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Sports Apparel: Negative Datapoint

Sports apparel numbers (as reported today by SportscanINFO) slowed for the third consecutive week, reversing an otherwise encouraging trend since August. Weekly ebbs and flows in this data is routine, but we start to pay attention to three consecutive data points. What’s most intriguing is that the sports retail channel remains very solid – as is the family channel, but is weakness in mass channels that took down the average yet again.

 

 

Sports Apparel: Negative Datapoint  - 1

 

Sports Apparel: Negative Datapoint  - 2

 

Sports Apparel: Negative Datapoint  - 3

 

 


BWLD - BLACK BOOK

At Research Edge, black books provide an in-depth look at our strongest fundamental ideas.  I have recently completed a black book on BWLD.  This black book looks at the company from both a fundamental and macro (Keith McCullough) perspective.  Please email me if you would like a copy.

 

BWLD - BLACK BOOK - BWLD black book


MCD - GOT SOME 'SPLAININ' TO DO!

 

KM just shorted MCD again as the stock broke through his $56.37 TREND line.

 

On the positive side, the stock dividend yields 3.5% and management will likely raise the dividend again in December.  The company reassesses its dividend policy once a year.  The company will generate over $1.0 billion in FCF (after dividends and capital spending), spending most of it on share repurchase.  Valuation is reasonable, trading at 8.5X NTM EV/EBITDA.  Lastly, the dollar headwind will become a tailwind in 4Q09.  What’s not to like?

 

I have no problem being short MCD because sales are slowing and it was the only restaurant company on the planet not to see a big benefit from lower food costs in 2009.  The company will report 3Q earnings on October 22 and is holding its bi-annual analyst meeting in mid November.  Given the severity of the decline in same-store sales, management will likely be on the defensive as it relates to the launch of McCafe – the most expensive new product launch in the company’s history.

 

From day one, I have contended that this McCafe launch was never going to work because it falls outside of the company’s core competency and does not appeal to McDonald’s core customer.  While I thought the product would have some success during the initial launch period, given McDonald’s marketing muscle, even that has not played out.  The continued slowdown in the U.S. highlights that MCD’s espresso-based beverage platform is still not working.  Additionally, as I have said before, the fact that MCD has said recently that breakfast sales are declining increases my conviction that MCD’s specialty beverage launch will not prove to be the success that investors have anticipated for some time.  If the company cannot drive incrementally more specialty beverage sales during the initial months of its national campaign (while offering giveaways) and in the summer months, it will become significantly more difficult going forward.

 

We will be interested to hear from management more specific, measurable performance metrics on the launch.  Specifically, how many McCafe units are the restaurants selling per day relative to the targeted 100 units and what level of incremental sales is being generated relative to the planned $125K per restaurant from the entire beverage rollout.  For reference, the company sold about 45-50 McCafe beverages per day in test markets, a level that some franchisees thought was too low to warrant a national rollout.

 

I’m going to go out on a limb and make up an excuse for MCD executives before they do.  Initially, management contended that it needed to get on national TV for the McCafe product to hit full stride.  Now, MCD is on TV and it’s still not working.  Management will need a new excuse because it is not going to admit defeat just yet.  The NEW excuse will be that that the company needs to get the full line of beverages in place before the consumer will be fully aware of all the new beverage products the company is trying to sell. 

 

 

Also, the all important ROIIC metric that I talk about so often is in a free fall!

 

MCD - GOT SOME 'SPLAININ' TO DO! - mcdroiic


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%

European Expansion, On The Margin

We’ve been writing about  improving fundamentals in Western Europe for months now, and today’s PMI numbers for September confirm that this positive trend is still in motion.   The chart below shows the directional moves on a sequential basis. The take-away here is that Eurozone PMI (composite) improved month-over-month and importantly remains above the 50 level that signals expansion. For Germany and France—the two largest economies in the Eurozone—September showed an improvement in manufacturing and services short of an unexpected decline in German services to 52.2 from 54.1 in August, according to Reuters.

 

Rising unemployment remains a headwind for Europe into year-end and 2010 and we expect the positive rate of change for fundamental metrics (like PMI) to slow over the next two quarters. Eurozone unemployment, which gained 10bps to 9.5% in July and could run into the mid 10% range next year may well erode the gains we’ve seen in business and consumer confidence over the last months and dampen consumer spending. 

 

Inflation, an additional potential dark cloud on the horizon, has begun to pick up but is still running negative at -0.2% in August year-over-year in the Eurozone (Eurostat). We are looking for inflation to ramp on an annual compare in Q4 due to the manic fall in energy costs in October-December of 2008.  As a critical piece of the puzzle we’ll be monitoring the sequential change of energy prices and their impact on the region’s (specifically Germany and France) industrial and manufacturing base. There are no signs of slowing there yet however (based on what lagging data is available), with Industrial new orders in the Eurozone at +2.6% for July, trending comfortably upward from June’s reading of +4%.

 

We bought Germany via the etf EWG on 9/21. The country’s most present catalyst is regional elections this Sunday, which we’ll be writing on in greater depth. We’re currently short the UK via EWU and the Pound via FXB.

 

Matthew Hedrick

Analyst 

 

European Expansion, On The Margin - a1

 


MGM MAY JUMP ON THE IPO BANDWAGON

MGM may be looking to IPO a portion of its Macau operations.

 

 

Following on the fleet heels of WYNN and LVS, MGM may be looking at IPOing a portion of its Macau operations.  We are unsure if Pansy Ho is involved.  It probably makes sense to capitalize on the big multiples awarded Macau cash flow.  Moreover, unlike those in the US, Macau cash flows are not depressed and may actually be benefitting from somewhat of a VIP bubble.

 

A Macau IPO could generate $120-180 million in gross proceeds to MGM using the following assumptions:

  • 50% MGM ownership of MGM Macau
  • IPO 25% of MGM Macau operations
  • Long-term run rate of $150-175 million in EBITDA at MGM Macau
  • 12-13x multiple
  • Approximately $850 million in net debt at MGM Macau at 12/31/09

Pre-Game Fed Watching...

There is a very interesting Pre-Game developing here in both the US Treasury and Currency markets ahead of Ben Bernanke’s Game Time (2:15PM EST).

 

In the chart below, Andrew Barber and I show the immediate term TRADE line breakout we are seeing in 2-year Treasury rates. That breakout line is at 0.99%, and the marked-to-market rate is currently 1.02%, testing 4-week highs…

 

Coincidently, the US Dollar has stopped going down. Anything that isn’t down versus the Burning Buck’s YTD low (yesterday) is, on the margin, US Dollar bullish.

 

Understanding that bottoms are processes (not points) is critical, but so is respecting that Bernanke has the world power to crush short term Treasury Bonds (letting yields rise) by simply changing his rhetoric on the Fed Funds rate. ZERO percent isn’t a perpetual position.

 

Again, he doesn’t have to signal a rate hike absolutely. All he has to is signal one rhetorically, and that bearish intermediate term TREND line for 2-year yields at 1.07% (red line in the chart below) will be in play.

 

Dollar up, rates up = a lot of things REFLATION down.

 

2-year yields are where they are Pre-Game. Oil is getting hammered. Copper has broken its immediate term TRADE line ($2.85/lb) as well.

 

Stay tuned…

 

Keith R. McCullough
Chief Executive Officer

 

Pre-Game Fed Watching...  - a1

 


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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