R3: VFC, BBY, M, Cotton Import Fee



June 15, 2011






  • According to a recent survey by Acosta Sales & Marketing, there is startling divergence in grocery budgets by demographic. Households earnings less than $75k per year, which account for roughly 75% of the population, are reducing budgets by at least 10% while those earning above that level are increasing spending by up to 34% more. Trip frequency also plays a meaningful role coming into play when gas prices reach $3.70 at which point shoppers begin to cut back. The national average was above that level last week suggesting that we may see strip center outperformance begin to moderate.
  • The two key drivers of better than expected sales at BBY were mobile computing and phones (being the lead retailer for the Verizon iPhone launch didn’t hurt). What’s interesting to note here is the company’s new Tablet Central initiative its rolling out that will offer a one stop-shop highlighted competitive differences between models. Sounds just like what BBY is known for in TVs, which has proved to be a struggle in respect to actually converting traffic into sales.



VF Corp Set to Launch Vans to Target the Premium Indian Sector - Apparel manufacturer VF Corp is launching its Vans brand in India to tap into the ever-growing premium sector in the country. VF Arvind Brands, a joint venture between the US firm VF Corp and Arvind Group, has announced that it will open two Vans stores in the country, one in Bangalore and the other in Delhi. These outlets will market products from Vans signature men's and women's footwear lines, as well as apparel and accessories. "The demand for lifestyle products is growing. It is the right time to bring international brands into the country," said Kanchan Pant, managing director of VF Arvind Brands.  <FashionNetAsia>  

Hedgeye Retail’s Take: Zero downside. 1.2 billion people, 2.4 billion feet. Plus an established JV with Arvind Mills that is in its sixth year leaves little integration risk for VFC as it sends new brands to India.  This makes perfect sense to our Hedgeyes. Add that to this week’s TBL deal, and VFC continues to plow forward…


Macy's Mobile Marketing - Martine Reardon may put on the wrong shoes or forget her purse in the morning, but one thing she always has on her is her BlackBerry. “I can’t let it out of my hands,” said Reardon, Macy’s executive vice president of marketing and advertising, as she underscored the booming popularity of mobile communications and how Macy’s is embracing the technology. “Mobile is clearly a very important part of a consumer’s life, and a marketer’s life.…There are 300 million mobile subscriptions projected by the end of 2011,” said Reardon, adding that two to four years ago, it was less than half that.  Mobile devices and tablets have surpassed the usage of desktops and notebooks and “will become even more important from the point of view of a brand like Macy’s because it enables you to share that social space and shopping space at the same time.”  <WWD>

Hedgeye Retail’s Take: Hardly a visionary statement. The head of marketing and advertising using personal experience to discuss strategy for such a large and complex beast? C’mon… The true visionaries are the ones that are working on – and talking about – things that folks like us can’t even conceive at this point in time.  This is not a negative development by any means, but at a point where ‘Long Macy’s’ is one of the most consensus calls in retail, a story like this reminds us that there’s nothing super-human about this company. It’s simply a department store. That’s all. Nothing else.


ADT Study Estimates Store Theft Rose 12 Percent in 2010 - Retailers lost more than $37 billion to theft last year, according to an annual survey recently conducted by the University of Florida with a funding grant from ADT Commercial, a major security systems integrator. The National Retail Security Survey (NRSS) preliminary results show an increase in theft by nearly $4 billion, from $33.5 billion in 2009 to $37.1 billion in 2010. “It is possible this increase is due to the prevalence of Organized Retail Crime (ORC) where items are stolen in quantity and then resold to consumers on the Internet or at flea markets,” said University of Florida criminologist Richard Hollinger, Ph.D., who directed the survey. “The National Retail Federation just completed its own survey showing an increase in ORC activities with more than 95 percent of retailers saying they had been victims and almost 85 percent indicating that the problem had gotten worse over the last three years.” <SportsOneSource>

Hedgeye Retail’s Take: This synchs the reality that Home Invasions/thefts also tick up meaningfully during recessions due to cutbacks in police overtime hours. Ditto for retailers. With fewer eyeballs watching, there’s more opportunity. This article chalks it up to organized crime. I chalk it up to employees – they’re usually at the top of the ‘shrink’ list.  Here’s a funny anecdote…Ever go to a Six Flags? The game alley where you give a few dollars at a time to the 18-year old kid behind the counter is a double edged sword. It’s the highest margin attraction, but also the highest shrink as those dollars end up in pockets instead of cash registers. As a result, Six Flags installed cameras so the employees know they’re being watched. What they don’t know is that most of the cameras are simply a shell. They don’t work, but serve the intended purpose anyway.


Carol Brodie’s Rarities Breaks HSN Records - Carol Brodie likes to break the rules. The self-proclaimed “passionate and obsessed jewelry lover and collector” launched Rarities: Fine Jewelry With Carol Brodie — a high-end jewelry business — on HSN, a traditionally mass medium and the exact opposite of what everyone else told her she should do. Two years later, Brodie reigns as the top-selling jewelry line on the network and its online counterpart, — a feat, given the above factors and the current economic climate at the collection’s launch. “I did anything that I was told didn’t traditionally work on TV,” said Brodie, who spent almost a decade as Harry Winston’s global director of communications and has worked with De Beers, Ivanka Trump Fine Jewelry and Fabergé. “I was told big earrings weren’t something you sell on TV — and they are now one of my best-selling items.” <WWD>

Hedgeye Retail’s Take:  Ask Liz Claiborne… Home Shopping works – even though no one gives them credit for it.


USDA Proposes to Raise Cotton Import Fee - US Department of Agriculture’s Agricultural Marketing Service (AMS) is seeking comments by 5 July on a proposed rule that would increase the assessments paid by importers of cotton and cotton-containing products under the Cotton Research and Promotion Order.  These assessments would be raised by 16.4 percent from 1.088 cents per kilogramme to 1.2665 cents per kilogramme, which is based on the 12-month average of monthly weighted average prices received by US cotton producers. The revenues generated by these assessments are used to finance research and promotion programmes designed to increase consumer demand for upland cotton in the US and international markets. AMS is also proposing to revise the conversion factors and expand from 706 to 2,371 the number of HTS codes used to calculate the importer assessment. AMS notes that the inclusion of these additional codes would allow the programme to assess almost 100 percent of imported raw cotton and cotton-containing products, as it does with the domestic producer assessment. <FashionNetAsia>

Hedgeye Retail’s Take: Not devastating. But not the right direction – especially if you are overexposed to cotton-heavy, mid-tier brands (i.e. JC Penney).





Just a little tidbit on ASCA. 



I was in Kansas City yesterday and visited ASCA KC.  It looks like the flow through has been very strong at the property so we should see sequential margin improvement.  KC is a major contributor for ASCA as its second largest property.  We think the read on ASCA KC provides further evidence that the company is on track to beat the consensus Q2 estimate of $0.45.  We are at $0.52.


We’ve been a little cautious about sequential VIP volume growth as Macau works its way through the summer.



While we clearly haven’t seen any evidence of a slowdown, our concern surrounds the historical 9 month lag between Mainland China tightening (higher discount rate and bank reserve requirement) and VIP volumes, which we’ve shown to be statistically significant (see our note: A VIP SLOWDOWN IN THE CARDS? (05/22/11).  Now the concern seems to be growing in the junket community as well.


While we need to do some more work in this area, it appears that some junkets fear that the significant underground banking industry in China is becoming a more attractive option for cash deposits than junket operators.  VIP liquidity is somewhat fueled by investors who get a fixed return on their money deposited with junkets.  That yield has been higher than the above board Chinese banks so there’s been no issue with keeping the junket liquidity engine pumping.  Now that government credit restrictions are tying the hands of the big banks, the underground banks have moved in to fill the significant credit demand.  With that kind of demand, these banks can afford to pay higher deposit rates than the big banks and even the junket operators.  Thus, money may start to move from the junkets to the underground banks.  Obviously, this could constrict junket liquidity, junket play, and ultimately VIP casino revenues.


While June has certainly been much slower than May, we cannot yet attribute the sequential slowdown to lower junket liquidity.  June is seasonally slower and May benefited from high hold.  We will be watching this closely and continuing to talk to market participants and will update you on any further findings.  In the meantime, we just wanted to point out the potential of this issue as it may be significant.

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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

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