prev

CASUAL DINING CAPACITY PROBLEMS

According to a report by real estate research firm Reis, U.S. store closings and cutbacks turned the second quarter into the worst one for strip mall owners in 30 years. Strip malls saw average vacancies spike 0.5% to 8.2%, a level not seen since 1995. To date, we have not seen a corresponding reduction in capacity at casual dining restaurants. The reduced traffic to the malls and strip centers puts downward pressure on traffic trends at restaurants adjacent to these locations.
  • The end of the current cycle will be marked by a reduction in Casual Dining capacity.
Casual Dining traffic trends versus Vacancy rates

VIX BREAKING DOWN - BE CAREFUL

The Volatility Index (VIX) has come in hot from our 31-32 target, correcting -22% in less than a week. A breakdown and close below the 23.99 line, gets me more confident in the holding long exposure for a continued market squeeze to test S&P-1289.

There is blood in the water. The sharks are circling the shorts. Be nimble, and be careful out there.

KM

BWS: Barron’s Told 1/2 the Story

Barron’s might be right on this stock – but for all the wrong reasons. If you want to play a short squeeze on this company coming anywhere near expectations on a lousy quarter, then be my guest. But for those of you that are actually thinking of investing in this company due to a rebound in the business – be aware that there is no reason why this company cannot go bankrupt. Seriously. Consider the following…
  • 1) 70% of sales come from Famous Footwear – a moderate footwear chain with about 1,100 stores throughout the US. There’s nothing wrong with these stores, but I’m concerned that BWS has been underinvesting in store-level capex, and is now incrementally channeling its capital towards accelerated store openings. These stores are in more expensive locations with higher rent hurdles.
  • 2) Competitive risk: there is an 87% store overlap between Payless Stores and Famous Footwear. At the same time where BWS arguably underinvested in its stores, Payless did the opposite. This puts Famous in a tough position regardless of the operating environment throughout ‘09.
  • 3) The industry risk here is tremendous. BWS is at the apex of the massive margin squeeze I expect to see beginning in 1Q09. With 97% of its product made in China (both direct and indirect), and with brand exposure that is squarely ‘caught in the middle’, this company will be a price taker.
  • 4) The wholesale portfolio accounts for about 40% of cash flow. Yes, there are some good brands like Via Spiga, and maybe even Naturalizer. But I’d argue that half of the portfolio does not even need to exist. (brands include Franco Sarto, Via Spiga, Etienne Aigner, Nickels, Private Label, Carlos, Naturalizer, Life Stride, Dr. Scholl's, plus Children's portfolio).
  • 5) BWS looks relatively healthy from a balance sheet perspective with a 21% debt to total capital ratio. But including the impact of operating leases, it is about 61% based on my math. In addition, as I outlined in our bankruptcy call last week, we also need to look at the flexibility of the operating leases – which is often the key factor in retail bankruptcies. BWS’s trend is not good. The flexibility ratio has been declining, and particularly took a leg down last year as BWS reaccelerated its growth strategy. Translation = it is getting into more expensive properties with higher lease minimums just as the industry is heading into a major margin crimp.
  • With EBIT margins at about 4%, this name might seem down and out, but the reality is that it has margins that in the same ballpark as others in the industry, and it has a materially weaker portfolio. I could make a case where margins head to zero – or worse.
  • The bottom line -- Barron’s might have this ‘Trade’ right into 2H08, but if that materializes, then this could be one heck of a short for 2009.
BWS is signing leases with more aggressive terms. This is something to watch...

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Deflation Chart: Corn and Soy Have Record Weekly Declines

Agricultural commodities in general and corn and soy in particular declined sharply this week. The market had to digest both the Argentinean government’s capitulation and nearly perfect weather in the Midwest.

CBOT December corn closed at 628.5 ($6.285 per bushel) on Friday, down -20.24% from the all time high close of 788 on June 26, while November Soybeans closed at 1,448 ($14.48 per bushel) down 11.22% from the all time high close of 1631 on July 3, 2008.

CBOT September wheat closed at 804 ($8.04 per bushel) on Friday, down 36.69% from the year’s high close of 1270 on March 12 (40.42% below the all time high intra-day on Feb 27th). Remember that wheat soared in February and March on increased export tariffs imposed in the Ukraine, Russia and Argentina as well as draught in Australia.

Things can change very quickly in this market. We have been very lucky with weather for this corn crop in recent months, but the crop is less mature than it would typically be at this time of year. In recent week estimates placed only 13% of total corn crop pollinating vs. a seasonal average of 50% . If we had any additional bad weather the impact on this crop could be profound, driving total corn yield down by more than the 10% decline estimated by the USDA.

Additionally, the strikes in Argentina took many farmers off their land to work the picket lines and roadblocks, and the threat of heavy export tariffs did not encourage production during the planting cycle. Put bluntly, a lower yield caused by less ideal weather, lower stocks at harvest in Argentina resulting from the strike – or a combination of both, could return pricing pressure into these markets. Proceed with caution.

Andrew Barber
Director

CRB Commodities Index vs. Brazilian Equities

This picture is one that we often discuss in our morning research meetings. The correlation of the CRB Commodities Index to Brazilian stocks.

For the last month, we've been talking about the breakdown in the Brazilian Bovespa as a leading indicator for inflation. After this week's stiff -7.4% correction in the CRB Commodities Index, this positive correlation proved powerful once again. Brazilian stocks sniffed this correction in inflation readings out well in advance of the crowd.

KM
CRB Commodities Index vs. Brazilian Equities

Cuban Sugar: Will Obama Coat The US With Supply?

Joe Conason' editorial in this Saturday's Chicago Sun-Times laid out a theory gaining traction among U.S. liberals - that lifting the Cuban embargo can help open the floodgates for cheap sugar-based biofuels to alleviate skyrocketing energy costs.

I have zero interest in arguing about ethanol science or having a political debate over lifting trade sanctions against Cuba. What I am interested in is what any thaw in U.S./Cuban relations might mean for global sugar production and how that would impact the markets, which for the past year, have been driven by the sprint between surging Brazilian supply and demand.

It's important to remember that Cuba, today an importer of refined sugar, was the world largest exporter and third largest producer as recently as 20 years ago. Back then, total production on the island averaged as much as 7 million metric tons a year as opposed to this year's official (and probably overstated) 1.5 million. Decades with no reinvestment in infrastructure following the collapse of the Soviet Union have left the island's farms and refineries in shambles.

Since assuming power, Raul Castro has been slowly implementing small economic and social reforms leading many to conclude that he may be more open minded towards overtures from the U.S. than his older brother was. Meanwhile, Barack Obama openly indicated his willingness to consider steps towards normalizing relations with Cuba in recent years (although he has been much more tight lipped on the subject since assuming the role of candidate). Obama's real chance at victory in November, coupled with a new flexibility among Cuba's leaders make the end of nearly 50 years of trade sanctions seem like a possibility for the first time.

Regardless of whether Conason is right about the impact of sugar on global oil dependency, the re-emergence of Cuban Sugar exports to the U.S. would certainly recast the entire world market for Sugar.

Andrew Barber
Director
Research Edge's Sugar Chart

GET THE HEDGEYE MARKET BRIEF FREE

Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

next