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I guess we are not talking about explosive growth, but March was pretty strong and certainly improved sequentially.



Following up to our positive regional gaming note on 3/28/11, state gaming revenue releases have so far confirmed our positive assertions.  Illinois, Indiana, Missouri, and Iowa are in and with the exception of the perpetual laggard Illinois, March was a strong month for regional gaming.  Our two favorite names our PNK and ASCA and both are poised to beat Q1 estimates quite handily in our opinion. 


We are making it a habit to look at sequential revenue adjusted for seasonality instead of just looking at YoY growth given the extreme volatility over the past few years.  March 2011 was clearly a solid month on a YoY basis but more importantly was a step up sequentially.


The following charts show the recent trends of the mature regional gaming markets that have already released March gaming revenues.  We show actual gaming revenues as well as what was predicted by our model for each month based on the previous 3 months, adjusted for historical seasonality.  As can be seen, March was a much stronger month than the model prediction, indicating fairly significant sequential improvement in each of the markets presented.









GIL: Deal Kinda Makes Sense

I could raise serious concerns about the timing and synergy opportunities for Gildan/Gold Toe. But there are strategic benefits, and stocks don't go down when estimates go up. Net/net: It's a positive near-term.  


Bull Case For The Deal

  1. Deceleration in Gildan’s top line starting in the quarter to be reported on May 11 is a near-mathematical certainty. And yes, they’ve locked in only 55% of cotton costs for 4Q – and it’s at $1.25 – with minimal hedging in 2012. There’s one easy way to get out of  your way of a collapse in operating profit growth – buy something. Regardless of whether people like us frown upon this practice, the reality is that it doesn’t matter. If earnings go up, the stock isn’t going down.
  2. I like the diversification factor ,which should improve stability and earnings predictability, which is something I’m willing to award a higher multiple. Specific changes are as follows…
    1. It cuts Broder’s ‘material customer’ risk by nearly half
    2. Lowers exposure to Latin America from a sourcing perspective (virtually all of Gold Toe’s product is outsourced to Asia – unlike GIL, which is all vertical in Honduras and Dominican Republic).
    3. Trades off capital intensity for working capital intensity. The latter gives a less painful spank when revenue declines.
    4. The deal actually gives Gildan brands that consumers know.
    5. Great CEO in Steve Lineberger, but vital that he to stays on. He’s an industry veteran who was vital in several iterations of HBI’s restructurings. If he ultimately takes on a higher profile role at Gildan, it could be meaningful.
    6. Even though it is a tiny percent of revenue, the fact that Gold Toe makes UnderArmour’s socks is solid. All the company needs to do is put a big UA logo on its IR marketing materials and it gets instant credibility (it makes socks for New Balance too).
    7. At the end of the day, the 7.2x EBITDA multiple isn’t half bad. We’ve seen assets in the intimate apparel space sell routinely for 3-6x EBITDA.  But if we give the company credit for synergies, we’re looking at a multiple closer to 5.5x.




Bear Case for Gold Toe

1)      The timing of the deal is very suspect, as noted in point #1 above. Examples where companies succeed in buying assets to shield organic revenue from slowing are few and far between.

2)      The company has been shrinking. Steve Schwarzman (Blackstone) has been trying to unload this puppy since early 2010 when it was $350mm in sales. Now it is $280mm. This revenue loss was mostly on the private label side – much of which was unprofitable. But overall, we like sales streams that are going up, not down.

3)      Schwarzman didn’t want it. Other financial buyers didn’t want it. No other strategic buyers wanted it.

4)      Why not pre-announce 2Q results with this deal? C’mon… the quarter ended 12 days ago and the Street’s revenue estimate is for 25% top line growth compared to guidance of 15%.

5)      It was pretty clear from management’s comments on the call that Gold Toe is just as wide-open to input costs as Gildan. They are relying on pricing to stick.  It might very well stick, but I don’t want to bank on it.

6)      Synergies are difficult to bank on.

  1. First off, management’s answer to the question asking for clarification on drivers for synergies was unacceptable.
  2. Second, they’ve got to be on the revenue side. Why? Really…do you think that there are ANY costs left to cut after years under Blackstone’s (or any PE firm’s) ownership? No.
  3. With a sub-12% SG&A ratio, Gildan is, and has been, one of the leanest companies around.
  4. There are no tax synergies, as the tax rate is going up, not down (to a whopping high-single-digit rate).
  5. Netting all this out, it suggests to us that synergies need to be manufacturing-related. Yes, GIL is extremely efficient with their manufacturing ops, but even without acquisitions, it has ‘manufacturing issues’ every few quarters.



Conference Call-Outs 

GIL acquiring Gold Toe for $350mm – assuming no debt.

                2010 revs $280mm

                EBITDA $48.6mm


 Highlights from the Call:


  • can leverage GT brand to the mass market via Gildan's facitilities
  • Have already met with both UA and New Balance re the acquisition, both companies have already approved the continuation of licenses


  • Combined entity will have sock revenues of ~$500mm
  • Gold-Toe will complement Gildan's existing private label business
  • Senior Mgmt of GT will stay on with GIL
  • Also has long standing sourcing network
  • ~80% of product sourced from Asian contractors


  • $350mm purchase price equate to 7.2x EBITDA
  • Gold-Toe has so far been successful in passing through price


  • $10-$15mm in cost synergies:
  • Expect annual amortization of intangibles of ~$10mm
  • Tax rate expected to be close to 25%
  • Purchase price includes more than $100mm in operating loss carry forwards
  • Also unfunded pension liab's of $15mm-$20mm pretax
    • Expect the deal to be immediately accretive to EPS


  • Deal fulfills the 3rd leg of three-pronged retail marketing approach:
  1. Selectively pursue private-label brands from mass market retailers
  2. Develop the Gildan brand
  3. Look for brands or licenses in channel of distribution where GIL isn't


  • Positions Gildan as the largest sock provider in the world
  • Deal fills the void that Gildan had in terms of enhancing distribution = product for certain channels
  • Believe they will be able to significantly expand their distribution - "there is no overlap whatsoever"
  • Largest sock customer = ~60% of volume will now equal ~30% of aggregate volume of combined entity
  • Gold-Toe in department stores, sporting goods, national retail chains, and wholesale clubs whereas Gildan primarily in Mass channel
    • GT also adds brand design expertise



  • SKU rationalization:
  • GT has more SKUs than GIL


  • Financial Accretion:
  • Can assume 2010 EBITDA as a base from which to grow (even with some SKU rationalization)


  • Cost Synergies:
  • Primarily in manufacturing and distribution
  • Shifting some manufacturing to existing facilities in Honduras
  • GIL's ultimate capacity is 65mm dozen, had been producing 52mm dzn at year end - the difference will be used to accommodate GT product


  • License Deals:
  • Both UA and NB deals expire in 2013, but feel that they will be able to renew


  • Manufacturing Strategy:
  • Not intent to eventually manufacture GT product in-house
  • GT mgmt strength in outsourcing
  • GT's expansion into underwear - Gildan could manufacture in own plants
  • GT just launched the new underwear brand so still very new in the process


  • P&L:
  • GMs higher, SG&A somewhat higher than GIL's
  • Average ASPs for GT ~$4/dozen


  • Purchase price via cash v. debt?
  • Probably use about ~$200mm to finance the deal at ~1% (LIBOR + 75bps)


  • Tax impact of deal on consolidated rate will be to increase it to 5-6% from 3-4% currently


  • Cotton costs:
  • Already have passed through price increases they expect to offset higher cost of cotton
  • Have lower amount of cotton in product relative to GIL socks


  • Gold-Toe owned store base plan?
  • They do own roughly 29 stores - mostly in factory outlet malls
  • They're profitable for GT and GIL plans to continue to operate them going forward



Will report Q2 May 11th

NKE: Ditching the Money Losers


Nike announced this morning that it is closing down the Denver NikeTown. This is a good thing. For those of you that have not been in a NikeTown, they’re massive flagship stores that do nothing but hemorrhage cash.


That’s probably not an entirely fair statement, as running SOME of these stores  -- the ones that are strategically positioned in high-quality, high-traffic locations – help build brand awareness in a way that marketing dollars would otherwise be spent.

NikeTown Denver joins Costa Mesa and Honolulu as the mammoth stores closed over the past several years.  


The good news is that this really leaves only one major money-loser – which is NikeTown Portland. Why such a money loser? It disproportionately relies on tourists, as locals are going to know at least someone who works at Nike who can get them gear at the employee store at half price.  As it relates to tourists -- although Portland is a  beautiful city, it is not a travel destination like New York, Las Vegas or London. But in the end, it’d probably be both embarrassing, and politically unpopular for the company to close down its presence in downtown Portland.  


The positive impact here is less than a penny per share. So it really doesn’t move the needle. But it’s the kind of move Nike shareholders should want to see.  Most importantly, it does NOT signify a shift away from retail, but rather a step toward profit.


NKE: Ditching the Money Losers - NKE NikeTown 4 11


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The commodities crunch hits homebuilders hard

European Risk Monitor: Negative Greek Divergence

Positions in Europe: Long British Pound (FXB); Short Spain (EWP)


If nothing else, the European discourse in recent weeks has proven out Keith’s Keynesian Endgame thesis – European leaders will continue to throw money and more favorable loan terms at member countries to prevent the failure of any one country, and therein preserve the structure that unifies unequal countries that share a common currency. This, along with the recent hawkish stance of the ECB and 25bps interest rate hike on April 7th, has been bullish for the EUR, currently pushing against $1.45 versus the USD.


With Portugal’s bailout imminent (in the neighborhood of €50-80 Billion), Greece’s fiscal issues are bubbling back to the surface. This weekend at a meeting of European finance ministers in Hungary, German finance minister Wolfgang Schaeuble re-stoked the fear trade by saying that Greece may need more capital and/or more favorable loan terms to return to fiscal health. The statement in and of itself comes as no great surprise – remember that Greece’s debt as a % of GDP is expected to ramp to 159% in 2012, and we’re of the camp that PM Papandreou and Co. will come well short of their target to reduce the country’s deficit from a high of 15.4% of GDP in 2009 to 3% by 2014 – yet the Greek equity index ATHEX was pounded down a full -2.6% on the news today.


This weekend’s meeting also opened up the prospect of a further restructuring of Greek government debt, with EU Economic and Monetary Commissioner Olli Rehn saying, “We have a solid plan. It is based on a very careful analysis of debt sustainability”. Translation: let’s fill up the trough. And this follows the already generous terms of the country’s €110 Billion bailout, which were amended last month to include repayment in 7.5 years instead of 3 and a cut to the interest rate of 100bps to around 3.5%. 


Hedgeye’s weekly European Risk Monitor shows that Greek bank swaps (in particular) pushed higher after improving on the margin last week (see chart below). Sovereign CDS spreads show a near-term downward inflection in risk for Ireland and Portugal, while on the TREND Greece pushes higher as Spain and Italy wane (chart below).


Matthew Hedrick



European Risk Monitor: Negative Greek Divergence  - bankcds


European Risk Monitor: Negative Greek Divergence  - CDS

R3: M, TGT, Mall Vacancy Rates, Choo



April 11, 2011





  • According to real estate research firm Reis, mall vacancy rates reached 9.1% hitting the highest level in a decade in the 1Q of 2011 up from 8.7% in Q4. Strip mall vacancy rates remained flat with prior quarter at 10.9% close to the prior peak of 11.1% in 1990 – a level that could be breached if new property scheduled to come online does in 2011. Looks like rents are one of the few input costs likely to remain stable for retailers in the coming months.
  • Following our recent comment on increasing Blockbuster store availability and the positive implications for Hibbett Sports, a recent New York Times article suggests there could be increasing competition for the locations. Significantly smaller than other recent vacancies such as Linens ’n Things and Circuit City, the average 6,000 sq. ft. layout is better suited for a multitude of retailers like the featured La Familia pawn shop. With 700 stores expected to close by month’s end, speculation remains high that Dish Network is likely to liquidate the remaining 1,700 locations.
  • Retail earnings revisions ticked up last week in the wake of same store sales.  Though for the first time since January, the direction of stocks deviated from the direction of revisions. This shows how this group NEEDS earnings to head higher to stand still. Here’s an interesting dose as to which retail sub-groups are leading/lagging peers:
    • The biggest callout to us is discount stores vs. footwear/sporting goods retail. Most notably – Target has underperformed over every single duration. This has been, and still is one of the top short ideas in the Hedgeye Portfolio.
    • Similarly, in the Home category, we’ve got the soft side (BBBY and WSM) standing out over the hardlines (LOW and SHW).

R3: M, TGT, Mall Vacancy Rates, Choo - R3 4 11 1


R3: M, TGT, Mall Vacancy Rates, Choo - R3 4 11 2




Toning's Rocky Road - While the toning footwear category has declined in recent months, experts say the category could reverse course by fall, albeit with some changes. According to data gathered by The NPD Group, sales of toning product fell in February to $41.2 million, compared with $87.3 million in March of last year. Experts pointed out that declines in the past few months largely are due to excess inventory, which is driving down prices and holding up fresh product from entering the marketplace. “What the problem is today is not a lack of demand but rather an oversupply of product,” said Matt Powell, an analyst with SportsOneSource. “The consumer still likes this category.” Powell added that the short-term success of toning would depend on how quickly retailers can push through aging inventory. “Before back-to-school, we should be back to [positive growth],” he said. “Retailers are telling me that newer styles of toning are selling at an acceptable rate at an acceptable margin.” <WWD>

Hedgeye Retail’s Take: These figures largely depend on how the category is defined. There’s no disputing the fact that ASPs continue to slide and are now below $60 on average. While the margins at retail may still be at an  “acceptable rate,” the reality is that this is most likely due to increased markdown money from the brands to protect shelf space.


Footwear Exports From Vietnam Exceed $1Bn in Q1 - Vietnam’s footwear sector continued ranking third after garment and crude oil with export revenues reaching US$1.3 billion in the first quarter of 2011. The Ministry of Industry and Trade said that a year-on-year increase of 29.7 percent in export revenues was attributable to the continuous economic reovery. The European Union continued to be the largest market for Vietnam’s footwear, importing $356 million worth of products in the first two months of the year, followed by the US ($230m) and Japan ($54m), respectively, worth of Vietnam’s footwear.  Vietnam’s footwear exports to China, the Republic of Korea and other markets also rose. <FashionNetAsia>

Hedgeye Retail’s Take: About 40% of this is Nike. No joke…


At Macy's, a Makeover on Service - Several Macy's sales associates sat in a training room in the chain's Christiana Mall store recently hashing out sales-floor scenarios. Mary Martin, Macy's vice president of learning and development, directed the group's attention to a card at the center of the table with a statistic: Forty-eight percent of Macy's customer complaints are focused on interactions with sales associates. The training session is part of a new strategy by the department store to improve its track record on customer service, which in recent years has dented the reputation of the storied retailer, lowered its scores in annual customer service rankings—and most likely slowed growth. Part of the problem may be attributed to Macy's Inc. 2005 merger with May Department Stores Co., after which the company struggled with poor customer service as it focused on integrating various regional chains under the Macy's banner. "A couple of years ago we had seven different divisions, so we had great service in some divisions and not as good in others," said Terry Lundgren, chairman and chief executive of Macy's, in an interview.<WallstreetJournal>

Hedgeye Retail’s Take: Exceptional customer service has long been a hallmark of Macy’s key competitor, Nordstrom. It should come as no surprise then that JWN’s same store sales outperformance on a relative basis is highly correlated with the company’s top customer service satisfaction score according to the American Customer Satisfaction Index. However, it’s worth noting that over the past year, Macy’s score improved to 76 from 71 while Nordstrom’s stepped back to 82 from 83.


Japanese Department Store Sizes 2012 Impact - Department store operator Takashimaya posted double-digit growth for the fiscal year just completed but warned its performance will be less stellar over the next 12 months in the aftermath of Japan’s massive earthquake and tsunami. The retailer said it sees net profit falling 38.6 percent to 8.5 billion yen, or $99.78 million at current exchange, for the year ending February 2012. Operating profit will slide 12 percent to 16 billion yen, or $187.83 million, and revenue is seen dropping 2.6 percent to 846.8 billion yen, or $9.94 billion, it said. A spokesman for Takashimaya said in the first week following the earthquake, sales at the retailer’s 18 stores in Japan were down 38 percent compared with normal levels. The following week they were down 22.6 percent, the week after that they were down 8.2 percent and in the first week of April, they were only 1.5 percent lower than usual, signaling that consumer confidence may be returning to the country. <WWD>

Hedgeye Retail’s Take: On the one-month anniversary of the Japanese quake – one thing is clear, we are still a long way off from fully understanding the full magnitude and duration of the tragedy. While Takashimaya sees operating profit down 12% in F2012, Onward Holdings’ updated outlook from Friday suggests stable domestic earnings in Japan offset by growth overseas. According to the weekly sales data, performance rebounded rather quickly all things considered – however, between disruptions, discounting, etc. margins are likely to report a more lasting impact as Takashimaya’s outlook suggests.


Jimmy Choo Sale Takes Step Forward - The £400m-£500m sale of luxury shoe brand Jimmy Choo took a step forward on Friday, with the original shortlist of 10 parties whittled down to four. It is understood that TPG Capital, a private family office and potentially a consortium of Investcorp and luxury group Labelux are through to the second round. Big luxury goods groups were also expected to look at Jimmy Choo, as well as Asian buyers, although it was not clear whether any made the second round. The company’s shoes, costing as much as £1,800 ($2,948) a pair, have become a favourite of Hollywood celebrities, being worn by the stars of Sex in the City, actress Julia Roberts and singer Beyoncé. Louis Vuitton Moët Hennessy has been mooted as a potential suitor, as has the brand’s eponymous founder Jimmy Choo. However, Mr Choo is not thought to be in the second round. Some analysts thought the business could appeal more to a strategic buyer than a private equity group. <FinancialTimes>

Hedgeye Retail’s Take: There’s no shortage of interest for top luxury brands of late. Yes, Bulgari is more of a jewelry/accessories brand, but the premium doesn’t hurt and now with a Prada IPO slated for later this summer, there’s likely to be increased urgency in getting a deal struck. In addition, the brand’s re-introduction of its men’s line since it started exploring strategic options last fall is also likely to be a further positive for Choo’s valuation.


Laura Ashley to Launch Intimates - Laura Ashley Inc. has signed a licensing agreement with Secret Lace LLC to produce, market, sell and distribute the first collection of intimate apparel bearing the Laura Ashley Intimates and Laura Ashley London names. Distribution will be aimed at major specialty and department stores and specialty boutiques in the U.S., Canada and Mexico and 400 Laura Ashley stores in Europe, Asia, South America, Australia and New Zealand.  The Laura Ashley Intimates line, which will be unveiled at the May innerwear market here, will be launched for fall, while the Laura Ashley London collection will be introduced at retail in early 2012. Wholesale sales projection the first full year for the combined lines is more than $2.5 million, said Albert Zaccai, senior vice president and chief operating officer of Secret Lace, a division of privately owned Just One LLC. <WWD>

Hedgeye Retail’s Take: $2.5mm? That seems like a joke. Laura Ashley continues to be (and always has been) a very solid name in both home furniture and women’s fashions. Intimates should be a lay-up. 





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