BBBY: Sales…check…GM’s…check…SG&A Control…check…Cash…check

BBBY reported 2Q EPS of $0.52, well ahead of the Street which was looking for $0.47.  Our model was actually forecasting $0.53 (we had a slightly lower share count).  The magnitude of the upside is noteworthy but the composition and consistency of BBBY’s steadily improving results is even more impressive.  Once again, the upside in the quarter came across all three line items. 


First, same store sales came in at down 0.6%, about 60 bps ahead of the Street.  Whispers were as high as 3%.  If you were trading the stock long into the quarter, then we can see how you might be disappointed.   However, at a near flat same store sales result, the company is well on its way towards positive comps over the next couple of quarters.  Trading sentiment aside (which will only last for about a day!), the topline is still a relative outperformer across much of retail and certainly sufficient to drive earnings growth (proven for the second straight quarter). 


Gross margins were much better than expected, actually UP 51 bps year over year.  This is the first positive gross margin result since the third quarter of 2006! I continue to believe this is only the beginning of margin recovery resulting from a substantially more benign promotional environment, a less competitive marketplace, and tight inventory control.  Management noted that product acquisition costs were also favorable which helped to drive the improved profitability.   Recall that Linens’ heavy couponing began long before the end of 2008 as the company attempted to drive sales as the ship was slowly sinking.


SG&A expense was better as well, with the expense ratio down 98 bps.  We were modeling a 170 bps decline, but instead results were more balanced between margins and expenses. SG&A dollars were essentially flat with last year.  We expect expense improvement to moderate, however leverage will begin to build as sales growth continues accelerates.  Additionally, reduced levels of direct mailings will continue to be a source of expense reduction over the next few quarters.


Finally, the balance sheet was solid with inventories down just over 3%, against total sales that grew by 3%.  Still no debt and a growing cash balance that now totals $1.2 billion (up $450 million from 1Q).  Share repurchase was barely noticeable (more of a token purchase) with the company buying back $20 million in the quarter.  There is close to $900 million remaining under the current buyback plan and I suspect repurchase activity will pick up in the coming quarters.


From here, it’s steady as she goes.  We should continue to expect the comp trend to turn positive in 3Q, gross margin expansion (after 10 quarters of declines), expense leverage, and earnings growth of at least 17% for 3Q and 20+% in 4Q.  Throw some more meaningful share repurchase on top and the numbers will move higher.


I know this is getting repetitive but the bottom line here is this was another solid quarter and BBBY now begins to anniversary easier sales comparisons.   Additionally, while the downturn in home furnishings, subsequent Linens N’ Things liquidation, and industry consolidation took place over a multi year period, so too will the recovery.   So what’s the bear case? Valuation is the most common pushback along with many investors saying, “I missed it”.  Six months from now we’ll be looking back and the stock will be higher. 


And, by the way this is one of the best looking SIGMA charts in all of retail…



BBBY: Sales…check…GM’s…check…SG&A Control…check…Cash…check - BBBY 9 09


Yesterday the Ministry of Finance announced that it would extend its support for Cinda Asset Management, one of the four primary AMCs set up to absorb bad loans from commercial bank books over the past decade, for 10 additional years. Cinda currently holds more than $36 billion in bad loans purchased from China Construction Bank, an amount equal to more than half CCB’s net assets.  CCB officially has a non-performing loan ratio of 2% excluding “special mention” assets. 


Although no one was surprised that the AMCs life will be extended rather than see massive mark downs hit the balance sheet of the financials they sprang from, the expectation of many observers has been that Beijing would rather see the companies take on new business as agencies which could ultimately allow the debt to be supported without direct government support.  Instead the government appears to be signaling a willingness to allow these pools of zombie assets stagger on without any new plan for recouping losses on these troubled debt portfolios.


As the extension of credit between financial instructions continues to grow rapidly (see chart below) the expectation that the system will be able to support liquidity hinges heavily on government backing for the AMCs . As the Chinese become more acclimated to capitalism, they will have come to recognize that denial can have catastrophic consequences  -with the policy makers and bankers in both the US and Japan providing cautionary examples.


Andrew Barber







Speaking at the launch of Wynn Macau’s initial public offering in Hong Kong, Steve Wynn said, “With this IPO, we’re a Chinese company with Chinese ownership.”  The IPO seeks to raise up to HK$12.6 billion by selling a 25% stake in the Macau business.  Wynn’s Macau business significantly outperformed its Wynn’s Las Vegas resorts during the second quarter, bringing in 32% more revenue and 56% more pre-tax earnings than the US operations.


Local tycoons and a fund have already committed to buy US$250 million worth of the Wynn Macau shares. These cornerstone investors include former Sun Hung Kai Properties chairman Walter Kwok Ping-sheung, Sogo department store owner Thomas Lau Luen-hung, Malaysian billionaire Quek Leng Chan and mainland-focused local fund management company Keywise Capital Management.




Steve Wynn has indicated that Wynn Macau had spent seven months planning a new project to be completed on the Cotai strip and could “take the next step” as early as the spring of 2010.  In April, the company will open an expansion of its flagship project, known as Encore at Wynn Macau.  However, Wynn sees Cotai as an “extraordinary” opportunity and believes that, in their plans for a new project there, Wynn Resorts has a “completely unique idea that’s never been done before”.





Visitor arrivals into Macau rose 6.4% in August from a year earlier to 2.62 million, according to figures released by the Statistics and Census Service today.  50.9% of arrivals were from mainland China, an 8.9% year-over-year increase.  Visitation from Hong Kong rose by 2.9%, from Taiwan by 12.6%, and from Japan by 27.1%.  Arrivals from South Korea and Malaysia slowed by 15.4% and 13.9%, respectively.  For the first eight months of the year, visitor arrivals decreased by 9.6% from the previous year to 14.2 million.

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KSWS: Positive Top Line Datapoint

K-Swiss top line trends in the US continue to improve on the margin, due in part to the launch of its new ‘Tubes’ running product.  Key callouts are…

1)      Dollar sales and market share both continue to trend higher on a fairly consistent basis.

2)      Before the launch of this product, KSWS’ share of the running category was 0.02%. Now it sits at about 0.11%. That might not seem like a big number, but for a category that measures about $4bn at retail, these bps add up pretty quickly.

3)      The new launch nearly doubled the average selling price of K Swiss’ existing running offering.



Is this a game changer for KSWS? No… But for a company that has been decimated by fashion trends, over reliance on one category, poor brand management, excess cuts from Foot Locker, supply chain pressure, and a money-losing subsidiary, we need to keep in mind that ANY stabilization has meaningful margin implications. Keith recently removed this one from his virtual book due almost entirely to liquidity (or lack thereof), which is a factor he places increased emphasis on today as we head into a stagflationary environment in 4Q. Over longer durations. I still really like both the trajectory of the P&L, balance sheet, and ultimately risk/reward.



KSWS: Positive Top Line Datapoint - KSS1


KSWS: Positive Top Line Datapoint - 2



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