Our Home Furnishings Call Is Getting Tough To Argue With

Great quarter from one of our favorite names - Bed, Bath and Beyond, which crushed my above-consensus estimate by over 15%. The SIGMA chart below speaks a thousand words here. We're seeing both inventory/sales spread get more favorable while gross margins are coming in ahead of expectations. With compares for the upcomming few quarters increasingly easy and the trajectory looking good, I continue to like this one.


Our Home Furnishings Call Is Getting Tough To Argue With - BBBY Edited SIGMA


Rather than go on about the merits of BBBY's quarter, I want to hit on a few thematic notes, as well as company-specific divergences within the Home Furnishings space.


Looking at retail sales and personal consumption, we're seeing a positive inflection point in each (keep in mind that ‘less bad' is good in our model). There is a bullish call to be made in this space based on the emerging macro-economic trend of employment turning and a housing bottom. No, we're not saying you should run out and buy Toll Bros. Quite the opposite, actually. We like companies that will benefit from consumers staying put in their existing homes, with plans of doing so for a while. That usually means sprucing up one's home, and catching up on deferred capex.


Who will capitalize? If you listened to any conference calls on the fourth quarter, you heard some good mixed with the bad on the home furnishings front. JC Penny, Williams-Sonoma, and Wal-Mart mentioned the increased time spent at home eating and entertaining as a cause for less bad home furnishing sales. Then others like Target (that can't seem to get out of its own way) highlighted the risks they face as well as the efforts they are taking to consolidate SKUs to fix the business. .


Here's an overview of what different management teams had to say about the home furnishings space this quarter.


"There is one major behavior change we have seen during the past year that has had a significant impact on our home business. Families are definitely eating more often at home. While we expect this to have a positive impact on grocery, we also have seen increased comps in home categories for cooking, dining and entertaining at home," Eduardo Castro-Wright - WMT Vice Chairman - Q4 CC.


"From a merchandising perspective, we had negative growth in all key categories, although bakeware, electrics and cookware were less pronounced. Exclusivity and perceived investment value continued to drive these categories as people are eating out less and entertaining at home more," Dave DeMattei - WSM Group President - Q4 CC.


"Another bright spot was our home business that has experienced stability over the last few months," Ken Hicks - JCP President, COO - Q4 CC.


"We're seeing a little bit of life in the home business as we start the spring season. I think that may be the bottoming effect of home furnishings over the last two or three years. We may be seeing a better trend going forward. Although until the housing crisis is more or less fixed on a macro basis, it's going to be hard to see great increases," Mike Ullman - JCP CEO - Q4 CC.


"In our retail segment our results were characterized by a fundamental change in consumer spending patterns that negatively impacted both our traffic and sales, particularly in higher margin discretionary categories like seasonal, apparel and home," Gregg W. Steinhafel- TGT CEO - Q4 CC.


"On the highly discretionary side in home and [...] we're looking at mid double digit comp decreases [for 2009]. We are very conservative in apparel, home and seasonal categories where there is significant markdown risk," Gregg W. Steinhafel- TGT CEO - Q4 CC.


Zach Brown

Our Home Furnishings Call Is Getting Tough To Argue With - Home Furnishings SIGMA
Our Home Furnishings Call Is Getting Tough To Argue With - Home Furnishings Sales Chart


Russia: Reward Outstrips the Risk

Position: Long Russia via the etf RSX

Everyone's aware of the geopolitical risk associated with Russia.  Below are negative and positive factors for framing this debate; we believe reward outstrips the risk. As always, price rules.


  • Russia has a massive amount of debt to refinance this year (~$100 Billion)
  • Siberian Services (an oil drilling company) defaulted on $100 Million of debt today. This is the second case of default in Russia this year (Finance Leasing Co.)
  • Volatility of Medvedev and Putin Government remains a constant
  • Inflation at 14% in March Y/Y
    • Volatility in the Ruble (despite intermediate stabilization) is always a credible threat. Should inflation extend itself, it will put further pressure on the price of imports


  • Russian stock market (RTSI) is up +36% since March 1st or +17.2% YTD
  • Russia benefits from Commodity Reflation
    • Economy is levered to basic materials and energy commodities
    • In Q408 natural gas and oil accounted for 46% of total export revenues.  (Down from over 50% in 1H08)
    • Credit Suisse upgraded Russian stocks today, citing stabilization of oil prices
  • Proximity to THE client, China
    • Russia has what China needs-Oil.  Russia did a major oil deal with China in mid- February '08. In return for 300,000 barrels of crude a day for 20 years, China loaned $15 Billion to Russia's Rosneft (oil firm) and $10 Billion to Transneft (oil pipeline co.). The loans will help capitalize their balance sheets and promote expansion
  • Increased Ruble stabilization versus its trading band
  • Early cycle in mark-to-market prices to expedite its purge
  • Putin issued a $90 Billion stimulus package yesterday
  • International reserves up last week $2.7 Billion to $388 Billion, third largest in the world

We're currently long Russia via RSX, which we bought for a second time this year on 3/27.

Matthew Hedrick

Russia: Reward Outstrips the Risk - ruskie



Now we know why EAT's CFO Chuck Sonsteby was so bullish about margins!  EAT preannounced its 3Q09 earnings and even with same-store sales slowing from 2Q09 to -5.6% from -4.5%, management expects EPS of $0.44-$0.45 versus consensus at $0.29.  Based on this guidance, operating margins will likely improve by 180-200 basis points year-over-year following five quarters of year-over-year margin declines.  Management attributed these better than expected margins to cost of sales favorability, lower preopening expenses and better control of labor and G&A expenses.   And, as I said last week (please refer to my April 3 post titled "EAT - Is There A Paradigm Shift in Casual Dining?"), there appears to be more fat still left to cut, largely related to the company's recently announced organizational changes and decision to have Todd Diener, serve as the president of both the Chili's and On the Border brands.  This will lead to more management cuts across the two concepts.  That being said, EAT's press release stated that management expects its current margin momentum to continue into fiscal 2010. 


Some of EAT's margin favorability was offset by weaker than expected same-store sales growth in 3Q09.  Despite the sequential slowdown in same-store sales on a year-over-year basis, EAT's blended 2-year average trends improved slightly in 3Q09 to -2.3% (from -3.3% in 2Q09).  Chili's same-store sales growth declined 5.2% in the quarter but on a 2-year average basis, decreased 1.8% (from -3.3% in 2Q09).  Traffic trends at Chili's worsened in the third quarter, declining 9.6% versus -5.5% and -5.8% in 1Q09 and 2Q09, respectively. 


EAT's recent same-store sales and traffic trends reaffirm my view that it is unlikely we will see a significant improvement in casual dining sales trends in calendar 2Q09 from the -3% to -5% levels.  The issue facing all operators will be the impact on the P&L from discounting in an effort to drive customer counts.  As of yesterday, Chili's started its "10 meals for under $7" deal (not reflected in the 3Q09 numbers).  In 3Q09, Chili's price and mix increased sequentially on both a 1-year and 2-year basis while traffic declined.  Going forward, Chili's could see a tick up in traffic as it promotes its $7 menu options at the expense of price and mix.   In today's environment, I think this is the way casual dining is headed - less is more.  And EAT has and continues to proactively adjust its margin structure and business model to outperform in this environment.


EAT – LESS IS MORE - Chili s 3Q09 Price Mix Traffic

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Nevada just released February gaming revenues and the Las Vegas Locals Market declined only 5% versus a 22% year-over-year drop in January.  The comparison wasn't necessarily easy either.  Last year February declined only 6% and February 2009 had one less Saturday, one less Sunday, and compared against a leap year. 


Why are we getting excited about a 5% decline?  We recognize that it is only one month of data but in this environment we are very focused on deltas.  In this case, the delta is clearly better.  Business could be getting less bad.  We also focus on six month moving averages in our Delta Charts.  Here, the six month moving average turned up for the first time in a year, potentially indicative of an intermediate pivot. 


LV LOCALS: THE FEB PIVOT - lv locals feb pivot


It is highly unlikely that March will result in continued upward momentum in the moving average line, but April most certainly will.  March 2009 revenues would have to increase almost 5% for this to happen since September, the only positive growth month in the last 8, exits the 6 month average in March.  However, March revenue growth, while likely negative, should exceed the 6 month moving average and the delta would remain positive.


Our intermediate thesis on the Locals Las Vegas market is that 2009 will be "less bad" (positive delta) and 2010 could actually show growth.  We predicted as much in our 02/05/09 note "THE LOCALS LAS VEGAS MACRO MODEL".  This would be a positive scenario for BYD, the largest public company operating in this market.

Some Love For Lloyd...

Most of our clients know that I have had a bone to pick with the way that Goldman Sachs has managed the risk associated with public (and now government) shareholder capital for a long time now (I started shorting it in November of 2007). They privatized their profits and socialized their losses.


Today, Goldman's CEO, Lloyd Blankfein (under the duress associated with protestors with pink banners) is giving the most straight talk that I have yet to hear from a CEO running a horse and buggy whip in the land of public Investment Banking Inc.


Dear Lloyd,


For whatever it's worth, I am going to give you some love. You are talking my language - the language of Partnership and Capital Preservation. You even used some Research Edge lingo when it came to discussing Risk Management, Team Based Compensation, and the "Global Interconnectedness" of the world's markets.


In terms of measuring the delta in my own mind about GS stock, this is a meaningful shift. I, for one, will stop shorting your stock... for now.


We all know that you abandoned true Partnership for the payout associated with being a public company. With public funds you are now hostage to public accountability.


Today, for both America and her stock market, you made a very important step.


Thanking you for seeing The New Reality,

Keith R. McCullough
Chief Executive Officer

Some Love For Lloyd...  - blankfein

HPQ breaking down

The TREND line of Hewlett is $33.33; watch it closely...

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