YUM - Not Making Any Real Changes, Despite Slower Sales

Earlier today, I highlighted the fact that YUM was trading down despite it having beat 2Q EPS expectations and how this marked a change in pattern to how the restaurant names have been trading following quarterly earnings. For the most part, restaurant companies have been posting better than expected bottom line numbers by cutting costs to offset soft revenue trends, and their stocks have been rewarded. I think a couple of things are at play here:

1.) Investors have become accustomed to revenue misses from the casual dining operators and other restaurants in this more challenging environment, but this was the first significant same-store sales miss for YUM's China and YRI businesses, forcing YUM to take down FY comparable sales guidance.

2.) Financial engineering helped YUM to offset its weaker than expected top-line results (a lower tax rate and lower share count).

Relative to how other restaurant names have traded, I think the second point is the more important one as we have seen a lot of companies offset soft sales trends with significant cost cutting. These reduced cost structures, however, have created more operating leverage and stemmed from increased labor efficiencies and G&A savings. These companies have made real changes to how they operate their businesses and the benefit of the savings will continue to be realized going forward. A significant portion of the cost reductions have resulted from slowing new unit growth.

YUM, on the other hand, is maintaining its full-year 10% EPS growth guidance despite lowering its same-store targets as a result of a lower tax rate, a less negative foreign currency impact and improved restaurant margins in China and the U.S., largely as a result of more commodity deflation than initially anticipated. None of these earnings drivers is sustainable. YUM is not offsetting its top-line weakness by making significant changes to its operating model.

YUM is targeting $60 million in G&A savings in the U.S. but even with these cost savings, YUM had to take down its U.S. operating profit growth target to up high single digits from about 15%. In the U.S., YUM is taking real costs out of the business, primarily as a result of its refranchising strategy, but these cost reductions are not enough to offset the same-store sales shortfall. This is a big difference relative to what we have been hearing from other restaurant companies.

I have been saying for a couple of quarters now that YUM is growing too fast, particularly in China and YRI. This rapid growth will make it difficult for YUM to reduce costs and could prove a challenge to margins should sales deteriorate further.

YUM's CEO David Novak closed the call by saying that he is fixated on 3 shareholder value drivers: first, driving new unit growth; second, improving same-store sales and third, being the industry leader in return on invested capital. He highlighted the fact that the company has the most work to do around growing same-store sales. I would argue that YUM's sustainability and returns would improve dramatically if the company focused on fixing same-store sales first and growing new units second.

YUM - Not Making Any Real Changes, Despite Slower Sales - YUM 2Q09 EBIT

YUM - Not Making Any Real Changes, Despite Slower Sales - YUM 2Q09 CFFO




In addition to discussing current trends, Marriott will likely highlight the strength of its balance and cost cutting efforts.  The company will likely discuss its debt reduction plans ($600 to $650MM), upcoming notes sale, reduced investment spending, SG&A and property level cost cuts.

2Q09 overview

When MAR reported its 1Q09 results on April 23, 2009, they guided to North American comparable systemwide RevPAR to be down 20 to 25% in 2Q09 and RevPAR outside North America to decline roughly 17 to 20%.  We estimate that total RevPAR will decline 22% in 2Q09.

  • Since April 23rd the Euro has been roughly 3% stronger, benefitting USD international ADR's
  • Lower end brands have had less severe RevPAR declines than Luxury and Upper Upscale, and limited service rooms make up 52% of Marriott's system-wide rooms.

We're at $0.23 cents and $210MM of EBITDA for Q2.  Despite our assumption of a 60% decline in incentive fees, we still think that fee revenues will come in a little better than management guidance, given our projected room count growth of 5%.  We have owned, leased, corporate housing and other revenue at $10MM, at the lower end of company guidance.  As MAR alluded to on June 2nd at the Goldman conference, margin declines will become worse throughout the year as they begin to annualize the cost savings initiatives that were put in place starting 2Q08.  Our timeshare estimates are in line with management guidance.

Full year 2009

We expect the company to keep its RevPAR guidance flat for full year 2009 and suspect that full year may come in a touch better given the depreciation in the dollar since initial guidance. For the balance of the year, occupancy will be stable to improving from its lows; however we believe that ADR will continue to be weak.  Since MAR doesn't own many hotels the flow-through issue is less of a concern for them than REITs and operators.  For this reason we think that MAR's EPS will likely trough in 2009, while most other c-corp and REIT operators will face further declines as occupancy and therefore directs costs increase, while rate is likely to still remain weak. For 2009, our EPS estimate is $0.95 and our Adjusted EBITDA estimate is $855MM.

  • Total fee revenues: we're in line with management guidance of $1,050 -$1,100MM
  • Gross margin from owned, leased, corporate housing & other: We're below management's guidance $55-$65MM
  • We're in line with timeshare guidance


YouTube from 1Q09 call

General Market Trends:

"As we've discussed before, our industry typically lags heading into a downturn and to recover, so we're obviously far from being out of the woods. However, there are some initial signs of demand stabilization even if at today is very low levels."

"We've seen gross booking trends for transient travelers flatten during the first quarter, and new group bookings, while still declining, are doing so at a lower rate. Of course, while demand may have bottomed, there is still risk in pricing and therefore RevPAR."

"To buttress transient occupancy, we added business from the federal government, travelers using AAA and senior citizen discounts and other contract customers. Despite this, we continue to see occupancy declines reflecting weakness across most corporate rated business."

"Nevertheless we are already seeing significant competitor discounting of room rates for corporate business in many markets. As we discussed last quarter Marriott will not lead the market down on rate but we also do not intend to lose share by failing to respond. Room rates are likely to remain weak until the economy shows meaningful improvement."


Group Business:

"recent cancellations are running at more normal levels."

"meeting planners are showing a greater preference for urban and suburban hotels rather than luxury and resort locations for new business. Another lingering impact of both the rhetoric and the economy is the continued hesitancy on the part of meeting planners to book new meeting though we note that the rate of year-over-year decline has been improving for the past 16 weeks."

"Attrition in meeting attendance remains a significant problem, but it too appears to be stabilizing."


Lease/ Owned business:

"While we own or lease 41 hotels, seasonally softer performance, combined with the weak economy, should continue to constrain profits. Results will also likely be affected by tougher comparables since contingency cost cutting for North American hotels began in the second quarter of 2008."



"In our time share business new sales in the first quarter were consistent with our expectations and we were pleased with the relative strength all be it within small volume of our fractional sales."

"We've seen some stabilization [in delinquency rates] in early April which gives us some cautious optimism in this area."



"On the cost side, we revived purchasing specs, shortened restaurant menus and hours, and reduced food waste. At some hotels we've temporarily shut down floors, reduced the number of restaurants and shortened retail outlet hours. Many associates were working in multiple departments and often at multiple hotels as we work hard to give associates as many hours as possible."

"Since cost reductions began in the second quarter of 2008 margin comparisons will become more difficult for the rest of the year."


Balance sheet/ Cash flow related:

"We continue to aggressively manage our balance sheet and our cost structure to meet whatever challenges may present themselves. During the quarter we reduced our debt by about $150 million and expect to reduce debt by $600 million to $650 million in full year 2009."



"We're also relaxing some brand standards for hotels and capital expenditure guidelines for new initiatives and renovations."

Retail First Look: Europe/Asia Retail Call Outs


15 JULY 2009


Anyone watching Levi Strauss?  The lack of public equity makes it so easy for some to forget that this company generates $4,270bn in sales, and is larger than VFC's aggregate denim businesses. It's numbers yesterday were ugly. Trends are not getting better. It sounds like US mass channels are not a complete disaster, which is a positive (or absence of a negative), but does VFC want an increasingly desperate (and levered) huge competitor? Probably not. FX played a role in the 3.4% revenue decline in the quarter, though wholesale trends in both Europe and Asia are eroding. I found it most interesting to hear management note that Japanese customers have dramatically downshifted in price point. Note that these numbers come on the heels of Levi's recent completion if the acquisition of 73 Levi's and Docker's stores from now defunct Anchor Blue retail Group. And then this morning we see VFC throw its hat in the ring to buy Eddie Bauer assets. There are questions to be answered in this space. Stay tuned...

Swedish fast fashion retailer H&M reported disappointing same store sales in June,  of -5%.  This marks the second month in a row of missed expectations.  Despite the company's value driven strategy, the overall global market weakness coupled with an intense promotional environment (especially in Europe) appears to be taking its toll. 

Retail First Look: Europe/Asia Retail Call Outs - H M 1 yr



Some Notable Call Outs

- At a conference on Tuesday, Stage Stores management offered one of the more articulate examples of how it's capturing market share from the liquidation of its main competitor.  In the 100 markets where Stage and Goody's competed head to head, the company is now seeing an 800 to 900 bps incremental comp improvement.  Additionally, the company has identified 50 former Goody's boxes that fit their demographics.  The cost to convert these locations is trending towards a net investment of $12-$17 per foot vs. a typical store which requires $27 per foot.  As the survivors begin to take advantage of dislocation in the industry, we expect to see a tail of above-average profitability accruing to those positioned for growth.

- At the same conference, PVH CEO Manny Chirico mentioned that second quarter business for the company's flagship Calvin Klein brand has been strong both domestically and internationally.  Domestic performance is coming from market share gains while international is being driven by organic growth.  The company's retail segment continues to suffer and is expected to shrink from 700 doors at the beginning of 2008 to 400/450 over the next 2 years.

- Based on the press release it looked like Amazon was launching a major effort in the outdoor category, with an expansion in hardlines and softlines.  However, after further exploration it appears that this is really more of remerchandising effort and also a reemphasis on the affiliates,, and  This strategy appears to be no different than the "mall based" approach that the company employs across all of its merchandise categories.  We won't ignore the powerful growth in Amazon's business model but this effort does not look like a game changer for the outdoor industry in the near term.



- NRF estimates a negative BTS season - Back-to-school shopping will be a somber affair this year, according to new data released by the National Retail Federation. In its 2009 Back-to-School Consumer Intentions & Actions Survey, NRF forecasted b-t-s spending to shrink by 7.7% on average per family, to $549, while footwear purchases will decrease by 15% , to $94 per family. NRF predicts that 56% of shoppers will be hunting for sales more than during last year's b-t-s season, 42% will buy more generic brand products, and 40% will use coupons for their b-t-s purchases. <>

- Kellwood Co. faces midnight deadline to avert bankruptcy filing - Round-the-clock talks between Kellwood Co. executives and bondholders took on extra urgency Tuesday as the company tried to avoid defaulting on $140 million in notes that mature at midnight tonight. Sources familiar with the negotiations said St. Louis-based Kellwood was unlikely to make an immediate decision on what action to take in the event of a default, hoping to resolve an impasse with Deutsche Bank, its largest noteholder, and avert a bankruptcy filing. <>

- Heelys announces new CEO - Five months after the resignation of its former CEO, Heelys Inc. has found a new leader. The company on Tuesday named Tom Hansen as its president and CEO, effective Aug. 1. Hansen is currently president of TM Advertising, where he has created campaigns including American Airlines' "We Know Why You Fly" and Nationwide Insurance's "Life Comes at You Fast." Hansen said in a statement: "We plan to bring that same innovative, entrepreneurial spirit to the creation of new products, new designs and a new brand marketing effort that will provide the solid foundation for Heelys to not only grow short term but to thrive for some years to come." Hansen also acknowledged Heelys' "reduced sales volume" and noted that "several cost and infrastructure opportunities" will help restore profitability for the company "very soon." <>

- New footwear report on India bullish - The Indian footwear market has recently seen a demand shift from low-priced footwear to medium and high-priced products. But the huge potential that this development creates is as yet largely untapped. The growing aspiration to look trendy but comfortable has increased the demand for footwear having international high-fashion brands in Punjab. And for the brands, it is an opportunity to provide the Punjabi consumer with products that have a classic elegance - tasteful luxury, enduring quality and fine imprint of craftsmanship. Jimmy Choo, Pavers England, GUCCI, Moschino - just to name a few, the global luxury brands in footwear have already entered the Indian market. Till a few years ago, buying a foreign footwear brand would require a trip abroad, a gift from overseas friends/family or at the most an online purchase. But it changed with the permission for 51% Foreign Direct Investment (FDI) in single-brand outlet in early 2006 that allowed foreign footwear brands to enter India. It also strengthened the organized retailing in footwear. The affluent customers in India today have a wider choice in buying stylish and comfortable shoes. <>

- Indian retail trade expected to grow 13% per year for next 3 years - Indian retail trade will reach $590 billion within two years, according to the minister for commerce and industry. "Retail trade is estimated to grow at 13% per annum from $322 billlion in 2006-07 to $590 billion in 2011-12," Jyotiraditya Scindia said in a written reply to Parliament. The government has no plans to change the sector's controversial foreign direct investment (FDI) policy, and fully recognises the need to ensure that small retailers are not adversely affected by the growing organised retail and that there is no adverse effect on employment, said Scindia. The share of organised retail in India's total retail sector has expanded from 3.3% in 2003-04 to 4.1% in 2006-07. <>

- Spanish unemployment is showing possible early signs of recovery - In May and June the jobless rate fell 1.5% from an astounding 18.7%, the highest in Europe. Meanwhile, Spanish retailers from the fashion and footwear sector are seeing improved sales since hitting a low in March. In a statement to the media Miguel Angel Fraile, General Secretary of the Spanish Trade Confederation (CEC), expressed optimism that consumer demand would continue to recover "little by little" and that this recovery would be a "soft one" in the summer months. Small and medium retailers suffered a fall of 20% in average sales in the first quarter compared to the same period in 2008, but Fraile is confident that the situation was unlikely to deteriorate since it was "not possible to consume less". He also pointed out that poor March sales may have been tied to lack of retail offers in stores in the run up to Easter Week in April. In the first three months of 2009 sales in Spain fell by up to 70% in sub sectors such as home equipment and furniture; 40%  in automotive products; 30% in electrical home appliances and 25% in fashion and footwear.  Leisure activities declined by just 15% - 20% and food purchases between 2% - 5%. The situation in Spain contrasts sharply with that of China, for example, where retail sales continue to grow at 15% and demand for imported western goods is still strong. <>

- Sri Lanka export figures down from decreasing textile and garment exports - Decreasing textile and garment exports in Sri Lanka have dragged down total export figures for May, with earnings falling over 25% this year compared to last year. Sri Lanka's export earnings reached $538.5 million in May, a 27.8% drop on the same period last year, according to the Central Bank, with textile and garment exports shrinking 22.7% to $237.5 million. "Textiles and garments exports to the EU and the US decreased by 17.9% and 29.4% respectively, due to lower demand emanating from these countries," the Central Bank said. <>

- Bangladesh government to aide garment sector - Bangladesh's commerce minister Faruk Khan has given indications to the garment sector that financial help will be given to them from a stimulus package when the new budget is announced. The industry has complained of the effects of the economic slowdown, and Khan said that sectors that have been affected by the situation would get a share of the $726.7 million stimulus package that has been proposed for the forthcoming budget. <>

- Singapore Retail Sales Drop in May for Eighth Month as Wages, Tourism Fall - Singapore's retail sales fell for an eighth month in May as jobs losses, wage cuts and fewer tourist arrivals depressed spending. <>

- New bill to drop tariff on Outdoor apparel - Columbia Sportswear, The North Face and Patagonia are a few of the recreational performance outerwear companies that stand to benefit from a tariff-dropping bill introduced in the House and Senate. The U.S. Outdoor Act, introduced Friday would eliminate duties on about 80 styles of imported high-tech apparel designed for hiking, biking, skiing and other outdoor recreational activities. If enacted, the bill would save outdoor apparel manufacturers close to $600 million over 10 years, according to the Congressional Budget Office.  "This bill removes unnecessary tariffs on apparel not currently made in the U.S.," said Blumenauer. "In addition, the companies that benefit from these reduced tariffs will be required to contribute a portion of their savings toward research programs that are developing ways to keep America's apparel industry globally competitive and more environmentally sustainable."  <>

- BRBY reports strong retail sales and weak wholesale for first quarter - First-quarter revenue at Burberry Group plc rose 8.5% due mainly to strong retail performance in Europe and Asia. Retail sales, which accounted for about two-thirds of total revenue in the period, grew by 12% on an underlying basis (up 28% reported). New space generated 8% of this growth, with Burberry Middle East contributing 4%. Comps in the quarter were flat year-on-year, reflecting positive customer response to the Spring/Summer ranges, particularly to new accessory programs and recent strategic initiatives, including men's tailoring, denim, sport and childrenswear. Europe and Asia both delivered double-digit percentage growth, with exceptional performances again in the UK and Korea (both helped by favorable currency movements). The United States and Spain remain more difficult markets, with comps in both markets again down double-digit in the quarter. For the year as a whole, Burberry plans to open a net 10-15 mainline stores, with an increase in average selling space of 10-12%. Wholesale revenue declined by 28% on an underlying basis (down 21% reported). Burberry is projecting wholesale revenue to be down by about 25% at constant exchange rates for the six months to 30 September 2009. This includes the impact of the closure of Thomas Burberry; the continued planned rationalization of many small specialty accounts in Europe; and the conversion of Burberry Middle East from wholesale to retail. Excluding these actions and closures, first half wholesale revenue is planned down around 15% at constant exchange rates as wholesale customers adjust their inventory levels in line with current sales trends. Spain remains challenging. A further three franchise stores were opened in the quarter in Emerging Markets, including the first Burberry store in Bahrain. China continues to perform strongly, while Russia and parts of the Middle East remain difficult. Total licensing revenue in the first quarter declined by 3% on an underlying basis (up 12% reported), benefiting from timing differences in royalty receipts, mainly in Japan. In the year to March 2010, Burberry still expects underlying licensing revenue to decline by between 10% and 15%, although reported licensing revenue should increase year-on-year reflecting currency benefits. <>

- US Wholesale apparel prices - Wholesale prices for U.S.-manufactured apparel decreased 0.2% in June compared with May and rose 1.3% from a year earlier, the Labor Department said Tuesday. Women's and girls' domestic apparel prices declined 0.1% in June, but increased 1.7% in 12-month comparisons, according to the Producer Price Index. Men's and boys' apparel fell 0.4% month-to-month, but increased 1.9% year-over-year. Prices for all U.S.-made goods increased 1.8% in June, driven mostly by a surge in gas prices. The advance in prices followed a rise of 0.2% in May and a climb of 0.3% in April. <>

- Health care reform and WMT -  Wal-Mart Stores Inc. stands to gain considerable ground in its public image and labor relations. The country's largest retailer has long been cast as antiworker after a series of negative incidents and a vigorous effort against unionizing its stores, but in recent times has improved its stance through better employee benefits. Now, Wal-Mart has inserted itself into a game-changing debate of historical proportions that promises to burnish its reputation and establish the company as a model corporate citizen in the eyes of workers and consumers. At the same time, business groups, including the retail industry's major lobbying group, the National Retail Federation, find themselves on the other side of public sentiment by opposing several of the health care proposals, including an employer mandate. Such a stance in this economic climate is loaded with public relations headaches. The retail industry employs 24 million people, 50 to 60 percent of whom are eligible for health care benefits, according to industry figures. That means 10 million to 12 million retail employees, many of them working part-time, are not eligible for employers' health coverage. A new USA Today/Gallup poll out Tuesday said 56 percent of Americans favor a health care reform bill, 33 percent oppose it and 12 percent do not feel strongly either way. To finance the bill, 61 percent believe employers who do not provide insurance should pay a fee. <>

- Target, Kelly Services May Back Mandatory Health Care by Large Companies - Target Corp. and Kelly Services Inc. said they may support Wal-Mart Stores Inc.'s call for mandatory medical insurance by large companies as part of a proposed overhaul of U.S. health care. <>

- BWS's Famous Footwear launches BTS branding campaign "Make Today Famous" its 1st national cable TV ad campaign ever - Famous Footwear today announced its first nationwide branding, advertising and social media campaign that will reach consumers across the country with an empowering message - Make Today Famous(TM). To unveil Make Today Famous to consumers nationwide, Famous Footwear is implementing its largest, most integrated branding campaign to date. The campaign kicks off the retailer's Back-to-School season, a time when more people are shopping for shoes than most other times during the year, and includes Famous Footwear's first-ever national cable television advertising campaign and radio spots in 47 major cities.The campaign features a significant social/digital media component that includes dedicated website, online banner ads, a Facebook page, YouTube channel ( Footwear, with a zero in place of the "o" in the word "Famous"), Twitter handle (@Famous_Footwear) and viral video. In fact, a 30-second video "teaser" released on Father's Day, which shows a dad swaddling his newborn son and raising him into the air to give the giggling child a different view of the world, garnered approximately 70,000 views in the first 48 hours. More videos are planned, including a soon-to-be released digital short, and will be available at, which launches August 3 and includes fun and interactive shoe-themed quizzes and games. <>

Retail First Look: Europe/Asia Retail Call Outs - bws image

- Retailers and designers get personal with group meetings with customers to boost sales - Battling the recession, designers and retailers are wooing customers at intimate gatherings that range from informal fashion presentations in private homes or hotels to in-store events after business hours. The goal: to inspire shopping by offering an exclusive experience and interaction with fashion arbiters. Saks Fifth Avenue, Neiman Marcus and Nordstrom, among other stores, are pushing the strategy, which is cost-effective and represents targeted use of marketing budgets. "Any time we can work one-on-one with customers we can do a much better job of customizing trend presentations - versus pulling a fashion show for a large group where you don't necessarily know what they are looking for," said Kimberly Grabel, senior vice president of marketing at Saks. The luxury retailer is increasing these get-togethers throughout the 53-store chain - including flagships that previously focused on large-scale events like runway shows, she said. Nordstrom designer buyer Margaret Hinojosa de Garza said she helped arrange an invitation-only cocktail party for about 65 women, who are among top customers, at the retailer's store at Dallas' NorthPark Center that featured Jason Wu's fall collection. The designer appeared at the store a day late after his flight was canceled because of bad weather.  The company is using the tactic in about half of its 176 full-line stores, a spokeswoman said. <>

- Surf/Skate industry shows resilience - The surf/skate industry is showing notable resiliency during recent global economic challenges, posting U.S. retail sales of $7.22 billion in 2008 according to the the 2008 SIMA Retail Distribution Study released by the Surf Industry Manufacturers Association.  The study indicates that the surf industry experienced a slight dip in 2008 with retail sales hitting the $7.22 billion mark compared to $7.48 billion in 2006 (a 3.5% decrease). Softness was most apparent in the fourth quarter of 2008, coinciding with the global economic indicators of that time. However, the surf industry has shown substantial growth of 10% for the last five years. The 2008 SIMA Retail Distribution Study cites several key factors as driving the overall consistency of the surf industry, including: loyalty of core surfers and skaters to the lifestyle and sport; and, the increasing demand for surf/skate footwear and accessories as evidenced by the double-digit growth of these key categories. Passion and youth largely drive the surf industry. <>

- Graj + Gustavsen has teamed up with Cherokee to relaunch the 1970s apparel brand A. Smile - The line, slated for a 2010 rollout, will be repositioned to the young, contemporary consumer market. A. Smile launched in 1969 and offered young men's and women's fashion with a focus in jeanswear. "A. Smile's legacy as a revolutionary apparel brand in the 1970s resonates with the mindset of today's consumer who is seeking an authentic, counterculture lifestyle," says Simon Graj, founding partner of G+G. "We are thrilled to be partnering with Cherokee, one of the most recognizable names in retail and licensing. As brand innovators, we will work to build on A. Smile's strong brand identity and unconventional premise to deliver a cool and relevant concept." Cherokee currently has license agreements in categories such as family apparel, fashion accessories and footwear, as well as home furnishings and recreational products. <>

- launches outdoor shop - The Seattle-based e-tailer announced Tuesday it had launched a dedicated outdoor recreation store on its Website. Housed at, the new site features an expanded offering of outdoor footwear, apparel and gear.  According to a release, the growth of Amazon's camping and hiking category was the impetus for the new store, which launches one week before the semiannual Outdoor Retailer trade show in Salt Lake City. The site stocks hiking boots, sandals, trail runners, climbing shoes and casual styles for men, women and kids from brands including Merrell, Vasque, Lowa, Adidas and New Balance. <>

- London-based online retailer ASOS is going global and coming to America -, the London-based online fashion retailer, which made its name spotlighting celebrity-influenced looks, is setting its sights globally. The company began marketing itself in Sweden and Denmark two years ago - it already ships worldwide - and is considering targeting countries such as the U.S. and Japan, with the eventual plan to introduce separate ASOS sites for different countries. ASOS, like Net-a-porter, appears to have sidestepped the recession that's hit much of the British clothing industry and has added labels such as Gap and Mango to its mix of house and outside brands. <>

- Zappos gets a large pool of applications for ad agencies - The chance to work with a hot brand like Zappos is too much for many agencies to pass up, even when it means pouring in tons of time, effort and money into a Byzantine review process in which they have little chance of succeeding. Zappos recently got RFP responses from 104 agencies, with 22 then chosen to do 90-minute presentations at Zappos headquarters in Las Vegas this week. In an unusual twist, it required shops to submit storyboards and ad mockups for the initial round, all in a tight two-week turnaround. While many agencies privately grumbled, one that was not chosen as a finalist offered unusually public criticism that the review exemplified all that is broken in the account review process. In a blog post, Ignited executive creative director Mike Wolfsohn said a site the agency set up for the review was given only a cursory glance by Zappos employees, with just five pages of 25 being read, never even viewing the page presenting the team that would work on the account. "If agencies are going to spend weeks preparing their response, the least any client can do is commit 30 minutes to look at it," he said. The post echoed the private complaints of many shops that took part in the review for the $7 million account. Zappos is meeting with agencies this week, through Friday. <>

- Borders UK fights to avoid bankruptcy - Struggling bookseller Borders UK is in advanced talks with the private equity arm of turnaround specialist Hilco over a possible sale of the business. <>

- Sears, Kmart and, most recently, Toys"R"Us have launched Christmas in July promotions, including online boutiques and discounts - Sears Holdings rolled out Christmas Lane Web shops at and, featuring holiday décor, winter-weather items and gifts. The retailer has also set up in-store Christmas décor shops in 372 Sears stores. Beginning Sunday, Toys"R"Us stores will kick off a one-week Christmas in July sale, offering 40 percent to 50 percent off toys and games. Discounts include $100 off Play Along's Hannah Montana Malibu Beach House, as well as 50 percent off Hasbro's Star Wars Clone Wars Republic all-terrain tactical enforcer vehicle. The toy retailer also plans to open an in-store holiday station where kids can create greeting cards, play games and get a free candy cane. <>

- JCP launches new BTS campaign - JCPenney has launched its back-to-school initiative, which includes a teen microsite highlighting the retailer's young men's and juniors' lines for fall. The push showcases JCPenney's newest apparel lines such as RS by Sheckler, Rusty, Third Rail a Zoo York Production and Decree. The Web microsite,, features a digital runway where visitors can create their own looks, as well as a sign-up to receive text messages about back-to-school sales and special offers. The back-to-school marketing campaign is also supported with a JCP Teen Facebook page, cinema and TV spots, an exclusive concert series and more. <>

- Ray-Ban this month will open its first online store - The site is launching as the 70-year-old company enjoys a bit of a fashion revival. Its iconic Wayfarer sunglasses, newly recolored in bright solids such as red and turquoise, have been widely photographed on the street and on celebrities. The Web store "is a natural extension, a logical step for the brand, providing the loyal customer with limited access to the brand" more accessibility, said Pierre Fay, executive vice president of Wholesale NA Luxottica Group, which owns Ray-Ban. <>



FINL: BB&T upgrading to Buy from Hold.

UBS: Initiating on:

                FL with a Neutral, target of $10.

                NKE with a Neutral, target of $54.

                UA with a Sell, target of $18.

PLCE: Bank of America/Merrill Lynch initiates with a Buy, target of $32.

CHS: Jefferies initiating with a Buy, target of $15.




-Donald Blair, VP & CFO, sold 3,000shs ($155k) less than 10% of common holdings as part of 10b5-1 plan.

-Trevor Edwards, VP, sold 3,000shs ($155k) less than 10% of common holdings as part of 10b5-1 plan.

-Hans Van Alebeek, VP, sold 2,250shs ($116k) roughly 20% of common holdings as part of 10b5-1 plan.

-Eric Sprunk, VP, sold 2,250shs ($116k) roughly 30% of common holdings as part of 10b5-1 plan.

-Eunan McLaughlin, President Affiliates, sold 2,250shs ($116k) roughly 10% of common holdings as part of 10b5-1 plan.

-Gary Destefano, President Global Operations, sold 3,000shs ($155k) less than 20% of common holdings as part of 10b5-1 plan.






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Noise Before Defeat

"Tactics without strategy is the noise before defeat."
-Sun Tzu
Managing risk around this proactively predictable trading range remains our objective here in Q3. All of the noise you hear about "200-day moving averages" to crashes and "Chinese bubbles" are just that - noise. Capitalize on it.
After getting hit on Monday, Asian equities have busted another move to the upside. With the exception of Japan which was flat overnight, most of the major Asian stock markets have tacked on an impressive 2-day rally.
Last night's moves in Asia included:
1.      China closing up another +1.4%, making its 2-day move +3.5%, and establishing yet another new YTD high of +75.2%.

2.      Hong Kong +2.1%, making its 2-day move +5.8%, and breaking out above my immediate term TRADE line.

3.      Taiwan +1.5%, Korea +2.6%, Australia +1.5%, Thailand +2%, India +3%, and Singapore +3.4%.

The Chinese strategy continues to inspire leadership in the region. Their tactics have been surgical. Their execution, flawless.
China is the 21st century's growth engine. If you are American and don't like the sounds of that - too bad. Not unlike Americans versus the British at the outset of the 20th century, the Chinese couldn't care less.
Remember that China's stated foreign reserve policy is to maintain three objectives: 1. Liquidity, 2. Safety, and 3. Returns.
By the way, those are unlevered returns backed by organic growth. No, you haven't seen the Steve Schwarzman of China yet have you? That American private equity poster child would be the antithesis of the Chinese investment philosophy.
Say what you will about your levered long lovers here in America. The Chinese have liquidity. And lots of it. This morning China reported their money stats. Chinese foreign reserves shot up another $178B to $2.13T. That "T" is as in TRILLION. And that is, like the 2009 performance of the Shanghai Composite Exchange, a new high.
Within the Chinese money stats was this little critter that US politicians don't want to talk about called the money supply. M2 (a measure of the money supply) in China ramped up to +28.5% year-over-year growth in the month of June. That too, is a new high.
With the US government creating more money than God could right now, there is a lot of money floating around out there in this brave new interconnected global world. In the immediate term, it will continue to be reflationary. In the intermediate term, it will lead to one of our Q3 2009 Investment Themes - a Reflation Rotation. And in the long term, reflation will ultimately morph into inflation.
Before you get your shirt in a knot about inflation, take it off, relax, and get a tan or something. We won't see the political football of reported inflation accelerate in the USA until Q4. In between now and then, all you need to do is buy low, sell high, and trade the range.
Chinese growth accelerated sequentially in Q2 (versus Q1). That we know. What we don't know is where that growth will end up in Q3. What we know is that economic growth comparisons for Q3 are quite easy (earthquake of generational proportions last year, plus the country's lockdown for the Olympics). What we know is that stock markets are leading indicators, not lagging ones - and our real-time update on that for both China and Asia overall is on the tape.
Stay long what The Client (China) needs, not what America wants them to need. In the last few weeks, both copper and gold have held their long term TAIL lines of support (copper = $2.08/lb, gold $871/oz). Stay away from the US Dollar (we're short) and US Treasuries (10-year yields trading back up to 3.54% this morning are signaling that my long term view of reflation morphing into inflation is going to be right).
In the immediate term, China is now OB (over-bought). So please don't run out and buy it up here with the 200-day monkeys at +75% YTD. In the immediate term, the US Dollar Index will be oversold again at $79.58 and the SP500 will bump up against its immediate term TRADE resistance line of 913 in and around this morning's open.
In the intermediate term my Range Rover call remains (SP500 871-954). In the long term, as you listen to all of the noises of those who missed both the crash and the squeeze, remember that the "tactics without strategy is the noise before defeat." China gets this, and so should we.
Best of luck out there today,


USO - Oil Fund-We bought USO on 7/6 and 7/8 on a pullback in oil. With the USD breaking down, oil should get a bid.  

EWZ - iShares Brazil-President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt -leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country's profile matches up well with our re-flation theme.

QQQQ - PowerShares NASDAQ 100 - We bought Qs on 6/10 and added to the position on 7/7 to be long the US market. The index includes companies with better balance sheets that don't need as much financial leverage.

CAF - Morgan Stanley China Fund - A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.

TIP- iShares TIPS - The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%. We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

XLV- SPDR Healthcare - We re-initiated our long position in healthcare on 6/29.  Our healthcare sector head, Tom Tobin, wants to fade the public plan, and he's been right on this one all year.

GLD - SPDR Gold - Buying back the GLD that we sold higher earlier in June on 6/30. In an equity market that is losing its bullish momentum, we expect the masses to rotate back to Gold.  We also think the glittery metal will benefit in the intermediate term as inflation concerns accelerate into Q4.

XLI - SPDR Industrials - We don't want to be long financial leverage, which is baked into Industrials.

EWI - iShares Italy - Italian Prime Minister Silvio Berlusconi has made headlines for his private escapades, and not for his leadership in turning around the struggling economy. Like its European peers, Italian unemployment is on the rise and despite improved confidence indices, industrial production is depressed and there are faint signs, at best, that the consumer is spending. From a quantitative set-up, the Italian ETF holds a substantial amount of Financials (43.10%), leverage we don't want to be long of.

DIA  - Diamonds Trust- We shorted the financial geared Dow on 7/10, which is breaking down across durations. We are long the NASDAQ via Qs, which is long liquidity and economic leverage.  

EWJ - iShares Japan -We're short the Japanese equity market via EWJ on 5/20. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

XLY - SPDR Consumer Discretionary - We shorted XLY on 7/9 on a rip as our team has turned negative on consumer.  

UUP - U.S. Dollar Index - We believe that the US Dollar is the leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. Longer term, the burgeoning U.S. government debt balance will be negative for the greenback.

XLP - SPDR Consumer Staples - We shorted XLP on the bounce on 6/17.   Added to the position on 7/1, as our stance on the consumer is no longer bullish like it was in Q2, when gas prices and mortgage rates were dramatically lower.

SHY - iShares 1-3 Year Treasury Bonds - If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.

YUM - Two Pictures Tell the Story

YUM management can talk all it wants about what it is going to do to fix KFC and Pizza Hut, but the reality is that the company needs to slow its growth. Same-store sales are one of the factors that make up the sustainability model and with trends like you see below it should be done sooner rather than later. Senior management compensation is dependent on growth in system wide sales, so it is not likely to change its tone any time soon. Unfortunately, the longer YUM grows without acknowledging the real issues, the worse things will get.

With the stock looking down today following YUM's beating 2Q EPS expectations but missing on the top-line, we are seeing a shift in pattern as the trend has been for companies' stock prices to outperform after reporting weaker than expected revenue performance but having cut costs enough to report in line or better than expected earnings.

YUM - Two Pictures Tell the Story - YUM China 2Q09

YUM - Two Pictures Tell the Story - YUM YRI 2Q09




MPEL and LVS have agreed a junket commission cap of 1.25%, effective since July 1st.  The Macau government has said it plans to limit commissions paid to junket operators, but that didn't stop MPEL and LVS taking the initiative to agree to implement a cap on the commission paid to junket operators.    The companies are effectively coordinating in order to squeeze the middle man.  Ho states that there has been no ill effect on volumes as a result of the new policy, "Our volume has been stronger than ever."

This is the first significant instance of cooperation between gaming companies since they formed a coalition in April to limit competition in the face of declining revenues. 

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