Video | Keith Talks Market Turbulence With Maria

Hedgeye CEO Keith McCullough talks with Maria Bartiromo of Fox Business about today’s market selloff.

Retail Callouts (10/15): Tory, NKE, LULU, WMT, RH, KATE, ZQK

Takeaway: Retail Rolling. Tory testing Wall Street. Huge Nike knockoff lawsuit. LULU Swoosh gaffe. A worthy RH peer? McKnight finally gone from ZQK.



Hedgeye Department Store Black Book/Tomorrow -- Thursday October 16th 11amEST

In Thursday's Black Book, we dive into the industry's supply/demand balance, real estate profiles, category exposure and e-commerce margins.

Relevant tickers: JCP, M, KSS, DDS, JWN, SHLD, TGT, WMT, TJX, and GPS.

Call Details

Toll Free Number:

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Conference Code: 693664#

Materials: CLICK HERE



Takeaway: We've been scratching our heads lately in looking at the strong ICSC numbers. This basket of 80 retailers shows 3.8% yy growth, which has been in stark contrast to Consumer Confidence. But this morning's retail sales report actually matches up well with ICSC.  The gov't numbers and the ICSC trends (both 2 and 3-year run rate) are clearly decelerating. 


Retail Callouts (10/15): Tory, NKE, LULU, WMT, RH, KATE, ZQK - 10 15 chart1


Retail Callouts (10/15): Tory, NKE, LULU, WMT, RH, KATE, ZQK - 10 15 chart7





Tory Burch Interview

Retail Callouts (10/15): Tory, NKE, LULU, WMT, RH, KATE, ZQK - 10 15 chart6




Takeaway: This was a big interview for Tory. She grabbed the headlines again only a month after luring ex-RL COO Roger Farrah to be her co-CEO. She came across as being extremely poised, confident, and surprisingly humble (we think she's less humble off camera). She nixed the idea of an IPO, but not convincingly. We still think that will come within 12-18 months. The interview is worth a watch.


NKE, WMT, HMB - Converse Accuses Wal-Mart, H&M of Selling Knockoff Chucks



"Nike Inc.’s Converse sued Wal-Mart Stores Inc. and Hennes & Mauritz AB, along with other retailers and shoe importers, accusing them of selling knockoffs of its iconic Chuck Taylor All-Star sneakers."

"Wal-Mart, the world’s largest retailer, and H&M, Europe’s second-biggest clothing chain, sell shoes that are 'confusingly similar imitations' of the trademarked All-Star shoes that date back to 1917, Converse said in separate complaints filed today in federal court in Brooklyn, New York."


Takeaway: The irony is that Nike had its beta test with Wal-Mart and what was then its Starter brand. That failed miserably and Nike proved one of the few companies to walk away from a partnership with WMT. WMT thought it could go solo in sourcing Converse knock-offs for its stores. That's backfiring. The interesting thing about this space is that so many companies knock off other brands -- it's simply accepted as the norm. But that does not mean its ethical, or better yet, legal.


ZQK- Quiksilver Announces Changes to Leadership Team



"Quiksilver, Inc. announced that the company is taking the next step in its transfer of leadership, which began with the appointment of Andy Mooney as chief executive officer in January 2013. Following a successful handover, Bob McKnight will retire as a senior executive of the company on October 31, 2014, and he will remain a director. The company also said Andy Mooney has been elected chairman and Pierre Agnes has been promoted to president of Quiksilver, Inc., effective November 1, 2014."


Takeaway: The stock traded up 14.5%, and then after the close it is announced that McKnight is retiring for real. Looks like someone got that memo before the rest of us.


LULU, NKE - Lulu Mannequin Wearing the Swoosh


Takeaway: LULU mannequin's never EVER wear Nike's. But these outfits in the front store of Lululemon SoHo broke that rule big time. The other two broke it again by not only wearing Converse, but knockoff Converse. See lawsuit comment above.

Retail Callouts (10/15): Tory, NKE, LULU, WMT, RH, KATE, ZQK - 10 15 chart3


Restoration Hardware Comp? Arhaus

It's so hard to find a comp for Restoration Hardware. People look at West Elm, or Williams-Sonoma, but they're really different customers looking for a different aesthetic at a different price point. But take a look at Arhaus (pronounced Our-House). It is by far and away the closest we've ever come to seeing the 'Resto look' in a place that's not Resto.  Granted, the prices are higher, the quality is lower, and the design is a 7 to RH's 10. It also lacks the size and scale to compete with RH's prices. But this is one to watch. 


Retail Callouts (10/15): Tory, NKE, LULU, WMT, RH, KATE, ZQK - 10 15 chart4


Retail Callouts (10/15): Tory, NKE, LULU, WMT, RH, KATE, ZQK - 10 15 chart5



Nike Product Spotlight - New Fuel Band

Retail Callouts (10/15): Tory, NKE, LULU, WMT, RH, KATE, ZQK - 10 15 chart2


Takeaway: This is puzzling. Nike shuttered its hardware business in April. It did so, we think, because it had otherwise planned to produce a SportsWatch at a $400 price point. Tim Cook, who is on Nike's Board, likely stepped in and 'advised' Nike that it would be a bad idea to compete with Apple iWatch, which is at a sub-$400 price point. He's right. These fuelbands advertised above could be modified leftover inventory -- at least that's how it sounds to us.





"Kate Spade & Company confirmed its previously announced plan and appointed Thomas Linko as Chief Financial Officer of the Company.  In this position, Mr. Linko will oversee the global finance team and report to George Carrara, President & Chief Operating Officer. Mr. Linko is the former Chief Financial Officer and Chief Operating Officer of Juicy Couture."


Takeaway: This is absolutely not new. It's a positive, as KATE needs strength at the top of its finance organization. But it's not new. As a sidenote, KATE currently has a job posting for a new VP Financial Planning and Investor Relations.





GPS - Gap Inc. Adds 63,000 Jobs This Holiday Season



"Gap Inc. announced plans to hire more than 63,000 seasonal associates nationwide at its Gap, Banana Republic, Old Navy and Athleta stores, call centers and distribution centers for the 2014 holiday season."

"Gap, Banana Republic, Old Navy and Athleta are also coming together to hold a series of in-store hiring events in the company’s first-ever Holiday Hiring Blitz, taking place October 13 - 18."


AMZN - Smiths News launches new Pass My Parcel delivery service with



Pass My Parcel will provide a speedy, efficient and flexible parcel service for consumers who want a quick and convenient way of collecting their parcel. This new service will see Smiths News distribute parcels on behalf of Amazon, to its consumers through a network of independent retailers operating as parcel shops.


WTSL - The Wet Seal, Inc. Announces Initial Steps in Cost Savings Plan



The Wet Seal, Inc., a leading specialty retailer to young women, today announced that it has begun the initial steps to reduce the Company's overall cost structure. As part of this initiative, the Company instituted a workforce reduction resulting in the elimination of a combination of 78 filled and open positions. These include 66 positions at the Company's corporate office, representing a 24% reduction in headcount, and 12 positions at the field management level, representing a 20% decrease.


Gucci Making Retail Push in Russia



"A floundering economy, falling oil prices and a weak ruble against the stronger dollar and euro currencies — combined with a potential worsening of Western sanctions — are no roadblocks for Gucci, as it rolls out its new retail strategy in Russia."

"The Italian firm, which last April took direct control of the retail network and operations for its three stores in the Moscow area, has opened two new units in the region this month — a 10,764-square-foot flagship store located on Moscow’s prestigious Petrovka Street, and a 7,534-square-foot boutique in the city’s GUM department store. Both units feature the latest Gucci store concept, which mixes the brand’s signature rosewood and marble with Art Deco-inspired elements, such as ribbed glass, polished gold, smoked mirrors and bronze glass."


VFC - This North Face Store's Floor Disappears, Forcing Startled Shoppers to Climb the Walls

Pasted from



Alco Stores files Chapter 11, to sell or liquidate



"The 113-year-old retailer and its subsidiary, Alco Holdings Ltd Liability Co., filed voluntary petitions for relief in the U.S. Bankruptcy Court for the Northern District of Texas, Dallas Division.  It listed assets of $221.7 million and debt of $161.6 million."

"Alco said Wells Fargo intends to provide it with a $110 million revolving credit facility and a $12.6 million secured term loan so it can repay some debts and continue operating."

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Europe, Oil and the UST 10YR

Client Talking Points


The economic data coming from Europe is flat out awful, in rate of change terms it’s simply ugly. If you get rate of change right you get bond yields right. This is why the German bund yields are falling this year, because growth is falling in rate of change terms. The FTSE and the DAX remain decidedly bearish trends on our quantitative model.


In the U.S. we are definitely in #QUAD4, which happens when growth and inflation slows at the same time. Today is not the day you want to short oil. Immediate term trade oversold for WTI Oil is $80.07, oil remains in a bearish trend formation on our quantitative model.


The finishing move in UST 10YR as we move towards 2% is that the Fed comes in line with our call and gets more dovish on the margin. Jon Eric Hilsenrath (the chief economics correspondent for The Wall Street Journal) said that the Federal Reserve is looking at the CRB Index, the Fed only looks at the CRB Index when it is going down. When the CRB Index was up 12% they didn’t need to raise rates?  When the market and the economy and/or both go down the Fed gets easier, so the UST 10YR goes lower. Today is not the day to buy the TLT you buy it on pullbacks or you buy it on days that bond yields bounce.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). U.S. real GDP growth is unlikely to come in anywhere in the area code of consensus projections of 3-plus percent. And it is becoming clear to us that market participants are interpreting the Fed’s dovish shift as signaling cause for concern with respect to the growth outlook. We remain on other side of Consensus Macro positions (bearish on Oil, bullish on Treasuries, bearish on SPX) and still have high conviction in our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.


We continue to think long-term interest rates are headed in the direction of both reported growth and growth expectations – i.e. lower. In light of that, we encourage you to remain long of the long bond. The performance divergence between Treasuries, stocks and commodities should continue to widen over the next two to three months. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove. We certainly hope you had the Long Bond (TLT) on versus the Russell 2000 (short side) as the performance divergence in being long #GrowthSlowing hit its widest for 2014 YTD (ex-reinvesting interest).



The U.S. is in Quad #4 on our GIP (Growth/Inflation/Policy) model, which suggests that both economic growth and reported inflation are slowing domestically. As far as the eye can see in a falling interest rate environment, we think you should increase your exposure to slow-growth, yield-chasing trade and remain long of defensive assets like long-term treasuries and Consumer Staples (XLP) – which work decidedly better than Utilities in Quad #4. Consumer Staples is as good as any place to hide as the world clamors for low-beta-big-cap-liquidity.


Three for the Road


At least 2/3 of the country has had negative wage growth and seen cost of living hit all time highs @KeithMcCullough


Don’t be afraid to give up the good to go for the great.

-John D. Rockefeller       



The German Government lowered its GDP forecast (leaked on Friday) to 1.2% in 2014 (vs 1.8% prior); and 1.3% in 2015 (vs 2.0% prior).


LEISURE LETTER (10/15/2014)



  • Oct 15: LVS Q3 earnings 4:30pm , pw 12611335
  • Oct 17: Hedgeye cruise pricing survey (mid-October)
  • Oct 23: PENN Q3 earnings 11 am
  • Oct 23: LHO Q3 earnings 11 am "La Salle Hotel Properties"
  • Oct 24: PEB Q3 earnings 9 am


959:HK Amax International Holdings– announced it completed the purchase of a 60% interest in Forenzia Enterprises Ltd, a firm that has access to an online gaming license for the Pacific island nation of Vanuatu. The transaction total consideration was HKD48.1 million (US$6.2 million). Amax International plans to use the license to operate from the country’s capital Port Vila live table games videoed and streamed for online players. At the same time it will seek to arrange for junkets to fly high rollers from mainland China and elsewhere in Asia to Vanuatu to take part in those table games. Vanatu, an archipelago country, is located about 1,100 miles east of Cairns Australia, 300 miles northeast of Nwe Caledonia and about 700 west of Fiji. The resident population is estimated at 260,000 people. During 2013, nearly 60% of visitors were from Australia, 13% New Zealand and 12% New Caledonia and more than half of all visitation is via cruise ship. 

Takeaway: A very small and very remote casino location. However, the "video" betting is a recent development and a trend we expect to gain greater acceptance once Studio City Manila opens, maybe in December or early January.


BRBY:LN – warned that second-half wholesale revenue will decline and that it expects “slight downward pressure” on margins sent the shares down as much as 6.2%, the steepest intraday decline in a year. Fewer Chinese tourists have been shopping in Hong Kong because of pro-democracy protests over the past three weeks, while fighting in Ukraine and the resulting sanctions have depressed Russian spending in Europe. 


 CWN:AU – Yesterday, the Victorian Parliament’s upper house approved Victoria’s Casino and Gambling Legislation Amendment Bill 2014, if fully approved, the law will extend Crown Melbourne casino resort's gaming license from 2033 to 2050. The extension is part of a wider number of reforms that include the removal of the super tax on commission-based play for international and interstate VIP players from next year. The legislation also allows for more gaming tables and gaming machines across the floors of the casino.The number of tables will increase from 400 to 440, but only 10 of the new tables will be allocated for VIP play. The casino operator will also be allowed to increase the number of fully automated table game terminals from 200 to 250. The property will also be able to add 128 new gaming machines to its floors. Crown Melbourne is the largest casino in Australia and is managed by Crown Melbourne Ltd, a unit of Australia’s Crown Resorts Ltd. Crown Resorts.

Takeaway: Mr. Packer strengthening the positioning of his Crown Melbourne casino both with better tax economics as well as table and game terminal programming. 


HLT – announced the launch of Canopy by Hilton, a new hotel brand that redefines the lifestyle category around the mindset of today’s leisure and business travelers. Christopher J. Nassetta, president and CEO of Hilton Worldwide, unveiled the Canopy by Hilton concept to nearly 1,900 owners and development representatives at Hilton Worldwide’s Global Partnership Conference in Orlando, Florida.  Nassetta said. “We saw an opportunity to not only enter the lifestyle space by developing a new brand, but also to redefine this category by creating a more accessible lifestyle brand. We identified the need to take the emphasis off of capital-intensive design and deliver exactly what the target consumer desires: an energizing, comfortable stay with more included value.”

Takeaway: Finally, the Hilton lifestyle brand. We look forward to seeing the concept first hand, once deployed. It's likely a long, uphill battle to acceptance, however.


HST – announced that on October 3, 2014 the Company's litigation related to the San Antonio Marriott Rivercenter hotel ended in favor of Host Hotels & Resorts as the Texas Supreme Court denied the motion for rehearing from Keystone-Texas Holding Corp.  On June 13, 2014, the Texas Supreme Court had overruled a lower court's $57.3 million verdict against the Company for allegedly interfering with an effort to sell a San Antonio shopping mall and adjacent land underlying the San Antonio Marriott Rivercenter hotel.  Now that the decision by the Texas Supreme Court is final, the Company will reverse the $69 million loss contingency previously recorded under GAAP.  In addition, a court-ordered bond will be released and the Company will recoup its previously funded $25 million escrow. 

Takeaway: A favorable resolution to the legal proceeding.


CCL –  Carnival signs MOU Deal with Chinese Shipyard at CCS9 in Tianjin

joint venture aimed at accelerating the development and growth of the Chinese cruise industry, expected to be one of the largest cruise markets in the world with 4.5 million passengers by 2020, according to the Chinese Ministry of Transport (MOT).  The MOU outlines the framework for exploration of a partnership between Carnival Corporation and the CSSC that includes the possibility of forming a shipbuilding joint venture that could become a three-way arrangement involving Fincantieri of Italy, the world's largest cruise ship building company, in support of the Chinese government's plans to grow the cruising industry in China and could result in the first world-class cruise ship to be built in China.

Takeaway:  A favorable shipbuilding deal for CCL and China.  


RCL – Celebrity Cruises has announced an All-Included Europe Package beginning Monday, Oct. 13.  Guests can now fly directly from New York or New Jersey where they can embark on their European vacation.  The Celebrity All-Included Europe Package is available for the following prices: $2,999 Oceanview lead rate for seven-night Celebrity Equinox Mediterranean sailings; $3,499 Oceanview lead rate for 12-nights on the Silhouette to the Baltic; and $3,499 Oceanview lead rate for 10- or 11-nights on the Reflection on Mediterranean sailings

Takeaway:  All-inclusive deals continue to be more popular. Celebrity taking a page out of Prestige's playbook.


October Macau GGR(LUSA/Macau Daily Times) The gaming sector should see its revenues shrink for the fifth consecutive month in October. Sources linked to Sociedade de Jogos de Macau (SJM) and Melco Crown contacted by the news agency Lusa estimate that the decrease could range between 10 and 13%. “We are still at the beginning of the month, but given the results of the Golden Week we believe that the October revenues will improve when compared to the previous four months.  However, year-on-year the results will decrease above 10% again,” an SJM source said “Gaming revenues are falling and a profit fall when compared to 2013 can’t be discarded,” a Melco Crown source told Lusa. The same source added that the losses are related to “a stricter control on the part of the mainland authorities of the money that is transferred outside its borders, that is limited [by law] to 20,000 yuan.”

Takeaway:  We bet the decline will be larger and margins will be worse = snakeyes for the operators. 


Macau GGR vs. Employment(Macau Daily) Reported that if gaming revenues drop below MOP22 billion per month, as compared to MOP25 billion now, a wave of dismissals in casinos will begin. However, the article lacked any reference to a spokesperson or government official.  By contrast, Carlos Siu, Associate Professor for the Gaming Teaching and Research Centre at the Macao Polytechnic Institute does not currently foresee any impact on employment resulting from the deceleration of gaming profits, saying, “In terms of the global [economic] environment, Macau is still having a rather good one.” He believes that the city need not worry if staying alert.

Takeaway:  Politics will be played in preventing job losses.


Macau-Zhuhai Border Checkpoint (Macau Daily Times) Zhuhai authorities will strive to finish the expansion of the border crossing channels at the Zhuhai-Macau Cross Border Industrial Zone before mid-December.  Although the authorities stated that they are yet to make the decision on which groups will be allowed to cross the border through the Industrial Zone checkpoint, it is likely that Macau residents, non-resident workers, mainland tourists and students may soon be able to cross the border between midnight and 7 a.m.  The expansion will add at least six automated passenger clearance channels in both directions, as well as a manual clearance channel. It is expected that, after the expansion, the Industrial Zone checkpoint will be capable of handling around 12,000 people between midnight and 7 a.m.

Takeaway: A long-term infrastructure positive but not likely to stimulate additional near term demand for the Macau casinos.


China Corruption Crackdown Continues – Agile Property Holdings (3383:HK) saw its share price plummet following a report Mainland authorities are investigating an alleged involvement of the company's chairman, Chen Zhuo Lin, in a bribery case linked to officials in Yunnan Province over property project approvals. 

Takeaway: The crackdowns continue.


New Jersey Sports Betting – The New Jersey State Senate approved a sports betting bill on Tuesday.  The bill now goes before the Assembly for review and vote. If passed in its current form, the legislation will then go to Governor Christie for signature. If the legislation becomes law, the law will likely be heard by U.S. Federal Court.

Takeaway: An uncertain outcome still remains.


Hurricane Gonzalo – maintaining its strength as a strong Category 3 Hurricane with sustained winds of 125 mph and is moving northwest on a heading of 320 degrees at 13 mph.  Gonzalo over the next 12-18 four hours is expected to turn away from the East Coast of the United States and pass just of the Western shore of Bermuda early Friday morning.  Both CCL and RCL skipped ports of call this week across the Caribbean but expect for Bermuda rerouting over the coming days.


LEISURE LETTER (10/15/2014) - hurricane bermuda




Hedgeye Macro Team remains negative on Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  We're seeing bottom-up slowing in European cruise pricing in our monthly survey.  Europe has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely. Following CCL's earnings release, we recently turned negative on those stocks based on the negative European thesis.  To a lesser extent, HOT and HLT are also exposed to European weakness.


Hedgeye Macro Team remains negative on consumer spending and believes in muted inflation, a Quad4 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.


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