luxury sectors.  Growth clearly remains the top priority for management with square footage expected to increase by 10% (vs. 8% LY) driven by aggressive expansion in China, new moves into Europe, and modest growth in the US supported by a resurgent men’s initiative.  Cash generation is also a strong point as it always has been.  The company ended the quarter having repurchased $388 million worth of stock, with $940 million on its balance sheet and no debt. 


The “growth” story and the cash are hallmarks of Coach and factors that certainly shouldn’t be ignored.  However good this may be, we come away from the quarter with more questions than answers on two fronts. First, is the Street really prepared for extremely challenging gross margin hurdles over the next three quarters after barely printing a gross margin gain of 15bps on an easy LY compare? And secondly, if SG&A growth remains high to support the company’s growth initiatives, will be there be meaningful earnings leverage in the near-term to satisfy those that are accustomed to consistent upside?  Couple these unanswered questions with the fact that inventories ended the quarter up 36%, a full 17 points higher than sales growth and we believe there may be more risk than reward in the near term.  While the SIGMA chart is not a perfect predictor by any means, this pattern is turning out to be a classic setup for future downside.


COH: Questions Trump Answers - COH S 1 11


Eric Levine


R3: SBUX, KSWS, VFC, Prada


January 25, 2010





  • 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 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  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.



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



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