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The Singapore Sling: Why We Are Long of Singapore

Position: Long Singapore via the etf (EWS); Bullish on SGD-USD.


Conclusion: As part of our call that growth will slow globally in 2H10, we want to be long currency and equity markets that are poised to accelerate domestic consumption. Singapore is one of those economies and, as a result, is one of Hedgeye’s top Macro investment ideas.


Based on recent strength in manufacturing and exports Singapore posted a 2Q10 GDP growth number of 19.3% Y/Y. The record gain was fueled by strong industrial production growth, which accelerated in May to +58% Y/Y. Manufacturing in Singapore has grown by an average of 45% in the first five months of 2010, led by strong output in the pharmaceutical and electronic sectors – two of Singapore’s largest export bases.


Despite the EU’s sovereign debt issues, the large growth in exports during the 2nd quarter, the net of which compromised 25% of GDP in 2009, is an incrementally bullish read-through in conjunction with the 2Q GDP release. Singapore’s non-oil, domestic exports accelerated on the margin in June to +29% Y/Y vs. +24% Y/Y in May. Upon further scrutiny, however, we find that European austerity and economic stagnation in the U.S. paints a more sober picture of the intermediate term trade outlook for the $182 billion economy. Today, the Trade Ministry of Singapore stated:


“In the European Union, domestic demand remains depressed as concerns over the sovereign-debt crisis persist… The implementation of fiscal austerity measures in some of the economies may further weaken their domestic demand. The weakening of the euro against key trading partners will also dampen import demand in the European Union. Signs of a slowdown in the labor market in the U.S. have affected consumer confidence, and sluggish final demand from the world’s largest economy as well as Europe has led to a moderation in manufacturing in Asia.”


The consensus belief that European Austerity may negatively negative impact Singapore’s exports has upside risk.  Nominal exports to the EU are less than 8% of the total with the economically healthy Germany compromising 20% of that share. That said, just last week, the EU Delegation to Singapore plainly stated that trade between the two entities would remain vigorous in 2H10, despite austerity measures.


Breaking down the most recent trade numbers in more granularity, we find that growth of non-oil, domestic exports (NODX) to the EU accelerated in June (+75% Y/Y vs. +5.7% Y/Y in May) due to a favorable inventory cycle for pharmaceuticals, electrical machinery, and computer parts. This is likely to moderate going forward, as Singapore PMI slowed in June (though still showing expansion in all major categories: total, new export orders, new orders, and order backlog). The takeaway from this is that, while cause for concern, European austerity fears  should not be overstated in an analysis of Singapore’s trade outlook.


The Singapore Sling: Why We Are Long of Singapore - 1


Trade Outlook: Moderate


In fact, the majority of Singapore’s exports go to Asian economies, with the largest recipients being: Hong Hong (11.6%), Malaysia (11.5%), China (9.7%), Indonesia (9.7%), and Japan (4.6%) (CIA Factbook, 2009). The U.S. is a destination for roughly 11% of Singapore’s nominal exports, so continued weakness (Y/Y growth flat sequentially from May to June) from that market – which we expect – may continue to weigh on Singapore’s export growth throughout the remainder of this year. Conversely, bullish demand from China – supported by government stimulus and recent wage growth – may help offset any potential declines in exports caused by the U.S., which we’re already seeing evidence of. While growth of NODX to both China and Hong Kong slowed marginally in June, the Singapore Trade Ministry has credited one or both of these markets as the largest contributors to overall export growth in every month this year except February. Even then, Taiwan and Indonesia picked up the slack in February as two of the largest contributors to growth. Asian markets will likely be the key drivers to Singapore’s export growth going forward and the recently launched China-ASEAN Free Trade Area agreement holds the potential to greatly accelerate intra-regional trade.


All said, Singapore’s export growth is still likely to moderate from here and, like many world economies, will slow in 2H10. Despite this, we contend that the economy is in a bullish setup supported by internal demand, as supported by the Ministry of Trade’s third upwardly-revised 2010 GDP estimate today (+13-15% Y/Y vs. previous forecast of +7-9%).


Domestic Consumption Outlook: Bullish


At a mere 2.2% in 1Q10, Singapore’s latest unemployment rate is at its lowest level in 18 months, thanks to private and public efforts to bolster the services sector the Southeast Asian economy. The opening of two casino resorts by Genting Singapore Plc and Las Vegas Sands contributed to a net addition of 36,500 jobs in the quarter and record tourism for the sixth consecutive month (+30% Y/Y in May and driven by intra-Asian visitation). Singapore has a resident population of roughly only 5 million, so 36,500 job adds and high tourism rates will have an measured impact on the economy. Further, Singapore also has an open policy of importing highly-skilled labor to meet its growing demands (1.5 million immigrants from China, India, and Malaysia).


The demand for highly-skilled labor is particularly prevalent in the financial services, construction and energy sectors. For the third consecutive year, the World Bank has ranked Singapore as the easiest place in the world to do business and the fundamentals behind that calculation make Singapore a likely destination for relocated financial services as a result of global industry regulation. Singapore is already Asia’s leading OTC commodity derivatives hub with more than 50% of the region’s volume. According to Singapore’s Ministry of Trade and Industry, increased intra-regional trade will likely result in the need for upwards of $8 trillion of infrastructure and insurance investment over the next decade, so the government has been busy making concessions to accommodate this growth. In the construction sector, the government has set aside 25% ($250 mil.) of the National Productivity Fund for manpower development and technology adoption. In the energy sector, Singapore is developing a facility to store liquefied natural gas to reduce dependence on imports from neighboring countries where the pricing outlook is uncertain. All in all, Singapore is making moves in line with our TAIL thesis that Asian markets will continue to take share from the U.S. and the EU in the global economy.


The Singapore Sling: Why We Are Long of Singapore - 2


Risks: Moderate in the Absolute; Negligible Relative to the Downside Risks of Other Advanced Economies (U.S., Spain, France, Greece, Mexico)


So what are the downside risks to the bullish case on Singapore’s economy? With the equity market up only 1.9% YTD and far from the top of the performance leaderboard, this leading indicator suggests there are risks associated with this thesis. Those risks include: an expedited move in the Singapore Dollar vs. the U.S. Dollar, which would further dampen export prospects to that market; and a potential for a hiccup in pharmaceutical manufacturing, which itself is a very volatile industry subject to large production swings by big companies such as Sanofi-Aventis SA.


With 19% Y/Y GDP growth and CPI currently running at the highest level since Dec. ’08 (+3.24% Y/Y), the Singapore Dollar is in a hawkish setup ahead of the next Monetary Authority of Singapore policy review in October (the Monetary Authority uses the Singapore Dollar instead of interest rates to manage inflation). The currency rose as much as 1.2% on the day of the last MAS meeting back in April when the board allowed a revaluation of the Singapore Dollar and shifted to a stance of gradual appreciation. If the currency continues to strengthen against the U.S. Dollar from here, export competitiveness to the U.S. market may come under pressure. SGD-USD has gained 1.5% against the last two weeks alone and our Short the US Dollar thesis makes this trend likely to continue. If the euro appreciates further from here, however, relative strength in that currency may offset a portion of this pressure. Fifty-eight percent of the U.S. Dollar Index is Euros, further U.S. Dollar debasement from here will provide reasonable support for the EUR-USD, which is teetering on a TREND line breakout above $1.28. SGD-EUR supports this view, down (-0.3%) in the last two weeks.


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A second risk to Singapore’s go-forward outlook is the prospect of an eventual overheating in the housing sector. An alarming report by CIMB suggests that overall housing affordability in Singapore is now inching closer to the banks’ mortgage-to-income threshold ratio, after a 10% YTD increase in private home prices which has elevated those levels above the 1996 peak. While appropriate cause for alarm, further analysis suggests that housing prices are far from a China-like bubble. First, housing CPI (the largest component of the consumer price index) has lagged overall inflation for the past 12 months. From the November 2008 peak-of-peaks, housing CPI has experienced a (-4.2%) decline. Furthermore, a marginal deceleration of Y/Y growth in the latest housing CPI reading suggest that concerns are likely overdone for now. In the event that they aren’t, however, expedited appreciation in Singapore’s housing market will likely put more pressure on the MAS to raise the value of the currency – which would further augment our bullish consumption thesis. Moreover, immigration policies designed to expand Singapore’s population by over 50% in 10 years suggest there won’t be any “ghost towns” on the island anytime soon.


The Singapore Sling: Why We Are Long of Singapore - 5


Conclusion: Long EWS; Long SGD-USD


In summary, we like economies in the back half of 2H10 and 2011 that are setup to accelerate domestic consumption to offset a decline in global trade and industrial production (China, Brazil, Singapore). Keep in mind, however, that every market and currency has its price and with growth poised to slow globally, relative economic performance will matter even more in 2H10. We are no longer in a “rising boat lifts all tides” investment environment, so we’re waiting for price confirmation in markets like China and Brazil on the long equity side. From a quantitative standpoint, Singapore’s price is right. We expect Singapore’s FTSE Straits Times Index to outperform many global equity markets throughout the remainder of the year. From a currency perspective, Singapore’s hawkish economic setup and low deficit-to-GDP ratio (2.6% in 2010) makes the Singapore Dollar a strong FX play - particularly relative to the $USD.


The Singapore Sling: Why We Are Long of Singapore - 6


Darius Dale


Bear Market Macro: SP500 Levels, Refreshed...

What a difference 6 hours of trading makes… 

  1. Intel (INTC) posts a blockbuster quarter, trades up +7% in the pre-market and is now only up +2.5% with TREND line resistance = $21.98
  2. SP500 (SPY) falls hard from pre-open futures indications, breaking down back below our critical long term TAIL line = 1096
  3. Volatility (VIX) continues to push higher (closed up on the day yesterday as well), trading convincingly above our long term TAIL = 23.69. 

All that said, unless 1076 is violated to the downside on a closing basis, what was immediate term TRADE line resistance last week (1076) is now immediate term TRADE support. This is the most immediate term duration in our model, but it definitely matters.


Altogether, I say respect the math from here. A break of 1076 is now flashing no downside support to 991. In other words, I’d consider the SP500 trading in an intermediate term range of 991 to 1144 probable scenario that you should manage risk towards.


Short high, cover low.



Keith R. McCullough
Chief Executive Officer


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

Housing Market, Or Lack Thereof

Conclusion: The Mortgage Brokers Association reported that demand for loans to purchase homes sank to a 13-year low last week, which bodes poorly for demand and future price.


Josh Steiner and his team held a very thorough and thoughtful call on the U.S. housing market a few weeks ago (if you aren’t currently getting his Financial Sector Research, please email Jen Kane at ).  Their conclusion was simply that consensus is not bearish enough on the next move in housing prices in the U.S.


The data points today from the Mortgage Bankers Association is another important supporting point in the Hedgeye Mosaic as it relates to our bearish view on housing.  According to the survey, request for loans to purchase houses dropped 3.1% on a week-over-week basis in the week ending July 9th, which is adjusted for the holiday.  Demand for refinancing fell similarly, and was down 2.9% on a week-over-week basis.


This was the lowest reading in this survey since December 1996.  Just as a reminder, the prime interest rate, a proxy for where mortgage interest rates are at generally, was at 8.25% then versus today’s 3.25%.


If you are a housing bull today, you have to ask yourselves this: If people aren’t buying houses at all time lows in mortgage rates, when will they?


The obvious answer is when prices go lower. By a lot.


Daryl G. Jones

Managing Director


Housing Market, Or Lack Thereof - shark chart

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Nike Crushed It

Nike Crushed It


Consumer Discretionary is clinging on for dear life. But athletic apparel sales for last week turned up sequentially. Nike crushed it. UA put in a nice dent as well. No one else came close.


Key observations from sports apparel sales for the first full week of July:

  1. Noticeable uptick after 3 disappointing weeks. As always, we look at the 3-week trend, which accelerated by 200bp.
  2. All channels improved sequentially, which in itself is rare based on the year-to-date trends. There does not appear to be a calendar shift issue or any major weather anomalies. In fact, the Northeast heat wave could have easily stunted sales last week, but it did not.
  3. New England, South Atlantic, Pacific/Mountain regions all showed the biggest uplift. If this is a sign of broader shopping patterns, it’ll be interesting to see how this triangulates with retailers like Payless who called the South/West as negative contributors last quarter (we’re meeting w PSS tomorrow).
  4. Nike had a HUGE week. I mean HUGE. Sales +28% with market share +626bps? That’s tremendous for a company that has 30% of the market.
  5. The next best share leader is UA, with 46bp. Might not sound as impressive, but given such a smaller sales base, it still translates to 10% sell-through growth. The recent trend of sales growth 2-3x the industry is holding for UA.
  6. Every other brand was a yawn/sleeper from a market share perspective. Adidas was particularly notable with sales -5.3% given its World Cup exposure. I guess not many Spain and Germany jerseys flew off the shelves last week in the U.S. despite selling nearly one-million Spanish jerseys following World Cup victory   per our news run this morning.

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Currency’s Reflection: Bullish on the Pound

Position: Long the British Pound via the etf (FXB); Short US Dollar (UUP)


“Put your hand on a hot stove for a minute, and it seems like an hour. Sit with a pretty girl for an hour, and it seem like a minute. THAT’s relativity.”

-Albert Einstein


When discussing currencies it’s worth repeating that we’re betting on the “relative” strength of one currency versus another. Currently we are bullish on the British Pound (GBP) versus both the USD and EUR; we expressed this conviction by buying the etf FXB in our virtual portfolio on 7/12.


The Debt Road


Taking a step back, yesterday in the Early Look Keith wrote: “This morning’s run of global macro news reminds me of three things:


1.       Sovereign Debt issues are here to stay

2.       American Austerity is on the way

3.       Global growth is going to continue to slow”


In summary, these three points reflect much of what our macro team has focused on in our research over the last 6th months: unchecked government debt and deficit imbalances (globally) will come home to roost. Over the balance of this year the price action across global markets and multiple asset classes has swung considerably alongside fears of sovereign default in Europe, especially from those nations so affectionately named under the acronym “PIIGS” (Portugal, Italy, Ireland, Greece, and Spain) or “Club Med” states. We’ve track this fear in the form of bond yield spreads, CDS prices, currency moves, and equity market performance, and played Europe’s Sovereign Debt Dichotomy (our Q2 Theme) by shorting Spain (via the etf EWP) and being long Germany (EWG) in 1H10.


We now think that while Europe’s Sovereign debt issues are by no means rearview (Portugal’s debt was downgraded by Moody’s yesterday), the spotlight concerning the risk of a government piling debt up debt will move to the US, a position encapsulated by our Q3 macro theme of American Austerity.  (Note: this position is very quickly becoming consensus).


As it translates to our view of global currencies, we believe the USD is setting up to give back much of its gains YTD. Should this be the case, and in light of the continued sovereign debt fears in Europe, we could see the Pound as the relative beneficiary of this currency trade. 


Currency’s Reflection: Bullish on the Pound - DXY1


Our bullish positioning on the Pound follows two main threads:


1.)    The Austerity measures issued by the new UK government of PM Cameron and Chancellor of the Exchequer Osborne show their intention to rein in fiscal imbalances. We think fiscal austerity should boost investor sentiment and future growth in the UK despite meek growth prospects this year and next.

2.)    For the intermediate term TREND we see continued political and economic headwinds in the US and throughout certain Eurozone countries; we believe the Pound stands to benefit on a relative basis from the downward pressure on the USD and EUR.


Bullish on the UK


We’re bullish of PM Cameron’s conservative government that took office in early May. The new tide of “austerity” that his government has issued, with initial measures proposed in an Emergency Budget released on June 22nd by the Chancellor of the Exchequer, George Osborne, spell significant spending cuts and incremental consumption tax hikes to trim fat and boost revenue in Britain. With a budget deficit (as a % of GDP) of some 11% in 2010, Britain is proverbially biting the bullet (now) to shore up its fiscal house, a move we believe will better position itself for future growth and appreciate the value of the Pound.


The UK’s main austerity measures include:

  • A 25% cut in the budgets of government departments starting April 2011 through 2015 (a spending review is expected for released in October)
  • Tax on banks with liabilities greater than £20 Billion (the tax is expected to generate approx. £2 Billion annually)
  • Increase to the Value Added Tax (VAT) from 17.5% to 20% starting January 2011
  • Increase in capital gains tax for higher tax bracket earners, to 28%. No change (18%) for low to middle income earners
  • A 2 year wage freeze for all but the lowest paid among Britain’s 6 million public servants and a 3 year freeze on benefits paid to parents for rearing children
  • Cuts to the housing benefit and disability allowance
  • Decrease in corporate taxes, staggered over 4 years from 28% to 24%

We are by no means bullish on the UK economy across the board (it’s one of the main reasons we haven’t bought UK equities). The housing market is one particular area of concern. To the joy of many home sellers (and real estate agents), Cameron’s government did away with Home Information Packs (HIPs) in late May, documents required of homeowners to sell their properties that many complained simply increased the “cost and hassle of selling a home”. However, scrapping HIPs has increased the supply of homes on the market over the last months, and consequently dampened prices.  Recent surveys from Hometrack and Nationwide corroborate the recent turn in prices (see chart below). Should the housing market take a second dip, we’d expect to see significant downward pressure on the consumer.


Currency’s Reflection: Bullish on the Pound - home2


Secondly, the government’s go-forward relationship to the country’s all-important banking sector is still unclear. Cameron’s policy will need to find the appropriate balance between levying a bank tax (which the UK has spearheaded ahead of global backing) and guarding against excessive risk taking by banks while not running banks (and financial professionals) to tax friendly havens, like Switzerland. Decreasing corporate taxes is a start.



Bottom Line


Growth: we don’t expect to see significant growth in the UK in the next year. GDP is projected at 1.2% in 2010 and 2.0% in 2011 by Bloomberg consensus, and we think that consenus is reasonable.


Unemployment: the UK’s nominal unemployment rate has shown improvement over the last two months, dropping 10bps to 7.8% in the latest reading.


Inflation: inflation pressures appear to be waning—CPI readings have come in over the last months, registering 3.2% in June Y/Y.


Currency: we’re bullish on the Pound outright because we think that capital and currency markets will favorably price the austerity measures Britain is taking to shave down the government’s budget deficit.  We think the Pound-USD can continue to trend higher from its near-term bottom of $1.43 on 5/20 (see chart below).


Our TRADE line of support for the Pound-USD is $1.48 with TRADE resistance at $1.53.


Matthew Hedrick



Currency’s Reflection: Bullish on the Pound - p3

R3: Gulf Impact Still Early


 July14, 2010


We’ve received increased interest in names over-indexed to the gulf states of late – here are a few to keep an eye on.





As we near day 100 of the BP Deepwater Horizon oil spill saga and the economic impact on the region shifts from near-to-intermediate term in nature, we’ve received increased interest in names over-indexed to the region. While outsized risk of underperformance in gulf state markets (i.e. TX, LA, MS, AL, & FL) is expected to soon take hold, confirmation of this reality at retail is currently mixed at best.


Case in point are the regional trends from our weekly Sportscan apparel data (see chart). Over the last 4-months, the South Atlantic region (including FL & AL) has reported the strongest results while South Central (including TX, LA, & MS) has held in surprisingly well on a relative basis.  It’s important to keep in mind, however, this is simply one of many sources reflecting regional performance.  Recall that the Midwest was highlighted as a pocket of strength in June by many retailers yet this region is a clear laggard in sporting apparel.


While the economic impact from event-driven catalysts such as the BP oil spill can take time to materialize and in some cases can be short-lived, we have run an analysis flushing out retailers with over-exposure to Gulf states. Including some names from our Restaurant sector head, Howard Penney, the retail/restaurant names with high exposure to the region include: DDS (42%), CTRN (41%), SMRT (39%), HIBB (31%), SKS (28%), SCVL (26%) as well as EAT, PFCB, and SONC.  If you are interested in further detail on the broader list of names let us know.


R3: Gulf Impact Still Early - Sports Apparel Geographies





- Add maternity to the list of growing merchandise categories and demographics that privately held fast-fashion retailer, Forever 21, is targeting. The latest line called love21mternity is available online and at stores in five states. Bloggers are quick to point out that three of the five states have amongst the highest teen pregnancy rates in the country, but that’s a tough demographic positioning to prove.


- According to American Express, 61% of Americans report that customer service is more important to them in today’s economic environment and will spend 9% more when they believe a company provides excellent customer service. However, only 37% of Americans believe companies have increased their focus on providing quality service, while 27% believe there has been no change, and 28% say they believe less attention is being paid to good service.


- Burberry noted that in light of more recent global macro jitters, it has yet to see any pick up in order cancellations or changes in whole account buying behavior. Additionally, U.S department store distribution was highlighted as an area in which they are expecting to gain penetration for the Spring ’11 season.


- Retail real estate continues to struggle, despite the appearance that the health of retailers remains OK. In the second quarter, vacancy rates for shopping centers hit their highest point since 1991, while regional malls hit levels not seen since 1999. Shopping center vacancies are tracking at 10.9% while mall vacancies are at 9%.





Avon Acquires Jewelry Company Silpada Designs - The direct seller stepped up its acquisition spree by purchasing jewelry company Silpada Designs Inc., a direct seller with operations in the U.S., Canada and the U.K., for $650 mm. The purchase is Avon’s third this year — after a 13-year hiatus from acquisitions. It follows two smaller-sized buys, the premium natural skin care range Liz Earle and the trademark of baby care line Tiny Tillia. The all-cash transaction is expected to close in the third quarter. The jewlery category offers an opportunity to polish the company’s image and style authority. <wwd.com/business-news>

Hedgeye Retail’s Take:  The largest of the transactions announced over the past couple of days, but just one of many.


Asics Buys Swedish Outdoor Products Company  Haglöfs - Asics Corp. said Monday that it has agreed to purchase 100% of Swedish outdoor products company Haglöfs for 1 bn Swedish krona, or $133.4 mm at current exchange, from private equity company Ratos AB. Asics said it is looking to expand its apparel business by rolling out high-quality and functional products, as well as grow its core business of running gear. Haglöfs posted a net profit of 48 mm krona, or $6.4 mm, on sales of 590 mm krona, or $78.7 mm , for the fiscal year ended Dec. 12.  <wwd.com/business-news>

Hedgeye Retail’s Take:  Hitting the iron while its hot, Asics looking outside the company to build and boost its apparel business.  We continue to believe more capital and competition put into the space is a win for retailers and the consumer.


Billabong Acquires RVCA - Billabong International Ltd. reached a conditional agreement to acquire California apparel brand RVCA. Terms of the deal were not disclosed. Billabong expects RVCA to contribute 2% to Billabong group revenues in the 2010/2011 fiscal year and be neutral to earnings. <sportsonesource.com>

Hedgeye Retail’s Take:  Nothing wrong here with an effort to bring some grassroots creativity into the corporate mix.  Smaller brands continue to be the lifeblood of the “alternative” sports and lifestyle sectors.


Concept One Accessories Acquires Blue Marlin - Concept One Accessories has acquired the trademarks and Web site of Blue Marlin, the men’s sportswear and headwear brand, from New Blue Holdings. Blue Marlin, known for its vintage track jackets and caps featuring the insignia of historic Negro League and international baseball teams, went bankrupt in 2008 after reaching a sales peak of $25 mm in 2006. Its assets were subsequently bought by New Blue Holdings, an investment group. Concept One Accessories owns the Block Headwear brand and also holds more than 65 licenses. <wwd.com/business-news>

Hedgeye Retail’s Take:  One of the originators of vintage athletic appears to be on the cusp of a comeback.  Expect to see Blue Marlin leverage the license portfolio of its parent.


Online Private Shopping Club Beyond the Rack Received Equity Investment - Online private shopping club Beyond the Rack said Monday it has received a $12 million equity investment from Highland Capital Partners LLC and BDC Venture Capital Inc. The proceeds will be used to finance accelerated growth and expansion of operations of the Montreal-based firm, which, until this point, had been funded exclusively by angel investors. The percentage of equity to be held by the new investors wasn’t disclosed.  Highland, whose previous investments have included Lululemon Athletica Inc., MapQuest Inc. and Lycos Inc., will have a favorable impact on its business both logistically and financially. <wwd.com/business-news>

Hedgeye Retail’s Take:  Is the bubble nearing for “private sale” ecommerce?  It now appears that private equity is going well beyond the name brand sites in an effort to get in on a piece of the latest retail trend.  Certainly the RueLaLa and Vente-Privee valuations are enough to keep investors interested.


Rock Creek Athletics Acquires DeLong Brand - Rock Creek Athletics, based in Grinnell, Iowa, has acquired the varsity award jacket business assets from Daden Group, also based in Grinnell, Iowa, including the DeLong brand. <sportsonesource.com>

Hedgeye Retail’s Take: Gotta love M&A, but do kids still wear wool and leather-armed varsity jackets? 


UK Retail Sales Rise in June Against Tough Comps, Helped by Sun and Clearance - UK retail sales values rose 1.2% on a like-for-like basis from June 2009's 1.4% increase, helped by the heatwave in the second half of the month. This June was slightly less hot, but sunny for most of the month. On a total basis, sales were up 3.4% against a 3.2% increase in June 2009. Clothing and footwear sales growth slowed, as many people had already bought in May's sun. TVs benefited from the football and outdoor DIY and leisure improved in the sun, but at the expense of indoor homewares. Overall shop price inflation slowed to 1.5% in June from 1.8% in May. Food inflation slowed to 1.7% in June from 2.2% in May. Non-food inflation slowed to 1.4% in June from 1.6% in May. Non-food items, including electricals and clothing, continue to be cheaper than they were this time last year. In the face of weak demand, retailers will continue to use widespread discounts and promotions. But, given their thin margins, there will be little scope to absorb next year's VAT increase. This will put significant pressure on inflation from January onwards.  <brc.org.uk>

Hedgeye Retail’s Take:  Outlook not looking good for the UK consumer, although this market has never been a hotbed of successful and profitable retailing. 


China's Textile Manufacturers Fear Yuan Appreciation Will Lead to Bankruptcies - China National Textile & Apparel Council vice president Gao Yong told the China Daily that a 5% currency appreciation could cause half of the country’s textile companies to go bankrupt. He said the bankruptcies would be spurred by the industry’s thin profit margins of around 3 to 5 percent. The textile industry output in 2009 accounted for just more than 11% of China’s gross domestic product, a Ministry of Commerce report said. The Chinese government conducted a yuan stress test in March that indicated textile manufacturers’ profit margins would decline 1% if the currency appreciates by 1%. Textile industry profit margins already have been affected by rising raw material and labor costs, together with an appreciating yuan, which rose 21% against the dollar from 2005 to 2008. Textile products have become more expensive, resulting in diminishing price advantages compared with Vietnam, Indonesia and other Southeast Asian countries. China’s textile manufacturers could further be squeezed by rising labor costs. <http://www.wwd.com/business-news/?module=tn>

Hedgeye Retail’s Take:  Interesting politicking here by the Ministry of Commerce, which surely must have known that this was coming.  Seems suspect that the policies put in place would hurt such an important component of China’s GDP, without some sort of offset.  As such, perhaps additional VAT rebates are on the horizon.


Chinese Footwear Exports Saw Significant Growth in the First Five Months of 2010 - China’s footwear exports recorded an increase of 45% in volume and 32% in value in May compared to the same period a year ago, according to the China Leather Industry Association. <fashionnetasia.com>

Hedgeye Retail’s Take:  Easy comps coupled with one of the hottest sectors in retail is sure to lead to a substantial pick up in demand.  Interestingly, China has lost some share on the margin to Vietnam and Indonesia, making these numbers appear to be even stronger.


Global Yarn and Fabric Output Suddenly Dropped in Q1 - Global yarn and fabric output dropped significantly in the first quarter, largely because of double-digit declines in production in China, an industry survey said. The biggest factor pushing down the numbers was the decline in apparel consumption, but conceded factors such as stock draw downs and scarcity of cotton supplies may have played a role. <wwd.com/business-news>

Hedgeye Retail’s Take:  Sounds like another reason for inflation to pick up.


 Adidas Sells Almost One Million Jerseys of Spanish Soccer Team - Adidas AG indicated it sold almost one million replica jerseys of the Spanish national team, which won the World Cup on Sunday. <sportsonesource.com>

Hedgeye Retail’s Take:  Clear example of how one of the most challenged economies in the Western world can still find a reason to spend.  At almost $100 for an official replica, plenty of unemployed Spaniards found a few extra dollars to focus on a positive.


Giorgio Armani SpA 2009 Earnings Drop - With the recession affecting its core business and licensed products, Giorgio Armani struggled in 2009.  Total sales fell 6% but jumped 32% in China. The company closed 2009 with a cash pile of 447 mm euros. <wwd.com/business-news>

Hedgeye Retail’s Take:  Interesting proxy as Prada readies its IPO.  Expect to get sick of hearing about the Chinese luxury consumer at any point now.


Amazon Offers College Students Exclusive Perks - Amazon.com Inc. moved today to grab a bigger piece of the online textbook business by offering college students special deals. The world’s largest online retailer today launched Amazon Student, a free membership program that offers college students at least one year of free two-day shipping via free membership in Amazon Prime, which usually costs $79, as well as other benefits such as exclusive discounts and promotions. In doing so Amazon enables students who buy new textbooks through the site to have those books guaranteed to arrive in two days—or they can pay $3.99 for next-day delivery. The Amazon Student page, located at www.amazon.com/b/?node=668781011, also features a variety of other merchandise likely to appeal to college students, such as laptops, bedding and microwavable foods like Kraft Easy Mac. <internetretailer.com>

Hedgeye Retail’s Take: And now we wait to see what Barnes & Noble does in response now that they own one of the largest college bookstore operations in the U.S.


Retailers Seek an Edge with New Formats - The retail landscape is being remodeled as economic volatility compels stores to alter traditional formats. Large chains are breaking out the most profitable or promising segments of their businesses, such as accessories, sportswear and denim, into smaller stand-alone footprints. Other retailers are trying to appeal to a younger demographic with new labels and edgier store concepts. BCBG launched BCBGeneration to target a younger crowd and A|X Armani Exchange opened a new concept store in Los Angeles that doubles as an event space and features an art gallery. Guess is revamping its accessories-only concept, and plans to open more than 40 of those doors globally over the next year. The company’s Guess denim stores also have a new look and are branded separately from other company lines, such as G by Guess. <wwd.com/retail-news>

Hedgeye Retail’s Take:  Creativity is the most overlooked factor in a retailers ability to drive sales.  Those that are not investing and experimenting will ultimately lose, or be relegated to a simple one factor model, which is price.


Prada Receives 360 mm Euro Loan - Prada SpA has negotiated a three-year loan agreement of 360 mm euros to refinance a long-standing debt and to propel the company’s retail growth, its top priority. Prada is eyeing an initial public offering for the fourth time, possibly as soon as the first quarter of 2012. The timing coincides with the expiration of a 450 million euro, or $568.5 million, debt, which will partly be written off by this fresh loan, secured at lower interest rates. <wwd.com/business-news>

Hedgeye Retail’s Take:  The pre-IPO cleansing process is now in full force.


Golfsmith Secures $90M Loan; Opening 14 Stores - Golfsmith completed an amendment and extension of its revolving credit facility with GE Antares Capital.  <sportsonesource.com>

Hedgeye Retail’s Take:  With the golf space in a malaise (was it ever really that great?), it’s unfortunate to see companies still growing for the sake of growth. 


GIL Shuttering Fort Payne Hoisery Plant, Shifts to Honduras - Gildan-Prewitt company officials announced plans to relocate 30% of its knitting equipment and all its remaining wet processing operations in Fort Payne, AL to Honduras. About 130 of Fort Payne's remaining hosiery workers will lose their jobs by the end of the year. <sportsonesource.com>

Hedgeye Retail’s Take:  Hard to believe there were still socks being manufactured stateside.  On the other hand this is a natural off-shoring margin boost strategy that is long overdue.


Double-Digit Growth Again for Online Ad Spend - The economy suffered around the world in 2009, but the online advertising market showed its resistance to the recession. While total media spending dropped, online ad spending increased by 2% to $55.2 bn. eMarketer forecasts that 2010 will bring a return to double-digit online ad growth, with global spending set to reach $61.8 bn. Growth will continue at rates of over 10% each year through 2014. North America and Western Europe accounted for nearly three-quarters of the world’s online ad spending in 2009, but those mature online ad markets will post slower growth rates than developing areas in Asia-Pacific, Eastern Europe and Latin America. The internet’s share of total ad spending worldwide will jump from 11.9% in 2009 to 17.2% in 2014. Continued high growth in the online space coupled with a 2009 spending decrease of 10.5% for total media, followed by a slower recovery, will help online get an ever-larger slice of the ad spending pie. <emarketer.com>

Hedgeye Retail’s Take:  Nothing surprising here, given the relatively small share online advertising currently has in the grand scheme of things.  Furthermore, the with higher ROI’s and almost infinite ways to get closer to specific target audiences online ads just make a heck of a lot of sense.


R3: Gulf Impact Still Early - 2 


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