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RESTAURANTS – DIVERGENCE BECOMING A TREND

MRT reported better than expected 4Q09 earnings yesterday and a -5.3% decline in same-store sales (on a comparable 13-week basis).  This -5.3% marks a significant improvement from the -16.8% in 3Q09.  Easier comparisons drove a lot of this improvement, but trends also got sequentially better on a 2-year average basis.  Comparable restaurant sales turned positive in December and have continued to get better since then (+1.5% in January and +4.4% in February to date).  Management said it is seeing increased business travel and as a result, improved Monday-through-Thursday business.  For reference, in the past, MRT has said that about 80% of guest checks are on expense accounts, but that mix has fallen off throughout this economic downturn.  MRT also said that in response to increased corporate spending, it experienced a pickup in holiday party bookings during the fourth quarter; though many businesses hosted lunch events in place of dinner events, lowering the holiday party average check. 

 

This increase in expense account dining at MRT supports PFCB’s expectation for marginally better business trends going forward (30% of tickets at the Bistro).  This also increases my conviction that we will continue to see a divergence in performance between casual dining and QSR names, particularly for those concepts that target higher income consumers.  Even after the most recent fall off in consumer confidence, confidence levels remain highest among consumers in the $50K+ income bracket.  The price action in the stocks, along with management commentary, has confirmed this thesis.

 

RESTAURANTS – DIVERGENCE BECOMING A TREND - FSR QSR

 

RESTAURANTS – DIVERGENCE BECOMING A TREND - consumer confidence income

 

As the Hedgeye Retail team said in our internal meeting this morning, February retail sales came in better than expectations across the board, but one of the biggest positive divergences came out of Nordstrom.  “Both Nordstrom and Neimans had solid months and although Saks missed relative to expectations, comps came in positive for the month, which is a victory in itself.”

 

Hedgeye’s Financial Analyst, Josh Steiner, also recently highlighted on February 25th following JPMorgan’s investor day that “The recovery is happening disproportionately at the high end of the income spectrum. The following chart shows that households with income greater than $125k spent +4.8% more in 4Q09 than in the prior year. This compares with +3.3% for families with between $75-125k and just +0.8% for those with less than $75k in household income.”

 

RESTAURANTS – DIVERGENCE BECOMING A TREND - sales growth


GC: POTENTIAL 4Q09 UPSIDE

With capital projects behind it, potential earnings upside, and a solid balance sheet, Great Canadian appears to have a favorable set up in front of it.  Q4 is next on the docket.

 

 

Great Canadian is scheduled to report its 4Q09 results after close this Monday, and we believe they will once again beat expectations.   More importantly, we think that consensus numbers for 2010 are reasonable.  Going forward, all of the projects are either completed or wrapping up and the balance sheet should remain in great shape.  All Great Canadian needs to do it simply operate their properties.

 

We think Great Canadian will report $32.3MM of EBITDA on $97MM of revenues, compared to consensus expectations of $31MM of EBITDA and revenues of $96.25MM.  Canadian provinces don’t report monthly gaming numbers like most states in US, but the BCLC does put out a quarterly report of payments it makes to local governments representing their stated share of casino and community gaming centre revenues.   While it hasn’t been “spot on,” the BCLC numbers have been a good directional indicator on trends at GC’c British Columbia casinos (see charts below).  According to the 4Q09 data, 6 of the 7 BC-located Great Canadian properties showed material sequential improvement in y-o-y trends and 3 of the properties had y-o-y revenue increases.

 

This quarter’s results should benefit from the recent slot refresh, completion of expansion projects at River Rock, View Royal and Ph1 at Georgian Downs, and better weather comparisons, as December 2008 had severe snowstorms.  While all of this sounds very “bullish”, we’re under no delusion that things are rosy in Canada and that GC’s customer is in recovery mode. Despite all the positives, we’re projecting less than 1% growth in y-o-y revenues.  However, when you combine that with massive cost reductions, some pretty good results should be in the wings for GC.  The stimulus pumped into the Vancouver economy from the Olympics won’t hurt 1Q2010 results either.

4Q09 DETAIL

 

River Rock: $30.7MM of revenues and $14.3MM of EBITDA

  • The Canada Line, walkway opening, expanded parking, slot refresh, and the end of construction disruption should produce a lift in revenues at River Rock.  According to the Local share data, monies paid to Richmond (where RR is located) increased 17% y-o-y. 
  • Easy weather comparisons should also make for healthy increases in 4Q09. In Dec 2008 revenues plummeted 23% y-o-y compared to a 6% average decline in October & November 2008. 
  • We’re projecting gaming revenues of $23.6MM and $7.1MM of hospitality revenues. 
    • Table revenues up 12% assuming a 3% increase in table drop and 22% hold. Table hold in 4Q08 was 20%, which is 1.6% below the properties’ nine-quarter average. 
    • 12% increase in slot win assuming a 10% increase in slot handle, which was down 17% last year.  
  • Operating expenses (including promotional expenditures) down 18%  y-o-y to $16.4MM. Operating expenses were down 26% y-o-y in 3Q09 

 

GC: POTENTIAL 4Q09 UPSIDE - River Rock 

 

Boulevard: $17.0MM of revenues and $8.3MM of EBITDA

  • We’re projecting gaming revenues of $14.4MM and $2.6MM of F&B revenues 
    • Table revenues down 6% assuming a 1% increase in table drop and 20.6% hold. Table hold in 4Q08 was 22.2%, above properties’ nine-quarter average of 19.4% 
    • 4% decrease in slot win assuming a 8% decrease in slot handle and 7% win, compared to 6.7% win last year  
  • Operating expenses (including promotional expenditures) down 14% y-o-y to $8.8MM compared to a 15% decrease to $8.6MM in 3Q09 

 

GC: POTENTIAL 4Q09 UPSIDE - Boulevard

 

Vancouver Island: $10.7MM of revenues and $6.24MM of EBITDA

  • In August 2009, View Royal’s gaming expansion was completed, adding 120 slots. However, there was also construction disruption in the third quarter. 
  • The Local Share data implies 5% increase at View Royal, offset by a 4% y-o-y decline at Nanaimo
  • We’re projecting gaming revenues of $9.8MM and $0.9MM of F&B revenues
    • Table revenues down 13% assuming a 5% decrease in table drop and 23.5% hold.  Table hold in 4Q08 was 25.8%, 230bps above properties’ nine-quarter average.
    • 6% increase in slot win assuming a 3% increase in slot handle and 7.25% win, compared to 7% win last year
  • Operating expenses (including promotional expenditures) down 12% y-o-y to $4.4MM compared to a 18% decrease to $4.3MM in 3Q09

 

GC: POTENTIAL 4Q09 UPSIDE - Vancouver island casinos

 

Nova Scotia Casinos: $9.7MM of revenues and $2.4MM of EBITDA

  • We’re projecting gaming revenues of $9.5MM and $1.35MM of F&B revenues 
    • Table revenues down 7% assuming a 1% decrease in table drop and 19.2% hold. Table hold in 4Q08 was 20.4%, 140bps above properties’ nine-quarter average 
    • 1% increase in slot win assuming a 4% decrease in slot handle  

 

Other:

  • Georgian Downs should benefit from its slot expansion which added about 350 slots in August.  We’re projecting $2.8MM of revenues from gaming at Georgian Downs, compared to $3MM in the 3Q09 (which is typically a seasonally stronger Q)  
  • Great American Casinos will benefit from a strong Canadian Dollar for the first time in 2009.  The Canadian Dollar strengthened 14% against the dollar in 4Q09 compared to 4Q08.  At current rates, the Canadian dollar is 9.6% stronger than the FX rate in 2009.  For 4Q09 we’re expecting $6.2MM of revenues and $0.8MM of EBITDA at the Great American Casinos 

INITIAL CLAIMS AND RETAIL SALES LOOK BETTER THIS MORNING

 

This morning we got a reprieve on the claims front and added tailwind out of February retail sales. Initial unemployment claims fell 29k last week to 469k from 498k the week prior (revised up 2k). Consequently, the 4-week rolling claims number dropped 3.5k to 470.8k from 474.3k.

 

This latest print, while positive on the margin, isn't enough to keep to push claims back into our 3 standard deviation channel. As pointed out a few days ago in our report analyzing companies' correlation with claims we expect claims to move lower, back into our 3 sigma channel in the coming months. Weather was an aberration in February, which caused claims to be artificially high. Moreover, going forward, we expect Census hiring to begin to exert downward pressure on claims this month and lasting through May/June. 

 

INITIAL CLAIMS AND RETAIL SALES LOOK BETTER THIS MORNING - JS

 

 

Separately, February retail sales numbers are out this morning, and our retail analyst Brian McGough thinks they are much stronger than expected, and would have been even stronger without the heavy February snowfall totals. This bodes well principally for volume/transaction-based companies like AXP, MA, V and to a lesser extent DFS.

 

Joshua Steiner, CFA


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QSR – COMMENTARY FROM WEN CALL

WEN commentary on the QSR space:

  • Discounting remains as strong as ever.  While BKC has stepped back on its bacon double cheeseburger promotion, the overall discounting environment remains as aggressive as WEN has seen
  • There is much breakfast market share to be gained by more established brands (given the recent launch of MCD’s breakfast dollar menu, I find it hard to believe breakfast share will be gained easily by any of MCD’s competitors.  That being said, investment at breakfast will need to be justified)
  • The current marketing environment is the most difficult WEN management has faced at any point
  • Commodity prices will be higher in the second half of the year (this will make it increasingly more difficult for the industry to afford to discount)
  • Companies that capitalize and “play offense”, in these chaotic times, will reap future benefits
  • Unemployment remains a significant headwind for Wendy’s (and obviously, the industry in general)
  • Consumer confidence, while not as low as in early ‘09, is far from encouraging

INITIAL CLAIMS AND RETAIL SALES LOOK BETTER THIS MORNING

This morning we got a reprieve on the claims front and added tailwind out of February retail sales. Initial unemployment claims fell 29k last week to 469k from 498k the week prior (revised up 2k). Consequently, the 4-week rolling claims number dropped 3.5k to 470.8k from 474.3k.

 

This latest print, while positive on the margin, isn't enough to keep to push claims back into our 3 standard deviation channel. As pointed out a few days ago in our report analyzing companies' correlation with claims we expect claims to move lower, back into our 3 sigma channel in the coming months. Weather was an aberration in February, which caused claims to be artificially high. Moreover, going forward, we expect Census hiring to begin to exert downward pressure on claims this month and lasting through May/June. 

 

INITIAL CLAIMS AND RETAIL SALES LOOK BETTER THIS MORNING - claims

 

Separately, February retail sales numbers are out this morning, and our retail analyst Brian McGough thinks they are much stronger than expected, and would have been even stronger without the heavy February snowfall totals. This bodes well principally for volume/transaction-based companies like AXP, MA, V and to a lesser extent DFS.

 

Joshua Steiner, CFA


R3: Happy New Fiscal Year!

R3: REQUIRED RETAIL READING

March 4, 2010

 

This morning’s same-store sales results confirm the positive commentary that has been trickling out of earnings calls over the past couple of weeks.  February was a strong month.  Yes, compares were easy, but the results stand out especially in light of record snowfall-induced disruptions for most retailers.  

 

 

TODAY’S CALL OUT

 

This morning’s same-store sales results confirm the positive commentary that has been trickling out of earnings calls over the past couple of weeks.  February was a strong month.  Yes, compares were easy, but the results stand out especially in light of record snowfall-induced disruptions for most retailers.  On an overall group basis, monthly performance improved across the 1, 2, and 3 year time frames.  For the first time in over a year, the 2 and 3 year stacked trends turned positive.  While this is certainly a better than expected start to the fiscal year for almost every retailer, its important to note what lies ahead.  Momentum will continue to improve sequentially based on continued easy comparisons and the Easter calendar shift, which will give March an added boost.  The question now is not if sales momentum will remain, but rather where already high expectations are heading.  To support an improving trend, we do believe we’ll begin to see inventory commitments creep up. Otherwise  we are getting closer and closer to a point where topline opportunities may begin to be missed in a more meaningful way.

 

February Recap:

 

Upside to expectations: COST, ANF, DDS, LTD, ZUMZ, BJ, JWN, M, GPS, AEO, ARO, ROST, TJX, TGT, JCP, BKE, DDS, FDO, FRED, WTSLA

In-line: KSS

Slight downside to expectations: SKS, BONT

 

R3: Happy New Fiscal Year!  - SSS 1 year total

 

R3: Happy New Fiscal Year!  - SSS 2 year Feb

 

Eric Levine

 

 

LEVINE’S LOW DOWN 

  • BJ’s Wholesale management indicated that severe deflation in perishables resulted in the category reporting its lowest comparable store sales of the year. Despite the severe inflation, unit comps increased more than offset pricing, which led to a 3% increase for the quarter. While deflation overall put pressure on the topline, management believes at it cycles last year’s price declines in 2Q, the topline will begin to improve. Overall, the company estimates deflation had a 250-300bps impact on fourth quarter sales. 
  • Keep an eye out for the latest YouTube/ viral social media trend to hit the world of retailing. Dubbed “haul videos”, these short videos are on-camera recaps of shopping trips. In other words, a young women goes to the mall, comes home, sets up her camera or webcam, and reports on her shopping trip and what she came home with. And to demonstrate the power of YouTube, the most popular “haul video” has now recorded 580,000 hits! With that many views, this a trend that is likely here stay for at least a little while… 
  • Costco noted that closings of Sam’s Club locations that are in the same trade areas as their own stores should positively impact 7 or 8 units. Interestingly, the positive impact is likely to come in the form of better margins. The elimination of Sam’s as a direct competitor within a specific trade area allows Costco be slightly less aggressive on pricing, especially on highly visible and price sensitive items. 

 

MORNING NEWS

 

Kohl's to Add Nine New Stores, 1,500 Jobs - This spring, Kohl's plans to open nine new stores in five states, creating more than 1,500 jobs. The retailer expects to open a total of approximately 30 stores by the end of the year. Kohl's nine new stores will be located in Maryland, New York, Oregon and Pennsylvania. In addition, the retailer plans to remodel 85 stores this year. "We continue to bring customers new stores where they can enjoy Kohl's great brands and tremendous values and invest in our existing store base—remodeling 85 stores, 66 percent more stores than last year—to keep the customer experience fresh and exciting," says Kevin Mansell, Kohl's chairman, president and chief executive officer. Kohl's currently operates 1,067 stores in 49 states. Licensed product lines found at the retailer include Simply Vera Vera Wang, Food Network, LC Lauren Conrad and Avril Lavigne's Abbey Dawn. <licensemag.com>

 

Macy's Prepares Exclusive Brand Launches for Spring - Four new fashion brands and two home line expansions will roll out this month and April exclusively at Macy's. The new fashion brands include Ellen Tracy for women's better sportswear, Kouture by Kimora for young trendsetter apparel, Threads & Heirs for men's casualwear and mstylelab for jewelry and hair accessories for young contemporary consumers. The home line expansions include multiple mattress styles for the Martha Stewart Collection and casual Latin-inspired dinnerware for Vida for España by Eva Mendes. In other Macy's news, the latest Kenneth Cole Reaction men's sportswear line will be available exclusively this fall at stores within the U.S. and its territories. The men's collection will include denim, graphic tees and woven shirts—all targeting a young, casual and price-conscious demographic. The sportswear will initially hit 150 Macy's stores and online at www.macys.com in September. The in-store rollout will see the apparel in Reaction-themed, shop-within-a-shop concepts. A further 550 store launch will follow. The sportswear range builds upon Macy's current Kenneth Cole Reaction offerings such as footwear, outerwear, tailored clothing, dress shirts and ties, pants, bags and luggage, small leather goods, belts, men's jewelry, sunglasses and fragrance. <licensemag.com>

 

Heelys Fills Positions to Support 2010 Business Plan - Heelys announced several staff changes to support their 2010 business plan, which includes revitaling its brand, making new products a priority and improving partnerships with retailers, marketers, licensers and the media. Ryan Wills has been promoted to Director of Innovation. His primary responsibilities will be driving new product design and development. He will also work across the board with the marketing group to create packaging, in-store merchandising materials and communications programs for these new products. Chris Harper has been promoted to Vice President of Sales and Retail Relationships. In this role Harper will build on his previous retail responsibilities and will work directly with retailers to build specific sales programs as well as product and promotional concepts to drive sales in their particular stores. In doing so he will work closely with Heelys' outside sales representatives, customer service, marketing and product development to ensure that retailers have what they need to succeed with the Heelys brand. <sportsonesource.com>

 

Congress Grills Kirk on Exports - Senators voiced bipartisan skepticism about President Obama’s initiative to double exports in five years, pressing U.S. Trade Representative Ron Kirk at a hearing Wednesday for details on how the administration could achieve such an ambitious goal. Kirk was questioned as House Ways & Means chairman Charles Rangel (D., N.Y.), a champion of trade benefits for developing countries, said he was temporarily stepping down from his powerful post. Rangel’s decision came after the House ethics committee admonished him for taking corporate-sponsored trips to a Caribbean conference. He is also the focus of a broader ethics investigation. Initiatives to overhaul U.S. trade preference programs and a bill to renew tariff breaks on imported products that expired last year, with an adverse impact on apparel and textile companies, face new uncertainty without Rangel’s muscle to push them through the committee, which controls legislation on taxes and trade. It was unclear whether Rangel, who kept his seat on the committee, will be able to regain the chairmanship or who would replace him in the interim. The most senior Democrat on the committee is Rep. Fortney “Pete” Stark of California.  <wwd.com>


Fed Report Shows Slow Retail Pickup - The retail outlook in most parts of the U.S. improved mildly in late January and throughout February despite the impact of heavy snowstorms and continued economic pressure from high unemployment rates, according to the Federal Reserve Board’s Beige Book, released Wednesday. Several districts in the Fed’s report said the severe snowstorms in early February “held back” some sales, but retailers were still able to meet expectations for the month. The anecdotal report from the Fed said retailers in most of the 12 districts tracked for the Beige Book noted that sales were strongest for lower-priced items and that sales of luxury items were still sluggish as the economy slowly climbs out of a deep recession. A major snowstorm blanketed regions in the U.S. in the first weeks of February. Retailers in New York attributed slowdowns for some chains to wintry weather, noting sales in areas with less inclement conditions were stronger than expected. Philadelphia retailers reported that the weather in February offset a mild trend of increased sales for the month. Some regions reported sales rebounds after the storms, as consumers succumbed to “cabin fever” and ventured out to go shopping when roads were clear, but retailers in Richmond noted the occurrence of back-to-back storms in that region on consecutive weekends made it hard to recover all the sales that were lost.  <wwd.com

 

Underemployment 19.8% in February, on Par With January - Gallup Daily tracking finds that 19.8% of the U.S. workforce was underemployed in February, on par with January's 19.9% reading.

 R3: Happy New Fiscal Year!  - G1

"Hope for finding a job remained flat in February: 40% of the underemployed were hopeful that they would find a job in the next four weeks, compared to 39% in January." These results are based on February interviews with more than 19,000 adults in the U.S. workforce, aged 18 and older. Gallup classifiesrespondents as "employed" if they are employed full time or are employed part time but do not want to work full time. Gallup classifies respondents as "underemployed" if they are employed part time but want to work full time or are unemployed. Unemployed respondents are not employed, looking for work, and available for work. February's 19.8% underemployed estimate includes 10.6% who are unemployed and 9.2% who are working part time but wanting full-time employment (neither estimate is seasonally adjusted, and both are based on adults 18 and older). Both figures are similar to January's estimates.

 R3: Happy New Fiscal Year!  - G2

Although Gallup's data trend closely with figures put out by the U.S. government's Bureau of Labor Statistics, there are important methodological differences between how Gallup calculates and how the government calculates its estimates. For example, the Bureau of Labor Statistics reports a seasonally adjusted unemployment rate for the U.S. workforce aged 16 and older. Gallup data are not seasonally adjusted and are based on respondents aged 18 and older. <gallup.com>


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