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M – Not a Bad Qtr, But Expectations Still Too High

Takeaway: Still cautious on M – not due to the disappointing qtr, but bc of the limited upside in the financial model. Street numbers look too high.

Conclusion: The quarter was more balanced than the print suggested, but we struggle with how to model anything in the ballpark of the Street’s numbers in the out years. Margins are tapped and costs are accelerating. That’s not in expectations.


We struggle with this Macy’s print to some degree. It’s easy for us to jump on the bandwagon of the company missing EPS and taking down comp guidance – obviously negative developments. But in reality, this was probably not as bad as the headline otherwise suggests. A financial algorithm of a 3.4% comp, 6.9% EBIT growth, and 10.7% EPS, and 53% cash from operations is tough to label as an outright #fail. Macy’s is the best in the business at driving its financial model, and we’ve got to respect that. But when all is said and done, we simply have a tough time justifying that there’s enough room to evolve the financial model into something that’s meaningfully better than we see today.


One of the most telling points of the conference call for us was when CFO Hoguet compared Macy’s to how the company looked a year before the economic melt-down in 2008. Since that prior peak; a) square footage is down 2%, b) sales are up by $1.95 bn, or 7.4%, c) Gross Margins are flat at 40% (peak), d) SG&A dollars are down in absolute terms by $170mm, or 2%.  She’s right to call it out. It’s a heck of an accomplishment. But it’s also what gives us pause in modeling material upside over the next three years.


The department store group is in year six of a margin recovery cycle – and it has never gone more than five years without a correction in the past (see chart below). The company is up-front about its gross margin pressure, but then (responsibly) admits that it needs to keep spending on key initiatives to drive the top line. Management notes that it will absolutely hit a 14% EBITDA margin (70bps above current run rate), but that 15% is not likely. Whenever a management team in retail is that certain about hitting a margin target, it is usually due to lower SG&A. Our point here is that it sounds like Gross Margins are completely tapped, and SG&A leverage is in the 8th inning. In the absence of square footage growth, this tells us that we need to rely on capturing market share to drive the top line, or financial engineering to enhance EPS in order for this model to work.


M – Not a Bad Qtr, But Expectations Still Too High - dept margins


Could the company earn the Street’s $5.05 next year? It’s possible. If Macy’s really wants to get there, it could. But if it accelerates investment to sustain any form of comp alongside a peak Gross Margin, then we think we’re looking at $4.50 at best.


The stock is admittedly cheap at face value. But it’s easy to forget what can happen to a department store stock that misses expectations meaningfully. People think that 7-8x EBITDA is cheap today – but these names have traded at 7x EARNINGS on the back end of past cycles.  We’re not making the call today that we see this again. At least not yet. But for all these reasons, we simply would not touch Macy’s on the long side.  


M – Not a Bad Qtr, But Expectations Still Too High - m financials

M – Not a Bad Qtr, But Expectations Still Too High - M Sentiment


As a token of our appreciation we would like to extend an invite to join us at Mad46 from 5-7 p.m. tomorrow, August 13th. Mad46 is located at the corner of 46th and Madison atop the 19th floor of Roosevelt Hotel.   


Representatives from all ten sectors will be present, and you're welcome to bring colleagues and friends. 


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Macro Team


Buying British Pound on a Correction (FXB)

This morning we issued a buy signal on the GBP/USD (via the etf FXB) in our Real-Time Alerts with the cross reaching our immediate-term TRADE oversold level ($1.67) within our bullish long-term TAIL view (support = $1.65).

Buying British Pound on a Correction (FXB) - z. gbpp


The GBP/USD has corrected -2.2% M/M and took a leg down this morning (~50bps) following the BoE’s release of its August Inflation Report. We believe today’s weakness reflects:

  • UK wage growth that fell -0.2% in Q2 Y/Y (the first decline since 2009)
  • BoE Governor Mark Carney rhetorically pushing out expectations for a rate hike to at least late 1H 2015 (though no specific guidance was given)

That said, the GBP/USD is up +12% since it troughed on 7/5/13 and continues to be supported by healthy underlying fundamentals that we expect to persist in 2H (and especially versus the Eurozone – click here for more on our negative outlook on European equities and the EUR/USD):

  • UK unemployment rate fell 10bps M/M to 6.4%, the lowest level since 2008, and is now expected to drop below 6.0% by year end
  • The Bank revised up its expectation for near-term growth to 3.5% in 2014
  • CPI of 1.9% Y/Y is managed toward 2.0% target

Buying British Pound on a Correction (FXB) - zz. unemploy


Further, we expect a more dovish policy response from the ECB and Fed versus the BoE over the intermediate to longer term that should be supportive of the Pound versus the USD and EUR:

  • Janet Yellen’s commentary suggests she remains an uber dove: (See Reuters article yesterday with current and former Fed officials indicating that Yellen and core decision-makers at the U.S. central bank are determined not to raise interest rates too early and risk hurting the fragile U.S. economy). We’ll be watching her Jackson Hole commentary beginning August 21 for a confirming dovish outlook.
  • ECB’s Mario Draghi looks poised to issue QE over intermediate term. Following the June announcement of the issuance of the TLTRO programs to unlock lending, come Fall he may begin QE-lite purchases (via ABS). A hike in rates (after cutting in June) appears highly unlikely over the next year plus given underlying weak fundamentals and inflation expectations that are likely to miss on the downside. 

Matthew Hedrick

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Takeaway: This is a complimentary look at Daily Trading Ranges, our proprietary buy and sell levels on major markets, commodities and currencies.

This note was originally published August 13, 2014 at 07:11 in Daily Trading Ranges. Click here to subscribe and learn more about the service.

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Keith's Macro Notebook 8/13: EUROPE COPPER UST 10YR

LEISURE LETTER (08/13/2014)

Tickers:  SJM, CZR, SGMS, H, RCL


  • Aug 14:
    • GENTING SINGAPORE 2Q earnings
  • Aug 18:
    • REVEL auction


SJM –  Casino Grand Lisboa:  In the second half of 2014, work is being undertaken to add up to 14 more premium mass market tables on the mezzanine floor of the casino, to shift 7 tables from other areas to the high-yielding first floor and to add electronic table games on the second floor.

Takeaway:  More premium mass competition is coming.  We think margins may be shrinking in this prized segment.


EBAY – (pokerfuse) PayPal is considering servicing the US state regulated online gambling market. The payment processor is widely used outside the US for gaming deposits and withdrawals, but has so far refused to extend the option to its US customers.  In order to enter the market, PayPal will need to be licensed by the Nevada and New Jersey regulators - an accomplishment that PayPal's competitors NETELLER and Skrill have already achieved.

Takeaway:  Paypal would give online gaming a needed boost. 


CZR – Caesars Entertainment Corporation and Caesars Entertainment Operating Co. will purchase and retire $238M of Caesars Entertainment Operating Co. outstanding 2016 and 2017 notes held by third parties, with such notes representing 51% of each such class not held by affiliates of Caesars Entertainment Corporation. Caesars Entertainment Corporation also agreed to contribute to Caesars Entertainment Operating Co. for retirement $393M of Caesars Entertainment Operating Co. 2016 and 2017 notes currently held by Caesars Entertainment Corporation subsidiaries. The proposed transaction will reduce Caesars Entertainment Operating Cos debt by $548M and cut interest expense by $34M annually.

Takeaway: Still a heavily levered company with bad domestic demographics and increasing competition. 


SGMS – was awarded a new instant game contract for two years, subject to an additional two years, with the Taiwan lottery and will provide instant games, marketing services and licensed property.  The SGMS contract will begin in June 2014.

Takeaway: A good win for SGMS. 


H – (WSJ) In a story about next week's opening of the Park Hyatt New York, Hyatt is indicated the average daily rate for the 210 rooms is more than $900, which puts the Park Hyatt along side the Four Seasons, St. Regis and Mandarin Oriental as New York City's highest priced hotel rooms on a nightly basis.

Takeaway: A market leading hotel with similar rates. 


RCL – has extended its contract with ByoPlanet International and added $2 million to fund the company's disinfectant technology that prevents Norovirus on ships.

RCL bought 350 additional ByoPlanet sprayers to add to the existing 10-30 sprayers they have on each cruise ship.

Takeaway: Good headline but will not do much to prevent the prevalent risk


Ohio Limited Smoking while Gambling (Cincinnati.com) – The Ohio Casino Control Commission is reviewing proposals from Cincinnati's Horseshoe as well as Hollywood Casinos in Columbus and Toledo which have petitioned to add slot machines in designated smoking areas of the properties while keeping their main gaming floors smoke-free.  Horseshoe has petitioned to install about 150 slot machines and other gaming devices on a 10,000 square foot smoking deck.  Assuming each machine generates Horseshoe's average $175 revenue per slot per day, the casino could generate an incremental $10 million in gaming revenue and Ohio would collect one-third of the additional revenue via taxes.

Takeaway:  If approved, the main casualty would be Indiana.  Indiana struggled in July with GGR falling 12% YoY and higher promotional spending.


Singapore REVPAR (STR) – During July 2014, the Singapore hotel industry reported 3.9% RevPAR growth to SGD252.41/day based on a 2.5% increase in occupancy to 87.4% and a 1.3% increase in average daily rate to SGD288.95. During July supply grew 1.8% while demand rose 4.4%.

Takeaway:  Decent start to Q3 on the lodging side.


Macau Smoking Ban Update (Macau Business) The Macau Health Bureau is seeking additional information from some casinos about their proposals for smoking rooms.  Health Bureau director Lei Chin Ion says casinos must send his bureau floor plans for their smoking rooms by early September.  Mr Li says 40 gaming establishments have submitted proposals for smoking rooms and only one has not. The smoking ban is scheduled to begin on October 6 at which time smoking will be allowed in casinos only in smoking rooms with no gaming facilities, and in VIP gaming rooms.

Takeaway:  Unsurprisingly, a slow process.  October 6th  may be pushed back.


California Online Gaming – California lawmakers have shelved bills that would have created a legal Internet poker system for players within California, making this the fifth year in a row in which they’ve publicly flirted with the idea without casting a vote.

Takeaway:  No online gaming expansion this year.

Vietnam Gaming Expansion – (GGRAsia) Vietnam’s Ministry of Finance will put forth "Casino Decree for Table Games" which may subject to additional provisioning allow Vietnamese nationals to gamble in casinos in Vietnam. According to the draft decree, casinos would be open to Vietnamese nationals aged 21 and over, who would still have to meet certain background and financial criteria that the government will define at a later date. Vietnam’s Prime Minister, Nguyen Tan Dung, would be responsible for selecting which casinos could become open to local gamblers. Vietnam has a population of around 92.5 million. The country has seven table game casinos; however, current law prohibits Vietnamese punters from gambling at home, unless they hold a foreign passport.

Takeaway: Another potential alternative gaming market for Chinese gamblers. 


Chinese Consumer Spending in July - (ChinaNews) According to UnionPay China, the Bankcard Consumer Confidence Index was up 0.06 from a month ago to 85.33 points after expenditures increased.  According to the data, the transaction value at hotels and airline ticket offices climbed 13% and 34.3% respectively as summer holiday is usually a peak season for traveling. Card holders' transaction size at domestic travel agencies and major scenic spots also increased 59% and 62%, respectively. Transactions at home appliances retailers rose 4.2% versus June 2014.  Additionally, higher gas price pushed up transaction value at gasoline stations, which increased 9% year-over-year.

Takeaway:  A positive for the mass gaming segment. 


China July new yuan loans -  CNY385.2B vs consensus CNY745B and CNY1.08T in June

  • Loan growth +13.4% y/y vs +14.0% in June
  • Deposits +10.9% y/y vs +12.6% in June
  • Total social financing CNY273.1B vs CNY1.97T in June
  • M0 +5.4% y/y vs +5.3% in June
  • M1 +6.7% y/y vs +8.9% in June
  • M2 +13.5% y/y vs consensus +14.3% and +14.7% in June

 Takeaway:  Way below expectations. Negative sign for VIP.

Japan Macro - Japan's GDP contracted at 6.8% annualized rate during April through June.  This was the largest contraction since the March 2011 earthquake and the result of the April sales tax increase to 8%.  Japan's economy is forecast to grow an annualized 2.9% according to a recent Bloomberg survey.  The government aims to raise the sales tax to 10% in October 2015 from 8% now. Abe will decide whether to proceed with the plan by year-end, based on the economy’s strength.

Takeaway: Slower Japanese growth simply provides greater support for casino gambling legislation.  


Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye

Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

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