Retail Chart of The Day: ROST

I’m the first to admit that our SIGMA charts are next to impossible to interpret for anyone that has not spent 15 minutes on the phone with someone on my team.  But if you can’t interpret the chart below and either a) you can short stocks or b) own ROST, then you should give us a call.


The crux of it is that the delta on sales/inventory spread is turning down after 6+ quarters on cloud 9 at the same time we have visibility on comping against increasingly tougher Gross Margins and favorable SG&A.  ROST drives its business in large part on packaways, meaning that it buys all it can when the going is good, and pulls out of inventory to sell when appropriate. Right now, the 2H buys that were subsequently packed away are keeping this company alive and kicking. Yeah, it has another quarter of great top and bottom-line visibility. But then the simple fact that it is at peak margins and full valuation with slowing momentum will start to matter.


Retail Chart of The Day: ROST - ROST SIGMA CHART

Germany: A Huge Deflationary Print?

Research Edge Position: Long Germany (EWG)


The Federal Statistics Office reported that German Producer Prices fell 7.8% in July from a year earlier. As we’ve been highlighting in our posts on Germany  over the last weeks, we see this deflationary environment in the short term as positive (it remains our conviction that in the last quarter inflationary pressure will return to the major economies) as the economy melts up, having moved into positive territory with a +0.3% in Q2 GDP reading quarter-on-quarter.


On an annual compare this “deflationary” PPI number (the lowest in 60 years) can be heavily attributed to the manic energy prices of last year, while on a sequential basis, PPI fell 1.5% or -0.2% when excluding energy costs. According to the report, energy prices fell 16.5% annually, with gasoline decreasing 5.1% on the previous month.  After June’s PPI reading of -4.6% Y/Y, July’s number does not sway our opinion that producers will benefit on price declines which, if sustained, should continue to trickle down to consumers. German CPI last registered  at -0.7% annually (the Eurozone average), and we see this purchasing power as bullish for consumer sentiment and spending.


While a strong Euro has also benefitted domestic purchasing power, we’re still cautious on the export picture with the Euro above the $1.42 level. However with exports and factory orders increasing sequentially, ZEW’s economic expectations number jumping upward, and continued strong and transparent leadership from Chancellor Merkel and Co., our bullish stance on Germany is intact.


Matthew Hedrick


Germany: A Huge Deflationary Print?  - MH ppi







  • Deflation in food and consumables continues to weigh on topline results at BJ and is one of the reasons management tempered its outlook for same store sales over the back half of the year. The rate of price declines in key perishables categories including meat, produce, milk, eggs, and dairy increased during 2Q and are now expected to remain a headwind over the next two quarters. Same store sales in the perishables category decelerated from a 12% increase in 1Q to a 6% increase in 2Q. Unit volumes are still positive, but pricing trends are clearly taking their toll. Additionally, BJ’s continues to struggle with general merchandise sales, which comped negatively by 2%. Despite positive traffic of 4%, BJ’s membership remains cautious in its purchase of discretionary products while at the same time choosing to spend on food and consumables.


  • PetSmart is one of the few retailers caught in the middle of a transition from inflation to deflation and the company is not getting any benefit along the way. On one hand, substantial inflation (up until now) in premium pet food and consumables was helping to drive same store sales and leverage expenses. With a limited amount of dollars to spend and the cost of pet food on the rise, the PetSmart customer then reduced their purchases of higher margin hard goods. The net result was a negative mix shift resulting in gross margin pressure. Shifting forward to the current trend, inflation is no longer holding up and y/y pricing gains are unraveling, leaving same store sales below plan. With deflation likely to kick in as many manufacturers have stopped raising prices on premium food (there is now talk of lowering prices), the forecast for the topline is now clouded. The optimal outcome for PetSmart would be a reversal in the mix shift now that the consumer may ultimately have more discretionary spend. However, it’s too early to make this call and the Catch-22 scenario of fewer sales and less margin appears to be the most likely outcome for at least a couple of quarters.


  • As Tween Brands prepares to close its merger deal with Dress Barn, some interesting details were shared on the company’s conference call about its real estate portfolio. Between now and 2012, 361 store leases come due out of a total base of 900. In 2010, 200 stores will be up for renewal. We suspect this was well understood by Dress Barn during their due diligence, as it gives the new owners a huge amount of flexibility in profitably rightsizing the portfolio as well as mitigating some risk in the former Limited Too mall stores that are being transitioned to the value-focused Justice concept. While we don’t expect all of the leases to expire, the pendulum has certainly shifted towards the tenant in regaining flexibility and reducing costs in what has been a landlord driven environment for the last few years.


  • Perry Ellis management had a handful of optimistic comments on its 2Q conference call as it pertains to the environment and specifically to their business. First, the company reminded listeners that 90% of its business is men’s which has not suffered as much as women’s. Second, the idea of depleted inventories at retail was introduced with the belief that planning over 3Q and 4Q may be too low even if the sales environment does not improve dramatically. Third, it was pointed out that apparel unit sales have remained robust and the recent decline in overall apparel spend has been predominantly driven by promotions and price erosion. Finally, the company reminded investors that many small apparel manufacturers have been going out of business, which ultimately leads to market share opportunities for the better capitalized survivors. We can’t say we disagree with many of the points made on the call, although we’re pretty certain it doesn’t pay to nudge expectations higher before the evidence of a positive shift takes place.


  • It’s hard to believe back to school is underway and now a shift in focus toward Halloween is underway. While not a huge holiday for most retailers, Halloween has historically been used as a barometer of discretionary spending in the past. With that said, it’s important to note (thank you Hot Topic) that Halloween falls on a Saturday this year, which makes the calendar optimal for a full two days worth of costume parties and candy-induced bellyaches. As October 31st draws closer, expect consumables retailers to highlight the calendar benefit. In the meantime, we’ll focus on the timing of Labor Day, which detracts from August but helps September.




-Retailers are anxious to look ahead and now a survey of top executives found many don’t expect any real improvement until at least 2011 - That’s not to say it’s all doom and gloom among retail’s top brass, however. 70% of retail executives surveyed by KPMG expect business conditions to improve next year, with 68% predicting stronger revenues and 66% forecasting better profits. But 44% of executives also thought the economy wouldn’t substantially recover until 2011 or beyond.  “These executives feel like they have done what they need to do to survive and be poised to take advantage [of conditions] when the economy recovers,” said Mark Larson, KPMG’s global retail sector chair, who was encouraged by the survey but acknowledged the improvement in 2010 will come off of plummeting profits and sales in 2009. Three-quarters of the retailers surveyed by KPMG said they had already trimmed their workforces and only 14 percent said they were still planning to issue pink slips. The weakness of the consumer and the impact of lower spending levels on retailers’ bottom lines came into even sharper relief as specialty stores reported second-quarter results Wednesday, adding to the slew of poor numbers that have been reported since last week. Cost-cutting and inventory reduction have been major themes so far this year, but some retailers appear to have made their cuts and are planning to bolster their businesses where they can. Overall, 54% of those surveyed by KPMG said their strategic focus was on investment, while the rest are still zeroed-in on cost cuts. Seventy-seven percent of executives are using technology to reduce operational costs.  <>


-Aeon Co., Japan’s second-largest retailer, may expand in India and Vietnam to boost growth as sales slump in its home market - “At a macro level, gross domestic product in the next 10 years is going to grow faster in Asia than the rest of the world,” Jerry Black, vice president in charge of Aeon’s Asia strategy, said in an interview today in Chiba, near Tokyo. While the company hasn’t made “any firm decisions,” India “is appealing to us” and he’s looked at locations in Vietnam. Aeon, operator of Jusco general-merchandise stores, is struggling to spur sales in Japan. The retailer also plans to “expand more aggressively” in Malaysia and Thailand, said Black, Aeon’s first non-Japanese executive.   <>


-China's textile and garment export fell 12.35% - China's textile and garment export fell 12.35% to $16.38 billion  in July from the same period last year, according to the latest statistics on the official website of the General Administration of Customs. The figure in July, however, was 21% from $13.48 billion in June. The textile and garment export declined 11.15% to $89.17 billion in the first seven months from the same period last year due to sluggish demand in China's major export destinations, the US, EU and Japan. <>


-Research reveals mixed impact of recession on Europe - Across the board people said that they were spending more time researching before making a purchase. In the UK, one in five will no longer make a purchase without extensive online research. In Germany, this figure rises to 27%. In France it is 13%, while in Spain and Italy one in ten people said that their research had increased. The results highlighted some surprising differences in local responses. One point, however, is consistent: people still love to shop but they're working harder to get the best from their money. Most affected overall by the credit crunch are the Brits and the Italians. 82% and 86% respectively said that they felt the economy had affected them personally. The most resilient nation is France, where an impressive 63% said that they had yet to really feel the downturn.  <>


-Germany-based Deichmann Shoes is making a play for U.S. market share - The private firm, which owns the Rack Room and Off Broadway retail chains, will introduce its own stores starting this fall. It is unclear if the stores will be under the Deichmann name, as they are in Europe. Five store locations have been confirmed, starting with units in Kennesaw, Ga., and Towson, Md., with three additional openings to follow in the Boston area. A continued Northeastern retail push is planned for 2010.  <>


-Wal-Mart launches Mad Style by True Jackson for BTS - Walmart is heading into the back-to-school season in style, nabbing an exclusive on "Mad Style by True Jackson," a line of apparel and accessories inspired by the Nickelodeon series. The line, designed by Jane Siskin, president and chief executive officer of L'Koral, is inspired by the live-action series True Jackson VP and includes long sleeved t-shirts; knit tees featuring graphics with positive messages like 'Be true to you'; fashion leggings with novelty buttons; jumper dresses with removable straps; tunic dresses with pre-scrunched sleeves; Mary Jane shoes; ballet flats; and sneakers. Every item in the collection is priced at $14 or less. "True Jackson VP inspires girls to dream big and embrace their individuality and creativity," said Hal Snik, svp, domestic licensing, Nickelodeon/Viacom Consumer Products. "The Mad Style line embodies the spirit of the show and the clothes are comfortable and affordable enough so that girls can follow the trends or create a look totally in their own style." Additionally, a microsite -- -- has been developed exclusively for consumers and will be the digital headquarters for the new line. Kids can log on to view images of the line, get weekly style tips, play dress-up games and more.  <>


-Dick's Sporting Goods decides not to sell Michael Vick jerseys - If you find an Eagles No. 7 jersey at one of Dick's Sporting Goods stores, it will be a Ron Jaworski throwback and not a brand new Michael Vick. That's because the company has decided not to sell jerseys bearing Vick's name. "We are simply evaluating the reaction of Eagles fans before we commit to buy it to sell in our stores," said Dick's chief marketing officer Jeff Hennion. "Right now, we're not sure how much demand there really is. If there's demand for it, we'll sell it." While there has been anecdotal evidence that suggest that Vick jerseys have been selling well, one retailer told us that they weren't moving as fast as they had hoped. Not only is Vick's past a factor, our source said, but also the fact that it's hard to sell the jersey of a quarterback who is not the starter in this environment. Two years ago, after Vick's dogfighting ring became public, Dick's was the first national retailer to pull all Vick products from its shelves. Dick's has nearly 400 stores in 40 states, but has the largest population of stores in Pennsylvania, where the company is based. <>


-Heelys Q&A - After exploding onto the footwear scene in 2000 with a “stealth skate shoe,” Heelys Inc. has struggled to maintain its momentum. In an unconventional move, the company named advertising veteran Tom Hansen as its new CEO in July. Several weeks after beginning his work at the Dallas-based firm, Hansen gave Footwear News some insight into Heelys’ future. Tom Hansen believes Heelys is an icon brand, which either recreates — or totally creates — its own category. It was probably one of the most disruptive forces in the [footwear] category when it came out. "Heelys, as a brand, never developed. It’s still a product. That represents a giant opportunity."  "We’ve focused on the product of shoe with a wheel in the heel, but [we want to move ahead to] the benefit of Heelys." The new CEO believes that dance and music are big potential areas of growth for Heelys. "We want to be a brand that can participate in that part of pop culture. Beyond just skating, we see a lot of opportunity in the area of dance competitions, like the B-Boys."  <>


-Exports of Swiss watches continue to fall, declining 25.9% in July - Since January, watch exports have fallen 26.3%, reflecting wilting demand for expensive timepieces amid the economic crisis. Dollar figures are converted at average exchange rates for the periods to which they refer. The Swiss watch industry has been in decline since the end of 2008, after five years of strong growth, with exports currently below 2006 levels. Although all price segments declined in July, watches costing between 200 and 500 Swiss francs, or $186 to $466, held up best, with a fall of around 7%.  More expensive ranges fell by more than 20%, while watches costing over 3,000 Swiss francs, or $2,797, recorded a steeper fall than the others, plummeting over 30%. Gold watches suffered the biggest fall in value terms, while the performance of steel and bi-metal timepieces was average, the federation said in a statement. <> takes the title as the most consistent site in July - led a group of 23 major retailers that achieved an “excellent” web site consistency rating in July, according to Gomez. The top 48 retail web sites measured last month had an average site availability rate of 92.65%. <>


-Abercrombie & Fitch sales fall in Q2, but web takes lightest hit - Abercrombie & Fitch’s second quarter sales declined across the board. Q2 e-commerce sales were $48.7 million, a 13% decline from $55.9 million in the second quarter of 2008. Total sales decreased 23% to $648.5 million from $845.8 million in Q2 of 2008. <>


-American Apparel web sales were down 3.8% in the second quarter - Consumer brand manufacturer American Apparel reported web sales of $8.39 million for the second quarter of fiscal 2009, down 3.8% compared with $8.72 million in Q2 2008. Total sales edged up 2.3% for the quarter. <>


-Riddell Sports signs NFL deal - Riddell Sports has signed a multi-year extension to its existing licensing agreement with the National Football League through 2014. <>


-Workwear and uniform brand Dickies has signed Bioworld as its newest headwear and cold weather accessories licensee - The apparel label has also extended its multi-year contract with Randa for licensed leather goods. Bioworld is currently developing a product line for spring 2010, which will include headwear and cold weather accessories, including scarves for men, women, boys and girls. The Bioworld announcement comes after Dickies ended its nine-year partnership with former headwear licensee Daystone International. "We've realized that Dickies customers use our apparel not only for work, but for after work and weekends, as well," says Michael Penn, vice president of licensing for Dickies. "Our brand has a long-standing heritage of providing quality, value and durability; whether you wear the clothes to rebuild a car or attend a music festival. Our network of licensing partners plays an integral role in getting our brand to consumers, and it's important that we do so in a consistent manner." The contract extension with Randa will see further development of Dickies-branded items such as belts, wallets, suspenders and travel kits for men and boys. Randa has worked with Dickies for more than 25 years. <>


-Men's Wearhouse has announced its second annual National Suit Drive- Determined to empower unemployed men by providing them with the necessary professional attire that will build their self-esteem and help "sell themselves" during job interviews, Men's Wearhouse has announced its second annual National Suit Drive, September 1-30. Concerned that thousands of men are unable to secure employment because they lack the initial, yet vital, step of looking presentable for a job interview, the nation's leading retailer of men's tailored clothing, is working with more than 200 local non-profit organizations throughout the country to collect thousands of articles of professional attire to be used by individuals looking to re-enter the workforce. In addition, Men's Wearhouse will donate one tie for every suit donated to help complete the outfit.  All 1,065 Men's Wearhouse and Men's Wearhouse & Tux locations will serve as drop-off sites for gently used suits, dress shirts, sport coats, slacks, ties, belts and shoes that will be used to benefit men in need of these items to transition into the workforce. <>


-Stage Stores Inc. names new senior VP of cosmetics - Stage Stores Inc. has named Christine Johnston, a former Macy’s beauty executive, as senior vice president of cosmetics, a new position. In the new post, Johnston reports to Andy Hall, the firm’s president and chief executive officer. She is responsible for all aspects of the company’s cosmetics business, the firm stated, which includes buying, planning, allocation and replenishment for the retailer’s Houston and South Hill, Va., divisions. <>


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

08/19/2009 10:52 AM


Levine and I had a higher level of conviction that the shorts would get squeezed ahead of the EPS report (tonight) than in the EPS report itself. Selling green here. KM

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Not unexpected but good new nonetheless, LVS filed an application to possibly list shares on the Hong Kong stock exchange.



IPOing part of its Macau operations is one prong of the LVS strategy to shore up its balance sheet, overcome covenant hurdles, and potentially fund the restart of Lots 5 and 6 on Cotai.  While the actual floating of shares will not come until later this year, the news is positive.  Remember, last week LVS obtained an amendment of its Macau credit facility to raise the maximum leverage covenant.  The company is certainly executing on the balance sheet front.


Operationally, the fundamentals are improving dramatically in the Macau market.  August should be the strongest month in over a year and the comparisons get much easier starting in September.  The Venetian may be having its best month ever.  See "ANOTHER MONSTER MONTH IN MACAU" from 8/17/09 and "THE MACAU HIGH SEASON" from 8/12/09 for more detail.



The Present

“Confine yourself to the present.”
-Marcus Aurelius
The Shanghai Composite was up 4.5% overnight. Depending on which media pundit’s point of view you subscribe to, this move either represents a partial rebound, a dead cat bounce or a lower high.
I had never worked as an analyst prior to joining Research Edge. When I joined Keith here early last year and began to participate in the morning meetings, the process of articulating an investment thesis to an audience seemed very exotic to me. Prior to that my investment experience had been confined to managing a portfolio and I was judged solely by the performance of my P&L, not WHY anything in the book went up or down but simply IF it went up or down. There was no report to be filed, no discussion about the catalysts, timing or risks, no degrees of right or wrong; there was only a single number at the end of every period by which I was judged.
Describing the complex, rapidly evolving, highly volatile current situation for Chinese equities is one of the most difficult things I have ever attempted to articulate in writing, let alone to develop a cohesive investment and risk management thesis for. Our process for China to date has been about three things: 1) trying to maintain objectivity, 2) trying to maintain humility and, 3) confining ourselves to the present.
The first point is simple enough: We have learned to say “I don’t know” and try to take nothing for granted. When we discuss China with investors of all types the one question that comes up again and again is: “Don’t they make up much of the data you rely on”? Our response is usually to remind them that no one in this market, not even the leaders at the National Bureau of Statistics, believes that the economic data produced by the Chinese government is accurate enough to be relied on completely. Like sailors with a bad map, we have to navigate by keeping an eye on the horizon and gather as much marginal data from objective sources to test every component of our thesis at every opportunity. Every one of these tiny data points (a report from a Brazilian metals exporter, comments by a Singapore chip producer’s CFO, a speech by a regional bureaucrat in some provincial city you can barely envision on the map) gets thrown into the process to be vetted.
The second point, humility, is similar to the first but more sublime. We strive to hang on to our fear; to avoid overconfidence. Years working as a trader taught me that only a disciplined mind following a process can consistently outperform, but that perversely is the very success of any process and can be its undoing if that investor becomes arrogant. The development of China’s economy as it moves towards growth fed by internal consumption that has seemingly unlimited potential is a narrative that can be intoxicating. During the rapid run up of the Shanghai Composite in the first half of this year it would have been easy for us to become overconfident. Instead, with every passing 5% up move we became more and more obsessed with finding holes in our thesis –until the initial pullback on July 28th, which came as a relief strangely enough since it validated our fears and forced us to retest our process.
The third point may be the most critical. Before I started this job I believed that the role of an analyst was to look across the horizon and attempt to predict change. I now understand that an analyst’s job is ultimately the same as portfolio managers –to look at the horizon and predict change IN THE CONTEXT OF THE PRESENT.  We are witnessing profound changes in the Chinese economy that may well be the largest economic driver of growth for this century, but in the here and now Chinese equities are also trading based on short term credit levels, investor euphoria and flawed reporting methods. To get somewhere on the map, first you need to know where you are, and that is the cornerstone of our process. Analysts and economists who ignore price action and sentiment in favor of pure data may be right in the long run, but the process of successful investing requires risk management for the present.  
In the coming week we will be reporting frequently on China as our thesis continues to evolve with each new data point. We will be trying to articulate this to you in real-time, with our eye on the horizon and our head in the present.
Andrew Barber

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 reflation call.

XLK – SPDR Technology Tech and Healthcare remain the two sectors most primed for accelerating M&A activity in Q4. Both look great from an intermediate term TREND perspective, but at a price.

EWC – iShares Canada We bought Canada on 8/11. Canada has what THE client (China) needs, namely commodities, which we believe will reflate as the buck burns.   

QQQQ – PowerShares NASDAQ 100 We bought Qs on 8/10 and 8/17 to be long the US market. The index includes companies with better balance sheets that don’t need as much financial leverage.

EWG – iShares Germany Chancellor Merkel has shown leadership in the economic downturn, from a measured stimulus package and budget balance to timely incentives such as the auto rebate program. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; factory orders and production as well as business and consumer confidence have seen a steady rise over the last months, while internal demand appears to be improving with the low CPI/interest rate environment bolstering consumer spending. We expect slow but steady economic improvement for Europe’s largest economy, which posted a positive Q2 GDP number.

XLV– SPDR Healthcare Healthcare has lagged the market as investors chase beta.  With consumer confidence down and the reform dialogue turning negative we like the re-entry point here.

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.

CYB – WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

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. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

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.

DIA  – Diamonds Trust- We shorted the financial geared Dow on 7/10 and 8/3.

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.

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.

McCullough Favors Shorting Darden, Research In Motion

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