March data discrepancies, good foot traffic over the weekend, and MGM Cotai.



Below are some recent tidings from our contacts in Macau:


Thoughts on the March Data Discrepancies

The data leaks originating from Macau government sources are usually reliable.  So what happened in March when 60-80% growth turned into 42%?  There are a few theories floating around but we thought that these two were most plausible:

  • There is some chatter on the ground that in order to stem any potential Visa restriction tightening, government officials purposefully pumped up market expectations so that the healthy 40+% actual growth came across as disappointing. 
  • While revenues certainly slowed in the back half of the month, the magnitude implied by the 15 day, 28 day and 31 day mark were quite large and therefore we would have expected to hear at least qualitative evidence of a slowdown in play - which we clearly did not.  One explanation is that volumes didn't really change materially over the course of the month but that there was a reversal in luck.


Strong foot traffic in the first week of April

The Ching Ming holiday, which celebrates the oncoming of Spring, just ended and the traffic in Macau has been very solid. Apparently the Venetian had 110K visitors this past Saturday versus an average of 65k.  Our contact on the ground believes that strong trends will continue through Golden Week which takes place the first week of May.


MGM Cotai Site

It probably isn't a complete surprise that MGM is working to secure a Cotai site ahead of its IPO.  According to our sources, MGM's Cotai site sits directly behind Sands' 5 & 6 and is directly overlooked by City of Dream’s (COD) Hyatt hotel.  The road access is good although the location isn't great since it's on the back side of the strip.  The block size is almost exactly the same as 5 & 6.


Below is the a map showing the proposed MGM site plus two photos with a view of the current state and its position re: COD and lots 5 and 6.








The government released its G-19 data a short while ago (G19 = non-mortgage consumer credit for the uninitiated, i.e. credit card, auto and student loan debt). After last month's major slowdown in credit contraction in the revolving portion, we were eager to see whether it was the start of a trend or just an aberration. This month suggests it was an aberration. Revolving credit shrank $9 billion at an annualized rate of 13.1% in February as compared with positive growth (upwardly revised) of 2.1% for January. Currently, the peak to trough decline in revolving consumer credit stands at 12.0%, or $117 billion.


On the margin, this is a negative. The companies principally affected include Capital One (COF), Discover (DFS), American Express (AXP), Bank of America (BAC), JPMorgan (JPM) and Citigroup (C).


Joshua Steiner, CFA







FDO: 2Q Continues the Surge

FDO: 2Q Continues the Surge


Conclusion: Beat the Q with accelerating comp trends and SG&A leverage. Comp growth strength indicating discounters stores have some gas left in the tank here. Read throughs on DG, DLTR, and NDN.


1) Changes to our view on…

a) Company: Specific to FDO is the recent expansion of store hours, which is now chain-wide.  This has got to be helping but there has been no quantification as to what extent.  Net, net consumables driven traffic and some benefit from internal efforts (store hours, POS reset, improved consumables merchandising) is clearly taking hold here.  We’re no more inclined to own it here, but have a bit more evidence to consider before shorting.


b) Industry: Management was quick to point out that the payroll cycle appears to be as pronounced as it has been for while, which is interesting given the pick-up. Demand is coming across the store, even in consumables which has already been strong.  Overall demand is seemingly improving across all demographics, channels, and product offerings.  Pent-up demand, a slightly improve employment picture, and a favorable year over year tax credit environment (especially for lower income spectrum) contributed to uptick. 


2) Key Issue: Management expects same store sales to continue to accelerate throughout the year- largely a result of easing compares and the culmination of the company’s latest strategies. They’d better! With 1-year compares getting easier (especially in 4Q), the company’s guidance already suggests that 2-year trends are starting to flatten out. The big question here is whether there is some real underlying strength that we simply can’t explain (ie they’re sandbagging), or is this setting up to be a big deceleration story in 2H?


3) Read through for peers: Positive for DG, DLTR, NDN, WMT, HBI and GIL. Perhaps even positive for other retailers geared toward lower-priced discretionary items, such as Collective Brands (PSS).


FDO: 2Q Continues the Surge - FDO Comps Chart



Clean Headline: $0.81

Guidance: Updated on March 4th to $0.70 - $0.80

Street: $0.78

Last Year Clean: $0.43


Sales growth: +4.9% -- Revs slightly higher due to 3.6% comp growth which marked a 1 and 2 year acceleration. The increase in comparable store sales was a result of increased customer traffic, as measured by the number of register transactions, and an increase in the value of the average customer transaction. Consumables growth slowed sequentially to 5.1% from 5.8% in Q1 10 while home products, apparel, and seasonal/electronics improved on the margin.   


GM %: 35.4%, up 175bps yy. Result of higher purchase mark-ups and reductions in markdown expenses, freight expenses and inventory shrinkage.


SG&A: +4.1%, -20 bps, margin declined primarily as a result of lower utility costs and lower insurance expense which more than offset higher expenses related to expanded store operating hours and certain store maintenance and repair costs.


Balance sheet: Inventories down 10% on 5% sales growth. Good spread, sequentially improving. Capex as a % of sales was in line with Q1’s levels but increased on a TTM basis.


SIGMA: In sweet spot; positive trajectory to the upper right with better margins and improved sales-inventory delta.


Guidance: Increased 2010 guidance to $2.48 - $2.58 from $2.15 - $2.35, Street at $2.77. Expects Q3 EPS at $0.71 and $0.76 compared with $0.62 last year and street $0.70.  Comps for Q3 expected to increase 6% to 8%.  Favorable weather trends and the impact of the Easter shift have March comps +11%.


FDO: 2Q Continues the Surge - FDO SIGMA



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German Factory Order Moonshot

Position: Long Germany (EWG); Short Euro (FXE)


With Keith buying Germany (via the etf EWG) in our model portfolio today, we thought it worth following up that despite today’s moonshot number in German Factory Orders (+24.5% in February Y/Y), the comparison is off the trough in orders of -38.0% in February last year (see chart below). Last month also saw a sizable annual improvement (+20.6%) versus -36.8% in Feb. ‘09.  Month-over-month manufacturing orders were flat (0.0%).


The improvement on an annual comparison is in line with our bullish thesis on the German economy, namely that its exports continue to benefit from increased global demand (and in the near term a weaker EUR), in a favorable inflation environment with CPI at +1.1% in Mar. Y/Y and PPI at -2.9% in Feb. Y/Y. Additionally, the most recent PMI Manufacturing and Services figures show a continued improvement in trend.  


Germany fits one of our investment themes of owning High Grade Versus High Yield. We’re also currently short the EUR versus the USD via the etf FXE, a position that continues to work as the fears associated with Greece and the other PIIGS remain at large.


Matthew Hedrick



German Factory Order Moonshot - Deutschland



Barring a couple of names in QSR, volume is slowing.  Regardless, stocks keep going up!


Looking at the table below, it is clear to see which stocks have been performing well: almost all of them.  The most consistent performers over the past few days, from a price and volume perspective, have been PNRA, CMG, RUTH (outside of yesterday), PZZA, and CBRL. 


In terms of commodities, the PNRA story has been helped by declining wheat and corn prices.  It seems that those trends may be reversing lately; we will be monitoring these trends closely.


TALES OF THE TAPE - commodity 4.6


In terms of upgrades/downgrades, there has been plenty of activity in the last 24 hours. 

  • This morning, CMG was upgraded to neutral from underperform. Yesterday the stock was up 2.4% on strong volume.  While CMG, at 12%, has almost twice the short interest of the average QSR stock, it is up 38.6% year-to-date. CMG is trading at 26.4x NTM EPS and 11.7x EV/EBITDA as compared to 8.6x for the QSR group. 
  • Also this morning, SBUX was upgraded to BUY from HOLD.  The stock was flat yesterday. 
  • DRI was upgraded to outperform from neutral.  Yesterday the stock was down on weak volume.
  • CPKI was upgraded to neutral from underperform following a flat day of trading yesterday.
  • Papa John's was upgraded to BUY from HOLD.  The upgrade cites better sales trends and an improved outlook for the price of cheese.


TALES OF THE TAPE - stock 4.6


Howard Penney

Managing Director

R3: Accelerating Sales (and Gas)



    April 7, 2010


    While we’ve seen rising gas prices act as a “tax” on the consumer historically, it appears this relationship isn’t holding as true right now with trends at the pump echoing an acceleration in recent sales trends. 




    This morning we received two additional earnings reports from retailers with a disproportionate number of stores located in rural areas.  Both FDO and TSCO (pre-announcement) shed additional light on what is clearly an accelerating trend in sales and profits.  Without rehashing the subtleties of each P&L, we believe it’s worth taking a step back and asking a simple question.  Why all of a sudden is momentum at retail strengthening, across a broad range of channels, demographics, and product offerings?  Clearly traffic is improving and yes, year over year comparisons have something to do with this.  But two-year trends are also accelerating, which suggests overall demand is truly improving.  Pent-up demand, a slightly improved employment picture (i.e. less fear), and a favorable year over year tax credit environment (especially for those on the lower end of the income spectrum) are all likely contributors to the recent uptick. 


    However, we can’t ignore the other side of the demand equation- gas prices.  While sales have been accelerating over the past few months, gas prices have also been on the rise.  All of sudden, at least in the near-term, it appears that this has had little, if any, impact on consumer demand.  Perhaps the marginally improving employment picture trumps all other factors, but it’s hard to ignore what the impact could be if gas prices continue on the same trajectory as the year progresses.  After all, this is a double tax on the consumer.  First, at the pump and secondly, at the store- where prices are likely to rise as retailers and wholesalers will be passing on cost increases.


    R3: Accelerating Sales (and Gas) - DG FDO and Gas




  • Keep an eye out for online start-up, Fashion Stake. The website allows consumers to directly fund fashion designers after browsing online collections. In return for buying a stake in a collection, customers receive credits for purchasing clothing. According the site’s homepage, the company motto is “democratize fashion”.

  • According to Edison Research, for the first time the internet has surpassed TV as the most “essential” medium. When forced to choose between TV or internet, but not both, 49% of respondents were in favor of internet vs. 48% for TV. Interestingly, in 2001 72% of respondents were in favor of TV vs. 26% for the internet.

  • Crocs recently launched its first TV commercial featuring the company’s proprietary Croslite material and character. The new “Share the Love” campaign focuses on the key attributes of the company’s shoes- feather-light, odor-resistant, and form-to-fit. The new marketing campaign is the first to focus on the brand and its key attributes since the company dissolved its AVP sponsorship.




     R3: Accelerating Sales (and Gas) - Calendar





    Millenials Feel Better, Plan to Buy More Apparel - Despite a 9.7% unemployment rate, the job picture for young adults is showing signs of improving, prompting recession fatigued Millennials (ages 18 to 32) and Generation-Xers (ages 33 to 45) to seek a “survival reward,” such as replacing a worn pair of pants or piece of furniture, said Irma Zandl, president of The Zandl Group. People are starting to say they’re getting good jobs, it’s a marked improvement from the last two years. The job climate and economic environment are not back to the way it was but there is still an “uplifting effect” taking hold on the psyche of some consumers, possibly stirred by the creation of 162,000 jobs last month — the most in three years. According to a Zogby Interactive Survey of 4,218 adults conducted in mid-March for WWD, 13% of the public plans to spend more overall this year than in 2009. About 16% of young adults polled by Zogby International said clothing was gaining importance on their shopping lists, compared with just 6% of American adults in general.  <>


     R3: Accelerating Sales (and Gas) - By the Numbers


    Retail Rents Stabilize/Rise in Manhattan - Retail rents are rising in select Manhattan neighborhoods and space availability is tightening, according to Cushman & Wakefield Inc. Only one of the seven retail Manhattan submarkets, or neighborhoods, tracked by Cushman & Wakefield experienced a quarterly increase in space availability. Four had a decrease and two remained stable. Average asking rents for ground floor space increased in five of the submarkets. In SoHo, asking rents increased $11 compared with the first quarter of 2009 and now average $269 a square foot. Times Square asking $647 from $610 with unchanged availability, Third Ave asking $242 from $235 last year with availability down, Madison Ave ask is cheaper at $827 vs. $834 last year. <>


    British Retail Inflation for March - Overall shop price inflation slowed in March to 1.2% from 1.7% in February. Food inflation slowed marginally to 1.2% in March from 1.3% in February. Non-food inflation slowed to 1.3% in March from 1.9% in February. Food inflation has fallen to its lowest for over three years and overall shop price inflation is the lowest since November. Non-food inflation fell for the first time since VAT returned to 17.5%. Falling shop price inflation is particularly welcome relief for consumers as they face sharp rises in other living costs, such as fuel.  <>


    US & India Talk Trade - The U.S. and India have clashed over agriculture subsidies within the context of the stalled Doha Round of global trade talks aimed at lowering tariffs and other barriers to trade. The U.S. also asked the WTO to rule on whether some Indian textile and apparel products still qualify for export subsidies. The WTO said last month a range of products have reached a qualifying threshold of 3.25% share of world trade for two consecutive years and would require India to phase out any export subsidies on them. India is a major trading partner for the U.S. and a top 10 supplier of apparel and textiles. The U.S. imported $4.6 billion worth of apparel, textiles and home furnishings from India in 2009.  <>


    India Apparel Exports Fall in January - Indian apparel exports fell by around 14% in January as weak demand still plagues the sector, according to estimates from the Apparel Export Promotion Council (AEPC). <>


     R3: Accelerating Sales (and Gas) - Apparel Imports Table


    US & Brazil Discuss Cotton Subsidies - The U.S. and Brazil reached an agreement Tuesday that will delay sanctions set to start today on millions of dollars of U.S. exports and seek a permanent negotiated resolution in their long-running dispute over cotton subsidies. The WTO authorized Brazil to impose sanctions last September because the U.S. failed to end cotton subsidies the WTO said were in breach of global trade rules. The WTO issued a series of findings between 2005 and 2008 that said U.S. cotton subsidies violated its regulations because they give U.S. growers an unfair advantage by allowing them to sell at a lower price than their competitors. The list of products that would have been hit with retaliatory tariffs included raw cotton, woven fabric, men’s and boys’ cotton pants and shorts, women’s and girls’ cotton pants and shorts, some jewelry and some beauty care categories. The list of goods targeted was valued at $591 million, according to Brazil. <>


    Import Cargo to Grow 8% in April - Import cargo volume at the nation’s major retail container ports is expected to be up 8% in April compared with the same month a year ago, and solid increases are expected to continue through the summer as the U.S. economy improves, according to the monthly Global Port Tracker report released by the National Retail Federation and Hackett Associates. <>


    Pakistan Textile Export Target to be Missed by $1.5 bn - Pakistan's textile export target of $10.5 bn set for 2009-10 is likely to be missed by $1.5 bn due to yarn shortage, increase in electricity and gas tariff and unscheduled load shedding. <>


    Easter and March Retail Sales - An early Easter might have gotten shoppers into the stores last month, but it was a solid reaction to spring merchandise that got them to amp up their spending in March. Easy year-ago comparisons will also help translate last month’s result into a fruitful beginning to spring for retailers reporting comparable-store sales on Thursday. March 2009 represented the low point of consumer spending. SpendingPulse, an information service provided by MasterCard Advisors that estimates total U.S. retail sales by cash, check or credit card, said specialty apparel sales are expected to be up 5.2% for the month, thanks to strong sales gains of 9.3%, 7% and 4.2% in men’s apparel, footwear and women’s apparel, respectively. Department store sales, however, are anticipated to slip 3.2%. Luxury sales provide a better sign of health and are projected to jump 22.7%. <>


     R3: Accelerating Sales (and Gas) - ICSC Chain Sales Index


    Canadian Sporting Good Company Forzani Sees Mixed Quarterly Results - The Forzani Group Ltd. (FGL) said its net earnings fell 5.4% on a 2.1% decline in revenues for the quarter ended Jan. 31, 2010. The retailer said unseasonably warm weather hurt sales of snowsports gear at Canada’s largest sporting goods retailers during the quarter, but that overall retail system sales were up 14.5% in the first eight weeks of the current quarter. The three largest categories (alpine ski, snowboard and outerwear) accounted for an overall same-store retail system sales decline of 8.1%. <>


    Snow Sports Market Grew this Season - Snow Sports market sales reached $2.7 bn in February with a 3% gain in dollars sold compared with August through February last season, according to the SIA Retail Audit. Warmer weather in states north of the Mason-Dixon Line, less snow in the Rockies and wetter and colder weather in the south have contributed to shifting sales patterns this season. <>


    Macy's Marketing Campaign - Macy’s has been serving up fashion advice via a series of “irreverent” celebrity-studded Web videos. The department store has tapped style gurus like Martha Stewart, Donald Trump, Clinton Kelly, and Rachel Roy to guide consumers through real life challenges—like what to wear when meeting your ex-boyfriend for coffee. (Agencies JWT, New York, and Mediaedge:cia handled creative and media buying duties, respectively.) The goal, said Martine Reardon, Macy’s marketing evp, is to give consumers the confidence and style tips they need to “put it all together.” The effort, she said, stemmed from research that showed consumers wanted more than just “fashion advice from Macy’s.”  <>


    PSUN Names Senior VP of Retail - Pacific Sunwear of California Inc. has named Paula Lentini as senior vice president of retail to oversee the company’s almost 900 stores. The position had been vacant since last year. Lentini, former vice president of retail sales and operations for T-Mobile USA, will be responsible for operations, real estate, construction and loss prevention. Lentini also worked at Gap Inc., where she spent seven years as a zone vice president, as well as Victoria’s Secret Stores, Ann Taylor and Macy’s. <>


    Facebook Users Influence Their Friends’ Shopping - 68% of consumers with Facebook accounts say a positive referral from a Facebook friend would make them more likely to buy from or visit a retailer, research and consulting firm Morpace Inc says in new study. <>


    Target Buy Back - Target said on Tuesday that a subsidiary is buying back $900 mm in notes. The indirect wholly owned subsidiary is Target Receivables Corp., whose Delaware statutory trust called Target Credit Card Owner Trust 2005-1 issued floating rate Class A asset-backed notes. The trust is offering to buy back the notes, which have a principal amount of $900 million. <>




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