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Conclusion: PFCB is facing easy comparisons in 3Q10 on many fronts.  At the same time, trends are getting better at the Bistro, which should make for a strong third quarter.  Co-CEO Bert Vivian’s modestly positive comments today increase my conviction that PFCB will have a marginally stronger back half of the year.

To that end, PFCB should move up and to the right into the “nirvana” quadrant of our restaurant sigma chart (positive same-store sales and growing YOY restaurant level margin) during the back half of the year after starting out the year in the “deep hole” quadrant (negative same-store sales and declining YOY restaurant level margin). 

Risk: Despite the company’s modestly optimistic outlook for the industry, our Hedgeye view is that the consumer will continue to face increased pressure in the back half of the year.


Mr. Vivian gave a broad overview of his outlook for PFCB and the industry for the balance of this year and next year at an investor conference this afternoon.  Overall, he said that the year is progressing as management had expected going into the year.  Specifically, business travel trends, or the weekday business, improved during the first half of the year while the social side of the business, primarily driven on the weekend, has caught up to-date in 2H10.  To that point, the company is seeing fairly even activity across the week on a YOY growth basis; though Mr. Vivian called the growth “modest.”


In August, same-store sales growth was positive for the Bistro in 36 of the 38 states in which it operates, which Mr. Vivian said signals a real change in tide of the overall health of the business relative to last year.  Trends were negative in all 38 states in the year-ago period.


Regional performance:  Las Vegas is currently one of PFCB’s strongest markets.  Traffic has been consistently solid this year in Las Vegas, which is a marked change from last year.  California continues to be an extremely important state for PFCB as it drives about 16-17% of sales.  Trends in California need to stay positive in order for the Bistro to be positive (California turned positive for the Bistro a few months ago).  Trends in Arizona have bounced back and forth whereas Texas and Florida have shown modest positive growth.


Commodities: The company is locked in on its commodity needs for the balance of 2010.


Share repurchase: PFCB expects to buy back about $40 million in shares in 2010.




Currently, Mr. Vivian expects 4Q10 to be ok as he thinks consumers will be out and about around the Christmas season; though people will still be looking for great value.




“Unless the solar systems collide,” Mr. Vivian expects next year to be marginally better for PFCB and the industry.  For industry trends to come in better than ok, there would need to be a significant change in the jobless situation, which he views as unlikely.


Commodities: The company is locked in on a bulk of its commodity needs through the end of FY11, with the exception of beef (which he expects to move higher).  On balance, PFCB is locked in at prices that are fairly similar to 2010 levels.


Labor:  Mr. Vivian expects higher labor costs to put some pressure on margins in 2011 as a result of increased wage rates, a higher level of turnover and higher health care costs, which are expected to be up low double digits.  The company hopes to take some price next year to offset these higher costs as long as traffic trends hold up in the back half of the year.


New openings: Current development plans include about 4-6 new Bistros each year over the next 3-5 years and about 10-15 Pei Wei openings in 2011 (closer to the low end of that range) and 15-20 in 2012.


Share repurchase: PFCB expects to buy back about $60 million in shares next year.


Unilever and International businesses: Expected to add a small, high-margin royalty stream to PFCB’s P&L over time, which requires no capital on the part of PFCB.


EPS growth: Expects to achieve low double-digit EPS growth over the next 3-5 years.




Howard Penney

Managing Director

US Dollar: Ugliest Macro Chart In The World



No, I’m not telling you to short the US Dollar right here and now. It will finally be immediate term oversold within 50 basis points from today’s price.  That said, you should continue to short it with impunity on rallies to lower-highs until America changes its conflicted and compromised monetary policy.


I typically don’t short-and-hold. But in this case I am, at a bare minimum, evolving my investment style. I shorted the US Dollar on June 7th when consensus about “Euro Parity” was running rampant and the US deficit and debt ratios were about to cross the proverbial Rubicon of risk. Risk for anyone with a US Savings account (which yields ZERO percent) or anyone who cares about the US Dollar-adjusted-value of their wealth, that is…


CNBC executives won’t get this because they think that the America’s health should be solely measured by the daily tick of her stock market. Sadly, they cheer on things like “QE” and they buy-and-hope that a balding man in government will save their advertising revenues.


Debauching a citizenry’s currency for the sake of short term stock market returns never ends well for that currency’s society. The current inverse correlation between the US Dollar Index and the SP500 is -0.88. That’s alarmingly high, but at least the nature of the mathematical reading has a very high correlation with the complacency of the government that stands behind this currency’s value destruction.


The reflation trade in everything priced in US Dollars will be on until the music stops. And it will stop. We’ve all seen this movie before. This time is different only in that we won’t be able to blame Lehman or Madoff.


"To stand in silence when they should be protesting makes cowards out of men."
- Abraham Lincoln


Keith R. McCullough
Chief Executive Officer


US Dollar: Ugliest Macro Chart In The World - 1

CRI: Back in the Book

The near-term cotton trade is done like dinner. But CRI is putting up –HSD EPS on +HSD sales with raw materials set before a quarter of CRI’s customers were even born. How can they do +7% sales and +6% EPS next year??? No Way.



Keith added Carter’s to the short side of Hedgeye’s virtual portfolio yesterday; revisiting a high-conviction call that we have that margins will unravel by 400bps in 2011. See our 9/16 post ‘CRI: One of the Worst Stories in Retail.’  Also as noted in that report, the next 1-2 quarters have numerous events to be cognizant of as it relates to timing and sizing a position.


In his words (plucked from our email exchange) “Pretty bullish volume/price move there today – either someone knows something we don’t or someone thinks they do. I’d be digging for what you don’t want to find if I were you. TAIL/TREND lines of resistance converging in the $27.06-$27.76 range = bearish. TRADE support = $25.01, bullish.”


CRI: Back in the Book - cri


So let’s think about this for a minute… What can go wrong for a short here? The catalyst calendar is a pretty good place to start.

1)      Same store sales next week. Will likely confirm upside to anyone who owns/operates boxes that sell apparel.

2)      CRI reports 3Q on Oct 19. 12 weeks ago they lowered comp expectations from 4% to 2%. It’s no secret to anyone that business in September across all of retail was strong. Carter’s won’t be left out of that dynamic.  The company stated outright on its last call that a better comp could mean upside from its $0.76 implied guidance (Street at $0.74). Sensitivity is high on such a low (and insufficient) cost structure.

3)      Then 2-weeks later, CRI is hosting an analyst meeting to show the fruits of the new design team at Osh Kosh (15% of sales and EBITDA). It’s unlikely that the company is inviting analysts in to show them ‘how horrible the product is.’


Here are some offsets to keep on your risk-management plate.

A)     Message to the Street: Cotton COGS is not Real Time: The Street has come down a couple pennies in 3Q to $0.74, which I’m willing  to bet is due to cotton shooting from $0.75/lb to $1.01 today. But here’s what gets me…  The company is selling product today based on cotton bought six months ago. It is competing with others at retail who have a cost of materials set when a quarter of CRI’s customers weren’t even born yet. Think about that for a minute.


B)     Timing Mismatch:In a ‘rebound’ quarter like 3Q could be, the company is looking at mid-high single digit sales growth and a double digit decline in EPS?!? On top of that, the Street is modeling 7% sales growth in 2011 along with 6% EPS growth!?!  Can someone – I mean anyone – please explain to me how this is mathematically possible given the confluence of Macro factors?


C)     ‘We get it’ that everyone understands the near term cotton risk.What we don’t think people have really thought through are the implications for the margin climate as the companies start to absorb the real cost, and get pushed by partners in the supply chain. This supply chain is extremely complex, and is the key factor in sparking irrational pricing behavior (which, to a company like CRI that has a 40% discount on its product the day it hits the floor, is untenable).


D)    If Everyone Waits For Prices To Decline, Will It Happen? Consider this…We met with HBI and VFC last week, and have since had conversations with 2-other major apparel companies. While hardly a representative sample, one factor all had in common is the view that 1) cotton prices will stay at elevated levels, and 2) they’re not locking in anything at a buck per pound. So if they all agree that there is a supply problem, but will wait until prices come down before locking in, then it begs the question as to whether price will really come down after all?


E)      Why did so many companies blow off the cotton issue at the GS conference – and others since?Aside from not wanting to beat up their partner’s CEO at the very start of back-to-school season, the reality is that they were having a good revenue month. Good revenue on product procured before input costs went parabolic is hardly a reason for any CEOs to sweat during their few dozen double-secret one-on-ones.


We outline the full CRI thesis in out 9/16 report, and if anything feel stronger today than we did then about the idea. But if there’s any one clarifying factor today vs. then it is duration. For those who are shorting names like CRI today based solely on the ‘cotton trade,’ then congratulations, you’re late.  Those fans who are chirping that strength in cotton provide an opportunity to get involved with a ‘high-quality’ growth idea like CRI. Then I wish them the best of luck. They’re gonna need it. 


We’re going to stick with our research, good 'ol fashioned math, and our process.  There might be near-term ‘Oohs and Ahhs’ around leverage to a good September and the cute little denim for Jr. out of Osh Kosh. But it can’t sidestep what is a very big problem lurking below the surface. Our team will continue to dig deeper into the story, and unless the facts change meaningfully, we’ll get louder with our call on any strength. As always, Keith will manage around the timing/sizing.


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CoD driving strong Mass and VIP business. We’re well above the Street.



The “crew that couldn’t get their act together” appears to have gotten their act together.  We first highlighted the potential for sustained market share gains in late July.  MPEL gained significant share that month, gained even more in August, and is poised to take another step forward in September.  Gaining market share while the market grows 40-70% is impressive, particularly for a company held in such low esteem by the investment community.




Given the strong market growth in Macau this quarter as well as an estimated 250bp sequential increase in market share to 16.0%, we think MPEL can post EBITDA of $120 million.  Consensus is only $100 million.  Our Q4 estimate of $92 million is also higher than the Street at $88 million.


City of Dreams drives most of the company’s revenues and profits and has been the market share driver.  So what’s driving the market share gains?  On the Mass side, we believe the reconfiguration of the slot floor earlier this year has created a busier and more exciting feel.  Too much space can be a bad thing for a casino.  Also, management was very promotional in the first half, particularly in Q2, which seems to be paying dividends. 


On the VIP side where the market share gains have been more pronounced, aggressive junket commissions have certainly helped although we do not think Q3 commission rates and VIP promotional activity have increased.  Rather, we think MPEL may be advancing junket commissions for 3-4 months.  Essentially, they are providing more credit to the junkets.  This should have the impact of better margins than a straight commission increase, but may create longer term credit risk.  For now, we are not worried.


While 16% market share was probably aided by high hold, particularly in September, we think a 15%+ share is probably sustainable and is likely above investor expectations.  Sure the stock has moved up significantly off its sub $4 in late July when we first turned positive on the name.  However, MPEL remains discounted to the group--10.5x 2011 EV/EBITDA versus 12.5-14.5x, and EBITDA estimates could go higher.  There is still 25% upside to the low end of that range, without the benefit of higher numbers.


Updated sales guidance implies that Jack in the Box trends are at least stabilizing.


Management stated at an investor conference this morning that it does not expect to see a significant improvement in Jack in the Box top-line trends until the unemployment picture improves in its key regions.  That being said, with less than one week left in the company’s fiscal 4Q10, management said that same-store sales are tracking slightly better the company’s most recent quarterly guidance.  For reference, JACK guided to a 4.5% to 5.5% decline in comp sales at Jack in the Box.  A -4.5% comp implies two-year average trends that are relatively stable with 3Q10.  The company attributed the better-than-expected trends to its strong promotional calendar and better service execution.




Howard Penney

Managing Director

R3: JCP, ANF, BONT, PSS, and E-com


September 29, 2010


More evidence that e-commerce continues to rise in importance to the overall retail sector, as positive data from Shop.org supports a building trend.  And, finally JCP decides to call it quits on paper-based catalogs next year, instead planning to focus exclusive on the internet for its direct business.





  • Add Donna Karan to the list of brands entering the world of e-commerce for the first time. The site features an extensive selection of apparel and accessories from the higher-end “New York” line as well the moderate DKNY line.


  • For the first time, a female has designed a pair of Air Jordans for Nike. The lavender limited edition Ladies Air Jordan 2 Retro shoes were designed by Vaq$htie Kola, former girlfriend of hip-hop star Pharrell. Hard to believe the idea of a female designing for a female is a new concept at the world’s largest athletic footwear company.


  • According to Nielsen, IPad owners are the most male-dominated group of mobile computing owners. 65% of owners of the hot new device are male and 63% are under the age of 34. Surprisingly, the Playstation Portable skews slightly more female than the iPad, with just 63% of its owners being male. What does all this mean? At least for now, a whole lot of male targeted advertising will begin making its way onto the iPad very soon.




JC Penney Steps Ups Store Growth - J.C. Penney Co. Inc. on Tuesday said it will open three stores next year as part of its plan to generate $1 billion in sales growth through new retail expansion over the next five years. Penney’s long term plans call for opening 75 new stores by 2014. The first three stores are slated for Dallas; Daly City, Calif., which borders San Francisco, and Glenarden, Md., about 10 miles east of Washington. Penney’s has existing stores in all three markets, which cater to middle-income shoppers. While Wal-Mart Stores Inc. slowed construction of SuperCenters amid the weakening economy and Gap Inc. has said it’s not planning to open new stores in the near term, Penney’s believes the markets it’s identified are underserved by its stores, so it will intensify its presence. <wwd.com>

Hedgeye Retail’s Take: While this technically counts as “stepped up” growth, it’s hardly worthy of a press release. Three store openings in 2011 implies there are 72 additional locations needed to reach the company’s goal by 2014. Recall that JCP hasn’t opened a meaningful amount of new stores in years, leaving this goal to appear lofty (and back-end weighted) at best.


JCP Getting Out of Catalog Business - Just 10 months after axing its twice-yearly Big Book, J.C. Penney Co. is getting out of the catalog business altogether. In 2011, J.C. Penney will cease publishing about 25 other specialty catalogs, says a spokeswoman. Instead, J.C. Penney, No. 16 in the Internet Retailer Top 500, will publish more direct marketing pieces such as its 43-page “Little Red Book” and “Matter of Style” publications that showcase current merchandise such as men’s and women’s fashions available in the chain’s 1,107 department stores in the U.S. and Puerto Rico and online at JCP.com. “We will no longer be publishing our specialty catalogs which were being used as ‘look books’ by our customers to see what was new in the stores or online,” the spokeswoman says. “We have always served our customers by how they want to shop and now and in the future that’s online and in stores.” <internetretailer>

Hedgeye Retail’s Take:  Good move to not wait until the paper catalog was completely dead.  Near death, yes.


Juicy Hires Nealz - Juicy Couture, a division of Liz Claiborne Inc., has poached LeAnn Nealz, executive vice president and chief design officer at American Eagle Outfitters Inc., as its new president and chief creative officer. Nealz will be responsible for all creative aspects of the business, including product design, marketing and store design, and will report to Edgar Huber, chief executive officer of Juicy. Nealz succeeds Juicy co-founders and co-designers Gela Nash-Taylor and Pamela Skaist-Levy, who left their day-to-day responsibilities in January and took on nonoperating creative roles at the company. The duo plan to launch their own brand next year when their non-compete runs out. Nealz’s influence will be evident in late 2011.<wwd.com>

Hedgeye Retail’s Take: Finally, a new leader at Juicy, but the wait for an improving trend, updated product, and new strategy will still have to wait. Getting a leader however, is definitely a step in the right direction. 


A&F Fined for Hiring Practices - U.S. Immigration and Customs Enforcement said Tuesday it reached a $1.05 million settlement with teen retailer Abercrombie & Fitch Co. for violating federal immigration laws by failing to adequately verify that employees in its Michigan stores were eligible to work in the U.S. According to ICE’s Office of Homeland Security Investigations, the settlement stems from a November 2008 inspection that uncovered numerous deficiencies in the chain’s electronic I-9 verification system, which is supposed to verify that workers are eligible to work in the U.S. ICE said they knew of no illegal aliens who were actually hired by A&F as a result of the technology deficiencies and that Abercrombie had since addressed the problems and implemented new company practices to prevent any future violations. <wwd.com>

Hedgeye Retail’s Take: Not quite as bad as hiring based on appearance, but still another negative HR related issue coming out of ANF.


Simmon's ArgyleCulture Relaunched at Macy's - ArgyleCulture, the three-year-old men’s collection for the “urban graduate” moving beyond the Phat Farm, hip-hop look, hasn’t exactly set the fashion world on fire. But the breakout moment has arrived, at least according to the designer and music mogul behind the brand, Russell Simmons. On Thursday, ArgyleCulture gets relaunched at Macy’s Herald Square with a new 750-square-foot shop, and Simmons starts his road show at Macy’s stores around the country to promote the brand. In addition, a fall advertising campaign with Tyson Beckford as the face of ArgyleCulture launches Oct. 11, and a tuxedo-ed Simmons will be splashed across the side of city buses. After that, Simmons takes another dive into reality TV with an eight-part series beginning Nov. 2 chronicling the making of ArgyleCulture. Terry Lundgren, chairman, chief executive and president of Macy’s Inc., which sells ArgyleCulture exclusively, will appear in several episodes with Simmons. <wwd.com>

Hedgeye Retail’s Take: Not many new apparel lines (especially men’s) get an entire reality show/tv series dedicated to it. Clearly Macy’s and Simmons are pulling out all the stops to make this work.


Big & Tall at Bon-Ton - The Bon-Ton Stores Inc. has signed an agreement with Casual Male Retail Group Inc. for Casual Male to supply big and tall men’s apparel through Bon-Ton’s e-commerce site and, beginning next spring, in a limited number of Bon-Ton’s 277 department stores. With the new alliance, Bon-Ton will expand the size and scope of its big and tall offerings, which will include sportswear, activewear, tailored clothing and accessories. A Bon-Ton spokeswoman said the availability of big and tall men’s wear will be flagged on Bon-Ton’s Web site, at bonton.com, but not the Casual Male association. <wwd.com>

Hedgeye Retail’s Take: Probably a low risk way for Bon-Ton to expand its offering without taking on too much risk. Will it move the needle? No. Still, an interesting combo and one that may open further doors for Casual Male’s big and tall expertise.


Vision Street Wear (PSS) Going South - Collective Licensing International reached a new three-year agreement with Town Connection of Buenos Aires to license apparel and skateboarding hardgoods for the Vision Street Wear brand in Argentina. Under the design and manufacturing agreement, Town Connection will hold the exclusive license for Vision Street Wear in Argentina and will initiate and drive the growth of the brand in this important international market for the brand. Town Connection's inaugural collection will debut in Spring of 2011 and this introduction will mark the first time Vision Street Wear has been available in Argentina since the brand's re-launch in 2009. <SportsOneSource>

Hedgeye Retail’s Take:  Collective Brands has had success in South America with its other brands primarily in Columbia, but expanding branded product is right in-line with its strategy and what we expect to see more of through 2010.


Barefoot Run in NYC - Vivobarefoot and Tip Top Shoes, the leading independent family footwear store in New York City, will sponsor the largest-ever official barefoot and minimalist shoe run in New York City. The race will take place on Sunday, Oct. 10th, 2010 on Governors Island, NYC at 8:30 a.m. The first-of-its-kind event, entitled Barefoot Runners NYC, also includes "a weekend of educational, social, and athletic happenings to support the growing recognition that going barefoot, or as close to it as possible, is the healthiest way to be." <SportsOneSource>

Hedgeye Retail’s Take: Another positive step in the right direction for the barefoot/minimalist running movement. Recall that new players including New Balance are launching footwear to address the growing trend.


Retailer Online Performance Report - Online retailers’ web sales, conversion rate and average order value are all up this year, says a report released today by Forrester Research Inc., a research and consulting firm, and Shop.org., the e-retailing arm of trade association National Retail Federation.

Here are some of the most important metrics from the survey of 87 retailers:

  • Average online conversion rate is 2.9%. 54% of respondents say their conversion rate is up this year, 29% down.
  • Shopping cart abandonment rate is 55%, with 17% saying it’s higher than last year and 31% lower.
  • Average order value is $132; 47% say it’s higher than last year and 27% lower.
  • Web sales increased on average by 12% in the first quarter and 15% in the second quarter year over year for the retailers responding.
  • 80% of retailers say their e-commerce business was profitable in 2009, and 70% say it was more profitable last year than in 2008.


Hedgeye Retail’s Take:  More support for continued growth in e-commerce, as all key metrics for the industry are moving in the right direction. Interesting to see on an absolute basis just how low the conversion rate is for an online transaction. 


Small Businesses Recalibrating Social Media Expectations - After climbing steeply, according to research from Network Solutions and the Center for Excellence in Service at the University of Maryland’s Robert H. Smith School of Business, small-business adoption of social media marketing has plateaued at 24%. The study of US small business found that those that do market via social media primarily use Facebook (82%), and that the most common activities are maintaining a company page on a social network and posting status updates or links to interesting content. About half of businesses that used social media also monitored brand chatter on social networks. As small businesses have gained experience with social media, some have realized their expectations for the channel did not line up with the reality of the social web. As the wider marketing world begins to look at social as more of a loyalty channel than one for acquisition, small businesses are also finding that their hopes for spreading brand awareness and attracting new customers have not been fully met. By contrast, somewhat fewer small businesses had expected to use social media as an engagement channel, but nearly two-thirds have had success in that area. <emarketer>

Hedgeye Retail’s Take:  Perhaps the plateau has been hit as marketers and businesses alike are still trying to figure out how to effectively market via social networking.  Clearly this is still a work in progress, even for large multi-billion dollar companies.  Nonetheless, the real benefit to a small business lies within the fact that this is a low cost, low risk way to reach broader audiences. 


R3: JCP, ANF, BONT, PSS, and E-com - R3 9 29 10


Just For the Heck of It - Yusuke Sato says a man walked into his tobacco store in Atsugi, southwest of Tokyo, this month and bought 100 cartons of Mild Seven cigarettes. While they may not be good for his health, he may have saved $1,300. The man is one of thousands of smokers across Japan stocking up before Oct. 1 to beat a record 40 percent tax increase on tobacco. Their hoarding may add as much as 1.4 percentage points to this quarter’s annualized economic growth rate, according to estimates from the Japan Research Institute. <bloomberg.com>

Hedgeye Retail’s Take:  Should be a good month for Costco Japan and other discounters selling cigarettes.



Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%