PSS: Starting Over

I still like this name a lot. As I sit here prepping for next week’s analyst meeting, I’m staring at our sales/inventory/margin chart. It is absolutely classic retail 101. Notice the following path…

1) Business was solid in ’06 into 1Q07. Sales up, inventories down, and margins positive (and stock at $40).

2) Inventories begin to build relative to sales in 2Q and 3Q07 – both standalone PSS and resulting from Stride Rite acquisition. Margins stay positive, but hang on by a thread as inventory builds.

3) PSS can’t hold the line with margin, and by 4Q07 falls into a negative margin position – along with high inventories and low sales. Stock tests single digits.

4) 1Q08: Margins still down, but inventories clean up. Stock finds bottom.

5) 2Q08: Sales/inventory spread in perfect balance, and margins come back to year ago levels. Stock sees high teens.

6) Next stop… Sales/inventory spread goes higher, and margins trend up. As it relates to timing, we’ve got one more quarter of tough margin compares, but 3Q and 4Q are flat-out easy. Importantly, I think we’ll see top line accelerate at the same time as we start to see PSS leverage Saucony, Sperry and Keds. We’ll hear about that on Monday.

The Race To China

With so many companies initiating or accelerating investment in China over the past quarter – I had my team dig in to when each apparel/footwear company started investing in building a Chinese consumer business (i.e. not manufacturing). It’s pretty startling when charted against the Yuan/Dollar. Some companies were ahead of the curve – such as Nike, Adidas, VF Corp, and even Jones Apparel Group (1993 – who would have thunk??). But I’m astounded by the sheer number of companies that invested in China AFTER a parabolic move in currency (bad trade) due to slowing growth in core markets. This chart shows proactive versus reactive strategic planning at its best.


The offsetting relationship between Strip table hold percentage and Strip volume appears to breaking down. If sustained that is bad for Las Vegas. Hold percentage has served as sort of a hedge when table volume dries up. Both important metrics are now in descent.

The first chart graphs Las Vegas Strip table (excluding Baccarat) hold percentage, drop, and US retail sales. As expected, US retail sales and table volume move pretty much in tandem. Surprisingly, table hold percentage actually tracks inversely to the other variables. Moreover, the relationship of all three is statistically significant (see the correlation table).

  • I have to say I was surprised and almost shocked at the correlation. Table hold percentage is not really “statistically derived” like slot hold percentage. Obviously, a slot machine is computerized and can measure exactly how much is wagered. A table game cannot. The table hold percentage is calculated dividing casino win or revenue by drop. Drop is simply the amount of chips exchanged for cash regardless of how much is actually wagered. I had posited that gamblers are less likely to wager as much when times are tough. They still may take out as many chips but would actually spend less time at the table wagering those chips. This would have the effect of lowering the hold percentage during an economic slowdown. Moreover, in order to attract more gamblers in difficult times, casinos could provide better payouts on blackjack or even offer more single deck table games. I guess I was wrong.
  • Possible explanations for the counterintuitive relationship between volume and hold %? Discounted room rates attract a lower end customer that plays less but plays stupid and plays more “house” games (lower odds). Another potential answer is more psychological. Players may be more disciplined in limiting chips to how much they are willing to lose which likely gives them the security to play longer. Volume down, hold percentage up.

  • These explanations are only possibilities. What is interesting is that there are more factors at play than just “luck”. Think about that the next time an analyst justifies a string of bad months based on low hold percentage. What is disconcerting now is that hold percentage and volume have been moving down in tandem as of late. Maybe I’ll be right after all.
Historical hedge between volume and hold % breaking down
Economy drives volume, hold % inversely correlated to both

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"Evil Doers", Continued...

In what looks to be the most ridiculous comment of the day by the US Financial system's said leadership, New York's Attorney General, Andrew Cuomo, is asking the SEC to "freeze short selling" in the US Financials!

Are you kidding me Andrew? Do you have any idea what this kind of reckless political rhetoric can do to the market? If you think Long Term Capital Management blowing up was a problem, go right ahead and test your politically convenient theory here and see what happens if the entire hedge fund community has to pull their hedges.

Worse yet, consider the implications to the few money managers and individuals out there who have proactively hedged their portfolios for what has turned out to be an unmitigated disaster in risk management by the executives of our publicly held investment banks.

We cannot continue to manage this Financial Crisis reactively. Now that John McCain has thrown his thought partner, George Bush, under the bus today, I have no idea who is going to provide some sensible, calming, proactive leadership – but, boy, do we need it, fast!


"They" are going to get them Evil Doers!

Allegedly, per our friends at Street Account, "CalPERS no longer lending out shares of Goldman Sachs and Morgan Stanley"...

At one point, MS was down -40% today. Morgan Stanley has already traded 225 million shares, multiply that number by $20 or $25/share, and that's one heck of a lot of evil doers shorting their stock!

Maybe someone who is long is selling it... Shhh - don't tell anyone... that doesn’t fit the Wall Street excuse making narrative.


The following comments are from a well respected MCD observer:

The original (internal) objective was to have enough stores on specialty coffee to go on National television in April of 2009. The national fund (OPNAD) had it on the 2009 calendar until recently. Problem is that no one thinks it would be smart to launch in the summer, especially since they had reasonable success this summer with a national iced coffee program so they'll want to do a repeat next summer and launch McCafe in the Fall/Winter of 2009/2010.

Reasons for the delay are many:

* franchisee foot dragging

* Unrealistic construction schedules

* Instead of using proven local contractors experienced in remodeling MCD stores MCD Corp. hired Bovis Lend Lease to coordinate the remodeling of all USA stores from Australia.

The real issue here is that the products have not proven themselves and many are still in the development stage yet a huge chuck of MCD advertising will eventually be diverted to McCafe. And if it
doesn't work well management will insist on diverting even more advertising $$$$$ to the program.

The MCD franchisees are concerned about the impact on overall sales, development and the introduction of other new products.

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