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R3: RL, JNY, WFMI, GPS

R3: REQUIRED RETAIL READING

February 10, 2010

 

 

 

RESEARCH ANECDOTES

  • After two consecutive years of strong boot sales, JNY management suggests the trend is likely to soften in 2011. While providing confirmation of strong demand for new spring product, perhaps initial BTS interest is prompting the cautionary tone. Keep in mind that despite the changing hemlines in denim (returning to flare) are better suited for booties than boots, DSW had bullish comments on boots, both present and future.
  • If the use of superlatives is an indication, Ralph Lauren management used “extraordinary” to describe their business performance 16 times on yesterday’s call. Among the positive drivers were the company’s new Madison Avenue flagship stores, which registered a 100%+ increase in average ticket sales compared to prior holiday seasons driven in large part by higher priced items like handbags, accessories, and jewelry/watches.
  • Whole Foods efforts to promote health and wellness will be accelerated with the company’s launch of five prototype wellness clubs (within existing stores) this year.  While just a test, management believes the company can be part of the solution for the nation’s healthcare crisis primarily through educating the consumer about changing their unhealthy lifestyles.
  • Is email marketing losing its luster? According to a report from Exact Target/CoTweet, 91% of us email users have subscribed to company’s email and later decided they didn’t want it.  The report also found that 18% of email users never open emails from companies and 77% have become more cautious about giving their email addresses to companies over the past year.

OUR TAKE ON OVERNIGHT NEWS

 

Jones Launches B Brian - The launch of B Brian Atwood, the designer’s contemporary-priced collection with The Jones Group, drew a crowd of socialites and editors to the swanky Lion speakeasy in the West Village last night. Atwood held the spotlight at the crowded party, where friends and press clamored for a few minutes with the glowing designer to hear about his enthusiasm for the new collection. Guests included co-host Byrdie Bell, DJ Alexandra Richards, Ali Wise, Rose McGowen, Olivia Chantecaille, Poppy Delevigne, Nate Berkus, Hilary Rhoda, and the entire executive team of Jones Apparel Group. <WWD>

Hedgeye Retail’s Take: Sounds like a fun fashion week party on the same day the company reported lackluster earnings.  Unfortunately JNY needs several Brian Atwood-type efforts to work if the topline is ever going to meaningfully and sustainably accelerate. 

 

Wolverine Promotes Two in Outdoor Group - On the heels of a reorganization announced last month, Rockford, Mich.-based Wolverine World Wide, Inc. said Tuesday it had created two new executive positions in its Outdoor Group to give added focus to its Merrell and Chaco brands. Effective immediately, brand veteran Seth Cobb has been appointed VP and GM of Merrell, and Chip Coe, formerly head of accessories for all Outdoor Group brands, has been named VP and GM of Chaco.“These promotions give us a strong set of resources to drive brand-specific strategy and give us an enhanced brand focus,” Jim Zwiers, president of the Outdoor Group, told Footwear News. <WWD>

Hedgeye Retail’s Take: Expect to see more emphasis on brands other than Merrell as Chaco and Cushe begin take on a more meaningful part of the portfolio. 

 

Men's Wear Leading Recovery- Men’s wear could be the leading indicator of the long-hoped-for consumer revival. The sector was a strong performer over the holidays and has continued its steady climb upward this year. In December, MasterCard Advisors SpendingPulse, a macroeconomic report tracking national retail sales, reported that men’s wear sales rose 9.9 percent that month. In January, sales increased 8.1 percent, according to MasterCard. The improvements have retailers in a buoyant mood as they head to Las Vegas next week for trade shows even as they battle a harsh winter, rising raw material and fuel prices and lingering financial uncertainty. <WWD>

Hedgeye Retail’s Take: While MasterCard has never been a pure proxy for overall retail sales, this data coincides with anecdotal comments coming out of December and January sales.  Clearly a multi-year malaise in menswear is seeing some mean reversion at this time. 

 

Undergarments Gain Share - The dollar share of the men’s underbottoms market held by the long-legged brief silhouette last year, up from 31.9 percent in 2009. Long briefs vaulted into the dominant position among men’s underwear models, higher than boxers, which fell to a 29.9 percent from 32.6 percent in 2009. Men’s underwear sales overall were up 10.7 percent last year.<WWD>

Hedgeye Retail’s Take: Looks like men are replenishing their undergarments at the same time they’re replenishing their “outergarments”.  For those not familiar with long briefs, these are basically the underwear version of compression shorts.   

 

No Relief Seen From Record Cotton Prices - Cotton prices are expected to remain at record-high levels this year, due to a tight supply-and-demand situation, which was borne out by a new report released Wednesday by the U.S. Department of Agriculture.  According to the USDA, cotton stock levels among three of the five top producers in the world, including China, the U.S. and Pakistan, are estimated to end the marketing year on July 31 at record-low levels, which will continue to drive high cotton prices globally and increase pressure on the entire supply chain, from yarn spinners all the way to the consumer. India and Brazil showed slight increases. <WWD>

Hedgeye Retail’s Take: In looking at the dynamics driving cotton prices, the offset to increased acreage is stronger demand. Recall that earlier this week, Gildan’s CEO Chamandy projected that cotton prices will return to a range of $0.90-$1.20 next year driven by increased supply.

 

Fashion Footwear Sales Increased in 2010 - It’s official: 2010 was a good year for the footwear industry, as Americans bought more trendy shoes than they did in 2009.The latest sales figures for the fashion footwear market, released by marketing research company The NPD Group, show that total fashion shoe sales in the U.S. rose 7.2 percent — a strong reversal of the 3.5 percent decline recorded in 2009. “The footwear market was the last to feel the pain of the recession and is the first to feel the gain of the recovery,” Marshal Cohen, chief industry analyst at NPD, said in a written statement. “Women were the first to feel ‘frugal fatigue’ and head back to spending on fashion product, while spending on men’s and children’s products has followed.”  <WWD>

Hedgeye Retail’s Take: With the fashion category resurging as well over the last ~6-months, we continue to favor athletic footwear which continues to benefit from the reinvigoration of new product innovation.

 

Gap expands e-commerce brands  - If there’s any gap in online apparel retailing in Europe, Gap Inc. intends to fill it. Today, Gap, No. 23 in the Internet Retailer Top 500 Guide announced plans to expand its e-commerce brands for Gap and Banana Republic to eight more European retail markets: Austria, Estonia, Finland, Luxembourg, Malta, Portugal, Slovakia and Slovenia. Gap already sells online in Belgium, Denmark, France, Germany, Ireland, Italy, Netherlands, Spain, Sweden and the United Kingdom. With the latest European rollout, Gap is offering consumers immediate shopping on the English-language versions of Gap.com and BananaRepublic.com and up to three days shipping at a flat rate of 6 British pounds (US$8.21). “Launching in eight additional European countries underscores the loyalty and enthusiasm customers in Europe have shown for our online brands since the sites launched last August,” says Gap Europe and strategic alliances president Stephen Sunnucks. <InternetRetailer>

Hedgeye Retail’s Take: We can’t think of another retailer that’s rolled out e-commerce platforms across so many countries in such short order. With many multinational retailers looking to tepidly expand e-commerce in 2011, they should take note.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


THE M3: CNY MACAU; S'PORE TOURISM; MGM IPO; SHUTTLE CONTROL; TOURISM RECEIPTS

The Macau Metro Monitor, February 10, 2011

 

MACAU RECORDS 805,289 VISITOR ARRIVALS DURING CNY Strait Times, Macau Daily Times

According to official government figures, Macau had 805,289 tourist arrivals during CNY, representing 8.6% YoY growth.  477,252 visitors came from mainland China, a 14% gain YoY.  Macau's border-gate checkpoint logged the largest number of border movements, with arrivals and departures standing at 754,822 and 786,618 respectively, according to the Immigration Department.

 

The average daily number of rented hotel rooms rose 1.1% to 16,949; overall ADR gained 14.4% to MOP 1,878. 

 

TOURISM SECTOR PERFORMANCE FOR DECEMBER 2010 STB

Singapore visitor arrivals grew 15.9% YoY to a monthly record, 1,127,000 in December.  Visitor days grew 13.1% YoY.  Indonesia (262,000), Malaysia (130,000), PR China (100,000), Australia (87,000) and India (74,000) were Singapore's top five visitor-generating markets in December 2010.

 

THE M3: CNY MACAU; S'PORE TOURISM; MGM IPO; SHUTTLE CONTROL; TOURISM RECEIPTS - SINGPOARE


MGM MACAU SEEKS LISTING APPROVAL FOR HK IPO IN FEB Reuters

MGM Macau is looking for HK listing approval at the end of February.  It was originally scheduled for the 2H 2011.  But analysts say the Ho dispute may push back IPO plans.  MGM Macau seeks to raise $800MM.  BofA, JPM, MS are the joint global coordinators for the deal, and joint books with BNP Paribas, CLSA, DB, and RBS.

 

LAWMAKER CALLS FOR CASINO SHUTTLE CONTROL Macau Daily Times

Lee Chong Cheng has asked the Government about whether the Administration will roll out special laws or regulations to monitor the number, routes, passenger capacity and parking spaces of the casino shuttle buses.  Last year, Macau had 1,451 tourism coaches, 55 more than in 2009.

 

“The casino shuttle buses do not only station at various border checkpoints and occupy public space, but also increase pressure to the traffic, reduce the turnover rates of vehicles and cause road congestion.  The soaring number of casino buses also occupy the parking spaces of heavy vehicles, forcing tourist coaches to park on yellow lines which affects the traffic and leaves a negative image to tourists,” Lee said.

 

Lee also questioned the appropriateness of continuing to offer tax exemptions to tourist coach imports.

 

SINGAPOREANS PREFER TO GAMBLE ON LAND, NOT ON SEA Asia One, Channel News Asia

In 2010, S'pore tourism rose 49% YoY in tourism receipts to S$18.8BN, a 10-year high.  Together with other sightseeing and entertainment outlets in Singapore, the two IRs contributed 21% in estimated earnings.  Meanwhile, gaming ships saw passengers decline 11% YoY, largely due to two gaming ships ceasing operations.  Some gaming ships are no longer making Singapore one of their ports of call, says Singapore Tourism Board's (STB) Chief Executive, Ms Aw Kah Peng.

 

STB expects 2011 tourism to grow but not at the "exceptional" levels of 2010.


SHORT INTEREST UPDATE

Looking at recent short interest moves in the restaurant space, it is interesting to note the increase in casual dining short interest versus quick service.  Below I go through some important takeaways:

  • CAKE is seeing short interest increase dramatically.  This company has an average check problem and the prospect of rising meat and dairy costs obviously doesn’t help the company’s outlook.
  • PFCB, despite a marginal uptick over the past two weeks, has seen short interest come down significantly of late.
  • CHUX is the perennial under-performer and the shorts piled into this ahead of the most recently reported quarter.
  • MCD remains the Teflon Don of the restaurant space – this will change in 2011.
  • CMG short interest remains low but ultimately the tide will reverse.  Labor cost efficiency, part of the secret sauce that footed the bill for organic, spot market, Food With Integrity, are going higher.  There is complacency here and I anticipate a change here when the music stops.
  • SBUX and PEET saw short interest rise while GMCR ticked down.  I believe that the PEET shorts are playing with fire here and GMCR is a much more attractive target on the short side.

SHORT INTEREST UPDATE - short interest historical 210

 

Howard Penney

Managing Director


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JOBLESS CLAIMS BREAK THROUGH 400K, ROLLING CLAIMS APPROACHING 400K

Initial Claims Show Further Improvement

The headline initial claims number fell 33k WoW to 383k (36k after a 3k upward revision to last week’s data).  Rolling claims fell 14.5k to 415.5k. On a non-seasonally-adjusted basis, reported claims fell 26k WoW.  Year-to-date are defying the trend we've seen in recent years. In most years, the first few weeks of February see an uptick in non-seasonally-adjusted claims.  This year, that increase has not occurred, and the strength is showing through in the seasonally adjusted series. 

 

Rolling claims (415k) are now getting close to the 375-400k range at which the unemployment rate should start to come down. This week’s print (383k), the lowest since mid-08, falls squarely into that range. If this level is held, we would expect to begin to see unemployment improve, assuming claims hold this level or improve further. That said, it is worth highlighting an important caveat. This recession has been different in that it has pushed the labor force participation rate down by ~200 bps, which has had a correspondingly positive improvement on the unemployment rate. In other words, the unemployment rate isn't really 9.0%, it's 11.0%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11.0% actual rate as opposed to the 9.0% reported rate.

 

JOBLESS CLAIMS BREAK THROUGH 400K, ROLLING CLAIMS APPROACHING 400K - 1

 

JOBLESS CLAIMS BREAK THROUGH 400K, ROLLING CLAIMS APPROACHING 400K - 2

 

JOBLESS CLAIMS BREAK THROUGH 400K, ROLLING CLAIMS APPROACHING 400K - 3

 

One of our astute clients pointed out the relationship between the S&P and initial claims shown below.  We show the two series in the following chart, with initial claims inverted on the left axis. Certainly, today's claims print augurs well for further upside on this basis.

 

JOBLESS CLAIMS BREAK THROUGH 400K, ROLLING CLAIMS APPROACHING 400K - 5

 

In the table below, we chart US equity correlations with Initial Claims, the Dollar Index, and US 10Y Treasury yields on a weekly basis going back 3 months, 1 year, and 3 years.

 

JOBLESS CLAIMS BREAK THROUGH 400K, ROLLING CLAIMS APPROACHING 400K - 4

 

Joshua Steiner, CFA

 

Allison Kaptur


JOBLESS CLAIMS BREAK THROUGH 400K, ROLLING CLAIMS APPROACHING 400K

Initial Claims Show Further Improvement

The headline initial claims number fell 33k WoW to 383k (36k after a 3k upward revision to last week’s data).  Rolling claims fell 14.5k to 415.5k. On a non-seasonally-adjusted basis, reported claims fell 26k WoW.  Year-to-date are defying the trend we've seen in recent years. In most years, the first few weeks of February see an uptick in non-seasonally-adjusted claims.  This year, that increase has not occurred, and the strength is showing through in the seasonally adjusted series. 

 

Rolling claims (415k) are now getting close to the 375-400k range at which the unemployment rate should start to come down. This week’s print (383k), the lowest since mid-08, falls squarely into that range. If this level is held, we would expect to begin to see unemployment improve, assuming claims hold this level or improve further. That said, it is worth highlighting an important caveat. This recession has been different in that it has pushed the labor force participation rate down by ~200 bps, which has had a correspondingly positive improvement on the unemployment rate. In other words, the unemployment rate isn't really 9.0%, it's 11.0%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11.0% actual rate as opposed to the 9.0% reported rate.

 

 JOBLESS CLAIMS BREAK THROUGH 400K, ROLLING CLAIMS APPROACHING 400K - claims rolling

 

JOBLESS CLAIMS BREAK THROUGH 400K, ROLLING CLAIMS APPROACHING 400K - claims raw

 

JOBLESS CLAIMS BREAK THROUGH 400K, ROLLING CLAIMS APPROACHING 400K - claims nsa

 

One of our astute clients pointed out the relationship between the S&P and initial claims shown below.  We show the two series in the following chart, with initial claims inverted on the left axis. Certainly, today's claims print augurs well for further upside on this basis.

 

JOBLESS CLAIMS BREAK THROUGH 400K, ROLLING CLAIMS APPROACHING 400K - s p and claims

 

Yield Curve Continues to Widen

We chart the 2-10 spread as a proxy for NIM. Thus far the spread in 1Q is tracking 42 bps wider than 4Q.  The current level of 284 bps is slightly wider than last week.

 

JOBLESS CLAIMS BREAK THROUGH 400K, ROLLING CLAIMS APPROACHING 400K - spreads

 

JOBLESS CLAIMS BREAK THROUGH 400K, ROLLING CLAIMS APPROACHING 400K - spreads QoQ

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 

 

JOBLESS CLAIMS BREAK THROUGH 400K, ROLLING CLAIMS APPROACHING 400K - subsector perf

 

 

 

Joshua Steiner, CFA

 

Allison Kaptur


The World's Danger

“The world is not dangerous because of those who do harm, but because of those who look at it without doing anything.”

-Albert Einstein

 

One of the most influential books that I have read in the last few years has been “Einstein: His Life and Universe” by Walter Isaacson. I say most influential because it fortified something within me that the best teams I played on took to battle every day on the ice. Courage.

 

If you are going to play this globally interconnected game of risk management at the highest level, you need to have the confidence and courage to play it with everything you’ve learned. You have to trust yourself and your process. You have to accept its weaknesses. You have to maintain opposing thoughts in your mind and remain calm.

 

You also have to be able to challenge accepted dogma, groupthink, and consensus when you have an opposing point of view.

 

Now that America’s Almighty Central Planner has laid down the Keynesian consensus, it’s time to take this puck right to the net on him and show the crowd what’s going on in this world outside of the bubbles that Ben Bernanke admits he never realizes he’s in:

 

To recap, Bernanke’s conclusions in his testimony before Congress yesterday were as follows:

  1. US Monetary Policy doesn’t affect Global Inflation
  2. US Inflation is benign
  3. US Dollars are “relatively attractive”

Let’s go through these in reverse order, given that’s how I’d weight the risk implied by a man with this amount of power who looks at the world right now without doing anything:

 

1.  US Dollar – after a +1.3% three-day recovery ahead of Bernanke’s testimony, the US Dollar Index dropped immediately following his aforementioned comments and is now down for the 6th out of the last 7 weeks. The world’s currency market votes on credibility real-time.

 

With the US Dollar being bearish across all 3 of our core risk management durations (TRADE, TREND, and TAIL)… and without any respect or support from the manipulator of the world’s reserve currency, I don’t see why we shouldn’t be modeling a probable scenario analysis for another US Dollar crisis (i.e. a retest of its prior lows).

 

 

2.  US Inflation – while Bernanke did point out that central banks hold more than 60% of their foreign currency reserves in US Dollars, he forgot to remind himself that “the Dollar is used in 85% of all foreign exchange transactions worldwide.” (Barry Eichengreen, “Exorbitant Privilege”)

 

Furthermore, there isn’t one major asset class in the world right now that implies that inflation expectations are low. Sure, the Fed’s compromised and conflicted calculation of inflation is benign, but we’re not willing to accept that as gospel. Here’s three ways to look at inflation:

 

A)     Bonds – US Treasury and Emerging Market bonds have been going straight down, literally, since QG2 was introduced at the beginning of November of 2010. Inflation is bad for bonds. Bernanke is implying the entire global bond market has this wrong.

 

B)      Stocks – Emerging Market stocks have been getting absolutely crushed since QG2 in November, 2010 and in the US stock market there’s a huge sector performance divergence embedded in the SP500 that is also inflationary. The S&P Energy Sector (XLE) is the best sector of the 9 we track for 2011 YTD at +7.51%, while the S&P Consumer Staples Sector (XLP) is the worst at +0.75% YTD. Ben, who is taking it in the margin? Bingo, the American consumer.

 

C)      Corporations – Yesterday on the Coca Cola conference call (a relatively large company with a global footprint) this is what management had to say about inflation - citing bills for juice, plastics, and sweeteners, they saw a 60% ramp in cost of goods sold in the October to December period. Management went on to say that they’ll need to raise prices on beverages in the US in 2011 as it faces $300-$400M in cost increases from commodities. McDonald’s, Proctor & Gamble, and Sysco Foods have had similar comments.

 

 

3.  Global Inflation – in a shining moment for his academic dogma, Bernanke blamed the highest world food prices in the history of mankind on “emerging market demand.”

 

All the while, almost every single Emerging Market demand signal we measure sequentially is getting hammered as Global Inflation (which is priced primarily in US Dollars) slows last year’s cyclical economic recovery. Overnight, Indian stocks traded down another -0.74% taking the BSE Sensex to down -14.9% for the YTD as concerns of Asian growth slowing continue to spread to Thailand, Philippines, and Indonesia (down -2.1%, -2.8%, and -1.3%, respectively).

 

Pakistan, which is the world’s 6th largest population (so we think worthy of considering in light of The Ber-nank’s accelerating emerging market demand thesis), saw import demand DROP from +29% year-over-year growth in December to +3.7% year-over-year growth in January. Since commodity inflation was raging in January (with the USD down for 6 of the last 7 weeks), we’d have liked to have Ben’s rebuttal to that…

 

Now do I have courage here or common sense? Does Ben Bernanke’s new world order of the world’s reserve currency having no impact on global prices make any sense to anyone who isn’t levered long the inflation trade? How about this concept of the USA decoupling from the Rest of the World? These are important questions that, sadly, our 112th Congress didn’t have the analytical competence or courage to ask…

 

The World’s Danger remains a US Central Planner’s academic dogma.

 

My immediate term support and resistance lines for the SP500 are now 1306 and 1336, respectively. At 11AM EST, our Macro team will be hosting a conference call on one of the latest bubbles perpetuated by the Federal Reserve’s policy of zero percent interest rates in perpetuity – Munis (email if you’d like to participate).

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The World's Danger - aa1

 

The World's Danger - aa2


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