Chart of The Week: Monkey See, Monkey Do...

I get a tremendous amount of feedback (mostly positive) about staying with this important macro call that we established in Q2. Initially we coined it Breaking The Buck. In Q3 we changed it to Burning The Buck (we update our 3 core Global Macro Themes quarterly).  I understand that macro inverse correlations like this aren’t perpetual. But they sure are profitable while they last.


In the chart below, Andrew Barber and I have shown what the last 7 weeks have looked like from the perspective of this simple 2-factor setup (SP500 versus the USD Index). For economists, hindsight like this is always crystal clear – but we wanted to show it in to your inbox this morning so that you can put it in front of the next economist/strategist that comes into your office and tells you this can’t be this simple.


In chaos theory, you take a dynamic/complex system and find deep simplicity in underlying patterns. That’s all this is – its math. As soon as the crowding out effect starts to erode the returns associated with a US Government sponsored Dollar devaluation, I will change my stance. For now… Monkey see, Monkey do…



Keith R. McCullough
Chief Executive Officer


Chart of The Week: Monkey See, Monkey Do...  - sp11


Chart of The Week: Monkey See, Monkey Do...  - sp22




24 AUGUST 2009





Every day, I feel honored and privileged to put on my Research Edge jersey and compete along with my teammates. They make me better every day, and hopefully, I occasionally reciprocate.  This morning I need to direct you towards Keith’s Early Look.  He sets the stage with a look at Merlin Olsen’s approach to his NFL career. He played for the same team for his entre 15 year career, made it to the pro bowl in all but his last, and never missed a game. Every morning his feet were on the floor, with no days off, and no excuses. You’ve got to either a) admire that, or b) pray that you are not competing against it.


This applies quite well to being a retail analyst in these fleeting days of summer. Everyone else is getting over the earnings season hangover for companies on a Calendar FY. For retailers, the hangover is in full force.


Last week was a busy one, and this will be too. One of the biggest thematic call outs thus far has been in the sporting goods sector.  With results out of DKS, FL, and HIBB, we got a nice snapshot into where this industry stands. Bottom line is that inventory is building across the board. Not good. Retailers are shifting to lower-price performance shoes, and are giving new brands a shot. KSWS, PSS and UA stand out on the positive side. Nike and DKS are Neutral to negative. FL and HIBB are scary.


There’s another dozen retailers reporting this week. Our feet, as always, will be on the floor helping members of our exclusive network win.




Some Notable Call Outs


  • As Ann Taylor looks to improve its merchandising, while at the same time cutting inventory levels dramatically (down 30%/square foot), it is finding that its customer has become accustomed to buying on promotion. Even with lower ticket prices, the customer is not meaningfully responding to such price cuts. As result, the merchandising strategy on a go forward basis will include much more planned ticket promotions that highlight “before and after “ pricing.


  • Following a mid-teens same store sales decline in its US division, Footlocker is looking to change its footwear mix in an attempt to boost sales. Management hopes to insert “value” in the assortment through the addition of more moderate priced footwear. Expect Footlocker to make an “aggressive” push in brands like K-Swiss and in product categories that include classic tennis and white shoes. Heightened promotional activity is also likely as the company looks to drive traffic and adjust inventory levels to current demand.


  • Technical running shoes remain the bright spot in an otherwise challenging athletic footwear environment. Hibbett Sports highlighted that its technical running category actually comped positively in 2Q. Additionally, it is one of the few categories that is being planned up for the remainder of the year.





-The New Normal for vendors and retailers- Even as vendors and retailers continue to struggle with non-shopping consumers, declining sales and a near-term outlook that remains uncertain, the outlines of the world beyond the economic downturn are coming into focus. And the result can be summed up in one phrase: Less will be more. The NPD Group estimates that 12% of vendors will not survive the recession and nearly 20% will abandon expansion strategies and retrench, focusing on their core products and markets. There will be fewer consumers, which will mean fewer stores, fewer collections, fewer products per collection and lower inventories. That will be what will be required to adapt. But to survive, vendors and retailers will have to ensure there is less duplication, faster turnarounds and more exclusive, innovative product to excite shoppers. Here, WWD canvasses manufacturers, analysts and consultants on the key factors that will drive the age of the New Normal.  INVENTORY REDUCTIONS - Retailers are cutting inventories by 15% or more from a year ago, meaning reduced orders for vendors, as well. Small manufacturers are the most vulnerable as merchants stick with tried-and-true labels to lure reluctant shoppers back into their stores. SELLING OUT - For the retailer, it’s a balancing act between creating demand and disappointing the customer. Although stores are counting on being able to reorder midseason, that may not be possible, especially on fashion goods, since vendors have cut back as well so as not to be stuck with excess merchandise. MARKDOWNS - Full price doesn’t mean much anymore in light of in-season discounts that can hit 70 to 80 percent. NPD reports that 52% of all merchandise is now sold at promotional pricing — five years ago, 52% was sold at full price. The risk of such deep discounting is that original selling prices become meaningless and that, even once the economy recovers, consumers will resist paying full price. BUYING CLOSER TO NEED - With retailers clamoring for faster turnaround, can vendors answer the call? Fashion firms say anything less than eight weeks is impossible to achieve due to the demands of the production schedule. VERTICALIZATION - Department stores have been losing market share nearly every year since 2003, and that trend is expected to accelerate this year. According to NPD’s Cohen, department stores, which account for 16 percent of fashion sales, have been losing about 0.5 percent a year, and he expects they could lose up to a full point as mass merchants and lower-priced retailers gain consumer attention during the recession.  <>


-Good news: Sales of men’s underwear are up so far this year - If Alan Greenspan’s theory is correct, the economy may have turned the corner. The economist and former chairman of the Federal Reserve Board famously kept tabs on sales of men’s undergarments, which he believed could accurately predict swings in consumer spending. Unlike coats or sportswear, underwear sales tend to be unmoved by the vagaries of trends or seasonal spending. Greenspan, who articulated his theory of “briefonomics” more than 15 years ago to then-CBS reporter Robert Krulwich, saw in this stability a winning economic indicator. “On those few occasions where [sales] dip, that means that men are so pinched that they are deciding not to replace underpants,” According to The NPD Group, sales of men’s underpants are up 4.7 percent for the first half of the year, even as the men’s wear business overall continues to stagnate, falling 5.2% during the same period. But even if underwear is an economic groundhog, the rest of apparel has a way to go before it will enjoy comparative gains. For the same six-month period, sales of tops tumbled 8.8%; tailored clothing dipped 5.2%. Apparel accessories slumped 4.4%. Only sleepwear and fleecewear posted gains, surging 11.7% and 14.4%, respectively.  <>


-Direct Foreign Investment in China fell 36% in July - Despite deep declines in foreign investment, analysts say the textiles and apparel industry is bound to recover and begin seeing new investment as soon as the world’s economy gets back on its feet. The Chinese government last week released new figures showing the country’s foreign direct investment, or FDI, fell by 35.7% in July from the same month a year ago. The decline marked a continuing pattern that began with the onset of the credit crunch last fall, with 10 months in a row of falling foreign direct investment in China. Although the government has been pushing long-term economic development for more homegrown innovation and domestic consumer demand to wean itself off a reliance on exports, China remains heavily dependent on foreign direct investment. “We still need a lot of foreign investment, that’s for sure,” said Lu Yayong, of the China Research Center of Foreign Direct Investment. “With too little capital invested in private businesses and the country’s high savings rate, foreign investment is very important for the development of this economy. <>


-The U.S. International Trade Commission voted to find a trade remedy case involving textile products and Chinese quotas - The U.S. International Trade Commission voted unanimously on Friday to move forward with the first trade remedy case involving textile products from China since quotas were lifted at the end of last year. The ITC found that imports of “narrow woven ribbon with woven selvage” from China and Taiwan injured or posed a threat of injury to domestic companies. The ruling clears the way for the Commerce Department’s Import Administration to move ahead with its parallel investigation. The products covered by the decision include certain woven ribbon used for embellishing apparel or decorative purposes like gift wrapping. <>


-For retailers these days, liquidity is the name of the game - To reduce losses — and improve their bottom lines — retailers across categories are seeking out ways to improve cash flow. And in this economic climate, all areas of the business are prime targets for potential savings. “Inventory is No. 1,” said Paul Erickson, SVP of RMSA Retail Solutions, a consulting firm. “And the faster you sell it, the better your cash flow.” Though that may sound obvious, Erickson, who often gives seminars on the topic, advises that independent retailers turn, or sell, their entire inventory at least three times a year. But how do you do that? For many retailers, reducing inventory levels has helped. DMM of footwear at DTLR, which has 66 athletic stores throughout the East Coast, said that while he can’t stop buying completely, his approach is different now. Such opportunities, he said, include looking for deals from vendors, who may be receiving cancelled or returned orders that they are willing to resell for a better price. And now more than ever, such arrangements between retailers and vendors can help a store’s cash-flow situation. <>


-L.L.Bean announced the March 2010 launch of L.L.Bean Signature, a sportswear collection for men and women - The company has tapped Alex Carleton, the founder of fashion label Rogues Gallery, as the L.L.Bean Signature creative director. The company said the L.L.Bean Signature will be rooted in L.L.Bean tradition. Carleton plans to take iconic L.L.Bean style elements from different decades and juxtapose them with innovative, modern designs to create updated fit and style for the new label. “L.L.Bean Signature will take the best of Bean and re-interpret it in a fresh new way,” said Chris Vickers, vice president of L.L.Bean Signature. <>


-UK's Debenhams demands better supplier terms - The department store group wrote to some of its suppliers last month, demanding that they meet its “minimum standard payment terms” by August 4. The new terms moved the payment timetable from 60 days to 65 days, according to The Daily Telegraph. Retailers extend payment terms to enable them to have cash in their bank for longer. Payment terms have been moved from around 30 days to up to 90 days over the last decade. Debenhams declined to confirm the terms it demanded. However, it said that the changes were requested to a “minority” of suppliers so that they could be bought in to line with its other suppliers. A spokesman said: “A letter has gone to a minority of our suppliers who do not comply with the company’s minimum standard payment terms. Payment terms remain unchanged for the majority of suppliers.” Like-for-like sales at Debenhams fell by 0.8% over the 12 weeks to May 23, meaning that the department store has taken market share from rivals. It also improved its gross margin by 90 basis points. <>


-Christopher & Banks eyes the holiday season with a multichannel strategy - New online gift centers on the women’s apparel retailer’s e-commerce sites are increasing click-through rates while also expanding product offerings in stores, where shoppers can check computer monitors for suggested gift arrangements. <>


-Nike Inc., Tommy Hilfiger USA Inc. and Diesel USA Inc. hurt by confessed Ponzi scheme operator Marc Dreier - On Aug. 19, Judge Jed Rakoff, of U.S. District Court in Manhattan ordered that Dreier also pay restitution to his victims. Hedge funds Elliot Associates LP and Fortress Investment Group topped the list, owed $99.9 million and $84.4 million, respectively. However, Rakoff also ordered that Dreier make good with smaller investors including apparel firms Nike, owed $243,124; Coogi Partners LLC, owed $47,650, and Adidas America Inc., owed $6,258. The 24-name list included a handful of other fashion firms owed less than $5,000, such as Tommy Hilfiger, Diesel, Seven For All Mankind, Rock & Republic Enterprises Inc. and Nautica Apparel Inc. Court records did not immediately make clear how Dreier is to pay back his victims, though Rakoff ordered, in a July 17 ruling, that he forfeit millions of dollars worth of cash and property. The 10-page list of assets included bank accounts, homes in the Hamptons and West Indies, an Aston Martin and a collection of contemporary art that featured works by Andy Warhol and Damien Hirst. <>


-Lead plaintiffs in a lawsuit  appeals judge' dismissal of case on SHLD and its chairman, Edward Lampert - Former Kmart investors filed the suit against Lampert and onetime Kmart chief executive officer Julian Day in 2006. The lead plaintiffs in a lawsuit that had accused Sears Holdings Corp. and its chairman, Edward Lampert, of securities fraud said Friday they would appeal a judge’s dismissal of the case. Former Kmart investors filed the suit against Lampert and onetime Kmart chief executive officer Julian Day in 2006, but a judge threw the case out last month.  <>


-Despite discouraging sales trends in much of the footwear industry, there was an increase in visitor attendance - The mood at the Atlanta Shoe Market, held here Aug. 14-16, was one of optimism, as visitor attendance jumped 16 percent from last year. Among the retailers touring the aisles were regulars such as Belk, Peebles, Shoe Carnival and Shoe Show, and newcomers Boscov’s and Von Maur. Independent store owners reportedly came from across the Southeast, as well as more distant areas including the Midwest, Southwest, New England and Caribbean. Exhibitor attendance, meanwhile, rose 6 percent year-over-year, with new brand additions including The North Face, Toms Shoes, Dolce Vita and Members Only. While pricing continued to be a factor, buyers at the Atlanta Shoe Market said they were on the hunt for uniqueness. <>


-Women’s footcare accessories brand Foot Petals, has big plans for the coming months - Despite a rocky economy, Tina Aldatz, president of women’s footcare accessories brand Foot Petals, has big plans for the coming months. The Long Beach, Calif.-based company has developed into a $9 million business, and Aldatz expects to more than double that number by 2011 through a series of initiatives, including an exclusive and nationwide partnership with Target, a footwear license and concentrated international growth. “ Here at home, where Foot Petals can be found in nearly 5,000 stores and about 100 online retailers, Aldatz has teamed up with Target to create small shop-in-shops in the shoe departments at all the chain’s 1,700 locations, beginning February 2010. The company has been selling its accessories in specialized colors and shapes to Target since 2007 under the exclusive Fab Feet name. <>


-American Apparel is announcing the launch of larger and more elaborate kids and babies lines of clothing - Responding to countless requests from customers and employees for American Apparel in youth sizes, the company has translated dozens of its adult styles for the children's lines, as well as incorporating new colors and designs. "We've received so many letters from parents asking us to 'shrink down' some of the signature styles for their kids. The ones we started with are  simple, practical, fun solutions for parents short on time; they already know the styles and how comfortable they are. We've been looking forward to building this part of our line and are very happy to have answered this demand," said Marsha Brady, a creative director for American Apparel. American Apparel currently sells the kids and baby lines at more than 70 US retail locations, several international shops, and online from its e-commerce site. As the company's target customer has matured and begun to include larger numbers of parents, there has been an increased retail and wholesale demand for American Apparel basic styles in children's sizes. In expanding in this area, the company also has an opportunity to reach out to a consumer who may not otherwise have shopped at American Apparel.  <>


-When James Blake takes the court at the US Open in a couple weeks, he’ll be wearing his new Fila line. But unlike any athlete before him, the logo doesn’t spell out his initials or show a symbolic silhouette. Instead, Blake’s logo is “TR,” and the line is called Thomas Reynolds, the first and middle name of his late father. “I wanted to be part of something that wouldn’t necessarily have to always be tied to me and be more about the spirit that father embodied,” Blake said. Fila will help capture the lessons instilled in James by Blake’s father, who died in 2004, through print ads and through hang tags on the line. While some might think that having a brand modeled after a player's family member is a risk, Blake's agent Carlos Fleming views it from a different perspective. Golf, fitness and leisurewear are the next up for the Thomas Reynolds brand if everything proceeds as planned. <>



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

08/21/2009 10:38 AM


I've been looking for an out in this position, and what else can I say - I'm out. Selling green. KM





WMT: James Breyer, Director, purchased 5,000shs ($257k) increasing total common holdings by nearly 10%.



  • Paul Sweetenham, SEVP, Group President – Europe, sold 11,070shs ($391k) after exercising the right to buy 12,500shs, less than 20% of total common holdings.
  • Jerome Rossi, SEVP, Group President, sold 41,250shs ($1.5mm) after exercising the right to buy 41,250shs, roughly 50% of total common holdings pursuant to 10b5-1 plan.


TRLG: Joseph Coulumbe, Director, sold 2,000shs ($44k) less than 10% of total common holdings.


Sequentially, McCarran YoY traffic improved to -9.3%. However, high slot hold and strong table volume last year in July could cause July gaming revenues to fall 14% per our model.



McCarran Airport experienced a 9.3% year-over-year drop in passenger traffic in July.  The decline was better than June’s 11.4%.  On a revenue basis, we expect the decline to be worse than the airport traffic would indicate due to high slot hold and abnormally high table drop in July, 2008.  We project a 14% decline in gaming revenues.  Nevada will release those numbers in a couple of weeks.




Gaming revenues appear to be stabilizing, albeit at a pretty low level.  Nonetheless, one would expect the increase in automobile traffic from California (due to low gas prices) to have a greater offsetting impact.  Automobile traffic has increased three straight months and likely did so again in July.  However, as we’ve been writing about, the favorable gas price comparison will reverse in November culminating in a 50% YoY increase in late December.  This is certainly a bigger issue for the regional gaming companies but will also negatively affect visitation to the Strip later this year.


Looking ahead, August and September look to be difficult comparisons.  Gaming revenues declined only 7.2% and 4.8%, respectively, in those two months. 



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Prepared For Pain

“One of life’s most painful moments comes when we must admit that we didn’t do our homework, that we are not prepared.”

-Merlin Olson


Same jersey for 15 years in the NFL. Same process every day. Same expected results. Merlin Olson played for the Los Angeles Rams for all 15 of those years. He made it to the Pro Bowl in every year but his last. He never missed a game.


For those of you who have played competitive sports, you know how impressive this man’s tolerance for pain must have been. Every morning, his feet were on the floor, expecting to play. No days off. No excuses. He was prepared for pain.


While we get compensated like them, we generally do not attack the professional game of investing like professional athletes do. Rarely, if ever, are our every moves You Tubed by an instant replay. This, of course, presents our daily exercise of debunking global macro a tremendous opportunity to be transparent.


A lot of people are giving lip service to transparency right now. They should. It finally matters. In principle, transparency is what is going to matter to The Client in this business going forward. Whether that Client is China or a high-net worth American, you had better do your homework or be prepared for pain.


What is it that you do? That’s the most relevant question of asset management for the foreseeable future. This market’s generational short squeeze is going to expedite The Clients getting some answers. We, as an industry, are evolving. This is good.


In the aftermath of Bernanke pandering in Jackson Hole on Friday and continuing to Burn The Buck, the US stock market hit another YTD high. At 1,026 in the SP500 we are now staring at a +52% rally from the March 9th, 2009 low. Let’s think about that return again: +52%!


In The New Reality, fact based context is going to be critical. While the manic monkeys made up stories as to why we were going to crash every day that we were down in the last 4 months, guess what – we didn’t. The only larger modern day stock market move that the Americans have seen since this +52% rally, was the crash of 2007-2008. That move was -57% from the peak. There is now only a 500 basis point spread between these two crashes versus consensus expectations. For some, both were painful.


The beauty of this game is that it waits for no one. The global market couldn’t care less if I’d like to spend time on the beach with my family. It is as interconnected as it has ever been, and it will mark itself to market every day. Per some pundits, China was “crashing to a bear-market low” – until we saw a cumulative +7.2% three-day move come with last night’s Shanghai Composite Index close, that is…


In the US, I hear a lot of talk about “low volumes”, but that doesn’t do The Client any good. In fact, that excuse, when considered next to the actual score of the game, has no relevance to The Client whatsoever. It’s an excuse. Can you imagine Merlin Olson explaining away the last game of his career (the NFC Championship game at Minnesota in 1976) as weather or volume related? C’mon, let’s get real here. By the way, Friday’s new high came on accelerating daily volume (+11% versus Thursday’s volume).


The New Reality remains. In the immediate term, when the US Dollar goes down (like it did on Friday), everything priced in those Dollars will continue to go up. In 6 out of the last 7 weeks, the US Dollar has been down. In 6 out of the last 7 weeks, the SP500 has been up. There is a deep simplicity to chaos theory. That’s math, not fiction.


Dominating inverse correlations in global macro like this aren’t perpetual. But you will experience the Pain Trade if you claim that they don’t matter while they are dominating. Understanding that when it’s sunny out, some people in this business will still say it’s raining. That is what it is. There is very little responsibility in recommendation any more.


Goldman Sachs is getting a little ribbing from their pals at the WSJ this morning for giving “tips” to preferred clients in what Goldman calls their weekly “Trading Huddle.” As with everything the house of the Almighty One creates, I am certain that there is a perfectly theoretical explanation for this. Rather than whine about it this morning, just look at their “conviction” buy list versus their other “buys” for what they are – this is what they do.


What I do is show everything I do real-time. No, there is no super secret sauce associated with my playbook. Every sale that I made into Friday’s strength (Germany (EWG), Canada (EWC), Healthcare (XLV), etc…). Every sale was probably a little early. Every time stamp is up there on our portal. It ticks, like a game clock and the score should.


What is it that I’ll be doing this morning? More selling. No, not because a squeezed man named Roubini is reminding me of some “L” or “W” shaped economic pattern. I’m selling because I know the value of realizing victory. I know the difference between a real W or an L. And I don’t need the other team’s “trading huddles” to give me a conviction play versus every other play I plan on running.


We’ll be running it straight up the middle this morning - selling and preparing for pain. The SP500 will be overbought as we approach my intermediate term TREND target of 1,041.


Best of luck out there this week,






EWZ – iShares BrazilPresident 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 TechnologyTech 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.


QQQQ – PowerShares NASDAQ 100We 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.


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. 





XLP – SPDR Consumer Staples – We shorted XLP on a bounce on 6/21. One way that investors chase a bearish USD is buying international FX leverage in global consumer staples. Shorting green.


DIA  – Diamonds Trust- We shorted the financial geared Dow on 7/10, 8/3, and 8/21. 


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.




12.1 million people visited Macau during the first seven months of the year, 11.9% less than in the same period of 2008, according to official data released by the Statistics and Census Services.  Visitation from the mainland fell by 17.6% for the year through July for a 5.9 million people.  Visitors from Hong Kong, Taiwan and Malaysia also fell by 2.4%, 6.6%, and 30.1%, respectively.  The number of visitors from Japan increased 1.1% to about 194.7 thousand, while visitation from Thailand also increased by 3.8%. 





Guangdong residents making trips to Macau under the individual visitation scheme may soon be able to secure visas more often - once per month rather than the current limit of once every two months, according to the Macau Travel Industry Council. 

President of the MTIC, Andy Wu Keng-kuong, said that tour operators in Macau had been expecting Guangdong to relax visa restrictions following the October 1 National Day celebrations.  He stated that it is not typical for the authorities to make an official announcement, but a traveler may experience a different wait time for visa applications to be processed and accepted.  However, an employee of a Shenzen travel agency told the SCMP that she had not yet heard of any policy change.





eSun Holdings Limited announced that it is terminating its JV agreement with Taubman Centers Inc. to develop Studio City.  The statement, released last Friday, said that the agreement had been terminated due to a number of deadlines not being reached.

Sporting Goods: Inventory Building

With results out of DKS, FL, and HIBB, we got a nice snapshot into where this industry stands. Bottom line is that inventory is building across the board. Not good. Retailers are shifting to lower-price performance shoes, and are giving new brands a shot. KSWS, PSS and UA stand out on the positive side. Nike and DKS are Neutral to negative. FL and HIBB are scary.


Bottom line here is that inventories are growing too fast. Period. All three retailers had their respective sales/inventory spread go the wrong way. Yes, some look better than others – DKS better, FL horrible.  But this Street is not a good one. The single most notable call out is that the retailers are shifting towards lower price point product, and sound like they are giving smaller technical brands a shot at success. The only non-technical call-out of consequence is FL already making noise that they had cut too deep into their KSWS positioning. This plays into our thesis for KSWS. It also gets us more comfortable with PSS – not only because of Saucony and Sperry (which is doing well), but it validates PSS’ price point positioning (which these other brands still can’t touch with a 20 foot pole). All-in, this is a slight negative for Nike. Let’s not be sensationalistic here… US footwear is less than a quarter of the company’s business, and the recent trajectory is already weak (i.e. no surprise to anyone). But inventory building broadly in the channel, price points shifting down’, and Nike’s largest US customer changing the CEO guard (and likely to find a way to allocate more space to new brands), I still can’t justify being early on this one given the growth profile (or lack thereof).


Sporting Goods: Inventory Building - Sporting Goods SIGMA


Key Points:


Notable thematic trends:


Fashion vs. Performance: FW DKS noted the benefit of less exposure to fashion while FL & HIBB commented that they will be shifting their respective mixes towards performance given the dramatic slow-down in fashion demand.


High vs. Moderate Price: As higher priced shoes become increasingly stressed, all three retailers are focused on increasing offerings  at moderate price points.


Domestic vs. International:  With DKS and HIBB rooted domestically, FL was the only one of the three able to comment on international business, which outperformed in Q2.  While U.S. sales were down mid to high teens, Europe and Canada was down low single digits with Asia Pacific posting high single digit sales growth.


Lateral Call Outs:


KSWS (+): branded and typically more moderately priced (specifically mentioned positively by FL)

UA & NKE (+/-): thematic trend of focusing on performance/technical implies less of a hit for UA & NKE, however, this will be offset in part by a greater focus on moderately priced footwear. While UA has commented that it will produce shoes at broader range of price points, NKE’s AirMax remains the priciest shoe in the shop.

NKE (+): basketball continues to be the standout category in footwear

VFC/North Face (+): HIBB noted that it will be up measurably in back half and in many more doors y/y



FL: has the benefit of a new CEO taking the helm at a (another) low point in the company’s performance.

  • We’d have thought that Serra would have printed a better quarter as his tenure comes to a close – regardless of the environment. Our sense is that the ‘cleansing’ would not come until all the skeletons burst out of the closet after Ken Hicks has an offensive plan for the company. We can’t rule out that this is yet to come.
  • Based on Hick’s prior experience at JC Penney, we expect to see a revamped apparel program including much improved private label merchandise. That’s obviously not great for the incumbant brands.
  • Management commented that its posture on moderately priced footwear is officially under review along with the rest of the business. We suspect that it will take some time for Hicks to adjust the portfolio, but are confident that the proportion of lower priced styles and brands will increase next year.
  • FL has been pruning its store base, but we would be surprised if it got more aggressive given the success of other retailers in lowering lease costs.


DKS: is showing signs of its former self – kinda. Results are still horrendous on an absolute basis, but they are trending far better than the group.  Easing inventory and gross margin compares don’t hurt.

  • DKS stands out as one of the only players in this space that is taking up investment spending while others pull back. The company is accelerating West Coast expansion both in acquiring former Joe’s stores and increasing penetration in Southern CA), investing in e-commerce, and building out marketing/merchandising IT infrastructure (originally postponed in ’09) to drive future growth.
  • We debate here amongst our team as to whether this is good for DKS or not (McGough more negative, with the rest of the team positive). We all like when companies spend when the environment is telling competitors to stop writing checks. But Dick’s has a horrific track record of generating any kind of ROI on either acquisitions or organic investment.
  • In addition to the signal of increased confidence in the top-line, we know that pressure from Golf Galaxy clearance activity is expected to subside after Q3 at the same time that gross margin compares get progressively easier (down 190-230bps) over each of the following three quarters.


HIBB: is more clouded as credibility and volatility are now keys to this story.  Even with the rebound in 3Q results, a sustainable improvement in trend remains less clear.

  • Consistent with FL, HIBB appears to be setting the bar low given their commentary that they “want to be absolutely conservative.”  . 
  • Upside is not a given, however, as it would require comps at the high end of the range (flat) in addition to gross margin expansion at the same time the company is shifting to lower priced product.3Q comps are  currently running at a –LSD decline. About 10% of stores should still benefit from a tax free shopping holiday, which could help get to numbers in aggregate. But this is not a slam dunk.
  • On a relative basis, sounded like performance footwear fared better than fashion.  Go forward focus will be continued on performance and more on price.  Fashion appears to be where the risk lies.  More dollars will be allocated to the technical piece going forward vs. fashion (where sell-throughs have slowed).  - KSWS is becoming more performance oriented and FL specifically noted that they need to step up purchasing of the brand.
  • Markets with back to school in full force are showing less price resistance.  Customers willing to pay for what they need.
  • Technical running is being planned up and will get more “open to buy” orders. –Good for KSWS, UA and even Saucony (PSS).


Sporting Goods: Inventory Building - SG CompTable 8 09


Sporting Goods: Inventory Building - SG CompChart 8 09


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