What's New Today in Retail (10/31)

Takeaway: Big rebound in ath apparel v. storm-impacted ‘12. TGT lowers rev goal by $9bn. Food stamp cut to hurt WMT, TGT, $ Stores, supermarkets.



Athletic Apparel Data


Takeaway: 29% growth in last week's athletic apparel data -- simply unbelievable. This is one of the highest numbers we can recall seeing in over 10-years of tracking this data.  Now for the sobering caveat….we're comping against a storm-impacted 2012, so compares are extremely easy.  The biggest winners for the week? Arcteryx and UnderArmour -- both up over 70%, and Nike up over 50%.


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TGT - Target Backs Off $100 Billion Sales Goal



  • "Target Corp. backed off its goal for hitting $100 billion in sales by the end of 2017, as pressure on low-income shoppers and tough competition from rivals like Inc. weigh on results."
  • "The shortfall will come from Target's U.S. operations, rather than Canada, where its early foray has met with some struggles attracting customers and managing inventory. While Canada's contribution of $6 billion in sales by 2017 is still on track, the U.S. division's sales will be around $85 billion instead of $94 billion."
  • "Target now expects overall U.S. sales to rise 3% to 4% a year through 2017, instead of 5%."
  • "On a webcast of the meeting, Chief Financial Officer John Mulligan said the company still expects to generate $8 a share in profit in 2017, as the company opens fewer new stores and expects to buy back more stock. Target's shares closed up 2.2% at $65.71."


Takeaway: This is as big a statement we can ever recall hearing from a mega cap retailer. Going from $94bn to $85bn? That sales reduction is in itself bigger than 90% of retailers in the US.  The market's reaction is a bit perplexing. Either a) people knew this was coming down the pike, b) they were expecting a greater decline in sales, or c) they like the financial engineering to drive EPS. Of course we should also consider that TGT was never afraid to miss its targets. It was never a serial sandbagger. This actually puts the company's forecasts within a realistically achievable range.


WMT, TGT, KR - Retailers Brace for Reduction in Food Stamps



  • "Retailers and grocers are bracing for another drain on consumer spending when a temporary boost in food-stamp benefits expires Friday. The change will leave 48 million Americans with an estimated $16 billion less to spend over the next three years and comes just months after the expiration of a payroll tax cut knocked 2% off consumers' monthly paychecks."
  • "Enrollment in food-stamp benefits surged during the recession and in its wake, increasing by 70% from 2007 to 2011 before leveling off. The government's stimulus program increased Supplemental Nutrition Assistance Program, or SNAP, benefits across the board by 13.6% in 2009."
  • "As that temporary increase expires on Friday, benefits for a family of four receiving a maximum allotment will drop by 5.4%, the equivalent of about $36 a month, or $420 a year, according to the U.S. Department of Agriculture."
  • "The $16 billion, three-year toll of the cuts estimated by the Center on Budget and Policy Priorities pales in comparison with the estimated $120 billion, one-year hit caused by the earlier expiration of the payroll tax cut. But for many retailers the two have a cumulative effect."


Takeaway: Bad for the consumer, and as such it's bad for WMT, TGT, Supermarkets, and Dollar Stores.


JNY, GIII - Jones Group auction pits Sycamore against G-III



  • "The New York-based owner of Anne Klein, Nine West and Stuart Weitzman is entering the final stages of an auction process that pits the buyout firm Sycamore Partners against apparel company G-III, The Post has learned."
  • "Jones is in talks to sell itself at a price tag between $1.2 billion and $1.3 billion, or roughly $16.50 to $17.50 a share, according to sources close to the talks."


Takeaway:  Odd to see a private equity firm pitted against a strategic buyer. Separately, JNY reported earnings, and its SIGMA trajectory was one of the most encouraging (headed up and to the right) that we've seen in a while. Too bad it does not matter anymore.


JNY - JNY Q313 Earnings


What's New Today in Retail (10/31) - chart7 10 31


NKE, FL - KD VI hits stores today


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Takeaway: One of the ugliest shoes we've seen out of Nike in a while. That means that kids will probably love it.


LULU - Lululemon to move into one of world’s famous shopping zone



  • "Beverly Hills based Maxxam Enterprises announced that fast-growing yoga themed apparel retailer Lululemon has signed a long-term lease to move into a prime Third Street Promenade location in Santa Monica, California."
  • "Lululemon expects to open its 6,400 square foot store in 2014."


FNP - Lucky Brand Opens Beverly Hills Flagship



  • "The nearly 4,500-square-foot store on Beverly Drive is a platform for Lucky Brand’s increasingly expansive portfolio of merchandise that extends from kids to, for the first time, home."


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Takeaway: FNP clearly is keeping its foot on the gas in growing Lucky -- even while it's on the block. That's a great move as it relates to keeping interest alive.


PETM - Dorothy the English Bulldog from Texas Wins $10,000 in PetSmart’s Halloween Photo Contest



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Takeaway: No, McGough is not losing his mind. Just couldn't resist putting this photo in on Halloween.





  • "Today, Joe’s Jeans Inc. in conjunction with Curiologie Development Ltd. announced the grand opening of the first Joe’s® retail boutique in Canada. Located in the Oakridge Centre in Vancouver, B.C., the flagship Canadian location will feature the brand’s signature designer denim line, as well as all the latest lifestyle pieces and accessories for men, women and children. The boutique is the thirty-fifth location for Joe’s® and is set to open to the public on November 2, 2013."


Bruno Magli - Bruno Magli to Change Hands



  • "British investment fund Fortelus Capital, which acquired the brand in 2007, has entered into exclusive negotiations with a consortium of South Korean investors that include E-Land Group and Asian private equity investor CDIB Capital to sell the entirety of the storied Italian footwear brand."
  • "E-Land formed a venture with Kate Spade in Mainland China, and has taken took control ofaccessories brand Mandarina Duck and Italian brand Belfe, among others."




Google Holiday Study Cites Big Web Presence



  • "Half of all U.S. consumers will research holiday goods online prior to Thanksgiving weekend, and 60 percent will make a Web purchase that weekend, according to a holiday research study conducted by Google set to be released today."
  • "Eighty-nine percent of shoppers will use the Internet this holiday season and 79 percent call the Web their most useful shopping resource. Three-quarters of consumers will use online research to help determine which brands and retailers they’ll turn to and what kinds of gifts they’ll buy."
  • "Forty-one percent of adult shoppers will use a smartphone to either shop or for research this holiday. And out of all shoppers who own a smartphone, 76 percent will use their device to shop this year and 25 percent will transact via their mobile device."
  • "Millennials ...will drive mobile holiday shopping. Eighty-eight percent of smartphone owners in this group will use their device for online shopping and 31 percent said they will transact via their smartphone. The study saw a 28 percent year-over-year increase in Millennial smartphone owners who plan to make a mobile holiday purchase — versus just a 13 percent increase for adults ages 35 and over."

Dead Cat Dollar Bounce?

Client Talking Points


The Nikkei's rally on Up Dollar/Down Yen was short lived. After testing 14,491 TRADE resistance on the Yen selloff, the Nikkei failed and dropped -1.2%. That’s not good. Neither is China down another -0.9% after failing at 2189 TRADE resistance on the Shanghai Composite. #lowerhighs


Good is good for our #EuroBull Q4 Macro theme as Italy’s inflation continues to slow. It's down to +0.7% year-over-year now from up +3.4% only a year ago. A #StrongEuro perpetuates Down Inflation. Our Hedgeye playbook loves that. Italy’s stock market and divergence this morning is on that too up +0.6%.


Trick or treat? TREND or TAIL? The U.S. Dollar's long-term TAIL support line of $79.21 was recovered. That’s good. Why? Because it means we won’t look like Venezuela this week. Phew. But the TREND resistance remains overhead at 80.16. So, unless you’re a long-term holder of dollars, you want to wait and watch on this thing. Pimco's Bill Gross begging for higher taxes this morning? Yuck. The Dollar Devaluation and Bond Bull Lobby is coming on thick.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

In line with our #EuroBulls Q4 theme, we’re long the German DAX via the etf EWG. With European fundamentals showing improvement off low levels, we expect outperformance from Germany, and in turn for the region’s largest economy to pull the rest of the region higher. ECB policy remains highly accommodative and prepared to aid any of its sovereign members to preserve the Union. Inflation remains moderate and fundamentals are positive: confidence readings and PMIs are up since June, with factory orders trending higher and retail sales inflecting to push the trade balance higher. Finally, the unemployment rate has held steady at the low level of 6.9%, all of which signals to us that Germany’s economic climate is ramping up.


WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.


Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road


MT @KeithMcCullough Bernanke #BondBullLobby by Gross/Gundlach is thick. Reality: Ben created MBS + corp mkt that real guys cant get out of @Hedgeye


“You can’t tax business. Business doesn’t pay taxes. It collects taxes.” -Ronald Reagan


Disappearing bonuses? Goldman Sachs, along with the investment-banking divisions of six of its biggest U.S. and European rivals, allocated a collective 39% of revenue for compensation in the first nine months, down from 42% a year earlier and the 50% some firms earmarked before the financial crisis. Goldman Sachs’s 41% ratio so far this year is its lowest nine-month figure as a public company.

Parasitic Policy

This note was originally published at 8am on October 17, 2013 for Hedgeye subscribers.

“By definition, a government has no conscience. Sometimes it has a policy, but nothing more.”

-Albert Camus


With the debt ceiling and government shutdown behind us (at least for a few months), we can now all go back to focusing on doing investment research.  Well, not so fast, now we actually have to focus on the Federal Reserve.  The key question there is, of course, will they taper or not taper.


Yesterday, we wrote in the Early Look about an interesting study from the San Francisco Fed, which showed that the Fed’s program of quantitative easing had a de minimis impact on the real economy.  We would actually take it a step further and suggest that with the inflation of commodities due to printing more dollars, QE may have even eaten into the real economy.


In that regard, we were trying to think of an analogy from the animal kingdom that best represented the impact of QE on the real economy and very naturally the tape(r) worm came to mind.  For those that didn’t know the following is a description of a tape worm (emphasis mine):


“Tapeworms, or cestodes, are intestinal parasites; they are worms that are flattened like a tape measure. A tapeworm cannot live freely on its own - it survives within the gut (intestine) of an animal, including a human.”


To be fair, my assessment that QE effectively eats into its host, the real economy, has led to some push back.  As my colleague Christian Drake rightfully pointed out to me earlier this week, while QE may not have an impact on the real economy, it does have an impact on asset prices.  As an example, in the Chart of the Day we show the S&P 500 index with and without the twenty-four hour pre-FOMC returns.


The implication of this chart is quite astoundingly that the Fed may be responsible for almost all returns of the SP500 since 1994.  Further, if QE truly does inflate asset prices, as the correlations suggest, then there is likely a wealth impact that ultimately does impact the economy by the way of increased consumption.


As we stand here today though, it seems much easier to argue that some easing of stimulus is likely to strengthen the U.S. dollar and deflate oil, which is probably the most important consumer stimulus the Fed could implement over the coming quarters and years.  Hopefully, Mrs. Yellen gets the memo on this point.  Let’s face it, if oil were at $50, we’d all be buying jelly doughnuts for the office.


Back to the global macro grind . . .


As noted, the government is back to work and the debt ceiling is averted, so now the global equity markets should be rallying hard.  Well, that’s not quite how it is working out this morning.  U.S. futures are down, Europe is off 25 – 80 basis points, and Asia is up, albeit small.  So much for the party!


As we, and people much smarter than us have often said, markets don’t like uncertainty and our fine elected officials have now created more uncertainty with a number of looming deadlines, specifically:


-          December 13th – the date when a House-Senate committee will report back on negotiations on a longer term budget deal;

-          January 15th – the date on which the government is now open until subject to another budget agreement being reached; and

-          February 7th – the next debt ceiling.


Now of course, Washington is changing this morning.  Former Newark Mayor (although we understand he didn’t actually live there) Cory Booker is the newly minted Senator from New Jersey.  We knew Cory when we were undergrads at Yale and he was in law school and he can be persuasive, but we aren’t sure even he can resolve this mess of catalysts that Congress will be dealing with in the next three months.


So, speaking of the real economy, what impact does this massive amount of uncertainty have?  According to Gallup, the economic confidence index has fallen off a cliff in the last month from -15 (a range it had been in for awhile) to -40.  With such short term and potentially negative catalysts on the horizon, it is unlikely this confidence improves meaningfully.


Luckily, as global asset allocators, we have the choice to be underweight the U.S. and our view on Europe is looking very compelling on a comparative basis as we highlighted in our recent Q4 theme - #EuroBulls. The euro, a currency we do have longer term issues with, is breaking out on our quant models and is up another 70 basis points this morning to $1.3629 versus the U.S. dollar. 


Increasingly, the recent data from Europe is also supportive of being a #EuroBull.  Some examples include:


-          Greek 10-year yield down 206 basis points month-over-month to 8.4%;

-          Eurozone September CPI benign at 1.1%;

-          European new passenger car registrations up the most in two years at +5.4% year-over-year in September;

-          European ZEW economic expectations at 59.1 in October, a sequential improvement from September; and

-          U.K. ONS house price index +3.8% in August which beat expectations and increased sequentially.


To be fair, all is not great in Europe. But, in global macro markets, change happens on the margin, and on the margin the European economy is improving.


Our immediate-term Risk Ranges are now:


UST 10yr yield 2.66-2.73%

SPX 1685-1725

VIX 15.21-17.63

USD 80.11-80.67

Brent 110.01-112.05

Gold 1265-1303


Good luck out there today.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research 


Parasitic Policy - The Drift


Parasitic Policy - z. vp 10 17

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The Doppelganger Fed

“One day everything will be well, that is our hope. Everything’s fine today, that is our illusion.”



In German folklore a doppelganger is literally a paranormal double of a living person. More contemporarily, the word doppelganger is used to identify a person that closely resembles someone else either physically or behaviorally. As an example, some people have suggested that my doppelganger is Russell Crowe.


As it relates to the Federal Reserve, the biggest question facing investors currently is whether Janet Yellen will be a doppelganger, in terms of policy and communication, of current Chairman Ben Bernanke (more commonly known as The Bernank).  Practically speaking, copying Bernanke’s behavior is likely to mean a continuation of QE Infinity.


Keith had some colorful comments on Fox Business last night as it relates this idea of QE Infinity. The video is attached in the link below and Keith’s comment begin at around the 3:00 mark. As Keith notes, the biggest issue is that the Fed is confusing the market which has dramatically heightened interest rate volatility this year.


Paul Singer from Elliott Management made a similar statement in his letter to investment partners yesterday where he wrote:


“QE Infinity” has so distorted the prices of stocks and bonds that nobody can possibly determine what the investing landscape would look like, or what the condition of the economy and financial system would be, in the absence of Fed bond-buying.”


This is indeed the issue, namely that the economy and investors have become so accustomed to abnormal interest rate policy, that they have an incredibly difficult time determining what normal is anymore.  Sadly, the new normal appears to be to wait for the Fed’s next whisper to the Wall Street Journal’s Jon Hilsenrath.


To be fair, for those that are into reading Federal Reserve tea leaves, there was communication other than whispers to Hilsenrath yesterday. Specifically, in its statement the Federal Reserve made three changes:

  • This clause was removed, “the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market”;
  • They changed ”that economic activity has been expanding at a moderate pace” to “generally suggests that economic activity has continued to expand at a moderate pace”; and
  • They removed the “some” from this statement - “Some indicators of labor market conditions have shown further improvement”.

Maybe it is just me, but I’ve been reading English for a long time now and I have no idea what the implication is of those changes.


The fact is that the bogey that remains out there is 6.5% unemployment and if we take their word then the Fed will:


“. . . keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent.”


Although, even there, The Bernank has been quite dodgey as he has at times alluded to 7% being the bogey for altering monetary policy and other times suggesting he would lower the bogey to 6%. But if we accept the current 6.5% target, QE Infinity is likely to continue at the rate of $85 billion, give or take, for the for seeable future. 


In the Chart of the Day, we’ve highlighted the growth of the Federal Reserve balance sheet since 2008 as a result of QE Infinity.  In total, the Fed is almost at $4 trillion in assets on its balance sheet.  Not to be the alarmist, but another reason that we may be in the low interest time zone for a lot longer than we realize is because of interest rate risk associated with the Fed’s balance sheet.


Ironically, some pundits (we won’t name names) have commended the Fed under Chairman Bernanke for being transparent and great at communicating.  Sadly, it doesn’t take much more than the last 24 hours to understand that a) the Fed is as bad at communicating as ever and b) this is why investors are so confused. Frankly, we see no reason to believe that Yellen will be anything but Bernanke’s doppelganger on the communication front . . . and so the confusion will go on.


Sadly for stock operators, this confusion has led to an environment in which fundamentals for companies are, at times, ignored.  As an example, let’s look at both earnings and sales results for SP500 companies:

  • Sales: 60% of companies that beat sales estimates subsequently outperformed the market to the tune of 3.7% on average.  The other 40% of companies that beat sales estimates underperformed the market over the subsequent 3-days by an average of -3.8%.   Subsequent performance for companies missing Sales estimates was similarly mixed.  
  • EPS:   56% of companies beating EPS estimates subsequently outperformed the market by ~3% on average while 44% went on to underperform the market by an average of -4.1%.  Subsequent performance for companies missing EPS estimates was similarly mixed.

In a nutshell, stock performance has had very little relation to fundamental performance in 2013.  More simply, it has been a structurally tough year to isolate Alpha.  But even there no one should be surprised, because it is a macro driven market.  And if you don’t do macro, macro will do you.


Our immediate-term Risk Ranges are now:


UST 10yr Yield 2.47-2.60%


VIX 12.85-14.92

USD 79.21-81.16

Brent 108.86-111.27

Gold 1


Keep your head up and stick on the ice,

Daryl G. Jones


The Doppelganger Fed - Chart of the Day


The Doppelganger Fed - Virtual Portfolio

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Early Look

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