R3: Really?!? With Hedgeye Retail

R3: Really?!? With Hedgeye Retail


Toys R Us is coming public – again. Really!?! Oink oink. Really?!?



As my team and I went through the news and our research form the past day, in the back of my head I kept hearing a perverse iteration of “Really? With Seth and Amy.” For those who are not SNL fans, this is part of the Weekend Update where Seth Meyers and Amy Poehler tear into current events with a super sarcastic tone. I can try to describe it here… but there are these things called You Tube and Hulu that can show it better.



- Goldman Sachs Hired for 800 mm Toys R Us IPO - KKR & Co. LP and Bain Capital Partners LLC hired Goldman Sachs Group Inc. for a $1 billion initial public offering of Toys R Us Inc., the retailer the buyout firms purchased in 2005, according to people with knowledge of the matter. The filing for the U.S. listing may come as soon as today, said the people, who declined to be named because the discussions are private.
Hedgeye Comment: Really?!? Like we really need this piggy to be public again? First Dollar General, now Toys R Us, and yes, Sports Authority next. Really?!? Oink oink…


- Add Big Lots to the list of retailers looking for “A” location real estate. Following the successful trial of eight test locations in ’09, the closeout retailer is looking to add nearly half of its new stores in “A” locations this year. While a closeout concept in higher-income demographic areas may not sound like a natural fit, management raved about the productivity of its stores with sales at $180 to $200 per square foot.
Hedgeye Comment: The sustainability of these results is a concern given that closeout inventory was both the most plentiful and arguably of the highest relative quality over the last 12-months in a very long time and perhaps ever.  You’re looking for prime real estate Big Lots? Really?!? Check out what happened when DSW went this route. How bout Circuit City? Shift to more expensive locations in a business model that in structurally not set-up to cover these rents and let’s see how you stack up.  


- Costco noted that the lack of promotional activity in televisions is one of the key drivers behind the category weakness. Management also went on to explain that increasing demand from Chinese consumers for the same products has been a key reason why manufacturers have been less aggressive on price. However, COST does expect pricing to loosen up over the summer as efforts to stimulate demand are likely to reaccelerate.
Hedgeye Comment: Price cuts just in time to buy your gazillion inch flat screen for World Cup. This price/demand trade-off actually makes a whole lot of sense to us.


- China: Demand For Luxury Unaffected by Economic Downturn - A survey from consultancy KPMG showed the economic situation had little impact on most respondents’ spending habits. The survey, which interviewed more than 900 people in 15 cities, found that 62% continued their spending on luxury goods in 2009 and 2010. Despite a tougher economic climate, respondents demonstrated their brand loyalty, as they chose to stick with existing brands rather than downgrading to less prestigious options.
Hedgeye Comment: Note that China has the world's second-highest number of dollar billionaires after the United States, and a new class of wealthy Chinese created by the country's three-decade boom has latched onto foreign luxury brands as status symbols.  Don’t underestimate the impact of the Iron Rice Bowl being broken.


- Swiss Wath Exports Growth Slows in April - Swiss watch exports continued to rise in April, albeit at a slower pace than in the first quarter, growing 11.5%. Watch exports in April returned to their 2007 level over the first four months of the year, the sector posted a rise of 16.4% versus 2009. The increase in April was driven by timepieces at both ends of price spectrum. China confirmed its position as the leading growth market, with a rise of 150.2% on the month, while the United States progressed by a modest 1.6% and Germany saw sales slide 15.2%. <>
Hedgeye Comment: Demand for watches, TVs, other luxury goods all solid in China.


- While Tiffany reported solid sales gains across all regions and product price points, it did note that jewelry over $50,000 posted substantial increases. However, management was also quick to point out that the fine jewelry category also had the easiest comparisons with last year’s trough performance.
Hedgeye Comment: It’s easy to take a quote like “items over $50,000 are posting increases’ wildly out of context. It’s clear that ‘easy compares’ are a key driver here.


- Genesco continues to make progress with rent negotiations on its existing store base. Management noted that the company successfully renegotiated 100 leases in the first quarter, resulting in a 9% reduction in rents in those stores.
Hedgeye Comment: GCO is the ugly red-headed stepchild in footwear retail. But these guys have been managing their lease portfolio like champs.


 - When discussing the performance of discretionary vs. non-discretionary merchandise, Costco’s CFO responded with “my favorite article that I read about all of this was called, Frugality Fatigued. People were frugal last year. Some of them are a little tired of being frugal and they're buying things for the home. And whether it is door mats or housewares or coffee machines or live goods, plants, that's stuff that has been strong.”
Hedgeye Comment: Good for Bed, Bath and Beyond.


 - In an effort to expand owned retail, Australian-based Billabong acquired all but the most valuable assets of Becker Surf and Sport – its branded surfboards. The deal included the brand’s 5 brick and mortar stores in SoCal, which will double the company’s presence in CA, as well as the rights to the Becker’s online business. With only 27 stores stateside.
Hedgeye Comment: It’s too early to tell if this is the beginning of more aggressive expansion plans to roll up smaller brands in the U.S., or simply an opportunistic deal among long-time friends.  





GCO's Hat World to Acquire Sports Avenue - Genesco Inc. announced that its Hat World subsidiary has entered into an agreement to acquire the assets of Sports Avenue and related entities. Sports Avenue operates 46 retail stores across the United States and 13 ecommerce sites, selling officially licensed NFL, NCAA, MLB, NBA, NHL and NASCAR headwear, apparel and accessories, and had revenues of approximately $42 million for its most recent fiscal year.
Hedgeye Comment: Accountability check… When GCO bought Hat World, I thought it was absolutely ridiculous. It turned out to be a high ROI deal. At face value, this one looks equally ridiculous. But they’ve earned the benefit of the doubt.


FINL Cofounder and Chairman to Retire - The Finish Line, Inc. announced that Alan H. Cohen, the company's co-founder and chairman, has informed the board of his decision to retire as chairman and as a member of the board at The Finish Line's 2010 Annual Meeting of Shareholders to be held on July 22, 2010. TGlenn S. Lyon, currently chief executive officer and a member of the board, will succeed Cohen as the company's chairman <>
Hedgeye Comment: Non-event


Finish Line Finds Mobile Is A Good Fit - Finish Line says 3% of its e-commerce revenue comes from m-commerce. And 8% of its online customers access its sites though mobile devices. It’s stats like this, Finish Line says, that show a mobile strategy is important. <>
Hedgeye Comment: Is it me, or is this an uphill battle? One form of distribution growing another form of distribution for content that it does not own or control. Really?!? Can anyone find me someone in their right mind that would invest in this? This is not to say that FINL can’t work. In fact, it likely will, along with the rest of the Athletic space over the next 2 years. But using an e-commerce angle is sad.


ANF Settles Stockholder Lawsuit - Abercrombie & Fitch Co. said in a Securities and Exchange Commission filing Thursday that it had agreed to settle a five-year-old stockholders’ lawsuit for $12 mm. Plaintiff Robert Ross filed the class-action suit in 2005 on behalf of investors who bought the company’s Class A shares between June 2 and Aug. 16 of that year. The suit alleged that, during the period, Abercrombie executives made misleading statements about the strength of its business and caused an inflation of the firm’s stock price. <>
Hedgeye Comment: Really?!? ANF management make misleading statements?


CVS Caremark Says Computer Error Caused Customers to Overpay - The company says an error in data that it gave the Medicare website resulted in SilverScript Medicare prescription-drug customers' being charged higher prices than advertised since the start of the year, the WSJ reports. Generic drugs were not subject to the same problem. A Medicare spokesman says the company will refund the price difference to customers specifically requesting it, and it will also help anyone who, using the correct prices to make their comparisons, wants to switch plans.
Hedgeye Comment: Computer errors and fat fingers don’t just cost us in equity values…


The Macau Metro Monitor, May 27th, 2010



According to LUSA, casino gross gaming revenue in May is on track to hit between MOP17 or 18 billion.  If LUSA is right, this would represent 100% YoY growth.



A transit permit, which allows Chinese passport-holders, with RMB 200 and an itinerary, to pass through Macau on to a third destination, has been reinstated by the Zhuhai Customs and Immigration Authority after being suspended in mid 2008.  This permit would allow the visitor to stay for a maximum of 7 days.  The reinstatement of the transit permit is great news for junkets, allowing them to move people into Macau with more ease.


ENCORE IS THE WORD Intelligence Macau

Steve Wynn wants Encore to be an attractive destination for direct-VIP players.  According to IM, compared with those of junkets, margins on direct -VIP players are almost double; win-hold % are also higher for direct-VIP players because of tougher credit decisions made by management and retaining customer loyalty. The Sky Casino also caters to high rolling  slot players with machines in private, elaborately-designed rooms.


LOT 5&6 ON THE MOVE? Intelligence Macau

Activity is returning to Lots 5&6.  IM knows suppliers who have signed contracts that include a requirement of 30% local labor in their workforce, not one-for-one, as had been expected. According to Macao Daily, the government's Labor Bureau will meet with Sands CEO Jacobs to discuss his plan and requirements for imported labor quotas. 


For concessionaires that have been employing more electronic table games to supplement the capped table limits, loose regulatory times may soon come to end.  According to IM, caps on electronic tables games are coming within the next three months.


Yesterday, the rebound in the EURO seemed to be the big driver of the shift in sentiment, as the S&P rose 3.3% to 1,103.   The REFLATION trade benefitted from a strong rebound in the Chinese market and surging commodity prices.  The Hedgeye Risk management models now have Consumer Discretionary (XLY) as the only sector positive on TREND.  


Financials (XLF), Energy (XLE), and Materials (XLB) were the three best performing sectors yesterday.  There were a number of positive dynamics at work in the energy sector today, including the outperformance of the underlying commodities with July crude +4.2%.   Of note, BP rose 7% on reports that it had some success in stopping the flow of oil from a leaking well in the gulf.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (71.25) and Sell Trade (77.68).


Treasuries came under pressure today with the dampened risk aversion trade.  Moreover, the VIX declined 15.2% yesterday. The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (28.07) and Sell Trade (45.20). 


Yesterday, we covered our short in the Dollar as the Euro bounces right back to the top end of our immediate term range.  The Dollar Index is in the process of putting in an intermediate term top, but we need to manage risk around the daily volatility of the position.  The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (85.27) and Sell Trade (86.97). 


The big news yesterday was that volatility in the Eurozone will not have a significant impact on China’s strategy of diversifying its foreign-currency reserves.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.21) and Sell Trade (1.24).


Within the Financials (XLF), the banking group led the way with the BKX up 4%.  C +4.2%, BAC +4.6% and JPM +4.2% were all strong performers.  With the pickup in risk appetite the higher bets regional names such as RF +6.5% and KEY 6.4% were among the best performers.


The Technology sector mad a notable recovery following Wednesday’s dramatic underperformance.  The hardware group provided a good chunk of upside leadership, along with recovery in the software sector.  The semis also finished sharply higher today with the SOX +5.2%.


In early trading, copper is trading higher and headed for the first weekly gain in seven weeks.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.03) and Sell Trade (3.21).    


So far this week, gold has rallied 3% and is trading higher today.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,191) and Sell Trade (1,233).


As we look at today’s set up for the S&P 500, the range is 96 points or 5.2% (1,046) downside and 3.5% (1,142) upside.  Equity futures are trading mixed to fair value in the wake of Thursday's pop. 


On the economic front to be reported today will be:

  • Apr Personal Income and Spending
  • PCE Deflator
  • Core PCE
  • May Chicago PMI
  • May U. of Michigan Confidence
  • May NAPM Milwaukee

Howard Penney













the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

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.

get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.