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China's Chart Of The Day

In our presentation of our Hedgeye Macro Themes for Q1 of 2010, we used this Chinese PMI chart to emphasize our point. Our call was quite simply that the PMI was elevated and setting up to roll over from its recent 2009 highs. This morning the data reported for January did just that.


China’s PMI report for January slowed sequentially to 55.8 versus 56.6 in December.


While the sequential slowdown wasn’t material, the point is that the PMI stopped accelerating to the upside. Everything that matters in our macro model happens on the margin. The change of the slope of this line is a good example of that.


Did it matter? With Chinese stocks closing down another -1.6% overnight, taking them to -10.3% for the YTD, apparently it did. We are not calling for a crash in China. Our Chinese Ox In A Box call is simply that inflation will accelerated sequentially as growth slows. This is obviously starting to be priced in.



Keith R. McCullough
Chief Executive Officer


China's Chart Of The Day  - PMICH


He Who Sees No Inflation?

This morning’s Prices Paid component of the ISM Manufacturing report for January was inflationary (see the chart below). Yes, unfortunately Ben, Main Street actually has to pay for things with marked to market prices. On a year-over-year basis, Prices Paid are up a staggering +133%!


I know, I know… the Federal Reserve claims to see none of this; 'tis the narrative fallacy of He Who Sees No Inflation (Bernanke). But the bond market sees it – that’s another reason why bonds are selling off today. For those who support this Bubble in US Politics, inflation is easy to ignore. Sadly, that doesn’t mean it goes away.


This Prices Paid reading of 70 (January) was a +13.8% sequential monthly acceleration from the December report. With headline Producer Prices (PPI) recently reported at +4.4% year-over-year, and Q4 GDP posted at +5.7%, this unsustainable and unreasonable policy of maintaining a ZERO percent “emergency” level for the Fed Fund rate is starting to really eat into the Times Man of the Year’s credibility.



Keith R. McCullough
Chief Executive Officer


He Who Sees No Inflation? - PP


YUM is scheduled to report 4Q09 earnings after the close on Wednesday with the earnings call to follow on Thursday morning.  Given that the company updated its 4Q09 outlook and provided detailed FY10 guidance on December 4th prior to its annual investor meeting in New York, I am not expecting too many surprises.  My EPS estimate of $0.50 is slightly better than the street’s $0.48 per share estimate, but again, an earnings beat from YUM would not come as a surprise.  If YUM’s earnings do come in better than expectations, that will be the extent of any good news in the quarter.  Management guided to 4Q09 same-store sales growth of -3% in China, -1% in YRI and -8% in the U.S., which implies a further sequential slowdown in 2-year average trends in the U.S. and China, YUM’s two biggest segments from an operating profit perspective.  A -1% at YRI in 4Q09 yields a +2.0% 2-year average trend, which is flat sequentially from 3Q09, but down from the 5%-plus level that the company posted in 1Q09 and throughout all of 2008.


YUM’s stock has underperformed its QSR peers over the last year and more recently, in the last 6 months, slumped -3.1% versus the group’s average 10.3% move higher.  This sequential slowing of top-line trends across each of the company’s segments is largely to blame, and management’s full-year 2010 comparable store sales guidance assumes more of the same.  YUM’s same-store sales guidance of +2% in the U.S. implies flat 2-year average trends in 2010, but this is flat with what have been consistently weak results.  YUM’s 2% comparable store sales target for China in 2010 assumes a 250 bp decline in 2-year average trends, after declining more than 600 bps in 2009.  And, the 3% target for YRI also points to continued declines in 2-year average trends. 


Management maintained its 10% EPS growth goal for 2010.  The company will benefit from continued commodity deflation in the first half of the year, particularly during the first quarter and should be helped by foreign currency favorability, also in the first half of the year (the company guided to a full-year foreign currency translation benefit of $25-50 million).  The solid cash flow story remains intact with YUM set to generate about $900 million in free cash in FY09 and I am modeling a number north of that in FY10.  That being said, I think investors need to a see shift in trends in China, most importantly, and in the U.S. before becoming more comfortable with owning this name.




Despite all of the slides that YUM management has put up over the years showing the size of the U.S. relative to the growing size of China and YRI in terms of operating profit, currently, the U.S. remains the biggest segment at 38% of operating profit.  Although the U.S. is still the biggest standalone segment, the company’s ongoing EPS growth model relies more on growth driven by Financial Strategies than from the U.S. business (as seen in the company’s slide attached below).  This is not new as the company has successfully achieved its annual 10% EPS growth goal while consistently missing its ongoing U.S. operating profit growth target of 5%.  If the company is unable to hit this 5% goal in 2009 (my model has the company just falling short), it will only become increasingly harder to do.  Yes, YUM is currently operating in a difficult environment from a top-line perspective but the company has been benefiting from significant commodity favorability, particularly in the second half of the year, on top of the recently implemented G&A savings (yielded over $50 million of the targeted $60 million in savings through 3Q09).  It is important to remember that YUM’s initial 2009 guidance included 15% operating profit growth in the U.S.  This was then revised down to high single digit growth, which again, I think could prove aggressive.


YUM – CHINA DEPENDENT - YUM EPS ongoing growth model


During the fourth quarter, YUM will reverse its prior four quarters of operating profit growth in the U.S.  Same-store sales growth deteriorated further as indicated by management’s -8% guidance (could come in worse as we have heard from YUM’s peers that weather in December was a factor), commodity deflation will still benefit the company during the quarter but to a lesser degree than in 3Q09 (only about $9 million vs. $16 million in 3Q09, according to guidance provided in the 3Q09 earnings release) and G&A savings could be partially offset by “certain G&A expenses that are a bit back loaded this year.”


Going forward, management has said that YUM’s profits will increasingly be driven by Mainland China, YRI and Taco Bell (estimated to make up 90% of profits by 2012 versus close to 85% now).  In the meantime, the company continues to maintain its 5% operating profit goal in the U.S.  In 2010, YUM will be lapping positive operating profit growth in the U.S., which in and of itself, puts the company’s 5% operating growth at risk once again.  YUM will also be lapping the $60 million in cost savings.  Not to mention, we do not know when trends will stop getting worse.


So that leaves China and YRI to buoy future growth, but based on recent trends and the uncertainty around when demand will return to prior levels, some investors may not be convinced.




As I said earlier, same-store sales trends in China continue to get worse.  And, easy comparisons no longer seem meaningful as the company’s 4Q09 guidance of -3% is lapping only 1% growth from the prior year (which is an easy comparison relative to the 12%-14% compares from 1H08).  In 3Q09, YUM was able to deliver 32% operating profit growth despite the slowdown in top-line trends as commodity deflation helped to the tune of $21 million.  Although the company is expecting a similar level of commodity favorability during the fourth quarter, the continued fall off in same-store sales will lead to increased sales deleveraging.  I am modeling single digit operating profit growth in the quarter, which is a far cry from the 20%-plus growth to which investors have become accustomed.  Commodity deflation should continue to benefit margins in the first quarter, but remember the company’s same-store sales guidance implies a continued fall off in 2-year average trends for the full year.  Management will do its best to offset any bottom line weakness with continued development growth (6% of the company’s EPS growth target is driven by new unit growth), but it is important to note that the company lowered its targets for China within it ongoing earnings growth model to 15% operating profit growth (from +20%).


YUM – CHINA DEPENDENT - YUM EPS growth int l development




Same-store sales trends fell off during the second quarter on a 2-year average basis, but have remained fairly steady since then.   Full-year guidance, however, implies a slight slowdown in 2010.  Both commodity costs and foreign currency translation worked against YRI for most of 2009, but that should reverse on both fronts in the fourth quarter.  Through the third quarter, YUM’s earnings included a negative $53 million impact from currency.  In its December 4th 2009 guidance, the company stated that its full-year guidance assumed a negative foreign currency translation impact of about $45 million, which implies an $8 million benefit in 4Q09, largely at YRI.  Those two factors should help to offset the expected 1% same-store sales decline during the quarter and lead to operating profit growth in the quarter, reversing the prior four quarters of decline.  Commodity cost and F/X favorability should continue to benefit this segment in early 2010 but slowing top-line trends could weigh on results.


Howard Penney

Managing Director

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R3: 2-Cents on SSS, Footwear, and News


February 1, 2009


If athletic footwear is a negative standout in and around all the SSS data points this week, we’d look to opportunistically buy key names that should be winners in 2010.





Sales trends appear to have been relatively constant for the most part in January, with discretionary items – mostly apparel – outpacing the discounters. January is one of the least significant months of the year, accounting for only about 6% of annual sales – though it is more meaningful as it relates to clearance activity for the quarter. Within softlines, we saw athletic footwear take a dive over the past 2-weeks, despite stable performance in apparel. This is noteworthy in that athletic footwear was flat-out abysmal from April through Mid-December, and then picked up meaningfully. Perhaps a near-term head-fake.


The actionable point here is that if anything footwear-related underperforms meaningfully, esp NKE, FL, FINL, and UA, then it is a chance to step in front what should be a major turnaround in this group in 2010. We’ve been vocal on this, so I won’t reiterate here. Let us know if you need additional thoughts.


 R3: 2-Cents on SSS, Footwear, and News - 1


R3: 2-Cents on SSS, Footwear, and News - 2


R3: 2-Cents on SSS, Footwear, and News - 3




  • According the Retail Advertising and Marketing Association, 3.6 million Superbowl viewers are expected to buy a new television, up substantially from 2.6 million last year. The average price of all flat panels is now $587 vs. $832 in 2008, which is likely a key reason for the expected increase in units sold. Perhaps it’s just the excitement in Indianapolis and New Orleans- probably not!
  • During 2009, top online retailers sent an average of 132 promotional emails to consumers, up 12% from 2008. That is roughly 11 emails per month or 2.5 emails per week per subscriber. Since 2007, promotional email volume is up about 39%. Not surprisingly, November and December represent the months with highest volume of promotional email, averaging 13 and 15 emails per subscriber respectively.
  • According to online coupon aggregator Retailmenot.com, a free shipping code for Kohls and a printable 20% off coupon for Gap were the most used/downloaded promotional coupons for the month of December. Victoria’s Secret, Amazon, and Best Buy were the most searched brands in online coupons for the month. Growth in coupon popularity continues to surge, as Retailmenot registered a 44% increase year over year in traffic to the site (19.34 million users in December ’09).


MORNING NEWS  (we now include our 2-cents at the end of each of these stories.)


Wal-Mart creates a global e-commerce unit, reorganizes U.S. web operations - Wal-Mart Stores Inc. has set up a new global e-commerce unit called Global.com to drive online growth in new markets as well as in those where it sells today. The retail giant also restructured its Walmart.com U.S. division to integrate it more closely with store operations. “Now that we have a well-defined blueprint to continue to grow our online business, it’s time to leverage our size and global footprint to take advantage of this evolving customer trend,” said Eduardo Castro-Wright, vice chairman, in a memo to staff. Castro-Wright oversees both the company’s U.S. operations and its global sourcing organization. Wal-Mart, which operates e-commerce sites in the U.S., U.K., Canada, Mexico and Brazil, says the Global.com unit will work to develop global e-commerce strategies and create a single global e-commerce platform that could be used in every market. The idea of a single global e-commerce platform echoes the model used by the world’s largest online retailer, Amazon.com Inc.  <internetretailer.com>

Hedgeye’s 2 Cents: This is overdue, and is one area where Wal-Mart has not been ahead of the curve.


Under Armour Mulling West Coast Design Center  - Under Armour is exploring opening a West Coast design center, with Portland and Los Angeles among possible locations, according to a report in the Portland Business Journal. The business magazine, citing e-mail exchanges it received, said officials in Portland, which employs about 100,000 activewear employees at firms such as Nike, Adidas and Columbia Sportswear, are looking to recruit Under Armour in hopes that firm may want to tap the local talent base. But the article also indicated that Under Armour does not appear to be aggressively pursuing the effort. UA's top executives rejected an offer to meet with Portland Mayor Sam Adams to discuss a possible Portland design center. The report also said Under Armour gave a "lukewarm reception" when Greenlight Greater Portland, the area's private economic development group, sent two executives to Under Armour's headquarters in Baltimore. The report also noted that e-mail messages said an Under Armour executive visited Los Angeles in July to explore its options there. Brad Dickerson, Under Armour's chief financial officer, downplayed the notion of any large presence outside of Baltimore. Dickerson pointed to Under Armour's recently unveiled 140,000-square-foot Tide Point building as example of the company's commitment to growing locally. Around 300 Under Armour employees will occupy the space by the end of January. In total, there is room for 450 workers. "Anything else we do would be on a very small scale," Dickerson added. <sportsonesource.com>

Hedgeye’s 2 Cents: Why does UA already have a lukewarm reception to opening offices in Portland? Because it already has defacto hiring ops there. UA has people on the ground frequently in the Portland area to tap into talent – mostly Nike’s. It particularly flexed its muscle in CQ209 when Nike was in lay-off mode. Also, remember that Nike’s apparel business (still 90% of UA business) has heavy presence in NYC.


Jones Taps Richard Dickson - Richard Dickson is joining Jones Apparel Group as president and chief executive officer of branded businesses, a new post. He begins Feb. 8. Wesley Card, president and chief executive officer of Jones, will relinquish the president's title. Dickson, 41, will report directly to Card and will be responsible for managing the company's wholesale and and retail businesses worldwide. Most recently, Dickson was with Mattel Inc. as general manager and senior vice president of Barbie. Earlier he was senior vice president, marketing, media and enetertainment worldwide for Mattel Brands. Before that he spent over 10 years at Bloomingdale's before launching Gloss.com, an e-commerce beauty Web site. <wwd.com>

Hedgeye’s 2 Cents: Non-fashion guys have rarely worked in Fashion businesses. That said, Barbie is about as mature as mature can get, and sells into the most consolidated retail channel out of any category out there. Ironically, selling into the Macy’s of the world is a step-up for Dickerson. But do Anne Klein suits have the same consumer connection and defendability as Barbie?


Versace Agrees on Job Cuts, Unveils Lower-Priced Line - Gianni Versace SpA has signed a preliminary agreement with unions on job cuts in Italy and introduced a lower-priced women’s wear collection as part of a plan to return to profitability in 2011. The deal is “the guarantee that our plan as we organized it will succeed,” Chief Executive Officer Gian Giacomo Ferraris said in a telephone interview. The accord, which includes the closure of Versace’s three-year-old accessories factory in Burago, near Milan, will be concluded Feb. 4, Ferraris said. The cuts will commence in March and end in June. Versace, which was founded by the late Italian designer Gianni Versace in 1978, said Oct. 28 it would eliminate about 350 out of 1,360 positions worldwide, or 26 percent of its workforce, and scale down investments. The luxury clothing maker expects to report a 30 million-euro ($42 million) operating loss for 2009, while sales probably fell 19 percent to 273 million euros, hurt by falling wholesale revenue, Ferraris said. <bloomberg.com>

Hedgeye’s 2 Cents: Versace is a great brand, but the organization is a mess – and it’s not getting better. If these layoffs eat further into the talent pool inside Versace, then there’s big trouble.  That’d be a nice set-up for JNY to buy it. 


American Apparel's Push for Tush - Do you pass by those ubiquitous American Apparel skimpy billboards throughout the city and wish you could be one of those scantily clad hipsters being photographed in someone's poorly lit basement?  Do you have a great booty? Well, now's your chance.  Presenting, the American Apparel Best Bottom Contest. If you have an inflated affinity for your own bottom that's better kept secret, and you have the level of naked comfort required for a friend to photograph said bottom and submit it to a national contest for American Apparel, then this competition is for you: The temple of technicolor cotton goods is holding the interactive competition on its website wherein individuals may submit photos of their derriere for consideration online.  Those cheeks deemed worthy enough of serving as the official rear end of American Apparel are then posted for everyone's voting.  <nbcnewyork.com>

Hedgeye’s 2 Cents: I couldn’t make this up if I tried.


Saks, Neiman's Settle Humane Society Fur Lawsuit - Saks Inc. and Neiman Marcus Inc. said Friday they resolved a lawsuit brought by the Humane Society of the U.S. over mislabeled fur. The animal rights group named the two luxury retailers as defendants in a consumer advocacy complaint filed in Washington, D.C., Superior Court in 2008. The suit alleged the companies had improperly labeled raccoon dog fur as “faux” or misidentified its source animal on labels or advertisements. Lord & Taylor settled its portion of the suit in December and Andrew Marc settled in March. Macy’s Inc. is now the sole remaining defendant in the case. Saks Inc. and the Humane Society said Friday they had reached a settlement requiring stricter labeling standards. In addition, the retailer agreed to change its advertising policies and endorse federal legislation designed to end the sale of fur-trimmed garments without total sourcing disclosure, the Humane Society said. <wwd.com>

Hedgeye’s 2 Cents: This is one of those negatives that could be turned into a big positive with the proper PR strategy. Unfortunately, Macy’s does not get that.


The Macau Metro Monitor. February 1rst, 2010



Citing ''contacts in Macau'', David Bain of Sterne Agee said solicitors working for Macau's chief executive, Fernando Chui Sai On, had been asked to examine ''a potential transfer of ownership'' of shares in Melco Crown Entertainment from Crown to Harrah's.  Packer has a long-standing relationship with senior Harrah's executives and Crown owns a 2.5% stake in Harrahs. 



Lusa reported that January revenues grew 63% in January to MOP 14BN. Market share for LVS was 22% and SJM's market share was 30%.


Similar to the rest of the Regionals, PENN could miss Q4 projections.  2010 commentary will likely drive the stock.



PENN will report Q4 EPS on Thursday morning.  We expect a miss.  Street is at $0.19 and we are projecting $0.16.  There is always the potential for a lower tax rate, lower corporate expense, etc., but we believe the underlying property metrics will disappoint.  Looking ahead, PENN should provide its first look at 2010 and again we think the guidance will come in below consensus estimates.  We are projecting $1.27 and $598 million in EPS and EBITDA, respectively versus the Street at $1.40 and $639 million. 






  • “We obviously continue to feel challenged with the softening of the consumer on a macro basis. As you see economic data coming out regarding the de-leveraging of the consumer and increased savings levels from them, it's certainly is reflective in what we are seeing in our demand and our businesses.”
  • “Visitation continues to be flat, in some cases actually like Lawrenceburg showing growth, but clearly spend-per-visit and time-on-device is expecting many of our businesses, even though we showed slight revenue growth year-over-year.”
  • “There is no question we are seeing the migration down in terms of customer where they are still coming, but they are playing at lower periodical levels than they had in prior year, any even in prior quarter, so that’s obviously is affecting the top line of business, we continue to be appropriately aggressive in adjusting our cost structures, our labor levels , our marketing spend.”
  • “It’s more of the same as we saw in the second quarter and as we highlighted in our results the month of August is really the softest we saw in the third quarter.”
  • “I think we haven’t seen any change in any of the trends in October that we’ve seen in the third quarter.”
  • “We saw in the third quarter that the trends continued to decline as we look at year-over-year numbers. So we are not seeing any recovery yet from the consumer in terms of those metrics that I outlined.”
  • “Our business are not declining as much as our spend-per-visit. And I don’t think that is kind of at least it’s not a situation where the customers don’t like our products they just don’t have the money that they used to have to spend on.”  



  • Lawrenceberg: “We are not getting growth in our VIP segments that we had hoped for and we recognized that we are working right now and improving the non-gaming amenities in Lawrenceburg. We are going have a new meeting space complete late this year, early next year. So that we can conduct more VIP special events in a high quality environment on the casino floor. And we are improving the tiered restaurants that are on that third level in that space, which will be finished in the late second quarter, early third quarter of next year.”
  • “Looking into the fourth quarter, we’ve got maintenance CapEx of roughly 36, project CapEx of 49 and that includes Maryland, Joliet and again some expenses in Lawrenceburg to come up with this whole.”
  • What % of cost cuts are sustainable? “I think when you look at what’s been done if volumes come back and we start showing growth, yeah there will be some of that, but I would think two-thirds of it is sustainable.”

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