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America's Trident

“As we are always told, you have to earn that Trident every day. We never stop learning, never stop training.”

-Marcus Luttrell (Navy SEAL, Team Leader, SDV Team 1, Alfa Platoon)


God knows I spend too much time ranting about what’s broken in this country. For anyone who has analyzed Congress and the Debtor Nation that it has created, America’s problems are finally crystal clear. This morning it’s time to celebrate what’s never been compromised - the sheer will of the men and women who serve this country, accountably, with their lives each and every day.


I have cited this book before. It’s a modern day American inspiration for many. In “Lone Survivor”, Marcus Luttrell not only reminds us of what America’s bravest do for us while we are sleeping, but he hammers home that it’s ok to want to be the best that we can be.


No matter where you go this morning, here we are. Let professional politicians be political. Let socialists pander to collectivism. Let excuse makers avoid mirrors. But please… please don’t stop letting the real leaders of this country be patriots.


Unlike the Fiat Fools, who point fingers and say “no one saw this coming” Luttrell admits, “we do have our own brand of arrogance. But we paid for every last drop of that sin in sweat, blood, and brutally hard work.”


It’s ok to be confident if you’ve done your own work. You don’t owe willfully blind politicians and incompetent bankers who are chasing one another’s compensation tails a lick of sympathy. America isn’t a country of losers. “Every Navy SEAL is supremely confident because we’re indoctrinated with a belief in victory at all costs.”


The victory of America’s Trident stands for all that we can be when no one is looking. Enough of the self interest. Enough of the me me me. The single grade medal Navy SEAL Trident is one of the most recognizable badges on earth because there is nothing else like it. It stands for selflessness, pride, and honor.


After a horrendous month for stock and commodity markets around the world (SP500 down -7.1% for the month-to-date), take this Memorial Day weekend as an opportunity to take a step back – take a deep breath – and think about what you can do to be the change you want to see in this country.


Rather than listening to the broken promises of professional politicians, stand up for yourself and look your kids in the eye and promise them that you’ll do all that you can to make the roofs over their heads as credible as the skies that our military’s finest guard above them.


You want real American leadership? You have to get out there and be it. Next time a bad guy at work is whining, send him this message from Instructor Eric Hall (a veteran Navy SEAL of 6 combat platoons) from page 150 of Lone Survivor:


“We don’t put up with people who feel sorry for themselves. Any problems with drugs or alcohol, you’re gone. Anyone lies, cheats, or steals, you’re done because that’s not tolerated here. Just so we’re clear, gentlemen.”


Just so we’re clear. There will be no political fear-mongering in my family or firm’s hard earned savings accounts. There will be no crack-pot sell-side strategist slapping a perma-buy on everything that is a rally of global risk from Wednesday’s YTD low. There will be a real-time risk management process however; and it will be our own.


On yesterday’s market strength, I raised the cash position in our Asset Allocation Model to 76%. We’ve had a winning month, and I am not about to put my team’s fate in the hands of mediocrity.


“Never stop learning, never stop training.”


God bless America’s finest on this Memorial Day Weekend,



Keith R. McCullough
Chief Executive Officer


America's Trident - Pic of the Day


The news agency LUSA is reporting May total gaming revenues may come in at 17-18bn MOP. We think business slowed the last week so the low end of that range is more likely.



We should be getting the Macau property numbers for the month of May next week but LUSA is already reporting that total gaming revenues could be in the range of 17-18 billion MOP.  We think LUSA is basing that projection on the results through the first three weeks which we already reported were very strong in our 5/25/10 post “WHITE HOT MACAU”.  However, our sources indicated that business has slowed over the past week.  We think 16.5-17 billion MOP is probably the right range.  That still represents approximately 90% growth.


We continue to believe that MPEL and Wynn gained market share sequentially, mostly at the expense of LVS.  Apparently, Wynn’s hold percentage came off very high levels in the 2nd half of the month so market share will not be as high as the 18% it had mid-month.


The explosive growth will once again be fueled by the VIP segment.  One possible explanation for at least part of the strong growth came to light recently.  Apparently, certain mainland visa restrictions from the Zhuhai Province were lifted recently.  This specific restriction impacted junket players but now mid and high rollers face no restrictions.  This favorably impacted May and likely will continue to do so in future months.

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PSS: Mind the Earnings Juice

It’s always nice to find a solid multi-year story that actually has near-term earnings juice.  PSS is one of the few.



There’s been increasing evidence to suggest that Payless’ Performance Lifestyle Group along with core retail stores are likely having a solid first quarter. In fact, our above-consensus estimate for the quarter of $0.88 vs. Street at $0.74 may be looking a bit conservative given some mid-quarter data points. Additionally, though sourcing is less of a driver that it has been, it should still fuel GM% to come in 2x expectations. The key variable is how aggressively the company reinvests in SG&A during the quarter – we’re modeling 5% growth yy. With rent and DC savings offset by growth investments in PLG there could be some variability in opex, but the bottom line here is that the two most important lines of the P&L are tracking nicely.


Here are a few facts to consider:

  • First, as it pertains to Saucony.  It’s no secret that performance running has been and still is one of the strongest performing sub-categories of athletic footwear.  Last month we addressed the strength vis-a-vis, Brooks - a direct competitor to Saucony as well as another of the niche “running only” brands.  Brooks CEO recently noted that after a mid-single digit increase last year, the company’s U.S sales are tracking up 25% through April with a double digit positive backlog through the Fall.  Keep in mind this is also consistent with commentary from FL and HIBB last week, both of which highlighted performance running as a leading category. 


  • Secondly, the NPD monthly brand data is directionally accurate.  While in no way does the data capture all U.S sales of the Performance Lifestyle Group’s big brands, it has still proven to track closely with reported trends.  The charts below include trends through the end of April.  Despite an Easter induced spike in March, trends turned positive across all major brands on a sequential basis during the quarter (bottom chart).

PSS: Mind the Earnings Juice - 1


PSS: Mind the Earnings Juice - 2


  • What about the backlog?  Unbeknownst to most investors and analysts, PSS began reporting a backlog number for the wholesale division at the end of its fiscal year with the filing of its 10-K.  Perhaps last year’s data point was lost in the shuffle during the market meltdown, which is why not many people are focusing on this year’s version.  According to the filing, PSS’ Performance Lifestyle Group backlog (for orders delivered this year) was up 36%.  Now keep in mind the order book does not include or account for cancelations or shipment delays, but this is impressive growth nonetheless. In taking a look at the past 2-years, approximately 88%-90% of year-end backlog has been realized in Q1 revenues. With a backlog of $222mm at year-end, if we assume only 80% is realized (which we have) that suggests 20% growth yy, or 3.5% to the top-line alone.

PSS: Mind the Earnings Juice - PSS WhslRevs 5 10


  • Finally, the overall health of the family footwear channel suggests our 3% same store sales estimate for the core retail business may prove conservative.  Recall that 4Q same store sales were light given lack of inventory support for key trends including boots as well as the post-Oprah hangover.  Continued strength in mall traffic as indicated by Q1 retail sales along with a conservative forecast for a flat ticket, we further believe a 3% comp may indeed be too low.  Consider the following charts as a proxy for PSS’ historical same store sales results as well as the charts illustrating relative comp trajectories including preannouncements from both DSW and SCVL.

PSS: Mind the Earnings Juice - PSS Comp Trends


PSS: Mind the Earnings Juice - PSS comp trends 2 yr


PSS: Mind the Earnings Juice - FamFWComp Table 5 10


PSS: Mind the Earnings Juice - FamFWComp Chart 5 10



R3: Athletic Top-Line Put Into Context


May 27, 2010





With mixed datapoints out of retail earnings this week as it relates to demand headed into the end of May, we want to put this into context as it relates to the athletic space. The bottom line is that after 2-years of fairly extreme volatility in the athletic space relative to retail – which we best capture by measuring the rate of change in  the weekly ICSC index vs. other data series such as NPD and SportscanINFO – the Athletic space is performing right in line with the rest of the world.


One thing worth noting is that we have just ended nearly a month-long period of tough compares as last year’s spread contracting by 16 points in 3 weeks. We’re now into a period where compares are increasingly easy through through Thanksgiving.


Note that this is the same time period over which we think the product cycle will start to kick up more meaningfully (as we’ve been very vocal about), and we get a little bump due to a little event called World Cup.


The bottom line is that the data started to support our thesis earlier this spring when the sector’s top line accelerated meaningfully. Now we’re in a holding pattern. That does not concern me one bit. If it concerns the market, then it’s a great opportunity to scoop up more UA, FL and NKE – our core three calls.


R3:  Athletic Top-Line Put Into Context - 1


R3:  Athletic Top-Line Put Into Context - 2


R3:  Athletic Top-Line Put Into Context - 3


R3:  Athletic Top-Line Put Into Context - 4


R3:  Athletic Top-Line Put Into Context - 5


R3:  Athletic Top-Line Put Into Context - 6


R3:  Athletic Top-Line Put Into Context - 7


R3:  Athletic Top-Line Put Into Context - 8





-American Eagle noted that the company overbought in the knit tops category, despite the positive customer response to the company’s value pricing strategy. Overall, management simply bought too many units. As a result, the company expects to make less unit buys in 3Q, with an emphasis on higher AUR’s. Interestingly, AEO still remains one of the few specialty retailers that is not chasing inventory, but rather placing more aggressive “bets” that don’t seem to be fully accepted by its customer.


- 99 Cents Only management noted that the company continues to experiment with creative pricing schemes as a means to address potential inflation down the road. While the company is not seeing any signs at the current time, inflation creates challenges for the company which historically has remained true to its $0.99 pricing on everything. Test pricing includes efforts to price items on a per unit or per lb basis as well as to sell a gallon of milk at a market driven price (above $0.99).


- Fred’s management noted that while the competitive environment was relatively stable in 1Q, promotional cadence has picked up in 2Q. Fred’s CEO went on to say. “ we anticipate the competition becoming much more aggressive relative to price and promotion as we're seeing today and moving forward and throughout Q2 and potentially beyond.” The comments were primarily focused on Wal-Mart’s rollback efforts, which have intensified over the past couple of weeks.


- After indications of a trend shift to athletic footwear from casual at Foot Locker and vice versa at DSW, Brown Shoe confirmed they are indeed seeing the former with athletic outperforming other categories in both women’s and men’s businesses. It’s also worth noting that comps up 15.5% at Famous Footwear represented the greatest quarterly gain in more than a decade.





WMT's Asda Group buys Netto's UK Discount Supermarkets - Wal-Mart Stores Inc.’s Asda Group Ltd. agreed to buy Netto’s 193 U.K. discount supermarkets for 778 million pounds ($1.13 billion) as it fights to retain its No. 2 position in Britain’s food retailing market. <bloomberg.com/news>


Chinese Consumer Remains Loyal to Luxury Brands - Chinese consumer loyalty to luxury brands remains high despite the economic downturn, according to a report released Wednesday by KPMG. Of the consumers surveyed, 72% said they felt little or no impact from the recession, while 62% said they would continue to maintain their luxury goods spending this year. The 927 luxury consumers surveyed were between the ages of 20 and 44. <wwd.com/business-news>


GSI Commerce Extends and Expands Timberland Ecommerce - GSI Commerce Inc. has extended and expanded a multiyear agreement to provide The Timberland Company with e-commerce technology, order processing and customer care services for their U.S. and European Web stores. <sportsonesource.com>


JJB Sports Will Be Unprofitable For A While - JJB Sports Plc said full-year losses narrowed and recovery won’t be “quick or easy.” JJB had trouble getting merchandise shipped last year as it struggled to avoid falling into bankruptcy. Last September, it said performance wouldn’t improve until late 2010 or early 2011 because inventory levels wouldn’t improve soon enough. One encouraging sign was the 7.5% increase in comps for the 16 weeks ended May 23.  <bloomberg.com/news>


J. Crew Bridal Takes Inspiration from a French Salon - Furnished with brass-rimmed vitrines for vintage jewelry, velvet drapes in the window and a graciously spaced showroom downstairs with a crystal chandelier and private suites so family and friends can comfortably witness the fittings, the 4,000-square-foot J. Crew bridal shop opens today on the corner of Madison Avenue and 66th Street. The boutique also retains J. Crew’s signature quirkiness, with an assortment that ranges from a more traditional silk taffeta gown with a floral sash to an offbeat pairing of a delicate Mongolian wool vest with a tricotine skirt with a train. <wwd.com/retail-news>


Hamptons and the Luxury Market - The Hamptons are mellowing out amid the global recession. After last year’s downturn, retail vacancies filled up fast, particularly in East Hampton, where there’s been an infusion of designers and brands — from Hugo Boss to Juicy Couture as well as Chico’s bringing a lower-priced offering to a high-end field. Ater a decade of evolving toward a year-round, spend-with-abandon destination, retailers say there’s contraction. Merchants must grab as much business as they can in July and August, when the real migration eastward occurs. This contrasts with past years, when good traffic could be counted on for a longer stretch, beginning a few weeks before Memorial Day and lasting until a few weeks past Labor Day. <wwd.com/retail-news>


Jimmy Choo Is Going Sporty - The London-based luxury brand, known for its sky-high stilettos, is launching a capsule collection of sneakers for fall ’10. The two-style offering — which comes in white, black, purple and beige — includes one low-top and one high-top style. Embellished with gold details, including a star-shaped eyelet, the sneakers feature patent leather, suede and exotic snakeskin uppers. The styles are set to retail between $495 and $565 at Jimmy Choo boutiques and Jimmychoo.com.  <wwd.com/footwear-news>



Take it as a data point or it may just be speculation, but the Starbucks bloggers are talking about insufficient staffing levels.  I would not even highlight this if so much of the margin recovery story at SBUX was not built on cost cutting.  To that end, the company continues to surprise to the upside with its cost cutting initiatives. 


From a Starbucks blog; “apparently there is such a staffing crisis at the SM (Store Manager) level in the DC area that several SMs in the Mid-Atlantic are being recruited to travel down to DC, all expenses paid, for a period of two months to help run the stores until ASMs and RMTs are ready to assume those positions. One of the SMs I know is going.”


More important for the Restaurant industry as a whole is the trend in turnover rates if the economy and the job picture gains momentum.  In an economy that is creating jobs there is an increased willingness to quit and walk away from a lousy job, and the restaurant industry will pay the price. 


For now, however, we don’t have much to worry about.  As our Financials Analyst, Josh Steiner, wrote today “Consistent with the trend year to date, claims remain in their ~450k range, too high for unemployment to improve meaningfully. This morning the reported number fell 14k to 460k, down from last week's revised print of 474k, and higher than consensus of 458k.  Rolling claims climbed 2k to 457k week over week.  Remember, we need to see initial claims fall to a sustained level of 375-400k in order for unemployment to fall meaningfully and, by extension, lenders' net charge-offs to return to normalized levels.  We remain well above that level.”


Cutting costs too deeply is a whole different issue.  Based on SBUX’s improving same-store sales trends, I had not been under the impression that the company was cutting costs to the extent that it was detrimental to the customer’s experience.  In the most recently reported fiscal 2Q10, store operating expenses (including labor costs) as a percentage of retail sales decreased 350 bps YOY in the U.S.  Management attributed the YOY decline to “sales leverage, the closure of underperforming stores and the continued application of lean principles in our store labor deployment.  Lower benefits expenses related to health and welfare programs, which tend to vary from quarter to quarter also contributed to the improvement. As a result of the lean work to-date, productivity and customer satisfaction have both improved dramatically compared to last year. We continue to refine these important activities as many of them are customer facing. In addition we have other initiatives under way such as a new labor scheduling tool and a new point-of-sales system that we expect will further increase productivity once fully implemented.”


It will be important to monitor whether customer satisfaction scores continue to improve to ensure that the company’s cost cuts are sustainable and not a result of management “pulling the goalie” to improve margins.  I don’t think this is the case, however, as management seems focused on improving the customer experience and sequentially better same-store sales and traffic trends seem to reflect that renewed focus, but insufficient staffing levels would be concerning.


SBUX - COST CUTTING GONE TOO FAR? - SBUX US store op exp   of sales


Howard Penney

Managing Director

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