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URBN: Still Like It

Takeaway: We think we’re at an inflection point of what we expect to be multiple upward EPS revisions in 2013. We see 25%+ upside over the next 12-mo.

We still like URBN even after the +6% move reflecting the positive QTD comp update after yesterday’s close of +HSD ahead of expectations (+5%E). It’s worth noting this outperformance came against the tougher half of the quarter – comps get easier over balance of 4Q. Revisions out over the last 24-hours will be the latest in what we expect to be a series of upward earnings revisions. We’re still +11% above consensus for F13 (half of which has been updated) and +19% above the Street for F14 representing an average of 28%+ EPS growth over the next two years.


Up next on the catalyst calendar is an update at ICR in mid-January right as Anthro is accelerating out of the turn and then earnings in early March. A year after reshuffling the senior ranks, it appears that management is hitting its stride and doing everything right.  In addition, with URBN breaking through its TRADE line of resistance at $38.92 this morning it has a bullish setup here according to Keith’s quantitative risk management levels.


With a favorable fundamental setup over the next several quarters, one of the best positioned e-commerce businesses in retail (20%+ of sales) headed into the holidays, and quantitative factors all in alignment, we see 25%+ upside from here in 2013.

 

 

Here are our thoughts from last week’s Idea Alert on URBN:

 

“We published it first on 3/22 with the stock at $28. Then again at $26 on 5/22. Today we have an opportunity to publish it again in the wake of a 'less than breathtaking' quarter. Though we think we'll have the opportunity to remind you of our thoughts again 20% higher a year out.


Underlying business trends came in largely as expected in the most recent 3Q, but importantly posted continued improvement in fundamentals. Importantly, Anthro is reaccelerating headed into a highly anticipated holiday season for the brand. With a rebound in comps along with new store, online, and international growth opportunities, we see a sustainable return to low double-digit top-line growth. Moderating markdown rates coupled with tighter inventories (see SIGMA below) is gross margin bullish at the same time the company is beginning to leverage its investment spending including its new DC. This call isn’t predicated on a return to prior peak margins (18%+) to work. In fact, we’re shaking out at +/- 16% margins over the next two years which will likely prove conservative.


The reality is that sentiment is still not overly bullish with 46% Buy ratings from the 31 firms that cover the name. While modestly more bullish than the 43% Buy rating mix YTD, it’s well below the 60%-80% mix from 2008 through 2010.


We’re shaking out ahead of the Street in the upcoming quarter as well as +12% and +20% above consensus EPS in 2013 and 2014 respectively. After nearly two years of declining estimate revisions, we think we’re at an inflection point of what we expect to be multiple upward earnings revisions in 2013. It's not cheap, and it’s a slow grind to full recovery. But from where we sit, boring can still work.”


URBN Risk Management Levels (on 12/4):

 

URBN: Still Like It - URBN TTT levels


URBN SIGMA is back in the sweet spot (sales outpacing inventory growth with margins expanding):


URBN: Still Like It - URBN SIGMA


MACAU: HIGH HOLD LIKELY CONTRIBUTED TO A STRONG DECEMBER START

Our expectation of a strong December, with accelerated YoY growth from November, seems to be coming to fruition.  Average daily table revenues were HK$930 million, up 33% from the comparable period of 2011, and much higher than November’s ADTR of HK$769.  Our full month GGR projection for December is HK$25-26 billion, up 9-13% YoY.  Beyond December, we remain concerned with smoking restrictions to be implemented in January, stabilizing Mass hold %, China’s corruption crackdown, and the recent poor performance of the Shanghai stock exchange.

 

MACAU: HIGH HOLD LIKELY CONTRIBUTED TO A STRONG DECEMBER START - M 

 

For market shares, MPEL, MGM and LVS are strong out of the gate here in December, all well above recent trend.  We are hearing that the market held high in the first 10 days with the exception of Wynn and Galaxy.  We continue to believe that LVS and MPEL are the most defensive stocks against our slowing growth theme.  LVS should continue to be a market share gainer over the next 12 months while MPEL is on track to handily exceed Q4 EBITDA projections.

 

MACAU: HIGH HOLD LIKELY CONTRIBUTED TO A STRONG DECEMBER START - M2


WOOF: Room For Upside

We believe there’s a correlation between housing and pet care that’s worth exploring. One name that we see as a potential long idea is animal hospital operator VCA Antech (WOOF). Research shows that consumers in the 25-34 year old age bracket are the largest percentage of first time home and pet buyers. We believe the pet ownership life cycle begins when young couples get a dog when their children are young, followed by a second replacement dog. If housing continues to improve, then pet ownership would follow and same store trends for WOOF would also improve. 

 

WOOF: Room For Upside - Household Formation vs WOOF SS normal

 

WOOF: Room For Upside - New Home Sales vs WOOF SS normal

 

WOOF: Room For Upside - Pet ownership life cycle normal


Early Look

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DG: Tough to Smoke’em if you Don’t Got’em

Takeaway: DG’s EPS beat this morning is uninspiring. The bottom-line is that the top-line is slowing…

DG’s EPS beat this morning is uninspiring. The key trend to watch continues to be the rate of consumables growth. For the third quarter in a row consumables grew as a percent of sales, but at a decelerating rate sequentially (on a TTM basis).  This trend is notable because 1) consumables tend to be a lower gross margin business – a positive, and 2) they are a key traffic driver – not good. As such, it’s not surprising to see DG post comps +4% shy of expectations+4.6%E in the quarter. In addition, DG’s 4Q comp outlook of +3%-4% vs. +4.3%E suggests continued pressure on the top-line over the near-term.


One of the key factors to consider here is the recent introduction of tobacco at FDO. As one of DG’s chief competitors, this is a notable shift as it’s the only dollar store to sell tobacco to consumers over-indexed to smoking. It’s hardly a game changer for DG today, but when a key competitor needs to shift to Smokes to get its comp, it’s not exactly a positive sign for the space. We continue to think that ‘the consumables shift’, which has been driving comp for both major Dollar Stores, is getting long in the tooth to say the least.


Lastly, with inventories outpacing sales growth this quarter and a tough comp ahead in 4Q (including an extra week), this is not a good setup near-term for DG.

 

DG: Tough to Smoke’em if you Don’t Got’em - DG CatMix

 

DG: Tough to Smoke’em if you Don’t Got’em - DG S

 

 


Bursting Bubbles

Client Talking Points

Das DAX

Germany’s DAX is the new killing it. The index is hitting highs not seen since 2008; that includes holding above September closing highs (7451). That level has now become support instead of resistance. While the mainstream media is focused on the Dow, the DAX is where the real action is. Keep in mind that the DAX’s performance does not mean that the German economy is A-OK. Sure, it’s in better shape than our economy right now, but Germany has plenty of issues to deal with. The Eurozone crisis is still a crisis and is far from over.

Holler At The Dollar

Since 2007, we’ve had the pleasure of watching Hank Paulson, Tim Geithner and Ben Bernanke destroy the value of the US dollar. All this printing of money was supposed to fix all the bad stuff that happened to us but instead, we still have $3.50 a gallon gas, expensive food at the grocery store and bubbles all over the commodity space. Since the Bernanke Top (Sept. 14, 2012), we’ve seen the CRB Commodities Index drop -8.7% while the S&P 500 is only down -3.8% during the same time period. Our global macro theme of commodity bubbles deflating is coming true and strength is finally coming back to the US dollar, which has been up for 8 of the last 11 weeks.

Asset Allocation

CASH 55% US EQUITIES 12%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 15% INTL CURRENCIES 12%

Top Long Ideas

Company Ticker Sector Duration
YUM

New unit openings in China and strength in YRI and US should offset China weakness in 1H13. China SRS growth is sensitive to the economy but new unit growth and ROIIC are likely to be supported by continuing growth of the consuming class in China. Looking at operating income by geography for YUM/MCD/SBUX, we can see that YUM is the most geographically diverse. This is manifest in YUM’s more stable EPS growth and price performance over the last 10 years.

SBUX

Uncertainty in US from a macro perspective (jobless claims uptick) gives us pause from TRADE perspective although coffee prices will serve as a tailwind going forward. Company is becoming more complex, taking on risk as it acquires new brands. Longer-term, we view Starbucks, along with YUM, as one of the most attractive global growth stories in our space.

FDX

Margins are in a cycle trough as the USPS is on the brink. FDX is taking more share in the U.S. and following the recent $TNT news flow we think $UPS is in a tough spot.

Three for the Road

TWEET OF THE DAY

“If you were lucky enough to buy $AIG shares from the gov't at $32.50 last night in the follow-on, you're very happy right now.” -@GTWNJACK

QUOTE OF THE DAY

“There is danger from all men. The only maxim of a free government ought to be to trust no man living with power to endanger the public liberty.” -John Adams

STAT OF THE DAY

Baltic Dry Index falls by 3.9% to 900, the biggest drop since January.


THE M3: ALIPAY; CHINA LOANS; AERL

The Macau Metro Monitor, December 11, 2012

 

 

SANDS CHINA STARTS ACCEPTING ALIPAY Macau Business

The Venetian Macao and Sands Macau now accept payments via Alipay, China’s most widely used third-party online payment solution.  The service provider had more than 700 million registered accounts as of June, and began facilitating transactions from the Venetian Macao and Sands Macao websites on November 28.  Alipay is an affiliate of Alibaba Group.


“Offering Alipay as an additional payment option when booking our hotels online represents a fabulous convenience for our guests who book online from the mainland,” said David Sisk, COO of Sands China.

 

CHINA NOV LOAN DATA POINTS TO GRADUAL BUT BUMPY RECOVERY Reuters

November new yuan loans totaled 522.9 BN yuan, missing estimates of 550 BN yuan.  M2 money supply grew a slower-than-expected 13.9% YoY in November.

 

AERL TO LIST IN HONG KONG Macau Business

Nasdaq-listed VIP room gaming promoter Asia Entertainment & Resources Ltd announced yesterday it intends to file a formal listing application with the Hong Kong Stock Exchange in the first half of 2013.    The company further announced yesterday that it has entered into engagement letters with professional advisors in order to complete the listing.

 

AERL promotes four VIP gaming rooms, all in Macau. They are located in StarWorld, Galaxy Macau, Venetian Macao and City of Dreams, respectively.  For the first 11 months of 2012, AERL’s rolling chip turnover was US$16.83 billion (MOP134.64 billion), down 7.4% YoY.

 

 



Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.57%
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