prev

MGM: MAINTAINING LOW CAPEX

MGM is severely under spending on maintenance capex. The good news is they can probably keep it up [down] through 2011.

 

 

We’ve always thought that maintenance capex in the casino industry needed to be 5-7% of revenues.  It’s not the perfect measure but it’s good enough.  Companies have either spent this much or under reported true maintenance.  To its credit, MGM has historically spent in the 5-9% which means they are a) honest in their reporting and b) properly maintaining their properties.  Certainly, given the company’s exposure to the competitive LV Strip and its market positioning at the upper end of the spectrum, they do need to spend more.

 

The following chart shows MGM’s historical maintenance spend as a % of revenues and as a % of PP&E.  Clearly, capex is way below normal levels on both metrics.

 

MGM: MAINTAINING LOW CAPEX - mgm25

 

MGM plans on spending $200 million on maintenance capex this year and next year, representing about 3% of revenues.  They can probably get away with it since they had fresh product heading into the downturn.  MGM spent 9% of revenues on maintenance capex in both 2007 and 2008.  However, they will have to play catch up in 2012 and therein lies the problem.  Normalized capex will eat into its free cash flow.  In 2011, we project MGM will generate $225 million in free cash flow but only $75 million if we normalize maintenance.  That translates into a paltry 2% free cash flow yield on the current stock price.  Note that for this analysis we are using a modified free cash flow measure that includes hypothetical JV distributions and income tax benefits.  True free cash flow will undoubtedly be negative next year. 


Bear Market Macro: SP500 Levels, Refreshed...

Since April, there have been bulls who have appeared and disappeared. All the while this Thunder Bay Bear has remained bearish.

 

I’m not bearish on every country and every asset class. If you look at Hedgeye’s Virtual Portfolio, you’ll see that we actually have as many longs as we do shorts right now (we’re long Indonesia, the British Pound, etc). We’re simply bearish on both America’s currency and stock market.

 

As risk managers who are accountable to the score every day, we force feed ourselves the most immediate term data points (both economic and price oriented). Sometimes the data doesn’t support our bearish stance, most of the time it does. Otherwise we wouldn’t remain bearish.

 

This morning’s jobless claims report of 500,000 was an absolute bomb (highest since November of 2009). Next week’s Existing Home Sales report (August 24th) will be a bomb too. Bombs are bearish.

 

From a quantitative factoring perspective, as of 11AM EST my model is flashing me lower-highs of immediate term resistance (1093) and lower-lows of immediate term support (1059). That’s bearish too.

 

I’m not always bearish, but when I am – I use Hedgeye.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bear Market Macro: SP500 Levels, Refreshed...  - 1


R3: TVs, HOTT, Levi’s, supply chain disruptions, etc…

R3: REQUIRED RETAIL READING

August 19, 2010

 

Lots of noise here today across the global supply chain with issues both new and existing... 

 

 

RESEARCH ANECDOTES

  

- Substantial traffic increases at TJX continue to be the main driver of same store sales, although the company is now anniversary these gains in the back half.  As a result, the company will be spending incremental marketing dollars in an effort to lap these tough traffic compares.  Expect to see even more ads on TV.

 

- In one of the worst category performances so far this earnings seasons, BJ's TV sales comped down 25% in the quarter.  This weakness is consistent across most retailers however the magnitude here is noteworthy.  Management is expecting further asp declines to help spark demand over the back half.  A tax-free event this past weekend in MA was noted to have helped sales in the category.

 

- From goth to Justin Bieber, Hot Topic admits that in the process of trying to determine what style it wants to embody its customers are in two distinct camps – pop and more alternative/goth (what HOTT has been known for historically). Noting that the “pop camp” is winning out, expect to see a new Hot Topic going forward from what we have come to know.

  

 

OUR TAKE ON OVERNIGHT NEWS 

 

China Anti-Dumping Victory Over EU - The WTO has disapproved the EU’s imposition of extra duties on imports from China, which may bring broad implications to the EU trade policy. Sources said that the WTO panel will say that the EU discriminated against Chinese exporters of screws and bolts compared to exporters from other countries when it applied a single anti-dumping duty based on the national principle. In future, the EU will have to set individual duties for companies on case-by-case basis in order to comply with the WTO position rather than a blanket duty for the whole country. The EU already uses the individual duty model in cases of countries it considers not to be market economies, such as Cuba, Albania or Vietnam.  <fashionnetasia.com>

Hedgeye Retail’s Take: More important than many are likely to realize at first blush as this may be the first step of several such measures. Recall that China brought another case against the EU regarding duties on footwear back in May 2010.

 

Bangladesh Labor Unrest May Divert Garment Orders to India - Bangladesh’s ongoing labor strife over minimum wages may cause some of the country’s garment orders to be switched to its neighboring India. In 2009-10, India lost out to its neighbor in apparel exports as the minimum wages of $100 per month were no match to the monthly $24 paid in Bangladesh. However, the recent labor strife forced Bangladesh to increase wages of its garment workers by 80% to $43 per month. The wages are further set to rise as despite the hike leaving India with the opportunity to overtake Bangladesh. The optimism in the industry stems from the recent enquiries coming from new retailers like Tricot (Chilie), Puntroma (Spain), Aibonito (Spain), Distri-Center (France), apart from the likes of Wal-Mart and M&S. <fashionnetasia.com>

Hedgeye Retail’s Take: While the target wage rate at $75 is still below India, it matters little as customers place a premium on avoiding supply disruptions. Expect increased interest in India to accelerate a resolution to this issue.

 

South African Outbreak Halts Raw Wool and Mohair Exports to China - An outbreak of Rift Valley Fever among South African livestock has forced the country to halt exports of raw wool and mohair to China. South Africa is the world’s second-largest supplier of apparel wool and the leading supplier of mohair, which comes from the fleece of the Angora goat. The country exports about 4 mm kilograms of mohair wool a year, roughly 70% of the world’s supply. China is the country’s biggest customer. Wool and mohair exports have continued to other countries, including the U.K., Germany, India and Taiwan. A spokeswoman for Cape Wools, the executive arm of the Wool Industry Forum of South Africa, said the loss of China as an export market could have serious repercussions on the price of wool and worldwide supply.  <wwd.com/business-news>

 Hedgeye Retail’s Take: Cost increases in cotton, disruptions in wool supply – will 2011 mark the return of polyester?

 

Adidas Launches Flagship Online Store on Taobao - Adidas has opened a flagship online store (http://adidas.taobao.com/) on China's Taobao Mall, the business-to-consumer (B2C) platform within Taobao. The adidas store on Taobao Mall will be its only official online retail channel in China.  <sportsonesource.com/news>

Hedgeye Retail’s Take: A bit slow to the party, but it’s a start. We expect the focus here to ramp significantly.

 

Levi Strauss Creates Asian Brand Denizen Targeting Youthful Emerging Middle Class - Levi Strauss & Co. is embarking on an aggressive expansion in China. The brand, named Denizen, is a first for Levi Strauss, the iconic purveyor of Americana that introduced jeans in the U.S. in 1837. It is rolling out in China, Singapore and South Korea with 50 stores by the end of the year, marking the first time the company has started a brand outside the U.S. Levi’s has opened more than 600 branded stores across the country and has a considerable presence in China’s key retail districts. The company joins Hermès International in the rush to develop a brand in China.  <wwd.com/retail-news>

Hedgeye Retail’s Take: A great example of what a retailer can do once it has roots placed firmly in foreign soil. Let the U.S.-based denim battle begin with VF also intently focused on the opportunity to grow in China.

 

Industry Executives Praise Toning and Boot Categories - Industry executives praised the toning and boot categories as key growth areas in footwear right now in a discussion at FN Platform. The panel included Debbie Ferrée, vice chairman of DSW Inc.; Scott Prentice, VP of sales at Jimlar Corp.; Tom Romeo, president and CEO of Bearpaw; Sonny Shar, CEO of Pentland USA; Cliff Sifford, EVP and GMM of Shoe Carnival Inc.; and Diane Sullivan, president of Brown Shoe Co. Despite upcoming price increases and issues with delivery from China, panelists agreed that the toning category has been good for sales. Sullivan added that the whole wellness category has exploded, with the success of barefoot product demonstrating a consumer interest in fitness and innovation. The panelists also said boots would continue to drive the market going into the next season. “Early reads [on boots] have been extremely positive,” said Sullivan. “The shift we’ve seen is almost as though the consumer goes directly from sandals to boots. That closed-up category is more [difficult].” <wwd.com/footwear-news>

Hedgeye Retail’s Take: Mirroring the buzz out of MAGIC, it appears that boots are indeed back again this year after a major return and resurgence last year increasing shoe chains’ chances to comp.

 

Modell's and REI: Sporting Goods Continue to Expand Store Base - Modell's Sporting Goods gave its flagship store location at West 42nd Street in Times Square New York City a major facelift as the next step its its "Rebirth" store renovation strategy. It also announced plans to open its first stores on the Upper West Side of Manhattan. REI (Recreational Equipment, Inc) plans to open a new store in Santa Barbara, CA and relocate its current location in Santa Ana, Calif. to The Market Place in Tustin, CA.  <sportsonesource.com>

Hedgeye Retail’s Take: One down, many many more renovations to go at Modells. We still think Sports Authority files for IPO before year end.

 

Levi's Workwear by Bill Reid - The limited edition capsule collection that Billy Reid designed with Levi’s combines Southern-flavored tailoring and rugged workwear, and will bear the label Levi’s Workwear by Billy Reid. The line, handcrafted in the U.S., will launch in September at 14 Bloomingdale’s stores, including the New York flagship, as well as five Billy Reid stores, bloomingdales.com and billyreid.com. Among the 10 styles in the range are cotton jersey, crewneck pieces with a “Calabama” graphic, a melding of Levi’s California headquarters and Alabama, where Reid lives. Prices range from $45 for the Calabama T-shirt to $295 for a heavy twill hunting coat with detachable apron. <wwd.com/retail-news>

Hedgeye Retail’s Take: The latest apparel offering from this solid American brand, which has struggled to get it right. Hat’s off to taking another cut at it – results to TBD.

 

Vans Shows Some New Styles - Slim silhouettes are the style prescription this spring from Cypress, Calif.-based Vans, a division of VF Corp. Low-profile girls' sneaker looks appear both in both low and midcuts (and, in a surprising departure, hard soles), but the brand’s laid-back surf DNA remains the inspiration, with the color palette including cool neutrals, whimsical prints and bold stripes. Styles range from $45 to $60 and retail at mall-based stores, boutique accounts and at Vans.com. <wwd.com/footwear-news>

 Hedgeye Retail’s Take: Vans going preppy? Perhaps another sign that skate has slowed.

 

R3: TVs, HOTT, Levi’s, supply chain disruptions, etc… - 1


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

INITIAL CLAIMS JUMP AGAIN... TO A 9-MONTH HIGH!

Jobless Claims Hit 500k

Initial jobless claims rose 12k last week to 500k, the highest level since November 2009.  Consensus had called for a small decline.  Rolling claims rose 8k to 482.5k, also the highest level since last November.  We have been looking for the range of 375-400k as the maximum level for unemployment to fall meaningfully, but with claims moving the wrong direction, the spectre of rising unemployment looms.  

 

To reiterate, our firm is of the strong view that US economic growth is going to slow markedly in the back half of this year and into 2011. We think this will keep a lid on new hiring activity and will keep cost rationalization paramount in the minds of C-suite executives. All of this raises the risks that a prospective slowdown in GDP will precipitate an incremental slowdown in hiring/pickup in firings, which will, in turn, further pressure growth. We continue to look to claims as the best indicator for the job market, as they are real time and inflections in the series have signaled important turning points in the market in the past.

 

INITIAL CLAIMS JUMP AGAIN... TO A 9-MONTH HIGH! - rolling

 

INITIAL CLAIMS JUMP AGAIN... TO A 9-MONTH HIGH! - raw

 

Below, we chart US equity correlations with Initial Claims, the Dollar Index, and US 10Y Treasury yields on a weekly basis going back 3 months, 1 year, and 3 years.

 

INITIAL CLAIMS JUMP AGAIN... TO A 9-MONTH HIGH! - 1

 

As a reminder, May was the peak month of Census hiring, and it should now be a headwind through September as the Census continues to wind down.

 

INITIAL CLAIMS JUMP AGAIN... TO A 9-MONTH HIGH! - census chart

 

Joshua Steiner, CFA

 

Allison Kaptur


INITIAL CLAIMS JUMP AGAIN WHILE THE 2-10 SPREAD SLIPS FURTHER

Jobless Claims Hit 500k

Initial jobless claims rose 12k last week to 500k, the highest level since November 2009.  Consensus had called for a small decline.  Rolling claims rose 8k to 482.5k, also the highest level since last November.  We have been looking for the range of 375-400k as the maximum level for unemployment to fall meaningfully, but with claims moving the wrong direction, the spectre of rising unemployment looms.  

 

To reiterate, our firm is of the strong view that US economic growth is going to slow markedly in the back half of this year and into 2011. We think this will keep a lid on new hiring activity and will keep cost rationalization paramount in the minds of C-suite executives. All of this raises the risks that a prospective slowdown in GDP will precipitate an incremental slowdown in hiring/pickup in firings, which will, in turn, further pressure growth. We continue to look to claims as the best indicator for the job market, as they are real time and inflections in the series have signaled important turning points in the market in the past.

 

INITIAL CLAIMS JUMP AGAIN WHILE THE 2-10 SPREAD SLIPS FURTHER - rolling

 

INITIAL CLAIMS JUMP AGAIN WHILE THE 2-10 SPREAD SLIPS FURTHER - raw

 

2-10 Spread Compresses Further

 

The following chart shows 2-10 spread by quarter while the chart below that shows the sequential change. The 2-10 spread (a proxy for NIM) has been collapsing in the past two quarters.  The current value of 214 bps compares to 217 last week.

 

INITIAL CLAIMS JUMP AGAIN WHILE THE 2-10 SPREAD SLIPS FURTHER - spread

 

INITIAL CLAIMS JUMP AGAIN WHILE THE 2-10 SPREAD SLIPS FURTHER - spread QoQ

 

The table below shows the stock performance of each Financial subsector over four durations. 

 

INITIAL CLAIMS JUMP AGAIN WHILE THE 2-10 SPREAD SLIPS FURTHER - perf

 

Below we show the correlations between initial claims and each of the 30 Financial Subsectors. We have refreshed this table to reflect prices through the end of July. Using this updated measure, Credit Card and Payment Processing companies remain the most correlated to initial claims, with R-squared values of .63 and .65 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.  

 

INITIAL CLAIMS JUMP AGAIN WHILE THE 2-10 SPREAD SLIPS FURTHER - init. claims subsector correlation analysis as of 8.4.10

 

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 .33 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. 

 

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. 

 

INITIAL CLAIMS JUMP AGAIN WHILE THE 2-10 SPREAD SLIPS FURTHER - init. claims company correlation analysis as of 8.4.10

 

As a reminder, May was the peak month of Census hiring, and it should now be a headwind through September as the Census continues to wind down.

 

INITIAL CLAIMS JUMP AGAIN WHILE THE 2-10 SPREAD SLIPS FURTHER - census chart

 

Joshua Steiner, CFA

 

Allison Kaptur


SBUX: LINKING CAFÉ AND CPG BUSINESSES

Starbucks announced an interesting strategy to construct a relationship with supermarkets through its own cafes. 

 

Reports came through last night about a new strategy by Starbucks to use its rewards program to bring grocery store customers to its cafes.  Starbucks’ Via product reached sales of $100 million in its first 10 months and Starbucks has reiterated several times over the last few months that creating a significant packaged goods business is a centerpiece of its growth strategy. 

 

The chart below shows TRADE line resistance for SBUX building at $25.03.

 

SBUX:  LINKING CAFÉ AND CPG BUSINESSES - sbux levels

 

Howard Penney

Managing Director


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

next