The Macau Metro Monitor, February 14, 2013




The Year of the Snake continues to bring thousands of tourists to Macau, although the growth rate has slowed down.  Yesterday, Macau welcomed close to 162,000 visitors, an increase of 16.4% YoY.  That marked a growth slowdown in comparison with the day before, when Macau welcomed almost 167,000 visitors, up by 28.4% YoY.  Note that the figures provided by the Tourist Office also include non-resident workers and students, some of whom exit and re-enter Macau during the holiday period.


Of the total tourist arrivals recorded yesterday, close to 114,000 were from the mainland, up by 24.6% YoY. The soaring number of tourists is putting heavy pressure on Macau’s borders, in particular on the Border Gate checkpoint, which is the busiest.  Media reports said that people had to wait for several hours either to enter or leave Macau.  Some chaotic scenes and scuffles were recorded, though there have been no reports of people being injured.


In the first four days of the Year of the Snake, Macau welcomed close to 566,000 tourists, up by 21.5% YoY.



Marina Bay Sands was fined $475,000 by the Casino Regulatory Authority of Singapore (CRA) on Wednesday for surveillance breaches.  The integrated resort had failed on three counts and were fined under Regulation 3(2) of the Casino Control (Surveillance) Regulations.  The first breach, which led to a $150,000 fine, was for failing to retain casino surveillance footage during the period of Sep 14, 2011 to April 12, 2012. Casinos have to retain footage for a specified time period. The time period was not disclosed.  The second fine of $100,000, was for failing to ensure continuous recording of casino surveillance footage from Dec 17, 2011 to June 14, 2012.  The third fine of $225,000, was for the lack of notification system to alert the casino of failures to their surveillance system.

Practioner Pants

This note was originally published at 8am on January 31, 2013 for Hedgeye subscribers.

“Only practitioners (or people who do things) tend to spontaneously get the point.”

-Nassim Taleb


On a flight to Denver last night I had round 2 with Taleb’s new book, Antifragility. It wasn’t painful, but I definitely feel like the guy has something brewing inside of him. Transitioning from a market practitioner to a philosopher can’t be easy.


“I am re-connected to my practical self, my soul of a practitioner, as this is a merger of my entire history as practitioner and volatility specialist combined with my intellectual and philosophical interests in randomness and uncertainty…” (page 13)


People can go a little squirelly when they over-think the complex.


Back to the Global Macro Grind


Buy or sell? Or, as my 2-year old daughter Callie has figured out (when asking me for something when she senses I am pre-occupied), “yes or no?”. If you are playing this Game of Risk in real-time, you don’t have time to philosophize. Save that for the weekends.


On Monday and Tuesday, we bought the US Equity market open (on red). Yesterday, we sold it (on green). It doesn’t always work out that way - but when it does, at least you know that you did it for a reason.

In yesterday’s rant, I outlined the reasons to make some risk adjusted sales (SP500 and US Treasury 10yr Yields immediate-term TRADE overbought) pre-game. And that’s really why I do what I do. I need a repeatable process so that I can have a plan.


Oh, and the plan is that the plans are always changing …


Some people don’t like that. It doesn’t sound sophisticated, I guess. But on that point, I agree with Taleb: “Simplicity has been difficult to implement in modern life because it is against the spirit of a certain brand of people who seek sophistications…”


Less is more and usually more effective.” –Nassim Taleb


So, let’s slap on the Practitioner Pants and go down that path this morning (just bullet points from my notebook).



  1. Russell2000 reversed from its all-time high yesterday, closing down -1.2% at 896
  2. SP500 was down for the 2nd day in 3, finally making a lower high vs the YTD closing high of 1507
  3. US Equity Volatility (VIX) continues to signal a Risk Range with lower-highs and lower lows (11.94-14.62)
  4. US Equity market Volume is finally starting to show some flickers of light (+8% versus the TREND avg)
  5. All 9 S&P Sectors in our model are bullish on both our TRADE and TREND durations (19 of the last 20 days)
  6. US Dollar Index signaled immediate-term TRADE oversold at $79.24 yesterday
  7. US Treasury Yields (10yr) signaled immediate-term TRADE overbought at 2.04%; next support 1.93%
  8. Apple (AAPL) failed at immediate-term resistance yesterday; Risk Range = $420-461 


  1. Eurostoxx50 and Eurostoxx600 both signaled immediate-term TRADE overbought yesterday
  2. DAX immediate-term TRADE support line of 7771 needs to hold for price momentum to continue
  3. Spain’s IBEX is snapping its immediate-term TRADE support of 8494 this morning (-1.6%)
  4. Italy’s MIB Index is breaking its immediate-term TRADE support of 17189 this morning (-1.1%)
  5. Greece’s squeezage finally stopped for a day (Athex index -1.5%)
  6. Euro (vs USD) = immediate-term TRADE overbought at $1.35 (support = $1.33)


  1. China’s stock market (Shanghai Comp) is signaling immediate-term TRADE overbought at 2384
  2. Japan’s Nikkei (up +28.6% as the Yen gets Taro Aso’d) has immediate-term TRADE resistance at 11159
  3. South Korea’s KOSPI remains bearish TRADE (1976 resistance) and bullish TREND (1959 support)
  4. India’s BSE Sensex is down (net) since being the first major country to cut rates in 2013
  5. Thailand and Vietnam (momentum markets in Asian Equities) corrected -1.1% and -1.6% overnight
  6. Brazil’s BOVESPA Index snapped immediate-term TRADE support of 60889, -1.8% yesterday

What’s new? We have 4 major countries (Brazil, South Korea, Spain, and Italy) showing initial chinks in the Global Equity market armor. It’s only an immediate-term TRADE signal (all remain bullish intermediate-term TRENDs), so do with it what you decide to do. I did.


Catalysts? It’s month-end today. Tomorrow you probably get another confirmation on why stocks are crushing US Treasuries and Gold for 2013 YTD (employment #GrowthStabilizing). But, at the same time, Oil prices up here are a new headwind to global consumption.


Buy or sell? Yes or no? These are simple questions requiring simple answers. No one has a Ph.d in playing a game that’s always changing. Stick with the practitioners. We can win this game together.


Our newly minted Senior Sector Head of Consumer Staples, Rob Campagnino, will be hosting an expert call on pyramid schemes ("An Expert's Opinion on Multi-Level Marketing, Pyramid Schemes and Herbalife” featuring multi-level marketing expert Dr. Jon M. Taylor) at 1030AM EST today. Ping if you are interested.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, 10yr UST Yield, and the SP500 are now $1649-1678, $113.02-115.22, $79.24-79.81, $1.33-1.35, 89.98-91.68, 1.93-2.04%, and 1495-1511, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Practioner Pants - Chart of the Day


Practioner Pants - Virtual Portfolio

JNY: We Want Mgmt To Take The Other Route

Takeaway: The leverage in this model is nothing short of extreme. We want JNY to be the next LIZ/FNP. But until management agrees with us, it won't.

Given how 'out of favor' JNY perennially is we’re tempted to want to go the other way – and today’s beat certainly supports that point. During the quarter, both Domestic Wholesale Jeanswear and Domestic Wholesale Footwear & Accessories confirmed not only the turn we saw last quarter, but a reacceleration in both sales and profitability in these key segments (accounting for 65% of total EBIT). At the same time, despite further revenue deceleration, incremental losses slowed in Domestic Wholesale Sportswear arresting the contracting profit trend reported in each of last four quarters. Not bad at all.


The leverage in this model – both operational and financial – is nothing short of extreme. If only a few things go right, this company can print $2 in earnings power – which makes a $12 stock look like a seriously mispriced asset. But there are two ways to get to the earnings power in question. A) improve the entire portfolio of 30+ brands under the JNY banner, or B) take a draconian stab at this portfolio and do to it something akin to what LIZ/FNP did over the past two years.


Despite the glaring evidence that things are getting better, the reality is that the risk/reward is still not good enough for us to get involved here. Why? Simply put, management is gunning for option ‘A’. For a portfolio that is simply ‘average’, we can’t bank on broad-based improvement in the macro environment to unleash the earnings, and we don’t have the confidence yet that JNY possesses the tools to keep the recent momentum going. We want option ‘B’.


We think that JNY needs to go the way of FNP. It needs to focus its portfolio into the brands the matter most, and dispose of/sell the rest. JNY has over 30 brands, and our sense is that the average investor can’t name the brands representing over a third of JNY’s revenue base.


Realistically, the best way to monetize this content will be for department stores to strike exclusive deals with the company for 100% wholesale distribution, or the brands should be sold to the retailer (like FNP did with JCP and the Liz Claiborne Brand).


When all is said and done, we think that this will prove to be a more valuable strategy for shareholders than to try to continue to run this company as a multi-brand portfolio.


The problem is that management seems to have zero desire to go down this path. They seem to be comfortable running the ship much like it has been run for the past 20 years. Are there call options in footwear and International? Yes. And they’re making great strides today in US Wholesale. Both of these things are great. But they require too many leaps of faith for us at this point, and we don’t like investing based on faith. 

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Hedgeye’s Best Consumer Ideas: Short BKW

Takeaway: We remain bearish on Burger King (BKW) as the company was never properly "fixed" when it went private.

Howard Penney – Restaurants: SHORT Burger King (BKW)

BKW was taken private in 2010, then IPO’d again in 2012 after only 18 months, in what Penney calls “one of the best charades put over on restaurant investors in 2012.”  Penney says there are issues in BKW’s North American operation that have persisted since before the company went private in 2010 and have still not been addressed, and the private owners appear to have starved BKW of cash, deferring much needed capital expenditures.


Sentiment on BKW is very high in the investing community, with analysts championing it as a successful turnaround and a play on global consumer growth.  But Penney says the building blocks of a successful business are just not in place.  BKW made a big deal over cost cutting – one executive said the management team in Miami were “sitting on pickle buckets” rather than spend corporate cash on office furniture – but a company doesn’t cut its way to sustainable profitability and, says Penney, the revenue side is simply not there.  There has been significant deterioration in same store sales (SSS) across the US and Canada.  Penney thinks SSS declined 4%, versus the consensus of analysts covering the company of only around a 2% decline, and he expects sales growth for the last quarter to be only 2%, short of the 3.4% average expectation.


Calling BKW “the turnaround that failed to turn around,” Penney says the company could significantly disappoint when it reports earnings this Friday.  He acknowledges that the stock has drifted lower in recent weeks, but he expects disappointing numbers that could rattle largely positive sentiment in the near term as folks realize BKW is not the global growth vehicle its boosters say it is.  If negative surprises lead to downgrades, Penney thinks the stock could drop by as much as $4-$5 in the near term.  





Today we covered our short position in Darden Restaurants (DRI) at $45.78 a share at 10:31 AM EDT in our Real-Time Alerts. Solid alpha day for us in Darden. We'll book Hedgeye Restaurants Sector Head Howard Penney's 13th gain in 15 tries at immediate-term TRADE oversold. We remain bearish on the fundamentals. 


TRADE OF THE DAY: DRI - image001

FNP: Getting Closer To A Solution

Takeaway: The mgmt shuffle at Juicy is great news, but not unexpected. It's clear that CEO McComb supports the part of the business that matters most.

FNP announced after the close that LeAnn Nealz, President and Chief Creative Officer at Juicy Coture, is leaving the company effective March 1st.  This is absolutely positive news, but comes as no surprise to us as noted in our comments as recent as last month (see below). One of Juicy’s problems is that it has been run by a creative person as opposed to a business person. We’ve seen that strategy too many times in this business, and it always fails.


The reality is that in early December CEO Bill McComb inserted a business and operationally-focused leader (Paul Blum) between himself and Nealz – not exactly a great vote of confidence. It was clear that the two would gel and endure, or would disagree and she would leave. There was no question that Blum had McComb’s full support.


We continue to think that Juicy will be monetized to help pay down debt and allow investors to focus on Kate Spade – one of the fastest growing assets in retail.  To be clear, we’re not saying that getting rid of Kate is a catalyst. Everyone is expecting that – and in fact, if it does not happen then the price will take a hit (unless the brand is immediately returned back to profitability under FNP’s banner). But very few people call us asking about Kate, believe it or not. It’s all about Juicy. When people understand the sales and margin upside at Kate from what we see today, we think that we see the next leg of upside from where we are today.  







Takeaway: Getting closer to a sale of Juicy? Regardless of the decision, we think the team has focus. Only good can come from that.

Reuters just noted that FNP is exploring alternatives, including a sale, of Juicy Coture. It says that the company has been having discussions, but has not yet made a decision.


This is completely in-line with our thesis on the company, that Juicy has gotten to a point where disposing the asset and paying off debt will allow FNP to focus on its crown jewel – Kate Spade – which is one of the fastest-growing assets in retail. At the same time, it will have Lucky Brand to continue its role as the annuity in the portfolio to help fund Kate’s growth prospects.


It’s easy to get hung up on internalizing near-term growth and margin performance – a hundred million in revenue here or there, or margins plus or minus a point or two. That seems like a lot in a given reporting period.


But with Kate, the company is en route to adding another $1bn+ in revenue and doubling margins. Will COH or KORS double margins? Not when they’re sitting at 31% and 20%, respectively. In fact, we’d argue that COH and KORS margins will converge closer to 25% over the next 2-3 years.  Kate should get close as well from its current margin rate of around 12% (fully loaded).


Kate is doing it right. The company has been investing capital consistently back into building the operating platform to aggressively gain share. Some of that base investment tapers off as the company moves into adolescence. Our point is that in looking at what the company is capable of, think big. This is not about a few points of comp here or there.


We know that we sound like a broken record with our bull call on FNP. But quite frankly, it is a great story worthy of being a bull.


The company is hosting an analyst meeting for Kate Spade in 1Q where the growth opportunity should be more apparent to the investment community.


As for Juicy, we’re often asked “is it really worth anything?”, our answer is ‘definitely’. Think of all the times people chalked up certain consumer brands as being dead. It happened at FNP, actually, when the company owned Mexx – which was a far bigger dog than Juicy. We hate to pick a multiple out of the air in valuing assets, but does 0.5x sales sound in the ‘fair’ category? Sure, it's consistent with past transactions in retail. We wouldn’t be shocked by more. That suggests about $250mm, which could repay 65% of FNP’s debt.


(If the table below is tough to read, let us know and we'll send the file).


FNP: Getting Closer To A Solution - lizsop





Takeaway: We expect FNP to undergo meaningful structural change in 2013 that will continue to unlock shareholder value.

Dinner with a management team rarely (if ever) shifts ones’ investment thesis on a stock, and our’s with FNP last night was no exception. But we definitely walked away with confirmation that the management team is deploying assets to the areas that will fuel growth, and will do what it needs to do in order to purge parts of the portfolio that are simply not working. The bottom-line is that we expect FNP to undergo meaningful structural change in 2013 that will continue to unlock shareholder value.     


The only negative point we could really think of is that with a ~20% hit to EBITDA guidance (Juicy plus general conservatism) and a resulting 12% increase in the stock price, it would be flat-out dishonest of us to not admit that this latest update started the clock and set expectations that something strategic will, in fact, happen this year. Fortunately, we think it will happen, and when it does the path to a $20 stock will be apparent.

In the process of reflecting on his current “State of the Industry,” CEO Bill McComb highlighted that apparel is becoming increasingly commoditized requiring brands to become more differentiated in a consumer-direct format with a focus in part on accessories to shape how he runs each of his portfolio brands for tomorrow. In listening to McComb talk strategyvabout the future of the business, he most similarly sounds like Dick Hayne of URBN. Not a bad stock chart overvthe past year to follow.


Here are a few musings from last night:      

  • As for branded commentary, while Kate continues to be the fastest growing, Juicy remains the most dynamic. McComb put new Juicy CEO Paul Blum in place to set a path for the brand’s approach to market and its product allocation/mix across categories. This leadership has been sorely missed in recent years, which has lead the brand to run astray under Chief Creative Officer Leann Nealz in 2012. Simply put, a creative designer has been running the brand, and our opinion is that she had too much latitude to skew the brand up and down in price point and age. The brand needs a business person to instill a process to methodically target a consumer and procure product accordingly. We’re not declaring victory for Juicy. But we think that it has more going for it today as it relates to touting leadership to make it salable.
  • The upshot is that Paul is setting the course, but that’s just the start. In order to execute effectively, 1) the role of Chief Merchant still needs to be filled, and 2) the chief creative visionary has to be onboard and willing to follow the course set before her. Any deviation there would likely result in a replacement.
  • At Lucky, it’s clear that the focus beyond core denim (i.e. more fashion product) is critical to driving store productivity from $460 up to and beyond management’s $650 per sq. ft. target. In addition, e-commerce will be the primary driver of comp over the next 12-months as the team integrates successful initiatives at both Kate and Juicy.
  • As for Kate, there’s a ton of moving parts over the next year or two that drive brand growth, but McComb remains focused on the bigger picture – investing to ensure the Kate Spade business achieves a critical mass not necessarily managing to profitability. We’re not talking about a $460mm brand at 10% margins getting to 12% overtime, but a path and vision for sub $500mm brand to ultimately achieve $3Bn in revenues at margins over 20%+. We don’t think that investors are looking at the big picture here with what this brand can become. Focusing on the baby steps is an opportunity cost.


As we look ahead to the upcoming catalyst calendar, we expect confirmation shortly that a Kate Spade analyst day will take place over the next 3-months. Given the transformation and multitude of moving pieces underlying Kate’s growth trajectory, the added detail and visibility will be a net positive in light of the discounted multiple the market assigns to this brand.

Prior to then, we wouldn’t be surprised to see the addition of a Head Merchant at Juicy. Beyond 3-months is when we suspect more significant divestiture events are most likely. Among the assets likely to be monetized first are the Adelington Group and then Juicy.

The impact of these events on the balance sheet and P&L would be substantial and set free FNP’s most important asset i.e. Kate Spade. Keep in mind that a 0.5x sales multiple on Juicy Cotoure would net $250mm, which would eliminate 65% of debt, and leave FNP with debt to total capital of under 15%. That’s definitely consistent with what investors want to see from an early cycle high growth story. A better informed market following a 1H analyst day is more likely to reward the remaining business with an appropriate market multiple, which could in turn reward investors with a 40%-65%+ return from current levels and a stock worth $20-$24 per share. FNP remains one of our top longs for 2013.


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