Topics will include:
- China tightening the screws on large cash transactions
- Smoking restrictions
- Plateauing mass hold percentage
- Performance of SSE
Takeaway: With $3 in earnings power over the next 2yrs reflecting rev & EPS growth of 30%+ and 25%+ in '13 & '14, we can’t bet against this one here.
While not outright bullish on LULU, we came away from the print tempering the negative bias we had in prior quarters about trends in new store productivity. New store productivity is still hardly knocking the cover off the ball at a sub-50% level. But it stopped getting worse, and we think that the acceleration in the International story is a clear positive as it relates to perception in hitting LULU’s lofty growth goals over the next 3-years.
The cost of growth is still a concern. In fact, LULU fessed up that higher costs to grow its international presence to buy higher priced real estate will take-down margins from current levels. While we don’t like to see that directionally, let’s face the reality that this is still a sustainably high margin concept with anomalously high asset turns resulting in return on operating assets over 100%. If there’s a trade off between sales and margin it might matter for most companies, but we
think that LULU could sustain this hit without giving up its multiple.
This brand is in a rarified class of great global brands with great growth runway ahead. But like UA, we use ‘global’ loosely with less than 5% of sales currently generated outside of North American borders. That’s about to shift meaningfully and will be a key driver behind ~30% top-line CAGR over the next 3-years. Growth like that is tough to find in retail. At the end of three years, International should be 15% of sales for LULU, slightly ahead of what we previously assumed.
Following favorable tests, LULU is officially moving forward with plans for expansion into both Asia (Hong Kong & Singapore) and Europe (London & Germany) over the next 2-3 years. While this is likely to cost a few points of margin in the process, an investment cycle like this is what can get this brand from $1.4Bn to $3-$4Bn+ over the next 5-years as it continues to develop and create new product opportunities as only LULU can.
One of our concerns on the name recently has been eroding new store productivity trends – that reversed this quarter for the first time in the last six. While positive on the margin, it’s still something to watch closely particularly as the company looks to open larger stores overseas. Larger stores mean higher sales per store, but it’s higher sales per square foot that matters.
It helps that LULU is seeding the market by launching e-commerce and showrooms ahead of stores, but the reality is that even if these stores are targeted for higher density locations it’s simply tougher to squeeze higher productivity out of a bigger box. Given the revenue opportunity associated with this initial investment, we’re willing to give LULU a pass during the early stages as long as we see the incremental revenue growth to justify the effort (and spend).
The setup over the next two quarters – particularly on the top-line – is a tough one for LULU, but international growth should start to hit just as that gets easier next year (Q2/Q3) signaling a significant acceleration in growth over the back-end of what we call ‘intermediate-term’ (2-3 quarters). With $3 in earnings power over the next two years reflecting revenue and EPS growth of 30%+ and 25%+ in 2013 and 2014, we can’t bet against this one here.
Per Keith’s risk management levels, a close above LULU’s immediate-term TRADE level of resistance of $71.34 would suggest a bullish setup near-term.
LULU Risk Management Levels:
LULU SIGMA reflecting return to positive sales/inventory spread:
Initial jobless claims are now back to pre-Hurricane Sandy levels. Two weeks ago, examining state level data of NY, PA and NJ showed that these three stated accounted for 20.3% of jobless claims while only accounting for 13% of the population. That difference, 7.3%, is down from 12.4% in the previous week. If we adjust the claims number from two weeks ago, 393k, for this over-representation we find normalized claims should be around 366k (393k / 1.073). This morning's print of 370k is consistent with that estimation. One month from now, we expect numbers will be fully normalized.
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Takeaway: Growth revised down once again. Draghi stretches for optimism.
Positions in Europe: Short Russia (RSX)
Today’s Q&A session revealed that there was “wide discussion [about a rate cut] but the prevailing consensus was to leave rates unchanged”, leaving the interest rate on the main refinancing operations unchanged at 0.75% along with the interest rates on the marginal lending facility and the deposit facility at 1.50% and 0.00%, respectively.
The real call-out of the meeting is the ECB staff’s projections downward revision for Eurozone GDP. Below we show the last three estimates, with the trend decidedly Down, Down, Down. This move however didn’t come as a great surprise as we noted it in our November ECB report. We’d call to your attention specifically 2013, which shows a dramatic revision to the top end range.
2012 GDP growth
DEC: -0.6% and -0.4% SEPT: -0.6% and -0.2% JUN: -0.5% and 0.3%
2013 GDP growth
DEC: -0.9% and 0.3% for 2013 SEPT: -0.4% and 1.4% JUN: 0.0% and 2.0%
Beyond the inability of the ECB to accurately forecast, what was telling about today’s conference was that Draghi went so far as to paint an optimistic tone (in spite of falling economic projections) by citing business confidence surveys in Germany, France, and Italy that ticked up in the most recent reading. Citing merely this data in a sea of negative to depressed data is an obvious stretch.
The Q&A was largely filled with a tight-lipped Draghi for any comment on Spain or Italy tapping the OMT, with him simply reiterating that it’s up to the individual Eurozone governments to request a bailout and that the Bank stands ready to use OMTs (of course under conditional requirements).
However, one question on a Banking Union is worth highlighting. To paraphrase, it went: “Given that the ECB’s stance on a Banking Union remains that it should include all 6,000 banks whereas the Germans believe it should only include its largest banks, if it is decided that a Banking Union does not include all 6K does it make sense to have it at all?”. To this Draghi dodged the answer and only said that a Banking Union needs a strong supervisor where the ECB doesn’t have reputational risk.
This is a clear signal to us that the ECB and Germans (in particular) will be at loggerheads over the formation of a Banking Union, and extend market consternation as Eurocrats push out the formation of a Banking and Fiscal Union. We believe the inability to find a solution should strengthen the lid on the EUR/USD, with our intermediate term TREND line of resistance in the sand firmly at $1.31.
While we will not argue that we have seen improvement in European equity and bonds markets since this summer, especially following Draghi’s September OMT announcement, we contend that despite all the market intervention, prices will (in time) reflect the underlying health (or lack thereof) of the region. Here we believe Europe’s path to growth will be constrained and prolonged by Eurocrats. Weak credit lines to households and corporations are one piece of evidence of a very clogged environment that should hamper real growth.
You can find Draghi’s Introductory Statements here.
Gross gaming revenue (GGR) in Macau rose 8% in November on a year-over-year basis. Despite a tough hold comp, VIP hold appeared slightly below normal for this year but well below 2011 numbers. Mass revenue led the way, up 33%, while VIP revenue declined slightly for the second consecutive month. How did the Macau players fare?
Sands China (LVS) saw market share at 20.8%, up 15.6% year-over-year. GGR growth led the market and the mass business grew a whopping 75% year-over-year. Wynn (WYNN) struggled with GGR down 2% and mass hold up only 6%. MPEL saw GGR grow above average and mass share grew to 12.9%, an all-time high. MGM Resorts (MGM) had the worst month with market share barely rebounding from October’s 8.9% number and mass share was only 6.9%, nearly an all-time low. GGR fell for the second straight month at MGM.
Takeaway: While there may be a small amount of further renormalization, the bulk of the post-Sandy distortion is behind us.
Back to Normal / Tailwinds Ahead
Initial claims are now essentially back to pre-Sandy levels. We show this in the first chart below. For the last few weeks we've been looking at state level claims data for NY, NJ and PA. State level data is released on a one-week lag relative to the national data. Two weeks ago, NY, NJ and PA accounted for 20.3% of total jobless claims, while accounting for 13.0% of the population. That difference, 7.3%, is down from 12.4% in the previous week. If we adjust the claims number from two weeks ago, 393k, for this over-representation we find normalized claims should be around 366k (393k / 1.073). This morning's print of 370k is consistent with that estimation.
We expect that claims should start to resume their normal behavior in the coming weeks. As a reminder, we continue to expect a seasonality-driven tailwind to benefit the data through the end of February. This, combined with our bullish view on housing, should provide an ongoing top-down tailwind for the sector.
This week initial jobless claims fell 23k to 370k from 393k. The prior week's number was revised up by 2k to 395k. Incorporating this upward revision, claims were lower by 25k. Rolling claims, meanwhile, rose 2.25k WoW to 408k and non-seasonally adjusted claims rose 140k to 499k. The rolling series, both SA and NSA, are obviously reflecting the Sandy distortion on a lag. We expect that one month from now they will fully normalized.
Joshua Steiner, CFA
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