Retail Callouts (6/26): BBBY RH WSM PIR WMT HBI LULU



Thursday (6/24)

NKE - Earnings Call: 5:00pm


Friday (6/25)

FINL - Earnings Call: 8:30am




BBBY - 1Q14 Earnings

Newsflash…BBBY misses yet again. What's interesting to think of is the bifurcation in results of some of the major home furnishings companies over the past month. RH comped 18% and WSM 10% -- both of these companies beat materially, and sell roughly half of their product online (the greatest percentage in all of retail sans AMZN). BBBY and PIR both missed and guided down. They both generate less than 10% in sales online. Go figure.

 Retail Callouts (6/26): BBBY RH WSM PIR WMT HBI LULU - Chart 1 6 26 2014


HBI - HanesBrands to Acquire DBApparel, the Leading Intimate Apparel and Underwear Company in Europe, to Leverage Its Innovate-to-Elevate Strategy and Global Supply Chain



"DBA is a leading marketer of intimate apparel, hosiery and underwear in Europe, new geography for Hanes. The all-cash transaction would be accretive to adjusted earnings per share in the first 12 months after closing, including an estimated $0.25 of adjusted EPS excluding actions in 2015. With the realization of full benefits in three to four years, the acquisition would add, on an annual basis, more than $875 million in net sales, approximately $125 million in adjusted operating profit excluding actions, and approximately $1.00 in adjusted EPS excluding actions."

"Hanes’ transaction offer values DBA at €400 million on an enterprise basis (approximately $550 million at current exchange rates), or approximately 7½ times EBITDA. Hanes intends to fund the acquisition with cash on hand and third-party borrowings. The post-synergy multiple is expected to be less than 4 times EBITDA. The acquisition could close as soon as the third quarter 2014."


Takeaway: The company is two months away from anniversarying its acquisition of Maidenform -- which in itself has been a home run -- and it's already doing another deal. We can beat the company up for obfuscating weakness in the core business by doing deals…but that's really irrelevant. The fact is that this is a great deal for HBI, it gets the international exposure it needs, and it got it done at 7.5x EBITDA -- before synergies. This should be accretive almost immediately, regardless of what the company guides. This stock is headed higher.


Fast Retailing - Uniqlo Eyeing India for Manufacturing



"Fast Retailing Co. Ltd.’s Uniqlo brand is considering sourcing garments in India, according to a statement from the Indian government."

"Fast Retailing chairman, president and chief executive officer Tadashi Yanai met with Indian Prime Minister Shri Narendra Modi on Wednesday, the Indian government said in a brief statement on its Web site. “[Uniqlo] aims to source garments from India,” the government said."


Takeaway: Fast Retailing is still the leading candidate to buy Lululemon.


WMT - Walmart wins China labour dispute



"A Chinese arbitration panel has dismissed a landmark suit brought against Walmart by a chapter of the country’s official trade union, ending a three-month dispute that galvanised labour activists across China."

"The panel dismissed worker demands for additional compensation after the world’s largest retailer closed their store in Changde, Hunan province, in March as part of a broader restructuring of its China operations."


Takeaway: This might be Walmart's biggest international victory -- ever.


ADS - Adidas's World Cup, So Far: Record Sales and One Ugly Bite



"Herbert Hainer, chief executive officer of Adidas Group, held a press conference in Germany on Tuesday to brag about the company’s sales, so far, from its sponsorship of the 2014 World Cup. Adidas, he said, would “definitely achieve” its goal of selling $2.7 billion in soccer gear this year. He went on, in a not-so-subtle jab at rival Nike, to proclaim the company’s “outstanding position as the clear No. 1 in football globally.”

"On the other side of the Atlantic, at the Estadio das Dunas in Natal, Brazil, Uruguayan striker Luis Suarez was about to create a marketing headache for the brand. During the 79th minute of the must-win match for Uruguay, Suarez apparently bit Italy’s Giorgio Chiellini on the shoulder. To make matters worse for Adidas, many of the company’s World Cup promotions depict Suarez with his mouth wide open."


Takeaway: This was a defensive press conference. Hainer's stock is hitting a new 52-week low. Adidas is great at defensive PR. Not so good at playing offense.




LULU - Survey: L.L. Bean tops in online customer service for May



"L.L. Bean had the overall best customer service performance in May, the second time the retailer has topped the list in the past three months."

"Looking at all companies included in Stella Benchmarks, the following companies were best overall performers within the five service areas measured:"

• Phone: & Lululemon (tied)

• Email: Lululemon

• Chat:

• Shipping: Hautelook

• Returns/Refunds: Mr Porter





"EBay CEO John Donahoe took to the stage at this month's 10th annual Internet Retailer Conference & Exhibition in Chicago to discuss what he calls the "commerce revolution"."

"The term applies to the many ways consumers shop for products today, including going into a store to buy a product, browsing retail sites during work hours, making a purchase from a tablet while watching television at home, etc."

"For too long, Mr. Donahoe said, retailers have seen various shopping behaviors through their own eyes — in channel terms — rather than seeing it from the consumer's vantage point. "Consumers," he said, "just want to shop.""


BKS - Barnes & Noble Agrees to Spin Off Nook Unit as Sales Decline



"Barnes & Noble Inc. (BKS), facing declining sales at both its bookstore chain and Nook electronic-reader business, plans to split them into separately traded companies to improve performance."

"The spinoff will be completed by the first quarter of next year, New York-based Barnes & Noble said today in a statement."


Stalemate Over Garment Factory Safety in Bangladesh



"Eight times now, the European-dominated Accord on Fire and Building Safety in Bangladesh — a group of more than 150 retailers and brands — has forced the temporary closing of garment factories after its inspectors found dangerous conditions."

"But from the time the inspections began, tensions have been growing between the Accord and the Bangladeshi apparel industry, resulting in an impasse over a recent attempt to shutter what the Accord considers an unsafe factory building that houses Florence Fashions. And this time, as on several previous occasions, the Bangladeshi government has aligned with a garment manufacturer opposed to having its factory closed, even temporarily."


EBAY - EBay names IBM exec to lead enterprise business


"EBay Inc. said Tuesday that it hired former International Business Machines Corp. executive Craig Hayman to lead its enterprise business."

"Mr. Hayman spent 15 years at IBM IBM -0.10%   , helping oversee the technology giant’s industry cloud solutions and other businesses, eBay EBAY +0.08%    said in a news release. He also spearheaded deals to buy more than a dozen companies while building a partner network, the company said."

"“A longtime customer of IBM, eBay Enterprise’s fulfillment centers, drop-ship and Ship-from-Store capabilities are unique in helping retailers better serve their customers,” Mr. Hayman said in a release. “I am honored to be part of the team and join this purpose driven company, which is enabling commerce on a global scale.”"


Hickey Freeman Revamps N.Y. Store



"“It’s a celebration of American artisanship.”That’s the way Doug Williams, chief executive officer of W Diamond Group, described the revamped and reenergized Hickey Freeman store whose long-awaited renovation was completed late Sunday night."

"“We started this process in 2011, then with the HMX bankruptcy, it was put on hold. But as soon as W Diamond acquired the assets, we started back up again,” he said."



Client Talking Points


In other news, as the USD declined yesterday, commodities hit a fresh year-to-date high – CRB Commodities Index = 313, or +11.8% year-to-date; it’s a lot easier being long inflation and the slower growth it derives than the Russell 2000.


One of the few commodities that hasn’t ripped in 2014 is now signaling a potential bearish to bullish @Hedgeye TREND reversal; our breakout line = $3.10/lb, so watch that closely; almost every fund we speak to thinks this is a supply short.


UST 10YR Yield -5 basis points for the week (-16% year-to-date) as the U.S. growth slowing data continues to support the case for downward dog bond yields; our predictive tracking algorithm for 2014 GDP is now tracking toward +1.3%; Q2 can only be better than a horrendous Q1, but Q314 GDP setting up to be a mess.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.


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.


Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.

Three for the Road


Barney & Janet dont get this > Carney Says Housing Is ‘Biggest Risk’ as BOE Acts on Market

@Keith McCullough    


“Our knowledge of the factors which will govern the yield of an investment some years hence is usually very slight and often negligible.”

- John Maynard Keynes


It has been 48 trading days since the S&P 500 has had a +/- 1% day, this has only happened 1 other time in 2 decades.

CHART OF THE DAY: Creative Accounting at $UAL

CHART OF THE DAY: Creative Accounting at $UAL - 77


Hedgeye industrials sector head Jay Van Sciver on United Airlines: 


“By our estimates, the underlying UAL operations have generated a cumulative loss over the past two years. Further, UAL has burned over $1.4 billion in free cash flow, defined as Cash Flows from Operating Activities - Net Capital Expenditures, in the last two calendar years. As the high cost U.S. major since AMR's bankruptcy-related cost cuts, we expect UAL to struggle to improve its operations relative to competitors. In our view, it is relative costs that matter. We expect UAL to continue to underperform lower cost airlines.  


This is just the tip of the proverbial iceberg.

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Creative Mistakes

“Creativity is allowing yourself to make mistakes.  Art is knowing which ones to keep.”

 -Scott Adams


As you may already know, Scott Adams is the creator of the cartoon "Dilbert." The cartoon makes light of the corporate world and was originally created in the early 1990's as Adams was being "downsized" from a major corporation.  Even though Adams isn’t a professional investor like most of you reading this, his quote above is remains rather apropos to the investing world.


Most great portfolio managers and analysts are also incredibly creative.  They are creative in the types of analysis they employ and they are creative in their questions for management. But perhaps most importantly, they are creative in idea selection.  The true skill, of course, then comes in knowing which creative ideas to keep.  Some call this risk management.


We hired a cartoonist recently here at Hedgeye. Cartoons are a great way to communicate our often contrarian investing ideas and themes.  Take for example the cartoon posted below that we included in our 100-page deep dive short call on United Airlines (UAL) earlier this week.


The cartoon emphasizes the craziness (at least from our perspective), of UAL’s accounting policies.  Not unlike our short calls on certain stocks in the Master Limited Partnership (MLP) sector, we have a difficult time reconciling the valuation with UAL with its underlying cash flows.  That said, we also know, to paraphrase Keynes, that the market can remain irrational longer than many investors can stay solvent.


As it relates to airlines, and specifically UAL, longer term we much prefer Warren Buffet’s maxim on the industry. That is, the best way to become a millionaire is to start a billionaire and buy an airline!


Creative Mistakes - United Airlines cartoon

Back to the Global Macro Grind...


Our research team has been busy generating some very contrarian and well researched investment ideas lately.  This morning I wanted to highlight a few.  (As always, if you want more details on the idea and would like to review the more detailed work, please email for details on how to subscribe.)


First up on the runway is naturally United Airlines (UAL).  The core of thesis per our industrials sector head Jay Van Sciver is as follows:


“By our estimates, the underlying UAL operations have generated a cumulative loss over the past two years. Further, UAL has burned over $1.4 billion in free cash flow, defined as Cash Flows from Operating Activities - Net Capital Expenditures, in the last two calendar years. As the high cost U.S. major since AMR's bankruptcy-related cost cuts, we expect UAL to struggle to improve its operations relative to competitors. In our view, it is relative costs that matter. We expect UAL to continue to underperform lower cost airlines.  


This is just the tip of the proverbial iceberg.


In our Chart of the Day below, we highlight this free cash flow deficit versus its peer group.  As the chart shows, UAL appears to have severely disadvantaged economics as compared to its peers.


The second idea I wanted to highlight is Lululemon (LULU), a contrarian long idea.  For many a thoughtful short seller, LULU has been one of the better short plays in retail of late. Rightfully so.  Management appears to be making one misstep after another and doing virtually everything in its power to ruin what is actually a solid brand and product.  The core of our long thesis according to our Retail sector head Brian McGough is as follows:


“There’s a massive bifurcation between the growth potential at this company, and the lack of a plan to execute on it. If management continues to execute in a sub-par way, we see downside to about $31 (stress testing our model at 10x EBITDA). Not pleasant (18% downside), but not the end of the world from its current price ($37.61). If the company/Board adds the operational depth that is necessary, then the discussion returns to this company doubling or tripling its top line, and realizing $3.00-$4.00 in earnings power.  Pick whatever multiple you want, but the stock price on $3.50 in earnings will push it through its all-time high of $82.”


Finally, the last idea (and probably most controversial idea I wanted to highlight) is our short call on YELP.   From a stock price perspective, on the short call we’ve been early, but we are getting increasing confidence in our thesis the more work we do.  Our Internet sector head Hesham Shabaan actually had a call recently with the chief financial officer of YELP to discuss, which is at the core of our short thesis.  This was his takeaway from that call:


“Where we didn’t get a tremendous amount of detail was when we delved into its customer repeat rate, which is how we are backing into its attrition rate.  We did spend some time discussing this topic, and while he wouldn’t explicitly verify or refute our attrition thesis, he did say that YELP has never said that they are not losing customers after we delved into its reported numbers.


The question he wouldn’t answer, which is a spin off of its customer repeat rate metric: “How many of your current customers have been generating revenue for YELP for over a year?”


This is the most important question because it drives at the heart of the retention issue we have been highlighting.  We estimate that in any given period that the overwhelming majority of YELP’s reported Local Business Accounts are accounts the company has signed within the LTM (meaning YELP is losing the majority of its accounts after the first year).”


Clearly, Hesham didn’t get a lot of clarity on attrition in his discussion.


As always, let us know if you have any questions on these or any other creative investment ideas you may be working on.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.46-2.64%


India’s Sensex 247

VIX 10.61-12.97

USD 80.02-80.47

Gold 1  


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Creative Mistakes - 77

LEISURE LETTER (06/26/2014)



  • Friday, June 27 Las Vegas May revenues


ALL.AX/Aristocrat – confirmed the company is in talks to purchase U.S. competitor Video Gaming Technologies Inc for about $1 billion which makes slot machines primarily for Native American casinos. 

Takeaway: It would seem consolidation of the slot equipment companies is in full force - with both VGT and IGT now in play.  This deal solidifes Aristocrat's position in the Class II market.


CZR – in an interview with Bloomberg News, CEO Gary Loveman indicated that a Japan gaming resort would require at least a US$5 billion investment and that Caesars would have no problem financing such a project.

Takeaway: Maybe Mr. Lovemen should recall his Harvard teaching and academic days and revisit the Modigliani-Miller Theorem.


IKGH – (GGR Asia) still chasing HK listing and has been pursuing a dual listing for more than a year. The Hong Kong exercise is expected to be what’s known as a ‘listing by introduction’. In such a process, a company that has shares issued on another exchange can – subject to local regulatory approval – list its shares in Hong Kong without raising new funds or issuing new shares. As part of the HKSE listing process IKGH terminated the personal guarantees of Chairman Lam Man Pou and COO Vong Hon Kun.

Takeaway: Given the HKSE listing by introduction as well as the termination of the personal guarantees, we would not be surprised to see IKGH embark on an offering of HKSE listed shares following the listing.


MGM – will expand its M Life customer loyalty program to include Empire City Casino at Yonkers Raceway.  In the joint marketing agreement, members of Empire City's rewards program will receive promotions at MGM casinos and M Life members will receive promotions for Empire City. 

Takeaway: Interesting alliance and foray into the metropolitan NYC gaming market.


BEE – will ring the NYSE Closing Bell this afternoon. 

Takeaway: Could BEE management also be in NYC for other reasons and could a potential acquisition be in the near future?


H (Chicago Business) plans to sell a portfolio of 32 hotels that could be worth about $500 million and hired Jones Lang LaSalle Inc. to market 21 Hyatt Place and 11 Hyatt House hotels totaling 4,200 rooms across the United States. The portfolio consists mostly of former AmeriSuites, Sierra Suites and Summerfield Suites hotels that Hyatt upgraded to fly Hyatt Place select-service and Hyatt House extended-stay flags.

Takeaway: Recycling of capital continues.


L – Loews Hotels announced a contract to purchase the 556-room InterContinental Chicago O'Hare, located in Rosemount, for $120 million. The property opened in 2008 and will be rebranded as a Loews Hotel.

Takeaway: Loews continues its well broadcast efforts to increase the size and scale of its hotel portfolio.


Insider Transactions

HST - EVP & CFO Gregory J. Larson sold 18,000 shares on Monday, June 23rd at an average price of $22.43 and now owns 116,503 share.


WYN - CEO Geoffrey A. Ballotti sold 70,271 shares on Tuesday, June 24th at an average price of $75.00 and now owns 107,771.

Takeaway: More insider selling from the C-Suite!


US Government Goes to Macau – Agents of the US Department of Treasury Internal Revenue Service’s criminal enforcement unit traveled to Macau during May to gather information regarding the flow of money from Macau to US casinos. The US Treasury Department’s anti-money laundering unit has also been looking into the flow of money across the Pacific.

Takeaway: A continuation of the inquiry efforts announced back in March by the US Treasury.


UnionPay Point of Sale Machines – (Macau Daily TImes) Secretary for Economy and Finance Francis Tam stated yesterday that the Macau Monetary Authority gave no instructions to remove all point of sale (POS) machines from jewelry and luxury stores located inside or outside casinos. Mr. Tam noted those stores located at casinos will not be allowed to increase the number of POS machines they own, starting from July this year.

Takeaway: An interesting debate on the issue.


LEISURE LETTER (06/26/2014) - union pay


Union Pay & ICBC – The Industrial Commercial Bank of China (ICBC), launched its first credit and debit card in the southern hemisphere aimed at providing a more convenient tool for frequent travelers to Asia including China from New Zealand.  The ICBC debit cards with the UnionPay logo can withdraw cash from 30% of ATMs in New Zealand and is accepted by some 10,000 business outlets. As a reference point, UnionPay card holders reached some 4.2 billion, exceeding those of Visa and Master though UnionPay is yet the most widely used card in the world.

Takeaway: UnionPay is not going away and this announcement with ICBC should help quell the concerns regarding UnionPay.


Thailand World Cup Arrests – Thai police arrested more than 1,000 people, including four foreigners, in a crackdown on illegal betting during the World Cup. Police also seized betting slips worth USD525,000 during raids since the World Cup kicked off in Brazil on June 12. On Tuesday, police and military officials arrested four foreign nationals on suspicion of illegal betting at a sauna in downtown Bangkok, Chantavit said.  Of the 3 suspects – one from Macau and two from Hong Kong – were believed to be bookmakers. The fourth, a Malaysian, was placing bets at the time of his arrest

Takeaway: Given today's highly contested match between the US and Germany, we expect more arrest annoucements. 


Saipan Gaming – Saipan’s first electronic gaming facility has had its soft opening. Club C, at Kanoa Resort in Chalan Kanoa, launched six months after the Commonwealth of the Northern Mariana Islands, a U.S. Pacific territory, passed a law to regulate e-gaming. The new club will have its formal opening on July 18, and will be targeted at tourists. Club C currently has 64 machines available for use, out of the total 112 machines ordered.

Takeaway: The build-out of Saipan begins.


Florida Day Boat Gambling – as a follow-up to our Tuesday story regarding Victory Casino Cruises begins offering a gambling-focused day cruise out of Mayport (Jacksonville) -- the 1st sailing was sold out.  Recall, the 600-passengers, high-speed catamaran features 21 table games and more than 300 slots sails twice daily at will sails twice daily at 11 a.m. and 7 p.m. 

Takeaway: We expect good demand as high quality offering such as this experience is much easier for greater Jacksonville residents than a drive to South Florida. 

Las Vegas Tourism – Las Vegas McCarran Airport traffic during May increased 0.3% versus +1.7% during April.

Takeaway: We expect good Vegas revenues this Friday, driven by baccarat.


Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye

Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

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