PSS: Numbers Need To Go Higher

Black Book thesis solidly intact. No changes to our estimates on PSS or the view we articulated in our Black Book (let us know if you are interested in a copy) about how and why PSS has $2.00+ in EPS power over 2-years – about 65% ahead of the Street’s expectation.


The quarter in itself was kind of a yawn. Probably more puts than takes – which is one thing we outlined in our Black Book, but it was definitely not anywhere near as bad as it could have been given the circumstances and the sentiment. Comp was right in line (but still weak at -7.3%), GM a 100bps worse than we had in our model.  SG&A in line.  Tax rate helped, but will be a benefit on an ongoing basis. Working capital and cash flow was really solid – the CF trajectory was better than I modeled, and inventories are in check.


As for the outlook, the only thing that was new to me was that mgmt quantified a 20%+ decline in rent on leases being renegotiated during the course of business. This is above the mid-teens rate I had in my model (you do the math – rent is 15% of COGS, and 20% of stores up for renewal per year at 20% price cut).


Rubell probably kept earnings in check for 3Q by noting that product costs (68% of COGS by my math) will be down only low-single-digits in 3Q and then will accelerate to 10%+ in 4Q.  I think the 3Q is a low-ball number. Even with better meat on the bone from PSS on financials, my sense is that numbers won’t go up anywhere near as much as they should.


As for other items that lead to my 6% margin and $2.00 in EPS power number… nothing really changed. Own out of the print, not into it.  This continues to be a BIG idea.


 PSS: Numbers Need To Go Higher - PSS S 9 09

Europe: When Boring is Good

There are a number of European Data points out this week worthy of mention. While most of the figures below are decidedly rear-view, they underscore the sequential improvements in the region’s fundamentals. We’re currently not invested in Europe.


Eurozone Data-


Q2 GDP down 0.1% quarter-on-quarter   (after -2.5% in Q1)

Q2 Household expenditure up 0.2% Q/Q   (after -0.5% in previous quarter)

Q2 Exports decreased by 1.1% Q/Q   (from -8.8% in Q1)

Q2 Imports down 2.8% Q/Q   (after -7.8% in the previous quarter)


  • Bullish data, especially with a positive external balance (surplus) of 19 Billion EUR for the Eurozone in Q2.

(source: first estimates from Eurostat)


CPI down 0.2% in August Y/Y (-0.7% in July Y/Y)


  • The new data is in line with our thesis that the strong economies of the Eurozone are importing deflation. This deflationary level is stable in the near term with interest rates low and growth slowly returning; we expect to see annual inflation compares shift towards the positive in Q4 due in part to energy prices a year earlier.  Eurostat issued just its initial CPI estimates for August so we don’t have component stats yet but, as an example, Germany, the Eurozone’s largest economy, saw food prices fall between 0.9%-1.7% in August M/M, a clear benefit for the consumer.

Industrial Producer Prices down by 0.8% in July M/M (or -8.5% Y/Y)


  • Producers are also benefitting from deflationary energy costs sequentially. On an annual basis, prices in industry fell 4%; in the energy sector alone prices fell 20.2%. 

Unemployment rose 10bps to 9.5% in August


  • We expect this number will rise (esp. as cash for clunkers winds down (Germany, today) and stimulus packages fade). As unemployment pushes up look for confidence numbers to erode, ending months of sequential improvement.  Retail sales continue to be a poor gauge of economic health, however as unemployment rises look for the consumer to pull back in spending. 

PMI Manufacturing rose to 48.2 from 46.3. Final PMI Services comes out tomorrow, but initial estimates showed improvement and composite PMI reached the 50.0 mark in August, the line dividing contraction from growth.


Business and consumer confidence improved for the fifth straight month in August


Industrial Orders jumped +3.1% in June M/M


As we prepare to reinvest in Europe if attractive entry points arrive we’ll have our Eye on both country and regional performance. For now, the data above, though rear-view, clearly shows improvement across a number of metrics. As noted, a rising unemployment rate and dwindling stimulus packages may create a stumbling block in market performance on the TREND duration.  Sometimes the best thing an investor can do is do nothing. That’s where we are at, for now. Stay tuned.



Matthew Hedrick



The “grass roots” survey, which represents a geographic mix of stores across the U.S., indicates that July same-stores sales growth continued to improve from June levels with 76% of respondents reporting a sequential improvement.  In fiscal 3Q09, U.S. reported comparable sales declined 6% (better than the 8% decline in 2Q09) and management stated that the numbers got stronger throughout the quarter.  Based on that statement, it is reasonable to assume that June same-stores sales were about -5% or better, and July looks to have improved from that level. 


Over 75% of respondents reported flat to positive same-store sales growth.  Overall, the survey indicates that same-stores sales growth was flat to +1%, which like in past months seems too good to be true.  Providing a haircut to the numbers would put comparable sales growth at -2% to -3%, which at first look also seems aggressive, but it is important to remember that SBUX is lapping a -8% number in the U.S. from 4Q08 so comparisons definitely get easier.  A 3% decline in U.S. same-store sales for 4Q09 would represent a 2-year average trend similar to that of 3Q09. I continue to think that it is more important to focus on the numbers on a directional basis, rather than looking at the absolute numbers, and directionally, the respondents are seeing better results in July than they did in June.


As we stated following SBUX’s 3Q09 results, MCD’s McCafe does not appear to be negatively impacting SBUX’s sales.  The survey’s findings actually seem to mimic CEO Howard Schultz’s comment that the increased level of advertising around the QSR coffee segment seems to be benefiting SBUX by increasing trial with more respondents saying that MCD’s premium coffee initiative is having a positive impact than those experiencing a negative impact.  



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US Dollar Update: Pandering Politicians

After having a huge move to the upside yesterday, the Buck is Burning again here intraday. Why? That’s easy:


1.       Timmy Geithner came back from wherever he was and was back on TV

2.       The FOMC minutes were released


The first point is more of the same. The Chinese laugh at this guy; he’s a squirrel hunter with little to no credibility in supporting America’s currency. The second point is the more alarming one. These puppets at the Fed A) don’t get paid and B) must be aspiring to get paid.


The only way to achieve B) is, ostensibly, to pander to the political wind. Of course, when any outside Chinese auditor looks at this they must think they are looking at Japan. Nevertheless, here’s the upshot of the Fed’s Minutes:


  1. There was “uncertainty” about nearly everything other than the Great Depression Part 2 no longer being a certainty
  2. Several members indicated “concerns about counterparty risk and access to liquidity” becoming a problem again
  3. I didn’t understand the rest


Point 1 really amplifies the Japanese like credibility crisis our economic “experts” perpetuate. These guys seriously have no idea or they are willfully blind. The second point is the more alarming point. With the TED Spread (the measure of global counterparty risk) hitting a new cycle low this morning at only 20 basis points wide; 3-month US Treasury yields at 0.13%; and 3-month LIBOR hitting new lows at 0.33%, these people have to be seriously kidding me.


With Japanese style money this cheap, so are the opinions of these Pandering Politicians.


The US Dollar is hitting her lows of the day here, trading down -0.49% at $78.37, breaking our immediate term TRADE line again. In the immediate term, this will stoke the REFLATION trade. In the long term, if this politicization of the US Federal Reserve continues, our Buck will Burn.



US Dollar Update: Pandering Politicians - BURN


Managing Risk: SP500 Levels, Refreshed...

I am getting a lot of questions this morning. That means the players in the market are confused. They should be.


Right now we have a very dynamic daily setup in the SP500 where the immediate term TRADE lines (buy 994, sell 1004) are only 1% apart (see chart). Tight is as tight does, so for now, trade that range.


A close and continued breakdown of the SP500 below the 1004 line keeps the intermediate term TREND line in play (947). Whereas a close above 1004, and a breakdown of the US Dollar Index below the $78.54 level, puts 1020 in play again on the upside.


The topside of this risk management picture is, of course, a lower-high, versus the YTD closing high of 1030. On the margin, that’s bearish. Fundamentally, I do see a bearish unemployment report coming on Friday. So managing risk with tight stops today/tomorrow is paramount.



Keith R. McCullough
Chief Executive Officer


Managing Risk: SP500 Levels, Refreshed...  - a1


Trends Looking Good For Sports Apparel

The second half of 2009’s back to school season appears to be picking up with industry sales positive and incrementally better than the previous week.  As a reminder, we don’t look at the absolute growth in these SportscanINFO numbers given our view that the sample is somewhat flawed. But the fact is that it is a consistently flawed sample, and as such the directional changes have proven to be quite relevant. The bottom line here is that the industry’s total dollars are picking up steam. Is it coming at the expense of price point? Yes, somewhat. But the ASP trends are nowhere close to what I’d consider panic levels.


Total industry sales grew by 3% driven by growth in Sport Retailers and Family Retailers while the Discount/Mass Retailers channel continued to underperform.  All channels sequentially improved on sales while ASP growth remained positive across the board.  Major deltas between this week and last week are the sales jumps of 5% by Sport Retailers and Family Retailers and the 15% jump in ASPs by Discount/Mass Retailers.


Full Line Sporting Goods, Mid-Tier Department Stores, and Family Footwear stores were positive for the week with Athletic/Urban Specialty stores sequentially improving but remaining negative.  All geographic regions of the US were positive with the exception of New England, the Middle Atlantic, and the East North Central who were all down less than 5% which was an improvement.


Trends Looking Good For Sports Apparel - Sports Apparel Table


Trends Looking Good For Sports Apparel - Sports Apparel   chart


Trends Looking Good For Sports Apparel - Sports Apparel ASP chart