Gopher Shrugged

“It’s been proven that every business depends on every other business… so everybody ought to share the burdens of everyone else.”

-Orren Boyle (Atlas Shrugged)


While it’s hard to pinpoint exactly who each character in today’s emerging socialist state would be in Ayn Rand’s “Atlas Shrugged”, I’m very confident that Tim Geithner could audition for more roles than one. He’s trained for this for 47% of his life.


In Chapter 3 of “Atlas Shrugged”, titled “The Top And The Bottom”, Rand introduces the largesse of Big Government Intervention via a political panderer by the name of Orren Boyle who “had appeared out of nowhere, five years ago, and had since made the cover of every national magazine…”


Ah, to be on 60 Minutes… my life would finally have purpose…


“Disunity,” drawled James Taggart, “seems to be the basic cause of all social problems.”


“You said it, Jim. Disunity that’s the trouble.”


That conversation (pages 44-45) between a modern day bailout socialist (James Taggart) and Geithner (Orren Boyle) pretty much sums up how this country’s central planning board of directors thinks about things – in real-time.


Real-time? Yes We Can. Check out these comments yesterday by The Gopher (Geithner) about this country’s fiscal affairs:

  1. “Dark forces are waging a war of attrition against efforts to strengthen regulation of the financial system…”
  2. “They’re trying to starve the agencies of funding so they can’t enforce protections…”
  3. “Right now this is all theater… I think there are some people pretending not to understand…”

No – I could not have made up these quotes if I tried. Nor do I find them funny. Political “theater” like this is a national embarrassment. Our moving more and more to the left everyday has every capitalist in America subliminally losing confidence in how this is all going to end.


“Who Is John Gault?”


This is the world’s 2nd most influential book of all-time (according to a 1991 survey by the Library of Congress) next to the Holy Bible for good reason. There are socialists and there are capitalists. And there are politicians in your life - at work, school, and play – angling … and scheming… somewhere in between the socialist-capitalist spectrum.


Never mind “Who Is John Gault?” – maybe a better question is who are you in today’s edition of Gopher Shrugged? It’s an important question to ask yourself as we extend and pretend on the definition of a true free-market society.


Back to the Global Macro Grind


US stocks and commodities we’re up yesterday because the US Dollar was down. If you want to fix this “disunity” thing – for short-term political resolve - that’s pretty much the only way to do it (if you think getting stocks up is the answer that is). All these fat cats have to do is blow up the hard earned credibility embedded in America’s currency.


The problem with this solution to the problem – the problem that they created - is that when you abuse it (and I mean burn it), the “reflation” trade turns into The Inflation (and some loony guys making Reardon Macro in New Haven said INFLATION SLOWS GROWTH).


That’s the problem.


Dollar DOWN a smidgen yesterday = commodity inflation UP big time (up +1.5% on the CRB Commodities Index – a basket of 19 commodities). So take that “theater” at the pump this Memorial Day weekend folks, and like it.


There’s seemingly no juice left in The Gopher’s “agencies.” Market volumes are drying up. And the “dark forces” of market gravity associated with those God blessed things called supply, demand, and price have US stocks down for 4 consecutive weeks.


What are we pee-ons who are starting our own companies, on our own sweat capital, to do? Easy answer. Raise Cash in our portfolios so that we can be there … once again - like we were in 2008… to hire and creatively destruct all that is wrong with central planning.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $96-89-101.57, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Gopher Shrugged - EL geithner


Gopher Shrugged - VP


The Macau Metro Monitor, May 26, 2011




Former Sands China CEO Steven Jacobs has filed new papers against LVS and Chairman Sheldon Adelson, alleging that Adelson tried to intimidate the Reuters international news service into retracting its story about the company and its relationship with alleged triad member Cheung Chi Tai by falsely claiming it was defamatory.  Jacobs' lawyers also mention a May 2010 memo from David Law, Sands China’s collection manager, who discussed sending a US$4.8 million (MOP38.4 million) company check by courier to Las Vegas; this goes against Sands' claim that Jacobs lied about the company sending money abroad via a Macau courier.


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TODAY’S S&P 500 SET-UP - May 26, 2011


Mean reversion bounces to lower-highs across all of the big macro stuff that matters (Euro, Oil, SPX futures, etc), but nothing has changed in terms of the big lines in the sand that ultimately matter – primarily USD support and UST yield resistance.

  1. USD immediate-term TRADE range = 75.65-76.26 (wants to make higher-lows and higher immediate-term highs)
  2. Euro immediate-term TRADE range is tight = 1.39-1.41, with $1.41 being its new TREND line of resistance
  3. Oil immediate-term TRADE range = 96.89-101.57, so we’re looking at shorting oil ahead of another USD rally


As we look at today’s set up for the S&P 500, the range is 19 points or -0.79% downside to 1310 and 0.65% upside to 1329.









  • ADVANCE/DECLINE LINE: 934 (+1172)  
  • VOLUME: NYSE 961.30 (+10.70%)
  • VIX:  17.07 -4.21% YTD PERFORMANCE: -3.83%
  • SPX PUT/CALL RATIO: 1.30 from 1.84 (-29.07%)



  • TED SPREAD: 20.89
  • 3-MONTH T-BILL YIELD: 0.06%
  • 10-Year: 3.13 from 3.12
  • YIELD CURVE: 2.61 from 2.61 



  • 8:30 a.m.: GDP Q/Q: 2.2%, prior 1.8%
  • 8:30 a.m.: Net export sales, cotton, corn, soybean
  • 8:30 a.m.: Jobless claims, est. 404k, prior 409k
  • 9:45 a.m.: Bloomberg consumer comfort, est. (-47.0), prior (-49.4)
  • 10:30 a.m.: EIA natural gas storage change, est. 95, prior 92
  • 1 p.m.: U.S. to sell $29b 7-year notes 


  • Google holds press conference in NY; may discuss mobile- payments system, Digital Trends says
  • NY Fed said to probe Goldman Sachs’s mortgage allegations: FT
  • Marriott expects to recognize several hundred million dollars in cash tax benefits from the spin off of its timeshare business
  • Bank of America pressured by states to change mortgage practices - Bloomberg
  • CEO Mark Zuckerberg says Facebook "[doesn't] have the DNA to be a music company or movie company" - GigaOM
  • Starbucks raises bagged coffee prices by 17% - WSJ - The WSJ reports that the price increase will take effect 12-Jul, and comes after they raised supermarket bagged coffee 12% in March.






  • Global Food Production May Be Hurt as Climate Shifts, UN Forecaster Says
  • Oil Falls From Two-Week High in New York on Bets That Recovery Is Too Slow
  • Wheat Gains for Second Day on Concern Dry Weather in Europe Damaged Crops
  • Gold Falls as China Bond-Buying Speculation Curbs Demand; Silver Declines
  • Sugar Rises for Third Day on Indications of Stronger Demand; Coffee Gains
  • Copper May Rise in London Trading on Prospects for U.S. Demand on Growth
  • Platinum Surplus Seen Jumping Eightfold After Japan Quake Cuts Car Output
  • Gold Companies May Face $100 Billion Liability for Ill South Africa Miners
  • Rusal Leads $10 Billion Borrowing in Metal Producer Revival: Russia Credit
  • Rail-Car Orders at 13-Year High Ratify Buffett’s U.S. Bet: Freight Markets
  • ‘Stressed’ Carbon Credits Drawing Record Demand in Europe: Energy Markets
  • Natural Rubber Output Growth to Miss Estimate This Year, Association Says







  • EUROPE: soggy Kleenex this morn w/ DAX, Denmark, and Russia all flagging negative divergences - not what the bulls need to see (sold Sweden)
  • Switzerland calls for phasing out of country's five nuclear reactors - FT
  • Germany Apr Import Prices +9.4% y/y vs consensus +9.9% and prior +11.3%
  • France May Consumer Confidence 84 vs consensus 83





  • ASIA: wicked volatility off yesterdays bombed out lows; Vietnam +3%, KOSPI +2.8% - but China down for 4th day of 4 this wk; India still lags
  • Japan April corporate services price index (0.8%) y/y, (0.1%) m/m









Howard Penney

Managing Director

RL: Great Company/Strategy, Bad Stock



The 4Q print changes nothing related to our long-term call re: $9 in EPS power. But RL’s response to inflation and reinvestment in new product – while positive strategically -- hits our intermediate-term (TREND) model and view. Short-term (TRADE), we wouldn’t touch this name. There’ll be a chance to buy this great business at a far better price.


This is a name where we fundamentally believe in where the company is headed strategically. But with industry fundamentals starting to crack, RL’s valuation simply defying gravity – already representing the $8-$9 in earnings power we think it has over the course of 2-3 years -- and the inevitability of RL’s perennial ‘guide down and smoke’ philosophy finally catching up with it, we’re actually surprised it was not down far more on the day. This is a great brand and a great business. But at $114.70, we don’t think it will be a great stock. We’ll look forward to buying this one back lower.


Changes to our Thesis

We think it’s best to tear this beast apart by duration, and then see how today’s event altered this one way or another.


Long-Term (TAIL): This quarter changed not a thing. Now that RL has complete control of its geographic and product licenses, it can consistently take up product mix to higher end apparel and accessories, take this brand from $15bn at retail up to $20bn. Ultimately we’ll be looking at upwards of $9 in EPS power and 25% RNOA within 3-years. In fact, it’s quarters like this where RL is not afraid to take it on the chin with margins in order to sustain profitable top line growth in the outer years that separate it from the pack.


Intermediate-Term (TREND): Definitely some moving parts here. The company may have only missed the consensus by $0.04, but it missed our estimate by $0.20. Every line of the model was spot on, except for wholesale margins. Part of this was more delivering from the holiday shift than we anticipated (part of which should make itself whole in the current quarter). In addition, we were definitely not anticipating RL’s response to inflation. Specifically, it only took up prices on high end product, and left prices on lower/mid product unchanged – hence absorbing the margin squeeze. On one hand we could argue that this is good for retail partners as RL is being rational and is not strong-arming the chain. But on the flip side, it will compress the perceived value gap between its’ product and that of the competition. Good for Ralph, bad for competition. Questionable for the industry.


It also invested in a new high-end denim label for both men and women as well as a its bedding and bath business. Lesser companies would pull back on investing in this kind of environment. Not RL. That said, we still need to take down our EPS estimates for this year – though it does not jeopardize our $9 3-year number.


Immediate-Term (TRADE): We wouldn’t touch RL here on a TRADE duration. We’re quite surprised it did not trade off more meaningfully on this miss. This company never misses. Check out the chart below. It shows a few things…a) for a given quarter, where the Street’s estimate were before management guided, b) where estimates shook out after they guided, and c) what RL ultimately printed. That’s OK if you’re like VFC where you do it by a few pennies at a clip. This is the ultimate ‘guide down and beat’ company. But RL does it by 20-30%. The good news is that it’s almost always to the upside. But that has become the norm. The bad news is that the sentiment has gotten to a point where RL needed to beat by a certain amount to avoid going down. With the stock having outperformed retail (RTH) by 12% and the S&P by 15%, respectively, for the year-to date, we’ve been concerned that this would catch up with them. Given the weakness we expect to see in the broader retail space throughout the remainder of this year, we can’t imagine that anyone will give retailers’ multiples – even RL’s – the benefit of the doubt.


RL: Great Company/Strategy, Bad Stock - Snag1




  • Sales: 1.4 billion +7%
  • Wholesale segment: +2%
    • Strong growth in U.S.  wholesale shipments
    • Continued growth in foreign department stores
      • Offset by a planned decline in Japanese wholesale shipments
      • Softness in some European specialty stores
      • Wholesale operating income: 136 million
        • The operating profit margin declined 670 basis points
        • The decline in margin rate is primarily attributable to the cost of goods inflation, lower Japanese wholesale shipments and continued investment in new merchandise categories.
        •  Retail:+14%
          • Comparable store sales increased +7% 
          • (excluding sales at the Asian stores and concessions shops that we assumed in the fourth quarter of fiscal 2010. *These sales will be included in  comps getting in the first quarter of fiscal 2012)
          • Retail segment operating income: +40%
            • Operating margin improved 80 basis points
            • Licensing:  -6% 
              • Higher fragrance licensing revenues were more than offset by a decline in international licensing revenues related  to the South Korea transition. Consolidated inventory was at 39% at the at the end of the fourth


  • Total Comparable Store Sales
  • Consolidated Comps up +7% reflecting:
    • 8% increase at factory stores
    • 10% growth at Club Monaco
    • sales increased 21%
    • The 3% decline in Ralph Lauren comps during the first quarter is due to HSD reduction in Japanese operations. Excluding Japan, Ralph Lauren comps were flat


  • Gross Margin 56.8%
  • Some of the inflationary cost of goods pressure we experienced in the fourth quarter was offset by a higher level of full price selling at most of the retail concepts and this seasonal variation in overall channel mix.


  • Operating Expenses: $693 million +12%
  • Operating expense margin rose 240 basis points to 48.6% in the fourth quarter reflecting incremental expenses associated with the recently transitioned South Korean operations,


  • Operating Income:117 million -32%
  • Primarily do the calendar shifts affecting the comparability of the period.


  • Effective tax rate in was 34.4%
  • Was approximately 250 basis points higher


  • Net income: +$73 million
  • Impact from Japanese earthquake was $0.02 on 4Q earnings.


  • Balance Sheet
  • Inventory: +39% reflecting;
    • Inventory this time last year was very low. So the comparable period was understated and this period inventory overstated.
    • The transition of the Southeast Asia and greater China region and South Korean inventory was incremental this year versus last year.
    • The remaining quarter of the increase is attributable to cost of goods inflation and foreign-currency  dynamics.
    •  CapEx:~$255 million reflecting;
      • Support  of retail stores
      • Wholesale shop development worldwide
      • Continued infrastructure investment.
      • Repurchased approximately 6 million shares of stock for an aggregate of 578 notary during the year including two million shares for $247 million during the fourth quarter.
      • board authorized an additional $500 million for share repurchase
        •  Cash position: 1 billion


  • Other 
  • Next 3 years company intends to invest over $1 billion in total capital to continue advancing  strategic objectives.
    •  $500 million in capital we intend to invest over the next 3 years for
    • Concession shops
    • Continued development of global e-commerce
    • *Nearly 70% of this capital will be allocated to international markets.
    • Company believes it will generate over $3.5 billion of EBITDA over the next 3 years
    • The company finished assuming control of distribution in South Korea during the fourth quarter
    • Completed the last phase of multi-year mission to bring Asian operations in-house


  • Japan
  • China and South Korea concessions shops performed better than anticipated during the quarter. Japan sales were down approximately 30% in the weeks following the  earthquake and tsunami compared to the relatively flat performance in the quarter to date period prior to the disaster.


  • Easter Shift
  • There was an extra 53rd week that in results last year in the fourth quarter and a later Easter week this year that shifted that holiday sales growth  into the first quarter of fiscal 2012 versus the fourth quarter that we are reporting now.
  • There was also the timing of the high volumes sales week post-Christmas that fell within the third quarter of fiscal 2011 compared to the fourth quarter of fiscal 2010.
  • On a normalized calendar basis, the shifts negatively affected sales growth in the quarter by approximately 10 full percentage points.


  • Cost pressures
  • Company made pricing adjustment by brand and region to help mitigate inflationary pressures.
    • Pricing change does not completely offset higher costs.
    • "In general, we've determined not to not to pass on the full impact of our higher cost of goods and the magnitude of inflation is such that we do expect our gross profit margin and our operating margin to be down in 2012."
    • "We believe the customer, the consumer will accept some higher prices due to the strength of our brand and the consistent quality of our merchandise but after a decade of apparel deflation the actual customer reaction remains unknown until the merchandise is available for sale in stores."


  • Outlook
  • First Quarter
    • Sales: Increase in the mid 20% range
    • Wholesale expected to grow at low 20%
    • Retail expected to grow faster.
    • Comparable store sales are projected to increase by LDD
    • Operating Margin: flat


  • Fiscal Year 2012
  • Sales: Increase in the mid teens range
  • Retail expected to grow faster than wholesale
  • Operating Margin: down 150bps
  • Tax rate is estimated at 33%
  • CapEx: expected to be 325million




SG&A Growth Spending:

-        Excludes any restructuring charges related to repositioning in China

-        Expect to leverage operating expenses

-        Continue to invest in infrastructure and advertising – expect these to continue


SG&A Flex Dependent on Sales:

-        Retail is growing faster than wholesale

-        Strategy in growing Asia is primarily driven by growing the retail base vs. wholesale distribution

-        Key for the company has been that they have invested on high return opportunities over the last several years, which is what is driving sales today


Input Cost Flow Through:

-        If you look at run-rate for Q3, adj Q4, and Q1 outlook, top-line trend is strong

-        Did not take many price increases in the spring, but have for fall

-        Those increases dependent on price of product and merchandise categories

  • Range from LSD to mid-twenty percent increases
  • Some of bigger cost inflation was realized in lower end of product quality pyramid

-        Believe cost increases will begin to moderate in Spring of 2012

-        Not going to alter cut or quality of product


Pricing by Categories:

-        A bit more cautious in lower end categories where consumers are more sensitive to price inflation

-        Not determined by gender


Club Monaco/Rugby – Int’l Expansion:

-        Club Monaco growing in success

-        Have had many retailers in Europe looking to carry the line

-        The European partners feel that they can carry it in proper distribution channels as well as at stand alone locations – test this February in Browns of London extremely successful

-        Believe CM represents a substantial opportunity in Europe – will be opening first store in Europe in London later this year

-        Rugby expansion also targeted in Europe


Denim Launch:

-        Denim will be reintroduced in 250 stores in US and Canada in both Men’s and women’s

-        the Denim & Supply business in Europe will replace the existing Polo Jeans Co. business closed 4yrs ago


Domestic Business:

-        Historical target of 1/3 of business from domestic/Eur/China increasingly challenged given the strength of domestic business



-        Japan and South Korean business are heavily dominated by department store shop-in-shops

-        In Japan, have seen a very positive response as the company has ‘elevated’ both women’s and kid’s product categories – more logoed pieces

-        In Korea, added a very strong team that came on with acquisition

-        Have been replenishing new inventory over last 5-months

-        Customer has responded well to new fashion

-        Much of demand driven by Chinese coming to Korea for shopping weekends given the currency arb

-        China/Dixon acquisition required RL to build the region from scratch

-        Also more stand alone retail


Expanding Home Category:

-        Began shipping in May

-        Focus on Bed and Bath

-        Have been working hard on this over the last 2-years ramping more recently

-        Have recently added lighting and rugs

-        All changes team has made have been received very well


Margin Outlook:

-        SG&A outlook suggests significant ramp due to Korea build out

-        Also to support new initiatives like home

-        Expanding e-commerce distribution (Europe and exploring Asia)

-        Additional international growth opportunities


Korea Impact:

-        Dilutive in Q4, accretive in F12


Japanese Business/Travel & Tourism:

-        Japanese business hardest hit 2-months following tsunami disaster, travel and tourism still down dramatically

-        Chinese having difficulty obtaining visas to travel to US so going to Europe instead

-        Starting to see improvement in ‘mood’ of Japanese shopper

-        Headline issue is the Chinese tourist shifting from US to Europe where RL doesn’t capture as much business

JCP: Convergence Boosts Conviction

KM re-shorted JCP today. Recall that he covered in advance of storytelling around Ira Sohn today. Apparently, this is not materializing. The margin risk here is meaningful, as it's at the center of the bullseye as the industry margin structure cracks. Check out the $0.12 gap between TRADE and TREND lines. Convergence makes this one of our best shorts.


JCP: Convergence Boosts Conviction - Snag

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