JACK’s 4Q09 6% same-store sales decline at its Jack in the Box concept came in significantly worse than my estimate, street expectations and management’s guidance of -2.5% to -4.5%.  Making matters worse, trends have deteriorated further with management forecasting a 10% same-store sales decline in fiscal 1Q10 based on trends in the first seven weeks of the quarter.  We have a seen significant slowdown in QSR trends, particularly at the concepts that have relatively more premium product offerings and relatively more geographic exposure to California.  To that end, maybe I should not be surprised by these results, but JACK’s underperformance did shock me because trends fell off so dramatically from the prior quarter, with comparable sales declining 500 bps on a 1-year basis and 270 bps on a 2-year average basis.  A -10% number in Q1 would imply another 245 bp sequential decline in 2-year average trends.


Like last quarter, management attributed the sales weakness to rising unemployment (12%-plus level in California) and increased industry discounting with the biggest fall off in trends continuing to stem from lower breakfast, side item, beverage and mid-tier priced sales.  Specifically, management thinks its sales suffered from its strategic decision to go off air with its new product news as the company allocated more advertising dollars to its value offerings, which according to management, were just not compelling enough.  In response to a question, management stated that BKC’s $1 double cheeseburger, which was launched nationally in October, could also be impacting JACK’s sales trends in the current quarter.


Going forward, management thinks it is extremely important to balance its advertising budget behind both its premium and value messages.  In this environment, it is somewhat surprising to think that more advertising behind premium offerings would help, which is concerning because even the significantly lower same-store sales guidance for full-year 2010 of -3% to -7% assumes a sequential improvement in 2-year average trends throughout the year from current Q1 trends. 


If the economic environment does not improve in the near-term, I have a hard time believing that premium offerings will drive traffic higher.  According to management, being more promotional and offering an increased number of value items are not helping either.  JACK was only on air with its value promotions and traffic has not improved in Q1.  And, management said that significant check erosion was responsible for the sequentially worse trends quarter to date.  This leaves the company in a difficult position.  Increasing value at the expense of average check only makes sense if it is getting more people in the restaurant.


JACK’s full-year 2010 guidance of 15%-16% restaurant level margins implies that margins will be flat to down 100 bps YOY despite the expected 3%-7% decline in same-store sales at Jack in the Box.  As I pointed out last week in reference to CKR, these operators cannot continue to hold margins (even considering current refranchising initiatives) with demand decreasing so significantly.  Keep in mind that food cost favorability will moderate and go away.  For reference, commodity costs were down about 5.5% in 4Q09 with beef and cheese down 17% and 31%, respectively.  This level of YOY commodity favorability drove food and packaging costs as a percentage of sales down 320 bps YOY in 4Q09 and helped to push restaurant level margins 220 bps higher on a YOY basis despite the 6% decline in comparable sales.  This favorable offset to declining sales will not last.



SCVL/PSS: Yet Another Family Footwear Retailer Smokes

SCVL/PSS: Yet Another Family Footwear Retailer Smokes


There’s a lot of smoking going on these days in family footwear, a space we’ve favored for two quarters now. PSS is the way to play it. I am getting worried that hype is growing – but in the end it is still not in the numbers.


SCVL crushed the quarter on every item, lining up fundamentally to exceed the street and guidance for at least the next 2 quarters.


EPS: $0.59 vs. Street of $0.30 and Research Edge estimate of $0.40

                Comps were up an impressive +10%, or 2.5% on a 2-year trendline basis. Average price per pair sold was up 5.5%, footwear units sold were up 4.3%, and traffic was up 5.7%.  Favorable product mix shift towards high priced footwear such as boots and athletic helped drive the comp. This represents the largest comp number in the company’s history.  Comp guidance was low to mid single digit comp increases.


Revenue: +12.6%, massive sequential increase from -3.6% in Q2, 2yr jump as well. 


Stores: Opened 4 stores and closed 1.  Planning on closing 6 stores in 4Q, an increase of 1 store closure compared to previous guidance.  Stores are working efficiently as sales per square foot grew by 11% for 3Q which was the first positive growth point since Q2 07. 


Gross Margin: increased by 260bps to 29.8% compared to 27.2%.

  • The merchandise margin increased 110bp primarily as a result of:
    • Less clearance product (inventories +5% on 12.6% sales growth)
    • Strong boot sales, which carry a higher margin.
  • Buying, distribution and occupancy costs decreased 150bps, which was largely due to comp leverage.

SG&A: SG&A dollars grew by 6% but as a percent of sales fell by 150 bps, on top of a 3% decline in the year-ago quarter.  The increase in SG&A was due to additional costs related to incentive compensation and employee benefits and to a lesser degree advertising and added store operational costs.


Commentary from CEO Mark Lemond: "Our large selection of value priced name brand footwear resonated well with consumers resulting in the highest third quarter comparable store sales gain in the Company’s history. We experienced higher than expected sales of athletic product during the back-to-school season and very strong boot sales later in the quarter. Our 10.2% comparable store sales gain was significantly above our expectations for a low to mid single digit comparable store sales increase for the quarter. The sales increase, combined with a higher gross profit margin and controlled expenses, resulted in our second best quarterly earnings in the Company’s history."


We’re looking at $0.32 for Q4 versus the $0.03 that the street was estimating before the results were announced. 



Comps +3% to +5% in 4Q, which suggests -4.4% in underlying trend. CEO admitted on the call that guidance was very conservative.  {note, I’ll give them the benefit of the doubt on good 4Q comps given that 3Q inventory was positive. We need to be weary of retailers whose inventory is TOO lean at end of 3Q. It there’s a snap in pos demand in holiday some companies might (ironically) be leaving money on the table.}


SCVL/PSS: Yet Another Family Footwear Retailer Smokes - SCVL SIGMA


SCVL/PSS: Yet Another Family Footwear Retailer Smokes - SCVL image 1


SCVL/PSS: Yet Another Family Footwear Retailer Smokes - Table for SCVL


SCVL/PSS: Yet Another Family Footwear Retailer Smokes - comp trends chart SCVL




Takeaways from G2E Las Vegas trip



All the manufacturers had impressive content, but I’m not sure anything we saw at the show will change ship shares IN THE NEAR TERM, grow the market, nor will good content change the fact that.

  • There aren’t many new facilities opening up in FY2010
  • None of the new domestic markets will really come to fruition in FY2010
  • Manufacturers are hopeful but have yet to see a real pick up in the replacement market


In the longer term we think that manufacturers are cognizant of the need to reach younger players and are attempting to reach that player through features like:

  • Skilled or the appearance of skilled gaming
  • More community elements to bring some of the excitement of table games to slots
  • Personalization
  • Greater use of sound and color


One of the trickiest things is figuring out whether the better content we saw this year will actually grow the market or just cause existing players to migrate away from older games they were playing.  I don’t have the answer but I think, in the short term, it’s very hard to grow the market in the current economy.


Most manufactures showed a large number of games which utilized past hit titles and added additional features to enhance level of excitement surrounding the game (bonusing, wheels, community features, tournaments etc).


More focus on participation games and more talk about bundling.


All the manufacturers had touch screen features that I thought were pretty cool.


What’s the difference between BYI’s iView DM and IGT’s Service Window?

  • To the player, these two “windows” look roughly the same and have the capability of providing the same services and applications.  The major difference is that BYI’s window has a bar across the bottom of the screen as well as a pop up on either the right or left side of the base game.  IGT allows each player to customize the look and feel of their service window and only comes across the left side of the monitor
  • To the operator there some major differences, IGT’s Service window is built into the game CPU so if it’s not a new AVP box or a new WMS box that comes with the built in feature you can’t add it.  BYI’s iVIEW DM is a standalone hard drive that sits on top of a game’s CPU.  This means that you can add the service window feature to any new or old video slot machine and while opening the box of an IGT or WMS game voids the warranty on the game we would wager that if operators really wanted to do this than IGT and WMS would probably need to work with them… we’ll wait and see what they do at Pechanga
  • IGT has developed a server window interface which will allow operators to get the service window on non-AVP IGT machines through the Next Gen hardware which will come to market in June 2010…. They are not currently developing a similar bridging solution for non-IGT games


New markets:

  • Illinois: shipping to this market should begin in Sept 2010.  IGT already has a distributor agreement signed as does WMS (Betson).  Aristocrat (ALL.AU) and BYI in negotiations with distributor
  • All the manufacturers are in talks with Italian concession holders.  We should see some shipments in FY 2010
  • Australia:  WMS is testing products that will address the ~ 130k club market, believe that IGT and WMS are addressing the smaller casino market (20k games)


Manufacturer highlights:




For sale games:

  • BYI has a nice looking new Pro-series (alpha 2 cabinet) being launched this year
  • More than just one title for the V32 cabinet should translate into more traction in video sales
  • While the new reel product (replacing the aging S6000s) may have looked boring to the video player or investor, we heard some good feedback from the operators

Participation games:

  • The U-Spin game definitely stole the show for games that are going to be ready for commercialization within the next few quarters
  • Two-seater games “Meet in the Middle” and “Move around the Board
  • Digital Towers
  • Hot Shots Progressive with a wheel bonusing features

Future games (12 -18 months away):

  • The iVIEW Display manager was impressive.  Instead of a button panel, BYI has a touch screen panel that has the feel of an iPhone.  Players can customize the panel and have multiple options of how to initiate spins.  The new touch functionality will also allow them to introduce more “skilled based” games where players can “roll” balls etc.  Remember that BYI still has rights to the Atari library
  • Alpha 2 pro-series box – great graphics/sounds and touch functionality
  • BYI has a “MLD” like product – with LCD projection over curved glass behind an LCD screen.  This curved glass really creates a similar feel to traditional spinning reels - we expect that BYI will develop interesting transmissive overlays on the front screen in the coming months.  We believe that unlike IGT’s MLD, most operators who purchase this game will use it as a true substitute to reels




WMS did a great job on content – big “wow” factor.  The company had obviously focused its R&D on growing the gaming market by appealing to that younger 30-50 yr old demographic.


WMS continued to rollout successful features like adaptive gaming, community gaming, and sensory emersion/“emotion” across more of their content and add more features to updated versions of successful franchises.


New franchises like “Lord of the Rings” and “Price is Right” were particularly impressive and had a number of “hooks” that provided the secret sauce to the success of “Wizard of Oz” and “Star Trek”.


Future games (12-18 months away)

  • WMS is still the only company that recognizes players no matter where they play, but now WMS is going to try to increase player/casino loyalty by allowing players to continue to learn about the game from home… basically tapping into that MMOE universe.  This should attract younger players, create enhanced player loyalty, venture into online “gaming”, without the wagering, by letting players to continue the game experience at home
  • WMS will be using the top LCS screen on top of base games to create new bonus game content (mega multipliers, community mega multipliers/Meta Screen, Winner’s Share) which they will sell on a fee per day per license basis in FY2011.  Should materially enhance the performance of base games…currently in trial at a few locations





Consolidating platforms should boost cash flow generation as they refresh roughly 20k games every year.


The MLD/AVP platform is really letting IGT produce some great for sale product.


Introduced new participation product that uses some of WMS’s success of episodic gaming and player recognition.


New “Sex in the City” and “Cougar” titles were intriguing.


The 103/70 FT screens can be used to refresh participation content with minimal cost (“American Idol”, “Wheel of Fortune Spin”, “Wheel of Fortune Puzzle”).


“Skilled based” reel game with the joystick driven “star” bonus round that should appeal to the younger 30-50 crowd.


IGT is really utilizing and sharpening their MLD technology, we expect that they for an extra $3K many casinos will opt for the AVP MLD games vs the regular video product.  IGT is expecting that 25% of total game sales will be MLD in 2010; we wouldn’t be surprised if it’s even higher with the new bonus features and enhanced content/titles available on that platform.


IGT has something called “discovery gaming” which is similar to WMS’s adaptive gaming concept.  Discovery gaming isn’t truly server based – since the game will only recognize players at a particular facility.  IGT said it will take them roughly 24 months to become truly server based with this concept.  Discovery gaming will be featured on the “Quest for Lost City” game.


The multi-play (4 games occurring at the same time) and press and play features on many of IGT’s for sale titles were interesting. 

the macro show

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Where’s Waldo?

I happened to be watching US Secretary of the Treasury Tim Geithner getting skewered on Capital Hill this afternoon and thought--if Keith weren’t on a plane right now he would be having a field day at “Timmy’s” expense. 


Keith has said in the past that the “New Reality” is that we have a Treasury Secretary who has no qualms watching the Buck burn. In short, Keith has stressed that the long term credibility of the US Financial System has been eroded by flooding the system with dollars. 


Ironically, on the day that Tim Geithner gets hammered the dollar stages a 0.5% rally and the market gets smoked.  I suspect this will be a topic for the Early Look tomorrow…   


Last week the Fed Chairman started talking about "watching" the U.S. dollar.  While Geithner and Bernanke can sit back and watch all they want they only have two options for firming the dollar’s value: intervene or raise interest rates. Raising interest rates would be a fundamental shift the Fed will pursue sooner rather than later, but is not likely right now, given the fragility of the economy and the financial markets.


As the resident bear in the office, the most severe economic downturn in generations continues.  At best, some key statistics such as retail sales and housing have bottomed out at lower levels, yet given the contraction in consumer credit and increased unemployment, the traditional avenues to renewed growth are just not available today to bail out the economy.  Certainly, the current level of the S&P 500 does not reflect the underlying economic and financial-system reality.


Howard Penney

Managing Director


Where’s Waldo? - geithner


On Cusp of The Anniversary

On Cusp of The Anniversary


ROST is inching closer to anniversarying one of the best periods in history for off-price inventory acquisitions.  Add to that eight quarters in a row of inventory declines (while sales have accelerated) and it’s hard to envision anything but a deceleration in momentum is on the horizon.


Another quarter of strong results for ROST, with 3Q EPS of $0.84 coming in inline with the Street and recently raised guidance.  Embedded in the results are well controlled inventories (down 7% against a 12% total sales gain), coupled with solid same store sales, which ultimately was the key driver of substantial gross margin expansion (up 340 bps).  There’s a lot to like about the quarter except that the results are now in the past and it’s time to look ahead.  3Q09 marks the 8th quarter in a row where the company as reported a decline in inventories and a positive sales/inventory spread.  The combination of better buying (i.e lots of quality goods at great prices) and impressive inventory management per foot has yielded dramatic gross margin expansion. 


All of this is evidenced below as both ROST and TJX are among a very short list of companies that have hovered in the “Sweet Spot” of our SIGMA analysis for so long.  With management’s reiteration of prior 4Q guidance below the Street ($0.88-$0.94 vs. Street of $1.00), it’s hard to ignore that this stellar run may be slowing on the margin.  Expectations remain high here and the opportunity for further margin expansion at as great a pace as we’ve seen is just not likely.  Inventory reductions, shrinkage, fuel cost benefits, and favorable buying conditions are all slowing on the margin and will no longer provide the tailwind necessary to keep momentum moving forward at the current pace.


On Cusp of The Anniversary - ROST and TJX


*Note that there is an r-squared of 0.9x of stocks going down when the SIGMA line turns south in quadrant 1.


On Cusp of The Anniversary - ROST SIGMA



DKS Better Have a Good Answer For This


The company printed a solid quarter, but as evidenced below it suggests a massive roll in 4Q top line. They’re going to need to give solid detail as to why this should be the case.



DKS Better Have a Good Answer For This - DKS CompDiscGuid 11 09



DKS Better Have a Good Answer For This - DKS ImpliedComp 1yr2yr Trends 11 09

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