Conclusion: While U.K. housing data points are rolling over, they are still more positive than in the United States. This fact combined with an increased likelihood that interest rates in the U.K. increase sooner than in the U.S., supports our long Pound, short U.S. Dollar position.
Position: Long Pound (FXB)
Below are a few charts we keep front and center to track moves in the UK housing market: the UK’s Hometrack Survey and British Bankers Association Mortgage data. In both we’ve seen a marked turn in housing since early 2010, a downward move we’d expect to continue over the intermediate term TREND due to significant oversupply issues (2004-7 period) and continued weak demand, reflected in buyer/consumer economic hesitance alongside new waves of austerity measures (higher VAT, government job and wage cuts) that should pinch the consumer and lead to tame economic growth out on the curve (see charts below).
In context, we believe that the weakness in the US’s housing market could be a far greater driver in capital and currency market moves over the next 3 months (both locally and globally). To be clear, our bullish call on the Pound via the etf FXB in the Hedgeye Portfolio is a relative one based on our conviction for weakness in the USD over the intermediate term TREND. As a point to note, we’re still seeing inflation signals in the UK, which may also be fueling the move in the GBP-USD, which is up +2.75% in the last month and +6.04% in the last three months. CPI in the UK has held above the 3% level (year-over-year) each month in 2010, while US CPI has trended lower this year, currently at 1.1% in August Y/Y.
Increased inflation in the United Kingdom is likely to lead to rates moving higher sooner than in the United States where the primary concern from Federal Reserve officials remains deflation. Further, an increase in interest rates in the United Kingdom will continue to support an appreciation in the Pound versus the U.S. dollar.
Our TREND level of support for the FTSE is 5,260. Our TRADE and TREND levels of support for the GBP-USD are $1.55 and $1.52, respectively (see chart below).
Consensus expectations are for an accelerated pace of GDP growth in 3Q10 to 1.9% from the 1.6% posted in 2Q10. As an aside, on September 30th, the Department of Commerce will report the second revision to 2Q10 GDP and the expectation is for the growth to hold steady with annualized quarterly growth of 1.6%, according to Bloomberg.
While the durable goods data on Friday sparked a 2% rally in the S&P 500 on Friday, the MACRO data from last week continues to point to a sequential slowdown in 3Q10 GDP growth.
On the housing front; existing home sales, new home sales, housing starts and building permits are now declining year-over-year and quarter-to-quarter. The biggest quarter-to-quarter decline is coming from existing home sales followed by new home sales, down 28.5% and 14.3% respectively. Building permits, and indication of future demand, is down 4.1% quarter-to-quarter.
New orders for durable goods is also seeing a sequential slow down quarter-to-quarter of 0.3%, while still growing year-over year. While the durable goods number missed overall expectations, when transportation and aircraft were stripped away it beat.
Moving to this week and today’s news, the Dallas Fed Manufacturing Index came at -17.7, on expectations of -6.0 and compared to -13.5 previously. In addition, U.S. economic activity, according to the Federal Reserve Bank of Chicago fell in August to -0.53 versus -0.11 in July.
The MACRO forces sending the S&P 500 (+9.43%) in September, don’t correlate with Gold (+4.8%) and the dollar getting hammered (-4.28%). Bond yields also suggest that the state of the economy may not be as strong as many investors believe (or hope). With the US economy continuing to weaken, the only option for the Federal Reserve to ensure stocks do not slump is to aggressively add liquidity to the system.
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Taking into account the number of weekend days versus weekdays and adding in estimated slot revenues, we project September will come in around HK$14.9 billion or +40% YoY growth.
Macau generated HK$12.5 billion in table gaming revenues through September 26th, implying +40% YoY growth for the full month of September, per our projections. Market share trends remained consistent with last week: MPEL and MGM above recent history and Wynn well below. We are hearing that rolling chip hold percentage remains low at Wynn and MGM and high at MPEL. The junket market continues to get more aggressive, mostly in the form of commission advances. MGM and MPEL, on the margin, are most aggressive while LVS also appears to be extending terms for commission advances. We will be writing more about this shortly.
Below are the September month to date table gaming revenues in Macau through the 26th.
Conclusion: Finish Line comps were light, but not all points of comp are created equal. With questions surrounding market-share gains and losses within the mall-based athletic footwear space, we remind investors that a point of same-store sales at Foot Locker represents 3.2 times the revenue dollars as a point of growth at Finish Line. Same store sales beats and misses simply don’t tell the true market share story, nor are they worth over-analyzing when a product tailwind is building.
With the reporting of Finish Line and Nike results lat last week there’s been a large amount of data shed on the athletic wholesale and retail landscape. On one hand we got confirmation from Nike that the domestic outlook appears to be accelerating over the back half of the year with the reporting of a 14% increase in domestic futures. On the other hand we got a glimpse of monthly volatility in the mall at retail and the inherent risk of running inventories too low when demand appears to be picking up. That was Finish Line.
As a result of the data flood, we were also faced with a whole bunch of speculation surrounding the momentum and trends at Foot Locker, athletic retail’s 800-lb gorilla. As most of you know, we’ve been bullish on the opportunity for FL and its shares going back to February of this year. Along the way there have been zigs and zags with the quarterly results, but the overall trajectory of earnings, sales, and stock performance has been positive and in line with the thesis we originally laid out. With each data point, we check our thesis against reality as any analyst would do. This time is no different, as we’re challenged to rectify the sales miss at Finish Line with a decade-high futures number from Nike.
One of the main issues or topics coming out of this week’s results surrounds market share amongst the mall based athletic chains. We’re often baffled by the Street’s obsession with same-store sales and this time is no exception. For the first time since we laid out our bullish thesis on FL, we’re now getting questions about possible share gains at the expense of FINL. For the past year, the question was centered on Foot Locker’s share loss.
However, the reality is, this is not about comps. All comp points are not created equal. Given that both FL and FINL are no longer growing their store base, it’s a fairly simple exercise to figure out what a comp point really means for revenue at each company. It turns out that if you exclude international from FL’s total and look at the domestic business, a point of same store sales is worth about $35 million to the topline ($50 million on a global basis). At FINL, a comp point yields about $11 million in incremental revenue for the chain. So in other words, a point of domestic comp at Foot Locker is worth 3.2x the revenue dollars at Finish Line. Again, not surprising given that Foot Locker is running 2,732 domestic stores to Finish Line’s 667 (productivity accounts for the discrepancy between sales and stores).
The bottom line here is it is entirely possible that Foot Locker may out “comp” Finish Line in their 3Q. For those “comp junkies” this is good news. We are hearing that apparel is taking hold, and in fact is running up double-digits at the Lady Foot Locker sub-brand. This is all part of the plan to turn the business around and it is largely on track. However, the Street is overly focused on one chain winning, the other losing, and using same store sales as the barometer. In aggregate, the market it robust, the product pipeline continues to improve, ASP’s remain strong, and the comparisons are fairly easy. We expect both FINL and FL to perform well against this backdrop.
With that said, FINL needs to produce a same store sales result 3.2x as good as Foot Locker’s to maintain market share neutrality. This is something to watch, especially as FL’s merchandising efforts begin to take hold and the inevitable market share debate rolls on.
R3: REQUIRED RETAIL READING
September 27, 2010
With the holiday season fast approaching, much to do with retailers adjusting store locals and formats while the brands are keyed in on marketing and advertising strategies.
- The urban retail landscape is likely to heat up a bit with Target’s announcement that it will pursue a test of a smaller format store, ranging from 60-100k square feet. The company plans to open its first prototype of the concept in Seattle in 2012. Additionally, speculation remains that Wal-Mart is also pursuing a similar strategy that may be announced at the company analyst meeting in October.
- According to Adage (the leading source of marketing and advertising news), Best Buy is planning on increasing its TV ad presence this holiday, a move that is counter to industry trends. Ad spend on TV is expected to rise by a low double digit percentage, with the funding coming from a cutback in newspaper inserts and other newspaper ads.
- Converse is coming to Manhattan with its first flagship retail store in Soho. Nike is said to be taking the 7,000 square foot former Ann Taylor location on Broadway. The store is expected to be open by the holidays.
- As one of the key top-line growth drivers at VF Corp., management clearly noted in a recent meeting that future growth at The North Face would come primarily from growth in new(er) sport categories (e.g. cross country skiing & long-distance running) in lieu of incremental distribution. That said, the brand is growing at key outdoor retailers such as DKS and REI despite increased competitive pressures from Columbia’s new OmniHeat line.
- Only a short time after winning space at DG from Fruit of the Loom, Hanesbrands’ sales are already up 30% at the account relative to its predecessor. Providing not only a real-time example of the strength of the brand, the company’s success at DG also serves as a powerful sales tool reflecting the superior productivity of the line for retailers as well.
OUR TAKE ON OVERNIGHT NEWS
Wal-Mart Offers to Buy South Africa's Massmart for $4.2 Billion - Wal-Mart Stores Inc. , the world’s largest retailer, plans to buy Massmart Holdings Ltd. in a transaction worth about $4.6 billion, entering Africa in its biggest deal in more than a decade. <bloomberg.com>
Hedgeye Retail’s Take: The last continent without a Wal-Mart appears to be heading for EDLP. While the headlines appear to paint the African opportunity with a broad brush, it’s highly unlikely we’ll see Wal-Mart’s influence makes its way beyond the major urban and developed centers in lower-risk countries. With that said, this is a sizable investment indeed and one that was needed to make this company truly global.
Best Buy Expands Its Buy Online, Pickup In Store Options - Best Buy is bolstering its buy online, pickup in store program with a guarantee that the retailer will make in-stock items available for pickup within 45 minutes of an order being placed. It is also allowing shoppers to pick up items direct from its warehouses. <internetretailer.com>
Hedgeye Retail’s Take: This trend has legs as we see more retailers prescribe to the in-store pickup option. For a retailer with bulky product like BBY, this model makes even more sense as it saves the consumer shipping costs and an additional leg for the retailer easing the load on distribution demand.
Converse Jumps Back Into TV - Combining the worlds of basketball and music, Converse is breaking a 60-second TV spot promoting its Star Player Evo shoe, featuring Julius “Dr. J” Erving and Doug E. Fresh along with several well-known skateboarders. The spot will break during this Sunday’s The Family Guy and also will run during the first NBA season opener on Oct. 26, which will feature the Boston Celtics squaring off against the Miami Heat. Though Converse CMO Geoff Cottrill said the brand has advertised on TV recently, including during the MTV Video Music Awards, according to The Nielsen Co., such appearances have been relatively rare. The brand spent well under $1 mm on measured media in the first six months of 2010, zero in 2009 and $5 mm in 2008, according to Nielsen. <brandweek.com>
Hedgeye Retail’s Take: Highlighting its heritage, Nike is obviously stepping up the marketing of its brand – what’s more interesting is the targeted demographic. With Dr. J and Doug E Fresh headlining the spot, the brand is clearly looking to resonate with Baby Boomers since it will be the first time for the majority of today’s youth watching to see the stars of the 70s & 80s in person.
Burlington Coat Factory Boosts Comps Through Discounting - Burlington Coat Factory Investments Holdings Inc. saw its losses mount in the second quarter despite increases in net and same-store sales. Gross margin declined to 35.6% of sales from 39.5% a year ago. Burlington Coat Factory saw strong performance in dresses and women’s suits, intimate apparel, accessories, shoes, men’s, and home divisions. Misses, sportswear, juniors and the Baby Depot operation underperformed the company average. <wwd.com/business-news>
Hedgeye Retail’s Take: Further evidence that brand strength is critically important in today’s market, not to mention a functional web presence. It’s safe to say that intimates at Burlington Coat Factory is not exactly destination shopping.
NBA Players Have New Jersies from Adidas - NBA players will have a new look on the court this season. Adidas, the league’s official outfitter, unveiled the Revolution 30 uniforms last week, which will be worn by all 30 teams. The brand says the new jerseys are 30% lighter than last year’s and are made from 60 percent recycled materials. Among the changes: The material that makes up the player’s number was switched from a heavier fabric to a breathable mesh. The uniform is the result of four years of research done by Adidas. <wwd.com/footwear-news>
Hedgeye Retail’s Take: After suffering a brief setback when Garnett switched endorsements from Adi to Anta, they’ve given the NBA something else to talk about – great timing given the lightweight trend.
P Diddy Plans UK Launch for Sean John Megabrand - Sean Combs, the singer previously known as P Diddy, is to launch his lifestyle clothing brand Sean John in key European markets early next year. <drapersonline.com>
Hedgeye Retail’s Take: Diddy going global – only surprise here is that it hasn’t occurred sooner.
Vibram FiveFingers Making Moves - On the strength of its quirky-looking FiveFingers product, the Italian brand has been a standout in a weak economy. In fact, sales have tripled every year since the style's debut in 2006 — and this year, the brand is on course to deliver 1.4 mm pairs of the glovelike shoes, a fivefold increase over the prior year. Vibram's retail customers claim they have runners coming in and buying their second and third pair already. It's a category of footwear that's not going away. About a third of the Vibram business worldwide is in FiveFingers product, with 90% of that done in North America. The company derives the other two-thirds of its business from its components program. To keep pace with demand, the firm expanded to a new office earlier this month, giving it three times the space. On the production front, Vibram has shifted its operations from a single factory in Southern China to five, with one or two more scheduled to be added by the end of the year. Additionally, the company has upgraded its distribution center capabilities and installed a new operating system, which should be able to handle the company's needs beyond $1 billion in sales. At the same time, the brand has continued to unveil new styles, and for spring '11 will introduce kids' shoes. To support the growth initiative, Vibram is now venturing into advertising for the first time. <wwd.com/footwear-news>
Hedgeye Retail’s Take: All this growth on word-of-mouth marketing, just wait until the brand makes marketing efforts official. If you haven’t already, we recommend reading “Born to Run,” the book largely responsible for the accelerating the barefoot trend.
The EU Acts to Encourage Cross-Border Shopping - In an effort to persuade consumers in the European Union to shop online with retailers outside consumers’ home countries, the E.U. Parliament this week gave its backing to a trust mark that e-retailers could place on their e-commerce sites to show they meet reliability standards. Bureaucrats and merchant groups still need to hash out the requirements retailers must follow to obtain the mark. But the parliament wants to base those requirements on E.U. law and follow the example of trust mark labels used in its 27 member states. <internetretailer.com>
Hedgeye Retail’s Take: The EU takes note of one of the key growth channels for U.S. retailers.
Six Leather Plants in Jiangxi, China to be Shut Down - Six leather-related factories in Jiangxi are being forced to close down by the end of the month as a result of Chinese state programme of eliminating outdated production capacities. <fashionnetasia.com>
Hedgeye Retail’s Take: The latest update as China continues to make its efforts to ‘clean up shop’ public to counter its perception as one of the global economies most hazardous working environments.
Sharp Cut in Indian Apparel Tax Refund Rates to Affect Jobs, Exports - Indian exporters are disappointed about the government’s sharp reduction in the rates of duty drawback or tax refund, stressing that such a move will adversely affect employment in industries include apparel, leather and handicraft. <fashionnetasia.com>
Hedgeye Retail’s Take: Despite its position as one of the largest global economies, the reduction in tax refunds will certainly hamper India’s export economy. Fortunately for most domestic retailers, India has not been one of the primary beneficiaries of the shift out of China relative to southeast Asia countries.
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