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BBY: The TV Tell All


June 15, 2010


TV sales appear to be the culprit, directly and indirectly, in today’s BBY shortfall.  Expect the environment to heat up as inventories look bloated against lackluster sales trends. 




Embedded in today’s disappointing BBY results are a few key messages.  First, the shortfall came primarily in two areas, sales and expenses.  Domestic comps were weaker than expected, due in large part to weakness in the TV, entertainment, and media categories.  As it relates to TV’s, the negative low single digit performance was a measurable slow down from 4Q’s high single digit increases.  So why the weakness?  Management attributes the slowdown to lack of compelling promotions (thanks to Costco for pointing this out two months ago) in the category, both from a price and innovation perspective.  Of course, the benefit here is higher ASP’s than anticipated.  This quarter marked the lowest year over year decline in average selling prices for TV’s in over two years!  Good news?  Not really.  It’s clear that the consumer is highly motivated by price and without promotional activity, traffic suffers. 


As it pertains to expenses, management suggested the company’s SG&A was a bit over-budget in the first quarter at time when sales were described as being volatile.  This really leads to a question of execution and control.  Expenses and inventory are the two main areas that management should optimize in the wake of an unclear topline trend.  Unfortunately, both areas were not managed in synch with the choppiness in sales.  The balance between near term investments in SG&A (focused on store resets highlighting connectivity, development of a used video game business, and growth in mobile as well as international markets) and potential benefits to gross margins in the future is out of alignment.  With that said, we realize (and were reminded several times on the call) that the first quarter is  a) a small quarter and b) normally not a predictor of holiday upside/downside. 


Regardless of the importance of 1Q historically, it’s still worth noting that overall inventories increased 15% while sales were up 7%.  On a comp basis, US inventories increased 10% against a 1.9% increase in comp store sales. Either way we slice it, we believe a better time to buy TV’s is on the horizon.  Something has to give and it’s either a step-up in promotional activity led by BBY or a pick-up in vendor driven promotions in an effort to stimulate unit demand.   Either way, we’re likely to see the competitive environment change as efforts to boost sales and help mitigate inventory risk take place before the holiday season arrive in five short months. 


Eric Levine



BBY: The TV Tell All - BBY SIGMA





-A few weeks back we noted that Sears is looking to monetize its real estate by subleasing floor space within it’s existing (and operating) stores. It seems that Forever 21 may actually be a potential tenant, with word coming from Costa Mesa that the specialty retailer is in discussion to take a 40,000 square foot space inside a Sears store. While this is a unique arrangement for sure, being a landlord may actually be a better business than selling Craftsman tools. We do wonder however, how much control a mall-owner and its other tenants may have over what types of retailers are permitted to sublet Sears’ space.


-This year’s Best Department Store in the World award goes to U.K retailer, Selfridges. Yes, this is a real award given by the Intercontinental Group of Department Stores.


-Keep an eye on the rumor that Coach and JC Penney may be in talks to collaborate on an accessories line. Nothing is official but Coach’s CEO noted this could be a possibility. He further went on to note that the Coach brand would not be included in any such effort with JCP.





World Cup Drives More Demand for Indonesian Footwear Manufacturers - Indonesian shoe manufacturers has recently acquired additional orders worth US $360 mm from six international and important footwear brands, partly due to the forthcoming World cup held in South Africa this month, according to Aprisindo Indonesian Footwear Association for Indonesian shoe manufacturers. US-based, Nike Inc and New Balance; France-based, Lacoste, Japan’s Mizuno and Adidas Group and Puma from Germany are the six international key footwear brands, which have placed their future orders with Indonesian shoe manufacturers, owing to quality assurance. With the World Cup being held in South Africa later this month, the demand for shoes has further increased and close to 70% of the sports shoes required for the championship will be delivered by Indonesia. The new duties imposed on footwear produced in Vietnam and China has also helped the Indonesian shoe industry. <fashionnetasia.com>

Hedgeye Retail’s Take:    We’re wondering who buys shoes to sit in front of a TV to watch the World Cup.  Now, jerseys on the other hand are a no brainer.  More importantly, we see here an example of how nimble the brands can be in shifting production throughout Asia to take advantage of favorable pricing dynamics. 


India Might Overtake US in Cotton Exports this Season - The Department said India is making ongoing improvements in ginning practices and export logistics, which are enhancing its long term competitiveness. China's growth as an importer is favoring in particular Indian exporters and the dramatic shift reflects both tight American supplies and the development of India's cotton sector, it said. Demand for cotton is being driven by China, the biggest textiles producer, whose consumption will rise by 1.5m bales to 49.0m bales. <fashionnetasia.com>

Hedgeye Retail’s Take:  Hard to believe the U.S has one last stake in the ground in the apparel manufacturing process.  Quality has long been an issue with foreign cotton supply, but it appears that this is finally changing.  Overtime, this probably leads to some pricing opportunity as well as a more stable global crop given the weather dependence of the this key textile ingredient. 


Chinese Labor Hikes - A spate of suicides at the world’s largest factory has drawn international criticism of the Chinese manufacturing model, raising new questions about whether low-cost production is worth the potential consequences. The suicides have prompted the Taiwanese-owned company and others to increases salaries. But labor-rights groups say much more work is needed and low wages are only one part of the problem with China’s manufacturing industry. They argue that vast structural changes are required and that the world can no longer expect this country’s workers to work themselves to death to make consumer goods. All this has raised new questions about whether China has reached a critical juncture, moving away from being the world’s low-cost production center. Such a move is in line with the government’s ambitious but far-off goal of becoming an economy based on innovation by 2020.  <wwd.com/business-news>

Hedgeye Retail’s Take:  One word: inflation. 


Sam's Club Focused on Apparel Offerings - If there is a bright spot for apparel at Wal-Mart Stores Inc., it may be at Sam’s Club. “We’re seeing good trends in apparel, and we’re bringing in new brands that are appropriate on a seasonal level,” Brian Cornell, CEO of Sam’s Club, said after the WMT annual meeting on June 4. In contrast, vice chairman Eduardo Castro-Wright characterized Wal-Mart’s apparel business as “disappointing” and “a work in progress.” Without the constraints of Wal-Mart’s “low-price leadership” strategy, Sam’s Club can sell department and specialty store brands but still at significant savings. The approach of Sam’s Club to apparel “is generated by aspirational brands and a treasure hunt vibe,” said Linda Hefner, executive vice president of merchandising. The warehouse club still sells organic cotton apparel. In addition, Sam’s Club features Nicole Miller New York, manufactured by Delta Galil, as a club channel offering for Sam’s; along with Levi’s boot-cut jeans, Calvin Klein shorts, Speedo swimsuits, Anne Klein Sport, DKNY, Reebok, Everlast, Champion, Cole Haan, Chaus and Lizwear. <wwd.com/retail-news>

Hedgeye Retail’s Take:  Maybe the discount stores should adopt the club’s merchandising strategy.  Limited SKU’s + national brands=simplicity. 


Hat World to Expand HQ - Hat World Inc. a multichannel retailer and manufacturer of hats and sports apparel, announced it will expand its Indianapolis headquarters and distribution operations. The company, which acquired two other sports apparel retailers in May, says the facility will allow it to consolidate its manufacturing and warehouse operations that are now located in  Wisconsin. Hat World, No. 381 in the Internet Retailer Top 500 Guide, says it plans to invest up to $22 mm to lease and equip the additional space. The retailer says it plans to begin hiring manufacturing and warehouse positions later this summer as it phases in up to 571 new jobs at its headquarters by 2015. <internetretailer.com>

Hedgeye Retail’s Take:  It seemed like this business had run out of room to grow about three years ago!  Clearly there’s value and opportunity in operating the largest (and only) chain of headwear-specific stores. 


Former ARO Supplier Indicted on Fraud Charges - Douglas Dey, the owner of a former supplier of Aéropostale Inc., was arraigned on Monday in Brooklyn federal court in connection with a multimillion-dollar kickback scheme that also has ensnared Christopher Finazzo, the chain’s former chief merchandising officer. According to the U.S. Attorney’s Office in Brooklyn, the 28-count indictment — unsealed on Friday — charged the two with mail and wire fraud, money laundering conspiracy and conspiracy to violate the Travel Act. Finazzo was also charged with “causing Aéropostale to make a false statement in a report that was filed with the Securities and Exchange Commission.”  <wwd.com/business-news>

Hedgeye Retail’s Take:  Given ARO’s post-Finazzo success, it’s fair to say this probably has little relevance beyond the headlines. 


Frederick's of Hollywood Looks to Expand Product Offerings Through Licenses - Frederick’s of Hollywood Group Inc. is looking to move the brand beyond intimate apparel. After licensing Blue by Yoo to produce and market a line of Frederick’s swimwear on an international basis, the firm is looking to expand into other product categories. In addition to swimwear, the company has identified domestic and international licensing opportunities that will allow them to expand beyond intimate apparel and into a lifestyle brand, which includes product categories such as fragrance, jewelry, accessories, footwear, headwear, handbags and costumes. The company is also exploring partnerships with international distributors in countries including South Korea, Brazil, Japan, China and Canada. Frederick’s of Hollywood recently began a strategic marketing initiative with the Hard Rock Hotel & Casino in Las Vegas and launched a social media and online marketing campaign.  <wwd.com/business-news>

Hedgeye Retail’s Take:   Sounds like this strategy will need a bit of luck.  Frederick’s definitely has a brand image associated with lingerie and we wonder how easily it can be translated into other categories.



The Macau Metro Monitor, June 15th, 2010


Secretary Tam said Wynn Macau hasn’t yet presented any application for the new gaming tables the company expects to include in its Cotai project.  Tam stressed that no applications for gaming tables will be accepted before 2013; he added that any acceptance of gaming tables applications after March 2013 will depend on the development of the local gaming sector at that time.

Contacted by Macau Daily Post, a spokesperson for Wynn Macau said: “We continue to work with the Macau government and take their direction with respect to a Wynn development on Cotai, and all necessary applications will be made as and when required."


IM reported MOP 6bn for gaming revenues as of June 13, which is on track to hit MOP13.8bn for the month. IM stressed that weekly and daily revenue numbers are quite volatile and do not reflect ebitda gains very accurately (except at SJM).



The number of new private homes sold in Singapore fell ~50% sequentially in May.  According to the Urban Redevelopment Authority, home transactions declined across all segments in May.



In July, Hong Kong-based Borey Samsoun Company plans to begin building The Samsoun Casino and Resort, a new US$4 million casino in Bavet town, located 1 km from the Vietnamese border.  The proposed development is expected to take three years to complete.


As for the sector outlook, the Ministry of Economy and Finance’s chief of Casino Management Chrun Theravath said that many firms are waiting for further signs of revival before beginning construction on planned developments.  There are 27 licensed casinos presently operating in Cambodia.  Two new casinos have already opened their doors in the Kingdom this year, with $100 million Titan King Resort and Casino beginning operation in Bavet City and the Top Diamond Casino launching in Kirivong district, Takeo province.

Circumference of Darkness

“As our circle of knowledge expands, so does the circumference of darkness surrounding it.”

-Albert Einstein


Yesterday was an interesting day. I woke up, sat in a 4AM traffic jam, then mentioned the word “truth” in my Early Look and proceeded to have dozens of bulls remind me that the “truth” is that the market was up for 2 days in a row and I was on the losing side of that trade. Maybe their circle of knowledge led them to believe yesterday was going to be another up day. Who knows. But after 3PM, I stopped getting their emails…


No worries boys. This is the game we all wake up to play. Every day there are winners and losers. I built this transparency platform during the crash of 2008 with you in mind. Everything I say and do is marked-to-market live on my risk management portal. Everyone knows the truth about every position I take.


For those of you who have friends who forward you our work so that you don’t have to do the right thing when no one is looking, my current short positions in the Dow Jones Industrial and SP500 ETFs are +0.49% and -0.33% for and against me, respectively.


As our circle of knowledge about Washington and Wall Street expands, citizens around the world are not only catching a glimpse under the modern day Roman Empire’s proverbial clothes, they are starting to ask some really good questions. Many of these questions boil down to investment processes – what is it that you do?


We know what conflicted, compromised, and constrained ratings agencies and bankers do. We also know what professional politicians do. But do we really know what asset managers who can’t preserve their client’s hard earned capital do in down markets? You tell me…


The scariest part about the most recent decline in the SP500 (down -10.5% from its April 23rd YTD peak) is not only the lack of respect that the bulls have for US government deficits and debts, but the “circumference of darkness” that surrounds their analysis.


Yesterday, the Obama Administration inched a step closer to telling the truth about this country’s fiscal problems. Washington finally admitted that the 2010 and 2011 estimates for the US budget deficit were too low. As a reminder, the fiscal 2009 US budget deficit was $1.4 TRILLION DOLLARS. The new estimate for 2010 is $1.6 TRILLION Dollars. Or a +14.3% year-over-year increase in debt financed deficit spending.


Importantly, the US government’s 2011 estimate for a deficit cut to $1.3 TRILLION remains tenuous at best. They have no idea what growth in 2011 will be and, as a result, will be adhering to the Buy-And-Hope model that they want America’s creditors to subscribe to when it comes to holding US Treasuries.


We continue to think that Ben Bernanke’s GDP growth forecasts for both the back half of 2010 and all of 2011 remain far too optimistic ( the Administration’s GDP forecast for 2011 is even higher!). The “circumference of darkness” comes into play when the Fiat Fools of US forecasting mismatch expectations like this versus reality.


The reality is that our Creditor (China) doesn’t believe us. You can look it up on the Chinese finance ministry’s website yourself, but upon receipt of the $1.6 TRILLION memo China stated that the US needs to “seriously consider” the structural problems associated with this Fiat Fool model and “stop blaming” others.


Our go-to-move in response to this mess is to mark-US Treasuries to-model as low as we can for as long as we can until the circle of the world’s knowledge about Washington’s Perceived Financial Wisdoms is too obvious. This morning we are seeing US bond yields begin to trade like Japanese Government Bonds, with 3-month US Treasuries yielding 0.06%!


What Bernanke and Geithner may not get is that holding US Treasury rates artificially low for an “extended period of time” actually aids and abets the blowing out of global bond yield spreads (the long ends of marked-to-market curves do just that, get marked higher). Whether you are looking at the TED spread, Levered Loan spread, or High Yield spread this morning you’ll see the same thing – the “circumference of darkness” that began to develop in mid 2008 – spreads widening…


Spain is going to try to issue almost $5 BILLION Dollars worth of 12-month debt today. The yield on that low-quality Fiat Promissory Note is 2.30% - that’s up from yielding 1.59% for the same maturity less than a month ago. Spreads on 10-year Spanish debt versus German Bunds are 209 basis points this morning versus their YTD peak of 215bps on June the 8th.


My moving from bullish to bearish will always change. Until the US addresses this Spanish looking deficit problem head on with some form of austerity measures, the biggest clean-up ahead of the Obama administration won’t be found in the darkness of our waterways – it will remain on our children’s balance sheet.


My immediate term support and resistance level for the SP500 are now 1082 and 1101, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Circumference of Darkness - DEF

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.


Another day of being confidently mixed - the S&P 500 finished mixed and little changed on a quiet Monday. The major indices opened up strong, but ended up closing near their lows on the day.  Moody’s downgrade of Greece sovereign debt to junk was key driver of lower prices.   There was some positive news out of Europe in the form of a better than expected industrial production number.


The BP oil spill situation and Obama continued to provide the bulk of the headlines. BP closed down 10%.  The dollar and gold were weaker on the day; oil and other commodities were stronger (though the commodity equities were weaker).


The best performing sectors were Utilities (XLU +0.6%), Consumer Staples (XLP +0.6%) and Consumer Discretionary (XLY +0.3%).  The Hedgeye Risk Management models still have Energy (XLE) and Utilities (XLU) positive on TRADE; there are no companies positive on TREND.  The three worst performing sectors yesterday were Materials (XLB - 1.0%), Energy (XLE - 0.5%), Financials (XLF - 0.4%).


Precious metals/miners underperformed, with the XAU down 1.5%.  Stocks contributing to the underperformance were; CF (5.0%), DOW (3.1%) and MON (2.4%).


The DXY declined 1.1% on Monday and the Hedgeye Risk Management models have the following levels for the USD – Buy Trade (86.42) and Sell Trade (88.51).  The VIX declined only 0.7%, but is down 21.8% over the past week. The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (26.21) and Sell Trade (33.05).  The TED spread has expanded further to 0.46 as investors look to T-Bills for security.


In early trading, the EURO is trading higher by 0.4%, after rising 1.1% yesterday.   The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.18) and Sell Trade (1.23).


On the MACRO front, there was some positive economic data out of the Europe, with continued sovereign debt issues mixed in.  Eurozone April Industrial Production grew 9.5% year-over-year vs. consensus +8.7% and prior revised +7.7% (+0.8% m/m vs. consensus +0.5% and prior revised +1.5%).  Spanish officials did admit that a freeze up in interbank lending was affecting Spanish banks and Greece was downgraded midday by Moody’s to Ba1 from A3.


The Financials (XLF) also underperformed, with the BKX lower by 0.8% on continued reporting of possible regulation, especially as related to swaps trading desks. It was also reported that Senator Lincoln was considering compromise on her provision.


The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (73.57) and Sell Trade (76.97).


In early trading, Copper fell in London, ending the longest rally in more than five months, as the dollar strengthened after Greece’s credit rating was cut to junk, reviving concern about Europe’s sovereign debt crisis.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.88) and Sell Trade (3.05). 


Gold futures may extend their previous day's losses on Tuesday tracking a higher dollar.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,216) and Sell Trade (1,244).   


As we look at today’s set up for the S&P 500, the range is 19 points or 0.7% (1,082) downside and 1.0% (1,101) upside.  Equity futures are trading above fair value after equity markets gave up a triple digit gain near the end of Monday's session due to Moody's downgrading of Greece's sovereign rating to junk.


Howard Penney














We've got the mid-month numbers and they look good, especially for Wynn.



The following table details the table-only Macau June revenues through the 13th in HK dollars.  Assuming slots at about HK$650m, Macau is tracking close to HK$14bn for June, up 74% YoY.  This would be another very strong month, particularly for Wynn.




In terms of table revenue market share, Wynn looks like the biggest gainer sequentially, from 15.7% in May to 18.3% in June.  LVS also gained share from May but down slightly from beginning of June.  SJM, MPEL, and MGM all lost share but there is still a half month to go.


Anna and I are in Singapore and Macau this week so we should have more color.

McCullough Says U.S. `Debt Balloon Is Massive'

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