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R3: HD, SHLD, CROX, PVH

 

R3: REQUIRED RETAIL READING

March 21, 2011

 

 

 

 

RESEARCH ANECDOTES

  • In one of the first earnings revisions attributed to the tragedy in Japan, Billabong has lowered its June fiscal year-end outlook. After originally guiding towards flat sales, the company is now expecting top-line deterioration to the magnitude of 2%-6%. Interestingly, Japan only accounted for only 4% of global sales and 3% of EBITDA as of FY10. While roughly two-thirds of Japanese profits  are typically booked between March-June, it appears that Japan is perhaps one of only a few regions coming in below expectations.
  • After a successful test last year, Home Depot is bringing back its ‘Spring Black Friday’ event with the first of four weekends in select markets this past weekend. With door buster discounts as high as 50%-75% off select items, the company will post offers on Facebook every Friday now through the end of May in an effort to rebound from the lowest level of Lawn and Garden sales in over a decade last year.
  • Following weeks of speculation regarding Apple’s interest in retail space within Grand Central, the latest news suggests that the retailer has pulled out of negotiations. With this deal now at, or near an end, the question remains where Apple will look to anchor its latest flagship in the Big Apple.    

OUR TAKE ON OVERNIGHT NEWS

 

Sears’ Turf Wars Campaign - In a retail world which is polarising between “value” and “specialty”, many department stores have reacted by dumbing down their offer and embarking on broad-based discounting programs. The upshot, in Australia at least, is that the line between “department store” and “discount department store” has become increasingly blurred. So it’s refreshing to see a venerable US department store bucking the trend with a sharp, category-specific, competitively-focused campaign. Sears, that bastion of US retail, has just launched a new promotional initiative for the Northern Hemisphere Spring called “Turf Wars”. As indicated by the theme, it’s a tough-talking campaign that “names names” (in a tongue-in-cheek way), urging consumers to shop for their lawn and garden products at Sears, rather than The Home Depot or Lowes (the big-box home improvement competitors in this category). <InsideRetailing>

Hedgeye Retail’s Take: What’s interesting here is that we’re starting to see more retailers and brands call out their competition in ways that etiquette of the past would disallow. (Note the New Balance running campaign vs. Nike).

 

Van Heusen to Diversify into Non-Apparel - Van Heusen, a part of Madura Fashion & Lifestyle, the branded apparel business of the Aditya Birla Group, is targeting the non-apparel space as a future growth engine.  Van Heusen is a leading premium lifestyle brand straddling the premium apparel range with a turnover of Rs.650 crore and it is now planning to increase its presence in the premium non-apparel space currently dominated by multinational brands. From a small presence in men's ties and belts, the company's non-apparel business plan includes an entry into men's footwear, eyewear, watches and luggage. It will also enter the women's shoes and bags segment. Speaking to this correspondent, Ajay Ramachandran, Brand Head, Van Heusen, said, “we see a good demand for these products and over the next five years, expect the non-apparel business to contribute around 10 per cent of our targeted Rs.2,000-crore turnover.” <TheHindu>

Hedgeye Retail’s Take: Little impact on P&L. But we continue to be won over on the margin with how Manny is running this ship. All these little initiatives are going to add up to something meaningful one day soon.

 

Crocs Develops Lightweight Sneaker for Men - Crocs Inc. stepped out of its element when it launched a brand of high heels and other women's shoes that looked nothing like its iconic bright, lightweight clogs. Now it's doing it again, with a line of seven-ounce sneakers for men. The Niwot, Colo.-based company has no intention of abandoning its signature clogs, beloved by some and loathed by others. But it's pushing to become a shoe brand for all seasons and buyers, chief marketing officer Andrew Davison said. This summer Crocs plans to extend the sneakers to women and offer women's shoes made with more translucent materials, while maintaining its ideals of lightweight, odor-resistant, fun, casual footwear, Davison said. "The next couple of seasons, you'll see us push the boundaries of what a casual shoe is," he said. <Forbes>

Hedgeye Retail’s Take:  There’s a big difference between pouring a few tons of plastic pellets into a vat and popping out those Crocs we’ve grown to know and love to hate. Getting into more of a lifestyle business means one thing – complexity. The process from design, procurement, marketing, manufacturing, and logistics means that Crocs will see a meaningful change in its cash conversion cycle. We think that this is going to be one of the keys to whether they can make this work.

 

A Struggling Wal-Mart Turns to Its Core  - After attempting to appeal to a wider variety of shoppers backfired, discount giant Wal-Mart Stores Inc. now is mired in its worst U.S. sales slump ever. I think we tried to stretch the brand a little too far,' says William Simon, Wal-Mart's chief for the U.S.  But William Simon, the former Navy officer put in charge of the flagging U.S. division last June, says he is confident that the lumbering giant can reverse its fortunes after seven consecutive quarters of domestic sales declines at stores open at least a year. Part of his strategy includes returning to the "Every Day Low Prices" formula Wal-Mart popularized, after the company in recent years veered away from offering low prices across the board and instead discounted some items while raising prices on others.  Mr. Simon says he hopes this will win back some of Wal-Mart's core customers—households earning $30,000 to $70,000 a year—which the company has been losing to upstart dollar-store chains. <WallstreetJournal>

Hedgeye Retail’s Take: The only thing notable in this article is that it is in the WSJ. We still think that with inflation on the rise in 2010, and consumer spending remaining challenging at best, Wal-Mart has its job cut out for it.

  

Marimekko to Expand in U.S. Online - Marimekko, the Finnish design house, is moving ahead with its U.S. expansion plans, opening a flagship here, launching an e-commerce site, and extending its collaboration with Crate & Barrel.  In addition, the company seeks to enter new retail partnerships for clothing and accessories and increase its presence in home furnishings stores.  The flagship will open this fall in Manhattan’s Flatiron District in the “Toy Building,” at 200 Fifth Avenue. With nearly 4,000 square feet of selling space, the store will mirror the recently opened flagship in Helsinki. Both stores are designed by IMA, the Japanese architectural firm, in cooperation with Marimekko’s own store design team. The world of Marimekko products will be displayed, with new merchandise showcased each season.  <WWD>

Hedgeye Retail’s Take: No threat

  

European M&A Activity Heats UpEurope appears to have caught the M&A fever again.  The last six months has been a lively period for European mergers and acquisitions activity, culminating in the blockbuster $6 billion-plus transaction by LVMH Moët Hennessy Louis Vuitton for Bulgari earlier this month that followed a rash of private equity deals. Overall, and boosted by the LVMH deal, M&A activity in Europe in the fashion and luxury space over the last six months has approached $10 billion — and all signs are the momentum will continue throughout the rest of the year.  “There’s been a pickup in activity over the last several months. It’s been very substantial. Right now luxury is back [and] banks are starting to lend again,” said Richard Kestenbaum, partner at Triangle Capital LLC. “There are signs that firms who have capital are waiting in the wings wanting to do something.”  In the Bulgari deal, LVMH was able to double its watch and jewelry division through a single acquisition.  <WWD>

Hedgeye Retail’s Take: Is it us, or does this snippet scream 2003-2007? We’re not suggesting that all deals will be bad. But when executives tout that they “doubled a business” with a given acquisition, it is usually a bad sign.

 

The Aftershock for Retail Companies in Japan - As fears mount about Japan’s economy slipping into a recession, footwear firms are struggling to keep stores operating normally in the region. While every company said last week they are most concerned about the safety of their employees amid growing threats of a nuclear crisis, execs noted that business has been disrupted to varying degrees. Kobe, Japan-based Asics Corp., which derives about a third of its revenue from its domestic business, experienced light damage in certain facilities and distribution centers, including cracked walls and broken windows in its business office in Tokyo. And not all 57 stores in the country are fully operational, said Gary Slayton, Asics’ VP of marketing. “Our infrastructure and supply chain haven’t been disrupted. <WWD>

Hedgeye Retail’s Take:  The ONLY consolation from a business perspective is that there are very few businesses outside of the lux market that have had any success in Japan in a pretty long time. This is actually a pretty good time for better-managed companies to invest capital.

 

 

 


European Risk Monitor: Bank Swaps Tighten Ahead of EU Summit

Positions in Europe: Short Italy (EWI); Short Spain (EWP)

 

Below we include our weekly Risk Monitor for European bank CDS. Banks swaps in Europe were mostly tighter week-over-week, tightening for 32 of the 39 reference entities and widening for 7.

 

European capital markets continue to be volatile given existing global concerns (in particular the results of the earthquake and tsunami in Japan and unrest in MENA) and domestic issues (existing sovereign debt imbalances across states; indecision from the BoE and ECB on adjusting monetary policy to reflect inflation pressures; the second round of Bank Stress Tests; and the likely consummation of dovish agreements at the comprehensive EU Summit this week (March 24-25) – in short, a larger and more generous social net to bailout/protect ailing member states).

 

To the last point, European equity markets could likely trade with a positive bias anticipating that the EU Summit will calm near-term bailout/default fears. In particular we’ve highlighted Portugal as one country on watch as it goes up against a hefty schedule of bonds coming due over the next 4 months (see our portal: Portugal Shakes on Debt Dues on 3/16).

 

In the Hedgeye Virtual Portfolio we’re short Italy via the etf EWI and Spain via EWP. Our position remains that despite initial attempts at austerity, these two countries should break longer term under their bloated sovereign debt and deficit imbalances. In both cases, we tactically shorted the etfs on a bounce last week. We view the EUR-USD currently overbought, with immediate term TRADE levels of $1.39 - $1.41.

 

Matthew Hedrick

Analyst

 

European Risk Monitor: Bank Swaps Tighten Ahead of EU Summit - cds


GREECE: DRAFT GAMING BILL SUBMITTED TO PARLIAMENT

Update on the Greek VLT Bill.

 

 

The Greece finance ministry unveiled the draft gaming law late last Friday.  The draft details an international tender where each market participant will be able to acquire one license.  An exception may be held for OPAP due to its monopoly agreement it has with the Greek government.  Any unsold licenses will be evenly distributed to those that would already have received a license.  There will be a 30% gross profit tax paid to the government on a quarterly basis.  In addition, a 10% tax on players’ gains will be imposed both in VLTs and Internet betting.  The minimum payout will be 80%.  The gaming regulator that will be established will set up a live monitoring system to which every VLT and internet site will be permanently connected.

 

The ministry reiterated that the bill will earn 500MM euros (US$698 MM) from license fees and 200MM euros (US$280MM) annually from tax collections.  Currently there are over 250 betting websites, ~20,000 slot machines and ~150,000 computers operating gaming programmes illegally in Greece, said the ministry.

 

What are the next steps (with tentative dates):

  1. Passage of bill in Parliament (Late 2011)
  2. Bill sent to President Papoulias for promulgation and publication in the Government Gazette (Late 2011/early 2012)
  3. Setup of new gaming supervising committee (early 2012)
  4. Tender process (2012-2013)

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THE M3: CPI, GALAXY EARNINGS DATE

The Macau Metro Monitor, March 21, 2011

 

 

CONSUMER PRICE INDEX FOR FEBRUARY 2011 DSEC

Feb CPI rose 4.7% YoY and 0.90% MoM.

 

DATE OF BOARD MEETING Galaxy Entertainment

The board of directors of Galaxy Entertainment Group will discuss FY 2011 results on March 30.

 

 

WEEKLY RISK MONITOR FOR FINANCIALS: SPREADS TIGHTENING

This week's notable callouts include European bank and sovereign swaps tightening and the 2-10 spread tightening.  


Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Neutral/ 4 of 11 improved / 4 out of 11 worsened / 3 of 11 unchanged
  • Intermediate-term (MoM): Negative/ 3 of 11 improved / 5 of 11 worsened / 3 of 11 unchanged
  • Long-term (150 DMA): Positive / 5 of 11 improved / 4 of 11 worsened / 2 of 11 unchanged

WEEKLY RISK MONITOR FOR FINANCIALS: SPREADS TIGHTENING - summary

 

1. US Financials CDS Monitor – Swaps were mixed across domestic financials, widening for 16 of the 28 reference entities and tightening for 12. 

Tightened the most vs last week: JPM, WFC, BAC

Widened the most vs last week: RDN, PRU, HIG

Tightened the most vs last month: UNM, MMC, WFC

Widened the most vs last month: RDN, MET, XL

 

WEEKLY RISK MONITOR FOR FINANCIALS: SPREADS TIGHTENING - us cds

 

2. European Financials CDS Monitor – Banks swaps in Europe were mostly tighter, tightening for 32 of the 39 reference entities and widening for 7.

 

WEEKLY RISK MONITOR FOR FINANCIALS: SPREADS TIGHTENING - euro cds

 

3. Sovereign CDS – Sovereign CDS tightened across Europe, falling 33 bps on average last week as Greece backed off its highs. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: SPREADS TIGHTENING - sov cds

 

4. High Yield (YTM) Monitor – High Yield rates rose slightly last week, ending at 7.81, 2 bps higher than the previous week.  

 

WEEKLY RISK MONITOR FOR FINANCIALS: SPREADS TIGHTENING - high yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index fell last week to end the week at 1599.   

 

WEEKLY RISK MONITOR FOR FINANCIALS: SPREADS TIGHTENING - lev loan

 

6. TED Spread Monitor – The TED spread hit the highest level since last August, ending the week at 23.7 versus 23.2 the prior week.

 

WEEKLY RISK MONITOR FOR FINANCIALS: SPREADS TIGHTENING - ted spread

 

7. Journal of Commerce Commodity Price Index – Last week, the JOC index hit its lowest level since January, the rose to end the week 1 point down from its prior level at 27.5.

 

WEEKLY RISK MONITOR FOR FINANCIALS: SPREADS TIGHTENING - JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields fell 52 bps.

 

WEEKLY RISK MONITOR FOR FINANCIALS: SPREADS TIGHTENING - greek bonds

 

9. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps.  We believe this index is a useful indicator of pressure in state and local governments.  Markit publishes index values daily on four 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. Our index is the average of their four indices.  Spreads fell last week, closing at 131 on Friday.  

 

WEEKLY RISK MONITOR FOR FINANCIALS: SPREADS TIGHTENING - MCDX

 

10. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production.  Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion.  Early in the year, Australian floods and oversupply pressured the Index, driving it down 30%. Since then it has bounced off the lows and is now steadily climbing.  Last week it rose 216 points to 1346. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: SPREADS TIGHTENING - baltic dry

 

11. 2-10 Spread – We track the 2-10 spread as a proxy for bank margins.  Last week the 2-10 spread tightened slightly to 276 bps. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: SPREADS TIGHTENING - 2 10

 

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows:  2.1% upside to TRADE resistance, 3.0% downside to TRADE support.

 

WEEKLY RISK MONITOR FOR FINANCIALS: SPREADS TIGHTENING - xlf

 

 

Joshua Steiner, CFA

 

Allison Kaptur


CHART OF THE DAY: U.S. Dollar Debauchery = The Inflation

 

 

CHART OF THE DAY: U.S. Dollar Debauchery = The Inflation -  chart


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