R3: Grounded Consumerism


December 22, 2009





Based on a recent survey, a surprising number of Americans indicate that the recession has actually had a positive impact on their lives.  In the wake of such an eye opening response, there is likely a longer term impact on how retailers and their customers think about the new reality of “grounded consumerism”.



We don’t often read too much into consumer surveys, however a recent study caught my eye.  The Context-Based Research Group recently released its findings from a 1,000 person survey (arguably a small sample) aimed at examining the changing attitudes and behavior of American consumers in the wake of the recession.  Sounds like a bunch of touchy-feely stuff, but I have to admit the results are very interesting and worth thinking about as we contemplate an eventual economic recovery.


The study, which is a follow-up to a similar one conducted one year prior, discovered that the recession has actually had a positive impact on people’s lives.  Amidst all the job loss, housing turmoil, and heightened stress, 43% of respondents indicated that the recession has actually been a positive. Huh?  Even more interesting is that those who have been most impacted by the recession feel the same way as those that have been least impacted.  Score one for what Context-Based Research calls “grounded consumerism”.


The simple fact is that consumer shopping habits and  social habits have shifted over the past year.  The obvious changes come in the form of fewer trips to the mall, buying private label, and cutting back on luxury purchases.  However, the less obvious consumer changes are coming in the form of more altruistic acts, be it spending more time with family and friends or actually engaging in volunteerism.  I’m not writing this as a call to arms for everyone to quit their day jobs and head to a soup kitchen, but rather to suggest the floodgates of retail and consumerism may not re-open as fast as we might think to the extent that this survey is representative of the US Consumer at large. 


Job creation will most certainly go a long way and there is no doubt more cash in consumers’ wallets will help to rebalance the playing field between value, moderate, and luxury retailers.  Mall traffic will pick up and discretionary products will sell once again.  However, the winners in the future may no longer be as obvious.  Retailers will have to be more strategic and less “in your face” in an effort to reduce their “transactional” images and to enhance their positive social messages. Price may not ultimately be the key driver of demand.  At the end of the day a retailer is always going to be focused on the next sale, but a little understanding that the consumer of tomorrow may no longer be all about consumption, consumption, consumption may ultimately be the best strategy. 


Eric Levine





  • Walgreen’s management believes that consumers are waiting longer than ever to make holiday/seasonal purchases. As a result, the focus on the this week is more important than ever, with the bulk of sales still to come. Walgreen is one of the few retailers open for business on Christmas Day.
  • In an effort to reinforce the retailer/customer relationship, JCrew has once again sent its best customers a personal gift. In the past, the company has been known send a small item in appreciation for their business. This year’s gift is a day planner, which was sent out last week. While most retailers are looking to cut costs, this certainly stands out as an example of one retailer that is investing the future. The ability for JCrew to create one on one relationships with its core consumer is in fact eye opening in today’s world of retailing.




Uniqlo Ramps Up Growth in Europe - In central Paris, where Uniqlo opened a 23,000-square-foot flagship on Oct. 1, which that month rang up the most sales of any of its doors worldwide, the brand plans as many as six other locations. Taking into account the city’s outlying neighborhoods, some 10 doors in all are expected, each measuring at least 22,220 square feet, said Charlotte Bouvier, marketing director of Uniqlo France. Uniqlo also has its sights set on other major European cities, such as Madrid, Barcelona, Milan and a city in Germany. It’s possible the retailer will expand in London, where it has 14 boutiques, Bouvier said. Such moves are part of Uniqlo’s goal of being a global force. It intends to open 100 to 200 stores a year outside Japan, as part of a plan of its parent company, Fast Retailing Co. Ltd., to grow sales from 685.04 billion yen, or $7.12 billion at average exchange, for the year ended Aug. 31, to 5 trillion yen, or about $54.85 billion at current exchange, by 2020.  <>


Zungui Haixi Completes Initial Public Offering - Zungui Haixi Corporation (TSX VENTURE:ZUN), a China-based manufacturer of sportswear and casual footwear, is pleased to announce the successful closing today of its initial public offering. 11,500,000 common shares were sold for gross proceeds of $37,375,000 by a syndicate of underwriters led by CIBC World Markets Inc. and including Canaccord Financial Ltd., GMP Securities L.P. and Research Capital Corporation. The underwriters have an over-allotment option exercisable for a period of 30 days from closing to purchase up to an additional 1,725,000 common shares at the offering price of $3.25 per share. Zungui Haixi intends to use the net proceeds of the offering to expand its retail and distribution network in China, increase production capacity, invest in marketing and promotional activities and for working capital and general corporate purposes. <>


S&P Upgrades Burlington Coat's Debt - Burlington Coat Factory Warehouse Corp. won a ratings upgrade from Standard & Poor’s based on its plan to reconfigure its $800 million asset-based credit facility. S&P raised its rating on BCF’s secured debt to “B-minus” from “CCC-plus” while maintaining the Burlington, N.J.-based off-price retailer’s stable outlook and overall “B-minus” corporate credit rating. BCF intends to extend the maturity date of $600 million of its revolving credit facility to January 2014 and pay off $200 million upon its May 2011 expiration. In addition, it is seeking to extend the maturity of $550 million of its $865 million term loan, due in May 2013, for two years. The upgrade moves BCF’s rating up one notch and, while still in speculative territory, implies the issuer “has the capacity to meet its financial commitment.”  <>


Bluefly Gets $15M Boost - Bluefly said Monday it will receive $15 million from Rho Ventures, giving the troubled company more working capital with which to buy inventory and acquire customers. The 10-year-old online purveyor of off-price goods has never turned a profit. In its most recent statement, filed in November for the quarter ended Sept. 30, the company had an accumulated deficit of $147 million and said it was working under a “streamlined” business plan intended to help Bluefly meet its expenses. The plan called for reductions in marketing, hiring and buying new inventory. The company said in the filing it believed it had enough cash and credit to continue operating for at least 12 months. However, the filing was not audited. Net sales decreased by 14 percent to $17.1 million for the three months ended Sept. 30 compared with the same period in 2008, the filing said.  <>


Judge Halts Macy's-Calvin Klein Chocolate Giveaway - A federal judge halted a Macy’s-Calvin Klein chocolate giveaway on Monday, granting an Oregon sweet shop’s request for a restraining order. In a lawsuit filed Friday, Eugene, Ore.-based Euphoria Chocolate Co. alleged that a promotional box of chocolates that Macy’s has given to customers who buy the Calvin Klein fragrance Euphoria infringes on its own trademark rights. According to Macy’s Web site, the candy is a gift to shoppers who spend $65 or more on the scent. Along with the complaint, filed in U.S. District Court in the confectioner’s hometown, Euphoria Chocolate also filed a motion for a temporary restraining order and preliminary injunction. Judge Ann Aiken signed the order Monday.  <>


Private equity bidders offer £800m for Pets at Home - Four private equity firms have each submitted offers of more than £800m for specialist retailer Pets at Home. The business is being prepared for a sale or float in the new year by owner Bridgepoint. Apax, Bain, KKR and TPG are all interested in acquiring Pets at Home, the Daily Telegraph reported. The retailer appointed JP Morgan Cazenove to advise on options in October, and a ‘dual-track’ process – which could result either in an IPO or sale – is under way. The store group has been one of the retail winners during the recession as shoppers proved reluctant to rein in spending on their pets. Last year Pets at Home’s profits rose by 29%. Bridgepoint bought Pets at Home for £230m in 2004. The business has since been refinanced four times, generating more than £120m for investors. <>


Potential buyers circle U.K. Department Store Liberty - Big names are running the slide rule over department store Liberty, but a “serious offer” remains to be tabled. Robert Bensoussan’s Sirius Equity, which backs LK Bennett, and distribution and retail giant Li & Fung are said to be among potential bidders. However, a source familiar with the situation said that interest received so far did not yet amount to “serious offers” and did not know whether the process would lead to the tabling of fleshed out proposals. Liberty, which is backed by property firm MWB which last week unveiled a £25m share placing to avoid breaching banking covenants, appointed advisors Cavendish Corporate Finance and Global Leisure Partners in July to advise on finding new investors or partners as it seeks to expand internationally. However, the fundraising also attracted interest from parties interested in buying the whole of Liberty. <>


Gabriella Forte to quit D&G - Gabriella Forte, who joined Dolce & Gabbana USA in 2002 as president and licensing director is to leave the Milanese fashion label. During her time at D&G, Forte has served in a number of high-profile roles and was most recently executive adviser to the the board and to the founders, Domenico Dolce and Stefano Gabbana. Forte was responsible for the expansion of the brand in the US during the three years she held the post of president. Forte leaves D&G on January 1 and a successor has not been appointed. <>


Outsourcing on Rise as Stores Cut Costs - Outsourcing doesn’t only take place in India — it’s also happening at the local mall. Apparel companies are increasingly looking to third parties to help stock, merchandise and sell goods on the department store floor as they seek new and cost-effective ways to entice shoppers. Merchandising responsibilities in the past fell to the retailer. More recently, brands themselves shared some of the burden, assembling in-house merchandising teams that fanned out across the country, descending on department stores where they ensured sizes were stocked, presentations were neat and signage was up to standards. But in lean times, in which retailers have reduced sales staff and vendors are closely scrutinizing operational costs, outsourcing some or all merchandising jobs to retail service companies has come into vogue. <>


Online retail sales set a single-day record by topping $900 million - Last Tuesday was the biggest sales day in the history of online retailing, says web measurement firm comScore Inc. E-retail sales totaled $913 million on Dec. 15, making it the first day ever to top the $900 million mark, comScore says. It followed a disappointing Monday, when sales were 1% below last year. But Tuesday through Thursday were all strong online sales days, comScore says. “In fact, each day through Thursday December 17—the last day that many online retailers would guarantee free shipping in time for Christmas—saw at least $800 million in spending, which suggests that savvy consumers may have been waiting for those last-minute deals,” says comScore chairman Gian Fulgoni. For the holiday season, online retail sales are up 3.7% to $24.757 billion from $23.873 billion last year, comScore says. That covers the period from Nov. 1 to Dec. 18. MasterCard Worldwide reported today even stronger online growth, estimating e-commerce <>


Stores Push to Recoup Lost Sales - Retailers have no illusions about miracles in the final stretch of a mostly muted holiday season. Markdowns likely will accelerate, more ads will be placed, but generally strategies are set, and there’s little to do to make up for the estimated $2 billion in losses from the weekend snowstorm that blanketed the Northeast and Mid-Atlantic states. Despite the pressures, retailers don’t seem to be panicking, citing greatly reduced inventories, rising online sales and an extra day of shopping compared with last year’s disastrous season. Projections are holding steady for flat to slightly positive or negative comparable-store sales for holiday. A clearer read will emerge Jan. 7, when December comps are reported. “Most of the sectors are showing improvements in their growth rates since Black Friday,” said Michael McNamara, vice president of research and analysis at SpendingPulse, an information service of MasterCard Advisors. “In terms of the latest performance figures, the electronics, men’s apparel, footwear and furniture and furnishings sectors are all showing positive or flat year-over-year growth rates since the Black Friday weekend. E-commerce continues to be one of the stars of the season with a season-to-date growth rate of 13 percent. <>

US STRATEGY – DAY 2 – Dollar up, Stocks up

The S&P 500 finished higher by 1.1% in light, pre-holiday trading yesterday.  The news worthy items in focus yesterday were the amended healthcare reform legislation out of the Senate, continued M&A activity and the sell-side generally getting more bullish at the end of the year. 


Yesterday, Sanofi-Aventis agreed to acquire Chattem for $1.9B in cash.  In addition, TreeHouse Foods gained 12.3% after announcing that it had signed a definitive agreement to acquire Sturm Foods, a private label manufacturer of hot cereal and powdered soft drink mixes. 


For the second day in a row the Dollar index was higher and stocks followed.  Yesterday, the Dollar index rose 0.3% to 78.03.  Every sector was positive on the day with the high beta Financials, Materials and Consumer discretionary leading the way.  Utilities and Consumer staples were the two worst performing sectors.   


The Healthcare (XLV) underperformed on a relative basis, but managed care stocks were among the best performers with the HMO index up 3.0%. The performance was driven by developments out of Washington as Senate Democrats reached a deal on healthcare reform legislation.  The news of the demise of the elimination of the public option was welcome news.  Also showing strong relative outperformance were the PBMs such as CVS +3.6%, ESRX +3.3% and MHS +1.7%.


The Materials (XLB) was the second best performing sector yesterday despite the continued bounce in the dollar. Upbeat sell-side commentary provided support for the steel and fertilizers sectors. 


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 16 points or 0.5% upside and 1.0% downside.  At the time of writing the major market futures are slightly higher.


In early trading crude oil dropped after OPEC agreed to maintain production targets at a meeting in Angola.  OPEC will hold total production quotas at 24.845 million barrels a day.  The Research Edge Quant models have the following levels for OIL – buy Trade (69.71) and Sell Trade (74.31).


Gold declined $15.00 to 1,097 in Hong Kong; gold is trading at its lowest level in six weeks.    The Research Edge Quant models have the following levels for GOLD – buy Trade ($1,090) and Sell Trade ($1,151). 


Copper fell in London as stockpiles expanded to almost a seven-year high, signaling demand related issues.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.08) and Sell Trade (3.14).


Howard Penney

Managing Director


US STRATEGY – DAY 2 – Dollar up, Stocks up   - sp1


US STRATEGY – DAY 2 – Dollar up, Stocks up   - usdx2


US STRATEGY – DAY 2 – Dollar up, Stocks up   - vix3


US STRATEGY – DAY 2 – Dollar up, Stocks up   - oil4


US STRATEGY – DAY 2 – Dollar up, Stocks up   - gold5


US STRATEGY – DAY 2 – Dollar up, Stocks up   - copper6



The Macau Metro Monitor.  December 22nd, 2009.




In an interview in Singapore yesterday, Las Vegas Sands Corp Chairman Sheldon Adelson forecasted that Sands China may generate revenues of $4.5 billion to $5 billion next year.  Sands China had revenues of $3.05 billion in 2008.  Recently, record new loans in China have boosted spending and a recovery in visitation to Macau has led to gaming revenue to climb 6% in the first 11 months of 2009, according to the news agency Lusa.  Adelson also said that he does not expect its Singapore operations to cannibalize Macau’s mass casino market




Sheldon Adelson has said that LVS could finish “all the [Cotai] properties easily within five years”.  The five projects, including two that are half way through construction, will complement the company’s two existing casinos in Macau.  Sands has said that it expects to open phase one of the two half-constructed projects on Cotai by June 2011. 




Harrah’s Entertainment Chairman and CEO Gary Loveman wants to bring the Caesars Palace brand to Macau.  While Harrah’s owns a golf course in Macau, entering the gaming market would require working with an existing operator because the government limits the number of licenses to six.  A spokesman for MGM Mirage said that he was “unaware of any contact with Harrah’s about Macau”.   Spokespeople at other Macau operators were unavailable for comment. 

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Google, Apple Eroding Microsoft's Dominance

FDO: The Ultimate Catch-22

FDO: The Ultimate Catch-22


With Keith re-shorting FDO last week, here’s some quick insight into why we are (and have been) so fundamentally negative on this name.


At this point in the cycle, it’s no surprise that the weak economy and its disproportionate impact on low and middle income consumers has been a key driver to the dollar stores and deep discounters over the past 12-18 months.  The weak macro environment makes this sub-sector of retailing the ultimate Catch-22 when it comes to success.  Essentially, as our nation’s economy faltered and less people were employed, retailers like FDO and DG benefited.  In other words, one man’s pain is another man’s pleasure.  And while morally it’s a bit conflicting to bet on the fragility of the American consumer, we know that placing bets is what the Street is all about.  So morals aside, outsized same store sales gains (relative to history) driven by sharp pricing, EBT usage (food stamps), and quite simply necessity have propelled the topline performance of FDO, DG, DLTR, and NDN beyond “normal” levels.  Along the way, gross margins and expense leverage have benefitted and EBIT margins have inched their way towards historical highs.  This all sounds like a perfect set up, but how long can this last? 


Within the context of the cash strapped consumer, Family Dollar has been a relative laggard.  Yes, the same store sales did accelerate late in 2008, resulting in historically high sales growth for three of the last five quarters.  However, the company has been unsuccessful in maximizing this trend on a consistent year over year basis.  For two quarters in a row now, same store sales have been disappointing, missing both company guidance and Street expectations.  What is more troubling is that momentum in the most recent quarter slowed on easier comparisons, and now the company faces its toughest compares (through June) in the past seven years!  Quite simply, Family Dollar’s pace of share gain has slowed and it’s only going to get tougher.  Same store sales are likely to turn flat through the first half of the year, leaving little room for expense leverage, let alone multiple expansion.  At the same time FDO (and others) are ramping up unit growth in 2010, which will not only put pressure on the P&L but increase the likelihood for cannibalization and competition.  We’re all for being opportunistic, but can the U.S retail landscape really handle an additional 1,100 units annually for the next few years?


 FDO: The Ultimate Catch-22 - FDO  DG  WMT comp chart 2yr


To be fair, maybe we’re being too harsh and should consider the other side of the story.  Let’s look at the biggest risk factors associated with a negative view on FDO and the space in general:


  • The classic Depressionista set up. The economy takes another leg down, leaving more middle and upper middle income consumers in the sweet spot for dollar store shopping.  Incremental traffic is getting harder to come by, but a new wave of potential customers seeking deep discount consumables would enable FDO, DG, and others to extend their runs. 
  • The trade off scenario. The economy improves and along with it sales of higher margin discretionary products pick up.  This affords FDO the opportunity to drive higher average transactions and also a more profitable basket.  Offsetting this pick up is the likelihood that some portion of the FDO’s middle income customer base sees economic relief as the overall macro backdrop improves.  This results in slowing traffic and sales as this consumer begins to shop elsewhere, returning to a routine that likely involves more trips to a Target or a Kroger.  In a perfect world, sales slow, margins expand, and the Street is OK with it. 
  • The growth trumps all thesis.  After 4 years of moderating new store growth, management regains confidence that there is ample opportunity to grow the FDO store base.  Although expectations are for a modest ramp to 500 new stores per year over the next 2-3 years, management decides to seize the moment and ramp up sooner.   With DG and DLTR also growing rapidly, one must really be on board with bullet #1 to get comfortable with over 1,100 new units opening across the U.S each year.  There is no other sub-sector of retailing that will see as much square footage growth over the next 3-4 years.  We just wonder if growth for the sake of growth can drive multiples at this point. 


So at the end of the day that leaves us and Keith (with his re-initiated short position) with a negative bias on FDO shares in the near to intermediate term.  We’re carefully watching for the risk factors associated with a name that it is so highly leveraged to the most economically challenged consumer in the U.S economy.  For now though, we’re comfortable that the reward for slowing sales far outweighs the risk of the Catch-22.


FDO: The Ultimate Catch-22 - FDO SIGMA




Back in August, CKR started to go after MCD by name when it warned “consumers not to fall for the McHype.”  The burger war, which is thus far a one-sided battle, started with CKR saying, “The Original Six Dollar Burger at Carl’s Jr. has 24 percent more meat than McDonald’s Third Pounders, yet costs the same - $3.99.  And at Hardee’s, the 100% Black Angus beef Original Thickburger has just as much meat as McDonald’s Angus burger, but costs 60 cents less. Those are the facts and that’s the value of our burgers.”  Since then, CKR has introduced both The Big Carl and The Big Hardee, which it calls a counterpunch to MCD’s iconic burger, the Big Mac. 


When CKR first launched this attack, I offered the following warning:


MCD can and will beat CKR at the advertising game if it so chooses.  In the near-term, CKR may get some attention from its mudslinging tactics as everyone enjoys a good corporate battle!  And, the money-back guarantee may increase trial at Carl's Jr., but in the end, MCD will likely win the battle as you can never underestimate the company's marketing muscle.


Along these same lines, Crain’s published an article today titled “McDonald's rivals launch barrage of ads attacking quality, price,” which discusses whether MCD should and/or will fight back as other competitors, including Wendy’s and Burger King, have joined CKR in going after their biggest competitor.  Specifically, the article states, “Ads for Wendy's, Burger King, Hardee's and Carl's Jr. take direct aim at the quality of McDonald's fare.  It's an unusual scrum of comparative advertising that comes as McDonald's U.S. sales slide and the battle for marketshare intensifies.  Most of the ads call out McDonald's burgers or breakfast items by name — Wendy's alone stops just short of identifying its target — and all attack the quality, freshness, taste or price of McDonald's food.”


The article correctly points out that MCD spends more than twice as much on advertising as its fast-food rivals with MCD spending $856.1 million in the October 1, 2008-September 30, 2009 timeframe according to TNS Media Intelligence relative to BKC’s $316.5 million, Wendy’s $289.6 million and Carl’s Jr.’s $38.3 million.  With this level of spending, I continue to believe that MCD can and will win this advertising battle if it so chooses.  I don’t think MCD will go after its competitors by name because the fact that many of its peers are going after them only highlights its leadership position.  And, relative to the article calling this “an unusual scrum of comparative advertising,” MCD’s CEO James Skinner would disagree as he said on the company’s 3Q09 earnings call that these types of naming names advertising tactics are “nothing new for us, by the way, just so you know, but we've consistently been providing Dollar Menu to our customers over the last seven or eight years. It's a consistent approach. We have value across our menu and we're very pleased with the customer reaction to our Dollar Menu and the expectation for us is to be able to stay the course on this and continue to communicate everyday affordability everywhere in the world really, not just here in the United States…But it's not unusual for our competitors to name names regarding McDonald's. We've been through this in previous periods and we will continue to take share and continue to grow and our Dollar Menu will be a big piece of that.”


In discussing whether MCD will fight back, the article raises what I think is the more important question about how the company will allocate its marketing spending going forward when it states “But every dollar spent on a defensive ad is a dollar that won't be spent on McDonald's other priorities: launching its national $1 breakfast menu, ballyhooing its new beef snack wrap and touting its ambitious lineup of fancy coffee drinks.”  Without even considering the need to defend its name, I have concerns about how MCD will be able to continue to support its core menu while also promoting its McCafe launch.  MCD has stated that it has been able to continue to advertise its core menu while also allocating more marketing dollars to breakfast and specialty coffee.  The company did increase its total dollars spent, but lower media rates really enabled MCD to focus on both its core menu and McCafe launch in 2009. 


As of the company’s 3Q09 earnings call, management stated that the trend of slowing media costs was already starting to slow and that pricing was beginning to move up.  Specifically, MCD said that “the spending rate, the spending trend for [MCD] is if anything going up, not going down.”  MCD’s decision to go aggressively after the beverage category diluted the company’s marketing message in 2009.  I think this increase in media rates could make this more of an issue in 2010 and impact the company’s ability to continue to spend behind McCafe without giving up some level of spending behind its core menu, which drives the bulk of MCD’s business. 


Add to that the fact that MCD has already said that it will launch a Dollar Menu at breakfast supported by national advertising.  We also know that the company will be completing its rollout of frappes by mid-2010, which will require media support.  MCD said at its November analyst meeting that it will allocate more advertising dollars to its Dollar Menu (to 15%-20% of resources from its current 10%-15% level).  This increased spending behind the Dollar Menu could include spending behind the launch of the Dollar Menu at breakfast, but management had not yet announced that it would be launching the Dollar Menu at breakfast when it made this comment about advertising spending.  Then, there is the Angus burger which was launched in July, which might require increased marketing support.  If MCD then also chooses to spend to defend its name, some part of the menu will suffer from a marketing support perspective.




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