Retail First Look: 6/15/09

The balance of power continues to shift from the East to the West

Li & Fung, the largest sourcing agent on the planet, said the insolvency of German retailer Arcandor, one of its biggest customers (6% of sales), would affect the company's ability to hit its three-year target of US$20 billion (HK$156 billion) in annual revenue. I don't care what anyone tells me, but this is good for US retailers. Increased capacity in Asia plus added government incentives for local factories to be net exporters of apparel and footwear while the major agents are aggressively courting more US business??? Can someone tell me why that's NOT fundamentally bullish?


In a recent press interview from New York, William Fung said...

"I think we have to work hard to sign more deals. We have been successful with the Liz Claiborne deal and we have a couple of other deals we are working on, in fact that is why I'm here".


In February, Li & Fung agreed to pay $83 million to become Liz Claiborne's primary sourcing agent for apparel and accessories. Late in April, the company said it expected to sign an outsourcing deal with loss-making U.S. retailer Talbots Inc within the next 45 days.


"We are hopeful we can make up for some of these unfortunate losses in our turnover," he said.


Fung, said he was working on a potential deal with an American company, and said the company would work to fulfill its three-year plan through acquisitions and outsourcing deals in the U.S. and Europe.



Some Notable Call Outs

1) Three new anecdotes on the increasing focus companies need to have on growing online business. As noted several times, one of our key themes surrounds companies that have meaningful presence and order fulfillment operations (and invested in them BEFORE the real estate market crash).


  • High street fashion retailer Uniqlo has recently joined forces with SEO agency 4Ps Marketing in a bid to drive forward Uniqlo's online presence. The campaigns focused on the search engine Google using Search Engine Optimisation and Pay Per Click. The results of the partnership have seen Uniqlo's online revenue increasing by an impressive 30.76% for the month of May. (Bharat


  • NIKE partners with Baidu in brand promotion. Under the partnership, Nike will first integrate popular sports game contents with its brand promotion contents and put them up on its official website in a community, and then, embed the well-received Baidu community search products such as Baidu Zhidao and Baidu Baike into the Nike branded community. (Trading Market)


  • Online mall??? will invest more than 200,000 Euros to create and launch the first online mall in Romania. will be devoted to higher-end brands of clothes, footwear and accessories. Customers can also go shopping together with a consultant, who will give advice and details about the products (Financiarul)


2) The re-opened auction process for Filene's Basement continues, with a resolution expected this week. As of this weekend, Men's Warehouse partnered with Crown Acquisitions and Syms partnered with Vornado are both bidding for the assets.


3) This probably won't move the same store sales needle, but Whole Foods set up a temporary location at the Bonnaroo music festival over the weekend to supply concert goers with a variety of snacks and provisions.


4) A conversation with a small, private New England based off-price retailer revealed that business trends have been very strong for the last 6 weeks. Management believes less local competition from Filene's Basement as well as the company's direct mail advertising efforts are driving substantial traffic gains.


5) Adidas CEO Herbert Hainer commented on the company's restructuring efforts noting that it's made "significant progress with Reebok," but not "fast enough" in German newspaper Welt am Sonntag Sunday after being asked about a possible sale. After paying $4.3B for Reebok in 2006, both revenue growth and profitability have deteriorated significantly. However, with the company beginning to see improved results in the form of decelerating sales declines in Q1, my sense is a deal is unlikely near-term.


6) Here's the winner of the 'you can't make this stuff up' award of the week. Sears Holdings and AOL are tired of too much negative press out there. So they've come up with their own solution, (an abbreviation for Good News Network) which will "foray into delivering 'good news' at a time when Americans need it.


7) Private equity interest in Chinese retail is not slowing down, but we stress 'retail.' Interest for manufacturing and sourcing assets is clearly on the downswing,


MORNING NEWS (full detail including sources at end of this note)
ZachHammer's overview of items you're unlikely to find in the general press.


  • Consumers aren't the only ones cutting back. Retailers are reining in their spending
  • London Retail sales rose 1.6% on a like-for-like basis in May
  • Matt Priest, the new president of the Footwear Distributors & Retailers of America is using a fresh set of eyes to evaluate and revamp the organization
  • VF Corp's CEO Eric Wiseman, speaking Friday at Reuters Global Retail Summit in London, said he has seen its U.S. markets "stabilize" but he does not expect a return to growth in 2009
  • Guitarist Eddie Van Halen filed a lawsuit against Nike in Los Angeles, alleging the company is using his trademarked red, white and black striped guitar design for one of their shoes
  • Ready for Star Trek: The Sneaker? Discount footwear retailer Payless ShoeSource is launching a broad line of Star Trek-inspired Airwalks at 4,000 stores this fall
  • Consumers' caution could dampen summer spending, Performics says


RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough):

06/12/2009 10:27 AM


Buying red here in a name that will be one of the main Survivors of the US Retail bankruptcy cycle that will be associated with higher rates. KM


 Retail First Look: 6/15/09 - 6 15 2009 8 40 16 AM



 Retail First Look: 6/15/09 - 6 15 2009 7 18 53 AM



Consumers aren't the only ones cutting back. Retailers are reining in their spending - with most broadline players slashing millions from their budgets as they try to counter withering sales. Although some, such as Wal-Mart Stores Inc., continue to pump money into their businesses to grab market share, the majority are drastically slimming down within their business models. And if consumer spending doesn't bounce back, retailers will have to start making more drastic and ultimately transformational changes that could reshape the industry, said experts. Sears Holdings Corp., Macy's Inc., Dillard's Inc., J.C. Penney Co., Saks Inc., Nordstrom Inc., and Target Corp. cut a collective $668 million in selling, general and administrative expenses in the first quarter, pushing their SG&A expense down 6.3 percent from a year earlier. That means fewer dollars supporting brands and driving foot traffic, the axing of information technology projects and cramped cross-country plane rides for executives who can't afford to be seen in first or business class as they lay off workers. "From travel to supplies to benefits to marketing to information technology, we're leaving no stone unturned," said Stephen I. Sadove, chairman and chief executive officer of Saks, which reduced first-quarter expenses by $44 million, more than it planned to cut for the whole year. "How we have always done it is irrelevant. We're approaching every area of the business asking how should we do it going forward." Saks rival Neiman Marcus last week revealed plans to reduce expenses by $125 million a year. "Our team has done an excellent job of decreasing their spend," said Burt Tansky, president and chief executive officer of Neiman Marcus. "We are undergoing a comprehensive process that we believe has been thoughtful and significant." About 60 percent of planned expense reductions already have been realized. Neiman's cut $38 million from selling, general and administrative expenses in the most recent quarter versus its 2008 counterpart. Sears, which has 3,900 doors under its namesake and Kmart brands and has been criticized in the last few years for not investing enough in its stores, is the industry's most aggressive cost cutter. The firm surprised Wall Street with first-quarter earnings after it reduced advertising spending by $107 million and payroll and benefit expenses by $84 million. Cuts are even being made in the off-price channel, despite the competitive advantage that comes from having a value orientation during the downturn. Earlier this year Stein Mart Inc. laid off 178 assistant managers, while the rest of its managerial staff took a 5 percent pay cut and store associates' hours were cut by 17 percent. Like other retailers, the company stopped paying shareholders a dividend, eliminated its stock buyback plan and halted contributions to employees' 401(k) retirement plans. All of this feeds into a vicious economic cycle, where the slowdown in consumer spending prompts businesses to cut workers, increasing the ranks of the unemployed and further weakening spending. Department stores alone eliminated a total of 10,800 jobs in February, March and April, according to government statistics that adjust for seasonal variations in workforce. Last month, the department store channel actually added 4,500 positions, although specialty stores cut 3,300 jobs.

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London Retail sales rose 1.6% on a like-for-like basis in May. This was the weakest growth in London this year but it was held back by tough comparatives and milder weather. Footfall in London in May fell 0.4% according to Synovate Retail Performance but the capital continued to outperform the UK as a whole - like-for-like retail sales across the country were down 0.8%in May, according to the British Retail Consortium. The BRC added that the favourable exchange rate continued to draw in tourists to the capital, particularly from Western Europe, but that those tourists were spending less. BRC director general Stephen Robertson said: "It's no surprise this May's sales growth was weaker than last year's, which greatly benefited from the dramatic improvement in the weather. Despite this, London retailers outperformed the rest of the UK by a wide margin. And consumer confidence held up better in the capital than other parts of the UK."  Robertson added: "The sunny days boosted sales of clothing, footwear and outdoor living, but not as strongly as compared to last May - which was sunnier."

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Matt Priest, the new president of the Footwear Distributors & Retailers of America is using a fresh set of eyes to evaluate and revamp the organization. FDRA is gearing up to tweak its communications strategy, services and physical office space, said Priest, who started work at the organization in February, following former president Peter Mangione's retirement.  Communicating more effectively with FDRA's constituency is a key priority, according to Priest. "There are things that members expect in the age of Twitter and instant news," Priest said. "They expect the free flow of information on what decisions are being made, whether it's here or at the port of Long Beach, Calif., or in Beijing. ... Because at the end of the day, we're here to provide predictability and certainty in an uncertain global environment."  To achieve those goals, Priest said the organization will look for cost-effective uses of technology. A new Website was unveiled in the first few weeks of Priest's tenure. New e-mail newsletters with breaking news and information from Washington, D.C., have started going out to the association's members. FDRA also is exploring how Twitter and RSS feeds could be used to provide even more timely updates to members. Additionally, the association's offices on F Street in Washington, between the White House and Capitol Hill, will be updated to include a work center for visiting members who are in town for business.  Priest said he would also like to expand the locations where FDRA meetings are held to include Washington. Historically, meetings have been held in New York and Las Vegas, but getting execs to Washington, where they can be directly engaged, is important, he explained. "[Our members] are our best advocates here in Washington," Priest said. "I'm here to mind the store and make sure our voice is heard at Consumer Product Safety Commission staff meetings and on the Hill, but when a member can come in and speak to their member of Congress about the effects of certain legislation, that is an amazing tool for us as an industry." FDRA's core issues will stay the same, Priest said. They include duty reduction as exemplified in the Affordable Footwear Act; social compliance issues; navigating the implementation of the Consumer Product Safety Information Act; and the pending Employee Free Choice Act - a proposed bill that would make it easier for workers to form unions. "What keeps us sharp - what keeps any organization sharp - are the times we're in right now," Priest said. "We're in an environment where reevaluating our services and making sure we're providing the best bang for the buck is the assumption."

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VF Corp's CEO Eric Wiseman, speaking Friday at Reuters Global Retail Summit in London, said he has seen its U.S. markets "stabilize" but he does not expect a return to growth in 2009. "The apparel (wholesale) business and the stores that we sell (in), things seem to be stabilising," said Wiseman, according to a report on Reuters.. "They're not stabilizing at a great place but compared to December, January and February, when week after week it looked a little bleaker, it's stable." Wiseman said VF had also seen some of its markets in Europe bottom out. "I don't think most of Western Europe is any better or worse than the U.S., it feels like it's stabilising here some too," he said. But Wiseman does not expect any of VF's markets to return to growth in 2009. "We are assuming that there is no recovery this year for sure," he said. Regarding the 2010 outlook, the CEO said, "We will not be assuming that there's an enormous recovery that lifts our performance. That assumption is off the table. Whether there's any improvement in 2010, and when you assume it, is the discussions we're having now." Wiseman said VF Corp continues to explore acquisitions, with the recession having created "lots of opportunities", and was having "a lot of discussions". "Our priorities are outdoor, action sports and contemporary, (brands), that's where we would most like to expand our portfolio," he said.

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Guitarist Eddie Van Halen filed a lawsuit against Nike in Los Angeles, alleging the company is using his trademarked red, white and black striped guitar design for one of their shoes. Nike's "Dunk Lows" shoes feature red, white and black streaks along the midsole. The lawsuit comes as Van Halen has come out with his own line of sneakers under a similar color-scheme

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Ready for Star Trek: The Sneaker? Discount footwear retailer Payless ShoeSource is launching a broad line of Star Trek-inspired Airwalks at 4,000 stores this fall, via a global licensing deal with CBS Consumer Products. The sneakers will sell for around $50, at the retailer, which is known for its $15 footwear and buy-one-get-one bargains. The shoes, designed by jeffstaple (aka Jeff Ng), will be styled after the colors and designs of Starfleet crew uniforms. Airwalk, which had its peak in the early '90s, has technically become a Payless house brand through a series of acquisitions. Payless bought Collective Licensing International, which manages Airwalk, in 2007 along with Stride Rite, at which time the operating company was renamed Collective Brands. Airwalk is still managed autonomously by the Collective Licensing International unit and is sold primarily at Payless in the U.S. Liz Kalodner, evp and general manager of CBS Entertainment unit CBS Consumer Products, brokered the deal on behalf of the property. She sees many advantages to exclusive retail offerings, and she's made several recent matches for stores and properties such as America's Next Top Model, Mighty Mouse and 90210. "There's a tremendous opportunity in today's market for direct-to-retail deals because they allow a retailer to differentiate itself and to have a great margin while doing so," Kalodner said.

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Consumers' caution could dampen summer spending, Performics says - Online consumers spent less on Mother's Day this year, and their caution could put a damper on spending through Labor Day, based on results of a May survey of web shoppers by search marketing firm Performics. The survey found 40% spent less on Mother's Day than usual, 8% more and 53% the same amount. And many consumers plan to spend conservatively this summer. 33% say they will spend less on summer vacations versus 6% who expect to spend more, and 19% say they canceled vacations because of the economy. 46% say they will spend less on home improvements versus 11% planning to spend more. The results are based on a survey May 12-13 of 300 consumers who had made online purchases in the previous six months. "From a low-key Mother's Day to cutbacks on summer travel and home improvement, it's clear consumers continue to tighten their belts and be more selective with their spending," says Michael Kahn, senior vice president of marketing at Performics. "Advertisers across the board, especially in highly affected segments like travel and home improvement, must acknowledge these behaviors and find creative ways to engage their audience and stay competitive." One way to do that is to focus search campaign keywords and ad copy on items consumers view as essentials, Kahn says. And, recognizing that more consumers will be staying closer to home this summer, he says multichannel retailers should make sure that search engines' local listings, such as Yahoo Local and Google Maps, have correct store information, hours, locations and products offered. The May survey was the second in Performics' planned monthly poll of online shoppers to track their confidence and spending plans. Consumers in the May survey were more pessimistic than they were in April, with 29% saying their household economic situation is improving or they expect it to improve this year versus 40% in April. "With only two months of data, we think it is probably still too early to draw conclusions on broad trends," Kahn says. He says it's likely that the responses vary with the latest economic news, such as unemployment reports and the rise and fall of the stock market.

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The Hangover

“Would you please put some pants on? I feel weird having to ask you twice.”
-Phil Wenneck, The Hangover
This morning’s most important quote is the same one that’s been the most critical to global macro on every morning of 2009 - the US Dollar. The #1 headline on the Bloomberg box today is “Stocks, Commodities Retreat; Dollar, Treasuries Rise.” This correlation isn’t new. This is the inverse relationship between REFLATION and the once almighty Buck.
The #2 story on Bloomberg is about the same thing, Alexei Kudrin’s commentary that the US Dollar is in “good shape.” Getting less attention is the second part of what the Russian Finance Minister had to say overnight, which is that “it’s too early for an alternative” to the world’s reserve currency.
“Too early” simply implies the simple matter of time. The New Reality in the global financial system is that heads of state and finance have finally shifted away from the “if” to the “when”. This is what’s new. The Piggy Bankers have been paid, but America is going to pay for this by losing her status as the world’s financial fiduciary.
Kudrin is making comments ahead of the BRIC Summit (Brazil, Russia, China, India) that is being held in Russia tomorrow. Like Geithner, Kudrin doesn’t really do macro, so he’s probably having a little sit down with Putin and Medvedev right about now, given that his comments have crushed the Russian stock market for its biggest one-day drop in 2-weeks (down -4.1%). If you sponsor strong Dollar rhetoric, you are sponsoring The Hangover associated with the unwind of the REFLATION trade.
China doesn’t seem to mind the US Dollar moving higher for once. Why is that? Well, because they are one of the biggest losers of the great American REFLATION trade. As American policy makers are Burning The Buck, the US Dollar denominated Debtors get paid, not the Creditors. The Chinese, like American Consumers, could do without spiking costs in terms of what they actually need – crude and capital.
Maybe this is why the Chinese stock market flashed such an eye opening positive divergence overnight versus the rest of Asia’s stock markets. With stocks in Japan and Hong Kong giving back 1-2% of their respective recent rallies, the Shanghai Stock Exchange powered forward for another +1.7% daily gain.
US Dollar up was what we saw the US stock market digest on Friday. The immediate rotation that US risk managers moved toward was impressive. The entire complex of the REFLATION trade had The Hangover, while the recipients of lower energy/commodity prices (US Consumer and Healthcare stocks) outperformed. In the face of a rational rotation, the SP500 registered a new YTD high at 946. Again, albeit on low volume, that was impressive.
After a +40% trough-to-peak move that a lot of people missed, can the US stock market continue to work higher without REFLATION? That’s a good question. Is the REFLATION trade over? That’s obviously another one that one should be considering this morning.
Until I see a breakout and close above the $81.86 line in the US Dollar Index, my answer will be that the REFLATION trade will continue to dominate. This morning, the Dollar is trading +0.85% at $80.81, and you’re seeing the US Equity Futures trade down alongside REFLATION markets like the aforementioned one in Moscow. You’re also seeing the price of Dr. Copper trade -4.5% below its YTD high that was established last week. Burning The Buck has dominating impact across currency, commodity, and country level ETFs.
After Alexei Kudrin has his slap on the wrist talk with the boys who run the joint, I expect Russian rhetoric to lock arms with the same that has dominated world markets for the last 3-weeks. In the long run, the world’s reserve currency is going to be a basket, not a Buck. This will take time. Understanding the difference in duration between The Hangover and The US Currency Credibility Crisis will be all that remains in between. Trade the range.
My immediate term upside target for the SP500 is now 949 and downside is 932.
Best of luck out there this week,


QQQQ – PowerShares NASDAQ 100 — We bought Qs on 6/10 as a better way to be long the US market than the SP500. The index includes companies with better balance sheets that don’t need as much financial leverage.

FXA -CurrencyShares Australian Dollar Trust—Thanks to recovering Chinese demand for commodities, the sure handed management of RBA Governor Glenn Stevens and comparatively modest consumer debt levels –Australia’s GDP continued to expand in Q1 while other industrialized economies saw double digit declines.  As with Canada, we like the Australian economy as an offset to the toxic US balance sheet. 

XLV – SPDR Healthcare —Healthcare looks positive from a TRADE and TREND duration. We bought XLV on 6/08 to get long the safety trade.

EWC – iShares Canada — We want to own what THE client (China) needs, namely commodities, as China builds out its infrastructure. Canada will benefit from commodity reflation, especially as the USD breaks down. We’re net positive Harper’s leadership, which diverges from Canada’s large government recent history, and believe next year’s Olympics in resource rich British Columbia should provide a positive catalyst for investors to get long the country.  

XLE – SPDR Energy — We bought Energy on 6/05. We think it works higher if the Buck breaks down.  Bullish TRADE and TREND remain.

CAF – Morgan Stanley China Fund — A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.

TIP– iShares TIPS — The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%. We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

GLD – SPDR GOLD —We bought more gold on 5/5. The inflation protection is what we’re long here looking ahead 6-9 months. In the intermediate term, we like the safety trade too.


SHY – iShares 1-3 Year Treasury Bonds – If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.

UUP - U.S. Dollar Index – We believe that the US Dollar is the leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. Longer term, the burgeoning U.S. government debt balance will be negative for the greenback.

XLU – SPDR Utilities – As long term bond yields breakout to the upside, Utility investments are the relative yield loser. So far this thesis has gone against us.

EWW – iShares Mexico
– We’re short Mexico due in part to the repercussions of the media’s manic Swine flu fear.  The country’s dependence on export revenues is decidedly bearish due to volatility of crude prices and when considering that the country’s main oil producer, PEMEX, has substantial debt to pay down and its production capacity has declined since 2004. Additionally, the potential geo-political risks associated with the burgeoning power of regional drug lords signals that the country’s economy is under serious duress


Given that Trian controls the company, I initially came to the conclusion that the use of proceeds from the bond offering will be used to pay a special dividend. Why? It's a classic move by a private equity firm that wants to get paid. While a dividend is still possible, it's less likely. If they do end up paying a dividend, it would be a long-term negative and would limit the operational flexibility of the company.

Without fully understanding the use of proceeds, the offering is likely dilutive annually by $0.04-$0.05; the announced $550 million of unsecured debt will likely carry a coupon of approximately 9%. To answer the question as to why do an offering now, Andrew Barber's June 12 post titled "RATES, VOLATILITY AND LINES IN THE SAND" provides an interesting perspective. It's probably because they can - the credit markets are open and it might not last. As Andrew pointed out, "In today's environment, the reality for mid and lower grade issuers is simple: they are simply taking liquidity whenever and wherever they can find it after a long drought, and are likely more focused on their cash needs in 2 months than prevailing rates in 2 years."

Given this thought and the background of the principles at Trian, speculation is rampant that WEN is going to make an acquisition. I guess it could, but an acquisition would be viewed as bad for the stock; this partially explains why the company traded massive amounts of volume last week. Right now WEN is a turnaround story; the company needs to fix what it has before it takes on another concept.

I view an acquisition as unlikely and of course, the company line is that there is "nothing imminent." The biggest opportunity for WEN is to fix the margins on its current assets. Layering in a dual brand at Wendy's to help breakfast and or dinner sales are a very complicated process and are a very high risk proposition.

Importantly, it could take years to have an impact on profitability. Every dollar of capital the company has needs to be reinvested into fixing the existing asset base. This management team needs to prove to the street that it can execute its current business plan before the street will accept additional risk.

In the minds of senior management it's not a question of whether margins can be restored, but instead, management is confident they will be fixed by 2011. With margins being fixed in two years time, management needs to be thinking now about restarting the organic growth engine by that time. Organic growth for WEN is going to come from domestic and international unit growth, dual branding of the Wendy's and Arby's brands and growing the breakfast day part. None of this will come easy and there will be skeptics about the company's ability to grow internationally, but the planning process needs to start now if it going to be in the 2011 business plan.

I am very skeptical about WEN's international opportunities, given that I have witnessed the company fail multiple times. The excuse provided for the company's failure to execute internationally in the past was not bad management, but failure of the brand to perform at the same level as it does in the United States. That being the case, there is no need right now for massive amounts of capital to fund the international growth initiatives. Aspects of these growth initiatives are in contrast to the company's cost cutting story as they require "infrastructure investment" to lay the ground work for growth.

Absent of buying a "breakfast" concept, there is no need for capital beyond the company's current capabilities to grow the breakfast day part. In the short run, WEN will be replacing the horrid Folgers brand they are currently selling by testing new products that hopefully will resonate with consumers. While there are huge opportunities for breakfast within the Wendy's system, the concept's real estate strategy never contemplated selling breakfast, leaving some units incapable of executing the daypart properly due to poor locations.

WEN needs to upgrade its asset base, particularly Arby's, but this needs to be done systematically. Remodels are not easy to execute and need to be done in a thoughtful way that enhances returns. Not all remodel programs are created equal and WEN does not need a war chest of cash to do this.

Lastly, we can't rule out buying back stock. Adding leverage to WEN's balance sheet just to give the money back to shareholders is a big mistake. Leveraging up the balance sheet WILL NOT create shareholder value and limits the company flexibility to navigate a difficult environment. The money WEN is borrowing is not cheap and needs to be reinvested in a way that will generate incremental returns to shareholders. Right now, it is difficult to see where the ROI is going to come from.

The uncertainty of the debt offering throws into question the direction of the company. WEN's business plan had relied on a cost cutting strategy to fix margins by 2011, but the company's decision to raise capital to fund future growth initiatives goes against that very strategy. Same-store sales trends ate stagnant, and there is limited visibility to what is going to put Wendy's products and marketing initiatives on the map. Arby's is also suffering from a consumer identity crisis.

Despite the fact that senior management feels comfortable working with Peltz and team, the recent services agreements reek of corporate excess in a challenged economic environment. This relationship only adds to the discounted valuation the company is currently getting.

Trading at 6.4x NTM EV/EBITDA, WEN is undervalued relative to its global restaurant peer group trading at 9.0x NTM EV/EBITDA but is trading in line with its small-cap domestic peers. Roland Smith and team now have a bigger hurdle to leap to gain confidence that they can execute on a business plan that creates value for shareholders.



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Fernando Chui Sai On is set to be the only candidate in the upcoming election for CE.  Ho Chiu Meng had been his main rival, but he announced to the Macau Daily News that he would not stand in next month's CE election. In order to run for the position, Ho Chiu Meng was required to resign from his current position as chief prosecutor and he has not done so.

It is said that Chui Sai was not Beijing's preferred candidate for the position. However, it seems unlikely that the changing of the guard in Macau will alter current laws regarding visas and the curbing of junk visitation in the near-term.



City of Dreams has had a less impactful first week than had been anticipated.  While it was known that VIP and premium mass market play would take some time to get up to speed, there has been some surprise at unofficial marketshare numbers suggesting no meaningful sequential gain on the part of Melco-Crown. 



Two major takeaways from the May gaming revenue numbers:

  • 1) SJM and WYNN gained considerably in terms of volume, as the number of rolling chips purchased overall was the highest since last August.
  • 2) The gap between SJM and LVS (31% to 21%) has widened as a result of higher volumes for SJM and lower win-hold rate for LVS.



The Macanese government has pledged to spend MOP100m on at least two flu shots for each resident. This comes as Hong Kong's chief has closed schools and nurseries to prevent the spread of the flu.  This has caused some concern among casino operators, fearful that their business will be impacted by flu fears.




The Macau Daily Blog posted an article outlining four "big phenomenons" [sic] hurting Macau.

  • 1) Dropping EBITDA margins.
  • 2) Mass Market has been squeezed
  • 3) The product mix being put out is the same across the board. No "wow" factor
  • 4) Junk tourism. Low value, low yield, for operators.



Macau is enjoying a taste of Bollywood magic with a galaxy of Indian stars arriving in the city for one of Asia's most-watched film awards. Oscar winning composer A.R. Rahman, who wrote the score for Slumdog Millionaire, superstar Amitabh Bachchan and Bollywood's leading couple Aishwarya and Abhishek Bachchan, are among those visiting the Las Vegas of the east for the 10th International Indian Film Academy (IIFA) awards.



MGM Mirage, the casino company controlled by Kirk Kerkorian, and Malaysia's Genting Bhd. are considering a possible partnership, spokesmen from both companies said.



High rollers in Macau are increasingly playing the slots.  Slot machines remain a minor segment of the market, at 6% of total revenue. However, in Q109 slots accounted for some $743m in revenue vs $81.5m of revenue in Q104.


City of Dreams has only been opened for two weeks but we thought we'd give you some initial impressions from our guys on the ground.  Warning:  these insights are early and anecdotal in nature.  We are actively attempting to corroborate all of the following.

  • Weak Rolling Chip (RC) turnover at City of Dreams - MPEL acknowledges it will take a while to ramp up the RC segment. We are hearing CoD only did HK$4BN in Rolling Chip turnover over first 10 days, or HK$400MM per day. By contrast, Venetian and Wynn Macau average approximately HK$700MM and HK$900MM per day, respectively, during the summer months. All three properties maintain approximately 140 RC tables.
  • Traffic strong at CoD- indicative of the mass market focus. Uncertain of the turnover per customer but hearing it is somewhat low.
  • CoD may be experiencing low hold
  • Venetian Rolling Chip business holding up - the junkets are reporting that RC turnover at Venetian hasn't been impacted much.
  • Venetian traffic down - see chart below
  • Wynn losing MM and RC customers to MGM? - Something is going on here. We've heard it from multiple industry sources.

We'll have more to report this week and next.  I will be in Macau on 6/22-26 visiting the operators, suppliers, junkets, developers, etc.  Stay tuned.




Consumer sentiment continued to improve in the month of June, although the University of Michigan index rose by less than expected, it was certainly not a bad number.   The index rose to 69 in mid-June from 68.7 in May, up sharply from the 28-year low of 55.3 in November, but still below the 88.2 ten year average.


As I said in the Early look, it appears the numbers ARE peaking. The market forecasts were for a higher number, in the area code of 69.5.

It not clear to me that it's prudent to plan for a strong summer season for the consumer.  From where I sit a cautious consumer still prevails and most remain resolute about becoming more practical when making purchasing decisions.

As we head into the key summer driving season the price of gas at the pump is surging.  While the relative "affordability" compared to last year's $4+/gal price tag has most consumer feeling less of a pinch, the 63% increase year-to-date will put the brakes on incremental spending.  Especially with the sequential increase that is outlined in the chart below.

Howard Penney

Managing Director


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