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MCD rallied 2.6% yesterday, but on no volume.  Given yesterday’s strength, we added to our short position in MCD in the Hedgeye portfolio.  Were January trends a game changer for MCD?  I’m not convinced.  Yesterday, MCD reported that January systemwide sales grew 7.4%, or 6.7% in constant currencies, against an easy comparison.  As we move through the balance of the year, these trends will slow. 


As you can see from the first chart below, the street is forecasting accelerating sales trends as we progress through the year with little impact on operating profit margins from higher inflation.


We believe that the street’s expectations are very aggressive, as reflected by our 2011 estimates, as shown in the second chart below.  We expect to see earnings revisions through the balance of the year. 






Howard Penney

Managing Director

R3: GIL, DSW, ADI, and Kmart



February 9, 2010



  • Requiring registration for an e-commerce site before allowing consumers to make a purchase may actually do more damage than good.  According to a survey by Janrain, 75% of consumers will avoid creating a new user account for an e-commerce site, with 54% leaving the site or not returning, 17% going to a different site if possible, and 4% leaving/avoiding the site.  Of those that actually take the time to register, 76% admit to providing incorrect or incomplete information.
  • Kmart is pulling out all the stops to elevate its image as an affordable fashion apparel destination.  To coincide with NY Fashion Week (beginning tomorrow), the company is launching @KMartFashion on Twitter,  social brand channels on Facebook and YouTube, a Spring ad campaign in Vogue, and the launch of a Concierge service which will service 50 editors, bloggers and fashionistas over the course of the week.  At the end of the day, we still remain skeptical that Kmart’s image will benefit from such efforts.
  • Management of “basics” maker Gildan suggested the price of cotton is likely to come back to trading in a range of $0.90-$1.20 next year following a ‘soft landing.’  With prices currently near $1.80, it would appear that management is suggesting current level are at or near peak. Price increases at retail still remain the biggest wild card over the back half as elasticity has yet to be tested in the modern retail era.  Socks and underwear are definitely categories to watch.



Marc Jacobs Open Pop-Up Shop - Robert Duffy has been known to reshuffle his enclave of Marc by Marc Jacobs stores on Bleecker Street in Manhattan when the mood strikes him, and the 10th anniversary of the secondary line is as good a reason as any. As of yesterday, the Little Marc store at 382 Bleecker has been made over into a pop-up shop housing a capsule collection of Marc by Marc clothes (women’s and men’s) and accessories reissued for the anniversary; the space will be open for two weeks, selling pieces such as military jackets, flag-print dresses, belts with fruit buckles for girls and T-shirts and field jackets for boys.  <WWD>

Hedgeye Retail’s Take:  With a mini real-estate empire in the West Village, the company remains creative in its efforts not only merchandise creatively but also to continuously rebrand specific stores.  Imagine if retailers with multiple locations in the same mall mixed things up on a quarterly basis?


Retail Stocks Hit New Post-Recession Highs - Retail stocks hit fresh multiyear highs Tuesday as investors fostered hopes that the consumer resurgence seen in January would continue. The S&P Retail Index jumped 1.5 percent, or 7.6 points, to 517.13 — its best close since July 2007. The Dow Jones Industrial Average increased 0.6 percent, or 71.52 points, to 12,233.15, a level not seen since June 2008. Retail gainers included Urban Outfitters Inc., up 5.6 percent to $37.06; J.C. Penney Co. Inc., 4.9 percent to $35.03; Chico’s FAS Inc., 4.2 percent to $11.95, and Dillard’s Inc., 3.9 percent to $42.04. Vendors also picked up steam, and among those logging new 52-week highs were Under Armour Inc., which closed up 2.3 percent to $66.99; Fossil Inc., 2.2 percent to $78.21, and Polo Ralph Lauren Corp., 1.7 percent to $115.77. <WWD>

Hedgeye Retail’s Take:  History suggests that January sales do little to establish Spring trends.  With that said, there’s no denying the year ended on a positive note with inventories clean and clearance levels low.


Copenhagen Goes Back to Basics  - Offering toned down, classic collections devoid of glitter and frills, brands showing at the Gallery, CPH Vision and Terminal-2 trade shows here last week during Copenhagen Fashion Week expressed a focused, back-to-basics approach. “The party is over. It’s more basic and simple, we’re looking for good solid brands as customers are willing to pay for quality items that last,” said Anja Torjusen, a buyer for Moshi Moshi, which has three stores in Denmark. Torjusen lauded Surface to Air’s collection and the sailor jackets by American label Fidelity. “It’s about being honest and connecting with real women,” agreed Sam Jones, fashion director of Style Passport, a soon-to-be-launched British online store specializing in beauty and fashion items for stylish vacations. So far, around 50 labels, such as Anya Hindmarch and J Brand, will be stocked by the site, which is due to go live on March 8th. < WWD>

Hedgeye Retail’s Take:   Don’t ignore the trends out of Copenhagen, which is one of THE places that many retailers and designers look to for cues.  It’s way too early to call a trend, but certainly Gap and American Apparel would come to mind of basics are on the rebound.


Nike Taps Exec to Head Affiliates Group -  Nike has named a new head for its affiliate division. Roger Wyett, VP and CEO of Hurley International, will become president of Nike Affiliates, overseeing Cole Haan, Converse, Hurley International and Umbro. Prior to Hurley, Wyett served as global VP of apparel for Nike. He joined the company in 1994 and will replace Eunan McLaughlin, who announced his retirement. <WWD>

Hedgeye Retail’s Take:   With a cash balance on the rise, the time may be nearing for the affiliates group to add an additional brand to its portfolio. 


U.S. consumers saw 4.9 trillion web display ads in 2010 -  Online display advertising continues to grow, according to a new report from web measurement firm comScore Inc. The report says U.S. Internet users saw 4.9 trillion display ads last year. That number stands to grow as more major brand marketers invest in all facets of online advertising. EBay led the way among retail-related sites with 36.8 billion impressions in 2010.  The comScore “2010 U.S. Digital Year in Review” report says that 104 different advertisers delivered at least 1 billion display ad impressions each in the fourth quarter, up 30% from 80 advertisers a year earlier. <InternetRetailer>

Hedgeye Retail’s Take:  Take note of the real estate on your screens, which continues to shrink as more and more ads get pushed your way. 


DSW to merge with Retail Ventures - Footwear retailer DSW Inc said it agreed to merge with its largest shareholder Retail Ventures Inc  in an all-stock deal, and raised its full-year outlook. Retail Ventures will become a wholly-owned subsidiary of DSW in a tax-free exchange of shares at an exchange ratio of 0.435 DSW shares per RVI share, DSW said in a statement.The merger eliminates the complexity and public company expenses associated with Retail Ventures, whose only operating business is its 62 percent stake in DSW, the company said. <Reuters>

Hedgeye Retail’s Take:  Overshadowed here by the transaction is the fact that sales accelerated in 4Q, coming in at 14.9% on top of a 12.9% increase LY.  So much for tough compares.


Adidas Sees 15% to 20% Annual Growth in China -  Adidas will grow 15% to 20% annually in China over the next five years and exceed 1 billion euros ($1.36 billion) in revenue this year, Adidas Chief Executive Officer Herbert Hainer in an interview on German television. He also expects the company overall to see significant growth this year after a strong 2010. "We have a very good 2010 behind us -- we have developed enormously well. And we will continue to grow in 2011," Hainer told Deutsches Anleger Fernsehen, according to Reuters. Adidas' full-year 2010 results are due on March 2. "We are lucky, that we have the women's soccer world cup and many other sport events on top of that (in 2011)," he added. <SportsOneSource>

Hedgeye Retail’s Take:   Nothing new here as China growth for most global brands with an established presence in the region are looking to grow by a similar amount.  What is surprising is that Hainer mentions the women’s world cup as a key driver of growth in 2011.  What about toning?



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

  • MCD was added to the “Key Calls” list at UBS.  Shares are Buy rated with a price target of $86.
  • MCD’s largest global franchisee is preparing for a U.S. IPO, according to the Financial Times.
  • BWLD reported after the close.  Comps slowed and the Gap-to-Knapp went negative on a one-year basis.  Highly favorable chicken wing prices and other margin gains helped the company beat on the bottom line.
  • BWLD target raised to $55 from $52 at Deutsche Bank.
  • GMCR has been outperforming the QSR space and is not the best performing QSR stock over the last week and month.  Yesterday the stock gained 3.2% on good volume.
  • SBUX also saw its share price gain, by 2.4%, on accelerating volume.



Howard Penney

Managing Director

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The Macau Metro Monitor, February 9, 2011



A Transportation Infrastructure Office (GIT) spokesperson said the Macau government has challenged Bombardier's injunction by claiming the injunction would seriously harm the population, by delaying the construction works of LRT and the conclusion of the regional transportation network it belongs to.  Last week, GIT said the injunction would not have “a great impact on the project’s full development.”


The challenge was filed at the Court of Second Instance (TSI).  TSI should reach a final decision within two weeks.  If the court accepts the injunction, Bombardier is likely to launch a legal appeal against the tender decision, which means the LRT process could remain frozen for up to a year


Another bidder in the MRT tender, Siemens, has requested more details on the process from the government. The company has not decided whether also to pursue an injunction.



Stanley Ho still has not received a formal proposal from family members to solve the dispute over his assets distribution.  Mr. Oldham, Ho's lawyer, said a new court case would be filed today against Mr. Ho's family to recover his assets.


Resorts World Sentosa hosted more than 1,000 events last year, while Marina Bay Sands hosted 700 events.  The Singapore Expo is adding a new convention wing called Max Atria which has 23 meeting rooms and function areas.  It is scheduled to open in 1Q 2012.


LOANS RISE FAST macaubusiness.com

According to the Monetary Authority, domestic loans to the private sector grew 4.9% on a monthly basis to MOP130.5BN in December.  Loans to restaurants, hotels and similar businesses, personal housing loans and loans to the gaming sector increased QoQ at 20.9%, 11.3% and 7.5%, respectively.

CHART OF THE DAY: Our Almighty Central Planner



CHART OF THE DAY: Our Almighty Central Planner -  Chart

Known Unknowns

This note was originally published at 8am on February 04, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

"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 sales@hedgye.com.


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

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