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Athletic Apparel Trends March On


Weekly athletic apparel sales remain healthy through the first two weeks of March extending a strong finish to February. Both the athletic specialty and department/mass channels improved on the week while sales in the family channel slowed on the margin. Most notably, ASPs declined in both the athletic specialty and family channel for the fourth straight week. However, unit volume continues to outpace ASP declines. On the contrary, ASP increases have impacted sales momentum in the discount/mass channel as unit sales remained negative for the third consecutive week.  Sales growth was strong across all regions with very few exceptions.  The Pacific region stands out as being a laggard with momentum still positive but slowing over the prior two weeks.


Lastly, we note that athletic apparel faces its toughest compares in the coming week as it faces the Easter shift.  Once past last year’s Easter comp (April 4th)  compares get progressively more favorable over the next 3-months.


Athletic Apparel Trends March On - FW App App Table 3 16 11


Athletic Apparel Trends March On - FW App App 1Yr 3 16 11


Athletic Apparel Trends March On - FW App App 2Yr 3 16 11


Athletic Apparel Trends March On - FW App Reg 3 16 11


Casey Flavin



Darden is scheduled to report fiscal 3Q11 earnings next week on Thursday, March 24 after the market close.  The company held a two-day analyst meeting on January 31 and February 1 and provided a mid-quarter update on earnings and comp guidance.  Although the company cited an estimated negative 80 bp impact from weather and a 20 bp hit from the Lenten season shift into fiscal 4Q11 this year on fiscal 3Q11 blended comps (60 bp Lent shift impact at Red Lobster), the company’s second half blended comp guidance of +1.5% to +2.5% assumes a significant acceleration in two-year average trends across each of its three major concepts.  Specifically, management guided to +3.0% to 3.5% same-store sales growth at the Olive Garden in fiscal 2H11, flat to -0.5% comp growth at Red Lobster and +4.0 to +4.5% growth at LongHorn Steakhouse. 


For fiscal 3Q11, management stated that it expects comps to come in at +1.0%, or just below the mid-point of the targeted 2H11 comp range after adjusting for the negative weather impact.  This +1.0% comp growth would translate into a 280 bp acceleration in two-year average trends from the prior quarter, which seems aggressive, particularly given the recent trends at Red Lobster.  It is important to remember, however, that management gave this guidance two months into the quarter and recently reported Knapp track trends point to sequentially better casual dining trends in February.  That being said, I am modeling a slightly lower 0.7% blended comp estimate for the third quarter as I am not yet convinced of the timing of the turnaround at Red Lobster. This 0.7% estimate still assumes a 260 bp acceleration in two-year average trends, and that includes the negative impact from weather.


Red Lobster’s same-store sales growth has fallen short of street estimates for the last three quarters and its underperformance relative to Knapp Track trends widened to nearly 3% during fiscal 2Q11 on both a 1-year and 2-year average basis.  Management attributed the weakness to the fact that affordability has become a more important consideration for its core customers and that Red Lobster’s promotions were not properly addressing that need for value.  In October of fiscal 2Q11, the company altered the way it was advertising its featured menu items to include specific price points rather than just starting price points in order to provide what it called “price assurance” for its customers.  Management also introduced more affordable items across the menu. 


The company highlighted the sharp jump in Red Lobster’s comp growth in October and November to +1.8% from -6.6% in September as proof that these pricing changes are causing the tide to turn at Red Lobster.  On a two-year average basis, comps improved an impressive 470 bps in October but then decelerated 125 bps in November, which is still much better than the extremely weak results seen in September.  Management stated during its analyst meeting that trends in December and January, after adjusting for weather, were in line with October and November levels, which implies about 1.0% same-store sales growth on a reported basis when you adjust for the estimated negative 80 bps from severe weather.


Given the concept’s recent underperformance, I think investors will be most focused on whether Red Lobster was able to sustain these improved trends in February.  For reference, it will be important to focus on two-year average trends in February because Red Lobster is facing a much more difficult comparison from February 2010 of +7.5% relative to the -8.5% comp in January 2010.  In addition, the company’s estimated 60 bp negative impact from the shift of the beginning of Lent into 4Q11 this year will hurt reported February results.  Taking this all into consideration, I am modeling a -2% comp for Red Lobster in fiscal 3Q11 (slightly below management’s -1% guidance), which assumes a nearly 450 bp acceleration in two-year average trends. This estimate is aggressive, but we know the December/January trends were positive and industry trends improved in February.  The company will need to sustain the assumed significantly higher fiscal 3Q11 level of two-year average trends, relative to 1H11 levels, during the fourth quarter in order to hit its targeted fiscal 2H11 Red Lobster comp growth of flat to -0.5%, which could prove difficult. 


As I stated earlier, DRI’s fiscal 2H11 comp guidance for both the Olive Garden and LongHorn implies a sequential uptick in two-year average trends, but given these concepts’ recent performance and the industry’s recently reported improved trends in January and February, the guidance does not seem to be as much of a stretch.  On a one-year basis, however, the comps will likely be much better during the fourth quarter than the third quarter as a result of easier comparisons and the expected reported weather impact in fiscal 3Q11.  Management’s fiscal 3Q11 blended comp guidance of +1.0% implies a 2% to 4% comp during the fourth quarter to achieve the targeted fiscal 2H11 +1.5% to +2.5% growth range. 


Relative to earnings, rising commodity costs are definitely a concern for Darden.  During the company’s fiscal second quarter earnings call, management guided to a +1.0% to 1.5% increase in fiscal 2H11 commodity costs and to flat FY11 food and beverage costs as a percentage of sales.  A little over a month later, the company raised this inflation guidance to up 1.5% to 2.0% but did not comment on food and beverage costs as a percentage of sales.  Given that commodity costs moved higher and the company updated its blended comp guidance to +1.5% to +2.0% from 2.0%, food and beverage costs as a percentage of sales will likely move slightly higher on a full-year basis, which will have a negative impact on margins in 2H11 relative to the first half when food and beverage costs as a percentage of sales declined.


I am expecting restaurant-level margins to continue to improve during the second half of the year, however, as the YOY bp change comparisons get easier and same-store sales trends should come in better, particularly during the fourth quarter.  Additionally, Darden achieved significant leverage on the labor line during the first half of the year, which I expect will continue and help to offset some of the commodity cost pressures.  Further helping the labor expense line is the company’s new direct labor optimization initiative, which it is rolling out later in the year.  Management anticipates this effort will generate modest savings during fiscal 4Q11 and then ramp up significantly next year, ultimately delivering $30 million to $40 million in annual savings when fully implemented.


I am currently modeling full-year earnings of $3.37 per share, which is in line with both the street’s estimate and the high end of management’s full-year guidance.  Relative to consensus EPS estimates, however, I am $0.02 shy of the third-quarter estimate and $0.02 higher for the fourth quarter.









Howard Penney

Managing Director


Portugal Shakes on Debt Dues

Conclusion: Portugal is shaking with a heavy load of its debt (principal + interest) for 2011 coming due over the next 3-4 months; this is combined with a credit rating downgrade this morning, and push backs on its austerity programs to narrow its high debt and deficit imbalances. Bailout cometh?


Positions in Europe: Long Germany (EWG); Short Spain (EWP)


As the spotlight returns to Europe’s sovereign debt and deficit issues, Portugal continues to melt. All the macro signals we follow suggest that Portugal will likely follow its peers Greece and Ireland and require a bailout to meet its fiscal imbalances.  The supporting evidence includes:

  • A hefty schedule of debt (principal + interest) that comes due in the months of March, April, and June (or ~ €16.1 Billion), accounting for nearly two thirds of its debt obligations for 2011 (or ~ €25.4 Billion).  So far the country has sold ~ €7 Billion in bonds of its €20 Billion target this year. (See chart below)
  • Portugal’s credit rating was cut 2 steps by Moody’s today to A3 (or 4 steps from junk), citing the country’s “subdued growth prospects” and “the implementation of risks for the government’s ambitious fiscal consolidation targets.”
  • Portugal’s Finance Minister Fernando Teixeira dos Santos acknowledged today that the country's current borrowing costs aren't sustainable in the medium and long term, according to the WSJ.

Portugal Shakes on Debt Dues - port1


The combination of a substantial near-term load of debt payments due with a downgrade of its credit rating suggests that the yield premium to issue Portuguese debt will continue to push higher, making it harder to finance its near-term issuance, all of which increases the probability that the country asks for outside support. In an auction of 12-month treasury bills today worth €1 Billion, the average yield paid was 4.331%, up from 4.057% two weeks ago. 


And the risk management signals that Portugal is near asking for a bailout include:

  • Sovereign CDS suggests the risk trade is definitely “on”, and has been for over a year. Since a year-to-date low in Portuguese CDS on February 3rd at 389bps, CDS is up 30% to 507bps. Like we saw in the case of Greece and Ireland, when the 300bps level was violated to the upside, a bailout of the country came within weeks. Portugal broke out convincingly from the 300bps level in early September of last year. (See chart below)
  • Like CDS, the risk premium to own Portuguese debt is also reflected by the government’s 10YR bond, which shows yields increasing 100bps year-to-date. 

Portugal Shakes on Debt Dues - pfinal


Finally, PM Socrates announced late yesterday that opposition lawmakers’ resistance to additional budget cuts announced last week to meet deficit targets threatens a “political crisis”.  Socrates and his Socialist party, which does not have a majority in parliament, has put forward an overly ambitious target (in our opinion) to cut the country’s budget deficit from 9.3% of GDP in 2009 to an estimated 7% in 2010, 4.6% in 2011, and to the EU limit of 3% in 2012. The government issued austerity measures in late September 2010 that included a 5% wage reduction for public sector workers earning more than 1,500/month, a hiring freeze, and an increase in VAT from 21% to 23%. Now the government is calling for new austerity plans to control operational and administrative expenses.


Today Socrates said that the plan for the new cost cutting measures would be announced before the EU Summit on March 24-5 and acknowledged that if the new austerity measures are voted down in parliament, his government would likely face early elections.


Given the political consternation about the size and shape of its austerity program combined with the near-term forces of rising debt costs into a schedule of sizable payments coming due and estimated -1.3% GDP in 2011 (expect tax revenues to be down!), we think the probability of a near-term bailout in Portugal has greatly increased. We can’t be certain of the position Eurozone leaders will take on Portugal in the days ahead, especially ahead of the EU Summit on March 24-5, but we’d expect the market to continue to punish Portugal as uncertain surrounds the collision of its fiscal and political imbalances and near-term debt obligations.


Matthew Hedrick


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%


A hedge to interest rates, a strong BS and FCF, margin levers, and a countercyclical element to its growth profile should make IGT a much more defensive stock than its trading would indicate.



It’s no secret we like this sector long-term.  We like it near-term too when sentiment gets overly focused on the timing of replacement demand; like now.  Twenty years is not the new replacement cycle paradigm.


How can the new slot replacement cycle be 20 years?  Video poker has averaged a 13 year cycle historically and they only get replaced upon disintegration.  Even if we assume a 13 year cycle for all slots, that is a level 45% higher than the current 45k replacements.  Hence, our belief is that currentl replacement levels are simply not sustainable. 


We like the Big Three over the long-term but with all the risk out there in the world IGT might be the most defensive.  IGT and BYI should be market share gainers over the near term.  Favoring IGT is no more than a risk management move.  While BYI is probably better positioned over the long-term – not susceptible to prolonged participation market share losses - IGT has more margin levers over the near term and less risk with systems timing so it’s more defensive in an uncertain time.



  • Great balance sheet – only 2x levered
  • Free cash flow positive – around $1.40 per share this year
  • Hedge to higher interest rates – higher game ops margins due to jackpot annuity funding at lower net present values as interest rates rise
  • Benefits from budget deficits so countercyclical to some extent – states need money!
  • Near term margins levers


  • Trough replacement demand and new market growth currently
  • 40-50% increase in replacements just to normalized levels
  • Visible new market growth already but states and international budgets are in rough shape – casinos are now a politically palatable way to increase government revenues – we’ve seen it before
  • Combined we should see 20-25% CAGR EPS growth over a 3-5 year period – and that growth will be highly cash generative



March 16, 2011






  • Williams Sonoma noted that West Elm achieved record sales and profits during 4Q, marking a full year of upside relative to plan.  As a result., the company is gaining confidence towards an acceleration in store openings for the brand.  Unfortunately, the step up in square footage is likely to begin in 2012 with a chance for a handful of incremental stores to be added to the pipeline in 2011.
  • Despite rising costs on the magnitude of 10-15% of the back half of 2011 for Pacific Sunwear, management continues to highlight occupancy costs as the company’s single biggest challenge.  With these costs approaching 20% of sales, management has been meeting with landlords to work on some mutual concessions in order to alleviate such cost pressure.  While the meetings with all landlords are now complete, the company does not expect to know what the outcome of rent concession discussions will be for at least 30-45 days. 
  • In yet another example that the promotional activity in footwear remains benign, the management of BWS noted they expect zero BOGO days in Q1 compared to 5-weeks during the same period last year.
  • One of the more notable callouts from DSW was the increase in units per transaction the company realized in Q4 for the first time in over three years. With an average of 1.5 UPT prior to 2008, management highlighted an increase over the last few months to roughly 1.3. This may be as much an indication of consumer mindset as the company’s growing accessories business, which will also help drive this metric.



Japan Tragedy and its Impact on the Global Economy - Japan is just starting the long process of digging out from last week’s massive earthquake, but economists say the country’s plight is likely to have only a small impact on the global economic recovery. Using as guideposts other natural disasters, such as the 1995 Kobe earthquake and Hurricane Katrina in 2005, experts are predicting the disaster will slow Japan’s economy for a quarter or two until the rebuilding process stimulates activity in building and other sectors. Even though the earthquake and tsunami are estimated to have claimed more than 10,000 lives, the country’s economic slowdown is expected to trim only 0.1 to 0.2 percentage points off global economic growth this year. This assumes officials racing to shut down several damaged nuclear power generators are able to prevent widespread fallout — the fear of which has prolonged the initial phase of the disaster, rattled global markets and prompted some people to leave Tokyo. <WWD>

Hedgeye Retail’s Take: From a market perspective, the reality is that the magnitude of this devastating events impact is still a moving target near-term – from a retail perspective, the psychological recovery will remain the key factor.


Gap Aims to Expand 1969 Line - Gap’s 1969 brand is embracing denim diversity. From her perch at loft offices in an industrial area here where the premium denim movement took root, 1969’s creative director Rosella Giuliani is orchestrating Gap’s premium collection’s efforts to stay in stride or ahead of the denim fashion curve by broadening its range of colors, fabrics and lengths. Her challenge is to keep the retailer’s denim relevant and continue the momentum of 1969, which started two years ago after a major rethinking of Gap jeans’ fit and positioning. The collection is considered a bright spot in Marka Hansen’s spotty tenure at the helm of Gap North America, which ended with Art Peck taking the reins last month. <WWD>

Hedgeye Retail’s Take: While the definition of premium denim may vary, at $59-$89 this line falls squarely into the substantial white space of sub $100 denim and will offer consumers something to consider come spring. Effectively marketing the line will be the company’s next challenge in rebuilding Gap's image as a denim destination once again.


Lucky Brand Founders Launch Civilianaire - Gene Montesano and Barry Perlman are going back to basics. The Lucky Brand founders have shed the managerial red tape, complicated global supply chain, ambitious retail rollouts and unrelenting pressure to improve the bottom line that typified their previous corporate existence at Liz Claiborne Inc. to build Civilianaire from the ground up. The new brand is based and made here, where Montesano and Perlman are fully in charge both financially and creatively of a staff of about six. The new line reintroduces familiar shirts and jeans from their past to a generation of postrecession consumers rejecting noisy designs in favor of a stripped-down aesthetic intended to transcend trends. <WWD>

Hedgeye Retail’s Take: Keeping the brand message defined and consistent was a challenge for the duo at Lucky, however it appears their new line is much less about fashion and more focused on classic vintage styling.


Adidas Launches New Campaign - On Wednesday the Herzogenaurach, Germany-based athletic brand launched “All Adidas,” its first major branding campaign since 2004’s “Impossible Is Nothing.”  The global TV- and Internet-focused campaign is meant to help the brand raise awareness with the high-school age consumer, a segment targeted under the Route 2015 plan to grow sales, Adidas America President Patrik Nilsson told Footwear News. “We’ve had a tremendous year already, so we’re now coming in and doing the biggest campaign we’ve done in America that tells the story of how diverse the brand is and inviting the consumer into the brand, to participate in what the brand really stands for,” Nilsson said.  The campaign, conceived by Adidas’ lead ad agency, Montreal-based Sid Lee, debuts globally with two TV spots (a 30-second and a 60-second version) and an extended two-minute version available online.<WWD>

Hedgeye Retail’s Take: The latest result of the company’s stepped up marketing efforts appears to be priming the pump for the much anticipated launch of outdoor this fall for which authenticity will play an important role. Given that the company’s roots are far deeper in sport, it will be interesting to see how the marketing message is crafted as we near the launch.


Court Holds SEO Firm responsible for Online Sales of Counterfeit Golf Clubs -  A federal court has ruled that a firm that provided marketing and web hosting services was financially responsible for the sale of counterfeit golf clubs by a client e-retailer. A federal judge in South Carolina entered a judgment against Bright Builders Inc. on counts of contributory trademark infringement and unfair trade practices for allegedly assisting in the construction and hosting of the e-commerce site CopyCatClubs.com. Judge Margaret B. Seymour of the U.S. District Court for South Carolina ordered Bright Builders to pay $770,750 in statutory damages and Christopher Prince, owner of the web site, $28,250, according to lawyers for the plaintiff, Cleveland Golf Company Inc. Bright Builders and Prince did not immediately respond to requests for comment. <InternetRetailer>

Hedgeye Retail’s Take: The cost of business in partnering with a entity named  CopyCatClubs.com – c’mon.


A Bright Future for Daily Deal Sites - Deal-of-the-day sites, often featuring a group buying component, have taken off over the past year, with startups like Groupon getting big fast and major internet properties like Google and Facebook looking for their own ways to get in on the action. Consumer spending on deal-a-day offers is poised to grow more than 35% to reach $3.9 billion in the US by 2015, according to a March 2011 forecast by BIA/Kelsey. Deal sites like Groupon, LivingSocial and others have become popular among users who are getting accustomed to receiving deals packaged conveniently in one daily email, eliminating the need for hunting around on the web.< eMarketer>

Hedgeye Retail’s Take: There’s a point at which consumers are going to limit the amount of deals they’re willing to be subject to on a daily basis, which doesn’t appear to be taken into account in this straight-lined approach.


R3: WSM, PSUN, DSW, BWS - R3 3 16 11




Chicken gains on the week as the usual suspects reverse their direction and decline week-over-week.


This past week was a week of deflation for commodities.  Events in Japan, and the ongoing concerns regarding the implications of the tragedies,  have put pressure on commodity prices across the board.  Cheese, corn, coffee, and wheat, are all up between 40% and 90% year-over-year but declined sharply in the last week.  This will offer some encouragement for restaurant operators and shareholders that commodity inflation may be moderating.  Chicken (broilers and wings) gained on the week but year-over-year inflation is not a concern for the protein. 


Cheese prices declined 10% week-over-week.  As the chart below shows, cheese prices remain elevated and restaurant companies with exposure to cheese.  Below, I provide some commentary on cheese from both management teams provided during their most recent respective earnings calls:




"Yeah, so the forward curve and kind of looking at about three different sources right now have cheese actually easing a little bit through the rest of the year. We're at almost $2 right now. And so, our expectation is that we're going to see a little bit of easing, to give you on cheese. We've talked about this in the past, we've got a contract in place that basically reduces the volatility on cheese moves by about a third. So about two thirds of increases or decreases in cheese are passed through to our system.


I think the kind of consensus forecast out there right now for cheese are in the $1.70 to $1.75 range. And – you know so what you're looking at is kind of a $0.25 to $0.30 move and I think we've said in the past a $0.40 move in cheese is equal to a point at the store level P&L."



We expect the favorable impact of early year sales results to substantially mitigate the unfavorable impact of currently projected commodity cost increases, most notably cheese, throughout the remainder of the year.


DPZ is 95% franchised and, as such, management claims a degree of insulation from commodity costs.  Of course, to the extent that price needs to be taken and royalties slow, the company is not immune from inflation.  The downward move of cheese over the past week will raise hopes that a price increase can be avoided. 


Looking at the chart below, the trend in cheese prices seems to be levelling out.  Nevertheless, even if cheese prices were to trend horizontally throughout the rest of the year, at it’s most benign, cheese price inflation would be 13%. 




Corn’s decline over the week was largely focused on corn importers in Japan delaying purchases in the wake of the disastrous events unfolding there.  Corn is a key input for the livestock and poultry businesses and, at +73%, remains a headwind on a year-over-year basis but has declined abruptly on the news from Japan.




Chicken wing prices definitely deserve a callout this week.  While the gain in prices was muted, at +0.5%, it is possible that this signifies the end of a longer downward trend in chicken wing prices as concepts like DPZ shift to chicken and increase demand for the commodity.






Howard Penney

Managing Director

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