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MACAU OCTOBER BLOWOUT?

Takeaway: Still like LVS - the operator growing its market share

That’s the feeling on the ground.

 

 

Macau’s recent run has been outstanding – double digit YoY gross gaming revenue (GGR) increases monthly since January and accelerated growth over the summer.  September is off to a great start and we are looking for high teens growth.  What could be the next catalyst?  How about a record month in October, but not just a record?  There are some market participants who feel that Macau could grow by 30% YoY.

 

Our own forecast currently calls for 18-22% YoY growth.  However, that projection is solely based on carrying the recent monthly GGR levels forward with a seasonal adjustment.  Following some calls to Macau, we’re starting to believe our estimate could be low.

 

Strong junket and high end Mass bookings for the October holiday are fueling the optimism.  Some are suggesting GGR of HK$35.0 billion which would crush the hold-aided record month of March 2013 of HK$30.4 billion.  We’re not ready to go there yet but HK$32.0+ (+20% YoY) seems likely, +25% doable, and 30% possible.

 


CASUAL DINING TRENDS REMAIN WEAK

We’ve been bearish on the casual dining sector since early June and, on Friday, Black Box gave us a look at August sales trends which showed little improvement from an ugly July.

 

Black Box reported that August 2013 same-restaurant sales declined -0.2%, while comparable traffic trends declined -1.9%—both metrics accelerated 70 bps and 30 bps on a sequential basis, respectively.  These estimates come against August 2012 comps of +1.0% and -1.1%, respectively.

 

Malcolm Knapp also released his August 4-week estimates this weekend.  Knapp-Track casual dining same-restaurant sales declined -1.7%, while comparable guest counts declined -3.1%.  These results come against full 5-week August 2012 comps of +1.0% and -1.2%, respectively.  Knapp will release his 5-week August estimates later this week.

 

Currently, consensus estimates for the 24 casual dining chains we track in the space are for 3Q13 same-store sales growth of +1.2% (excluding the DRI brands) versus +1.7% in 2Q13.  For the first two months of 3Q13, Black Box has reported same-store sales of -0.6%.

 

With September traditionally being a difficult sales month given the back-to-school trends, it is unlikely we will see a significant uptick in same-store sales.

 

The following companies saw SSS revised down over the past month: BWLD, CBRL, DRI, EATRT.

 

The following companies saw SSS remain unchanged over the past: BJRI, CAKE, DIN, RRGB, KONA, RUTHTXRH.

 

 

CASUAL DINING TRENDS REMAIN WEAK - BBOX chart1

 

CASUAL DINING TRENDS REMAIN WEAK - BBOX chart2

 

CASUAL DINING TRENDS REMAIN WEAK - BBOX chart3

 

 

 

Howard Penney

Managing Director

 


Kohl's: A J.C. Penney Problem?

Takeaway: We think KSS stole as much as $800 million in sales from JCP. JCP wants it back. Succeed or not, JCP will inflict damage on KSS as it tries.

This note was originally published September 06, 2013 at 09:18 in Retail

Conclusion: We think that KSS stole as much as $800mm in sales from JCP last year. JCP wants it back. Succeed or fail, JCP will inflict damage on KSS that is not appreciated.

 

We’d been assuming for much of the past year that the primary beneficiaries of JCP’s share loss have been Macy’s and GPS (Gap and Old Navy US). At face value, the sheer dollar shift in 2012 supported this thesis. But our recent work has presented us with new data that make us think we’ve been negative on the wrong names. Specifically, we recently conducted an extensive consumer survey to understand why consumers have shifted dollars away from JCP, and where the share has gone. And the big winner (and soon to be loser) turned out to be Kohl’s. Macy’s came in at number two, but by a wide margin. Gap looked surprisingly good.

 

Survey Says: As outlined in the chart below, consumers claim that almost 19% of items that they shifted away from JCP are now being purchased at Kohl’s. The math is pretty simple. $4.3bn in sales lost * 18.6% share shift = $800mm.  But the obvious counter-attack is “That can’t be right. KSS has been putting up horrible numbers – that’s way too high as KSS only gained $475mm in net sales in 2012”. It’s a logical question, and we’d ask the same one.

 

But our sense is that what’s actually happening is that the $475mm sales gain includes upwards of $800mm in sales gains from JCP.  In other words, sales on an organic basis were likely down at JCP last year by several hundred million.

 

We understand that there is sampling error associated with every form of survey – ours included. But we should note that this is not a typical ‘ask a bunch of people at the Garden State Plaza Mall what they think’ kind of survey. We put this up any other one out there.

 

Even if you do want to adjust for sampling error, these numbers are still so high that we can raise a very large red flag for anyone modeling KSS’ comp or Gross Margin out over the next 1-2 years. Customers are never easy to win back, but we surveyed how consumers would respond to pricing, promotions, private label and remodels, and we feel pretty confident that KSS is going to have a problem on its hands.

 

Stores Shopped Instead of JCP (blue column) vs Items Dispersion of Where Items Where Purchased (Gray)

Kohl's: A J.C. Penney Problem? - shareshift

Source: Hedgeye Research

 

Share Gain From JCP By Income

Kohl's: A J.C. Penney Problem? - share2

Source: Hedgeye Research


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MACAU STILL ROLLING TO START SEP

LVS off to another good start

 

 

For the first 8 days of September, daily tables averaged HK$924 million, up 17% from the comparable period in September of 2012.  Our full month GGR (includes slots) YoY growth projection remains at +15 to 19%.  September is a seasonally slower month than August.

 

It’s way too early to discern any sustainable market share moves but we remain encouraged by LVS’s strong start to the month.  On the whole, we expect LVS to continue to gain share.  MGM’s share is unusually low to start the month.  No doubt, hold is to blame.

 

MACAU STILL ROLLING TO START SEP - maca 1st wk sept

 

MACAU STILL ROLLING TO START SEP - macau atdr


MONDAY MORNING RISK MONITOR: U.S. LOOKS GOOD, PORTUGAL NOT SO MUCH

Takeaway: The risk genie remains in the bottle for now. Potential problem areas include Portuguese sovereign/bank swaps and Indian bank swaps.

Key Takeaways:

 

* U.S. Financial CDS -  Domestic financial swaps were notably tighter last week, with some of the largest improvements coming from the mortgage insurers (MTG: -21 bps, RDN: -20 bps) as well as AXP (-4 bps), MS (-7 bps) and GS (-4 bps). Both AGO and MBI saw swaps widen, adding to the trend we've seen M/M.  Overall, swaps tightened for 20 out of 27 domestic financial institutions.

 

* Sovereign CDS – Portuguese sovereign swaps should be monitored closely as they have risen 95 bps in the past month, to 533 bps. In the last week, Italian, Spanish and Portuguese sovereign swaps widened by 6, 2 and 22 bps, respectively. Meanwhile, French, Irish and Japanese swaps tightened 1, 3 and 3 bps, respectively. The US and Germany were unchanged. All the countries we track now have swaps higher on a M/M basis.

 

* Asian Financial CDS - Indian banks finally cool off. We've been flagging the rising risk in the Indian banking system for several weeks now. This past week, Indian banks finally saw their swaps decline, albeit nominally relative to the magnitude of increase over the intermediate term. Swaps were also notably tighter in China with two out of three banks seeing their swaps decline by more than 10 bps. Japanese financials were largely unchanged on the week. 

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 4 of 13 improved / 1 out of 13 worsened / 8 of 13 unchanged

 • Intermediate-term(WoW): Negative / 5 of 13 improved / 5 out of 13 worsened / 3 of 13 unchanged

 • Long-term(WoW): Negative / 3 of 13 improved / 3 out of 13 worsened / 7 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: U.S. LOOKS GOOD, PORTUGAL NOT SO MUCH - 15

 

1. U.S. Financial CDS -  Domestic financial swaps were notably tighter last week, with some of the largest improvements coming from the mortgage insurers (MTG: -21 bps, RDN: -20 bps) as well as AXP (-4 bps), MS (-7 bps) and GS (-4 bps). Both AGO and MBI saw swaps widen, adding to the trend we've seen M/M.  Swaps tightened for 20 out of 27 domestic financial institutions.

 

Tightened the most WoW: AXP, RDN, MS

Widened the most WoW: MBI, AGO, ACE

Tightened the most WoW: AXP, RDN, MET

Widened the most MoM: MBI, JPM, AGO

 

MONDAY MORNING RISK MONITOR: U.S. LOOKS GOOD, PORTUGAL NOT SO MUCH - 1

 

2. European Financial CDS - European bank swaps were broadly tighter again last week, declining by an average and median of 5 bps. One of the few outliers was Banco Espirito Santo of Portugal where swaps rose 10 bps W/W and are up 69 bps M/M, currently at 569 bps. This reflects the overall deterioration in the Portuguese sovereign market. 

 

MONDAY MORNING RISK MONITOR: U.S. LOOKS GOOD, PORTUGAL NOT SO MUCH - 2

 

3. Asian Financial CDS - Indian banks finally cool off. We've been flagging the rising risk in the Indian banking system for several weeks now. This past week, Indian banks finally saw their swaps decline, albeit nominally relative to the magnitude of increase over the intermediate term. Swaps were also notably tighter in China with two out of three banks seeing their swaps decline by more than 10 bps. Japanese financials were largely unchanged on the week. 

 

MONDAY MORNING RISK MONITOR: U.S. LOOKS GOOD, PORTUGAL NOT SO MUCH - 17

 

4. Sovereign CDS – Portuguese sovereign swaps should be monitored closely as they have risen 95 bps in the past month, to 533 bps. In the last week, Italian, Spanish and Portuguese sovereign swaps widened by 6, 2 and 22 bps, respectively. Meanwhile, French, Irish and Japanese swaps tightened 1, 3 and 3 bps, respectively. The US and Germany were unchanged. All the countries we track now have swaps higher on a M/M basis.

 

MONDAY MORNING RISK MONITOR: U.S. LOOKS GOOD, PORTUGAL NOT SO MUCH - 18

 

MONDAY MORNING RISK MONITOR: U.S. LOOKS GOOD, PORTUGAL NOT SO MUCH - 3

 

MONDAY MORNING RISK MONITOR: U.S. LOOKS GOOD, PORTUGAL NOT SO MUCH - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose 8.7 bps last week, ending the week at 6.57% versus 6.48% the prior week.

 

MONDAY MORNING RISK MONITOR: U.S. LOOKS GOOD, PORTUGAL NOT SO MUCH - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.0 points last week, ending at 1804.

 

MONDAY MORNING RISK MONITOR: U.S. LOOKS GOOD, PORTUGAL NOT SO MUCH - 6

 

7. TED Spread Monitor – The TED spread rose 0.2 basis points last week, ending the week at 23.8 bps this week versus last week’s print of 23.65 bps.

 

MONDAY MORNING RISK MONITOR: U.S. LOOKS GOOD, PORTUGAL NOT SO MUCH - 7

 

8. CRB Commodity Price Index – The CRB index fell -0.8%, ending the week at 293 versus 296 the prior week. As compared with the prior month, commodity prices have increased 3.5% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: U.S. LOOKS GOOD, PORTUGAL NOT SO MUCH - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread was unchanged last week at 13 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

MONDAY MORNING RISK MONITOR: U.S. LOOKS GOOD, PORTUGAL NOT SO MUCH - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 14 basis points last week, ending the week at 2.89% versus last week’s print of 3.03%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR: U.S. LOOKS GOOD, PORTUGAL NOT SO MUCH - 10

 

11. Markit MCDX Index Monitor – Last week spreads widened 2 bps, ending the week at 104 bps versus 106 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1.

 

MONDAY MORNING RISK MONITOR: U.S. LOOKS GOOD, PORTUGAL NOT SO MUCH - 11

 

12. Chinese Steel – Steel prices in China fell 0.1% last week, or 4 yuan/ton, to 3594 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: U.S. LOOKS GOOD, PORTUGAL NOT SO MUCH - 12

 

13. 2-10 Spread – Last week the 2-10 spread widened to 248 bps, 9 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: U.S. LOOKS GOOD, PORTUGAL NOT SO MUCH - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.0% upside to TRADE resistance and 0.8% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: U.S. LOOKS GOOD, PORTUGAL NOT SO MUCH - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Asian Markets Strengthen

Client Talking Points

China Calling

China’s economy finally flexes some muscle, with exports up 7.2% and inflation benign at 2.6% year-on-year. That was good enough to drive the Shanghai Composite 3.4% higher, crossing our TREND line of resistance of 2123.

Japan’s Economy Grows. Really.

Japan reports that GDP rose 3.8% in the most recent quarter, and the market loves chasing sequential growth. The Nikkei rose 2.5% for the sessions, and is already up 6% in September. This must be a bear market.

Gold Bulls Are Still Out There

Gold prices are down this morning, following a 0.5% down week where the net long position in futures/options contracts hit its highest level since January. That’s a great contra-indicator, and we still don’t like Gold though lots of others do.

Asset Allocation

CASH 26% US EQUITIES 26%
INTL EQUITIES 23% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 25%

Top Long Ideas

Company Ticker Sector Duration
WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

HCA

Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road.

TROW

Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road

TWEET OF THE DAY

“I have never witnessed more whining about markets in my life”

--@KeithMcCullough

QUOTE OF THE DAY

“The secret of life is honesty and fair dealing. If you can fake that, you’ve got it made.” – Groucho Marx

STAT OF THE DAY

3, The number of NFL games Sunday where the first score in the game was a safety.


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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