US STRATEGY – Revisiting the “Bottomed Out” BUCK

On Monday there was no follow thru from the big move in the dollar on Friday.  Yesterday, the dollar index was down 0.2% to close at 75.76.  If the dollar index closes up today it will have been up three of the last five days.  Yesterday I started to make the case that if the dollar were a “stock” as an equity analyst I can make the case that the “fundamentals” are bullish.     Taken together - the labor market, the rising savings rate, the trade picture, corporate profitability and the Fed’s free money policy – do not support a weak dollar.       


Yesterday, the S&P 500 declined 0.2% and made a second outside reversal in as many days.  While there was not any BIG theme to drive yesterday’s performance, the S&P continues to show signs of breaking down.  Yesterday, comments from Fed Chairman Bernanke that the US economy faces "formidable headwinds" was a non event for the market.  The MACRO calendar is quiet today except for the ABC consumer confidence number due out after the market close today.   


Despite the Fed’s cautious comments, parts of the RECOVERY trade were alive and well yesterday.  The three best performing sectors were Utilities (XLU), Consumer Discretionary (XLY) and Materials (XLB).  Rising 6.8%, the XLU has been the best performing sector over the past week.  The XLY was the second best performing sector yesterday and for the past week, benefiting from the better labor markets.  Driving the XLB higher was OI (4.1%), DOW (2.0%) and BLL (1.8%). 


Driving the S&P lower was the Financials (XLF).  Within the XLF the REITs and regional banks were the biggest drag on performance; names such as KEY (4.4%), BBT (2.8%) and PNC (2.7%) were among the worst performers.  While there did not seem to be any specific news, it should be noted that the FDIC announced six more bank failures on Friday, bringing the year-to-date total to 130 from 25 in 2008 and 3 in 2007.


Helping to put some incremental pressure on the S&P 500 was the 4% move in the VIX.  In total seven of the nine sectors outperformed the S&P 500, but only three showed positive performance on the day.   The two sectors that did not outperform were the Industrials (XLI) and the Financials (XLF).  Energy (XLE), the other sector broken on TREND, was down 0.2% in line with the S&P 500.      


From a risk management standpoint, the ranges for the S&P 500, the Dollar Index and the VIX are seen in the charts below.  The range for the S&P 500 is 35 points or 1.5% upside and 1.5% downside.  At the time of writing the major market futures are trading slightly lower.


Crude oil is trading lower as the dollar is stronger in early trading today.  The Research Edge Quant models have the following levels for OIL – buy Trade (74.30) and Sell Trade (78.11).


Gold is basically trading unchanged on the day, but the trends are still bullish.    The Research Edge Quant models have the following levels for GOLD – buy Trade (1,150) and Sell Trade (1,186).


Copper is higher for the first time in four days on the back of the Fed’s comments.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.09) and Sell Trade (3.26). 


Howard Penney

Managing Director


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Alternative to cap-and-trade deserves a...

SKX: Wellness/Toning Category Has Legs

As we head into the key holiday selling season in the absence of real broad-based consumer-driven demand, it’s important to note the product trends that are helping to drive relative outperformance. One such trend has been women’s fashion boots as highlighted in our 11/09 post “The Boot Heat Map.” The other (though arguably less publicized) trend has been in what has been dubbed the “wellness/toning” category, comprised of product’s including SKX’s Shape-Ups and Reebok’s Easy Tones. With retailers beginning to recognize the contribution of wellness product in 3Q, it will play in increasingly more important role in 4Q performance and beyond for retailers and SKX alike.


Strong demand for wellness shoes was one of the keys to our view ahead of SKX’s 3Q results. Since then, the Street has increased FY10 estimates by 50% to $1.50. While we remain meaningfully above current expectations by nearly 25% at $1.85, we are mindful that the gap has narrowed considerably over the last month as expectations have clearly risen. So the question remains – is the Shape-Ups trend more Crocs-like, or Ugg-like in duration?


I’m leaning towards the latter given the view that “function” is less fickle than fashion. While SKX is busy at work trying to introduce some level of creativity into the category in the form of different uppers (boots, sandals, leather, shearling, etc..) for next year, the wellness benefits are not to be overlooked.  Whether you buy into the true technical benefits of the curved sole which is said to promote better posture, toned legs, and ease joint pressure the reality is that the perceived benefits are driving demand and product awareness.  The category is expected to see a substantial influx of marketing dollars being spent on the category across all brands and SKX is well positioned with its current market leading position.  Other brands in the category include the original MBT and Reebok.


In an effort to size the opportunity for wellness I incorporated DSW’s recent commentary that this category could represent 2%-3% of total revenues. Assuming that same share of revenue for other footwear retailers like SCVL and BWS (Famous Footwear) and then 1%-2% for others including  DKS, TSA, HIBB, FINL, and FL one can derive a $135-$215mm opportunity.  Add to that the sell-through at department stores like Macy’s and Nordstrom’s (SKX is back at JWN for the first time in three years) and you can add an additional 50% in revenues getting arriving at a market size of ~$200-$300mm domestically.  Note, that doesn’t include smaller chains and independent retailers. Given tests thus far, simply doubling the domestic opportunity to account for international market potential is likely to prove conservative. Taking this approach, we get to an estimated ~$400-$600mm global opportunity for wellness shoes.  Given Shape-Ups dominant position in the category, it is evident that not only is this trend at its early stages, but also that it also has legs.


For better perspective on the wellness category, we took at look at the commentary of several footwear retailers from Q3. Like boots, wellness/toning is one of the few product trends that is being called out and is still likely to drive upside in 4Q:


DSW: The position we've taken is we started with our key partner, Sketchers, and everybody has the Shape-ups program and we tested that late in Q2, early in Q3 and saw some very very promising results and positioned ourselves to be in a very strong position for 4Q going into 1Q so that is where we've taken the majority stake in the toning product. We are, however, testing product from other athletic resources in a good, better, best, price point so we'll test everything from a 39 all the way up to $79 price point in addition to the $100 Sketchers shape-up that's out there right now. Some of the early results from these test items have proved very promising…even having said that, I think you're really looking at two, maybe 3% of your total business, the total DSW business being in this toning product.


BWS: We anticipate consumer purchasing patterning will be similar to those that we saw in the third quarter…as such, we ramped up our 4Q receipts of key categories and brands, most notably boots and wellness product, which we think will be the key drivers through holiday and into spring lead by Sketcher Shapeups and Reeboks Easy Tone.


SCVL: We anticipate continued strength in the athletic category and are enthusiastic about the opportunity to have two new significant product lines in the wellness category with Skechers Shape-Ups and Reebok Easy Tone Shoes…to take full advantage of this hot selling category we have taken a strong inventory position in Wellness. Therefore, inventories are up 2.4% on a per door basis with boots and Wellness accounting for all of this increase. With the expected continued strength in boots and Wellness footwear, we currently expect our comparable store sales in Q4 to increase in the range of 3 to 5%.


We had a few stores with Wellness product in August. Actually we delivered that product early in the second quarter, and then as we saw the product selling through early in the second quarter and in August, we bought for additional stores for September. Then we bought for more stores in October and as we move through fourth quarter all stores actually within the next one week, all stores would have. So the inventory built during the quarter and as the inventory built product reap the benefits of the sale.


We have no way of telling whether or not we are bringing in a new customer. We do know, we have a unique   concept. As we get product in and refill of this product has been selling out and we've been filling it back in…so we actually believe that our customers are stepping up for this product, and they've been looking for it.


We saw the trend early, and we tested those shoes in about 25 stores in early spring as soon as we can get them. And when we saw the sell through, very aggressively went after it and as the sell through continues, the more stores we put them in, we got even more aggressive. So I'm feeling very confident that we are well covered in Wellness as we go through spring.


HIBB: We actually have the toning…and we'll see that grow into our next year as well and build upon it. As long as we see good marketing around, supporting the programs now, we'll be able to support it from our end as well.


GCO: We are not involved in the wellness business. We know it's very important for a lot of footwear guys. We don't think it hits our customer. We're really much more of a fashion retailer…It's an older demographic so we've chosen thus far not the play.



After meeting with COO/CFO David Weinberg last week at FFANY, we came away from the meeting with a few key takeaways: business is currently strong, Shape-Ups is still in its infancy, and that the opportunities to exceed earnings estimates in the near-term appear to be high. This sentiment is illustrated (and supported) in the follow charts. Note that while unit volume at retail declined in October according to NPD data, Shape-Ups as a % of SKX revenues continues to grow reflecting typical seasonality (see Figure 1).



Casey Flavin



Figure 1:

SKX: Wellness/Toning Category Has Legs - SKX ShapeUp PercentSales 12 09



Figure 2:

SKX: Wellness/Toning Category Has Legs - SKX ShapeUp Units 12 09



SKX: Wellness/Toning Category Has Legs - SKX S 12 09



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By the Numbers

Research Edge Position: Short UK (EWU)


From our seat we’ve watched European fundamentals slow sequentially over the last months while unemployment (9.8%) and inflation (est. +0.6% in Nov. Y/Y) have accelerated moderately across the region. Although we’ve seen little rhetorical movement in monetary policy from the ECB to raise rates, the bank’s recent announcement to withdraw its emergency stimulus measures has accelerated investment risk for countries with levered balance sheets. In particular, and combined with the news from Dubai World, countries like Greece and Turkey (and even some Eastern European countries that remain levered to Western European banks and foreign currency) have seen manic swings in their equity markets over the last two weeks, while other markets like Russia (RTSI) have corrected from frothy YTD highs.


As the largest economy in the Eurozone, the German economy remains an important proxy for regional health. As the graph below depicts, Factory Orders have slowed sequentially over the last months and although rising on an annual basis, they are still well off historical levels. We attribute this trend in particular to the expiration of country’s cash-for-clunkers program, a strong Euro, and increased fears associated with future joblessness. 


While we’re on balance bullish on the German economy over the intermediate to long term, our stance on the UK remains bearish and we’re short the etf EWU in our virtual portfolio.


Matthew Hedrick



By the Numbers - orders


No slowdown post Golden Week.  SJM steals the show yet again.



We expected November to be strong, but 63% y-o-y growth was better than almost anyone's projection.  Not only did business not decelerate post-Golden Week but it actually accelerated.  Adjusted for higher sequential hold in the month, y-o-y growth would still have been close to 50%.  Easy comps, the strong stock market recovery, lax visa restriction enforcement, the new CE, and new supply were probably all contributing factors to the furious recovery in Macau.  For all the reasons noted, and the coming visit of the Chinese Premier, the pace of growth could continue to exceed expectations through the first quarter of 2010.


While the rising tide lifted most all ships (well almost all - sorry, Altira), SJM continued to outpace its competitors.  LVS lost share due to weaker relative performance at Venetian but Four Seasons showed huge growth once again.  If Four Seasons stabilizes at these levels the property may be able to earn close to $50MM of EBITDA, way ahead of consensus projections.



Y-o-Y Table Revenue Observations:


LVS table revenues up 38% with almost all the growth coming from a 62% increase in VIP revenues

  • Sands was up 63%, driven by a 120% increase in VIP and 4% growth in Mass
    • VIP growth was largely driven by easy hold comparisons.  Sands suffered weak hold in November 2008 of around 1.6%, assuming 10% direct play.  If we assume 12% of total VIP play was direct in Nov '09, this implies hold 3.3% this year. 
    • Junket VIP RC increased 11%
  • Venetian was up 14% with VIP increasing almost 18% and Mass increasing 8%
    • Junket VIP RC increased 3.7% and hold appears to be roughly 50 bps better y-o-y
  • Four Seasons was up 248% y-o-y driven entirely by VIP growth 
    • Junket VIP RC increased almost six-fold to $881MM vs $133MM.  In 3Q09 FS also derived 50% of its RC from direct play versus having almost no direct play in 4Q08.  Therefore, if the direct play is material, volumes could be up even more y-o-y than the junket numbers imply
    • However, FS's very strong growth in VIP will be somewhat masked by low hold that we estimate to be in the 2.0%-2.2% range, assuming direct play was between $250-350MM


Wynn table revenues were up 34%

  • Mass was up 19% and VIP increased 38%
  • Junket RC increased a massive 66% which was somewhat offset by weaker hold
  • Assuming 9% of total VIP play was direct in Nov '08 and 12% was direct in Nov '09, we estimate hold declined 50 bps to 2.5% in Nov '09 


Crown table revenues grew 92%

  • Altira was down 21% (the only property in Macau with lower November revenues)
    • VIP roll was down 25% and hold was in the normal 2.85%-2.9% range
  • CoD table revenue was up 16% sequentially, benefiting from better hold than October m-o-m
    • Mass continued to ramp growing 18% m-o-m to $26MM
    • Junket VIP RC fell 13% sequentially.  It appears that CoD's junket play is stabilizing in the $2.4-3BN monthly range
    • Despite what the company said on its 3Q09 conference call, we saw that there was 10.3% direct VIP play as a % of total VIP roll.  If we assume that the direct play as a % of total VIP play is closer to 12% these last 2 months, it appears that hold was around 3% in November and 2.3% in October


SJM continued its hot streak, with table revenues up 114%

  • Mass was up 38% and VIP was up 191% 


Galaxy table revenue was up 44%, driven by a 45% increase in VIP win and a 39% increase in Mass

  • Starworld continued to perform well with table revenue up 53%, driven by 54% growth in VIP revenues and 38% growth in Mass win


MGM table revenue was up 38%

  • Mass revenue growth was very strong at 53%, while VIP grew 35%
  • Junket rolling chip was up 36% 



Market Share:


LVS share decreased to 20.8% from 23.7% in October, but higher than September's 19.6%

  • Sands' share decreased by 1% to 7.5% sequentially
  • Venetian & FS share decreased to 13.3% from 15.3% in October


WYNN's share at 12.1% increased slightly from a low of 11.9% in October



Crown's market share increased to 12.9% from 11.9% in October

  • Altira was one of the only properties to experience revenue declines y-o-y in the month of November


SJM's share increased to 33.1% from 31.6% in October



Galaxy's share decreased slightly to 12.3% from 12.8% last month

  • Starworld's market share grew to 9.9% from 9.4% in the previous month


MGM's share increase to 8.9%, from 8.0% in October, was mostly hold driven



THE MACAU NOVEMBER DETAIL - Macau Total Bac Rev Share Nov







TLB: NOL Stocking Stuffer

At the close on Friday I noticed a common thread among several of the days’ top outperformers (i.e. TLB, CHRS, LIZ, & DDS) – we had highlighted them a month ago (“Bill Critical for Ailing Retailers” on 11/08) as key beneficiaries of the Business Assistance Act of 2009. While talk of the benefit has crept into late 3Q earnings calls (e.g. CHRS last week), the benefit of this legislation is still flying under the radar of most investors and will provide meaningful relief to some of the smaller undercapitalized retailers.


After speaking with several companies on the topic, there are a few considerations helpful in trying to quantify the materiality of this benefit:


1)      The bill only applies to domestic losses

2)      Re timing of cash receipt:

  • if claiming ’08 losses, process can be underway now but can take 2-3 months to get paperwork in order from start to finish.
  • if claiming ’09 losses, have to wait until taxes are filed for the year (some companies could realize in Q1, but not until 2Q for most).

3)      There are restrictions re eligibility of losses

  • Has to be a valid deduction (e.g. a pure reserve on the books that has not been realized is NOT valid).

4)      A company can recoup up to ~35% of eligible losses



So why revisit this topic now? With TLB reporting tomorrow morning, it’s worth noting given that short interest is at 38% second only to October 15th when it had reached 42% and the stock was 60% higher. While this legislation is hardly the catalyst to send shares back to recent peak levels, it’s important to note the cash infusion – particularly with TLB’s revolver expiring in the 1Q of 2010 that could result in a near-term reprieve.



Casey Flavin


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