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R3: JWN, COST, URBN, and India


March 8, 2011


  • Add Costco to the list of retailers looking to increase their presence in the bridal business.  Costco is collaborating with designer Kirstie Kelly to offer six wedding dresses priced from $700 to $1400.  Word has it that the dresses will be merchandised in a shop-in-shop manner via special four-day trunkshows.  The roaming sale events will come complete with fitting rooms, bridal consultants, and a lounge. 
  • URBN outfitters is one of the first US based retailers to note a negative impact from the increased VAT in the UK along with broader austerity measures.  While US comp momentum has improved to pre-January levels so far in 2011, Europe remains slightly below early 4Q trends.
  • Innovative marketing can still work, as evidenced by Kimberly Clark’s social sampling promo for Kleenex.  The brand shipped 1 million mini-boxes of tissues to consumers as part of its “Softness Worth Sharing” campaign.  The social media driven program let people send samples to friends and family via Kleenex.com.  Overall market share is up 3.9 points since the campaign began.



New Balance Takes on Nike in Commercial -  In one of the commercials for its new "Make Excellent Happen" campaign, New Balance Inc. makes a relatively rare move of comparing one of its shoes to its largest competitor, Nike. The Nike Lunarglide is shown on digital scale weighing 11 ounces while New Balance's new 890 is shown on a scale next to it initially weighing 11.1. After a bunch of nuts and bolts are literally dumped from the New Balance shoe, the weight of the 890 is shown reduced to 9.7 ounces. In the 16-second commercial, the narrator first intones, "Introducing the New Balance 890 with Revlight." A hand then pours out a clank of screws out of the 890 to reduce the weight from 11.1 ounces to 9.7 ounces. The narrator then continues, "It weighs practically nothing...It's about to change everything...New Balance. Let's make everything happen." <SportsOneSource>

Hedgeye Retail’s Take:   Marketing aside, it’s the powerful combo of fresh marketing of fresh product that continues to keep us enthused with the athletic footwear and apparel space.


HauteLook kicks off SoleSociety - Flash sale retailer HauteLook launched SoleSociety.com today, a membership site that offers personalized recommendations and sends shoppers a new pair of shoes each month for a set price of $49.95. First-time visitors to SoleSociety.com take a quiz that uses celebrity and runway images to determine their “StyleBio.” Shoe selections are then personalized based on the bio and highlighted in the shopper’s “Closet.” Members then choose from the styles offered on the site each month. Registration and shipping are free and members have the option to purchase as many shoes as they’d like or skip buying in any month. Members have until the fifth day of each month to decline the shoe selection on the web site; otherwise the shoe selection will be shipped and the member’s credit card charged. <InternetRetailer>

Hedgeye Retail’s Take: Clearly an innovative proposition that combines fashion with replenishment.  We do wonder however how many people will buy-in for a new pair of shoes each month as well as what the return rates will be given sizing inconsistencies between brands.


J. Crew Sale Completed - J. Crew Group Inc. said Monday that its acquisition by affiliates of TPG Capital and Leonard Green & Partners for $2.86 billion has been completed. The affiliates, Chinos Holdings Inc. and Chinos Acquisition Corp., paid $43.50 a share in cash. The transaction was approved by J. Crew’s stockholders at a special meeting of shareholders on March 1. The stock, which had traded under the symbol “JCG,” will be delisted. The deal spawned a lawsuit by investors against J. Crew in Delaware Chancery Court hoping for a higher price per share as shareholders complained that chairman and chief executive officer Millard “Mickey” Drexler held discussions with the private equity firms about a deal before telling the retailer’s board. The two sides reached a $10 million settlement in January, but then the shareholders tried to renege on the agreement. Meanwhile, the lawsuit is still on the court’s docket. A Delaware judge is expected to rule on the validity of the settlement. <WWD>

Hedgeye Retail’s Take:  Unfortunately this means a less exciting conference circuit with one of retail’s more animated and brutally honest CEO’s no longer having to cater to the Street.  Of course there will be a road show at some point.


Frey Wille Opens in New York - Viennese fine jeweler Frey Wille tiptoed into the American market with the opening of its first New York flagship on Monday, on Madison Avenue. The 900-square-foot space is being subleased from handbag brand Furla. Frey Wille chief executive officer Frederich Wille said the firm was drawn to this location as it offered a four-year lease, as opposed to the standard 10-year investment.Though Frey Wille has 85 boutiques worldwide, this is only its second flagship in the U.S. The first opened in Santa Monica, Calif., in November 2005. <WWD>

Hedgeye Retail’s Take:  For those less familiar, Frey Willie is primarily centered on hand-decorated enamel designs at the higher end of the fashion jewelry pricing spectrum.


Apparel Retailers' Pricing Power is Tested - While some retailers are starting to let clothing prices rip, others are still trying to avoid further cuts. Aeropostale, for example, is expected on Thursday to post a year-on-year drop in earnings per share for its January quarter. Surging costs on everything from cotton to fuel and overseas labor are creating headaches up and down the retail supply chain and leaving many companies with little choice but to start raising prices. That is plenty risky in the current environment, however: Morgan Stanley estimates U.S. apparel-sales volume could fall 2.2% this year if prices rise 4%. The hit could be worse for some retailers than others, as a number of earnings reports this week from specialty stores like Aeropostale and AnnTaylor Stores are likely to show. Best-positioned are chains like Lululemon and, to some degree, AnnTaylor that have pricing power: strong brands and financially sound customers willing and able to pay up. <WallstreetJournal>

Hedgeye Retail’s Take:  Hard to believe Ann Taylor has pricing power since the company adopted a fairly aggressive promotional strategy a few years.  Yes the brand is being turned around, but pricing power is something we normally associate with true differentiated content such as Ralph Lauren or Nike.


Microsoft Partners with Dealmap, Gets into Social Shopping - Microsoft Corp. is getting into social shopping.  Thursday, the software giant said it was partnering with The Dealmap, an aggregator of local and national deals, a move that would allow it to use its 13.1% share of the search market to offer vendors bigger audiences than they currently reach. The alliance will allow advertisers to reach both desktop and mobile users of the software giant's Bing search engine. Partnering with The Dealmap, owned by Menlo Park, Calif.-based Center'd Corp., pushes Microsoft into the newly emerging group-shopping business. Social shopping allows businesses to reach larger pools of customers by offering discounts on goods and services to people who sign up for the bargains.  <WallstreetJournal>

Hedgeye Retail’s Take:   Yet another player (and late adopter) to the social buying world.  With so many offers being pushed at the consumer we wonder how long this deal-spam will ultimately last.  As soon as the deals become overly restrictive or laden with fine print, we’re pretty sure the consumer will smarten up.


Retailers on Strike in India - More than 10,000 retailers of branded apparel — including small shops in markets and in bigger malls — shut their doors throughout India Monday in an act of solidarity with fashion manufacturers. Producers in India have been protesting since the government unveiled a 10 percent increase in excise duty on branded apparel last week. On Friday, more than 100,000 factories closed in a protest orchestrated by the Clothing Manufacturers Association of India. “We have to encourage consumption and not discourage it,” said Kumar Rajagopalan, chief executive officer of the Retail Association of India. The strike is estimated to have caused the loss of about $38 million worth of business in a single day. <WWD>

Hedgeye Retail’s Take:  Certainly an odd set of events and timing with the impending rise in manufacturing costs likely to hit India as hard as any cotton producing nation.  The backlash from such a move is sure to continue beyond the protests.  Petitions to repeal the bill have already been floated.


Supply of Ultrafine Leather Runs Short in China- Due to the strong growth in the consumption of ultrafine PU leather in China, the sector has been experiencing a short supply, reported the China Leather Industry Association. Over seventy million square meters of ultrafine PU leather were consumed in China in 2009, it is estimated the consumption will reach 110 million square meters in 2011 and 129 million square meters in 2012. The growth rate will be above 20%, said the Association. Despite the twenty million square meters of the production capacity will be added to the industry, it still is hard to meet the increasing demand in the next two years. <FashionNetAsia>

Hedgeye Retail’s Take:  For those less familiar, “Ultrafine Leather” is not leather at all .  It’s actually synthetic leather, albeit a higher quality version of vinyl.


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

  • SBUX will begin selling instant coffee in China next month.   The stock gained 1.4% yesterday, outperforming QSR peers, on accelerating volume. 
  • SONC was upgraded to Neutral from Negative at Susquehanna.  Yesterday the company announced its estimate that second fiscal quarter same-store sales increased 1.0%-1.5% for the quarter, continuing the improving sales trend from the first quarter.
  • EAT gained 4.3% on strong volume following yesterday morning’s upgrade from UBS on stabilizing Chili’s trends.
  • DIN declined 5% on accelerating volume.  DIN spoke at the RJ conference yesterday.
  • CMG was downgraded to Underperform from Hold at Jeffries.  Rising food cost inflation was cited as the reason behind the change and the price target provided was $198.
  • CBRL gained 50 basis points on accelerating volume but will likely underperform if oil trends higher. 
  • MCD U.S. comps came in at +2.7% versus the estimate of +4.0%.  I will have a more detailed post on this later this morning.
  • TAST trading up on accelerating volume - Burger King gaining some traction?
  • An interesting story on NRN.com highlights growing scrutiny restaurant companies are being placed under about the legal status of their workers.  Pei Wei Asian Diner is the latest target of investigation in this regard following the (ongoing) investigation of CMG that came to light recently.



Howard Penney

Managing Director


“Tis one thing to be tempted, another thing to fail.”

-William Shakespeare


I sold my long positions in oil (OIL) and Brazilian oil giant Petrobras (PBR) on yesterday morning’s opening market strength. This doesn’t mean I am not bullish on either (in the Hedgeye Portfolio we are still long China National Offshore –CEO, and Suncor -SU). This simply means that my risk management model was calling them both out as immediate-term overbought.


Overbought is as overbought does. Sometimes my risk management signals are wrong. Most of the time they aren’t. Temptation is always there to violate my investment process. Most of my big mistakes are a direct function of giving in.


What if I gave into consensus on February the 18th and bought the SP500 at 1343? What if I gave into the Temptation of The Flows into US and Japanese Equities that peaked in the same week? What if I saw the hedge fund community’s highest net long position in bullish oil contracts yesterday (highest since 2006) and decided to ignore my risk management signal on the oil price?


“What if” may be an acceptable strategy for someone living in the theoretical. In this globally interconnected game of decision making however, there are no “what ifs.” There are players and pretenders. There are wins and losses.


Subliminally, I may have learned this risk management process from my Dad. Whether it was in his profession as a firefighter or in the game of life that he coached me – somewhere along the line I learned that we are all accountable for the decisions we make in this life and how those decisions affect others.


While I highly doubt that the US Federal Reserve is going to be sourcing risk management lessons from a few Canadian Bears on the topic of accountability, maybe they’ll re-read this quote about Temptation from their Maestro of ideological groupthink gone bad:


“The temptation is to step on the monetary accelerator or at least to avoid the monetary brake until after the next election… giving into such temptations is likely to impart an inflationary bias to the economy and could lead to instability, recession, and economic stagnation.”

-Alan Greenspan, 1993


Again, like any good Fire Chief or Global Macro Risk Manager, you should re-read that quote slowly. And read it again. While there is a Temptation to scan for headlines about some Libyan nut-job as opposed to understanding the long-term structural underpinnings of the The Inflation, it always pays to take the time to make the highest probability decisions based on the best information you have.


That Greenspan quote was highlighted by the late Austrian economist who I have cited recently - Murray Rothbard. Later on in his book, “The Case Against The Fed”, this is what Rothbard had to say in order to contextualize The Inflation that the Fed perpetuates:


“We are now so conditioned by permanent price inflation that the idea of prices falling every year is difficult to grasp. And yet, prices generally fell every year from the beginning of the Industrial Revolution in the latter part of the 18th century until 1940, with the exception of periods of major war.” (page 21)


Interestingly, Rothbard published this book in 1994 and passed away in 1995. Since, the American financial system has learned virtually nothing from these types of risk management perspectives. That’s because the modern day US Empire of Fiat Finance is grounded in a policy to inflate the stock market (see the inflation chart below dating back to the year 1500).


Can our industry or America’s conflicted and compromised politicians handle a deflation of inflated prices? Can they handle a reflation of the price of a Debauched Dollar? I think the answer to those questions is as clear as Americans living on entitlement goodies - many have a patriotic answer about debts and deficits, but they lack a pragmatic plan; particularly if the plan hits them in the wallet.


To be crystal clear on this, if I was damned into the job of Chief Central Planner in this country, this is what I would do:

  1. Raise interest rates
  2. Cut entitlement spending
  3. Strengthen the US Dollar

Points 1 and 2 address both monetary and fiscal policy head on. Point 3 would be the effect. Going back to the following experiences:

  1. 1950’s-1960’s France and Britain
  2. 1970’s United States of America
  3. 1990’s Japan

There hasn’t been a modern economy that has devalued its way to prosperity by debt financed deficit spending.


The Temptation is to create massive US Dollar denominated correlation-risk (USD inverse correlation to the price of oil is currently -0.93) that all interested inflation policy parties can blame on the Middle East or “global supply and demand imbalances” if unwound.


But be careful on that Temptation because it creates expectations. We Expect Price Volatility, not Price Stability. That’s why small business owners like me won’t jump in with both feet and start hiring aggressively. Anyone who has to meet a payroll in this country gets it – our medical and employment costs are rising as economic growth slows. As Greenspan reminded the Keynesians in 1994, that’s what The Inflation does.


Thankfully, one voting member of the Federal Reserve had the political spine to call this like it is yesterday. Dallas Fed President Richard Fisher told the Institute of International Bankers in Washington, DC that “the liquidity tanks are full, if not brimming over.”


Indeed Mr. Fisher. Indeed. That’s what printing money with an inflation policy achieves. It’s time to get out of the way, let the US Dollar strengthen, and the price of oil deflate.


My immediate term support and resistance levels for WTI Crude Oil are $101 and 107, respectively. My immediate term support and resistance levels for the SP500 are now 1297 and 1315, respectively.  


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Temptation - c1


Temptation - c2

CHART OF THE DAY: Inflation is a Fiat Policy



CHART OF THE DAY: Inflation is a Fiat Policy -  chart


GS downgraded WMS and trashed the sector.  Their slot estimates are factually wrong but are their concerns warranted?



Goldman Sachs sent shock waves through the gaming investment community yesterday with the release of its annual slot survey.  Smaller than expected slot budgets, waning Wide-Area Progressive (WAP) demand, and more competition were cited as reasons to be cautious on the stocks.  The firm was particularly negative on WMS and actually downgraded the stock to sell.


While we are not sure WMS is a sell given the favorable long-term outlook for this sector, we’ve articulated the view that the company is in danger of losing some share in calendar 2011.  GS’s survey corroborates that to some extent.  However, we must take the slot company responses with some caution.  Firstly, the number of participants and the participating operators in the survey change each year, so the results each year aren't exactly apple to apple comparison of sentiment changes within the same group.  In last year’s survey, WMS was cited as the clear winner in the survey, yet from Q4 2009 to Q4 2010, its market share was essentially unchanged.  IGT was considered somewhat of a loser in last year’s survey, yet its market share only dropped 1%.  In terms of stock performance, WMS has dropped 24% since last year’s GS survey was released up until the day before this year’s survey while BYI and IGT only fell 7% and 5%, respectively.


The reaction yesterday may have been extreme but we’re still a little wary of WMS over the near term.  We do like IGT and BYI – IGT is a better near-term story because it’s safer (margin levers) but BYI is a better 12-18 month story.  Both should be sequential market share gainers as we move through the year.


In terms of Goldman’s industry conclusions, we would caution investors on putting too much stock on operator responses regarding budgets.  We stand by our 55k estimate for calendar 2011 replacement demand versus GS at 47k.  More importantly, we are pretty sure GS’s slot estimates for new casinos and expansions are just flat out wrong.  They appear to be off by 10k units in 2011 and 20k units in 2012.  Here are the discrepancies:




The other important issue is wide area progressive where GS seems to be overly focused.  Yes that business is waning but they ignore that a big reason for that is the growth in other pricing models such as fixed daily fees and straight revenue participation.  These are actually higher margin pricing schemes because there is no jackpot expense. 


We continue to believe that replacement demand is uncertain but priced in to the stocks.  IGT seems to be the best positioned over the near term because they maintain the most margin levers should replacement growth fail to materialize.  BYI seems to have the most upside over a 12-18 month time horizon given the likely technology-driven, sequential pickup in ship share off of a low base and low valuation.  WMS is well-positioned long term but could continue to hit bumps in the road as market share normalizes at a lower level.

Virtue's Lie

This note was originally published at 8am on March 03, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“So our virtues Lie in the interpretation of the time.”

-William Shakespeare


This morning Global Equity markets are begging for Libyan resolve. The Chinese and Russians talking down a US no-fly zone notwithstanding, fidgety bulls are trading on a tick with the direction of the price of oil. That is “the interpretation of the time.” That price volatility is also becoming this market’s greatest risk.


The longer term risk management question as to the pace of Global Inflation Accelerating remains – if peace and love were to breakout across the Middle East tomorrow, will that stop the world’s reserve currency from being debauched?


Looking at the Global Currency market’s real-time vote on money printing, Ben Bernanke’s 2-day Semi-Annual Storytelling on US Monetary Policy was a disaster. Whether The Ber-nank chooses to be willfully blind to this or not, the US Dollar Index is now down for 8 of the last 10 weeks and collapsing to lower-lows.


Proving that petrodollars are indeed affected by the dollar’s price or that US Dollar priced inflation at the pump is a consumption tax on US growth is a trivial exercise. What isn’t trivial to the American public is the math. And that’s not because the math isn’t trivial. It’s because we have allowed an Almighty Central Planner to garner so much political power that he can not only obfuscate things like math – but make up his own interpretations of the times.


Before I get into Bernanke’s definition of what the US Dollar is (Ron Paul asked him for it yesterday), here’s the math on the inverse correlations between US Dollars and things that are inflating:

  1. Oil = -0.86
  2. Gold = -0.90
  3. CRB Commodities Index = -0.90

*Note to Fed: this correlation risk is running extremely high


And if you want the R-squares on these relationships they run between 0.74-0.82, so the correlation between what the US Dollar is doing and inflation is doing is crystal clear. Now some academic brainiac who is defending the Keynesian Kingdom of thought is going to quickly say something in response about “causality versus correlation” and, while there may be differences in certain scientific exercises, it’s a crock when it comes to analyzing the Fed’s mandate.


The Fed’s official marketing mandate is “price stability.” Whereas the Bernanke Fed’s operative has been to print money and inflate. He has only raised interest rates ONCE (2006) and he has overseen the highest levels of PRICE VOLATILITY that modern day markets have ever seen. Ever is a long time.


What is causality? What are the root causes of inflation? Is the global market place or The Bernank going to resolve this debate? Mr. Macro Market all but evaporated the Keynesians with The Inflation of the 1970s – are we looking to roll the bones to see if we get one of those again? (see the chart below of long-term median price inflation going back to the year 1500 from Reinhart & Rogoff’s This Time Is Different, page 181)


First, to attempt to briefly address some answers to these questions, let’s define what the US Dollar and Causality are:

  1. Causality (per Wikipedia) – is the relationship between an event (the cause) and a second event (the effect), where the second event is understood as a consequence of the first (agreed).
  2. The US Dollar (per Bernanke yesterday) – is the buying power of a piece of paper for things that people actually need to buy (agreed).

Now, since Bernanke says there is no inflation, he says the “price stability” and buying power of the US Dollar are just fine. And every American who doesn’t have a car service take them to work will tell you that’s the most ridiculous conclusion they’ve ever heard. In fact, most Americans think Bernanke is simply part of the government lying to them about real-world inflation – and you know what, most Americans aren’t as stupid as Bernanke must think they are – they are right.


Back to causality - to understand the cause of inflation, one must study the history by which The Inflation is priced – fiat currencies:



  1. 1913 – US Federal Reserve Act allows the US to move towards a money printing model that would eventually abandon the Gold Standard
  2. 1917 – US Treasury is given discretion to issue US Treasury Debt (to finance War, not national deficits and political careers)
  3. 1919 – Post WWI, 60% of Global Reserves are denominated in US Dollars


  1. 1950’s – France ran deficit and devaluation policies (debauching the franc and France’s currency credibility)
  2. 1960’s – Britain ran deficit and devaluation policies (debauching the pound and Britain’s currency credibility)
  3. 1970’s – USA ran deficit and devaluation policies (debauching the dollar and America’s currency credibility)

Do we need to bring back a great American leader (Herb Brooks) to line The Bernank up on the blue line and repeat – “Again”… “Again”… “Again”? Or do we need a Miracle? Developed economies (including our own) have tried this over… and over… and over again with the cause (politics) and effect (inflation) being the same.


To make matters worse, it appears that the Big Government Spenders of longstanding European and modern American ilk haven’t learned a damn thing from all this. Bernanke seems readily prepared to blame any unintended consequences associated with this US Dollar Crisis on either Congress or someone in the Middle East. Gotta love the accountability in that. ‘Congress needs to stop spending, but I need to keep printing’ – he said it, not me.


My bearish view of Bernanke’s process isn’t a new one. Neither is managing the systemic risk that the Federal Reserve imposes on global market prices. Anyone who has been managing market risk for the last decade has been paid to accept and understand that the Greenspan/Bernanke interpretations of the times have not worked. As the late Murray Rothbard (distinguished Austrian School of economics professor) wrote in “The Case Against The Fed” in 1994:


“The Federal Reserve System is accountable to no one; it has no budget; it is subject to no audit; and no Congressional committee knows of, or can truly supervise, its operations… and this strange situation, if acknowledged at all, is invariably trumpeted as virtue.”


Maybe it has become the virtue of the few who hold centralized power in the palm of their hands – but this is not the virtue of the American Constitution. Neither is it the virtue of this Canadian who thought he was building an American family and firm under a President’s marketing pitch about Transparency, Accountability, and Trust. This virtue is a lie.


My immediate term support and resistance lines for the SP500 are now 1291 and 1319, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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