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R3: Sales, JCP, TGT vs. Target, Li&Fung

 

R3: REQUIRED RETAIL READING

May 2, 2011

 

 

RESEARCH ANECDOTES 

  • At the company’s recent analyst day, management at LIZ highlighted that it’s star performer of late Kate Spade is seeing business in Japan return close to prior quake levels. This is the most bullish take we’ve heard yet regarding Japanese-based performance from domestic companies after nearly two months since the event.
  • Following last week’s devastating tornados in Alabama, a call with the management of Hibbett Sports revealed that approximately 12 stores had been directly damaged by the storms, or roughly 1.5% of the total store base. However, this doesn’t include stores that will be indirectly impacted from power outages, road damage, and a myriad of other disruptive factors that will weigh on sales at the end of April. In terms of magnitude, with pre Easter weeks already in the books, the last week of April will likely only account for 5-6% of the quarter's sales.

OUR TAKE ON OVERNIGHT NEWS

 

Retail Crippled in Wake of Tornadoes - Retailers in the South experienced serious damage to many stores and were still trying to communicate with some associates late Thursday in the wake of the killer tornadoes that swept through six states Wednesday, which, according to reports at press time, had left 250 to 300 people dead. Rescue crews were pulling people out of the rubble of devastated neighborhoods, with most of the destruction occurring in Alabama, particularly Tuscaloosa. One off-duty Belk Inc. associate was reported killed and the company was attempting to reach 20 to 30 others late Thursday afternoon, according to spokesman Ralph Pitts. Power outages and downed phone systems are making communications difficult.

Pasted from <WWD>

Hedgeye Retail’s Take: April will show some huge numbers when same-store sales are released this Thursday – with anywhere from 8-14%. But some retailers missing those numbers will point to weather. As it relates to cooler weather in the earlier part of April, it’s debatable. But last week, the tornadoes are clearly a massively identifiable event. Even those areas of the Southeast that were not directly impacted are still subject to that somber mood after being hit by such a devastating event. Retail will need a very solid 1st half of May, otherwise will see heavier promotions kick in to clear spring merchandise and stay clean. 

 

J.C. Penney Launches Big and Tall Concept - The gloves are coming off in the battle for the men’s big and tall customer. J.C. Penney Co. Inc. today will take the wraps off The Foundry Big & Tall Supply Co., a new retail concept targeted to this growing market segment — one that will pit it directly against the other major players in the men’s industry, all of whom have identified this niche as one ripe for expansion.  The biggest player is Casual Male Retail Group Inc., which operates nearly 500 stores including four Destination XL superstores, which combine all of the company’s concepts: the moderate Casual Male merchandise as well as the more-upscale Rochester Big & Tall, along with shoes. The company will add 10 to 14 additional DXL stores this year and, by 2015, expects to have between 75 and 100 units in operation.<WWD>

Hedgeye Retail’s Take: While this is a tough business, the fact is that it is one of the faster growing segments of retail. Men are not getting taller, but they are getting bigger. While we don’t have statistics to back it up, we’d suspect that JCP’s ‘Middle America’ customer is right in the sweet spot here. This is not enough to impact top line for JCP in any of the next 2-3 years. But if successful, it could at least add a glimmer of hope (and value) to JCP’s Enterprise Value. 

 

Target Goes to Canadian Court - Target Corp. heads to the Federal Court of Canada on Monday, hoping to win the exclusive right to use its name in Canada, just three months after the retailer unveiled a plan to expand into the country. Fairweather Ltd. owns 15 Target Apparel stores in Canada, including this one in Toronto. Target Corp. plans to open Canadian stores by 2013. The Minneapolis-based discount-store chain is asking the court to impose a preliminary injunction against Canadian merchant Isaac Benitah and his company, Fairweather Ltd., which owns 15 stores across Canada called Target Apparel and has a logo similar to that of Target Corp. "If the defendants are not restrained, the plaintiffs will lose the ability to control their reputation and goodwill in Canada," according to the filing by Target Corp. The court hearing is the latest volley in a battle that Target Corp. and Mr. Benitah have been waging for close to a decade over who owns the rights to the Target name in Canada. <Wallstreetjournal>

Hedgeye Retail’s Take: This is a very political case in Canada. Small time Canadian apparel brand called Target Apparel vs. US goliath Target. The local brand has a bigger presence today, but Target Corp wants to reserve the right to get big in Canada in the future. Interesting, though that Target Corp still plans only 15 stores by 2013. Target Corp claims that Target Apparel’s logo is too similar. That’s pretty much a joke from our perspective. Ask 10 people to design a logo for a company called target, and at least half will draw a bulls eye. Will the Canadian government stick up for the little guy, or will it risk the near term backlash from its citizenry about voting in favor of the Americans and the promise of jobs 3-5 years down the road? We don’t know. But given how important this is to TGT’s growth, we would not bet against it. They won’t be afraid to pay.

 

Borders Adviser-Fee Pay Bid Should Be Denied - Borders Group Inc. (BGP) hasn’t shown that it can pay the costs of its bankruptcy case and should be denied requests to pay lawyers and other professionals, the U.S. said. The U.S. Trustee, a bankruptcy watchdog for the Justice Department, today objected to monthly statements of compensation and expense reimbursements for 11 professionals working on the case. Andrew Glenn, a lawyer for Borders, said the company will file its financial report today and will pay fees owed to the U.S. Trustee, answering two of the concerns raised in papers filed in U.S. Bankruptcy Court in Manhattan. “There was an issue with a reconciliation of the bill we received,” Glenn, a lawyer with Kasowitz, Benson, Torres & Friedman LLP, said in an e-mail.  The operating report for the period of Feb. 16 to March 31 hasn’t been filed, acting U.S. Trustee Tracy Hope Davis said in the filing. Kasowitz, Borders’s main bankruptcy counsel, has requested $1.27 million in fees for Feb. 16 through March 31. Financial adviser Jefferies & Co. has requested $250,000. <Bloomberg>

Hedgeye Retail’s Take: These advisors had the pleasure of walking Border’s through the bleeding process, and are now being left holding the check. How fitting…

 

Li & Fung Exec Charged With Bribery - A senior merchandise manager at Li & Fung faced bribery charges on Wednesday, according to Hong Kong’s Independent Commission Against Corruption.  Hong Kong’s ICAC said that Doris Au Yeung Lai-hung, 44, was charged with “six counts of agent accepting an advantage.”  At the time of the alleged offenses, the defendant was responsible for placing purchase orders from Li & Fung with apparel suppliers for children’s wear. Also named as defendants were Guan Xiaoyi, 30, director at Sun Xinfa Arts Manufacture Ltd., and Yeung Wai-sing, 40, finance manager at Shun Fat Arts Manufacture Ltd.  The ICAC said both Guan and Yeung face a joint count of conspiracy to “offer advantages to an agent.” <WWD>

Hedgeye Retail’s Take: On one hand, this happens all the time, but for some reason the government simply chose to take action on this one. On the other hand, with such tight capacity, perhaps the ‘payoff game’ is getting more closely watched.

 

Online Retailers to Benefit more from Mothers Day This Year - When it comes to seeking that perfect gift for mothers this year, 21.5% of consumers will turn to online retail sites, up slightly from 19.7% last year, according to a survey released this week by the National Retail Federation. The trade group’s 2011 findings are based on surveys of 8,488 consumers conducted between April 4 and April 12. BIGresearch conducted the survey. “This Mother’s Day, the woman who often puts herself last is being put first,” says Matthew Shay, president and CEO of the National Retail Federation. “Americans are in a much better position to spend this year and will push the daily stresses of high gas and food costs aside for one day to celebrate the most important women in the world to them.” <InternetRetailer>

Hedgeye Retail’s Take:  Is it us, or do these numbers still seem low?

 

 


TALES OF THE TAPE: SONC, MCD, WEN, KONA, BWLD

Notable news items from the past few days and price action from Friday, along with our fundamental view on select names.

  • SONC reported that its system-wide same-store sales have increased by an estimated 4% to 6% for the first two months of the company’s third fiscal quarter.
  • On Friday, SONC rallied 12.8% on accelerating volume.
  • MCD said this week that its store growth and hiring are about to accelerate in China, with plans to open 700 new stores in the country by the end of fiscal 2013 which will bring its total restaurant count there to 2,000, according to nrn.com.
  • WEN is testing its new chicken sandwich in Columbus, OH. 
  • According to The Times of India, fine dining brands are “hungry for India debut” as the affluent middle class expands.
  • KONA gained 3.4% on accelerating volume while BWLD declined 1.2% on accelerating volume.

TALES OF THE TAPE: SONC, MCD, WEN, KONA, BWLD - stocks 52

 

Howard Penney

Managing Director


WEEKLY RISK MONITOR FOR FINANCIALS: LITTLE CHANGE WEEK OVER WEEK

This week's notable callouts include Greek bond yields continuing upward and commodity prices falling.


Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Positive / 3 of 11 improved / 2 out of 11 worsened / 6 of 11 unchanged
  • Intermediate-term (MoM): Neutral / 4 of 11 improved / 4 of 11 worsened / 3 of 11 unchanged
  • Long-term (150 DMA): Neutral / 4 of 11 improved / 4 of 11 worsened / 3 of 11 unchanged

 

WEEKLY RISK MONITOR FOR FINANCIALS: LITTLE CHANGE WEEK OVER WEEK - summary

 

1. US Financials CDS Monitor – Swaps were mostly tighter across domestic financials, tightening for 25 of the 28 reference entities and widening for 3. 

Tightened the most vs last week: PMI, RDN, ALL

Widened the most vs last week: MBI, AGO, MS

Tightened the most vs last month: ACE, ALL, AGO

Widened the most vs last month: PMI, MTG, RDN

 

WEEKLY RISK MONITOR FOR FINANCIALS: LITTLE CHANGE WEEK OVER WEEK - us cds

 

2. European Financials CDS Monitor – Banks swaps in Europe were mostly tighter, tightening for 31 of the 39 reference entities and widening for 8.

 

WEEKLY RISK MONITOR FOR FINANCIALS: LITTLE CHANGE WEEK OVER WEEK - euro cds

 

3. European Sovereign CDS – Greek CDS reversed their meteoric rise in the middle of last week, leading the overall average to flat for the week (down 2 bps).    

WEEKLY RISK MONITOR FOR FINANCIALS: LITTLE CHANGE WEEK OVER WEEK - sov cds

 

4. High Yield (YTM) Monitor – High Yield rates fell last week, ending at 7.66 versus 7.78 the prior week.  

 

WEEKLY RISK MONITOR FOR FINANCIALS: LITTLE CHANGE WEEK OVER WEEK - high yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index rose slightly last week to end the week at 1621.   

 

WEEKLY RISK MONITOR FOR FINANCIALS: LITTLE CHANGE WEEK OVER WEEK - lev loan

 

6. TED Spread Monitor – The TED spread rose last week, ending the week at 23.8 versus 22.3 the prior week.

 

WEEKLY RISK MONITOR FOR FINANCIALS: LITTLE CHANGE WEEK OVER WEEK - ted spread

 

7. Journal of Commerce Commodity Price Index – Last week, the JOC index fell to end the week at 28.3, 3.8 points lower than the prior week.

 

WEEKLY RISK MONITOR FOR FINANCIALS: LITTLE CHANGE WEEK OVER WEEK - JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields jumped a further 76 bps despite the mid-week pullback.

 

WEEKLY RISK MONITOR FOR FINANCIALS: LITTLE CHANGE WEEK OVER WEEK - greek bonds

 

9. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps.  We believe this index is a useful indicator of pressure in state and local governments.  Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 14-V1.  Last week spreads fell to 112 from 123. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: LITTLE CHANGE WEEK OVER WEEK - markit

 

10. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production.  Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion.  Early in the year, Australian floods and oversupply pressured the Index, driving it down 30% before bouncing off the lows.  Last week it hit its lowest level since early March, then rebounded slightly to 1269. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: LITTLE CHANGE WEEK OVER WEEK - baltic dry

 

11. 2-10 Spread – We track the 2-10 spread as a proxy for bank margins.  Last week the 2-10 spread tightened 6 bps to 268 bps. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: LITTLE CHANGE WEEK OVER WEEK - 2 10

 

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows:  0.6% upside to TRADE resistance, 1.4% downside to TREND support.

 

WEEKLY RISK MONITOR FOR FINANCIALS: LITTLE CHANGE WEEK OVER WEEK - XLF

 

 

Joshua Steiner, CFA

 

Allison Kaptur


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Dangerous Knowledge

“A little knowledge is dangerous. So is a lot.”

-Albert Einstein

 

I have a tremendous amount of respect for what Einstein’s independent thinking did for this world, and I love that risk management quote. No matter what you do or do not know this morning, there’s this interconnected Global Macro market’s last price.

 

US Dollar driven correlation-risk to currency, commodity, and stocks market prices is running at its highest level since Q2 of 2008. While it’s Dangerous Knowledge to have marked-to-market models on your desktop to help you price this real-time risk, it’s doubly dangerous to summarize the uncertainty associated with this risk with partisan politics.

 

Since neither the Manic Media nor 90% of Washington/Wall Street got what a Crashing Currency meant in Q2 of 2008, we don’t expect consensus to provide any proactive thought leadership on the risk management topic this time. Whether it’s the US Dollar Index’s relationship to the price of Oil, Gold, or even Volatility, the similarities to the second quarter of 2008 are borderline glaring at this point.

 

The most market relevant mathematical learning since Einstein’s Relativity has been Chaos and Complexity Theory. It, unlike Efficient Market Theory, accepts uncertainty as a grounding principle. The Keynesian Kingdom’s top brass doesn’t do uncertainty. Allegedly, this time they know exactly what’s going on out there in this gargantuan ecosystem of colliding factors that we call the Global Economy.

 

What’s going on in Global Macro markets may very well be trivial. Market prices and the trailing correlations that impacted them are historical facts. What’s “not clear” (to quote The Bernank’s favorite career risk management qualifier from last week) is what can be quantified as causal over a long period of time. “Not clear” that is, to the professional politicians who are accountable to the US Dollar Debauchery math.

 

Here’s what the US Dollar did last week:

  1. Down another -1.4% week-over-week to a new YTD low
  2. Down -9.8% from its January, 2011 price and down for the 14th week out of the last 18
  3. Down -17.5% from June 2010

Wait. What does June 2010 have to do with anything other than making Groupthink Geithner’s record as a credible US Dollar stability guy anything short of a national embarrassment? June 2010 is when the US Dollar was high and prices at the US pumps were a lot lower.

 

38% lower, actually…

 

Looking ahead at our kids getting out of school and the summer driving season (hearing from my expert network that both still occurs this year), I think most Americans think a -17.5% meltdown in their Crashing Currency and a +38% tax at the gas pump is a bad trade – for them.

 

Have no fear however, the President is here in his weekly address (Saturday): “When oil companies are making huge profits and you’re struggling at the pump, and we’re scouring the federal budget for spending we can afford to do without, these tax giveaways aren’t right.”

 

Right. right…

 

Meanwhile, Brazil’s President had a different take than blaming Petrobras: “Guaranteeing purchasing power means playing tough on inflation. This is one of the fundamentals of our political economy, and one we’ll never let up on.”

 

At least there’s a healthy political bid/ask spread out there in terms of what left-leaning President knows the least about Complexity Theory. With American central planners leaning more left than even Europe and Brazil at this point – who would have thunk…

 

Back to the Global Scorecard – here were the big Global Macro currency and commodity moves associated with the US Currency Crashing week-over-week:

  1. The Euro = UP another +2.1% to $1.48
  2. The Chinese Yuan = UP another +0.3% to a new all-time high of $6.49
  3. CRB Commodities Index (19 commodities) = UP another +0.8% to a new 2-year weekly closing high of 370
  4. WTI Crude Oil = UP another +1.5% to a new 2-year weekly closing high of $113.93
  5. Gold = UP another +3.5% to a new all-time high of $1556 (all-time is a long time)
  6. Copper = DOWN -5.4% at $4.17/lb

Oops, one of these things is not like the other. That’s right, Dr. Copper is reminding those of us with some knowledge about real-time market signals that Global Growth Slows As Inflation Accelerates. Maybe that’s why Chinese and Brazilian stocks lost -3.3% and -1.4% last week, respectively. They no likey The Inflation from The Bernank.

 

US stocks had another great week, rallying like Japanese equities have for decades to lower-long-term-highs on decelerating volume and scary skew signals. But don’t worry – this Currency Crash thing is cool, like it was in Q2 of 2008, until it isn’t…

 

In the Hedgeye Asset Allocation Model I proved that I still know a little about learning from my many prior mistakes. I ended the week with my highest invested position of 2011, dropping my allocation to Cash to 34% (at the last immediate-term overbought peak in US Equities I had 62% in Cash, so at least this time is different in that I am riding out more of The Inflation trade’s gains).

 

The Hedgeye Asset Allocation Model’s week-end allocations are now as follows:

  1. Cash = 34% (down from 40% last week and 52% in the last week of March)
  2. International Currencies = 30% (Chinese Yuan, Canadian Dollar, British Pound - CYB, FCX, and FXB)
  3. Commodities = 12% (Gold, Oil, and Corn – GLD, OIL, and CORN)
  4. International Equities = 9% (China – CAF)
  5. Fixed Income = 9% (US Treasury Flattener – FLAT)
  6. US Equities = 6% (Technology – XLK)

A little knowledge of the Bin Laden takedown would have helped me be levered-long everything US Equities into this week’s start. Having Dangerous Knowledge like that though is a lot of knowledge I’ll pray to do without!

 

My immediate-term support and resistance lines for Gold are now $1515 and $1557, respectively. My immediate-term support and resistance lines for oil are now $111.47 and $115.61. And my immediate-term support and resistance lines for the SP500 are now 1338 and 1377, respectively.

 

I plan on taking down both my gross (Hedgeye Asset Allocation invested position) and net long positions (Hedgeye Portfolio: 17 LONGS, 11 SHORTS) into this morning’s newsy strength.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Dangerous Knowledge - Chart of the Day

 

Dangerous Knowledge - Virtual Portfolio


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