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R3: Easing Into Earnings With Macy’s

R3: REQUIRED RETAIL READING

May 12, 2010

 

 

TODAY’S CALL OUT

 

Macy’s reported 1Q earnings this morning of $0.05, a penny ahead of recently revised guidance and in-line with the Street. After hosting an analyst day two weeks ago and reporting April same-store sales late last week, there are few surprises with today’s release. As is always the case with Macy’s the conference call tends to add a bit of color to the quarter, but there are a couple of highlights worth noting at first glance:

  • Guidance remains unchanged (albeit recently revised upward) for the year at $1.75 to $1.80, driven by a 3-3.5% same store sales increase. Management says “it is premature to raise annual guidance further at this time given the macro-economic uncertainty.” With same store sales coming in at 5.5% in the recently reported quarter, the current comparisons for 2Q almost identical to 1Q, and demand through early May remaining solid, this seems like an overly conservative statement to make. With that said, the Street is at $1.87 and with so much riding on 4Q profits we expect conservative posturing to continue.
  • E-commerce appears to be building as a key contributor to the business, finally. Sales from Macys.com and Bloomingdales.com increased by 34% in the quarter, contributing 90 basis points to the overall same store-store sales result. This outperformance is amongst the stronger online results we’ve seen from traditional retailers.
  • Inventories remain in very good shape, down 7% year over year. With total sales up 7%, the 14% sales/inventory spread is noteworthy and sequentially improved from 4Q.
  • Management mentions the success of the quarter is in part due to the company’s My Macy’s strategic initiatives. While these internal efforts have been underway for a couple of years, it’s hard not to notice the company’s success coinciding with 1) the overall pick up across the mall and 2) similar margin and sales performances out of other department store operators.

Eric Levine

Director

 

R3: Easing Into Earnings With Macy’s - M SIGMA

 

 

 

LEVINE’S LOW DOWN 

 

- With clogs back on the runway and toning shoes all the rage, it was only a matter of time before the two products became one. Enter the “Fitflop Gogh”, a clog built around the company’s Microwobbleboard technology. Keep an eye out for the patent leather, metal studded version slated to pop in NYC boutiques in a matter of weeks.

 

- In a yet another sign that the off-price channel is seeing less quantity of “quality” brand name goods, Fossil pointed out that its sales to the off-price channel were down 50% in its first quarter to about $5 million. Management also noted that the run rate for off-price sales from Q408 to Q209 was about $10 million per quarter. Clearly tight inventory and growing demand is helping to dramatically reduce FOSL’s reliance on off-price.

 

- With a deal announced between Zale and Golden Gate Capital, it appears the company has bought some time (and raised some capital) to execute another iteration of a turnaround strategy. While the details of the merchandising and marketing plan were not discussed, it was clear from management comments that Zale’s store base is not expected to shrink from here. In fact, the interim CEO made it a point to say with the current assets acting as a base, the goal is to grow the business from here. Easier said than done, but time now appears to be on ZLC’s side.

 

 

HEDGEYE CALENDAR

 

R3: Easing Into Earnings With Macy’s - Calendar

 

 

MORNING NEWS 

 

GSI Acquires E-Commerce Supply Chain Solutions - GSI Commerce Inc. has acquired VendorNet, a Boynton Beach, Fla.-based multichannel e-commerce supply chain solutions provider to more than 100 retailers and brand marketers. <sportsonesource.com>

 

Macy's May Offer Exclusive New Clothing Line from Hugo Boss in Fall 2011 - Sources say Macy's is in talks to sell "White Label," which will be a range for men and women priced below most Hugo Boss offerings, the NY Post reports. The mid-priced line is part of Hugo Boss CEO Claus-Dietrich Lahrs's plan to double US revenues. <streetaccount.com>

 

Macy's Launches Web Site Geared Towards Travelers - The site includes a hotel search and booking engine powered by Kiwi Collection. <internetretailer.com>

 

International Spend in UK Hit by Flight Ban in April - International shopper spend in the UK fell 16% year-on-year in April as the volcanic ash cloud impacted tourism.  <drapersonline.com>

 

Furniture Buying Index Up 6th Month in a Row - The Furniture Buying Index, tracked by America's Research Group, jumped two points this month to a reading of 71, marking the sixth consecutive month the Index has moved up.  “Pent-up demand and larger than expected tax refunds helped drive the Index up two points this month,” said Britt Beemer, chairman of America’s Research Group.  “When the Index reaches 70 points or higher, the success of retail furniture sales goes up dramatically. “This is a good sign especially considering that Memorial Day weekend is historically a very strong furniture weekend.” <hfbusiness.com>

 

K-Swiss Boosts Marketing Efforts with Another Athlete - KSWS signed a multiyear deal with France’s second highest ranked tennis player Gael Monfils to represent both footwear and apparel. The 23-year-old tennis phenom, currently ranks at No. 18 in the ATP World Tour and will be the highest ranked player on the K-Swiss team, which also includes tennis players Bob and Mike Bryan and Sam Querrey. Monfils has two career ATP titles and is a seven-time ATP Tour finalist. “He will be a big part of our marketing efforts, not only in Europe, but globally as well,” K-Swiss sports marketing director Erik Vervloet said in a statement. “He is young, talented, and is only going to get better as the years go on.” <wwd.com/footwear-news>

 

Red Wing Shoe Co Receives Grant to Expand Facilities - Red Wing Shoe Co., the owner of Vasque, Irish Setter Boots, and other shoe brands, has received a $261,270 grant to expand its plant in Potosi, MO, and add 42 new full-time jobs within two years, according to the St. Louis Business Journal. <sportsonesource.com>

 

Li Ning Tripling Store Size - Chinese sportswear company Li Ning Co. Ltd. is tripling the size of its Pearl District store. The store opened only three months ago. <sportsonesource.com>

 

Hot Topic Launches Helmetgirls Tees - Urban pop-art artist Camilla d'Errico has paired with Hot Topic to launch a line of T-shirts featuring Helmetgirls designs. The tees by licensee All Pacific Apparel are rolling out to Hot Topic stores now in the U.S. and online. D'Errico's manga-inspired artwork has been on snowboards, magazine covers, toys, clothes and accessories. <licensemag.com>

 

Yoox Profits Triple in Q1 - Profits at online retailer Yoox Group quintupled in the first quarter, jumping to 2 mm euros. Increase due to currency hedging and lower interest expenses having self-financed most of its investments on the back of its initial public listing last fall. Revenues gained 43.4%, reaching 50.3 mm euros. The 10-year-old company also runs e-commerce sites for designer brands from Marni and Emilio Pucci to Emporio Armani, Valentino and Roberto Cavalli. This division reported a 109% increase in sales. At the end of March, Yoox counted 20 online stores, eight more than in March 2009. In the first quarter, Yoox launched online stores for Coccinelle, Giuseppe Zanotti, Napapijri and Alberta Ferretti. In February, the firm extended its collaboration with Giorgio Armani SpA in Europe, the U.S. and Japan until Jan. 31, 2015. Under the new agreement, the Armani Jeans brand also will be included on emporioarmani.com. Geographically, sales in Italy grew 21.1% and 38.7% in Europe. Revenues in North America rose 111.6%. <wwd.com/business-news>

 

Maidenform Brands Inc. Doubles Profits - Strength due in part to strong gains in its shapewear business. The firm also raised its guidance above Wall Street’s estimates. Sales rose 25.1%: Wholesale sales increased 27.4%, Retail sales rose 3.7%. Top- and bottom-line results exceeded analysts’ expectations. Leaner inventories and reduced promotional activity drove the firm’s gross margin up 430 bps. Shapewear sales, up 34%, were key to the quarter’s performance. “Shapewear now makes up more than a third of Maidenform’s global business and is the fastest-growing category in intimate apparel,” said CEO Maurice Reznik. <wwd.com/business-news>

 

R.G. Barry Quadruples Profits - Higher sales and margins helped R.G. Barry Corp. more than quadruple its third-quarter profit. The marketer of slippers and accessories footwear, recorded 5.1% sales growth and 690 bps gross margin expansion. “Our spring business benefited from the growth initiatives undertaken during the past several years and is being measured against our very healthy results from the equivalent period last year,” said Greg Tunney, president and CEO, in a statement. <wwd.com/footwear-news>

 

 


THE M3: SANDS 1:1 RATIO; SANDS GETS COTAI CONCESSION; STUDIO CITY-USE IT OR LOSE IT; WEAVER EXIT

The Macau Metro Monitor, May 12th, 2010

 

 

NO IMPORTED LABOUR UNTIL SANDS MEETS 1:1 RATIO Macau Daily Times

Human Resources Office (GRH) coordinator Wong Chi Hong said Sands China will only get imported labour for the resumption of its Parcels 5 & 6 construction when half of the workers needed are Macau residents.  He confirmed yesterday that GRH has already received the imported labour application from Sands China “a long time ago”, but said he was not sure if it was in last year or this year.

 

In addition, Wong Chi Hong stressed that the Office will not approve any quotas at this moment before Sands China can meet the requirements and confirms when exactly the suspended construction work on the Cotai Strip can be restarted.  “We definitely won’t give them [Sands China] any quotas in advance, it has to depend on the actual conditions of the construction because it’s still waiting to be resumed, and also how many local workers they are going to hire,” Wong Chi Hong said.  “We have already said that the minimum ratio [of local to imported workers in the construction industry] is 1:1. So we will only approve the quotas when at least 50 percent of their workers come from Macau,” he added.

 

SANDS GETS COTAI LAND CONCESSION macaubusiness.com

Sands China has obtained the official land concession contract for parcels 5 and 6 in Cotai.  The company will have to pay a premium of MOP1.87 billion for the two parcels, which have a total size of 150,134 square-meters.  The concession contract states that the company has 48 months to develop parcels 5 and 6.

 

HIGH STAKES IN MACAU CASINO PROJECT FACE-OFF WSJ

According to a letter reviewed by The Wall Street Journal, an impatient Macau government could move to settle Studio City's fate as soon as this week.  The letter, signed by Jaime Roberto Carion, director of land and public works in Macau, said the government would invalidate or terminate land rights for the $2.4 billion casino-resort project unless a satisfactory reason is given for its delay.  The parties, including U.S. investment firms Silver Point Capital LP and Oaktree Capital Management LLC, had one month from the date of the letter, April 14, to respond.

 

WEAVER QUITS SANDS CHINA Intelligence Macau

Stephen Weaver, chief development officer of Sands China, has left the company.  The creator of the Cotai Strip masterplan, Weaver had already resigned from the Sands China board a few weeks ago.


Financial Triumvirate

“Don’t tell mom I’m an investment banker. She still thinks I play piano in a brothel.”

– Bruce McKern

 

Early on in my career on Wall Street I had a friend who ended his Wall Street career after just a few years to become a teacher.  He has gone on to become headmaster at one of the best private schools in Ohio, helping to shape the minds of thousands of kids.  As for me, I don’t know what it’s like to wake up in the morning and not think about making money. 

 

There are lots of ways to make money legally on Wall Street and some do it better than others.  Wall Street storytelling is exemplified by bankers dressing up assets to look better than they are.  Then they charge huge fees for this service, while charging you interest on the money you borrow from them (and they can borrow money while paying little to no interest). 

 

Since March of 1792, it does not matter what side of the Street you are on; it’s all about making money.  Today, thousands of people are waking up thinking “how can I make money today”, but at the same time they see that Washington is demonizing what has been part of our culture for 218 years.   

 

The excesses of Wall Street are not excusable and are front and center right now, but Wall Street continues to be a necessary and critical part of our culture, and our economy.

 

With Financial reform on the tip of Obama’s tongue, can the recent string of events be just a coincidence?

 

(1)   SEC charges Goldman Sachs with fraud

(2)   Federal prosecutors are investigating whether Morgan Stanley misled investors

(3)   Last week the market melts down for some unknown reason….

(4)   JPM, GS and BAC have perfect quarters (what were they thinking?)

 

What is not a coincidence is the “Financial Triumvirate” of perfect quarters from JP Morgan, Goldman Sachs and Bank of America (Ken Lewis must be steaming right now).  Maybe now it's time for Mr. Bernanke to stop throwing money at the “Piggy-Bankers” who get up every morning and have nothing better to do but think about making money. 

 

He is making life so easy for them…. 

 

If you are a client that is on the other side of the “Financial Triumvirate”, you must be thinking “what do they know that I don’t?”.  Yes, it’s a stacked house!  The big boys have an unfair advantage in knowing exactly what the order flow pipeline looks like, so they can sit back and let their clients come to them for another losing trade.  This is a theme Washington can understand! 

 

Even so, you would think that in a “normal quarter” they would still have some trades go against them.  Flawless is definitely an outlier and nearly statistically improbable.  According to our in-house financial guru, Josh Steiner, in a “normal quarter” the historical charts of profitability distribution suggest that they lose money 5-10% of the time. 

 

When it’s all said and done, Main Street is the biggest loser. The man on the street is not getting paid on his /her savings account while Washington continues to enrich the Piggy-Bankers on Wall Street, whose sole purpose in life is to make money.  Last night, the ABC consumer confidence index came in unchanged at -47 for the week ending May 9.  The “Financial Triumvirate” may be doing what they do best, but it’s not trickling down to the little guy on Main Street.   

 

After last week, it is much clearer now why the Federal Reserve is keeping rates so low.  The European Sovereign debt issues and the size of the new loan facility have exposed the vulnerability of the EU as an economic power, which puts the US in a position of relative strength.  Having a sound banking system is critical to maintaining this mystique.  This is Dollar bullish! 

 

What can’t be ignored is that the consumer credit cycle of the past 20 years is dead.  At the same time, sovereign credit issues, combined with unsupportable entitlement spending, have ushered in an era of political and social instability.  This is a negative for the market and equity valuations, and I will point to Healthcare as a classic example.   Yesterday, our Healthcare analyst Tom Tobin said to me that he thought that Healthcare as a “safety trade” was gone, as the US and EU governments account for about 50% of payments to Healthcare.  Without healthcare, what’s left? Utilities?  Please say it’s not so.  

 

How many times in 2008 did you read that “cash is king” and that anything with leverage was going to zero?  In 2010 cash is still king and asset valuations are dependent upon the predictability and sustainability of cash flow generation. 

 

Yesterday, we sold our trading long position in QQQQ and took our allocation to US Equities in the Hedgeye Asset Allocation Model back to zero percent.  Also, at 12:14 PM we re-shorted the SP500 on strength (SHORTED SPY at $116.69) and our view of the market right here and now with the S&P at 1,155 is implied by our positioning.  Financial reform, Healthcare reform, the elimination of the Bush tax cuts, trillion dollar bailouts and the negative credit cycle are all inhibitors to growth.     

 

Wall Street’s interests are not always aligned with those of Main Street, and given what is happening on Main Street today, it is easy to demonize Wall Street.  However, not all bankers are bad.  Washington is trying to push through its financial reform so it does not want to educate people on the good guys and the critical role they play in today’s economy.  Some reform may be necessary, but too much financial reform will not only be an inhibitor to growth, but could also put a damper on a culture that has thrived on the dreams of those waking up, wanting to make money.

 

 

Howard Penney
Managing Director

 

Financial Triumvirate - gs dealer 1


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Chinese Inflation Watch . . . Negative for Global Demand

Conclusion: All parties and asset classes  leveraged to the RECOVERY trade (copper, oil, Brazil, Industrials globally) will come under increased pressure if China's latest round of tightening proves ineffective to contain inflation and the country is forced to implement further tightening.

 

In the last 48 hours, a bevy of inflationary data points out of China have been cause for concern globally and may lead to increased tightening in China, which is negative for global growth.  Furthermore, we believe that the Bovespa in Brazil will continue to ride the tide of Chinese producer demand, which is already showing signs of slowing on the margin.

 

 According to recent estimates, China accounts for nearly 13% of Brazilian exports (second only to the U.S. at ~14%). With China’s imports slowing sequentially to +49.7% Y/Y in April and the prospects of further tightening by the Chinese government, Brazil’s export-heavy economy could come under increased pressure on the margin. The chart below outlines the tight trading relationship between the two countries of late.

 

Chinese Inflation Watch . . . Negative for Global Demand - 1

 

Furthermore, China’s shrinking trade surplus (-87% Y/Y in April)  may limit the size of any perspective yuan appreciation, which is less positive for the Brazilian economy vs. a larger appreciation (FYI: Brazil, India, and Europe have backed the U.S.’s call for a stronger yuan).

 

Below is a summary of the most important (inflationary) Chinese economic data released in the last 48 hours which took the Shanghai Composite down another -1.9% overnight to -19.2% for 2010 YTD: 

  1. Chinese inflation (CPI and PPI) up again sequentially to +2.8% and +6.8% y/y, respectively - the largest spikes in inflation in 18 months!
  2. Chinese property prices (70 cities) +12.8% year-over-year representing the largest jump since 2005;
  3. China's purchasing price for raw materials accelerated 50bps sequentially to +12% y/y;
  4. Chinese imports came in at +49.7% year-over-year growth;
  5. Chinese loan growth up +51% sequentially (m/m) in April to 774B Yuan (versus 511B Yuan in March);
  6. Chinese Industrial Production (April) +17.9% versus +18.1% y/y in March;
  7. China’s Money Supply (M2) for April slowed month-over-month by 100bps, but is still up +21.5% y/y, which suggest future inflation will be  very difficult to avoid (The Central Bank of China has a inflation target set at +3% y/y - just 20bps away from April's reading). 

All told, these inflationary data points add increased pressure for China to raise interest rates and allow the yuan to appreciate. Aside from those options, however, China has already taken measured steps to cool its economy, the most important of which are: 

  • Raising reserve requirement ratios three times YTD;  those levels are now at 17 percent for the largest banks and 15 percent for smaller ones;
  • China's Banking Regulatory Commission ordered 78 state-controlled companies to exit real estate sector;
  • Chinese Banks are now asking for 40%-50% down payments  for second mortgages;
  • In March, Chinese officials raised deposit requirements for buyers at land auctions to 20% of the minimum price to increase costs for developers; and
  • China's State Council raised down payment requirements for second homes to at least 50% and have pegged mortgage rates to no lower than 110% of the benchmark rate. 

Despite the latest round of tightening measures being put in place just a few weeks prior, these steps have already had a slight, but measured impact in property prices. Beijing News reported today that property prices in the Capital fell 31% in the past month. While we must be careful to not extrapolate this decline and apply it to the entire Chinese property market, it's important to note that a systemic 20-30% decline in housing prices in China's first-tier cities will ease tightening concerns. It may, however, cause producers to substitute away from investment in property, which, on the margin, is bearish for Brazilian exports and the global industrial sector at large.

 

In fact, we're already seeing signs of that substitution effect, as Total Planned Investment in New Construction Projects has slowed sequentially from +34.5% y/y in the three-months ended in March to +31.3% y/y in the four-months ended in April. Furthermore, Chinese PMI slowed sequentially to 55.4 in April vs. 57 in March, which raised concerns that Chinese demand for commodities will continue to wane.  These are marginal sequential changes, but they matter.

 

Time and data will tell the full story on Chinese housing prices and whether or not the Chinese government will continue to tighten to prevent further inflation. It is important to remember that the Chinese economy is a managed and controlled market, suggesting that incremental tightening will be at their own pace, in spite of external pressure to revalue the yuan. Regardless, all parties and asset classes  leveraged to the RECOVERY trade (copper, oil, Brazil, Industrials globally) will come under increased pressure if China's latest round of tightening proves ineffective to contain inflation and the country is forced to implement further tightening.

 

According to the below Hedgeye RECOVERY Index, the Indices, Industries, and Asset Classes leveraged to the RECOVERY trade have suffered near-widespread declines YTD, with the notable exceptions of the S&P Building and Construction Index and the S&P Homebuilders Index.

 

Chinese Inflation Watch . . . Negative for Global Demand - 2

 

Darius Dale

Analyst


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