Charting Japan: Plain Ugly...

Oh what a wonderful difference a year makes... from all of the story telling of the resurgence of the land of the rising sun, to "Japanese Activism", did we ever have a chuckle with Wall Street's creativity. Then we shorted them and Japan. Now the stock market is almost -60% lower, and we have the 1st negative Japanese retail sales growth report (year over year) since July of 2007 (see chart). Are you thinking this is a one-time event, or will this manifest into its negative 25 year "Trend" of Japanese economic malaise? For now, we have locked in our gains on the short side of the EWJ etf, but we will be back, re-shorting the story tellers... patience always pays…
  • The Nikkei should be covered, for a "Trade", anywhere under the 7,127 line.
Chart courtesy of


WYNN announced it will open the Encore hotel in Las Vegas on 1/12/08. We had predicted the property would not make its expected December open date in our 8/12/08 note "GOOD ENCORE, BAD ENCORE". The obvious negative here is that Wynn Encore Las Vegas will miss out on the very lucrative New Year's celebration week. Not a huge deal in it of itself provided that the budget of $2.3bn remains intact.

On the contrary, we still believe Encore Macau may open on the early side of its announced range of first half of 2010. The budget there of $700 million looks very doable.


What I care about is:

• Debt at $2.6bn, below estimates
• Shouldn’t bust a covenant in Q4
• Leverage restriction escalates from 6x to 6.5x in 2009 so out of danger zone
• I’m way below the Street on EBITDA and EPS yet I’m still calculating net free cash flow of $1.60 (40% FCF yield) in 2009

My sources indicate October is better in regional gaming markets than September. September could end up being a near term low. Trade looks higher.

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UA: Better Than An $18 Stock Needed

Beat and guide down. Familiar story… There are puts and takes to this Q for UA, but there’s no doubt in my mind that they net out to be a positive result. Here’s the simple overview…

1) Revs +24% -- 400bp better than I expected (which was about in line w the Street). Footwear appears to be the biggest driver, which is not a shocker. Kids posted a sharp deceleration on both a 1 and 2-year basis, which the company will need to explain on the call. Not huge to the P&L, but bit signal of brand relevance.

2) Gross Margin +41bp. I’m very impressed that UA pulled this off. I had the GM improvement a full quarter out in model once inventory was completely cleared. But with sales +24% and inventory only +8%, the GM math is less of a surprise.

3) SG&A: A highly discretionary line for this company on a Q to Q basis. UA guided to 11.5% and came in at 10.7%, which is a $2mm delta, or about $0.03-$0.04 per share. While I’ll want color on this (perhaps just due to revenue beat/pull forward), nothing about the trend on a standalone basis concerns me.

4) Cash Cycle: 19 day improvement in inventories, 3 day reduction in DSOs, but giving back 18 days in lower payables?? This is likely driven by footwear, where factories are more consolidated and terms are tighter than in dealing with the fragmented apparel factories (i.e. there are about 30 factory groups worldwide that make footwear, but about 20,000 apparel groups).

5) Visibility? Over each of the last two quarters, the company has guided to a very tight FY operating profit target ($103.5M-$104.5M in Q2 to $104.5M-$105.5M in Q3). The outlook for the remainder of 2008 guides to a much wider range of $97.5M-$104.5 implying more uncertainty over Q4 profitability.

Netting it all out, with all the negativity on the name heading into the quarter, I’ve gotta think that the stock rips on a result like this in conjunction with a big market day. It should. UA remains in my top 5.

DIN - The Miracle in Glendale

I have got to hand it to Julia Stewart, CEO of DIN; she can spin a good story when she needs to. Two things happened that are completely out of left field and caught me by surprise. First, DIN manages to find a buyer for 110 severely underperforming Applebee’s stores. Second, the company reported that Applebee’s operating margins increased 220 basis points, allowing operating profits to grow by 13.8%. In this environment, this is nothing short of a miracle.

I’m focused on these two events, because it was game changer for the time being. My guess is that when people digest the reality of the situation the enthusasism will wane.

Operating Margins -

For 3Q08 Operating margin improved 220 basis points to 11.4% compared to 9.2% in 3Q07. Food costs increased by 30 basis points and labor decreased by 80 basis points primarily due to a reduction in hourly wage rates and lower management bonus payouts.

The first RED flag – in this environment it is nearly impossible to lower labor costs with a MSD digit decline is traffic trends. The math does not work! The customer experience will be compromised and it’s likely we will see further weakness in same-store sales.

Applebee's also experienced an approximate 170 basis point improvement in direct and occupancy costs primarily related to lower depreciation expense resulting from purchase price allocation adjustments.

The second RED flag – Nearly one year after buying the Applebee’s chain they are still making purchase price adjustments to manufacture improved margins?

Putting it all together, Applebee’s segment operating profits increased 13.8% to $30.0 million in the third quarter. For the Applebee’s chain to show this level of profit growth is truly amazing and completely unsustainable.

Asset sales

DIN also reported today the sale of an additional 66 Applebee’s restaurant, bringing the total to 110 stores, which the company expects to close before year-end. The incremental 66 new stores are being sold to three different franchisee groups and are not contingent on financing. All of the buyers appear to be currently operating of have been involved in the restaurant business. Additionally, it’s likely that all the stores were losing money. That is the good news.

The RED flag – These stores were sold at fire sales prices. Putting any value on something losing money is good news, but the next tranche will not be so easy. At some point unloading a significant amount of stores will require some financing. In this environment access to capital is getting harder and the cost of capital is rising, except for those that can borrow from the FED.


DIN is not out of the woods yet. DIN is levered at 7.1x, slightly below the 7.5x threshold at the end of November 2008. The company is in crisis mode as it is trying to save money by cutting employee bonuses and changing its travel and vacation policies. We already know that casual dining sales trends have continued to accelerate on the downside in September and October. The uptick in profitability at the Applebee’s chain appears to be unsustainable, given current sales trends and commentary from other competitors in the space. The company is desperately seeking liquidity and the realities of today will eventually catch up with the business.

TBL: I’ll Take This Shot

Someone asked me what I thought about TBL here. Not fun in this market to make a call on an EPS event, but as Wayne Gretzky said, “you miss 100% of the shots you don’t take.” Bottom line: I like it.

1) This is a longer term fundamental call that I won’t rehash here…but I like how the company has (unbeknownst to the Street) offensively taken down margins by about500bp by investing in key areas despite a slowdown in its core boot business. I think margins have troughed. Check out prior TBL posts for deets…

2) This name is ripe for our ‘Capitalists Emerging’ theme. No debt, and $2.60/sh in cash on the balance sheet. I still think it is more likely than not that TBL is owned by either Nike or VFC over the next 12 months. No one thinks that the Schwartz family will sell. I disagree.

3) I’m above consensus for the upcoming quarter and year. No, the top line is not knocking the cover off the ball, and FX is no longer helping. But store closures, asset divestitures, and shifting apparel over to PVH in a licensed model should all help on the margin. Recent trends in 4Q have been positive (see chart below).

4) Starting in 3Q, TBL goes against its easiest top line compares vs. last year, and cycles meaningful inventory build in 2H07.

5) Short interest is registering at only 6% of the float, a level not seen since mid-07. This might seem super bearish. But since the last short interest data was released (getting cut by a third), TBL went from $17 to $10.50. I think that the bearishness out there is more than it seems at face value. Comments I hear from investors definitely support that.

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