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R3: PSS, RL, ARO, Tapout, NFL…



September 8, 2010



From mixed martial arts brand acquisitions to NFL licenses and the opening of the new Ralph Lauren men’s store in the NYC, there’s certainly a masculine bias to this morning’s happenings...





  • A survey by BIGresearch and the NRF suggests that the implementation of a federal VAT would reduce spending by 64% of consumers.  Specific areas in which respondents would cut back included: eating out (83%), clothing and accessories (80%), food/groceries (74%), entertainment (72%) and travel (72%).  Only 10% of those surveyed were in favor of a VAT to reduce the deficit while 80% are in favor of reduced government spending as a means to handle the deficit.


  • Online private-sale retailer Gilt.com appears to be in the midst of a PR storm. It turns out that a handful of customers were charged more than advertised prices during the company’s end of season women’s sale. Originally the company fluffed off the issue, but an article in WWD on the subject is sure to rectify the situation much more quickly than originally planned. Keep in mind that in some states it is illegal to charge more than advertised prices, even if it’s a mistake.


  • First it was Canada, now it’s Brooklyn. After a flurry of recently announced store opening plans focused north of the border, we’re now seeing Brooklyn attracting national chain stores. This time word has it that Aeropostale will be opening a new store Downtown. Recall that Apple has long been rumored to be opening a store in the borough as well.


  • E-mail remains by far the most popular mobile internet activity, taking up 41.6% of a users time according to Nielsen. Portal usage comes in second, representing 11.6% of time spent, while social networking continues to grow and represents about 10.6% of usage time.  All in despite reports to the contrary, e-mail remains by far the most popular mobile internet activity.




Authentic Brands Group Acquires Tapout and Silver Star Casting - Authentic Brands Group, LLC, has acquired Tapout and Silver Star Casting Company (Silver Star), two of the biggest names in the mixed martial arts (MMA) industry. The buys mark the first major acquisitions for Authentic Brands Group, a buyout group formed by Leonard Green & Partners and Knights Bridge Capital and led by James Salter. <sportsonesource.com>

Hedgeye Retail’s Take: MMA continues its meteoric rise into the sports arena limelight – this time with a noteworthy endorsement of sorts from Wall Street. Atypical in almost every way, from a CEO named “Punkass,” to the trajectory of its revenues from ~$16mm in 2006 to ~$200mm in revenues last year, Tapout is a certainly a crown jewel of sorts in MMA.


Saucony Appoints Chris Lindner as SVP, Chief Marketing Officer - Saucony, Inc. appointed Chris Lindner to the newly created role of senior vice president/chief marketing officer. Prior to his new role at Saucony, Lindner was vice president of global marketing at Converse Inc., a subsidiary of Nike, Inc., where he oversaw all marketing execution throughout North America as well as the brand's global regions. <sportsonesource.com>

Hedgeye Retail’s Take: Chris Linder is one of the good guys. Loss for Converse, but good for PSS. Collective Brands continues to fuel the fastest growing brand in its portfolio. With the company focused on growing the brand in Europe, expect Linder’s experience to contribute heavily there.  It’s a shame that no one cares about this part of PSS’ portfolio.


Airwalk Goes Old School - Aiming to meet demand for products from its archives, Airwalk relaunched its website last month with e-commerce. The new site features classic products, as well as signature shoes from Airwalk athletes. “Eighty percent of visitors to our site wanted to buy product,” said Tiffany Fraser, Airwalk’s e-commerce manager. “Our product methodology is to offer old-school styles, nothing that you would see anywhere else. You won’t find it anywhere in the U.S.” The site debuted with a focus on its classic Desert Boot, Prototype 540, and Prototype 600 styles. About 300 pairs of each will be available to consumers, and two to four major launches, with apparel pairings, will roll out each year. <wwd.com/footwear-news>

Hedgeye Retail’s Take: Going retro is hardly new, but this is consistent with Collective Brands commitment to growing its branded portfolio - we’ll need to see much more from PSS in 2H.


R3: PSS, RL, ARO, Tapout, NFL… - R3 1 9 8 10


Retail Space Availability to Drop in 2011 - Space available for lease at U.S. local retail centers will decline next year for the first time since 2005 as consumer spending rises, according to commercial broker CB Richard Ellis Group Inc. The availability rate, which refers to space being actively marketed and ready for tenant construction in a year, will fall to 12.8% for neighborhood and community shopping centers at the end of 2011 from a peak of 13.2% in the second half of this year. National chains that rent space from Kimco Realty Corp., the biggest U.S. owner of community shopping centers, have “selectively resumed their expansion strategies,” David Henry, the company’s chief executive officer, said on a July 28 conference call. The availability rate at community and neighborhood shopping centers was 13.1% in the second quarter, up from 12.2% in the same period a year earlier. The rate probably will fall to 12.1% at the end of 2012. Rents may not rise at neighborhood and community retail centers before 2012.   <bloomberg.com>

Hedgeye Retail’s Take: This may be a minor sequential improvement but the real impetus for improving vacancy rates will be both a sustained pick up in square footage growth coupled  by further rent relief.  Capacity remains in check as new developments still show little signs of picking up.  For now it’s a waiting game to see which comes first, rent or growth.


NFL to Revamp Apparel Licenses - The National Football League is exploring opening up its apparel licenses to other manufacturers. The rights are currently held by Reebok in a deal that ends at the close of next season. According to a report in Sports Business Journal, categories such as on-field, youth, headwear and performance will be broken out into their own distinct categories that would be available to new licensees. <sportsonesource.com>

Hedgeye Retail’s Take: We can debate all day whether this strategy makes sense, but let’s face a fact… the NFL is doing what all high profile licensees do – they are beginning to negotiate through the press. Their ultimate goal is likely to keep Adibok, but at a higher ticket.


RL Introduces the Converted Rhinelander Mansion as the Home Base of Men's Wear - Today, the designer will take the wraps off the Rhinelander Mansion, which has been converted to a men’s-only retail emporium. Women’s wear has been relocated and will share a newly constructed 40,000-square-foot home across the street, to be completed next month. Although Polo Ralph Lauren Corp. has embraced digital platforms for selling and marketing product, it also continues to raise the bar for the in-store experience. <wwd.com/retail-news>

Hedgeye Retail’s Take: The highly anticipated men’s store is here. With men’s typically relegated to basement or back room locations, this store is guaranteed to offer a  new experience. While highly unlikely to surpass the productivity of the women’s store across the street, it’s worth noting that this store has been under construction (and behind plan) and will finally have revenue associated with what has been a liability.   


R3: PSS, RL, ARO, Tapout, NFL… - R3 2 9 8 10

R3: PSS, RL, ARO, Tapout, NFL… - R3 3 9 8 10

R3: PSS, RL, ARO, Tapout, NFL… - R3 4 9 8 10


BOOT Opens New Manufacturing Facility - LaCrosse Footwear Inc. has opened a new manufacturing facility in its home city of Portland, Ore., to produce the Danner brand. Located in an industrial building about one mile from the company’s headquarters, the factory contains roughly 59,000 square feet, representing twice the footage of the firm’s previous factory there. According to LaCrosse CEO Joseph Schneider, the facility will be able to better meet the growing worldwide demand from its customers in the work, military, law enforcement, outdoor recreation, hunting and Japanese markets. <wwd.com/footwear-news>

Hedgeye Retail’s Take: New capacity is not typically worthy of a callout, but this is notable due to the fact that we are talking about a new/expanded DOMESTIC footwear manufacturing facility when ~98% of footwear is still produced overseas. LaCrosse Footwear, however, only outsources ~60% of its production overseas.


Gucci to Offer $750,000 Speedboat With Italian Yacht-Builder Riva in 2011 - Gucci, the Italian luxury brand owned by Paris-based PPR SA, said it will introduce made-to- order speedboats next year, with prices starting from 590,000 euros ($750,000). The vessels will be produced in partnership with yacht- builder Riva to help mark Gucci’s 90th anniversary in 2011, the Florence, Italy-based fashion company said today in a statement. <bloomberg.com>

Hedgeye Retail’s Take: I had to check the date on this piece twice as it sounds like something we’d have seen back in 2007. While consistent with a luxury lifestyle, involvement in yachting is rarely a positive from a financial perspective.




TODAY’S S&P 500 SET-UP - September 8, 2010

As we look at today’s set up for the S&P 500, the range is 21 points or 0.53% (1,086) downside and 1.39% (1,107) upside.  Equity futures are trading mixed tracking a weak close in Asia and lower European indices as worries about the state of some European economies and the banking sector keep investors away. Today's macro highlights include: MBA Mortgage Purchase Applications, Beige Book and July Consumer Credit.

  • President Obama is expected to say that Bush-era tax cuts for the wealthiest Americans shouldn’t be extended when he speaks in Cleveland at 2:30 p.m.
  • Altera (ALTR) boosted 3Q rev. growth forecast to 10%-14% from 4%-8%
  • AngioDynamics (ANGO) forecast 1Q EPS 7c-8c, vs est. 11c
  • Phillips-Van Heusen (PVH) boosted FY adj. EPS guidance to $3.70-$3.80 from $3.55-$3.65, vs est. $3.62
  • RTI Biologics (RTIX) cut FY EPS forecast to 10c-12c from 15c-17c
  • UDR (UDR) agreed to buy five communities in Calif., Mass and Md., and one pre-sale venture in Mass., for $455.1m
  • Wet Seal (WTSLA) plans to buy back as much as $25m shares


  • One day: Dow (1.03%), S&P (1.15%), Nasdaq (1.11%), Russell 2000 (2.19%)
  • Month-to-date: Dow +3.25%, S&P +4.05%, Nasdaq +4.49%, Russell +4.52%
  • Quarter-to-date: Dow +5.80%, S&P +5.93%, Nasdaq +4.72%, Russell +3.74%
  • Year-to-date: Dow (0.84%), S&P (2.09%), Nasdaq (2.66%), Russell +0.63%.


  • ADVANCE/DECLINE LINE: -1416 (-3115)
  • VOLUME: NYSE: 830.38 (-12.24%) - summer is no longer an excuse
  • SECTOR PERFORMANCE: All sectors were down yesterday
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Oracle +5.85%, US Steel +4.57% and Newmont +1.97%/Goodyear Tire -6.02%, H&R Block -5.94% and KLA -5.57%
  • VIX: 23.80 +11.7% - YTD PERFORMANCE - (+9.8%)            
  • SPX PUT/CALL RATIO: 2.00 from 2.08


  • TED SPREAD: 17.18 0.468 (2.797%)
  •  3-MONTH T-BILL YIELD: .14% trading flat
  • YIELD CURVE: 2.12 from 2.20  


  • CRB: 273.81 +1.04%
  • Oil: 74.09 -0.68%
  • COPPER: 347.05 -0.84% - First down day in three
  • GOLD: 1,256 +0.55%


  • EURO: 1.2732 -1.12% - Looking to be down for three days
  • DOLLAR: 82.82 +0.95% - two day rally




  • Nikkei (2.18%); Hang Seng (1.46%); Shanghai Composite (0.11%)
  • Asian markets followed Wall Street down today.
  • In China, financials slumped, and property stocks went down on a report that the government may launch a new round of measures to cool the property market.
  • Steel stocks fell on profit-taking.



  • FTSE 100: (0.61%); DAX: (0.65%); CAC 40: (0.54%) (as of 04:55 ET)
  • European markets opened modestly lower, pared declines to trade little changed, with pan-European indices seeing slight gains, before moving sharply lower as concerns over the financial sector again hurt sentiment.
  • Peripheral markets led declines as worries over Irish banks continued and news that National Bank of Greece will raise approx €2.8B in capital sent Greek banks down over (5%).
  • Defensive sectors led performance, with three sectors, utilities, food & beverage and healthcare, trading higher on the day. 

THE M3: SITES 7 & 8

The Macau Metro Monitor, September 7th 2010




Acting CEO Michael Leven said that "there is no reason to believe that a subsequent application by any third party will take precedence" over Sands’ rights to develop sites 7 and 8.  Leven explained that Sands China had previously submitted a detailed development application to the Macau government detailing plans for the two sites.  “Subsequent to that application, we have obtained site investigation and consolidation licenses from the government, which authorized us to enter the site and carry out the substantial works that have to date been completed,” Leven said.  “Our consultants have continued to pursue the development application in a timely manner,” Leven said. “We have received no indication from any relevant department that our applications are not proceeding in the usual course.”  Meanwhile, Macau’s Land, Public Works and Transport Bureau has denied receiving any letter from SJM expressing interest in Cotai’s parcels 7 and 8.

Someone Gets To Be Canadian

“Somebody gets to be smart and somebody gets to be dumb. If we win, it'll be because of the President. And if we lose, it'll be because of me.”

-Karl Rove  


Yesterday afternoon at our offices in New Haven, CT, Daryl Jones and I hosted former White House Deputy Chief of Staff and Senior Advisor to President George W. Bush, Karl Rove, for a political strategy conference call.


For the record, before you call me a raging Republican, remember that I am neither a Democrat nor a Republican. I am Canadian (with a green card and an American son who has much better chances of wearing his country’s Olympic hockey jersey on this side of the border!).


I, like most immigrant small business owners in this country, fundamentally believe in doing the best I can to provide for both my American family and American employees. This includes analyzing and understanding US political policy as it is going to affect markets and my firm’s future.


If I couldn’t stand Karl Rove’s politics, I’d still have invited him to our offices to meet with us. How else would a Risk Manager of both global market strategy and local payroll-punching get to the right answers?


It turns out that Rove was perfectly analytical and proactively prepared with plenty of math. The data, after all, doesn’t lie as much as some of America’s current politicians do. That said, the data can still change before the mid-term elections in November.


Daryl Jones will publish a more in depth research note later on today that covers some very interesting intermediate to long term US political strategy topics that we dug into with Mr. Rove in our Q&A session (the changing US electorate, small business healthcare spending, taxes, etc.).


For now, I’ll spare you having to watch the DVR version of this weekend’s Meet The Press where CNBC’s money-honey-mini, Erin Burnett, espoused her unqualified US political strategy thoughts about how the economy has seen the “stimulus really work” and give you some proactive political predictions that you can hold Karl Rove to: 

  1. The Republicans will win the House by a wider than expected margin.
  2. The Democrats will cede at least 8 seats to the Republicans in the Senate.
  3. The anti-incumbent vote in America will be pervasive theme. 

“Anti-incumbent” means anti any professional politician in Washington who sold you a bill of dry heaves in the most recent election, or as Mr. Rove called them, incumbent politicians with a “D” after their name who are perceived to be easiest to blame. Shock-and-awe, eh? A Republican strategist concluding that the Democrats are going to get rolled over in the mid-terms!


Well, take it from one Canadian with an American family looking to be on the right side of this immediate term TRADE rather than get stuck in the partisanship of being wrong and blaming someone else’s politics for it – I think Rove’s got this one right.


If you’d like the slide deck that backs Rove’s analysis and the replay of the conference call, please email . I’ll be happy to print the most analytical rebuttal to Mr. Rove’s conclusions, provided that you let me print your name on the analysis like he did with his. This is the only way I know to strap on the accountability pants folks. I’d much rather be proven wrong here than remain wrong…


Whether we like politics or not, we all have to play the risk management game that’s in front of us. To spend or not to spend more taxpayer moneys on “stimulating” the economy, remains the question.


The SP500 was down -1.2% yesterday to 1091, taking its cumulative decline since its YTD high on April 23rd to -10.4%, and its YTD loss for 2010 to -2.2%. Was yesterday’s weakness related to an expectation mismatch associated with an alleged “better than expected” employment report on Friday? Or was it based on another partisan “spending plan” of $50 BILLION that Americans don’t buy into?


Plenty more questions remain for the Fiat Spending Bulls this morning than there are answers. I don’t need Karl Rove to remind me of that. My immediate term support and resistance levels for the SP500 are now 1086 and 1107, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Someone Gets To Be Canadian - 1


McDonald’s is scheduled to report its August sales numbers before the market open tomorrow.  August 2010 had one less Saturday, and one additional Tuesday, than August 2009. 


Below, I go through my take on what numbers will be received as GOOD, BAD, and NEUTRAL, for MCD comps by region.  For comparison purposes, I have adjusted for calendar and trading day impacts.  To recall, July same-store sales exceeded street expectations and I fully expect that August will also surprise to the upside.   



U.S. (facing a relatively easy 1.7% compare, including a calendar shift which impacted results by -0.7% to -0.8%, varying by area of the world): 


GOOD:  5% or greater would be perceived as a good results because it would imply that the company was able to improve U.S two-year average same-store sales (by ~30+ bps) on a sequential basis.  This would be a strong number in light of the average same-store sales figures for 2010, but it is clear that McDonald’s top-line has stepped up meaningfully and I actually expect a print of 7% or more for August.  This would be far in excess of the current consensus same-store sales number of 4.4% for the U.S. August results.  Smoothie sales continue to be strong; while a result of 5% or greater would be received positively by the Street, a number of 7% or more is in play. 


NEUTRAL:  Roughly 4% to 5% implies two-year average trends that are approximately in line with those seen in July.  I would view this range with a positive bias and expect any neutral result to fall in the upper quintile.  Lower than that would be slightly disappointing. 


BAD:  Below 4% would indicate that two-year trends have deteriorated on a sequential basis.  Following two consecutive strong months of top-line performance in the United States, it would be disappointing if two-year trends were to slow from here.  Sales of smoothies, said on the 2Q earnings call to be “blowing away high-end projections”, remained “top contributors” to sales growth in July.  I expect that sales of smoothies and core products improved on a sequential basis in August.



Europe (facing a relatively easy 3.5% compare, including a calendar shift which impacted results by -0.7% to -0.8%, varying by area of the world):



GOOD:  6.5% or better would be a good result for MCD’s Europe operations as it would imply a level two-year trend following a strong month in June.  While a print of 6.5% would actually be a sequential slowdown in trends of approximately 10 bps, it would represent the highest same-store sales results since September 2009.


NEUTRAL:  5.5% to 6.5% would imply two-year average trends that had declined slightly below those seen in July.  This would be received as NEUTRAL because July trends were particularly strong on a two-year basis, therefore a deceleration, provided it is only marginal, would not be viewed with much disappointment.


BAD:  Below 5.5% would imply two-year average trends that have declined sharply from July’s results.  The Street is expecting a number of 5.2%, but it seems that the global business has been performing strongly and exceeded expectations in July – I believe it will once again do so in August.




APMEA (facing a relatively easy -0.5% compare, including a calendar shift which impacted results by -0.7 to -0.8%, varying by area of the world):


GOOD:  A print of 10% would imply trends roughly in line with those seen in July.  Any improvement would, of course, be well-received, but a print that sustains the strong improvement in July from June’s poor number would be viewed positively.  


NEUTRAL:  Comparable-store sales of 8% to 10% would result in two-year average trends slightly below those seen in July but still above the lower level implied by June’s result.  On a one-year basis, this range also implies a number far in excess of the disappointing APMEA sales results of March, April, and May.   


BAD:  Same-store sales of 8% or less would imply a significant sequential slow down from July’s trends.  Additionally, if the result is in the region of 7.5% or lower, it would imply results even worse than June on a two-year average basis.  The Street is expecting a number of 7.4%.  I believe this is conservative given that a print of 7% would yield a two-year average number of 3.6% - a mere 20 bps over the trough December two-year number. 




Howard Penney

Managing Director

EARLY LOOK: Accept Uncertainty

This note was originally published at 8am this morning, September 7, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.



EARLY LOOK: Accept Uncertainty - Van Gogh




“For my part I know nothing with any certainty, but the sight of the stars makes me dream.”
-Vincent van Gogh
Back to the grind this morning. I’ll try to kick things into gear by keeping this tight. I’ll start where I always do, utilizing real-time market prices and the governing principles of chaos theory in our macro models. Managing risk in this increasingly interconnected global marketplace always starts with accepting uncertainty.
Chief of the Reserve Bank of Australia, Glenn Stevens, had this to say overnight as he kept Aussi rates unchanged at 4.5%:
“With growth in the near term likely to be close to trend, inflation close to target and with the global outlook remaining somewhat uncertain, the board judged this setting of monetary policy to be appropriate for the time being.”
Crisp, concise, and the to the point. To be sure, saying “somewhat uncertain” was pointed directly at Ben Bernanke who calls today’s global economy “unusually uncertain.” Altogether, global risk managers and central bankers alike should simply accept uncertainty in what it is that they do.
While I’m not certain about what it is exactly that Bernanke does in managing multi-factor and multi-duration global macro risk every day, I am certain about what it is that Congress does whenever they have an economic problem to solve for – spend.
Taking President Bush’s lead in increasing government spending, President Obama introduced another $50 BILLION in stimulus spending over the long weekend. This isn’t a political point – it’s a mathematical one. As you increase the numerator (spending) and the denominator continues to shrink (GDP), the ratio of US deficit/GDP goes up.
While there was some sort of sadistic fanfare associated with a 9.6% unemployment rate in this country being “better than expected” on Friday, we are going to look at the current intermediate term TRENDS in both US employment and consumption for what they are and we’re going to cut our US GDP growth estimate from 1.7% for Q3 to 1.3%.
What are the main macro signals in the US marketplace that continue to flash slowing growth?
1.      US Currency – the US Dollar was down last week for the 12th week of the last 14, losing another -1.1% of its uncertain value as the world’s reserve currency. Perhaps the President’s plans for additional stimulus leaked into week’s end. You tell me.


2.      US Bond Yields – after rising from its YTD lows last week, the interest rate on 10-year US Treasuries are falling again this morning back down to 2.65%. Notwithstanding that our intermediate term TREND line of resistance remains much higher (up at 3.01%), the reality here is that the bond market doesn’t lie about US GDP growth; politicians do.


3.      US Equities – after a big rally from oversold lows (we covered most of our short positions between August 24th and 25th walking through the math associated with the 1040 level being an important level to book gains on the short side), the SP500 remains bearish from an intermediate term TREND perspective. Our Bear Market Macro line in the sand remains 1144, and we have immediate term TRADE resistance at 1107.

This isn’t to say that there aren’t other countries, currencies, and commodities in this world that won’t do well in this uncertain macro marketplace (after being bearish on them for the first half of 2010, we are long Chinese equities via the CAF). This is simply an opportunity to recognize that there is nothing “unusual” about how currency, bond, and equity markets in the US are correlating.
What could change our view that US GDP growth is slowing?
1.      Weekly Jobless claims dropping, sustainably, below 390,000.

2.      Weekly MBA mortgage applications showing some semblance of a demand signal for US Housing (as opposed to the lowest levels of demand since 1997).

3.      Weekly price performance of US currency, US Treasury bonds, and US stocks changing their intermediate term TRENDS for at least 3 consecutive weeks.

What could change our call for American Austerity (Q3 Hedgeye Macro Theme)?
1.      Slowing US government spending

2.      Accelerating US GDP growth

Unfortunately, despite the “sight of the stars” of the northern lights last week, I am certain that I see neither government spending nor growth in America changing their respective bearish paths this morning.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer


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