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R3: Drought, JCG, Mango, and Ferragamo

 

R3: REQUIRED RETAIL READING

April 14, 2011

  

 

OUR TAKE ON OVERNIGHT NEWS

 

Drought A Big Worry as Cotton Planting Begins - How many acres of cotton will be planted in 2011 when all is said and done? Analysts say economics and weather will play a big role. Tight supplies in old crop cotton are a bullish for new crop cotton. Fundamentals can change in a hurry. Producers should consider putting a floor under cotton prices at between $1.30 and $1.40 a pound. Cotton acreage estimates may push the markets up and down as planting season nears, but lingering dry weather across the Cotton Belt could have a much bigger impact on the market in the longer term, according to Texas A&M Extension economist John Robinson, speaking at the Ag Market Network’s April 12 teleconference.  USDA’s March 31 Prospective Plantings report was a surprise to many, projecting cotton plantings at 12.56 million acres of upland and Pima. The market reacted fairly strongly with new crop cotton prices moving to just under $1.40 per pound. Robinson thinks cotton acreage may end up a couple of percentage points higher than March projections. <DeltafarmPress>

Hedgeye Retail’s Take: Prepare for speculation about what ‘next year’s crop will be.’ Investors are absolutely fed up with the inflation debate. Actually, they view it as a fact – not a debate. But quantifying the benefit to margins if we have a bumper crop is clearly more interesting, and potentially profitable.  KEEP IN MIND, however, that changes to the crop discussed today will not impact retail margins until 2013.

 

Ferragamo Aiming for July IPO - Good things come in threes. After Prada and Moncler, speculation is mounting here that Salvatore Ferragamo is the latest Italian brand to be looking at an initial public offering by July. Prada plans to list in Hong Kong in the first half, while Moncler is expected to hold its IPO slightly earlier in Milan. A source said Ferragamo’s IPO could value the company at around 1.5 billion euros, or $2.1 billion at current exchange, compared with the larger Prada’s estimated valuation in Hong Kong of up to $9 billion. Italy’s merchant bank Mediobanca has been tapped, together with J.P. Morgan, as coordinator of Ferragamo’s global offer, joint book runner and joint lead manager, a well-placed source told WWD. These are the same two banks chosen in 2008 by the Florence-based firm, which had plans to go public that year.  <WWD>

Hedgeye Retail’s Take: Given the resilience of the luxury market in the face of such ugly Macro cross-currents over the past few years, luxury IPOs have several relatively strong legs to stand on. Sell while the going’s good…

 

A Brit in London - Burberry has brought its Burberry Brit concept onto home turf. On Friday, it will unveil a sprawling, 10,000-square-foot Burberry Brit store located in London’s bustling Covent Garden area. The store is Burberry’s seventh Brit store globally and its first in the U.K., following recent Brit openings on Bleecker Street in New York and Corso Venezia in Milan.  Christopher Bailey, chief creative officer at Burberry, described Burberry Brit as “the casual expression of the Burberry guy and girl.” To wit, although the store, which Bailey designed, is done out with Burberry’s signature dark wood floors and sleek, polished black chrome fittings, it’s filled with colorful, casual merchandise. The brand’s April Showers collection, which includes pieces such as red Perspex trenchcoats and yellow mini capes, stands near the store’s entrance, placed amid Perspex blocks in primary colors. The two-story store also has areas devoted to accessories and denim, while a room on the basement floor is given over to the label’s trenchcoats and outerwear. <WWD>

Hedgeye Retail’s Take: These mega stores have traditionally been marginally profitable at best. But for the luxury brands, they’ve actually been profit centers (note comment re Ferragamo and luxury market). We’re seeing – for the most part – rational growth in these stores, as well as rational closures when warranted (i.e. NikeTown Denver closing).

 

J Crew to Launch UK Online BusinessJ Crew, the “preppy” US retailer bought out in a $3bn private equity deal last year, is planning to launch an online business in the UK’s high-end fashion market this summer, its chief executive has said. Mickey Drexler, J Crew’s head and one of the most renowned personalities in US fashion retail, said the group would use its online business to spearhead its overseas expansion ahead of opening more bricks-and-mortar stores. Mr Drexler successfully repositioned J Crew as an up-market brand, but until now he has maintained a narrow focus on the US market. He will join a growing band of fashion retailers using the internet to lead expansion outside their home markets. “We just have huge demand overseas,” Mr Drexler told Bloomberg TV. “We’re walking, we’re studying right now. But we launch in the UK . . . in August or September. That’s kind of our official online international.” <FinancialTimes>

Hedgeye Retail’s Take:  The interesting angle is that J Crew is rolling into a new market without having legacy infrastructure as baggage. Do not underestimate the importance of this! Growth into new markets without the hassle of an antiquated operating asset base is extremely high return.  We think this will come at a premium going forward.

 

Retail Restructuring Seen Ahead - Retail will be a primary source of restructuring activity for the next 18 months, if not longer.  That’s the conclusion of Durc Savini, managing director and head of the restructuring and recapitalization group at investment bank Peter J. Solomon Co., which held a company presentation Wednesday on “2011 Retail Restructurings: Watch Hemlines, Hardlines and Waistlines” at New York’s Princeton Club. Other presenters included Kenneth Berliner, president and head of the mergers and acquisitions group, and managing directors Jeffrey Derman and Jeffrey Hornstein. Savini told attendees that the largest segment of firms with risky credit ratings — 18 percent — are apparel and retail companies. Those limited by lack of financial strength or low pricing power are the ones that will be facing tough headwinds, he said.  <WWD>

Hedgeye Retail’s Take: Hmmm… The head of a retail restructuring Firm talking up that restructurings will pick up meaningfully over the next 18-months. Do you think that just MAYBE he’s a little biased? Nonetheless, given the 400+bp margin compression we expect to see this year – and specifically in 2H – he’s probably right.

 

Mango Planning Large-Scale Global Expansion - Coming off a 10.9 percent sales increase in 2010, Mango is planning to add another 550 stores to its global portfolio this year, including entries in six new markets that will give it a presence in 109 countries.  Through its own network and those of franchisees, the Barcelona-based retail and wholesale firm added 380 stores last year, lifting its total to more than 2,000. Included in the total store count are 113 units under its H.E. by Mango men’s wear banner, 39 of which are in Spain. Among the 550 stores to be added this year are 20 men’s stores. The company said that it eventually expects to have 500 H.E. by Mango stores.  In 2010, Mango’s revenues grew to 1.27 billion euros, or $1.68 billion, from 1.15 billion euros, or $1.6 billion, in 2009. These figures, converted from the euro at average exchange for their respective periods, represent both wholesale revenues and sales of company-owned stores, excluding value-added taxes.  <WWD>

Hedgeye Retail’s Take: Check these guys out. When people are hitting the conference circuit and doing their super-duper-double-secret one-on-ones, they’re focused on the typical US (used to be) growth companies.  

 

R3: Drought, JCG, Mango, and Ferragamo - R3 4 14 11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


THE MGM ROLLERCOASTER

It’s up, it’s down, it’s up again.  Here’s a playbook for what promises to be a volatile month of trading.

 

 

What do you get when you mix high short interest, high leverage (operating and financial), transactions, depressed earnings, and a big valuation?  If you guessed stability, you lose! 

 

MGM will likely report earnings the first week of May.  We think it will be just ok.  Expectations seem to be pretty high though, particularly given the Street’s rate surveys and management’s RevPAR commentary.  We have little doubt that strong YoY convention activity drove rates meaningfully higher in Q1 but our concern is more on the casino side.  Street projections of mid-single digit growth in MGM’s Las Vegas casino revenue looks aggressive to us. 

 

Having said that, we are not too much below the Street for wholly owned Las Vegas EBITDA.  Our Q1 estimate is $225 million versus the Street around $235 million.  Whisper expectations may be higher and that is why we are concerned.  We will have a more detailed earnings preview out soon.

 

So stock is going down right?  Not so fast.  MGM Macau is humming and yesterday’s IPO announcement and deal with Pansy Ho is an overall positive.  Operating control should be good for MGM and good for the property.  Moreover, WYNN should report before MGM and we are expecting a huge quarter out of Wynn/Encore Las Vegas.  That should get investors juiced for MGM, given its significant Strip exposure.  However, we think WYNN will be the Vegas anomaly and MGM’s results may disappoint.


QE2 ENDING WILL RIPPLE THROUGH BOTH CLAIMS AND THE MARKET

QE, Claims, and the Market

Inspired by a chart our macro team published last week showing Fed Treasury purchases and commodity prices, we show the impact of the Fed's Treasury and MBS purchases on the S&P and on claims.  We observe in the charts below that the three series move in tandem.  We see two plausible interpretations of this data.

 

1) Quantitative Easing drives claims down, which fuels an increase in the market.

2) Quantitative Easing drives the market higher, which decreases claims.

 

Regardless of which interpretation of this data you subscribe to, the reality is that QE2 ends in June, which cuts off this process at the source. The data suggests that in the absence of Fed purchases, the market and claims tread water or deteriorate. For this reason primarily, we are cautious on the Financials space overall heading into the summer months.

 

QE2 ENDING WILL RIPPLE THROUGH BOTH CLAIMS AND THE MARKET - Fed

 

QE2 ENDING WILL RIPPLE THROUGH BOTH CLAIMS AND THE MARKET - S P

 

QE2 ENDING WILL RIPPLE THROUGH BOTH CLAIMS AND THE MARKET - S P and Fed 

 

Initial claims rose 30k last week (27k after the upward revision to last week's preliminary report).  This pushes claims back above the threshold of 400k that we watch as the trigger level for unemployment to fall.  Rolling claims rose 6.25k to 395.75k. 

 

QE2 ENDING WILL RIPPLE THROUGH BOTH CLAIMS AND THE MARKET - raw claims

 

QE2 ENDING WILL RIPPLE THROUGH BOTH CLAIMS AND THE MARKET - raw raw

 

The Bureau of Labor Statistics noted that the week following the end of a quarter usually sees an increase in claims.  The week after the end of each quarter is marked with a white arrow in the chart below.  Clearly, there is a seasonal pattern here.  Last week, claims increased by more than the typical seasonal amount, which flowed through into the seasonally adjusted numbers and drove the 30k increase.

 

QE2 ENDING WILL RIPPLE THROUGH BOTH CLAIMS AND THE MARKET - NSA

 

Yield Curve Remains Wide

We chart the 2-10 spread as a proxy for NIM. Thus far the spread in 2Q is tracking 4 bps tighter than 1Q.  The current level of 273 bps is slightly tighter than last week (276 bps).

 

QE2 ENDING WILL RIPPLE THROUGH BOTH CLAIMS AND THE MARKET - 2 10

 

QE2 ENDING WILL RIPPLE THROUGH BOTH CLAIMS AND THE MARKET - 2 10 QoQ

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 

 

QE2 ENDING WILL RIPPLE THROUGH BOTH CLAIMS AND THE MARKET - subsector perf

 

 

 

Joshua Steiner, CFA

 

Allison Kaptur


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THE M3: 1Q S'PORE GDP; CAP ON LABOUR GROWTH; SMOKING BILL; TOUR/HOTEL STATS; NORTH KOREA CASINO

The Macau Metro Monitor, April 14, 2011

 

 

S'PORE ECONOMY CONTINUES TO GROW Channel News Asia, Strait Times

Singapore 1Q GDP rose 8.5% YoY, beating estimates of 5.7% growth. On a seasonally-adjusted, annualized basis, the economy grew by 23.5% QoQ.  The Ministry of Trade and Industry said the strong growth was driven by the manufacturing sector, particularly in the electronics and precision engineering clusters, which benefited from a pick up in business investment in the region.  Meanwhile, the Monetary Authority of Singapore (MAS) said that economic activity is likely to be sustained at a high level for the rest of the year even with inflation concerns.  To combat inflation, MAS said the exchange rate policy band will be re-centered below the prevailing level of the SGD/USD, which suggests a higher S'pore $.

 

LABOUR FORCE TO GROW BELOW 10 PERCENT YEARLY: GOVT macaubusiness.com

According to Secretary Tam, the overall total labour force (including imported labour) must not increase by more than 10% per year.  The restrictions are needed due to “concerns over the use of social resources”.  Macau’s current unemployment rate is below 3%, with the Monetary Authority saying that the territory has already achieved full employment.
 

INDOOR SMOKING BILL PREPARED FOR FINAL VOTE Macau Daily TImes

The smoking bill is ready for final reading even though the issue of whether to exempt casinos from the smoking ban is still not fully resolved.  Nonetheless, it’s likely the law will be approved.  There is no date set for the vote.


PACKAGE TOURS AND HOTEL OCCUPANCY RATE FOR FEBRUARY 2011 DSEC

Visitor arrivals in package tours increased slightly by 0.5% YoY to 466,843 in February 2011. Visitors from Mainland China (332,349), Hong Kong (19,880), Japan (19,453) and Malaysia (9,191) decreased by 1.2%, 1.5%, 11.4% and 9.0%, respectively.  Visitors from Republic of Korea (25,596); Taiwan (24,895) and India (8,374) increased by 85.0%; 16.0% and 61.2% respectively.

 

Total number of available guest rooms of the hotels and guest-houses increased by 1,146 (+6.1%) YoY to 20,083 rooms.  Hotels and guest-houses received 600,248 guests in February 2011, +3.7% YoY, with the majority coming from Mainland China (55.1% of total) and Hong Kong (18.8%).

 

MOUNT KUMGANG MULLS OPENING CASINO TO LURE MAINLAND TOURISTS Macau Daily News

After the exclusive operation right of a casino granted to Hyundai Corporation in Mount Kumgang was terminated, North Korea plans to set up a casino to lure Chinese tourists. Currently, there is only one casino in the country located in Rason, which is exclusively open to foreigners.  The Chinese government has previously banned residents from going to Rason’s casino.  The feasibility of a casino in Mount Kumgang remains uncertain.


TALES OF THE TAPE: MCD, SBUX, CBRL, CAKE, CMG, PNRA, KONA

Notable news items and price action over the past twenty-four hours, along with our fundamental views on select names.

  • MCD Japan has cut its full year profit estimate by 28% in the aftermath of the earthquake/tsunami disaster.
  • SBUX Coffee Japan LTD cut its full year earnings forecast for the period ending 3/31/2011 by 28%.
  • CAKE was reiterated “Neutral” at Piper Jaffray.
  • CMG gained 2.6% on accelerating volume.
  • PNRA gained 2.4% on strong volume.
  • KONA declined 3.8% on accelerating volume.

 

TALES OF THE TAPE: MCD, SBUX, CBRL, CAKE, CMG, PNRA, KONA - stocks 414

 

Howard Penney

Managing Director


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - April 14, 2011

 

Peru fell 6.2% bringing the biggest three-day decline since October 2008 to 12% on concern opposition candidate Ollanta Humala will win the presidential runoff in June and expand government control of the economy.   Year-to-date the market is down 20% making it the world’s second-worst performer after Egypt.  As we look at today’s set up for the S&P 500, the range is 17 points or -0.34% downside to 1310 and 0.96% upside to 1328.

 

SECTOR AND GLOBAL PERFORMANCE

 

Yesterday, the Financials broke TRADE and TREND.  We now have 5 of 9 sectors positive on TRADE and 8 of 9 sectors positive on TREND.    

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING GLOBAL

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING GLOBAL

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 101 (+1599)  
  • VOLUME: NYSE 900.85 (-5.13%)
  • VIX:  16.92 -0.99% YTD PERFORMANCE: -4.68%
  • SPX PUT/CALL RATIO: 1.68 from 1.50 (+12.59%)

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 22.48 -0.250 (-1.100%)
  • 3-MONTH T-BILL YIELD: 0.06% +0.01%
  • 10-Year: 3.49 from 3.52
  • YIELD CURVE: 2.74 from 2.75 

 

 MACRO DATA POINTS:

  • 8:30 Initial Jobless claims
  • 8:30 PPI
  • 9:45 Bloomberg Consumer Comfort

 

WHAT TO WATCH:

  • Ford may slow or stop production in Asia this month due to Japanese-made-part-shortage - Detroit News
  • Justice Department, SEC looking into Libor rigging - WSJ
  • US foreclosures decline (35%) y/y in March according to RealtyTrac

 

COMMODITY/GROWTH EXPECTATION

 

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

COMMODITY HEADLINES FROM BLOOMBERG:

  • European Union Wheat Struggle Means No Relief From Near-Record Food Prices
  • Copper Falls for Fourth Day on Concern China Tightening May Erode Demand
  • Crude Trades Near Lowest in Two Weeks as Gains on Gasoline Supplies Fade
  • Soybeans Decline as Brazil Increases Exports, China May Sell From Reserves
  • Gold Trades Little Changed at $1,457.57 an Ounce, Paring Earlier Advance
  • Sell Silver as Gold Ratio Signals Slump, Commodity Broking's Barratt Says
  • Uranium Producers in Takeover Play as Assets Exceed Share Price: Real M&A
  • Gold Producers' Stocks Are Cheap, Former BlackRock Fund Manager Birch Says
  • BRIC Leaders Say Increasing Commodity Prices Pose Threat to Global Growth
  • Dwindling Cattle Herds Garner Ranchers Subsidized Loans: Argentina Credit
  • China Developer Seeks Approval for $157 Million New Zealand Farms Purchase
  • Europe Commodity Day Ahead: Glencore to Raise up to $11 Billion With IPO  

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • European equity markets moved lower from the open, with the exception of Ukraine and Hungary. 
  • Peripheral markets were among the leading fallers on continuing debt worries - Russia, Greece Italy and Spain leading the way down
  • Irish Central Bank Says Sovereign Debt Concerns Remain and pose threat to euro growth
  • Central bank cuts 2011 Ireland GDP forecast to 0.9% vs. 1% and sees Ireland 2012 GDP at 2.2%
  • The FTSE and DAX holding intermediate-term TREND lines of support, while Greek stocks look like they could start to crash, again.

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING EURO

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING EURO

 

 

ASIA PACIFIC MARKTES:

  • Asia saw broad based weakness, albeit controlled; pricing in a US growth slowdown
  • China fell 0.26% after a rumor that March inflation was 5.3-5.4%; the official figure is to be announced tomorrow.
  • India rallied hard up 2.25% 

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING ASIA

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING ASIA

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels 414

 

 

Howard Penney

Managing Director


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