• run with the bulls

    get your first month

    of hedgeye free


Bear Market Macro: SP500 Levels, Refreshed...

Bullish hope in any bear market is fleeting. After an early morning run-up, another 2-day bounce in the SP500 is fading. The question now is can the US stock market make another lower-low (YTD closing low for the SP500 was established last Friday at 1022)?


In our risk management speak, we’d call the probability of seeing a fresh YTD low probable. In the chart below we show our refreshed immediate term TRADE line of support down at 1006. That means it’s probable that the SP500 could lose 55-60 points in a day. That would leave a mark.


Since every single line in every single major market outlined in our Q3 Macro Theme presentation (slide 25) remains broken AND we see a probability of an immediate term drop of this magnitude, we are going to stick with the ZERO percent asset allocation to US Equities that we moved back to yesterday.


If you are looking for a catalyst for weekend news-flow, tomorrow kicks off the National Governors Association (NGA) meetings in Boston (2010 Annual Meeting, July 9-12). Our Q3 Macro Theme of American Austerity will be a front and center topic of discussion given that Governors know this national deficit and debt situation as well as anyone trying to balance a budget. The numbers don’t lie like some politicians do.


Keith R. McCullough
Chief Executive Officer


Bear Market Macro: SP500 Levels, Refreshed...  - S P

Half Empty or Half Full?

Another mixed-bag month for same store sales, but this time it appears to be more directionless than most.  The focus is about to shift to back-to-school and the challenge is in reading whether June was half-empty or half-full.  Depends on who you ask.



Another mixed-bag month for same store sales, but this time it appears to be more directionless than most.  The reality is, demand is neither getting materially better or worse.  The underlying two-year comp trend has now been flat to down 1% since December (with the exception of a near perfect setup in March).  Perhaps the biggest takeaway with today’s results is that the outlook is less clear than it has been in a while.  This is best evidenced by the limited amount of earnings revisions we received today, despite the fact that many companies actually posted solid absolute results, cited tight inventories, and strong sell through of higher margin apparel.  Yes, there is earnings upside to be had but that is a coincident indicator.  The focus is about to shift to back-to-school and the challenge is in reading whether June was half-empty or half-full.  Depends on who you ask.


Half Empty or Half Full? - SSS 7 8 10


Highlights from another sales day data dump:

  • Target noted that strength in the month was led by food and HBA, followed by apparel.  Most notable was management’s callout of softness in electronics, video games, music, and movies.  Recall that TV’s especially have been under pressure given an industry slowdown in promotional activity.
  • Ross Stores continues to highlight home, dresses, and shoes as top categories.  This is consistent with prior months.  Florida and the mid-Atlantic were the strongest regions, increasing by high single digits.
  • Kohl’s noted that favorable weather (a.k.a HOT!!!) helped to lead the Northeast and mid-Atlantic to outperformance for the month.  Footwear and men’s were the strongest categories for the month.  Strength in men’s is notable and something to watch.  Clearly Father’s Day had a positive impact.
  • Nordstrom highlighted dresses, jewelry, and women’s shoes as leading categories for June.  Also of note was particular strength in the company’s Half Yearly Sale, which posted a high single digit increase. Sales trends in the first half of the month were stronger than the back half, which is in part due to the timing of the sale event.
  • JC Penney noted that company’s best region was the Southeast, while all were positive.  Interestingly, JCP cited a mid teens increase in regular and promotional sale across all apparel categories, offset by substantially lower clearance sales.  Overall, this is a solid endorsement for gross margins, although an earnings guidance update was notably absent from the release.  Home continues to be a weak spot for the company.
  • Abercrombie noted that its positive June results were largely the result of sales events that ran across all brands throughout the month.  Notably, weeks four and five were the strongest.  No mention of bed bugs.
  • Gymboree attributed its upside revision to earnings to share repurchase activity.  The company repurchased 2.2 million shares in the quarter for $96 million.  This leaves the company with 28 million shares outstanding, which suggests a pretty meaningful buyback has taken place.
  • Gap Inc. noted that “June results were disappointing, driven by traffic that remained negative at all three brands”.  Furthermore, margin pressure is now anticipated to in July to keep inventories clean.  At Gap, kids and baby outperformed adult, while men’s outperformed women’s.  Overall, the company’s tone and results clearly highlight concern in the near term.  Recall that management essentially stated that 2010 is a topline year and inventory/margin improvements are nearing an end.
  • Costco noted that inflationary trends were slight and consistent with May.  Management also noted that TV and computer sales remain negative, in line with the trend over the past several months.  Less coupons and promotional activity is a key reason behind the weakness in the TV category.
  • E-commerce had another standout month at Kohl’s (~+50%), Abercrombie (+62%), Aeropostale (+43%) , Macy’s (+37.6%), and Nordstrom (+66%).
  • Aeropostale noted that all regions for the month were positive and equally strong.  Weeks one and four were the strongest.
  • American Eagle stands out as one of the few to admit sales were below expectations for the month, with weakness persisting throughout June.  As a result, promotional activity was increased to drive incremental unit sales.  The formula worked, driving unit sales up mid-teens while average unit retails decreased by low double digits.  Unfortunately, this strategy will result in margin pressure making this the second time in as many months that AEO tempered earnings expectations.
  • Hot Topic highlighted a wide divergence in category performance within its stores for June.  Licensed led the way, increasing by 18% while fashion apparel was considerably weak, down 29%.
  • Limited Brands continues to note (as they have for the past several months) that merchandise margins continue to improve driven by less “sale” days, tighter inventory management, cost savings efforts, and favorable product mix shifts.  Overall, newness continues to sell well as evidenced by a 17% comp increase at Victoria’s Secret. 
  • HomeGoods continues to outperform the other divisions at TJX, with comps increasing 8% on top of a strong 10% increase last year.  On the flipside management noted that the company’s UK and Ireland stores are underperforming in part due to execution issues which are being exacerbated by weakening consumer confidence in those regions.

- Eric Levine


YUM is scheduled to report 2Q10 earnings after the close on Tuesday.  On an EPS basis, my estimate is coming in light, at $0.50 versus the street’s $0.54 estimate, but given the company’s track record of beating expectations, I would not be surprised if numbers came in above my estimate. 


Going into the quarter I continue to have two primary concerns, largely related to what I recognize as overly aggressive unit growth in China and profitability issues in the U.S. 





Despite the expected sequential slowdown in same-store sales growth in 2Q10 on a 2-year average basis (management’s guidance implies a 300 bp deceleration), I don’t think the issues in China will become more apparent until the second half of 2010 when restaurant profit margin should decline YOY.  Specifically, management pointed to commodity inflation and increased wage inflation in the back half of the year.  It is important to remember that restaurant margin growth in 1Q10 was driven primarily by commodity cost deflation of $15 million.


Although same-store sales improved significantly in 1Q10 on a 2-year average basis, I don’t think this trend is sustainable (again, management’s 2Q and FY10 guidance implies a deceleration).  Any slowdown in same-store sales growth will take a toll on margins as the company faces commodity and wage rate headwinds in 2H10.


As shown in the chart below, YUM China has been operating in what we call “Nirvana”, when both same-store sales and YOY restaurant profit margin growth are positive.  YUM should remain in Nirvana territory in 2Q10, but trends should get more difficult in 2H10, with the company potentially falling into “Deep Hole” territory (negative same-store sales and YOY decline in restaurant level margin) in 3Q10 and “Trouble Brewing” territory in 4Q10 (positive same-store sales and YOY decline in restaurant level margin). 


For reference, when we think about the four quadrants outlined below, we recognize the trends associated with operating in both the “Life-Line” and “Trouble Brewing” territories as unsustainable.  Broadly speaking, if a company is posting positive same-store sales and declining margins (Trouble brewing), the company is unable to leverage its positive top-line and is therefore spending too much (often a result of growth related costs). 


Within “Life-Line”, a company’s margins continue to grow despite negative same-store sales growth.  A lot of restaurant companies have operated in this quadrant in recent quarters as they have focused on cutting costs to offset the difficult sales environment.  A company cannot cut costs forever without hurting the customer experience so margins will eventually follow the direction of same-store sales growth. 






YUM is facing its most difficult same-store sales comparison in 2Q10 as it laps the Kentucky Grilled Chicken launch and a +3% comp at KFC (the only positive comp at KFC in 2009).  That being said, I am expecting same-store sales in the U.S. to improve slightly in 2Q10 from 1Q10 on a 2-year basis, primarily as a result of the new $2 combo meal at Taco Bell (lower drink and combo sales hurt 1Q10 trends) and the Double Down at KFC (which was reported to be on the menu indefinitely after initial plans introduced it as an LTO). 


During the first quarter, U.S. profitability was hurt by an increase in the number of consumers buying off the “Why Pay More” menu at Taco Bell.  Even if same-store sales get better in 2Q, this value menu will likely continue to be an important driver of traffic growth at the concept.  This combined with the fact that commodity costs should turn inflationary in the U.S. and the YOY restaurant profit margin compares get increasingly difficult for the next two quarters should continue to put pressure on U.S. profitability. 


The chart below highlights that U.S. same-store sales and margins have suffered for some time now, with the company operating in a “Deep Hole” for the last two reported quarters.  YUM will likely remain in a “Deep Hole” in 2Q10 but should then recover somewhat in the back half of the year as it emerges from the “Deep Hole” and potentially moves into “Nirvana” territory in 4Q10.  This expected recovery is largely a function of easy comparisons in 2H10 (as management pointed out on its 1Q10 earnings call).  YUM is lapping -6% and -8% same-store sales from 3Q09 and 4Q09, respectively. 


We will have to see how same-store sales track for the rest of the year in the U.S. (QSR trends, on average, continue to be choppy), but I continue to think that YUM’s full year U.S. operating profit could fall short of the company’s guidance of 5% growth (I am currently modeling nearly 3% growth with the bulk of that growth coming in 4Q10 when the company is lapping a 23% decline from 4Q09).





Howard Penney

Managing Director

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.

UA: Leaks Lend to Bull Case

Images are leaking out on UA’s basketball shoe, supporting our view that it will be impactful to the P&L sooner than many expect (see our prior post where we YouTube UA management’s change in verbiage on the launch). One of the images from SoleCollector is interesting, as the ‘tag’ to the picture includes a big alpha-numeric name, plus some html code I don’t understand, but also the words ‘coming in November.’ (yes, Nov 2010).


Please don’t ask me what I think of the shoe. Judging a shoe’s fashion-worthiness is not my bag. In fact, I’m probably a contra indicator. But what I will say is that the shoe looks very un-Nike-ish. Yes, that’s a good thing. If UA tries to play Nike’s game, it will probably get whooped. It needs to be different, and that will almost certainly be the pitch to retailers.


To be absolutely 100% clear here...our thesis on UA is not about a single shoe, sport, or athlete. It is the sheer organic growth and earnings power that UA should realize over the next 2-years while the rest of retail struggles to stand still. Let us know if you want our more thorough analysis on UA.



UA: Leaks Lend to Bull Case - 111


UA: Leaks Lend to Bull Case - 222



UA: Leaks Lend to Bull Case - 333



Our July 2 Write Up

Finish Line’s management team slipped on Friday, giving indication that Under Armour’s basketball product is on the way sooner that many may think. So many people we talk with seem to blindly accept that UA footwear will not meaningfully push until 2H11. But c’mon… don’t you think that management would buy themselves just a little time to execute this initiative? After the first go around, where results were so-so at best, they’re not going to get this wrong. That’s not because it’s written in the cosmos, it’s because they’ve proactively invested for it, beginning last summer. I don’t believe that basketball will be UA’s saving grace, but will be one of the many categories that allows the company to take this from being a $150mm footwear brand, to being a $1bn brand.  


Kevin Plank Q4 08 CC (January 29, 2009)“Beyond running footwear, there are growth opportunities for us long-term in soccer boots and eventually once the product is

ready, basketball.”


Kevin Plank Q1 09 CC (April 28, 2009)“We have no designated date as to when we will be launching basketball, other than the fact that exactly when we are ready.” …  “But again we believe that we are going to be very important in basketball. We also believe that we have the luxury of being patient as to the point when we decide to enter that market. And we will do so, frankly, first and foremost and only when the product is 100% ready. So we're biding our time and going to make a strategic decision around that.”


David McCreight Q2 09 CC (July 28, 2009)“As it relates to basketball we currently are already on court. We'll continue to read the market place there and roll out when appropriate.”


Kevin Plank Q3 09 CC (October 27, 2009)“We've got 20 Elite high schools. We've got Brandon Jennings in the NBA, so we have presence and we more importantly have feedback from all levels of competition

and we will be evaluating and making those decisions to go at it, first and foremost when the product is ready and when we're ready to support it and tell a big story. Go heavy or go home.”


Kevin Plank Q4 09 CC (January 28, 2010)“Being a great footwear company is not just about making a big splash with launched products, and we have no major footwear launches planned for 2010. However, we are developing our basketball footwear and positioning for a future launch. While you won't be able to find Under Armour basketball footwear for sale at retail, you will find it being tested and authenticated throughout 2010 on the feet of ten Division I basketball programs, more than 20 top high school programs, as well as on the feet of NBA Rookie of the Year contender, Brandon Jennings. We can be patient because of the multiple growth levers that

allow us the patience to prioritize.”


Kevin Plank Q1 10 CC (April 27, 2010)“As it relates to basketball, number one, we are very committed to getting into this category. And for us it's not a question of if as much as it's a question of when.” … “I think we are very, very pleased, I think, with the progress we've made to date. And I think we're frankly sitting in the catbird as to the timing and when we choose to enter this category. And I think we'll be opportunistic with that approach, but it doesn't have to be something we can force. And, frankly, as you can see, with the strong Apparel business we can use timing to our advantage and are not forced from a revenue standpoint. So the answer to that is we're not making any declarations as to when we're going to enter the market. But when we do we'll walk in with a point of view and we'll enter with strength.”


Sam Sato FINL Q4 09 CC (June 25, 2010)"As we move into Q3 and beyond, Reebok under the Zig Tech is introducing a basketball shoe as is Under Armor and we've seen both of those and put orders against that and think there's a tremendous opportunity for us to capture some business in that category as well."


Bernanke: "Get It Off Zero!"

Conclusion: Washington’s Economic Officialdom doesn’t understand that a ZERO percent “risk free” rate of return not only scares capital out of this country, but that it is also a tax on the fixed incomes of baby boomers with hard earned savings accounts. 

It’s no secret that we are not fans of Ben Bernanke and his Princeton crony Paul Krugman. We don’t believe in disrespecting the cost of (or access to) capital. When you socialize an economic system, you encourage bad behavior by undisciplined allocators of capital. Bad players then perpetuate existing problems.


Thankfully, there seems to be a reasonable voice at the US Federal Reserve who doesn’t wake up looking to pander to a Nobel Prize winner that has seen nothing but his 2008 theories fail. When you watch Krugman speak, you tell me if the man looks right stressed. If I were him, I would be too.


Kansas City Fed head, Thomas Hoenig, speaking with Kathleen Hays on Bloomberg Radio's "The Hays Advantage," yesterday at 11:30AM EST said he didn't think a one percent interest rate would be harmful to the economy. "I am not saying raise rates to very high levels. I am saying get it off zero," Hoenig said. (Source: Bloomberg) 


Below, Darius Dale did a solid job paraphrasing the highlights from an outstanding Hays interview:

  • You have to be careful with resisting the inertia of “extended and exceptional”.  Just because the EU sovereign debt crisis scared investors and inflation fears subsided doesn’t mean that we should hold rates low indefinitely.
  • How do you incentive savings and subsequently loans when you’re giving people zero % returns on saving?
  • You can’t solve every problem with monetary policy. It is an allocative instrument and we need to use it carefully.
  • I’m not saying take rates up substantially. I’m advocating a policy towards a slow normalization of rates (i.e. what we’re seeing in Australia, etc.)
  • There is a time factor; the more we delay, the more difficult it will be to make a move, as uncertainties and issues build up. Slowing growth, housing, and the Bush tax cuts expiration will all be factored into the debate as we progress through the year.
  • There will always be risks and the more you delay in acting, the more the risks begin to pile up.
  • To have lived through three bubbles (housing, tech, 1970’s), not calling out the negative implications of negative real interest rates would be a derelict to my responsibility as a official of the FOMC.
  • It’s expensive to hire people in the U.S. That and uncertainty about the future – including burgeoning fiscal deficits – means we are going to have to wait until the confidence comes back for job creation to accelerate.
  • When I was elected Federal Reserve president of K.C., I was given a single reichsmark by my elderly German neighbor. He said to me, “When I was a boy, this could buy a small house. By the time I got older, it couldn’t even buy a loaf of bread. Don’t let that happen here.”
  • The German hyper-inflation was caused by trying to fix every single economic and political problem with monetary policy.

Keith McCullough

Chief Executive Officer


Darius Dale


Thanks Bron Bron

So will LeBron go to Miami, New York, Chicago???  From an investment vantage point, I could care less. The simple fact that I am addressing this point is a big positive for the athletic brands and retailers.


Can anyone remember a time when there was this much hype around an athlete’s decision to play in a given city – or to play at all? I can… It was summer of 2001 when Jordan returned (which arguably should never have happened). Heck, I even recall sitting in the hot seat in the morning meeting room of my then-buldge-bracket employer and a seasoned salesperson literally asked me in front of thousands of ears whether Jordan was returning.


I thought that was both sad and ridiculous at the time.  The reality, though, is that it mattered. It mattered because it was an incremental boost to the product cycle. Nike amped up its product line around MJ with the Wizards, and kicked its marketing machine into high gear. Any retailer worth its salt could not afford to miss out on that, so orders followed. Jersey sales also picked up, and Reebok had the exclusive license for ‘official’ league jerseys. Adidas has since restructured the deal such that it sells them under the Adidas logo.


So what are we looking at here?  With the exception of LeBron ending up in the media-market-equivalent of Outer Moongolia like Portland (Trailblazers) or in Kobe’s shadow like w the LA Clippers (it'll never happen), this event will be incremental across the board.

1)      For Adidas, they’ve been relying on World Cup and Shape Ups. WC is almost over, and Germany was sent packing by a ‘lesser’ Adidas team. Not sure when the bubble will end on shape ups, but a pick-up in Jersey sales from the most exciting free agent switcheroo will help keep adi’s momentum going for another quarter.


2)      For Nike, they have LeBron, Wade, Carmello, and Bosh. From an asset standpoint, they can’t lose. Now they need to execute on product and marketing. That’s where my confidence level is highest. If these three guys (LeBron, Bosh and Wade) all end up in Miami, then Nike will be giddy with how they can build up this franchise into the next season. Given Nike’s legacy in Chicago with in the 1980s and 1990s with the Jordan/Rodman/Pippen trifecta.


3)      Arguably, the biggest winners across the board are the retailers.  We’re only talking about a half a point to a point in comp for a company like DKS, HIBB or FL. But given that this is a business that has faced headwinds for the better part of four years, we’ll take what we can get.


Thanks Bron Bron - 7 7 2010 9 22 14 AM

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.48%
  • SHORT SIGNALS 78.35%