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FL: RUN This Town

FL: RUN This Town

 

We took a trip to RUN by Foot Locker over the weekend.  While we hope to see a more exciting store prototype in the future, at the end of the day, what we saw was a credible first effort and just the beginning of management’s efforts to revitalize and grow the chain. 

  

“We gonna run this town”

 –Jay-Z

 

Over the weekend we visited Foot Locker’s latest prototype in Manhattan’s Union Square, which is called RUN.  And while there is still a long way before Foot Locker is “running” any town, let alone Union Square, we believe this is step in the right direction.  The store was celebrating its official grand opening although a salesperson noted that it was open for about three weeks.  There were a couple of interesting takeaways from the visit, a few of which we share below .

 

Importantly, the key components to a successful running shop were all present- performance product, customer service, and community involvement.  On the flip side, we expected a more exciting and differentiated store environment.  At the end of the day, what we saw was a credible first effort that is designed to take direct aim at specialty running shops and the performance running market.  We hope we’ll see a more exciting store prototype in the future and one that is visually differentiated and unique.  For now, it’s important to remember that this is just a one store test and it is just the beginning of management’s efforts to revitalize and grow the chain.

 

So what did we see?

 

  • The grand opening event was highlighted by window signage offering 20% off the entire store (over the weekend only).   Whether it was the discount or the store’s prime location in Union Square, the store was filled with customers.

 FL: RUN This Town - 1

  • Upon entry (front 1/3 of store), the walls to the left and right were separated by gender but dominated by Nike.  This prime real estate in the store was clearly designated to showcase Nike apparel with Nike footwear, although there were other brands integrated on the wall that fit into similar color palettes.  

 FL: RUN This Town - 2

  • The footwear walls dominate the middle 1/3 of the store, with clear signage delineating different types of running footwear (Stability, Cushioning, Trail, etc…).  From a brand perspective, most major technical running product is offered.  I observed Asics, Brooks, Saucony, New Balance, Mizuno, Nike, Reebok, Adidas, and Under Armour.  Higher end product was also well represented, making the offering more akin to a Road Runner Sports and less like a traditional Foot Locker.  There was very little product in the store that could even be construed as a fashion item.  Differentiation is clearly at work here.

 FL: RUN This Town - 3

  • Sales help was abundant and the employees were not forced to wear the traditional “Striper” uniform.  Instead, employees were wearing tight fitting compression tops in black, adorned with the RUN logo.  If rolled out, we wonder if physique will begin to play a bigger role in staffing.  Service levels were noticeable, if not aggressive.  At several times during our visit, we were approached and asked if we needed any assistance.  We did engage several associates and found that knowledge levels were surprisingly high on specific running questions.  Anecdotally, we heard salespeople explaining the merits of non-Nike footwear for true running. 
  • The back one-third of the store was the most active.  In this area, we found accessories, more apparel (including technical brands like Sugoi), the cash wrap, a community room (containing trail maps, running literature, and message boards advertising local events), and two high tech treadmills (for testing shoes and conducting gait analysis).   

FL: RUN This Town - 4

 

Overall, we were impressed with the overall look and feel of the store but recognize this is just a one store test.   We suspect that there will be numerous tweaks to the store model, merchandise, and in-store environment as additional locations are opened.  Importantly, we see this as just one small step in the company’s efforts to 1) differentiate the store base between concepts, and 2) build new vendor relationships beyond the core.  With no major national chain of running stores, there is a great opportunity for RUN by Foot Locker to tap into of the largest athletic footwear sub-segments.

 

 

Eric Levine

Director


Drill Baby Drill

Long Oil via the etf USO

 

Surely and silently domestic drilling rates have been picking up in the United States this year.  In fact, as outlined in the chart below, oil and gas rig activity is approaching the almost all time highs of 2008.  Of the two, oil drilling has been even more robust and has in fact surpassed all time highs.

 

Oil rigs in the domestic United States’ last peaked in activity on November 2008.  On February 1, 2010, a new post-1993 peak was established, and as of March 12th the oil rig count is now 5% above that level.

 

According to the Energy Information Administration:

 

“Half of the overall increase in rig counts since June 2009 has been in the Permian Basin of West Texas, where rigs drill primarily conventional vertical wells. Just under one-fifth of the increase has occurred in the Williston Basin, straddling Montana and North Dakota, where horizontal drilling programs have rapidly increased production from the Bakken Shale. (These two areas also accounted for about two-thirds of the drilling during the previous peak in 2008.)”

 

In effect, it is back to normality for the major drilling companies.  They are executing on their historical drilling plans, and investing real capital.

 

From a broader supply and demand perspective, there is not a whole lot read into this activity since it is in the U.S. is a small portion of global oil production (less than 10%), and the United States exports very little of its oil (less than 5% of total production).  It does, though, speak to the confidence of oil companies that we are at a price that may be sustainable.

 

Consistent with drilling increasing for oil domestically, days of supply has been consistently below year ago levels for the past two months.  While oil supply domestically is at or above its five year range, it is noteworthy to see supply normalize versus year ago levels – and a bullish indicator for the price of oil.

 

Interestingly, also as it relates to oil is the ongoing relationship with the US dollar.  Last year, the key driver for the price of oil was the weakness in the U.S. dollar.  With a negative correlation of close to 0.85, as the U.S. dollar went, so opposite went the price of oil.  In the second chart below, we chart oil versus the U.S. dollar for the last three months.  The inverse relationship has clearly broken down.  So despite oil getting more expensive in U.S. dollar terms, it keeps going up in price, which is also a bullish indicator.

 

We are long of oil in here, and continue to like it.

 

Drill Baby Drill - 1

 

Drill Baby Drill - NA Rotary Rig Count

 

Daryl G. Jones

Managing Director


A BUSY RESORTS WORLD SENTOSA

We’ve got some takeaways from Singapore. The good:  busy and decent table win, the less good: expensive busing may be playing a role.

 

 

Resorts World Sentosa (RWS) has been open for more than a month.  The initial read we got from our consultant this weekend was positive with a caveat.  Mass revenue per table per day looks good at between US$3,600 and US$5,300, which compares favorably to the Mass average in Macau at US$3,600.  While this should not be too surprising since RWS is operating a monopoly, a busy casino cannot be considered a bad thing.  The only thing tempering that enthusiasm is that we are hearing that the property is operating an aggressive busing from Malaysia – no doubt impacting its Highlands property - which is expensive and highly promotional.

 

Here are some observations: 

 

RWS Details:

  • Opened 2/14/10
  • 380 Mass tables, 120 VIP tables, 1,100 slots (only 850 appear operational)
  • Budget of US$5bn, up from US$3.4bn
  • Locals have to pay entry fee of S$100 per day or S$2,000 per annum
  • Foreigners pay no fee

 

Customer Base:

  • Visitor traffic predominately Malaysian
  • Tapping into current Highlands customer base in Malaysia
  • Aggressive and expensive busing from Malaysia
  • Local play builds beginning late afternoon

 

Operations:

  • Roulette (20% of Mass floor) much bigger than Las Vegas or Macau
  • Baccarat only 23% of Mass floor
  • Slots more popular than Macau
  • Peak time for Mass floor is late afternoon
  • Only 250 of the 380 Mass tables are open at peak – lack of staff may be the problem
  • Due to inexperience, game speeds are very slow
  • Minimum bets are averaging around S$50
  • Win per Mass table estimated to be S$5,000-7,500 per day

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MONDAY “MANIA” MACRO MIXER - IT ALL RHYMES

As Keith alluded to in today’s Early Look, the sad part about playing this game every day is the shameless use of inside information by people trying to make money. 

 

We don’t have inside information but we think Mr. Macro Market is whispering in our ear.  The CRB Index and gold are breaking down from an intermediate term perspective for one reason: interest rates are heading higher. 

 

Last week there was a compression in our “Piggy Banker Spread”, especially with gains in the 2-year yield. The 2-year yield remains in a bullish formation* and typically when the Hedgeye model flashes a bullish formation we assume a high level of conviction on our call. 

 

Interest rates are going up globally!  Domestically, they are going up because we are a debtor nation and inflation is going to accelerate on a reported basis in March from February’s data.  Lastly, the dollar is in a bullish formation and last week hit at 3-week high, confirming the bullish formation on interest rates. 

 

From a MACRO perspective, that RHYMES because somebody knows something you don’t know.  Another thing that RHYMES today is that rumors create fear and bubbles that people are terrified of being short into!  Today’s speculation:

 

(1)    Pactiv (PTV) is trading higher in reaction to a rumor that it is an LBO candidate

(2)    Martin Marietta (MLM) is moving higher in reaction to rumor that private equity is interested in the company

(3)    SK Broadband rises most in eight months on merger speculation

(4)    Papandreou Says Talk of Greece Leaving Euro Zone a ‘Joke’

 

Shorting is difficult enough to do, never mind in a market so affected by ridiculous rumors.  Shorting due to valuation or a small earnings miss might not be worth the price of admission.  Stick with flawed business models. 

 

Have a great day,

 

Howard Penney

Managing Director

 

* Official definition (glossary on hedgeye.com):  A bullish formation occurs when the TRADE, TREND, and TAIL lines of support for a security's price sit below the current price, with the TRADE line closest to the current price and the TAIL line farthest below, with the TREND line in between. A Bullish Formation predicts a behavioral response by the market in which investors of different durations are driven by the price to conspire to drive the price higher through their mutually reinforcing investment activity.

 

MONDAY “MANIA” MACRO MIXER - IT ALL RHYMES - Piggy10

 


MACAU SOUNDS FROM THE GROUND

Tidbits from our guy on the ground in Macau

 

 

WYNN:

  • Expectations are high for Wynn Encore both inside and outside the company
  • Wynn Macau is under roomed so Encore will be hugely additive
  • Details and timing on Wynn Cotai are scarce.  If there is any announcement it would be at the opening of Wynn Encore

MPEL:

  • Mass ramp continues at City of Dreams (CoD)
  • VIP is struggling at CoD - turnover less than Altira
  • Whispers are surfacing that CoD is pushing up commissions despite agreement with Venetian to hold rate

LVS:

  • Sale of Four Seasons residences seem likely
  • Politics could complicate matters as Macau Chief Executive is under pressure to build more affordable housing
  • Real estate developers will not be happy if LVS is allowed to sell apartments on Cotai

CD – LOOKING AT THE TRENDS FOR 2010

This week we will be getting some incremental data points on the health of the casual dining space from DRI earnings on Tuesday and Brinker’s annual analyst meeting on Friday.  In both cases I expect the news flow to be positive. 

 

Over the past 90 days, casual dining stocks are up an average of 34.9% while quick service stocks are up 21.8% on average.  The outperformance is attributable to the data; consumer confidence trends are showing that consumers in higher income brackets have higher levels of confidence.  Additionally, a relative improvement in higher-end retail sales (Tiffany’s today and Nordstrom in February), as highlighted by our Retail team, has been observed recently.  Household income is also picking up disproportionately at the “high end of the income spectrum”, according to J.P. Morgan’s investor day (highlighted by financials sector head, Josh Steiner, on 2/25).  Management commentary from chains like PFCB also suggests that business expense expenditures may be picking up.

 

Coming into the summer months, the trends in top line sales will take on increased importance for overall stock price performance.  Casual dining, like quick-service, is facing some notable operating cost increases, on a year-over-year basis, particularly in the third quarter.  As seen in the chart below, declining food costs have been a significant tailwind for the industry in 2009.  The benefit from lower food costs began in earnest in 1Q10, but the favorability accelerated throughout the year peaking in 3Q09.  It’s impossible to make a blanket statement about every restaurant company and the impact of foods costs on the P&L, but it is helpful to look at a broader measure of food cost trends. 

 

Given that most companies contract out a year or more (in some cases) for 75% or more food costs, the timing of higher foods costs impact on the P&L is delayed by six months or more.  The broadest measure of overall food inflation, The CRB Foodstuffs Index, is trending upwards and is likely to remain at elevated levels for the next few quarters (currently at +15.7% YoY) given that 2Q09 saw a decline of -30% YoY for the Index.

 

Given the current trends, 3Q09 will be a very difficult quarter for the industry from a cost stand point, putting incremental pressure on the sales trends to continue to improve. 

 

CD – LOOKING AT THE TRENDS FOR 2010 - cd food

 

Additionally, it’s not likely that labor costs will provide any tailwind for Casual Dining operators.  Unionization is not currently in the media’s crosshairs but it is probably going to be a focus of the current administration at some point in the next three years.  It is also worth considering the chart below; labor costs are growing at a steady rate on a two-year average basis.

 

CD – LOOKING AT THE TRENDS FOR 2010 - cd labor costs

 

EBIT margin trends, shown in the chart below, vividly illustrate the benefit of cost cutting and lower food costs that occurred through 2009.  As it stands now, it’s is not very clear where any margin tailwind will come from unless there is positive traffic trends and incremental pricing.  Labor cost trends are not promising and food costs look set to increase as a percentage of sales in the middle and second-half of next year.  As a point of reference, EBIT margins rose 110 bps in 3Q09 and 120bps in 4Q09; it will be difficult for the casual dining chains to match these levels of margin expansion. 

 

CD – LOOKING AT THE TRENDS FOR 2010 - cd ebit margin

 

Sales trends in casual dining are showing considerably more stabilization that in quick service restaurants.  We are hearing that February and March same-store sales results continue to improve on a sequential basis.  On a two-year average basis, sales trends in January improved by 380bps from December, to -3.2%.  The improvement is impressive despite the fact that unemployment, the increase in the savings rate, and inflationary consumer prices are all a potential drag on spending patterns.

 

It seems that, as PFCB management alluded to, an improvement in “expense account” spending could be helping trends at casual diners.   While consumer confidence among higher income brackets is currently providing a boost to casual dining, a reversal in the overall stock market could quickly change this.  Darden restaurants is reporting after the close Tuesday and I will be eager to hear what commentary, if any, they offer on current trends in early fiscal 4Q10.

 

CD – LOOKING AT THE TRENDS FOR 2010 - cd sss

 

 

Howard Penney

Managing Director


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