• run with the bulls

    get your first month

    of hedgeye free



The short interest data is showing a lot of capitulation on the short side in the restaurant space.  Even Starbucks saw a reduction in short interest according to data released Thursday.  In this post, we go through our sentiment score card and then, below that, some callouts on short interest in QSR and Casual Dining names.


For the most recent data, which was released yesterday and reflects the short interest level as of the settlement date of 1/31, short interest declined sharply in most names in the restaurant space, as the second table below illustrates.  Only RUTH, CBOU, BWLD, and CBRL saw meaningful upticks in short interest during the two week period ended 1/31.  


Below is our sentiment score card.  The usual suspects are at the top: MCD, YUM, SBUX.  EAT and PFCB languish near the bottom with other “untouchables”.  As we wrote earlier in the week, we don’t see much downside to PFCB.  We feel that there is a couple of outlier FY12 estimates (~$1.80) being baked into consensus that are skewing the consensus EPS number higher than true expectations.  We believe that the more accurate consensus EPS number for FY12 is $1.50.  Earnings are, in our view, in a bottoming period for PFCB.  For investors looking for two-to-three year turnaround stories, we believe PFCB is one to consider.  We like what management is doing and, clearly, the investment community has written it off.  There may be a couple of difficult quarters ahead but we view the longer term risk/reward as favorable on the long side.




SHORT INTEREST – HOW LOW CAN IT GO? - sentiment scorecard






SHORT INTEREST – HOW LOW CAN IT GO? - short interest





  • PNRA saw short interest in the stock decline dramatically as it had been for some time.  The stock had posted impressive gains throughout the fourth quarter only to miss on the top line (5.9% bakery comps versus 6.3% consensus)
  • SBUX and MCD sentiment can’t get much better.  SBUX is rated highly by the street (21 Buy ratings, 8 Hold, and 1 Sell) with only 0.9% short interest.  Despite shorts covering coming into earnings on 1/26, the stock declined on the print before regaining ground and reaching a new high yesterday.  MCD has traded lower since its January sales results came out on 2/8.  Despite beating estimates, expectations are extremely high for MCD.  The street remains extremely bullish despite the stock price appreciating by 35% since the beginning of 2011; there are 21 Buy ratings, 9 Holds, and 0 Sells on the stock and a mere 0.7% of the float is sold short.  Even what would be considered as a small factor, like FX turning from a tailwind to a headwind, is enough to move the stock with the long side this crowded.  We expect McDonald’s to continue to take share domestically but as investors ponder the company’s ability to outstrip the impressive top-line growth of 2011, the trajectory of the stock’s price chart will likely moderate.  However, as the remodel program progresses in the U.S., we expect a benefit to same-store sales both through incremental traffic in the box and more efficient execution at the drive-through (6 seconds of time shaved off the process equals one point in same-store sales). 



  • CBRL short interest is building as gas prices climb higher. 
  • Short interest was building in BWLD ahead of its 4Q earnings release as investors were concerned about rising costs and the company’s growth prospects versus the street’s expectations.  Unfortunately for those pressing the short side (we had a bearish fundamental view on the quarter), the top-line blew away expectations and 1Q12 to-date comps – although the impact of weather was not disclosed (PNRA said January comps were helped by 350 bps by weather) – were given as +12.9%.  The stock responded very strongly to this and, with comps like that, it is difficult to argue that it should not.  One concern that we maintain needs to be monitored by investors in this name is the fact that margins declined year-over-year despite flat wing prices (will be unfavorable in 1Q) and a surging top-line. 
  • CAKE is reporting on 2/21 and has seen short interest come down sharply over the last two weeks.  During 4Q11 and 1Q12 to-date, the stock has traded extremely well.  We will be publishing on our view ahead of CAKE’s release on 2/21 late next week.



Howard Penney

Managing Director


Rory Green







NEW PRODUCT: Triangulating Asia

***After receiving feedback from several clients, we’ve decided to make some fairly dramatic changes to our weekly risk monitor products. We hope you enjoy the new, more in-depth format whereby we focus solely on the three key risks we think will most impact your respective portfolios to the upside or downside. We encourage you to follow up with questions/comments/concerns and/or if you’d like to dive deeper into a theme or topic that you may or may not see below.***


Virtual Portfolio Positions in Asia: Long Chinese equities (CAF); Short Japanese equities (EWJ).


Japan’s Eroding Current Account Bodes Poorly for Long-term JGB Demand

Japan, whose local-currency sovereign credit profile cites the tailwind of a persistent current account surplus, saw the figure fall to a 15yr-low of 2% of GDP in 2011. This is a very important statistic because it directly calls into question Japan’s ability to be a net creditor nation in perpetuity.


NEW PRODUCT: Triangulating Asia - 1


Japan’s eroding current account is one of several key long-term tailwinds for JGB demand that look to inflect in the months ahead – putting a noteworthy level of Japanese sovereign credit risk on the table for, really, the first time ever in 2012. The others include:

  • An acceleration in long-term inflation expectations as the BoJ looks to dramatically step up its share of JGB ownership (from 8.5% of total outstanding currently) by ether printing new banknotes or altering their mandate;
  • A potential sovereign debt downgrade(s) to A+, which will trigger capital raises across the Japanese banking system to the tune of ~$80 billion; and
  • A realization by market participants that the Diet has no credible plan for fiscal consolidation – in the face of a world-beating $3.2 trillion financing refinancing schedule for CY12. Further, staunch political gridlock will prevent any meaningful reform(s) from passing through the legislative process – per recent public statements from key policymakers in both leading parties (DPJ and LDP).

Turning back to Japan's current account dynamics, the country posted an annual trade deficit in 2011 for the first time since 1980 (-$32 billion) – with weakness not being singularly driven by the MAR '11 tragedy. Recall that both Japanese exports and industrial production growth came in flat-to-down from a YoY perspective throughout the entirety of 4Q11. 


NEW PRODUCT: Triangulating Asia - 2


While investment income more than offset the precipitous decline in the trade balance, the dramatic slowing of foreign inflows from a trade is worrying in that there appears to be little respite on the horizon from a long-term perspective. To that tune, the trend of Japanese corporations off-shoring manufacturing production amid persistent currency strength (JPY up +56.8% vs. the USD over the previous five years) looks to continue accelerating (email us for company-specific details).


The swing into deficit territory from a trade balance perspective was also driven by an -85% decline in power generation from the country’s nuclear generators (34,417 megawatts pre-quake/tsunami vs. 5,058 in mid-JAN ‘12), which forced Japan to import energy products in size. All told, Japan lost roughly 25% of its total power-generating capacity as a result of the MAR ’11 tragedy.


Today, only three of the nation’s 54 nuclear reactors are in operation, with little political will to turn them back on as the nation shifts its energy policy towards more renewable energy generation – one of the three preconditions to convince former Prime Minister Naoto Kan to step down in AUG ’11.


Looking ahead, these growing headwinds facing Japan’s current account dynamics are unlikely to inflect in any material way, given that Japan needs a strong yen to limit the cost of energy imports. That will continue to put pressure on the country’s ability to be a manufacturing and export economy going forward, slowing domestic growth and weigh on the sovereign’s ability to tax its economy. Currently, Japan relies on debt issuance to fund nearly half (49%) of all expenditures. Expect that figure to continue to make all-time highs going forward.


NEW PRODUCT: Triangulating Asia - 3


***If you have not yet seen our Japan’s Jugular 2.0 presentation, please email us and we’ll get it over to you promptly.***


Chinese Inflation Data Complicates Domestic, Global Growth Outlook

Growth Slows as Inflation Accelerates – period. Only in an Ivy League introductory macroeconomics textbook is faster inflation a precondition for sustainable economic and employment growth – of course, following the chapter whereby currency devaluation strategies are professed to boost GDP via export competitiveness.


China – where Keynesian economics are far less in vogue than in Washington D.C. – saw its headline CPI reading accelerate to +4.5% YoY in JAN from +4.1% prior. While Lunar New Year distortions may have contributed to the gain, the +3.4% increase in Brent crude oil prices during the month also “fueled” a sequential uptick (+1.5% MoM vs. +0.3% prior).


NEW PRODUCT: Triangulating Asia - 4


As we have articulated in many notes over the past six months, China is not particularly close to cutting interest rates and the JAN inflation reading + the potential for another round of The Bernank Tax will not sit well with the PBOC. Both the data and China’s sovereign debt market + interest rate swaps markets agree with our long-held conclusion that a Chinese rate cut(s) continues to be uncomfortably out of reach – so much so that the likely acceptance of this viewpoint prompted Singaporean Prime Minister Lee Hsien Loong to say earlier this week that “China’s economy may be headed for a rough landing”.


NEW PRODUCT: Triangulating Asia - 5


NEW PRODUCT: Triangulating Asia - 6


China delaying any meaningful monetary easing takes away a key supportive catalyst for global growth in the intermediate term. In the near term, China’s JAN economic growth data was actually quite bad (again, accepting some level of Lunar New Year distortions):

  • Exports: -0.5% YoY vs. +13.4% prior
    • Exports To EU: -3.2% YoY vs. +7.2% prior
    • Exports To US: +5.5% YoY vs. +11.9% prior
  • New Loans: +738.1B MoM vs. +640.5B prior
    • YoY: -29.2% vs. +33.2% prior
    • Slowest pace of JAN MoM credit expansion in five years
  • M2 Money Supply: +12.4% YoY vs. +13.6% prior

All told, we can’t help but take the view that consensus is continuing to dramatically misinterpret slowing Chinese economic data as a catalyst for monetary easing. Refer to our JAN 17 note titled, “China, With Context” for more details behind our conclusion.


The Bernank vs. Asia: Interest Rate Duel

We introduced the following equation back in a NOV 2010 research note to describe how the Fed’s policies inflate would impact a globally-interconnected economic system:


Quantitative Easing = accelerating inflation [globally] = monetary policy tightening [globally] = slower growth [globally]


This equation is particularly predictive for emerging markets, where the food and energy components of headline CPI readings garner more weight than their developed market counterparts.


In the second full week post the Fed’s pledge to maintain ZIRP through 2014, we’ve already seen a couple of noteworthy shifts in the scope for Asian monetary policy, most notably South Korea and Australia’s decision to hold off lowering their benchmark interest rates after dovish talk and/or previous rate cuts.


From a market signaling perspective, we see that 1yr O/S interest rate swaps are pricing in less monetary easing across various Asian economies (based on spreads relative to benchmark interest rates) – a trend that, while intact from roughly the start of the year, is only perpetuated by The Bernank Tax:


NEW PRODUCT: Triangulating Asia - 7


For reference, Indonesia, which the lone outlier in the previous chart, saw its equity market close down -2.6% wk/wk into and through a -25bps rate cut to 5.75%. The Jakarta Composite was only equity index in the region to close the week lower (-2.6% vs. +1.1% wk/wk on a regional median basis). Its currency also suffered amid this potentially lax monetary policy decision, closing down -1.2% wk/wk against the USD vs. a regional median of -0.8%.


Asian currencies as a whole, which are up +2.5% vs. the USD on a median basis in the YTD have been recently outperforming food and energy prices, on the margin, from a YoY perspective – a trend that has been supportive of slower CPI readings across the region. We expect this trend to reverse and re-inflate Asian CPI and PPI readings in the coming quarters if Qe3 is explicitly pursued:


NEW PRODUCT: Triangulating Asia - 8


The quantitative setup in the U.S. Dollar Index will continue to tell you all that you need to know regarding whether or not the risk of Qe3 is real or merely hearsay:


NEW PRODUCT: Triangulating Asia - 9


Darius Dale

Senior Analyst


The Economic Data calendar for the week of the 13th of February through the 17th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.



THE WEEK AHEAD - bottom1

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

The Bear Market in Miles Driven in the United States

Conclusion:  The price of oil globally continues to march higher despite miles driven in the United States declining to levels not seen since 1999.  The fact that oil climbs higher despite this bearish demand statistic is a bullish indicator as to the resiliency of the price of oil.

Positions: Long BTE and Long XLE

We have a bullish view of oil, which is primarily driven by monetary policy and limited supply.  On the first point, dovish, or inflationary, U.S. monetary policy is a headwind for the U.S. dollar and tailwind for those global commodities priced in the U.S. dollar.  Over the last three years the correlations of both WTI and Brent versus the U.S. dollar are -0.65 and -0.66, respectively.  The FOMC’s decision to extend “exceptionally low levels” for the federal funds rate through 2014 further supports this bullish factor.


On the second factor of supply, in the chart below we highlight the trend in annual global oil production growth from 1966 – 2010.  The trend is clearly that the world’s ability to grow year-over-year production has become increasingly limited in the last decade, especially versus the late 1960s and early 1970s when global oil production had a number of years of almost double digit year-over-year growth.   Production from 2001 – 2010 grew at annual basis of only +0.94%, which is below the average annual growth since 1966 of +2.20%, but also occurred during a period in which the price of oil was up more than 400%.  So, despite clear incentives to produce more, the world’s oil producers are seemingly unable to ramp production.


The Bear Market in Miles Driven in the United States - oilproduction .02.10.12



An emerging counter point to the bullish case for oil is declining demand for oil in the U.S., at least based on miles driven by U.S. consumers.  In the chart below, we show finished motor gasoline supplied in the United States every week.  As the chart shows, not only has this proxy for demand flat lined since 2004, but the most recent data points actually suggest meaningful year-over-year declines.  In fact, in the most recently reported data from the Department of Energy, which was for the week ending February 3rd 2012, finished motor gasoline supplied was down -5.7% year-over-year.  This data rhymes with the U.S. gasoline demand as reported by Master Card, which showed a -5.3% decline last week and the 24thstraight week of y-o-y gasoline demand decline.


The Bear Market in Miles Driven in the United States - gasweekly.02.10.12



From our perspective, we are seeing the real time impact of The Bernank Tax.  The inflation of oil leads to, naturally, lower demand or use of gasoline, which is a headwind to economic activity and specifically consumption, which makes up 70% of U.S. GDP.  Increasing energy prices also impacts consumer confidence.  The most recent data point on this front is the University of Michigan Consumer Sentiment Survey, which today showed that current conditions sequentially declined to 79.6 in February versus 84.2 in January.   Not surprising, given the The Bernank Tax, Brent is up almost 10% in the year-to-date.


The Bear Market in Miles Driven in the United States - mich.brent.02.10.12




Daryl G. Jones


Director of Research

Weekly European Monitor: Full from Greek Salad

Positions in Europe: Short EUR/USD (FXE)


Asset Class Performance:

  • Equities:  European indices were mixed week-over-week (after 3 straight weeks of gains across most of the region), with a positive divergence from the western periphery.  Top performers: Estonia 5.6%; Greece 4.6%; Portugal 2.4%; Norway 2.1%; and the Denmark 1.1%. Bottom performers: Hungary -3.2%; Belgium -3.2%; Russia (MICEX) -2.4%; Netherlands -1.9%; Czech Republic -1.9%.
  • FX:  The EUR/USD gained +0.07% week-over-week. Divergences: RUB/EUR +0.40%, HUF/EUR -1.26%, PLN/EUR -1.30%. YTD the HUF has made the largest gains (among European currencies) against the EUR at +6.95%.
  • Fixed Income:  10YR sovereign yields broadly decreased across the periphery w/w. Greece led the move, falling -118bps to 32.91% followed by Portugal (-133bps) to 12.97%. Spain increased 31bps to 5.25% and Germany gained 13bps to 1.97%.

Weekly European Monitor: Full from Greek Salad  - 1. yields



In Review:

It was another manic week with attention directed at Greece. But as Keith noted in today’s Early Look, Greece is but a tree within a forest of globally interconnected risks. Our note on 2/8 titled “Greek PSI Is NOT Getting Done” proved to be apt—Eurogroup Ministers withheld approval on a Greek bailout on Thursday (2/9) evening, citing that the country must come up with €325 million in additional cuts to this year’s budget, therein delaying a decision for yet another week.  Here’s a “new” Greek timeline:


Sunday (2/12) – Greek government to identify €325 million of additional cuts to this year’s budget and get it through a Parliament vote on Sunday, along with a signed memorandum that will hold them to their commitments.


Wednesday (2/15) - Once this is done, the Finance Ministers will meet again and potentially sign off on the deal, although Jean-Claude Juncker says there are no guarantees a final decision will be made then. 


Tuesday (3/20) - Greece’s €14.5 billion Bond Redemption due.


As we noted in our post “Greek PSI Is NOT Getting Done”, even if the Eurogroup approve the bailout terms, individual parliaments may call the issue to vote. For example, the German Bundestag plans to vote on the issue on February 27th, all of which suggests a final decision on PSI and a bailout could drift towards an 11th hour decision ahead of the country’s €14.5 billion bond due on March 20th.


We’re of the opinion that Eurocrats, led by the voice of Chancellor Merkel, want to work with Greece to preserve the union. For one, we think a weak EUR/USD is in the interest of Germany and Greece is an important export market. Secondly, our read on Eurocrats remains that they fear the domino effect: despite talk of ring-fencing Greece, they overwhelmingly fear far larger countries defaulting or leaving the union as a result of a Greece exit and therefore see it as a risk not worth taking.


In our note on 2/9 titled “Tight-Lipped Draghi Goes Further Non-Standard” we discussed the marginal changes to the ECB’s growth outlook, namely to “tentative signs of stabilization in economic activity at a low level” versus “substantial downside risks”, and additional collateral changes (for more see the note).  Additionally, the BOE met this week and kept rates UNCH but added £50 billion additional QE (in line with consensus) in response to very negative growth prospects.



Call Outs:

  • Portugal - Fitch says Portugal faces a very serious recession this year, but will not need another bailout.
  • China - may provide an investment to Europe (likely EFSF) of as much as €100 billion, said Yuan Gangming, an economist at the Chinese Academy of Social Sciences.
  • Russia - Putin may dissolve his ruling party and create a new power base after next month’s presidential vote.
  • Germany - Merkel’s ruling Christian Democrats rose 2 percentage points to 38%, the highest approval rating since August 2009, in the weekly Forsa poll. The Free Democrats, Merkel’s junior coalition partner, were stuck at 3% and the Social Democrats, the main opposition party, were unchanged at 27%.
  • Switzerland - SNB reiterated a warning that the Central Bank will intervene heavily at any time if needed to defend a cap on the value of the Swiss franc versus the euro and stated that it won’t allow the euro to trade below 1.20 francs.
  • Vodafone - missed quarterly revenue forecasts, with increasingly tough trading in Spain and Italy overshadowing solid performances in emerging markets and northern Europe.

Key Regional Data This Week:

Positives (+)


Eurozone Sentix Investor Confidence -11.1 FEB vs -21.1 JAN

Russia CPI 4.2% JAN Y/Y (exp. 4.3%) vs 6.1% DEC


Negatives (-)

Germany Exports -4.3% DEC M/M (exp. -1%) vs 2.6% NOV

Germany Industrial Production 0.9% DEC Y/Y (exp. +4.3%) vs 4.4% NOV

Germany Factory Orders 0.0% JAN Y/Y (exp. -0.4%) vs -4.3% DEC


UK Industrial Production -3.3% DEC Y/Y (exp. -3.1%) vs -3.6% NOV

Greece Unemployment Rate 20.9% NOV Y/Y vs 18.2% OCT

Greece Industrial Production -11.3% DEC Y/Y vs -7.8% NOV





(2/8) Iceland Sedlabanki Interest Rate UNCH at 4.75%

(2/9) BOE keeps rates UNCH at 0.50%. The BOE adds 50B GBP in asset purchases/QE (as expected) to take the program to 325B GBP

(2/9) ECB keeps rates UNCH at 1.00%


CDS Risk Monitor:

On a w/w basis, CDS was largely down across European sovereigns, with Portugal leading the charge down for a second straight week, at -179bps to 1,154bps. Ireland saw the next largest drop at -18bps to 565bps (see charts below).   


Weekly European Monitor: Full from Greek Salad  - 1. cds a


Weekly European Monitor: Full from Greek Salad  - 1. cds b




Keith shorted the EUR/USD via the eft FXE on 1/19 in the Hedgeye Virtual Portfolio and re-shorted the pair on 2/8 with the price bumping up against our immediate term TRADE resistance level of $1.32. We continue to think that the uncertainty around shoring up Greek PSI and bailout deals will drive this pair lower.  


Weekly European Monitor: Full from Greek Salad  - 1. EUR DIES



The European Week Ahead:

Sunday:  The Greek government is to identify €325 million of additional cuts to this year’s budget and get it through a Parliamentary vote on Sunday, along with a signed memorandum that will hold them to their commitments.


Monday:  Jan. Germany Wholesale Price Index (Feb 13-14); Jan. UK  Consumer Confidence (Feb 13-17) and RICS Home Price Balance


Tuesday:  Feb. Eurozone Zew Survey Economic Sentiment; Dec. Eurozone Industrial Production; Feb. Germany ZEW Survey Economic Sentiment and Current Situation; Jan. UK CPI and Retail Price Index; Dec. UK House Prices; Q4 France Non-Farm Payrolls and Wages – Preliminary; Q4 Greece GDP - Preliminary


Wednesday:  (Tentatively) Eurozone Finance Ministers will meet and sign off on the Greek bailout should it pass the Greek Parliamentary vote on Sunday. Q4 Eurozone and Germany GDP – Advance; Dec. Eurozone Trade Balance; UK BoE Inflation Report; Jan. UK Jobless Claims Change and Claimant Count Rate; Dec. UK Unemployment Rate; Q4 France GDP – Preliminary; Jan. Russia Industrial Production (Feb 15-16); Q4 Italy GDP – Preliminary


Thursday:  Eurozone ECB Publishes Feb. Monthly Report; Jan. Eurozone New Car Registrations; Jan. Russia Real Wages and Unemployment Rate (Feb 16-20); Q4 Spain GDP – Preliminary; Sweden Riksbank Interest Rate Announcement


Friday:  Dec. Eurozone Current Account and Construction Output; Jan. Germany Producer Prices; Jan. UK Retail Sales



Extended Calendar Call-Outs:

29 February:  2nd 36-Month LTRO Allotment


25-26 February:  G20 Finance Ministers Meeting in Mexico City. Decision on IMF loan of €500B expected.


29 February:  Eurogroup Meeting to sign the endorsed agreement between the 17 on the Treaty for the European Stability Mechanism.


1-2 March:  Signing of the Fiscal Compact by 17 Eurozone leaders together with the non-euro area leaders of countries willing to join. Further the group will reassess the adequacy of resources under the

EFSF and ESM rescue funds.


30 June:  Deadline for EU Banks to meet €106 billion capital target/the 9% Tier 1 capital ratio.


1 July:  ESM to come into force.



Matthew Hedrick

Senior Analyst



GIL: Amnesia?


Following a 30% tailspin just 2mo ago, the stock is back to pre-‘announcement’ levels. Despite the modest improvement, we think the risk/reward is still unfavorable given the current level of uncertainty and execution risk.


Gildan reported a modest beat after severely haircutting expectations some 35% last quarter. Just two months later, following a 30% tailspin, the stock is back to pre-‘announcement’ levels. It’s acting like the incremental pros in the quarter far outweigh the cons, we disagree. GIL is shifting its focus toward growing its own retail via Gold Toe and its international business. We expect this to cause transitional interruptions in the process, which the stock is does not currently reflect.

Let’s take a look at the key highlights at each end of the spectrum this quarter:


  • While pricing remains challenging in the U.S. wholesale distributor channel, GIL has been able to get some pricing in the retail channel, which added $10mm in revs (+3%) and accounted for some of the unanticipated upside in sales this quarter.
  • International is finally starting to materialize contributing what we estimate to be less than $10mm of revs in the quarter. It has been identified as an opportunity for a few years now, but the company has never had the capacity to handle the extra business. Ironically, just as international demand comes on, the company is taking one of its facilities and capacity off with the closure of Rio Nance 1 at the end of Q2. The opportunity there is to potentially upgrade the facility to improve efficiency, but for now it’s going to be mothballed for the near-term.
  • With market share in its core t-shirt and fleece markets up around 65% it’s a challenge to maintain share, but GIL was up roughly 4pts yy though down ~1pt sequentially. Perhaps one of the more bullish results of the quarter was GIL’s unit growth coming in up +3-5% vs. the industry down 3-4%. We think this can be primarily attributed to the company being one of the first to take pricing down amidst an aggressive destocking environment at year-end.


  • Pricing in the U.S. wholesale distributor business remains highly unstable. While December was a bit less promotional than expected, destocking continues leading to further heightened promotional activity. In fact, the company noted it expects promotional activity to increase through Q2 before improving sometime in Q3. That suggests we’re only half way through this irrationally competitive environment at best.
  • Another variable to consider is that GIL is not fully hedged nor bought for F12. The company’s guidance assumes the remainder of Q4 purchases will be made a current spot prices. This could go both ways.
  • GIL is growing its own retail and international business the same time CapEx is at multi-year lows and SG&A has to head higher if the company expects to capitalize on these opportunities. That could definitely be positive for the business 2-3 years out, but will require significant investment near-term – something GIL is not accustomed to with a historical SG&A ratio of 10-11%.

There are two additinal points to consider. First, management suggested that the Branded Apparel business (~25% of sales) could eventually achieve profitability similar to Printwear in the mid-20s. Its currently just about break even. If we want to paint a super bullish scenario and assume GIL is running at 25% margins (closer to 20% with corporate allocations) we are looking at $3+/sh in earnings power. We think the mere suggestion of this level of profitability was viewed positively if not flat out bullish, but there are a lot of questions between now and then that don’t appear to be appropriately discounted in the stock.

It’s also worth noting that the company hasn’t operated with this type of leverage since ’02-’03 when GIL shifted to its off-shoring model – they don’t have that lever anymore. Given that management didn’t repurchase any stock during the quarter, our sense is they aren’t comfortable running this thin. With the entire 1H generating negative FCF its will provide the company little financial flexibility while simultaneously looking to expand new growth businesses.

We fully acknowledge that there was an improvement in fundamentals on the margin, but not significantly enough to completely dismiss the impact of perhaps the most challenging six-month period in company history. We’re shaking out at $1.08 this year and $1.90 next year reflecting an 22x and 12.5x earnings multiple, and 14.5x and 10x EBITDA = not cheap.

These estimates are predicated on 13.5% revenue growth this year and 12% for next year reflecting the incremental revenue from Gold Toe, pricing in Branded Apparel, and growth of retail and international offsetting the impact of lower unit sales and pricing from destocking in the 1H. In addition, we are assuming gross margins of 16% in Q2 reflecting a sequential increase from Q1 due to the absence of an inventory devaluation (= 7pts), the impact of manufacturing downtime (=3-4pts), and higher unit volume. Similarly, with the closure of Rio Nance 1 at the end of Q2 and higher utilization, we have margins  up to 24-25% in the 2H and up 450bps next year to 23.5% reflecting 300-400bps from lapping the interruptions of the 1H F12, higher utilization, and improved manufacturing efficiencies. While we expect SG&A growth (+20%) to outpace sales (+12%) in support of retail and international initiatives, we expect operating margins to expand 366bps in F13.

Despite the modest improvement, we think the risk/reward is still unfavorable given the current level of uncertainty and execution risk.


Casey Flavin



GIL: Amnesia? - GIL S


GIL: Amnesia? - GIL RNOA


Here are our notes from the call:


Revs:  -8.3%

Printwear: -41%

Branded Apparel: +93%

GM: 2.1%; -2265bps


SG&A: +22%

  • Selling prices slightly higher than projected in December - due to lower projected promotional discounting in Dec
  • Q1 loss due to:
    • Still consuming inventories made at peak cost
      • Avg cost of cotton in Q1 was more than double yy = $0.45/sh impact
    • Selling prices in print were reduced during Q1 in-line with current futures initial through ST promotions and then formal reduction in gross selling prices announced in De
      • Selling prices in Branded Apparel have remained largely unchanged and were increased at the end of FY to reflect current cotton future costs
      • U.S. wholesale distributors delayed replenishment of inventory in anticipation of the above selling price reductions in printwear
      • Distributors were able to lower inventories in Q1 b/c seasonally lowest
      • De-stocking of distributor inventories resulted in close to 40% reduction in GIL's unit sales in Q1 and significantly more impactful than the 3.9% decline in screenprinter demand last yr
      • Partially offset by higher market sales and higher shipments to Europe and other Int'l mkts
      • Lower Printwear sales impacted EPS by $0.25
    • Benefit of Printwear selling price reduction applied to distributor inventories devaluatation = $0.16
    • Extended manufacturing shutdown taken in December to manage inventory levels = $0.07
  • These factors resulted in segment operating losswhen otherwise profitable

Branded Apparel:

  • Improved results due to higher selling prices implemented in Q4
  • Improved sock manufacturing efficiencies
  • Accretion from GoldToe
  • Expect results to continue to improve as lower cost cotton cycles through after Q2 + manufacturing efficiencies as sock facility ramps with integration of GT
  • SG&A expenses for branded apparel division saddled with infrastructure put in place to support LT plan
    • As well as duplication of costs to the GT acq
    • Expect expenses for BA to be more inline with sales despite higher development costs associated with GT for retail over time


  • Inventories up 67% (down 6pts seq)




  • EPS $0.20
  • Revs +$500mm
  • Contribution from GoldToe
  • Higher cotton costs expected to impact EPS by $0.70 vs. last yr
  • Impact of higher cotton costs projected to be largely offset by higher printwear unit sales despite assumed industry demand in U.S. distributor channel down -5%
  • And market share gains and increased int'l penetration, higher selling prices, efficiencies and accretion from GT


  • Higher cost cotton to roll of in Q3
  • Assumes GIL covers remaining open cotton purchases for Q4 at current rates
  • No recovery in overall industry shipments to U.S. distributor channel - guidance assuming 5% decline in Q2 and flat in 2H compared to low base in F11 when demand was down 8%
  • Mkt share in U.S. distributor channel of ~65%
  • Industry pricing slightly lower than Q1; printwear is currently aligned with mkt
  • The industry has experienced inflation in labor, energy and other input costs - no assurance of rational pricing and further promotional activity will not occur
  • Price increases implemented at retail in Q4 stick
  • Progressing with facility for activewear and underwear expect to be online by end of year
  • Will be lowest cost facility adding capacity and further manufacturing efficiencies in F13

  • Expect further efficiencies in sock manufacturing as it ramps up
  • Temporarily retired RN1 to manage pace of capacity expansion at end of Q2
  • CapEx still ~$100mm for F12
  • FCF of $75-$100mm; burn cash in Q2, generate in 2H
  • Did not buy any stock despite stock price decline


Branded Apparel Margins:

  • Anticipate similar to wholesale in the long run ~25%
  • Will take time given investments over the next few years

Cotton Hedging:

  • Avg. quarterly cost peaked at ~$1.60 in Q4 and still flowing through until Q3
  • Have hedges into Q4

Promotions / Price Reductions:

  • t-shirts and fleece
  • Current environment in-line with projections
  • Q2 assumes some additional promotions from Q1
  • Pricing is slightly lower this quarter than Q1 as expected

Q2 Revenues:

  • Expect strong sales growth in Printwear due to int'l penetration and some inventory destocking by U.S. distributors and increased market share

Wholesale Distributor Inventory Levels:

  • ~45% relative to GIL's share in low 60s
  • So far in January seeing stronger POS than projected; also in Feb
  • 30% increase in int'l
  • Hadn't had inventory historically to support
  • Reflects opportunity in Mexico and Europe
  • All int'l markets doing exceptionally well


  • Have placed over 15,000 stores and locations
  • Testing GT underwear in different retailers
  • Expanding some categories
  • Launched GT product called solutions - compression sock
  • Have secured new programs for the fall
  • Pushing for BTS and holiday promotional items

Branded Apparel:

  • Re Q2 guidance assuming GT contribution is similar ~$50-$60mm, restocking is some (small) but mostly international penetration within screen print channel


  • Other competitors have had to take write-downs because goods sold for under cost
  • There is still some irrational pricing taking place
  • So far GIL is running well ahead of -5% decline in shipments
  • "So in certain cases, I would say that there is definitely irrational pricing going on in the marketplace at even today's levels. So if the price does continue to deteriorate, it's because it's irrational, it’s not something that I think is sustainable first of all. As well as the same competitors that are pushing pricing down potentially in this channel are racing as fast as they can to raise prices at retail because they are running through all the high cost cotton. So I think as an industry, everybody is in the same boat. We are going to be, obviously, consuming our high cost cotton by the end of -- from the beginning of our third quarter. We feel comfortable with our positioning. We also feel comfortable we can command a premium for our products."

GIL Inventory Levels:

  • Inventories up 67% = 100mm from higher costs (27%); 60mm GT (16%); balance is units (23%)

Price elasticity:

  • POS is down overall at retail b/c raising prices
  • Elasticity almost direct 1/1 relation
  • Took two small price increases at retail vs industry increases in 30%-40% range
  • Prices increases added ~$10mm in revs to the quarter = +3%


  • Inventories down much more than POS unit reduction


  • Taking out a little more time during Easter
  • Will have 70-75mm dzn of Activewear capacity with remaining 3 facilities

Mid-Tier & JCP:

  • Think JCP strategy is going to work well for GIL
  • Got tripped up in answering saying they were mentioned as one of the opportunities…overall happy with Gold Toe placement

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 80.37%
  • SHORT SIGNALS 78.32%