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E-commerce Pendulum Shifting

We recently published a (mini) Black Book on the topic of e-commerce.  We explored two primary areas which we believe are most relevant to today’s retail landscape.  Growth in multi-channel retailing and the implications for an internet sales tax.  In both cases, we believe the pendulum is swinging in favor of traditional bricks & mortar retailers.   We explore the following areas in detail:


Growth in multi-channel retailing is increasing at its fastest pace in years, driven by a culmination of factors:

  • Convenience
  • Selection
  • Content/Editorial
  • Conspicuous Consumption


The internet sales tax debate is as hot as ever, with the recent introduction of the Main Street Fairness Act. We answer the following questions:

  • Why isn’t there a tax on e-commerce sales for “online only” entities to begin with?
  • What exactly is the Main Street Fairness Act?
  • What is the Streamlined Sales and Use Tax Agreement (SSUTA)?
  • What are the tax revenue implications from a tax?
  • Who’s in favor of the legislation? Who isn’t?


In the absence of meaningful physical store growth, e-commerce has emerged as the single biggest source of incremental revenue and market share gains for traditional retailers.  Interestingly, neither the Street nor the companies themselves spend much time on the topic.  Yes, there are a few exceptions including Williams-Sonoma and J Crew that have embraced the internet as a full-on profit and growth center, but there are many more that are just beginning to make meaningful inroads online. 


If you’d like a copy of the report or would like to discuss this topic in further detail please let us know.  In the near-term we expect this will become a more meaningful area to watch within the incumbent retail landscape.  In the near, near-term keep an eye on the Main Street Fairness Act.  State budgets are in turmoil and a quick fix lies within leveling the playing field between those with a tax advantage (i.e Amazon) and those without.



Eric Levine



At this point the consensus thinking is that EAT had a difficult quarter and every indication is that they did.  The sale of OTB and the extra week will add to the confusion. 


So far in the 2Q earnings season, with few exceptions, there have not been many restaurant companies that didn’t have a difficult quarter.  So will EAT’s quarter be much worse than consensus and how will the stock react?  As you can see for our sigma chart on EAT, the company has been operating in the “deep hole” for all of FY 2010 and this quarter will not look much better.  Here is a look at guidance and key focus points ahead of earnings on Thursday.

  • The current $0.46 consensus estimate is largely meaningless although $0.45 is a better number.
  • The 2011 outlook and commentary on current trends will be the focus of the call.
  • Progress on margin initiatives is important for restoring confidence as sales trends remain challenged.
  • The street is so bearish that the number of shares sold short doubled during the quarter.



  • To maintain or sequentially improve two-year average blended same-store sales (52 weeks vs 52 weeks), Brinker will need to post roughly flat comps or better for 4QFY10.  We have sales down 3-4% (on a 52 week vs 52 week basis) so this will be a net negative.
  • According to Factset, the Street is expecting a company same-store sales number of 0%, would seem to include the 53rd week.  The nine estimates comprising this Factset estimate are greatly varied; the highest estimate is +5.3% and the lowest is -4.3%. 



  • Same-restaurant sales of 1 to 2% for current fiscal year includes 53rd week.
  • Full year EPS guidance on a continuing operations basis before special items of $1.20 to $1.24 (consensus at $1.21), implying a range of $0.45 to $0.49 (consensus is at $0.46) for the fourth quarter.
  • Lower-than-normal expenses such as insurance expense, property tax, utilities, and vacation expense favorably impacted margins be approximately 110 bps in 4QFY09.
  • The long-term goal is to double fiscal 2010 consolidated EPS before special items by 2015 with 10 to 12% EPS growth is for fiscal years ’13 through ’15.
  • Minor levels of sales growth of approximately 1 to 2% same-restaurant sales.
  • 500 basis points of margin expansion at Chili’s offset by 100 basis point depreciation impact for a net 400 basis point impact to operating margins over the next three years.
  • Investment in CapEx will only continue as proof of returns warrant.
  • Free cash flow will be reinvested into the business, used to reduce debt, pay dividends and, to the extent cash remains, reinstate our share repurchase program.
  • The cash balance will be put to work and the company will likely carry levels to meet working capital needs of approximately $50 million, barring any significant event in the future that may suggest a need for higher liquidity levels.  (Cash balance at 3/31: $181.9m)
  • On The Border proceeds will be put to use…for share repurchase to quickly rebuild the EPS base
  • “We will receive approximately three to $6 million of fees for providing support services to the acquirer, Golden Gate.”
  • We will extend our portfolio to have 425 Chili’s restaurants internationally by 2014, cementing us as the dominant player.



  • We will fuel our growth through equity investments and franchise partnerships, taking advantage of demographic and eating trends that will only accelerate In the rest of the world over the next decade.
  • Same-restaurant sales for the quarter at our international restaurants increased nearly 1%, and we’re further encouraged by the economic stability of many of the countries that we do business in today.


EAT: GLANCE AT THE 4QFY10 MENU - eat sigma chart



Howard Penney

Managing Director




HBI: Your Long Thesis Just Blew Up

Don’t get lost in the weeds here, folks. Every analyst is likely to come out defending this HBI deal. Mathematically, it makes sense. The conference call – at face value – made sense too. But make no mistake – to stay invested here your thesis HAS TO change; and meaningfully at that.               


This story has changed. Period. Think about it… It used to be a story where the last standing US manufacturer of apparel was offshoring its apparel to recapture margin to become more competitive, kick-start growth, boost margin and repay a heavy debt burden.  Now, the company is out doing acquisitions when it cannot even keep up with the current boost in growth it is experiencing in its core business (remember in 2Q they had to outsource demand at zero margin). In addition, they’re getting into the licensed apparel business for college bookstores? Yeah…perhaps it makes sense given HBI’s core competency. But whatever happened to de-levering?  Debt on top of big, expensive, inflexible, wholly-owned factories that depend on maximizing capacity utilization is a very very dangerous combination, my friends.


Most people are going to come out defending this deal, while few will nix it. Management is following up with a roadshow to fuel the fire. But one thing is certain. The primary reason why 90%+ of the bulls I have EVER spoken with on this name (and I worked on the deal when it was spun out of Sarah Lee) has absolutely positively changed. To think that there’s not some serious ‘thesis-morph’ at play here would be flat-out disingenuous.  This thing is actually starting to smell a bit more like VFC. But keep in mind that it took VFC the better part of a decade to diversify away from its capital intensive denim and intimate apparel businesses (the latter of which it sold at a fire-sale price).  VFC had its fair share of blowups in the interim.


The point here? DO NOT lose sight of the core business for HBI. Lack of de-levering + high commodity costs + increasingly desperate competition + shake up in the management ranks at largest customer + unsustainable growth in second most important distribution channel (dollar stores) = risk, risk, risk.  




Gear For Sports, a leading seller of licensed logo apparel in collegiate bookstores



(FY10 ended in June)

  • Sales ~$225mm
  • EBIT $25mm+
  • OM 11%+
  • (implied D&A of ~$5mm)
  • Expected to close in Q4 and be immediately accretive
  • ~$0.20 in 1st 12 months
  • ~$0.30 in 2nd 12 months
    • No write-offs or restructurings needed, not dilutive to 4Q or 2010 earnings guidance of $2.25-$2.35


  • Total cost of $225mm
  • $55mm in cash
  • $~$170mm in debt
  • = ~7.5x EBITDA
  • Still project 2010 debt-to-EBITDA ratio of ~3.5x on a pro forma basis

Management Changes:

  • Very little change
  • Gear For Sports senior management will remain in place to run the business, and the administrative, operational, production and sales structure will remain intact, with management offices remaining in Lenexa, Kan.Gear For Sports President Larry Graveel intends to retire but will remain in his role for approximately six months, while Chief Financial Officer Craig Peterson and Executive Vice President of Sales Jim Malseed will remain in place and continue to lead the business.


Call Notes:



  • Revenues -
  • Growing MSD over last 4-5 years
    • Graphics -
    • Great
      • Justified acq solely be the opportunties on the cost side
      • Relative to what GFS can buy their products for, HBI has a significant opportunity to provide cheaper product
      • Will start to integrate more product and access global supply chain in 2011


  • Good/better/best structure of brands
  • Gear for Sports - opening price point
  • Champion - good price
  • Under Armour - premium offering
  • have already agreed to transfer license to HBI (5-year license) restricted to college bookstores, resorts and golf


  • t-shirts in the $15-$30 range
  • Sweatshirts in the $30-$60 range


  • Paying down debt would be $0.10 accretive next year; acquisition will provide ~$0.20, so ~$0.10 net accretive in Yr1
  • Primarily predicated on cost synergies
  • Assumes MSD growth in GFS business
  • They are paying 10%+ on their debt now

Cyclicality in recession:

  • Similar to HBI, positive momentum coming out of 2008


  • Has ~25% market share of the college channel
  • Growing consistently MSD
  • Opportunity to grow golf and resort business, in addition to further share
  • Mgmt sees opportunity to grow in HSD range

Brand distribution (as % of total):

GFS 20%

HBI 50%

UA 30%

  • GFS sources UA product directly so that won't change

Working cap - Gear for Sports:

  • ~$60mm last year
  • Inventory accounted for ~$50mm
  • High turns as a sourced business 

Distribution Opportunities:

  • Opportunity not to take to mass, mostly sporting goods, college books stores and mid-tier dept. stores due to price point
  • Outerwear - graphics will increase from 5-6% of business today to 20-25% post acq.

Manufacturing Facilities:

  • Graphic printing in Kansas City (Gear for Sports) - quick turn
  • Operation in Mexico - semi quick turn ~1 week
  • Outsourced printing in Central America

Capacity Implications:

  • Gear for Sport units not that great, will have capacity to handle despite tightness in most recent Q2
  • Capacity constraints due more to much tighter turnaround needs


  • $11mm in synergies in first 12-months related to better sourcing of blanks alone
  • Re 11% margins, they've been consistently in the 10%-12% range

Dynamics of Industry:

  • GCO rolling up industry on retail side
  • Not a lot of opportunity to capture synergies


  • Operating margins, have been in 10%-12% range, post synergies could get to mid teens margins
  • Could add 100bps to Outerwear margins, ~10bps to consolidated HBI margins




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Exporting Away

Position: Bullish Bias on German Equities (EWG)


As an update to our bullish bias on German equities, we got two pieces of data over the last days, both of which are lagging indicators but nevertheless bullish.  Germany’s trade balance showed a surplus of €14.1 Billion in June, with a 3.8% gain in exports month-over-month and an increase in imports of 1.9% versus the previous month. Certainly the weakness in the EUR-USD in June (see chart below) is helping to support gains in exports. On Q2 earnings calls we heard again and again of strong demand from China. While China will increasingly become a larger export market for Germany, in the near term its exporting picturing will make its largest gains alongside economic improvement from its largest trading partner, the EU. However, here we caution that we expect to see slower growth throughout Europe in the back half of 2010 as austerity measures choke off growth. We do see stability in the EUR, unlike the Euro parity camp, and currently our support and resistance TRADE lines for the EUR-USD are $1.30- $1.33.


Exporting Away - mh1


Secondly, July’s final reading of German CPI was in line with the initial estimate of 1.2%, a level we believe should roughly remain stable throughout the end of the year, and looks favorable compared to UK levels (see chart below). Notable changes month-over-month in German CPI were: clothing and footwear -3.5%; diesel oil -2.0%; and restaurants and hotels +2.6%.


Exporting Away - mh2


Matthew Hedrick




As we look at today’s set up for the S&P 500, the range is 21 points or 1.3% (1,113) downside and 0.9% (1,138) upside.


Equity futures are trading below fair value with today's FOMC meeting the key focus. The FOMC plans to release a statement at 2:15 p.m. today and, in my view, it’s unlikely that Chairman Bernanke will be able to string together the right words to satisfy the market. 



  • VOLUME: NYSE - 790.073 (-16.5%)
  • SECTOR PERFORMANCE: Every sector positive yesterday - XLY, XLK and XLB leading the way
  • MARKET LEADING/LOOSING STOCKS: CARMAX +4.95, King Pharma +4.44 and Hewlett-Packard (7.99%) and Tyson Foods (4.9%)


  • VIX 22.14 1.84%- The VIX is broken on TRADE, but bearish for equities.
  • SPX PUT/CALL RATIO - 2.01 up from 1.74 (low on 07/15/10 of 0.87)


  • TED SPREAD - 25.99 -0.759 (-2.837%)
  •  3-MONTH T-BILL YIELD .14%, unchanged
  • YIELD CURVE - 2.3088 to 2.2974


  • CRB: 274.59 -0.04%
  • Oil: 81.48 0.97% (first up day in 3)
  • COPPER: 335.30 0.33% (currently trading at 328 below 332 - BEARISH for growth expectations
  • GOLD: 1,200 -0.37% (trading down for 2 days)


  • EURO: 1.3228 -0.39%  - (trading down for 2 days)
  • DOLLAR: 80.711 +0.38%) - (trading up for two days)


  • ASIA - Major indices closed weaker in response to a sharp fall seen in China in response to bearish economic data. Banking stocks were among the leading decliners, while energy stocks were also weighing on markets.  
  • EUROPE - European markets are range bound at lower levels with investors largely sidelined ahead of today's FOMC meeting. Mining, Financials and export orientated names are weighing on the indices.
  • EASTERN EUROPE - Trading lower - Russia down 1.86% and Hungary down 1.76%.
  • LATIN AMERICA - Mixed Peru and Chilie trading higher
  • MIDDLE EAST/AFRICA - Mostly lower with Nigeria leading the way…

Howard Penney

Managing Director


THE DAILY OUTLOOK - levels and trends













R3: Geared Up for M&A


August 10, 2010





It’s been relatively quiet on the M&A front in retail of late, but Hanesbrands is breaking the silence this morning with the acquisition of Gear for Sports, a leading seller of licensed apparel in collegiate bookstores. While modest in size at $225mm, our view is that this is a net positive event for the company – here are a few things to consider:



  • Clean – low integration risk given existing relationship between the two companies.
  • Opportunity for scale – with only three brands in its portfolio (GEAR FOR SPORTS, Champion, and Under Armour), HBI can provide product with favorable cost dynamics.  Plus eliminating the middle man (i.e the wholesale/distributor process) margins will be inherently higher on HBI brands.
  • Higher margin –11%+ EBIT margins at Gear for Sports. HBI hasn’t posted double-digit margins since 2003 and the company is buying the company for 7.5x, a multiple below where HBI trades currently ( 8.8x EV/EBITDA).



  • Balance Sheet – leverage now moving in the opposite direction.  After increasing debt for the first time since the spinout when the company reported Q2 results in July, this deal continues the trend adding $170mm in debt ($55mm in cash).  The company still expects to end 2010 with a debt-to-EBITDA ratio of ~3.5x on a pro forma basis.
  • Low Growth Business – While an average growth rate of 2% over the last two years isn’t shabby on a relative basis, this is not likely to be a true growth business once dust settles. 
  • Opportunity Cost – hitting the bid on a ‘distribution acquisition’ likely takes HBI out of the running for the opportunity to add a better known brand to the portfolio (at least in the near term).

The company will be hosting a call on the acquisition at 9am this morning (; code: 93137436). Among the items I’m more interested in clarifying is the proposed accretion related to the deal ~$0.20 in the first 12-months. On an absolute basis ($25mm in EBIT) that may be the case, but taking into account the opportunity cost in interest expense we are coming out closer to $0.08-$0.10. Either way, we view this morning’s acquisition which is both margin and earnings accretive as a positive near-term.


Details of the deal from the press release:



(FY10 ended in June)

  • Sales ~$225mm
  • EBIT $25mm+
  • OM 11%+
    • (implied D&A of ~$5mm)


  • Expected to close in Q4 and be immediately accretive
    • ~$0.20 in 1st 12 months
    • ~$0.30 in 2nd 12 months
  • No write-offs or restructurings needed, not dilutive to 4Q or 2010 earnings guidance of $2.25-$2.35



  • Total cost of $225mm
  • $55mm in cash
  • $~$170mm in debt
  • = ~7.5x EBITDA


  • To pay for acq. Instead of debt
  • Still projects 2010 debt-to-EBITDA ratio of ~3.5x on a pro forma basis


Casey Flavin




- For those following the Jersey Shore, add Mike “The Situation” to the list of reality TV stars turned fashion mogul.  The Situation is launching a casual sportswear line in conjunction with an existing brand known as DILLIGAF (it’s acronym that requires Googling).  Retail partners have yet to be announced.


- In one of the more innovative uses of the iPhone app, The North Face launched Trailhead.  The app lists trails and maps around the US, as well as allows users to track their movements via GPS.  However, the most innovative feature comes with the weather forecasts.  The app actually suggests which North Face clothing you should wear based on expected weather conditions over the users specified route.


- Add H&M to the list of retailers finally launching e-commerce.  Similar to Zara, the retailer will launch in Europe first, on September 26.  No word on timing for the US launch.





Li & Fung Ltd. Plans to Privatize a Hong Kong-listed Transport Affiliate - Li & Fung has been acquiring rivals and entering into supply agreements to help meet a sales target of $20 bn this year. Last month Li & Fung increased its funds for acquisitions to about $1.15 bn. Privatization will help cut operational costs for Li & Fung as IDS provides logistics and distribution. <bloomberg.com/news>

Hedgeye Retail’s Take:  While not an acquisition of a “brand”, Li & Fung continues to invest in the tools needed to facilitate growth.  Expect more content related deals to take place as the company diversifies its revenue and profit model away from the traditional “middle man” operation. 


UK Clothing Sales in July Led by Menswear and Womenswear - Clothing sales picked up slightly in July, helped by summer Sales and promotions but . Retail like-for-like sales across all sectors increased by just 0.5% in July as shoppers’ fear of looming public spending cuts took hold while total retail sales were up 2.6%. Menswear and womenswear clothing led the improvement in clothing sales while growth in kidswear was steady but weaker than earlier in the year. Clearance and promotions helped boost sales but often at the expense of margins, the BRC said. Dresses, tops and skirts, lightweight knits and swimwear sold well during the month. Bags, jewelery and hair accessories were popular, particularly in clearance Sales. <drapersonline.com>

Hedgeye Retail’s Take: Kidswear/juniors apparel weakness is a common theme out of the UK and the US in July.  Interesting to note how UK retailers boosted sales through promotions at the expense of margins while many US retailers hurt top-line due to fewer days of discounting.


UK Footwear Sales in July Slowed to Record Weakness Since August 2009 - Sales of men’s and kid’s shoes were down on last year for the first time since August 2009. Women’s footwear sales also slowed but continued to show a slight gain. Footwear sales were often discount-driven, with heavy mark-downs in clearance events to attract cautious shoppers. Sales of casual shoes and sandals were boosted by the warm weather but formal styles struggled. Autumn ranges which had already been brought into store had seen good early interest in new styles. <drapersonline.com>

Hedgeye Retail’s Take: Footwear weakness out of the UK in July marks a notable divergence from the commentary out of the US. 


Not All Back-to-School Shopping Occurs in August - A new study finds that consumer interest in computer purchases peaks in July, while interest in the office and school supplies and apparel categories remains strong well into September. Shoppers start thinking about school supplies and apparel much earlier and stay engaged with ads later than what is generally understood to be the crunch month of August. The PointRoll survey tracked interactions with online advertisements from 2006 to 2009. The study suggests marketers in the office and school supplies and apparel categories may want to rethink their practice of cutting advertising spend sharply in late August. According to PointRoll, companies currently reduce their back-to-school advertising by 75% at the end of August before Labor Day. <internetretailer.com>

Hedgeye Retail’s Take: Retailers, for the most part, already know this.  One thing to consider is that if computers sell the best in July but were noted as a category of weakness by COST and TGT, then be weary of over exposed electronics retailers like BBY.


Innovation is the New Buzz Word in M&A - There is a rush of companies searching for businesses that have the pulse of new consumers. New players are also entering the mix, making for some pretty interesting bedfellows. Take Wal-Mart Stores Inc., which bought video download site Vudu. Denim brand J Brand sold a majority interest, said to be worth more than $50 million, to Star Avenue Capital, a partnership between talent agency Creative Artists Agency and Irving Place Capital. And the Estée Lauder Cos Inc. acquired Smashbox, picking up expertise in digital, social media and television distribution, as well as a photo studio to boot. Looking beyond the traditional boundaries of fashion can lead to a big payoff. This emerging M&A model is a distinct departure from the traditional one, where retailer A buys retailer B, reaching new customers while realizing synergies. <wwd.com/business-news>

Hedgeye Retail’s Take:  Or, the glass half empty view would be that companies have run out of synergistic opportunities and are now increasing their risk tolerance in an effort to potentially acquire “the next big thing”.


Men’s Wearhouse Acquires 2 Leading Providers of Corporate Uniforms and Workwear in the UK - Dimensions Clothing Limited and certain assets of Alexandra plc, two leading providers of corporate uniforms and workwear in the United Kingdom, were acquired for $97.5 mm. The companies will be organized into a U.K.-based holding company, of which Men’s Wearhouse will control 86% and certain existing shareholders of Dimensions will control 14%. The acquisition is expected to be accretive to earnings in fiscal 2010 and projected annual sales for the business are expected to be approximately $207.8 mm, in fiscal 2011.


Hedgeye Retail’s Take:  How long before the “corporate uniforms” are replaced with suits in the UK?


Independent Retailers Feel Soft Sales and Credit Crunch - Retailers shopping the Cobb Show late last month at the Cobb Galleria here saw a slight uptick in business in the spring, but sales have been very sluggish this summer. The lack of availability of credit to small businesses is hurting retailers and vendors. Exhibitors said more manufacturers are requiring their retail customers to pay by cash on delivery, money order, company check or a credit card. Buyers were at the Cobb Show shopping for new trends for fall and looking for bargains. They wanted slimmer jeans, as well as other lifestyle looks, specifically board sports.  <wwd.com/retail-news>

Hedgeye Retail’s Take:  Sounds like the gradual (and profitable) shift in market share towards the better capitalized, larger chains is still underway.  Having a balance sheet has become a key asset even in an environment that is stable.


July's Import Cargo Volume Expected to Increase 15% - The large double-digit increases in June and July appear to be the result of backlogs built up due to the lack of shipping capacity earlier in the year after ship owners took vessels out of service during the recession and were slow to return them as the economy began to pick up. With many retailers appearing to bring merchandise in early to avoid any further bottlenecks, July is likely to be the peak shipping month for 2010 rather than the traditional rush of holiday season merchandise in October. There are indications that the shipping season may have peaked earlier than normal as the rush to re-stock inventories earlier in the year intersects with a combination of increased shipping capacity, consumer confidence levels not seen since August 2009 and the slowing growth of consumer spending,” Hackett Associates founder Ben Hackett said.  <sportsonesource.com>

Hedgeye Retail’s Take:  Keep an eye out for building inventories earlier than expected as this suggests holiday build is coming early.


Nike Opens New Store in Santa Monica Place, CA - The new two-story, 20,000-square-foot location unveils Nike’s newest store concept, including the introduction of Nike+ Run Club and team customization services. The store is the first multi-category concept in the U.S. since the company opened its last NIKETOWN in 1999. <sportsonesource.com>

Hedgeye Retail’s Take:  Putting the Nike store aside, this mall is supposedly one of the premier shopping venues to open in the last few years.  In fact, it may be one of the only malls to open in the last few years!


 Mizuno Corp Q1 Sales Strength Led by Europe and Americas - The Japanese athletic company cited athletic footwear as the largest contributor to growth. Revenue in Europe grew 14% and the Americas 15%, thanks to increased sales of footwear and baseball goods in those regions. <wwd.com/footwear-news>

Hedgeye Retail’s Take:  Another sign that performance footwear remains strong.


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