FL: Hedgeye Internal Q&A

KM's quick ping to Hedgeye Retail team when FL stock turned down "FL - anything coming out of the meetings thats neg?"  Levine's quickie answer is below. More details to come later.


From Levine

Probably a bit of hype going in.  a little short on specifics as it pertains to product improvements (i.e what programs are forthcoming?).  areas of risk, such as the dividend, were put to rest.  It’s not going anywhere. 


Now this is an execution story, with the plans laid out in front of the Street.  I walked away confident that we’re spot on with our thesis and that the opportunities are big.


The only complaint I heard was that some people were hoping to gain exposure in greater depth to the management team, beyond the top 4 guys.  This didn’t happen although I’m sure this is still evolving.


Hicks saw our powerpoint and told me I was spot on with where they’re going.  Keep in mind that the work we’ve done is in far greater depth than what they spoke about today.  This is where the true upside lies…


Eric Levine

Hedgeye Retail


Spanish Piggy

Position: Short Spain (EWP)


I have been getting a lot of questions/emails today about Spain (I wrote negatively about it in my Early Look note this morning). Hopefully the “speculator” fun-cops over in the left wings of Europe don’t come after me. I am but one man, with an innocent chart and mouths to feed.


When it comes to size and scope, at $1.6T in GDP Spain’s economy is approximately 4.7x larger than that of Greece ($338B in 2009). There are 46.7 million people in Spain versus 11.3 million in Greece. That’s a lot of people who are likely offended by being called a Spanish Piggy.


When it comes to balance sheet and deficit problems however, the financial data doesn’t lie; politicians trying to put lipstick on it do. At 11.4%, Spain’s deficit to GDP rivals that of the USA’s and over $654 billion in public debt is pushing up against a worrisome risk manager’s level of 44% of GDP.


Because I am focused on these mathematical realities doesn’t make them new. That said, I am also very respectful of the fact that the last time the obvious risks implied by Spanish leverage started to freak people out, stocks went a lot lower than where they are currently trading.


In the chart below, you can wrap your head around the risk/reward of being short Spain’s stock market. Since the most recent YTD low established on February 5th, 2010 on Spain’s IBEX 35 Index at 10,103, Spanish stocks ripped the shorts for an expedited +9.4% rally. We short sellers of piggies call that an entry point.


We are using our intermediate term TREND line of resistance at 11,385 (red line in the chart below) as our risk management line. You can also use that as your stop loss level if you think there is risk that this Spanish Piggy can fly higher. With a Global Bubble in Bailout Politics forming, anything can happen…




Spanish Piggy  - spain

PSS: Looking for Another Strong Quarter

There are many tools we use to prep for a quarterly earnings release. As it relates to PSS, we included several of them below. The bottom line is that we’re well ahead of the Street. The consensus is looking for a loss of $0.26. We’re at a loss of $0.10. Could we be aggressive? Perhaps.


We need to temper comp expectations given the pull forward into 3Q from the Oprah promotion as well as the fact that PSS is not benefitting as much as some other retailers due to its lack of meaningful exposure to the ‘toning’ category. But when all is said and done they’re still going up against a -11% slide in traffic last year. A positive low/mid single digit comp is perfectly reasonable.


On the margin side, we’re coming out at a +470bp boost in margins versus last year. Yes, that’s a sequential reacceleration. But PSS is looking at the most favorable sales/inventory spread it’s seen in years. If there were ever a time to come in strong on the gross margin, now is it. If there’s any area we’d point to on the cost side that might be aggressive, it is our assumption for a 1% boost to SG&A – as we could see a potential pick up in incentive comp spending given the rebound in operating performance this year.


So yes, we’re anything but conservative headed into this print. But even if we soften up our comp and SG&A expectations, we have a tough time modeling a loss that starts with a $0.2 handle.  Is this a trade into the print? We don’t think so…not after a 18% run in the stock over the past 4 weeks. But we don’t think they’ll give enough ammo relative to expectations to cause a mass exodus from this name.



PSS: Looking for Another Strong Quarter - PSS 1 Revenue Slide 3 10


PSS: Looking for Another Strong Quarter - PSS 2 EBIT Slide 3 10


PSS: Looking for Another Strong Quarter - PSS Comp Store Estimate w NPD 3 10


PSS: Looking for Another Strong Quarter - PSS CompTrends Ind 3 10


PSS: Looking for Another Strong Quarter - PSS SIGMA 2 10



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The flowing note below was recently published by Christian Drake of the Hedgeye Healthcare team.  The genesis of the note is a follow on to a note we published on 2/24/2010 called “Domestic Pigs,” which focused on state pension liabilities.


Fiscal Conservatism, at least rhetorically, is garnering more headlines as politicians and state officials attempt to right size state budgets operating increasingly at a deficit.  Political and fiscal motivations look to be coalescing around a same objective as mid-term elections approach and politicians address a growing base of discontent from a populous who, over the past year, have been forced to face their own ghosts of leverage past and are now seeing the canonical kick-the-can approach to public debt management for the financial malfeasance that it is.


Current estimates peg state budget shortfalls for 2010 & 2011 as high as $350B and as state governments look to reorder their fiscal house, Medicaid allocations, at 21% of state revenues for FY2009, will continue to be a principal target for prospective offsets. 


Collectively, NASBO, the Kaiser Foundation, and the U.S. Census Bureau provide some interesting data as it relates to the condition of State budgets and the historical and prospective effects on Medicaid eligibility and reimbursement.  

Roughly 60M people receive Medicaid support in the U.S. with rolls continuing to swell as unemployment persists and payrolls continue to decline.  As stated above, Medicaid made a new high in FY2009 as the state entitlement program absorbed an average of 21% of all state revenues - coming in just behind education as the single largest budget allocation.  Total Medicaid Spending growth averaged 7.5% against a budgeted average of 3.6%, as enrollment grew by the largest amount since the program was first implemented back in the 60’s. 


In an attempt to keep individuals insured and support State’s Medicaid funding obligations, the American Recovery & Reinvestment Act (ARRA2009) allocated some $87B to increase the federal matching percentage.  Prior to 2009, federal support, by way of FMAP (Federal Medical Assistance Percentage), averaged a matching rate of ~57% nationally.  With the ARRA2009 subsidy, the matching range increased ~6% to a range of 61% to above 84% with support totaling $44.1B as of Jan. 31st. 


An important stipulation in the ARRA legislation was that states could not restrict Medicaid eligibility or enrollment if they wished to qualify for enhanced FMAP matching.  When the ARRA program ends, so does the incentive for maintaining broad eligibility.   The enhanced FMAP has 12/31/10 end date and represents a huge budgetary trapdoor for states who expect Medicaid enrollment to continue rising in the face of economic stabilization & improvement.  Indeed, enrollment increased 9.3% in 2002 following the 2001 recession. 


The Kaiser Commission’s February update on Medicaid & the Uninsured (Here) found that halfway through FY2010, forty-four states are again seeing Medicaid enrollment and spending growth in excess of their budgeted projection.  Almost every state implemented some new policy measure to control Medicaid spending in FY2009 with the balance of measures coming in the form of provider cuts and benefit limits.  Moreover, 29 states reported that additional mid-year cuts in FY2010 are likely and 15 others indicated further reductions are under consideration but that it remained too soon to tell.   


Analysis by The Center on Budget and Policy Priorities, who updated their analysis of the current & projected state fiscal positions last week, tells a similarly bleak story.  You can find the updated report Here but the relevant takeaways surround the projected budget shortfalls for the FY’s 2010, 2011, & 2012.  As it stands, newly identified mid-year 2010 budget shortfalls equal $38B while projected shortfalls for FY 2011 & 2012 total 130B and 120B, respectively. 


Aggregate state budgets, defined as the sum total of state’s general funds, totaled $686.5B for FY2008.  Using this 2008 total as a budget baseline, the projected FY 2011 & 2012 deficits equate to 19% and 17.5% budget shortfalls, respectively.  Moreover, without continued Federal support such as an extension of ARRA2009 stimulus monies (which is slated to end Dec. 31, 2010/mid FY 2011), the FY2011 shortfall could move more towards $180B, or 26.5% of budget. 


Nationally, payments to Medicaid average 16-17% of total outlays from state’s General Funds.   Applying this percentage to the projected budget shortfalls for fiscal year’s 2010-2012 yields the projected Medicaid shortfall for the respective years.  Calculated in this way, the shortfall in Medicaid dollars as a percentage of the state’s Medicaid budget is 5.5%, 15%, & 17.5% for the balance of FY2010, FY2011, & FY2012, respectively.




Consensus commentary from Medical Directors interviewed in the Kaiser survey foreshadows significant reimbursement and/or eligibility cuts as 2011 budgets are contemplated. 


“Many governors’ proposed budgets for state fiscal year 2011 include drastic cuts to Medicaid as well as other state programs and state employees… Medicaid directors see the prospect for widespread program cutbacks in 2011, including eligibility cuts that would affect millions of Medicaid beneficiaries as well as the hospitals, doctors and other providers who

depend on Medicaid to pay for health care they provide to Medicaid enrollees.”


In varying proportions, States General Funds source the bulk of their revenues from income & sales tax.  While employment will continue to recover, tax revenues should remain under pressure as consumer’s continue to delever and wage inflation remains muted alongside continued excess capacity. 


Below we’ve highlighted Florida & New York as examples of the similar but different means by which states generate funds.  The principal sources of revenue for each come from income and sales tax, followed to a lesser degree by tariffs on tobacco, alcohol, insurance & other corporate taxes.    As can be seen below, Personal Income tax (73%) + Sales tax (14%) represent  87% of revenue for NY.   Similarly, income & sales tax represent 81% of Florida state revenues.  However, in contrast, Florida, which has a corporate income tax but no personal income tax, generates 74% and 7% of revenues from Sales tax & Corporate Income tax, respectively – almost the mirror opposite of NY.






Rainy day funds have been highlighted as a means of offsetting declining tax revenues.  Rainy day funds, which essentially represent the cumulative budget surpluses allocated to savings during feasting years, can be used to subsidize budget gaps during short-term periods of economic weakness.  While balances grew through the first half of the decade, finishing FY206 at 11.9% of expenditures, states drew heavily from these budget stabilization funds during 2008-2009 dropping that balance to 4.8% of expenditures.  Furthermore, NASBO reports that if Texas & Alaska are excluded from the calculation, total rainy day funds would amount to only 2.7% of expenditures.  Balances have likely dropped further since the December survey and, at this point, probably offer little in the way of budgetary support.


Healthcare reform measures passed through Reconciliation and resulting in an increased Federal shouldering of insurance coverage costs has the potential to significantly reduce state budget pressures, specifically as it relates to Medicaid.  Passage of any major reform initiative, however, remains a big “IF’ and clarity on the range & magnitude of measures that actually emerge in the final iteration of the legislation is still somewhat of a tossup. 


Passage or no-passage, Understanding State’s fiscal positions helps contextualize the pressures likely to be faced by healthcare providers & others levered to State & Medicaid reimbursement.   Indeed, cost pressures faced by states could preview fiscal problems and actions taken at the national level – future cost containment actions, an eventuality we’ve dubbed Health Reform II, implemented at the Federal level as our nation’s P&L & Balance sheet begin to drown in healthcare liabilities under expanded government control.




From an equity perspective, the most obvious follow through is to names directly levered to Medicaid reimbursement and eligibility decisions, namely Medicaid HMO’s.   Medicaid insurer’s are cyclical in so much as they are levered to state tax revenues.  In turn, given that the state coffers are singularly levered to the consumer, the group’s strong longer term correlations to indicators such as consumer sentiment and chain store sales isn’t particularly surprising.


Given the set-up, the fate of Medicaid HMO’s remains tied to the health of state budgets over the longer term while reform legislation will continue to dominate the immediate term. While no candidate can explicitly campaign on an agenda of alienating the uninsured in favor of fiscal austerity, on the margin, a general shift over the intermediate term towards fiscal conservatism would be a negative for provider’s and insurer’s levered to Medicaid.


Looking beyond the HMO’s, our initial screen returned 160 companies with a market cap over $500M who reference Medicaid in their 10K’s.  Some companies in the screen have minimal leverage to pressure on Medicaid spending while others hold more definite risk.  We’ll be working to narrow the candidate list to target those names most directly impacted by Medicaid reimbursement and those most likely to be targeted as offsets to prospective legislation which aims to add an expected $450B in additional costs to the State entitlement program.    


Christian B. Drake









R3: DKS: The Key Issue


March 9, 2010


The P&L and balance sheet are telling us that we need to start to believe in revaluing this as a growth story. Unfortunately for DKS, the market already is. In another quarter this story won’t look as pretty.





Yeah, DKS beat by a penny – but still only posted 2% EPS growth year/year. There is a little bit for both the bulls and the bears to chew on. But one thing strikes me as being particularly noteworthy. Specifically, we’re seeing the spread between inventory/sales erode at the same time capex is creeping back up. That’s on top of the highest free cash flow margin in DKS’ history. What does DKS have in its favor? Yes, the cycle in athletic is looking positive, but DKS is far less exposed to the key factors therein relative to FL, FINL, or HIBB. DKS has one more quarter of easy comps on the top line and GM line, but then we have to start to value this once again as a growth story. At nearly 20x earnings I’d argue that the market already is.


More to come after the conference call.


R3: DKS: The Key Issue  - DKS FCFMargin 3 10


R3: DKS: The Key Issue  - DKS SIGMA 3 10




  • Let the marketing begin! Now that Zappos has been under the Amazon umbrella for a few months, the company is launching its first integrated marketing campaign. The ads, which will run across TV, print and online feature Muppet-style puppets modeled after actual customer service employees. The campaign also plays off of the extremely high level of customer service embedded in the Zappos culture. 
  • In effort to promote Gap’s loyalty program test in Vancouver, the company turned its entire store upside down (literally, including logos and cars parked out front). The program called Sprize, utilizes the tagline “Shopping turned on its head”. No word on when the test may be expanded stateside, but for now it’s underway at 10 stores in Vancouver. 
  • According to research from Nielsen, Millenials spend the most when making a shopping trip, but also engage in the fewest amount of trips. The average basket spend of a Millenial is about $53, edging out the Gen Xers by $1. Boomers average $45 per trip and those born prior to 1946 average $38 per trip. The study was based on trips to grocery stores, supercenters, mass merchants, and drug stores. 
  • A little good weather goes a long way to draw out the shoppers. While purely anecdotal, a visit to SOHO in New York over the weekend yielded some interesting observations. One may have thought the holiday shopping season was in full force. Old Navy, UNIQLO, and Levi’s all had long lines of customers waiting to pay on what appeared to be a very busy Saturday. 




Payless Launches Champion Toning Footwear Collection - Payless ShoeSource announced the launch of Champion Fitness, a line of toning shoes for women ranging in price from $25 to $40. "Our Champion Fitness shoes feature the latest technology at an affordable price to democratize this new idea in the athletic shoe arena, giving greater access so more people can enjoy the benefits of these innovative shoes," said LuAnn Via, CEO of Payless.  "Champion Fitness shoes help make fitness walks and other walking activities more beneficial to the health and wellness of the overall body.  We are thrilled to celebrate this new idea in footwear and to deliver leading technology at a great price to our shoppers." The Champion Stride features the Cradle Toning bottom, a patent-pending technology with two curved pods that create slight instability -- both laterally and back-to-front --  while walking to encourage muscle toning benefits. This shoe also includes special Air Traverse cushioning that transfers air between the heel and forefoot on impact for added comfort and support while walking. The shoe also has a Dual Density EVA midsole with exceptional cushioning and shock absorption benefits and features a tight-hold midfoot overlay design for maximum stability and to enhance a good fit. Payless said it expects to expand the Champion  Fitness line with future styles for women and men by the end of the year. The Champion brand is licensed to Payless from HBI Branded Apparel Enterprises LLC.  <>


J.C. Penney reshuffles its e-commerce leadership - J.C. Penney Co. Inc. has named Nancy Love, vice president for planning and allocation for the retailer’s men’s division, as its senior vice president. She reports to Mike Boylson, chief marketing officer. John Tighe, who previously held the position, was promoted to senior vice president and general merchandise manager of the retailer’s home division. J.C. Penney says that Tighe will serve on the company’s executive board. He also will oversee web content for the home division, says a company spokeswoman. J.C. Penney hired Tighe in 2002. Most recently, he had overseen strategy and business planning for the retailer’s web site.

For two years web sales have remained flat for J.C. Penney. The retailer said results for the fourth quarter of 2009 showed a 4.3% year-over-year increase in web sales, but J.C. Penney did not release specific numbers. <>


Cabela’s continues its executive structural changes - Cabela’s Inc. has named Doug Means executive vice president and chief supply chain officer. Means will report to Cabela’s CEO Tommy Millner. The move is the latest in a number of changes Millner has made in Cabela’s executive ranks as the company implements its stated strategy of growing the its direct-to-consumer channel and improving its overall multichannel operations. “In January, we announced several changes and promotions in our top leadership roles, better aligning Cabela’s executive management team with our strategic initiatives,” says Millner. “I am excited to welcome Doug to our executive team and look forward to his valuable contributions to our supply chain operations.” Means previously worked as executive vice president of production for Jones Apparel Group Inc.’s Better Sportswear line. Prior to joining Jones Apparel, Means was a consultant for advisory firm Kurt Salmon Associates, where he specialized in improving retailers’ operations, developing strategic distribution and logistics plans, and building logistics optimization models. <>


Stage Stores casts an executive to lead its entry into web selling - Retail chain Stage Stores, which operates 758 stores in 39 states, is finally getting into e-commerce, and it has tasked its chief information officer to lead the charge. Along with the assignment, Steven Hunter has gained a promotion from senior vice president to executive vice president while retaining the title of CIO. The company aims to roll out its e-commerce site by 2011. “This is an exciting opportunity for us to make our merchandise more accessible to consumers in small towns across the nation,” says Andy Hall, president and CEO of the chain, which focuses on small and mid-sized communities. “Given Steven’s impressive track record and leadership abilities, I know we are in good hands on this very important initiative.” Prior to joining Stage Stores in June 2008, Hunter had been senior vice president of information technology for regional department store chain Belk Inc. He previously held positions at consumer electronics retail chain Best Buy Co. and at Kmart, now part of Sears Holdings Corp. <>


Target Announces Debut of Shaun White Shoes - Target announced the launch of Shaun White Shoes, an exclusive collection, which will debut nationwide in early fall 2010.  An expansion of Target's strong relationship with Shaun White, the line will feature skate-inspired shoes for boys and young men. The collection of shoes will be designed by White in collaboration with his brother, Jesse, and will feature styles influenced by the professional skateboarder's lifestyle.  "It's been a lot of fun working with Target for the past few years on my clothing line," said White.  "I'm excited to have the opportunity to bring some authentic skate shoes into the mix." Starting this fall, Target guests can find Shaun White Shoes alongside Shaun's clothing and the exclusive version of his video game, Shaun White Snowboarding, at Target.  <>


Marvel, Reebok to Launch Kids' Footwear at Finish Line - A line of Reebok children's sneakers, featuring Marvel Entertainment's Spider-Man, will hit Finish Line stores nationwide this spring. The new footwear range is an expansion of Marvel's relationship with Reebok, which began in spring 2008 with the launch of Iron Man and The Incredible Hulk children's sneakers. "The co-branded partnership with Reebok and retail support at Finish Line enables Marvel to further maximize the exposure of the brand and expand our presence in key distribution channels," says Paul Gitter, president of consumer products for North America, Marvel Entertainment. "Based on the consumer reaction to our previous collections with Reebok, we are sure the new Spider-Man sneakers will be a hit with kids and parents alike." Marvel Entertainment is a wholly owned subsidiary of The Walt Disney Company. <>


Columbia to Open Chicago Store - Columbia Sportswear Co. has scheduled the opening of its fifth U.S. Columbia branded store Friday, March 12 on Chicago's Magnificent Mile. Located at 830 N. Michigan Ave., the new 11,000-square-foot store will feature Columbia's innovative and high-performance outdoor apparel, footwear, accessories and equipment, as well as stylish Sorel brand footwear merchandised throughout two stories of glass, reclaimed wood and locally sourced stone. "We are thrilled to showcase our innovative outdoor products to Chicago residents and the millions of visitors for whom the Magnificent Mile is a must-shop destination," said Tim Boyle, president and chief executive officer, Columbia Sportswear Company. "The Midwest is a great place to hike, bike, ski, fish, hunt, golf or simply enjoy the beauty of the Greater Outdoors, and Columbia offers locals and visitors alike the outdoor products and technologies they need to enjoy all their activities in comfort, rain or shine."  <>


$1.1M Shoe Mania Settlement Sought - New York footwear chain Shoe Mania could pay $1.1 million to former and current employees to settle several outstanding wage-and-hour lawsuits. Attorneys for both the shoe retailer and the suits’ plaintiffs asked a federal judge to approve a proposed settlement in a joint motion filed Friday in U.S. District Court in Manhattan. The agreement would give class status to Shoe Mania employees who worked as retail sales persons, stock persons, security guards, cashiers, managers, assistant managers and office personnel between October 2002 and the date of a signed order. An attorney for the plaintiffs declined to comment on the number of people in such a class on Monday. Neil Greenberg, an attorney for Shoe Mania, said the company looked forward to “putting this matter behind it and working with the employees to ensure the continued prosperity of the business in these difficult economic times.” The proposed agreement stipulates the company continues to deny any liability or wrongdoing in the cases. If approved, the settlement would end four lawsuits brought by employees between 2008 and 2009. Among other allegations, the complaints accused Shoe Mania of failing to properly pay minimum wage and overtime.  <>


Bergdorf Woos Jason Wu - The designer, who recently moved into a vast 9,000-square-foot showroom on 35th Street in Manhattan, has teamed up with Bergdorf Goodman to launch a limited edition capsule collection, to be sold exclusively at the store and on the company’s Web site starting May 14. The lineup ranges from chiffon day pieces to more structured sheaths, inspired by what Wu calls classic American style: defined waists and hues like lemon yellow, red and navy are focal points. While emphasizing shape, Wu also wanted to create pieces with ease and versatility, as with a checkered cotton and silk dress with three-quarter-length sleeves. Other key pieces include a black eyelash silk metallic dress and, on the more formal end, a red faille cocktail dress with French knot and crystal embroidery detailing. <>


Brazil Targets U.S. Goods for Harsh Sanctions - Brazil told the World Trade Organization in December that it was considering sanctions against the U.S. for failing to end two cotton subsidy programs. Brazil argued the programs have allowed the U.S. to maintain its spot as the world’s second-largest cotton supplier, behind China, and violate international trading rules. The WTO authorized Brazil to target U.S. goods in an arbitration panel ruling in September. According to the list of sanctions, tariffs on U.S. raw cotton would increase to 100 percent from 6 percent. Woven fabric tariffs would rise to 100 percent from 26 percent. Tariffs for men’s and boys’ cotton pants and shorts and women’s and girls’ cotton pants and shorts would climb to 100 percent from 35 percent. Some jewelry and beauty care categories were also included in the list. The tariffs go into effect in 30 days, unless the two governments can broker a fix for the problem. In all, retaliatory tariffs for more than 100 U.S.-produced goods were on the list, which also includes shampoo, soap, deodorant, fresh fruit, cars, carpets, curtains, refrigerators and other industrial products. The list of sanctioned goods is valued at $591 million, according to Brazil. The remainder of the retaliation that Brazil was authorized, $238 million, will be applied to U.S. patents, trademarks and services later this month.  <>


Retail Stocks Reach New Highs - A year after the market bottomed out, investors are ready to believe in a retail rebound. Shares in the industry are still rushing ahead. The S&P Retail Index inched up 0.4 percent Monday to 436.89 — a level not seen since December 2007 — and Abercrombie & Fitch Co., J. Crew Group Inc., Macy’s Inc., Limited Brands Inc. and Nordstrom Inc., to name but a few, all reached 52-week highs. Retail shares hit their recession low of 207.49 in November 2008, while the Dow Jones Industrial Average marks a year since its nadir today. But unlike last year, when cash preservation and cost cuts drove stocks, investors appear to be betting stronger-than-expected February sales and employment data are pointing to better times and fewer roadblocks ahead — a real, rather than a relative, rebound. Retail stocks have traditionally led markets out of recessions since merchants are among the first to feel a turn in consumer spending. That rationale seems to be holding sway even though the economic recovery has been slow to take hold and high unemployment and general caution have restrained spending.  <>


Online Apparel Sales Predicted to Reach $45B - Apparel appears poised to establish a commanding e-commerce lead. Online sales of apparel, accessories and footwear are expected to continue to grow at double-digit levels for the next five years, allowing them to pull well ahead of computer hardware, software and peripherals, according to a forecast released Monday by Forrester Research Inc. The two broad categories led all others in U.S. online retail sales with $27.3 billion last year as apparel gained 17 percent and computer-related merchandise picked up 7 percent, a rate expected to drop further in the next half-decade. So, while apparel and related products are expected to hit $44.6 billion in online sales by 2014, revenues of computer products by that time are projected at $36.3 billion, a low-single-digit growth rate. Online sales accounted for 6 percent of total retail sales in the U.S. last year, a figure expected to rise to 7 percent this year and 8 percent beginning in 2013, according to Forrester. The e-commerce portion of apparel sales, 9 percent last year, is seen hitting 10 percent this year, 11 percent in 2011 and making its way to 12 percent in 2013. By contrast, online sales accounted for 52 percent of computer-related purchasing last year and are expected to hit 55 percent by 2011, offering less room for increased penetration.  <>


West Coast Ports Fight to Stay on Top - Political ineffectiveness, legal confrontation, tension between port interests and mounting competition are chipping away at the dominance of the twin ports of Los Angeles and Long Beach, said speakers at the Trans-Pacific Maritime Conference here. Despite signs the ports’ economic fortunes are on the upswing, John McLaurin, president of the Pacific Merchant Shipping Association, said he sees considerable challenges this year. During an address on the second day of the conference, which took place March 1 and 2 at the Long Beach Convention Center, McLaurin blamed the California legislature’s intractability and massive budget shortfalls for crippling West Coast port projects. California’s deficit stands at $20 billion, and Los Angeles’ is $212 million. The Clean Truck program took effect in October 2008 with the aim of reducing truck-related emissions by 80 percent by 2012 by eliminating some 16,000 trucks not compliant with 2007 environmental standards. Already, about 6,000 low emission trucks have been introduced and emissions have decreased 60 percent. <


Based on the two restaurant data points we got this morning from RT and BKC, we know weather had an impact in February.  BKC’s same-store sales trends for January and February seemed to be defined by the weather whereas RT’s fiscal 3Q comparable store sales continued to improve in spite of the weather.  BKC reported today that U.S. and Canada same-store sales declined 8.2% in the January/February timeframe versus a 3.1% comp in the same period last year.  This implies a significant deceleration in 2-year average trends from the prior quarter.  Management attributed 3% of the decline to severe weather, which it said impacted 75% of its system’s restaurants in this segment.


RT also cited that weather reduced same-store sales by 1.5% to 2%.  That being said, the company announced that its company comparable store sales for fiscal 3Q10 were -0.8% to -1.0%.  At the low end of the range, this implies a 235 bp improvement in 2-year average trends from the prior quarter.  RT stated that same-store sales were even slightly positive in January and February, “despite the worst weather in memory across many of [its] core markets.”  The divergence in trends for RT and BKC again highlights the continued outperformance by casual dining relative to QSR.  It also highlights that the weather impact is real, but that it can become more of an “excuse” for disappointing trends.   RT and BKC may not have the same geographic footprint, but BKC’s same-store sales trends deteriorated somewhat from the prior quarter even excluding the negative 3% impact from weather, which leads me to believe that weather was not the only factor to blame for softening results.


Howard Penney

Managing Director

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