Athletic Specialty Apparel Performance Gap Widens


Athletic apparel sales slowed for the third consecutive week across the industry. Sales in the athletic specialty channel, however, diverged posting a significant sequential acceleration widening the recent performance gap between the two. ASPs in the specialty channel remain strong up MSD, but also turned sharply higher across the industry debunking concerns over potential inventory clearance activity – an incremental positive for margins early here in the 2Q.


Athletic Specialty Apparel Performance Gap Widens  - FW App App Table 1 6 15 11


Casey Flavin



I continue to believe that the COSI turnaround story is on track, despite what the weakness in the stock, of late, might be suggesting.  In 1Q11 COSI reported a 3% in same-store sales, implying that 2-year trends declined from a -0.3% to -0.7%.  All of our visits and checks suggest that the company can post 3-4% same store sales in 2Q11. 


One of our recent checks was by Hedgeye intern, Yale football star, and restaurant channel-checker extraordinaire, Allen Davis.  The following is his account of his channel check of the Cosi restaurant on East 8th Street in NYC:  


In the third week of my internship, I discovered what will probably become the most important lesson of my summer: When working as a research analyst covering the restaurant space, always mention places you haven’t eaten. Who would have thought that a casual inquiry as to the food selection as Cosi would lead to my first due diligence trip?


The first thing I noticed when I walked in was how many people were in there. I’d make a rough estimate of 16. I walked up the counter, was asked what I wanted, then looked up for the menu. No menu at the counter!  Instead, it is posted in small framed sections along the wall as you walk in. I didn’t even notice it.  I just assumed it was art of some kind. I can certainly appreciate the effort to class up a fast casual place with innovative menu design; perhaps the behind the counter menu is too fast food-ish, but some warning would have been nice.


The menu itself was well organized.  Each framed piece was a different type of item. Options weren’t as wide as I expected. Other than pepperoni, the pizza just seemed like pizza versions of their sandwiches. I nearly got the half-sandwich plus soup deal, it seemed like a great value, but they didn’t have any hearty soups. I guess the margins on selling those aren’t as high. I ended up getting a strawberry-mango smoothie and a Bacon, Turkey &Cheddar Melt. The most important factor in my choice was that bacon was the first ingredient listed. That’ll get me every time.


When the cashier asked if it was ordering my food to stay or to go, I turned to look into the seating area and had two big realizations. Firstly, no one sitting down was actually eating anything. Not one person. There were a few half empty drinks, so I guessed they had been at one point, but for now they were just hanging out, typing away on laptops. I guess Cosi is the Starbucks of fast casual food: buy one thing and you can linger as long as you want. The second thing I noticed was that the seating was amazing. I know a lot of places have started upgrading the interior, but McD’s has nothing on this place. It felt like a living room, complete with big comfy armchairs, a few longer bench-like sofas. They weren’t messing around with leather seats and padded stools here. They meant business.  However, I needed to get back to my apartment to watch PTI before my workout, so I took my food to go.


While I waited, I watched a guy in a chef’s jacket make bread. I’ve never seen anyone other than my Mississippi grandmother make bread so, naturally, I stared at him.  I’m sure he felt like an animal on display at the zoo. There was a basket of sample slices by the station. I took a piece.  It was really good, so I took another. By the time I remembered my manners, I must have housed six or seven pieces.  I don’t know it they sell their bread, but they should.


Now, on to the food. The sandwich was good. Pretty standard-fare, but it didn’t give me anything to hold against it. I wasn’t a huge fan of the Dijon sauce on the melt; it was a bit spicy for my taste. They put a good amount of bacon on the sandwich though and it was cut thicker than I expected. A lot of places (McDonald’s I’m looking in your general direction) are really stingy with bacon. The best compliment I can give the melt is that It looked like the picture, something I don’t see too often. I didn’t like the smoothie. The mango part was good, but they put strawberry sauce in it. This sauce is a growing problem in fast casual/quick service beverages.  I don’t know who thought it was a good idea, but they were wrong. Pouring strawberry sauce into a mango smoothie doesn’t make a strawberry-mango smoothie. The strawberry sauce just sat at the bottom and since the straw wasn’t sturdy enough to support a stir, leaving me no option but to drink the sauce before I got to the mango smoothie, which was actually good.


Overall, my first Cosi meal was pretty good. When I go back, I won’t get the same drink, but I’m definitely going back.



Allen Davis



Howard Penney

Managing Director


As sequential inflation has slowed or, at least, become less broad-based in agricultural commodities, many of the key items we monitor seem to be at potential inflection points.  Grain prices declined week-over-week and, while corn will likely see year-over-year inflation for the entirety of 2011, it seems increasingly possible that wheat purchasers could benefit from easier compares in the fourth quarter.  This would obviously benefit PNRA and, to a lesser extent, the pizza concepts.  Chicken wing prices, empirically, trade relatively higher in the second half of the year as football season kicks off.  Clearly, this year, the NFL shutout is the $64,000 question for wing prices and, more importantly, BWLD sales.


The dollar remains the key driver and, any incremental bid that is placed under the value of the US currency will “deflate the inflation”, as Hedgeye CEO Keith McCullough, points out in his Macro notes.







Wheat may rise going forward, despite the 2.2% decline last week, due to speculation that wet weather in Canada may impair sowing.  This data point, in addition to concerns that dry weather hurt the winter crop in the U.S. and France, the world’s two largest exporters, could provide support for wheat prices from here.  In addition, the fact that corn inflation has outstripped inflation in wheat has caused a substitution effect as farmers turn to wheat, instead of corn, to feed their livestock.  Wheat prices are a key concern for PNRA and the pizza concepts.


Corn prices are also likely to increase from here, at least judging by the supply and demand dynamics.  While the dollar can absolutely trump these factors, in terms of what U.S. companies pay for input costs, corn demand is, according to Bloomberg, accelerating beyond farmers’ ability to boost yields.  This is causing stocks to become depleted as Chinese demand grows and demand from ethanol factories also continues to be a bullish factor.  Corn is really an important input cost for the broader restaurant industry because of its derivative impact on protein costs.  CMG is one company that does not hedge its commodity costs in general.  While Chipotle has corn locked for the year, any further impact on meat prices as a result of higher feed costs could impact margins.









Coffee prices gained 1.8% week-over-week as weather continues to impact coffee production in Latin America.  Demand remains strong for coffee and this has also helped keep prices high.  Following its 1Q earnings call, PEET highlighted the significant impact high coffee prices can have on its gross margin in the second quarter.  Coffee prices have come down since that earnings call took place but the absolute price remains extremely high.





Chicken Wings


Chicken wing prices gained last week.  This cost change is not a concern for BWLD given that, on a year-over-year basis, prices remain highly favorable. 


WEEKLY COMMODITY MONITOR: PNRA, CMG, DPZ, PZZA, BWLD - chicken wings price chart



Howard Penney

Managing Director

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 80.52%
  • SHORT SIGNALS 78.68%

Taking up FL and FINL Estimates


After combining a) NPD Weekly data with b) Monthly channel breakout, c) SportscanINFO apparel POS and d) our SIGMA analysis,  we’re taking up our estimates for FL and FINL.  Here are some callouts…



For starters, the bifurcation between the athletic specialty channel and the shoe chain and natn’l/department store channels continues to be at least eight-point wide. This indicates that weekly trends (that people trade on) are significantly understating relative performance in the athletic specialty channel. Case in point, athletic specialty was up +6.4% for the month substantially outperforming the broader index up only +1.5%. We saw this trend begin in January – and have another 6 months before we have to think about ‘comping the comp.’


With sales coming in stronger than expected against considerably tougher compares in conjunction with company specific factors, we are taking our estimates up for both FL (comps up to 9% from 7% and EPS to $0.16 from $0.12 for Q2) and at FINL (comps up to 7.5% from 5% and EPS to $0.26 from $0.23). Our FL estimates remain well above the Street at $0.11 due to tight inventory management and clear progress underway with both merchandising and marketing initiatives in light of a strong first month of the quarter. It’s worth noting that despite taking up our FINL estimates for the quarter ended in May, we are below the Street ($0.29E) due to higher investment spending as the company completes several initiatives embarked on in 2010 and greater exposure to toning relative to FL that will weigh on results.  


Here are some of the additional highlights:

  • ASPs turned lower in May across all three channels. Two important factors to keep in mind here are 1) as we highlighted in our post “Athletic Apparel Remains Strong – FW Choppy” on 5/30, the decline of the toning category is having a profound effect on ASP trends to the tune of 3%-5%, and 2) ASPs grew mid-single-digits in the first week of June the strongest increase since March implying a positive incremental move for margins.
  • Sales in the athletic specialty channel increased +6.4% outperforming both shoe chain (-2.1%) and dept./natn’l chain store channels  (-8.5%). Despite a also sequential deceleration across all three channels, the positive spread between athletic specialty and the other two channels remains at least eight-points wide.
  • In the athletic specialty channel, running continues to be not only the largest, but also fastest growing primary category for the fifth month in a row.
  • Growth in running has been fueled largely by new Reebok (RealFlex and Zig Pulse) and Adidas (Climacool) introductions as well as the latest generation of Nike AirMax and Free styles. Share gains by Reebok and Adidas continues to come primarily at the expense of Puma and New Balance. However, in an uncharacteristic shift Nike conceded -173bps of share in the running category as well. Adidas/Reebok is clearly raising the competitive bar in this category, a development we’ll be watching closely in a category that Nike dominates with nearly 50% share. By comparison, Adi/Reebok has only 15% share.
  • Share gains by both Nike and Adidas in aggregate are among the key brand callouts due in part to contraction in the toning category. Interestingly, while Adidas has gained its share almost entirely in the athletic specialty channel, Nike has gained most of its share in the shoe chain and natn’l/department store channels over the last four months. It’s worth noting that Nike is not losing share in the key athletic specialty channel, but it’s not gaining it either. On the other hand, Adidas/Reebok appears to be taking greater share from the smaller fragmented brand set.
  • Converse posted its second month of positive sales growth in a year last month and its second consecutive month of share gain, which starts a stretch of considerably easier compares for the brand.
  • Reebok trends reflect the most dynamic shift in portfolio mix of any footwear brand over the last few years. What jumps off the page in looking at the brand’s trends is the volatility between sales, units, and ASPs. The resurgence of sales in 2010 was entirely driven by toning, which also took ASPs higher. However, since year-end ASPs have come down while sales have remained relatively stable on higher unit growth. Contrary to its toning counterpart that has been losing ~300bps of share on a monthly basis, Reebok as maintained positive share gains driven by a shift to new lower cost running product, which continues to drive recent brand momentum.

Taking up FL and FINL Estimates  - FW Mo Table 1 6 11


Taking up FL and FINL Estimates  - FW Mo MktShr Table 6 11


Taking up FL and FINL Estimates  - FW Mo by Cat 6 11


Taking up FL and FINL Estimates  - FW Mo Cat Athl 6 11


Taking up FL and FINL Estimates  - FW Mo Running 6 11


Taking up FL and FINL Estimates  - FW Mo ASPs 6 11


Taking up FL and FINL Estimates  - FW Mo MktSh 6 11


Taking up FL and FINL Estimates  - FW Mo MktShr Agg NKE 6 11


Taking up FL and FINL Estimates  - FW Mo MktShr NKE 6 11


Taking up FL and FINL Estimates  - FW Mo MktShr ADI 6 11


Taking up FL and FINL Estimates  - FW Mo Reeb 6 11


Taking up FL and FINL Estimates  - FW Mo MktShr SKX 6 11


Taking up FL and FINL Estimates  - FW Mo MktShr Puma 6 11


Casey Flavin



This note was originally published June 15, 2011 at 07:55am ET.


“True, atomic bombs have made nuclear war so catastrophic that I am convinced no country wishes to resort to it.  But I am equally convinced that we are at the mercy of an error of judgment or a technical breakdown, the source of which no man may ever know.”

-Jean Monnet


Jean Monnet is regarded by many as the chief architect of European integration.  Following the World Wars, there was much support for political movement that would lessen the probability of the horrors and injustices that ravaged Europe for so much of the first half of the Twentieth Century being repeated.  Indeed, a plaque in Washington D.C. on the front of the Willard Hotel memorializes Monnet as a man that died as a “proud citizen of the Europe he inspired and helped to create”.


The period immediately following World War II was clearly anomalous in many respects.  For one, there was broad consensus on the need for closer European integration which, it was claimed, was the only way to defeat the ugly beast of Nationalism that had marred so much of the continent’s past.  Every viewpoint must be understood in the context of the environment in which it is adopted.  Winston Churchill, possibly the most proud of all Englishmen, was firmly in favor of European integration.  In a speech at Zurich University, that came to be known as “The Tragedy of Europe”, Churchill stated plainly, “We must build a kind of United States of Europe”.  His conviction in this matter was clearly derived from his experiences of war-time Europe, speaking as he was in September of 1946.  Interestingly, while his use of “we” implies British participation in the process, he excluded Britain from his description of the proposed “United States of Europe”. 


Given that a key initial component of the European project, as proposed by the Schuman Declaration, was to be the pooling of coal and steel production, it is astonishing to think just how economically and financially integrated the present day European Union is.  Merely fifty-five years later, the labyrinthine European financial system has become so complex and interconnected that understanding the implications of policy changes or – indeed – the limits of national autonomy within Europe, has become exceedingly difficult.


Indeed, Matt Hedrick, Hedgeye’s cerebral Europe Strategist, has recently been analyzing the nuances of the European banking system of late.  The guidelines by which European money is created is quite opaque, with many standards relating to banking practices within the European Monetary Union seemingly in a constant state of flux.  For example, Matt has pointed out recently, in dialogue about Greece with a Hedgeye client, that National Central Banks can decide what collateral to accept from commercial banks based on ECB guidelines.  However, recent concessions mean that government debt and bank assets rated near or at junk are acceptable in some cases.  In addition, the recent downgrading of Greece to a credit rating of CCC from B by Standard & Poor’s is drawing attention to the country’s ability, or lack thereof, to meet future obligations.  There are innumerous potentially unexpected consequences that could arise from the current system.  


It has been astonishing to hear market commentators dismiss the risk Greece poses to the broader European and global financial markets.  Some television pundits have asserted that “Greece doesn’t matter”.  Clearly, given the interconnected nature of risk within the European financial system and the fact that the Bundesbank has the most exposure of any European bank to the peripheral countries, Greece absolutely matters.  The determination of European leaders such as Jean-Claude Trichet to assuage any and all fears of contagion within Europe – be they emanating from Greece, Ireland or elsewhere – speaks to this fact. 


Of course, European leaders have been forced to choose their words increasingly carefully since, essentially, the outset of the European sovereign debt crisis began attracting attention in 2010.  For instance, the viability of the single European currency has been called into question for some time.  As Hyman Minksy writes in “Stabilizing an Unstable Economy”, “Money arises not only in the process of financing, but an economy has a number of different types of money: everyone can create money; the problem is to get it accepted”.  This point highlights a crucial role that the European Union is assuming on a broader sense: assuming that the currency – and means by which it is created – continues to be accepted.  This logic can be extended to other facets of the European Union.  It is not only crucial that the common currency continues to be accepted by the people, but also that the common monetary policy, laws, policies and frameworks continue to be accepted also.  As social unrest intensifies in Europe, it becomes more and more challenging to bind a continent together which, for so much of its history, has been defined by factionalism.


The “Greece doesn’t matter” attitude is typical of U.S. centric investors that, time and again, commit the sin of neglecting to realize the interconnected nature of global macroeconomic risk.  It is acutely ironic that it may just be the highly integrated nature of Europe that breeds disagreement in the 21st Century after Monnet, Schuman, and so many others saw integration as key to securing the future prosperity of Europe’s people.  As recently as 2005, this view was held firmly.  Whether in Celtic Tiger Ireland or the booming Costa del Sol in Spain, European integration was credited as a key driver of prosperity.  Many in the peripheral countries now blame a lack of monetary autonomy for sluggish growth.


What’s voted by the market as “good” today can be “bad” tomorrow.  That can be correlation risk, interest rate risk, geopolitical risk or any other condition or accepted truism.  Investors that dismiss this reality are repeating the mistakes of the recent past, just as we believe that policy makers in Washington are repeating mistakes made in the 1970’s that led to Jobless Stagflation.  If an unfortunate turn of events did take place in Europe – George Soros recently stated his belief that the risk of this is mounting – the traditional response will take over the airwaves: “it was unforeseeable”.  What is foreseeable about markets is that they are unpredictable, especially in Europe which has seen so much turmoil and conflict throughout its modern history.  From a shorter-term perspective, price is telling us all we need to know as equity markets slump and CDS spreads continue to widen.  While the U.S. has no shortage of its own internal problems, we know from very recent history that the global markets are closely interconnected.


Indeed, as Churchill said in “The Tragedy of Europe”, “Is it the only lesson of history that mankind is unteachable?”


Rory Green







The Macau Metro Monitor, June 15, 2011




The new facilities will consist of a US$3.0 BN five-year Term Loan A and an undrawn US$500 MM five-year Revolver, maturing in 2016.  Sands will have the option to raise an incremental $1.0BN of new senior secured credit facilities.  After a 6-month introductory period, borrowing rate will be priced at LIBOR +2%.  Proceeds will be used to help pay down Sands' $2.7BN Venetian Macau Credit Facility, $1.75BN Venetian Orient Limited Credit Facility, and for construction of Sites 5 & 6.  The refi is subject to certain Macau Government approvals.


Singapore's Casino Regulatory Authority (CRA) says it is reviewing "more than a handful'' of junket operators to see if they can be given licences to work at the two integrated resorts.  CRA refused to say if any licences would be given out by the end of this year.  



The Director of the Hong Kong and Macau Affairs Office of the State Council, Wang Guangya, paid visits to Grand Lisboa and Galaxy Macau yesterday.  This was an unusual move as usually Beijing officials opt to stay away from casinos during their official trips to Macau.



Permira Advisers LLC may be looking to sell its US$1.7 billion (MOP13.6 billion) stake in Galaxy Entertainment Group.  The deliberations are still at an early stage and no timing or size of the sale has been decided yet.  Permira bought its 20%  stake in Galaxy in October 2007.


Cambodian casino operator NagaCorp, which operates Phnom Penh's only full-scale casino, announced it will acquire two development projects in a US$369 million deal to expand its presence in Phnom Penh.  The projects would expand the existing NagaWorld and double the company's developed floor space, and create a two-level pedestrian shopping arcade called NagaCity Walk.


Nagacorp’s CEO and majority shareholder, Chen Lip Keong, is privately funding the new projects, which are expected to be completed in 2016.


Singapore's Urban Redevelopment Authority (URA) reported a 12.75% MoM drop in private homes sold in May, from 1,805 to 1,575 units.


Singapore's overall unemployment rate fell to a three-year low of 1.9% in March amid healthy economic growth and a tight labor market.

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