[video] Keith's Macro Notebook 2/4: JAPAN RUSSIA COMMODITIES

Something Is Really Wrong In Retail

Takeaway: Something is wrong here.

Something Is Really Wrong In Retail - retailchart

Takeaway from Hedgeye Retail Analyst Brian McGough: This is simply abysmal news for retail. We haven't seen a flat year-over-year reading like this in the ICSC-Chain Store Sales Index (an index of 80 chain store retailers) since February 2010. Now, you can call it weather, you can call it whatever you want. We keep it simple here at Hedgeye. We just call it terrible.

Something is wrong here. 

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One Thing Working In This Dog Breath Market

Takeaway: Got commodity exposure?

So... U.S. stocks got gored yesterday (biggest 9-day decline since 11/11 for the Russell 2000 which was drubbed -7.4%).


But wouldn't you know… The CRB Commodities Index went UP.


One Thing Working In This Dog Breath Market - comm


The CRB Index is now up +1.4% year-to-date versus Consumer Discretionary (XLY) which has been pummeled -8.7%.

One Thing Working In This Dog Breath Market - XLYCRB 

If you're still wondering... yes we stand by our #InflationAccelerating Q1 Macro Theme. It's non-consensus and it's working. Hedgeye CEO Keith McCullough has been discussing this important development with top subscribers for some time now.


Everything that happens in Macro happens on the margin.


It’s no different this time.


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The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
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Please join the Hedgeye Gaming, Lodging, Leisure Team led by Sector Head Todd Jordan for their Regional Reversal Flash Call today, February 4th at 2:00pm EST. 



  • Same proprietary model that predicted the December swoon in regional gaming revenues is predicting sequentially better results in January and February
  • Along with the overall market, the December downturn contributed to 20% stock declines in PENN and PNK and 12% in BYD
  • Sell side Q4 2013 and 2014 estimates have come down and buy side expectations may be even lower
  • While risk remains through earnings season, bad news looks priced in but an improving Jan and Feb does not
  • We maintain our negative long term view given weak demographics



Please email  for details. Attendance on the call is limited. Please note if you are not a current Tier 1 or Tier 2 subscriber to our Gaming, Lodging & Leisure research, there will be a fee associated with this call.         

What's New Today in Retail (2/4)

Takeaway: ICSC worst in 4 yrs. JCP comp ok, liquidity good. Kate finally stands alone. NKE launches Flight 23 Jordan compliments of Footaction.



RL - Earnings Call: Wednesday 2/5 9:00am




ICSC - Chain Store Sales Index


Takeaway: This is simply abysmal. We haven't seen a flat yy reading in the ICSC index since Feb 2010. Call it weather, call it what you want. We call it terrible. 


What's New Today in Retail (2/4) - chart2 2 4




JCP - Turnaround Remains on Track



  • "J. C. Penney Company, Inc. today provided a preliminary update on its sales performance during the holiday and fiscal fourth quarter periods.  For the combined, nine-week November and December period, the Company reported comparable store sales growth of 3.1 percent over the same period last year."
  • "For the full quarter, comparable store sales - which exclude the 53rd week of fiscal 2012 - rose approximately 2.0 percent...For the fourth quarter, sales grew approximately 26.3 percent over last year.  In addition, the Company closed its 2013 fiscal year with total available liquidity in excess of $2 billion."


Takeaway: In any other economy, a 2% comp wouldn't be anything to write home about. But let's face it, competitors are struggling to comp positive. You can say that JCP has 'easy compares' but that does not matter -- they comped positive, period. Even better is the fact that the company stuck to its' guns with liquidity forecasts, which tells us that is did not buy the comp on the gross margin line. Good stuff. We backed away from our JCP bull call several weeks ago. We did not turn negative, we simply stated that for us to confidently make the bullish call, we need a management team we can trust to execute on a long-term turnaround plan.  Ullman is not the guy. But today, that won't matter. The print should quiet the bears for a day or two.





  • "Fifth & Pacific Companies, Inc. announced today that it has completed the sale of Lucky Brand Dungarees, Inc. to an affiliate of Leonard Green & Partners, L.P. (LGP) for total consideration of $225 million, with $140 million in cash at closing and the remaining $85 million financed in the form of a three year, secured, seller note, subject to certain capital adjustments."
  • "Fifth & Pacific Companies, Inc. will support the transferred business through a Transition Services Agreement (TSA) with Lucky Brand Jeans while Lucky Brand creates a standalone infrastructure.  The TSA is expected to span up to 24 months."


Takeaway: Now Kate stands alone -- which is exactly how new CEO Craig Leavitt wants it.


NKE - Nike Opens First Flight 23 Jordan Store



  • "Nike Inc. launched its much-buzzed-about Flight 23 Jordan brand store on Saturday at an event in New York. Flight 23 is a partnership with athletic retailer Footaction."
  • "[Jordan President Jordan Miller] predicted the opening of the first Flight 23 could push other athletic brands to follow suit. In terms of store expansion to other major cities or within malls, nothing is confirmed yet, but Miller did note that Chicago is 'definitely on the top of the list'…"


What's New Today in Retail (2/4) - chart3 2 4


Takeaway: Partnering with Footaction is a pretty savvy move for Nike. FA is marginal at best, and they'll do whatever Nike wants -- and they'll probably pay for a disproportionate amount of the start-up costs. Nike will handle the merchandise and branding. Footaction will sit back, write checks, and let Nike do its thing.


MW - MW's K&G Division Shutters E-commerce Operations



  • The Men’s Wearhouse Inc.’s K&G discount division might have been in play for nearly a year, but it’s no longer online. Visitors to were informed, 'Although our e-commerce store is no longer accepting online orders, our retail stores are still open for business as usual.'”
  • "...Doug Ewert, MW’s chief executive officer, responded to questions about the site’s shutdown through an e-mail and said it had nothing to do with a pending sale or 'anything strategic for K&G,' but that it 'did not make financial sense to continue.'"


Takeaway: We've yet to see any bricks & mortar retailer succeed that does not have a website -- at least for informational purposes.




JWN - Nordstrom to Relocate Ala Moana Store



  • "Nordstrom Inc. plans to relocate its store at the Ala Moana Center in Honolulu to a new, smaller location in spring 2016."
  • "The new unit, part of a redevelopment project under way at the center by owner General Growth Properties Inc., will occupy approximately 186,000 square feet on three levels. Until it’s opened, Nordstrom will continue to operate its current store in the mall, a 211,000-square-foot unit opened in March 2008."


BWS - Diane Sullivan Now CEO, President and Chairman of the Board for Brown Shoe Company



  • "Diane Sullivan is now CEO, president and chairman of the board of Brown Shoe Company. The company’s board of directors appointed Sullivan as chairman of the board last June, and her new role became effective yesterday, February 2, 2014."




What's Selling: Athletic



WISH, Atlanta

  1. Jordan Retro 10
  2. Adidas Stan Smith 
  3. Nike Black History Month pack

Top trend: “The Flyknit racers and the technical running products from Nike have been hot. It’s cool to see that product come back,” said buyer Frank Cooke.

EXTRA BUTTER, New York and Rockville Centre, N.Y. 

  1. Nike Air Trainer 1 Super Bowl
  2. Nike Black History Month KD 6
  3. (tie) Adidas EQT 93 and Reebok Instapump Fury 

Top trend: “Metallics have now crossed over to guys,” said Jason Faustino, co-owner of the two Extra Butter locations. 

RIME, Brooklyn, N.Y. 

  1. Adidas Stan Smith
  2. New Balance 996
  3. Nike Party Pack shoes

Top trend: “Companies are starting to address [the women’s business] with [exclusive] products and collaborations made for women,” said owner Sue Boyle.


Accenture Survey: Webrooming Eclipsing Showrooming 



  • "In a survey of 750 adult consumers, 21 percent of U.S. shoppers said they plan to increase their in-store purchasing, up from just nine percent of shoppers in the previous year. Asked to name what retailers need to improve the most in the overall shopping experience, 40 percent of respondents ranked improving the in-store shopping experience first, compared to just 16 percent who said the same of online shopping."
  • "More shoppers are looking to take advantage of seamless retail services involving the store: In the most recent survey, 19 percent of shoppers said they are using 'click and collect' services (reserving or buying an item online and then traveling to a store to collect it) more often than in the previous year, compared to 12 percent who said the same in the 2012 survey. Additionally, more shoppers (14 percent compared to seven percent) are buying in-store and having the product shipped to their home."
  • "The ability to check product availability online before traveling to a store is the service that would most improve the shopping experience for 31 percent of U.S. shoppers surveyed. And, the vast majority of respondents (89 percent) said they would either travel to a store to make a purchase or buy online if retailers offered real-time information on product availability."








Long term hurdles remain but we’ve got some reasons to believe these stocks could outperform over the short term.



September and December were horrible months for regional gaming companies.  Q3 earnings were impacted but Q4 will likely prove far worse.  The bad news:  regional gaming faces a long-term secular headwind of demographics so growth will continue to be difficult to achieve.  The good news:  December’s swoon was more math driven than a further deterioration in demand.  The upshot:  despite very poor weather, January should outpace very low expectations and mark an upward trend, culminating in a potential flat February.  By comparison to December, a flat February will make these stocks look like growth companies.


So bad news seems reflected in the stocks:

  • All states have released December GGR – cat’s out of the bag
  • Earnings have come down dramatically – buy side even lower we think
  • Stocks have been blasted YTD
  • BYD pre-announced yet stock climbed 10% on Friday
  • Investors are expecting an even worse January given the weather



With the bad news mostly in – there is a risk of further 2014 estimate reductions during earnings season – it may not take much for a reversal with the right catalyst.  Our regional gaming model predicts sequential improvement December to January (even with the weather) and from January to February which could actually be flat YoY.  A couple of positive data points could be the short term tonic these stocks need.


What happened to these once loved real estate plays?


Since the11/15/12 PENN announcement that it was splitting into a REIT and an operating company, regional gaming stocks exploded.  Lost through the new real estate lens was the fact that regional gaming revenue growth was lagging badly behind other consumer sectors despite a growing economy.  Earnings estimates have consistently shrunk over the same period.  Investors didn’t care until the states released September gaming revenues (down 9% in the aggregate) and companies generally missed earnings expectations.  However, the stocks came surging back through the end of the year.




This time it’s different


Pushed on by a bad stock market and the bad December GGRs, investors punished regional gaming stocks.  BYD, PENN, and PNK are down 12%, 20%, and 20%, respectively, YTD as can be seen in the chart above.  The December (and September) downtowns were entirely predictable and similarly, a January/February recovery may be in the works. 

In our October 10/31/14 note “OCTOBER SURPRISE”, we correctly predicted the October rebound from the awful September – also correctly predicted.  On January 3, we released “THE DECEMBER SURPRISE” calling for a near 10% decline in December regional gaming revenues”.  What is our point?  Our point is that our model works and the model is now predicting sequential improvement in January despite the bad weather and – hold on to your seat – actual flat YoY February.  Hooray!  See below.




Bad demographics should continue to pressure regional gaming revenues.  Younger generations are just not interested in slot machines.  We’ve written extensively about this secular headwind so we won’t rehash here.  However, these volatile stocks can move significantly with ‘on the margin’ catalysts.  We think the emergence of 2 sequentially better data points will be those catalysts.  BYD, PENN, PNK should all benefit.


BYD probably maintains the most upside if they can fix operations.  Their properties run at significantly lower margins and revenue per gaming position than the competition in most of the company’s markets.  A senior management addition or change is probably necessary to affect the turnaround but no doubt the potential is there.  Since BYD pre-announced EPS already, it is the lower risk play into earnings.  Not surprisingly, PENN is furthest from its recent peak and without a real estate angle, is a pure play on regional gaming with no real estate angle.  The luster has worn off of PNK – the Wall Street darling of the bunch until recently.

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