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R3: NKE, M, Kors, LIZ



June 28, 2011





  • Among the many new product previews likely to accompany Nike’s analyst day presentations, today could include a sneak peak at the company’s latest “Make Yourself” campaign. The 2011 iteration slated to air this fall was shot by Annie Leibovitz highlighting seven professional women athletes. Interesting to note the stark contrast between these images and Lululemon’s current campaign (leisurely, bright, airy). Chiseled physiques like these don’t just happen. Accompanying a campaign like this with new innovative product, will make for a highly competitive women's athletic apparel market over the next 12-24 months.

R3: NKE, M, Kors, LIZ  - R3 6 28 11




Tommy Hilfiger Eyes Stake in Michael Kors - Tommy Hilfiger’s original investment team may soon be back together again. Tommy Hilfiger and Joel Horowitz are said to be among the private investors due to invest in Michael Kors, joining their previous partners, Silas Chou and Lawrence Stroll, who bought Michael Kors in 2003 for a reported $100 million, according to sources. Kors is seeking to raise as much as $500 million to fund its global expansion plans and has hired Morgan Stanley to sell an equity stake of about 25 percent. The round of financing is closed and is expected to be finalized in July, according to a financial source.  Hilfiger, who was traveling in Europe, declined to comment on whether he will invest in Kors, but told WWD: “Anybody would be crazy not to invest in it. Michael Kors is the next major global player in my eyes.” <WWD>  

Hedgeye Retail’s Take: Kors has been one of the fastest growing brands in recent years and his recent efforts to expand the brand internationally illustrates its strength. Back in March, Kors opened his first full collection international store with a flagship in Paris to accompany the five he has stateside. With Kors looking to sell only a 25% stake, we can’t imagine demand was an issue here. Given Tommy’s international experience and ties to the brand’s current owners, it would be more surprising if he wasn’t involved in some form.


Old Gringo Sues Lucky Brands - Western boot maker Old Gringo has sued Lucky Brands, a division of Liz Claiborne, for unfair competition. Old Gringo alleges Lucky has made a “cheap knock-off” of its popular Marsha boot, and sold an “unauthorized” copy of the style, which involves a distinctive embroidered boot with a side zipper. The style has been a best seller for Old Gringo, and the Chula Vista, Calif.-based firm is seeking injunctive relief for unfair competition and false advertising. It first filed its complaint on March 23, 2011, in the U.S. District Court for the Southern District of California. In the lawsuit, Old Gringo claims it first designed, manufactured and sold the Marsha boot to specialty boutiques in the western U.S. in July 2008. Calling the boot “a work of art,” the firm added that the Marsha became the firm’s best-selling style by 2009. <WWD>

Hedgeye Retail’s Take:  This one falls into the any news is good news camp. Lucky is starting to finally turn under Dave DeMattei and this ‘slip up’ may not be the worst thing for the brand since it suggests a fashion awareness that the brand had been lacking. Anecdotes like this suggest the brand could be starting to get the women’s business right.


R3: NKE, M, Kors, LIZ  - R3 2 6 28 11


Macy’s Goes GlobalMacy’s Inc. today kicked off international sales to online shoppers in 91 countries. Consumers can place orders at the retail chain’s Macys.com and Bloomingdales.com e-commerce sites. U.S.-based shoppers also can ship gifts bought through Macys.com or Bloomingdales.com to customers in those 91 countries (see the list below). “International shipping will enable Macy’s to build upon its existing customer base beyond the United States by exposing our product offerings abroad,” says Kent Anderson, president of Macys.com. The company says international shoppers accounted for 36 million web site visits to Macys.com last year. Macy’s Inc. is No. 17 in Internet Retailer’s Top 500 Guide. <internetretailer>

Hedgeye Retail’s Take:  Macy’s is among the early adopters to take their business global. Within the past month, Williams-Sonoma, Barneys New York, and Jos. A Bank all launched international e-commerce programs. While not as aggressive as WSM’s free shipping launch, this move provides Macy’s with a substantial opportunity to further expand its online business, which the company has been successful in growing and which accounts for over 20% of sales.


Brooks Bros. to Carry College Licensed Apparel - Brooks Brothers has reached an agreement with IMG Worldwide Inc., the owner of The Collegiate Licensing Company (CLC), to sell college-licensed apparel for the first time in its almost 200-year history. The agreement allows for the sale of merchandise, beginning Aug. 15, from 15 schools, including Alabama, Auburn, Boston College, Cornell University , Georgetown, Georgia, Harvard, the U.S. Naval Academy, New York University, Notre Dame, Ohio State, Princeton , Stanford, Vanderbilt and Virginia, according to a report by Bloomberg. Items were be available depending on the proximity of each school's campus to Brooks' stores. The lines, for men only, will comprise sweaters, dress and polo shirts and ties. Eventually a children's and women's line is expected to be added as well.  <SportsOneSource>

Hedgeye Retail’s Take:  Really? Brand dilution is the first thing that came to mind after reading this. There are a lot of ways to capture a younger demographic, but this one is a stretch. There’s something about logoed shirts that just doesn’t resonate with preppy.


Blue Nile Moves Away from Engagement Rings - Online jeweler Blue Nile Inc., which posted record sales of $80.2 million during the first quarter, plans to grow its business by offering more moderately priced engagement rings and expanding its product assortment. Blue Nile’s core business is engagement rings, which represent about 68% of its annual revenue, Vijay Talwar, interim chief financial officer and general manager of international, told analysts last week at the Goldman Sachs Second Annual Dot Commerce Day. Non-engagement business, such as necklaces or bracelets, accounts for the remainder of revenue. “That’s essentially what our model is based on and how we’ve been able to grow and get to this point,” Talwar says. For Blue Nile, No. 60 in the Internet Retailer Top 500 Guide, the average ticket for engagement rings is about $6,100, he says. That compares with the U.S. average of about $3,200.

Hedgeye Retail’s Take: Now this makes sense. Evolve as your customer’s needs do is a time honored retail tradition. Ideally, Blue Nile would have evolved its offering a few years ago, but as they say, better late than never.


Dwyane Wade Designs for Hublot - Dwyane Wade might have sat front and center during the men’s fashion weeks in Milan and Paris, but on Monday the basketballer unveiled a luxury design venture of his own: a limited edition timepiece created in partnership with Hublot.  Hublot’s King Power “D-Wade” watch, which will bow in late fall, is comprised of a black, micro-blasted ceramic casing offset with red detailing. Retailing for $20,000 with production limited to 500 pieces, the 48mm timepiece is Wade all the way — from the stitching on the black leather strap that’s made to look like a basketball net, to the subtle “basketball effect” of the watch face. There is also a “3” on the face (Wade’s Miami Heat number), and the player’s new logo appears on the back. <WWD>

Hedgeye Retail’s Take:  Yet another sign that the premium luxury watch market is in the stratosphere.




The following is a republished note from our Financials vertical, led by Josh Steiner - the architect behind our long-term Housing Headwinds thesis. Josh has been and continues to remain both the axe and bear on the Street as it relates to the US housing market. If you'd like to see more of his extensive work on this subject, please email sales@hedgeye.com. 


Case-Shiller YoY Decline Worsens

The Case-Shiller 20-City Home Price Index increased 66 bps in April to 138.84 on a non-seasonally-adjusted basis.  On a YoY basis, however, prices fell -4.0% YoY in April versus -3.8% YoY in March.  There is a strong seasonal aspect to home prices, with the greatest increase in prices occurring in April, May, and June, as we show in the chart below. Thus, expect to see two more months of improvement (May and June) before the downtrend resumes.  As a reminder, we use the NSA YoY data instead of the seasonally adjusted series because S&P noted last year that their seasonal adjustment factor had become unreliable.  Let us know if you'd like to see a copy of the S&P report.


Looking at the breadth of the index,16 of the 20 cities measured accelerated their YoY declines in April while 4 slowed or improved.  Month over month, all 20 cities were sequentially better on an NSA basis (declined less or increased more MoM in April than they did in March).


Mortgage Interest Deduction Under Renewed Fire

The head of the Minneapolis Federal Reserve made a speech yesterday proposing that the mortgage interest deduction be scrapped in favor of a tax credit to assist homebuyers with their down payment.  While Kocherlakota was attempting to disincentivize leverage, rather than increase total government tax revenue, the mortgage interest deduction has come under fire from a number of different angles recently.  For reference, with a median home price of $170,000, a 20% down payment, and a 5% mortgage rate, the median borrower's monthly payment is $730.  Annual interest expense on this payment is $6,430 at year 4 (roughly midway through the life of a typical mortgage).  With a $50,000 median household income and an average 22% federal tax rate, the interest deduction is good for a $1,415 tax offset.  Eliminating this would represent a 2.8% tax increase on $50,000 in income, the national household median.  Needless to say, this would be a headwind for the housing market and another push from homeownership into the rental market.  












As we've noted previously, the greatest appreciation/smallest downside each month occurs in those cities with the highest home prices.  The charts below demonstrate. Not surprisingly, Washington DC continues to be the best performing market in the country (followed by New York) based on the unprecedented growth of the Federal Government.






Joshua Steiner, CFA


Allison Kaptur


The following are some nuggets we picked up recently.  We’re here in Macau and will try to get confirmation on a lot of this stuff. 




  • Galaxy Macau - drop in share may be due to weakness in VIP business
  • Galaxy Macau advertising in HK has not gotten the bang for the buck spent.  Behind target.
  • Management quietly disappointed that the property has not performed to expectations


  • Mostly good news for the most underappreciated stock in Macau in our opinion
  • Strong volumes the last couple of weeks
  • Galaxy Macau impact on CoD has been less than expected – Street consensus was that CoD was going to get crushed
  • Macau Studio City:
    • Probably needs gazetting to start construction
    • Shouldn’t be a problem if developer sticks to original 2008 plan; otherwise, any changes to the plan will require new govt approvals
    • Earliest ramp-up in construction will be end of 2011; same time for Wynn Cotai
    • Neptune likely to open at CoD in the next couple of weeks
    • Another junket operator Lao Kung also finalizing deal to open at CoD


  • Rumor that Neptune thinking about moving home base VIP room from MGM to Galaxy Macau
  • Would be a blow to MGM since Neptune was a big part of MGM’s market share surge
  • Plausible given Galaxy’s struggles – Galaxy may be willing to offer attractive package


  • Will announce name for sites 5 & 6 soon; probably Sands Cotai
  • Hotel operator for site 5 will probably be Holiday Inn or Hilton
  • Site 5 completion date: 1Q 2012 is doable but certainly by 2Q 2012.

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




Persisting drought conditions in the southern Great Plains states are making it likely that the rebuilding of the United States’ cow herd will take four years or more. 


Wheat has continued to slide and could, once June is completed, be at the end of the biggest monthly slump since 2008 as harvesting accelerated thanks to the warm, dry weather.  According to the U.S. Department of Agriculture, approximately 44% of the winter crop was harvested as of yesterday, ahead of the five-year average of 37%. 


Restaurants have seen declining guest visits for evening meals for three years but that is now changing, according to new findings from the NPD group.  Food inflation for groceries is said to have narrowed the gap between away-from-home and in-home dining costs.  See the chart, below, for a longer term perspective of Food-at-home CPI versus Food-away-from-home



TALES OF THE TAPE - cpi home away from home




  • MCD is to start serving Café con Leche drinks in South Florida, targeting the large Latino population.
  • CBOU continues to outperform.  The stock has gained 27% over the past month.
  • SONC declined on accelerating volume.  We are negative on this name.



  • KONA, one of our favorite names in casual dining, traded up 9.3% yesterday.  Please refer to our prior notes on this.
  • RUTH and BWLD gained on accelerating volume yesterday.
  • MRT declined on accelerating volume.

TALES OF THE TAPE - stocks 628



Howard Penney

Managing Director

The Long Run

“Avoiding danger is no safer in the long run than outright exposure.  The fearful are caught as often as the bold.”

Helen Keller


It is difficult to invest for the long term.  In order to do so, the key characteristic an investor must have is permanent capital.  The best example of permanent capital is Berkshire Hathaway, Warren Buffett’s investment vehicle.  Since Berkshire recently hit a 52-week low, in the short run, it has been a bad investment.  In the long run, of course, Berkshire has been a fabulous investment.


From December 31st, 1987 to the close yesterday, Berkshire “A” shares have returned ~3,770%+.   Over the same period, the SP500 has returned ~415%+.  In the long run, it is obviously difficult to debate Buffett’s success as an investor.  Unfortunately, very few investors can operate for the long run because of a lack of permanent capital and an unwillingness of those that provide the capital (limited partners) to suffer volatility. 


Naively many investors attempt to emulate Buffett’s performance by purchasing stocks that emulate his criteria.  In aggregate, studies show that cheap stocks with clean balance sheets will outperform over time if bought well.  Obviously, the challenge when emulating Buffett, though, is to assess the moats of a company and barriers to entry of an industry.


As Buffett wrote in his 1992 letter to Berkshire Shareholders:


“An economic franchise arises from a product or service that: (1) is needed or desired; (2) is thought by its customers to have no close substitute and; (3) is not subject to price regulation. The existence of all three conditions will be demonstrated by a company's ability to regularly price its product or service aggressively and thereby to earn high rates of return on capital. Moreover, franchises can tolerate mis-management.  Inept managers may diminish a franchise's profitability, but they cannot inflict mortal damage.”


The challenge of finding a long term economic franchise is that very few exist, or are sustainable.  At one point, the newspaper industry was a prime example of an economic franchise.  The newspaper was needed, in many markets had limited competition (think the Buffalo News), and pricing of newspapers was not regulated by the government.  While arguably the newspaper industry did represent franchise-like investments during periods, those investors that held these franchises in perpetuity are likely not happy today. 


The key way to “avoid danger in the long run” is to remain flexible, not duration specific.  I appeared on the Kudlow Report a few months back and one of the other guests was extolling on the virtues of being a long term investor and indicated that his firm has an average holding period of four years.  In theory, that’s fine if you have the process and team to execute on a long term holding period.  If you are investing for the long term, which for this discussion we’ll just consider beyond three years, it requires just as much work, if not more, than if you are an intraday trader.


The primary reason investing for the long term requires more work is because in the short term, assets will get mispriced.  Much of this can be attributed to behavioral finance and fear.  When assets get mispriced, such as in the market dislocation during the subprime debacle, it requires strong conviction in the research process to believe the fundamental story and to continue to buy, or even hold, as an investment is dramatically underwater.  While many fund managers claims to be adept at buying while there is “blood in the streets”, very few actually can effectively time purchases.  The world is replete with studies that show both professional and individual investors classically sell at the bottom and buy at the top.


Given the challenges with true long term investing and the reality that most cannot do it, we emphasize three investment durations in our research: TRADE (3 weeks or less), TREND (3 months or more), and TAIL (3 years or less).  In theory, at least based on how we analyze timing and risk, they are all related, so a TRADE idea can become a TREND idea and so on. Thus, a rigorous daily research process is critical to our success (hence the early mornings).


Shifting to the short term, there are a number of data points from the last 24 hours that I wanted to flag as fundamental to some of Hedgeye’s key investment views:


First, the European sovereign bond markets continue to signal that the worst is yet to come for sovereign debt on the continent.  Even as equity markets seem to be lightly cheering positive developments yesterday, bond yields have barely budged.  In fact, Greek 10-year yields are at 16.5%, Irish are at 12.1%, Portugese are at 12.1%, Spanish are at 5.7%, and finally Italian 10-year yields are at 5.0%.  Specific to Greece, civil unrest continues to accelerate as Greek trade unions are planning a 48-hour strike to protest austerity measures that will be voted on Thursday.  We remain long German equities via the etf EWG and short Spanish equities via the etf EWP.


Second, Premier Wen Jiabao provided us an early view on Chinese inflation for the full year yesterday.  He indicated on Hong Kong-based Cable TV that while he sees difficulties in reaching a full year inflation target of 4 percent, inflation “can still be kept below 5 percent”. This supports our view that the proactive monetary tightening that China has implemented will lead to steadily decelerating inflation in the back half of 2011 and marginal dovishness out of the People’s Bank of China.  We are long Chinese equities via CAF.


Finally, New Jersey officials are purportedly in negotiations to secure a temporary $2.3BN bank loan to cover a state cash shortfall.  New Jersey needs the cash to pay various bills between the start of its fiscal year on July 1st and the mid-summer bond offering.  We’ve been consistently negative on State and Local level finances and this provides incremental support to the view.  While many States are constitutionally obligated to balance budgets, it will be challenging and will likely require additional municipal bond issues as federal government support will be largely non-existent in fiscal 2012.  Further, State and Local level austerity will be a drag on economic growth more broadly.  We currently have no position in the municipal bond market.


Good luck “avoiding danger” out there today,


Daryl G. Jones

Director of Research


The Long Run - Chart of the Day


The Long Run - Virtual Portfolio


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