Export data released by the Japanese customs office today showed a decline of 40.9% year-over-year, lower than consensus estimates and a sequential decline from last month's figures.


Critically, May exports bound for China registered under 5% of Total exports -the lowest percentage in over 20 years. Although the Japanese auto manufacturers and other durable goods producers are participating in "the client's" recovery financially through joint ventures, the reliance on higher margin North American and European markets continues to keep domestic assembly lines stalled.

With job security still weighing heavily on domestic consumers and nowhere for rates to go but up, we continue to see Yen weakness as the sole near term positive catalyst for Japanese manufacturers as they grapple with stagnant customer markets.

Andrew Barber


Liquidity Abounds!

Today the ECB announced it will offer 442 Billion Euros of 12-month loans to banks at the current Euribor rate of 1.57%.

This is a massive issuance with a minimal rate of interest! In context it's equivalent to one third of all sovereign issuance in the Eurozone this year, and should go a long way to unlock European credit markets. Since October 2008 the ECB has lent to banks for terms of 6 months against eligible collateral; yet this new issuance is a sizable boost. 

Today was the first of three auctions scheduled for this year, with the others set for September and December. The increase in lending is bullish for European recovery, which the Central Bank has forecast to decline 4.6% this year before returning to mild growth next year. We'll be monitoring the extent to which these monies reach Main Street. Should mortgage rates compress it could significantly improve the consumer's health.  Despite increased business and consumer sentiment readings from Europe's largest economies (German, France, and Italy) retail sales and exports -as well as home prices and sales, are at depressed levels with little signs of sequential improvement across most of Europe. 

We've had a bearish bias on Europe generally but have strategically traded European countries from a fundamental and quantitative set-up this year as we anticipate greater divergence between the major EU economies as the global recovery process continues to drag on. We're currently short Italy via the etf iShares EWI and have recently traded the Swedish and German markets on the long side, and the Swiss market on the short side.

Matthew Hedrick


While Jack-in-the-Box is outperforming some of its competition (Carl's Jr.) on a same-store sales basis, it's underperforming the industry-behemoth McDonald's.

Generally, I like the direction management is headed by concentrating on the core business by selling underperforming, low return assets. While it's not new news that JACK has agreed to sell 55 of its 61 Quick Stuff convenience stores and gas stations, it is a statement as to where management is taking the company. The re-franchising strategy is also a long-term net positive, but the dilutive nature of each transaction is less of a positive.

The biggest negative for JACK has been the rapid growth in capital spending over the past two years, which has contributed to the decline in JACK's return on incremental invesed capital (ROIIC). Over the past two years capital spending has grown 10% and 16% faster than revenues, respectively.


Management doubled its new Qdoba company-operated openings in 2008 just as same-store sales started to slow. The company plans to increase Qdoba company openings to 30-40 per year from its prior 10-15 run rate (21 in FY08 and 25 planned for FY09). In this environment, it's unlikely that the company will get paid for an accelerating rate of growth. With Chipotle growing at 125+ stores a year, the heat in on Qdoba not to fall too far behind, a situation that is not necessarily good for shareholders.

The company is increasing its Jack in the Box company openings in FY09 at the same time it is accelerating the refranchising program. Increasing company new unit development is clearly inconsistent with the company's refranchising goal of operating less company restaurants.
The company has attributed part of the increase in capital spending each year since at least FY06 to its ongoing reimage program at Jack in the Box so it is spending incrementally more on these reimages each year. In FY08, the capital spending increase was also attributed to a kitchen enhancement program at Jack in the Box (a program to increase restaurant capacity for new product introductions while reducing utility expense using energy-efficient equipment) and the purchase of smoothie equipment.

While these non customer-facing initiatives, such as the kitchen enhancement program and the purchase of smoothie equipment, are important, they do not typically generate incremental returns. Based on my estimates, with the number of new company units coming down in FY08, these non customer-facing initiatives grew as percent of overall capital spending at the same time capital spending grew 17% YOY, thereby explaining the decline in returns. The company plans to maintain the same level of capital spending over the balance of FY09 but with new company unit growth accelerating in FY09 relative to the prior year and the kitchen enhancement spending wrapped up in FY08, a greater level of the spending should be allocated to more customer-facing and typically higher return initiatives.

The real turnaround in returns could come in 2010. The company's exterior reimage program is expected to be complete by the end of fiscal 2009 and the interior reimage program finished by 2011 so the level of capital spending associated with these reimages should be less going forward. If the company keeps its new unit growth in check and more prudently manages its capital spending, cash flows can be redeployed to shareholders, thereby providing a positive catalyst for the stock.


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Obama's Focus

We watched President Obama's press conference from yesterday and have spent the last 18 hours internalizing it.  There are a couple of key takeaways that are worth emphasizing that relate to a few Research Edge TAIL (up to three years) investment themes.

The first relates to healthcare.  Our Healthcare Sector Head Tom Tobin has been involved in grass root efforts to advise the Obama Administration on developing a palatable healthcare plan.  He's also written some very poignant notes on the topic, so we'd encourage you to chat with him.  In effect, healthcare reform is becoming a major political issue for President Obama. Our summary of President Obama's comments relating to healthcare from the press conference are outlined below:

"Complicated issue, very optimistic about progress.  Forming the plan will not add to the deficit, thereby burdening the taxpayer. We will find the money within the existing healthcare system. Want to reduce cost, "can't throw good money against bad habits." If you like your existing plan, you can keep it, but maybe you don't. We need to fix the system now, so it won't be broken for everyone. 1 of 5 dollars we spend will be on healthcare in next decade. Status quo unacceptable. Reform is a necessity."

President Obama is making it very clear that he will expend political capital to reform healthcare, or at least attempt to reform healthcare.  This is obviously very controversial, especially with independents who were the key factor in electing Obama.  We have seen Obama's approval rating nose dive over the last few weeks, which has a direct correlation with the hospital stocks and, of course, his ability to actually get meaningful legislation passed.

Our healthcare team put together the chart that is attached below, which compares President Obama's approval versus the hospital index.  In lockstep, the hospital index has declined with Obama's approval rating.  The biggest drain on earnings for hospital companies is bad debt, which should only accelerate in the coming quarters with the increase of unemployment, even if at a lesser rate.  Therefore, Obamacare would in theory benefit hospitals as the insured become a larger percentage of the populous, which should lead to a decline in bad debt.  The action in hospital stocks seems to be suggesting that the viability of the Obama's plan is very much in question.

The other obvious call out from President Obama's press conference is a real lack of the focus on foreign affairs.  As the Politico reported:

" A couple of surprising words were missing from President Obama's 55-minute news conference on Wednesday: "Iraq" - and "Afghanistan. Also MIA: "Korea," "Pakistan," "soldiers," "surge" and "war" - as well as the Army, Navy, Air Force and Marines. The omissions were partly a result of the short attention span of the press, which did not ask about those topics after the president did not mention them in his opening statement. But the silence on those subjects also provides a striking illustration of one of the singular differences between Obama and his predecessor."

We have been discussing this point repeatedly.  For better or worse, President Obama is much less focused on foreign affairs than his predecessor.  The TAIL risk here is that this public representation, i.e. not discussing foreign affairs, is a representation of a private allocation of time.  In a time, when foreign policy risk is becoming more and more serious in North Korea, Iran, and Pakistan, there is risk that a lack of focus by the administration will lead to an inadequate, or reactionary response.  While playing defense on a potential North Korean missile launch towards Hawaii is appropriate if the North Korean regime is not a serious risk, it does send a message to other enemies of the United States that could potentially embolden them, which is a TAIL risk we need to consider.

Daryl Jones

Managing Director

Obama's Focus - hosp


SONC's fiscal 3Q09 top-line numbers came in worse than expectations with system same-store sales down 5.4%. The company was lapping its first quarter of easy sales comparisons, and management set expectations high when it highlighted this fact during its second quarter conference call, saying, "As a reminder, as we move into the third and fourth quarters, our same-store sales comparisons at partner drive-ins will become increasingly easier." Unfortunately, these easy comparisons did not translate into improving same-store sale trends. Instead, comparable sales deteriorated further from 2Q09, down 7.7% at partner drive-ins and -4.9% at franchise drive-ins, and worsened as the quarter progressed with May sales coming in lighter than March and April.

Like last quarter, SONC's declining average check became increasingly problematic. Following the introduction of its Everyday Value Menu in late December, SONC's traffic trends have turned less negative at the expense of its average check, which fell 4.9% in 3Q09 following -3.4% and -1.9% in 2Q and 1Q, respectively.

SONC - A BALANCING ACT - SONC 3Q09 traffic and average check

SONC is not alone in this balancing act between traffic and check with some of its QSR peers choosing to chase traffic at the expense of check and margins (MCD) and others failing to drive traffic with their premium-priced brand strategies (CKR). SONC had allocated all of its advertising dollars to promoting its new value offerings from January to April, which curbed traffic losses, but with its average check declining further, the company reallocated some of its marketing dollars back to its premium offerings in May. And what happened? Traffic was softer in May. Management recognizes that it must work to fix its average check and has introduced initiatives to do so, primarily by trying to re-engage its customers with its higher priced combo meal offerings, but there is no easy fix, particularly in this environment. As management stated, "Value is the number one item driving traffic these days and we need to make sure that traffic is sustained."

SONC ‘s quick success in its ability to drive traffic with the Everyday Value Menu, which grew to 10% of sales within 3 months of its introduction, and the subsequent fall off in traffic in May as the company decreased its marketing spending around the value menu only increases my conviction that CKR will not work in this environment. The company will not be able to drive traffic with its premium menu items. When CKR reports its fiscal first quarter results after the close today, management will continue to maintain that it must protect its brand and will not succumb to selling "margin-eroding" products. We already know that sales trends worsened during the quarter, particularly at Carl's Jr., which were down 5.1%, and I don't see them improving under this current premium sales strategy.

Despite the continued top-line weakness and declining average check, SONC's fiscal 3Q09 margin performance did provide some good news during the quarter. Both restaurant level and operating income margins declined YOY but improved rather markedly on a sequential basis.


The company's refranchising efforts have seemed to help on this measure. In the third quarter, alone, SONC refranchised 177 units, bringing this year's total to 194 and lowering the company's partner ownership mix to 14% from closer to 20%. The positive impact from these refranchising efforts was felt rather immediately as underperforming partner drive-ins that were refranchised had less of an impact on margins and SG&A expenses came down as a percent of sales. As the company benefits from increased royalty revenues and focuses on fixing the fewer partner drive-ins in the system, margins should continue to improve going forward. In the near-term, however, there will some offsets to these margin improvements as the company is facing increased pressure on the labor line in 4Q09 with minimum wage rates set to increase yet again in July. Additionally, although management is expecting commodity costs to come down YOY in the fourth quarter, food costs as a percent of sales are expected to be flat to up as a result of the company's increased contribution from its value menu. SONC has done a good job of managing this food cost line following the introduction of its Everyday Value Menu but we knew it was only a matter of time before margins would take a hit from this new menu.



Retail First Look: 6/24/09


After the close tonight, two of the higher-profile names in consumer discretionary print numbers - Nike and Bed, Bath & Beyond. Nike has seemingly dominated my own focus, but don't forget that BBBY is one of our core names that we will consistently revisit at the right price. My colleague Eric Levine is the man on BBBY here, and I thought the following exchange this morning might be useful to you.

Levine: "I'm modeling EPS a couple of cents ahead of the $0.25 Street number.  Guidance was $0.23-$0.24.  Same store sales are tracking in the low-single digits as best as I can tell, which is a sequential improvement from 4Q when they declined by 4.2%.  Upside in the quarter should be driven by the gross margin line which is expected to benefit from a less promotional environment and building benefit from less competition.   Bottom line here is that the quarter should look fairly similar to 4Q in terms of key drivers, which in this case is a slightly negative topline and a better gross margin line. 

McGough: "Wont that be bad in light of BBBY's multiple and what we saw out of BBY last week (when it beat, but on a weaker top line)?"

Levine: "No, I don't think so. Comps at BBY ended up being worse than expected with people focusing on the fact that CC's liquidation didn't have as a big an immediate impact as expected.  My sense is that there is less "hype" built in to BBBY when it comes to Linens and the revenue line.  I still think a sequential improvement in comps with a better gross margin line will be taken positively."

Bottom Line:  Collectively, we like BBBY.Over the next 12-24 months BBBY is a  "mean revision" story, driven by an improving economic backdrop, the elimination of the company's most direct competitor, and the bottoming of the worst period in modern history for home furnishings consumption.  Gross margin recovery is the most overlooked item by the Street and the source of upside over the near and intermediate term.  A more rational promotional environment driven by Linen's absence is key to the story.  Modest square footage growth of 5% coupled with operating margin recovery should drive FCF growth in excess of 15% over the next 2 years.  Cash flow yield remains attractive at 6.1% ('09) and 9.0% ('10) respectively. Multiples are full, so this needs to be an earnings-driven story. The good news is that the Street's numbers are 1-year behind. $0.25-$0.30 beat per Yr1 and Yr2 = $5-$6/yr.



Some Notable Call Outs 

  • Slightly better SportscanINFO numbers last week, but the headline is deceiving. There was a marked improvement in the athletic specialty channel, but additional weakness in mass and family channels. That drop-off is so severe that any sane analytical mind needs to question the validity of the data.
  • Consistent with commentary from other consumable-driven retailers, Kroger highlighted relative strength in its own/private brand products with sales up double-digits. National brands declined slightly for the quarter, albeit at a lesser rate than in 3Q and 4Q. Clearly price sensitivity is driving this trend. Inflation was 3.6% for the quarter, reflecting increases in grocery, drug, general merchandise, nutrition, and deli/bakery. Deflation remains prevalent in produce and dairy. Consumers continue to exhibit cautious shopping patterns as demonstrated by more frequent visits that are resulting in lower average basket sizes. Overall, there have been no measurable changes in the company's performance or the consumer's purchasing habits over the past few months.
  • Over the past year J Crew has joined many other brands by using the "sample sale" as an incremental tool to clear inventory. While reports from consumers have generally been moderately disappointing in terms of quality and price of the merchandise, it is likely that these events have helped to clean up inventory as sales have slowed. The 4th such sample sale is now slated to take place beginning July 12th.
  • In another twist on the sample sale, 20 retailers in Charlotte, NC have pooled their excess inventory to throw one massive sale event later this month. In a normal environment we would never see competitors getting together under one roof!



Zach's overview of items you're unlikely to find in the general press.

  • The Indonesian footwear sector is in a state of euphoria over the fact that prospects of sales in domestic and overseas markets have increased due to a slowdown in imports of Chinese footwear and a rise in demand from the European Union. Sales in the domestic markets have visibly increased since the government clamped down on imports from China by reducing the number the number of ports of entry to crack down on illegal imports, which was hurting the local producers. On the other hand footwear exporters are optimistic of growth in shipments from the country by at least 5% in the second half of 2009, due to a renewal in demand from the overseas markets, mainly the European Union which accounts for 37% of Indonesia's footwear exports. Local manufacturers have been able to increase their market shares by more than 7 percent due to clamp down on imports. Shoe production reached 1.2 billion pairs last year and is dominated by sports shoes which account for about 800 million pairs. Domestic sales touched 235 million pairs, of which 40% were manufactured locally and the rest imported. <>
  • According to a report, the Russian luxury market is dramatically transforming under the influence of the economic crisis. Stagnation of the Russian economy, devaluation of the national currency, the growth of unemployment, and the falling of purchasing power will reduce value of the Russian apparel market. IndexBox predict consumers' expenditures for luxury apparel, footwear, and accessories will fall 30% in 2009, compared with the same period of the previous year. <>
  • Indian Apparel exports fell by close to 10 per cent in April this fiscal and exporters expect an equally disappointing data for May of down 10% to 15% under impact of global downturn.  Garment exports from the country dropped to 10.75%. For May there are very few orders from the US and EU markets. Indian exporters face the double whammy of declining demand and competition from Vietnam, Cambodia and Bangladesh. "We are losing out our competitive edge to neighboring countries where exporters enjoy more incentives... they managed to have a greater presence in the western markets," Vaid added. <>
  • Fashion houses, designers and retailers are rushing into the free social media phenomenon that is reshaping not only interpersonal communication, but how apparel, accessories and beauty products are marketed and sold. They are tweeting, blogging and updating their profiles in an effort to mold their brand personalities on real-time global platforms and form relationships with a community of customers, particularly consumers for whom the Web is as important as a limb. <>
  • Payless ShoeSource, the retailer on a mission to democratize fashion in footwear and accessories byoffering the most in-demand styles at affordable prices, announced today its summer collection featuring the season's hottest trends. The line includes gladiator sandals, embellished wedges, nautical details and colorful canvas so everybody can have access to the latest looks - all at a great price. The retailer is currently stocking shelves with hot summer styles for on average under $20 an item, with many styles for under $15. ThePayless summer collection reflects the most current trends with a diverse array of silhouettes, colors, materials, and details to suit any
    outfit. With today's focus on stretching dollars, shoppers can update their wardrobes and snatch up even more of the latest fashions and still stay within their budgets. <,+11:07+AM>
  • At the Men's Wearhouse shareholder meeting, management announced that promotions like buy one, get one free that are driving business in the down economy, will remain because they believe the economy has not yet begun to recover. <>
  • The TJX Cos. Inc. will pay a $5.5 million settlement, $2.5 million to establish a data security fund and $1.8 million to cover the states' investigation costs over cyber theft in 41 states. The agreement puts an end to the states' investigations into the retailer's culpability in the massive security breach, through which hackers stole information on 45.7 million credit and debit cards from the company's computer systems during 2005 and 2006, TJX said.  <>
  • The Obama administration filed its first World Trade Organization case against China on Tuesday over export restraints on raw materials that it charges provide an unfair advantage to Chinese industries, while limiting access and raising costs for countries importing the goods. Although the materials covered by the complaint are not used in apparel or footwear making, textiles and leather could be the next step. The materials included in the complaint are mainly used in the production of steel, aluminum, and other chemical products: bauxite, coke, fluorspar, magnesium, manganese, silicon metal, silicon carbide, yellow phosphorus and zinc). The downstream products that incorporate the raw goods at issue cover a wide range of items, including textile laminates, cosmetics, flame retardants, fiber products, consumer electronics, automobiles and contact lenses. <>
  • The Organization for Economic Co-operation & Development forecast Tuesday that more than 57 million people will be unemployed in rich nations by the end of 2010, up nearly 20 million from 37.2 million at the end of 2008. The agency said the surge in the jobless numbers will bring the OECD unemployment average to around 9.9 percent, the highest since the Seventies, when it averaged 9.8 percent. Obama was on the tube yesterday saying that Unemployment will reach 10% in the US.  If you remember from the conference calls of Q4 08, companies like Macy's baked in their longer term estimates based on the assumption that unemployment in the US would be 9%.  We are now only a few bps from 10% unemployment. <>
  • AmericasMart officials hope a recent executive change and a renewed commitment to buyers' market experience will position the show for growth once the economy bounces back. In the meantime, officials are offering retailers more incentives to shop in Atlanta, including expanding the show to a fiveday, Thursday-to-Monday format, providing educational business seminars during market and offering additional show perks. Product callouts: In sportswear and dresses, immediates are selling best and there is a buzz in the accessories market. <>
  • Having struggled with exhibitor exodus and dwindling buyer attendance over the last year, a toned-down ASR is starting to emerge, and organizers are taking aggressive measures to lure buyers and exhibitors alike. Tompkins said ASR's prices for the Sept. 10 to 12 show were reduced by about 25 percent over last September, and organizers are infusing new life to the show through a five-year licensing deal - valued between $1 million and $2 million - with Class trade show founder Jason Bates to bring his two-year-old concept to San Diego. Called Class@ASR, the idea is to bring fashion-forward, upscale brands to the mix, adding diversity to an exhibitor roster traditionally comprised of surf-skate stalwarts. The Class addition will target boutique buyers and some 100 contemporary labels, including Modern Amusement, Original Penguin and Howe. The show will take place in the San Diego Convention Center with ASR, but will be curated and organized separately. <>
  • Organizers of international textile shows have already seen the poor economy cut into their exhibitor and attendance figures, but believe pent up demand and faint glimmers of optimism will lift their shows during the last half of the year. <>
  • Father's Day Sales Better Than Expected -Promotional and last-minute. Those words described Father's Day business for retailers around the country last week. Even so, most stores were pleased with the way sales wound up and are optimistic the modest pickup they've been experiencing for the past several weeks will continue into fall and holiday. Casualwear, most notably colorful polos and woven sport shirts, were among the most popular items. And the catchphrase of the season is lean inventories. After getting burned last fall and holiday with an overabundance of goods, retailers have slashed their budgets and are now carrying the bare minimum in order to inch their margins back to acceptable levels. <>
  • In an effort to reach more independent retailers nationwide, Nina Shoes has launched an Internet initiative catering exclusively to smaller specialty boutiques in the country's harder-to-reach regions. The wholesale portal, which launched in the spring and will make its debut at WSA in July, is targeted toward independent retailers in areas without local sales representatives and those that have difficulty attending trade shows. <>
  • A small sports-licensing company in Westwood, Mass. has sued Nike Inc. and the Naismith Memorial Basketball Hall of Fame Inc. for fraud and breach of contract over a proposed Nike line of Michael Jordan sportswear. SportsFuzion Inc. claims Nike and the Hall of Fame's plans for a "Air Jordan Hall of Fame" apparel collection circumvent a 2006 contract that it said gave SportsFuzion exclusive sportswear licensing rights to the Hall of Fame's trademarks and logos. <>
  • U.K. online sales up 14% in last 12 months, London trade group reports - Online retail sales in the U.K. grew 14% from April 2008 to April 2009, the Interactive Media in Retail Group and technology and consulting company Capgemini report. U.K. consumers spent £43.8 billion (US $61.7 billion) online last year. <>
  • LVMH Moët Hennessy Louis Vuitton and Chicago-based Monastery Hill Bindery have ended their legal battle over the luxury house's Epi Leather trademark on hotel guest room binders sold to the Grand Hyatt that infringed on the Epi pattern, which is made up of two-tone wavy lines. Monastery Hill admitted no wrongdoing but entered into an injunction barring it from infringing upon the Epi trademark and will stop selling the product and destroy the remaining stock. <>
  •  French President Nicholas Sarkozy on Monday said the burka, the traditional Islamic garment worn by women that covers the face entirely, is unwelcome in France. The country's National Assembly on Tuesday said it has created a commission of 32 deputies to investigate whether women should be allowed to wear burkas. But, some worry that banning the garment could have a detrimental effect on French business. That could especially be the case for top-end hotels, many of which are owned or frequented by Arabs, and for bastions of the luxury trade. <>


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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.