In today’s US Strategy note we provided levels for the VIX. We have been asked by a number of clients to provide our levels on the VXX; we are currently long the VXX in our virtual portfolio.
With the pending release of Malcolm Knapp’s May same-store sales and traffic trends, the rumor mill is circulating a -1% same-store sales number. We obviously have no way to confirm the validity of this -1% number prior to Malcolm’s official release, but we thought it was worth commenting on regardless.
A -1% same-store sales result would imply flat 2-year average trends on a sequential basis from April. For reference, same-store sales trends in April decelerated 80 bps on a 2-year average basis from March. In light of the sequential slowdown in May 2-year average trends reported by a few QSR companies (please refer to yesterday’s post titled “QSR – A LOOK AT CURRENT TRENDS” for more details), I was expecting a further slowdown in May for the casual dining operators so a -1% would be positive relative to my expectations. It is worth noting, however, that this upside to my estimate would still imply a 50 bp deceleration in 2Q10 quarter-to-date trends from the first quarter on a 2-year average basis. So, as I have said before, top-line trends will be coming under increased pressure as the industry, on average, begins to lap increasingly more difficult YOY EBIT margin comparisons in 2Q10 and for the balance of the year.
In May, we are lapping the first month in 2009 when reported comparable traffic growth was better than reported same-store sales growth. This trend, which Malcolm dubbed “a most unusual event”, continued through November 2009 as a result of the significant industry discounting. As we begin to lap these bigger YOY average check declines, we should begin to see checks stabilize YOY, offset by traffic. Although significant discounting is not good for average check growth or margins, continued improvements in traffic trends will be the most important indicator of a recovery. In April, traffic trends on a 2-year average basis slowed 140 bps sequentially from March and 100 bps from the average in 1Q10.
Recent casual dining management comments:
PFCB June 9 presentation: The company implemented a 1% to 2% price increase at the Bistro in May in an attempt to support average check, which has been a drag on comp growth as traffic has improved. And, Mr. Vivian stated that comp growth is “getting dangerously close to getting positive.” Weekday sales growth is improving ahead of weekend growth, which he attributes to stronger business travel spending (accounts for about 30% of Bistro’s tickets). He also commented that sales and traffic trends at Pei Wei continue to improve in 2Q10.
Specifically, he said that management continues to believe that the second half of the year will be better than 1H10, and in line with management expectations, they are continuing to see a gradual improvement in trends across the country. They are seeing signs of life in Arizona and California and although retail activity slowed in May in California, the Bistro continued to show steady progress.
EAT June 8 presentation: Relative to average check trends, the company stated, “We’re hopeful that some of the more aggressive discounting that’s been occurring in this space is starting to abate, and you’re starting to see people promoting lower- priced items on their menu than necessarily discounting items, which we hope is a good sign.”
CAKE June 8 presentation: “Without specifically commenting on any results that we’ve seen since we made our – gave our guidance in April, I think that the consumer is impacted obviously by a lot of things and the stock market going up and down, the things that are going on overseas. Things that don’t make you feel better about your wealth don’t help you consume more. So those are things that are potentially worrisome for all consumer product companies. And I would just say that what we’re focused on is controlling the things that we can control.
We can control, when you come into our restaurant, whether we give you a better experience than we gave you the last time we came in, that the food was hot, that it was cooked perfectly and that your wait time was reduced, or at least your quote time was accurate. There is many things that we can control. So we’re working on those types of things, but I think the consumer is resilient. They showed that they returned to the brands that they liked the best first, when they came back. And dining out is one of those things that I think consumers are – they like to take away last and they like to put back first when they feel like they can, from a economic standpoint.
We have – incident rates on desserts are up for us, which is kind of incredible in this environment. They’re up and consumers are ordering more desserts, less alcoholic beverages, so we’re not driving them to drink, I guess yet. But our incident rates on most of our items are up, other than beverages.”
RUTH June 8 presentation: They have three buckets of consumers (special occasion, business and affluent, core consumers). Each bucket makes up about 1/3 of tickets. Regulars are coming back and they are seeing better special occasion trends. Weekend business is getting stronger and total revenue is up on certain nights. They are seeing more energy around the restaurants and bars.
The athletic industry is still looking good. Regional performance is shaping up out West. Nike and UnderArmour are looking solid, while Columbia is simply crushing it.
LEVINE’S LOW DOWN
New York & Co.’s Top Two Design Executives Have Abruptly Quit - Marie Holman-Rao, chief design officer, and Anne-Charlotte Windal, senior vice president and general manager of design, both resigned this week. A search for their successors is expected to begin immediately. In the meantime, Greg Scott, president, will lead the design and visual teams. Windal is expected to stay at N.Y. & Co. for awhile until the company rebuilds the design team. The departures compound the challenges of inventory buildups and some fashion misses that have caused the company to expect Q2 losses. The retailer needs to sharpen its image selling sexy, modern and moderate price apparel and accessories targeting women 25 to 45. <wwd.com/retail-news>
Hedgeye Retail’s Take: This won't be the straw that breaks the camel’s back, but when you're one of the only retailers discounting on top of discounts last year due to fashion misses you've gotta be worried...
Adidas Again Defends Soccer Ball - Adidas again defended itself against complaints against its new Jabulani soccer ball and its performance at the World Cup. Adidas' Global PR Manager Erik Van Leeuwen noted that FIFA has said that the new ball is tested and proven and there have been no complaints. <sportsonesource.com>
Hedgeye Retail’s Take: Negative PR is still PR. And, this is probably not going to prevent the local kid from wanting an “official” World Cup ball to kick around at the park.
Hopkins Sporting Goods Buys Stake in Wrestler's World - Iowa-based Hopkins Sporting Goods has acquired a minority stake in Suplay Products, Inc. dba Wrestler's World. Terms were not disclosed. <sportsonesource.com>
Hedgeye Retail’s Take: This is the real type of wrestling gear, not the WWE kind. Aside from the M&A worthiness of this, there are no signs that wrestling has become a growth area for the sporting goods industry.
Early Sales Indicate Father's Days Sales Upside - Early sales indications are decent — if not spectacular — for most retailers, and they’re expecting a surge in the final days before the holiday on Sunday. So far, traditional seasonal items such as T-shirts, shorts and short-sleeve knits have been most popular. Stores have been aggressive in their promotions this year — whether it’s gift-with-purchase coupons, one-day specials or celebrity in-store appearances. With overall business still a little shaky, stores believe they need incentives such as these to drive sales. According to the 2010 Father’s Day Consumer Intentions and Actions Survey, conducted by BIGresearch for the National Retail Federation, consumers will spend an average of $94.32 on Father’s Day gifts this year, up nearly 4%. Total Father’s Day spending is expected to reach $9.8 bn. Special outings, gift certificates and apparel are expected to be the most popular gift choices this year, according to the survey. <wwd.com/business-news>
Hedgeye Retail’s Take: While this commentary on sales trends is not terribly different from that which characterized Mother’s Day, the reality is the spend on Mom is 50% higher than it is for Dad. Either way, this bodes well for June- which was already off to a solid start.
Tiffany Engages in M-Commerce - The jeweler has introduced an iPhone and iPod Touch app that offers a virtual display case of its diamond rings. The app, dubbed the Tiffany & Co. Engagement Ring Finder, was created in response to growing customer desire for mobile and interactive shopping, the merchant says. The app includes Ring Sizer, a tool that lets shoppers determine their size by placing a ring directly on the screen of the mobile device and aligning it with the correct circle in a guide. Shoppers can browse the collection according to shape, setting, metal or design. The rings are shown in actual size. Each style may be viewed with diamonds of six different carat sizes. And shoppers can zoom in on a ring’s details, pair the rings with wedding bands, and save or share their favorites via e-mail, Facebook and Twitter. <internetretailer.com>
Hedgeye Retail’s Take: Clever way to get males excited about one of the biggest purchases in their lives, especially if they’re shopping at Tiffany. Or better yet an even more clever way for someone to drop a hint that they want to get engaged! Also an interesting juxtaposition between and old-school, heritage brand and forward-thinking technology. It won’t be long before almost every retailer has some sort of mobile presence.
Men's Wearhouse Looks to E-commerce and M-commerce for Sales Growth - The addition of mobile-phone shopping applications that store customer sizes, preferences and offer a phone answering message from the Men’s Wearhouse founder and chairman is part of a plan to increase the e-commerce business. Currently, e-commerce accounts for less than 5% of the company’s $1.9 billion in annual sales. “That’s our main focus now in all our divisions — to make e-commerce an integral part of our business,” Zimmer said at the annual shareholder meeting, describing a strategy in which Internet and sales among the company’s 1,142 U.S. and 117 Canadian stores work in tandem to bolster business. <wwd.com/business-news>
Hedgeye Retail’s Take: With fit and alterations being such an important aspect of a suit purchase, this is one business that may hit some limit on how far it’s direct business can go. However, once fit is established (provided the waistline stays put), we can see some interesting replenishment opportunities via e-com and m-com.
Macy's Private Label I.N.C. to Sell Men's Footwear - Macy’s private-label collection I.N.C. International Concepts, a line of moderately priced apparel and outerwear for men and women, is adding men’s footwear to the offering for fall. A women’s collection is already at retail. The collection will include a wardrobe of looks, from motorcycle boots to high-top sneakers. Set to retail for $60 for sneakers to $100 for boots, the line will hit 150 Macy’s doors in July. <wwd.com/footwear-news>
Hedgeye Retail’s Take: Seems like a natural extension for Macy’s powerhouse private brand, but not one that is likely to move the needle.
Kohl's Inks Deal with Aldo Shoes - Kohl’s is looking to take its burgeoning footwear business to the next level. The department store chain said Wednesday it has inked a deal with Aldo International to produce private-label offerings for the chain. Aldo will design a range of products for women and men, and the styles will be available at Kohl’s stores and on Kohl’s.com beginning next spring. The move, Kohl’s said, will bolster its private-label and exclusive brand segment, which accounted for 47% of sales in the first quarter. <wwd.com/footwear-news>
Hedgeye Retail’s Take: Good move here by KSS to boost its fashion footwear offering while maintaining differentiation from JCP and others. Also, an interesting opportunity to take Aldo distribution out of the mall to new distribution points.
Seven For All Mankind Return to Print Advertising - 7 is aiming to spur growth with an ambitious, multimillion-dollar advertising campaign for fall that will be its first print campaign for the VF Corp.-owned premium denim brand since fall 2008. The campaign, which was shot by Mert Alas and Marcus Piggott and features models Masha and Julian Schratter, will break in September books, in addition to an outdoor and online component. The media buy comprises 15 titles, including Vogue, W, Vanity Fair, InStyle, Elle, GQ, Details, V and Nylon. The ads also will run in Europe and Asia. The brand is celebrating its 10th anniversary this fall and the company hopes the campaign will help drive traffic to stores. For the first time, the brand tapped an outside agency to create the ads, New York-based Chandelier Creative. <wwd.com/markets-news>
Hedgeye Retail’s Take: We're finally seeing VFC put its money where its mouth is. VFC claimed over the last 2 quarterly calls that they would increase spending primarily on Vans and TNF. Now it looks like Seven is getting some marketing dollars as they look to revitalize the once-hyped denim brand. Next up, accelerating store growth?
Overstock.com Most Consistent Online Retail Site in May - Overstock.com had the best consistency rating among large retailers for May, says Gomez, the web performance division of Compuware Corp. Last month the mass merchant had the best aggregate site loading time at 17.60 seconds. Rounding out the top five retailers after Overstock.com, Gomez listed CDW.com (17.85 seconds), Staples.com (18.75), LLBean.com (18.93), and BlueNile.com (18.99). <internetretailer.com>
Hedgeye Retail’s Take: Clearly the benefit of operating in an online world, companies can measure with complete accuracy how fast it takes to load their sites. We just wonder if the consumer really notices a 1-2 second difference in load time across different brands. No matter how long it takes, waiting even a minute is sure faster than getting into the car and heading to the local strip-mall. Clearly there’s a double standard here in terms of expectations in an online vs. offline retail experience.
China's Quanzhou City Produces 20% of World's Sport Shoes - Sports shoes manufactured in China's Quanzhou city currently accounts for 40% of national production in 2010, and 20% of the world's total output, according to China Leather Industry Association. The city has 925 shoe businesses with production capacity of RMB100 million and achieved total output value of RMB208.315 billion in the first five months, up 29.4% from early year. <fashionnetasia.com>
Hedgeye Retail’s Take: Its not like Quanzhou was off the radar, but add the city name to your google global alerts… we will.
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Following the 3 day holiday and through the 16th, June revenues now look on track for north of HK$14 billion.
Macau table gaming revenues through June 16 came in at HK$7.5 billion. Projecting the current run rate over the remaining 14 days of the month, and adding estimated slot revenues, yields a full month projection of HK$14.8 billion. However, business is likely to taper off following the recent 3 day Chinese holiday so our best estimate is for June revenues of HK$14.0-14.5 billion. While it's not May's 95% growth, 74-80% growth is still very impressive.
In terms of table market share, LVS lost a lot of share over the holiday, down to 19.2% but similar to May's low of 19.4%. Wynn held steady, just below 18% but way up from May's 15.7%. MPEL seemed to do quite well over the holiday, raising its table share from 12.0% to 12.8%, but still below May's table share of 14%.
Things Continue to Get Worse
For the last few months we've been growing incrementally more bearish for two reasons. First, we've become worried about the rising risk of a double dip in the housing market; our Financials vertical will be hosting a conference call on next week. Second, we've become cognizant of the lack of improvement in the employment picture. Since the start of this year, almost six months now, the number of people filing new unemployment insurance claims hasn't fallen one iota. Compare that with the almost straight line of improvement we saw from April 2009 through year-end 2009, where claims were falling at a rate of 23k/month. The reported number this week rose 12k to 472k, but that's after revising the prior week up by 4k so the real increase was 16k. Either way, the bottom line is that claims remain in the ~450-460k range. Rolling claims were actually flat at 463.5k vs 464k the prior week. As a reminder, we need to see initial claims fall to a sustained level of 375-400k in order for unemployment to fall meaningfully and, by extension, lenders' net charge-offs to return to normalized levels. We remain well above that level, but more importantly we're showing zero signs of progress moving to that level.
Below we chart the raw claims data.
As a reminder, May was the peak month of Census hiring, and it should now be a headwind to jobs from here as the Census winds down.
Below, we've added a U.S. equities correlations table which regresses the S&P 500 and the nine S&P sectors against weekly jobless claims, the U.S. Dollar Index, and 10-Year U.S. Treasury yields. The highest inverse correlations to weekly jobless claims on a one-year basis are (in order): Consumer Staples (XLP), Consumer Discretionary (XLY), and Technology (XLK). Utilities (XLU) has the lowest inverse correlation of all the sectors during the same duration.
Joshua Steiner, CFA
*** We've added subsector and company correlations to initial jobless claims later in this note. ***
Things Continue to Get Worse
For the last few months we've been growing incrementally more bearish for two reasons. First, we've become worried about the rising risk of a double dip in the housing market, which we'll be hosting a conference call on next week. Second, we've become cognizant of the lack of improvement in the employment picture. Since the start of this year, almost six months now, the number of people filing new unemployment insurance claims hasn't fallen one iota. Compare that with the almost straight line of improvement we saw from April 2009 through year-end 2009, where claims were falling at a rate of 23k/month. The reported number this week rose 12k to 472k, but that's after revising the prior week up by 4k so the real increase was 16k. Either way, the bottom line is that claims remain in the ~450-460k range. Rolling claims were actually flat at 463.5k vs 464k the prior week. As a reminder, we need to see initial claims fall to a sustained level of 375-400k in order for unemployment to fall meaningfully and, by extension, lenders' net charge-offs to return to normalized levels. We remain well above that level, but more importantly we're showing zero signs of progress moving to that level.
Below the jobless claims charts, we show the correlations between initial claims and each of the 30 Financial Subsectors. Not surprisingly, Credit Card and Payment Processing companies show the strongest correlations to initial claims, with R-squared values of .62 and .72 over the last year, respectively. Surprisingly, some subsectors show a positive correlation coefficient to initial claims - i.e. Financials that go up as unemployment claims go up. These names are concentrated in the Pacific Northwest Banks and Construction Banks, though these correlations are usually not very high.
In the table below, we found the correlation and R-squared of each company with initial claims, then took the average for each subsector. For composition of the subsectors, see Chart 5 below.
The following table shows the most highly correlated stocks (both positively and negatively correlated) with initial claims. Note that the top 15 negatively correlated stocks have a much stronger correlation on average than the top 15 positively correlated stocks - as you would expect, given that most of the Financial space is pro-cyclical.
Astute investors will note that in some cases the R-squared doesn't seem to reconcile with the square of the correlation coefficient. This is a result of finding the correlation and then averaging. For example, Pacific Northwest Banks have an average correlation coefficient of .32 and an average R-squared of .52 (with CACB, CTBK, FTBK, and STSA strongly positively correlated and UMPQ strongly negatively correlated). The different directions have the effect of canceling out each other out when finding the average correlation coefficient, but do not cancel out when finding the average R-squared.
Below we chart the raw claims data.
The table below shows the stock performance of each subsector over four durations.
As a reminder, May was the peak month of Census hiring, and it should now be a headwind to jobs from here as the Census winds down.
Joshua Steiner, CFA
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