R3: Why L&F Matters!


March 25, 2010


This is the most important company in global (and US) apparel by a long shot. They’re backing off of rev targets, but sticking to EBIT goals. Costs matter more. Inventories rising, sales falling. Chinese labor is more accessable, but more expensive. For those concerned about retail in 2H – this confluence of factors will not ease your fears.


TODAY’S CALL OUT: Why L&F Matters!


First off, most US Consumer/Retail investors we hear from could care less about Li&Fung – at least as it relates to a factor they need to focus on real-time. “Hey, I have a US mandate and can’t buy it, so I’ll save it for weekend reading – at best.”  Are you kidding?  Think about it like this. L&F generates around US $14bn in sales. That’s the same size as Gap Inc, almost 3x the size of Ralph Lauren, and equal in size to the entire teen-retail specialty apparel space. Of that $14bn, 60% is in the US, with 27% in Europe.  But keep in mind that this is not gross revenue at the US consumer level, nor is it gross wholesale revenue, but rather the COGS equivalent for these players. The point is that We’re talking about a company that directly touches between $25bn and $35bn of a $280bn industry. No one else comes remotely close – by a long shot. Even if you can’t buy Li&Fung, pay attention to what they say, and more importantly, what they do.


The bottom line here is that last night’s results were not good. Inventories are rising, sales falling. They’re banking on a new deal with Wal*Mart to save the day.  They’re also backing off of revenue targets, but are sticking to EBIT goals. That tells me that they’re going to get tighter with costs. Not good. Maybe better availability of Chinese labor will help (a notable Macro point), but out of the other side of their mouth they discuss higher labor costs.


For people concerned about what 2H in retail could look like, this report should not be inspiring.


Here are some details on the print:


Conf. Call Highlights:


  • turnover by market, we're still about 60% something for the United States. That hasn't really changed. And Europe is about 27%. And the rest of the world is the balance.
  • Turnover by product was still one-third hard lines and two-thirds soft goods. So that hasn't changed much. But with the Walmart deal, I could see that in the future, because I believe the Walmart deal, because of the way their business is - it's slanted towards hard line - that should start to increase the percentage of hard line in our business.
  • We expect more than $2b US in shipments in the first full year



  • We're expecting the business environment to be increasingly positive. We see a lot of positive signs. Things have changed. I think that when you -- we start to see the numbers in the United States, we're probably coming out of the recession, at least number-wise. We don't expect a double dip. But we're planning our business based on a neutral environment, without going anything more negative, but actually not going more positive than it is today. But the expectation is it will increasingly get better.
  • We expect the total year to be flat on inflation.
  • We're also continuing to have a number of deals in work. I expect that over the next months ahead of us that we'll be able to announce certain deals. We're focused really on the health and beauty area, footwear, European onshore. And I expect some new deals in the US onshore as well. But I would say just watch this space.
  • And finally, on our three-year plan, those targets were formulated in 2007. We're not going away from them. We're committed to it. But I would say that they're challenging. But I would say that there's two targets, $20b top-line target and a $1b core operating profit target. Our focus -- if I had to say, the biggest focus is on our bottom line, basically, for 2010, to get as close as possible to the $1b mark.



  • We're watching the US dollar very carefully. We see many issues with the currency. I think it's very volatile against many currencies, including the euro and renminbi and a number of Asian currencies. And that's something that we're managing.
  • We're concerned about trade protections between the United States and China. We're watching it very carefully. We think it's real, although we think we're in a pretty good position because of our global network to make changes for our customers if things turn out to be a problem.
  • Another area that is -- I think a lot of people have been concerned about is the labor situation in Southern China. I think people have read that there's been a lot of labor shortages. And quite frankly, what we see right now is it's not really a labor shortage anymore. There's definitely enough laborers to go around at the right price. So there is definitely an increase on wages going forward, to get workers. But I think the availability of workers is much better than it was a few months ago.



R3: Why L&F Matters! - Results


R3: Why L&F Matters! - Outlook


R3: Why L&F Matters! - Sourcing


R3: Why L&F Matters! - Outsourcing


R3: Why L&F Matters! - Li Fung SIGMA





  • It’s good to be a “junior anchor tenant” (15k-60k sq/ft) looking for new locations. According to CoStar, there is currently 200 million square feet representing 8,900 units available for lease across the US. Approximately 75% of the property is actually vacant and about one third of the locations are the result of major closings from retailers including Circuit City, Linen’s ‘n Things, Goody’s, Steve and Barry’s, and CompUSA. While leasing activity is picking up, 72 million square feet of property has been on the market for 22+ months, 79 million square feet for less than a year, and 50 million for 12-21 months.


  • In an effort to boost brand awareness and reach new customers, Wolverine World Wide is looking to boost spending on its Merrell brand by reallocating marketing spend. A study by NPD suggests that despite substantial growth over the past decade, Merrell ranks 79th out of 100 footwear brands in terms of brand awareness. The overall awareness number is just 8%. Interestingly, Merrell’s conversion rate ranks second to Nike. Intent to repurchase also ranks number two.


  • Given the recent pick-up in sales at PVH’s retail/outlet stores, the company is no longer expecting to close as many as 150 doors over next 4-5 years. Plans now call for closure of 100 to 120 units, or about 20-25 per year for each of the next few years.


  • If 3D televisions (which recently hit Best Buy shelves) are going to take off, consumers will need a much bigger offering of 3D content. It appears that Cablevision is trying to take a lead position on 3D broadcasting, with the company airing the first NHL hockey game in 3D last night. It’s no coincidence that the game was between the Rangers and Islanders given that the Dolans control the cable company, the network, and the Rangers.





Indonesia: Govt withdraws technology upgrade scheme for textile firms - Indonesia's Industry Ministry has decided to pull back the subsidy scheme for textile companies to upgrade their machinery due to a lack of interests over the last three years. The cost of manpower was higher in administrating the scheme due to the low number of applicants. However there is still a similar scheme in place and put forward by the Directorate General for Small and Medium Industries offering soft loans to SMEs which intend to replace their ageing machines with new technology and equipment. <>


China: The authorities shut down dirty tanneries - The mainland Chinese government has begun the process of forcibly shutting down tanneries that have little or no pollution control. However, tanneries with a low production capacity (less than 30,000 pieces per annum) but have acceptable waste treatment controls are allowed to remain in business. Such actions have shown the Chinese government's goal of irradiating polluting tanneries and moving towards a leather manufacturing sector focused more on high quality as well as high output production. There are approximately 700 tanneries operating in the country which are considered to be medium and large sized operations which have adequate pollution control and turn over more than 5 million RMB (US$732,000) a year. <>


China: Textile, garment exports surge 89.3% in February - China's textile and garment export value reached US$12.64 bn in February, up by 89.3% from the same month of last year but down 18.8% month on month. The export value of textile products was US$4.57 bn in February, up 78.2% year on year but down 18.2% month on month. The value of garment exports was US$8.07 bn , up 96.3% from a year ago but down 19.2% from January. In the first two months of this year, the country's exports of textile and garments increased 29.0% year on year to US$28.24 billion in total. As the relatively low base figure in the first half of 2009, a possible appreciation of RMB and higher labor costs, analysts estimated that the exports of textile and garments in the first half of this year will be more than those in the second half.  <>


Vietnam: Footwear exports reach US$6.2 bn despite February slump - The value of Vietnam's footwear exports edged up in the first two months of the year on an annual basis, but exports for February alone slumped 32.7% month-on-month. The Leather and Footwear Research Institute predicted that the country's leather and footwear exports can increase from US$5.3 bn last year to US$6.2 bn this year. There are more than 700 firms operating in the sector, employing 700,000-750,000 workers, of whom 80% are women. Vietnam ranks fourth globally in footwear exports, selling its products to 50 countries and territories, with the EU, US, and Japan being the main buyers. The main export items are sports, canvas, and leather shoes and sandals. <>


Peru: New tanning and footwear industrial park to be built - Peru has officially approved plans to build a new industrial park for leather and footwear in Trujillo in the northwest of the country. Covering an area of 102 hectares, the new facility will house small and medium-sized companies involved in producing leather and footwear. The plan is also to include manufacturers of leathergoods, and to produce leather and finished products to meet the demands of the domestic and the export market. <>


Hermes Declines - Hermes International SCA, the French maker of luxury handbags and silk ties, said full-year profit declined as distributors cut inventory.

Hermès International reported flat net profits and beat its initial forecast for operating profits as a recovery in sales in the fourth quarter helped it outperform its luxury peers in 2009. The operating margin fell by 30 bps to 24.2%. <>


Takashimaya Scrap Merger Plans with H20 Retailing - Japan’s Takashimaya Co. said Thursday it has scrapped its plans to merge with H2O Retailing Corp., the parent company of Hankyu and Hanshin department stores. In 2008, the two retailers announced plans to integrate their operations within three years. The combined group would have rivaled Japan’s largest department store retailer Isetan Mitsukoshi Holdings. It also would have become the latest example of consolidation in Japan’s retail industry, which is struggling with sluggish consumer demand. <>


Men's Specialty and Independent Stores Struggle - One of the country’s premier men’s specialty stores which has been in business for 101 years, and at one time operated three units, will be closing the doors of its last remaining store permanently. Atributed the closure to the recession. Aggressive promotions from Jos. A. Bank and the Men's Wearhouse make it difficult for independent specialty shops to stay in business.  Jos. A. Bank Clothiers Inc. has been running aggressive promotions on suits and dress shirts, even offering the eye-popping deal of buying one sport coat or blazer and getting two pants and two sport shirts free. The Men’s Wearhouse Inc. felt the heat and answered with its own set of giveaways, which have included buy-one-get-one-free deals on suits. According to the National Retail Federation, retailers and restaurants lost more than 470,000 jobs in 2009, which is twice as many people as the entire workforce of the Big Three automakers. And since January 2008, retailers and restaurants have lost more than 1.1 million jobs. The NPD Group Inc. reports specialty stores still account for the largest share of the U.S. apparel business, with 30.8% of the dollar volume share in February, a number that declined from 31.1% of the market in February 2009. But those figures also include the big players such as Men’s Wearhouse and Jos. A. Bank. <>


New CEO for Sports Authority - Sports Authority on Wednesday announced the promotion of David Campisi to president and CEO. Campisi succeeds Doug Morton who stepped down from the top position last October, though he remains as chairman at the company. After joining the sporting goods chain in 2004 as president of merchandising, Campisi was named as president and chief merchandising officer in 2005. In his new role, Campisi told Footwear News he planned to refocus the organization around the customer experience and delivering value. “We’ve done a lot of research, and it tells us our customers look not for discounting but for great brands and value,” he said. “We’re also about to launch a new training program for our associates, and you’ll see [the effects of] that in our stores at the end of May. You’ll clearly see a change in style and enthusiasm.” <>


Geox Innovator of the Year - Geox founder and chairman Mario Polegato was named Innovator of the Year Wednesday at the CNBC European Business Leaders Awards.

The panel cited his Italian firm for having broken new ground in developing a “fashionable brand with new technology.” (Geox’s line of men’s, women’s and children’s footwear and apparel focuses on breathable materializations.) <>


WMT is poised to Sell $2 bn of 5-, 30-Year Bonds as Spreads Narrow - WMT may sell $2 billion of 5- and 30-year senior notes, tapping the U.S. bond market for the first time in eight months, according to a person familiar with the transaction. <>


WMT Expands in China - A new wholly owned subsidiary has reportedly been set up by Walmart in Hebei, China, in an effort to further expand and localize its operations. The new subsidiary, according to China's Ministry of Commerce, is an addition to more than 10 others in the country that Walmart began forming in 2009. Those efforts last year supported the opening of 40 new Walmart stores. Walmart arrived in China in 1996, launching a supercenter and Sam's Club in Shenzhen, followed by neighborhood markets. In February 2007, the retailer invested in hypermarket chain Trust-Mart, which operates more than 100 retail units. <>


Fashion Sales rise 6.5% in UK in February - Clothing, textile and footwear store sales rose 6.5% by value and advanced 4.4% by volume in February, the Office for National Statistics reported. <>


Williams-Sonoma’s web sales fell overall in 2009, but rebounded in Q4 - Home furnishings retailer Williams-Sonoma’s web sales fell 8.4% last year as store sales slumped by 7.7%. But after a Q4 sales upturn, chairman and CEO Howard Lester sees better results ahead in 2010. <>


Annual web sales rose slightly for dELiA*s, but ebbed in Q4 - Internet sales fared better for dELiA*s in 2009, but declined slightly in the fourth quarter. E-commerce revenue increased 4.1% for the full year, but fell 1.9% in the final quarter. <>


Web sales were harder to come by for New York & Co. in 2009 - E-commerce revenue and comparable-store sales at New York & Co. declined 2.4% and 11.8%, respectively in 2009. <>


Staples’ new web site caters to small and medium businesses - Staples Advantage, the business-to-business division of office supplies retailer Staples, has launched a new web site to meet its customers` demands for supplier consolidation and reduced procurement costs. <>


Blue Nile says a competitor illegally copied its web site product images - Blue Nile has sued Victoria’s Diamonds for allegedly illegally copying photographic images on A pre-trial hearing is set for April 26 in federal court. <>


Tiffany has major e-commerce expansion plans for Europe - Tiffany will begin selling online on the European continent this year, says CEO Michael Kowalski. In the U.S. Tiffany will also begin selling a new line of designer bags on its e-commerce site. <>


Apparel retailers are still posting the best site response time - Apparel and accessories merchants continue to deliver the best response time to shoppers with a high broadband connection—for the 10th consecutive month, says Gomez, a division of Compuware. <>


Social Media Making E-mail Marketing More Powerful - In 2009, e-mail marketers started to get social, but 2010 will be the year social media makes e-mail marketing more powerful, according to eMarketer. Social media is a partner, not a threat, to e-mail marketing because it provides new avenues for sharing and engaging customers and prospects. Even though people are spending more time using social media, they are not abandoning e-mail. The two channels can help each other, offering the opportunity for marketers to create deeper connections.



R3: Why L&F Matters! - social media


Claims data this morning showed further improvement. Claims dropped 14k week over week to 442k from 456k (last week was revised down 1k), while the 4-week rolling average declined by 11k to 454k from 465k. The following chart shows the rolling average trend line. Below that we show the raw data.




It is worth noting that the seasonal adjustment factors were updated this past week, as they are annually, which had the effect of lowering claims by 10k more than they would have been under the old methodology. We think it's also worth noting that while the rolling average claims remain outside our 3-standard deviation channel as depicted in the above chart, the one-week claims data is now tracking the high side of our channel suggesting further improvement ahead. We continue to expect to see a claims tailwind throughout the Spring months (April, May) as census hiring picks up and weather-related effects dissipate.




The following is the census hiring chart showing hiring in the 2000 and 1990 census by month, which should be a reasonable proxy for hiring this Spring.





Joshua Steiner, CFA


We’re projecting over $1.5bn of net gaming revenues at MBS next year.  Rev per visitor should be above Highlands and close to Venetian Macau, while daily visitations will likely be below both.



LVS’s Marina Bay Sands (MBS) resort in Singapore will open in April and we are projecting a little over $1.5bn in gaming revenue in its first full year of operations (2011).  Venetian Macau generates approximately US$96 in gaming revenue per visitor while attracting around 60k visitors per day.  That property is on a run rate of over US$2bn in total annual gaming revenues.  The nearest casino to Singapore is Genting’s Highlands in Malaysia which as a monopoly, produced revenue per visitor of $68 and daily visitation of 53k.


Similar to most Macau casinos, Venetian benefits from an astronomical amount of VIP play, a level which Singapore is unlikely to attain.  Venetian’s Mass revenue per visitor is only $46, less than half of its total.  Despite a much smaller VIP book, MBS could benefit from a long length of stay given the extensive entertainment options.  The average visitor spends close to 4 days in Singapore while the average visitor to Macau spends about 36 hours.


In terms of daily visitation, MBS is unlikely to produce the levels of either Venetian or Highlands.  Singapore locals will be swayed by the S$100 levy.  Moreover, Highlands was operating as a monopoly and now, must compete with MBS and its sister operation, Resorts World, which already opened in Singapore.


Our US$1.5bn gaming revenue estimate for MBS contemplates revenue per visitor of US$90-100 and daily visitation of 40-50k.  The following chart shows the gaming revenue possibilities for MBS. 



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 78.70%


Carbonated soft drink market is shrinking, MCD shifting gears


My initial reaction to the news that MCD will be selling all soft drinks, no matter the size, for $1 this summer was one of surprise.  While I still maintain that the company is overly-focused on transaction-counts, an article published last night by the Atlanta Journal Constitution entitled, “Soda business shrinks for fifth straight year” may give some indication as to MCD’s reasoning:

  • According to Beverage Digest, the volume of the U.S. soda business declined 2.1% last year
  • The publication believes that many more years of decline are in store for soft drinks
  • Energy drinks and ready-to-drink teas posted slight increases last year, according to Beverage Marketing Corp.
  • Health and obesity concerns continue to hamper full-calorie soda sales

While MCD has sold drinks for $1 in past summers, the promotion this year is lasting 150 days compared to 100 days in years prior and this year drinks of all sizes will be priced at $1.  The concession may serve to effectively take traffic from competitors and fuel the discounting war.  The “ready-to-eat” smoothie market has grown dramatically in recent times, with more than 80% of the consumption growth coming in the last five years, according to  There are valid concerns regarding MCD’s ability to sell $4 blended drinks alongside $1 soft drinks, but the respective market trends are indicating a shift from soft drinks to the “health and wellness” segments.


Howard Penney

Managing Director


There appears to be a bit of waning upside momentum, but the daily pattern of higher-highs and higher-lows remains intact.  The S&P 500 closed down 0.5%, with volume up 3.3% day-over-day.  Breadth declined significantly with the advance/decline at -2353 to -992. 


The US MACRO data points continue to come in with a mixed message.  On one hand, the durable goods report was positive for the third month at 0.5%, though slightly below expectations of 0.6%.  On the other hand, housing continues with a string of disappointments as new home sales hit a record low.   The February new home sales were 308,000; lower than consensus 315,000 and down from a revised January report of 315,000. The Census Bureau estimate of new houses for sale at the end of February was 236,000, which represents 9.2 months of supply; up slightly from 9.1 months in January.  Overseas, Fitch’s downgrade of Portugal created increased sovereign debt concerns. 


The Dollar index had another strong day improving 1.2% and is down slightly in early trading today. 


The VIX was up 7.3% yesterday, the biggest up day since February 4, 2010.  The VIX continues to be broken on all three durations - TRADE, TREND and TAIL. 


The Financials (XLF) was the only sector to close up on the day.  The XLF was driven by the banks with the BXK +0.4% on the day.  BAC is leading the money center names higher after the company announced that it would start forgiving mortgage loan principal for homeowners who owe more than 120% of their homes' value.  MBIA and Genworth Financial were the two best performing stocks in the XLF. 


Despite the disappointing news in housing, the S&P 500 Homebuilding index rose +1.9%; the third straight daily gain.  LEN reported a much smaller loss than expected and said that it is on track to achieve profitability in fiscal 2010.


Crude was down 1.6% following a larger than expected build in crude inventory.  Yesterday, crude broke the Hedgeye immediate term risk management line, so we sold out of our position in the USO.  With Global Sovereign Debt risk mounting, we don't get paid to hope oil holds support.


Yesterday, gold prices are trading lower nearing a six-week low as continued negative Euro zone news lifted the dollar.  In early trading, copper is trading lower also as the dollar is trading higher. 


In early trading, equity futures are trading above fair value, in an effort to reverse yesterday's declines.  As we look at today’s set up the range for the S&P 500 is 17 points or 0.7% (1,160) downside and 0.5% (1,174) upside. 


Today's MACRO highlights are:

  • weekly jobless claims
  • Bernanke testifies on the FEDs exit strategy
  • weekly natural gas inventories


Howard Penney

Managing Director

Professional Forecasting

“We have two classes of forecasters: Those who don’t know – and those who don’t know they don’t know.”

-John Kenneth Galbraith


I have that quote scotch taped on the insert of my investment notebook. I keep it there not to remind myself how wrong the consensus groupthinkers tend to be, but to always remember that I don’t know what I don’t know. Mr. Macro Market knows all.


I have never been afraid to shoot the puck or make a call on markets. You can call that brave or arrogant. I call it strapping it on every morning and playing the game to win. For any of you who have done anything at the highest level in your life, you get this. Confidence beats cowardice.


What gives me confidence is my investment team and market prices. Before I make a call on anything out there, I check with what Mr. Macro Market tells me to look at, then I ask my analysts what they think. That’s it – we start each day by admitting that we may not know what market prices are telling us.


Every three months, we change our Top 3 Macro Investment Themes. Why do we change them? Well, that’s easy – because market prices change. We get a lot of questions on where we will wash out on our Q2 Macro Themes. We are waiting until the seconds run out on the game clock for Q1 to do that.


Any professional athlete, entertainer, or investor worth their title wakes up every morning reviewing their performance. Sometimes people don’t like others talking about performance. Sometimes people appreciate accountability. But no matter where you go in the morning, there your performance will be.


By next Thursday, my Macro Team’s performance will be on the scoreboard for Q1 of 2010. While I myself have made plenty of tactical mistakes out there, I think my teammates have performed admirably on nailing down 3 big macro moves. As a reminder, our Q1 macro calls have been:

  1. Buck Breakout (bullish on the US Dollar; bearish on commodities, gold, euro, etc…)
  2. Chinese Ox In A Box (bearish on Chinese stocks; bullish on Chinese yields and currency)
  3. Rate Run-up (bearish on US Treasuries)

My biggest question every morning is where do our macro themes start to go wrong. The score is the score. What matters from here is what to make of it. Am I becoming consensus? Where do I sell the US Dollar? Should I cover my short position in gold? Should I short Chinese stocks again, or should I be long them?


Well, the good news is that my business model allows me to change my views on all of this with a click of a button. The conflicted and compromised ratings models of the Investment Banking Inc. can’t do that for you but I, like the buy-side, can. We call that cool.


Becoming consensus isn’t cool. Neither is not knowing that you don’t know that consensus can remain longer than you can remain solvent. I have learned this lesson plenty enough times in my career to never disrespect it.


So, before I wrap up, let’s quickly look at consensus relative to what Mr. Macro Market is telling me this morning relative to our Q1 Macro Themes:

  1. US Dollar is overbought anywhere north of $81.92 on the USD Index. The big breakout line (support) is the immediate term TRADE line at $80.45.
  2. Chinese stocks got spanked again last night, trading down -1.2% on the SSEC, and breaking my immediate term TRADE line of support of 3034.
  3. US Treasury rates blasted right through every line of resistance I have in my macro models yesterday, across durations.

The least consensus call we have left is that rates are going to continue to Run-up. As a reminder, our call on US interest rates going higher is fairly straightforward and it’s based on 3 forecasts:

  1. The Data – we think inflation (CPI), globally, will accelerate sequentially in March vs. February. We think unemployment rates (including the USA) are setting up to drop, sequentially, for the next 3 months, and that reported global growth will continue to surprise to the upside.
  2. The Decision – Bernanke is preparing to remove the “extended and exceptional” language from consensus policy.
  3. The Debtor – whether USA’s The Creditor be China or the US taxpayer in California, Piling more Debt Upon US debt Upon Debt from here is bearish for government bonds (we are short IEF and MUB).

Here are three fresh quotes that support our forecast for higher interest rates, globally, this morning:

  1. Sovereign Debt - “Our financial support demonstrates our commitment to finding a fair and equitable solution for all stakeholders in the wider interest of the economy.” -UAE Supreme Fiscal Committee chairman, Sheikh Ahmed Bin Saeed Al Maktoum, on bailing out Dubai World at a price.
  2. Sovereign Debt - “in an emergency, such aid would have to be provided as a combination of the International Monetary Fund and joint bilateral measures in the euro zone.” –Germany’s Merkel on pushing the Greeks to higher lending rates at the IMF.
  3. Sovereign Debt - “We have clearly underestimated the impact on the euro from the European sovereign crisis and perhaps also from the broader macro adjustment that it portends.” –Goldman Sachs, capitulating on their bullish view of the Euro.

At least someone at Goldman is admitting that they too don’t always know what they don’t know. Cheers to professional forecasting. If you want to get in this game, be prepared to win and lose - because everyone, whether they like you personally or not, will be keeping score.


My immediate term support and resistance levels for the SP500 are now 1147 and 1177, respectively.


Best of luck out there today,



Professional Forecasting - Professional Forecasting




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