Bernanke's Burden Of Proof - Vol. II

As expected the FED ignored the recent CPI and PPI data…..  I will not change from what I said earlier today - today’s CPI data solidifies Bernanke changing the language at the next meeting.  He needs to remove his unsustainable and unreasonable policy that remains “exceptional and extended.”


We have used the term “pandering” to reflect the fact that the Federal Reserve is subjected to short-term political pressures to keep rates low.  FYI--the time to raise rates is now! 


The consensus expectations are convinced that there is no inflation worries building in the economy  and that rates will stay "exceptionally low" to keep the economic recovery on track.  However, it’s my belief that the CPI continues to run counter to what REAL people and business are experiencing.


Tomorrow Ben will be in front of congress.  A cynic would suggest that today’s FED statement did not contain anything inflammatory ahead of the confirmation process, and that he is just trying to get to the January meeting. 


Howard W. Penney

Managing Director


CityCenter may or may not generate the buzz MGM hopes for, but if it does it probably won't come from Vdara.



We've been in Vegas, staying at the Vdara, since Sunday night, and below are some of our impressions of City Center and small tidbits that we've learned during the last few days


City Center mechanics

  • City Center may not have 5,900 rooms after all, or at least not for a long time
    • Vdara currently has 400 rooms open and will likely remain at this level until at least end of 1Q2010.  Until MGM can figure out which buyers are going to close on the reserved condos, and which will back out, they can't really touch most of the rooms at this property
    • Harmon, which (until recently) management recently assured investors would open in 2010, is now indefinitely postponed until at least 2011 or until demand comes back, whenever that may be
  • Whatever condos don't close in early 2010 will not likely get sold off for another 12-24 months (ie whenever the market recovers)
    • The Mandarin residential product, which is 93% reserved, should have the best closing rate.  We would guess in the neighborhood of 70-75%
    • For Vdara and Veer, a 60% closing rate would be optimistic.  The issue for Veer is that they need to sell at least 50% of the inventory in order for their JV lender to offload the mortgages to Fannie/Freddie.  Otherwise Veer is basically impossible to finance and will likely sit dark.  We think that MGM will do whatever they can to push buyers from Vdara to Veer in order to reach that hurdle rate and just run Vdara like a regular hotel
  • It's unlikely that MGM gets any distributions from condo sales
    • Below is a quick outline of how condo proceeds will be distributed...if you do the math you will arrive at the same conclusion as us
    • First in line: up to $250MM of the condo proceeds to go towards construction costs
    • Second in line: the next $250MM of condo proceeds goes towards permanently reducing the City Center credit facility from $1.8BN to $1.55BN
    • Third in line: Dubai World gets priority on the next $491MM of condo proceeds
    • Last in line: After the $991MM of condo proceeds get distributed MGM can now get its distribution of what's left... our guess is that distribution doesn't come until the cows come home or the market recovers in 2011/2012
  • At some point MGM will need to re-start Harmon, which should cost around $300MM, any proceeds from condo sales will like be largely offset by construction spend on Harmon which MGM will need to fund


Our CityCenter experience (actually Vdara):


Vdara is a newer but unfortunately, less cool, version of The Hotel.  Given the ease of access, it appears to be more of a Bellagio adjunct than part of the CityCenter metropolis.


City Center feels like a cluster of separate properties rather than a cohesive resort.  If you are staying at Vdara and want to see the rest of the resort its not very easy.  To get to Aria you have to cross the "City Center highway" which is basically a 2 block walk across a maze of "highway" with no sidewalk or walking path.  There is however, a convenient covered walkway connected to Bellagio (no accident, we surmise).  To get to Mandarin you can take the covered walkway through Bellagio to the "City Center Tram" to Crystals, walk through Crystals and across the sky bridge to Mandarin.  Alternatively, you can walk across City Center highway to Aria and risk getting run over, walk through Aria, and then walk two blocks to Mandarin. You get the point. 


Vdara also only has one restaurant, Silk Road, which is quite tasty (all three meals) and a lobby bar & coffee station.  The gym is nice and there is a convenient $15 resort fee added to your room rate which covers the cost of the gym.  However, unless you are getting a treatment at the spa, you still have to pay $25 to access the tiny spa facilities containing only a locker room with showers, hot tub, steam room, and sauna.  This is no Encore Spa so the likelihood of a $25 splurge is probably low.


The room is fairly nice - a la "The Hotel" at Mandalay Bay - but smaller with a useless kitchenette and no separate living room. The observant traveler will be able to tell MGM didn't spend big bucks on the fixtures here.  Toilet paper holders seem to be having trouble staying on the wall and who needs a nightstand drawer that closes?  It's the little things, folks.

Glass-Steagall Reinstatement Heating Up

Here's a key call-out from our new Financials analyst, Joshua Steiner:



This morning Senators John McCain (R-AZ) and Maria Cantwell (D-WA) are floating a bipartisan bill aimed at reinstating Glass-Steagall. Under their proposal, firms operating with both commercial and investment banking businesses would be given one year from the date of passage to separate the commercial and investment banking sides of the business into separate companies. The bill would also preclude commercial banks from operating in any sort of insurance capacity, requiring affiliated insurance businesses be separated as well.


The proposal comes on the heels of similar efforts to amend the House Financial Services Stability Improvement Act a few weeks back. Passage in the Senate will be an uphill battle, and while a similar amendment failed to escape committee in the House, we think it amounts to another log on the fire of calls for financial reform.


Once Healthcare has moved off the front burner early next year, we expect financial reform to take center stage, with the threat of Glass-Steagall likely being the bargaining chip to get tougher rules/regs through.

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Later today, the FED will ignore the recent CPI and PPI data; the text of today’s release from the FED was already written before the CPI data was released.  I’m kidding; I actually have no idea.  What I do know is that today’s CPI data solidifies Bernanke changing the language at the next meeting.


Ben has proven that he has zero ability to forecast inflation accurately, so when you see him PANDER today, it will be based on what he thought the CPI and PPI were going to be prior to this week.  There is a one month lag in the data – and he is a month behind that data. 


The cost of living (CPI) in the US accelerated in November from October - my 1.9% estimate turned out to be 1.8%.  Regardless, it still marks the end of DEFLATION in the US.  The core was not up as much as expected due to a drop in ”shelter” costs.  It’s my belief that the CPI continues to run counter to what REAL people and business are experiencing.


The Research Edge Inflation index is still signaling that the FED will need to raise rates sooner rather than later.


Howard W. Penney

Managing Director




UBS upgraded DRI this morning going into the quarter.  Casual dining in general does not look good and I don’t think DRI’s numbers will look good so I don’t understand the reason for getting behind this name now.


Darden is scheduled to report fiscal 2Q10 results after the close tomorrow.  My EPS estimate is $0.02 shy of the street’s $0.41 per share estimate.  The extent to which commodity costs prove favorable on a YOY basis is the biggest question mark and could provide some upside to my numbers.  After the first quarter when food costs as a percentage of sales declined nearly 200 bps YOY, management said the food cost benefit would continue into the second and third quarter but would moderate somewhat from Q1.  Management offered this Q2 outlook with a high level of confidence as 80%-90% of its commodity input costs were locked in for the first half of the year at that time. 


Relative to full-year EPS numbers, estimates have come down 2% since last quarter to a much more reasonable range.  I am still a couple of pennies lower than the street but estimates are not as glaringly high as they were going into the Q1 report.


Management lowered the low end of its blended same-store sales guidance after Q1 to -3% to flat.  Even a -3% number assumes some acceleration from Q1’s reported -5.3% and based on industry trends as reported by Malcolm Knapp, we are not yet seeing any improvement.  As I said following Q1, management stated that some of the implied improvement will result from the “arithmetic” or easy comparisons, but the -3% assumes a pick-up in 2-year average trends as well. 


CEO Clarence Otis also said DRI’s guided comparable sales range assumes some acceleration of share gains relative to the industry.  During the first quarter, DRI’s three largest brands combined (Olive Garden, Red Lobster and LongHorn) outperformed the Knapp industry benchmark, excluding DRI, by 250 bps and Mr. Otis said he expects to widen that gap to 300 bps for the full year.  With discounting mounting and DRI choosing not to play the discounting game at LongHorn and Red Lobster, in particular, it might be difficult to increase the company’s gap to Knapp.  I am not saying that DRI cannot achieve -3% comparable sales growth for the year, but again, based on current industry trends, it is not a given and will rely on a pick-up in overall restaurant demand.


For the second quarter, my blended same-store sales estimate of -4.5% is only a little light relative to the street’s expectation of -4.3%.  On a brand by brand basis, my estimates are less aggressive than the street at Red Lobster and LongHorn but more favorable for Olive Garden.  I am modeling -8% at Red Lobster, -8% at LongHorn and -1.5% at Olive Garden.  We know that blended numbers came in roughly -4% to -5% in September (1.9% better than Knapp) because management stated that September was running similar to August.


It is important to remember that all of the company’s concepts are facing difficult comparisons in November due to the holiday shift which benefited Q2 last year and will negatively impact Q2 results this year.  For reference, this Thanksgiving holiday shift benefited last year’s Q2 same-store sales numbers by 70 bps.  Comparisons at Red Lobster are particularly difficult in September as well so a tough September combined with a tough November should yield a pretty ugly number for the quarter, even in light of the company’s running its Endless Shrimp promotion going into the quarter.


On its last earnings call, management talked about doing some more value initiatives at Red Lobster but insisted that it would not damage the brand by participating in the discounting tactics used by its peers.  DRI’s ability to build traffic in the near term will depend on how far management will go to push value and blur the line around discounting.  I hope management will further address its sales building initiatives for Red Lobster on its Q2 earnings call.


Relative to margins, I am modeling a 100 bp contraction in Q2 margins following Q1’s 55 bp margin expansion.  As I said before, the extent to which food costs are favorable in the quarter will factor in here.  Regardless, I think margins will continue to decline for the balance of the year.


Working against margins in Q2:

-Lapping cost saving initiatives implemented in 2Q09

-There will be spending in this year's second quarter related to the company’s field supervisory conferences. Many of these conferences were postponed last year because of the difficult economic environment and the resumption this year will boost selling, general and administrative expenses in this year's second quarter compared to the same quarter last year.

-In addition, last year's second quarter included employee benefit-related favorability that the company does not anticipate this year. That favorability, which was included in selling, general and administrative expenses, was fully offset over the balance of the year by increased tax expense.



Required Retail Reading: Footwear Industry Sales Trends/Data Update


December 16, 2009





Synching industry sales trends/data from NPD and SportScan with the same-store sales of individual companies is part of our process at Research Edge.  And since this is part of our process, it can also be a part of yours.  If you are interested in seeing company specific data in the footwear and sports apparel space, please contact us so that we can set you up with weekly or monthly customized reports on the companies you care about.



Yesterday we received a key data point that shakes, but does not break our bullish outlook on the family footwear space.  Sales sequentially fell from an impressive 17.7% growth rate in September to 7.4% in October to -0.7% in November.  While November’s data is negative, it doesn’t change our fundamental view.  Here’s why:


  • The November compare for Shoe Chains is the most difficult monthly compare in Q4 (November ‘08: +1.5%, December ‘08: +0.2%, January ‘09: -4.7%)
  • The month of November accounts for only 31% of the quarter while December accounts for 45%.
  • The data does not include fashion footwear, which is where the majority of the boot category rests.  And with the return of cold weather, we can’t ignore boots as they become an more meaningful percentage of 4Q sales.  Recall that most retailers are reporting this is one of the best boot seasons in the past several years.  We estimate boots as a category represent about 20% of the 4Q business.  While some individual retailers are seeing boot sales increase upwards of 50%, we estimate that the overall industry is growing somewhere around 20%.  If we factor in a low to mid single digit lift from boots on top of the baseline trends, November shakes out in the +3% to +4% range which is a sequential slow down, but still better than indicated.       


Required Retail Reading: Footwear Industry Sales Trends/Data Update - FL 12 16 09 Fig1 


Required Retail Reading: Footwear Industry Sales Trends/Data Update - image png


Company impact:


Required Retail Reading: Footwear Industry Sales Trends/Data Update - FL 12 16 09 Fig3


  • SCVL faces the greatest potential risk according to the math.
  • PSS, DSW, and SCVL face easier compares in Q4 than they did in Q3.  BWS face a more difficult Q4 compare down 1.5% vs. -6.7% in Q3.
  • Shoe chains haven’t underperformed athletic specialty stores since February 2009.  The outperformance of athletic specialty has been fueled by the toning/fitness category.


Required Retail Reading: Footwear Industry Sales Trends/Data Update - 4




  • Despite the belief that ecommerce is potentially a thorn in the side of traditional bricks and mortar retailing, there are some interesting trends developing for those with a bricks and clicks strategy. Both Wal-Mart and Best Buy are seeing a substantial portion of their online customers opting for in-store pick-up rather than delivery to one’s home. Wal-Mart is suggesting 40% of its consumers are picking up in-store while Best Buy is tracking at 30%. Even more surprising is that these statistics were provided during the current holiday season, a time in which free or almost-free shipping is standard.
  • In the first sign that gift cards are back after a challenging holiday season last year, Best Buy reported that it’s seeing strong trends in the category. Sales of gift cards were up 40% y/y heading into Black Friday and increased over 100% during Friday and Saturday of the Black Friday weekend. Historically, consumers at BBY spend on average 2x the face value of their gift card when redeemed.
  • Celebrity gossip sites are all over the latest photo shoot for the next Candies marketing campaign featuring Britney Spears. Word has it that famed-photographer Annie Leibovitz conducted the shoot for Kohl’s in Los Angeles last week. While the Candies ad campaigns have historically been centered on the spokeswoman, this is sure to gain added attention given Leibovitz’s stature behind the camera.




G-III Apparel plans public share offering - G-III Apparel Group Ltd. said Tuesday it plans to sell common stock in a public offering to fund general operating costs and possible acquisitions. The company, based in New York, did not say how many shares it would sell or how much they would cost. Piper Jaffray & Co. is the bookrunning manager. Lazard Capital Markets is co-lead manager of the offering while Brean Murray, Carret & Co. and KeyBanc Capital Markets are co-managers. G-III Apparel shares fell $1.05, or 5 percent, to $20.20 in after-hours trading Tuesday, as investors worried about the stock possibly becoming more diluted. <>


Dave McTague Named Cole Haan CEO - Cole Haan has named Dave McTague as its new chief executive officer, effective Jan. 4, succeeding James Seuss, who has decided to leave the company. Seuss, who held the ceo post since May 2006, could not be reached for comment, but it is understood he has another job, which could not be learned at press time. McTague will report to Eunan McLaughlin, president of Nike Inc. Affiliates, which owns and operates the accessories firm. Prior to his most recent role as executive vice president of partnered brands for Liz Claiborne Inc., which he left on Dec. 4, McTague served as president of Converse Apparel from 2005 to 2007. Nike owns Converse as well. <>


Collective Brands Promotes John Smith - Collective Brands Inc. has appointed John Smith to SVP and GM of retail for its Performance and Lifestyle Group. Smith joined the company in 2005 and will now report to Stride Rite Children’s Group’s new president, Sharon John. The former SVP of store development and procurement will now lead all retail efforts for the Performance and Lifestyle Group, creating a new strategy in partnership with the Stride Rite Children’s Group. “Applying John’s extensive retail knowledge and strategic thinking directly to the Performance and Lifestyle Group operation will enable us to take our retail businesses in this important and growing unit of our company to the next level,” Matt Rubel, CEO of Collective Brands, said in a statement.  “This move ... shows our commitment to the PLG retail business — a critical initiative for Collective Brands’ hybrid business model.” In his new position, Smith proposes to expand the 360-store Stride Rite chain. <>


Abercrombie & Fitch Creates Stir in Tokyo - Hundreds of shoppers hit Ginza Tuesday morning to be the first to enter Abercrombie & Fitch’s new flagship here. By the 11 a.m. opening, an estimated 1,000 people had lined up to get into the American brand’s first store in Japan. The first customer in line, Hiroaki Kato of nearby Kanagawa, arrived at 9 a.m. on Monday to stake out his spot. “All I’ve had is a single cup of coffee,” he said. Models dressed in jeans, T-shirts, checked flannel shirts and wool jackets greeted customers as they entered the store. Inside, more models, many barely dressed, roamed the shop floor in front of a massive wall mural. The first 500 customers in line were given long, narrow posters displaying a male model’s bare back, the same image that was blown up on the sides of an advertising truck that made its rounds through the area.  <>


Iconix Brand Group Said to Be Breaking Off Talks to Buy Playboy - Iconix Brand Group Inc. is breaking off talks to buy Playboy Enterprises Inc. after determining it would be too complicated to separate the Playboy brand from the company’s other assets, said two people familiar with the matter.

Iconix, the owner of London Fog and Danskin, was interested in licensing the brand and had wanted to divest, shut down or find partners for Playboy units, said the people, who declined to be identified because the talks were private. The situation is still fluid and may be resolved soon, another person said.

Tara Levy, a spokeswoman for Iconix, and Martha Lindeman, a spokeswoman for Chicago-based Playboy, couldn’t be reached to comment outside of regular business hours yesterday.  <>


Cabela's Amends Credit Facility - Cabela's Inc. successfully completed the second amendment to its Second Amended and Restated Credit Agreement. The amendment allows the company to contribute up to $225 million of capital to World's Foremost Bank, the company's wholly-owned bank subsidiary, in calendar year 2010 plus up to $25 million of capital in any fiscal year. The company's ability to make the $225 million capital contribution in 2010 is contingent on changes in accounting rules and regulatory guidelines. The company paid a fee of 50 basis points of the revolving commitment amount to the lending banks to facilitate the amendment. For accounting purposes this fee will be amortized over the remaining term of the credit facility, which expires June 30, 2012. The applicable margin associated with borrowings outstanding under the agreement was unchanged. <>


European Optical Titan to Acquire FGX International - FGX International Holdings Limitied, which makes Foster Grant, Gargoyles, Ironman, Champion and Body Glove sunglasses, has signed a definitive agreement to merge with a subsidiary of Essilor International of Charenton-le-Pont, France. Under the terms of the merger agreement, which was unanimously approved by the boards of directors of both companies, FGX International shareholders will receive $19.75 per share in cash upon completion of the merger, for an aggregate value of approximately $565 million, including the assumption of FGX debt of approximately $100 million. FGXI was trading at $17.91 Wednesday morning before markets opened. If completed, FGX International will become a wholly owned subsidiary of Essilor. <>


Esprit Plots Growth, Seeks Revival in U.S. - The brand, which has had a European and Asian focus for the last five years, is trying to make an impact with larger, architecturally significant stores and an edgy new advertising and image campaign. A three-level, 15,000-square-foot Esprit flagship is set to open at 21-25 West 34th Street here in March. It will be Esprit’s largest store in North America and second largest worldwide. When it bows, the flagship will be Esprit’s fifth unit in Manhattan. Existing stores are in the Flatiron District, Fifth Avenue, SoHo and Columbus Circle. The new flagship will offer men’s casual, men’s collection, women’s casual, women’s collection, women’s EDC and men’s and women’s accessories.  <>


Henri Bendel Launches New Concept in California - Henri Bendel opened a pair of concept stores last month in Southern California that focus exclusively on Bendel-branded merchandise, including jewelry and accessories, beauty products and an assortment of edibles. A 2,400-square-foot boutique launched at South Coast Plaza in Costa Mesa, Calif., followed by a 2,000-square-foot store at Beverly Center mall in Los Angeles. The Limited Brands Inc.-owned luxury chain has sharpened its focus on its most profitable areas, while getting out of apparel — a companywide shift. The parent company sold off majority stakes in The Limited and Express chains in 2007. <>


Jones Apparel Group, Inc. Names Stacy Lastrina Chief Marketing Officer - Jones Apparel Group, Inc. (NYSE: JNY) ("Jones") today announced that Stacy Lastrina has been promoted to the position of Chief Marketing Officer. Ms. Lastrina, who previously served as Executive Vice President of Marketing and Creative Services, will continue to report to Wesley R. Card, President and Chief Executive Officer, Jones Apparel Group. Ms. Lastrina has 19 years of experience with Jones Apparel Group, having joined Nine West Group in 1991 as Director of Marketing. Jones acquired Nine West Group in 1999.  <>


The North Face Sues The South Butt - The North Face has filed a patent infringement suit against a teenager marketing fleeces, T-shirts and shorts under the brand name "The South Butt." In its lawsuit, TNF alleges James Winkelmann Jr., Williams Pharmacy and The South Butt LLC infringed on its patent with their parody product. Winklemann, 18, created The South Butt two years ago and began selling them through Williams Pharmacy, which owns four drug stores in the St. Louis area. The brand features fleeces, T-shirts and other apparel adorned with a square white on red logo that is very similar to TNF's iconic logo. The South Butt uses the tagline "Never Stop Relaxing" in a parody of TNF's "Never Stop Exploring."  <>


Lorpen Expands US Sales Force by 35% - Lorpen, known for its performance socks for outdoor and wintersport enthusiasts,  announced it has greatly expanded its U.S. sales force to keep up with the company’s solid growth in 2009. Lorpen has partnered with the following agencies and independent sales reps that specialize in the outdoor and wintersports industries: Great Pacific Sales will cover the Calif., Nev., Ariz. territory; Will Mason and Deno Dudunake will cover the New England territory; Continental Divide Sports will cover the Utah, Colo., Wyo., N.M. territory; Joe File will cover the Ohio, Ind., Ill., Ky., Mich. territory; Kent Fried will cover the Md., Del., DC, NY, Penn. territory; and Outdoor Marketing Alliance will cover 16 states in the Southeast and Midwest territories. <>


CFOs Say Customer Outreach Not Hurt by Marketing Cuts - Retail finance executives cut where and what they could in 2009, including marketing budgets, but the flexibility of their marketing partners and emphasis on productivity allowed them to maintain or even increase their advertising outreach. This was among the key findings in a survey of chief financial officers from 26 specialty and department store retailers in the U.S. and Canada conducted by Karabus Management Inc., the Toronto-based retail advisory subsidiary of PricewaterhouseCoopers LLP. The 26 stores participating in the second-annual cfo survey ranged in volume from $140 million to $9 billion, with 46 percent public and the remainder private. Forty percent of the cfo’s surveyed said they’d moved away from traditional broad-based advertising and toward more targeted promotions geared to existing customers, and half indicated that, because of savings offered by their media and marketing partners, they were able to cut back on marketing expenditures without materially affecting their customer outreach efforts. <>


U.S.-Made Apparel Prices Rise - Wholesale prices for U.S.-made apparel rose 0.2 percent in November compared with October, and increased 0.3 percent versus a year earlier, the Labor Department said Tuesday in its Producer Price Index. Women’s apparel prices advanced 0.2 percent in month-to-month and year-to-year comparisons. Men’s apparel prices were flat in November compared with the previous month, but gained 0.8 percent from a year ago. Prices for all U.S.-made goods and services increased 1.8 percent in November, driven primarily by a temporary spike in the cost of fuel.  “There is nothing in this report that points to incipient or sustained pressure on broad prices in the economy,” said Brian Bethune, chief U.S. financial economist at IHS Global Insight.  <>


European Retailers Upbeat About Christmas - Shoppers across Europe are loosening their purse strings for the Christmas season, according to retailers, who are upbeat about sales so far. European economies continue to struggle — especially in such key markets as the U.K. and Germany — resulting in trends around the Continent that are similar: While shoppers are more than happy to spend, many are trading down, sticking to their budgets and investing in classic, enduring pieces rather than trendy ones. There’s some discounting going on, although not as rampant as in the U.S., and stores such as Printemps in Paris, Selfridges in London and Düsseldorf’s Eickhoff Königsallee are entertaining shoppers with impromptu pantomime performances, Russian dancers, and tempting them with cinnamon cookies and Champagne.  <>

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