• run with the bulls

    get your first month

    of hedgeye free



I’m surprised that this stock was not down today


The consensus was right; EAT did not have a good quarter and chances are they are not going to have a good 1Q11 either.  4Q10 was not a disaster and the balance sheet and free cash flow are helping to support the stock (EAT could buy back as much as 25% of the market capitalization).  The short interest doubled during the quarter which speaks volumes to how the stock is trading today.  As a client told me today, ‘Chuck is scaring the shorts with the “I’m gonna start buying tomorrow speech”’.


I‘m completely on board with the changes the company is making to the Chili’s business model and convinced that at some point in the not too distant future the pay off will be what the company is expecting.


The trick is getting from point A to B.  As I sit here today the process seems slightly more challenging than it did when first proposed.  The current guidance is as expected; EPS from continuing operations is expected to increase between 10% and 20%, including a lap of the 53rd week.   


What scares me from today’s call is this: “we do need better top line results than we originally forecasted to hit that goal but were not prepared to walk away from the target today.”  My translation: “current sales trends are not good and we need to see a significant improvement to make the numbers.”  Chili’s same-store sales decelerated in 4Q10 and have continued to slide in 1QFY11 - not good.


Right now current guidance is for same-store sales to be flat to down 2%, while revenue will be down 2% to 4%.  Excluding the impact of the 53rd week, revenue will be flat to down 2%, and franchise revenue to increase in the mid single digits.  Traffic growth needs to improve over 500 bps in an extremely difficult environment. 


With 64% of their commodity exposure contracted for the fiscal year, lower cost of sales should be supportive in 1HFY11. Unfortunately, top line sales will likely not gain traction until FY 2H11.  Three months ago I thought we were 6 months away from seeing a turn in the fundamentals; unfortunately it now seems that we are still 6 months, or possibly even 9 months, away. 


I’m very much supportive of the direction the company is headed, but relative to current guidance for the top line, we are set up for more disappointments. 






Howard Penney

Managing Director

GIL: 3Q10 Conf Call Notes

GIL topped expectations in Q3, but the outlook for 4Q and 2011 are now even less certain.



A few of the more notable concerns coming out of this morning’s conference call include:


-  Sales pull forward into Q3 was acknowledged ahead of price increases implemented in Q4

-  Plant inefficiencies (ramp of new underwear programs, transition to new DC, and 3rd party sock inefficiencies) impacted 3Q by $0.04 and are expected to impact Q4 by $0.05

-  After originally downplaying the impact of the Haiti earthquake disaster, GIL now assumes the net impact (provided that insurance proceeds of $0.07 are received in Q4 as expected) is now $0.09 in 2010 – another ~$0.03+ in Q4

-  Reduction in full-year capex from to $130mm from $155mm will be realized in 2011

-  If cotton stays at current prices ~$0.80/lb. that will equate to a negative $0.50 EPS impact in 2011

    > 3% price increase in screenprint channel already implemented equates to a positive ~$0.30 in 2011

    > Absence of plant inefficiencies and benefits of investments in capex "should bridge the gap"


Gildan’s track record of forecasting/projecting broad-based earnings impacts from “one-off” events is less than consistent.  Recall that the Dominican Republic disruptions and $0.40 of related inefficiencies were “wiped out by downtime taken to minimize inventories after Broder.”  While the dynamics currently driving elevated cotton prices appear to have staying power beyond the near-term, the assumption that efficient operations will be the key variable offsetting margin pressure appears to be overly optimistic. Despite the assertion that recent labor disputes in Bangladesh have not affected initial operations, it’s hard to believe that 2011 will not be without unexpected challenges. We maintain that earnings will contract in 2011. The fundamentals warrant keeping a very close eye on price vs. expectations in the coming months. Should we see any material recovery in shares following today’s pullback we’d be looking to address a position from the short side.



P&L Notables:

  • Activewear and underwear sales were $351mm, up +36% (down on 1Yr & 2Yr basis) reflecting:
    • Higher market share in U.S. wholesale distributor channel
    • Overall strength in industry demand up +10.5% yy
    • Continued growth in Int'l  and other screenprint markets
    • Unit shipments of underwear and activewear for retailers up more than 2x yy
    • ~2% increase in net selling prices for activewear, more favorable activewear mix and increased shipments
    • Some pull forward ahead of expected price increases effective at start of Q4
    • Unit growth according to S.T.A.R.S. data reflects 20%+ growth across all categories (Sport shirts, Fleece, T-shirts, and all products) compared to 3%-11% industry growth 
      • unit growth up +60% yy


  • Socks sales were $44mm down -11.5% yy (sequential improvement on 1Yr, significant decline on 2Yr) reflecting:
    • 'short-term' issues related to 3rd party contractors during ramp of Rio Nance IV & transition to U.S. DC
    • ASPs lower yy from shift to more basic mix = ~$2.5mm impact
    • Expects to gain share in socks in mass channel
    • July has been a strong month with sales up +15% yy
    • Expect retail sales in Q4 across all categories up significantly higher yy driven by BTS placements in socks and underwear


  • Continue to get new retail programs for 2011 in all categories
  • Expect growth in screenprint channel as production ramps in 2011


  • GMs 27.1%, up 269bps reflecting:
    • Better pricing for activewear and more favorable mix
    • Lower cotton costs
    • Offset by ramp in underwear/activewear programs
    • Add'l costs related to 3rd party sock contractors & Haiti earthquake disruptions
    • Cost of cotton Q4 price will be ~$0.73/lb.; Q1 expected to be $0.78/lb.


  • SG&A up $4mm (+10.2%), down -167bps reflecting:
    • Higher volume distribution expenses
    • Impact of initial ramp of Charleston retail DC
    • Higher value of Canadian dollar on corporate expenses & variable comp


  • Haiti Earthquake Impact:
    • ~$19mm ($0.16 in EPS in Q2-Q4) – partially recoverable via insurance coverage (max recovery of $8mm, $0.07 per share)
    • Assuming insurance recoveries will be realized in 4Q
      • $0.03 in Q2; $0.015 in Q3; $0.015 in Q4
    • Net impact assuming insurance proceeds of $0.07 as expected = $0.09 in 2010 
    •   Roughly $0.10 impact from lost sales opportunity from lost production
    •   ~$0.06 from inefficiencies


  • Plant inefficiencies (ramp of new underwear programs, transition to new DC, and 3rd party sock inefficiencies) impacted 3Q by $0.04 and are expected to impact Q4 by $0.05

Balance Sheet:

  • $201mm in cash
  • Generated $82mm in FCF

F10 Outlook:

Sales: ~$1.3Bn (+25% yy)

  • Unit sales volume growth in activewear and underwear of approx. +30%
  • Activewear shipments in the 4Q are assumed to be constrained by current low level of finished goods inventories
  • Socks flat based on weaker than expected sales in Q3 (had expected unit sales up +6% in FY10)

GMs: ~27.5% (was 27%)

  • Due to better pricing for activewear and more favorable mix
  • Partially offset by lower than projected benefit of July 5th price increase that is not being applied to back orders
  • Re 2011 - mgmt believes higher selling prices + efficiency gains + lapping inefficiencies will offset cost inflation in cotton, energy and other purchase costs


  • Impact from Haiti earthquake ~$19mm ($0.16 in EPS) – partially recoverable via insurance coverage (max recovery of $8mm, $0.07 per share) expected to be realize in Q4

CapEx now expected to be $130mm (down from $155mm – pushed out to 2011)

  • The Company continues to believe that higher selling prices in fiscal 2011, combined with the impact of projected manufacturing efficiency gains from new capital investments and the non-recurrence of supply chain inefficiencies incurred in fiscal 2010, will fully offset increases in the cost of cotton, energy and other purchased cost inputs.

Production Capacity:

  • Expect to exit 2010 with production capacity for activewear and underwear of more than 60mm dzns + 2-2.5mm dzns of capacity in Bangladesh
  • Approx. 2mm dzns of planned production needed to rebuild activewear finished goods back to optimal levels
  • Ramping Bangladesh facility as Asian hub
    • It was confirmed in Q3 that Bangladesh will indeed have duty free access to China
    • Hasn't been impacted by recent labor disputes
  • Have started development of Rio Nance V facility
    • Expect to be completed in Q4 2011
    • Will provide sock capacity of 6mm dzns in 2011



Decline in Socks:

  • Delay of Rio Nance production in 2009 necessitated the use of 3rd party contractors that were late in deliveries to GIL
  • Initial BTS unit shipments on time - 100% complete
  • Initial sales in July up +15%
  • Charleston DC disruptions now behind them
  • Service and in-stock levels all at high 90% levels
  • Will be using 3rd party distributors through end of Q4 until Rio Nance IV ramps

Pricing on Socks:

  • There was one last large program that was exited at beginning of Q4 so now all disc. programs have been lapped

Program Updates:

  • New programs in all categories in 2011
  • Extension into activewear programs
    • mgmt expects significant growth in activewear next year 3x 2010
    • 2x in underwear
    • Socks will fill year end stated incremental capacity

Deferred CapEx:

  • Reduction in year-end capex from $155mm to $130mm will be realized in 2011
  • Mostly related to timing of equipment purchases
  • Roughly $5mm of small projects that were eliminated - won't impact 2011

Activewear Growth:

  • Private label to big box retailers and branch with regional accounts
  • Expect both t-shirts and sweatshirts to grow significantly from incremental programs


  • Don't see evidence of restocking here, see inventories at retail in "good balance"
  • Didn't have enough sock inventory to meet demand
  • Project significant increase in Q4 into 2011

Capacity Recap in 2011:

  • Caribbean textile facilities exit 2010 north of 60mm dzns (activewear and underwear)
  • Bangladesh (primarily activewear) ~2.5mm dzns in 2011 (exit at ~3.5mm run-rate)
  • Sock capacity with ramp of RN IV will be 65mm dzns
  • In 2010 ~52mm dzns activewear; ~52mm dzns socks

Retail Profitability:

  • Objective to achieve comparable profitability to screenprint channel
  • Believe inefficiencies will be eliminated in 2011
  • Ramp of RN IV will also result in lower costs

Starter Program:

  • Doing well, had major rollout for BTS
  • Looking to expand within that product category and develop new products as well
  • Sole supplier for underwear, but not for socks

Haiti Insurance Recovery:

  • $0.16 total impact to EPS in 2010
  • Roughly $0.10 impact from lost sales opportunity from lost production
  • ~$0.06 from inefficiencies
    • $0.03 in Q2; $0.015 in Q3; $0.015 in Q4
  • Receipt of insurance funds reflected in year-end gross margin projections


Tax Rate: Expect 2% for FY

SG&A: Expect 10%-11.5% of sales

Depreciation: ~$70mm


Market Share:

  • Down to 63.9% from 64.4%
  • Mentioned that with inventories tight heading into Q4, likely to lose some share near-term
  • Expect to get pricing in across all categories going forward

Bangladesh Operations:

  • Labor rate only 1/3 of wages in China after recent increase
  • Energy cost also 1/3 of comparable costs in China (nat gas vs. coal & steam)
  • Less expensive RMs, can buy cotton cheaper relative to regulated cotton in China that has be domestically produced, or highly taxed
  • Japan, Australia, Europe, & China (as of July) are all duty free from Bangladesh
  • Are seeing broader rotation towards Bangladesh

Wal-Mart RFID program to include Underwear:

  • WMT has compensated GIL for add'l cost of applying RFID to other products - expect same for underwear

Industry Capacity:

  • Both inventories and supply is tight in all categories
  • Service levels both at retail and wholesale are particularly tight due to RM price inflation
  • Expect supply to remain tight into 2011
  • GIL doesn't have all yarn secure for 2011 programs yet

Sock Profitability:

  • Below corporate average (~27%) but 'moving in the right direction'
  • Underwear also a bit low, but expect to hit margin tgts in 2011
  • Of the 52mm dzns of socks produced in 2010, 20mm dzns produced in less efficient US facilities or by 3rd party contractors
  • Will be out of RN IV next year generating incremental margin

Pricing Environment:

  • GIL's price increase of 3% not significant relative to higher prices in marketplace
  • $1.50 t-shirts marked up to $22-$30 a piece by the time it gets to retail
  • Pricing in asia has gone up 25%-30% on basic t-shirts YTD, more significant than 3% increase GIL projected
  • Feel they are globally competitive - creating demand opportunities
  • Could be room for add'l increases going forward if cotton stays at ~$0.80/lb.

Int'l & Other Screenprint Channel Opportunity:

  • See growth in Eur, Mexico, Japan, China, etc.
  • Project ~50mm dzns in overall production over next 5-years with upside

Wal-Mart Program Expectations/Shifts:

  • Believe focus will continue to be on basics despite recent mgmt chgs - believe they remain aligned

Change to GM Outlook:

  • Primarily due to higher selling prices in the 2H of the year
  • Offsetting more favorable mix coupled with inefficiencies


  • If cotton stays at current prices ~$0.80 that will equate to a $0.50 EPS impact
  • 3% price increase in screenprint channel = ~$0.30 in 2011
  • Nonrecurrance of inefficiencies and benefits of capex "should bridge the gap"
  • Q4 price will be ~$0.73/lb.

Yarn Supply:

  • With capacity striped out of the system in 2008, expect tight market to continue through 2011
  • Takes 12-18+ months to build and ramp new facilities to add capacity
  • "The cost of producing a basic t-shirt globally has relatively hit the bottom"

GIL: 3Q10 Conf Call Notes - GIL S 8 10 post




Hedgeye Macro Mixer – 3Q Theme: American Austerity - Deficits Are Bad

According to the American Pulse™ survey, 77% of consumers say the federal deficit is the result of government spending too much.  77% also say that the deficit will impact the current economy in a negative way.


I was not looking for a survey to confirm one of our key 3Q themes, but I came across this one that highlights a theme that we have been writing about for the past couple of months. 


According to the latest American Pulse™ survey of 5,005 respondents, 72% of consumers say the deficit will negatively affect the future growth of the economy.  As an aside, we explored the math behind the negative impact of deficits on growth during last week’s MACRO conference call. 

The survey noted that 77.2% of Americans believe that the deficit is a result of government spending being out of control.  And given the deficit, 57.5% think that it wasn’t wise for Congress to skip voting on a budget this year (16.3% think it was smart).

Not surprisingly, a staggering number of people have no confidence in politicians.  Some interesting stats:

  1. 78.8% believe that politicians are mismanaging taxpayer dollars, compared to only 6.9% who think they are using them wisely.
  2. 71.8% have little-to-no confidence that the government’s economic policies will get the economy back on track vs. 28.2% who are confident/very confident
  3. 70.1% say the federal deficit will have a negative impact on job creation
  4. 74.9% have little-to-no confidence that the government’s economic policies will help lower unemployment vs. 25.1% who do
  5. 54.1% feel the Obama administration is not listening to the voice of the people, while 31.1% say it is. 

What does this all mean for President Obama? He currently trails an unnamed Republican candidate among registered voters, independents and women, which, on the margin, is bullish for the extension of the Bush Tax Cuts, should sentiment be reflected at the polls come November. See the chart below.


Howard Penney

Managing Director


Hedgeye Macro Mixer – 3Q Theme: American Austerity - Deficits Are Bad - obama vs rep

real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

Growl . . . Oil Demand Data Is Bearish

Conclusion: Recent demand data points from two of the world’s largest importers of oil, China (third largest importer) and the United States (largest importer), are meaningfully bearish for price.


We want to highlight a couple of recent data points related to oil demand globally that are solidly on the bearish side of the ledger.  While oil has had a good move over the last couple months based on U.S. dollar weakness, its move has been somewhat muted versus other periods of U.S. dollar weakness.  This is likely primarily related to a realization that future economic growth in the U.S. is slowing, and based on emerging negative demand data points.


The first point to highlight on the demand side is related to distillate stocks in the United States. In the chart immediately below, we show that distillate stocks are currently at a 27-year high in the United States.  Distillate stocks are primarily comprised of heating oil and diesel fuel. The massive build in distillate stocks obviously reflects very weak end market demand.


Diesel, specifically, accounts for ~18% of all petroleum demand in the United States (second only to gasoline) and 95% of all goods transported in the United States are done so via diesel engines.  A drop off in demand for diesel is therefore meaningful to overall oil demand in the U.S., but also an indicator for economic activity in the U.S.  On both fronts, this increase in distillate stocks seems to be a bearish indicator.


Growl . . . Oil Demand Data Is Bearish - 1


The second data point to highlight is from China and relates to Chinese imports of oil in July, which fell off somewhat precipitously from June.  Specifically, oil imports were down 3.2% year-over-year and down 14.7% month-over-month.  While we aren’t ready to take one month and extrapolate, it is in the short term, bearish for price.


Growl . . . Oil Demand Data Is Bearish - China Crude Oil Imports


As we wrote in late July:


“U.S. dollar correlation - In 2009, the key macro factor driving the re-flation trade was U.S. dollar down, and everything priced in U.S. dollars up.  Simply, the decline in value of the U.S. dollar versus other currencies increased the inherent value of those global commodities that were priced in U.S. dollars.  Oil was a primary beneficiary as its price increased by almost 80%.  The correlation, or at least the strength of it, is no longer intact.  In fact, since late June we have seen a dramatic decline in the U.S. dollar versus other major currencies, north of 7%, but have not seen a similar move in oil.  In 2009, oil moved inversely to the dollar with a factor of more than 4:1.  As noted, recently that correlation has gone away, so despite being bearish on the dollar, we are not seeing a corresponding correlation that makes us bullish on oil.”


The fact that oil is not inflating with the same vigor as in 2009 combined with the fact the bearish data point continue to pile up, makes us bearish of oil from a supply / demand perspective.


Daryl G. Jones
Managing Director

Hedgeye U.S. Budget Deficit Estimates For 2011E Are Going Up

Conclusion: U.S. Federal budget deficit numbers continue to be alarming with expenses running up more than 10% on a normalized basis year-over-year. Suffice it say, we remain short the U.S. dollar via the UUP.


The U.S. Treasury Department reported budget deficit numbers for July and year-to-date earlier today.  We’ve outlined the trend in the chart below, but we now have our 22nd consecutive month of running a deficit as nation.  On a reported basis, the July 2010 deficit came in at $165 billion, which is an improvement on a reported basis versus July 2009.  The story, as always, is in the fine print.


In the table immediately below we have normalized numbers for the fiscal year-to-date (July is the 10th month in the government’s fiscal year), so we excluded TARP and payments to GSE, and added back a 1-time FDIC payment. To say the results are scary is an understatement.  For the first ten months of the fiscal year, government spending is up 10.4% on a year-over-year basis, or $288 billion.


Hedgeye U.S. Budget Deficit Estimates For 2011E Are Going Up - 1


As the table above shows, every single line item is up on year-over-year basis!


On the revenue side of the ledger, the results are equally discouraging with revenue up an anemic 0.8% on a year-over-year basis. The notable detractor was personal income tax receipts (41% of total government revenue), which were down 4% year-over-year.


In aggregate, the deficit was up 27% after normalizing for TARP and payments to GSEs.  Needless to say, so much for a better economy benefitting deficit reduction.


As we contemplate this release and think about the coming fiscal year, we are beginning to believe that we are too low on our deficit projections for fiscal 2011E, which we have growing to 10.6% of GDP in 2011E from our 2010E of 10.4%.  Given that we believe GDP growth in 2011 will be in a best case scenario 1.7%, the denominator will not move much (which will also negatively impact tax revenues).  So, the outstanding question is on the numerator.


Obviously, if deficit growth were to stay on the same trajectory it is on now, of 27% growth, it would be an unmitigated disaster and come in well above our projection of 10.6% as a percentage of GDP.  In fact, we could be looking at a number closer to 13%.


The wild card will be taxes and what happens with the Bush tax cuts.  Do they expire, or do they get extended?  Obviously, if they expire tax revenue will go up dramatically.  The larger problem though is the growth trajectory of spending.


In a scenario where the Bush taxes cuts expire and taxes for corporations and individuals go up 30% in aggregate, but expenditures grow at the same rate, the deficit would still grow on a year-over-year basis.  (The 30% growth in tax revenues is a plug number, which represents an aggressive scenario in our opinion.  It is likely that aggregate tax revenue does not increase nearly that much.)


The simple conclusion from the report today is that absent a dramatic policy shift in terms of spending, our deficit projections will be going up, and with that the U.S. balance sheet will continue to degrade.


We remain short the U.S. dollar via the UUP.


Daryl G. Jones

Managing Director


Hedgeye U.S. Budget Deficit Estimates For 2011E Are Going Up - US Federal Budget

The Duopoly Fade

The Duopoly Fade


As more and more players enter the toning category, pricing pressure and market share loss are beginning to rear their head in what was once a two horse race.


The latest weekly scan data confirms a growing trend in the toning category.  This is no longer a two horse race, dominated by Skechers and EasyTones.  The data below shows the emergence of “other” brands in the category as well as declining ASP trends.  There’s no question that increased competition was imminent in the category.  After all, toning has enjoyed one of the most spectacular category innovations we have seen in a long time.  However, success breeds imitators.  Which in this case means competition for shelf space, new players/brands/SKU’s at sub-$100 price points, and ultimately price/margin compression. 


One caveat to note.  Skechers recently noted that it is in the midst of a transition towards new styles and lines, which is resulting in clearance of some older SKU’s.  We do believe that this is in some part a reason for pricing pressure on the category.  We’ll be watching closely as product transitions towards fall, to see if ASP’s will (ever) rise again, or if competitive factors become the dominant force in impacting pricing.


Take a look at the charts below to see the changes underway as “toning” appears to be transitioning from a duopoly to a much broader range of players.


The Duopoly Fade - 1


The Duopoly Fade - 2


The Duopoly Fade - 3


The Duopoly Fade - 4

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.