Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble... to give way to hope, fear and greed.

- Benjamin Graham


The issues that surround one of our three key themes for 2Q10 (Sovereign Debt Dichotomy) are not going away despite a $1 trillion bail out of the PIIGS in the EU. Although our conclusion has been that it will bring May showers (another 2Q10 theme), the prevailing market structure is bullish and is begging us to speculate once again.


Yesterday, US equities finished higher, the move was muted with volume down 13% day-over-day and down sequentially for the past four days. The S&P 500 rose 1.37% yesterday, while the Russell 2000 rose 2.97%. Globally, equity markets continue to be focused on macro developments in the EU, particularly as additional austerity measures adopted by Spain helped to dampen some of the moral hazard concerns that had have dominated the market since the beginning of May. This too shall pass, as Spain’s underlying fundamentals suggest an even rockier road ahead (email if you’d like to take part in our Monthly Strategy Call on May 18th: Sovereign Debt: Bearish Enough on Spain?). While these austerity measures are needed, the monstrous amounts of debt being taken on by European governments continues to debase the Euro.


At the time of writing, equity futures are trading below fair value, giving back some of yesterday’s gains. In Europe, Greece, Spain, France and Italy (all problem deficit countries) all trading lower again this morning. Since the market close yesterday, CSCO reported numbers above estimates (but trading lower) and the SAP bid for Sybase (SY) is now official. As we look at today’s set up, the range for the S&P 500 is 42 points or 2.4% (1,144) downside and 1.2% (1,186) upside.


On the MACRO calendar we have:

  • April Import Price Index,
  • Initial jobless claims
  • Treasury Auctions in 30-yr bonds 

The reduced level of moral hazard concern can also be seen in the VIX, which was down 9% yesterday and has declined sequentially for the past three days. It should be noted that the VIX is still up 63% over the past month. The Hedgeye Risk Management models have levels for the VIX at: buy Trade (20.41) and sell Trade (39.39).


The Dollar bullish TREND remains (up 0.43% yesterday) and is trading higher today. The Hedgeye Risk Management models have levels for the DXY at: buy Trade (83.85) and sell Trade (84.99). In contrast, the Euros bearish TREND remains as the Hedgeye Risk Management model registers its lowest low of immediate term support YTD at 1.24. The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.24) and Sell Trade (1.28).


The XLK was the best performing sector yesterday after selling off on Tuesday. M&A and the credit-card names were among the standouts in the sector. SY was up 35.1% on reports that the company will be acquired by SAP. IBM (up 4.6%) was one the best performers in the hardware space after the company said it expects to double its earnings to at least $20 a share by 2015. The SOX also rallied 2.8% yesterday.


The Industrials (XLI) and Materials (XLB) outperformed the broader market today. Both sectors have been significantly impacted the macro influences that have been driving the market over the last couple of weeks. The Machinery group and Transports were big gainers yesterday with the S&P Machinery Index +3% and the Transports up 2.1%.


The low beta Utilities (XLU), Healthcare (XLV) and Consumer Staples (XLP) were the bottom three performing sectors yesterday.


In early trading, Copper rose for the first time in three days in London as concerns about European budget deficits eased as Spain announced its biggest round of budget cuts in 30 years. The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.07) and Sell Trade (3.21).


Oil is looking lower for a third straight day as U.S. crude inventories grew and the dollar is stronger. The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (74.99) and Sell Trade (80.34).


Gold’s safe-haven status continues with Gold up 1.8% yesterday and is now up 12.4% YTD. The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,199) and Sell Trade (1,246).


Howard Penney

Managing Director













Brazilian Shopping Spree

Conclusion: While we do question the sustainability of peak sales growth, we’d be remiss not to call out Brazil’s ability to manufacture domestic demand in lieu of Chinese’s tightening. Moreover, domestic demand in Brazil will continue to influence the Bovespa apart from the Chinese demand story. This is in contrast to Europe, which is struggling with internal demand.


Brazilian retail sales grew at the fastest pace since 2001, as surging consumer demand augments an economic recovery that has largely been linked to China. We’ve been vocal in recent weeks saying that the outlook for the Brazilian economy is leveraged to Chinese demand and to the extent we see further tightening by their government. Although lagging, today’s Brazilian retail sales release moonshot sent the Bovespa up 1.2% in on the day and tells a tale of domestic strength - at least for now.


Brazilian retail sales sequentially accelerated to +15.7% y/y in March, up from a revised +12.2% y/y in February. The +15.7 % yearly increase is the most since at least 2001, according to the IBGE. Even more impressive, the jump was recorded in the same month real wages declined -3.01% y/y (March inflation more than doubled nominal wage growth at +5.16% y/y vs. +2.15% y/y), suggesting that March’s shopping spree was likely the result of a sequential improvement in the real wage growth rate. A pickup in consumer credit may have also occurred, as Cia Brasileira de Distribuicao Grupo Pao de Acucar, Brazil’s largest retailer, reported a 33 percent jump in quarterly profit citing a measured increase in consumer demand for electronics as the nation’s citizens prep for the World Cup.


While we do question the sustainability of peak sales growth, we’d be remiss not to call Brazil’s ability to manufacture domestic demand in lieu of Chinese’s tightening. Furthermore, with food inflation being the largest driver of price increases for the month of April, we may see consumer demand stay for a little while as this year’s forecasted record harvests will exert downward pressure on food prices.


Darius Dale



Brazilian Shopping Spree - Brazil Retail Sales


Wynn's revenue share in Macau share looks good on a preliminary basis.



Our Macau sources are telling us that Wynn’s market share of gross gaming revenues month-to-date has jumped to 18% due to strong VIP turnover and decent hold.  Obviously, Encore is fueling the increase but, if our sources are correct, Wynn would be adding more share than supply which would be a positive.  One source even suggested that Wynn overtook LVS in market share, although it could be due to just low hold. 


As we wrote about yesterday in “MPEL: TOO BIG OF A MOVE DOWN”, we think Macau is having a very good May, driven by very strong VIP volumes.  Our best guess is that May revenues should increase +60% y-o-y.  Wynn has materially higher market share in VIP and to get to 18% total GGR share, they would need to capture over 20% of VIP revenue – which is a nice jump over April and 1Q2010.  In April, VIP revenues grew 89% y-o-y to almost $1.27BN, and if May comes in at similar or slightly higher levels and if Wynn’s Mass share creeps up a few bps to 10%, that would imply a whopping $274MM of gross table revenue for Wynn.  We’ve also heard that all of the Encore tables are direct play tables which means lower blended commissions and higher margins.


To put things in context:

  • Wynn added 37 VIP tables and 24 Premium Mass tables, representing a 2.3% and a 70bps addition to the market as a whole, respectively. 
  • Wynn’s market share in April:
    • 14% ($239MM) of total table revenues
    • 16% share of VIP revenues
    • 14.4% share of Junket RC
  • Wynn’s market share in 1Q2010:
    • 13.5% ($663MM) of total table revenues
    • 15% share of VIP revenues
    • 16% share of Junket RC

TSA: File the Dang IPO Already!

TSA: File the Dang IPO Already!


Yet another announcement from TSA lighting the path to an IPO later this year. It’s all good for the industry for now. We’ll see competitive tension, no doubt. But without it we’re left with atrophy, which has hurt for the past 3 years. The cycle is turning positive.


It’s like torture waiting for The Sports Authority to come back to market. We’ve been watching and waiting since we made our view clear in January. Since then, the company has announced an acceleration in square footage growth from 0% to a high-single digit rate.   And then this morning it announced a new concept called S.A. Elite. I’m going to realistically assume that this new concept was embedded in the company’s prior growth acceleration plans. But the noise is getting louder.


Comps are looking better, capacity has been pulled out of the industry, the athletic cycle is just starting to turn up due to elevated levels of R&D out of the vendors, and this happens to be a window where private equity firms can jettison levered businesses they’ve been sitting on through the recession and credit crunch.


This will be Dollar General all over again. Also watch Toys R Us, PetCo…You get the drift.


The S.A. Elite idea is actually pretty interesting. The boxes are about 80% smaller than existing TSA box, and will be geared toward very high-end product from only the top brands. TSA is highlighting how ‘brand presentation’ will be key, and it is investing in things like lighting, high-end fixtures, and just about anything else needed to get brand CEOs’ juices flowing. The first one opens in August in Denver, with opportunity for ‘200-300 over 5-10 years.’


One point I don’t get is that it’s pretty clear based on what we see out of this space is that you need to be super-aligned with how the brands want to approach the market – otherwise you’re hanging on by a thread. We’re seeing Foot Locker close and consolidate its base of stores, and open up more category-specific (i.e. run, hoops) and brand-specific (Nike) stores. TSA is going out there with more multi-brand stores. It seems to me that the path to success here will be to make the experience heads and tails above everything else out there, which will be costly with an unproven return on capital. I wonder if Leonard Green is going to fund this, or if they’ll ask you to do so when it’s a stand-alone company?


The most commonly asked question of me is whether this is good or bad for the industry. The bottom line is that if the growth is going to come from a high-end concept where the formula works for both the retailer and the brands, then it is quite healthy. Tension in this business is good. It keeps people on their toes, and it keeps R&D checks flowing. Inactivity is bad. Complacency = no spending = weak product cycle. So longer term, I’m torn on this specific transaction without knowing more facts.


But near-term, it’s a positive. More hype, more press, better product flow, better comps, etc…will keep a halo around the athletic space well after the rest of retail enters its ‘show me’ stage of earnings growth (which it is just kicking off now).


- Brian McGough

Watching the IRS

Conclusion: Keep your Hedgeyes on the IRS and how 2011's tax rate increases will affect the economy at large. Expect more attention to be paid to this as we progress through the year, and for it to be priced into the markets as early as this summer. 


With sovereign debt concerns, the EU bailout package, accelerating inflation, and fat fingers garnering so much investor attention globally, we thought  we'd give you a quick global macro break and focus you on a domestic issue that will become increasingly important as 2010 progresses - 2011 tax hikes.


Since I collected my first paycheck some 8-9 years ago, I've been duly focused on taxes - i.e. how much of the money I made I wasn't actually going to be able to spend. After all these years (joke), the only thing I've come to learn about taxes is they don't get less annoying with time. And in 2011, I expect to become even more annoyed (along with a lot of other taxpayers).


Changes to be enacted in 2011: 

  • Income tax brackets are scheduled to change for 2011, with the highest rate increasing from the current 35% to 39.6%. Each of the lower brackets will also be increasing. It has yet to be determined where the income threshold will be for each bracket, but taxpayers can rest assured that their federal tax burden will be increasing for 2011; 
  • Capital gains tax rates are also scheduled to change. The top rate for long-term capital gains is expected to rise from 15% to 20%; and 
  • The preferential qualified dividends tax rate of 15% is scheduled to expire, so all dividends will be taxed at ordinary income tax rates. 

Obviously, this will be a headwind for the American consumer and will have negative implications for discretionary spending in 2011 (we may see a marginal pull-forward in spending on larger-ticket purchases this year as consumption is all but sure to decline next year). Less obvious, however, are the implications the tax rate hikes will have on the certain markets and M&A activity.


Under the new tax structure, we could see investment money flow towards capital gains away from equity income - especially those monies that will be taxed at or near the highest rate (39.6%). With so many retirees dependent on dividend funds, however, Congress may be inclined to level the playing field by either raising capital gains taxes or lowering the tax rate on dividends. Time will tell on that matter.


The far right column of table below shows the Y/Y percentage change in the after-tax income from a variety of investment sources. We have used the top tax bracket as a proxy for wealthy investors, simply because the flow of their monies will have greater impact on the overall investment community.


 Watching the IRS - Taxes


It is important to also note that municipal bonds and municipal bond funds will become more attractive on the margin vs. taxable bonds and taxable bond funds. While we believe the state budget and U.S. sovereign debt issues will have a greater impact on municipal bonds inflows, we'd be remiss not to call out this additional tailwind for the investment vehicle.


Regarding M&A activity – which should pick up with capital gains taxes headed higher – private businesses will be looking to sell prior to the tax rate hikes, and, as the year progresses, those looking to acquire with cash will have a more favorable environment. Sellers will certainly feel the pressure to unload by year's end rather than face a 33.33% higher effective tax rate in 2011. Aware of this selling pressure, buyers equipped with cash will be hunting for discounts late in the year. As an aside, buyers looking to acquire with deferred payments may be subject to a premium to offset the seller's increased 2011 tax burden.


In short, keep your Hedgeyes on the IRS and how 2011's tax rate increases will affect the economy at large. Expect more attention to be paid to this as we progress through the year and for it to be priced into the markets as early as this summer.


Darius Dale


R3: Easing Into Earnings With Macy’s


May 12, 2010





Macy’s reported 1Q earnings this morning of $0.05, a penny ahead of recently revised guidance and in-line with the Street. After hosting an analyst day two weeks ago and reporting April same-store sales late last week, there are few surprises with today’s release. As is always the case with Macy’s the conference call tends to add a bit of color to the quarter, but there are a couple of highlights worth noting at first glance:

  • Guidance remains unchanged (albeit recently revised upward) for the year at $1.75 to $1.80, driven by a 3-3.5% same store sales increase. Management says “it is premature to raise annual guidance further at this time given the macro-economic uncertainty.” With same store sales coming in at 5.5% in the recently reported quarter, the current comparisons for 2Q almost identical to 1Q, and demand through early May remaining solid, this seems like an overly conservative statement to make. With that said, the Street is at $1.87 and with so much riding on 4Q profits we expect conservative posturing to continue.
  • E-commerce appears to be building as a key contributor to the business, finally. Sales from and increased by 34% in the quarter, contributing 90 basis points to the overall same store-store sales result. This outperformance is amongst the stronger online results we’ve seen from traditional retailers.
  • Inventories remain in very good shape, down 7% year over year. With total sales up 7%, the 14% sales/inventory spread is noteworthy and sequentially improved from 4Q.
  • Management mentions the success of the quarter is in part due to the company’s My Macy’s strategic initiatives. While these internal efforts have been underway for a couple of years, it’s hard not to notice the company’s success coinciding with 1) the overall pick up across the mall and 2) similar margin and sales performances out of other department store operators.

Eric Levine



R3: Easing Into Earnings With Macy’s - M SIGMA






- With clogs back on the runway and toning shoes all the rage, it was only a matter of time before the two products became one. Enter the “Fitflop Gogh”, a clog built around the company’s Microwobbleboard technology. Keep an eye out for the patent leather, metal studded version slated to pop in NYC boutiques in a matter of weeks.


- In a yet another sign that the off-price channel is seeing less quantity of “quality” brand name goods, Fossil pointed out that its sales to the off-price channel were down 50% in its first quarter to about $5 million. Management also noted that the run rate for off-price sales from Q408 to Q209 was about $10 million per quarter. Clearly tight inventory and growing demand is helping to dramatically reduce FOSL’s reliance on off-price.


- With a deal announced between Zale and Golden Gate Capital, it appears the company has bought some time (and raised some capital) to execute another iteration of a turnaround strategy. While the details of the merchandising and marketing plan were not discussed, it was clear from management comments that Zale’s store base is not expected to shrink from here. In fact, the interim CEO made it a point to say with the current assets acting as a base, the goal is to grow the business from here. Easier said than done, but time now appears to be on ZLC’s side.





R3: Easing Into Earnings With Macy’s - Calendar





GSI Acquires E-Commerce Supply Chain Solutions - GSI Commerce Inc. has acquired VendorNet, a Boynton Beach, Fla.-based multichannel e-commerce supply chain solutions provider to more than 100 retailers and brand marketers. <>


Macy's May Offer Exclusive New Clothing Line from Hugo Boss in Fall 2011 - Sources say Macy's is in talks to sell "White Label," which will be a range for men and women priced below most Hugo Boss offerings, the NY Post reports. The mid-priced line is part of Hugo Boss CEO Claus-Dietrich Lahrs's plan to double US revenues. <>


Macy's Launches Web Site Geared Towards Travelers - The site includes a hotel search and booking engine powered by Kiwi Collection. <>


International Spend in UK Hit by Flight Ban in April - International shopper spend in the UK fell 16% year-on-year in April as the volcanic ash cloud impacted tourism.  <>


Furniture Buying Index Up 6th Month in a Row - The Furniture Buying Index, tracked by America's Research Group, jumped two points this month to a reading of 71, marking the sixth consecutive month the Index has moved up.  “Pent-up demand and larger than expected tax refunds helped drive the Index up two points this month,” said Britt Beemer, chairman of America’s Research Group.  “When the Index reaches 70 points or higher, the success of retail furniture sales goes up dramatically. “This is a good sign especially considering that Memorial Day weekend is historically a very strong furniture weekend.” <>


K-Swiss Boosts Marketing Efforts with Another Athlete - KSWS signed a multiyear deal with France’s second highest ranked tennis player Gael Monfils to represent both footwear and apparel. The 23-year-old tennis phenom, currently ranks at No. 18 in the ATP World Tour and will be the highest ranked player on the K-Swiss team, which also includes tennis players Bob and Mike Bryan and Sam Querrey. Monfils has two career ATP titles and is a seven-time ATP Tour finalist. “He will be a big part of our marketing efforts, not only in Europe, but globally as well,” K-Swiss sports marketing director Erik Vervloet said in a statement. “He is young, talented, and is only going to get better as the years go on.” <>


Red Wing Shoe Co Receives Grant to Expand Facilities - Red Wing Shoe Co., the owner of Vasque, Irish Setter Boots, and other shoe brands, has received a $261,270 grant to expand its plant in Potosi, MO, and add 42 new full-time jobs within two years, according to the St. Louis Business Journal. <>


Li Ning Tripling Store Size - Chinese sportswear company Li Ning Co. Ltd. is tripling the size of its Pearl District store. The store opened only three months ago. <>


Hot Topic Launches Helmetgirls Tees - Urban pop-art artist Camilla d'Errico has paired with Hot Topic to launch a line of T-shirts featuring Helmetgirls designs. The tees by licensee All Pacific Apparel are rolling out to Hot Topic stores now in the U.S. and online. D'Errico's manga-inspired artwork has been on snowboards, magazine covers, toys, clothes and accessories. <>


Yoox Profits Triple in Q1 - Profits at online retailer Yoox Group quintupled in the first quarter, jumping to 2 mm euros. Increase due to currency hedging and lower interest expenses having self-financed most of its investments on the back of its initial public listing last fall. Revenues gained 43.4%, reaching 50.3 mm euros. The 10-year-old company also runs e-commerce sites for designer brands from Marni and Emilio Pucci to Emporio Armani, Valentino and Roberto Cavalli. This division reported a 109% increase in sales. At the end of March, Yoox counted 20 online stores, eight more than in March 2009. In the first quarter, Yoox launched online stores for Coccinelle, Giuseppe Zanotti, Napapijri and Alberta Ferretti. In February, the firm extended its collaboration with Giorgio Armani SpA in Europe, the U.S. and Japan until Jan. 31, 2015. Under the new agreement, the Armani Jeans brand also will be included on Geographically, sales in Italy grew 21.1% and 38.7% in Europe. Revenues in North America rose 111.6%. <>


Maidenform Brands Inc. Doubles Profits - Strength due in part to strong gains in its shapewear business. The firm also raised its guidance above Wall Street’s estimates. Sales rose 25.1%: Wholesale sales increased 27.4%, Retail sales rose 3.7%. Top- and bottom-line results exceeded analysts’ expectations. Leaner inventories and reduced promotional activity drove the firm’s gross margin up 430 bps. Shapewear sales, up 34%, were key to the quarter’s performance. “Shapewear now makes up more than a third of Maidenform’s global business and is the fastest-growing category in intimate apparel,” said CEO Maurice Reznik. <>


R.G. Barry Quadruples Profits - Higher sales and margins helped R.G. Barry Corp. more than quadruple its third-quarter profit. The marketer of slippers and accessories footwear, recorded 5.1% sales growth and 690 bps gross margin expansion. “Our spring business benefited from the growth initiatives undertaken during the past several years and is being measured against our very healthy results from the equivalent period last year,” said Greg Tunney, president and CEO, in a statement. <>



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