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Great Expectations...

Not surprisingly, Fed Funds Futures have moved back to reality, pricing in a 90% chance that Bernanke will NOT raise interest rates this week.

I have focused on this current mania of Fed Centricity as one of the major risk factors to the US stock market. We have the likes of Larry Kudlow and Vince Farrell on CNBC parroting whatever it takes to push the Federal Reserve to do something that helps prop up the US stock market. Three months ago it was give us shock and awe, cut, cut, cut . Today, it's the reverse, hike, hike, hike. Its manic, short term, and unsustainable behavior.

Government intervention is not the answer to our problems. This is America - the great bastion of capitalism, not a Keynesian social net.

De-leveraging and saving continues to be my investment strategy of choice, until all of this nonsense clears itself from our screens. The new range I am using for the S&P 500 is 1311-1340.
KM

LIZ: Core Brand Inflecting?

I like this story a lot for reasons having nothing to do with current sales trends. But what I think is a key metric of brand performance is heading up while the stock heads down. Noteworthy call out.


I continue to like LIZ - a lot. Not the brand. Not the competitive positioning. Not the industry. But the tools at this management team's disposal to create shareholder value over the next 18 months. I outline these in depth in my 5/13 posting, but the crux is that with accelerated cliff vesting of (underwater) options in 2009, and just about the biggest SG&A lever in the industry, I think that over the next 12 months we'll see either a) SG&A investments pay off (unlikely), b) management rescind the invested capital and print as margin (more likely), or c) LIZ do nothing and we see some major corporate action. All of these would probably be good for the stock.

But I'd be remiss to not at least acknowledge that the company has a base business in the interim. After all, when all is said and done, the company is still in the business of selling clothes. That's where I picked up an incrementally positive trend.

Even though LIZ is a portfolio of over 40 apparel brands, the core Liz Claiborne brand still accounts for about a third of cash flow. As such, it is not a shocker that the stock still trades in line with this business. I don't like to look at aggregate sales numbers, but rather what I call the price-adjusted sell-thru rate. What this refers to is the merchandise price change needed to push a given sell-thru rate through the channel. The chart below shows that LIZ has traded spot-on with this rate over the past year. That is - until March, when this ratio inflected positively, though the stock wants to do nothing but go down. The price action does not smell right to me.

For a company with $3 in EPS power, this price action does not make much sense to me. Again, I'm not saying that LIZ SHOULD print a $3 EPS number, but simply that it CAN, and the incentives are aligned for this to come to fruition.


Exhibit Source: NPD Fashionworld and Research Edge, LLC

HBI: Sniper vs Shotgun

A more focused marketing approach, plus market share gain I highlighted last week, plus a violent reaction to a recent short report gets me warmer on this name.

I just posted a quickie on Under Armour after going through some yellow flags I'm seeing in promotional activity. I searched through our arsenal of tools to find a company that is showing opposite trends. How ironic that the best match is Hanesbrands (i.e. super high performance apparel brand versus sleepy maker of tighty whities).

Check out the chart below, which shows brand promotional media spending by product type (each product sums up print, TV, internet and outdoor).

The most startling takeaway is how grossly different the strategy is today as opposed to when HBI was under Sarah Lee. It's like night and day. Shotgun versus sniper rifle. The old strategy fired as much buckshot as it could muster and hoped it hit something. The new strategy is to focus on a smaller number of targets, but nail them even if they're a quarter mile away.

When I combine this analysis with 1) my HBI posting from a few days ago showing how effectively HBI is gaining share in core categories, and 2) the stock's brutal reaction to a short report issued last week, I'm warming up to the stock.

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UA: Sweeping Apparel Under The Carpet?

Yes, footwear is performing well. But my analysis begs the question as to whether UA is sweeping ad spend associated with cleaning apparel inventories under the performance footwear rug.

You've seen me throw out some incrementally positive comments recently on UA - particularly given what appears to be very solid execution on its footwear launch (which is still tracking extremely well, by the way). Footwear is extremely important to future growth UA, but let's not forget that apparel accounts for 90% of its current cash flow. For every positive datapoint I see on footwear, I get more guarded on apparel.

Our analysis shows the heavy step-up in brand-promotion media spend in the first half. Yes, we all know that UA lowered the earnings boom early this year for this very reason, but that was due to the footwear launch. We're seeing this come through, but what I'm surprised to see, however, is the massive year/year increase in print ad spending on performance apparel. While I am not yet certain as to why, let's stay intellectually honest and at least ask the question as to whether the company is sweeping ad spend associated with cleaning apparel inventories under the performance footwear rug.

My long standing take on UA is that the brand is tremendous, and that I don't question for a minute that it can grow 30% top line for another 3-5 years. But simply think that the gross margin needs to come down another 2-3 points to reach UA's potential. Last I checked, growth stocks at 30x+ earnings don't like when margins come down. I like the brand, but I still don't like the stock.


Exhibit 1: The increase in instances of promotional activity synch almost perfectly with change in the Sales/Inventory spread. Interpreting the chart shows that promotions are high, but so are inventories. Margins have yet to take the big hit.

ADMIRALING PNK'S PRESIDENT OPPORTUNITY

Was that Dan Lee I saw trying to cut the stern line of the President? Cutting the boat loose during the Mississippi River flooding could have generated some nice insurance proceeds. In all seriousness though, it looks like we've gotten past the worst of the flooding and that is good news. The President suffered no major damage and while collecting insurance proceeds is not an option, PNK maintains some nice optionality on this facility.

The zero cash flowing Admiral President (AP) casino is worth not much more than a bag of rocks as far as Wall Street is concerned. A Chain of Rocks President Casino, however, is a whole different matter. PNK management is contemplating moving the AP 8 miles north, but still within city limits, near the Chain of Rocks Bridge spanning the Mississippi River. I can hear it now, "Why is this guy talking about the smallest property in PNK's portfolio?" I've got 25 million reasons why. That's $25m in potential incremental EBITDA which equates to over $2 in equity value after assuming a $50m investment. Not bad for an option that falls way below Wall Street's radar screen.

Since opening Lumiere Place (LP), PNK has operated the AP at a loss in downtown St. Louis. The company maintains 3 options on this:

Status quo
Close it down - $6-14m accretive to EBITDA
Convert to the Chain of Rocks - $6-25m accretive to EBITDA

The biggest delta here is the impact on Lumiere Place. AP run rates around $35m in annual gaming revenues and is a stone's throw from LP. Will LP get 1/3, 1/2, 2/3 of that business? Your guess is as good as mine but each scenario moves the needle. There is little question in our minds that with a $50m investment for renovations and a pavilion, Chain of Rocks should pull in at least $4m in monthly revenues, up from the current $3m at the downtown location.

What's the hold up? Come on folks, this is the gaming industry. Doing anything in the world of gaming is like issuing a sell side (non-Research Edge) research report. One needs multiple levels of regulatory approvals. In this case, PNK is seeking evaluation and approval from the Missouri Gaming Commission and the City of St. Louis. We don't anticipate material issues with obtaining these approvals although timing is never certain.

MACAU JUNKET COMMISSIONS APPROACHING JUNK BOND YIELDS?

  • This is a gross exaggeration I know, but I am increasingly alarmed by the junket price war. My source indicates that LVS may have boosted its commission again, from an implied 1.25% of roll to 1.3%. I believe MGM may have moved even higher than LVS. No indication on Crown but if I had to guess I'd say MPEL will or already has followed suit. This chart examines the relationship between escalating junket commission rates and declining theoretical EBITDA margins on VIP revenues. I estimate the casinos break even on VIP business around a commission rate of 1.5%.
  • No word yet on WYNN but I am skeptical they can hold out any longer. WYNN has proven to be the best operator in Macau and their performance resilient despite an uncompetitive junket rate. At some junket rate, price will win over product, at least with some junkets and players. I am not sure we are there yet but any market share loss or softening of its junket position could be a major dent to this Bugatti. WYNN's stock has been a massive outperformer relative to the group and deservedly so. Could WYNN's stock become a victim of its own success? Follow the junket rates and market share.

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