prev

Retail: Shifting Into The Danger Zone

 

(Note: This post includes the industry SIGMA, which was not included previously - otherwise unchanged)

 

With the Q2 Retail earnings season now in the books, let’s revisit the industry’s financial health. Following our mid-earnings update, the 2H shaped up considerably different than the first. Results started off good overall and remained that way through the quarter. The notable change however, was the positive turn in sales/inventory trajectory.

 

After starting the quarter down -25% reflecting continued deterioration, the industry finished with a sales/inventory spread down only -11% marking the first quarter in the last five to show sequential improvement. The delta was driven primarily by footwear and sporting goods retailers (FL, FINL, DKS, HIBB, DSW, GCO) as well as a few notable apparel companies (GES, LTD, and ANF) that posted a positive sales/inventory spread reflecting cleaner inventory levels in the athletic channel relative to the industry more so than stronger top-line growth.

 

This doesn’t change the fact that the consolidated SIGMA for the apparel/footwear supply chain remains squarely in the lower left quadrant with inventory growth outpacing sales growth and margins contracting. To some extent, it’s 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 have realized close to 10% higher prices. Coupled with a sharp decline in cotton prices, we think there’s a high likelihood of a false sense of security across the industry that will compel companies to order up for next season – not good.

 

Shorts: JCP, UA, HBI, SHLD

Longs: LIZ, NKE, RL, TGT

 

Retail: Shifting Into The Danger Zone - Ind SIGMA Q2 9 11

 

The sales trajectory setup for the space is unchanged, Q1 through Q3 of last year grew steadily between 8-10%, but then in the three quarters since, we have seen a definite step-up. While the yy change has only been by roughly 200bps, the underlying 2-Yr trend has increased from sub 2% to 4% in Q3 last year before jumping up to 9-11% over each of the last three quarters. This would be less concerning if inventories were tight and margin compares easy, but that’s not the case.

 

Retail: Shifting Into The Danger Zone - Ind SIGMA PODs 9 11

 

Not surprisingly, with sales slowing and margins tightening, we’ve seen the industry shift from the top-left quadrant where 52% of the industry was this time last year (sales/inv spread positive margins expanding), to the lower left quadrant otherwise referred to as the “Danger Zone” where 37% of the industry players we track are now (negative sales/inv spread margins contracting). This move has still not been fully reflected in the stocks leaving an notable overhang on the industry. In addition, with Q3 earning season setting up to be the worst in worst in 2-years, we see further downside near-term for retail stocks. We’ll get the latest read on this reality when retailers report September sales tomorrow.

 

Retail: Shifting Into The Danger Zone - Ind Sig Quads Q2 9 11

 

 


Occupy Hedgeye: SP500 Levels, Refreshed

POSITION: Long Utilities (XLU)

 

Keith is on the road today in beautiful Kansas City, but, as always, the global macro grind goes on back at Hedgeye Headquarters in New Haven, CT.  The short covering opportunity we called for yesterday is further manifesting itself today with the SP500 up +0.8% to 1,129.  Our “Trade the Range” mantra continues, as we are seeing higher-lows of immediate-term TRADE support and lower-highs of intermediate-term TREND resistance. The current TRADE range is 1,093 to 1,139.

 

In the last couple of days, the global macro news has been better than bad, but we should be clear, our fundamental concerns have not changed. In that vein, an interesting new negative catalyst that is emerging is the “Occupy Wall Street” protests.  The most recent rumor suggests that group may attempt to erase the NYSE from the internet on October 10th.  We aren’t exactly sure what that means, but it is potentially a leading indicator for this group to disrupt financial markets, or at least attempt to do so.

 

Aside from the opportunity to cover shorts, make no mistake about it though, the SP500 remains broken on both a TREND and TAIL basis with those resistance lines up at 1,237 and 1,266, respectively.  In fact, according to some recent analysis from Ned Davis:

 

“The average bear since 1900 has lasted 410 days and seen a decline in the major averages of -31.5%. So far, the 2011 version has lasted 158 days and the decline just under -20%. To reach the average, the DJIA would have to fall to 8,775.”

 

It is unlikely this bear is done growling.  Trade the range.

 

Daryl G. Jones

Director of Research

 

Occupy Hedgeye: SP500 Levels, Refreshed - SPX


MAR YOUTUBE

In preparation for MAR's 3Q earnings release tonight, we’ve put together pertinent forward looking company commentary from its 2Q earnings call.

 

 

2Q YOUTUBE

  • “Transient business is back in a big way. The 2011 transient occupancy rate for the Marriott brand increased 3.5% points, reaching 2007 peak transient occupancy levels this quarter"
  • [Internationally] “We opened over 32,000 rooms in the last 12 months, roughly a 4.5% net unit growth rate”
  • “Our development pipeline increased to more than 100,000 rooms with nearly 40% of our rooms in the full-service pipeline in China and India”
  • “YTD, we have returned over $700mm in share repurchases and dividends to shareholders, and we remain committed to do more”
  • Timeshare sales and services net was about $0.02 lower than expected, largely due to reportability. We expect about half of this shortfall will turn around later this year and the remainder next year.”
  • “G&A was about $0.02 better than expected due to several non-routine items including reversal of an earlier loan loss provision… largely due to $5mm reversal of a loan loss provision and lower than expected workout costs which we now believe will occur later in the year"
  • “Approximately 5% of our domestic system-wide rooms are located in the Greater Washington, D.C. market, considerably higher than the industry’s concentration. In 2010, approximately 6% of our worldwide fee revenue came from this market and 13% of our incentive fee.”
  • “Across North America, second quarter Group REVPAR at the Marriott brand increased 2% YoY”
  • “Group bookings made in Q2 for later in 2011 increased 18% and long-term group bookings are returning. In Q2, we booked business for 2012 that was 19% higher than the prior year and booked business for 2013 that was 13% higher… Nearly a quarter of the group business booked in our second quarter were for the years 2014 and beyond”
  • “With good cost controls, we expect domestic house profit margins to increase 100 to 125bps and international margins to increase roughly 150BPS for the full year and that’s excluding the impact of the Middle East and Japan”
  • “Incentive fee growth YoY was constrained by modestly lower incentive fees in the DC market and declines in incentive fees at hotels in the Middle East.”
  • “Our owned and leased profits declined $2mm due to lower hotel termination fees YoY and lower results at our leased hotels in Tokyo”
  • “Timeshare sales and services net declined due to lower interest income and to a lesser extent, higher product costs.  Compared to our expectations, lower timeshare sales and services net reflected higher sales and marketing costs as well as delays in revenue recognition associated with certain special promotions”
  • “Our international REVPAR growth, even excluding the Middle East, is likely to slow a bit in Q3 from Q2 pace. The 2010 World Expo will be a tough comp for our Shanghai hotels later this year.  REVPAR growth in Europe is expected to moderate in H2 due to the timing of this year’s fairs in Germany as well as tougher comparables.”
  • Guidance:
    • Q3 International system-wide REVPAR: 6% to 8% (ex Middle East and Japan)
    • FY11 International system-wide REVPAR: 7% to 9% (ex Middle East and Japan)
    • Q3 NA system-wide REVPAR: 5% to 7% due to a higher leisure mix
    • FY11 NA system-wide REVPAR: 6% to 8%
    • 3Q Timeshare contract sales: slightly up YoY
    • 3Q Timeshare segment results: $25-30MM
    • FY11 Timeshare contract sales: slightly down YoY
    • FY11 Timeshare segment results: $140-150MM
    • FY11 Timeshare sales and services revenue, net: $205-$215MM
    • FY11 G&A expense: +6% to 8% over adjusted levels in the prior year (which includes $5MM in transaction costs) 
    • FY11 EPS: +17% to 24%
    • FY11: EBITDA will climb 9% to 13% compared to last year’s adjusted amount
    • FY11: $500-$700MM of investment spend; including $50-100MM of maintenance spend
  • “We expect to remain aggressive given our recent stock price and substantial investment capacity”
  • [Timeshare Spinoff] “We also believe we can generate cash flow over time from the sale of excess assets including some very attractive beachfront real estate.  We expect to generate meaningful amounts of FCF for the foreseeable future. As our inventory declines over time, we intend to pursue asset light expansion opportunities. We also expect to be able to develop new resorts, buy distressed inventory, or enter into turnkey projects with third-party developers”
  • “Cash tax benefits to be several hundred million dollars; and just to clarify, that’s cash taxes. We’ve benefited those over the years. But this is inherently triggering those taxes as part of the spin. And a good portion of those will be recognized currently or be benefited currently at the date of the spin with the rest carried forward over the next several years”
  • [Japan]:”We’re seeing occupancy build, but we expect that even in Q4, we will be on average 20% to 30% REVPAR down from Q4 2010.”
  • “That wholesale business is not likely to come back with significance until there has been sustained stability in that market. We haven’t seen that yet and so we would both expect in the guidance that we’ve given and as a predictive matter that Egypt is probably a 12 to 18 month recovery story.”
  • “Jordan is not as bad as Egypt and in many respects is more stable. But generally, I think implicit in our guidance is a pretty slow recovery for the region as a whole”
  • “If anything, we’ve been very heartened by the strength of leisure business. Now, let’s back up and state the obvious: leisure travel is more price-sensitive than business travel. Notwithstanding that, I think most of the leisure business which is driven in our hotels is probably coming out of the higher wealth demographic. As a consequence, the persistent high unemployment, the weakness in the construction trades and the like is probably less relevant currently to what we’re seeing in leisure demand. But leisure demand is going to be more influenced by pricing and by consumer sentiment and those sorts of things. And as a consequence, we see it to be a little bit weaker but still pretty healthy on a y-over-y basis and are quite gratified by what we’ve seen so far.”
  • [Group bookings in] “Q2 were up anywhere from roughly 15% to roughly 20% depending on whether you’re looking at bookings for Q3 or Q4 or 2012 or 2013”
  • “Our incentive fee…increased without the DC, Middle East or Japan.  Incentive fees would have been up almost 22% in Q2. So you could see the effect that that had on percentage that we ended up reporting at 9%.”
  • “$30mm to $35mm is the total fees out of the Middle East last year.”
  • “Marriott brand is bigger than most of the full service brands. So we tend to have more suburban hotels; we’re probably going to tend to have more secondary market hotels. I know among our markets where we have disproportionate market share, we’ve got Detroit, we’ve got Atlanta, and we’ve got Washington DC.”

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.

G2E: WMS COMMENTS

Here are some tidbits from our WMS meeting at G2E


  • Aladdin: people love the movement of the seat but the game was toned down a bit as it got too complicated. 
  • Wizard of Oz was just turned on at Planet Hollywood as a community game.  This Wide Area Progressive game has a wheel.
  • Clue: WMS simplified the game with 2 screens, which is very similar to Lord of the Rings.  It is close to being commercialized.
  • Battleship: WMS had its first install.  Reusing Price is Right signage. It is a WAP and Portal product.
  • WMS's bread and butter for sale products are G+ and G+ deluxe, and Super multi-pay products.
  • Royal Series: first for sale bank/progressive product.  It is very volatile.
  • Awesome Reels: 6 by 4 video slot
  • Baron von Bacon: A Goldfish math wheel game with a time device
  • Lord of the Rings: 3 reels with reel and video options.  WMS is doing that option for almost all their products.
  • Price Is Right: Game is simplified with just one PLINKO feature.
  • Monster Jackpots, Gone with the Wind, LIFE are big event games with a wheel.  Initial approvals are anticipated in the June 2012 quarter.
  • Poker on Bluebird xD: Multi-game model. It is very easy to play with personalization features- screen color, volume, R or L handed, save settings to mypoker account, and speed.  Users can also play at home for fun and win trophies/leaderboard.  Poker offering is one year away from commercialization.  WMS can roll out casino integration sooner than rolling out the games.
  • New cabinet with a different field of vision: No name yet and the timing is far out.
  • New community game with a cinema-like experience. It's basically a slant top box with a 120-inch display where when you enter the bonus round, there is a perceived skill element by using a joystick (similar to Wii). 

ECB and BOE likely on Hold

Positions in Europe: Short Italy (EWI)


It appears more likely that the ECB may keep interest rates on hold when it meets tomorrow (and likely choose to cut later into year-end) given the preliminary September CPI report that jumped 50bps to 3.0% year-over-year. Equally, we expect the BOE to be on hold, a position it has maintained since March 2009 despite pressing inflation—and here we’ll reiterate that policy makers are in a box with the country stuck squarely in stagflation with little room to cut interest rates to spur growth (see chart below).  We’d fade any commentary from Cameron & Co. that the economy is running in a positive direction. And today’s Final Q2 GDP report in which Q/Q was revised down 10bps to 0.1% won’t help sentiment!

 

ECB and BOE likely on Hold - 1. BOE

 

Tomorrow marks an important meeting for the ECB as it is President Trichet’s last meeting before Mario Draghi takes over on November 1.  As we’ve written about in the last months, the ECB is in the unfavorable position of being the one institution that may need to significantly contribute to Europe’s sovereign debt and banking “bazooka” bailout, while the Bank’s mandate and position (at least until now) remains to shy away from all things related to fiscal policy [short of the SMP] and focus solely on its mandate of price stability. If the last months have proven anything, it’s that there are flaws in this system, or at least to the extent that one monetary policy can govern uneven economies, especially in a slow to negative growth environment. Yet don't discount the resolve of policy makers to continue to attach fiscal "band-aids" to the Union's imbalances.

 

In any case, we’d expect to see the ECB cut its main rate of 1.50% sometime into year end, but wouldn’t be surprised if it didn’t come tomorrow.  The high frequency data we follow continues to trend lower as inflation remains above the Bank’s 2% target, but within a range that should come in over the coming months. Reflecting slower growth, today we received PMI Services data across the major economies. The SEPT data shows a marked slowdown month-over-month, with the Eurozone, Germany, Italy and Spain all below the 50 line, which signals contraction.

 

ECB and BOE likely on Hold - 1. Services

 

Germany, in particular, continues to remain THE country carrying the biggest stick when it comes to voicing the direction of Europe’s sovereign debt and banking contagion crisis, which may continue to take pressure off the ECB  to not only act on monetary policy, but fiscal policy as well.  However, it’s equally clear that neither Chancellor Merkel nor Brussels have any clear idea about how to get out of this mess. Yesterday the market in the US rallied on a late-session article from the FT that said EU officials are examining ways of coordinating recapitalizations of banks and agreed that additional measures are urgently needed. This news is also clearly boosting European equities today, yet again we’d warn that that such “news” will provide at best a short term rally.

 

Below we’ll leave you with some recent quotes from Chancellor Merkel as it relates to the sovereign debt and banking crisis in Europe. What stands out is that Merkel sounds increasingly of the opinion that performing wall sits to save the Union over the longer duration benefits both Germany and the Union. 

 

Merkel reaffirms anti-Eurobonds stance: issuance of shared debt by euro countries isn’t the solution to the problem spilling from Greece, even though some may long for the “big bang” to end the debt crisis… “Whoever believes that has no clue about the economy.”

 

Merkel on Default: A Greek default would have unpredictable consequences, lead to speculative attacks on other highly indebted euro countries and risk sending German economic growth into reverse. Letting Greece default would trigger “a gigantic loss of confidence” in euro-area sovereign bonds…”

 

“No one can say with certainty” what would happen if Greece defaults…. Before I make a nifty step into an adventure, I have to ask whether we can really handle this and can we oversee what we are doing?”

 

“Solidarity is always cheaper than if we were to go it alone and wind up with the problem Switzerland has -- that the currency level is so high that you can’t export any products anymore. Today, going it alone is no path to a better future.”

 

---------------

Going into tomorrow’s meeting we see a bearish immediate term TRADE range in the EUR-USD of $1.31-1.34. The pair remains broken on an intermediate term TREND duration. 

 

 

Matthew Hedrick

Senior Analyst


MPEL: COULD THE SHAREHOLDER MEETING BE A CATALYST?

MPEL’s special shareholder meeting tonight could provide some long overdue clarity.

 

 

MPEL’s stock has been hammered – absolutely hammered.  While all the Macau stocks have been crushed as investors replay 2008 in their heads, MPEL has underperformed even this pitiful collection of stocks.  Despite all the rumors and storytelling, the fact is that investors fear that a slowing China economy and tighter credit will pressure junket volumes similar to 2008 and that is the reason these stocks are down.

 

For Q3, MPEL fell 35% but that was concentrated in September when the stock fell 36%.  By comparison, the US operators with casinos in Macau fell an average of 23% and 24% in Q3 and September, respectively, while the Hong Kong listed Macau stocks dropped 30% and 41%.  In October, MPEL is down again, -4%, but this pales in comparison to the HK listed stocks which are down 19% already this month.

 

MPEL: COULD THE SHAREHOLDER MEETING BE A CATALYST? - mpel1

 

MPEL now trades at around 5x 2012 EV/EBITDA which seems ridiculous.  Investors clearly don’t believe that current Macau run rate revenues are sustainable but that doesn’t explain the relative valuation discount.  So why so cheap?

  • It’s MPEL, the gang that couldn’t shoot straight – 4 straight quarters of outstanding results apparently cannot overcome dreadful performance following the IPO in 2006.
  • Despite the US listing, MPEL is considered an Asian stock and US investors implicitly trust the US operators more.  As shown above, the HK stocks have underperformed, sometimes even more so than MPEL.  Similar among the HK stocks, public shareholders have little control over the entity given the concentrated ownership – for MPEL, Melco and Crown control almost 70% of the stock.
  • Shareholder dilution – as one of my smart clients has asked “do these guys really want to be known as serial diluters?” More on this later.
  • Recent performance is not sustainable – What?  MPEL has consistently grown market share and margins since the management change in the middle of 2010.  And they aren’t necessarily buying the business as EBITDA has grown faster than revenues and the company has beaten bottom line expectations (hold adjusted) for 4 straight quarters.

So what could be a catalyst to turn this thing around?  First, a rate cut or some other macro measure by the Chinese government to show it is focused on ensuring a soft landing would help all the Macau stocks.  For MPEL in particular, we are pretty sure they will beat the quarter, potentially beating Q3 EBITDA estimates by 40%.

 

Most immediate, MPEL will hold a special shareholder meeting tonight to discuss and vote on a listing on the Hong Kong exchange and a stock buyback.  Investors rightly fear a big dilutive equity raise.  This seems to be priced into the stock.  We are hard pressed to believe that MPEL would do a straight equity raise at 5x EV/EBITDA.  With cash trapped at the parent due to restrictions from the $600 million senior notes, MPEL eventually needs to raise cash or pay off the notes.  We opt for the latter, of course.

 

So the options for MPEL are as follows:

  • A big equity raise $250-300 million – probably in the stock already
  • Cancelling the HK listing – would be a huge positive for the stock
  • Going forward with the listing but buying an equal amount of stock of MPEL to offset dilution but still add the second listing – this would squeeze the shorts
  • A substantially smaller IPO – probably a positive

The prospectus is supposed to be offered sometime this month.  Hopefully , we will know more details tonight.


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.

next