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CRI: Turning Point

Conclusion: The strategic implications of this CRI deal with JCP are spot-on with what we think is a very underappreciated risk in retail. It may give CRI a near-term revenue lift due to channel-fill, but it is ill-equipped to manage undifferentiated product across channels with polarized price points. This will ultimately be its undoing.


We’ve been waiting for this announcement that Carter’s is opening a shop inside JC Penney. It makes perfect sense, actually, in the context of the store that JCP is trying to build. But while these ‘partnerships’ seem equal, the reality is that they’re not, and this one favors JCP by a country mile. Ultimately, we think that this will be CRI’s swan song.

Consider the following…


1)      JCP has a bidding process for all its shops. CRI no doubt went up against Gerber, Disney, Circo, Zutano (highest unit count on Amazon) and others for this business. It is definitely a sales/margin trade off. Note that VFC’s Lee recently lost out to Levi’s in JCP as it did not chase price. Good long term for VFC. Bad short term. CRI is the opposite.


2)      CRI’s challenge is that it puts similar product into every channel of distribution. Look inside Wal-Mart, Target, Macy’s, Amazon, and Kohl’s. They all have product that is remarkably similar. That’s fine when a brand is small, but as it grows up, it gets very dangerous.


3)      Oh and by the way, the same product is in Carter’s own stores, and on its web site, and it’s almost always 40-50% off.


4)      Look at what happened when Liz Claiborne launched Liz & Co inside none other than JC Penney 6 years back. The product looked very similar to what was selling at Macy’s, but at a lower price. It didn’t take Macy’s too long to cut Liz. The market’s reaction was not pretty – the stock went from $43 to $2.


5)      How does Carter’s in-store promotional strategy synch with Johnson’s ‘Every Day Low Price’ strategy? So if a product is $14.99 list in a Carter’s store, it will be knocked down to $8.99 on day 1. On average, the whole lot will clear at about $6.00. If Johnson holds true to his Plan, then he’s going out with an initial price in the $6 range. How will Macy’s feel about that when they’re selling the same thing down the hall for $10? Wal-Mart at $9?   


6)      CRI is setting up this deal with its largest customer’s top competitor – KSS. Let’s think of how that discussion went for the CRI sales rep to Kohl’s. “Hey…Just want to let you know that we’re starting a program with JC Penney to do exclusive shops with product that is at least as good as what we’re selling to you, but will be listed at a 30% discount. You cool with that? Good. Nice knowing you.”


7)      CRI does not need to disclose how big Kohl’s is as a customer, because the reality is that as a percent of aggregate sales no one is within a stone’s throw of 10%. But that’s bc CRI’s own retail business accounts for about 55% of sales versus only 29% for Carter’s wholesale. But that’s comparing apples and oranges. We need to either gross up wholesale, or take down retail for an even comparison. Either way, looking at EBIT is a fair comparison. In the regard, both Carters US brand wholesale and retail each account for about 45-47% of EBIT. International accounts for the rest, more than making up for Osh Kosh, which is perennially in the red. KSS might only account for 3-4% of CRI’s total sales, but it is closer to 6-7% of profits.


8)      This is not just about KSS. There are going to be so many moving parts across retail in 2H. Heck, there already are. That will intensify. The dominoes that fall in footwear, housewears, underwear, fragrances, etc…will cause reverberations that are impossible to predict. For example, JC Penney’s Tourneu shop could take share from Macy’s on the margin at ridiculously low prices. Macy’s might not strike back in the jewelry category, but rather in its terms or pricing with Outerwear vendors like Columbia, Underwear like Hanesbrands, or moderate ends of the portfolio of apparel/footwear from companies like Jones Group. The cross-currents here will be fierce, and we have yet to gain conviction that anyone is really prepared for it.


Growth has come from Playwear. That’s less defendable than the core baby biz (i.e. Competes w/Old Navy)

CRI: Turning Point - category


Can’t look at the wholesale/retail split by revenue, as it grossly understates the importance of the wholesale business.

CRI: Turning Point - revebit


Company-Operated retail stores and mass retailers have grown in importance

CRI: Turning Point - channel


We’ve always believed that slot volume is the ultimate indicator of a Vegas recovery


  • Our predictive model has been proven effective in projecting monthly slot volume on the Strip as indicated by the high correlation between the red and blue lines
  • MGM is as close to a Strip pure play as there is and its stock has closely tracked changes in slot volumes on the Strip
  • We’re not optimistic about slot trends over the near term and maintain that Vegas may be in a secular slot decline due to poor demographics and an aging core slot customer base



OH SNAP: Have Food Stamps Hit Peak Enrollment?

We’ve analyzed the latest data for the Supplemental Nutritional Assistance Program (SNAP), better known as food stamps. Since President Obama took office in 2008, the participation has shot up drastically over the last four years. Currently, about 15% of the nation or about 46 million people are enrolled in the SNAP program.  


The year-over-year growth rate is actually declining at an accelerated rate. At the current trajectory, it should go negative by October. While a positive for the American taxpayer, dollar stores like Family Dollar (FDO) and Dollar General (DG) are going to feel the pressure as more people wean themselves off food stamps. Over the last five years, the growth in the SNAP program has been a positive for dollar stores, driving new business. All good things come to an end, though. Keep an eye on names like FDO and DG as the SNAP participation rate drops.



OH SNAP: Have Food Stamps Hit Peak Enrollment?  - SNAP Aug

Early Look

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Short Selling Opportunity: SP500 Levels, Refreshed

POSITIONS: Short Industrials (XLI) and SPY


Since February 15th, 2012 this is the 9th time I have issued a Short Selling Opportunity note. Maybe this will be the 1st time out of 9 that I am wrong. Maybe not. That’s the game. You either buy or sell here. You don’t hide from accountability.


Across my core risk management durations, here are the lines that matter to me most: 

  1. Immediate-term TRADE resistance = 1405 (lower highs)
  2. Immediate-term TRADE support = 1388 

Every time I do this, I feel like I have to re-live the last 5 years. It’s weird. People are pressured to buy high and sell low, I guess.


Given the fundamental growth picture in the world, this one looks as clear to me as the other 8 shots were.


As Gretzky said, you’ll miss 100% of the shots you don’t take.




Keith R. McCullough
Chief Executive Officer


Short Selling Opportunity: SP500 Levels, Refreshed - 1

HedgeyeRetail Visual: SNAP/FDO Update


Latest data shows modest uptick in the percent of Americans benefitting from food stamps (otherwise known as SNAP – Supplemental Nutritional Assistance Program) to about 15%. Don’t be fooled. The year/year growth rate is actually declining at an accelerated rate. At the current trajectory, it should go negative by October.

We think that growing SNAP participation has been a significant tailwind for dollar stores over the last 5-years. The absence of which we think is something that will temper their top-line growth rate on the margin. We remain bearish on FDO.  


HedgeyeRetail Visual: SNAP/FDO Update       - SNAP





We held a call with clients on July 19th discussing our concerns about the long-term outlook for Darden’s stock.  We have written a longer - Black Book - that offers a comprehensive account of our thoughts on what we see as the most important factors affecting Darden’s financial health over the next three years.  Our view is that burgeoning growth in the company’s net units has masked some serious deficiencies in Darden’s two largest chains: Olive Garden and Red Lobster. 


The poor trends at Olive Garden and Red Lobster are pressing the company towards an impasse.  Specifically, the company is burning cash and the stock can no longer be all things to all investors.  A rich dividend, aggressive growth profile, and sturdy balance sheet have attracted investors of all different styles to buy Darden’s stock over the past few years.  One, or more, of these attributes is likely to fall away as maintaining all three becomes unsustainable.  A proactive reorganization, including a cessation or slowing of unit growth, would be preferable to the more likely reactive lowering of margins or slashing of the dividend that we think is becoming inevitable.


We have seen this movie before in the Restaurant Industry, and are advising clients to avoid Darden as a long-term buy idea until, at least, the facts change.


One of more daunting macro charts from the Black Book is the long-term trend in the population growth of the 55-64 YOA cohort.  The trend is decelerating and is set to continue decelerating for years to come.  This age group is a high-frequency customer within the industry, especially Red Lobster and Olive Garden. As Brinker CFO Guy Constant said at a recent conference: 


"What got you to win historically in casual dining was demographics in trade area and real estate. That's how you won. We all built many, many restaurants over many, many years and that's how you won. And in many ways we open the doors and they came because there were a lot of macroeconomic tailwinds who were contributing to that"




This trend is not encouraging for a company that is focusing on growing the unit count of concepts not producing consistent guest count growth.  


Call me with any questions.





Howard Penney

Managing Director


Rory Green