Charting Why They'll Cut Again Tomorrow: UK Industrial Production

The winner of this morning's worst economic report goes once again to our British friends. Industrial Production growth for the month of September showed another y/y decline of -2.2% (see chart). While this is 10 basis points better than august, it remains bad... bad enough for the Bank of England to start cutting interest rates more aggressively.



We have collected some trench data from the current the promotion of the Jr. Bacon Cheeseburger, Crispy Chicken sandwich and the Doublestack, all for $.99. Operators were asked to comment on the impacted to their restaurant. A complete assessment from on sales, food cost, labor, service, etc and what has changed, if anything, since the end of the promotion.

Two key themes emerge from the survey……..

  • It helped drive same-store sales........

  • But not profitability…..

The value trio promotion had the following effect on my overall sales:
The value trio promotion improved the profitability of my restaurant:

Eye On Pragmatism: China (FXI) and Taiwan (EWT)

Political relations between the two nations are still frozen, but could thaw. Meanwhile trade is red hot!

Agreements signed in Taiwan by representatives of the Chinese Government controlled Association for Relations Across the Taiwan Straits (ARATS) and the Taiwan-based Straits Exchange Foundation (SEF) have been greeted in the press as a historic breakthrough between the two nations. This comes after 60 years of hostility and a decade after the last attempted trade talks were abandoned.

The Chinese government still officially regards Taiwan as its sovereign territory and the specter of escalating hostilities between the mainland and the island republic have remain a continuing threat to Asian security.

The new agreements open the door for more efficient trade through direct shipping and postal service as well as increased cooperation on tourism. These are regarded as first step towards closer economic ties.

A simple run through the math suggests that this economic summit is a recognition of a “New Reality” (our 2009 Investment Theme) that has emerged over the past decade. Data released by the Taiwanese government shows that the mainland market already accounted for over 25% of total exports prior to the slowdown despite the lack of direct shipping routes. As Taiwan becomes increasingly dependent on Chinese demand, and as China becomes increasingly pragmatic in its embrace of free trade, this type of corporation is, in the near term, in interest of each.

There is no suggestion that this meeting necessarily heralds a diplomatic breakthrough. During the visit Chinese representatives are expected to not only refer to the Taiwanese president as only “Mr.”, but to avoid even mentioning the name of the country itself. The Taiwanese government is still spending billions on US missiles and fighter planes and the Chinese government is still committed to securing the submission of its rogue province –they have merely made the pragmatic decision to seek mutually beneficial economic policies in the meantime.

What could be more capitalistic than that?

Andrew Barber

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October Sales Preview - Updating the Macro View of the Consumer

Retailers are scheduled to report their October comparable sales numbers on Thursday. As we are anticipating less than pretty results from most retailers, we thought this would be a good time to take another look at the state of the consumer over the last 2 years. In early October, we analyzed the changing state of the consumer over the last 40-plus years (please refer to Brian McGough’s two posts dated October 12 for more details). Specifically, we wanted to see how consumers were faring in the year-ago period to gauge what type of consumer environment retailers are comparing against in their upcoming reported October results.

Since January 2007, personal consumption expenditures hit their YOY peak in growth in November 2007 and have since grown at a moderated to declining rate. Nondurable goods spending has helped to support total PCE growth as gasoline, fuel oil and other energy spending picked up in September 2007 and began to really accelerate in October followed by four months of 30%-plus YOY increases. Energy spending continued to grow at double-digit rates since that period through July as gasoline prices hit historical highs.

At the same time energy costs took a larger share of wallet, consumers were hit with overall inflationary pressures as CPI reflected these higher energy costs and began its steady YOY increase in August 2007. The unemployment rate, which has been on an upward trend since January 2007, also began to increase at a more significant pace during this October to November 2007 timeframe. Not surprising, disposable personal income growth decelerated in October as well as it coincided with the uptick in unemployment rates. Since then, disposable income growth has continued to moderate until it turned relatively flat in March 2008. The government’s rebate checks helped to boost numbers in May (also provided a lift to May, June, July retail sales numbers), but this government intervention only provided a short-term fix and disposable income growth has since abated. So needless to say, consumers were already under pressure in the year-ago October period. These pressures, however, were only beginning to emerge, albeit at a fairly rapid pace, so it is safe to assume that consumers had not fully realized the severity of the issues.

As we think about October 2008 retail sales, consumer confidence has waned on a YOY basis, unemployment rates have worsened and disposable personal incomes have deteriorated further. The consumer has gotten some relief in recent months as it relates to gasoline prices and overall inflationary pressures, but as I said earlier, we are anticipating another month of toxic results and as Brian McGough stated on October 12, discretionary spending could finally turn negative in 1Q09 and be down about $170 billion in FY09.


I believe Ted Chan will be named the new Chief Executive of Crown Macau, replacing Keith Heise who may have been fired. This appointment would make sense as Amax Entertainment announced on Monday that Mr. Chan resigned to pursue another Macau opportunity.

Amax owns 80% of AMA, which is currently the sole junket aggregator for Crown Macau. The arrival of Mr. Chan would appear to be fairly seamless and confirm Crown’s position as primarily a VIP property. I’m not sure what this means for the AMA/Crown relationship. We had been hearing that it was somewhat strained already.

The management change was probably driven by what we expect was an awful Q3 at Crown, both on the volume and hold side. MPEL will announce Q3 earnings later this month and investors shouldn’t be surprised when it is not pretty.

RL: Quick Take

Execution, execution, execution… Numbers are heading higher – as is the stock. Still one of my favorites.

Clean beat. $1.58 vs. my $1.36 and the Street at $1.24. If there’s one thing I need to see, it is that sales were +10% and inventories were -3%. Cash flow algorithm looks solid: sales +10%, gross profit +13%, EBIT +26%, capex was down 40%, and stock repo accelerated by 3x sequentially.

In typical RL fashion, the company threw out a cautionary flag to keep estimates in check. I’d be intellectually dishonest if I called it a complete sandbag. The fact is that things simply are not good out there. But as I’ve noted over the past few days, and months, this company has more levers to pull than any other in the space. It probably does itself no justice by taking up numbers right now. I’m inclined to go towards $4.35 for the year unless I hear compelling evidence on the call to suggest otherwise.

Check out our margin walk from 2 days ago showing the detailed puts and takes in this model.