prev

R3: M, PSUN, CROX, and Moody's

RESEARCH ANECDOTES

  • Sears continues to up the ante with its apparel program, this time recruiting UK retailer Next for its latest collaboration. Sears.com becomes the exclusive retailer of Next product in the U.S in a similar arrangement to the MANGO/JCP partnership (except this deal has no retail presence). Recall that Sears also has a partnership in place with French Connection as well as announced sublet with Forever 21. In other words, Sears is becoming a mall within a mall.
  • According to an InsightExpress study, 45% of consumers prefer receiving mobile coupons via text message, with 28% preferring to locate them via an app, and 27% preferring to receive them in-store. A substantial number of mobile ad and coupon campaigns are currently focused on geographic targeting, allowing advertisers to drive traffic to a specific region or local.
  • Following in the footsteps of Burberry, Gucci livestreamed its Milan runway show as part of its Gucci.com redesign. Unlike other live runway events online, Gucci’s virtual fashion show included virtual guests and virtual seat assignments. Throughout the show, 10,000 “guests” Tweeted and chatted as they watched the latest fashions strut down the runway.

OUR TAKE ON OVERNIGHT NEWS 

 

Macy's Plans To Hire More for Holiday - Macy's Inc. plans to hire 65,000 seasonal workers to staff its stores, call centers and distribution centers for the holidays. The department store, which employs 161,000 year round, said the holiday hiring represented a slight increase from the past given the 3 to 3.5 percent comparable-store sales gain it expects to see in the second half. “It is vitally important that our customers are well-served during the busiest shopping time of the year," said Terry Lundgren, chairman, president and chief executive officer. Most of the positions are part time. <wwd.com/business-news>

Hedgeye Retail’s Take:  Given that customer service has been on the decline for a while in the traditional department store channel, it’s good to see a commitment to holiday staffing.  With that said, if sales don’t materialize expect the temporary help to be cut back and matched commensurately with sales demand.

 

Moody's Cuts Outlook on Retail Sector - This might be about as good as it gets until 2012. Moody’s Investors Service Wednesday cut its credit outlook on the retail sector to “stable” from “positive.” The debt watchdog said growth in U.S. retail earnings, before interest and taxes, would “slow to a modest low-single-digit pace over current levels for the next 12 to 18 months.” “Consumers continue to face high unemployment and personal debt levels along with low asset values and tight credit availability which will continue to make them focused on value,” Moody’s said, noting holiday sales and margins would increase only marginally. Retailers are coming up against tougher comparisons on both the sales and the margin fronts and executives are running out of ways to boost growth. “Retailers have generally exhausted the ability to increase earnings from expense reductions and inventory efficiencies,” Moody’s said. <wwd.com/business-news>

Hedgeye Retail’s Take:  A seemingly proactive move here from Moody’s and an outlook which we can’t disagree with.  We’re simply moving beyond the point of “this is as good as gets”.

 

PSUN Tough Road Ahead - A year after becoming president and chief executive officer of teen retailer Pacific Sunwear of California Inc., Gary Schoenfeld gave a pep talk before the crucial back-to-school season. With the $1 billion company posting an eighth consecutive quarter of losses in August — and forecasting a ninth — he might have to give a few more. It isn’t business as usual at PacSun, which along with the flow of red ink, had to fend off a hostile takeover bid last year by the much smaller athletic brand Adrenalina Inc. The recession has weakened the teen retail sector. There are fewer jobs for young people and their parents have diminished discretionary income. Apparel spending among 13- to 17-year-olds dropped 6% in June according to The NPD Group. In an effort to reverse its slide, PacSun has identified three key areas: product, customer relevance and engaging shoppers in stores. The turnaround blueprint includes pumping up the fashion quotient in juniors, reviving its shoe category and offering more exclusive items from vendors. After years of elevating its private label business, PacSun is courting vendors, including Fox, Volcom, Hurley, Quiksilver, O’Neill and Roxy, as partners for exclusive offers, in-store displays and events that are intended to lure shoppers from other mall-based competitors .<wwd.com/business-news>

Hedgeye Retail’s Take:  Nothing new here except that patience appears to be waning.

 

Niche Team Sports Growing - According to the SGMA, overall participation in the top seven team sports in the U.S. declined in the last year but participation in seven 'niche' team sports is on the rise. Those seven 'niche' team sports which had respectable gains in participation since 2008 are fast-pitch softball (up 13.8%), ice hockey (up 12.2%), rugby (up 8.7%), beach volleyball (up 7.3%), lacrosse (up 6.2%), indoor soccer (3.7%), and gymnastics (3.6%). <sportsonesource.com>

Hedgeye Retail’s Take:  While it’s important to keep on an eye of the demographic trends underlying athletic participation, we don’t see UA or NKE making a big push into softball or beach volleyball anytime soon.

  

Crocs Launches E-Commerce in Canada and Australia - Crocs, Inc. announced the launch of Canadian and Australian websites as well as a new consumer mobile site. In addition to providing supplementary revenue opportunities, the new online offerings are designed to enrich the Crocs online experience.  <sportsonesource.com>

Hedgeye Retail’s Take:  Expanding on the company’s revamped e-commerce platform, we should continue to see additional countries added to Crocs’ direct to customer infrastructure. 

 

The Sports Authority Checks in With a Location Based App - The Sports Authority Inc. is testing location-based promotions by offering discounts to customers who check in at stores and sports stadiums using a location-based rewards iPhone application. The rewards app comes from Loopt Inc., a social mapping company that allows users to check in wherever they are using their mobile phones and see where their friends are, similar to location-based services offered by Gowalla and Foursquare.  <internetretailer.com>

Hedgeye Retail’s Take:  As we’ve noted in recent months, location based applications present the biggest opportunity for marriage between mobile devices and retailing.  Driving traffic to stores may actually be an even bigger opportunity in the intermediate term than actual transactions taking place over an iPhone.

 

Levi's Conducting $100 mm Global Media Review - Levi's is conducting a global media review, the brand has confirmed. The brand spends an estimated $100 million annually on ads worldwide -- about $50 million of that in the U.S., according to Nielsen. Omnicom's OMD is Levi's lead U.S. media shop and is believed to be participating in the review. Another contender is said to be Publicis Groupe's Starcom, which works for the brand in some overseas markets. <brandweek.com>

Hedgeye Retail’s Take:  Despite the review (which is part of any brand’s marketing process) we continue to expect Levi’s to push the envelope with its marketing.  If you haven’t see this, check it out: http://www.youtube.com/user/walkUSA


European Bearish Data Roam

<revised with correct chart below>

 

Hedgeye Portfolio: Long Germany (EWG); Long British Pound (FXB); bullish on EUR-USD

 

Position: Eurozone, Germany and France Services and Manufacturing PMI numbers decline in September; UK housing loan data continues to wane; and risk heightens across the region, in particular vis-à-vis rising CDS spreads in Portugal and Ireland above the critical 400bp line (see charts below). Today’s data is in line with our call for a material downward inflection in fundamental European data across most of Europe beginning in August and continuing over the intermediate term TREND. 

 

We’re however not bearish on Europe outright. As we noted in a recent post titled “The EU’s Guiding Hand”, we’re currently bullish on Germany, with the DAX outperforming many of the equity markets of its Western European peers, and bullish on the GBP and EUR versus the USD on a relative basis, as we see substantial downside in the USD and YEN, in particular. Our bullish intermediate term TREND line for the DAX is 6089; our TREND lines for the Euro and Pound are $1.26 and $1.52, respectively.

 

Below is a short discussion of today’s charts:

 

1.  We expect Eurozone Services and Manufacturing PMI to continue to wane over the intermediate term TREND as austerity measures across the region squeeze the consumer and dampen the economic outlook out on the curve.

 

European Bearish Data Roam - h1

 

2.  The UK housing market remains a critical fundamental headwind (like in the US) that we think will continue to drag down growth prospects in the UK.  According to the British Bankers Association, loan approval for house purchase declined -7.2% M/M and fell -22.3% Y/Y.  Noteworthy is that year-over-year comps will get increasingly difficult up to a loan approval peak in Dec. ’09.

 

European Bearish Data Roam - h2

 

3.  As an important leading indicator, the risk trade in Portugal and Ireland is breaking out vis-à-vis CDS spreads, in particular.  As we noted in late ’09 and 1H10 in relation to Greece, and as history has shown in relations to the CDS spreads of Lehman Brothers and Bear Stearns, the 400bp line is a critical inflection line (Shark Line) to watch as the probably of upside risk heightens materially as you move through the line.

 

European Bearish Data Roam - h3

 

Matthew Hedrick
Analyst


INITIAL CLAIMS RISE WHILE HOUSING STARTS FORETELL NO IMPROVEMENT IN UNEMPLOYMENT

Improvement in Single Family Housing Starts Leads Improvement in Unemployment

The folks at Calculated Risk (calculatedriskblog.com) showed an interesting chart yesterday of Single Family Starts versus unemployment.  We’ve recreated this chart below.  As you can see, an improvement in single family starts typically leads an improvement in unemployment by 12-18 months.  (The 2001 recession was an exception.) Single family starts have not been improving in recent months; rather, following the expiration of the tax credit, they’ve trended sharply downward.  This suggests that we are not in for a swift improvement in unemployment from here – in fact, the downward move suggests that unemployment could increase on a reported basis (though clearly the labor force participation rate is affecting the unemployment print, as we demonstrated two weeks ago). 

 

INITIAL CLAIMS RISE WHILE HOUSING STARTS FORETELL NO IMPROVEMENT IN UNEMPLOYMENT - 2

 

Initial Claims Climb 

Initial claims rose 12k last week to 465k (rising 15k before the revision).  Rolling claims came in at 462.25k, a decline of 3.25k over the previous week. Reported claims climbed back toward the middle of the range of 450-470k that the series has occupied for all of 2010. While the rolling claims number was incrementally bullish, we are still looking for initial claims in the 375-400k range before unemployment meaningfully improves.

 

INITIAL CLAIMS RISE WHILE HOUSING STARTS FORETELL NO IMPROVEMENT IN UNEMPLOYMENT - 3

 

INITIAL CLAIMS RISE WHILE HOUSING STARTS FORETELL NO IMPROVEMENT IN UNEMPLOYMENT - 4

 

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 CLAIMS RISE WHILE HOUSING STARTS FORETELL NO IMPROVEMENT IN UNEMPLOYMENT - 1

 

Census headwinds should abate at the end of September, as this is the last month in which Census has historically been a drag. 

 

INITIAL CLAIMS RISE WHILE HOUSING STARTS FORETELL NO IMPROVEMENT IN UNEMPLOYMENT - 5

 

Joshua Steiner, CFA

 

Allison Kaptur

 

 


real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

CHART OF THE DAY: Real Estate Bubbles

 

 

While the United States of America in 2010 may not “precisely” be Japan of 1997, there are plenty of similarities developing in terms of Big Bureaucratic Government resolve. If you have any recovering friends from Groupthink Inc who make it past the remedial exercise above, please send them our Chart of The Day that overlays the Japanese real estate bubble with ours. *Note the duration.

 

CHART OF THE DAY: Real Estate Bubbles - Japan U.S. Real Estate

 

 

 

This chart was extracted from our EARLY LOOK note, available to RISK MANAGER and INVESTOR subscribers in real-time, at 8am ET every morning.  The Early Look is unlocked at 4pm ET for non-subscribers.  To gain access the note in its entirety, please subscribe or sign-up for a free-trial.


INITIAL CLAIMS RISE WHILE HOUSING STARTS FORETELL NO IMPROVEMENT IN UNEMPLOYMENT

Improvement in Single Family Housing Starts Leads Improvement in Unemployment

The folks at Calculated Risk (calculatedriskblog.com) showed an interesting chart yesterday of Single Family Starts versus unemployment.  We’ve recreated this chart below.  As you can see, an improvement in single family starts typically leads an improvement in unemployment by 12-18 months.  (The 2001 recession was an exception.) Single family starts have not been improving in recent months; rather, following the expiration of the tax credit, they’ve trended sharply downward.  This suggests that we are not in for a swift improvement in unemployment from here – in fact, the downward move suggests that unemployment could increase on a reported basis (though clearly the labor force participation rate is affecting the unemployment print, as we demonstrated two weeks ago). 

 

INITIAL CLAIMS RISE WHILE HOUSING STARTS FORETELL NO IMPROVEMENT IN UNEMPLOYMENT - starts and unemployment

 

Initial Claims Climb 

Initial claims rose 12k last week to 465k (rising 15k before the revision).  Rolling claims came in at 462.25k, a decline of 3.25k over the previous week. Reported claims climbed back toward the middle of the range of 450-470k that the series has occupied for all of 2010. While the rolling claims number was incrementally bullish, we are still looking for initial claims in the 375-400k range before unemployment meaningfully improves.

 

 INITIAL CLAIMS RISE WHILE HOUSING STARTS FORETELL NO IMPROVEMENT IN UNEMPLOYMENT - rolling

 

INITIAL CLAIMS RISE WHILE HOUSING STARTS FORETELL NO IMPROVEMENT IN UNEMPLOYMENT - raw

 

Our firm's expectations for an ongoing economic slowdown relative to the first half of the year will keep a lid on new hiring activity as management teams focus on cost control. All of this raises the risks that a prospective slowdown in GDP will precipitate an incremental slowdown in hiring/pickup in firings, which will, in turn, further pressure growth. We continue to look to claims as the best indicator for the job market, as they are real time and inflections in the series have signaled important turning points in the market in the past.

 

Yield Curve

The following chart shows 2-10 spread by quarter while the chart below that shows the sequential change. The 2-10 spread (a proxy for NIM) has been under significant pressure in the past two quarters.  Yesterday’s closing value of 212 bps is down from 224 bps last week.

 

INITIAL CLAIMS RISE WHILE HOUSING STARTS FORETELL NO IMPROVEMENT IN UNEMPLOYMENT - spreads

 

INITIAL CLAIMS RISE WHILE HOUSING STARTS FORETELL NO IMPROVEMENT IN UNEMPLOYMENT - spreads change

 

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

 

INITIAL CLAIMS RISE WHILE HOUSING STARTS FORETELL NO IMPROVEMENT IN UNEMPLOYMENT - subsector perf

 

Census headwinds should abate at the end of September, as this is the last month in which Census has historically been a drag. 

 

INITIAL CLAIMS RISE WHILE HOUSING STARTS FORETELL NO IMPROVEMENT IN UNEMPLOYMENT - census chart

 

Joshua Steiner, CFA

 

Allison Kaptur


SBUX – INFLATION FORCES STARBUCK’S HAND

Costs are too much to absorb, according to CEO Howard Schultz.

 

August 31, 2010: SBUX says it has no plans to raises prices, even though it expects higher coffee costs to weaken its profits in the upcoming fiscal year.  Management said it is able to maintain its current prices because it has long-term relationships with farmers, traders and co-ops in multiple coffee-growing regions.  Importantly, it also has bought the majority of its coffee for its upcoming fiscal year.  No change in the fiscal 2011 EPS guidance of $1.36 to $1.41, which factors in an expected $0.04 hit from higher coffee prices. 

 

September 21, 2010: At a conference in LA, CEO Howard Schultz predicted a “tough” 2011, with conditions improving the following year.  At the time I thought this was a very odd comment.  What was going to make FY2011 so tough given how strong sales are?  Or have they slowed?

 

September 22, 2010: From the SBUX press release, SBUX is raising some prices “due to the recent dramatic increases in the price of green arabica coffee, currently close to a 13-year high, as well as significant volatility in the price of other key raw ingredients, including dairy, sugar and cocoa.”

 

So what had changed between late August and now?

  • Coffee is up 1.8%
  • Milk is up 3.8%
  • Sugar is up 23.1%
  • Cocoa is up 2.4%

SBUX – INFLATION FORCES STARBUCK’S HAND - sbux eps table

 

While we think same-store sales have slowed in 4Q10 on a one-year basis, the company reiterated its comfort level with current guidance, as management affirmed its forecast for the current fiscal year.

 

SBUX – INFLATION FORCES STARBUCK’S HAND - coffee and milk

 

Going into 2011, expectations will remain high as the company’s FY11 same-store sales guidance of low-to-mid single digit growth assumes a fairly steady improvement in two-year trends.  For reference, +1% same-store sales growth in the U.S. in FY11 would imply a 350bp improvement in two-year average trends from FY10 (assuming 6.5% growth for FY10).  I think same-store sales and margin growth will continue to materialize in FY11 but the rate of growth will slow and the company’s ability to continue to surprise to the upside from both top-line and bottom-line perspectives will likely diminish. 

 

Howard Penney

Managing Director


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

next