R3: GPS, Reebok, J Crew, Bulled-up NRF



April 8, 2011




  • After stepping back and evaluating reality after yesterday’s retail sales results, we remain convinced that numbers are headed lower this year, and that the timing will start in June. See our note (Retail: Sell the Strength).
  • If one more person asks me about PLCE, I might scream. It’s definitely the consensus ‘I’m doing work on this name’ buzz ticker for the week.
  • Target’s relative weakness definitely confirmed our negative view (Keith is short TGT in the Hedgeye portfolio). I remain convinced that given their levels of investment in the business (or lack thereof), they can get sales growth, or margin improvement – but not both.  Are we the only ones who wish that the retailer that accounts for 7.1% of all consumer retail sales put some numbers out there? The comparison would be so telling.
  • At a time when many retailers are testing smaller footprint concepts, Forever 21 is planning to open a behemoth, Miami Beach’s largest specialty store at 39,000 sq. ft., in 2012. While significantly larger than the company’s average 10,000 sq. ft. footprint, it pales in comparison to the 110,000 sq. ft. store that just opened last February in Louisville Kentucky. In addition to another handful of 80,000+ sq. ft. locations opened over the last 12-months, it looks like the retailer is clearly on the path of becoming one of the largest mono-brand retail footprints.
  • According to a recent study by Harris Interactive, consumers are employing various saving strategies in light of rising food costs. Not surprisingly, using coupons was the most frequently used tactic by 72% of participants with comparing unit prices of package sizes a close second at 71%. Interestingly, adults with household incomes in the $75k-$100k range were more likely to use coupons (81%) compared to households that make less than $35k (63%).



Gap Sells Bonds to Buy Back Shares - Gap Inc. is taking on debt to buy back shares, jumping into hot bond markets Thursday just as its operations showed the pressure of a 10 percent drop in comparable-store sales for March. The San Francisco-based retailer said the proceeds of its bond offering — which was said by financial sources to have raised $1.25 billion through the sale of 10-year notes — would go toward “general corporate purposes including share repurchases.” The company also secured a $400 million five-year term loan and inked a new $500 million revolving credit facility with Bank of America Merrill Lynch, J.P. Morgan and Citigroup Global markets.  The share buyback might be an effort to assuage shareholders in what could be a tough year. One shareholder in particular — Sears Holding Corp. chairman Edward S. Lampert, who recently scooped up 35 million shares of Gap, or 5.8 percent of those outstanding — is known to favor share repurchases. <WWD>

Hedgeye Retail’s Take: After taking a ~6% position in the company back in February, Lampert can be credit for the retailer for stepping up repurchases. On February 24, GPS announced a new $2Bn authorization (with no expiration date), which would account for nearly 20% of outstanding shares at the current price. Between the company’s net cash position and new credit lines, it has plenty of powder to execute the familiar Lampert repurchase plan. AutoZone redux?


NHLPA, Reebok Ink Apparel Deal - The National Hockey League Players’ Association (NHLPA) announced new five-year apparel agreements, highlighted by the continuation of its partnership with Reebok.  In addition, the NHLPA said it is expanding its roster of apparel licensees to include Old Time Hockey, Knights Apparel, and Elmau & Associates.   “We are very excited to continue our partnership with Reebok while bringing on board new NHLPA licensees Old Time Hockey, Knights Apparel, and Elmau & Associates, all of which will enhance player licensed product offerings for hockey fans,” said Adam Larry, NHLPA Director of Licensing and Associate Counsel. “Reebok has done a great job supporting our player apparel program over the years and we’re pleased they will continue to produce quality apparel featuring NHL players. Our new partners will enhance the NHL player apparel offerings in strategic areas, thus enabling the NHLPA to meet the growing demand for player apparel.”<SportsOneSource

Hedgeye Retail’s Take: After losing its NFL license last year, the renewal with the NHLPA is more important than perhaps it should be for Reebok. The fact that several other providers were added to the apparel mix dilutes Reebok’s exclusivity in some respects, but the reality is that one of the sports’ top equipment providers couldn’t afford to lose out entirely – especially with Bauer having gone public.


Spending on Food, Gifts and Apparel Expected to Increase This Easter, According to NRF - Not since 1943 have Americans seen an Easter fall this late in the calendar, but it seems the delayed holiday won’t impact consumers’ eagerness to spend on décor, food and even new spring apparel. According to NRF’s 2011 Easter Consumer Intentions and Actions survey, conducted by BIGresearch, the average consumer is expected to spend $131.04 on everything from candy to clothes – up from last year’s $118.60 but not quite to pre-recession levels. Total spending on Easter related merchandise is expected to reach $14.6 billion.* “Due to such a late holiday, Easter promotions will last all spring long,” said NRF President and CEO Matthew Shay. “Though lingering concerns over food and energy prices may keep shoppers from splurging, retailers are expecting consumers to stock up on apparel, home décor and of course food and candy, a good sign leading into the much busier and important months to come.” Food and candy will account for most of a consumer’s budget, bringing in $2.1 billion in candy sales and $4.5 billion in food sales alone. <NRF>

Hedgeye Retail’s Take:  We’re not going to do battle with the NRF’s interpretation of these surveys. They’re useful to an extent, no doubt. But we remain concerned about May and June. In fact, with dollars going out the door so late in April it might very well temporarily empty consumers’ wallets as 2Q begins.


J. Crew Goes Bigger on Fifth Avenue - J. Crew’s newly expanded and remodeled flagship at 91 Fifth Avenue here is described by a long list of superlatives. It’s the largest store in the chain, having grown to 20,800 square feet from 15,000 square feet. According to sources, sales are expected to exceed $1,100 to $1,200 a square foot.  The location, near 17th Street, is also J. Crew’s first three-level store and the first to house men’s, women’s and Crewcuts, its children’s brand, under the same roof. (A unit at Garden State Plaza in Paramus, N.J., offers the three businesses, but in adjoining stores with separate entrances.) The flagship boasts the chain’s first proper shoe and handbag departments, and the first men’s and women’s suit areas. It also has the first dedicated area for personal shopping, a lounge with private dressing rooms off the main floor. Home delivery and complementary “house calls” will be coordinated from the store.  With a lighter and more open design, the store’s decor is a nod to a midcentury modern sensibility with art and objects from the Thirties to the Sixties, such as Bradley Hughes’ “Lucille” lighting fixtures and a curated art collection. <WWD>

Hedgeye Retail’s Take: 5th avenue retail space is funky, to say the least. The 49th Street to 59st corridor runs an average of $1,500 per square foot in rent (prime spots are well above $2,000). There’s a big notch down from Grand Central (42nd) and 49th Street – by about $1,000, actually. Then as we head downtown the rates start to creep higher. Our sense is that the 17th Street location is pushing $800-$900/ft.  The point here is that the reports of sales being ‘expected to exceed $1,100/ft’ BETTER be true, otherwise the math simply doesn’t work.


Uniqlo to open third New York City store - Japanese apparel retailer Uniqlo said Thursday it will open its third New York City location.  The new store, on 34th Street, set to open this fall, following the opening of the chain’s largest flagship location on Fifth Avenue earlier in the fall. Both stores will join the current Uniqlo location in Manhattan’s Soho district.  Parent company Fast Retailing said it is targeting about $59.5 billion in sales and approximately $11.9 billion in profits by 2020. To meet these targets Fast Retailing said it plans to continue to open Uniqlo stores in major U.S. cities. <Chainstoreage>

Hedgeye Retail’s Take: I wish I could run my business based on 2020 goals. Nonetheless, the Uniqlo concept works, and the Japanese need so desperately to expand beyond their stale shores. Their cost of borrowing is nil, real estate is cheap and getting cheaper, and the weak dollar makes it increasingly easy to deploy capital in the US profitably. We’re probably giving them too much credit there as it relates to reasons for growing. But Uniqlo is faster, smarter, the consumer loves it, and its growing.


Japanese Tanners avoid earthquake disaster - Japan’s tanning industry has not been directly affected by the recent earthquake, according to the Tanners’ Council of Japan.  About 85% of Japanese tanneries are concentrated in Hyogo and Wakayama areas and 15% are located in eastern Japan which main areas are Tokyo and Saitama regions, said the Association. The main production areas of the Hyogo region are Himeji and Tatsuno districts. Western Japan which includes Hyogo and Wakayama was unaffected by this earthquake and tsunami.  <FashionNetAsia>

Hedgeye Retail’s Take: Let’s not over think this. Japan accounts for less than 2% of global leather production. As a sidenote (for all you leather enthusiasts), the mix of uses for leather is as follows; a) Footwear = 52%, b) Garments = 10%, c) Auto = 10%, d) Furniture = 14%, e) Gloves 4%, with the remainder spread across a multitude of categories.


Target calls for Canada Stores to generate 6-Billion per Year - No. 2 U.S. discount retailer Target Corp expects to generate sales of $6-billion a year in Canada in six to seven years, Chief Financial Officer Douglas Scovanner said in an interview with Reuters on Wednesday. It plans to open more than 200 stores in Canada, its first foray into a foreign market, with the first stores opening in 2013. Scovanner said Target plans to invest "many billions" of dollars in Canada, where it sees annual pretax profits of "hundreds of millions" of dollars over the six- to seven-year period. The company announced plans in January to take over leases of up to 220 Zellers discount stores owned by Hudson's Bay Co for $1.83- billion. It said at the time it planned to open 100 to 150 stores in the country in 2013 and 2014. <Financial Post>

Hedgeye Retail’s Take: In looking at the simple math here, $6Bn should seems to be a reasonable hurdle, but may be viewed as a disappointment if that’s all the discounter can generate up north in 6-7 years time. With the average U.S. store generating about $40mm annually, 100-150 stores operating for more than 3-years should be able to approach similar productivity, or $4Bn-$6Bn in sales. Assuming additional new store growth and the underpenetrated nature of the Canadian market, this continues to be a solid longer-term growth opportunity for the discounter struggling to grow the top-line here in the near-term.


Moncler Targets June for IPO - IPOs seem to be the latest Italian fashion. Moncler SpA on Tuesday filed documents to list on the Italian Stock Exchange, heading for a float by June. The hot outerwear brand’s initial public offering will come shortly before the equally anticipated one from Prada Group, which is expected to list its shares on the Hong Kong Stock Exchange by late June. Moncler’s filing did not disclose the amount of shares it plans to list, although sources have said it was looking at floating up to 50 percent of the company. They estimated the float would value the group at about 1.1 billion euros, or $1.5 billion at current exchange. In addition to the Moncler brand, the Moncler Group includes high-end sportswear labels Henry Cotton’s, Marina Yachting and Coast + Weber + Ahaus, and it holds the license for Cerruti. The private equity fund Carlyle Group owns 48 percent of Moncler. <WWD>

Hedgeye Retail’s Take: After acquiring the brand in 2008 and growing its store base from four to more than thirty, Carlyle has significantly increased the high-end fashion outdoor outerwear brand’s reach. After looking to add another brand to Moncler over the last year, the public markets may make it considerably easier for the company to do just that. The high end is the one area that seems to be defying gravity.




Chart of the Day: Exposing the Keynesian Kingdom

With crude oil at $125/bbl., Bernanke, Dudley, and Evans are getting exactly what they wanted...


Chart of the Day: Exposing the Keynesian Kingdom - 1


Have a great weekend,


The Hedgeye Macro Team


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

  • PFCB was initiated with a “New Outperform” rating at Wells Fargo.
  • PFCB announted a long-term licensing agreement with Interaction Asian Restaurants L.P. to develop and operate P.F. Chang’s China Bistro in the Canadian provinces of Manitoba, Ontario, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland.  The first location is scheduled to open in 2012.
  • MCD Japan sales fell 7% in March due to the closure of restaurants damaged in the March 11 earthquake.  Rolling blackouts implemented following the quake also reduced operating hours.
  • Tilman J. Fertitta and his Landry’s Restaurants Inc. subsidiary on Thursday officially placed a bid of $137.3 million for McCormick & Schmick’s Seafood Restaurants Inc.
  • Nestlé is looking to develop its food supply service to restaurants (Nestle Professional.
  • USDA inspectors are exempted from the government shutdown, if it comes to pass.
  • YUM traded down 1.4% on accelerating volume after a strong session the day prior.
  • PNRA also declined 1.4% on accelerating volume.
  • Casual dining took it on the chin following the RT earnings Wednesday after the close.  I remain positive on EAT, PFCB, and RUTH while maintaining a cautious view on TXRH and CAKE.
  • Praesidian Capital Opportunity Fund III-A LP offered $9.5 million for the 20 Charlie Brown’s restaurants, including 17 in New Jersey.




Howard Penney

Managing Director

Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.


The Macau Metro Monitor, April 8, 2011




Singapore's Casino Regulatory Authority said it has to-date received some information alleging illegal activities in the casinos.  It has asked Adelson and MBS to provide details.  Adelson said LVS officials have filed a "suspicious transaction report". Adelson added, "We are not doing business with third parties [junket operators], doesn't mean one doesn't slip though without our knowing about it."


Contrary to what Adelson said about the Singapore government having not made up its mind about allowing junkets, CRA said it has received junket applications endorsed by RWS and is currently processing and investigating them.


MPEL Co-COO Nick Naples for operations says non-gaming revenue is set to continue to increase at the company’s properties in 2011.  “It would be conservative to say we expect to see another 10-15% growth in our non-gaming areas. However, we cannot really grow ‘The House of Dancing Water’ much more. But we are seeing very healthy growth over 2010 already. Currently, it is at a break-even level with the occupancy rate hovering around 95-96%," said Naples.  He added that CoD may "add new offerings in 2011 and 2012."



Success Universe plans to open a Sogo-like department store at Ponte 16.  Ponte 16 on the Inner Harbour is 49% owned by a subsidiary of Success Universe. The majority share is owned by SJM–Investimentos, an indirect, wholly owned subsidiary of SJM Holdings.  The department store is to be located at Ponte 16’s phase 3, to be completed by the end of 2012.  The HK$800MM development plan needs approval from the Macau government.


“We think Japanese-style department stores run better than their peers and we are in talks with some operators,” deputy chairman Hoffman Ma said. As part of the development project, Ma expects the number of gaming tables to grow to 150 from the current 109 by 2013.



Sources say Russia has plans to build a casino in Oblast, a neighborhood of the Chinese province Heilongjiang.

America's Last Entitlement

“The best way to destroy the capitalist system is to debauch the currency.” 

-John Maynard Keynes


What’s worse right now, American fiscal or monetary policy? Sadly, that’s a tough call. As the world embraces the idea of a US Government Shutdown this morning (yes, many of us would like to see these people stop what they are doing), even John Maynard Keynes is rolling over in his grave. The US Dollar Index is trading down at fresh YTD lows of $75.14.


Let’s take a look at both sides of what drives a country to “debauch the currency” (looking at Europe vs USA, straight up) and the immediate-to-long-term risk management implications for your portfolios:


1. Monetary Policy


As anyone who has traded a currency market in the last 40 years knows, currencies trade not only on the direction of a country’s monetary policy (hawkish or dovish), but relative to other countries with competing policy views.


For the 1st time in 40 years, the Europeans raised interest rates before Americans did yesterday. Notwithstanding the colossal failure of common sense associated with The Bernank opting to starve the American common man with inflation and a zero percent return on his savings account, it’s important to recall that Trichet’s rate hike didn’t come from the zero bound. He was already at 1% and he moved to 1.25%. That’s bullish for Euros versus Dollars.


In justifying the interest rate hike, the ex-Finance Minister of France told the world, “You know from our own doctrine that we always do what is necessary to deliver price stability.” In the immediate-term, even for the left-leaning Frenchman, that is pseudo-true. Relative to The Bernank, it’s very true. With the USD down for 11 of the last 15 weeks, Bernanke is perpetuating the highest PRICE VOLATILITY that commodity markets have ever seen.


2. Fiscal Policy


On a relative basis versus Europe, particularly relative to the United Kingdom, the United States of America isn’t even in the area code of where capital market winds have blown European politicians. Since many European markets can’t mark-their-bonds-to-model like Geithner and Bernanke have attempted to mark US Treasuries, austerity measures have either been imposed by popular vote (UK) or by market vote (Portugal). Both votes count.


Many Americans have found rhetorical resolve in calling Europeans “pigs”, and that might feel all good and fine if you’re an American living large on a banking fee or a Washington retainer, but that doesn’t change the reality of what the rest of the world rightly started calling Boehner and Reid this week – donkeys.


While the “audacity” of President Obama’s “hope” is clearly not an investment process that global currency markets are long of (to the contrary, the largest short position in US Dollars, ever, implies the world is betting against the 112th Congress in size), an earthshaking culture shock to the Big Government Spending model is the only thing Americans can hope for.


3. Long Dollar, Short Euro, Short Commodities?


That would be the most contrarian (and least profitable) call you could have made in the first 3 months of 2011. And that’s exactly why you should be asking yourself if The People can govern the government as the US Constitution asks them to. Betting against professional politicians of a centrally planned state is easy – betting against the common sense of the sometimes Forgotten Man (Amity Schlaes) in America is a losers’ long-term bet.


I think my defense partner, Daryl Jones, asked the most contrarian question on US Fiscal Policy yesterday that you can ask yourself right now, “Could The Ryan Budget Be The Most Economically Bullish Legislation of Our Lifetimes?” (send us an email if you’d like a copy, )


This isn’t a partisan point. Remember, I am Canadian – and I edit Big Alberta’s work. If a Democrat or a talking monkey were to put a legitimate spending cut bill on the floor we’d be asking the same question. I really don’t care what it takes, or who sponsors it – arresting the Debauchery of the US Dollar has become a national security issue for America’s standard of living.


You don’t have to take my word for it on what happens when you burn your currency at the stake. History is littered with examples. This is not the best long-term path to prosperity. If you are a raging Republican or a dogmatic Democrat who has supported Big Government Intervention for the last decade, all you need to do is take the Keynesian Kingdom call on this from John Maynard Keynes himself – “The best way to destroy the capitalist system is to debauch the currency.”


If you’re really long The Inflation this morning (LONG: oil, gold, etc; SHORT: dollars, US Treasuries, etc), this idea of combining fiscal and monetary conservatism should scare the hell out of you. When you consider that The Bernank has not only perpetuated unprecedented Price Volatility AND the largest NET-LONG position that the hedge fund industry has EVER had in commodities – you should be afraid, very afraid. I am.


But we are all big boys and girls managing risk out here on the Global Macro gridiron, so suck it up, take a deep breath, and pray. Because, at a new all-time record high price for Gold this morning of $1470/oz and $111.56/barrel oil, there’s a new bubble in town – the bubble of America’s Last Entitlement. Cheap money and donkey politicians won’t last forever.


My immediate-term support and resistance lines for oil are now $107.16 and $111.59, respectively. My immediate-term support and resistance lines for the SP500 are 1312 and 1343, respectively.


Best of luck out there today and have a great weekend,



Keith R. McCullough
Chief Executive Officer


America's Last Entitlement - Chart of the Day


America's Last Entitlement - Virtual Portfolio

CHART OF THE DAY: Accountability A'Cometh for the Keynesian Kingdom?



CHART OF THE DAY: Accountability A'Cometh for the Keynesian Kingdom? -  chart

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