SAM is trading lower today on lower-than-expected FY11 earnings guidance.


On February 4th, we outlined our reasons for being cautious on the Boston Beer Company in 2011 in a post titled “SAM – HEADING FOR A HANGOVER.”  Specifically, we cited the potential for slowing top-line trends and rising costs.  Yesterday, SAM reported 4Q10 earnings of $0.87 per share, which fell short of the street’s $0.90 per share estimate.   Revenues came in light relative to consensus estimates with FY10 depletions up 11.5%, at the low end of management’s upwardly revised guidance range of +11-13% that was provided in December.  That being said, with depletions up 12% during the quarter, top-line trends continued to be solid and gross margins increased by more than 500 bps YOY.


Looking into 2011, the top-line comparisons will be difficult but the company guided to 9% depletion growth, which is slightly improved from its prior guidance of up mid-to-high single digits provided during its 3Q10 earnings release.  SAM maintained its FY11 gross margin guidance of 54-56% and stated, “From a cost perspective, I think we indicated the biggest cost exposure we have is energy, sort of linked to freight sort of outbound primarily, little bit of inbound.  I know there have been observations of cost increases on some of the agricultural materials that we use, but we were in actual [sic] good position when we made our arrangements for our 2011 purchases so we think we’re actually covered there in the guidance that we had given previously. So, that hasn’t really changed since we last gave that guidance. And on the other packaging material items, we haven’t seen too much movement and certain nothing that it would just put as noise at least to date.”


This current margin guidance continues to assume a 1% revenue per barrel increase which may not be easily passed on to consumers in light of the continuing tough economic environment and could put pressure on the company’s 9% depletion target.  Management alluded to the tough competitive environment in its comments yesterday, saying that it in 2011, “we expect to augment our sales force and brand support levels further to address the increasing competitive activity and to grow our brands appropriately given the opportunities we see. It is possible that these decisions might result in slower earnings growth in 2011, as we may forsake some earnings in the short term in order to build our organizational capabilities and support our brands at appropriate levels.” 


Specifically, the company is going to increase its investment in its brands by $12 to $18 million in 2011.  Although management had stated its intention to increase the level of investment behind its brands in 2011 prior to yesterday, they had not quantified the magnitude of the increase.  This is important because the company widened the range of its FY11 EPS guidance yesterday to $3.45 to $3.95 from its prior guidance of $3.95, which it provided in December.  Management stated that the new guidance reflects the negative impact of rolling out its new Freshest Beer Program, which it expects to reduce EPS by $0.20-$0.30 as it will cause core shipment growth to lag depletion growth during the year.  Although this was the only explanation provided by management, a $0.30 impact would imply a full-year earnings range of $3.65-$3.95, rather than the $3.45-$3.95 range provided.


Given that the full-year margin guidance did not change, which was surprising to me, management must think that shipments could actually lag depletions more than the initial 2%+ estimate as a result of the new Freshest Beer Program and is providing a cushion on the downside or the company increased its planned level of spending behind its brands in 2011 in order to defend its share position in what it expects will be an increasingly competitive market.  If the latter reason is correct, it puts the company’s 9% depletion target at risk, particularly when you combine that more competitive market with the company’s trying to pass on a 1% price increase.  Either way, shipment growth would be negatively impacted.


Howard Penney

Managing Director

Price Volatility: VIX Levels, Refreshed

I fundamentally believe that Big Government Intervention in our markets perpetuates the opposite of what the Big Central Planners at the Fed are marketing. This is not “price stability” – this is Price Volatility. And our industry is levering up (net leverage in the hedge fund industry hit its October 2007 high this month) on it again as it accelerates. That’s scary.


Obviously there was a 2008 market crash that Bernanke didn’t see coming, but his being ignorant of the risks embedded in fueling $150/oil with a US Dollar Debauchery policy doesn’t give him a hall pass on blaming the highest levels of price volatility that our markets have ever seen on the “market.” He is the market – at least in terms of establishing the cornerstones of rate cut and QE expectations.


Since the US stock market put in another lower long-term high at 1343 on February 18th (see the red circle in the chart below), volatility (VIX) is up +32%. That’s not price stability. That shows you what happens when the easy money music stops (fund flows into US, Japanese, and Western European equity markets peaked in the same week). And unless he opts for QG3 in May/June, it will stop.


One of the hallmarks of our risk management strategy is that real-time prices rule. Currently, we are seeing the confluence of a TREND line breakout in the VIX (> 17.88) and a TRADE line breakdown in the SP500 (1319). This continues to have me thinking that the SP500 is going to continue to make a series of lower immediate-term and long-term highs on rallies.


The VIX won’t be immediate-term TRADE overbought until it tests 21.70 again on the upside.



Keith R. McCullough
Chief Executive Officer


Price Volatility: VIX Levels, Refreshed - VIX


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

  • SBUX is rated neutral at Janney, according to a report this morning that highlights coffee prices as the primary risk to EPS over the next twelve months.  Given SBUX’s customer loyalty, control over its supply chain, and – most importantly – the fact that they have locked in their coffee prices for the year, I am maintaining a positive view on SBUX.
  • SBUX’s managing director for the U.K. has spoken of a difficult sales climate in which fewer people are out on the streets shopping.  The U.K.’s 736 Starbucks stores saw a drop in sales since early January.
  • SBUX turned 40 yesterday and unveiled its new logo.
  • CBRL’s soft performance over the last month has coincided with a spike in gasoline prices.   MasterCard Advisors’ SpendingPulse report showed yesterday that average gasoline demand fell 1.8% to 8.953 million barrels-per-day in the week to March 4th.  Year-over-year, demand slipped 1%.  Retail gasoline prices rose 19 cents last week to $3.43 per gallon, 27% higher than a year ago, after crude oil rose to a 29-month high on unrest in the Middle East, the report said.
  • SONC gained almost 4% on accelerating volume following an upgrade yesterday.  This name is not out of the woods and, as I wrote in a note yesterday, I believe that the preannounced comps for 2QFY11 flattered to deceive.
  • DIN continues to underperform, declining on strong volume yesterday.  EAT, BJRI, CAKE, and RT all gained (with EAT trading on strong volume).
  • YUM traded higher on accelerating volume.  



Howard Penney

Managing Director

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TODAY’S S&P 500 SET-UP - March 9, 2011


As we look at today’s set up for the S&P 500, the range is 35 points or -1.73% downside to 1299 and 0.92% upside to 1334. 



  • 10 a.m.: Wholesale Inventories, est. 0.9%, prior 1.0%
  • 10:30 a.m.: DoE Inventories
  • 1 p.m.: U.S. to sell $21b 10-yr notes reopening
  • 1:30: p.m.: Geithner testifies at House appropriations subcommittee
  • 3 p.m.: USDA Broiler eggs set    


  • Senate to vote on $61b budget-cutting measure passed last month by Republican House
  • Arab League may call this week for a no-fly zone to shield civilians and rebels from further
  • Australian Prime Minister Julia Gillard to address a joint session of Congress
  • Nasdaq predicts at least 45 Chinese companies will list in U.S. this year, topping last year’s record  


For the third day we have 7 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.  The two sectors broken on TREND are Technology and Materials. 

  • One day: Dow +1.03%, S&P +0.89%, Nasdaq +0.73%, Russell 2000 +1.53%
  • Month-to-date: Dow (0.10%), S&P (0.41%), Nasdaq (0.59%), Russell +0.15%
  • Quarter/Year-to-date: Dow +5.50%, S&P +5.10%, Nasdaq +4.26%, Russell +5.23%
  • Sector Performance: Financials +2.19%, Industrials +1.56%, Materials +1.15%, Utilities +1.12%, Consumer Spls +0.88%, Consumer Disc +0.80%, Healthcare +0.55%, Tech +0.83%, Energy (0.82%)


  • ADVANCE/DECLINE LINE: 1558 (+3172)  
  • VOLUME: NYSE 1002.67 (-3.18%)
  • VIX:  19.82 -4.07% YTD PERFORMANCE: +11.66%
  • SPX PUT/CALL RATIO: 1.55 from 2.28 (-32.09%)


Treasuries were weaker with the rally in stocks, supply concessions and according to the WSJ

  • TED SPREAD: 21.11 +0.609 (2.969%)
  • 3-MONTH T-BILL YIELD: 0.11%  
  • 10-Year: 3.56 from 3.51
  • YIELD CURVE: 2.83 from 2.81


  • CRB: 361.09 -0.50% YTD: +8.50%  
  • Oil: 105.02 -0.40%; YTD: +12.98% (trading -0.08% in the AM)
  • COPPER: 433.85 +0.27%; YTD: -1.79% (trading +0.45% in the AM)  
  • GOLD: 1,427.95 -0.28%; YTD: +0.83% (trading +0.19% in the AM)  


  • Palm Oil Seen Advancing 12% on Shortages as Record Food Prices Roil States
  • China's Demand for New Zealand Milk Products Surges Fivefold Since 2008
  • Oil Falls a Second Day on OPEC Supply Speculation, Rising U.S. Stockpiles
  • Copper Climbs in London Before German Industrial Production
  • Wheat Climbs as Dry Weather Conditions Threaten China Crop; Soybeans Fall
  • Gold Advances to $1,431.90 an Ounce in London Trading, Erasing a Decline
  • World Soybean Surplus May Swell on South American Harvests, Analysts Say
  • K+S Raises Potash Price for a Fifth Time on Agricultural-Product Inflation
  • Asian Coking-Coal Contracts May Rise 44% to Record After Queensland Rains
  • Aluminum Fee to Japanese Buyers Halts One-Year Drop as Demand Recovers


  • EURO: 1.3909 -0.40% (trading -0.20% in the AM)
  • DOLLAR: 76.798 +0.39% (trading +0.11% in the AM) 


  • FTSE 100: (0.28%); DAX: +0.44%; CAC 40: +0.10% (as of 04:58 ET)
  • European markets trade mixed initially benefiting from a modest decline in oil prices and constructive EPS results and despite disappointing results from Texas Instruments (TXN) overnight.
  • Portuguese 10-year bonds fell for a third day, pushing the yield as high as 7.70% (the most since at least 1997.)
  • The equivalent-maturity Italian yield climbed to 5% for the first time since November 2008.
  • The euro depreciated against all but two of its 16 most-traded peers.


  • Nikkei +0.6%; Hang Seng +0.4%; Shanghai Composite +0.1%
  • Markets were mixed today, getting support from a pullback in oil prices.
  • Cathay Pacific Orders 25 Airbus, Boeing Planes After Annual Profit Triples
  • China May Deflect Geithner Pressure by Reporting Smaller February Surplus
  • Thailand Raises Key Rate a Second Time This Year as Asia Fights Inflation

Howard Penney

Managing Director

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

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