Some are excited about a return to growth in August.  Time for a look under the hood.


  • US gaming revenues (from reporting jurisdictions) increased 5% YoY in August.  Even same-store revenues were positive, up 3%.
  • However, August received a 2% boost from a very high hold % in Strip Baccarat.  Subtracting out Strip revenues (to look at regional type markets), same-store revenue was actually flat in August.
  • Moreover, August contained one extra Saturday which likely contributed 2-3% to YoY growth
  • The takeaway is that August was actually another weak month overall in US gaming


What’s New Today in Retail (10/2)

Takeaway: Footwear data weakish -- but in a seasonally unimportant period. Interesting color from RH mgmt. UA, LULU, LVMH, SPLS, ICON, Uniglo, JCP...

What’s New Today in Retail (10/2)




MFB – Extraordinary Shareholder Meeting: Thursday 10/3




Weekly Footwear Data

Another weak showing for athletic footwear sales, with trends remaining flattish for the year. Units are weak, while they're offset by a 4% increase in ASP. The saving grace is that this week is traditionally one of the weakest from a seasonal perspective. We'd be a lot more concerned to be looking at these trends a month from now.  


What’s New Today in Retail (10/2) - chart1 10 2

What’s New Today in Retail (10/2) - chart2 10 2

What’s New Today in Retail (10/2) - chart3 10 2

What’s New Today in Retail (10/2) - chart6 10 2

What’s New Today in Retail (10/2) - chart5 10 2




RH - Interesting Discussion In Conference Webcast 


CEO Gary Freidman explains the companies sourcing advantages:


"Here you can see an example that we've used, where these are the exact same chairs. They're colored slightly differently, just so they don't look exactly the same. But this chair was being sold at $500 to $600 in the independent boutiques. We're able to bring this chair to market at $199: exact same wood, exact same fabrication. You go, how do we do that? Well, what we've done is we've eliminated the middleman."

"So, you've had a market that's controlled at the high end that has worked through domestic importers, okay. Somebody buying the chair, for example for $125 in Asia, importing that chair at 20 to maybe 200 chairs at a time, marking that chair up to $250, selling it to a local retailer, who is marketing it up to $500 to $600, and you say, what have we done? Well, one, we went to that supplier and didn't buy the chair for $125; we're buying the chair for significantly less, one because of our volume. Two, because we've got the opportunity to enable that vendor to source raw materials better, whether it's sourcing the wood or in this case this chair is covered with Belgian linen. We happen to be the biggest importers of Belgian linen in the world. Okay. So instead of that vendor buying Belgian linen at his price, he is now buying it at our price. Instead of $15 a yard, it might be $9 a yard. So we got multiple opportunities to kind of create a value that's unseen before in this marketplace and this is a real example. In this case, both these retailers have recently discontinued selling this chair. But that chair was probably carried in hundreds of small retailers."


"Yeah, I mean when you say you can't get it here, almost all of our assortments in the high 90s is kind of proprietary goods. But you will have people that might have something similar. In that case, that chair, we came into the market after that chair was in the market. And then we bought that chair that was in the market. We completely disrupted the market. Now it's hard to find anybody that has that chair. One of our competitors Williams-Sonoma Home just introduced that chair at I think $420, I don't why, but we believe our compelling value will keep people out of the market as far as trying to knock us off at least at that quality level. But today, the vast majority of our products in the 90s isn't available anywhere else."


Trivia Question of the Day


“What’s the significance of today’s data (10/2) in the world of retail?”

Answer: It marks the day in 1996 that Lance Armstrong learned that he had cancer. Upon his recovery and subsequent Tour de France victories, Nike commercialized it into a product line of mostly black and yellow product called 10/2. It grew up into a several hundred million dollar business.

Trivia question number 2. “How big is the line today?” Zero


UA - NBA Standout Stephen Curry Joins Under Armour Basketball Roster 



"Under Armour announced the addition of NBA point guard Stephen Curry to their roster of world-class athletes. As part of the multi-year partnership, Curry will be wearing the new UA Micro G Anatomix Spawn basketball shoes and featured in upcoming marketing campaigns via digital, social, print, in-store and out-of-home."

"Curry joins an Under Armour athlete roster that includes Michael Phelps, Tom Brady, Cam Newton, Bryce Harper, Jordan Spieth, Lindsey Vonn and NBA players Brandon Jennings, Raymond Felton, Greivis Vasquez and Kemba Walker."


Takeaway: With basketball players, the first question to ask is ‘why did Nike pass on him’. That said, this synch with UA’s strategy to secure ‘B’ players that wear UA shoes while competing against Nike players.


LULU - Lululemon’s sheer yoga pants lawsuit gets lead plaintiff



"A Louisiana pension fund will lead U.S. litigation accusing Lululemon Athletica Inc. of fraudulently hiding defects that caused yoga pants to become nearly sheer, and concealing talks that led to the surprise departure of its chief executive."

"U.S. District Judge Katherine Forrest in Manhattan on Tuesday said the Louisiana Sheriffs’ Pension & Relief Fund, which owned about $1.3 million of Lululemon stock, will handle the litigation on behalf of shareholders."

"The Baton Rouge-based fund plans to seek class-action status for shareholders between March 21, when full-year results were announced, and June 10. It said it lost $116,000 on transactions in that period. The fund’s law firm is Bernstein Litowitz Berger & Grossmann, a shareholder class-action specialist."


Takeaway: Proving a moronic business blunder is one thing. Proving malice and/or violation of Securities law is another.


LVMH - WWD NEWS ALERT: Jacobs Exits Vuitton To Focus On IPO



  • "Marc Jacobs is leaving Louis Vuitton as plans take shape for an eventual public offering for the Marc Jacobs brand."
  • "LVMH chairman and ceo Bernard Arnault, together with Jacobs and his long-time business partner Robert Duffy, confirmed the developments to WWD…"
  • "The offering should occur within the next three years."


Takeaway: Stating the obvious here, but not good for LVMH. Jacobs is looking at KORS, Kate Spade, the likely IPO of Tory Burch, and the success of Ralph Lauren – and with some likely coaching from his bankers – it makes perfect sense that he’s focused on better monetizing his name.


FL, LVHM, BONT, HMB, GPS - LVMH, Richemont Among World's Best E-tailers



  • "The scores for the table were created by Web site management company Sitemorse using automated software that read and reviewed the first 125 pages of each retailer’s site, placing them in a ranked table based on user experience (UX), governance, risk and compliance (GRC), and search capability (SEO)."
  • "C&A Europe was the highest-ranking fashion company, in second position. Swedish food retailer ICA was the top performer. The German Tengelmann Group, which owns fashion retailer KiK, in 9th place; Nordstrom was 11th, followed by Associated British Foods, which owns Primark, at 13th place; Foot Locker and the Bon-Ton stores also appeared in the top 20 retailers’ Web sites."
  • "Further down the list, at number 38, was Richemont, Marks & Spencer at 54th position, Inditex was 63rd, [LVMH] was 67th, [H&M] was 121st, The Gap was 157th, Arcadia — owner of Topshop— was 173rd, while Macy’s was 191st."

Takeaway: We’re not verifying this study, bc it seems so ‘off’ logically. LVMH makes sense. HMB – perhaps. But BONT? FL? GPS? We don’t see it.


ICON - Macklemore & Ryan Lewis Taking Buffalo Brand Viral



  • "Iconix Brand Group Inc., which sought to give Buffalo David Bitton an international boost when it acquired a 51 percent stake in the company eight months ago, is now looking to give the brand a viral lift."
  • "Iconix has engaged hip-hop duo Macklemore & Ryan Lewis as the first of its participants in its 'Blank Check Series,' which will endow artists in various media to produce media content on behalf of the brand."

Takeaway: Not sure if these guys have staying power --- but their status in the hip-hop realm today is untouchable.


9983 - Uniqlo Expands Footprint in U.S.


  • "Uniqlo is multiplying in the San Francisco Bay Area.After opening a flagship on Powell Street in San Francisco a year ago, the Japanese retailer is adding four stores in the region by November. The new Northern California stores are in Hillsdale Shopping Center in San Mateo, Stonestown Galleria Mall in San Francisco, Westfield Valley Fair Mall in Santa Clara and the mixed-use development Bay Street Emeryville in Emeryville."
  • "The San Francisco and New York areas are hubs of retail activity for Uniqlo in the U.S., where it will end up with a total of 17 stores this fall."
  • "Next year, Meyer [COO of Uniqlo US] has forecast that Uniqlo will add 20 or more stores in the U.S."
  • "In the U.S., Uniqlo is just getting off the ground and has registered operating losses."

Takeaway: Watch out for these guys. The parent is comfortable growing while losing money, and the product is inexpensive relative to the quality and fashion quotient. Also, its cost of capital is close to zero.


BURL - Burlington Prices IPO Shares



  • "Burlington Stores has priced its shares at $17 each as it prepares to go public on Wednesday."
  • "So far 13.3 million shares are set to begin trading Wednesday morning on the New York Stock Exchange under the symbol 'BURL.'"


SPLS - Staples Acquires Runa to Transform Shopping Experience Through Personalization



  • "[SPLS]...announced today it has completed the acquisition of Runa, a software company based in San Mateo, Calif. that helps online retailers increase sales by personalizing the shopping experience. Terms and conditions of the acquisition were not disclosed."


Takeaway: Makes sense. Anyone in this space needs to differentiate as much as possible to gain share.


JCP - Former J.C. Penney Outlet Stores to Close; 1,400 Jobs Lost



  • "The new owner of J.C. Penney's former outlet store business said Tuesday that it will close all 15 locations amid a steep drop in sales."
  • "The outlet stores, which are in 14 states, were purchased in October 2011 by SB Acquisitions from J.C. Penney and rebranded JC's 5 Star Outlet."
  • "Before the acquisition by SB Acquisitions, Penney had designated them for closure."


KER - Saint Laurent Severs Ties With Colette



  • "According to sources, Yves Saint Laurent is taking legal action against several makers of T-shirts bearing the 'Ain’t Laurent Without Yves' slogan."
  • "The French fashion house also has severed a 15-year business relationship with Paris retailer Colette for having carried them."
  • "Sarah Andelman, Colette’s creative director...said Slimane and YSL have retaliated by canceling her spring and resort orders totaling 101,191 euros at wholesale, or $136,690 at current exchange."
  • "The 'Ain’t Laurent' T-shirt, retailing for about 42 euros, or $56.75, winks to Slimane’s decision last year to change the name of YSL collections and stores to Saint Laurent."


What’s New Today in Retail (10/2) - chart4 10 2


JOEZ - Joe's Hudson Jeans Buy Said Completed



  • "Joe’s Jeans Inc.’s acquisition of fellow premium denim brand Hudson Jeans for $97.6 million has been consummated."
  • "Joe’s acquired all the assets of Hudson Clothing Holdings Inc. for a combination of cash and $24.1 million in convertible notes from Peter Kim and Fireman Capital Partners. Kim will continue with Hudson as its chief executive officer and join the board of Joe’s."




Bangladesh apparel makers count the cost of unrest



  • "The fallout from last week's violent protests in Bangladesh's key apparel industrial belts could lead to financial losses of around BDT6.0bn (US$77m) for apparel makers…"
  • "Garment exporters say the losses were incurred as a result of production disruption and vandalism during the six days of unrest, which began on 21 September."
  • "An official from the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) told just-style that nearly 3,000 ready-made garment (RMG) units were caught up in the clashes - with 65 factories damaged and arson attacks launched on 25."
  • "'the overall cost of production in the apparel sector has increased by 12-13% due to the recent trouble, general strikes and political uncertainty over the upcoming general election,' Atiqul Islam, president of the BGMEA, told just-style yesterday…"


India’s apparel exports to touch US$ 17bn in FY’14: AEPC



  • "The garment industry of India is expected to achieve the target of US$ 17 billion in exports for the current fiscal year as the outbound shipments of apparel have already touched US$ 5 billion during the first four months of 2013-14, according to the Apparel Export Promotion Council (AEPC)."
  • "Mr. Sakthivel [President of the AEPC] said that the growth in apparel exports is attributed to the recovery of the US economy, which is the country’s second largest export destination, in addition to the increasing demands from emerging markets such as Latin America and Africa, he added."
  • "During April to July 2013-14, apparel exports have increased by 13 percent year-on-year to US$ 5 billion, he added."

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Managing Global Risk

Client Talking Points


After posting the best Japanese auto sales number in 14 months, the Yen continued its latest run and is finally signaling immediate-term TRADE overbought vs US Dollar. No, the Nikkei definitely does not like #StrongYen. It closed down -2.1%, leading the losers in Asia overnight. Japanese stocks are oversold right now. Yes - it's a good spot to buy. 


The critical confidence vote appears to be going the right way for Italy's Prime Minister Enrico Letta (not so good for Berlusconi). Italian stocks are up +0.9% in response to that development. Italy is diverging big time versus the rest of European Equities (Swiss -1.1%, France -0.9%, Russia -0.9%).


After a nice run-up on yesterday’s 56.2 ISM manufacturing print for September, the 10-year yield has pulled back to 2.62% this morning. US Equity futures? They do not like Down Dollar, Down Rates. Politicians (and bond fund managers) do. It's #OctTaper vs Bernanke now. More to be revealed.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.


Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road.


Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road


TREASURIES: 10yr and Yield Spread backing off again this morning - US stock futures dont like that @KeithMcCullough


It's not that I am smart, it's just that I stay with problems longer

-Albert Einstein


According to MarketWatch, it was virtually impossible to sign up for Obamacare on it opening day yesterday. They went went 0-for-51 in trying to apply online for Obamacare in all 50 states and the District of Columbia. (MarketWatch)

Get High

This note was originally published at 8am on September 18, 2013 for Hedgeye subscribers.

“If you want to get open under the basket, don’t just run towards the hoop – run to the free throw line first, then cut to the baseline to get open.  Get High to Get Low. “

-Coach Ken Smith, Windsor CT basketball   


Standing on stage in a Speedo with a freshly shaven body while a bunch of guys cheer for you elicits kind of an odd feeling.


The whole competitive bodybuilding scene is a singularly peculiar, multifarious mix of culture and personality and I do miss parts of it…kinda. 


For the un-indoctrinated, the canonical approach to (natural) bodybuilding contest preparation, from the nutritional side, goes something like this: 


In the 3 months leading up to contest day, you progressively tighten up the diet by concomitantly lowering total consumption and shifting your macronutrient profile increasingly towards protein and polyunsaturated fats (think olive oil, fish oil, mixed nuts, etc). 


At some point, as caloric intake declines, you initiate or increase caffeine consumption for its beneficial thermogenic and appetite suppression effects.  Nearer the end, if you need to further accelerate progress (and it’s the mid-2000’s when it was still legal) you may add in some measured amount of additional stimulant (via ephedrine) to help augment fat loss. 


In general, the diet-stimulant combo works exceptionally well - for a while.  Continue the regiment too long and the impact starts to diminish and ultimately reverse. 


While there is some definite science underpinning the contest preparation process, there’s an undeniable element of art in manipulating all the diet and exercise dynamics so that your physique peaks exactly on contest day. 


There is also the invariable, post-contest frustration.  Inevitably, following the aesthetic ‘peak’ on contest day, the veins start to disappear, muscle definition fades, and you begin to smooth out as both diet and fluid balance renormalize to sustainable levels.  After a week or two of physiological adjustment, you’re back to feeling (and looking) normal. 


Does that over-consume à diet à stimulate à adjustment cycle look familiar?


Bodybuilding contest preparation is not dissimilar to monetary stimulus in the aftermath of a multi-decade credit binge.   After the fun time (pizza eating/credit amplified consumption to offer both sides of the analogy) comes the diet/deleveraging and the stimulants/monetary stimulus to help things along - followed by the inevitable, but necessary, let down on the back end of the whole process. 


Consensus continues to believe we’ll start the QE reversal adjustment process today with something on the order of a $5-10B reduction in monthly purchasing.  Maybe it’s fully priced in, maybe not.  Ultimately, measured policy normalization is a healthy and necessary adjustment and one we think justified given the positive breadth of the data YTD. 


Back to the Global Macro Grind…..


There are three primary fiscal policy catalysts on the calendar in the near term:

  1. Oct 1st – Government Funding: the current Continuing Resolution, which provides funding for government operations in the (now all too familiar) event there is no official budget, ends on September 30th.
  2. Late October - Debt Ceiling:   The latest statements from Treasury Secretary Lew, place the breach date between the end of October and mid-November.
  3. Year End - Sequestration/Fiscal 2014 Budget – Spending levels decline in accordance with sequestration if Congress fails to reach an agreement on an alternative. 

Government funding, the Debt Ceiling, and the fiscal 2014 budget are three discrete events that have coalesced into a single, policy amorphism as each political side threatens standoff or promises compromise/concessions on one as a condition for an accord on another.  


The majority of recent reports suggest the appetite of Republicans to present a united front in tying a delay in Obamacare implementation and other spending and tax initiatives to the Sept 30th government funding deadline is fading – which leaves the debt ceiling as the brinksmanship event of choice.


So, does the Debt Ceiling matter?  


In large part, the debt ceiling matters as a political issue only in so much as the debt level exists as a partisan point of contention and a pervasive populous concern.   For both the politico and the populous, the precedent appears to be that debt generally only matters when the slope is going the wrong way. 


Consider the broader realities existent in 2011 vs. those prevailing today.  The contrast is both illustrative and stark.  


In 2011, when the Debt Ceiling clash roiled equities, we were still well north of $1T in deficit spending, the US credit rating hung in the balance, Europe was still on the brink, confidence remained near trough, QE was only midstream, and fixed income remained fully bid.


Presently, deficit spending is in retreat, the US credit rating isn’t a headline concern, confidence has inflected, Europe is stable-to-improving, policy is re-normalizing, and fund flows have begun a secular reversal.     


Clearly, both the macro and sentiment dynamics have changed materially since Debt Ceiling 1.0.  So has the trajectory of debt spending.  


In the Chart of the Day below, we show the Trend in the deficit-to-GDP ratio.   As can be seen, after reaching a peak of ~10% in 2009, the ratio has showed steady decline with accelerating improvement over the last year alongside stronger economic growth, higher taxes, a retreat in stabilizer payments, and a number of non-recurrent inflows.   


We expect the ratio to retreat further as the domestic macro data continues to reflect ongoing, albeit modest, improvement. 


Indeed, yesterday, in its latest update to the long-term budget outlook (Here), the CBO projected deficit spending would continue to drop over the next few years, falling to 2% of GDP by 2015 with the Debt-to-GDP ratio declining to 68% from its current level of ~73%. 


Yes, the long-term budget outlook, saddled with unsustainable growth in entitlement obligations, remains dire. We’ll break down the budget outlook in detail, by duration, in subsequent notes, but the key takeaway here is that the outlook for both growth and debt spending over the intermediate term remains positive.   


Markets and political strategy move on the slope of the line (better/worse, not good/bad) not on a highly uncertain, 12 year forward projection. 


At present, the Trend slope of improvement in domestic growth, credit, confidence, and deficit spending are all positive and both Treasury Yields and the $USD (our key price signals as it relates to concern over the debt ceiling) remain Bullish from a price perspective.


#RatesRising has been reflecting that positive fundamental reality as have market prices as pro-growth exposure continues to get marked higher (new YTD high yesterday for the QQQ’s and another new all-time high for the R2K) while the underperformance spread for slow growth, yield chase assets (Utilities, MLP’s) continues to expand.   


Notably, policy normalization and #RatesRising alongside Trend improvement in debt and deficit levels also holds important implications for future fiscal policy initiatives.  


If we actually allow rates to go higher over the next couple of years – monetary policy can again be used as a tool to help offset employment and output drags stemming from fiscal policy decisions aimed at putting the budget on a sustainable long-term course.


If we stay at zero percent until projected debt/deficit ratios trough in 2015/16 we lose that optionality.  To reiterate the basketball strategy quote from my AAU coach above:  “Go High to Get Low”.


Perhaps the journey starts today. 


Our immediate-term Macro Risk Ranges are now as follows:


UST 10yr Yield 2.82-2.99%
SPX 1680-1714

USD 80.79-81.73

Brent 107.58-111.43

NatGas 3.59-3.73

Gold 1288-1349


Christian B. Drake

Senior Analyst 


Get High - z. cd


Get High - zz. vp 918

October 2, 2013

October 2, 2013 - dtr



October 2, 2013 - 10yr

October 2, 2013 - spx

October 2, 2013 - dax

October 2, 2013 - nik

October 2, 2013 - euro



October 2, 2013 - VIX

October 2, 2013 - dxy

October 2, 2013 - oil

October 2, 2013 - natgas

October 2, 2013 - gold
October 2, 2013 - copper


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