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R3: Saucony, Fugu, Nike and Ben & Jerry’s


July15, 2010


Can’t you tell by the title? This means that last week’s footwear data was as upbeat as what we saw out of apparel – good enough to move the 3-week trend higher. Here are some callouts by brand.  





Athletic footwear sales for last week mimicked the upswing we noted yesterday in Athletic Apparel. As with apparel, a multi-week downswing was broken, and the all-important 3-week trend ticked up.  In fairness, this is only slightly greater in magnitude than the ISCS Retail Index.  But all three metrics had not necessarily been moving in lock-step year-to-date. The fact that they are now (and the fact that this was not a calendar shift or weather issue) is a positive callout for the beginning of July.  Other nuggets worth calling out on footwear…

  1. The best trending brand that’s not toning-related is…Saucony??? Yes…This is now broken out in the sample. Average growth in the 65% range for the past 3-weeks? Not too shabby.  Too bad it’s only about 5% of sales and 10%+ of PSS’ EBIT. But with core PSS retail flat and brands like Saucony, Sperry and Keds crushing it, this gap closes daily.
  2. Next most impressive brand… Private Label!?! Are you kidding me? Check out the 3-week trend. Very solid. We need to look into this. Historically, private label sneakers sell as successfully as Fugu (Poisonous Blowfish sushi-style) served by a street cart vendor. (Bad joke. The point is…neither sell).
  3. Reebok’s growth dipped below 100% for the first time this summer. Let’s face facts…it’s still stellar. But Herbert Hainer (CEO) YouTubed himself on Bloomberg saying that sales will double again next year in this category for RBK. I don’t doubt that the wholesale shipments will be there. But the margins? I wonder if he can convince the starting 5 of the Miami Heat to walk around in those suckers.  That’s about as likely as… well…who am I kidding. It ain’t happening.
  4. Under Armour still has a whole lot of nothing in the tank. But that’s to be expected. We’re seeing the magnitude of yy sales declines, but the key is that sales, units and ASP are all in line. That’s the key we’re looking for as it relates to a signal from the data on movement of product in, or clearing product out.
  5. Nike’s numbers look good. No surprise there. But Converse and Jordan continue to trend down. We don’t think that this is not a relevance issue for either, but rather a shift in distribution to retailers not included in the sample. Nonetheless, both are massive and more profitable than 80% of other stand along publicly traded footwear companies. We’re going to do more work to research this one.
  6. Did you catch Nike’s answer to the toning shoe? It’s called “Wearing toning shoes to Ben & Jerry’s is not exercise. Get up off your rump, put on these kicks, and do some squats.’ Check out the image below.

 R3: Saucony, Fugu, Nike and Ben & Jerry’s - NKEvsSKX


R3: Saucony, Fugu, Nike and Ben & Jerry’s - 2


R3: Saucony, Fugu, Nike and Ben & Jerry’s - 3


R3: Saucony, Fugu, Nike and Ben & Jerry’s - 4


R3: Saucony, Fugu, Nike and Ben & Jerry’s - 5





- First it was Nike’s Tiger Woods video, then the World Cup teaser, and now Old Spice. In less than two weeks, the brand’s pitchman, Old Spice Guy, has garnered 5.5 million YouTube views. Now if that doesn’t help sales, then nothing will. Talk about bringing a stodgy old brand to a new audience.


- Proving that Bergdorf Goodman is in a rarified league of luxury players, the 5th Avenue store has revealed its July windows. Incredibly, they were SIX years in the making. The company’s visual director has been collecting antiques for this presentation, which is called “Beauty Challenged”. We’re just guessing, but this does not sound like a cheap endeavor.


- A poll from ShopSmart (part of Consumer Reports) reveals that the average woman spends just $34 on a pair of jeans. Woman ages 18-34 are willing to spend $60 a pair on average, but only 1 in 10 women say they’ll spend over $100. Is premium denim finally losing some luster?





NRF Expects Average American Family Spend to Increase 10% - The National Retail Federation's 2010 Consumer Intentions and Actions Back to School survey found that the average American family will spend $606.40 on clothes, shoes, supplies and electronics, compared to $548.72 last year, and close to the $594.24 in 2008.  <sportsonesource.com>

Hedgeye Retail’s Take:  If this holds true we’re setting up for a couple of good months ahead on the same store sales front.  This forecast stands out as one of the more bullish NRF predictions, especially compared to those more discretionary forecasts the trade group has made for holidays like Mother’s Day, Valentine’s Day, and Easter. 


Zumiez Ends Its Short Pursuit Over West 49 - Zumiez Inc. said it was ending its takeover pursuit of West 49 Inc., leaving the path open for Billabong International Ltd. to continue its deal to buy the Canadian action-sports retailer. Last week, Zumiez approached West 49, saying it was prepared to make an offer exceeding the C$1.30 per share Billabong offered when the two companies entered a definitive agreement to merge last month. <sportsonesource.com>

Hedgeye Retail’s Take:  Looks like ZUMZ will now refocus its efforts on organic Canadian growth.  Recall its first store in Vancouver opened this year. 


Li & Fung Nearing Deal to Acquire Jimlar Corp. - Li & Fung Ltd. appears poised to gain a foothold in footwear. Financial sources said Wednesday that LF USA, the U.S. subsidiary of the Hong Kong-based firm, is nearing a deal to acquire footwear firm Jimlar Corp., a $450 million privately held firm that owns the Frye trademark and does business through licenses such as Coach and Calvin Klein. An agreement might not be completed until Li & Fung reports earnings next month, since it is in a “quiet period” under applicable securities law. Li & Fung has been on a buying binge, and last week disclosed three acquisitions involving an initial cash outlay of $140 million for several licensing deals, including a relationship with Sean John for men’s sportswear. <wwd.com/business-news>

Hedgeye Retail’s Take:  Li and Fung continues to raise the bar in acquiring content as a compliment to its core sourcing business.  With a potential “foot” hold in the brown shoe arena, it’s likely we see the company leverage this expertise to grow its footwear sourcing.  Clearly apparel is no longer the dominant category for which Li & Fung sources for its partners. 


Tommy Hilfiger's New Lifestyle Collection and Retail Concept - Tommy Hilfiger is out to woo the twentysomething customer with a new men’s and women’s lifestyle collection that has its own retail footprint. Meet Tommy, the brand’s effort to lure customers from American Apparel, Gap, Abercrombie & Fitch and American Eagle Outfitters. The line will target an audience with a median age of 25 and veer away from the preppy looks that are the mainstay of Hilfiger’s collection sold exclusively at Macy’s. Tommy aims to focus on handmade details, distinctive materials and unexpected pairings for unique looks. Tommy is “absolutely a reaction” to the ubiquity of specialty store environments,” said Gary Sheinbaum, chief executive officer of Tommy Hilfiger USA. Knits will sell for $24 to $59, and denim, $79 to $129. Outerwear will start at $129 for men and $139 for women. The Tommy Hilfiger Group will begin selling Tommy in October in three freestanding Canadian stores — two in Toronto and one in Edmonton. The collection also will be introduced that month in dedicated areas of 14 existing Tommy Hilfiger stores in Canada. <wwd.com/business-news>

Hedgeye Retail’s Take:  More Canadian retailing taking center stage as brands and retailers look north for growth. 


Inditex Plans Australian and South African Expansion As Well As International E-Commerce - Inditex Group, Europe’s largest clothing retailer and owner of the Zara chain, plans to expand into Australia and South Africa next year as part of a campaign to enlarge its global footprint. The group opened 98 stores in 29 countries during the first quarter, bringing the total to more than 4,700 locations in 76 countries. Zara’s Australian debut would start with a few doors in key large cities in the first year, an Inditex spokesman said. Zara will launch online sales on Sept. 2 in France, Germany, the U.K., Spain, Italy and Portugal. <wwd.com/retail-news>

Hedgeye Retail’s Take:  Finally some ecommerce in key European markets, with the U.S notably absent from the list.  In fairness, leveraging infrastructure across Europe makes a ton of sense.  On the flip side, Zara remains on a very short list of domestic retailers with just an online “lookbook” to satisfy those consumers unwilling or unable to visit a physical store. 


JCP Launches Aggressive BTS Campaign Driven by Social Media - J.C. Penney Co Inc. is heading back to school with an aggressive campaign largely built around digital and social media and mobile marketing. For the first time, the department store chain will use haul videos in which consumers assess product, and mobile iAds, signaling Penney’s determination to capture a bigger share of the youth market. This year, on a monthly basis, Penney’s has been lagging its prime competitors, Macy’s and Kohl’s.  <wwd.com/retail-news>

Hedgeye Retail’s Take:  Efforts to reach the youth demo should be noted, but we wonder how much of these efforts will appear “natural” to the consumer vs. contrived.  If you haven’t seen a haul video yet, check out juicystar07 on YouTube. 


H&M Reports Strong June Sales - After a dissapointing April comp of -6% and then a weak May where the 2 year trend fell to levels last seen in August 2009 when its stores ran out of inventory, H&M finally got it right this June.  An impressive 9% comp was enough to raise its 2 year trend to +2%.  Sales which grew 20% for the month appear to have gotten slightly weaker in the last week of the month since management commented on June sales through the 22 were up 22% on its mid year report . <www.hm.com/us/press>

Hedgeye Retail’s Take:  While it’s too early to call a turn here based on one month’s data, H&M is one of the few retailers with easy compares on the topline through the remainder of the year.   


R3: Saucony, Fugu, Nike and Ben & Jerry’s - H M June 2010


Piperlime Sponsors Next Project Runway - Piperlime.com is headed to the small screen. The e-tailer, a subsidiary of Gap Inc., announced today it will sponsor season eight of Lifetime Television’s “Project Runway,” which debuts July 29. As one of the final prizes, the season’s winner will sell an exclusive collection on Piperlime.com. Also part of the collaboration, the show’s accessories wall — which designers use to complete their weekly looks — will now feature products from the site and has been repainted in Piperlime’s signature green. On the e-commerce site, a shopable version of the wall will allow customers to buy the items they see on TV.  <wwd.com/footwear-news>

Hedgeye Retail’s Take:  Interesting to see GPS using TV for its fledgling Piperlime brand while shying away from the mass media with the core Gap.  We suspect this is in part to build the brand as Amazon/Zappos steps up as well as to take advantage of outsized ecommerce growth that is prevalent across most of retail.



Initial claims fell 29k last week (25k net of the revision), the largest one-week improvement since February and the lowest absolute weekly number since mid-2008.  Rolling claims fell almost 12k to 455k, the largest improvement since November of 2009. While the raw data has been volatile for the last five weeks (moving up or down more than 15k each week), until this week the rolling number had moved only slightly.  This is undeniably a positive move. Initial claims are, however, still elevated at 455k (rolling), and we would have to see this rolling claims figure come down substantially into the 375-400k range before unemployment will meaningfully improve. We prefer a wait and see approach, but if the data continues to trend positively (better for two weeks in a row now) we will begin to change our tune as employment, along with housing, are the keystones of the economy.






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


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


INITIAL JOBLESS CLAIMS DROP SHARPLY - SHOULD WE GET EXCITED? - init. claims subsector correlation analysis


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


INITIAL JOBLESS CLAIMS DROP SHARPLY - SHOULD WE GET EXCITED? - init. claims company correlation analysis


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


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




Joshua Steiner, CFA


Allison Kaptur


As we look at today’s set up for the S&P 500, the range is 40 points or 1.8% (1,0764) downside and 1.9% (1,116) upside.













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“I like narrative storytelling as being part of a tradition, a folk tradition.”

-Bruce Springsteen


Life imitates art and consistent with tradition, the earnings season is all about corporate storytelling and stocks trading on headlines – remember, fat fingers rule the world! So far the 2Q10 earnings season is no exception and if the trend continues, it’s going to be a long hot summer.


The S&P’s 6.0% rally since the July 4th holiday has been about the second quarter earnings season and how good the numbers are going to be despite continued signs that global growth is slowing.  The signs of a renewed or intensifying economic downturn continue to mount and this will manifest in Q3, not Q2… Yes, Intel had a great quarter, but that is in the rear view now.


I realize that Alcoa’s management team had to put their best foot forward about the demand environment, but growth is slowing and they appear to be speaking out of both sides of their mouths.  The quarter that AA reported was potentially a bearish indicator of what’s to come; prices up and demand down, by any other name that is stagflation.  There is the potential that AA management has set themselves up for a Toll Brothers “You-Tube” moment.  To recall, this is how things went for Toll Brother last quarter:


“It appears that our business has finally emerged from the tunnel and into a bit of day light.”- Bob Toll, CEO May 26, 2010. 


Then three weeks later:


“In the three weeks following our earnings conference call on May 26, 2010, our per-community deposits have been running about 20% behind the comparable period in last year’s third quarter and our per-community traffic has been about 3% behind.”  -Joel Rassman, TOL CFO, June 16, 2010.


No matter where you look in the USA or abroad the news continues to point to trouble ahead.  Here are some data points about American Austerity at the state level that can’t be ignored: 


(1)    By the end of June, the backlog of unpaid bills in Illinois could exceed $5.5 billion 

(2)    Most of California's 240,000 state employees could see their salaries temporarily cut to the federal minimum wage.

(3)    Minnesota is delaying tax refunds

(4)    State tax revenues fell 12% from Sept 2008 to 2009


Who gets hurt the most by these trends? The consumer.  


As I said earlier, the signs of a renewed or intensifying economic downturn continue to mount, highlighted by the weaker than expected June retail sales (June represents the second straight month of declining retails sales) and a worse than expected May trade deficit.


On a year-to-year basis, June 2010 retail sales were reported up by 4.8% from June 2009, continuing a trend of slowing annual growth, versus a revised annual May gain of 6.8% (previously 6.9%) and a revised 8.7% (previously  8.9%) annual increase in April.  The annual numbers are working off the effects of the severe decline in economy last year and are somewhat meaningless.


The slowing retail sales numbers suggest that the upcoming second quarter GDP "advance" estimate due to be reported on July 30th will show the economy slowing further.  The sharp deterioration in May’s trade deficit also suggests a meaningful widening in net exports, also a negative for GDP. 


Sadly, the "advance" GDP number is largely a guess by the BEA.  In order to maintain consistent data series, the BEA is measuring the same types of supply-side data that they first developed in the middle of the previous century.  Bottom line, someone sitting in Washington is guessing how fast our economy is growing (or contracting) based on a method developed in the previous century.  This is just plain wrong and is a clear indication that the government data cannot be trusted to accurately show what is happening in the real economy.  


As we said on our Q3 theme call, we are below consensus for GDP growth in 2H10.  Yesterday’s retail sales data and other upcoming reports should continue to be on the downside of expectations, as the fall-off in business activity begins to accelerate despite what the corporate story tellers are saying.  Yesterday, the FED agreed with this call, but they still don’t have it right. 


With respect to the FED forecast adjustments, the upper and lower bounds of the central tendency forecasts for 2010 GDP (Q4/Q4) were each lowered by two tenths (now 3.0% to 3.5%). The upper bound for 2011 was lowered from 4.5% to 4.2%, but the lower bound was lifted a tenth to 3.5%.


The unemployment projections for year-end were little changed (9.2% to 9.5%), as the lower bound was lifted just a tenth; although the range for 2011 was raised by two tenths to 8.3% to 8.7%. Policymakers appear to be resolved to a somewhat slower pace of labor market recovery. Similarly, core inflation forecasts drifted slightly lower for 2010 (now 0.8% to 1.0%), 2011 (0.9% to 1.3%) and even 2012 (1.0% to 1.5%).


If the “fat fingers” want to trade another negative headline based on slowing economic data, they will get a chance today - Industrial Production is due out.  June industrial production is expected to be -0.1%, consensus was previously at a 0.2% gain.  May was reported at a gain of 1.2% (1.3% prior to revisions).  Consistent with other economic data out of Washington, until the consensus begins to catch up with the weakening reality, reporting risk continues to be to the downside of expectations.


On Friday, the Hedgeye retail team will host a conference call that will provide further evidence that demand may be on the cusp of deterioration, exacerbated by a housing double dip.  To listen to that call please email for more details.   


Function in disaster; finish in style


Howard Penney


Storytelling - boss


Since early 2008 we’ve singled out housing as the #1 macro driver of gaming revenues. An updated analysis shows housing and unemployment are even more critical now.



Sorry to bore you with statistics but I’m a bit of a nerd and it’s a big part of our process.  Way back in early 2008, we regressed all important macro variables on gaming volumes and found that over the period from 1993 to 2007, housing was the most important driver, followed by GDP.  It was an easy call then for us to be negative on gaming for most of 2008.  Statistics do matter.


When we updated the regressions for Las Vegas Strip gaming volumes, we saw that correlations and R Squares have increased.  Over the last 15 years, national housing prices, interest rates, and unemployment are the only three macro variables that mattered, and mattered in that order.  T-stats are all close to or above 2.  Surprisingly, GDP was an insignificant driver of Las Vegas Strip gaming volumes.  Combined, these macro variables drove an R Square of 0.48.




The housing (wealth effect) and unemployment impacts are fairly obvious.  The positive relationship between interest rates and gaming volumes may not be as intuitive to the casual observer.  The average age of a LV visitor is 50 years old, and weighting age with gambling dollars would surely result in an even older demographic.  Many of these gamblers live on fixed incomes so discretionary spending goes higher as interest rates move up.  This phenomenon has been consistently borne out in our statistical analysis.


We also broke down the analysis into shorter periods.  The impact of housing and unemployment escalated over the last five years while GDP remained insignificant.  Interest rates were also insignificant during that period.  The housing coefficient doubled from the 15 year regression while the unemployment coefficient went up slightly.  Most importantly, the R Square actually increased to 0.69 despite fewer observations (months).  Now more than ever, investors need to have a view on housing and unemployment to make real money in this sector in our opinion. 




So where do we stand?  We defer to the Hedgeye Macro group and our financials guru Josh Steiner.  Hedgeye Macro is negative on unemployment relative to consensus and Josh has written extensively on the significant hurdles the housing market face.  If we are right, Las Vegas won’t be recovering anytime soon and MGM MIRAGE will struggle to maintain its 12x EBITDA multiple and/or the consensus EBITDA projection.


Reported a solid quarter and issued smart guidance; smart, as in very conservative Q3 but reasonable full year.



Not surprisingly, MAR reported solid Q2 results and bumped up 2010 guidance.  MAR remains attractively valued, particularly on a relative basis, and is certainly the most defensive of the lodging names. 


They beat our EPS estimate by a penny and beat the Street by $0.02.  Adjusted EBITDA of $278MM was $3MM above our estimate and 7% ahead of the consensus.  On the surface it may look like the beat was driven by stronger RevPAR and room openings.  Not to take anything away from Marriott, but looking under the hood that’s not exactly correct.  


By our math, the beat came from higher termination fees on the owned, leased, corporate housing and other, higher incentive fees, lower timeshare costs, and lower SG&A.  At least the first three items are lower multiple drivers of value.  Even so, 3Q guidance of $0.18-0.22 seems awfully low given the revised RevPAR guidance and upwardly revised room growth.  Even if we use MAR’s seemingly high $155MM SG&A guidance, it seems that they should easily beat the top end of their range.  Consensus heading into the release was $0.22.



The Details:


Owned, leased, corporate housing and other revenue of $255MM was $6MM below our estimate but gross margin was only $1MM below our estimate.

  • Termination fees net of property closing costs were $6MM this quarter; that’s pure margin but low to no multiple revenue.  We typically estimate $2MM of termination fees per Q.
  • Assuming that branding fees were stable in the $19MM range implies that F&B and other revenue only increased 1% YoY, which is somewhat disappointing given the pickup in occupancy and improved corporate travel.

Fee income of $287MM was $1MM ahead of our estimate.  However, Management and Franchise fees were lower than our estimate with Incentive fees making up the difference.  We believe Incentive fees are less valuable.

  • Management fees grew 7.9% YoY, which is below the aggregate of the room managed, room base growth and RevPAR growth.
  • Incentive fees came in $6MM above our estimate.
  • Franchise fees were $2MM below our estimate.

Timeshare results managed to beat our estimates and management guidance despite weak contract sales given the difficult YoY comparisons, which included 25 year anniversary promotions.  Timeshare before SG&A was $8MM better than our estimate.

  • Some of the lower contract sales were offset by the fact that MAR was able to recognize a higher percentage of sales.  Last year MAR had to defer recognition of 14% of contract sales, while this quarter they were able to recognize 92% of contract sales.
  • Finance income was a little lower then our estimate due to a lower loan balance ($987 down from $1046MM last Q).
  • Timeshare sales and services, net margins, were 21.6%, in line with 1Q2010 margins and a nice improvement over 2009 margins.
  • SG&A declined another 6% on top of a 36% decline last year.

SG&A came in $8MM below management guidance.  Oddly, the guidance for Q3 is $13MM higher than the actual Q2 quarter.  As a reminder, 3Q2009 included $15MM of unfavorable impact associated with deferred comp compared with 2008 and $5MM of certain litigation expenses.  At the time, MAR claimed that $130MM was a normalized number.  MAR’s $155MM guidance implies 19% YoY growth which, again, seems way too high.

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