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February 23, 2010






  • Wal-Mart noted that EDLP remains a key priority and one of the pillars of the company’s four-point plan to reinvigorate domestic sales momentum.  With price leadership at the forefront of Wal-Mart’s marketing message, management also reiterated that the company will “only pass on price increases when they cannot be avoided”.
  • Home Depot noted that the company’s 2011 forecast is based on a “commodity neutral” plan on the cost side of things.  Management did go on to note that there has been an increased amount of vendor-requested price increases over the past 45 days and they will evaluate each request on a case by case basis.  On the top-line, inflation in lumber and copper added about 50 bps to same store sales.
  • Macy’s noted that the company’s fashion offering allows the retailer to be less reliant on opening price point basics and more focused on product that contains more fashion at higher price points.  Additionally, the company noted that areas like home, center core, accessories, and other non-apparel categories will not be as impacted by raw material price increases.  
  • In a slight, but meaningful change in tone, VF’s management highlighted that marketing related investment spend will stay at the same rate in 2011 – approximately 5.5% of sales. Just last month it was suggested that marketing would revert back to historical levels of ~5% of sales to offset margin pressure. While the added spend will certainly help drive top-line growth towards expected levels of 8%-9% this year, the company has identified 100bps of additional SG&A expenses as an offset to higher costs in the coming months in an effort to keep operating margins flat-“ish.”



J.C. Penny to Unveil New Logo - J.C. Penney will an unveil a redesigned logo and a new slogan in its spring campaign launching during the Academy Awards on Sunday. The logo is still in red and white but with a more modern, graphic look. JCPenney is spelled out in lower case, the first three letters in white and contained in a red box; the rest of the lettering in red against a white backdrop. Logo redesigns can be tricky. Gap last year redesigned its logo, but scrapped it after a public outcry and quickly restored the old version.  However, there’s always excitement surrounding the Academy Awards, where Penney’s is the sole retail sponsor.<WWD>

Hedgeye Retail’s Take: It’s going to take more than a logo change to drive traffic back into the company’s store. 


Levi's, H&M  ban Sandblasting - Levi Strauss & Co. and Hennes & Mauritz have agreed to collaborate with the International Textile Garment & Leather Workers’ Federation to draft a manifesto banning the use of sandblasting in denim, in the hopes of convincing other brands to eliminate it, the global union federation said Friday. Levi’s and H&M said last year that they were eliminating sandblasted products from their lines due to health concerns for workers who are involved in the process around the world. “Sandblasting is a serious industry concern, and even though we at Levi Strauss & Co. are confident in our practices, we decided that the best way we can help ensure no worker in any garment factory faces the threat associated with exposure to crystalline silica is to move to end sandblasting industrywide,” said a Levi’s spokeswoman.  <WWD>

Hedgeye Retail’s Take:  Sounds like selvedge and other clean denim looks may become more popular if sandblasting falls by the wayside. 


Abercrombie consolidating fulfillment operations -  As part of an ongoing move to cut costs, Abercrombie & Fitch Co. is making plans to consolidate its distribution centers into a single facility. Abercrombie & Fitch, No. 65 in the Internet Retailer Top 500 Guide, currently operates a pair of distribution centers near its headquarters in New Albany, OH. One center is used to ship orders for its global e-commerce channel and for its Abercrombie & Fitch store locations. A second center supports the retailer’s store network for the Hollister and Gilly Hicks brands. <InternetRetailer>

Hedgeye Retail’s Take: With e-com volumes rising at a rapid pace, the move for distribution efficiencies makes a ton of sense. 


Moncler Said Eyeing Public Offering by June - Moncler Group is revving up to launch an initial public offering in the first half, possibly in June.  According to sources, the Italian company has tapped Banca Imi, Morgan Stanley and Bofa-Merrill Lynch as global coordinators. The plan is to float up to 50 percent of Moncler on the Milan Stock Exchange.  In addition to the Moncler brand, the Moncler Group includes high-end sportswear labels Henry Cotton’s, Marina Yachting and Coast, Weber & Ahaus, and it holds the license for Cerruti. The group closed 2010 with sales of 426 million euros, or $562.3 million. <WWD>

Hedgeye Retail’s Take:  If you haven’t seen the company’s flash-mob fashion show in Grand Central check it out:  http://www.youtube.com/watch?v=6Cn5FRLtWHE.  Hopefully the roadshow will be almost as exciting.


Auri Footwear to be Sold- Wellstone Filter Sciences, Inc. has entered into an agreement to acquire Auri Design Group, LLC, which designs and sells Auri Footwear for men and women.  The agreement is expected to close in the next few days, subject to the prior satisfaction of customary closing conditions and will result in Auri becoming a wholly-owned subsidiary of a public company. Wellstone plans on changing its name to "Auri, Inc." following the close of the transaction. "Our entire team is excited about the new opportunities that will be created by being traded on the OTC Market. It will help fuel our marketing and growth objectives in the short and long term" Founded in 2007 and headquartered in Laguna Beach, California, Auri Footwear was named by Forbes magazine as one of "America's Most Promising Companies." <SportsOneSource>

Hedgeye Retail’s Take: While still a nascent brand, the company has licensed Outlast technology originally designed for NASA spacesuits to keep feet cool and dry. Adding a bit of functional technology to the shoes fashion should help drive interest in the footwear which sells at $85-$230.


Mobile Payments Take Hold Around the World - A sixfold increase in the volume of mobile payment transactions is on the way in the next four years, according to one research firm. A forecast from Yankee Group predicts the worldwide transaction value of mobile payments will total $984 billion by 2014, up from $162 billion last year. That includes transactions from mobile banking, international and domestic remittances, contactless cards, mobile coupons and near-field communications. According to an Accenture survey of “tech forwards”—web users who use several networked devices and internet services—there is widespread concern around the world with the safety of mobile payments. <eMarketer>

Hedgeye Retail’s Take:  Anything that facilitates faster checkout and higher consumer satisfaction is likely to take hold as in the case of mobile payment technology.  Imagine not having to wait in a line ever again when wanting to check out of a Macy’s at Christmas.


R3: WMT, HD, M, VFC - r3 2 23 11


Buyers Turn to Cotton Alternatives - It’s all about blending in for spring 2012 fabrics, with high raw material costs pushing weavers to increasingly experiment with alternative fiber mixes. Designers attending the recent edition of Première Vision here embraced the trend for blends, lauding the innovation on display across collections. Among the fabrics being blended with cotton were linen, viscose, synthetics and cellulose-based fibers like Lyocell, Modal and Tencel. “It’s a challenge; you have to make something new out of it,” said Lanvin men’s wear designer Lucas Ossendrijver, who cited Japanese woolen mill Nikke among the standouts. “More blends will come out on the market, which I think is more interesting as yarns are a lot more advanced than in the Seventies.” <WWD>

Hedgeye Retail’s Take:  FYI the addition of synthetics can help the wear and tear of a garment.  Good news for those who will need to justify paying higher prices by wearing their garments longer. 


Textile Makers in Taiwan Required to Change Prices - Taiwan’s textile industry has not been positive about the new policy formulated by the Taiwanese Ministry of Economic Affairs (MEA) which requires producers across the textile value-chain to change prices of their products to just once-in-a-month.  The MEA has suggested the once-in-a-month pricing policy to safeguard the interests of the downstream producers like fabric manufacturers to protect them from the volatility of raw material prices as well as ensuring adequate supply. <FashionNetAsia>

Hedgeye Retail’s Take:  Don’t we live in a real-time, mark to market global economy?  Monthly pricing in this case seems archaic. 


China raises wages - China, the biggest brake on global inflation for two decades, is embracing wage increases that threaten to erode retailers’ margins and demand for bonds. Premier Wen Jiabao convenes the annual National People’s Congress March 5, where delegates will approve a five-year plan designed to elevate the role of domestic demand. Part of that strategy is endorsing higher pay, with all 31 Chinese provinces and regions likely to boost their minimum wages in 2011 for the second consecutive year, according to Credit Suisse Group AG. “When historians go back and describe 2010, the big story will be the massive increase in salaries that will redefine the global manufacturing model and redefine the inflation outlook for the next 10 years,” said Dong Tao, chief economist for non- Japan Asia at Credit Suisse in Hong Kong.  <Bloomberg>

Hedgeye Retail’s Take: The margin pressures continue. The positive for most companies this time is that they now have alternative sourcing options after facing last year’s wage increases. As such, expect the shift in manufacturing to accelerate in the coming months.




CHART OF THE DAY: Don't Fail to Evolve While There's Still Time...



CHART OF THE DAY: Don't Fail to Evolve While There's Still Time... -  chart

Growth's Failure

“The only real failure in life is not to be true to the best one knows.”



Yesterday was the biggest down day for US stocks since August 11th of last year. If and when the US stock market starts to really break down again, I think the only real failures in our industry will be revealed by those who have chosen not to evolve their global risk management process from 2008.


One down day certainly does not a bearish trend make. But a -2.1% drop in price momentum on an accelerating volume study of +31% (week-over-week) combined with a one-day rip of +27% in volatility (VIX) should definitely have the bulls’ attention.




That’s the core 3-factor model I use across risk management durations. That’s what I have stayed true to since I re-built the model in 2007. That’s just part of my process. In order to embrace uncertainty as a given, I think a risk manager is best equipped to be Duration Agnostic.


The only real failure in my process would be choosing not to change the process as this globally interconnected marketplace changes. One of the key changes that I’ve made in the last 3 years is changing the durations in my models, dynamically, as volatility levels change.


I model all security level volatility from the bottom up, but to simplify this point I’ll use the VIX. Here’s where a closing price of 21.11 in the Volatility Index (VIX) fits across my 3 core risk management durations (TRADE, TREND, and TAIL):

  1. TRADE (3-weeks or less) = bullish, with TRADE line support at 16.17
  2. TREND (3-months or more) = bullish, with TREND line support at 18.09
  3. TAIL (3-years or less) = bearish, with TAIL line resistance at  22.09

So, in Hedgeye-speak, what’s happened to the VOLATILITY factor in the SP500’s 3-factor model is critical to acknowledge. Whether the TRADE and TREND lines of bullish VIX support hold or not is something that Mr. Macro Market will decide but, for now, what was overhead resistance in VOLATILITY is now support – and that’s bearish for US stock market price momentum. A breakout in the VIX above the TAIL line will make things crash.


Now if you take this 3-factor model:

  1. PRICE down
  2. VOLUME up

And overlay it with a critical correlation – the inverse correlation between the SP500 and the VIX – you’ll see that this relationship has been one of the most important concurrent risk management indicators we’ve been offered since the early part of 2008. Ignore it at your own risk.


In the chart below, you can see that this isn’t foreign land for me to be treading on. When I made the bearish call for a US stock market correction in April of 2010 (our Hedgeye Macro Theme was “April Flowers, May Showers”) I gave you the same signals.


Well, almost the same…


Nothing in my models are ever really the same, particularly when I blow out the vantage point to that other sneaky little critter called The Rest of the World. That’s why my baseline Global Macro Risk Management Model includes 27-factors (which also change and re-weight dynamically) and include important real-time prices like the US Dollar, Indian stocks, Copper, etc…


And this is really where I can look myself in the mirror and say, despite the fierce lobbying for me to chase US stock market fund “flows” into their mid-February crescendo, I stayed true to the best top-down risk management process I know – when Global Inflation Is Accelerating, and Global Growth Is Slowing, it’s time to build up a large asset allocation to Cash.


Now not a lot of people have Street credibility on moving to Cash. Not only because they didn’t start making this move in early 2008, but because they don’t have an investment mandate that allows them to move into Cash. That’s an industry problem, not yours.


Global Growth Slowing is perpetuated by Global Inflation Accelerating. Anyone who has ever invested in emerging markets recognizes this basic reality. Everyone who is short Emerging Markets (EEM), India (IFN), and Brazil (EWZ), like we are in the Hedgeye Portfolio gets the profitability of it too.


The biggest question about Growth’s Failure in virtually all of Asia and the austere side of Europe that you can answer for yourself is will Global Growth Slowing affect the said “safe havens” of US and Japanese stocks?


My answer to this is not only implied by the high-frequency growth data that I grind through every macro morning, but it’s amplified by the math that stands behind the reality that Structural Long-Term Growth Is Impaired By Rising Sovereign Debts.


Whether it’s American, Japanese, or Western European debt, it’s all the same thing – debt. And that’s why we’re not surprised to see consumption growth slowing in these Developed Debtor countries as we infuse them with $95 oil and other inflation related taxes.


Growth’s Failure won’t be crystal clear to Wall Street until it’s in the rear-view mirror, but yesterday’s PRICE, VOLUME, and VOLATILITY readings combined with continued breakdowns in Asian Equities and a breakout in oil prices should read true “to the best one knows” about globally interconnected risks.


My immediate term support and resistance lines for the SP500 are now 1307 and 1330, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Growth's Failure - day1


Growth's Failure - day2

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

  • MCD is raising prices by 0.8% in Germany on higher raw material costs, Bild reported. 
  • TXRH reported EPS of $0.14 versus expectations of $0.16.  FY11 guidance is for EPS to grow by 10% versus prior guidance of up 5-15%.  10% EPS growth implies EPS of $0.88 versus consensus of $0.94.  Comps came in at 3.1% versus expectations of 2.9% and guidance for FY11 comps is 3.5%. 
  • TXRH also declared an 8 cent dividend.
  • PZZA reported 4Q results yesterday after the close.  System comps came in at 0.7% versus the street's expectation of 0.5% and EPS came in at $0.51 versus consensus of $0.48.  EPS guidance of $2.00-$2.12 was reaffirmed versus consensus of $2.07 as the company believes favorable impact of early year sales will substantially mitigate the unfavorable impact of currently projected commodity cost increases throughout the remainder of the year.
  • DPZ is launching a new campaign promoting a new chicken menu.  The company is replacing Domino’s Chicken Kickers with a boneless chicken option.  Its chicken wing recipe is also changing.
  • Restaurant stocks in general declined steeply yesterday on strong volume. 
  • WEN, PEET, and CHUX were the only three stocks to gain on strong volume.  WEN and PEET are two names I have been vocal on as of late.  I see PEET as a viable target for SBUX, as I have written about at length over the past couple of weeks.  WEN is a classic turnaround story and I saw the recent Analyst Day (and announcement that the firm is selling Arby’s) as an inflection point for this company (WEN: FOCUSED, REAL & UNDERVALUED, 1/28/11).
  • DIN declined on strong volume, as did CAKE, CPKI, CBRL, and many other casual dining stocks. 
  • In QSR, KKD, SONC, CMG, JACK, CBOU and YUM were among the notable decliners. 



Howard Penney

Managing Director


In preparation for PNK's Q4 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from PNK’s Q3 earnings call.



  • "And so I would caution a little bit that as we enter these next few months of the fourth quarter, last year was a tough winter for us, Belterra in particular had a tough time and St. Louis to a lesser extent. I would caution that we not go crazy with 4Q estimates based on 3Q performance. Rather you can count on us to be very disciplined in our focus on revenue management and cost reductions to take advantage of the revenue opportunity that we do have in a very cold quarter.”
  • “We are certainly not done looking for additional efficiencies at corporate end throughout the company. In the phase of a challenging current economic climate, our ability to increase revenue is somewhat limited, although we are finding pockets of growth i.e. New Orleans – the New Orleans market in the last quarter.”
  • “And speaking of Baton Rouge, we do have about $340 million of cash construction cost remaining there. The vast majority of which will occur in the 2011 period.”
  • [Baton Rouge investment] “We believe that the second 100 million has a very healthy return and that’s how we thought about it. We looked at what the base was that we are going to spend and what you could really get for that base and then by adding a parking garage and it’s just common sense that your first 100 rooms are your most expensive rooms because of the infrastructure you got put in place. And then adding the second 100 rooms, we believe our ability to reach a market of about a two hour drive time around Baton Rouge that it was going to be a return that and Joe I am not going to be specific on the number that we targeted but we believe was favorable to shareholders.”
  • [Belterra] “I think absolutely what you are seeing is sustainable. And what you are not seeing is, we starting to put in place revenue drivers that will add to that property. But across the board I’ll tell you that we feel good about the way all of our team and all of our operators are making good decisions about the right use of resources.”
  • [L’Auberge] “We’re in the early stages of our hotel yield management today.”
  • [River City] “We have been exceeding people’s expectations when they visit that facility and we still believe we’re in the early stages of getting settled into River City.”
  • [Seasonality] “The properties we have in Reno, obviously Belterra, and our St. Louis segment, we’ve got four properties in particular that are highly subject to difficult weather conditions. That said we also saw a virtually unprecedented monster storm come through the upper Midwest earlier this week that provides some evidence as to potential impact at one or more of those properties in the fourth and first quarters.”
  • [Reduction of marketing expenses] “We would say we are in the second maybe or top of the third inning.”
  • “I mean we have Atlantic City that is an asset for sale right now and hopefully, we are not going to have any further write down of Atlantic City but that’s all a possibility on what happens with Atlantic City.”

VFC: Hope and Luck

VFC front-loaded a lot of good ‘ol fashioned optimism. But you need a lot of Hope and Luck to get ’11 guidance. The risk/reward here looks flat out bad.


VFC isn’t the kind of company that tends to surprise us on the average EPS print. After all, it’s a $14bn portfolio of brands (about the same size as Gap) that spans just about every relevant category out there. In other words, the company realistically should not dramatically outperform the industry, because it IS the industry.


We understand the ‘quality of management’ factor. But  two days ago, if you’d have asked me what the probability is of VFC beating the quarter, AND taking up estimates to a level suggesting 10% sales AND EPS growth in 2011, I’d have said (and did say)…


“Even if they think they can do these numbers, there’s 87% of the year left to go. They do themselves no favors by doing this now.” That’s particularly the case due to VFC’s expectation for success in large part to a consumer and retailer-led price increase.


I sat here for two hours on this VFC model, and I legitimately cannot find a way to get above $7.00 for the year. I’m shaking out at about $6.45 (flat year/year).


Here’s what you’ve got to believe to get their numbers

  1. There has been only one year in VFC history where it printed 10% annual organic growth. That was 2006, where VFC benefitted from a healthy consumer, and solid organic growth from building out The North Face stores (which is a 2x gross-up in sales dollars from cost, to wholesale, to retail). In other words, '11 needs to be VFC's best year ever.
  2. The former algorithm from 2003-2008 was for hsd top line growth, split evenly between organic growth and acquisitions. There’s no mention of acquisitions now. That either means that the REAL expected organic growth is over the top of historical peak, or the company will come back with a deal and say ‘that’s included in our prior guidance.’  They’ve done it before, and the market was often split on sentiment.
  3. Levi’s remains rational in 2011. If VFC Jeanswear Coalition’s top competitor starts to buy market share, then there’s no way that VFC is hitting these numbers.
  4. The SIGMA looks awful. Check out the chart below. We show the past four quarters for Macy’s VFC, Wal-Mart and Home Depot – all companies that reported today. VFC not only is headed in an unhealthy place, but the yy comps starting quite difficult (ie squarely in ‘sweet spot’ for past three quarters. You've got to believe that they can turn this around -- and fast.

And lastly, I’ve got to point out something related to cost inflation that we published earlier today. It’s quite relevant here. There are three stages we think companies are (or are not and should be) concerned about cost inflation. Let’s go in order of simplicity.


1)  Control what you can control. The companies see the same tape we do and where prices are headed, and they plan accordingly with their own procurement. Focusing solely on this will blow them up.

2)  Workup a strategic plan as to how they think their supply chain partners will react when faced with a meaningful change in their cash flow.  I’m referring to how a brand like Lee, Wrangler and North Face react when price is altered by Levi’s or Columbia, respectively.

3)  In addition to the two preceding points, the most successful companies are planning for how a supply chain partner will look to squeeze when it’s hurt in other categories. For example…what happens if the ‘food inflation pass through’ is maxed out and Wal-Mart needs to face a food price increase at risk of losing additional traffic?


Why not push it through to more discretionary and highly fragmented categories like apparel and toys?


Go out and ask a CEO of a ‘basics’ apparel company if he has ever knowingly funded markdowns in fresh fruit. He’ll say no, and he’s not lying. He’s simply unaware.


VFC: Hope and Luck - compsigma

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