FINL: Insights From a Strengthening #2

We recently posted our Footlocker wishlist and believe the latest results from Finish Line offer some insights into what’s working and what’s not in the world of mall-based athletic footwear retailing.  While the ultimate success of Footlocker’s efforts will be determined by its own merchandising and turnaround strategy, there are interesting takeaways from FINL that should give Footlocker some things to think about it.  Finish Line has always been successful when it is selling product that consumers want (yes I know that is an obvious statement, but it’s true) and as a result, are more likely  to pay full price.  This is in contrast to Footlocker, which has historically been very promotional (BOGO’s were at one point the norm).  The key conclusion here is that product, not price, will be the most important factor in driving healthy margin expansion and sales growth in the space.  Finish Line is onto these trends and early results appear to be promising.


Some of the takeaways on product, pricing, and e-commerce from the Finish Line quarterly call:


  • Sales patterns within the quarter remained volatile, with underlying demand still not improving at a steady and predictable pace.  Customers showed up for Black Friday and other promotional events, but sustained momentum is still elusive.
  • Focus on innovative product has been successful in driving full priced sales, especially in performance dominated categories.  Running, a category where FINL has worked with vendors on developing exclusive product, invested in in-store presentation, and increased training for its associates had strong results in the quarter.  Same store sales in the running category increased in the mid-teens, with strength in both men’s and women’s.  Nike and Puma were leading running brands in the quarter.  Both are focused on lightweight shoes as part of their innovation message.  Overall, ASP’s increased 4.8%, reflecting the strength in full priced sell-throughs of performance product.
  • The toning category was again mentioned as a key highlight from a product standpoint.  As inventories in the product category began to improve towards the end of 3Q, management noted that toning became a “contributor” to 3Q results.  Both Shape-Ups and Easy Tones are driving strength in this young category.  Management expects toning to be a “meaningful” contributor to the fourth quarter.
  • The powerful combination of e-commerce and physical retailing continues to show benefits.  FINL noted that sales under the company’s “We’ve Got It” program are up 50% year to date.  This effort substantially increases conversion because it gives the customer the option of having an out-of-stock item shipped directly to their home rather than walking away completely without a sale.  We continue to hear more and more from retailers that are effectively leverage a fully integrated multi-channel strategy.
  • Weaker categories in the quarter included basketball (comped down and expected to remain under pressure) and casual athletic (i.e non-performance).
  • Kids performed above average, driven by strength in Brand Jordan, Puma, and Under Armour.
  • Apparel posted its first positive comp in 15 quarters, increasing by 5%!  The repositioning of the product offering towards a more premium product is beginning to show results.  Brand Jordan, The North Face, and Under Armour were key drivers in the quarter.


This was the headline from yesterday - “Sales of existing U.S. homes in November rose to the highest level in almost three years as first-time buyers rushed to take advantage of a government tax credit and lower prices.”


This is what we are hearing today - “U.S. new-home sales in south fall to lowest level since 1991”


I suspect that the difference in the performance in existing home sales and new home sales has to do with pricing.  The homebuilders still need to make a margin on the sale of a home versus a consumer wanting out of his/her house.


Last night after the close, the ABC consumer confidence index improved to -42 from -45 last week.    Today, the U. of Michigan consumer confidence final reading for December improved for the first time in three months.  The Reuters/University of Michigan final index of consumer sentiment rose to 72.5, from 67.4 in November. The figure was lower than the preliminary 73.4 reading in early December. 


While most consumers have little confidence in the job market and more than 7 million consumers are unemployed versus this time last year the 23% YTD move in the S&P 500 is benefiting consumer confidence – to a degree. 


The U. of Michigan December reading suggests a lower-high from the 73.5 reading in September 2009.


As I said yesterday, there are a number of sectors in the economy that are bouncing along the bottom and housing is one of them.  Importantly, without Government tax incentives, the housing market would likely still be in a decline.


The river card on this week’s MACRO calendar will be tomorrow’s weekly jobless claims report.  Although the consensus estimate suggests that the number will fall by 10,000 to 470,000, I suspect more Americans than anticipated will have filed first-time claims for unemployment benefits last week.  Last week we were reminded that the labor market will take time to strengthen and that there are parts of the economy that are still struggling.


Howard Penney

Managing Director







December 23, 2009


Today is the day where the penned-up demand of Firms that were on the Dollar General deal can finally unleash their Analytical hounds to let the world know how great of a deal this really was. While FDO is still the better short here, DG’s day will come. Perhaps sooner than later.





Today is the day where the penned-up demand of Firms that were on the Dollar General deal can finally unleash their Analytical hounds to let the world know how great of a deal this really was. Seven brokers launched coverage this morning, five of them with Buy ratings, and none with Sells. The average price target for the bulls is $29. Yes, that’s 32% above where it is today. Not bad for a deal that was priced at the lower-end of the $21-$23 range. Hats off to JP Morgan, the only broker on the deal to not pump its tires.


Does DG still qualify as the type of company that can learn pretty much anything it wants to for a couple of quarters? Although it hardly proved that theory in the latest quarter, the answer is probably yes. But the fact remains that this was arguably the best period to take a dollar store public (again) in the past ten years. In 2010 is gets a lot harder. Yes, the company is helped by a better maturation curve for its stores. But it no longer benefits from the incremental consumer trade-down, shift towards consumables, and increased private label. Margins are peaky, debt is massive, and the company is signing new lease obligations like they’re going out of style. This smells so bad in so many ways.


For now, we like Family Dollar as the better short. But DG’s day will come – perhaps sooner than later.


R3: HAPPY DOLLAR GENERAL DAY - 12 23 2009 8 18 10 AM





  • As the “private sale” trend continues to grow, keep an eye on Zulily. The online private sale site is set to launch in early 2010 with a merchandise focus centered on mom, babies, and kids. The site is partially funded by Mark Vadon, founder of Blue Nile.


  • With Barnes & Noble’s Nook e-reader gaining considerable attention over the past few months as a formidable competitor to Amazon’s Kindle, it’s too bad the product will barely be brought to market in time for the holidays. While the troubles with meeting pre-order demand have been well documented, BKS recently indicated it will now be offering a Nook gift certificate and a $100 gift card to those that are no longer going to get their device before December 25th. Many customers are now up in arms, as the company has delayed shipping dates several times along the way only now admitting that the product will not make it in time for the holiday.


  • Call it cost cutting or an employee morale boost? Crocs has closed its offices for the holidays over the final two weeks of the year. Maybe it’s just a reward for the company’s ability to clear through 12 million pairs of excess inventory over the past 12 months!





Iconix Lauches European Division - Iconix Brand Group Inc. said Tuesday it has partnered with The Licensing Company to launch a European unit to pursue expansion in the region. A group of investors led by The Licensing Company and Albion Equity Partners acquired a 50 percent stake in the new division, Iconix Europe, for $4 million, Iconix said. As part of the deal, Iconix retained its own 50 percent interest in the venture and the rights to its first $6 million of distributions. Iconix said it currently has 11 existing licensing agreements in Europe. The company said it expects to record a pre-tax gain of between $5 million and $7 million related to the transaction. <>


Brazilian Fitness Brand Track & Field Plans U.S. Push - Track & Field, a high-end fitness and lifestyle apparel brand with 36 stores in Brazil, wants to tap into the $30 billion U.S. fitness industry. The company, which uses innovative fabrics such as material that stays dry and fabric that stretches comfortably, will launch an 850-square-foot store next month at 977 Madison Avenue and 77th Street in Manhattan. “When I look at the U.S. market, most companies investing in [innovative] fabrics are very big, like Nike,” founding partner Frederico Wagner said. “It’s hard to think of these companies as being very exclusive.” Wagner said Brazil, which will host the 2016 Summer Olympic Games in Rio de Janeiro, ultimately could support a chain of 70 units, but he sees the potential in the U.S. for as many as 300 to 350 stores. Track & Field sells athleticwear for indoor and outdoor sports, and casualwear that can be worn anytime. There are also collections for cross-training, triathlons, yoga, running, swimming, biking and winter and summer sports. Prices range from $40 to $180 with the average price point at $75. <>


Billabong to Acquire Stake in Surfstitch - Billabong International Ltd entered into a conditional agreement to acquire an interest in Australian online board sports retailer, Surfstitch. The agreement will allow Billabong acquire a minority equity interest in Surfstitch, with options to acquire 100 percent of the business. Billabong said the purchase price was not material and was subject to a confidentiality agreement.   <>


Chinese Retailer PCD Enjoys the Boom - While department stores in the U.S. face tough competition from online retailers and big-box giants, the department store chain PCD in China is booming, reports Business Week. PCD has grown rapidly since opening its first store in 1998. PCD operates 16 department stores and one outlet mall. Earlier this month, it made its Hong Kong trading debut with shares soaring 30 percent, putting the little-known PCD in the industry's big leagues. The company now has a market capitalization of $1.3 billion, larger than some of the top names in the business. As the Chinese economy rebounds, shoppers are returning to the country's stores and investors are driving up the stock prices of Chinese department store chains. <>


Cavalli Renews Global Eyewear License With Marcolin - Roberto Cavalli and Italian eyewear maker Marcolin SpA said Monday they have renewed the license to globally produce and distribute sunglass and prescription frames branded Roberto Cavalli and Just Cavalli until Dec. 31, 2015. The license was set to expire at the end of December 2010. The partnership between the two firms dates to 1999 for the signature branded collection, and to 2005 for the Just Cavalli label. The companies said that the license renewal marks the designer’s 40th anniversary next year. To celebrate the milestone, Marcolin and Cavalli said they are “working at an ambitious development seize new and further growth opportunities.”  <>


Decline in Swiss Watch Exports Ebbs - Swiss watch exports, still feeling the impact of the economic crisis, nevertheless showed a marked improvement in November as their monthly decline was the most moderate for the year. Exports of Swiss timepieces fell 10.6 percent to 1.4 billion Swiss francs, or $1.38 billion at average exchange rates, last month, compared with a 22.7 percent drop reported in October, according to the Federation of the Swiss Watch Industry. In the January-to-November period, the decline in exports was 23.7 percent. <>


Shrinking Credit Threatens Almost $9 Billion in Holiday Sales - Target Corp. and U.S. retailers may lose almost $9 billion in holiday sales as banks rein in lending to cash-strapped consumers before a new credit-card law takes effect. Sales in November and December may fall 1.2 percent to $436.7 billion from the same period in 2008, said Britt Beemer, chairman of consumer polling firm America’s Research Group. If lenders weren’t cutting customer spending limits and rejecting more credit-card applicants, sales would gain about 0.8 percent to $445.5 billion, he said in a Dec. 21 interview. Target Chief Financial Officer Douglas Scovanner says the credit-card legislation is exacerbating a spending slump just as consumers begin to consider more discretionary purchases they would usually buy with credit. Items such as clothing, jewelry and home goods suffered steeper declines during the recession and are among the most profitable sales for retailers.  <>


Fed, FTC to Require Notices for Credit Decisions - The Federal Reserve Board and the Federal Trade Commission announced rules giving U.S. consumers more information when they’re lent money at higher rates because of their credit report.  Consumers given less-favorable terms will be given a notice and the opportunity to get a free report, the Fed and the FTC said in a statement today. Lenders can also comply by giving customers a free credit score, which is usually available for a fee from credit-reporting companies. Currently, lenders don’t have to explain why a borrower is getting particular terms. The rules will apply to all forms of consumer credit, including credit cards, auto loans, mortgages and student loans. The rules apply to banks and lenders such as auto dealers and financing firms. Congress has tightened regulations for lenders this year. President Barack Obama signed a credit-card law May 22 that limits rate increases, among other changes. A new Consumer Financial Protection Agency is under consideration by legislators as part of a broad regulatory overhaul.  <>


Brazil Eyes Sanctions for U.S. Cotton - Brazil told a World Trade Organization forum Monday it could impose punitive sanctions of about $829.3 million because of the U.S.’ failure to scrap cotton subsidy programs found in breach of global rules. A preliminary list published in Brazil’s official daily in November cited more than 200 products that could be targeted for high tariffs, including cotton yarn, cotton fabrics, denim fabrics with more than 85 percent cotton, men’s and boys’ trousers, knitted or crocheted fabrics of cotton and woven fabrics of nylon. Other products on the provisional list include agricultural products, machinery and equipment; pharmaceuticals, and chemical products.  <>


EU Prolongs Duties on Chinese, Vietnamese Footwear - The European Union on Tuesday extended punitive taxes on imports of Chinese and Vietnamese shoes. Ministers from the 27 EU nations "today adopted a regulation extending, by a further period of 15 months, the anti-dumping duty on imports into the EU of footwear with leather uppers originating in China and Vietnam," a statement from the bloc's presidency said. The move is designed to help southern EU producers compete against lower-cost footwear imported by companies such as Nike Inc., Puma and Adidas. The extension of the duties on leather shoes is a compromise because a U.K.-led group of northern European nations opposed re-imposing the levies for the usual five-year period, according to Bloomberg. The anti-dumping measures in the EU carry import duties of 16.5%levied on Chinese shoes with leather uppers and 10% on the same kind of shoes from Vietnam. The duties aim to counter below-cost imports from China and Vietnam. <>


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Standing Still

“The United States needs to move very fast to even standstill.”
-John F. Kennedy
As I was overlooking the shoreline, making my coffee this morning, the big lake they call “Gitche Gumee” was inordinately calm. In the 17th century, French explorers called this massive body of fresh water, “The Highest Lake.” Today, we call it Lake Superior.
After seeing the US stock market hit her highest levels in the last 14 months yesterday, I suppose it’s only fitting that the manic media is anything but calm. A +65.4% meltup in the SP500 has a frantic cast of characters at CNBC scrambling for the latest crackberry sound-bite. Bull markets drive advertising dollars, don’t forget.
Sometimes, in markets, the best thing to do is to do nothing at all. Sometimes, standing still gets you to exactly where you need to be. Sometimes, it doesn’t.
Every market minute presents us with an opportunity to move. Discerning which opportunities to act upon is where the real risk managers of this game make a name for themselves. Everything has a time and a price. Every time you act, you put your (or other people’s) hard earned capital at risk.
When it comes to addressing the highest level of proverbial water on this US stock market lake, there is no denying that I have failed to discern the opportunity in the last 3-days. On Friday, I did not stand still. I sold my bullish position in US Technology (XLK). Standing still and holding that investment in our Asset Allocation Model was the winner’s reward.
Every market minute presents us with wins and losses. Booking a gain on the long side of Tech was a win. Not turning around and shorting the tech ETF prevented my having a loss. Altogether though, I could have played this better.
Standing still and watching a low volume holiday rally is what it is. It’s a call I made. It’s been a rigorously thought out and conscious decision. I don’t wake up every morning, dunk my head in the lake, and go with the flow. I grind through my global macro investment process and look at everything in terms of risk versus reward.
One of the most misunderstood global macro risks in the market today is that of sovereign debt defaults. Many market pundits are brushing off what is happening in Middle Eastern debt, Eastern European banks, and Chinese property stocks as isolated events. Standing still into year-end with that opinion is very risky.
Sovereign defaults, as a percentage of total global defaults, remains at a generationally low level. That can change. Carmen Reinhart (University of Maryland) and Ken Rogoff (Harvard) wrote a great book in the last year titled, “This Time is Different: A Panoramic View of Eight Centuries of Financial Crises”, that provides the best historical context of this critical risk management point. So rather than rehash their work, I will refer you to the Amazon.
The simpleton question that every global risk manager should be asking themselves is this: if sovereign defaults are near all-time lows, and sovereign bailout debt issuance continues to hit all-time highs, how do you think this is going to all end? Until we know, I can assure you of this – we don’t know. That’s what I call risk.
The United Arab Emirates stock market is getting hammered again this morning, trading down another -3.8%, after Dubai World got 100 bankers into a room at the Dubai International Convention Center and peddled them a “Standstill Offer.” No one bought that line. So Dubai World pushed the discussion out to sometime in January. Ladies and gentlemen of Dubai, this is not a time to standstill. Stock markets wait for no one.
Middle Eastern debt defaults, combined with a breakdown in the price of oil from an intermediate term TREND perspective, are some of the main reasons why I have recently raised my water levels of cash in the Asset Allocation Model to 62%. With the US Dollar and long term US Treasury rates breaking out to the upside, I am more comfortable standing still with US Cash now than at any other time other than 16 months ago, when I recommended you move to 96% US Cash.
I will be the first to admit that US stock and debt markets are much less risky now than they were back then. I will also be one of the first to remind you this morning that emerging markets from Asia to the Middle East may not be. As cost of capital in the US continues to heighten (10-year yields are hitting new 4 month highs again this morning at 3.74%) and global access to capital continues to tighten, I see plenty of global default risk heading into 2010 and beyond.
In the meantime, like the mountain they call the Sleeping Giant on The Highest Lake, I intend to sleep soundly with my cash, standing still.
My immediate term support and resistance lines for the SP500 are now 1107 and 1120, respectively.
Best of luck out there today,




VXX - iPath S&P500 Volatility
For a TRADE we bought some protection at the market's YTD highs by buying volatility on 12/14.

EWZ - iShares Brazil
As Greece and Dubai were blowing up, we took our Asset Allocation on International Equities to zero.  On 12/8 we started buying back exposure via our favorite country, Brazil, with the etf trading down on the day. We remain bullish on Brazil's commodity complex and believe the country's management of its interest rate policy has promoted stimulus.

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.


RSX – Market Vectors Russia
We shorted Russia on 12/18 after a terrible unemployment report and an intermediate term TREND view of oil’s price that’s bearish.

EWJ - iShares JapanWhile 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.

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.   

XLY - SPDR Consumer Discretionary We shorted Howard Penney's view on Consumer Discretionary stocks on 10/30 and 12/2.

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.


The Macau Metro Monitor.  December 23rd, 2009




Macau’s Statistics and Census Service or DSEC announced that the number of visitor arrivals increased by 2.7% year-over-year in November, slower than the 5.2% growth seen in October.  Visitation from mainland China grew by 14.6% y-o-y, while visitation from Taiwan and Malaysia increased by 15.8% and 5.1% respectively.  Visitation from Hong Kong, Japan, and Singapore decreased in November.  For the year-to-date, visitation has dropped 6.2% compared to the same period of 2008.



Yesterday, the S&P pushed to a new a high for the year, closing up 0.4% on yesterday’s trade line of 1,118.  In very light pre-holiday trading, volume declined 5.6% day-over-day and the breadth of the market narrowed.  The MACRO calendar drove yesterday’s optimism on the better-than-expected housing data, which sparked a rally in the homebuilders and housing-leveraged stocks.  Countering that optimism was another downward revision to Q3 GDP. 


The higher beta small-cap names continue to outperform with the NASDAQ and Russell 2000 rising 0.7% and 0.8%, respectively.  The VIX continues to be broken on all three durations (TRADE, TREND and TAIL), breaking below 20.00 yesterday to close down 4.6% at 19.54. 


There continues to be a breakdown in the inverse correlation between US equities and the dollar that has dominated the MACRO landscape in 2009.  The Dollar index has increased for the past seven days and the S&P has now been up for the last three.  The Dollar index is up 0.71% in the past three trading days and the S&P 500 is up 1.99%.


Housing-related stocks were among the best performers yesterday with the XHB +2.25%.  The main driver of yesterday’s performance was a better-than-expected existing home sales number.  The NAR reported that existing homes sales rose 7.4% month-over-month in November to a 6.54M annual rate; the highest since February of 2007. Total inventories fell 1.3%, while the months’ supply dropped to 6.5 from 7 in October (single-family months' supply fell to 6.2 from 6.8).  Notable gainers in the group included builders KBH +6.9%, PHM +4.7% and TOL +4.5%.


Yesterday, the three best performing sectors were Technology, Consumer Staples and Materials.  Increased earnings expectations helped the Technology (XLK) sector outperform the S&P 500 by 0.4%.  The bright spot was the semi space with the SOX +0.6% yesterday.  Two standouts were AMKR and JBL, which both posted guidance ahead of Street expectations.


The momentum behind the RECOVERY trade has helped Materials (XLB) outperform, but has left the Industrials (XLI) behind.  The Road& Rail (R), Air Freight (FDX) and Machinery (FLS) were among the laggards.  The best performing stock was FLIR Systems, up 3.5% on the day. 


From a risk management standpoint, the ranges for the S&P 500, the Dollar Index and the VIX are seen in the charts below.  The range for the S&P 500 is 16 points or 0.5% upside and 1.0% downside.  At the time of writing, the major market futures are slightly higher.


The CRB improved by 0.04% yesterday; grains, Energy and Livestock all traded higher on the day.


In early trading, crude oil held steady above $74 a barrel in New York before a U.S. Energy Department report on inventory levels.  The report today is expected to show oil inventories shrank by 1.6 million barrels in the week ended Dec. 18, according to the median estimate by Bloomberg.  The Research Edge Quant models have the following levels for OIL – buy Trade (70.49) and Sell Trade (74.52).


Gold declined for the third day in London.  Gold declined by 0.3% to 1,080.  The Research Edge Quant models have the following levels for GOLD – buy Trade ($1,071) and Sell Trade ($1,151). 


Copper rose in London on speculation that demand in China and the U.S. will strengthen.  Also, the dollar decline has created an arbitrage opportunity for Chinese speculators.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.09) and Sell Trade (3.15).


Howard Penney

Managing Director









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