R3: BBBY: Consistency Repeats Itself


April 8, 2010





It is said that history repeats itself.  It can also be said that consistency repeats itself.  BBBY continues to be the poster child for this theme as evidenced by 4Q results. Yet again, the ‘BBBY is too expensive’ case proves thin.  Even with lofty expectations and “whispers” that to some seemed like a stretch, expectations were handily exceeded.  There is very little to criticize or critique here.  The results speak for themselves. 


Earnings of $0.86 per share were $0.13 ahead of the Street.  Same store sales were up 11.5%, representing the second quarter in row of sequential acceleration on a one and two year basis.  Gross margins expanded by 180 bps, benefitting from a continued decrease in couponing, reduced markdowns, and solid inventory management.  Recall that we have been bullish on the multi-year opportunity that still lies ahead for BBBY, which in part results from dramatically reducing couponing in the wake of capacity reductions in the home furnishings sector.  SG&A as a percentage of sales improved by 270 bps, also reflecting lower coupon circulation, lower ad expenses, and leverage on payroll and central costs.  The balance sheet remains solid, with inventories up 7.1% against a 16.7% increase in total sales. Additionally, the company ended the year with $1.7 billion in cash and no debt.  Square footage growth for 2010 is as expected, with 60 stores in the pipeline representing 5% growth.   All in, this quarter was very consistent with the prior two quarters- with a slight sales acceleration. 


For anyone that has been following our positive stance on BBBY for a while, we recognize these posts may seem repetitive.  For now and for at least the next few quarters we remain confident that this type of performance will continue.  Tight inventories, reduced couponing, expense control,  coupled with same store sales and store growth, make this one of the most consistent stories in retail.  And this holds true even after the earnings upside we saw over the back half of 2009. 


We believe the biggest mistake coming out of the this quarter would again be to “take the trade”.  Earnings guidance calls for 10-15% growth in 2010. We’re looking for 25% and that may be conservative.  Yes, expectations continue to rise, but it’s important to put 4Q results in perspective.    This is just the third quarter in a row (after 10) in which gross margins have improved.  Sales are accelerating, as they should when a macro recovery is underway and the company’s biggest direct competitor is now gone for just over a year.  And, some day management may actually put the cash balance to work.


Eric Levine



R3: BBBY: Consistency Repeats Itself - BBBY





  • Despite a meaningful pick up in same store sales trends at Family Dollar in the month of March, management noted that they still see a pronounced payroll cycle. In fact, there has been no meaningful change over the past couple of quarters in the low income consumer’s behavior relative to the payroll cycle. While they did not elaborate any further, perhaps this status quo behavior suggests that the recent acceleration in sales is less related to the low income and more attributable to a higher income customer.


  • According to luxury website innovator, James Gardner of createthe Group, consumers are more likely to buy when consumers recommend outfits or products to other consumers, rather than brands themselves doing the merchandising. In fact, the conversion rate on the area of Juicy Couture’s site where consumers put together their own looks and then post them to other consumers is 162% higher than the traditional ecommerce offering. With that said, expect to see more “user generated” merchandising make its way across the internet. Recall that this is consistent with recent surveys that suggest consumers trust peers more than they trust brands.


  • Rumor has it that Japanese fast-fashion chain UNIQLO is headed to midtown Manhattan to fill one of the most expensive retail locations in New York. The space which was formerly the home of Brooks Brothers on Fifth Ave. occupies 70,000 square feet and supposedly commands an annual rent of $30 million! This would mark the chain’s second stateside location, with the other located in Soho. For anyone who hasn’t seen the concept first-hand we highly recommend a store visit. Clever merchandising, deep value pricing, and an extremely colorful in-store environment makes for long lines almost every day of the week.





R3: BBBY: Consistency Repeats Itself - Calendar





Consumer Credit Declines in February - Consumer credit in the U.S. declined in February more than anticipated, indicating Americans are reluctant to take on more debt without further improvement in the labor market. Borrowing fell $11.5 bn, the most in three months, after a revised $10.6 bn January gain that was twice as much as initially estimated, the Federal Reserve said today in Washington. The drop was the 12th in 13 months and shows consumer purchases, which account for about 70% of the economy, will be limited until households become more optimistic about the recovery. Confidence to finance spending may be restored if employment keeps rising after a March payroll gain that was the biggest in three years. <>


CEOs A Little Less Confident on the Future - While declining to 62 from 64 in the final quarter of 2009 after gains in each of the four quarters last year, the measure is still in positive territory. According to the board, a reading of more than 50 reflects more positive than negative responses. “Ceo’s continue to rate current economic and industry conditions favorably, but expectations are that the pace of growth will not pick up in the months ahead,” said Lynn Franco, director of The Conference Board Consumer Research Center. “Hiring plans are improved from last year, but less than a third expect employment levels to increase this year.” In the most recent survey, 71 percent of ceo’s assessed current economic conditions as having improved when compared with six months ago, down from 75 percent last quarter. <>


Protesters Paralyze Bangkok, Shut Down Malls - Major malls in downtown Bangkok are losing millions of dollars daily after being forced to close since Saturday by thousands of antigovernment protesters who have paralyzed the district. The losses will mount if the demonstrators keep retailers shut during the 10-day Thai New Year celebration, Songkran, which begins Friday. “We make a lot of money during Songkran. That’s huge for us,” said a spokesman for Siam Paragon Development Corp., which operates Bangkok’s luxury Siam Paragon mall. <>


Talbots Seals the Deal, Finally - After six deadline extensions, The Talbots Inc. finally completed its warrant exchange offer with BPW Acquisition Corp., allowing the retailer to acquire the special purpose acquisition company on Wednesday. Talbots said that in addition to closing the BPW deal, it repurchased about 29.9 mm of shares held by former majority stockholder Aeon Inc., which constituted a 54% stake in the specialty retail firm. <>


M&S Fourth-Quarter Sales Growth Quickens More than Anticipated on Fashion - Marks & Spencer Group Plc, the U.K.’s biggest clothing retailer, said sales growth accelerated more than anticipated in the fourth quarter as shoppers bought new fashion ranges. <>


Fast Retailing Raises Profit Forecast by 5.2% on HeatTech Underwear Sales - Fast Retailing Co., Japan’s largest clothing retailer, raised its full-year profit forecast 5.2 percent and said it may list shares overseas, where it expects operating profit to more than quadruple this fiscal year. <>


H&M Starts the Year Strong - Hennes & Mauritz AB, the world’s third-largest fashion retailer, saw net profit jump 45.2% in the first quarter as new store openings in South Korea and Israel and an early Easter boosted sales in its stores despite lingering economic doldrums. Same-store sales rose by 2% in the quarter. H&M said total sales rose 21% in March versus the same month a year earlier, while same-store sales were up 9% following a dip in February. The March increase was partly due to calendar effects, which contributed 2% points, and by a positive effect from Easter falling one week earlier than it did in 2009, it said. <>


R3: BBBY: Consistency Repeats Itself - H M


Nike Tiger Commercial - Nike Inc. plans to air a new television commercial featuring Tiger Woods and a voice recording of the golfer's late father. It's the first ads featuring the golfer since revelations about his extramarital affairs. Check out the video: <>


Sports Direct Makes Offer for Faith - Sports Direct is among five bidders to have made offers to invest in footwear specialist Faith, it is understood.  <>


Sales for Slump in 2009 - Sales were down across all major channels, including, for Brown Shoe Co. last year. recorded a decrease in web sales of 8.2% to $68.1 million from $74.2 million in 2008, while total and specialty retail sales also fell. <> Garners the Fastest March Response Time - gave shoppers the fastest high broadband access time among large web retailers last month, says Gomez, the web performance division of Compuware. <>


Bluefly Gets Inside Customers’ Closets With its New Social Media Strategy - The off-price fashion apparel retailer launched this week as a social media site where consumers can upload photos and videos displaying favorite items from their own closets. <>


Web Retail Sales Grew 18.4% in March, MasterCard says - It was the eight consecutive month of double-digit growth in e-retail sales, says the monthly MasterCard Advisors SpendingPulse report. <>


Claire's Becomes Twilight Destination - Fashion accessories and jewelry chain, Claire's, has become a destination retailer for Twilight Saga merchandise across 831 branches in the U.K. and Europe throughout 2010. The first products hit Claire's stores on March 22 with the DVD release of The Twilight Saga: New Moon. The retail program will be supported by dedicated Twilight Saga areas in-store and a window presence. <>


Meany Manipulators

“Only free men can negotiate; prisoners enter into contracts.”

-Nelson Mandela


Nelson Mandela, the first South-African president to be elected in a fully representative democratic election in that country, knows a thing or two about negotiating.   He also knows a thing or two about being in prison, as he spent 27 years of his life in a South African penitentiary.  Upon release, he returned to the leadership of the African National Congress and led the multi-party negotiation that led to the first multi-racial elections in South Africa.  This Nobel Prize winner is one of the icons of our times.


It is no secret that his negotiations coincided with his release from prison.  Prisoners have effectively entered into a penal contract with the state (even if unjustly), so they have no bargaining position.  Even on the highest level of political and international relations, negotiations require thought, preparation, and tactics.  And, as Mr. Mandela says, “only free men can negotiate.”


The Art of Negotiation was a book published by Gordon Wade Rule in 1962.  The book provides a detailed plan for conducting a negotiation.  A couple of points he highlights as keys to success in any negotiations:

  • Realistically evaluate your bargaining position both with respect to individual points and overall possibilities of success;
  • Determine clearly your authority – if any – to settle each point within the maximums and minimums; and
  • Consider how and where you would like to see the negotiation get underway and proceed.

Today, and likely through the duration of the week, we will see whether Timmy Geithner understands The Art of Negotiation.  Timmy is in China today to meet with Chinese Vice Premier Wang Qishan.  The primary topic of these discussions will be Chinese exchange rate policy.  Interestingly, this visit will occur a week before Timmy’s boss, President Obama, will meet with Chinese President Hu Jintao.


In Washington, the political heat is being turned up on China.   U.S. lawmakers are currently moving forward with legislation that would require the U.S. to impose tariffs on countries with “misaligned currencies”.  As the ever chatty Professional Politician Senator Charles Schumer said yesterday:


“China will not act on their own because they want to maximize their wealth . . . every Treasury Secretary says “Let me talk to them, I can get them to change” and the change almost never occurs and when it does, it’s small, grudging and temporary.”


In contrast, Timmy actually delayed the release of the Treasury Department report on global currency policies that would likely name China a currency manipulator.  With this rhetoric from Congress it seems that the United States is undermining a number of core tenets from the Art of Negotiation.  Thus the talks today for Timmy, and next week for his boss, appear to have some challenges.


The most important challenge is, of course, determining whether the United States has any bargaining position at all.  In the Chart of the Day below, we have highlighted the growth of Chinese ownership of U.S. government debt.  Currently, U.S. debt in the hands of foreign governments is 25% of all U.S. government debt and more than 25% of that is owned by the People’s Republic of China.  China is the United States’ single largest foreign creditor.


One thing that United States officials need to consider is the appetite of the Chinese to continue to fund U.S. public debt in an environment where their currency is not pegged.  Since it is likely that the Yuan would appreciate under free market conditions, perhaps meaningfully, the value of the Chinese holdings of U.S. government debt could depreciate meaningfully and sour Chinese interest in further U.S. treasury purchases. 


According to a recent report by the Congressional Budget Office, the United States will be running close to a trillion dollar budget deficit annually for the next ten plus years.  If these projections are even in the ball park of reality, the United States needs good relations with its creditors. Calling your banker names, like Meany Manipulator, even if accurate, is not conducive to maintaining amiable relations.


For the first time in a long time (maybe ever), Keith applauded Timmy’s decision yesterday to delay the release of the currency  report ahead of his meetings with Chinese officials.  More specifically, the Treasury department cited upcoming meetings between between Chinese President Hu Jintao and President Obama on the sidelines of the Nuclear Security Summit on April 12-13, the second round of the U.S.-China Strategic and Economic Dialogue in late May, and the G-20 summit in Toronto in late June.  These will be critical global macro events to keep your Hedgeyes on.


Even as Professional Politicians like Senator Schumer continue to turn up the rhetoric on the Meany Manipulators, it does seem that Timmy and crew are taking a more balanced and thoughtful approach, though perhaps they have no choice.  After all, if someone lends you money, copious amounts at that, are you really any different from a “prisoner that has entered into a contract”?


Interestingly, Gordon Wade Rule dedicated his seminal book, The Art of Negotiation, to his country. His country and political leaders could use some art in their negotiation right about now.


Keep it real,


Daryl G. Jones

Managing Director


Meany Manipulators - Chinese Holding of UST


The S&P 500 finished lower by 0.6% yesterday, as the REFLATION trade gave back some of its recent outperformance; oil declined 1.1% on a larger-than-expected build in crude stockpiles.  On the MACRO front, Greek bonds fell and stocks tumbled on speculation that the bailout will unravel.  Despite the correction in the S&P 500 and in each of the sectors, the Hedgeye Risk Management models still have all nine sectors in a perfect formation - positive on TRADE and TREND. 


The EURO fell for a fourth straight session against the dollar; if today’s early gains hold, the dollar will be up for the past three days.   A stronger dollar and a 2.4% increase in the VIX provided some headwind for pockets of the RISK/RECOVERY trade. The Hedgeye Risk Management models have levels for the Volatility Index (VIX) at: buy TRADE (16.09) and sell TRADE (17.63).  We are currently long the VXX.


The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy TRADE (80.74) and sell TRADE (82.13).


A larger-than-expected decline in February consumer credit seemed to accelerate some of the selling pressure late in the day, as volume picked up 23% day-over-day.  Consumer credit declined $11.5B to $2.448T in February, the biggest decline in three months. A Bloomberg survey was looking for a much smaller decline of $1B. Revolving debt fell by $9.4B in February, while non-revolving debt was down $2.1B. However, January consumer credit, which posted the first increase in a year, was revised to reflect a jump of $10.6B vs. the originally reported $5B increase.


Despite a larger-than-expected decline in consumer credit, the Consumer Discretionary (XLY) was the best performing sector on the day.  The XLY declined only 0.36% on the day.  The retail group continues to extend its outperformance with upbeat expectations heading into March comps due out today.  The earnings calendar was also a net positive.  Restaurant stocks also outperformed following the rest of retail and the consumer discretionary names.  CKR +6.6% was the best performer after announcing that it had received a takeover proposal that may be superior to the bid it accepted from Thomas H. Lee Partners in February.


The Energy XLE was the worst performing sector yesterday.  The weakness was largely attributed to a selloff in oil, a stronger dollar and some bearish inventory data. Crude stockpiles rose 1.98M barrels last week vs. the Bloomberg consensus for a 1.35M barrel increase. The refiner’s coal names were among the notable laggards in the energy sector. 


The Financials (XLF) finished lower for the first time in four days, declining only 0.4%.  With C and BAC up on the day, the money-center banks outperformed the regional’s.  The investment banks were notable outperformers with GS and MS up 2% and 2.3%, respectively. 


In early trading, crude oil is looking lower for a second day n New York after a report showed U.S. crude inventories increased more than forecast last week.  The Hedgeye Risk Management models have the following levels for OIL – Buy TRADE (84.14) and Sell TRADE (88.47). 


In early trading gold is looking to decline on the back of a stronger dollar.  The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1117) and Sell TRADE (1153).


In early trading, copper fell in London for a second day, extending a decline from a 20-month high, on concern that recent advances were not supported by demand from China.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy TRADE (3.56) and Sell TRADE (3.69).


In early trading, equity futures are trading below fair value as global markets slip in the face of Greece's growing financial instability.  As we look at today’s set up the range for the S&P 500 is 16 points or 0.5% (1,176) downside and 0.8% (1,192) upside. 


Today's MACRO highlights are:

  • Initial Jobless Claims
  • Natural Gas Inventories
  • Treasury Auctions in 30-yr bonds


Howard Penney

Managing Director













the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.


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