R3: WMT, KCP, JCP, and ANF


February 4, 2010



  • In a marketing driven, fashion world sometimes it’s just better to remain silent.  Yesterday, Kenneth Cole used poor judgment by Tweeting that the “uproar in Cairo” is a result of the people hearing the company’s new Spring line is now available.  The backlash has already begun in full force, with the creation of a parody Tweet feed called KennethColePR which mocks the original statement.
  • Duane Reade and Walgreen’s watch out.  A new drugstore hybrid concept called Prime Essentials is about to open in NYC with high hopes of becoming a citywide chain.   The store looks to combine traditional drugstore offerings with groceries as well as home goods.  The first location opens in Tribeca next month.
  • According to a Harris Poll, 34% of Americans have no retirement savings and 27% have no personal savings.  Eighteen months ago the same survey produced modestly lower results, with 30% indicating no retirement savings, and 22% with no personal savings.



New York City Council Holds Wal-Mart Hearing - Wal-Mart Stores Inc. declined to attend Thursday’s New York City Council hearing on how its stores affect small businesses and communities, but it dropped off a petition with 30,000 consumers’ signatures in support of opening units in the five boroughs.  The hearing was spearheaded by City Council speaker Christine Quinn, a vocal critic of Wal-Mart, who is bent on preventing the retail giant from entering New York City.  Wal-Mart has yet to identify a site in New York, but has expressed interest in Gateway II, a shopping center near Jamaica Bay in Brooklyn that doesn’t require City Council approval.

Pasted from <WWD>

Hedgeye Retail’s Take:  We wonder if the media is taking this subject to new highs while at the same time WMT is methodically plotting its moves behind the scenes to amicably enter the NYV market.  While the issues at hand are union and job related, the reality of lower prices in one of the most expensive markets in the world may be overlooked by those who have actually never shopped a supercenter.


Low Inventories Hit January Comp-Store Sales - January exhibited the balancing act retailers face for all of 2011: keeping inventories lean, but not so low that they lose sales. Unfortunately, many stores last month cut back too much — and the harsh winter weather didn’t help matters. The International Council of Shopping Centers said retailers logged a 4.8 percent jump in comparable-store sales, which generally bested analysts’ estimates of a 2 to 3 percent rise. But it was clear some stores went into the month light on inventory and came out on the other end light on sales. <WWD>

Hedgeye Retail’s Take:   It would be hard to find a retailer complaining that they ran out of goods by the end of the holiday clearance season, only to come into Spring clean.  More interesting is that this scenario played out after what some viewed as a disappointing December. 


Modern Bride enters JC Penney's - Within the past week, Modern Bride bridal jewelry shops have popped up inside more than 1,000 J.C. Penney stores, recasting the category with a fresher, younger image and extending the retailer’s strategy of partnering with publishers in nontraditional ways. Modern Bride magazine was shut down in fall 2009, but Penney’s licensed the name from Condé Nast believing it still conveys brand authority. Penney’s executives also said the Modern Bride name could be seen in other wedding-related businesses, but didn’t specify. The assortment includes engagement rings and wedding bands for 24- to 30-year-olds

Pasted from <WWD>

Hedgeye Retail’s Take:   With marriage rates mostly consistent from year to year at around 2 million couples, it’s notable to see so much effort being put into the refreshing/reinventing the bridal business.   Recall that JCG, URBN, David’s Bridal, and now JCP are all upping the ante with new merchandising efforts.


BJ’s Surges as Board Decides to Explore Options, Sale - BJ’s Wholesale Club Inc. surged the most in almost three months after saying its board has decided to explore strategic options, including a possible sale.  The Westborough, Massachusetts-based retailer has hired Morgan Stanley as its financial adviser, according to a statement today. The company had a market value of about $2.35 billion as of yesterday’s close. BJ’s hired the investment bank last year after receiving an offer from private-equity firm Leonard Green & Partners LP, three people with knowledge of the matter said at the time. <Bloomberg>

Hedgeye Retail’s Take:  Now the question shifts to deal or no deal?  Clearly Sara Lee must give some pause to those who believe a sale is imminent. 


Gains Expected for Cosmetics- Mass cosmetics are on a roll. On the heels of 4 percent sales increases for 2010, retailers and manufacturers are confident the category is poised for another year of growth, possibly even outpacing last year. They cite expansion into global markets and heightened consumer confidence as the main drivers.  Carmen Bauza, vice president of beauty for Wal-Mart Stores Inc., said, “The customers are feeling enough is enough. We’ve dealt with this [recession] for two years and they’ve been able to manage through this environment. Customers have learned to manage their finances and to manage their priorities.” Bauza speaks from experience. She and other Wal-Mart employees are expected to live on a budget for a period of time so they know how far a dollar actually stretches.< WWD>

Hedgeye Retail’s Take:  While a bottoming in the consumers wallet may be in part the reason behind a mass cosmetics improvement, the quality of the products being sold at Mass may also be a driver as well.  Anyone notice the sales-assisted departments at TGT or CVS lately?

Canada's Aritzia Arrives in New York - As American retail’s migration north continues — Target recently said it will open stores in former Zellers units — Canadian retailer Aritzia is heading in the opposite direction.  A temporary location on the third floor of 524 Broadway and Spring Street will debut Sunday, a precursor to Aritzia’s permanent 10,000-square-foot bi-level unit opening in May.  Aritzia, a vertically integrated multilabel retailer for women ages 18 to 35, produces eight proprietary brands with names such as Wilfred and A Moveable Feast. All are designed in-house and are far from basic. “They’re there to stand on their own as individual brands and to complement the other brands,” said Brian Hill, chief executive officer. <WWD>

Hedgeye Retail’s Take:   A competitor to Scoop and Searle arrives on their home turf. 


Acushnet Sales Process Begins - Morgan Stanley has sent out marketing materials and non-disclosure agreements for the sale of Acushnet, the parent of Titleist or Footjoy, according to a report on CNBC. The number of potential suitors include Nike, Adidas, Callaway, Cleveland/Srixon parent Sumitomo Rubber and Mizuno. Callaway would likely have to partner with a PE firm to make an acquisition, the article stated. The first round of bidding will complete in late February. If bidding is less than desirable, an IPO-based spinoff of Acushnet could be the end result. <SportsOneSource>

Hedgeye Retail’s Take:  The interesting scenario surrounding this sales process lies within the fact that the potential buyers are amongst a very small group.  With very little growth in the industry overall, it will be interesting to see which strategic buyer views scale as a key driver of success despite that fact that owning multiple brands is likely cannibalistic.


The web grows almost six times faster than stores for Abercrombie - Sales were up across the board for specialty apparel retailer Abercrombie & Fitch Co. last year, but the Internet grew nearly six times faster than stores. For the fiscal year 2010 ended Jan. 29, Abercrombie, No. 65 in the Internet Retailer Top 500, reported:E-commerce revenue grew year over year 41.3% to $352.5 million from $249.4 million in fiscal 2009 and total sales increased year over year 18.5%. <InternetRetailer>

Hedgeye Retail’s Take:  E-com sales now top out at 10.2% of total, which puts the company in line with the historical averages for retailers with direct businesses. 


TODAY, FEB. 4, 2011 10AM EST


Valued Client,


5-10 minutes prior to the 10 AM EST start time please dial:

(Toll Free) or (Direct)
Conference Code: 569781#


To access the "Analyzing the Geopolitical Chessboard" materials please click here


To submit questions for the Q&A, please email .




Join Hedgeye's CEO Keith McCullough and Managing Director Daryl G. Jones, who will be joined by Yale Professor Charles Hill for a discussion of recent events in the Middle East and an analysis of the major risks associated therein. The topics being covered will include: 

  • What are the sources of the Jasmine Revolution? How important is inflation?
  • Is the Jasmine Revolution going global? If so, where should we look next for popular upheaval?
  • How will a change in Egyptian leadership (shift in power to the Muslim Brotherhood) shape U.S. influence in the region?
  • What is the future of the Arab and Israeli relationship?
  • Are their implications as it relates to Iran and nuclear proliferation?
  • As these events unfold, how will they impact global markets?  

Please contact if you have any questions. 



The Hedgeye Macro Team

This electronic mail transmission contains confidential information intended only for the person(s) named. Any use, distribution, copying or disclosure by any other person is strictly prohibited. If you received this transmission in error, please notify the sender by reply e-mail and then destroy the message.


With normal hold, MBS would’ve missed the Street.  Relative to estimates, Singapore is no longer the positive outlier and that is the crux of our thesis.



LVS posted a strong Q4, at least relative to consensus.  The problem is that whisper numbers were higher.  With an 18x EV/EBITDA multiple, estimates need to go significantly higher to grow into the multiple.  That is the issue we have with this stock.  For the first time in 5 or 6 quarters, our estimates are not 20% or so higher than consensus.  In fact, if hold was normal across its Asian properties, LVS would’ve missed the consensus EBITDA projection.


Absent from the conference call discussion was the high hold, although management did volunteer a lot of commentary regarding the low hold at Four Seasons.  In terms of our expectations, the high Mass and VIP hold at MBS was not anticipated.  We estimate it contributed almost $20 million of incremental EBITDA.  Even with the high hold, the upside to our estimate was only 1% at the property which leads credence to our view that EBITDA upside may be restricted to Macau and there are better ways to play Macau.

Las Vegas

Vegas revenues of $310.6MM were 2% below our estimate while EBITDA of $80.6MM was$3MM better than our estimate.  As mentioned on their conference call, Sands has implemented a shift in strategy in Las Vegas by cutting promotional spending and comps.  While this negatively impacted RevPAR stats, this strategy seems to be paying off on the bottom line.

  • Promotional spending as a % of GGR declined to 18.4% this quarter from a 32% average YTD run rate.  We’re guessing that the lower occupancies and GGR were negatively impacted by this decline.
  • Total operating expenses increased 11% YoY to $230MM (compared to $232MM in 3Q10) and $207MM in 4Q09



On an aggregate basis, higher than normal hold across Mass and VIP revenues benefitted Macau revenues and EBITDA by $16MM and $18MM, respectively.


Sands revenues of $319MM were $2MM above our estimate while EBITDA of $93.4MM was $13MM better than our estimate. 

  • While net gaming revenues were spot in-line with our estimate, non-gaming less promotional spending was $2MM better.  Promotional spending declined to 3.4% of net casino revenues from a YTD average of 4.2%
  • Normalizing for slightly high hold, revenues would have been $14MM lower and EBITDA would have been $2MM lower
  • Direct play was 15%, up from 14% the last 2 quarters
  • While we won’t know until the Sands China quarterly release is out, we suspect junket commissions were lower this quarter
  • Fixed costs were also $5MM below our estimate

Venetian revenues of $661.5MM were 0.6% above our estimate while EBITDA of $235.6MM was 10% better than our estimate. 

  • Direct play decreased to 19% of total VIP RC from a range of 21-24% YTD. We assumed that the direct play would be in 23% - in-line with the last 2 quarters, which is why our hold rate assumption was 8bps lower.
  • If we were to use the mid-point of LVS’s normal VIP hold of 2.85%, revenues and EBITDA would have been $17MM and $3MM lower, respectively
  • Mass drop only grew 6% YoY, lagging Macau mass market table revenue growth of 31%. Mass hold of 28.2% almost 4% above the prior 7 quarter average.  Using the prior 7 quarter average, gaming revenues would have been $36.5MM lower and EBITDA would have been impacted by about $22MM
  • Net gaming revenues were $12MM below our estimate but were more than offset by higher non-gaming and lower promotional expenses
  • Same with Sands, we suspect junket commissions were lower this quarter at the Venetian
  • Fixed costs were also $5MM below our estimate

Four Seasons revenues of $92MM were 13% below our estimate while EBITDA of $12.2MM was $9.6MM lower than our estimate. 

  • Direct play was 54% - higher than the 43% we had estimated.  As a result, hold was a lot lower than our 2.17% estimate – which accounts for the majority of the EBITDA miss vs. our estimate
  • Low VIP hold negatively impacted revenues by $60MM and EBITDA by roughly $14MM.
  • Mass drop appears to have plateaued at $99MM since 1Q2010.  Mass hold of 33% was 8% above the 11 quarter trailing average of 25%.  Using the 11 quarter average, revenues would have been $8MM lower and EBITDA would have been $5MM lower.
  • Net net hold issues negatively impacted revenues by $52MM and EBITDA by $9MM


MBS revenues of $558MM were in-line with our estimate, while EBITDA of $306MM was 1% better.

  • While slot handle was better than we estimated, mass drop and VIP RC were weaker
    • RC volume actually decreased by 21% QoQ
  • “Normal” VIP hold of 2.85% would have negatively impacted revenues by $21MM and EBITDA by $10MM
  • “Normal” Mass hold would’ve negatively impacted Mass EBITDA by $8-10MM
  • Non-gaming revenues were $3MM higher than our estimate while promotional was $3MM lower
  • Rebates were 1.31% ( flat to 3Q)
  • Fixed expenses were $153MM (vs. $148MM in 3Q)

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

  • Kraft’s lawsuit over Starbucks’ plan to end an exclusive distribution agreement will receive expedited review from the U.S. Court of Appeals for the Second Circuit.  SBUX says that Kraft violated several provisions of the pact, like properly stacking shelves with its coffee, which allows it to end the deal. SBUX is trading well despite commodity pressure.
  • GMCR gained on accelerating volume following strong earnings results after the close on Wednesday.  This was a day in the sun for GMCR but SBUX, in my view, will take more and more of their market share as time goes on.
  • CHUX reported its sixth straight quarterly loss as higher commodity and operating costs weighed on margins.  4Q revenue came in at $183.5m versus an expected $185m.  The company guided to revenue of $260-$266m for 1Q versus consensus at $267.4m.
  • DRI increasingly likely to buy a new chain over the next couple of years, according to Janney Capital Markets.  California Pizza Kitchen, BJ’s Restaurants, and Yard House are three of the chains mentioned in the report.  DRI might buy something, but not any time soon.
  • BWLD appointed James Schmidt to the newly-created position of chief operating officer, with immediate effect.
  • WEN is the best performing QSR stock over the past week and up every day since the analyst meeting on big volume.
  • DPZ declined on accelerating volume.  The stock received some publicity lately with SAC buying shares but we see three quarters of difficult top line compares and cheese prices up 33% YTD and 19% YoY.
  • MCD releasing sales on 2/8.  The company guided to 4-5% global same-stores sales.  The USA continues to slow, Europe accelerated sequentially and APMEA slowed sequentially.



Howard Penney

Managing Director

Known Unknowns

"Reports that say that something hasn't happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns -- the ones we don't know we don't know.”

-Donald Rumsfeld


A few nights ago, I participated in a panel on CNBC’s The Kudlow Report to discuss the outlook for the U.S. equity markets.  Interestingly, my co-panelists were an actor, Tommy Belesis, who was featured in Wall Street II and Lee Munson, who is not an actor, at least professionally, but is a veritable Jim Carey wannabe.  Larry asked all three of us about Egypt and both of my co-panelists suggested the spread of democracy would be a great thing for the markets.  Call me a nerdy hockey player from Yale, but my response was a bit more nuanced.


Stepping back for a second, I tend to agree that the proliferation of democracy is a positive force in this world.  (Hopefully that goes without saying.)  From a pure geo-political risk perspective, there are very few examples of modern democracies going to war.   Thus, the more democracies there are globally, the more likely it is that there will be less armed conflict between nation states.  This is a positive when considering a risk premium to apply to certain equity markets.


As it relates specifically to Egypt, the view I articulated the other night is that the outcome is very uncertain.  We don’t know that this is the onset of flourishing democracies in the Middle East.  Further, we don’t know what the unintended consequences of a regime change in Egypt will be.  As Former Secretary of Defense Rumsfeld notes above, the outcome of this historic last month of protests in the Middle East is, at best, a “known unknown.”


The benefit in having our headquarters at the Taft Mansion on Yale’s Campus is more than just easy access to Yale Hockey games at historic Ingalls Rink, but also easy access to Yale’s academic engine.  To the last point, we are hosting a call at 10 a.m. for institutional subscribers and prospects with Yale Professor Charles Hill.  The title of the call is “Analyzing the Geopolitical Chessboard: Is This Checkmate for American Influence in the Middle East?” If you’d like to join us for the call, please ping sales at .


Rather than acting, we decided to bring in an expert to discuss the situation in the Middle East and North Africa.  Professor Hill teaches the Grand Strategy class at Yale, and is the former Chief of Staff of the State Department, an advisor to former Secretary of State George Shultz, and former Secretary-General of the United Nations Boutros Boutros-Ghali.  Needless to say, Professor Hill forgets more foreign policy strategy in a day than most of us will ever know.


Currently, the primary issue as it relates to U.S. foreign policy in the Middle East is centered on the future of Egypt, which has been a long standing ally of the United States in the region.   After the 1973 Arab-Israeli War, Egyptian foreign policy shifted under Anwar Sadat, who opted to pursue a peace process with Israel, which he believed was in the best long term interest of Egypt.  As a result, the U.S. has been a major sponsor of both military and economic aid to Egypt.  In fact, Egypt is the second largest non-NATO recipient of military aid from the United States after Israel.


From an economic perspective, Egypt is the 27th largest economy in the world and, perhaps more importantly, controls the Suez Canal, which connects the Mediterranean and Red Seas.  The key benefit of the Suez Canal from a global economic perspective is that it allows water transportation from Asia to Europe without the need to circumvent Africa.  In aggregate, the Suez Canal carries almost 8% of the world’s sea trade.


Egypt’s strategic and economic importance can obviously not be understated in global affairs, and whilst it is difficult not to support popular protests against a non-Democratic regime, such as the one run by Hosni Mubarak in Egypt, as risk managers we also need to understand the alternatives.  If Mubarak was nothing else, he was a strong American ally in the region.


The debate over the future of Egypt currently centers on the role in which the Muslim Brotherhood will play.  The Muslim Brotherhood is the world’s largest and oldest Islamic political group, and was actually founded in Egypt in 1928.  Currently, the Brotherhood is banned in Egypt, but in the post-Mubarak era, the Brotherhood will have a role which could shift Egyptian foreign policy quite dramatically.  In fact, a leading member of the Muslim Brotherhood, Muhammad Ghannem, recently said to the Arab Press, “The people should be prepared for war against Israel.”


There are some that believe the Muslim Brotherhood is an effectual organization.  This was best articulated by Scott Atran, author of "Talking to the Enemy: Faith, Brotherhood and the (Un)making of Terrorists", in the New York Times yesterday when he wrote:


“Ever since its founding in 1928 as a rival to Western-inspired nationalist movements that had failed to free Egypt from foreign powers, the Muslim Brotherhood has tried to revive Islamic power. Yet in 83 years it has botched every opportunity.”


On the other side of the debate is Dr. George Friedman from STRATFOR who recently wrote:


“The demonstrations open the door for the Muslim Brotherhood, which is stronger than others may believe. They might keep the demonstrations going after Hosni leaves, and radicalize the streets to force regime change. It could also be the Muslim Brotherhood organizing quietly. Whoever it is, they are lying low, trying to make themselves look weaker than they are — while letting the liberals undermine the regime, generate anti-Mubarak feeling in the West, and pave the way for whatever it is they are planning.”


As for where Hedgeye stands, we covered our short Egypt position yesterday (via the etf EGPT) in our Virtual Portfolio.

Keep your head up and stick on the ice,


Daryl G. Jones

Managing Director


Known Unknowns - mass

CHART OF THE DAY: A Known Assumption --- Geopolitical Risk is Over After Egypt



CHART OF THE DAY: A Known Assumption --- Geopolitical Risk is Over After Egypt -  Chart of the Day

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