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Apparel Cost Pressures: Impact of Bangladesh

Takeaway: The latest factory tragedy in Bangladesh -- the 5th largest apparel producer -- highlights continued looming labor cost pressure.

The building collapse in Bangladesh on April 24 that killed over 400 people was a horrible event in itself. That goes without saying.  But it also has negative implications for US apparel retailers and brands.  While Bangladesh accounts for a mere 0.2% of Global GDP (about the size of Utah), it is the fourth largest producer after China, accounts for nearly 5% of US apparel imports and is more significant than Honduras, Thailand and the Philippines. Apparel accounts for 80% of total exports for Bangladesh, making it more dependent on apparel than any other country in the world. Similarly, approximately 10% of the members of parliament have ownership interest the apparel factories, which clearly skews their allegiance. For example, there are only 18 inspectors overseeing the 100,000 factories in the Dhaka district (largest manufacturing hub), which employ 3 million people. This has allowed Bangladesh to be incredibly price competitive – below China in many categories – which was in part passed through to customers (and ultimately, to us).  The compromise has been safety, and the consequences have been tragic.

 

Our sense is that this latest tragedy will be the straw that breakes the camel’s back. We’re likely to see either higher wages, or more compliant working conditions – which costs money. If the Bangladesh government does not impose better standards on its factories, it’s customers might do it for them.  That’s especially the case as US companies are getting more conscious about their reputation on the world stage.  Ultimately, even though Bangladesh only accounts for 5% of our consumption, any change in wage in wage structure or working conditions are likely to have impacts beyond its borders as other countries follow its lead.

 

The bottom line is that this is not enough for us to take down earnings estimates for the group. But with margins at peak we need to be conscious of every little factor that could cause margin pressure.

 

Apparel Cost Pressures: Impact of Bangladesh - otexa1


LVS YOUTUBE

In preparation for LVS's 1Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.

 

 

POST-CONFERENCE COMMENTS

 

MACAU

  • "I think the most underrated part of our portfolio is our pure mass table business and our slot/ETG business, we now have 6,000 positions in the slot/ETG segment, which we think will, the next few years, grow to $1 billion of top line at a 48% margin."
  • "[SCC] "We did do one thing, we're working on that, is improving the premium mass space for gaming. It doesn't have a great premium mass area. We're taking one of the theater boxes and repurposing that for gaming and that would be a very upscale 90 table first quarter of 2014. That's the missing component in the VIP segment in the mass and SCC."
  • [Site 3] "We'll raise project financing, which we're in the process, of doing of about $2.7 billion, so an equity check of about $700 million. Hopefully, we'll be done with it based upon our development timeline by, let's call it, the middle of December of 2015. That's at least the target timeframe. It's a wonderful theme property, probably about 3,000, 3,200 hotel rooms, probably about 4.3 million square feet or 4 million square feet."
  • "If you look at the premium direct business in Macao, the reserve against that's about 40%."

SINGAPORE

  • "The non-gaming piece, it's a magnificent hotel property. It's got 2,600 keys. The ADR is approaching 375. It runs almost full, 95%, 98%."
  • "The mall - it's got very, very successful segments. It's making more than $10 million a month, $30-some million a quarter. But we think there's magnificent upside in the mall as we rethink the mall."
  • "We'll have [VIP] margins about 30%, but it's not like Macao, where it's easy."
  • [VIP] "We should make $350 million or $450 million a year out of that segment."
  • [Mass win/per day] "And if we get that number from $4MM or was it, I think $4.4MM or $4.5MM last quarter, we get that back up into a growth market at a 70-point margin, that's the sweet spot of our Singapore growth on the casino side."
  • "We're about 30% reserved, if you will, in terms of the receivable balance. We expected our reserve provision against receivables to grow in that 35% to 40% range."

VEGAS

  • "I think Vegas remains challenging."
  • "I still think the spend – we can sell rooms and we can occupy buildings. And it looks busy, but the spending habits still haven't come back where they were. The two upside businesses here today in Las Vegas are high-end Asian, which we're very fortunate to be participating in that. We had a wonderfully busy Chinese New Year's and we stayed busy. I mean Chinese New Year's used to be the most of the business, now it's year-round Chinese people coming to Las Vegas."

 

YOUTUBE FROM Q4 CONFERENCE CALL

 

SINGAPORE

  • "I think we're starting to see it in the first quarter (benefit from new hires targeting premium mass gamer). I think we'll see it progressive throughout this year. Frankly, we're doing two things. We're revisiting our database in the premium mass. We're also opening offices. And I think you'll see that progress fully in 2013. I do think there's real opportunity to grow this segment materially as we get into 2013 and 2014."
  • "Singapore is the most challenging credit market from a perspective of, a) highly concentrated; b) very little legal help in the region to collect; and c) there is no junket buffer. So as I said in the past, I remain optimistic, but cautious."
  • "We've been talking about Tower 3 putting a new VIP facility up there for some period of time. I was in Singapore just a few weeks ago and we did receive a request for information from the government from certain government agencies about putting more details on the request, which we are now submitting. But I don't expect you'll see something like that happen because there's about a year construction period where it would happen. As far as additional rooms are concerned and additional buildings, we've had some conversations but nothing is quite moving forward at this point."

KOSPI: Back In Play

Korea's KOSPI index is heavily tied to the performance of severa outside factors, including the value of the Japanese Yen and the US tech sector. So with the S&P 500 hitting new all-time highs, it should come as no surprise that the KOSPI was up +1.2% this morning, heading above our TREND line of resistance at 1943 and closing at 1963. If the rally in US tech stocks can hold and the Yen can shield its fall from grace, expect more good times for the KOSPI.

 

KOSPI: Back In Play - kospi


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 80.28%
  • SHORT SIGNALS 78.51%

IS GOOD DATA BAD FOR THE YEN?

Takeaway: If improving economic data helps get the LDP elected to an Upper House majority come July, it’s ultimately structurally bearish for the yen.

SUMMARY BULLETS:

 

  • As it relates to our structural bear case on the Japanese yen, we continue to view marginal improvement in Japanese growth data over the intermediate term as an ultimately bearish factor for the yen on a TAIL duration, as it helps strengthen the LDP campaign ahead of the JUL Upper House elections. Specifically, total LDP control of Japan’s bicameral legislature will give the party that brought us “Abenomics” a free pass to enact any fiscal Policies To Inflate they feel entitled to in the event the Japanese economy fails to achieve their +3% nominal GDP growth targets.
  • Moreover, with control over both houses of the Diet, they’ll be able revise the BOJ’s charter to the extent Kuroda’s team fails to deliver the +2% inflation it has repeatedly promised to help produce. As a reminder, Japan’s YoY CPI actually slowed -20bps in MAR to -0.9%, so there’s a lot of hay to bale on both the growth and inflation fronts from here.
  • We reiterate our view that Japanese policy is set to remain decidedly dovish for the foreseeable future. Much like the mid-to-late 1990s, the growing rift between US and Japanese policy is set to perpetuate sustainable strength on USD/JPY cross over the long-term TAIL. Our call for an improving US economy  – something consensus simply would not agree with even as recently as one month ago – continues to play out in spades. That only insulates our call for the aforementioned policy divergence.
  • Our refreshed immediate-term risk range on the USD/JPY cross is included in the chart below. Simply put, we think now is a great spot to add to your short yen/long Nikkei exposure.

 

The past 24 hours produced some pretty decent MAR/APR economic data out of Japan – arguably the best batch of growth data we’ve seen in roughly a year. Industrial Production, Overall Household Spending, Retail Sales and Housing Starts all accelerated in MAR, while the Manufacturing PMI posted an acceleration in APR. Additionally, Japan’s Unemployment Rate ticked down in MAR:

 

  • MAR Industrial Production: -7.3% YoY from -10.5% prior;
  • MAR Overall Household Spending: +5.2% YoY from +0.8% prior (fastest YoY gain since FEB ’04);
  • MAR Retail Sales: -0.3% YoY from -2.2% prior;
  • MAR Housing Starts: +7.3% YoY from +3% prior;
  • APR Manufacturing PMI: 51.1 from 50.4 prior; and
  • MAR Unemployment Rate SA: 4.1% from 4.3% prior.

 

IS GOOD DATA BAD FOR THE YEN? - 1

 

IS GOOD DATA BAD FOR THE YEN? - 2

 

IS GOOD DATA BAD FOR THE YEN? - 3

 

While some of the aforementioned YoY growth numbers were far less than buoyant from an absolute perspective, the 2nd derivative deltas (i.e. what matters in macro) all moved in the right direction. While we still don’t buy into the consensus view among mainstream economists that monetary Policies To Inflate as causal to sustainable economic growth, we won’t blindly deny Japan this cyclical opportunity to confirm an escape from the country’s third recession in five years.

 

As it relates to our structural bear case on the Japanese yen, we continue to view marginal improvement in Japanese growth data over the intermediate term as an ultimately bearish factor for the yen on a TAIL duration, as it helps strengthen the LDP campaign ahead of the JUL Upper House elections. Specifically, total LDP control of Japan’s bicameral legislature will give the party that brought us “Abenomics” a free pass to enact any fiscal Policies To Inflate they feel entitled to in the event the Japanese economy fails to achieve their +3% nominal GDP growth targets.

 

Moreover, with control over both houses of the Diet, they’ll be able revise the BOJ’s charter to the extent Kuroda’s team fails to deliver the +2% inflation it has repeatedly promised to help produce. As a reminder, Japan’s YoY CPI actually slowed -20bps in MAR to -0.9%, so there’s a lot of hay to bale on both the growth and inflation fronts from here.

 

IS GOOD DATA BAD FOR THE YEN? - 4

 

We reiterate our view that Japanese policy is set to remain decidedly dovish for the foreseeable future. Much like the mid-to-late 1990s, the growing rift between US and Japanese policy is set to perpetuate sustainable strength on USD/JPY cross over the long-term TAIL. Our call for an improving US economy  – something consensus simply would not agree with even as recently as one month ago – continues to play out in spades. That only insulates our call for the aforementioned policy divergence.

 

IS GOOD DATA BAD FOR THE YEN? - 5

 

In the interim, however, the USD/JPY cross has indeed backed away hard from the psychologically-important 100 line. This has been driven by repatriation of foreign assets (six consecutive weeks on a net basis) as the yen has approached what appears like historically-favorable rates on a trailing 3-5yr duration.

 

IS GOOD DATA BAD FOR THE YEN? - 6

 

We reiterate our view that consensus – be it Japanese households, Japanese corporations, sell-side actors or buy-side speculators – remain Not Bearish Enough on the Japanese yen from here. That, combined with our thesis as updated above, helps us feel comfortable reiterating our call for yen weakness and Japanese equity market strength with respect to the intermediate-term TREND duration.

 

Our refreshed immediate-term risk range on the USD/JPY cross is included in the chart below. Simply put, we think now is a great spot to add to your short yen/long Nikkei exposure.

 

Darius Dale

Senior Analyst

 

IS GOOD DATA BAD FOR THE YEN? - 7


HSY Continues Its Indulgent Run

This note was originally published April 25, 2013 at 13:52 in Consumer Staples

HSY reported first quarter earnings this morning. The company is largely on track, growing in all categories across multiple channels, including club, and has good marketing support behind the launch of Brookside (dark chocolate, wellness). Second quarter will be challenged based on tougher comps in a historically weaker quarter. Volume should drive performance in the year in which HSY expects a 12% gain in earnings per share (EPS). We like the story, but would prefer a better entry point - perhaps second quarter concerns and performance provide it.   

 

What we liked:

  • Revenue slightly missed consensus $1.83B vs $1.84B, but up a healthy 5.5% (Volume +5.3%; Price +0.5%; FX -0.3%)
  • EPS of $1.09 beat estimates of $1.04, up 13%, and fiscal year guidance adjusted up to $3.61-$3.65 vs previous $3.56-$3.63 - first quarter guidance increases are rare
  • Gained market share in every category that it competes in
  • Higher dollar sell-through for Easter despite shorter season
  • Gross margin +2.4% in the quarter on lower commodity costs of $35MM and supply chain efficiencies
  • Strong brand support for Brookside
  • Focused on continued expansion to emerging markets (China, Brazil, India, and Eastern Europe)

What we didn’t like:

  • Q2 is historically a weaker quarter and is facing higher tax rate and more difficult comps
  • Valuation, though more easily supported in the case of HSY given its growth profile and categories than for the balance of the staples group

BUD: The Good, The Bad & The Ugly

This note was originally published April 30, 2013 at 09:39 in Consumer Staples

BUD reported first quarter  earnings per share (EPS) this morning and ABI BB is currently down about 3% in European trading – volume was weak across the board and volume guidance was soft relative to expectations.



What we liked:

  • Beat on EPS ($1.16 versus $0.98 consensus), but entirely due to below the line items (tax rate, lower interest expense year on year)
  • Pricing remained robust leading to constant currency organic revenue growth of +1.5% against a reasonably difficult comparison (Q2 comps ease, Q3 and Q4 stiffen) despite a decline in volume

What we didn’t like:

  • Volume softness across multiple regions save for Asia Pacific with organic volume declining 4.1% against the most difficult comparison of the year
  • Market share decline in the U.S. (0.5%)
  • Lack of operating leverage (unsurprising, given volume declines) as constant currency EBIT grew only 0.2% on constant currency revenue growth of +1.5%
  • Gross margin declined 1.33% against the most difficult comparison of the year
  • Cautious volume commentary on Brazil (industry flat to down low-single versus prior view of low to mid-single digit growth)

Stepping back for a moment and looking at BUD within the context of the broader consumer staples group, we continue to struggle to find names that we are comfortable with over almost any duration given what we see as the currently stretched state of valuations.  With BUD, we have good visibility on double digit EPS growth driven by continued strong pricing, merger synergies (eventually) and below the line items - even factoring in continued volume weakness.  The company’s FCF yield (7%) remains attractive relative to the group.  Based on that context, we are going to keep BUD on our preferred list.  We expect a couple of European sell-side downgrades, just because that is how those analysts generally roll, but we think BUD continues to make sense once the impact of this quarter shakes out.


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