R3: GPS, NKE, RL, & cost inflation


October 12, 2010


M&A still the topic of the day with news of Nike capturing the NFL apparel license from Reebok a close second.




- Score one for the “fans.”  After receiving a week’s worth of backlash regarding Gap’s reinvented logo on Facebook and other blogs, the company has reverted back to its old branding.  Interestingly, Gap’s president, Marka Hansen, admits that the company made a big mistake by not engaging their passionate customers BEFORE making the branding change.  This will go down as a case study for other brands looking to test the waters on change.  Clearly a case of Facebook viewed as a liability and not an asset.


- Rumor has it that fashion designer Alexander Wang may be working on a collaboration project with Nike.  Recall that other athletic brands have historically forged relationships with high-end designer.   Adidas and Stella McCartney and Puma and Hussein Chalayan are just a couple examples.


- In just 10 years, a 20 point gap in the percentage of 25-34 year olds getting married vs. staying single has reversed.  As it stands now, 46% of those aged 25-34 are single vs. 45% which are married.  Marketers have taken particular note of this demographic trend, which suggests teens and college students are not the only target groups which are being focused on with a “single” approach.





Retail M&A Activity Heats Up With GYMB, DLTR, and JCP Activism - The markets were left to digest news that The Gymboree Corp. had agreed to be taken over by Bain Capital Partners LLC, fulfilling expectations of a private equity takeover of the specialty chain geared to children and their parents, as well as Dollar Tree Inc.’s acquisition of the 85-unit Dollar Giant stores chain in Canada. And Bill Ackman's Pershing Square fund's 16.5% stake in JCP. Gymboree agreed to be acquired and taken private by Bain for $65.40 a share, or $1.8 bn. Dollar Tree’s acquisition of Dollar Giant, for $51 million, is the company’s first expansion outside the U.S. The deal is expected to close by mid-November. Dollar Giant stores average 9,000 gross square feet and operate in British Columbia, Ontario, Alberta and Saskatchewan. The retailer prices its goods and consumables at $1 or less. <>

Hedgeye Retail’s Take:    While we expected M&A would be a big story this year, we’re surprised to see deals being struck at peak margins and peak stock prices.  2007 anyone?


Wal-Mart to Benefit From Budget-Conscious Shoppers - Wal-Mart Stores Inc., the world’s largest retailer, will attract a bigger share of holiday shoppers this year as budget-conscious consumers seek discounts, according to a survey released today. The amount of consumers who said they plan to do more holiday shopping at Wal-Mart exceeded the share of those who expected to do less by 22%, according to the survey by Consumer Edge Research. The study canvassed about 2,500 people in the U.S. Consumers are curbing spending as the unemployment rate hovers near a 26-year high, prompting stores to boost promotions to draw shoppers. Other retailers that may profit from shoppers’ caution include Inc., EBay Inc., and Target Corp. More shoppers plan to avoid stores owned by Costco Wholesale Corp., Toys ’R’ Us Inc., and department stores like Macy’s Inc. <>

Hedgeye Retail’s Take:  Hard to believe that the holiday alone would drive incremental traffic to WMT given their merchandising challenges.  If anything, consumers may be disappointed that prices are no longer being aggressively rolled back.


UK Based Chain Accessorize Arrives in the US - Accessorize, the U.K.-based chain, is dipping a big toe in U.S. waters with the openings in New York of a 400-square-foot store at 329 Bleecker Street on Oct. 28 and a 500-square-foot unit at 1 Union Square West on Nov. 18. With an ambitious plan, the company will take the plunge and aims to open 100 units in the U.S. by 2015. In addition to the store openings, the retailer, which is a division of the multimillion-dollar Monsoon retail group, is working to launch a U.S. transactional Web site. The UK company has existed for 27 years and has over 750 stores. The product range includes statement jewelry, bridal jewelry, watches, handbags, purses, wallets, shoes, hats, gloves, lingerie and more. Accessorize introduces 1,500 new products each season; they are well-priced and globally sourced. Stores do an average of $1,500 a square foot. <>

Hedgeye Retail’s Take:  The UK invasion continues and it’s not just a handful of stores.  With 100 Accessorize units slated to open over the next 5 years, this is definitely a trend to watch.


Ralph Lauren To Open Its First UK Rugby Store - The luxury lifestyle brand will open a 5,703 sq ft Rugby store at 43 King Street in autumn next year, on a 15-year lease. The signing follows a new letting to Burberry, which will open a store on King Street in 2011. Developer of the area Capco has been striving transform the area into a more upmarket shopping destination.  <>

Hedgeye Retail’s Take: Although its only 1 store, this is a sign of growth for RL's youthful, preppy brand which currently only has 11 stores all based in the US. Look to see RL put more support behind this brand as it looks to grow in alternative channels like the recent success of Club Monaco.


Other Countries Benefit From China's Rising Labor Costs - As the world’s manufacturing powerhouse sees the demand for higher wages and the cost of operations increase, apparel companies are starting to turn to places such as Vietnam, India and Bangladesh, as well as Central America and Mexico for production. Many already have experience in these regions even while they kept the bulk of their sourcing in China, as political and practical decisions forced their hand during the last decade. <>

Hedgeye Retail’s Take: Not new news here, but sizing up the chart below is noteworthy. Two of the greatest beneficiaries - Bangladesh and Vietnam have considerably different wage rates reflecting the ‘premium’ retailers are willing to pay for a more developed economy and with inherently lower risks.

R3: GPS, NKE, RL, & cost inflation         - 1


World Apparel Convention Discuss Cotton, Consumers, Labor Costs, and the End of Fast Fashion - Panelists at the two-day World Apparel Convention held here last week by the International Apparel Federation said higher production costs from raw materials and labor would be passed on to consumers. The rising retail prices could potentially mean the end of cheap and fast fashion, they said. Robin Anson, managing director for Textiles Intelligence claimed, "I don’t see the price [of cotton] coming down at least for the next crop year.” The increasing cost of labor is a more worrying trend that is likely to continue, not just in China but also in Vietnam and Bangladesh. Chinese workers are no longer willing to work miles away from home to only see their family once a year. Minimum wage has already increased twice in the last two years. China’s apparel industry could, over time, become more like that of Italy’s small manufacturing districts. <>

Hedgeye Retail’s Take: If Anson’s view becomes a reality with persistently high cotton costs through next year, not only will apparel get more expensive for the consumer, but more importantly retailer margins will be compressed substantially more than what the Street is expecting in next year’s estimates.


Manufacturers and Designers Cope With Impact of Higher Costs - Designers focused on trying to limit the impact of higher costs as they sought textured goods or soft, draping fabrics for next fall’s collections at textile shows here. With mills raising prices in response to the increased costs of cotton, minerals, labor and energy, designers said they had little choice but to absorb the higher costs and shrink their profit margins. “You can’t [raise the prices of the clothing] because [there’s] too much competition from other manufacturers and stuff coming in from China is so cheap,” said Miriam Schwartz, designer for junior dress line CW Designs in Tarzana, Calif. <>

Hedgeye Retail’s Take: Expect to see more of these public admissions from designers and retailers alike – particularly in light of our Consumer Cannonball theme, which we’ll be hitting on in our Friday call, suggesting that consumers will not be the ones eating higher costs across retail.


Email Still Tops Facebook for Keeping in Touch - Facebook may have more than 500 million users around the world, but in the US most people online still rely more on email to share content with friends and family. <>

Hedgeye Retail’s Take: With the 18-24 age group the only demographic that uses Facebook more widely than email it’s going to be years until that mix shifts up through adjoining brackets. However, given the novelty of the site, we question the sustainability of these 70% rates. That said, the fact that the site has achieved that sort of penetration over alternative legacy mediums is impressive to say the least.

R3: GPS, NKE, RL, & cost inflation         - 2


Short interest has been coming down over the past couple of weeks, particularly in the casual dining category.  The shorts have been continuing to press the bets on CHUX, EAT, BOBE, and MRT.  There has been a strong reduction of short interest in DIN, BWLD, CAKE, RRGB, and CBRL.  BWLD’s commodity cost outlook is favorable in the short-term (a rare situation in this space with the food prices having increased so much of late). 


CHUX continues to struggle within the over-crowded Bar & Grill category while Brinker continues to work on transforming their back-of-the-house operations to ultimately boost margins in the next six months. 


Overall, it is not surprising that short interest has come down so much.  Restaurant stocks have been handily outperforming the S&P 500 over the past number of months and the covering of short positions has aided the rally.  It is worth monitoring the trend in the CRB Foodstuffs Index, however, and the relationship between the index and casual dining margins.  On a year-over-year basis, the index is at a higher level than the prior peak of 2008 when casual dining average margins saw significant (~200 bps) compression.  I will be posting on this in more detail later today.


In the QSR space, the average level of short interest, 5.6%, is far lower than the 10.4% average short interest in the casual dining category.  The coffee stocks that had been experiencing a sharp uptick in short interest, PEET and GMCR, have seen the shorts back off which could imply that investors have shifted focus from the coffee cost squeeze that was so strong it forced Starbucks into raising prices.  DPZ, BKC, BAGL, CMG, and SONC were pressed by the shorts on a two week basis.  DPZ remains expensive at 9.2x EV/NTM EBITDA.  The short interest uptick in SONC has only come about over the past two weeks versus the other names (DPZ, BKC, BAGL, and CMG) seeing a sustained increase.   CMG’s short interest is at 12.5%, behind PEET and GMCR at 19.5% and 16.4%, respectively.  With commodities at their current level, CMG’s margins could be vulnerable given the company’s generally uncontracted food cost basket. 




Howard Penney

Managing Director


TODAY’S S&P 500 SET-UP - October 12, 2010

As we look at today’s set up for the S&P 500, the range is 20 points or -1.06% downside to 1153 and 0.66% upside to 1173. Equity futures are trading below fair value in reaction to fairly steep falls seen across Asian and European markets overnight as a firmer dollar sparks some profit taking in risky assets.

The main event for today is this afternoon's important FOMC minutes which will be scrutinized for any fresh insight into the Fed's preconditions for implementing additional QE; after the close Intel (INTC) will report Q3 earnings.

  • ActivIdentity agrees to be bought by Sweden’s Assa Abloy for $3.25-shr; 43% premium to yesterday’s close
  • Deere (DE) maker said Sept. retail utility tractor sales fell single digits vs industry sales down 11%
  • GlaxoSmithKline’s (GSK) Hycamtin drug can be toxic to bone marrow when added to most common initial chemotherapy for advanced ovarian cancer, study says
  • Global Payments (GPN) reported 1Q adj. EPS 67c vs est. 69c, sales $440.1m vs est. $438.4m
  • Halozyme Therapeutics (HALO) will decrease research related to new compounds and cut jobs by 25%; expects to incur one- time charge in 4Q, mostly offset by reduced payroll expenses
  • Myriad Genetics (MYGN) said new Prolaris product accurately predicts prostate cancer survival


  • One day: Dow +0.03%, S&P +0.01%, Nasdaq +0.02%, Russell (0.04%)
  • Month-to-date: Dow +2.06%, S&P +2.11%, Nasdaq +1.42%, Russell +2.56%
  • Quarter-to-date: Dow +2.06%, S&P +2.11%, Nasdaq +1.42%, Russell +2.56%
  • Year-to-date: Dow: +5.58%, S&P +4.5%, Nasdaq +5.87%, Russell +10.89%


  • ADVANCE/DECLINE LINE: -318 (-1149)
  • VOLUME: NYSE - 827.90 (-12.25%)  
  • SECTOR PERFORMANCE: Energy +0.27%, Technology +0.17%, Consumer Staples +0.11%, Healthcare +0.06%, Utilities +0.03%, Consumer Discretionary +0.03%, Financials (0.14%), Materials (0.18%) and Industrials (0.26%)
  •  MARKET LEADING/LAGGING STOCKS YESTERDAY: Wynn +8.45%, NY Times +7.11% and Supervalue +7.75%/Citrix -6.65%, Salesforce -5.63% and Akami -3.81%.
  • VIX: 18.96, -8.45% - YTD PERFORMANCE: (-12.54%)
  • SPX PUT/CALL RATIO: 1.49 from 1.69, -11.74%


  • TED SPREAD: 18.16, 0.710 (4.070%)
  • 3-MONTH T-BILL YIELD: 0.12%
  • YIELD CURVE: 2.06 from 2.06


  • CRB: 296.37 +1.26%
  • Oil: 82.21 -0.54%
  • COPPER: 378.95 +0.40%
  • GOLD: 1,353.45 +0.71%


  • EURO: 1.3888 -0.37%
  • DOLLAR: 77.442 +0.15%




  • European markets: FTSE 100: (1.11%); DAX (0.96%); CAC 40 (1.56%)
  • Major indices are weaker in early trade in response to falls seen across Asia with weak commodity prices weighing on mining names, with financials also acting as a drag in response to China temporarily raising its reserve requirement ratio by 0.5% to a historical high of 17.5% for 6 major banks.
  • South Korea's Posco's (PKX) disappointing outlook statement weighs on European steel makers
  • Germany Fin Min spokesman says against extension of Greek repayment plan for EU/IMF bailout loan
  • Germany Sep Final CPI +1.3% y/y vs Prelim +1.3%
  • UK Sep CPI 3.1% y/y vs cons 3.1%, RPI +4.6% y/y vs cons +4.4% 


  • Nikkei (2.09%); Hang Seng (0.37%); Shanghai Composite +1.23%
  • Markets closed broadly lower ahead of the much anticipated release of the FOMC's September meeting minutes later today.
  • The continuing weakness of the dollar vs the yen has the Nikkei trading lower as any remaining luster from the BOJ's surprise rate cut last week appears to have vanished as investors are now focused on additional Fed easing.
  • Shanghai reversed earlier losses to close at its highest level in five months, after gains in commodity stocks and autos, offset drops in banks following a surprise temporary rise in reserve requirements 
Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends













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The Macau Metro Monitor, October 12th 2010



According to China Securities Journal, China will start levying a property tax on a trial basis in some selected cities “within months.”  Shanghai has already started to prepare for the tax.   Nie Meisheng, president of the China Real Estate Chamber of Commerce, believes that the performance of the real estate market will determine whether a tax is introduced this year. He thinks housing prices will remain high as most developers have plenty of cash.  On Sept 29, China's State Council said that it will introduce the trial property tax in some cities and then expand the tax nationwide.



Guo Shuqing, chairman of China Construction Bank, says a property tax is necessary to reduce the dependence on government revenues from the industrial sector and stabilize the real estate market.  Guo believes the tax rate being discussed is still too low to have any meaningful impact on housing prices. 



Sources say one of S'pore's 40 richest people recently lost a total of S$100 million and another tycoon from the timber-rich East Malaysian state of Sabah lost $50million at RWS and MBS.  This follows businessman Henry Quek, who has settled his whining over losing S$26 million over 3 days at RWS. 

Inflation Wars: Snorting QE

"I didn't even like coke that much, it was just a case of getting on whatever train I needed to take to get high.”

-Carrie Fisher


On many levels, the Big Government American Life of the late 1970s became a scary place. As consensus gets paid to snort QE and blow its mind on whatever M&A machination they can dream up because “money is cheap”, please remember that we’ve seen government sponsored trailers to this movie before.


In 1977, as Jimmy Carter was being sworn in as President of The United States and the Fed’s Chairman, Arthur Burns, was finishing his experiment of monetizing US Treasury debt, “Star Wars Episode IV: A New Hope” came to the big screen. In the meantime, Princess Leia (Carrie Fisher) was snorting lines of cocaine on the set of “The Empire Strikes Back.”  


If you didn’t know that’s what was going on behind the scenes, now you know. Yesterday, in the spirit of Columbus Day, the now 53-year old Fisher admitted that she didn’t even really like doing coke, but she was quite happy to get high anyway.


Hope, of course, is not an investment process and neither is chasing this market higher in the face of what you really know is going on. Inflation is running up again. Both companies and consumers alike are starting to get squeezed.


Before you have a “New Keynesian” who got submarined by stagflation circa 1981 send me a reply explaining how everything is “deflationary”…  but earnings for the companies my buddies and I are long are “going to be great”…  but “we need QE3 anyway”… let’s look at some real-time prices:

  1. CRB Commodities Index hit a new YTD high yesterday for 2010 (up +13% since August!).
  2. Copper prices are up +28% since August and are now testing their all-time peak prices of 2008.
  3. Chinese stocks have rallied +20% since their July lows.

China, Copper, and Commodities? Yes, Dear Congress person, these are what we call demand drivers of long term secular inflation that are augmenting your Burning of the Buck as you provide the stimulus for Jobless American Stagflation.


Now please don’t take my word for this concept of long-term secular inflation. Have all of your analysts read pages 180-201 in Reinhart & Rogoff’s ‘This Time Is Different.’ Chapter 12, “Inflation and Modern Currency Crashes”, is very timely reading when you consider the history of global inflation going back to the year 1500.


Yes, going back that far in time is a long time. But so is life and, as Rose Bertin aptly put it, “there is nothing new except what is forgotten.” The chart on page 181 of the median inflation rate, using a 5-year moving average, tells you all you need to know. Ever since the world convinced itself that the US should be trusted to debauch the world’s reserve currency, prices have gone up.


In today’s world inflation is, like politics, a local phenomenon that’s backed by the credibility of the government who oversees its currency. So let’s strap the accountability pants on and snort down some local inflation readings from this morning:

  1. UK Consumer Price Inflation (CPI) was reported at +3.1% year-over-year (+110bps above what even the government calls acceptable).
  2. Brazil is raising its inflation forecast for 2011 to +4.98% - that’s pretty precise because they change the estimate as prices change.
  3. Korea’s Posco (the 3rd largest steelmaker in the world) cuts earnings guidance by 7% due to “commodity costs” rising.

All the while, back here in the Empire of the Fiats, after the US Dollar has lost -13% of its value over the course of the last 19 weeks, Ben Bernanke is going to fear-monger you into trusting that everything you put in your car or grocery basket is deflating. Keep snorting on that QE idea dude. Arthur Burns did.


Ahead of Heli-Ben’s deflation speech at the Boston Fed on Friday, think about what’s really going on behind the scenes here folks. The US government is broke and can’t afford to tell Americans on Social Security that professional politicians would rather pay themselves than the political piper.


As my partner, Howard Penney wrote yesterday, health insurance premiums are rising, poverty is up (43 million on food stamps), and the nation's unemployment rate is nearly 10% and now the government is expected to announce this week that more than 58 million Social Security recipients will go through another year without an increase in their monthly social security benefits.


As a point of reference, Social Security and Supplemental Security Income benefits are adjusted annually to reflect the increase in inflation; the average CPI-W for the third calendar quarter of the prior year is compared to the average CPI-W for the third calendar quarter of the current year and the resulting percentage increase represents the percentage that will be used to adjust Social Security benefits beginning for December of the current year.


The projection will be made official on Friday, when the Bureau of Labor Statistics releases inflation estimates for September. Those on Social Security haven’t had a raise since January 2009, and now it looks like they won’t be getting one until at least January 2012.


Now you know why Bernanke’s speech in Boston is titled “Revisiting Monetary Policy In A LOW INFLATION Environment”…

Keep taking whatever train you boys at the Fed need to get on to help CNBC cheer that stock market higher. We know what’s going on behind the scenes.


My immediate term support and resistance lines for the SP500 are now 1153 and 1173, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Inflation Wars: Snorting QE - fisher


It was WYNN’s turn to make the big move yesterday. Some of the move was for legitimate reasons, some not so much.



WYNN climbed over 8% yesterday even after a big October move.  Here is what we think were the drivers:

  • October revenues were off the charts in the first 10 days and Wynn’s market share improved from September
    • The numbers were indeed terrific and implied a HK$20 billion (+65%) month even after normalizing post Golden Week revenues
    • WYNN’s table market share for the first 10 days was 14.2% which is higher than September’s 12.0% share
    • However, 14.2% is still right around pre-Encore averages so it shouldn’t be something to get excited about
    • As long as Macau keeps growing like it has market share probably won't matter
  • Reports of US$125m in EBITDA over Golden Week
    • We heard this rumor yesterday and we think it is insane
    • We know Wynn generated HK$1.2 billion in the first 10 days of October which implies around US$35m in EBITDA so not even close under any aggressive scenario
  • September market share loss was due mostly to hold percentage
    • Rolling Chip share actually declined 1% from August so they did lose VIP volume share
    • Mass revenue share went up sequentially so that was a positive
  • Vegas carryover from Friday
    • Las Vegas Strip revenues were released on Friday - up over 20% in August
    • Baccarat revenues drove the growth
    • If WYNN captured its fair share of the Baccarat business – its Q3 moved from an in-line quarter to a nice beat
    • However, we are hearing that MGM held well which would imply a low hold at Wynn since Baccarat hold percentage was below normal
  • Special dividend – this remains a possibility and has been used to explain recent moves in the stock
  • Short covering
    • 23% of the float was short
    • This likely played a role

So that’s what we are hearing/thinking on WYNN.  It seems that the stock could back off over the near term as the short covering abates and investors realize that $125 million in EBITDA for 10 days is near impossible.  Moreover, anecdotally, we are hearing that business levels and traffic slowed demonstrably this past weekend, even below normal levels.  The Street is clearly expecting HK$20b+ in October gaming revenues.  The quarter is definitely looking better than it did a week ago but it looks like the stock will have a choppy ride for the rest of the month.

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