R3: Blackhawks Exposure Revealed


June 11, 2010


In light of the city’s first Stanley Cup in 50-years, we decided to take a quick look at which retailers are over-indexed to the Chicago market.





While hockey merchandise sales are not typically a key driver for athletic and sporting goods retailers, we decided to take a quick look at which retailers are over-indexed to the Chicago market in light of the city’s first Stanley Cup in 50-years. Using the population of Illinois relative to the total U.S. at 4.2%, we can see which retailers are over and under indexed to the Windy City. As the chart illustrates, the primary beneficiaries are Athlete’s Foot, The Sports Authority, Finish Line and Dick’s. While Wednesday night’s victory is likely to impact the sale of jerseys and t-shirts, we don’t expect the Blackhawks victory to have a meaningful impact on public company sales in Q2.  However, the Cup could be and added bonus for TSA’s forthcoming IPO. 


R3: Blackhawks Exposure Revealed - 1





- Lululemon noted that its class of stores opened in new markets toward the tail end of 2008 were real stand-outs when compared to the overall average comps for the quarter. These stores outperformed the reported 35% increase on a constant dollar basis. Management attributes the outperformance to traffic, which is in part driven by growth in brand awareness over the past 18 months.


- A survey from Compete suggests online coupon usage has a meaningful impact on retailers’ results. About 57% of consumers who used a coupon code on their last online purchase indicated they would not have made the purchase if the coupon was not used. Coupons also seem to have meaningful ROI impact, with those using coupons spending an average of $216 vs. $122 for those without coupons. Bottom line, keep the coupons coming.


- Add Radio Shack to the list of retailers this go around that will be selling the iPhone 4 at launch. Recall that the prior release of the 3GS was confined to Best Buy, Apple, and AT&T. To sweeten the deal, The Shack will also give consumers a trade-in credit for their old iPhone. Score one for the Shack!





UK Branded Market Bouncing Back While Independents Lose Share - The branded market could be ripe for a resurgence after figures showed the 2.5 year trend for declining sales in the sector has come to an end. Independents have borne the brunt of the decline in the branded fashion sector, notching up the biggest market share declines in the clothing and footwear markets so far this year. <>

Hedgeye Retail’s Take:  Not surprisingly the larger, better capitalized companies are taking share while the little guy loses.  Nothing new here except that bounce of the bottom seems to be following a pattern similar to recovery we’ve seen stateside. 


Rating Agencies Upgrade Neiman Marcus, Hold Barneys New York - Neiman Marcus Inc. got a thumbs-up from one ratings agency Thursday, while Barneys New York Inc. received a less flattering assessment from another. Moody’s Investors Service upgraded Neiman’s corporate family rating to “B3” from “Caa1” based on a “solid recovery in credit metrics,” while Standard & Poor’s Ratings Service took Barneys off CreditWatch without changing its “CCC” rating. However, S&P lowered its issue-level rating on Barneys to “CCC-minus” from “CCC” and lowered its recovery rating to 5 from 3 “based on our view that the company’s valuation has diminished over the past few years.” Barneys was placed on CreditWatch with positive implications on April 22. <>

Hedgeye Retail’s Take:  Nothing like a rearview ratings change for the luxury leaders, both of which are showing signs of life against easy compares. 


Skechers Plans to Expand into Ireland - Skechers USA Inc. revealed its plans Thursday to launch Skechers-branded retail stores throughout Ireland later this year. Under a licensing deal with footwear retailer Shuz 4 U Ltd., SKX will open the first two shops (for men, women and kids) in Dublin and Cork by the end of 2010. Additional stores are planned over the next five years. “Our 10 branded Skechers stores in the United Kingdom give us a highly effective means to reach consumers," said Michael Greenberg, president of Skechers, in a written statement. “This licensing partnership with Shuz 4 U allows us to leverage strong European Skechers brand recognition into an expansion of our retail foothold and build on the strong wholesale business we currently have in Ireland and the U.K." <>

Hedgeye Retail’s Take: By going the partnership route, this makes the move into Ireland less risky but also less rewardy.  Nonetheless, it’s finally time for the Irish to don their EasyTones on the way to the pub.  Something tells us Ireland is not where the real opportunity lies in Europe.


GSI Maintains E-Commerce Agreement with Radio Shack - GSI Commerce Inc. announced a new multiyear extension of its e-commerce agreement with RadioShack Corporation. Under the new agreement, GSI will continue to provide RadioShack® with e-commerce technology, order management, customer care and interactive marketing services. RadioShack has been a GSI partner since 2005. <>

Hedgeye Retail’s Take:   GSI continues to hold its own with those retailers who are behind the curve on building out their own e-commerce infrastructure.  Given the consumer’s high propensity to buy consumer electronics online, it’s interesting to see RSH choosing to use its cash flow for other things rather than finally invest in what may be the only growth vehicle left for the retailer.  Looks they bought themselves some time on this initiative at the very least.


Brands Need to Capture Teen Influencers - Not all are created equal in the eyes of social media advertising.  Investing in ways to capture the attention of the most active and engaged social media teens may have a higher ROI than reaching the masses.  According to a study, the top 15% most active and engaged members of Facebook and myYearbook are more likely than other teens to recommend a variety of products to their friends. Reaching teen influencers will mean taking advantage of earned-media opportunities and word-of-mouth that comes from highly trusted friends.  <>

Hedgeye Retail’s Take:  Put aside the focus on “influencers” and it seems to us that social media, which facilitates real-time, honest feedback on products and brands actually means companies need to produce good product not just good marketing.  The feedback loop is only getting faster and more accurate.

R3: Blackhawks Exposure Revealed - 2


Footwear: What's Selling - WWD asked a few independent footwear retailers what product was selling and what's on sale.  Here are the answers:

Pegasus Shoes, Woodstock, N.Y. 1. Vibram FiveFingers, 2. Jambu Planet and Papaya, 3. Dansko Serena, On sale: “Things are always on sale,” said owner Len Sapiro. “For promotions, right now, we’re giving away a free pair of organic cotton socks with any online order, plus a $3 discount.”

When The Shoe Fits, Vancouver, Wash. 1. Brooks Adrenaline GTS 10, 2. Keen Presidio, 3. Aravon Maya, On sale: “Not a lot right now,” said owner Alan O’Hara. “The semi-annual sale will break on July 9, so right now I just have some discontinued stuff from last year, like old sandals.”

Comfort Shoe Gallery, Gig Harbor, Wash. 1. Taos Treasure, 2. Naot Believe, 3. Chaco Hipthong, On sale: “I have a sale rack of discontinued items, but as far as new products, nothing really,” said owner Lori Cain. “The sale rack is just shoes and boots left over from last winter, so it has some discontinued styles and colors. Some brands, like Dansko, never make it over there.”

Heart & Sole, O’Fallon, Mo. 1.Taos Prize, 2. Romika Maui 01, 3. Birkenstock Mayari, On sale: “Right now sandals are $10 off,” said owner Jerry Herndon. “No specific brand, just all sandals.”

Sole Food, Seattle, Wash. 1. Keen Newport, 2. Creative Recreation Cesario Lo, 3. Camper Laura, On sale: “There’s Keen, Indigo, Frye boots, a lot of sandals and closed-toe ballets,” said store manager and buyer Annie Kritsonis. “I usually put things on sale that I only have in one or two sizes left, so right now it’s a mixture of flats, sandals and pumps.”

All About Feet, Houston, Texas 1. Finn Comfort Phuket, 2. MBT Sport 2, 2. Dansko Serena, On sale: “A little bit of everything,” said associate Jackie Sabbe. “We put all the brands on sale at one point, but the big sales are at season ends. There will be a sale at the end of August and another one in January.” <>

Hedgeye Retail’s Take:  Ask a shoe store what they’re selling in June and what you get? Sandals, sandals, and more sandals.  Add in a little performance running and these comments coincide with anecdotes with the larger chains.  Strong sales of sandals of course are good for margins and limited seasonal markdown risk.

Brazil . . . Winning the World Cup of Interest Rates

Conclusion: Brazil increases interest rates to 10.25%, which leads the G20. Investors applaud, the masses are less pleased.

From Brazil, we're seeing more proactive risk management from a central bank president not named Glenn Stevens. As widely anticipated, the central bank’s monetary policy committee voted unanimously to raise Brazil’s primary interest rate, the SELIC, by 0.75%, to 10.25%.  The previous rate hike – also 0.75%, from 8.75% to 9.5% - was put through in April.  The rate increase was in line with market expectations in the central bank’s efforts to combat inflation.  The monetary policy committee meets again on 20 July.


Labor unions and business owners have expressed displeasure, saying the bank has thrown a bucket of cold water on the economy at what should have been an auspicious moment.  Sao Paulo’s business federation (Fecomerico) said the rate hike is the bank’s way of compensating for the state’s inefficiency.  They said the country should get public spending under control and make investments that will provide productive stimulus, rather than seek to control demand through higher interest rates. Consumers are echoing the more of the same with their wallets. Consumer credit delinquencies rose 1.9% in May Y/Y and 4.3% M/M (the first increase since Oct. 2009). Burgeoning credit card debt, consumer financing and bank loans were seen as the principle cause of the rise in the indicator, as consumer indebtedness grew at an accelerated rate during the last three quarters.  Rising interest rates were also seen as a contributing factor.


While we’d prefer not to take sides here, we do have a soft spot in our hearts for countries that respect the cost of capital – particularly in the face of white-hot growth and above-target inflation. To recap, Brazil posted a China-esque +9% Y/Y 1Q10 GDP release on Tuesday and May inflation (CPI) came in up 5.22%, though down sequentially from 5.26% in April, which is above the target rate of 4.5%.


In short, this seems like a classic case of short-term pain for long term economic gain. While Brazil does indeed have its problems (crime, government wastefulness, dried up capital markets), it certainly deserves a pat on the back for this latest bout of risk management. With the Bovespa rallying 2.6% yesterday, it looks as if it is getting just that.


 Brazil . . . Winning the World Cup of Interest Rates - Bovespa


Moshe Silver

Chief Compliance Officer and Managing Director


Darius Dale



The Macau Metro Monitor, June 11th, 2010



According to DB analyst, Karen Tang, casino gambling revenue in Macau soared 70% in the first week of June. Seeing no sign of a slowdown she raised her forecast of 50% growth in 2010. 



Susan Macke, IGT's chief marketing officer,  believes the growth in slot machine uptake will be similar to that of Las Vegas.  Macke said only 1/2 of the 2,500 slot machines allowed for each casino in Singapore have been installed.  Macke is also bullish on South Korea and the Philippines.  For the US market, Macke does not see replacement rate for slot machines rising to the 10% level any time soon as cautious consumer spending will crimp operators' spending on slot capex; however, Macke does see an uptick in sales before the end of the year.


IM still believes the MOP 20 billion-a-month mark will be broken by October unless Beijing sends a strong signal that mainland asset prices must come down and strong capital flow into Macau is cut off.  Until that happens, junkets will continue to have plentiful working capital and credit to extend to keep the party going.

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US gaming revenues still haven’t reached a definitive recovery phase and investors are worried. That worry spreads to suppliers and their gaming ops segments. BYI looks the most protected.



Which supplier should you own given the current casino environment?  Well, that depends on your outlook.  If you are looking for a V-shaped recovery in gaming spend, then WMS or IGT is your best bet.  Close to 100% of WMS gaming operations revenue is on a variable revenue share basis, while for IGT it is 75%.  However, IGT generates approximately 57% of its revenue from gaming operations and WMS only 40%.  Thus, on a net basis, IGT has a higher exposure to casino variability at 43% versus 38%.


If you think casino revenue growth will stay sluggish/negative and potentially take a turn for the worse, then you short the operators and stay away from the suppliers.  If you must own a supplier stock, then BYI is for you.  BYI generates approximately 50% of its gaming operations revenue from fixed daily fee structures and 50% variable.  Moreover, only 36% of its total revenues is derived from gaming operations so net exposure to casino revenue variability is only 18%.


Of course, should US gaming revenues take the plunge, the recent acceleration in replacement demand will be short-lived and operators will cut back.  That will not benefit any equipment supplier.  BYI would be relatively better off in that scenario and is probably the lower risk slot play.



Austerity’s Bite

“Everything we hear is an opinion, not a fact. Everything we see is a perspective, not the truth.”

-Marcus Aurelius


Austerity is the new buzz word in Europe; from newly elected UK Prime Minister David Cameron in the north to Italian PM Silvio Berlusconi in the south, the issuance of austerity measures from European governments to combat bloated fiscal imbalances seems like a near daily occurrence.


The word austerity comes from the Latin austerus meaning “dry, harsh, sour, tart” and was originally used to describe fruit and wine, however in economics refers to a government’s reduction in spending and/or increases in taxes to reduce a budget deficit.  Over the last weeks, European austerity packages have included such provisions as civil servant wage freezes, extensions on the age of retirement, and levies on alcohol and tobacco to an additional tax on the price of an airplane ticket. In short, governments are trimming obvious “fat” and creating revenue streams to rein in over-extended budgets.


Here’s a quick recap of budget deficits (as a percentage of GDP) and the notable austerity packages issued in Europe over the last months:


Greece – (13.6%); plans to cut €30 Billion in spending over the next three years

UK – (11.5%); £6.2 Billion (or €7 Billion) in spending cuts this year

Spain – (11.2%); €15 Billion in spending cuts and 5% reduction in public worker wage this year

Portugal – (9.4%); plans to issue measures to save €2 billion this year

Italy – (5.3%); €25 Billion in cuts over two years (*strike planned for June 25th)

Germany – (3.3%); €11.2 Billion in spending cuts for next year, or ~€85 Billion by 2014.


The most obvious question to ask is will these measures be enough to reduce deficits and return “health” to Europe?


In both the immediate and longer term the answer to this question appears to be No and a qualified No. In the near term, Europeans are taking to the streets, with strikes over austerity measures already held in Greece and Spain. While the estimated 2.5MM strikers in Spain appeared mostly harmless (a colleague likened the visual displays on TV to a pre-game World Cup party), strikes in Greece had a very ugly undertone with the death of 3 protestors.  As Keith has noted recently, austerity will equate to civil unrest:  the confluence of a government’s need to tax its people versus the public’s cry that they aren’t responsible for the government’s fiscal mismanagement, and therefore refusal to bear the brunt of the measures. We believe that deficit reduction alone won’t solve Europe’s fiscal problems.


In the longer term there are numerous structural and fundamental concerns related to the Eurozone. We’ve pointed out in our quarterly theme work that the investment risk related to sovereign debt default or restructuring is not limited to Greece, but will spread to Spain, France, and Italy, much larger economies than Greece with debt exposure to European banks far greater than Greece’s obligations by a factor of 4-5 times. The outcome could cause further (and greater) downward pressure on markets. 


Importantly, it’s worth noting that the European and IMF-led €750 trillion “loan” facility to buy up toxic debt from European countries “in need” (and return investor confidence) has failed to buoy European markets largely because ECB President Jean-Claude Trichet has not outlined just how the facility works! As a result, we’ve tracked increases in government bond yields, sovereign CDS, and equity underperformance, along with the Euro-USD that broke through our immediate term support line of $1.20-1.21 earlier this week to a low of $1.1876 on 6/7 and is down 15% YTD.


Further, what we have seen since the facility was announced on May 10th is strong headline risk (think comments from a Hungarian official last week of a Greece-like debt crisis in his country that sent markets plunging) and continued day-to-day volatility. Also, the separate European/IMF funded €110 Billion aid package to Greece hasn’t made a dent in performance or sentiment: the Athex is down 33% YTD and the worst performing major index in the world.


Could it be that the experiment of uniting disparate economies is a losing effort?


As we see it, there are two main threads of questions that still need to be worked through to determine the path of the Eurozone:

  1. Should European officials revise the standards of the Stability and Growth Pact, which limits members to a budget deficit no greater than 3% of the country’s GDP?  Could more malleable standards be devised (alongside an oversight body) to limit fiscal imbalances across countries, to benefit both the individual country and the Union as a whole? Conversely, is there any merit in imposing harsh budget reduction mandates (that governments may likely fail to meet) at the expense of growth?
  2. Can the Eurozone, a union of 16 disparate countries that share the Euro as a common currency and are tied to the European Central Bank for monetary policy, exist at all, if countries cannot manipulate (devalue) their currency to inflate their way out of debt or independently adjust interest rates to spur or quell growth? 

Clearly these are big questions, all of which we don’t have the answer for.  What we can count on is the continued lack of political solidarity from European leaders to proactively address the region’s ails, which is risk we’re focused on managing around. Statements yesterday from EU President Herman Van Rompuy are case in point: “And if the plan [€750 Billion loan facility] were to prove insufficient, my answer is simple: in this case, we’ll do more.” This is not leadership! 


If austerity is the first start to something better, we caution that weaker growth prospects are ahead for much of Europe. In the longer term, it just may be that despite the Eurozone’s intention for the whole to be stronger than the individual parts, disparate parts may remain just that, or conversely, and to quote a line from William Butler Yeats’ poem “The Second Coming”: Things fall apart; the center cannot hold.


We’re currently short France in our virtual portfolio via the etf EWQ and have been short Spain (EWP) this year as a way to play the weakness we see in Europe.


Matthew Hedrick


Austerity’s Bite - EL CDS

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