R3: WAG/DRD: Oink Oink


February 17, 2010


The history on Duane Reade is comical. I’d be laughing if it did not destroy capital for real investors along the way. If Oak Hill is willing to bail and realize a -45% loss, what does that say about everything else in the pipe?  As we’ve been saying, sell these pigs while you can. The window won’t be open forever.





Ok… let me get this straight…

First, Duane Reade comes public.

Then it dirties up the P&L at the expense of shareholders.

Then a management-led buyout occurs at depressed prices.

Then Oak Hill and banker du jour convince the 800-lb gorilla (Walgreens) to take advantage of an all time high in the ‘Piggy Banker Spread’ (2s to 10s) to get paid on yet another billion dollar deal that should not be a financial reality.


This madness is so unsustainable.


More Detail on the Timeline

1998: After 6-years under Bain’s umbrella, Duane Reade goes public in 1998 at $20. Peaks 6-9 months later in the $40s.

2001: DRD takes a big hit post 9/11 (where DR has an overwhelming presence). A vey tough draw…

2002-‘03: Company rebuilds, but also front-loads expenses thereby cutting margins in half, and keeping the stock in the teens throughout the economic rebound.

2004: $774mm Oak Hill partners up with DRD management to buy the company for $774mm, or $16.50ps. They double DRD’s debt to $500mm.

2005-‘09: DRD proves to be too levered to navigate through the recession. Loses approx $350mm due to weak ops and elevated debt payments.

2010: Announces sale to WAG for $1bn in cash.



So let’s tally up the scoreboard.

Investors: The only long investors that made out big at any time during DRD’s public history were the ones who were allocated shares in the 1998 IPO at $20 and saw it rise over 6 months to $45. Aside from that, investors largely had negative returns across longer-term durations.

Oak Hill and Management: $774mm plus about $350mm in cumulative losses. Not a very impressive cost basis, boys.

Sure, that might just seem like a -11% return over 5-years – not terrible for this environment.

But there’s this thing called leverage. After accounting for which, the return is -45%.


All of this is hindsight – and Walgreen’s problem now.

But what does this say about the future?



If Oak Hill is willing to bail and realize a -45% loss, what does that say about everything else in the pipe?

As we’ve been saying…sell these pigs while you can. The window won’t be open forever.




  • In an effort to pre-empt weak traffic and poorly identified fashion trends, Abercrombie noted that gross margins were adversely impacted in 4Q by markdowns taken on Spring merchandise that will now go straight to clearance or outlet stores. While it is never a good thing for a non-price driven brand to take such measures, we note that this is a big step for management to take their lumps up front rather than wait until finding out the goods just did not sell well. It appears that management is realizing that the first markdown is always the cheapest…
  • Fossil management indicated that innovation and new product introductions continue to resonate well with consumers. As a result, these products are commanding higher price points and little price resistance by consumers. In fact, Fossil’s best-selling styles, which are normally around $75, are currently priced at $95 and $105. As a result, the company is seeing healthy increases in average unit retails, even with challenging economic headwinds.
  • While there were some small signs of inflation towards the end of the quarter, Whole Foods noted that inflation will not be a major factor for the company over the next few quarters. At most, management believes inflation could be 100 to 150 bps over the balance of the year. Overall, deflation is also no longer a major factor for the company. The company also continues to benefit from opportunistic buying in areas such as natural meats where supply has recently outstripped overall market demand.



General Growth Says Simon Offer Low, Invites Bidders - General Growth Properties Inc. said a $10 billion takeover offer from rival Simon Property Group Inc. is too low and it will invite others to make bids as it considers options for emerging from bankruptcy. General Growth plans to provide information on the company, including financial projections and data on its shopping malls, to those interested in making bids. Materials likely will be sent out by the beginning of next month, with indications of interest due back within four weeks, the Chicago-based mall owner said today in a statement. “We believe the information we would provide to you as part of this process will enable you to better understand the company, get to a higher valuation, and provide a fully documented offer,” General Growth Chief Executive Officer Adam Metz said today in a letter to Simon chairman and CEO David Simon. The letter was included in today’s statement. Simon offered to buy General Growth for more than $10 billion and combine the biggest U.S. mall owners. About $9 billion of the bid is in cash, Indianapolis-based Simon said in a statement today. General Growth shareholders would get about $9 a share, including $6 in cash, and unsecured creditors would be repaid in full for about $7 billion. Simon said it made its offer public after receiving “no substantive” response from its rival.  <>


Express Plans IPO - Express Parent LLC, the owner of Express specialty apparel stores, said in a regulatory filing Tuesday that it plans to raise as much as $200 million in an initial public offering. Express became a stand-alone business in 2007 when private equity firm Golden Gate Private Equity Inc. paid $602 million to acquire a 75 percent stake in the chain from Limited Brands Inc. The Securities and Exchange Commission filing said proceeds from the IPO would be used to prepay debt due in 2015, but did not provide details on an IPO date or how many shares would be offered. The total debt is $416.9 million. Teen chain Rue21 and discounter Dollar General both had IPO’s in November. VS Holdings Inc., which operates Vitamin Shoppe stores, went public in October. Express, which has been in business more than 30 years, is the sixth largest specialty retail apparel chain in the U.S, according to the filing. The company targets men and women between the ages of 20 and 30 and operated 573 stores with average square footage of 8,700 as of Jan. 30. The filing said the retailer plans to open on average 30 new stores in the U.S. and Canada every year for the next five years.  <>


Puma Launches Sports-Infused Mobile Phone - Puma launched its first mobile phone, named the Puma Phone, featuring a number of sports-related features, including applications for runners and cyclists that let them keep track of speed, distance and pace. The phone can also keep track of the number of steps taken and the number of calories burned. A solar panel on the back of the phone can be used to charge it, and it has a 2.8-inch touch screen on the front. The device was unveiled Tuesday at the Mobile World Congress. Among the unique features are a timer that looks like an analog stopwatch, a compass designed to look like something off a yacht and a music player that looks like a record player. The feature lets users spin and scratch a virtual record. More standard features include a 3.2-megapixel camera with an LED flash, A-GPS (Assisted-GPS) and an FM radio. It can be used to surf the Web using HSPA (High-Speed Packet Access) at up to 7.2M bps or 2.9M bps, according to Puma. Puma's first smartphone will be available in Europe first  most other parts of the world soon thereafter. The U.S. launch is uncertain. Pricing also wasn't announced. The device is manufactured by Sagem Wireless and is based on a proprietary operating system. <>


PacSun Taps Christine Lee to Succeed Cunningham - Pacific Sunwear of California Inc. has snagged former Urban Outfitters Inc. executive Christine Lee to serve as its senior vice president and general merchandise manager of juniors’ merchandising and design. She succeeds Brad Cunningham, who left the company a few months ago, according to a spokeswoman. In her new role, Lee will oversee all buying, design and merchandising for the juniors’ apparel and accessories offered in the company’s nearly 900 PacSun stores as well as online. “Christine’s expertise in fusing customer insight, fashion trends and brands will enable us to create excitement in our stores and a stronger connection to our female customers,” said Gary Schoenfeld, president and chief executive officer of the Anaheim, Calif.-based chain. “With her previous successes in growing both apparel and accessories, Christine will be instrumental as we reestablish PacSun as a favorite destination for fashion, brands and California-inspired product.” Lee spent nearly 20 years with Urban Outfitters working her way from sales associate to general merchandise manager of women’s apparel and accessories, urban renewal and design, a $300 million business.  <>


Stage Stores Appoints Chief Merchant and COO - Stage Stores, Inc. named Richard Maloney chief merchandising officer and Edward Record chief operating officer. Both Maloney and Record will report to Andy Hall, President and CEO. Maloney, 60, joined Stage Stores in October 2008 as the President and Chief Operating Officer of the South Hill Division, headquartered in South Hill, Virginia. Prior to joining Stage Stores, Maloney's 32 year retail career included seven years as President and CEO of the Meier and Frank division of Macy's. As Chief Merchandising Officer, Maloney will oversee all of the merchandising, planning and allocation functions of the Houston Division. In addition, the Chief Operating Officer of the South Hill Division will report to Maloney. <>


Dollar General Waltzes Bobby Brooks Into Walmart Territory - Dollar stores are unlikely fashionista destinations, but Dollar General (DG) wants to change that idea. Can its down-home style re-occupy the retail space that Walmart (WMT) and other ex-discounters are abandoning? Dollar General is  getting set to launch the Bobby Brooks line of apparel in two collections later this year–one for women; the other for girls. To hype the launch, the retailer is holding a model search among its employees. The association of Bobbie Brooks with Walmart is germane because Dollar General has aspirations to become more like what Walmart used to be. The company, which has almost 9,000 stores in 35 states, has even been teasing Walmart a bit lately. Dollar General issued an announcement about adding 5,000 jobs shortly after Walmart announced that it was laying off about 11,000 employees. <>


Creditors Approve The Walking Co. Reorg Plan - The Walking Company Holdings, Inc. said that the unsecured creditors committee, established as a result of the company's voluntary filing for chapter 11 bankruptcy protection, has agreed to support the company's plan of reorganization filed last week and not pursue other alternatives. "With this positive result, we are now looking to emerge from chapter as early as mid April," stated Andrew Feshbach, CEO of the Company. Working closely with its bank, landlords, vendors, and shareholders, the company has been able to restructure its balance sheet and long-term financial obligations. As a result, the company submitted a reorganization plan on February 2, 2010 to keep 207 of its 214 current store locations open and pay off all of its debts and future obligations to trade creditors.  <>


Textile And Apparel Trade Deficit Shrunk In 2009 - Year-end data released by the U.S. Department of Commerce show that the textile and apparel trade deficit fell by 13 percent in 2009. Manufacturing industry trade officials say, however, that the decline was due to the collapse of the U.S. economy rather than any long-term improvement. Commerce department data show the textile and apparel trade deficit amounted to $74 billion based on imports of $90 billion and exports of $16 billion. China accounted for $36 billion of the U.S., imports and only $848 million of U.S. exports, resulting in a relatively minor drop of 4.5 percent in the trade deficit. Apparel imports from the Caribbean nations, which often contain yarn and fabric made in the United States, amounted to $7 billion, a decline of 17 percent. U.S. trade with the North America Free Trade Agreement countries -- Canada and Mexico -- show $9.4 billion in imports, a decline of 11 percent; and $8.4 billion in exports, a drop of 7 percent from 2008. U.S. exports to countries with which the United States has free trade agreements remained a little stronger, dropping by only 3 percent from 2008. <>


Nordstrom, Target Lead In Customer Satisfaction - In the derby to please shoppers, stores like Nordstrom and Target continue to trounce their competition. But overall, online retailers continue to gain, according to the latest American Customer Satisfaction Index (ACSI), indicating that many consumers find shopping online much more pleasing than hoofing it through an actual store: The ACSI, founded at the University of Michigan and based in Ann Arbor, says its index for e-tailers gained a percentage point to 83 (out of a possible 100) compared to offline retailers, which gained a percentage point to 76. In the online group, Netflix jumped 2 percentage points to 87 -- dethroning Amazon, at 86. Newegg fell a bit to 86, while eBay remained at 79. Among brick-and-mortar stores, Nordstrom -- with a score of 83 -- continues to outperform its department-store competition, including Kohl's (79). JC Penney (79), Dillard's (78), and Sears (74.) And while others gained a bit in the group, Macy's, which eliminated more than 7,000 jobs last year, was the lone decliner, with its score falling to 71. Of the discounters, Target -- with an 82 -- soared above Wal-Mart Stores, with a well-below-average of 71.

Barnes & Noble, with an 84, beat Borders, at 81. Costco, with 81, outperformed Wal-Mart's Sam's Club, at 79. Publix continues to lead among supermarkets. And office stores gained somewhat, with OfficeMax climbing 4% to tie Staples, with a 77. And while Home Depot gained 3% to 72, it still continues to lag Lowe's, which climbed to a 79.  <>


The Macau Metro Monitor, February 17th, 2010


The total number of passengers passing through the ferry terminals over the three-day Lunar Year reached 446,100. Officials attribute the rise in traffic, compared with last year's, to better facility technology and an economic upturn. The MDN believes that the peak of arrivals is expected today and tomorrow. 



Resorts World Sentosa expects lower visitor numbers when the public holidays end. The casino has attracted some 41,000 people so far since its grand opening on Sunday.The more popular games included baccarat, roulette, pontoon and blackjack. Long waits overwhelmed facilities and confusion over dress code were some of the complaints received. Resorts World Sentosa said they will take feedback from guests seriously.



Enter The Dragon

“The successful warrior is the average man, with laser-like focus.”

-Bruce Lee


Bruce Lee was a Chinese American born in California in 1940, then raised in Hong Kong until his teens. He then returned to America as man of many inspirations. From philosophy, to screenwriting, and the martial arts, Lee was an average man who proved to be a successful warrior of life.


If you want to be a warrior of risk management, you need to be able to survive the daily battles of short selling. This is not a blood sport, nor is it one that deserves the attention of your emotions. It’s a mathematical martial art that requires flexibility and laser-like focus.


Overall, I’m probably a better short seller and risk manager than I am long term investor. That’s probably because I have more experience in down markets than I have in up ones. I entered this daily battle of ‘don’t lose money’ at a hedge fund in the year 2000. The first 3 years of my ‘be right or be gone’ experience were in down markets. Call me biased, but the only business I trust owning for the long term is the one I am building with my own hands.


Experience in short selling doesn’t equate to long term success unless you allow yourself to learn from your mistakes. You need to be mentally malleable. You need to have a multi-factor risk management model that isn’t pre-programmed or fixed. Your planning and strategy has to be dynamic.


Today, every mistake that I make ticks live against me on an open web portal. I am sure there are other effective ways to hold oneself accountable to reality in this world but, for me, this does the job.


Yesterday I made two short sales into the market’s close. I sold both the US Energy Sector ETF (XLE) and the SP500 ETF (SPY). Since I remain bullish on a continued Buck Breakout here in Q1 of 2010, my intermediate term bearish views on Commodities have been clear – but that doesn’t mean I need to be short Energy, Oil, or Gold at every price. If you want to be a successful warrior of short selling macro markets, start with this advice – don’t short and hold.


Bruce Lee’s martial arts philosophy was called ‘Jeet Kune Do’, or ‘The Way of The Intercepting Fist.’ Metaphorically, that’s a good way to think about the art of short selling. You are tasked, daily, with understanding all of the investment styles within a style that could affect your position.


Per Wikipedia, “Jeet Kune Do is primarily an open hand system. The system works on the use of different 'tools' for different situations. These situations are broken down into ranges (Kicking, Punching, Trapping, & Grappling), with techniques flowing smoothly between them.”


When I think about making moves on the short side of a market, I definitely break my decisions down into ranges. While sometimes I write like I am punching someone, there is obviously no physical kicking or fist punching in risk management – but there most certainly is a constant pounding of the keyboard that helps me understand the probabilities embedded in the ranges that I am breaking down.


Let’s consider a live position here – shorting the SPY:


1.       I have an immediate term (as in today) probability model that shows me max upside to 1103 and downside to 1074.

2.       I have a 3-day probability model with a wider range of 1048 to 1103

3.       I have an intermediate term TREND (3 months in duration) line of resistance at 1100

4.       I have a long term TAIL (3 years in duration) line of support down at 984

5.       I have bearish volume signals (yesterday we had +1.8% SPX up day on a down -11% immediate term volume study)

6.       I have bearish volatility signals, provided that the VIX holds my immediate term support line of 20.82


So, what do I do with all of that information? I short the SPY with a plan to short more if the top side of my immediate term range of (1103) isn’t violated to the upside in concert with a reversal in both my volume and volatility situations.


That’s a simple 3-factor model (price, volume, and volatility) that I update every 90 minutes of marked-to-market price action. That’s definitely not the only 3-factor model I use. That’s simply the one I was using yesterday when I made my decision to ‘Enter The Dragon’ on the short side of the US stock market.


Bruce Lee would probably sign off on this thought process, primarily because it leans on a philosophy of mental flexibility rather than a rigid investment mandate. Some people call managing risk proactively, “trading.” Some people call it whatever they want to call it. I call it waking up expecting to be a risk management warrior. And being considered an average man by my competitors is plenty fine by me.


Best of luck out there today,






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).

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.


SPY – SPDR S&P 500 We re-shorted the SP500 at an attractive re-entry point on 2/16/10. We are bearish on US Equities for the immediate term from this price. Shorting green.


XLE – SPDR EnergyWe remain bearish on Oil for the intermediate term TREND and bullish on the US Dollar on the same duration. Everything has a time and a price.


GLD – SPDR Gold We re-shorted Gold on this dead cat bounce on 2/11/10. We remain bullish on a Buck Breakout and bearish on Gold for Q1 of 2010, as a result.


RSX – Market Vectors RussiaWe shorted Russia on 2/9/10 and maintain our intermediate term TREND bearish view on the price of oil.


XLP – SPDR Consumer StaplesThe Consumer Staples sector finally broke both our TRADE and TREND lines on 2/8/10. Given how many investors own these stocks because it was a "way to play the weak US Dollar" last year, we have ourselves another way to profit from a Buck Breakout with this short position.


EWJ – iShares Japan We re-shorted Japan on 2/2/10 after the Nikkei’s up move of +1.6%. Japan's sovereign debt problems make Greece's look benign.


IEF – iShares 7-10 Year TreasuryOne of our Macro Themes for Q1 of 2010 is "Rate Run-up". Our bearish view on US Treasuries is implied.

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News emerged today unveiling an agreement between BKC and SBUX to offer Seattle’s Best Coffee in approximately 7,250 Burger King restaurants across the United States by September 2010.  This is a positive for both companies.


On their last earnings call, SBUX made it clear that they saw growth potential in the Seattle’s Best Coffee brand.  Management stated that its research strongly suggested that SBUX had an “opportunity to position SBC with new customers” and that they “plan to create compelling franchising and distribution opportunities in 2010 and beyond”.  SBC is already in Subway restaurants.  Starbucks sees SBC as an opportunity to increase its overall share of the coffee market.  We believe that the partnership with Burger King will offer an effective vehicle for Starbucks to gain further traction in the market. 


BKC stands to gain from the agreement also.  For the second fiscal quarter, ended 12/31, Burger King’s traffic grew year-over-year in all day parts except breakfast.  In order to compete with McDonald’s during the breakfast day part, it has been clear that a premium coffee program would greatly aid that effort.  Serving SBC in Burger King is likely to have a positive impact on breakfast traffic.  It was reported that BKC will begin rolling out the coffee brand in the summer to better compete with MCD’s McCafe drinks and be nationwide by September.  During BKC’s most recent earnings call, management hinted at upcoming initiatives to address their breakfast offerings, “…we obviously have a lot of activity happening in our pipeline against breakfast. We do have upcoming in April, some breakfast value news that we will be advertising in the market.”  Whether or not there is more incremental news regarding Burger King’s breakfast menu, I view this news as a modest positive for the company.

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