March data discrepancies, good foot traffic over the weekend, and MGM Cotai.



Below are some recent tidings from our contacts in Macau:


Thoughts on the March Data Discrepancies

The data leaks originating from Macau government sources are usually reliable.  So what happened in March when 60-80% growth turned into 42%?  There are a few theories floating around but we thought that these two were most plausible:

  • There is some chatter on the ground that in order to stem any potential Visa restriction tightening, government officials purposefully pumped up market expectations so that the healthy 40+% actual growth came across as disappointing. 
  • While revenues certainly slowed in the back half of the month, the magnitude implied by the 15 day, 28 day and 31 day mark were quite large and therefore we would have expected to hear at least qualitative evidence of a slowdown in play - which we clearly did not.  One explanation is that volumes didn't really change materially over the course of the month but that there was a reversal in luck.


Strong foot traffic in the first week of April

The Ching Ming holiday, which celebrates the oncoming of Spring, just ended and the traffic in Macau has been very solid. Apparently the Venetian had 110K visitors this past Saturday versus an average of 65k.  Our contact on the ground believes that strong trends will continue through Golden Week which takes place the first week of May.


MGM Cotai Site

It probably isn't a complete surprise that MGM is working to secure a Cotai site ahead of its IPO.  According to our sources, MGM's Cotai site sits directly behind Sands' 5 & 6 and is directly overlooked by City of Dream’s (COD) Hyatt hotel.  The road access is good although the location isn't great since it's on the back side of the strip.  The block size is almost exactly the same as 5 & 6.


Below is the a map showing the proposed MGM site plus two photos with a view of the current state and its position re: COD and lots 5 and 6.








The government released its G-19 data a short while ago (G19 = non-mortgage consumer credit for the uninitiated, i.e. credit card, auto and student loan debt). After last month's major slowdown in credit contraction in the revolving portion, we were eager to see whether it was the start of a trend or just an aberration. This month suggests it was an aberration. Revolving credit shrank $9 billion at an annualized rate of 13.1% in February as compared with positive growth (upwardly revised) of 2.1% for January. Currently, the peak to trough decline in revolving consumer credit stands at 12.0%, or $117 billion.


On the margin, this is a negative. The companies principally affected include Capital One (COF), Discover (DFS), American Express (AXP), Bank of America (BAC), JPMorgan (JPM) and Citigroup (C).


Joshua Steiner, CFA







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FDO: 2Q Continues the Surge

FDO: 2Q Continues the Surge


Conclusion: Beat the Q with accelerating comp trends and SG&A leverage. Comp growth strength indicating discounters stores have some gas left in the tank here. Read throughs on DG, DLTR, and NDN.


1) Changes to our view on…

a) Company: Specific to FDO is the recent expansion of store hours, which is now chain-wide.  This has got to be helping but there has been no quantification as to what extent.  Net, net consumables driven traffic and some benefit from internal efforts (store hours, POS reset, improved consumables merchandising) is clearly taking hold here.  We’re no more inclined to own it here, but have a bit more evidence to consider before shorting.


b) Industry: Management was quick to point out that the payroll cycle appears to be as pronounced as it has been for while, which is interesting given the pick-up. Demand is coming across the store, even in consumables which has already been strong.  Overall demand is seemingly improving across all demographics, channels, and product offerings.  Pent-up demand, a slightly improve employment picture, and a favorable year over year tax credit environment (especially for lower income spectrum) contributed to uptick. 


2) Key Issue: Management expects same store sales to continue to accelerate throughout the year- largely a result of easing compares and the culmination of the company’s latest strategies. They’d better! With 1-year compares getting easier (especially in 4Q), the company’s guidance already suggests that 2-year trends are starting to flatten out. The big question here is whether there is some real underlying strength that we simply can’t explain (ie they’re sandbagging), or is this setting up to be a big deceleration story in 2H?


3) Read through for peers: Positive for DG, DLTR, NDN, WMT, HBI and GIL. Perhaps even positive for other retailers geared toward lower-priced discretionary items, such as Collective Brands (PSS).


FDO: 2Q Continues the Surge - FDO Comps Chart



Clean Headline: $0.81

Guidance: Updated on March 4th to $0.70 - $0.80

Street: $0.78

Last Year Clean: $0.43


Sales growth: +4.9% -- Revs slightly higher due to 3.6% comp growth which marked a 1 and 2 year acceleration. The increase in comparable store sales was a result of increased customer traffic, as measured by the number of register transactions, and an increase in the value of the average customer transaction. Consumables growth slowed sequentially to 5.1% from 5.8% in Q1 10 while home products, apparel, and seasonal/electronics improved on the margin.   


GM %: 35.4%, up 175bps yy. Result of higher purchase mark-ups and reductions in markdown expenses, freight expenses and inventory shrinkage.


SG&A: +4.1%, -20 bps, margin declined primarily as a result of lower utility costs and lower insurance expense which more than offset higher expenses related to expanded store operating hours and certain store maintenance and repair costs.


Balance sheet: Inventories down 10% on 5% sales growth. Good spread, sequentially improving. Capex as a % of sales was in line with Q1’s levels but increased on a TTM basis.


SIGMA: In sweet spot; positive trajectory to the upper right with better margins and improved sales-inventory delta.


Guidance: Increased 2010 guidance to $2.48 - $2.58 from $2.15 - $2.35, Street at $2.77. Expects Q3 EPS at $0.71 and $0.76 compared with $0.62 last year and street $0.70.  Comps for Q3 expected to increase 6% to 8%.  Favorable weather trends and the impact of the Easter shift have March comps +11%.


FDO: 2Q Continues the Surge - FDO SIGMA



German Factory Order Moonshot

Position: Long Germany (EWG); Short Euro (FXE)


With Keith buying Germany (via the etf EWG) in our model portfolio today, we thought it worth following up that despite today’s moonshot number in German Factory Orders (+24.5% in February Y/Y), the comparison is off the trough in orders of -38.0% in February last year (see chart below). Last month also saw a sizable annual improvement (+20.6%) versus -36.8% in Feb. ‘09.  Month-over-month manufacturing orders were flat (0.0%).


The improvement on an annual comparison is in line with our bullish thesis on the German economy, namely that its exports continue to benefit from increased global demand (and in the near term a weaker EUR), in a favorable inflation environment with CPI at +1.1% in Mar. Y/Y and PPI at -2.9% in Feb. Y/Y. Additionally, the most recent PMI Manufacturing and Services figures show a continued improvement in trend.  


Germany fits one of our investment themes of owning High Grade Versus High Yield. We’re also currently short the EUR versus the USD via the etf FXE, a position that continues to work as the fears associated with Greece and the other PIIGS remain at large.


Matthew Hedrick



German Factory Order Moonshot - Deutschland



Barring a couple of names in QSR, volume is slowing.  Regardless, stocks keep going up!


Looking at the table below, it is clear to see which stocks have been performing well: almost all of them.  The most consistent performers over the past few days, from a price and volume perspective, have been PNRA, CMG, RUTH (outside of yesterday), PZZA, and CBRL. 


In terms of commodities, the PNRA story has been helped by declining wheat and corn prices.  It seems that those trends may be reversing lately; we will be monitoring these trends closely.


TALES OF THE TAPE - commodity 4.6


In terms of upgrades/downgrades, there has been plenty of activity in the last 24 hours. 

  • This morning, CMG was upgraded to neutral from underperform. Yesterday the stock was up 2.4% on strong volume.  While CMG, at 12%, has almost twice the short interest of the average QSR stock, it is up 38.6% year-to-date. CMG is trading at 26.4x NTM EPS and 11.7x EV/EBITDA as compared to 8.6x for the QSR group. 
  • Also this morning, SBUX was upgraded to BUY from HOLD.  The stock was flat yesterday. 
  • DRI was upgraded to outperform from neutral.  Yesterday the stock was down on weak volume.
  • CPKI was upgraded to neutral from underperform following a flat day of trading yesterday.
  • Papa John's was upgraded to BUY from HOLD.  The upgrade cites better sales trends and an improved outlook for the price of cheese.


TALES OF THE TAPE - stock 4.6


Howard Penney

Managing Director

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