19 AUGUST 2009




  • Target stands out as one the few retailers willing to comment on early back to school sales and the results are encouraging (yes, we know it’s early in the season). Based on the small sample set of only two weeks worth of data, Target commented that back to school and back to college sales are tracking ahead of plan and the overall run-rate for the month is tracking ahead of 2Q results. There are still 11 weeks to go in the quarter, but the fact that management was willing to comment suggests there is a higher level of confidence emanating from the big red bullseye. Of course, substantial earnings upside following an epic battle with Ackman also helps.


  • Home Depot’s CEO did not shy away from a point blank question asking when same-store sales would actually turn positive. In a sign that stability and visibility are building, the CEO responded with, “I would say it will be some time in 2010 and probably second quarter or back half of 2010.” With domestic same store sales down 6.9% in 2Q, there is clearly work to do before the topline turns positive. Interestingly, the CFO believes expense leverage on the upside will be disproportionate to the downside (which currently tracks at about 10bps of SG&A deleverage per 1 pt of comp decline).


  • For the second time this year, TJX increased its store growth plans for the year. The company now plans to open 90 stores in 2009, up from a recently revised range of 80-85, and an original plan of 65. Store growth next year is now expected to be even greater than the 4% square footage growth planned for ’09. TJX stands out as one of the few companies taking advantage of real estate dislocation, both domestically and in Europe.


  • With an essentially unchanged environment for the luxury consumer in 2Q, SKS was able to generate a better than expected gross margin result despite a still-weak topline. When pressed on the its conference call, management noted that they are trying to ease off of promotions as supply/demand has become better balanced. The company is promoting less frequently and is now pulling some items out of promotion all together. This all sounds positive, but we caution that it will take the consumer quite a bit of time before she feels compelled to purchase at full price. To some extent, lower initial pricing and mix shifts toward lower price points may help offset promotional cadence but it is still early to make a call on these merchandising changes.


  • In another sign that visibility may be improving slightly, Perry Ellis management reinstated its policy of providing fiscal year earnings guidance with the reporting of its 2Q results. The company cited better visibility on the Fall season coupled with cost controls as the key driver behind the EPS outlook, which calls for $0.70-$0.85 per share. Consensus is currently $0.75.


  • Our latest data point from the running shoe market suggests that the demand for technical shoes is improving. Fleet Feet, an operator of 90 specialty running stores nationwide with brands like Brooks, Asics, Saucony etc., reported 1H comps up 8.4% with June comps up 11.1%. The June result was best month so far this year. Not only is this an indication of accelerating demand, but this also lends support to consumers’ desire to seek “value” (but not necessarily price) given the highly trained staff that typically works at a highly specialized retail store.




-Retail sales in central London in July were 2.2% higher, on a like-for-like basis, than a year ago, when sales were up 5.8%. Retail footfall in July fell back below its year-earlier level, hit by the wettest July on record and many clearance sales coming to an end. Sterling's weakness against the euro continued to attract overseas visitors, especially those from western European countries. Middle Eastern visitors were more numerous, coming before Ramadan. Food, clothing, footwear and outdoor living slowed as the wet weather turned minds to indoor items such as homewares and furniture. <>


-New USDA world cotton consumption report sees slight uptick - The latest US Department of Agriculture (USDA) forecast for 2009/10 projects that world cotton consumption will increase by 2% increase from 2008/09 but the growth rate is well below the 2004-2007 average.  The modest rebound is forecast as the world economy begins a slow recovery from the most severe global economic conditions in decades. Meanwhile, cotton consumption among the major spinners has become more concentrated. The top four cotton-spinning countries are forecast to account for nearly 73% of global consumption in 2009/10, up from the 2004-2007 season average of 69%. In addition, the top three spinner’s shares continue to increase. China and India have each increased their share of world cotton consumption recently by nearly 2% above their respective 2004-2007 averages. Pakistan has seen its share rise also, while Turkey’s share of global consumption has declined. <>


-Sri Lanka to revive cotton production - Sri Lanka's Member of Parliament and senior Presidential Advisor Mahinda Rajapakse said the government aims to revive cotton production in the country on levels that were achieved in the past. He said nearly 50% of the cotton demand of the country were met by the production of the Hambantota province which had alone met the need of the handloom sector back in the 1970’s. He said initially cotton bales were imported from India, which later led to importing yarn and finally fabrics which sounded the death-knell of the cotton sector in the country, but the government would do everything to make Sri Lanka sufficient in cotton production.   <>


-Pakistan's Ministry of Textiles passes new policy to revive textile exports - Pakistan's Ministry of Textiles has announced to launch an export development fund amounted Rs 40 billion under the new textile policy for the first time in the history of the country. To revive textile exports, the new National Export Policy (NEP) has targeted to increase revenue from exports to US $25 billion within the next five years and as a first step has reduced the mark-up to 5%. Under the NEP, the government is planning to provide zero rating to exports which could help the exporters price their products competitively and is also offering relief to manufacturer-exporters who are unable to clear their debts. <>


-Top Online Apparel and Accessories Retailers - According to figures from Nielsen, eBay was the leading online retailer in the apparel and accessories category during July, with nearly 2.6 million purchases — representing 27 percent of all apparel and accessories purchases online that month. The category’s buyers spent an average of $81.83 each, and made 1.54 purchases each. EBay consistently ranks among the top online retailers in terms of traffic, according to Nielsen. Other top retailers during July included Victoria’s Secret, Lands’ End, J.C. Penney Co. Inc., plus-sized merchant Woman Within and Old Navy. The majority of the Top 10 retailers are either midpriced or discount shopping destinations for money-conscious consumers. <>




-The collapse in retail spending is hammering stores in Eastern Europe - The region's severe recession sent retail sales down an outsized 29% in Latvia in June compared to a year ago, 20% in Lithuania, 17.8% in Romania, and 10.5% in Bulgaria. For the entire 27-member EU, retail was up 0.1%, a figure that underlines the disproportionate impact the recession is having on the European Union's newer, eastern members. Some analysts think retail statistics look so much worse than in the West in part because some hard-pressed retailers are moving sales off the books to avoid taxes — meaning those sales don't show up in the totals. In many places, stores are shuttered, and many windows are plastered with political posters and signs offering fire-sale discounts of up to 90%. Eastern Europe is getting a cold shower after years of heady growth fueled by cheap bank loans and the euphoria of EU membership in 2004. Romania, Bulgaria, and Hungary and the Baltics are struggling, while Poland and the Czech Republic are faring relatively better.  <>


-As Shoppers trim expenses, coupon use is robust at department stores and mass market retailers, as well as at grocery stores - The economic crisis has eroded the stigma linked to coupon-clipping, with shoppers seeking any financial advantage they can get, according to a survey by marketing firm ICOM Information & Communications. A total of 86.5% confirmed they utilized coupons in the previous month at grocery stores, 41.3% tapped into coupons for purchases at department stores or mass merchants; 46.5% at restaurants, and 34.9% used them to shop for personal or health care products at drugstores. Coupons enable typical households to save 25% a year without cutting purchases, and almost all retailers are “increasing the number of coupons they issue,” Storey said. A separate study for the National Retail Federation found 43.4% of shoppers said coupons influenced them to shop at a particular store, and coupons or sales influenced 47.8% of back-to-school purchases.  <>


-Guess is sued by a Manhattan property owner for failure to comply with agreement - A Manhattan property owner that ended a lease with Steven Madden Ltd.’s retail unit to make way for a Guess store sued Guess Retail Inc. after Guess allegedly backed out of the new agreement. According to a lawsuit filed in U.S. District Court in Manhattan on Aug. 14, 720 Lex Acquisition LLC agreed in June 2008 to rent its entire building at 720 Lexington Avenue to Guess. The 15-year lease called for Guess to pay $30 million in rent over its term. As part of the preparation for its new tenant, the property owner said it terminated a lease with the building’s previous occupant, Steve Madden Retail Inc. <>


-Escada's US arm has followed its German parent company in filing for Chapter 11 - The Munich-based luxury fashion house filed for bankruptcy on Friday and was followed this week by Escada USA. Escada told WWD that the US arm had followed suit in order to stabilise Escada’s important American business, which accounted for approximately 20% of the group’s sales in 2008. An Escada spokesperson said that the move was “a crucial first step in the overall restructuring of the group.” The group saw its latest restructuring proposal rejected by bondholders last week and received interest from a potential buyer, Munich lawyer Nickolaus Becker, yesterday. <>


-JD Sports to acquire online sports retailer Kitbag - According to reports, JD wants to buy the business from home shopping group Findel, which has been trying to offload its non-core assets. Kitbag is also understood to have courted interest from private equity groups. Kitbag employs around 200 staff and has a turnover of around £30m. JD has made several acquisitions this year including French retailer Chausport and rugby brands Kooga and Canterbury Europe.  <>


-Easton-Bell Sports, Inc. reported sales declined 15.2% Q2 09 (down 12.6% on a constant currency basis) - Team Sports net sales decreased 23.8% for the second quarter due to the decline in sales of baseball and softball bats, football equipment and the negative impact that the currency fluctuations had on sales of hockey equipment in Canada and Europe. Action Sports net sales decreased 2.3% due to lower sales of OEM cycling components and powersports helmets, partially offset by increased sales of snow sports helmets and cycling apparel. Benefited during the quarter from ongoing focus on cash management, including lowering inventories, which helped reduce net debt. <>


-Retail market in the Orlando area appears to be showing signs of life - The retail market in the Orlando area appears to be showing signs of life in the first half of this year, according to the International Council of Shopping Centers’ bi-annual Florida Retail report. Despite seeing a 3% increase in the unemployment rate since the end of 2008, some Orlando submarkets saw increases in rental rates through the first six months of the year, said the report, released Aug. 17 during the ICSC’s convention at the Gaylord Palms in Orlando. But many of those same submarkets also saw huge drops in occupancy rates, the report said. The Orlando market saw an overall 2% drop in retail occupancy, from 91.6% at year-end 2008 to 89.7% in midyear 2009. Meanwhile, rental rates saw a 1.1% decline <>


-Intimonth LLC today kicks off its contribution to the nation's stimulus package by launching - Without the need to wait for a tax return or a stimulus check, aims to give away one million free panties to anybody that requests a pair. Intimonth LLC believes that a new pair of sexy panties will help people forget the ongoing economic, political and personal problems facing them today. So let people forget their troubles and work on their own relationships with a new pair of seductive panties. Imagine how that will stimulate the economy. These panties, which normally retail for $40, are made from the finest satin, silk and other stimulating materials in styles including Thongs, G-Strings, French Knickers, Bikinis and  Tangas. Visitors to will also have the opportunity to explore and join is the largest lingerie club on the Internet and stimulates its members every month with European designed lingerie delivered directly to their home. <>


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

08/18/2009 11:04 AM


Re-shorting AutoZone on a green day. We don't like current clunker trends or the sell side upgrade that gives us this great re-entry point. KM




RL: Ralph Lauren, CEO, sold 127,600shs (~$8.2mm) less than 1% of total holdings pursuant to 10b5-1 plan.


CAB: Mark Reuben, Director, purchased 200,000shs (~$3mm) on a base of over 500,000shs owned.



  • Tracy Gardner, President – Retail & Direct, sold 80,000shs (~$2.4mm) roughly 50% of total common holdings upon exercising the right to buy 90,000 pursuant to 10b5-1 plan.
  • Libby Wadle, EVP Factory & Madewell, sold 16,573shs (~$507k) less than 30% of total common holdings pursuant to 10b5-1 plan.


JOEZ: Joe Dahan, Creative Director, sold 600,000shs ($420k) less than 5% of total common holdings.


RCL has a much different take on their recent quarter than investors did. While we are much more concerned than mgmt with next year's supply increases, they may have a point regarding 2009.



Corporate was surprised and frustrated by the investor reaction to the call.  Given the low share count, small movements in the bottom line heavily impact their EPS.

  • Fuel negatively impacted guidance by 5 cents, post 6/29 guidance, however, it has now swung the other way and should benefit them by 5 cents
  • The other 5 cents was related to 13 Pullmantur members getting swine flu (post guidance) which caused a last minute cancellation and bad press which negatively impacted bookings from Spain to the Caribbean in the following weeks

Given that overall business conditions were steady to slightly improving (although this wasn’t really reflected in yield guidance for the balance of 2009), and given the positive guidance on yield growth in 2010, management actually thought the stock price would react positively.



Business Environment:


  • They still feel very strongly that the business environment is stabilizing to slightly improving
  • Given that 85-90% of the business in 2009 is already booked, the “positive” trends they are seeing may not be reflected in yields for the balance of the year, such as the slightly upward bias on close in bookings
  • FX should have a mildly positive impact for the balance of the year since deposits on international cruises will translate into more dollars once those revenues get recognized.
  • RCL locked in some commodity and food costs for next year - close to the lows. They claim that they will benefit even if there is some reflation in these costs
  • Visibility has remained at four to four-and-a-half months out (on average); however, the shorter and cheaper weekend getaway product has less visibility, typically booking approximately two months out.
  • They believe that the “high beta” nature of their stock will help them the next few quarters
  • Onboard spend is trending in the same pattern as shipping. Mix shift in onboard spend has been away from materials (retail & art auctions) towards experiences like shore excursions/etc.



New Supply:


For 2010, the new hardware is performing “extremely well” which is why they are expecting moderate yield growth.  For a third of the business that was on the books for 1Q2010 the pricing was better than where they ended 1Q2009.  However, given the large amount of availability for 1Q2010 and the “closer in” nature of bookings, there won’t be a whole lot of confidence in “guidance” until the 3Q09 call when at least 50% of business should be booked. 


Why are they not concerned about the supply growth?

  • The net supply increases will impact Europe (new ships to the saturated North American market, older ships moved in to Europe).  Management believes Europe is very underpenetrated, has a lot of organic growth left, and can absorb the new supply.
  • New supply is being absorbed by first time European cruisers
  • Most of the new ships are going to North America, and there is a segment of the cruise population that likes to say they’ve been on the latest and greatest ship.  Ships that are a few years old are then moved to Europe – and while they aren’t brand new, they are still “fresh” compared to what’s currently out there.





  • Fuel hedges in 2010 – in the low 60’s per barrel range and remaining at the same level for 2011
  • Around 420’s range per metric ton


Gas prices have been extremely favorable on a YOY basis for restaurant companies this year.  During the first half of the year, gas prices were down 38% on average.  This YOY favorability has continued in 3Q, but gas prices have moved higher in the last month, up about 7%.  Looking at the chart below, this YOY cost benefit will start to moderate and could go away in the fourth quarter.  Gas prices typically decline after the peak summer driving season, but are not likely to decline as dramatically as they did from last summer’s historically high prices. 




From a restaurant demand perspective, consumers do not typically think in YOY terms.  Gas prices are up 7% in the last month and 14% in the last three months.  This will put increased pressure on consumers’ wallets and impact their decisions about eating out. 


To that end, we have seen this being played out in the most recent restaurant industry sales data released by Malcolm Knapp.  For the past 5 months we have seen a sequential decline in same-store sales trends for the Full Service restaurant companies. 


I would also note that a key Research Edge MACRO theme is the Q4 REFLATION ROTATION theme, where reported inflation will begin to show up in Q4.  Helping to contribute to that theory will be the price of gas consumers are paying by November.  Currently the national average for a gallon of gas is $2.64 relative to $2.65 on October 27, 2008 and $2.40 by November 3, 2008.      

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No Crash Here: SP500 Levels, Refreshed...

So far, today’s intraday high in the SP500 is 990. Please forward that print to all the crash callers out there –  the 990 level in the SP500 is -2.2% off the 2009 YTD high, +9.6% higher than the 2008 year end close, and +46.4% higher than the capitulation closing low of March 9th.


The last 2-days of selling are what we simpleton macro folks call a correction, not a crash…


Calling crashes is, presumably, a behavioral response by the manic media and group-thinkers alike who missed calling the 2007-2008 US market crash. It is sad and it is silly, but don’t get upset about it – capitalize on it. Provided that the US Dollar remains broken across all durations, stay with the global macro program that’s worked since March. Buy red on US Dollar up days; sell green on US Dollar down days; rinse and repeat.


I have been, on balance, selling strength today. As is customarily my problem, I am sure I am making some sales too early. That’s my problem, not yours. Immediate term TRADE lines of resistance are at 999 and 1020 (dotted red lines). A close below 999 today puts immediate term downside TRADE support in play at 979. A close above 999, combined with a Burning Buck and the kind of global macro data we received out of Hong Kong and Germany today, and you’ll see another higher-YTD-high to sell into.




Keith R. McCullough
Chief Executive Officer


No Crash Here: SP500 Levels, Refreshed...  - a1



CKR reported period 7 and fiscal 2Q 2010 same-store sales results this morning.  Carl’s Jr. has struggled recently and reported period 7 comparable sales of -5.2%, representing 2-year average trends that were about even with the prior period.  On a quarterly basis, CKR’s top-line trends slowed on a sequential basis at both its Carl’s Jr. and Hardee’s concepts, as seen in the charts below. 






Judging by how CKR is trading up today, investors seem to be comforted by the fact that the company is guiding to 2Q restaurant level margins of 19.1%-19.4%, about even with last year’s 19.3% number.  This is impressive relative to the significant fall off in same-store sales growth, but as I keep saying, this is not a sustainable trend.  The company will not be able to maintain these margins if same-store sales continue to decline. 




Carl’s Jr. has recently underperformed its QSR peers, largely as a result of its more premium priced menu, which has failed to drive traffic in this tough economic environment.  Making things even more difficult for Carl’s Jr., MCD rolled out its new Angus burger in early July.  Although the timing is not right for another premium-priced QSR product, I have said that MCD’s new Angus product would put increased pressure on Carl’s Jr.’s sales as MCD is a formidable competitor with a large advertising budget.  MCD has not yet launched a national advertising campaign around its Angus burger, but we have seen coupons like the one below.




To that end, today, in a separate press release, CKR warns Carl’s Jr. and Hardee’s “consumers not to fall for the McHype.”  The entire press release is focused on McDonald’s new Angus offering.  “The Original Six Dollar Burger at Carl’s Jr. has 24 percent more meat than McDonald’s Third Pounders, yet costs the same - $3.99.  And at Hardee’s, the 100% Black Angus beef Original Thickburger has just as much meat as McDonald’s Angus burger, but costs 60 cents less. Those are the facts and that’s the value of our burgers.”  CKR is even offering a money-back guarantee beginning in mid-September that will give customers a refund if they don’t agree that CKR’s burgers are better than MCD’s Angus burgers. 


The fact that CKR is making such a big deal about MCD’s Angus burger makes me believe that the company is feeling increased pressure from this new product.  CKR also stated that it will be introducing a new product tomorrow at its Carl’s Jr. restaurants, The Big Carl, which it calls a counterpunch to MCD’s iconic burger, the Big Mac.  It is one thing to go after a competitor, but it is another to go after that competitor by name, particularly when that competitor is McDonald’s.  MCD can and will beat CKR at the advertising game if it so chooses.  In the near-term, CKR may get some attention from its mudslinging tactics as everyone enjoys a good corporate battle!  And, the money-back guarantee may increase trial at Carl's Jr., but in the end, MCD will likely win the battle as you can never underestimate the company's marketing muscle.




Pop, Pop, Bang! German Sentiment Popping

Research Edge Position: Long Germany (EWG)


The ZEW Center for European Economic Research reported today that its August index of Investor and Analyst Expectations rose to 56.1 from a pullback in July to 39.5. This increase for the index, which aims to predict economic health six months ahead, is bolstered by ZEW’s gauge of the Current Economic Situation, which rose to -77.2 from -89.3 in July. (See Chart Below)


The data supports our bullish fundamental outlook on Germany. We believe that Germany’s recent CPI and PPI figures represent a healthy (short term) deflationary environment that benefits both consumers and producers due to the purchasing power associated with imported commodity price declines (bolstered by a strengthening Euro); particularly  cheaper energy costs.  Interestingly, today’s CPI data from the UK for July registered unchanged at  +1.8% Y/Y  -a sequential divergence from Germany’s consumer deflation, which, along with the Eurozone average, stands at -0.7% annually. Our bearish outlook on the UK remains as we believe inflation is getting ahead of growth.


The recent German Q2 GDP release at 0.3% Q/Q has certainly helped to improve sentiment, as the public begins to believe that the recession is passing (or at least that the worst is behind them). Although all economic data is ultimately rear-view, with both Germany and France exiting recession from a technical level, look for countries across the EU to benefit from increased demand and confidence from consumers in the Eurozone’s largest economies. 


Matthew Hedrick



Pop, Pop, Bang! German Sentiment Popping - a1


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