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HedgeyeRetail Visual: Is eBay Adding to GSI?

While not exactly the first metric people look at with eBay, the performance of GSI Commerce, which it acquired in June of 2011, is particularly important to us as a proxy for brick & mortar expansion into the digital marketplace. GSI (8% of eBay sales) specializes in creating, developing and running online shopping sites for brick and mortar brands and retailers (customers include but are not limited to Sport’s Authority, Dick’s Sporting Goods & Toys R Us). It might be too soon to judge, but since the acquisition, growth at GSI has gone in the wrong direction. It still rang in a healthy 21% comp in the latest quarter, though this was a 500bp deceleration from the 26% rate posted in both 4Q and 1Q. It’s not the end of the world, but the synergies have clearly yet to show themselves.

 

HedgeyeRetail Visual: Is eBay Adding to GSI? - GSIC COTD


CHART DU JOUR: DOUBLE DOWN PERFORMANCE

  • According to AppData, Double Down’s MAU (monthly average user) looks like they’ve taken a breather since April.  Its DAU (daily average user) also look flat QoQ at 1.4MM.
  • While Double Down is not going to make or break the quarter for IGT, it is a sore topic for many investors.   Therefore, disappointment in interactive may elicit an exaggerated response from the investor community, especially given that Patty has marketed this segment as a large source of growth for IGT.
  • Based on our analysis, Double Down casino seems to be losing some market share in its competitive set.  We estimate that their market share in 1Q12 was approx 8.7% and has declined to 6.6% in 2Q12.  The good news is that July share seems to be tracking at 6.8% up from just 6.1% in May.

 

CHART DU JOUR:  DOUBLE DOWN PERFORMANCE - DD


FCFS: Canary In A Goldmine?

Our original call pre-earnings on First Cash Financial Services (FCFS) was that it would take a hit on earnings due to falling gold prices and the influx of “we’ll buy your gold now” stores popping up all over the place. That was our consensus on the pawn space as a whole. FCFS managed to beat expectations for Q2, but after speaking directly with management, we’re still cautious about this name.

 

Management pushed back on our argument. Since we had some valid discourse, we’ve decided to outline the points they made on the call below:

 

  • Point 1: On the issue of gold, FCFS says it’s becoming a smaller portion of their business. US stores see gold for 60% of collateral, while Mexico only sees 20%. That’s significantly less than competitors in the pawn space like CSH and EZPW.
  • Point 2: There are two types of customers: those trying to just sell their gold and those who are using valuable items (i.e. family heirlooms, wedding rings) for collateral that they ultimately want back.
  • Point 3: FCFS is growing. From 2002 to 2Q12, they’ve gone from ~120 stores to 675 stores. The bottom line is that store growth has likely accounted for a larger portion of long-term revenue growth than we had assumed, which means that gold price tailwinds must have accounted for a smaller portion.

 

This quarter's results are consistent with our basic view on First Cash.  The company is a solid operator with strong growth prospects baked into existing store count from acquisitions and new store openings.  However, First Cash has significant gold exposure, though less than CSH and EZPW, and so long as gold prices are moving sideways to lower we think it will be hard for FCFS shares to hold their current level. 

 

 

FCFS: Canary In A Goldmine?  - FCFS earningsreview


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EXPERT CALL WITH SHAMIN HOTELS

Some interesting takeaways from our call with Neil Amin, CEO of Shamin Hotels.

 

 

We hosted a call on Monday with Neil Amin, CEO of Shamin Hotels.  Shamin owns 40 hotels with over 4,000 rooms mostly in the Mid-Atlantic region.  Neil provided some honest and unbiased commentary about the industry and some of the major players from a decidedly private and independent perspective.

 

Here are some of our takeaways:

  • Bullish on the lodging cycle and so far, there are no signs that positive North American RevPAR trends are slowing down
  • That said, visibility is limited and current trends are more reflective of travel decisions made 6 months ago.  RevPAR usually lags the macro.
  • While it’s still early, brands should be able to get good pricing increases on corporate negotiated rates, since last year was really the first time rates have moved upwards since 2008  
  • Ability to push rate is largely dependent on the local market in question.  Obviously, markets with healthy occupancy are able to get more rate than others
  • While overall costs are increasing at 5-7% rates, CostPAR increases are more contained
    • Wages are increasing 3%, however, wage pressure is also market specific
    • Lots of the cost creep is coming from brand initiatives and required upgrades as the market recovers (eg. HDTV, flat screen TV’s, deferred maintenance and remodels)
  • Obamacare will likely lead to more part time workers so employers can avoid offering insurance to all employees or paying a penalty.  It will result in higher costs.
  • In most markets, it’s still cheaper to buy then to build, which is good for keeping supply growth suppressed over the intermediate term
  • Asset prices should continue to see support from low interest rates, which provide buyers an attractive return spread (cap rate less cost of capital)
  • Definitely are not a disposer of properties in this environment
  • Given the changes in the lodging landscape and the evolution of the various brands, renewing a HOT or MAR flag once the initial contract term expires poses a very high hurdle. 
    • Size and room design mandates have changed over the last 20 years
    • Harder to get a contract renewed in competitive markets where the Brand knows they can get a more “choice” asset flagged
  • High flag renewal hurdles are an opportunity for conversion brands; especially some of the Wyndham portfolio brands and Choice’s Quality Inn brand
  • Most franchisees view Sales Force One as a conflict of interest
    • Hotel owner outsources the reservation function for convention / group business to MAR.  Thought process for MAR is that there are synergies to centralizing bookings in a particular market. 
    • Franchisees view that MAR has a conflict of interest in filling their managed hotels where they have incentive fees ahead of the franchised properties.  Franchisees don’t like the idea of relinquishing control of their customer relationships.
  • OTAs are a high cost distribution channel that they try to use sparingly

A NIM-ble Way to Look at Bank Stocks

If you’re thinking of investing in bank stocks, you should understand  net interest margin, or “NIM” for short. It refers to the dollars of interest income less the dollars of interest expense divided by the average interest earning assets in the period. This is a very important metric for us when we look at the health of the big banks like Bank of America (BAC), JP Morgan (JPM), etc. When a company’s NIM changes, even by a few basis points, it puts a hurting on earnings power.

 

Take Bank of America, for example, who saw its NIM compress 30 basis points quarter-over-quarter. Per Hedgeye’s Managing Director of Financials Josh Steiner:

 

To put this in perspective, the company lost $1.27 billion in quarterly earnings power, or roughly $5 billion in annual earnings power in just one quarter! On a per share after-tax basis, that works out to $0.34 cents in full-year earnings per share. While that may not sound like a lot, Bank of America is only expected to earn $0.55 in 2012 and $0.94 in 2013, so taking a hit of $0.34 in a single quarter is big deal. Remember, that hit is recurring, not one time.”

 

A NIM-ble Way to Look at Bank Stocks  - NIMchart1

 

The above chart represents the six quarters “performance” of NIM for some of the biggest banks out there. It gives you an idea of why banks’ earnings are getting squeezed as NIM compresses; they’re essentially losing out on a big chunk of money every report.

 

On the macro side of things, remember that we’re currently in a low-yield, low-rates environment courtesy of the Federal Reserve. Ever heard of bankers doing 3/6/3? Borrow at 3%, lend at 6%, be on the golf course by 3pm. That doesn’t really work the same way anymore. It’s harder to earn interest in this environment and there’s no longer a 300 basis point spread like there used to be back in the day.

 

What’s the end game to all this?

 

So long as the long end of the curve keeps falling (which it is), and banks remain asset sensitive (which they are), then you should reasonably expect to see NIM come under greater and greater pressure, which, in turn, puts pressure on bank earnings. Bank earnings, NIM – remember to keep your eye on this come Q3. 


INITIAL JOBLESS CLAIMS: ROUND TRIP, ONE MONTH AWAY FROM IMPROVEMENT

Claims Come Full Circle 

Initial jobless claims were 386k this past week, 36k higher than the prior week's number. There was a 2k upward revision to the prior week's data. The 4-week moving average, meanwhile, fell 1.5k to 376k. On a non-seasonally adjusted basis, claims rose by 11k. The YoY change in the non-seasonally adjusted series moderated to ~7% improvement from a ~8% run rate in the prior week. This last point is the most important. We use the YoY rate of change in non-seasonally claims to gauge the real underlying trend, considering the seasonal adjustment distortions that are taking place. That YoY rate of change has been slowly getting worse over the last few months, decelerating from a 10% YoY improvement to a 7% improvement currently. This suggests a real underlying slowdown, as opposed to the one created by seasonal adjustment distortions. 

 

The Auto Distortions Correct

As a reminder, the distortions over the past three weeks all reflect differences in the timing of auto manufacturing layoffs from recurrent mid-summer plant idling. Last week claims rose 36k, while the two weeks prior to that saw claims fall a combined 36k, so we're back to square one. 

 

Going forward, we still expect distortions in the seasonal adjustment factors to push claims higher from here. By the end of August, these distortions should begin to reverse and the data should start to look better again moving into the Fall months. 

 

INITIAL JOBLESS CLAIMS: ROUND TRIP, ONE MONTH AWAY FROM IMPROVEMENT - Claims   Auto Distortions SA

 

INITIAL JOBLESS CLAIMS: ROUND TRIP, ONE MONTH AWAY FROM IMPROVEMENT - Claims   Auto Distortions

 

INITIAL JOBLESS CLAIMS: ROUND TRIP, ONE MONTH AWAY FROM IMPROVEMENT - Raw

 

INITIAL JOBLESS CLAIMS: ROUND TRIP, ONE MONTH AWAY FROM IMPROVEMENT - Rolling

 

INITIAL JOBLESS CLAIMS: ROUND TRIP, ONE MONTH AWAY FROM IMPROVEMENT - NSA

 

INITIAL JOBLESS CLAIMS: ROUND TRIP, ONE MONTH AWAY FROM IMPROVEMENT - Rolling NSA

 

INITIAL JOBLESS CLAIMS: ROUND TRIP, ONE MONTH AWAY FROM IMPROVEMENT - S P

 

INITIAL JOBLESS CLAIMS: ROUND TRIP, ONE MONTH AWAY FROM IMPROVEMENT - Fed

 

INITIAL JOBLESS CLAIMS: ROUND TRIP, ONE MONTH AWAY FROM IMPROVEMENT - YoY NSA Claims

 

The 2-10 Spread

The 2-10 spread widened 2 bps WoW to 127 bps, as the ten-year treasury yield fell 2.5 bps to 150 bps. That's little comfort though as the curve overall is still exceptionally tight. We've seen plenty of evidence of the effect of this in bank earnings over the past 4 days. Our macro team expects the yield spread to continue to compress.

 

INITIAL JOBLESS CLAIMS: ROUND TRIP, ONE MONTH AWAY FROM IMPROVEMENT - 2 10

 

INITIAL JOBLESS CLAIMS: ROUND TRIP, ONE MONTH AWAY FROM IMPROVEMENT - 2 10 QoQ

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 

 

INITIAL JOBLESS CLAIMS: ROUND TRIP, ONE MONTH AWAY FROM IMPROVEMENT - Subsector Performance

 

INITIAL JOBLESS CLAIMS: ROUND TRIP, ONE MONTH AWAY FROM IMPROVEMENT - Companies

 

Joshua Steiner, CFA

 

Robert Belsky

 

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