prev

Retail: The Smoke Is Clearing

 

Look past the good numbers that some companies are printing. Financial metrics are turning the wrong way. Shorts: JCP, HBI, GIL, M, COH. Longs: WMT, TGT, NKE, LIZ.

 

 

With the end in sight for Retail earnings season, let’s step back and take a look at its financial health. Many will argue that numbers were good overall, and they’re right. Companies like Wal-Mart and Target (names we like) definitely showed up to play the game. But as we’ve been saying, we don’t like the deviation between the different companies in the space (HD/LOW, KSS/JCP, JWN/SKS, to name a few). In looking back through history, such volatility has always preceded a big move up or down in the space. I bet down.

 

Some notables…

1)       Take a look at this consolidated SIGMA chart for the apparel/footwear supply chain. Any way you cut it, this is simply bad. The sales/inventory spread has been drifting down for five quarters now, and is sitting today at -25%. Yes, I realize that this is needed for the industry to catch up on 3+ years of unsustainably low inventory levels. But the fact remains that Gross Margins are near peak for the space. Also, we’re facing a dynamic where the better companies ordered 10% fewer units and realized close to 10% higher prices. Mark my words, given the fragmentation of this business, many companies will have the mindset that says “Hey, if I sold X units at a 10% higher price, I bet that next season I can sell X+5% at the same price or higher.” Add on the fact that cotton prices are off so dramatically over the past few months, and this is luring the industry into a false sense of security. That’s bad.

Retail: The Smoke Is Clearing - Industry SIGMA chart1

 

2)      Let’s look at the simple sales trajectory for the space. Q1 through Q3 of last year grew steadily between 7-8%, but then in the three quarters since, we saw a definite step-up. While it might only be by 200bp on a yy basis, the more appropriate way to look at this is on a 2-year run rate. That’s where it gets scary. We had sub 1% growth in 1Q and 2Q of last year, then we moved to 3%, and for the last three quarters (ending 2Q12) we’re had a range of 7-9%. In other words, top line compares start to get much tougher 1 quarter out. That’s not horrible if inventories are tight and margin compares are easy. But it simply is not the case.

Retail: The Smoke Is Clearing - Industry PODS 2

 

3)      When we delineate the companies we track by SIGMA quadrant and track their respective movement from 1Q, there was a disproportionate shift of companies out of the sweet spot (sales/inv spread positive and margins up) to the Danger Zone (sales/inv spread and margins both down). That’s not horrible if the market has already recognized it. But the market hasn’t. In addition, unlike quadrants 2 and 4 of our grid – which are transitory and usually house a company for 2 quarters or less – a company can be in quadrant 3 for a multiple of that. Note: companies like Sears, K-Mart and Foot Locker lived there for the better part of a decade.

Retail: The Smoke Is Clearing - industry sigma Q2 2010

 

Retail: The Smoke Is Clearing - SIGMA TABLE  3  Q2 2011

 

Brian P. McGough
Managing Director


INITIAL CLAIMS BACK UP ABOVE 400K WITH MARGIN PRESSURE UNRELENTING

Initial claims climbed 13k from the prior week (9k after the revision to the prior week's print), bringing the headline number back to 408k.  Last week, we noted a divergence in the usually-tight correlation between the S&P and initial claims, suggesting that claims would move higher, the S&P would snap back, or some combination.  We continue to expect claims to back up further to close this gap. If all the mean reversion comes on the claims side claims will rise to ~475k. This would be reflect/cause a significant slowdown in US economic growth expectations consistent with our Macro team's call.  

 

Challenger Announced Job Cuts rose 60% YoY in July, a leading indicator for initial claims.  While still well below 2008-2009 levels, this is a substantial acceleration from recent months.  

 

INITIAL CLAIMS BACK UP ABOVE 400K WITH MARGIN PRESSURE UNRELENTING - rolling

INITIAL CLAIMS BACK UP ABOVE 400K WITH MARGIN PRESSURE UNRELENTING - raw

 

INITIAL CLAIMS BACK UP ABOVE 400K WITH MARGIN PRESSURE UNRELENTING - nsa

 

INITIAL CLAIMS BACK UP ABOVE 400K WITH MARGIN PRESSURE UNRELENTING - announced job cuts

 

INITIAL CLAIMS BACK UP ABOVE 400K WITH MARGIN PRESSURE UNRELENTING - job cuts yoy

 

INITIAL CLAIMS BACK UP ABOVE 400K WITH MARGIN PRESSURE UNRELENTING - S P

 

INITIAL CLAIMS BACK UP ABOVE 400K WITH MARGIN PRESSURE UNRELENTING - XLF

 

Margins under Pressure 

We track the 2-10 spread as a proxy for bank margins.  With the long end of the curve continuing to come down even as the short end is fixed close to zero, margins are under assault.  The 2-10 spread of 197 bps compares to an average for the 3Q of 240 bps and an average for 2Q of 264 bps.  

 

INITIAL CLAIMS BACK UP ABOVE 400K WITH MARGIN PRESSURE UNRELENTING - spreads

 

INITIAL CLAIMS BACK UP ABOVE 400K WITH MARGIN PRESSURE UNRELENTING - spreads QoQ

 

The chart below shows performance by subsector. With the market coming up for air in the last week, Title Insurers and Payment Processors have both broken back above positive YTD territory.  

 

INITIAL CLAIMS BACK UP ABOVE 400K WITH MARGIN PRESSURE UNRELENTING - perf

 

Joshua Steiner, CFA

 

Allison Kaptur

 


THE M3: JULY CHINESE HOME PRICES; 2Q EMPLOYMENT SURVEY

The Macau Metro Monitor, August 18, 2011

 

 

CHINA PROPERTY SLOWDOWN STINGS AGENTS WSJ

Prices of newly built homes in 39 of 70 large and medium-sized Chinese cities covered in a government survey rose MoM in July, down from 44 cities in June.  Prices in Shanghai, Beijing, Shenzhen, Guangzhou and other large cities were flat MoM in July.

 

EMPLOYMENT SURVEY FOR 2ND QUARTER 2011 DSEC

Total labor force was 338,000 in 2Q 2011, comprising of 329,000 employed and 9,000 unemployed.  24.6% of the employed were engaging in Recreational, Cultural, Gaming & Other Services.  Median monthly employment earnings of both the employed (MOP9,600) and the local residents (MOP10,000) held stable relative to 1Q 2011.

 

 

 


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

FL: Trends Into The Print

Channel data supports our above-consensus view on FL. We like NKE better at this point, and Nike’s numbers continue to crush the competition. Adidas and Reebok are holding their own. The smaller guys are flat-out losing.

 

Let’s take a glimpse into channel footwear data in advance of FL’s print.  When all is said and done, we are at $0.17 for FL on a comp assumption of +9.5% for the quarter headed into Thursday’s print, which is ahead of the Street at $0.12 and 8.1%, respectively. Is FL one of our favorite names? Not anymore. But we still believe that those who think that the recent strength is over will miss much of this turnaround story. A name like this that has been (justifiably) out of favor for the better part of 20 years, will show more than just a few quarters of upside as the management team makes up for the sins of old.

 

 

Here are some additional highlights:

 

  • The 1.8% increase in Athletic Specialty sales round out the Fiscal quarter for FL with consolidated Athletic specialty sales up 7.2% for the 3 month period.
  • Although all three channels saw sequential deceleration, Athletic specialty/SG outperformed the Department & National Chain store channel and Shoe Chain channel with sales growing 1.8% vs. (14.8%) and (3.4%) respectively. The gap between athletic specialty and the department stores sales growth actually grew from 15.5 points to 16.6 points in July while the gap between athletic specialty and shoe chain shrunk from an ~11 point difference down to a ~5% spread.
  • While industry ASP growth was essentially flat, ASPs were down 6.4% in the Department store channel and down slightly in the shoe chain channel suggesting increased promotional activity while athletic specialty is closer to full price sell through. While still positive, we’re not particularly thrilled with the trendline ASP for the industry. Let’s keep an eye on that one.
  • Nike continues to post outstanding market share growth. But in fairness, this represents Retail sales – and Nike NEEDS outstanding share gains to fuel its recent futures growth.
  • Puma, New Balance & Skechers saw another month of sales declining year over year; down 28.4%, 11.4% & 49.8% respectively conceding more share to Nike, Brand Jordan, Adidas & Reebok.
  • Reebok continued its growth in sales, ASP & marketshare for the third month in a row with Sales up 49.8% on 8.4% ASP growth to the tune of 170 bps in market share.
  • UnderArmour is still not showing up for practice.

 

FL: Trends Into The Print - chart1

 

FL: Trends Into The Print - chart2

 

FL: Trends Into The Print - chart3

 

FL: Trends Into The Print - chart4

 

FL: Trends Into The Print - chart5

 

FL: Trends Into The Print - chart6

 

FL: Trends Into The Print - chart7

 

FL: Trends Into The Print - chart8

 

FL: Trends Into The Print - chart9

 

FL: Trends Into The Print - chart10

 

FL: Trends Into The Print - chart11

 

FL: Trends Into The Print - chart12

 


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - August 17, 2011

 

As we look at today’s set up for the S&P 500, the range is 35 points or -1.83% downside to 1172 and 1.10% upside to 1207.

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels 818

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: +591 (-1525)  
  • VOLUME: NYSE 972.85 (-14.1%)
  • VIX:  31.58 -3.9% YTD PERFORMANCE: +77.92%
  • SPX PUT/CALL RATIO: 2.23 from 1.41 +58.16%

 

CREDIT/ECONOMIC MARKET LOOK:

 

FIXED INCOME: Yield Spread (UST) continues to compress this morn (10s-2s = 191bps) = explicit signal that US Growth is still slowing.

  • TED SPREAD: 29.27
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.23 from 2.29    
  • YIELD CURVE: 2.09 from 2.17

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30 a.m.: Consumer Price Index (MoM), Jul, est. 0.2%; prior -0.2%
  • 8:30 a.m.: Initial Jobless Claims, Aug 13, est. 400k; prior 295k
  • 9:45 a.m.: Bloomberg Consumer Comfort, Aug 14, prior -49.1
  • 10:00 a.m.: Philadelphia Fed Business Outlook Survey, Aug, est. 2.0, prior 3.2
  • 10:00 a.m.: Existing Home Sales, Jul, est. 4.9m; prior 4.77m
  • 1:00 p.m.: U.S. to auction $12b 5-yr TIPS (reopening)
  • 2:30 p.m.: Fed’s Dudley to tour Jersey City, NJ

 

WHAT TO WATCH:

  • Morgan Stanley cut est. for global growth to 3.9% this year, down from 4.2%, while Deutsche Bank said China’s economy may expand less than 9% in 2011, 2012
  • Rep. Barney Frank, D-Mass., asked Fed to extend examination of Capital One’s acquisition of ING Direct USA, in letter yesterday
  • DOJ investigating whether S&P executives overruled when analysts wanted to give lower ratings on mortgage bonds: NYT
  • Sen. Charles Grassley, R-Iowa, asked SEC to answer allegations agency destroyed files from initial investigations of firms including Goldman Sachs, SAC Capital, Bernard Madoff Investment
  • Coca-Cola plans $4b in new spending in China over next 3 years: WSJ, citing CEO Muhtar Kent
  • Pemex announces results of auctions for contracts to operate three Tabasco oil fields. Watch Schlumberger, Halliburton
  • GE CEO Jeff Immelt speaks at Dartmouth in PM
  • Dept. of Interior, Exxon said to be fighting over significant oil find in Gulf of Mexico which co. says may yield 1b bbl: WSJ
  • Forest Labs hosts annual meeting, with Carl Icahn nominating 4 to the board
  • Target hosts investor meeting, to lay some financial goals beyond this year
  • MGM Resorts founder Kirk Kerkorian said to complete sale of 20m shares yesterday, cutting Tracinda stake to 22% from 27%: WSJ
  • ArcelorMittal, Peabody send bidder’s statement to MacArthur Coal holders today; cos. call takeover offer “compelling”
  • No IPOs expected to price today

 

COMMODITY/GROWTH EXPECTATION

 

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

MOST POPULAR COMMODITY HEADLINES FROM BLOOMBERG:

  • Gold Futures Climb 1.5% to Record $1,819.90 an Ounce in New York
  • Oil Falls in New York on Signs Slowing Economy May Curb Demand
  • Copper Falls as Banks Reduce Global, Chinese Growth Estimates
  • Corn Falls Most in More Than a Week as U.S. Rain May Aid Crops
  • Sugar May Advance as Asia Boosts Purchases, Coffee Declines
  • Gold Demand Falls 17% on Slower ETP Investment, Council Says
  • China Gold Investment Demand Jumps 44% on Rising Inflation
  • Chavez Orders $11 Billion of Gold Home as Metal Hits Record
  • Debt Funds Dumped as Gold Flows Jump 74% in Crisis: India Credit
  •  Oil Refiners Delay Maintenance as Profits Surge: Energy Markets
  • India Monsoon Rain Revival Lifts Rice, Cotton Crop Prospects
  • JPMorgan Said to Move Global Agriculture Head to Singapore
  • Sugar Sales in China Unlikely to Plug Shortfall as Imports Gain
  • U.S. Commodities Day Ahead: Gold Rises Above $1,800 on Slowdown
  • Venezuela Gold Move Shows Foreign-Storage Discomfort, UBS Says
  • British Farmland Values Rise to a Record on Commodity Prices

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • Europe Stocks Drop as Officials Say Fed Shouldn’t Shield Market
  • ECB Daren’t Blink as It Stares Down Bond Yields: Euro Credit
  • Barclays Sees ‘Very Real Competition’ From Chinese Firms
  • Europe Construction Output Falls on Declines in Germany, France
  • Foster’s Says SABMiller $10 Billion Takeover Offer Too Low
  • Denmark’s Regional Banks Dump Assets to Avoid Funding Wall
  • Czech Koruna May Be Next Franc Before Euro QE, Record Plc Says
  • Gilt Yields Drop to Record Low, Pound Slips on Retail Sales Data
  • RTS Futures Fall as Growth Woes Trump Oil Gain: Russia Overnight
  • Swiss Swap Rates Turn Negative on Franc Fight: Chart of the Day
  • Financial Turmoil Adds to Allure of Europe’s Best Properties
  • Maserati Made in Michigan Lets Chrysler Drive Luxury SUV: Cars

THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

  • Biden Meets China’s Xi to Build ‘Personal Relationship’

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

Howard Penney

Managing Director

 

 


SINGAPORE Q2 REVIEW

Peak market growth or seasonality?

 

 

The numbers are in for the Singapore casino gaming market in Q2 and it ain’t pretty.  For a quarter-on-quarter comparison in Q2, Gross Gaming Revenues fell 5.6% to S$1.8BN, (5.4% on a net basis), EBITDA dropped 5.2% to S$855MM, mass revenues slipped 0.3% to S$584MM and VIP Rolling Chip Volume was 0.6% lower to S$31.6BN.  The decelerating growth in Singapore could be a sign of a maturing market or is it seasonality?

 

By contrast, Macau GGR grew 12% sequentially in Q2.  Moreover, Q3 is on pace to grow another 7% on top of Q2.  While Macau and Singapore are two different markets and the opening of Galaxy Macau in mid May did boost growth, we would guess the seasonality profiles of each wouldn’t vary too much.  Given the newness of Singapore, one would expect sequential growth to be even higher than Macau.  Obviously, that is not happening.  We need more quarters to fully assess the seasonality vs peaking growth situation but signs certainly seem to point to a market that has already seen its best growth.

 

Poor hold of 2.8% in the quarter negatively impacted results, especially compared to 1Q11 which held high at 3.3%.  Average hold for the 2 IR’s since 1Q10 has been close to 3%.  If we adjust Q2 hold using the average hold rate of 3%, Q2 GGR would have actually increased QoQ but at a slower rate.  The chart below shows how the Singapore market would have trended on a hold-adjusted basis.  Sequential revenue growth have been falling since 3Q 2010.

 

SINGAPORE Q2 REVIEW - singapore

 

In terms of Q2 market share, MBS, helped by higher hold and higher mix of non-gaming revenues, became the market leader for the 1st time in terms of net gaming revenue.  MBS also wrestled the lead back from RWS in EBITDA and Mass revenue share, and closed the gap with RWS in RC share.

 

No matter how you slice it though, Singapore slowed in Q2 and the outlook for significant further growth, particularly from the Mass market, remains cloudy.  According to Genting, the Mass market is constrained due to an insufficient supply of hotel rooms in Singapore, limited ‘local’ population, and inability to promote gaming to locals.  High hotel occupancy rates in Singapore imply that the market is in fact short of room supply.  From Jan-May 2011, Singapore hotel occupancy averaged 85%, 1% lower than 2010’s occupancy rate.  Therefore, MBS has a clear advantage in that it has twice as many hotel rooms as RWS.

 

It is still uncertain how 3Q will play out as a seasonally slow August - “Ghost” month - will be offset by a strong September, propelled by Formula One Racing and a strong convention calendar.  Nevertheless, we believe growth has peaked in the near-term and wouldn’t be surprised to see unimpressive growth for the rest of the year.  Obviously, the wild card is the licensing of the junkets before year-end, which would boost VIP RC volumes.

 

SINGAPORE Q2 REVIEW - singapore3

 

SINGAPORE Q2 REVIEW - net revenue

 

SINGAPORE Q2 REVIEW - ebitda

 

SINGAPORE Q2 REVIEW - mass

 

SINGAPORE Q2 REVIEW - rc


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

next