Marty’s Competitive Overlap

Here’s an overview of which footwear retailers have the most geographic overlap with Marty’s, which filed Chapter 11 yesterday.

The verdict? Largest overlap (5-mile radius) goes to Foot Locker (6.6%), Payless (4.6%) and DSW (3.9%). Finish Line and Famous Footwear are around 2.5%. Skechers brings up the rear at 0.6% -- though we can’t ignore the $172k receivable on SKX’s books that is at risk.

I can debate whether overlapping a bankrupt competitor is positive or negative – i.e. will it lead to more promotional behavior if the retailer stays alive, or will it rationalize industry capacity?

The answer depends on duration, which is unknown for now.

More important than any direct impact on any of these peers, my view on all this is that it simply shows how high-cost retailers in a low margin business with structurally weak asset turns simply cannot cut it when the supply chain starts to stress out like we’re seeing today. There will be more Marty’s, Steve and Barry’s and Shoe Pavilion’s. I think that this particularly highlights the risk to DSW’s business model, as well as all components of Brown Shoe.

Unemployment Matters

Spurred by the casual dining traffic chart I posted yesterday, someone asked me a question earlier today about casual dining traffic trends and whether the more severe fall off in trends in July and August was a function of year-ago comparisons and could trends have actually bottomed. I charted the year-over-year traffic declines on a 2-year average and 3-year average basis, which shows that the declines have not stabilized, but in fact, have accelerated their move downward. Not surprisingly, these declines have coincided with the rise in unemployment rates.

As my partner Keith McCullough said on his portal on September 5th regarding August’s 6.1% unemployment rate, we are still in the early innings of an accelerating unemployment cycle. Unfortunately, as this number climbs, we should expect to see increased deterioration of traffic trends at casual dining restaurants because as this chart clearly shows, easy comparisons have not meant anything for some time now.


Pinnacle Entertainment pulled its application to build a $650 million casino resort in Wyandotte County, Kansas. The company beat the deadline to retrieve its $25 million deposit back from the state, a wise move in our opinion. While its pipeline of potential new projects is deep, PNK is actually committed to two: South St. Louis County (fully financed) and Sugarcane Bay (almost financed).

The risk factors of committing to Kansas were numerous: a dismal consumer outlook, potential smoking ban, high construction costs, and the likely removal of the $500 loss limit in nearby Missouri, to name a few. Most importantly, cost and access to capital make this (and most) projects untenable from an IRR perspective. This is consistent with one of our major themes: cost of capital is going much higher. I shutter to think what type of interest rate PNK would have to pay lenders to compensate for a 3rd definitive development in the pipeline.

get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

Goldman (GS): Staying Short

To me, this has been, and continues to be, the most straightforward secular short thesis in the Hedgeye Portfolio. Wall Street’s operating structure is in the process of changing, and those captive to its current structure will have perpetual headaches to deal with, including competing with Research Edge.

There was nothing that Goldman's CFO, David Viniar, said on the GS conference call today that convinces me that they are not operating under the same compromised, constrained, and conflicted structure that the industry is struggling with. Conversely, Viniar reminded us all that they are very much hostage to the investment banking cycle, and as captive as they have ever been to the volatility implied in their Principal and Prop P&L's. It would have been interesting to get one of their prop traders on the conference call – but these guys aren’t into the transparency thing.

Goldman Sachs is a compensation structure that is proving to make a lot of money in bull markets, and losing an undeterminable amount in down markets. They have not been public across cycles of economic crisis, so the jury is still out on how much money they can lose peak to trough. Today, they printed a down -40% number in their investment banking division and a nasty -67% one in their Trading & Principal division. While Viniar admitted on the call that they may take down risk in a "tactical" way, he refused to imply that they will change their strategies. They don’t consider risk in the same way that I proactively manage it, so this is confusing to me altogether.

There are levered long bull market strategies, and then there are those that can protect and preserve capital in times like this. Great investors evolve. Goldman's prop businesses sound like they don't think they need to. That's plain scary, and I am excited to wakeup competing them every day. They have nothing but market share to give us.

The stock has rallied from $118/share on the open. You should sell it here. On Sunday, my downside target was $147.43. As the facts change, I do, and after listening to their conference call today, I'm going to move that immediate target price to $117.72.


The Compromised Conundrum

The most interesting thing I see in the FOMC decision is that their decision no longer has any proactive solution. By managing the Fed funds rate reactively, they have put themselves in a box.

"Downside risks to growth remain"... "we expect inflation to moderate"... and oh, by the way "strains in the financial market have increased significantly"... Gee, thanks for the update.

The only real update here is reality. Reality remains that the Fed can’t do a whole hell of a lot anymore. With slowing growth and sticky headline inflation, cutting rates further makes the USA look more and more like Japan. The US economy is experiencing stagflation, and the only way out of it is by eventually raising rates like the rest of the world has.

Bernanke blew all of his bullets way too early in this financial crisis. He did not have a process to proactively predict current market risks.

Now, he is in a politically compromised box, feeling shame.

Chart of the day: British CPI, Accelerating!

This chart amplifies the point I was making in this morning's Early Look with respect to the dynamics by which British inflation can accelerate as their currency gets pounded (pardon the pun). As the US Dollar wins, the British Pound loses.

The UK's CPI was reported at a new sequential high of +4.7% y/y and was the highest number I see in the data set, going back to 1997. The chart tells a thousand words, and it will pressure the BOE not to cut rates, yet.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.