June 14, 2011






  • The ante has just been raised for online home goods retailers with WSM announcing it will offer free international shipping. When this trend emerged early last year, industry players were forced to follow suit as free shipping became an increasingly important factor driving consumer purchasing decisions. While many retailers followed suit, we don’t expect a similar shift in the industry in response to this move given the added costs associated with international shipping. As a purely domestic concept, this initiative is likely to be margin dilutive, but will be a key first step in introducing the brand into international markets ahead of what is likely to be a more aggressive store expansion effort.
  • Among the benefits of the acquiring TBL is that it will boost VF’s international exposure to 35% of sales, a significant step towards its goal of achieving 40%. That said, we won’t give VFC a free pass  -- it still needs to grow the core suggesting 45% Int’l is the new delta.
  • With only 81 stores currently located in the U.S. and 138 worldwide, LULU accelerated its plans for store expansion to 30 in 2012 up from the 22-27 suggested at year-end. This will include 10 new markets, which the company identifies in part by tracking online shipments to gauge demand. As if the U.S. didn’t provide enough potential, LULU is also growing stores in Australia with 12 there currently. This is one of those concepts where we don’t think we’re anywhere close to questioning the unit growth potential.



Union Votes to Authorize Strike Against Macy's - The Retail, Wholesale, and Department Store Union, which represents more than 4,000 workers at four of the retailer’s New York City area stores, including the Herald Square flagship, has authorized its executive board to call a strike in the event that a new contract is not secured by midnight on Wednesday. To hedge its bets, the department store took out an ad in The New York Times on Sunday seeking temporary sales staff in the event of a possible labor dispute. “A vote by the union to authorize a strike is an expected part of the process during contract negotiations,” said Elina Kazan, vice president of media relations for Macy’s Inc. “We have been meeting daily to negotiate a new contract for approximately 3,800 employees before the current contract expires on June 15, and we will continue to be at the bargaining table with the union, discussing issues and working together towards reaching an agreement before the deadline. We have offered the union wage and benefits programs that will positively impact the lives of our associates, and will be among the best at department stores in New York City and across the country. <WWD>

Hedgeye Retail’s Take: A reported $0.35 increase off a base of $7.50 for some is not much of an improvement. Not to mention when you take into account one of the other key bargaining points – the potential implementation of a new electronic scheduling system that could ultimately reduce full-time shifts and overtime. If this passes without a hiccup, it’d be a win for Macy’s. Probably not enough to change our negative view on the name – unless the model changed meaningfully relative to consensus. We’re doubtful that’d be the case.


Gilt Groupe Moves Deeper into Full-price Retailing - Gilt Groupe Inc. will depart from the limited-time, deep discount e-retail model that fueled its enormous sales growth with the launch this summer of Park & Bond, a men’s apparel site that sells items at full price. The company says the success of Gilt MAN, the company’s flash-sale site for men, inspired it to move into full-price retail. “Moving into the full-price retail space is the natural next step following the runaway success of Gilt MAN,” says John Auerbach, general manager of Gilt MAN. Auerbach will also work as president of Park & Bond. Gilt Groupe, No. 49 in the Internet Retailer Top 500 Guide, had Internet Retailer-estimated sales of $425 million in 2010, up from $170 million in 2009 and $25 million in 2008. The e-retailer is currently testing another non-flash sale site, GiltTaste, which sells gourmet foods. <InternetRetailer>

Hedgeye Retail’s Take: We give GILT a lot of credit here in that it continues to grow its footprint – fully recognizing that it cannot scale existing concepts. This move, however, is clearly a push to go deeper. They can leverage existing infrastructure, which is good. Though if it takes off, it will need to scale up its pick/pack capability in ways that it is not traditionally accustomed.


Wal-Mart Loses Appeal of $187 Million Verdict in Worker Lawsuit - Wal-Mart Stores Inc. (WMT), the world’s largest retailer, lost its appeal of a $187.6 million verdict in a case accusing the company of denying Pennsylvania workers rest and meal breaks. A three-member appeals court panel ruled June 10 that there was “sufficient evidence” in the record to conclude Wal-Mart violated state wage laws for contractual rest breaks. The court ruled that the trial court must recalculate more than $45 million in attorneys’ fees in the case.  “Wal-Mart’s own internal audits revealed violations of company policies regarding missed breaks and work off-the- clock,” the panel said in a 211-page opinion.  The verdict is the largest against Wal-Mart over missed breaks, Michael Donovan, an attorney for the Pennsylvania workers said. Wal-Mart agreed to pay as much as $640 million in 2008 to settle more than 60 federal and state lawsuits over similar claims. Former Wal-Mart employees Dolores Hummel and Michele Braun sued the company in state court in Philadelphia over claims they were pressured by store managers to skip breaks and cut meals short. Lawyers for the women argued that the company made workers skip more than 33 million rest breaks from 1998 to 2001 to boost productivity and cut labor costs. <Bloomberg>

Hedgeye Retail’s Take: There are right ways and wrong ways to cut costs, we’ll let you decide which this falls into. After being docked for these practices just a few years back, one would think the retail giant would improve oversight of such practices. At the end of the day, cutting corners is costing the retailer more from both a dollar and brand perspective.


Columbia Sportswear Files European Antitrust Complaint W.L. Gore - Columbia Sportswear Company announced that the company and its Italian subsidiary, OutDry Technologies S.r.l., have filed a complaint with the Commission of the European Union against W. L. Gore & Associates, Inc., alleging that W. L. Gore & Associates has violated European Union competition laws by abusing its dominant position in the market for waterproof breathable membranes for footwear and gloves. Columbia and OutDry Technologies also said they welcomed the recent public news that the United States Federal Trade Commission has issued a subpoena to W. L. Gore in connection with its own investigation into whether Gore has "engaged in unfair methods of competition 'by contracts, exclusionary practices, or other conduct related to waterproof or waterproof and breathable membranes or technologies and related products.'" <SportsOneSource>

Hedgeye Retail’s Take: Now that Columbia owns one of the greatest threats to W.L. Gore’s Gore-Tex technology it’s no surprise that the defacto weather-proofing giant is trying to protect share. However, shining the light on this case could actually be a meaningful step in the right direction enabling COLM to accelerate the integration of this technology. The critical technological difference between traditional Gore-Tex is that it uses interior membranes to keep water out whereas OutDry is breathable membrane on the exterior of wearable product a key element in reducing weight among other benefits.


Sergio Rossi Buys Back China Shops - Sergio Rossi is expanding in China and buying back its five boutiques in the region from its local franchisee partner, Shanghai Kutu Trading Co. Ltd.“We’ve been in China for five years now, developed a sense of maturity and global vision and this step is part of leading the brand into the future,” said Christophe Mélard, president and chief executive officer of the luxury footwear firm. The stores are located in Shanghai, Beijing, Ningbo and Shenzhen. Sergio Rossi is maintaining an existing franchisee agreement with Sichuan Lessin Department Store Co. Ltd. to further develop its business in second- and third-tier cities in China. Mélard stressed that while the Italian company plans to double the number of stores in China in three years, it is not steering away from a highly selective distribution. <WWD>

Hedgeye Retail’s Take: Solid move by the PPR owned label and a common trend by brands looking to accelerate store growth in the region of late. With slightly more than 50 stores worldwide and nine in China we’re not talking a massive acceleration in store growth, but the initiative will certainly increase geographic exposure in China.  The key here is ‘control.’ When any brand worth its salt reacquires content ownership from a licensee, it not only consolidates the profit at a higher margin (and hopefully accretive to the P&L based on purchase price), but it allows growth to accelerate due to direct control by the parent.




J.C. Penney taps Apple’s retail chief as CEO


My last note on CBRL was titled ‘THE BRIDGE TO NOWHERE’ starting with the following quote:


“The definition of insanity is doing the same thing over and over and expecting a different result.”

-Albert Einstein


I continued: “Year-to-date, CBRL has underperformed the S&P 500 by 19.55% and is now trading at 6.2x EV/EBITDA.  Value or value trap?  I think the latter.  I really think CBRL’s management is unwilling to face reality.  I listened to CBRL management team speak at the Goldman conference and I could almost not believe what I was hearing.  I’m convinced that this concept is in a secular decline and the only way out will be very painful for shareholders.  That said, anything’s possible; Trian might take another run at the company!”


Ok, so it was not Nelson Peltz, but last night a 13D was filed on CBRL by Sardar Biglari owning a 9.7% stake.  The restaurant industry is an easy target for activist investors to push around bad management teams and CBRL is no exception to that rule.  Sorry, Mr. Woodhouse; your track record speaks for itself, especially knowing that this is the second time you will be faced with an activist shareholder.


Sadly, the last time Mr. Woodhouse was challenged to create shareholder value he failed (see my table below) and, in fact, I have made the case that the concept is in secular decline.  It could be argued that the company is in worse shape than it was in 2007.


In the 2006/2007, when CBRL faced Nelson Peltz, the stock peaked at $50.74.  Given the secular decline I see in the concept’s business, I don’t see much value past the $50 level, because the cost of fixing declining traffic trends is both time- and capital-intensive.  The questions investors need to ponder are: can Mr. Woodhouse fend off Mr. Biglari and what will he do to create value?  Will he pursue the same path he did against Nelson Peltz? 


Look no further that the 2007 proxy for Mr. Woodhouse’s success plans four years ago.  It is plain for all to see how he benefited from the situation.  Will he turn this current scenario into another big payday for himself?  If history is any guide, he will.


From the 2006 proxy: “The Success Plan was adopted in order to reward certain key personnel, including certain executive officers of the Company and its subsidiaries, for undertaking and for various degrees of success in implementing the restructuring plan announced March 16, 2006. The restructuring (the ‘Restructuring Plan’) includes implementation of a modified Dutch auction style tender offer in an amount of at least $700 million and related financing (the ‘Tender Offer’) and divestiture of the Company’s wholly-owned subsidiary, Logan’s Roadhouse, Inc. (the ‘Logan’s Divestiture’) at one of two levels of proceeds (the ‘Target Level’ and the ‘Maximum Level’).


The Success Plan includes a $7.9 million bonus pool that will be paid to two groups of executives: the ‘CBRL Participants’ and the ‘Logan’s Participants’. It should be notes that Mr. Woodhouse collected $4.2 million or 53.1% of the ‘success fee’.”


As in 2006, my guess is that the street will focus on the real estate and the potential for a sale/lease back transactions to create value.  To be clear, this has never worked and will not work this time.  Bill Ackman has tried the strategy many times and it has never been proven to work.  It can make for good headlines, but that is about it.  This time around there is not another concept to divest.  This only serves to highlight just how bad things are at CBRL today.  The sale of Logan Roadhouse was supposed to allow the current management team to focus only on the performance of the Cracker Barrel concept.  If traffic trends are a benchmark for the measurement of success, then it is important to note that traffic trends are significantly lower today than in 2007.


I let you be the judge of the company’s performance since the beginning of fiscal 2007.  The store base has grown by 11%, sales by 2.3%, EBITDA by $3.4 million, EBIT has declined by $68,000 and the share price has gone nowhere.  All the while, Mr. Woodhouse has pocketed approximately $37 million in total compensation over the same period. 


Allowing that to sink in, the only word fit for print I can think of is “embarrassing”.


CBRL - JUST EMBARRASSING - cbrl compensation


CBRL - JUST EMBARRASSING - cbrl price chart



Howard Penney

Managing Director

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Squeezy: SP500 Levels, Refreshed

POSITION: no position SPY


In this morning’s Early Look note (“Bullish Bears”), I walked through why I thought this morning’s Global Macro Grind was bullish for the immediate-term TRADE duration in US Equities.


A market like this (bearish intermediate-term TREND, with resistance = 1320) can get Squeezy; particularly after it gets exhausted on the downside. After 6 consecutive down weeks, we’re probably going to see an up week –but the question remains, up to where? 

  1. TRADE = 1312 – that would be a probable +3.3% Meltup
  2. TREND = 1320 – that would be more than a Meltup, if it were to hold 

I am expecting #1, not #2, for now…


The hallmark of a great risk management is being Duration Agnostic. Downside support is now a higher intermediate-term low at 1262.


Manage your risk proactively,



Keith R. McCullough
Chief Executive Officer


Squeezy: SP500 Levels, Refreshed - SP500


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

  • WEN was raised to Buy from Neutral at UBS based on upside to SSS estimates in 2H (particularly in 4Q) based on the re-launch of the premium burger.
  • WEN CEO Roland Smith said yesterday that the 2008 combination of Wendy’s and Arby’s has “absolutely not” been a failure.
  • PNRA has launched a $40 million advertising campaign, called “Make Today Better” yesterday.  Chief Marketing Officer Michael Simon called the effort Panera’s “most significant ad campaign to date”.
  • CBRL Biglari Holdings Inc. has reported a 9.1% stake, according to a 13-D filed yesterday. The company plans to communicate with management and members of the Board regarding the business, governance, and future plans of the company.
  • RUTH and DIN gained on accelerating volume yesterday.  RRGB and KONA declined on accelerating volume.




Howard Penney

Managing Director


The Macau Metro Monitor, June 14, 2011




Secretary Francis Tam said the Macau economy is likely to experience a low double-digit growth this year.  There are forecasts that call for a slowdown in 3Q, added Tam.  Last year, the MSAR economy grew by 26.2% to MOP 217 BN.  The secretary also acknowledged that yearly inflation – which hit 4.9% in April – is likely to remain high for the foreseeable future, considering the situation in mainland China and worldwide.



Visitor arrivals in package tours decreased by 5.0% YoY to 543,679 in April 2011.  Visitors from Mainland China (408,461), Thailand (12,959) and Japan (9,233) decreased by 4.9%, 14.7% and 45.3% respectively.  Visitors from Taiwan (27,491); Hong Kong (24,718) and Republic of Korea (18,546) increased by 11.9%, 9.4% and 23.5% respectively.


Hotels and guest-houses received 675,836 guests in April 2011, up by 1.7% YoY, with the majority coming from Mainland China (53.4% of total) and Hong Kong (20.9%).  The average length of stay remain unchanged YoY at 1.4 nights.  The average occupancy rate of hotels and guest-houses was 84.5%, up by 3.6% points YoY.



According to the State Council's Taiwan Affairs Office, a pilot plan allowing Mainland China visitors to Taiwan as individual tourists will commence on June 28, which covers residents from Beijing, Shanghai and Xiamen at the first stage.  Currently, mainlanders are only allowed to visit Taiwan on package tours after the authorities lifted a partial ban in July 2008.



China's Required Reserve Ratio for banks will be raised to a new high of 21.5%, effective June 20.  Also, China’s producer prices rose 6.8% in May and non-food inflation accelerated to 2.9%, the fastest pace in at least six years.

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