Skepticism+Activism=Short Squeeze

Skepticism+Activism=Short Squeeze


Over the past couple of year’s BJ’s has been an LBO target on a couple of occasions, often times with a real estate angle leading the rumor mill.  On the surface, this time is more of the same. 


This morning’s 13D filing by Leonard Green disclosing a 9.5% stake in BJ’s Wholesale Club took us and the market by surprise.  It certainly has the shorts scrambling to cover this morning as well, hence the outsized move in a weak tape.  Over the past couple of year’s BJ’s has been an LBO target on a couple of occasions, often times with a real estate angle leading the rumor mill.  On the surface, this time is more of the same. 


The 13D states: “The Reporting Persons acquired the Shares in the belief that the Shares were undervalued. The Reporting Persons intend to contact representatives of the Issuer to engage in a dialogue regarding potential options for enhancing shareholder value. These discussions may include a “going-private” transaction, new financings (potentially through mortgage financings or sale leaseback transactions) or other similar transactions. The Reporting Persons look forward to working with management of the Issuer in the future.”


A couple of observations:

  • Leonard Green has a long history of involvement with retail transactions, almost exclusively via buyout scenarios.  Their one recent “trade” occurred with WFMI, which in hindsight appears to have been a home run of a transaction.  Interestingly, Leonard Green does have some history with BJ’s, via its predecessor parent, Waban.   While no transaction ever occurred, the then CEO, Herb Zarkin, is currently BJ’s non-executive Chairman of the Board.
  • While sale-leaseback is listed as a possible outcome of Green’s efforts, it’s important to note that BJ’s owns approximately 30% of its clubs.  While still substantial given the geographic locations of the clubs, primarily in the Northeast and Mid-Atlantic, this is not a slam dunk in terms of unleashing value on a one off basis.  This is especially true given the inherently thin EBIT margins that may not benefit from turning a real estate asset into a rent liability. 
  • There is no question that BJ could benefit from an improved merchandising effort (especially on the non-food side of things), but this hardly seems like a task that requires a change in ownership or capital structure.  Recall this is a company that is historically very conservative and debt-free.  Unless the board and shareholders are in capitulation mode, it seems hard to envision that this glorified supermarket would be interested in “creative financing” options. 
  • This is likely just the beginning of the “fireworks” between the company and Green.  If anything, this will act as a near-term benchmark for other LBO rumors that will have to be vetted. We wouldn’t be surprised to hear more about RSH and SVU in the coming weeks given the market reaction to this filing.


Eric Levine

R3: We’re American!

R3: We’re American!


American Eagle making a push into the Middle East raises some important questions about the company’s growth trajectory, but also about the ‘traditional’ growth model in retail.





Remember that scene in the 1985 flick “Spies Like Us” when the two clueless government agents (Chevy Chase & Dan Aykroyd) greet a mob of freedom fighters by saying “We’re Americans!”?  The picture below sums up the result.


R3: We’re American! - 1 


Well, yesterday American Eagle announced that it will be entering the middle east through a multiyear franchise agreement to open American Eagle and aerie stores starting in the spring 2012. The initial plan is to enter Israel, which has shown an appetite for US brands. We’ve also seen the recent intro of the brands into Dubai and Kuwait. The move follows the Pittsburgh-based teen retailer’s recent disclosure of plans to open stores in Hong Kong and China in early 2011. Fox-Wizel is the planned franchisee in Israel, but it is worth noting that the company operates 170 Fox stores in its home market of Israel and another 250 in other markets.


If the plan is to use the same products that are produced for domestic consumption, then this seems like a decent way to add volume to an existing infrastructure.  Over the long run, it’s very unlikely that a handful of franchises in various countries actually moves the needle for AEO.  Getting inventories inline and driving same store sales is still pre-eminent driver of the company’s results (and share price).


Also, at risk of sounding alarmist, as it relates to ‘event risk’ I’ve always been concerned with brands entering the Middle East that are viewed as ‘a slice of Americana.’ I’m talking about potential targets like Nike, McDonalds, Starbucks, Apple, etc… But American Eagle probably trumps them all.


Looking more at what this means to business growth, it begs a few questions. The old model of specialty retail was to come up with a concept – either by merchandise genius or pure chance. Then to scale that to 50 stores. Then go public. Then scale to 500 stores. Then promise to have stores in every mall in America. Once tapped out, then either acquire or look internationally.  There’s Limited Brands and Foot Locker. I’m not suggesting that those can’t be great stocks. And in fact, we think that FL is great idea here. But the call there is in fixing the mess that was created by ‘growing for the sake of growth.’


It makes us wonder if the ‘new’ new model is investing heavily in an internal R&D on consumer preferences and trends, and then launching pliable concepts with higher hit ratios with smaller store counts. Basically, I’m talking about Urban Outfitters.  This is definitely something to chew on.





-  Amidst a difficult economic client, obesity rates in the U.S continue to rise according to a Trust for America’s Health Study. Obesity rates increased in 28 states last year, with only Washington D.C showing a decrease. Two-thirds of adults and one-third of children are now overweight or obese in America.


- A GQ/Allure study focused on grooming and beauty revealed some interesting results. 72% of men and 78% of women said that compared to 10 years ago, men are under more pressure to care about their appearance. Men now spend $121 a year on grooming products, up from $90 just five years ago. On average, women spend $194 per year.


- Disney finally unveiled the first of its newly redesigned stores. The location in Montebello, CA is expected to serve as the prototype for an eventual 300 worldwide locations. In the near term, Disney expects to have 20 redesigned stores open by year end. The stores are approximately 5,000 square feet.





Footwear Retailer and Distributor Buzzell Acquired Comfort Brand 1803 Trademark - The 1803 trademark has been acquired by Buzzell Inc. of Honeoye Falls, N.Y., a footwear retailer and distributor, which plans to introduce new product for fall ’10. According to Buzzell President Korey Buzzell, all 1803 merchandise will continue to be sourced in Portugal, where the design team is based. The line, which was founded by Paul Grimble in 2000 under the Job Footwear umbrella, will remain focused on comfort-oriented women’s and men’s casual and career looks, retailing for $130 to $170. Distribution will be targeted to independent shoe stores and small comfort chains. <>

Hedgeye Retail’s Take:  It’s a good thing these shoes are all about comfort because they certainly aren’t about style.  As a premium product in the comfort category, we suspect this will remain a niche brand (easily found at The Walking Company). 


JCP Forms Long-Term Deal with Aldo Shoes For Shop-In-Shops - J.C. Penney Co. has inked a long-term deal with Aldo USA Inc. to open shop-in-shops selling Aldo’s emerging Call It Spring brand. The deal marks another step in Penney’s ongoing efforts to reinvent its selling floors with exclusive brands, fill voids in the merchandising and create more of an updated, modern specialty store experience within its department store walls. While Aldo has become ubiquitous, operating 1,500 stores in more than 50 countries, it’s barely scratched the surface with its less expensive and younger Call It Spring line of men’s and women’s shoes and handbags. There are only 25 Call It Spring stores in the U.S. and 300 globally. Penney’s will launch 350- to 500-square-foot women’s and men’s in-store shops selling a total of more than 300 styles of footwear and handbags. The program will make its debut this fall in Penney’s Manhattan store in Herald Square and will roll out to 100 Penney’s stores and in the spring, as well as to 500 more stores in fall 2011. <>

Hedgeye Retail’s Take:  So only one month after Kohl’s signed a deal with Aldo to design an exclusive footwear and accessories line for the chain, Aldo strikes again with JCP.  The deal with Penney appears to be much more comprehensive than the one with KSS, however we can’t help but scratch our heads on this one.  If the point is to be differentiated, we’re not sure why both are betting on Aldo to help drive fashion footwear sales.


JCG Grabs Another Exclusive Deal with a Denim Brand - J. Crew has snagged another exclusive, this time with denim brand Imogene + Willie. The Nashville-based jeans label will offer two styles of men’s jeans and two bags at J. Crew’s men’s stores in TriBeCa, SoHo and on Madison Avenue (opening in late summer) starting at the end of August. The merchandise will also be available online. Right now, Imogene + Willie jeans are sold only in the brand’s Nashville store and a specialty store in Austin, Tex., named Stag. The line of artisan denim is the creation of the husband-and-wife team of Matt and Carrie Eddmenson. <>

Hedgeye Retail’s Take:  Expect more collaborations to continue with small and larger brands.  JCG continues to raise the bar as a curator of goods and sets the tone for the better priced, vertically integrated product offering.


Nike Expands Livestrong Brand Globally - Nike Inc. said it will expand its Livestrong brand outside of the U.S. Livestrong footwear, apparel and accessories will launch in Canada, France and the U.K beginning Thursday. <>

Hedgeye Retail’s Take:  What’s most surprising here is that Armstrong wasn’t already promoted as a global brand.  It probably helps that there will be much fanfare surrounding his ‘final’ final ride in Le Tour 2010.


Billabong to Acquire West 49 - Billabong International Limited has reached an agreement to acquire West 49 Inc., Canada's leading action sport retailer. The Australian-surf apparel giant plans to acquire West 49 for C$1.30 (U.S. $1.24) per share, for an enterprise value of approximately C$99.0 million ($94.3 million.). <>

Hedgeye Retail’s Take:  With Zumiez heading north, a better capitalized West 49 might make for a more competitive action sports landscape.  Either way, the M&A continues.


Lack of Optimism Defines Retailers 2H 2010 - The first half of 2010 ended Wednesday with consumer enthusiasm for apparel weak, retail stocks battered and fashion’s hopes for the year resting heavily on the fate of the back-to-school and holiday seasons. Economists and analysts expect consumers to remain conservative about their spending against a weak economic backdrop and growing uncertainty. The boost of government supports, such as the homebuyer tax credit and credits for energy-efficient appliances, are also going to fade even as efforts to extend unemployment benefits appear to be heading toward a Congressional dead end. Retailers are tentative heading into the second half as increasingly difficult comparisons make it harder to hit third- and fourth-quarter numbers. <>

Hedgeye Retail’s Take:  At the risk of saying this summary is also quite an obvious one, it’s also spot on.  Either demand picks up or it will be a slow and potentially ugly second half for retail.  Inventory remains fairly tight however, so the focus will likely shift to which companies are managing risk best vs. those that are still “hoping” for sales to improve.


E-Retailer ModCloth Secures Funding To Expand - Under-the-radar indie e-tailer ModCloth has raised $19.8 million in funding from Accel Partners to further develop social commerce and expand its operations. Founded in 2002 as an online vintage store by now-married partners Susan Gregg Koger and Eric Koger when they were teenagers, ModCloth was run out of a dorm room while the two attended Carnegie Mellon University. After graduating in 2006, they added inexpensive, vintage-inspired new clothing to the site, which grew quickly. In 2009, ModCloth had $19 million in revenues and became profitable.  <>

Hedgeye Retail’s Take:  Impressive backing for the small site and definitely a brand to watch.  Come to think of it, we don’t really know of any vintage (inspired) concepts that exist on a large scale.  Vintage tends to be local and used.  This takes the idea national and puts inventory behind the merchandising.  Seems like a smart combo so as long as consumers continue to dress with looks from the past.


CHS Accused 2 Former Employees of Giving Confidential Information to CACH - Chico’s FAS Inc. and its White House|Black Market Inc. division believe Caché Inc. attempted to add to its cachet illegally. The retailer has accused two former employees, Rabia Farhang and Christine Board, of supplying Caché, their subsequent employer, with confidential information and trade secrets. The defendants were WH|BM merchandise managers until the fall and allegedly provided rival women’s apparel retailer Caché with product design and developmental plans regarding WH|BM’s seasonal lines through this year, according to court papers filed Tuesday in New York State Supreme Court. <>

Hedgeye Retail’s Take:  With much of the focus on the Russian spy scandal, it appears that espionage is back en vogue.  If anything, this gives WWD a chance to cover the courtroom drama surrounding the latest James Bond story to come out of missy apparel.


Gander Mount Sues Credit Card Issuer - Gander Mountain Co. filed a lawsuit against its credit card issuer, Columbus, Ohio-based World Financial Network National Bank over its credit card approval policies. The outdoor retailer claims a proposed new policy will deny customers with good credit from being approved for its store credit card. <>

Hedgeye Retail’s Take:  Newsflash.  Credit access to all consumers, good and bad, is under attack from policy makers as well.  Rule changes inevitably mean consumers may not be charged excessive fees, but they will have less access to free flowing credit lines.


PETM Launches Martha Stewart Pets Line - An extensive range of pet products from Martha Stewart has arrived exclusively at PetSmart stores and The line, called Martha Stewart Pets, includes collars, harnesses, leashes, bedding, feeding tools and more than 50 toys. The products retail from $3.99 to $59.99.


Hedgeye Retail’s Take:  A win, win for both parties as Martha Stewart continues to find new product categories to put her brand on and PetSmart differentiates with a high margin product line. 



Initial claims rose 13k  to 472k last week (15k net of the revision of last week's reading), nearly wiping out last week's improvement. This drove the rolling average up 3.25k to 466.75k, its highest level since March.  Overall, claims continued to track roughly in the 450-470k range they have occupied for the last six months.  For unemployment to materially improve, claims need to fall to the 375-400k range.  Other than extremely weak sentiment going into tomorrow's unemployment report, there don't seem to be any positive signals.  




Below we chart the raw claims data. 




As a reminder, May was the peak month of Census hiring, and it should now be a headwind to jobs from here as the Census winds down.




Below, we chart US equity correlations with Initial Claims, the Dollar Index, and US 10Y Treasury yields on a weekly basis going back 3 months, 1 year, and 3 years.Not surprisingly, Consumer Discretionary has the largest inverse correlation to Initial Claims (r-squared = 0.74) on a 1-year basis. On the flip side, it is a surprise to see that the Financials have the second lowest inverse correlation to Initial Claims (r-squared = 0.36) on a 1-year basis.




Joshua Steiner, CFA


Allison Kaptur


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.


Initial claims rose 13k  to 472k last week (15k net of the revision of last week's reading), nearly wiping out last week's improvement. This drove the rolling average up 3.25k to 466.75k, its highest level since March.  Overall, claims continued to track roughly in the 450-470k range they have occupied for the last six months.  For unemployment to materially improve, claims need to fall to the 375-400k range.  Other than extremely weak sentiment going into tomorrow's unemployment report, there don't seem to be any positive signals.  




Below the jobless claims charts, we show the correlations between initial claims and each of the 30 Financial Subsectors. To reiterate, Credit Card and Payment Processing companies show the strongest correlations to initial claims, with R-squared values of .62 and .72 over the last year, respectively.  Surprisingly, some subsectors show a positive correlation coefficient to initial claims - i.e. Financials that go up as unemployment claims go up.  These names are concentrated in the Pacific Northwest Banks and Construction Banks, though these correlations are usually not very high.  


In the table below, we found the correlation and R-squared of each company with initial claims, then took the average for each subsector.  For composition of the subsectors, see Chart 5 below.


INITIAL JOBLESS CLAIMS UP 13K = NO SIGNS OF IMPROVEMENT - init. claims subsector correlation analysis


The following table shows the most highly correlated stocks (both positively and negatively correlated) with initial claims. Note that the top 15 negatively correlated stocks have a much stronger correlation on average than the top 15 positively correlated stocks - as you would expect, given that most of the Financial space is pro-cyclical. 


INITIAL JOBLESS CLAIMS UP 13K = NO SIGNS OF IMPROVEMENT - init. claims company correlation analysis


Astute investors will note that in some cases the R-squared doesn't seem to reconcile with the square of the correlation coefficient. This is a result of finding the correlation and then averaging. For example, Pacific Northwest Banks have an average correlation coefficient of .32 and an average R-squared of .52 (with CACB, CTBK, FTBK, and STSA strongly positively correlated and UMPQ strongly negatively correlated). The different directions have the effect of canceling out each other out when finding the average correlation coefficient, but do not cancel out when finding the average R-squared. 


Below we chart the raw claims data. 




The table below shows the stock performance of each subsector over four durations. 




As a reminder, May was the peak month of Census hiring, and it should now be a headwind to jobs from here as the Census winds down.




Joshua Steiner, CFA


Allison Kaptur


Yesterday, the S&P closed down 1% (12% for 2Q) and seven of the last eight days.  Overnight China reported that its June Purchasing Managers Index dropped to 52.1 vs. 53.9 last month; overnight the Chinese market closed down 1% and is now down 27.5% year-to-date.  The Chinese equity market has now declined for seven straight days.


On the MACRO front, the disappointing ADP Employment report is helping to confirm our thesis that the consumer is being DUPE(d).  DUPE(d) is my view of the consumer for 2H10 where trends are starting to roll over with the growing potential for a double dip, unemployment staying high, prices paid by the consumer going up and equity and real estate prices going down.  The June ADP numbers increased 13,000 vs. consensus 65,000 and upwardly revised prior 57,000; the June number is the smallest gain since February.


The MBA weekly Purchase Application Index released yesterday fell 3.3%, bringing June-to-date to 86.1 (versus April at 123.2 and May at 101.0).  With just a few days left in the month, June is tracking to be down 30% versus April.   According to the Hedgeye Financials team “We track Purchase Applications as a leading indicator of home sales activity, and continued lack of improvement in this metric is troubling, as 2010 YTD continues to be in line with a 1997 level of demand.  This abysmal level comes despite the lowest mortgage rates since the inception of the MBA survey.”  


Treasuries were mixed with the long end outperforming.  The dollar index closed at $86.01, trading flat on the day and the Hedgeye Risk Management models have the following levels for the USD – Buy Trade (85.30) and Sell Trade (86.59).  The VIX moved higher by 1% on the day and surged 100% in 2Q10.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (36.66) and Sell Trade (39.90). 


The Euro moved higher by 0.4%, and is rallying in early trading today.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade ($1.22) and Sell Trade ($1.24).


All nine sectors declined yesterday with the worst performing sectors being Technology (XLK -1.5%), Consumer Discretionary (XLY -1.2%) and Financials (XLF -1.2%)


Despite big issues surrounding the RECOVERY trade the Industrials (XLI) was one of the best performing sectors.  One of the highlights was Ford up 2.0%; Ford announced actions to reduce debt by $4B.  The S&P Airlines Index traded flat on the day. 


In the second quarter, copper declined 17% creating a bearish formation for global growth.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.85) and Sell Trade (2.98).


The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,228) and Sell Trade (1,258). 


Crude oil fell for a fourth day - the longest losing streak in seven weeks - as concern the economic recovery in the U.S. and China will continue to slow.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (75.03) and Sell Trade (77.31).  


As we look at today’s set up for the S&P 500, the range is 61 points or 1.2% (1,018) downside and 4.7% (1,079) upside.   Equity futures are trading below fair value.  Today's MACRO highlights include US Initial Jobless Claims, ISM manufacturing at and Pending Home sales.    


Howard Penney













Seeing What Matters

“It’s not what you look at that matters, it’s what you see.”

-Henry David Thoreau


This is a squirrely business. Anyone who has spent a day working on Wall Street and took the time to observe their surroundings gets that. If you are currently working within the Berlin Walls of Investment Banking Inc. and don’t know what I am talking about – look a little closer; it’s what you see that matters.


No matter how odd (or normal) someone on Wall Street is, there is one thing that can trump all of his or her social behaviors – performance. If you can drive a P&L on a big desk, one day you’ll be called “smart” – and from that day, until you lose money, you’ll have found the elixir of a highly compensated life.


You don’t have to like every person in this business to like the rules of the game. This is America  - a country built on the principles of meritocracy. No matter how screwed up our political aristocracy gets, they’ll eventually be held accountable by the performance gods. Every day that we walk down this transparency path in the modern YouTube world provides the next opportunity to expedite the process of price discovery.


Here was the score for June and Q2 of 2010 in US Equities:


1. June 2010: Dow (3.58%), SP500 (5.39%), Nasdaq (6.55%), Russell2000 (7.88%)

2. Q2 2010: Dow (9.97%), S&P (11.86%), Nasdaq (12.04%), Russell2000 (10.19%)


Whether you’ll be held accountable to the score in a public forum or not, the best part about this business is that you know the score. We all get marked-to-market every day. The most important relationships you’ll ever have in this business are with your teammates – they know the score too.


Today is July 1st, Canada Day and day 1 of keeping score for Q3. As is customary, my team and I will be introducing our Q3 Hedgeye Macro Themes. Unlike the sell side fee and commission chasing units of Investment Banking Inc, we change our investment themes as time and prices do. We aren’t paid to be dogmatic or theoretical. We get paid to get these themes right.


Rather than my giving my own paralysis of how we did with our Q2 Macro Themes, I’ll let our clients decide. Rather than give political lip service to the words “transparency” and “accountability”, every long or short position that we recommend at Hedgeye is marked-to-market, real-time, every day for all of you to see at


We’ll walk through a 35 slide presentation at 11AM EST explaining the following Q3 Macro Themes and how to use them from a risk management perspective:

  1. American Austerity
  2. Housing’s Headwinds
  3. Bear Market Macro

For anyone who puts up with reading my daily rants, these investment themes won’t have many surprises. In sharp contrast with our Sovereign Debt Dichotomy call in Q2, where we called for being short the Euro and Spain in particular, we’ll be zeroing on how the storytelling of deficit and debt problems (as a % of GDP) will find their way to the US. We already shorted the US Dollar (UUP) on June 7th, 2010, so we’ll be explaining that position’s risk/reward.


In principle, our investment themes are designed to be pragmatic. Everyone knows that they are late if they get to work at this firm after 530AM. Getting in early isn’t about face time. It’s not about what our analysts are looking at on their screens at that hour either – it’s all about synthesizing what everyone else is looking at and seeing what matters.


What matters this morning is what mattered 6 months ago when we introduced our Chinese Ox In A Box theme for Q1. If you didn’t see the Chinese forcing a slowdown in their own economic growth coming, you certainly see it happening now.


In our Q1 Macro Theme presentation we showed a slide with Chinese PMI growth putting in an intermediate term top in the 57-58 range. This morning’s Chinese PMI report for the month of June came in at 52.1 versus 53.9 in May, another sequential month-over-month slowdown. Chinese stocks closed down for the 7th day in a row, making a lower-YTD-low at -27.6%, second only to Greece in the world stock market league standings for last place.


The point of this morning’s missive isn’t to take a victory lap on China. It’s about seeing this business for what matters – it’s all about being right. Do you have a repeatable top-down global macro process to augment your stock picking and asset allocation or not? Did your risk management process work during the bear market moves of 2008? Is it working now? Who’s “smart” enough to change their positioning as prices do?


Our immediate term downside target for the SP500 remains 1018. Let the battle of Q3 2010 performance begin.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Seeing What Matters - tiger

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.