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On EAT’s 1Q conference call, management just stated that California continues to be weak.


Last week, CKR and CPKI reported worse than expected sales results, which suggested that sales trends in California are not getting any better.  The divergence in gas prices between the west coast and the national average, which is illustrated in the first two charts below, might help to explain the regional weakness.  Although there is a normal seasonal divergence in the price of gasoline geographically within the U.S., the current divergence is the most pronounced in more than 15 years. 


CKR’s CEO Andrew Puzder continues to attribute weakness in sales trends to the current unemployment rates in California and stated just last week that “In particular, record levels of California’s unemployment exceeding 12%, and 18% for the broader unofficial statistic, have negatively influenced consumers’ buying habits.”  Higher unemployment rates combined with this growing spread between regional gas prices, which has been accelerating since mid May, does not bode well for California-centric concepts, such as CPKI, CAKE, RRGB, MSSR, PFCB, JACK and CKR.  On a more favorable note, the third chart also highlights the regions of the country, which benefit from relatively lower gas prices, most notably Texas. 


Overall, gas prices have been extremely favorable on a YOY basis for restaurant companies this year.  During the first half of the year, national average gas prices were down 38% on average.  This YOY favorability continued into 3Q with gas prices down 33% on average.  Looking at the final chart below, this YOY cost benefit has already started to moderate and based on current prices should reverse come the end of October. 


RESTAURANTS – WESTERN U.S. DEMAND HEADWINDS - Gas price.west cost recent


RESTAURANTS – WESTERN U.S. DEMAND HEADWINDS - Gas price.west cost historical


RESTAURANTS – WESTERN U.S. DEMAND HEADWINDS - gas prices regional difference



TJX: Inside the Debate

Our internal process is one that openly encourages debate when we disagree. That’s when our hit ratio goes up… Here’s our take on TJX.  The bottom line is that big cap, liquid quality in a space that will be beating for the next 3-months is not a place to source shorts -- at least at this price.



Keith: Stock looking to be way overbought now fyi… on the news… I like shorting these for a TRADE.


Brian: Yes, TJX gets put in the ‘quality’ bucket in retail. But let’s not forget that margins are at peak, and we’re coming off an 18-month period that helped off-price retailers like TJX and ROST materially. The preannounced comp was a definite positive, but in looking at the 2 and 3-year trend, there is really no change in trend. If anything, it is slightly negative. The gross margin story here will be short-lived, with one more quarter before the financial profile looks less favorable. I’m not going to get too excited about the company’s announcement about an increase in long term unit growth to 4-5% as we’re already looking at a mature company with 2,700 big box stores.  There are other names I’d short before this one, but there will be a time over the next 1-2 quarters where this will make a lot of sense. If it is overbought on this news, then I won’t argue to stay away.


Levine: Recognizing that the incremental data points on TJX are likely to remain positive, I wanted to make a few points before putting the short TRADE on. 


Key factors to look out for over the next 3 months:  1) EPS guidance way too low, but the Street is obviously tuned in to this, 2) they took up the square footage growth rate for next year to 5% from 4%, which is fairly respectable for a company of this size.  I can’t knock them for investing into strength. And 3) the gross margin compares in Q4 are a joke (last year they got caught like the rest of retail with too much inventory).


On the flip side, the 2 year comp is holding steady but not accelerating.  With that said, this is still one of a few retailers with positive 2 year trends. 


Final note here, is that there may be support from other retail/apparel earnings as they begin to trickle out.  We’re now seeing a handful of positive pre-announcements as well which is likely to build momentum.  To the extent you view this is as a negative to being short, it is probably one of the biggest risk factors in the near-term.



Team Conclusion: Hold off at this price. Big cap, liquid quality in a space that will be beating for the next 3-months is not a place to source shorts.


TJX: Inside the Debate - TJX Comp Trends

Retail: Gas Divergence Implications

What has been a gas price tailwind vs. last year is going the other way. Further, California is posting the biggest (unfavorable) spread in recent history. There are implications for retail.



We’re in an interesting position right now as it relates to gas prices.  As consumers, we see prices going up sequentially, which has been the case for almost this whole year.  We’re now looking at prices near 12-month peak levels. But relative to last year, we’re still looking at prices nearly a buck lower. As it relates to share of wallet, that’s big. But by late November, we’re at a point where the yy positive delta goes away due to the precipitous decline in oil we saw around this time last year. In other words, this has been a tailwind for most of ’09, and it’s about to turn into a headwind.


My colleague Andrew Barber brought something to my attention that otherwise slipped right past me. That’s the relative trajectory of West Coast prices. Simply put, over the past month, we’ve seen a divergence in West Coast prices vs. the National Average that we’ve not seen in over 15 years.  In effect, National prices are rolling and California prices are going the other way.


We can speculate all day about how this will negatively impact players like Ross Stores (which is on my short bench), but the bigger impact, I think, will be on smaller (mostly private) regional players that are hanging by a thread. They have visibility on cash flow today – like the rest of retail – but as holiday approaches, that visibility goes punk. My sense is that accelerates the rate at which players like Dick’s will step up and acquire real estate as incumbents go bust.


Retail: Gas Divergence Implications - 1


Retail: Gas Divergence Implications - 2


Retail: Gas Divergence Implications - 3

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The cold wet weather that has dogged the Midwest this year has caused projected harvest start and completion times to be delayed for staple grains, with Corn and Soybean harvests off to the slowest start in decades.  As of October 11, the USDA estimated that only 13% of the total corn crop had been harvested versus an average of 35% by that time in the past five harvests.  Although the harvest is seriously delayed, in absolute size it’s anticipated to be a bumper crop: The USDA estimates a 13 billion bushel season for 2009, which would make it the second largest harvest on record. 


Futures markets ultimately function as insurance markets however, and despite the size of the yield, anticipated prices have risen sharply as more time in the field creates further risk of weather damage and other unknowns. With the harvest expected to drag into late November, the price of December delivery corn has bounced back from last month’s low close of $3 per bushel on September 4th  to  almost $3.85 per bushel in today’s session.


Sanderson Farm (SAFM) is trading lower after being downgraded at KeyBanc.  The thesis is that rising corn prices make feed costs more expensive.  As the story goes corn prices will continue rising due to a declining U.S. dollar boosting exports and expectations that ethanol producers will use more corn.


Keith bought SAFM today on the downgrade.  At research edge we do not agree that corn is headed much higher.  At the current prices for crude oil, Ethanol is not a concern and the bumper crop for corn will ultimately dictate the future of corn prices, which is likely lower.   In two weeks, SAFM will be holding an analyst meeting updating the investment community on where the company is headed and the state of the industry.  Notwithstanding a slight uptick in the price of corn, the industry outlook is positive and SAFM is one of the best managed companies in the space.


Our bottom line: Corn has a broken TAIL and a bullish TREND… within an industry that’s been wrecked/consolidated, broken TAIL prices are positive for producers.


Andrew Barber



Kerry Bauman

Senior Analyst







McCarran Airport reported a decline of only 1.2% in September passenger traffic. However, the September revenue comp is the most difficult for the foreseeable future.



A 1.2% drop in enplaned/deplaned McCarran passengers is the smallest since February 2008.  The airport traffic comparison was relatively easy.  Nonetheless, the number was decent and could contribute to positive growth in Las Vegas visitation.  We now project visitation will show ever-so-slight growth - the first growth month since May 2008 - when the Convention Authority reports its numbers in a few weeks.


What's going on?  The calendar was very favorable, hence the easy comparison, with Labor Day weekend falling mostly in August of last year versus September of this year.  We also think the 17.5% year-over-year decline in gas prices in September will help drive auto traffic from California up around 10%.


So revenues will be strong too, right?  Not so fast. We are projecting Strip gaming revenues to fall 13% despite the decent traffic number.  Slot and table hold last September were each a full percentage point above the average.  The high hold % last year contributed a 10% offset to the gaming revenue decline.  Gaming revenues would've fallen around 15% rather than the relatively strong 5% that was reported in September 2009.  Of course our projections assume normal hold percentages this year and relatively stable Baccarat volumes.  Visits from a few Baccarat whales can have a big impact on revenues.  Indeed, an otherwise dreadful August was somewhat saved by strong Baccarat volumes.


The details of our projections are portrayed below.  Investors may be disappointed when the revenue numbers are released in a few weeks, particularly given the potential enthusiasm surrounding last night's airport numbers.













October 20, 2009





After months of publicly expressing a desire to make acquisitions, Li & Fung announced a deal to acquire privately held Wear Me Apparel Group for $400 million.  While the Street was likely awaiting a more exciting and public deal, once again we are reminded of how much business still takes place in private hands within the apparel industry. ‘Wear Me’ holds licenses for brands including Calvin Klein, Timberland, Disney, Marvel and Nickelodeon and generates sales of $800-$900mm annually. Interestingly enough, the deal includes everything except the hard retail assets, supporting our view that Li&Fung wants brands, and not boxes. Let’s give these guys props as it relates to timing, as it is happening just days after Disney hints at taking its Disney Retail store count up meaningfully. It also happened weeks after Liz Claiborne struck an exclusive deal with JC Penney for all ‘Liz Claiborne-branded product and sub brands.’ Remember that LIZ sold its sourcing operation to Li&Fung earlier this year, and now will be shifting production on the margin through JCP’s sourcing infrastructure, which is one of the best in the business. I’m not suggesting that Li&Fung did this deal in response to LIZ, as the scope is much larger and all adds up to a net positive.  But the chain of events here between LIZ, Disney and Li&Fung remind us that that the retail landscape is much more interconnected globally than most people think.




Some Notable Call Outs

  • Dueling comments this morning as it relates to European VAT (value-added tax), which is a key factor in driving retail consumption and retail margin.
    • Bulgaria’s Finance Minister vowed to cut VAT from 20% (one of the highest in the world) to 16% by 2013. If Borissov’s government can pull this off without breaking the bank, it will be a clear positive.
    • On the flip side, the UK (clearly, a much larger component of European consumption than Bulgaria) is taking up VAT on January from 15% to 17.5%. That’s not new, but saber-rattling in advance of the proposed event continues to increase. The latest opposition is quite interesting. Retailers are questioning return policies around the holidays. If someone gets a gift in late December, and then price goes up 2.5% on Jan 1, then how do they handle product returns?  Well…I hate to break it to them, but the consumer will demand the better price, and the government certainly won’t make up the difference. Yes, that means it comes out of the supply chain.


  • The Consumer Electronics Association released its 16th annual holiday survey and the results are bullish (after all, would the industry organization paint a bleak picture of itself?).  All kidding aside, the results were interesting with the survey showing that 4 out 5 adults plan on buying  Consumer Electronics this holiday (the highest percentage in 16 years).  Additionally, consumers are expected to spend about 8% more this holiday on CE products vs. last year for an average spend of $222.


  • Let the book wars begin.  Not surprisingly, Target.com is matching recent Wal-Mart and Amazon price cuts with an $8.99 offering on this holiday’s anticipated best sellers.  While the retailers are getting aggressive, it should be noted that the biggest losers in this scenario are the publishers, which for decades have been the most profitable component of the book supply chain.  Hardcover bestsellers now appear to be relegated to a traffic driving item with very little profitability.


  • In a sign of the apocalypse, someone actually came out positive on UA this morning. Are people finally starting to get it? Check out our note from Sunday. 


  • The first “boot induced” positive pre-announcement took place this morning with Steve Madden announcing substantial upside to its 3Q results.  Positive boot callouts have been on the radar for a few months, but this is the first confirmation that the trend is meaningful and one to watch for other brands and retailers with exposure to this higher price point category.  Before we extrapolate the trend however, it’s worth highlighting that we’re focusing on fashion boots, not snow boots (at least not yet!).




-Down Under Retailer Kathmandu Floats an IPO - After months of speculation, Australasian outdoor-gear retailer Kathmandu has confirmed a dual listing in both Australia and New Zealand with the launch of its IPO on Monday, offering between 166.9 million and 197.4 million shares for sale, or 84% to 99% of the issued capital. The shares will be priced at between (NZ$2.01 and NZ$2.32 (A$1.65 - A$1.90), raising a total of between $NZ338.6 and $NZ457.2 million. The retailer currently has more than 80 stores in Australia, New Zealand and the U.K. Kathmandu, which Goldman Sachs and Quadrant bought for NZ$275 million (A$204 million) in 2006, is offering its shares to the market at around 13-15 times its forecast 2010 earnings, a discount to the Myer offer at around 14-17 times and in line with the overall market. Kathmandu, which will have a market cap of up to A$380 million after the IPO, has a gross profit margin of 64% percent of sales, which makes the offering all the more attractive. <sportsonesource.com>


-Carl Icahn Offers CIT $6 Billion Loan - American financier Carl Icahn, CIT Group Inc.’s largest creditor, has offered the beleaguered lender an alternative option in the form of a $6 billion loan. In a letter to CIT’s board, Icahn said the loan would save the company $150 million in fees to prospective lenders, and would not force bondholders to vote for a revised debt exchange. Icahn in his letter criticized the proposed $6 billion in a secured term loan being offered by the company as a “bad-faith attempt to buy votes for the company’s exchange offer/plan of reorganization, since all prospective lenders must vote their CIT debt in favor of the company’s plan in order to receive an allocation of the new loan.” He also chastised the proposed prepackaged bankruptcy plan because it would give the board “releases against certain claims that shareholders and bondholders would have against them.” <wwd.com>


-Bernanke: Asia Leading Recovery - Policymakers searching for an economic engine to drive the recovery are looking beyond the U.S. consumer and toward rebounding economies in Asia. Bernanke also warned Monday that the trade imbalances with Asia, which have improved as U.S. consumers save more and Asian consumers spend more, could reassert themselves as the economy perks up and trade volumes rebound. Current Asian growth helps makes Asia a better candidate to lead the recovery than the U.S. consumer, who helped fuel growth and kept Asian factories humming earlier in the decade, but has reprioritized over the last year in favor of saving over spending. “The Asian recovery to date has been in significant part the result of growth in domestic demand, supported by fiscal and monetary policies, rather than of growth in demand from trading partners outside the region,” Bernanke said. <wwd.com>


-Global Textile Production Increases in Second Quarter - Global fabric and yarn production posted major gains in the second quarter, spurred by a double-digit surge in output by Asia, marking a major turnaround after two years of continuous falls, an industry survey said. World yarn production during the April to June period expanded 22.4 percent compared with the previous quarter, and was the first gain registered after falls since the second quarter of 2007, said the International Textile Manufacturers Federation. World fabric production notched 14.4 percent increase in quarter, ITMF said, but production increases in Asia, up 16.7 percent, and in North America, up 7.8 percent, were offset somewhat by slight declines in Europe and South America. <wwd.com>


-TJX Raises Profit Guidance Again - Off-price giant The TJX Cos. Inc. on Monday raised its third-quarter profit guidance for the second time in as many weeks and said October comparable-store sales would climb 9 percent to 11 percent. For the third quarter, profits from continuing operations are now expected to rise to 77 to 79 cents a diluted share. On Oct. 8, the company said earnings for the quarter would rise to 71 to 74 cents, and in August the projection was for earnings of 62 to 68 cents. Year-ago earnings tallied 58 cents. <wwd.com>


-U.K. Retailers call for extension of trade credit insurance top-up scheme - Retailers have voiced their concerns that trade credit insurers do not assess risk accurately and said that the Government’s temporary Trade Credit Insurance Scheme was yet to help their business. 38% of large retailers and 28% of small and medium-sized retailers revealed in the British Retail Consortium’s Quarterly Credit Conditions Monitor report today, that the reduction or withdrawal of credit insurance has negatively impacted their businesses over the last year and want the Government’s trade top-up scheme extended beyond the end of this year. The temporary Trade Credit Insurance Scheme introduced by the Government in its April budget comes to an end on December 31 and 77% of large businesses and 59% of smaller retail businesses believe this should be extended, said the BRC. <drapersonline.com>


-Jean Paul Gaultier Set for Target Collaboration - Target confirmed on Monday that Jean Paul Gaultier will be the third in its series of Designer Collaborations, a relatively new concept intended to boost the discounter’s cheap-chic status. The program features well-established designers who draw inspiration from a collaborative partner, muse or creative element. Designer Collaborations is separate from Target’s Go International initiative. The exclusive Jean Paul Gaultier for Target collection will debut on March 7 in more than 250 stores nationwide and on target.com. The collection will be available through April 11. Gaultier’s Designer Collaboration will have a tighter distribution than the last participant, Anna Sui, whose collection was sold in about 600 Target units. <wwd.com>


-Quelle to Liquidate in Germany - The 82-year-old German catalogue company Quelle, which belongs to the insolvent Arcandor Group’s Primondo mail-order division, is being liquidated. About 7,000 employees in Germany are affected. Quelle’s overseas operations are healthy, according to the insolvency administrator, and will now be sold in an independent process. Separate buyers are also being sought for the remaining Primondo businesses, which includes the catalogues Baby Walz and Hess Natur as well as the TV shopping channel HSE24. The search for an investor for Arcandor’s Karstadt Department Store group is ongoing. <wwd.com>


-LVMH, Analysts See Luxe Rebound Near - While still faint, there is light at the end of what has been a long and dark tunnel for the luxury sector. That was the word from LVMH Moët Hennessy Louis Vuitton on Monday as it reported a 3 percent dip in third-quarter revenues and trumpeted improving trends in all its businesses versus the first half of the year. Meanwhile, Deutsche Bank issued a bullish profits outlook on luxury goods and, at a meeting in Milan organized by Italy’s Fondazione Altagamma association, Bain & Co. predicted a full recovery of the market in the 2011 to 2012 period. <wwd.com>


-'Affordable Luxury' Bucks the Crisis - Tommy Hilfiger just opened a 22,000-square-foot store on Fifth Avenue in Manhattan, a move that, in this economy, some might call insane. But the Hilfiger line, like many midrange designer brands, is growing, while other labels, notably at the high end, are struggling to hang on to market share. Brands like Tommy Hilfiger, D&G from Dolce & Gabbana, or Tory Burch, all selling below the luxury designer category, are growing now because they expanded or reorganized, repositioned collections or introduced new lucrative lines before the first signs of the recession. <nytimes.com>


-Columbia Sportswear to Open Store in Germany - Columbia Sportswear Co. announced it will open a store in Munich, Germany. The 4,800-square-foot store is expected to open in December on Munich’s Sendlingerstrasse, one of the city’s fastest-growing shopping streets with 50,000 visitors each day. The Munich store will be the the company's third branded store in Europe. Its Frankfurt store opened in August followed by the London store last month. In a statement, Columbia said Sendlingerstrasse is one of the fastest developing shopping streets within Munich, with approximately 50,000 people visiting each day. <sportsonesource.com>


-Michigan Avenue Gets Mall Flavor - Luxury labels have some new company on the Magnificent Mile here, with recent entrants such as Best Buy, Zara and Forever 21 adding a dose of the mall. As part of the thoroughfare’s evolution, Tiffany & Co. now sits next to a new 18,000-square-foot Victoria’s Secret and its pink facade, which opened this week. Saks Fifth Avenue will be joined at the Chicago Place mall by the nation’s largest Zara, a three-level, roughly 35,000-square-foot space set to open Oct. 30. Doors away, fast-fashion retailer H&M sits around the corner from Ralph Lauren. <wwd.com>


-Puma opens development center in Vietnam - German sporting goods company Puma AG opened a new product development center in Vietnam on Tuesday, part of an effort to streamline the creation of new apparel and reduce costs. Puma said the center in Ho Chi Minh City pulls together suppliers, researchers and developers under one roof. <businessweek.com>


-US Lacrosse Partners with Champion as the Official Performance Apparel - US Lacrosse announced a new partnership with Champion Athleticwear. Champion has been selected by the sport`s national governing body as the "Official Performance Apparel of US Lacrosse." Champion shares US Lacrosse`s commitment to the responsible development and growth of lacrosse across the country. <sportsonesource.com>




RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough): NKE


10/19/2009 10:13 AM


We shorted it for an immediate term TRADE fading the Goldman call. I'll take that off now, keeping a trade a trade. KM



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