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CHART OF THE DAY: Friday the 13th

Scary Hedgeye picture of the day


CHART OF THE DAY: Friday the 13th - chart1

R3: Heading South



August 13, 2010


With all the major department stores having reported 2Q earnings, it’s clear that inventory positions are heading south.  A look at the SIGMA overlay sums it up.






With all the major department stores having reported 2Q earnings, we overlayed their SIGMA charts to see what the state of the industry looks like.  Without exception, all four companies saw EBIT expansion and inventory management erode sequentially.  Very simply put, inventory management (as defined by the spread between sales growth and inventory growth) has hit the wall.  JCP is faring the worst on this metric, as the company sets up for a slowing top-line against growing inventory. KSS still appears to be managing its business with the most discipline, but SG&A investments leave the P&L with little room for error (and leverage on sales, at least for the next two quarters).


While we have been cautious on those that are reliant on mall traffic to drive top-line (vs. those that can drive sales via product innovation or fashion), we believe this is further confirmation that tough compares, lackluster demand, and building inventories could and should lead to earnings risk over the back half.  In the near-term, we expect promotional cadence to pick up as retailers have become accustomed to managing risk on a very short time frame.  Additionally, we expect to see increased volatility in both sentiment and fundamentals as the Street looks to grasp onto every data point trying to gage promotional activity, tax-free holiday impact, and overall traffic levels.  The bottom line is that inventories look heavier than we’ve seen in over a year relative to expected demand.


R3: Heading South - JCP KSS JWN M 8 10

- Eric Levine, Director



  • Kohl’s noted that its private and exclusive brands outperformed significantly during 2Q with overall penetration increasing by 300 bps year over year to 49.1%. The company’s three largest brands Apt 9, Croft & Barrow, and Sonoma combined for a 20% increase. Major exlcusive brands including Vera Wang, Food Network, and Elle were up over 30%.


  • Keep an eye out for a collaboration between two iconic brands, Peanuts and Lacoste. The two are joining forces in the fall to commemorate the 60th anniversary of the Peanuts comic strip with an apparel offering. We suspect this is just the beginning of a big year for Peanuts, with both new ownership and the birthday celebration underway.


  • After declaring intentions to be the largest specialty apparel retailer in the world and signing one of the most expensive 5th Avenue leases in history, UNIQLO is on the prowl for additional Manhattan sites. Word has it the Japanese value priced retailer has signed a lease for a 34th St location. New York remains the only domestic market for the brand.



More Footwear Production Shifts to the Indonesia As Labor Cost Rise Elsewhere - A number of athletic footwear brands have shifted part of their production to Indonesia this year as production costs in other parts of the world has been increasing, according to the Indonesian Footwear Association. These brands include Asics, Mizuno and New Balance. Indonesia exported $1.8 bn worth of goods in 2009 and he expected the figure will increase to $2 bn this year. Meanwhile, Adidas, which has also been aggressively expanding production in Indonesia, said the country, its third-biggest supplier, offered “abundant labor availability, good quality, competitive prices and political stability.” Although production here is growing rapidly, the company said the expansion will not happen at the expense of its top suppliers, China and Vietnam.  <fashionnetasia.com>

Hedgeye Retail’s Take:   Indonesia continues to be the single biggest beneficiary of rising costs in China and Vietnam for its footwear manufacturing base.  Expect to see this shift continue until capacity maxes out and wage inflation begins to creep into this manufacturing base as well.


US International Trade Commission To Clear Tariffs on Woven Ribbon Imports from China and Taiwan - The U.S. International Trade Commission voted Thursday to clear the way for punitive tariffs to be imposed on woven ribbons imported from China and Taiwan, in the first trade remedy case involving textile products from China since quotas were lifted at the end of 2008. The vote concluded an investigation that determined China illegally subsidized and dumped “narrow woven ribbon with woven selvage” into the U.S. market. Taiwan was found to have dumped woven ribbon into the U.S. market. The products covered by the ruling include certain woven ribbon used for embellishing apparel and footwear or for decorative uses like gift wrapping. <wwd.com/business-news>

Hedgeye Retail’s Take:  Sounds like we may see more gifts wrapped with ribbon this year than ever.


Talbots Continues to Change it Up - “They’ve become a bit of a hindrance for attracting new customers. They see the red door — they think it’s their grandmother’s store,” said Trudy F. Sullivan, president and CEO of Talbots, who for three years has been leading a turnaround of the chain, long a predictable mainstay in malls and on main streets across America. There’s been little left untouched aside from keeping the classic appeal aimed at women 40 and older. Talbots’ major shareholder switched from Aeon in Japan to BPW Acquisition in the U.S. through a merger completed in April, changing the board and ownership and deleveraging the company with $420 million in debt paid down. The chain also established a $200 million credit facility with G.E. and has doubled the capital expenditure budget to $40 million this year for upgrading stores, information technologies and the Web site. Earlier, the store count and corporate staff were reduced; the J. Jill division was sold, and the kids’ and men’s categories were discontinued. In addition, the two big annual clearances were dropped in favor of taking less dramatic markdowns monthly to keep inventories cleaner and to sustain a steadier flow of merchandise. The apparel sourcing switched to an exclusive partnership with Li & Fung, saving costs and speeding product development, though Talbots still does all its own design and recruited a chief creative officer, Michael Smaldone, to focus the fashion and sharpen the image. The result: Styles are chicer, with shapelier fits such as sleeker pants with lower rises for a younger look, though the collection is still considered classic and traditional but with added twists and embellishments. <wwd.com/retail-news>

Hedgeye Retail’s Take:   If successful, this strategy to lower the average age of the core Talbots customer will go down as one of the more impressive brand positioning in specialty retail.  All eyes are on the fall, which will offer the best read to-date on whether merchandising and marketing changes are taking hold.


Texas Gets A Boost From Better Beaches than Oil Filled Louisianna and Mississippi - Texas beach towns are getting a boost from the BP Plc oil spill as Gulf Coast vacationers head west because of concerns about crude-contaminated beaches in Louisiana and Mississippi.  Room rentals at beach hotels in Galveston, Corpus Christi and South Padre rose 5.2 percent in the second quarter from the same period last year, according to the tourism division at the governor’s office in Austin, Texas. “If anything, we have benefitted from the disaster,” said Edith Fischer, director of tourism at the Brazosport Chamber of Commerce. The Gulf region could lose $22.7 billion in tourism dollars over three years from effects of the spill, a study commissioned by the U.S. Travel Association found. Florida would be the hardest hit because it’s so dependent on beach tourism, the study said.  <bloomberg.com/news>

Hedgeye Retail’s Take:  Not a bad trade off for retailers with a heavy TX presence. 


Levi's Introduces Curve ID - Levi's introduced a new women's jeans line this week, Curve ID, via a campaign from Wieden + Kennedy that pitches the product with ads that declare, "All asses were not created equal." The campaign, says the agency, is a rallying cry to women everywhere that, as the ad copy notes, "hotness really does come in all shapes and sizes." A gatefold ad that features three women in different cuts, Slight Curve, Demi Curve and Bold Curve, tells women that "we should be able to go into stores and find jeans that fit us instead of having to fit into the jeans." The line was created as a result of research that included more than 60,000 body scans of women around the world and designed to fit three universal body types. "Since we created our first women's jeans 75 years ago, no one has changed the formula for finding the perfect fit," said You Nguyen, svp, women's merchandising and design for Levi's. "Our revolutionary approach looks beyond waist size to address the true curves of a women's entire body." Levi's global survey found that more than half of women, 54 percent, try on at least 10 pairs of jeans to find one pair they would buy; most women, 87 percent, wish they could find jeans that fit better than the ones they own; most women, 67 percent, believe that jeans are designed for women with "ideal" figures; and few women, 28 percent, believe that jeans are designed to fit their bodies. <brandweek.com>

Hedgeye Retail’s Take:  Leave it to Levi’s to come up with a buzzworthy marketing campaign about once every three to four years.  This one certainly has the chance to be a head turner. 


Marks & Spencer Opens Vital Lines of Credit for Suppliers - M&S is working with high street banks HSBC and Royal Bank of Scotland (RBS) to open up vital lines of credit for its suppliers after extending its settlement terms. The UK’s largest clothing retailer has used its clout and established relationships with the banks to negotiate preferential lending rates for its 860 general merchandise suppliers who want to borrow against their M&S sales invoices to ease their cash flow. Landed or full-service vendors (FSV), those which manufacture stock and deliver it to the UK for the retailer, have had payment terms increased from four to five weeks. The payment term changes will have a negative impact on suppliers’ cash flow at a time when there is a general lack of trade credit insurance availability on supplier orders. However, M&S’s Vendor Financing Scheme with the banks will offset this when it comes into effect on new orders on September 1.The decision to extend the settlement terms will also bring in millions of pounds in liquidity for M&S. <drapersonline.com>

Hedgeye Retail’s Take:   Financial engineering of the supplier/retailer inventory pipeline sounds risky at best.  Yes, this might be the only alternative, but perhaps cutting inventories and managing risk against a small topline is the safer way to go.


UK Plus-Sized Womenswear Grows - Sales of plus-sized womenswear have soared 45% in the UK over the past five years, putting the market on track to reach £3.8bn this year. Research by consumer research firm Mintel showed that almost a quarter of UK women wear clothes in a size 18 or over. Plus-sized womenswear chain Evans is the latest retailer to cash in on the growing market. The 260-store retailer, which is part of Sir Philip Green’s Arcadia Group, is poised to target overweight teens with the introduction of exclusive ranges from around five young fashion obrands in selected stores and online. The retailer is expected to roll out an ecommerce site for the offer under a standalone name, although the name and launch date have yet to be decided. <drapersonline.com>

Hedgeye Retail’s Take:  Sounds like a mirror image of the US.  Unfortunately, domestic retailers have yet to profitably capitalize on the obesity trend in a meaningful way.


Consumers Slow to Use Mobile For Shopping? - More than a third of all U.S. mobile consumers, about 80 million consumers, will use their mobile phones to help them shop this holiday season, but many won’t complete the purchase through the mobile channel, according to a new PriceGrabber.com survey.The survey of more than 1,100 consumers with web-enabled phones found that 32% felt the purchase process on their smartphone took too much time; 26% indicated transactions were too difficult to complete; 19% said products were too difficult to find; and 10% said their phones didn’t support secure credit card transactions. For others (16%), the roadblock was that they didn’t know how to make a purchase via mobile. However, many of those obstacles can be overcome, according to e-commerce technology provider MarketLive Inc. In its report, “Mobile Marketing for the Holidays,” MarketLive suggests retailers create a mobile gift guide with a streamlined selection of popular products, including gift cards.  <internetretailer.com>

Hedgeye Retail’s Take:  Enter the Ipad. 


Akami Helps Retailers Nab Higher Online Conversion Rates - Akamai Technologies Inc. compared the retailers in the Internet Retailer Top 500 Guide using its services versus those that do not and found Akamai customers experienced a 33% higher conversion rate on average. Akamai says it works with 260 retailers on the Internet Retailer Top 500 list. The HomeDepot.com, No. 39 in the Internet Retailer Top 500 Guide, says it has experienced a 30% increase in conversion rates since it began using Akamai’s Dynamic Site Accelerator service. Dynamic acceleration delivers changing, non-cacheable content such as inventory more quickly to retail web sites by serving it to web site visitors who request it via a nearby Akamai portal. <internetretailer.com>

Hedgeye Retail’s Take:  Yet another reason why e-commerce continues to experience solid, above average growth.  Technological innovations today have even the playing field where at one time e-commerce leaders such as Amazon had a substantial competitive advantage based on technology alone.




Still great, but not as great as we thought.



We don’t want to take anything away from Genting Singapore’s terrific quarter reported yesterday.  However, after further review, they are not as good as they first appeared.  The positive VIP hold impact was greater than we thought.  Mass also held higher than we thought.  Thus, actual volumes were lower than discussed in our note yesterday.  The upshot here is that normalized EBITDA was S$425 million versus our initial normalized impression of S$450 million.  Including the high hold, actual EBITDA was S$503 million. 


April was clearly the standout month in the quarter and while May and June volumes were weaker, both months benefited from the high hold.  We don’t expect April volumes to be replicated anytime soon.  Here are some additional thoughts:

  • VIP Hold benefit on EBITDA was higher than our initial estimate of S$50MM and was likely closer to S$65MM
    • While the company said that normal EBITDA margins are in the 48-58% range assuming normal hold, we think that normal margins are closer to the low end of that range rather than the mid-point.
    • VIP as a % of gross win was 60% not 64% (as we wrote about earlier)
    • We estimate that RC volume was about S$14.5BN and the win rate was around 3.75%
    • Normal hold is 2.8-2.85%
  • Mass also held above the company’s “normal range” of 16-20%.  We think the benefit of high hold on Mass could have benefited revenues by $20MM.  We estimate that Mass win was approximately $230MM.
  • We estimate that win per EGM/slot was just under USD$800/day or S$1,100/day
  • Non gaming was likely between 12-15% of reported net revenues
    • F&B and other hotel revenues are roughly equal to room revenues
    • Other non-gaming revenues aside from hotel, F&B, and USS include revenues from the car park, retail and MICE business
  • Spend per visitor at Universal Studios decreased sequentially since there were more promotional giveaways in the first quarter.

Model tweaks:

  • 2010:  We estimate that RWS can produce revenues of S$2.74BN and EBITDA of S$1.45BN for 2010.  Treating the UK operations as discontinued starting 3Q2010, we assume the Genting Singapore can do S$3.0BN in revenues and S$1.2BN of EBITDA.
  • 2011:  We project that RWS can produce revenues of S$3.4BN and EBITDA of S$1.7BN.  After corporate overhead, our 2011 EBITDA estimate is S$1.5BN.

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As we look at today’s set up for the S&P 500, the range is 17 points or 0.3% (1,080) downside and 1.2% (1,097) upside.  Equity futures are trading below fair value in an erratic morning; there was early strength on the back of strong Q2 German GDP but that has since given way MACRO economic concerns - July CPI and Retail Sales will be in the spotlight today.  Headline CPI is estimated to have increased by +0.2% m/m, and Retail sales to have risen +0.5% m/m.

  • ADVANCE/DECLINE LINE: -436 (+1854) Breadth positive on a down day!
  • VOLUME: NYSE - 1007.39 (-13.48%) - Summer volume for sure!
  • SECTOR PERFORMANCE: Two sectors positive - XLB and XLV
  • MARKET LEADING/LAGGING STOCKS: Office Depot +4.46%, Motorola +4.16 and Cisco -9.38% and Netapp -8.67%


  • VIX - 25.73 1.34% - The VIX now up for 4 days and bearish for equities.
  • SPX PUT/CALL RATIO - 2.98 up from 1.64 surging yesterday (low on 07/15/10 of 0.87)


  • TED SPREAD - 22.54 -0.382 (-1.669%)
  •  3-MONTH T-BILL YIELD .15% Unchanged
  • YIELD CURVE - 2.1661 to 2.2061 (close)  - Now at 2.1786 


  • CRB: 268.91 +0.03% (first up day this week)
  • Oil: 75.74 -2.92%
  • COPPER: 330.55 +0.92% (currently trading at 322 - BEARISH for growth expectations)
  • GOLD: 1,213 +1.38% (safe haven status returning?)


  • EURO: 1.2849 -0.28% - (trading down every day this week)
  • DOLLAR: 82.635 +0.42%) - (trading up every day this week)


  • ASIA - Closed on a stronger note.  Japan closed modestly higher on the day, but closed 4% lower on the week.  China's Shanghai index closed up 1.2% (down 1.94%on the week), as property shares reversed earlier losses triggered after a central bank statement showed a steep drop in new mortgage loans in Shanghai.
  • EUROPE - Markets are trading back below breakeven after a slightly disappointing Italian bond auction offset earlier strength generated by a robust Q2 GDP reading from Germany.  
  • EASTERN EUROPE - Trading mixed to lower - Russia down for the fourth day; Latvia up 1.80%.
  • LATIN AMERICA - Trading higher Peru, Argentina and Brazil and up small.
  • MIDDLE EAST/AFRICA - Trading mixed.

Howard Penney

Managing Director


THE DAILY OUTLOOK - levels and trends 813














Sure, equipment sales were awful but the most important takeaway may actually be positive.



The BYI quarter and guidance was pretty much in-line with our expectations – obviously lowered following the IGT and WMS releases.  The segments were off, however, but in a positive way.  Low international shipments drove a pretty big miss in equipment sales.  Systems beat slightly but the big upside surprise was in gaming operations.  Given the recurring nature of gaming operations revenues vis-à-vis equipment sales, this surprise was a positive one.


Assuming the forward numbers are reasonable, the stock looks pretty cheap, particularly given the 3-5 yeah outlook we see for new markets.  Of course, if the domestic casino markets do not recover and replacements continue to suffer, the slot market recovery will be delayed.  Under this scenario, the casino operators will be in even worse shape.


Here are the details of the quarter:

  • BYI reported equipment sales revenues of $63.5MM and gross margin of $31.6MM, missing our estimate by $7MM and $4MM, respectively
    • Interestingly, the miss versus our numbers was on the international shipments.  Actual international units shipped was 1,225; our estimate was 2,000 units.
    • After IGT and WMS reported, and it became obvious that our initial estimate for replacement units in the quarter were too high, so we took down our NA unit estimate to 2,450. 
    • ASP’s were much better than we expected – out of the top 3, BYI was the only manufacturer to report strong ASP growth
    • Our best estimate (until ALL reports) is that the total shipments to NA in the quarter were approximately 16k, which pegs BYI’s ship share at 16%, up from 13.5% last quarter.  Per usual, Konami’s March quarter market share was inflated.
  • Systems is always a crap-shoot.  Revenues were $0.6MM below our estimate, while gross margins were $1.4MM better. Next quarter will be weak because of timing, but full year guidance looks fine.
  • Gaming operations revenues of $77.4MM and gross margins of $54.1MM, were very solid – beating our estimates by $4MM on both revenue and gross margin.
    • The beat came from better than expected net placement of premium rental & daily fee products
    • Yield also increased due to the mix shift towards premium pay products. Most of the legacy units have a daily fee of $50/day while some of the new products that BYI is releasing have a daily fee of $75/day.  The margins on these products are very high since there is no jackpot funding.
  • Other stuff:
    • SG&A, R&D and D&A were all low… but that was expected
    • The other expense of $2.1MM was FX related and on an after-tax basis, cost BYI 2 cents per share
    • The tax rate of 37.8% was above their normal range of 35-36.5%.  It cost them about 2 cents in the quarter.
    • It would have been nice to see an actual decrease in the share count given that they spent $47MM on buybacks in the quarter.
  • Thoughts on the guidance:
    • Given where stock prices are and the 8 week visibility window on replacements, we think the low end of BYI’s guidance assumes 50,000 industry replacement units, delays and low ship share in IL, some delays in Italy, and very little traction in Australia… the latter 3 are all back-end loaded.
    • While the Street was up at $2.48 for FY2011, we think that the whisper was in-line with the new guidance.


The Macau Metro Monitor, August 13th, 2010



Marina Bay Sands sees nearly full occupancy this weekend when the Youth Olympic Games opens and high levels of occupancy for the next weekend.  In Singapore, hotel rates have spiked, and the Youth Olympic Games and the Singapore Grand Prix are likely to keep rates high until the end of September.  SA Tours senior executive Dan Lim said: 'It's difficult to get more rooms as all the hotels are almost fully booked. The only way is to try a walk-in booking, or to book through the Internet, which can cost a bit more." However, Singapore's high prices in general, coupled with higher room rates, are shutting out tourists with lower travel budgets.



A division of PBOC reported Shanghai's loans plunged by 11.4 billion yuan ($1.68 billion) to 270 million yuan, 98% lower YoY and 91% lower MoM.  “Because of recent policies on the property market and low transaction volume, individuals’ demand for mortgages continued to contract,” PBOC said.



Macau package tours surged 167% YoY to 489,023 in June 2010, as visitors last year were still influenced by swine flu fears.  Visitors from Mainland China (337,558), Hong Kong (23,357), Japan (22,591) and Taiwan (22,152) rose substantially by 210.6%, 51.5%, 142.3% and 75.4% respectively.


603,004 guests checked in, 35.3% YoY.  The average occupancy rate of hotels and guest-houses rose 15.2% points to 75.7%. 



Per-capita spending of visitors increased 3% YoY to MOP 1,575 in 2Q.  52% of the interviewed visitors in 2Q claimed they had participated in gaming activities during their stay in Macau.  The average length of stay of visitors shortened by 0.2 days to 0.9 days.


According to a Credit Suisse study, higher China urban household income than what was reported in official government data, due to unreportable income from "illegal or quasi-legal activities," could partly explain the soaring gaming revs in Macau.  The report suggested Galaxy would benefit since its Galaxy Cotai project is aimed at the Chinese middle class.

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