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Since we're always asked about the M&A market during earnings season, we've highlighted a few trends below.




  • Average Key Per Price for luxury/UUP transactions in 3Q rose to $350k, which was higher than the YTD average of $300k.  
  • Global transaction volume of $9.9BN topped last year’s level of $9.0BN.  
  • US transaction volume is closing in on $5BN, up 106% YoY.  The bulk of transactions continue to be single-asset and Luxury/UUP.
  • REITS (existing and newly formed) have dominated the M&A market so far.
  • Access to capital continues to be limited.
  • According to Fitch - CMBS hotel loans defaulted at a higher rate (20%) in August than July (18.6%)


  • Average Key Per Price
    • US $359,795 since 6/30/2010 (13 transactions)
    • $301,886 YTD (33 transactions)
  • International
    • $279,784 since 6/30/2010 (11 transactions)
    • $427,097 YTD (24 transactions)
  • Cap rates/Valuation
    • 5-6% range, in line with 2006 cap rates
    • 9-11x EBITDA; however, two luxury hotels recently sold at 17-18x EBITDA

Q3 Transactions (Summary)











American Bliss

This note was originally published October 07, 2010 at 08:12am ET 


“There are two ways of being happy: We must either diminish our wants or augment our means - either may do - the result is the same and it is for each man to decide for himself and to do that which happens to be easier.

-Benjamin Franklin


American Bliss - Ben Franklin




It is nearly impossible to get away from talking about QE – believe me, I tried.  But the quote below from Ben Bernanke is the first story that caught my eye today. 



American Bliss - Bernanke 2



"Raising the inflation objective would likely entail much greater costs than benefits.  Inflation would be more volatile, bring more uncertainty and possibly create destabilizing moves in commodity and currency markets that would likely overwhelm any benefits arising from this strategy."


Am I missing something or is this just another case of watch what I do, not what I say?


Mr. QE is doing nothing but destabilizing commodities and currency markets.  Our contention has been for some time that quantitative easing leads to reflation, which can lead to inflation.  Gold continues to signal high inflation expectations among investors.   The Hedgeye math says: QE =Reflation = Inflation


Pick your duration of one day, one week, one month, or three months; as quantitative easing expectations have ramped higher, so has the outperformance of commodity-driven equities and the global recovery-leveraged Materials and Industrials sectors.  Yesterday was no exception.  With the S&P trading flat on light volume, the best performing sectors were Energy (XLE), Materials (XLB) and Industrials (XLI).  The worst performing sector yesterday was Consumer Discretionary (XLY).  Yes, inflation is bad for consumer spending!



American Bliss - Federal Reserve


Rhetoric from Federal Reserve officials on the need for quantitative easing may affect the markets but consumer behavior, and confidence, remain impervious to Washington, DC Groupthink.  Downturns such as the one we are living through today (41m Americans on food stamps) deeply affect consumer confidence and attitudes towards debt accumulation in the name of consumption. 


As I said on our 4Q10 themes call, the Consumption Cannonball implies that consumers will continue to save more and are “reconsidering” their living standards; the policies of the FED and the Obama administration are perpetuating this trend.  While creating windfall returns for paper assets and financial institutions, quantitative easing has not met the expectations touted by many of its initial proponents.  By failing to improve the unemployment picture (as was promised), the administration’s policy of quantitative easing is a failure as far as Main Street is concerned.   The effect on the dollar (and commodities) of this policy is further hampering a consumer recovery.


The lack of traction in the labor market was reinforced yesterday after ADP reported that private payrolls fell 39,000 last month following a 10,000 gain in August, while consensus expectations were for a 20K increase. 



American Bliss - Chicago Federal Reserve



Charles Evans, President of the Federal Reserve Bank of Chicago said because unemployment is not coming down nearly as quickly as it should, his conclusion is that “we need more monetary accommodation than we’ve put in place!”  Yet there is no connection between QE and the ability to reduce unemployment!  As Albert Einstein said, “The definition of insanity is doing the same thing over and over again and expecting different results.”   


Despite the S&P 500 being up 8.7% in September, the consumer macro factors were mixed as confidence, employment and housing data all added further to our conviction that recent governmental policies are failing to produce a real consumer recovery.  


For all the valuation junkies that will tell you that the market is cheap on a P/E basis, that metric will be fighting the gravitational pull of slowing growth.  Despite all of the QE talk, 3Q10 will likely represent the last double digit EPS growth quarter for the S&P 500 for the next one, maybe two years.  Which begs the question, have you factored in enough of a slowdown in earnings growth? 


American Bliss - 1


Looking out over the next 6 quarters, consensus is projecting S&P 500 earnings growth of 20% in 3Q10, dropping to 11.8% in 4Q10 and sub 10% for the balance of 2011.  In a slowing growth environment, how do you manage risk around the fact that these estimates might be too aggressive?  This is the question every portfolio manager/analyst needs to be thinking about as we head into the current earnings season. 


As it relates to our 4Q10 Consumption Cannonball theme and the implied year-over-year deceleration in discretionary spending, Brian McGough asked the question: are management teams being conservative enough?  How do you manage risk around 2011 guidance that companies might throw out to the Street before they know; (1) what will happen to the consumer, and more importantly, (2) how will they behave when desperate competitors react in a weak consumer environment?  


How will you manage risk around this?


We are likely to get a small preview of these trends with today’s retails sales data.  Most retailers are expected to meet estimates that are not viewed as overly aggressive; although difficult comparisons will also play a role as September 2009 was the first month of positive comps in some time for many retailers.


For the time being many American will be forced to diminish their wants in order to be happy. 


Howard Penney


Conclusion: U.S. dollar weakness, long term demand, and softer yields than expected keep us bullish on corn.


Positions: Long Corn via the etf CORN


Earlier today we sold our agriculture position via the etf DBA for a small profit, but we remain long corn, via the etf CORN.  In the attached chart we highlighted one key reason to be long corn, which is U.S. dollar weakness.  The threat, risk, and overhang of loose monetary policy and continued monetary easing will serve to continue to weaken the U.S. dollar and inflate commodities that are priced in dollars, such as corn.


While the recent corn stocks report from the USDA came in about 300 million bushels higher than expected, the view many of our commodity contacts is that this report is likely not accurate.  Even though we find it difficult to believe that government data may not be accurate (this is sarcasm), those closest to the date seem to believe the stock number is not aligned with the reality of the stock situation.  In fact, there is a view that the vast majority of this “surprise” 300 million bushels is actually old crop corn that is often traded at a 80% discount to the market.


Next Friday, the USDA will release more data on corn situation, specifically the yield estimate.  Interestingly, the USDA estimated national yield in August at a record.  As one subscriber wrote us:


“In the 2010 August crop report the USDA estimated the national yield at a record. Given the extraordinary weather we have had this summer, I found that quite amazing. We had an unprecedented amount of rainfall in key growing areas in June, July and August. Some areas in Iowa received over 50 inches in these months. Nighttime temperatures were at an all time record for several weeks after pollination. Top agronomists have written many papers on the negative effects of high nighttime temperatures on kernel fill, or ear weight, and yet in their September report the USDA used a near record ear weight.”


Needless to say, the yield data seems set up to disappoint and is likely to decline sequentially.


Just as a broader frame of reference, corn is more than just a speculative commodity the lads at Hedgeye like to trade.  In fact, corn is the most widely produced feed grain in the United States, accounting for more than 90% of total value and production of feed grains.  Almost 80 million acres of corn are planted in the United States and corn is the main ingredient in livestock feed, so will impact the margin and prices on cattle and pigs as well.  Corn is also a major export product as more than 20% of corn grown in the U.S. is exported.  Corn is almost an important input in ethanol, whose demand is only expected to grow in coming years based on the Energy Independence and Security Act of 2007 which mandates increased use of biofuels.


Given the importance of corn to the U.S. economy, it makes us wonder why the USDA’s data is so corny.


Daryl G. Jones
Managing Director



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September Sales Tales

A solid month for those keeping score, but the headlines don’t always tell the whole story.  The trend for September was clearly positive, with 17 companies reporting results that exceeded expectations, 5 that missed, and 2 that were inline.  Beneath the surface, there were a handful of underlying trends that are worth highlighting.

  • Almost every retailer with back-to-school exposure cited strength.  Shopping “closer to need” was the common catch-phrase used to describe why September ultimately ended up being the beneficiary of the annual return to class.  At some point, maybe the Street and the companies themselves will realize that “close to need” is analogous to shopping when it “makes sense”.  Your kid goes back to school in shorts because it’s still warm out.  The weather gets cooler. Mom goes to the store to replenish the fall wardrobe.  None of this is rocket science, but for some reason we keep talking about how the consumer is buying closer to need.  Now’s the chance to pre-empt holiday speculation by recognizing that the final 10 days before Christmas are the most important days.  Not Black Friday and not early December.
  • Promotional activity remained heightened during the month, especially in the teen apparel space.  JC Penney also cited promotional activity as the reason why it re-affirmed guidance (not raised) despite posting a better than expected topline. 
  • Gap noted that it expects October to be promotional for its brands given its “challenging” results in September.  They’re clearing out goods and moving on. 
  • The men’s business stood out for the month across a variety of retailers including JCP, JWN and ANF.  Perhaps this is a bit of pent-up demand as the male consumer looks to replenish his wardrobe after taking an extended break from the mall.  This is something to watch, especially since the focus for several months has been primarily on dresses, footwear, and the home.
  • Without question, momentum slowed in the final week of the month.  Almost every retailer highlighted week 5 as the weakest due to unfavorable weather (hot and rainy) as well as difficult comparisons with last year’s perfect cold weather set up.  Recall that an early cold spell came at the perfect time last year, allowing retailers to maximize full priced sell-throughs on early fall merchandise sets.
  • Coincident with weather patterns, the northeast region was most commonly called out as having the weakest regional results.
  • The south and southeast were among the better performing regions for the month.
  • Footwear remains a consistent standout, producing above trend results at: DDS, KSS, JCP, SKS, and JWN
  • American Eagle seems to have taken its foot off of the promotional gas, citing less promotional activity as the reason for raising guidance.  Recall that AEO has lowered guidance a handful of times since the Spring.  They appear to have lowered the bar too far.
  • Our overall index of same store sales remains relatively stable, despite what appears to have been a very good month for retailers.  On a one-year basis, the index remains in a narrow range, hovering between a 3.5% to 4% increase since May.  On a two year basis, the trend improved for the second month a row.  This is the first time we’ve recorded two months of sequential positive trends since the Feb/March time frame.

September Sales Tales - Sept SSS


Eric Levine


UA/NKE: Tom Brady -- Free Agent

Tom Brady is a free agent -- at least as it relates to retail. Under Armour struck first in the game of chess. Don't jump to conclusions before seeing who captures the king.



Anybody watch the Patriots/Dolphins game on Monday night? See Brady’s shoes? For the first time in his career as a Patriot, he was not wearing Nike.  Certain folks in the press have picked up on this, and are running with it in their own special, albeit inconsequential, way. No single deal can make a brand – and I don’t care what brand it is. If anything, we’d argue that a deal (and fincial terms therein) can break a company a lot easier than it can make or break the brand. But the key here is that you need to put the Brady endorsement into context. It’s important to watch, but not for reasons others might think. Consider the following…


UA/NKE: Tom Brady -- Free Agent - tbua


1)      Cross-Over Appeal: Brady is one of those cross-over athletes. Like Maria Sharapova, Lance Armstrong, or (at least the former) Tiger, Brady could be on the cover of Sports Illustrated and GQ at the same time. Add on the fact that he’s married to one of the most sought-after supermodels on the planet (Gisele Bunchen), and you can tack on People magazine as well due to the ‘Brangelina’ factor.


2)      But is Brady An Exception to The Rule?: Despite having all this going for him, Brady has  arguably been a low-return investment for Nike, who has been paying a minimum of $12mm in each of the past four years. Think about it in the context of a required return of 10% (below any of the major brands’ IRR). Let’s keep the math simply. $48mm over 4-years should result in about $53mm of EBIT. Using a 50% incremental margin, we’re talking $105-$110mm in revenue required to justify Brady. That sounds kinda big, especially given that he’s not exactly ‘Mr. Personality’ around game time. (Author’s note: what a sad note about public perception – as he so focused on winning that he generally could care less about the press, and sometimes gets dinged for it). But it does impact commercial value relative to athletes like Drew Brees and Troy Polamalu, who are also leaders in their own right, but are less expensive and are more marketable around game time.


3)      This Might Be a Game of Chess: Why?

  1. This is far from a done deal. Keep in mind that Reebok (adidas) currently holds the license for the entire NFL as it relates to ‘official on-field’ apparel. This is a 10-year deal that ends in 2012. Seems far off, but whoever designs the product for 2012 needs 18 months lead time at a minimum. So that’s up for bid now. Before we get a decision, they’ll be plenty of iterations of agents, brands, and even the NFL itself playing the pricing/positioning game through the press.
  2. In May, the Supreme Court ruled 9-0 against the NFL that it can no longer treat this contract as a single business, but rather a group of businesses. This is a win for the players association, as well as brands that don’t want to be obligated to pay for unprofitable parts of the license that they want no part in (mouthguards, gloves, whatever…).
  3. What’s the point? After seeing Brady win his 100th game on Monday wearing Under Armour cleats, you can be pretty darn sure that Nike’s head US Football dreaded going to work on Tuesday morning. Nike probably would admit that Brady is not worth as much coin as he’s been pulling down. But a bigger question might be the cost if they were to allow him to fall into the hands of its top competitor in football. In other words, has Nike gotten so big that people don’t give them credit for the endorsement, but will only penalize them for not having it?
  4. Does Under Armour know (or think that they know) that Nike won’t lose Brady, so they’re putting on the pressure on the comp level to pull resources away from pieces of the unbundled NFL license that UA will find more attractive?


This is the kind of media noise and speculation (including our own) that we won’t bake into our model just yet. We need to wait to get the facts. It’s a good news/bad news/good news scenario. The fact that UA is on such offense right now speaks to the health and trajectory of its business. On the downside, these deals are ALWAYS dilutive before they regurgitate any cash – no exceptions. But in the end, this is all consistent with a) what UA should do, and b) what management said it would do over the past several years.



UA/NKE: Tom Brady -- Free Agent - tb1


UA/NKE: Tom Brady -- Free Agent - tb2


UA/NKE: Tom Brady -- Free Agent - tb3



October 7, 2010


Positioning by retailers is heating up ahead of the holiday with an uptick in seasonal hiring at KSS, online shipping incentives by others, while Bergdorf is jumping the shark setting windows already here in early October. 




- Expect to hear some commentary on the new Gap logo at next week’s analyst meeting.  As it stands now in the world of fashion and marketing blogs, Gap has definitely elicited some negative feedback.  Let’s hope there’s some product to back up the new image or else it will be difficult to see how comps accelerate with a simple change in font.


- Bergdorf Goodman gets the award for Christmas in October.   The luxury department store has already begun to set its holiday windows, skipping Halloween and everything in between.  Talk about holiday fatigue.


- Costco noted that it sees some light at the end of the tunnel for the TV category, which has been under pressure for several months now.  The company expects promotional activity to pick up (helped by vendor support) over the November/December holiday period, which in turn should help spark unit demand.


- Louis Vuitton can't keep up with the demand for its logo. It is reportedly closing key stores in Paris an hour earlier than normal in order to retain merchandise. So, if you want your LV that badly, you're going to have to make sure to start shopping earlier. Normal hours are set to resume next month.





KSS To Hire 40,000 this Holiday - Kohl’s Corp., the fourth-largest U.S. department store chain, plans to hire about 40,000 people this holiday season, 21 percent more than last year, to prepare for a projected uptick in sales. The employees will work in the company’s 1,089 stores, as well as distribution centers and credit operations. U.S. retailers could add as many as 650,000 jobs this holiday season, 30% more than last year. <bloomberg.com>

Hedgeye Retail’s Take: So, are they cutting their full time employees and just adding cheaper part time labor or is KSS just bullish on the holiday season? 


Neapolitan Tailored Clothing Company Kiton Buys Italian Based Textile Mill Carlo Barbera - Biella, Italy-based textile mill Carlo Barbera has found its white knight in Kiton, the Neapolitan tailored clothing company established in 1956 by Ciro Paone. During a fashion preview in New York City on Wednesday, Antonio De Matteis, Kiton’s chief executive officer, revealed his company has purchased a controlling stake in the mill, which has been weighed down by financial problems. He said the purchase price was 3.3 mm euros, or $4.5 mm at current exchange. The deal does not include the Luciano Barbera clothing line that is available at luxury stores such as Neiman Marcus and Bergdorf Goodman. <wwd.com/business-news>

Hedgeye Retail’s Take:  Talk about old school.  One of the finest suit and shirt-makers on the planet is heading towards vertical integration, a strategy that is sure to keep quality at its highest. 


Retailers Join Forces on Shipping - Bidding to match, and surpass, the successful free shipping program of Amazon.com Inc., 15 retailers and GSI Commerce Inc. have launched ShopRunner, a service that offers consumers free two-day shipping and free returns. Amazon’s Prime loyalty program does not cover free shipping when items are returned. Consumers pay $79 per year for the benefits, the same $79 annual fee Amazon charges for its Amazon Prime free shipping program. Retailers such as The Sports Authority Inc., Toys 'R' Us Inc. and Wilsons Leather already are taking part. GSI says such merchants at Borders, Barnes & Noble, Ice.com Inc. and CSN Stores LLC are among the two dozen other online retailers scheduled to participate.  <internetretailer.com>

Hedgeye Retail’s Take: After some internal discussion on this one, this appears to be more of a headline event than one with a real financial impact. Assuming $79 covers roughly 10-12 shipments annually, Amazon’s Prime program makes sense given the breadth of product and staples the retailer offers (e.g. diapers, detergent, etc.). On the other hand, it’s tougher to justify for some of these other retailers when figuring that one would have to purchase a hoody a month just to cover the cost.


MasterCard: Web Sales Grow 7.8% in September - E-commerce sales growth picked up modestly from August, a modest increase from 7.2% growth in August, MasterCard Advisors reported. Online apparel sales registered the highest growth among e-retail categories, at 13.4%. Total apparel sales, online and offline, were up 3.8%, following a 2.6% gain in August, according to the monthly SpendingPulse report. Overall, September continued the pattern of consumers spending selectively and leaning towards non-discretionary rather than discretionary items. The strong performance of the financial markets, which often helps the higher-end sectors, did not appear to do so in September.  The month benefited from late back-to-school shopping, with some apparel shopping pushed back from August to September as parents postpone fall and winter purchases until the cooler weather arrives. <sportsonesource.com>

Hedgeye Retail’s Take: We question the sustainability of these results particularly in apparel given our expectation of a deterioration in consumer spending over the balance of the year.


JCP and Condé Nast Unveil Modern Bride Concept - Condé Nast is collaborating with JCPenney to launch a Modern Bride-inspired retail concept in stores. The retailer has been granted the rights to use the magazine brand in all categories, including a jewelry line for launch this February. In time for Valentine's Day, JCPenney's fine jewelry department will feature an expanded assortment of bridal jewelry, including engagement rings and wedding bands, with Modern Bride signage and packaging in a specialty store environment. <licensemag.com>

Hedgeye Retail’s Take: Not a bad move given the high likelihood of demographic crossover between the two brands. 


Home Depot, CVS, and Amazon Are Tops for Online Gift Cards - A study of the gift card programs of the Top 100 online retailers  finds only 50 offer digital gift cards. Among those, the five digital gift card programs rated as best by research and advisory firm RSR Research were: The Home Depot Inc., CVS Caremark Corp., Amazon.com Inc., American Eagle Outfitters Inc., and Sears Holdings Corp. The study analyzed digital gift card purchases made in July. It evaluated the retailers’ programs using 20 criteria including comprehensiveness of the offering, selection, the purchase process and the recipient experience. <internetretailer.com>

Hedgeye Retail’s Take: We question the validity of the study given the highly undifferentiated nature of what is essentially cash.


Clothing Helps Drive 6.5% Sales Increase For M&S - Sales at Marks & Spencer Group plc rose 6.5% in the second quarter ended Oct. 2, with clothing sales up 7.8%. However, chief executive Marc Bolland warned that trading conditions would become more challenging later this year.  <wwd.com/business-news>

Hedgeye Retail’s Take: Notable in that at most retailers, footwear has outperforming category relative to apparel.


GSI Commerce to Open Louisville Facility - GSI Commerce Inc. will hold a grand-opening ceremony on Monday, Oct. 11, for a new Louisville facility. The new facility will specialize in the customization of sports apparel such as jerseys, T-shirts, and fleecewear. <sportsonesource.com>

Hedgeye Retail’s Take: The company’s 5th domestic facility increases GSI’s fulfillment space to 2.6mm sq. ft. reflecting the increasing demand for more stable e-commerce management as well as fulfillment from the industry’s leading provider.


Rose Gold In Style - Designers are viewing spring through rose-colored glasses, and their collections show it. Metallic rose-gold leather appeared throughout the Paris collections, surpassing other metallics as the new neutral for spring. Perhaps it was Victoria Beckham’s now well-known request to have designer Brian Atwood create shoes to match her rose-gold Rolex that sparked the trend, but he’s not the only one that is riding this wave.  <wwd.com/footwear-news>

Hedgeye Retail’s Take: Metallic shoes have been a strong trend for several years now so with a relatively limited color palette – so why not rose gold in an attempt to perpetuate the trend?


Apparel Continues Topping List of Exports in Vietnam - Finished garments continued taking the lead among Vietnam’s exports since the beginning of 2009, posting a total turnover of US$8 bn in the first nine months of this year. The export of garments to the Republic of Korea grew 84%, the highest growth rate as compared to other industries, mainly thanks to a reduction in tariff in line with the ASEAN-RoK Free Trade Agreement. Apparel exports to the US , which accounts for 55% of the industry’s revenues, increased by 20%. In particular, garment exports to the European market have bounced back in the past three months, at 7%, following a long period of dropping. Vice Chairman of the Vietnam Garments and Apparel Association (Vitas) Le Van Dao said a number of domestic garment companies have received orders for the first half of 2011, plus prices have risen by 10-15% year-on-year.  <fashionnetasia.com>

Hedgeye Retail’s Take: In addition to stronger demand out of Europe, Vietnam is the obvious beneficiary of wage inflation in China driving companies to look towards other SE Asian countries. We expect this is just the beginning of a longer term ramp in export demand as Vietnam is at a structural advantage to others in the region.


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