European Risk Monitor: Negative Greek Divergence

Positions in Europe: Long British Pound (FXB); Short Spain (EWP)


If nothing else, the European discourse in recent weeks has proven out Keith’s Keynesian Endgame thesis – European leaders will continue to throw money and more favorable loan terms at member countries to prevent the failure of any one country, and therein preserve the structure that unifies unequal countries that share a common currency. This, along with the recent hawkish stance of the ECB and 25bps interest rate hike on April 7th, has been bullish for the EUR, currently pushing against $1.45 versus the USD.


With Portugal’s bailout imminent (in the neighborhood of €50-80 Billion), Greece’s fiscal issues are bubbling back to the surface. This weekend at a meeting of European finance ministers in Hungary, German finance minister Wolfgang Schaeuble re-stoked the fear trade by saying that Greece may need more capital and/or more favorable loan terms to return to fiscal health. The statement in and of itself comes as no great surprise – remember that Greece’s debt as a % of GDP is expected to ramp to 159% in 2012, and we’re of the camp that PM Papandreou and Co. will come well short of their target to reduce the country’s deficit from a high of 15.4% of GDP in 2009 to 3% by 2014 – yet the Greek equity index ATHEX was pounded down a full -2.6% on the news today.


This weekend’s meeting also opened up the prospect of a further restructuring of Greek government debt, with EU Economic and Monetary Commissioner Olli Rehn saying, “We have a solid plan. It is based on a very careful analysis of debt sustainability”. Translation: let’s fill up the trough. And this follows the already generous terms of the country’s €110 Billion bailout, which were amended last month to include repayment in 7.5 years instead of 3 and a cut to the interest rate of 100bps to around 3.5%. 


Hedgeye’s weekly European Risk Monitor shows that Greek bank swaps (in particular) pushed higher after improving on the margin last week (see chart below). Sovereign CDS spreads show a near-term downward inflection in risk for Ireland and Portugal, while on the TREND Greece pushes higher as Spain and Italy wane (chart below).


Matthew Hedrick



European Risk Monitor: Negative Greek Divergence  - bankcds


European Risk Monitor: Negative Greek Divergence  - CDS

R3: M, TGT, Mall Vacancy Rates, Choo



April 11, 2011





  • According to real estate research firm Reis, mall vacancy rates reached 9.1% hitting the highest level in a decade in the 1Q of 2011 up from 8.7% in Q4. Strip mall vacancy rates remained flat with prior quarter at 10.9% close to the prior peak of 11.1% in 1990 – a level that could be breached if new property scheduled to come online does in 2011. Looks like rents are one of the few input costs likely to remain stable for retailers in the coming months.
  • Following our recent comment on increasing Blockbuster store availability and the positive implications for Hibbett Sports, a recent New York Times article suggests there could be increasing competition for the locations. Significantly smaller than other recent vacancies such as Linens ’n Things and Circuit City, the average 6,000 sq. ft. layout is better suited for a multitude of retailers like the featured La Familia pawn shop. With 700 stores expected to close by month’s end, speculation remains high that Dish Network is likely to liquidate the remaining 1,700 locations.
  • Retail earnings revisions ticked up last week in the wake of same store sales.  Though for the first time since January, the direction of stocks deviated from the direction of revisions. This shows how this group NEEDS earnings to head higher to stand still. Here’s an interesting dose as to which retail sub-groups are leading/lagging peers:
    • The biggest callout to us is discount stores vs. footwear/sporting goods retail. Most notably – Target has underperformed over every single duration. This has been, and still is one of the top short ideas in the Hedgeye Portfolio.
    • Similarly, in the Home category, we’ve got the soft side (BBBY and WSM) standing out over the hardlines (LOW and SHW).

R3: M, TGT, Mall Vacancy Rates, Choo - R3 4 11 1


R3: M, TGT, Mall Vacancy Rates, Choo - R3 4 11 2




Toning's Rocky Road - While the toning footwear category has declined in recent months, experts say the category could reverse course by fall, albeit with some changes. According to data gathered by The NPD Group, sales of toning product fell in February to $41.2 million, compared with $87.3 million in March of last year. Experts pointed out that declines in the past few months largely are due to excess inventory, which is driving down prices and holding up fresh product from entering the marketplace. “What the problem is today is not a lack of demand but rather an oversupply of product,” said Matt Powell, an analyst with SportsOneSource. “The consumer still likes this category.” Powell added that the short-term success of toning would depend on how quickly retailers can push through aging inventory. “Before back-to-school, we should be back to [positive growth],” he said. “Retailers are telling me that newer styles of toning are selling at an acceptable rate at an acceptable margin.” <WWD>

Hedgeye Retail’s Take: These figures largely depend on how the category is defined. There’s no disputing the fact that ASPs continue to slide and are now below $60 on average. While the margins at retail may still be at an  “acceptable rate,” the reality is that this is most likely due to increased markdown money from the brands to protect shelf space.


Footwear Exports From Vietnam Exceed $1Bn in Q1 - Vietnam’s footwear sector continued ranking third after garment and crude oil with export revenues reaching US$1.3 billion in the first quarter of 2011. The Ministry of Industry and Trade said that a year-on-year increase of 29.7 percent in export revenues was attributable to the continuous economic reovery. The European Union continued to be the largest market for Vietnam’s footwear, importing $356 million worth of products in the first two months of the year, followed by the US ($230m) and Japan ($54m), respectively, worth of Vietnam’s footwear.  Vietnam’s footwear exports to China, the Republic of Korea and other markets also rose. <FashionNetAsia>

Hedgeye Retail’s Take: About 40% of this is Nike. No joke…


At Macy's, a Makeover on Service - Several Macy's sales associates sat in a training room in the chain's Christiana Mall store recently hashing out sales-floor scenarios. Mary Martin, Macy's vice president of learning and development, directed the group's attention to a card at the center of the table with a statistic: Forty-eight percent of Macy's customer complaints are focused on interactions with sales associates. The training session is part of a new strategy by the department store to improve its track record on customer service, which in recent years has dented the reputation of the storied retailer, lowered its scores in annual customer service rankings—and most likely slowed growth. Part of the problem may be attributed to Macy's Inc. 2005 merger with May Department Stores Co., after which the company struggled with poor customer service as it focused on integrating various regional chains under the Macy's banner. "A couple of years ago we had seven different divisions, so we had great service in some divisions and not as good in others," said Terry Lundgren, chairman and chief executive of Macy's, in an interview.<WallstreetJournal>

Hedgeye Retail’s Take: Exceptional customer service has long been a hallmark of Macy’s key competitor, Nordstrom. It should come as no surprise then that JWN’s same store sales outperformance on a relative basis is highly correlated with the company’s top customer service satisfaction score according to the American Customer Satisfaction Index. However, it’s worth noting that over the past year, Macy’s score improved to 76 from 71 while Nordstrom’s stepped back to 82 from 83.


Japanese Department Store Sizes 2012 Impact - Department store operator Takashimaya posted double-digit growth for the fiscal year just completed but warned its performance will be less stellar over the next 12 months in the aftermath of Japan’s massive earthquake and tsunami. The retailer said it sees net profit falling 38.6 percent to 8.5 billion yen, or $99.78 million at current exchange, for the year ending February 2012. Operating profit will slide 12 percent to 16 billion yen, or $187.83 million, and revenue is seen dropping 2.6 percent to 846.8 billion yen, or $9.94 billion, it said. A spokesman for Takashimaya said in the first week following the earthquake, sales at the retailer’s 18 stores in Japan were down 38 percent compared with normal levels. The following week they were down 22.6 percent, the week after that they were down 8.2 percent and in the first week of April, they were only 1.5 percent lower than usual, signaling that consumer confidence may be returning to the country. <WWD>

Hedgeye Retail’s Take: On the one-month anniversary of the Japanese quake – one thing is clear, we are still a long way off from fully understanding the full magnitude and duration of the tragedy. While Takashimaya sees operating profit down 12% in F2012, Onward Holdings’ updated outlook from Friday suggests stable domestic earnings in Japan offset by growth overseas. According to the weekly sales data, performance rebounded rather quickly all things considered – however, between disruptions, discounting, etc. margins are likely to report a more lasting impact as Takashimaya’s outlook suggests.


Jimmy Choo Sale Takes Step Forward - The £400m-£500m sale of luxury shoe brand Jimmy Choo took a step forward on Friday, with the original shortlist of 10 parties whittled down to four. It is understood that TPG Capital, a private family office and potentially a consortium of Investcorp and luxury group Labelux are through to the second round. Big luxury goods groups were also expected to look at Jimmy Choo, as well as Asian buyers, although it was not clear whether any made the second round. The company’s shoes, costing as much as £1,800 ($2,948) a pair, have become a favourite of Hollywood celebrities, being worn by the stars of Sex in the City, actress Julia Roberts and singer Beyoncé. Louis Vuitton Moët Hennessy has been mooted as a potential suitor, as has the brand’s eponymous founder Jimmy Choo. However, Mr Choo is not thought to be in the second round. Some analysts thought the business could appeal more to a strategic buyer than a private equity group. <FinancialTimes>

Hedgeye Retail’s Take: There’s no shortage of interest for top luxury brands of late. Yes, Bulgari is more of a jewelry/accessories brand, but the premium doesn’t hurt and now with a Prada IPO slated for later this summer, there’s likely to be increased urgency in getting a deal struck. In addition, the brand’s re-introduction of its men’s line since it started exploring strategic options last fall is also likely to be a further positive for Choo’s valuation.


Laura Ashley to Launch Intimates - Laura Ashley Inc. has signed a licensing agreement with Secret Lace LLC to produce, market, sell and distribute the first collection of intimate apparel bearing the Laura Ashley Intimates and Laura Ashley London names. Distribution will be aimed at major specialty and department stores and specialty boutiques in the U.S., Canada and Mexico and 400 Laura Ashley stores in Europe, Asia, South America, Australia and New Zealand.  The Laura Ashley Intimates line, which will be unveiled at the May innerwear market here, will be launched for fall, while the Laura Ashley London collection will be introduced at retail in early 2012. Wholesale sales projection the first full year for the combined lines is more than $2.5 million, said Albert Zaccai, senior vice president and chief operating officer of Secret Lace, a division of privately owned Just One LLC. <WWD>

Hedgeye Retail’s Take: $2.5mm? That seems like a joke. Laura Ashley continues to be (and always has been) a very solid name in both home furniture and women’s fashions. Intimates should be a lay-up. 





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Though still early, April revenues have been impressive.



Macau is off to another great start to a month with April table gaming revenues of HK$6.7 billion through the 10th.  Adding in slots and taking into account the number of weekend and weekdays, we are making an early projection of HK$19.0-20.0 billion for the full month.  That range of revenues would produce a YoY increase of 44-52%, fairly spectacular given the +70% comparison last April.  We would caution that with only 1/3rd of the month in, it is still early.  We think we’ve taken into account a likely slowdown in late April ahead of the May Golden Week, but that week may be a bit unpredictable. 


MPEL is the clear winner in terms of market share here in April, climbing to 19.5% versus the 14.5% trailing 3 month average.  MPEL’s high teens share in early April is likely unsustainable but we are hearing volumes have been strong.  It is likely that MPEL will post another strong month of share.  Wynn’s share was also strong while Galaxy, SJM, and LVS have taken a hit.  It’s probably not as prudent to be overly focused on market share given the overall strength of the market, however.


Here are the details:




Big jump on transaction volume in Q1



Market M&A Trends for Q4 and Year 2010

  • Q1 US transaction volume soared close to $5BN, more than half of total volume for 2010
  • Biggest deal: Ashford Hospitality’s acquisition of 28 Highland Hospitality hotels for $1.28BN in a foreclosure deal
  • Consistent with 2010, REITS (existing and newly formed) dominated the M&A market in Q1
  • Hotel delinquencies have stabilized. The latest data from Fitch showed hotel delinquencies in February hit 14.3%, a rate similar to Q4 2010

Luxury Segment

  • Average Price per Key
    • Q1 2011 Global average: $279,697
      • US average: $289,733 (4 transactions)
    • Q4 2010 Global average: $998,687.  In Q4, there were several sales in Europe (London, France, Dubai) that surpassed $1MM in average price per key.
      • No US transactions

Upper Upscale Segment

  • Average Price per Key 
    • Q1 2011 Global average: $250,532 
      • US average: $261,559 (20 transactions)
    • Q4 2010 Global average: $257,295
      • US average: $291,945 (7 transactions)



Notable news items from the past few days and price action from Friday.

  • MCD CEO, Jim Skinner, received a total of $9.7 million in compensation in 2010, including his roughly $42,000 annual salary increase as well as a 38% rise in his annual performance bonus.
  • JACK was cut to “Underperform” from “Neutral” at Credit Suisse.
  • WEN is challenging its biggest rival, McDonald’s, by putting its marketing dollars behind gaining more French fry market share.  A “national taste test” carried out by Wendy’s claims that 56% of consumers preferred Wendy’s fries to McDonald’s, with 39% taking the opposite view and 4% having no preference.  Wendy’s fry unit sales were up 16% during the national media in December versus the base period.
  • DIN is carrying out an internal investigation after a toddler at a Madison Heights, Michigan, Applebee’s location was served alcoholic margarita mix.  Police are looking into the incident and Applebee’s has pledged to cooperate and conduct its own investigation.
  • YUM gained on strong volume on Friday. 
  • KKD gained on strong volume on Friday, also.  The stock has declined sharply since 3/31, when the company announced disappointing earnings.
  • RT declined once more, on accelerating volume, as confidence in the company’s ability to meet the Street’s expectations waned. 




Howard Penney

Managing Director

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