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CBRL - demand demolition

Cracker Barrel is, in my view, the most susceptible of all restaurant concepts to the demand destruction that is caused by elevated gasoline prices.  We charted CBRL traffic trends versus miles driven in our post on 4/12.  Today, the Hedgeye Energy team produced a telling chart today showing that gasoline prices are looking a lot like 2008. 


If gasoline consumption trends are rolling over, the miles driven statistics will follow.   CBRL has struggled to generate significant traffic growth for some time now.  From the second quarter of this year, it should slow even further.   At the very least, it’s difficult to argue that CBRL will see the pick up in traffic that the concept needs.  A combination of inflation and slowing same-store sales is not what we are looking for in today’s environment.


The following come from the Hedgeye Energy team in today’s note titled, “GASOLINE CONSUMPTION SHOWING EARLY SIGNS OF A 2008 REPEAT”:


MasterCard Advisors reported this week that US retail gasoline stations sold 9.02MM b/d of gas in the week ending April 8th – a 3% drop year-over-year.  It was the six straight weekly year-on-year decline, indicating that demand destruction as a result of higher prices has set in, and it is eerily similar to 2008.


In early May of 2008, with the price of Brent crude oil near $110/bbl and the regular gasoline at $3.60, gasoline consumption went decidedly negative for 30 straight weeks.  During that time (May 2008 – Nov 2008) the price of Brent crude oil went from $108/bbl in May to its mid-July peak of $145/bbl before crashing to $60/bbl in December.  Prices did not find a bottom until February 2009, near $55/bbl.  


In fact, in 2008 it was not until gasoline consumption was negative year-on-year for 12 consecutive weeks that oil and gasoline prices peaked and subsequently began their rapid declines in mid-July.


The fact that higher gasoline prices impair demand and economic activity is obvious.  What’s not so apparent is the threshold and timing at which it does so.  Recent history reminds us of the damage that high energy prices can have on asset prices.  With gasoline consumption negative for six straight weeks and the average price of a regular gallon of gas at $3.79, the spring of 2011 is beginning to look a lot like the summer of 2008…


CBRL - demand demolition - gasoline energy 



Howard Penney

Managing Director


A Tale of Two Asias

Conclusion: From a monetary and fiscal policy perspective, we continue to see a widening divergence between developing Asia vs. developed Asia, which is contributing heavily to the divergent paths of the real economies. Net-net, we remain favorably positioned to China and Singapore and bearish on Japan and Hong Kong.



Long Chinese equities (CAF);

Long Chinese yuan (CYB);

Bullish on the Singapore Dollar for the intermediate-term TREND and the long-term TAIL;

Getting constructive on Singaporean equities for the intermediate-term TREND and Bullish for the long-term TAIL;

Bearish on Japanese equities for the intermediate-term TREND and the long-term TAIL;

Bearish on Japanese yen for the intermediate-term TREND and the long-term TAIL;

Bearish on long-term JGBs for the intermediate-term TREND and the long-term TAIL; and

Bearish on Hong Kong dollar-based fixed income for the intermediate-term TREND and long-term TAIL.


Developing Asia: China & Singapore


Judging by our writing over the past three years, it’s no secret that China and Singapore continue to be our favorite investment destinations in Asia on the long side – be it equity, currency, or fixed income. That certainly doesn’t mean we’re married to these ideas, or perpetually bullish, and we have no problem managing risk around these long-term theses within narrower windows of duration. Key examples of this duration agnosticism include our decisions to put Chinese equities in the “penalty box” for the bulk of 2010 via our Chinese Ox in a Box theme and our decision to back off Singaporean equities alongside all other emerging market equities in early November.


As the positioning in our Virtual Portfolio would indicate, China is no longer in the penalty box, and we are getting incrementally warmer on Singaporean equities, as overly bearish consensus growth estimates are likely to be surpassed in the coming quarters.


From an absolute perspective, Singapore growth data lags China’s in our models by one quarter, meaning that we expect Singapore’s YoY GDP growth rate to bottom out in 2Q11 before reaccelerating in 3Q11. Tomorrow, China’s 1Q11 YoY GDP report should come in as both a sequential deceleration from 4Q10 and a cycle bottom, which sets the stage for a reacceleration over the next 3-6 months.


A Tale of Two Asias - 1


From a relative perspective, these rebounds in growth are likely to come at a time when global growth (particularly US and EU) is slowing sequentially – especially if crude oil prices stay elevated. That’s certainly not to say that China and Singapore are immune to this phenomenon and we expect high energy prices to impose a similar burden on these economies as well. That said, however, we do expect equity market investors to once again pay a premium for absolute, unlevered growth – particularly when it’s accelerating on a relative basis (i.e. we expect the “flows” to head toward China and Singapore in the coming months).


A Tale of Two Asias - 2


On a P/E basis, both China and Singapore are “cheap” relative to the last time their growth rates were accelerating on a relative basis to global growth.


A Tale of Two Asias - 3


Recapping recent economic data, we continue to see more signs of the resultant effects of sober and proactive fiscal and monetary policy in both countries. For instance, Singapore’s preliminary 1Q11 YoY GDP report showed a deceleration to +8.5% YoY vs. +12% YoY in 4Q10, largely due to a measured slowdown in manufacturing growth (+13.9% YoY vs. +25.5% YoY in 4Q).


This growth slowdown is a welcome event by Singaporean officials, as the county has been in a tightening cycle since mid-2010. Still, the robust QoQ SAAR growth rate (+23.5% vs. +3.9% in 4Q) was enough to strengthen their resolve to continue tightening, which they did by re-centering the currency’s trading band upwards (the Singapore central bank uses the Singapore dollar, rather than interest rates, to implement monetary policy). We welcome this proactive maneuver, as Singapore looks to continue warding off inflation, currently running at +5% YoY. This latest revaluation is a net positive for the Singapore consumer, given that we anticipate Singaporean CPI to accelerate into the early-to-mid summer months.


Shifting gears to Chinese economic data, we see that the main event is scheduled for later tonight (GDP, CPI, Manufacturing, and Retail Sales). This morning, however, we continued to get positive signs that the Chinese economy is responding well to the recent tightening measures. While both Money Supply (M2) and Credit growth accelerated sequentially in March (+16.6% YoY and +679.4B yuan, respectively), Total National Financing growth came in at 4.19T yuan in 1Q11 – down (-7.1%) YoY.


This new, encompassing metric includes bank lending, trust loans, corporate bond issuance, equity fundraising by non-financial companies, and other sources of capital accumulation, and it shows that recent PBOC efforts to combat inflation are having the desired impact. M2 and Credit growth rhymed with this reading when analyzed with a wider lens: M2 growth remains (-1,310bps) below its Nov ’09 peak growth rate and aggregate Credit growth fell (-13.3%) on a YoY basis in 1Q11. All told, we expect the Chinese equity market to welcome these depressed growth rates because they: a) give the PBOC headroom to slow the pace of tightening; and b) they provide stability for China’s long-term economic growth.


Developed Asia: Japan & Hong Kong


Insomuch as we love China and Singapore for the long term, we have an equal disdain for the Japanese economy due to its inability to grow organically – which is made worse by its massive sovereign debt load (north of one QUADRILLION yen) and the Japanese government’s heavy hand in its economy and financial markets. Hong Kong also remains in our penalty box, but for different reasons (reactive, rather than proactive monetary and fiscal policy) and to a lesser extent.


Take Japan for instance. In the wake of this recent string of unprecedented natural disasters, the BOJ did what it always does every time the Japanese equity market loses any meaningful amount of value – PRINT LOTS OF MONEY. Unfortunately for Paul Krugman, who advised them to do so in the late 90’s, the tactic has yet to create positive effects for Japan’s real economy. The effects of massive stimulus still remain muted in Japanese financial markets as well, with the Nikkei 225 still trading (-11.1%) below its Feb. 21 peak.


To their credit, however, Japanese officials (with the help of their G7 counterparts) did manage to successfully weaken the yen over the near term, as it trades (-5.4%) below its March 17th peak closing price. We continue to echo the sentiment put forth in our recent work, which effectively warns Japan’s bureaucrats to lay off attempts to weaken the yen due to the likelihood it causes a significant uptick in inflation and bond yields in Japan:


“History shows us that G7 intervention to weaken the yen has resulted in a significant uptick in inflation within Japan. In fact, if the G7’s plan to weaken the yen is “successful”, we expect the inflationary impact to be even greater this time around, particularly given Japan’s current staggering sovereign debt load and easy monetary policy.”

-Japanese Yen: Be Careful What You Wish For, Consensus… 3/18/11


In fact, we’re already seeing signs of the weak yen perpetuating inflation, as well as stirring up inflation expectations in Japan. Yesterday, Japan’s Corporate Goods Price Index accelerated for the fourth straight month, coming in at +2% YoY. Import prices accelerated to +9.4% on a YoY basis and we expect this trend to continue in the coming quarters as Japan accelerates purchases of raw materials and energy products in its rebuilding efforts.


A Tale of Two Asias - 4


A weak yen is definitely not beneficial for Japan’s rebuilding cause.  A (-29%) slide in the yen after the G7 intervened in the wake of the Kobe earthquake caused Japanese Import Price growth to peak at +15.1% a year later. This surge in raw materials costs was eventually passed through to end consumers as Japanese CPI accelerated from marginal deflation to +2.5% YoY in the ensuing months. Unlike then, however, we contend that the Japanese consumer is unable to absorb rising prices this time around – particularly after a near-decade long trend of wage deflation.


A Tale of Two Asias - 5


From an expectations perspective, we see that Japan’s short-to-intermediate-term inflation swaps are on the uptrend. In addition, expectations for a major uptick in future JGB issuance is putting a great deal of political pressure on the BOJ to fund the debt via monetization. If Shirakawa elects to go the route of former Japanese Finance Minister Korekiyo Takahashi, “look out above” is the only advice we’d offer to Japanese inflation and inflation expectations. For more details on how this is likely to end up over the long-term TAIL, please refer to our March 25 post titled “Japan: A Fiat Fool’s Game”.


A Tale of Two Asias - 6


Shifting gears to Hong Kong, we continue to see signs that inflation is a real problem in the former British colony. Hong Kong Property Prices have recently exceeded their all-time highs last seen in 1997 – shortly after the Asian Financial Crisis began. On a YTD basis (through Feb.), property prices have increased +7.2% YoY; this is on the heels of a +24% increase in 2010 and a +30% increase in 2009.


In waking up to this gravely concerning property bubble, Financial Secretary John Tsang had this to say:


“I am deeply concerned that overall property prices in February have surpassed the peak in 1997. I shall pay close attention to developments in the property market… The current abundant liquidity and low interest rates will not last forever. Neither will rising property prices.”


This rhymes with Bernank-style reactionary central banking strategy, whereby officials finally start to “pay close attention” to inflation when inflationary headwinds are beyond obvious and hint at tightening only after the bubble peaks. With GDP growth well above its historical average on just about any duration, it’s no secret that Hong Kong’s Monetary Authority should have tightened interest rates several quarters ago, as both Hong Kong’s main policy rate and real interest rate remain at all-time lows.


A Tale of Two Asias - 7


A Tale of Two Asias - 8


When Hong Kong’s property bubble pops (and it will), Indefinitely Dovish central bank policy should receive the bulk of the blame for any ensuing economic hardship. Princeton-trained economists will blame supply and demand imbalances, all the while ignoring the impact of incredibly dovish monetary policy on aggregate demand. We find this ironic, given that at the heart of Keynesian economics is a belief that monetary and fiscal policy can be used to increase or decrease said aggregate demand.


In Hong Kong currently, accelerating inflation (be it in housing, goods, or services) is depressing aggregate demand and causing citizens to take to the streets in protest with increasing frequency and severity. A growing imbalance in per capita income between Hong Kong’s elite and middle class is forcing the government to react to these violent demands, with the latest budget calling for the government to literally give away money to disgruntled citizens, many of whom will likely want more than the $770 handout that’s currently on the table when it’s all said and done.


All told, both Hong Kong and Japan show us just what happens to an economy when fiscal and monetary policy remains Indefinitely Dovish; structurally depressed growth rates (Japan), runaway inflation (Hong Kong), and civil discontent (both) are just some of the more pronounced ill-effects. Needless to say, our outlook for both Japan and Hong Kong is not positive on a long-term basis. On the flip side, however, we continue to like the proactive and sober monetary policy of China and Singapore and, thus, we remain favorability positioned to their financial markets.


Darius Dale



The last time I visited the KONA story, management was involved in a proxy fight with one of their largest shareholders, creating a big distraction for the entire enterprise.  While the shareholder is still one of the top holders of the stock, the dispute has, by and large, dissipated and management is now freed up to dedicate 100% of its attention on executing its business plan and generating shareholder value.  With the stock having treaded water for much of the past twelve months and the future looking brighter, I decided it is time to revisit this name once again.


Our bullish thesis on the KONA is rests on four pillars:


  1. KONA is relatively well-positioned at this juncture because, as a higher-end concept, its core customer is demonstrating a propensity to spend over the past few quarters as our High-Low society sustains itself.
  2. We estimate that comparable restaurant sales are trending at approximately 4% in 1Q11, bringing the two-year average trend to 0.8% for the quarter.  We expect acceleration in two-year average trends for the balance of 2011.
  3. Operational improvements, coupled with improving top-line trends, will allow for significant margin improvements over the next two years.
  4. In 2011, KONA will print its first profitable quarter since it became a public company.


I expect operational improvements implemented in 2010 to begin to flow through in 2011, along with the benefit of additional efficiency-orientated measures taken during the year.   These initiatives include phase four of the menu evolution and the benefit of five new remodels.  In addition, reduced litigation expenses will provide a $0.04-$0.05 tailwind for the company in 2011.


Longer-term , over the next two years, KONA will see a significant step up in profitability and also be re-accelerating unit growth, leading to improved shareholder confidence and a higher valuation.  Based on our 2011 EBITDA estimate of $7.2 million, KONA is trading at 6.0x EV/EBITDA, as compared to the average casual dining company trading at 7.0x.  Over the next two years, we estimate that KONA will grow EBITDA over 100% and potentially earn as much as $0.25 in 2012.  Based on the price of the stock today, assuming a 7x multiple on our 2012 EBITDA estimate, KONA is worth between $7.50 and $8.00, up over 55% from current levels.




KONA entered 2011 with some strong top-line momentum; posting a 6.4% increase in same-store sales in 4Q10, up 6.4% sequentially (4Q was the fourth consecutive quarter of positive traffic trends).   The top-line story for KONA has breadth and depth.  While the company does not report monthly comparable restaurant sales comps for all three months of the quarter, management stated in the transcript that approximately 75% of the comparable base of restaurants is expected to report positive comparable restaurant sales growth this quarter, with many reporting double-digit growth.


The increased momentum toward the end of 2010 was driven by menu improvement and new marketing initiatives driving awareness, increasing guest frequency and marginally boosting average check.  Currently, they are running 1.7% menu pricing, and will see an uptick in menu prices when the new sushi menu is rolled out in 2Q11.  We expect that KONA can maintain 4% same-store sales in 1Q11 and produce mid-single digit same-store sales for the balance of 2011.




As with most restaurant companies today, food inflation is the most concerning issue.  In 4Q11, cost of sales increased to 28.4% (up from 26.2% last year) and will be at that same level for 1Q11, according to current guidance.  KONA is experiencing significant year-over-year increases for beef, chicken and seafood.  Half of the 220 basis point increase was due to higher commodity prices and the other half was driven by upgrading the quality of ingredients.  In early January, KONA began to contract for certain commodities for 2011, but no contracts are available for certain seafood products. 

Off-setting the some of the food inflation in 4Q10 was lower labor costs.  In 4Q10, labor expenses decreased to 34.8%, as a percentage of sales, from 36.9% last year.  The lower labor cost is attributable to the leveraging of fixed management wages, hourly labor and benefit costs from the 6.4% increase in comp sales.   Going forward, labor costs should continue to improve incrementally as the company gains leverage from improving comparable-restaurant sales.


Restaurant operating expenses decreased to 16.7%, as a percentage of sales, in 4Q11 from 17.9% last year; lower operating expense is primarily due to lower repair and maintenance expenses and leverage over higher volumes. Looking out to 2011, KONA will see restaurant operating expenses around 15% of sales, down from 16% in 2010.  Occupancy expenses decreased to 8.0%, as a percentage of sales, during the fourth quarter from 8.7% last year.  KONA continues to try to squeeze landlords for abatements and rent reductions at certain lower volume restaurants.  All in, restaurant operating profit margin was 12.0% in 4Q10 compared to 10.3% last and for the full year.


The G&A line is an area KONA can continue to target for improvements in 2011.  In 4Q10, G&A declined $446,000 year-over-year, primarily due to a reduction in severance and legal fees partially offset by an increase in bonuses.  As a percentage of sales, G&A decreased 300 basis points to 7.3% of sales versus 10.3% last year.   In 2011 G&A should be roughly $7-$8m, or around 7% of sales.


KONA’s balance sheet is in great condition and the company around $2.0 million in free cash flow in 2011.  Unhampered by shareholder issues or balance sheet concerns, the focus is now on store-level execution and returning to profitability.  On this count, the company has initiated a plan of action that will allow for a significant improvement in profitability.  A theme that runs through all of the stocks we like on the long side is the active engagement, by management, in margin enhancement efforts despite the difficult commodity environment.  KONA is a good example of this and, we believe, represents an opportunity on the long side for investors.







KONA - GAIN ALPHA ON THE KONAVORE DIET - kona food vs alcohol


Howard Penney

Managing Director

Early Look

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Europe’s Mania Returns

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


What a difference a day makes!  Yesterday, European equity markets closed up between +40 to 150bps; today they’ve given back all of this gain (and more) as headline risk continues to govern market performance. Today’s European headline is very much a continuation of the discussions had over the weekend by European finance ministers, namely the prospect that Greece may need a significant restructuring of its government debt to stay “afloat”; however new statements today have sent Greek (and Portuguese) bond yields and the cost of insuring debt (sovereign CDS) to all-time highs.


The Greek 10YR bond yield jumped a full 30bps day-over-day to 13.2% and the yield spread over German bunds reached 984bps, a new all-time high – eclipsing even the spread in early May 2010 when the country received its €110B bailout.  Equally, Greek CDS rose 45bps d/d to an all-time high of 1105bps. The Portuguese 10YR yield continued its expedient upshot today, rising 11bps d/d to rival Ireland at 9.0%, as a bailout package (~80B EUR) for Portugal remains imminent on the backdrop of an interim government that has called new elections for June (see charts below).


Europe’s Mania Returns - na1


Europe’s Mania Returns - na2


The news today included interview statements made by German finance minister Wolfgang Schaeuble to the German newspaper Die Welt that investors holding Greek bonds could face losses after 2013, when the temporary bailout fund that includes Greece’s rescue package expires. Further, Greek finance minister George Papaconstantinou said Greece may be unable to return to financial markets next years. These statements come ahead of potential announcements this Friday by Greece on alternative fiscal solutions to calm investors. Looking further out, June remains an important catalyst date when both the IMF and European authorities will review Greece’s “debt sustainability”. 


As always, Greece remains squarely mired between debt as a % of GDP that is expected to ramp to 159% in 2012, and a target from PM Papandreou and Co. to reduce the country’s deficit from a high of 15.4% of GDP in 2009 to 3% by 2014 – which we’ll think they’ll come short of.  The government is working against €13.1 Billion in debt (principal and interest) due in the months of April and May, of the some €42.5B due this year.


For us, the Greek “news” comes as no surprise: we’ve long said that the Keynesian Endgame that comprises European and IMF funding and subsidization of member states through more relaxed lending requirements in order to preserve the Eurozone as an entity will not end well. In fact, these bailouts are mere band-aids to calm shorter term market fears, and ultimately fail to instill (or address) the necessary response from country leaders to tackle and set longer-term plans for fiscal and economic health. In any case, the strong equity market moves made by the peripheral countries in the beginning part of 2011 are now seeing significant mean reversion.  


Conclusion:  European markets will continue to be volatile as the sovereign debt contagion runs its course, which we think could take at least 3-5 years. Managing risk will be an exercise based on duration. We’re comfortable largely being out of the way of this contagion risk, though we’re presently short Spain via the etf EWP. In Europe we like countries with sober fiscal standing (Germany, Sweden, Netherlands), which we think offer an attractive growth profile coupled with a defensive stance among sovereign debt contagion across the region.


Matthew Hedrick


R3: Drought, JCG, Mango, and Ferragamo



April 14, 2011





Drought A Big Worry as Cotton Planting Begins - How many acres of cotton will be planted in 2011 when all is said and done? Analysts say economics and weather will play a big role. Tight supplies in old crop cotton are a bullish for new crop cotton. Fundamentals can change in a hurry. Producers should consider putting a floor under cotton prices at between $1.30 and $1.40 a pound. Cotton acreage estimates may push the markets up and down as planting season nears, but lingering dry weather across the Cotton Belt could have a much bigger impact on the market in the longer term, according to Texas A&M Extension economist John Robinson, speaking at the Ag Market Network’s April 12 teleconference.  USDA’s March 31 Prospective Plantings report was a surprise to many, projecting cotton plantings at 12.56 million acres of upland and Pima. The market reacted fairly strongly with new crop cotton prices moving to just under $1.40 per pound. Robinson thinks cotton acreage may end up a couple of percentage points higher than March projections. <DeltafarmPress>

Hedgeye Retail’s Take: Prepare for speculation about what ‘next year’s crop will be.’ Investors are absolutely fed up with the inflation debate. Actually, they view it as a fact – not a debate. But quantifying the benefit to margins if we have a bumper crop is clearly more interesting, and potentially profitable.  KEEP IN MIND, however, that changes to the crop discussed today will not impact retail margins until 2013.


Ferragamo Aiming for July IPO - Good things come in threes. After Prada and Moncler, speculation is mounting here that Salvatore Ferragamo is the latest Italian brand to be looking at an initial public offering by July. Prada plans to list in Hong Kong in the first half, while Moncler is expected to hold its IPO slightly earlier in Milan. A source said Ferragamo’s IPO could value the company at around 1.5 billion euros, or $2.1 billion at current exchange, compared with the larger Prada’s estimated valuation in Hong Kong of up to $9 billion. Italy’s merchant bank Mediobanca has been tapped, together with J.P. Morgan, as coordinator of Ferragamo’s global offer, joint book runner and joint lead manager, a well-placed source told WWD. These are the same two banks chosen in 2008 by the Florence-based firm, which had plans to go public that year.  <WWD>

Hedgeye Retail’s Take: Given the resilience of the luxury market in the face of such ugly Macro cross-currents over the past few years, luxury IPOs have several relatively strong legs to stand on. Sell while the going’s good…


A Brit in London - Burberry has brought its Burberry Brit concept onto home turf. On Friday, it will unveil a sprawling, 10,000-square-foot Burberry Brit store located in London’s bustling Covent Garden area. The store is Burberry’s seventh Brit store globally and its first in the U.K., following recent Brit openings on Bleecker Street in New York and Corso Venezia in Milan.  Christopher Bailey, chief creative officer at Burberry, described Burberry Brit as “the casual expression of the Burberry guy and girl.” To wit, although the store, which Bailey designed, is done out with Burberry’s signature dark wood floors and sleek, polished black chrome fittings, it’s filled with colorful, casual merchandise. The brand’s April Showers collection, which includes pieces such as red Perspex trenchcoats and yellow mini capes, stands near the store’s entrance, placed amid Perspex blocks in primary colors. The two-story store also has areas devoted to accessories and denim, while a room on the basement floor is given over to the label’s trenchcoats and outerwear. <WWD>

Hedgeye Retail’s Take: These mega stores have traditionally been marginally profitable at best. But for the luxury brands, they’ve actually been profit centers (note comment re Ferragamo and luxury market). We’re seeing – for the most part – rational growth in these stores, as well as rational closures when warranted (i.e. NikeTown Denver closing).


J Crew to Launch UK Online BusinessJ Crew, the “preppy” US retailer bought out in a $3bn private equity deal last year, is planning to launch an online business in the UK’s high-end fashion market this summer, its chief executive has said. Mickey Drexler, J Crew’s head and one of the most renowned personalities in US fashion retail, said the group would use its online business to spearhead its overseas expansion ahead of opening more bricks-and-mortar stores. Mr Drexler successfully repositioned J Crew as an up-market brand, but until now he has maintained a narrow focus on the US market. He will join a growing band of fashion retailers using the internet to lead expansion outside their home markets. “We just have huge demand overseas,” Mr Drexler told Bloomberg TV. “We’re walking, we’re studying right now. But we launch in the UK . . . in August or September. That’s kind of our official online international.” <FinancialTimes>

Hedgeye Retail’s Take:  The interesting angle is that J Crew is rolling into a new market without having legacy infrastructure as baggage. Do not underestimate the importance of this! Growth into new markets without the hassle of an antiquated operating asset base is extremely high return.  We think this will come at a premium going forward.


Retail Restructuring Seen Ahead - Retail will be a primary source of restructuring activity for the next 18 months, if not longer.  That’s the conclusion of Durc Savini, managing director and head of the restructuring and recapitalization group at investment bank Peter J. Solomon Co., which held a company presentation Wednesday on “2011 Retail Restructurings: Watch Hemlines, Hardlines and Waistlines” at New York’s Princeton Club. Other presenters included Kenneth Berliner, president and head of the mergers and acquisitions group, and managing directors Jeffrey Derman and Jeffrey Hornstein. Savini told attendees that the largest segment of firms with risky credit ratings — 18 percent — are apparel and retail companies. Those limited by lack of financial strength or low pricing power are the ones that will be facing tough headwinds, he said.  <WWD>

Hedgeye Retail’s Take: Hmmm… The head of a retail restructuring Firm talking up that restructurings will pick up meaningfully over the next 18-months. Do you think that just MAYBE he’s a little biased? Nonetheless, given the 400+bp margin compression we expect to see this year – and specifically in 2H – he’s probably right.


Mango Planning Large-Scale Global Expansion - Coming off a 10.9 percent sales increase in 2010, Mango is planning to add another 550 stores to its global portfolio this year, including entries in six new markets that will give it a presence in 109 countries.  Through its own network and those of franchisees, the Barcelona-based retail and wholesale firm added 380 stores last year, lifting its total to more than 2,000. Included in the total store count are 113 units under its H.E. by Mango men’s wear banner, 39 of which are in Spain. Among the 550 stores to be added this year are 20 men’s stores. The company said that it eventually expects to have 500 H.E. by Mango stores.  In 2010, Mango’s revenues grew to 1.27 billion euros, or $1.68 billion, from 1.15 billion euros, or $1.6 billion, in 2009. These figures, converted from the euro at average exchange for their respective periods, represent both wholesale revenues and sales of company-owned stores, excluding value-added taxes.  <WWD>

Hedgeye Retail’s Take: Check these guys out. When people are hitting the conference circuit and doing their super-duper-double-secret one-on-ones, they’re focused on the typical US (used to be) growth companies.  


R3: Drought, JCG, Mango, and Ferragamo - R3 4 14 11



































It’s up, it’s down, it’s up again.  Here’s a playbook for what promises to be a volatile month of trading.



What do you get when you mix high short interest, high leverage (operating and financial), transactions, depressed earnings, and a big valuation?  If you guessed stability, you lose! 


MGM will likely report earnings the first week of May.  We think it will be just ok.  Expectations seem to be pretty high though, particularly given the Street’s rate surveys and management’s RevPAR commentary.  We have little doubt that strong YoY convention activity drove rates meaningfully higher in Q1 but our concern is more on the casino side.  Street projections of mid-single digit growth in MGM’s Las Vegas casino revenue looks aggressive to us. 


Having said that, we are not too much below the Street for wholly owned Las Vegas EBITDA.  Our Q1 estimate is $225 million versus the Street around $235 million.  Whisper expectations may be higher and that is why we are concerned.  We will have a more detailed earnings preview out soon.


So stock is going down right?  Not so fast.  MGM Macau is humming and yesterday’s IPO announcement and deal with Pansy Ho is an overall positive.  Operating control should be good for MGM and good for the property.  Moreover, WYNN should report before MGM and we are expecting a huge quarter out of Wynn/Encore Las Vegas.  That should get investors juiced for MGM, given its significant Strip exposure.  However, we think WYNN will be the Vegas anomaly and MGM’s results may disappoint.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.