Jordan Doubts CityCenter Will Boost Demand...

ROST: Can it Get Any Better?

With Keith managing risk around our cautious view on ROST (shorted again today), we remain convinced that the opportunities to meaningfully exceed both guidance and elevated Street expectations are gradually becoming harder and harder to achieve.  Recall that on November 19th we posted a note suggesting that the anniversary of the best time in recent history for off-pricers is now upon us.  When you add in eight quarters in a row of inventory declines (while sales have accelerated) it remains hard to envision anything but a deceleration in momentum is on the horizon.  There is no question that this has been a great run, as it has been for other retailers benefitting from value pricing and the consumer trade-down effect.  But, if you’re curious what could happen while results remain robust on an absolute basis, with growth continuing at a decreasing rate, take a look at Aeropostale’s recent performance. 


Check out this historical perspective below, which takes a detailed but long look at the relationship between the industry’s inventory management (represented by the Sales/Inventory spread) vs. ROST historical same-store sales.  The Sales/Inventory spread for clothing and accessories retailers is currently at its widest margin since before 1996.  Truly amazing!  We then line this up against Ross’ topline results and you will see that ROST’s same-store sales exceed the Sales/Inventory spread far more frequently than not, 138 months out of 166 or 83% of the time.  In fact, of the 28 times the sales/inventory spread outpaced comps over 13 years, 3 have been since September of this year alone.


The cleanliness of the inventory pipeline for retailers and manufacturers alike is about as good as we’ve ever seen and as a result, there are simply less “quality”  goods for ROST to procure.  Additionally, with fewer units floating around in the pipeline, we should begin to see ROST (and others) no longer being able to buy as close to need as we have seen over the past year.  This should have an adverse impact on inventory turns as well as the industry’s ability to flow fresh, unique good as frequently.  All this points to diminishing upside on margins and earnings…



ROST: Can it Get Any Better? - ROST SInv vs Comps 12 09



ROST: Can it Get Any Better? - ROST SInv Spread vs EBIT 12 09



Negative Datapoint from H&M

Negative Datapoint from H&M


H&M’s sales comps are flat-out manic. Substantial slowdown in November, but pick-up in first two weeks of Dec. The volatility in sales trends has picked up at H&M – which (aside from Li&Fung) is the closest thing to a barometer for global apparel spending.


Comps accelerated their rate of decline drastically on a 1 and 2 year basis.  Comps almost fell to August’s levels which were the worst seen in over 5 years.  Only August 2009 and April 2008 experienced greater declines over the last 5 years.


As we’ve said in the past, H&M’s results are important to follow because it serves as a meaningful pulse on global discretionary spending. Many people underestimate how truly massive and relevant H&M is. While slightly smaller on the top line than Gap, its $2.6bn in EBIT dwarf’s Gap’s $1.6bn. Aside from being one of the largest, most profitable and highest-return apparel companies in the world, it is clearly the most diverse. 


In a move that we’d say is somewhat out of character for this company, it provided no commentary on the month’s results, but instead pointed to the more positive December trends which are up 11% over the first two weeks.  In other words – ignore the bad, focus on the good.  Nonetheless, if December holds at a double digit rate, then the 2-yr trend will be net positive. Let’s hope this continues. But ‘hope’ as we often say, is not an investment process.


Negative Datapoint from H&M - 1 year H M


Negative Datapoint from H&M - H M 2 yr



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As a reminder this is what “He Who Sees No Bubbles” said recently…


“Elevated unemployment and stable inflation expectations should keep inflation subdued, and indeed, inflation could move lower from here.  “The Federal Reserve is committed to keeping inflation low and will be able to do so.”


-          December 7, 2009 - Fed Chairman Ben S. Bernanke in a speech to the Economic Club of Washington


The US Dollar has strengthened over the past few weeks and is strong again today.  Today’s PPI reading and Wednesday’s CPI could be the river card that reveals why?  We have been calling for inflation to return and that time is now. 


The consensus estimates for the seasonally-adjusted November CPI is 0.4% according to Bloomberg versus 0.3% in October.  Given the implied relative strength of gasoline and food prices in the November retail sales data, an upside surprise to consensus is a better than average possibility.


A consensus report would boost year-to-year CPI inflation from minus 0.2% in October to roughly a positive 1.9% in November.  The November CPI data will officially end the recent period of formal DEFLATION.


Inflation is moving lower?


Howard Penney

Managing Director




Charting Bernanke's Vision

Howard and Matt have a post coming out later today that You Tube’s the Fed Chief’s views on US Consumer Price Inflation. As a teaser, here’s a chart of He Who Sees No Bubbles (Bernanke) vision impairment.


Note that in 2006 (when this chart bottomed) neither Bernanke or Greenspan could foresee the mountain of Producer Price pressure that were on the horizon. I suppose it’s hard to see the easy money price bubbles that those engulfed by their own predetermined Doctrines create.


Buyer of Perceived Wisdom that the Fed won’t have to raise rates in 2010 beware. At this stage of the game, the data doesn’t lie – people do. Ben Bernanke is going to be playing some political football with a +2.7% year-over-year PPI report.


The US Dollar and bond yields are now breaking out to the upside on both an immediate term TRADE and an intermediate term TREND basis.


We remain short the SHY (short term Treasuries).



Keith R. McCullough
Chief Executive Officer


Charting Bernanke's Vision - USPPI



The 2010 MGM outlook looks bleak and the valuation rich by historical standards. Does that mean it's a short right here?



We're not so sure.  We've written about the likely low CityCenter return on investment and more importantly, the potential for serious cannibalization (see CITYCENTER: A GROWTH OR DONNER PARTY FOR MGM?, 11/23/09).  The valuation at 11.5x 2010 EV/EBITDA looks high especially relative to the historical range of 7-11x.  Moreover, cost of capital is likely going higher as MGM will be forced into refinancing much of its debt in 2010.  We think some form of equity issuance (convertible or straight equity) is likely. 


That's a compelling short story, no?  The problem is that shorting MGM into the CityCenter opening this week is consensus.  Look at the following chart that measures sentiment and short interest among select gaming, lodging, and leisure stocks.  MGM sits farthest down the sentiment line, which measures average analyst rating along the vertical axis and overall short interest along the horizontal axis.  MGM maintains the highest short interest and one of the lowest average ratings in this universe.


MGM: THE CONSENSUS SHORT - sentiment and short interest


The sentiment surrounding MGM could hardly be worse.  Even after a big two day move, the stock is 20% off its recent high in an otherwise strong stock market and the short interest has been climbing.  Any encouraging data points surrounding Q1 2010 room rates or indicating a solid opening of CityCenter could spark a short squeeze.  Don't forget that MGM has extra incentive to spin the CityCenter opening and market absorption favorably.  After all, 2010 will be a year of financing and fundraising. 


So far, we don't have any positive data points to report.  Indeed, CityCenter is still pricing rooms at a discount to the peer group for January and MGM is offering attractive promotions for the Aria and now Bellagio (see below) for Q1.  However, shorter seller beware.


MGM: THE CONSENSUS SHORT - bellagio offer

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