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R3: Plus Sizes, Forever 21, NKE, and Leather


September 22, 2010


Investors and retailers alike continue to place bets on the growing plus size market, this time with a purchase out of bankruptcy.  Despite obesity rates being at all time highs, retailers until now have struggled with profitably reaching this demographic 





-According to the Luxury Institute, 57% percent of high-end consumers identify quality customer service as a defining characteristic of luxury goods.  However, expense cuts over the past year or so have left 50% of luxury consumers noticing a drop off in the quality of the luxury consumer experience. Additionally, 76% of respondents believe high quality of the goods themselves is a defining characteristic of a luxury product, while at the same time 51% of consumers believe quality has declined.


-According to CoStar, investment in retail real estate has been steadily improving throughout 2010.  Through the first 8 months of the year, $22 billion has been invested in retail related properties.  This marks a substantial pick up from 2009, which saw total investment of $12 billion for the entire year.  There are also signs that this trend may continue, with signs beginning to show that lenders are beginning to feel comfortable disposing their distressed assets in an effort to clean up their books.


-For the first time, more computer games were purchased via online downloads than in retail stores, according to NPD. So far in 2010, PC game sales sold in brick and mortar stores still have a dominant 57% share, but if higher ASPs in physical stores continues, online  downloads will take over which will have implications for retailers from GME to BBY.


-Fashion ads may soon have to label photos that have been retouched curbing the latest trend from too thin to impossibly skinny. With brands and designers becoming increasingly liberal in their use of photoshopping subjects (recall RL’s ad controversy in Japan involving Flippa Hamilton), the British government is convening next month to evaluate the effects of these fallacious representations on their female audience. While the soda industry adopted labeling for caffeine, we suspect the outcome here is likely to require more than a simple label.





Urban Brands Bought Out of Bankruptcy - Urban Brands Inc., parent company of the Ashley Stewart plus-size specialty apparel chain, inked a deal with an affiliate of Gordon Brothers to buy the business out of bankruptcy proceedings. The Secaucus, N.J.-based Urban, along with 54 affiliated debtors, filed Chapter 11 petitions for bankruptcy court protection Tuesday in a Delaware bankruptcy court. Urban Brands operates 210 stores in 26 states and has 2,100 employees. <wwd.com/business-news>

Hedgeye Retail’s Take:  Looks like the start of another attempt to capitalize on the plus-size trend.   Unfortunately, the holy grail of retailing targeting this demographic has yet to be found (profitably).  Despite this, obesity in the U.S remains at record levels, leaving the potential for getting the business fixed very high. 


Canadian Sporting Goods Company Forzani Sees Sales Lift in BTS - The Forzani Group Ltd. reported same-store sales climbed 5.8% in seven weeks ended Sept. 19. Comps at its corporate stores jumped 8.9% while comps at its franchised locations dipped 0.2%. In the two weeks ended Sept 19, comps grew 8.1%. A 12.1% gain in corporate comps offset a decline of 0.1% at franchised locations. In the five weeks ended Sept 5, comps advanced 4.8% with corporate comps up 7.4% and franchise comps sliding 0.4%. <sportsonesource.com>

Hedgeye Retail’s Take:  No surprise here as the Canadian market is mirroring the same product and inventory trends we see here in the U.S.  Less competition in that market also helps. 


Forever 21 in India - Fashion brand Forever 21 has made a foray into the Indian retail market, opening a 10,000 square feet flagship store in New Delhi. The store was inaugurated by Bollywood's sultry actress Bipasha Basu and Forever 21's president, Alex Ok. Don Chang, owner and founder of Forever 21 said, "The Indian women truly understand and appreciate fashion and opening of Forever 21 will encourage fashionistas to give into their style desires and will provide them a much needed “Fashion Stimulus." <just-style.com/news>

Hedgeye Retail’s Take:  Nothing really surprises us anymore when it comes to Forever 21.  The brand continues to persue unabated growth across multiple store formats, varied real estate profiles, and now multiple geographies.   


Plus Sized Retailer Avenue Launches Mobile Shopping App - Avenue, a premier plus size brand in the portfolio of Redcats USA, launched its iPhone application. This new application enables fashion enthusiasts to now experience and shop a streamlined version of Avenue's website at the click of a button. They can also browse new arrivals, search for specific items, take advantage of Avenue's great promotions and deals, make purchases with just a few clicks, and find the closest Avenue retail store within a matter of seconds.  <retailsolutionsonline.com>

Hedgeye Retail’s Take:  More plus size in the news, this time mixed with m-commerce.  We continue to believe mobile shopping is nothing more than e-commerce on a smaller screen.  The better the technology, the more likely transactions will begin to take place. 


Japanese Athletic Company Mizuno Launches New Global Golf Brand JPX - Mizuno, the leader in golf technology and innovation, is set to launch a new global brand, "JPX", to deliver the highest performing game improvement equipment in the world. Superceding the award winning MX line of equipment, the JPX brand will bring Mizuno's very latest game improvement technologies to the United States. JPX will complement Mizuno's legendary MP Series, which is world renowned amongst professionals and better amateurs. Heading the JPX launch are the JPX-800™ and JPX-800 Pro™ irons. <worldgolf.com>

Hedgeye Retail’s Take:  Based on the description, JPX hardly seems like a new brand.  Instead, it appears to be a line extension or sub-brand under the Mizuno umbrella.  Either way, golf’s anemic growth probably puts a lid on the idea of creating an entirely new brand for a market that has been stagnant for a while.


China: Fujian Province Toughens Control Over Tanners - China’ Fujian province has recently launched a new pollution prevention program for the Quanzhou leather industry to step up pollution prevention and treatment in the region. <fashionnetasia.com>

Hedgeye Retail’s Take:  As we’ve mentioned over the past few months, the Chinese government is focused on cleaning up the tanning industry.  Both regulation and massive tannery closures are expected to take place over the next year or two.  Leather looking more and more like a commodity that could see pricing increases soon.


Local Advertising Sees Slow Rebound Overall but a 30% Increase Online - Local advertising spending is holding up better in 2010 than previously expected, according to estimates from BIA/Kelsey. The firm, which initially predicted a nearly 1% drop in overall local ad spending this year, forecast growth of 2.1% to $133.3 billion by year-end. Drilling down into where that spending will occur, online is the source of all growth in the space. Traditional local spending, after a dramatic plunge in 2009, will continue a downward trajectory through 2011 and will not recover to earlier spending levels. But rising spending on the web will fuel overall increases in the local space from 2010 through 2014. The growth of online local ad spending, along with the stagnation of traditional efforts, will mean online takes an ever greater slice of the local advertising pie in coming years. Online has already increased its share by 50%, from 10% in 2008 to 15% this year. <emarketer.com>

Hedgeye Retail’s Take:  With location based services embedded in smartphones, it certainly feels like the tipping point has been reached for the decline of traditional local advertising.  Penny Shoppers and billboards take note.

R3: Plus Sizes, Forever 21, NKE, and Leather - 1


BBBY: Facing Reality

So here’s the setup on BBBY.  I’m at $0.67 for the quarter, Street is at $0.63 (high-end of guidance).  I’m modeling a 5% comp and modest gross margin expansion.  This represents the first quarter that the company comes up against gross margin gains on y/y basis.  Importantly, I believe they can achieve margin expansion given ’07 and ’08 saw massive margin erosion in the wake of the housing blow up and substantially heightened promotional activity. 


The environment over the past few months has been very much status quo from a promotional standpoint (we’re not talking denim or logo tees here) as well as a demand perspective.  WSM, PIR, KSS, TGT, COST, and TJX all continued to highlight home/soft home as a leading category (i.e actually comping positive), which is consistent with the commentary we’ve been accustomed to hearing over the past 6 months.  Overall there remains substantially less couponing by BBBY a key factor in maintaining margin expansion.


With the fundamentals sound, the sentiment is a bit different heading into the quarter this time vs. last.  Recall,  there was much speculation last quarter surrounding a same store sales miss heading into the print.  BBBY ultimately came through with the top line, although there was substantial volatility into the reporting of results and the shares sold off even with confirmation that sales didn’t tank. 


This time the set-up is more benign, as we haven’t heard many whispers going into tomorrow evening.  The flip side here is the stock is at $42 (almost parity with June 23rd, the date of the last quarterly release) but the environment is slightly more positive towards the space (we can’t ignore the S&P’s 8.8% increase month to date as one of the more positive backdrops).  All in, this quarter largely hinges on guidance for the next quarter and the year.  The Street is currently at the upper end of this quarter’s guidance, but ahead for the remainder of the year.  Like most of retail, the rest of the year that presents the greatest challenge on both top and bottom line comparisons.  We’re concerned that the 19% growth represented by the consensus is very unlikely to be blessed by management.  Yes there is still upside here on the margin line, but you won’t know it come tomorrow’s recorded conference call.  Headlines will run with a “guide down”  spin even if we all know that this management team is one of the most conservative in all of retail. 


Yes, we’d all like to believe all of this conservatism and tough comparison rhetoric is “in the stock”.  However, this is easier said than done and we wouldn’t be surprised to see a sell off even if the underlying prospects remain solid for BBBY.  For the longer term, we’re still comfortable that margins can continue to expand and that cash will either continue to build or eventually be deployed. 


The wildcard remains share repurchase, which management has been very conservative with despite sitting on $1.6 billion in cash and no debt.  This can only mean upside, but we put less than a 50% chance that they stepped it up in a meaningful way.  BBBY is still one of the better retailers out there, with a decidedly favorable competitive position.  We’re just not confident that the stock is well positioned from the long side (come tonight’s results).


BBBY: Facing Reality - bbby2q


Eric Levine



TODAY’S S&P 500 SET-UP - September 22, 2010

As we look at today’s set up for the S&P 500, the range is 25 points or -1.47% downside to 1123 and 0.63% upside to 1147. Equity futures are trading lower tracking amid a sell off among European indices. Today's macro highlights include: MBA Mortgage Purchase Applications and Jul FHFA House Price Index.

  • Adobe Systems (ADBE) forecast 4Q sales $950m-$1b vs est. $1.03b
  • Analogic (ALOG) reported 4Q EPS 56c vs est. 39c 
  • Cintas (CTAS) raised FY EPS forecast to as much as $1.63 from as much as $1.58, vs. est. $1.55
  • EBay (EBAY) said it sees 3Q results near top of July forecast of adj. EPS 35c-37c, rev. $2.13b-$2.18b
  • PMC-Sierra (PMCS) cut 3Q rev. forecast to $161m-$163m from $169m-$177m, vs est. $173.5m
  • Power-One (PWER) plans to buy back 10m shares


  • One day performance: Dow +0.07%, S&P (0.10%), Nasdaq (0.28%), Russell 2000 (0.79%)
  • Month-to-date: Dow +8.62%, S&P +7.45%, Nasdaq +11.13%, Russell +10.4%
  • Quarter-to-date: Dow +10.1%, S&P +10.58%, Nasdaq +11.38%, Russell +9.06%
  • Year-to-date: Dow +3.19%, S&P +2.21%, Nasdaq +3.53%, Russell +6.28%


  • ADVANCE/DECLINE LINE: 839 (-2767)
  • VOLUME: NYSE - 1048.08 (+9.66%)  
  • SECTOR PERFORMANCE: Three sectors rose XLI, XLV and XLE.  There was a clear lack of overall direction following the FED announcement yesterday.  The positives were (1) the softening of European sovereign contagion following "successful" debt auctions in Ireland, Spain and Greece. (2) Worries about a double-dip in housing were eased to some extent following better-than-expected August housing starts data and (3) corporate actions also remained a tailwind for sentiment.
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Nvidia +5.42%, Baxter +3.63% and Vulcan Materials +3.14%/Owens-Ill -6.12%, Sandisk -6.11% and NY Times -5.57%
  • VIX: 22.35 +3.95% - over the past week the VIX is higher and so are stocks - YTD PERFORMANCE: (+3.09%)          
  • SPX PUT/CALL RATIO: 2.01 from 2.16 -7.21%


  • TED SPREAD: 13.42 -0.538 (-3.857%)
  •  3-MONTH T-BILL YIELD: 0.17% unchanged
  • YIELD CURVE: 2.18 from 2.25


  • CRB: 278.36 -0.46%
  • Oil: 74.97 -1.6%% 
  • COPPER: 348.10 -0.67%  
  • GOLD: 1,273 -0.48%


  • EURO: 1.3128 +0.43%
  • DOLLAR: 80.439 -1.10% - Trading below 80 early on 




  • FTSE 100: (0.55%); DAX (0.98%); CAC 40 (1.14%)
  • Major indices are trading sharply lower after being indicated higher pre-open.
  • Banking shares are leading the selloff on concerns over the state of the global economy.
  • Bank of England minutes: BOE voted 8-1 for 0.5% interest rate in Sept
  • BASF raises 2010 outlook


  • Nikkei (0.37%); Shanghai Composite (closed)
  • Most Asian markets that were open posted small gains this morning, but settled to small losses by the end of the day.
  • Japan dipped early on a strong yen, but made up some of the loss as the currency weakened.
  • Securities and real estate were up, while insurance and machinery declined. 
Howard Penney
Managing Director

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99 weeks of unemployment benefits running out and no jobs.  This is the scenario facing many Americans heading into year-end.


Whatever your view on the role of government in today’s economy, it is undeniable fact that government intervention is having a dramatic impact on current conditions as well long term prospects.  With the creation of the Emergency Unemployment Compensation program in 2008, the government provided income for thousands, then millions, of Americans who would have otherwise been left with no source of income.  The result has been a propping up of consumer spending and the chart below shows that story.  The beneficiary, struggling to make ends meet, will spend a large portion of the check he/she receives.  That has helped stimulate consumer spending as more and more people joined the program.


These benefits expiring (in the absence of legislative action), will provide a year-over-year headwind for consumer spending.  As of the most recent data points, there are ~500,000 people receiving benefits under the Tier 4 category of the Emergency Unemployment Compensation program. 




Howard Penney

Managing Director

Embracing Change

So, Tim, how's it going? 



Who would have thought Tim Geithner would be the last man standing on the Obama economic team?


First, let me say for those that don’t know, Lizzie O'Leary (@lizzieohreally) is a Washington D.C.-based correspondent for Bloomberg Television who covers politics and economic policy from the White House, Treasury Department, and Capitol Hill. She is officially a @Hedgeye twerp (a term of endearment).


So, Larry Summers is going back to Harvard.  President Obama campaigned on the theme “change for America” and a change it is.  Not the change we were promised, but one that is long overdue. 


There are so many quotes from Larry, Tim or Ben that I could have used to start off the Early Look today, but I chose a one-liner from the @Hedgeye twitter feed that made me laugh, and there were many.  On a serious note, this country is in need of “change” and a new economic team at the White House is a great place to start. 


Keith said it best last night, @KeithMcCullough – “The dogma of the Robert Rubin/Larry Summers economic ideology has to leave the West Wing if America wants any chance.”


The popular press and the new media just skewered Larry Summers last night, which would have made him an easy target for today’s Early Look’s musing.  If you have not figured it out yet, I have embraced a change in my daily process by integrating Twitter as part of it.  For competitive reasons, I’m not going to say how, but Reuters and Dow Jones need to be looking at the Twitter business model very closely as it is their future. 


The other one-liners that made the highlight reel on the Hedgeye Twitter feed:

  • @Moorehn - Poor Larry Summers. Leaving before he could throw a proper tantrum about a woman joining Obama's economic team. 
  • @HowardKurtz - Larry Summers bailing from WH. Will Obama name a replacement before election and portray it as jumpstarting his economic efforts?
  • @ErikSchatzker - Summers to teach job creation and stable finance at Harvard. Hmm. Reminds me of that old saying about those who can't do.
  • @zerohedge - Summers to resume his job of destroying Harvard's endowment

Ok, back to reality and the euphoria that has made September performance one of the best since the 1930’s.


So far this week, we have learned that the recession has ended and after the close last night the ABC consumer confidence index fell to -46 for the week ending September 19th, down 3 points from the week prior.  This news and the University of Michigan reading from last week spell bad news for consumer spending.  The recession may be over, but there are structural issues that demand immediate attention.  The data bears this out:

  • Over 41 million Americans are on food stamps.
  • 17 million children struggle with hunger in America. That's 1 in 4 kids.
  • 1 out of every 6 Americans is on some kind of anti-poverty program.
  • 1 out of every 7 mortgages was delinquent or in foreclosure in Q1 2010.
  • Over 8 million Americans are receiving unemployment insurance.

It’s going to have to be an impressive trick if the new Obama economic team can embrace change and get us out of this mess without feeling more pain.  As the saying goes - no pain, no gain!


The September month-to-date performance has been nothing short of spectacular, but it is difficult to reconcile this euphoria with the current fundamentals of the economy.  So far for the month of September, the Dow is up 8.62%, S&P up 7.45%, NASDAQ up 11.13% and the Russell 2000 up 10.4%.  With the Dow +0.07%, S&P (0.10%), NASDAQ (0.28%) and Russell 2000 (0.79%) yesterday, there was a clear lack of overall direction following the FED announcement; except for the direction of the dollar, which is getting crushed, down 1.1% yesterday and 3.2% over the past month.  The euphoric feel comes from:   

  • Consumer confidence is near “the great recession” lows and investor sentiment is near multi-year highs.
  • Some of the market darlings (AAPL and AMZN) look over extended.
  • The MACRO risks (housing and slowing GDP) have taken a back seat in September, but will rear their ugly heads soon.
  • The 2yr and 10yr yields are at record lows and the dollar is getting crushed.

The policies of the old Obama economic team were enough to keep us out of a full-blown depression, but were clearly not effectively dealing with the deficit.  The question is not whether or not the next team will prove any more adept at instilling confidence in government’s ability to address the nation’s debt. 


The burgeoning healthcare bureaucracy, economic stimulus spending, bailouts, and the increase in military spending have all contributed to the explosion in federal debt over the past decade.  The continued growth of that debt has provided an illusion of an economic recovery. 


In the chart below, we show one example of government spending providing an unsustainable crutch for government spending.  As America’s unemployed make their way through the 99 weeks of benefits afforded them by Uncle Sam through the Emergency Unemployment Compensation program, it is clear from Bureau of Labor Statistics data that the economy is not yet ready to put these people back to work.  Retail sales will certainly be impacted by people running out of these benefits – a stimulus that, like many others, has been financed by increased debt.


One last thought - The dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty, and we must rise with the occasion. As our case is new, so we must think anew and act anew. 

-Abraham Lincoln


Function in disaster; finish in style


Howard Penney


Embracing Change - Howard Atlas Penny


The Macau Metro Monitor, September 22nd 2010



CEO So believes he will receive a response from the Government regarding its two plots on Cotai by the end of 2010.  “We hope to have a larger space for development... SJM has the least exposure in Cotai so we’ve expressed that if there is other land available [Sands China parcels 7 and 8] we’ll be interested in it,” So said.  “I think any organizations or concessionaires can express their interest and there is nothing wrong with it,” So added.  Meanwhile, So denied there are any plans to cooperate with Macao Studio City or any of the other five gaming operators to jointly develop the Cotai Strip.


So also said 4Q GGR will not grow as much as in the first nine months of this year. “For the whole year of 2010, I expect there will be an increase of around 40%,” So said.  In addition, he urged the Government to give a clearer idea about the allocation of imported labour quotas so that the gaming operators can prepare their human resources development plan accordingly.  So also suggested pegging the Pataca with the Yuan  to ease inflation pressures.



The US consul general for Macau and Hong Kong, Stephen Young, says he is optimistic that these policy changes will not damage the interests of US companies operating in Macau.  “I’ve been assured by the chief executive and others that the necessary workers that these guys [US-based casino companies operating in Macau] need to do their jobs to both build and run casinos will be available, and it’s an ongoing dialogue that they and I and the government of Macau continue to pursue,” he said.


Mr Young said he has already met CEO Chui and representatives from LVS, WYNN, and MGM.  He added he would meet with Sands' new management team today.



Total visitor arrivals rose by 14.2% YoY to 2,357,689 in August.  Visitors from Mainland China increased by 20.3% YoY to 1,263,442 (53.6% of total visitor arrivals), with 590,271 traveling to Macao under the Individual Visit Scheme, up by 18.2% from August 2009.



The number of passengers passing though Changi Airport in August rose 9.6% to 3.47 million.