R3: Earnings Callouts From a Diverse Group


February 25, 2010


Last night and this morning have brought a wide range of earnings reports ranging from SWY to TRLG. A couple of callouts from the diverse group caught our eye.






Headline earnings of $0.53 appear to be in-line with the Street, but below the surface continued topline weakness continues. Identical store-sales declined by 4.1%, meaningfully below the Street’s expectation for a 2.9% decrease. Bulls have been waiting for inflation to kick in at any time and so far signs of an inflation driven pick-up at retail remain elusive. We continue to believe the competitive environment will put a lid on opportunities to take prices higher, at least in the near-term. Also notable was the company’s decision to hold off on providing 2010 guidance until a March 3rd analyst meeting. We’re not sure what a few extra days will do at this point in helping to put forth an outlook for the coming year.


R3: Earnings Callouts From a Diverse Group  - SWY SIGMA




Reported EPS of $0.59, $0.03 ahead of the Street on a better than expected topline. The key here in the near-term centers around investment spend over the first three quarters of the year and the company’s decision to curtail its off-price business. On the investment side, the build out of an internal salesforce, the opening of a Hong Kong office, and incremental ad spend are all taxes on earnings for the year. The off-price business is expected to be cut 25% or by $10 million, which still leaves a fair amount of product to be sold through that channel and the company’s own outlets. All in, management suggested that the entire years earnings growth will be driven by 4Q, or beginning in 8 months! Perhaps most troubling is that SG&A and gross margins continue to move higher in tandem, clearly leaving little upside and leverage despite the hyper unit growth of the company’s retail stores. We continue to see risk here as the business model remains in the midst of major (and costly) changes.


R3: Earnings Callouts From a Diverse Group  - TRLG SIGMA




Clean beat here this morning with EPS coming in at $1.40, above the recently guided range of $1.36-$1.37. Guidance is slightly below the Street with management citing a belief that the environment will remain challenging and they are not baking a pick up into the forecast. In other words, they continue to be conservative. It looks like 2010 will be a year in the which the company will continue to focus on market share gains by using some gross margin/inventory management benefits to further reinvest in price (which in turn drives share). The balance here between longer-term results and reinvestment at the expense of printing higher EPS in the near-term is notable and something that is expected to continue. Further introductions of exclusive product should also be both a source of competitive advantage as well as a source of gross margin gains.


R3: Earnings Callouts From a Diverse Group  - KSS SIGMA



Eric Levine





  • Chico’s management indicated it has been using pop-up store locations for its Soma brand as a way to gage demand in a particular mall or trade area. The result of these tests has yielded about 8 or 9 longer-term lease signings, all of which are in freestanding mall locations. Soma stores will continue to be targeted primarily at A malls. 
  • For the first time in a year, Dollar Tree reported an increase in average ticket. While the company has been seeing positive traffic gains for some time, management believes that newer customers are returning to the store and buying more than they have on initial visits. The average ticket increased by 0.8%. 
  • In an effort to differentiate itself among other luxury retailers, Saks Fifth Avenue is seeking to secure exclusive lines with its designer partners. Exclusive product currently represents about 10% of sales, but is expected to double over the moderate term. 
  • TJX remains one of the few retailers looking to accelerate square footage growth over a multi-year period. The company grew square footage by 3% in 2009, and is planning on growing by 5% in 2010, and 5% in 2011. Based on current concepts and filling in existing markets, management believes the chain could expand from 2,700 to 4,200 locations over time. 
  • True Religion management indicated it is embarking on an effort to reduce the company’s sales to the off price channel. In 2009, the company sold approximately $40 million worth of product to off-price or about 13% of the company’s total sales. Given that this is a “luxury” denim brand that is still in growth mode, it’s interesting to see such a strong reliance on the discount channel as well as the brand’s own outlet stores. 




GGP in Deal for Bankruptcy Exit - General Growth Properties Inc. said Wednesday that it reached a deal to emerge from bankruptcy with a $2.63 billion investment from Brookfield Asset Management Inc. The agreement with the Canadian property management company would split General Growth into two separate divisions and give Brookfield a 30 percent stake in the number-two U.S. mall operator. The deal comes after General Growth last week rejected an unsolicited $10 billion bid from its chief rival, Simon Property Group Inc. It is subject to bankruptcy court approval, as well as better offers in a court auction. Simon did not immediately comment. The Chicago-based real estate investment trust said the commitment would help it recapitalize at $15 a share and give unsecured creditors par value and accrued interest on their claims. General Growth said the agreement is not subject to due diligence or any financing condition. Under the proposed terms, shareholders would receive one share of new General Growth Properties common stock at $10 a share, plus one share of a new entity, General Growth Opportunities, at $5 a share. General Growth Properties would retain the core mall assets and General Growth Opportunities would own certain noncore assets, which the mall operator said would include its “master planned communities and landmark developments like South Street Seaport” in lower Manhattan. <>


Walmart Canada to Open More Supercenters - Plans are in the works to open 35 to 40 more Walmart Supercenters in Canada this year. The new locations will be 10 percent smaller than current stores and will include both general merchandise and full supermarkets. The project, which includes new stores, relocations and expansions, will see an addition of up to 6,500 jobs in retail and construction. Start dates and specific store locations have not yet been announced. The new supercenters will bring Walmart Canada's operating total to 124. The retailer also has 200 general merchandise stores in the country. <>


Nine West launches a Facebook shopping tab - Nine West launched today a shopping application on its Facebook fan page that allows the company’s Facebook followers to buy products from designer Fred Allard's accessories line, as well as offers Facebook-only promotions such as 15% off purchases. The app, which was developed by technology firm Fluid Inc., is only accessible by Nine West Facebook fans. Limiting the app to fans gives its Facebook-related offers an air of exclusivity and should bolster the company’s fan base, says Andy Lloyd, Fluid CEO. Nine West fans who click on a “shop lookbook” tab on Facebook can shop, as well as note whether they “like” or want to “share” a product using the Flash-enabled app. When a shopper clicks the “like” button, that information is shared with everyone connected to her on Facebook. When she adds an item to her shopping bag a separate tab opens with Nine West’s standard checkout. Checkout occurs outside Facebook because Fluid and Jones Apparel Group, which owns Nine West, were concerned consumers would be hesitant to complete a transaction on Facebook, says Lloyd. <>


Barnes & Noble CEO stakes the company’s future to e-commerce - Barnes & Noble Inc. sees the future and it’s clearly e-commerce. In fact with a burgeoning online business and aggressive new business development in the e-book reader market, Barnes & Noble is transforming itself from a conventional books retailer into a major e-commerce franchise, CEO Steve Riggio told Wall Street analysts on the company’s third quarter earnings call. While it didn’t break out specific numbers for its new e-book reader, Barnes & Noble Inc. nonetheless credits sales of nook with providing a spark in web sales for the third quarter of fiscal 2010. <>


Amazon and Microsoft agree to share access to each other’s patent portfolio - Inc. and Microsoft Corp. have agreed to provide each other access to their patent portfolio, including the technology behind Amazon’s Kindle e-book reader, Microsoft announced yesterday. The agreement covers a broad range of products and technology, including the open source and proprietary software components supporting the Kindle and Amazon’s use of Linux-based web servers, Microsoft says. Microsoft did not identify which parts of its patent portfolio will be accessible to Amazon, which will pay Microsoft “an undisclosed amount of money under the agreement,” the software company says. A spokesman for Microsoft said that more specific terms of the agreement remain confidential. Amazon did not immediately return a request for comment. <>


Crocs Wins Appeal in Patent Claims Over Copycat Shoes - Crocs Inc., the maker of colorful plastic clogs with holes, won an appeals court ruling that revived patent-infringement claims over what it considers copycat footwear. A U.S. appeals court sent the case back to the U.S. International Trade Commission in Washington for further proceedings. Crocs, based in Niwot, Colorado, can seek an order to prevent imports of rival Holeys, Dawgs and Waldies shoes made in Asia and brought to the U.S. The company originally filed an ITC complaint in 2006 against 11 companies. The only ones remaining in the case are Double Diamond Distribution Ltd., a company based in Saskatoon, Saskatchewan, that owns the company making Dawgs shoes; Holeys Canada Inc. in Vancouver; and Effervescent Inc. of Fitchburg, Massachusetts, maker of Waldies Comfy Clogs. <>


Industry Sees Pros and Cons in Jobs Bill - Apparel and retail groups said the $15 billion jobs bill passed by the Senate Wednesday is a step in the right direction, but criticized the legislation for failing to meet the immediate needs of their member companies to create new jobs. The bill would give a package of tax breaks to businesses that hire new workers and invest in new equipment. Democrats were able to break through the partisan morass on Capitol Hill and secure votes from Republicans to pass bipartisan legislation they hope will create tens of thousands of jobs and help revive the weakened economy. The vote was 70 to 28. The centerpiece of the legislation is a $13 billion provision that would offer an exemption from Social Security taxes to companies this year that hire new workers that have been unemployed for at least 60 days. Companies also would receive a $1,000 tax credit for each new worker that is retained for a full year. Employers would receive the credit in their 2011 income tax returns. Another provision in the bill would allow small businesses to immediately write off equipment purchases up to $250,000 as business expenses, as opposed to depreciating those costs over time.  <>


Web-only retailers took the center stage for revenue growth in 2009 - With 35% of Top 500 retailers now breaking out annual web sales, it’s clear that web-only merchants took business away from the rest of the retail market in 2009, according to analysis of data for Internet Retailer’s forthcoming 2010 Top 500 Guide. Combined revenue for the 175 merchants that have reported annual web sales so far increased 13.8% to $49.70 billion in 2009 from $43.69 billion in 2008. However, among the 99 web-only retailers who have reported sales thus far, sales increased 25.2% to $32.45 billion from $25.92 billion in 2008. Even excluding growth powerhouse Amazon which grew 27.9% to $24.51 billion from $19.17 billion in 2008, the remaining 98 web-only retailers grew 17.6% to $7.94 billion from $6.75 billion.

The analysis of 99 web-only retailers, 36 chain retailers, 32 catalog companies and eight consumer brand manufacturers reveals:

  • Even though only a few consumer brand manufacturers have released e-commerce figures thus far, that group grew collective annual web sales by 12.7% to $487.6 million from $432.5 million in 2008.
  • Chain retailers’ web sales declined 3.7% in 2009 to $12.94 billion from $13.44 billion.
  • Catalogers posted a 2.6% decline in online revenue to $3.8 billion from $3.9 billion.



Across the industry from MCD to MSSR chains are having to give up margin to mitigate the pressure on guest traffic.  In two decades as a restaurant analyst this trend has never been good news.  Today, things are different and it appears that traffic matters more than margin.  That is a difficult statement to make but for now getting people in the door matters most.


Below are comments on Burger King from the TAST conf call…


“Promotional tactics are centering around the consumer’s need for extreme affordability with very aggressive promotional activities as the QSR industries and its conventional customers have come under increasing pressure.”


“We are hopeful that Burger King adjust its discounting strategy and launches new products in 2010 these efforts will provide more balance to the brand barbell [ph] strategy.”


“This promotion [dollar double cheeseburger] which continues is certainly an aggressive discounting tactic intended to drive both top line and customer traffic. Although we're still selling a lot of doubles burgers, we have experienced a gradual tapering off from the initial levels.”


Relative to trends prior to the promotional activity from Burger King, there was some improvement in both sales and traffic.  However, these have been at the expense of some margin degradation given the inherent discount. 


Comparable sales for our Burger Kings in the fourth quarter were down 3%.  Our average check decreased 5.8% while customer traffic increased 2.1% for the quarter.


"BKC coined the term 'extreme affordability' but unfortunately, that has turned their Burger King core customers into 'extreme bargain seekers'"




  • Comparable stores sales for 1Q10 to-date are down more than 8% (although this is versus a tough +5% compare, they said trends remain soft, continuing trends from December)
  • TAST is closing 7 Burger King restaurants in 2010
  • Commodity costs expected to increase 3 or 4% for Burger King segment in 2010


Initial unemployment claims rose 22k last week to 496k from 474k the week prior (revised up 1k). Consequently, the 4-week rolling claims number rose 6k to 473.8k from 467.8k.


This latest print pushes claims squarely outside our 3 standard deviation channel. For reference, our channel reflects the trajectory that's been in place since the March 2009 peak in claims. While we had been hesitant to call a reversal in the underlying improvement trajectory, the fact is that six weeks of data do make for a trend. On the margin, this is clearly bearish for companies with direct consumer credit exposure.





Joshua Steiner, CFA

Managing Director, Financials

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.


Despite flat McCarran airport traffic, don’t expect January gaming revenues to be positive. 



McCarran Airport released its January traffic yesterday.  The number of enplaned/deplaned passengers declined only 0.2%, the second best month in over two years.  However, the comp was ridiculously easy as January 2009 was the worst month since late 2001 which was obviously impacted by the events of 9/11.


We think it is unlikely that January gaming revenues will be positive even with the easy comparison and the CityCenter draw.  For one, Chinese New Year occurred in January of last year versus February of this year.  Indeed, table drop was up over 9% last year.  Second, we expect slot handle per visitor to continue to fall.


Overall, our model is projecting a 6% decline in Strip revenues in January assuming normal table hold percentage of 12% and a seasonally normal hold percentage on the slots.  We say seasonally because January usually carries a higher slot hold percentage as a catch up from December.  The state doesn’t count coins on Saturdays and holidays so slot revenues get shifted into the next month.


REVERSION BACK TO RED - strip metrics jan


REVERSION BACK TO RED - mccarran traffic jan 10

Sleeping Giants

“The great danger for most of us lies in not setting our aim too high and falling short; but in setting our aim too low, and achieving our mark.”



Last night the Canadian Olympic Hockey Team woke up.  The result was a dismantling of Russia in the quarterfinals in Vancouver.  The final score was 7 – 3 and the Canadians outshot the Russians 44 – 28.  If the hockey world didn’t know what the Canadians were capable of . . . well . . . now they know.  The giant is no longer sleeping.


As I was watching the game in the confines of Richter’s Bar and Grill in New Haven, CT, I couldn’t help but smile as the game ensued.  Yes, I’m Canadian, so it was cool to watch my team win.  Yes, it was funny when Keith texted me to tell me that his son two year old son was singing the Canadian National anthem.  And yes, I was drinking Molsons like they were water. 


Most importantly, I was smiling because this is what it is all about. Competing at the highest level and leaving everything on the ice.  Ask Canadian player Eric Staal about that, he left his teeth on the ice last night.  He then skated to the bench, took a tug on his water bottle, and went out for his next shift.   Not dissimilar to stock market operators like ourselves who keep at it every morning, even if we have a bad trade the day before.


At one point in last night’s game, the Canadians were up 6 -1.  Like most Canadians, I was giddy.  But I couldn’t help but notice that Canadian Coach Mike Babcock still wasn’t smiling.  In lieu of the ETFs this morning, we’ve pasted a picture of Coach Babcock’s scowling mug below.  Suffice it to say, this is not the face of man who will let his players “aim too low”.


Similar to expectations for sports teams, global macro data points can be ignored, but that doesn’t mean they cease to exist.  We have a number of call outs on that front this morning that are critical to highlight before the puck drops at 9:30 a.m.


While we have debated whether inflation is occurring domestically with some of our subscribers, the international data points continue to support an inflationary picture.  This morning, India, the world’s 12th largest economy, reported wholesale inflation.  This index, which measures basic food prices, rose 17.6% year-over-year.  That is inflationary.


To their credit, the Indians are concerned about inflation and attempting to address it.  In late January, the Indians raised their lenders’ cash reserve ratio to 5.75% from 5%.  Additionally, last week Chakravarthy Rangarajam, the top economic adviser to Prime Minister Manmohan Singh, acknowledged publicly that there is a danger of high food costs spreading to other commodities.   The Indians may not be setting their “aim too high” in combating inflation, but they are aware of the problem.  And that is a start.


From a longer term perspective, Analyst Darius Dale wrote a great note yesterday titled, Domestic Pigs, regarding burgeoning state deficits, that includes a series of data points that should not be ignored.  If you would like a copy of this fine note and to trial our subscriber service, email us at . To paraphrase the note:


“A recent release by the PEW Center on the States shows a $1 trillion gap between the $3.35 trillion in pension, health care, and other retirement benefit-related liabilities currently on States balance sheets and the $2.35 trillion in assets they have to cover them. 


Currently, 41 States' pension programs are less than 10% funded.  In addition, only 5% of the $587 billion liability for current and future retiree health care and other non-pension benefits is currently funded.


Unfortunately for State governments, purging the balance sheet is only a temporary fix. Across the country, State governments are facing lawsuits from municipalities school districts outraged by budget cuts.


So with their backs against the funding wall, States must find a cumulative $18.8 billion to balance their budgets in remaining months of the current fiscal year and an additional $53.6 in fiscal 2011.”


To be fair, some astute Governors realize the crisis they are facing and are both acknowledging and addressing it.   Most specifically, newly elected Governor Christie told mayors and local officials yesterday in New Jersey to prepare for state aid cuts on a massive scale to address New Jersey’s estimated $11BN deficit.  According to Governor Christie:


“At some point, there has to be parity between what’s happening in the real world and what’s happening in the public sector world.”


We like what we see and hear from Governor Christie.  State deficits are front and center for us as a macro risk and Governor Christie, at least, is trying to be the one Governor who won’t be “falling short” in addressing this macro risk.


Tonight is the women’s hockey gold medal game and on Sunday is the men’s hockey gold medal game.  As one of my friends back home likes to say, “it’s full giddy up time.”  Enjoy the Olympics and may the best teams win.


Keep your head up and stick on the ice,


Daryl G. Jones

Managing Director


Sleeping Giants - mike



The Macau Metro Monitor, February 25th, 2010



According to Michael Leven, LVS's COO, LVS would like to renegotiate its $5 billion US debt by the end of this year. At the Reuters Travel and Leisure Summit in New York on Wednesday, Levin commented on LVS's bet on the success of its Singapore casino resort to help it pay down debt. Although LVS has over $5 billion in cash, above the $3 billion threshold required of its debt covenants, Leven warned that underperformance in Singapore, specifically a less than $400 million in EBITDA by the end of the year, would create problems for its covenants.


He said the company's 130 US lenders will likely seek a paydown of $1 billion or so as well as a higher interest rate and fees. The company carries about $11 billion in total debt – $5 billion by the US group, around $3.6 billion in Singapore and $2.7 billion or so in Macau, he said.


Levin agrees with the Chinese government's 10-12% target annual growth rate in Macau casino revenues as a way to sustain growth and prevent a bubble-like environment. In addition, Levin does not expect tighter monetary policy in China to significantly impact Macau operations, noting their Macau customers' preference for using cash rather than credit to gamble.


Sands expects to begin selling condominiums at its Macau Four Seasons property through a co-op structure – which will bring in north of $1 billion, Leven said. Once the Singapore resort is fully up and running, Macau will drop from 70% to 50% of Sands' earnings.




The number of visitors to Macau in January 2010 totaled 2.05 million – up 6.8% YOY. Chinese mainland visitors rose 18.9%

to 1.13 million - with 447,681 traveling to Macau under the Individual Visit Scheme, down by 21.7% YOY.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.52%
  • SHORT SIGNALS 78.67%