January 21, 2009


Athletic footwear and apparel are setting up to outperform in 2010, which is consistent with our view that this will be a standout space in retail.





Athletic footwear sales were up again last week marking the 7th straight week of positive sales growth – the longest such trend in over 2-years. Coupled with our visit to Nike headquarters last week, this trend gives us further confidence that 2010 will indeed mark the year that athletic footwear outperforms. Other than a BTS induced two week pop in sales back in September, we have to look back to the 1Q of F09 to site positive sales. So what does this mean?


With sales of footwear strongest in February last year this trend is likely to cool as comparisons get tougher in the weeks ahead. However, the balance of the year lines up favorably with a product-driven demand cycle that we expect to see by mid-year as key players (i.e. NKE & UA) rollout new lines after some internal reorganization and arguably reinvigoration – also good for FL & FINL. This is not to take away the from the strength that we’re also seeing in apparel though less notable on the margin as it has outperformed footwear for the last 12-months.


The punchline? In broader retail, earnings revisions we’re looking at near-20x p/e on 25% consensus EPS growth expectations – a stark contrast to what we saw at the March 9th lows. Earnings revisions have been steadily easing over the past three weeks, suggesting that the magnitude of the upside after the sell-side overshot on the way down is coming to an end. When we combine that with our view that the athletic space will accelerate while the rest of retail decelerates, it is something to keep a keen eye on.


Our favorites include NKE, BBBY, FL, FINL, PSS and UA (we like it more after the print given the recent positive change in sentiment).  On the flip side, we don’t like ROST, JCP, M, FDO, and DG.


R3: ATHLETIC STARTING OFF 2010 STRONG - Footwear and Apparel in the Sports Retailer Channel




  • In an effort to emphasize Coach’s opportunity for growth in China, management offered some interesting statistics regarding brand awareness. Coach’s unaided awareness in China is currently 8%, while it is 72% in the US, and 63% in Japan. Interestingly, the Chinese consumer’s intent to repurchase Coach is 94%, a figure greater than in the US or Japan. Given the limited growth prospects remaining domestically, we expect to hear more and more about China over the next couple of years.
  • Keeping with the China theme, super-luxury brand Hermes recently (and quietly) purchased a Chinese brand called Shang Xia. The acquisition will allow Hermes to offer a lower priced product, locally sourced and tailored specifically to the Chinese luxury consumer. While it is very clear that the Chinese luxury consumer clearly favors western brands, the move is interesting in that it is an attempt to plant the seeds and cultivate a Chinese-only luxury offering. Additionally, this allows Hermes to appeal to a wider target audience without damaging its high-priced namesake brand.
  • With the winter Olympics on the horizon, marketing efforts are beginning to perk up. Labatt just announced that is joining the “unofficial” Olympic party with the opening of Club Bud, a party venue open for just five nights during the event. Interestingly, Labatt has partnered with the NHL, Lululemon, Under Armour, and Burton to produce themed evenings on each night. Molson is actually the official beer supplier to the Olympic games despite these “unofficial” efforts...




Deckers Outdoor Makes A Simple Decision - Deckers Outdoor Corp. is shifting some senior brand responsibilities and moving its Simple brand from under the UGG brand umbrella managed by Connie Rashwain to instead report into Teva brand President Peter Worley.  “This is an exciting opportunity for both the Simple and Teva teams to engage, exchange ideas, and collaborate, as we evolve and develop both unique brands,” stated Peter Worley.  “Connie Rishwain has lead and supported the Simple Brand and the Simple team to date.  This move will allow Connie to dedicate more of her time and focus on the UGG Brand and its continued future success.  We look forward to great things from the Simple Brand under Pete’s leadership,” stated Angel Martinez. <>


Istithmar's CEO Switch Ignites Speculation About Barneys - With David Jackson, the chief executive officer of Istithmar World, out of the job as of Tuesday, the Dubai-based investment company appears intent on accelerating restructuring efforts for its various operations, including its U.S. retail holdings, Barneys New York and Loehmann’s. Aidan Birkett, the chief restructuring officer of Istithmar’s parent, Dubai World, on Wednesday said Andy Watson would be interim ceo, succeeding Jackson. “We are pleased that Andy is stepping in as acting ceo of Istithmar World,” said Birkett, who is leading the moves by Dubai World to renegotiate $27 billion in debt. “His experience will be vital in actively managing the portfolio of assets held by Istithmar World.” Under Jackson, Istithmar World “expanded rapidly as a private equity investment house during the years before the economic crisis hit,” Birkett said, adding, “Today, Istithmar World is focused on the steady-state management of existing assets to maximize value rather than on private equity investment.”  <>


Obama: will insist on consumer financial protection - President Barack Obama said on Wednesday he would keep consumer protection at the heart of his proposed overhaul of financial regulation, despite suffering a serious political setback in the U.S. Senate. It's very important to have a consumer finance regulatory authority that is willing to actually enforce the law, so that people aren't getting gouged," Obama told ABC News in an interview marking his first year in office. The White House separately said that Obama would discuss financial reform in remarks on Thursday after meeting in the Oval Office with Paul Volcker, the former Federal Reserve chairman who heads Obama's economic recovery advisory board. Obama's desire for a new consumer financial protection agency and other parts of his ambitious reform agenda became even harder to achieve after his Democratic party on Tuesday lost its 60-seat Senate majority in an upset victory in Massachusetts by Republican Scott Brown. This "supermajority" allows Democrats to overcome Republican delaying tactics in moving legislation through the Senate to Obama's desk to be signed into law. Republicans oppose key parts of Obama's plans to tighten rules on complex financial firms, whose reckless betting on the property market tipped the financial system to the brink of collapse in 2008. Its members have also opposed a financial responsibility fee he wants to slap on banks to recoup billions of dollars taxpayers spent on corporate bailouts. <>


U.S.-Made Apparel Prices Flat in December - Wholesale prices for U.S.-made apparel were flat in December compared with November and rose 0.2 percent from a year earlier, the Labor Department said Wednesday in its Producer Price Index. Women’s domestic apparel prices declined 0.1 percent month-to-month, but were up 0.1 percent from December 2008. Men’s apparel prices were flat in December and increased 0.6 percent year-over-year. Prices for all U.S.-made goods rose a seasonally adjusted 0.2 percent in December, driven by a rise in food prices.  <>


Global Output Set for Slow Rebound - World output is forecast to grow 2.4 percent this year, rebounding from a 2.2 percent decline last year, with emerging economies such as China and India leading the recovery, according to a United Nations report. The study estimated world trade volume, which fell 12.5 percent last year, will increase 5.4 percent. The rebound largely will result from $2.6 trillion in fiscal stimulus measures by major economies that “effectively arrested further erosion of confidence worldwide” caused by the recession, the report said. But U.N. economists cautioned the recovery will be uneven and fragile.  <>


Americans See Economic Recovery a Long Way Off - Two-thirds (67%) believe it will be two or more years before recovery starts. Americans are thinking in terms of years, not months, when pondering how much longer it will be before the U.S. economy starts to recover. The vast majority (67%) believe it will be at least two years before a recovery starts, and nearly half (46%) think it will be at least three years.The findings are from a USA Today/Gallup poll conducted Jan. 8-9. With a full third of Americans (34%) saying it will be four or more years before a recovery starts, the mean response is 4 ½ years -- putting the average predicted onset of recovery well into 2014. Public opinion about the timeline for recovery is seemingly in conflict with recent economic reports suggesting the U.S. economy grew in the second half of 2009, possibly setting the stage for recovery this year. However, much of the current economic analysis is highly cautious, in part tempered by the continuing high rate of unemployment -- thus, perhaps, contributing to Americans' skepticism about a speedy return to business as usual. Americans' outlook for recovery today is similar to what Gallup found in July 2009. Americans living in households earning $90,000 or more annually are more optimistic about when recovery will occur than are those in households with lower income levels; still, the majority of all income groups expect to wait at least two years before the economy starts to recover. The extent to which the balance of power in Washington influences Americans' economic optimism is evident in the partisan responses. Democrats -- who generally have more confidence in the leadership of President Obama and the Democrat-controlled Congress -- are much more optimistic about an economic recovery in the near term than are independents or Republicans.Much of the responsibility for economic recovery will be assigned -- fairly or unfairly -- to President Obama. Indeed, already more Americans disapprove than approve of the job he is doing on the economy. In general, Americans do believe presidents' policies can influence the direction the economy takes. The poll finds about half of Americans -- regardless of party affiliation -- saying a president has "a great deal" of influence over national economic conditions. Another 35% say a president's policies affect the economy "a moderate amount," while 10% say they have little impact.The American public seems braced for a long road to economic recovery. Not only do most Americans expect to wait two or more years for a recovery to start, but the majority continue to believe the economy is getting worse. While such pessimistic views could help Obama in terms of keeping the expectations bar low, now that he is entering his second year, Americans are likely to increasingly judge his performance on the economy by his own economic policies. <>

Chinese Ox In A Box

“We have two classes of forecasters: those who don’t know – and those who don’t know what they don’t know.”

-John Kenneth Galbraith


This morning you are going to see a host of perpetually bullish market forecasters start to get worried about China. It’s about time. As we have been saying for the last few months, the Chinese Ox is in a Box in Q1 of 2010.


The way that this works is that China reports a better than “expected” GDP number for Q4 of 2009, CNBC cheers, but the local market reaction in both China and Hong Kong is lower stock prices. Then, all of the revisionist forecasters start asking why? And, finally, they end up knowing what they didn’t know.


In the aggregate, China’s Q4 GDP  is the equivalent of the bark on the tree. Whereas the December and January growth numbers, combined with an explicit change in Chinese monetary policy, is the forest. China is tightening monetary policy as inflation accelerates. Slowing sequential growth and accelerating sequential inflation is what is putting Chinese stocks in an intermediate term box.


Slowing growth and accelerating inflation? Yes, that’s been our forecast, and here is the data:


1.       Industrial production growth slowed in December to +18.5% year-over-year (missing expectations)

2.       Consumer Price Inflation (CPI) accelerated, big time, in December to +1.9% year-over-year (up from +0.6% last month)

3.       Money Supply growth (M2) slowed 200 basis points in December to +27.7% versus a record high of +29.7% (y/y) in November


What’s most interesting about this call for China to tone down what we have called speculative loan and money supply growth, is that the Chinese government absolutely agrees with us. They will not pander to the politics of inflating asset prices. They have learned what not to do from us.


Within China’s Q4 economic growth report, the government removed the language of “moderately loose monetary policy.” For all of the US Federal Reserve watchers out there, that would be the equivalent of Bernanke removing the “extended and exceptional” language in his currently conflicted and compromised stance.


It’s one thing to be in the political penalty box for doing something like starving your citizenry of fixed income on their savings accounts. It entirely a different thing to put yourself in the box with an explicit attempt to slow speculative borrowing. The latter is China’s strategy. The former is America’s. And for those like Goldman who came out saying “buy China” on January 1st who didn’t know that… well, now they know.


We hosted our Macro Themes conference call for our subscribers last week, and we will be presenting the case for the Chinese Ox In a Box later on today on Yale’s campus at an investor lunch. If you’d like a replay of our call and the slides, please email sales@


Now that I have issued you a shameless sales plug, here are the top 3 conclusions from our Chinese Ox In a Box presentation:


(1)    Money supply growth slowing.  Right now the central bank has not stated a 2010 target for growth in M2, but had a 17% goal last year.   The actual growth rate was more than 25% for 2009, peaking at 29.7% growth YOY in November.  We think that money supply growth could be cut by 1/3 of its current pace.

(2)    Loan growth slowing in 2010. Chinese banks extended 9.59 trillion Yuan of loans in 2009, compared with 4.15 trillion Yuan in 2008 (+131% y/y growth). We think loan growth could drop by at least 1/3 of its current pace.

(3)    Bullish on the Chinese currency. The Chinese Yuan appreciated +18.7% between 2005 and 2008, but has been basically flat for the past 18 months. This will change, when the Chinese government decides to raise both lending and currency rates again in 2010. We think that currency appreciation will be at least +3-6% in the coming 6-12 months.


Additionally, here are the key lines of resistance that have now built themselves into real-time Chinese stock market prices:


1.       China’s Shanghai Composite Exchange = 3204

2.       Hong Kong’s Hang Seng Index = 21,829


We remain bullish on China’s long term TAIL, but that’s an investment view that has 3 years in duration. When one is bullish on something for the long term, that doesn’t mean they have to be bullish on it at every price.


Our call for Q1 on China is simply that, an intermediate term call of caution. It’s what our Hedgeyes are forecasting so that you can proactively manage the risk associated with stock market prices that have stopped going up.


Best of luck out there today,






EWC – iShares Canada — We remain bullish on the intermediate term TREND for Canada. With a pullback in the ETF on 1/15/10 we bought Canada.


XLK – SPDR Technology — We bought back Tech after a healthy 2-day pullback on 1/7/10.


UUP – PowerShares US Dollar Index Fund — We bought the USD Fund on 1/4/10 as an explicit way to represent our Q1 2010 Macro Theme that we have labeled Buck Breakout (we were bearish on the USD in ’09).

VXX - iPath S&P500 Volatility — The VIX broke down to our immediate term oversold line on 1/6/10, prompting us to add to our position on VXX.


EWG - iShares Germany —Buying back the bullish intermediate term TREND thesis Matt Hedrick maintains on Germany. We are short Russia and, from a European exposure perspective, like being long the lower beta DAX against the higher beta RTSI as well.

EWZ - iShares Brazil — As Greece and Dubai were blowing up, we took our Asset Allocation on International Equities to zero.  On 12/8/09 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.

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 mispriced and that TIPS are a efficient way to own yield on an inflation protected basis.



IEF – iShares 7-10 Year Treasury One of our Macro Themes for Q1 of 2010 is "Rate Run-up". Our bearish view on US Treasuries is implied.
RSX – Market Vectors Russia
We shorted Russia on 12/18/09 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.

SHY - iShares 1-3 Year Treasury BondsIf 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. January 21rst, 2010



The Statistics and Census Service reported that consumer prices in Macau increased 0.8% y-o-y in December and 1.2% in 2009.



Resorts World Sentosa partially opened yesterday with 1,340 rooms in 4 hotels, including a Hard Rock hotel and a property designed by Michael Graves. The casino opened is scheduled to open in March following delays in getting license approval. The 7,300 seat-ballroom will host its first event at the end of this month and Universal Studies theme park is scheduled to open its doors over in several weeks.  Genting expects tourists to make up 60% of visitors to its casino with 25% of those visitors coming from China.

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The S&P rolled over on Wednesday, with all of the major indexes finishing down more than 1% on the session.  Tuesday’s euphoria over the election in Massachusetts was quickly overcome by the potential for Congressional gridlock on a number of important issues.  Overall the volume was still light, but was up 1.9% day-to-day; breadth was the worst it’s been all year. 


The Hedgeye RISK Management sector models saw a breakdown yesterday in two sectors – XLY and XLU – both broke TRADE. All nine sectors declined yesterday and all nine are positive on TREND. 


On the MACRO front, the “CHINESE OX IN A BOX” and liquidity concerns were on the front burner as the focus was on Beijing's efforts to curb new bank lending.  Not surprisingly, this dynamic weighed on the RECOVERY trade as the Dollar Index continues to trade higher.  Of the three worst performing sectors two are leveraged to the RECOVERY TRADE - Materials (XLB) and Energy (XLE).  


The XLE and XLB were also hit by the strength in our “BUCK BREAKOUT” theme, which underpinned the safe haven status (i.e. better fiscal outlook now that Democrats have lost in Massachusetts and heightened risk aversion with the VIX up +6.1% on the day yesterday.  Precious metals and industrial stocks were among the biggest decliners in the XLB, while higher-beta coal and oil services stocks were underperformers in the XLE sector.  On Wednesday, crude closed down 1.9% to $77.74 a barrel.


Also on the MACRO front the MBA mortgage applications slowed to 9.1% from 14.3% and housing starts declined 4% from 8.9% last month.  On the positive side building permits were 653,000 vs. 584,000 last month. 


Also taking center stage on the downside was Technology (XLK).  The XLK underperformed yesterday despite the Q4 earnings beat from IBM. There was weakness in the software group today, with the S&P Software Index declining 1.4%, while the Semis held up better than the broader XLK. 


The best performing sector yesterday was the Financials (XLF), down only 0.3% on the day.  Within the XLF the banking group bucked the broader market selloff today with the BKX up 1.4% with the Trust names (STT, NTRS and BK) trading higher following their Q4 earnings results. Regional banking stocks are also performing wells after their Q4 earnings reports.


As we look at today’s set up the range for the S&P 500 is at 20 points or 0.43% (1,133) downside and 1.05% (1,150) upside.  At the time of writing the major market futures are trading down on the day.  


Copper imports by China, climbed for a second month in December on rising demand.  Despite this news Copper traded down 2.67% yesterday and is flattish in early trading today.  The Hedgeye Risk Management Quant models have the following levels for COPPER – buy Trade (3.32) and Sell Trade (3.46).


In early trading today Gold is declining for a second day, after falling 2.4% yesterday; the biggest decline since December 17, 2009.  The Hedgeye Risk Management models have the following levels for GOLD – buy Trade (1,101) and Sell Trade (1,134).


Yesterday crude traded down by 1.9%, and is trading slightly lower in early trading today.  The strength in the Dollar and increased inventories are putting pressure on oil.  The Hedgeye Risk Management models have the following levels for OIL – buy Trade (76.94) and Sell Trade (80.49).


Howard Penney

Managing Director















SBUX’s fiscal 1Q10 earnings came in at $0.33 per share, better than my $0.29 per share estimate and the street at $0.28 per share.


The company raised its full-year EPS guidance to 1.05-$1.08 (above the street at $1.02), or +31%-35% growth, up from its prior +15%-20% range.  Despite the better than expected same-store sales growth of +4% in the U.S. and +4% internationally, SBUX maintained its prior guidance for modestly positive comparable store sales growth.  The company did reiterate the higher end of its prior revenue guidance of mid-single digit growth.  The biggest delta to the prior guidance comes from the company’s new outlook for 400 bps of margin growth in the U.S., up from its initial expectation of 200-250 bps of growth.  SBUX maintained its expectation for 200-250 bps of margin improvement in the international segment, but reaffirmed the low end of its prior margin guidance for the CPG segment of 35%.


SBUX is now targeting $1 billion in free cash flow for the full year versus its prior outlook of $900 million.  Part of this increase may stem from the company’s lowering its capital spending expectation to $500 million (from $500M-$550M); impressive, nonetheless.

Post-Holiday State of the Industry: Sports Apparel

This week's sport’s apparel sales confirm two trends that we are currently observing across the athletic apparel industry: 1) inventories are tight, and 2) the consumer "trade down effect" has largely bypassed the industry.  These conclusions are supported by the divergence in performance between traditional Sporting Goods retailers (i.e. branded/performance), the Family channel, and the Discount/Mass channel.  Since the November lows that resulted from the sales "pull-forward" during October (yes, it was weather), sales of athletic apparel in the Sporting Goods channel have been particularly strong. Sales of similar, value-priced athletic apparel have lagged however in the Discount/Mass channel.


 Post-Holiday State of the Industry: Sports Apparel - Dollar Sales Channel


Sales in the Sporting Goods channel have been up an average of 9% y/y each week since the beginning of December, with sales in the Family channel flat-to-slightly up over the same period. In contrast, weekly results in the Discount/Mass channel have been down an average of 14% y/y since the start of December.  Furthermore, average price points in Discount/Mass have declined an average of 9% over that same period.  Contrast that with improving ASP’s in both the Sporting Goods (up an average of 2% y/y) and Family channel (up an average of 6% y/y) since the beginning of December.  It is clear that branded, performance product is key to the diverging results. 


 Post-Holiday State of the Industry: Sports Apparel - ASP Channel


The chart below illustrates how sales in the Discount/Mass channel have largely been under pressure for some time now.  Interestingly, the recent weakness comes at time when comparisons are easing and will remain so throughout much of 2010.  Further sales declines suggest market share loss to the other, higher priced channels and/or the consumers’ lukewarm appetite for value-priced athletic apparel.  Oddly, this all comes at time when we’ve seen other value-driven apparel retailers like Old Navy, Uniqlo, and Aeropostale outperform dramatically.  After some initial worry a couple of years ago with launch of Wal-Mart’s Starter and Target’s C9 brands, it appears that these opening price point offerings have yet to make a measurable impact on the branded players .  Clearly, the innovation, branding, and authenticity in the performance apparel space is helping to drive demand and differentiate the channels. Tight inventories are also a key driver behind the ASP increases.


 Post-Holiday State of the Industry: Sports Apparel - Discount Mass


We know that one week's worth of data hardly creates a trend, but there are always a few notable callouts:

  • UA was the only company in the sample to see a sequential pickup in dollar sales, improving by 100bps vs. last week to +9% y/y
  • At -3% y/y, this week marks the 11th out of the previous 12 weeks COLM sports apparel sales have declined on a y/y basis
  • Despite falling by 301bps sequentially, NKE market share still came in at +217bps y/y; Adidas was a not-too-distant second at +145bps y/y; NKE has been gaining 3-5 points of market share each week since mid-November, while Adidas has been gaining 1-4 points of market share during the same period

Post-Holiday State of the Industry: Sports Apparel - Sports Apparel Trends


Post-Holiday State of the Industry: Sports Apparel - Sports Apparel Industry by Company


Post-Holiday State of the Industry: Sports Apparel - Sports Apparel Industry by Category

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