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R3: JCG, AZO, PVH, and GPS

R3: REQUIRED RETAIL READING

March 2, 2011

 RESEARCH ANECDOTES

  •  Target’s expansion within NY’s five boroughs is likely to continue with the company picking up a 7.9 acres parcel of land in the Bronx.  The site is slated to include a 300,000 square foot mall along with a Target.  Given the size of the land it’s unlikely that this location will be part of the company’s smaller store test of CityTarget’s.
  •  According to the NRF/BigResearch 2011 Tax Returns Intentions and Actions Survey, 41.9% of respondents will pay down debt, 42.1% will increase savings, and 29.7% will put the cash towards everyday purchases.  The amount of consumers putting money into savings rose by 4% year over year while those planning to pay down debt slipped by 4.5%.  Approximately 63.9% of Americans have already filed their returns.
  •  Add AutoZone to the list of retailers noting that tax refunds (aka Refund Anticipation Loans) did not materialize at the same level as they have in prior years.  This had a negative impact on January results (along with weather) although management believes this will likely end up being a timing issue rather than a permanent reduction in cash flow for the company’s lower-income consumer.

 

OUR TAKE ON OVERNIGHT NEWS

 

Shareholders Approve J. Crew Buyout - Shareholders approved J. Crew Group Inc.’s $3 billion buyout by TPG Capital and Leonard Green & Partners by a better than three-to-one margin at a special meeting Tuesday. The acquisition faced opposition heading into the meeting. Some investors saw the price of $43.50 a share as inadequate and groused over the way chairman and chief executive officer Millard “Mickey” Drexler talked to the private equity firms about a deal before informing his board. Investor advisory firm Institutional Shareholder Services Inc. recommended stockholders vote against the deal. <WWD>

Hedgeye Retail’s Take:  Despite rumors that TPG/Leonard Green were contemplating a higher bid (competing against themselves) the soap-opera style saga surrounding this deal is now over.  It will be 3-5 years before the Street needs to brush off its earnings models on this specialty retailer for its next IPO.

 

Gap's Asian Expansion Moves Forward - Gap Inc. is continuing its international expansion drive, eyeing potential acquisitions, launching a Japanese e-commerce site and bringing the Old Navy chain here, according to John Ermatinger, Gap’s Asia Pacific president. Although the executive said the company’s main priority is developing its existing portfolio of brands, Gap is “always looking” at possible acquisitions. He said the company has already examined some companies in Asia, but the potential targets have either overlapped with Gap’s existing brands or turned out to not be for sale. <WWD>

Hedgeye Retail’s Take:  Interesting comments on acquisitions which would surely jumpstart the company’s Asian expansion efforts.  If anything were to transpire, we suspect a deal would be rather small in nature relative to the overall size of the corporation.  A content related purchase would also be high on the list.

 

PVH Gives Izod Watch License to Ritmo Mundo - Phillips-Van Heusen Corp. has licensed Ritmo Mundo to market and distribute a line of men’s and women’s watches under the Izod label in North America. The deal is for five years, with a three-year renewal option at PVH’s discretion.The sport-inspired Izod watches will debut at BaselWorld in Switzerland later this month. They will be distributed at major department stores and specialty stores throughout the U.S., Canada and Mexico. “We are very excited to partner with Ritmo Mundo — a highly respected luxury watchmaker,” said Allen Sirkin, president and chief operating officer of Phillips-Van Heusen. <WWD>

Hedgeye Retail’s Take:  While FOSL tends to garner a fair amount of the business in the licensed watch business, we’re reminded that there are still plenty of partners for which brands can develop partnerships with.  Don’t expect the IZOD watch biz to be a meaningful driver of sales or earnings.

 

New Balance Launches "Excellent" Campaign - New Balance debuted a new brand campaign designed to motivate and inspire active consumers to reach a new level of personal performance -  a new level of "Excellent."   The fully-integrated campaign launches a new tagline, "Let's Make Excellent Happen," and plans to aggressively leverage the voice of Team New Balance athletes to bring the brand's message to life. "This campaign is grounded in our running heritage yet reflects the innovation and passion of our brand, our products and our world-class athletes as we compete in today's marketplace," says Rob DeMartini, President and CEO at New Balance. The campaign's creative work includes TV, print, digital advertising, engagement in NB's on-line community, viral video content, in-store and event exposure. The cornerstone of the campaign is the "Pier 54" television spot. <SportsOneSource>

Hedgeye Retail’s Take:   Increased advertising=good for retailers like FL, FINL, and DKS.  Expect the new campaign to reinvigorate New Balance which has taken a bit of a backseat to both toning and more innovative running platforms from NIKE, Adi, and UA over the past several months.

 

Jeans Maker RGR to Close - A surge in cotton prices has forced the closure of Groupe RGR, a 38-year-old maker of denim sportswear for U.S. clients such as Gap Inc. and Tommy Hilfiger, and Lois jeans in Canada. The company will close five plants in July, affecting about 400 full-time female workers who will lose their jobs. “It’s the toughest decision I ever had to make in my life,” said Rolland Veilleux, co-founder and chief executive officer of RGR, based in St. Georges de Beauce, near Quebec City. “At the top in 2000, we employed 1,800 and operated 11 specialized plants working for top North American clients,” he said. “But we’ve had to fight mounting low-cost Asian competition for several years. Business has been declining steadily and we no longer have the volume.” <WWD>

Hedgeye Retail’s Take:   This may be one of the more extreme examples of what rising costs can do for textile manufacturers that are still operating with high cost infrastructures. 

 

Cotton Committee Forecasts Production Increase The International Cotton Advisory Committee on Tuesday projected that worldwide cotton production will increase 9 percent to 127 million bales in the 2011-2012 season, as farmers plant more in response to spiraling raw cotton prices and increased demand that has gripped the industry. On the Cotlook A index, cotton prices, which have created havoc in the apparel and textile industries’ pricing structures all the way through to retail, are expected to hover around $1.61 a pound in this new season, after hitting a record high of $2.33 a pound on Feb. 18, the committee said.  <WWD>

Hedgeye Retail’s Take: Not surprisingly demand leads supply which in turn leads to lower prices as supply increases.  The key issue here being that an entire growing cycle needs to transpire before we see prices come in materially.

 

Retailers Can Win over Negative Consumers   - Retailers can’t give up on consumers who post negative reviews or comments on social networks such as Facebook, Twitter or Yelp. Rather, by listening and responding to those complaints merchants can turn disgruntled shoppers into brand advocates, according to a new Harris Interactive report commissioned by RightNow Technologies Inc., which provides customer data and contact center technology. The report, which is based on a survey of 2,516 shoppers in January, found that many retailers are attempting to do just that. 68% of the consumers who posted a complaint or negative review said that they were contacted by the retailer. <InternetRetailer>

Hedgeye Retail’s Take:  Imagine a retailer actually caring what you think?  Simple customer service goes much further than simply low prices.  Expect to see the feedback loop continue to increase as social networks allow consumers to share their views/thoughts/complaints in real time.


Getting Old

“Demographics is destiny.”

-Arthur Kemp

 

Undoubtedly, there is a lot I disagree with Arthur Kemp on.  He is the Foreign Affairs Spokesperson for the British National Party, and is a self-avowed white separatist and critic of miscegenation.  Yup, definitely not that kind of cat I would spend much time socializing with or supporting.  Despite this, his quote above regarding demographics rang very true with me.

 

We employ demographics across many of our research verticals, and in fact use it from a macro perspective when analyzing countries and demand patterns.  The inevitability of demographic trends is difficult to deny.  In some instances, it may merely be getting old, which is what my mother likes to tell me I’m doing as a 37-year old bachelor.  In other situations, demographics, and the related outcomes, relate more to youth and birthrates.

 

In an intraday note yesterday titled, “Could the Kingdom Fall?”, I highlighted the importance of age to social unrest in the Middle East and North Africa.  Simply put, MENA has a young population that is severely under-employed.  If there is an elixir for social unrest, this is it - young people with too much time on their hands, and not enough money in their pockets. 

 

As a frame of reference, the median age in the United States is 36.9 years. Globally, the median age is 28.4 years.  So, the population of the United States is meaningfully older than the rest of the world.  The global median age is driven down by the Middle East and North Africa.  In the Chart of the Day, we’ve highlighted this global discrepancy broadly, but the median age in Iran is 26.8, in Iraq 20.9, in Egypt 24.3, in Libya 24.5, and in Pakistan 21.6.  The lower average and median ages in MENA have been driven by vastly improving health care over the last decade, which have driven up birthrates.

 

In Japan, the key demographic trend is the exact opposite.  In contrast to many MENA countries, and really the world, Japan is old.  Not getting old, but already there.  In fact, the median age in Japan is 44.8 years.  According to the CIA World Fact Book, this makes Japan the second oldest nation based on median age after Germany, whose median age is 44.9.  Not surprisingly then, demographics is one the key tenets in our bearish thesis on Japan’s equity and currency; or as we like to call it: Japan’s Jugular.

 

While Japan’s median age is slightly lower than Germany’s, it has by far the world’s most elderly population.  Currently, as of 2009, 22.7% of Japan’s population is above 65 years of age.  The Japanese government has modeled this ratio to grow to 29.2% by 2020 and to 39.6% thirty years after that.  The implications are that in ten years the ratio of retirees to working age will be ~48% in Japan. 

 

The aging Japanese population has dire implications related to the future fiscal and monetary health of the country.  The Japanese Government Pension Investment Fund, the world’s largest pension fund with ~$1.4 trillion in assets, has consistently been one of the largest buyers of Japanese government debt.  This fiscal year, ending March 2011, the fund will be for the first time a net seller of Japanese government bonds.  According to Takahiro Mitani, the President of GPIF, “We certainly have to come up with an adequate amount” to pay pensions.  With these bond sales, the impact of demographic headwinds has likely reached an inflection point in the Japanese economy. These sales will only accelerate in the coming decades and with them the associated risks to the Japanese economy (higher interests rates as one) will also accelerate.

 

In the United States, there is some clear destiny embedded in demographic trends as well, specifically related to healthcare and healthcare investors.  The Baby Boomer wave, which Healthcare investors commonly, and mistakenly, place as the core driver of a long-term Healthcare growth thesis, remains the most consequential domestic demographic trend. 

 

Boomer Employment (45-64 yr olds) reached its crescendo in the 1 timeframe with peak earnings and peak disposable income occurring alongside historic lows in unemployment.  Now, with this segment of the working population in deceleration mode, the U.S. workforce nearing a peak in average age, and the echo boomers (30-39 yr. olds) years away from peak consumption growth, the healthcare and broader economy face significant longer-term demographic headwinds.

 

This last point is also embedded in long-term projections for healthcare and social security entitlements in the United States.  In the Congressional Budget Office’s long-term baseline scenario, due to these aging demographic trends, social security spending accelerates from 4.8% of GDP in 2010 to 6.2% in 2035 and healthcare spending accelerates from 5.5% of GDP to 9.7% over the same time period, which will lead to a huge ramp in mandatory government spending over the coming decades with no reform.

 

While there is inevitability embedded in many of the demographic trends outlined above, from a risk manager’s perspective we just have to manage the tail and headwinds accordingly.   And as Chuck Jones, the inventor of Wile E. Coyote, said about inevitability:

 

“There is absolutely no inevitability as long as there is a willingness to think.”

 

Indeed.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

 

Getting Old - daryl1

 

Getting Old - daryl2



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THE M3: TAM COMMENTS; HIGHER USS PRICES; FLEMING

The Macau Metro Monitor, March 2, 2011


GAMING INDUSTRY'S DEVELOPMENT TO SLOW DOWN: GOVERNMENT macaubusiness.com

Secretary Francis Tam said the government  "is poised to control the level of expansion of the sector."  He added, "We shall only see the industry increasing by a few percentage points” every year.


TICKETS TO UNIVERSAL STUDIOS LIKELY TO COST MORE Strait Times

Tickets for adults to Universal Studios Singapore now cost $66 on weekdays, and $72 on weekends and peak periods. Travel agents expect prices to rise by between $2 and $8 as a result of price hikes by RWS.  RWS will charge travel agents between $1 and $3 more for tickets which they re-sell to tourists from April 30.

 

US REGULATORS INVESTIGATE JACOBS' ACCUSATIONS AGAINST SANDS macaubusiness.com

Las Vegas Sands has denied the allegations and will cooperate with the probe. Separately,  Sands China has announced David Fleming as an alternate director to Michael Leven starting March 1.  Fleming is the joint company secretary and the general counsel of LVS.

 


TALES OF THE TAPE: PEET, CMG, MCD, DPZ, CBRL

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

  • PEET gained 0.3% on strong volume while other QSR concepts declined on the day.  Interestingly, following the outperformance of the stock yesterday, the company was upgraded today to Buy from Neutral at Janney Capital.
  • CMG was upgraded to Market Perform from Underperform at Morgan Keegan.  The stock has been trading poorly of late as concerns mount over the commodity cost outlook and the ongoing investigation into CMG’s hiring practices by immigration authorities.
  • MCD, according to Bloomberg, is expecting a 20% jump in sales in Malaysia.
  • DPZ reported earnings in line with street expectations yesterday morning but the stock declined on accelerating volume on inflationary headwinds and management’s outlook.  See our posts from yesterday.
  • CBRL declined 3.6% on strong volume.   The significant rise in gas prices at the pump will impact travel plans this summer, which could impact CBRL’s same-store sales trends.

TALES OF THE TAPE: PEET, CMG, MCD, DPZ, CBRL - stocks 32

 

Howard Penney

Managing Director


Superior Defense

This note was originally published at 8am on February 25, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“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,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Superior Defense - na1

 

Superior Defense - na2


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