prev

Japanese Yen: Be Careful What You Wish For, Consensus...

Conclusion: History shows us that G7 intervention to weaken the yen has resulted in a significant uptick in inflation within Japan. In fact, if the G7’s plan to weaken the yen is “successful”, we expect the inflationary impact to be even greater this time around, particularly given Japan’s current staggering sovereign debt load and easy monetary policy.

 

Positions (TREND duration): Bullish on the yen and bearish on equities; OR bearish on the yen and JGBs. Getting ahead of the whims of central planners will be key to isolating the winning strategy here.

 

After just over a decade of inactivity on a collective scale, the G7 jointly intervened in the global currency market to help the ailing Japanese economy by weakening the yen, which is down nearly (-2.3%) on the day. In addition to today’s centrally-planned intervention, the G7 promised additional support as needed:

 

“We will monitor exchange markets closely and will cooperate as appropriate.”

 

In spite of yet another round of Almighty Central Planning perpetuating unprecedented volatility in yet another market, we remain positive on the yen over the intermediate-term TREND for now. That could change. While today’s intervention may have cooled off the speculative bid for yen appreciation (net yen shorts of Japanese households dropped -30% day/day), the fundamentals – repatriation and compressing interest rate differentials leading to unwinding of carry trades – remain supportive.

 

The expected acceleration in JGB issuance in the wake of this crisis (which, coincidentally, pushes Japan’s sovereign debt load above one QUADRILLION yen) has to be financed somehow, which is one of the supportive factors for the repatriation case (in addition to risk aversion and the need to finance rebuilding efforts).

 

Of course, the Bank of Japan could continue to provide “powerful” and “massive” stimulus, as pledged by BOJ governor Masaaki Shirakawa. They are currently already monetizing JGB debt at a rate of ¥21.6 TRILLION ($267.2B) yen annually, so what’s another ¥10-20 TRILLION yen in perpetual debt monetization?

 

The last time the world’s Almighty Central Planners decided to collectively intervene to weaken the yen as on August 15, 1995 (about a half a year after the Kobe earthquake). The yen went on to weaken (-29%) over the next three years until a reversal of that intervention scheme on June 17, 1998 sent the yen sharply in the other direction.

 

As with any Fiat Foolery throughout the course of history, the resultant yen weakness was accompanied by unintended consequences, as the deliberate currency devaluation resulted in a sharp spike in reported inflation on the island economy. As always, there are two sides to every trade.

 

The chart below shows YoY growth in Japanese Import Prices swung +1,860bps in the year following the initial intervention (July ’95: -3.5% YoY vs. July ’96: +15.1% YoY). In the 18 months beginning in Jan ’96, Japanese Import Price growth averaged +10.4% YoY. Eventually, these higher input costs manifested their way into reported inflation throughout the Japanese economy, with Japan’s Nationwide CPI peaking at +2.5% YoY in Oct ’97 vs. a deflationary (-0.6%) YoY just two years prior – a +310bps swing.

 

Japanese Yen: Be Careful What You Wish For, Consensus... - 1

 

This history lesson begs the following questions with regard to the current round of intervention:

 

Can the Japanese government’s stained finances handle backup in interest rates? Debt Service already consumes ~45% of the central government’s revenue.

 

Japanese Yen: Be Careful What You Wish For, Consensus... - 2

 

Can the Japanese consumer, after many years of price and wage deflation handle higher prices?

 

Japanese Yen: Be Careful What You Wish For, Consensus... - 3

 

Can Japan, which will need to procure raw materials from abroad to rebuild in the wake of the current disaster, afford an acceleration of imported inflation brought on by currency weakness?

 

Japanese Yen: Be Careful What You Wish For, Consensus... - 4

 

Can Japanese economy handle higher inflation, period? We don’t think so. This is why we stand counter to the current sell-side storytelling about “accelerated growth driven by construction and yen weakness”. The playbook for where Japan may be headed as a result of this current round of Big Government Intervention has a lot more factors than consensus’ simple two-factor, “buy the dip” model.

 

In fact, BOJ governor Shirakawa agrees, saying today that the government wants to avoid abruptly weakening the yen because it may bring about a back up in JGB yields. “That’s naturally the biggest fear for the government”, he says.

 

A worthy fear indeed.

 

Darius Dale

Analyst


Good Nugget For PSS

 

Another good nugget out of the family footwear channel, which bodes well for our call on PSS. Consistent with our note earlier this week, we expect the comp diversion that has been present between PSS and the rest of its peers to continue to converge again in Q1 a positive for the company near-term.

 

Interestingly, in looking at the aggregated SIGMA chart of the four companies, the Sales/Inventory spread improved for all but one – BWS. With an additional ~$50mm of inventory related to the acquisition of American Sporting Goods added to the mix equating to a -4% impact to the Sales/Inv spread next quarter, Brown Shoe is going to be challenged to improve its spread near-term. PSS starts to go against very favorable SIGMA comps.

 

Good Nugget For PSS - FamFWComp Chart 3 11

 

Good Nugget For PSS - FamFWComp Table 3 11

 

Good Nugget For PSS - FamFW SIGMA 3 11

 

Casey Flavin

Director


MACAU SLOTS TAKING OFF

Explosive slot revenue growth in Macau is a trend that has gone unnoticed.

 

 

We wrote a rather negative note on Macau slots a couple of years ago (“ASIAN SLOTS: SELLING HAGGIS TO VEGANS?” on 07/08/08).  At the time we were data dependent and the data didn’t show that the Chinese liked slots very much.  Since we’re still data dependent, we’d like to point out the huge growth in slot revenue and win per day per slot (WPD) generated in Macau since Q3 2009. 

 

MACAU SLOTS TAKING OFF - slot1

 

It seems the trend of Macau as a slot market has gone largely under our and the Street’s radar screen.  However, this trend has very positive long-term implications for the operators and the slot suppliers. 

 

Not only are slots the highest margin revenue stream in Macau but there are no government caps on number of slots like there is for tables.  It’s not like slots aren’t already important. We estimate that LVS and WYNN will generate $190 million and $175 million, respectively, in EBITDA (before fixed cost allocation) from slots in Macau in 2011.  That represents over half of the total EBITDA generated by LVS and Wynn at their properties in Las Vegas.

 

In Macau, there has been virtually no replacement cycle given the youth of the properties.  That will change in the next few years.  For the suppliers, that means a double boost for revenues:  replacement slots and satiating the increased demand from patrons.

 

In addition, win per day per slot (WPD) generated in Macau since Q3 2009 has soared.  The following chart compares WPD in the Macau and Las Vegas Strip markets.  After trailing the Strip by a wide margin, Macau finally caught up in 2009 and then separated big time to the upside.  It is clear that 14k slots is not sustainable in Macau.  The number of slots in Macau could almost double and still maintain the Strip average for WPD – and that’s without any growth.  With visitation up 15%, GDP up almost 10%, and growing Chinese penchant for the slot product, we don’t see why slot revenue won’t continue to grow well into double digits.

 

 

MACAU SLOTS TAKING OFF - slot2


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

Short-The-Rip: SP500 Levels, Refreshed...

POSITION: no position in SPY

 

This email may or may not make people happy, but 30 handles higher in the SP500 from what we called a Short Covering Opportunity, I’m going to call this for what it is – an opportunity to Short-The-Rip.

 

It’s probably ok to call it that… kind of like “Buy-The-Dip”… but on the other side…

 

It’s been a long week and I am running out of jokes and the SP500 should run out of immediate-term TRADE steam as it hopes for 1292 on anemically low volume.

 

PRICE/VOLUME/VOLATITY readings in my model remain bearish, but from a price. Manage your risk in this new bearish trading range of 1253 to 1292 for now and if the facts change, I’ll try my best to signal it if I’m so lucky to see it when it matters.

 

Have a good weekend,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Short-The-Rip: SP500 Levels, Refreshed...  - 1


CAKE – STORMY FIRST QUARTER

Given the recent volatility in the commodity markets, particularly with milk and cheese prices up approximately 48% and 36% year-to-date, respectively, I decided to take a closer look at the CAKE model.  As of the company’s fourth quarter earnings call on February 10, CAKE had contracted 60% of its food needs, including “virtually” all of its proteins.  The company is still exposed, however, on its dairy, fresh fish and some cheese requirements.  All in, management guided to 3% cost inflation for the year, up 4% in 1H11 and up 2% in 2H11.  This guidance includes the expectation that some of the current price levels on its non-contracted items will abate as the year progresses.  Cheese prices fell 10% last week, but with prices still up about 44% year-over-year and milk up about 53% year-over-year, there remains significant risk to the company’s full-year commodity cost outlook, particularly during the first half of the year.

 

We already know that top-line trends suffered early in the first quarter as a result of bad weather, which management said impacted first quarter comp trends by 1%.  The company guided to flat to +2% comp growth in 1Q11, below the full-year expected run-rate of 1-3%.  This softer start to the year will only magnify the commodity pressures during the first quarter.   Management implemented a 0.7% price increase during the February/March time-frame, which will result in a 1.4% price impact by the end of the quarter relative to only 0.5% of price during the fourth quarter.  This higher pricing should help to offset some of the increased margin pressure during the first quarter but negative mix has worked against the company’s pricing initiatives recently; though average check did improve sequentially during the fourth quarter. 

 

Management guided to $3 to $5 million of additional savings, primarily on the labor and operating expense lines, and tighter G&A controls to offset the expected incremental $0.05 per share of commodity costs relative to the company’s prior guidance and as a hedge against higher than expected commodity costs going forward.  To that end, management’s full-year EPS guidance of $1.55 to $1.70 seems achievable.  I am currently at $1.64 per share (the street is at $1.65 per share). 

 

The first quarter, however, could be a little rough given the negative weather impact and tough commodity environment.  I am currently modeling $0.31 per share, below the street’s $0.33 per share estimate but within management’s 1Q11 EPS guidance range of $0.29 to $0.33.  I am expecting restaurant-level margins to decline about 90 bps during the quarter.  The company is facing its most difficult restaurant-level margin comparison during the first quarter on a YOY bp change basis.  Although I think the company will continue to get leverage on the labor expense line, it will likely not be enough to offset the sharp increase in commodity costs.  It is important to remember that about 90 bps of the company’s fourth quarter labor expense favorability as a percentage of sales was due to one-time items that will not repeat during 1Q11. 

 

CAKE should continue to face commodity pressures during the second quarter and for the balance of the year, but the YOY comparisons get a little easier as we progress through the year.  Cost of sales as a percentage of sales declined 70 bps during 1Q10 and then increased 20 bps, 50 bps and 100 bps in 2Q10, 3Q10 and 4Q10, respectively.  These easier comparisons, combined with my expectation for the company to achieve leverage on the labor and other operating expense lines for the year, should translate into higher restaurant-level and operating margins for the balance of the year.  This YOY margin growth relies on continued same-store sales improvement, but given recent industry trends as measured by Malcolm Knapp, the company’s full-year comp guidance of 1% to 3% does not seem out of reach; though it does assume a sequential acceleration in two-year average trends.

 

CAKE – STORMY FIRST QUARTER   - cake sigma

 

CAKE – STORMY FIRST QUARTER   - MILK316

 

CAKE – STORMY FIRST QUARTER   - cheese 316

 

 

Howard Penney

Managing Director


R3: NKE, SCVL, LULU, JWN

 

R3: REQUIRED RETAIL READING

March 18, 2011

 

 

 

 

RESEARCH ANECDOTES

  • Nike has historically taken up price to offset input costs, so it was not a surprise to hear them talk about this on last night’s call.  That said, in the past it has largely been more focused on ‘launch product’, special edition footwear and their ‘Dunk’ business.  This time around, look for more broad pricing initiatives. This is the first time we’ve ever heard them talk about pricing in apparel. We’re naturally more guarded there given the fragmentation of the market. But on the flipside, the ramp in product quality over the past 2 quarters has been impressive.  The line between mix shift and price is fine, indeed.
  • In the spirit of better late than never, SCVL’s management highlighted the upcoming launch of its e-commerce platform in the 2H of the year joining the rest of its public peers in the family channel online. With DSW recently highlighting the e-commerce channel as its fastest growing again this quarter, the launch will provide a timely contribution to the top-line in the back half.
  • Logging some of the most productive store metrics in all of retail, Lululemon achieved over $1,700/sq. ft. in 2010 with the most productive stores exceeding $4,000 a foot. While the natural gravitation of brand proliferation will eventually temper these levels, with only 122 stores in the North America and 78 in the U.S., it may be a while until we see it become a reality. 

OUR TAKE ON OVERNIGHT NEWS

 

Harbor to Produce Izod Footwear - Harbor Wholesale Ltd. is getting into alligator footwear. Phillips-Van Heusen Corp. announced on Thursday it had inked a licensing deal with Harbor to produce Izod branded footwear in the U.S. and Canada. Under the license, which has an initial term through 2015, Harbor will produce and market men’s, women's and children's casual and dress casual footwear, leisure athletic shoes and non-beach sandals. The new footwear will begin shipping this summer. Harbor is also the global licensee for wholesale footwear for PVH’s Bass and G.H. Bass brands. <WWD>

Hedgeye Retail’s Take: Despite the absence of growth in the Bass business over the last 4-years, leveraging a reliable licensee to expand the Izod brand into footwear makes sense, particularly given the continued demand for vintage Americana style. For PVH, this won’t be noticeable until the back half of 2012 – and with a 7% (est) royalty on what will likely be a $100mm business overall, might not move the needle.

 

HauteLook Launches Shoe Web SiteHauteLook Inc. is putting a focus on footwear.  The flash-sale Web company, which was purchased last month by Nordstrom Inc., hosted a preview of its new membership site, Solesociety.com, in New York on Wednesday. The shoe website soft launched earlier this month. Registration for Sole Society is free, and members are asked to complete a style quiz upon joining. Each month, they will be offered six to 12 footwear looks under the Marco Santi name, an exclusive line produced by the Camuto Group. The styles, including low heels, pumps, wedges and booties, will retail for $50 each, and users can pick as many items as they want. Nina Tooley, director of marketing for Solesociety.com, said footwear is a strong category on HauteLook, prompting the company to branch out. And since the soft launch, Sole Society already has more than 100,000 members. <WWD>

Hedgeye Retail’s Take: As fast-flash discount luxury sites continue to pop up in increasing numbers and most with a core apparel/home goods focus, we like this move into an underpenetrated category. As we’ve noted in the past, there’s a limit to how many daily offers a consumer is willing to receive, as such first movers have distinct competitive advantage.

 

Burberry Brit Heads Downtown - Bleecker Street’s combination of quaint antique shops and expensive designer brands has become a magnet for tourists and younger shoppers alike. Seeking to tap into the street’s mix, Burberry Brit on Thursday unveiled a two-level, 4,150-square-foot store at 367-369 Bleecker Street. In mid-April, a Brit unit will bow in London’s Covent Garden. The company has not finalized the size of the Covent Garden store. If the two units, opening months apart on opposite sites of the Atlantic, have anything in common, it’s locations that appeal to young people.  “They both speak to a real youth culture,” a Burberry spokesman said. “Both areas have young stores and are vibrant. Covent Garden has skateboard shops and a market.” <WWD>

Hedgeye Retail’s Take: Expanding the company’s sports collection inspired concept not only broadens the presentation of the luxury brand’s line, but will also likely attract a younger customer – a positive for Burberry.

 

Retailers Scale Back Price Hikes - Consumers coping with higher fuel and food prices were in no mood to deal with higher apparel prices in February. Economists and analysts said retailers may have tested the waters with apparel price hikes in January to offset soaring raw materials prices, but met resistance from consumers and pulled back, as evidenced by an unexpected drop in apparel prices in February, according to a closely watched government index released Thursday. This preliminary sign of shoppers’ refusal to accept higher prices currently working their way through the supply chain only adds to the already high pressures on gross margins confronting retailers and wholesalers. Retail apparel prices fell in February in the men’s and women’s apparel categories compared with a month ago, despite inflationary pressure further down the supply chain from historically high cotton prices, the Labor Department said in its Consumer Price Index. <WWD>

Hedgeye Retail’s Take: If retailers are backing off now, can you imagine what they are going to do when they start to sell product that is actually made with more expensive raw materials?

 

eMarketer predicts E-commerce will Grow 13.7% - While e-commerce sales will continue to grow over the next four years, its rate of growth will steadily drop as the online retailing market matures, according to a report today from eMarketer. E-commerce sales will grow 8.1% in 2015, down from 14.8% in 2010, the market research firm predicts.  EMarketer estimates that total U.S. e-commerce sales in 2015 will reach $269.8 billion. EMarketer used available e-commerce estimates for 2009 and 2010 from the U.S. Department of Commerce as a starting point for its projections. The Commerce Department estimates e-commerce sales increased 14.8% to $165.4 billion in 2010 from $144.1 billion in 2009. EMarketer estimates e-commerce sales will increase 13.7% this year, with sales—excluding travel, digital downloads and event tickets—totaling $188.1 billion. <InternetRetailer>

Hedgeye Retail’s Take: We don’t think anyone expects the channel to grow double-digits in perpetuity, however, there is still significant growth ahead for many retailers that have only just started to get started with online efforts. Footwear retailers and brands in particular lag many top branded apparel companies in terms of e-commerce contribution – a factor that will continue to provide a tailwind over the intermediate term. More importantly, we need to look at ecommerce as it relates to consumers shopping direct (to the brand), or at retailer’s own e-commerce sites. Big difference.

 

Brands Move Workers Out of Tokyo - Fashion companies began to leave Tokyo Thursday, moving westward to Osaka amid the threat of radioactive fallout, widening blackouts and diminishing food supplies. Six days after a massive earthquake and tsunami hit Japan, damaging the Fukushima nuclear plant 124 miles northeast of the capital city, Chanel was handing out iodine tablets to workers and Hennes & Mauritz and PPR temporarily relocated offices. And some brands stopped giving updates on their operations in the country. Ordinarily accessible, Polo Ralph Lauren Corp., Burberry and Paul Smith, as well as several other firms, did not respond to requests for comment Thursday. Procter & Gamble Co. issued a statement saying all its employees were safe, but a spokeswoman declined to say whether they had been instructed to leave Tokyo. <WWD>

Hedgeye Retail’s Take: H&M may have been one of the first to report relocations, but they certainly weren’t expected to be alone in the process of ensuring the safety of their employees. There are times when the bottom-line is that personal priorities trump the corporate bottom-line, unfortunately – this is one of them.

 

 

 


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

next