According to a franchise consultant, one of McDonald’s largest Co-Ops in the country showed a $0.39 decline in breakfast average check for the first week of February with a 3.1% increase in breakfast sales and a 10.9% increase in TCs. 


The February data points are significant as they reflect the beginning of the national launch of the $1 menu at breakfast.  In the same Co-Op for the same period, “regular menu” sales were down 1.6%.  The regular menu accounts for 70%+ of total sales for McDonald’s US Business.  Considering this, and taking the Co-Op example cited above as representative of the wider system, a 3% increase at breakfast would not be enough to move the US business back into positive territory. 

McDonald’s has a big voice when it comes to marketing so with transactions up more than 10% at breakfast there will be other companies within the breakfast day part that will begin to suffer.  For starters, it will make it nearly impossible for WEN and BKC to take any significant market share at breakfast.  Neither company has the marketing muscle or the margins to afford to be competitive. 


Given the lessons learned from 2009, I do not think that a typical SBUX customer is going to make the switch to MCD; although Dunkin has responded to the new McDonald’s dollar menu.

R3: FL: Bringing the Hardwood to Champs


February 24, 2010


FL is synching with the NBA and Adidas in a strategic partnership, in yet another example of the kind of exclusivity and differentiation that we believe will be key to the turnaround at Foot Locker.





We continue to believe in the opportunities for Foot Locker and the major effort underway to revamp the company’s merchandising and product offering. As retail earnings have dominated the headlines over the past couple of days, an announcement with little fanfare was made that brings the NBA, Foot Locker, and Adidas together in a strategic partnership. Through its Champs Sports division, the three entities are teaming up to create an official NBA shop within its stores. The offering will include official NBA/Adidas on-court licensed apparel and NBA themed fashion apparel. The merchandise is expected to range from official jerseys and uniforms to hats and accessories. Importantly, the collaboration also includes an exclusive fashion line created by Adi for Champs. Exclusivity remains one the biggest opportunities for Foot Locker and its 5 major sub-brands, and this is a step in the right direction. Not only will all of the product be provided by Adidas with some of it only available at Champs, but the entire concept of the NBA shop will be unique to the chain. Currently, the NBA has only one branded store on 5th Avenue in New York.


While Champs has always sold a limited offering of NBA gear, this represents a cohesive and coordinated effort highlighted by an 80-100 square foot area delineated by a replica hardwood floor and NBA Shop fixtures. We suspect the NBA and Adidas picked up the tab on these efforts, which is clearly a win-win from a capital allocation perspective as it relates to Foot Lockers cash flow and balance sheet. With all due respect to Nike, it’s also positive to see some efforts aimed at better balancing the brand presence within the store.


R3: FL: Bringing the Hardwood to Champs - 1


As one might expect, the merchandise will be predominately geared towards local team preferences, with additional product tied to the teams and players that resonate on a national level. Rollout is anticipated this month with 69 stores primarily in the Miami market, with expansion into other major markets shortly after. By the ’10-’11 season all 500+ stores are expected to have the 8-10 foot shops. While it is still too early to tell exactly what impact these shops will have on productivity, we believe this is yet another step in the right direction. After years of status-quo merchandising efforts, this partnership on a very basic level indicates that vendors and even leagues are excited about the prospects of working closely with Foot Locker to reinvigorate growth. If proven successful, would it be unreasonable to see a MLB or NFL shop at some point? We still believe this is just the beginning of many more merchandising changes on the way…


As a reminder we will be hosting a conference call this Friday (2/26) at 11am highlighting two of our Top Ideas for 2010 – Nike & Foot Locker. Contact to request access.


Eric Levine





  • An email in my inbox yielded an interesting take on the “limited-time” sale from Banana Republic. The After 5 Style Event advertised 25% off orders of $100 or more. However, the discount is only valid online between 5PM and 11:59PM EST time and in-store from 5PM-9PM. Given that the coupon arrived at 1:15PM the same day, it will be interesting to learn if higher value discounts offered over a short period of time can actually drive demand enough to move the needle. 
  • Macy’s CFO indicated that recent snowstorms in February have had a negative impact on sales, but that the month is still “doing well”. 
  • Target management noted that they are now beginning to see a positive turn in the performance of their home categories. While basics categories are performing well, pockets of strength in the better and best categories are also popping up. 
  • Iconix noted on its quarterly call that Wal-Mart’s Latin American sub-brand, Suburbia, will be selling Mossimo in a direct-to-retail partnership. While this is perfectly allowable under the terms of the license, it is still interesting to note that Target in the U.S has been the brand’s main growth driver over the past 10 years. We don’t often see an exclusive brand in one region, also being distributed by a competitor in another. 
  • While other areas of retailing are beginning to talk about inflation, Home Depot is not seeing any signs that product costs are on the rise. Inflation remains very low, according to management and should remain so over the course of 2010. Management also pointed out that lumber is currently only 7% of the sales mix, down from a mid-teens percentage when the housing market was much more robust. As such, lumber price increases are not having a material impact to sales at this time. 
  • When asked about e-books and e-readers, Barnes and Noble management indicated that they believe in a platform of content distribution that is open and compatible with numerous devices. This commentary is interesting, especially in light of the company’s efforts to develop and sell its own device (the Nook). As of now, it looks like BKS is taking a slightly different approach to Amazon, which is building its business almost exclusively around the Kindle. 
  • LIZ management noted that restructuring efforts have resulted in a dramatic reduction in the company’s distribution infrastructure. With a peak of 10 DC’s in 2006, the company is now operating one central facility in the US. 




Finish Line Secures Credit Facility - The Finish Line, Inc. entered into an unsecured $50 million revolving credit facility credit agreement. The facility, which expires on March 1, 2013, provides that, under certain circumstances, the company may increase the aggregate maximum amount of the credit facility by up to an additional $50 million. According to a filing with the Securities & Exchange Commission, the new credit agreement will be used by the company, among other things, to issue letters of credit, support working capital needs, fund capital expenditures and for other general corporate purposes. The new credit agreement and related loan documents replace the company's prior credit facility dated as of Feb. 25, 2005 and related loan documents, in each case as amended from time to time. All commitments under the prior credit agreement were terminated effective Feb. 18, 2010. Existing letters of credit of $3,950,350 under the prior credit agreement were deemed issued under the New credit agreement. No advances were outstanding under the Prior credit agreement as of February 18, 2010, and no advances were borrowed under the New credit agreement on February 18, 2010. Accordingly, the total revolving credit availability under the New credit agreement immediately after the consummation of the New credit agreement was $46,049,650. The company's ability to borrow monies in the future under the New credit agreement is subject to certain conditions, including compliance with certain covenants and making certain representations and warranties.  <>


Wal-Mart Plans Latin American Acquisitions, Acquires Streaming Movie Company -  Wal-Mart Stores Inc., the world’s largest retailer, plans to make acquisitions and open new outlets in Latin America, said Eduardo Solorzano, president and chief executive officer of the region. Wal-Mart is seeking growth in fast-growing markets such as Brazil, China and India as its U.S. sales have stalled. The retailer said last week that domestic sales would be “more challenging” in the first quarter after reporting fourth- quarter revenue that trailed its projections. International sales account for a quarter of the company’s revenue. In other news, Wal-Mart Stores Inc. says it will buy Vudu Inc., which sells technology and services that enable consumers to stream high-definition movies into homes. The deal, which Wal-Mart says will close within the next few weeks, puts the retailer in closer competition with such companies as Netflix Inc. and Apple Inc., both of which sell digital entertainment. Terms were not disclosed. Founded in 2004, Vudu will become a wholly owned subsidiary of Wal-Mart. Wal-Mart says Vudu’s licensing agreements with studios and distributors enable access to 16,000 movies. Consumers need broadband Internet connections and high-definition TVs or Blu-ray players to rent or buy the movies. Vudu sells boxes that attach to or are built into TVs, enabling access to movies.  <>   <>


Charming Shoppes launches a universal shopping cart - Plus-size apparel retailer Charming Shoppes Inc. introduced today a universal shopping cart that follows shoppers across its four e-commerce web sites:,, and The change will allow shoppers to pay one flat shipping rate for purchases made at more than one site, as well as to have purchases shipped to its stores for free. "We're thrilled to offer our customers the ease and convenience of shopping our entire family of brands online with one universal check-out," says Jim Fogarty, president and CEO of Charming Shoppes. "This new functionality allows us to leverage the strength of our great brands while maintaining what is unique and compelling about each brand's identity." <>


Calvin Klein Supplier Top Form to Boost Bra Capacity - Top Form International Ltd., a Hong Kong bra maker that supplies brands including Calvin Klein and Maidenform, plans to increase manufacturing capacity as retailers in the U.S. and Europe restock and demand rebounds. Top Form, which has almost tripled in market value over the past year, may build a fourth factory in China, ChairmanWillie Fung Wai Yiu said. The company may boost capacity by 20 percent within the next two years.  The underwear and nightwear market in the U.S., Top Form’s biggest market, may grow 2.4 percent to $12.9 billion this year after declining 8.6 percent in 2009, according to data from Euromonitor International. Top Form, which is 23 percent-owned by Belgian luxury lingerie maker Van de Velde NV, also supplies other brands sold by retailers including Victoria’s Secret and Wal-Mart Stores Inc., Fung said. <>


Industry Lobbied With Their Wallets in 2009 - The retail and fashion industries largely increased their level of spending on lobbying last year, pouring millions of dollars into influencing critical policies on trade, health care, organized retail crime, credit card fees and union organizing. Wal-Mart Stores Inc., Sears Holdings Corp., Tiffany & Co., Hanesbrands Inc., J.C. Penney Co. and Abercrombie & Fitch all boosted their spending last year on lobbying the Obama administration and Congress, according to the government’s recently released lobbying figures. Target Corp. and Limited Brands Inc. cut back on lobbying expenditures. President Obama’s signature issues, including health care reform, climate change and clean energy proposals, and financial regulatory reform all stalled in Congress last year and have been in limbo in the early part of 2010. Apparel brands, retailers and industry trade groups, opposed to many of the far-reaching policy proposals that would impose tough new regulations on the business community, saw their money spent on lobbying as a great return on investment. But there were fewer lobbying successes in the trade area, where many of the industry’s trade expansion priorities failed to lead to congressional action under a Democratic-controlled Congress and White House. <>


Carrefour to Close 21 Belgian Stores - Citing worsening market conditions, Carrefour Belgium, a subsidiary of Carrefour SA, the world’s second-largest retailer, on Tuesday revealed plans to shutter 21 stores in Belgium. At stake are some 1,672 jobs. Carrefour outlined plans to develop its franchise business to help bail out certain hemorrhaging stores and to contribute 300 million euros, or $408 million at current exchange, over three years toward the remodeling of existing stores in line with new retail concept developments, including online initiatives. Carrefour operates 627 stores in Belgium. <>


Japan's Jan. Exports Surge 41% - Japan’s exports surged 40.9 percent in January, providing the most recent sign that the world’s second-largest economy is recovering. The Ministry of Finance said Wednesday that exports rose to 4.9 trillion yen, or about $54.07 billion at current exchange, on increasing demand for Japanese goods from Asian countries. Specifically, exports to China, Japan’s single largest trading partner, grew 79.9 percent. Exports to the United States increased 24.2 percent. The data is good news for Japan but there are still concerns about the longer-term economic prospects for the country, in light of persistent deflation and high levels of government debt. There are also fears that Toyota’s recall crisis will dent the nation’s economic growth and tarnish its image abroad. Earlier this month, Japan's Cabinet Office said the country’s fourth-quarter gross domestic product grew a faster-than-expected 1.1 percent from the previous quarter. It advanced 4.6 percent on an annualized basis. <


The Macau Metro Monitor, February 24th, 2010



LVS plans to open the first phase of its $5.5BN (MOP44BN) Marina Bay Sands development on April 27th. The property plans to have 963 hotel rooms, part of the shopping mall and convention center, celebrity chef restaurants along with other dining outlets and the casino to open on April 27th. The opening of the second phase (i.e. Sands SkyPark, Event Plaza along Marina Bay, various retail stops and restaurants) will coincide with the grand opening celebration on June 23rd. The two theatres and  museum are scheduled to open in October and December, respectively.


A Resorts World figure says that RWS had more than 149K visitors in its first week of operations. Although the number of high rollers remain small compared with those in Macau, locals crowded the casino, despite the S$100 entry levy. The complex's four hotels were fully booked over Lunar New Year and have enjoyed 80% occupancy at other times since the Jan 20th opening.

Early Look

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US STRATEGY – Macro Headwinds

While volume was up 14% day-over-day, the absolute level remains very low as the stocks sold off on Tuesday.  Globally the MACRO environment continues to be challenging as the RECOVERY theme is losing traction.  The dollar was stronger yesterday after Germany's business climate index unexpectedly fell in February for the first time in 11 months and confidence and spending data out of Italy and France also suggest that a regional recovery is uncertain. 


Domestically, the market weakness was made worse as February consumer confidence plunged 10.5 points to 46. Following a disappointing University of Michigan confidence reading on February 12th, the Conference Board’s confidence index declined from a revised 56.5 in January to 46.0 in February, the lowest reading in 10 months.  According to the median of 68 estimates in a Bloomberg survey, Economists forecasted that the confidence index would decline to 55.0 from a previously reported 55.9 January number.  Expectations fell to a seven-month low, while the current conditions index hit its lowest level since early 1983.


Ironically, with consumer sentiment the primary impetus for yesterday’s 1.2% decline in the S&P 500, Consumer Staples and Discretionary were the two best performing sectors in the market yesterday.  With Utilities rounding out the top three, the SAFETY trade was in full force yesterday.  Not surprisingly, the VIX rallied 7% yesterday.  The Hedgeye Risk Management models have the following levels for VIX – buy Trade (18.57) and Sell Trade (22.64). 


Within Consumer Discretionary (XLY), Retail held up better than the S&P 500.  The outperformance was on the back of HD and M, which reported better than expected trends for 4Q09.  On the downside, TGT finished off its lows, but was still weaker on the day following its Q4 results and less than robust outlook.


After being the best performing sector on Monday, the Financials (XLF) was the worst performing on Tuesday.  The decline in the XLF is centered on the decline in the banking stock with the BKX down 2.3%; large-cap regional’s were among the worst performers in the group.


Along with the XLF breaking TRADE and TREND yesterday, Technology (XLK) broke TRADE yesterday.  Yesterday’s decline in technology was centered in the Semiconductors with the SOX down 2.8% on the day. 


Equity futures are trading modestly below fair value following Tuesday's nearly 1.2% decline sparked by disappointing consumer confidence data, and ahead of Fed chairman Bernanke's testimony to Congress at 10am ET.   Ahead of his testimony the Dollar index is slightly lower in early trading.  The Hedgeye Risk Management models have levels for DXY at – buy Trade (79.60) and sell Trade (81.05). 


As we look at today’s set up the range for the S&P 500 is 31 points or 1.7% (1,090) downside and 1.1% (1,121) upside. 


Copper is declining for a third day in London after imports of the metal into China, the world’s biggest consumer, dropped for the first time in three months.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.17) and Sell Trade (3.46).


In early trading gold is trading down for the third straight day.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,075) and Sell Trade (1,117).


Oil is trading down for the second day in a row.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (77.09) and Sell Trade (81.88).


Howard Penney

Managing Director


US STRATEGY – Macro Headwinds - sp1


US STRATEGY – Macro Headwinds - usd2


US STRATEGY – Macro Headwinds - vix3


US STRATEGY – Macro Headwinds - oil4


US STRATEGY – Macro Headwinds - gold5


US STRATEGY – Macro Headwinds - copper6


Selling Fear

“We have a product for sale called news, and I’m the salesman.”

-Shepard Smith


You can call Fox News what you will, at least Shep calls what he does like it is. Living a life in front of a camera definitely requires some off-stage face time with a mirror. I wish more people in the manic media would realize that. Self-awareness is important.


I’m my own media, and yes I’m a salesman too. I have no shame in saying so. Selling things you believe in is cool. Some people sell religion. Some people sell dreams. Some people sell fear.


It’s a lagging indicator, but Selling Fear is something that’s become quite popular for both Washington and Wall Street ever since most of these people missed calling the stock market crash. To some extent it’s about job security. To some extent it’s about group-think. To some extent it’s just plain sad.


Being a risk manager doesn’t mean waking up every morning and scaring the living daylights out of your readers or viewers. On quite the contrary, managing risk is about understanding that risk works both ways.


Orchestrating your decision making at the extremes of hope and fear is where the real risk management happens, not in front of a room full of sell-side bankers and brokers who are chowing down on some rubber chicken road-show lunch.


On the topic of Sovereign Debt for Dummies, I wrote about Harvard’s Ken Rogoff becoming a consensus-fear indicator yesterday. He’s right back at it again this morning, stealing the headlines of the manic media with a fear-mongering call to action against China. The headline reads “Rogoff Says China Crisis May Trigger Regional Slump.” Oooh. Ahhh. Scary, eh?


Not so much folks. You see, while some of these academics like Niall Ferguson, Nouriel Roubini, and Ken Rogoff should be commended on the highest order for calling out real risks before the crowd saw them coming, these guys aren’t God. At least not mine…


The manic media props these academics up as risk managers, when in reality what they become are classic contrarian indicators. Managing risk is like driving a car. The weather changes daily, and so do the hopes and fears of everyone else on the road. Real-time risk on the road doesn’t happen in the vacuum CNBC is piping you from the radio as the crash they missed calling is staring at you in the rear-view mirror.


Let’s get back to China. And for accountability’s sake, maybe you give us some knucks for calling out the Chinese Ox In a Box at the top, because my team did. China has tightened lending terms multiple times in the last 3 months, and has seen their stock market lose almost -10% of its value as a result. AFTER this self-induced correction in their own property and stock markets, Rogoff says “if there’s a this-time-is different story in the world right now, it’s China.”


Ok Ken. Thanks. So after selling off to higher-lows earlier this week, what did China’s stock market do on that overnight? You got it Pontiac - it went straight up…


China’s Shanghai Composite closed up +1.3% last night at 3022, and instead of being down -10% for the YTD, it’s now down -7.8%. Importantly, Chinese stocks are now making a series of higher-lows. They have also held what I see as their long term TAIL line of support (2897 on the Shanghai Composite). That, combined with Chinese crash calling becoming consensus fear is bullish, on the margin.


Again, the easier thing for me to do this morning would be to wake-up and dog-pile Rogoff’s warnings – Selling Fear. But that’s not the prudent thing to do for your portfolio. The risk manager in me is now asking the question that we asked of ourselves before getting bullish on China in December of 2008 – if there’s a consensus call lurking in the halls of those Selling Fear this morning, may that be the “short China” call that we ourselves have supported?


Rogoff says China’s GDP could drop to 2%. Sorry dude, not in the next 3, 6, or 12 months. Heck that might not happen for the next 3, 6, or 12 years; but, again, our risk management strategy isn’t to make open ended predictions like the one Ken just made. We focus on this thing called timing. That’s what academics like Roubini and Rogoff don’t do. Not saying when is the hallmark of Selling Fear.


I remain bullish on a Buck Breakout, bearish on US Treasuries, and bearish on gold. Over the course of this 2-day correction, I have moved to neutral from bearish on US stocks. At a price, I will go bullish. I dropped the cash position in our Asset Allocation Model from 64% to 61% yesterday. I’m in no rush to buy things, but Selling Fear is not what I recommend doing after virtually every stock market in the world is down on the year-to-date.


My immediate term support and resistance levels for the SP500 are now 1090 and 1121, respectively.


Best of luck out there today,





XLF – SPDR Financials — With sentiment negative and a Piggy Banker Spread hitting a record wide spread on 2/23/10, we bought red.


XLK – SPDR Technology — Technology is underperforming the SP500 YTD; a down day on 2/22/10 prompted us to buy more. We expect to see some positive mean reversion for Technology as M&A picks up.


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.



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 StaplesGiven how many investors own Consumer Staples 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.


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.


So the “Big Four” slot suppliers each increased or maintained ship share in CYQ4. That’s what they said.  Sound implausible? It does to us. IGT needs to rerun its numbers.



Here our some quotes from Q4 CY2009 conference calls:


IGT Management - “But our internal estimates should base on tracking of one order to the next, would suggest we're somewhere around 40% on the replacement side, which is consistent with where we were for Q4”

  • More like 30% for replacement demand by our estimation
  • 31% including sales into new and expanded casinos, down from 42% in CYQ3 and 39% in Q4 CY2008.

BYI Management - We estimate that we maintained our game ship share in the low 20s…”

  • We calculate ship share was more than maintained, it actually grew from Q3 CY2009
  • 20% looks like the right market share to us in Q4 but we could be off by one or two percentage points

WMS Management - We've said previously that we would be disappointed if we couldn't get above that 30% replacement share. We think we did very well for the quarter but until everybody reports, we're not going to know. I believe that if we did compare favorably to our biggest competitor who announced last week, but until the others report, we won't know exactly what our share is but we're guessing it's in the low thirties.”

  • We calculate replacement ship share at 31%, in-line with management’s assertion
  • WMS did compare favorably with IGT, increasing its overall ship share from 20% in Q3 to 26% in Q4.  Nice work.

ALL Management - In North America, an increased ship share and growth in our gaming operations installed base was more than offset by significantly lower demand, including in the systems market.”

  • We agree 100%.


The following chart shows the slot ship share trends for the “Big Four” suppliers.  Since some of the analysis involves assumptions, we may be off by a percentage point or two here and there but for the most part we feel good about our numbers.  While one quarter does not make a trend, the other three suppliers seemed to gain share in Q4 CY2009 at the expense of IGT.



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