What’s New Today in Retail (9/23)

Takeaway: JCP/financing + no more Wi-Fi, JNY bids due, SHLD kitchen remodeling, WSM/PBteen celeb designer line, Costs rising in Bangladesh

What’s New Today in Retail (9/23)




JCP - J.C. Penney Said in Talks to Raise More Money for Turnaround



  • "J.C. in talks to potentially raise more cash, said people with knowledge of the matter. The chain doesn’t have immediate cash needs, and is exploring fundraising amid shareholder pressure to take advantage of cheap financing, said the people, who asked not to be named as the deliberations are private. Goldman Sachs...which arranged a $2.25 billion loan for the retailer this year, is advising J.C. Penney on funding options including borrowing against its real estate, said one of the people."
  • "One option under consideration is for J.C. Penney to borrow against the real estate that it hasn’t already pledged as collateral on other debt, three people said. J.C. Penney values its owned and ground-leased real estate at $4.08 billion, according to a May investor presentation."


Takeaway: JCP does not need the cash right now, and our math suggests that it can go the next three years without tapping external sources. But a key consideration is that a new CEO would likely want to come in with zero liquidity risk. Our sense is that JCP is doing this to broaden the pool of potential CEOs.


JCP - JCPenney Cuts Off Free Wi-Fi



  • "JCPenney is busy undoing the work of former CEO and ex-Apple retail head Ron Johnson, and this week the company is axing the free Wi-Fi he once dubbed 'fundamental architecture' for stores. The retailer confirmed the removal of the service to BuzzFeed after shoppers voiced their displeasure on Twitter. A JCPenney spokesperson explained that the signal wasn't used very often by customers."
  • "JCPenney has already invested $12 million installing the system last year, but shutting it off for customers will save the chain about $7 million a year, according to BuzzFeed."
  • "...CEO Mike Ullman, the investment hasn't been worth it. In addition to slow usage, he said the mobile checkout technology that was based on the Wi-Fi was confusing for most customers. Shoppers also don't tend to realize free Wi-Fi in a store exists, or just choose to use their own data plan instead. Mobile checkout will still be able to run on the private Wi-Fi network, but Ullman will put a new focus on making sure store associates are visible and able to assist customers."


Takeaway: This borders on ridiculous. But the reality is that people don’t go to JCP to get free Wi-Fi.




JNY - Bids Due for The Jones Group



  • "The last of the second-round bids in the Citi-led auction to sell the company are expected to come in today, according to sources."
  • "Private equity giant KKR & Co. and Sycamore Partners have paired up for a bid and are believed to be a formidable presence in the process. Leonard Green & Partners and Golden Gate Capital have also each expressed interest in the firm or in certain of its businesses, while Iconix Brand Group Inc. is said to have taken a look at the apparel side of the company."


Takeaway: We were asked by someone if we thought Steve Madden would be interested in Stuart Weitzman and 9 West. Our answer is Yes. Footwear assets are the crown jewel at JNY.



WMT - Walmart to present paper to government on sourcing model



  • "American retail chain Wal-Mart Stores, yet to make an application for opening retail stores in India, is planning to send a paper on its sourcing model to the Department of Industrial Policy and Promotion (DIPP) soon. The next round of government clarification to the multi-brand retail policy could come after weighing the points made in that paper."
  • "The Cabinet cleared up to 51 per cent foreign direct investment (FDI) in multi-brand retail exactly one year ago. But there hasn’t been a single proposal so far, due to policy riders which are considered tough by the industry. Thirty per cent mandatory sourcing from Indian micro, small, and medium enterprises (MSMEs) tops the list of hurdles. There are other roadblocks like the requirement of statewise clearances to retail chains, upcoming elections and fear of a policy reversal if the Bharatiya Janata Party (BJP), a party that has opposed FDI in retail, forms the government at the Centre. To woo foreign investors, DIPP recently issued clarifications easing some of the norms. But companies are asking for more."


Takeaway: WMT’s dance with India has been years in the making. If it succeeds, however, in accelerating its’ rollout in India, look for the stock to be revalued higher.


WSM - PBteen unveils first-ever collection with a celeb stylist, designer



  • "PBteen has unveiled an inaugural collaboration with celebrity stylists and fashion designers Emily Current and Meritt Elliott. The exclusive, one-of-a-kind collection is the first collaboration of its kind for PBteen and represents Current’s and Elliott’s debut into the world of interiors and home furnishings."
  • "The collection consists of more than 37 products across seven key categories and includes bedding, furniture, lighting, wall décor, decorative accessories and jewelry storage…The Emily & Meritt for PBteen Collection ranges from $29 to $799."


NKE - Nike’s Knight, Wife Pledge $500 Million to Cancer Research



  • "Nike Inc. Chairman Philip Knight and his wife Penny Knight pledged $500 million to jumpstart a $1 billion cancer research initiative at Oregon Health & Science University...The gift is contingent on the university raising an additional $500 million for cancer within two years."


Takeaway: You gotta hand it to the guy, between this and his gifts to the University of Oregon’s Athletic Department, he’s establishing himself as one of the foremost philanthropists of his day. Note, however, that Nike does not consume much of his time anymore.


HD - Home Depot elects CVS exec to board



  • "The Home Depot has elected Helena B. Foulkes to the company's board of directors. Foulkes will be a member of the finance and leadership development and compensation committees."
  • "During her more than 15 years at CVS, Foulkes has served as the company's EVP and chief marketing officer, SVP of health services of CVS/pharmacy, SVP, marketing and operations services, January to October 2007, and SVP, advertising and marketing"


SHLD - Select Sears Hometown & Outlet Stores debut kitchen remodeling services



  • "More than 20 Sears Home Appliance Showroom and Sears Appliance & Hardware stores in New Jersey, Pennsylvania and Delaware have unveiled kitchen remodeling services from Kitchen Tune-Up, a national kitchen and bath remodeling franchise."
  • "The stores feature an interactive Kitchen Tune-Up kiosk, where customers can learn about affordable options to update their kitchen, view cabinet door samples and use an iPad to see project ideas and book an appointment for a no-obligation estimate."





MKS - M&S Uses New Technology To Monitor Factories



  • "In the aftermath of Bangladesh’s Rana Plaza tragedy, retailers have been struggling to figure out how to monitor the factories they contract with, remote as they often are. Marks & Spencer (M&S) has announced a plan to use new technology to keep tabs on its factories, designed for mobile phones."
  • "The new technology is designed to collect information directly from the factories regarding labor conditions, safety, job training and general worker satisfaction. Surveys are distributed to factory workers in various languages–Hindi, Sinhalese, etc.– and returned anonymously. M&S has already tested the program with thirteen of its suppliers in India and Sri Lanka, interviewing more than 2,000 workers."
  • "M&S plans a massive rollout of the program in the future, with the intent to reach thirty more factories and 22,500 more workers in India, Sri Lanka and Bangladesh. It remains unclear how they intend to ensure workers have access to mobile phones and iPads, or how they can guarantee they are permitted by supervisors to answer the questionnaires candidly."


Two Hundred Bangladesh Apparel Factories Shut on Labor Unrest



  • "Bangladesh apparel manufacturers suspended production in about 200 garment factories after at least 10,000 workers took to the streets demanding a salary increase...The workers pelted the factories with bricks and blocked a highway, Abdus Salam Murshedy, president of the Exporters Association of Bangladesh, said in a phone interview today."
  • "The protesters demanded a minimum monthly salary of 8,114 taka ($104), up from 3,000 taka now, Murshedy said as he headed into a meeting with government officials to look into ways to control the unrest."
  • "At a meeting with labor leaders and government officials on Sept. 17, factory owners’ representative Arshad Jamal Dipu proposed increasing the monthly basic salary by 600 taka to 3,600 taka."


What’s New Today in Retail (9/23) - 1111111111111111



Takeaway: Bangladeshi garment exports totaled $12.56 billion to Europe, $4.99 billion to the US, and $0.98 billion to Canada in the 12 month period ended June 30, 2013. As noted in the article, building safety improvements are expected to add $0.10 to the end price of each manufactured garment, that coupled with an increase in the minimum wage level could mean another bump to the final cost.


Cambodian Garment Factories Come Under Scrutiny



  • "A monitoring group backed by the United Nations said it would begin to publicize garment factories' compliance with worker rights and safety standards in Cambodia, a controversial program that its organizers say will be the world's most extensive initiative to improve working conditions at plants."
  • "The program...Better Factories Cambodia began rolling out on Friday" 
  • "But Cambodia's government and the country's factory association have opposed the new program, saying it could wind up shaming only some factory owners and driving business to other countries where oversight is less rigorous."
  • " Better Factories, among other things, inspects manufacturing facilities for problems such as child labor and unsafe conditions and offers training for factories to upgrade but has no enforcement power."


What’s New Today in Retail (9/23) - 22222222222222222




Bangladesh Factory Owners Fear Excessive Minimum Wage Hike



  • "Garment factory owners in Bangladesh are seeking a minimum wage increase for workers that is commensurate with the rate of inflation, but doesn’t exceed 20 percent."
  • "The current minimum wage for garment workers in Bangladesh is Taka 3,000 ($39) per month after it went up by more than 80 percent in 2010. With the proposed rate increase, the new monthly minimum wage would be Taka 8,000 ($102)."
  • "Production costs have increased with newly implemented fire and building safety compliance following the Rana Plaza building collapse and owners fear a wage increase of more than 20 percent would cause their factories to suffer."



Retailers’ online holiday campaigns to start before Halloween is over



  • "Almost half [of retailers] — 49% — say they will launch their first online holiday campaign before the ghosts and sexy nurses have finished marking Halloween, online traffic-tracking firm Experian Marketing Services’ first such survey of 212 retail marketing executives found."
  • "In terms of the way retailers are marketing to shoppers on the Web, 59% of them said they will be using online displays, followed by 55% of them citing email marketing. Print advertising comes in third place with 46%. In comparison, only 24% of marketers cited mobile marketing as a key holiday marketing channel."
  • The Experian survey showed 70% of marketers said they plan to use some sort of online promotional offer this holiday season. Free shipping, cited by 39% of retailers, ranked as the top promotional tactic, followed by deal-of-the-day offers and e-coupons. While retailers such as Wal-Mart Stores Inc...and Toys “R” Us have touted free layaway offers, only 3% of executives surveyed say they plan to resort to layaway."
  • "A confident 28% of respondents said they don’t plan to offer any promotions this holiday. While mobile didn’t rank as a top marketing priority, 43% of retail respondents said they plan to develop 'mobile optimized websites,' followed by 'mobile optimized email.'"



Breaking Bad Rates

“If personality is an unbroken series of successful gestures, then there was something gorgeous about him, some heightened sensitivity to the promise of life, as if he were related to one of those intricate machines that register earthquakes ten thousand miles away.”

- F. Scott Fitzgerald, “The Great Gatsby”


Sunday is the day that many of us spend the evening relaxing in front of the T.V. and, if the advertisers are lucky, watching live sports.  If the advertisers are not so lucky, we are likely catching up on TIVOed or Netflixed T.V. shows (that lack live and targeted commercials).  A fan favorite around the Hedgeye office is Breaking Bad, which coincidentally was awarded the Emmy for Best Drama last night.


For those that haven’t watched this Emmy award winning T.V. show, it is about a high school science teacher who, after discovering he has cancer, turns to cooking methamphetamine to pay for his cancer treatments and provide a level of comfort for his family.  No surprise, the protagonist Walter White begins to struggle with returning back to the somewhat simple life of being a high school teacher and ultimately decides to create his own methamphetamine empire.


As Walt pursues broadening his drug empire, he becomes increasingly morally corrupt and as the title insinuates, truly begins to “break” bad and make decisions that benefit his short-term gain at the expense of almost all else.  While it would be a stretch to compare the FOMC to drug dealers, even if much of the country is addicted to low interest rates, in the Chart of the Day we’ve taken a look at the 10-year yield over the last three weeks and titled it, “Breaking Bad Rates.”


To be fair, lower interest rates aren’t all bad.  For those of us who want to refinance our mortgage or buy a new home, it is actually quite a good thing.  From a more macro perspective though, loose monetary policy leads to a weak dollar, which sustains high commodity costs.  Low interest rates also incentive more speculative type investing, which create amplified business cycles.


As the market showed us last week, even if Chairman Bernanke is not suffering from the same internal conflicts as Walter White, the world is definitely addicted to the cheap American dollars that his policy has propagated.   As Bernanke said in his press conference last week:


“We want to be sure that the economy has adequate support until we can be comfortable that it is, in fact, growing the way we want it to be growing.”


Rationally, if the Chairman of the Federal Reserve comes out and questions the underlying strength of the economy, one would expect more economically sensitive asset classes to sell off, or at least be weak.  That, though, is not the reality in our current centrally planned world in which addiction to low interest rates is spreading faster than Walter White’s blue meth across New Mexico.


Back to the global macro grind . . .


Speaking of breaking economic data, the news out of China this weekend is largely breaking to the positive.  Septembers HSBC flash purchasing managers index came in at a better than expected and expansionary 51.2.  This was also a sequential improvement from August of 50.1 and the highest reading since March.  As a result, the Shanghai Composite is up more than 1.3% this morning leading most of the major Asian indices.  Imagine that a stock market that actually trades on the underlying growth prospects of its economy!


Our quantitative model, actually front ran this positive data point, which my colleague Darius Dale published in a note on September 6th titled, “China Goes Bullish Trend the Only Positive Data Point That Actually Matters.”  At the time, we were struggling with the myriad of data points out of China, which were still more negative than positive, but the equity market, being the sneaking leading indicator it is, ultimately signaled to us more good news was to come.  And so it has.


The set up for China gets increasingly interesting if the HSBC survey is correct and Chinese GDP is set to accelerate sequentially and exceed current consensus estimates.  While we are not quite ready to get aggressive on the long side of China just yet, we do like those economies with accelerating growth and benign inflation.   In fact, we’d call that breaking good and at a minimum we would not short China.


To be fair, none of the structural headwinds that we’ve been researching and writing about have gone away, but on the margin things do appear to be getting less bad at a time when the majority remains overly cautious on China.  According to a Bloomberg poll from last week, which surveys Bloomberg Professional users, more than 32% cited a slowing China as the #1 risk to the global economy and only 17% indicated they believe that China’s economic outlook is improving.   Didn’t know the consensus view on China? Now you know.


Speaking of breaking good, the economic data out of Europe this morning is also largely positive.   While the Eurozone flash manufacturing PMI edged down to 51.1 in September from 51.4 in August, both the Services and Composite PMI hit 27-month highs.  Now this is just one data series, but the potential for a sustained European recovery is a theme that you will likely see us highlight more and more often heading into year-end.


Our immediate-term Macro Risk Ranges are now as follows:


UST 10yr 2.58-2.81%



USD 80.16-81.11

Euro 1.33-1.35

Gold 1


Good luck out there this week.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Breaking Bad Rates - Chart of the Day


Breaking Bad Rates - Virtual Portfolio

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Congress, Save Us!

This note was originally published at 8am on September 09, 2013 for Hedgeye subscribers.

“For God’s sake declare the colonies independent at once, and save us from ruin.”

-John Page


That’s what Page said to Thomas Jefferson in the Spring of 1776. By September (on this day in fact), the Continental Congress officially named its union of independent states, the Unites States.


And the rest is history (sort of). We’re a long way from Patrick Henry’s “give me liberty, or give me death” speech from Virginia (March of 1775).  At this point, Congress is the butt of most jokes. But in these Unites States, anything can happen – there’s always a chance!


Imagine Congress saves us from seeing $6 at the pump? My simpleton read-through of Obama’s QA from St Petersburg last week is that he’ll respect Congress’ wishes if he can’t sell action in Syria. A no-action vote could save the American Consumer from ruin.


Back to the Global Macro Grind


There is no greater threat to this country than empowering both the almighty petro-dollar and/or the conflicted and compromised overlords who get paid by it. One of the most misunderstood realities of the 2008 crisis was $150 oil. Never forget that.


Since they are now front-running Obama with weapons of manic media, do you think Putin or Assad (or any of these whack jobs in Latin America or the Middle East) would stand a chance if the President of the United States started pulverizing them with a Weapon of Mass Currency Appreciation?


Both Reagan and Clinton seemed a lot stronger versus the Ruskies than Bush or Obama have been. Have you ever thought to yourself whether or not $20 oil had anything to do with that? How about the +4% US GDP growth rips of 1983-89 and 1993-99? Both were #StrongDollar, Strong America periods for both our Presidents and people.


“Our” – I keep saying our – and I am Canadian! For God’s sake Americans, stand up to this.


While both the US Dollar and US stock market seem to be sniffing out a no-action vote on Syria, they haven’t gone after the price of oil, yet. Check out last week’s most speculative lines on Middle Eastern conflict (commodities):

  1. Crude Oil’s net long position (futures and options contracts) just off its all-time high to +386,982 contracts
  2. Gold’s net long position was up another +3.6% w/w to +101,396 contracts = highest since January

That’s right Sons of Washington, when Wall Street wants to roll the bones on geo-political risk, they opt for the asset class with the highest beta, and then lever up those bets with options contracts. That’s why they’re great contra-indicators as they peak.


Gold peaked when speculation peaked that the USA would use the only other weapon of mass currency destruction that’s more dangerous than the Taliban – The Federal Reserve’s Dollar Debauchery campaign.  That was 2011-2012.


So when will oil peak? (*hint, it already did in 2008)


If we don’t do Syria, oil prices have plenty of intermediate-term downside – and, as a result, the US Consumer has plenty of intermediate-term upside.


Across our core risk management durations, here are the lines of support for WTI and Brent Oil that matter to me most:

  1. BRENT: immediate-term TRADE resistance = $117.98; intermediate-term TREND support = $108.35
  2. WTI: immediate-term TRADE resistance = $110.86; intermediate-term TREND support = $102.89

In other words, the opportunity for Obama here is to back off Syria and give Americans a 7-8% back-to-school tax cut (to TREND support) at the pump.


God forbid he drives a #StrongDollar move above and beyond a no-action call on Syria (i.e. hires Summers to taper and tighten). Oil prices could crash.


That’s what I’m talking about! Oh yeah – a little more red, white, and blue pin action for the only community of investors who are killing it in 2013 YTD – Growth Investors.


Last week’s Hedgeye Risk Management Style Factors were screaming growth:

  1. Top 25% (SP500 Quartile data) EPS Growers = +24% YTD (vs +15.5% YTD for the bottom 25% quartile)
  2. Low Yield (i.e. higher growth) Stocks = +26.4% YTD (vs +11.0% for High Dividend Yielding stocks)
  3. Consumer Discretionary (XLY) = +1.7% SEP and +23.6% YTD vs Utilities (XLU) -0.9% SEP and +5.9% YTD

“Screaming” – yes, Patrick Henry style - keep screaming at the government to strengthen the Dollar. That includes cutting defense spending from the all-time USA high Obama established in 2011.


Never, ever, forget that the government of these United States works for you – not the other way around.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.83-3.01%

SPX 1643-1665

VIX 15.07-17.49

USD 82.02-82.91

Brent 114.66-117.89

Gold 1366-1401


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Congress, Save Us! - Chart of the Day


Congress, Save Us! - Virtual Portfolio

September 23, 2013

September 23, 2013 - dtr



September 23, 2013 - 10yr

September 23, 2013 - spx

September 23, 2013 - dax

September 23, 2013 - nik

September 23, 2013 - euro

September 23, 2013 - oil

September 23, 2013 - natgas



September 23, 2013 - VIX

September 23, 2013 - dxy

September 23, 2013 - yen
September 23, 2013 - gold

September 23, 2013 - copper





Typhoon Usagi has caused at least 33 deaths, forced hundreds of flight cancellations and shut down shipping and train lines before weakening to a tropical depression over the southern Chinese province of Guangdong on Monday.



Macau visitor arrivals increased by 7.1% YoY to 2,871,088.  Mainland visitors totaled 1,881,588, with 47.5% travelling to Macau under the Individual Visit Scheme.  The average length of stay of visitors stood at 1.0 day.





In August, passenger traffic at Changi airport increased 9.4% to 4,678,005.




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