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BWS/DSW: Industry Read Through

DSW and BWS results were consistent with what we saw last week from the Sporting Goods retailers – weak results overall, with an increasing delta between the quality and junk. BWS is definitely the junk – always has been, always (likely) will be. While DSW is not quite the quality in the group, it is certainly doing and saying things that are far more ‘quality-ish’ than it has in the past. The only similarity between the two is guidance of a low-mid-single digit comp decline in 2H driven by lower traffic. DSW took up guidance and is investing in growth, while BWS is upping the ante on cost cuts – again (the latter is going to run out of steam early in ’10).

 

Not a surprise that both companies are expecting heavy promotions in 2H; however, BWS was the first we’ve heard state that promotions won’t be about the price, but about the brands. Additionally, BWS suggested that they are underinventoried heading into the BTS season, which is in stark contrast to it’s eroding sales/inventory spread. In an attempt to find the silver lining in the quarter for BWS, all we could come up with is that the company is heavy in athletic inventory, which continues to outperform non-athletic by a wide margin. But that’s a stretch to point to as a positive. 

 

Our bet in this space is still with PSS, which is far better positioned with price points, inventories, branding, and sourcing benefits. We don’t love PSS into the print, but it is the name to own over 12-18 months. Numbers are way too low.

 

BWS/DSW: Industry Read Through - Footwear SIGMA 8 09

 

Key Points:

Notable Thematic Trends:

 

Athletic vs. Non-Athletic: BWS noted that athletic shoes significantly outperformed with comp declines in the low single digits compared to low double-digits for non-athletic shoes.             

 

Women’s vs. Men’s: Women’s and women’s junior business showing early signs of life at BWS and DSW (sandals) while Men’s remains soft.             

 

Private Label vs. Branded: with private label accounting for half of the BWS’s 21% decline in wholesale, branded shoes continue to outperform. Management also noted BOGO sales more brand centric than price.

 

BOGO vs. Single Pair Promotions:  After disappointing promotions on single pairs, BWS transitioned to BOGO promotions driving traffic higher towards end of Q2.

 

Lateral Call Outs:

 

ZQK (+): DC shoes remains ‘very healthy’ at BWS consistent with recent trends in skate.

PSS (+): Saucony key driver in running, which is leading outperforming athletic category at BWS.

SKX (+): women’s and women’s junior business showing early signs of life at BWS, still early.

NKE (+/-): Converse positive at BWS while consumer price sensitivity likely to impact sales of top-line styles.

 

Company Call Outs:

 

DSW: Similar to FL, has a new CEO taking over the reins at a low point in the company’s performance:

  • Compared to the last call in which MacDonald highlighted 10 opportunities for improvement, with 120 days under his belt, the new CEO appears to be much more focused. Initiatives that will drive assortments, value, and improve the shopping experience in the 2H are the primary focus, anything else has been pushed out until 2010.
  • Raising guidance while investing in growth initiatives such as IT projects, BTS marketing/advertising spend, and new store growth suggests a level of flexibility in case trends deteriorate.
  • DSW is showing greater discipline in expanding its store base despite greater availability of real estate. While mgmt suggests growth in 2010 will be similar to 2009, we would expect an increase given the improved productivity of newer store formats (since 2007).
  • Cash position grows to $179mm ($4/sh) providing DSW with multiple options to grow the business.

 

BWS: Despite a more stable cost base, uncertainty on the top-line and increased promotions limit visibility in 2H.

  • The expectation of positive earnings in Q4 could prove challenging. While management’s view is largely based on gross margin expansion from sourcing benefits, our sense is that management is discounting the potential for a heightened promotional environment by insisting that “it’s not about the price” for consumers, but instead about the brands.  
  • With inventory levels elevated due to the Eddleman consolidation and a build of athletic product ahead of BTS, margins remain at risk barring a notable pickup in comp trends despite management’s assertion that inventories will be down 3% yy by the end of Q3.
  • Nearly all of the comp decline at Famous Footwear was due to lower traffic trends, which improved in the back half of the quarter with the introduction of BOGO promotions. Given their success, we expect BOGOs to continue in order to drive comps and margin pressure to remain as a result.
  • Reduction in store base is likely to continue as a key source of savings with expectations for FY09 expense reductions of $40mm up from $30mm earlier in the year.
  • Early read from BTS markets is that they are trending positively both in sales and traffic counts after starting 2-weeks later than expected.
  • Wholesale to remain weak through 2H with new launches and brand momentum offsetting private label driving improvement in 2010 though too early to tell if there will be growth.

 

BWS/DSW: Industry Read Through - PSS BWS DSW Footwear Comp Table 8 26 09

BWS/DSW: Industry Read Through - PSS BWS DSW Footwear Comps 8 26 09

BWS/DSW: Industry Read Through - PSS BWS DSW Footwear Comps 2Yr 8 26 09


SBUX – BLACK BOOK

I have recently completed a black book on SBUX.

 

At Research Edge, black books provide an in-depth look at our strongest fundamental ideas.  I have recently completed a black book on SBUX.  My thesis on SBUX has not changed, but this black book looks at the company from both a fundamental and macro (Keith McCullough) perspective.  Please email me if you would like a copy.

 

SBUX – BLACK BOOK - sbuxbb


THE CURRENT DYNAMICS OF CORN

Corn futures have been in sharp decline in recent sessions as lower demand has been amplified by improving USDA crop reports for this harvest. September Contracts have been below 3.20 in today’s session –down 21% YTD.

 

THE CURRENT DYNAMICS OF CORN - CORN

 

This price action reflects a converging set of factors:

 

CORN SUPPLY - The USDA recently updated its crop forecast and is now calling for a near-record U.S. corn harvest this fall.  This is happening at a time when the global economy and other factors have reduced the need for corn, creating a potential supply imbalance.  The USDA forecasts the corn crop will be 12.8 billion bushels, just slightly lower than the 2007 record crop of 13 billion bushels.  The large crop is projected in a year when the number of acres planted is down: 6.5 million fewer acres in the U.S. than in 2007. This year's crop continues to benefit from improved seeds and an ideal growing season for much of the Corn Belt.



CORN DEMAND - In 2009, corn exports for this year's first six months were down 40%.  While the BURNING BUCK could help to boost the export picture, uncertainty prevails.  Gas prices have started to move higher, and thus one could expect the ethanol producers to see increased need for corn, but I’m not convinced.  The economics of ethanol never made sense, and there is less capital chasing the business; as a result, we are unlikely to see a repeat of 2007.  Approximately half of the corn produced in the U.S. is used for animal feed.  Due to last year’s spike in corn prices and the slowing economy, there are fewer animals out there to feed, so the need for corn is less.

 

THE CURRENT DYNAMICS OF CORN - corn exports

 

WHO BENEFITS, WHO DOES NOT?

ADM and BG grow corn and as such are hurt from lower corn prices as their crops command lower prices on the market.

MTC and D produce corn seed and they stand to feel the pinch if farmers buy less corn seed.  Additionally, improved seeds allow farmers to get bigger yields per acre, suggesting the need to buy fewer seeds.

 

POT and MOS may see less business from farmers if they use less fertilizer on their crops.

Consumer staple companies will benefit.  Food, Beverage and the meat processing industry will benefit from lower ingredient costs.  The Restaurant industry will continue to be the beneficiary of benign food cost trends.     

 

 

Howard Penney

Managing Director


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Outside Reversals: SP500 Levels, Refreshed...

This market continues to have issues traversing our updated Range Rover line of topside resistance (we changed that line to 1041 on our last monthly strategy call – it’s the dotted red one in the chart below).

 

All together, while it’s paid to ride the rocket of the Pain Trade higher (buying dips) for the last few weeks, this week a new strategy is emerging as potentially profitable – selling the rips!

 

I don’t have to be bullish or bearish. At this stage of the game we are seeing outside reversals – breaking out to new highs versus the prior closing high, then reversing intraday to a lower closing high – and, on the margin, outside reversals are more bearish than bullish.

 

I have immediate term TRADE support at the 1009 line (dotted green). If that line breaks, watch-out below (TREND line support = 940). If 1009 holds, and the US Dollar puts in another lower-high, buy the dip.

 

This isn’t trading. This is risk management.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Outside Reversals: SP500 Levels, Refreshed...  - a1

 


RESTAURANT INDUSTRY – THE CURRENT DYNAMICS OF CORN

CORN SUPPLY - The USDA recently updated its crop forecast and is now calling for a near-record U.S. corn harvest this fall.  This is happening at a time when the global economy and other factors have reduced the need for corn, creating a potential supply imbalance.  The USDA forecasts the corn crop will be 12.8 billion bushels, just slightly lower than the 2007 record crop of 13 billion bushels.  The large crop is projected in a year when the number of acres planted is down: 6.5 million fewer acres in the U.S. than in 2007. This year's crop continues to benefit from improved seeds and an ideal growing season for much of the Corn Belt.


CORN DEMAND - In 2009, corn exports for this year's first six months were down 40%.  While the BURNING BUCK could help to boost the export picture, uncertainty prevails.  Gas prices have started to move higher, and thus one could expect the ethanol producers to see increased need for corn, but I’m not convinced.  The economics of ethanol never made sense, and there is less capital chasing the business; as a result, we are unlikely to see a repeat of the past issues.  Approximately half of the corn produced in the U.S. is used for animal feed.  Due to last year’s spike in corn prices and the slowing economy, there are fewer animals out there to feed, so the need for corn is less.

 

WHO BENEFITS, WHO DOES NOT?

ADM and BG grow corn and as such are hurt from lower corn prices as their crops command lower prices on the market.

MTC and D produce corn seed and they stand to feel the pinch if farmers buy less corn seed.  Additionally, improved seeds allow farmers to get bigger yields per acre, suggesting the need to buy fewer seeds.

POT and MOS may see less business from farmers if they use less fertilizer on their crops.

Consumer staple companies will benefit.  Food, Beverage and the meat processing industry will benefit from lower ingredient costs.  The Restaurant industry will continue to be the beneficiary of benign food cost trends.

 

RESTAURANT INDUSTRY – THE CURRENT DYNAMICS OF CORN - corn1

 

RESTAURANT INDUSTRY – THE CURRENT DYNAMICS OF CORN - corn2


MCD - PULLING OUT ALL THE STOPS

A Crain’s article reported yesterday that MCD’s Chicago-area restaurants are bringing the Dollar Menu to breakfast “as the fast food chain turns to discounts to revive slowing morning sales.”  According to the article, the local deal, which will include six items priced at $1: sausage biscuit, sausage McMuffin, medium coffee, two hot cakes, two hash browns, and fruit-and-yogurt parfait, is similar to the breakfast value offerings that MCD has sold in other markets, such as Seattle.  For reference, the sausage sandwiches previously sold for around $2.

 

MCD said on its last earnings call that outside of the benefit the company has gotten during the breakfast timeframe from advertising coffee, the rest of breakfast has slowed down some.  This slowdown is not unique to MCD as the article states that morning meals at fast food restaurants fell 2% YOY during the spring, according to the NPD Group.  It does signal, however, that MCD’s coffee and specialty beverage sales are not creating the much anticipated lift in sales during breakfast.  MCD just launched its national advertising campaign behind the espresso-based beverages in May.  Although MCD stated that it experienced some benefit during the breakfast daypart from the advertising, if there was a substantial pick up in coffee purchases (MCD has said that more than 50% of McCafe sales happen at breakfast), I would have expected that to translate into increased breakfast food purchases, which was not the case. 

 

The article references a memo that Steve Plotkin, the head of McDonald’s Western Division, wrote to franchisees last month, in which he states, “Breakfast sales are declining, and the only growth that we have had in the last two years has been based on price and not demand.”

 

This slowdown in breakfast demand just increases my conviction that MCD’s specialty beverage launch will not prove to be the success that investors have anticipated for some time.  U.S. same-store sales growth has come under pressure in recent months.  If the company cannot drive incrementally more specialty beverage sales during the initial months of this national campaign (while offering giveaways) and in the summer months, it will become significantly more difficult going forward.

 

From a margin standpoint, this move to launch more value items at breakfast could prove to be detrimental.  Historically, breakfast has generated a lower average check for MCD than the other dayparts but yielded a higher margin transaction.  Increased dollar menu sales at breakfast will remove some of this margin favorability. 


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