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Retail: Get Ready for Q3

 

This morning’s sales reports were choppy as was expected with the concoction of BTS, Irene, and the start of more challenging 2H compares all taking hold. Not surprisingly, with only one month of Q3 now in the books there was little color on any change to internal full-year outlooks, or margins, but the same number of companies beat on the sales line as missed and sales decelerated on both a 1yr and 2yr basis for the second consecutive month. This is not good for one of retail’s most crucial selling seasons and suggests early confirmation of our view that Q3 earnings season is setting up to be the worst in two-years.

 

On the whole, BTS commentary was unremarkable (TGT good, JCP poor) while surprisingly few retailers highlighted Irene among the key reasons for lighter sales (JCP was one of them). That said, most retailers noted anywhere from a 0.5%-3% impact to comps from the storm. Interestingly, TGT noted a positive +0.5% benefit from the storm adding that the shift is likely to impact September by a like amount.

 

Our sense is that many retailers - especially on the discretionary side - are underestimating the percent of sales that are lost forever vs. pushed into September.

 

A few additional callouts in August:

  • High/Low-end performance bifurcation persists. Within department stores,  JWN +6.7%, SKS +6.1%, M +5% outperformed while TJX +1%, SSI -1.7%, KSS -1.9%, JCP -1.7% all underperformed.
  • Discounters continue to be the strongest performing segment of retail. This is likely due to greater grocery exposure, which continues to be a key category. Retailers with exposure there (TGT up mid-teen, COST up LDD, & BJ) all came in well above expectations.
  • JCP was a clear negative callout again. The most notable callout in its report was e-commerce down -8%. The rate of underperformance in this category appears to be accelerating to the downside making it increasingly more difficult to meet top-line expectations. This is hardly a business that should be down for anybody - ever.
  • GPS was another negative callout with both domestic and international business down HSD. International was down 9% - this is supposedly their growth engine?
  • Lastly embedded in LTD’s solid sales report was La Senza (their higher end concept) coming in down -8% reflecting a sharp deceleration at the high end.

Shorts: JCP, JCP, and JCP. HBI, GIL, UA and COH

Longs: WMT, TGT, NKE, LIZ

 

 

Retail: Get Ready for Q3 - SSS Total 8 11

 

Retail: Get Ready for Q3 - SSS 1 yr 8 11

 

Retail: Get Ready for Q3 - SSS 2 yr 8 11

 

 

Casey Flavin

Director

 


WEN CEO SHAKEUP

Wendy’s announced this morning that Roland Smith will be retiring and making way, effective September 12th, for Emil Brolick, COO at Yum Brands.

 

This morning’s announcement has a number of implications for Wendy’s that range from positive to negative with, we believe, more of the former than the latter.

 

Emil Brolick is joining a company with which he is very familiar; from 1988 to 2000, he held a variety of marketing positions at Wendy’s and worked closely with founder Dave Thomas.  He was viewed favorably by the investor community during his time at Wendy’s.  At the time of his departure, the company was performing very well.  From there he joined Taco Bell, where he helped improve sales and profits through new products and remodeling restaurants. 

 

Roland Smith retiring is certainly not a good concurrent indicator of the performance of the company.  The recent news that WEN is suing significant franchisees Lewis Topper and Jeffrey Coughlan and their WendPartners Franchise Group is concerning.  The disagreement seems to be anchored on the purchasing of new equipment key to the rollout of the new burgers (WEN – A SMOOTH TRANSITION FOR THE NEW BURGER, 8/1/2011).   As we wrote on August 1st, the rollout of the new product is crucial to the Wendy’s turnaround story.  Roland Smith leaving does not convince us that Wendy’s is on the precipice of a turnaround, nor does it convince us that the relationship with the franchise-base is as good as it needs to be during this phase.

 

A month ago, our takeaway was that we view the stock favorably over the longer term but see the turnaround taking longer than expected, leading us to take a negative view over the near term.  While the company’s most formidable competitor, MCD, marches on with its own remodel program, a change in CEO is only going to further push out the timetable for the WEN turnaround.  While the transition should be smooth, given Mr. Brolick’s familiarity with the company, he will likely examine the initiatives that are being pushed through and make adjustments where necessary.  In our view, he is likely to let some initiatives, like the new food items, proceed as planned but may cast a more critical eye on other plans that have been more cumbersome, like the remodel program. 

 

Over the longer term, we believe that Mr. Brolick joining Wendy’s will be a positive for the company given his proven track record at the company, his understanding of the company’s core principles, and the probability that his tenure will likely serve as an opportunity for the relationship with franchisees to be improved. 

 

The stock faces several headwinds at present, such as high beef prices, and we believe that near-term guidance could come down.  Ultimately, Roland Smith’s departure signals that business at Wendy’s has not been strong but perhaps the most expedient path to achieving the turnaround is via new leadership.

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 

 


JOBLESS CLAIMS REMAIN ABOVE CRITICAL LEVEL

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Initial Claims Drop 8k (9k after revision)

Initial jobless claims fell 8k (9k net of last week's revision) to 409k.  Last week, the Department of Labor noted that at least 8,500 claims were due to the Verizon strike, so this week's claims are flat WoW excluding the VZ contribution.  Our analysis has shown that a level of 375-400k is necessary to move unemployment lower, so today's print represents yet another week of the labor market treading water.

 

We have been noting for several weeks that jobless claims and the S&P - which usually track closely together - have diverged recently.  If all the mean reversion comes from claims moving higher, that implies a coming claims level of 450-475. 

 

Challenger announced job cuts for August were released yesterday.  The level fell to 51k from 66k in July.  On a YoY basis, August is 47% higher than last year, compared to +60% YoY in July. 

 

JOBLESS CLAIMS REMAIN ABOVE CRITICAL LEVEL - rolling

 

JOBLESS CLAIMS REMAIN ABOVE CRITICAL LEVEL - raw

 

JOBLESS CLAIMS REMAIN ABOVE CRITICAL LEVEL - claims   sp2

 

JOBLESS CLAIMS REMAIN ABOVE CRITICAL LEVEL - fed and claims

 

JOBLESS CLAIMS REMAIN ABOVE CRITICAL LEVEL - challenger

 

JOBLESS CLAIMS REMAIN ABOVE CRITICAL LEVEL - challenger YoY

 

2-10 Spread Remains Under Pressure

The 2-10 spread hit a level of 2.02 yesterday and is currently running at an average level of 2.30 for the quarter.  This is dramatically tighter than 2Q, which saw an average level of 2.64.  

 

JOBLESS CLAIMS REMAIN ABOVE CRITICAL LEVEL - spreads

 

JOBLESS CLAIMS REMAIN ABOVE CRITICAL LEVEL - spreads QoQ

 

Subsector Performance

The chart below shows the performance of financial stocks by subsector.

 

JOBLESS CLAIMS REMAIN ABOVE CRITICAL LEVEL - perf

 

 

Joshua Steiner, CFA

 

 

 

Allison Kaptur

 

 

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THE HBM: COSI, WEN, SONC, BKC

Notable macro data points, news items, and price action pertaining to the restaurant space.

 

MACRO

 

Consumer

 

Initial jobless claims came in at 409,000 for the week ended 8/27, a decrease of 12,000 from the week prior at 421,000 (revised).  The four-week rolling average ticked up by 1,750 to 410,250, as the chart below illustrates.

 

THE HBM: COSI, WEN, SONC, BKC - initial claims

 

 

Costs

 

Farm product prices received by farmers rose 1.1% in August. The increase in the overall index is driven by strength in crop and livestock prices; the overall index is 29% higher than a year ago.  The recent flood/drought inflicted damages to domestic crop ensure food price inflation will continue well into 2012.

 

 

Subsectors

 

Food retailers have taken the lantern of performance.   Food processors continue to perform sluggishly.

 

THE HBM: COSI, WEN, SONC, BKC - subsectors fbr

 

 

QUICK SERVICE

 

COSI CEO James Hyatt is leaving “for personal reasons”. 

 

WEN CEO Roland Smith is stepping down from his role as President and CEO but will serve as a Senior Advisor to the Company during a transition period with newly announced President and CEO Emil Brolick (effective 9/12).

 

WEN’s new burgers are being rolled out.  A post on grubgrade.com describes two new choices of the D.T. Double.  In addition to “The Original”, the newcomers are the “Spicy Chipotle” and the “Garlic Steakhouse”.  The Original D.T Double has American cheese and a “signature sauce”.  The Spicy Chipotle D.T. Double includes pepper jack cheese and fiery chipotle sauce.  The Garlic Steakhouse D.T. Double has Monterey Jack cheese and garlic aioli sauce.  These double cheeseburgers are all priced at $2.99.

 

THE HBM: COSI, WEN, SONC, BKC - WEN DT



SONC continues to underperform on multiple durations and did so yesterday on higher volume studies.  I’m not a believer that hot dogs are going to keep momentum going for ever - but the company continues to introduce new products.  Sonic is adding on to its 100% all-beef hot dog line again this fall, introducing two new hot dogs in the form of the Bacon & Blue Dog and the Kickin’ Coney. Here’s a little more information:  Bacon and Blue Dog: It’s a hot dog made with 100% pure beef, covered in crisp bacon, fresh lettuce, ripe tomato and blue cheese dressing on a poppy seed bun (450 Calories, 27 grams fat, 9 grams sat. fat, 17 grams protein.)  Kickin’ Coney: A hot dog made with 100% pure beef and topped with chili, cheddar cheese, crispy onions and chipotle BBQ sauce (480 calories, 27 grams fat, 11 grams sat fat, 19 grams protein)

 

THE HBM: COSI, WEN, SONC, BKC - SONC CONEYS

 

 

BKC has brought to the U.S. the multi-person meal platform it has been offering in Australia. Coupons distributed nationally this week include one for a $6.99 Meal for Two combo and another for a $9.99 Family Bundlecombo.  

 

THE HBM: COSI, WEN, SONC, BKC - BKC BUNDLE

 

 

CASUAL DINING

 

New Bennigan’s Franchising Co. chief executive Paul Mangiamele says he’s upbeat on the 80-unit chain’s performance after a successful reboot this summer at Bennigan’s corporate restaurant in Chicago.  Same-store sales increases at the flagship unit are running in the low double digits, said Mangiamele, who took over as chief executive in May. Same-store sales for the rest of the system are in the low single digits. – NRN

 

THE HBM: COSI, WEN, SONC, BKC - BENNIGANS

 

THE HBM: COSI, WEN, SONC, BKC - stocks 91

 

 

Howard Penney

Managing Director

           

 

Rory Green

Analyst

 

 

 

 

 

 

 

 

 


THE M3: AUGUST GGR; WEN JIABAO

The Macau Metro Monitor, September 1, 2011

 

 

MONTHLY GROSS REVENUE FROM GAMES OF FORTUNE DICJ

A new monthly Macau GGR record.  August GGR came in at 24.769 MOP BN (24.048 HKD BN, 3.084 USD BN), up 57% YoY.  This is also the highest YoY growth rate to date in 2011.

 

WEN JIABAO: CURBING INFLATION IS PRIORITY Macau Daily Times

According to China National Radio, Chinese Premier Wen Jiabao said, "Currently, our country’s economic development is still facing a very complicated domestic and external environment that is unstable and fraught with many uncertain elements... but stabilizing overall price levels remains the priority task of our macroeconomic controls [and] will not change."  Wen remarked that while policymakers have admitted that the official annual inflation target of 4% is unlikely to be met in 2011, China’s economic fundamentals remained strong and could continue to grow at a fast pace.

 

 

 


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - September 1, 2011

 

After global equities got pulverized in August and we got another low-volume month end rally out of the way, we’re back to Global Macro fundamentals driving markets this morning. 

 

GLOBAL GROWTH – what’s scariest about Germany’s crash is that its economy is in much better shape than most of the majors (including the USA); while it’s nice to see everyone in the US claiming to have nailed calling all bottoms in August, that doesn’t change the fact that Q2 US GDP was revised down another -31% in the last month to 0.98% (Germany’s Q2 was +2.8%)

 

As we look at today’s set up for the S&P 500, the range is 31 points or -1.30% downside to 1203 and 1.24% upside to 1234.

 

US Equities should be fine as long as 1203 holds (SP500). If/when it doesn’t, I guess they’ll call that risk “on” (its always on) … until the media begs for the next Keynesian experiment (Obama delayed his bag of goodies to next Thursday).

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels 91

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: +901 (+139)  
  • VOLUME: NYSE 1265.13 (+24.13%)
  • VIX:  31.62 -3.86% YTD PERFORMANCE: +78.14%
  • SPX PUT/CALL RATIO: 1.40 from 1.84 +23.60%

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 31.71
  • 3-MONTH T-BILL YIELD: 0.02% +0.01%
  • 10-Year: 2.22 from 2.19    
  • YIELD CURVE: 2.03 from 1.99

MACRO DATA POINTS (Bloomberg Estimates):

  • U.S. auto sales may have failed to rebound in August, running at a 12.1m rate, analysts est., down from 12.5m rate in 1H 2011
  • August retail sales were likely curtailed after Hurricane Irene pushed back-to-school purchases into September. Retail Metrics index est. up 5% vs 3.6% Y/y
  • President Obama agreed to move his speech on economy, jobs to Sept. 8 after House Speaker Boehner protested; note NFL season opener at 8:30 p.m. that day
  • Competitors will not unequivocally benefit if Justice prevents AT&T's takeover of T-Mobile USA - WSJ

 

WHAT TO WATCH:

  • 8:30 a.m.: Net export sales, commods
  • 8:30 a.m.: Jobless claims, est. 410k, prior 417k
  • 9:45 a.m.: Bloomberg consumer comfort, prior (-47.0)
  • 10 a.m.: Construction spending, est. 0.2%, prior 0.2%
  • 10 a.m.: ISM Manufacturing, est. 48.5, est. 50.9
  • 10:30 a.m.: EIA Natural Gas
  • Noon: Fed’s Duke speaks at Fed conference in Washington

COMMODITY/GROWTH EXPECTATION

 

COPPER – after Charlie Evans vowed to debauch the US Dollar, most things inflation ripped for a few days, including Copper – but the ole Doctor failed at its TREND line (4.21/lb) this morn and leads commodities on the downside (-1.4%).

 

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

MOST POPULAR COMMODITY HEADLINES FROM BLOOMBERG:

  • Silver Poised for ‘Golden Cross’ Rise to $50: Technical Analysis
  • Baltic Container Jump Dulls Hamburg’s Euro Pain: Freight Markets
  • Copper Drops for First Day in Seven on China Growth Concern
  • Gold Drops for Second Day as Equities Rally Amid Fed Speculation
  • Glencore Proposes $1.2 Billion Takeover of Optimum Coal
  • Oil Advances on Manufacturing Reports; Cushing Supplies Decline
  • Carnivores Will Choose Cheap Pork Over Beef: Chart of the Day
  • Barclays Declines to Comment on Report of Warehouse Purchase
  • Cheap Gas Joins EPA to Prompt Switch From Coal: Energy Markets
  • Aluminum Fee to Japan Cut as Slowing Recovery Curbs Demand
  • Crude Declines in New York on Signs of Slowing Recovery in U.S.
  • Corn, Wheat Drop on Speculation Demand for U.S. Crops May Slow
  • U.S. Mint American Eagle Gold Coin Sales Are Most Since January
  • OPEC Output Climbs to Highest Level Since 2008, Survey Shows
  • China Appeals WTO Ruling on Raw Material Export Controls
  • Joy Global Sees ‘Strong’ Metals, Coal Demand Led by China, India

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • EUROPE: just a bloody mess; Germany leads to the downside this morn, down -2% (down -19% in AUG) and down -24.7% since May as PMI data falls
  • GREECE: which the manic media was celebrating as rescue me 4 days ago has since dropped 11% in a straight line - long live the Fiat Fools
  • EuroZone Aug final Manufacturing PMI 49.0 vs preliminary 49.7 and prior 50.4

THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

  • ASIA: mixed again overnight with China down -0.44% and Philippines up +0.42%; Korea's KOSPI remains bearish/broken as Tech orders..  NVLS told us this last night.

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

Howard Penney

Managing Director


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