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UA: Look to History

Hey UA… Here’s a recommendation for you… if you’re gonna suggest that Footwear, your hugest future revenue growth driver, is going to be flat next year, you may actually want to add that color to the press release.  No matter. What’s my view? As noted several times, the one potential shocker to this quarter would be increased SG&A growth to build a footwear organization. The company gave us that today. Given the strength of 3Q revenue – by a long shot – it simply did not matter to 3Q, and I don’t think it will matter much to 4Q either.


The salt in the wound came when UA noted that sales associated with that investment would be flattish next year. I don’t buy it. I think its McCarthy buying time, and keeping his hurdle low. This is not just my ‘gut’ (a gut is something that’s tough to invest with for me), but rather analysis based on historical precedent. Let’s look at McCarthy at Timberland.


He joined in May 2006 and was charged with the task of heading up the flailing ‘Yellow Boot’ business. This was about a third of sales, but 2/3 of profit – and was headed nowhere but down. He halted the decline over 2 quarters. He then grew the business for a year in the mid-single digits, while the rest of TBL shrunk by close to 10%. So of course, TBL pulled him away from the newly branded ‘Authentic Youth’ business, and made him co-president of the Company, while it took resources away from his former division.


The point here is that I agree that it will take some time for McCarthy to make a mark at UA, but the clock started ticking in August. UA will be selling product made under a process that is not his through April/May, and then ‘The McCarthy Product Transition’ kicks in for fall – not 2011 as the company suggests.


The company suggests about $0.97-$1.00 in earnings next year. We’re at $1.20. Then we’re at $1.75 the year after. 40% CAGR in earnings and cash flow? That doesn’t stink.


Conference call starting out strong.  October looks better than people may be expecting in both Macau and Las Vegas.



Steve Wynn stated that Q4 in Macau and Las Vegas will be up over last year assuming rebounding trends in October persist.  We had already projected that but the opening tone of the call sounds pretty positive.


The other item of note is that Macau Encore is coming in under budget.

Chart of The Week: Rate Rotation

We have 3 Macro Themes that we work with quarterly. From an investment process perspective, these investment themes are generally born out of one another (for example, in Q1 we had Breaking The Buck and come Q3 that morphed into Burning the Buck).


Our views of the deflation/inflation cycle have been expressed via our Q3 Theme of Reflation’s Rotation (reflating prices from their lows of y/y deflation) and now what we are calling for in Q4, a Rate Rotation (born out of accelerating y/y growth and price data).


Politicization of the US Federal Reserve aside (which you shouldn’t set aside), the two things that the Fed should care about in setting rate policy are:

  1. Growth
  2. Inflation

On the Growth front, at this point a monkey can tell you that Q4 GDP will be positive. On the Inflation front, the monkeys still need to be fed more data.


Altogether, GDP and CPI are lagging indicators, so we need to have a proactive forecast that bats at a higher average than the dismal forecasting one held by Bernanke’s stint  at the helm of the US Federal Reserve.


In terms of reported y/y deflation, the July 2009 CPI report of -2.1% is going to be the low for this part of the cycle. The October and November CPI reports are going to continue to be less deflationary, sequentially, and the bond market is already figuring this out.


Recently, TIPs and Gold have already traded at their YTD highs, discounting that reported deflation is a rear-view concern. As a result, now we see interest rates starting to discount the Fed hike that we have been calling for. Yesterday, the Fed futures had an 86% probability baked into the cake for a hike to 0.50% by the April 2010 meeting.


Only a month ago, probabilities weren’t betting on a hike until Q3 of 2010. Goldman still has NO hike for 2010 as their call. We’re on the other side them.


The question now is how right are the moves in both the 2-year and 10-year yields that Andrew Barber and I have outlined in the chart below? The two lines that matter most in our Macro model on this front are the TAIL lines. The TAIL, in our language, is the longest term duration that we use to manage risk (3 years or less).


The TAIL breakout line for the long end of the curve has held up since the US stock market started reminding the Depressionistas that this isn’t a Great Depression in April/May. On the short end (2-year yield) is where you see fits and starts of breakdowns and breakouts –this is called the politicization of the short end of US policy making.


When Bernanke finally signals that ZERO isn’t a perpetual policy, expect 2-year yields to blast off from this 0.98% level. A Q4 Rate Rotation is finally underway.



Keith R. McCullough
Chief Executive Officer


Chart of The Week: Rate Rotation - a1


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Very solid quarter but it's all about expectations.  Conference call should be somewhat upbeat.



Wynn reported what we thought were pretty solid numbers and handily beat the street's EBITDA for Vegas and Macau.  The numbers were pretty much in-line with our expectations, absent some high hold in LV and low VIP hold in Macau.  It's clearly all about expectations, though, and the stock action this morning clearly indicates that investors had hoped for better.  This is somewhat surprising since the Macau number should've been easy to estimate within +/- 5% and Las Vegas wasn't a disaster.  That's what happens when you trade at north of 15.5x 2010 EBITDA.  No surprise that MGM is down on WYNN's price action since we're pretty sure people are expecting a big number when they print next Thursday.



3Q09 Details

WYNN reported revenues of $773MM and $198MM of property level EBITDA , beating our revenue number by $3.6MM and our EBITDA number by $1.2MM.  Wynn Las Vegas EBITDA was $6.5MM above our estimate while Wynn Macau was $5.4MM below our estimate.



Las Vegas net revenues were $324MM vs our number of $307MM, and EBITDA was $70MM, $6.5MM better than our estimate.

  • Table drop was 5% lower than our estimate, however, higher hold more than made up the difference.  While 23.7% hold is within WYNN's normal range of 21-24% and actually below 3Q08 hold, in only 2 of the last 7 quarters has Wynn reported hold above 21%.  We were assuming a lower normalized hold in the 21% range given the fact that customers are gambling less and for shorter periods, thereby decreasing the average hold rate to 19.7% over the last 6 quarters. Using a 21% hold rate,  we estimate that revenues would have been $14MM lower and EBITDA would have been $6.8MM lower than reported numbers.
  • Slot win was $2.7MM below our estimate due to weaker slot drop -- 1.6% worse than our estimate and slot hold was 20 bps lower than 3Q08.
  • Hotel revenues were in line, however, occupancy was 6% lower than our model while ADR was $15 per night better at $210
  • Other F&B, entertainment, retail and other non-gaming revenues were strong, coming in $9MM above our estimate


Wynn Macau results were below our estimates with revenue $14MM below our estimate and EBITDA $5.4MM below our estimate.

  • VIP gross table win was $14MM below our estimate due to lower hold of 2.8% vs our "normal" rate of 3%
    • The 20 bps point hold differential would have resulted in $28MM of higher revenues and $10MM of incremental EBITDA
  • Mass table revenues were in line with our numbers
    • Wynn removed some more Mass tables for the 6th consecutive quarter
  • Wynn's slot revenue was disappointing, but some of that may be attributed to disruption of the slot floor reconfiguration and removal of 100 slots in the quarter
  • The addition of a new high-limit gaming salon with 40 machines opened ahead of schedule and the opening of two new private gaming salons with 29 VIP tables is also opening one quarter ahead of schedule


Other details:

  • SG&A (net of corporate and stock comp) was $6MM higher than we modeled, while corporate was $5MM lower.  This was due, we suspect, to some reclassification of expenses related to the Wynn Macau IPO

US Strategy – Heightened Volatility

The VIX  was up 9.7% yesterday and moved through and closed above its immediate term TRADE line of 24.13, which implies a break out on a short term duration and signals a heightened volatility environment on the margin.


On Monday, the S&P 500 closed at 1,066, down 1.2% and 3.2% over the past week.  Yesterday’s down day for the S&P 500 was on big volume which is bearish and notable since most major down days we have seen in the past three months have been on lower volume.     


The tight correlation between the US dollar appeared to be the catalyst behind the reversal in the S&P 500 from the positive open, as the dollar index was down on the day. 


The recovery trade was put into question as Financials, Materials and Energy were the worst performing sectors.  According to StreetAccount, there were reports that Senate leaders are negotiating to gradually phase out an $8K tax credit for first-time homebuyers; the XHB declined 1.5% on the day. 


Today we are waking up to the news that more countries are increasingly pulling back stimulus measures.  Specifically, Norway is likely to raise its interest rate by 25 bps tomorrow and India will begin its exit from monetary stimulus measures.  U.S. policy makers continue to lag their global brethren in the easing of stimulus, but can they be far behind? 


Yesterday, five sectors outperformed the S&P 500 and every sector was down on the day.   For the second day in a row, the three best performing sectors were Technology (XLK), Consumer Discretionary (XLY) and Consumer Staples (XLP), while Energy (XLE), Financials (XLF) and Materials (XLB) were the bottom three. 


Consumer discretionary was the best performing sector on Friday.  Again, the breadth of the outperformance was not particularly impressive, as the bulk of the outperformance was again driven by RSH and AMZN.  Media and housing related names were the biggest underperformers in the index.


The Materials and Financials were the two worst performing sectors yesterday.  The Materials (XLB) fell more than 2% for a second straight day on Monday, as the dollar rallied for the third straight day.  Within the XLF, the decline in the regional banks continued yesterday, and have now fallen four out of five trading days.


Today, the set up for the S&P 500 is: TRADE (1,066) and TREND is positive (1,013).   The Research Edge quantitative models have 9 of 9 sectors in the S&P 500 positive on TREND and 4 of 9 sectors are positive from the TRADE duration.  The only sectors positive on both durations are Energy, Technology, Consumer Discretionary and Consumer Staples.     


The Research Edge Quant models have 2% upside and 0.5% downside in the S&P 500.  At the time of writing the major market futures are flat. 


The Research Edge MACRO Team.



US Strategy – Heightened Volatility - s pperf

US Strategy – Heightened Volatility - chartoct27





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. <fashionnetasia.com>


-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. <wwd.com> <sportsonesource.com>


-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. <fashionnetasia.com>


-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. <fashionnetasia.com>


-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. <sportsonesource.com>


-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. <wwd.com>


-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. <wwd.com>


-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. <drapersonline.com>


-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 ferragamo.com in Italy and the U.K. immediately, and in the U.S. and other European markets in the next few months, Ferragamo said. <wwd.com>


-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. <wwd.com>





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.

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