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CHART DU JOUR: SINGAPORE FX TAILWIND

LVS’s MBS should get an FX boost in Q4.

 

  • If the current S$/US$ rate of 1.224 stands, it will result in almost a 5% favorable EBITDA impact for LVS’s MBS.
  • Expectations remain low in Singapore.  Q4 MBS estimates were lowered by another 3% following Q3 earnings.
  • After a drop in gaming market share in Q3 mostly due to hold, MBS should see a sequential comeback in Q4.  While both IRs held high in 4Q11, which will no doubt make YoY comparisons challenging, MBS has an easier hold comparison of 3.3% (4Q11) vs. RWS’s hold of 3.9%.

 CHART DU JOUR: SINGAPORE FX TAILWIND - fx2


Trading Off Inventories for Margins

This note was originally published November 15, 2012 at 14:28 in Retail


Apparel retailers are reverting to a margin mean this quarter to an extent that we have not seen in years. As our SIGMA analysis shows, we’re seeing margins revert to zero barrier for many of the larger players oferall, with resulting in flex in the level of inventory relative to sales. The ups the ante for the level of sell-through that is necessary headed into the holiday season.


Our SIGMA charts below will look familiar to most, but for those new to this representation of fundamentals it triangulates the sales/inventory spread (i.e. sales growth minus inventory growth) on the x-axis as well as the year-over-year change in operating margin on the y-axis. Company’s want to be in the upper right (sales outpacing inventory growth with expanding margins) not the bottom right though directional moves within the same quadrant are often more important indicators for future outcomes and when stocks often have the most meaningful moves.


Consider the following:

  1. Mid-tier companies are at a collective inflection point re margins headed into 4Q. In fact, with all but JCP posting less than a +/- 40bps delta, variation in the yy change in margins is the tightest we’ve seen in over 4-years suggesting the likelihood for increased EPS volatility this holiday season particularly in light of top-line compression, or margin give up to support the sales gain.
  2. Our thesis on GPS and M is that the second JCP stops hemorrhaging sales at its current run-rate, it will put incremental pressure on these companies that have been gaining share. If JCP fails to recover – ever (which we think is unlikely) – then that’s bullish for M and GPS. We think in 1-2 quarters JCP’s delta will improve on the margin, and while still bad for JCP, will hurt its peers.

In light of this setup within this mid-tier(ish) space, we like M, GPS, and KSS (post 4Q) on the short-side and WMT long. In other segments of retail, we continue to favor the athletic space (NKE, FINL, FL) as it has such a positive tailwind in the form of a company R&D driven product and marketing cycle.


Trading Off Inventories for Margins - MidTier EPS Surprise History

 

Trading Off Inventories for Margins - MidTier SIGMAs

 

Trading Off Inventories for Margins - MidTier wJCP SIGMAs

 


 

 


Trading Off Inventories for Margins

Apparel retailers are reverting to a margin mean this quarter to an extent that we have not seen in years. As our SIGMA analysis shows, we’re seeing margins revert to zero barrier for many of the larger players oferall, with resulting in flex in the level of inventory relative to sales. The ups the ante for the level of sell-through that is necessary headed into the holiday season.


Our SIGMA charts below will look familiar to most, but for those new to this representation of fundamentals it triangulates the sales/inventory spread (i.e. sales growth minus inventory growth) on the x-axis as well as the year-over-year change in operating margin on the y-axis. Company’s want to be in the upper right (sales outpacing inventory growth with expanding margins) not the bottom right though directional moves within the same quadrant are often more important indicators for future outcomes and when stocks often have the most meaningful moves.


Consider the following:

  1. Mid-tier companies are at a collective inflection point re margins headed into 4Q. In fact, with all but JCP posting less than a +/- 40bps delta, variation in the yy change in margins is the tightest we’ve seen in over 4-years suggesting the likelihood for increased EPS volatility this holiday season particularly in light of top-line compression, or margin give up to support the sales gain.
  2. Our thesis on GPS and M is that the second JCP stops hemorrhaging sales at its current run-rate, it will put incremental pressure on these companies that have been gaining share. If JCP fails to recover – ever (which we think is unlikely) – then that’s bullish for M and GPS. We think in 1-2 quarters JCP’s delta will improve on the margin, and while still bad for JCP, will hurt its peers.

In light of this setup within this mid-tier(ish) space, we like M, GPS, and KSS (post 4Q) on the short-side and WMT long. In other segments of retail, we continue to favor the athletic space (NKE, FINL, FL) as it has such a positive tailwind in the form of a company R&D driven product and marketing cycle.


Trading Off Inventories for Margins - MidTier EPS Surprise History

 

Trading Off Inventories for Margins - MidTier SIGMAs

 

Trading Off Inventories for Margins - MidTier wJCP SIGMAs

 


 

 


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WMT: Idea Alert. Buying Again.

Takeaway: $WMT's inquiry into the FCPA will cost money, but not the ~$9billion in market cap WMT lost today.

We’re adding WMT back to the long side of our portfolio on today’s selloff.  The print was in-line with our view for a tepid top line, but SG&A and below-the-line items making up for the difference. But to suggest that the stock is trading off 4% because of a perceived weak earnings quality is just plain silly. The 8-K added that “Inquiries or investigations regarding allegations of potential F.C.P.A. violations have been commenced in a number of foreign markets where we operate, including but not limited to Brazil, China and India.”

 

That’s bad enough news to anyone who knows the story, but it sounds a heck of a lot worse when you read out the acronym FCPA – Foreign Corrupt Practices Act.  Not exactly a confidence-inspiring ring to it.

 

All that said, the company will spend money on these inquiries. Millions…tens of millions. Maybe even a hundred+. But the risk of WMT realizing that it has to pull out of a country or severely limit growth outside the US is not in the realm of what we think is realistic. Today alone, the market dinged WMT’s market value by ~$9billion, and pushed the stock within $2 of its long term TAIL support of $66.12.

 

Downside here is minimal, concerns will blow over, and there’s a big call option on WMT if oil rolls. 

 

WMT: Idea Alert. Buying Again. - WMT TTT

 

Call it financial engineering, and better tax planning. We'll call it better better relative EPS growth on a big liquid name.

 

WMT: Idea Alert. Buying Again. - 22


Materials & Dial-in Information for Best Ideas Call

Materials & Dial-in Information for Best Ideas Call - materials

 

Today at 1:30pm EST we will be hosting our Best Ideas Call. Follow the link below to access the presentation.

 

Materials: Best Ideas Call Presentation

 

Please dial in 5-10 minutes prior to the 1:30pm EST start time using the number provided below. If you have any further questions email

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  • Conference Code: 666651#

 

We will be outlining the top investment ideas, both long and short, across each vertical of our world-class research team. In aggregate, we will offer one high conviction and differentiated investment idea from each of our 8 verticals over the intermediate term duration.  

 

Below is a list of speakers:

  • Daryl Jones, Director of Research
  • Darius Dale, Macro
  • Brian McGough, Retail
  • Todd Jordan, Gaming, Lodging and Leisure
  • Howard Penney, Restaurants
  • Tom Tobin, Healthcare
  • Josh Steiner, Financials
  • Jay Van Sciver, Industrials
  • Kevin Kaiser, Energy



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