R3: Fore!


July 2, 2010


Decelerating golf data for May highlights the volatility of monthly data while confirming pockets of regional strength.





As many plan to head out to the links over the holiday weekend, the latest update on golf rounds played (albeit on a lagged basis) provides a few noteworthy highlights. May data, courtesy of Golf Datatech, reveals a sharp sequential deceleration to -2.9% from +10.5% in April.  After posting positive growth in 7 of 8 regions last month, May reveals only three key areas of strength with New England (+8.2%) Mid-Atlantic (+4.1%) and South Atlantic (+3.6%) all posting positive numbers.  Recall that DKS has a notable presence on the East Coast.


While month to month results are clearly volatile (and weather sensitive), lackluster YTD results (-3%) remain unchanged.  As such, we suspect improved demand noted by retailers is likely to continue to be driven by share gains more than anything else.  On the wholesale side, golf participation-driven demand appears to remain lackluster.  Net, net aside from monthly volatility,  rounds played remains a headwind for the industry overall.





- Whether it’s in preparation for its IPO or just another growth vehicle, Prada has finally entered the world of e-commerce.  The multi-country site is more than just a placeholder, offering a full range of the company’s high priced handbags, leather goods, and accessories.  And of course what would ecommerce be without free shipping, this time with a threshold of $2,000.


- According to a BIGresearch survey, 16.2 percent of consumers will head to stores to buy new patriotic merchandise this year for July 4th, up from the 14.1 percent who shopped for apparel, decorations and accessories last year.   Even more eye opening is AAA forecast for a 17.1% increase in road travel over the holiday weekend.  Approximately 34.9 million people are expected to hit the roads and travel at least 50 miles from their homes.


-If you haven’t already seen the news out of Hollister’s “EPIC” flagship store in Soho, then here goes.  The store is closed, temporarily, due to bedbug infestation.  According to news and blog reports, employees began complaining about bedbug bites weeks ago but were originally ignored.  After the volume of complaints grew and spread to the customer base, management finally decided to close the store to exterminate.  Unfortunately, bedbugs thrive in a dark environment. For those who haven’t been, the store has no windows!  We’re officially crossing this location off of our store visit list.





Amazon Acquires - is acquiring daily deal site, one of the pioneers in offering the one-day bargains that many online consumers seem to love. Amazon, which just about a year ago acquired in a deal valued at almost $900 million, isn’t saying much about its latest acquisition. But in a series of blog postings on, founder and CEO Matt Rutledge says his company looks forward to becoming an independent operating subsidiary of Amazon. Internet Retailer estimated web sales of $71.6 mm in 2009. <>

Hedgeye Retail’s Take:  A smart purchase for Amazon, which gives now allows the company to use its own inventory to fuel the Woot “offs”.  Given the cultlike following of Woot, we just hope they don’t over expose it.  The essence of Woot is one product per day, which it what truly makes it unique. 


Delta Apparel Acquires HPM Apparel - Delta Apparel Inc. has agreed to acquire HPM Apparel Inc., which markets U.S.-produced collegiate fashions to college bookstores under The Cotton Exchange brand. Robert Humphreys, Delta’s CEO, said the deal furthers the company’s efforts to tap into the college bookstore market, while also adding to its business with the military and other retail channels. “In addition, this business provides us additional U.S. screen print and embroidery capacity, further enhancing our speed to market initiatives,” he said. Delta said the deal would add about $25 mm in sales to the fiscal year ending July 2, 2011, while being slightly accretive to earnings. <>

Hedgeye Retail’s Take:  Simple bolt on acquisition which should drive some synergies.  However, this does little to differentiate the company’s core business away from commodity tees. 


LI-NING Unveils Rebranding Strategy - LI-NING unveiled a new logo and slogan Wednesday in a brand relaunch timed to coincide with the 20th anniversary of the founding of China's dominant domestic sporting goods apparel brand. <>

Hedgeye Retail’s Take:  We continue to believe that LI-NING and other Chinese sports brands will continue to raise the bar from a competitive standpoint rather than watch Nike and Adi walk into their marketplace.  Furthermore, we’re still waiting for LI-NING to enter the market here in the U.S.  Perhaps a re-branding is just what they’ve waited for before taking the brand stateside.


Uniqlo’s June Comp Decline Disappointing - Fast Retailing said Friday that Uniqlo’s same-store sales slumped 5.8% in June on slow sales of summer items and lower foot traffic. These figures exclude Uniqlo’s business outside Japan. The brand saw its same-store sales drop 16.4% in March and slide 12.4% in April. They recovered in May, gaining 3.1%. June demand for its stay-cool innerwear range, called Silky Dry for men and Sarafine for women, was high but some stores ran out of certain sizes and colors and missed out on sales to consumers. Uniqlo expects its inventory will work better in July and August, when consumers are in the market for t-shirts and shorts rather than underwear. <>

Hedgeye Retail’s Take:  After a very strong run, Uniqlo has on more than one occasion missed the mark on merchandising and inventory “under” management.  Making a bet that underwear would be a key summer item just seems flat out wrong and is clearly an example of complacency after the company had a hit on its hands with Heatech.


Bloomingdale's to Showcase New Brand Pippa - French Connection has developed a new brand, Pippa, and Bloomingdale’s will have the exclusive on the fall launch.  Pippa, described by officials as a collection of contemporary workwear essentials, will be at all Bloomingdale’s stores and in the second week of August, but shoppers will be able to preorder on in mid-July. Bloomingdale's feels strongly that creating an on-trend category for the young professional woman is going to resonate. <>

Hedgeye Retail’s Take:  Differentiation and exclusivity continue to dominate department store merchandising efforts, this time with a horrible brand name.  Pippa? Really?


Sephora Perfumery Chain Enters Brazil - The Sephora perfumery chain is about to enter Brazil, the world’s third-largest cosmetics market, and take its first step into South America following its parent LVMH Moët Hennessy Louis Vuitton’s purchase of 70% of the Rio de Janeiro-based online retailer Sacks. The Brazilian retailer offers more than 270 brands and boasts a customer portfolio of more than 830,000 clients, with four million unique visitors a month. <>

Hedgeye Retail’s Take:  Keep an eye on Brazil which for a long time now has been playing second fiddle to China and the Middle East in terms of emerging market growth.  The luxury market is booming in Brazil and we expect it will become a major target market for premium brands over the next several years. 


The NBA and GSI Commerce Extend E-Commerce Agreement to 2017 - GSI Commerce Inc. signed an extension of its multiyear e-commerce agreement with the National Basketball Association (NBA) to 2017. Since partnering with GSI in 2007, the NBA's online sales have grown each year.  <>

Hedgeye Retail’s Take:  If there’s one client that isn’t going to take their e-commerce in house, it’s the NBA.  This remains a win-win for both parties.


PVH and Ike Behar Apparel Grow Partnership - Ike Behar Apparel & Design has extended its licensing agreement with Phillips-Van Heusen to include ready-to-wear dress shirts, beginning January 2011. For 10 years, the two have been partners. The Insignia Division of PVH's dress furnishings group has been producing neckwear for the Ike Behar brand. <>

Hedgeye Retail’s Take:  Formerly a higher-end dress shirt brand, it now appears that the company is heading downscale a bit with this ready-to-wear effort.  We would expect to see distribution for Behar to expand as well, beyond Saks and Neiman’s along with this new line.


The Macau Metro Monitor, July 2nd, 2010



According to the Gaming Inspection and Coordination Bureau (GICB), June GGR rose 65% YoY but fell 20% MoM.  Analysts attribute the relatively soft number to World Cup gambling, as it takes away from gambling in casinos.  June revenue totaled MOP13.642 billion (US$1.705 billion) compared with the MOP17.1 billion recorded in May.


According to IM,  SJM kept its market share lead at 30%; Sands China had 21%; Wynn had 17%; MPEL had 13%; Galaxy had 10.7%; and MGM remained in last place at 7.5%.  IM says July is always stronger than June, though usually not quite as strong as May, and August is one of the best months of the year for both mass and VIP.



IM believes 2Q EBITDA will be off the charts particularly for Wynn Macau and Sands China as they take the biggest percentage of revenue gains to their bottom lines.  IM also believes 3Q will be stronger than 2Q (because of August results), with the 4Q being the strongest (biggest Golden Week of the year and December spending).


IM says SJM and Galaxy's third party casinos have the best revenue-share deals for junkets. If a commission war does break out between the concessionaires and the junkets, IM believes Wynn and Sands would be least impacted as they continue to expand their direct VIP business, which is more dependent on product (Encore and Plaza) and less on rebates.


In addition, IM thinks the bottom three operators will do well in the coming months.  CoD will post solid numbers despite its lawsuit on reclaiming US$35m from its former junket consolidator at Altira.  Galaxy will continue to grow RC volume until Galaxy Macau opens in March 2011, when it will need to adjust its mass-marketing strategy.  MGM will throw everything but its credit-conservativism (and perhaps even that) at the market as it prepares for its IPO.


NON-GAMING, ANYONE? Intelligence Macau

By moving Robuchon a Galera from the old Lisboa to Grand Lisboa's 9th and 10th floors, Grand Lisboa hopes its non-gaming facilities would drive traffic.  IM sees 3Q EBITDA gains from this transition.  Meanwhile, CoD is planning a 20,000 cubic meters nightclub and a Hard Rock Cafe, and the Venetian may be unveiling some new nightclubs.



The Urban Redevelopment Authority (URA) released preliminary estimates that showed private residential property for 2Q rose 5.2%, compared with 5.6% in 1Q.  Based on the estimated price index of private residential property, prices rose from 175.0 points in 1Q to 184.1 points in 2Q.




The data points in Global MACRO have turned decidedly negative, putting pressure on the US equity prices; China’s PMI, US jobless claims, US ISM and the US housing market.  The S&P 500 closed lower on Thursday by 0.3%, making 8 of the last 9 days down-days for the market.


Yesterday’s Jobless claims were 472,000 vs. consensus 455,000; prior week revised to 452,000 from 459K - the 4-week average is the highest since March 6th of 466,750.  Continuing claims were reported at 4.616M vs. consensus 4.52M; prior week revised to 4.573M from 4.548M.  June ISM was 56.2 vs. consensus 59.0. 


We are bearish in our outlook for housing and home prices; this is being expressed in out 3Q10 theme of Housing Headwinds.  Yesterday’s May Pending Home Sales declined 30.0% month-to-month versus consensus of a decline of 11.8%.  Pending homes sales for May declined 15.6% year-over-year.


Despite the decidedly negative trends for the consumer, the only two sectors in the green yesterday were consumer related - Consumer Discretionary (XLY up 0.8%) and Consumer Staples (XLP up 0.2%).  The S&P Retail and Restaurant indices were up 1.1%, each. 


Treasuries were mixed with the long-end outperforming in a continued flattening of the curve.  The 10-year traded below 2.90%, before rising again to 2.94% at the end of the day.  The dollar index closed dramatically lower, closing down 1.5% at $84.60.  The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (83.56) and Sell Trade (86.52).  The VIX moved lower by 4.9% - the Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (30.46) and Sell Trade (36.16). 


With a sharp decline in the Dollar index, it’s worth noting the big spike in the Euro - the Euro traded up 1.5%, closing at 1.2439.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.22) and Sell Trade (1.25).


The three worst performing sectors were Materials (XLB down 0.6%), Healthcare (XLV down 0.9%), and Financials (XLF down 0.9%).   Health insurers CI and WLP were lower on concerns around healthcare reform risk.


This has been a disastrous week for copper, down 4.9% over the last five trading days.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.84) and Sell Trade (2.97).


Yesterday gold saw its biggest decline in two months (April 16).  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,207) and Sell Trade (1,265). 


Oil has declined 5% over the last five days, on slowing global growth.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (72.88) and Sell Trade (75.14).  


As we look at today’s set up for the S&P 500, the range is 57 points or 1.5% (1,012) downside and 4.1% (1,069) upside.   Equity futures are trading mixed ahead of the jobs number.    


Howard Penney













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An American Business

“Being ignorant is not so much a shame, as being unwilling to learn.

-Benjamin Franklin


After finishing “Founding Brothers” by Joseph J. Ellis, I just started digging into “Benjamin Franklin - An American Life” by Walter Isaacson. Being a Canadian hockey player these days can feel golden at times, but not when I’m staring at the mountain that is my reading pile of American history.


On June 23rd I titled my Early Look “Rigorously Frugal” in reference to how the Founding Fathers of America considered government spending. By immersing myself in Franklin’s American story, one thing has already become crystal clear – on a relative basis to Thomas Jefferson, Benjamin Franklin lived frugally.


What I love about Franklin is that he wasn’t twirled up in the trees with the squirrel hunters espousing theories. He was a doer. If we had him running a portfolio in these globally interconnected times, I think he would find a way to do quite well. The man never stopped learning.


Ahead of our 4th of July weekend, here are 3 more Franklin quotes that I think fit our financial times:

  1. “We are all born ignorant, but one must work hard to remain stupid.”
  2. “A penny save is a penny earned.”
  3. “By failing to prepare, you are preparing to fail.”

As a practical matter, I think a lot of Americans are already moving down the right path when it comes to preparing their personal balance sheets for the inevitable. While the US government literally does the opposite of these 3 Franklin quotes, Americans are proving to do what they’ve always done – evolve.


On the first point, dropping Americans 401ks to 201ks and then fear mongering them from the mountain tops of political life did exactly what professional politicians preached – it scared the hell out of the American people. Whether it be from a mortgage application or a US equity fund flow perspective, Americans are proving that they haven’t remained “stupid” enough to make the same mistake twice. They aren’t buying houses or stocks.


On the second score, while the savings rate in this country has its own problems in terms of how it’s calculated, there is no doubt that the direction of cash in savings accounts of fiscally conservative Americans is going one way – up. Earlier this week we saw the US savings rate bump back up to 4%. Everything starts with a penny saved (after buying our Gold position back yesterday, our allocation to cash in the Hedgeye Asset Allocation Model is now 58%).


On the final point, whether it was preparing for a slowdown in Chinese or US economic growth, a lot of our clients were proactively prepared for the swoons that we’ve recently seen in global equities. As of last night’s close, China and the US are down -27.3% and -7.9% YTD, respectively. Those who were unwilling to learn that there is a global interconnectedness to fiat currencies and the Debtor Nations that create them are learning now.


Yesterday we had our largest audience ever for a quarterly Macro Themes conference call. As Big Alberta (Daryl Jones) and I broke bread with our American teammates for dinner last night in New Haven, there was a sense of graciousness that I have not yet felt in my investing life. We are grateful for our clients giving us the opportunity to build a new American business. Without their confidence in us, we wouldn’t have been able to build while we learn.


I realize that sometimes I sound overly doomsday’ish when I write about the state of this American union – and to be clear, I remain bearish on all that has become the Officialdom of Perceived Wisdoms in Washington’s economic department – but I am also humbled and proud to have the opportunity to be industrious and frugal in building this American business. I may not make the money I used to make working on Wall Street, but I am certainly happier.


My immediate term support and resistance levels for the SP500 are now 1012 and 1069, respectively.


Enjoy America’s 4th of July with your families and friends,



Keith R. McCullough
Chief Executive Officer


An American Business - ben


We’ve found seasonality in slot ship share; something to think about when making judgments about quarter to quarter shifts.



If history holds, IGT should see a sequential market share gain when calendar Q2 unit figures are released.  However, before anyone runs out and calls an end to IGT’s chronic ship share losses, understand that seasonal shifts may explain most of the changes.  In the following chart, we’ve analyzed the seasonal shifts in quarterly ship share.  For IGT, BYI, and WMS, each bar represents the percentage of average annual ship share for each of the four quarters for the period of 2007-2009.




Aside from the aforementioned CY Q2 shift in IGT, the only other notable shift occurs in CY Q3 where WMS typically gives back a lot of share.  Unlike IGT and WMS, BYI's share is usually consistent throughout the year.  Although as we noted in our post last week, Konami is likely to give up a lot of share from CY Q1 to CY Q2 which could benefit all three US suppliers.  Konami's fiscal year end is March 31st and they tend to be very aggressive in that quarter.  IGT apparently captures the lion's share of Konami's sequential decline.  WMS maintains a lot of exposure to the Midwestern markets, which generally experience their strongest quarter in CY Q3.  Thus, customers tend to order a lot of WMS products ahead of the big July 4th weekend, which falls in CY Q2.  WMS's FY 4Q also ends in June which may spur sales as salespeople strive to meet annual quotas.


As the consumer gets DUPE(d), consumer discretionary categories like casual dining will feel the pinch.


I think it is instructive to link Tuesday’s Early Look with the current picture we face when looking at restaurant stocks.  “MEGA” was one of our Q209 macro themes – calling for a MEGA squeeze in consumer stocks with Mortgage Rates going down, the Employment picture turning around, Gas prices declining sharply year-over-year, and Asset prices re-flating.  Looking at the data as we emerge from 2Q10, it is clear that the American consumer is now going to get DUPE (d) and is not going to be happy. 



Double-Dip:  The housing market and the broader economy are on the precipice of a double dip; housing prices have already started to decline and the economy has slowed significantly quarter-to-quarter in 1Q10.  The Hedgeye Risk Management Financials team recently presented a very strong case for why the housing market is in trouble.  We have high conviction that a double-dip in housing is underway and this will have a serious impact on consumer behavior.  Following a decade of out of control spending, the state of the USA’s balance sheet inhibits the country’s ability to navigate the structural issues still present in the economy.  Our Double-Dip thesis was supported by data released yesterday concerning mortgage applications; 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).  A few additional points to keep in mind include:

  1. The benefits from the current Obama stimulus peaked in the 1Q10 - Slowing GDP growth.
  2. In 2011, taxes are going up and that will hamper economic growth - Slowing GDP growth.
  3. Real estate prices are estimated to decline 20% in the next twelve months - Slowing consumer spending. 



Unemployment:  Weekly Jobless Claims have not shown any material improvement over the past six months.  Private sector job creation remains a concern; private-sector job creation in May decreased sequentially from April.   While private sector job creation had been growing for four straight months, it has now come to an impasse as businesses have become nervous about the state of the economy.   Unemployment is at an elevated level and indicates a continuing softness in the underlying economy.  Some data emerged yesterday is supportive of our view that the unemployment picture is not materially improving.  According to ADP, US companies added a mere 13,000 jobs vs consensus 65,000.  As census workers are laid off, the rate could jump higher unless other sources of employment pick up hiring drastically.  This metric, of course, is of paramount importance to the restaurant industry’s top line.

  1. The Administration failed to get Congress to pony up an extra $50B for unemployment claims - our leveraged balance sheet inhibits the government’s ability to provide stimulus. 
  2. A strong dollar policy has proven to help job creation – Bill Clinton and Ronald Reagan were the last two presidents to oversee true job creation and both pursued strong dollar policies - to be sure Obama is debauching the US currency.
  3. As the Double-dip scenario pays out, unemployment will remain elevated and may even go higher. 


Prices Paid by the Consumer:  While reported inflation by the government looks to be under control, the Hedgeye Inflation Index tells a different story.  The Hedgeye Inflation Index focuses on the part of the economy showing inflation that impacts the consumer, specifically the spread between the prices of things they buy and what they earn.  Looking out over the next 6-12 months (and even longer), consumers will be paying more to drive their cars, or “bring home the bacon” and to make sure they have health insurance for their family.  The issues that arise from the disaster in the Gulf of Mexico will not be solved by the cash flow from BP.  The government has been sponsoring cheap gas prices in the US for years and that will, at some point, come to an end.  Once again, the government cannot afford to manage through the issues the country faces due to the highly-leveraged balance sheet.      

  1. The Hedgeye Inflation Index turned ugly last week.
  2. The disaster in the Gulf is inflationary and will be a drag on growth.
  3. The prices paid by the US consumer for gas is far below the rest of the world and there is a possibility that the gap could close significantly under pending energy legislation – this would be a massive headwind for the consumer.  Some commentators are speculating that prices could rise to meet those paid at the pump in Western Europe – some 50% higher than where they are currently.


Equity and Real Estate deflation:  We believe that the debasing of any currency (even the Almighty Dollar) ends badly.  A lack of austerity in government policies and an aversion to facing facts among our professional politicians is not helping the long-term outlook for equities.  The VIX’s 19% up-move week-over-week, along with the move in the equity market, indicates that political summits are doing little to ease fears. 

  1. U.S. equity markets have lost $1.78 trillion since April 23 on concern the European debt crisis will spread. 
  2. China declined 4.2% last night and is now down 26% year-to-date. 
  3. The S&P 500 is down 3.6% year-to-date. 


The same metrics that buoyed the consumer over a year ago are depressing spending this year.  As long as the data continues to confirm this thesis, we will continue to believe that the consumer is getting DUPE(d).  Taking stock of performance in restaurant stocks over the past quarter, it is clear that the space is highly susceptible to the factors I have outlined above. 



From the table below, one can see right away that it has been an ugly quarter for casual dining.  Almost every stock in the category with the exception of Cracker Barrel, BJ’s Restaurants, and Landry’s (private) got hammered over the last quarter.  Notably, in the table, from Bob Evans down to the bottom of the list (BOBE, RT, RUTH, BWLD, EAT, MSSR, DIN, RRGB, and CHUX) there are nine stocks that have declined by more than 20% over the last 90 days.  Despite the precipituous declines, some of these  companies are still facing serious issues (RRGB’s heavy dependence on promotions, BWLD’s terrible ROIIC due to unsustainable growth).   With regard to EAT, we are maintaining our view that the company can take meaninful share from DIN and use their improved balance sheet (new revolver and proceeds of On the Border sales) to buy back ~25% of their market cap.



In terms of QSR, too, the poor outlook is certainly being confirmed by the price action.  Chipotle has been unstoppable, up nearly 20% over the last 90 days, but has declined 4% over the past month.  The QSR group on average is down nearly 6.6% over the past quarter.   The “U” in DUPE(d) is highly relevant for the quick service category and, as I discussed above, the unemployment picture is not improving materially.  QSR management teams have reiterated ad nauseum (Sonic Corp and Starbucks recently) the need for the unemployment picture to meaningfully improve if the topline is to grow.



Some recent news items include:

  • CKE restaurants announced that its stockholders approved the proposal to adopt a merger agreement providing for its acquisition by “entities created by certain affiliates of Apollo Management VII, L.P.”. 
  • Brinker International and OTB Acquisition LLC, an affilliate of Golden Gate Capital, closed the sale of On The Border Mexican Grill & Cantina.  Gross proceeds for the transaction total $180 million.
  • Jack in the Box announced a five-year, $600M refinancing plan, comprised of a $400 million revolving credit facility and $200 million term loan.
  • Starbucks is rolling out free WIFI in all US and Canada stores today.
  • UBS raised its YUM price target to $49.
  • CAKE upgraded to market perform from underperform.
  • PFCB upgraded to market perform from underperform.
  • CPKI mentioned in NY Post article detailing how, despite the capital gains tax increasing from 15% to 20% next year, private equity is not overly eager to spend.  The CPKI auction, according to a source cited in the article, is near collapse and the restaurant company is an example of the lack of growth potential out there for PE to acquire.
  • An interesting article in the Wall Street Journal titled, “USING STARBUCKS, DUNKIN’ DONUTS TO TRACK ECONOMY”, discusses the relationship between the state of the economy and where consumers buy their coffee and how much they are willing to spend.  By breaking out the average dollar transactions at Starbuck’s and Dunkin’ Donuts, a research economist was able to identify a trend whereby consumers spent less at the outlets during the worst of the recession, but the spending on coffee ticked up as the unemployment picture improved.  In April, the trend reversed but as the article notes, much of that change is likely to be seasonal.
  • McDonald’s is changing its menu.  The “Big N’ Tasty”, “Mac Snack Wrap”, and the fruit and walnut salad, among other items, are being crossed off the menu while an oatmeal breakfast will be rolled out nationally in January. 
  • Cosi, Inc., has announced that it has named Kimberly Letizia as its director of Culinary Innovation and Menu Strategy.  Letizia most recently acted as Corporate Chef Consultant to Kraft Foods.




Howard Penney

Managing Director