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UNEMPLOYMENT EDGES UP macaubusiness.com

Unemployment in Macau for June to August 2009 rose by 0.1% when compared to the May to July period, to 3.8%.  Underemployment stayed the same at 1.9%.  On a year-over-year basis, the unemployment rate rose by 0.8%.  The employed population decreased by 1,700 from the May to July period to 318,800.  Employment in retail trade and construction saw decrease, while employment in restaurants and similar activities registered an increase. 



Wynn Resorts’ $1.6 billion IPO is more than 10 times covered, according to a source familiar with the deal.  Most of the interest for the unit has come from Asia and the company favors at least 50% of the offering going to Asian investors.  The retail part of the offering was some 50 times covered in the first few hours.



August saw 2.06 million visitors coming to Macau, a 6.4% increase over the same month of last year.  On a sequential basis, the number of arrivals rose by 17.7%.  August’s figure was the highest since March 2008, when 2.13 million people visited Macau.  50.9% of the visitors were mainlanders in August, reaching 1.05 million, up 8.9% year-over-year.

WEN – A small data point

MHGU is small but represents the current trends at WEN.


Meritage Hospitality Group operates 73 quick service and casual dining restaurants, including 69 Wendy’s restaurants in Michigan and Florida.  The company, which is the only publicly traded Wendy’s restaurant franchisee (MHGU – currently up 12% today), reported 3Q09 earnings for the period ended August 30 and attributed part of its earnings improvement to a successful new Wendy’s product launch. 


Specifically, Meritage’s CEO Robert E. Schermer, Jr. Stated, “We continue to experience improved margins and profit flow-through from our Wendy’s operations…. The new management team at Wendy’s International is delivering on its initial promises to the Wendy’s franchise system beginning with a successful new product launch of boneless chicken wings in June 2009.  Looking ahead, we believe that Wendy’s has a strong new product pipe line and is focused on margin growth at the Wendy’s unit level.” 


When WEN reported its 2Q results, management stated that it had started off the third quarter with great results on both of its wings products, helping to drive comparable sales growth at Wendy’s up 2% in July (from -1.2% in 2Q09).  Although Meritage only represents a small percentage of Wendy’s total U.S. restaurant base, the company’s improved performance could signal that the management changes and new products at Wendy’s are working to grow market share.


WEN – A small data point - wen

DKS: Update from our HQ Visit



We came away from our meeting at HQ incrementally upbeat about DKS' sales/GM trajectory and and levers it has to pull ahead of the Street's number for the quarter and year.  This is not earth shattering, as DKS was one of the few retailers linked to this space that registered a positive inflection this past quarter.  But our sense is that the trends have continued (supported by outperformance of ths sporting goods channel in third party market share data).


Looking out a bit further, it is clear that DKS would like to resume a more normalized mid-teens square footage growth rate but will not do so until the real estate development pipeline begins to build.  In the interim, second-use sites and one-off real estate acquisitions are likely. We were particularly intrigued to learn that less than 10% of its leases come up for renewal over each of the next 4 years (DKS has a 10 yr target duration for its portfolio). We just heard from Finish Line that 40% of its leases are due within 18 months. Yes, the box economics are different between the two as FINL averages about a 5-year duration. But that definitely makes us question if DKS will benefit from the current property cost environment as much as others. In other words, has its aggressive plan to lock up property terms duriing the '-03--'07 bubble coming back to haunt them?


Here are some other notables...


Competitive Environment

- One of the more notable comments of the meeting was in response to a question about the macro environment and its current impact on the industry to which mgmt responded something to the effect of “from our perspective, we would have preferred for the rebound to have come later, it would have resulted in further shakeout within the industry.”


- TSA:

   - status of TSA’s financial health unknown within the industry

   - continue to add stores at same relative pace to prior years

   - not seeing any changes with in-store environment or promotional cadence

   - only competitor with similar box size out west (~50k sq. ft.) – most comparable competitor


- Academy Sports: 110 stores – 73 in TX

   - 80-100k sq. ft. footprint

   - Everyday low price

   - Moving eastward into TN, NC, KY (overlapping more with HIBB)

   - Approaching $2Bn in annual sales


- Hibbetts: much smaller format, not competing much if at all head-to-head


Market /Regional Trends

- All regions performing similarly, no standouts to note. 

- Target market size has/will not change

   - not considering utilizing a smaller format to pursue smaller markets (i.e. HIBB no interest)

   - minimum box size remains ~40k sq. ft.


Store Additions

- Westward growth – have secured 10 of 32 Joes locations

   - (6 to open in Oct, 4 in 2010)

   - Was watching Joes for 2-3 years before sites came on market.

- Chicks acq primarily driven by box size – have built 2 additional DKS stores around these in CA

- Regions of greatest growth opportunity:

   - FL, TX, AZ, CA, Pacific Northwest

- Will build out in 1-5 location groupings, not 10+ chunks

- Priority towards vacant, build out (Greenfield), and second use (in that order)

   - Activity from a developer standpoint still very slow – is capping rate of growth via Greenfield opporty’s

   - Barring further filings, upside to expectations of 24 stores in 2010 is limited

   - Co-tennancy remains key factor in growth plans.  Won’t open sites unless tenants in strips are preferred retailers (i.e  

     BBY, BBBY, TGT, WMT, etc…)

- Mall 20% (~75-80k sq ft), off-mall 80% (~50k sq. ft)

- Unlikely to see any additional specialty concept acquisitions in near-term. 

- Will need to add a West Coast distribution facility in 2 years to support expansion.


Lease/Rent Terms

- Ability to negotiate rents is greater with new build outs with greater upfront capital commitment from DKS

- Don’t have a meaningful % of portfolio coming up for renewal over the next 4yrs, renewals become significant after then

- Typical lease is 10yr term with 4-5 options at 5yrs each. ($0.50 bump in yr 5)

   - Joes slightly different – DKS put up more capital upfront that usual to get them up and running faster

   - Much more favorable rents offset higher capital costs.


Store Economics

- $870k of CapEx / store

- $800-$900k of inventory expenses

- $200-$250k of opening costs

  = ~$2mm cash investment

- Expectation of cash on cash returns of 50%+ by Yr2

- On ~$9-$10mm in sales (~10%+ FCF margin)


Brand/Category Extensions

- Jordan shop-in-shops and yoga concepts are past testing phase and in the process of being rolled out into more stores

  (Jordan in 60+)

- Self service concept test in footwear has been a success (see pictures below), being rolled out in all new stores, retrofit

  will happen overtime.

   - Essentially inventory made available on floor – has enhanced customer satisfaction and conversion

   - Not translating into meaningful labor savings (has been largely reallocated in store)


DKS: Update from our HQ Visit - DKS 2 9 09


Figure 1: New self-service concept in the Footwear department.


- The North Face is now in ~80% of all DKS stores

   - While nearing full penetration, there is room to flex footprint within the store

   - DKS growing Nike ACG private brand within store (competes directly with TNF)

- Product mix (hardline 50%, apparel 30%, footwear 16%) unlikely to change materially

   - Hardline moving away from bigger ticket items (weights, machines, etc.) towards exercise balls & bands

- Private label and private brand continues to grow (last cited as 15% of total sales back in 2006)

   - Both have similar margins ~600-800bps better than product being replaced

   - Private label direct sourced

   - When asked if savings from sourcing will be reflected in pricing, commented that more likely to drop to the bottom line

   - Over the last 12 months, DKS has had more opportunity to purchase branded off-price product

   - Less in the way of exclusive product this year compared to last


Guns & Ammo

- Guns and ammo has buoyed several players in the industry – GMTN was “thrown a lifeline”

- Benefit will be anniversaried 11/15

- Traffic and demand remains strong to date

- Did not specify what % of sales G&A accounted for



- Stressed that dot.com was very much in initial stages of growth – “really in startup mode”

- Expected to be neutral to the P&L in 2009, positive in 2010

   - $25mm+ investment in F09


Golf Business

- Trends are improving visibly 

- Has been undoubtedly the most significant drag on GMs 

- Pointed out several times that clearance activity related to merchandise errors in golf will be complete in 3Q and the associated margin drag will end immediately as inventory is cleaned up.

- Considered an attractive growth engine 

- Own ~20% of golf market; ~4x greater than next largest competitor (Golfsmith at ~5%) 

- Vendor pricing advantageous due to size and stability relative to Mom&Pops 

- 3 key issues related to GG integration have been: 

   - Macro environment  

      - beginning to stabilize 

   - Competitive (historically adversarial) cultures 

      - DKS mgmt took control of Golf Galaxy as of 1/09 

   - Product  

      - too much private label; balancing with more private brand

      - reducing overall inventory

Marketing/Advertising Strategy

- Greatest allocation of spend is tabs – will continue to be

- Overall, print continues to shrink – moving towards direct to consumer (e.g. mobile, online, etc.)

- Using more spot network TV advertising, but not material to spend. 


Acquisition Outlook

- DKS: no plan to be acquisitive over next 18-24 months

- When asked about interest in other specialty brands, assured there is no interest – commented to the effect that following

  the recent integration of both Chicks and GG they “could use a breather”


Operating Margins:

- Most significant drag on gross margins (Golf Galaxy & Chicks integration and promotional environment) beginning to ease


- SG&A plans largely fixed for balance of 2009 and 2010 with investments in dot.com, new HQ, and merchandising and

  marketing systems


Inventory Control

- Plans to get inventory turns back to 2000-2002 levels over the next 3-years

- Considering a realignment of executive compensation tied to specific inventory turns/mgmt targets

- DKS continuing to push for and get better terms from vendors



DKS: Update from our HQ Visit - DKS Store KSWS 9 09

Figure 2: KSWS prominent end cap display.

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There is a substantial high-end business in Las Vegas but it is slots and mid-level table play that comprise the bulk of gaming revenues.  Thus, we can derive a pretty good guess of gaming revenues given the visitation figures and even the airport traffic numbers.  Indeed, the correlation between the number of monthly Las Vegas visitors and gaming volume is 0.66.


Macau is a whole different environment.  Visitation has very little correlation to gaming volumes and revenue.  That may not be a surprise when considering the VIP segment.  However, even the Mass business has shown an immaterial correlation, R Square, and T-stat in the regressions, albeit slightly more correlated to visition than VIP.  The VIP and Mass segments continue to be driven by high end players.  This will probably change over time should slots ever take off and as the market grows.


For now, pay little attention when someone says "the casinos are packed" or "the casinos are empty". 


Business Week reported on McDonald’s expansion of its McCafés in Europe and like so many other reports regarding increased coffee competition in the U.S. that have come before it, implied that Starbucks will be the likely loser.  There are some definite differences in the way MCD is growing its McCafé business in Europe relative to in the U.S. and the outcomes are, therefore, likely to be different.  In both regions, I don’t recognize McCafé as a significant competitive threat to Starbucks.


We all know where I stand on the U.S. initiative; McCafé will not provide the added sales layer that so many are anticipating and it will not provide the necessary returns.  In the U.S, MCD did not build a separate café section, but rather, the bulk of the McCafé investment came from new equipment costs and the cost to remodel the drive-thru to accommodate this new equipment.


In Europe, MCD’s McCafé remodel includes adding a café area to existing restaurants with a separate counter and comfy furnishings.  Although the article correctly points out that because the café is located within a McDonald’s restaurant, it will still smell like a McDonald’s, the addition of the café does provide more of a coffee house environment than is present in the U.S. 


The more important difference, however, stems from franchisee support of the McCafé rollout.  In the U.S., there was a lot of “noise” in the system regarding MCD’s decision to nationally launch McCafé.  A lot of franchisees openly communicated their opinions that the test market performance did not warrant a national rollout.  The Business Week article points out that “European franchisees like McCafés because they encourage customers to stop in for breakfast and during off-peak hours. Store revenues jump 20% to 25% after adding a new McCafé, says Michael Heinritzi, McDonald's No. 1 European franchisee, with nearly 40 stores across Germany and Austria.”  Franchise support is often a strong indicator of future success because franchisees will typically only want to invest in something if they have seen proven results. The results appear to have convinced European operators where as the test markets in the U.S. left many franchisees concerned.


I don’t know enough about McCafé results thus far in Europe to know if it will prove to be a successful strategy for McDonald’s but it seems to be more promising than in the U.S., which I continue to think will be a failed strategy.  Relative to Starbucks, I continue to think that even with McDonald’s adding cafés in Europe that the two companies offer a completely different experience which will appeal to two different consumers.  McDonald’s will maintain its fast-food image first and foremost before that of a coffee destination.


The Economic Data calendar for the week of the 28th of September through the 2nd of October is full of critical releases and events. The market will be impacted by several key non-economic factors as well next week: China will be celebrating the 60th Anniversary of the PBOC while the German National Election results will be digested on Monday. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.  



Monday Sept. 28


North America

The Treasury will auction 4 week, 3 month and 6 month Bills at 1 PM.



In the UK, Nationwide house prices for September will be released on Monday morning, as will September Italian Consumer Confidence.



On Monday morning Taiwanese August Leading Economic Index levels will be released while in Japan August CPI as well as September Tokyo specific CPI, will be announced at 7:30 PM.  



Tuesday Sept. 29


North America

Case-Shiller Home prices for July will be released at 9 AM on Tuesday, followed by Conference Board Consumer Confidence levels for September at 10 AM and USDA September Agricultural prices at 3 PM. Weekly ICSC, Redbook and ABC Consumer Comfort index data will also be released at normal scheduled times. 



Tuesday brings a slew of critical economic data points for Europe. At 5 AM Bloomberg Eurozone PMI as well as Confidence Measures (Consumer, Economic, Retail and Construction) for September will be released.  Also on Tuesday morning German Import Prices for August, as well as Italian Business Confidence and Spanish CPI for September will be published. In the UK, third release GDP as well as second release Trade Data, Government Spending and Fixed capital Formation for Q2 are scheduled as are BOE Mortgage and M4 levels for August. The UK’s DMO will be Auctioning 3.75 billion GBP in Gilt due in 2022.



Hong Kong Retail Sales for August will be published on Tuesday morning while in the evening Japanese industrial production and Shipments for August and September PMI will be announced. Also in the evening, Retail Trade and Building Approval data for August will be released in Australia as will South Korean Current Account balance levels.



Wednesday Sept. 30


North America

Third Report Q2 GDP and Corporate Profits will be released at 8:30 AM on Wednesday while Chicago PMI readings for September will be issued at 9:45 AM. Weekly MBA Mortgage application data will be released at the normal time as will EIA oil gas and distillate stock levels. In Canada, August raw Material and Industrial Product Prices for August and July GDP by Industry and Average Earnings will be announced.



French and Italian PPI for August, as well as Italian CPI for September are scheduled for release on Wednesday morning as will September Eurozone Flash CPI. German Unemployment data for September will be published and the German government will be auctioning 2 year Schatz.



On Wednesday morning Japanese Housing Starts and Constructions as well as Thai Trade and Production data for August will be released. In the evening, South Korean Trade data for September and Japanese Retail Sales for August will be announced. Chinese PMI for September is scheduled for release at 10:30 PM.



Thursday Oct. 1


North America

At 8:30 AM on Thursday PCE and personal Income data for August will be released, while ISM Manufacturing levels for September as well as Construction Spending and pending Home sales for August will be published at 10AM. Domestic Car Sales will also be announced. Weekly Initial Claims, M2 and EIA Natural gas stocks data will be released at the normally scheduled times. The treasury will announce a reopen on 10 year notes, 10 year TIPS and 30 year Bonds at 11 AM. Finally, at 10 AM Chairman Bernanke will testify on regulation reform.



On Thursday Morning Reuters PMI-Manufacturing for September will be released for Germany, France, Italy and The Eurozone in aggregate, while in the UK CIPS PMI will be released. German Retail Sales for August will be announced at 2 AM. France and Spain will be auctioning Treasuries during the day while in the UK the DMO will be taking 2.25 billion in Gilts due in 2030 to market.



October First is the 60th anniversary of the People’s Republic and Chinese markets will be closed. September CPI for South Korea and August CPI for Thailand are scheduled for release on Thursday as will Indian Trade data for August (along with weekly WPI data). In the evening PCE, Income and Unemployment data for August will be released in Japan.



Friday Oct. 2


North America

The Labor Department will release September unemployment, Average hourly Wage, Non-Farm and Manufacturing Payroll at 8:30AM. August factory Orders will be released at 10 AM.



Eurozone PPI for August will be released on Friday morning as will UK CIPS Construction PMI.



The continuing celebration in China and the mid-autumn festival in Korea will leave markets closed in both nations on Friday. September PMI will be announced in Singapore.  


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