MACY'S: More Downside Than Upside

We’re seeing more downside in Macy’s (M) than upside these days. The company is comping well right now thanks to the success of My Macy’s and the Millennial Stores. The stock is trading at 5.5x EBITDA today but could be seen as trading at 8.5x earnings if you factor in things like gross margin leverage. Would you really pay 8.5x/5.5x for a department store stock assuming that everything goes according to plan without any hiccups? That’s a risky bet considering that no one can keep comping up forever and JCPenney (JCP) is a credible threat to Macy’s. Hence, we’re increasingly bearish on the stock moving forward in Q4.


MACY'S: More Downside Than Upside - m2


From Retail Sector Head Brian McGough:


This a business that has no square footage growth, no ‘birthright to comp’ in its core, struggles to consistently earn its cost of capital (what happens when lease accounting rules change and M has to account for its property?), and has zero competitive advantage in the core area that will be driving incremental consumer purchases for generations to come –”

Growth In Macau

Gross gaming revenue (GGR) was up +3.5% in Macau for October, at the high end of our forecast for the month. VIP hold was down but mass volume grew. We think that November growth will pick up with 7-14% growth year-over-year and will accelerate into December. So with Macau volumes and revenues picking up, who’s the winner? Las Vegas Sands (LVS). They put up the best GGR growth and largest market share on a month-over-month basis. LVS reached a three year high in market share on Mass revenue and a 2 year high in slot market share. LVS remains one of our top long ideas.


On the other side, Wynn Resorts’ (WYNN) market share set an all-time low of just 10.1% because of lower hold. A freidnly reminder: house hold is the measure of the amount of money a casino table game keeps from the total amount of money that is dropped into the game's cash box. MGM and SJM also had low hold. As for Galaxy and MPEL, they put up solid mass growth yet again.


Growth In Macau  - image002


Growth In Macau  - image003


In today's Morning Investment Call, we discuss yesterday’s selloff in the market, our macro themes of Earnings Slowing and Growth Slowing, and the inherent risk associated with the fiscal cliff. Remember: it’s all about trading the risk and the range of the market. Stay within your limits and you’ll be fine. You can listen to the Q&A from the call below.



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Three Big Themes

Client Talking Points

Three Big Themes

Now that we can put the political madness of the election behind us, let’s focus on our three macro themes for Q4 and beyond. We’re well into earnings season and our theme of #EarningsSlowing continues as company after company either misses Street expectations or lowers guidance. The commodity bubble given to us courtesy of the Fed is bursting at the seams with commodities down -9.3% since the Bernanke Top (September 14). Lastly, there is the fiscal cliff. It has been said that Republicans are reaching across the aisle and offering compromise on taxes in order to fix this mess, but more than likely, the two sides will bicker until the 11th hour and will kick the can down the road yet again. 

Market Breakdown

Yesterday’s big selloff can be attributed to the election results. Or the trouble in the Eurozone. Really, it can be blamed on anything. That’s how it works. If your strategy doesn’t work, just find someone or something to blame. It’s certainly worked out well for Old Wall. With the pop in the futures this morning, we’ll likely see some upside early on in trading; what really matters is the risk and the range. If you stick to your levels and trade within them, you’ll do just fine. That’s how proper risk management works as opposed to closing your eyes and throwing darts at sheets of paper with tickers written on them.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

After a long downward slide, TCB has finally turned the corner. The margin has stabilized after the balance sheet restructuring. Loans are growing thanks to the equipment finance business. Non-interest income is more likely to go up than down going forward, a reversal from the past 18 months. Credit quality has a tailwind from a distressed housing recovery in TCB’s core markets: Minneapolis, Detroit and Chicago. On top of this, the CEO, Bill Cooper, is one of the oldest regional bank CEOs, which raises the probability that the bank will be sold. Expectations are bombed out at this point, so we think it’s time to move from bearish to bullish on TCB.


Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjoys a strong position in a structurally advantaged industry and an attractive valuation.


While political and reimbursement risk will remain near-term concerns, on the fundamental side we continue to expect accelerating outpatient growth alongside further strength in pricing as acuity improves thru 1Q13. Flu trends may provide an incremental benefit on the quarter and our expectation for a birth recovery should support patient surgery growth over the intermediate term. Supply costs should remain a source of topline & earnings upside going forward.

Three for the Road


“scheduled a meeting at 3pm - people complained because lunch time is from 2 to 4pm#spainisdifferent” -@brilldisruptive


“You must first have a lot of patience to learn to have patience.” -Stanislaw J. Lec


US jobless claims fall by 8000 to 355,000


Takeaway: We are growing more certain that DRI's next earnings release will disappoint shareholders.

Conclusion: It seems likely that Darden is lagging the industry given Knapp trending at -1.8% (on average) for first two weeks of October and Blackbox coming in flat for the month.  Assuming Knapp Track in Oct comes in roughly on trend with the first two weeks, the 180bps spread is far greater than it has been (it was 0 bps in September) and is possibly a poor sign for Darden.  We will be waiting for Knapp’s monthly data to confirm.


Blackbox Intelligence released casual dining same-restaurant sales growth data for October at 0% with traffic at -2.1%. 


Last month, we learned that Knapp Track casual dining comps were down -1.5% and -2.1% for the first and second week of the month, respectively. 


There are many differences between the two metrics, but one significant one is that Darden (the largest system in the business) is not counted in the Blackbox data.  If we assume that Knapp’s October data will come in on trend with the first two weeks, this could be negative for Darden. 


If a significant portion of the spread between Knapp and Blackbox is driven by Darden not being accounted for in the Blackbox data, which is likely to be at least partly true given Darden’s size, we would infer that Darden underperformed the industry in October. 



Howard Penney

Managing Director


Rory Green




The Macau Metro Monitor, November 8, 2012




Private equity company Permira Advisers LLP has agreed to sell its remaining holdings (5.94% stake) in Galaxy. Completion of the sale is expected to be on November 12.  The 249.6 million shares were sold at HK$27.17 (US$3.5) each, putting the deal value at HK$6.78 billion, a source with direct knowledge of the deal told Reuters.

Early Look

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