R3: DKS, UA, Reebok, SKX


March 9, 2011






  • In a rather unexpected callout, DKS management highlighted TaylorMade’s R11 and Burner drivers among the key products fueling Q1 sales in addition to more likely candidates such as running, baseball, and lacrosse product. In fact, part of the impetus was a concerted marketing effort initiated in the 4Q – after several lackluster years, early indications suggest golf may indeed be returning to a positive contribution for sporting goods retailers.
  • After nearly tripling its media spend in each of the past two years, expect continued investment from Reebok in 2011 to be even more noticeable with new campaigns featuring the brands EasyTone and ZigTech footwear. In addition, given the success of marketing induced sales of late, expect to see the brands latest effort to be highly visible in the coming weeks in anticipation of Reebok’s new Flex platform launch stateside in April.  
  • According to the NRF, Americans planning to celebrate St. Patrick’s Day this year are expected to spend 20% more than they did in 2010.  Total St. Patrick’s Day spending is expected to reach $4.14 billion this year with a record participation rate of 52% (up from 45% LY).  Nearly 102 million people are expected to wear green to celebrate.



Skechers Sues Sears - The Manhattan Beach, Calif.-based footwear brand alleges that Sears is selling footwear that infringes on its popular product lines, which include Shape-ups, Twinkle Toes and Z-Strap. The suit, filed in the U.S. District Court for the Central District of California, asserts that Sears is selling products that look like Skechers’ own under the labels of TheraShoe, Melrose Avenue, Paris Blues and Athletech, all through Sears and Kmart retail stores and websites. Both Sears and K-Mart sell Skechers shoes. Skechers is seeking compensatory and punitive damages, as well as injunctive relief for alleged infringement on its patents, trademark and trade dress rights, for dilution and for unfair competition. In a statement, Philip Paccione, general counsel of Skechers, said Skechers has “obtained more than 150 patents and trademarks on these lines, and [has] built them into brand names universally recognized around the world as synonymous with Skechers.” <WWD>

Hedgeye Retail’s Take: Familiar territory for Skechers, but not as the prosecutor. With the company believing that it has now earned the right to be considered a real brand following the success of Shape-Ups, this case may in fact be more about perception than having solid legal merit.


Under Armour Secures First Premier League Presence With Tottenham - Under Armour has reached a sponsorship deal with the Tottenham Hotspur Football Club. The five-year collaboration is Under Armour's first kit supply agreement with a Barclays Premier League team and represents the Brand's largest European team sponsorship. Beginning with the 2012/2013 season, Under Armour will provide Tottenham Hotspur with performance apparel, including training wear and playing kit for the Club's First and Academy teams, together with replica product for the Club's supporters around the world. Daniel Levy, Chairman Tottenham Hotspur, said: "We are delighted that Under Armour will become our new technical partner from 2012 onwards. They are an extremely ambitious brand with global aspirations, making them ideal partners for Tottenham Hotspur." <SportsOneSource>

Hedgeye Retail’s Take: Replacing Puma in their own back yard is big win for UA. Terms of the deal haven’t been disclosed, but in looking at comparable sponsorships this deal could range from $4-$12mm a season. Our sense is that as the company looks to step up their presence in soccer and Europe, additional deals will be forthcoming.


Abercrombie & Fitch Sues Surf Style - Abercrombie & Fitch Co. has filed a lawsuit against Surf Style Retail Management Inc., alleging trademark infringement and unfair competition, among other claims. The suit, filed on March 1 in a federal court in Miami, named as defendants four individuals who are also executives of Surf Style: Avi Ovaknin, Doron Malinasky, Eliyahu Levy and Shaul Zislin. Court papers said a flying seagull logo on Surf Style’s apparel and beach accessories was “identical, or nearly identical, and confusingly similar to A&F’s seagull mark,” which A&F uses for its Hollister brand. <WWD>

Hedgeye Retail’s Take:  ANF remains one of the most diligent trademark enforcers although blatant copying is not likely to hold up in any court.


Aeropostale Expands Into Asia - Aeropostale Inc. announced plans to expand into Asia with an agreement to open about 25 stores across Singapore, Malaysia and Indonesia over the next five years.  The teen-apparel retailer said it had reached a licensing pact with Montreal PTE Ltd., a joint venture between Apparel Group LLC and Jay Gee Melwani Group, to open the stores. The first one is slated to open in Singapore later this year.  Aeropostale currently operates 906 stores in 49 states and Puerto Rico, as well as 59 stores in Canada. It also operates 47 of its P.S.-branded stores for children across 13 states. Aeropostale has posted better results of late, helped by increasing sales. Last month, the company boosted its fiscal fourth-quarter earnings guidance while reporting surprise growth in January same-store sales. <WallstreetJournal>

Hedgeye Retail’s Take:   Licensing remains the growth vehicle of choice for most domestic specialty retailers given the lower risk, lower cost nature of the partnership.  However, we note that it will take a fair amount of time for these stores to become financially meaningful to the overall company so long as the store base remains small relative to the 900+ US locations.


Cabela's to Pay $10.4M in FDIC Settlement - Cabela's has agreed to pay nearly $10.4 million for "alleged unfair and deceptive practices" of its credit card operation as part of a settlement with federal regulators. It also agreed to reform its credit card practices. The Federal Deposit Insurance Corporation announced the agreement with Cabela on Tuesday. According to the settlement, World's Foremost Bank, Cabela's credit card operation, will pay $10.1 million in restitution and a $250,000 civil money penalty. The retailer did not admit wrongdoing. The FDIC said it determined that WFB did not operate its credit card programs "in an appropriate manner with regards to certain overlimit fees, credit line decreases, minimum payments due, late fees, penalty interest rates, notices to customers, and collection practices. The Consent Order, in part, requires WFB to correct the violations of law, develop appropriate policies and procedures to ensure future compliance, and effectively monitor third-party agreements and activities." <SportsOneSource>

Hedgeye Retail’s Take:   While not great from a PR standpoint, we highly doubt this will impact the loyalty of the core, card holding Cabela customer.  Similar settlements and fines have been levied on many credit card issuers as the FDIC looks to clean up industry practices.


Payment Card Fraud Falls 10% in U.K. - The amount of card-not-present payment card fraud in the U.K. fell by an estimated 10% last year, according to Retail Decisions, a fraud prevention and payment processing firm. The company estimates the value of the fraud that took place through online, mail order and telephone channels where a payment card is not directly swiped totaled 239 million pounds ($386 million), down from 266 million pounds ($430 million) in 2009. Such fraud in the U.K. fell 15% from 2008 to 2009, the company says, making 2010 the second year in row of reduced card fraud in direct sales channels.  The firm estimates such fraud will decline 5% in 2011, but says it expects fraud to rebound in 2012, when London hosts the Olympic Games <InternetRetailer>

Hedgeye Retail’s Take:  Good news for the issuers and retailers as technology advancements are the likely driver of reductions in fraud. 


Mobile Marketing is on The Rise - Marketers are increasingly eager to reach consumers via their mobile devices, a new report from consultancy Forrester Research Inc. finds. More than 40% of 252 U.S. interactive marketing professionals in a recent poll by Forrester report using some form of mobile marketing. And an additional 35% plan to incorporate mobile into their marketing plans over the next year. Mobile marketing budgets, the research finds, also will climb, although mobile will still account for a small portion of total marketing spend. Forrester estimates that nearly 40% of active mobile marketers are still allocating only test budgets for mobile. Nearly 53% of marketers say they will increase their mobile budgets in 2011, and only 4% are planning on decreasing them.  However, nearly 59% of marketers say they will spend less than $1 million on mobile this year. 23% plan to spend more than $1 million and the rest don’t know what they will spend, Forrester finds. <InternetRetailer>

Hedgeye Retail’s Take: The most significant callout from the study suggests that nearly 40% of active mobile marketers are still testing the medium. This provides a significant share that may indeed ramp spend in the coming years. It can also result in a transitory base as increased use could vary initial results.




Milk and coffee prices roared higher this past week as wheat and corn bucked, for now at least, their upward trends.


Milk prices gained over 14% last week as the supply of cattle remains tight.  With corn prices up 92% year-over-year, maintaining a herd of cattle is increasingly difficult for farmers.  Natural disasters in New Zealand and weather factors throughout the wider region Down Under, coupled with strong demand from China and other Asian markets, has supported this rally in dairy prices.  CAKE is one of our best ideas to play commodity exposure on the short side.  On the most recent earnings call in February, management stated they are expecting to see dairy, fresh fish, and cheese (not contracted for by the company) to come down in the second half of the year.  Currently it seems like these items are heading higher and the company may have to become more aggressive with pricing.  As I alluded to in my post, "CAKE: PUNT AND HOPE", from 2/11, it seems likely that the company will have to raise prices.  The probability of this seems to grow with every passing week. 


The price of coffee is the most eye-catching of all the commodities we are monitoring: up another 6.6% and now up 106.4% year-over-year. Starbucks revealed on its latest earnings call that it has effectively locked in coffee prices for the year.  GMCR, according to the most recent earnings call, had locked in six months coverage at fixed prices.  The company stated that it will “adjust our pricing as necessary”.  PEET passed along increasing costs to its customers via price increases recently.  The retail and home delivery business prices increased in the fourth quarter, the foodservice business saw an increase in January, followed by the grocery business.  The company did not disclose its current hedging strategy for 2011 (as of 3Q10, we know PEET had locked in 40% of its 2011 coffee needs), but management said it expects coffee costs to climb nearly 30% YoY.




Beef prices remain high, gaining an additional 3% over the past week.  On a year-over-year basis, beef prices are up 22%. The increasing demand for proteins on a global basis, the impact of natural disasters, the upward trend in corn prices and, of course, the downward trajectory of the dollar, all serve to push beef prices higher.  As I have said before, concepts that can pass this on to consumers will fare best during 2011.




Corn prices took a step back on a week-over-week basis but it is important to watch the overall trend which, as the chart below clearly shows, is higher.  Corn is a key input cost for the livestock and poultry businesses and, at +92% YoY, is likely to squeeze meat-producers’ margins for the foreseeable future.







Howard Penney

Managing Director

CHART OF THE DAY: Easy Money Optimism



CHART OF THE DAY: Easy Money Optimism -  chart

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Under Attack

“Nobody ever defended anything successfully.  There is only attack and attack and attack some more.”

-General George S. Patton


The rose-tinted view that has driven the S&P to current levels, up 5.1% year-to-date, is becoming more and more difficult to justify.  As uncertainty around the Middle East mounts, highly significant factors behind the global economy, such as oil, are becoming more and more of a concern for investors.  The revolution sweeping through the Middle East is driving oil prices higher as the timeline, geography, and repercussions of the political turmoil remain uncertain.


Moody’s reminded us on Monday of the significant uncertainty surrounding the Eurozone’s sovereign debt issues.  In early trading today, Portuguese 10-year bonds fell for a third day, pushing the yield as high as 7.70% (the most since at least 1997) and the equivalent-maturity Italian yield climbed to 5% for the first time since November 2008.


With members of Ireland’s new government striking a fairly combative tone with respect to a prospective renegotiation of that country’s bailout, and other countries rolling over significant levels of debt in 2011, the media’s glare will shortly become more focused on Europe and her myriad issues.  Yesterday, the Euro fell the most in two weeks on all the uncertainty.


Here in the U.S., inflation is a tax on the consumer and, as such, the broader economy.  In fact, I would posit that inflation (inclusive of things people actually buy, like gasoline, food and clothes), is a more devastating drag on the consumer than allowing the Bush tax cuts to expire.  Inflation is taxation without the consent of the vast majority of those affected. 


With the past two years having seen the second largest upward two-year move in equities after the period from 1953 to 1955, inflation is derailing the markets to a greater or lesser extent depending on the market in question.  In the end, as in 2008, risk is always on and it is always interconnected.  As oil climbs higher, threatening growth at a time the U.S. economy can ill-afford it, the recovery scenario that has been priced into the markets starts to look less impenetrable, less defensible. 


Currently, my attention is firmly focused on the consumer.  The spread between consumer expectations and present situation sentiment or, as we like to call it, the Hedgeye Optimism Spread, is at peak levels.  Employment has been improving on the margin but, as I see it, two factors along the risk spectrum could spoil the U.S. equity market party that has been raging since 2010.  First, gasoline prices can keep doing what they’re doing.  Second, interest rates can go up.  The magnitude of a possibly interest rate increase is unknown but (think Volcker) there is precedent for sharp, short, expedient increases in interest rates when inflationary pressures merit it. 


The pressure for the USA to raise interest rates is growing by the day.  Jean-Claude Trichet is telling the world that Europe is ready to raise rates and Timothy Geithner (who met with Germany’s Finance Minister in Frankfurt yesterday), no doubt is begging them not to.  One small reason Europe needs to raise interest rates is the fact that European gasoline prices are at an all time record of $8.632 per gallon.  European Central Bank Governing Council member Axel Weber has stated that, “Inflation may be more sustained and more fundamental than the ECB’s latest projections suggest” and that he sees “considerable future price pressures.”


This divergence in rhetoric between the USA and EU poses an interesting dilemma for investors.  We know from experience that any faith in policymakers in Brussels or Washington being able to manage through this situation seamlessly is gravely misplaced.  We were reminded of this last week on CNBC when Alan Greenspan said, “The one thing we all pretend we can do but we can't, is forecast." 


Recently, a question we received from a discerning client prompted us to overlay the Hedgeye Optimism Spread against the Yield Curve in a chart.  The picture certainly tells a story; the escalation of easy money monetary policy in the United States heralded a period of high correlation between the Optimism Spread and the Yield Curve.  Apparently, rendering the country “awash with liquidity” instills a belief among consumers that economic circumstances are set to improve.  As Keith referenced in the Early Look from Monday morning, according to Jim Rohn, “For every promise there is a price to pay”.  Ultimately, a consumer facing mounting costs at the grocery store and at the pump is going to recalibrate expectations.   The U.S. consumer is now under attack as inflation squeezes like it’s 2008.


After losing some momentum in recent months, the recovery of new vehicle sales regained steam in February.  Having said that, GM and F stock can’t get out of their own way; GM is down 11.2% YTD and is trading below the $33 IPO price.  Is consumer pent-up demand supporting the rise in vehicle sales?  The stocks of the automobile makers are telling you a different story. 


Yes the labor market momentum is building, as expected payroll gains strengthened measurably in February, following the weather-induced weakness in January. The unemployment rate was a surprise at 8.9%, but it is likely an aberration as more discouraged workers than previous months did not enter the labor force.  We see an Intermediate term bottom in the unemployment rate.


The gradual improvement in the labor market is benefiting consumer income trends. Real disposable income growth late last year was the fastest since the fall of 2007. The rate of growth is still far from robust;  there are two factors that are limiting income: (1) the selective nature of the recovery, and (2) declining government support.


Despite a surge in personal income growth, real spending declined in January. Real personal consumption expenditures slipped by 0.1%, marking the first decline since April 2010. Nominal spending rose by 0.2%, which was about half of the average pace from the previous six months.


The inflation tax will likely erode the Hedgeye Optimism Spread as reality for the US consumer sets in.  According to the latest American Pulse™ Survey of 5,224 respondents, 80.3% of registered voters agree that the increase in gas prices is one of the worst problems affecting the United States.  The survey asked respondents to list the worst problems currently affecting the United States, and registered voters mentioned in order of frequency: unemployment (80.4%), rising gas prices (80.3%), weak economy (70.6%), national debt (69.4%) and rising food prices (61.9%).


The U.S. consumer is under attack and the bull case for equities to withstand escalating input costs is becoming less and less defensible.  We are expressing this view on US based consumption by being short MCD, WMT and TGT.


Function in disaster; finish in style


Howard Penney

Managing Director


Under Attack  - HP EL 3.9.11


Under Attack  - HP EL 2

Enabling Success

This note was originally published at 8am on March 04, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“He is able who thinks he is able.”



When I started this firm, I had a simple goal – to democratize the risk management process of a hedge fund. What does that mean? That means showing the world exactly what it is we do, real-time, in a transparent and accountable way.


What does a hedge fund do? You’ll get a lot of different answers to that question – and as industry supply of hedge funds continues to expand, you’ll get more hedge funds who really don’t do what I do – hedge. Some strategies are simply levered-long versions of mutual funds that charge higher fees. Those hedge funds tend to blow up when markets stop going up.


Enabling Success in a hedge fund model is best achieved by having short positions that don’t hurt you when the market goes up. It’s a trivial exercise to buy something when everything is going up – that’s called beta. Managing losses is the key to this game – not chasing relative returns.


I don’t run money anymore, and a lot of people still ask me why. Three years ago, I thought I might eventually go back to doing it again – not anymore. I’m having too much fun building a real company with real cash flows. I absolutely love reading and researching so that I can put myself out there every morning. The challenge for me isn’t how much money I make, it’s how big of an arena I can play this game in.


I’m certainly not walking through these thoughts for any other reason than this is what I am thinking right now. I only have 45 minutes to write you these missives every morning – so I have to roll with what’s in my head. That requires a risk management process in and of itself – editors!


Enabling clients to look inside our risk management process seems to be the most empowering part of what we do. In order to Enable Success in this business, I think you need to let independent minds explain their research perspectives so that you can weigh them against your own. Whether our research is top-down, bottom-up, or quantitative – it seems to elicit plenty of feedback. Constant feedback enables success too.


How have we enabled this research platform to deliver an 81.6% batting average on the short ideas since inception in 2008? It certainly hasn’t been by sitting on my positions. Short-And-Hold isn’t a repeatable strategy across market cycles inasmuch as Buy-And-Hold isn’t. If you want to compound positive absolute returns on the short side over time, you have to keep moving.


Enabling Success on the short side of your portfolio is also driven by finding asymmetric opportunities. Since I attach the Hedgeye Portfolio at the bottom of this note every morning, you can monitor this real-time. But the upshot of it all is that you can witness a raging bull-run in US stocks and, at the same time, find ways to make money on the short side. If you broaden your scope, there’s always a short selling opportunity somewhere.


When I was younger, I was pigeon-holed into following US Retail and Restaurant stocks – so automatically, I was handcuffed to fishing in the creek that was in my area code. I was in the right place at the right time however, because 2000-2002 were bearish US stock market tapes, so there were plenty of names that were going down. Timing, like gravity, matters.


As I get older, I’ve simply broadened my horizons to fishing in oceans around the world across asset classes. At the same time, I’ve expanded my research team to 40 people (the largest team I managed at a hedge fund was 6).  


Enough about that. I just felt like writing about it this morning. I think it’s important to be transparent about what it is we do.


Since I only have 15 minutes left, here’s what I’ve been doing this week in the Hedgeye Asset Allocation Model:

  1. Reduced my cash position from 58% to 49%, taking advantage of some lower prices earlier in the week
  2. Expanded my invested position in International Currencies (Chinese Yuan and Canadian Dollars) as the Buck Burns
  3. Expanded my invested position in German Equities (EWG) where we remain bullish
  4. Bought back Gold on yesterday’s correction (GLD)
  5. Stayed long Oil and Grains (OIL and JJG)
  6. Stayed long US Healthcare (XLV) – my favorite US Sector alongside Energy

On the long/short side of the Hedgeye Portfolio, the main investment theme remains being long of The Inflation:

  1. Long Stocks with top line leverage to The Inflation (bought Petrobras (PBR) this week)
  2. Short stocks without pricing power whose margins get jammed with The Inflation (McDonalds (MCD), Target (TGT), etc.)
  3. Short Bonds and Emerging Markets – The Inflation is bad for them

Yes, there are some names in the Hedgeye Portfolio that aren’t working – there always are. There are also names that don’t always fit the top down and quantitative themes we’re focused on like a glove. These are names that my analysts like on either a turnaround or operating basis (SBUX, WEN, IGT, etc.).


Altogether, Enabling Success in terms of asset allocation, security selection, or net exposure is really best achieved managing your mistakes so that they don’t suppress your ability to generate repeatable absolute returns across market cycles.


My sincerest thank you to all of you who have enabled this platform to thrive. We don’t have to wake up every morning looking for some central planner in government to help us employ people. In an industry that is in dire need of evolution, you’ve enabled us to be the change we want to see in the world.


My immediate term support and resistance levels for the SP500 are now 1318 and 1342, respectively.


Happy birthday to my baby girl, Callie.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Enabling Success - yy1


Enabling Success - yy2


The Macau Metro Monitor, March 9, 2011


According to the US Department of State's International Narcotics Control Strategy Report 2011, illegal side-betting could total MOP 1.88 trillion, 10x the MOP 188.3 billion in Macau GGR in 2010.  Reiterating the junket concern in the August 2010 report, the 2011 report calls for "robust oversight of junket operators."  It classifies Macau as a “major money laundering” territory and a “jurisdiction of primary concern” and claims for the 1st time that local “financial institutions [are] engaged in currency transactions involving significant amounts of proceeds from international narcotics trafficking”. The reports stresses, “In addition to the existence of casinos, close proximity border with PRC [the People’s Republic of China] and Macau’s open economy, are factors that create a risk of money laundering and terrorist financing activities”.


However, the report does acknowledge that Macau continues to make considerable efforts to establish an anti-money laundering framework that meets international standards.  It states that the GIF (Financial Intelligence Office) should have access to all the currency transaction reports sent to the DICJ by gaming operators.



The consortium between Bombardier Transportation and China Road and Bridge Corporation (BT CRBC) has filed a new lawsuit in Macau’s Administrative Court to obtain the release of documents and additional information regarding the public tender for the supply of the rolling stock and the system for the first phase of the Light Rail Transit (LRT).  The BT CRBC consortium claimed it was barred from analysing several documents from the LRT tender process.  The new lawsuit, filed on March 2, suspends yesterday’s deadline for lodging an appeal against the result of the tender.


Sands Macao’s “Imperial Stadium” features live roulette and sic bo games with 100 individual electronic touch-screen stations, combining live dealers with electronic stations.

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.