Department Store Callouts


With the major department stores having reported this week, here are the latest views on price elasticity from the front lines:


“So far our average regular price sales were up a little bit, but that’s mostly due to mix and it’s not really due so much to inflation. I think lot of what we’ve been hearing hasn’t really happened at least for us yet in terms of cost of goods flowing through to the customer. So we want to see what shakes out with that.” -JWN


“There's not one answer to how we've dealt with the pricing increases. In some cases where we know the customer is very value-oriented, we are not passing the cost increase completely or at all to the customer and hoping to make up the margin other places.” - M


“So far, the results we have gotten have kind of been what we expected broadly which is this kind of one to one for every increase in costs, there’s a corresponding decrease in units” – KSS


“The customer does not have much inelasticity desire at new price points. The share of opening price points was important to them and it continues to be the case” - JCP



If JWN isn’t been able to pass through price increases, neither is anyone else – not good for lower end and mid-tier players. Here’s something else to consider. Every department store raised guidance this week with the sole exception of JCP. Take a look at the price performance on the week and implied multiples for group below. We used the current price over the low end of company guidance for our P/E calculation.


For JCP, we assumed the low end of its previous guidance of $2.15-$2.20. Interestingly, this still warrants the second highest multiple in the group behind only JWN. If you take into account that it came in $0.07 shy of its Q2 guidance and is guiding Q3 another $0.07 below consensus estimates, full-year guidance would have had to come down to at least to $2.00 implying an even richer 13.3x multiple. Just for reference, we’re shaking out at $1.60 for the year suggesting at this price, JCP trades at the highest multiple of the group at 16.6x!


JCP remains at the top of our short list.


Department Store Callouts - DeptOutlooks 8 11


Department Store Callouts - Dept SIGMA 8 11


Casey Flavin



This edition of the macro mixer echoes a theme that I laid out in this morning’s Early Look.  I wrote, “If the similarities between 2011 and 2008 are bad, the differences are almost worse.”  You might have better luck at guessing whether we are headed for another recession but several catalysts long highlighted by Hedgeye CEO Keith McCullough, including the debt ceiling debate, the US debt downgrade, and consensus expectations becoming overly bullish were certainly pointing to a potential market slowdown.  The potential for Recession 2.0 now looms large and consumer confidence data out this morning (the worse University of Michigan reading since 1980!) is not encouraging.


Some of the differences between 2008 and today seem worse than the similarities: joblessness is higher, more people are reliant on food stamps for sustenance, and the financial crisis threatening to wreak havoc on our economy is not here in the USA and therefore less within our government’s control.  The similarities, given that we are comparing the present situation to crisis of 2008, are inherently negative.  Gas prices are elevated, the VIX is spiking, stocks have fallen off a cliff, and consumer confidence is depressed.


The last point on consumer sentiment being is the most relevant today, with the University of Michigan index plunging in early August.  Today, confidence fell 8.8 points to 54.9 versus 63.7 in July.  The index has fallen 19.4 since May 2011 and the magnitude of the decline has been exceeded only twice in the history of the index - fall of 1990 and 2005.


The expectations component led the decline, falling 10.3 points to 45.7 (this is its lowest level since 1980).  Assessments of current conditions dropped 6.5 points to 69.3, the lowest level since November 2009.


While this does not bode well for consumer spending in August, today’s retail sales data suggested that sales held up well in the month of July.  Retail sales rose 0.5% in July, the largest gain in four months; excluding those and auto dealers, core sales grew 0.3%, down from the upwardly revised 0.5% June figure.  Growth was led by miscellaneous retailers, gasoline stations, and electronics and appliance retailers. Sporting goods and hobby stores, department stores, and building supply stores were the primary losers.


Confirming the sluggish consumer environment, total business inventories increased 0.3% in June after a downwardly revised 0.9% in May (previously 1%).  The growth was smaller than expected and largely driven by wholesaler inventories, as retail inventories continue to contract.  The weaker than expected month is an indication that businesses continue to manage inventories very closely as consumer spending trends are tenuous at best. 


MACRO MIXER - RECESSION 2.0? - umich sentiment 812


MACRO MIXER - RECESSION 2.0? - umich expectations 812


MACRO MIXER - RECESSION 2.0? - umich attitudes



Howard Penney

Managing Director



Weekly Asia Risk Monitor

As usual, we’re keeping it brief. Email us at if you’d like to dialogue further on anything you see below.




In Asian equity markets, Australia’s All Ordinaries Index parted a sea of red, closing up +1.6% on a wk/wk basis. In Asian currency markets, the Japanese yen’s +2.6% wk/wk gain potentially sets up another round of intervention. In Asian bond markets, Indonesia’s +20bps wk/wk rise in 2yr yields stands out as peculiar, given the trajectory of Indonesian inflation readings. Thailand’s yield curve narrowed substantially (-32bps wk/wk) and is near inversion. Clearly the Thai fixed income market has become quite bearish on the slope of Thai economic growth.


Perhaps the key callout of the week is the move(s) in Asian CDS markets. Though up across the board and across multiple durations, the absolute levels remain rather depressed relative to their European counterparts – i.e. credit market participants aren’t yet expecting global contagion to materially affect the solvency of Asian sovereigns in the event of a potential European banking crisis.


Weekly Asia Risk Monitor - 1


Weekly Asia Risk Monitor - 2


Weekly Asia Risk Monitor - 3


Weekly Asia Risk Monitor - 4


Weekly Asia Risk Monitor - 5


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Weekly Asia Risk Monitor - 8





-China’s July economic data came in as expected – inflation peaking and growth slowed at a decelerating rate: CPI accelerated to +6.5% YoY (37-month high); PPI accelerated to +7.5% YoY; industrial production growth slowed to +14% YoY; retail sales growth slowed +17.2% YoY; fixed assets investment growth slowed to +25.4% YoY; new loan growth slowed to +492.6B MoM and -7.5% YoY; money supply (M2) growth slowed to +14.7% YoY.

-Housing transactions cratered in July, falling -30% MoM – more scope for the PBOC to become dovish on the margin.

-China’s trade balance widened amid faster growth in both exports and imports, highlighting a subtle point we continue to make – Deflation the Inflation is very bullish for China’s net export P&L over the near term, due to the fact that export prices are typically more fixed than import costs.

-As lower expectations for further monetary tightening continue to be priced into China’s interbank rates and swaps spreads, we think the credit crunch facing China’s small-to-medium-sized enterprises will begin to wane. While we don’t see a flood of dovishness in sight, on the margin, credit conditions in China should go from “bad” to “less bad”.

-The Chinese yuan is making 17yr highs in both the spot and forwards market as consensus calls for QE3 spur inflation worries – most notably from Chinese officials: “[Additional easing in the U.S.] is highly likely… This may push up commodity costs and cause more hot money to flow into developing countries, including China” – China’s National Development and Reform Commission.


Hong Kong

-GDP growth slowed -210bps in 2Q to +5.1% YoY and we see further downside in 2H – especially if Hong Kong’s property market continues to show marginal weakness. We remain the bears on Hong Kong’s financial services and property developer stocks.



-The businesspeople on the ground in Japan see what we see – slowing growth ahead: the outlook component of the Economy Watchers Survey ticked down to 48.5 in July.

-Vice Finance Minister Fumihkio Igarashi confirmed that Japan is ready to intervene again in the FX market to stem the rising tide in the yen – just over a week after their (unsuccessful) record-setting solo intervention. Chief Cabinet secretary Yukio Edano also said that the country is considering measures to help Japanese corporations to cope with the strong yen.

-Current prime minister Naoto Kan and his record-low 18% approval rating may be on the way out the door soon, as the second of his three hurdles to resignation looks to be cleared (passage of the deficit-financing bill). All that’s left is nuclear power reregulation and, by the looks of it, the opposition (LDP) may push that bill along as well just to get Kan out of parliament.

-Finance Minister Yoshihiko Noda is likely to “run” for the soon-to-be open prime minister role in Japan. A Noda victory is likely to be incrementally supportive of growth-negative fiscal policy (higher taxes), which would be incrementally bullish for JGBs.

-PPI accelerated in July to +2.9% YoY.



-Recently reappointed (through Sept. ’13) RBI governor Duvvuri Subbarao confirmed that the central bank sees the current rate of inflation as “too high” by a double, which more than likely means there’ll be no easing of monetary policy anytime soon in India.

-Local car sales growth cratered in July (-15.8% YoY vs. +1.6% prior). Though hikes are starting to eat away at consumer demand, inflation remains sticky.

-India’s three weekly inflation readings all accelerated to new intermediate-term highs in the last week of July: food (+9.9% YoY); energy (+12.2% YoY); and primary articles (+12.2% YoY).

-Indian corporations are shelving bond deals amid the rupee’s recent declines, which, in turn, puts upward pressure on the spreads of Indian foreign currency denominated debt. Rising domestic interest rates have led Indian corporations to issue a near record amount of external debt YTD – very negative for Indian equities in the event things take a turn for the worse in Europe (weak currency inflates corporate debt burdens).



-The RBA cut its 2011 GDP growth forecast (by -38.4% to 2% YoY) and, more importantly, walked down its long-term interest rate assumptions to flat vs. a previous forecast of a +50bps rise by mid-2013. We continue to see further downside to Australian interest rates over the intermediate-term TREND as growth slows Down Under.

-Consumer confidence ticked down in August to 89.6 (the lowest level since May ’09) while Australia’s unemployment rate backed up +20bps to 5.1% in July. Australia’s ailing economy needs a bone and we think Stevens will deliver the goods (rate cuts) by the end of the year if we are to remain right on the slope of global growth (negative).


South Korea

-PPI accelerated in July to +6.5% YoY. We expect most reported input price series to begin trending down over the intermediate term, as Deflating the Inflation continues to play out across the commodity complex.

-The Bank of Korea kept its benchmark interest rate on hold at 3.25% amid waning external and domestic demand.



-Real GDP growth came in flat in 2Q and our models see more of the same in 2H.

-Bank Indonesia kept its benchmark interest rate on hold at 6.75%.



-The Singaporean government cut their full-year GDP growth and full-year export growth forecast, citing slowing U.S. and E.U. growth.



-CPI slowed in July to +1.3% YoY alongside and acceleration in export growth and a wider trade balance. While we’d steer clear of open economies such as Taiwan on the long side over the intermediate-term, we are quick to point out that developing Asia by and large is unlike the U.S. and the E.U. in that it doesn’t have massive sovereign debt burdens structurally impairing growth.


Darius Dale


Early Look

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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.


Only slightly below us but well below the Street




  • RWS net revenue of S$716MM and Adjusted EBITDA of S$352.5MM
    • Gaming net revenue of S$583.9MM and non-gaming revenue of S$132.1MM
    • Hotel occupancy of 88% and ADR of S$317
    • USS average daily visitation of 10,300 and spend per visit of S$83
  • "Win percentage in the premium player market segment for second quarter of 2011 was significantly lower than the theoretical win and that of first quarter of 2011"
  • "The Maritime Experiential Museum will open in October 2011, followed by the world-wide debut of Transformers - a major blockbuster attraction in USS in December 2011...At the end of this year, we will add more luxury rooms at our high end West Zone...These accommodations, when fully completed by first quarter of 2012, will be highly complementary to our vision to be the playground for the rich and famous in Asia."


  • Maintained 55% of the GGR in 1H11
    • After 60% in Q1, we think share dropped to 48% in Q2
  • Had a hold % of 2.66%. RC volume was lower while the Mass market remained stable
  • Sales and market activities continue to ramp up
  • Focus will continue to be on premium customers
  • In the short term they remain cautious due to the recent market turmoil



  • Hold impact in the quarter? Theo is 2.8-3.0%, if they adjust then the EBITDA margins would have been 51%. Revenues would be 5% higher.
    • If hold was 2.9% revenues we estimate that revenues would have been S$39MM higher and EBITDA would be S$33MM higher
  • In their view the local Singapore market that is interested in gambling has already been tapped. In order to increase their Mass revenue they need to attract more international visitors. There are a lot more regional Asian flights coming into the Singapore.  More hotel rooms coming online over the next few years will also help grow the Mass market
  • Continue to see a lot of VIP players coming from abroad.  VIP players from Singapore are a small percentage of total VIP players
  • They are concerned on how the market crash in Europe and US will impact Asia, but so far there has been no impact on their business
  • VIP RC declined 13% QoQ
  • Win rate in the Mass market was consistent QoQ
  • There are no seasonal patterns that they can discern thus far
  • Think that the international markets will be a source of growth.  MBS has the advantage of more hotel rooms and the number of hotel rooms that surround their property compared to their property which has a location disadvantage
  • When do they expect some growth in the VIP segment? 
    • They believe that 2Q results were impacted by CNY which benefited the first quarter.  They are optimistic that they will do well on the RC chip side
  • Mass market EGT reconfiguration? 1,800 machines on site - by year end they will reach the max of 2,500.
  • There was some growth in slot revenue in the 2nd Q and believe that once the reconfiguration is complete there will be even more growth
  • No change in the commissions
  • Will have 550 table games by year end assuming they go to 2500 slots.  Currently they have 543 table games. Expect the mix of tables to remain 1/3 VIP and 2/3 Mass
  • Net gaming revenue  - 34% was VIP and RC revenue was 49% of their gross gaming revenue.
  • They are happy with the current commission structure and have no plans to change it in the near future
  • Market share of VIP turnover was - 52%
  • Where is the $60MM investment they made was in PP&E. The investment was not to offset any gaming debt
  • Mass & Slot share of GGR is around 51%
  • Mass market margins have remained the same QoQ
  • USS generates a lot of FCF for them once they are past the B/E point. For every extra 1,000 people they bring down it all drops down to the bottom line. Transformers will be a major attraction for them.
  • The new hotel will have 200 rooms which are very large. Will help grow the VIP.   Have about 120 rooms now that are "VIP". Will open by year end - but the villas will open in Feb/March 2012
  • If the interest rates remain low than the interest expense will remain low at these levels. Paying only 1.45%. Interest expense should stay at below S$30 
  • Credit extension has not been impacted by the recent global events. Don't expect to make any changes to credit policy
  • Cash spend on the Western Zone - S$600-800MM in the next 12-14 months. The S$500MM that was spent in 1H was for payment of prior completed capex
  • Will be repaying S$500MM of their term loan per year starting in 2012
  • Marine Park will open in mid 2012 and there will be no more major capex
  • Not all of their VIP business is from mainland China - a lot of Chinese live elsewhere
  • Total GGR market share for 2Q - 50%; the 50% share on handle and drop for Mass was 51%
  • Again, we think it was sub-50%
  • Number of casino visitors QoQ has been quite consistent 
  • Malaysian contribution to casino? Their visitation from Malaysia is still very strong
  • They are looking at further markets like Japan and Korea for marketing? There is no movement politically in Japan for gaming approval. They don't see gambling legislation moving too fast in Korea
  • Use of cash?
    • Looking at a number of projects that they don't want to discuss for competitive reasons
    • Hope to utilize that cash in the 12-24 months
  • 67% VIP RC share in the 2Q
  • Receiveables are growing is because the business itself is still growing. The receivable has been growing at a similar pace to revenue. Will have aging information at year end.
  • Roughly 95% of their gaming space is utilized
  • There is some overlap between the 2 IR customers
  • Has the Singapore market reached saturation?
    • MBS is always more optimistic than they are. They are working hard to build top and bottom line. Its still tough to know what the market growth will be going forward because there aren't any clear seasonal trends that have emerged. They are also more leisure oriented.

The Week Ahead

The Economic Data calendar for the week of the 15th of August through the 19th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - b. cal

The Week Ahead - 8. cal2




Notable news items and price action pertaining to the restaurant space. 






University of Michigan Consumer Confidence was a BOMB this morning, coming in at 54.9 versus 62 expectations and 63.7 prior.




According to the Bloomberg consumer confidence index, sentiment dropped 1.5 points, to -49.1 for the week ended August 7; dropping back near its mid-May low and only 5 points from its all-time low. 





Retail Sales


Retail sales rose 0.5% in July, the largest gain in four months; excluding autos core sales grew 0.3%, down from the upwardly revised 0.5 June figure.  In July, growth was led by miscellaneous retailers, gasoline stations and electronics and appliance retailers.   On the down side were Sporting goods and hobby stores, department stores, and building supply stores.




Thank in large part to GMCR, the QSR category has performed strongly relative to its peers.  What we would call out here is the improving performance in Food Processing, a space that has been heavily beaten down throughout the recent phase of high levels of inflation in agricultural commodities.






  • WEN discussed the new coffee program at breakfast and a new prototype to drive sales during its earnings call yesterday.  Other than that, it wa just an OK quarter!  SSS for Wendy’s company-operated stores were flat sequentially on a 2-yr basis at -0.3%.
  • BKC SSS grew by +6.8% in Latin America and +2.2% in Europe, Middle East, Africa and Africa and Asia Pacific (EMEA/APAC) and declined by 5.3% in the U.S. and Canada.  BK has been testing smoothies, salads, parfaits and oatmeal at 100 locations.
  • PNRA was upgraded to “Buy” from “Neutral” at Miller Tabak.
  • THI was upgraded to “Buy” from “Hold” at TD Newcrest.


  • DRI has entered into an agreement with CMR, a Mexican casual-dining restaurant operator, to develop and operate Red Lobster, Olive Garden and The Capital Grille brands in Mexico.
  • EAT was downgraded to “Neutral” from “Buy” at SunTrust Robinson Humphrey.
  • BWLD was upgraded to “Buy” from “Neutral” at Sterne, Agee.
  • RRGB has named Stuart Brown CFO of the company, according to reports out this morning.




Howard Penney

Managing Director


Rory Green




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