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Uh Oh: Lower Highs?

As most US Economic observers know, America is no longer an economy driven by her manufacturing sector. That’s why the ISM Non-Manufacturing Index has become one of our critical macro leading indicators. This morning we saw a sequential downtick (month-over-month) in the Index for the month of July (see chart).


Everything that matters in our macro models happens on the margin. The US market’s negative reaction to this report is well placed.


As you can see in the chart below, since the free money Go-Go days of 2006-2007, this Non-Manufacturing index has had fits and starts – but in the end, has simply made a series of lower-highs. While the Q209’ directional move of going from the toxic to bad was good (see the levels on this chart from late 2008 to Q2 of 2009), what you may be staring at here is an economic picture that simply remains bad.


This morning’s ABC/Washington Post Consumer Confidence report rhymed with what you see in this chart. Although it deteriorated marginally -  the point is that on the margin it deteriorated. For today at least, this is new.


I quoted Buffett earlier this week with this, but I think that it’s the most fitting way to end this post:


“Charlie and I believe that when you find information that contradicts your existing beliefs, you’ve got a special obligation to look at it – and quickly!”


 Before we all run around taking the Greenspan and rear-view looking economic savants word for it that the recession is over, look at this chart again.




Keith R. McCullough
Chief Executive Officer


Uh Oh: Lower Highs? - a1

Back to school ramp begins

Our weekly sports apparel data showed meaningful sequential and year over year changes.  In the absence of consistent quantitative and anecdotal evidence that true underlying demand has improved, we believe the calendar impact of a ramping back to school selling season is underway.  With that said, the trends on both a sequential and year over year basis are encouraging.  Additionally, the consistency in the sporting goods channel over the past three weeks suggests that volatility is in check.  With more moderate weekly ups and downs, inventory planning and promotional cadence should be easier to manage and inventory risk should be muted.


The overall industry reported a positive week (albeit just north of flat), with trends increasing in most channels of distribution.  On the downside, while still positive, the sporting goods retailers decelerated.   On an absolute growth basis, full-line sporting goods reported a positive week, offset by weakness in the athletic/urban specialty stores.  Regionally, we saw strength on the West coast for the second week in a row with sales up 28%.  The eastern seaboard was quite the opposite, with double digits declines for the week.  Average price point changes were mixed across channels as discount/mass retailers showed the biggest sequential decline in ASPs, while the sporting goods and family channels were relatively stable.  This data confirms that the promotional environment remains rational- at least for now in the very early stages of the back to school season.


Back to school ramp begins - Sports Apparel Table

Back to school ramp begins - Sports Apparel   sales

Back to school ramp begins - Sports Apparel ASP chart



Adidas/Nike 'Disaster Gap'

Results are still abysmal based on every metric I use, and it's an insult to Nike to stack the two against one another. But I think that Adidas finally hitting bottom is a net positive for both.



The ‘Disaster Gap’ between Nike and Adidas is narrowing. Let’s not mince words here…Adidas’ results are abysmal. Sales down 3%, EBIT –63% and EPS – 94%.  But a key takeaway is that it has narrowed the gap with Nike when looking at the rate of change from 13 weeks ago.


This is best evidenced by overlaying each company’s trajectory on our SIGMA chart (time series triangulation of sales, inventories and margins). Adi is still in the ‘death zone’ where inventories are growing too fast and margins are down. But it is clear that we’ve seen the bottom, as the rate of change is improving on the margin (sales-inventory spread going from -30% to -14%, and margins ONLY down 5 points instead of -8.5 pts).


Adidas/Nike 'Disaster Gap' - 8 5 2009 11 21 49 AM 

I’m mixed on this as it relates to Nike. Why? Ordinarily I’d like a desperate competitor as it would presumably give the stronger player the opportunity to step in, take it on the chin, and go on complete offense to crush the competition. Long term, that’d be ideal, and short term it would hurt. Understanding that is traditionally a great way to make money in this name. The problem is that as fiercely competitive as Nike is, it does not think about ‘crushing the competition’. It beats to its own drum. A weak competitor (i.e. Adi with an extra hundred million in inventory) acting desperately is problematic for Nike. A less desperate Adidas (which, mind you, at about $15bn vs. Nike at $18bn is larger than most US investors think) eases potential margin pressure from Nike.


As a sidenote, check out the quality gap between the two companies in the chart. Nike is so dang tight – managing a sales/inventory spread between a band of +5% and -5% and margins between +2 and -2pts yy. Adidas can’t even compare.

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JACK – Comments from JACK

The following comments are taken from the JACK 10Q

 “Sales during the quarter started off strong but deteriorated significantly near the end of the quarter. System same-store sales at Qdoba restaurants decreased 2.0% year-to-date compared with a year ago as the macroeconomic environment continued to affect consumer spending at restaurants with higher check averages.”

Plus….   New guidance Q4 FY 2009 guidance

2.5%- 4.5% same-store sales decrease at Jack in the Box company restaurants versus a 0.8% decrease in the year-ago quarter - which is lapping an easier comp than 3Q.

Confuses me as to why stock is up even with better YOY margin

These comments have obvious implications for our cautious stance on CKE Restaurants…..

Retail First Look: 8/5/09


05 AUGUST 2009




  • DSW’s secret designer shipment has been leaked and will be revealed to the public on Thursday.  Recall that the company highlighted the “opportunistic” purchase with first quarter earnings.  While we can’t vouch for the age of the merchandise until we see it, the buzz suggests there will be shoes, handbags, luggage, and belts at select locations.  And the mystery brand is…Gucci.  Maybe the heavy radio advertising and deeply discounted Italian goods will help drive traffic and ultimately an improvement in same store sales. 


  • While most domestic brands focused on China expansion have traditionally planted the seeds in the major cities, Iconix is taking a slightly different approach.  Over the next three years, the company expects to have over 500 stores in China between Rampage, London Fog, and Rocawear.  Interestingly, ICON’s growth strategy is centered on the masses with distribution focused on densely populated, but non-major cities.


  • Contrary to traditional grocers and discounters, Whole Foods is seeing early signs that the trend towards “trading down” may be easing.  Transaction count and basket size both showed sequential improvement in the quarter and the overall comp was the first sequential improvement in 6 quarters.  Interestingly, management commented that competitors have been deemphasizing organics in favor of increased focus on value.  As a result, increased supply and lower prices in the organic produce category benefitted Whole Foods’ on a gross profit dollar basis. 


  • In a rare example, True Religion management highlighted that some of its major customers (department stores) may have remained too conservative on inventory commitments in the quarter.  As a result, the company has been lobbying for more auto-replenishment programs to maintain adequate stocking levels.  Despite the challenging environment, the retailers have been receptive to the replenishment programs and are taking slightly more inventory to ensure in-stocks for the Fall season.




-EU protectionist actions pose as a serious obstacle for Indian exporters - Indian exporters are facing new challenges in view of EU's protectionism of offering subsidies to the local farmers and its non-tariff barriers on services exports, according to the Federation of Indian Chambers of Commerce and Industry (FICCI). The India-EU Trade Relations in the post-recession period, Indian exporters are facing the adverse impact of the huge amount of subsidies enjoyed by EU farmers through free seeds and fertilizers and a freight subsidy to producers. In addition, they face cumbersome quality testing which increases the cost and time of Indian companies.  <fashionnetasia.com>


-Global demand from retail space declines - The demand for retail space has declined in most markets, with New Delhi reporting a 25% decline in the last six months. The capital city ranked 69th in rentals among the list of major cities across the world during the first quarter of 2009, says a survey by real-estate consultancy CB Richard Ellis. According to the report, Global Retail MarketView, the demand for retail space has declined across the world as consumers cut back on spending and unemployment continued to rise in many countries.  Emerging and less established markets have been most significantly affected. Buenos Aires saw the largest annual decline in retail rents year-on-year with a drop of 37% followed by Warsaw (33%) and Washington DC (26%). <thehindubusinessline.com>


-New legislation introduced which would provide duty-free treatment of apparel products from the Philippines - US Rep. Jim McDermott (Democrat-Washington) has recently introduced legislation that would provide duty-free or reduced duty treatment to certain apparel products from the Philippines that are generally not produced in the US. These products would be afforded duty-free treatment provided they are wholly assembled in the Philippines or the US and the component determining the article's tariff classification consists entirely of (i) fabric components cut in the US or the Philippines, or both, from fabric and yarns wholly formed in the US; (ii) components knit-to-shape in the US from yarns wholly formed in the US; or (iii) any combination of the fabric components or components knit-to-shape described in points (i) and (ii).  <fashionnetasia.com>


-Thursday Retail Sales Preview - Government subsidies may be moving the needle on new car and home sales, but also appear to have siphoned enough discretionary dollars to have hurt retailers' July sales. The 4.9% sale decline that Thomson Reuters expects would equal June's drop and indicate that demand for most retail goods, particularly apparel, is not being hoisted by government assistance. In addition to federal measures, including the hugely successful "Cash for Clunkers" auto program, and tax credits and low interest rates for certain home buyers, July was influenced by chilly weather, a dearth of tax-free holidays, still-high unemployment and, in some cases, limited inventories that meant missed purchases. Investors should look out for companies that may issue second-quarter warnings in tandem with their softer sales since they now have the full picture for the quarter. American Eagle Outfitters Inc. (AEO) and Zumiez Inc. (ZUMZ) may lower expectations, some analysts said. J.C. Penney Co. (JCP), Kohl's Corp. (KSS) and Aeropostale Inc. (ARO) are receiving the most predictions from analysts when it comes to lifting their views. Still, retailers are looking at continued softness across the board, with teen apparel and department stores pegged to see the biggest same-store-sales declines. Teen apparel retailers are expected to post a 10.5% decline, while department stores are expected to report a 9% drop. <online.wsj.com>


-Outdoor Industry Association survey sees negative outlook on Outdoor in 2009 - In a survey released today by Outdoor Industry Association (OIA), small businesses reported their revenue expectations for 2009 continue to fall and employment indicators continue to decline. Bottom line: Outdoor businesses have a more negative view about recovery than they did in the fall of 2008 or in the spring of 2009. <sportsonesource.com>


-European Retail Sales Decline More Than Estimated as Companies Shed Jobs - European retail sales fell more than economists forecast in June as companies fired workers to survive the recession, making consumers hesitant to shop. <bloomberg.com/news>


-Collective Licensing International has a Vision - Collective Licensing announced that it had relaunched the Vision Street Wear skate brand with a line of shoes for men, women and children. The line, available this month, is being sold exclusively at Finish Line stores. “Partnering with a leading athletic retailer such as Finish Line ensures that our brand reaches our core consumers looking for the perfect combination of performance and style,” Bruce Pettet, president and CEO of Collective Licensing, said in the release. “Finish Line is the ideal venue to launch Vision Street Wear. They have the same passion for high-quality, premium brands.” <wwd.com/footwear-news>


-Skechers USA President not letting Shape-Ups shoes fall to a flexible price point - In a letter to retailers sent earlier last week, Skechers USA President Michael Greenberg referenced a letter sent to all retail partners in January in which a $100 per pair minimum resale price for Shape-Ups was established.  The latest letter, dated July 29, notes that the mandatory minimum resale price for Shape-Ups was being set at the minimum resale price reflected on the wholesale line sheets.  He also indicated that the product should be “excluded from all promotions, discounts, ‘buy-one-get-one’s,’ and any other off-price vehicle that would reduce the selling price below the mandatory minimum resale price.”  Skechers will, however, permit “occasional pricing specials” and “set window periods” so retailers can “clear obsolete styles and colors.”<sportsonesource.com>


-Hanesbrands and Naturally Advanced Technologies team up - Naturally Advanced Technologies Inc. has entered into a multiphase joint development agreement with Hanesbrands Inc.,that will allow Crailar(R) Organic Fibers technology to be processed for use in commercial apparel knit products made by Hanesbrands. NAT, using technology developed with and licensed from The National Research Council of Canada (NRC), and Hanesbrands, a leading producer and marketer of innerwear, outerwear and hosiery apparel, will retrofit existing dying equipment at a Hanesbrands facility to develop a commercially viable use of the 100 percent organic fiber. <prnewswire.com>


-Pony drops Nike "V" lawsuit - Pony Inc. withdrew its trademark lawsuit against Nike Inc. Tuesday, noting the disputed “V is for Victory” marketing campaign had been wrapped up. Pony has used a chevron to mark its work for over 35 years and argued in an April 3 suit filed in San Diego federal court that Nike’s campaign amounted to trademark infringement, trademark dilution and unfair competition.  <wwd.com/business-news>


-Tom O’Riordan has stepped down as CEO of American Sporting Goods. According to O’Riordan, when he joined the company in March 2007, he was tasked with positioning the company’s portfolio of brands — which includes Avia, And1 and Ryka — for an eventual sale of the company. When a sale seemed unlikely, the former Fila America CEO decided it was time to leave. <wwd.com/footwear-news>


-Designers work with Target  on limited collections - Designing sisters Kate and Laura Mulleavy will be bringing their ethereal sensibility to a wider world when Target introduces Rodarte in December as part of its Go International series of limited collections. The 55-piece Rodarte line for Go International will launch at most Target stores nationwide and on target.com on Dec. 20, and will be available through Feb. 6. Prices for Target’s Go International Rodarte collection will range from $9.99 for knee-highs to $79.99 for a leopard print jacket. <wwd.com/retail-news>


-Gucci is hoping its temporary stores leave a lasting impression - Like other luxury retailers in the recession, Gucci is looking for high-impact, lower-cost methods of generating interest in the brand, especially among style leaders who may not be moved by conventional forms of advertising. Gucci Icon-Temporary is that method. The flash sneaker store will touch down in six or seven locations around the world where tastemakers gather, such as Art Basil Miami Beach, staying open for two or three weeks in each spot. The first stop on the tour will be Crosby Street in SoHo on Oct. 23. Other stops will include London, Berlin, Paris, Hong Kong and Tokyo. <wwd.com/retail-news>


-James Blake apparel line - James Blake will have more than just his serve on his mind when the U.S. Open kicks off in Flushing, N.Y., on Aug. 31. He’s also using the tournament as the opportunity to launch his new men’s apparel collection with Fila. Blake, 29, who switched sponsors from Nike to Fila in January, will debut the Thomas Reynolds Collection on Aug. 15 at Lord & Taylor, Paragon Sporting Goods, select Dick’s Sporting Goods and tennis specialty stores including Masons Tennis Mart and Tenniswarehouse.com. The line, which sports an R-dot logo, is named after Blake’s father, Thomas Reynolds Blake, who died in 2004 after battling lung and stomach cancer.  <wwd.com/menswear-news>


RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough): TGT

08/04/2009 03:10 PM


My timing here was awful this time (re-shorted 7/13 before the mkt ripped), and I just posted on this better than expected savings rate. Booking the loss. KM



Retail First Look: 8/5/09 - SV 8 5 09



We think that Melco will miss street expectation when they report this Thursday.  However, the CoD commentary will be positive since the property has ramped nicely, albeit with high hold %. 


We’ve been positive on MPEL (see “BUY THE RAMP UP, SELL THE RAMP DOWN”, of 07/16/2009) since right after City of Dreams (CoD) tanked its first two weeks.  The stock is up 43% over the last 3 weeks on the strong CoD rebound.  We would caution investors that while we still feel the property is on a ramp up, the July numbers indicate that a lot of the July revenue bounce was hold related.



-For MPEL’s Q2, we’re at $217MM of revenues (4% below consensus) and a loss of $13MM of EBITDA (vs. Street at $2MM) for 2Q09.

-We estimate that Altira will report $172MM of net revenue and $8MM of EBITDA.

  • The drop off in EBITDA is due to low hold, which we estimate to be around 2.5% for the quarter. As a reminder, commissions at this property are based on rolling chip volumes (as opposed to revenue share) so hold will be low but the junket payout is still high.
  • We estimate fixed expenses at Altira are roughly $25MM per quarter

-Our CoD projection is net revenues of $21MM and an EBITDA loss of 16MM

  • We were surprised when the company told investors that fixed costs were $23MM for the month of June, based on the number of employees, we expected a cost of $15MM for the month (using our number the EBITDA loss would be 9MM)
  • Our understanding is that, in June, some of the junket commissions were variable and some were fixed

-We estimate that Mocha Slots will report $24.5MM of revenue and 6.4MM of EBITDA

-We also assume $9MM of overhead.  Excluding pre-opening expenses, we assume a loss a of 16 cents this quarter


Thoughts on July #’s and Melco’s pre-release

While CoD demonstrated impressive growth in the month of July, we would note that some of the growth is not sustainable and low “quality”. We estimate that about $37MM of revenues came from abnormally high hold.  Given the “fixed” commission caps at the property, 60% of this revenue directly flows down to EBITDA.

  • While we aren’t going to complain about the growth, we would have been a lot happier if it came on the “Mass” side, after all, City of Dreams is supposed to be a premium mass property. In July, 83% of the revenues came from VIP. 
  • Please see “JULY GOT HOTTER IN MACAU” which we put out yesterday, where we talk about July trends in further detail.

Despite noting that VIP hold was only a little above “normal” in July, hold was not normal at either property

  • CoD held very high, while Altira held pretty poorly
    • At CoD that extra hold drops to the bottom line, ex-taxes given the fixed 1.25% commission rate
    • We would also note that Altira experienced “abnormally” low hold in 6 of the 9 quarters since it opened
      • 4 of the 9 quarters had hold below 2.5%, while 2 had hold in the 2.6-2.7% range, despite this small fact Melco raised the “normal” range to 2.85% from 2.75%

So while trends in July were definitely positive, before we all high–five each other, we’d like to see the “money” in Mass and some sustainable hold data that we can put a multiple on.



Over the long term we are bullish on Macau, as it is one of the few markets with excess demand.  Beijing will continue to control the market growth, but growth will be positive.  Same store Mass market growth, on the other hand, will be decidedly negative since Beijing’s target mid-single digit market growth will not offset 20%+ Mass table supply growth later this year and into 2010.  However, MPEL added a lot of the supply so they are less susceptible to market share losses.

Once the difficult credit comparisons are lapped in the 3Q09, we think the VIP market will begin to grow as well.  We also believe that there can be substantial upside if the government decides to lower the gaming tax rate and if the Yuan is pegged away from the dollar. 



Until growth resumes in the in VIP market, we believe that Altira’s EBITDA generation will be capped at about $20MM per quarter (subject to hold of course).  When the entire market begins to grow, we think that Altira may be able to eventually get to the $90- $100MM EBITDA range. We do not believe that the property will see $163MM of EBITDA again unless the tax rate gets cut in Macau.


City of Dreams

There is some confusion over what the fixed costs should be at this property once Hyatt opens.  Hopefully, management will provide some color on Thursday.  Based on the “$23MM” figure in June, management implied approximately $90MM per quarter in fixed costs once the Hyatt is fully opened.  However, based what we know the fixed costs to be at operating properties in Macau, our guess is that fixed costs will move closer to $60MM per quarter over time.  Based on this assumption, we think that CoD will be able to produce $175MM of EBITDA in 2010, and eventually ramping to the low to mid 200MM range.

MPEL 3Q09:  We’re at $70MM of EBITDA and $492MM of revenues, which is materially higher than the street, which probably hasn’t updated their numbers for high hold and flow-through

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