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Takeaway: MCD raises wages, adding to lower tier wage pressure. DKS implications of Leonard Greene stake in Bass Pro.


WAGE PRESSURE Builds Further For Retail

MCD, KSS, JCP, M, TGT, WMT - McDonald's USA Announces New Employee Benefit Package Including Wage Increase and Paid Time Off at Company-Owned Restaurants


Takeaway: The largest restaurant group in the US and two of the three largest retailers are setting the tone on the employment front. Some may minimize this announcement because it only applies to 10% of MCD's, 14k US stores, and it's unlikely that Franchisees will follow suit, but we point to a) the 90,000 employees it will effect and b) the legislative risk associated with these pay moves by MCD, WMT, and TGT. Will we see a sweeping national reform of the Federal Minimum Wage? Who knows -- but, what is clear is that the likes of KSS, JCP, and M will have to compete with the employment leaders to attract and retain workforces. The reason why we haven’t seen it yet is because we’re now at a seasonal lull for retail. By July, retailers will start beefing up temporary workforce ranks for ‘Back to School’ and then they kick it up a notch again in October as they prepare for Holiday. With the exception of grocery retailers, they ALL follow that pattern. That’s precisely when we’ll see the biggest wage pressure. And it's not like these companies can optimize payroll hours to offset the additional cost without sacrificing the in-store 'experience'. KSS in particular at it's analyst day characterized its employee management as 'world-class' and said there wasn't much wiggle room.

To review our outlook for the year, see our note Retail - Our 2015 Quarterly Playbook  LINK: CLICK HERE

Additional data: According to Glassdoor, MCD pays its base level employees (crew members & cashiers) $8.31. That's just south of KSS territory, and below all of the big players in the retail industry. Here's a look at the average hourly wages by retailer.

Retail Callouts (4/2): KSS, JCP, M, TGT, WMT, DKS, HIBB, FL - 4 2 chart1

DKS Implications of Possible Leonard Greene Stake in Bass Pro


Takeaway: Bass Pro stores are absolutely massive, about and pump north of $60mm through an average store -- close to $300 bucks per foot (vs DKS at $207). Those numbers have tailed off over the past couple of years according to Euromonitor, but at 1.1x EV/Sales (LTM)  it doesn't seem like an egregious multiple for Leonard Green to stomach. With DKS trading at a discount it's likely we'll here some renewed talk in about the possibility of the company going private, though Stack has all but said he wouldn't sell. Here's how we are thinking about that talk…

Based on our LBO model (ping us is you want a copy), a DKS LBO at the current price -- and even 20% lower -- makes no financial sense. The IRR is negative in both instances.

To be clear, our model assumes…

  1. DKS tops out at 900 stores by 2018, below management's 1,100 goal
  2. 2% to 3% comp store sales growth as e-commerce offsets negative store traffic.
  3. Gross Margins fall by 50bp annually as e-commerce dilutes profitability, and aggregate sales growth is not strong enough for DKS to leverage occupancy costs.
  4. EBIT margins fall from 8% today to 6% in 2018.

Though the math on our model makes no sense, the reality is that a banker Dick's might hire to sell the company will use much more bulled-up assumptions. We've said it before and we'll say it again, if DKS could find a buyer with the stock at a $5-handle, it should hit the bit on that all day. Ed Stack built a good business in a tough space. But it's running out of growth and margin, and we think he knows it.  

Retail Callouts (4/2): KSS, JCP, M, TGT, WMT, DKS, HIBB, FL - 4 2 chart2C

LBO Model

Retail Callouts (4/2): KSS, JCP, M, TGT, WMT, DKS, HIBB, FL - 4 2 chart3


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