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Hedgeye Retail: 3x3x3

Here’s an update on our Three key themes, Three top longs & Three shorts.  We also include bulleted deltas that we picked up in our research over the past week that are worth noting.

 

 

THREE KEY RETAIL MACRO THEMES

 

1)      Consumption Cannonball: 4Q (i.e. now) will begin a period during which government subsidies subside, while expenses ramp creating increasing pressure on the U.S. consumer. Recent BEA data (11/4) shows that transfer income is fading and taxes are on the rise. Granted, this is September data, but the trend should continue. A few more bullets…

  1. Both personal income and spending weakened in September.  Personal income fell 0.1%: the first decline since last September.
  2. The decline in income was driven by a $25.5 billion reduction in emergency unemployment insurance benefits.  Emergency benefits had boosted transfer income by $20.5 billion in August.
  3. Interest income (due to the Federal Reserve emergency interest rates fell 0.9% for the third straight month.
  4. Tax payments are up, driving disposable income down 0.2%.
  5. Real spending was up 0.1% driven by consumers diving into the savings rates which fell to 5.3% - matching its lowest level in over a year.

2)      Raw Margins: The margin squeeze from raw materials is misunderstood given the lag between when product is ordered, raw materials are procured, and when factories set FOB prices. We’re seeing factories change the field goal in the middle of game play by simply not filling orders placed by certain customers due to raw materials/inventory/margin risk. Raw materials also head higher, and management teams we talk to are largely waiting to buy for Summer and Fall 2011 as they are ‘waiting for a pullback.’  If everyone is waiting for a pullback in prices, will the price relief ever come?

3)      3rd Derivative: The big margin killer in 2011 will not be the obvious hike in raw materials at the same time consumer trending trends down. That’s maybe good for 1-2 points in industry margins. But when we account for the unknown – which is ‘competitors and supply chain partners behaving badly’ in the face of obvious industry stress – we think that the total hit for the apparel industry in 2011 will be around 3-4 points at a mid-single digit top line growth rate. (i.e. the product is coming in…we know that. It WILL be sold, but at what price?).

 

LONGS

 

FL:

  • Continue to believe the triangulation of a step-up in the industry R&D cycle combined with Foot Locker-specific drivers including improved apparel assortments (now over 50% changed y/y), distinct banner segmentation, and inventory management will lead to a continued string of upside over the next several quarters. 
  • Weekly industry data, a recent pick-up in basketball momentum driven by key product launches, and anecdotal confirmation that the company continues to collaborate and partner with its suppliers all support our view that strategic initiatives remain on track to support near and intermediate term upside on both the top and bottom lines.  FL reports 3Q results on Friday, November 19th.
  • Our estimates remain comfortably ahead of the Street for this year at $0.93 vs. $0.86.  Expect 3Q results to show same-store sales at 5+% along with meaningful gross margin expansion.  Looking for $0.20 vs. Street at $0.16. 

LIZ:

  • 5-years of torture and pain finally coming to an end. The major issues plaguing the industry – excess inventories, cotton, and supply chain uncertainty, to name a few, do not even make the list as it relates to LIZ’s key opportunities.
  • Finally transitioned away from Macy’s and other ‘better’ department stores,  marking an end to a distracting and margin-dilutive transition. Now exclusive with JC Penney and QVC, which is a steady mid-single-digit margin, and more importantly, it is very light on asset intensity due to leverage in JCP’s sourcing organization.
  • Closing LIZ outlet stores, which were some of the least productive in all of retail.
  • Mexx (1/3 of revenue but losing money) is a massive lever that is finally swinging from negative to positive.
  • More upward revisions to come. There’s better than $1.00 in EPS power. A $6 stock could care less about that.

NKE/RL:

  • It’s a tossup at current prices which name is more attractive. RL or NKE.
  • Two things they both have in common are a) sheer organic top line momentum, and b) meaningful earnings upside in both the upcoming quarter and the next two years.
  • We think that there’s less good news in and around Nike right now. If we had to pick one, that’d be it.
  • There’s going to be a meaningful product step-up in the Spring that both the company and retailers have succeeded in keeping quiet. Note: that’s good for retailers as well.
  • Also, we like the lack of exposure to cotton with Nike.
  • People STILL don’t understand the impact and duration of its category rollout.
  • How can we ignore one of the greatest structural Yuan-appreciation stories in retail.

SHORTS

 

CRI:

  • Over-earning by at least 400bp. At peak margins and peak asset turns, but have not invested enough over the past 3 years of current CEO regime to sustain either metric without sacrificing top line.
  • CRI has not been focused enough on product and R&D, but rather on promotional cadence and inventory management. It is at a point in its own margin cycle where the top line MUST come through. Cotton prices 2x above last year, and recent turbulence with both KSS and WMT (the latter of which is completely re-building its apparel strategy) leave question marks in the mix.  The punch-line is that CRI is holding on too tight with its current productivity levels.
  • Our estimate stands at $1.85 next year versus the Street at $2.30. Street numbers have come down. But given the volatility in CRI’s retail sales and margins (retail is half of its overall sales, and 90% of the product is 40% off the first day it hits the floor) we think that the miss will not be a slow drip – but rather a meaningful event where investors are given ammo too challenge CRI ever earning over $2 again.

JCP:

  • In all the wrong spots as it relates to where you want to be at this point in the cycle – overexposed to a) middle America, b) apparel, c) private label, and d) weak management.
  • Remain unconvinced that company’s stated goal to drive $5 billion in incremental revenues over the next five years is achievable via a combination of new stores, new concepts, a same store sales CAGR of 4%, and accelerating e-commerce growth. 
  • Near-term profits being driven by expense cuts at the risk of further damage to the company’s customer experience and competitive positioning.  Gross margins likely to erode due to: peak gross margin compares, rising input costs with 50% of product exclusive or private label, and unfavorable sales/inventory spread which remains elevated entering the holiday selling season.  JCP remains one of a handful of retailers citing a highly promotional environment.
  • Distractions from both activist investor attention and formation of a “growth brands initiative” takes focus away from fundamentally improving existing store productivity and profitability.  Risk to short is that this process becomes self-fulfilling with weak management leading credence to Ackman’s pursuit.

WMT:

  • Not and LBO candidate!
  • Free-shipping initiative yet another example of how focused WMT remains on competitive pricing.  Continue to believe inflation in both consumables and discretionary items will not be entirely passed on as WMT’s remains focused on reinvesting in price.  Self-imposed deflation will remain the key factor limiting comp acceleration.
  • Still not convinced a true strategy is in place to improve high margin apparel opportunity in the near to intermediate term.  Management is focused on basics but that puts the category in the sweet spot for competition.  Without a pick-up in non-food areas, comps and profitability is destined to move sideways for yet another year.

WEEKLY DELTAS

Here is an overview of some of the more relevant research anecdotes for the industry over the past week.

  • The issue of rising cotton and sourcing costs is nothing new but JCP management noted that they are now encountering some factories which are not accepting orders due to input cost uncertainty.  While these orders primarily center around goods to be manufactured for Fall ’11 delivery, the data point is noteworthy. If this becomes a more widespread stalemate between manufacturers and suppliers, there will likely be capacity constraints come next year.
  • A quick check of Footlocker.com and UnderArmour.com reveals that UA’s flagship basketball shoe (Micro G Black Ice) is sold out in black and almost sold out in white.  While the launch was done on a small scale, the sell through is noteworthy. 
  • Wal-Mart’s  free shipping announcement essentially forces all other major retailers to match the offer.   While free-shipping has always been part of the holiday promotional calendar for most e-commerce players, the PR alone on this might leave free shipping offers in place longer than retailers would have liked.
  • Holiday marketing campaigns are creeping up earlier than ever, with most retailers launching their efforts a full two months in advance.  This year Best Buy launched its official holiday campaign on November 1st, a full 10 days earlier than last year.  By this weekend, almost all retailers will be in full on holiday marketing mode.
  • KSS and JCP both highlighted warm weather as a reason for slightly higher inventories at quarter end.  Outwear sales were substantially below last year in early October, but have since recovered.  JCP noted that category has gone from down 30-40% for a couple of weeks to up 20% as soon as cooler weather moved in.
  • While it’s clear these trends suggest the trajectory of positive footwear sales since August may now be in question in the face of more challenging comparisons looking forward – the opportunity for retailers to outperform based on portfolio mix is now greater than it has ever been over the past 2-years. The bifurcation between performance and non-performance footwear has widened since late summer with the current 40-point spread at its widest margin in 2-years. The bottom-line here is that with a favorable comp outlook for athletic footwear through November getting progressively more challenging through year-end – portfolio mix between performance and non-performance footwear will be critically important in driving near-term sales performance at retailers.
  • U.S. apparel and textile imports increased +16.7% in September. Keep in mind this is a substantial deceleration from the August rate of +29% reflecting retailers push to restock earlier than usual driven by fears over transportation cost inflation. We expect continued sequential deceleration with inventories now at higher year-over-year levels coupled with retailer interest in avoiding excess buildup.
  • We’re seeing the 13D/F filings pick up meaningfully in Retail. Since we’re at the point where average/poor CEOs are facing the music as it relates to negative organic growth due to poor planning and investment in growth during the recent downturn – why not? They’re either blowing up, buying growth, or both. With the cost of borrowing just about as close to Japan as it can get, and the M&A cycle at the lowest level in almost 2 decades, M&A activity seemingly has only one way to go. That’s higher. On a recent Cramer segment, Wes Card (JNY CEO) was asked why he’s not buying back stock? Wes answered by saying that he’d rather buy other businesses than his own. Additionally, at JCP, CRI, and SKX, we saw several examples of investors stepping in ahead of the game.
  • Steven Madden confirmed that while boots started selling earlier this year than last, the category continues to be robust again in 2010. In addition, the company is also seeing a shift into booties as well with a lace-up style one of the brands hottest selling SKUs currently. 

 


R3: GOOG, PVH, COH, UA

R3: REQUIRED RETAIL READING

November 15, 2010

 

 

 

RESEARCH ANECDOTES

  • Tommy Hilfiger ups its ante in the menswear business by adding Simon Spurr to its list of creative consultants.  The British menswear designer is said to be collaborating on the fall 2011 men’s runway line as well as working closely with Tommy himself. 
  • Coach’s efforts to give its chief designer, Reed Krakoff, a line of his own continues to push the envelope.  Krakoff will be launching a limited edition fragrance, with just a 400 bottle production run, for $695.  Clearly the pet project of Krakoff is looking to hit a very, very small demographic and one that is so narrow it is unlikely to ever yield tangible benefits to the parent company.
  • According to the 2010 Morepace Omnibus Study on holiday spending, 40% of consumers do not anticipate putting their holiday purchases on credit cards this year, up from 35% last year.  Even more interesting is that 53% of consumers with annual incomes of $50,000 or below will be staying away from plastic this holiday season.
  • With a win over the Steelers Sunday night, the Patriots’ Tom Brady improved his vaunted record against the Steelers to 6-2 compared to Roethlisberger’s 2-4 against the Patriots. It’s important to note this is Brady’s first game as part of the Under Armour team. With many of the team’s stats rather pedestrian, he’s proving to be more valuable than ever leading the team to a 7-2 record – one of only three teams in the league to have no more than 2-losses.

OUR TAKE ON OVERNIGHT NEWS

 

Google's e-Commerce Site Confirmed - Google is venturing into fashion with a new Web site and virtual designer boutiques, set to launch Wednesday. The fashion world is abuzz with talk about the venture, according to sources who have been briefed on the search giant’s plans. Anyone will be able to create and share their own personalized shop by selecting style preferences and the looks, brands and items they love — in the end making it easier and more stylish to buy fashion on the Web. The search company has tapped Sarah Jessica Parker to set up her own personalized shop and is reportedly wooing Katie Holmes to do the same. Oscar de la Renta, Tory Burch, Cynthia Rowley, Marchesa, Isaac Mizrahi, Tracy Reese and Erin Fetherston are some of the big names Google has invited to set up their own virtual stores on the site, although shoppers will most likely also be able to draw on a huge variety of fashion brands for sale online to stock their virtual shops. Visitors will not actually complete a purchase on Google, but will click through to a brand’s online store or a retailer who carries the item, such as Saks Fifth Avenue, Barneys New York, Net-a-porter or Yoox. Google executives declined all comment on the site, which is being unveiled Wednesday and celebrated with a party in New York that night at Skylight SoHo. The new site, dubbed — for now — Boutiques.com, is part of a bigger trend toward new retail formats that the Internet and social media have made possible. <WWD>

Hedgeye Retail’s Take: Another step in the democratization of fashion and, as we stated last week Google is not becoming a retailer.  Rather, the search behemoth is happy to collect its referral fee allowing the transaction to take place directly between the consumer and the merchant.

 

Carrefour Sells Sells Thailand Ops to Big C - Carrefour has agreed to sell its Thailand operations to Big C, a subsidiary of Groupe Casino, for 868 million euros, or $1.19  billion at current exchange rates. Carrefour, the world’s second-largest retailer behind Wal-Mart Stores Inc., said the move was in line with its strategy to focus on markets where it holds a leadership position. “Carrefour’s growth prospects in Thailand did not allow the group to envisage occupying a leading position in this market in the medium or long term,” it stated. The sale price corresponds to 120 percent of the net sales of the business and a multiple of 13 times earnings before interest, taxes, depreciation and amortization, Carrefour added. The retailer operates 42 stores, including 34 hypermarkets, in Thailand, where it has been present since 1996. It is the fifth biggest organized food distributor in the country, with a market share of 6 percent and net sales of 723 million euros, or $1 billion, in the 12 months to June 30. Big C is the second largest hypermarket operator in Thailand, with 69 hypermarkets and net sales of 1.7 billion euros, or $2.36 billion, in the year to June 30. Dollar rates are calculated at average exchange rates for the period in question. Casino said the sale would allow Big C to become joint leader in the Thai hypermarket segment. <WWD>

Hedgeye Retail’s Take: Pretty impressive multiple for a non-core asset.  Certainly makes cleaning up one’s global portfolio more attractive.

 

UA Partnering With Thermos - Thermos is partnering with Under Armour to create a line of BPA-free, co-branded and insulated bottles that will be available beginning in May 2011 at sporting goods retailers. The line will include insulated stainless steel bottles, Tritan plastic bottles and squeezable bottles and feature four  interchangeable lids, which includes a range of designs from a traditional screw top lid to an innovative flip-top spout lid with one hand push button operation. “This partnership allows us to reach a segment that already makes up Under Armour’s core consumer, the active athlete who relies on staying hydrated to perform at his or her best,” said Rick Dias, President and Chief Operating Officer at Thermos. “Given the strong correlation between cold hydration and improved athletic performance, we’re confident that this partnership will result in superior hydration for better performance at all athletic levels.” “Under Armour is constantly pursuing new innovations and products to help give athletes an edge in performance,” said Edward Giard, VP Licensing and Accessories at Under Armour. “Our partnership with Thermos, a leader in the hydration bottle category, allows us to continue our mission to make all athletes better and equip them with the best performance gear possible.” <SportsOneSource>

Hedgeye Retail’s Take: Strategically brand enhancing – this move will have little impact on the P&L. Recall it wasn’t long ago when green Gatorade bottles played a key role in the brand becoming ubiquitous in sports and synonymous with hydration.

 

Simple Shoes Rebranding Plan - After 20 years in business, Simple Shoes is charting a new course. Known for its leadership in the sustainable footwear business, the brand, a division of Goleta, Calif.-based Deckers Outdoor Corp., is entering 2011 with this agenda: Keep the green features, but lose the eco-only categorization. By emphasizing Simple’s casual sneaker roots, Teva and Simple President Pete Worley wants to position the brand to compete with players such as Vans and Converse. “Our challenge is to broaden that eco-friendly message and make it more palatable to a broader audience, and create a brand message that is more welcoming, not shouting, ‘You’re a bad person if you don’t wear eco-friendly shoes,’” Worley said. Simple was placed under Worley’s direction in January (previously it was part of the Ugg division). He said the brand had lost sight of its identity. “The original roots of the brand — and the reason it’s called Simple Shoes — was that it was all about the simple life, of which environmental consciousness was a very important element,” he said. “But over the years, that eco story took over and became the entire platform, and it even took on a bit of a preachy tone, if you will.” Worley said market research conducted early this year showed that the brand message was “too serious” for most consumers. “We believe that has held Simple back and caused it to be less approachable than it should be,” he said. “[Simple’s] high-water mark, sometime in the late 1990s, was just north of $30 million. Since then the brand has lived in the $15-to-$25 million range in global sales. That’s barely scratching the surface, so there’s huge potential out there.” Now he wants to more than double the business to $50 million to $60 million in the next few years. <WWD>

Hedgeye Retail’s Take: In a rare case of a company shifting away from its eco-friendly efforts, this is ‘simply’ an example of too much of a good thing can indeed be too much.

 

Pop-Up Shop Momentum Continues - It’s no secret that pop-up shops are hot. As the format continues to gain steam, more brands are seeing it as a chance to stand out — and not just to sell shoes. These temporary shops offer an opportunity to generate buzz for a brand, test the viability of operating retail stores and connect with consumers in a more intimate way — and they’re much less risky than traditional stores, which require firms to be locked into a lease. With their now-you-see-it, now-you-don’t allure, pop-up shops have been a bright spot in a dismal retail environment. And the glut of available real estate due to the stagnant economy has meant short-term leases for prime storefronts are much easier to come by. Florsheim, Piperlime, Manolo Blahnik and Frye are just a few of the footwear companies that have recently jumped on the bandwagon. “The pop-up phenomenon has gone mainstream, and we’re seeing a diverse and broad set of companies embracing the format,” said Janet Hoffman, managing director of Accenture’s retail practice. “[Everyone is] seeking new ways to grab consumers’ attention and reignite their desire to spend.” According to John Florsheim, president and COO of parent firm Weyco Group Inc., the success of the venture already has the company thinking about pop-ups in other cities. The Soho shop, meanwhile, is slated to remain open through February, but Florsheim said the brand isn’t ruling out staying in the space permanently.<WWD>

Hedgeye Retail’s Take: Not surprisingly, the pop-up concept, is becoming more mainstream.  Unfortunately that means the whole idea becomes less exciting and economically beneficial to retailers if in fact everyone is doing it.  How long before malls set aside a certain amount of square footage for rotating retail concepts?

 

COLM's Gert Boyle Bests Robber - Gert Boyle, the 86-year chairman of Columbia Sportswear, certainly last week lived up to the "One Tough Mother" role she plays in her company's advertising campaigns, According to The Oregonian, Boyle was confronted outside her home in West Linn, OR last Wednesday by a man claiming to be making a delivery. When she got suspicious, he pulled a gun and ordered her inside the house. Stating she had to turn off the house alarm system, Boyle tripped a silent panic button to summon the police. Unaware that the alarm had been triggered, the robber "tied Boyle's hands, roughing her up a little, and began rifling through the house." After police arrived a few minutes later, the robber headed out the back door. He was later  apprehended and was arraigned on charges of robbery, kidnapping and burglary. Boyle is apparently in good shape. "Gert is fine," said Kerry Tymchuk, a PR specialist who helped Boyle write her 2005 book. "She's just a bit shaken up, and she has a fat lip. It really was a long night for her. But it's typical of her that she outwitted the burglar. She's a pistol." <SportsOneSource>

Hedgeye Retail’s Take: The second best bit about this story aside from a positive conclusion was Gert’s response to the police chief  – “I was OK until that jacket walked in here” – the robber was sporting North Face outerwear.

 

H&M SSS Slow in October - Hennes & Mauritz AB said same-store sales in October increased 3 percent, compared to 8 percent in September. Including new stores, total revenues for the month of October grew 13 percent, versus 16 percent in the previous month. The October figure compared with a 3 percent decline in same-store sales in the same month last year. <WWD>

Hedgeye Retail’s Take: Still positive, but slowing sequentially over the last 3-months reflecting modest improvement in underlying demand.

 

Rue La La Goes Local in Boston - Rue La La, one of the earliest luxury flash-sale sites, said this week that Rue Boston will be the first city in its Rue Local series. The site will offer daily deals for Boston-based restaurants, spas, salons, retailers and events, says Rue La La, No. 103 in the Internet Retailer Top 500 Guide. All Rue La La members in the greater Boston area will receive an offer by e-mail every day featuring a Rue Boston Pick at up to 70% off retail prices.  Rue Boston offers will be available for 24 hours though consumers can redeem the deals for varying amounts of time. Rue La La members in Boston also can access local Rue Boston offers on RueLaLa.com, where they’ll see local deals alongside other, non-local discounts. <internetretailer>

Hedgeye Retail’s Take: Hmm, sounds like Gilt City.  Good news for Bostonians however looking for a deal.

 

China Launches Campaign Against IP Violations - China has launched a half-year campaign to crack down on the violation of intellectual property rights (IPRs) and the production and distribution of fake products, reported the China Leather Industry Association. The campaign, beginning in November, targets pirated publications, software products, DVDs, designs and other products with IPRs, focusing on violations of registered trademarks and patents at both the production and distribution level. Fourteen provinces, municipalities and autonomous regions including Beijing, Guangdong, Zhejiang and Shanghai will be affected. <FashionNetAsia>

Hedgeye Retail’s Take: This is big for luxury retail brands that have had to fight (and fund) the good fight themselves for…ever. With U.S. customs starting to step up efforts and now Chinese associations doing the same, a groundswell is finally underway. Is this a near-term positive – no, but certainly an intermediate-to-long term benefit as brands recapture a greater percent of real consumer spend.

 

 


MACAU SLOWS IN WEEK 2 OF NOVEMBER

Table revs thru the 14th were HK$7.4BN.  Normalizing the rest of the month, including slots, would produce 35-39% YoY growth for November.

 

 

Table revs slowed down  in November, averaging a still respectable HK$498MM per day in the 2nd week from HK$562MM in the 1st week.  We believe the monthly run rate for total gaming revenues including slots slipped to HK$16-16.5 billion. At this level, November would represent 35-39% growth YoY, the lowest rate since August 2009.

 

The Macau Grand Prix starts this Thursday. While the event may encourage the Mass to come out and gamble away on the peninsula, VIP volumes may fall as players stay at home to avoid the road restrictions that makes it inconvenient to move around.  Thus, daily revenue for the coming week may continue to be soft.

 

Driven by low hold, LVS continues to underperform with a measly 12.9% share, way below its trailing 3-mth average of 19%.  It looks like SJM has taken significant share from WYNN; comparing the 2nd week with the 1st week, SJM gained 3.8% points to 34.6% share and WYNN lost 6.4% points to 12.3%.  Confirming its recent uptrend, Melco has been able to sustain its above-average share.

 

MACAU SLOWS IN WEEK 2 OF NOVEMBER - macau1


Daily Trading Ranges

20 Proprietary Risk Ranges

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THE M3: MGM IPO; SO NOT LEAVING; WEN COMMENTS; LOAN QUOTAS

The Macau Metro Monitor, November 15th, 2010

 

MGM MACAU TO LIST UP TO 25 PERCENT OF CAPITAL macaubusiness.com

CEO Jim Murren announced that MGM Macau is targeting to sell up to 25% of its capital in its HK IPO.  “We're going to list 20-25% of the total enterprise. I can't predict very specific in terms of timing but I can say we're ready”, Mr Murren told China Daily.  Mr Murren also said that MGM Resorts International will open hotels in Beijing, Sanya, Tianjin, Chengdu and Shanghai from 2011 to 2014. The Beijing property will be the first to open, in August 2011.

 

AMBROSE SO NOT LEAVING SJM macaubusiness.com

SJM CEO Ambrose said he is not leaving the company.  As SJM's third largest shareholder, So offered no explanation for his stock sale.  He reiterated SJM's interest in Macau Studio City but still believes that "Macau peninsula is the centre of gaming."  So expects the government to decide on the company’s request for a plot of land near Macau Dome “by the end of the year”, but noted that SJM isn’t “in a hurry to build in Cotai”.


WEN JIABAO URGES MACAU TO FOCUS ON SOCIAL AFFAIRS Intelligence Macau, Macau Daily Times

Premier Wen stressed the importance of closing wealth gap in Macau and addressing the inflation risk in housing and public goods. Wen said, "The Guangdong-Macau cooperation framework will further promote the ties between Macau and the Mainland. The Mainland will impose a significant impact on Macau's development and therefore I hope the [SAR] Government can be well-prepared and outline a [thorough] planning accordingly."

 

MORE CHALLENGING INFLATION FACTORS AT PLAY THIS TIME SCMP, Intelligence Macau

If history is any guide, more rate rises, loan quotas and price control could be planned as China combats inflation, particularly rising home prices.  IM believes if lending quotas become a reality, it could be a major headwind for Macau.


KNAPP TRACK: CASUAL DINING RECOVERY

Conclusion: Knapp Track comparable restaurant sales trends in October indicate that the casual dining recovery remains intact.  As per our recent research on EAT (see yesterday's note "EAT - BADGE OF HONOR), we see Brinker as a way to play this trend.

 

The Knapp Track preliminary results for October suggest that the casual dining recovery seen in the third quarter has continued into 4Q.  October casual dining comparable-store sales came in at +1.6%, the strongest print since August 2007, and traffic declined 0.9%.  Trends have been improving sequentially for most of 2010.  On a two-year basis, October comparable-store sales declined 1.6%, which was a 105 basis point improvement versus the two-year trend in September.  In terms of comparable guest counts, on a two-year basis, October saw a 95 basis point improvement versus the two-year trend in September. 

 

Knapp highlighted the number of initial jobless claims trending down as being a positive for casual dining sales and I would agree with that. However, it is important to note that while the most recent report indicated a significant improvement, there is still some way to go before the four-week rolling average reaches the 375-400k range we are looking for before unemployment can begin to improve.

 

KNAPP TRACK: CASUAL DINING RECOVERY - initial claims

 

Howard Penney

Managing Director


WEEKLY FINANCIALS RISK MONITOR: NEGATIVE BREADTH WORSENS ACROSS SHORT AND LONG TERM DURATIONS

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Negative / 1 of 10 improved / 5 of 10 worsened / 4 of 10 unchanged
  • Intermediate-term (MoM): Positive / 3 of 10 improved / 4 of 10 worsened / 3 of 10 unchanged
  • Long-term (150 DMA): Negative / 0 of 10 improved / 7 of 10 worsened / 2 of 10 unchanged / 1 of 10 n/a

WEEKLY FINANCIALS RISK MONITOR: NEGATIVE BREADTH WORSENS ACROSS SHORT AND LONG TERM DURATIONS - summary

 

1. US Financials CDS Monitor – Swaps were negative in the US last week, widening for 27 of the 29 reference entities. 

Tightened the most/widened the least vs last week: SLM, PMI, RDN

Widened the most vs last week: C, ACE, TRV

Tightened the most vs last month: AXP, MET, CB

Widened the most vs last month: COF, PMI, MBI

 

WEEKLY FINANCIALS RISK MONITOR: NEGATIVE BREADTH WORSENS ACROSS SHORT AND LONG TERM DURATIONS - us cds

 

2. European Financials CDS Monitor – In Europe, the pattern was the same for bank swaps.  Swaps widened for 36 of the 39 reference entities and tightened for only 3.    

 

WEEKLY FINANCIALS RISK MONITOR: NEGATIVE BREADTH WORSENS ACROSS SHORT AND LONG TERM DURATIONS - euro cds

 

3. Sovereign CDS – Sovereign CDS decreased 7 bps on average last week as swaps eased off their highs on the news that Ireland is in talks with the EU.   

 

WEEKLY FINANCIALS RISK MONITOR: NEGATIVE BREADTH WORSENS ACROSS SHORT AND LONG TERM DURATIONS - sov cds

 

4. High Yield (YTM) Monitor – High Yield rates rose sharply last week, closing at 8.06 on Friday.  

 

WEEKLY FINANCIALS RISK MONITOR: NEGATIVE BREADTH WORSENS ACROSS SHORT AND LONG TERM DURATIONS - high yield

 

5. Leveraged Loan Index Monitor – After weeks of putting in new YTD highs, the leveraged loan index failed to rise last week.  The series closed the week down a point from its level last Friday. 

 

WEEKLY FINANCIALS RISK MONITOR: NEGATIVE BREADTH WORSENS ACROSS SHORT AND LONG TERM DURATIONS - lev loan

 

6. TED Spread Monitor – Last week the TED spread fell slightly, closing at 16.0 bps.

 

WEEKLY FINANCIALS RISK MONITOR: NEGATIVE BREADTH WORSENS ACROSS SHORT AND LONG TERM DURATIONS - ted spread

 

7. Journal of Commerce Commodity Price Index – Last week, the index rose 5.1 points, closing at 26.8.

 

WEEKLY FINANCIALS RISK MONITOR: NEGATIVE BREADTH WORSENS ACROSS SHORT AND LONG TERM DURATIONS - JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields arrested their climb, ending the week 7 bps below last week’s close.

 

WEEKLY FINANCIALS RISK MONITOR: NEGATIVE BREADTH WORSENS ACROSS SHORT AND LONG TERM DURATIONS - greek bonds

 

9. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps.  We believe this index is a useful indicator of pressure in state and local governments.  Markit publishes index values daily on four 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. Our index is the average of their four indices.  Pricing data was not available for Friday.  As of Wednesday, spreads rose sharply to close at 166 bps.     

 

WEEKLY FINANCIALS RISK MONITOR: NEGATIVE BREADTH WORSENS ACROSS SHORT AND LONG TERM DURATIONS - markit

 

10. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production.  Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion.  Last week the index fell 18 points, closing at 231 versus 250 the prior week.  

 

WEEKLY FINANCIALS RISK MONITOR: NEGATIVE BREADTH WORSENS ACROSS SHORT AND LONG TERM DURATIONS - baltic dry

 

Joshua Steiner, CFA

 

Allison Kaptur


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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

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