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Early Read on July Same Store Sales

With a handful of companies reporting July sales so far, the results are generally in line with expectations.  On the upside, Urban Outfitters reported better results for its second quarter with overall same store sales decreasing by 6%.  Still an absolute negative but on track with their sequentially improving trends.  On the downside, cult rocket-ship (stock) retailer The Buckle reported what appears to be a huge disappointment.  Results were up 2.8% with expectations for a 10% increase.  Given the large calendar shift which impacts teen retailers disproportionately, this may explain some of the deceleration from prior months. 

Our main call out comes from Costco, which had interesting comments on its category performance.  Management mentioned that the overall trends were very similar to last month, with the exception of non-food categories which showed a slight uptick in trend.  Office, sporting goods, small appliances, domestics, and mens/womens apparel produced a same store sales increase of 10% excluding currency effects.  With overall traffic up 3.5%, it appears market share gains and perhaps a bottoming in the more discretionary categories is beginning to occur.  This trend warrants more data points before we can make a definitive call, but the positive tone is certainly noteworthy.

MCD - July Sales Preview

MCD is scheduled to report July comparable sales on Monday.  MCD said on July 23 in its 2Q09 earnings release that it expected to report July consolidated comparable sales similar to or better than June.  Specifically, management stated on its 2Q earnings call that July sales trends in Europe and APMEA were running better than June.  For reference, MCD’s June same-store sales growth was 1.8% in the U.S., 4.7% in Europe, 0.3% in APMEA and 2.6% on a consolidated basis, which represented a slowdown in 2-year trends in each geographic segment. 


Given that MCD had visibility on nearly 3/4 of the month when it gave its outlook on July sales trends, there is little chance that July results will vary too greatly from its guidance.  That being said, I wanted to provide comparable sales ranges for each geographic segment as a benchmark of what I think would be good, neutral, or bad results based on 2-year average trends. 


U.S. (company increased coffee giveaways, facing a tough 6.7% comparison from last year)

Good: +2.5% or better would signal a re-acceleration in 2-year average trends.


Neutral: +1.8% to +2.5% would signal an improvement in 2-year average trends, but is somewhat expected given the company’s guidance.


Bad: < +1.8% would come in below management guidance.  Anything below -1.3% would signal a continued sequential slowdown in 2-year average trends.


Europe (Germany was weaker in June due to less couponing YOY, rest of Europe continues to be strong)

Good: +6.0% or better would signal a return to the strong level of 2-year average trends that was present earlier in 2009.  Europe really only faced one month (June) of softness in 2–year trends.


Neutral: +5.0% to +6.0% would signal an improvement in 2-year average trends from June levels, but again is somewhat expected given the company’s guidance.  Although MCD’s guidance said similar or better than the 4.7% number in June, management said it was trending better than that so I think a better than 4.7% number is already built into expectations.


Bad: < +5.0% would come in below management guidance and built in expectation.  Anything below +3.0% would signal a continued sequential slowdown in 2-year average trends.


APMEA (Japan and China were responsible for June slowdown, Japan had improved off of June levels, China continued to be negative but was more negative in June than it had been for prior 5 months)

Good: +4.0% or better would signal a marked improvement on a sequential basis from June’s 0.3% number.  +7.0% or better would signal a return to the strong level of 2-year average trends that was present earlier in 2009.  Like Europe, APMEA really only faced one month (June) of softness in 2–year trends.


Neutral: +1.7% to +4.0% would signal that APMEA trends have stabilized with 2-year average trends flat with to slightly better than June levels. 


Bad: < +1.7% would be better than management guidance and would show a sequential improvement from June on a 1-year basis, but would signal a continued sequential slowdown in 2-year average trends.  Again, management had already stated that APMEA July trends were running better than June’s 0.3% number so some level of sequential improvement is built into expectations.






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. 

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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


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).


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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