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M: Look Through Near Term Share Gain

On its 2Q conference call, Macy’s played-down potential impact from the recent string of bankruptcies in the department store space. I think the company was right to play it down, because quite frankly it does not have the infrastructure/ clue (few retailers do) to know why a customer is or is not shopping in its stores. What is certain is that the store overlap is quite meaningful.

My Jr Analyst Zac has turned into quite the cartographer of late. His analysis below shows that about 20% of Macy’s stores overlap with either a Mervyn’s, Boscov’s, or Goody’s within a 3-5 mile radius. The initial hit is/was likely to have been negative given the aggressive promotional activity, but as with most bankruptcies, the business siphons away in subsequent quarters to competitors. In this economy, it is not unrealistic to assume that the business is lost forever. But my sense is that Macy’s sees a bump. My math suggests something in the 0.5-1% comp range is not out of question. Not huge, but enough to cling on to for a zero growth retailer that is in a secular decline.

When I stack that up against cycling extremely weak gross margins last year, and the fact that Macy’s SG&A ratio is trending down despite zero sales growth (i.e., this is bad behavior as the company is cutting into muscle), this puppy might actually shape up to show a decent cash flow trajectory in the coming quarters.

It’s tough for me to make any kind of positive fundamental call given that I believe margins will be 2-3 points lower at this company in another 3 years. Also, from a tactical standpoint, how can I ignore Keith’s comment that ‘if it fails to close above 21.24, short it with impunity.’ Today’s close was 2 cents shy… (Yes, his timing models have proven to be accurate to the penny).

Ralph (RL): Collars Up Boys!

Short the white T's (GIL) and long the pink collars (RL). Brian McGough wears pastels, and the shorts who are still in this stock are wearing red faces.

I'm taking my new squeeze target up to $76.99/share. Short interest here remains way too high.
KM
  • RL is going higher...
(chart courtesy of stockcharts.com)

Yield spreads: Paying up for liquidity

Citi placed $3 Billion worth of 5 year senior notes on Tuesday at 6.51%, nearly 80 basis points higher than the recent average spread-to-treasury level for a bank issuer with an equivalent rating.

JP Morgan is selling $1.6 Billion in perpetual securities today at a yield of 8.63%, the low end of pricing where the paper was being marketed by 12.5 basis points. The glass-half-full crowd are happy to see that the paper is getting placed.

Andrew Barber
Director
  • Liquidity tap, drip drip...
Chart by Research Edge LLC

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What Do The Boys In Chicago Think About Jobs?

Jobless claims came in at an elevated 450,000 this week. Below we have attached a chart of Initial Claims over Treasury Futures.

This may be far too pedestrian an observation for some, but the boys in Chicago appear to have had their eyes firmly on the initial claims numbers since they started ticking up last month.

As the facts change, great traders do.
KM

Obama's Populist CPI Balloon

This morning’s Consumer Price Index was actually a lot higher than I expected it to be, and it's bearish for stocks. As soon as Obama gets back from his Hawaiian vacation, the attached chart will be on his desk.

Main Street consumer confidence continues to tank, despite falling gas prices and rising stocks. Unemployment is their main concern, and inflation is a close second. The Democrats know this ring tone.

The headline CPI reading of +5.6% year over year may very well be a lagging economic indicator (it was the highest monthly report since January of 1991), but that doesn't mean that Obama won't use it to his advantage. Bernanke is “data dependent”, remember?

KM

YUM - THE CASH FLOW STORY IS CHANGING.

I have always wondered why the street is enamored with a company that can only grow EPS 10-12%, when they are reducing shares outstanding by 8% (company FY08 guidance). This raises so many red flags!

I recently ran my sustainability analysis on YUM, only to conclude that there is shift in how the company is going to allocate is cash flow over the coming years. Quietly, YUM’s has been allocating more cash toward capital spending - this increases the risk profile of YUM (relative to the past) and drives lower incremental returns for shareholders.

Here are some of the facts regarding YUM's uses of cash over the past 12-months:
Dividends paid declined by 3% (partly due to a lower share count).
Yum has burned thru $1.4 billion in cash (Cash from ops - Cap Ex. - Share repo - Dividends)
Interest expense increased 8% (due to higher debt levels to fund the cash burn)
Shares outstanding declined by 2% (despite spending $1.9B on buying back stock)
Capital spending has increased 13%

First, YUM’s capital spending needs are growing and that will come at the expense of the share repurchase program. Second, if interest expense in up 8% (due to higher debt levels to buy back stock) and the share count has only declined by 2%, how is that accretive to shareholders?

This dogs hunting day are over.

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