November 18, 2009





We’ve been expecting a big quarter out of PSS (one of our favorite names all year), and the preannouncements out of DSW and now BWS (after the close yesterday) support our call. We still think estimates are too low, by a long shot.



After the close yesterday we had our latest positive preannouncement with BWS reporting earnings 30% above consensus. Recall that DSW kicked off the 3Q with a preannouncement back in mid-October. This leaves us with only two companies that have not preannounced in the small peer group that we track for PSS – Shoe Carnival and…PSS itself. The read through has obvious implications with trends improving on the margin at the same time that PSS is hitting an inflection point in earnings. Consistent with our call, the Street is still too low by at least 20%, 25% and 30% for the quarter, year, and 2010.


With more retailers starting to report positive same store sales in the absolute sense driven in part by improved traffic, we are seeing a significant acceleration of comp trajectory across footwear on both a 1Yr and 2Yr basis. Taking all the factors into consideration, including comps tracking +/- 1% on a 2-year basis for both DSW and BWS in the 3Q,  I am increasingly confident that PSS will print a positive absolute comp this quarter. With sourcing costs easing heading into the 2H and the DC transition complete, the leverage on higher sales is meaningful.


The bottom line is that we are coming out at $0.58 for the 3Q, meaningfully above Street expectations of $0.47, and closer to $2.00 for next year. With the stock trading at 10x our fiscal 2010 estimate, the earnings power is not reflected in shares at this level. For further detail on PSS and our multi-year thesis, please contact us for a copy of our PSS Black Book.


RETAIL FIRST LOOK: IT'S A FOOT RACE - FootwearCatTable 11 09











  • Despite some initial confusion surrounding commentary about the promotional environment, Target’s management was quick to point out that they always anticipate a “highly promotional fourth quarter” and this year should not be any different. They further elaborated that planned promotional activity is not likely to be more aggressive than in the past (including Black Friday) and clearance promotions should in fact be less this year given the tight inventory control across the entire retail landscape heading into the holidays.
  • On its very bullish conference call, TJX management suggested that the company’s success in 2009 has not really benefitted much from other retail bankruptcies, inventory liquidations, and the recession. While the company’s results have been exceptional, it’s hard to believe these external factors haven’t had a meaningful impact. Otherwise, it’s hard to explain why almost all other off-pricers ranging from Ross Stores to Gilt Groupe are also experiencing similar positive trends.
  • While most apparel retailers are now complaining about the warm weather and the abrupt shift in momentum from October in the sale of seasonal apparel, Home Depot is seeing the opposite. Management noted that same stores sales in November are tracking ahead of October’s -5.2% trend, due in part to seasonally warm weather. Outdoor categories, such as roofing, are seeing positive benefits from the warm trends.
  • In an effort to reach younger customers and broaden its customer base, Burberry is embracing the world of digital media. The company is planning to spend 40% of its European Fall/Winter campaign budget online. The spend is notable as the overall industry statistics suggest that in five years, only 20% of global ad spend will be digital (clearly it is much less today). Burberry’s digital leadership position is highlighted with its recent online broadcast of the company’s London Runway show and its launch of





Consumer Prices Suggest Core Inflation Low - Builders in October probably broke ground on U.S. houses at the fastest pace in 11 months, and consumer prices held below the Federal Reserve’s long-range goal, economists said reports today may show. A report from the Labor Department may show the cost of living climbed 0.2 percent for a second month. The Commerce Department’s housing report is due at 8:30 a.m. in Washington. Estimates in the survey ranged from 570,000 to 630,000, after 590,000 in September. Also at 8:30 a.m., the Labor Department will release the consumer price gauge. Compared with the same time last year, prices were probably down for the eighth consecutive month. Excluding food and energy costs, the so-called core index rose 0.1 percent after climbing 0.2 percent in September, according to the Bloomberg survey median. The gauge was probably up 1.6 percent in the 12 months to October, according to the survey median. Fed policy makers’ long-term forecast for their preferred measure of inflation, the Commerce Department index tied to consumer spending and excluding food and fuel, calls for gains in a range of 1.7 percent to 2 percent. It was up 1.3 percent in the 12 months to September.  <>


Obama, Hu Vow Cooperation Amid Divisions Over Trade - President Barack Obama and Chinese President Hu Jintao concluded their formal meetings in Beijing yesterday with promises of increased cooperation amid lingering friction over currency, trade and human rights. Obama said the world’s most populous nation played a vital role in helping end a global recession and will be a key partner in dealing with challenges from curbing the nuclear ambitions of Iran and North Korea to combating climate change. “The relationship between the United States and China has never been more important to our collective future,” Obama said in an appearance with Hu at the Great Hall of the People.  <>


Goldman Sachs, Buffett Said to Plan Aid for Small Businesses - Goldman Sachs Group Inc., under fire in Washington for setting aside billions of dollars for bonuses a year after getting a taxpayer bailout, is preparing to team up with Warren Buffett to provide assistance to small businesses, said people familiar with the matter. The charitable effort, which may be announced as soon as today, coincides with one of the Obama administration’s top economic priorities: spurring hiring at small companies. The initiative would aim to provide assistance -- ranging from counseling to obtaining funding -- to 10,000 U.S. businesses, according to the people, who declined to be identified before the program is announced. Buffett’s Berkshire Hathaway Inc. is the largest shareholder in New York-based Goldman Sachs. <>


EU VAT: No longer a threat - The European Union plans to impose value added tax on non-European companies that provide services in the European Union. But Indian IT companies are not worried, reports CNBC-TV18's Kritika Saxena. It was a proposal that, when first announced, had Indian IT companies sweating at the brow. The EU plans to impose value added tax on non-European companies operating inside the EU starting the first of January. Indian firms were worried that this would scale up costs by 25%, making their pricing uncompetitive. But now, this panic has subsided. <>


Ahold Aims to Cut Costs by 350 Million Euros, Step Up Expansion - Royal Ahold NV, the owner of the U.S. Stop & Shop grocery chain, pledged to cut costs by 350 million euros ($521 million) and pursue expansion amid speculation that the company may become a takeover target. Ahold plans the expense reduction by the end of 2012, Chief Executive Officer John Rishton said today, adding there is “not an area in the business we’re not looking at.” The Amsterdam- based retailer today reported a 22 percent gain in third-quarter net income to 238 million euros, beating the 179 million-euro average estimate of eight analysts in a Bloomberg survey. Ahold, the owner of Dutch market leader Albert Heijn, should use excess cash of about 2 billion euros to make acquisitions or buy back stock to avoid becoming a bid target, analysts including Petercam’s Fernand de Boer have said.  <>


TSA Will Sell Wii Game Consoles - The Sports Authority will begin selling Nintendo products, including videogaming consoles and the Wii Fit and Wii Fit Plus games. TSA has been in talks with Nintendo for the past six months and decide dto carry the game console, "to shift the paradigm and shake up the treadmill and sporting-goods business.” Select TSA stores will begin publicizing the tagline “We know fit. We know fun” and will sell Wii products and feature the games in dedicated areas. Fitness trainers will be on hand to help customers try them out. <>


India IPO funding seen hit by unsecured lending curb - A popular tactic used by Indian brokerages to raise money for rich clients is likely to be banned by the central bank's move to curb unregulated lending, potentially crimping funding for a long pipeline of planned IPOs. India's central bank this month proposed to stop borrowers from issuing non-convertible debt with a maturity of less than 90 days, part of a broader effort to remove excess liquidity as overseas funds pour into its markets. Brokerages have made such borrowings mostly from mutual funds, typically at twice the commercial paper market rate, and then turned around and loaned the funds to rich clients. The wealthy investors, in turn, used the cash to invest in a recent slew of IPOs, fuelling aggressive valuations. <>


UPS expects a slight increase in holiday season shipments this year - From Thanksgiving to Christmas, United Parcel Service of America Inc. expects to deliver about 400 million packages worldwide, with most of them in North America, representing a slight increase over last year’s holiday shopping season, a spokeswoman says. UPS expects its busiest day of the year will be the Monday before Christmas, Dec. 21, when it expects to deliver 22 million packages, an increase of about 40% over normal daily delivery volumes. To handle the peak volumes, UPS will hire about 50,000 seasonal workers, many of them delivery drivers’ helpers.  <>


The Sharper Image returns - The Sharper Image, the former multichannel retailer which closed its nearly 200 stores last year shortly after filing for bankruptcy, is back with a new e-commerce site at The site, which Camelot Venture Group designed, developed and launched, features the retailers’ trademark gadgets, such as sound-soothing alarm clocks and adjustable-temperature wine chillers.  <>


Lanvin Finds Minority Investor - WWD has learned the French fashion house has sold a minority stake to an investor in exchange for a capital injection estimated in the tens of millions of euros. The identity of the investor could not immediately be learned, but it is understood to be a European family holding company with a long-term horizon and no exit strategy. It acquired a 12.5 percent stake in Arpège SAS, the holding company for Lanvin. He declined to name the investor, while characterizing it as in sync with Lanvin’s “human scale” organization and familial management style. The proceeds will be used to help Lanvin expand its retail network and deepen its commercial footprint, leveraging the design prowess and buzz of its acclaimed creative director Alber Elbaz, Andretta said. <>


Web sales up 12.6%, but where are those sales coming from  - When it comes to online sales, it looks like things may be bouncing back a bit. In October, e-commerce sales increased 12.6% over October 2008, according to a new monthly study of 150 e-retailer clients of MyBuys Inc. that the firm conducted exclusively for Internet Retailer. So in October, even though total sales were up by 12.6% year over year, the industry’s health was little changed from a year ago because total sales owed so much to discounted items, sales of which were up 112%, and because the depth of discounts increased from an average of 24.6% in October 2008 to 28% this October. Online retailers saw sales drop 2.6% on non-discounted goods from the same period last year <>


New Domestic Focus for China, Hong Kong - China’s economy and manufacturing sector are picking up steam again, posting impressive new growth numbers that point to a strong recovery from the global financial crisis. Not far behind, textile and apparel trade fairs in Hong Kong and Mainland China are approaching the next six months with renewed vigor and hope for a revitalization in customers and purchases. “In general, Asian economies are recovering from the global crisis more quickly than elsewhere,” said Michael Duck, director of Hong Kong’s Asia Pacific Leather Fair. “This region has the world’s largest populations and its citizens are fast improving their standard of living and level of disposable income. These economies, once regarded as the low-cost production platforms for an affluent West, are now turning attention to their domestic markets.” <>


Japan Looks for a Jumpstart - As Japan inches its way out of a recession, trade show organizers are seeking strategies to entice retailers and give the market here a boost. “Neither buyers nor exhibitors can figure out what suits the market,” said Takashi Yoshioka, who represents the casual apparel show Frontier. “[Buyers’] budgets are smaller than before, and they don’t know what to sell and buy.” Naoya Jita of JFW International Fashion Fair, Japan’s biggest fashion trade event, also recognized the challenges in the current market.  “Buyers are interested in the goods that sell well now, but more than that, they are looking for something that creates [future] excitement on the retail scene,” Jita said. <>


New Balance isn't just sensible shoes anymore - New Balance for Nine West is unveiling its seasonal lineup of fashionable sneakers and shoes for women. Earlier this year, New Balance Athletic Shoe Inc., the Boston-based company known for athletic footwear, teamed up with shoe retailer Nine West to launch their first joint collection of footwear; the footwear aimed to combine New Balance performance technology with Nine West's sense of fashion and style. <>


Powdr Corp. Agrees to Buy Copper Mountain - Intrawest and Powdr Corp announced they have entered into a definitive purchase agreement to sell Intrawest’s interests in Copper Mountain to Powdr Corp. The transaction is anticipated to close in December 2009 and the agreement is subject to regulatory approvals including the issuance of a U.S. Forest Service special-use permit to Powdr Corp. This winter season it is business as usual at Copper Mountain. Once the transaction is finalized Intrawest and Powdr Corp have committed to work together to ensure that all of the multi-mountain season pass products, vacation reservations and joint marketing initiatives will be honored for the 2009-2010 winter season.  <>


Deckers Wins Ugg Counterfeit Lawsuit - Deckers Outdoor Corp. has won a copyright infringement lawsuit against a Melbourne, Australia firm over the sale of counterfeit Ugg boots. According to Smart Company in Australia, a court has ordered the company, Hepbourne, to pay Australian $7.5m (U.S. $6.9 mm) to Deckers. Deckers has pursued Melbourne company Hepbourne for over five years over the sale of counterfeit boots and has obtained court orders on a number of occasions preventing Hepbourne from selling the boots. But according to court documents, Hepbourne continued to sell the boots at markets and on eBay, even after legal action was launched and the homes of some of its selling agents were searched. A Federal Court judge in Australia awarded Deckers A$3 million (U.S. $2.8 mm) in damages for lost profits and a further A$3.5 million (U.S. $3.3 mm) for the flagrancy of the copyright breach. The defendants were also ordered to pay A$1 million (U.S. $0.9 mm) in costs. <>


Orenstein Launches Consulting Business - Joel Clark Orenstein, who has held executive posts at companies such as Halston, Oscar de la Renta outerwear, J. G. Hook, Fashion Ribbon, Federated Department Stores and Lord & Taylor, has started his own consulting firm. Orenstein Fashion Business Planning & Merchandising Service will offer services such as business planning, financial analysis, merchandising, sales management, evaluation of channels of distribution, sourcing and marketing. Based in Southport, Conn., Orenstein is working with a team of merchants and business analysts on a freelance basis. <>


Barclays Head of Global Retail Warns Upstart Supermarket Banks - The new boss of global retail banking at Barclays has hit out at supermarkets and other companies setting up their own banking offers. Antony Jenkins, who recently moved to the role, believes supermarkets may be underestimating the difficulties of running a banking operation and questioned whether they had the right skills to run it, according to the Financial Times. Tesco and Sainsbury’s have both been taking advantage of the loss of confidence in traditional banks by ramping up thier financial services offers. “The series of disruptions in the global financial system has created opportunities for other players to enter the market and it’s going to make it an interesting landscape,” he said. <>


“The future belongs to people who see possibilities before they become obvious.”  
-Ted Levitt
I’m guest-writing the Early Look this morning for Keith, and he asked me to give a glimpse into why I’m so focused on Mobility for the next few years, with our new Mobility Black Book, and the conference call we’re hosting for Tech subscribers tomorrow afternoon. Here goes, and feel free to ping me with any feedback/questions at .
The Mobile Internet has the power to pull us out of the current economic downturn.  That’s how powerful this innovation cycle is and will be over the coming years.  It will impact every consumer with an Internet-enabled mobile phone (meaning everyone) and it will alter the way every business does business.
If that sounds a bit crazy, take a second to put away your Blackberry or your iPhone – these devices aren’t what I am talking about.  Far from being well underway, mobility – especially the Mobile Internet – is just beginning.  This isn’t about packaging desktop applications into smaller form factors.  The Mobile Internet is a different animal altogether.
Mobile devices will increasingly be connected to the cloud and able to leverage all information – in real time.  Simply put, the ability to marry ubiquitous information with location-based, personal productivity, and social-networking services will lead to magical outcomes.  Yes. I said “magical.” Mobile ecosystems are just now beginning to grasp what can be built to take advantage of connected mobile devices.  Apple and the iPhone showed the world a teeny slice of what’s possible, but thinking the iPhone is our final destination is like thinking the telegraph was the crowning achievement in telecommunications.
Currently, just 20% of mobile devices worldwide use 3G networks, which is the minimum required for modern smartphones, and the inflection point for 3G and smartphone growth will be in 2010. And, as a sublimely smart colleague of mine told me this morning, 2010 is a mere 6 ½ weeks away.
Over the last two years, Apple and the iPhone have shown the world what is possible, and we are on the cusp of an explosion that will leverage mobile platforms to drive new services, then the new services drive new demand, then new demand drives new devices. Rinse and repeat. For the end user, the handset maker and the application/service developer, this is a self-perpetuating, virtuous cycle.
So what? As the Mobile Internet matures, the economics will go towards online commerce, paid services, and advertising, while data will get proportionately less revenue, just as with Web 1.0.  Make no mistake, data revenue growth will still be substantial, as more data flows to more devices more often, but other segments of the market will grow faster.  At the same time, new marketing, advertising and customer experiences will arise from the combination of local, social, and mobile which allows businesses to efficiently hit their targeted demographics. The companies that ‘get’ this will leapfrog the competition.  
It’s been a decade since we’ve seen this sort of sea change, and it won’t hit every name the same. Some tech companies have used the recession to invest and position themselves (GOOG, ADBE, MOT), and some have been fighting a rear-guard action in last year’s war (RIMM, ERIC, NOK). More importantly, and harder to predict, a whole generation of lesser-known infrastructure players will win big here, and with Switzerland plays that leave them immune to the vagaries of product cycles. Think Levi Strauss selling pickaxes to the gold rush.
Imagine a world with five billion mobile devices.  Data will be real-time, around the world, instantly.  
Imagine getting into your car and having the latest traffic information, music and news that’s most relevant to your exact location and plans for the day fed to you via the cloud.  
Imagine your wife’s birthday combining with her social network’s comments and your e-commerce platform to suggest, order, inscribe, and deliver (ahead of time!) the right gift at the right time.  
Imagine being able to leverage your Mobile Internet, camera, location and search to get the best deal available, real-time, on anything.
Imagine knowing what Americans are worried about this week.
Imagine knowing when your father’s insulin shot is late, and when your daughter has gotten an A.
Keep on imagining…

Rebecca F. Runkle
Managing Director



FXE – CurrencyShares Euro Trust
We bought the Euro on 11/12 on a down move against our short position in the British Pound. A bullish formation in the Euro remains and we think the ECB could hike before the Fed does.

XLU – SPDR Utilities We bought low beta Utilities on discount on 10/20. TRADE and TREND bullish.

GLD – SPDR Gold We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.   

CYB – WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP – iShares TIPS The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

EWJ – iShares Japan While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

EWY – iShares South Korea South Korea has joined Japan in the ominous position of broken TREND and TRADE. This is not China or Taiwan. This is an early cycle economy that we want to be short against China/Taiwan.

XLI – SPDR Industrials We shorted Industrials again on 11/9 on the up move as the US market made a lower-high.  This is the best way for us to be short the hope of a V-shaped recovery.   

EWU – iShares UK Despite areas of improvement, broader fundamentals remain shaky in the UK: government debt continues to expand, leadership in critical positions lacks, and the country’s leverage to the banking sector remains glaringly negative.  Q3 saw its GDP contract by -0.4%. Further bank stimulus and the BOE’s increase in its bond purchasing program suggest that this will not end well.

XLY – SPDR Consumer Discretionary We shorted Howard Penney’s view on Consumer Discretionary stocks on 10/30. TRADE and TREND bullish.  

FXB – CurrencyShares British Pound Sterling
The Pound is the only major currency that looks remotely as precarious as the US Dollar. We shorted the Pound into strength on 10/16 and 11/16.

SHY – iShares 1-3 Year Treasury Bonds  If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.


Here are our MGM notes from the Las Vegas meetings.



LVCVA announced that they got six new conventions.  Aria is pricing above Bellagio 80% of the time over the next few months – not what we’ve heard.


For Aria - will room revenue as a % of total be smaller than their other properties?

Probably, given all the condo hotels.   We will start with a block of rooms on December 16th and then scale up the opening through January 1st.  Vdara – 1,500 rooms,1/2 condo 1/2 hotel, of that amount open by January.  Booked 45% of the 750 condos that are available.  They prefer to walk those condo customers over to Veer.  Veer has 750 units - 65% have been contracted out.  Will not offer financing to condo hotel buyers.  Condo owner can't contractually rent those units for less than 6 months at a time. Don't know how many of their buyers will be able to close.


Rough start to marketing Aria's convention business.


High end has the biggest swing between week and weekend rates.


Crystals will open with 30% of the 500 salable square feet. 85% is contracted out. $130 per square foot rates - $30mm in EBITDA initially and then scale. 


Funding gap post opening - $244mm is the gap.  Next $490mm goes to DB, next goes to them, and the next gets split 50/50.  Another unsecured deal - have $2bn of maturities - Macau IPO, leveraging up City Center next year, secured is cheapest option but that option is small.  MGM would still look at asset sales.  Equity linked products are a painful way to go.


They would rather shutter floors than drop pricing on Aria.  Pre-opening will flow through the income statement not through the equity and affiliates line.  $5bn new cost base over 20-25 years.


Plan to recap City Center and dividend back the proceeds.


“No way” to PNK acquisition.


Think they can get $800mm- $1bn out of MGM macau - 50% to them. Think they can do $300mm next year in ebitda.  Secured basket is a little under a $1bn now.  Convert is a last option. Haven't had deep discussions with the banks on rollover.


Didn't comment on the $150 ADR we had been hearing for Aria. 


A lot of the conventions for 4Q09 were canceled and it is still hurting the city.


Think that they will be able to hold rate next year/raise rates in 2010 given their occupancy. Pretty significant portion of rooms booked through OTAs.


AC not super excited about that market for next year. IPO in Macau may make them more comfortable.


This past weekend was very good.


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The Macau Metro Monitor.  November 18th, 2009



Mainland tourists outspend and outstay most foreign tourists, according to new information from the Statistics and Census Service.  The per-capita spend of Mainland visitors in the third quarter was MOP 3,268, almost twice the average spend of other visitors.  Overall per-capita spend of visitors declined year-over-year by 9%. 


In the third quarter of 2009, per-capita non-shopping spending (excluding gaming expenses) of visitors fell by 12 percent year-on-year to MOP 931, of which expenses on Accommodation and Food & Beverage accounted for 47% and 31%, respectively.

TJX: The Street Knows It

With TJX results out today, we revisit a debate we had on October 20th.  Not a whole lot has changed (stock price or expectations) with today’s solid results and outlook.  The reality is, for the past few quarters the process with TJX is almost like clockwork.  Issue conservative guidance, beat sales month after month, pre-announce upside, exceed earnings by a penny, and reissue conservative guidance.  Underlying all of this of course, is strong demand for TJX’s value offering and commensurate customer traffic gains.  Along the way, we have been quick to point out that the benefits of the “perfect storm” of quality inventory supply coupled with unprecedented consumer demand for “value” have not yet been exhausted.   Today’s results support our prior conclusion, but also make us ask the question “how much better can things really get.”


As a reminder, our October 20th 2009 comments:


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.



Fast forward to today and management remains bullish (perhaps increasingly so) and expectations are high.  We are now at the point where the Street simply doesn’t believe guidance and its embedded conservatism.  Let’s use 4Q same store sales guidance as an example.  Management would like the Street to consider that even with the positive commentary on traffic gains and the company’s ability to “keep” its new customers, same store sales are going to decelerate sequentially by 100-300 bps on a two-year basis.  While the math doesn’t tell the whole story, the disconnect between the bullish commentary and the company’s forecast for $0.66 to $0.71 in 4Q does.  Our model is shaking out at $0.89 for 4Q, and we would not be surprised to see the consensus trickling higher as the rest of the Street goes through the same exercise.  Holding the two year trend out of 3Q constant,  we’re expecting comps in the 8-9% range (vs. guidance of 5%-7%) and operating margin expansion of 370 bps (guidance is for +170bps). Recall that last year even TJX got caught with excess inventories (and subsequent clearance) as the overall retail environment went through a dramatic transformation.


Calling the top is a dangerous game, but we continue to inch closer to a time when increasingly elevated expectations can no longer be exceeded.  Earnings are going higher and the Street knows it.  Comparisons remain easy until the Spring and the Street knows it.  Management is stepping up its reinvestment (store growth, marketing, share repurchase, and bonuses) and the Street knows it.  So, while there is still no doubt that 4Q will likely be another quarter of substantial upside, we can’t help but wonder what happens as the same-store sales revert back to “normal” and new peak margins become harder to achieve.


TJX: The Street Knows It - 1


TJX: The Street Knows It - 2


UK Inflation Pops, Note the Compare

A report from the UK Office for National Statistics today showed the country’s Consumer Price Index for October rose 1.5% year-over-year, from 1.1% in the previous month.  This seemingly large jump is better understood within the context of the precipitous fall in energy prices last Fall from manic highs in the summer of 2008 (see chart).


In fact, prices from fuels and lubricants in the UK fell by 0.7% between September and October this year versus a fall of 6.1% a year ago, which was a major contributor to October’s inflationary print. Month-over-month CPI rose 0.2%.


In 2009 we’ve stayed away from (or shorted) countries with financial leverage.  We continue to see headwinds in the UK into 2010 including rising unemployment, ballooning government debt, and a weak Pound for the import-heavy economy (for more see our post “Pounded Pound Breeds Inflation” on 11/6).  The government’s recent decision to bailout RBS and Lloyds for a second time to the tune of 31.3 Billion Pounds and the extension of the BOE’s bond purchasing program by 25 Billion Pounds after printing a contracting Q3 GDP report (-0.4% Q/Q) add support to our bearish conviction.


In our virtual portfolio we remain short the UK via the etf EWU and short the Pound via FXB. 


Matthew Hedrick



UK Inflation Pops, Note the Compare - UK CPI


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