Notable trends:

  • Coffee prices continue to rise, ticking up +0.9% over the past week.  Despite the recent upward trend, coffee prices remain down -28.7% on a year-over-year basis.  We expect coffee prices to remain low in 2014, but a continuation of the recent upward trend could, on the margin, negatively affect sentiment around SBUX, DNKN, GMCR, KKD, THI and other coffee retailers in 2014.
  • Cheese Block and Milk prices were up +0.8% and +0.1% over the past week and are up +14.9% and +2.3% on a year-over-year basis, respectively.  High dairy prices are, to varying degrees, a negative for TXRH, CAKE, DPZ, PZZA, and CMG.
  • Corn and Wheat prices are down -2.0% and -1.2% over the past week and are down -30.3% and -27.1% on a year-over-year basis, respectively.  Grain costs continue to provide retailers, restaurants and consumers with lower food costs than a year ago and should benefit 4Q margins for companies with large exposure to this group.
  • Beef prices have been trending up YTD and should continue to pressure margins for BLMN, TXRH, CMG, MCD, JACK, SONC, WEN and others with significant exposure.  We expect some restaurants, mostly fast food providers, to feature chicken products on their menus in 2014 if the rise in beef prices persists.
  • Gasoline prices ticked up 150 bps over the past week and are now up +0.6% on a year-over-year basis, despite being down for the majority of the 2013.  We will continue to monitor this trend, as any sustained increase or decrease in gas prices could have a significant impact on the direction of discretionary spending.  




















Howard Penney

Managing Director


What's New Today in Retail (12/30)

Takeaway: JCP rights another RonJon wrong. TGT’s reputation falling like lead. WMT/Sams crushing it in China. Labor unrest kicks up notably.



JCP, SQBG - JC Penney and Sequential Brands Group amend William Rast license agreement



  • "As previously disclosed, on November 17, 2011, William Rast Sourcing, LLC and William Rast Licensing, LLC, each a wholly-owned subsidiary of Sequential Brands Group, Inc., entered into an exclusive license agreement with J.C. Penney Corporation, Inc., pursuant to which the Company granted the Licensee a license to use its William Rast trademark in connection with the manufacture, sale and distribution of multiple product categories, including men’s and women’s apparel and accessories."
  • "Due to changes in circumstances with respect to the License Agreement, the Company and the Licensee entered into an amendment to the License Agreement on December 24, 2013, pursuant to which the term of the License Agreement will end on June 30, 2014 instead of January 30, 2016."
  • "In addition, under the terms of the License Amendment, the rights granted to the Licensee under the License Agreement were deemed non-exclusive (instead of exclusive) for the duration of the term and the Company will be permitted to enter into additional licenses with other parties to use the Trademark in connection with the manufacture, sale and distribution of the Products."


Takeaway: Yet another example of JCP walking away from a mistake that Johnson rammed down its throat. The primary line for Rast was the JT line of (primarily) denim. Sounds appealing to me, as well as many people reading this note. But the average Joe consumer simply did not want it. They wanted Arizona. Timberlake announced back in the Spring that he was walking away from the deal. No surprise there. Nice to see JCP followed suit. The only things worse than making a mistake is a) not fixing it, and b) not being transparent about it.


TGT - PIN Numbers Stolen in Target Breach



  • "Target on Friday confirmed that strongly encrypted PIN data was removed from its system during the security breach that took place between Black Friday and Dec. 15."
  • "'While we previously shared that encrypted data was obtained, this morning through additional forensics work we were able to confirm that strongly encrypted PIN data was removed,' Target said Friday. 'We remain confident that PIN numbers are safe and secure. The PIN information was fully encrypted at the keypad, remained encrypted within our system and remained encrypted when it was removed from our systems.'”


Takeaway: Don't underestimate how much of a disaster this is for Target. Yes, it's a breach of confidence on the part of the consumer -- and as we know from JCP, rattled confidence can take a long time to regain. But there is also financial pain -- partially in the form of lost sales, but also because TGT was not insured for this. That's the part of this whole mess that simply blows our mind. Some retailers simply use Paypal, as it transfers the liability. We know it's unrealistic to assume that all TGT shoppers use Paypal. But it is realistic to expect the company to but in place the appropriate risk management (i.e. insurance).


CROX - Crocs, Inc. Announces Financial Partnership with Blackstone, Expands Share Repurchase Plan, Announces CEO Retirement



  • "Crocs, Inc. today announced that an investment fund affiliated with Blackstone has agreed to purchase $200 million of newly issued series A convertible preferred stock. In connection with the investment, Crocs intends to revise its capital structure to accommodate a $350 million stock repurchase program approved by its board of directors. This includes using the net proceeds of approximately $180 million from the Preferred Stock as well as excess cash to fund the repurchase plan."
  • "With its investment, Blackstone will be entitled to two seats on the Crocs board of directors."
  • "John McCarvel also announced his intention to retire as president, chief executive officer and board member on or about April 30, 2014."
  • "Crocs also updated its fourth quarter 2013 outlook and currently expects revenue to be at the low end of the previously provided guidance range of $220 million and $225 million, and diluted loss per share to be at the low end (meaning the higher loss) of the previously provided guidance range of ($0.20) and ($0.23)."


Takeaway: None of this -- not the CEO retirement, lower guidance, or greater involvement by a major investor -- comes as a surprise. We still think that CROX is ungrowable without severely impairing either its EBIT margins or asset turns.


UHR - Fire Destroys Swatch Workshop



  • "A fire has destroyed a workshop at the heart of the Swatch Group division that produces the movements used in the majority of Swiss watches, the world’s largest watchmaker said."
  • "The flames were brought under control by 9.30 a.m. and nobody was injured, but the workshop 'has been entirely destroyed,' Swatch Group said."


Takeaway: So unfortunate. The timing is a double cheek slap. 1) This time of year is never when you want to have something like this happen (but at least it was after most watches for holiday were already on the shelves -- if not on people's wrists). 2) Swatch is in the midst of integrating its Harry Winston acquisition. While this does not threaten smooth integration, it definitely diverts management's time and attention.


WMT - Walmart in drive to expand Sam’s Club chain in China



  • "The expansion of Sam’s Club is also tapping into a trend that is transforming Chinese consumption habits: the rapid growth of China’s auto market."
  • “'About 90 per cent of the people who shop in our Sam’s Clubs drive to the club versus our Supercenters, where that number can be as low as 10 per cent,' says Greg Foran, head of Walmart’s China business, on a tour of one of Beijing’s two Sam’s Clubs. 'They’re coming to this particular location maybe once a month and they’re buying enough items to last them that month . . . The frequency of shopping is less but the value of [each customer’s] basket is a hell of a lot more.'”
  • "Walmart is concentrating the discount warehouses in the outskirts of “tier 1” and “tier 2” cities – primarily provincial capitals and independently administered conurbations such as Beijing and Shanghai – where incomes and car penetration rates are highest."


Takeaway: An interesting read into the shopping habits for Chinese consumers in the consumables space. It makes obvious sense that people would need to drive more often to get to a Sam's -- as the real estate is usually located in the sticks.  But the ratios of 90% drive to Sam's vs. 10% drive to supercenters seems extreme to us. 




Retailers Reflect on Holiday Shoe Sales



Daniel Kahalaniowner, DNA Footwear, Brooklyn, N.Y.

  • Holiday sales strategy: "We did a Thanksgiving sale, and we did a one-week sale [before] Christmas. Now we are going into our end of the season sale that starts Jan. 6."
  • Top sellers: "Ugg is not dead. Everyone wants to say that it is, but there is still high demand. People also couldn't get enough Sorel."

Andrea Poukeyco-owner, Kick, La Crosse, Wis.

  • Holiday sales strategy: "We send out direct mailers to the top 20 percent of our customers for holiday with a coupon for $25 off of a $100 purchase or more. We do that every year and [it has] been working every year.
  • Top sellers: Sorel and Sam Edelman

Dan Ungarpresident, Mar-Lou Shoes, Cleveland

  • Holiday sales strategy: "[A promotion offering 30 percent off boots] worked very, very well. Additionally, we did a 15 percent off friends and family [sale]... but frankly consumers are not even responding if it's not somewhere between 40 and 70 percent off."
  • Top sellers: Ziera, Clarks, SAS and Ugg classic styles

Caroline Pricesales associate, Kicks Shoes, Columbia, S.C.

  • Holiday sales strategy: "Our owner is all about shopping local and giving back to the community. We always do something philanthropic at Thanksgiving and Christmas in exchange for giving our customers a discount... This year, at Christmas, our charity was Toys for Tots, which kicked off about two weeks before Christmas."
  • Top sellers: "We’ve sold a lot of Dolce Vita, Vince Camuto and Kate Spade. They’re always good brands for us, in particular the Dolce Vita line because it's very fashion forward but isn’t so pricy."

Dave Levyowner, Hawley Lane Shoes, Shelton, Conn.

  • Holiday sales strategy: "We did radio spots that branded us — [no] promotions or discounting this season." 
  • Top sellers: "No. 1 [was] Ugg. A lot of people thought it would be way down, but it was exceptionally strong, [especially] the standard styles. Additionally, New Balance, SAS, Merrell, Dansko and Minnetonka. We also had huge increases with Kamik."


Breaking News: Cambodia Overrun by Factory Worker Protests



  • "Despite the announcement of an eagerly awaited rise in the minimum wage for factory workers, Cambodia’s manufacturing industry has been halted by tens of thousands of protesters, swarming the streets in a show of demonstration."
  • "The Labour Advisory Committee reported a $15 increase in monthly wages, effective April 1, 2014. Under the newly accepted plan, the minimum wage will rise incrementally over the next five years, lifting it from its current $80 per month to more than  $160 per month. In 2015, the monthly minimum wage is set to increase again by $15, then by $16 in 2016, $17 in 2017 and, finally, $17 in 2018. Unions have been demanding that the minimum wage increase to the target $160 immediately."


Political Chaos Hits Bangladesh Industry



  • "As Dhaka witnessed one of the highest days of political drama of the pre-election fervor on Sunday, businesses remained largely closed as ground transport was shut down. The opposition led parties continue to call for businesses and the city itself to remain closed on Monday to send a strong message of protest to the ruling Awami League."
  • "Officials of the Bangladesh Garment Manufacturers and Exporters Association told WWD that they were struggling to ensure that orders could be met although December has been a hard month and that garment factory owners were now paying major penalties because of the political situation. 'Cancellation of orders worth $3.77 million have happened in this month itself,' a BGMEA official said. This was in the first three and a half weeks of this month."






[video] Keith's Macro Notebook 12/30: JAPAN UST10YR METALS

European Banking Monitor: Improvement Continues Into Year-End

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .




European Financial CDS - Swaps mostly tightened in Europe's banking system last week with the average change -1 bp and the median -2 bps.


European Banking Monitor: Improvement Continues Into Year-End - z banks


Sovereign CDS – Sovereign swaps mostly tightened over last week. French sovereign swaps tightened by -1.0% (-1 bps to 54 ) and Spanish sovereign swaps widened by 1.7% (3 bps to 157).


European Banking Monitor: Improvement Continues Into Year-End - z sov1


European Banking Monitor: Improvement Continues Into Year-End - z sov2


European Banking Monitor: Improvement Continues Into Year-End - z sov3


Euribor-OIS Spread – The Euribor-OIS spread widened by 2 bps to 14 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 


European Banking Monitor: Improvement Continues Into Year-End - z. euribor


Matthew Hedrick







Hedgeye CEO Keith McCullough answers top questions on this morning's macro call including where the S&P 500 is headed in 2014, whether he'd be buying Euros here and where Gold becomes an attractive short.


What a Year

Client Talking Points


The Nikkei closes its year up +0.7% at the year-to-date high of 16,291 up +59.3% as the Yen goes out on its year-to-date lows south of $105 (down -18% vs US Dollar). Bottom line: Get the Yen right, you’re still getting Japanese stocks right.


The 10-year Treasury is stiff-arming the US growth bears with a 3% handle again this morning. Putting that into its proper context (it's either +26 basis points month-over-month or +130 basis points year-over-year) this was a big move. The question now becomes do we breakout above this 3% level that the bond bull lobby hasn’t sanctioned? More to be revealed.


Nope. Precious metals do not like #RatesRising. Silver is down -1.8% this morning and Platinum (we shorted it in Real-Time Alerts on Friday) and Gold are down -0.9% and -0.7%, respectively. My immediate-term risk range says 10-year yield 3.05% and Gold $1179. Incidentally, the SPX risk range is 1817-1859. Higher-lows and higher-highs remain bullish until they aren’t.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Our bullish call on the British Pound was borne out of our Q4 Macro themes call. We believe the health of a nation’s economy is reflected in its currency. We remain bullish on the regime change at the BOE, replacing Governor Mervyn King with Mark Carney. In its October meeting, the Bank of England voted unanimously (9-0) to keep rates on hold and the asset purchase program unchanged.  If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper.


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


US Stocks last wk: SP500 and Russell2000 +1.3% each to +29.1% and +36.7% YTD respectively @KeithMcCullough


"If you have zest and enthusiasm you attract zest and enthusiasm. Life does give back in kind." - Norman Vincent Peale


Got Fear? The VIX continued its 2013 crash last week. It was down -9.6% week-over-week and down over -30% year-to-date.

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