GMCR beat on the bottom line, but not the top…

COGS up 540 bps and SG&A down 610 basis points – You can only cut SG&A so much to make up for lower gross margins!. Despite incremental promotional expenses and a new manufacturing facility in TN, the company expects to get additional leverage on SG&A in 2009.

I still contend that by Q4 the signs of stress will be much more evident that they are today.

Did I mention they don’t generate enough operating cash flow to cover their capital needs and the stock trades at 17x EV/EBITDA!

Demand destruction at its best!

Scary Charts: 2 year and 10 year US Jobless Claims

Within the context of my last posting that contextualizes where 448,000 fits within the historical US economic cycles, you can tell me where you think these charts are headed next.

Sometimes pictures of facts are more poignant than prose.
10 Year
2 Year

Watch Out, The (E) In Our RIPTE Model Is Getting Crushed

The is NO need to split atoms about this morning’s jobless report. It was a horrendous number, assuring us that the (E), as in employment, in our RIPTE Consumer Spending Model is heading into a darker hole.

Weekly jobless claims spiked this morning up to 448,000, taking the 4 week moving average up for the 2nd week in a row to 393,000. In order to understand macro, I always look back before I take a shot at looking forward. In a historical context to prior US recessions and consumer spending depressions (1), this run rate of unemployment claims is alarming.

Peaks in jobless claims in 1990 and 2001 were reported at 500,000 and 480,000, respectively. There is little doubt in my mind that this cycle sees those prints. The big question is can the US employment picture deteriorate to the 560,000 and 620,000 levels in claims that we saw at the peaks of 1972-74 and 1981-83 cycles, respectively.

The US Consumer is hostage to deteriorating RIPTE “Trends” until the facts bear out otherwise.

Early Look

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KSWS: Keep This One on Your Screen Today

Decent number out of KSWS this morning. EPS about in line, and revenue beat. But the company took down revenue guidance for 2H as I suspected. How I am doing the math, backing out the impact of the $30mm PSS settlement (which helps by about $0.58ps) KSWS took the year down as low as a loss of $0.08 (range of -0.08 to +0.07) versus the current consensus of $0.18. I think this is conservative guidance. Importantly, it masks the cash flow growth to come in '09. Check out the comment I posted yesterday afternoon for better context.


LVS may have struck out in Las Vegas in Q2 and higher corporate expense is never a hit. However, these issues shouldn’t overshadow some home run trends at Venetian Macau. Adjusted Q2 property EBITDAR of $140.2 million exceeded expectations. More importantly, the trend is higher. The property should generate its highest VIP volume this month since November. On the mass market side, July should exhibit the best gaming volume month ever at the property. The data confirms our 7/24/08 call that foot traffic at The Venetian Macau picked up considerably in July. What’s driving the improvement? On the VIP side, higher junket commission rates and more direct marketing and credit have been the key drivers. Within the mass market, the ramp up of LVS’s ferry service appears to be the main catalyst. The following chart shows the number of ferry passengers carried daily by LVS to the Cotai Strip. The trends are obviously encouraging and have driven visitation to The Venetian up 28% in July. I remain very cautious on Las Vegas and some aspects of the Macau market, but with a huge short interest, LVS’s stock could continue to drive in some runs over the near term.


U.S. same-store sales decelerated from 2Q and were down mid single digits in 3Q. Traffic trends remained weak. The company experienced traffic declines in the U.K. and slower sales momentum in Canada. Importantly, the reduction in new store openings and closure of underperforming stores will mitigate these trends in fiscal 2009.

CEO Howard Schultz said they are seeing signs now in the U.K. that emerged in the U.S. in the beginning of the year as it relates to consumer spending. He also said that the “very, very tough economy” in Spain has caused management to alter its growth plans because they don’t want to expand when consumers are under a lot of pressure. Management commented that they are facing significant challenges during the afternoon day part. They see the current economy as a tremendous headwind that has prevented them from moving the needle on improving traffic and the environment has proven more difficult than they anticipated back in January.

  • So how is this good? Starbucks had grown accustomed to 20%-plus revenue growth and 5%-plus same-store sales growth results. Three consecutive quarters of negative comparable sales and traffic, 9% sales growth and about 500 bps of U.S. margin compression in 3Q has forced management to make real changes.
  • U.S. company-operated store unit growth had been in the 13%-19% range YOY, and now management is forecasting a negative 60 net new stores in FY09 as the announced store closures will exceed store openings. Capital Expenditures as a percent of sales have been moving up rather significantly, from 7.8% in 2004 to 11.5% in 2007, despite declining returns. Based on the company’s revised guidance, however, capital expenditures are expected to be $1 billion in FY08 and $750 million in FY09, a 7% and 30% decline, respectively from 2007. This more disciplined spending will generate incremental free cash flow and yield better returns for shareholders. To that point, it was encouraging to learn that the company is seeing incremental sales at the stores that are in proximity of the 50 stores that have already been closed.

    The company also lowered its international unit growth targets to 825 net new stores in FY08 (from prior guidance of 975) and 900 net new stores in FY09 (from 1,050). Management said they are taking “learnings from [their] U.S. market experience and approaching international growth with cautious optimism, given the current environment.”

  • Relative to overall traffic declines, management indicated that it is seeing an uptick in afternoon traffic as a result of its Vivanno and Sorbetto beverage launches, which they highlighted as an incremental positive as afternoon traffic “has been the burden for the past six months or so or even more than that.”

    Mr. Schultz reiterated that there is “no silver bullet” and that he cannot predict the economy, but that they are managing the things they can control. That being said, I remain convinced as Mr. Schultz said, “Starbucks is going to win.”

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