SKX: Estimates Still Too High

SKX jumped on the endorsement bandwagon (again) and shifted more capital away from fashion and towards performance. Bad move -- as they shift from their core and towards a much more competitive space. The stock is getting cheap, and sentiment is poor. But next near's numbers are way too high.



Just days after we see Nike re-sign Michael Vick, and UnderArmour endorse Kemba Walker, Skechers jumps in and endorses the Patriots’ Danny Woodhead. This is yet another reason why we’re going to wait for SKX to get cheaper before even considering getting involved. We’re not knocking the company for spending endorsement dollars, but we’re definitely concerned about who they’re endorsing. In the past, they’ve endorsed Carrie Underwood, Britney Spears, Kim Kardashian, Christina Aguilera, David Cooke, Rob Lowe, and Ashlee Simpson. The closest this got to being athletic-inspired was that Kardashian’s mother is married to Bruce Jenner.


Do we have a problem with this? Absolutely not. It works for Skechers. They’re all about being on trend with the right styles. That’s all and nothing else. That’s what they’re very good at.


But now with endorsements like Danny Walker, Karl Malone, Rick Fox, Broadway Joe, and (gulp!) Wayne Gretzky??? Sorry to notify the boys in Manhattan Beach – but when you start going this route, you have to innovate new product, not copy it.


In the fashion space they’re the 900lb gorilla -- competing with the Steve Madden’s of the world, as well as hundreds of smaller players in a non-consolidated space.


But on the performance side of the biz, it gets more gnarly… First of all, Nike Inc (which has about 45% of the market) could care less about fashion. But when Skechers tries to compete in Nike’s backyard (athletics), it should probably tread lightly. It’s not just Nike – as there’s another 4 players (Adidas, Reebok, Asics, New Balance) who each account for about 6-8% share of the industry. Under Armour has only 1%, but is on its way to 10%, and the fledgling Chinese brands (Li-Ning and Anta) have extremely deep pockets and a strong desire to export content to the US.  For SKX, there’s not as much room to grow.


We don’t want to come across as perennial cynics here. The reality is that SKX has offered tremendous opportunities in the past to catch 5-baggers in otherwise tepid markets. In addition, the brand has been around for a while, it has a relatively sound infrastructure, and when focused, it succeeds more often than not.


It’s not that we doubt they can keep pressing the performance category. Our point is very simply that it’s going to take significantly greater capital ADDED to the model in order to do this rather than reallocating capital from their extremely successful core fashion business. SG&A has been trending up, which is good in this case, but it has been entirely due to marketing dollars, not internal talent. This actually smells a lot like Reebok from about a decade ago. They meaningfully changed up their marketing budget towards sports performance, but abandoned their core. Pulling design, merchandising and sales talent from your cash cow to grow a new business is simply a bad idea. No one we’ve ever seen has done this successfully.


As for the stock, clearly expectations have come down. The stock is off 80% from its recent peak of $40, and is squarely in the ‘buy zone’ of the Hedgeye Sentiment Monitor. In addition, the consensus number of $0.45 this year is probably doable. But the problem is that next year, the Street is back up $1.32 – that’s very optimistic. If you believe those numbers, then by all means, stomach the near-term risk, be a hero and buy the stock. But our level of confidence that the company won’t earn over $1.00 is better than 75%. Management is selling on the way down. We'd follow their lead and resist the temptation to jump in too early here.


SKX: Estimates Still Too High - 7 8 2011 1 02 47 PM

Italian Risk Rising!

Positions in Europe: Long Germany (EWG)


In the European Chart of the Day below we highlight all-time wides in the spread between 10YR German Bund yields and Italy’s 10YR bond. The factors weighing on this spread include:


  1. Ongoing sovereign debt contagion across the region
  2. The ability of Berlusconi’s government to finalize a €47 Billion austerity package next month
  3. Italian bank worries as the second round of European Stress Tests are due on July 13th(an estimated 15-22 of 95 banks are rumored to fail; Unicredit stock was halted today after -6.5% drop)
  4. Talk today that Berlusconi’s Finance Minister Guido Tremonti is caught up in allegations of graft that may call for him to step aside


To the last point, it’s been reported that Berlusconi called a closed-door meeting with Tremonti today to discuss allegations that Marco Milanese, a lawmaker accused of corruption who until nine days ago was Tremonti’s political advisor, had been paying €8,500 a month on rent for an apartment used by Tremonti in Rome. According to The Economist, Marco Milanese is wanted on suspicion of having supplied confidential official information to a businessman in return for “significant cash payments and other gifts such as expensive watches, jewels, luxury cars (Ferrari and Bentley) and holidays abroad”.



While Tremonti publically stated he’d change his arrangements as of this evening, the news compounds recent negative Italian headlines.


Matthew Hedrick


Italian Risk Rising! - italy. yields


Employment data a mixed bag for restaurants.

The overall jobs picture this morning was unambiguously awful and the unemployment rate has ticked up to 9.2%.  The level of growth in employment among the 20-24 years of age cohort accelerated in June, which is a positive data point for QSR.  May employment growth among this age cohort came in at a meager +1.1%.  June’s employment level for 20-24 year olds grew 1.5%.

Overall, the jobs report was clearly worse-than-expected.  The other four age cohorts we show in our chart, below, all show sequential deterioration in employment growth. As a reminder, much of the positive sentiment from management teams over the past number of quarters as been based upon an improving employment landscape.  Equally, much of the improvement in consumer confidence surveys that has occurred has been driven by improving expectations, rather than current situation perceptions, and the slide in employment levels will likely weigh on expectations.


As the second chart, below shows, employment growth in the food service industry continues to be robust but there was an interesting slowdown in Full Service employment growth in May.  This data lags the employment by age data by one month.  The May Full Service slowdown may prove to be immaterial but, since late 2010, Full Service employment growth has lagged Limited Service employment growth.  If this divergence were to become more pronounced, we would take it as being suggestive of slowing trends in casual dining versus quick service.  The employment by age data for June, additionally, would corroborate this idea.  The space has been on fire and we would need further confirmation from this and other factors to become more bearish, but these two data points are noteworthy this morning.



Howard Penney

Managing Director


Rory Green




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Probably won’t be a surprise that we think that it will be MPEL.


Now that we have the property detail for June, our models have been updated.  The table below shows our EBITDA estimates versus the Street.  The largest divergence is, of course, MPEL.  Our new EBITDA estimate is $180 million, up from $172 million, 18% above the Street.  We wouldn’t be shocked if they managed to beat even our number. 


JPM just raised their MPEL estimate $49 million to $168 million.  That’s a whopping 41% increase and he’s still too low!  Such a monstrous revision must’ve been accompanied by a rating upgrade right?  Wrong.  JPM is a dollar short and a day late on this one.  Or should I say 10 months late on an upgrade (but not too late) and at least $12 million short on the quarter. 


Wynn Macau also had a strong quarter.  We are projecting EBITDA at the property of $317 million, 10% above consensus.  MGM and LVS may only come in-line with consensus.  We don’t have estimates for Galaxy but we are not optimistic about Galaxy Macau to post EBITDA anywhere close to what the Street is expecting.





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


Corn prices have been on a downward trend of late but Morgan Stanley is still advising clients to be long December 2011 corn.  The argument, per Bloomberg, is that inventories are tight and the government’s acreage number will ultimately be revised downward by the USDA.




  • SONC is rated Buy at Lazard Capital, with a PT of $13.
  • PNRA was reiterated overweight at Piper Jaffray, with an upwardly revised price target of $148.
  • SBUX has appointed Greater China Chairman Wang Jinlong as head of its Asia Pacific operations excluding China.
  • SBUX is testing “refreshers” in a can, according to



  • CAKE rated New Neutral at Lazard Capital.
  • BJRI rated New Neutral at Lazard Capital.
  • DRI rated New Buy at Lazard Capital.
  • DRI’s Olive Garden has rolled out a more healthful kid’s menu, dropping milkshakes and fries in favor of fruit smoothies and grapes.
  • PFCB rated New Buy at Capstone.
  • RT rated New Hold at Capstone.
  • EAT’s Chili’s is in hot water again having serves three fruit smoothies with tequila to a trio of young children (as young as 8 years old).



Howard Penney

Managing Director


Rory Green


Being Able To Change

This note was originally published at 8am on July 05, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“He is able who thinks he is able.”



After taking a much needed week off, I’m back in the saddle this morning and ready to manage some risk. So let’s get at it - here’s where the Hedgeye Asset Allocation Model stands:

  1. Cash = 52% (down 6% week-over-week from 58%)
  2. Fixed Income = 33% (Long-term Treasuries and US Treasury Flattener – TLT and FLAT)
  3. International Equities = 9% (China and Germany – CAF and EWG)
  4. US Equities = 6% (Healthcare – XLV)
  5. International Currencies = 0%
  6. Commodities = 0%

Have we been able to change our exposures in order to reflect our Macro Themes? In some cases, yes. In others, not yet. There is a big difference between Risk Management and Research – it’s called timing.


A lot of people say you can’t time markets. We agree – by the looks of Q2 performance numbers out there, a lot of people can’t. But what if you could? Would you change?


In June we went 21 for 22 on closed positions in the Hedgeye Portfolio. That’s better than a swift kick in the Canadian bacon. That also lends credibility to the concept that timing markets within a band of probabilities is possible.


Did I get crushed on the first day of July? Big time. Do I plan on getting crushed every day this month? You tell me. Being Able To Change is critical to the Risk Management Process. Crush or be crushed.


So let’s get back to positioning…


Growth Slowing and Deflating The Inflation have been 2 big Research calls we’ve made in the last 6 months. In the Hedgeye Asset Allocation Model, that’s why I have such a large allocation to Fixed Income. Slowing growth and slowing inflation is good for bonds – and from some prices… in some countries… bad for stocks.


I’ll get back to stocks in a minute…


Fixed Income

  1. Fixed Income Exposure – on last week’s bond bombings, I took our allocation to its highest for 2011 YTD.
  2. Long-term Treasuries (TLT) – was a really good position to hold on the long side in Q2 2011. It was contrarian and it was right. To a degree, when 2-year US Treasury yields hit 0.34% during the thralls of June (and 10-year yields were trading consistently below 3%), being bullish on bonds because growth was slowing as inflation deflated was being priced in. For now, we’ll stay long TLT provided that our intermediate-term TREND line of support for 10 and 30 year yields don’t breakout above 3.24% and 4.38%, sustainably.
  3. US Treasury Flattener (FLAT) – another rock solid position for us in Q2 and we expect it to continue to be, provided that La Bernank cannot find a way to suspend gravity with another Fiat Fool Experiment to take the short end of the curve beyond the zero-bound. The all-time wide in 10s minus 2s = +293 basis points wide. The Q1 2011 average was +276 basis points wide. And this morning 10-year minus 2-year yields = +270 basis points wide. We’re looking for further compression in the 10s/2s spread over the intermediate-term TREND.

Now back to everyone’s favorite storytelling vehicle – stocks.

  1. Equities Exposure – for Hedgeye, a 15% asset allocation to Global Equities is actually relatively high for 2011! We’ve cut this exposure to a Japanese style ZERO percent more than a few times in 2011, but I doubt we’ll do it again. Why? China.
  2. China (CAF) – in the face of some borderline heated debates with the buy-side on the road for the last 6 weeks of Q2, we bought Chinese Equities on June 16th, 2011. We’re already up +9.86% on that position and while we fundamentally respect that bottoms are processes and not points, we think we may have bottom-ticked this major country market for the intermediate-term. We think Chinese Growth Fears are beyond exaggerated and that Chinese Inflation Slows in Q3/Q4 of 2011.
  3. Germany (EWG) – since the beginning of 2010, we have preferred long DAX versus long the SP500 and that’s been as right as the sun rising in the East. Like it did in 2010, the DAX continues to outperform the money honey loved SP500 (up +7.8% YTD in 2011). As it should - Germany, like most countries, has plenty of political baggage – but it isn’t long US Congress.

In terms of US Equities, people who think in boxes like to try to put Hedgeye in one. But guess what – we’re going to pop out of that box early every morning and annoy those people.

  1. Equities Exposure – having a ZERO percent asset allocation for parts of May and June was good. Why change the process if you don’t have to own something when it goes down for 7 of 8 weeks? Today, we’re at 6% and we can buy more. Yes We Can.
  2. Healthcare (XLV) – on January 3rd, 2011 when we introduced our “call” for the start of the year, we called out Healthcare and Energy as our 2 favorite S&P 500 Sectors. Those sectors are #1 and #2 for the YTD at +14.2% and +11.4%, respectively. So we do have it in us to pick the right ponies every once in a while on the long side – again, no boxes for Big Alberta please. He wears Lulu Lemon.
  3. SP500 (SPY) – obviously being short SPY isn’t an asset allocation call in our model, but people are going to hold me accountable to being short it right here and now – and they should. I was dead wrong with this position last week, and I’ll just thank my lucky Northern Lights that I covered all of our S&P Sector ETF shorts (Basic Materials, Energy, etc) a lot lower. What was intermediate-term TREND resistance in the SP500 (1314) is now support, and I have this short position on a very short leash.

From a Commodities and International Currency exposure perspective, we’ve sold everything (including Gold), so there’s nothing incremental to say about that other than to re-state the why. Our Global Macro Theme of Deflating The Inflation means there is no reason to be long The Commodity Inflation (or the currencies that back Commodity heavy countries) until we see our theme fully priced in.


Being Able To Change isn’t easy. Every day I challenge myself to consider being the change we all want to see in this profession. My immediate-term support and resistance ranges for Oil, the Shanghai Composite Index, and the SP500 are now $90.56-97.05, 2714-2861, and 1314-1341, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


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