- While it may not pass the statistical level of significance, posted Base Mass table minimum bets seemed to move a little higher in July as can be seen in the first chart below. This represents the first positive move on the Base Mass side in a year for this dataset
- We view table minimum bet levels as a pricing mechanism set by the casinos to respond to or entice demand
- The data is observed so it is not perfect. As such, we would caution investors into reading too much into one data point. Rather, it is more prudent to wait for confirmation in August and September
- Unfortunately, the rest of the data is negative. Premium Mass minimum bet levels confirmed the year-long segment trend again in July as did observed average bet levels for both Premium and Base Mass segments (seen in the 2nd chart)
Takeaway: One month doesn’t make a trend, but a slightly positive Base Mass data point emerges among mostly negative trends
Takeaway: Macy’s business model is a short from where we sit. Unfortunately the stock probably isn’t.
Conclusion: Macy’s business model is a short from where we sit, but the stock probably isn’t. It took down 2H expectations to a point we think is doable. Until then, there’s a perceived call option on real estate value – even though we think that’s a bad idea for M.
Everything about Macy’s quarter screams “late cycle”. The -1.5% comp de-levered into -24% decline in EBIT, and a 38% decline in Cash Flow – despite a 7% increase in credit income (extra $0.02 per share – now 30% of EBIT). That’s the worst performance we’ve seen out of Macy’s since 1Q09 – when we were knee deep in the Great Recession. There was a clear note of caution about softness in the economy, which is the second time we’ve heard that in as many days from a retailer that missed (Hibbett being the other).
Despite the weakness in 2Q due, in part, to general softness in the economy, the company noted that Back-to-School started off well. But that’s something we take with a grain of salt, as the company (and others) almost always say that they’re pleased with initial trends – if nothing else, from a PR perspective.
In fact, just last year Macy’s said...
“Well, the end of the second quarter, back-to-school was extremely strong at the start. We will see as it goes through the season, but we feel very good about it.”
Only to come back 13 weeks later to tell us…
“We were disappointed, however, that we did not sustain the momentum of the strong start to our back-to-school business...”
Guidance for the remainder of the year is a mess. The company actually held its annual constant, but now that includes a $250mm gain on property sale – part of which appears to be from future expected cash flows. So that’s about $0.46 per share. When we back out the $0.12 2Q miss, it suggests that – on an operating basis – 2H numbers are coming down by $0.34, or 10%. This isn't a slam dunk by any stretch, as it suggests 8% 2H growth excluding the gain on sale, which compares to -15% in 1H. But with the excess inventory Macy's is sitting on (see SIGMA below) its likely to drive comp, albeit at lower margin.
There’s one area, however, where we give this management team all the credit in the world (aside from financial engineering). It’s knowing what to say and do to take investors’ attention off the key issue at hand (weak core). Today that took the form of two separate press releases regarding 1) an e-commerce joint venture with Li & Fung/Alibaba, and 2) The renovation and partial monetization of a downtown Brooklyn property. Neither of these two are material to results, but the headlines suggest otherwise. Also, management said enough to keep the activists at bay as it relates to monetizing large parts of the real estate portfolio. That subsequently keeps a bid on the stock as hope springs eternal for a Macy’s REIT (see below).
Despite the weakness in the quarter and the major structural issues plaguing its business model, we don’t really consider this one a great, or even a good, short from here. It appears cheap on earnings and cash flow, and there’s a definite call option on store monetization. We’re simply avoiding it on both sides until we see a change in the research, the price, or both.
HERE’S WHAT WE SAID ON 7/16/15 AFTER THE REIT ISSUE WAS PUSHED INTO THE FOREFRONT
Takeaway: We don’t dispute the M REIT math. Just because it could happen, does not mean it should.
We want to be clear about where we stand on the whole Macy’s REIT issue.
Up front let’s just say — it makes sense. When this became a potential issue six months ago, we removed the name from our active short list. Note that as it relates to this week, the concept of a REIT is not new. The only new component is Starboard going activist on making it happen two days after Macy’s sold off a store in Pittsburgh.
We want to be crystal clear that the way to be positioned in this space into our #growthslowing Macro call is to be short KSS. There is ZERO potential for Kohl’s to be monetized as a REIT.
There Is Zero Real Estate Play At KSS. The same strategy that gave KSS the upper hand in a pre-Internet era is the same one that takes away any optionality on a take out. It’s real estate is worth very little. The company owns 413 out of its 1164 stores. But they are almost entirely located in strip centers. JCP, for example, has 140 stores in ‘A’ malls (the top 300 malls in the country). KSS has less than 10. When you look at the economics, there are 1100 regional malls, and there have been maybe 5 built over the last decade. If you are a retailer who owns a piece of that real estate (the equivalent of beachfront property – there’s simply no more being made) then you’re in luck. But there are 7,000 strip centers. They’re literally a dime a dozen. Using the same metaphor, it’s like having a beach home, but being a half-mile walk to the ocean.
As it relates to Macy’s there are a few considerations.
1) First is that we don’t think that the property values argued by Starboard are egregious. Keep in mind that Saks recently monetized its 5th Ave store for $3.7bn. When we look at Macy’s Herald Square, Chicago, and San Francisco properties, we don’t dispute that we could be looking at $6bn+ in value right there.
2) But, and this is a HUGE but…These exceedingly valuable properties are currently a massive freebie. Macy’s pays zero rent on them. Unless you want to assume that the operating company goes away — i.e. is worth zero — then Macy’s has to pay rent back to the future landlord. The more valuable the property is, the higher the rent, and the lower the margins. A $24bn value in the analysis below suggests that Macy’s would have to pay about $1.5bn in extra rent. Do you really want to cash in the crown jewel assets of an uber-cyclical and levered business, weigh it down with rent occupancy payments, potentially buy back stock (as some are arguing to us) at the top of a growth and margin cycle — only to leave Macy’s with no levers left to pull when the environment inevitably goes the other way? Yes, you’ll have sold assets at the top, but will have locked in rent at the top too.
3) The CEO and CFO at M are easily the most financial savvy executives in all of retail. If doing this kind of deal made sense, we think they’d probably have done it already. That said, CEO Lundgren has maybe a year or two before retirement, and Hoguet (CFO) has maybe a couple years more. This could potentially alter their appetite for a deal as it relates to creating a legacy. We’re just not so sure that’s the legacy they want to create.
4) If a deal comes to fruition, we wonder who will be on the other end? We know for a fact that there’s a market for one-off properties — like Macy’s Pittsburgh property that it monetized earlier this week. In that instance, Macy’s sold it and exited the market. It didn’t belong there. We’ve also seen instances where several stores were sold at a time. But 446 stores worth 89mm square feet and 5% of total apparel and accessory retail space in the US? We be really interested to see how liquid the market is for that kind of space.
Takeaway: We added McDonald's to Investing Ideas on Tuesday, August 11th.
THE HEDGEYE EDGE
MCD's business performance has been in decline since 2012. Earlier this year, they began drifting away from their value messaging, taking the small fries off the Dollar Menu in 2H 2012, followed by the McDouble in 2013. The final straw was when they stopped nationally advertising the value message in the beginning of 2015. All of that is now behind us. MCD has new leaders in place.
In addition to new leadership, MCD has reorganized the way it operates. For the first time in its history, the company is aligned by like markets versus geography. This has had the greatest impact on Doug Goare, President of International Lead Markets (he used to be the President of Europe in which he ran 40 markets and managed roughly 100 people.) Goare now oversees five key markets and has about three to four people supporting him. This is a big change to the business model. Goare is no longer distracted by less important markets. His time is freed up to focus on what is critical to the company.
We continue to get more bullish every time we talk to the company, franchisees and/or customers which we have polled via conducting surveys. This ship is in gear and headed north. 2015 will be the last time this stock is below $100.
INTERMEDIATE TERM (TREND) (the next 3 months or more)
Management has brought back the value message with the $2.50 Double Cheese Burger and Fries deal. Although off to a soft start, they have corrected mistakes. This deal is not the final solution; management is still working with franchisees on a more permanent national solution for value.
With all the improvements being made to the food and environment within the MCD restaurants, we continue to believe the inflection point for this stock with be the third quarter of 2015. We expect management to tell investors they see the light at the end of the tunnel and are nearing growth in the U.S. business. Additionally, there is an analyst meeting in November (after the 3Q earnings comes out) where we expect to learn more about cost savings initiatives, receive further updates about the turnaround and management’s guidance for 2016.
LONG TERM (TAIL) (the next 3 years or less)
We are going to be looking at a much different company 1-3 years from now. Urgency has been instilled from the top down by new CEO Steve Easterbrook. He wants more speed and is encouraging people to get things done faster. The food and experience provided to the customer will greatly improve over the coming months as “Experience the Future” is implemented across the system. It won’t be instantaneous though, as MCD has a lot of work to do around changing the perception to bring back customers it may have lost.
Things like All Day Breakfast, responsibly sourced ingredients, and bringing back the value proposition will lead to increased sales and customer satisfaction. While this company is too big to be completely fixed overnight, management has the right plans in place. We are confident in where they are headed.
ONE-YEAR TRAILING CHART
the macro show
what smart investors watch to win
Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.
Takeaway: Mgmt is having difficultly communicating with the street; something it can't afford given the fundamental headwinds across its business
- F1Q16 = LANGUAGE BARRIER: Mgmt failed to properly flag the financial impact of the suspension of its lottery business and the transfer of its SME business to Ant Financial. Collectively, these headwinds hampered total revenue growth by 8 percentage points, leading to F1Q16 revenue growth of 28% vs. consensus expectations of 33%. Note that we were also taken by surprise (covered Short) since we didn't understand the financial impact of the suspended lottery business either. These lapses in communication could become a recurring issue since BABA is a foreign company (less stringent reporting requirements) that doesn't provide financial guidance.
- FUNDAMENTALS STILL SOFT REGARDLESS: China Retail revenue growth still decelerated to 29% (ex lottery); below street expectations of 31% that we thought were light heading into the print. That compares to 32% and 39% in F3Q15 and F4Q15, respectively. GMV continued to slow, growing 36% y/y (ex lottery) vs. 40% and 49% in in F3Q15 and F4Q15, respectively. Take-rates also inflected lower on a y/y basis, with desktop take-rates declining at its sharpest y/y rate in BABA's reported history.
- MOBILE OR DESKTOP, NOT BOTH: We're referring to the mobile debate. The bull case is that mobile take-rates will ascend to desktop levels. Our bear case is that one grows at the expense of the other, and the two will most likely converge rather than meet up top since we believe that traffic mix is predominant driver of each (see note below for detail). We suspect mobile take-rates may start topping out with mobile traffic mix already at or above 85% (our estimate).
Let us know If you have any questions or would like to discuss in more detail.
Hesham Shaaban, CFA
BABA: Tactical Cover
07/16/15 08:46 AM EDT
BABA: The Mobile Debate
03/04/15 10:34 AM EST
Editor’s Note: Below is a transcript of Hedgeye CEO Keith McCullough’s remarks on The Macro Show yesterday morning following the big news out of Beijing. If you would like to subscribe to our live, interactive show where we take subscriber questions click here.
* * * * *
Today’s top three things:
You wake up to these non-linear, central-planning surprises, but you also wake up to something that is proactively predictable within the non-linearity. What do I mean by that? It’s non-linear because it’s a surprise. This of course is the biggest move in 20 years by the Chinese. But it’s a 2% move, so some will say, “Oh ho-hum. It’s not that much on an absolute basis.” But again, history will tell you that when a country starts to move down the slippery slope of an ideological path which is the proactively predictable point, it’s the first of many.
It’s the first of many.
So the Chinese have done effectively, they’ve tried almost everything that America has taught them… and Japan has taught them… and Europe has taught them… But now they are going to go to the wood and going to start to devalue their currency.
Every country in modern human history has tried this. You’ll note that it hasn’t worked. Maybe they don’t have to be beholden to that reality because they are a communist country? But again, it is what it is this morning.
The Chinese stock market—get this—is down one basis point on the news. One basis point on the news. So they’re centrally puppeteering this whole thing at this point.
It’s also telling you that the GDP number that they had allegedly in the second quarter (which they reported within a week of the second quarter ending, which was just magnificent) is not a 7.0. The 7.0 is just not a 7.0. With exports down -9%, what they’re doing now is panicking. They’re panicking. They’re making moves that they didn’t think they’d have to make this quickly. Again, trying to centrally plan a stock market and at this point devalue the currency should sound very familiar to countries that have panicked in the past.
It is what it is.
The regional fallout on that—Thailand, Taiwan, Indonesia, Singapore—big, big places, at least in terms of what has mattered historically to Asian asset allocation, Asian foreign currency asset allocations, equity markets. These markets are down 4-6% in the last month. If you didn’t know why, now you know.
The Chinese are going to start to compete with not only their customers, but with their people. With their people, they lose purchasing power. When you devalue a currency of a person, you can try it at home. You can take a Canadian loonie and just cut it in half, and you will say, “Wow that is worth less than what it was worth yesterday.” It used to be illegal in the US to do that, its called clipping coins.
So again, this is what it is. This is going to have much more unintended consequences than any of us could possibly think of right here.
During this recent edition of RTA Live, Hedgeye CEO Keith McCullough pulls no punches as he walks though the rising risks in the market with macro analyst Darius Dale.
Subscribe to Real-Time Alerts today for access to this and all other editions of RTA Live.
Subscribe to Hedgeye on YouTube for all of our free video content.
Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.