Given the news from MCD today, the following thoughts on unemployment help to explain why MCD is seeing sluggish trends in the USA!


This chart tells the story about a key demographic for the QSR segment - the core 16-24 year olds - which are heavy users of fast food. 


The following is taken from Andrew Barber’s post “Stagflation: Where the Pain is...”:



Looking at total employment ratio’s estimated by the Department of Labor shows that, on a seasonally adjusted basis 16-24 year olds had a very rough summer in 2009 with the figure hitting the lowest level since inception in 1948 and fewer than 50% working for the first sustained period since the draft ended (without seasonal adjustment that ration would be over 51%).


DOL methodology excludes military personnel from the labor force estimates but, with up a huge percentage of all men 18-21 drafted (or motivated to enlist by the draft) at periods between the end of WW2 & early 70’s, and furthermore with 72% of all Vietnam period veterans accessing GI bill benefits (significantly higher than WW2 & Korea vets, presumably because Vietnam vets were significantly younger as a group) it must have skewed this data immensely. Note that the prior Assistance Readjustment act of 1972 raised GI bill benefits for returning servicemen to payout levels exceeding many entry level salaries –essentially creating a huge incentive for veterans not to work during the subsequent recessionary periods. This all suggests that, on the whole, the employment picture for young Americans is significantly worse than at any point in the living memory of the majority of the population.






CEO Matt Rubel sold 100,000 shares just days after commenting on the 2Q earnings call that Q2 marked the bottom. Yes, that came as an initial shocker to us on many levels. But the picture becomes far less suspect after a deeper dive.


First off, when Matt Rubel joined PSS in July 2005, his employment contract included an option on 720,000 shares of common stock at $20.93/sh and 214,250 shares of restricted stock. Under the vesting schedule, 120,000 shares were to vest on the 1st and 4th anniversary of the grant, with 240,000 shares on the 2nd and 3rd anniversary.  We just passed the four year lockup. 


Secondly, and perhaps most importantly, check out the chart below. We’re not looking at the most stellar track record of market timing here. Rubel’s last three sales left money on the table as the stock kept grinding higher. In fact, he had a $630k sale immediately before a 100% run in the stock in July 2008.  His best trade was calling the top and selling 25% of his stock in the late summer of 2007 – just as the credit environment melted down, the economy went sour, and the SRR deal turned out to be horribly timed.


THE question here is whether he is again ‘calling the top.’  That answer is No. Say what you want, but the guy has a Macro process. We sat down with him for a couple hrs last month, and walked through the macro call, and how he is aligning the company’s resources to leverage the upside. I’m genuinely not concerned about this sale. Check out our PSS Black Book for more details on our thesis.




SBUX – Interesting Takeaways

Starbucks CFO Troy Alstead presented this morning at an investor conference and based on his comments, the company appears to be maintaining its momentum.


First, in reference to my comments earlier this morning on MCD’s August sales trends, Mr. Alstead stated that there is a great deal of noise in the coffee segment that has helped everyone in coffee, including Starbucks.  This helps to explain why SBUX’s sales trends are becoming less bad at the same time MCD launched its national campaign behind its McCafe beverages.


Signs that SBUX’s focus on cost cutting and improving profitability is working:


SBUX removed 30 stores from its planned closure list.  These 30 stores were significantly underperforming and slated to close, but are now contributing profitably. 


Mr. Alstead said that the initial results out of the 2009 class of stores are encouraging.


He stated that management still has limited visibility (though he believes the company has more visibility than it had 6 months ago), but that SBUX shaped its plans and forecasts around the expectation that there is still a long economic recovery ahead of us.  That being said, he thinks the company is positioned to live in this environment and still grow margins.


SBUX is still a growth story:


Mr. Alstead commented that going forward, SBUX’s growth will be more focused on improving the profitability of its currents store base rather than unit growth.  Along those same lines, he said that capital spending will first be allocated to preserving the health of its current portfolio before going to new unit development.  To that end, he said that the company’s business model can now yield very healthy profit growth with only slight comp growth (more mature comp growth). 


There is still unit growth ahead, however.  Unit growth will continue to be cautious in 2010, but the CFO said that there is room for growth in the U.S. and significant opportunity outside of the U.S.  Specifically, he said that he does not see the company growing as fast as it did 2-3 years ago, but expects it to accelerate from 2009 and 2010 levels.  The company will pursue this growth in a more disciplined manner, with a close watch on the velocity in which it penetrates markets and a focus on achieving a 2 to 1 sales to investment ratio.


Mr. Alstead also said that there is huge headroom for non-store channel growth as the Consumer Product Group’s business is still under exploited in the U.S. and open to pursue internationally. 


Driving shareholder returns:


When asked how the company will use its free cash flow, Mr. Alstead responded that management is focused on driving shareholder returns and will be making strategic decisions about “how to distribute cash.”  I have been saying for some time now that I would like to see SBUX establish a dividend in order to increase its total amount of cash returned to shareholders to a level more in line with that of its global restaurant peers (MCD and YUM).  This could be one way the company will decide to distribute cash.



Other key takeaways:


The CFO stated that the company’s decision to raise prices on some products while lowering prices on others to reflect costs and the consumers’ willingness to buy will be net neutral to net positive to margins.


SBUX continues to be focused on its advertising with the CFO mimicking a comment that CEO Howard Schultz has made in the past that the company will no longer allow itself to be defined by others.


SBUX – Interesting Takeaways  - sbux


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Stagflation: Where The Pain Is...

“I want to be clear on something: less bad is not good”, “That’s not how President Obama and I measure success”  Vice President Biden, WSJ Saturday September 6th on last week’s unemployment number… 


The single biggest market story of last week was unemployment re-accelerating to new highs and the subsequent crashing of the US currency. In our investment process, what happens on the margin is critical, and on the margins of the US Employment data –the demographic and duration tails, the picture is becoming increasingly grim:



In the charts below we have taken the monthly unemployment figures compiled by the Department of Labor for the estimated total of individuals without work for a period of 27 weeks or greater and averaged it to quarterly for the past 60 years. Chart 1 illustrates the raw number, while chart 2 shows the same figures divided by the Labor Department’s estimate of the total working population. Note that in chart 2 we are now exceeding the early 80’s industrial-job death rattle for ultra long duration unemployment.


Stagflation: Where The Pain Is...  - a1


Stagflation: Where The Pain Is...  - a2




Looking at total employment ratio’s estimated by the Department of Labor shows that, on a seasonally adjusted basis 16-24 year olds had a very rough summer in 2009 with the figure hitting the lowest level since inception in 1948 and fewer than 50% working for the first sustained period since the draft ended (without seasonal adjustment that ration would be over 51%).


DOL methodology excludes military personnel from the labor force estimates but, with up a huge percentage of all men 18-21 drafted (or motivated to enlist by the draft) at periods between the end of WW2 & early 70’s, and furthermore with 72% of all Vietnam period veterans accessing GI bill benefits (significantly higher than WW2 & Korea vets, presumably because Vietnam vets were significantly younger as a group) it must have skewed this data immensely. Note that the prior Assistance Readjustment act of 1972 raised GI bill benefits for returning servicemen to payout levels exceeding many entry level salaries –essentially creating a huge incentive for veterans not to work during the subsequent recessionary periods. This all suggests that, on the whole, the employment picture for young Americans is significantly worse than at any point in the living memory of the majority of the population.


Stagflation: Where The Pain Is...  - a3


Obviously the data we are working with are only estimates, and we are making some big assumptions, but the data clearly seems to paint a bleak picture with more people unemployed for sustained periods and fewer young people with the disposable income that comes with a job. With a depleted currency, structural stagflation is becoming a legitimate risk.


Andrew Barber

Directordrew Barber

MCD – Premium products are not driving incremental traffic

Given the sluggish sales trends in the USA, senior management must be questioning the most expensive new product launch in the company’s history.


Relative to my August sales preview, both the U.S. and APMEA numbers were bad and Europe results were neutral.  In the U.S., MCD’s same-store sales growth was up 1.7%, which signals a return to the slowed 2-year trends we saw in May and June, making the strength in July look like an aberration.  Again, I would point to bad timing.  MCD is pushing more premium menu items (the Angus Third Pounders and McCafe espresso-based coffees) at exactly the wrong time, considering the difficult economic backdrop.  The all important 16-24 year old age group is facing extremely high levels of unemployment so for the most part, they don’t have the discretionary income to pay up for these more expensive menu items. 


Additionally, this continued slowdown in the U.S. highlights that MCD’s espresso-based beverage platform is still not working.  MCD’s business is coming under pressure at the same time SBUX’s is posting sequentially improved results.  SBUX’s numbers are still negative relative to MCD’s low single-digit increases but the directional moves are telling.  SBUX’s results are becoming less negative at the same time MCD is really pushing its McCafe products. 


APMEA’s August comparable sales growth came in down 0.5%.  This decline marks the first time this segment has posted a YOY monthly decline since May 2005 and represents a significant shortfall from the 5%-plus numbers to which investors have become accustomed.  MCD attributed the decline to weakness in China and Japan.  On a 2-year average basis, August results were similar to June and July, which signals that MCD may be facing a period of sustained weakness in its APMEA segment. 


In Europe, MCD reported 3.5% same-store sales growth.  I outlined this type of result in my sales preview note as Neutral because it represents a 2-year average trend that is similar to that of July.  For August, the two-year average growth is 7.6%.  To be clear, this is a strong result, but people expect this type of growth out of Europe. 


MCD – Premium products are not driving incremental traffic - mcdussss


MCD – Premium products are not driving incremental traffic - mcdeursss


MCD – Premium products are not driving incremental traffic - mcdapmeasss






Anyone who thinks that they can hide behind duration mandate and not at least acknowledge how near-term sentiment impacts their stocks is simply not being intellectually objective. 


Our analysis below breaks down over a hundred retail-related companies and triangulates buy-side sentiment, our sell-side ratings factor, and the delta in insider buying/selling. The visuals clearly flag areas of both risk and opportunity.


We break out the analysis into four charts/segments to avoid the visual from being illegible. We look at 1) apparel/footwear retail, 2) brands, 3) specialty retail, and 4) all other. We could write pages interpreting the charts, but we’ll let you make your own conclusions. Some of our initial take-aways are as follows:


  1. Bearish Callouts: These are names with low short interest, high sell-side factors, and no positive momentum with insiders buying. TJX, GPS, GCO, NKE, WWW, COH, CVS, KR, MAT, and FGXI.
  2. Bullish Callouts: Hated across the board. High short interest and negative sell-side factors. We omit any names where management is selling, and of course, look for instances where the opposite is happening. UA, BKS, VLCM, EK, ETH, LIZ, KSWS, and COLM. WFMI would be on this list of the insider selling factor was not the highest in the entire group (!).


Let us know if you’d like any additional depth or color on the analysis.












Some Notable Call Outs


  • While the Street continues to reward GPS for its turnaround of Old Navy, lean inventories, and steady margins, the company is quietly experimenting with its direct brand, Piperlime. The multi-branded shoe site launched women’s apparel today. The offering consists of about 65 premium and designer contemporary brands. The offering is denim heavy, but also includes a wide range of sportswear. Free shipping and free returns are also included with each order. We wonder if this is now GPS’ in-house laboratory for testing fashion and then using the data in real time to influence the company’s vertically integrated merchandise.


  • The numbers and raw data associated with Walmart are always staggering and sometimes worth repeating. In this case, I stumbled across some data on Walmart’s private label brand “Great Value”. At an estimated $10 billion in annual sales, the brand would be the 39th largest retailer in the U.S if it were to stand alone. This makes it bigger then Bed Bath and Beyond, Whole Foods, and Family Dollar. The brand is also very close to the amount of business P&G does with Walmart on an annual basis, which was just under $12 billion in fiscal ’09. We know the numbers are huge, but when we get a nugget like this it just acts as a reminder of the power and scale that Walmart exerts.


  • In yet another example that consumers continue to be driven by price, Craigslist debuted at No. 25 on the annual STORES Favorite 50 online retailers list ahead of well-known retailers like Gap (No. 28) and (No. 38). With consumers increasingly accustomed to shopping both traditional and non-traditional channels for best prices, it should come as no surprise that the other newcomers included Footlocker’s (No. 27) and (No. 39).





-Online retailer Yoox Group has decided to push ahead with an initial public offering despite the uncertain financial markets - Shareholders of the Bologna, Italy-based e-tailer approved the IPO on Tuesday. Yoox is expected to list on the Milan Stock Exchange STAR segment for small companies by yearend. In the first half of 2009, Yoox’ revenues rose 46.6%. Geographically, Italy accounted for 27.6% of sales; Europe, excluding Italy, for 49.8%; North America for 14.9%, and Japan for 5.9% of revenues. The nine-year-old company operates its own online stores, and, and runs e-commerce sites for designer brands, from Marni and Diesel to Emporio Armani and Emilio Pucci. During the first half, Yoox developed online stores for Moschino, Bally and D&G, bringing the total stores to 13. <>


-Message at WWDMAGIC: High Fashion at Value Prices - Apparel and accessories retailers and manufacturers at the trade show here found common ground in the new reality — consumer frugality — and in how to deal with it. Although major challenges persist as the economy struggles for consistent traction, the three-day show at the Las Vegas Convention Center last week appeared more upbeat. But price sensitivity and cost-cutting remained key themes. <>


-Many online consumers come face to face with ads on Facebook - Online social networks like Facebook and MySpace accounted for more than 20% of U.S. online display advertising in July, says comScore Ad Metrix. MySpace and Facebook account for more than 80% of advertising on social networks. <>


-Maidenform Brands, Inc., a global branded marketer of intimate apparel, has entered into a license agreement with Komar Company -  The license agreement grants Komar the exclusive right and license to manufacture, market, sell and distribute women's and children's sleepwear, women's long underwear and women's swimwear under certain Maidenform brands to select retailers in the U.S., Canada and Mexico.  <>


-Indonesia's man-made fiber sector has been given a boost - Three major manufacturers having invested US $7.1 million on new factories and machinery which will help lower production costs. The three fiber manufacturers are PT Teijin Indonesia Fiber Corp PT Indonesia Toray Synthetic and PT Sulindafin. The new machinery will run on cheap gas instead of costly electricity. According to Secretary General of the Indonesian Synthetic Fiber Producers Association, new machines can cut from 5 to 10% of the current energy costs incurred by the companies. These three companies had purchased the new machineries under the technology up-gradation program initiated by the government, which entitles them to claim a subsidy of 10% on total investment. He said that there were 18 synthetic fiber manufacturing companies in Indonesia in 2007, out of which only 12 were operational. The sector had been experiencing a 10% hike in production costs because of the surge of crude oil prices.  <>


-Report says Dick's Sporting Goods Top of Mind for Sporting Goods Shoppers - Full-line sporting goods retailers like Dick’s Sporting Goods and Sports Authority are top of mind when consumers think about where to shop for sporting goods, including footwear and apparel, but the larger and broader mass merchant stores like Wal-Mart and Target rise to the top when consumers are prompted with retail store names.  Data from the SportsOneSource 2009 Where America Shops report. Full-line sporting goods retailers are at the top of list, with Dick’s Sporting Goods (42%) and The Sports Authority (32%) at the top of the list for unaided awareness levels.  Both retailers ranked ahead of discount/mass merchant giant Wal-Mart (28%), indicating that when in the market for sporting goods, the first thought would be to go to a full-line retailer rather than an a other type of retailer. Foot Locker (21%) was the mall specialty retailer mentioned most often and Cabela’s (10%) was the most often mentioned outdoor retailer on an unaided level. Combining the unaided and aided awareness responses, Wal-Mart received the largest number of respondents (86%) indicating they were aware of the retailer, Foot Locker was second (85%) and Target was third (82%).  However, Foot Locker was the top-ranked retailer in awareness among teens and young adults. A bit surprising given the focus of the retailer, Foot Locker actually had a higher overall awareness level with females than males when assessing the adult (over 25 years old) survey demographic.  Only five retailers, including Dick’s Sporting Goods, Bass Pro Shop and Cabela’s, received higher awareness levels from males over the awareness level received by females. <>


 -Anna Sui for Target - Anna Sui for Target, part of the retailer’s Designer Collaboration series, channels the well-dressed women of “Gossip Girl” and debuts in 600 select Target stores out of more than 1,700 units, and on Sunday at Designer Collaborations taps established talents to create collections inspired by a muse, creative element or collaborative partner. Alexander McQueen launched the effort in March with McQ Alexander McQueen for Target, inspired by Leila Moss, lead singer of The Duke Spirit. Sui had wanted to design for Target for some time but “couldn’t figure out what the concept would be,” she said. When the retailer approached her with Designer Collaborations and the muse element, the project began to make more sense. <>


-After being sold by K-Swiss Inc. in May, Royal Elastics is repositioning itself under new ownership - John Bondoc, who previously worked at Royal as creative director and now heads REH, the investment group that bought the brand, said he has sharpened the demographic focus of the label. “We needed to tweak the brand identity,” he said. “Now, it’s younger, [directed at] the 15- to 25-year-old consumer, who is typically a creative-minded person in art, sport or fashion. It’s a lifestyle. The inspiration has to come from being young.” To help reacquaint the Royal Elastics team with the culture it’s targeting, Bondoc opened a design studio in a loft in downtown Los Angeles. “A lifestyle brand has to be embraced by the culture,” he said. Bondoc said he also was taking price points down. While the brand had sold for $80 to $250, the spring line will range from $60 to $80, with some signature product topping out at $110. “The idea is to cut off the extremely expensive end and add a lower-priced shoe,” he said. That move was made possible by one of the brand’s investors, a China-based footwear factory. Bondoc said he realized as he was putting together investors to buy the company that a strategic partner that could also produce more value-oriented shoes was imperative. <>


-True Religion Nugget on Credit Card Division - True Religion, the Vernon, Calif.-based premium denim brand, stopped using factors in mid-July, opting to expand its own credit division and work closely with international distributors as well as small boutiques that pay with credit cards or cash on delivery. <>


-For Neiman Marcus Inc., it’s been one tough year of mounting losses and declining sales - The luxury chain Tuesday reported a $168.6 million net loss for the fourth quarter ended Aug. 1, including noncash pretax impairment charges of $143.1 million, compared with a net loss of $35.7 million in the prior year’s quarter, when there were $31.3 million in charges. On an operating basis, the company lost $192.1 million in the last quarter, versus a $6.2 million loss a year earlier. With the nation’s affluent dramatically curtailing their store visits and purchasing less per visit, Neiman’s total revenues in the quarter fell to $768 million, compared with $1.03 billion in the prior year. Comparable revenues decreased 23.4%. Neiman tightly managed expenses, resulting in a total reduction of $183 million, which included the elimination of approximately $100 million of non-variable costs from our expense structure this year. <>


-A new home range, the Country Living Collection, hits 1,200 Kmart stores and 500 Sears stores this week - The line features modern and traditional styles from the pages of the Hearst-owned lifestyle magazine. The collection includes fashion bedding, kitchen textiles, tabletop and bath ranges, as well as furniture. Items retail from $6.99 for washcloths to $279.99 for furniture. "The addition of Country Living to our portfolio increases the options available to our Sears and Kmart customers in both look and style, and in a broader range of products that our customer has already told us she wants," says Doug Wurl, vice president and general merchandising manager for home fashions at Sears Holdings Corp. "The magazine's reach, coupled with the accessibility of our stores and online channels, create the potential for a true national brand with elevated design sensibilities and enormous appeal." Country Living magazine offers more than 11 million readers content on decorating, gardening, entertaining and travel.  <>


-Burberry Group plc is set to join the most exclusive club on the London Stock Exchange, the FTSE 100 - The FTSE 100 is a listing of the companies with the highest market capitalization on the LSE. As of Tuesday’s close, Burberry’s market capitalization was 2.2 billion pounds, or $3.63 billion. The figure has tripled over the past year. Burberry is the only fashion and luxury goods company currently in the FTSE. By contrast, L’Oréal, PPR and LVMH Moët Hennessy Louis Vuitton are listed on the CAC 40, the benchmark French stock market index. On Tuesday, Burberry’s shares closed at 5.08 pounds, or $8.38, up 0.5 percent on the previous day. “Burberry is so fortunate to have such a strong momentum, both at a corporate and brand level,” Burberry chief executive Angela Ahrendts told WWD on Tuesday. “The team remains focused on pursuing our core strategy, which we believe will continue to deliver shareholder value.” <>



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


09/08/2009 03:23 PM


Just doing a little housekeeping; making some sales in names we bought well on last wednesday's lows. We can always buy a stagflation victim lower. KM






  • Eva Sage, EVP, HR, sold 100,000shs (~$2.1mm) upon exercising the right to buy 100,000shs accounting for 100% of total common holdings.
  • Sabrina Simmons, EVP, CFO, sold 40,000shs (~832k) upon exercising the right to buy 40,000shs accounting for 60% of total common holdings.
  • Robert Fisher, Director, sold 277,013shs ($4.9mm) roughly 2% of total common holdings.



  • Ernie Herrman, SEVP, Group President, sold 6,658shs ($241k) roughly 7% of total common holdings.
  • Jerome Rossi, SEVP, Group President, sold 1,331shs ($47k) less than 5% of total common holdings.


PSS: Matt Rubel, Chairman, CEO & President, sold 100,000shs ($1.6mm) under 30% of total common holdings.


SKS: Stephen Sadove, Chairman & CEO, sold 100,000shs ($598k) less than 10% of total common holdings.


CHS: John Burden, Director, purchased 10,000shs ($610k) adding approximately 20% to total common holdings


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