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Bottom Forming in Home Furnishings

We know that government data tends to lag the "real time" information we get on same-store sales day.  However, it's worth taking a look at the latest chart tracking home furnishings' sales, which was updated this morning with the June report.  Consistent with anecdotal evidence that the home category continues to improve, the government data supports commentary from the horse's mouth.

Bottom Forming in Home Furnishings - Home Furnishings Chart

Now what does this mean for BBBY?

- BBBY has demonstrated substantial outperformance and market share gains in both positive and negative environments. The 2001-2002 spread is just about the same magnitude as the 2008-present spread. I would chalk up the earlier period share gains to aggressive store growth and the original "category killer" positioning. The latter is part Linens, part independents going away, part overall superior execution.

- When looking at the big picture, the longer term chart clearly indicates a positive inflection point in what appears to be the worst period for the industry in a decade. Even more interesting is how BBBY underperformed the industry when the housing boom was at its best. This to me further indicates a point I have made in the past that BBBY is much more consistent than people think.

- Finally, the 3 year trend on PCE for home furnishings has finally turned. This delta is notable albeit just a very minor inflection point. With BBBY already showing acceleration in comp trends versus the overall industry it isn't far off to assume positive comps by year end. The worst comp in the past 10 years was in 4Q08. Yes we know all of this already, but this momentum has legs and profitable ones at that. Remember, the key here is a more rational competitive environment with BBBY regaining control of its promotional destiny. Less coupons=profitable market share gains.

Bottom Forming in Home Furnishings - BBBY Comps and the Industry

Bottom Forming in Home Furnishings - Spread BBBY

Bottom Forming in Home Furnishings - PCE Consumer


DIRTY WORD

During our Q3 themes call we talked about inflation returning in Q4.  We are not calling for STAGFLATION but the possibility is there. 

As a result of sharply higher energy and food price increases, the headline producer price index rose for the third consecutive month.  After gains of 0.3% in April and 0.2% in May, the PPI rose 1.8% in June. The increase was above the consensus projection of 0.9%.  June's 1.8% advance is the largest since the 2.4% gain posted in November 2007.  The 6.6% rise in energy prices suggests that there is upside risk to June's consumer price index reading.

DIRTY WORD - USPPI

While the core PPI surged 0.5% -the biggest increase in almost a year,  almost all of this upside reflected a surge in car & truck prices which can be an unreliable indicator.  Not including autos, the core was up only about 0.1%.  Not so bad!

A Commerce Department report today showed U.S. retail sales rose in June, helped by incentives on autos and higher gasoline prices which boosted service-station receipts. The 0.6% increase was larger than forecast and was the biggest gain since January.  Importantly, excluding automobiles and gasoline, sales dropped for a fourth consecutive month.  

The headline retail sales number in June looks positive on the surface, but the recession has limited retail sales increases to only four of the past 12 months.  Most consumers continue to be cautious in the face of rising unemployment and falling home values.

So where do we go from here?  According to Bloomberg, GDP growth will average 1.5% in 2H09 after declining in 2Q09.  Betting that the consensus is nearly always wrong, the 1.5% GDP figure looks aggressive and the risk is to the downside. 

A soft economy in 4Q, coupled with our 4Q inflation call and the possibility of stagflation cannot be ruled out yet.

Howard W. Penney

Managing Director


A Bump in the Road

The ZEW Center for European Economic Research reported today that its July index of investor and analyst expectations slipped to 39.5 from 44.8 in June. The index aims to predict economic health six months ahead, and came in considerably lower than surveyed economists' forecast of 47.8. Conversely ZEW's gauge of the current economic situation rose to minus 89.3 from minus 89.7 in June, underperforming a consensus forecast of -87.8.

July's drop comes after months of sequential improvement in economic expectations (see chart) and recent improvements in underlying fundamentals. May German Industrial Production improved on a monthly and annual basis, helping to confirm a bottoming in production; and Factory Orders improved 4.4% on a monthly basis.  (For more, see our post on 7/8 "Sequential Improvement for Europe's Workhorse").  Exports picked up 0.3% on a month-over-month basis in May while imports declined 2.1%, contributing to an increase in the unadjusted trade surplus to $9.6 Billion from $9.4 Billion in April, according to the Federal Statistics Office.

A Bump in the Road - ZEW

Inflation is currently running at a healthy annual 0.0-0.1% (at the Eurozone average) and we don't expect that number to veer greatly when July's report comes out tomorrow.  As we move into 2H '09 we expect to see a slight increase in unemployment, offset with increased exports that should turn consumer and investor confidence higher.  Look for Factory Orders to be an important indicator of the health of the German economy. 

In light of this data, moderating expectations for future growth indicated by the ZEW survey suggest a realistic appraisal of sluggish global demand, rather than a negative sentiment shift.

While we've yet to see positive performance out of the DAX in 2009 (currently at -1.1% YTD) our bullish bias on Germany remains. We believe that Germany's significant industrial capacity provides a structural advantage, especially as global economies melt up. Further, the country's economic rather than financial leverage, a function of the government's aversion to overextending its balance sheet and Chancellor Merkel's balanced pledge of 85 Billion Euros to promote growth through tax cuts and programs like its "cash-for-trash" auto rebate will benefit steady but slow economic improvement in 2009 and positive growth in 2010, especially when compared to some its financial levered Western European peers, including:  Italy, Spain, UK, and Ireland. 

Matthew Hedrick
Analyst
 


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THE MACAU METRO MONITOR

MACAU HOTEL OCCUPANCY DIVES TO 54.9%, LOWEST SINCE 2003 scmp.com

Hotel occupancy in Macau has not been this low since the 2003 outbreak of SARS.  Now, in 2009, the swine flu outbreak and a crackdown on "zero-free" package tours by the mainland government are contributing to the slump.  Average hotel occupancy across Macau in May was 59.4%, down from 72.9% during the same period in 2008. 

The number of hotel rooms in operations was essentially unchanged in the five months since the grand opening of the hotel tower at SJM Holdings' Grand Lisboa in December last year.  Visitation statistics resonated with the poor hotel figures; visitor arrivals fell 20% in May from a year earlier and 15% from the previous month despite dual holidays falling in May.  The negative impact of this decline carried into June's gaming revenues which were down 17% from a year earlier, according to preliminary data from the Portuguese news agency Lusa.


BOUNCING BACK

Singapore Q2 GDP data released last night registered a -3.7% year-over-year growth rate, stronger than economist consensus by 170 basis points. 

BOUNCING BACK - singapore

The headline data was largely driven by resuming construction projects, an uptick in Pharmaceutical sector activity and inventory restocking in the electronics manufacturing - a clear sign that domestic business confidence is improving as investments increase and stimulus programs in neighboring countries begin to bear fruit.

When this data is taken to a higher vantage point in the context of Singapore's regional role -a highly developed entrepot economy in a strategically central position in the Pacific rim supply chain, the signal sent is unmistakable: Chinese demand driven trade continued to strengthen in June, and this sequential increase confirms that ASEAN and other smaller inputs into the matrix have felt that strength as much as the primary commodity and durable goods producing economies have.

We remain long Chinese demand via CAF as we continue to see the Ox pushing forward.  China can't carry the whole world on its back indefinitely, and we have yet to see real confirmation of broadening demand there, so at some point this surge will likely abate. For the time being however the data still supports only one conclusion.

Andrew Barber

Director


RT - Comments from Investor Conference

We just heard from RT last week when the company reported its 4Q earnings so today we heard more of the same as it relates specifically to RT. RT's CEO Sandy Beall did say, however, that he is seeing more discounting within casual dining now than in the spring. We will be learning more about calendar 2Q results in the coming weeks and how casual dining margins fared overall, but this statement could point to increased margin pressure in the current quarter. A large number of companies, including RT, have been able to cut costs to partially offset the significant level of discounting, but a second round of cuts will be more difficult without impacting the customer experience.


RT said it will begin in January to execute against its goal of increasing average check to $12.50 to $14.50 from about $11.50. That being said, the company has not increased its prices in about 3 years. Although RT has been successful in driving increased traffic as of late, it has done so by better marketing its value offerings. It will become increasingly difficult for the company to raise its prices as it has trained its customers for the last 3 years to expect a lower average check. We will have to wait and see...


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