Valued Client,


Hedgeye's CEO Keith McCullough, Managing Director Daryl G. Jones, and Lou Gagliardi of our ENERGY vertical recently hosted a conference call on crude oil. The key questions answered included: 

  • Why has oil been trading off in the last week(s)? What's changed?
  • How should we think about assessing the upheaval in the Middle East as it relates to supply?
  • What are the key long term supply and demand factors to analyze as it relates to future price?
  • What are the implications for other energy markets?
  • What's next for the price of oil?
  • What are the best oil equities to play given the current environment?
  • What is the role of US monetary and fiscal policy in determining the price of crude oil? 



Replay Podcast:


Presentation Slides:


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The Hedgeye Macro Team

R3: PVH, JJB, Leather Shoes & Labradoodles



March 23, 2011






  • In a stunning display of missing the boat, the “original” toning brand MBT is just now deciding to take a more aggressive approach in the U.S. with the launch of its new shop-in-shop within footwear boutique concept The Core in northern California. To top it off, in addition to a more pronounced physical presence the brand is also launching its first ever domestic advertising campaign.   
  • In an effort to improve an underperforming apparel category, DG will be reallocating space towards more children and infant apparel from the laggard women’s category. Additionally, consistent with recent trends at mass/discount retail, management highlighted shoes and accessories as the strongest segment within the apparel category.
  • While exclusive merchandise deals are hardly novel at retail, Hollywood studios are beginning to play a more significant role as a proven traffic driver. With offers that include specialty tracks, new footage, and limited run toy designs, studios are leveraging the exposure to drive sales of their own consumer products as well as traffic at retail in what appears to be a truly mutually beneficial partnership.
  • In an effort to compete on something other than price, grocers are becoming increasingly focused on differentiated experiences by offering events such as wine tastings, live music, and even Zumba classes in the case of Whole Foods. What may sound more like a gimmick is actually gaining traction with the frequency of customer visits increasing to several times a week compared to what has historically been a once a week chore. Based on the success at grocers, we wouldn’t be surprised to see the trend spread through to other areas of retail. Remember the Duane Reade in Brooklyn that added a beer bar back in January?



Tommy Preps for Takeoff  - On May 19, Tommy Hilfiger will open a traveling pop-up shop in New York in the form of a replica East Hampton beach house that will stock the brand’s new Prep World collection of 60 men’s and women’s Eastern Seaboard staples. The collection offers classic, wardrobe-building pieces sure to be embraced by prepsters from Nantucket to Knokke, Belgium—and the designs fuse European silhouettes with American country-club motifs. Hilfiger has tapped author Lisa Birnbach of The Official Preppy Handbook fame to join him in launching the pop-up shop as it travels around the world, including stops this spring and summer in Los Angeles, Paris, London, Amsterdam, Stockholm, Madrid, Tokyo and, yes, Knokke. Apart from the Prep World collection, the shop—which will be built from the ground up in each city—will sell vintage croquet, badminton and tennis gear. <WWD>

Hedgeye Retail’s Take: Following a particularly harsh winter, the beach house inspired pop-up is likely to resonate. But more importantly, Tommy has been such a poor performing brand in the US (despite the fact that it has been stellar in Europe), and this is an innovative way to change up the perception.   


Lacoste Unveils Catherine Malandrino Collection - With the Lacoste + Malandrino line making its debut in stores in mid-April, both the French brand and Catherine Malandrino are gunning for shoppers to look at the label with fresh eyes. The 12-piece spring line — the first in a collaboration that will last four seasons — has white harem pants, slinky knit dresses, wide-leg pants and mini-pleated skirts, a far cry from the standard polo shirt. “My most important role with Lacoste is to open the door to the feminine world,” Malandrino said of her work with Lacoste. “Now I am relaying effortless, chic, everyday clothes that you don’t have to think about. All of the silhouettes can be eye-catching, whether it is a miniskirt or high-waisted pants.” With her designer status, French upbringing, Saint-Tropez hideaway and Lacoste-loving husband, Malandrino was a logical choice to partner with Lacoste. <WWD>

Hedgeye Retail’s Take: the iconic polo shirt has always been Lacoste’s signature item, now it got a shot in the arm – disproportionately in its the women’s business. 


Fur Labeling Act Comes Into Law in U.S - A new legislation that requires all fur-trimmed fashions sold in the US to be labeled with the type of animal and the country of origin, regardless of the value of the fur, has recently come into effect, sources reported. The Truth in Fur Labeling Act closes a loophole in federal law that currently allows some animal fur garments to go unlabelled if the value of the fur is $150 or less. Past investigations by the Humane Society of the United States (HSUS) have found jackets trimmed with animal fur—including that from domestic dogs, wolves or raccoon dogs—being sold across the country without labels or falsely advertised as “faux fur”. <FashionNetAsia>

Hedgeye Retail’s Take:  Wow. We didn’t realize this was on the table. We kinda figured that this was either a) in place or b) not necessary. This is coming from a guy that owns four dogs…the thought of walking into a Macy’s and seeing fur labeled as ‘Labradoodle’ is sickening. The good news is that this is something we’ll likely never see, but unfortunately have probably seen in the past without knowing it because of the loophole in question.


Danskin to Launch Sports Line - Danskin will launch a line of high-tech sports bras and contemporary daywear, loungewear and sleepwear in July.  This will be the first collection of daywear, loungewear and sleepwear bearing the Danskin name.  Iconix Brands Group Inc., which has owned the Danskin name since 2007, entered into a licensing partnership with Saramax Apparel Group Inc. in late 2010 to produce the sports bras and innerwear lines.  Distribution is aimed at better department stores, sports specialty stores and e-commerce businesses.  Officials declined to give a first-year wholesale sales projection, but sales for the combined lines could exceed $5 million the first full year, according to industry estimates. Eddie Betesh, chief executive officer of Saramax, said the Danskin collections received “strong” reaction during the innerwear market week in February. <WWD>

Hedgeye Retail’s Take: Gotta hand it to these guys. They keep finding ways to grow.


JJB Investors Back Lease Changes - JJB Sports, the U.K. sporting goods chain, has persuaded creditors and investors to back a controversial rescue plan. The company said it received the required 75% majority support of unsecured creditors and a majority of its shareholders to undergo a company voluntary arrangement (CVA), its second in two years. Chairman Mike McTighe said: "Following approval of the CVA proposals at the creditors' meetings held this morning, approval by the shareholders this afternoon further demonstrates the solid support for the company's turnaround. "We would like to thank our landlords and creditors who have supported the company. As a result the management and the vast majority of our colleagues now have the opportunity to work alongside all stakeholders as we continue to achieve milestones in our turnaround." <SportsOneSource>

Hedgeye Retail’s Take: No way that anyone would allow this company to go under 16 months before the London Olympics.


Brandix buys Comfortwear - Sri Lanka's top apparel exporter Brandix has announced a major addition to its portfolio, following the acquisition of full ownership of Comfortwear (Pvt) Ltd., the Group's former joint venture with Lanka Equities. The new cluster, Brandix Lingerie, formally launched on 1st March 2011, will see the Group emerge as a key player in the manufacture of high end specialty bras and complementary coordinates for global high street labels such as Marks & Spencer, H&M, and Victoria's Secret, the announcement said. The two manufacturing facilities of Comfortwear in the Wathupitiwala Export Processing Zone in Nittambuwa, which have been under Brandix management since December 2008, have been restructured into a focused Bra/Lingerie facility that complements the Group's extensive product offering in categories such as casualwear, intimates, briefs, textiles, knits and accessories, Brandix Group Director AJ Johnpillai said.<Fibre2Fashion>

Hedgeye Retail’s Take: Good example of the bottom end of the supply chain doing what it needs to in order to stay profitable.


Leather Footwear Industry to Seize New Opportunities - The leather and footwear industry is now taking the lead in Vietnam’s export earnings from major markets such as Europe, the US, Japan and the Republic of Korea (RoK). 2010 was the most successful year so far for Vietnam’s leather and footwear industry with export turnover reaching more than US$5.2 billion. It is also one of the top five sectors that posted the highest export turnover in the country. With such momentum toward development, the sector has set its export target at US$5.4 billion this year.  The EU removing anti-dumping duties on Vietnam’s leather-capped shoes as of April 1 is also a good sign. This means that trade barriers imposed by the EU for Vietnamese footwear products have been fully abolished. This will offer a huge opportunity for Vietnamese footwear businesses to expand their markets to European countries.  Many Vietnamese footwear businesses have been urgently seeking new outlets and devised development strategies to promote exports to the European market, secure a firm foothold in the domestic market, renovate methods of production, and improve product design. <VovNews>

Hedgeye Retail’s Take: This is interesting, actually. The boost in raw materials in cotton, oil, etc, has disproportionately not taken up leather. As such, Vietnam – which is perhaps the most skilled country from a footwear building standpoint – is likely to shift on the margin to leather. Unlikely to have a big impact in the US, but for companies that sell leather footwear in Europe are probably going to benefit. This will help Ralph Lauren, Timberland, and a host of luxury brands.


Jeans Makers Embrace Point-of-Sale - The hot new trend in premium denim isn’t aesthetic, but practical: a strong partnership with retailers. Jeans makers are increasing efforts to work more closely with merchants and boost their marketing and branding presence on the sales floor. While vendors have always tried to cultivate good relationships with buyers, the tenor of their new initiatives has heightened amid weak sales in the challenging economy. Taking a more proactive approach, denim companies want to keep their spots on the competitive sales floor, where stores are kicking out brands that fail to sell. “This is a bull’s-eye economy,” said Gina Bloomingdale, vice president of sales at Los Angeles-based Habitual. “People are dropping lines and closing their doors. Before, if you had a 50 percent sell-through, you were OK. Now, if you’re not getting a 60 percent sell-through, they’re not coming back to see you.” <WWD>

Hedgeye Retail’s Take: This probably leaves out the fact that the premium denim market has tanked. Interesting, though, to see smaller retailers behave so rationally. It’s a shame that department stores don’t have the luxury to boot out a brand that is ‘only’ putting up a 50% sell-through.


Dolce & Gabbana Expanding in China - Italian fashion brand Dolce & Gabbana unveiled plans for 15 new stores across China in an effort to boost business in the world's fastest-growing luxury-goods market. The company currently operates 26 stores in China, including Hong Kong. The fashion house, which has become a major global business in the past decade, said the 15 new boutiques will be opened within the next two years.  It also plans to introduce a high-end cosmetics line developed with consumer-goods giant Procter & Gamble Co., according to designers Domenico Dolce and Stefano Gabbana, in an interview on Monday. D&G and P&G several years ago forged a partnership to produce fragrances and cosmetics. <WallstreetJournal>

Hedgeye Retail’s Take: There 's plenty of room for continued expansion in China off a low base; however, the cosmetics line is the real callout here. Given the brand's loyal customer base and successful foray into fragrance, This is a natural extension that could ramp quickly for the company.   


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SONC reported fiscal 2Q11 earnings after the close yesterday.  The company had already preannounced comp results of +2.2% at company-owned drive-ins, which was the first quarter of positive same-store sales growth after 11 quarters of declines.  Earnings of $0.02 per share fell short of the street’s $0.03 per share estimate and despite the positive comp growth, restaurant-level margins still declined about 260 bps prior to non-controlling interest and 170 bps including the change to the company’s partner compensation structure, which includes non-controlling interest.   Even with positive comp growth, the company was not able to get any leverage during the quarter.


Higher commodity costs were a big factor for SONC during the quarter with food and packaging costs as a percentage of sales up 110 bps YOY due to higher beef and dairy costs and continued product quality investments.  The company had guided to a 25 to 75 bp increase in food and packaging costs for both the second and third quarters during its first quarter earnings call.  The company is locked in on most of its commodity needs, outside of beef and ice cream mix, and now expects third quarter commodity pressures to worsen with food and packaging costs as a percentage of sales up about 150 to 200 bps.  Although SONC management expects costs to mitigate somewhat during the fourth quarter as result of improved sales and the lapping of product quality investments from the prior year, food and packaging costs as a percentage of sales are still expected to increase 50 to 100 bps YOY.  As a result of these higher-than-anticipated food costs, management is now guiding to a decline in full-year restaurant-level margins relative to its prior guidance for flat fiscal FY11 margins.


The company now also plans to take a menu price increase during the fiscal third quarter, which will result in a 1.0 to 1.5% cumulative price increase (fully implemented in fiscal 4Q11) to help offset the increased commodity pressure.  As of the first quarter earnings call, the company had planned a less than 0.5% cumulative price increase for the third quarter.  Although management stated that this price increase has been tested and has not impacted traffic trends, I think a price increase of this magnitude is risky in this environment, particularly for a company that has underperformed its competitors and posted its first quarter of positive comp growth after about two and a half years, and will likely be detrimental to traffic trends.


The focus of yesterday’s earnings call was on management’s guidance for “continued improvement in same-store sales trends throughout the fiscal year.”  Although same-store sales improved during fiscal 2Q11 to +2.2% at company-owned drive-ins from -1.9% during 1Q11, two-year average trends decelerated about 85 bps.  The year-ago comparisons get increasingly more difficult with the company lapping a -6.3% comp from fiscal 3Q10 versus the -14.9% comp in fiscal 2Q10.  The guidance for sequentially improving same-store sales growth seems so unbelievable that about four different analysts questioned whether management was referring to better two-year trends rather than the implied 1-year trend.  Management finally just said that the guidance did, indeed, assume positive comp growth in both the third and fourth quarters as they layer on various initiatives and build on current momentum.


Given that two-year average trends continued to decelerate during the second quarter and only maintaining the same +2.2% level of comp growth in fiscal 3Q11 (rather than sequentially improving) implies a 430 bp improvement in two-year average trends, I think analysts and investors, alike, are right to be cautious.  This comp guidance is definitely aggressive.  With the stock trading up today, however, it seems that some investors are drinking the Kool-Aid.


It is important to remember that the company’s current margin guidance, particularly as it relates to the food and packaging expense line, takes into account this aggressive comp guidance so margins could come in much worse than current expectations should same-store sales trends fall short of management’s targets.  The company also guided to leverage on the labor and operating expense lines during the back half of the year as it laps the implementation of its new partner compensation structure in April of the third quarter and more importantly, as a result of the assumed continued momentum in top-line growth.  Time will tell.









Howard Penney

Managing Director


Wheat and corn lead the way as commodity prices, in general, rebound from last week’s slowdown.


If last week bucked the trends in the commodities we follow in our weekly monitor, this week reestablished them.  Wheat and corn were highly notable last week as the grains saw price declines of 7.2% and 8.5%, respectively.  Corn, in particular, is highly important for the broader food and restaurant industries as a feed for livestock.  While the week-over-week gain in live cattle prices was tame, at +0.7%, if corn prices can remain elevated I expect beef prices to follow suit. 


As the chart below shows, corn prices have rebounded sharply over the past week and remain significantly above the levels of 2010.  In terms of news flow, it seems that the grain is set to continue on its upward trajectory, supported by an expected increase in global demand.  In particular, China, which only last year became a net importer of corn, is expected to increase imports of the grain over the next couple of years.  For restaurant companies with high exposure to protein costs, increasing corn prices are a concern.  Below is some commentary from management teams on corn prices:


CMG, 4Q10 Earnings Transcript, 2/10/11:

“Though we have contracted for most of our corn for our salsa for the year, reports of continuing or even worsening supply shortages of corn will only add to inflationary pressure on the meats that we serve.”


JACK, 1Q11 Earnings Transcript, 2/24/11:

“There are some Act of God provisions that will get us north of our contract bands, but at a reduced rate from what the current market pricing is ... And then also grain, corn, wheat and soybean impact, and there are input costs for a number of the proteins. And that's really what's driving up beef at this point.”





Wheat prices rose in step with corn over the last week, supported by dry weather in the plains of the United States and on signs that demand from Japan may be unaffected by the March 11 earthquake.  For companies like Panera, which does have wheat costs largely locked in for 2011 roughly flat versus 2010, prices remaining this elevated could result in a price increase in the back half of this year.





Cheese prices declined 9.3%, week-over-week.  As the chart below shows, cheese prices have come down significantly over the last two weeks (~10% and 9%, respectively).  Below, I again provide some commentary from management teams from their most recent earnings calls with their views on cheese prices and the implications for their businesses. 



"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 leveling out.  Nevertheless, even if cheese prices were to trend horizontally throughout the rest of the year, inflation over the first half of the year, at least, would remain a significant headwind for restaurant companies with exposure.







Howard Penney

Managing Director


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

  • SONC reported $0.02 adjusted versus $0.03 expectations.  Revenues also came in a little light, $113.5m versus $114.5m despite comps turning positive, as preannounced, and management guiding to positive comps in the back half of the fiscal year despite increasing difficulty in year-over-year compares.
  • BWLD, not surprisingly, is kicking off a “grass roots” movement to “save our season” so that the fans can enjoy the football season from which BWLD derives so much of its traffic.
  • SBUX has lost some of its “buzz”, apparently.  Market research firm, YouGov BrandIndex, are not clear on the cause of the recent swoons in public perception but suspect that news around higher packaged coffee prices may be impacting consumer view.
  • COSI traded up, on strong volume, after trading poorly for much of the last month.
  • RRGB traded up 2.4% on accelerating volume.  MRT, PFCB, and RT traded down on accelerating volume.




Howard Penney

Managing Director

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