R3: Putting Toning Aside


June 18, 2010


While most believe toning has been carrying all the weight for the industry, it appears that the core athletic footwear space is holding its own.





It’s no secret that toning has had a meaningful contribution to the Athletic Specialty channel, with particular strength in May.  However, in recent weeks toning’s contribution to the overall athletic space (as shown below) has sequentially decelerated, but at a greater rate than non-toning product.  As such, if we exclude toning from the equation we see that the overall athletic industry remains in positive territory, with a far less contribution from toning. 


More specifically, it’s worth noting that Skechers and Reebok are showing a meaningful sequential increase in sales when we exclude toning from the data set.   Clearly each brand is benefitting from substantial increases in brand awareness, driven of course by toning.  More interesting will be Reebok’s efforts in the Fall, when we expect to see further line extensions and enhanced merchandising efforts aimed at capitalizing on the brand’s new life.  It’s still early to have complete confidence in the brand’s full resurgence, but this may be the best opportunity for Adi to reinvigorate Reebok since aerobics burst onto the scene.


R3: Putting Toning Aside - Toning 1


R3: Putting Toning Aside - Toning 2 





- Kroger observed that the promotional activity out of Wal-Mart lately is not terribly different than it has been, despite additional media attention focused on increased rollback activity. In fact, Kroger believes that Wal-Mart is acting more like the traditional grocers than they ever have, with a larger focus on key item promotions. Recall that as an EDLP retailer, key items have not been a big a part of Wal-Mart’s pricing strategy.


- PVH management noted that the company’s retail same store sales continue to trend in the 11-12% positive range quarter to date. This is inline with prior quarter results. When questioned about the situation in Europe, PVH’s CEO responded with “We are seeing, if anything, we are seeing the business strengthen over the last six weeks, not weaken. Our comps have improved as we have come up against what I would consider easier comparisons as the year has gone on.”


- PIR one pointed out that it has seen no deceleration in sales halfway through the company’s current quarter. In fact, June month-to-date same store sales are tracking ahead of the company’s reported 14.3% first quarter increase.





Footwear and Apparel CPI Declines While Total CPI Growth Slows- Retail apparel prices fell 0.6% compared with a year earlier while Footwear prices increased 1%. Women’s apparel prices declined 0.1% while men's dropped 2.1%. The overall CPI increased 2% while core CPI increased 0.9%. On the margin, apparel prices sequentially improved while footwear continued to erode albeit at a slower rate. Compared to the Core CPI growth, footwear had been rebounding since July 2007, but has recently slowed and fallen in line while apparel notoriously struggles below the core rate. <>

Hedgeye Retail’s Take:  In contrast to the government data, ASP’s on footwear continue to increase year over year.   After the latest round of earnings reports, most footwear companies suggest that ASP’s are up low to mid single digits.  On the athletic side, innovation has been key to the retailers ability to sell higher price points. 


R3: Putting Toning Aside - CPI 1


R3: Putting Toning Aside - CPI 2 


U.S. Soccer Sues Sports Authority Over World Cup Ads - The U.S. Soccer Federation sued Sports Authority Inc. over its advertisements linked to the World Cup, contending Dick's Sporting Goods is the national team's only licensed retailer. <>

Hedgeye Retail’s Take:  Maybe Dick’s should challenge TSA to a friendly to settle the dispute? 


Liz Claiborne Scores Canadian Licensing Agreement - The firm’s namesake brand, which J.C. Penney Co. Inc. will begin carrying exclusively in the U.S. in August, will be sold north of the border under a licensing agreement with Trimera Group’s Future Fashions division. The brand is currently sold in Sears Canada, but is not produced under license. The agreement, which covers apparel, handbags and accessories for the Liz Claiborne brand, also includes men’s and women’s apparel under Claiborne’s Axcess label, which is sold at Kohl’s in the U.S. Liz Claiborne will provide “select design services” for both brands, while Trimera will work on design, as well as production, distribution, marketing and merchandising. Trimera produces and markets a range of apparel goods worldwide, working with brands as diverse as Disney and Nickelodeon to Sean John and Nike. <>

Hedgeye Retail’s Take:  While Canada isn’t going to move the needle, this is a good move to leverage the now-licensed Liz brand.  Unfortunately, Canada is probably one of the few markets left for which the namesake brand has brand recognition.   


Zumiez to Expand into Canada - Canadian retail real estate consulting firm Northwest Atlantic announced that Zumiez will open a store in the greater Vancouver area. <>

Hedgeye Retail’s Take:  Following in the footsteps of other retailers including KSS and TGT, the push north continues.  The action sports market is alive and well in Canada and this makes perfect sense. 


Google Releases Commerce Search 2.0 - Google on Thursday released Version 2.0 of a service that it hopes the nation’s top 1,000 retailers will use to power the searches on their e-commerce sites. Unlike most competing search products, Google Commerce Search is a cloud service, so it can be set up and customized relatively quickly, and performance will not vary even during unusually busy times such as holidays and sales, according to the company. The faster, better customizable platform claims it will improve conversion rates. Merchants can set up menus with categories of their choice, such as denim, tops, brands, dresses under $99 or pencil skirts. If retailers want to promote certain types of items — latest arrivals, sale or private label, for example — they can arrange to have those show up first on search results. <>

Hedgeye Retail’s Take:  We’re all for making the online shopping experience easier and more efficient and this all seems to make intuitive sense.   


Sun Capital Partners Buys Remaining Limited Stake - Limited Brands Inc. said on Wednesday it has sold its remaining 25% stake in Limited Stores LLC to Sun Capital Partners Inc. for $32mm. Sun Capital now fully owns the brand, having bought a 75% stake in 2007 from Limited Brands, whose chief executive officer, Leslie Wexner, decided to shed the underperforming apparel businesses he founded in the Sixties. In addition to Limited Stores, Wexner sold a 75% stake in  Express to Golden Gate Capital. <>

Hedgeye Retail’s Take:  Is a name change finally on the way for Limited Brands now that the flagship brand has finally been sold?   


Price Wars in the UK - Premium independents have been forced to fire the starting gun on their summer Sales up to four weeks early to compete with high-end department stores. <

Hedgeye Retail’s Take:  With the UK retail marketplace historically promotional at only certain times of the year, this is an interesting development.   


Reebok Cleans Up It's E-Commerce - Reebok had a problem with the way it managed content on its e-commerce site. Adding any new marketing messages or merchandise took too long and required special training with the company’s third-party content management system. After switching to Allurent Inc.’s on-demand Visual Merchandiser tool, Reebok was able to more quickly make changes to its site, reducing the time spent managing web content by 50%. <>

Hedgeye Retail’s Take:  Probably a good time to upgrade the site that has gotten deluged with visitors since EasyTones hit the market.  In fact, the site is almost entirely devoted to the toning product- as it should.


International Brands Dominate Facebook Fan Index - Although American brands hold the #1 spots across fashion, footwear, and retail, international brands hold top spots.  Adidas, Puma, Lacoste, and Burberry rank 2-5 in fashion. Adidas and Puma take 2 and 3 in footwear. Zara and H&M take 2 and 3 in retail. 

Hedgeye Retail’s Take:  Many interesting conclusions to gather from the table below.  Mainly, those brands with the biggest budgets and reach by traditional measures are not necessarily the most popular Facebook brands.  Also, luxury brands seem to have a great following despite the likeliness of having an older, less tech savvy customer demographic.   


R3: Putting Toning Aside - Facebook Fan Index




The S&P finished slightly higher, up 0.1%, due in part to a stronger tape for Consumer Staples (XLP), Utilities (XLU) and Technology (XLK).  For the second day in a row, there were some positive developments on the RISK front out of Europe, offset by a weaker-than-expected economic picture in the US.


The market seemed to also ignore two leading indicators of growth - Copper and China.  Last night, China closed down 1.8% (down for the last two days) and is now down 23.3% year-to-date.  Yesterday, copper declined 3% and is trading down another 1% this morning to 2.88.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.71) and Sell Trade (3.00).


While the Materials sector (XLB) was down 0.5% yesterday, it’s up 1.9% over the past week despite the weakness in China.  Yesterday the XLB underperformed with another round of below-consensus guidance out of the steel stocks, with recovery concerns across the rest of the industrial metals groups.  Currently, the Materials (XLB) and Energy (XLE) look vulnerable.    


Oil declined by 1% yesterday to $76.79 and is indicating down 1.5% in early trading today.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade ($73.73) and Sell Trade ($79.59).


On the MACRO front, the US economic picture is also showing some signs of weakness.  Initial claims rose for a second straight week, increasing to 472,000 last week from an upwardly revised 460,000 in the prior week.  The RECOVERY trade was dealt a body blow with the Philadelphia Fed Index falling to 8 in June from 21.4 in May, the lowest level since August 2009 and below consensus expectations. 


For the second day in a row Consumer Discretionary (XLY down 0.6%) was the worst performing sector.  Within the XLY, housing-related stocks came under pressure again with the XHB down 2.4%.  May single-family housing starts fell a larger-than-expected 17.2% month-to-month, with a 10% decline in single-family permits.  To top it off, TOL was the worst performing stock down 4% on a cautious business trends. TOL noted that deposits have been trending 20% below year-earlier levels in the past three weeks, while per-community traffic has slipped 3% since the end of the last quarter. The company added that demand has been "quite choppy".  LOW declined 2.2% and was one of the worst performers in the S&P Retail Index, which declined 1.2% yesterday.  As a reminder, Hedgeye has been bearish on housing heading into the back half of this year and throughout 2011.


Despite some takeover speculation surrounding M&T Bank +9%, the banks and brokers were mostly weaker as additional clarity on some of the more onerous measures of the reform legislation is unlikely to come until next week.  The Financials (XLF) was one of the four sectors that declined yesterday, with the BKX down 0.4%. 


Treasuries were stronger with the weak economic data, but the VIX declined by 2%.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (23.38) and Sell Trade (32.09). The DXY declined by 0.4% yesterday and the Hedgeye Risk Management models have the following levels for the USD – Buy Trade (85.11) and Sell Trade (86.57). 


So far this week, the EURO is up 1.96%.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade ($1.21) and Sell Trade ($1.24).


Yesterday, Consumer Staples (XLP) was the best performing sector.  The sector seemed to benefit from the more defensive tone in the market.  Leading the XLP higher, KR was up 3.3% and SVU was up 6.1%, while SWY was up 1.7% after the company posted better-than-expected Q1 results. 


Gold remains in a bullish formation and we are long via GLD.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,231) and Sell Trade (1,248).   


As we look at today’s set up for the S&P 500, the range is 36 points or 1.5% (1,099) downside and 1.7% (1,135) upside.  Equity futures are trading below fair value as European markets are weakening and the news flow is light ahead of quadruple witching day. 


Howard Penney













Guarding The Guards

“Who will guard the guards themselves?”



In recent writings, I’ve been focusing on the events that led to the fall of the Roman Empire. I’ve been trying to wrap my head around the dynamics of politics and power in societies that are dominated by professional politicians as they finally hit their tipping point.


I have a profound respect for economic and political history, not because it’s ever the same, but because the patterns of human behavior often rhyme. I’m certainly not an expert on Rome pre 49BC when Julius Ceasar crossed the Rubicon, but in hindsight I can see as well as you can. The outputs of certain abuses of power become crystal clear.


One of the best parts about my job has turned out to be putting myself at the very heart of an exclusive network of thought leaders. Every morning I basically have an opportunity to inspire a debate. The more outside of consensus I get, the louder the feedback mechanism of the Hedgeye network becomes.


The aforementioned quote came from one of our many thoughtful subscribers. He’s studied the aftermath of what I have been writing about as of late. Juvenal was a Roman poet from the 1st century AD.  I consider myself very fortunate to be privy to thoughts like these – it’s always important to consider what winners in this business are thinking. Collaborative thought is a critical driver of risk management.


Our subscriber wrote:


 “Through his Satires of Juvenal, who once asked, “Quis custodiet ipsos custodes?” Effectively meaning, “Who will guard the guards themselves?” (along with other similar, idiomatic translations) the question posed by Plato and put to Socrates as the main character in The Republic, is as proper now as it was more than 2,000 years ago. With Fiat Fools and global government incompetence accelerating the journey down the Road to Perdition, every free market thinker should ask, and then answer for himself, this question.”


Sometimes it’s that simple – risk management, that is. Sometimes the best absolute performance is assigned to whomever is able to contextualize all that’s going on in this interconnected world and ask themselves the right question first.


Answering the question of “who will guard the guards” of the Fiat Fools becomes less and less clear by the day. Whether it’s Jean-Claude Trichet talking circles around the ECB’s bailout program this morning or Alan Greenspan doing his best to attempt to dislodge himself from the problems he perpetuated, this all seems to be heading the same way. The guardians of debt financed deficit spending are expediting their own demise.


This morning, Greenspan is making headlines by finally admitting that the US cannot Pile Debt Upon Debt Upon Debt in perpetuity. In a WSJ Op-Ed, he wrote: “Perceptions of a large U.S. borrowing capacity are misleading… Long-term rate increases can emerge with unexpected suddenness” and that the Big Government Keynesians of the world need a “tectonic shift” in the way that they have been purporting to guard their respective citizenries.


It’s US Open time, and even I will give Mr. Greenspan a golf clap for that. Well done. Listening to the facts and evolving the thought process is always a critical part of any risk manager’s evolution.


But will the guards who have been guarding Ben Bernanke and his Japanese style monetary policy hold the line? Do the guards of Washington’s Economic Officialdom care what the 84-year-old man of the money printing presses is saying this morning?


My risk management style isn’t to ask an academic like Larry Summers or Christina Romer in Washington for a leading indicator that might start answering these questions. I ask Mr. Macro Market. What we have seen in the last 3 weeks may not be a “tectonic shift” in the market, but it’s certainly a change on the margin. As Ben Bernanke and Tim Geithner refuse to address the debt and deficit problems in this country, the US Dollar has started to fall.


Since its highs in early June where we shorted it, the US Dollar has all of a sudden lost over -3% of its value. Now any currency trader (which John Maynard Keynes was himself) will quickly remind you that this is partly because the Euro has stopped going down. And I will, in turn, quickly agree – after all, market prices don’t lie; politicians do. All currency moves should be considered relative to each other.


This, importantly, only amplifies my point. As Europe admits that it has a deficit problem, implements austerity measures and, at the same time, the US Administration continues to maintain this ridiculous stance that America’s spending and debt problems are “different”, the Euro actually becomes relatively more credible than the US Dollar. Again, everything is relative between two fiat currencies that are manipulated by Fiat Fools.


Now I am certain that I will get a lot of emails on that statement, because it’s not patriotic to say the Euro is anything but a dog with fleas, but managing risk with your patriotism or politics only gets you in trouble so let’s take a step back and respect that in the last decade the Fiat Fools of US monetary policy have done nothing but debauch the value of the US Dollar. Pull up a 30 year chart of the US Dollar and the story is the same – a long term series of lower-highs and lower-lows.


Why is that? Where have the guards of fiscal conservatism gone? Who will guard the guards of the US currency debasement experiment from here?


Sadly, after seeing Ben Bernanke’s Fed add another $14 BILLION of mortgage backed security toxic waste to America’s liabilities this past week (taking the Fed’s balance sheet up to its highs of $2.35 TRILLION dollars!), there are fewer and fewer guards with credibility left.


My immediate term support and resistance lines for the SP500 are now 1099 and 1135, respectively. We remain short the US Dollar via the UUP.


Best of luck out there today and enjoy your weekend,



Keith R. McCullough
Chief Executive Officer


Guarding The Guards - Chart des tages

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The CAC40 intermediate term TREND line is broken at 3,799.


Coming out of the Hedgeye MACRO morning meeting, France (EWQ) is our top SHORT idea.  France is taking on Mexico today.  While France is the higher ranked team by FIFA at #9 (Mexico is #17) les bleus have been somewhat out of sorts lately.  Coach Domenech’s approval rating is at a similar level to that of Nicholas Sarkozy. 


While the referees will be watching closely for any French handballs, we will continue to hold the French accountable for their piling debt upon debt upon debt.



VXX Levels

In today’s US Strategy note we provided levels for the VIX.  We have been asked by a number of clients to provide our levels on the VXX; we are currently long the VXX in our virtual portfolio. 


VXX Levels - vxx



With the pending release of Malcolm Knapp’s May same-store sales and traffic trends, the rumor mill is circulating a -1% same-store sales number.  We obviously have no way to confirm the validity of this -1% number prior to Malcolm’s official release, but we thought it was worth commenting on regardless. 


A -1% same-store sales result would imply flat 2-year average trends on a sequential basis from April.  For reference, same-store sales trends in April decelerated 80 bps on a 2-year average basis from March.  In light of the sequential slowdown in May 2-year average trends reported by a few QSR companies (please refer to yesterday’s post titled “QSR – A LOOK AT CURRENT TRENDS” for more details), I was expecting a further slowdown in May for the casual dining operators so a -1% would be positive relative to my expectations.  It is worth noting, however, that this upside to my estimate would still imply a 50 bp deceleration in 2Q10 quarter-to-date trends from the first quarter on a 2-year average basis.  So, as I have said before, top-line trends will be coming under increased pressure as the industry, on average, begins to lap increasingly more difficult YOY EBIT margin comparisons in 2Q10 and for the balance of the year.


In May, we are lapping the first month in 2009 when reported comparable traffic growth was better than reported same-store sales growth.  This trend, which Malcolm dubbed “a most unusual event”, continued through November 2009 as a result of the significant industry discounting.  As we begin to lap these bigger YOY average check declines, we should begin to see checks stabilize YOY, offset by traffic.  Although significant discounting is not good for average check growth or margins, continued improvements in traffic trends will be the most important indicator of a recovery.  In April, traffic trends on a 2-year average basis slowed 140 bps sequentially from March and 100 bps from the average in 1Q10.


CASUAL DINING – KNAPP RUMOR MILL - Knapp May 2010 estimate


Recent casual dining management comments:


PFCB June 9 presentation:  The company implemented a 1% to 2% price increase at the Bistro in May in an attempt to support average check, which has been a drag on comp growth as traffic has improved.  And, Mr. Vivian stated that comp growth is “getting dangerously close to getting positive.”  Weekday sales growth is improving ahead of weekend growth, which he attributes to stronger business travel spending (accounts for about 30% of Bistro’s tickets).  He also commented that sales and traffic trends at Pei Wei continue to improve in 2Q10. 


Specifically, he said that management continues to believe that the second half of the year will be better than 1H10, and in line with management expectations, they are continuing to see a gradual improvement in trends across the country.  They are seeing signs of life in Arizona and California and although retail activity slowed in May in California, the Bistro continued to show steady progress. 


EAT June 8 presentation:  Relative to average check trends, the company stated, “We’re hopeful that some of the more aggressive discounting that’s been occurring in this space is starting to abate, and you’re starting to see people promoting lower- priced items on their menu than necessarily discounting items, which we hope is a good sign.”


CAKE  June 8 presentation: “Without specifically commenting on any results that we’ve seen since we made our – gave our guidance in April, I think that the consumer is impacted obviously by a lot of things and the stock market going up and down, the things that are going on overseas.  Things that don’t make you feel better about your wealth don’t help you consume more. So those are things that are potentially worrisome for all consumer product companies. And I would just say that what we’re focused on is controlling the things that we can control.


We can control, when you come into our restaurant, whether we give you a better experience than we gave you the last time we came in, that the food was hot, that it was cooked perfectly and that your wait time was reduced, or at least your quote time was accurate. There is many things that we can control. So we’re working on those types of things, but I think the consumer is resilient. They showed that they returned to the brands that they liked the best first, when they came back. And dining out is one of those things that I think consumers are – they like to take away last and they like to put back first when they feel like they can, from a economic standpoint.


We have – incident rates on desserts are up for us, which is kind of incredible in this environment.  They’re up and consumers are ordering more desserts, less alcoholic beverages, so we’re not driving them to drink, I guess yet. But our incident rates on most of our items are up, other than beverages.”

RUTH June 8 presentation:  They have three buckets of consumers (special occasion, business and affluent, core consumers).  Each bucket makes up about 1/3 of tickets.  Regulars are coming back and they are seeing better special occasion trends.  Weekend business is getting stronger and total revenue is up on certain nights.  They are seeing more energy around the restaurants and bars.


Howard Penney

Managing Director


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