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R3: M, H&M, SKX, FitFlops


January 26, 2010





  • Check out Macy’s promotion at its Herald Square flagship which puts a live human comedian with a habit of sleepwalking in one of the company’s streetside storefronts.  The pr stunt is a collaboration between Downy and Macy’s aimed at promoting Macy’s bedding and Downy’s fabric softener.  The sleepover begins toay.
  • After a home-run collaboration with Lanvin, H&M is following up the collection with a line called “Waste”.  The extremely limited distribution, 10 piece line will be constructed entirely of leftover fabric scraps from the Lanvin production.  Unfortunately for fashionistas, the collection will only be available in one store in the US (5th Ave), which suggests there wasn’t enough “waste” to produce a larger run.
  • With Skecher’s expecting to drive a resurgence in toning momentum via its Kim Kardashian Superbowl commercial, we hope the game remains close. As it stands now, the company’s spot is slated to air after the two-minute warning in the fourth quarter.  If the game were to be a blowout, it’s fair to say the 100 million expected viewership may dwindle measurably by the final minutes.
  • It was only a matter of time until a company or brand stepped up to give Michael Vick a second chance. Unequal Technologies – a maker of shock-blocking material used in football pads amongst other products – has done just that announcing a 2-year endorsement contract. After wearing the company’s technology following a rib-injury in the playoffs, Vick is a great fit offering the company battle tested credibility. While we don’t expect the endorsement offers to come pouring in, don’t be surprised to see other small brands/companies start taking shots with one of the game’s more dynamic players.



Bloomingdale's Gives Handbags a Makeover - Bloomingdale’s has swept away the confusion and congestion that greeted customers entering its 59th Street flagship in Manhattan with a sophisticated venue for designer handbags and leather goods. The project, a 12,500-square-foot space on the Lexington Avenue side of the store, calls out European and American labels with individual shops bearing the brand’s signature touches. It also takes a top-selling business to a new level. “Designer handbags and our fine leather business was one of our strongest categories all last year, along with fine jewelry,” Michael Gould, Bloomingdale’s chairman and chief executive officer, told WWD. “We feel good about it. We keep on pushing.” <WWD>

Hedgeye Retail’s Take:   If you haven’t been to the Bloomies flagship in a while, it’s worth a visit.  This is what a modern era department store should look like with proper reinvestment over time.


Macys.com makes free shipping standard - To sum up Macy’s new attitude toward free shipping: To beat ‘em, join ‘em. Macy’s Inc. will begin shipping all online orders at Macys.com of $99 or more for free tomorrow. Most orders that fall below that threshold will be shipped for an $8 flat fee, the company says. The new free and reduced rate shipping options from Macy’s is the latest in a series of initiatives from big online and multichannel retailers to match the success of Amazon Prime, which charges subscribers a $79 annual fee for free standard shipping on all purchases made directly from Amazon.com. <InternetRetailer>

Hedgeye Retail’s Take:  It appears that free shipping is here to stay following a holiday period which was highly dependent on such a strategy.  Good for the consumer, for sure.


Ron Burkle Trims American Apparel Stake - Financier Ronald Burkle is backing away from the embattled American Apparel Inc. Burkle sold off 909,500 shares of American Apparel for $1.4 million this month, leaving him with 3.4 million shares, or 4.3 percent of those outstanding, according to a filing with the Securities and Exchange Commission Tuesday. The investor paid $5.9 million for a 6 percent stake in the company in June. So far, Burkle’s managed to make a return on his investment — having paid an average price of $1.38 a share to build the stake and selling shares at an average price of $1.55. Based on those averages, his profit on the shares just sold would be just under $155,000. <WWD>

Hedgeye Retail’s Take: Even in its fragile state, American Apparel still manages to make it into the news.  Clearly not the “turnaround” Burkle was banking on.


Coty Inc. Gets Funding from Investors - Coty Inc. may be moving plans for an initial public offering to the front burner again. Speculation about a possible IPO by the beauty firm whirled Tuesday in light of a cash infusion made into the company by two private equity firms. Berkshire Partners, based in Boston, and Rhône, which has offices in New York, London and Paris, made minority equity investments in the $3.6 billion Coty. Each of the investors will be represented on its board. Details of the transaction were not disclosed. <WWD>

Hedgeye Retail’s Take:   One to watch for sure, with a portfolio that includes the holy grail of fragrance, Calvin Klein. 


Retail Theft a Growing Issue - The cost of retail crime has skyrocketed. That’s because studies on and the reporting of retail crime have been extremely segmented. Retail loss prevention and law enforcement experts believe that if taken together, the figure would be more than $60 billion. For example, a $33.5 billion figure cited in the 2009 National Retail Security Survey from the University of Florida refers only to shrinkage, the industry term for internal theft that includes shoplifting and accounting errors. Organized retail crime involving stolen property transported across state lines accounts for $30 billion in annual losses, according to the FBI’s Web site. Neither report takes account of check kiting and credit card or gift card fraud. <WWD>

Hedgeye Retail’s Take:  So is it growing or is just being measured more effectively?  Either way, a tough economy is usually grounds for an uptick in theft.  Clearly still a huge opportunity to recoup even a small part of the $60 billion walking out of retailers each.


FitFlop Appoints CEO - FitFlop, the rocker-bottom sandal company, has appointed Suzie de Rohan Willner as chief executive officer. She was formerly director of global merchandising retail and head of international headquarters in London for Puma. She has also previously worked at Timberland, Dockers and Levi Strauss. Rohan Willner will be based at FitFlop's London headquarters. Founder and Creative Director Marcia Kilgore announced the appointment, effective immediately, late last week. The CEO is a new position for the company. <SportsOneSource>

Hedgeye Retail’s Take:  This may be the first company we’ve seen with the “CEO” position being described as a new one.  Either way, Fit Flop continues to sit on the fringe of the toning category and has yet to make a dent in the share held by Skechers and Reebok despite having an early lead.


Consumer Confidence Rises in January - Consumers began the year in an upbeat mood, sending the Conference Board’s Consumer Confidence Index up 7.3 points to 60.6, its best mark in eight months. Both components of the Index also saw gains, with the Present Situation Index rising to 31 from 24.9 last month and the Expectations Index increasing to 80.3 from 72.3. The overall figure and Expectations numbers were the highest since May, when they stood at 62.7 and 84.6, respectively, and the Present Situation measure the highest since the 42.3 registered in November 2008, two months after the financial meltdown.

Pasted from <WWD>

Hedgeye Retail’s Take: Certainly a notable positive in aggregate, but keep in mind that ICSC chain store sales reported a third straight decline down 1.2% suggesting that consumer demand is mixed at best.


Social Network Users Are Satisfied with Privacy Options - Facebook is as well known for its privacy flubs as for its massive user base, and it’s not the only social media site with this problem. But research suggests that users may be OK with how privacy works on social networks and feel comfortable dealing with the problem themselves, by using the sites’ privacy settings. Harris Interactive found in a December 2010 survey of US social media users that nearly four in five (78%) believed they could prevent “potentially negative experiences” dealing with social media activity by using their privacy settings. <eMarketer>

Hedgeye Retail’s Take: I’m surprised how many users are this positive when it comes to controlling their own privacy online – it comes down to what information is offered in one’s profile. In this case, the adage of ‘less is better’ certainly applies.


R3: M, H&M, SKX, FitFlops - R3 1 26 11



Athletic Apparel Sales Reaccelerate

Underlying trends for athletic apparel remain strong with sales reaccelerating after a meaningful slowdown last week. The rebound was less significant than we had expected, however given unprecedented weather disruptions year-to-date, the reacceleration should be viewed positively on the margin. In looking at the regional trends in greater detail, there was a notable divergence between sales in western regions (Pacific and Mountain) compared to reaccelerating trends across all other regions – particularly the South Atlantic and South Central. While the national weather data suggests more precipitation out west than average last week, we suspect year-over-year comparisons to be the cause for underperformance.  


Lastly, given disruptions over the last few weeks we expect to see continued acceleration in sales next week. With the final two weeks of the retail calendar accounting for 40%-50% more sales volume compared to the 1H of the month, January’s monthly performance will fall largely on the shoulders of next weeks’ results.


Athletic Apparel Sales Reaccelerate - FW App App Table 1 26 11


Athletic Apparel Sales Reaccelerate - FW App Reg 1 26 11


Athletic Apparel Sales Reaccelerate - Weather 1 26 11


Casey Flavin

Early Look

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Notable news items/price action over the past twenty-four hours.

  • Despite the continuous upward trend in wheat prices, PNRA and BAGL gained on strong volume.
  • PZZA and DPZ are up despite cheese prices gaining 8.2% week-over-week
  • GMCR declined on accelerating volume.  SBUX wants K-Cups’ 70% share of the instant coffee market.
  • A HedgeyeEdge favorite, EAT, surged 11.3% on accelerating volume after investor confidence in the turnaround story grew.
  • Other casual dining names gained on the solid results from EAT. CAKE, DIN, TXRH, BWLD and CPKI all saw a gain in share prices.  I find that interesting given that we know, via Malcolm Knapp’s casual dining sales data, that casual dining sequentially slowed during 4Q10.
  • MCD share price ticked up slightly on the day with weak volume.
  • MCD has announced that it will accept contactless payment at its 1,200 restaurants throughout the UK, making it one of the first tier-one merchants to implement the technology in the country.
  • According to adage.com, the most “checked-in” merchant last week was Starbucks with 151,000 last week, followed by McDonald's with 51,000, according to Foursquare check-in data.




Howard Penney

Managing Director


Analysts are blaming the January RevPAR slowdown on the weather. We remain more concerned with the shock of potentially negative RevPAR growth in June/July.



January RevPAR growth in the Upper Upscale segment has only averaged +3.5% YoY, versus 10% and 5% in November and December, respectively.  Usually, we see the weather excuse used by retail and restaurant companies but give the analysts a pass.  Besides, we are less concerned with YoY comps given the wild volatility in RevPAR over the past three years.  Rather, we prefer to track RevPAR on a sequential, absolute dollar basis, adjusted for monthly seasonality.


Through this lens, we saw a major spike in RevPAR during the spring and early summer of 2010 – pent up demand in our view – followed by a drop off in August/September and stagnancy through the rest of the year.  Of course, the YoY comps told a different story.  2010 RevPAR ended up almost 6%.  But as shown below starting in August 2010, RevPAR has either been underperforming or slightly above depressed seasonal expectations.




The analysts not focused on dollar RevPAR will be shocked when there is a marked slowdown in RevPAR growth post the February peak.  In fact, RevPAR was so strong in June and July that we could actually see RevPAR go negative, assuming there is not a meaningful sequential pick up.




If we are right, the slowing comps will have negative earnings ramifications relative to Street Q2 and Q3 estimates.  Of course, if January’s significant slowdown is related to anything more than just weather, the downside will be that much more severe.


Another strong week of price gains for commodities tracked in our commodity monitor.  Here besides the table below detailing the moves, here are a few takeaways I think are relevant.


1)  The increase of cheese prices continues, now up 23% YTD and gaining 8.2% on the week.  As I wrote in last week’s note on commodity costs, this is significant for CAKE, DPZ, and CMG among others. 

  • CAKE COGs raised by 50 basis points last quarter largely due to pressure from cheese and dairy costs.  CAKE’s commodity basket remains exposed and, week-over-week, the move in cheese (and dairy) prices is bad news for their margins.
  • DPZ margins were negatively impacted by rising cheese prices in 3Q10.  The company is facing difficult comparable restaurant sales compares over the next few quarters and gaining leverage over these rising cheese prices in the first quarter, facing a 14.7% comp last from 1Q10, may prove difficult.
  • CMG, as I wrote last week, seeks to source as much of its ingredients as possible from local and organic sources which means margins face significant exposure to commodity headwinds.  The company has been impressive in terms of its offsetting commodity costs with operational initiatives inherent in its business model.  Given the magnitude of commodity cost increases, operational efficiency may not insulate CMG’s bottom line from cost inflation in perpetuity.

2)  Coffee declined once again but, behind wheat and corn, remains on the podium as far as year-over-year changes go. 

  • SBUX reports today and they may take some comfort in the week-over-week decline in coffee prices along with the continuing pain of 66% year-over-year inflation in coffee prices.

3) Favorable chicken wing prices continue: good news for BWLD.  See chart below.










Howard Penney

Managing Director

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