Emerging Markets Are Tightening Monetary Policy, How Are You Positioned?

Conclusion: Seven of ten of the largest emerging market economies are tightening monetary policy.


In the table below, we’ve outlined the largest ten emerging market economies, their 2009 GDP, their most recent CPI reading, and the current monetary stance of their federal banks.  To say that emerging markets are leaning towards tightening their monetary policy, which will lead to slower growth, is an understatement.  Some key takeaways: 

  • In aggregate, the ten largest emerging market economies represent ~$12.7TN in GDP, which is ~21% of global GDP and the fastest growing portion of global GDP;
  • The current average CPI reading for this collection of economies is 6.3%, and only Poland has a reading below 4%; and
  • Of the 10 economies, 7 are currently tightening, 2 are neutral and likely to tighten, and 1 is loosening (albeit in the face of 5%+ inflation). 

In sum, the emerging markets see inflation, are tightening policy, and this doesn’t bode well for the slope of global growth.


Emerging Markets Are Tightening Monetary Policy, How Are You Positioned? - 1


Daryl G. Jones
Managing Director

DSW: Strength Notable on M&A Day

While the focus on DSW is inevitably the company’s merger with holding company RVI, the 4Q same store sales increase of 14.9% should not be ignored.  The overall strength was broad based, but below the surface there are some interesting trends to note:

  • Strength was pretty consistent across the board.  Every single category had comp increases reflecting a continuation of the momentum seen in 3Q.
  • No major fluctuations month to month, with consistency throughout the quarter.
  • Cost increases remain consistent with prior views coming out of the NY Shoe Show.  Expect impact at end of 3Q, early 4Q.  7-12% increase in general with fluctuations between categories.  Getting “nice” results from early spring.
  • Boots were very strong once again, up 16% in 4Q and 57% on a two year basis.  Positive comp increases in December and January for cold-weather product but fashion boots drove the strength.  Strength continues into 1Q.  Expect that 2011 could actually be another strong boot year based on what was shown at Shoe Show. 
  • Not expecting much of an uptick in in-season opportunistic closeouts.  Company did do some pre-buying of inventory to hold for next year.  Management expects this strategy to enable a greater value proposition next year in the rising cost environment.
  • Flat clearance levels year over year in 4Q.
  • Men’s business up 14% in 4Q.
  • DSW will look to hold price on more commodity-like items responsible for bigger volumes overall.  Fashion items will see increases where the value is warranted.

Eric Levine



BWLD reported strong 4Q10 EPS results after the close yesterday, reporting $0.55 per share relative to the street’s $0.52 per share estimate.  Top-line trends fell short of street expectations, however, with company same-store sales growth coming in -0.3% relative to the +0.4% consensus estimate and management’s guidance for at least a flat YOY result. 


Going into the quarter, I thought management’s comp guidance could prove conservative as it implied a 40 bp deceleration in two-year average trends after beginning the quarter strong with two-year trends up 90 bps in October from the end of 3Q10.  Industry trends, as measured by Malcolm Knapp, also slowed during the quarter, down nearly 90 bps on a two-year average.  BWLD underperformed Knapp trends on a one year basis for the first time since 4Q05.  The company still outperformed on a two-year average basis but the gap to Knapp has narrowed considerably (to 3.3% in 4Q10 from 8.9% in 4Q09).


Despite this comp slowdown during the quarter, BWLD is trading significantly higher today (currently +12%), which I would attribute largely to the strong reported same-store sales trends in early 1Q11.  During the first six weeks of the first quarter, company comp growth was +3.8%, implying a 100 bp improvement in two-year average trends since the end of the year.  Management would not comment on whether this comp acceleration is reflective of a sustainable trend for the remainder of the quarter and year, but they did say the comp growth did not include any one-time benefits outside of the company’s being extremely focused and ready for Super Bowl this year. 


BWLD’s 1Q11 comp trends will benefit from both an 80 bp increase in average price during 1Q11 relative to 4Q10 and from the expansion of its Happy Hour initiative from only three markets in 4Q10 to about 65% of its company markets by the end of the first quarter.  That being said, I don’t think the company will be able to sustain the same level of momentum from early in the quarter for the balance of the quarter; though trends should accelerate from 4Q10 levels with increased pricing helping to offset my expectation for a continued slowdown in overall casual dining trends.  I am currently estimating +3.5% company-owned comp growth during the first quarter, which assumes a 60 bp increase in two-year average trends.  I think two-year average trends will be flat-to-slightly down for the remainder of the year, implying about +2.5% growth for the full year.


Restaurant-level margins improved an impressive 140 bps YOY during the fourth quarter as the company continued to benefit from favorable traditional chicken wing prices (traditional wings accounted for 20% of 4Q10 sales).  Cost of sales as a percentage of sales was down nearly 150 bps YOY.  Given that chicken wing prices were down 16% YOY, I was actually expecting this expense line to come in even more favorably, but management stated that the lower wing prices were partially offset by a slightly lower traditional wing sales mix (-1% YOY) and higher beer costs during the quarter. 


The company took a price increase in early January to slightly offset these higher beer costs, but they will continue to put pressure on margins going forward as could a continued decline in wing sales.  It is important to note that overall alcohol sales mix fell to 23% during the fourth quarter from 25% in the year ago quarter, which is not good for margins.  The company is hoping that the expansion of its Happy Hour program will work to once again boost its alcohol sales mix. 


BWLD will see the biggest benefit to its restaurant-level margin in Q1 from an estimated 30% decline in chicken wing prices (prices averaging $1.29/lb during the first two months of the quarter).  Chicken wing prices peaked in 1Q10 at $1.91/lb.  Depending on where prices come in for the remainder of the year, BWLD will likely continue to benefit from favorable prices; though the YOY favorability will lessen as the year progresses.  Increased labor costs will likely continue to pressure margins in early 2011 as the company rolls out its Happy Hour program and invests to improve service during the lunch daypart.   


BWLD maintained its FY11 guidance for 13% unit growth, but is now expecting to open 50-55 new company-owned restaurants relative to its target of at least 40 units outlined on its 3Q10 earnings call.  This new development target assumes a 40-60% increase in new company-owned unit growth from 2010 (total company-owned unit growth +16-18%).  Although the company’s AWS have outpaced same-store sales growth for the last three quarters, highlighting the strength of new unit openings, I am not convinced this aggressive acceleration in unit growth is good for returns.  Management stated that cannibalization negatively impacted quarterly comps during 2010 by about 25-50 bps and would expect that trend to continue in 2011. 


The company justified the acceleration in unit growth by saying, “But we've been gearing up for increased company store growth over the last couple of years. And again once you have that first one or two in a market it's certainly easier to add that third, fourth and fifth because you've got teams in place, you have an ability to hire and train.” Management went on to partially blame its lagging franchisee comp growth on cannibalization in markets such as Texas where franchisees have opened second and third stores in markets that only had one for a while. 


I don’t think it is ever a good sign for returns when management is explaining away sales cannibalization.  In some markets, there just may not be a need for a third, fourth and fifth store.  Based on my assumptions, ROIIC (return on incremental invested capital) should continue to be strong in 2011, but I would expect it to decline from the nearly 30% level in 2010.  The direction of returns is worth keeping an eye on.


Same-store sales growth should come in strong during the first half of 2011 on a one-year basis as YOY comparisons get much easier.  Higher menu pricing, combined with extremely favorable wing prices, will continue to push margins higher during the first quarter, but I would then expect margin trends to decelerate for the balance of the year.


All in, I think BWLD’s earnings results will be in line with the street’s expectations during the first half of the year but could fall short in the back half of the year.  I am currently modeling FY11 EPS of $2.45 (+16.5% YOY) relative to the street’s $2.50 estimate and management’s FY11 guidance of at least 18% growth.  Going into the quarter, I thought management’s FY11 +18% EPS guidance was conservative, but same-store sales trends fell short of my expectations during 4Q10, COGS as a percentage of sales were not as favorable as I was modeling, management guided to some G&A pressure in 2011, primarily as a result of incremental investment internationally and the company will face sharply higher preopening expenses YOY. 


Sell-side sentiment has improved over the last four months as reflected by the 67% of analysts recommending BWLD as a buy relative to only 44% in November 2010.  Although the next two quarters should be fine relative to current expectations, I would expect trends to decelerate in the back half of the year.


BWLD - BUFFALO SOLDIER - BWLD sales vs. margin


Howard Penney

Managing Director

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The UK Sees Inflation

Position: Long Sweden (EWD); Short Italy (EWI), and Euro (FXE)


As was the case in Ben Bernanke’s testimony before the House Budget Committee today, it continues to amaze our team that The Ber-nank says he sees no threat of inflation domestically and has no concern that US monetary policy is contributing to massive inflation in global commodities. In contrast to Bernanke, both ECB President Trichet and BoE Governor King have expressed in recent weeks that 1.) they see inflationary pressures mounting, and 2.) they’ll appropriately address inflation through monetary policy. 


While we don’t purport to have a crystal ball to predict when central banks will raise main interest rates, the rhetoric from the ECB and BoE would suggest a much higher probability that they’ll raise rates sooner than the FED. In fact, we think the BoE will be the first to raise given the higher rates of inflation that the economy is being hit with.


In the UK, CPI has ticked higher over recent months –currently at 3.7% year-over-year—and data out today from the British Retail Consortium on the UK Shop Price Index showed further confirmation of this inflationary trend with price inflation for the overall index, and food inflation accelerating at the fastest pace in 19 months (see table insert in chart).


The UK Sees Inflation - pen1


We think in the near-term, and as soon as this quarter, it would be prudent for the BoE to hike to combat inflation. However, pinning the tail on the timing of a hike is exceedingly difficult, especially given that there’s significant concern that a hike would stymie the already weak GDP outlook for the country this year and next. No doubt the UK economy is in a tough policy spot. The chart of 2 year UK government bond yields below continues to warn of pressing inflationary risks.


The UK Sees Inflation - pen2


With the minutes of the last BoE meeting on January 13th showing a shift by most members to the upward medium-term inflation risks, we’ll take our cues from the action and any incremental statements from King and Co. tomorrow.


Matthew Hedrick



Solid quarter with good cost controls, particularly with regard to promotional activity. Here are our notes from the conference call.



“During the fourth quarter, we achieved year-over-year growth in net revenues, Adjusted EBITDA and Adjusted EPS, while maintaining a strong Adjusted EBITDA margin.  We believe the fourth quarter reflected signs of market stabilization in many of our markets that, together with the strength of our operating strategies, lays the foundation for our return to growth.”

- Gordon Kanofsky, Ameristar’s Chief Executive Officer



  • "Promotional allowances decreased $2.3 million (3.1%) ... The decrease in promotional allowances was mostly due to more efficient promotional strategies overall, and in particular, promotional spending relating to the November 13, 2009 bridge closure near our East Chicago property."
  • “We are extremely pleased with the fourth quarter financial results, especially considering that the bridge closure near our East Chicago property adversely affected the full 2010 fourth quarter but only about half of the 2009 fourth quarter, Ameristar St. Charles faced new competition beginning in March 2010 and we had already reached the anniversaries of our new hotel and favorable regulatory changes in Black Hawk prior"
  • Ameristar St. Charles: "The effective management of costs and the recapturing of market share during the fourth quarter of 2010 resulted in Adjusted EBITDA growth for the first time since the new competitor entered the St. Louis gaming market in the first quarter of 2010."
  • Black Hawk: "Our quarterly market share surpassed 28% for the first time"
  • "Our Vicksburg property declined in all key metrics, mostly due to an unusually low table games hold percentage in the 2010 fourth quarter that adversely impacted Adjusted EBITDA by approximately $1.1 million."
  • 4Q10 Debt: $1.54BN; Leverage ratio (total & sr): 4.76x
  • 4Q10 Capex: $19.8MM
  • “With the continuation of our key strategies and our ability to maximize revenue flow-through with our dynamic operating model, we are optimistic that 2011 should produce additional top-line and bottom-line growth.”
  • 1Q11 Guidance:
    • D&A: $26.5-27.5MM
    • Interest, net of capitalized interest: $24.5-25.5MM (including non-cash interest of $2.3MM)
    • Tax rate: 42-43%
    • Capex: $10-15MM
    • Non-cash stock comp: $3-3.5MM
  • FY2011 Guidance:
    • D&A: $105-110MM
    • Interest, net of capitalized interest: $98-103MM (including non-cash interest of $9MM)
    • Tax rate: 42-43%
    • Capex: $65-70MM
    • Non-cash stock comp: $13.8-14.8MM


  • Got more of their growth from market share growth than market improvement in the quarter
  • Ameristar St Charles seems to be faring better than other competitors in the face of new supply in St. Louis
  • 28.5% market share in Blackhawk - continue to garner more share in that market
  • Growth in E. Chicago - due to favorable weather comparison, more efficient cost control and lower promotional spend
    • Continuing to try to strengthen the property by renovating the hotel rooms and working with the city to improve access to the property
  • 4Q market share improved in Council Bluffs, without aggressive promotional spending 
  • East Chicago cost them $0.18, increased interest expense by $0.16 and competition in St. Charles impacted them by $0.12 for FY 2010
  • When they reach 4.5x leverage, their interest expense will decrease by 25bps - which should happen by mid 2011
  • Lapping of bridge closure and new competitor in St Charles will help them in 1Q and beyond
  • Capex is mostly KC hotel expansion and maintenance
  • Interest expense should decrease about $9MM in 1Q11' YoY due to swap expiration and lower debt levels.



  • Should generate $120-125MM of FCF which they will likely use to retire debt (interest expense guidance assumes debt reduction)
  • IL continues to be mired in its usual quagmire 
  • Indiana - relatively stable environment but there is talk of a smoking ban although casinos will likely get an incentive
  • Black Hawk - what is the opportunity there?
    • They do anticipate that the market will improve and that their operations will become more efficient - so there is potential for margin improvement. Think that they can operate the hotel with a little more efficiency.
  • In East Chicago, they continue to be supportive in efforts to replace the bridge but so far that isn't happening. There is some work going on to improve road access but it's going a little slower than they expected
  • Vicksburg market share?
    • 44%
  • 100 room, $14MM project in KC - open in 2012 - they expect to start construction in mid-2011 and will take 18 months or so to open the hotel
  • Will this be a normal year for slot spending?
    • Yes, they will continue to spend at their historical levels. Having a fresh floor has helped them gain share in many markets
  • What are non-operational professional fees?
    • Related to the evaluation of the sale of the company... there will be some continuation of those fees but they can't quantify them at this time.
  • Corporate run rate should be at $12MM per Q (excluding stock comp)
  • Have implemented some efficiencies that should help control costs. If revenues were flat, they expect margins to be flat
  • No opinion on Maritime exemption in Indiana. If it passes, it would help them
  • There was a little KC design spend in the capex 
  • Is 4x leverage still the goal for them?
    • No comment, but they could look to refinance some debt in 2011
  • Where have they pulled back on promotional spending and how sustainable are those cuts if consumer spending recovers?
    • No comment... but think that their changes are sustainable. That said they continuously monitor promotional spending.
    • Hope that as the economy recovers, the walk in customer returns- and that's a high margin customer
  • Any change in the rated/ unrated play?
    • Moderate yes- what they have seen in most markets are stabilization and in a few select markets, some modest improvement
    • As the economy declined, gaming lagged the rest of the economy in declining and think they will see the same lag on the recovery
  • FTE hasn't really changed - but full time/part time mix has shifted towards more PT
  • Have some cross play btw their markets but it's minimal (re: Q to cross market Black Hawk)
  • Market share gains were due to excess promotional spending at Black Hawk - they just need to be more focused on the cost efficiencies at the property


Likely earnings beats, higher estimates, and new junket business drive a favorable thesis.  Industry-wide junket liquidity/credit conditions remain our only concern.



The stock has taken one on the chin, not as bad as 0200.HK (Melco), but MPEL is down 11% in the last week.  So what’s driving the move down?  We think it is related to general Macau concerns - the weak start to February and the fear that Chinese tightening will constrict the Macau junket business.  We are not worried at all with the former but the latter should always be a concern.


As we stated when we posted the pre-Chinese New Year (CNY) celebration revenues for February, the numbers are irrelevant.  CNY-related gambling really didn’t begin until last Sunday and our guys on the ground are indicating huge volumes and traffic.  While we never bought into the hype of a HK$20 billion month, we are sticking with our projection of HK$17-18 billion.  Maybe that would disappoint some people but assuming MPEL maintains its share, the company would be on pace to easily beat Q1 estimates.


The second issue is real; although with all our contacts in Macau, we can’t say we’ve seen any indication of a liquidity driven junket slowdown.  We’ve statistically tested the relationship between Chinese monetary policy and junket volumes and the causal relationship has been real and significant historically.  However, the relationship broke apart during the last 6 months of tightening.  Does that mean it won’t be reestablished?  Of course not, and we are monitoring that closely.


So what are the positive catalysts?  A second blowout quarter in a row from the gang that couldn’t shoot straight for one.  See our 1/11/11 note, “MPEL: AN ENCORE PERFORMANCE” for the details.  Our EBITDA estimate is 20% above the Street for Q4.  The good times should continue as January was strong and Q1 estimates look too low.  So far during CNY, we are hearing that MPEL’s volumes and hold is strong.


Looking ahead to Q2, Galaxy could announce that the April opening of Galaxy Macau will be pushed back to June.  Cotai cannibalization on MPEL’s City of Dreams (CoD) has been a worry for investors.  An additional two months of CoD operating without the additional competition should allow for another beat in Q2.  Finally, we think MPEL could pick up some of SJM’s junket business in the coming months as we wrote about in our 01/27/11 note, “MPEL: FAMILY SQUABBLES AND OTHER CATALYSTS".

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