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WRC: Getting Easy To Not Like It Again

I struggle with this one. My model has the company missing the quarter by a nickel due to weaker top line and gross margins (see below), and visibility on any stability is six months away at best. I still don't think that the margin structure is sustainable without any temporary help from the Obama administration breaking the buck. In fact, the consensus is looking for flattish EBIT margins at 10% during the upcoming year as well as in 2010. Maybe that's doable, but I can't get to upside - even with sourcing savings on the docket.


But would I be shocked to see them beat the quarter? No. WRC has posted an average 40% variance each quarter over the past 5-years. In fact, this company beat for the last 11 quarters until dropping the bomb in 4Q (just after management sold the most stock since emerging from bankruptcy). Since then the company has not given explicit guidance to the public, but set low general hurdles, and has subsequently worked the conference and 1-on1 circuit meaningfully. Would it have done so in advance of a big miss? Probably not. If another big miss happens, this name will be in 'sentiment purgatory' for a long long time.


But it's certainly not there now. 80% of sell-side ratings are 'Buy' and only 4% of the share are held short. As noted, management timed mass sales magically before the last big miss in 4Q.  But with the stock dropping to $12.60, you would think that management would have jumped back on board, huh? Not quite. Not a single purchase from $13 up to its current $28. Maybe the senior management team is as weary of the current multiple as I am.


Our Model

Our WRC model is coming out at $0.68 for the quarter, $0.05 below the Street consensus of $0.73.  The key difference in our model vs. others lies on the top-line coupled with a slightly more negative forecast on gross margins. 



Revs are decelerating as square footage growth in CK cannot fully offset declines in all other divisions, comparisons extremely tough, and unfavorable FX(-9)%.


Revenues decelerating on a 2 yr basis throughout the year and will decelerate in 1H on a 1yr basis.  Compares ease a bit in 4Q, as this was the first quarter that WRC reported a substantial slowing in sales momentum at any point over the past 9 quarters.


Square footage growth of 20% (up 25% in F08) for CKI will continue to help drive sales in the sportswear and intimate (CK retail) segments.  The most recent data point given at a March B of A conference was that comps were running 10% for retail. While still robust, this was down from a 12% run rate in 4Q.


Timing of swim shipments may have an impact on 1Q as retailers continue to shift receipts closer to need.  Also given the short selling season for swim, it is possibly that wholesale accounts remain extremely conservative on inventory commitments given the inherent margin risk associated with the category.



Decelerating along with sales after huge gains over the past 2 years.  1H especially tough with GM's up 600+ bps total over prior 2 years.


SG&A expected to be down but at a slightly lesser rate than sales. 


$70mm in cost cuts announced for 2009 and more recent headcount reductions are expected to the keep SG&A dollars down for the year by 8%.


Capex/Working Capital

CapEx should be down slightly in 09, $40mm vs. $42mm in 08.  Square footage growth down slightly to 20% from 25%.  Keep in mind that this rate of growth is in the top 5% of retailers in this climate. Why not ease back with capital commitment and hold out for better terms on properties (i.e. LULU, URBN, HIBB, COH).


Inventory position will be the first metric I check when numbers are released. WRC has done a solid job over the past three years with consistently growing inventories ahead of sales. This was when FX was a benefit, growth came disproportionately from International ops, and they sold off low-turning intimate and swim businesses. The extent to which WRC can hold this will be the key to Gross Margin volatility in 2H.



WRC: Getting Easy To Not Like It Again - 5 10 2009 8 38 34 PM


WRC: Getting Easy To Not Like It Again - 5 10 2009 8 29 43 PM


Macau table revenue fell 10% y-o-y, very similar to March's 9% decline.  The breakdown was also similar with the decline driven by a 14% decline in Rolling Chip revenue, partially offset by a 1% increase in Mass Market.  Once again, Rolling Chip continues to face tough comparisons with the liquidity driven, massive growth last year.  Those tough comparisons will end in September.  Despite the tighter visa restrictions, Mass Market revenue is holding in.


The following are some observations about the property level numbers:


  • Wynn: Down to 12.3% from an 12 month average of 16.3%
    • Some of the drop on Wynn's share is due to lower hold % in month, but Rolling Chip was also down materially, as was Wynn's Mass Market share
  • LVS: Flat from March at 26%
    • Rolling Chip was up 5% y-o-y for LVS's properties on a combined basis (Sands was down but Venetian was up)
  • MPEL: Crown's market share increased to 9% from 8% last month
    • Hold was weak in both March & April, so the share gain was based on better rolling chip volumes
  • MGM: Down to 8.4% vs 9.8% last month
    • Bad hold was responsible as Rolling Chip was up y-o-y
  • Galaxy: Up 2% sequentially from March levels to 12.6%
    • Some of the lift is due to better hold
  • SJM: Up to 31.7% from 30% in March


Y-o-Y Win comments:

  • LVS:
    • Sands up 30% driven by an 85% increase in RC with Mass down 11%
    • Venetian & FS up 14%
    • Total table revenue from Macau + 20% at $253MM
  • Wynn:
    • Down 36%, with VIP down 38% and Mass down 27%, total table revenue: $120MM
  • Crown:
    • Down 54%, total table revenue $89MM
  • Galaxy:
    • Up 17%, with VIP up 30% and Mass down 29%, total table revenue: $123MM
    • Growth driven by Starworld which had table revenues grow 49% to $84MM

APRIL SIMILAR (NOT) TO MARCH - macau april total bac rev shr

APRIL SIMILAR (NOT) TO MARCH - Macau April mm rev shr

APRIL SIMILAR (NOT) TO MARCH - April Macau RC turnover shr

Exports: What Germans Do Best (…or Second Best)


Marginal fundamental improvement leaves us cautiously optimistic


Exports rose 0.7% in March on a monthly basis from February, the first positive month-over-month change since last September, according to data released by the Federal Statistics Office today. The delta here is critical to note. We could only focus on the annual percentage change in exports (see chart below), yet we're of the camp that the incremental improvement of fundamental data points on a sequential basis is confirming that Germany's recession is waning.  Is Germany out of the dark? Certainly it is NOT, however we're bullish that the country's recovery will come sooner and outperform many of its Western European peers, especially if it can get its strong side, exports, moving.


 Additional data points that have come in this week show a mixed fundamental picture:


  • Industrial Production held steady from February's contraction of 3.4% on a monthly basis or fell 20.4% on an annual basis
  • Manufacturing Orders increased 3.3% in March on a M/M basis
  • Retail Sales (excluding autos) fell 1.0% in March M/M
  • Trade Surplus increased to 11.3B EUR in March from 8.6B EUR in the previous month

Not included in retail sales is the success of Germany's auto rebate program. According to the VDIK Association of International Motor Vehicle Manufacturers new car registration in Germany was up over 30% in April year-over-year, and anecdotally the program has been a huge success. The program incentivizes individuals to trade in their old cars (9 years+) and receive 2,500 Euros towards a new car that meets certain emission standards. As we discussed in a post on 4/24, "Germany's Lifeblood Das Auto", the automobile industry has remained relatively resilient despite severe global demand destruction. But the numbers don't lie.  BMW beat Q1 expectations, yet still recorded a net loss of 55M EUR before taxes and depreciation and Daimler reported that revenue fell by 25%, adjusted for exchange-rate effects. GM's German Opel division still hangs in the balance as it looks for a buyer. Increasingly Italy's Fiat looks like a strong candidate.


While the ECB trimmed the interest rate 25bps to 1% yesterday, the cut was largely baked in. We've been harping on the ECB's lethargic call to action to cut for the better part of this year. Yesterday helped to confirm that ECB monetary policy can only go so far, especially as it runs out of room to cut. We've highlighted the positive fiscal stimulus measures issued by countries like Sweden. Additionally we believe that Norway will roar higher due to its leverage to the price of oil. We're oil bulls on a TREND (3 month or more) duration. 


The ECB decision yesterday to pump some 60B EUR in the Eurozone economy through its purchase of euro-denominated covered bonds will help put wind in Europe's sails. Importantly for Germany and Chancellor Angela Merkel, who is fighting for reelection in September, there will be a focus on offsetting the negative sentiment associated with a burgeoning unemployment rate, which currently stands at 8.3%, and getting domestic deals done, like an owner for Opel. Importantly, German confidence indices (ZEW and IFO) have improved in April. Confidence, according to a distinguished Yale professor of European Union Studies that we recently had the pleasure to meet with in our office, is a measure not to be overlooked.


As always, price rules. With the appropriate entry point we'll be considering the etf EWG on the long side.


Matthew Hedrick



Exports: What Germans Do Best (…or Second Best) - germany1

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Research Edge Position: Short Indian Equities via IFN


Weekly Wholesale Price Inflation data issues by the Indian Ministry of Commerce today rose for the third consecutive week on a year-over-year basis.  While still well below 1%, inflation has clearly signaled a bottom inside positive growth territory.  For the politicians jockeying for position in the final stages of the National Election, the critical question is how much impact the wholesale decline in the past 8 months has had on the cost of living for the lower economic classes. 




CPI data is released by the Labour Bureau on such a time lag that we do not have a clear view of how significantly prices have contracted in urban or rural areas, but fertilizer prices released today as a component of WPI registered at over 4% Y/Y providing some clues. As a critical component of the cost overhead for the massive portion of India's population laboring as subsistence farmers, we have been watching fertilizer prices carefully. Despite the increase in farm subsidies (including those on fertilizer) as part of the stimulus packages, the price of some basic agricultural products is still higher than many Congress Coalition incumbents from rural states would like. While there has been no indication of any major upsets yet, the opportunity for leftist hardliners to pander to the anger of the rural poor -the 700 million people that have seen the quality of their life improve little (or even erode) during the miraculous economic growth of the past decade, are real and could force a coalition realignment.


We have maintained a negative bias on the Indian economy since launching our firm early last year. Our short bias on Indian equities yielded spectacular results throughout last year, but we were bloodied a bit by a nasty little hit last month after we battled the India Bulls unsuccessfully. Now as the election draws to a close and the markets shake off the impossible promises of the campaign to focus on core issues, we expect the equity market to contract.


With global commodity reflation, slim prospects for increasing internal demand for high tech goods and services sufficient to offset US market share loss and the looming spectacle of the Satyam trials (which may well underscore basic concerns about accounting standards and regulatory controls) there are lots of near term drivers that could prove us right.  As always we will take our cues from price action and change our positions as the data dictates but, for now, we are comfortable being contrarians and shorting the Indian market.


Andrew Barber


Restaurants - SAFETY TRADE - NOT

I wrote the Early Look on Thursday titled "Beta Shift - Down" The note was to think about the next 3-month move for the market and not reacting to what is being said today. The next 3-month move favors the SAFETY TRADE. On Tuesday and Thursday this week, there was a BIG positive divergence in the "safety trade" just as the Research Edge quantitative models flashed that every sector in the S&P 500 was positive from a TRADE and TREND perspective.

The two early-cycle sectors that led the way from the March 9th lows, Technology and Consumer Discretionary, have been lagging as of late. Restaurants are likely to underperform, as the market shifts to the ‘SAFETY TRADE."

In this environment the FULL SERVICE could suffer more than QUICK SERVICE.

CAKE, EAT, DIN and DRI look vulnerable.


Restaurants - SAFETY TRADE - NOT - fsr


There is no denying that these are some very strong monthly sales numbers from MCD, especially in light of the trends we're seeing at Burger King, Wendy's, and the rest of the consumer names.

So where do we go from here?

The summer will be critical for MCD as the discounted drink promotion was an enormous success for the company last year. If you are a believer that MCD's Latte promotion will be a successful follow up to the drink promotion, there is nothing to worry about. Personally, it's hard to see how an expensive hot beverage is going to do as well as a cheap cold beverage in the summer.

For the balance of 2009 McDonald's global comps get much more difficult; the US comparisons get more difficult peaking at 6.7%; Europe peaks at 11.6% in August and AMPEA in November at 13.3% (10% August comparison).

The current sales trends we are seeing from McDonald's can challenge my cautious stance on the stock. I still stand with my thesis that MCD's coffee strategy moves the store execution away from the core competency of the company and the price tag will limit the success. The average check at breakfast for McDonald's is $3 (+/- $0.50 depending on how you order). Adding a $3+ latte will double the average check at breakfast! Once we get past the trial phase, sticker shock will limit repeat business.














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