October 27, 2009





By now it should come as no surprise that October is shaping up to be a strong month for same-store sales.  In the last week alone we have gotten positive confirmation of such trends from JCG, LULU, DECK, and SKX.  With most of the focus on the absolute trends, the question still remains as to whether true underlying demand is in fact improving.  Or, is this just a case of really easy comparisons and conservative planning off of last year’s volatile base? 


In order to get a better picture underlying demand, we take a hypothetical look at October’s weekly same store sales (as reported by ICSC) , extrapolate the trends, and ultimately forecast what lies ahead.  Our exercise assumes  the two-year comp for the industry gets close to flat this month and remains there on a go-forward basis.  Holding the two-year trend constant, we then arrive at the commensurate one year trend that hypothetically lies ahead.  I know this is an overly simplistic “extend the trend” exercise, but the fact of the matter is that it is accurate more often than not when there are extreme year over year swings like we have right now .  As you’ll see, the one year monthly comps will have to meaningfully accelerate, even from here, in order to achieve a flat performance on a two year basis.  Such a radical improvement to the upside for November and December seems out of the picture, even with the strength we are seeing today.




Weekly Comparisons


Expected October Retail Chain Sales Monthly Estimate based off of reported weekly results is 1.5%.

                Note: Timing of Halloween will benefit from 2 days of Halloween (Friday and Saturday) this year






Some Notable Call Outs


  • In attempt to marry design, ecommerce, and a bit of competition, Beta Fashion has been launched in the UK.  The site, which is ecommerce enabled, sells fashion apparel and collections entirely based on user-submitted designs.  After ideas are submitted, a panel of professionals as well as other members of the site’s community can vote and choose which designs are worthy of production.  The goods are then sourced and sold in limited edition runs on the website.  While this may not be a model for economies of scale, it certainly has potential to showcase design talent which otherwise may have gone unnoticed.


  • After checking in with a private equity contact who focuses exclusively on consumer-related investments, there were a few interesting tidbits worth sharing.  First, I was told that financing is picking up for some of the better positioned companies in retail.  Small and middle-market businesses are now able to find liquidity, which is the first time in a while that we’ve seen such a trend re-emerge.  Secondly, there has been a small pick-up in the number of “books” floating around as we get towards year-end, with many of these potential deals stipulating a 4Q close.  The speed suggested here is largely believed to be unrealistic. 


  • A conversation with a large liquidator of merchandise (apparel, home, etc…) suggested that inventory in the closeout/disposition channel has dried up and the overall business is slow.   There is now the belief that the liquidation business has peaked and with inventory levels as lean as they are, business will remain slow unless there is a major change in overall demand.




-European Union - The EU could keep import duties on footwear from China and Vietnam - Diplomats from the European Union announced that the European Commission could propose and extension of 15 months on customs duties applied to footwear manufactured in China and Vietnam. This decision would be taken in spite of the widespread opposition from large footwear corporations which manufacture in these countries as well as from distribution companies in Europe. It is still not clear what route will be taken. European footwear manufacturers tend to be small to medium size companies and are concentrated in Italy, Portugal, Romania, Spain and Poland. The governments of these countries will support the continuation of these duties but it looks as if others, where there is no relevant footwear manufacturing industry any more, will be opposed. <>


-Iconix Said Close to Deal With Ecko; Ecko Names VP, E-Commerce - Marc Ecko may be close to finding a new partner in Iconix Brand Group Inc. After months of speculation, a possible deal was in the works between Marc Ecko Enterprises Inc. and Iconix. Sources said the two firms are close to signing an agreement, and it could happen as early as today. The deal would give the marketing and licensing firm, which generates about $8 billion in annual retail sales, the rights to the Ecko brand and its trademarks. The deal also could help Ecko pay down significant debt owed to a group of lenders headed by CIT, as well as trade receivables owed to its sourcing agent, Li & Fung Ltd. Ecko hired investment bank Peter J. Solomon in November to assess and facilitate these strategic options. Mark Ecko Enterprises has named Bryon Colby, former managing director of e-commerce technology provider Fry Inc.’s New York office, vice president of e-commerce. In the role he will lead e-commerce and digital media strategy, including directing online creative services, merchandising, marketing and digital content. <> <>


-BRAZIL: Four giants promise to protect the Amazon - On October 5th 2009 four of the world’s largest meat and leather companies signed an agreement in which they are committed to refuse the purchase of cattle from recently deforested areas of the Amazon. Marfrig, Bertin, JBS-Friboi and Minerva reached this agreement in Sao Paolo, Brazil. This decision is in response to the pressure of companies such as Clarks, Adidas and Nike who are demanding that their suppliers in Brazil guarantee that their products are not obtained from the destruction of Amazonia. <>


-Italy - Caught red-handed! - Italian police arrested several tanners in the industrial Arzignano district for tax evasion. In total some 120 tanneries are under investigation in Italy’s most important tanning region. Police sources indicated that between 18 and 21 tanneries were directly involved in the police raids so far and that the unpaid taxes amount to more than €240 million. More arrests are expected soon. <>


-Lululemon Hikes Third Quarter Guidance - Lululemon Athletica inc. raised its guidance for the third quarter. The company now expects diluted earnings per share to be in the range of 17 cents a share to 19 cents a share as compared to its previous guidance range for diluted earnings per share of 11 cents to 13 cents. The company's improved guidance reflects stronger than anticipated net revenues for the quarter. The company now expects net revenue to be in the range of $110 million to $112 million for the third quarter of fiscal 2009. <>


-Survey Finds U.S. Consumers Ready to Go Green - A high percentage of U.S. consumers are expected to convert to eco-friendly products across many industries, including 59 percent in apparel and 74 percent in health and beauty, according to a report by consultancy group Grail Research. For apparel, the most important feature for driving purchases of green goods, said the report, was the manufacturing of the product caused minimal harmful emissions and the packaging is made of recyclable material. For health and beauty, the most important factors are that the product is natural and not tested on animals. <>


-Retailers and Vendors Charge Ahead on Sustainability - The global apparel industry is embracing sustainability as a key to long-term survival. Fears that the recession would slow or halt investments in sustainability, environmental initiatives and corporate social responsibility appear to be unfounded. In fact, executives said as consumers around the world continue to feel the sting of the financial crisis, the case has strengthened for better corporate practices that would spur efficiencies and lower resource consumption. <>


-Fiber Price Sheet: October 27, 2009 -




-U.K. Store closures hit fashion and footwear - One in 10 retailers closed their doors between January and September this year according to research released today by the Local Data Company. Fashion and footwear was one of the worst casualties of the recession with 17.9% of stores in the womenswear and kidswear sectors and 12.4% of menswear stores shutting their doors in the first nine months of this year. Footwear also fared badly with 14.9% of stores closing. <>


-Armani, Ferragamo Expand Online - Salvatore Ferragamo SpA on Monday became the latest fashion company to launch its own online store, while Giorgio Armani went one further and unveiled plans for mobile commerce. Customers of Florence, Italy-based Ferragamo will be able to shop on its redesigned Web site in Italy and the U.K. immediately, and in the U.S. and other European markets in the next few months, Ferragamo said. <>


-Ruffian to Design Macy's Line - Macy’s Inc. has enlisted Ruffian design duo Brian Wolk and Claude Morais to create two capsule collections for an upcoming men’s private label line called Threads & Heirs. It’s a strategy inspired by Target’s Go International guest designer series and marks the first time Macy’s has called upon talent from the high-end women’s fashion arena to shape a private label men’s program. Threads & Heirs will be produced by LF USA’s Oxford Collections, a subsidiary of Li & Fung Ltd. <>





NKE: Hans van Alebeek, VP, sold 16,000 shares after exercising options to buy 16,000 shares for a net gain of $392k.


COLM: Klenz Walter, Director, sold 2,300 shares after exercising options to buy 5,250 shares for a net gain of $52k.


URBN: Harry Cherken Jr., Director, sold 30,000 shares for a net gain of $990k.


JCG: Tracy Gardner, President – Retail & Direct, sold 39,000 shares after exercising options to buy 39,000 shares for a net gain of $1.16mm.


MOV: Richard Cote, EVP-COO, sold 166,000 shares after exercising options to buy 200,000 shares for a net gain of $579k.


NFLX: Leslie Kilgore, Chief Marketing Officer, sold 25,800 shares after exercising options to buy 25,800 shares for a net gain of $851k.

UA: Squeaky Clean

It’s rare that I come up with a goose egg when I try to find a bear case in a company’s results. But Under Armour represents just that. The company beat meaningfully on revenue – in both core apparel and in footwear – with revs growing +16% on a 7% decline in inventory which has bullish implications for 4Q gross margins.  My only concern headed into this quarter was not really a concern at all – it was that Gene McCarthy’s effort to build a footwear organization would results in higher SG&A spend. That’s exactly what UA did. But they completely funded it with better sales and margins. 


Uber-bears will point to the fact that annual guidance did not go up as much as 3Q beat. If they're going to hold their hat on that one, I wish them the best of luck. 'Wishing for luck' however, is not an investment process.


This has been one of two key Retail Focus long ideas for the past six months. Expectations on this hated name have come up in recent weeks, with short interest coming down to around 20% (still very high) and 2 analysts actually coming out positive over two weeks. (The 90%+ bears are going to have some explaining to do today).


Why does any true investor own this company? It is because they think, as we do, that sales will double over 3 years, which will be an intermediate stopping point (check out our S-curve analysis posted this past weekend). The 3Q result gives all the confidence I need to see that Kevin Plank, David McCreight, and now Gene McCarthy are building a world class organization to win.


UA: Squeaky Clean - UA S 10 09

The Resident Bear

“You are the most bearish person at the firm”
 -Keith McCullough
Yesterday, in our internal research meeting, Keith said that I’m the most bearish person at the firm.  I’m OK with that.  I would much rather be called a bear with the S&P 500 at 1,066, than the index at 672.  Just to point out, I’m a survivor on many different levels so I’m happy to be alive and always an optimist.    
As I have said consistently for the past three months, as we head into 4Q09, there has been a disconnect between the demand side of the equation and stock prices within some sectors of the market.  As a consumer analyst, I see it every day and at times it’s frustrating.    
The Conference Board’s consumer confidence will release the October number shortly, and I don’t expect it to be much different than consensus, it actually may tick up slightly versus the 53.1 reading in September.  With unemployment drawing closer to 10% and consumers still skeptical about economic recovery rumblings, it’s hard to make a case that more people feel confident and /or very confident in chances for a strong economy.
And since I’m the resident bear, this is not a very merry sign for retailers headed into a critical holiday season.  I know this is consensus thinking, but the current unemployment trends and the implications for consumer demand are bad for some stocks.
The following has been engraved on every Research Edge employee’s forehead – Dollar down = Stocks up!  In January, walking down the streets of NYC we got some funny looks.  Today, being dollar bearish is the consensus!  It’s always dangerous to bet on the consensus being right, so I’ll take the other side of that trade!  So what is going to change the course of the dollar?  I have no idea, but this is what I do know….
(1)   The Obama train is off the tracks.  The decline in Barack Obama's popularity since July has been the steepest of any president at the same stage of his first term for more than 50 years - DOLLAR BULLISH!
(2)   Crude is up 81% year-to-date for the wrong reason – everything priced in dollars has gone up with the decline in the dollar. It does not matter what letter of the alphabet you use to describe the recovery.  It is the US dollar that has driven the price of oil so far beyond the realities of what normal supply and demand fundamentals appear to be - DOLLAR BULLISH!  
(3)   According to a BLOOMBERG survey, beginning in 3Q09, GDP growth will remain positive in each quarter through the end of 2010.  If this is correct, interest rates are headed higher – DOLLAR BULLISH!
(4)   Setting aside the Case-Shiller data due out at 9 am, the news on housing will be an incremental negative in 1H10 - DOLLAR BULLISH!
(5)   We are losing the WAR in Afghanistan and the outlook for democracy in Iraq is slim – DOLLAR BULLISH!
(6)   The improvement in the US financial system is over shadowed by continued bankruptcies.   The KBW Regional bank index is down 27% year-to date and 3.6% over the past month.  Behind the headlines of the “too big to fail” banks, there are still significant issues lingering within the US financial system.  Shelia Blair is still putting out fires and is running out of money.  Yesterday, regulators seized seven banks bringing this year’s number of seized banks to 106 and the total since the recession started to 131. As a point of reference, 181 institutions collapsed during the savings-and-loans crisis.  Currently, 416 banks are on the FDIC’s watch list.  According to Bloomberg, to date bank failures have cost the FDIC’s fund about $25 billion and is expected to cost $100 billion through 2013.  This has negative connotations for risk – the VIX was up sharply again yesterday – 9.7%.  The VIX closed at 24.31, above the immediate term TRADE line of 24.19 - DOLLAR BULLISH!  
Yesterday the S&P 500 did not break down and close below her trade line at 1,065, which is bullish, as the futures are trading slightly higher when I got up today.  Earnings season is winding down and we are now headed into the MACRO season.  The upcoming MACRO season is setting up to be more Dollar bullish than we have seen at any time in 2009.  
The dollar is the world “reserve-currency” and will be for some time to come.  Between our blundering politicians and the current financial crisis, right now it’s easy to take shots at the US Dollar and question her status as the world’s “reserve-currency.”  This too shall pass.
Yes I’m the resident bear at Research Edge, but I’m not alone, just outspoken.  I’m also proud to be an American!
Function is disaster; finish in style.
Howard Penney

EWT – iShares Taiwan
With the introduction of “Panda Diplomacy” Taiwan has found itself growing closer to mainland China. Although the politics remain awkward, the business opportunities are massive and the private sector, now almost fully emerged from state dominance, has rushed to both service “the client” and to make capital investments there.  With an export industry base heavily weighted towards technology and communications equipment, Taiwanese companies are in the right place at the right time to catch the wave of increased consumer spending spurred by Beijing’s massive stimulus package.

XLU – SPDR Utilities
We bought low beta Utilities on discount (down 1%) on 10/20. Bullish formation for XLU across durations.

FXC – CurrencyShares Canadian Dollar
We bought the Canadian Dollar on a big pullback on 10/20. The currency ETF traded down -2%, but the TRADE and TREND lines are holding up next to Daryl Jones’ recent note on the Canadian economy.
EWG – iShares Germany Chancellor Angela Merkel won reelection with her pro-business coalition partners the Free Democrats. We expect to see continued leadership from her team with a focus on economic growth, including tax cuts. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; with fundamentals improving in a low CPI/interest rate environment, we expect slow but steady economic improvement from Europe’s largest economy.


GLD – SPDR Gold We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.   

XLV – SPDR Healthcare We’re finally getting the correction we’ve been calling for in Healthcare. We like defensible growth with an M&A tailwind. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.


CYB – WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.
TIP – iShares TIPS The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

XLY – SPDR Consumer Discretionary Consumer Discretionary has rallied from the freak-out “short everything consumer” lows, prompting a short on 10/22 as a hedge for a TRADE.

UUP – PowerShares US Dollar We re-shorted the US Dollar on strength on 10/20. It remains broken across all 3 investment durations and there is no government plan to support it.

FXB – CurrencyShares British Pound Sterling
The Pound is the only major currency that looks remotely as precarious as the US Dollar. We shorted the Pound into strength on 10/16.
EWJ – iShares Japan While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.


SHY – iShares 1-3 Year Treasury Bonds  If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.


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The Macau Metro Monitor. October 27th, 2009





The total number of visitor and non-resident arrivals was 2,204,014 in September 2009; visitor arrivals for September 2009 increased by 3.8% year-over-year to 1,689,007.  


Analyzed by place of residence, visitors from Mainland China grew by 16.1% year-over-year to 878,479 (52% of total visitor arrivals), with 354,443 travelling to Macau under the Individual Visit Scheme (unchanged year-over-year). Visitors from Japan (44,763) and Indonesia (30,098) rose by 24.8% and 65.5% respectively; however, those from Hong Kong (492,603); Taiwan (96,382) and Malaysia (22,714) decreased by 9.6%, 6.4% and 29.1%. Same-day visitors (851,758) accounted for 50.4% of the total visitor arrivals, with 446,735 coming from Mainland China.





Grant Bowie, President of MGM Grand Paradise Limited, said that he is not concerned by visa restrictions being imposed by Beijing in Guangdong. He was quoted as saying, “Macau has a very fortunate and experienced industry. So we are in a much stronger position than anywhere else of the world. We should feel quite comfortable with that… [The territory] is very flexible and dynamic, and we’ll be able to respond to this issue (visa restrictions). It is a matter we can manage on a day-to-day basis. We will work positively to operate within the situation we have available to us."


WMS reported in line earnings and reiterated guidance. Given WMS's lofty multiple, in-line probably wasn't quite good enough for the stock. WAP's performance and backlog provide optimism though.



WMS reported Adjusted EPS of $0.36 in line with consensus and revenues of $165.3MM which missed street numbers by $2.5MM. WMS came in a penny light of our EPS number and $1.6MM shy of our revenue number.


3Q09 Detail: 


The entire revenue miss vs our expectations came from lower "other product sales revenues" while the Street was too aggressive on slot shipments.  WMS sold 4,851 new units, well below the Street projection of 5,500 units - one analyst actually projected 6,829 units.  We suspect that at least one analyst was incorrectly telling clients that WMS's shipment to Firekeepers was excluded from 4Q09 results and would be in 1Q2010.

  • New unit sales revenues came in line with our estimate, with higher ASPs compensating for slightly lower shipments
    • NA new unit shipments of 4,851 were 43 units below our estimate and international unit shipments were 77 light of our estimate
    • We estimate that WMS got 15% of new openings and expansions in NA and over 30% of replacement shipments - although we will have to wait for the other suppliers to report their results to confirm those numbers
    • Higher ASP's made up the revenue gap.  This is not unexpected, since any upside to new shipments would likely come from Class II or Helios platform jurisdictions, which have lower ASP
    • WMS expects flattish ASP's to from the current quarter starting in the 2H2010 with higher Blue Bird 2 (BB2) mix being offset by lower priced Helios sales
  • "Other product sales revenues" missed our mark by $1.6MM despite higher conversion kit shipments
    • Most of what was in used games this quarter were trade-in resales, not BlueBirds, so they were very low margin. Some quarters in the past they sold refurbished units which had higher prices and better margins
  • Gross profit was in line with our number, due to margins being 90 bps higher mix of BB2's 


Gaming operations revenues were in line with our expectations and gross margin was $1MM better than our estimate. As we wrote in our preview for the quarter on 10/23/2009, it was "all about WAPs"

  • WAPs had another huge quarter, adding 374 units sequentially after adding 386 units last quarter. Not only did the install base for WAPs growth 15% sequentially, but we estimate that average revenue per day also increased y-o-y
    • While there were many questions focused on growth in revenue per day and it's sustainability, a large portion of the growth was also mix driven, as WAP's generate more then 2x the average daily win of other participation products
  • Gains in WAP placements were offset by sequential declines in the install base for LAPs (116 units), stand alone games (271 units), and casino-owned daily fee games (101 units)
    • From a development standpoint WMS has put more emphasis behind the WAP platform, as can be seen with 3 major WAP game launches in the quarter. WMS has a large backlog for WAPs and should have another strong quarter in Dec. 
    • Some of the standalone's had very good longevity and that caught up with them this quarter.  We should see similiar attrition on standalone and LAPs next quarter.  In the second half of the year standalone units should grow if WMS's new games are successful, while LAPs are expected to stabilize and stay flattish in the back half of FY 2010. 

Below the gross margin line, R&D came in $2.3MM, or 10%, above our estimate, while D&A came in $0.4MM below our estimate due to the lower number of net additions to the participation install base


FY 2010 guidance was left unchanged but revenue guidance for 2Q2010 of $184-190MM is below consensus of $192MM. 

  • The December quarter should have higher domestic unit sales as there are materially more new openngs and expansions shipping in the quarter, including:
    • City Center (1,940 slots), River City (2,000), Choctow Casino in Oklahoma (3,000)
  • The December quarter is also seasonally slightly stronger for replacements than September ahead of New Year's and the holidays

LULU: Oh Happy Day

On Friday evening, LULU issued a Form 4 on behalf of CEO Christine Day noting that her spouse’s IRA had acquired 3,000 shares of LULU in an open market transaction on October 15th at $25.41. I guess that was not super noteworthy to me in light of the dozen or so filings I see every day and the fact that at $76k the dollar amount did not bowl me over.


But then after the close today I had a double take when I saw LULU positively preannounce the quarter.


Maybe I’m missing something… but am I the only one who thinks this is a wee bit peculiar?

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