RL: Before The Quarter

Here we are again, waiting for another quarter from RL. And of course, the ONLY question I’m being asked is “How much will RL beat by given management’s sandbagging track record, and is it in the stock?”


The answer is they’re going to beat meaningfully. We’ve got ‘em at $1.52 vs. the Street at $1.29 (20%). Then we’ve got 4Q (Mar) at $1.28 vs. the Street at $0.88 (45%).


There are several factors to consider about this quarter.

  1. The company guided to high-teens growth in total company sales, and noted that Retail will lead that growth. Huh?
    1. They guided to high teens for Wholesale too. Fall rollout of Lauren handbags to 150 US doors is partially driving this.
    2. But we’re just at the point now where RL’s retail segment is larger in size than wholesale.
    3. Let me get this straight…two divisions of equal size accounting for 95% of revenue. One will grow high teens, and the other will be more than that. How does that equate to high teens for the parent?
    4. We think that Retail will grow by 30% in the quarter. Why?
      1. First and foremost, The Chinese and Korean licenses are both being folded into Retail – instead of wholesale like all previous licenses have been. Is this just accounting? An optical illusion to goose the perception of growth? Perhaps. But strip out 4% of a 23% top line growth expectation, and I’ll still be impressed.
      2. RL turned on its UK business in October. This alone should boost e-commerce as a percent of total from 3.5% to 5%. And yes, it carries an incremental margin north of 50%, and serves as the best avenue to flush out goods at end of season.


In aggregate, we have sales  growing by 23%. If we’re right on that, then in order to justify their ‘GM down 100bp’ guidance, we’d need to peg SG&A up near 30% in order to get closer to the consensus. That’s not going to happen.


Is it in the stock? RL saw record selling activity in December by several senior executives. Regardless of what the stats say, my sense from talking to investors is that there simply is no consensus on this name.  But one trend is clear in looking at other names in retail – investors are paying for top-line growth. RL fits right in.


I wouldn’t chase it here, as there’s admittedly not enough controversy in the name. But If we’re right with $6.13, $7.34, and $8.34 for the next three years, respectively, then it suggest 20% CAGR EPS growth with a bullet proof balance sheet. We never like pulling multiples out of the air – but the reality is that others will. Let’s use a number a bit below the growth rate. 18%, or 18x? It suggests $110 today (where the stock is), $130 in a year, and $150 in 2.




We’re not expecting a LVS sell-off as better relative volume growth and tame expectations could combine for a positive stock market reaction to earnings.



LVS dropped 9% the day after earnings were released.  The two issues we had with the quarter were that whisper expectations were way too high and MBS volumes dropped 20% sequentially.  On the other hand, the analysts seem to have little concern about the MBS performance despite the fact the property would’ve missed expectations with normal hold.  Less than a week after LVS reported its 4Q2010 results, one Asian analyst cut their target for Genting on fears that it too experienced a similar sequential drop.   While we have no illusions that Genting’s VIP volumes were up a whole lot, our belief is that they were at least in-line and possibly marginally better than 3Q volumes.


Our 4Q2010 projection of S$399MM EBITDA for RWS is marginally ahead of consensus, but given the sell-off in the stock, in-line should be good enough.  We believe Genting gained volume share from LVS.  Genting should also provide an update on their junket licensing progress.  Our understanding is that they are expecting approval in the first quarter and if they do, this could be a nice catalyst for Genting to grow their VIP business. 


October was the strongest month of the quarter by far.  November was slow, as seasonally expected. While December enjoyed huge foot traffic, high 90’s occupancies in the hotel and Universal ran at capacity, we don’t think that strong retail traffic translated to huge gaming volumes which is why this quarter is softer than many had initially hoped for and forecasted.  


Below are the details behind our projections for RWS:

  • Total net revenue of S$806.7MM
  • Non-gaming revenue of S$129MM
    • Room revenues of S$27MM (S$260 ADR & 85% occupancy); F&B and other revenue of S$29MM
    • S$59MM of park revenues (7,750 visitors per day)
  • Net gaming revenue of S$678MM
  • S$9.5MM/day in gross casino revenues
    • S$136.6MM of slot revenues (S$800/win per day)
    • Gross VIP revenues of S$470MM and net VIP revenues of S$272MM
      • RC Volume of S$16.5BN, 2.85% hold
    • Mass table revenue of $269MM
  • Variable expenses of S$243MM and fixed expenses of S$165MM essentially flat with S$163MM in Q3, which we think is a good reference for fixed expenses until RWS opens the west zone and marine park

Retail: China Rate Move is Material


Here’s a question the average Retail analyst is not asking, but should.  “What is the relevance of China’s move today to raise rates (again) by 25bps to 300bps above Fed Funds?”


Our Macro team has been all over how Asian (and even global) growth is slowing on the margin, yet global inflation is accelerating. As Keith put it this morning,


“…the Chinese and Indian governments are going to perpetuate this investment theme, as they do not get paid to be willfully blind to the effects of inflation on their common people over the long term. In other words, China is doing what it has to in order to address what Bernanke refuses to.


In the short-run, this is the pain that Asian central bankers are willing to impose on their stock markets. Over the long-run, seeing inflation destroy their sovereign bond markets, corporate margins, and their citizenry’s buying power is a really bad idea”


Will this immediately hurt US/European brands who will notice a near-term slowdown in demand in China? Our sense is that the answer is ‘probably not.’


Does it mean that it ups the ante for US companies looking to China to find cheap labor given that wage pressure and product costs have already resulted in higher product costs out of Asia? Probably.


The bottom line is that at any given time, China is incrementally exporting more inflation (to US) or importing inflation. Neither is a particularly comforting place to be. The best positioned companies are those who have a revenue base in China that is similar in size to its sourcing business. Being net neutral Yuan/USD is the lowest risk model. That’s Nike and Adidas. Ralph Lauren also screens well.


Other global brands/supply chain partners like Li&Fung, H&M and Inditex are probably Ok. 


US brands that sell 100% in the US and have 100% of product manufactured 8,000 miles away are – for the most part – in trouble. We still think estimates are too high out there by 10-20%.

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I can say with certainty that every restaurant operator has been looking at CMG restaurant level margins with sheer amazement.  Undoubtedly, the financial performance has been nothing short of amazing in FY10 with restaurant-level margins that are about 1000 bps above comparable companies on average (please refer to the chart below for more details). 


CMG ON ICE? - CMG ROP margin comp


The lines that make up the biggest difference between CMG and the competitors are Labor costs and Occupancy and other.  News has emerged via the Wall Street Journal that Immigration and Customs Enforcement (ICE) officials are scrutinizing CMG’s employment practices.  Following the company being forced to dismiss hundreds of employees in Minnesota, ICE is going to examine the eligibility of CMG employees in Washington, DC, and Virginia.  Perhaps this piece of news goes some way towards explaining the “magic” CMG formula for restaurant-level margin outperformance.  If it were proven that the company has not been paying appropriate wages, it could possibly shed light on where some, or all of, the 500 to 700 basis points difference in labor costs is coming from.


CMG is due to report 4Q10 EPS on Thursday, February 10 after the market close.


I expect the company had a strong quarter, with same-store sales up 9-10% and EPS that can easily beat the consensus estimates of $1.30.  Clearly a beat would not be uncharacteristic for this company, so I expect the 2011 outlook to be a primary driver of the stock’s performance.  While significant food inflation is a given for CMG in 2011, higher labor costs might not be completely factored in.


As we can see below, Chipotle’s outperformance of another burrito concept, Qdoba, is nothing short of remarkable.  It will be interesting to gauge Chipotle management’s tone on the earnings call with regard to margin outlook and, of course, to hear the reaction to the recent ICE news.


CMG ON ICE? - burritos


Howard Penney

Managing Director


The Melt-Up: SP500 Levels, Refreshed

POSITION: no position in SPY


For the sake of risk managers out there who still respect that mean reversion is one of the most powerful mathematical forces to consider in risk management, I think I may have to preface every note I write on the SP500 from this price and beyond with the fact that this has been the most expedited 24-month move (in price) in modern US stock market history (rivaled only by the 1936 rally, which obviously ended in tears with another Big Government Intervention strategy in 1938).


That said, that doesn’t mean markets can’t melt-up before they melt-down. And this one is melting-up, right here and right now – so our job is to deal with it. Let’s do that the way we always do, across our 3 core durations: 

  1. TRADE (immediate term) – bullish on a 2.5 standard deviation move to 1330 (the +3 standard deviation move I have been talking about is 1340);
  2. TREND (intermediate term) – assuming we get the 1330 print, I have -7.3% downside risk to my TREND line of 1233; that’s your mean reversion risk (next 3-6 months); and
  3. TAIL (long term) – don’t forget that all we are doing here (like they did in Japan) is using government leverage to inflate to another lower-long-term high. 

Now 1330 is -15% below the October 2007 all-time high, but +97% above its March 2009 low (that’s not a typo). So the question really comes back to the incremental buyers who are going to fly with Buzz Lightyear to 1340 and beyond: What’s are you playing for from that price – and, more importantly, what’s the intermediate-term mean reversion risk to that strategy?


For now, we’re leaning long in the Hedgeye Portfolio and I’m very worried about it. From here, I expect to take down exposure on the way up.



Keith R. McCullough
Chief Executive Officer


The Melt-Up: SP500 Levels, Refreshed - 1

R3: URBN, ADI, AMZN, Jimmy Choo


February 8, 2010






  • A sneak peek of Jimmy Choo’s men’s line is now available, with the company expected launch 16 styles in Fall 2011.  Prices won’t be cheap, with the lineup ranging from $595 to $1095.  Recall that Choo has been expanding beyond women’s footwear as the company contemplates and IPO.
  • According to the Pew Research Center, US desktop computer ownership has fallen slightly since 2006, as laptops have gained in popularity. Currently 59% of all adults own a desktop computer, and 52% own a laptop (76% own a computer overall).  In 2006, 70% of adults owned desktops while 30% had laptops.
  • Google Insights observed that shopping related searches picked up in the “heat” of recent snowstorms on the east coast.  Specifically, apparel retailers in Philadelphia actually saw a mid-week search peak on the 27th when they were in the middle of one of the worst blizzards.  Chicago and Dallas also prove to be noteworthy case studies where weather-induced boredom has helped to drive consumers towards ecommerce.    



Urban Outfitters Debuts Bridal Line - There’s not a single Cinderella-style wedding gown in the Bhldn collection. Bhldn, Urban Outfitters Inc.’s newest retail concept, is the firm’s attempt to put its unique, slightly off-kilter stamp on the bridal business. Rather than traditional gowns, Bhldn is more likely to make a large, lopsided taffeta bow the focal point of a dress, give a wedding gown an unfinished hem or cover elaborate pearl-studded flowers with a sheer layer of tulle so only a hint of the decoration is visible. There’s also a design component featuring items with a do-it-yourself sensibility, such as flower garlands that look homemade but are already put together, as well as glassware, serving pieces, candelabras, cake toppers and lanterns.< WWD>

Hedgeye Retail’s Take:    Official unveiling takes place on February 14th.  Head to now for a sneak peak of the brand’s aesthetic, which is very much an extension of Anthropologie (at least from the limited imagery so far).


Loehmann's Reorganization Plan Ok'd - Loehmann’s Capital Corp., which operates the Loehmann’s nameplate, expects to exit bankruptcy proceedings by March 1. A Manhattan bankruptcy court on Monday confirmed the company’s joint plan of reorganization, paving the way for its exit from Chapter 11 protection subject to its finalizing the terms for a $45 million exit financing facility. Loehmann’s said, “The plan was overwhelmingly supported and accepted by the company’s creditors who voted. The implementation of the plan will enable Loehmann’s to continue operating as normal.”  <WWD>

Hedgeye Retail’s Take:  Good news for loyal customers with one exception.  Credit and liquidity are key to the off-price business, which in turns fuels quality merchandising.  Loyalists are very much aware of how the company’s offering has suffered over the past several months.


Adidas Outdoor Collection - Adidas will bring its outdoor collection to the U.S. this fall, distributed through Agron Inc., a longtime partner and licensee of its accessory line. The 45-style footwear offering for men, women and children launched abroad two years ago and includes light performance hiking styles priced between $110 and $200, and a $230 multiday backpacking boot called the Super Trekking Formotion boot. Adidas also will deliver water and multisport styles to select retailers in June. That part of the line includes the men’s Speed Boat style that will retail for $75 and feature an easy-on EVA tongue top, and the colorful unisex Boat CC Lace shoe that retails for $65 and features drainage and Adidas’ Climacool upper. <WWD>

Hedgeye Retail’s Take:  Competition clearly heating up in the trail running/outdoor category with Adidas coming to market with an entirely new assortment.  Recall that The North Face, Merrell, Teva, and Timberland are all expanding their efforts in the category as well.

R3: URBN, ADI, AMZN, Jimmy Choo - r3 2 8 11


Big Retailers Let Their Amazon Channel Run Dry - Consumers can no longer buy products from Macy’s Inc., Inc. and Gap Inc. on Inc., as each of the three retailers has decided to pull their products off of’s marketplace in recent months. Ever since Inc. started letting other retailers sell through its e-commerce platform as third-party sellers, there has been a “swinging pendulum of support and pull-back” from major retailers concerned about the ability of Amazon, No. 1 in the Internet Retailer Top 500 Guide, to use marketplace retailers' sales information for competitive purposes, says Scot Wingo, CEO of ChannelAdvisor Corp., a company that helps retailers sell through their-party e-marketplaces. <Internet Retailer>

Hedgeye Retail’s Take:  Clearly with momentum on a standalone basis, retailers themselves are looking to regain control of their distribution.  We’re just surprised it took so long for many of these retailers to realize that a direct customer relationship is more valuable than third-party affiliate arrangements.


Consumer Credit Expands - Consumers and lenders felt good enough about the economy to expand credit card debt for the first time in 27 months in December, helping to push retail stocks to a 0.5 percent gain Monday. The Federal Reserve said outstanding revolving credit inched up a seasonally adjusted 0.3 percent to $800.54 billion in December, the first monthly gain since August 2008, just before Lehman Bros. collapsed and the financial crisis took hold. Total consumer credit grew for the third straight month. The S&P Retail Index rose 2.31 points to 509.53 as the Dow Jones Industrial Average gained 0.6 percent, or 69.48 points, to 12,161.63. Investors were also encouraged by a flurry of acquisition activity, including AOL Inc.'s $315 million deal to buy The Huffington Post. <WWD>

Hedgeye Retail’s Take:   Coincidence or just a case of holiday cheer?  While shrinking credit availability and usage has been a headwind for the US consumer, this slight change in trend is certainly notable.


Ocean Container Lines Foresee Potentially Tight Q3 - A rebounding U.S. economy will likely lead to a tight supply of vessel space and equipment during the peak third quarter shipping season, according to Transpacific Stabilization Agreement (TSA), which represents the major container shipping lines serving the Asian-U.S. trade.  The group said its forecast of 7-8% growth in container traffic for the Asian-U.S. trade indicates that additional ships now being delivered will be needed and well-utilized in the upcoming third-quarter, when Asian-U.S. shipping peaks. “After demand growth of more than 15% in 2010, we expect further growth in the 7-8% range for 2011,” said Y.M. Kim, President and CEO of Hanjin Shipping Co. “This continued cargo growth, from a much higher base, is in our view a very positive sign of recovery.” <SportsOneSource>

Hedgeye Retail’s Take: Recall that Q3 volume hit record highs in 2010 as retailers pulled shipments forward looking to shirk both spiking shipping and input costs so while full-year growth expectations are robust on top of a strong 2010, expect the majority of that growth to be front-end loaded.


Superbowl Commercials Underwhelm- Advertisers paid about $3 million for every 30 seconds of air time during the Super Bowl last night and used those pricey seconds to showcase their best creative efforts. Teen sensation Justin Bieber and heavy-metal icon Ozzy Osbourne hawked for Best Buy, Chrysler used Eminem to uncover Detroit’s soul and GoDaddy followed the hot chick formula that’s proven useful for the brand in the past. But one digital marketing expert says that marketers generally stumbled in connecting their TV commercials to their web assets in a way that would strengthen ties with consumers. “We were surprised that there weren’t more and better uses of digital,” says Dennis Bajec, chief creative officer of Resource Interactive, a digital marketing agency. <InternetRetailer>

Hedgeye Retail’s Take: This was a big year for advertisers looking to generate more than just a 30-second impression with pre-game efforts to ‘reveal’ spots directly on company/branded sites as well as post game promotions with the former representing a marked change from years past. In case you missed it, Volkswagen’s successful Star Wars inspired spot went viral in the week leading up to the game creating a significant buzz among parents of budding Lord Vaders.




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