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THE MACAU METRO MONITOR

SEVEN DIE AS TYPHOON KOPPU HITS CHINA news.xinhuanet.com

Seven people are dead and four are missing as typhoon Koppu hit south China.  More than 100,000 residents had to be evacuated as torrential rain caused mudslides in Guangdong province.  The typhoon has thus far resulted in an estimated economic loss of two billion yuan, according to the civil ministry.  Houses in parts of the province were destroyed and a cargo ship ran aground in Zhuhai city’s harbor near Macau, spilling 50 tons of fuel into the sea.

 

 

PRESS DIGEST – HONG KONG ECONOMIC TIMES uk.biz.yahoo.com

Due to the rising prices of shares in gambling companies in Hong Kong, Wynn Macau is considering increasing its IPO fundraising target by 30-40% to HK$7.8 billion, according to an unnamed source.


CASUAL DINING - AUGUST KNAPP TRACK

Malcolm Knapp reported that August casual dining same-store sales declined 5.4% with traffic -4.6%.  For the fourth consecutive month, comparable guest count results were better than sales by close to 1%, which points to the significant discounting in the industry. 

 

These reported numbers improved on a sequential basis from July, becoming less bad after getting increasingly worse for five consecutive months.  Although comparable sales growth came in 2.9% better than July on a 1-year basis and 1.6% better on a 2-year basis, the rumor mill was suggesting a -4.0% August number versus the reported -5.4% so overstated expectations may offset some of the impact of this sequentially better sales news. 



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CKR – NO REASON TO BE OPTIMISTIC

At first glance the quality of the quarter is suspect and P8 same-store sales for Carl’s Jr. continue to decelerate on a 2-year basis.

 

As expected lower food costs saved the day for CKE, but two items highlight the challenges the company faced in making the numbers in the quarter – (1) a lower tax rate and (2) At Carl’s Jr. there was an adjustment to workers compensation expense that benefited labor costs, mitigating the decline in store level margins.

 

We will have more after we have a chance to talk to the company.

 

CKR also reported same-store sales for period 8.  While the absolute decline was the best in five months at the Carl’s Jr. concept, on a two-year average basis the numbers slipped 1.1% sequentially.  Hardee’s remained flat sequentially on a 2-year average basis at -0.1%.

 

 

CKR – NO REASON TO BE OPTIMISTIC - carljr

 

CKR – NO REASON TO BE OPTIMISTIC - HAR P8SSS


KR: Tough To Win On Price Alone

Keith’s TREND/TRADE model suggests more risk than reward. The fundamental story sounds the same.

 

After listening to Kroger’s conference call yesterday and discussing the finer points with Keith, we’ve come to the conclusion that this is a classic value trap with “hope” pinned solely on inflation (or less deflation).  So long as market share continues to shift away to discounters, dollar stores, and warehouse clubs and flexibility with union labor costs is inherently limited, visibility on margin expansion remains unclear to us. 

 

Key points from management’s 2Q recap point to another quarter of headwinds for KR (and likely SWY, SVU) with:

 

  • Deflation having a greater negative impact on sales and margins.  Now spreading to areas away from dairy and perishables and into most grocery categories.  Perishable deflation deeper than anticipated.
  • A pick-up in national brand sales which adversely impacted mix (this is likely due to intense price competition and vendor support which is allowing consumers to trade back into branded goods simply based on lower prices).
  • Sharp increase in customers using food stamps.
  • Intensified competition on price during the quarter.

 

Bottom line, it appears that the environment is getting worse here on the margin for the grocers .  This is mostly due to the industry pulling the trigger on price at a time when it was originally expected that deflation would reverse.  Investors who are long these names are banking on inflation.  In my mind, it takes a lot more than that to drive traffic back from the non-traditional competition. 

 

KR: Tough To Win On Price Alone - KR chart

 

 


(Swine) Flu Season Already?

At the risk of being alarmist, we are pointing out the following graphics on (Swine) Flu with caution.  In no way is the Research Edge Retail team pretending to be CDC workers or doctors, but we would be foolish to ignore such eye opening trends.  The charts below tell the story, although we can say with certainty the media isn’t shying away from what may become the most talked about national topic in the coming weeks and months.   As evidence as to how consensus the concerns are, do a quick Google News search for “Flu” and you’ll find around 75mm hits, with about 39mm of them related to H1N1 specifically, and about symptoms, prevention, and the effectiveness of wearing surgical masks.

 

(Swine) Flu Season Already? - flu chart

 

We’ll leave it to you to decide if you want to stay home, avoid public places, and use Purell every five minutes.  However, we’re fairly sure if the Flu virus continues to permeate the rest of the U.S with the speed and breadth as we have observed in recent weeks in the South, then there will be implications for consumer spending in both quantity, category and channel.  

 

 (Swine) Flu Season Already? - flu map

 

So, how should we think about the potential impact of Swine Flu fear and/or actual symptoms impacting a large portion of the U.S population?  The obvious answer is to think about which retailers may benefit from this pandemic, which include CVS, WAG, and RAD. For those thinking about which companies may suffer most, mall-based retailing could take the biggest hit as consumers look to avoid highly populated public areas.  For the extremists, Amazon.com, Drugstore.com, FedEx, and UPS all could benefit from cocooning.

 

We don’t have all the answers and we’re not into “playing” names at the expense of human suffering, but this is a trend worth watching.  For now we’re digging to see if any impact is materializing in the South as the brown states have reached “widespread” levels of Flu activity.  And for those who haven’t bookmarked http://www.cdc.gov/flu/ now is a good time.

 

 

Eric Levine

Director


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