R3: RL, HD/LOW, DKS, New Balance



May 18, 2011






  • Confirming the recent strength in strip centers, management of URBN highlighted that Anthropology and Urban Outfitters stores were strongest in lifestyle centers and both weakest in street locations. Mall performance on the other hand was mixed.  
  • An interesting similarity coming out of both Lowes and Home Depot is the strong performance in the kitchen category. While Lowes highlighted strong promotional activity as the key driver, Home Depot cited a greater emphasis on educating its associates as the primary driver of double-digit comps across most of the category, which it turns out drove 40% of increase in total ticket growth in the quarter.
  • In a sign that consumer demand for aspirational product (i.e. higher ticket items) is still alive and well in the sporting goods industry, DKS’ management highlighted that higher end running shoes and the new $400 TaylorMade R11 driver were among the best selling items in their respective categories.



New Balance Creates Comfort/Casual Unit - New Balance is staking a bigger claim in the casual market. The Boston-based company has partnered with industry veteran Bob Infantino in the creation of DryDock Footwear, an independent business unit set up to develop its casual-comfort brands Aravon and Dunham. Infantino, most recently president of Clarks Cos. N.A., will assume the same role at DryDock. According to a company release, DryDock Footwear will be based in Boston, with Infantino spearheading development of the New Balance brands, in addition to creating new labels in the casual arena.“We’re getting together to do what [New Balance Chairman Jim Davis] did so nicely with [New Balance’s] size and width selection,” said Infantino, regarding the company’s initiatives. <WWD>

Hedgeye Retail’s Take: NB entering the brown shoe category instead of incrementally allocating capital (both human and financial) into taking share in athletic is an interesting turn. This is good for the incumbents – particularly UnderArmour.


Growth in Retail Container Traffic Levels Off - Import cargo volume at the nation's major retail container ports is forecast to level off this month at about the same numbers as last year after nearly 18 months of year-over-year gains, according to the monthly Global Port Tracker report released by the National Retail Federation and Hackett Associates. "After nearly a year and a half of volume increases, it's not surprising to see some leveling off," NRF Vice President for Supply Chain and Customs Policy Jonathan Gold said. "Retailers are being cautious with how much merchandise they import due to economic pressures such as higher commodity prices, but overall consumer demand remains strong." U.S. ports followed by Global Port Tracker handled 1.08 million Twenty-foot Equivalent Units in March, a gain of only 0.3 percent over the same month a year ago. The number was down 2 percent from February, traditionally the slowest month of the year. While the increase was small, it was the 16th month in a row to show a year-over-year improvement after December 2009 broke a 28-month streak of year-over-year declines. One TEU is one 20-foot cargo container or its equivalent. <SportsOneNote>

Hedgeye Retail’s Take: This comes as a surprise to us. After 2-years of pulling inventories down to borderline-unhealthy levels, shipments should be on the upswing. In the first quarter, it was clear that retailers/brands pulled product forward ahead of COGS increases – so perhaps volume took a breather.  Another consideration is that volume is tracked in TEUs, or twenty-foot-equivalent units. This says nothing about how full the containers are. As oil prices rise, we tend to see logistics teams maximize space inside the container to mitigate the need for additional TEUs. Remember that in filling a container, you either a) leave free space, b) fill perfectly, c) ‘cube out’ (run out of space), or d) ‘weight out’ (don’t fill the visible space, but hit weight limit). Apprel and shoes don’t ever weight out, so this is all about cube optimization. We suspect we’re seeing that today. BUT, if we see a consistent downtick in unit volume, it will test our negative assertion that unit shipments will not be down meaningfully for the year despite higher costs.


Polo Ralph Lauren Wins Fragrance Case - Score one for Polo Ralph Lauren Corp. A New York federal judge ruled Friday that the U.S. Polo Association cannot use a horse-and-rider symbol evocative of Polo’s famed logo in conjunction with the word “polo” to market its fragrances. The USPA claimed that Ralph Lauren was “attempting to monopolize the depiction of the sport of polo,” by preventing it from using its “double horseman mark” on its recently launched fragrance products, according to the original lawsuit filed Nov. 13 in Manhattan’s U.S. District Court. After deliberation, Judge Robert Sweet denied the USPA’s request for a declaratory judgment, citing that the use of the double horseman image with the word “polo” infringes on Ralph Lauren’s “substantive trademark rights” as it would likely cause “consumer confusion.” As a result, the court granted L’Oréal USA Inc., Ralph Lauren’s fragrance licensee, a permanent injunction and ordered that all of the plaintiff’s claims be dropped.<WWD>

Hedgeye Retail’s Take: This is big for RL. The battle between these two has been in progress for well over a decade. For better or worse, most consumers see a horse riding jockey swinging a mallet on apparel and think Ralph Lauren. We didn’t think much of this until we got an email from Bob Store’s last year promoting USPA gear. The association can certainly claim the ‘authenticity’ factor, but the logos are unmistakably similar. Time for the USPA to update its logo.


Sears Sues Former Executive of Lands’ End - Sears Holdings Corp. has asked an Illinois court to stop former Lands’ End president Nicholas Coe from joining Limited Brands Inc. as CEO of its Bath & Body Works division. Sears says in court documents that Coe violated his non-compete agreement with the company and is asking for an immediate injunction and damages. Sears also names Limited Brands Inc. and its Bath & Body Works business entities in the suit and asserts the companies were aware of Coe’s severance agreement with Sears, which says Coe cannot work for a Sears competitor for one year after leaving the retailer. Lands’ End is a division of Sears Holdings Corp. In the court filing submitted yesterday to the Circuit Court of Cook County, IL, Sears says Coe submitted his resignation May 11 with the intention of joining Limited Brands May 16. <InternetRetailer>

Hedgeye Retail’s Take: Hmm, not exactly direct competitors, but SHLD looking to pull whatever levers it can here obviously.


Faster Fulfillment - As they build new warehouses and reconfigure existing ones, many web retailers are deciding that rising consumer expectations of fast and accurate delivery require new technology and new warehouse procedures. Few areas of e-commerce illustrate the cutting edge of warehouse management better than flash-sale retailing. In order to offer shoppers big discounts on small quantities for limited periods, web merchants must be able to buy, receive, inspect, pick and ship orders quickly. “The supply chain itself has been our Achilles’ heel in this company for the last couple of years, as it is for any company scaling like us,” says Christopher Halkyard, vice president of operations for Gilt Groupe Inc., which had Internet Retailer-estimated sales of $425 million last year, up 150% from $170 million in 2009. Gilt is No. 49 in the Internet Retailer Top 500 Guide. <InternetRetailer>

Hedgeye Retail’s Take: Gilt Groupe either has a better handle on its fulfillment now or is eating the cost in the near-term since we just received yesterday an email announcing they’ve reduced shipping and will cover return costs if you opt for ‘store credit’. The bottom-line is that consumers are getting used to free shipping – these guys are forced to follow suit or lose share.


Hublot Opens New York Flagship - Hublot has opened the doors to its New York flagship and unveiled a timepiece in partnership with amfAR here. The 3,200-square-foot store on Madison Avenue between 62nd and 63rd streets is one of five freestanding U.S. stores the brand plans to open in the next six months — and the first in New York. Currently, Hublot has stores in Boca Raton and Bal Harbour, Fla., Beverly Hills and the U.S. Virgin Islands, and future domestic locations include boutiques in Las Vegas, Palm Beach, Fla., and Vale and Aspen, Colo. — all opening between October and December of this year, according to Hublot’s chief executive officer, Jean-Claude Biver.  <WWD>

Hedgeye Retail’s Take: Hublot has been opening stores more aggressively since ’08 when the company was in 100% cash according to CEO Biver. With only 28 stores globally, the brand is still small at retail, but is looking to change the buying habits of the U.S. consumer, who by and large is less apt to buy a luxury watch just because they can relative to Asian consumers. While we don’t love the timing heading into the 2H, the reality is that consumers looking to purchase a $100,000 watch are less sensitive to Main Street reality.


Wal-Mart in China E-Commerce Investment - Wal-Mart Stores Inc. is looking to further expand its reach into China. The retail giant said Friday that it’s buying a minority stake in Chinese e-commerce company Yihaodian in a deal that is expected to close within 60 days.  Launched in 2008, Yihaodian sells groceries, consumer electronics, clothing and other items, and has an employee base of 2,000, according to Wal-Mart. “Online sales in China are growing rapidly and are projected to match U.S. online sales in the next few years,” Eduardo Castro-Wright, vice chairman of Wal-Mart Stores and chief executive officer of Walmart global e-commerce and global sourcing. “By investing in Yihaodian, we're continuing to establish a presence in this important e-commerce market, and are moving forward on fulfilling our aspiration of being the leading global multichannel retailer." Wal-Mart, which has 8,986 doors globally, has 328 stores in China, according to a March 30 filing with the Securities and Exchange Commission.  <WWD>

Hedgeye Retail’s Take: With the aftertaste of the Alibaba debacle still palpable, it’s hard not to consider the risk in this strategy. Yes, the businesses are quite different and Wal-Mart could presumably acquire the business in whole if necessary, but we question the strategy from a branding standpoint. While the Wal-Mart nameplate has become synonymous with EDLP stateside even if at times that’s not the reality, selling goods through another branded site might jeopardize the valuable opportunity for brand-building in new markets.


ANF: Duration Disconnect


The duration between the bull and bear case should keep this name in the market’s good grace for at least another quarter or two.


Not a whole lot of companies are printing results that we’d refer to as ‘bullet proof’ but ANF clearly did – more than doubling the consensus. We won’t waste time here rehashing what the market already knows about one of the best performing retail stocks in the market (+31% ytd), but what we do know is that you can drive a truck between the bull and the bear case on this name.


On one hand, this is a US-centric brand that needs to shrink its base of once-vaunted US stores due to overbuilding and cannibalization while it pumps more (working) capital into those stores – and only has a well-understood and potentially over-hyped International business to fuel its growth, and  $4-5 ultimate in EPS power can’t sustain a $74 stock for too much longer.


On the flip side, the productivity and profitability of its International stores 1500bps higher than US stores, and the pricing power is what some in the trade would refer to as ‘a gift.’ There’s very strong demand and little pricing pushback from consumers in the UK, and now France, and why not Eastern and Northern Europe? Asia? If you want to put your bull hat on here you can build up to $10 in EPS power over 3-years, which suggests that this thing could double – again.


The interesting point on sentiment here is that those that truly believe in this story are not going to be derailed by trouble in the US. They’ve already written it off. At the same time, they’re looking to an international story to play out over 2-3 years. The bears are looking for the weak US business to be more reflective in valuation (after all – few and far between will a retail growth story ever work if the core stalls) and the international business to prove less accretive than is broadly accepted by a consensus that does not have a single ‘sell’ rating out of 27 analysts (does ANF really need 27?). Here’s some fun math… Apple has $5.25Bn in EV per analyst covering, Nike has $2.2Bn, which is spot on with AMZN. ANF has $207mm. (Alas…maybe we’re the pot calling the kettle black.)  


The point here is that ANF has been a frustrating short. But when you look at the dynamics behind the long case vs the short case, the short one becomes incrementally difficult to hang your hat on. Of course, once everyone believes that, it’s probably baked in.


While we seriously consider the long-case (as we do with all names that we’ve been both long and short in the past), we’d point to this sentiment alongside the chart below. Yes, it’s our trusty SIGMA. If you don’t look at them, this one is definitely worth a look-see.


Specifically, the latest data point swung it into the upper right hand quadrant – both margins and the sales/inventory spread improving. That’s in a $74 stock. What’s interesting, however is that ANF is about to go up against two-quarters where it’s been in a very ugly place while the industry was sitting pretty. That’s the same time where the rest of retail will be going down and to the left. In other words, this leaves ANF up there with NKE and a select few others that will improve RNOA while the rest of the industry fades. That’s a tough incremental sale on the margin.


ANF: Duration Disconnect - ANF S 5 18 11




Commodities rolled off sharply week-over-week but, given the magnitude of the year-over-year gains most foodstuffs have registered, there is still significant cost pressure for food and restaurant companies.


Following the spate of 1Q11 earnings over the past few weeks, the overarching message is that commodity inflation is going to meaningfully impact the bottom line in 2011.  It is interesting to note that corn posted another gain last week in the face of a broad-based drop off in commodity prices.  This is a bullish sign for protein prices given that feed costs can be expected to rise as grain costs go higher.






Corn prices outperformed last week.  Five consecutive days of price gains made the longest streak since December.  Adverse weather is delaying sowing from North Dakota to Ohio as approximately 63% of the U.S. corn crop was sown as of May 15th, below the five-year average of 75%.  AFCE, CMG, MCD, JACK and TSN are just a few companies that have highlighted corn prices, and the impact of higher corn prices on protein costs, as being bullish for food costs and negative for margins.









Beef prices are a concern for many restaurant companies, particularly in QSR.  WEN increased its commodity guidance for

2011 to 5% to 6% from 2% to 3% largely due to higher beef prices.  While prices fell off 1.3% over the past week, corn prices moving higher supports beef prices over the longer term.  However, TSN reported recently that meat demand has been "much improved" but prices may have climbed to a level at which consumers are no longer willing to buy.





Chicken Wings


Chicken wing prices seem to go down every day that ends with a “y”.  The chart below says all that needs to be said; year-over-year, wing prices are down -37% versus the other foodstuffs we follow (excluding chicken) being up an average of +39%.  BWLD continues to benefit from this.  Of course, all good things must come to an end; SAFM expects stubbornly high chicken supplies to come down this summer.  Sanderson Farms Chief Executive Joe Sanderson said recently that the number of eggs set in incubators, an indication of future supplies, are so far not mimicking increases in recent years that occurred in May.  The likely result, according to Sanderson, is fewer chickens in July, August, and September. 





Howard Penney

Managing Director

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TGT: Aweful Quality Beat


We’ve been bears on TGT for most of this year under the premise that the financial engineering over the past two years left the company without the resources to achieve its aggressive top line growth goals while improving margin – and that’s regardless of any erosion in the Macro climate. You simply can’t stave off Ackmanism by way of cutting costs and expect that to be a good platform for growth. This quarter was another piece of evidence in that chain.  Operating EPS was weak by most measures, with the entire beat – and then some – coming from better results out of the credit portfolio. ‘And then some’ is probably an understatement. We’re talking $83mm year on year – that’s about $0.08 per share, or 8% yy EPS growth. We don’t want to take this away from TGT by any means, as this is a real earnings contributor. But in 1Q of next year, we have to ask ourselves if there’s any mathematical way to get another $83mm in upside in the credit portfolio without pinching retail? Again, one of our macro concerns in retail is that our bearish outlook in 2H proves false as the consumer takes down the current 5% personal savings rate in order to fuel its spending addiction. That’s worked in the past when interest rates were heading South. But if we’re sitting here later in the year with the personal savings rate and interest rates BOTH near zero, AND with TGT having made its quarters by way of lowering its bad debt expense, it simply does not give us that warm and fuzzy feeling in our gut.


TGT: Aweful Quality Beat                     - TGT S 5 18 11



Athletic Apparel Positive Diversion


Athletic apparel sales posted a sequential acceleration in the athletic specialty channel; a slight positive in advance of the FL quarter. Total industry sales ticked slightly lower, however, showing a continuation of the volatility that we started to see several weeks back. One factor that keeps us from ringing any alarm bells given volatility in other channels is the sheer strength in ASPs across the board. That continued in the recent week.  


Lastly, on a regional basis New England was a clear negative standout as the only region to report a sales decline last week down -12% reflecting a saturated weekend with the Mid-Atlantic and South Central outperforming up +16% and +14% respectively – not good for DKS despite commentary yesterday that they “have seen a return to expected sales performance” and better on the margin for HIBB.


Athletic Apparel Positive Diversion - App Table 5 18 11


Athletic Apparel Positive Diversion - FW App Reg 5 18 11


Casey Flavin



Due to the magnified impact on MPEL's bottom line of low hold given its junket mix, MPEL may disppoint whisper EBITDA expectations of $145 million. However, volumes were strong. Here is what they said last Q.




  • “We will have some incremental expense associated with new amenities such as Cubic...and the full impact of our labor rate increase, which took place in the middle of the fourth quarter. But net-net, we think we can keep a very tight lid on expenses and FTE increase in 2011.”
  • “We also opened two new junket rooms at City of Dreams.”
  • 1Q11 guidance:
    • “Depreciation and amortization costs is expected to be approximately US$85 million...
    • Corporate expense is expected to come in at US$17 million to US$18 million...
    • Net interest expense is expected to be approximately US$28 million...
    • We do not expect any meaningful pre-opening or capitalized interest in the first quarter of 2011.”
  • “Our first quarter results are off to a good start. We experienced a strong Chinese New Year holiday period, with visitation and gaming volumes well in excess of last year’s results.” 
  • “Our marketing grip has generated significant results through its destinational sales strategy, building relationships with travel trade operators throughout China, and the APAC region, as they continue their 20-city roadshow tour in the first half of 2011.”
  • “We believe the introduction of another integrated resort on Cotai will benefit City of Dreams.”
  • “We expect to continue to reduce our debt balance in 2011 through scheduled amortization payments and cash flow from operations.”
  •  “I think usually after Chinese New Year, which is 15 days after the first day of Chinese New Year, we tend to expect much slower volumes in Macau.”
  • “For the full year of calendar 2011, we’re expecting about US$60 million of total CapEx, the vast majority of that will be growth rather than maintenance.”
  • “In terms of the overall representation from the premium direct, the business represents about 15% to 20% during fourth quarter. And basically, Altira is a junket play.”
  • “I think in the last quarter (3Q), and currently, we stick with the commission cap low 1.25% to the junkets and also we count religiously a significant type idea whereby our revenue share more though in junket and COD stick with the same level of our neighbors. So we didn’t see any changes in terms of rebate to the market in the last couple of months.”
  • “We haven’t seen any need to change our overall provisioning policy and we’ll continue to follow our existing policy. At this point, we think we’re in good shape as far as our reserve and adequately reserved in light of our business volumes.”
  • “It is very clear that tourism promotion and also the fact that China is trying to move into a consumption spending economy is definitely the case, and therefore that benefits Macau and tourism sectors in general. So all in all, we are not concerned about these tightening measures. But with regard to the banking system, I think it provides a solid platform for the Chinese economy to continue to grow at a steady pace for years to come.”
  • [Altira growth] I think it is a combination of both visitation numbers as well as our growing number of membership, and the reason is quite mixed in terms of the growth story. But we did a lot of looking to the opportunity in a lot of direct marketing and also in different tier of the alignment with the customer with the different tiers of customer, including premium mass and mass. I would think that that our premium mass is doing a little bit better than the mass, purely because we put a lot of effort in looking to opportunity going forward to in terms of direct marketing.”
  • “That additional hotel tower together with the podium is a 1.5 million square feet development. So, when we do build it, it’s going to be a significant addition to City of Dreams, not just on the hotel inventory side, but also in addition on the overall proposition being subject to regular government’s approval on additional gaming space or retail restaurant proposition.”
  • “We still have a management contract for Macau Studio City, and we continue to have discussions with the partners of Macau Studio City to hopefully have that project start in one way or the other.”
  • [Cubic opening] “I think we are looking at a end of first quarter, early second quarter date."
  •  “Hard Rock Cafe is certainly a lease that we have with a licensee from Hard Rock International. They plan to start construction within the next month or so and are currently planning a September or Q4 opening for the cafe.”