FASB 166 & 167 go into effect on January 2, 2010.  Income will increase but cash flow will not change.  Here's why



Under the current accounting rules, companies underwrite timeshare loans and collect interest on those loans at an average rate of 13-14%. Periodically, around 2x per year, that company will sell bonds that are backed by those loans. Typically some sort of over-collateralization is required, meaning that if I have $200MM of loans, I can only sell $150MM of bonds; the difference is the "over-collateralization" amount. The over-colleratization pool is meant to absorb any losses that occur in the loan pool that backs the bonds.  The bonds that are backed by the timeshare loans pay a much lower interest rate than the rate paid by the loan holder.  For example, MAR's on Oct 21st pays interest of 4.809%.  The underwriter of the loans and residual holder (i.e. MAR/ HOT), book a gain that consists of the present value of the spread between what they collect on the loans (14%) and what they pay the bond holders (let's say 4.809%) over the duration of the loan pool (2.5 - 3 years on average).  Once the securitization is done, the loans come off the balance sheet (they're typically in receivables), MAR/HOT books a gain on their residual interest, and they receive the cash proceeds from the bond sale.


Under the new accounting rules, those receivables (loans) come back on the books, as do the bonds that are backed by those receivables and non-recourse to MAR/HOT.  MAR & HOT will no longer book a gain that is the PV of the interest spread but rather recognize interest they collect on the loan pools and report interest expense associated with what they pay to the bond holders.  So actually, income statement accounting will more accurately reflect cash flow on timeshare loans.  This is why they will recognize more earnings from timeshare in 2010 versus booking gains and then amortizing those gains over time. The the securitized receivables will come back on the balance sheet, so there will be new line item titled as such.  The securitized debt will also come back on the balance sheet but it will not effect covenant calculations or the way ratings agencies treat this debt - since it remains non-recourse. There will also be a small increase in shareholder's equity, since the receivables exceed the securitized debt amount (due to the over-collateralization issue we already discussed).


We like the new accounting rules since earnings better reflect cash flow and big gains on timeshare note sales are eliminated.  Hope this helps.




PSS: WMT Price Gap Widening

The WMT price point gap is the key call-out of our ongoing survey of like-for-like product in the value-zone. PSS seems to be more closely aligning its competitive price positioning with TGT, KSS and JCP.



Interesting change this week in our survey of price points on like-for-like product at a select group of low-price/discount footwear retailers.  We track this specifically as it relates to Payless, as its strategy is to sell at a 20-30% discount to its competition. That’s when it has historically realized optimum traffic and conversion.  The one thing that did not change is something that is really worth calling out, which is the consistency in price movements between Payless, Target and JC Penney. As the chart below suggests, PSS sells consistently at a discount to Kohl’s, but in a more volatile range. The big notable, however, is Wal*Mart is tracking at a 32% discount to PSS. This is starting to turn into a head-scratcher for me. Over time, I want to see PSS’ price gap with WMT widen and move closer to the TGTs, KSSs, and JCPs of the world, but that won’t happen overnight. But such material fluctuations so quickly require that I at least stay on guard to ensure that I’m not missing something. It helps that we’re so early in the season. If it was December and we saw this price gap, or I did not have the confidence that Rubel and team are proactively managing this price strategy, then I’d be raising a yellow flag about now. But I'm not. Numbers still need to come up.


And yes, I completely realize that our survey can’t adequately forecast the comp in such a complex business with thousands of stores and hundreds of thousands of SKUs. But not only has this been a directionally accurate tool for us, but most importantly it helps us make sure we’re asking the right questions.


Darius Dale and Brian McGough


PSS: WMT Price Gap Widening - 10 25 2009 8 50 30 PM

JNY: The Quantamental Shark Line

JNY: Bullish Formation


Oh the irony that Keith mentions 'The Shark Line' while I sit here watching Jaws on cable with my kids (while going through earnings models). I gave my take on JNY. Here's his...


TRADE = 18.35, so pretty close here – the catalyst will decide its fate

TREND = 15.22, a lot lower… so this one isn’t for the faint of heart as we are testing the TRADE shark line

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JNY: Every Dog Has Its Day

 I will put JNY in the top 3% of worst-managed retail companies of the past decade.  It was so textbook how the company was robbing its brands of capital, acquiring marginal content to give the optical illusion the its top line was growing, and printing unsustainably high margins. But we all know that already. That fateful July day when Boneparth was ousted in the Summer ’07 and the Street realized that $3.00 in EPS was only a pipe dream and the stock subsequently plunged to $13 is proof enough of that. What we also know is that every dog has its day, and even though the current management team is average at best, the trajectory of the P&L here is still a winner.


We’re coming in at $0.36 for the quarter versus the Street at $0.28, and we’re 35% above the Street next year at $1.50.  A couple of things to consider on the model that people might not be considering…


1)      First, Liz Claiborne is walking away from about $400-$500mm in business at wholesale with its new deal with JC Penney. JNY is the obvious beneficiary. Not a 3Q event, but it’s on the immediate horizon.


2)      The most powerful part of this story is that JNY is accelerating its store closure program – simply because the commercial real estate market (or lack thereof) has created a window for JNY to bail on money-losing businesses.  We’re talking 240 stores out of about 1,000 – and the stores in question are losing money to the tune of a -10% EBIT margin. You do the math…$1.5mm per store *240 stores *-10% EBIT mgn. Yes, that’s about 5points in margin accretion to retail – even with the sales base dropping by a third. This is a business that had a -7% EBIT last year.


3)      Not sure if anyone noticed, but t his is the best boot cycle we’re seen in years. A primary beneficiary? 9 West – about a billion in sales.


Do I love this company? Course not. But my feelings about a company have nothing to do with my analysis of its financials.  Numbers need to head higher here. Mr. Market knows this to a certain extent, as short interest is sitting at a measly 5% of the float – low for JNY.  But an offsetting factor there is the simple fact that (until late last week) no one has asked me about the company in six months.


JNY: Every Dog Has Its Day - 10 25 2009 8 03 46 PM 

UA: $1.5bn Roadmap

To all ye ‘Under Armour is too Expensive’ detractors, simply keep in mind that not only does UA have $400/$500mm in growth over 3-years, but a plan to get there.  Here’s our S-Curve…



We already put out a note on our thoughts on the quarter to be reported on Tuesday (10/10: UA: How Have Expectations Changed?), so I won’t rehash that now.  But as we head into UA’s quarter, let’s keep an important backdrop in place. That is that this is a company that can grow – for a long time – and it has the plan, the people, and the infrastructure to do it.


The biggest pushback we get on this name is ‘it’s too expensive.’  If you want to look at p/e or EBITDA, then be my guest. Yes, on those metrics, it’s expensive. But if you stuck to trading ranges of those multiples with UA in the past – well – you’re probably not one of the ones making the ‘valuation’ case to me today. As we’ve noted several times, when looking at EV/Total Addressable Market Value, it’s tough to find something cheaper in consumer.


We admit…it’s easy for someone to throw out a large dollar number as to market size and then claim a company as ‘cheap’.  We, of course, did not do that. We went into each category of UA’s business, and ramped each one according to realistic expectations based around the capital UA is deploying into its business. Ultimately, we map out how the company gets to $1.5bn in sales in 3-years (vs. sub $800mm in 2008), a glimpse of which is below. Details behind our analysis are available to our Premium Access subscribers. Please contact for more depth.


UA: $1.5bn Roadmap - 10 25 2009 6 34 24 PM


Gas prices are due to become a headwind for gaming markets all over the country, having been a massive tailwind for much of the past year. Some markets will be hit much harder than others.




We’ve proven that gasoline prices are a statistically significant variable in driving gaming revenues.  While the coming surge in year-over-year gas prices will negatively impact gaming markets around the United States, some markets are worse off than others.  The chart below illustrates the spread between the respective areas and the national average price of gas.  The most notable outlier is California and it’s big.







If current gas prices stay constant, California will be hit far harder by the year-over-year growth in prices than other areas of the country.  As the second chart (below) demonstrates, December would bring a 70% y-o-y hike in gas prices in that state.  Gas prices are highly significant in influencing consumer behavior.  California has its own tribal casinos which will no doubt be impacted.  California also provided 28% of the visitation to Las Vegas in 2008, with Southern California being the origin of 24% of visitors in the same period.  Despite the economy, car traffic from California has been positive every month since March due in part to huge YoY declines in gas prices.






It is clear that all gaming markets in the United States will be hit by the effects of the gas price inflation in the back end of this year and the beginning of next year.  The East Coast and Gulf Coast markets will have more moderate increases in the price of gasoline, but the increases of 47% and 44% respectively are certainly not to be dismissed. 


On a relative basis, Las Vegas’ auto-traffic should suffer more than other gaming markets.  Even given the steep sequential drop off in the monthly year-over-year increases in gas prices, the increase in California’s February gasoline prices will still be almost an average of 10% higher than the other markets depicted in the chart above.

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