JCP: Picking Apart the Outlook


In digging below the surface, JCP’s guidance for 2011 of $2.00 to $2.10 does not appear as robust as it seems. What the press release fails to articulate is an assumption that the company’s pension expense will be reduced by $134 million year over year in 2011. This equates to a savings of $0.36 per share, which when added to the $1.59 just reported for 2010 gets to a starting point of $1.95. Add to the base the assumption that same store sales are expected to grow a robust 3-5% and management is essentially guiding to incremental earnings growth of just $0.05 to $0.15.  Something is clearly not adding up if comps are expected to be solid, gross margins essentially flat, and barely any “core” earnings growth will result.


Bottom line here is not to be fooled by the seemingly robust topline outlook.  Earnings growth in large part is being supported by pension expense reduction for 2011, at least for now. We expect the combination of 3-5% same store sales increases and flat margins to also be a challenging goal to achieve.


JCP: Picking Apart the Outlook - JCP 2 11


Eric Levine





February 25, 2010






  • KSS indicated that its e-commerce business would approach $1 billion in revenues this year, representing 30% growth over 2010 sales of $720 million.  To support this growth an additional e-commerce distribution facility will open in the fall.  $1 billion in .com sales would represent approximately 5% of total company revenues.
  • Target noted that its overall home business has been a mixed bag.  There has been strength in the opening price point offering as well as the “best” categories.  However, the middle or “better” part of the assortment has been weak.  Merchants are working to the address this softness via a reinvigoration of product freshness.
  • Safeway believes that after two years of declining price per item, the company and industry needs to take some risks and pass increases along.   They are passing along inflation currently and are not seeing a “demand depressing effect”.  Management went on to say that they believe consumers are feeling better than they were one year ago which allows the market to absorb price increases with little resistance (so far).
  • GPS noted that it plans to be much smarter and more strategic with its promotional strategy in 2011 at Old Navy.  The company will ramp new efforts over the course of the year, with maximum year over year change in promotional strategy taking place over the back half.  Expect to see further innovation (digital) and creativity (not just % off).
  • Online sales at CROX has been one of the more impressive in retail with growth rates in e-commerce up +44% and +24% in Q4 and FY10 respectively. More impressive is the fact that online sales account for nearly 10% of the company’s revenues while most retailers and branded manufacturers are building off a much smaller base.
  • With gross margins up over 400bps in Q4, DECK acknowledged that the bulk of the expansion was due to price increases implemented last year ahead of anticipated raw material cost increases that never materialized. With pricing for sheepskin locked in and cost increases expected to be up 10% for 2011, we question how receptive retailers will be to further increases while other brands are essentially proposing higher prices for the first time related to higher input costs.



Polo Ralph Lauren Unveils new iPad App - This Friday, Polo Ralph Lauren Corp. is launching its first RLX iPad app, and this being Polo, there’s no shortage of innovative elements to underscore the brand’s athletic roots. It features real atheletes wearing the clothes, and the iPad’s built-in accelerometer, digital compass, assisted GPS and Multi-Touch screen capabilities allow users to do all sorts of things with the athlete images, from flipping it to tilting it and tapping the screen to experience the different movements of the clothes. “This application places the user in the driver’s seat so that they can control the technical functions of the apparel and experience the brand in a way that is visually entertaining,” <WWD>

Hedgeye Retail’s Take: RL has had apps all along for its purple/black label, but one designed specifically for the brand’s RLX line makes sense. The brand marketing and message, while still very much Ralph, is considerably different from the brands classic lifestyle lines making it a challenging fit inside the typical club-like RL store. The option to view the line virtually may ultimately help piqué interest and ultimately drive traffic. 


No Fear Fliles Chapter 11 - No Fear Retail Stores, Inc., which has 41 stores in California, Arizona, Nevada and four other states, announced that it filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of California. Based in Carlsbad, CA, the stores target to motocross and surf markets. Its stores sell No Fear-branded clothing as well as Spy Optic and other brands. Other brands include So Cal, No Cal, Fearless, FMF, Gatorz, Hustler and Truth.<SportsOneSource>

Hedgeye Retail’s Take: The second brand of note to file YTD reflects the relative weakness we’ve seen in the west coast region.


Sportmax Unveils New Store Concept - A new Sportmax store concept will be unveiled here today. Covering 2,700 square feet over two stories, with four large windows, the store is located in the city’s central Via Spiga, and replaces a previous one on the same street, in Milan’s so-called golden shopping triangle. But Milan is only the first step in a global retail expansion for the brand. “While maintaining a selective distribution, we want to increase our worldwide presence, in China and Russia, for example,” said Luigi Maramotti, president of the Max Mara Fashion Group, which controls the Sportmax label. There are currently 13 Sportmax stores, in cities such as Paris, Moscow, Hong Kong, Shanghai and New York. These units will be renovated along the lines of the Milan blueprint. <WWD>

Hedgeye Retail’s Take: The upgrade at retail makes sense from both a presentation and messaging vantage point given Max Mara’s strategy to start distributing the Sportmax brand in department stores over the next two years.  


Clinique Enters the Digital Age The brand, which made its debut in 1968 with a hand-operated diagnostic slide device, has joined the iPad generation.  The new device, called the iPad Skin Diagnostic Tool, will be installed in new counter configurations, which ultimately will include new product testers for foundation and color cosmetics and a new smart-screen scanner that provides product information and even reviews from other consumers. “By integrating digital technologies into the shopping experience, we are offering the consumer a stimulating and socially modern way to connect with the brand,” stated Lynne Greene, global brand president of Clinique, Origins and Ojon at the Estée Lauder Cos. Inc. <WWD>

Hedgeye Retail’s Take: Which brands don’t have an app at this point is the question, but it sounds like the idea here is more one of self help at the counter, which may indeed increase traffic and interest in light of the fact that many shoppers look to avoid engaging predatory counter staff.


Cameroon May Increase Cotton Output 35% - Cameroon may increase cotton output by as much as 35 percent this season by using higher yielding strains and improving agricultural techniques, according to Sodecoton, the state-owned producer. “We intend to produce at least 39,000 metric tons more of the crop,” Ibrahim Ngamie, director of agricultural production, said in an interview today in the capital, Yaounde. That would boost output of the fiber to about 150,000 tons, up from 111,000 tons last year, he said. Cotton, mostly grown by about 227,500 small-scale farmers in the north of the country, is Cameroon’s fifth-largest foreign exchange earner, according to the government. The West African nation plans to boost output by reorganizing the industry, training farmers and increasing the use of more resistant and higher-yielding crop strains.<Businessweek>

Hedgeye Retail’s Take: Optimistic headline, but this is a rounding error. By way of perspective, as the world’s #24th leading cotton producer Cameroon produces only 1% of the cotton volume of #2 India.


Social Media Budgets Grow - Over the next several years, social media spending will become a bigger percentage of companies’ overall marketing budgets. Yet CMOs report there are still challenges when it comes to integrating social media into their overall business strategies. The American Marketing Association and Duke University’s Fuqua School of Business surveyed more than 400 top marketers for the February 2011 CMO Survey. They reported that over the next 12 months, social media spending will jump to 9.8% of marketing budgets, up from the current level of 5.6%. In the next five years, that percentage will increase to 18.1%. <emarketer>

Hedgeye Retail’s Take: With marketing budgets accounting anywhere from 5%-10% of sales for most retailers/brands, the average increase in spend implies a 25-50bps impact to margins this year. Given that most retailers are using the SG&A line to offset cost inflation, we expect most investments in social media to replace more costly marketing efforts rather than be purely an incremental expenditure.


R3: KSS, TGT, GPS, DECK - R3 2 25 11




The Macau Metro Monitor, February 25, 2011



The unemployment rate for November 2010 - January 2011 held stable at 2.7% and the underemployment rate remained unchanged at 1.7% from the previous period (October-December 2010). 
Total labor force was 332,000 in November 2010 - January 2011 and the labor force participation rate stood at 71.4%, with the employed population increasing by about 800 over the previous period to 323,000.


DICJ director Manuel Joaquim Das Neves said the Macau government isn't likely to get involved in the Ho drama.  Neves also said that MGM Macau told DICJ that Daisy Ho had stepped down from its board at the end of 2010.  The move raised speculation that Daisy was trying to seek a board seat at SJM.



Casino operator Crown's CEO, Rowen Craigie, said that Crown has lost some of its business to S'pore's 2 IRs and that the VIP market was growing strongly, particularly in Macau.  He said facility upgrades in progress at Crown and Burswood would help boost Crown’s share of VIP numbers.


Craigie added that many VIP gamblers from South-East Asia were now choosing to play locally, and some of Crown’s key VIP customers were spreading their time between Macau, Las Vegas, Australia and Singapore.


The Court of Second Appeal rejected Bombardier’s injunction seeking to cease all administrative actions related to the public tender to supply the rolling stock and system for the light rail transit system.  Bombardier may seek an appeal. The two losing bidders of the LRT contract – Bombardier and Siemens – still have until March 8 to lodge an appeal regarding the tender result.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.45%
  • SHORT SIGNALS 78.38%


TODAY’S S&P 500 SET-UP – February 25, 2011


Oil was, once again, a key driver of equity prices yesterday.  The rise in oil reversed yesterday intraday and equities, on cue, finished strongly into the close in New York.  Speculation that the U.S. recovery will be further confirmed by data to be released today also helped stocks as the concerns surrounding oil prices abated.  As we look at today’s set up for the S&P 500, the range is 31 points or -0.85% downside to 1306 and 1.52% upside to 1330.




  • 08:30 a.m.: GDP QoQ, 4Q, Est. 3.3%, prior 3.2%
  • 08:30 a.m.: Personal Consumption, 4Q, Est. 4.2%, prior 4.4%
  • 08:30 a.m.: GDP Price Index, 4Q, Est. 0.3%, prior 0.3%
  • 08:30 a.m.: Core PCE QoQ, 4Q, Est. 0.4%, prior 0.4%
  • 09:55 a.m.: U. of Michigan Confidence, February (final), Est. 75.4, prior 75.1 




Two of the nine S&P 500 sectors are positive from a TRADE perspective while all nine are positive from a TREND perspective.

  • One day: Dow (0.31%), S&P (0.10%), Nasdaq +0.55%, Russell +0.57%
  • Month-to-date: Dow +1.48%, S&P +1.55%, Nasdaq +1.40%, Russell +2.94%
  • Quarter-to-date: Dow +4.24%, S&P +3.85%, Nasdaq +3.21%, Russell +2.62%
  • Sector Performance - (6 sectors up and 3 down): - Consumer Discretionary +0.60%, Industrials +0.58%, Technology +0.35%, Healthcare +0.34%, Financials -0.24%, Utilities -0.39%, Consumer Staples -0.41%, Materials -0.52%, Energy -1.41%



  • ADVANCE/DECLINE LINE: +143 (+1052)
  • VOLUME: 1221.30 (-8.20%)
  • VIX: 21.32 (-3.62%)
  • SPX PUT/CALL RATIO: 2.22 from 1.34 (+65.67%)



  • TED SPREAD: 18.47 from 18.88
  • 3-MONTH T-BILL YIELD: 0.13% from 0.12%
  • 10-YEAR: 3.46% from 3.45%



  • CRB: 346.3 -0.63%; YTD: +3.90%
  • Oil: 97.61 +0.34%; YTD: +5.84%
  • Copper: 440.2 +1.35%; YTD: -0.84%
  • Gold: 1404.72 +0.13%; YTD: -1.13%



  • USD: 77.149 +0.12%
  • Euro: 1.378 -0.07%



  • FTSE 100: +0.83%; DAX: +0.43%; CAC 40: +1.31%
  • Russian Central Bank Unexpectedly Raises Main Rates, Reserve Requirements
  • Lloyds Tumbles as Rising Funding Costs Threaten 2011 Profit
  • Sentance Says BOE Must Tighten Now to Prevent Tough Moves Later 



  • Nikkei +0.71%; Hang Seng +1.82%; Shanghai Composite +0.00%
  • Asian Stocks Climb for First Time This Week on Oil Price; Hynix Advances
  • India Says Economy May Grow as Much as 9.25% Next Year Amid Inflation Risk
  • World’s Biggest Pension Fund ‘Will Likely’ Sell Japan Bonds



Howard Penney

Managing Director

CHART OF THE DAY: Uncle Sam & Big Government Central Planning Approve this Rally



CHART OF THE DAY: Uncle Sam & Big Government Central Planning Approve this Rally -  chart

Superior Defense

“Defense is superior to opulence.”

-Adam Smith


Stock market bulls pulled out all of their guns yesterday. From the Fed’s James Bullard beating his chest on the potential for QG3, to the Saudis banging out barrels of oil, and the media professing that the Libyan nut-job had been shot – it was all out there. Central Planners of the world unite!


Yes, it’s sad – but it’s true. The other side of the Big Government Intervention trade has been price volatility. What can the Almighty Government do for us next? Price “stability” mandate of the Federal Reserve Act of 1913 be damned. This casino is open for business.


Can US stock market bulls handle three consecutive down days anymore? The Europeans were amazingly able to stomach four. After a 3-day -2.8% drop from this intermediate-term cycle’s closing high in the SP500 of 1343, the question remains – can the bulls defend their critical support lines?


Government Supports in this market are crystal clear: immediately after the St Louis Fed dove opened his mouth, the US Dollar got Bullarded (new wiki synonym for debauched). At the same time the Saudis predictably defended their Kingdom.


Quantitative Supports are less clear: with so many of Wall Street’s finest still using the 50 and 200 day moving averages as their point and click concepts of revisionist risk management, it’s become both entertaining and frightening to watch. The bulls panic when there’s such a big gap between last price the and nearest one-factor price momentum reference point (the 50-day for the SP500 is down at 1287).


I used to do that – trade on emotion. When I was in college, someone invented the internet. And I was immediately able to punch a moving average into a chart. Then I started doing it with lots of charts. Then I started trading and realized by 2001 that I needed a lot of beers to convince myself that a simple moving average was going to be the elixir of my stock picking life.


I wrote about a basic 3-factor setup that I use in my multi-factor, multi-duration, risk management model earlier this week – PRICE, VOLUME, and VOLATILITY. So rather than attempting to make any more average-at-best jokes in a Friday note, I’ll just get on with it and show you some immediate-term TRADE lines of  support and resistance.


SP500 (see attached chart)

  1. TRADE line resistance = 1326 (that’s both a lower long-term and lower immediate-term high)
  2. TRADE line support = 1295

Volatility (VIX)

  1. TRADE line resistance = 22.96
  2. TRADE line support = 18.14

The inverse correlation between the SP500 and the VIX is a critical one to consider when mapping out the probability of the US stock market holding onto its bullish intermediate-term TREND. What’s most interesting about the current setup is that when you expand your duration to 3 months-or-more (our TREND duration) as opposed to 3 weeks-or-less (our TRADE duration), both the SP500 and the VIX are bullishly positioned. One of the two has got to give.


Here are those two critical intermediate-term TREND lines of support:

  1. SP500 = 1251
  2. VIX = 18.11

For now, the better benefit of the doubt should be given to the stock market bulls. With the SP500 still up +93.2% from where we got bullish on US Equities in March of 2009, a tremendous amount of price momentum has been baked into this bullish cake.


Additionally, the immediate-term move in Big Government Sponsored Volatility (VIX) has been surreal (the VIX is UP +37% since February the 11th!). And most 3.5-4.5 standard deviation moves in price (oil just had one too) are subject to immediate-term mean reversion corrections.


All that said, the coming days will be critical to monitor from a PRICE, VOLUME, and VOLATILITY perspective. The fundamental Global Macro overlay of Growth Slowing as Inflation Accelerates will also be key to measure in real-time.


Most Asian and Emerging stock markets are already broken on both our TRADE and TREND durations. Concurrent VOLUME and VOLATILITY signals continue to support the bearish case for our short positions from Emerging Markets (EEM) to Brazil (EWZ).


Here at home, I maintain that the Superior Defense for America’s long-term prosperity is defending the US Dollar rather than debauching it. I want to stand alongside the brave men and women wearing Canadian and American jerseys who recognize that the names on the front of our jerseys mean more than the ones on our backs (Herb Brooks). It’s time to stop begging for Saudi barrels and Quantitative Guessing. It’s time to stand up and be accountable.


My immediate term support and resistance lines for the SP500 are 1295 and 1326, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Superior Defense - na1


Superior Defense - na2

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.