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Is it me, or is online Luxury retail setting itself up to have wide ranging implications in 2010? Following in the footsteps of online fashion off-pricers Gilt, Ruelala, and eLuxury is the introduction of The Fairest. The site aims to bring invitation only, limited time sales events to the beauty sector. While offering steep discounts on premium beauty products, the site also marries content to ecommerce in the form an extensive blog. Again… content wins, and legacy distribution needs to be proactive and strategically astute about how not to get run over. My prediction is that Macy’s, Sak’s and others start scooping up these little .com assets starting in 1Q as the retail M&A wave picks up steam.




Some Notable Call Outs


  • In a unique twist on recycling, Target is taking the vinyl used in its Times Square billboards and turning it into limited edition totebags. As the billboards are refreshed, the recycled bags will be available for sale on Target.com.


  • Despite posting strong results and successfully clearing through excess inventories, J Crew is hosting its 5th sample sale in Manhattan beginning September 10th. The merchandise is being advertised as true samples, so size and selection are expected to be limited.


  • A Craigslist advertisement seeking employees for a new Best Buy to be located in Union Square (NYC) reveals that the store will be open 24 hours. This is the first store in the chain slated to be open 24/7. The store will fill a vacant Circuit City and will be located above a new Nordstrom Rack (formerly the Virgin Megastore). This is one landlord who is benefitting from a tenant upgrade.




-The wealthy are more conservative with shopping in the consumer environment - Affluent consumers are being thriftier and are more concerned about U.S. economic recovery than health care reform, according to a new study. The report by BIGresearch of Columbus, Ohio showed consumers with household incomes of at least $100,000 or more were making numerous concessions to the economic downturn. Supposedly its become more and more chic to save money, and the affluent talk about coupons and sales at the country club now. Among consumers with household incomes of $150,000 or above, 49.5% described themselves as being “more practical in their purchases” compared with 31.5% of those surveyed two years ago, and 44.2 % said they were more budget-conscious, up from 25.1% in August 2007. The percentage of respondents saying they only bought apparel on sale moved up slightly, to 15% from 13.7%, but those saying they made greater use of coupons more than doubled, to 30.8% from 15.1%. Apparel purchasing was more affected among those in the $100,000-to-$149,000 household income category, with 21.4% indicating they were only buying clothes on sale, compared with 15.7% in August 2007. <wwd.com/business-news>


-An exciting trend could emerge from the upcoming spring runway shows: relevance - That is exactly what stores are eagerly expecting with the onset of the collections, even if they’re buying a lot less inventory. And brands are striving to deliver it, along with lower prices. “In the pre-collections, we saw an emphasis on more wear-now products and an attempt to really understand the price-value relationship,” said Joseph Boitano, Saks Fifth Avenue’s group senior vice president and general merchandise manager of women’s. “I believe we will see some serious fashion down the runway — realistic prices, good quality, beautiful fabrication, a lot of creativity and some very big happy surprises,” predicted Stephanie Solomon, Bloomingdale’s vice president and fashion director for women’s ready-to-wear and accessories. The biggest relevance will be with reality-based prices. Designers appear to be thinking strategically, by merchandising collections with a greater variety of items and price points, while demonstrating less dependence on a classification or two that may have historically sold well. For months, retailers have been pressing designers for change to better reflect their customers’ lifestyles and, even more, desire to spend less. For spring, retailers will allocate a greater percentage of the overall budget to the highest-margin categories — which include bridge and contemporary women’s sportswear, private label, men’s accessories, women’s shoes and accessories — and to the best performing classifications within each designer or brand. <wwd.com/retail-news>


-Book cracks the case for what women want on a consumer level - In researching the book Women Want More, the authors found brands such as Apple, Adidas and Nike were named most often by women as “catering to their needs, making them feel the best and capturing their imagination,” Silverstein said. “They’re not classical female brands. They are all affordable luxuries.” As digital, activewear and athletic shoe brands are ringing true, Silverstein said, “there are huge opportunities” for other marketers to address women’s desires. The authors found what women want more of is time, money and love. “Above all other issues, women everywhere intensely feel a lack of time in their lives and the pressure of trying to contort time to accommodate everything they want to achieve,” Silverstein and Sayre write. In the realm of apparel consumption, women’s desire for more time is now “trumping” their longtime priority on fit as the primary element influencing a purchase, Silverstein said. If a woman doesn’t make the time to shop, how a garment fits becomes irrelevant.  In short, the days when shopping was a popular leisure activity are continuing to fade. “Billionaires are now role models for women,” Silverstein said. “It is fair now for women to want to be billionaires.” If they expect to win the attention and money of these well-educated, economically powerful people “marketers will have to look at the purchasing cycle from the consumer’s point of view,” he said. From this vantage point, the question becomes how to shorten the time in which, and increase the ease with which, women decide to buy something, actually purchase it, and begin using it. Among those answering the call in the apparel sector has been H&M, with its quick-and-out offers of exclusive, well-priced designer collections. <wwd.com/retail-news>


-Skateboarding pushes the limits of fashion - From Nike and Sport Chalet to DC Shoes and Vans, men’s skate brands are extending their retail reach and launching new clothing lines. Nike Inc., the world’s largest athletic apparel and footwear company, unveiled a 3,400-square-foot shop in Laguna Beach, Calif., in July to highlight its four action sports brands: Nike 6.0, Nike SB, Hurley and Converse. Skate shops seem to be more resilient than their surf counterparts during the recession. A study commissioned by Surf Industry Manufacturers Association, an Aliso Viejo, Calif.-based trade group, said skate-focused stores tallied sales of $2.85 billion last year, which was the same as in 2006, the last time the report was issued. Surf-focused shops, however, posted a 6.8 percent decrease in sales to $2.47 billion in the same period. In those two years, 156 surf doors shuttered, resulting in 7.4% fewer stores. The skate sector has “been one of the highlights in this very slow economy,” said Paul Smedley, senior merchant of apparel at La Canada, Calif.-based Sport Chalet. Sport Chalet reported a double-digit increase in sales at its skate-centric shop-in-shop, Project Fifty Nine, which is in five of its 18 stores across the West. Double-digit growth is also giving a boost to Vans as it solidifies its strength in skatewear. Despite seeing fewer wholesale accounts because of the economic downturn, Luciano Mor, category director for men’s apparel at Vans, a Cypress, Calif.-based subsidiary of VF Corp., said skate has been a bright spot. To be sure, the skate sector hasn’t been immune from cutbacks. In a move to trim costs, Quiksilver eliminated about 10% of the positions at subsidiary DC Shoes in August, after layoffs at the flagship brand and Roxy. But unlike surfing, which requires proximity to the beach and optimal water conditions, skateboarding is accessible to a larger and diverse group. <wwd.com/retail-news>


-Sri Lanka incentivizing investments in manufacturing - The Sri Lankan Board of Investment (BOI) has invited garment companies to invest in the Northern region of the country and has asked the Joint Apparel Association Forum (JAAF) to suggest incentives to attract investments in these areas. Apparel manufacturers have voiced out that they are willing to invest in the Northern region where companies can enjoy a lower labour cost advantage but are waiting for clear policy directives and plans of the government in the meantime regarding what kind of investor facilities will be provided, according to the Secretary General of JAAF Rohan Masakorala. Incentives suggested by JAAF include tax-free holidays and duty-free vehicles, both of which can kick start investments in the former war-ridden region. Garment companies are also urging the government to identify and allocate suitable land to set up their factories, while prospective investors should be allowed to buy land based on a government valuation. <fashionnetasia.com>


-UK traffic down in August - Hot weather and the Ashes cricket tournament meant footfall in August dropped back 4.1% - the steepest decline for the past seven months. <drapersonline.com>


-Payless ShoeSource is expanding to Russia - PSS signed an agreement with current franchisee partner M.H. Alshaya Co. to open two Payless stores in Russia beginning in 2010. Alshaya is Payless' franchisee partner in the Middle East and has opened stores in the United Arab Emirates, Saudi Arabia and Kuwait. The two companies said that Russia, with a population of 140 million people who have rising household incomes and are attracted to affordable fashion, is a strong fit for Payless. About five stores will bow there late next year, with a minimum of 90 stores in about five years and at least 300 expected in the long term. <wwd.com/footwear-news>


-Lululemon introduces new brand for young women between 6 and 12 - lululemon athletica inc. is introducing ivivva athletica, a new brand the vertical retailer said is focused on 6-12 year olds and will feature technical, multi-functional apparel that will include many of the design features found in lululemon product. <sportsonesource.com>


-Barneys Said to Weigh Debt Swap, Bankruptcy as Holt Renfrew Shows Interest - Barneys New York is weighing a debt restructuring or bankruptcy filing that may wrest control from the Dubai government-owned firm that loaded it with debt in a 2007 leveraged buyout, three people briefed on the matter said. <bloomberg.com>


-EBay Will Sell Skype Stake to Silver Lake-Led Group for About $2 Billion - EBay Inc. agreed to sell 65% of its Skype Internet-calling unit to an investor group led by Silver Lake for about $2 billion to focus on reviving sales at its main e-commerce site. <bloomberg.com>


-American Apparel ad banned - A “provocative” fashion advert for American Apparel featuring a model showing part of her nipple has been banned because the model looked like a child. In six photographs the model wore little make-up and posed in a fleeced hooded top and shorts, revealing more skin in each picture until she partially exposed a nipple with the top unzipped. American Apparel argued the pictures were supposed to show different fashion looks, and the model was actually 23 years old. <retail-week.com>


-Blue Nile aims to sparkle with redesigned web site - Online jewelry retailer Blue Nile launched its first redesigned e-commerce site in 10 years with new features including larger imagery, expanded product detail and improved site search capabilities on category pages. <internetretailer.com>


-Sam’s Club steps into web-enabled foot-scanning kiosks - The wholesale club division of Wal-Mart Stores is testing in several stores web-enabled kiosks from eSoles that are designed to scan customers’ feet and match them with custom-fitted footwear insoles. <internetretailer.com>


-Amer Sports lowers FY guidance, exploring sale of its cycling brand - Amer Sports said it is currently exploring alternatives in respect of its cycling business Mavic, including a divestiture. It also warned that current estimates for FY09 are too "too optimistic" given current economic conditions while unveiling a €150 million ($215 million) rights issue to bolster its balance sheet. <sportsonesource.com>


-Spyder Active Sports hires new VP of Sales and Marketing - Russ Rowan has been named vice president of sales and marketing for Spyder Active Sports. Rowan’s background includes tenure at other worldwide performance apparel and action sport brands such as Helly Hansen, Burton, and O’Neill. <sportsonesource.com>


-Footwear brands Altama and Moskito branch out into new categories - As some footwear companies continue to tighten their product offerings in a tough economy, brands such as Altama and Moszkito are instead venturing into new categories. Military footwear producer Altama, a division of Tactical Holdings, is giving military personnel a chance to get step into something comfortable after a day in their combat boots. The Atlanta-based company is moving into new footwear territory with the introduction of Panamoc, a gored slip-on designed for everyday wear. The shoe features the brand's signature Sand Shark slip-resistant outsole, dual-density orthotic footbed and water-resistant leather and nubuck uppers. Available in six colors and materials, the shoe retails for $99. The men's Panamoc, available in medium and wide widths, will hit stores in October, with the women's, available in a medium width, will follow in December. It is being targeted to both military retail outlets and mainstream retailers. In a separate move, Moszkito, based in Scottsdale, Ariz., known for its collection of over-the-counter footbeds and Archy sandals with built-in arch support, has added a companion series of closed-up styles for men and women for fall. Like the sandals, the new casuals include four styles for women and four for men, all with a removable footbed with 16-millimeter arch support, retailing for $80 to $85. Rounding out the assortment are two styles each for men and women that come complete with a set of three footbeds in varying arch heights, retailing for $110 to $120.  <wwd.com/footwear-news>


-Union-backed WakeUpWalmart.com on Tuesday took aim at Wal-Mart Stores Inc. over health care - The coalition of unions, consumer groups and other organizations launched two health care-focused advertisements and outlined an agenda to address broader issues of workers’ rights, corporate responsibility and environmental issues at Wal-Mart. The push by WakeUpWalmart.com comes as the retail giant has waded into the health care debate this summer. In July, Wal-Mart came out very publicly in favor of a controversial employer mandate provision in health care reform legislation being drafted on Capitol Hill. The endorsement, made in conjunction with the Service Employees International Union, ruffled feathers in the retail industry but garnered positive reactions from some supporters of the employer mandate. With Wal-Mart front and center on the health care debate, WakeUpWalmart.com launched ads calling the retailer out for not offering employees enough health care coverage. The ads conclude with, “Wal-Mart can afford to be a better employer. Now would be a good time to start.” The ads highlight what WakeUpWalmart.com calls “Wal-Mart’s failure to cover 700,000 of its employees, nearly half its workforce.” The ads were posted on the coalition’s Web site and are expected to air on television in Chicago, Boston and Philadelphia starting this week and elsewhere the following week. <wwd.com/business-news>


-Columbia sues former footwear designer - Columbia Sportswear Co. has filed a lawsuit against its former lead footwear designer accusing him of working for competitors, including Crocs Inc., while it employed him. In a complaint filed Aug. 24 in a Multnomah County circuit court in Portland, Ore., the apparel maker alleges Brian O’Boyle had set up his own design business, 1 Pen Inc., in order to do freelance work for other companies. The arrangement violated an employee confidentiality agreement he signed in 2003, the company alleged. According to Columbia, O’Boyle undertook more than $50,000 worth of projects for Crocs and other competitors and incorporated “Columbia design elements” into his outside work. The company said he left in July but declined to disclose the circumstances of his departure. “Some or all of the competitive designs were made from Columbia’s offices and computers, and during Columbia business hours,” the sportswear firm said in its complaint, further alleging O’Boyle did not disclose the full breadth of his activity when it confronted him. O’Boyle could not immediately be reached for comment, as a phone number listed for him had been disconnected. Columbia is seeking an injunction barring O’Boyle from misappropriating its work, disgorgement of any profits ruled unjust, legal costs and other, unspecified damages. <wwd.com/business-news>


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Danger Ball

“A little knowledge is dangerous. So is a lot”

-Albert Einstein


My beautiful wife, Laura, played lacrosse in college… so in addition to a lot of pucks kicking around our house, we have lacrosse balls. My son, Jack, likes to throw these balls around. I’ve finally instilled risk management in his head however. He recently started acknowledging that these are “Danger Balls.”


For those of you who were in the game yesterday, I sincerely hope you saw the Danger Balls that we were calling out intraday. There were more of them in one day’s game than I’ve seen in my notebooks going all the way back to February.


Last week I titled a note, “Ball Underwater.” That Ball is the US Dollar. After Buffett, PIMCO, and their tail chasers rolled out the consensus barrel of US Dollar bearishness, that Ball had nowhere to go but up, so I covered my US Dollar short position and started selling down my exposure to commodities and reflation oriented equities (currently I have only a 3% Asset Allocation to Commodities, and it’s all in Gold, GLD).


When you hold a dominant global macro factor underwater for an extended period of time, now you know what happens. That ball shooting straight up yesterday was a Danger Ball! Dollar up = mostly everything priced in Dollars straight down.


As I watch the “everyone is out this week” C-team on CNBC this morning attempt to explain why the US market got hammered intraday (no one on their A-team would make my practice squad), I can only shake my head at what the Chinese must be thinking. If this is what American financial analysis is considered to be, this is embarrassing.


Last night, Larry Kudlow, who was a B-team sell sider way back when to begin with, wasn’t any better. It’s both shocking and sad that I have yet to see one of these manic media mavens actually call out the reason why we rolled over, hard, intraday. That reason was US Prices Paid.


Within the ISM Manufacturing report for August (which by the way, Depressionistas, was expansionary) is this leading indicator that we macro people use called the ISM Prices Paid report. Yes, that’s what real American companies do when they buy stuff. They pay for things in US Dollars.


The Prices Paid reading came in at what we titled in an intraday Macro note as a “moon-shot.” At a report of 65, not only was this an +18% sequential monthly acceleration from July, but a 260% year-over-year reading versus Q4 of last year!!


Who cares about Q4? Surely anyone who is attempting to invest ahead of it! While we are still in Q3, and a lot of market players want to believe that because they are on vacation that the market “isn’t doing much”, yesterday was a stiff reminder that Mr. Market waits for no one.


Danger Ball can also be subbed for what we have called a Reflation Rotation. This is simply the morphing of year-over-year deflation readings into absolute year-over-year INFLATION readings. While I don’t think you see those in the US CPI or PPI reports until October, yesterday’s Prices Paid report was one more leading indicator as to the probability of my call coming to fruition. Yesterday’s stock market move was discounting the probability of one word – stagflation.


At Research Edge we subscribe to the principle of responsibility in recommendation. An ex-Goldman Partner actually told me that’s what we do, and I’d like to thank that fine gentleman for giving us the compliment. For those of you who don’t get our intraday Macro calls, email . They aren’t free, but they are good at telling you what winning teams see, real-time, in the marketplace.


After the 10AM ISM release, here are the headlines that came out of our Research Edge Black Box:


  1. Just Shorting
  2. The “V” I don’t See
  3. VIX: That Ball Underwater Pops
  4. The Buck: That Ball Underwater Pops


The point here isn’t to take a victory lap. The point is to remind you that there are plenty of teams in this business who have a real-time risk management process. Managing risk doesn’t stop with Wall Street’s vacations. Subscribers to our exclusive network knew exactly what we think and when. They have a proactive plan that they can trust. They know I’ll be accountable to it at 4AM every morning.


Again, this is not a victory lap. It’s our simpleton submission that we are here to help manage risk. So let’s roll through the You Tube replay of yesterday.


  1. We started shorting stocks after that ISM report, when the stock market was up
  2. The “V” I don’t see, was that which the same revisionist economists who called for a Great Depression 6 months ago are calling for now
  3. The VIX (volatility) Index popped; breaking out intraday about both my immediate term and intermediate term TRADE and TREND lines
  4. The US Dollar Index popped; breaking out intraday above my immediate term TRADE line


Since 2 of the most bearish charts in all of global macro that supported one of the sharpest 6 months rallies in US stock market history were the VIX and the US Dollar, these 2 Danger Balls mattered, big time.


The confluence of the aforementioned fundamental catalyst (ISM Prices Paid), a breakdown of the SP500 through immediate term TRADE support for the 1st time since June, and breakouts in both Volatility (VIX) and the US Dollar is what it is. I have no idea how the manic media can wake up this morning dazed and confused by this.


Mr. Market got the Danger Ball memo, real time. Yesterday’s volume was a monster. My daily broad market volume study registered a +33% meltup in day-over-day volume! Market smack-down day on accelerating volume = Danger Ball.


Here are the Danger Ball levels, refreshed for last night’s closing prices:


  1. SP (TRADE resistance)
  2. Nasdaq 1991 (TRADE resistance)
  3. VIX 27.77 (TREND support)
  4. USD $78.54 (TRADE support)


Again, that’s a simple 4-factor risk management model to use as your heat map. Yes, everything can change and become rosy again, but I don’t get paid to be bullish or bearish. Our subscribers pay me to manage risk.


The right call in August was to buy every dip. That’s no longer my call. That said, I’m not bearish like I was in September of last year either. Our most invested position in the Asset Allocation Model came in August when we dropped our position in US Cash down to 23%. Today we have a 54% Cash position. Today may be a beach day for some, but when Jack wakes up in an hour, his Dada is going to be telling him it’s a Danger Ball day. No beach.


Best of luck out there today,






XLV– SPDR Healthcare We’re finally getting the correction we’ve been calling for in Healthcare. It’s a good one to buy into. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.


EWH – iShares Hong KongThe current lower volatility in the Hang Seng (versus the Shanghai composite) creates a more tolerable trading range in the intermediate term and a greater degree of tactical confidence.


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.


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.





LQD – iShares Corporate Bonds – Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates that bonds will give some of that move back. Shorting ahead of Q4 cost of capital heightening as access to capital tightens.


EWJ – iShares Japan –While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. 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.

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Macau’s six gaming concessionaires generated US$1.5 billion or MOP11.27 billion in gross gaming receipts last month, the highest gaming revenue ever recorded locally, according to a source of the Gaming Inspection and Coordination Bureau (DICJ).  Last month’s gaming revenues rose by 17.3% compared with the same month as last year.  On a year-to-date basis, gross gaming receipts are down 6.8% on a year-over-year basis.

According to the cited DICJ source, SJM was again the leader with 26% of the market share.  LVS and MPEL followed with shares of 24% and 16%, respectively.  Wynn’s revenues amounted to 13% in August, with MGM and Galaxy taking 11% and 10%, respectively.

The Macau Post Daily also cited the Xinhua News Agency as stating that travel agencies in Guangdong had indicated that the mainland’s current travel-permit curbs for travel to Macau “will be relaxed in the coming months”.



The Hong Kong Economic Journal reported today that Wynn Resorts Ltd. plans the raise US$1 billion in an initial public offering of its Macau assets on September 25.  The Journal cited an unnamed source.  Wynn plans to start a roadshow for the IPO on September 21, after receiving approval from the Hong Kong stock exchange next week.

Dow Jones Newswires reported that investment banks Morgan Stanley, J.P. Morgan Chase & Co. and UBS AG have been appointed to handle the IPO. 


Darden is scheduled to report fiscal first quarter earnings on September 29 after the market closes and sales trends will not look good.  The company’s same-store sales growth had fallen off rather significantly on a 1-year basis in May (last month of fiscal 4Q09) at its two biggest brands, Red Lobster and Olive Garden.   Judging from what we have heard from other companies about trends in June and July and Malcolm Knapp’s numbers, which show that casual dining comparable sales growth got sequentially worse in June and July (approaching December levels), DRI’s sales results may come in worse than expected.  DRI did not provide same-store sales guidance for the first quarter, but said that comparable sales growth at Olive Garden, Red Lobster and LongHorn Steakhouse on a blended basis would be flat to down 2% for the full-year.  Fiscal first quarter numbers are likely to come in below that full-year guidance range. 


On its fiscal 4Q earnings call in June, management stated that from a sales perspective that it was seeing some variation in trends from month to month but that it was not experiencing any deterioration in June.  In making that comment, I think the company was referring only to 1-year trends because DRI faced difficult sales comparisons in May, particularly at the Olive Garden, as a result of the stimulus checks that went out in May 2008.   Management pointed out that in June 2008, gas prices spiked north of $4 so easier comparisons are at play in June relative to May.  On a two-year basis, however, I would expect sales trends to show a sequential slowdown from both May and the fourth quarter across all of DRI’s concepts.  With overall casual dining sales trends approaching December levels, no concept is immune.  Even the Olive Garden, which has significantly outperformed its peers, experienced a 4.5% decline in same-store sales growth in December 2008, and the Olive Garden’s gap to Knapp had already narrowed rather substantially in May.


This weak sales performance will not be unique to Darden, but Darden is one of the first casual dining companies to report June, July and August numbers (CBRL will report its 4Q09 numbers for the period ended July 31 two weeks earlier).  Even with sales slowing on a sequential basis, I do not think DRI will report an earnings miss relative to the street’s expectation for Q1 EPS of $0.66.  But, if we continue to follow the calendar 2Q earnings season trend, including the reaction to DRI’s fiscal fourth quarter results (ended May), of stocks going down despite positive earnings surprises, we could see DRI take a hit. 


The good news for DRI, however, is that the company provided such a wide full-year 2010 EPS guidance range of -2% to +8% that even if sales come in worse than expected, I do not think the company will have to take down its sales or EPS projections for the year.  That being said, I would not be surprised to see the street’s full year EPS expectation of $2.80 come down.  Given that we don’t experience a dramatic recovery in restaurant demand, a number in the $2.70-$2.75 range seems more reasonable. 


In fiscal 2009, DRI captured about $45 million of cost acquisition synergies and generated about $35 million of savings from business strengthening initiatives.  In fiscal 2010, the company expects to capture another $10 million of acquisition synergies and an additional $5 million of cost savings (primarily in the first quarter).  Although these cost saving initiatives will benefit earnings, the incremental savings are coming down on a year-over-year basis so it will become more difficult for the company to offset continued sales weakness in fiscal 2010.  This inability to continue to offset sales deterioration with an accelerated pace of cost cutting highlights one of the biggest headwinds for casual dining operators in the coming quarters.  

The Buck: That Ball Underwater Pops!

This is the most dominant driver of today’s macro market move. It’s driving the VIX higher and the SP500 lower.


Right after the ISM Prices Paid report (accelerating inflation) was released this morning, the US Dollar began to strengthen. Then, like our old friend Jimmy Braddock (Cinderella Man) coming back from the ropes, Pop, Pop, Bang! The US Dollar has put on quite a move. The Buck was a Ball Underwater.


In the chart below, we have painted the lines that matter:


  1.     Immediate term TRADE = $78.54
  2.     Intermediate term TREND = $79.81


While we respect that bottoms are processes, not points. We understand what it means when a fighter like Braddock starts to ring the market’s consensus bell. Reflation traders, it’s time to get out of the way. Dollar up = everything else down. Let this Ball Underwater go to where its inertia takes it. This is not a TREND, but it packs one heck of a TRADE punch.




Keith R. McCullough
Chief Executive Officer

The Buck: That Ball Underwater Pops! - usdi1

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