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BWS: Quick Take

Conclusion: Good number overall, with upside to EPS almost entirely driven by 16% retail comps, while finally growing wholesale sales. GM +278bps, due to better sell-through, better product with higher margins, fewer promotions and lower markdowns. Good read-through for PSS here headed into next week’s print.  



  Clean/Street/Guidance/LY:: $0.26/$0.14/-$0.14


Guidance: Raised 2010 sales growth targets to high-single/low-double from prior guidance of mid-single. Guides Q2 net sales growth to low/mid teens range.

Street $1.06. Net revenue guidance increased to high-single/low-double from prior guidance of mid-single. Lowered SG&A guidance by ~50 bps, lowered interest expense, raised taxes, and raised the lower side of Cap Ex guidance.


Sales growth: +10.9%. Sq footage -3.1%, Brown Shoe Comp 15.5%, Specialty Retail Comp 16.2%, Wholesale +3.5%. New store productivity at Famous Footwear 95% -- - improving on the margin. Revs on the higher side of guidance across all segments.


GM %: 41.4%, up 278bps yy. 1 year sequential erosion but 2 year improvement due to a slightly more difficult comp. Comps get harder going forward.  Famous Footwear GMs improved 230 bps from improved sell-through – more trend-right merchandise, and fewer promos (not sure if it’s by accident or solid proactive planning).  Wholesale GMs increased 310 bps due to lower markdowns and improved sell-through and higher margin brand growth.  Specialty Retail increased 150 bps from better product and more full priced selling.


SG&A: +5.5%, 2 year slowdown. SG&A margin -192 bps. Increase due to higher incentive compensation but offset by 62 fewer stores in operation.  


Balance sheet: Inventories up 6% on 11% sales growth. Good spread, though sequential erosion. Capex inflected, now growing as a % of sales, currently at 0.9% of sales ttm. That’s absolutely not sustainable. Average inventory on a per-store basis at Famous Footwear increased 15.9% at quarter-end, reflecting recent sales trend and near-term outlook including its investment in higher-priced categories. Inventory at its Wholesale division decreased 3%.


SIGMA: In clean up mode, negative SIGMA move. Sequentially worse sales-inventory growth ratio and margins.


BWS: Quick Take - BWS S 5 26 10



R3: AEO: Inventories Rise, Guidance on the Demise


May 26, 2010





This morning American Eagle Outfitters reported a largely inline quarter, with EPS of $0.17 coming in at the high end of the company’s guidance and on target with the Street.  By now this is old news and hardly surprising given the updates we’ve gotten along the way with each monthly sales report.  However, there are two incremental data points that stand out from the release.  First, guidance for 2Q is well-below the Street, with the new forecast of $0.12-$0.16 falling below the consensus of $0.21.  Secondly, inventories are on the rise.  On a sales increase of 8%, inventories were up 16.9%. Management chalks this increase up to a strategic initiative to have a better in-stock position on denim as well as comparisons with last year in which inventory was down 4% per foot. 


No matter how we look at it, this stands out as one of the few mall-based retailers actually committing to inventory build in advance of any potential (i.e. hopeful) acceleration in sales.  Add in the fact the company has now shed its loss producing division, Martin & Osa, and it’s a bit curious to see inventories on the rise when guidance is on the demise.  In fact, AEO is the first company we’ve seen out of earnings season to take a haircut to 2Q earnings based “margin pressure related to weaker trends early in the quarter.”  Perhaps this is a company specific issue, as much of the past year AEO has lagged its peers in the area of inventory management, but this is a data point worth keeping an eye on.  This could be a lull or the beginning of a trend.  Either way, there’s 6-8 weeks before the key back to school season kicks in and it’s fair to say some doubt should begin to enter the minds of both investors and retailers.


Eric Levine



R3: AEO: Inventories Rise, Guidance on the Demise - AEO SIGMA





- Despite some chatter suggesting post-Easter business has seen a slowdown across the mall, PVH is not seeing this from their wholesale perspective. Management noted that the company’s customers across all tiers of distribution are still pulling orders forward to meet demand.


- DSW noted that the company’s loyalty program continues to grow and now totals 14 million members. Clearly the program includes DSW’s most loyal customers as indicated by the fact that 86% of revenues are derived from those carrying loyalty cards. Efforts to mine the loyalty database and segment promotional offers are still underway.


-Fashion accessory consumption, a key consumer discretionary barometer, is on the rise as indicated by NPD data with sales up 17% in Q1 compared to a 10% decline in the same period last year. Notably, larger ticket items like women’s handbags drove the outperformance of women’s accessories up 20% during the quarter.





R3: AEO: Inventories Rise, Guidance on the Demise - Calendar





ICSC Lowers May Monthly Sales Target - The International Council of Shopping Centers said U.S. retail sales in May are so far coming in worse than originally expected. It now expects sales during the month to be up 2% to 2.5% vs. previous estimate of 3.5%. The reason for lower the estimate was inconsistent traffic trends and softer consumer spending.  Some chains said that a later Memorial Day holiday will shift some sales from May into June.  <sportsonesource.com/news>


Kevin Garnett Switches From Adidas to ANTA - Despite signing a "lifetime endorsement deal" with adidas in 2003, Boston Celtics star Kevin Garnett has reportedly signed an endorsement deal with the Chinese-brand ANTA for the coming season.  <sportsonesource.com>


Obama Signs Haiti Trade Bill - President Obama has signed into law a bill that almost triples the amount of apparel made in Haiti that can be shipped into the U.S. duty free. The bill is intended to help Haiti, the poorest country in the Western Hemisphere, rebuild after the devastating earthquake in January that disrupted the mainstay of its economy — the apparel and textile industry. The sector accounted for two-thirds of Haiti’s exports and almost 10% of GDP. Apparel and textile imports were $513.3 million in 2009. <wwd.com/business-news>


Perry Ellis Brings Business In House - Perry Ellis International is bringing its dress shirt business in-house, ending its license with Smart Apparel (U.S.) Inc. at the end of this year. On Jan. 1, 2011 Miami-based PEI will assume all aspects of the business under the Perry Ellis and Perry Ellis Portfolio brands. Smart Apparel, which made Perry Ellis dress shirts for two years, will continue to produce Perry Ellis branded suits, suit separates and sport jackets. <wwd.com/menswear-news>


Wal-Mart Cuts Apple's iPhone Price - Wal-Mart Stores Inc., the world’s largest retailer, cut the price of Apple Inc.’s iPhone 3GS by $100 to $97 before the possible introduction of an upgraded version of the device. The deal is available in stores and not online, Wal-Mart said on its website. It requires a two-year service contract, Melissa O’Brien, a spokeswoman for the Bentonville, Arkansas- based retailer, said in an e-mailed statement. The reduction may also be aimed at clearing unsold iPhones before Apple unveils the next iteration.  <bloomberg.com/news>


84% of Women Plan to Increase Spending as the Economy Improves - Among the top items they plan to purchase are electronics, clothing and accessories, according to a new survey. <internetretailer.com>


Burberry Group Profits for Year Fuelled by a 6.5% Sales Growth and Cost Efficiencies, Boost 2011 Capital Spending - The fastest growing category was non-apparel, which accounted for 36% of revenue. Burberry plans to build on its strong financial position by accelerating investment in growth initiatives in retail, digital, and new markets, while continuing to enhance the brand. The company added that in the current year, capital expenditures would nearly double and be spent in part on new stores and refurbishment as well as expanding key product areas including kidswear and moving into emerging markets. <wwd.com/business-news>


Steve Madden to Find New Designer through MTV - Steve Madden has enlisted the help of MTV to find the newest member of his design team. On the cable network’s new show, “Hired,” tonight at 6:30 p.m., Madden chooses between five recent graduate contestants, each vying for a position at Steven Madden Ltd. The candidates each meet with a recruiter, who provides suggestions and tips, before they meet with Madden himself for an interview. The final round includes an additional interview and hands-on activities at the Long Island City, N.Y.-based headquarters. One lucky winner will be offered the job during tonight’s episode. <wwd.com/footwear-news>


Sneaker Con in New York - The lines were out the door for last Saturday’s Sneaker Con in New York, the third edition of the celebration of all things sneaker. According to organizer Yu-Ming Wu, more than 1,000 sneaker fans flocked to Manhattan’s Sullivan Street to buy, trade and ogle some of the most sought-after kicks around. Sponsored by New York retailer Dr. Jay’s and by Adidas Originals, the meetup featured 40 vendors hawking their wares, as well as an exclusive look at rare Kaws toys from the private collection of Lev Levarek from Toy Tokyo. <wwd.com/footwear-news>



The Macau Metro Monitor, May 26th, 2010



As the Macau Government Tourist Office (MGTO) promotes Macau to Indians, IM believes the Venetian would benefit the most.  Sources say the Indian visitors to Macau stay longer and spend more on the higher-margin, non-gaming than a typical Chinese visitor would.


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.


While the market is down 11.7% from its high in April, over the last three days the S&P is up 0.25%, despite the weakness in global markets. Yesterday’s news flow was focused on stresses in the Spanish banking system and the escalating geopolitical tension surrounding the Korean peninsula. Supporting the performance has been a reduction in the RISK trade as the VIX declined 9.6% yesterday and is now down 26.5% over the past three days. The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (26.89) and Sell Trade (45.83).


Our “Sovereign Debt Dichotomy” theme continues to play out, as the focus has begun to shift to the forced consolidation in the Spanish banking sector stemming from the Real Estate asset bubble. At the same time yesterday, we saw an increased level of stress in the funding markets with three-month dollar Libor rising for an 11th straight session to 53.6 bp, the highest level since early last July. This morning, three-month LIBOR has held steady day-over-day, unchanged at 53.6 bp. The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.21) and Sell Trade (1.24). Despite the recent resilience in the euro, the issues in Europe continue to drag on sentiment.


In early trading, the DXY is trading higher for the third day in a row. The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (85.08) and Sell Trade (86.97).


From a MACRO perspective, the outperformance of the US recovery is taking a back seat to the MACRO headwinds from Europe. Yesterday, the Conference Board's consumer confidence index rose to 63.3 in May from 57.7 in April, the highest level since March 2008. The expectations index posted its third straight meaningful gain, increasing to 85.3 from 77.4 last month, and the highest level since August 2007. The Conference Board tends to be at best concurrent indicator; we use ABC weekly and Michigan bi-monthlies as pseudo concurrent-to-leading looks into consumer confidence. The Consumer Discretionary (XLY) was the second best performing sector yesterday.


The Materials (XLB) was the best performing sector yesterday, and one of four sectors that was positive on the day. The XLB outperformance came despite pressure on commodities and commodity equities from the strength in the dollar. The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.01) and Sell Trade (3.31).


Precious metals were also up on the day; Gold closed up 0.2% to $1,197. At the time of writing, gold is trading at $1,213, down 2.4% from the record high of May 12th. The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,184) and Sell Trade (1,255).


The Financials finished higher on the day after underperforming earlier in the day. While legislative issues remain, the outperformance was driven by the banking group with BKX up 1%. Regional names were among the best performers with KEY up 3.9%, STI up 3.6% and PNC up 2.1%. In addition, the investment banks and the mortgage insurers were another bright spot.


The Industrials (XLI) declined 0.1% yesterday on the continued scrutiny surrounding the RECOVERY trade. Conglomerates, E&Cs and machinery names were among the laggards. Another notable underperformer was Technology (XLK); the S&P Software index was down 0.7%, while the semis finished higher with SOX up 0.6%.


As we look at today’s set up, the range for the S&P 500 is 61 points or 2.5% (1,047) downside and 3.2% (1,108) upside. Equity futures are trading above fair value as global markets rebound from Tuesday's slump. The OECD has raised global economic forecasts and US GDP forecasts to +3.2% vs. previous +2.5%. For the fourth day, the Hedgeye Risk management models have 0/9 sectors on TRADE and 0/9 sectors positive on TREND.


On the economic front, to be reported today are: 

  • MBA Mortgage Applications
  • US Durable Goods (Apr) consensus 1.5%; ex-transportation 0.5%
  • New Home Sales (Apr) consensus 421K; MoM 2.3%
  • DOE Crude Oil Inventories released
  • Treasury Auctions in 5-yr notes 

Oil is trading higher after the American Petroleum Institute said gasoline supplies fell 3.19 million barrels last week. Crude has dropped 20% since reaching $87.15 a barrel on May 3. The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (67.33) and Sell Trade (71.72).


Howard Penney

Managing Director













The Great Enemy Of The Truth

"The great enemy of the truth is very often not the lie - deliberate, contrived and dishonest - but the myth - persistent, persuasive, and unrealistic."
-John F. Kennedy


Modern day Rome (Washington) has rendered itself a very sad place. When it comes to storytelling, that is…


JFK’s prescient point in 1962 may very well explain the fall of the modern day Keynesian Empire as much as it explains who our professional politicians see when they look in the mirror.  Collectively, the myths of their “pretended patriotism” can be “persistent, persuasive, and unrealistic.”


As I sat beside Bloomberg’s Deirdre Bolton yesterday, watching Timmy Geithner represent the US government’s latest storytelling to the Chinese, I couldn’t help but notice the shadows that became Mr. Geithner. Both the proverbial shadow of global doubt and the two Chinese flags enveloping Timmy’s conflicted representation of the American “truth” were ominous.


As Geithner prepares to reach the heights of hypocrisy this morning (speaking in London), here’s our version of the sad truth - America is 3-6 months away from becoming the global spotlight that is a European debtor and deficit disaster.


Remember, the math doesn’t lie; politicians do. Here the latest:

  1. Fed’s Balance Sheet: last week the Federal Reserve’s balance sheet expanded by another $14.8B on a week-over-week basis, after the Fiat Fools signed off on the Fed buying another $21B in Mortgage Backed Securities (on the week!). This puts the Fed’s balance sheet at a new sequential peak of $2.35 TRILLION dollars (Transparency/Accountability check: Bernanke said he was going to reduce the size of the Fed’s Balance Sheet)…
  2. America’s Balance Sheet: post yesterday’s $42B in 2-year Treasury issuance, the United States of America’s total debt balance has officially eclipsed the $13 TRILLION dollar mark, or 86% of projected 2010 GDP (as a reference point for sovereign debt/GDP ratios, our Managing Director of Macro, Daryl Jones, has Spain’s 2010 Debt/GDP at 69%).
  3. America’s Off Balance Sheet Liabilities: post another day in the life that has become the fictional equivalent of extend and pretend until another professional politician can hold the bag for our kids, this mother nut of debt does not cease to exist. I have recently finished reading David Walker’s “Comeback America”, so for the sake of time this morning, let’s use his estimate from 2008 of $42.9 TRILLION dollars and persuade ourselves that since Walker left working for Groupthink Inc. in Washington (he worked on these numbers for 4 presidential administrations), his estimate from almost 2 years ago is plenty conservative/low.

Now Walker calls this America’s “$56 TRILLION Financial Hole”, but the hole is actually getting deeper. That’s what happens when you keep digging in with more debt. This is the sad truth. From Hank The Market Tank Paulson to Tricky Dick Fuld, America has not learned the most important lesson of the 2008 crisis: borrowing short to fund long term liabilities heightens the probability of a balance sheet blowup. Instead of Lehman’s, now it’s America’s.


Back to Timmy being engulfed by the Star Spangled Banner’s shadow of doubt…


When Bloomberg’s Peter Cooke asked Geithner about America’s financial positioning, Timmy was quick to acknowledge that all of the aforementioned TRILLIONS of issues have the USA in a “very strong position”…


Too make things worse… the man, the myth, that would be Keynesian Legend in a Roman Empire past… went on to say that it’s the Europeans who face the “difficult challenge of trying to restore sustainability to an unsustainable system”…


All righty then…


With a calculation of the world’s most significant Debtor Nation in hand, your risk management choice this morning is clear. Believe the government or your gut. The myth that America’s deficit and balance sheet issues are not heading down the same path as Europe’s is both “persistent and persuasive”, indeed. It is also unrealistic.


I re-shorted the SP500 (SPY) into yesterday’s closing rally, and I will re-short it again on strength. My allocation to US Equities mirrors Bernanke’s Japanese style monetary policy at zero percent. After all, if you want to take their word for it – the risk free rate of return in America is actually zero. Risk free is where I want my family and firm’s hard earned incomes to be, for now…


My immediate term support and resistance lines for the SP500 are now 1047 and 1108, respectively. The SP500’s long term TAIL of support is now 1074. This powder keg of government-sponsored volatility remains.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Great Enemy Of The Truth - JFK

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%