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Ahead of the company analyst meeting tomorrow, corn is testing two-week lows. 


It was just two-weeks ago that the “street” was cutting estimates and downgrading SAFM due to higher corn prices.  Now look what is happening to corn. 


According to Farm Futures Daily, “Corn should open lower this morning, with more chart-based weakness emerging after a failed rally attempt overnight. Futures tried to bounce back at the onset of the electronic-only session, but lost ground after stock market losses in Europe deepened.  December futures are testing two-week lows below $3.65."


I certainly don’t expect the street to adjust estimates or ratings weekly on SAFM, but corn has a broken TAIL and a bullish TREND.  Within an industry that’s been wrecked/consolidated, broken TAIL prices are positive for producers.


We are LONG SAFM.  As we said two weeks ago, we do not agree that corn is headed much higher.  At the current prices for crude oil, Ethanol is not a concern and the bumper crop for corn will ultimately dictate the future of corn prices, which is likely lower.   Tomorrow, SAFM will be holding an analyst meeting updating the investment community on where the company is headed and on the state of the industry.  The industry dynamics are positive and SAFM is one of the best managed companies in the space.





US Strategy – Volatility, Take Two

On Tuesday, the S&P 500 closed at 1,063, down 0.3%.  Yesterday’s was the third down day in a row for the S&P 500 and it finally broke the trade line.  The heightened volatility continued yesterday with the VIX up 2.1% yesterday and has now moved 18.8% in the past week.       


On the MACRO front, the drag on the market seemed to be the weaker-than-expected October Consumer Confidence data. For now, Consumer Confidence continues to make a series of lower-highs (see the chart in our post from yesterday). Americans are not as stupid as Washington thinks they are. The Conference Board’s index of Consumer Confidence fell to a three-month low of 47.7 from 53.4 in September.


Yesterday, the Case-Shiller report showed that the composite index of home prices in 20 metropolitan areas rose 1.2% month-to month in August, above the consensus estimate of a 0.7% increase.  The magnitude of the increase, however, declined on a sequential basis for the first time in four months.  In July, the index improved 1.6% month-to-month.  Nonetheless, the rate of annual decline in home price values continues to improve. 


The question about whether these trends will continue to show sequential improvement rests on the upcoming November 30 expiration of the government's $8,000 tax credit for first-time home buyers.  Also impacting these housing numbers are the anticipated higher unemployment rates through year-end and the apparent trend toward lower consumer confidence numbers, which was more evident today following the disappointing conference board reading. 


These issues, coupled with a new wave of foreclosures hitting the housing market in early 2010, suggest that the improvement in pricing trends are sure to slow down and may even begin to deteriorate further.


Yesterday, four sectors outperformed the S&P 500 and three sectors were positive on the day.   The three best performing sectors were Energy (XLE), Healthcare (XLV) and Consumer Staples (XLP), while Industrials (XLI), Consumer Discretionary (XLY) and Materials (XLB) were the bottom three. 


The Energy sector was the best performing sector despite the pick-up in risk aversion and dollar strength.  Also helping performance was better-than-expected earnings and cost-savings guidance from BP. 


Managed care rallied today with the HMOs up 3.7%, following a decline of 2.7% yesterday.  Healthcare reform continues to be a major headwind for the group. 


Today, the set up for the S&P 500 is: TRADE (1,060) and TREND is positive (1,015).   The Research Edge quantitative models have 9 of 9 sectors in the S&P 500 positive on TREND and 3 of 9 sectors are positive from the TRADE duration.  The only sectors positive on both durations are Energy, Technology and Consumer Staples.     


The Research Edge Quant models have 2% upside and 1.5% downside in the S&P 500.  At the time of writing the major market futures are poised to open to the down side. 


The Research Edge MACRO Team.



US Strategy – Volatility, Take Two - S P500


US Strategy – Volatility, Take Two - s pperf


US Strategy – Volatility, Take Two - sv oct 28




October 28, 2009





I maintain my view that those with sophisticated dot.com infrastructure as it relates to branding, consumer experience, demand creation, procurement and order fulfillment will not only command a meaningful valuation premium as we head into 2010, but they will be targeted by retailers that are willing to blur the lines between new and traditional channels in order to keep pace with the consumer. Last night, GSI Commerce (GSIC), one of the largest e-commerce service providers, bought Rue La La for $350mm in cash and stock. I guess deals like this are easier to do when your currency is up vs last year. This values Retail Convergence (Rue La La’s parent) at 1.5x revenue, but at a much steeper 35-40x EBITDA given the thin margins. Perhaps that will be irrelevant as GSI scales Rue La La on to its own infrastructure – if fact that is part of the plan. Yes, this smells a lot like when Amazon bought Zappos, but it is far more relevant to the purchaser (now at $967mm in revs, but that goes to $1.2bn with a solid growth engine). People will start paying attention to GSIC. But this is only the first of many deals to come. (By the way, the ‘Terry’ in my title refers to Macy’s – a reacceleration in ecommerce is going to take this business a step back in time – again. Isn't he glad he consolidated it and now has a monopoly?).




Some Notable Call Outs


  • Now that JC Penney has a established a presence in Manhattan, it appears to be joining the creative pulse of the city as well. In an effort to promote the Olsen Twins’ new line of junior apparel, Olsenboye, JCP is selling the line (at a discount) and handing out free cupcakes out of a pink ice cream truck in NYC. This whole promotion sounds very Target-like…


  • Cabela’s 3Q results confirmed that the positive trend for firearms and ammo is slowing sequentially, largely due to difficult comparisons. Offsetting this slowdown was a pick-up in softgoods, which tend to carry higher margins. While the firearms trend is slowing, management did suggest there are still some types of ammunition that remain in short supply.


  • Iconix indicated that two of its portfolio brands that had trouble comping over the first half of the year are now starting to do well. This includes both Candies (Kohl’s) and Mossimo (Target). The pick up in Mossimo is notable, especially given the size of the brand and the commensurate positive margin implications it should have for Target.





-H&M Eyes Expansion in U.S. and Canada - Daniel Kulle, H&M’s new president of North America, has a can-do attitude. Neither the recession that has sapped consumers’ fervor to shop nor the competition from lower-priced mass merchants has dampened Kulle’s desire to expand in the U.S. “The potential in the U.S. market is very big,” he said. “We have the strength of a very good business. We have the people here. We have logistics, with three distribution centers. We have the framework to move more [product].” Of H&M’s 169 U.S. stores, most are on the East and West Coasts and in the middle of the country. Now the retailer wants to make a move on the South. In addition, Kulle said, “there’s loads of potential in Manhattan, Chicago and Los Angeles. We have seen that the U.S. customer likes us.” <wwd.com>


-Limited Details Major Overseas Push - After decades of taking it slow overseas, Limited Brands Inc. is charged up and aims to double international revenues to $2 billion in three years. “We’re taking it very seriously,” Limited’s chairman, chief executive and founder Leslie H. Wexner said during an analysts’ meeting in Columbus, Ohio, on Tuesday. “A paradigm shift happened in the last 12 months.” Wexner said the $1 billion in revenue currently generated abroad is “very profitable” and that Limited’s La Senza intimate apparel chain in Canada, acquired in 2007, is “an area of accelerating growth.…We will start plowing forward very aggressively.” <wwd.com>


-Tommy Hilfiger European retail sales soar - Tommy Hilfiger has revealed that global sales increased by 3.5% to EUR772m (£697.9m) in the six months to September 30. In Europe retail sales rose 24.4% with like-for-likes up 2.5%. However, European growth was offset by a slowdown in wholesale sales resulting in an overall sales decrease in Europe of 6.4%. Tommy Hilfiger, which is owned by Apax Partners, said that wholesale sales dropped in Europe because of a more cautious stance by wholesale customers and due to Tommy Hilfiger’s strategic decision to reduce its wholesale customer base. <drapersonline.com>


-Guess? Founder Georges Marciano Faces Bankruptcy Petition - Guess? Inc. co-founder Georges Marciano faces an involuntary bankruptcy petition from three former employees seeking $95.3 million.

The petition for Chapter 11 bankruptcy was filed in bankruptcy court in California yesterday by Joseph Fahs, Steven Chapnick and Elizabeth Tagle, who were among five ex-workers awarded $370 million in damages from Marciano by a Los Angeles jury in July. <bloomberg.com>


-Tesco to Create 1,000 New Jobs at Banking Unit in Newcastle - Tesco Plc, the U.K.’s largest retailer, said its banking unit will start a customer service center in Newcastle, northern England, creating 1,000 jobs. Tesco Bank, the supermarket chain’s personal finance unit, is expanding after starting a joint venture with Fortis U.K. to provide home and car insurance. Tesco has also added 1,000 jobs this year in the Scottish cities of Edinburgh and Glasgow, the retailer said today in a statement on its Web site. <bloomberg.com>


-Japan’s Retail Sales Drop 1.4%, Less Than Forecast - Japan’s retail sales fell less than economists forecast in September, adding to signs that consumers may be becoming confident about the resilience of the recovery. Sales slid 1.4 percent from a year earlier, the Trade Ministry said today in Tokyo, the smallest drop in 10 months. The median estimate of 13 economists surveyed by Bloomberg was for a 1.6 percent decline. <bloomberg.com>


-TRU Reveals Its Plans for FAO Schwarz - In time for the holiday season, FAO Schwarz will open branded in-store boutiques in Toys"R"Us stores nationwide, re-launch its e-commerce site and more. FAO Schwarz was acquired by Toys"R"Us in May 2009. A selection of FAO Schwarz's classic toys will be available on Nov. 1 within branded boutiques at 585 Toys"R"Us stores nationwide. Items will include the FAO Schwarz signature holiday ornament and 2009 collectible bear, as well as the brand's mascots, Patrick the Pup and his sister, Penelope, among others. The iconic FAO Schwarz large piano replica from the Tom Hanks movie Big will also be available. <licensemag.com>


-Cabela's Nearly Doubles Q3 Net Income; Raises Guidance - Cabela's Inc. reported that total revenue for the third quarter increased 2.0% to $624.3 million compared to $611.8 million for the third quarter of 2008. Retail store revenue increased 6.1% to $348.0 million led by a 3.5% increase in comparable store sales; direct revenue decreased 6.2% to $226.2 million as the company lowered direct marketing costs 15.1% resulting in increased revenue per catalog page; and financial services revenue increased 15.0% to $48.2 million. <sportsonesource.com>


-An apparel era ends in Winston-Salem - Hanesbrands plans to stop hosiery production at its Weeks plant by end of 2010, cutting 240 jobs. Hanesbrands said yesterday that it will end hosiery production at the 850,000-square-foot plant by the end of 2010, eliminating 240 manufacturing jobs and transferring 80 distribution jobs to its Almondridge Road center in Rural Hall. It will begin reducing production at Weeks -- its last Forsyth County plant -- in the second quarter. The company said that consumers have been purchasing fewer sheer-hosiery products for more than 10 years, with sales off 14 percent in 2008 and down another 18 percent through June 30. <journalnow.com>


-Poll Finds Holiday Shoppers Averse to Hype - Holiday shoppers are in no rush to get the season under way, but when the spirit seizes them, about half will spend between $300 and $1,000 on presents, according to a new poll by Zogby International. With Christmas decorations creeping into the stores and holiday ads and catalogues surfacing before Halloween in the past several years, 53 percent of those surveyed online from Friday through Monday agreed: “Christmas-holiday shopping should start after Thanksgiving and I do not like seeing decorations and hearing holiday music until then — when I’m ready to start shopping.” <wwd.com>


-Q&A With Geoffrey Miller, Author of “Spent: Sex, Evolution and Consumer Behavior” - Geoffrey Miller believes sex is a primary basis for how consumers decide what to buy. Miller, the author of “Spent: Sex, Evolution and Consumer Behavior” (Viking), is a professor of evolutionary psychology at the University of New Mexico and a consultant to companies such as Procter & Gamble Co. and The Coca-Cola Co. He argues consumers buy and wear what they do because of their desire to attract potential mates, rather than fashion trends. <wwd.com>





NKE: Phil Knight, Director sold another 577,600 shares  for a gain of $36.1mm.


COLM: Michael McCormick, EVP-Sales & Marketing, purchased 2,500 shares for $100k.



  • Douglas Jakubowski, President, sold 15,000 shares for a gain of $147k.
  • Jeffery Cohen, President Consumer Direct, sold 1,880 shares for a gain of $18k.


GPS: Marka Hansen, President-Gap Brand, sold 86,750 shares after exercising options to buy 86,750 shares for a net gain of $798k.


JWN: Margaret Myers, EVP, sold 11,500 shares after exercising options to buy 11,500 shares for a net gain of $357k).




As we often say at Research Edge, prices don’t lie. The market is always telling us something. Here are some names that are showing outside movements relative to the market, peers, and volume trends…


  • Retail stocks significantly underperformed the market yesterday with apparel, accessories, and luxury goods leading the charge down 5% followed closely behind by sporting goods down 4.6%.
  • Biggest losers of apparel, accessories, and luxury goods include CRI, UA, VFC, APP, ICON, LIZ, and MOV.  EVK and KCP were only the only positive stocks in apparel, accessories, and luxury goods but their gains were on low volume.
  • Every sporting goods retailer was down yesterday with GOLF, FINL, FL, and BGFV posting the largest losses on positive volume.
  • Footwear and consumer electronics were the only positive sectors yesterday.  Footwear was up on volume for the day while electronics was down.  Consumer electronics flashes as the best looking sector because it is green across all three durations, but internet and catalog retailers are nipping at their heels from AMZN's massive moves early this week.
  • LULU took the top spot for biggest gainer yesterday driven by its preannouncement of killer earnings.
  • HOV, FLWS, IRBY, SKX, and BBY deserve positive callouts for their gains across all durations.  Keep an eye on FLWS because it has flashed positive for the last 2 weeks and continues to move higher in the face of an adverse market.  With the total group of retailers down 5.2% on the 3-week, FLWS is up 36%.
  • Biggest losers are CRI, CMRG, ACAT, POOL, WINN, SMRT, and BBI.  CMRG rejoins CONN, BKS, and APP on the list on the biggest losers of the most durations after posting a few positive days this early this week.  APP remains hated on price and confirmed by volume.





This is a shameless plug for the BLACK BOOK I wrote on Buffalo Wild Wings…


The title of the report was “BWLD – DESERVING OF A PREMIUM MULTIPLE?”


In summary, my longer-term concerns center more around growth related issues, with the short term sales and cost trends top of mind.  I heard last night from the company that 4Q09 same-store sales are up 6%, but even with that top-line growth, EPS growth will be significantly below trend.  I’m not that big on doing a “review” of a quarter unless there is something significant that impacts my long term view of the stock.  I think there were some interesting trends in the most recent quarter that are consistent with my thoughts first put out in the BWLD Black Book.  We will be publishing on those trends shortly.  Needless to say, I think the best days at BWLD are behind them.







Marriott's timeshare securitization announced on October 21rst is a perfect illustration on just how much the securitization market has improved over the last 6 months



Last week, Marriott completed a pretty attractive securitization deal. Since several transactions occurred, the attractiveness of the deal may have gotten lost in the details.


In March 2009, Marriott completed a private placement of $205MM floating rate Timeshare Loan Backed Notes with a commercial paper conduit administered by JPMorgan.  The rate on that deal was 9.87% and Marriott contributed $284MM in timeshare mortgages to the trust, retaining a 28% residual interest in the trust.  Not only was the advance rate a stingy 72%, but all the cash flow from the trust was being paid entirely to the holder of the Notes for 12 to 24 months; and only thereafter, Marriott was entitled to begin receiving a return on its residual interest.


Earlier this week Marriott bought back the the March deal for $233MM and then sold $218MM of those loans plus another $168MM of loans on its balance sheet into a trust which then issued $317MM of Timeshare Loan Backed Notes at a rate of 4.809%.  The new notes had an advance rate of 83% and paid a rate 50% below MAR's issue just 6 months earlier.  In addition, while any principal repayments on the residual accrue to the bondholder, MAR gets to keep the interest payments on the residual from day one.


Now that's a pretty good deal. If HOT's deal is anywhere as good they should book a healthy gain on their note sale in 4Q09.


Tempered expectations for the quarter but bullish outlook for 2Q2010 and beyond



After watching WMS and WYNN get slammed after reporting what we believed were solid results, our expectations for Bally's release Thursday after close are "tempered".  Then again, the stock go crushed yesterday and it's not like we've been touting the quarter.  For us, the play is long-term.  BYI has managed strong year over year growth in EPS in one of the worst periods for slot sales we've ever seen.  Not too shabby.


For the fiscal Q1, we're slightly below Consensus EPS of $0.53 for 1Q2010.  We're guessing that some fear of a miss or lower expectations are priced in given that the stock has traded off 9% since 10/23.


As we wrote about on October 23rd, in our "WMS 1Q2010 PREVIEW", there weren't a whole lot of new and expansion units shipped this quarter and replacements should be down sequentially due to seasonality.  We estimate that BYI's shipments to NA markets in 1Q2010 were roughly 2,750 down from 4,001 units in 4Q09. We expect international shipments to be down about 5% since shipments to Australia won't be material until 2Q2010.  Our total new unit sales are just shy of 4,100 units with ASP's around $14,600.  The higher mix of conversion kits sold in the quarter and higher ASPs should help margins which we expect to be slightly north of 48%.


BYI gave pretty good guidance regarding it's systems business on its last call; stating that the June quarter was a trough at $47MM and that while the September quarter should be better it probably won't be a mid 50's quarter revenue wise. Our estimate for systems revenues is $50MM in 1Q2010 with margins at 75%.


Despite the September quarter being a seasonally weak quarter for gaming operations, we think that BYI could actually report better than expected results in this segment given the large number of games that were introduced over the last few months.  We estimate $74MM of gaming operations revenue in 1Q2010 at a low 70's margin.


While BYI did not provide quarterly guidance on its last call, we do think that they are more likely to do so on this upcoming call, especially if they miss the street number.  On the last call (see the "YOUTUBE" section below), BYI spoke extensively on how good the December quarter is shaping up to be.  We agree; the December quarter does look good to the tune of EPS of $0.65 vs consensus of $0.58.  Here are our preliminary thoughts on FQ2 (Dec):

  • Systems business should have a record quarter given the backlog
  • Materially more openings and expansions, as well as a seasonal uptick in replacements
  • Shipments to new international jurisdictions like Australia and Singapore
  • Strong backlog for game ops




  • We expect margin on our game sales will be in the high 40's over the next several quarters
  • Year-on-year sales of conversion kits increased by about one-third. This is a testament to our improving video content, which remains an opportunity and should result in additional conversion kit sales moving forward
  • There will be new and exciting international opportunities for Bally over the next 12 to 24 months. We've been building infrastructure in anticipation and our team is ready to execute. Markets such as Australia, Singapore, Italy and certain European countries remain the key focus for us
  • Our product pipeline for both gaming operations and sale games is stronger than it has ever been. Q4 saw the initial release of many new products...We've just launched our new Digital Tower Series of products and our new Jumbo cabinet. Our Fireball™ Digital Tower game is performing at levels between 2x and 5x half average in its initial installation. More games will follow to support the Digital Tower Series of games, and we believe this could be a great opportunity for our Gaming Operations business
  • Commencing in Q2, a new spinning wheel game and DualVision™ cabinet will be available for gaming operations
  • In game sales, we continue to produce world-class mechanical reel products. This range will soon include transparent reels in the much-anticipated classics, designed to replace valued estimated North American footprint of 40,000 to 50,000 successful but aging pre-Alpha Hi-D [high definition] north steppers
  • While the sentiment of our customers seems to be firming at this time, we are not predicting a significant uptick in the game-buying patterns for the remainder of this calendar year
  • We expect our maintenance revenues will continue to grow in fiscal 2010 to a range of $58 million to $62 million
  • Since April 2009, we have seen a significant pickup in systems-related purchasing decisions. This seems particularly true with respect to competitive replacements. Casinos deciding to replace their current, not very well supported systems with Bally's core and supporting systems products. This increased sales activity should positively impact systems revenue reported starting Q2 of fiscal 2010
  • Fragile state of the current economy gives us less than optimal visibility in the current year. However, we do see several specific positives for Bally in our fiscal 2010 when compared to our fiscal 2009.
    • First, we entered the new year with a higher level of gaming operations and systems maintenance revenues, and 48% of our Q4 revenues were recurring revenues.
    • Second, we have a larger footprint of games in the field to attack with conversion kits and our new model.
    • Third, internationally, we will be selling in some jurisdictions that are new to Bally.
    • Fourth, we have an enhanced product offering in both games and systems.
    • And fifth, there are margin opportunities in game sales, interest and other expenses
  • These positives will be partially offset by fewer expected new casino openings and expansions

  • Currently expect our fiscal 2010 diluted earnings per share to be in a range of $2.25 to $2.50.  Due to normal seasonal variations in our business and our expectation that general economic conditions will begin to improve in calendar 2010, we believe the earnings power of the company will be greater in the second half of the fiscal year.
  • [RE: Systems] September quarter may also not be as strong as those mid-50 numbers that you had seen in prior quarters. But that said, beginning in the April time frame, we saw our systems pipeline begin to build, and it's now at record levels, which is why Ramesh was so optimistic about our December beyond quarters for systems
    • We certainly would hope that the systems business would maybe have troughed in the June quarter, although I could say we're not going to give any revenue guidance for the September quarter on systems
  • We still believe that between the high 60s and low 70s, varying quarter-by-quarter based on jackpots and some seasonality, is the right range for gaming ops. Same thing on the systems, we think between 70% and 80% is the right gross margin range

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