Retail Callouts (10/10): DG, FDO, AMZN, NKE, ZQK

Takeaway: Shorting DG is still the best way to play FDO merger. AMZN finally going brick & mortar. Nike’s full court press. Finally a ZQK activist.



FDO - 4Q14 Earnings


Takeaway: Sales were in line, (comps +0.3% vs 0.1%E), but Gross Margins missed considerably (32.9%A vs. 34.3%E), EPS missed by 5.5%, and inventories grew at twice the rate of sales.  But best of all was the company's guidance or lack thereof. We'll paraphrase here…[1Q will be challenging, but the investments made in '14 will set up an accelerated rate of sales and margins throughout the year. But in light of the merger, we won't give any more guidance].


The way we see it, when there are two companies who are in a bidding war to buy your company, that's exactly when most retailers would pull every lever possible to print the best (and perhaps inflated) earnings number imaginable in order to get the best price for shareholders. That clearly was not the case here. That tells us that either 1) it actually was the case, and the real earnings stream would have been much lower, 2) FDO is so married to the idea of merging with DLTR that it is putting up worse numbers to discourage a DG bid, or 3) FDO is simply not managing the outcome (we have a hard time with that).


We still think that the best way to play this is to short Dollar General. IF DG 'wins' FDO, then it actually loses as it will be paying close to 13x EBITDA for a marginal asset. If it 'loses' then it gives up the equity value gained since it joined the bid, and the stock goes back to the low $50s. 


Retail Callouts (10/10): DG, FDO, AMZN, NKE, ZQK - chart1 10 10 14


AMZN - Amazon to Open First Brick-and-Mortar Site



  • "Amazon’s space at 7 West 34th St., across from the Empire State Building in Midtown, would function as a mini warehouse, with limited inventory for same-day delivery within New York, product returns and exchanges, and pickups of online orders."
  • "The Manhattan location is meant primarily to be a place for customers to pick up orders they’ve made online, but will also serve as a distribution center for couriers and likely one day will feature Amazon devices like Kindle e-readers, Fire smartphones and Fire TV set-top boxes, according to people familiar with the company’s thinking."


Takeaway: It's only taken 20 years. This door looks more like an Urban fulfillment center than  an actual store, but the framework could be in place for an actual retail presence. We have a hard time imagining what an AMZN store would look like. The breadth of the product offering is limitless, so selecting the right SKU representation at retail would be an interesting case study to watch. But, if any company has the information to make that happen it's AMZN. They've been studying shopper's behavioral habits since they set up a network of computers on retrofitted doors. Most likely AMZN will set up a presence to hawk its own items (Kindle, tablet, phones, set-top boxes, etc.), which would make sense given that most retailers have pulled the items from shelves in response to AMZN's bullying. We're not sure how sustainable that is given that outside of the Kindle - AMZN has been spinning its tires trying to find traction. In light of the news flow around SHLD this week, we think this article is worth a read ( It's more provocative than probable, but thought provoking nonetheless.


 NKE, Adi - Louisville’s Rick Pitino Says Shoe Companies Overinfluence Recruiting



  • "At issue, Mr. Pitino said, is the relationship between major sportswear makers and basketball programs for high-school students, from which top-flight colleges and universities recruit players. Coaches of youth programs affiliated with a specific shoe company tend to encourage athletes to attend colleges with the same sponsor, Mr. Pitino said."
  • "The Cardinals won the NCAA Division I National Basketball Championship in 2013. Still, Mr. Pitino said he believes rival sportswear maker Nike is 'winning the battle right now' for top high school recruits."


Takeaway: These comments by Mr. Pitino were just too good to pass up. He's basically saying 'thanks AD for signing a 5yr $39mm deal with Adidas this past April. Now nobody wants to come play ball for me." That $39mm,  by the way just so happens to be the 3rd most lucrative deal in all of college sports, behind Notre Dame and the University of Michigan. But, his logic does make sense. Between the Jordan Brand and Nike - NKE owns somewhere between 90%-95% of the basketball footwear market. Plus, college jerseys, footwear and apparel are more important than ever, evidenced by the glut of special jerseys on display on the field every fall Saturday on campuses across America. Nike owns this segment and recruits have taken notice.


ZQK - Quiksilver Shareholder Says Company’s Turnaround Plan is a Failure



  • "The 11-point turnaround plan announced by Andrew Mooney 16 months ago has thus far failed to deliver the desired results and, based on the deterioration in the company's core brands since that time has in actuality had a profound detrimental effect on the financial position and operating performance of the company, in my opinion."
  • "Other investors have come to the same conclusion, since the stock price is down roughly 80% this calendar year. Accordingly, it is time for the Quiksilver board to implement a new strategy in order to preserve shareholder value by commencing a process to sell the company."
  • "…I believe that the company's well known brands, global retail and wholesale presence and supply chain still have value. But, the only way to unlock this value for shareholders, and to maximize shareholder value consistent with the board's fiduciary duties, is to immediately pursue the sale of the company through a competitive bidding process."


Takeaway:  These are the guys (Consac) that pushed for a sale of Vitacost and Bebe. Regardless of who is calling for a sale, it's near impossible for anyone to argue with their logic. Quiksilver simply should not be a stand-alone public company. With barely $300mm in equity value, the market seemingly agrees. The most surprising thing to us is that companies like VF Corp and Kering don't see what we do.




GIII - Cyber Attacks Spread: Bass & Co. Latest Hit



  • "The company said it discovered that an unauthorized person had connected a small data capture device to one of the cash registers in its store on International Drive in Orlando [Fla.].' The device recorded information from payment cards, including cardholders’ names, card numbers, expiration dates, verification codes and e-mail addresses, if they were provided.  Just one register was targeted in the attack."


LEISURE LETTER (10/10/2014)

Tickers: RCL, SNOW


  • Oct 15: LVS 3 earnings 4:30 pm , pw 12611335
  • Oct 16: Hedgeye cruise pricing survey (mid-October)


GENTING UK – Phil Ivey has lost his case against a British casino he accused of improperly withholding his winnings.  Britain’s High Court ruled that Genting Casinos UK does not have to pay him the 7.7 million pounds (USD12.4 million) he was seeking.  He claims he won the money during two days of playing baccarat at Crockfords, a Mayfair casino that is part of the Genting group, in August 2012.


RCL– is offering two new sales in one. Book any Royal Caribbean cruise (excluding Quantum of the Seas or Anthem of the Seas) before the end of October, and you can take advantage of these two offers: 1) Buy one guest, get one guest for 50% off; and 2) When booking air accommodations through ChoiceAir, get an additional 5% off the first and second guests. The new cruise deal is good for bookings made between October 2 - 31, 2014 on all ships excluding Quantum of the Seas, Anthem of the Seas and all China departures. 


SNOW – Steamboat Ski Resort is suing Utah tourism officials, claiming a $1.8 million campaign designed to lure tourists in the lucrative winter sports industry away from Colorado violates their Ski Town, U.S.A. trademark because Salt Lake City is marketing itself as Ski City US. 

Takeaway: The battle for skiers and marketing identity intensifies.


Japan's Gaming Enabling Legislation – (Reuters) Contrary to recent stories, Japan's pro-casino lawmakers are set to tweak a proposed bill on casino legalization to address concerns of a possible spike in gambling addiction, but have agreed to not propose banning Japanese nationals from casinos

Takeaway: We look forward to moving beyond the talk and posturing and finally having floor debate commence.


Macau Golden Week Jewelry Sales(Macau Business Daily) Chow Sang Sang Holdings International Ltd. saw sales in its five jewelery stores in Macau rise more than 10% during National Day Golden Week, with more than 90% of customers hailing from the mainland.  By comparison, Chow Sang Sang sales in Hong Kong being declined 6% to 8% during the period, negatively impacted by the Occupy Central movement.

Takeaway: A sales increase of up 10% seems disappointing given Mainland Chinese visitation increased 17% during Golden Week.


Indiana Gaming Law Changes Sought – Leaders from Indiana’s ailing gambling industry pleaded their case before lawmakers Wednesday, looking for ways to attract more customers and beat back competition from out of state that has sprung up in recent years. Three of their top requests are for lawmakers include: 1) to allow riverboat casinos to move ashore,  2) allow table games two racinos, and 3) eliminating the tax on free play. 

Takeaway: Regional gaming operators seeking relief from the cannibalization of new land based casinos in Ohio and well as video gaming in Illinois. 


Best Western Launches Brand Extensions – announced plans for two new brands: Vib, a lifestyle hotel concept targeting millennial travelers; and BW Premier Collection*, a soft brand.  The company’s global pipeline includes more than 400 properties, 35% of which are in North America. Half of the North American pipeline are new-build hotels and include 26 Best Western properties, 106 Best Western Plus hotels and 10 Best Western Premier properties.

Takeaway: Another hotelier attempts to court millennials.


Atla Remains a No Boarder Mountain – Earlier this year a group of snowboarders filed a discrimination lawsuit against Alta, claiming they were being turned away not because they present a risk to skiers with whom they share the terrain but because they are perceived as being rowdy and obnoxious. A federal judge dismissed the suit, basically saying that the right to snowboard is not guaranteed by the equal protection clause of the Constitution. The only other U.S. resorts that ban snowboarding are Deer Valley, also in Utah, and Mad River Glen in Vermont.

Takeaway: Ski purists rejoiced Alta with the ruling the mountain will remain free of Boarders.


El Niño – the Climate Prediction Center agency of the National Weather Service said on Thursday, the El Niño weather phenomenon is expected to occur in the next 1-2 months and last into next spring in the Northern Hemisphere, although the El Niño will likely be less strong than forecasted three months ago.

Takeaway: We've been talking about El Niño since May and we hope for a stronger pattern which would result in warmer weather, a positive for consumer spending.


Hedgeye remains negative on consumer spending and believes in muted inflation, a Quad Four set-up.  Following a great call on rising housing prices, the Hedgeye Macro/Financials team is decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.


TODAY’S S&P 500 SET-UP – October 10, 2014

As we look at today's setup for the S&P 500, the range is 35 points or 0.37% downside to 1921 and 1.44% upside to 1956.                         













  • YIELD CURVE: 1.87 from 1.87
  • VIX losed at 18.76 1 day percent change of 24.16%


MACRO DATA POINTS (Bloomberg Estimates):

  • Monthly Budget Statement, Sept., est. $82b (prior $75.1b)
  • 8:30am: Import Price Index, Sept., est. -0.7% (prior -0.9%)
  • 9am: Fed’s Plosser speaks in New York
  • 1pm: Fed’s George speaks in McCook, Neb.
  • 1pm: Baker Hughes rig count
  • 2:08pm: Fed’s Fisher speaks in Dallas
  • 3pm: Fed’s Lacker speaks in Chicago



    • President Obama speaks at San Gabriel Mountains national monument designation
    • Senate, House out of session
    • 12:30pm: World Bank President Jim Yong Kim speaks on “Rising to the Renewable Energy Challenge” panel at International Monetary Fund, World Bank annual meeting
    • 1:30pm: G-20 news conference


  • Symantec to Divide Into Storage and Security Businesses
  • GE’s Immelt Sees Divestitures in Plotting 2015 Deal Strategy
  • Juniper Slides After Preliminary Results Miss Its Own Forecast
  • Dave & Buster’s Raises $94 Million in Games and Food Chain IPO
  • Family Dollar Profit Declines as Price Cutting Reduces Margins
  • GT Advanced Wants Permission to Wind Down Sapphire Operations
  • Pimco Cut Government-Related Debt Last Month as Gross Quit
  • Minimum-Wage Backers to Get Unlikely Ally With Next NRF Chairman
  • U.K. House-Price Growth Slows to 10-Month Low on Rate Prospects
  • Spanish Hospital Monitors 13 People for Risk of Ebola Contagion
  • Tesla’s Musk Unveils All-Wheel-Drive Version of Model S
  • Fidelity Investments Said Hit in JPMorgan-Hack Attack: WSJ
  • U.S. Retail Sales, JPMorgan, IMF, Li Trip: Wk Ahead Oct. 11-18



    • Fastenal (FAST) 6:50am, $0.45
    • Progressive (PGR) 8:14am, $0.44



  • WTI Oil Extends Bear Market Tumble on Global Glut; Brent Slumps
  • Commodities Drop Near Five-Year Low on Growth Concern to Gluts
  • Copper Set for Longest Losing Run Since 2008 as Economies Slow
  • Barge Fees Limit Exports as Crops Compete for Space: Commodities
  • Fracking Setback in Poland Dims Hope for Less Russia Gas: Energy
  • Gold Cuts Weekly Gain as Improving U.S. Data Strengthens Dollar
  • Corn Falls to Trim Weekly Gain on Crop Outlook, Equities Slide
  • Freeport Offers Rio Recipe to Repel Glencore Advances: Real M&A
  • Coffee Reaches Highest Since March in London; Sugar Declines
  • Indonesia to Miss Oil Output Target of 1 Million Barrels Daily
  • Palm Oil Extends Retreat as Export Drop Signals Slowing Demand
  • Glencore Said to Have Explored Possible Australia Listing
  • Gold Traders Most Bullish in Five Weeks on Fed Growth Concern
  • LME Aluminum Wait Times in Detroit Climbed to 702 Days in Sept.

























The Hedgeye Macro Team

















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#Preppers Await!

This note was originally published at 8am on September 26, 2014 for Hedgeye subscribers.

“We are the ones that we have been waiting for.”

-Alice Walker


“So,” how is everyone feeling this morning? I’m feeling great.


Since I’m running out of fresh content on both shorting the Russell 2000 (IWM) and buying the Long Bond (TLT), today I decided to weave a little Alice Walker (she wrote The Color Purple in 1982) with some perma-bear prepping.


If you don’t know what a #prepper is, look it up. On Wiki you’ll be re-directed to “Survivalism” and on the Googler you’ll get everything from “How To Build Your Own Bunker” to “Getting Ready For Barackalypse.” There’s always a bear market somewhere!

#Preppers Await! - r5


Back to the Global Macro Grind…


When you see me going all bear-mauler in the introduction to a research note, you buy/cover.


Yep, that’s pretty much the call this morning. I call it fading myself. If you didn’t buy and/or cover the swan dive that the SP500 took into yesterday’s close, you aren’t a real bull anyway.


Oh, and don’t forget to sell the “GDP is back” bounce by noon. Damn day-traders.


Forget the traders, how about them damn moving monkeys? Huh? Did Mucker call me a monkey? No. No. I would never call anyone names. I’m referring to this billion dollar app thing that I built for my 6yr old son called Monkey In The Middle.


Here’s how it works:


  1. It has a 1yr chart
  2. It has a simple moving avg
  3. It has a ticker box


And voila! That’s it. So easy a kindergartner can do it. He can analyze any ticker in the world, across asset classes!


Other than this being the most myopic single-factor interpretation of risk since the caveman throwing grass into the wind, the problem I foresee with this billion dollar idea is what happens when my son starts doing wacky stuff like multiplication.


Or, what if he figures out that moving monkeys are different if he uses a simple vs. an exponential moving average? Then my app is dead. But, in the meantime, you never know, yo. There’s an app for that too btw (it’s called “yo” – you say yo to me, I say yo back).


Serious question though, what is the 50-day Moving Monkey?


  1. Is it 1978 (exponential moving avg) or 1976 (simple moving avg) for the SP500?
  2. Or, is it 1151 (exponential moving avg) or 1148 (simple moving avg) for the Russell 2000?


I am not messing around here guys. If I am going to start building my family a legitimate bunker, I need to know what the signal is! Will using the exponential one help me front-run the simple ones? In the bush (with bears), all I need to do is out-run the last guy.


In all seriousness, the entire linear concept of using the 50-day is as ridiculous as the ideology that the Federal Reserve, European Central Bank, and Bank of Japan, can collectively bend gravity.


Moving along…


Does your iPhone bend? The stock did yesterday. It moved 2x what the market did, signaling immediate-term TRADE oversold within its bullish intermediate-term TREND setup. “So” I signaled buy AAPL (Apple) yesterday.


If we get the Q2 “GDP is back” bounce (newsflash: next week it will be Q4), I want to own the real bubbly stuff. Remember when The Facebook (FB), Apple (AAPL), and BABA had a projected $1 TRILLION in combined cap? I do. That may have been the top.


Tops are processes, not points. And the thing about the real bubbly ones is that you can risk manage them for a little while with a bullish bias (commonly called buying the damn dip). But there will come a time when they pop. Try it at home – those don’t bounce.


This is where I use my immediate-term Risk Range process (sorry Jack, our app doesn’t have real-world application!):


  1. SP500 signals immediate-term TRADE oversold at 1962, within a bullish intermediate-term TREND
  2. Russell 2000 signaled immediate-term TRADE oversold at 1104, within a bearish TREND
  3. Front-month VIX signals immediate-term TRADE overbought at 15.92, within a bullish TREND


In other words, both volatility and the SP500 are bullish on an intermediate-term duration and the Russell 2000 small-cap #bubble is bearish across all durations. “So” on the oversold signals, you keep your small cap shorts on and buy big cap liquidity (AAPL).


If you’re longer-term, and not into managing the immediate-term risk of the range… and are right freaked out about something like the #Quad4 (US growth and inflation slowing at the same time), #preppers have a ton of stuff to sell you. Someone should definitely IPO that!


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.42-2.58%

SPX 1962-1988

RUT 1104-1138

VIX 13.48-15.92

USD 84.64-85.53
Gold 1209-1250


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


#Preppers Await! - 09.25.14 TLT vs. RTY

Oil, XLY and UST 10YR

Client Talking Points


WTI crude crushed (-1.6% this morning) to $84.42 and finally signals immediate-term TRADE oversold within a very bearish TREND; XLE (Energy Stocks) are now -4.3% for 2014 year-to-date and look quite deflationary.


The XLY has been (and continues to be) one of the worst places to be in S&P Sector allocation terms in 2014, down hard again yesterday and -2.6% year-to-date. Our call remains that at least 2/3 of the U.S population is experiencing max cost of living pain - the deflation might help, but on a big lag to expectations.


UST 10YR Yield of 2.32% continues in crash mode (yield is -23% year-to-date) and continues to signal that U.S. GDP will be lucky to be ½ of what consensus had it at the start of 2014. We still can’t believe consensus has 2015 U.S. GDP up at 3.1%; expectations, as our boy William wrote, can be the ‘root of all heartache’.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). Now that we have our first set of late-cycle economic indicators slowing in rate of change terms (ADP numbers and the NFP number), it's time to really think through the upcoming moves of this bond market. We are doubling down on our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.


Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position.  Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.


Restoration Hardware remains our Retail Team’s highest-conviction long idea. We think that most parts of the thesis are at least acknowledged by the market (category growth, real estate expansion), but people are absolutely missing how all the pieces are coming together to drive such outsized earnings growth over an extremely long duration. The punchline of our real estate analysis is that a) RH stores could get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. The consensus is looking for long-term earnings growth of 28% -- we’re looking for 45%.  

Three for the Road


There's only one 2014 LONG I kept on in Real-Time Alerts pre yesterday's swoon, $TLT #timestamped



The vision of a champion is someone who is bent over, drenched in sweat, at the point of exhaustion when no one is watching

-Anson Dorrance


Natural Gas from shale formations accounts for 40% of all U.S. natural gas produced, and this is expected to increase to 53% by 2040 according to EIA estimates.

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