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Brazil's Developing Dirt

As a proactive global risk management exercise, we have recently focused our Hedgeyes on Brazil’s domestic newspapers (reading them in Portuguese).


Here are a few interesting takeaways that we have translated for you from this week’s domestic news. Ultimately, the US media focuses very little on the macro issues in Brazil, and we think there is an opportunity to be your risk manager calling out macro risks as they develop.


Political Corruption

11 – 12 February 2010 – O Globo (Brazil)


Jose Roberto Arruda, Governor of Brasilia, the nation’s capital city, has surrendered to Police in a corruption probe. 

Arruda is charged with accepting bribes in connection with awarding government contracts.  He was videotaped last year accepting bags of money and the video was YouTubed around the country.  His explanation at the time was that he was accepting donations to help him launch a program to distribute free panettone cakes for the city’s poor.  I kid you not.


One of the key witnesses in the government’s case claims he was offered a half million dollar bribe to reverse his testimony.


Five alleged co-conspirators have also been named.  Arruda was part of an opposition that had hoped to campaign against Dilma Rousseff, Lula’s hand-picked successor, partly by dredging up corruption charges that had been raised during Lula’s earlier presidential campaign.  It didn’t work against Lula then, and it doesn’t look like they will be able to use it now.  NB: Lula is leaving after two terms with something like an 81% approval rating.  This is amazing for a head of state who is not a dictator.


Lula expressed his concern about the implications of the arrest for the integrity of the political system – this is the first time in Brazil’s history as a democracy – post military dictatorship – that a high level official has been charged with corruption.


Social Unrest

O Globo 11 February – One of the directors of the social activist group Nos do Morro was found murdered in Rio de Janeiro.  Jose Frederico Pinhiero was found with his throat cut after being reported missing by his family.


Nos do Morro is a major Rio de Janeiro not-for-profit cultural and social welfare group founded in 1986.   It combines cultural activities with social programs in the Morro de Vidigal neighborhood of Rio.  It has programs designed to keep kids in school and promotes local culture.  Group members have been featured in national and international venues, including appearing in such internationally known movies “City of God.”


A related cultural group, AfroReggae, was also victimized.  Its leader was attacked and robbed.  The assailants were caught on street cam video but have been released on their own recognizance, pending court proceedings. 


[COMMENT: It is not clear to me whether there is police, or other government support for attacks against successful grass roots social programs, but clearly there is no immunity for the Good Guys caught between those warring for control in the inner city.  If these high-visibility champions of the inner-city poor are also their victims, one has to wonder how successful the government will be in cleaning up crime and violence in advance of the World Cup and Olympic Games.  This could get extremely ugly.]


Moshe Silver and Keith McCullough


FL: Thinking and Doing

When we originally wrote our “wishlist” (see note from 12/17) for Foot Locker, one of our key points highlighted the company’s opportunity to both right-size and optimize its 3,700 store portfolio.  We’ve already gotten confirmation of some store closures, and now we’re “seeing”  some efforts to optimize.  It appears that Foot Locker is converting its Union Square store in Manhattan into a new concept called, RUN by Foot Locker.   While no formal announcement has been made regarding this prototype, it’s currently under construction and in plain view.  Clearly if management wanted to keep this a secret they wouldn’t have picked this location…


FL: Thinking and Doing - FL RunSign 2 10


With our retail detective hats on, we observed several individuals working inside the store yesterday, mostly testing different wall displays.  The inside of the store is still very much in a raw state, so it’s probably at least a few weeks before we actually see any signs of opening.  Nonetheless, we view the idea of a running concept as a step in the right direction and potentially integral to the segmentation efforts needed to differentiate the chain (both amongst competition and itself).  As a reminder, running is the largest sub-segment of the athletic footwear market with nearly $5 billion in sales at retail, and one that has been showing substantial growth for about a year.  Additionally, while none are publicly traded, there has been an increase in the growth of specialty running stores over the past few years with the likes of Fleet Feet, Road Runner Sports, and others.  


FL: Thinking and Doing - FL RunningYYChg 2 10


Unique to any credible running effort is a wide selection of technical brands and most importantly customer service.  In running specialty stores there is very little price promotion or discounting.  Maybe a loyalty program to foster repeat business, but barely any POS promotions.  Wouldn’t that be a change for the historical champion of the BOGO strategy? While it’s too early to tell exactly what Foot Locker is planning for its price/value message here, there is no question that running shops make up for discounting with exceptional customer service.  Which from a runner’s perspective, typically includes personalized fitting, gait analysis, and other technological innovations aimed at matching the customer with the ideal shoe.  


Another key aspect of specialty running shops is community involvement, which often makes the stores a hub for marketing local events, classes, and outreach.  Yes, they’re very Lululemon-like when it comes to mixing commerce with true passion for the sport.  Clearly there is work to do here as the concept evolves, but building a service oriented culture could have substantial ramifications not just for a running concept, but for the entire chain.  After the store opens, we look forward to a field trip to test out this theory.


Another thought… is this a way to diversify away from Nike without changing Nike’s space allocation at existing Foot Locker stores? That would be a margin boost for FL – to the extent it can still drive traffic. In a category like running, that would probably not be a problem.  But on the flip side, our sense is that FL tests some Nike mono-brand stores, where FL will carry the real estate and fixtures, while Nike will sell in as a wholesale model.


Will these work? We don’t know, and for now we don’t care. Test or no test, the bottom-line here is Foot Locker’s new leadership is thinking and doing.   We’re on the cusp of hearing more details about the broader strategic plan, but again this is a step in the right direction.  It certainly seems like a better idea than long lost Footquarters.  We also suspect this isn’t the only idea to come from management.  Now if only all of these “labs” were in a 1 mile radius of company headquarters it will make the detective work much easier…


- Eric Levine


FL: Thinking and Doing - Footwear Running Market Image 2 10



FL: Thinking and Doing - FL RunSign2 2 10




As we previewed yesterday we thought consumer confidence in February would not live up to expectations….


The Reuters/University of Michigan preliminary consumer sentiment index dropped to 73.7 from January’s 74.4 reading and expectations of 75.0.  How can this be happening at a time when GDP is 5.7% in 4Q09 and the unemployment rate unexpectedly dropped in January?


Here is my list (feel free to add to it if I miss anything):


(1)    40% of American STRONGLY DISAPPROVE of the way President Obama is performing.

(2)    While the U.S. unemployment edged downward in January, consumers still appear a little wary about the labor pool.

(3)    Those with a job are worried about becoming laid off.

(4)    For most consumers paying down debt remains the priority.

(5)    Most consumers are focusing on needs over wants.

(6)    3, 4 and 5 suggest that most consumers are just not that comfortable with their financial standing.

(7)    The market’s decline at the end of January appears to have rattled investor confidence this month.

(8)    25-30% of consumers are underwater with their mortgages.

(9)    This winter sucks.


Ben Bernanke recently said the Federal Reserve will raise the discount rate “before long.”  With conventional mortgage rates around 5% and likely headed higher this could deflate very important assets on the consumer’s balance sheet.  It’s unlikely that current conditions are going to improve to a degree that we see any significant move to the upside in consumer confidence. 


Howard Penney
Managing Director




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  • While the domestic new construction sales environment in NA will remain challenging, they will benefit from conversions when M&A activity picks up
  • See tremendous growth for their conversion brands
  • Returned 90% of their generated cash flow through dividends and buybacks in 2009
  • Grew membership in Choice Privileges (CP) by 2MM, and now CP members now deliver 25% of gross revenues. Hope to add 2.2MM CP members in 2010
  • New construction franchise sales are more impacted - declined 72%. Conversion sales decreased 32%
  • Repurchased an additional 200k shares through Feb 11, 2010
  • Had $65MM R/C availability as of Feb 11, 2010
  • It's clear that conversions are where the action will be for the next 18 months


  • Conversion demand outlook?
    • New construction demand will be challenged with the lending environment through 2011.  However, when it comes back it will come back first to limited service.
    • Conversions will accelerate when they feel more comfortable that trends have bottomed and when transaction volumes pick up.  Independent conversion is also an opportunity.
    • In the meantime, they have the ability to incentivize some deals by providing sliver capital
  • Why does upscale makes sense for them
    • Because they are unrepresented there... need to be in more urban locations, which tend to be more upscale and upper upscale opportunities. Will also give them the opportunity to grow more internationally
    • Hope that they will find the right opportunity this year
  • Why is Comfort Inn room down sequentially?
    • "pruning" hotels that aren't meeting brand standards and moving a significant number of those into Quality bands
  • Why are they confident that their limited service brands will see a steep RevPAR recovery throughout the year
    • They usually are a few quarters behind full service.  Believe that there will be an upturn in RevPAR mid year, and that they will have a more dramatic recovery in back half
    • RevPAR in Q2-Q3, down mid single digits and Q4 flat
    • Q1 gets less weighting 
    • Their busiest time is the summertime - since they are leisure oriented and looking for value
  • Have less RevPAR sensitivity and hence its easier for them to "make their numbers" by tweaking below the line items
  • What kind of brands are they interested?
    • It will include brands that own real estate but they are not interested in owning that real estate
    • Thinks that there should be some attractive acquisitions in the next 18 months, but they haven't shown themselves yet
  • SG&A for 2010?
    • Low single digit % increase.  To the extent the development is better or worse, commissions will impact that.
    • Believe that they have some more flexibility on the SG&A but that they are sized appropriately and would like scale their structure
  • Have they considered helping their franchisees access larger banks?
    • They are most likely not going to be able to help since the majority of loans are sub $7MM and don't have multiple franchises
  • Do they think that leisure travelers are taking advantage of trading up?
    • No - they gained share last year.  They did see some of their competitors "buying" share late last year. This is still a definite value orientation on a net net basis
    • Giving people what they want: Free breakfast, free parking, free internet
  • R/C refinancing?
    • Tenor is shorter now than what is was before. So they will consider terming out some debt.  Will need to address the R/C refinancing sometime in 2010- but not sure when. There is a possibility that they will put some fixed rate debt back in the structure at a 5-6.5% rate for a CHH like credit, depending on tenor.
    • Not counting on significant interest rate hikes in the near term, so that's why they are thinking about fixing some debt. Despite it being near term dilutive, its a good move in the longer term
    • Will not use FCF to delever, want to keep returning cash to shareholders
  • Would they need to see to accelerate the buyback
    • If they saw a significant gap btw share price and their perceived value of the company
  • They will stay with the franchise model when and if they go upscale.  When they go internationally they sometimes need to adjust their model.  If they buy a brand with significant management business they will figure out what to do with that.  Want to stick with just franchise
  • They are participating with EXPE at similar levels that they have done historically.  EXPE is not a significant distribution channel for them
  • SG&A decreased as a result of lower variable commissions and reduced headcount by low single digit
  • Ok this guy is a little slow... yes interest rates declined in 2009 and CHH has all variable debt




R3: Footwear Moves Up, Apparel Status Quo


February 12, 2010


This morning we highlight a handful of key observations from the latest set of weekly sports apparel and footwear data. Overall, status quo on the apparel trend, with an uptick in athletic footwear led primarily by Nike. Our top pick in the space also remains Nike, although this is certainly not a call on one week's data.





This morning we highlight a handful of key observations from the latest set of weekly sports apparel and footwear data. Overall, status quo on the apparel trend, with an uptick in athletic footwear led primarily by Nike. Our top pick in the space also remains Nike, although this is certainly not a call on one weeks data.


R3: Footwear Moves Up, Apparel Status Quo - 1




  • Athletic apparel industry dollar sales for the week are in line with current trends observed over the past 3 weeks. No notable change in sales cadence, with the exception of a slight narrowing of performance between the traditional Sporting Goods retailers and the Discount/Mass retailers. Recall that we recently noted a wide divergence in performance between these two channels, which suggested the consumer has been decidedly in favor of branded performance apparel vs. other value priced offerings.
  • We may be observing a small pick-up in discounting in the Sporting Goods channel, although it’s probably still too early to make a big callout on this. The 1% decline in ASP’s for the week, offset with an acceleration in unit sales suggests that there may be promotional activity. We suspect this is post-season clearance, but we will keep an eye on this in the coming weeks.
  • Adidas sport apparel sales growth has been on a path of steady decline since the beginning of the year, with those declines accelerating to a 1.2% y/y decrease. This marks the brand’s first negative reading since the beginning of last Summer.




  • This week we observe a sizable inflection to the upside on overall industry sales, with the two-year trend growing for the first time in 4 weeks. Strength across the Nike brand portfolio is was a key driver of the acceleration.
  • Nike posted a 53% increase y/y for the week, driven in part by a +3000bps sequential improvement in Brand Jordan. Clearly new product introductions are helping here.


R3: Footwear Moves Up, Apparel Status Quo - 2


  • With expectations for Under Armour footwear tempered by management’s focus on building the product line and brand for the long term, we see continued weakness for the brand at retail. However, this week’s sequential deceleration was 2200bps, still a large decline but substantially better than trends we have seen in recent weeks.


R3: Footwear Moves Up, Apparel Status Quo - 3


Eric Levine & Darius Dale




  • When asked about key drivers of sales in the near-term, Family Dollar’s CFO suggested that efforts to expand store hours is at the top of the list. By the end of the this month, FDO expects to have all stores rolled out with expanded hours. This marks an acceleration in the rollout, which means either sales have slowed and they are attempting to make up for it, or the extra hours actually drive incremental sales. Either way, consumables sales are still outperforming discretionary- a trend that is expected to continue until we see a measurable change in the economic backdrop.
  • Along with a better than expected earnings report, VF Corporation also announced it is stepping up its marketing and product development efforts in 2010. The company will spend an incremental $50 million or 70 bps as a % of sales, to bolster market share in The North Face, Vans, 7 For All Mankind, and in the Asia region overall. Approximately $40 million will be spent on advertising while the rest will come in the form of product development and innovation. Included in this plan is The North Face’s first foray into TV advertising.
  • Even after recording the first year of coupon usage growth in over a decade, Free Standing Insert coupons (you know, the Sunday paper kind) grew at a substantially slower pace than their digital equivalents. According to coupons.com, digital coupons grew at a rate of 10 to 1 vs. traditional paper based promotions. Approximately 20% of the U.S population used digital coupons last year. Additionally, digital coupon users tend to have higher household incomes than traditional coupon clippers.




Coach Plans Spring Opening For First Store Focused On Men - Coach Inc. (COH) is opening its first men's-only store as the retailer moves to extend its reach beyond traditional female customers. The store will be on trendy Bleecker Street in New York City's West Village, taking over space that was occupied by a Ruehl boutique that was closed as Abercrombie & Fitch Inc. (ANF) shuttered the concept last year.  <wsj.com>


Birkhold Outlines New Lacoste Strategy - Steven Birkhold assumed the chief executive officer position at Lacoste’s U.S. business on Jan. 4 and is laying out a postrecession strategy for the French sportswear brand. The former Diesel USA ceo’s game plan includes expanding merchandise assortments outside of Lacoste’s core polo business, opening new outlet stores to de-emphasize markdowns in full-price doors, opening a concept store for the trendy Lacoste Red collection and doubling marketing expenditures in the U.S. Currently 30 to 40 percent of the U.S. business is in polo shirts. “There are literally thousands of sku’s available from the Lacoste collections in France and maybe we’ve been too narrow in our editing process for the U.S. market over the last few years,” said Birkhold, who has taken steps to widen assortments for fall. <wwd.com>


LVMH Takes Another Ebay Decision - LVMH Moët Hennessy Louis Vuitton has won another case against online auction giant eBay — this time for its flagship Louis Vuitton brand. Calling the decision a victory in protecting consumers against counterfeiters, Vuitton said Paris’ Tribunal de Grande Instance, or Superior Court, ordered eBay to pay it 200,000 euros, or $275,206 at current exchange rates, in damages, as well as 30,000 euros, or $41,281, for legal fees. The court also ordered eBay to stop using Vuitton-related key word searches or face fines of 1,000 euros, or $1,376, per infraction. “Louis Vuitton welcomes this decision which confirms established case law that aims to protect the consumer from the illicit use of company trademarks,” said Nathalie Moullé-Berteaux, global intellectual property director of Louis Vuitton. EBay said it was disappointed by the Paris court’s decision, but satisfied LVMH had been awarded just 200,000 euros, instead of the 1.2 million euros, or $1.6 million, the luxury group had originally requested. <wwd.com>


Kohl's Launches Multi Million Dollar Initiative to Fight Breast Cancer - Kohl's Department Stores (NYSE: KSS) announced today a new philanthropic initiative to fight breast cancer in the state of Wisconsin. Kohl's will donate more than $7 million over the next three years to the American Cancer Society and the Milwaukee Affiliate of Susan G. Komen for the Cure. The donation, which will be used to support breast cancer research, education and patient-assistance programs, represents the largest corporate gift ever made to the Komen Milwaukee Affiliate — or any national Affiliate — of Susan G. Komen for the Cure®, as well as to the American Cancer Society’s Midwest division, which includes Iowa, Minnesota, South Dakota and Wisconsin. "At a time when many companies are cutting philanthropic giving, we are in a financial position that allows us to expand our community relations programs with a new focus on women's causes," said Kevin Mansell, Kohl's president, chief executive officer and chairman of the board. " <prnewswire.com>


How Best Buy stays relevant in a changing online world - It’s getting more challenging to reach increasingly demanding customers online, so Best Buy Co. Inc. is carrying out a three-part web strategy of enhancing accessibility, localization and personalization, John Thompson, general manager of BestBuy.com, will tell his audience during his keynote address at next week’s Internet Retailer Web Design & Usability Conference.  In a presentation he has entitled Staying relevant in a changing landscape, Thompson will describe the steps Best Buy is taking to connect with shoppers in new ways, engage consumers at a local level and personalize key components of its web site to increase the relevance for shoppers. Thompson, who joined Best Buy in 2001 as senior vice president of supply chain and business systems for Best Buy stores, has also worked as a senior executive at other major retailers. He was chief information officer at Liz Claiborne Inc. and chief information officer and executive vice president of merchandise planning and logistics at Goody’s Family Clothing Inc.  <internetretailer.com>


Charlotte Ronson Entering Chinese Market - Charlotte Ronson has formed an alliance with Hong Kong-based MH Concepts to bring the contemporary brand to China. The partnership marks Ronson’s first Chinese venture and will begin with the fall Charlotte Ronson collection in July, when four doors open in Hong Kong, Shanghai, Beijing and Guangzhou. Six additional doors are to launch before yearend, reaching a total of 200 by 2014 throughout China, Hong Kong and Macau. The doors include freestanding stores, mall units and department store shop-in-shops. Thirty percent will be directly operated by MHC, and the rest will be franchises. Merchandise will be sold in China online at charlotteronson.cn. The entire venture is expected to generate $10 million in first-year sales. <wwd.com>


TNF Expands PlanetExplore to New York Area - The North Face today announced that PlanetExplore, a new online resource for outdoor recreational activities, is now available in the New York region. Created by The North Face, PlanetExplore is an online community of national and regional organizations, helping people of all ages find local outdoor recreational activities. The New York launch of PlanetExplore comes on the heels of The Outdoor Foundation’s recently released Special Report on Youth, which found that outdoor participation among youth continues to decrease each year, with the rate of decline steepest among the youngest age groups. After launching in the San Francisco Bay Area, home of The North Face, PlanetExplore expanded into the Midwest with a Denver release, and is now available nationwide with the New York introduction. The site has partnered with more than 100 non-profit organizations across the country, offering many opportunities to discover a diverse array of outdoor activities. <sportsonesource.com>


Burton Cuts Small Percentage of Staff and Reinstates Salaries - Burton has restructured its North American staff, resulting in a layoff of less than 2% of its global employee base. The company also announced that it reinstated salaries and merit increases that were decreased eight months ago due to the economic downturn. "Burton continues to lead the industry, which is in better shape than it was one year ago," says Burton CEO Laurent Potdevin. "Layoffs are always difficult, but in today's changing marketplace, some restructuring was necessary to maintain our investments in product development and marketing." After staff reductions, Burton employs over 600 people in North America, with its total global headcount topping 950. <sportsonesource.com>


Retailers are turning to social media, video and faster buying, study shows - The 2009 holiday shopping season was perhaps the roughest in the history of online retailing. The wretched economy caused consumers to rein in spending and conduct more comparison shopping, hunting for the best deals.

Changing consumer behavior throughout 2009, in turn, caused retailers to try new selling and branding techniques, or augment existing ones. Three areas of change included the use of social networking, online video and streamlined purchasing, according to The E-tailing Group Inc.’s annual study of 100 online retailers. 60% of the retailers in the study featured on their e-commerce sites links to social network presences, notes Lauren Freedman, president of the research and consulting firm. Freedman will be speaking at the Internet Retailer Web Design & Usability Conference, Feb. 15-17 in Orlando, FL, in a session entitled Lessons from Holiday 2009. <internetretailer.com>


U.S. Textile, Apparel Imports Fall in '09 - The volume of textile and apparel shipments to the U.S. declined in 2009 amid the global recession, even as imports from China and Vietnam continued to rise.The overall U.S. trade gap widened in December to $40.2 billion, compared with $36.4 billion in November, primarily because of a surge in oil imports. Nigel Gault, chief U.S. economist for IHS Global Insight, said U.S. exports are likely to grow but imports will be subject to fluctuations as the global economy rights itself. Despite the wider trade deficit in December, he said, “It is hard to describe the trade figures as bad news, since they show a continuing robust rebound in world trade.” Textile and apparel imports dropped 7.5 percent to 46.6 billion square meter equivalents compared with 2008, the Commerce Department Office of Textiles and Apparel said Wednesday. Apparel shipments for the year fell 6.1 percent to 21.3 billion SME. Textile shipments were down 8.6 percent to 25.3 billion SME. <wwd.com>


Consumer Groups Warn About Tax Refund Loans - Millions of Americans buy pricey refund-anticipation loans, or RALs, instead of waiting for their free IRS checks. Consumer advocates have warned taxpayers for years about the loans that, they say, drain millions of dollars out of U.S. tax refunds each year. Indeed, 8.4 million Americans took out RALs in 2008, costing them $806 million in interest payments and fees, according to data recently published by two consumer advocacy groups; the Consumer Federation of America and the National Consumer Law Center. RALs often carry annual percentage rates as high as 500 percent, according to the law center, with an average RAL of $3,300 carrying a rate of 72 percent.

Refund-anticipation lenders often target low-income taxpayers, especially those who receive the Earned Income Tax Credit, according to the IRS. About 1 in 17 tax returns filed in 2008 involved a RAL.  <abcnews.go.com>

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