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R3: UA: Bullet Proof?

R3: REQUIRED RETAIL READING

July 27, 2010

 

UA had a critical setup into this quarter. It delivered. But the market was ready for it.

 

 

TODAY’S CALL OUT

 

The setup heading into this eps release was questionable at best. On one hand, apparel trends clearly looked good at retail, inventories were in check across the board, channel partners consistently leaked out indications that a bigger footwear push was happening sooner than later (in line with our view), and the consensus estimates were just flat-out low across the board. In fact, our estimate for next year still stands head and tails above the Street at $1.75 vs. the Consensus at $1.30.

 

But then Kevin Plank threw a changeup and booted his President of just 2-years just 2 weeks ahead of the quarter – and the seasonally weakest quarter at that. This thing was primed for fireworks. But every analyst came out and defended the stock in the face of the event. Even I thought the management change was perfectly rational – though would never have thought the stock would tread water (nevermind go up!).

 

In the end, this quarter was another outstanding one for UA. 24% top line growth with 1% inventory decline? Sweet…  Also, I love the fact that the company delivered its SG&A in spite of such big top line numbers. The punchline there is that it is spending when it should in order to sustain its growth trajectory – instead of printing unsustainably high margins in a period of questionable growth (i.e. Skechers).

 

The question here is whether the recent run has this stock priced for perfection. If so, then UA delivered. But if the company says anything remotely cautious on its call, I can’t imagine that the stock cannot be bought lower. Will be back after the conference call as warranted.

 

 

LEVINE’S LOW DOWN 

 

- Luxury retailer, Saks Fifth Avenue, is about to launch designer plus size apparel with partners including Chanel and Dolce & Gabbana.  However, the store’s merchandising approach will be slightly different than a traditional retailer which would normally have a “department” devoted to the larger sizes.  Saks will mix these items in with existing stock, extending the traditional size runs.

 

- According to the 2010 American Pantry Study, 93% of consumers expect to remain cautious with spending even when the economy improves.  Interestingly, 55% of those cutting back suffered no decline in income, but felt they “should be” cutting back.  When it comes to using loyalty cards and coupons, 81% of respondents indicated the process is “fun”.

 

- Sales of significant retail properties (over $5 million) slipped again in the second quarter, declining 9% sequentially from 1Q to $2.9 billion.  This marks the seventh time in eight quarters that investment spend in retail real estate has remained below $5 billion.  From 2001-2008, total investment in retail properties topped $5 billion consistently, quarter after quarter.

 

 

MORNING NEWS 

 

China Labor Shortages May Impact Fall Sporting Goods Deliveries - Of all the challenges facing the U.S. sporting goods industry in 2010, one would hardly think labor shortages in China would top the list but whether it comes to making golf clubs, toning shoes or hiking boots, the topic is dominating earnings calls and boardroom discussions across America. The deep recession and a steep rebound in orders this spring have made it difficult for Chinese factory owners to fill jobs. <sportsonesource.com>

Hedgeye Retail’s Take:  It’s been a long, long time since we’ve talked about out of stocks and product shortages.  Good for margins, not so good for the topline.   

 

Bangladesh Garment Factories Unwilling to Meet Minimum Wage Demands - As garment factory owners in Bangladesh are unwilling to offer workers as per their minimum wage demands, the government is indirectly intervening into the matter. The country’s Prime Minister, Sheikh Hasina, stressed that apparel factories paying their workers are insufficient as well as inhuman. The government will reveal the minimum wage structure for garment workers by July 28th. The Labor Ministry has been in talks with the garment factory owners to fix an apposite wage structure for their workers although the government cannot directly intervene into the privately-run industry.  <fashionnetasia.com>

Hedgeye Retail’s Take:  More inflation.

 

China Shuts Down Five Tanners in Fuzhou City - Five tanneries in Fuzhou city, China are closing down their operation by October this year as part of a plan to eliminate outdated production capacity and clean up the environment. All 5 of the Tanneries have annual production below 20,000 pieces of standard cattle equivalent. The announcement has shown China’s plan to eliminate outdated production capacity. Production and effluent treatment systems that fall below environmental standards and those tanneries that have a low production volume under 30,000 pieces per year will be the target of elimination. <fashionnetasia.com>

Hedgeye Retail’s Take:  Keep an eye on leather pricing as China continues to crack down on a substantial number of tanneries that are harming the environment.  China has said it expects to close 1,000 small and medium tanneries in its effort to eliminate harmful pollution created from such facilities.  Approximately 700 large and more environmentally friendly factories will remain.

 

Brazilian Footwear Brand Corso Como Growth Spurt - Since its 2006 launch, the Campo Bom, Brazil-based brand has been steadily adding new categories, expanding its retail and online presence and bolstering its name in the U.S. and abroad. Sold in 870 doors in the U.S., including Nordstrom, Bloomingdale’s and Anthropologie, and in another 250 shops internationally, Corso Como in May made its first move into branded retail with a website and e-commerce platform. The company also is eyeing expansion across Europe, particularly in England, France, Italy and Spain, and plans to up its trade show presence in the region. Corso Como has made its mark in the women’s market with its collection of low-key, sophisticated and comfort-driven designs at accessible price points, and is growing the category mix. <wwd.com/footwear-news>

Hedgeye Retail’s Take:  While most brands see Brazil as a substantial end-user market, it appears competition is brewing on domestic soil.  Brazil has been a large player in the footwear market for years, but branded exports to the US have not been a huge part of the equation, until now.

 

Warnaco Names Jim Gerson President, Swimwear - The Warnaco Group, Inc. appointed James B. Gerson as president of its Swimwear division. Jim joins Warnaco from V.F. Corp, where he most recently served as president of Reef.  <sportsonesource.com>

Hedgeye Retail’s Take:  Another high profile defection from VF Corp.  Recall that VFC has been trying to build Reef into another of the company’s large lifestyle brands, like Vans and TNF.

 

Nike Saves Face on Honduran Labor Issue - Although this has virtually no financial impact, Nike saved face by pledging to pay $1.54 mm for a worker relief fund to Honduran workers after University of Wisconsin at Madison terminated its agreement and Cornell warned it would follow. Nike’s action is a reversal of its stance in April, when the company said the contract factories bore sole responsibility for paying the workers’ severance. <wwd.com/business-news>

Hedgeye Retail’s Take:  For a company of its size, Nike is keenly aware of how important image and social responsibility is to today’s consumer. Score one for the college students.

 

Eastern European Malls Use Dinosaurs, Spas to Lure Shoppers - If Christian Dior’s brand name can’t attract customers, maybe dinosaurs will. That’s the plan behind Galerie Harfa, a half-built shopping mall perched above Prague’s Vysocany suburb that will have a dinosaur-themed amusement park, fitness center and rooftop swimming pool. As the economic slowdown squeezes retail sales in the Czech Republic and Hungary, companies such as Hochtief AG, Strabag SE and Skanska AB help construct venues with spas and electric-car tracks to lure shoppers. Mall space has more than quadrupled since the former Communist nations joined the European Union in 2004, exacerbating the need to offer more than just shopping. “It’s not enough to line up the usual suspects like Zara, Esprit and H&M,” said Lenka Hartmanova, a Prague-based analyst at real estate company DTZ Holdings Plc. <bloomberg.com/news>

Hedgeye Retail’s Take:  If only they could take apart and move the failed Meadowlands, NJ mall, Xanadu, to eastern Europe.

 

 Drugstore.com Branches Out - The e-retailer today unveiled VitaminEmporium.com, which sells vitamins and supplements as well as such items as shampoo, toothpaste and pet products. The site went live quietly a few weeks ago, but drugstore.com only announced it today. <internetretailer.com>

Hedgeye Retail’s Take:  Competition is heating up in the vitamin and wellness category, this time drugstore.com is taking a stab at the market.  Haven’t we seen this before?  Remember St. John’s Wort?

 


THE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP

As we look at today’s set up for the S&P 500, the range is 34 points or 2.4% (1,088) downside and 0.6% (1,122) upside.  Equity futures are trading above fair value in the wake of Monday's strong performance which followed a surprise jump in New Home Sales and another slew of positive earnings.  Today highlights sees May Case-Shiller Home Price Index and July Consumer Confidence.

  • Advance/Decline Line: +1875 (+38)
  • Volume: NYSE 1018 (-11.48%) - below LTM average
  • Sector Performance: Every sector positive (the RECOVERY trade outperforming the S&P 500)
  • Market Leading Stocks: Biogen +8.2%, Genzyme +7.7% and Devry -6.4%, FMC Tech -3.0%

Equity Sentiment:

  • VIX 22.73 (-3.2%) - The VIX is broken on TRADE - BULLISH for stocks
  • SPX Put/Call ratio - 1.73 (low on 07/15/10 of 0.87)
  • Consumer sentiment declining

Credit/Economic Market Look:

  • TED Spread - 33.302 to 33.029
  •  3-Month T-Bill Yield .14%
  • Yield Curve 2.407 to 2.406

Commodity/Growth Expectation:

  • CRB: 266.51 +0.02%
  • Oil: 78.98 unchanged
  • Copper: 321.5 (+1.2%) – trading above its TRADE line - BULLISH for growth expectations
  • Gold: 1,186 (-0.3%)

Currencies:

  • EURO: 1.30 (+0.6%)  - trading above the TRADE line
  • DOLLAR: 82.08 (-0.5%) - BEARISH formation

Overseas Markets:

  • ASIA - Major indices closed mixed despite a strong early start. China closed lower on fears about its banking sector.
  • EUROPE - Major indices were higher following Wall St's strong performance overnight - PIIGS outperforming 
  • Euribor moved higher overnight to 0.893% from 0.889% yesterday - (Bearish)
  • LATIN AMERICA - Major indices are higher
  • MIDDLE EAST - Mostly higher with the UAE trading down 0.19% 

Howard Penney

Managing Director

 

THE DAILY OUTLOOK - levels and trends

 

THE DAILY OUTLOOK - S P

 

THE DAILY OUTLOOK - DOLLAR

 

THE DAILY OUTLOOK - VIX

 

THE DAILY OUTLOOK - OIL

 

THE DAILY OUTLOOK - GOLD

 

THE DAILY OUTLOOK - COPPER


Pause To Wonder

“He who can no longer pause to wonder and stand rapt in awe, is as good as dead; his eyes are closed.”

-Albert Einstein 

 

My eyes definitely aren’t closed this morning. We are in day 6 of another low-volume, global macro, short squeeze that has expanded its multi-factor wings from Europe to China and back to the US. The interconnectedness of the modern day macro market continues to leave me in awe.

 

After moves like this it isn’t time to panic - it’s time to pause. Slow down your decision making and take the time to wonder what the potential scenarios are for the next big move. Every Euro Parity Parrot has been squeezed; most in the ‘China is going to zero’ camp have been too – and now the mean reversion associated with a global illiquidity squeeze has the 200-day Moving Monkeys in the US jumping around like they usually do when you throw them a banana.

 

Standing “rapt in awe” is not what you should do when you see perma-bulls, parrots, and monkeys alike get bullish when they see green on their screens. In the dynamic ecosystem that is the global marketplace, this is a constant. You don’t need fractal math to forecast this kind of proactively predictable behavior.

 

What you should do is have a risk management plan that’s duration agnostic and changes, real-time, as global market prices do – so let’s go through that in Europe, Asia, and the USA, from both an equity and currency market perspective, using our TRADE (3wks or less) and TREND (3mths or more) durations:

 

1. Europe

A)     Equities – all 3 of my current major leading indicators (DAX, FTSE, and IBEX) are flashing bullish TRADE and TREND as of this morning. Bullish immediate term TRADE isn’t new, but bullish intermediate term TREND is and I’ll need to see that confirm. The FTSE’s intermediate term TREND line = 5351 and this is the first day that we’ve seen that eclipsed to the upside. One day doesn’t a repeatable TREND make, but the German DAX and Spanish IBEX have been trading above their respective intermediate term TREND lines now for almost a full week – so stay tuned.

B)      Currencies – most European currencies look outstanding relative to the US Dollar. Both the Euro and British Pound are bullish TRADE and TREND with TREND line support levels for the Euro and Pound at 1.27 and 1.48 per USD, respectively.

 

2. Asia

A)     Equities – leading indicators for the entire region aren’t broadly bullish across both TRADE and TREND durations yet, but China has recently broke out to the upside from an immediate term TRADE perspective (2485 = TRADE line support for the Shanghai Composite) and the Hang Seng in HK has moved to bullish TRADE and TREND with TREND line resistance becoming support at 20,518. Japanese stocks look diametrically different than those in Singapore, Thailand, and HK, with Japan closing down again overnight and remaining broken on both TRADE and TREND durations.

B)      Currencies – most Asian currencies continue to look bullish relative to the US Dollar. India raising interest rates by a higher than expected 50 bps last night adds to the hawkish bias that Asian governments have moved towards in recent months (rate hikes in Thailand, Taiwan, Korea, etc). The one thing that can crush their domestic citizenries is inflation. It’s important to understand that inflation, like politics, is local.

 

3. USA

A)     Equities – all 3 of my current major leading indicators (SP500, XLY, and XLF) look the same – bullish from an immediate term TRADE perspective and bearish from and intermediate term TREND perspective with the following Bear Market Macro levels of TREND line resistance: SP500 = 1144; XLY  (Consumer Discretionary) = $32.99; and XLF (Financials) = $15.49. And no, we don’t use the 200 or 50 day Moving Monkeys to make our Macro Theme calls. We use our proprietary multi-factor, multi-duration model with a fundamental global macro overlay that considers country, commodity, and currency risk.

B)      Currency – the US Dollar Index continues to look awful from both a TRADE and TREND perspective with TREND line resistance now fortifying itself up at $84.21. Like a stock price for a company, the fiscal health of a country is reflected by the strength of her currency. As the European governments get austere, the US government continues to play chicken with a global game of reflation that is damning both the rates of return on American savings accounts and the currency that backs them.

 

So, in the aggregate, as we Pause To Wonder what this all means relative to our current positioning, this is what I am going to do:

  1. Europe – stay away from the short side of European Equities (we have no European equity shorts); get long some European equity exposure (preferably German) on a pullback; and remain long the British Pound (we are long FXB).
  2. Asia – buy more Asian Equities and Currencies. We are currently long Singapore (EWS) and the Chinese Yuan (CYB).
  3. USA – short the SP500 all the way up to 1144 (we are short SPY) and remain short the US Dollar (we shorted the UUP on June 7th).

Managing risk doesn’t happen in a price-momentum, performance chasing, vacuum. It’s both global in capital flows and interconnected across asset classes with a Darwinian function that will render long term parrots and monkeys “as good as dead. “ In the short run, our risk management task remains to not lose money and keep your hard earned capital alive.

 

My immediate term support and resistance levels for the SP500 are now 1088 and 1122, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Pause To Wonder - china


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THE M3: S'PORE JUNE TOURISM; 2 NEW SANDS EXECS NAMED; UNEMPLOYMENT FALLS

The Macau Metro Monitor, July 27th, 2010


TOURISM SECTOR PERFORMANCE FOR JUNE 2010 STB

Visitor arrivals to Singapore registered 26.7% growth to reach 950,000 in June 2010, the highest ever for June.  This is the seventh consecutive month of record visitor arrivals.  It is only eclipsed by 972,000 in Dec 2009.  China (+65.8%), Malaysia (+51.3%), and Hong Kong (+48.2%) registered the highest growth out of the top 15 markets.

 

RevPAR increased by 42.6% YoY to reach S$192 in June 2010.  Average Occupancy Rate posted a 12.3% YoY to reach 88% in June 2010.  Average Room Rate increased by 22.7% YoY to reach an estimate of S$219 in June 2010.

 

THE M3: S'PORE JUNE TOURISM; 2 NEW SANDS EXECS NAMED; UNEMPLOYMENT FALLS - visitationa

 

SANDS CHINA LTD. ANNOUNCES APPOINTMENT OF TWO SENIOR EXECUTIVES Sands China

Effective 8/10/2010, Edward M. Tracy is appointed as President and Chief Operating Officer, and David R. Sisk will assume the title as Executive Vice President and Chief Casino Officer.  Tracy and Sisk will oversee and manage all non-gaming operations and gaming operations respectively for all Sands China Ltd's existing properties and future developments in Macau.

 

Tracy's experience includes serving as Chairman and CEO of Capital Gaming, a multi-jurisdictional manager of Native American and Riverboat Casinos, and as CEO of the Trump Organization.  Sisk formerly was the CFO and Executive Vice President of Wynn Las Vegas and Encore.

 

EMPLOYMENT SURVEY FOR APRIL-JUNE 2010 DSEC

The unemployment rate for April-June 2010 was 2.8% down by 0.1% over the previous period (March-May 2010).  Total labor force was 326,000 in April-June 2010 and the labor force participation rate stood at 71.6%, with the employed population increasing by about 1,000 over the previous period to 317,000.

 

Number of the unemployed decreased by about 300 from the previous period to 9,300.


LVS: IT MAY BE ABOUT EBITDA MARKET SHARE

With the departure of Steve Jacobs, look for LVS to play up the positive Macau outlook. LVS’s EBITDA market share, rather than revenue share, should be the focus.

 

 

On the margin, Marina Bay Sands should still be the major stock catalyst in LVS’s upcoming earnings release (Wednesday).  Even though Macau is the largest revenue and EBITDA contributor, we already know the Macau revenues.  With the detailed breakdown – Mass, VIP, VIP hold %, etc. – in our possession, we should once again get close to quarterly Macau EBITDA. 

 

However, we think there will be another interesting dynamic to LVS’s Q2 earnings release and conference call.  Steve Jacobs, CEO of Sands China, was dismissed recently.  Therefore,  Sheldon will probably be inclined to assuage investors that there is nothing to worry about.  We expect LVS will be extra bullish about the Macau outlook and may even introduce a new metric:  EBITDA market share. 

 

LVS generated an estimated 33% of Macau’s casino/hotel EBITDA in 1Q2010, much higher than its 21% revenue share.  With its revenue share in decline, it seems prudent to focus on the more important metric of EBITDA.  Look for management to really play up this angle and for investors to eat it up.  Even in this metric, however, their share has declined, down from 41% last year.  Although to be fair, City of Dreams, L'Arc, and Oceanus were not open for the full year 2009.  See the chart below for Q1 EBITDA shares:

 

LVS: IT MAY BE ABOUT EBITDA MARKET SHARE - EBITDA

 

Back to Steve Jacobs again, there is no doubt that he did a great job cutting costs and focusing the properties on higher margin Direct VIP and Mass business.  We agree with our Macau sources that the operating team is strong enough to offset the Jacobs loss.  However, where shareholders may miss Jacobs is in Jacobs' focus on serving all of Sands China shareholders rather than just the majority shareholder – LVS – and in the development of Lots 5 & 6.  Nonetheless, these are longer term issues and while important, may not be in most investors’ line of sight right now.


MPEL YOUTUBE

In preparation for the MPEL Q2 earnings release on July 28th, we’ve put together the pertinent forward looking commentary from MPEL's Q1 earnings release/call.

 

 

Q1 Conference Call

  • For 2Q, "Depreciation and amortization cost is expected to be approximately US$77 million.  Net interest expense in the second quarter is expected to be approximately US$20 million.  Preopening expense will be approximately US$4 million, which is primarily related to The House of Dancing Water."
  • "The increase in our mass-hold percentage [from 16 to lower 20s] is sustainable, real and driven entirely by the fundamental improvement to our business.... our stated range of 18 to 20 is the right guidance, I think we’ve been at the upper end of that."
  • "We will continue to drive additional benefit going forward by pushing occupancy at Grand Hyatt into the 90% plus level.... About 85% of the occupancy in the hotel is represented from Hong Kong or PRC with the rest of it from other markets to date. So, we expect to grow occupancy in there quite strongly into Q2."
  • "We expect to derive the majority of our EBITDA of City of Dreams from the mass market going-forward."
  • "I will venture that I have confidence in preserving a substantial portion of the low market priced bank debt facility, which fully matures in 2014, will allow us to construct a refinancing that will keep our blended cost of debt below that of most of the other global gaming companies.... our debt will drop down to 150bps over, substantially below any market price, which had just clearly been established at 450 over by one of our competitors.... We will complete a refinance transaction during 2Q."

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