DG: KM Stepping Up to Short – Again

DG: KM Stepping Up to Short – Again


Keith is going back to the well on DG today, shorting a name that we’ve been cautious on since its re-emergence as a public company back in November of 2009. We remain convinced that the opportunity to sustain both unit and comp growth is becoming harder to achieve. Despite reporting solid results on March 31st, it appears that Q4 F09 is likely to mark the post-offering peak for DG as it relates to rate of acceleration in business growth.


With the stock up over 12% since the Q4 print and coincidentally at the average price target ($29) of the seven brokers launching coverage after the IPO and several quarters of earning pretty much anything it wanted – 2010 will likely prove to be a different story. This is a year where both top and bottom line compares for DG will be at their toughest in the company’s history.  Comp guidance is suggesting deceleration and reliance on margin enhancing strategies such as “better buying”, increased private label penetration, and improvement in more discretionary categories such as home and apparel is far more speculative and risky than it has been over the past year.  At the same time year-over-year GM compares get very difficult effective immediately, and SG&A/Capex begin to accelerate along with stepped up square footage. We continue to believe momentum will slow on the margin, much like it has already done with the pace of Americans entering the “sweet spot” of the DG demographic. 


DG: KM Stepping Up to Short – Again - DG SIGMA



R3: Retail Headcount on the Rise


April 19, 2010





For the first time in almost three years, the growth in total retail hires has turned positive.  This shouldn’t come as a surprise given the positive sales recovery that has been in place for two quarters, but it’s worth noting for a couple of reasons: 


First, the productivity gains we’ve seen across most of the space have in some part been at the expense of headcount reductions and reduced store labor hours.  This is evident in the charts below, although what stands out to us is the duration of the prolonged hiring malaise.  Clearly retail hiring has been in a multi year secular decline until now. 


Secondly, in looking ahead we’d note that this is a clear sign that retailers are feeling better (and understaffed).  While it makes perfect sense to see hiring pick up against a commensurate rise in sales, we do wonder how much further the hiring will actually go.  The risk of staffing up against a still uncertain topline is one of the bigger risks we see.  This especially holds true after such a short and unprecedented period of EBIT expansion driven in large part by cost containment. 


With cost of goods also creeping higher, this is just another sign that peak EBIT margins may be unsustainable if sales don’t remain robust.


R3: Retail Headcount on the Rise - Job Hires


R3: Retail Headcount on the Rise - job openings





  • Be on the lookout for targeted online marketing the next time you check your online bank account. A company called Cardlytics is a pioneer in the effort to link targeted promotions with prior transaction activity. Retailers including Macy’s and Staples as well as McDonald’s are already using the service to target existing customers.


  • Add cosmetic/beauty retailer L’Occitane to the list of company’s coming public soon. The French based global retailer of Provencal beauty products is expected to complete a $700+ million offering with a listing based in Hong Kong. The company currently operates a 1,200 store global network in 70 countries as well as a wholesale business. There are approximately 170 stores in the U.S alone.


  • As Reebok attempts to build a domestic turnaround with its recent success with its Easytones fitness shoes, keep an eye on the athletic brand’s move with the NBA. Rumor has it that the company is the frontrunner to endorse the likely No. 1 NBA draft pick, John Wall. It’s been a while since Reebok paid up for anyone, which makes the rumored $3-4 million annual endorsement deal even more eye opening.




R3: Retail Headcount on the Rise - Calendar





M-commerce sales to Hit $2.42 bn this year (1.53% of e-Commerce) - U.S. mobile commerce sales hit $1.20 billion in 2009 and will grow to $2.42 billion this year and $23.83 billion in 2015, according to forecasts from Coda Research Consultancy. M-commerce will account for 1.53% of e-commerce this year, the firm predicts. <>


Pier 1 Imports Plans to Return to Selling Online - After pulling the plug on its e-commerce site three years ago as a cost-cutting move, Pier 1 Imports Inc. wants to get back in the online retailing game. Though details aren’t set, a new shopping site is forthcoming, says Pier 1 CEO Alex Smith. <>


 Chinese Apparel Filling Indonesian Store Racks - After more than three months of ASEAN-China Free Trade Agreement (FTA), chinese imported garments have started to fill up shelves and counters at department stores and shopping malls in Indonesia, reducing sales of local clothing of 20%.  “Chinese clothing, especially ladies’ wear, has begun to grow in number. It is now available in department stores while it could only be found in Glodok or Tanah Abang, “ said Poppy Dharsono, the Head of Association of Garment and Accessories Suppliers (APGAI). “Before the FTA, 40% of the products were imported from China. Now, their number can be up to more than 50%,” she said. <>


Bangladesh Apparel Exporters to Get a 2nd Stimulus - Finance Minister of Bangladesh AMA Muhith has assured readymade garment (RMG) exporters of implementation of Tk 1,000 crore second stimulus package in a month. Any garment factory owner exporting clothes worth $250 mm will be considered for the stimulus. There are at least 1,500 companies in the apparel sector entitled to the exemption of licence renewal fee for captive power plants. <>


R3: Retail Headcount on the Rise - US Apparel Import Table


German Cosmetics Firm Takes Over Cosmolab - German color cosmetics firm Schwan-Stabilo Cosmetics has taken over Cosmolab Inc. Lewisburg, Tenn.-based Cosmolab will continue to make cosmetics pencils from its current headquarters and it is expected to have total revenues of $40 million this year, according to Schwan-Stabilo. Cosmolab, which was in bankruptcy proceedings, was acquired by Schwan-Stabilo through its All4 Cosmetics Inc. subsidiary. “Cosmolab’s specific know-how and the production capacity fit perfectly into Schwan-Stabilo Cosmetics’ portfolio,” stated Ulrich Griebel, Schwan-Stabilo Cosmetics’ managing director. “We are confident to secure Cosmolab’s existence and its 300 positions for the long term through its incorporation into the very well organized Schwan group.” <>


Uniqlo Signs Fifth Ave. Flagship Lease - Fast Retailing Co., Ltd. said Monday it has signed a lease for a new Uniqlo store on Fifth Avenue. An opening date has not been established, but unlikely to happen this year. The 89,340-square-foot flagship will be located at 666 Fifth Avenue. The Fifth Avenue boutique will be the Japanese brand’s second location in New York. Its 36,000-square-foot Soho store opened in 2006. Uniqlo has spearheaded an international push in recent years, rolling out stores in Paris, London, Singapore, Moscow as well as several locations in South Korea and China. <>


Neiman Marcus Testing Discount Retail Concept - Neiman Marcus is testing a discount retail concept for aspirational shoppers who fled the luxury chain when the financial crisis hit in 2008. The 11,000-square-foot test store, part of the retail company’s Last Call clearance division, opened April 2 at Inwood Village, a popular outdoor shopping complex next to the wealthy University Park section of Dallas. It presents brand-name fashion and accessories, including Michael Kors, Badgley Mischka and Diane von Furstenberg, in an environment that looks like a hybrid of a boutique and an outlet. The emphasis is on contemporary apparel, handbags and shoes, and most prices fall between $45 and $300. <>


`Get-It-Cheap Party' for Luxury Goods Ends at Saks; Tiffany Raises Prices - Lisa Hagen bought a $395 Diane von Furstenberg sundress at Barneys New York last week, paying 58 percent more than she did for a similar dress two years ago. <>


JCP and People Watch - J.C. Penney has a new fashion director for its shoppers — People StyleWatch. Beginning in September in Penney’s stores and on, select items in misses’, contemporary and junior apparel, accessories and shoes will be flagged with “People StyleWatch Must Have” displays, effectively putting the magazine’s seal of approval on what it considers the trendiest, most desirable items developed by the retailer and its stable of designers, including Mary-Kate and Ashley Olsen and Charlotte Ronson, who have created the Olsenboye and I [Heart] Ronson collections, respectively, for the department store chain. Penney’s will launch exclusively Liz Claiborne and fast-fashion brand MNG by Mango this fall. <>


Shaun White Designs Shoe for Target - Shaun White has mastered skateboarding and snowboarding, and now the Olympic gold medal winner (who also plays a mean guitar) has added another title to his resume: shoe designer. His line of men’s and boys’ skate sneakers, created with his brother Jessie, come out this fall at Target. But the Whites and the Bullseye go way back: They launched an apparel line there in 2007, and Target started sponsoring Shaun eight years ago. <>


Jillian Michaels from Biggest Loser Talks K-Swiss - Trainer Jillian Michaels is getting “tubular.” The “Biggest Loser” badass — who recently signed on as the face of the K-Swiss running and training Tubes product — said she’s been a fan of the sneakers since they debuted. And while she gave props to the shoes’ stability and lightweight cushioning, it was the surface that got her, she said. ”They’re cool-looking, and I’m not going to lie, that matters!” she confessed to Insider. <>


New Balance Debuts New Shoe with Boston Marathon - New Balance is debuting an integrated 'Run Faster Boston' marketing campaign this April to coincide with the 114th running of the Boston Marathon today. The imagery highlights popular Boston landmarks and provides a sneak peek of the New Balance 759, one the company's new fall 2010 running shoes. <>


Majestic Introduces FanZones - Majestic Athletic, the official uniform supplier of Major League Baseball, has introduced Majestic FanZones in 17 MLB parks this spring. Each Majestic FanZone can quickly produce a replica jersey of any current player, not just those that concessionaires stock. Since some teams wear as many as five jerseys, fans can now chose from more than 100 different player jersey options right at the ball park. Majestic FanZones rely on real-time data, so consumers can get a jersey for a recently acquired or activated player immediately. <>


GS Risk: Obama Is Going For A Win

As flagged by NPR’s Planet Money blog, a Google search ad from Obama on the terms “goldman sachs SEC”:


GS Risk: Obama Is Going For A Win - obama


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GS: Charting The Risk

Taking people’s word for it isn’t our job. Our daily risk management task is to show quantitative scenario analysis.


The most important move in GS on Friday came when it broke our intermediate term TREND line of $165.58/share. Volume was huge (101M shares traded versus the average of 9M/day). That’s where the real conviction can be measured. Watch what buyers/sellers do, not what they say. What was support is now resistance.


One analyst said $1.20/share ($700M) is the downside. Obviously Mr. Market disagrees with that and I think there is a very narrow understanding of multi-factor global risk management in that estimate. For a broader conceptualization of risk, we’d point analysts to the history of de-regulating the derivatives market and who got paid by the opacity embedded therein.


In terms of downside from here, there is no support for GS to the immediate term TRADE line (dotted green line in the chart below at $149.46). On a breakdown and close below that price, I don’t see any support of consequence to $131.11.


From a risk management perspective, it will pay to wait and watch for a few days. GS reports tomorrow. Whether it’s right or wrong, you can be rest assured that the political likes of Gordon Brown (election May 6th) will have their eyes peeled on any excess in those earnings and use those against CEO Blankfein.


Finally, watching a flailing Chris Dodd live on TV right now should remind us all that there is major political risk embedded in the last bubble that has yet to be popped in financial markets - The Bubble in US Politics.



Keith R. McCullough
Chief Executive Officer


GS: Charting The Risk - GS

Keep Your Eyes on Greek CDS . . .

Below we’ve charted the CDS (Credit Default Swap) spread on Greek 5-year government bonds, which begs the question . . . are things getting worse in Greece?  CDS spreads for Greek government debt have blown out to levels not seen since February, when sovereign debt defaults concerns were most vocal.  While the market and headlines are now focused on Goldman Sachs and the financial sector, Greek CDS spreads are signaling ongoing sovereign debt issues.  And as we stated on our Sovereign Debt Call last month, history tells us that Greece is typically a leading and not lagging indicator.


The Ecofin Summit from April 16-17 of Eurozone finance ministers and central bankers in Madrid ended without substantial agreements on problems facing the European economy as a result of the Greek debt crisis.  While partially to blame was the distraction from the Icelandic volcano, the reality is that no real resolutions were reached regarding Greece.  While the Greek Prime Minister’s austerity measures appear aggressive, including a 10 percent cut in social spending, a two-year increase in the retirement age, and the elimination of public sector jobs and two months of wages for public service workers, the market is signaling, as outlined in the chart below, that they are not enough.


Greek has to borrow an estimated 12BN Euros in March and 32.5BN in Euros through the duration of the year.  Two years ago Greece was borrowing at ~4.5%, versus its current market rate of 7.37%.  The dramatically increased interest rate is obviously offsetting much of the gains expected from the austerity measures.


We highlighted sovereign debt issues as a key reason to be negative on equities heading into May, and will be keeping CDS spreads for Greece and its PIIGish brethren front and center.


Daryl G. Jones

Managing Director


Keep Your Eyes on Greek CDS . . . - Greece CDS

Opacity's Child

“Regulation of derivatives transactions that are privately negotiated by professionals is unnecessary.”

-Alan Greenspan


Some of the financial ideologies born out of the Clinton Administration’s second term are something for sore eyes this morning. With ex-Goldman CEO and czar of all things Greek Philosophy, Robert Rubin, at the helm of the US Treasury, there was no stopping Alan Greenspan and Larry Summers from de-regulating us into oblivion.


Now some may argue that is too aggressive a stance to take on America’s Wizards of Oz (after all, they are “professionals”), but one of those people isn’t President Bill Clinton. Clinton made 3 explicit comments about his Treasury Secretaries (Rubin and Summers) on ABC’s “This Week” program yesterday:


  1. “I think they were wrong and I think I was wrong to take their advice.”
  2. “Their argument was that derivatives were expensive and sophisticated and only a handful of people will buy them and they don’t need any extra protection.”
  3. “Sometimes people with a lot of money make stupid decisions and make it without transparency.”

Now whether you are political or not doesn’t matter this morning. This Tiger Woods like PR nightmare for Goldman Sachs is political in principle and global in reach. In the UK, Gordon Brown is staring down an election on May the 6th, so don’t think his rushing out to the cameras to call this a “moral bankruptcy” was ironic in its timing.


Don’t think for one second that the Clintons don’t have a plan here if President Obama fumbles on the opportunity either. Hillary’s husband admitting he was wrong in the face of Blankfein reminding the world that he thinks he is smarter than you, opens the fences for one of the biggest political softball pitches in US history.


History is what matters this morning, not the semantics of a Goldman VP and the volcanic ash that has become him. On December, 15th of 2000 Congress took Robert Rubin and Larry Summers word for it and declared law that derivatives and swaps were free and clear from regulation and/or oversight by the CFTC (Commodities Futures Trading Commission). Then in 2004, Hank Paulson and Dick Fuld lobbied hard to have the SEC removed their leverage ratios (great for a derivatives business, if you have one).


Taking a step back, most people in America are becoming familiar with the name Brooksley Born. She was the chair of the CFTC who tried to regulate the swaps market early in Clinton’s second term. This was after Orange County’s derivatives bet blew up (1994) and before Long Term Capital Management imploded (1998).


I know, how dare she try to regulate the Goldman boys (she was elected President of the Stanford Law Review in 1963) when, according to my favorite financial historian Roger Lowenstein, “most of the women in law firms were still pouring coffee.”


Brooksley Born resigned in 1999 and the rest, as they say, is history. In Lowenstein’s latest book, “The End of Wall Street” you can get up to speed on the history of derivatives de-regulation in literally 7 pages (pages 57-63). On page 62, Roger quotes Greenspan when he was asked about the topic of derivatives regulation again in 2002: “Regulation is not only unnecessary in these derivative markets, it is potentially damaging.”


What’s really going to be damaging here is the deepening global perception of American financial markets being opaque. When the President of the United States pipes his message of ‘Transparency, Accountability, and Trust’ into CNN, some people out there actually take his word for it.


I think this Goldman case is going to be much larger in scope than those who “bought GS on the dip” on the technical merits of the SEC fraud case on Friday think. This is going to be a global debate about transparency versus opacity. Goldman will be opacity’s poster child.


The risk manager in me obviously asks about the downside before I start accepting the narrative fallacy of perpetual upside; particularly after Thursday’s closing YTD high of 1211 in the SP500 (which was +79.1% higher than where most of people were right freaked out by the fears that the likes of another Goldman beauty, Hank “The Market Tank” Paulson, helped perpetuate).


Not unlike Hank Paulson’s grossly miscalculated risk that Lehman filing for bankruptcy was going to equate in a “cleanup day” (Lowenstein’s “The End of Wall Street”, page 198), the idea that re-regulation of the entire swaps and derivatives market is going to equate to a 1-day selloff in stocks from their nosebleed highs is reckless in its historical assumptions.


We shorted the SP500 on Thursday April 16th, then issued a slide presentation on Friday outlining why our Hedgeyes see the risk outrunning the reward at SP as we head into May. No, we didn’t know that the SEC was going to make this move. No, we didn’t purport to not know how opaque our financial system was prior to the announcement either. Managing risk doesn’t happen in the vacuum of Opacity’s Child. If you are going to play this game, just know who you are playing against.


My immediate term support and resistance levels for the SP500 are now 1175 and 1214, respectively.


Best of luck out there today,



Opacity's Child - BL


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