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R3: Sell It While You Can!


May 3, 2010





M&A and capital markets activity continues to pick up on the margin in retail. Whether it’s JNY rumored to be buying Stuart Weitzman (not surprisingly, at the exact time it needs to start printing real top line growth numbers) PVH completing its deal for Tommy, or Express coming public (why???), the activity is definitely there. In fact, Gordmans Stores, a 67-door off-pricer owned by Sun Capital Partners Inc., just laid out plans to raise as much as $75 mm in an IPO. I bet you were waiting all year hoping to get your hands on this one!!! (yes, that’s me being facetious).


I think one of the more notable items is that Sports Authority just bought Tommy Armour Golf from Hilco Consumer Capital. In the acquisition, the sporting goods retailer has been granted all Tommy Armour and Ram marks, as well as Zebra, 845, Silver Scot and TearDrop. Of note is that since September 2007, The Sports Authority sold Tommy Armour-branded products at more than 450 of its U.S. locations under a license agreement with HCC.  Now TSA can own what it already had premier access to in the first place. 


I’m not trying to bash this for the sake of being negative, but there are two primary points.

1)      All these squirrely little companies that were taken out by levered loans in the 2003-2007 time frame are finally coming out to party. Whether they SHOULD be public or acquired by larger companies is a different story. The fact that they COULD is causing the behavior.

2)      We’ve been saying it for three months, but get ready for TSA to come public. It’s going to pull a ‘Dollar General.’  They’re going to take a zero growth low-return concept, accelerate square footage by 8%, comp for the first time in years due to cyclical forces (Athletic is just starting on a multi-year burst of growth), and raise capital when the P&L and balance sheet are optically aligned to stand out in an otherwise challenging tape. I’m not saying this will be a bad deal, bc I do not know the price. But I can say that it will require the mother of all historical analytical context before drinking the cool aid.    





- After announcing in February that VFC was going to spend an incremental $50 million on marketing this year, management is increasing the budget again. Given strength in the overall topline and specifically in The North Face, Vans, and international, the company is allocating an additional $35 million towards marketing these three key areas over the next 3 quarters. Television advertising will be a key component of the stepped up spend, with emphasis placed on The North Face’s first TV campaign. Test spots are currently running in Boston with a broader launch expected in October.


- In the wake of the wake of the Peanuts acquisition by Iconix, it’s interesting and perhaps surprising to see that Charles Shulz never owned the brand. Scripps retained the ownership as a result of Shulz creating the characters/brand while working for the company. However, due to revenue sharing agreements it is estimated that Shulz himself earned over $1 billion dollars from his Peanuts characters. Shulz was paid $90 for his first month of work on the comic strip- a daily occurrence that he went on to author 17,897 times.


- Growth in viewership of online video continues, with 180 million U.S internet users watching 31.2 billion videos in March 2010. This compares favorably to the 28.1 billion viewed in February. Approximately 85% of all internet users in the U.S watches video online. Not surprisingly, YouTube has a tremendous lead on its competition in terms of market share, with 41.8% of all videos served from Google sites. Hulu comes in at a distant second with just 3.4% share.





 R3: Sell It While You Can! - Calendar





China Tops Value-Added Manufacturing - The International Yearbook of Industrial Statistics 2010, a study conducted by the UN Industrial Development Organization, showed China’s global share of value-added manufacturing - in both textiles and apparel - has soared in the last decade. In textiles, China increased its global share of value-added textile manufacturing in 2008 to 43.2%, up from 16.8% in 2000. Developed countries posted sharp declines: US saw its share slide in 2008 to 6.5% (down from 12.2% in 2000) and Italy posted a decline to 4.8% in 2008 from 9% in 2000. Some emerging economies, such as Brazil, Indonesia, Mexico, and Turkey, also experienced a loss in global share while India and Bangladesh posted gains, the study reveals. China has also managed to make similar inroads in its global share of value-added manufacturing (VAM) for apparel. In 2008 its market share reached 38.7%, leading the segment from a 11.2% share in 2000. Other gainers were Thailand, Vietnam, and Bangladesh. <fashionnetasia.com>


Real Estate Sees Flickers of Hope - Vacancy rates are down in several cities and fewer retailers are asking landlords for rent reductions. According to real estate research firm Reis Inc., the U.S. retail vacancy rate in the first quarter was 10.8%, up 20 bps from the prior period and 130 bps from a year ago. The vacancy rate at regional and super-regional malls rose 10 bps from Q4  to 8.9% in Q1, marking the sixth consecutive three-month period in which the mall vacancy rate hit a record high since Reis began tracking mall data in 2000. Asking rents at malls also have slid for six straight quarters. <wwd.com/business-news>


Luxottica Group SpA Kicks Off Year with Higher Profits - Leveraging growth in the U.S. and in emerging markets, the Italian eyewear company in the first quarter ended March 31 posted a 20.8% rise in net profits while sales gained 6%. Luxottica, which produces eyewear for brands such as Bulgari, Burberry, Chanel, Dolce & Gabbana, Donna Karan, Polo Ralph Lauren, Prada, Salvatore Ferragamo, Tiffany and Versace, said its success was attributable to its integrated business model and “four key pillars”: its own Oakley brand (20% sales growth); both the U.S. and emerging markets, and its efficiency. Sales in the U.S. advanced 6.1%, thanks to the performance of retail chains LensCrafters and Sunglass Hut, where comps rose by 6.6% and 10.8%, respectively. Sales in emerging markets climbed more than 30%. <wwd.com/business-news>


Swatch Partner Says Sales May Grow 30% this Year on China Demand - Hengdeli Holdings Ltd., the retail partner of Swatch Group AG in China, said 2010 sales growth may be the fastest in three years as it expands market share and Chinese consumers splash out on luxury watches and jewelry.  <bloomberg.com/news/retail>


Johnson's Positive Outdoor Results Have Good Implications for DKS - Johnson Outdoors Inc.'s sales rose nearly 6% in the second quarter ended April 2, 2010, reflecting shipments for the peak retail selling season for kayaks, canoes, tents, fish finders and other outdoor gear.  <sportsonesource.com>


New Orders for Furniture Keep Rising - New retailer orders for residential furniture rose 13% in February 2010 compared with the same month last year, according to the latest Furniture Insights survey of residential furniture manufacturers and distributors from the High Point accounting and consulting firm Smith Leonard.  <hfbusiness.com/news>

Triple Crown Worth Half As Much - Two years ago, when Big Brown went into the Belmont with a chance to win the first Triple Crown in 30 years, his owners said a win would make him a $100 million horse, thanks to huge stud fees they'd be guaranteed. As discretionary income has diminished the horse racing industry has gotten clobbered. Sales are still down 40% to 50% and the stallion market, which ultimately drives the value of a Triple Crown horse, has been badly affected. So much so that that that 50% haircut would apply to the winner of a Triple Crown should it happen this year.  <cnbc.com>



We have preliminary numbers that show April was up 70%+. WYNN (Encore helped) and LVS looked to have gained share sequentially at the expense of SJM and MGM.



We’ve got preliminary market revenues and market shares for the month of April in Macau.  We don’t yet have the Rolling Chip and Mass and VIP revenue breakdown but should have that shortly.


Our numbers show that total Macau table revenues were almost HK$13.3 billion.  Adding in HK$650-700 million of projected slot revenue gets us close to HK$14 billion, up over 70% year-over-year.  Seems like the MPEL guys were right.


Turning to market share, it was a big month for LVS and WYNN.  WYNN benefitted from 7 days of Encore.  MGM was a disaster, posting its lowest market share since February of 2009.  Of course, we don’t know who held well and who didn’t but we should soon.  Here is the breakdown:




Restaurant stocks showed considerable weakness to close out last week.


The important divergence between Quick Service and Full Service stocks during Friday’s trading was in the volume.  While both groups traded down on the day, volume was lacking in QSR’s decline while casual dining stocks declined an average of -3.3% on strong volume. 


We are headed into another important week for earnings with DIN, TXRH, PEET, DPZ, CPKI, MRT, MSSR and CEC all reporting.  The coffee names all declined sharply on Friday with GMCR and PEET suffering two of the biggest declines among QSR on high volume.  Coffee prices also showed strength, coincidentally or not, during Friday’s trading.


Last week, DRI’s presentation at the Barclay’s conference indicated that trends in April are slowing.  As a result, I suspect as earnings are released this week the Q1 numbers will look strong but inflation is looming and slowing sales trends are not positively correlated to higher stock prices. 


TALES OF THE TAPE    - stocks 430


TALES OF THE TAPE    - com430


Howard Penney

Managing Director

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The Macau Metro Monitor, May 3rd, 2010


Curbs on mainlanders visiting Macau remain tight as Beijing continues to crack down on money laundering and gambling by officials misusing public funds. Singapore may be a more accessible destination as gamblers have described the approval process to visit Singapore as quick and smooth.


A Shenzhen public security official in charge of reviewing applications for overseas travel said there were no restrictions on residents visiting Singapore, although civil servants had to get their supervisors' approval. A limit of one Macau visit every two months was still in place for Guangdong residents who were not civil servants, Zhang Yao, a Guangzhou-based manager for China Travel Service said. Approval of applications by mainlanders qualified to visit Macau normally took two or three weeks.


Melco is meeting investors May 3-10 ahead of a planned sale of up to $600 million in global bonds, a person familiar with the deal said Monday. The company begins the roadshow in Singapore Monday and will continue meeting investors in Hong Kong and London on Tuesday, New York on Wednesday and Thursday and Boston on Friday, the person said. It will wrap up the meetings in the U.S. West Coast next week. The bond will have an 8 year term with a call option that can be exercised after 4 years, through its wholly-owned subsidiary MCE Finance Limited. Melco will use the net proceeds from the proposed offering to reduce CoD debt, it said in a statement.


Bank of America Merrill Lynch, Deutsche Bank and The Royal Bank of Scotland are in charge of the transaction, the person familiar with the deal said.



The Labour Day rally on Saturday injured 41 people, including 32 policemen and two journalists, when protesters tried to force their way through security barricades preventing their access to the Almeida Ribeiro avenue, the main city thoroughfare downtown, a government statement said.

Local radio and media reports estimated that 1,000-1,500 people joined the march to demand job protection for local workers, more social housing, tough action against illegal workers and more action against corruption.


The S&P 500 finished lower on Friday after trending down throughout the session and closing on the lows of the day. Despite ending on a challenging note, all major indices were up for the month. On Friday, Gold, Volatility and Utilities (XLU) were up on the day; the XLU was the only sector up on the day.


Last week, large caps outperformed small caps as the Russell 2000 declined 3.41% on the week. On Friday, the VIX was up 19.6%, rounding off a +32% move on the week; the strongest move in volatility since the week of January 22nd. The Hedgeye Risk Management models have levels for the VIX at: buy TRADE (19.44) and sell TRADE (23.39).


On the MACRO front, real GDP increased 3.2% annualized in the first quarter; slightly below consensus of+3.3% and versus prior +5.6%. Personal consumption expenditures (PCE) were +3.6%; higher than consensus +3.3% and prior +1.6%. PCE accounted for 2.5% of the reported gain and business investment accounted for 1.6%, of which 1.5% was due to a continuing relative buildup in inventories. The big concern with the Q1 GDP report is the sustainability of trends in PCE.


Sustainable growth in PCE requires continued growth in disposable income. Without growth in income consumption can only be borrowed from the future quarters through additional debt and/or spending of savings. In the current environment, neither of those sources is real or sustainable. In 1Q, the quarter-to-quarter trend in real disposable income was contracting. (It should be noted that March income numbers are to be released today.) Real consumer credit, which has been reported only for January and February, was also contracting in the first-quarter versus the fourth-quarter.  In total, these trends show no basis for sustainable growth in PCE.


Also on Friday, April University of Michigan Confidence of 72.2 was better than consensus 71.0, but below March 73.6; preliminary reading was 69.5. Lastly, April Chicago PMI was 63.8; above consensus 60.0 and prior 58.8. Friday’s University of Michigan print is in line with the long term pattern of lower highs in consumer confidence that Keith discussed in our 03/26/10 note titled, “CONFIDENCE: IS IT REALLY A NEW SEASON IN AMERICA?” The storytelling that is so pervasive on Wall Street and in Washington is not being bought on Main Street.


On Friday GS was down 9.4% on a WSJ article concerning a possible federal criminal investigation; helping to make the Financials (XLF) the worst performing sector on the day and for the week. Other notable stocks MS and JPM declined 3.5% and 3.2%, respectively. Mortgage insurance companies also notably declined on the day.


With the Semi’s down (SOX -4.54%) on Friday, Technology (XLK) was also one of the biggest declining sectors on the day; last week the XLK lost 2.9%.


On the commodity front, crude remains in a BULLISH formation and was up 1.1% on Friday and 1.2% for the week (a three week high). The Hedgeye Risk Management models have the following levels for OIL – Buy TRADE (84.31) and Sell TRADE (86.31). In early trading, crude is slightly higher despite concerns that China’s third increase of bank reserve ratios will slow demand.


Last week, copper declined to a seven-week low on a decline in the China market and today’s news that the government ordered banks to increase its reserve ratios. The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy TRADE (3.29) and Sell TRADE (3.36).


Gold is in a bullish formation and is trading near a five-month high as the as the dollar is also higher on concerns the rescue package for Greece won’t be the last of the region’s debt crisis. The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1,157) and Sell TRADE (1,182).


In early trading, equity futures are trading above fair value despite weak Asian and European markets and ahead of economic data. As we look at today’s set up, the range for the S&P 500 is 12 points or 0.6% (1,179) downside and 0.4% (1,191) upside.


Today’s MACRO events: 

  • March Personal Income
  • March Personal Spending
  • March PCE Core
  • April ISM Manufacturing
  • April ISM Prices Paid
  • March Construction Spending
  • Domestic Vehicle Sales

Howard Penney

Managing Director













Crackberry Minutes

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.”

-Warren Buffett


Whether it’s Greece, Goldman, or British Petroleum this morning, it’s all one and the same thing. I agree with Mr. Buffett - reputational risk remains something you cannot control in a Crackberry Minute.


Despite one of the largest proposed government bailouts in world history, stocks from Athens to Hong Kong continued to sell off early this morning. Contrary to popular political beliefs, the people of this world apparently aren’t as stupid as the politicians would like to think. Thankfully, You Tube and Google are democratizing and expediting the discovery process. In the end, this will make our world a better place.


In between now and then, a lot is going to happen. While it may not be clear yet how this will end for GS and BP, for Greece it will end in default. There is no calculation that reveals a reasonable probability that after saddling themselves with another 110 Billion Euros of debt, the Greeks can grow GDP at the same time as they promise to cut the deficit. It’s not hard to figure this out and, as usual, Mr. Macro Market already has. It’s just math.


Understanding that most politicians don’t do math is important. Just see these Crackberry Debt Addicts for who they are as they chase one another for short term resolve to long term issues. Instead of Paulson, this time it’s Papandreou. The names have changed but this blue magic is exactly what Hank Paulson and his banking cronies tried to sell you in May of 2008. Borrowing short to fund long term liabilities eventually ends in tears (or in Paulson’s case, puking in the West Wing).


Puking isn’t cool, but it happens. That’s what you saw Friday with the conflicted and compromised sponsors of Goldman’s stock. Sadly, after writing my senior thesis on the credibility of his investment process here in New Haven many moons ago, I need to You Tube Mr. Buffett on that analytical score this morning.


Now before you read this Buffett statement about Goldman, please take a third of a Crackberry Minute and re-read the aforementioned Buffett quote on reputation.


“If you think about that, you’ll do things differently”…


Now here is the You Tube of Buffett from Berkshire’s annual meeting over the weekend: “There is no question that the press of the past few weeks hurt the company… the allegation of something didn’t fall in the category of losing reputation.”


Alrighty then…


Understanding that Buffett has $68B in derivatives exposure (yes, some of it is opaque) and a $5B preferred stake in Goldman that pays him as long as GS has capital, what did all of these reporters expect the man to say about Goldman? Before you take his or anyone’s advice on anything investment related in this world, please ask them how they get paid.


According to Buffett himself, “every day that Goldman doesn’t call our preferred is money in the bank… that’s $15 a tick. Tick, tick, tick. I don’t want those ticks to go away.” Cherry cokes, some DQ, and counting your government sponsored preferreds by Crackberry Minutes? Lovely…


For Americans to watch one of our most trusted investors tell us to trust him on this is just plain sad. I never thought I’d say this, but I have to this morning. Shame on you Mr. Buffett. Shame on you. We are looking for the Good Guys in this marketplace to lock arms with us, be accountable, and lead; not push their own book.


I had more replies to my Friday morning Good Guys note than I have in 2.5 years of writing my morning missives. For any reply, my Hedgeyes and I are always grateful. Each and every one of them provides us an opportunity to learn and evolve. Friday’s replies weren’t about tactical decision making however. They were unanimously from the heart. People want legitimate leadership they can trust, not lip service to the word capitalism.


And with that, a devastating oil slick, and the mother of all Keynesian European bailouts we shall carry on this morning. Feet on the floor, understanding that we can build a firm like this for the next 20 years and I will always be Crackberry Minutes away from letting the power of money ruin our reputation.


After shorting it on 4/29/10 at 10:19AM ($120.28 SPY), we remain short the SP500 in the Hedgeye Virtual Portfolio. At 10:26AM on Friday we re-shorted the Euro on strength. My immediate term support and resistance levels for the SP500 and Euro are 1179-1191 and 1.31-1.34, respectively.


Real-time, all the time. Transparency with no banking or brokerage fee slapped on it is our small contribution to being the change we want to see in this profession.


Our Sector Head for Financials, Josh Steiner, and I will be holding a conference call in our lunchroom today titled, “Underappreciated Legislative Risk for Financials.” Please email if are interested in participating in an open Q&A.


Best of luck out there today,



Crackberry Minutes - buff


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