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THE MACAU METRO MONITOR

MACAU’S GOVERNMENT APPROVES CAP TO “VIP” FEES wsj.com

 

GOVERNMENT TO SET UP JUNKET COMMISSION macaudailytimesnews.com

Yesterday Macau’s government approved an amendment that caps junket fees.  A maximum fine of MOP 500,000 ($62,000) was established for anyone who breaks the law.  The measure comes after the authorities received strong evidence of anti-competitive practice by VIP junket operators, according to the Executive Council spokesman, Tong Chi Kin.  The secretary for economy and finance will have the power to determine the maximum commissions and other remunerations casinos can pay the junkets.

 

The six gaming concessionaires and Sub-concessionaires, who recently formed the Macau Casino Gaming Concessionaires and Sub-concessionaires, hope to cap the commission paid to junket operators at 1.25, something Melco Crown and LVS have already implemented. 


JACK - Capex is Coming Down

Sales Update: Jack in the Box same-store sales declined 1% in fiscal 3Q09 (ended July 5).  Sales deteriorated rather significantly in mid-June and were actually down 4.4% for the entire month of June.  The company said a big portion of the decline stemmed from decreased sales of breakfast, side items, carbonated beverages and shakes, which it said is “indicative of consumers continuing to cut back on discretionary spending.”  JACK saw somewhat of a lift in numbers beginning in July with comparable sales running at about the midpoint of its Q4 guidance of -2.5% to -4.5%.  It is important to note that the company is lapping an easier comparison in Q4 of -0.8% versus -0.4% in Q3. 

 

Competitive landscape:  Management commented on its earnings call that its QSR competitors continue to get increasingly more aggressive with their couponing.  Although we already know that the 4-week period ending July 13 was particularly weak for CKR with reported same-store sales down 5% on a blended basis, and -6.1% at Carl’s Jr., a higher level of competitive discounting will only put further pressure on Carl’s Jr.’s premium-focused menu strategy. 

 

Management also said that when it initially experienced such a dramatic slowdown in June that it suspected sales were being hurt by the significant discounting by casual dining operators.  CEO Linda Lang said that with casual dining offering such compelling price points (meals for under $7 and 2 for $20), she would not have been surprised by some share shifts to casual dining but that relative to what she has been hearing from QSR and casual dining competitors, alike, she does not think this is the primary cause of the fall off in sales.  Rather, she thinks it is a sign of the difficult macro environment.  I always say that the restaurant is a zero sum game so when one company loses share, another wins.  And, although some restaurant operators are faring better than others, it would seem based on what we are hearing across the board that the overall pie got smaller in June…less people are dining out.

 

Following the Cash:  I pointed out in June (see my June 24 post titled “Following the Cash”) that 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 invested capital (ROIIC).  Importantly, I said the real turnaround in returns could come in 2010 depending on the company’s growth plans going forward.  Management had said that it would ramp up the growth of its Qdoba company units to 30-40 units per year, which I think is aggressive in this challenging environment.  To that end, I was encouraged to hear the company say that it will slow Qdoba growth a bit in fiscal 2010 because “the downturn in the development cycles and the ability of developers of shopping centers and the like to get credit is still difficult.”   Management did not quantify by how much it will slow Qdoba new company unit growth in 2010 following its targeted 19% new unit growth in 2009, but it did say that it expects capital expenditures to be down about $25 million from its planned $175 million in capital spending in 2009 (down 14% YOY).  I would like to see this growth cut rather significantly but it appears that JACK is at least headed in the right direction from a capex standpoint.

 

While top-line demand will typically take center stage for any restaurant company, JACK was not penalized today for missing same-store sales.  If you are taking the longer term perspective, following what JACK does with its cash will generate the most incremental return for shareholders over the next 12 months.


Athletic Footwear Takes a Leg Down

After getting a relatively positive read on athletic apparel earlier today, it appears that footwear did not follow suit.  For the latest week, athletic footwear in the sporting goods channel decelerated significantly.  Units and ASP’s both showed a sharp deceleration in trend vs. prior weeks.  The move in ASP’s is a trend we’re watching closely.  Anecdotally, the promotional environment as well as the major shifts in product mix remain stable.  However, this data point certainly challenges these observations.  It is still too early in the back to school season to suggest that promos will ramp up aggressively or beyond plans, but a prolonged negative trend in units and ASP’s would warrant some changes at retail.   With inventories still tight on and off the mall, a promotional ramp up would be a large departure from the relatively “stable” environment we have enjoyed for the past two quarters.

 

Athletic Footwear Takes a Leg Down - Sporting Goods Channel Table

Athletic Footwear Takes a Leg Down - Footwear and Apparel Dollar

Athletic Footwear Takes a Leg Down - Footwear and Apparel ASP chart

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%

Down Under: The World's Best Central Banker

 

RBA governor Glenn Stevens announced yesterday that the cycle of rate cuts has ended and that the next move by his team will be an increase. With the base rate at a 55 year low of 3%, Stevens has room to maneuver in either direction –unlike Bernanke & Co. (unless they decide to acquiesce to Maxine Water’s call to implement negative rates).

 

(text continues after chart 1)

 

Down Under: The World's Best Central Banker - a1

 

Stevens is signaling an unwillingness to wait for inflation to rear its head, choosing to act decisively now before unemployment peaks. This decision is made easier by the relative strength of the economy down under, but the decision still reflects a degree of integrity in the face of political pressure that is wholly alien to the leadership of the United States.

 

Evidence that Steven’s inflationary concerns are well founded arrived in today’s ABS June trade data release. At -$441 million AUD the deficit was almost half the consensus estimate, a decline driven by an increase in export value rather than volume as spot prices for ore, coal and precious metals continued to reflect increasing Chinese demand. Australia is able to provide “The Client” with both what they need AND what they want and, despite a slowing trajectory, total exports to China grew by double digits on a Y/Y basis for each of the first 6 months of the year.

 

 Down Under: The World's Best Central Banker - a2

 

Although we are not currently long Australian equities or the Aussie dollar, we continue to be bullish on prospects for this well managed economy rich in natural resources feeding off Chinese demand with inflationary tailwinds beginning to blow for core exports.

 

Andrew Barber
Director
 


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.

 

KM

 

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

 

 


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