• run with the bulls

    get your first month

    of hedgeye free


FL: Expecting the Expected

Foot Locker reports 4Q earnings on Wednesday 3/2 after the market close, followed by a conference call on Thursday morning.  We continue to expect a solid 4Q result, with our model forecasting EPS of $0.43 well ahead of the Street at $0.37.  The cornerstone of our forecast is a 6% same store sales increase coupled with gross margin expansion at the upper end of the guided range (+300 bps y/y).  We note that promotional activity during the quarter was low, with very few promos occurring beyond the traditional holiday period.  Recall that management suggested going into the quarter that they would strategically reduce promotional cadence if “sales were good”.  We believe this was the case.  


Beyond the quarter, which almost seems like old news at this point, we expect an update on the company’s strategic priorities for 2011 as well as some high level guidance.  We remind investors that we do not expect Foot Locker (and specifically CEO Ken Hicks) to change its policy regarding conservatism.  As such here’s a list of what we do and do not expect to hear on Thursday’s call.  We also include several questions that we’d like to hear answered as current management anniversaries its first year on the job.



  • A step up in the company’s use of its cash balance primarily on share repurchase and capex.  Capex should be north of the $110 million (up $10-$20 million) spent in 2010, with the incremental spending going towards store remodels and systems upgrades.  We would not be surprised to see some incremental capital put towards the company’s e-commerce platform, which to some degree has been stagnant for a few years now.  We expect the cash balance to be approximately $625-$650 million with the biggest variance coming from the possibility that share repurchase activity picked up during the quarter.  The current repurchase plan had $215 million remaining on it at the end of 3Q.
  • An update on where the company stands on year over year changes in merchandising.  Through the fall, 60% of the assortment (primarily apparel) had been changed.  Expect the number to be between 80-90% updated through Spring.
  • Inventories are likely to have ended the year down 2-3% on an absolute basis as the company continues to work towards its turn goal of 3x.  Guidance for inventories in 2011 should be down slightly.
  • Store closings for 2011 should be well below 2010 levels.  Expect 40-50 closings which represents a more “normalized” rate given lease expiration and real estate portfolio management.  FL closed approximately 110 units in 2010, with most shuttered over the first three quarters of the year.  Recall that the turnaround prospects for Foot Locker are not centered on shedding assets but rather on making the 3,500 store chain more productive. 
  • An update on the company’s banner segmentation efforts, which through 3Q were also about 60% complete. Recall that this process includes marketing and merchandising each of the company’s five core brands separately with a focus on unique customer segments.
  • An update on the company’s testing efforts as they pertain to RUN by Foot Locker, CCS test stores, mobile marketing/e-commerce, and merchandising exclusives.


  • Guidance in the press release or specific EPS guidance.  Management’s history suggests that high level guidance will be provided on a conservative basis.  Same store sales, inventories, gross margins, and SG&A will all be addressed.  We do not expect any surprises here but still remain above Street expectations for 2011. Our estimate calls for $1.40 vs. the Street at $1.25.


  • How big  was the 2011 increase in co-op advertising?  It appeared in 4Q that TV impressions were up substantially but at what (if any) cost?  How is Foot Locker measuring advertising effectiveness now that each of the major brands are firmly behind the company’s resurgence as the leading global seller of athletic footwear?
  • What is being done to jump-start the performance of the company’s e-commerce platform?  When is store pick-up and real-time store by store inventory going to be a reality for the consumer? With double-digit EBIT margins, even modest growth here could and should be meaningful to the bottom line.
  • How are the product trends in the US (running, basketball, toning) translating into Europe and Asia?
  • When can we see more House of Hoops-like collaborations with your vendors? 
  • If an NFL lockout occurs what impact may this have on this year?  Would this possibly help the impending launch of Nike’s NFL license given pent up demand may result from a NFL-free year?
  • What if anything will Allen Questrom be focused on with his recent board appointment? He has a history of changing company cultures and attracting human capital.  Will the organization see changes as a result?
  • What have been the biggest challenges so far in re-assorting the company’s apparel programs, both private label and branded?
  • What does a successful exclusive launch of UA basketball mean for future collaborations? (same for Li Ning? Is it significant enough to move the needle?)

Eric Levine



Keith shorted MCD in the Hedgeye Virtual Portfolio.


We have been bearish on McDonalds for some time now and published a contrarian Black Book detailing our thesis in mid-January.   MCD’s core business is in decline and the first chart, below, shows where January’s comparable restaurant sales came in versus expectations.  Our estimates for the rest of the year are also detailed in the chart; clearly we have a pessimistic outlook for the U.S. business which represents approximately 46% of the company’s operating profit.


The second chart details the quantitative set up for MCD at its current level.  The Hedgeye Risk Management quantitative set up shows the nearest intermediate-term support down at $74.12.






Howard Penney

Managing Director


Based on Q4 dollar RevPAR, January should've been stronger.



Following up on our 1/26/11 post, "HOTELS; BLAME THE WEATHER", January Upper Upscale Revpar grew 7.4% YoY.  While that may appear strong on the surface, it was actually a deceleration from Q4.  Seasonally adjusting Q4 dollar RevPAR produces January RevPAR growth 4 percentage points higher than actual.  It's hard to believe poor weather could explain that magnitude of a miss.  Given the high RevPAR volatility over the last three years, we track RevPar on a sequential, absolute dollar basis, adjusted for monthly seasonality.   


Reflecting November-January RevPAR, we project RevPar growth of 10% for February 2011, assuming no sequential growth in seasonally adjusted dollar RevPAR.  Anything below 10% will be indicative of a slowdown.  Thus far, the weekly February RevPar have been trending a tad lower than that.  We continue to believe that February will be the near-term peak for RevPar growth with contraction risk in Q2.





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.

India: Missing Where It Matters Most

Conclusion: Finance Minister Mukherjee’s budget failed to adequately address the #1 issue facing the Indian economy – inflation. As a result, our bearish stance on Indian equities continues unabated. Further, we don't see India meeting its FY12 deficit reduction target as a likely outcome.


Position: Short Emerging Market Equities via the etf EEM.


Though we tactically covered our short position in Indian equities on 2/24 (for a gain), we still remain quite bearish on them at current prices. India’s SENSEX has rallied +1.1% off its lows on 2/24, driven by a confluence of declining crude oil prices (India imports ~70% of its crude oil needs) and hopeful expectations surrounding the unveiling of the government’s FY12 budget, which took place today.


Regarding the budget specifically, it delivered where quite a few investors were hoping it would – on promoting investment in India’s woeful infrastructure. Highlights include: 

  • An additional +23% more spending on roads, ports, and power generation capacity;
  • The limit for foreign institutional investment in debt issued to finance infrastructure projects quintupled to $25B vs. $5B prior;
  • The limit for foreign investment for Indian corporate bonds doubled to $40B vs. $20B prior, with the entire delta reserved for bonds issued by infrastructure companies;
  • Domestic individual investors could purchase up to $450 worth of infrastructure bonds and receive tax-free status on the returns for an additional year;
  • $330M for investing in clusters of farmland with the intent on increasing lentil, palm oil, and vegetable production;
  • Keeping the excise tax at 10%, rather than returning it to its pre-crisis level of 12%;
  • $450M in rural infrastructure spending designed to created 4M tons of warehouse capacity used to store food grain (by March 31, 2012);
  • To further encourage investment in cold-storage capacity, the budget exempts air-conditioning units and refrigeration equipment from the excise duty; and
  • Mukherjee plans to incentivize commercial banks to increase lending to India’s farmers by +27%. 

For perma-bull BRIC-lovers, this bullish-on-infrastructure budget is full of long-term investment opportunities. For those of us that prefer to manage the risk associated with playing the game that’s in front of us, this budget is a flat-out failure, missing where it matters most – reigning in inflation. This budget does very little in combating India’s massive inflation problem, which now shifts the bulk of the onus of suppressing inflation back towards the central bank (think: policy “hot potato”).


To Mukherjee’s credit, his proposed budget “only” calls for a +3.4% YoY increase in spending, which is down substantially from the +20% YoY increases of India’s more recent budgets. On the flip side, however, these recent budgets reflect heavy countercyclical gov’t spending during and in the wake of the global financial crisis.


The fact that India is unable to retract from such elevated levels of gov’t spending shows that India’s ruling elite may be increasingly unconcerned about the strife of its impoverished populous. The reactions by India’s competing politicians (which certainly need to be taken with a grain of salt) underscore this assertion: 

  • “This is an anti-people budget. The budget is targeted at a section of the country who are considered to be the cream of the society. No relief measures have been unveiled to provide relief to the common man.” – Left Front Chairman and Communist Party of India-Marxist (CPI-M) politburo member Biman Bose
  • “The most important issue that is taking a toll on common man is price [increases]. No measures have been taken to tackle it. Rather they have given attention to indirect taxes. And another thing, no measures have been taken for the minority community of India.” – Forward Bloc leader Hafiz Alam Sairani
  •  “This budget is for the rich section of the society, not for the poor people.” – Communist Party of India (CPI) leader and state Water Resource Minister Nandogopal Bhattacharjee 

Less anecdotally, our analysis of the budget leads us to side with the gentlemen above. The budget is rife with tax hikes and income tax deductions that appear more symbolic than impactful in nature: 

  • A new service tax will be levied on air-conditioned restaurants that serve alcohol – in addition to the VAT, which is typically 12.5% for food and 20% for alcohol;
  • Hotels will levy an additional 5% service tax and all room rates will increase by a minimum of +1,000 ($22) rupees per night;
  • A +50 rupees ($1.10) service tax will be levied on domestic airfare and a +250 rupees ($5.50) service tax will be levied on international airfare, with an additional tax for flying business class;
  • A 5% tax will be levied against all services provided by air-conditioned hospitals with greater than 25 beds (essentially all major hospitals in every urban area);
  • The income tax exemption for individual male taxpayers increased +20,000 rupees ($445) to 180,000 rupees ($4,000). For women, the increase brings their exemption level to 190,000 rupees ($4,220). Calculations by consulting firm Deloitte Haskins & Sells suggests these increases amount to a tax saving of ~$45 per year, which is likely to be consumed by the increases in the effective tax rates on many services broadly; and
  • The retirement age drops to 60 from 65 previously and those individuals will maintain tax-exempt status on income less than 250,000 rupees ($5,555). Individuals older than 80 will maintain tax exempt status on incomes up to 500,000 rupees ($11,111). It remains to be seen how many individuals will benefit from this change in tax code. 

All told, taxes are going up, which directly equate to higher consumer prices. $112 Brent crude oil and a currency that is down (-1.3%) YTD indirectly contribute to accelerating inflation as well. As we have seen with the RBI’s decision to engage in Quantitative Easing throughout 4Q10 and early 2011, Indian monetary and fiscal policy continue to be managed in a way that disenfranchises the bulk of India’s population (the World Bank estimates that over 75% of Indians live on less than $2 per day).


Perhaps that is why thousands of protesters continue organizing rallies on the nation’s capital – a trend we expect to accelerate as growth decelerates over the next 6-9 months and inflation remains sticky due to corporate COGS increases being passed through to Indian consumers. Perhaps the worst part of the Finance Minister’s budget proposal is that it forecasts growth to accelerate to +9.25% YoY next year, which implies that corporations are likely to be increasingly comfortable passing through price increases to Indian consumers in an environment of robust growth expectations.


Decelerating global growth, heightened interest rates, and accelerating inflation – particularly elevated crude oil prices – all remain headwinds to Indian GDP growth over the intermediate-term TREND. Perhaps that’s why the SENSEX has diverged from both the government’s and sell-side consensus’ lofty growth projections (down -13.1% YTD).


Darius Dale



India: Missing Where It Matters Most - 1


Ho hum quarter and future




  • "We were able to increase our property EBITDA by about 17% (11% on a same store basis) on increased revenues of only 2.4% in part as a result of the benefits of lower gaming taxes in Florida and because we are providing an improved guest experience, our marketing programs are driving more profitable business, and our team remains focused on fiscal discipline.  The efficiency we have created in our business is demonstrated by the fact that in the markets where we experienced increased revenues the flow through on year-over-year revenue changes was significant, ranging from about 40% in Marquette to a high of 154% in Waterloo. In addition we were able to increase EBITDA in Lake Charles and Biloxi despite revenue declines year over year."
  • "While we have not experienced a wide spread increase in consumer spending, we are capitalizing on specific areas of opportunity in our business, and have therefore been successful in achieving improved financial results. During the quarter we experienced a slight decline in rated visits that was offset by an increase in rated spend."
  • "Capital expenditures during the quarter totaled $20 million, of which $8 million related to Cape Girardeau and $12 million related to maintenance capital expenditures."
  • "The Company expects capital expenditures for the remainder of the fiscal year to be approximately $15 million consisting of $10 million in maintenance capital expenditures and $5 million related to Cape Girardeau."
  • Development Update:
    • Casino Cape Girardeau:
      • "Completed purchase of all land and demolition of existing structures is underway... In the process of selecting a general contractor, we expect to break ground in the summer of calendar 2011. The $125 million project, which will feature approximately 1,000 slot machines, 28 table games, three restaurants, a lounge and terrace overlooking the Mississippi River and a 750-seat event center, remains on schedule to open in late calendar 2012."
    • PA:
      • "In January, the Pennsylvania Gaming Control Board indefinitely delayed its decision on granting the state's final Category 3 resort gaming license... Since that time, two new gaming board members have been appointed and the Company has received no guidance with respect to the timing of any announcement regarding the license."


  • Faced weather issues in Dec and Jan that have continued into February
  • Over 50% of their properties saw higher retail spend.
  • Beginning to look for new COO
  • 79MM on R/C; 357 MM sub notes; 5MM of other debt . Total debt: 1.25 BN
  • Leverage: 6.75x; interest coverage: 2.27x


  • Believes no gaming tax hike for Iowa - not popular with public
  • In November, signed with potential developer for Davenport casino. Quiet period right now.
  • Lake Charles
    • Continue to strengthen customer relationships
    • Niche with little competition
    • Consider Houston secondary/tertiary market - a little lift from high oil prices
  • Vicksburg EBITDA:
    • Pressured from high unemployment
    • Lula-20th cons. quarter of declining gaming revs
    • Natchez - highly promotional market
  • Term loan: All term B
  • Amending revolver? Yes, when they do new credit facility
  • Bridge opening in Thanksgiving benefited Bettendorf results
  • Missouri has been particularly strong. Iowa had a good Q. Pressure continues to be in the South.
  • Biloxi: market continues to be tough; decline in Pensacola market; canceled fishing tournament.
  • Corp exp run rate: lower than expected insurance claims benefited FQ3; for the year, run rate is mid-30s on a cash basis + stock comp (in-line with previous guidance).
  • Stock comp for F4Q: 1.4-1.8 is better range.
  • Cape Girardeau: still in process of selecting a contractor
  • Competitive market:
    • Increased promotional activity in Quad Cities; Jumer's in particular
    • Biloxi, Vicksburg, and Lake Charles - high promotional environment
  • Other accrued liabilities: some swaps, timing of payments
  • Interest expense run rate is in-line with guidance; wouldn't change until construction cycle at Cape Girardeau
  • A good chunk of the improvement in Florida is due to the change in tax rate
  • Increase in retail revenue at about half of their properties which is more a profitable customer for them
  • Iowa removal of smoke exemption for casinos?
    • Tough to read the tea leaves


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.  Both have seen increases in this metric, but casual dining continues to be the primary target. 

  • BWLD and EAT saw significant gains in their short interest levels over the past two weeks. 
  • PFCB short interest had been ticking down but the last two readings have shown that investors are continuing to short the stock, even with the short interest at elevated levels.
  • CMG saw an uptick in short interest as inflation concerns impact sentiment around the name.
  • GMCR saw a downtick in short interest over the past two weeks in reported data terms (settlement date 2/15) but I would submit that the recent decline in the share price (-5.65% since 2/15) suggests that sentiment around the name may be changing.
  • PEET short interest was driven higher as the continuing gains in coffee costs got the attention of the investor community.

SHORT INTEREST UPDATE - rest short interest


Howard Penney

Managing Director

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.