May 24, 2011






  • In one of the more successful examples of utilizing one’s own customer loyalty program, DSW highlighted that not only does the program consist of nearly 17 million members, but they also accounted for 88% of sales in Q1! Based on these metrics, it would appear that the company’s precision approach to marketing to its loyal customer base has been a major success – perhaps one that other retailers should take note of.
  • Following Macy’s latest strategy of testing new concepts highlighted in yesterday’s R3 news, it appears the retailers’ latest test will be anchoring an outlet shopping center. The new hybrid shopping destination is being spearheaded by The Mills, a division of Simon Property Group in Illinois. We’ve heard many retail CEOs speak of offering compelling ‘value’ to drive traffic in recent months, what better proof of concept is there than being able to sell full-price merchandise alongside outlet product.



Nook Color Apps Hit One Million Downloads in One Week - Barnes & Noble Inc. has achieved a major milestone, and in very short order. Consumers have downloaded applications in its week-old Nook Apps mobile app store one million times. The top five paid apps are Angry Birds, Drawing Pad, Solitaire, Aces Jewel Hunt and Astraware Mahjong. The top five free apps are Fliq Calendar, Fliq Notes, Pulse, Nook Word of the Day and Fliq Tasks. “Our recent software update to Nook Color delivered the most-requested tablet features by our customers, including the ability to shop for and download high-quality apps. Reaching over a million app downloads in just a week since the launch of app shopping for all Nook Color customers exceeded expectations, and is an exciting milestone for our developers, publishing partners, and most importantly for our rapidly growing Nook Color user base,” says William Lynch, CEO. The bookseller did not respond to questions about the number of Nook Color devices and paid apps sold. <InternetRetailer>

Hedgeye Retail’s Take: Just in time. With a fresh offer on the table and Burkle’s Yucaipa circling, we expect to see additional offers forthcoming. The success of the Nook as the #2 player in the tablet space helps transform BKS from a shrinking legacy industry leader to a top player in one of the most coveted tech categories. Let the bidding begin!


Madden Acquires Topline - Steven Madden Ltd. has a new business in its stable. The Long Island City, N.Y.-based firm has acquired The Topline Corporation for $55 million in cash, it said today. Topline, a privately held producer and marketer of private-label and branded footwear founded in 1980, had net sales of about $189 million in 2010 and is expected to be add between 5 and 7 cents to Madden’s earnings for the full fiscal year. Topline runs a large private label business, and the firm’s owned brands, which include Report, Report Signature and R2 by Report, are distributed to specialty retailers and department stores. “Topline's private-label business is one of the best in our industry and is highly complementary to our existing private-label footwear business,” said Edward Rosenfeld, chairman and CEO of Steve Madden, in a statement. “Its brands are currently exhibiting outstanding growth and represent great additions to our brand portfolio.” Speaking to FN on the phone, Madden’s founder, Steve Madden, said Topline “has the best sourcing base in Northern China, and we’re excited about leveraging that. It will help value go up.” <WWD>

Hedgeye Retail’s Take: Consistent with the company’s strategy of adding new brands to the portfolio, this deal is on the larger side for Madden. On the heels of 26% growth in 2010, this deal alone will add nearly 30% growth to the top-line in 2011 in addition to the seven new brands added over the last two years that the company expects to contribute an incremental $100mm over the next 3-years. With the deal expected to be accretive we have to assume operating margins of at least 10% in which case, it appears the company picked up the brand at roughly 3x EBITDA. If its growth profile is as attractive as the release suggests and it improves sourcing prowess to boot – this was a good deal.


Charming Shoppes Exploring Sale of Fashion Bug - Charming Shoppes Inc. (CHRS), the operator of the plus-size Lane Bryant chain, is exploring a sale of its Fashion Bug stores, according to a person with knowledge of the matter. Moelis & Co. is advising the retailer on a possible deal, said the person, who declined to be named because the process isn’t public. A sale of the unit may be a few weeks away, the person said. Fashion Bug, aimed at women aged 30 to 50, makes up about a third of the chain’s more than $2 billion in sales. Chief Executive Officer Tony Romano is devoting resources to the more profitable Lane Bryant label to revive earnings after almost $500 million in losses since 2007. While demand for plus-size apparel is growing, Fashion Bug’s challenge as a lower-priced retailer is to deliver stylish clothing without sacrificing margins, said McMillan Doolittle LLP’s Neil Stern. <Bloomberg>

Hedgeye Retail’s Take: Two years after completely overhauling its strategy, the company is still operating at a loss so something’s gotta give. Divesting the Bug would not only remove the most value oriented concept in the portfolio, but also the only one not to see a rebound in sales in 2010 following losses at all three in 2009. Underperformance during a turnaround is typically short-lived as appears to be the case here.


Bharti Wal-Mart to Expand - Bharti Wal-Mart Pvt. Ltd. Tuesday said it aims to open up to 20 more cash-and-carry stores in India by the end of 2012, as the company continues to expand its business in the country. "We plan to open eight to 10 stores this year [in 2011] and a similar number next year," Raj Jain, chief executive and managing director, told reporters on the sidelines of a company event. "We have done much more than what we had announced in 2007," he added. The joint venture between U.S. retailer Wal-Mart Stores Inc. and India's Bharti Enterprises Ltd. currently has four stores in Punjab state and one each in Rajasthan and Madhya Pradesh. Earlier this month the company said it aimed to open 10-12 more cash-and-carry stores in India by the end of 2011. <WallstreetJournal>

Hedgeye Retail’s Take: Wal-Mart continues to chip away at penetrating one of the most attractive international markets, but process is more drip-like than opening up the floodgates given the country’s stance on foreign direct investment. Continued progress, but not even close to moving the needle.


Amazon is the Most-Trafficked Site in the U.K - Amazon Europe and housewares retailer Argos held onto their spots as the first and second highest trafficked sites in the United Kingdom, but online grocer and discount mass merchant Tesco Stores jumped two places this year to No. 3, according to a new report from e-retail trade organization Interactive Media in Retail Group (IMRG) and web site traffic measurement firm Experian Hitwise. Tesco overtook electronics and books retailer for the third spot in the IMRG and Experian Hot 100 list, which ranks e-retailers based on traffic. Experian Hitwise and IMRG say the department store, apparel and accessories, and grocery and alcohol categories grew the most this year, with department stores now accounting for 18% of all U.K. visits to online retailers. <InternetRetailer>

Hedgeye Retail’s Take: Can’t imagine the company’s offer for free shipping to the UK from February until mid-May hurt its standing. The dilemma now may be reset in customer expectations.


April Outdoor Product Sales up 10.4 Percent - Sales of outdoor products grew a robust 10.4 percent to $710.8 million in the four week fiscal April period that ended April 30. According to retail point-of-sale data from the April 2011 OIA VantagePoint™ Trend Report, Outdoor Footwear led the pack, up 18.1 percent on broader distribution of — and new entrants to — the natural/minimalist categories. Outdoor Hardgoods increased 8.6 percent thanks to impressive sales in specialty channels, where technical backpacks, camping and paddlesports grew strongly. Despite unseasonably wet and cold weather across many parts of the United States, Outdoor Apparel sales, much of which is spring-related wear at this time of year, rose 6.5 percent. <SportsOneSource>

Hedgeye Retail’s Take: Positive in aggregate, but one can’t ignore the regional performance embedded in these results as we heard from DKS last week. Following February and March sales that were on track with plan, the company took a big hit in April suggesting other regions outside of New England and the Northern Midwest outperformed. Following record precipitation in April, May has yet to provide much of a break suggesting the pent up demand retailers expect may be muted.  



European Data Download

Positions in Europe: Long Germany (EWG); Sweden (EWD)


As ash clouds from Iceland’s recent volcano eruption slowly drift into European skies (the UK already ground 250 flights) and discussions fly in every direction on a possible debt default/restructuring strategy in Greece (see yesterday’s European Risk Monitor post for our take), below we provide the most salient data points and charts out today in Europe:


1.   Germany’s second reading of Q1 GDP was unchanged quarter-over-quarter and year-over-year at 1.5% and 5.2%, respectively. As the table below shows, Exports, Capital Investment, and Construction made significant gains. We continue to like Germany’s healthy 2011 growth profile of ~ 3.2% GDP and sober fiscal standing as a defensive play with the backdrop of persistent sovereign debt contagion across the Euro region. We’re also long Sweden (via the etf EWD) in the Hedgeye Virtual Portfolio with a similar thesis to Germany. However, Sweden enjoys an independent central bank (and currency), and has prudently hiked interest rates over the last 10 months to head off inflation.


European Data Download - g1



2.   Germany’s IFO Business Survey confirmed a developing trend of slowing confidence over the last months. [Additionally we’re seeing a similar trend across many western European countries. France’s Production Outlook fell to 15 in May versus 21 in April and Business Confidence slipped to 107 in May versus 109 in April, according to INSEE National Statistics Office of France].


As the chart below shows, the 6-month forward looking German Expectations (which we key off on in particular) declined month-over-month, and again we think is representative of the uncertainty surrounding the fiscal health of the region’s periphery.


European Data Download - g2



3.   UK Net Borrowing (Excluding Financial Interventions) was £10 Billion in April versus £7.3B a year ago.  As Chancellor of the Exchequer Osborne continues to fight to curb spending and generate revenue to reduce the country’s deficit, the April figures show a -0.8% decline in revenue and 5% gain in spending. The revenue figure was affected by a one-off bank payroll tax that brought in £3.5 Billion last April, and the “relatively high bonuses being paid and share options being exercised,” according to the UK Statistical Office.


The deficit is expected to narrow to 122 Billion in the fiscal year that began in April, or 7.9% of GDP. Public Sector net debt at the end of April 2011 was £910.1 Billion (60.1% of GDP) up from £765.5 Billion (53.0% of GDP) at the end of April 2010.


We continue to be very cautious on the UK economy. Persistent inflation (CPI is currently at 4.5% Y/Y) is the most immediate term threat. The BoE has yet to clearly signal any concrete action to curb inflation's rise short of acknowledging it. We expect consumer and business confidence to wane over the intermediate term as growth prospects remain weak and the government sheds more public-sector jobs to reduce the budget deficit.


European Data Download - g3


Matthew Hedrick



Cracker Barrel reported 3QFY11 (April) EPS of $0.58 (excluding a $0.06 gain from the sale of property) that was significantly below consensus of $0.66 and that same-store sales were down -0.3% for the restaurants and up 0.1% for retail, again, missing consensus expectations. 


Yes, it’s true that two-year trends improved sequentially on a monthly basis, as the quarter progressed, but the company raised prices aggressively in April.  While the desire to protect margins is understandable to a point, traffic has been the Achilles Heel of this company for some time. 


We’ve seen CBRL raise prices before in this situation and the outcome seems inevitable: traffic will suffer.  As the saying goes, the definition of insanity is doing the same thing over and over and expecting different results.  The chart below shows the sequential deterioration in comparable restaurant sales at CBRL.





The excuse given by the company and the forever-faithful bulls is to attribute the disappointing results to the economic environment.  While that may be true to some extent - CBRL traffic does track Vehicle Miles Driven quite closely - the company is clearly failing to increase usage.  As you can seen in the chart below, CBRL has only generated positive traffic in 3 of the last 19 quarters. 


Versus comparisons easy and difficult, traffic continues to decline.  Yet management continues to raise menu prices every quarter.  While CBRL core users generate 80% of their revenues, it’s imperative to keep giving them a reason to come back more often.  Unfortunately, raising prices on you core customer is not a long term strategy that will drive increased customer visits.  The data bears this out; two-year traffic trends continue to show no indication of an inflection in traffic trends.  Two-year average traffic trends declined 80 basis points to -2.1% in the third fiscal quarter versus -1.9% in 2QFY11.  This trend has been negative as far back as the eye can see.


CBRL - A CONCEPT IN DECLINE - cbrl traffic versus miles drive



We will see what management has to say on the call later today, but I would be surprised if there are any plans being implemented to increase customer visits that have not already been discussed.  The pressing question of the day is why management believes they can raise prices 3% on a low income customer that is seeing its disposable income decline.



Howard Penney

Managing Director

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  • CBRL - Q3 EPS of 58c misses by 8c. Revenue of $582.5m misses.
  • BEEF PRICES - Cash cattle have fallen 13 percent since the spring highs, and the decline represents $150 reduced value in the total price of a market-ready steer.  Demand for both pork and beef was called gloomy last week and lower fed cattle prices helped packers regain some margins on slaughtering and processing. The seasonal expected boost in demand has failed to materialize for beef - CattleNetwork
  • Sandwich giant Subway is testing a more upscale format called Subway Café, which the company hopes will address the needs of franchisees looking to open in office buildings and other more high-end venues - NRN
  • The National Restaurant Association Restaurant, Hotel-Motel Show kicks off Saturday at Chicago's McCormick Place. 
  • RRGB - Strong follow thru from last week performance on accelerating volume
  • GMCR and PEET continue to trade higher on strong volume
  • JACK - continues to struggle to gain traction
  • CHUX - Strong follow thru following a better that expected quarter






Howard Penney

Managing Director

CHART OF THE DAY: The Last Stand of the Equity Bulls


CHART OF THE DAY: The Last Stand of the Equity Bulls - Chart of the Day

The Last Stand of the Equity Bulls

“There are not enough Indians in the world to beat the 7th Cavalry.”

-George Armstrong Custer


I’m in the middle reading Nathaniel Philbrick’s book, “The Last Stand”, which is an account of General George Custer’s infamous defeat at the Battle of the Little Bighorn.   Even a novice in American history knows the outcome of June 25th, 1876, a day in which the 7th Cavalry Regiment was soundly defeated by the combined forces of the Lakota, Northern Cheyenne, and Araphao people on the Montana plains.


In total, according to archeologist reports, the 7th Cavalry suffered a 52% casualty rate.  The five companies that were directly under the control of General Custer fared much worse.  Near the end of the battle, Custer, and the troops directly under his control, found themselves in a weak strategic position on a hilltop, which would become known as Last Stand Hill.  According to almost all accounts, the Lakota completely annihilated 100% of Custer’s troops within an hour of initial engagement.   


Ironically, despite the inauspicious ending to his military career, George Armstrong Custer was probably one of America’s most celebrated cavalry commanders of his era.  While he finished last in his class at West Point, Custer had a meteoric rise in the Union army and at the age of 23, three days prior to the Battle of Gettysburg, was promoted to Brigadier General. 


At Gettysburg, Custer was credited with leading a mounted charge of the 1st Michigan Cavalry.  This charge halted the Confederate momentum at the Battle of Gettysburg, which would become known as the turning point of the entire Civil War.  Not only was Custer present at General Robert Lee’s surrender at Appomattox Court House, but the table on which the surrender was signed was given to Custer as a gift for his wife with a note from General Sherdian praising Custer’s bravery and his key role in the Union victory.


Perhaps, though, some of Custer’s early successes gave him some false confidence as it related to future military engagements.   According to reports from The Battle of the Little Bighorn, General Custer reportedly said the following shortly before his death:


“Hurrah boys, we’ve got them! We’ll finish them up and then go home to our station.”


With the history lesson complete, reading the story of Custer and the Battle of the Little Bighorn made me think contextually about the stock market.  In essence, I can’t help but wonder after a +95% move in the SP500 from the lows of March 2009, whether this is The Last Stand of the Equity Bulls.  Certainly, both price action and recent data suggests we are at a critical juncture.  As well, and not dissimilar to Custer, there is likely an over confidence bias pervading the stock market due to the expedited two year move off the bottom. (LinkedIn anyone?)


Just like the cavalry, we’ve been sounding the warning trumpets of our key 2011 investment theme that Accelerating Inflation will lead to Slowing Growth.  No doubt, we’ve been early sounding the trumpet, but the view is now playing out in spades.


A key tell for this theme has been the price of copper, which is down just over -10% on the year.  Dr. Copper is perhaps one of the most predictive markets for gauging future economic growth, especially from China, a nation that consumers 40% of the world’s copper.  In the most recent data from China, refined copper imports into China were down in April by -48% year-over-year and -17% sequentially from March.  On the LME, copper inventories are up +34% from their December 2010 lows.


In other industrial metals, similar trends are in place.  Lead inventories are up +53% this year to the highest level since February 1995, aluminum stocks are at near record highs and up +11% for the year, and zinc inventories are up +21% in 2011 and reached a 16-year high on May 18th.   Other commodities are signaling the same via price action with lumber down -28% in price in the year-to-date, rubber down -7%, and coal down -6%.  In aggregate, the commodity complex is clearly telling us that global growth is slowing.


While the most recent quarter of corporate earnings in the United States was decent, results, broadly, were characterized by margin compression.   This was a call our Retail team, led by Sector Head Brian McGough, was early and right in calling.  The bell weather indicator of cost inflation this quarter was Gap Stores, who cut their full year earnings estimates from a range of $1.88 to $1.93 per share, to a range of $1.40 to $1.50 per share due to “heavy cost pressure”.  Collectively, the “cost issue” was reflected in the number of quarters that “beat” earnings this quarter.  Incidentally, beats were down to the lowest level since Q4 2008 at 59.5%.  


With a couple more quarters of FIFO accounting and tough commodity input compares ahead for the stock market, the valuation / earnings growth story becomes less compelling for equities, especially in the context of a slowing top line.  Globally, slowing growth is being driven by the emerging world fighting inflation, with the most recent evidence being Chinese PMI coming in at a 10-month low.  In Europe, slowing growth is and will continue to come from massive austerity measures that are being implemented to, hopefully, head off massive debt restructuring.  While in the U.S., the consumer is facing a serious retrenching with U.S. average weekly earnings on a negative trend, unemployment numbers breaking out to the upside, and home prices continuing to be in free fall.


Despite the likelihood that corporate margins continue to compress in the coming quarters, which will continue the trends of slowing earnings momentum, those bullish of U.S. equities argue that yields on fixed income are so low that equities still offer a compelling risk / reward.  On some level we agree, as we’ve already made the case for the Fed to remain Indefinitely Dovish and James Bullard, the President of the St. Louis Fed, signaled as much when he said in a speech last night, “past behavior of the FOMC indicates that the Committee sometimes puts policy on hold.”


Being on hold is of course one thing, but not extending Quantitative Easing is quite another.  It is the later point that we believe the The Last Stand of the Equity Bulls is predicated upon.  Unfortunately, given the fact that reported inflation in the U.S. is actually set to accelerate, it seems unlikely that the Fed will re-up on Quantitative Easing in the short term.


Hurrah, equity bulls! Hurrah!


Keep your head up and stick on the ice,


Daryl G. Jones

Managing Director


The Last Stand of the Equity Bulls - Chart of the Day


The Last Stand of the Equity Bulls - Virtual Portfolio