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BBBY: Facing Reality

So here’s the setup on BBBY.  I’m at $0.67 for the quarter, Street is at $0.63 (high-end of guidance).  I’m modeling a 5% comp and modest gross margin expansion.  This represents the first quarter that the company comes up against gross margin gains on y/y basis.  Importantly, I believe they can achieve margin expansion given ’07 and ’08 saw massive margin erosion in the wake of the housing blow up and substantially heightened promotional activity. 

 

The environment over the past few months has been very much status quo from a promotional standpoint (we’re not talking denim or logo tees here) as well as a demand perspective.  WSM, PIR, KSS, TGT, COST, and TJX all continued to highlight home/soft home as a leading category (i.e actually comping positive), which is consistent with the commentary we’ve been accustomed to hearing over the past 6 months.  Overall there remains substantially less couponing by BBBY a key factor in maintaining margin expansion.

 

With the fundamentals sound, the sentiment is a bit different heading into the quarter this time vs. last.  Recall,  there was much speculation last quarter surrounding a same store sales miss heading into the print.  BBBY ultimately came through with the top line, although there was substantial volatility into the reporting of results and the shares sold off even with confirmation that sales didn’t tank. 

 

This time the set-up is more benign, as we haven’t heard many whispers going into tomorrow evening.  The flip side here is the stock is at $42 (almost parity with June 23rd, the date of the last quarterly release) but the environment is slightly more positive towards the space (we can’t ignore the S&P’s 8.8% increase month to date as one of the more positive backdrops).  All in, this quarter largely hinges on guidance for the next quarter and the year.  The Street is currently at the upper end of this quarter’s guidance, but ahead for the remainder of the year.  Like most of retail, the rest of the year that presents the greatest challenge on both top and bottom line comparisons.  We’re concerned that the 19% growth represented by the consensus is very unlikely to be blessed by management.  Yes there is still upside here on the margin line, but you won’t know it come tomorrow’s recorded conference call.  Headlines will run with a “guide down”  spin even if we all know that this management team is one of the most conservative in all of retail. 

 

Yes, we’d all like to believe all of this conservatism and tough comparison rhetoric is “in the stock”.  However, this is easier said than done and we wouldn’t be surprised to see a sell off even if the underlying prospects remain solid for BBBY.  For the longer term, we’re still comfortable that margins can continue to expand and that cash will either continue to build or eventually be deployed. 

 

The wildcard remains share repurchase, which management has been very conservative with despite sitting on $1.6 billion in cash and no debt.  This can only mean upside, but we put less than a 50% chance that they stepped it up in a meaningful way.  BBBY is still one of the better retailers out there, with a decidedly favorable competitive position.  We’re just not confident that the stock is well positioned from the long side (come tonight’s results).

 

BBBY: Facing Reality - bbby2q

 

Eric Levine

Director


THE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - September 22, 2010

As we look at today’s set up for the S&P 500, the range is 25 points or -1.47% downside to 1123 and 0.63% upside to 1147. Equity futures are trading lower tracking amid a sell off among European indices. Today's macro highlights include: MBA Mortgage Purchase Applications and Jul FHFA House Price Index.

  • Adobe Systems (ADBE) forecast 4Q sales $950m-$1b vs est. $1.03b
  • Analogic (ALOG) reported 4Q EPS 56c vs est. 39c 
  • Cintas (CTAS) raised FY EPS forecast to as much as $1.63 from as much as $1.58, vs. est. $1.55
  • EBay (EBAY) said it sees 3Q results near top of July forecast of adj. EPS 35c-37c, rev. $2.13b-$2.18b
  • PMC-Sierra (PMCS) cut 3Q rev. forecast to $161m-$163m from $169m-$177m, vs est. $173.5m
  • Power-One (PWER) plans to buy back 10m shares

PERFORMANCE

  • One day performance: Dow +0.07%, S&P (0.10%), Nasdaq (0.28%), Russell 2000 (0.79%)
  • Month-to-date: Dow +8.62%, S&P +7.45%, Nasdaq +11.13%, Russell +10.4%
  • Quarter-to-date: Dow +10.1%, S&P +10.58%, Nasdaq +11.38%, Russell +9.06%
  • Year-to-date: Dow +3.19%, S&P +2.21%, Nasdaq +3.53%, Russell +6.28%

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 839 (-2767)
  • VOLUME: NYSE - 1048.08 (+9.66%)  
  • SECTOR PERFORMANCE: Three sectors rose XLI, XLV and XLE.  There was a clear lack of overall direction following the FED announcement yesterday.  The positives were (1) the softening of European sovereign contagion following "successful" debt auctions in Ireland, Spain and Greece. (2) Worries about a double-dip in housing were eased to some extent following better-than-expected August housing starts data and (3) corporate actions also remained a tailwind for sentiment.
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Nvidia +5.42%, Baxter +3.63% and Vulcan Materials +3.14%/Owens-Ill -6.12%, Sandisk -6.11% and NY Times -5.57%
  • VIX: 22.35 +3.95% - over the past week the VIX is higher and so are stocks - YTD PERFORMANCE: (+3.09%)          
  • SPX PUT/CALL RATIO: 2.01 from 2.16 -7.21%

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 13.42 -0.538 (-3.857%)
  •  3-MONTH T-BILL YIELD: 0.17% unchanged
  • YIELD CURVE: 2.18 from 2.25

COMMODITY/GROWTH EXPECTATION:

  • CRB: 278.36 -0.46%
  • Oil: 74.97 -1.6%% 
  • COPPER: 348.10 -0.67%  
  • GOLD: 1,273 -0.48%

CURRENCIES:

  • EURO: 1.3128 +0.43%
  • DOLLAR: 80.439 -1.10% - Trading below 80 early on 

OVERSEAS MARKETS:

 

Europe

  • FTSE 100: (0.55%); DAX (0.98%); CAC 40 (1.14%)
  • Major indices are trading sharply lower after being indicated higher pre-open.
  • Banking shares are leading the selloff on concerns over the state of the global economy.
  • Bank of England minutes: BOE voted 8-1 for 0.5% interest rate in Sept
  • BASF raises 2010 outlook

Asia

  • Nikkei (0.37%); Shanghai Composite (closed)
  • Most Asian markets that were open posted small gains this morning, but settled to small losses by the end of the day.
  • Japan dipped early on a strong yen, but made up some of the loss as the currency weakened.
  • Securities and real estate were up, while insurance and machinery declined. 
 
Howard Penney
Managing Director

UNCLE SAM: RUNNING OUT OF CRUTCHES

99 weeks of unemployment benefits running out and no jobs.  This is the scenario facing many Americans heading into year-end.

 

Whatever your view on the role of government in today’s economy, it is undeniable fact that government intervention is having a dramatic impact on current conditions as well long term prospects.  With the creation of the Emergency Unemployment Compensation program in 2008, the government provided income for thousands, then millions, of Americans who would have otherwise been left with no source of income.  The result has been a propping up of consumer spending and the chart below shows that story.  The beneficiary, struggling to make ends meet, will spend a large portion of the check he/she receives.  That has helped stimulate consumer spending as more and more people joined the program.

 

These benefits expiring (in the absence of legislative action), will provide a year-over-year headwind for consumer spending.  As of the most recent data points, there are ~500,000 people receiving benefits under the Tier 4 category of the Emergency Unemployment Compensation program. 

 

UNCLE SAM: RUNNING OUT OF CRUTCHES - Howard Atlas Penny

 

Howard Penney

Managing Director


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Embracing Change

So, Tim, how's it going? 

--@lizzieohreally

 

Who would have thought Tim Geithner would be the last man standing on the Obama economic team?

 

First, let me say for those that don’t know, Lizzie O'Leary (@lizzieohreally) is a Washington D.C.-based correspondent for Bloomberg Television who covers politics and economic policy from the White House, Treasury Department, and Capitol Hill. She is officially a @Hedgeye twerp (a term of endearment).

 

So, Larry Summers is going back to Harvard.  President Obama campaigned on the theme “change for America” and a change it is.  Not the change we were promised, but one that is long overdue. 

 

There are so many quotes from Larry, Tim or Ben that I could have used to start off the Early Look today, but I chose a one-liner from the @Hedgeye twitter feed that made me laugh, and there were many.  On a serious note, this country is in need of “change” and a new economic team at the White House is a great place to start. 

 

Keith said it best last night, @KeithMcCullough – “The dogma of the Robert Rubin/Larry Summers economic ideology has to leave the West Wing if America wants any chance.”

 

The popular press and the new media just skewered Larry Summers last night, which would have made him an easy target for today’s Early Look’s musing.  If you have not figured it out yet, I have embraced a change in my daily process by integrating Twitter as part of it.  For competitive reasons, I’m not going to say how, but Reuters and Dow Jones need to be looking at the Twitter business model very closely as it is their future. 

 

The other one-liners that made the highlight reel on the Hedgeye Twitter feed:

  • @Moorehn - Poor Larry Summers. Leaving before he could throw a proper tantrum about a woman joining Obama's economic team. 
  • @HowardKurtz - Larry Summers bailing from WH. Will Obama name a replacement before election and portray it as jumpstarting his economic efforts?
  • @ErikSchatzker - Summers to teach job creation and stable finance at Harvard. Hmm. Reminds me of that old saying about those who can't do.
  • @zerohedge - Summers to resume his job of destroying Harvard's endowment

Ok, back to reality and the euphoria that has made September performance one of the best since the 1930’s.

 

So far this week, we have learned that the recession has ended and after the close last night the ABC consumer confidence index fell to -46 for the week ending September 19th, down 3 points from the week prior.  This news and the University of Michigan reading from last week spell bad news for consumer spending.  The recession may be over, but there are structural issues that demand immediate attention.  The data bears this out:

  • Over 41 million Americans are on food stamps.
  • 17 million children struggle with hunger in America. That's 1 in 4 kids.
  • 1 out of every 6 Americans is on some kind of anti-poverty program.
  • 1 out of every 7 mortgages was delinquent or in foreclosure in Q1 2010.
  • Over 8 million Americans are receiving unemployment insurance.

It’s going to have to be an impressive trick if the new Obama economic team can embrace change and get us out of this mess without feeling more pain.  As the saying goes - no pain, no gain!

 

The September month-to-date performance has been nothing short of spectacular, but it is difficult to reconcile this euphoria with the current fundamentals of the economy.  So far for the month of September, the Dow is up 8.62%, S&P up 7.45%, NASDAQ up 11.13% and the Russell 2000 up 10.4%.  With the Dow +0.07%, S&P (0.10%), NASDAQ (0.28%) and Russell 2000 (0.79%) yesterday, there was a clear lack of overall direction following the FED announcement; except for the direction of the dollar, which is getting crushed, down 1.1% yesterday and 3.2% over the past month.  The euphoric feel comes from:   

  • Consumer confidence is near “the great recession” lows and investor sentiment is near multi-year highs.
  • Some of the market darlings (AAPL and AMZN) look over extended.
  • The MACRO risks (housing and slowing GDP) have taken a back seat in September, but will rear their ugly heads soon.
  • The 2yr and 10yr yields are at record lows and the dollar is getting crushed.

The policies of the old Obama economic team were enough to keep us out of a full-blown depression, but were clearly not effectively dealing with the deficit.  The question is not whether or not the next team will prove any more adept at instilling confidence in government’s ability to address the nation’s debt. 

 

The burgeoning healthcare bureaucracy, economic stimulus spending, bailouts, and the increase in military spending have all contributed to the explosion in federal debt over the past decade.  The continued growth of that debt has provided an illusion of an economic recovery. 

 

In the chart below, we show one example of government spending providing an unsustainable crutch for government spending.  As America’s unemployed make their way through the 99 weeks of benefits afforded them by Uncle Sam through the Emergency Unemployment Compensation program, it is clear from Bureau of Labor Statistics data that the economy is not yet ready to put these people back to work.  Retail sales will certainly be impacted by people running out of these benefits – a stimulus that, like many others, has been financed by increased debt.

 

One last thought - The dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty, and we must rise with the occasion. As our case is new, so we must think anew and act anew. 

-Abraham Lincoln

 

Function in disaster; finish in style

 

Howard Penney

 

Embracing Change - Howard Atlas Penny


THE M3: SO COMMENTS; US CONSUL ON LABOR RESTRICTIONS; VISITATION INFO

The Macau Metro Monitor, September 22nd 2010

 

COTAI: SJM EXPECTS REPLY ON LAND APPLICATION THIS YEAR Macau Daily TImes

CEO So believes he will receive a response from the Government regarding its two plots on Cotai by the end of 2010.  “We hope to have a larger space for development... SJM has the least exposure in Cotai so we’ve expressed that if there is other land available [Sands China parcels 7 and 8] we’ll be interested in it,” So said.  “I think any organizations or concessionaires can express their interest and there is nothing wrong with it,” So added.  Meanwhile, So denied there are any plans to cooperate with Macao Studio City or any of the other five gaming operators to jointly develop the Cotai Strip.

 

So also said 4Q GGR will not grow as much as in the first nine months of this year. “For the whole year of 2010, I expect there will be an increase of around 40%,” So said.  In addition, he urged the Government to give a clearer idea about the allocation of imported labour quotas so that the gaming operators can prepare their human resources development plan accordingly.  So also suggested pegging the Pataca with the Yuan  to ease inflation pressures.

 

UNITED STATES FOLLOWING UP ON LABOUR RESTRICTIONS IN MACAU macaubusiness.com

The US consul general for Macau and Hong Kong, Stephen Young, says he is optimistic that these policy changes will not damage the interests of US companies operating in Macau.  “I’ve been assured by the chief executive and others that the necessary workers that these guys [US-based casino companies operating in Macau] need to do their jobs to both build and run casinos will be available, and it’s an ongoing dialogue that they and I and the government of Macau continue to pursue,” he said.

 

Mr Young said he has already met CEO Chui and representatives from LVS, WYNN, and MGM.  He added he would meet with Sands' new management team today.

 

VISITOR ARRIVALS FOR AUGUST 2010 DSEC

Total visitor arrivals rose by 14.2% YoY to 2,357,689 in August.  Visitors from Mainland China increased by 20.3% YoY to 1,263,442 (53.6% of total visitor arrivals), with 590,271 traveling to Macao under the Individual Visit Scheme, up by 18.2% from August 2009.

 

CHANGI AIRPORT PASSENGER NUMBERS GROW 9.6% IN AUGUST Channel News Asia

The number of passengers passing though Changi Airport in August rose 9.6% to 3.47 million.


Fed Says, "No Inflation" - Today's Headlines On Bloomberg

This note was originally published September 21, 2010 at 16:03 in Macro

Bernanke didn't see inflation with $147 oil back in 2008. So of course he doesn't see it now. Pull up a chart of gold, agricultural commodities, or base metals if you want the truth.

 

Today's Bloomberg headlines:

 

  • Gold Futures Surge to Record as Dollar Tumbles on Fed's Policy Statement
  • Cotton Rises, Extends Rally to 15-Year High as China Increases Purchases
  • Orange-Juice Futures Advance to Three-Year High on Florida Storm Concerns
  • Lumber Futures Jump Exchange Limit as U.S. Housing Gain May Revive Demand
  • Copper Declines as Uneven U.S. Recovery Tempers Gain in Asia Metals Demand
  • Sugar Drops on Reduced Concern About Supplies From Brazil; Coffee Climbs
  • Uranium Prices at 10-Month High Attract Hedge Funds, Investors, UxC Says
  • Rusal Sees Aluminum Rising to $2,400 to $2,500 Next Year on Chinese Demand
  • Oil Declines for Fifth Time in Six Days on Bets U.S. Refinery Output Fell
  • Wheat Declines on Bets Prices Climbed Too High Relative to Corn Futures
  • Hog Futures Rise on Signs of Shrinking U.S. Meatpacker Supply; Cattle Gain

 

Howard Penney

Managing Director

 

Fed Says, "No Inflation" - Today's Headlines On Bloomberg - 3

 

Fed Says, "No Inflation" - Today's Headlines On Bloomberg - 1


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