Retail Callouts (3/19): NKE, WMT, GPS, FOSL, JCREW, TGT, DECK, AdiBok

Takeaway: WMT gas stations. Jordan finally runs. Fast Retailing dumps JCrew. Gap taps Philippines. 60% of consumers blame TGT. DECK brand store = fail




  • GES - Earnings Call: Wednesday 3/19, 4:30pm
  • TLYS - Earnings Call: Wednesday 3/19, 4:30pm



  • WTSL - Earnings Call: Thursday 3/20, 5:00pm
  • NKE - Earnings Call: Thursday 3/20, 5:00pm



  • TIF - Earnings Call: Friday 3/21, 8:30am




 Jcrew, 9983 - Merger Talks Between J. Crew, Fast Retailing Break Down



  • "Merger discussions between apparel chain J. Crew Group Inc. and Japan's Fast Retailing Co. have broken down, people familiar with the matter said…Fast Retailing..walked away from discussions with J. Crew management and the company's private-equity owners soon after The Wall Street Journal and others reported on the talks in late February, the people said."
  • "While it isn't clear exactly why the talks broke down, some of the people said the fact that they became public played a role. The end to the discussions could prove temporary, and both companies could renew them down the road, the people added."


Takeaway: Kinda funny how the day this story broke several weeks back, everyone assumed it was baked. Even we assumed it would go through. After all, it makes sense. Fast Retailing has been looking to buy a US concept for the better part of three years. Just because talks broke down with Drexler & Co, it doesn’t mean that Fast is done. Quite the opposite, in fact. We’d expect them to accelerate their search. There are plenty of options – at prices below the $5bn price tag rumored for JCrew. We have some ideas. Let us know if you care to discuss.


NKE - First Look At The Jordan Flight Runner



  • "...the Jordan Flight Runner is the Jordan Brand's first-ever running specific model. The innovative runner aims to take comfort and performance to the next level with a Dynamic Fit lacing system and Zoom Air cushioning.
  • "The Jordan Flight Runner is set to officially release May 1st, and will retail for $110."


Retail Callouts (3/19): NKE, WMT, GPS, FOSL, JCREW, TGT, DECK, AdiBok - morningnote chart1 3 19


Takeaway: This might seem odd to some people, but it actually makes perfect sense. Jordan broke out of being just a Basketball brand a decade ago. The NBA is joined by the NFL, MLB, PGA and Lacrosse, among other sports, as places where you can find athletes wearing Jordans. Then why should the brand sidestep the most popular silhouette in the US? (yes, that’s running).  We’re not sure if they’re geared for fashion or to actually run in, but there are two things we know…1) they’re long overdue and 2) they’ll sell. Good move by Nike here.





  • "Fossil Group, Inc. announced today they are working together with Google supporting the extension of Android into wearables with Android Wear. As part of the launch, Google also announced the release of a Developer Preview of Android Wear, helping them build rich wearable experiences for their existing Android apps."


Takeaway: Good move by FOSL here. It is the undisputed king of the mass-market watch. But it faces a bit of a hurdle – from a secular standpoint. Odds are that 90% of the people reading this are wearing a watch. Now go and poll a group of kids under the age of 18 – across all income and demographic groups – and come up with a ‘watch ratio’ for that group. It certainly won’t be over 50%, and our sense is that it’ll struggle to get above 25%. Kids simply don’t wear watches anymore. Their watch is their phone. Fossil is smart to team up with Google and anyone else out there that can maximize its relevance with a younger consumer.   


GPS - Gap Inc. Opens First-Ever Franchise-Operated Old Navy Stores



  • "Gap Inc. announced today its plans to open five franchise-operated Old Navy stores in the Philippines in 2014...The first two Old Navy stores will open in Manila in March and there are plans to open three more stores in the second half of the year for a total of five Old Navy stores in 2014."
  • "Old Navy is partnering with Stores Specialists, Inc. to open the stores, which already operates Gap brand and Banana Republic stores in the Philippines."


Takeaway: We don’t like Gap for a number of reasons. But this move is fine by us. Makes sense to go into a new market like the Philippines with a partner. And Old Navy, with its low price points, is ideally suited for a poor country like the Philippines, which has a GDP less than half the size of Wal-Mart’s annual revenue base.


ADDYY - Herbert Hainer Takes New Role at Soccer Club 



  • "Herbert Hainer, Adidas' CEO, will become the new president and business chairman of German soccer club Bayern Munich, after the resignation of Uli Hoeness."
  • "In a subsequent conference call, the FC Bayern München AG supervisory board resolved the following: Herbert Hainer (59), Adidas AG CEO and previously deputy chairman of the FC Bayern München AG supervisory board, is appointed chairman of the supervisory board, effective immediately and until further notice. This decision was unanimously approved by the supervisory board."


Takeaway: Seriously Herbert? Let’s face some facts…you’re not exactly knocking the cover off the ball in your day job. Adidas needs more of your time, not less. You already endorse Bayern Munich, so what are the added benefits of being the President of the Club?  This is reminiscent of when Mike Ullman became Chair of the Dallas Federal Reserve and joined the Board of the NRF. Keep your eyes on the prize boys…


WMT - Wal-Mart Tests Convenience Store Prototype



  • "The Bentonville retail giant is having a grand opening of its 'Walmart To Go' store on March 19. The store is at 1300 S. Walton Blvd., less than a mile from the corporate headquarters."
  • "The store is approximately 2,500 SF, a small fraction of the size of the company’s small-format Neighborhood Market grocery stores. The store will sell gasoline as well as items usually associated with convenience stores."
  • “’It’s a convenience store test concept,’ Barnett said. ‘We’re not planning any more across the country.’”


Retail Callouts (3/19): NKE, WMT, GPS, FOSL, JCREW, TGT, DECK, AdiBok - chart4 morningnote 3 19


Takeaway: It’s so easy to knock Wal-Mart – that’s what happens when you get as big as it is. But the truth is that we give it credit for trying out new concepts. We wish we could say the same for other mature retailers, who seem so comfortable in their no-growth mediocrity. Our sense is that WMT sets up a few more of these concepts with one purpose in mind – to collect data about the kind of products people buy in these formats. Aside from testing new products in a very small concentrated space, it can use any insight gathered to add to its massive database that fuels merchandising decisions at its 4,000+ large format stores.


TGT - Survey: 60% of consumers blame retailers in breaches



  • "Six-in-10 (60%) of those who knew about any data breaches at notable retailers, such as Target and Neiman Marcus, hold the merchant responsible for preventing future incidents of a data breach. The '2014 Consumer Reaction to Financial Data Breaches Study' of more than 2,000 adult U.S. consumers from Feedzai and Harris Interactive also found that 43% think nothing is more aggravating than getting credit/debit card data stolen."
  • "Among U.S. adults who are aware of any data breaches, 60% believe merchants are responsible for preventing future incidents, while 13% believe responsibility falls on banks. Only 5% of these adults feel it is the consumer’s responsibility…"


Takeaway: We’re surprised to see that only 60% of consumers blame the retailer. Don’t get us wrong, 60% is a massive number – especially given that the survey was not confined to people that were actually harmed or in any way affected by the breach. But 40% of Americans giving retailers a free pass as it relates to blame for the risk is much greater than we thought.


DECK - Deckers Bows First Brand Showcase Store



  • "Deckers' first 'brand showcase' store, located at the firm's headquarters in Goleta, Calif., opened to the public today. The 8,000-sq.-ft. location will serve as a testing ground for new product and technology, in addition to offering regular collections from Deckers labels including Ugg Australia, Teva, Sanuk, Tsubo, Ahnu, Mozo and Hoka One One."
  • "The flagship also will allow shoppers to customize product in-store via iPad, with free shipping or in-store pick-up options."


Retail Callouts (3/19): NKE, WMT, GPS, FOSL, JCREW, TGT, DECK, AdiBok - chart3 morningnote 3 19


Takeaway: We’re so surprised when we see companies open these ‘brand showcase’ stores. The reality is that the consumer could care less that the company Decker’s exists. They might love one of the brands, like UGG. But just because Decker’s owns a bunch of brands that help it diversify seasonally does not mean that the consumer wants to see them all. We’d rather see separate retail stores for each concept in the appropriate location to best target each consumer.




Turnstyle to Bring Retail Underground at Columbus Circle



  • "The project, planned for the subway station concourse at 59th Street-Columbus Circle, envisions a 30,000-square-foot underground shopping mall populated by beauty, fashion, accessories and food shops. There’s space for 30 shops, which will be divided into three categories: grab ’n’ go, retail stores and marketplace."


Retail Callouts (3/19): NKE, WMT, GPS, FOSL, JCREW, TGT, DECK, AdiBok - chart2 morningnote 3 19




APP - American Apparel Misses SEC Filing Deadline



  • "American Apparel Inc. has missed the filing deadline for its annual report with the Securities and Exchange Commission as it struggles to fund its operations and pay interest on its debt."
  • "The company notified the SEC Tuesday that it had missed the Monday deadline...for its annual report...because it was focusing on putting together a plan to regain compliance with the listing standards of the NYSE MKT exchange. The exchange notified American Apparel that it needed to file a plan to regain compliance by Friday and make progress toward meeting the plan by April 15."

CHART OF THE DAY: The Fox In the Hen House


CHART OF THE DAY: The Fox In the Hen House - Chart of the Day

The Fox In the Hen House

"I am sometimes a fox and sometimes a lion. The whole secret in government lies in knowing when to be one or the other."

-Napolean Bonaparte 


The old farm yard analogy of a fox licking its chops and entering the proverbial hen house can likely be applied to many current situations. On the global macro front the situation in the Ukraine and stand-off, of sorts, between the West and Vladmir Putin is likely the most relevant. 


Certainly, the foxes in the Kremlin are licking their chops since annexing the former Soviet territory of Crimea.  Is this the beginning of another Cold War? It is likely not. But the ineffectiveness in combating the Russian move certainly increases the likelihood of additional and more aggressive moves by the Russians. (By ineffectiveness, I read yesterday that the current, proposed sanctions by the U.S. would freeze the assets of a mere seven Russian citizens.)


The Fox In the Hen House - fox


Late yesterday, the first fatality occurred as a Ukrainian military base in Crimea was overtaken by Russian / Crimean troops. Albeit only one serviceman was shot, and reports are still conflicted as to how and by whom, the response by the leadership in the Ukraine is to now allow their military to use force as needed in Crimea. 


Perhaps most telling yesterday was Vladmir Putin’s hour long speech, specifically this excerpt:


“Our Western partners headed by the United States prefer not to be guided by international law in their practical policies, but by the rule of the gun.  They have come to believe in their exceptionalism and their sense of being the chosen ones.  That they can decide the destinies of the world, that it is only them that can be right.”


Clearly, the old Russian fox Putin is licking his lips.


Back to the Global Macro Grind . . .


Assuming hostilities don’t accelerate in Crimea, the most significant impact from the annexation of Crimea by Russia is likely to be on the upcoming midterm elections.  The media has been very clearly painting President Obama and his administration to have been ineffective in dealing with the Russians and Obama’s approval rating is starting to reflect as much.


According to the RealClearPolitics approval aggregate, Obama’s disapproval rating is now 52 and his approval rating is 43, for a spread of 9.  Gallup runs the longest running approval poll and the spread in that poll is even wider.  Currently, according to Gallup, Obama’s approval is at 41.  This is the worst approval rating of Obama’s Presidency and lower than President George W. Bush at the same time in his Presidency.


The fact that President Obama’s approval rating is in free fall is likely to be felt by the Democrats in the upcoming midterms.  In fact, the generic congressional poll aggregate, which effectively asks the respondent to say whether they would vote Republican or Democrat in congressional races, is basically tied (with the Republicans actually leading in some polls).  This is an inflection point as the Democrats have led in this generic poll very consistently since the last mid-term elections.


Speaking of polls, yesterday our daily Hedgeye poll asked, “Are you feeling the price pinch at the breakfast table?”  More than 75% of the respondents responded, yes.  This obviously shouldn’t be a surprise given the fact that coffee, orange juice and lean hog prices have had almost parabolic moves in the year-to-date.  Of course, for those consumers who don’t eat breakfast (or eat for that matter), they may yet be immune to food based inflation!


As my colleague Christian Drake highlighted yesterday in an intraday note, inflation is also percolating in other parts of the economy.  Specifically, CPI Services growth continues to hold above 2% and the growth trend looks similar even if you strip out the Shelter and Energy components of the Index.  


Even as most consumers are seeing inflation, the bigger question will be whether the Fed sees it. Fed Chair Janet Yellen will get a chance to address this in her first news conference today at 2:30 pm (following the Fed statement at 2:00 pm).  Certainly the stock market is seeing the consumer getting squeezed as well, as the consumer discretionary and consumer staples sectors are both down on the year.


Speaking of the stock market, despite the somewhat tepid return in the year-to-date, (the SP500 is only up just over 1% in the year-to-date and most major markets are down on the year), the latest US Investor's Intelligence poll shows that a predominance of investors remain bullish. 


According to the poll:

  • Bearish sentiment is unchanged at 17.4%;
  • Those expecting a market correction increases to 30.6% from 27.5%; and
  • Bullish sentiment decreases to 52.0% from 55.1%.

To be fair, it is likely difficult to envision much of a correction when the stock market is barely up on the year, but nonetheless investor complacency, at least based on this polls, seems noteworthy to say the least.


Our immediate-term Global Macro Risk Ranges are now (we have 12 ranges in our Daily Trading Range product):


UST 10yr Yield 2.62-2.74% 

SPX 1 

VIX 12.79-17.34

USD 79.31-79.83 

Gold 1 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The Fox In the Hen House - Chart of the Day


The Fox In the Hen House - virtual portfolio

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Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

March 19, 2014

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The Horror

Client Talking Points


It's mere scraps for the 2013 Nikkei bulls... The Nikkei up only +0.36% overnight (it's down over -11% year-to-date). The Yen remains strong versus US Dollar ahead of Fed Chair Janet Yellen’s first official Dollar Devaluation statement. Meanwhile, Japanese Government Bond yields are down to 0.60% on the 10-year as Japanese growth slows. Things could be better.



There's a horrifying setup ahead of the Fed's “qualitative rate guidance” (i.e., price fixing the long-end of the curve as inflation expectations rise). Sure, it may be good news for the stock market short term, but Burning Buck remains the single, biggest long term TAIL risk to the US economy. In other words?Watch out.


The only good economic news here is that options bets are way net long crude oil in the face of a TREND breakdown (+432,820 net long futures/options contracts). Oil needs to go a lot lower from here to become a consumption tax cut. But at least it's not going up. That's a start.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization. 


Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.


We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.

Three for the Road


TREASURIES: 10yr 2.67% hasn't moved vs 24hrs ago - still pricing in US #GrowthSlowing  @KeithMcCullough


"Try not to become a man of success, but rather try to become a man of value." - Albert Einstein


A new £1 coin, billed by the Royal Mint as the "most secure coin in the world", is to be introduced in 2017. The move comes amid concerns about the 30-year old coin's vulnerability to counterfeiting, with an estimated 45 million forgeries in circulation. The Royal Mint, which believes 3% of existing £1 coins are fake, said the move would increase "public confidence" in the UK's currency and reduce costs for banks and other businesses. (BBC)

Voodoo Accounting + Face Tattoos

This note was originally published at 8am on March 05, 2014 for Hedgeye subscribers.

“Reality is wrong. Dreams are for real.”

-Tupac Shakur

My colleague and energy Sector head, Kevin Kaiser, approached me in the office the other day and told me that he had a disconcerting dream about me.  It turns out the dream itself wasn’t all that crazy, but was simply that I decided to get a Mike Tyson-esque face tattoo.  My takeaway was that Kaiser was probably just spending a little too much time on MLP accounting.


Incidentally we are still short Kinder Morgan (KMI) and Linn Energy (LINE) on our Best Ideas list.


In tribute to Kaiser’s dream, though, I’ve included as the Chart of the Day below an exhibit from his most recent note on LINE.  The exhibit shows the actual free cash flow from every quarter in 2013 as well as his projected 2014 free cash flow.  Admittedly, free cash flow might be a bit of a misnomer as cash flow is actually decidedly negative.


Voodoo Accounting + Face Tattoos - ironmike 

In fact, in 2013 free cash flow (defined as discretionary cash flow less cap-ex and contribution to JV) was negative $-374 million.  In 2014E, we are projecting free cash flow of negative $-132 million.  An astute analyst might actually note that at least the free cash flow deficit is improving, which is true if you believe LINE’s guidance.  The bigger issue, though, is one of distributions.


Based on current guidance, LINE will be paying right around $960 million in distribution in 2014E.  How does a company that has negative $-132 million in free cash flow pay almost $1 billion in distributions you might ask?  Well, in this instance, we can only assume that either they are going to issue massive amount of debt and new shares (they already have $9.1 billion in net debt), or as the famous American poet Tupac said in the quote above ...dreams are for real.


(Incidentally, you can rest assured that I won’t be getting a Mike Tyson face tattoo anytime soon!)

Back to the Global Macro Grind ...

Speaking of dreamland, President Putin proved yesterday that he may not actually be living in one based on his press conference to discuss Russia’s actions in Crimea.  We wrote in yesterday’s Early Look that Putin’s ambitions may not actually be as grandiose in the Ukraine as many in the manic media would have us believe.  In fact, it seems the key take away from the rambling press conference is that Putin has no intention to use force and is merely protecting legitimate Russian interests in the region.


The broader take away from this incident may actually be its impact on President Obama and, by default, the Democrats heading into the mid-term elections next fall.  As I wrote yesterday, we did a poll in which the results indicated pretty decisively that Putin would come out as the stronger leader and it seems this is certainly the case.  The New York Post (admittedly a Republican leaning newspaper) made an apt analogy between Obama and Jimmy Carter this morning in an op-ed in which they wrote:


“Vladimir Putin has taken the measure of Barack Obama. He’s found Jimmy Carter.


Like Jimmy Carter, who boasted he was free of any “inordinate fear of communism,” Obama began his term as president vowing to “reset” relations with Russia.


Like Jimmy Carter, who conveyed weakness when Iran took our embassy staff hostage, Obama confirmed his own weakness when he drew a red line in Syria and then backed down from enforcing it.


Like Jimmy Carter, who was rewarded by Leonid Brezhnev with a Soviet invasion of Afghanistan, Putin has returned Obama’s favor with a Russian invasion of Ukraine


And just like Carter, who responded with what his staff called “a strong public statement,” Obama responded with his own statement saying he is “deeply concerned” by Russia’s military movement in Ukraine.


As in the Carter era, Obama-era defenders of inaction suggest there is little they can now do to get Russia out of Crimea. They are likely right.”


Now whether Obama is truly a foreign policy comrade (for lack of a better word) of Jimmy Carter, or the NY Post is actually living in Republican dreamland, is certainly up for some debate.  But there can be no question that that is something that Republicans will push aggressively into the upcoming mid-terms, especially if the Russians remain in Crimea.


Even before the Ukrainian situation, President Obama’s approval rating was doing the Democrats no favors.   Since last summer, the last time his approval rating was higher than his disapproval rating, his rating has turned negative and decidedly so.  Based on the current Real Clear Politics poll aggregate, Obama’s disapproval rating is 52.7 for an almost 10 point spread versus his approval rating of 43.1.


In other news in the world of dreams, the Chinese this morning may be experiencing their first corporate bond default ever.  Specifically, Shanghai Chaoroi Solar announced it won’t be able to pay roughly $14.6 million in interest on a bond issue from two years ago.  It is likely too early to tell whether this is the canary in the Chinese debt coal mine, but one thing is for certain - the Chinese GDP target of 7.5% will be a mere dream if the $1.5 trillion Chinese corporate bond market starts to shake.


Conversely, the European economic recovery seems much less of a dream as PMI data accelerated to 32-month high 52.6 versus 51.6 prior. Additionally, European retail sales came in at a better than expected +1.3% year-over-year gain versus an expected decline of -0.4%.  When combined with the fact the periphery yields are now near all time lows, as evidenced by the Spanish 10-year yield ticking lower ahead of tomorrow’s auction, it may be time to do more than dream about the European revival.


Our immediate-term Risk Ranges are now as follows (our Top 12 macro ranges are in our Daily Trading Range product):


SPX 1848-1875

VIX 13.14-15.92 

USD 79.81-80.46 

Brent 108.05-111.85 

NatGas 3.79-5.09

Gold 1316-1351 


Keep your head up, stick on the ice and dream big,


Daryl G. Jones

Director of Research


Voodoo Accounting + Face Tattoos - virtual

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