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January 25, 2009

Consensus margin assumptions for 2010 are lofty to say the least. The Street is looking for a return to peak by 2011. Here’s a scenario analysis that puts it in perspective.


We stated last week our increasing concern that Retail’s earnings revisions are slowing, while the consensus forward growth expectation has ramped to 25%, the market is placing a 19x P/E on such growth, and stocks are no longer going up on earnings beats. I’d be interested to have a discussion with anyone with an objective investment process that is not concerned by this.

We took the analysis a step further to see what margin expectations are really embedded in this group. In doing so, it’s pretty clear that the market assumes margins to revert to the mean for Retail in 2010, and to revert to historical peak in 2011. There are some quality companies that have been proactively investing in their models and will get there. But we think we’ll see a big diversion between the quality and junk this year.

At a minimum, here’s a matrix that allows you to make your own top line and margin assumptions which gives the resulting P/E based on current market prices.

R3: Reversion to the Peak - Table Valuation

R3: Reversion to the Peak - Industry Operating Margin Chart


  • After two and half years, import volumes at major retail ports increased by 1.7% in December.  Global Port Tracker, which monitors cargo volumes also estimates that year over year import growth will continue for at least the next 6 months.  December marked the first month in the last 28 that showed a positive increase.
  • Add Movie Gallery to the list of shrinking strip mall tenants.  There is speculation that the 2,700 unit movie rental chain is considering closing an additional 1,000 stores as part of a restructuring effort.  The chain, which had 4,600 stores at its peak in June 2007, may also be considering a Chapter 11 filing.
  • While the overall success of the Vancouver Winter Olympics my already be in doubt, there is one item that appears to be a big hit.  The officially-licensed $10 red and white mittens worn by torchbearers during the run up to the games are now the must-have item of the event. The mittens have sold almost 2 million pairs in advance of the opening ceremony or about 1 pair for each 34 Canadians.  For each sale, $4 of proceeds is donated to support the Canadian Olympic efforts.


Walmart to Cut 11,200 Sam’s Club Jobs, Outsource Demonstrations  -  Wal-Mart Stores Inc.’s Sam’s Club chain, the second-largest U.S. warehouse club, will cut about 11,200 jobs in the next month after hiring an outside company to take over in-store product demonstrations. About 10,000 demonstration employees, most part-time, will lose their jobs in the U.S. as marketing firm Shopper Events LLC takes over sampling, Sam’s Club Chief Executive Officer Brian Cornell said in an interview yesterday. The company also is cutting about 1,200 membership recruiting jobs. The hiring of Shopper Events, which already works for Walmart’s namesake stores, is part of an effort to improve demonstrations and lure customers from rival clubs, Cornell, 50, said. Sam’s, which trails Costco Wholesale Corp. in sales, will use savings from labor costs to improve the sampling of food, beverages, health items and electronics, the CEO said. “This was not a cost-cutting move,” he said. “We view it as an investment in building membership loyalty and attracting new members and ultimately fueling growth for Sam’s Club.”  <bloomberg.com>

Chad Kessler Said Out at A&F - Abercrombie & Fitch Co., reeling from poor results, has dismissed its top ranking women’s merchant, Chad F. Kessler, according to sources. The company did not respond to requests for comment on Sunday. Kessler held the title of executive vice president of female merchandising and reported directly to Michael Jeffries, chairman and chief executive officer. He has been a key player at the specialty chain for a number of years, successfully rising up the ranks. Abercrombie has lately been outperformed by such youth specialty rivals as Aéropostale Inc., The Buckle Inc. and Hot Topic Inc. But the company, which operates Abercrombie & Fitch, abercrombie, Hollister and Gilly Hicks stores, is fighting back and trying to reconnect with consumers, including recently launching mobile commerce, advancing social networking initiatives and lowering prices. Kessler, who is in his mid-30s, has been executive vice president since November 2008. Before that he was senior vice president of female merchandising, prior to which he served as senior vice president and general merchandise manager of the Hollister division. <wwd.com>

New Look to consider IPO at board meeting - New Look’s board will consider this week whether to go ahead with a Stock Exchange listing. Although the retail sector has been de-rated by the City in recent weeks an IPO is an option for New Look, people familiar with the situation told the Financial Times.

The retailer, which will also look at alternatives including a sale to another private equity firm, delivered strong Christmas sales and former Tesco director John Gildersleeve became its chairman this month.

Last year, New Look drafted in JP Morgan Cazenove, Deutsche Bank and Credit Suisse to advise on an IPO. The retailer could be valued at as much as £1.8bn. New Look said that a float is one option, but no decision has yet been made. <drapersonline.com>

Salter Resigns as CEO of Hilco Consumer Capital - Jamie Salter has resigned as chief executive officer of Hilco Consumer Capital and Eric Kaup, general counsel at parent company Hilco Trading LLC, has been named interim ceo of the private equity firm. Kaup will continue as general counsel and executive vice president of Chicago-based Hilco Trading. Salter, who was said to have resigned over financial issues, cofounded Toronto-based Hilco Consumer Capital in 2006 with Hilco Trading. The firm invests in consumer product brands, and its investments include Polaroid, Sharper Image, Bombay Co., Ellen Tracy, Linens ‘N’ Things, Tommy Armour Golf and Halston. The company is also the exclusive adviser on licensing matters to the House of Marley. <wwd.com>

Disney Store Taps Whitestone as VP, Marketing - Damon Whitestone was recently promoted to vice president of marketing at Disney Store North America, where he will lead global marketing initiatives, as well as the North American marketing strategy through in-store brand positioning, franchise and synergy development. Whitestone joined Disney more than 12 years ago and had most recently served as the company's head of marketing for Walt Disney Records. In that former role, he created artist development and marketing plans for Disney artists from Miley Cyrus and Hilary Duff to the Jonas Brothers, as well as also working with film properties, including Enchanted, The Princess and the Frog and Cars. <licensemag.com>

Designer Allie Yoko Launches Athletic Apparel Company: White Iguana Apparel - The mission statement of the company is to develop athletic apparel that provides superior comfort by utilizing sustainable organic bamboo and environmentally friendly business practices. White Iguana Apparel is designing and selling their own line consisting of mens leggings, womens leggings, hoodies, mens athletic shirts, and womens athletic shirts. Products are different from others because they claim to protect sensitive skin from the uncomfortable and chemically treated athletic apparel sold by other brands. To combat the trend of exporting jobs overseas, their athletic apparel is 100% made in the USA. <www.wiapparel.com>

Finish Line Announces Nationwide Shoe Drive to Benefit Haitian Relief Efforts - Soles4Souls (www.giveshoes.org) and Finish Line (www.finishline.com) have joined forces to bring shoes to victims of the devastating earthquake in Haiti. Finish Line will help collect footwear to support Soles4Souls’ commitment to donate more than 1 million pairs of shoes to affected areas. Beginning January 22, customers at Finish Line will have the opportunity to drop off a gently worn pair of shoes. All donations will directly support relief efforts.  The retailer will also offer a $5 discount on a new pair of footwear with the donation of a gently worn pair, subject to certain terms and conditions. <tribwekchron.com>

Luxury Retailing: The Year Ahead - After a year of speculation about sell-offs and bankruptcies, the clouds in the luxury sector started to lift last November. Stores such as Bergdorf Goodman, Barneys New York and Saks Fifth Avenue have seen a slight uptick in sales, thanks to tourism, some pent-up domestic demand and the stock market holding steady. This year, the latest forecasts are for no major Chapter 11s to materialize, although it's anybody's guess whether deals will be struck. According to financial sources, they're more likely to be of a strategic character, rather than driven by private equity or real estate concerns. Luxury firms are all still managing under the duress of the tough economy, with significantly lower inventories, less dramatic markdowns, cash building up, reduced expenses and realistic expectations. They're also focusing more on accessories, cosmetics, shoes and contemporary sportswear, which continue to be among the busiest departments. Outlets are also perceived as an opportunity, with Saks Fifth Avenue, Neiman Marcus and Bloomingdale's among the retailers putting greater emphasis on the sector.  <wwd.com>

FCC Launches Consumer Task Force - This week the Federal Communications Commission also said it will work to tighten restrictions on "robocalls" by telemarketers. The FCC has launched a consumer task force to investigate ways to safeguard consumer rights in the context of proliferating telecommunications networks and technologies. Armed with a Government Accountability Office report urging the FCC to tighten its consumer protection rules, FCC chairman Julius Genachowski said Joel Gurin, currently chief of the commission's Consumer and Governmental Affairs Bureau, will head the cross-agency Consumer Task Force. The new FCC unit will include every Commission bureau chief, the chief of the office of engineering and technology, the general counsel, and the managing director.  <informationweek.com>

Jury still out on whether barefoot running trend is beneficial - Running barefoot is as old as humanity. We ran barefoot for thousands of years before shoes were invented. But barefoot running has become more popular lately, due mainly to Christopher McDougall's best-selling book "Born to Run," which describes the barefoot-running Tarahumara tribe of Mexico and its mystical ultra-marathoning lifestyle. Though there weren't throngs of barefoot runners at last week's P.F. Chang's Rock 'n' Roll Arizona Marathon and  1/2 Marathon, more people are interested in barefoot coaching seminars and "barefoot"-like footwear. The trend can also be tied to a backlash against running-shoe companies that pile on ever-increasing and costly amounts of padding and gel while pulling favorite models off the market to encourage stockpiling. <azcentral.com>