May 27, 2011






  • Genesco’s Lid’s business continues to outpace its other concepts growing over 40% in Q1 and now accounts for more than 30% of total sales. One of the key initiatives in this higher margin segment is the company’s new‘er’ team sports concept that it has been working on closely with Nike – in fact, the company is one of Nike’s largest team dealers. In addition, the company is beginning to penetrate smaller markets via its rollup strategy of smaller mom and pop team stores gaining additional access to smaller teams at both the high school and college level.
  • In the wake of anomalous weather events in April, management of Fred’s Department Stores noted a trend shift back toward basic and consumable products during the quarter compared to a higher discretionary merchandise higher margin mix realized over the last three quarters. The company also noted that more significant than weather was the impact of higher fuel prices on both freight costs and customers during the quarter.
  • Continuing its voracious appetite for increasing square footage, RUE highlighted its plan to add approximately 110 new stores over each of the next two years implying ~15% annual growth. With one of the smaller formats in teen retail at an average size of 5,000 sq. ft., management highlighted that some of the company’s top performing stores are located in small population suburban locations where they are the only teen retailer in town. Interestingly on the contrary to other retailers, RUE saw no difference in traffic patterns between their outlet vs. strip vs. mall-based locations.



Foot Locker Implements Organizational Changes - The company announced on Thursday a number of organizational and management changed designed to strengthen its retail store and direct-to-customer business units. Effective July 1, Richard Johnson, who currently serves as president and CEO of Foot Locker U.S., Lady Foot Locker, Kids Foot Locker and Footaction, will be promoted to EVP and group president of retail stores. He will also oversee all of the company’s domestic and international stores. The direct-to-customer business unit, under the new organizational chart, will now report directly to chairman, president and CEO Ken Hicks. Current EVP and CFO Robert McHugh will undertake new duties as EVP of operations support and be responsible for information systems and technology, real estate, logistics and sourcing. “This senior management reorganization will allow us to focus our key business units on improving our execution and continue to build on the success of our businesses,” Hicks said in a statement. “In particular, consistent with our strategic priorities, it will also enable us to strengthen our brands and put more emphasis on our high potential growth areas of dot-com and international development.” <WWD>

Hedgeye Retail’s Take: This is not a move resulting from poor financial management and an impending blow up. Quite the opposite; financial acumen has never been a core part of FL’s MO at the business level – only financial engineering sent down from above starting in the destructive Hartman years. With the direct-to-customer business now accounting for nearly 10% of total sales up from just 7% in ’08, getting the CFO in the ops side of the house makes sense to us.


Gap Enters Italy - In line with its bullish international expansion plan, on June 2, Gap Inc. will open its first outlet store inside the Vicolungo Outlet Center near Milan. The 7,560-square-foot space will carry Gap staples, including jeans and logoed sportswear, as well as seasonal assortments for men, women, kids and baby. “We are excited to bring the value expression of Gap brand to Italy for the first time and provide Italian consumers with the opportunity to purchase products designed specifically for Gap¹s fashion-minded, value-driven customer,” said Stephen Sunnucks, president of Gap Inc. Europe and Strategic Alliances The outlet, which comes six months after the inauguration of Gap’s first flagship in Milan, represents the “fastest execution of our international strategy to date,” said Sannucks. Moreover, fueled by the buoyant retail start, later this year Gap Inc. will inaugurate a store in Rome and two venues in outlet centers. Gap Inc. currently operates more than 370 stores through its outlet channel and over the last four years, its international outlet business skyrocketed 500 percent across the United Kingdom, Canada and Japan. Gap Inc. plans further growth in this channel with about 25 additional global stores in 2011 and through new market, such as China in 2012. <WWD>

Hedgeye Retail’s Take: International is the part of Gap, Inc that remains underappreciated. They actually have a real strategy and plan here, and it’s playing out. Unfortunately, it’s too small to matter – at least yet.


Syms Explors Strategic Options - Shares of Syms Corp. soared more than 27 percent Thursday after the off-price retailer known for its fondness for educated consumers said it had begun to explore strategic options. Syms said it has “initiated a process to explore and evaluate various potential strategic alternatives, which may include a possible sale of the company.” In addition, Syms said it hired Rothschild Inc. as its financial adviser to assist in the process. The company said there was “no defined timetable” for the review. According to a credit source, Alvarez & Marsal, the consultancy that specializes in restructuring, earlier this month completed a project for Marcy Syms, the firm’s chairman, president and chief executive officer. An Alvarez & Marsal spokeswoman didn’t return a call requesting comment. Syms acquired Filene’s Basement, now a wholly owned subsidiary, in a bankruptcy court auction in 2009. It operates 47 off-price stores under the Syms and Filene’s Basement nameplates, including five co-branded Syms/Filene’s Basement stores. <WWD>

Hedgeye Retail’s Take: Timing is solid. With inventories starting to build in the channel while sitting at the high end of a men’s apparel cycle, Syms gets even better buys headed into the summer and fall, which should optimize its margin structure and valuation.


Richemont Plan Aggressive Expansion - Luxury goods group Richemont is planning a significant expansion of its workforce over the next two years to cope with rising demand, sources reported. Richemont's deputy chief executive Richard Lepeu revealed to a Swiss media that the company is seeking to extend its operations following the release of a strong financial report. Lepeu told the press that the company would need between 850 and 900 new staffers in 2011, adding that a similar number would be required the following year.  He also stated that the firm was set to invest around 2.58 billion euros (£2.23 billion) in its production and distribution facilities as this is one area which is hindering Richemont's development. <FashionNetAsia>

Hedgeye Retail’s Take: Huh? A company that actually invests in taking on new employees to grow its business instead of simply making the existing ones work at unsustainably high productivity rates? There’s something you don’t see every day.


BCBG Vendors Unpaid - While BCBG Max Azria Group Inc. is negotiating new debt agreements, its vendors and creditors are waiting. The fashion firm, with interests ranging from mass to luxury, is at work on a deal to refinance its debt and untangle a web of interconnected financial arrangements, leaving vendors and creditors wondering when they’ll be receiving payments. Credit sources told WWD the firm has been slow in paying creditors, with some invoices unpaid since February. And last week, the fashion house told creditors BCBG had “suspended” all payments pending completion of new financing arrangements, according to one credit contact. BCBG has been trying to complete a deal to secure a new $230 million term loan to refinance a portion of its debt. A $94 million first-lien term loan comes due on Aug. 10, but that date would be moved up to June 16 if the $230 million term loan isn’t completed. If and when it’s refinanced, its maturity would extend until 2015. The company hopes to complete the refinancing by June 14, in advance of the deadline. According to credit sources, BCBG last August refinanced a $460 million asset-based loan through 2014. However, the ABL requires a “timely” refinancing of its first-lien term loan. <WWD>

Hedgeye Retail’s Take: As we all know, the shame here is that once a company gets tight on its payment and seeks protection, vendors naturally restrict product flow. That’ in turn, propagates weak inventory positioning and a severe competitive disadvantage.


Enter Rachel Zoe - When Rachel Zoe heard the long list of retailers that ordered her first collection for fall, she went numb. No wonder. Nordstrom, Saks Fifth Avenue, Bloomingdale’s, Intermix, Selfridges, Kirna Zabête and have purchased her label, Zoe said, though she has “no clue” what annual sales might be for the Li & Fung licensed brand. Neiman Marcus is launching the celebrity stylist’s sportswear, handbags and shoes in July at all 41 doors plus online and at Bergdorf Goodman. The rollout across the entire Neiman Marcus Group is a rare endorsement of a fledgling brand. Neiman’s backing is what brought her to a board room of the Ritz-Carlton hotel in Dallas with Mandana Dayani, her vice president, general counsel and chief wrangler, and Ken Downing, senior vice president and fashion director of Neiman Marcus. “She is a real talent,” Downing said. “She understands the customer and she’s brought an effortless chic to the collection. The clothes are going to appeal to women of many ages. And, she’s got an amazing name.” fashion jewelry for fall 2012. “I wish it were for spring,” she said wistfully. “I am dying to do jewelry. I’m gagging.”

Hedgeye Retail’s Take: Just goes to show how low barriers to entry are in this business. Incumbents need to invest to stay relevant. You listening Jones?


Inditex Targets Tailored - Spanish apparel retailer Inditex is planning to launch more tailored products across the emerging markets particularly in the Southern hemisphere, sources reported. Owning a number of retail chains including Zara and Bershka, the retailer is creating lines designed specifically for customers in key markets such as Brazil and South Africa. Zara currently operates 30 stores in Brazil and expects to open outlets in South Africa and Australia this year. In an interview with the Financial Times, Inditex's chief executive Pablo Isla claimed that it is important to offer consumers seasonal clothes in all regions across the world. <FashionNetAsia>

Hedgeye Retail’s Take: This company has earned the right to sell just about anything it wants. Its turn times and consistency of results dwarf US standards.


Japan Deflation Run Over - Japan’s policy makers, striving for more than two years to end deflation, refrained from calling a victory after prices rose in April, with an economic recession damping the nation’s outlook. Consumer prices excluding fresh food rose an annual 0.6 percent, the first gain since 2008, the statistics bureau said. Economy Minister Kaoru Yosano indicated today’s data don’t signal sustained gains. Japan’s challenges were highlighted by Fitch Ratings cutting its sovereign-rating outlook, citing the risk of rising debt on post-earthquake reconstruction.  The Bank of Japan is poised to keep its monetary stimulus, contrasting with counterparts from China to India that are tightening policy to stem inflation. Prices climbed in Japan after global energy and food costs rose and retailers suffered product shortages in the aftermath of a record earthquake and tsunami that caused the economy to shrink in the first quarter.  The increase in consumer prices in April, the first since 2008, matched the median estimate in a Bloomberg News survey of 25 economists. Retail sales fell 4.8 percent from a year earlier in April, the Trade Ministry said in a separate report released today, underscoring the impact on consumers from the March disaster. The drop reinforces forecasts for gross domestic product to shrink for a third straight quarter in the three months to June. <Bloomberg>

Hedgeye Retail’s Take: Not sure if this matters, but Tiffany’s Japan comps were up in April. It’s going to take a heck of a lot more than a month or two to reverse a long-term decline that’s made even more severe by a near term event of nature. But interesting to note the coexistence of the two datapoints.




The Macau Metro Monitor, May 27, 2011



The MGM China IPO was priced at HK$15.34 (US$1.97), the high end of the range.  The company sold 760MM shares, raising HK$11.66 billion ($1.5 billion).



RWS' executive chairman Tan Sri Lim Kok Thay said that barring any incidents, the resort is on track for its Phase Two opening and he is confident that it will attract more than 16MM visitors in 2011, up from last year's 15MM.  Starting with the opening of the maritime museum in 3Q, other attractions to open under Phase Two include the Equarius hotel, an oceanarium and a water theme park.



Macau's unemployment rate for February-April 2011 was 2.7%, unchanged from the previous period (January-March 2011).  Total labor force was 334,000 in February-April 2011 and the labor force participation rate stood at 71.2%. 




  • The Coffee trade continues - CBOU, GMCR, PEET and KKD continue to power ahead on good volume
  • JACK sales remain down - LA Times - The article talks largely to analysts and notes that the company's attempts to attract a slightly wealthier client base might actually backfire.  Maybe the LA Times should be talking to analysts that know that they are talking about, because the strategy is not to go after wealthier client base.  Here are the comments from the CEO speaking at the latest conference “Lastly I want to reiterate that our number one priority this year is to drive sales and traffic at Jack in the Box through investments we made to enhance our food, service and facilities. We recognize that these investments may depress margins in the near-term but should build sales and brand loyalty over the longer term. To recap the steps we are taking, we are investing resources to improve many of our top-selling core products and continuing to emphasize both premium products and value promotions in our marketing calendar. We're investing resources to improve the guest service by delivering a more consistent experience. And Phase two of this system-wide plan is focusing on improving speed of service and other key drivers of guest satisfaction.”
  • Yesterday, BWLD was added to short term buy list at Deutsche Bank
  • THI is still MUM on CEO’s departure; down for the second day on accelerating volume
  • MCD was weak in a strong tape…..  If the USA prints a 3% SSS for the month of May that suggests traffic is slowing
  • Overall Casual Dining had a great day yesterday
  • RRGB - The good news is getting baked in
  • CAKE - Up on strong volume and Im negative
  • RUTH and EAT (two names I like) were up on strong volume
  • Corn prices rose for a second day Thursday on concerns that heavy rains could hurt this year's harvest.  Corn rose 0.4%, while wheat rose 2.3% and soybeans rose 0.6%. Wet weather in parts of the Midwest has made it difficult for farmers to plant corn, even as demand remains high around the globe. 
  • Google has partnered with MasterCard and Citi in its Wallet application, which is designed to be a combination credit card, rewards program and coupon case when customers tap their smartphones at the register. Also on hand were Google's posse of retail and restaurant partners, including Subway, American Eagle and Macy's, which will enable Wallet payments and offers when the platform launches this summer. 




Howard Penney

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“Governments everywhere are still trying to cure by public works the unemployment brought about by their own policies.”

-Henry Hazlitt (Economics In One Lesson, page 208)


I suppose it’s only fitting that Henry Hazlitt revised his million-plus copies sold of “Economics In One Lesson” in June of 1978 (originally penned in 1946). That’s when the Western world was swallowing stagflation whole. That was shortly after the French introduced the G-Fluff.


G-Fluff, formerly known as the G-6 Central Planning Board (created by France in 1975), is now affectionately referred to by professional politicians as the G-8.


The G stands for Groupthink. The G-8 currently consists of Canada, France, Germany, Italy, Japan, Russia, United Kingdom, and the United States. Not to be outdone, The EU also sends their commissioners for 3 hour lunches that serve up piping hot bs, with broccoli.


This year’s G-Fluff conference is being held in a hoity-toity town on the northwestern coastline de la belle Provence. Les Obamas et les Sarkozys (hearing there may be more than a few of them – with adjoining rooms)… La rencontre… et la culture… sans le DSK.


BREAKING HEADLINE (out of the G-8 conference this morning):




Mais, qu’est-ce que c’est Le Recovery? Que’est-ce qui se passe avec Le Downside?


(Before someone goes all French socialist on me – for the record, my Mom’s side of the family is French-Canadian, and I went to French school until the 5th grade, learning how to read, write, and count in French before the English pig stuff.)


Back to Le Recovery et Le Downside


In Spain the socialists are running a 21.3% unemployment rate, so let’s not talk about that outcome of le debt financing les deficits – Spain isn’t allowed at the G-Fluff conference anyway.


Let’s talk about le USA.

  1. Yesterdays US jobless claims report rose 15,000 week-over-week to 424,000
  2. Ze rolling claim (the 4-week moving average) held at 439,000 – a new YTD high!

When considered on 1 of the 2 key measures of le success of Le Bernank (1. Full Employment, 2. Price stability), this is not good. Actually, it’s really bad – because our math suggests that for the unemployment rate in this country to recover, we’ll need to see weekly jobless claims consistently below 385,000.


Le Bernank et L’Obama get this. That’s why Le Bernank’s key statement less than a month ago at his Presser was:


“It’s not clear that we can get substantial improvements in payrolls without some additional inflation risk.”

-Ben Bernanke, April 27, 2011


In other words, without Le Quantitative Guessing (and ze Inflation born out of it) – we do not know what to do.


May I suggest two eggs, side by each, pour ton fluffy dejeuner Madame Obama?


This entire Keynesian experiment and my mockery of it is a much more serious joke than I can muster this morning. For the last 6 months Hedgeye has been warning that a policy to inflate will structurally impair (slow) economic growth.


I’m actually getting tired of hammering my hockey knuckles into my keyboard every morning – as de French-Canadian goalie from “Slapshot”, Dennis Lemieux, might say – SLOW-z… SLOW-zzz – de Inflation slow-ZZZ de growth!


Back to the Global Macro Grind


The US Treasury Bond market is busting a move to the upside again this morning. US Treasury Bond yields are getting crushed. The 2-year is trading at 0.48% and 10’s are testing a breakdown of the 3% line. The Yield Spread (2-year yields minus 10’s) continues to compress (+258 basis points wide, down another 6 basis points week-over-week).


What does this mean?

  1. Growth expectations are slowing
  2. Inflation expectations are slowing

We call this Deflating The Inflation (Hedgeye Q2 Macro Theme), and we can send you the 50 page slide deck on how it works. The two long positions we have on to reflect this view are bullish on the long-end of the bond market (TLT) and long a US Treasury Flattener (FLAT).


Yes, we are aware that Le Bernank has to end le QG2 in 6 weeks. We are also aware that when this unprecedented Keynesian experiment ends, jobless claims in America could go a lot higher. I don’t have to wonder what Henry Hazlitt would say about that in June 2011.


My immediate-term ranges of support and resistance for Gold, Oil, and the SP500 are now $1511-1538, $96.89-101.57, and 1, respectively.


Have a great Memorial Day weekend. God Bless America. And best of luck out there today,



Keith R. McCullough
Chief Executive Officer


G-Fluff - UST Yield


G-Fluff - port2

The Last Stand of the Equity Bulls

This note was originally published at 8am on May 24, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“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


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