R3: Seasonality Debunked – Toning Rebounds in March


April 20, 2010





The March monthly data out last night reflects continued momentum in sales for the toning leaders, debunking concerns of a post holiday slowdown. Yes, we are still in the early stages of a nascent category so fits and starts are to be expected, but a sharp rebound following a seasonally induced (prior) peak is an important indicator for broad-based toning demand.


Following strong holiday sales in December, sales of both Shape-Ups and Easy Tones rolled off; impacted primarily by strong holiday sell-ins and out of stocks for Reebok. New shipments expected to hit shelves in March materialized as reflected in a reaccelerated ramp headed into the Spring season. While overall demand is rather evident in the chart below, there are a couple other key observations to highlight as it relates to our refreshed data set.


First, despite continued anecdotal evidence that Easy Tones are preferred to Shape-Ups among athletic specialty and sporting goods retail customers, the sheer magnitude and trajectory of Shape-Ups sales reflects just how broadly it’s distributed. While Reebok is primarily sold through athletic channels, Skechers sells into the athletic channel, department stores (i.e. Nordstrom, Macy’s, JCPenney, etc.) and well-known 3rd party branded channels such as the Victoria Secret catalog. Moreover, this suggests a substantial runway ahead for Skechers and highlights the fact that this doesn’t have to be a one dog fight between the two as the category expands.


In addition, with lower-priced competition entering the marketplace (Payless, New Balance, GH Bass, Avia, et al.) ASPs are holding steady – for the most part. With Easy Tones maintaining price levels I’m less concerned about the $3 erosion in Shape-Up ASPs given the introduction of sandals for the Spring season that sell at roughly half the price of the original sneakers. In fact, I’d expect to see a similar trend over the next several months as sandals become a larger part of the mix as we head into Summer.  


The bottom-line here is that investment implications are positive for SKX with Street estimates looking light heading into earnings next Wednesday. For starters, compared to Q4, sales over the past 3-months suggest an incremental sequential increase of ~$60mm from Shape-Up sales alone at retail. Keep in mind that these figures capture only a subset of SKX’s sell-throughs and at wholesale, equates to ~$30mm. If we look at the $90mm of incremental sales y/y in Q4 and assume that Skecher’s core sales were up ~10% in the quarter, it would suggest that Shape-Ups contributed ~$60mm to the top-line last quarter – roughly half of what was captured by NPD monthly data. Our view is that domestic wholesale sales from Shape-ups alone are likely to account for the $70mm in incremental sales consensus expects in Q1. Given that initial sales of Shape-Ups are starting to ramp internationally as well as an incremental contribution of ~$10mm+ at retail, we expect the top-line to exceed expectations.


With incremental sales coming in at above core margins, we expect to see earnings come in at least 25% above current estimates. To be clear, our call is not necessarily to jump in up here near $40 a share, but that we are increasingly confident that the company will beat expectations and that the intermediate term momentum is likely to continue.  


Casey Flavin



R3: Seasonality Debunked – Toning Rebounds in March - Shape Ups and Easy Tones 





- Prepping for growth? Word has it that Neiman Marcus is opening a prototype discount luxury store, that is not located in an outlet center. While the concept is named “Last Call” (consistent with its existing outlet business), the store is expected to be less of a traditional outlet and more like an upscale off-pricer. A new name is also in the works although it has not yet been revealed.


- Saying and doing are two different things. According to a study from a PR firm, 73% of Fortune 100 companies are actively engaged with Twitter via 540 separate accounts. However, 76% of accounts do not post often, and 52% are not considered actively engaged as measured by engagement metrics such as numbers of links, hashtags, references, and re-Tweets. This reminds me of retailers who have websites but no e-commerce. Embarrassing.


- With “toning” being one of the more common buzzwords in footwear these days, we can’t ignore the growing presence of “shapewear”. The small but growing category continues to gain in popularity as consumers look to shortcut their efforts toward a trimmer look. While the category has been born at the high end with brands like Spanx, Cosabella, and Leonisa, it won’t be long before a mainstream brands makes a major push to take these compression-like items to the masses. As it stands now, growth in the category in the plus range of XL to XXXL or larger saw sales gains of 14.8 percent last year according to NPD.





R3: Seasonality Debunked – Toning Rebounds in March - Calendar





Luxury Sales to Rise 4% in 2010 but Won't Recover Until 2012 - Global sales of luxury goods will rise 4% this year to €158bn, following an unprecedented 8% drop last year, while accessories are expected to see the biggest rebound, with 5% growth, according to consultancy Bain & Co.  <>


China Urging Resumption of Shoe Trade with EU - China's Ministry of Commerce has reiterated its firm stance of safeguarding the legitimate rights and interests of domestic shoemakers and called for early resumption of leather footwear trade with the European Union (EU).  <>


Volcano Effects Fashion Industry - Europe’s flight freeze due to volcanic ash, which entered its fifth day Monday, is already impacting the fashion industry: scuttling or postponing events, stranding designers and executives and raising the specter of dampening the region’s fragile economic recovery. The ongoing disruption as a result of volcanic ash from Iceland has impacted designers from Giorgio Armani to Ralph Lauren, as well as cosmetics industry executives and design editors in Milan for various trade fairs. European authorities said they hoped some flights could begin today but the backlog of passengers and planes is likely to continue to strand people for days. Ferragamo says travel chaos from volcano ash is disrupting sales of handbags. <>


Lawmakers Urge Resolution of Mexican Trucking Dispute - House lawmakers are stepping up the pressure on the Obama administration to eliminate a controversial cross-border trucking program with Mexico and resolve a long-simmering dispute. A bipartisan group of 78 lawmakers wrote letters to U.S. Trade Representative Ron Kirk and Transportation Secretary Ray LaHood last week urging the administration to renegotiate and eliminate from the North American Free Trade Agreement a section that opens up U.S. highways to Mexican trucks. A successful renegotiation would also eliminate retaliatory tariffs, which are negatively impacting our export markets. <>


Talks of Strengthening Ties to Western Hemisphere Textile and Fabric Manufacturers - Textile and fabric manufacturers in the Western Hemisphere must establish a stronger regional identity through coordinated initiatives on issues ranging from trade policy to financing to remain a viable force, executives said. Members of the National Council of Textile Organizations ended their three-day annual meeting here last Wednesday with a consensus that, in order to meet low-cost competition from Asia, they have to do a better job of connecting retail companies with producers in the region to build awareness about sourcing, as well as the benefits of faster turnaround time and knowledge of the consumer base.  <>


Burberry Group Second-half Sales Rise 7% (6% cc)- Sales driven by strong full-price sell through of Burberry’s spring 2010 collections at its own stores. Total sales for the third quarter rose 15%, fourth quarter declined 2%. That was due to a 20% fall in wholesale revenue during the fourth quarter, caused partly by the company closing specialty accounts in Europe and weakness in Spain, where Burberry is withdrawing the local collections it sold in the country and introducing its global collection. Excluding those actions, Burberry said wholesale sales would have risen slightly. <>


ESPN, NBA Co-Brand Apparel for Playoffs, from VF Imagewear - A new line of co-branded merchandise inspired by the NBA on ESPN RV advertising campaign from ESPN Consumer Products and the NBA will roll out just in time for the NBA playoffs. The NBA on ESPN line includes T-shirts and hoodies from VF Imagewear, retro-influenced lifestyle T-shirts and hoodies from Sportiqe Apparel, fitted and adjustable hats from New Era Cap, novelty street signs and pennants from Wincraft and exclusive basketballs from Spalding. In addition, VF Imagewear and Wincraft have designed items with player nicknames and Sportiqe has produced illustrated tees.  <>


UA Signs Red Sox Jonathan Papelbon - Under Armour signed a multi-year endorsement deal with Boston Red Sox closer Jonathan Papelbon. Papelbon's endorsement deal with Reebok ended earlier this year. <>


Tesco to Step Up China Expansion, Sees Rise in Clothing Sales - Tesco Plc, the U.K.’s largest retailer, plans to make China a central part of an accelerated international expansion plan to fuel sales growth as its share of the domestic grocery market plateaus.  Tesco said that its full-year clothing sales rose 7.3% to hit £1bn, driven by a strong performance from kidswear, its F&F brand in Europe and its online offer.  <>


Gilt Groupe Adds A User Experience Exec From - Online luxury retailer Gilt Groupe Inc. has hired director of user experience and web strategy Brian Kalma as its senior director of interaction design and usability. <>


Sierra Trading Post Expands Shipping to 44 More Countries - Sierra Trading Post has expanded its international service to 44 new countries, including the Bahamas, Portugal and Thailand. The cataloger and e-retailer now ships to consumers in 92 countries. <>


GS: Risk Management Update

The GS bulls really tried to love the stock above my intermediate term TREND line of resistance pre-open (red line at $165.58 in the chart below), but the stock failed there, and it is now breaking down again on robust volume (21M shares by 11AM, when the 10-day avg prior to the news was 8.9M shares/day). Our updated line of immediate term TRADE line of support = $156.01.


I said this yesterday, and I’ll say it again. There is a bubble in US Politics that is going to stand in the way of this stock. If anything, this morning’s earnings are going to perpetuate that political bubble’s pressure. Between now and the SEC figuring out of there was fraud at GS, the company will have to get through both Senate Banking Committee meetings (Thursday) and the election in the UK (May 6th). Those forums will not be objective courts of civil law.



Keith R. McCullough
Chief Executive Officer


GS: Risk Management Update - GS


It is now clear that EPS will be up more than 10%-12% in FY11-FY12.


As part of the EAT Black Book we introduced yesterday, our EPS estimate for FY11 was well above consensus estimates.   After listening to management’s opening remarks on today’s earnings call, it seems that they agree with our conclusion.  EAT management just stated that it will not issue FY11 EPS guidance until its fourth quarter call, but that in order to meet its stated target to double EPS by FY15 that EPS is expected to grow 10%-12% in FY13-FY15 and more than that in FY11-FY12 (skewing more to FY12).



Howard Penney

Managing Director

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Will the company be able to maintain momentum in the U.S. from February’s strong results?


McDonald’s is expected to report before the market opens tomorrow and, along with its earnings for the first quarter, management will be disclosing details on its March sales trends.  On a year-over-year basis, there should not be any significant calendar impact other than March 2009 having on extra Sunday compared to March 2010.  In Europe, however, results in March 2009 were adversely affected by the shift in Easter-related holidays from March 2008 to April 2009. 


As usual, I would like to provide my view on comparable sales ranges for each of MCD’s geographic segments as indicators of what I would rate as GOOD, NEUTRAL, or BAD results based significantly on 2-year average trends.


U.S (facing a 5.6% compare, including a calendar shift which impacted results by -1.0% to -1.8%, varying by area of the world):


GOOD:  Any result greater than 1.0% would be received as a good result because it would imply that the company was able to maintain its momentum from February when you account for the impact from the 2008 leap year.  For reference, a 1.0% print would result in a slight acceleration in 2-year average trends from last month to about 3.8% when you account for last year’s calendar shift.  MCD’s 2-year average trends typically far-exceeded 3% but during the past six months, trends have been disappointing.


NEUTRAL:  Roughly flat to 1.0% implies 2-year average trends are about even with February, but still remain above prior month trends.


BAD:  A negative result would imply that February’s stronger result was only a 1-month aberration.  A -1% result would point to

two-year average trends that again fell below 3%.



Europe (facing an easy 2.9% compare due to Easter holiday shift, which impacted March ’09 by 2% and a calendar shift which impacted results by -1.0% to -1.8%, varying by area of the world):


GOOD:  Above 6% would signal a return to 6.0%-plus 2-year average trends when you account for both of last year’s calendar impacts, after coming in a little lighter for the last few months. 


NEUTRAL:  +3.5% to +6% would signal that 2-year trends are about even with both February levels and the prior few months.  While this level is neutral with respect to sequential trends, it would indicate continued softness in the Europe business compared to the most part of 2009 when 2-year average trends were consistently in the 6.0% to 8.0% range.


BAD:  Below +3.5% would indicate that trends have sequentially deteriorated further from February levels. 



APMEA (facing a 5.4% compare, including a calendar shift which impacted results by -1.0% to -1.8%, varying by area of the world):


It is important to remember that MCD began its significant promotional activity related to accepting coupons issued by other QSR competitors at its China stores (as we wrote about on 2/26/10) on February 24th.  This promotion was expected to run through March 23rd so it will be interesting to see the impact on March numbers.


GOOD: Better than 7% would signal that 2-year average trends have remained strong for three consecutive months after December’s disappointing 2-year average number.  


NEUTRAL:  Roughly 5% to 7% would indicate that 2 year-trend slowed slightly from the prior two months.  Some deceleration may be expected following February when the company’s results were helped by the celebration of Chinese New Year.


BAD: Below 5% would imply 2-year average trends that have slowed significantly from the prior two months.  Below 1% would point to trends even with the weak results we saw in December.



Howard Penney

Managing Director



Pasteurized Ignorance

“No matter how busy you may think you are, you must find time for reading, or surrender yourself to self-chosen ignorance.”



According to the Pew Research Center’s latest study on “Teens and Mobile Phones”, more than half of teens in America send 50 or more text messages a day (33% send more than 100 messages a day) and almost 75% of 12-17 year olds in America have cell phones. If you didn’t know we live in a crack-berry culture of sound-bites, now you know.


While Americans are definitely finding time to read, the question remains one of focus. What are you reading? When are you reading it? How do neurological factors in your brain affect the emotional side of decision making based on what you just read?


Adults in the investment business do their fair share of headline reading as well. Unfortunately, the pressures that have been institutionalized by short term performance measurements have rendered the historical context behind what we think we are reading into a collective warm boil of Pasteurized Ignorance.


On this day in 1862, French chemist Louis Pasteur created the first successful pasteurization test. Per our friends at Wikipedia, “pasteurization aims to reduce the number of viable pathogens so they are unlikely to cause disease… the process was originally conceived as a way of preventing wine and beer from souring.” This sounds like something that the world’s $80 Trillion derivatives market might need.


Since 2000, when Congress released the derivatives/leverage hounds, financiers have been getting plenty punch drunk on the profits that came along with the ignorance associated with Opacity’s Child (derivatives). All the while, American tax payers have been battle scarred from a decade of booms, busts, and dry heaves.


When I think about Goldman, Lehman, or Bear selling the Street this stuff, I just think of it for what it is. Heck, I’m a “sophisticated investor”, and I should know that derivatives don’t trade over the counter. They do not uphold the principles of transparency that a “free” marketer is sauced up on. And, given that everything else in our society is being posted to Twitter, there is no reason to believe that the rules of a conflicted and compromised derivatives market won’t be changing.


That’s it. That’s my take on Goldman Sachs. I really could care less about incompetent analysts at the SEC voting 3-2 on this being fraud. I really don’t care about Goldman’s EPS report this morning either (they crushed the number, reporting $5.59/share in EPS vs. $4.14 expected… and yes, they made a lot of money in fixed income and derivatives trading). I currently have no position in GS. I’ll short it when I am not being asked to 100x an hour. I’ll short it when it’s up and I see my price.


All I really care about is the history of the derivatives market in America and whether or not this mega-phone sound-bite provides the political capital for re-regulation of Pasteurization’s Ignorance. There is a long history of required reading here. A lot of it started with ex-Goldman Co-Chairman, Robert Rubin, being the Treasury Secretary. In the end, numbing it down to a French dude named Fab’s trade isn’t going to be the real public debate.


So onto the next…


Pasteurizing the Washington/Wall Street concept of risk management is the more important task for today. In less than 48 crack-berry hours, the Manic Media has completely forgot about sovereign debt, inflation and, well, pretty near everything! Because people ignored the microbial growth in their drink prior to 1862, certainly didn’t mean that the worms ceased to exist.


Here’s the grind on what our Hedgeyes are seeing globally this morning:

  1. Despite a recovery day in the USA, Japanese and Chinese stocks didn’t rally last night and are now both broken from an immediate term TRADE perspective
  2. India sees the ‘V’ in Inflation that we talked about on our Q2 Themes call. India went ahead and raised rates for the 2nd time in a month last night.
  3. Thailand has been getting tagged, dropping 10% in a straight line since April 7th on domestic unrest, and finally had a big up move last night, closing +4.6%.
  4. German ZEW (confidence) hit a 6 month high this morning and German stocks continue to outperform the likes of Spain which is trading down again this morning.
  5. UK inflation zoomed higher to +3.4% y/y growth in their CPI report for March. Yes, at Hedgeye we call this Inflation’s V and its born out of countries with fiat currency. 
  6. Greek bond yields are shooting to record wide spreads versus German Bunds (472 bps wide for 10yr paper) after the Germans reminded us they don’t trust the Greeks. 
  7. Brazil’s stock market broke its immediate term TRADE line of support on the Bovespa yesterday (that line = 70,006).
  8. Gold is starting to flag bullish again (bullish TRADE line of support = $1124/oz) in the face of sovereign debt and inflation risks mounting, globally.
  9. The IMF is proposing a new “bank tax” at the G-20 meetings that started last night.

While we can certainly suck Pasteurized Ignorance from the vacuum of headlines about Goldman that are on the tape this morning, that’s not going to do us a whole heck of a lot of good where it matters. Goldman being regulated will matter, but that’s not just something that’s going to affect Goldman.


While he testifies on Capitol Hill today, Tricky Dick Fuld will remind all Americans that we cannot run this country like a Lehman trader would his P&L. Thankfully, those days and ideologies will soon be gone. Or at least I hope they are. Hope, alas, is not an investment process but all that I have left that the 75% of this country’s 12-17 year olds who text one another are going to find a better way.


My immediate term support and resistance lines in the SP500 are now 1177 and 1214, respectively.


Best of luck out there today,



Pasteurized Ignorance - milk



The Macau Metro Monitor, April 20th, 2010



According to Steve Jacobs, Sands China is to go ahead with the sale of apartments in its Four Seasons complex in Cotai.

The company aims to obtain US$1.2-$1.4 billion (MOP9.6-11.2 billion) or more from the sales. ''Rest assured that we are acutely aware of the amount of value that can be unlocked through the sale of those apartments and it is the top of our agenda for 2010....'We believe there is ample interest from high net worth individuals from China, Korea, Vietnam and Japan.'' Jacobs said. 


Meanwhile, Sands China is ''actively engaged'' in looking for expansion opportunities in Asia. ''Japan remains incredibly attractive to us. We believe there'll be a tender sometime in the near future... 'We clearly have [Thailand] on our top-tier opportunities. But it's nothing that would be between now and this time next year.'' Jacobs said. 


On construction at sites 5 and 6 in Cotai, Jacobs revealed that between 2,000 and 4,000 workers recently resumed work.

The Sands China CEO said that the company postponed a contract signing ceremony with a contractor, which was scheduled for March 29, because ''we've got a series of announcements coming up, so it made more sense to bundle them all together.'' Once site 5 and 6 are operating, Jacobs expects Sands’ market share of Macau gaming revenues to increase to 30-35%. In March, the company had a market share of 19%, according to Lusa. Jacobs said the new properties can increase the non-gaming revenues for Sands China to 20-25% in two to three years, versus 12% now.

''As we move to develop sites five and six... it would be in the not-too-distant future that non-gaming would become the majority of our profitability,'' he said.



In 1Q2010, Macau registered a budget surplus of MOP 12.9BN (105% YoY), while direct taxes from gaming rose 60% to MOP14BN and represented 86% of the public finance revenue. The Government’s total revenue rose 54.9% to MOP16.39BN.



Local casinos were a major source of reports of suspected money laundering received by the Financial Intelligence Office (GIF) between years 2007 and 2009, the chairman of the Macau Institute of Financial Services (IFS), Antonio Felix Pontes, announced yesterday. In the past three years, the GIF received a total of 2,719 suspicious transaction reports, of which 58.3% (1,584) were from casinos and 40.6% came from the banks (1,101).

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