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JCP: Orange Jumpsuit Risk?

Who knew what, when?

 

JCP: Orange Jumpsuit Risk? - JCP Call Option Activity 20101012


JCP: Orange Jump Suit Risk?

Who knew what, when?

 

JCP: Orange Jump Suit Risk? - JCP Call Option Activity 20101012


Dropping the Mitts . . . Less Than a Month Until Election Day

Conclusion:  We are becoming increasingly convinced that that the Republicans will take back the Senate, which is supported by new data from Intrade.  Further, a major Republican win is clearly becoming priced into equity markets.

 

As Election Day 2010 looms in less than a month, the proverbial gloves are being dropped across the nation with political rhetoric from both sides taking a more aggressive tone.  In particular, the Democrats seem to be turning up the volume in terms of negativity.  Strategically, this may actually be a decent strategy, as the Democrats currently appear to be in dire straits.  Not only do the Democrats continue to lag in key polls, which we’ll touch on, but some of their large supporters from recent years seem to be losing interest in supporting politics.

 

In particular, we would highlight this quote yesterday about George Soros in the New York Times:

 

“Mr. Soros, a champion of liberal causes, has been directing his money to groups that work on health care and the environment, rather than electoral politics. Asked if the prospect of Republican control of one or both houses of Congress concerned him, he said: “It does, because I think they are pushing the wrong policies, but I’m not in a position to stop it. I don’t believe in standing in the way of an avalanche.”

 

Avalanche does indeed seem like the appropriate adjective given the results from some recent polls.

 

The polls we focus on most consistently in terms of predicting a potential upside surprise for the Republicans are the Generic Congressional Polls.  This is a poll that measures the generic preferences of Likely Voters.  Real Clear Politics aggregates all of the polling companies into an average (which is charted below).  Currently, the Generic Congressional Poll is as wide as it has been in this electoral cycle for the Republicans with 48.1% of those polled likely to vote for the Republican and 41.3% of those polled likely to vote for the Democrat.

 

Dropping the Mitts . . . Less Than a Month Until Election Day - 1

 

Additionally, Intrade has open futures contracts on both the Senate and House. Currently, the contract for the Republicans taking the House is trading at 78.7, which is basically its highest point of this election cycle. The contract for whether the Democrats will keep the Senate is also now leaning Republican, as it closed below the 50 level last night with a closing price of 48.5.  This contract has seen a dramatic decline in the last few weeks as the likelihood of the Democrats maintaining the Senate seems more and more unlikely based on recent data.

 

Dropping the Mitts . . . Less Than a Month Until Election Day - 2

 

In terms of the race for the Senate, the Real Clear Politics poll averages currently have the Democrats holding 48 seats, the Republicans winning 46 seats, and 6 seats currently too close to call. Interestingly, over at Pollster.com the Republicans are doing even better with 48 seats, while the Democrats have 47 seats with the remaining seats too close to call.  The most noteworthy race to recently shift categories is the Senatorial race in California between Barbara Boxer and Carly Fiorina, which has gone from Leaning Democrat to Too Close To Call, as Fiorina has narrowed the gap.

 

As we stated from the outset, the continued shift of the date towards the Republicans seems to have heightened the rhetoric of the Democrats.  As part of our research process, we receive campaign emails from both Democrats and Republicans and were somewhat interested to receive an email this weekend with this statement inserted:

 

"This is a threat to our democracy... And if we just stand by and allow the special interests to silence anybody who's got the guts to stand up to them, our country's going to be a very different place.


That's what the President just said about the Chamber of Commerce, a right-wing group spending $75 million to beat Democrats this fall, and reportedly taking money from foreign corporations -- some even owned by foreign governments.”

 

This statement from President Obama was made in conjunction with the video below, which attempts to tie the Chamber of Commerce, to President George W. Bush, and to foreign sources of money:

 

http://weblogs.baltimoresun.com/entertainment/zontv/2010/10/democrats_hit_new_low_with_tho.html

 

We were somewhat surprised to see President Obama, specifically, target the Chamber of Commerce, but to be fair the Chamber of Commerce has aggressively ramped up its lobbying efforts in the last decade.  In fact, in 2009 the Chamber of Commerce spent $144.5MM, up from $18.7MM in 2000, and is now the largest spending lobbyist by a factor of 5 (next is Exxon Mobil).  The vast majority goes towards Republican causes and candidates.

 

As we stated above, strategically it does make sense for the Democrats to amp up the volume on their attacks and try to bring back into focus the economic track record of the Bush administration.  There is also risk in this strategy, though, as the Chamber of Commerce, despite its lobbying efforts, legitimately represents more than 3 million U.S. businesses and, based on many polls, is a widely respected organization.

 

Regardless, with the Democrats facing an avalanche, as per George Soros, the next couple weeks should lead to an acceleration of aggressive attacks.  While there is potential that these attacks narrow the gap, there is also some probability that these attacks push voters further away from the Democrat party in the upcoming midterm.

 

Daryl G. Jones

Managing Director


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Cameron’s Inflation Conundrum

Conclusion:  As opposed to Germany, we expect to see a significantly higher level of inflation in the UK over the intermediate term TREND. PM David Cameron and his government are in a tough place as stagflation sets in. Today we bought Germany via the etf EWG in the Hedgeye Virtual Portfolio as the DAX tested and held both its TRADE and TREND lines of support.

 

This morning in the Early Look Keith noted some very important demand drivers of long-term secular inflation, namely:

  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.

To further contextualize the inflation/deflation debate, below we show a chart of UK and Greek inflation, two countries that are experiencing inflation above their European peers. Importantly, you’ll note the spread over German inflation, with CPI at +1.3%.  And the UK’s Retail Price Index, the very goods and service that households consume, is up +4.6% year-over-year or +0.4% month-over-month in September.

 

Cameron’s Inflation Conundrum - uk1

 

As we noted in a post on 10/8 titled “UK and Inflation’s Ugly Head”, PM David Cameron and his government are now at a crossroads as austerity measures in the UK (and throughout Europe) squeeze the consumer via higher VAT and growth slows into year-end and in 2011. Now Cameron and Co. must address the broader economy from a fiscal and/or monetary perspective in the next months:

  1. Go the likely route of the US (and potentially the Eurozone) in issuing some form of QE2, ie printing money which should further inflate prices and depreciate the Pound, and/or
  2. Raise the benchmark interest rate to quell inflation, but risk further choking off growth

While we are not going to speculate on the action of the divided Bank of England, we expect to see significantly higher inflation in the UK over the intermediate term TREND. Like in the US, an environment of declining growth and expanding inflation (stagflation) should fuel the unemployment picture.

 

We’re steering clear of the UK economy on the long side. We bought back our position in Germany (EWG) today on a pullback as it held its TRADE line of support at 6,230 and TREND support of 6,112. We’re currently short Italy (EWI) in the Hedgeye Virtual Portfolio

 

Matthew Hedrick

Analyst

 

Cameron’s Inflation Conundrum - uk2


R3: GPS, NKE, RL, & cost inflation

R3: REQUIRED RETAIL READING

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.

 

RESEARCH ANECDOTES

 

- 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.

 

 

OUR TAKE ON OVERNIGHT NEWS 

 

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. <wwd.com/business-news>

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 Amazon.com 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. <bloomberg.com>

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. <wwd.com/retail-news>

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.  <retail-week.com>

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. <wwd.com/business-news>

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. <wwd.com/business-news>

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. <wwd.com/markets-news>

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. <emarketer.com>

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


RESTAURANT INDUSTRY SHORT INTEREST

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. 

 

RESTAURANT INDUSTRY SHORT INTEREST - short interest 1012

 

Howard Penney

Managing Director


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