The Macau Metro Monitor, June 1, 2012




Macau gross gaming revenues rose 7.3% YoY to MOP26.078 billion (HKD 25.32 billion, USD 3.26 billion). 



Sands China Ltd withdrew its judicial appeal to get parcels 7 and 8 on Cotai.  On December 2010, the Macau government rejected a land concession application by Sands China for Cotai lots 7 and 8.  On January 2011, the company filed a judicial appeal with the Court of Second Instance.


In its 2011 annual report, the company said that it would record a charge for all or some portion of the US$101.1 million in capitalized construction costs as of December 31, 2011 should the company not get the land rights or receive a full reimbursement of its capitalized investment in the project.


Sands China CEO Ed Tracy said in a statement Friday the company is focused on opening the next phase of Sands Cotai Central this fall and "accelerating" the development of Parcel 3, "bringing it to the market as quickly as possible."



According to China Real Estate Index System (CREIS), average housing prices in 100 major Chinese cities fell by a slower pace MoM in May, slipping 0.31% from April to 8,684 Yuan $ a square meter.  April prices fell 0.34% MoM.  It was the first instance of a narrower decline, after four months of accelerating losses.  On a YoY basis, May fell 1.53%, compared with April's -0.71%.  

HedgeyeRetail Chart of The Day

We wonder if Ron Johnson is doing this math on where his revenue dollars are going. The recipient will fight tooth and nail to hang on to the $$$.




Let everyone fret over a percent here or a percent there. Let’s think about absolute numbers for a minute.


Though JC Penney no longer reports monthy comps, let’s assume that sales for the month followed the 1Q trajectory, and were down ~20% for the month of May. That suggests ~$240mm in lower sales versus last May. Kohl’s should be loving that, right? One would think. But despite 55% store overlap (5-mile radius), KSS could not capture a single dollar. In fact, it gave up ~$35mm of them.


Ron Johnson’s biggest problem, however, rests not in the fact that Macy’s captured ~$80mm, or that Gap/Old Navy nabbed $25mm. But rather that TJX and Ross Stores garnered a combined ~$110mm. With JCP’s EDLP strategy under such scrutiny, not only will Johnson need to pull the needle out of the consumer’s arm after 30-years of conditioning to wait for a sale, but now he has to worry about wrangling traffic away from the off-pricers.

This is going to take A LOT LONGER than a year.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%


CONCLUSION: The timing of our bullish thesis on Brazilian equities has been delayed as a result of the accumulation of negative effects stemming from the recent slew of policy maneuvers. We’ll likely revisit Brazil on the long side in the coming months, but, for now, we expect continued lower-highs in the BRL (vs. the USD) and Brazilian equities on a TRADE and TREND basis.




“… we can’t stress this enough: we expect both Brazil’s equity market and currency to experience continued downside over the intermediate term post the MAY 29-30 central bank meeting if their actions are perceived to be in line with the broader central plan of Brazilian policymakers. The strongest TREND-duration short thesis for Brazilian equities (i.e. the opposite of our long thesis) is quite consensus at this juncture, given that the Bovespa Index has indeed crashed from its MAR 13 YTD high (-20.1%).


Shorting Brazil from here requires true guts, but if the USD continues to make higher-highs over the intermediate-term – dragging cross-asset volatility up alongside it (the two are +94% correlated on an immediate-term duration) – Brazilian equities and the Brazilian real will likely continue to get tattooed if policymakers don’t commit to providing international investors with higher rates of expected return(s) via doing what they must to stem the tide/reverse the trend in the exchange rate (i.e. selling dollars, lowering cross-border IOF taxes, introducing a rhetorical floor for the BRL, hiking rates [not likely], etc.).”


Upon analyzing today’s -50bps SELIC Rate cut and associated COPOM commentary, it’s clear to us that Brazilian officials have no desire to protect the nation’s currency from capital flight associated with the latest King Dollar breakout – a phenomenon only exacerbated by the recent spate of increased capital controls and advance of the sovereign further into the Brazilian financial markets.




The benchmark SELIC Rate has now been reduced to an all-time low of 8.5% on the strength of a consensus decision by the COPOM (129 of 154 decisions) – which is the first to be publically disclosed on an individual basis under the new statue. While don’t have their full minutes (to be released on JUN 8), we feel comfortable in saying  their latest guidance is more dovish than their previous statement – which, inadvertently or explicitly, is in line with Rousseff and Mantega’s desires for a structurally lower domestic cost of capital and a weaker currency (generally at the expense of the Brazilian private sector and foreign investors): 

  • APR: “… even considering that the activity recovery has occurred more slowly than anticipated, the Committee believes that, given the cumulative and lagged effects of policy actions implemented so far [i.e. 350bps of rate cuts], any movement of additional monetary easing should be conducted with parsimony.”
  • MAY: “The COPOM considers that, at the moment, the risks to the inflation trajectory are limited. The committee also notes that, until now, given the fragility of the global economy, the contribution of the external sector has been disinflationary. Given this, and giving continuity to the adjustment process of monetary conditions, the COPOM decided to reduce the SELIC rate to 8.5 percent per year without a bias.” 

As such, we are no longer inclined to trade Brazilian equities with a bullish bias over the intermediate term (though we wouldn’t fight the onset of an unhealthy, centrally planned asset price pop out of the FED if one were to occur). While Brazil’s TREND-duration GROWTH and INFLATION outlooks continue to be supportive of a 2H12 rebound in both the currency and equity market, poor POLICY should continue weigh the BRL and the Bovespa over the immediate-to-intermediate term.


While we wouldn’t recommend shorting and holding Brazilian equities from here (the Bovespa has experienced a -21.8% YTD peak-to-present crash), we do find it prudent to wait and watch for quantitative confirmation of an immediate-term TRADE breakout or confirmation that the index won’t break down through its AUG ’11 lows before dabbling on the long side again.




Deflating the Inflation only works to stimulate economic output only if a country’s currency remains relatively strong enough to reap the benefit of the disinflationary forces – particularly in an economy like Brazil, which is simply laden with structural inflationary pressures (email us for our TAIL duration AUG ’11 Brazil Black Book). Brazil’s disinflationary tailwind stemming from our initial Deflating the Inflation theme (APR ’11) peaked in FEB and should continue be a headwind on the margin through at least SEPT (holding current market prices flat through year-end).






All told, the timing of our bullish thesis on Brazilian equities has been delayed as a result of the accumulation of negative effects stemming from the recent slew of policy maneuvers. We’ll likely revisit Brazil on the long side in the coming months, but, for now, we expect continued lower-highs in the BRL (vs. the USD) and Brazilian equities on a TRADE and TREND basis. Alas, POLICY remains the hardest factor to model – though arguably the most important to get right in today’s Global Macro environment.


Darius Dale

Senior Analyst

Mid-Tier Math Not Adding Up

Overall, an in-line-ish month for sales. Beats outnumbered misses by 2 to 1. But the standard deviation was generally benign. Not a surprise given that we just passed retail earnings season, and June – not May – is the real important month for the quarter.


We wonder if Ron Johnson is adding up where his lost revenue dollars are going. It’s not KSS. GPS and M can’t account for it. Enter the off-price retailers. Not only will he need to recondition the consumer to buy full price, but to stop treasure-hunting. Good luck.


No Shade for the Mid Tier: Of the 5 misses this morning, GPS (+2% vs. +2.2E) and KSS (-4.2% vs. -0.7E) were two of the most notable in light of DDS & JCP pulling out of the sample earlier this year. As we’ve highlighted in the past, mid tier retail will become increasingly vulnerable to share losses in 2H as pricing remains uncertain despite the expectations for margin expansion in light of easing costs.


Think of it like this…If we were to assume that JCP sales in May were down similar to the (-20%) decline we saw in 1Q12, that would equate to ~$240mm in mid tier dollars up for grabs. That alone makes Kohl’s and Macy’s lives easier. Macy’s sales were up $80mm. But KSS was DOWN $35mm?? Anyone want to explain that one? Either JCP is getting much better – which it is not, or there are other retailers scooping up the share. KSS is missing the boat here big time.


The kicker is that the off price retailers are taking share. Why? They’ve got the goods, and the consumer LOVES a bargain. I wonder if Ron Johnson knows that he’s going to have to not only condition the consumer away from looking for bargins in full price stores, but now he’ll have to worry about battling the value proposition at off-pricers as well.  


GPS: While GPS’ +2% comp miss was minor and expectations ran up from +1.4% to +2.2% into this morning’s print, each of GPS’ businesses’ underlying 2 yr trends eroded 200bps+ sequentially with the exception of international though it remained (-4%). While May only accounts for 31% of 2Q sales for GPS, June accounts for closer to 41% and although top line compares ease into 2H, they become more difficult in June first.


KSS: Aside from BKE, KSS was May’s biggest laggard with comps -4.2% vs. -0.7E. Most notably, KSS’ sales were -2.6% on a +7% increase in inventories driving the month’s sales to inventory spread to new lows -11.2% from -5% in 1Q12. This just after KSS announced they would be implementing a new EDLP strategy in response to JCP’s “Fair and Square” roll out. In the first quarter, with e-commerce sales +34% and new stores contributing ~1.7 points to the 1.9% top line growth, we estimate the core brick and mortar business contracted LSD. We continue to like KSS on the short side in light of the mid tier domino effect that we expect to play out further in 2H as both top and bottom line compares get increasingly difficult over the intermediate term. 



Off-Price Outperformance: ROST and TJX continue to outperform the SSS group as a whole coming in +8% vs +4.8E and +8% vs 4.9E, respectively, bucking consensus by 300bps+ each, the 2 largest beats on the morning excluding the smaller cap participants (CATO, SSI, BONT, ZUMZ). The spread between the consolidated off-price comp and the total SSS comp remains prevalent at about +4.5 points wide. Given our expectation for pricing to break down across the mid tier in 2H12 driven primarily by JCP/KSS EDLP, off priced retailers have the opportunity to capitalize on industry-wide inventory growth with better buys and a value proposition that already resonates with the consumer. In other words, the quality and availability of goods in the off price channel will only go up from here.


ROST: Posted revenues +13% with inventories -1% maintaining a mid teen sales to inventory spread.  


TJX: Sales came in +10% accelerating sequentially over +7% growth in May. TJX highlighted inventories as being “in great shape and turning fast” this morning following the 1Q12 inventory spread jumping 11 points from 4Q11 to +15% with inventories -3% headed into May. 


High End Remains Strong: High end retail (SKS, JWN, M) exceeded expectations in May with JWN comps in line (+5.3% vs. +5.3E), SKS beating (+4% vs. +3.3E) and M delivering 20bps of upside driven primarily by online +42% in May and 36% YTD. While the consolidated high end comp accelerated 200bps to +5%, the spread between high and low end contracted slightly on the margin from 10 points to 6 points.


COST: After uncharacteristically missing April consensus for the second month in a row in April, COST posted a 3 peat this morning with comps +4% vs. +4.4E. Gasoline deflation and FX combined negatively impact comps by 150bps though all major categories posted positive comps and AUR remained flat despite gas prices declining slightly from $3.86 to $3.84 year over year. 


Mid-Tier Math Not Adding Up - KSS SIGMA


Mid-Tier Math Not Adding Up - TGT monthly sales grid


Mid-Tier Math Not Adding Up - monthly SSS comp


Mid-Tier Math Not Adding Up - total SSS comp

VRA: Squeeze Context


Conclusion: We’re the low on the Street and are calling for the first miss since VRA went public. But the reality is that a company at VRA’s stage in its lifecycle can print what it wants to. Sentiment is poor, and the stock is off 44% over 2 months. If they pull one out of a hat after the close, it will allow us to get heavier on one of our favorite shorts.


We remain very negative on VRA. We’re We’re the low on the Street at $0.27 vs. the consensus at $0.29E for Q1, suggesting the first miss in the six quarters it has been public. That said, the stock is down 44% in 2 months, and though the Sell-side uniformly likes it with a 73% buy ratio, short interest is still sitting at 47% of the float. In other words, our model BETTER be right, otherwise this stock is going up on the print. A company at this stage in its growth cycle has so many moving parts, and the reality is that it can print (for a short time) pretty much what it wants to print. If the results are ‘in-line’ or better, this stock probably goes up. That’s when we get heavier again on one of our key shorts.

Our TAIL view (3-Years or Less) on VRA is that the company is that it is overextending the reach of its brand as it executes its growth strategy the wrong way. There’s nothing wrong with growing by any means. But the focus is too heavy on channel distribution as opposed to coming up with ‘must have’ product and brand messaging that will make the consumer claw over one another to get that product come hell or high water. Today VRA is sitting at nearly a 21% EBIT margin, and the consensus is looking for that to be up 100bps over the next two years. Call us perma-cynics, but we have yet to see any brand – ever – that has invested heavily in channel distribution above all else (as opposed to R&D and marketing) and has not seen severe swings in its margin structure. It’s easy to sit there and tweak a model thinking that maybe the Street is high or low by 25 or 50bps. But the real call is if margins are 10% in 2 years. Think that can’t happen? Pull up margin charts for TRLG, ANF, AEO, COLM, CROX…heck, even look at VRA. It is up nearly 2x from 11% just 3 years ago. Margins move in big steps in this space, my friends.

While the company simultaneously grows wholesale and retail with product that is largely like for like (a retail no no) it is also looking to expand into Japan, land another national department store account (they are partnered only with DDS). VRA is also doubling the size of its DC, which requires incremental investment. That’s great…we’ll never beat a company up for investing. But it will need to work out the kinks, and will ultimately need to grow into this new capacity.

It’s unlikely these efforts are enough to offset the declining core wholesale business as it becomes cannibalized by VRA’s own retail stores. Moreover, we need to remember that when retail and wholesale growth coincide – and in a way that is not prudent – it is not a pleasant process. We’re not talking about a slow ebb/flow of product orders at wholesale. The timing of these events is impossible to forecast. But we think we’ll see it. With a higher expense base, we expect margin contraction ahead for VRA and are 20% below Street expectations next year (F13). Our bias on our numbers is to the downside.


One risk to a short, and a very big one at that, is if VRA strikes a deal with Ron Johnson and team at JC Penney to do a shop in shop for the Vera Bradley brand in the 700 JCP stores that are being refurbished. That would be such a meaningful channel fill event that it would take up earnings – and margins – presuming the company let it flow through. That does not change the fact that there are 3,400 small wholesale accounts that probably be miffed that the brand is now in JCP. Managing that at a local level would be ‘less than pleasant’ for VRA. It would be one of those near-term positives that turns into a very large longer-term problem.


VRA: Squeeze Context - VRA S



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