It’s no secret that I think a PENN/PNK combination makes a lot of sense. For this reason, I find it very interesting that PNK hired Carlos Ruisanchez as its EVP of Strategic Planning and Development. Aside from being a fellow UCONN undergrad, Mr. Ruisanchez has some good experience as a senior banker covering the space at Bear Stearns. With pressure on management from shareholders and presumably the Board to increase shareholder value, might his duties involve a little more than just finding development opportunities? My guess would be yes.

PZZA: Papa John’s Expects Industry Consolidation

Just as Domino’s said that it is seeing more restaurant closures among the smaller players, PZZA said today that it expects increased consolidation within the pizza category, resulting in the closures of 2%-3% of the existing 65,000 pizza restaurants within 12-18 months. Management commented that “this should benefit the stronger national chains and [they] believe that the quality brand position will work to [PZZA’s] favor in picking up business from these closed competitor locations.”

I would agree that reduced capacity will benefit all of the market share leaders, including Domino’s.

RL: Numbers Are Still Too Low

I’ve been convinced that RL is under-earning, and 1Q results strengthen my view that there’s more to come. RL guided to $4.00-$4.10. I still think it prints better than $4.50 for the year.

To be clear, this was NOT a great quarter – despite half the sell-side congratulating management on the call for beating lowered guidance. Yeh, RL printed $0.93 vs the Street at $0.71, but sales were up only 4% and EPS was about flat vs. last year. Nothing to write home about.

That said, there were several things I liked, and another that raised an important potential concern.
1) Comps were decent at 4%, and wholesale managed to be flat despite a truly abysmal US whole business (which by my math was down around 20%). This helps show the geographical evolution of this company.

2) Inventories were down 6% despite a meaningful boost in FX, and a horrific retail environment. On top of this, Gross Margins were up, meaning that RL did not simply take it on the chin with margin to clean its books. The chart below says it all. After 10 quarters of fixing distribution and investing in product, we’re finally starting to see the benefit on RL’s P&L. The P&L trajectory is on solid footing.

3) The cash cycle overall improved by 9 days. Not only did inventories improve by 6 days, but DSOs were down by 2, and payables were up by 1. Not bad, Ralph.

My Biggest Concern. There is the potential for us to look back 2-3 quarters down the road and view this quarter as the peak for RL from an FX standpoint – not immaterial when a third of cash flow comes from Europe. See my 7/25 and 8/5 posts outlining 1) materially slowing retail sales in Europe and 2) Europe serving as the buffer for Chinese apparel imports as the US shifts to other countries on the margin. Bottom line = growth is slowing in Europe, costs are headed higher, and any organic growth and/or FX benefit could be history for US brands/retailers.

The saving grace for RL is that in this quarter, it ONLY BEAT AS MUCH AS IT HAD TO! The company delivered SG&A rather meaningfully (by about 275bp) as it took up SG&A to plow capital back into the organization to keep brand momentum going. If the FX factor reverses course later this year, RL is one of the few brands that can pull back on key levers to gain share without meaningfully sacrificing profitability.

RL guided to $4.00-$4.10. I still think it prints better than $4.50 for the year.


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US Dollar Right At the Goal Line This Morning

The US Dollar is surprising me, trading higher again this morning, so far, up at 74.13. Given Bernanke's directionless and dovish view, I was expecting to see a selloff here. That certainly doesnt mean things can't change, however.

The 200 day moving average is where a lot of the slower moving capital lies. I generally do not use this line to manage my portfolio, but I am always aware of it in order to understand risks of potential behavioral breakdowns/breakouts.

The 200 day moving avg for the US Dollar Index is 74.23. I have attached a 3 year chart just to remind you how many times we have toyed with this goal line, and failed.
  • Can The US Dollar Breakout With Bernanke Pandering To the Doves?
(chart courtesy of

Japan Is Getting Darker, Faster...

The Japanese government made explicit comments last night that assure me, at the very least, that economic trends are deteriorating as fast as I thought they would. Testing the 109 level, the Japanese Yen is hitting it’s lowest level relative to the US Dollar since January, as a direct result.

Japan's Finance Minister, Ibuki, actually used the word "stagflation", joining Ben Bernanke as the other major central banking head to do the same in recent weeks.

My short term target for the Nikkei is 12,807.

*Full Disclosure: I remain short Japan via the EWJ (ETF).
  • Japan's Nikkei Is Breaking Down
(Chart courtesy of

US Consumer Sentiment Continues Track Employment

This morning's weekly ABC/Washington Post consumer confidence reading reverted to its negative "Trend" line. This correlates positively with the sharp downward movement in last week's US jobless claims. Both have an inverse correlation with rising US corporate and personal bankruptcies.

At -49, the ABC confidence readings look primed to test their all time lows. This week's negative move is more negative if you consider that this occurred in the face of dropping oil prices.


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