R3: JNY, Li&Fung, GPS, SKX, URBN


October 7, 2010


M&A activity and chatter picking up in retail while international competition in e-commerce is keeping domestic players on their toes. 




- Count Glow-in-the-dark shoes among the new product you’ll see at Foot Locker this month as footwear retailers look to join in the Halloween spend. While the feature isn’t particularly new or novel, Nike takes it a step further this year with its Nike Dunk Halloween Edition sporting an upper that is entirely glow-in-the-dark. We don’t expect these styles to be a key top-line driver, but they’re at least more inconspicuous than light-up alternatives that have been banned by many schools.


- After stirring an initial wave of controversy with the unveiling of an unloved new brand logo, Gap is now asking its Facebook fans for input.  In fact, they are also soliciting consumers to submit their own logo ideas.  Why would they do that if they weren’t having second thoughts?


- Leave it to Skechers to knock-off even the shoes with the best of intentions.  The company launched a line of fabric shoes which look strikingly similar to TOMS.  Recall that TOMS gives a pair of shoes away to people in need for each pair sold.  At least Skechers is following suit by also giving away a pair to charity for each pair of “BOBS” it sells.  Would it have been that difficult for SKX to come up with an original charitable contribution of its own?





Nine West Group to Grow Mid-Tier Business - Nine West Group has appointed Richard Olicker to spearhead growth of its mid-tier brands division. Rick Paterno, wholesale president for better footwear brands at Nine West Group said now is the time to step up the growth of the mid-tier segment, as well as the first cost direct business segment, which started last year to source and make product for private label. “There is certainly growth with private label [business] throughout the industry, and many of our competitors have been in that business for quite some time,” he added. Nine West Group’s mid-tier brands include Mootsies Tootsies, Sam & Libby, Dockers, Nine & Co. and Gloria Vanderbilt. <>

Hedgeye Retail’s Take:  With Aldo becoming the fashion vendor of choice for both JCP and KSS, it looks like Nine West is attempting to step up its effort to remain on the shelves.


Manhattan Beachwear Acquires Apparel Ventures - Manhattan Beachwear, Inc., has reportedly acquired Apparel Ventures, Inc., effectively merging two large portfolios of swim labels. Apparel Ventures swimwear brands include a large portfolio of proprietary and licensed brands, distributed to national department stores, luxury boutiques, and specialty swimwear chains.  Proprietary brands include La Blanca and 2 Bamboo.  Licensed brands include Ralph Lauren, Trina Turk, ABS, Puma and Rampage. Manhattan Beachwear's owned brands include The Bikini Lab, 24th and Ocean and Maxine of Hollywood. Licensed swim brands include Kenneth Cole New York, Kenneth Cole Reaction, Nanette Lepore, Hermanny by ViX and Sofia by ViX. <>

Hedgeye Retail’s Take:  Perhaps the key to the swimwear business is remaining “private”.  With extreme seasonality, the product category has never been a very good business for any public traded manufacturer given it only makes money in one quarter (usually) and can sometimes be derailed by the weather.  Speedo is a case in point.


Li & Fung Sees 'a Lot of Orders or Next Year - Li & Fung Ltd. said it expects “a lot of orders” for next year as purchases and sourcing deals boost its market share. “With the acquisitions we have done, outsourcing deals we have done and the new business, next year looks very good,” President Bruce Rockowitz said in a phone interview late yesterday. “It looks less and less likely that there will be a double-dip recession.” Li & Fung yesterday won court approval for the more than HK$7 billion ($903 million) purchase of Integrated Distribution Services Group Ltd. that will increase revenue from China and Southeast Asia. The company wants to build a higher margin business selling brands to Asian consumers. This will create a whole new growth driver. <>

Hedgeye Retail’s Take: While we may question the company’s “macro” view, we do believe that Li & Fung is best positioned to benefit from rapid changes in the Asian sourcing base.


Gap and CVS E-Commerce Sites Crashed This Week - The Gap site went down Monday at about 9:20 a.m. Eastern time. The web site started loading very slowly, taking over 11 seconds to load. The problem only continued to get worse with intermittent time-out errors and persisted until 12:30 p.m.

The CVS site went down Monday at about 1:50 p.m. Eastern and was brought back up by 3 p.m. <>

Hedgeye Retail’s Take:  With so much focus on the growth in e-commerce these days, we often forget that these platforms are not bulletproof.  Yet another reason why we’re also seeing measurable increases in .com infrastructure investments to support future growth. 


Urban Outfitters Jams with Scarlett and Crimson - A range of Scarlett & Crimson-inspired cosmetics and accessories are now being stocked at Urban Outfitters, following success in Boots and Superdrug, according to Coolabi. Urban Outfitters' flagship U.K. stores (Oxford Street and Bluewater), as well as its major Scandinavian outlets in Copenhagen and Stockholm are featuring the Scarlett & Crimson lines. The lines include mascara and eyeliner. If the initial range proves successful, further plans are to roll out the products to more stores in time for Christmas. <>

Hedgeye Retail’s Take: Yet another apparel retailer getting into the cosmetic accessories game. Given the success of others ramping efforts here over the last year and the favorable margin profile of the category it’s no surprise to see a proliferation of offerings as core apparel margins continue to be squeezed.


Holiday Sales Could Be Good If September's Luxury and Bigger Ticket Strength Continues - It might not be a bountiful holiday, but if September same-store sales are any indication, consumers are likely to splurge on select higher-priced items, as luxury retailers got their groove back and better goods performed well for many mainstream stores. “The fact that luxury continued to post a strong performance is not surprising given the recent improvement in high-income household consumer confidence,” said Michael Niemira from the ICSC. Saks Inc. and Neiman Marcus Inc. called out robust sales in their fine jewelry categories last month, but so did Macy’s Inc., J.C. Penney Co. Inc. and The Bon-Ton Stores Inc. Comparable-store sales rose 2.6% in September, led by luxury’s 6.6% leap. <>

Hedgeye Retail’s Take: We’d caution straight-lining any pickup in consumer spending particularly one that’s accelerating heading into the holiday’s. Importantly, along with the ramp in luxury sales, most retailers acknowledged a shift into September as BTS spending was realized later this year.


British E-tailer Asos Launches US Site - The U.K.’s largest online fashion store just got a little bigger., which has more than four million registered customers, made its U.S. debut this week with the launch of a website exclusively for the American market. The London-based e-tailer, which offers more 800 brands and 42,000 product lines spanning men’s and women’s apparel, accessories and beauty products, was launched in 2000 and did about $370 mm in international sales for the year ending March 2010. More than 100 footwear brands are sold on the U.S. site, including Converse, United Nude, House of Harlow, Timberland and Asos’ own label. Before the launch, Asos had already established a database of 200,000 customers based in the U.S. and has been actively marketing to boost traffic there. Initial efforts, according to a press release from the company, have nearly tripled U.S. traffic and doubled U.S. sales. <>

Hedgeye Retail’s Take: Offering customers the full gamut from suits to swimwear, the UK retailer offers an impressive array of name brands online including many European brands not available through most domestic competitors. Offering free shipping and returns in the UK, international rates of $6 for standard 8-day delivery is competitive as long as you are willing to wait a few more days. Perhaps the cost of offering free shipping for a limited time would do the retailer well in terms of accelerating the build out its U.S. customer base.



Shallow Charlatans

"A modern philosopher who has never once suspected himself of being a charlatan must be such a shallow mind that his work is probably not worth reading."

- Leszek Kołakowski


Listening to Bloomberg’s Tom Keene interview Alan Greenspan last night gave me clarity on something that I haven’t quite been able to put my finger on for a long time. On the topic of US economic policy, the world has been transfixed by Shallow Charlatans.


Now let’s not confuse the word transfixed with convinced. Per the Merriam-Webster definition, to be transfixed is “to become motionless with horror, wonder, and astonishment.”


I became motionless last night – literally - as I was driving home down the Merritt Parkway listening to their discussion, I had to pull over to make sure I wasn’t selectively being astonished. Maybe it was my own personal prelude to listening to what I was hearing. Maybe it was meant to be listened to, rather than watched. I’m not sure. I’m still young enough to know what I don’t know.


What I do know is that I don’t surround myself with politicians or sell-side “economists” who are prone to groupthink. After yesterday’s market close I left the office for New Haven’s Owl Shop to have a cigar with some of the most sophisticated European buy-side investors I know. After that, I had a nice dinner at Mory’s with some colleagues who are trying to figure out how to not repeat history’s risk management mistakes.


Then, no matter where I wanted to be, there I was… in my car… parked at the Mobile station in the dark…. left in horror with what I thought would be this morning’s headline news…


When I woke up this morning, it was still dark… and I was still astonished – but the best news was that Greenspan’s revisionist history from last night wasn’t a top 3 Bloomberg headline. This is progress. Americans aren’t as stupid as the professional politicians who have been pillaging their savings with ZERO percent interest rates purport them to be.


HEADLINE: “Greenspan Says U.S. Creating `Scary' Deficit as Borrowing Rises”


The only thing that’s “scary” here folks is that an 84 year old man still fails to realize that what he’s scared of are the problems he perpetuated.


Even though Keene and Greenspan weren’t focused on it last night, the #1 factor in global markets today is the US Dollar. Yes, that could very well change next month or next year, but for those of us who are accountable to what comes out of our mouths, today’s prices are what matter most.


While it’s kind of astonishing to hear a Shallow Charlatan talk about the market when he’s never traded one, this remains the contrarian investor’s greatest opportunity – fading the sell-side and groupthink consensus. Consensus is that QE is a must and Burning The Buck is ok (until it isn’t). Consensus has given birth to some of the highest inverse correlations to the US Dollar that I have ever seen.


Rather than being transfixed by the radio or television, take 30 seconds out of your day to stare at this math embedded in correlations to US Dollars:

  1. High Grade Copper = -0.98
  2. Gold = -0.97
  3. Silver = -0.97
  4. Platinum = -0.93
  5. Reuters CRB Commodity Index = -0.96
  6. India’s Sensex Index -0.92
  7. Brazil’s Bovespa = -0.91
  8. SP500 = -0.88
  9. Rough Rice = -0.87

Now the way Keene whipped around his “7-standard deviation” jargon and Greenspan found a way to obscure just about the most basic of algebraic relationships, understand this folks – there are a lot of market practitioners out here who are playing this game with live ammo who get the math. Our job isn’t to talk over you. We have your back.


The basic math that I am showing you here is on our immediate term TRADE duration. In the immediate term is where you’ll find critical market risk. Yesterday the US Dollar was up a mere +13 basis points, or 0.13%, and the deleverage on the price of gold and oil were huge.


If this government and the Shallow Charlatans that advise it want to pretend that they aren’t perpetuating volatility and systemic risk, they can go do that. But I have a funny feeling that the nasty US Consumer Confidence readings we’ve had as of late (ABC/Washington Post weekly reading down to minus 47 this week) already tell you everything you need to know about Americans and their money – they know a ponzi-scheme when they smell one.


My immediate term TRADE lines of support and resistance for the SP500 are now 1148 and 1164, respectively.


Have a great weekend and best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Shallow Charlatans - greenspan


The Macau Metro Monitor, October 8th 2010



During Golden Week, visitor arrivals from Mainland China soared up to 1.8 million, of which 835,000 were mainland residents.  Visitor flow at 3 major checkpoints during the period: Gongbei had 1.7 MM visitors, Hengqin had 70,000 visitors, and Wang Cha had 33,000 visitors.


Even though Golden Week has ended, the majority of the hotel room rates in Macau are still high.  5-star hotel ADR (single-room) was MOP $1,800.  During the first two days of Golden Week, standard double sized hotel room rates in Cotai were up to MOP $2,000; Wednesday ADR was $1,800; and Friday's rate was $1,600.  Peak rates in Central Macau Peninsula were up to $3,388.  Surveys indicated that consumer expenditures during Golden Week were mainly on souvenirs and daily personal necessities.  Retailers said overall sales rose 30% YoY.  Immigration statistics revealed that the majority of independent travelers were from Shenzhen, Zhuhai, and Foshan.



Architects and gaming industry experts at the Asian Casino and Gaming Congress at MBS said that RWS has the edge over MBS because of its accessible location and RWS' loyalty program, which has received high marks for customer service and satisfaction.


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TODAY’S S&P 500 SET-UP - October 8, 2010

As we look at today’s set up for the S&P 500, the range is 16 points or -0.87% downside to 1148 and 0.51% upside to 1164. Equity futures are trading mixed to fair value ahead of today's key jobs report and following yesterday's inconclusive session which saw major indexes close little changed. After the close, Alcoa and Micron Technology opened the Q3 earning season. AA reported Q3 EPS $0.09, ex-items, vs. Reuters $0.05, and raised its 2010 forecast for global aluminum demand to 13% from 12%. MU reported Q4 EPS $0.32 vs. $0.39 and said demand softened significantly toward the end of the quarter.

  • Alcoa (AA) reported 3Q adj. EPS $0.09 vs estimate $0.05, raised 2010 aluminum consumption forecast to 13% from 12%
  • AngioDynamics (ANGO) cut FY 2011 EPS forecast to $0.47-0.50 from $0.53-$0.56, vs estimate $0.49
  • Bruker (BRKR) completed acquisition of Atomic Force Microscopy and Optical Industrial Metrology; Reiterated guidance
  • DragonWave (DRWI) reported 2Q revenues $27.2m vs estimate $26.9m
  • Kulicke and Soffa Industries (KLIC) sees 1Q revenue “significantly” below 4Q
  • Micron Technology (MU) reported 4Q revenues: $2.49b vs estiamte $2.66b
  • Onyx Pharmaceuticals (ONXX) delayed NDA for carfilzomib
  • Scansource (SCSC) raised 1Q revenue forecast to $623m-$633m from $555m-$575m, vs estimate $554.8m


  • One day: Dow (0.17%), S&P (0.16%), Nasdaq +0.13%, Russell 2000 (0.16%)
  • Month/Quarter-to-date: Dow +1.49%, S&P +1.48%, Nasdaq +0.64%, Russell +1.20%
  • Year-to-date: Dow +4.99%, S&P +3.85%, Nasdaq +5.05%, Russell +9.41%


  • ADVANCE/DECLINE LINE: -240 (-53)
  • VOLUME: NYSE - 910.39 (-7.10%)  
  • SECTOR PERFORMANCE: Only three sectors rose yesterday - Materials (1.00%), Consumer Spls (0.35%), Financials (0.41%), Energy (0.50%), Industrials (0.22%), Healthcare +0.20%, Utilities +0.19%, Consumer Disc +0.47%, Tech flat - The lack of direction in the market was not too surprising ahead of tomorrow's release of September payrolls and the unofficial start of Q3 earnings season after the close.
  •  MARKET LEADING/LAGGING STOCKS YESTERDAY: Adobe +11.50%, JC Penney +9.10% and Abercrombie +8.91%/Marriott -5.78%, Owens Illinois -4.48% and Starwood -2.95%.
  • VIX: 21.56 +0.33% - YTD PERFORMANCE: (-0.55%)
  • SPX PUT/CALL RATIO: 1.38 from 1.43 -3.60%


  • TED SPREAD: 17.65 0.203 (1.164%)
  • 3-MONTH T-BILL YIELD: 0.13% unchanged
  • YIELD CURVE: 2.05 from 2.03


  • CRB: 287.30 -0.64%
  • Oil: 81.67 -1.87% biggest down day since August
  • COPPER: 367.95 -1.96%
  • GOLD: 1,334.57 -0.90%


  • EURO: 1.3886 -0.28%
  • DOLLAR: 77.387 flat




  • European Markets: FTSE 100: (0.59%); DAX: (0.29%); CAC 40: (0.55%)
  • European markets opened lower in cautious trading with a focus on the US jobless report.
  • Major indices have traded in a narrow range between unchanged and down around (0.5%) and currently trade near the day's lows after stronger than expected UK PPI data.
  • Alcoa (AA) trades up +1% in Germany after its Q3 results last night. The auto, retail and banking sectors lead the regions fallers whilst basic resources and technology sectors lead a minority of sector gainers. US futures trade little changed
  • UK Sep PPI Output +4.4% y/y vs consensus +4.3% and prior 4.7%
  • UK Sep PPI Input +9.5% y/y vs consensus 8.6% and prior revised 8.7%
  • Bank of France released its Sep survey of industrial and service industries activity. Industrial activity picked up vs the lull in Aug, whilst the service sector increased strongly. Following the survey Central bank leaves its estimate of Q3 GDP unchanged at +0.3%


  • Asian Markets: Nikkei (0.99%); Hang Seng +0.16%; Shanghai Composite +3.13%
  • Ahead of today's US jobs report, Asian markets traded mixed with Shanghai up over 3% after being closed for a week, and the Nikkei down as the yen continues to flirt with record levels vs the US dollar.
  • After being closed a week for the Golden Week holiday, Shanghai stocks are sharply higher as they play catch-up with the rest of the world
  • Moody's said it is considering raising its A1 rating of China's sovereign debt. Moody's says it intends to conclude its review within a three-month period.
  • As the yen continues to strengthen versus a weakening dollar, Japan approved a ¥5.05T stimulus budget, larger than the ¥4.8T originally planned.
  • The yen is trading at 82.32 vs the US dollar 

Howard Penney


Managing Director


THE DAILY OUTLOOK - levels and trends















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

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