R3: Tricky Dick’s Gonna Beat


May 17, 2010





Here are some of our thoughts on Dick’s headed into the print on Tuesday. The bottom line is that the company should print something starting with at 2, vs. the Street at 13 cents. The comp and GM% setup looks solid. SG&A is up in the air due to catch up spending on systems, but they guided there already. We’re 10% ahead of consensus for the year. The cycle is still shaping up very nicely for this space – which has been core to our NKE and FL calls. But if Tricky Dick sandbags, lowers 2Q, and causes a selloff on the print, you’ll hear me get much louder on this name.


1)      As it relates to EPS – Our model is coming in hot for the quarter. $0.20 vs. Street at $0.13/$0.14 and guidance of $0.13. The key driver is comps. I simply can’t get to anything as low as the 3% comp they guided to. Sales have been strong in the channel based on reports out of competitors, and anecdotes from suppliers.  Weather was less favorable in DKS territory than in other parts of the country – but nothing so debilitating that it should hurt numbers. In addition, they are going up against -3-5% traffic trends in both 1Q08/09, and a 3-4% decline in both traffic AND ticket in 1Q09. To boot, this is the quarter where starts to get booked in SSS. We should be seeing acceleration in the 2-3 yr trends. In order to get there, I’ve got to double the company’s guidance (and Street estimates). I’m at 7%.


2)      GM%: +100bp sounds about right. Sales/Inventory spread ended last quarter in relatively good position on our SIGMA chart – suggesting that inventories were not a problem. Plus, they should lap Chicks liquidation and golf galaxy clearance last year. If anything, I may be light with 100bp GM improvement.


3)      SG&A: This is the biggest question mark. They deferred investments last year in systems to optimize regional product assortment (i.e. more like how HIBB does it). They noted that it should cost $0.16 ps throughout this year – or an even $0.04 per quarter.  Maybe they sandbagged there, but the reality is that I have no reason to doubt this number. If I back into P&L impact, $0.04 = $4.8mm after-tax (120mm shares), $8.0mm pre-tax, or 3-4% growth to each quarter in SG&A – all else equal. I think I’ve got that plugged into my model appropriately.


For the year, I’m at $1.55 vs Street at $1.37. Next year is $1.70.

Sell-side sentiment is about 50/50 split between bulls/bears.

Buy side is slightly more bearish. Short interest has come down from 16%, but still stands at just over 10%.


No way would I be short this thing headed into the print – even if it is expensive and has tripled off the low. There’s going to be many reasons as it relates to the industry cycle why this thing will make sense as one of the best houses on a bad street. In addition, earnings revisions will be supportive.  There’s still other places I’d rather be in the space as it relates to riding the upside – most notably FL and NKE, but if Tricky Dick beats the quarter yet sandbags guidance and the stock sells off, this one will make it towards the top of my queue pretty quickly.





- Unlike most retailers which are seeing their online businesses grow at rates far greater than their core same store sales, JC continues to underperform. The .com business grew 1% in the first quarter, essentially in line with overall sales growth. The e-commerce business continues to be negatively impacted by weak home furnishings sales. While the company is seeing a slight pick-up in soft home, management notes there is still much work to be done here to impact a measurable pick up in this key category.


- Keep an eye of Gap’s efforts to expand and grow its “1969” denim sub-brand and freestanding shops. With a handful of stores already open in LA, NYC, and now Chicago, the company has tapped a former 7 For All Mankind executive to become the creative director of the company’s heritage denim line.


- While most are fixated on Skechers wild success with its ShapeUps toning shoes, the company continues to grow in other ways. SKX announced a recent licensing deal to launch a line of leather goods, including belts, wallets, and coin purses for adults and children. Also on the way are licenses for apparel, sunglasses, legwear, bags, backpacks, and medical scrubs. It’s not clear how the medical scrubs fit into the company’s merchandise mix, but we suspect it has something to do with those in the medical profession already wearing the company’s footwear.





R3: Tricky Dick’s Gonna Beat - Calendar





H&M April Sales fall 6% - Hennes & Mauritz AB  said same-store sales in April slipped 6 percent as the Swedish fast-fashion giant came up against tough comps, cool spring weather and an early Easter holiday. Including new stores, sales for the month grew 4%. As of April 30, the Swedish fast-fashion giant operated 2,037 stores. The April figures represent a slowdown from March, when like-for-like sales grew 9 percent. <>


R3: Tricky Dick’s Gonna Beat - H M 1yr 


Affordable Footwear Act is Back - The footwear bill, which would eliminate duties on certain types of lower-priced and children’s footwear, is being attached to the jobs bill. They asserted that some international manufacturers are circumventing the U.S. tariff system and paying lower duties on some types of imported footwear than their American counterparts by using textiles in the soles of shoes to get a textile tariff classification, which is subject to lower duties. A provision in the Affordable Footwear Act would close the loophole that “allows importers to evade duties that help the domestic manufacturers compete in the U.S. and global markets,” they said. The bill states that textile materials inserted into soles does not change the character or classification of the soles or the shoes, and thus, is subject to the higher duties. The centerpiece of the duty-dropping footwear bill, which the industry has been pushing for a few years, would eliminate some $800 million in tariffs on approximately$1.7 billion collected each year. It would also eliminate tariffs on about 60% of shoes imported into the U.S., or nearly 1.5 mm pairs annually, according to industry figures. <>


Chinese Labor Shortage - A year ago, footwear manufacturers, deep in the trenches of the recession, were desperate for consumers to buy shoes. Now, the challenge has shifted to finding someone to make them. Footwear factories have so many orders that they are overwhelmed. Footwear Distributors and Retailers of America claimed after a recent poll that 88% felt the industry had a significant labor shortage, with 86% reporting that the problem had caused deliveries to arrive from one to four weeks late. There is also a generational change with young people having higher expectations of career paths. Footwear companies are feeling it the worst of any segment. <>


TRLG Hires Apparel President - Michael Egeck, the former president of The North Face brand, was named president of True Religion Apparel, the designer jeans company.  <>


Bulgari Not For Sale - Bulgari SpA, the world’s third- largest jeweler, isn’t for sale, and doesn’t plan to make acquisitions, Chief Executive Officer Francesco Trapani told Corriere della Sera in an interview. The family is “completely resistant” to the possibility of a sale, Trapani said in the interview with the weekly business supplement of the Italian newspaper. Trapani is the nephew of Chairman Paolo Bulgari, grandson of the company’s founder. The Bulgari brothers, Paolo and Nicola, along with Trapani, own about 51% of the company. <>


Senators Approve a Measure that Could Cut Retailers` Debit Card Fees - The fees that merchants pay to accept debit cards, including for online retail transactions, could decline under a measure the U.S. Senate passed yesterday. <>


Gilt Groupe Goes From Fashion to Furniture - Members-only luxury sale site Gilt Groupe is expanding into home goods, the retailer announced yesterday. Gilt Home will offer 15 sales per week from more than 200 brands that sell products such as outdoor furniture, rugs and bedding. <>



This morning we're rolling out our inaugural weekly risk monitor for Financials. The point is to provide readers with a snapshot of the changes that took place in various risk-based indicators during the last week to help them position as they look ahead to the coming week. We've selected specific indicators that we think represent good "canaries in the coal mine" in that they tend to reflect changes coming before those changes are more broadly priced into equity markets. Overall, 5 of the 8 measures registered positive readings on a week-over-week basis, while 1 was negative and 2 were neutral.


Our risk monitor looks at the following metrics weekly:


1. CDS for all available US Financials (30 companies).

2. High Yield

3. Leveraged Loans

4. TED Spread

5. VIX

6. Greek Bond Spreads

7. Markit Subprime Spreads

8. AAII Bulls/Bears Sentiment Survey



1. Financials CDS Monitor - Overall, credit default swaps in Financial companies were tighter nearly across the board last week with the largest improvement coming from GS, WFC and COF. Compared with a month ago, however, swap prices remain considerably elevated with the most widening at HIG, MET, JPM. Conclusion: Positive.

  • Tightened the most vs last week: GS, WFC, COF
  • Widened the most vs last week: ABK, MBI, AGO
  • Tightened the most vs last month: MTG, PMI, RDN
  • Widened the most vs last month: HIG, MET, JPM
  • Greatest CDS vs Equity divergence - last week:
    • GS (CDS 17.9% tighter / Equity 0.2% Higher)
    • ALL (CDS 15.6% tighter / Equity 0.2% Higher)
  • Greatest CDS vs Equity divergence - last month:
    • PMI (CDS 31.0% tighter / Equity 36.3% Lower)
    • MTG (CDS 33.6% tighter / Equity 28.7% Lower)
    • RDN (CDS 24.4% tighter / Equity 45.1% Lower)



2. High Yield (YTM) Monitor - High Yield rates tightened 24 bps last week, reversing some of their recent deterioration over EU contagion fears. Rates closed the week at 8.62% down from 8.86% the week prior. Conclusion: Positive.




3. Leveraged Loan Index Monitor - Leveraged loans were essentially unchanged last week, closing at 1491, up a hair from 1488 where they went out the week prior. It's interesting to note the divergence between HY and Leveraged loans over the last week. Leveraged Loans are slightly senior to High Yield in the capital structure (secured vs unsecured), so it is interesting to see HY outperforming LL at a time of still broadly perceived uncertainty. Conclusion: Neutral.




4. TED Spread Monitor - The TED Spread is a great canary. It was essentially unchanged last week closing at 30.0 bps down a hair from 30.8 bps in the week prior. Conclusion: Neutral.




5. VIX Monitor - The VIX is admittedly a far more coincident indicator, but we include it as a general reflection on the equities market. Last week the VIX closed at 31.24 down from 41.95 the week prior. Conclusion: Positive.




6. Greek Bond Yields Monitor - The Greece situation remains in flux and so we include Greek Bond 10-Year Yields as a reflection of that dynamic. Last week yields fell to 802 bps from 1229 bps. Conclusion: Positive.




7. Markit ABX Index Monitor - The Markit ABX Index was generally positive vs the prior week. We use the 2006-2 series and look at the AAA, AA, A and BBB- series. We include this measure as a reflection of what is going on in deep subprime distressed paper. Conclusion: Positive.



Source: Markit


8. AAII Bulls/Bears Monitor - The Bulls/Bears survey grew more Bearish on the margin vs last week. Bears increased by 8% to 36.6% while Bulls fell 2.5% to 36.6%. This now means that Bulls and Bears are equally balanced at 36% suggesting no edge is available presently from this survey. Conclusion: Negative.




Joshua Steiner, CFA


Allison Kaptur


The Macau Metro Monitor, May 17th, 2010



According to IM, because of the visa restrictions two years ago, mainland visitors switched from IVS to package tours in order to avoid the restrictions on the number of visits per year.  But overall mainland arrivals were up 8.18% in March 2010 as tour package numbers fell overall by 7.7% YoY. Are we starting to see a swing back towards IVS (individual visitor scheme) from package tours? If so, mainland visitors will have more money in their pockets for gaming, seeing as they don't need to pay a middleman to get to Macau. It may also weaken the hand of the junkets who control many of these tours.



Approving construction projects long after they are completed has become a common practice of the Macau government in the last few years as a backlog of land-use applications builds up while officials tread warily in the wake of the graft scandal involving former public works minister Ao Man-long. For example, the land-use approval for Sands China's US$4.42 billion project on the Cotai Strip was gazetted on Wednesday - four years after construction began and five years after the government received the application for the project.


Jaime Roberto Carion, director of the Land, Public Works and Transport Bureau, on May 7 admitted that his bureau was "a little slow" in approving land-use changes. "The process of changing land uses is a little slow. We will review it and speed it up," Carion said. A bureau spokesman said the government had been improving transparency in land-use approvals. "We are speeding up the revision of the Land Law and other relevant laws and regulations," he said.

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Prejudiced Fools

“Prejudices are what fools use for reason.”



Voltaire was a writer, philosopher, and playwright. He was one of the central figures of the Enlightenment. His real name was Francois Marie Arouet, but allegedly used upwards of 178 pen names during his time attempting to stave off being incarcerated.


On May 30th we will anniversary the 232nd year of Arouet’s death. While there are plenty of changes that have occurred in France since then, like Voltaire back in his day, we are comfortable being short the aristocracy of French politics. We call them these men the Fiat Fools.


Born in Lyon, France, the leader of the Fiat Fools is a 67 year old by the name of Jean-Claude Trichet. After being put on trial (charged with 8 others for banking irregularities at Credit Lyonnais) and cleared in 2003, Monsieur Trichet has led quite a life for himself as President of the European Central Bank. While I have had plenty of criticism reserved for Messrs Greenspan and Bernanke over the last few years, Mr. Trichet was also a critical part of the pied-piping for Fiat Fools.


This morning, Trichet is making headlines calling for a “quantum leap” to prevent the “bad behavior” of finance ministers and professional politicians across the fields of the Eurozone that he helped fertilize. Reaching the heights of hypocrisy is apparently something that the Frenchman feels no shame in doing. After all, who is actually going to hold the man accountable for laying the railway tracks of deficit building like he did as the Finance Minister of France?


World class leadership in hand, upward and onward we go this morning as the price of Keynesian Political Prejudice is priced into the Euro. The Euro is hitting 4-year lows this morning after the US Dollar traded higher for the 4th consecutive week. The US Dollar Index is up +16% and the Euro down -18% since their November 2009 levels.


Have no fear however. Our call this morning will not be to pile on to the “parity call” that has quickly become the most deserved and consensus trade in global macro. Both our immediate and intermediate term duration targets for the Euro are converging in the $1.21-1.22 range. Whenever these durations converge, my own mathematical prejudice is to cover my short position.


In Global Macro, for every short position covered there is a new opportunity to consider on the short side elsewhere. I laid out my intermediate term upward bound target for the US Dollar on Thursday, but it’s worth putting in print again here this morning as you have less and less reason to trust the calculus of some sell-side analyst who picks “parity” as his risk management level. My intermediate term upside target for the US Dollar Index remains $86.97.


Duration Mismatch is one of the most important drivers of making money in Global Macro. We are in early days of imputing the governing factors of chaos theory into global markets. That is a very good thing. It gives students of the modern day portfolio Enlightenment the edge.


The issues that Trichet is facing won’t be dissimilar to what Bernanke has coming down the pike. We’ll go through the timing of Spanish versus American debt maturities on our Monthly Macro Call tomorrow afternoon. This is a trivial exercise even for the most basic of calendar watchers. Please email if you’d like to participate. We will have our customary Q&A where well informed buy-siders can ask questions anonymously.


Back to our call for this morning, our call is what our call was in the middle of last week when we sold everything we could on US Equity market strength. Our allocation to US Equities in the Hedgeye Asset Allocation Model remains Bernanke’esque at ZERO percent. We remain short the SP500.


Both our immediate term and intermediate term TRADE and TREND lines for the SP500 are broken. What was longstanding support for US Equities is now resistance at 1144 (TREND) and 1183 (TRADE), respectively. Surely, this market has every opportunity to bounce, but our Q2 Macro Theme of May Showers looks like it will remain as long as A) it’s May and B) the SP500 continues to make a series of lower-highs.


Perversely, the Prejudices of Fiat Fools are all of a sudden making German Equities more attractive than most equity markets around the world. If you are a country exporting to China, and you sell the Chinese things that don’t look like Fat Middle Fingers, a Euro of $1.21 might be just what the German doctors of pseudo conservative fiscal responsibility have been waiting 60 years for.  Intermediate term TREND line support for Germany’s DAX is currently intact down at 5,912.


Best of luck out there today,



Prejudiced Fools - EURO 3.0 YEAR


Last week stocks finished higher with the Dow, S&P 500, NASDAQ and Russell 2000 up 2.31%, 2.23%, 3.58%, and 6.28%, respectively.  Despite having snapped a two-week losing week, there was no conviction behind the move.  The issues surrounding the Trillion dollar EU/IMF support package drove the bulk of the direction for stocks last week. 


At the end of the week, there were no sectors that are positive on TRADE and only three that are positive on TREND (Industrials (XLI), Consumer Discretionary (XLY) and Utilities (XLU)).   Last week, the Industrial sector was the best performing, rising 3.9%.  The XLI was the beneficiary of the EU/IMF bailout as it provides some support for the RISK/RECOVERY trade.  Last week, the S&P Industrial Conglomerates Index and the S&P Machinery Index were up 4.2% and 5.1%, respectively. 


China remained a MACRO headwind for US equities as the Shanghai Composite officially crashed last night, falling 5.07%, and is now down 21.9% year-to-date.  


On Friday Financials were the worst performing sector, on the regulatory overhang from Washington and the widening criminal probe of the investment banks are weighing on sentiment.  Late last week, there was the unexpected passage of the interchange amendment on Thursday night.  The financial regulations led to a steep drop in credit cards stocks on Friday with V down 9.9%, MA down 8.5% and CATM down 9.8%. 


Last week, Energy stocks underperformed as crude drops below $72.  Crude has now declined 17.5% over the past two weeks.  Within the XLE on Friday, E&Ps, oil services and integrated were all under pressure.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (71.27) and Sell Trade (75.26). 


At this time of writing the Euro is within a penny of our Q2 downside target of $1.21; getting immediate term oversold finally and USD is now overbought.  While the dollar is trading up again this morning, the Euro is trading down against all major currencies with the exception of British Pounds and Australian dollars.  With growth concerns mounting, the Australian dollar is under pressure and Australian bond yields were up today.  The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (84.67) and Sell Trade (86.23).


Sovereign credit contagion and stability concerns have driven a good chunk of the recent weakness in the Euro, while the outperformance of the headline US economic figures have contributed to driving the dollar higher.  Euro concerns continue to permeate the credit markets; 3 Month LIBOR is up to 0.45 and the TED Spread has widened further, indicating that the perception of credit risk continues to heighten.  The inverse correlation between the TED spread and the Euro has grown tighter; it is now -0.94.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.21) and Sell Trade (1.26).


Gold hit an all-time high last week (up 1.2%), while precious metals stocks (XAU +6.9%) also held up fairly well despite the inability of the EU/IMF backstop to put a bid under the euro.  The resilience in gold and gold equities seemed to be a function of heightened concerns surrounding the “fiat fools’” currency debasement following the massive bailout package and the accompanying ECB balance sheet deterioration.  Gold is now trading at $1,230 per ounce.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,211) and Sell Trade (1,259).


At the time of writing, equity futures are trading above fair value, but looking unchanged.  Global world volatility is driving MACRO sentiment and today's tone is likely to be driven by ongoing news out of the Eurozone region and the crash in the Asian markets.  As we look at today’s set up, the range for the S&P 500 is 34 points or 4.1% (1,110) downside and 1.2% (1,144) upside.  On the MACRO calendar we have:

  • May Empire Manufacturing
  • March Net Long-term TIC Flow
  • May NAHB Housing Market Index

Copper traded down 3% on Friday and in early trading it’s down nearly another 2% today.  Copper is trading lower on a stronger dollar and on concern that Europe’s sovereign-debt crisis and the decline in the Chinese market may curb demand for the commodity.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.99) and Sell Trade (3.18). 


Howard Penney

Managing Director















Taco Bell has a storied history of being a brand that is disruptive to the pricing structure of the industry. 


In 1Q10, the same-store sales performance (down 2%) at Taco Bell was the biggest disappointment.  I recently had breakfast with in NYC with Greg Creed, president of Taco Bell, and he commented that while the new products and marketing initiatives were working well, it did not offset the decline in the sales of drinks and combo meals.  In 1Q10, 40% of the decline in average check was due to lower drink sales. 


More importantly, the sales of its combo meals - peaked at 31% of all sales in 2008 - are now down to the “low 20’s” of sales.  What he would not tell me at breakfast was what he was going to do to fix what was causing the decline in same-store sales.  At the time he said they were testing a $2 combo meal, but there were no plans to roll it out nationally.  I guess now that has changed! 


While there is no official press release from YUM, there are media reports talking about the new combo meal and a quick stop by our local Taco Bell confirmed these reports (see picture below).  As was reported in USA Today, you get a taco or burrito, a medium soft drink, and a bag of Doritos chips - all for $2.  If you compare three items at MCD (a protein, a side dish and a drink), you end up paying $3. 


The interesting twist to this combo meal is the bag of Doritos.  At breakfast Greg mentioned a new partnership with Frito-Lay, but did not provide any details.  Since our meeting there has not been a press release about that either, but we can see where this may be going now they are including a bag of Doritos’s in a combo meal.  The new combo meal does not seem to be discounting any of the core items on the menu. 


I have no doubt that the YUM marketing machine will be going heavy and hard to get the news out on a $2 price point, which is sure to help Taco Bells’ declining sales trends.


YUM - TACO BELL'S NEW LOW        - 5 16 2010 9 36 46 PM


Howard Penney

Managing Director

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