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CHART DU JOUR: MISSOURI JULY GGR

Is MO a precursor for another poor month for the regional markets?

 

  • We believe July gross gaming revenues in Missouri fell 5% YoY but same-store revenues fell almost 8% — 4% lower than the seasonal trend would've predicted.  Same-store is lower because the St. Jo Frontier Casino was closed during July of last year.  Official results will be out next week.
  • July 2012 is down a Saturday but that is mostly captured in the model so results are definitely below recent trend
  • Missouri continues to underperform the regional markets due to new competition from Kansas

 

CHART DU JOUR:  MISSOURI JULY GGR - MO34


FDO: Idea Alert

Keith shorted FDO on today’s up-move – central planning isn’t quite the elixir of life should we see $5 at the pump. We remain bearish on the dollar store space; we don’t need Operating Margins to contract in order to build a short case but simply for the prior drivers of expansion to fade.

 

Last month, we had the pleasure of attending FDO’s analyst day where management left investors with something to be desired offering no change to its long term guidance which was initially provided back at the October 2010 analyst day calling for MSD comps, Operating Margin expansion and double digit EPS growth. Importantly however, with operating margins sitting around ~7.5% over the past 2 years and running flat to potentially down this year, it was notable that there was no clarification on the “operating margin expansion” guidance. When asked in the Q&A to elaborate on what that meant in terms of the magnitude of growth and timeline for expansion, CFO Mary Winston declined to provide additional detail and simply reiterated the qualitative drivers of improved profitability.

 

Over the past three years, the spread between FDO margins and DG margins, despite both reaching their respective peak levels, has expanded sequentially with FDO now running nearly 300bps below DG. With no additional insight into what levels of operating margins can truly be achieved over the next few years, what does “margin expansion” really mean for FDO as we sit 1 quarter away from a potential year of compression? We definitely think that FDO is a safer place to be on the short side than DG.

 

Here are some additional thoughts on our thesis:

  • Operating Margins have expanded from ~5.7% in 2007 to 7.5% in 2011. At the same time, while a drag on margins, an increase in consumables penetration (from 59% to 67% in 2011 and 68% YTD) has been a traffic tailwind. As an offset, FDO has drastically increased its private label offering from 4% to 25% today and while management expects to enhance its private label offering further, the rate of growth has slowed drastically. FDO does expect to double its private label offering by 2015 via an expanded assortment (which implies penetration just below 40% relative to 25% today), though we’re not so sure private label can continue to increase as a percent of sales as quickly as management expects especially considering the primary category to grow in is consumables.
  • Sadly, during the 5 years where margin expansion drove earnings, the percent of Americans on food stamps increased from 9% peaking at 15% last year. Should consumables penetration increase further without a correlated growth in consumers using food stamps as well as private label penetration, gross profitability will continue to deteriorate and strain earnings growth.
  • Capital expenditures are expected to run around 7% of sales this year following 3.7%, 2.5% and 2% over the last 3 years respectively due to reaccelerated store growth, an entire chain refresh set to be completed in 2015 and expanded DC capacity. These investments may not be timely given the deceleration in private label penetration and top line growth coming in below both internal and external expectations.
  • Finally, management highlighted at its investor day that digital would not become a meaningful part of the business in the foreseeable future. While the consumables business doesn’t necessarily cater to an online model as seamlessly as most other brick and mortar models, the missed opportunity for increased digital penetration to drive margin expansion through a lower cost structure is important nonetheless.

 

We continue to feel that with operating margins at peak, tailwinds fading, the inability to grow online and management teams offering no new insight into the drivers of future earnings growth, the dollar store space is not a safe place to be.

 

FDO: Idea Alert - FDO TTT


EMPLOYMENT DATA SUGGESTS NEAR-TERM STRENGTH FOR QSR

Employment data released this morning by the Bureau of Labor Statistics are a near-term positive for the restaurant industry, particularly Quick Service, as employment trends in Leisure & Hospitality held up in July.

 

Employment by Age

 

Employment growth among the 20-24 YOA cohort, which has been highlighted by several QSR management teams as an important source of demand, accelerated to 3.7% year-over-year in July from 3.4% in June.  The 45-64 YOA and 55-64 YOA cohorts saw sequential decelerations in their respective employment growth rates.  These demographics are important for casual dining and we will continue to monitor employment growth for these age groups as it has been a significant tailwind for casual dining over the last year.  Our cautious stance on casual dining sales trends, initiated in April, has been largely correct but the stocks traded with more resilience than we anticipated (led by Brinker).  We continue to like Brinker over the long-term tail as it takes share from the competition but macro concerns give us pause over the near term trade duration.

 

EMPLOYMENT DATA SUGGESTS NEAR-TERM STRENGTH FOR QSR - Employment by Age

 

 

Industry Hiring


The Leisure & Hospitality employment data, which leads the narrower food service data by one month, suggests that employment growth in the food service industry may stabilize in July.  On a sequential basis, the Leisure & Hospitality employment data registered a month-over-month gain of 27k (second chart below).  This is positive news for the restaurant industry, at least over the near-term.  Employment growth within the limited service industry saw a sequential acceleration in June while full service employment growth decelerated from May to June.

 

Sequential Moves

  • Leisure & Hospitality: Employment growth at +2.16% in July, up 7 bps versus June
  • Limited Service: Employment growth at 3.5% in June, up 42 bps versus May
  • Full Service: Employment growth at 2.6% in June, down 12 bps versus May

 

EMPLOYMENT DATA SUGGESTS NEAR-TERM STRENGTH FOR QSR - restaurant employment

 

EMPLOYMENT DATA SUGGESTS NEAR-TERM STRENGTH FOR QSR - leisure   hospitality

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 

 

 


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ANALYZING THE JOBS REPORT THROUGH THE LENS OF THE GENERAL ELECTION: JULY 2012 EDITION

CONCLUSION: The JUL ’12 US Employment Report leaves much to be desired in the way of supporting the bullish narrative of US economic strength and continues to affirm our view that President Obama’s odds of being reelected may actually be lower than they appear at face value. That said, however, there are enough pockets of strength in this report to potentially keep Bernanke on the sidelines in the SEPT FOMC meeting.

 

To say the JUL US Employment Report was a bit squirrely would be an understatement. Both the Headline Non-Farm Payrolls number (+163k MoM) and Private Payrolls number (+172k MoM) came in well in excess of consensus expectations, though both saw downward revisions to the prior month (+64k from +80k and +73k from +84k, respectively). Given the increasingly squirrely nature of US government agency economic reporting and the simple fact that this is an election year where the economy is arguably the #1 issue among registered voters, we are not shocked to see the BLS’s now-infamous Birth/Death Model – a purely statistical forecast based largely upon prior leverage cycle highs in US employment trends – produced +52k “jobs” MoM in JUL ’12, which is good for the highest JUL total on record (data going back to 2000).

 

All that said, when you net out the effects of the NSA B/D Adjustment from the NSA NFP MoM figure and analyze that data series on a YoY basis to offset seasonality distortions, you actually end up with a faster rate of true job growth than we saw last month (+51k from -85k). That is a positive. Another positive that seems to be overlooked is the fact that the JUL Seasonal Adjustment effect of +1,367 Payrolls MoM is very much in line with historical trends, which suggest that fears of inflated Payrolls gains bandied about in various media reports (which may or may not have been written with the goal of prompting the Fed to unleash further QE) may prove to have been quite overblown.

 

ANALYZING THE JOBS REPORT THROUGH THE LENS OF THE GENERAL ELECTION: JULY 2012 EDITION - 1

 

ANALYZING THE JOBS REPORT THROUGH THE LENS OF THE GENERAL ELECTION: JULY 2012 EDITION - 2

 

Unfortunately for President Obama’s odds of being reelected – which appear to be making another lower-high at 56.8% on our proprietary Hedgeye Election Indicator – the positives stop there: 

  • The headline Unemployment Rate SA ticked up +10bps MoM to 8.3%;
  • The “actual” Unemployment Rate SA (based upon our calculations using a 10yr average Labor Force Participation Rate) ticked up +20bps MoM to 11.2%;
  • The percentage of the working age population that is unemployed ticked up +20bps MoM to 41.6%; and
  • The percentage of the working age population not in the labor force ticked up to +10bps MoM to 36.3% as more and more Americans simply give up on looking for work – which will become increasingly hard to find if US corporations continue to implement cost-cutting programs in order to boost earnings, shareholder returns and executive compensation (see PG earnings results for more details). Refer to our JUL 20 note titled, “HAVE US CORPORATE EARNINGS GONE TOO FAR?” for our detailed analysis on this controversial topic. On the aforementioned metric, the US economy is a mere 10bps shy of the all-time high of 36.4% during the Obama presidency (APR ’12). 

ANALYZING THE JOBS REPORT THROUGH THE LENS OF THE GENERAL ELECTION: JULY 2012 EDITION - HEI

 

In the four charts below, we compare Obama’s “score” on the US Labor Market to the previous three two-term presidents. The Strong Dollar presidents (Reagan and Bush) are represented by the solid line plots; the Weak Dollar presidents are represented by the dotted line plots:

 

ANALYZING THE JOBS REPORT THROUGH THE LENS OF THE GENERAL ELECTION: JULY 2012 EDITION - 3

 

ANALYZING THE JOBS REPORT THROUGH THE LENS OF THE GENERAL ELECTION: JULY 2012 EDITION - 4

 

ANALYZING THE JOBS REPORT THROUGH THE LENS OF THE GENERAL ELECTION: JULY 2012 EDITION - 5

 

ANALYZING THE JOBS REPORT THROUGH THE LENS OF THE GENERAL ELECTION: JULY 2012 EDITION - 6

 

All told, the JUL ’12 US Employment Report leaves much to be desired in the way of supporting the bullish narrative of US economic strength and continues to affirm our view that President Obama’s odds of being reelected may actually be lower than they appear at face value. That said, however, there are enough pockets of strength in this report to potentially keep Bernanke on the sidelines in the SEPT FOMC meeting.

 

Darius Dale

Senior Analyst


EQUAL AND OPPOSITE REACTIONS

EQUAL AND OPPOSITE REACTIONS

 

 

CLIENT TALKING POINTS

 

HOLLER AT THE DOLLAR

We really like the US dollar, it’s true. We’re of the belief that the commodity bubble that currently exists (have you checked our grains or precious metals lately?) will pop and prices will come down as the dollar rallies. Currently, we’re long the USD Index but that could soon change as we manage the risk and the range. Bernanke can only keep the illusion up for so long before someone pulls back the curtain and reveals the reality of this dog and pony show.

 

 

LET’S ALL MAKE STUFF UP

The absurdity associated with today’s media is at an all time high. Yesterday, the news that the ECB wasn’t going to do anything hit at 7:45am. But the media said “Well, let’s wait until Draghi says something at 8:30!” And we did and guess what? He didn’t do anything new. Report the news and don’t worry about the outcomes. That should be the media’s job. We didn’t see a lot of people discussing the intraday reversal of Spanish equities, which were up 2%, then closed down -5.2%. Sheesh.                           

 

 

FALL OF THE ROUNDTABLE

We did an analysis of what’s going on at Knight Capital Group (KCG) with our Managing Director of Financials Josh Steiner and CEO Keith McCullough. We highly recommend taking the time to listen to the call, which examines Knight’s fate and counterparty risk on Wall Street.

 

URL: http://app.hedgeye.com/media/513

 

 

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ASSET ALLOCATION

 

 Cash:          DOWN                        U.S. Equities:    UP

 

 Int'l Equities:   Flat                        Commodities:    UP

                                  

 Fixed Income:  UP                         Int'l Currencies: Flat

 

 

 

_______________________________________________________

 

TOP LONG IDEAS

 

JACK IN THE BOX (JACK)

This company is transitioning from cash burn to $75mm annual free cash flow generation thanks to completion of a reimaging program and refranchising of JIB units. Qdoba is the leverage; a maturing and growing store base will bring higher margins. We see 8.5% upside over the next 6-9 months.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG            

 

FIFTH & PACIFIC COMPANIES (FNP)

The former Liz Claiborne (LIZ) is on the path to prosperity. There’s a fantastic growth story with FNP. The Kate Spade brand is growing at an almost unprecedented clip. Save for Juicy Couture, the company has brands performing strongly throughout its entire portfolio. We’re bullish on FNP for all three durations: TRADE, TREND and TAIL.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG

 

LIFEPOINT HOSPITALS (LPNT)

We continue to expect outpatient utilization to pick up in 2H12 alongside stabilization in acuity with ortho and cardiac/ICD volumes supporting both pricing and inpatient admissions growth. Births should serve as a tailwind into year-end, recent and prospective acquisitions offer some upside to 2012/13 numbers and the in place repo offers some earnings flexibility. With European and Asian growth slowing, we like targeted domestic revenue exposure as well.

  • TRADE:  NEUTRAL
  • TREND:  LONG
  • TAIL:      LONG

  

_______________________________________________________

 

THREE FOR THE ROAD

 

TWEET OF THE DAY

“RAJOY: `I TAKE NOTE' OF ECB WORDS, OTHER EU STATES SHOULD TOO. The Spanish 10 Year especially” -@zerohedge

 

 

QUOTE OF THE DAY

“Honesty is a good thing, but it is not profitable to its possessor unless it is kept under control.” – Don Marquis

 

 

STAT OF THE DAY

$3.09 billion. The amount of the loss recorded by the Royal Bank of Scotland (RBS) in the first half of the year.

 


GOOD KNIGHT AND BAD VIBES

KNIGHT: The Roundtable Falls

Knight Capital Group, one of the big players in retail brokerage order flow and market making on the Street, lost $440 million this week and is scrambling for funding after a “technology screw up” that caused the firm to screw up quotes for NYSE-listed stocks. We don’t believe that they will be able to get more than $60-80 million in funding and will be forced to go into bankruptcy or reorganization of some sort.

 

Knight’s counterparties are no longer routing order flow or using algos with the company. The entire Street has shunned them. This has really hurt confidence with investors, similar to the events of the flash crash and MF Global. The Financials SPDR (XLF), has been down significantly after big events like the aforementioned, and this will likely happen.

 

There will most likely be some kind of hearings in Washington or some kind of investigation. The Knight event will no doubt be used as fodder for regulation, particularly the Volcker Rule. We’ve been bearish on Morgan Stanley for some time and question how Knight will affect them. Counterparty risk affects the firm quite a bit but there hasn’t been a huge flight from the firm.

 


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