PSS: Dark Horse Move?


This is going to be a messy quarter for PSS, which reports after the close today, but the reality is that numbers may or may not matter. It’s the company’s first since the departure of CEO Matt Rubel and you can bet that it will be sweeping everything it can under the rug this quarter. All in, we’re at ($0.03) vs the Street at $0.12.


The fundamental call is still that this is a company with two divisions with the PLG group alone worth where the stock is currently trading. That’s unlikely to change with the print. But we can’t debate the fact that this synthetic value is more elusive than ever without a real CEO. Given our below-consensus estimates, we wouldn’t buy into the print, but if it trades off meaningfully around any bloodshed, we’d definitely look to get more constructive.


The ‘dark horse’ move here for PSS (i.e. the move that the 25%+ of the float that is short does not want to see) would be to clear its balance sheet in a meaningful way – especially given that Inventories have been growing disproportionately to sales over the last four quarters. This would tag EPS this quarter, but would be a positive margin event for 2H12.


Here are our assumptions for the quarter:



  • We expect sales up +2.7% driven by PLG and continued international expansion.
  • In looking at NPD POS footwear data, we can get a sense of what brands are doing from a directional standpoint. While in no way does the data capture all U.S sales of the Performance Lifestyle Group’s big brands, it has still proven to track closely with reported trends. Since Q1, three of PLG group’s four brands have accelerated sequentially or remained flat. In addition, with Q3 backlog up +39% compared to +49% in Q1, we expect revs up +20% on the heels of +22.5% growth last quarter.
  • In the domestic business, sales in the family footwear channel have improved sequentially coming in at -1.3% for the quarter up from -2.4% in Q1. In light of a particularly abysmal Q1 and a significantly more favorable compare relative to peers, we expect a stronger sequential pickup with domestic comps still performing below the industry at -4.5% up from -8.3% last quarter.
  • On the international front where the company has been performing significantly better, we expect comps up +5% reflecting a modest sequential deceleration on a 2-year basis.
  • In aggregate, we expect the Payless comps to come in down -2% driven by an improvement in traffic from last quarter as well as mix (more toning and boots), which is likely to keep ticket up LSD.

Gross Margins:

  • We are modeling a 250bps decline in Q2.
  • Similar to Q1, higher product costs and channel mix will pressure margins in Q2. However, with product costs expected to be up LDD from +6% last quarter, we expect this headwind alone to impact margins by -250bps. Mix will likely account for another -40-50bps headwind assuming $35mm of incremental PLG sales at sub 30% margins.
  • Offsetting these headwinds to some degree will be modest tailwinds from rent/occupancy equating to +20bps and product mix with greater volume from toning and boots.


  • We are modeling SG&A growth of 5.5%, however this may vary considerably as the company could opt to sweep all sorts of costs under the carpet this quarter.
  • With a $10mm severance-related charge expected in the quarter (=~$0.10 in EPS) along with costs associated with building out the international business offset in part by increase PLG growth spending last year ($5mm+), we expect SG&A to be up +5.5% in the quarter.


PSS: Dark Horse Move? - PSS PLG 8 11


PSS: Dark Horse Move? - FW Mo ChanSales 8 11


PSS: Dark Horse Move? - PSS CompTable 8 11


PSS: Dark Horse Move? - PSS Comp Trends 8 11


PSS: Dark Horse Move? - PSS Quick hit part 1


PSS: Dark Horse Move? - PSS quick hit 2 8 11


PSS: Dark Horse Move? - PSS Sigma 8 11


PSS: Dark Horse Move? - PSS sentiment 8 11



Bears Bounce: SP500 Levels, Refreshed

POSITION: Short Financials (XLF)


When the market’s rally is being led by Bank of America (BAC) and the Financials (XLF), that’s not a good thing. Or at least it hasn’t been since the Financials put in their Fed cycle-high in February of 2011.


Across all 3 of our core risk management durations (TRADE, TREND, and TAIL), the SP500 remains bearish/broken: 

  1. TAIL resistance = 1256
  2. TRADE resistance = 1165-1191 (using a range instead of a price point to capture wicked volatility studies)
  3. TRADE support = 1108 

Critically, nothing has changed in the last 2 days and now I am signaling a lower-low of immediate-term TRADE support (below the prior YTD closing low of 1119). If Bernanke doesn’t deliver whatever it is people are begging for on Friday, this could get very ugly, very quickly.


Bear markets bounce.



Keith R. McCullough
Chief Executive Officer


Bears Bounce: SP500 Levels, Refreshed - SPX

Sports Apparel Reflecting BTS Demand


Athletic apparel sales decelerated last week following stronger sales volume in the first two weeks of August driven in part by tax holiday driven BTS spending. That said, sales up HSD are back in-line with recent trends. Importantly, ASPs remain reasonably strong in the specialty athletic despite softness in other channels.


Sports Apparel Reflecting BTS Demand - App table 8 24 11



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Notable macro data points, news items, and price action pertaining to the restaurant space.




For the week ending August 19, MBA mortgage applications composite index declined 2.4% WoW, driven by a fall in purchase applications. The purchase index fell by 5.7% WoW; the most recent data on new and existing home sales indicates that homebuyer demand remains weak.  The refinance index inched down 1.7%.




Yesterday, the QSR space outperformed driven by the high beta coffee stocks and CMG (with the exception of DNKN), which I think is extremely overvalued.






  • The +3.43% move in the S&P yesterday was associated with a positive volume studies of +4%.  The only QSR names to move higher on accelerating volume were SBUX, PZZA and DPX. 
  • Dunkin' Donuts has signed a multi-unit store development agreement with the Robinson Family and Southern Food Services Inc. for four new restaurants in Northern Huntsville, Ala. The first restaurant is slated to open in 2012 and the remainder by 2016.




  • In the FSR space, the names that moved higher on accelerating volume were BBRG, BOBE, RRGB and TXRH. 





Howard Penney

Managing Director



Rory Green



In preparation for ISLE's FQ1 2012 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from ISLE’s FQ4 2011 earnings call and subsequent conferences/releases.




  • “We expect to open Lady Luck Nemacolin in approximately nine months after being given the green light by state regulators.”
  • “We expect depreciation and amortization to be right around $90 million. Cash taxes paid for the year should be less than $5 million. We expect interest to be somewhere between $83 million and $86 million for the year. Corporate, around $43 million, and with approximately $6 million in stock comp, so $36 million or $37 million cash.”
  • “Maintenance capital, we expect to be right around $50 million this year– while we will continue to spend on systems conversions at some of our properties. And depending on timing related to Cape Girardeau and Nemacolin, project capital to be probably in the $90 million to $100 million range for the year.”
  • “We have been in contact with the insurance companies daily and begun working on calculations of the claims for the reopened properties and expect to have the first one filed for Davenport, probably in the next several weeks. We have a good rapport with our insurance carriers for the process.”
  • “As we went through year end and really looked at some of our self insurance accruals and things like that, it’s really not so much to do with healthcare as it has been other claims, workers’ comp, general liability and other types of insurance. We’ve had some favorable results through some things like that.”
  • “We are still dealing with some economic issues, particularly high unemployment rates in some of our markets.”
  • [Cape Girardeau GMP contract] “I would say it would probably be – $50 million to $65 million would be my guess, just going off of what the land cost, what the infrastructure costs, and then what the all the FF&E and everything else goes under there.”
  • “The best indicator for us that the discretionary money is starting to come back into gaming and people are starting to be a little bit more confident is the increase in retail play. Again, about half of our portfolio showed an increase in retail play, which was consistent with our competitors.”
  • [Project Capex timeline] “I would say roughly, probably less than 10% of it the first quarter, 15% or so the second quarter, and then the balance of it in the back half of our fiscal year, relatively equal or maybe even ramping up continued through the year.”

Give It Up

This note was originally published at 8am on August 19, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“There’s nobody taking center from me until I give it up.”

-Joe DiMaggio


That’s what Joltin’ Joe had to say about Mickey Mantle taking his position in center field for the New York Yankees in 1951. Mantle was the superstar rookie. DiMaggio was the tiring veteran. 1951 would be the last year Joe DiMaggio played center field.


That’s another quote from “The Last Boy – Mickey Mantle and The End of America’s Childhood” (Jane Leavy, page 15) and, like I do with every book I read, I dog eared the page, and wrote a personal note to myself beside the quote.


I write a lot because I like to think a lot. Writing helps me think. Whether it’s to all of you every morning or to myself in bed with my books every night – it’s just what I love to do.


Rather than rip into some tired Old Wall Street brain-trust that doesn’t want us to be successful this morning, I think my humble submission to you today should be a simple one. Be yourself. Play the game that you love. And enjoy what you do.


Thirteen years ago when I started in this business, it was my job. Ten years ago, it became a compensation mechanism to make enough money to not have to worry like many hard working and honest people do in this world.


Today, it’s not about the money. It’s about building something that I love; building something that’s successful; and building something that lasts.


I don’t doubt that Merrill Lynch founder Charles Merrill and Joe DiMaggio were some of the best players of their days. I respect their successes. I love celebrating winners wherever I can find them. But today, Merrill and DiMaggio are dead.


Today, Bank of America Merrill Lynch is setting up to fire another 10,000 people (WSJ). Today is a new day. Today is as good a time as any for Old Wall Street to Give It Up.


We need to rethink and rework this business. We need new leadership. We need to evolve. Fast. Or it will, once again, be too late.


Back to the Global Macro Grind…


Global stock markets around the world are crashing. Crash, as we defined it, is a peak-to-trough decline of 20% or more in the price of something that ticks in a short period of time. From Seoul, Korea to Frankfurt, Germany, here’s what’s really going on out there:

  1. KOSPI (Korea) = down -6.2% overnight and down -22% since May
  2. DAX (Germany) = down -3.5% this morning and down -28% since May
  3. CAC (France) = down -2% this morning and down -33% since February
  4. MIB (Italy) = down -2% this morning and down -37% since February
  5. XLF (US Financials) = down another -2% pre-open and down 28% since February
  6. XLI (US Industrials) = down another -1.5% pre-open and down 23% since April

Old Wall Street can blame Europe, blame China, or blame Canada at this point. Reality is that finger pointing is for losers and I, like most of you, am tired of watching it. It’s time for the Captains of American Accountability to step up and take charge. US Growth Slowing is as big a problem as any right now to this globally interconnected marketplace.


Need more US-centric leading indicators other than Financials and Industrials crashing?

  1. US CURRENCY – while the US Dollar isn’t crashing to all-time lows (yet), it’s getting pretty darn close. At $74.20 on the US Dollar Index, it’s only 3% away from its all-time lows that were established by 2 conflicted and compromised Federal Reserve Chiefs (Arthur Burns in the 1970s and Ben Bernanke, twice, since 2006).
  2. US TREASURIES – both 2 and 10-year US Treasury Yields are now collapsing/crashing to all-time lows. When compared to 2008 (the levels they just eclipsed on the downside), that’s saying something. And that something is not good.
  3. US JOBS and HOUSING – both sets of numbers yesterday (weekly jobless claims and Existing home sales for July) were bad enough in their own right. The bigger problem is expectations of how bad both jobs and housing numbers are setting up to look in August-September. Yes, these are Hedgeye forecasts – and yes, we have been right on both YTD.

I’m young, and I have plenty of character faults. I get that I have a lot to learn. But I can assure you that I am on it. I love this game. I love this country. And I think my team and I can help be the change we all want to see in our profession.


My immediate-term support and resistance ranges for Gold (immediate-term TRADE overbought this morning), Oil (we remain the bear on oil, Goldman the bull), and the SP500 (bearish) are now $1773-1866, $79.23-84.42, and 1106-1166, respectively. Our allocation to both US and European Equities in the Hedgeye Asset Allocation Model remains 0%.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Give It Up - Chart of the Day


Give It Up - Virtual Portfolio


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