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R3: RL, TNF, SKS, and Fashion Trucks

R3: REQUIRED RETAIL READING

September 16, 2010

 

For first time in a while we’re seeing a handful of news items centered on growth and new concepts.  However, none of them are in a conventional sense.  Keep an eye out for another British invasion as well as mobile stores (in the form of trucks).

 

 

RESEARCH ANECDOTES

 

- With smartphones now representing 25% of cellphone ownership, mobile advertising is quickly becoming the fastest growth vehicle in the advertising industry.  As a result, mobile advertising is expected to account for about 20% of online ad budgets next year.

 

- Keep an eye on U.S expansion by British retailer, All Saints.  The company which is centered around a dark, vintage aesthetic has plans to open 50 U.S. stores over the next 5 years.  There are currently 6 domestic locations.  In the U.K. the retailer has amassed over $200 million in sales in just over 4 years.

 

- First it was a food truck revolution and now it maybe a fashion truck revolution.  In accordance with LA’s fashion week, a handful of designers and brands are setting up mobile stores.  These trucks are then tied in to Twitter or other mobile-based location tools to alert customers where they are parked at any particular time.  While this trend is still too small to matter, it certainly puts a twist on a traditional pop-up shop and calls “rent” into question.  Furthermore, it seems like this may be the ultimate “store” for testing new products or new markets.

 

 

OUR TAKE ON OVERNIGHT NEWS 

 

RL and TNF Score Victory Against Chinese Cybersquatters - Polo Ralph Lauren Corp. and VF Corp.’s The North Face unit scored a major victory against Chinese cybersquatters, but collecting the damages may be another matter entirely. A court in the Southern District of New York awarded the brands $78 mm, which is believed to be the highest sum of damages ever awarded in an Internet counterfeiting case. Initially filed in March, the lawsuit pitted the apparel brands against a network of more than 130 Chinese Web sites selling counterfeit goods to U.S. customers through up to 6,500 domain names such as laurenpolo.com and officialnorthface.com. <wwd.com/business-news>

Hedgeye Retail’s Take: While not often talked about, counterfeiting remains a huge challenge for these brands and others, especially within the Chinese market.  Interestingly, the Chinese government has recently been more sympathetic to Western brands in helping to crack down on the problem.

 

Dolce and Gabban Unveil New Retail Concept - Domenico Dolce and Stefano Gabbana are about to unveil a groundbreaking new retail concept — and this time, the Milanese fashion duo isn’t shy about highlighting the work of other designers. This weekend, Dolce & Gabbana will open Spiga2, a multibrand boutique that is curated by Dolce and Gabbana and features the work of young, emerging designers from around the world. The store is located at Milan’s Via della Spiga 2, which was previously an accessories-only store for the brand. Dolce and Gabbana handpicked the pieces they are planning to sell in the store, and the first run of designers includes Behnaz Sarafpour, Sophie Theallet, Yigal Azrouël, Fannie Schiavoni, Erkan Coruh, Peter Jensen and Heather Williams. <wwd.com/retail-news>

Hedgeye Retail’s Take: The focus on emerging designers remains high, as it seems many larger brands are searching for their next big growth vehicle.  Given the cost to start a fashion brand, it makes sense for lesser established designers to partner with those that can help expand reach and broaden distribution and awareness. 

 

Footwear News Teams Up with SKS - Footwear News has selected this seasons’ hottest heels — and starting now, consumers can vote for the sexiest pair. A special limited-edition magazine will launch today in select Saks Fifth Avenue stores, as will the “Sexy Shoes” contest. Voting is open to the public and will take place online, as well as at the 10022-SHOE boutique in the flagship Saks Fifth Avenue store in New York. Top designers featured in the contest include Christian Louboutin, Manolo Blahnik, Jimmy Choo, Chanel, Miu Miu and Dolce & Gabbana, among other big names.

 <wwd.com/footwear-news>

Hedgeye Retail’s Take: In other words, the women’s fashion footwear department at Saks has turned itself into a NCAA-style bracket.  Yet another example however of the democratization of fashion.  Online campaigns such as this one continue to encourage consumers to “vote” for what they like, which in theory should help retailers and brands better align themselves with what the market is looking for. 

 

New York Retailers Benefit from Fashion's Night Out - New York retailers said they were ecstatic over the boost they received from the second-annual Fashion’s Night Out. For brand Ralph Lauren, the citywide event that took place last Friday, was a major improvement from the previous year.  Stuart Weitzman, who spent FNO making appearances at his Columbus Circle and Madison Avenue locations, said the night drew more consumers into his stores than last year’s event. The designer added that being open until 11 p.m. instead of closing at the normal 6 p.m. time helped add to sales. The 2010 event equated to more than just extra foot traffic, it doubled some retail stores best sales days yet. <wwd.com/footwear-news>

Hedgeye Retail’s Take: Not only did it seem like this year’s event was better marketed, it also compares against one of the more difficult years for Fashion Week.  If anyone was in NYC this week, then it was pretty hard to ignore all things fashion. 

 

D6 Sports Licenses Action Sports Brands - D6 Sports announced its licensing acquisitions of World Industries, Zoo York, Mark Ecko, Bratz, Moxie Girlz, BFC Ink and Skelanimals. Along with the Airwalk, TapouT, Jester and No Rules action sports lines it already holds, D6 Sports said its poised to become the leading provider of action sports licensed products to the sporting goods channel. <sportsonesource.com>

Hedgeye Retail’s Take: With this stable of growing brands, we wonder how long before Iconix takes a hard look at D6. OR, maybe they already have. 

 

Theory Looking to Buy Proenza Schouler Brand - According to several sources, Theory’s Andrew Rosen is looking to buy the Proenza Schouler brand from European private equity fund Permira. The rumor first surfaced in the early spring, but Rosen, Theory’s co-founder and president, denied it at the time. However, talk of a deal resurfaced this week, and sources are confident Rosen and the Proenza Schouler designers are up to something this time. <wwd.com/business-news>

Hedgeye Retail’s Take: Recall that Proenza changed hands as a result of its parent, Valentino, also landing in the hands of Permira.  The brand has long been rumored to be for sale, although this time the potential buyer seems more feasible than prior whispers.

 

Coalition Asks Congress To Aide in Lower Shipping Rates - A coalition of importer, exporter and logistics associations is asking Congress to help change the law governing antitrust immunity for international ocean carriers, arguing that shipping rates should be set by market forces and not foreign-based companies “acting in concert.” Retailers, importers and exporters argue that carriers, particularly in the U.S. westbound and eastbound Pacific trade routes, charge identical or similar rates, break contracts to enact surcharges, bump containers off ships and refuse to load cargo without additional compensation. <wwd.com/business-news>

Hedgeye Retail’s Take: A fair request indeed as price fixing rarely benefits the customer and is typically immune to the underlying supply/demand forces, but there are no quick fixes here. Don’t expect these efforts, which have been cited regularly as a key inflationary factor in the near-term to save retailer’s margins in the 2H.

 

The Game of Online Free Shipping - Although free shipping of one form or another has become common on e-commerce sites, merchants must decide whether it really improves business or becomes just another cost to bear. Several merchants advise testing what works best with different product categories and pricing strategies—for example, offering free standard shipping only for light-weight but high-margin products, or setting a minimum order value. RestockIt.com, an online-only retailer of office and restaurant supplies has experienced conversion rate hikes of 20% to 30% through free shipping offers. RestockIt.com  has found free-shipping works best by offering it as standard fare on more than 100,000 of its higher-margin products. <internetretailer.com>

Hedgeye Retail’s Take: The cost of shipping heavier and therefore more expensive items is not as important in retail than some other industries, perhaps aside sporting goods/exercise equipment, but as we highlighted in our August e-commerce Black Book and have included below, there is no question free shipping is a critical factor in the consumer’s purchasing decision tree.

 

R3: RL, TNF, SKS, and Fashion Trucks - 1

 

Bangladesh: New Fiscal Package for Garment Exporters - Funded by the Export Development Fund, Bangladesh is offering a second stimulus package for ready-made garment exporters, which includes offering $10 million loans as well as continuing the five-percent cash incentive programme on the total value of exports. <fashionnetasia.com>

Hedgeye Retail’s Take: A 5% incentive program when new minimum wages remain at unacceptably low levels at $43 versus the $75 proposed, is likely to do little to drive productivity in a country with a disenfranchised workforce.

 

Pakistan: Discussion Over Trade Concessions with the EU - After a two-day meeting with the European Union foreign ministers in Brussels last week, Pakistan will be granted extraordinary trade concessions, which are set to bolster flood-devastated nation and help Islamabad tackle extremism. <fashionnetasia.com>

Hedgeye Retail’s Take: With floods impacting nearly 15% of the Pakistani population, the #4 global producer of cotton is going to require continued relief. This issue will continue to weigh on prices near-to-intermediate term.

 

Cost of Cotton Production Rises - The International Cotton Advisory Committee (ICAC) Secretariat undertakes a survey of the cost of cotton production at three-year intervals. During the last three years, the cost of production of seedcotton increased to US$0.43 per kilogram. The cost of production of cotton lint (net of land rent and the value of seed) increased to $1.22 per kilogram, a 17% increase from the average cost estimated in 2006/07. Lower yields in 2009/10 compared with 2006/07 were the main factor resulting in the rise in production costs. The net cost of production averaged about $1.15 per kilogram in Asia and West Africa. The Fruitful Rim region of the US, followed by Colombia and China, had the highest costs of production. India, whether irrigated or rainfed, had the lowest production costs for cotton because of recent increases in yields and high values for seed. The most recent survey was completed this month using data from 2009/10. Thirty-four countries participated in the latest survey, providing 63 entries, including rainfed and irrigated regions and regions within countries. <fashionnetasia.com>

Hedgeye Retail’s Take: Cotton / apparel cost inflation is likely to continue impacting prices, however remains secondary to the critical factors of global supply/demand dynamics.


INITIAL JOBLESS CLAIMS DOWN A HAIR

Initial Claims

Initial claims fell 3k last week to 450k (falling 1k net of the revision). Rolling claims came in at 465k, a decline of 13.5k over the previous week. Reported claims are now at the low end of the YTD range of 450-470k that the series has occupied for all of 2010. While the series is improving in the last few weeks, the reality is that claims still need to be 50-75k lower than they are now before unemployment will start to improve.

 

INITIAL JOBLESS CLAIMS DOWN A HAIR - 1

 

INITIAL JOBLESS CLAIMS DOWN A HAIR - 2

 

In the table below, we chart US equity correlations with Initial Claims, the Dollar Index, and US 10Y Treasury yields on a weekly basis going back 3 months, 1 year, and 3 years.

 

INITIAL JOBLESS CLAIMS DOWN A HAIR - 3

 

September will be the final month for meaningful census drag on employment in the economy.

 

INITIAL JOBLESS CLAIMS DOWN A HAIR - census chart

 

Joshua Steiner, CFA

 

Allison Kaptur


TWO POSITIVES FOR FINANCIALS - INITIAL JOBLESS CLAIMS DOWN A HAIR; YIELD CURVE WIDENS WEEK OVER WEEK

Initial Claims

Initial claims fell 3k last week to 450k (falling 1k net of the revision). Rolling claims came in at 465k, a decline of 13.5k over the previous week. Reported claims are now at the low end of the YTD range of 450-470k that the series has occupied for all of 2010. While the series is improving in the last few weeks, the reality is that claims still need to be 50-75k lower than they are now before unemployment will start to improve.

 

TWO POSITIVES FOR FINANCIALS - INITIAL JOBLESS CLAIMS DOWN A HAIR; YIELD CURVE WIDENS WEEK OVER WEEK - rolling

 

TWO POSITIVES FOR FINANCIALS - INITIAL JOBLESS CLAIMS DOWN A HAIR; YIELD CURVE WIDENS WEEK OVER WEEK - raw

 

 

Yield Curve

The following chart shows the yield curve (2-10 spread) by quarter with the chart below that showing the sequential change. The 2-10 spread (a good proxy for industry NIM) has been compressing for the past two quarters. Yesterday’s closing value of 224 bps is up from 214 bps last week.

 

TWO POSITIVES FOR FINANCIALS - INITIAL JOBLESS CLAIMS DOWN A HAIR; YIELD CURVE WIDENS WEEK OVER WEEK - spread

 

TWO POSITIVES FOR FINANCIALS - INITIAL JOBLESS CLAIMS DOWN A HAIR; YIELD CURVE WIDENS WEEK OVER WEEK - spread change

 

The table below shows the stock performance of each Financial subsector over four durations. 

 

TWO POSITIVES FOR FINANCIALS - INITIAL JOBLESS CLAIMS DOWN A HAIR; YIELD CURVE WIDENS WEEK OVER WEEK - price perf

 

September will be the final month for meaningful census drag on employment in the economy. 

 

TWO POSITIVES FOR FINANCIALS - INITIAL JOBLESS CLAIMS DOWN A HAIR; YIELD CURVE WIDENS WEEK OVER WEEK - census chart

 

Joshua Steiner, CFA

 

Allison Kaptur


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THE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - September 16, 2010

As we look at today’s set up for the S&P 500, the range is 24 points or -1.61% downside to 1107 and 0.53% upside to 1131.  Equity futures are trading below fair after markets this morning. Yesterday, U.S. equities succeeded in reversing earlier declines yesterday to close up on the day as investors shrugged off a disappointing NY Empire State manufacturing reading.

Today's macro releases include Initial Jobless Claims and September Philadelphia Fed Index.

  • AAR (AIR) reported 1Q EPS 35c vs estimated 30c
  • Abbott Labs (ABT) got a split decision from a U.S. panel on whether to recommend its diet pill Meridia to stay on market.
  • Amerigroup (AGP) boosted its stock repurchase program by $200m
  • Clarcor (CLC) boosted the low end of its 2010 EPS forecast
  • Dress Barn (DBRN) sees 2011 adjusted EPS $2.05-$2.15 vs estimate $2.09
  • Fifth Third (FITB) said it will acquire National Processing Co.
  • GameStop (GME) said it will buy back $500m in stock, debt
  • NPS Pharmaceuticals (NPSP) plans to sell $41.2m shares

PERFORMANCE

  • One day performance: Dow +0.44%, S&P +0.35%, Nasdaq +0.50%, Russell +0.50%
  • Month-to-date: Dow +5.56%, S&P +7.2%, Nasdaq +8.84%, Russell +8.35%
  • Quarter-to-date: Dow +8.16%, S&P +9.13%, Nasdaq +9.09%, Russell +7.03%
  • Year-to-date: Dow +1.38%, S&P +0.87%, Nasdaq +1.4%, Russell +4.31%

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: +174 (+400)
  • VOLUME: NYSE - 901.21 (-2.44%)  
  • SECTOR PERFORMANCE: Mixed performance - 5 sectors rose and 3 declined - the RECOVERY trade under-performed again yesterday.
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Pall +6.26%, Novell +5.92% and Mckession +5.39%/AK Steel -5.78%, Time Warner -4.97% and Micron -4.54%
  • VIX: 21.56 +2.50% - YTD PERFORMANCE: (+1.94%)           
  • SPX PUT/CALL RATIO: 1.53 from 1.58 -3.33%  

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 14.80 0.203 (1.391%)
  •  3-MONTH T-BILL YIELD: 0.15% unchanged
  • YIELD CURVE: 2.24 from 2.18

COMMODITY/GROWTH EXPECTATION:

  • CRB: 279.05 -0.93%
  • Oil: 76.02 -1.01% 
  • COPPER: 346.65 -0.06%
  • GOLD: 1,267 -0.20%

CURRENCIES:

  • EURO: 1.3001 -0.07%
  • DOLLAR: 81.491 +0.51%

OVERSEAS MARKETS:

Europe

  • Markets: FTSE 100: (0.12%); DAX +0.07%; CAC 40 (0.12%)
  • Major bourses remain locked into a narrow trading range with investors largely sidelined while economic indicators continue to paint an inconclusive picture on the state of the global economy.
  • Gains in Oil & Gas and Industrial Goods sectors have been offset by declines in Basic Materials, Autos Travel and Telecoms.
  • Volumes remain below seasonal average
  • Greek officials have ruled out the possibility of default, according to the FT
  • Spain sells €1.28B 30-yr Bond at average yield of 5.077% vs previous 5.908% with a bid-to-cover ratio of 2.1 vs previous auction 2.44 last and €2.72B 10-yr Bond at average yield 4.144% vs previous 4.86% with a bid-to-cover ratio 2.3 vs previous 1.88
  • UK Aug Retail Sales (0.5%) m/m vs cons +0.3%

Asia

  • Markets: Nikkei (0.07%); Shanghai Composite (1.89%)
  • Regional markets closed mostly lower in the wake of yesterday’s market intervention to weaken the yen. Japan rose in the morning, but gave up the gains on afternoon declines in commodity stocks. China fell again amid concerns tighter bank capital requirements may subdue credit growth.
  • Australia dropped as miners declined on stalled metal prices
  • Japan July tertiary industry activity index +1.6% m/m to 98.9. 
Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends

 

THE DAILY OUTLOOK - S P

 

THE DAILY OUTLOOK - VIX

 

THE DAILY OUTLOOK - DOLLAR

 

THE DAILY OUTLOOK - OIL

 

THE DAILY OUTLOOK - GOLD

 

THE DAILY OUTLOOK - COPPER


THE M3: MELCO COTAI LAND PREMIUM; HOUSE OF DANCING WATER; 10K WORKERS NEEDED; IMPORTED WORKERS

The Macau Metro Monitor, September 16th 2010

 

MELCO TO PAY AN EXTRA 257M PATACAS IN PREMIUM SCMP

MPEL will need to pay an extra 257 million patacas in land premium after the Macau government revised the land grant for CoD.  The fee is on top of the 842 million patacas premium payable under Melco Crown's 2008 land grant.  It was revised to allow a bigger, yet-to-be-developed apartment-hotel tower of 140,000 square metres, up from 106,000 sq.metres.

 

MACAU'S HOUSE OF DANCING WATER WILL BE PROFITABLE "IN A FEW YEARS TIME": LAWRENCE HO macaubusiness.com, SCMP

CEO Lawrence Ho says HDW will be profitable in a "few years time".  Ho added that the HDW event is helping the company gain brand recognition.  HDW is set to open to the public tomorrow, after a special VIP preview scheduled for today.

 

MACAU'S TOURISM SECTOR WILL NEED 10,000 NEW WORKERS NEXT YEAR: GOVERNMENT macaubusiness.com

The director of the Macau Government Tourist Office, João Manuel Costa Antunes, says the local tourism industry will need 10,000 new workers in 2011 if all the projects in the pipeline open as scheduled.

 

IMPORTED WORKERS ON THE RISE macaubusiness.com

The number of imported workers has increased for the second month in a row, after almost two years of decline.  In July, the total number of non-resident workers in Macau stood at 72,209, slightly up by 67 people in comparison with the previous month.


EARLY LOOK: The Safety of Academia

HAA: Cash 52%, Int'l FX 21%, Bonds 12%, Commodities 6%, Int'l Equities 6%, US Equities 3%

 

 

 

"Those who give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety."
-Ben Franklin

 


Yesterday afternoon the Hedgeye foot soldiers of the independent research gridiron rolled out of 111 Whitney to Luce Hall Auditorium for a 4PM roundtable discussion on “US Financial Reform: The Dodd-Frank Act – Will It Work?” The Moderator was Ernesto Zedillo (34th President of Mexico) and the participants were Robert Shiller (Yale), Thomas Cooley (Stern School of Business), and Stephen Roach (Morgan Stanley).

 

 

EARLY LOOK: The Safety of Academia - chart1

 

 
Until Roach started laying into some of academia’s Perceived Wisdoms about modern day risk management, it was a moderately boring event. It took Zedillo 13 minutes to introduce the financial crisis and pump Cooley’s recent books, then he handed it off to Shiller and Cooley whose main contributions to the debate were to A) support Dodd-Frankenstein and B) mock anyone who has worked at the Whitehouse who doesn’t have a Ph.D. in economics.
 
Now I’m a big fan of both mocking some of the financial academics in the West Wing and of Robert Shiller’s mean reversion work. He was my professor here at Yale in the mid-90s and I’m not going to ride his love-boat this morning, but he is one of the most important Risk Managers of modern day bubble making in the Fiat Republic.
 
Shiller made me smile when he acknowledged that Barney Frank was a poli-sci Ph.D. dropout and has certain barriers of competence on financial risk management matters. Pleasantries aside, Shiller’s idea that America’s economic resolve is going to be found within the Safety of Academia made me nauseous.
 
I certainly don’t always agree with Steve Roach, but his basic conclusion on Dodd-Frankenstein was that “it’s a framework” that will render itself an “insufficient solution” to this economic mess. While Tom Cooley was mocking the likes of Treasury Secretaries who don’t come from the Safety of Academia, Roach (who has his Pd.D. from NYU) was quick to remind him that the biggest joke of all is watching their academic colleagues at a G-20 summit talk about real-time markets. Zedillo didn’t like that.
 
While Shiller and Cooley were focused on whether or not Dodd-Frankenstein Reform would have prevented Lehman Brothers from imposing systemic risk on the US financial system, Roach was more concerned with its ability to prevent the next financial crisis. I agree with Roach’s main conclusion on the root cause of the US financial system becoming as compromised as it has  - US monetary policy. Zedillo didn’t like that either.
 
Shiller didn’t disagree with Roach on the Fed’s impact. Thank God. But the former Mexican Secretary of Education (Zedillo), didn’t like Roach going after another highly regarded academic (Ben Bernanke). This is the debate that needs to be had in this country. Is the root cause of all our leverage and liquidity problems simply the implementation of an academic ideology that monetary policy should only be used as a blunt instrument on the way down and not on the way up?
 
Roach knocked the pins down pretty convincingly on what the Federal Reserve’s objectives should be:
 
1.      Full employment  (1946 Employment Act)

2.      Price Stability (1976 Humphrey-Hawkins Act)

3.      Financial Stability (2010 Dodd-Frankenstein, God help us Act)

 
On Full Employment (economic growth) and Price Stability (inflation), it’s very hard to argue that the last decade of America operating under the Greenspan/Bernanke academic ideologies has worked (net American private sector job adds in the last decade has been ZERO).
 
This shouldn’t be a surprise, neither Greenspan nor Bernanke saw any success applying their academic theories as practitioners of real-time risk management. Volcker’s decade (1980’s, where net private sector job adds was +18 MILLION) was much more successful on both the Full Employment and Inflation scores.
 
On Financial Stability, I don’t think Dodd-Frankenstein supporters have any legitimate claim at this point that it can supersede or contain the long term TAIL risks that the current monetary policy of our Fiat Republic imposes. As both Harvard’s Ken Roggoff and Yale’s John Geanakoplos have both recently concluded, understanding financial crises starts and ends with the cycle of leverage.
 
The US Federal Reserve and the Bank of Japan (and now the European Central Bank) have all attempted to manipulate the cost of and access to that leverage. Since Paul Krugman used his economics Ph.D. to advise the BOJ to “PRINT LOTS OF MONEY” in 1997, the Safety of Academia hasn’t shown this modern day Risk Manager with a BA in Economics something that’s actually worked.
 
I continued to intervene in the Hedgeye Portfolio yesterday, reducing risk by making more sales on this market’s immediate term TRADE strength. In the last 48 hours I’ve gone from a mix of 14 LONGS/7 SHORTS to 13 LONGS/10 SHORTS. That’s the only way to protect my family and firm from the failed policy makers of this world who keep coming up with new policies to creatively destruct our economic liberty.
 
My immediate term support and resistance levels for the SP500 are now 1107 and 1131, respectively.
 
Best of luck out there today,
KM
 
Keith R. McCullough
Chief Executive Officer
HEDGEYE RISK MANAGEMENT


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