R3: Retail Deals and Margins



June 7, 2011






  • Despite a 68% increase in inventory levels on only 28% sales growth in the 1Q, management at GIII noted they believe gross margins to be at a normalized level and don’t expect promotional activity to further weigh on margins. Additionally, it was noted that the majority of the increase was driven by taking on product early ahead of cost increases not because of concerns over capacity constraints in the 2H. Contrary to their prior view, instead of a pickup in order cancelations in the 2H, the company is actually seeing a MSD-HSD increase in its order book.
  • On the contrary, inventories at TLB increased +13% on top of a -6% deceleration in sales resulting in considerable gross margin pressure from higher levels of promotional and markdown activity NT. In this morning’s release, the company highlighted that they expect a nearly 1,000bps impact to margins in Q2 as they look to clear excess inventory ahead of the back half.




Will Dollar General Lead Retailers Into Battle? - It would be tough to control a chain-store reaction. But that's a risk facing retailers that compete with Dollar General. The discounter last week said it would forgo gross-margin growth this year to keep retail prices low in the face of higher commodity costs. In doing so, Dollar General broke ranks with many grocers and drugstores that have pledged to pass cost increases onto consumers. The likely outcome: Dollar General will win market share. Drugstores, for instance, are vulnerable on items from groceries to shampoo because they charge far higher prices to compensate for lofty fixed costs. Nomura's Aram Rubinson estimates Dollar General pays just $7 a square foot annually on its leases compared with about $30 for the likes of CVS and Walgreen.  With just $13 billion in sales last year, Dollar General could only do so much damage alone. The more painful scenario is one where others follow Dollar General's lead. If a few more retailers keep prices down, the pressure would increase quickly for others to follow suit. Already, some retailers have been forced into selling milk below cost because rivals used it as a "loss leader" to attract shoppers.  <WallstreetJournal>

Hedgeye Retail’s Take:  This will only get worse. Companies can plan raw materials. They can plan subsequent discounts based on consumer behavior (to a degree). But even the best cannot plan on competing with a marginal competitor. This is bad for Gildan and Hanesbrands in particular.


Wal-Mart Unveils Ministores Near Dollar Rivals - The Walmart of the future could very well be the size of your local drugstore. Wal-Mart Stores this week unveiled its first Walmart Express, its answer to the growing threat of dollar stores which have been successfully maneuvering the post-recession economy. The 15,000-square-foot store, one-tenth the size of a Walmart superstore, aims to carry everything you might need on the spur of the moment, from milk and eggs to DVDs. Just not everything under the sun like its big cousin. Walmart Express is sized to fit into cities where space is at a premium and in rural areas that can't support a superstore. Dollar stores have enjoyed strong revenue growth as they've lured more shoppers with bargain prices and wider selections. Meanwhile, U.S. Walmart stores open at least a year have posted declines in revenue for eight straight quarters. <SeattleTimes>

Hedgeye Retail’s Take: The Seattle Times is a bit late on this one, but yet another example about how noise around the smaller-format WMT concept is coming down the pike. If anything, this is notable given both the stock and margin performance of the dollar stores over the past year.


Rakuten Acquires Ikeda - Japanese online retail juggernaut Rakuten is expanding its reach to South America with the acquisition of a 75% stake in Ikeda, a provider of e-commerce services to many of Brazil’s largest retailers. Financial terms of the deal were not disclosed. Founded in 1996 and headquartered in São Paulo, Ikeda provides retailers with a SaaS e-commerce platform, enabling its customers to help build their desired features and provides advisory services to support their online retail operations. Ikeda currently provides services to over 100 major retailers located all over Brazil. Forrester forecasts the e-commerce industry in Brazil to grow at 18% annually, with total sales expected to reach approximately $22 billion by 2016. For Rakuten, it’s a way to expand into South America rapidly. Founded in 1997 and headquartered in Tokyo, Rakuten provides a variety of consumer and business-focused services including e-commerce, travel, banking, securities, credit card and e-money solutions. Rakuten boasts operations throughout Asia, Western Europe and North America and has over 10,000 employees worldwide. <TechCrunch>

Hedgeye Retail’s Take: This makes sense in many ways. Not much impact – either competitive or opportunistic – for most companies that US investors tend to care about. But definitely something to watch evolve, as Ikeda serves a function similar to what we see from Amazon in the US (ie, buy an item from Target online and it is powered by Amazon).


eBay to Buy Magento - In another move to upgrade its e-commerce technology offerings and increase revenue, eBay Inc. said today it plans to buy Magento Inc., the developer of the widely deployed Magento open-source e-commerce platform used by more than 60,000 merchants and brands including Nokia, Lenovo, OfficeMax and The North Face. The deal follows eBay’s announcement in March that it intends to pay $2.4 billion for GSI Commerce, a provider of e-commerce technology and services for hundreds of retailers.EBay president and CEO John Donohoe says the move to acquire Magento supports eBay’s recent efforts to build an open commerce technology platform, which eBay calls X Commerce and which is designed to integrate many of the functions required to operate an e-commerce organization. “The feedback we’ve heard from external developers has been clear—they don't just want payments or an e-commerce site,” Donohoe says. “They want access to a full set of commerce capabilities to build complete shopping experiences for merchants. We believe the acquisition of Magento and creation of our X Commerce group will enable us to meet developers’ needs and drive global commerce innovation for retailers and consumers.” <InternetRetailer>

Hedgeye Retail’s Take: Ebay is definitely acquiring itself out of its old business model, and in the process is building the infrastructure needed to have its next wave of growth. E-commerce platforms married with e-fulfillment ops like GSIC are building Ebay’s capability to build its Consumer as well as B-to-B businesses.


Salvatore Ferragamo IPO Approved - Salvatore Ferragamo SpA on Monday received the green light to pursue its initial public offering on the Milan Stock Exchange, which is expected to take place by the end of the month. Sources said a road show is expected to kick off in London on June 13, and that joint lead manager Banca IMI-Intesa Sanpaolo Group values the Florence-based firm at 2.25 billion euros, or $3.29 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. In a separate development, Ferragamo has inked a licensing agreement with Marchon Group for the production and worldwide distribution of men’s and women’s sunglasses and prescription eyewear. The first collection will be available in Ferragamo boutiques, department and specialty stores and select optical shops starting in January. <WWD>

Hedgeye Retail’s Take: How odd that the current value indicated ‘by sources’ is up 50% from numbers recently speculated. Regardless, the market will price this name at the same level regardless of the ask.  In the end, Ferragamo is a very high quality brand and is one to be watched.


PPR Won’t Target Large Acquisitions - PPR (PP) SA, the owner of Gucci and Puma, ruled out making big acquisitions and repeated it will target mid-sized companies with high-growth potential as it reorganizes around luxury goods, sports and lifestyle items. PPR is planning a large purchase in the high-fashion business, La Tribune reported yesterday. The Paris-based company’s targets may include Prada SpA, Burberry Group Plc (BRBY) and Hugo Boss AG (BOS), the French newspaper said. “It’s not true that we will target large acquisitions,” PPR spokeswoman Charlotte Judet said today in a phone interview. Last month’s purchase of skate- and snowboarding clothier Volcom Inc. for $607.5 million is indicative of the size of deals PPR is interested in, she said, repeating comments made by Chief Executive Officer Francois-Henri Pinault. PPR is reorganizing to focus on its luxury-goods division, which includes Gucci, and a sports and lifestyle unit headed by Puma as it seeks to tap rising demand for branded clothing and accessories in emerging markets. The company, which sold furniture retailer Conforama in March, plans also to dispose of online retailer Redcats and the Fnac electronics and media chain and use some of the proceeds for acquisitions. <Bloomberg>

Hedgeye Retail’s Take: This comment was made to thwart speculation that PPR would buy Ralph Lauren. While we have no reason to think anything is imminent, we also have to reason to believe PPR’s comment. RL would be a perfect fit in its portfolio. Mr. Lauren is 73 years old, and Roger Farah (COO) is in his early 50s, a 2012 contract expiration date, and has at least another job in him.  Keep this one on your front burner.





Notable news items and price action from the restaurant space as well as our fundamental view on select names.

  • EAT this morning declared a quarterly dividend of $0.14 per share on the common stock of the company and, additionally, the Board of Directors authorized an additional $250 million in share repurchases.
  • MCD Japan May comps came in at +0.9% year-over-year.
  • PFCB was upgraded to Neutral from Underperform at Credit Suisse.
  • Lazard Capital initiates BWLD, MCD, and SBUX.  BWLD is rated New Neutral while MCD and SBUX are both rated New Buy with price targets of $47 and $92, respectively.
  • CPKI has signed a franchise deal to expand in Taiwan with new franchise partner, Quanta Foods.  The plan is to open six new restaurants in Taiwan in the next five years.
  • BOBE is announcing its fiscal year-end earnings after the market close.  Consensus is looking for Bob Evans comps of +0.9% y/y and Mimi’s Café comps of -1.8% y/y.
  • MRT outperformed the space yesterday, gaining 6% on strong volume.




Howard Penney

Managing Director


TODAY’S S&P 500 SET-UP - June 7, 2011


Ben Bernanke will be speaking in Atlanta tonight where he’ll talk around the need to cutt his GROWTH forecast, while raising his INFLATION forecast… again, after the fact. He’s usually 3-9 months behind Hedgeye – but Gaming Policy will remain the game that matters here with US/Global markets reading into this in the following way:

  1. UST Bonds – Indefinitely Dovish (Q2 Macro Theme); with upside in long-bonds up to 4.16% on the 30yr immediate-term
  2. US Stocks – Jobless Stagflation (1-1.5% GDP growth w/ 3.5% headline CPI, and markets pay a lower multiple for stagflation stats)
  3. US Dollar – Indefinitely Dovish – should equate to further downside pressure in USD to 73.76 (a higher low)


As we look at today’s set up for the S&P 500, the range is 48 points or -1.41% downside to 1268 and 2.32% upside to 1316.






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: -1798 (-483)  
  • VOLUME: NYSE 959.22 (-1.25%)
  • VIX:  18.49 +3.01% YTD PERFORMANCE: +4.17%
  • SPX PUT/CALL RATIO: 1.46 from 2.23 (-34.46%)



  • TED SPREAD: 21.11 -2.034 (-8.788%)
  • 3-MONTH T-BILL YIELD: 0.05%
  • 10-Year: 3.01 from 2.99
  • YIELD CURVE: 2.57 from 2.59 



  • 7:45 a.m./8:55 a.m.: ICSC, Redbook release weekly retail sales
  • 10 a.m.: IBD/TIPP economic optimism, est. 42.0, prior 42.8
  • 10 a.m.: JOLTS job openings
  • 11:30 a.m.: U.S. to sell $28b 4-week bills
  • Noon: DoE Short-Term Outlook
  • 12:30 p.m.: Fed’s Lockhart speaks in North Carolina
  • 1 p.m.: U.S. to sell $32b 3-yr notes
  • 2:30 p.m.: Fed’s Hoenig to tour factory in Colorado
  • 3 p.m.: Consumer credit, est. $5.0b, prior $6.016b
  • 3:45 p.m.: Fed’s Bernanke to speak to bankers in Atlanta
  • 4:30 p.m.: API inventories



  • World Bank releases report on global growth forecasts through 2013
  • Pershing Square’s Bill Ackman said his holdings in J.C. Penney one of his top two investments, speaking in New York yesterday (not so much for @HedgeyeRetail)
  • WSJ is positive on airplane makers, suppliers
  • Backers of delay to imposition of debit card swipe fees making concessions - NY Post
  • NYT DealBook discusses Goldman Sachs's subprime bet
  • NBCUniversal will purchase Blackstone's 50% stake in Universal Orlando



THE HEDGEYE DAILY OUTLOOK - daily commodity view



  • World Food Prices Linger Near Record as Meat and Dairy Costs Gain, UN Says
  • France Backs Compensation for Food Producers as E.Coli Crisis Hits Demand
  • E. Coli in Europe May Hurt U.S. Produce Sales Until Outbreak’s Cause Found
  • Crude Oil Advances; SocGen Sees 65% Chance OPEC to Raise Production Quotas
  • Sugar Climbs as Brazil’s Harvest May Miss Estimates; Cocoa Prices Advance
  • Wheat May Gain as Rains Might Be Too Late to Reverse European Crop Damage
  • Gold May Advance as Greek Debt Crisis, U.S. Data Increase Investor Demand
  • Copper May Fall on Concern China Might Take More Steps to Curb Inflation
  • Oil Stockpiles Fall in Survey as Canadian Pipeline Shuts: Energy Markets
  • Frontline Billionaire Fredriksen Bets Tankers Collapsing: Freight Markets
  • Barclays Sleepless in Sydney as India Firms Seek Coal Deals to Fuel Growth
  • Olam Plans to Raise S$740 Million Through Three-Tranche Offering of Shares
  • Aabar Plans to Make Joint Investments With Glencore, Financial Times Says




THE HEDGEYE DAILY OUTLOOK - daily currency view



  • EUROPE: better than bad with Germany leading the way on the upside, +.77% (we're long) and Spain underperforming +0.26%(we're short) $EWG $EWP

THE HEDGEYE DAILY OUTLOOK - euro performance




  • ASIA: better than bad session overnight, with China and India attempting to stabilize at+0.6% each and -2.3% and -9.6% YTD, respectively 

THE HEDGEYE DAILY OUTLOOK - asia performance








Howard Penney

Managing Director

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Borrowing Deceit

This note was originally published at 8am on June 02, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Nothing is easier than self deceit.”

-Demosthenes (circa 340 BC)


I’m borrowing that quote from Howard Marks, who borrowed it from Charlie Munger, who borrowed it from Demothesnes (Greek orator from ancient Athens). Borrowing ideas is what people in this business do.


What if I woke up every morning for the last 6 months borrowing the idea that US “growth” was “back” and that there was really nothing in this interconnected world to worry about?


Well, that idea would have been a really bad one to have borrowed. Nothing is easier than borrowing ideas – you have to do a lot less work. Nothing is going to protect your returns when those borrowed ideas turn out to be wrong either.


Howard Marks is a successful Risk Manager who runs $82 Billion (as of December 31, 2010) at Oaktree Capital Management. He borrowed that quote for his recent investment memo to Oaktree clients that was titled “How Quickly They Forget.”


Since Marks’ letter is marked “confidential”, I’ll have to stop on his ideas there, and get back to my own:

  1. GROWTH: US and Global Growth are slowing
  2. INFLATION: reported Global Inflation readings remain sticky and elevated because they are lagging indicators
  3. POLICY: Chinese policy (hawkish) continues to diverge from Fiat Fool policy (USA, Japan) which remains Indefinitely Dovish

Being on the road from Boston to Denver to Kansas City to New York to San Francisco in the last 4 weeks has been very interesting. The further I move in time, the more people seem to be agreeing with me on these Global Macro matters (prices going down do that). I’m in Santa Barbara, CA this morning and I’ll be in LA tonight. I don’t expect this bearish progression to lose momentum.


The #1 question Risk Managers want to know is “how do I make money with that?”


Hedgeye Risk Management’s answer remains:

  1. Don’t lose money (we went into yesterday’s meltdown with 10 LONGS and 12 shorts in the Hedgeye Portfolio)
  2. Buy Long-term US Treasuries (TLT) and a US Treasury Flattener (FLAT)
  3. Buy Gold (GLD)

Oh, did I borrow the only rule Buffett and Munger have signed off on before the 2011 version of buy-the-damn-dips? I think I did. Not losing money is indeed a risk management strategy worth borrowing. Try it at home – or with your client’s money.


The #2 question Risk Managers want to know is “where could your ideas be wrong?”


Hedgeye Risk Management’s answer remains:

  1. The Data – if our scenario analysis on growth and/or inflation change, we will
  2. The Market – if TREND line prices hold, we’ll cover shorts
  3. The Fed – if they legitimately move to QG3, we will resort to prayer

While Borrowing Deceit from the Fed on A) full employment and B) price stability can remain fashionable – it can also become, as Le Bernank likes to say, “transitory.” If the price of your homes and portfolios start going down, that is…


Of course, nothing is easier than waking up telling yourself that earnings were “good” and Le Bernank has your back. Sounds a little too much like Q2 of 2008 for me. “How Quickly They Forget.” (Howard Marks, May 25, 2011)


As for what to do in the very immediate-term, here are some key immediate-term TRADE ranges across Global Macro that we’re rolling with this morning:

  1. SP500 1305-1323 (bearish)
  2. Russell2000 801-828 (bearish)
  3. Nikkei 9257-9722 (bearish)
  4. Shanghai Composite 2669-2811 (bearish)
  5. FTSE 5801-5956 (bearish)
  6. DAX 7067-7344 (bearish)
  7. VIX 16.65-19.04 (bullish)
  8. USD 74.41-75.80 (bullish)
  9. Euro 1.41-1.44 (bearish)
  10. Oil 97.75-102.03 (bearish)
  11. Gold 1522-1549 (bullish)
  12. Copper 4.09-4.29 (bearish)

Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Borrowing Deceit - Chart of the Day


Borrowing Deceit - Virtual Portfolio

Buffett Behavior

“Human behavior, not monetary behavior, is the key…”

-Warren Buffett (May 1977)


“And when very human politicians choose between the next election and the next generation, it’s clear what usually happens.”


That’s clear, Mr. Buffett. Crystal.


I wrote my senior thesis on Warren Buffett while I was banging away on a typewriter here in New Haven, CT almost 15 years ago. Time flies. But history’s lessons don’t.


The aforementioned quotes come from a Fortune article Buffett wrote in May of 1977 titled “How Inflation Swindles The Equity Investor.” This was during the post Arthur Burns (last Fed Chief to attempt to monetize the US Debt) and Richard Nixon period, when Jimmy Carter promised to carry on the dual Fed/Presidential office mandate to attempt to inflate their way to prosperity.


The problem, of course, is that too much inflation slows growth… And Growth Slowing As Inflation Accelerates perpetuates The Jobless Stagflation… And the stock market pays a lower multiple for The Stagflation.


Back to our very human Keynesian politician …


Tonight, Le Bernank will be speaking in Atlanta where he’ll talk around A) cutting his GROWTH forecast and B) raising his INFLATION forecast (again, after the fact). While being a lagging indicator isn’t a new position for the Fed’s Chief, it’s important for Risk Managers to focus on Gaming His Almighty Policy. Across asset classes in the US, here’s how we think the market will respond:

  1. UST Bonds – Indefinitely Dovish (Q2 Macro Theme); upside in long-term bonds to 4.16% on the 30 year yield (immediate-term)
  2. US Stocks – Jobless Stagflation (1-1.5% GDP growth w/ 3.5% headline CPI; markets pay a lower multiple for The Stagflation)
  3. US Dollar – Indefinitely Dovish; should equate to further downside pressure in USD to 73.76 (a higher-low)

My lowest conviction Global Macro position is long USD into and out of this political pandering. I still like long-term bonds (TLT), UST Flattener (FLAT), and Gold (GLD).


On the short side, I covered some shorts yesterday and will look to re-short strength opportunistically today/tomorrow. So far, the best proxy product I can produce to express my risk management view of a traditional hedge fund’s NET EXPOSURE (longs minus shorts) is the LONGS minus SHORTS component of the Hedgeye Virtual Portfolio (chart below).


I know that’s not a perfect proxy, but I also know it’s a lot better than whatever the sell-side is still using to communicate their pre-2008 horse-and-buggy-whip research. With the SP500 being down now for 4 consecutive-days and 6 consecutive weeks, at Hedgeye we called yesterday a “short covering opportunity”, moving from net neutral in the Hedgeye Virtual Portfolio to 13 LONGS and 10 SHORTS.


That doesn’t make me wild and crazy long. It just means that I won’t lose an eyebrow as the machines fire up this morning’s S&P Futures. If you want to survive The Stagflation, you need to manage risk, real-time – and yes, that does include trading.


Managing risk (or trading) around the aforementioned Stock, Bond, and Currency market catalysts isn’t easy. Neither is attempting to justify being long the US Financials (XLF) with “valuation” as your backboard. Valuation isn’t a catalyst when stock prices are falling. The Financials (XLF) are down -13.1% since their YTD high on February 18th, 2011. “Cheap” stocks get cheaper.


In the same 1977 Fortune article, in asking Buffett “why does a man who is gloomy about stocks own so much stock?”… Buffett said: “Partly, it’s a habit…”


He’s partly human too. And “human behavior, not monetary behavior, is the key…”


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $98.46-102.47, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Buffett Behavior - Chart of the Day


Buffett Behavior - Virtual Portfolio

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%