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Bear Market Macro: SP500 Levels, Refreshed...

After a horrible pending homes sales number (down 30% sequentially in May; down -15.6% y/y), this bear market is gaining momentum to the downside. At a point, the SP500 will bounce from oversold levels – bear markets always do – but to lower-highs, as we keep selling off to lower-lows.

 

This morning’s ISM print in the US was more of the same in terms of what we saw overnight coming out of China (PMI slowed sequentially) – global economic growth is slowing. We walked through our GDP estimates for the back half of 2010 and into 2011 on our Q3 Macro Themes call this morning. Consensus is playing catch-up now in re-pricing expectations for go forward growth.

 

Some players are trying to pick the bottom here today. We’ve tried that in prior bear market cycles and don’t like the risk/reward setup in doing that here today - not in front of a long weekend and before another long line of America’s unemployed getting reported tomorrow morning.

 

Bottoms are processes, not points. Our immediate term TRADE line of support is now 1011.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bear Market Macro: SP500 Levels, Refreshed...  - sp


HEDGEYE'S Q3 MACRO THEMES - REPLAY AND SLIDES

The Hedgeye Macro Team, led by CEO Keith McCullough and Managing Director Daryl Jones, hosted our quarterly themes conference call today. To access the replay and the slides, please copy and paste the links below into your URL.

 

Podcast:

https://www.hedgeye.com/promos/podcasts/39445-3-8430-American_Austerity

 

Slides:

http://docs.hedgeye.com/Q3%202010%20THEMES.pdf

 

 

As a reminder, the 3Q10 Key Macro Themes are:

  1. American Austerity - As austerity measures are implemented around the world, the emerging debt and deficit issues in the U.S. will require an imminent and comparable policy response. 
  2. Housing Headwinds - The domestic housing market is faced with another leg down due to a supply and demand imbalance, which will begin to play out in Q3. 
  3. Bear Market Macro - Globally, there are a number of key markets that are in bearish quantitative set ups heading into Q3, which will position our tactical asset allocation. 

As always, if you have any questions regarding any of our processes or conclusions, please email .

 

We kindly thank you for your support.

 

Best regards,

 

The Hedgeye Macro Team



HEDGEYE'S Q3 MACRO THEMES: NAVIGATING THE ROAD AHEAD - REPLAY AND SLIDES

The Hedgeye Macro Team, led by CEO Keith McCullough and Managing Director Daryl Jones, hosted our quarterly themes conference call today. To access the replay and the slides, please click on the links below:

 

Podcast and slides.

 

As a reminder, the 3Q10 Key Macro Themes are:

  1. American Austerity - As austerity measures are implemented around the world, the emerging debt and deficit issues in the U.S. will require an imminent and comparable policy response. 
  2. Housing Headwinds - The domestic housing market is faced with another leg down due to a supply and demand imbalance, which will begin to play out in Q3. 
  3. Bear Market Macro - Globally, there are a number of key markets that are in bearish quantitative set ups heading into Q3, which will position our tactical asset allocation. 

As always, if you have any questions regarding any of our processes or conclusions, please email .

 

We kindly thank you for your support.

 

Best regards,

 

The Hedgeye Macro Team


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PSS Board…

PSS Board…

 

As the cheap get cheaper in today's market, I thought it was worth pointing out that inquiries from subscribers regarding PSS valuation have picked up meaningfully - even relative to other stocks. 

 

We'll never buy a stock just because it's cheap. But we do like when we find what we think are very good stories at irrational prices. Some might argue that it screens well on PE (sub-10x), EBITDA (4.7%), and FCF Yield (17%). But here's another way to look at it. When we break out our estimate for profit by brand/business, it suggests that the core retail business is trading for just under 3x EBITDA.  One thing I like here is that PSS finally has enough cash flow that it could actually consider buying back its stock meaningfully. In fact, at the current rate of cash flow, this company can buy back 15% of its stock per year.

 

You hear that, PSS Board??? 15% annually! There are shareholders that have gutted this out right alongside you - and have scars to prove it.  If you believe in your strategy, and your team - as we do - then step up and hit the bid. If sitting on cash while Bernanke and friends give you a whopping 0% rate of return on it is better than buying your stock here, then I will be very very afraid. We'll watch what you do, not what you say. Now get busy!

 

See Segment Analysis Below:


PSS Board… - 1



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.

 

 

TODAY’S CALL OUT

 

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.

 

  

LEVINE’S LOW DOWN 

 

-  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.

 

 

MORNING NEWS 

 

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. <wwd.com/footwear-news>

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 jcp.com in the spring, as well as to 500 more stores in fall 2011. <wwd.com/footwear-news>

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. <wwd.com/retail-news>

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. <sportsonesource.com>

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.). <sportsonesource.com>

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. <wwd.com/business-news>

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.  <wwd.com/business-news>

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. <wwd.com/business-news>

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. <sportsonesource.com>

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 petsmart.com. 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.

 <licensemag.com>

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. 

 


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