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CONCLUSION: The timing of our bullish thesis on Brazilian equities has been delayed as a result of the accumulation of negative effects stemming from the recent slew of policy maneuvers. We’ll likely revisit Brazil on the long side in the coming months, but, for now, we expect continued lower-highs in the BRL (vs. the USD) and Brazilian equities on a TRADE and TREND basis.




“… we can’t stress this enough: we expect both Brazil’s equity market and currency to experience continued downside over the intermediate term post the MAY 29-30 central bank meeting if their actions are perceived to be in line with the broader central plan of Brazilian policymakers. The strongest TREND-duration short thesis for Brazilian equities (i.e. the opposite of our long thesis) is quite consensus at this juncture, given that the Bovespa Index has indeed crashed from its MAR 13 YTD high (-20.1%).


Shorting Brazil from here requires true guts, but if the USD continues to make higher-highs over the intermediate-term – dragging cross-asset volatility up alongside it (the two are +94% correlated on an immediate-term duration) – Brazilian equities and the Brazilian real will likely continue to get tattooed if policymakers don’t commit to providing international investors with higher rates of expected return(s) via doing what they must to stem the tide/reverse the trend in the exchange rate (i.e. selling dollars, lowering cross-border IOF taxes, introducing a rhetorical floor for the BRL, hiking rates [not likely], etc.).”


Upon analyzing today’s -50bps SELIC Rate cut and associated COPOM commentary, it’s clear to us that Brazilian officials have no desire to protect the nation’s currency from capital flight associated with the latest King Dollar breakout – a phenomenon only exacerbated by the recent spate of increased capital controls and advance of the sovereign further into the Brazilian financial markets.




The benchmark SELIC Rate has now been reduced to an all-time low of 8.5% on the strength of a consensus decision by the COPOM (129 of 154 decisions) – which is the first to be publically disclosed on an individual basis under the new statue. While don’t have their full minutes (to be released on JUN 8), we feel comfortable in saying  their latest guidance is more dovish than their previous statement – which, inadvertently or explicitly, is in line with Rousseff and Mantega’s desires for a structurally lower domestic cost of capital and a weaker currency (generally at the expense of the Brazilian private sector and foreign investors): 

  • APR: “… even considering that the activity recovery has occurred more slowly than anticipated, the Committee believes that, given the cumulative and lagged effects of policy actions implemented so far [i.e. 350bps of rate cuts], any movement of additional monetary easing should be conducted with parsimony.”
  • MAY: “The COPOM considers that, at the moment, the risks to the inflation trajectory are limited. The committee also notes that, until now, given the fragility of the global economy, the contribution of the external sector has been disinflationary. Given this, and giving continuity to the adjustment process of monetary conditions, the COPOM decided to reduce the SELIC rate to 8.5 percent per year without a bias.” 

As such, we are no longer inclined to trade Brazilian equities with a bullish bias over the intermediate term (though we wouldn’t fight the onset of an unhealthy, centrally planned asset price pop out of the FED if one were to occur). While Brazil’s TREND-duration GROWTH and INFLATION outlooks continue to be supportive of a 2H12 rebound in both the currency and equity market, poor POLICY should continue weigh the BRL and the Bovespa over the immediate-to-intermediate term.


While we wouldn’t recommend shorting and holding Brazilian equities from here (the Bovespa has experienced a -21.8% YTD peak-to-present crash), we do find it prudent to wait and watch for quantitative confirmation of an immediate-term TRADE breakout or confirmation that the index won’t break down through its AUG ’11 lows before dabbling on the long side again.




Deflating the Inflation only works to stimulate economic output only if a country’s currency remains relatively strong enough to reap the benefit of the disinflationary forces – particularly in an economy like Brazil, which is simply laden with structural inflationary pressures (email us for our TAIL duration AUG ’11 Brazil Black Book). Brazil’s disinflationary tailwind stemming from our initial Deflating the Inflation theme (APR ’11) peaked in FEB and should continue be a headwind on the margin through at least SEPT (holding current market prices flat through year-end).






All told, the timing of our bullish thesis on Brazilian equities has been delayed as a result of the accumulation of negative effects stemming from the recent slew of policy maneuvers. We’ll likely revisit Brazil on the long side in the coming months, but, for now, we expect continued lower-highs in the BRL (vs. the USD) and Brazilian equities on a TRADE and TREND basis. Alas, POLICY remains the hardest factor to model – though arguably the most important to get right in today’s Global Macro environment.


Darius Dale

Senior Analyst

Mid-Tier Math Not Adding Up

Overall, an in-line-ish month for sales. Beats outnumbered misses by 2 to 1. But the standard deviation was generally benign. Not a surprise given that we just passed retail earnings season, and June – not May – is the real important month for the quarter.


We wonder if Ron Johnson is adding up where his lost revenue dollars are going. It’s not KSS. GPS and M can’t account for it. Enter the off-price retailers. Not only will he need to recondition the consumer to buy full price, but to stop treasure-hunting. Good luck.


No Shade for the Mid Tier: Of the 5 misses this morning, GPS (+2% vs. +2.2E) and KSS (-4.2% vs. -0.7E) were two of the most notable in light of DDS & JCP pulling out of the sample earlier this year. As we’ve highlighted in the past, mid tier retail will become increasingly vulnerable to share losses in 2H as pricing remains uncertain despite the expectations for margin expansion in light of easing costs.


Think of it like this…If we were to assume that JCP sales in May were down similar to the (-20%) decline we saw in 1Q12, that would equate to ~$240mm in mid tier dollars up for grabs. That alone makes Kohl’s and Macy’s lives easier. Macy’s sales were up $80mm. But KSS was DOWN $35mm?? Anyone want to explain that one? Either JCP is getting much better – which it is not, or there are other retailers scooping up the share. KSS is missing the boat here big time.


The kicker is that the off price retailers are taking share. Why? They’ve got the goods, and the consumer LOVES a bargain. I wonder if Ron Johnson knows that he’s going to have to not only condition the consumer away from looking for bargins in full price stores, but now he’ll have to worry about battling the value proposition at off-pricers as well.  


GPS: While GPS’ +2% comp miss was minor and expectations ran up from +1.4% to +2.2% into this morning’s print, each of GPS’ businesses’ underlying 2 yr trends eroded 200bps+ sequentially with the exception of international though it remained (-4%). While May only accounts for 31% of 2Q sales for GPS, June accounts for closer to 41% and although top line compares ease into 2H, they become more difficult in June first.


KSS: Aside from BKE, KSS was May’s biggest laggard with comps -4.2% vs. -0.7E. Most notably, KSS’ sales were -2.6% on a +7% increase in inventories driving the month’s sales to inventory spread to new lows -11.2% from -5% in 1Q12. This just after KSS announced they would be implementing a new EDLP strategy in response to JCP’s “Fair and Square” roll out. In the first quarter, with e-commerce sales +34% and new stores contributing ~1.7 points to the 1.9% top line growth, we estimate the core brick and mortar business contracted LSD. We continue to like KSS on the short side in light of the mid tier domino effect that we expect to play out further in 2H as both top and bottom line compares get increasingly difficult over the intermediate term. 



Off-Price Outperformance: ROST and TJX continue to outperform the SSS group as a whole coming in +8% vs +4.8E and +8% vs 4.9E, respectively, bucking consensus by 300bps+ each, the 2 largest beats on the morning excluding the smaller cap participants (CATO, SSI, BONT, ZUMZ). The spread between the consolidated off-price comp and the total SSS comp remains prevalent at about +4.5 points wide. Given our expectation for pricing to break down across the mid tier in 2H12 driven primarily by JCP/KSS EDLP, off priced retailers have the opportunity to capitalize on industry-wide inventory growth with better buys and a value proposition that already resonates with the consumer. In other words, the quality and availability of goods in the off price channel will only go up from here.


ROST: Posted revenues +13% with inventories -1% maintaining a mid teen sales to inventory spread.  


TJX: Sales came in +10% accelerating sequentially over +7% growth in May. TJX highlighted inventories as being “in great shape and turning fast” this morning following the 1Q12 inventory spread jumping 11 points from 4Q11 to +15% with inventories -3% headed into May. 


High End Remains Strong: High end retail (SKS, JWN, M) exceeded expectations in May with JWN comps in line (+5.3% vs. +5.3E), SKS beating (+4% vs. +3.3E) and M delivering 20bps of upside driven primarily by online +42% in May and 36% YTD. While the consolidated high end comp accelerated 200bps to +5%, the spread between high and low end contracted slightly on the margin from 10 points to 6 points.


COST: After uncharacteristically missing April consensus for the second month in a row in April, COST posted a 3 peat this morning with comps +4% vs. +4.4E. Gasoline deflation and FX combined negatively impact comps by 150bps though all major categories posted positive comps and AUR remained flat despite gas prices declining slightly from $3.86 to $3.84 year over year. 


Mid-Tier Math Not Adding Up - KSS SIGMA


Mid-Tier Math Not Adding Up - TGT monthly sales grid


Mid-Tier Math Not Adding Up - monthly SSS comp


Mid-Tier Math Not Adding Up - total SSS comp

VRA: Squeeze Context


Conclusion: We’re the low on the Street and are calling for the first miss since VRA went public. But the reality is that a company at VRA’s stage in its lifecycle can print what it wants to. Sentiment is poor, and the stock is off 44% over 2 months. If they pull one out of a hat after the close, it will allow us to get heavier on one of our favorite shorts.


We remain very negative on VRA. We’re We’re the low on the Street at $0.27 vs. the consensus at $0.29E for Q1, suggesting the first miss in the six quarters it has been public. That said, the stock is down 44% in 2 months, and though the Sell-side uniformly likes it with a 73% buy ratio, short interest is still sitting at 47% of the float. In other words, our model BETTER be right, otherwise this stock is going up on the print. A company at this stage in its growth cycle has so many moving parts, and the reality is that it can print (for a short time) pretty much what it wants to print. If the results are ‘in-line’ or better, this stock probably goes up. That’s when we get heavier again on one of our key shorts.

Our TAIL view (3-Years or Less) on VRA is that the company is that it is overextending the reach of its brand as it executes its growth strategy the wrong way. There’s nothing wrong with growing by any means. But the focus is too heavy on channel distribution as opposed to coming up with ‘must have’ product and brand messaging that will make the consumer claw over one another to get that product come hell or high water. Today VRA is sitting at nearly a 21% EBIT margin, and the consensus is looking for that to be up 100bps over the next two years. Call us perma-cynics, but we have yet to see any brand – ever – that has invested heavily in channel distribution above all else (as opposed to R&D and marketing) and has not seen severe swings in its margin structure. It’s easy to sit there and tweak a model thinking that maybe the Street is high or low by 25 or 50bps. But the real call is if margins are 10% in 2 years. Think that can’t happen? Pull up margin charts for TRLG, ANF, AEO, COLM, CROX…heck, even look at VRA. It is up nearly 2x from 11% just 3 years ago. Margins move in big steps in this space, my friends.

While the company simultaneously grows wholesale and retail with product that is largely like for like (a retail no no) it is also looking to expand into Japan, land another national department store account (they are partnered only with DDS). VRA is also doubling the size of its DC, which requires incremental investment. That’s great…we’ll never beat a company up for investing. But it will need to work out the kinks, and will ultimately need to grow into this new capacity.

It’s unlikely these efforts are enough to offset the declining core wholesale business as it becomes cannibalized by VRA’s own retail stores. Moreover, we need to remember that when retail and wholesale growth coincide – and in a way that is not prudent – it is not a pleasant process. We’re not talking about a slow ebb/flow of product orders at wholesale. The timing of these events is impossible to forecast. But we think we’ll see it. With a higher expense base, we expect margin contraction ahead for VRA and are 20% below Street expectations next year (F13). Our bias on our numbers is to the downside.


One risk to a short, and a very big one at that, is if VRA strikes a deal with Ron Johnson and team at JC Penney to do a shop in shop for the Vera Bradley brand in the 700 JCP stores that are being refurbished. That would be such a meaningful channel fill event that it would take up earnings – and margins – presuming the company let it flow through. That does not change the fact that there are 3,400 small wholesale accounts that probably be miffed that the brand is now in JCP. Managing that at a local level would be ‘less than pleasant’ for VRA. It would be one of those near-term positives that turns into a very large longer-term problem.


VRA: Squeeze Context - VRA S



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Acquisition of Gaylord's brand and hotel management business looks like a solid deal for MAR




  • Assumes that MAR will begin managing their hotels after their shareholder vote in 3Q12
  • During the past 4 years, GET feels like the value of their equity doesn't reflect the value of their company
  • Given the limited access to capital now, it is very difficult to develop new resorts
  • Their cost structure is currently inefficient.  Failure to act on GET's part would likely resort to a takeover by another entity below intrinisic value which would likely undertake similar tactics to reduce expenses. 
  • They believe that the hospitality industry is still in the early innings of a recovery and that their assets will be worth a lot more a few years down the road.  As a REIT, their investors will benefit from a large dividend and improvement in cash flows.
  • GET had an auction of their brand and feel like this deal reflects the best value to their shareholders by allowing them to reduce operating costs and convert to a REIT.
  • MAR's management expertise should help them improve occupancy and drive additional transient demand to their property.
  • GET will no longer pursue large scale developments.  Once GET converts to a REIT, they will pursue other growth strategies consistent with their new structure. 
  • See positive trends in their lodging business, however, their overall outlook on the business has not changed.
  • There were 3 other management companies that bid on their management company/ brand



  • GET believes that their large shareholders would approve of this transaction
  • How did they estimate the fee reduction? 
    • Have $45-50MM of overheard that they allocate to their hotels - i.e. central services
    • Think that there will be $16-17MM of savings at the corporate level
    • $20MM of savings after management fees by outsourcing management costs
  • GET already does a great job of managing occupancy in the 70s and since these are existing assets, they don't really pose a conflict to MAR's existing managed properties
  • MAR is not interested in buying GET's real estate
  • GET's Board unanimously approved the transaction 10-0
  • GET will post an investor presentation on their website with pro-forma 2013 estimates based on consensus analyst estimates in 24 hours
  • GET's credit statistics will improve because of improvements in cash flow generation from this transaction
  • GET's core expertise - Group business
    • GET light - potential of 500-600 room hotels with meeting space
    • Think that their is great growth potential from their existing assets
    • Potential from leisure business addition from MAR's existing customer base
  • MAR expects to earn incentive fees starting in 2013 and thinks that they are paying 8x for fees
  • This is a more accretive transaction than MAR buying stock
  • They are optimistic for the future growth of the GET brand but will likely take a long time given the scale of these assets
  • GET expects to hear from the IRS on the private letter ruling within the next week.  80/20 distribution is fairly standard.
  • The $210MM is the net proceeds from the deal.  GET will have about a $50MM tax bill after using up their NOL.
  • GET views that this transaction will materially improve their FCF and funds available for distribution. They are still in the process of developing a dividend policy though.
  • MAR thinks that they are paying 8-9x 2013 EBITDA for this deal
  • Not sure what the impact of this deal will be on their capex plans for 2013
  • Incentive management fees will be based on a pooled amount from the 4 assets. They are going to be getting a share of the EBITDA above a threshold target.
  • Multiple is 10x base fees in 2013 and expect that incentive fees will be in the money in 2013 so that takes down the level as well
  • The GET properties will be integrated into the MAR system
  • GET's floating rate debt is at historically unprecedented low rates and they don't see that rates will be increasing over the next 12 months.  Doesn't really make sense to convert that debt to fixed immediately and increase their borrowing cost by 4%. However, they will move their debt to 50/50 fixed/floating over the next 18 months.
  • If GET acquires resorts that they believe will benefit from the GET brand, then they will be talking to MAR about managing those assets
  • If GET can figure out a way to do Aurora that will get branded into a GET hotel and be MAR managed, that's their only obligation to MAR
  • Believe that they have the knowledge and expertise to meet meeting planner demands that can generate good returns. So GET does anticipate acquiring smaller "convention/group" hotels.
  • The $55MM of one-time costs are all cash
    • Conversion costs
    • Moving over systems 
    • Transaction costs
    • Severance and transition costs
    • Banking fees
  • They will be materially reducing the number of GET employees at the corporate level
  • The Opry, Ryman, Grand Ole - nothing will change there. They will continue to focus on growing those brands as they have in the past.
  • GET assumes that thier multiple will stay around 11x - similar to their C-corp.  However, quality REITs trade very differently (i.e. they do think that they can get a valuation premium). Their RevPOR on their assets is as good as any REITs and their leverage will be at a healthy level. They will also have a good dividend yield. 
  • Private equity has a 20-25% IRR hurdle rate and tend to bottom fish.  GET believes that the value of their assets will be worth a lot more in a few years and so it's much better to hold onto them rather than fire-sell them today.
  • MAR doesn't anticipate managing the assets until October 2012
  • There are fixed specific targets above which MAR will earn incentive fees which are similar to 2012 numbers
    • There is a cap of 20% of operating profits off of which MAR can earn incentive fees
  • GET's revenues are around $1BN so management fees are around $20MM
  • GET's aggregate costs to manage their hotels are about $60MM (central cost allocation and overhead). There will be a whole slew of efficiencies.  MAR's scale should help them save $8-10MM on just procurement costs. They spend $50MM+ a year on marketing. They spend $15-18MM/year on technology and money on accounting systems and reservations systems. Their current system was built not to increase too much with each hotel addition - MAR has thousands of hotels so it makes sense that they have much better cost leverage.



  • MAR has agreed to purchase Gaylord Hotels brand and the rights to manage its four hotels for $210MM 
  • Following the transaction GET will convert into a REIT effective 1/1/2013
  • "Terms of the management agreement call for Marriott to manage the four one-of-a-kind properties under the Gaylord Hotels flag. Marriott will receive a management contract with an initial 35 year term, 2% base management fee, and an incentive fee linked to improvement in hotel profitability." 
    • We estimate that management fees in 2013 will be roughly $13MM, excluding incentive fees
  • GET "anticipate[s] annualized cost synergies, net of management fees, will total approximately $33 to $40M. In addition, we believe we will have a unique competitive position in the hospitality REIT marketplace with a well capitalized balance sheet and a relatively predictable FFO (funds from operations) stream.” 
  • "As a REIT, the company will adjust its investment approach on the Aurora, Colorado hotel and convention center project. The company will no longer view large scale development as a means for growth and will not proceed with the Colorado project in the form previously anticipated. The company will re-examine how the project could be completed with minimal financial commitment by Gaylord during the development phase."
  • "By year-end, the company plans to issue its shareholders a special, one-time taxable dividend of its undistributed earnings and profits, after receiving a private letter ruling from the Internal Revenue Service (IRS). GET estimates the amount of the earnings and profits distribution to total approximately $415 to $450M. Gaylord intends to pay 80% of the dividend in shares of Gaylord common stock and 20% in cash." 
  • GET "expects to incur approximately $55M in one-time conversion, transaction and severance expense."
  • "Gaylord expects to hold a special meeting of stockholders in Q3 of 2012 for the purpose of voting on shareholder proposals that will facilitate becoming a REIT, amendments to its Certificate of Incorporation or other restructuring." 


Keith bought LVS in the Hedgeye Virtual Portfolio at $45.79.  According to his model, the TRADE range is at $45.65-49.73 and the TREND resistance is at $51.33.



As we wrote about in "A MACAU TRADE" (05/25/12), we like LVS for a long trade.  Macau market share has been unquestionably disappointing since Sands Cotai Central opened in April.  However, we believe share will increase from May's 17.5% to a more appropriate 19-20% range over time.   


Overall, Macau revenue growth for May will likely come in at the lowest level since summer 2009.  While we've been hitting on the slowing growth theme for almost a year, May was additionally hampered by low hold, a shorter Golden Week, and an unfavorable calendar.  Based on our math and assumption of normal hold, June should post higher YoY growth.  Sequentially better market growth and growing LVS market share should provide positive catalysts for a stock that has plunged 25% since its April high.



The Test: SP500 Levels, Refreshed

POSITIONS: Long Utilities (XLU), Short Industrials (XLI) and Short Basic Materials (XLB)


Our Growth Slowing, Strong Dollar, and Bernanke’s Bubbles (short Commodities) Macro Theme calls for Q2 have not changed – consensus is starting to.


Here are the lines, across risk management durations in my model, that matter most: 

  1. Intermediate-term TREND resistance = 1369
  2. Immediate-term TRADE resistance = 1316
  3. Immediate-term TRADE support = 1294 

In other words, I expect to see The Test (as in a re-test of the YTD closing lows), then maybe I’ll get net longer from there for the bounce. We’ll see. I think being able to change your mind fast is important right now.


Almost the entire Sell-Side still needs to cut their US GDP Growth estimates, again.




Keith R. McCullough
Chief Executive Officer


The Test: SP500 Levels, Refreshed - SPX

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