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May 11, 2010


This weekend, Hedgeye’s Zach Brown captained the team that brought one of sailing’s most prestigious trophies back to US soil. Those who bet on Europe bet wrong. There’s a good metaphor for companies heavily exposed to Europe.

The Wilson Trophy might not be well known to those that don’t have a passion for the sea. But make no mistake – it’s one of the most prestigious events in sailing.  Here’s a snippet on the event from the host club in England.

“200 Olympic-class sailors compete annually on West Kirby’s marine amphitheatre in one of the World’s favourite events for three days in May. Five thousand spectators and thousands on the web follow 300 short, sharp frenzied races in three-boat teams jostling on an area the size of a football field to earn the coveted title: "Wilson Trophy Champion." Frantic and frenetic, the sailors spin breath-taking skills caressing their boats through a needle's eye within a hair’s breadth of touching at grand-prix speeds. All powered by nature’s winds and the will-to-win.”

It’s always nice to host such an event and have your home team take the trophy. Next year, England’s West Kirby Sailing Club might not want to invite Team Extreme – the US team captained by Hedgeye’s own Zach Brown, who crushed the competition this past weekend and took the Trophy to US soil.

Did the West Kirby Hawks slow down this year? No. They did pretty well, but simply could not keep up with Team Extreme. But European assets not on the water are clearly slowing.

Humor me for a minute, and let’s use this as a metaphor for the Euro/Dollar. We highlighted on April 30 “The Real Question To Be Asking About Europe.”

Specifically…people continue to ask me about Europe, and whether we are ‘hearing about’ weakness given the volatility in financial markets. While I have not ‘heard’ of things slowing down en masse, I think that by the time any of us ‘hear’ about any broad-based weakness, it’s probably too late. Let’s accept the premise that things will slow – and anyone who is exposed to Europe that does not at least prepare for this coming down the pike from a risk management standpoint opens themselves up to a very big day of reckoning. In other words, the questions that we should be asking managements are “what are you doing, and have you done, to prepare for a potential slowdown” instead of “have you started to see any weakness.”

The chart below shows exposure to Europe for major consumer brands in retail alongside the yy changes in FX.

Can I say which domino will fall first? Not yet, but stay tuned. In the interim, while the herd mentality on the sell-side waits to get run over by this like Team Extreme pummeling the West Kirby Hawks, I can’t imagine that the market is going to be too generous with multiple expansion as positive earnings revisions slow, and potentially go negative.

R3: The Will to Win - Euro FX chart


- Coincidence or not, Express is preparing to celebrate both its upcoming IPO and the brand’s 30 year birthday. To celebrate, Vogue is hosting the brand along with a handful of celebrities and models at a fashion show late next week. Up and coming British singer VV Brown is also rumored to be playing the event. All this hoopla makes us wonder who’s picking up the tab for the festivities or is this just a case of setting up easy compares for next year?


- According to an AdweekMedia/Harris Poll conducted last month, 74% of respondents said when a celebrity endorser gets involved in a scandal, it has no impact on their view of the brand he/she endorses. Sounds like Tiger Woods and Ben Roethlisberger will be citing this poll when they look re-build their stable of endorsement deals.


- Keep an eye on Sears Holding’s real estate efforts. A recent update to the company’s corporate real estate homepage suggests the company is more than flexible in trying to take advantage of its vast (and aging) properties. While specifics are not listed by exact location, it appears Sears is willing to parcel up its stores for shop in shops, kiosks, licensed shops, special marketing events, and pretty much anything else one could think of. So much for selling whole properties…


R3: The Will to Win - Calendar


East Beats West in Manufacturing Costs - The East versus West debate for apparel sourcing comes down firmly on the side of Asia, but the Western Hemisphere has settled into its role as the go-to source for close-to-home replenishment. Speakers at the American Apparel & Footwear Association’s “Sourcing, Customs & Logistics Integration Conference” here last week said many of their sourcing strategies will remain the same in seasons ahead, but there are some tweaks being driven by a host of global factors, including rising costs, transportation challenges and increased competition from consumer markets outside the U.S. Apparel industry costs are increasing, said Rick Darling, president of Li & Fung USA, who sees an end to the deflation of apparel prices that resulted from the rise of China as a sourcing powerhouse. China, Vietnam, Indonesia and Bangladesh are the countries likely to dominate sourcing over the next five years, the executives said, but China is sure to retain its top spot. A lot of production in China will continue to shift away from traditional centers in the Pearl River Valley toward the interior of the country. <wwd.com/business-news>

Congressional Paralysis Causes Companies to Absorb 4+ Months of Increased Product Costs - Congressional paralysis on key duty suspension legislation has forced U.S. footwear, textile and apparel companies to change their business plans and absorb more than four months of increases in production costs, with no immediate relief in sight. Congress let legislation expire at the end of the year that suspended duties on millions of dollars worth of certain imported components used to make footwear, apparel and yarns and fabrics. As a result, footwear brands and retailers, yarn spinners and fabric firms have had to pay more than tens of thousands of dollars in duties since Jan. 1, which has forced many companies to either find alternative components and redevelop entire production lines or absorb the costs and raise prices. With duties spiking by as much as 37.5% on hiking boots, many footwear companies are redesigning boots to move them into lower tariff categories, said Nate Herman, VP of international trade for the American Apparel & Footwear Association, whose footwear members include New Balance, Skechers USA, Inc., SG Footwear Inc. and Jones Apparel Group Inc., which has several brands including Nine West. Herman said approximately 15 to 20 footwear companies have been impacted in their hiking boots styles and many are redesigning hiking boots from textile uppers to leather uppers to get lower duty rates. <wwd.com/footwear-news>

Hat World Acquires a Custom Screen Printer and Embroidery Operator - Hat World Inc. has acquired Brand Athletics Inc., a team apparel and equipment dealer, custom screen printer and embroidery operator. Terms of the deal were not disclosed. <internetretailer.com>

Stride Rite Appoints Feiner Senior VP - The Stride Rite Children's Group, a division of the Collective Brands Performance + Lifestyle Group, announced that Matt Feiner has been appointed senior vice president, wholesale, reporting to Sharon John, president of the Stride Rite Children's Group. <sportsonesource.com>

Bulgari Sees Gains, Narrows Profit Loss - Gains across most product categories and geographic markets, with the exception of Japan, helped Bulgari SpA narrow its loss in the first quarter. Revenues in the quarter rose 11.8% (12.6% cc). Francesco Trapani underscored a positive contribution from directly owned stores and at wholesale, “which showed a general recovery after massive destocking over the last year.” Trapani also pointed to “encouraging signs” at Baselworld, where orders for Bulgari watches and jewelry rose by 60% over last year. “We were also very satisfied with the performance of accessories, especially handbags, which confirms the success of initiatives to boost image, creativity and investments,” said Trapani. <wwd.com/business-news>

Armani Expanding Travel Retail Business - Giorgio Armani SpA is expanding its travel retail business through the opening of six Emporio Armani stores and five Armani Jeans shop-in-shops in the first half of the year. Following the unveiling this spring of the first Emporio Armani stores at the Sydney and Shanghai Hongqiao airports — and the second venue at Milan’s Malpensa Airport — by July the company plans to open units at Macau’s City of Dreams resort and casino and at the Miami and Nice airports.  <wwd.com/retail-news>

Ash Cloud May Cost Travel Industry $1.5 Billion, TUI Chief Peter Long Says - The volcanic ash cloud that shut down U.K. airspace for six days last month may have cost the travel industry more than 1 billion pounds ($1.5 billion), according to Peter Long , the head of tour operator TUI Travel Plc .  <bloomberg.com/news>

Amazon.com Plans to Hire Hundreds for its New Fulfillment Center - Amazon.com Inc. plans to hire several hundred full-time workers for its fulfillment center in Breinigsville, PA., scheduled to open in summer.  <internetretailer.com>