During our Q3 themes call we talked about inflation returning in Q4.  We are not calling for STAGFLATION but the possibility is there. 

As a result of sharply higher energy and food price increases, the headline producer price index rose for the third consecutive month.  After gains of 0.3% in April and 0.2% in May, the PPI rose 1.8% in June. The increase was above the consensus projection of 0.9%.  June's 1.8% advance is the largest since the 2.4% gain posted in November 2007.  The 6.6% rise in energy prices suggests that there is upside risk to June's consumer price index reading.


While the core PPI surged 0.5% -the biggest increase in almost a year,  almost all of this upside reflected a surge in car & truck prices which can be an unreliable indicator.  Not including autos, the core was up only about 0.1%.  Not so bad!

A Commerce Department report today showed U.S. retail sales rose in June, helped by incentives on autos and higher gasoline prices which boosted service-station receipts. The 0.6% increase was larger than forecast and was the biggest gain since January.  Importantly, excluding automobiles and gasoline, sales dropped for a fourth consecutive month.  

The headline retail sales number in June looks positive on the surface, but the recession has limited retail sales increases to only four of the past 12 months.  Most consumers continue to be cautious in the face of rising unemployment and falling home values.

So where do we go from here?  According to Bloomberg, GDP growth will average 1.5% in 2H09 after declining in 2Q09.  Betting that the consensus is nearly always wrong, the 1.5% GDP figure looks aggressive and the risk is to the downside. 

A soft economy in 4Q, coupled with our 4Q inflation call and the possibility of stagflation cannot be ruled out yet.

Howard W. Penney

Managing Director

A Bump in the Road

The ZEW Center for European Economic Research reported today that its July index of investor and analyst expectations slipped to 39.5 from 44.8 in June. The index aims to predict economic health six months ahead, and came in considerably lower than surveyed economists' forecast of 47.8. Conversely ZEW's gauge of the current economic situation rose to minus 89.3 from minus 89.7 in June, underperforming a consensus forecast of -87.8.

July's drop comes after months of sequential improvement in economic expectations (see chart) and recent improvements in underlying fundamentals. May German Industrial Production improved on a monthly and annual basis, helping to confirm a bottoming in production; and Factory Orders improved 4.4% on a monthly basis.  (For more, see our post on 7/8 "Sequential Improvement for Europe's Workhorse").  Exports picked up 0.3% on a month-over-month basis in May while imports declined 2.1%, contributing to an increase in the unadjusted trade surplus to $9.6 Billion from $9.4 Billion in April, according to the Federal Statistics Office.

A Bump in the Road - ZEW

Inflation is currently running at a healthy annual 0.0-0.1% (at the Eurozone average) and we don't expect that number to veer greatly when July's report comes out tomorrow.  As we move into 2H '09 we expect to see a slight increase in unemployment, offset with increased exports that should turn consumer and investor confidence higher.  Look for Factory Orders to be an important indicator of the health of the German economy. 

In light of this data, moderating expectations for future growth indicated by the ZEW survey suggest a realistic appraisal of sluggish global demand, rather than a negative sentiment shift.

While we've yet to see positive performance out of the DAX in 2009 (currently at -1.1% YTD) our bullish bias on Germany remains. We believe that Germany's significant industrial capacity provides a structural advantage, especially as global economies melt up. Further, the country's economic rather than financial leverage, a function of the government's aversion to overextending its balance sheet and Chancellor Merkel's balanced pledge of 85 Billion Euros to promote growth through tax cuts and programs like its "cash-for-trash" auto rebate will benefit steady but slow economic improvement in 2009 and positive growth in 2010, especially when compared to some its financial levered Western European peers, including:  Italy, Spain, UK, and Ireland. 

Matthew Hedrick



Hotel occupancy in Macau has not been this low since the 2003 outbreak of SARS.  Now, in 2009, the swine flu outbreak and a crackdown on "zero-free" package tours by the mainland government are contributing to the slump.  Average hotel occupancy across Macau in May was 59.4%, down from 72.9% during the same period in 2008. 

The number of hotel rooms in operations was essentially unchanged in the five months since the grand opening of the hotel tower at SJM Holdings' Grand Lisboa in December last year.  Visitation statistics resonated with the poor hotel figures; visitor arrivals fell 20% in May from a year earlier and 15% from the previous month despite dual holidays falling in May.  The negative impact of this decline carried into June's gaming revenues which were down 17% from a year earlier, according to preliminary data from the Portuguese news agency Lusa.

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Singapore Q2 GDP data released last night registered a -3.7% year-over-year growth rate, stronger than economist consensus by 170 basis points. 

BOUNCING BACK - singapore

The headline data was largely driven by resuming construction projects, an uptick in Pharmaceutical sector activity and inventory restocking in the electronics manufacturing - a clear sign that domestic business confidence is improving as investments increase and stimulus programs in neighboring countries begin to bear fruit.

When this data is taken to a higher vantage point in the context of Singapore's regional role -a highly developed entrepot economy in a strategically central position in the Pacific rim supply chain, the signal sent is unmistakable: Chinese demand driven trade continued to strengthen in June, and this sequential increase confirms that ASEAN and other smaller inputs into the matrix have felt that strength as much as the primary commodity and durable goods producing economies have.

We remain long Chinese demand via CAF as we continue to see the Ox pushing forward.  China can't carry the whole world on its back indefinitely, and we have yet to see real confirmation of broadening demand there, so at some point this surge will likely abate. For the time being however the data still supports only one conclusion.

Andrew Barber


RT - Comments from Investor Conference

We just heard from RT last week when the company reported its 4Q earnings so today we heard more of the same as it relates specifically to RT. RT's CEO Sandy Beall did say, however, that he is seeing more discounting within casual dining now than in the spring. We will be learning more about calendar 2Q results in the coming weeks and how casual dining margins fared overall, but this statement could point to increased margin pressure in the current quarter. A large number of companies, including RT, have been able to cut costs to partially offset the significant level of discounting, but a second round of cuts will be more difficult without impacting the customer experience.

RT said it will begin in January to execute against its goal of increasing average check to $12.50 to $14.50 from about $11.50. That being said, the company has not increased its prices in about 3 years. Although RT has been successful in driving increased traffic as of late, it has done so by better marketing its value offerings. It will become increasingly difficult for the company to raise its prices as it has trained its customers for the last 3 years to expect a lower average check. We will have to wait and see...

Retail First Look: CIT Implications


14 JULY 2009 


I didn't want to jump on the CIT bandwagon here, but I received about a dozen emails yesterday talking about the gloom and doom associated with  a Ch 11 filing.  Make no mistake, this is bad near-term. In doing the math, about 9% of CIT's $65bn portfolio are related to Retail, but it is one of the profit centers. In fact, last year CIT generated $100mm in net income in Retail, despite a $633mm loss in the overall portfolio. What does this mean? There are hundreds (if not thousands) of brands and retailers across sub-industries of Consumer that have existed simply because of the crutches in the system that allowed them to deliver sub-par product to a marginal consumer. There is definitely life beyond CIT. There are other factoring firms that will pick up the share as the economic balance finds equilibrium once again. But think about it this way... Does Ralph Lauren need CIT? No way. Does Kellwood? Jones Apparel Group? Perry Ellis? Warnaco? Yes, yes, yes and yes.  If the big guys are smart (let's assume that  they are big because they are at least reasonably smart), then this is a time when they flex muscle and gain share at retail and in both the mind and wallet of the Consumer. This event should help flush away the dregs of retail. I know I am still too early in suggesting this, but in hindsight I think that CIT Ch 11 proceeding will be viewed as part of the bottoming process for US Retail. 

In case anyone missed it, TBL snuck in an 8K after the close yesterday noting that Gene McCarthy is leaving the company effective on Friday. Terms will be disclosed as soon as they are finalized. In other words, there was a major shake-up, and he's out the door. There is no good that can come from this. Gene is the guy that TBL brought in to build a team to breathe life into the Timberland Brand. Gene 'gets' branding. He certainly did while VP Marketing of the Jordan brand during its rise to glory at Nike. He has been the architect of TBL's effort to clean up distribution, and take the brand upstream. Has it been a home run? No, but there is no absence of doubles and triples. My sense is that the 'penny pinching, tree-hugger' nature of the company is holding back on resources to grow the business at a time when it is deserving of the most capital.  I'd pit Gene up there as being on Matt Rubell's (PSS) career path - only 5-10 years down the line.  In fact, I think it'd be huge for PSS to hire the guy. As for TBL, this is a major blow. I had been a fan of the story up until earlier this year when I realized that numbers were too high. Now they REALLY look too high, and the talent to help TBL climb out of its miserable hole is fading. There's not much to hang your hat on with this story, except an acquisition. And as far as I'm concerned, the pool of buyers is half of what it was just three months ago, and the multiple has doubled.  Not good, TBL. Not good at all...



Some Notable Call Outs

- A last ditch effort is underway to save Ritz Camera from liquidation. After closing hundreds of stores but failing to hold off Chapter 11, the retailer is now pinning hopes on an auction for the whole company slated for July 23rd. If unsuccessful, it is expected that a complete liquidation will begin the next day.

- After 5 years of operating high-end outdoor retailer Smith and Hawken, Scott's threw in the towel on the chain and announced all 56 stores will close by year end. I wouldn't be surprised to see the brand reemerge, either in the form of further licensing deals (TGT already sells a line under the Smith and Hawken name) or an outright sale of the brand.

- Local marketing is in full force in advance of ANF's Hollister flagship opening this Thursday in SOHO, NY. The early marketing push includes two shirtless male models dressed in lifeguard shorts hanging out in front of the store's main entrance. Despite persistent same store sales weakness across all of the company's main brands, we expect the fanfare surrounding the store to be positive. After all, the store itself is likely to be very dramatic with an interior that supposedly sports a real pier and 77 flat screen tv's broadcasting a live feed of the ocean in Huntington Beach, CA.



- Ho Chi Minh City, Vietnam  is aiming to further develop its retail and wholesale industry - Ho Chi Minh City has plans for an extra 95 supermarkets and 140 "trade centres" planning to be built in the period until 2015. They will be built mainly in the Vietnamese city's downtown, the Nam Sai Gon and Thu Thiem urban areas, as well as at stops along its planned Metro rail line. The government's goal is to expand the share of modern retail distribution to 40% of the total retail value by 2015, with the new developments also expected to encourage more convenience and food stores in residential areas. Ho Chi Minh City is also planning to upgrade a total of 64 traditional markets in 2009-10 and another 31 markets in the next five years. <>

- Global cotton consumption expected to slow down - The US Department of Agriculture has reduced forecasts for global cotton consumption in 2009/10 due to expected slowdown in Pakistan, China and Thailand. The USDA said global consumption would be 112.62 million bales, down from last month's estimate of 113.42 million bales. However, the consumption prediction is still above last year's estimated demand of 110.34 million. The USDA also set the world production figure at 105.95 million bales for the year, down from its earlier estimate of 106.26 million bales. Global cotton consumption in 2008/09 was 106.93 million bales. <>

- More hypermarkets are expected to be built in India by 2011 - Around 315 hypermarkets are expected to come up in tier I and II cities of India by 2011 to sell off all articles from automobiles to needles under one roof as by then recovery from current downturn would have firmly established, according to a joint study by industry body Assocham and KPMG. The study entitled 'Reinventing India's Retail Sector' in its analysis of Feasibility of Hypermarkets in tier I and II towns between 2008-11 points out that even in year 2008, 212 towns had sufficient market potential for hypermarkets for break even existence. However, the study pointed out that the potential of those markets are yet to be realized by the industry. "That is a different matter that this potential has yet to be realized," stated the report. The report further stated that organized retail, which is growing at 20 per cent annually, is encouraging mall building activities at phenomenal rate, which would ultimately amount to creation of chains of hypermarkets.  Sajjan Jindal, president, Assocham, said that given the expected growth in number of households as well as in income and consumption per household in urban India, particularly in its leading 25 towns, 5 or more hypermarkets per city are feasible even in 2009. <>

- UK retail sales rise - UK Like-for-like retail sales rose 1.4% in June when fashion sales were boosted by the hot sunny weather and high street discounting. <

- Primark founder steps down - Primark founder Arthur Ryan is to step down as managing director of the fashion retailer in September, when chief operating officer Paul Marchant will become chief executive.  <>

- CHRS holds off on selling food business, more executive changes - Charming Shoppes pulled its Figi's food business off the selling block and made several executive appointments. The retailer initiated the sale of its Wisconsin-based Figi's Gifts in Good Taste catalogue business in August to refocus its energies on core brands. But Charming Shoppes said it has halted the sale process because it was unable to find an "acceptable valuation" to complete the transaction. The company also announced the appointment of Anthony Romano to executive vice president of global sourcing and business transformation.  Lisa Batra was named director of e-commerce for the Fashion Bug Brand, and Kimberly Aylward was appointed director of e-commerce for its Catherines brand. The firm hired Michele Pascoe as vice president of finance and chief financial officer of the Fashion Bug unit, and Brett Schneider to the same post at Catherines. <>

- Kellwood works to secure financing - Kellwood Co. raced the clock Monday, exploring its financial options and negotiating with key bondholder Deutsche Bank to avert bankruptcy by restructuring $140 million in obligations, which comes due midnight Wednesday. Michael Kramer, president and chief executive officer of Kellwood, said the process could take up to a month. "We are surprised and disappointed by Deutsche Bank's current position as they were on our bondholder steering committee, helped structure the deal and told us all along that they supported it," said Kramer. <>

- Industry retailers are jumping on the mobile commerce bandwagon - By Christmas 2010, shopping on the road, while waiting on line at the supermarket, traveling in China or backpacking through France - wherever there is cell phone service - just might be as normal as shopping online. The latest entry: London-based luxury e-tailer Net-a-porter on Monday launched a shopping application for the iPhone. Users who download the free application can see what's new in the store, shop and update their wish lists, among other things. At least 11 major companies, from Polo Ralph Lauren to Sears and CVS to Galeries Lafayette are raising their profiles by offering shopping on Web-enabled cell phones. Dozens more launches are expected in the next year. Just under 20% of customers have an iPhone or iPod Touch.  <>

- Ranking of the top 10 Vacation Destinations in the US - Even in a down economy, some people are still willing to pay for an escape from the daily grind. But many vacationers have decided to stay a little closer to home this year, favoring a jaunt within the U.S. over trips abroad. And according to a survey of almost 550 travel agents nationwide, big cities, relaxing atmospheres and star power reign supreme in 2009. 1) Las Vegas, 2) Orlando, 3) Kahului HI, 4) Honolulu HI, 5) New York City, 6) Phoenix/Scottsdale AZ, 7) Anchorage, 8) Washington DC, 9) San Francisco, 10) Chicago <>

- Eddie Bauer looking for bids - Eddie Bauer Holdings Inc. may draw bids from Iconix Brand Group Inc. as well as Golden Gate Capital. <>

- Nike merging websites - Nike has merged the popular website and its close to 2 million members with to give users a one-stop running destination online. has added many new features and social media opportunities. <>

- Sears teams up with the NBA and WNBA - Sears Holdings and the National Basketball Association (NBA), the Women's National Basketball Association (WNBA), and the NBA Development League (NBA D-League) announced a new promotional partnership in support of the Protege brand's line of basketball footwear, sold exclusively at Kmart and Sears.>

- K-Swiss lawsuit dismissed - The Los Angeles District Court has dismissed a lawsuit filed by K-Swiss against Puma over. Puma filed its own trademark infringement lawsuit in the District of Massachusetts and the case will continue to be heard there. <>

- SUBOI and Timex apparel license agreement - SUGOI Performance Apparel, a division of Dorel Industries Inc., and Timex Group, have entered into a license agreement for the design, manufacture and distribution of sports apparel under the Timex brand name. Sugoi will launch a line of Timex performance apparel designed for everyday athletes nationwide. <>

- Wal-Mart's magazine relaunching - Since its inception in 2004, Time Inc.'s All You magazine has been distributed at Wal-Mart stores and via subscription, offering consumers money-saving tips. This week, the magazine is relaunching its site to better serve its audience during a recession. Consumers visiting the site will get exclusive coupon offers, a Web video series and "Style for Less" tips.  With more Americans moving to budget-friendly shopping, this was the right time for a relaunch, said All You associate publisher Suzanne Quint. Brands such as Carvel Ice Cream, Arm & Hammer and Snapple have signed on as sponsors, offering the exclusive coupons on the site. Heinz's Smart Ones is the site's launch sponsor. <>

- Swank Inc. teams up with women's belt business - Swank Inc., the men's accessories supplier, thinks it has found the platform to get into the women's belt business - a strategic alliance with Style 365 LLC, a women's belt resource. Swank, which designs, sources and distributes men's belts and other accessories to a range of retailers under a sizable portfolio of licensed and owned brands, will assume responsibility for sourcing, logistics, financing and other backroom functions for Style 365. John Tulin, chairman and chief executive officer of Swank, said his firm had made an investment in the women's firm but declined to specify its size. <>

Puma is keeping it sleek and colorful for spring '10 - Streamlined shapes, bright colors and sculptural accents characterize the looks - both performance-athletic and athletic-leisure - brought to the market by the Herzogenaurach, Germany-based brand (a division of French luxury house PPR). Puma styles are available at Puma retail shops, and department stores and independent retailers, and sell for $60 to $295. <>

 Retail First Look: CIT Implications - Puma shoes

RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough): TGT 

07/13/2009 10:20 AM


We're expanding our short position in US Consumer. Being short Ackman's concentration factor (illiquidity) is also attractive here. KM



Retail First Look: CIT Implications - SV 7 14 09



Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%