R3: Groupon, JNY, VRA, ZQK



June 3, 2010





  • In the first of what we expect to be a more common trend across retail, Quicksilver decided to remit annual guidance after reporting improved 2Q results. Following expectations for 2011 EBITDA to be flat with 2010 results in Q1, management commented that it didn’t want to focus on the short-term outlook, but instead confirm that ZQK on track to achieve its longer term plan – 5-year that is. To some extent, we have to tip our hat to management for not trying to pretend to know how the 2H is going to play out, but the reality here is that similar to ’08, the spread between expectations and actual year end results is likely to get wider.
  • Despite taking down the back half of the year, Vera Bradley announced an important strategic move on its 1Q call in entering the department store channel by partnering with Dillards. With less than 40 retail/outlet stores, VRA currenly relies heavily on its more than 3,300 independent retailers for distribution. The initial launch at DDS will be in 65 doors and could grow to be as many as 300, but more importantly will lay the foundation for additional partnerships and geographic expansion – something investors are clearly banking on with the stock trading nearly 30x next year’s numbers.



Groupon Files S-1 - Groupon Inc., the fast-growing purveyor of online deals distributed through e-mails and social networking, Thursday took the first steps towards an initial public offering. The firm filed a registration statement with the Securities and Exchange Commission of its intent to go public. Morgan Stanley, Goldman Sachs and Credit Suisse are to be the lead underwriters of the IPO, the date for which hasn’t been set. Some published estimates put the amount to be raised at close to $1 billion. Without disclosing the number of shares to be offered or their price, the Chicago-based company said in the statement that it offers more than 1,000 daily deals to 83 million subscribers in 43 countries and has “sold to date over 70 million Groupons,” according to an introductory letter from Andrew Mason, the firm’s chief executive officer. Among these offers was one in August 2010 in which $50 of apparel from Gap was available for $25. The Groupon was made available to 9.2 million subscribers in 85 North American markets. “We sold approximately 433,000 Groupons in 24 hours, generating over $10.8 million in revenue,” the SEC filing said, adding that since the Gap discount, it’s also featured deals with Nordstrom Inc. The filing didn’t reveal how Groupon’s business broke down by merchandise type or retail channel, but its operating statement revealed that revenues, just $94,000 in its abbreviated first year in business in 2008, mushroomed to $30.5 million in 2009 and then exploded last year, reaching $713.4 million. <WWD>

Hedgeye Retail’s Take: An opportunistic filing in the wake of LinkedIn’s recent IPO success. The company doesn’t even have a date yet, but one look at the financials and it’s easy to see why they were so eager to share. Yes, the company has grown exponentially off a very small base in just two years, but more impressive is the fact that it just booked 90% of last year’s revs in the 1Q alone. We don’t expect the company to wait long before coming public, but for now they’ve certainly stolen the spotlight of pending IPOs.


JNY Acquires Footwear Brand - The Jones Group Inc.’s hands-across-the-water acquisition of U.K. footwear brand Kurt Geiger strengthens both companies’ global footprints and gives the buyer serious clout in the luxury sector. Jones closed on the acquisition early Thursday, paying $350 million in cash, inclusive of debt, to U.K.-based private equity firm Graphite Capital and to members of the firm’s management who held minority stakes. The deal weds two companies already familiar with each other. Geiger, Europe’s largest luxury shoe retailer, has been the distribution partner for Jones’ Nine West brand in the U.K. since 2009. “Strategically, this enhances our distribution and presence internationally,” said Wes Card, chief executive officer of Jones. The acquisition, which gives Geiger entree to the U.S. and Jones a platform in Europe, was financed with cash on hand and is accretive to second-quarter earnings. The existing Kurt Geiger management team, led by ceo Neil Clifford, will remain with the business. Card said the initial plan is to open more Kurt Geiger stores in the U.K., as well as bring the brand to the U.S. through freestanding stores and, through wholesale arrangements, department stores. Asked about store openings, Clifford said, “I can’t be specific, but we’d be disappointed not to start opening in 2012. We’ve already done quite a lot of thinking, and we’ve got a plan.” About 75 percent of Kurt Geiger’s business is women’s footwear, with the balance in men’s, a new market for Jones, and licensing. Card said the firm is still in the hunt for acquisitions and won’t limit its next deals to footwear, even though it now has a “powerful group of companies in the footwear industry.” <WWD>

Hedgeye Retail’s Take: Come on. This may have been an all cash deal, but the company still hasn’t paid off the remaining 45% due on the Weitzman deal at the end of 2012 and they just spent what cash they had. Moreover, the fact that CEO Card is looking to lever up even further in search of additional growth is downright scary.


June a Busy Month for Italian Luxury IPOs - Luxury firms are reporting brisk business in the first quarter and the outlook for the remainder of the year is bright. With these underpinnings, Italy’s three luxury initial public offerings are quickly taking shape and valuations of the firms are surging by the day. Salvatore Ferragamo’s listing on the Milan Stock Exchange is expected by the end of the month, with the road show kicking off in London on June 13, according to sources, who say joint lead manager Banca IMI-Intesa Sanpaolo Group values the Florence-based firm at 2.25 billion euros, or $3.23 billion at current exchange. Until now, sources said Ferragamo’s IPO could value the company at around 1.5 billion euros, or $2.1 billion. Mediobanca and J.P. Morgan will act as global coordinators and joint book runners. Italian fashion house Prada, whose IPO is expected to kick off on the Hong Kong Stock Exchange on June 23 or 24, plans to sell 423.3 million shares, or 16.5 percent of its capital, following a capital increase, said sources on Wednesday. As reported, Banca IMI-Intesa Sanpaolo Group, which owns 5.1 percent of Prada and is one of the banks leading the IPO, estimates Prada may be valued at 10.7 billion euros, or $15 billion at current exchange, according to a source. Until recently, analysts have said the IPO could value the company at up to $9.5 billion. The road show will kick off June 6 in Singapore, followed by Hong Kong, London and Milan, and will end in New York. On Wednesday, sources also said Banca IMI values Moncler, which got the green light to proceed with its listing on the Milan Stock Exchange this week, at 1.28 billion euros, or $1.84 billion. Moncler is expected to float more than 50 percent of the company by the end of the month. Banca IMI, BofA Merrill Lynch and Morgan Stanley International will act as global coordinators. Banca IMI will also be in charge of the IPO and act as sponsor. <WWD>

Hedgeye Retail’s Take: Notice a trend here? In addition to a collective sprint to market before the 2H, leading banks on these offerings are consistently valuing the companies well above pre-existing levels, no surprise there.


Samsonite IPO - Luggage maker Samsonite International S.A. stands to raise between $1.16 billion and $1.51 billion in an initial public offer later this month. The company made its ipo prospectus available Friday via the Hong Kong Stock Exchange website. The company said it plans to offer 671.24 million shares.The indicative price range for the shares is 13.50 Hong Kong dollars, or $1.74, to 17.50 Hong Kong dollars, or $2.25, or per share. Based on that range, the company will raise between 9.06 billion Hong Kong dollars and 11.75 billion Hong Kong dollars. The bulk of those proceeds will go directly to Samsonite's current shareholders, which include CVC Capital Partners, and the remainder will be used to pay off the company's debts. Samsonite, which is listing in Hong Kong the same month as Italian luxury goods house Prada, said it expects to announce the official offer price by June 15 and for its shares to commence trade on June 16. The company said its 2010 adjusted EBITDA more than doubled to $191.9 million and its sales rose 18.1 percent to $1.22 billion. <WWD>

Hedgeye Retail’s Take: Little known fact – back in the 1960s, the company manufactured and distributed Legos in North America under a licensing agreement establishing the brand in the U.S. before abandoning its toy business in the 70s. After paying $1.7Bn in 2007 for 60% of the company and then another $175mm to RBC to retain the controlling stake in 2009, CVC would just about break even if the deal comes through at the high end of the range, a considerably better fate than it faced back in ’09.


New Nike Action Sports Campaign - Nike Inc. is launching a new campaign, entitled "The Chosen," that is Nike's largest effort targeting action sports and its first global 'Just Do It' campaign featuring a pantheon of action sports stars.. According to a statement from Nike, the centerpiece of the campaign is a film featuring skate legend Paul Rodriguez (P-Rod), Olympic snowboarder Danny Kass, surf prodigies Julian Wilson and Laura Enever.  The film was shot all over the world at night and features lighting and pyrotechnics reminiscent of a live rock concert. Throughout the course of the campaign, Nike will be conducting global grassroots events providing athletes an opportunity to participate in the sports featured in the film. "'The Chosen' represents a new voice for Just Do It, a passing of the torch to the next generation of sports heroes," said Davide Grasso, Nike's vice president of global brand marketing. "This is a defining moment for Nike Action Sports as we evolve this iconic campaign to bring it to new audiences, in new ways around the world." <SportsOneSource>

Hedgeye Retail’s Take: All part of Nike’s plan to double the Action Sports business over the next 5-years. Before we get too excited let’s keep in mind the business currently accounts for less than 2% of total sales. The spot will air during the NBA finals on Sunday and in cinemas over the July 4th weekend for those interested.


Japanese Luxury Market Forecast Suggests Strong Rebound - Japane’s luxury goods market is expected to resume its pre-earthquake sales figures, according to consultancy firm McKinsey & Co.  The company conducted a survey of more than 1,300 consumers and 25 senior business executives to ascertain the impact of the recent natural disaster on the luxury goods sector. Around 60 per cent of business leaders forecast that luxury sales would either plateau or improve in 2011 compared to last year, while 85 per cent of respondents were optimistic that the market would improve in the longer term. The report also highlighted why consumers opt to buy premium products, with 28 per cent doing so as a "treat", 41 per cent citing their durability and 20 per cent of respondents noting their improved overall quality compared to standard products. <WWD>

Hedgeye Retail’s Take: One of the more aggressive forecasts we’ve seen given that the tsunami had an annualized MSD impact on sales not accounting for sales lost due to lower consumer sentiment after the initial impact.




Framing Up the Jobs Report – Hedgeye Style

Conclusion: If there’s one thing we’ve learned from today’s Jobs Report, it is that consensus has to start accepting the fact that US growth is slowing and that forward EPS estimates need to come down. In the report below, we pick apart the BLS’s reported numbers and update our view of the US economy.


It’s obvious that today’s Employment data is not positive, so there’s really no need to belabor the point (no pun intended). Where we do find added value in writing about today’s awful Jobs Report is in breaking down the numbers to find out what’s really going on with the labor market – Hedgeye style.


At the start of the year, the biggest pushback we got to our incredibly contrarian call that Growth will Slow as Inflation Accelerates was that the consumer would roar back and join the manufacturing-led recovery. With the Unemployment Rate ticking back up above 9% in May, that storytelling is rightfully being revised. We said it then and we’ll continue to say it: arguing that the jobs picture would improve and help fuel the recovery was significantly more apropos in March ’09 than in January ’11. Employment is a lagging indicator.


There are three charts we want to show you below, but first, let’s define some methods and terminology. 

  1. The first being the BLS’s Birth/Death Adjustment, which is the government’s way of estimating how many businesses are being created/shut down based on analysis of previous economic cycles;
  2. The second point we want to make is that the Birth/Death Adjustment is non-seasonally adjusted, so there is an omnipresent seasonal pattern to be recognized, with the peak positive adjustments typically coming in the three months of 2Q; and
  3. The third point we make is that the headline Payrolls numbers are seasonally adjusted, so netting out the government’s “fudge factor” is tougher than it appears to the naked eye. That said, while it may be akin to comparing apples vs. oranges, we find analytical respite in comparing the same faulty data series against itself on a year-over-year basis. 

More information on the Birth/Death model and its methodology can be found here:


Equipped with these caveats and idiosyncrasies, let us show you three charts that matter to what we’re all ultimately searching for: the slope of economic growth.


The first is showing just how seasonal the Birth/Death adjustment really is. The key takeaway here is that beyond next month, made-up job creation will be less able to support whatever headline Payrolls growth we have left:


Framing Up the Jobs Report – Hedgeye Style - 1


The second chart is that, on a year-over-year basis, Private Payrolls growth excluding the Birth/Death adjustment is running at +21k. Though up from -12k in April, that compares to +267k YoY as recently as February. Through the first five months of the year, we’ve added a cumulative net +363k actual private-sector jobs on a YoY basis. That's well below the reported figure of +550k YoY, which includes the B/D adjustment:


Framing Up the Jobs Report – Hedgeye Style - 2


The last chart is perhaps the most daunting as it relates to the economy. On three different measures, Real Wage growth has either flat-lined or is trending down.  And with unemployment remaining high and reported inflation remaining sticky, one could make a compelling argument that these trends will only get worse before they get better. We don’t disagree:


Framing Up the Jobs Report – Hedgeye Style - 3


Net-net, if there’s one thing we’ve learned from today’s Jobs Report it is that consensus has to start accepting the fact that US growth is slowing and that forward EPS estimates need to come down. While the sell-side continues to ratchet down their growth “forecasts” after seeing the data, we’ll continue to stick to our process and help you manage risk before it happens. Growth is slowing and it’s much less “transient” than the bulls think it is. Even with the world’s largest bond fund net short US Treasuries, the bullish bid across the bond market is telling us just that.


Darius Dale



Framing Up the Jobs Report – Hedgeye Style - 4

RL: KM Shorting for a Trade


Keith shorted RL in the Hedgeye virtual portfolio with the stock breaking through its intermediate-term TREND line of support and immediate-term downside to $113.88. Even though the 4Q print changes nothing related to our long-term call regarding $9 in EPS power and we still think RL will beat this year by +6% relative to consensus, we are shaking out below the Street in the upcoming quarter. Not only were we surprised the stock didn’t trade off more meaningfully following the miss, but perhaps even more so in the ensuing rebound. Trading above $123,  the stock is simply overbought relative to Keith’s model on an immediate-term TRADE basis.


See our recent post on 5/25 “RL: Great Company/Strategy, Bad Stock” for our more detailed view on the stock by duration.


RL: KM Shorting for a Trade - RL VP 6 3 11



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Wet Kleenex Europe

European Positions: Long Germany (EWG); Short Spain (EWP)


To borrow a phrase from Keith, Europe’s latest high-frequency data feels like a Wet Kleenex, which is to say not great and leaving an uneasy feeling. In particular, our conviction in Germany (in the Hedgeye Virtual Portfolio via the etf EWG) has recently waned.  PMI (Services and Manufacturing) and confidence surveys have declined in recent months as inflation accelerates and broadly sovereign debt contagion risk remains in the forefront.  From a quantitative setup the equity markets of Germany to Sweden to the PIIGS are all broken on the intermediate term TREND: this often is an indication to short a market, or get out of the way. Therefore we will be managing our long position in Germany accordingly as the DAX is trading right at its TREND line of 7,100 (see below).


Wet Kleenex Europe - mh1


PMI Services data out today for May confirmed the Manufacturing readings released on Wednesday—declines month-over-month for the major economies and the Eurozone average (see charts below). On the PMI survey, 50 is the line in the sand, with figures above 50 indicating expansion, and below indicating contraction. Spain is firmly in the latter camp, with Manufacturing at 48.2 and Services dancing on the line at 50.9. Equally Italy’s Services is flirting with the line (50.1) as is Ireland Services (50.5).  While Greece is taking the spotlight, we remain decidedly bearish on all the PIIGS (we’re currently short Spain via EWP), as we expect them to underperform their target debt and deficit reduction targets.


Wet Kleenex Europe - mh2


Wet Kleenex Europe - mh3


On the EUR-USD, we’re bearish as the pair reaches the top side of our trading range at $1.44, and believe it will bounce around in a range to $1.40 alongside headline risk, but ultimately find support as the EU continues to socialize the periphery’s fiscal imbalances at every step.


Matthew Hedrick



DRI continues to be view as the “safety trade” in casual dining due to the stability of its core brands, strong financial characteristics and seasoned management team.    


Being one of the companies in the restaurant industry that has some of the most “mature” brands, DRI incremental sales drivers are very sensitive to the performance of the quarterly promotions and limited-time offers.  In addition, we are in a very value-sensitive environment and the consumer has many choices from which to choose. 


DRI has a demonstrated over time that management has proven to be able to build their brands using LTO’s effectively, but they are not perfect.   Last quarter, the Olive Garden top line performance suffered from the shrimp and ravioli promotion falling afoul of guest preferences; this led to a negative menu mix in February.  According to management, the shrimp dish was a little too “culinary-forward” and didn't drive the same level of incremental guests as did the ravioli promotion with the $10.95 price point in 3Q10.  In 4Q10, The Olive Garden kept with a “culinary-forward” feel promoting the Culinary Institute of Tuscany (CIT) Soffatellis followed by Pastachettis. 


With expectations for Olive Garden performance lowered due to 400 underperforming stores that are awaiting a fresh look, Red Lobster (and Long Horn) must pick up some of the slack if management is going to hit its stated goal of 1.5% to 2% same-store sales in FY11; with the lower end being more likely.  Management’s bullish view of the top line is based partly on a continued improvement in the broader economic climate, especially in terms of employment, which has certainly not materialized.


In 4Q11, Red Lobster will benefit from the timing of Lobster Fest and the Create Your Own Shrimp promotion.  This brings me to Red Lobster and the current LTO, which appears to have an extremely compelling price point.  The “$15 Seafood Feast” includes soup, salad, entrée, dessert and unlimited Cheddar Bay Biscuits and runs from May 31st through July 25th.  In 3Q11, same-store sales increased 0.1% at Red Lobster (despite the adverse impact of 120bps related to the timing of Lent and their signature Lobster Fest promotion, and another 50bps of winter weather issues).  It would appear that the current promotion is accomplishing one of management’s stated goals of “price certainty” for the Red Lobster guest.


The $15 price point compares to the $19.75 average check, which includes lunch. This implies that the average check at dinner is likely closer to $25.  The issue Red lobster faces with this promotion will be the level of customer preference for the highly compelling $15 price target at a time when inflation is impacting the company’s margins, particularly in sea food.  There is clearly potential for a significant decline in average check.









Howard Penney

Managing Director



Employment data less positive for QSR, on the margin.


The overall jobs picture is causing concern here at the market open but, looking into the details that are most pertinent for QSR, it is the decline in the absolute growth level of employment in the 20-24 YOA cohort that caught our attention.  January through April brought 3%+ growth in the employment level among 20-24 year olds.  May’s number indicated a mere 1.1% in employment growth for that age bracket, which is a glaring red flag for QSR.  As a reminder, much of the positive sentiment from management teams over the past number of quarters has anchored on an improving employment landscape.  This view certainly doesn’t corroborate with Hedgeye’s macroeconomic view and, today’s news being the most recent instance, the data is also calling into question the idea of a sustained recovery in employment. 


As the second chart below shows, employment growth in the food service industry continued its upward trajectory in April.  Clearly, restaurant management teams can only react to the economic reality they are faced with, and the data is lagging one month behind the data in the first chart.


RESTAURANT INDUSTRY EMPLOYMENT DATA UPDATE - national employment growth by age





Howard Penney

Managing Directory

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