RETAIL FIRST LOOK: Case Building Against Dollar Stores


December 14, 2009





Anyone check out the USDA report on food stamp usage? 11% of the population on the program is the highest level in recent history – above any other recessions in the past 40 years. Where do people on food stamps get the most bang for their stamp? Hint…73% of DG’s mix is consumables, and 4% of sales comes from food stamps.



With one out of every eight Americans now receiving food stamps according to a USDA report out late last week, receipts of the government subsidy continue to hit record levels. While inherently bearish for the US economy, one benefactor of this trend is Dollar General for which food stamps now represent roughly 4% of sales. We’d argue that this is yet another unhealthy factor that helped drive this business in recent years. Is it any surprise that consumables are now 73% of the mix at DG (up from 72% yy), and its private label sales are up to 21% of consumables? Nope. Note to dollar store management teams… accelerating growth in your footprint (see our comments last week about these guys being among the few striking new real estate deals) after an unhealthy comp peak driven by a trade-down effect and mix-shift, and unsustainable cash flows is simply not the best capital deployment strategy.  You can’t straight-line business trends into perpetuity – especially when you’re at the top of your game. We firmly believe that DG and others that benefitted from the ‘trade down’ effect over the past two years will be key shorts in 2010.


RETAIL FIRST LOOK: Case Building Against Dollar Stores - Food Stamps Historical Participation Rate


Source: USDA Food and Nutrition Service Program Data;




  • In one of the more aggressive moves to help drive market share gains, Gildan announced that it offered a special distributor inventory devaluation discount to wholesalers when it lowered selling prices in October. This move essentially adjusted customer inventory that was already purchased to reflect the price reduction. The company also announced that it expects selling prices to be down 5% on average in 2010 compared to low-single digit declines realized this year, reflecting further evidence of continued supplier pricing pressure.
  • While the sales performance of Christmas trees varies from region to region so far this holiday season, the overall season is expected to generate $1 billion in sales of natural trees. Additionally, 35% of consumers who celebrate Christmas are expected to purchase trees this year, up from 25% in 2008. A quick search suggests that tree sales are performing well, although weakness is occurring in areas where weather has been challenge.




Nike puts its best footwear forward with two product launches - Nike , the world's largest sportswear company, likes to keep its eye on the ball, writes Jonathan Birchall . Last week, as the world was obsessed about the private life of Tiger Woods, the golf champion who endorses the company's golf brand, Nike pressed ahead with two new product launches. Both reflect its efforts to maintain its premium brands through technical and performance-focused innovation. Its new Total90 Laser III soccer boot costs $200, but includes new design features and links to online soccer coaching sessions. At $165, the Zoom Kobe V basketball shoe will be about $45 more than the current Zoom Kobe IV model, but is about an ounce lighter, using technology developed by Nike for its running shoes launched at last year's Beijing Olympics. The Kobe shoe will also be on sale on New Year's Day in China, Nike's second-largest market, two weeks before it reaches US stores. However, sales in China turned negative this year after the dramatic Olympic-year gains, while US sales have also declined. <>


New Balance Inks New Korean Distributor - New Balance has entered into an exclusive 11-year Korea distribution agreement with E-land, also known as The Group, an integrated fashion and retail company in Korea, as part of the company’s plan to expand its presence in key international markets. The distribution agreement commences on January 1, 2010 and will include New Balance product distribution and a license to design and produce New Balance Lifestyle apparel. “New Balance is proud to partner with The Group, a market innovator and leader in the fashion and retail business in Korea.” says Rob DeMartini, President and CEO, New Balance.  New Balance will also open a New Balance Experience Store in Korea in 2010. The company currently has 187 points of sales in Korea and plans to increase this to 280 by 2012.  New Balance has had a presence in the country since 2000. <>


CoutureLab Goes Brick and Mortar -, the luxury Web site that sells one-off designs and handmade pieces by brands and artisans from around the world, has sent a satellite from cyberspace onto the streets of Mayfair. The site has opened its first brick-and-mortar boutique, a 1,400-square-foot space at 37 Davies Street, between Claridge’s and Selfridges, that offers a look at the CoutureLab offer — and a forum for craftsmen to showcase their work. “A store was always in the plan,” said Carmen Busquets, who founded CoutureLab in 2007 and is one of the investors behind “Sometimes on CoutureLab, you can miss the attention to detail. And consumers get frustrated when they see a one-off item on screen, and it’s already gone.”  <>


All Points East: The Expanding Asian Market - Luxury goods companies and fashion houses shifted their focus Eastward in 2009 with a flurry of store openings and special events. While China and other emerging markets in Asia certainly felt the impact of the economic crisis, they did so to a considerably lesser degree than the U.S., Japan and Europe. And companies eager to offset slumping sales in many corners of the world reached out with increasing frequency to new customers in Hong Kong, Shanghai, Beijing, Singapore, Macau and elsewhere — even Mongolia. Much of this year’s retail expansion activity was focused on China, and for good reason. In a recent report, J.P. Morgan estimated that most companies registered sales growth of more than 40 percent in Mainland China in 2009 as its customer base, including locals and travelers, increased by more than 30 percent. Analysts Melanie Flouquet and Corinna Beckmann forecast the Mainland China consumer base will grow another 25 percent in constant currency terms in 2010, while that of the rest of Asia, excluding Japan, is seen rising 10 percent. <>


Fashion Joins the Social Media Revolution - Social media has turned the fashion world — and just about every other world — upside down. This year, Dolce & Gabbana was so enamored of bloggers, the company sat them in the front row, displacing some department store executives. YouTube has made stars of beauty maven and single mom Lauren Luke, and fictional misfit Fred Figglehorn. Middle-school fashion blogger Tavi Gavinson, 13, skipped classes to attend Marc Jacobs’ runway presentation and other shows. Designer houses like Louis Vuitton are live-streaming their fashion shows; Ralph Lauren, Chanel, DKNY and Gucci are among the many labels with iPhone apps, and Alexander McQueen is tweeting. And now the idea that “if you are not online, your customers will be” is a standard theme at <>


Free-shipping, home-page promos ramp up in drive toward Christmas - Among the top 100 online retailers, 73 offered free shipping deals during the week of Monday, Dec. 7, up from 68 a week ago and the highest total since Internet Retailer began tracking free shipping offers in early November. In the comparable week a year ago, 71 offered free shipping. In addition, 81 retailers in the top 100 also presented major promotional displays on their home pages—many highlighting potential gifts and discounts of 40% or more—and a number of retailers followed up with special e-mail offers to shoppers who had signed up for e-mail promotions. Among the e-mail promotions, one of the most robust was Kohl’s, which sent a different e-mail every day, with offers such as 25-65% off electronics and 50-60% off outerwear. <>


Congress Pushes Trade Office Budget Boost - Congress sent a $447 billion spending bill to President Obama on Sunday that would boost the budgets for the nation’s two top-trade agencies and increase funding for China enforcement offices and trade remedy oversight. The legislation, passed by the House on Friday and the Senate on Sunday, increases appropriations for dozens of government agencies in the 2010 fiscal year, which began Oct. 1, and adheres closely to the priorities of the Obama administration. The majority of Democrats have placed a premium on reshaping the trade agenda by tightening enforcement laws and pursuing trading partners, particularly China, which violate trade rules and hurt U.S. manufacturers. To that end, Congress increased the budget of the Commerce Department’s International Trade administration to $456.2 million from $429.9 million in the 2009 fiscal year. The Import Administration, a division of the ITA that monitors textiles and apparel and investigates antidumping and countervailing duty trade cases, will receive $68.2 million, up from $66 million.  <>


Bill Blass Group Files Suit - Bill Blass Group filed a lawsuit last week in a Manhattan federal court against its former beauty licensee, alleging breach of contract and trademark infringement claims. Blass said in court papers that it terminated its fragrance and cosmetics deal with First American Brands on Nov. 6 after the licensee missed royalty payments. According to the complaint, First American Brands has failed to respond to Blass’ “significant efforts” to contact it. “Given [the] defendant’s patent refusal to communicate, BBG can only assume that this former licensee is proceeding as if the license agreement had not been terminated and is continuing to sell and manufacture products,” Blass’ attorneys wrote. A spokeswoman for First American Brands said Friday she was not aware of the suit and would not comment. Blass is seeking an injunction, $5 million in punitive damages and $150,000 for breach of contract, among other relief. <>

Fat Cats With Broken Noses

"I did not run for office to be helping out a bunch of fat cat bankers on Wall Street”
-President Barack Obama

Now isn’t that a heroic one-liner from a President who is in a must need situation for a political win? If he understands the math associated with who financed these bonuses, I should hope he is including He Who Sees No Bubbles (Bernanke) and Timmy Geithner in this all encompassing populist attack on bankers.
There is another Political Fat Cat in Italy who has been living rather large as of late. He figured hot tubbin’ with teenagers was cool until his wife found out. Italian Prime Minister, Silvio Berlusconi, learned his lesson the hard way this weekend after taking a statuette of the Milan Cathedral in the melon.
Berlusconi is no hockey player. Apparently a broken nose in Italian Government gets you a couple days in the hospital. In hockey speak we call this getting your medicine.
Whether it is world markets cheering for another dose of Big Government Intervention in Dubai this morning (the UAE is trading up over +10% on “news” of a Abu Dhabi hybrid government bailout) or the reality that we have created Citigroup bankers who are too big to fail, the conclusion here is pretty obvious. Fat Cats aren’t just purring on Wall Street. They are in Washington and they will be seeing politically broken noses when their citizenry figures out the simple truth.
In the US, the truth of the matter isn’t about Democrats or Republicans. It’s about a bubble in Big Government. The Fat Cats in investment banking are simply paying themselves via the system of rules that our government empowered them with. Populist anger with banker bonuses should not be one-dimensional. For a politician in this country to call that out as something that they didn’t help finance is over the top. It’s time for the President to “get” this too.
Back by popular demand this morning, for all you Piggy Banker fans, this is the way banker compensation works. There is this thing called the Piggy Banker Spread (financiers call it the Yield Spread). It’s the spread between the short end of the yield curve and the long end (10-year minus 2-year Treasury Yields). This morning that spread is trading within 3 basis points (or 0.03 percent) away from its widest spread EVER!
Ever, President Obama, is a long time. You are currently signing off on fiscal and monetary policy that creates this Fat Cat Spread for the bankers to chow down on. Yes, this is how the math associated with borrowing from your citizenry’s savings accounts works. You give prudent American savers ZERO as a rate of return. At the same time, Piggy Bankers borrow at ZERO. Then they lend that money out to the citizenry (after they pay themselves) at higher rates of return.
Sorry Big Man, your definition of Fat Cat has a broken nose. And this one might take more than a few days in the hospital to fix.
Away from the most politicized US Treasury and Federal Reserve in modern finance, what’s driving this? Fear. This is the classic political move of fear-mongering to create a crisis that the politicians want to be credited in solving. The short end of America’s yield curve has been fear-mongered into the pig trough. This morning’s rate on 3-month US Treasuries is 0.02%. Yeah, I’m sure the Chinese love that as much as I and anyone with an American savings account does.
Fortunately, free markets are pricing in reality on the long end of the curve. Yes, the Fat Cats with broken political noses can tell you we need to maintain “an emergency level of ZERO percent for an exceptional and extended period”, but at the same time the rest of the world is free to mark these assertions to market. We are now seeing an intermediate and long term breakout in the yield of 10-year US Treasury yields as a result.
At 3.52%, I have 10-year yields busting a move above both of the most influential lines in my global risk management model:
1.      Intermediate term TREND line = 3.41%

2.      Long term TAIL line = 3.21%

At the same time I have the US Dollar breaking out to the upside above both its TRADE and TREND lines:
1.      Immediate term TRADE line = 75.33

2.      Intermediate term TREND line = 76.30

Are these two factors (US Dollar and US Treasuries) highly correlated? You bet your Madoff they are. They are leading indicators for the President Obama and his internal czars of Perceived Financial Wisdom to have a mea culpa on interest rate policy too.
This week is a critical one for those of us who are still data dependent. On Tuesday and Wednesday, we are going to see a continued REFLATION of the US producer and consumer prices. Yes, there was a time in the land of nod when He Who Sees No Bubbles (Bernanke) said we were going to have a Great Depression in prices. But, once again, the data has proven him wrong. The YTD low for CPI in the US was established all the way back in July at -2.1%. Now year-over-year inflation is about to go positive.
Bernanke’s inflation forecasting track record speaks for itself. It’s flat out awful. He would never be hired by us knuckleheads of the gridiron to manage marked-to-market P&L risk. That’s why they saved a special place for him in academia and Washington where forecasting is a revisionist historian’s profession.
I am looking forward to the US Government’s latest storytelling this week. The Fed’s Open Market Committee decision on Wednesday won’t disappoint in terms of political pandering. Fat Cats with broken noses dancing on the hot-stove of You Tube should be an interesting show.
My immediate term support and resistance levels for the SP500 are now 1096 and 1113, respectively.
Best of luck out there today,

EWZ – iShares Brazil
As Greece and Dubai were blowing up, we took our Asset Allocation on International Equities to zero.  On 12/8 we started buying back exposure via our favorite country, Brazil, with the etf trading down on the day. We remain bullish on Brazil’s commodity complex and believe the country’s management of its interest rate policy has promoted stimulus.

XLK – SPDR Technology
We bought back our position in Tech on 11/20. Rebecca Runkle has an innovation story in Mobility and Team Macro has an M&A story in our Q4 Theme, the “Banker Bonanza”. We’re bullish on XLK on TREND (3 Months or more).

GLD – SPDR Gold We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.   


CYB – WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP – iShares TIPS
The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

EWJ – iShares Japan
While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

XLI – SPDR Industrials We shorted Industrials again on 11/9 on the up move as the US market made a lower-high.  This is the best way for us to be short the hope of a V-shaped recovery.   

XLY – SPDR Consumer Discretionary We shorted Howard Penney’s view on Consumer Discretionary stocks on 10/30 and 12/2.

SHY – iShares 1-3 Year Treasury Bonds  If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.


With Citigroup repaying TARP and Abu Dhabi bailing out Dubai, markets are rallying across the board.  The only green not on my screen is the NIKKEI 225, down small.  The Tankan index (confidence among Japan’s largest manufacturers) rose the least since the economy emerged from its worst postwar recession as the strong YEN will erode profitability.


Last week the MACRO calendar dominated the news flow.  On Friday the S&P finished higher by 0.4% on fairly quiet trading.  On the MACRO front sovereign issues and TARP repayments seemed to be top of mind, but on the margin there were a number of positive issues.  Last week the Dow rose 0.80%, S&P rose 0.04%, but the NASDAQ declined 0.18% and the Russell declined 0.40%. 


On Friday the Dollar index closed at 76.573 up 0.7% on the day.  The Dollar index was up three of the five trading days last week.


The RECOVERY theme gained momentum with the better-than-expected increase in Chinese industrial production.  In addition, the retail sales data and the U. of Michigan consumer sentiment data helped retail and Consumer discretionary stocks in general.  The Consumer Discretionary (XLY) outperformed the S&P 500 by 210 basis points last week. 


Better consumer sentiment and improved retail sales numbers are leading to a breakdown in the RISK trade.  Positive MACRO data out of the US traditionally suggests the RISK trade will outperform.  Right now we are seeing a strong dollar with stocks up, led by the low beta Utilities (XLU). The breakdown in the inverse relationship between the dollar and risky assets is new. 


After falling early in the week, the retailers rallied strongly on Thursday and Friday.  Better-than-expected November retail sales and December consumer sentiment data created a positive underlying tone for the group. 


The notable underperformer on Friday was Technology (XLK) – the only sector to close down on Friday.  After being a star performer for two weeks the Semis have now become a headwind with the SOX down 1%.  BRCM was one of the weaker names in the group ahead of next Tuesday's analyst meeting.  Elsewhere, telecom equipment names were mostly weaker with JDSU, TLAB and CIEN taking the group lower.  Weaker-than-expected November NPD data weighed on most of the video game stocks, while the MOBILITY names were also under pressure. 


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 17 points or 1.0% upside and 1.0% downside.  At the time of writing the major market futures are trading slightly higher.


In early trading today, crude oil is trading lower for the ninth day, and is poised for the longest decline since July 2001.  Declining on supply and demand issues crude is now down 15% since October 21 – the year-to-date high.  The Research Edge Quant models have the following levels for OIL – buy Trade (68.79) and Sell Trade (74.30).


In London Gold is trading basically unchanged.  The Research Edge Quant models have the following levels for GOLD – buy Trade (1,090) and Sell Trade (1,147). 


Copper is up for a second day with dollar down and optimism that demand from China will be strong.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.10) and Sell Trade (3.26). 


Howard W. Penney

Managing Director















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The Macau Metro Monitor.  December 14th, 2009.



SJM Holdings will open Macau’s 34th casino tomorrow in an attempt to take a larger share of the mass market.  Following an investment of HK$1.5 billion, Casino Oceanus is set to open with 260 mass-market gaming tables and 560 slot machines spread over three floors and 32,000 square meters.  2,400 people will work at Casino Oceanus.  With no VIP service and no junket operators, and a direct connection to Macau’s main ferry terminal through a covered footbridge, Oceanus is, according to SJM chief executive Ambrose So Shu-fai, targeting “pure mass market”. 


Regional markets laid an egg in November with same store revenue down 7%, and that’s without the gas headwind.



We estimate that same store revenue in the regional markets declined 7% in November (only LA and MS haven’t reported).  November 2009 did contain one fewer Saturday but the comparison (-4%) wasn’t exactly difficult.  Combining October (one extra Saturday) and November yields a y-o-y decline of 4%.


Given October’s decent performance, many analysts are undoubtedly disappointed.  Other consumer sectors fared better in November – retail sales were surprisingly strong – which furthers the trend of gaming underperformance.  Gaming continues to face a combination of soft discretionary spending and a declining share of the discretionary wallet (see our 10/19 note “THE DOUBLE PCE WHAMMY TO GAMING”). 


Add a third negative factor to the mix:  gas prices.  As shown on the following chart, y-o-y gas prices will be up significantly in December and this headwind will persist through the first quarter at least.  Changes (y-o-y) in gas prices have historically been a statistically significant driver of gaming regional gaming revenues.  That’s bad news for the regional gamers already facing other headwinds.


AS EXPECTED, NOV DISAPPOINTED THE ANALYSTS - regionals vs gas projection


What does this mean for the stocks?  The regional gaming stocks have underperformed the market as can be seen below.  The stocks are not overly expensive but 2010 numbers probably need to come in.  Until they do, it’s hard to make a strong bull case for the group.



The Week Ahead

The Economic Data calendar for the week of the 14th of December through the 18th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - wa14 1

The Week Ahead - wa14 2