HD/LOW: Slider

It's always interesting to compare and contrast HD vs. LOW, but this quarter, the diversions are not quite as severe as the market suggests. Two Takeaways: Though the market could care less, 1) this is the first time in years that the 2 companies share similar slopes in SIGMA (P&L/Balance Sheet triangulation. 2) LOW actually looks better on paper than HD.


The market is painting HD as the hero and LOW as the goat. One beat and guided up, the other missed and guided down. While LOW’s comp of (-3.3%) was so much weaker than Depot’s (-0/6%), AND the underlying trendline (2, 3-year) also underperformed, check out the directional moves in our SIGMA (below). Nothing to take from Depot here. It printed a better quarter. Period.


These two companies have been duking out differing inventory strategies for a while, ‘stack it high, let it fly’ vs. ‘lay it low, let it flow), as well as the case regarding square footage growth vs. risk of increased cannibalization. All-in, we think that LOW usually wins that argument from a return on capital perspective. But that's longer term.


Above all the noise out there, there's something that clearly caught our eye.


Simply put, this is the first time in years that both of these companies shared a similar slope in SIGMA trajectory. What does this slope (down and to the left) mean? Aside from resembling a slider, It means that on the margin, both companies had a build in inventories relative to the top line AT THE SAME TIME profitability eroded ON THE MARGIN.


We’ve always said that these SIGMA charts don’t necessarily give us all the answers, but they do ensure that a) we’re asking the right questions, and b) we get a glimpse into how management teams trade off their P&L vs. their balance sheet in a given environment. The very simple take-always in looking at this chart are…


1)     Given the nearly identical slopes for the two since well before the recession, we’ve gotta call this out as meaningful. We don’t like to call a trend based on one data point – but ignore this one at your own risk (especially on a day like today where housing data came in weak).


2)     While the slopes of the lines are the same, their positioning is different. Depot is in what we call the ‘Danger Zone.’ That’s where margins are up, but inventory is building. The likelihood of a stock going up as it enters this quadrant (and stays there for one more, subsequently), is below 20%.


3)     On the flip side, LOW is resting in what we call ‘Clean Up Mode.’ That’s where margins are off, but the company is actively doing so to keep the balance sheet whole. The risk for LOW is that it continues its current slope. If that’s the case, then there’s a better than 90% chance that the stock will go down. But if it keeps itself clean and can ‘start over’ with its product flow heading into summer, we’d be surprised if HD continued to outperform LOW.


HD/LOW: Slider - 5 17 2011 11 04 28 AM

FL/DKS: Mind the Sympathy

Resist the urge to jump to conclusions on FL (which we like) based on the significant comp miss out of DKS (which we don’t like) this morning. If FL trades off, it will look all the more appealing heading into the print. Consider the following…


  1. Hardgoods account for 54% of DKS’ total sales (and is the likely source of comp underperformance in the quarter) while footwear is only ~18% of the portfolio. On the contrary, footwear accounts for nearly 90% of sales at FL.
  2. Based on monthly NPD POS athletic footwear data released last night, the spread between the athletic specialty channel and the shoe chains and dept/natn’l channels is at its widest in years. The bottom-line is that sales in the athletic specialty channel were up +8.4% in Q1 compared to the +3.6% implied by weekly data – this is a significant improvement.
  3. Lastly, ASPs, while growing at a sequentially lower rate, are still up LSD yy (vs a difficult 5% comp yy) in the athletic specialty channel – where FL is leading. In addition, higher unit sales more than make up for any ASP weakness.

We don’t want to send the wrong message here – this s not a stock we love. It’s not a great business, it’s far too over-indexed to one vendor, and it’s not super cheap at 6.2x EBITDA. But there is plenty of ‘outside-the-box’ execution to be conceived and executed upon here in the new regime.  We still think that after the call, this will slowly but surely convert some of the perennial perma-FL-haters’ into viewing this as a story that can manage double digit EPS growth and can buy back 30% of the float within 3-years. That’s not half bad…  While not our favorite stock, it is one we think should keep working in 2H.


The Macau Metro Monitor, May 17, 2011




MGM China will offer 760MM shares at HK$12.36 to HK$15.34 a piece.  MGM China received orders covering all the stock offered to institutional investors on the first day of marketing the IPO, two people with knowledge of the matter said.  MGM China will hold a press conference for the share sale on May 19.


Steve Wynn said he is confident Macau's gaming revenue growth for 1Q (+43% YoY) will be exceeded this year with the launch of Galaxy Macau.  Wynn added, "We just have a lot of VIP business, but we also have the best win per table in the general casino in Macau. Of all 33 casinos, the best general casino is the one you are standing on top of.  We are always looking for new opportunities. We feel that we are an Asian company and we are now mature. We are all grown up, we have a capital structure and balance sheet that allows us to go anywhere and do any project of any size easily."  Asked about losing market share to rivals, Wynn said he was not worried as the company's share of the money had grown.  Moreover, Wynn remarked that after seeing Galaxy Macau, it has made him rethink some of the designs for a new casino his company is planning to build.



Aristocrat announced it has well over 60% of the slot installations at Galaxy Macau.



The government will inject MOP 6,000 into the saving accounts of ~320,000 qualified permanent residents.

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DKS: Still Looking Elsewhere


These results from DKS don’t cut the mustard. This is the 1st time DKS has missed its own comp guidance in over 5-years, and by a wide margin.  They’re one of the few retailers playing the ‘keeping inventory tight and GM% high’ game so EPS impact was muted. But as we discussed yesterday in our note (DKS: Look Elsewhere) this stock is priced to grow.  The company is not following suit.


DKS: $0.30 vs. $0.29E

  • Lower than expected top-line offset by greater than expected expense control.
  • Core DKS comp of +1.4% begs the question of the source of underperformance. Our sense is that it came from the hardgood category given the strength we’ve seen in both athletic footwear and apparel during the quarter both of which have been up HSD.
  • Consolidated comp came in below the company’s range of guidance for the first time in our recollection since at least 2007. They have come in at the lower end of their range – but have never missed entirely.
  • Gross margins were a positive surprise in the quarter coming in up +80bps against the toughest comp of the year. While only 30bps higher than our estimate, this is one of the few positive surprises in the quarter and likely driven by mix to the extent hardgoods underperformed during the quarter – more to come on the call.
  • SG&A growth was substantially lower than we expected adding $0.03 in EPS in the quarter. Yes, the company is anniversaring higher investment spending from last year, but this is not exactly how you want to see a growth company hit numbers.
  • Contrary to our expectation [we said that they would likely not give forward guidance], management took up full-year guidance for the 9th consecutive quarter though only by the margin of the Q1 beat maintaining its outlook for the rest of the year.
  • The sales/inventory spread turned sharply lower following a run of seven straight quarters of a +4% or better, though in fairness remained in positive territory despite the negative delta. Inventories increased +4% on +6% sales growth against a more favorable compare as same store sales came in well below expectations.

DKS: Still Looking Elsewhere - DKS CompGuid Q1 5 17 11


DKS: Still Looking Elsewhere - DKS S 5 11


Casey Flavin



Notable news items and price action from the past 24 hours as well as our fundamental view on select names.

  • CHUX reported 1Q EPS from continuing ops of $0.09.  O’Charley’s comparable restaurant sales increased by 0.4%, with guest counts growing by 0.9%, for the first quarter.  Restaurant level margins declined from 15.8% in 1Q10 to 14.7% in 1Q11.  For 2Q, the company is forecasting a net profit/loss between -$1 million and +$2 million.
  • DPZ’s hedgefund fan base is growing.  Trian Fund Management LP disclosed a 9.7% stake yesterday.
  • DRI rotated four top executives at Red Lobster and Olive Garden.
  • YUM’s Taco Bell debuted a new promotion campaign for its Taco 12 Pack with the offer of free music by hip hop duo Chiddy Ban.
  • YUM’s bid to acquire Little Sheep will be subject to China’s anti-monopoly inspection process. 
  • CBOU and MCD gained on strong volume yesterday.





Howard Penney

Managing Director

NKE: Choose Your 'Term'

One of the big brokers is out with positive comments on Nike over the 'near-term.' We're the biggest long-term bulls here of anyone. But unless 'near-term' is six months out, we question this one. Choose your duration wisely here.



We note the following.

  1. If ‘near-term’  = this quarter, then we’re less optimistic. There still a firm –(300bp) yy gross margin headwind that Nike needs to pass, and then what’s likely to be another meaningful hit in its August quarter.
  2. We absolutely positively agree that Nike’s pricing initiatives will work. But we won’t see it until the November quarter.
  3. Then the February and May quarters of next year are the big margin movers – which, mind you, is also the same time that Nike sells into the Olympics, is coming off of less-stressed inventory levels.
  4. Most importantly, these things will culminate in the sweet spot of execution on its consumer-centric growth platform – which is the key factor that we think takes it from $20bn to $28bn over 3-years. That’s pretty dang solid, longer-term.


The bottom line is that estimates for the upcoming quarters have come down to some degree, which is a positive. Perhaps that mitigates the stock getting spanked as the Retail group comes under severe pressure in 2H (per our broader thesis).  But where we come up dry is why this is something that makes the stock go up over the near-term.  For those that love to buy great businesses at great prices, we think you’ll have a better shot at Nike than at $85.

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