PSS: Let the (WMT) Resets Begin

We’re starting to see broader evidence of Wal-Mart shift its focus away from footwear, which is positive for PSS on the margin. Back in July ’09 we highlighted the emergence of this theme, though evidence has been slow to come. In our ongoing analysis of Wal-Mart and its impact on everything else retail, we’ve been noticing enough tweaks to the assortment recently such that we thought it was time to break out the digital camera. Yes, the pictures below are from only one store, and there can be an endless number of variables impacting that specific store at that specific time on that specific day. But the step up we’ve seen in activity at Wal-Mart to change up its shoe department has been enough such that we think the pictures below tell a directionally accurate story.


When we look at quantifying the impact… Wal*Mart did $305bn in the US last year. About 11% of that was apparel, footwear, and accessories. Only about 100bps-200bps was driven by footwear, which suggests about $5bn annually.


The table below shows the store overlap between Wal-Mart and Payless. A quarter of Payless stores have a Wal*Mart within a mile radius. 43% have a WMT within 5 miles.


Let’s say Wal*Mart scales down footwear to 1% of sales over 3 years as it cycles through its remodel process. That suggests over $2bn is up for grabs. If I take it a step further and assume that 38% is within reach (within a 3-mile radius), then that’s $760mm. If PSS grabs only 10% of that, it would be a 2% comp alone. At a 30% incremental margin, we’re talking $0.23 per share. That’s off a base of $1.28 last year.



PSS: Let the (WMT) Resets Begin - PSS WMT 6 3 10


PSS: Let the (WMT) Resets Begin - PSS WMT 1 3 10


PSS: Let the (WMT) Resets Begin - PSS WMT 2 3 10


PSS: Let the (WMT) Resets Begin - PSS WMT 3 3 10


PSS: Let the (WMT) Resets Begin - PSS WMT 4 3 10


PSS: Let the (WMT) Resets Begin - PSS WMT 5 3 10



NKE: Tiger Adds to The Mo Mo

Shortly after 11am, it hit the tape that Tiger will be returning to professional golf by playing in The Masters next month.  One can argue that the $0.20ps that the stock jumped since then is in reaction to the news. We’d step back and ask the broader question as to who had the inside information and bought the stock accordingly pushing the stock from $64 to $71?


Regardless, this is good for Nike – from both a business standpoint and as it relates to price momentum. Keep in mind a few things…NKE is one of the few sponsors that did not drop Tiger like a bad habit over the past four months. Did it restructure his agreement to take down up-front risk in the event that he either prolonged his return or fails to perform upon his return? Probably. But they stuck with him. Interestingly, Tiger gear has been selling well as if nothing ever happened, and the golf market overall has definitely shown signs of picking back up after a long bottom. Though public perception is still very touchy at best, they’ll have much more in their back pocket to market him upon his return.


Is it any shocker that this was announced a day before Nike’s EPS? Probably not. In fact, we’d argue that given the 11.4% run in the stock over 4 weeks, it HAS TO pony up some solid numbers on results. The good news is that we think it will. We’re modeling $1.00 vs. the Street at $0.89. The biggest variance is on the top line, where we’re coming in at 8% versus the Street at 3.5%. Much of this is World Cup-related, which we do not think is appropriately accounted for in most models. 


If we’re off anywhere, it would likely be sales coming in 2-3% lighter, with that product showing up as higher inventories – again – due to World Cup. With Keith’s models suggesting that the stock is approaching a near-term overbought line of $71.17, we think that any result close to the consensus would jolt near-term enthusiasm, and give investors a shot at what we believe will be perhaps the best multi-year growth story in consumer/retail.


For our recent Back Book on Nike, please contact .


- Brian McGough



NKE: Tiger Adds to The Mo Mo - NKE 07 10 chart 3



NKE: Tiger Adds to The Mo Mo - NKE 04 07 chart 2



NKE: Tiger Adds to The Mo Mo - NKE 00 04 Chart 1


Will They Pin It? SP500 Levels, Refreshed...

The pain trade in this market will remain up until all overly bearish short sellers are pinned-up at the highs.


Where will those highs be? In the immediate term, my answer is somewhere in the area code of 1161-1163 (see chart below).


What could pin the SP500 up at that line?

  1. The Fed pandering to the carry trade again in their FOMC statement today (or the expectation that they pander prior to the decision).
  2. Continued price momentum supported by TRADE and TREND lines of support at 1111 and 1143, respectively.
  3. Fear of being squeezed.

Fear? Yes, fear can be more powerful than greed. Some pundits have started to say that this market is going up because the mutual fund community is being complacent. I don’t see that in any of our quant models, behavioral surveys, or our daily feedback mechanism (our exclusive network). I do, however, see fear in the short selling community - fear of being squeezed.


Since the Greek freak-out lows of February 8th, the SP500 has had an explosive move to the upside of +9.4%. This came immediately after an -8% drop in the SP500 from January 19th to February 8th. Some hedge funds got whipped around those lines. If you don’t think they fear an SP500 breakout from here, you’ve never really been short a market. Monthly and quarterly performance pressures matter.


My game plan from here is now fairly straightforward. I plan on shorting the SP500 again north of 1161. In anticipation of this potential pinning of the market, I have already proactively cut a lot of losses on the short side. I now have 17 longs and 8 shorts in the Virtual Portfolio versus my long/short ratio being roughly balanced in February.



Keith R. McCullough
Chief Executive Officer


Will They Pin It? SP500 Levels, Refreshed...  - sp12

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Macau gaming revenues almost reached HK$7 billion though the middle of March. While slower sequential growth, up 50% for the full month would be a good result.



We think Macau total gaming revenues were just under HK$7 billion through March 15th.  Revenues are on track for a HK$14 billion month which would be an increase of over 50% from March 2009.  This is sequentially slower growth than February (+70%) and January (+63%).  However, HK$14 billion is a very good number.  Note the monthly trends below


MACAU STRENGTH CONTINUES - macau monthly march estimate


Yesterday’s sharp sell-off was driven in part by fear of more regulation ahead of the Macau CEO’s address which ended a few hours ago.  Nothing major was announced, however.  Relief here combined with the strong month-to-date numbers is resulting in the bounce back in the stocks today.


Some may be concerned about Wynn's Cotai development given the Macau CEO's comments about slowing development.  However, in the press conference after his speech, Chui was quoted as saying "Apart from those we have agreed in principle in the past, in construction and those already approved, we will regulate (approval of the building of new casinos) in the future."  This appears to us to be a little less forceful, as it allows for projects that have been approved, as opposed to just development already started, and simply states that new approvals will be regulated, not that they will be prohibited.


The only somewhat disconcerting part of the speech was related to restrictions on foreign labor, which will apparently be tightened.  We don't believe the Macauese government would jeopardize LVS's construction of Lots 5/6 but inadequate labor could delay the project further.

R3: Don’t Read Into DSW


March 16, 2010


For reasons I still can’t explain, DSW and PSS still tend to trade in tandem. Yes, they both sell shoes. But the product is different, the box is different, the consumer is different, and the drivers to the story? Yeah…you guess right…they’re different. So of course DSW misses by a penny, guides to the lower end of the consensus range, the stock is off nearly 10%, and it’s taking PSS down with it (albeit not to the same magnitude). 





For reasons I still can’t explain, DSW and PSS still tend to trade in tandem. Yes, they both sell shoes. But the product is different, the box is different, the consumer is different, and the drivers to the story? Yeah…you guess right…they’re different. So of course DSW misses by a penny, guides to the lower end of the consensus range, the stock is off nearly 10%, and it’s taking PSS down with it (albeit not to the same magnitude). 


This is a great shot to step and get involved with one of the few multi-pronged stories in retail today. We outlined this in great detail in our PSS Black Book (dated 9/1/09), but the crux is that a) the company increasingly owns both content and distribution, b) some big competition (WMT) is de-emphasizing the footwear business, c) PSS has made structural changes in its model that increases speed to market, d) it finally has the systems in place to be in touch with the right consumers – and market the right product to them in the right channels, e) can, and will, both drive higher AURs on top of increased traffic. Ultimately, the consensus estimates are too low – as proved this quarter and should prove again in 2010.


Many people are concerned about the trajectory of retail earnings as we head into the summer, after we anniversary the easy sales/margin comps and how a team manages a business actually begins to matter again. Take a look at the chart below. This is how we think PSS will stack up. We should see a revenue convergence between PSS and the industry (keeping in mind that the industry numbers include 60 retailers who are growing square footage while PSS is not), and margins turning heavily in PSS’ favor.


There’s not a whole lot of safety in retail in 2010. I think PSS is an exception.  


R3: Don’t Read Into DSW  - 1




  • While some may not realize the scope of the PVH/Tommy Hilfiger merger, it’s worth noting that this marriage creates a global platform with substantial scale. With expected revenues of $4.8 billion, the combined entity will rank as the world’s 4th largest apparel platform, behind VF Corp, Ralph Lauren, and Esprit. Approximately 63% of sales will originate domestically, with the remaining primarily centered in Europe and Asia. 
  • A UK paper is reporting that fake Ugg’s are leading to foot problems among young women. The article suggests that medical experts are warning against wearing the poorly crafted knock-offs after seeing an increase in cases of foot pain and backaches. Sounds like one of the better methods to combat sales lost to counterfeiters. We wonder how long it will be before Croc’s gets their Dr’s note… 
  • Keep an eye on upscale Brazilian athletic-wear retailer, Track and Field, which finally opened its first US store in Manhattan. The upper east side location is just one of six planned for Manhattan with additional locations set for Boston, Chicago, Florida, Atlanta, and the Hamptons. The store employs a unique merchandising presentation in which customers can try on sample product that is displayed on hangers, while the saleable inventory is packed in plastic capsules that line the entire wall. Once a customer decides on a style and fit, the employee retrieves the capsule to complete a sale. 




Wal-Mart to Expand Its Financial Services - Wal-Mart Stores Inc., years after a failed effort to obtain a bank charter, plans a 50% increase this year in the number of the company's stores offering bank-like services. The expansion would push the number of Wal-Marts with "Money Centers" to 1,500, or a little less than one for every two Wal-Marts in the U.S., giving the nation's biggest retailer a financial presence that only a handful of banks have. Wal-Mart plans to open its 1,000th money center Tuesday. The money centers cater to millions of the retailer's lower-income customers who don't have a bank account or significant relationships with a bank. The federal government estimates that the category accounts for one in four U.S. households. "We think banks are not as interested in this customer and have a lot of other things on their plates," said Jane Thompson, president of Wal-Mart Financial Services. "So we see a lot to service customers' basic financial needs." Ms. Thompson described the money centers, which do three million to five million transactions a week, as "a very profitable part of our store," although the retailer didn't offer any specific numbers. Ms. Thompson said the centers are "getting way-above-average" comparable-unit growth and return on investment, because the units are cheap to put into stores. <>


Nike Files Lawsuit Against Counterfeit Websites - Nike Inc. has filed a lawsuit n U.S. District Court in Virginia seeking to gain control over 66 Internet domain names it claims are selling counterfeit goods. According to the Portland Business Journal, all the domain names are registered to entities in China. The domain names were registered through VeriSign Inc. in Dulles, Va. Nike is seeking an injunction to have VeriSign transfer the names into Nike's control. Nike's lawsuit does not seek any financial compensation, though the company argues that the domains - using names such as, and - are being used to sell unlicensed or counterfeit products with the company's trademarks. "Through such actions, Nike is irreparably damaged through consumer confusion, dilution and tarnishment of its valuable trademarks," the company said in court documents.  <>


True Religion to Open Branded Retail Store in London; Marks the Debut Store in the UK - True Religion Apparel, Inc. today announced that the Company's first branded retail store in the UK is scheduled to open in June of 2010 in London. Located at 27 James Street, the 1,507 square-foot store will be a freestanding location in heart of London's vibrant Covent Garden district. Similar to True Religion branded retail stores in the U.S., the store will offer shoppers the entire True Religion collection for men, women and kids, including its signature jean styles, its expanding denim, sportswear and handbag collection, and a full range of licensed merchandise. One the busiest shopping and tourist destinations in the UK, Covent Garden is home to several premier retailers, including Mulberry, Hugo Boss, Paul Smith, All Saints, Ted Baker, Karen Millen and Diesel. In addition, a flagship Apple store is under construction. The Covent Garden district will also benefit from the planned redevelopment of Covent Garden Market, which will include new restaurants, retail, and boutique hotels. <>


Nike Again Dominates SportsOneSource Brand Brackets for 2010; Adidas Second - With the field of 65 teams now set for the 2010 NCAA Division I Men’s Basketball Championship, Nike will once again be the brand seen the most by viewers of the event, as 77% of the teams (50 total) in the field will sport the Swoosh in some form, either as footwear, uniforms, or both. That percentage does not include the two teams who will be outfitted by the Jordan brand, a Nike subsidiary. Nike is guaranteed at least one entrant in the Final Four this year, as the entire West Regional, led by top-seeded Syracuse and second-seeded Kansas State will be outfitted head-to-toe by the brand. With 51 teams wearing some form of apparel or footwear from Nike, 45 of those will be outfitted with both footwear and uniforms. A year ago, Nike placed three teams in the Final Four in Detroit, while having a hand in all four participants, including eventual National Champion, North Carolina, which was outfitted by Jordan. Adidas will be the second-most prominent brand in this year’s event, with 11 teams being completely outfitted in the brands products, including five teams in the South Regional alone, topped by third-seeded Baylor, along with the Bears’ Big 12 brethren and fifth-seeded Texas A&M. Adidas also sports three teams in the East Regional, including fourth and fifth-seeded Wisconsin and Temple. Other brands represented in this year’s field include; Russell Athletic (three teams), Under Armour (one team), CRONS (one team), and Pro Look Sports (one team). Two brands, Converse and Reebok had one team each in the 2009 tournament, but are not represented in this year’s field. <>


Sport Supply to Be Acquired by ONCAP Sport Supply Group, Inc. has entered into a definitive merger agreement to be acquired by an affiliate of ONCAP Management Partners, L.P., the mid-market private equity business of Onex Corporation. Under the terms of the merger agreement, all of the outstanding shares of Sport Supply, other than those held by certain participating stockholders, will be acquired for $13.55 per share in cash. CBT Holdings, LLC, an affiliate of Andell Holdings, which beneficially owns approximately 16% of Sport Supply Group's outstanding common stock, and certain members of Sport Supply Group's management team, have entered into agreements with ONCAP to exchange their Sport Supply Group common stock and options, as applicable, for equity of the purchaser entity. Carlson Capital, L.P., which beneficially owns approximately 22% of Sport Supply Group's outstanding common stock, and CBT, have each entered into a voting agreement with ONCAP, and have each agreed to vote their shares in favor of the adoption of the merger agreement.  <> hires exec to relaunch Canadian retail site -, which recently unveiled a new design for its Canadian e-commerce site, has named Tim McMahon vice president of sales and general manager for Canada. He will be based in Toronto and will head the company’s brand strategy and development, web site traffic growth, and advertising and vendor relationship divisions for the company's Canadian business. Most recently, McMahon was vice president and general manager for ypOne Publishing, a provider of yellow pages shopping directories in the United States and Canada. Before ypOne, McMahon worked in sales development for Xerox, Ingram Micro and CDW. recently re-launched its Canadian shopping web site with the new design. will also sell through eBay Canada. "Tim's hire demonstrates our commitment to enhancing our offerings in Canada," says Neel Grover, CEO and president. "His extensive experience in the technology sector is a significant asset to our Canadian operations." <>


Limited Brands to issue special dividend; Approves $200m Share Buyback Program - Shares of Limited Brands Inc. rose Monday evening after the apparel and accessories retailer said it will pay a special dividend next month. Limited shares rose 4.1% to $24.67 in low volume. The company, whose stores include Victoria's Secret, New York & Co. and Abercrombie & Fitch, said its board has approved a special dividend of $1 a share. The dividend will be paid on April 19 to shareholders of record as of April 5. Limited also said its board approved a new $200 million share buyback program, including $31 million remaining under its previous repurchase plan. <>


Mauboussin Opens in Bloomingdale's - On the heels of a high-profile ad campaign, the French jeweler on Monday opened a boutique inside Bloomingdale’s in Chestnut Hill, a suburb of Boston, and is seeking more doors for wholesaling and retailing. For Bloomingdale’s, it’s a head start offering a brand currently without any wholesale distribution in the U.S., and with only one retail site, the four-level Mauboussin flagship opened October 2008 at 714 Madison Ave. in New York with an all-white bridal gallery and the François Chocolate Bar by pastry chef François Payard. Bloomingdale’s has been evolving its jewelry business, growing with firms such as David Yurman, John Hardy and Roberta Coin, since it took over its Finlay leased operation last year. The 450-square-foot Mauboussin shop inside Bloomingdale’s Chestnut Hill is leased and sells the semiprecious stone collection, bridal pieces and Swiss-made watches, with prices ranging from $875 to $20,000.  <>


Nicole Farhi Sold to OpenGate - Nicole Farhi’s new owners have big plans for the British brand, including internationally. On Monday, OpenGate Capital, a Los Angeles-based private equity firm, said it had acquired the company — including its inventory, retail locations and intellectual property — for 5 million pounds, or $7.5 million at current exchange rates, from French Connection Group Plc. News of the deal was first reported on on Sunday. Designer Nicole Farhi will remain creative director of the label and Nicki Scordi, managing director of Nicole Farhi, has been named chief executive officer. Scordi said Monday that during the next 90 days as the deal is completed, management will discuss “growing the business internationally.” “We want to be as present internationally as in the U.K.,” said Scordi. “Having a U.S.-based owner really adds to our ability to grow there.” OpenGate said it plans to grow Farhi’s retail presence in cities such as Paris, Hong Kong, Tokyo and New York. French Connection said Monday that Farhi had an operating loss of 5.6 million pounds, or $8.8 million, in the year to Jan. 31 on sales of 21.7 million pounds, or $34.3 million. Dollar figures have been calculated at average exchange rates for the period.  <>


AAFA Execs Seek Clear Direction on Trade - Apparel companies are concerned about President Obama’s trade agenda, seeking clarity so they can best strategize their sourcing plans. Executives attending the American Apparel & Footwear Association’s annual executive summit here last week pressed U.S. Trade Representative Ron Kirk about trade policy. “Our top concern is trade,” said Wesley Card, chief executive officer of Jones Apparel Group Inc. “We’d like to hear that there is going to be a consistent commitment to free trade.” In the first year of the administration, there was no clear movement on trade, said Rick Helfenbein, president of Luen Thai USA. Consumers in the U.S. “tend to think trade equals loss of jobs, but we need a vibrant trade policy,” Helfenbein said. Companies are faced with a difficult and complex trade environment, said John Strasburger, vice president of sourcing for VF Americas Sourcing. The proposed Trans-Pacific Partnership in particular will help companies globally, he said. “This is an industry that gets it — trade is critical to your lifestyles and you deliver a huge value proposition to American consumers,” Kirk told WWD. Kirk’s remarks at the summit marked the second time this year he has addressed industry executives, and earlier this month he visited a Glen Raven textile plant in South Carolina.  <>


China’s Economic Growth Momentum Has Peaked, Li & Fung Says - China’s growth momentum has peaked as orders and production expand at a slower pace, according to Hong Kong-based Li & Fung Ltd, the world’s biggest outsourcer for retailers. “It is now clear that China’s economy has been moderating,” Li & Fung, which sources products from mainland China, said in an e-mail today. The comment was in a report from the company’s research center, assessing manufacturing data. The world is counting on China, the third-biggest economy, to be an engine of growth as unemployment restrains the recovery in the U.S. and Europe grapples with the Greek debt crisis. Chinese officials assessing when to end stimulus measures are balancing asset-bubble and inflation risks against concern that a “double dip” global slump remains possible. <>


The Macau Metro Monitor, March 16th, 2010


In his Policy Address, Macau CEO Fernando Chui Sai-on did not announce any cap on the numbers of tables, slot-machines or casinos. The government also reaffirmed its intention to raise the minimum age to 21 for entering in casinos, but gave no date for the introduction of the measure. As expected, Chui believed Macau should diversify its economy and support the growth of its MICE (Meeting, incentive, convention and exhibtion) business. He stressed regional cooperation among Guangdong, Hong Kong, and Taiwan. Chui reaffirmed the government’s target of creating more public housing by building 19,000 units and stressed the importance of the construction of public infrastructures like the new hospital in Cotai and the light railway system. Chui did not say anything about wage increases.


"Apart from those we have agreed in principle in the past, in construction and those already approved, we will regulate (approval of the building of new casinos) in the future," Chui said at a news conference on Tuesday. Chui also said the government planned to set up a regulatory body to monitor the growth of the gambling industry.



The Monetary Authority of Macau released data showing a 6.2% increase in new mortgages approved QoQ to MOP 6.6BN . The number of new commercial real estate loans (CRELs) approved dramatically increased by 88% from the previous quarter to MOP6.3BN. The delinquency ratio for RMLs (residential mortgage loans) fell 0.04% to 0.19%, while the delinquency ratio for CRELs dropped 0.10% since end-September 2009 to 0.23%.


The number of visitor arrivals in package tours increased 9.7% YoY to 458,920 in January 2010. Visitors from Mainland China (328,956) rose by 5.1% YoY. Meanwhile, the number of Macau residents traveling outbound in package tours dropped 4.5% year-on-year to 28,471, with mainland China being the most popular destination. At the end of January 2010, the total number of available guest rooms increased by 1,548 (+8.8%) YoY to 19,086 rooms. A total of 664,403 guests checked into hotels and guest-houses in January 2010, up by 26.6% YoY. The average occupancy rate of the hotels and guest-houses soared by 16.0% year YoY to 81.6%.

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