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FL: Turnaround Set In Motion

While it appears that FL’s $0.24 headline EPS is a miss relative to the $0.26 consensus, we view this is quarter as a solid start to the impending turnaround.  So how can a miss be construed as a positive?  There are a handful of details in the release that suggest the company is setting up well for an earnings recovery, beginning now.  



Earlier today on our conference call (if you missed it let us know and we’ll provide replay info) we walked through our thesis on why we like Foot Locker and the opportunities that lie ahead.  With 4Q earnings now officially out a mere 4 hours after our call, we’re still feeling confident in our view.  While it appears that FL’s $0.24 headline EPS is a miss relative to the $0.26 consensus, we view this is quarter as a solid start to the impending turnaround.  So how can a miss be construed as a positive?  There are a handful of details in the release that suggest the company is setting up well for an earnings recovery, beginning now.  The highlights:


  • Same store sales came in at down 2.3% for the quarter, essentially in line with Street expectations.  Importantly, the release notes that sales improvement has continued through February, with comps in positive territory since the new year.  Recall that expectations here had risen throughout the quarter, as footwear in general showed a strong trend as well as growing excitement for women’s fitness shoes.
  • Inventory management kicked in this quarter, with total sales up 0.6% and inventories down 7.4%.  A marked improvement  and something that bodes well for future margins and cash flow.
  • The skeptics have been fixated on the balance sheet and the possibility of a dividend cut.  With a year-end cash balance of $589 million (net cash of $451 million) and the board’s decision to extend its share repurchase facility, the data speaks for itself.  A dividend cut is highly, highly unlikely.
  • Finally, gross margins improved by 5 bps, even as inventories were taken down.  This comes on top of a strong margin performance last year.  For those fixated on tough compares, this offers a glimpse into the potential that lies ahead.


All in, this quarter sets a base for which CEO Ken Hicks and his team will work from.  4Q was largely out of his hands anyway, especially since plans were likely set before he arrived.  However, the areas that were in his control or under his watch appear to be moving in the right direction.  It certainly helps to see a glimpse of a positive comp trend as well, but this is really a bonus to the overall progress at this time.  Merchandising changes currently in the works should take the topline even further, but for now key components of the turnaround already appear to be set in motion.


FL: Turnaround Set In Motion - 1



Eric Levine



The details are in. In this post, we analyze the Macau properties' February performance.



As we already know from the press reports, total table revenues were HK$12.4 billion, up 73% y-o-y, higher than our estimate of HK$11.0-11.5 billion.  As can be seen from the data, some of the better than expected revenue related to higher VIP hold percentage since VIP revenues were up 90% but volume was up 67%.  Higher Direct VIP play could explain part of it as it gets included in revenues but not in the volume numbers.  The comparison was pretty easy as it will be through June.  Table revenues in February of 2009 declined 17% and did not contain the Chinese New Year celebration.


In terms of company specific insights, Wynn had a great VIP month but its Mass business lagged again, up only 7% yoy vs the Mass market up 38%.  LVS lost share sequentially in both VIP and Mass.  Possibly as a result of its aggressive junket pricing, SJM increased share considerably in both VIP volume and revenue.



Y-o-Y Table Revenue Observations:


LVS table revenues increased 38% with most of the growth coming from a 66% increase in VIP revenues and 16% growth in Mass

  • Sands was up 66%, driven by a 92% increase in VIP and 31% growth in Mass
    • VIP growth was almost entire driven by easy hold comparisons.  Junket rolling chip was only up 3%.  Sands suffered weak hold in Feb 2009 of around 2%, assuming 12% direct play.  If we assume 12% of total VIP play was direct in Feb '10, this implies hold of 3.65% 
  • Venetian was only up 16%, with VIP and Mass both up 16%
    • Junket VIP RC increased 21%
  • Four Seasons was up 172% y-o-y entirely driven by 444% VIP growth with Mass declining 25% 
    • Junket VIP RC more than doubled to to $531MM but was down sequentially from $857MM in January as well as below record results of $1.3BN in December. 
    • Over the last two quarters, FS has averaged $355MM of direct VIP play per month.  Assuming similar results in Feb, hold would be around 2.9%


Wynn table revenues were up 55%, almost entirely driven by a 69% increase in VIP, while Mass revenues were only up 7%

  • Junket RC increased by a massive 83%
  • Assuming 12% direct RC play in both months, Wynn's hold rate was declined from 3.3% lsat year to 3.0% in Feb 2010


Crown table revenues grew 172%, with most of the growth fueled by 584% growth in Mass and 139% growth in VIP

  • Altira was up 22%, with VIP up 26% while Mass declined 21%
    • VIP RC was down 1%, however, after quarters of bad luck, Altira finally held well, thus driving better VIP revenues.  We estimated that Feb 09 hold was 2.6% compared to 3.3% in Feb 2010.
  • CoD table revenue decreased 24% sequentially, due to a 34% decline in VIP win which was only partly offset by an increase in Mass
    • Mass ramped 17% m-o-m to $36MM
    • Junket VIP RC declined 9% sequentially
    • If we assume 20% direct play at CoD (in line with what MPEL said on their earnings call), then total VIP RC would be $3.2BN compared to $3.5BN in January, using the same assumption.  However, hold in January was high at 3.7%, while February hold was a little light at 2.6%


SJM continued its hot streak, with table revenues up 87%

  • Mass was up 42% and VIP was up 121%
  • As we wrote about on several occasions, we believe SJM is being very aggressive on junket pricing


Galaxy table revenue was up 35%, driven by a 42% increase in VIP win, while Mass declined 7% increase

  • Starworld's table revenue was up 65%, driven entirely by 73% growth in VIP revenues. Mass only increased 1% y-o-y


MGM table revenue was up 148%

  • Mass revenue growth was 38%, while VIP grew 221%
  • Before you get too excited about the growth in VIP revenues, we would caution that Junket VIP RC was up 27% y-o-y, but the hold in Feb 09 was an anemic 1.5% while Feb 2010 hold is high at around 3.3% (assuming 15% direct VIP play)


Market Share:


LVS share dropped 160bps sequentially to 19.6%, with most of the share loss coming from VIP

  • LVS's share of VIP revenues decreased to 17.2% from 19% in Jan, while Mass fell to 26.6% from 27.3% in Jan
  • Sands lost 30bps, dropping to 6.8% sequentially
  • Venetian lost 50bps to 10.9% sequentially while FS share dropped 80bps to 1.9%
  • After SJM, LVS commanded the second highest share of the Mass market with 26.6%, followed by Crown at 10%


WYNN's was a big share gainer this month, increasing market share to 14.5% from 12.9% in January

  • Wynn's share gain was driven by VIP growth, which increased Wynn's share of the VIP market to 16.5% from 14.3%
  • On a RC basis, WYNN's market share of 15.7% is second only to SJM which commanded 34% of RC share in Febraury.  This is very impressive since Wynn's market share at one property surpasses that of LVS's 3 properties combined and Crown's two properties.


Crown's market share fell by 2.3% to 13.6% in February

  • All of the share loss was in VIP market share which declined by 3.5% sequentially to 14.8%
  • Crown's Mass market share increased by 1.5% to 10% - with CoD garnering 8.8% market share, on par with Wynn


SJM's share increased to 32.3% from 30.9% in January

  • Most of the share gain came from a 2.2% sequential increase in VIP share to 28.8%
  • RC share also increased by 260 bps to 34%


Galaxy's share increased slightly to 11% from 10.4% last month

  • Starworld's market share was flat at 8.4%
  • Galaxy's share of Mass fell to 4.3% from 5.7% in January but was offset by a 1.1% gain in VIP share to 13.3%


MGM's share increased by 30bps to 9%


Slot market commentary:

  • Slot win grew 28.5% y-o-y to $81MM
  • LVS's slot win grew across all 3 properties by 29% y-o-y to $26MM
  • Wynn slot revenues declined by 12% y-o-y to $16MM. They were the only concessionaire to experience a decrease in slot win
  • Melco's slot win grew 48% y-o-y.
  • MGM's slot win grew 65.4% y-o-y to $8MM










Early Look

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MCD is expected to report February 2010 sales before market open on Monday, March 8th.  On a year-over-year basis, there should not be any significant calendar impact in the U.S. as February 2009 included the same number of weekend days, and total days, as February 2010.  However, February 2009 sales trends present easy compares because of the extra day in the prior February due to 2008 being a leap year.  As a result, there are easy comparisons across the board for MCD’s segments.  This is especially true in APMEA because of the Chinese New Year calendar shift.  I expect headline numbers to appear better than the underlying trends actually are.


As is customary, I wanted to provide my view on comparable sales ranges for each of MCD’s geographic segments as indicators of what I would rate as GOOD, NEUTRAL, or BAD results based significantly on 2-year average trends.



U.S. (facing an easy +2.8% compare which was negatively impacted by 400 bps by the extra day in February 2008 due to the leap year):


It is important to note that February marks the first full month with the breakfast dollar menu as MCD began national advertising on January 11th.  Easy comparisons in February will help to make this breakfast dollar menu look successful, but I have some concerns as I outlined on 2/24. 


Weather likely had an impact on trends in February as cited by CKR this morning relative to the sequentially weaker results at Hardee’s.


While any positive result might be perceived as encouraging in light of recent results, it would not necessarily be sufficient to result in acceleration in 2-year trends.


GOOD:  Roughly +2.5% or higher would be required to result in sequential growth in 2-year trends from January to February.  While MCD is accustomed to higher 2-year trends than the 2.4% seen in January, any pickup would be seen as a positive given the softening of trends over the past number of months.  While a +3% number would be well received, it would still not yield a 2-year average trend of 3% (a level usually surpassed by MCD’s U.S. business until recently). 


NEUTRAL: +1.5% to 2.5% implies 2-year average trends that are roughly in line with what we observed in January.  From a sentiment perspective, a print in this range could be viewed favorably in light of recent declines in comparable-store sales.  In fact, it would be the best U.S. comp since September’s +3.2%.   Appropriately, the compare for February is also the easiest since September.            


BAD: Below 1.5% would signal a deceleration in 2-year average trends from January, and would be nearing a new low for MCD 2-year average trends.  Again, this bad result would still be a significant improvement from what we have seen in recent months on a 1-year basis, but 2-year average trends must be considered to get a better read on underlying trends.



Europe (facing an easy -0.2% compare, 4.0% excluding the impact from lapping the 2008 leap year):


GOOD: Better than 13% would result in a sequential acceleration in 2-year average trends from January.  Softness in Germany continues to manifest itself in MCD’s Europe top-line results.  Our Hedgeye Macro research suggests that softness in Germany is likely to persist in the near-term.  For the last three reported months, 2-year average trends have been below “normal”, and it would take a +13% result to move away from 5% to 6% and into the 6% to 7% range. 


NEUTRAL: +11% to +13% would imply 2-year average trends that are roughly even with the last 3 months.  While these numbers are impressive on a 1-year basis relative to the +4.3% result in January, it is important to remember the easy -0.2% compare from February 2009 versus the +7.1% compare the company lapped in January.


BAD: Below 11% would signal a clear decline from January’s already unimpressive 2-year average trend of 5.7%.  Again a 10% print, for example, would be the highest comparable sales number MCD has released for Europe since October 2008, but I believe that any optimism would be misguided in this case.



APMEA (facing an easy +0.7% compare, or 4.1% excluding the impact from lapping the 2008 leap year):


It is important to remember that the February number will be helped by the calendar shift of the Chinese New Year from January last year to February this year.


GOOD: Better than 13% would result in a 2-year average trend of 7% or higher, which would be in line with the 7.3% 2-year trend seen in January.  Considering that November and December’s 2-year average trends were at 6.1% and 3.4%, respectively, a February print that would maintain 2-year average trends above 7% would be a positive result for MCD APMEA.


NEUTRAL: + 11% to 13% would imply that 2-year average trends slowed somewhat from January levels but still remain in the +6% to +7% range. 


BAD: Anything below 11% would be a bad result for MCD’s APMEA segment as it would point to a significant sequential decline from January’s 2-year average trends.   This range would also point to a sign of continued weakness in China.  The recent promotional activity being undertaken by MCD in China, which we wrote about on 2/26, began on February 24th. I expect some impact from this, but March will be affected more meaningfully. 

Greek Short Squeeze

On 2/23 we penned a note titled “Duration Mismatch: Greece” in which we said that the big moves “associated with a scenario in which Greece defaults on its sovereign debt are behind us, for now.”


While the data has changed since that note, it has changed in the direction we expected it to. Not only are we getting confirmation from trending lower-highs in Greek CDS and the 10-year Greek bond yields, and higher-lows in Greek stocks (see Athex Composite in chart below) but today’s decision by the government to approve spending cuts and revenue generating measures is bullish in relation to the “action” the EU was looking for ahead of PM Papandreou’s visit to Germany, France and the US beginning this Friday.


Today the Greek government announcement 4.8 Billion EUR of deficit cuts, including:


(1.)  ~2.4 Billion EUR in spending cuts

(2.)  2% gain in VAT to 21%

(3.)  Higher tax on alcohol and tobacco, in particular


The proposal above has been estimated to trim its current budget deficit of 12.7% of GDP by 2%, or about half of the 4% in cuts the government set for this year. 


While this action is a first step in Greece cleaning up its own “house”, we wouldn’t rule out the future intervention from states like Germany and France, or the larger European community, due to the significant bumps that remain in the road ahead, including some 20 Billion EUR of Greek bills and notes due in April and May of this year. 


While the Greek government has announced it will issue 5 Billion EUR of bonds “when conditions are right for Greece” to foot near-term obligations, demand for this issuance is still largely uncertain and serious volatility could be seen ahead.


Every macro risk has a time and a price. Beware of consensus leanings. Sometimes they are lagging indicators. AFTER a stiff 3-week short squeeze in European stock markets is the time to start asking yourself whether you should be making short sales, not AS the manic media clamors for attention.


Matthew Hedrick



Greek Short Squeeze - g1


Greek Short Squeeze - g2


Greek Short Squeeze - g3


He Who Sees No ISM?

This morning’s ISM Non-Manufacturing report delivers yet another blow to narrative fallacy of those forecasting a 2010 “double-dip” and the Fed remaining perpetually at zero.


In the chart below, depending whether you are a Washington fear-mongerer or not, you may (or may not) be surprised to note that this February ISM report was the best for the non-manufacturing side of the US economy since October of 2007.  At 53, this was also a big +250 basis point higher, sequentially, than the January’s reading of 50.5.


Now, we understand (but do not respect) that He Who Sees No Real-Time Data (Bernanke) may be willfully blind to this chart, GDP running +5.9%, and inflation running +3-5% year-over-year on his own conflicted CPI and PPI calculations… but that certainly doesn’t mean these economic facts cease to exist.


Last night, Kansas City Fed head, Thomas Hoenig joined fed hawk Charles Plosser in stating plainly that the Federal Reserve probably shouldn’t maintain language of “exceptionally low rates for an extended period of time” because, I assume, they see this economic data for what it is. Keeping interest rates at zero is now inflationary.


I’m personally rather annoyed to be underwriting the widest Piggy Banker Spread ever (the spread between short and long term rates is +282 bps today). Ever, by all mathematical counts, is a long time. The US government has chosen to pay levered up American lenders rather than disciplined savers.


Unfortunately I can now only hope that I get a rate of return on my hard earned American savings that’s more reflective of the economic data that’s on the tape. Hope, alas, is not an investment process. Neither is depending on Greenspan or Bernanke groupthink oriented forecasts.



Keith R. McCullough
Chief Executive Officer


He Who Sees No ISM? - ism


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