R3: Sisyphus Meets Retail


March 19, 2010


The Greek myth of Sisyphus is personified in what we’re seeing in retail today.  Retail as a whole has rolled the rock up the hill and shortly approaches the period where we find out who gets crushed and who reaches the top. 





As a punishment from the gods for his trickery, Sisyphus was compelled to roll a huge rock up a steep hill, but before he could reach the top of the hill, the rock would always roll back down again, forcing him to begin again. The maddening nature of the punishment was reserved for Sisyphus due to his hubristic belief that his cleverness surpassed that of Zeus.


The Greek myth of Sisyphus is personified in what we’re seeing in retail today.  Retail as a whole has rolled the rock up the hill and shortly approaches the period where we find out who gets crushed and who reaches the top.  With most retailers having reported 4Q numbers, we aggregated the positioning in our SIGMA analysis – which measures the triangulation between sales/inventories and margins for each company.


We’re seeing unprecedented uniformity in the positioning among retailers in our SIGMA analysis. As a reminder, this analysis shows the trade-off a company is making at any given point in time on the balance sheet to drive the P&L, and vice versa. In a perfect world, both the balance sheet and P&L are headed in a positive trajectory at the same time. Today, we are looking at 61% of the 108 companies in our analysis in the ‘sweet spot’ of our analysis (sales growth outpacing in inventory growth, and margins headed higher), which is up from a mere 32% in 2Q and the 50% in 3Q. We have not seen a more meaningful positive move – ever. ‘Ever’ is a long time. As one might imagine, the stock moves associated with moves from one quadrant to the next are meaningful. Whenever a company moves out of Quadrant 1 – or even heads to a less attractive place in that quadrant, it is a negative stock move. And I’m not saying ‘sometimes it is a negative-ish move.’ We’re talking a .95x R2 with the average move squarely in the double digits.


What’s our point here?  Welcome to 2010. It is a stock picker’s market. Generating alpha by way of getting the group call right doesn’t matter anymore. Company fundamentals matter, and they matter big. When we re-run the analysis below in 13 weeks, we won’t see 61% of the companies in the sweet spot. Pick your battles…


We have a SIGMA book with 108 companies, which helps our team (and our exclusive Retail vertical subscribers) focus on which companies are interesting and at what time do they become actionable.  Let us know if you’re interested. We’ll be around all day.


R3: Sisyphus Meets Retail - SIGMA Positions Chart 2


Zach Brown

Hedgeye Retail




  • In a subtle but notable move, Barnes & Noble founding family members, Len and Steve Riggio, passed the CEO torch to William Lynch. Lynch has been with the company just over a year and has been running the .com and digital business. While the company remains committed to retail, it was noted that the future growth of the company is likely more rooted in the digital business. While there are no plans to close stores in a meaningful number, there are also no plans to add meaningfully to the 900+ store base. 
  • Ross Stores expects to expand square footage by 4-5% in 2010, with an increasing emphasis on the company’s lower-price format- DD’s Discount. Interestingly, the company expects to ramp up growth to about 7% in 2011, with an increased focus on entering new trade areas. DD’s expansion is forecast to be P&L neutral in 2010 from a margin perspective. 
  • GameStop made two notable points on the composition of its inventory. First, used game inventories coming out of the holiday ended up lower than expected which has prompted management to use promotions to drive trade-ins. Second, management noted that there is still a shortage on the hardware side of the equation, with PS3 and Wii still experiencing supply constraints. Management believes it will be a couple of months before adequate supply is available. 




Anthropologie to Launch International Site - Anthropologie is ready to reach a global audience with the launch on Saturday of its first international Web site. The new site, anthropologie.co.uk, will be priced in a variety of currencies, including euros, pounds and Swiss francs, and will deliver internationally from a U.K. warehouse. James Bidwell, Anthropologie’s managing director for Europe, said the site would have the same product assortment as the company’s London stores, the second of which opened Friday on The King’s Road. He said the site offered an opportunity to gauge the interest of the international market in Anthropologie. Depending on the response, he said, foreign language versions of the site may be launched. Bidwell added that an Anthropologie mobile phone application was also in the pipeline so international customers could shop from the road. Bidwell said the launch of the site is a major step toward positioning Anthropologie as a “global, customer-focused, channel-neutral brand.”  <wwd.com>


Sperry Top-Sider Hires Bill Bettencourt as SVP, Sales and Marketing - Sperry Top-Sider, a division of Collective Brands Performance + Lifestyle Group, announced that Bill Bettencourt has joined the Sperry team as senior vice president of sales, marketing and business development. Since 2004, Bettencourt was with Vans, Inc., where he most recently served as vice president, product and marketing. He joined Vans as vice president, footwear and equipment. In his role, Bettencourt will serve as the senior leader for Sperry's global marketing and sales effort and is responsible for the development and execution of authentic marketing programs and new business initiatives that will support and amplify Sperry Top-Sider's global brand position as the nautical lifestyle brand dedicated those with a Passion for the Sea.  A key part of the role includes managing and expanding the brand's wholesale partner network and identifying new strategic opportunities to expand the brand in the global marketplace.  <sportsonesource.com>


Columbia Sportswear extends its e-commerce strategy into the mobile arena - After introducing its first e-commerce site last summer, outdoor sportswear manufacturer and retailer Columbia Sportswear Co. has launched a mobile commerce site built on the same on-demand technology platform from Demandware Inc. “We’ve gotten a great response already on our mobile site as well as on our e-commerce site,” says Paul Zaengle, senior director of e-commerce for Columbia Sportswear. “Traffic on both sites is growing dramatically.” Columbia quickly picked up on the demand among its customers for a mobile site soon after launching ColumbiaSportswear.com last August, as tens of thousands of customers per week accessed the new e-commerce site through their mobile phones. “Mobile visitors were still in the low single digits in terms of percent of all visitors, but it was still a significant number of customers—and they weren’t getting a great shopping experience on our web site,” Zaengle says. <internetretailer.com>


Planning a mobile ad campaign? Google says mobile search ads won’t be cheap - Following a fivefold increase in the number of Google searches conducted on mobile phones in the last two years, the leading search engine said this week that it expects mobile ad rates will surpass PC-based search ad rates. Speaking in a conference call with analysts Monday that was webcast on YouTube.com, Google Inc.’s engineering vice president Vic Gundotra noted that mobile search ad rates had grown “dramatically” in recent years and can be expected to continue growing until they surpass desktop search ads rates. At the same time, Google plans to aggressively develop mobile applications to support online ads as well as more useful mobile search results. omplementary technology developments like GPS location, for example, are helping Google to develop more relevant mobile ads, Gundotra said. For instance, Gundotra demonstrated during the webcast how consumers with GPS-capable mobile phones can touch a “Near Me Now” link on their phone screens, then touch a category like “Restaurants” to pull up a list of natural and paid-search listings featuring nearby eateries.

“Google has bet big on mobile,” he said. <internetretailer.com>


Senate Bill Aims To Penalize Currency Manipulation - A group of 16 U.S. senators, including four Republicans, announced bipartisan legislation this week to penalize countries like China that undervalue their currency to artificially discount their exports.The Currency Exchange Rate Oversight Reform Act will require the U.S. Departments of Treasury and Commerce to take action to support American businesses and workers. The legislation includes provisions from Senator Stabenow's Currency Reform for Fair Trade Act, which she introduced last year. "Our workers are losing their jobs because countries like China continue to place artificial discounts of up to 40 percent on their products and then sell them here in Michigan at a cheaper price," said U.S. Senator Debbie Stabenow (D-MI). "This unfair practice puts our manufacturers and businesses at an extreme disadvantage and costs us jobs. That's why I have joined with my Democratic and Republican colleagues to introduce this bill to require the Departments of Treasury and Commerce to take action and stop these countries from cheating." <sportsonesource.com>


FedEx sees economic recovery spreading - FedEx says the global economic recovery is broadening, as the U.S. economy gains steam and Asia continues to show strong growth. For the U.S., FedEx confirmed what economists have been saying and what government reports have been showing: Manufacturing is leading a slow economic recovery while consumers are keeping purse strings tight. Last month, U.S. industrial production grew more than expected and the services sector accelerated at the fastest clip in more than two years. But consistently high unemployment and stagnant pay have so far held off any surge in consumer spending. For FedEx, the company is expanding service in Asia to capitalize on growth there. In the U.S., it's pursuing more commercial business because that's where the growth is at the moment. The adjustments, along with huge cost reductions, are paying off. On Thursday the Memphis, Tenn., shipping company reported its first year-over-year profit increase in five quarters. FedEx also raised its earnings forecast for the fiscal year ending in May, seeing "a continued modest recovery in the global economy." FedEx, considered an economic bellwether because of the variety of products it ships for businesses and consumers, said Thursday it earned $239 million in the three months ended in February compared with $97 million a year earlier. Revenue rose 7 percent to $8.70 billion. The results exceeded Wall Street expectations. <google.com

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