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The preliminary readings from the University of Michigan Surveys of Consumers improved marginally in August.  This marginal uptick is not being confirmed by Mr. Market – XLY is the worst performing sector today.  Furthermore, the two most important indicators in the national economy today – jobs and housing – are indicating that the narrative of recovery is, in fact, a fallacy.


The University of Michigan “preliminary” index of consumer sentiment climbed to 69.6 following 67.8 in July (which was the lowest since November 2009) and consensus of 69 (according to Bloomberg).  The measure of current conditions rose to 78.3 from 76.5 last month and the measure of consumer expectations for six months from now, increased to 64.1 from 62.3. 


The Consumer Sentiment Index is down 4.0% YTD and still 28% below the peak level of the chart - January 2007.


The big positive for the country over the past couple of weeks has been the developments in the Gulf and the positive spin around the cleanup efforts.  Aside from that there is not much else to write home about. 


The August preliminary reading might be a welcome sign for the “back-to-school” season, but it’s still going to be a hit-or-miss back-to-school season for some retailers, as suggested by advance retail sales figures reported today.  Consumers continue to send mixed signals when it comes to the economy and spending.


A separate survey by the Prosper group done in the month of August suggested that a recovery is down the road “when 40.6% feel worse off financially compared to a year ago” and “only one in ten says they are better off.” 


Lastly, while prices at the pump are only up $0.14 YoY, 68.1% of consumers surveyed say gas prices are still impacting their purchase decisions.


Despite the slight uptick in consumer confidence, the Consumer Discretionary (XLY) is the worst performing sector today.  We remain bearish on the intermediate term TREND for consumer spending.


Howard Penney

Managing Director




CONFIDENCE - GASPING FOR AIR - current conditions



Long Brazil?

Conclusion: We want to be long markets where domestic consumption is trending up in light of a slowdown in global trade and Brazil is one of those economies.


Position: Long Brazilian equities via the etf EWZ.


On Wednesday, we bought Brazilian equities on sale with the Bovespa down 2.1% on the heels of negative data out of China affirming slowing demand. While it’s true that China is Brazil’s largest export market (18.5% in 2009), Brazil is much more defensive than consensus thinks.


To put things in perspective, the Bovespa is in the bottom fourth of performance for all major equity markets globally on a YTD basis (down just under 4%) – worse than both Mexico and Ireland. The Bovespa’s underperformance is due to a series of interest rate increases (from 8.75% to the current 10.75%), and weakness in Brazil’s main exports: copper (down -2% YTD), crude oil (down -4.6% YTD), soybeans (down -2% YTD), and sugar (-30 YTD). Moreover, the Bovespa index is dominated by Petrobras and Vale (a combined ~18-20% of market capitalization), so it’s no surprise that the Brazilian stock market trades similarly to crude oil and copper (both of which have been rocked on a weekly basis: down 7.6% and 2.1%, respectively).


Long Brazil? - 1


We’ll leave consensus to wrestle with a two factor model, while we expand our analysis to determine the direction of Brazilian equities. Regarding foreign trade, Brazil’s economy is much more defensive than people think. Roughly 50% of Brazilian exports are commodities and basic materials, which can be interpreted in two ways. The first of which is that the short production chain on agricultural commodities limits any multiplier effect on the economy at large, which explains why despite YTD weakness in commodities, Brazilian unemployment is near all-time lows. Moreover, recent price appreciation in sugar and soybeans (up 11% and 8%, respectively on a monthly basis) is bullish for Brazil’s trade revenue.


Secondly, Brazilian trade revenue (~10% of GDP) is volatile and highly susceptible to swings in commodity prices. Furthermore Brazilian economists point out that Vale is the world’s largest producer of iron ore, which would imply that it could have a relative benefit in a time of industry consolidation. On Wednesday, we published a note highlighting the lack of Chinese demand for industrial commodities (iron ore, copper, crude oil, etc.) behind recent commodity REFLATION, which suggests that there is a substantial amount of downside risk that could weigh on commodity prices and Brazilian equities in the near term should this one-sided trade unwind in a meaningful way.


Despite this risk, we are comfortable holding the bag here on Brazilian equities for three main reasons: domestic consumption is trending up and looks to continue in that direction, inflation is trending down and should remain flat-to-slightly up from here, and interest rates hikes appear to be on hold for now. 


On the consumption front, Brazil’s unemployment rate (7% in June) is just 20bps above all-time lows, which explains the recent strength in Brazilian retail sales. Brazil’s June retail sales came in yesterday at +11.3% Y/Y, up from 10.2% Y/Y in May and the 1% M/M increase far exceeded consensus expectations of a 0.3% gain. The 11.5% gain in 1H10 was the largest gain ever on a six-month basis. Furthermore, Brazilian companies have been taking advantage of the secular up-trend of Brazil’s middle class. Hypermarcas SA, Brazil’s fourth largest consumer goods company by market value, has spent $R787.6 million reais YTD on Brazilian consumer goods companies and has amassed an additional R$1.2 billion for more acquisitions in the next 12 to 18 months, citing rising employment and slowing inflation. On the inflation front, Brazil CPI has been headed in the right direction for the past three months, declining from the April high of 5.26% Y/Y to July’s 4.6 % Y/Y.


Long Brazil? - 2


Long Brazil? - 3


Regarding monetary policy, we are in line with market expectations for muted, if any, rate hikes throughout 2010, which is bullish on the margin for Brazilian growth. According to the most recent survey, SELIC rate projections came down for the third consecutive week, now at 11% by year end vs. an estimate of 11.5% last week, which is reflected in the currency market – the 3-month put/call spread for the Brazilian real is ~525bps, which is the most among 47 major currencies tracked by Bloomberg. The bond market is also expecting zero rate hikes throughout the year as yields on zero-coupon bonds due in 2012 fell to the lowest ever yesterday as the government sold 6.7 billion reais ($3.8 billion) of the securities in its biggest auction of a single maturity.


Long Brazil? - 4


Weakening economic data also support this view: Brazil’s June industrial output fell the most in 18 months on a monthly basis, down 1.4% M/M (+12.4% Y/Y); Brazil’s service industry confidence fell for the fourth consecutive month in July to 129.5 vs. 131.5 in July. On the consumer front, select recent data has been worsening on the margin providing further downward pressure on interest rates: Brazilian consumer delinquencies have been on the uptrend, rising 1.5% M/M in July (+3.9% Y/Y) and Brazilian auto sales declined in June for the first time in 11 months on the heels of expiring government stimulus. All told, the combination of marginally weaker economic data and muted inflation will likely keep a lid on interest rates going forward, which is bullish for Brazilian growth and equities.


We do understand that owning Brazilian equities is quite contrarian here given all the noise coming down the pike regarding the elections and Petrobras’s share offering, both of which could be bearish on the margin for Brazilian equities over multiple durations. Petrobras, which was downgraded by UBS AG on Wednesday (after losing 25% of its market value YTD), is trading with an uncertainty premium in regards to the 5 billion barrels of oil it is seeking to purchase from the Brazilian government in exchange for stock. Investors are rightfully worried that a high price tag for the reserves (roughly $7.50 - $10 a barrel) will force the company to sell more shares to the public, which would result in incremental EPS dilution. Further complicating the situation are rumors from Societe Generale SA that Petrobras may delay the share offering again, citing a disagreement between the company and the National Petroleum Agency of Brazil on the price of the reserves. In no way is this a positive event for the Brazilian stock market, but as we pointed out earlier, Petrobras’ YTD decline suggests that a good chunk of this risk has been priced in. Furthermore, if the government agrees to sell the reserves at the low end of the range, Petrobras’ stock could surprise to the upside on the heels of that marginal tailwind.


Regarding the Brazilian elections, the current setup is less positive on the margin for Brazilian growth long term, though there is no shortage of near-term benefits should leading candidate Dilma Rousseff win the election. Rousseff, who is leading in the opinion polls (39% vs. 34% for Jose Serra) has raised more money than her opposition by a factor of 3x over Serra ($11.6 million reais). Unlike Serra, Rousseff has a reputation for relatively loose fiscal policy: as former head of the Government Accelerated Growth Progammes, she is linked to what will amount to over $500 billion – or ~33% of GDP – of infrastructure spending over the next five years. Money from the programs will continue to be a tailwind for the Brazilian economy over that duration, but longer term, investors fear that her heavy government hand will crowd out private sector investment – particularly if she is inclined to keep interest rates high to attract foreign capital to fund Brazilian government debt in order to finance increased deficit spending (3.4% of GDP currently). Although the construction jobs created by the current stimulus will not be around forever, we believe the growing Brazilian economy can withstand marginal deterioration of the government’s balance sheet over the next few years.


Darius Dale



Long Brazil? - 5


We're pretty sure he was forced out.



MPEL announced that Simon Dewhurst resigned and a search for a new CFO is underway.  Management is recognizing that they have moved from a development company to a management company and that the role of the CFO has changed.  They want a more experienced gaming person - an operational person vs. capital markets.


This move should not have an impact other than providing a cheaper entry point into the stock.  Recent and current market share gains by MPEL in Macau could be a positive catalyst.  Moreover, assuming August finishes as it began, MPEL will have strung two straight quarters of good hold - somewhat impeding the bear thesis that chronic bad hold is indicative of a major structural business flaw.

CHART OF THE DAY: Friday the 13th

Scary Hedgeye picture of the day


CHART OF THE DAY: Friday the 13th - chart1

R3: Heading South



August 13, 2010


With all the major department stores having reported 2Q earnings, it’s clear that inventory positions are heading south.  A look at the SIGMA overlay sums it up.






With all the major department stores having reported 2Q earnings, we overlayed their SIGMA charts to see what the state of the industry looks like.  Without exception, all four companies saw EBIT expansion and inventory management erode sequentially.  Very simply put, inventory management (as defined by the spread between sales growth and inventory growth) has hit the wall.  JCP is faring the worst on this metric, as the company sets up for a slowing top-line against growing inventory. KSS still appears to be managing its business with the most discipline, but SG&A investments leave the P&L with little room for error (and leverage on sales, at least for the next two quarters).


While we have been cautious on those that are reliant on mall traffic to drive top-line (vs. those that can drive sales via product innovation or fashion), we believe this is further confirmation that tough compares, lackluster demand, and building inventories could and should lead to earnings risk over the back half.  In the near-term, we expect promotional cadence to pick up as retailers have become accustomed to managing risk on a very short time frame.  Additionally, we expect to see increased volatility in both sentiment and fundamentals as the Street looks to grasp onto every data point trying to gage promotional activity, tax-free holiday impact, and overall traffic levels.  The bottom line is that inventories look heavier than we’ve seen in over a year relative to expected demand.


R3: Heading South - JCP KSS JWN M 8 10

- Eric Levine, Director



  • Kohl’s noted that its private and exclusive brands outperformed significantly during 2Q with overall penetration increasing by 300 bps year over year to 49.1%. The company’s three largest brands Apt 9, Croft & Barrow, and Sonoma combined for a 20% increase. Major exlcusive brands including Vera Wang, Food Network, and Elle were up over 30%.


  • Keep an eye out for a collaboration between two iconic brands, Peanuts and Lacoste. The two are joining forces in the fall to commemorate the 60th anniversary of the Peanuts comic strip with an apparel offering. We suspect this is just the beginning of a big year for Peanuts, with both new ownership and the birthday celebration underway.


  • After declaring intentions to be the largest specialty apparel retailer in the world and signing one of the most expensive 5th Avenue leases in history, UNIQLO is on the prowl for additional Manhattan sites. Word has it the Japanese value priced retailer has signed a lease for a 34th St location. New York remains the only domestic market for the brand.



More Footwear Production Shifts to the Indonesia As Labor Cost Rise Elsewhere - A number of athletic footwear brands have shifted part of their production to Indonesia this year as production costs in other parts of the world has been increasing, according to the Indonesian Footwear Association. These brands include Asics, Mizuno and New Balance. Indonesia exported $1.8 bn worth of goods in 2009 and he expected the figure will increase to $2 bn this year. Meanwhile, Adidas, which has also been aggressively expanding production in Indonesia, said the country, its third-biggest supplier, offered “abundant labor availability, good quality, competitive prices and political stability.” Although production here is growing rapidly, the company said the expansion will not happen at the expense of its top suppliers, China and Vietnam.  <fashionnetasia.com>

Hedgeye Retail’s Take:   Indonesia continues to be the single biggest beneficiary of rising costs in China and Vietnam for its footwear manufacturing base.  Expect to see this shift continue until capacity maxes out and wage inflation begins to creep into this manufacturing base as well.


US International Trade Commission To Clear Tariffs on Woven Ribbon Imports from China and Taiwan - The U.S. International Trade Commission voted Thursday to clear the way for punitive tariffs to be imposed on woven ribbons imported from China and Taiwan, in the first trade remedy case involving textile products from China since quotas were lifted at the end of 2008. The vote concluded an investigation that determined China illegally subsidized and dumped “narrow woven ribbon with woven selvage” into the U.S. market. Taiwan was found to have dumped woven ribbon into the U.S. market. The products covered by the ruling include certain woven ribbon used for embellishing apparel and footwear or for decorative uses like gift wrapping. <wwd.com/business-news>

Hedgeye Retail’s Take:  Sounds like we may see more gifts wrapped with ribbon this year than ever.


Talbots Continues to Change it Up - “They’ve become a bit of a hindrance for attracting new customers. They see the red door — they think it’s their grandmother’s store,” said Trudy F. Sullivan, president and CEO of Talbots, who for three years has been leading a turnaround of the chain, long a predictable mainstay in malls and on main streets across America. There’s been little left untouched aside from keeping the classic appeal aimed at women 40 and older. Talbots’ major shareholder switched from Aeon in Japan to BPW Acquisition in the U.S. through a merger completed in April, changing the board and ownership and deleveraging the company with $420 million in debt paid down. The chain also established a $200 million credit facility with G.E. and has doubled the capital expenditure budget to $40 million this year for upgrading stores, information technologies and the Web site. Earlier, the store count and corporate staff were reduced; the J. Jill division was sold, and the kids’ and men’s categories were discontinued. In addition, the two big annual clearances were dropped in favor of taking less dramatic markdowns monthly to keep inventories cleaner and to sustain a steadier flow of merchandise. The apparel sourcing switched to an exclusive partnership with Li & Fung, saving costs and speeding product development, though Talbots still does all its own design and recruited a chief creative officer, Michael Smaldone, to focus the fashion and sharpen the image. The result: Styles are chicer, with shapelier fits such as sleeker pants with lower rises for a younger look, though the collection is still considered classic and traditional but with added twists and embellishments. <wwd.com/retail-news>

Hedgeye Retail’s Take:   If successful, this strategy to lower the average age of the core Talbots customer will go down as one of the more impressive brand positioning in specialty retail.  All eyes are on the fall, which will offer the best read to-date on whether merchandising and marketing changes are taking hold.


Texas Gets A Boost From Better Beaches than Oil Filled Louisianna and Mississippi - Texas beach towns are getting a boost from the BP Plc oil spill as Gulf Coast vacationers head west because of concerns about crude-contaminated beaches in Louisiana and Mississippi.  Room rentals at beach hotels in Galveston, Corpus Christi and South Padre rose 5.2 percent in the second quarter from the same period last year, according to the tourism division at the governor’s office in Austin, Texas. “If anything, we have benefitted from the disaster,” said Edith Fischer, director of tourism at the Brazosport Chamber of Commerce. The Gulf region could lose $22.7 billion in tourism dollars over three years from effects of the spill, a study commissioned by the U.S. Travel Association found. Florida would be the hardest hit because it’s so dependent on beach tourism, the study said.  <bloomberg.com/news>

Hedgeye Retail’s Take:  Not a bad trade off for retailers with a heavy TX presence. 


Levi's Introduces Curve ID - Levi's introduced a new women's jeans line this week, Curve ID, via a campaign from Wieden + Kennedy that pitches the product with ads that declare, "All asses were not created equal." The campaign, says the agency, is a rallying cry to women everywhere that, as the ad copy notes, "hotness really does come in all shapes and sizes." A gatefold ad that features three women in different cuts, Slight Curve, Demi Curve and Bold Curve, tells women that "we should be able to go into stores and find jeans that fit us instead of having to fit into the jeans." The line was created as a result of research that included more than 60,000 body scans of women around the world and designed to fit three universal body types. "Since we created our first women's jeans 75 years ago, no one has changed the formula for finding the perfect fit," said You Nguyen, svp, women's merchandising and design for Levi's. "Our revolutionary approach looks beyond waist size to address the true curves of a women's entire body." Levi's global survey found that more than half of women, 54 percent, try on at least 10 pairs of jeans to find one pair they would buy; most women, 87 percent, wish they could find jeans that fit better than the ones they own; most women, 67 percent, believe that jeans are designed for women with "ideal" figures; and few women, 28 percent, believe that jeans are designed to fit their bodies. <brandweek.com>

Hedgeye Retail’s Take:  Leave it to Levi’s to come up with a buzzworthy marketing campaign about once every three to four years.  This one certainly has the chance to be a head turner. 


Marks & Spencer Opens Vital Lines of Credit for Suppliers - M&S is working with high street banks HSBC and Royal Bank of Scotland (RBS) to open up vital lines of credit for its suppliers after extending its settlement terms. The UK’s largest clothing retailer has used its clout and established relationships with the banks to negotiate preferential lending rates for its 860 general merchandise suppliers who want to borrow against their M&S sales invoices to ease their cash flow. Landed or full-service vendors (FSV), those which manufacture stock and deliver it to the UK for the retailer, have had payment terms increased from four to five weeks. The payment term changes will have a negative impact on suppliers’ cash flow at a time when there is a general lack of trade credit insurance availability on supplier orders. However, M&S’s Vendor Financing Scheme with the banks will offset this when it comes into effect on new orders on September 1.The decision to extend the settlement terms will also bring in millions of pounds in liquidity for M&S. <drapersonline.com>

Hedgeye Retail’s Take:   Financial engineering of the supplier/retailer inventory pipeline sounds risky at best.  Yes, this might be the only alternative, but perhaps cutting inventories and managing risk against a small topline is the safer way to go.


UK Plus-Sized Womenswear Grows - Sales of plus-sized womenswear have soared 45% in the UK over the past five years, putting the market on track to reach £3.8bn this year. Research by consumer research firm Mintel showed that almost a quarter of UK women wear clothes in a size 18 or over. Plus-sized womenswear chain Evans is the latest retailer to cash in on the growing market. The 260-store retailer, which is part of Sir Philip Green’s Arcadia Group, is poised to target overweight teens with the introduction of exclusive ranges from around five young fashion obrands in selected stores and online. The retailer is expected to roll out an ecommerce site for the offer under a standalone name, although the name and launch date have yet to be decided. <drapersonline.com>

Hedgeye Retail’s Take:  Sounds like a mirror image of the US.  Unfortunately, domestic retailers have yet to profitably capitalize on the obesity trend in a meaningful way.


Consumers Slow to Use Mobile For Shopping? - More than a third of all U.S. mobile consumers, about 80 million consumers, will use their mobile phones to help them shop this holiday season, but many won’t complete the purchase through the mobile channel, according to a new PriceGrabber.com survey.The survey of more than 1,100 consumers with web-enabled phones found that 32% felt the purchase process on their smartphone took too much time; 26% indicated transactions were too difficult to complete; 19% said products were too difficult to find; and 10% said their phones didn’t support secure credit card transactions. For others (16%), the roadblock was that they didn’t know how to make a purchase via mobile. However, many of those obstacles can be overcome, according to e-commerce technology provider MarketLive Inc. In its report, “Mobile Marketing for the Holidays,” MarketLive suggests retailers create a mobile gift guide with a streamlined selection of popular products, including gift cards.  <internetretailer.com>

Hedgeye Retail’s Take:  Enter the Ipad. 


Akami Helps Retailers Nab Higher Online Conversion Rates - Akamai Technologies Inc. compared the retailers in the Internet Retailer Top 500 Guide using its services versus those that do not and found Akamai customers experienced a 33% higher conversion rate on average. Akamai says it works with 260 retailers on the Internet Retailer Top 500 list. The HomeDepot.com, No. 39 in the Internet Retailer Top 500 Guide, says it has experienced a 30% increase in conversion rates since it began using Akamai’s Dynamic Site Accelerator service. Dynamic acceleration delivers changing, non-cacheable content such as inventory more quickly to retail web sites by serving it to web site visitors who request it via a nearby Akamai portal. <internetretailer.com>

Hedgeye Retail’s Take:  Yet another reason why e-commerce continues to experience solid, above average growth.  Technological innovations today have even the playing field where at one time e-commerce leaders such as Amazon had a substantial competitive advantage based on technology alone.




Still great, but not as great as we thought.



We don’t want to take anything away from Genting Singapore’s terrific quarter reported yesterday.  However, after further review, they are not as good as they first appeared.  The positive VIP hold impact was greater than we thought.  Mass also held higher than we thought.  Thus, actual volumes were lower than discussed in our note yesterday.  The upshot here is that normalized EBITDA was S$425 million versus our initial normalized impression of S$450 million.  Including the high hold, actual EBITDA was S$503 million. 


April was clearly the standout month in the quarter and while May and June volumes were weaker, both months benefited from the high hold.  We don’t expect April volumes to be replicated anytime soon.  Here are some additional thoughts:

  • VIP Hold benefit on EBITDA was higher than our initial estimate of S$50MM and was likely closer to S$65MM
    • While the company said that normal EBITDA margins are in the 48-58% range assuming normal hold, we think that normal margins are closer to the low end of that range rather than the mid-point.
    • VIP as a % of gross win was 60% not 64% (as we wrote about earlier)
    • We estimate that RC volume was about S$14.5BN and the win rate was around 3.75%
    • Normal hold is 2.8-2.85%
  • Mass also held above the company’s “normal range” of 16-20%.  We think the benefit of high hold on Mass could have benefited revenues by $20MM.  We estimate that Mass win was approximately $230MM.
  • We estimate that win per EGM/slot was just under USD$800/day or S$1,100/day
  • Non gaming was likely between 12-15% of reported net revenues
    • F&B and other hotel revenues are roughly equal to room revenues
    • Other non-gaming revenues aside from hotel, F&B, and USS include revenues from the car park, retail and MICE business
  • Spend per visitor at Universal Studios decreased sequentially since there were more promotional giveaways in the first quarter.

Model tweaks:

  • 2010:  We estimate that RWS can produce revenues of S$2.74BN and EBITDA of S$1.45BN for 2010.  Treating the UK operations as discontinued starting 3Q2010, we assume the Genting Singapore can do S$3.0BN in revenues and S$1.2BN of EBITDA.
  • 2011:  We project that RWS can produce revenues of S$3.4BN and EBITDA of S$1.7BN.  After corporate overhead, our 2011 EBITDA estimate is S$1.5BN.

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