PSS: When Boring is Exciting


PSS hit one right down the middle.  The annuity-like characteristics of Payless funded above average growth in the sexier part of the portfolio. This might be the quarter that people realize that PLG exists.


It’s been a while since we could refer to a PSS quarter as being ‘boring.’ That’s a good thing for such a high beta stock. Our thesis on this name is quite simple – use cash flow from a fully mature US store base to fuel growth in its stable of premium brands and International Payless retail business. When investors focus heavily on the prospect for a meaningfully positive US comp, we get worried. Same thing for a big negative comp. Why?  Because both are unsustainable.  


This quarter’s flattish comp (+0.4%) was about in-line. Importantly, it’s on an improving trend on the margin – at the same time PSS’ compares get easier in the coming two quarters. We’re still banking on marginally positive comp for the next two quarters, but we have more confidence that they’ll get there.


Additionally, in a move that is likely to get overlooked, management stepped up its cadence on domestic net store closures from 9 in 2010 to 40 in 2011. While this only represents 0.9% of Payless stores, we think it should help comp challenges, working capital, and profitability (and not to mention managements’ time and focus) on the margin. 


Looking at PLG, it was kind of a mixed bag. Top line slightly missed our estimate – but still came in at a robust 16%. While a sequential slowdown from the +20% growth rates reported in each of the prior two quarters, Q1 backlog accelerated. This was perhaps the most positive development in the quarter.


Most importantly, the backlog accelerated at the same time the Sales/Inventory spread improved by 500bps. Is it in an ideal position? No. But it is definitely getting better on the margin.


One thing we liked on the call was Matt Rubel’s realistic view on input costs relative to what we’ve heard from other CEOs over the past two months. He noted the dynamics around trying to pass through higher prices to a soccer Mom who is buying shoes that her kids will outgrow in 3 months. Will any or all of the strategies work to mitigate margin risk? Time will tell. But those who win will be those with a clear process that looks beyond taking prices up on a like for like basis.


In the end, we’re taking our 2012 number down slightly to $2.00 due to a slightly higher tax rate.  We’re sitting here with a $22 stock. Based on our math, Saucony and Sperry alone are worth $12-$14. That suggests that the remaining business is worth less than $10.


PSS: When Boring is Exciting - PSS S 3 11


PSS: When Boring is Exciting - PSS Comp Trends 3 11




Macau’s record setting February was volume driven and Mass was off the charts.  MPEL looks like the standout.



February was a record month, despite only 28 days.  Total gaming revenues increased over 47% off of a 71% comp.  Importantly, the growth in February was achieved in spite of low market hold and difficult hold comparisons.  Assuming direct play of 7% or RC of $4.8BN, February hold was only 2.67% compared to a hold of 3.02% in February 2010 (assuming 7.1% direct play or $2.8BN).  If hold in both periods was 2.85%, February YoY GGR growth would have been up 61%.


Market margins should be strong as Mass and slot revenue each set a monthly record as well.  In fact, high margin slot and Mass revenue growth in February as a percent of total revenue growth was the 2nd highest of any month since August of 2009.  Despite the low hold, February may have been the most profitable month ever in Macau.


Every property that we track appeared to have below normal hold, with the exception of Venetian.  MGM experienced its second best market share since opening this month.  MPEL also had a standout month in February.  Not only did market share grow 50 and 70bps from Dec and Jan, respectively, Mass market share for MPEL was at its highest ever at 11.9%, a 200bp increase from January.  City of Dream’s table share also reached 10.0%, just 10bps short of Venetian’s share – which is a huge accomplishment for the company.  On a YoY basis, MPEL’s total gaming revenue increased almost 62% and Mass table revenue climbed a whopping 63% versus market Mass growth of “only” 36%. 



Y-o-Y Table Revenue Observations:


Total table revenues grew 47% YoY this month despite low hold in the month, with Mass growth of 36% and VIP growth of 51%. Junket RC grew 71% in February.


LVS table revenues grew 32%

  • Sands was up 12%, driven by a 11% increase in VIP and a 14% increase in Mass
    • Hold was a drag for Sands this month.  Junket RC chip grew 51%.  Hold, adjusted for 15% direct play (in-line with 4Q10), was about 2.69%, compared to 3.75% hold in Feb 2010, assuming a 10% direct play estimate (in-line with 4Q09)
  • Venetian was up 37%, driven by a 24% increase in Mass and 46% increase in VIP.
    • Junket VIP RC increased 35%. Assuming 19% direct play, in-line with 4Q10, we estimate that hold was 3.27%, compared to 2.92% hold in Feb 2010 (assuming 21% direct play)
    • Venetian was the only property we track that held over 3% in February.
  • Four Seasons was up 75% y-o-y driven by 71% VIP growth and 93% Mass growth
    • Junket VIP RC increased 66%. Assuming 50% direct play, hold was 2.45% compared to an estimated hold of 2.60% in Feb 2010 assuming direct play levels were in-line with 4Q09 at 43%.

Wynn table revenues were up 50%

  • Mass was up 73% and VIP increased 46%
  • Junket RC increased 70%
  • Assuming 12% of total VIP play was direct, we estimate that hold was 2.58% compared to 3.11% last year (assuming 10% direct play)

MPEL table revenues grew 64%, equally driven by Mass growing 63% and VIP growing 64%

  • Altira was up 23%, with Mass continuing its tear, up 96% and VIP up 20%
    • VIP RC was up 56% - the property’s best growth quarter since Nov 2008.
    • Hold comparisons were not favorable. We estimate that hold was 2.57% compared to 3.34% last year.
  • CoD table revenue was up 97%, driven by 59% growth in Mass and 114% growth in VIP
    • Junket VIP RC grew 120%; Feb 2010 hold was 2.76% (assuming 15.2% direct play) vs. 2.58% this month, assuming 18.5% direct play

SJM revs grew 44%

  • Mass was up 26% and VIP was up 53%
  • Junket RC was up 69%

Galaxy table revenue was up 25%, driven by 56% growth in Mass and VIP growth of 21%

  • Starworld table revenues grew 30%, driven by 61% growth in Mass and 28% growth in VIP
  • Junket RC grew 41% at Galaxy and 48% at Starworld
  • Our understanding is that Starworld is somewhat capacity constrained

MGM table revenue was up the most in February, growing 92%

  • Mass revenue growth was 49%, while VIP grew 103%
  • Junket rolling chip jumped a massive 158%
  • Assuming direct play levels of 15%, we estimate that hold was only 2.63% this month compared to 3.34% last year. 


Sequential Market Share (property specific details are for table share while company wide statistics are calculated on total GGR, including slots):


LVS share ticked up to 18.1% from 17.8% in January, but was still below its 2010 average of 19.5%

  • Sands' share decreased 80bps to 5.2%
  • Venetian’s share rebounded from all time lows in January to 10.1% helped by high hold
    • Mass share increased 20bps to 14.8% from 14.7% in January
    • VIP share increased 2.9% to 8.7%
    • Junket RC increased 30bps to 5.7%
  • FS share decreased to 2.3%, down 1.1% from January which benefited from massive hold
    • Junket RC share increased 30bps to 1.4%
    • VIP share decreased to 2.4% from 3.8% in January
    • Mass share declined 30bps to 1.7%          

WYNN's share increased 1% to 15.2%

  • Mass market share declined 70bps to 11.2%, compared to an average of 10.1% in 2010
  • VIP market share increased 1.4% to 15.9% sequentially, in-line with its 2010 average of 16%
  • Junket RC share increased 1.7% to 15.6% compared to Wynn’s 2010 average of 15.2%

MPEL's market share increased to 15.2% from 14.7% in January – tied for 3rd place with Wynn

  • Altira’s share decreased to 5.1%, decreasing 1.6% sequentially- losing most of its gains in January. The share loss was entirely on the VIP side which lost 2.1% share sequentially.
  • CoD’s share increased 2.2% sequentially to 10% - only 10bps below Venetian’s table market share!
    • Mass market share increased to 10.3% - an all-time high for the property
    • VIP market share increased 2.1% to 9.9% while Junket RC share increased 1.1% sequentially to 8.9% (compared with 5.7% share for Venetian)

SJM's share decreased 80bps to 30.6% from January levels, with share losses in both Mass and VIP

Galaxy was the biggest share loser in the month with sequential declines of 2.3% to 9.1% - the company’s worst share month since May 2008

  • Starworld's market share plunged 2.9% to just 7.2% from 10.1% in the previous month
  • Share losses were entirely VIP driven

 MGM's share increased to 11.8%, from 10.6% in January and represented the property’s best share month since opening

  • Mass share decreased 50bps to 8.5%
  • VIP share increased 2.0%
  • Junket RC share increased 1.3% to 11.8% - a record share for the property


Slot Revenue:


Slot revenue grew 49% YoY in February to $120MM, setting an all-time monthly high – the second best month was October 2010 at $111MM

  • MGM slot revenues grew the most at 118% reaching $17MM – in-line with January’s record for the property
  • At 108% YoY, Galaxy had the second best growth – granted, on a very small base. Feb slot revenue reached $5MM.
  • Wynn’s slot revenue grew 81% YoY reaching $28MM –setting a record for the property and blowing away prior highs set in October at $22MM
  • MPEL’s slot revenues grew 30% reaching $22MM – also setting an all-time high for the company
  • SJM grew 30% to $16MM
  • LVS had the slowest slot growth at 25%, granted off of the highest base. Slot revenues were $32MM.









March 3, 2011






  • Costco noted that while most retailers try to get margin when they can (i.e. in inflationary periods such as now), they are trying to hold margins a bit while they can.  In other words, Costco will look to hold prices a bit longer than the competition in an effort to maintain its value proposition.  They also use margin improvements in categories other than food to offset some the of the margin degradation they expect to occur in consumable categories.
  • BJ’s noted that there has not been enough inflation coming through the system yet to have a good read on how Wal-Mart and the traditional grocers are going to pass through cost increases at retail.  Management believes that the company’s overall value proposition remains strong in periods of rising prices as the appeal of the “club” may actually go up on a relative basis when the consumer is looking to save money.
  • In one of the more sober perspectives on product costs so far this year, CRI’s management highlighted that better visibility suggests an increase of +25% through the 2H of 2011. While the company expects to mitigate cost increases with higher prices, it’s no surprise that margin compression is clearly a reality here as indicated by the Q1 outlook calling for earnings 15%-25% below consensus.



Amazon Warns it will Leave California Over Tax Law - Inc. told California tax officials this week that it will cut ties with thousands of California affiliates if the state passes pending legislation requiring the online retailer to collect sales tax from California customers. Amazon, contending that four bills pending in the California Legislature appear to be unconstitutional or would “construct Trojan horses” leading to unconstitutional regulation, said passage of any of the bills into law would compel the world’s largest online retailer to end its advertising relationships with more than 10,000 California-based participants in Amazon’s affiliate program. Amazon, No. 1 in the Internet Retailer Top 500 Guide, compensates program participants when they refer consumers who make purchases on <InternetRetailer>

Hedgeye Retail’s Take: Just weeks after threatening to pull out of Texas, Amazon is clearly ready to go to the mat here suggesting it will leave California as well if required to collect taxes. Given the state of California’s economy, the retailer’s stance on the issue has just strengthened materially.


RL Gang Back for Spring - Ralph Lauren’s favorite school class — dressed impeccably in his new childrens wear offerings — is back for spring. “The RL Gang: A Magically Magnificent School Adventure,” a shoppable online storybook, is launching Thursday at and, and Uma Thurman served as narrator this time. The second edition also comes with a contest to find a child to appear in a future installment. Parents in the U.S. and U.K. can upload a photo of their child on Lauren’s Facebook page for people to vote on — adding interactive elements to the project — and the winning child will be flown to New York for the shoot. <WWD>

Hedgeye Retail’s Take: The latest from RL’s innovative online team, this site offers a fresh new take on the presentation of children’s clothing illustrating the product in motion as worn by children in the story. Take a look here: (


Eva Mendez becomes Brand Ambassador for Reebok EasyTone - Hollywood actress Eva Mendes has become the latest ambassador of Reebok's EasyTone toning collection. Other endorsers include supermodel Helena Christensen and British actress Kelly Brook. "I feel better when I'm in good shape, and that's what I like about Reebok EasyTone - it gives me a little extra as I go about my daily activities," said Mendes in a statement. "Between long days on the set and travel, it's not always possible to get a full workout in, so I have to make the time I have count. As an actress, being fit is important, and EasyTone is my great secret!" Uli Becker, President of Reebok International, added: "Eva Mendes fits perfectly with Reebok and EasyTone - she's fun, inspirational, committed to fitness and a style icon to women around the world." <SportsOneSource>

Hedgeye Retail’s Take: The latest move to one up each other in the toning endorsement in the battle (recall Skechers just added Kim Kardashian), it appears the brands are looking to squeeze what remains of demand for the category.


Retailer Demand for Real Estate Rising - U.S. retailers are ramping up store expansion plans on the strength of a rebound in consumer spending, according to ChainLinks Retail Advisors, a retail real estate advisory services firm serving retailers, landlords, and investors in North America. The firm’s recently published National Retailer and Restaurant Expansion Guide reports retailer demand for real estate up across the board.  “As 2010 came to a close, growth plans were up 30% from the levels we recorded last year,” said ChainLinks Research Director, Garrick Brown. “Following the strong performance during this year’s holiday sales season, many chains further upped their growth plans.  <SportsOneSource>

Hedgeye Retail’s Take: Retailers have been increasingly more optimistic about store growth plans since the 2H of last year as sales results and visibility improved. The question now is how they’re looking at 2012 with top-line concerns secondary to tighter margins over the intermediate-term.


Advances in Technology Drive Activewear Market - Get me a doctor! That’s a cry activewear brands are making as they continue to push the technology envelope with products such as carbon fiber bicycle shorts, water-resistant running jackets and light-as-air skiwear. From medical doctors to engineers, companies are hiring experts outside the industry to develop new ways to protect athletes from both the elements and the rigors of sports — all while keeping comfort in mind.  For Under Armour, that translates into Charged Cotton, which is being billed as the first true performance cotton apparel, while at Asics, it’s battery-operated jackets that light up to make the wearer visible in the dark.  <WWD>

Hedgeye Retail’s Take: Still waiting on the next generation “wellness” apparel line that shrinks the waistline while stationary.


February e-commerce Spending Jumps 13.2% - Shoppers spent $13.8 billion online in February, a 13.2% year-over-year increase, according to an estimate released today by MasterCard Advisors, the credit card company’s consulting arm.  Consumers spent $13.1 billion online in January. February is the fourth consecutive month with double-digit online spending increases.  Plus, customers spent more money online in February this year than February last year in every category measured except department stores, MasterCard says, though the payment card network did not release figures for all categories. The SpendingPulse unit uses surveys and data from its credit and debit card network to estimate all retail transactions.<InternetRetailer>

Hedgeye Retail’s Take: Echoing improved sales we’re seeing in weekly athletic sales data, growth in online sales is a bit more modest as consumers were undoubtedly more anxious to get out of the house following an anomalous January.



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Including today’s performance MCD is down about 1% year-to-date and has underperformed the S&P 500 by roughly 5.0%. 


The underperformance is testing the willpower of the BULLS as we are headed into a very tenuous time for the company - the reporting of 1Q11 EPS.  Before we learn about earnings, we will get one more monthly reading on same-store sales trends for February. 


Yesterday, Bloomberg ran an article that highlighted one of primary our concerns for MCD, which is that the advertising strategy for the company has moved too far away from the core customer and is now too focused on selling a drink rather than a burger.


The article focused on Ronald McDonald and the company’s move away from using him as part of the advertising strategy.  While I agree with the premise of the article, the focus on Ronald McDonald misses the point.  Kid’s meals have been declining in importance for 20 years as evidenced by the removal of most playgrounds from suburban MCD stores six years ago.  In addition, Happy Meals have become an afterthought on the marketing calendar.  Ten years ago you would hear rumors that one market or another ran out of a particular toy in the middle of a promotion; that doesn't seem to happen anymore.


Lastly, when was the last time you heard management give credit to a Happy Meal promotion for increased same-store sales growth?


We have seen in some markets that MCD has been pushing to sell the basic Happy Meal for $2.99 instead of $3.50 to help improve sales; this price reduction won't be implemented nationally because with rising food costs and the cost of toys, the Happy Meal becomes a money loser for franchisees.  Since Happy Meals are a low profit sale for the company, it’s just not a focus.  In addition, a parent can spend less by ordering off the dollar menu. 


As I highlighted in the MCD Black Book, the dollar spend on beverages has shifted significantly over the past three years.  Advertising on beverages as a percentage of the company’s total U.S. marketing spend has gone from 3% in 2008 to 43% in 2010.  As hard as MCD tries, they are not going to be as successful as Starbucks in creating that third place.  Consumers are just not going to use the restaurant the same way. 


Domino’s new and inspired pizza launch is the most recent example of a successful new product that can’t “comp the comp.”  MCD’s smoothie/frappe launch will fall prey to the same phenomenon.  To recall, I estimate that the incremental frappe and smoothies sales combined contributed about 5.7% of the reported 2Q10 3.7% U.S. comp growth and 5.9% of the 5.3% growth in 3Q10.  If my estimates are close to being correct, that would imply a decline in the company’s core business of about 2.0% and nearly 1% in 2Q10 and 3Q10, respectively. 


Given MCD’s consistently strong performance, a negative comp for MCD is a bigger deal than it is for Domino’s (DPZ has only reported five quarters of positive domestic company-operated comp growth after eight quarters of declines).  MCD has spent significant time and effort trying to grow its beverage franchise.  With the “hot” part of the McCafe strategy already a bomb, any concern about the “cold” side will have an outsized impact. 


MCD has one more month of easy comparisons in the U.S. in February.  Come March, the comparisons get much more difficult and we would not be surprised to see the company report negative monthly comp growth.  And, the comparisons get increasingly more difficult during the summer months when MCD laps its smoothie/frappe launch from last year.  I am currently modeling negative U.S. same-store sales growth in Q2, Q3 and Q4 of 2011.  Even if my estimates prove overly bearish, MCD’s U.S. comp momentum will likely slow in 2011.


Howard Penney

Managing Director


Notable news items/price action from the past twenty-four hours.

  • WEN reported $0.01 ex-items versus the Street, in line with prior guidance from January 26th.  The company is guiding below the street on EBITDA but assuming the sale of Arby’s.  Affirming Wendy’s longer term target of 10% to 15% EPS growth, beginning in 2012.
  • WEN is to reopen stores in Japan, a market it quickly exited in 2009.  The company sees at least 71 stores in Japan in five years.
  • DIN reported 4Q EPS of $0.59 versus consensus $0.64.  Earnings included a $7.7M charge related to the default of an IHOP franchise.  Guidance for FY11 is for Applebee’s domestic system-wide same-store sales performance to range between 1% and 3% and company-operated restaurant level-margin of between 14.8% and 15.2%.
  • MCD traded poorly yesterday as headlines highlighted a decrease in its advertising spend and the movement of the brand from its core business to lattes and other beverages.  This is all confirmative of my Black Book of mid-January.
  • PEET continues to trade strongly following an upgrade yesterday that boldly stated that a deal would be done between PEET and GMCR by March 6th for Peet’s to enter the k-cup market.
  • DPZ gained on strong volume. 
  • CBRL gained 60 bps on accelerating volume following a difficult fortnight of trading.  Gasoline prices have been pressuring this stock.
  • MSSR traded down sharply on very high volume yesterday.  The stock was downgraded this morning.   On Tuesday, 4Q EPS came in at $0.22 ex-items versus $0.24.




Howard Penney

Managing Director


Initial Claims Fall to 368K

The headline initial claims number fell 23k to 368k (20k after the 3k downward revision to last week’s data).  Rolling claims fell 13k to 388.5k. On a non-seasonally-adjusted basis, reported claims dropped 33k WoW.  In most years, this week of the year sees an uptick in non-seasonally-adjusted claims.  This year, that increase has not occurred, and the strength is showing through in the seasonally adjusted series. 


We are now seeing claims enter the 375-400k range where unemployment can begin to come down. Claims will need to hold this level and improve further in order to see any real movement in the unemployment rate, but this is clearly positive on the margin. It is worth noting an important caveat. This recession has been different in that it has pushed the labor force participation rate down by ~200 bps, which has had a correspondingly positive improvement on the unemployment rate. In other words, the unemployment rate isn't really 9%, it's 11%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11% actual rate as opposed to the 9% reported rate.








One of our astute clients pointed out the relationship between the S&P and initial claims shown below.  We show the two series in the following chart, with initial claims inverted on the left axis.




In the table below, we chart US equity correlations with Initial Claims, the Dollar Index, and US 10Y Treasury yields on a weekly basis going back 3 months, 1 year, and 3 years.




Joshua Steiner, CFA


Allison Kaptur

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