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R3: TGT, FINL, & Tweeting at London 2012

 

R3: REQUIRED RETAIL READING

June 27, 2011

 

 

 

RESEARCH ANECDOTES 

  • In addition to product margins coming in better than expected at FINL during the quarter, CEO Glen Lyon mentioned that the industry was the most “rational” he’s experienced in his 10-years with the company. This is consistent with what we’ve seen in industry ASPs lately and is positive indication for margin stability – at least over the near-term.
  • In what is likely to take social media to a whole new level from a retail/branding perspective, the International Olympic Committee (IOC) has approved the use of Twitter at the London 2012 games. We can only imagine the plugs brands will get not only from athletes they endorse, but also exposure from fellow Olympic athletes who weigh in and comment on the latest gear. As if mobile wasn’t already a key marketing initiative for brands in 2011, it just got bumped up a few notches on the list for the top global athletic brands.   

OUR TAKE ON OVERNIGHT NEWS

 

Wal-Mart to Lease Zellers Units From Target - Target Corp. has found a tenant for some of the Zellers Inc. stores in Canada it doesn’t want — Wal-Mart Stores Inc.  The companies’ Canadian units have inked a deal in which Wal-Mart will assume the leasehold interests of up to 39 sites currently operated by Zellers Inc.  Terms of the agreement were not disclosed. The two companies said Friday that specific locations will be identified later this fall.  The sites are among the 220 possible locations whose leasehold interests Target is acquiring from Zellers Inc., a $1.84 billion deal the Minneapolis-based Target announced in January. The transaction allows Target to open between 100 and 150 stores throughout Canada in 2013 and 2014. <WWD>

Hedgeye Retail’s Take:  This deal was lined up the day TGT took over the Zeller’s locations, but there are still 30-80 leases the company is looking to unload. At roughly 100k sq. ft., the suitors for stores of this size are limited, but KSS and JCP are among the names that make the most sense.  

 

Canadian Judge Rebuffs Target in Bid for Name - Target Corp. lost its first court bid to win the exclusive right to use its name in Canada, where the company plans to expand in the next several years. The Federal Court of Canada late Thursday denied Target's request for a preliminary injunction against Canadian merchant Isaac Benitah and his company, Fairweather Ltd., which owns 15 stores across Canada called Target Apparel, and has a logo similar to that of Target Corp The judge said he agreed that customers might be confused by the similar name, but he didn't believe that Minneapolis-based Target would suffer irreparable damage if Target Apparel stores continued to operate under that name pending a full trial on the matter, preliminarily set for November 2012. Target Corp. doesn't plan to open its first stores in Canada until 2013.  <WallstreetJournal>

Hedgeye Retail’s Take: As we originally suspected, Benitah is in-line to be the big winner here, which phase one of this process now suggests is closer to reality. Target is not about to change its name. So, the company essentially has two options at this point, 1) buy the rights from the Canadian merchant - win, or 2) sell alongside him under a very similar nameplate – win. As you can see from the images below, Target’s marketing machine in Canada would only help Benitah’s Target Apparel chain as marketing targets less familiar Canadian consumers who are likely to unassumingly stumble into wrong retailer.

 

R3: TGT, FINL, & Tweeting at London 2012 - R3 6 27 11

 

Hosa Pulls Hong Kong IPO Amid ‘Adverse' Market Conditions - Hosa International Ltd., a sportswear maker, said it won’t proceed with its planned Hong Kong initial public offering because of “adverse market conditions” and volatility. China Outfitters Holdings Ltd. is also likely to shelve its planned listing, Hong Kong’s South China Morning Post newspaper said today, citing an unidentified person. The company didn’t immediately respond to an e-mail after normal business hours, and has no phone number on its website or listed with Hong Kong directory inquiries. Xing Yuan Power Holdings Co. also said yesterday morning that it won’t proceed with an initial sale because of market conditions. The city’s benchmark Hang-Seng Index entered a so- called correction last week, dropping more than 10 percent from its April high. <Bloomberg>

Hedgeye Retail’s Take:  A rarity among a flurry of brands and companies coming public of late – this could be viewed as a sign of demand beginning to slow. Looked at from another angle, this could also reflect the current state of the Chinese athletic market and the highly competitive environment in which domestic and foreign brands are vying for share. In thinking about the domestic companies and brands likely to succeed in this effort, Hosa and China Outfitters aren’t exactly the first to come to mind.  

 

LVMH to Launch Sephora in India with Reliance Brands - LVMH is in talks with Indian company Reliance Brands over the opportunity of launching its beauty retailer Sephora in the country, sources reported. Reliance Brands wants to launch more international brands to target the country's emerging markets for fashion and personal grooming. Reliance Brands is reported to have already scouted locations for Sephora Stores, which offer cosmetics and accessories. <FashionNetAsia>

Hedgeye Retail’s Take:  While the company has over 700 Sephora locations worldwide, entry into India, particularly with a well-known domestic player who has done similar deals with other  top brands (Diesel, Zegna, Timberland, and Steve Madden) this would be a good win for LVMH.

 

Made in America Back in Vogue  - Staying close to home can be very appealing. Skyrocketing costs in Asia and always-increasing product lead times have spurred American companies to take another look at making products in the States — or at least nearby. Big companies such as Timberland and Wolverine World Wide Inc. have added capacity to their facilities in the Western Hemisphere. Established domestic player New Balance is drawing more attention to made-in-America with a new customization program that leverages its New England factories. And smaller brands are getting in on the action, too: Portland, Ore.-based Keen opened a factory last October in its hometown, and Vere, a fledgling sandal brand shipping its first line next month, set up operations in Geneva, N.Y., last year. <WWD>

Hedgeye Retail’s Take:  The price differential is contracting indeed, but the case for outsourcing manufacturing operations still strongly supports the need for a foreign supply chain. What’s likely to change on a larger scale is a shift back towards production in the Western Hemisphere, but primarily among the countries in both Central and South America.

 

Patent-Overhaul Bill Clears House - House lawmakers passed legislation Thursday to overhaul the U.S. patent system for the first time in nearly 60 years, despite disagreements over patent-office funding and a provision that could help large banks challenge some patents. The House passed the America Invents Act on a 304-117 vote, a bipartisan tally with more than two-thirds of lawmakers from each party supporting the bill. The bill would change how the U.S. grants patents and award them to the party which is "first to file" an invention instead of the "first to invent" it. The change would bring the U.S. in line with other countries who adopted first to file patent systems years ago, a move that will simplify the patent process for companies that file applications in multiple countries. <WallstreetJournal>

Hedgeye Retail’s Take:  Sounds simple enough, but like most things we’re sure the related enforcement will be anything but.

 

 


European Risk Monitor: Thursday Night Lights

Positions in Europe: Long Germany (EWG); Short Spain (EWP)

 

The long-awaited date of this Thursday’s Greek vote on austerity is now close upon us after what seems like 2 weeks of intense breath holding on the state of Greece. Late Tuesday of last week PM Papandreou’s government won the confidence vote in a 155-143 decision with every member of his PASOK party voting the party line.

 

Thursday’s vote on the newest austerity package, which includes €28 Billion of spending cuts and tax hikes and €50 billion of private assets sales through 2015, is essential for its passage is conditional on 1.) Greece’s next €12 Billion funding tranche from the IMF (of the original €110 billion bailout passed in May 2010) to meet maturing debt obligations beginning in July, and 2.) setting into motion Troika’s (EU, IMF, ECB) position on an additional bailout package for Greece (estimated between €70-120 Billion) and steps to “softly” restructure Greek debt, namely by extending debt maturities.

 

Over the weekend France floated the idea of French banks reinvesting 70% of their maturing debt Greek bonds, with 50% allocated to new Greek debt with a maturity of 30 years (instead of 5) and another 20% directed to a zero coupon fund of “high quality securities”.  Clearly there are numerous unknowns surrounding this proposal, including if German banks would follow suit. But importantly, given that France and Germany have the most exposure to Greece of any Eurozone country, with €56.7 Billion and €33.9 Billion of bank and government debt liabilities, they’ll be the leaders in crafting a near to intermediate band-aid to uphold Greek funding needs.

 

While we’d expect to see more foot power in protest against austerity into and out of the vote on Thursday, ultimately we expect the measure to pass for it’s A.) in the interest of Troika to keep Greece on a short leash to quell talk of default/restructuring (and prevent any contagion weakness to the common currency), and B.) Greece may be able to reach a deal that broadly agrees with Troika’s deficit reduction demands, while specific terms like tax hikes and spending cuts could be back loaded towards 2014/15.

 

While this is only a hypothetical, such a tactic could be used to appease both Troika and the Greek populous. Ultimately it bodes poorly for any material change in the budget deficit, but then again given Greece’s poor prospects to grow any revenue with such a deflated growth profile, using smoke and mirrors by either party to reach any form of intermediate support should come as no great surprise.

 

For now, we continue to turn to our risk monitor indicators in Greece and throughout the periphery.  While we’ve seen slight inflections, the TREND line in risk continues decidedly higher for CDS spreads and sovereign bond yields. Greek CDS levels defy previous default indicators, and Portugal and Ireland indicate that their previous bailouts will not solve their sovereign and banking imbalances.  

 

European Risk Monitor: Thursday Night Lights - z. CDS

 

European Risk Monitor: Thursday Night Lights - z. yields

 

Our European Financials CDS Monitor shows a similar picture, with bank swaps in Europe wider last week, on a week-over-week basis for 35 of the 39 reference entities (only 4 were tighter) with a strong negative divergence from Greek banks.   

 

As Troika continues to socialize the Eurozone, we remain very cautious on the region, including on our long position in Germany (in the Hedgeye Virtual Portfolio via the etf EWG) as fundamentals have deteriorated over recent months.   For more, see our post on 6/24 titled “Germany: High Frequency Data Slows. Period.”  Additionally, we remain short Spain (EWP) where the data suggests continued headwinds from inflation, austerity, unemployment, and its real estate bubble. Just this morning, El Confidencial reported that Spanish banks may have $50BN in unrecognized problematic real estate loans. 

 

With big brother Troika in periphery’s pocket, we see a EUR-USD trading range of $1.41-$1.45. Stay tuned.

 

Matthew Hedrick

Analyst

 

European Risk Monitor: Thursday Night Lights - z. banks


MACAU UPDATE

No change to June revenue forecast of HK$19.5-20.5BN

 

 

Last week, Macau slowed down a tad with average daily gaming revenues decreasing to HK$664MM per day from HK$705MM per day the prior week.  This is still in-line with the 3-week average daily gaming revenues.   Our June GGR forecast of HK$19.5-20.5BN (+50% YoY) remains unchanged. 

 

Market share continues to be volatile as Galaxy Macau and MGM were the biggest losers last week compared with the previous week, while LVS and WYNN gained the most share.  Galaxy Macau’s big weekly drop was likely due to soft VIP volumes.  We’re also hearing StarWorld appears to be maintaining most, if not all, of its previous volumes.  MPEL also gained share last week as CoD continues to do well despite Galaxy Macau next door.

 

MACAU UPDATE - macau update


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TALES OF THE TAPE: CMG, MCD, WEN, THI, DRI, EAT

Notable news items and price action from the restaurant space as well as our fundamental view on select names.

 

 

MACRO

 

The health of the consumer is a key question right now as chains pass on price in an effort to protect margins due to elevated input costs.  Chipotle is the latest concept to make headlines for raising prices (see below).  Of course, unless commodities prices decline, we can expect price increases across the industry. 

 

Food costs have declined somewhat but, as the chart below indicates, the CRB Foodstuffs Index remains far above historical norms.  

 

TALES OF THE TAPE: CMG, MCD, WEN, THI, DRI, EAT - crb foodstuffs

 

 

QSR

  • CMG is raising prices regionally after saying on its February 20th earnings call that no price increase would be considered until the third quarter. A few days shy of the third quarter rolling around, the company has decided that it will raise menu prices in the Northeast and Southeast over the next few weeks with changes in other markets to follow.  According to The Wall Street Journal, NYC Chipotle restaurants increased prices by 50 cents last week, but lines were still “out the door”.
  • MCD has expanded its smoothie line with a mango pineapple flavor as it looks to emulate its success of 2010 in selling beverages.
  • MCD earned the title of “Most Effective Brand” in the inaugural Effie Effectiveness Index, which ranks brands by measuring the results of 40 worldwide marketing and advertising competitions.
  • WEN Chief Operating Officer, Andrew Skehan, was surprised to learn of the scantily clad models hired to greet reports at the first Wendy’s restaurant in Russia last week.  The Russian initiative was somewhat of a departure from the wholesome, pig-tailed, red-haired icon usually used to promote Wendy’s.
  • THI was restated “Buy” at BofA with a price target of C$55.

 

CASUAL DINING

  • EAT was mentioned on a list of potential M&A candidates by UBS.
  • DRI will report a solid 4QFY11 on June 30th, according to JPM, based on recent industry sales trends and company-specific cost savings. 

TALES OF THE TAPE: CMG, MCD, WEN, THI, DRI, EAT - stocks 627

 

 

Howard Penney

Managing Director


THE M3: SLOTS; UNEMPLOYMENT; IMPORTED WORKERS; GAMING TAXES

The Macau Metro Monitor, June 27, 2011

 


MACAU'S GAMING REGULATOR ADVISES CASINOS TO DROP ULTRA-LOW DENOMINATION SLOT GAMES IAG

Several of Macau’s gaming concessionaires have been advised by the Gaming Inspection and Coordination Bureau (DICJ) that slot games with denominations of less than 10HK cents per line are non-compliant and raises problem gambling issues.  IAG says the regulator has not gone as far as to issue a formal directive to ban the 2HK cent and 5HK cent games, but is currently issuing informal guidance that it would like to see their use discontinued. 

 

Several industry sources say currently, a small number of slot players using high denomination machines are providing the majority of the revenues, thus suggesting that the revenue implications of banning ultra-low denomination machines may be minimal.

 

EMPLOYMENT SURVEY FOR MARCH-MAY 2011 DSEC

Unemployment rate for the March-May 2011 period was 2.6%, down 0.1% point from Feb-April period and the lowest since the Handover of Macau to China.  DSEC said this was due to opening of Galaxy Macau.  Total labor force was 337,000 in March-May 2011 and the labor force participation rate stood at 71.6%, up by 0.4% point from the Feb-April period.

 

IMPORTED WORKERS ON THE RISE Macau Business

In May 2011, the number of non-resident workers in Macau reached 84,000, +1.6% MoM.

 

BUDGET SURPLUS RECORDS NEW INCREASE Macau Daily Times

According to provisional data released by the Macau Finance Services Bureau (DSF), direct taxes from gaming totaled MOP 35.17BN, up 46.2% YoY, from January to May 2011.


WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN

Margin Debt Backs Off of Recent Highs - Still at Elevated Level

We publish NYSE Margin Debt every month when it’s released.  This chart shows the S&P 500, inflation adjusted back to 1997, along with the inflation-adjusted level of margin debt (expressed as standard deviations from the long-run mean).  As the chart demonstrates, higher levels of margin debt are associated with increased risk in the equity market.  Our analysis shows that more than 1.5 standard deviations above the average level is the point where things start to get dangerous.  In May, margin debt decreased $5.3B to $315B.  On a standard deviation basis, margin debt fell to 1.36 standard deviations above the long-run average.

 

One limitation of this series is that it is reported on a lag.  The chart shows data through May.

 

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - margin debt

 

This week's notable callouts include widening spreads in MS, AXP, and municipal bonds.

 

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Negative / 0 of 11 improved / 6 out of 11 worsened / 5 of 11 unchanged
  • Intermediate-term (MoM): Negative / 0 of 11 improved / 9 of 11 worsened / 2 of 11 unchanged
  • Long-term (150 DMA): Neutral / 1 of 11 improved / 6 of 11 worsened / 4 of 11 unchanged

 

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - summary

 

1. US Financials CDS Monitor – Swaps widened across domestic financials last week, tightening for only 1 of the 28 reference entities and widening for 27.

Widened the most vs last week: MS, AXP, ALL

Tightened the most vs last week/widened the least: PMI, RDN, AGO

Widened the most vs last month: WFC, PMI, MTG

Widened the least vs last month: GS, AON, MMC

 

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - US CDS

 

2. European Financials CDS Monitor – Banks swaps in Europe were wider last week.  35 of the 39 swaps were wider and only 4 tightened.   

 

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - Euro cds

 

3. European Sovereign CDS – European sovereign swaps continue to move higher.  Notably, Ireland and Portugal swaps are now at the level that Greek swaps were just a few months ago, with both countries in the high 800s. 

 

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - sov cds

 

4. High Yield (YTM) Monitor – High Yield rates edged lower last week, ending at 7.57 versus 7.62 the prior week.

 

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - high yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index continued to slide, moving to its lowest level since mid-March, closing at 1598 versus 1602 the prior week.   

 

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - lev loan

 

6. TED Spread Monitor – The TED spread rose 2 bps to its highest level since early May, ending the week at 24.1 versus 22.1 the prior week.

 

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - ted spread

 

7. Journal of Commerce Commodity Price Index – Last week, the JOC index fell 4 points, dropping to 8.4. 

 

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields remained close to flat, ending the week at 1678.

 

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - greek bonds

 

9. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps.  We believe this index is a useful indicator of pressure in state and local governments.  Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 14-V1.  Last week spreads rose 7 bps to 122. 

 

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - mcdx

 

10. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production.  Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion.  Early in the year, Australian floods and oversupply pressured the Index, driving it down 30% before bouncing off the lows.  Last week the series remained flat versus the prior week.

 

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - baltic dry

 

11. 2-10 Spread – We track the 2-10 spread as a proxy for bank margins.  Last week the 2-10 spread tightened slightly to 254 bps.   

 

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - 2 10

 

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows:  3.3% upside to TRADE resistance, 1.0% downside to TRADE support.

 

WEEKLY FINANCIALS RISK MONITOR: MUNI AND MS SWAPS CONTINUE TO WIDEN - XLF

 

 

Joshua Steiner, CFA

 

Allison Kaptur


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