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Bullish On Brazil: Cautious Boom

POSITION: Long Brazilian Equities (EWZ)


After outperforming US equities for the better part of the last week  and trading up for the last 4 days, consecutively, the Bovespa in Brazil is taking a bit of a breather today. We’re going to stay long Brazil via the EWZ etf.


Moshe Silver did his usual translation of the Portuguese press this morning and had the following insights on what Latin America is starting to cautiously refer to as a boom:


“Fundacao Getulio Vargas, Brazil’s leading social and economic policy research university, working with Germany’s IFO institute, says the Latin American Economic Climate Index rose from 5.6 to 6.0 points between April – June of this year.  According to FGV, the combination of positive current readings, together with current projections, suggests that Latin America has entered a boom for the first time since July 2007, though the decline in projections leads FGV to characterize this as “a cautious boom.”


The current measures component of the index rose from 4.7 to 5.8, while the expectations component declined from 6.4 points to 6.2.  The FGV report said “the historical series of the economic climate index, going back to January 1990, shows that an economic climate index reading of 6 should be read as very favorable.”


For Brazil, the current measures component rose from 8.1 to 8.4, while expectations declined from 6.4 to 6.1, resulting in an unchanged reading of 7.3 points.  Argentina, Chile, Paraguay and especially Mexico showed higher readings.


The FGV report said “the situation in Latin America – as in the rest of the world – suggests caution.  In the Latin American countries studied, expectations started to decline from October 2009 through January 2010.  Nonetheless, analysis of current measures showed a reverse pattern.  The experts expected the worst, which did not come to pass.  Then they got better results out of current measures.  Still, they are not sure of how solid the recovery is.”


The intermediate term TREND line of support for the Bovespa is now 64,290.




Keith R. McCullough
Chief Executive Officer


Bullish On Brazil: Cautious Boom - 2

Sporting Goods’ Dynamic Duo

Here are some of our thoughts on both Dick’s and Hibbett’s headed into the Thursday and Friday’s prints respectively.



Our view is that the company will deliver on sandbagged guidance again after the close. The setup remains positive with the easiest top-line compare of the year and favorable GM compares. We expect comps to come in ahead of the guided range for the sixth straight quarter though we see the spread starting to compress (see chart below). A strong footwear cycle and benign promotional environment was a positive tailwind in the quarter. Also each qtr that passes leaves more opportunity for cycling investments in .com and planning systems.

  • As it relates to EPS – our model is coming in at $0.48 vs. Street at $0.41 and guidance of $0.37-$0.39 driven by comps. Given trends in the channel throughout the quarter, it’s virtually impossible to get to the +4%-5% comp they guided to unless we assume hardlines decelerated at a surprising rate. Weather was little changed in DKS territory relative to last year and other parts of the country. In addition, they are going up against -2% traffic trends and -1%-2% ticket trends in the quarter. After posting a +6.4% increase in traffic on a -2.5% in Q1, we expect similar albeit modestly lower sequential results to drive a +6.5% comp in the quarter.
  • GM%: +200bps has potential for upside. The sales/Inventory spread coming out of last quarter is in a relatively good position on our SIGMA chart suggesting inventory levels are in good shape. Lapping aggressive clearance activity at both Golf Galaxy and Dick’s and the incremental benefit of World Cup sales could drive upside.
  • SG&A: +11% yy continues to be the greatest variable. The company will continue to incur deferred investments in systems to optimize regional product assortment that will add an incremental ~$8mm in the quarter similar to Q1. While nearly 80% of remaining store growth in 2010  is expected to hit next quarter, any acceleration of plans could result in higher incremental preopening expenses.
  • Despite a strong 1H, and what is likely to be an upward adjustment to full-year guidance, there’s no reason for Ed Stack to change his (effective) sandbagging style.

For the year, we're at $1.58 vs. Street at $1.46 and guidance of $1.41-$1.44. Next year is $1.75.

Sell-side sentiment is a 70/30 split between bulls/bears compared to 55/45 3-months ago.

Insider activity has been relatively quiet. Short interest remains below 10%.


We don't love the story long term due to its latent rent hurdles due to aggressive growth posturing. But near term, the R&D cycle out of the brands is helping, and that should last at least through CY11. We're not averse to owning this.


Sporting Goods’ Dynamic Duo - DKS comps 8 10


Sporting Goods’ Dynamic Duo - DKS CompGuid 8 10



The bottom-line is that the company should print something starting with a 2, vs. the Street at $0.16 cents. The setup for the quarter is about as solid as it gets – against the worst comp in company history along with extremely favorable GM and SG&A compares. Consensus estimates equate to a ~14% comp based on our math – we’re at 16%. Like DKS, a strong footwear cycle and benign promotional environment continues to bode well for HIBB. 

  • As it relates to EPS – our model is coming in well above consensus at $0.22 vs. Street at $0.16 driven primarily by comps (we expect the addition of six new stores to add ~$5mm, or 4% to Q2). Sales were strong in the channel based on our trend data throughout the quarter (see charts below) with several incremental data points supporting our expectation for relative outperformance. First, employment figures in the southeast/central have been better than was largely expected driven by a BP funded stimulus. In addition, more favorable weather in Hibbett’s most concentrated regions compared to last year, gas prices that have receded from the critically important $3 level since the end of Q1 to ~$2.70, and both traffic and ticket going up against MSD declines in Q2 FY09 all contributed to regional outperformance as seen in the chart below. Anecdotally, Wal-Mart highlighted that traffic improved sequentially during the quarter – a trend we expect HIBB to confirm given declining comp trends last year down -8% in May, -10% in June, and -14% in July.
  • GM%: +350bp could even prove conservative. Sales/Inventory spread ended last quarter in solid position on our SIGMA chart – suggesting that inventories are lean. In addition, the company is lapping a period of aggressive clearance activity that impacted margins by at least 100bps in the year ago period as well as a spike in occupancy expense that accounted for another 130bps. A swing in both of these components along with a benign promotional environment relative even to Q1 could lead to further upside in product margins.
  • SG&A: +10% yy. While comping against a significant increase in comp and benefits last year, we expect absolute growth to be marginally higher than Q1 (+9.6%) due primarily to the addition of an estimated six new stores as well as opportunistic marketing spend that management highlighted on the last call. A key variable here is the potential for accelerated store growth should opportunities to acquire additional Movie Gallery/Blockbuster locations become available sooner than expected – not something we expect, but would view favorably as an accelerant to 2H revs.
  • Lastly, despite decelerating trends over the last few weeks ahead of BTS, we expect the company to raise year-end guidance for the third straight quarter primarily based on Q2 results.

Q1 YouTube:

"in terms of our guidance, we hope to increase it again in August and then again in Q3, but depends on the macro." – Mickey Newsome


For the year, we're at $1.60 vs. Street at $1.52 and guidance of $1.35-$1.50. Next year is $1.80.

Sell-side sentiment is about 60/40 split between bulls/bears.

Insider activity has been relatively quiet following sales in March. Short interest has come down from 32%, but still stands at a toppy 24% - high for such a good model.



Net/Net, numbers are likely to come in better than expected this quarter for both DKS and HIBB and there are going to be many reasons as it relates to the industry cycle why trends should continue for both players.


Sporting Goods’ Dynamic Duo - HIBB TrendData Q2 8 10


Sporting Goods’ Dynamic Duo - HIBB GasPrices Q2 8 10


Sporting Goods’ Dynamic Duo - HIBB RegionalTrends 8 10


Sporting Goods’ Dynamic Duo - DKS HIBB S 8 10


Sporting Goods’ Dynamic Duo - Fw App Ind Data 8 10


Casey Flavin, Director


EARLY LOOK: Winner's Tranquil

This note was originally published at 8am this morning. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK in real-time, published by 8am every trading day.





"To play well you must feel tranquil and at peace. I have never been troubled by nerves in golf because I felt I had nothing to lose and everything to gain.”        -Harry Vardon



Having tired of reading about the collapse of societies, currencies, and politicians, I have shifted gears in my mid-August reading schedule to something I am much more proud of pursuing in this good life than the fate of the Fiat Fools – winning.
What’s most interesting about the aforementioned quote isn’t that it comes from one of the world’s all-time great golfers, it’s that it comes from a man who had a nerve in his right hand that had been impaired by tuberculosis.
Despite the obvious disadvantage Harry Vardon had in a critical component of his game (putting), the man didn’t whine or complain. He didn’t point fingers either. He focused his mind and energy on what he could control.
In “The Grand Slam – Bobby Jones, America, and the Story of Golf”, Mark Frost wrote, “opponents felt as if Harry wasn’t even aware of their presence, and they weren’t wrong; experience had taught him that his opponent was the golf course, not the other guy.”
Vardon graced this good world between May 9th, 1870 and March 20th, 1937, winning the British Open Championship a record 6 times along the way. He was never the longest off the tee. He was never the flashiest player either. Harry Vardon was a Risk Manager.
On avoiding losses, Vardon once said that “more matches are lost through carelessness at the beginning than any other cause.” When it comes to modern day US monetary and fiscal policy doesn’t that ring in your ears?
Unfortunately it’s a lot easier to read that lesson than to execute on it. President Obama definitely has his work cut out for him on this score. After coming back from some much deserved peace and tranquil with his family on vacation, the President of the United States stepped right up into the tee-box of US mid-term election qualifiers delivering the following shot:
“We have a choice between the policies that got us into this mess and the policies that are getting us out of this mess.”
OK. Shot made. Predictably, all replays of this opening shot have been recorded by partisan pundits on both sides of the gallery. But can’t Americans do better than this?
I’m certain that we can. Both Bush and Obama signed off on empowering a losing economic ideology that’s taken this country and its balance sheet to its knees. It has been all about fear-mongering and now it’s playing on America’s nerves. Confidence is abysmal and spending is slowing. America’s winners are deeply troubled about a colossal “mess” in American politics – not about “the other guy.”
With all due respect Mr. President, it’s your ball now and you need to play it as it lies. Planning to have our central government’s economic planners come up with more plans to change the rules won’t work.
The solution here is to find a message that doesn’t focus on insulating America’s losers. We have to find a way to get back to winning. That starts with confident messaging. Confidence breeds success. Success builds confidence.
My immediate term supports and resistance lines for the SP500 are now 1062 and 1099 respectively. For now, we remain most confident in our short positions. We shorted the SP500 (SPY) at 1098 yesterday and we remain short the US Dollar (UUP).



EARLY LOOK: Winner's Tranquil - Screen shot 2010 08 18 at 9.10.43 AM


Best of luck out there today,

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August 18, 2010




WMT needs bank charter. Officially stick a fork in high end denim. HD's inventory miracle. NKE, UA, FL, APP, and more...












- In an interesting collaboration, Target and Gilt.com are teaming up to launch the discounters latest designer collaborations. Items from the John Derian, Tucker, and Mulberry collabs will go on sale before they appear in stores. Looks like Gilt is evolving beyond closeouts.




- Wal-Mart noted that sales of its financial service products (check cashing, prepaid debit cards, etc…) increased by double digits in the quarter. Given that groceries were slightly positive and other discretionary categories including home, apparel, and hardlines were negative it appears that this may have been one of the best performing areas in the store. Now if only WMT got its bank charter…




- Saks noted that denim remains one of the weakest categories in the store. It finally looks like premium denim may have run its course. Not good for True Religion or VFC’s Seven For All Mankind.




- Home Depot showed its third quarter in a row of inventory turn improvement, which comes as a result of recent systems and logistics investments. Prior to this recent improvement, HD had not reported an improvement in inventory turns in a decade!











Vietnam Overseas Footwear Orders Increases by 16% - Vietnam’s overseas footwear orders in the year to date has increased by 15-16% year-on-year at the expense of the labor shortage problems in China, according to Vietnam Leather & Footwear Association (Lefaso). Several local footwear producers claimed that they received a good volume of orders and big contracts. China has been facing worker shortage in labor-intensive industries, including the shoe-making sector, causing some of its partners to switch to Vietnam for footwear products. Footwear exports reached US$2.75bn in the first seven months of this year, up 13.8%.  <fashionnetasia.com>

Hedgeye Retail’s Take: Despite strong export numbers to the U.S. yesterday, news of this shift is not new news – expect the trend to continue. Also expect higher prices out of Vietnam.




American Apparel's Future Is Dim - Without a concession from its lender, the company will likely trip a financial covenant next month, causing a potential cascade of debt repayments. CEO Dov Charney expressed confidence American Apparel would live on claiming: “The capital structure issues will work themselves out.” That will take between 6 and 15 months, predicted Charney, who owns 45% of the company’s stock, inclusive of warrants. Much of the current problems can be linked back to difficulties at the firm’s Los Angeles factory, which hired 1,600 new workers in the second quarter due to the equivalent amount of illegal workers that were dismissed. The company’s debt load ballooned by $28.9 million to $120.3 million over the course of the second quarter ended June 30. And it expects operating losses of $5 million to $7 million during the quarter. First-half losses were described by the firm as “substantial.” American Apparel said it was “probable” that it would not meet the requirements of its minimum consolidated EBITDA covenant by Sept. 30. In June, Lion amended its credit agreement with the firm for a third time, adjusting the covenant and extracting an even higher interest payment in the process. <wwd.com/business-news>

Hedgeye Retail’s Take: This is one concept that wouldn’t be sorely missed if it ceased to exist tomorrow. Newsflash Charney, capital structure issues don’t “work themselves out,” management does.



Wal-Mart Pressured by Home Electronics Manufacturer For Labor Rights Issues - A Hong Kong labor-rights group is calling for U.S. retail giant Wal-Mart Stores Inc. to investigate Elec-Tech International Co., a home electronics supplier in China, following a rash of lost limbs and other severe workplace injuries that workers say were caused by unsafe equipment and no training. In a report slated for release this week, the labor-rights group Students and Scholars Against Corporate Misbehavior investigated a string of severed limbs and digits at the Zhuhai-based production center of Elec-Tech, a company that makes electronics, including small home appliances like toasters, coffee makers and electric skillets.  <wwd.com/business-news>

Hedgeye Retail’s Take: As if child labor concerns weren’t enough, heightened severed limb occurrences certainly falls into the “we have an issue” bucket. This one could become a serious black-eye in the media if not addressed yesterday.




World Basketball Festival Benefits Nike, Foot Locker - Athletic companies were looking for a boost in sales as a result of Nike’s World Basketball Festival, which took place in New York last week. The four-day basketball celebration, that included events at Foot Locker, House of Hoops and Champs banners throughout the city, were a positive for the New York-based athletic retailer which saw a lot of traffic in the New York stores. According to Nike Brand President Charlie Denson, retail partnerships were a key factor in planning this brand-building event. <wwd.com/footwear-news>

Hedgeye Retail’s Take: In light of recent concerns surrounding basketball sales despite our trend data suggesting otherwise, this is just one of several initiatives underway within Foot Locker’s merchandise mix. We expect this event to accelerate the positive sequential trend we’re seeing in basketball of late and expect to hear more about it on Thursday’s call when the company reports. By the way, we expect FL to come in well ahead of consensus.  




Mizuno Looking to Gain US Market Share on Road Trip - Mizuno Corp., the Japanese maker of baseball gloves and bats for major league stars Ichiro Suzuki and Hideki Matsui, is on a summer road trip to win a better position on U.S. baseball and softball diamonds. The company has deployed a caravan of royal blue-and-white vans bringing gear and glovemakers to stadiums, amateur fields and sporting-goods stores in California, Ohio, Indiana and Kentucky as it tries to boost its sales in the $1.8 bn diamond-sports retail market by 33% within five years.  Mizuno is fighting Nike Inc., Rawlings Sporting Goods Co. and Spalding for shelf space after the Osaka-based company’s baseball sales in the U.S. peaked at $75 mm in 2008. The company aims for sales of $100 mm by 2015, and it pulled out of Europe and Latin America to funnel resources into that effort. Mizuno ranked No. 6 in the U.S. baseball and softball retail market last year with an 8.2% share. Easton-Bell Sports Inc. led with 22%, followed by Rawlings, Wilson Sporting Goods Co. and Nike.  <bloomberg.com>

Hedgeye Retail’s Take: This sounds like a good idea. Nike is deploying capital around a category focus – and baseball is not one of them. Under Armour is diversifying out of cleats. Mizuno is striking while it can, and we'll be watching.



Wholesale Apparel Prices Made in US Increases Y/Y but Decline Sequentially - Wholesale prices for U.S.-made apparel declined 0.3% in July compared with June, but rose 0.1% from a year earlier, the Labor Department reported Tuesday in its Producer Price Index. Women’s apparel prices fell 0.5% for the month and 0.8% year-over-year. Men’s apparel prices declined 0.3% month-to-month, but rose 0.9% in 12-month comparisons. <wwd.com/business-news>


Hedgeye Retail’s Take: With cotton prices turning sharply higher coupled with wage inflation we expect these trends to turn higher not only on a yy basis, but also sequentially before long.




Firearm Parent Company Reports Sales Declines - Freedom Group, Inc., the parent company of firearms and ammunition brands such as Remington, Bushmaster and DPMS/Panther Arms, reported consolidated sales for the quarter ended June 30th fell 23.8%. The company also disclosed that it will pay $6 mm for its 75% stake in the outdoor apparel company Mountain Khakis, not including $1.6 million of debt the company assumed in the deal. <sportsonesource.com>

Hedgeye Retail’s Take: The ammunitions stockpile play is officially played out.




Perry Ellis Preannounces Positive Q2 - Perry Ellis International, Inc. said that based on preliminary estimates for Q2 it expects revenue of approximately $162 mm, compared to $159 mm during the comparable period last year. Revenues grew approximately 9%, excluding the planned exit of $11 million in unprofitable businesses from last year. Perry Ellis branded wholesale business as well as its owned retail stores were significant contributors to the company's revenue growth and earnings during second quarter fiscal 2011. <sportsonesource.com>

Hedgeye Retail’s Take: Hardly a surprise, but not a positive one with consensus above PERY’s preannouncement results.





























CHART OF THE DAY: Fed Balance Sheet

This chart was published this morning in conjunction with the Early Look note, available to subscribers in real-time at 8am every trading day.




Carelessness at the beginning?  Fed Balance Sheet (Assets; $USD Trillion)



CHART OF THE DAY: Fed Balance Sheet - Screen shot 2010 08 18 at 9.10.43 AM


The Macau Metro Monitor, August 18th, 2010



David Sylvester, senior vice president of Sands' Asia retailing operations, said retail outlets at MBS could generate annual S$1 billion sales when the complex is fully operational.  Sylvester said about 50 more shops will open at MBS in September; MBS will have more than 300 stores and restaurants.  To date, the company has signed contracts with future tenants for around 95% of the mall's capacity, said Sylvester.  Sands China has just finished renewing retail contracts at the Venetian with "everybody we wanted to renew," said Sylvester, adding sales in the resort's 1-million-square-foot mall have improved recently.


Sylvester also said he will begin marketing Sites 5 & 6 to mid-range retailers in a few weeks.  



At its general meeting, Genting Singapore stated that shareholders will not be receiving dividends this year because the company is bound by a bank loan agreement not to dispense dividends until it has fully repaid its loans.  Also the shareholders voted in favor of the UK divestment. 



The opening sale of One Oasis drove up the average transaction price of residential units in Coloane island by 1.3 times QoQ (191% YoY) to 59,509 patacas per square metre of usable area in 2Q.  According to DSEC, the average transaction price of residential units in the whole region of Macau rose 69.2% YoY. 

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