Cupid Shoots 73%

With sales day becoming less relevant due to fewer companies reporting, there are still a handful callouts from today’s reports.  Overall, 16 of 22 (73%) companies reported better than expected results while just six fell shy of Street expectations.  Valentine’s Day was a success, which certainly puts some pause in questioning the propensity of the consumer to shop for purely discretionary goods.  Februrary marks the second month a row of accelerating results on one, two, and three year basis.  Despite the noteworthy strength, it’s important to realize that the bulk of the first quarter’s volume is still very back half weighted due to this year’s three week Easter shift.  As a reminder, most retailers will be reporting negative comps in March followed by sharply positive results in April (based solely on the calendar). 


As always, here the notable callouts from February sales results:

  • ROST noted that pack-a-way now stands at 47%, up a full 14% year over year.  Given the fact that costs are on the rise, especially for fall ’11, we suspect the increased pack-a-way will provide nice margin cushion this fall.
  • Almost every retailer noted that momentum throughout month improved each week, with the final week showing the greatest year over year growth.
  • Apparel was the clear standout for the month, with early positive momentum in spring sell-throughs.  Hardlines, especially electronics and media, remained relatively weak for the month.
  • Kohl’s noted strength across all categories during the month, with men’s, women’s, kid’s, footwear, and home all posting positive comps. 
  • For those focused on comparisons, JWN reported its 18th month in a row of increased transaction counts.  Average ticket also increased for the month.
  • Just days after JCP provided guidance for e-commerce sales to increase by low double digits for the year, the company reported its strongest monthly increase of 11.8% in a long time.  Clearly the near term data has given management confidence given the .com has not sustained double digit increase at any point over the past few years.
  • TGT fell short of Street expectations for the third month in a row with the reporting of 1.8% comp increase.  While the result is “in line” with management’s expectation, it still appears light relative to the incremental 200-400bps of comp expected from the company’s P-Fresh and 5% rewards program.
  • TGT will have one of the more pronounced Easter shifts, with same store sales planned down mid to high single digits in March followed by a mid-teens increase in April.  Overall results for the quarter are expected to increase low single digits as per management’s current view.
  • Gap downplayed its disappointing negative 3% comp by saying, “February is a relatively small month and we remain focused on our full-year goals”. 
  • The northeast and mid-atlantic were often cited as the best performing regions for most retailers.  Upon further digging, it should be noted that these regions were impacted by major snowfall last year, making comparisons very easy.
  • LTD noted a strong response to the company’s Valentine’s Day gifting assortment, which helped to drive a 15% increase in comp store sales. 
  • Macy’s reported a 30.9% increase in online sales, which marks an acceleration from prior months.

 Cupid Shoots 73% - SSS1



Eric Levine


Trichet Boosts Rate Hike Expectations, Markets Cheer

Positions: Long Germany (EWG); Short Italy (EWI), short Eastern Europe (ESR)


Below we recap the important policy decisions and data points out of Europe this week:


In a Q&A session after the ECB announced no change to its key interest rates this morning, ECB President Jean-ClaudeTrichet said that an “increase of interest rates in the next meeting is possible… but not certain.” Despite all attempts by Trichet to be close-lipped on future actions by the governing council, the sentence was largely interpreted by the market as proof that the ECB will hike in the near-term.


And both the EUR and European equity markets cheered on the news. The EUR-USD rose to an intraday high of $1.3966 and European equity indices gained to close up +50 to 150bps today.


Trichet also made it clear that today’s decision was based on data taken from mid-February, and therefore did not include the recent move in crude prices, which created further speculation that greater inflationary readings next month may boost the probability of an interest rate hike. 


Our position remains that both the ECB and BOE will act to address their respective inflation pressures well before Ben Bernanke does, as The Bernank chooses to ignore the looming pressures of domestic and global inflation. On this basis we’d also expect the broader US market to underperform many of its European peers.


In comments today, Trichet said the range for Eurozone inflation (CPI) has shifted upwards to between 2.0% and 2.6% in 2011 and between 1.0% and 2.4% in 2012, mainly due to “the considerable rise in energy and food prices.”


This week we received new monthly Eurozone CPI and PPI numbers that confirm the rising tide of inflation. CPI rose 2.4% in February year-over-year versus 2.4% in January; and PPI increased 6.1% in January Y/Y versus 5.3% in December. The PPI report showed that energy prices jumped 13% from a year earlier.


Trichet Boosts Rate Hike Expectations, Markets Cheer - t1



European PMI Slowing?


European February Manufacturing and Services PMI reported this week show mixed signals. As we chart below, we believe the 60 level is a heavy resistance line for PMI numbers going back historically. If we look at the Manufacturing data, we largely see an improving trend for Europe’s largest economies, but caution that both Germany and the UK should slow on the margin in the coming months as they’re already well through the 60 line.


Trichet Boosts Rate Hike Expectations, Markets Cheer - t2


Services PMI show that Germany failed at the 60 line this month, as France improved just short of 60.  Importantly there’s a clear spread in the Services readings between the UK and Germany. We continue to see fundamental drags in the UK economy due to its austerity programs and rising inflation, both of which are choking off real growth. 


Trichet Boosts Rate Hike Expectations, Markets Cheer - t3



Germany’s Bullish Strut


German retail sales were released today and showed an improvement of +2.6% in January year-over-year versus -0.5% in December, or +1.4% in January month-over-month. Also, the German unemployment rate, reported earlier in the week, fell 10bps month-on-month to 7.3% in February. We remain bullish on Germany and are currently long the country via the etf EWG in the Hedgeye Virtual Portfolio. The DAX remains broken on a TRADE basis (3 weeks or less), however it is trading comfortably above its TREND (3 months or more) line at 7,016.


Trichet Boosts Rate Hike Expectations, Markets Cheer - t4



For another week we see attention shift away from Europe’s sovereign debt contagion to uprising in MENA and therein the implications for crude prices. On a bullish note, in an auction today Spain saw solid demand for €1.15 Billion of bonds due 2014 and 2016, with yields coming in considerably lower versus a previous auction of similar maturity. However, risk still loom large in Portugal, with sentiment rising this week that the country will require a bailout in the next weeks. We continue to monitor government yields as a proxy for this risk (see chart below).  Stay tuned.


Matthew Hedrick



Trichet Boosts Rate Hike Expectations, Markets Cheer - t5

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Price Volatility: SP500 Levels, Refreshed

POSITION: no position in the SPY


Not surprisingly, with the Hedge Fund Industry running with its highest net leverage since October of 2007 (all time high for SP500), price volatility is back.


As Fed fans will recall, the game in late 2007 was a gigantic game of chicken as to when the Fed was going to cut rates. Today, the causal factor remains the same (the Fed daring people to chase yield), but we’re gaming the probability of QG’s instead of rate cuts. After you cut to zero, that’s all you have left.


I haven’t made any sales yet today because I think the probability just went straight up of a test of the prior closing YTD high (1343). The better than expected fundamental (jobless claims of 368,000) supports that probability. Whether or not it sustains itself and trumps $101 oil is the game that we’ll be playing next week.


In the chart below you can see my immediate term TRADE line of resistance (1341) sits just inside of my intermediate and long-term TREND and TAIL lines of resistance (1343 and 1346).


So, if you didn’t know why we have price volatility back in the game, now you know. The Street is finally levered long bullish.



Keith R. McCullough
Chief Executive Officer


Price Volatility: SP500 Levels, Refreshed - 1

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.







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