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BBBY: Reality Isn't So Bad

Solid quarter for BBBY across the board.  Beat our $0.67 estimate driven almost entirely by leverage on better than forecast sales.  Comps came in at 7.4%, street was looking for just below 6%.

  • GM’s improved 56bps.  First quarter that results prove they can expand gross margins on top of last year’s gains.  Important event our view given that this provides less reason to be concerned about tougher near-term compares.  On a two year basis, GM’s were up 107bps, but still below 2006 peak 2Q levels of 42.2%.  To get back to peak, there is still room to expand GM’s by 130 bps.
  • SG&A leveraged better than expected on better topline results.  Absolute dollars came in line with our projections, up 4.8%.  Same dollar increase % as reported in Q1.  On a rate basis, SG&A improved by 174 bps as a % to sales.
  • Inventories up 8.5%, sales up 11.6%.  Sales/inventory spread continues to erode, although still positive on an absolute basis.  See SIGMA below for the trend.
  • Biggest surprise to us was the same store sales results and the share buyback activity. BBBY purchased $193 million or 4.9 million shares in the quarter, the biggest commitment to the buyback we’ve seen in a long, long time.  The balance sheet remains in solid shape, ending the quarter with $1.6 billion in cash/securities. There is more room to go here.
  • Guidance for 3Q of $0.61-$0.65, Street at $0.64 within the guided range.  Management took up full year to 20% EPS growth, which equates to $2.75.  Street currently at $2.71.  We still see results coming in closer to $2.80 for the year.

All in a solid quarter.  Incremental positives include gross margin gains on top of gross margin gains, stepped up share repurchase, and less than expected conservatism from management on the outlook.  Incremental negative is the erosion of the sales/inventory spread.  Yes, the latter point is nitpicky.  This was a solid result all around and it is consistent with the results we’ve seen over the past four quarters.  We continue to believe the de-layering of the multi-year period in which BBBY engaged in aggressive promotional activity and couponing remains key to driving EBIT margin expansion over the next year.  The quarter only adds confidence to this view.

 

BBBY: Reality Isn't So Bad - bbby2q

 

Eric Levine

Director


DRI – STRONG QUARTER BUT GUIDANCE STRETCHING

Full-year same-store sales and commodity guidance seem to be at risk.

 

DRI reported a relatively strong fiscal first quarter with blended same-store sales up 1.1% and EBIT margin improving nearly 130 bps YOY.  One area of continued concern, however, stems from performance at Red Lobster, which lagged the industry benchmark as measured by Malcolm Knapp by 170 bps during the quarter on a reported basis and by 70 bps when you adjust for the timing mismatch around the concept’s Endless Shrimp promotion.  During the prior quarter, Red Lobster lagged the industry by only 30 bps.

 

The company attributed its weaker-than-expected results at Red Lobster to ineffective promotional tactics in the quarter.  Specifically, management referred to its June promotion, which it said did not offer a compelling enough dish and its July promotion, which featured too high of a price point at $14.99.  Helping to offset the weakness at Red Lobster were same-store sales trends that continued to get better at LongHorn and improved trends at the Olive Garden after reporting a sales shortfall during fiscal 4Q10. 

 

The two biggest risks to Darden’s numbers this year stem from the company’s ability to achieve its full-year blended same-store sales growth guidance of +2-3% and rising commodity costs.  There were a lot of questions on the call about the company’s ability to meet its comparable sales targets for the year after coming in below the full-year guided range during the first quarter when the company was lapping its easiest comparison from the prior year.  This was a concern I had going into the quarter; full-year comp guidance seems aggressive as it implies a sharp improvement in two-year average trends.  And, given the fact that Red Lobster’s top-line trends decelerated even further during the quarter on a two-year average basis, even when you adjust for the promotional timing issue, this full-year guidance seems even less obtainable.

 

Management justified its comp guidance and the implied sequential improvement by saying that the industry is recovering faster than it had expected.  Excluding Darden, the industry, as measured by Malcolm Knapp, reported flat same-store sales during DRI’s fiscal first quarter, up from -1.4% in the prior quarter.  On a two-year average basis, this implies a 20 bp improvement making fiscal 1Q11 the fourth consecutive quarter of sequentially better industry trends on a one-year and two-year basis.  This sequential improvement in industry comps during the quarter is, in fact, better than I would have expected but I don’t think it guarantees that trends will continue to get better from here. 

 

Management highlighted recent GDP growth, as opposed to decline, and its correlation to consumer spending as one reason why industry trends should continue to improve.  I would argue, however, that although GDP growth may be positive this year versus negative last year, the rate of growth is decelerating and the Hedgeye expectation is for it to soften further in 2H10, which on the margin will be bad for the economic recovery and will limit the improvement in industry trends.  Even if industry comp trends do improve to -1%, as management guided to, DRI’s 2-3% blended same-store sales guidance assumes 300 to 400 bps of outperformance during the year after reporting only 110 bps of outperformance during fiscal 1Q11.  Red Lobster’s softening trends will make it that much harder to achieve such a wide gap to Knapp.  Management did say that with industry trends improving faster than expected, driven primarily by higher average check growth, that it expects Darden’s full-year gap to Knapp to come in slightly narrower than it initially expected.  That being said, its guidance still assumes sequentially better industry trends and continued outperformance.

 

During fiscal 1Q11, operating margin improved nearly 130 bps YOY.  The company achieved better leverage during the quarter on the food and beverage, labor and restaurant expense lines that I had anticipated.  Management said that positive comp growth, of course, helped in that regard along with the company’s cost saving initiatives related to automating its supply chain, centralizing facilities management and driving sustainability to reduce water and energy usage. 

 

Lower food and beverage costs as a percentage of sales drove the most upside relative to my numbers, which management attributed largely to lower commodity costs.  Management expects to benefit from a similar level of food cost favorability during 2Q, but then expects food costs to be up about 0.5% in the back half of the year.  There is little risk to the company’s 2Q food cost outlook as Darden is locked in on about 90% of its needs through the end of calendar 2010.  Right now, the company is only contracted for about 40% of its commodity needs for fiscal 2H11.  Although management believes that current levels of some commodities it uses are unsustainable and is therefore, not yet locked in, this commodity exposure poses a risk to Darden’s 2H11 numbers.

 

DRI – STRONG QUARTER BUT GUIDANCE STRETCHING - dri sigma

 

DRI – STRONG QUARTER BUT GUIDANCE STRETCHING - us gdp

 

DRI – STRONG QUARTER BUT GUIDANCE STRETCHING - personal income

 

 

Howard Penney

Managing Director

 

 


Comping The Comp - Athletic Trends Robust

As a follow up to last week’s athletic trend update, sales accelerated again this week a trailing 3-week basis in athletic footwear and apparel as well as at retail according to ICSC weekly retail sales. Perhaps most noteworthy is the growth in athletic footwear up +8.3% on a trailing 3-week basis despite facing materially more difficult compares (+3.7%). Importantly, this growth came on higher ASPs suggesting new product flow is starting to gain traction. Recall that next week marks the last tough comp (+4.8%) before footwear has the wind at its back with considerably more favorable compares over the next 2-months until holiday sales in December. In addition, all three channels were strong with discount/mass going positive for the first time in nearly a year. As a result, we expect the athletic space and athletic footwear in particular to outpace overall retail and continue to be a preferred subsector within retail.

 

Comping The Comp - Athletic Trends Robust  - FW App Industry Data 1yr 9 22 10

 

Comping The Comp - Athletic Trends Robust  - FW App Industry Data 2yr 9 22 10

 

Comping The Comp - Athletic Trends Robust  - FW App Industry Data Brand 1 9 22 10

 

Comping The Comp - Athletic Trends Robust  - Fw App Ind AppChan 9 22 10

 

Comping The Comp - Athletic Trends Robust  - FW App Industry Data Channel 9 22 10

 

Casey Flavin

Director

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.63%

Retail: Scary Chart Of The Day

UNCLE SAM: RUNNING OUT OF CRUTCHES

Out of Howard Penny's wheelhouse this morning: 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. 

 

Retail: Scary Chart Of The Day - Howard Atlas Penny

 

Howard Penney


MACAU SEPTEMBER UPDATE THROUGH THE 20TH

Another week, another update... Macau growth slows this week

 

Macau slowed a bit in the third week of September.  The daily table GGR for the last 6 days slowed to HK$429MM from a daily average GGR of $485MM for the first 14 days of the month.  Based on the table revenues through the 20th as shown below, we are now projecting total September revenues at HK$14.5-14.7 billion, or 36-38% growth over September of 2009.  Directionally, market shares were similar to our last update, although Wynn’s share loss and MPEL’s share gain have grown.  Wynn's share plummeted to just 6.15% over the last 6 days, while MPEL's market share soared to 19%.  Our understanding is that low hold (~2%) is largely to blame for Wynn's share losses.  If Wynn's hold was really just 2%, normalizing hold while holding the other concessionaires constant implies that their market share would have been around 13.3% through Sept 20th - which is still below the 13.9% share Wynn had in August, and its lowest share since opening Encore. MPEL is up 80 bps since our update last week.  Despite apparently low VIP hold percentage, MGM’s share continues to climb in response to the company’s aggressive commission efforts.

 

MACAU SEPTEMBER UPDATE THROUGH THE 20TH - macau sept1


European Fundamental Bears and Currency Bulls

Hedgeye Portfolio: Long Germany (EWG); Long British Pound (FXB); bullish on EUR-USD

 

Today, Eurozone Industrial Orders disappointed forecasts on a month-over-month and year-over-year basis. The data is in line with our call for a slow-down in fundamental performance across most of Europe—a call we’re making over the intermediate term TREND and longer term TAIL as austerity measures drag down growth prospects across the region.

 

We’re however not bearish on Europe outright. As we noted in our post yesterday titled “The EU’s Guiding Hand”, we’re currently bullish on Germany, with the DAX outperforming many of the equity markets of its Western European peers, and bullish on the GBP and EUR versus the USD on a relative basis, as we see substantial downside in the USD and YEN, in particular. Our bullish intermediate term TREND lines for the Euro and Pound are $1.26 and $1.52, respectively.

 

Comparison Boost?

 

Even off “easy” year-over-year compares of -24.7% in July 2009, Industrial Orders rose only +11.2% in July 2010, and undercut a forecast of +16.2% (see chart below). As a compare, June 2010 saw a rise of +22.7% year-over-year off a compare of -25.8%. Certainly as compares get harder into year-end and demand wanes, we’d expect Industrial Orders to slow further.

 

Over the immediate term TRADE to intermediate term TREND we expect European bond yields to continue to push to the upside as investors demand a yield premium to own the sovereign debt threats imbedded in European countries that are struggling to contain bloated sovereign debt and deficit levels.  As an example, today, Portugal successfully issued €450 Million in debt due 2014 that commanded a yield of 4.695% versus a similar maturing bond issued on July 28th that commanded a yield a full 1% less.

 

While we see further downward pressure across European markets over the immediate term TRADE and intermediate term TREND, we’re comforted over the longer term TAIL that the EU community will effectively backstop the region to prevent another Greek default scare, a fact that should help to put in a moderate floor on the downside from here. 

 

Matthew Hedrick

Analyst

 

European Fundamental Bears and Currency Bulls - e.orders


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